9.30.2011 Form 10Q
Table of Contents

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 FORM 10-Q
T
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2011
 or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                    to
Commission File Number 001-34806
QUAD/GRAPHICS, INC.
(Exact name of Registrant as specified in its charter)
Wisconsin
 
39-1152983
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
N61 W23044 Harry's Way, Sussex, Wisconsin 53089-3995
(Address of principal executive offices) (Zip Code)
 
(414) 566 – 6000
(Registrant's telephone number, including area code)

N63 W23075 Highway 74, Sussex, Wisconsin 53089-2827
(Former address if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No ¨
 Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No ¨
 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or smaller reporting company.  See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
 
Accelerated filer o
 
 
 
Non-accelerated filer x
 
Smaller reporting company o
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes ¨  No x
Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date.
Class
 
Outstanding as of November 11, 2011
 
 
 
Class A Common Stock
 
32,417,294
 
 
 
Class B Common Stock
 
14,198,464
 
 
 
Class C Common Stock
 
245,353
 
 
 
 
 

Table of Contents

QUAD/GRAPHICS, INC.
 
FORM 10-Q INDEX
 
For the Quarter Ended September 30, 2011
 
 
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2

Table of Contents

PART I — FINANCIAL INFORMATION

ITEM 1.
Condensed Consolidated Financial Statements

QUAD/GRAPHICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)
(UNAUDITED) 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2011
 
2010
 
2011
 
2010
Net sales
 

 
 

 
 

 
 
Products
$
985.1

 
$
1,004.0

 
$
2,753.2

 
$
1,700.8

Services
124.3

 
125.1

 
355.8

 
226.2

Total net sales
1,109.4

 
1,129.1

 
3,109.0

 
1,927.0

 
 
 
 
 
 
 
 
Cost of sales
 

 
 

 
 

 
 
Products
743.1

 
777.4

 
2,105.3

 
1,293.1

Services
97.3

 
93.8

 
275.4

 
163.7

Total cost of sales
840.4

 
871.2

 
2,380.7

 
1,456.8

 
 
 
 
 
 
 
 
Selling, general and administrative expenses
96.0

 
106.6

 
298.5

 
203.5

Depreciation and amortization
85.1

 
84.3

 
255.9

 
181.8

Restructuring, impairment and transaction-related charges
31.8

 
69.4

 
82.1

 
107.0

Total operating expenses
1,053.3

 
1,131.5

 
3,017.2

 
1,949.1

 
 
 
 
 
 
 
 
Operating income (loss) from continuing operations
56.1

 
(2.4
)
 
91.8

 
(22.1
)
 
 
 
 
 
 
 
 
Interest expense
25.4

 
31.1

 
84.5

 
61.4

Loss on debt extinguishment
34.0

 

 
34.0

 

 
 
 
 
 
 
 
 
Loss from continuing operations before income taxes and equity in earnings of unconsolidated entities
(3.3
)
 
(33.5
)
 
(26.7
)
 
(83.5
)
 
 
 
 
 
 
 
 
Income tax expense (benefit)
2.8

 
198.8

 
(8.1
)
 
197.2

 
 
 
 
 
 
 
 
Loss from continuing operations before equity in earnings of unconsolidated entities
(6.1
)
 
(232.3
)
 
(18.6
)
 
(280.7
)
 
 
 
 
 
 
 
 
Equity in earnings of unconsolidated entities
0.6

 
2.0

 
1.7

 
6.3

 
 
 
 
 
 
 
 
Net loss from continuing operations
$
(5.5
)
 
$
(230.3
)
 
$
(16.9
)
 
$
(274.4
)
 
 
 
 
 
 
 
 
Loss from discontinued operations, net of tax
(16.8
)
 
(2.1
)
 
(22.9
)
 
$
(2.1
)
 
 
 
 
 
 
 
 
Net loss
$
(22.3
)
 
$
(232.4
)
 
$
(39.8
)
 
$
(276.5
)
 
 
 
 
 
 
 
 
Net earnings attributable to noncontrolling interests
(0.1
)
 
(0.1
)
 
(0.2
)
 
(0.2
)
 
 
 
 
 
 
 
 
Net loss attributable to Quad/Graphics common shareholders
$
(22.4
)
 
$
(232.5
)
 
$
(40.0
)
 
$
(276.7
)

See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).

3

Table of Contents

QUAD/GRAPHICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (continued)
(in millions, except per share data)
(UNAUDITED)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2011
 
2010
 
2011
 
2010
Loss per share attributable to Quad/Graphics common shareholders:
 
 
 
 
 
 
 
Basic and Diluted:
 
 
 
 
 
 
 
Continuing operations
$
(0.12
)
 
$
(4.97
)
 
$
(0.36
)
 
$
(8.01
)
Discontinued operations
(0.36
)
 
(0.04
)
 
(0.49
)
 
(0.06
)
Loss per share attributable to Quad/Graphics common shareholders
$
(0.48
)
 
$
(5.01
)
 
$
(0.85
)
 
$
(8.07
)
 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding:
 
 
 
 
 
 
 
Basic and Diluted
47.1

 
46.4

 
47.2

 
34.3

 
 
 
 
 
 
 
 
Amounts attributable to Quad/Graphics common shareholders:
 
 
 
 
 
 
 
Loss from continuing operations
$
(5.6
)
 
$
(230.4
)
 
$
(17.1
)
 
$
(274.6
)
Loss from discontinued operations
(16.8
)
 
(2.1
)
 
(22.9
)
 
(2.1
)
Loss attributable to Quad/Graphics common shareholders
$
(22.4
)
 
$
(232.5
)
 
$
(40.0
)
 
$
(276.7
)

See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).

4

Table of Contents

QUAD/GRAPHICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions)
(UNAUDITED) 
 
September 30,
2011
 
December 31,
2010
ASSETS
 

 
 

Cash and cash equivalents
$
15.8

 
$
20.5

Receivables, less allowances for doubtful accounts of $73.3 at September 30, 2011 and $85.5 at December 31, 2010
662.4

 
786.4

Inventories
284.7

 
247.4

Prepaid expenses and other current assets
150.0

 
64.3

Deferred income taxes
82.0

 
76.8

Short-term restricted cash
2.7

 
16.0

Current assets of discontinued operations (Note 4)
72.1

 

 
 
 
 
Total current assets
1,269.7

 
1,211.4

 
 
 
 
Property, plant and equipment—net
2,192.2

 
2,317.8

Goodwill
782.0

 
814.7

Other intangible assets—net
314.7

 
368.3

Long-term restricted cash
75.6

 
84.5

Equity method investments in unconsolidated entities
71.3

 
82.5

Other long-term assets
46.5

 
67.8

Long-term assets of discontinued operations (Note 4)
102.9

 

 
 
 
 
Total assets
$
4,854.9

 
$
4,947.0

 
 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 

 
 

Accounts payable
$
314.3

 
$
332.4

Amounts owing in satisfaction of bankruptcy claims
20.4

 
26.1

Accrued liabilities
329.8

 
427.1

Purchase price payable on business exchange transaction (Note 3)
62.2

 

Short-term debt and current portion of long-term debt
83.1

 
102.6

Current portion of capital lease obligations
24.1

 
14.5

Current liabilities of discontinued operations (Note 4)
47.2

 

 
 
 
 
Total current liabilities
881.1

 
902.7

 
 
 
 
Long-term debt
1,505.2

 
1,418.4

Unsecured notes to be issued
40.9

 
52.5

Capital lease obligations
20.9

 
43.2

Deferred income taxes
461.1

 
433.8

Other long-term liabilities
463.9

 
603.8

Long-term liabilities of discontinued operations (Note 4)
68.4

 

 
 
 
 
Total liabilities
3,441.5

 
3,454.4

 
 
 
 
Commitments and contingencies (Note 11)


 


 
 
 
 
Redeemable equity (Note 20)
4.7

 
10.6

 
 
 
 
Quad/Graphics common stock and other equity (Note 20)
 

 
 

Preferred stock

 

Common stock, Class A
1.0

 
1.0

Common stock, Class B
0.4

 
0.4

Common stock, Class C

 

Additional paid-in capital
1,001.1

 
1,002.0

Treasury stock, at cost
(295.1
)
 
(295.7
)
Retained earnings
665.3

 
720.9

Accumulated other comprehensive income
35.5

 
52.7

 
 
 
 
Quad/Graphics common stock and other equity
1,408.2

 
1,481.3

 
 
 
 
Noncontrolling interests
0.5

 
0.7

 
 
 
 
Total common stock and other equity and noncontrolling interests
1,408.7

 
1,482.0

 
 
 
 
Total liabilities and shareholders' equity
$
4,854.9

 
$
4,947.0

 See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).

