Document
Table of Contents

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
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
quadlogo032019.jpg
Quad/Graphics, Inc.
(Exact name of registrant as specified in its charter)
Wisconsin
 
39-1152983
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
N61 W23044 Harry’s Way, Sussex, Wisconsin 53089-3995
 
(414) 566-6000
(Address of principal executive offices) (Zip Code)
 
(Registrant’s telephone number, including area code)
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, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
 
Accelerated filer o
 
 
 
Non-accelerated filer o
 
Smaller reporting company o
 
 
 
 
 
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
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 April 26, 2019
 
 
 
Class A Common Stock
 
37,979,598
 
 
 
Class B Common Stock
 
13,556,858
 
 
 
Class C Common Stock
 
 
 
 
 