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Table of Contents

QUAD/GRAPHICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(UNAUDITED) 
 
Nine Months Ended September 30,
 
2011
 
2010
OPERATING ACTIVITIES
 

 
 

Net loss
$
(39.8
)
 
$
(276.5
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 

Depreciation and amortization
263.6

 
185.3

Impairment and other non-cash integration charges
17.9

 
34.7

Amortization of debt issuance costs
7.3

 
3.0

Loss on debt extinguishment
34.0

 

Stock-based compensation charges
6.7

 
3.8

(Gain) loss on sales or disposal of property, plant and equipment
(0.2
)
 
0.7

Deferred income taxes
5.7

 
194.7

Equity in earnings of unconsolidated entities
(1.7
)
 
(6.3
)
Dividends from unconsolidated entities
4.7

 
0.4

Changes in operating assets and liabilities—net of acquisitions
(135.3
)
 
(156.9
)
 
 
 
 
Net cash provided by (used in) operating activities
162.9

 
(17.1
)
 
 
 
 
INVESTING ACTIVITIES
 

 
 

Purchases of property, plant and equipment
(134.3
)
 
(73.9
)
Proceeds from the sale of property, plant and equipment
13.0

 
10.1

Equity investment in unconsolidated entities

 
(10.0
)
Transfers from (to) restricted cash
22.2

 
(66.0
)
Deposit made related to business exchange transaction (Note 3)
(50.8
)
 

Acquisition of businesses—net of cash acquired
(4.6
)
 
20.6

 
 
 
 
Net cash used in investing activities
(154.5
)
 
(119.2
)
 
 
 
 
FINANCING ACTIVITIES
 

 
 

Proceeds from issuance of long-term debt
649.0

 
689.2

Payments of long-term debt
(743.9
)
 
(490.0
)
Payments of capital lease obligations
(11.7
)
 
(25.3
)
Borrowings on revolving credit facilities
875.2

 
627.9

Payments on revolving credit facilities
(712.7
)
 
(428.0
)
Payment of debt issuance costs
(11.5
)
 
(45.8
)
Bankruptcy claim payments on unsecured notes to be issued
(11.6
)
 

Proceeds from issuance of common stock
1.6

 
0.8

Tax benefit on exercise of stock options
0.8

 

Purchase of treasury stock
(5.4
)
 

Payment of cash distributions

 
(140.0
)
Payment of cash dividends
(18.9
)
 
(14.0
)
Payment of tax distributions
(4.8
)
 
(9.5
)
 
 
 
 
Net cash provided by financing activities
6.1

 
165.3

 
 
 
 
Effect of exchange rates on cash and cash equivalents
(19.2
)
 
(1.1
)
 
 
 
 
Net (decrease) increase in cash and cash equivalents
(4.7
)
 
27.9

 
 
 
 
Cash and cash equivalents at beginning of period
20.5

 
8.9

 
 
 
 
Cash and cash equivalents at end of period
$
15.8

 
$
36.8

 
 
 
 
SUPPLEMENTAL NON-CASH DISCLOSURE
 
 
 
Acquisitions of businesses (Note 3):


 


Fair value of assets acquired, net of cash
$
71.3

 
$
1,977.1

Liabilities assumed
(15.5
)
 
(1,834.5
)
Goodwill
6.4

 
744.7

Net equity issued for acquisition of World Color Press

 
(908.6
)
Purchase price payable on business exchange transaction
(62.2
)
 

Fair value of assets acquired, net of cash, other acquisitions
(4.6
)
 
0.7

Acquisition of businesses—net of cash acquired
$
(4.6
)
 
$
20.6

 See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).

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Table of Contents
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011
(In millions, except share and per share data and unless otherwise indicated)


Note 1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements for Quad/Graphics, Inc. and its subsidiaries (the "Company" or "Quad/Graphics") have been prepared by the Company pursuant to the rules and regulations for interim financial information of the United States Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been omitted pursuant to such SEC rules and regulations.  These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated annual financial statements as of and for the year ended December 31, 2010 and notes thereto included in the Company's latest Annual Report on Form 10-K filed with the SEC on March 24, 2011.

The Company's business is seasonal, with the majority of historical net sales and operating income recognized in the second half of the fiscal year. Seasonality is driven by increased magazine advertising page counts and retail inserts and catalogs primarily due to back-to-school and holiday related advertising and promotions.  Within any year, seasonality could adversely impact the Company's cash flow and results of operations on a quarterly basis.  Further, the comparability of the Company's results of operations between the nine months ended September 30, 2011 and 2010 was materially impacted by the acquisition of World Color Press Inc. ("World Color Press") on July 2, 2010.  The results of operations for World Color Press are included in the Company's consolidated results prospectively from July 2, 2010.

The financial information contained herein reflects all adjustments, in the opinion of management, necessary for a fair presentation of the Company's results of operations for the three and nine months ended September 30, 2011 and 2010.  All significant intercompany transactions have been eliminated in consolidation.  These unaudited condensed consolidated financial statements include estimates and assumptions of management that affect the amounts reported in the condensed consolidated financial statements.  Actual results could differ from these estimates.

The results of operations of the Company's Canadian operations (with the exception of the Company's Vancouver, British Columbia facility) have been reported as discontinued operations for all periods presented. The corresponding Canadian assets and liabilities have been reclassified in accordance with the authoritative literature on assets held for sale at September 30, 2011 and, as a result, balances are not comparable between periods. In accordance with the authoritative literature, the Company has elected to not separately disclose the cash flows related to the Canadian discontinued operations. See Notes 3 and 4 for information about the Company's pending sale of the Canadian operations.
 
Note 2. Recent Accounting Pronouncements

In September 2011, the Financial Accounting Standards Board ("FASB") issued new guidance on the disclosures about an employer's participation in a multiemployer pension plan. This new guidance requires additional disclosures regarding the significant multiemployer pension plans in which an employer participates. This includes the level of an employer's contributions in the multiemployer pension plans, and whether those contributions represent more than five percent of the total contributions made to the plan by all contributing employers. The expanded disclosures also address the financial health of significant multiemployer pension plans including the funded status and existence of funding improvement plans, the existence of imposed surcharges on contributions to the plan, as well as the nature of employer commitments to the plan. The guidance is effective retrospectively for fiscal years ending after December 15, 2011. As this guidance only amends the required disclosures in the notes to the condensed consolidated financial statements, the adoption of this standard will not have a material impact on the Company's consolidated financial positions, results of operations or cash flows.

In September 2011, the FASB issued new guidance on testing goodwill for impairment. This new guidance gives entities, subject to certain conditions, the option of first performing a qualitative assessment to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of the reporting unit is less than its carrying amount. The guidance is effective prospectively for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. The Company will adopt this new guidance on January 1, 2012. The adoption of this guidance will not have a material impact on the Company's condensed consolidated financial statements.


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Table of Contents
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011
(In millions, except share and per share data and unless otherwise indicated)

In June 2011, the FASB issued new guidance on the presentation of comprehensive income. This new guidance requires the components of net income and other comprehensive income to be either presented in one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive statements. This new guidance eliminates the current option to report other comprehensive income and its components in the statement of shareholders' equity. While the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under current accounting guidance. This new guidance is effective for the Company beginning January 1, 2012. As this guidance only amends the presentation of the components of comprehensive income, the adoption will not have an impact on the Company's consolidated financial positions, results of operations or cash flows.

Note 3. Acquisitions

2011 Acquisitions

On July 12, 2011, the Company and Transcontinental Inc. ("Transcontinental") entered into a definitive agreement whereby Quad/Graphics acquired Transcontinental's Mexican operations, as well as a portion of Transcontinental's book printing business that is produced for U.S. export, in exchange for the Company's Canadian operations (with the exception of the Company's Vancouver, British Columbia facility). Transcontinental's Mexican operations print magazines, catalogs, retail inserts, books and other printed materials, and employ approximately 900 people among its three facilities in Azcapotzalco, Toluca and Xochimilco, Mexico. See Note 4 for further discussion of the sale of the Canadian discontinued operations.

The Company completed the acquisition of Transcontinental's Mexican operations on September 8, 2011. The sale of the Company's Canadian operations to Transcontinental remains subject to customary regulatory clearances in Canada.

The terms of the definitive agreement require cash consideration to be paid to Transcontinental for the period between the acquisition of Transcontinental's Mexican operations and the completion of the sale of the Company's Canadian operations. The Company estimates these payments will total $2.8 million, and has included them as additional purchase price.

The total purchase price payable for the acquisition is as follows:
 
Purchase Price
Fair value of Canadian operations sold
$
59.4

Estimated cash consideration
2.8

Purchase price payable on business exchange transaction
$
62.2


In connection with the acquisition of Transcontinental's Mexican operations, the definitive agreement required the Company to deposit $50.0 million Canadian dollars with Transcontinental until the Canadian operations sale is completed. Pending Canadian regulatory approval, a portion or all of the deposit may be refunded to the Company. Under certain circumstances additional cash may be required to be paid as consideration for Transcontinental's Mexican operations. At September 30, 2011, the deposit was classified in prepaid expenses and other current assets in the condensed consolidated balance sheet.

The Company elected to hedge exchange rate exposure related to the $50.0 million Canadian dollars deposit by entering into 30-day foreign currency forward exchange contracts. The Company intends to continue using rolling short-term forward exchange contracts pertaining to this foreign currency denominated deposit as a fair value hedge until the close of the sale of the Canadian discontinued operations. At September 30, 2011, the mark-to-market gain on the derivative contract of $3.2 million was classified in prepaid expenses and other current assets in the condensed consolidated balance sheet. The mark-to-market gain and the related $3.2 million transaction loss on the deposit was included within selling, general and administrative expenses. This fair value determination was categorized as level 2 in the fair value hierarchy.


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Table of Contents
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011
(In millions, except share and per share data and unless otherwise indicated)

This acquisition was accounted for using the acquisition method of accounting under existing GAAP. The Company has recorded a preliminary allocation of the purchase price to the acquired tangible and identifiable intangible assets and liabilities assumed based on their fair values as of the acquisition date. Goodwill has been recorded based on the amount by which the purchase price exceeds the fair value of the net assets acquired. The preliminary purchase price allocation is as follows:
 
Preliminary Purchase Price Allocation
Accounts receivable
$
16.0

Other current assets
11.3

Property, plant and equipment
35.7

Identifiable intangible assets
7.0

Other long-term assets
1.3

Accounts payable and accrued liabilities
(14.9
)
Other long-term liabilities
(0.6
)
Goodwill
6.4

Purchase price
$
62.2


The preliminary purchase price allocation is based on valuations performed to determine the fair value of the net assets as of the acquisition date. The Company expects to complete the purchase price allocation during the fourth quarter of 2011.

2010 Acquisitions

On July 2, 2010, the Company completed the acquisition of World Color Press, a provider of comprehensive print, digital and related services to retailers, catalogers, publishers, branded-goods companies and other businesses in North America and Latin American countries.  The World Color Press acquisition was completed for $93.3 million in cash and $908.6 million in Company class A common stock.  The Company also borrowed $950.0 million of debt to fund a portion of the transaction and to refinance the World Color Press debt, including a $250.0 million advance from a revolving credit facility and $700.0 million from a term loan.  The historical World Color Press United States and Canadian operations that will be retained after the sale of certain Canadian operations to Transcontinental (see above and Note 4) are included within the North American Print and Related Services segment. The historical World Color Press Latin American operations are included within the International segment.  In connection with the closing of the acquisition, the Company registered its class A common stock with the SEC under the Securities Exchange Act of 1934, as amended, and on July 6, 2010, Quad/Graphics' class A common stock commenced trading on The New York Stock Exchange, LLC ("NYSE") under the symbol "QUAD".

The following unaudited pro forma combined financial information presents the Company's results as though Quad/Graphics and World Color Press had combined at January 1, 2010.  The pro forma information has been prepared with the following considerations:

(1)
The unaudited pro forma condensed consolidated financial information has been prepared using the acquisition method of accounting under existing GAAP.  Quad/Graphics is the acquirer for accounting purposes.
(2)
World Color Press historical amounts have been converted from Canadian generally accepted accounting principles to GAAP.
(3)
The pro forma combined financial information does not reflect any operating synergy savings that the combined company may achieve as a result of the acquisition, the costs necessary to achieve these operating synergy savings or additional charges necessary as a result of the integration, or the tax effects for the Company's transition to a C corporation.
(4)
The pro forma amounts were restated to exclude the Canadian discontinued operations (see Note 4).
 
Nine Months Ended September 30,
 
2011
(actual)
 
2010
(pro forma)
Pro forma net sales
$
3,109.0

 
$
3,139.9

Pro forma net loss from continuing operations attributable to common shareholders
(17.1
)
 
(241.8
)
Pro forma diluted loss per share from continuing operations attributable to common shareholders
(0.36
)
 
(5.17
)

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Table of Contents
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011
(In millions, except share and per share data and unless otherwise indicated)

Note 4. Discontinued Operations

As discussed in Note 3, on July 12, 2011, the Company and Transcontinental entered into a definitive agreement whereby, among other things, Transcontinental agreed to acquire the Company's Canadian operations (with the exception of the Company's Vancouver, British Columbia facility). As part of the transaction, Transcontinental will assume pension and post-retirement obligations pertaining to all Canadian employees. Quad/Graphics employs approximately 1,500 people among its seven facilities being sold to Transcontinental, which are located in Aurora, Concord and Markham, Ontario; LaSalle and Montreal, Quebec; Edmonton, Alberta and Dartmouth, Nova Scotia.

The sale of the Company's Canadian operations is subject to customary regulatory clearances, including clearance under the Canadian Competition Act. As of November 14, 2011, the regulatory reviews to approve the sale of the Canadian operations were not complete.

The following table summarizes the results of operations of the Canadian operations, which are included in the loss from discontinued operations in the condensed consolidated statements of operations for the three and nine months ended September 30, 2011 and 2010:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2011
 
2010
 
2011
 
2010
Total net sales
$
76.3

 
$
79.6

 
$
249.5

 
$
79.6

 
 
 
 
 
 
 
 
Loss from discontinued operations before income taxes
(16.8
)
 
(2.1
)
 
(22.8
)
 
(2.1
)
Income tax expense

 

 
0.1

 

Loss from discontinued operations, net of tax
$
(16.8
)
 
$
(2.1
)
 
$
(22.9
)
 
$
(2.1
)

The Company continued to execute restructuring events related to plant closures, workforce reductions and other restructuring initiatives, as well as transaction costs related to the sale of the Canadian operations. Due to these initiatives, the Company has recognized $2.6 million and $10.5 million in restructuring and transaction-related costs for the three and nine months ended September 30, 2011, respectively, and $4.6 million in restructuring costs in both the three and nine months ended September 30, 2010, within discontinued operations in the condensed consolidated statements of operations.

The Company also recorded a $13.9 million goodwill impairment charge for the pending sale of the Canadian operations due to the carrying value of the Canadian net assets exceeding the estimated fair value of the Mexican and U.S. books printing net assets acquired from Transcontinental. The goodwill impairment loss is included in the loss from discontinued operations in the condensed consolidated statements of operations during the three and nine months ended September 30, 2011.


10

Table of Contents
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011
(In millions, except share and per share data and unless otherwise indicated)

The following table summarized the current and non-current assets and liabilities held for sale of the discontinued Canadian operations included in the condensed consolidated balance sheet at September 30, 2011:

 
September 30, 2011
Receivables—net
$
56.0

Inventories
15.2

Prepaid expenses and other current assets
0.9

Current assets of discontinued operations
72.1

 
 
Property, plant and equipment—net
71.4

Goodwill
20.0

Other intangible assets—net
11.5

Long-term assets of discontinued operations
102.9

 
 
Total assets
$
175.0

 
 
Accounts payable
$
19.0

Accrued liabilities
28.2

Current liabilities of discontinued operations
47.2

 
 
Other long-term liabilities
68.4

Long-term liabilities of discontinued operations
68.4

 
 
Total liabilities
$
115.6

 
 
Net assets of discontinued operations
$
59.4


Note 5. Restructuring, Impairment and Transaction-Related Charges

The Company recorded restructuring, impairment and transaction-related charges for the three and nine months ended September 30, 2011 and 2010 as follows:

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2011
 
2010
 
2011
 
2010
Employee terminations
$
3.4

 
$
17.0

 
$
19.2

 
$
18.2

Impairment charges
4.0

 
6.4

 
4.0

 
30.8

Transaction-related charges
0.9

 
32.1

 
1.9

 
41.0

Integration costs
20.0

 
8.1

 
35.3

 
10.3

Other restructuring charges
3.5

 
5.8

 
21.7

 
6.7

Total
$
31.8

 
$
69.4

 
$
82.1

 
$
107.0


The Company's restructuring actions since the July 2, 2010 World Color Press acquisition through September 30, 2011 have resulted in approximately 5,300 gross full-time equivalent positions eliminated (approximately 3,400 net positions eliminated, after considering job additions related to work transferred to other facilities) related to 10 plant closures and other workforce reductions announced through the third quarter of 2011. Approximately 600 of these reductions related to restructuring activities completed in Canada prior to the pending sale of the Canadian discontinued operations.


11

Table of Contents
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011
(In millions, except share and per share data and unless otherwise indicated)

The restructuring charges recorded are based on restructuring plans that have been committed to by management and are, in part, based upon management's best estimates of future events. Changes to the estimates may require future restructuring charges and adjustments to the restructuring liabilities. The costs related to restructuring activities have been recorded on the condensed consolidated statements of operations as restructuring, impairment and transaction-related charges.  The transaction costs are expensed as incurred in accordance with the applicable accounting guidance on business combinations. For restructuring, impairment and transaction-related charges by segment, see Note 22.

2011 Restructuring Events

For the three and nine months ended September 30, 2011, the Company recorded: (1) $3.4 million and $19.2 million, respectively, of employee termination costs for plant closures and other workforce reductions announced through the third quarter of 2011, (2) $4.0 million of impairment charges for machinery and equipment, (3) $0.9 million and $1.9 million, respectively, of transaction costs incurred primarily in connection with the transaction with Transcontinental (see Note 3), (4) $20.0 million and $35.3 million, respectively, of World Color Press integration costs and (5) $3.5 million and $21.7 million, respectively, of various other restructuring charges including costs to maintain and exit closed facilities, as well as lease exit charges. The $35.3 million of integration costs recognized during the nine months ended September 30, 2011, is net of a $7.1 million gain on a collection of a previously written off note receivable for the June 2008 sale of World Color Press' European operations.

On March 15, 2011, the Company announced the closure of the Mt. Morris, Illinois plant. As part of this initiative, the Company recognized $0.5 million and $3.3 million of employee termination costs for the three and nine months ended September 30, 2011, respectively. The Company has also recognized $0.8 million and $1.7 million of other restructuring charges related to equipment removal costs and facility carrying costs for the three and nine months ended September 30, 2011, respectively.  The Company expects to incur additional restructuring charges for the Mt. Morris plant closure in the future.

On April 18, 2011, the Company announced the closure of the Buffalo, New York plant. As part of this initiative, the Company recognized $0 and $0.8 million of employee termination costs for the three and nine months ended September 30, 2011, respectively. The Company has also recognized $0.4 million and $0.6 million of other restructuring charges related to equipment removal costs for the three and nine months ended September 30, 2011, respectively. The Company expects to incur additional restructuring charges for the Buffalo plant closure in the future.

In addition to these plant closures, the Company continued to execute various workforce reduction and other restructuring initiatives related to the integration of the operations of World Color Press, as well as certain corporate and administrative functions.  Severance costs also continue to be incurred related to previously announced plant closures and workforce reductions.  The Company recognized the following charges related to these restructuring activities for the three and nine months ended September 30, 2011: (1) $2.9 million and $15.1 million of employee termination costs, respectively, (2) $1.7 million and $6.0 million of facility carrying costs, respectively, (3) $0.2 million and $6.2 million of estimated lease exit charges, respectively, and (4) $0.4 million and $7.2 million of other restructuring charges, respectively.  The Company expects to incur additional restructuring charges related to these and other initiatives in the future.
 
2010 Restructuring Events
 
For the three and nine months ended September 30, 2010, the Company recorded: (1) $17.0 million and $18.2 million, respectively, of employee termination costs for plant closures and other workforce reduction initiatives, (2) $6.4 million and $30.8 million, respectively, of impairment charges on assets related to the closures of the Pila, Poland and Reno, Nevada plants, (3) $32.1 million and $41.0 million, respectively, of transaction costs incurred primarily in connection with the acquisition of World Color Press, (4) $8.1 million and $10.3 million, respectively, of World Color Press integration costs and (5) $5.8 million and $6.7 million, respectively, of various other restructuring charges including utility contract costs, costs to maintain and exit closed facilities, and lease exit charges. 
 

12

Table of Contents
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011
(In millions, except share and per share data and unless otherwise indicated)

Restructuring Reserve
 
Activity impacting the Company's restructuring reserve for the nine months ended September 30, 2011 was as follows:
 
 
Employee
Terminations
 
Impairment
Charges
 
Transaction-Related
Charges
 
Integration
Costs
 
Other
Restructuring
Charges
 
Total
Balance at December 31, 2010
$
24.7

 
$

 
$

 
$
1.1

 
$
42.6

 
$
68.4

 
 
 
 
 
 
 
 
 
 
 
 
Reserve provisions
19.2

 
4.0

 
1.9

 
35.3

 
21.7

 
82.1

Cash payments
(38.2
)
 

 
(1.1
)
 
(22.1
)
 
(31.8
)
 
(93.2
)
Non-cash adjustments

 
(4.0
)
 

 
(0.8
)
 
(0.5
)
 
(5.3
)
Reclassify Canadian restructuring reserves to discontinued operations
(1.8
)
 

 

 

 
(1.8
)
 
(3.6
)
Balance at September 30, 2011
$
3.9

 
$

 
$
0.8

 
$
13.5

 
$
30.2

 
$
48.4

 
The restructuring reserves are classified as accrued liabilities in the condensed consolidated balance sheets, as the Company expects the restructuring reserves to be paid within the next twelve months. Restructuring reserves related to the Canadian discontinued operations are no longer reflected in the 2011 amounts above, but are further detailed in Note 4.
 
Note 6. Goodwill and Other Intangible Assets

Goodwill is tested annually for impairment as of October 31 or more frequently if events or changes in circumstances indicate that it is more likely than not that the fair value of a reporting unit is below its carrying value.  One of these indicators is a change in business climate, which may be evidenced by, among other things, a decline in a company's market capitalization below book value. During the third quarter of 2011, the Company's stock price decreased such that the Company's market capitalization was less than the carrying value of its equity. As a result, the Company conducted an interim goodwill impairment assessment of the United States and Latin American reporting units which included comparing the carrying amount of net assets, including goodwill, of each reporting unit to its respective fair value as of August 31, 2011, the date of the interim assessment. The European reporting unit does not have goodwill and the Canadian reporting unit was assessed separately for goodwill impairment as part of the pending sale of the Canadian operations.

Fair value was determined using an equal weighting of both the income and market approaches. This fair value determination was categorized as level 3 in the fair value hierarchy. Under the income approach, the Company determined fair value based on estimated future cash flows discounted by an estimated weighted-average cost of capital, which reflects the overall level of inherent risk and the rate of return an outside investor would expect to earn. Under the market approach, the Company derived the fair value of the reporting units based on market multiples of comparable publicly-traded companies. Because the estimated fair value of each of the Company's United States and Latin American reporting units exceeded its carrying amount, management concluded that no impairment existed as of August 31, 2011. No additional indications of impairment have been identified between the date of the interim assessment and September 30, 2011.

Goodwill related to the continuing operations at September 30, 2011 and December 31, 2010 did not include any accumulated impairment losses.  No goodwill impairment was recorded related to continuing operations during the nine months ended September 30, 2011 or 2010. However, a $13.9 million goodwill impairment was recorded related to the Canadian discontinued operations in the three and nine months ended September 30, 2011 (see Note 4).


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Table of Contents
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011
(In millions, except share and per share data and unless otherwise indicated)

Activity impacting the Company's goodwill for the nine months ended September 30, 2011 was as follows:

 
North America
Print and Related
Services
 
International
 
Total
Balance at December 31, 2010
$
796.5

 
$
18.2

 
$
814.7

World Color Press acquisition
(3.4
)
 

 
(3.4
)
Transcontinental acquisition (see Note 3)
2.5

 
3.9

 
6.4

Reclassify Canadian goodwill to discontinued operations
(35.7
)
 

 
(35.7
)
Balance at September 30, 2011
$
759.9

 
$
22.1

 
$
782.0


The Company has finalized the World Color Press purchase price allocation. Goodwill related to the Canadian discontinued operations is no longer reflected in the 2011 amounts above, but is included in Note 4.

The components of other intangible assets at September 30, 2011 and December 31, 2010 were as follows:

 
September 30, 2011
 
December 31, 2010
 
Weighted
Average
Amortization
Period (Years)
 
Gross
Carrying
Amount
 
Accumulated
Amortization
and Foreign
Exchange
 
Impairment
 
Net Book
Value
 
Weighted
Average
Amortization
Period (Years)
 
Gross
Carrying
Amount
 
Accumulated
Amortization
and Foreign
Exchange
 
Impairment
 
Net Book
Value
Finite-lived intangible assets:
 
 

 
 

 
 

 
 

 
 
 
 

 
 

 
 

 
 

Trademarks, patents, licenses and agreements
5
 
$
10.0

 
$
(9.4
)
 
$

 
$
0.6

 
5
 
$
10.0

 
$
(9.0
)
 
$

 
$
1.0

Customer relationships
6
 
386.3

 
(79.2
)
 

 
307.1

 
6
 
393.7

 
(32.3
)
 

 
361.4

Capitalized software
5
 
4.1

 
(1.6
)
 

 
2.5

 
5
 
4.1

 
(1.0
)
 

 
3.1

Acquired technology
5
 
8.0

 
(3.7
)
 

 
4.3

 
5
 
5.3

 
(2.7
)
 

 
2.6

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total finite-lived intangible assets
 
408.4

 
(93.9
)
 

 
314.5

 
 
 
413.1

 
(45.0
)
 

 
368.1

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other indefinite-lived intangible assets
 
 
0.2

 

 

 
0.2

 
 
 
1.2

 

 
(1.0
)
 
0.2

Total
 
 
$
408.6

 
$
(93.9
)
 
$

 
$
314.7

 
 
 
$
414.3

 
$
(45.0
)
 
$
(1.0
)
 
$
368.3

 
During the three months ended September 30, 2011, there were $7.0 million of additions to the customer relationship intangible asset related to the Transcontinental acquisition. Intangible assets related to the Canadian discontinued operations are no longer reflected in the 2011 amounts above, but are included in Note 4.

Amortization expense for other intangible assets was $17.0 million and $49.6 million for the three and nine months ended September 30, 2011, respectively, as compared to $16.3 million and $17.4 million for the three and nine months ended September 30, 2010, respectively. The following table outlines the estimated amortization expense related to intangible assets as of September 30, 2011:

Remainder of 2011
$
17.3

2012
67.2

2013
66.4

2014
65.6

2015
64.5

2016
33.0

2017
0.5

Total
$
314.5


14

Table of Contents
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011
(In millions, except share and per share data and unless otherwise indicated)


Note 7. Inventories

The components of the Company's inventories at September 30, 2011 and December 31, 2010 were as follows:

 
September 30,
2011
 
December 31,
2010
Raw materials and manufacturing supplies
$
134.2

 
$
164.4

Work in process
94.5

 
52.7

Finished goods
56.0

 
30.3

Total
$
284.7

 
$
247.4


Note 8. Property, Plant and Equipment

The components of the Company's property, plant and equipment at September 30, 2011 and December 31, 2010 were as follows:

 
September 30,
2011
 
December 31,
2010
Land
$
142.3

 
$
136.4

Buildings
913.3

 
919.1

Machinery and equipment
3,441.1

 
3,344.0

Other
196.7

 
182.4

Construction in progress
30.5

 
45.2

 
4,723.9

 
4,627.1

Less: Accumulated depreciation
(2,531.7
)
 
(2,309.3
)
Total
$
2,192.2

 
$
2,317.8


Other consists of computer equipment, vehicles, furniture and fixtures, leasehold improvements and communication related equipment.

Depreciation expense was $68.1 million and $206.3 million for the three and nine months ended September 30, 2011, respectively. Depreciation expense was $68.0 million and $164.4 million for the three and nine months ended September 30, 2010, respectively.

Assets Held for Sale from Continuing Operations

Certain closed facilities are considered held for sale. The net book value of the assets held for sale from continuing operations was $11.4 million and $20.0 million as of September 30, 2011 and December 31, 2010, respectively.  Assets held for sale from continuing operations are included in prepaid expenses and other current assets in the condensed consolidated balance sheets. 


15

Table of Contents
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011
(In millions, except share and per share data and unless otherwise indicated)

Note 9. Restricted Cash

The components of the Company's restricted cash at September 30, 2011 and December 31, 2010 were as follows:

 
September 30,
2011
 
December 31,
2010
Defeasance of unsecured notes to be issued (see Note 12)
$
77.6

 
$
89.2

Other
0.7

 
11.3

Total restricted cash
$
78.3

 
$
100.5

Less: short-term restricted cash
(2.7
)
 
(16.0
)
Long-term restricted cash
$
75.6

 
$
84.5

 
Note 10. Equity Method Investments in Unconsolidated Entities

The Company has a 49% ownership interest in Plural Editora e Gráfica ("Plural"), a commercial printer based in São Paulo, Brazil, and a 50% ownership interest in World Color Chile S.A. ("Chile"), a commercial printer based in Santiago, Chile.  The Company's ownership interest in Plural is accounted for using the equity method of accounting for all periods presented.  The Company's ownership interest in Chile is accounted for using the equity method of accounting since July 2, 2010, when the Company acquired its ownership interest in Chile as part of the World Color Press acquisition.

The Company's percentage of Plural's and Chile's net results of operations is recorded in the line item entitled equity in earnings of unconsolidated entities in the Company's condensed consolidated statements of operations, and is included within the International segment.

The combined condensed statements of operations for Plural for the three and nine months ended September 30, 2011 and 2010, and for Chile for the three and nine months ended September 30, 2011 are presented below:

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2011
 
2010
 
2011
 
2010
Net sales
$
58.6

 
$
40.7

 
$
161.7

 
$
111.3

Operating income
3.5

 
5.2

 
7.3

 
16.3

Net earnings
1.0

 
3.7

 
3.1

 
11.7

 
Note 11. Commitments and Contingencies

Commitments

The Company had firm commitments of $19.5 million to purchase press and finishing equipment at September 30, 2011.

Litigation

In the normal course of business, the Company is named as a defendant in various lawsuits in which claims are asserted against the Company.  In the opinion of management, the liabilities, if any, which ultimately result from such lawsuits are not expected to have a material impact on the condensed consolidated financial statements of the Company.

Environmental Reserves

The Company is subject to various laws, regulations and government policies relating to health and safety, to the generation, storage, transportation, and disposal of hazardous substances, and to environment protection in general. The Company provides for expenses associated with environmental remediation obligations when such amounts are probable and can be reasonably estimated. Such reserves are adjusted as new information develops or circumstances change. The

16

Table of Contents
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011
(In millions, except share and per share data and unless otherwise indicated)

environmental reserves are not discounted. The Company believes it is in compliance with such laws, regulations and government policies in all material respects. Furthermore, the Company does not anticipate that maintaining compliance with such environmental statutes will have a material impact upon the Company's competitive or consolidated financial position.
 
Note 12. World Color Press Insolvency Proceedings

The Company continues to manage the bankruptcy claim settlement process for the Quebecor World Inc. ("QWI") bankruptcy proceedings in the United States and Canada (QWI changed its name to "World Color Press Inc." upon emerging from bankruptcy on July 21, 2009).  To the extent claims are allowed, the holders of such claims are entitled to receive recovery, with the nature of such recovery dependent upon the type and classification of such claims.  In this regard, with respect to certain types of claims, the holders thereof are entitled to receive cash and/or unsecured notes, while the holders of certain other types of claims are entitled to receive a combination of Quad/Graphics common stock and cash, in accordance with the terms of the World Color Press acquisition agreement.

With respect to claims asserted by the holders thereof as being entitled to a priority cash recovery, the Company has estimated that approximately $20.4 million and $26.1 million of such recorded claims have yet to be paid as of September 30, 2011 and December 31, 2010, respectively, and this obligation is classified as amounts owing in satisfaction of bankruptcy claims in the condensed consolidated balance sheets.

With respect to unsecured claims held by creditors of the operating subsidiary debtors of Quebecor World (USA) Inc. (the "Class 3 Claims"), each allowed Class 3 Claim will be entitled to receive an unsecured note in an amount not to exceed 50% of such creditor's allowed Class 3 Claim, provided, however, that the aggregate principal amount of all such unsecured notes cannot exceed $75.0 million. In the event that the total of all allowed Class 3 Claims exceeds $150.0 million, each creditor holding an allowed Class 3 Claim will receive its pro rata share of $75.0 million of the unsecured notes issued, together with accrued interest and a 5% prepayment redemption premium thereon (the total of which is $89.2 million).  In connection with the World Color Press acquisition, the Company was required to deposit the maximum potential payout to the Class 3 claim creditors of $89.2 million with a trustee, and that amount will remain with the trustee until either (1) it is paid to a creditor for an allowed Class 3 claim or (2) upon all Class 3 claims being resolved any excess amount will revert to the Company.  In the nine months ended September 30, 2011, $11.6 million was paid to Class 3 claim creditors, therefore $77.6 million remains at September 30, 2011 and is classified as restricted cash in the condensed consolidated balance sheets (see Note 9).  Based on the Company's analysis of the outstanding claims, the Company has recorded a liability, classified as unsecured notes to be issued in the condensed consolidated balance sheet, of $40.9 million at September 30, 2011.

 
Restricted Cash
 
Unsecured Notes
to be Issued
Balance at December 31, 2010
$
89.2

 
$
52.5

Class 3 Claim Payments
(11.6
)
 
(11.6
)
Balance at September 30, 2011
$
77.6

 
$
40.9


While the liabilities recorded for any bankruptcy matters are based on management's current assessment of the amount likely to be paid, it is not possible to identify the final amount of priority cash claims or the amount of Class 3 Claims that will ultimately be allowed by the U.S. Bankruptcy Court.  Therefore, amounts owing in satisfaction of bankruptcy claims on the condensed consolidated balance sheet could be materially higher than the amounts estimated, which would require additional cash payments to be made for the amount exceeding the Company's estimate.  Amounts payable related to the unsecured notes could reach the maximum aggregate principal amount of $75.0 million, which would not require an additional cash payment as the maximum potential exposure has already been funded in trust, but would require additional liability and expense to be recorded as the Company's September 30, 2011 estimate of total Class 3 Claim payments is $40.9 million.  In light of the substantial number and amount of claims filed, the claims resolution process will take considerable time to complete.


17

Table of Contents
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011
(In millions, except share and per share data and unless otherwise indicated)

Note 13. Debt

Long-term debt consisted of the following as of September 30, 2011 and December 31, 2010:

 
September 30,
2011
 
December 31,
2010
Master note and security agreement
$
629.9

 
$
672.0

Term loan A—$450.0 million
450.0

 

Term loan B—$200.0 million
199.0

 

Revolving credit facility—$850.0 million
222.7

 

Term loan—$700.0 million

 
686.5

Revolving credit facility—$530.0 million

 
57.0

International term loan
70.0

 
72.1

International revolving credit facility
13.6

 
14.9

Domestic term loan

 
11.3

Domestic revolving credit agreement

 
1.0

Other
3.1

 
6.2

Total debt
$
1,588.3

 
$
1,521.0

Less: short-term debt and current portion of long-term debt
(83.1
)
 
(102.6
)
Long-term debt
$
1,505.2

 
$
1,418.4


Based upon the interest rates available to the Company for borrowings with similar terms and maturities, the fair value of the Company's total debt was approximately $1.5 billion at September 30, 2011.

On July 26, 2011, the Company entered into a $1.5 billion debt financing agreement with certain lenders. The $1.5 billion debt financing agreement includes three different loan facilities. The first is a revolving facility in the amount of $850.0 million with a term of five years maturing on July 25, 2016. The second facility is a Term Loan A in the aggregate amount of $450.0 million with a term of five years maturing on July 25, 2016. The third facility is a Term Loan B in the amount of $200.0 million with a term of seven years maturing on July 25, 2018, subject to certain required amortization. At any time when the Company's total leverage is 3.00 to 1.00 or greater, the Company is obligated to prepay a portion of the two term loan facilities from the net proceeds of asset sales, casualty losses, and certain indebtedness for borrowed money, or from a portion of its excess cash flow, subject to certain exceptions.

Borrowings under the revolving facility and Term Loan A loans made under the $1.5 billion debt financing agreement bear interest at London Interbank Offered Rate ("LIBOR") plus 2.25%, or 1.25% in excess of an alternate base rate, and Term Loan B loans bear interest at 3.00% in excess of LIBOR, with a LIBOR floor of 1.00%, or 2.00% in excess of an alternative base rate at the Company's option.

This debt financing agreement was entered into to reduce the Company's borrowing costs with lower interest rates and to create more financial flexibility with a higher revolving credit capacity and improvement in financial terms. The proceeds from the Term Loan A, Term Loan B and revolving credit facility were used to repay all outstanding balances and terminate the Company's $1.23 billion debt financing agreement (which included the $700.0 million term loan and the $530.0 million revolving credit facility), as well as to pay the new debt issuance costs incurred for the refinancing.


18

Table of Contents
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011
(In millions, except share and per share data and unless otherwise indicated)

The Company incurred $11.5 million in debt issuance costs in connection with the July 26, 2011 $1.5 billion debt financing agreement. In addition, prior to the execution of the new debt agreement, there were $35.7 million of remaining unamortized debt issuance costs and $8.9 million of remaining original issue discount from the terminated $1.23 billion debt financing agreement. In accordance with the accounting guidance for treatment of debt issuance costs in a debt extinguishment, of the $56.1 million of combined debt issuance costs and the remaining original issue discount, the Company accounted for the amounts as follows:
 
Loss on Debt Extinguishment
 
Capitalized Debt Issuance Costs
 
Totals
Debt issuance costs from $1.5 billion debt agreement from July 2011
$
4.2

 
$
7.3

 
$
11.5

Debt issuance costs from $1.23 billion debt agreement from July 2010
20.9

 
14.8

 
35.7

Original issue discount from $1.23 billion debt agreement from July 2010
8.9

 

 
8.9

Totals
$
34.0

 
$
22.1

 
$
56.1

The $34.0 million recognized in the three months ended September 30, 2011 was classified as loss on debt extinguishment in the condensed consolidated statement of operations. The $22.1 million of capitalized debt issuance costs were classified as other long-term assets in the condensed consolidated balance sheet and will be amortized over the 5 and 7 year lives of the new debt instruments. A new original issue discount of $1.0 million related to the Term Loan B was classified as a reduction of long-term debt.

The $1.5 billion debt financing agreement is secured by substantially all of the unencumbered assets of the Company. The $1.5 billion debt financing agreement also requires the Company to provide additional collateral to the lenders in certain limited circumstances.
As of September 30, 2011, the Company's various lending arrangements included certain financial covenants (all financial terms, numbers and ratios are as defined in the Company's debt agreements).  Among these covenants, the Company was required to maintain the following as of September 30, 2011 (for each covenant, the most restrictive measurement has been included below):

On a rolling twelve-month basis, the total leverage ratio, defined as total consolidated debt to consolidated EBITDA (as defined in the debt agreement), shall not exceed 3.50 to 1.00 (for the twelve months ended September 30, 2011, the Company's leverage ratio was 2.45 to 1.00). 

 On a rolling twelve-month basis, the minimum interest coverage ratio, defined as consolidated EBITDA to consolidated cash interest expense, shall not be less than 3.00 to 1.00 (for the twelve months ended September 30, 2011, the Company's interest coverage ratio was 6.42 to 1.00). 

On a rolling twelve-month basis, the fixed charge coverage ratio, defined as consolidated EBITDA and rent expense to interest and rent expense, shall not be less than 1.50 to 1.00 (for the twelve months ended September 30, 2011, the Company's fixed charge coverage ratio was 3.22 to 1.00).

Consolidated net worth of at least $745.8 million plus 40% of positive consolidated net income cumulatively for each year (as of September 30, 2011, the Company's consolidated net worth under the most restrictive covenant per the various debt agreements was $1.34 billion).

In addition to those covenants, the $1.5 billion debt financing agreement subjects the Company to certain quarterly financial covenants and also includes certain limitations on acquisitions, indebtedness, liens, dividends and repurchases of capital stock. If the Company's total leverage ratio is greater than 3.00 to 1.00 (total leverage ratio as defined in the debt financing agreement), the Company is prohibited from making greater than $120.0 million of annual dividend payments, capital stock repurchases and certain other payments. If the total leverage ratio is less than 3.00 to 1.00, there are no such restrictions.  As of and for the rolling twelve-month period ended September 30, 2011, the Company was in compliance with all financial covenants in its debt agreements.
    

19

Table of Contents
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011
(In millions, except share and per share data and unless otherwise indicated)

Note 14. Income Taxes

The Company records income tax expense on an interim basis. The estimated annual effective income tax rate is adjusted quarterly and items discrete to a specific quarter are reflected in tax expense for that interim period. The estimated annual effective income tax rate reflects the change in a valuation allowance due to expected current year earnings or loss.  A valuation allowance is established when necessary to reduce deferred tax assets to the amount more likely than not to be realized.  There was no material change in unrecognized tax benefits in the nine month period ending September 30, 2011, and the Company does not anticipate a material change in total unrecognized tax benefits within the next 12 months.

In connection with the July 2, 2010 acquisition of World Color Press and the public registration of the Quad/Graphics class A common stock, the Company changed the tax status of certain entities within the Quad/Graphics legal structure to C corporation status under the provisions of the Internal Revenue Code of 1986, as amended. From that point forward, these entities will be subject to federal and state income taxes. The impact from the conversion to C corporation status resulted in the recognition of income tax expense in the third quarter of 2010 of $200.5 million.
 
Note 15. Financial Instruments and Fair Value Measurements

Certain assets and liabilities are required to be recorded at fair value on a recurring basis, while other assets and liabilities are recorded at fair value on a nonrecurring basis, generally as a result of acquisitions or impairment charges.  Fair value is determined based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants.  The Company records the fair value of its forward contracts and pension plan assets on a recurring basis.  Assets measured at fair value on a nonrecurring basis include property, plant and equipment, assets held for sale, goodwill and other intangible assets.  The fair value of cash and cash equivalents, receivables, restricted cash, accounts payable, accrued liabilities and amounts owing in satisfaction of bankruptcy claims approximate their carrying values as of September 30, 2011 and December 31, 2010.  See Note 13 for further discussion on the fair value of the Company's debt.

The Company has operations in countries that have transactions outside their functional currencies and periodically enters into foreign exchange contracts.  These contracts are used to hedge the net exposures of changes in foreign currency exchange rates and are designated as either cash flow hedges or fair value hedges.  Gains or losses on net foreign currency hedges are intended to offset losses or gains on the underlying net exposures in an effort to reduce the earnings volatility resulting from fluctuating foreign currency exchange rates.

The Company also periodically enters into foreign exchange contracts against firm equipment purchase contracts denominated in foreign currencies and natural gas forward purchase contracts to hedge against increases in these costs.  Estimated market values were determined based upon quoted market prices.

As of September 30, 2011, the Company entered into 30-day foreign currency forward exchange contracts to hedge exchange rate exposure related to the $50.0 million Canadian dollars deposit related to the Transcontinental Mexico acquisition (see Note 3). There were no open foreign currency exchange contracts at December 31, 2010.  During the three and nine months ended September 30, 2011 and 2010, the Company's commodity contracts qualified for the exception related to normal purchases and sales as the Company takes delivery in the normal course of business. 


20

Table of Contents
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011
(In millions, except share and per share data and unless otherwise indicated)

Note 16. Other Long-Term Liabilities

Other long-term liabilities consisted of the following as of September 30, 2011 and December 31, 2010:

 
September 30,
2011
 
December 31,
2010
Single employer pension and postretirement obligations
$
234.9

 
$
330.7

Multiemployer pension plans—withdrawal liability
83.5

 
100.1

Tax-related liabilities
34.9

 
34.8

Employee-related liabilities
45.0

 
53.2

Other
65.6

 
85.0

Total
$
463.9

 
$
603.8


The single employer pension and postretirement obligation, as well as the withdrawal liability for the multiemployer pension plans pertaining to the Canadian operations, are no longer reflected in the 2011 amounts above, but are included in Note 4.

Note 17. Pension and Other Postretirement Benefits

The Company assumed multiple defined benefit pension and postretirement benefit plans as part of the World Color Press acquisition.  Prior to the acquisition, the Company did not have defined benefit plans and the resulting pension and postretirement obligations.  The components of the estimated pension expense and postretirement benefits (income) expense for the three and nine months ended September 30, 2011 and 2010 were as follows:

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2011
 
2010
 
2011
 
2010
Pension expense
 

 
 
 
 

 
 
Service cost
$

 
$
0.2

 
$
0.1

 
$
0.2

Interest cost
8.5

 
8.6

 
25.4

 
8.6

Expected return on assets
(6.9
)
 
(6.0
)
 
(20.7
)
 
(6.0
)
Net pension expense
$
1.6

 
$
2.8

 
$
4.8

 
$
2.8

Postretirement benefits income
 
 
 
 
 
 
 
Service cost
$
0.1

 
$
0.1

 
$
0.3

 
$
0.1

Interest cost
0.4

 
0.6

 
1.1

 
0.6

Amortization of deferred gains, net
(0.8
)
 

 
(2.4
)
 

Net postretirement benefits (income) expense
$
(0.3
)
 
$
0.7

 
$
(1.0
)
 
$
0.7


During the nine months ended September 30, 2011, the Company made the following contributions and benefits payments to its defined benefit pension and postretirement plans in its continuing operations:

 
Nine Months Ended
 
September 30, 2011
Contributions on qualified pension plans
$
32.4

Benefit payments on non-qualified pension plans
1.6

Benefit payments on postretirement plans
2.2

Total benefit plan payments of continuing operations
$
36.2




21

Table of Contents
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011
(In millions, except share and per share data and unless otherwise indicated)

Note 18. Loss Per Share Attributable to Quad/Graphics Common Shareholders

Basic loss per share attributable to Quad/Graphics common shareholders is computed by dividing net loss attributable to Quad/Graphics common shareholders by the weighted average common shares outstanding of 47.1 million shares and 47.2 million shares for the three and nine months ended September 30, 2011, respectively, and 46.4 million shares and 34.3 million shares for the three and nine months ended September 30, 2010, respectively.  The calculation of a diluted earnings per share amount includes the effect of any dilutive equity incentive instruments.  The Company uses the treasury stock method to calculate the effect of outstanding dilutive equity incentive instruments, which requires the Company to compute total proceeds as the sum of (1) the amount the employee must pay upon exercise of the award, (2) the amount of unearned stock-based compensation costs attributed to future services and (3) the amount of tax benefits, if any, that would be credited to additional paid-in capital assuming exercise of the award.  Equity incentive instruments for which the total employee proceeds from exercise exceed the average fair value of the same equity incentive instrument over the period have an anti-dilutive effect on earnings per share, and accordingly, the Company excludes them from the calculation.  Due to the net loss attributable to Quad/Graphics common shareholders incurred during the three and nine months ended September 30, 2011 and 2010, the assumed exercise of all equity incentive instruments was anti-dilutive and, therefore, not included in the diluted loss per share attributable to Quad/Graphics common shareholders calculation.

Reconciliations of the numerator and the denominator of the basic and diluted per share computations for the Company's common stock, including the impact of discontinued operations, are summarized as follows:

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2011
 
2010
 
2011
 
2010
Numerator:
 

 
 

 
 

 
 

Net loss from continuing operations
$
(5.5
)
 
$
(230.3
)
 
$
(16.9
)
 
$
(274.4
)
Net earnings attributable to noncontrolling interests
(0.1
)
 
(0.1
)
 
(0.2
)
 
(0.2
)
Loss from continuing operations
(5.6
)
 
(230.4
)
 
(17.1
)
 
(274.6
)
Loss from discontinued operations
(16.8
)
 
(2.1
)
 
(22.9
)
 
(2.1
)
Loss attributable to Quad/Graphics common shareholders
$
(22.4
)
 
$
(232.5
)
 
$
(40.0
)
 
$
(276.7
)
 
 
 
 
 
 
 
 
Denominator:
 

 
 

 
 

 
 

Basic weighted average number of common shares outstanding for all classes of common shares
47.1

 
46.4

 
47.2

 
34.3

Plus: effect of dilutive equity incentive instruments

 

 

 

Diluted weighted average number of common shares outstanding for all classes of common shares
47.1

 
46.4

 
47.2

 
34.3

 
 
 
 
 
 
 
 
Net loss attributable to Quad/Graphics common shareholders per share:
 

 
 

 
 

 
 

Basic and Diluted
 
 
 
 
 
 
 
Continuing operations
$
(0.12
)
 
$
(4.97
)
 
$
(0.36
)
 
$
(8.01
)
Discontinued operations
(0.36
)
 
(0.04
)
 
(0.49
)
 
(0.06
)
Loss per share attributable to Quad/Graphics common shareholders
$
(0.48
)
 
$
(5.01
)
 
$
(0.85
)
 
$
(8.07
)
 
 
 
 
 
 
 
 
Cash dividends paid per common share for all classes of common shares
$
0.20

 
$

 
$
0.40

 
$
0.50

 
 
 
 
 
 
 
 
Cash distributions paid per common share to Quad/Graphics pre-acquisition common shareholders as part of the World Color Press acquisition
$

 
$
4.98

 
$

 
$
4.98

 

22

Table of Contents
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011
(In millions, except share and per share data and unless otherwise indicated)

Note 19. Equity Incentive Programs

The Company recognizes compensation expense, based on estimated grant date fair values, for all share-based awards issued to employees and non-employee directors using the Black-Scholes option pricing model.  The total compensation expense recognized related to all equity incentive programs was $2.1 million and $6.7 million for the three and nine months ended September 30, 2011, respectively, and $1.3 million and $3.8 million for the three and nine months ended September 30, 2010 and was recorded in selling, general and administrative expenses.  The Company recognizes compensation costs for only those awards expected to vest on a straight-line basis over the requisite service period of the awards, which is generally the vesting term.  The Company estimated the number of awards expected to vest based, in part, on historical forfeiture rates and also based on management's expectations of employee turnover within the specific employee groups receiving each type of award.  Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods, if actual forfeitures differ from those estimates.

For grants made prior to January 1, 2011, equity incentive compensation expense only included the Company's 1999 Nonqualified Stock Option Plan and the 1990 Stock Option Plan.  For grants beginning January 1, 2011, the shareholders of the Company approved the Quad/Graphics Inc. 2010 Omnibus Incentive Plan ("Omnibus Plan") for two complimentary purposes: (1) to attract and retain outstanding individuals to serve as directors, officers and employees and (2) to increase shareholder value.  Concurrent with the July 2, 2010 closing of the World Color Press acquisition, an additional 2.3 million shares of Class A common stock were approved for issuance under the Company's Omnibus Plan.  Within the framework of the Omnibus Plan, the Company's board of directors approved the form of a new stock option award agreement, a restricted stock award agreement, a restricted stock unit award agreement and a deferred stock unit award agreement.  The first grants of any of these newly approved equity incentive instruments were made January 1, 2011 at an exercise price of $41.26.  Each equity incentive instrument granted has an exercise price of no less than 100% of the fair market value of the class A common stock on the date of grant.
 
At September 30, 2011, the Company has authorized a total of 6.1 million shares of its class A common stock for grants under all of the Company's equity incentive plans, and 1.7 million shares were remaining for future grants.
 
Stock Options
 
Options granted prior to 2011 generally vest at a rate of 5% to 10% per year and expire 90 days after the respective employee's termination from the Company.  For new option grants beginning January 1, 2011, options vest over four years, with no vesting in the first year and one-third vesting upon the second, third and fourth anniversary dates.  As defined in the individual grant agreements, acceleration of vesting may occur under a change in control, death, disability or normal retirement of the grantee.  For the new option grants beginning January 1, 2011, options expire upon the earliest of the tenth anniversary of the grant date, twenty-four months after termination for death, thirty-six months after termination for normal retirement or disability and 90 days after termination of employment for any other reason.  While stock options granted prior to 2011 were credited with dividend declarations, the new option grants after that time are not credited with dividend declarations.  Stock options are only to be granted to employees and will only be granted under the new option grant terms from January 1, 2011 forward.
 
The Company granted 448,154 and 2,875 stock options under the Omnibus Plan on January 1, 2011 and August 1, 2011, respectively. The Company granted 495,000 options under the pre-2011 stock option plans on January 1, 2010.  The grant date weighted average fair value of options was $13.17 and $18.78 for the grants during the nine months ended September 30, 2011 and 2010, respectively.  The fair value of each stock option grant is estimated on the date of grant with the following weighted average assumptions:
 
 
Nine Months Ended September 30,
 
2011
 
2010
Expected volatility
36.0
%
 
27.0
%
Risk-free interest rate
2.3
%
 
3.8
%
Expected life (years)
7.0

 
9.8

Dividend yield
2.0
%
 
%

23

Table of Contents
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011
(In millions, except share and per share data and unless otherwise indicated)

 
The Company determined expected volatility based on the volatility of comparable company stock.  The average risk-free interest rate is based on the United States treasury security rate in effect as of the grant date over the term of the expected life.  The expected life is based on the term and vesting period of each grant adjusted for historical experience in vesting.  Prior to 2011, no dividend yield is included because dividends were credited to the option holders.
 
Compensation expense recognized related to stock options was $1.7 million and $4.9 million for the three and nine months ended September 30, 2011, respectively, and $1.3 million and $3.8 million for the three and nine months ended September 30, 2010, respectively.  Total future compensation expense for all stock options granted as of September 30, 2011 is approximately $31.6 million, which is expected to be recognized over the weighted-average vesting period of 3.5 years.
 
Cash received from option exercises was $0 and $1.6 million for the three and nine months ended September 30, 2011, respectively, and $0.6 million and $0.8 million for the three and nine months ended September 30, 2010, respectively.
 
The following table is a summary of the stock option activity for the nine months ended September 30, 2011:
 
 
Shares Under
Option
(thousands)
 
Weighted Average
Exercise
Price
 
Weighted Average
Remaining
Contractual Term
(years)
 
Aggregate
Intrinsic Value
(millions)
Outstanding at December 31, 2010
3,736

 
$
13.12

 
6.9
 
$
105.1

Granted
451

 
41.20

 
7.0
 


Exercised
(94
)
 
(1.74
)
 
 
 


Cancelled/forfeited/expired
(14
)
 
16.28

 
 
 


Outstanding at September 30, 2011
4,079

 
$
16.21

 
6.2
 
$
28.0

 
 
 
 
 
 
 
 
Vested and expected to vest at September 30, 2011
3,702

 
$
13.05

 
6.2
 
$
26.4

Exercisable at September 30, 2011
1,577

 
$
9.72

 
5.6
 
$
17.2

 
The intrinsic value of options exercisable and options outstanding at September 30, 2011 and December 31, 2010 is based on the fair value of the stock price.
 
Share-based compensation activity for the three and nine months ended September 30, 2011 and 2010 is noted below:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2011
 
2010
 
2011
 
2010
Total intrinsic value of stock options exercised
$

 
$
1.9

 
$
3.1

 
$
2.2

Cash received from stock option exercises

 
0.6

 
1.6

 
0.8

Total fair value of stock options vested

 
0.7

 
5.4

 
6.4

 
Restricted Stock, Restricted Stock Units and Deferred Stock Units
 
Restricted stock ("RS") and restricted stock unit ("RSU") awards consist of shares or the rights to shares of the Company's class A common stock which are awarded to employees of the Company.  The awards are restricted such that they are subject to substantial risk of forfeiture and to restrictions on their sale or other transfer by the employee.  RSU awards are typically granted to eligible employees outside of the United States.  On January 1, 2011, RS awards of 119,315 shares and RSU awards of 14,625 units were granted at a grant date fair value of $41.26 and $38.86, respectively. On August 1, 2011, RS awards of 709 shares and RSU awards of 1,177 units were granted at a grant date fair value of $32.32 and $30.01, respectively.  All of the RS shares and the RSUs will vest on the third anniversary of the grant date, provided the holder of the share is continuously employed by the Company until the vesting date.  As defined in the individual grant agreements, acceleration of vesting may occur under a change in control, or death, disability or normal retirement of the grantee.  Grantees receiving RS grants are able to exercise full voting rights and receive full credit for dividends during the vesting period.  All such dividends

24

Table of Contents
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011
(In millions, except share and per share data and unless otherwise indicated)

will be paid to the RS grantee within 45 days of full vesting.  Grantees receiving RSUs are not entitled to vote and do not earn dividends.  Upon vesting, RSUs will be settled either through cash payment equal to the fair market value of the RSUs on the vesting date or through issuance of Company class A common stock.
 
Nonvested RS and RSU awards as of September 30, 2011, and changes for the nine months ended September 30, 2011 were as follows:
 
 
Restricted Stock
 
Restricted Stock Units
 
Shares
(thousands)
 
Weighted-
Average
Grant Date
Fair Value
Per Share
 
Weighted-
Average
Remaining
Contractual
Term (Years)
 
Units
(thousands)
 
Weighted-
Average
Grant Date
Fair Value
Per Share
 
Weighted-
Average
Remaining
Contractual
Term (Years)
Nonvested at December 31, 2010

 
$

 

 

 
$

 

Granted at January 1, 2011
119.3

 
41.26

 
3.0

 
14.6

 
38.86

 
3.0

Granted at August 1, 2011
0.7

 
32.32

 
3.0

 
1.2

 
30.01

 
3.0

Nonvested at September 30, 2011
120.0

 
$
41.21

 
2.3

 
15.8

 
$
38.19

 
2.3


Compensation expense of $0.4 million and $1.2 million was recognized related to RS and RSUs for the three and nine months ended September 30, 2011, respectively.  Total future compensation expense for all RS and RSUs granted as of September 30, 2011 is approximately $3.7 million, which is expected to be recognized over the weighted-average vesting period of 1.6 years.  The aggregate fair value of outstanding RSUs as of September 30, 2011 was $0.6 million.

On January 1, 2011, 13,704 deferred stock units ("DSU") were granted at a grant date fair value of $41.26 to non-employee directors.  The deferred stock units are fully vested on the grant date and all were outstanding as of September 30, 2011.  Each DSU entitles the grantee to receive one share of class A common stock upon the earlier of the separation date of the grantee or the second anniversary of the grant date, but could be subject to acceleration for a change in control or death or disability as defined in the individual DSU grant agreement.  Grantees of DSUs may not exercise voting rights, but are credited with dividends and those dividends will be converted into additional DSUs based on the closing price of the class A common stock upon settlement.  For the three and nine months ended September 30, 2011, the compensation expense recorded for these awards was $0 and $0.6 million, respectively.  As these awards were fully vested on the grant date, all compensation expense was recognized at the date of grant.

Other information

Authorized unissued shares or treasury shares may be used for issuance under the Company's equity incentive programs.  The Company intends to use treasury shares of its class A common stock to meet the stock requirements of its awards in the future.

Note 20. Shareholders' Equity

The Company has three classes of common stock.  There are 80.0 million shares of $0.025 par value class A common stock authorized, of which 40.0 million shares (including 7.6 million shares in treasury stock) and 40.0 million shares (including 7.4 million shares in treasury stock) were issued at September 30, 2011 and December 31, 2010, respectively.  There are 80.0 million shares of $0.025 par value class B common stock authorized, of which 15.0 million shares (including 0.8 million shares in treasury stock) were issued at September 30, 2011 and December 31, 2010.  There are 20.0 million shares of $0.025 par value class C common stock authorized, of which 0.5 million shares (including 0.2 million shares in treasury stock) were issued at September 30, 2011 and December 31, 2010.  The Company also has 0.5 million shares of $0.01 par value preferred stock authorized, of which none have been issued at September 30, 2011 and December 31, 2010.  The Company has no present plans to issue any preferred stock. 

On September 6, 2011, the Company's board of directors authorized a share repurchase program of up to $100.0 million of the Company's outstanding class A common stock. Through September 30, 2011, the Company repurchased 0.4 million shares of class A common stock in the open market for $7.4 million.


25

Table of Contents
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011
(In millions, except share and per share data and unless otherwise indicated)

In accordance with the Articles of Incorporation, dividends are paid equally for class A, class B and class C common shares.  On August 9, 2011, the Board of Directors declared a $0.20 cash dividend for each share of class A, class B and class C common stock outstanding to shareholders of record on August 29, 2011, which was paid on September 9, 2011. On May 10, 2011, the Board of Directors declared a $0.20 cash dividend for each share of class A, class B and class C common stock outstanding to shareholders of record on May 27, 2011, which was paid on June 10, 2011. On July 2, 2010, as part of the acquisition of World Color Press, there was a cash distribution of $140.0 million to Quad/Graphics' pre-acquisition common shareholders. On January 2, 2010, the Board of Directors declared a $0.50 cash dividend for each share of class A, class B and class C common stock outstanding to shareholders of record on January 2, 2010, which was paid on January 22, 2010.
 
In accordance with the Articles of Incorporation, each class A common share has one vote per share and each class B and class C common share has ten votes per share on all matters voted upon by the Company's shareholders.  Liquidation rights are the same for all three classes of stock.
 
Redeemable equity
 
The Company follows the applicable GAAP and SEC authoritative guidance for redeemable stock which requires the Company to record the class C common stock at full redemption value at each balance sheet date to the extent the redemption of those securities is not solely within the control of the Company.  Under the terms of the Articles of Incorporation, the class C common shares are required to be owned by a qualified employee retirement plan of the Company and each holder of class C common stock has a continuous right to have the class C common stock repurchased by the Company.
 
The redemption value of the class C qualified employee retirement plan shares at September 30, 2011 and December 31, 2010 totaled $4.7 million and $10.6 million, respectively.  There were no class C common shares redeemed by the Company during the nine months ended September 30, 2011.  Subsequent changes to the redemption value of the securities due to changes in stock valuation or dividend declarations are charged to retained earnings, while decreases in redemption value due to elimination of redemption features are credited to additional paid-in capital and retained earnings.  During the nine months ended September 30, 2011 the balance of redeemable equity decreased by $5.9 million, as shown in the table below:
 
 
Class C Common Stock
 
Total Redeemable Equity
 
Shares
 
Redemption
Value
 
Balance at December 31, 2010
0.3

 
$
10.6

 
$
10.6

Cash dividends declared

 
(0.2
)
 
(0.2
)
Decrease in redemption value of redeemable equity

 
(5.7
)
 
(5.7
)
Balance at September 30, 2011
0.3

 
$
4.7

 
$
4.7



26

Table of Contents
QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011
(In millions, except share and per share data and unless otherwise indicated)

Common stock and other equity and noncontrolling interests
 
Activity impacting the Company's common stock and other equity and noncontrolling interests for the nine months ended September 30, 2011 was as follows:
 
 
Quad/Graphics Common Stock and Other Equity
 
Noncontrolling Interests
Balance at December 31, 2010
$
1,481.3

 
$
0.7

Net loss attributable to Quad/Graphics common shareholders
(40.0
)
 

Net earnings attributable to noncontrolling interests

 
0.2

Foreign currency translation adjustments
(15.8
)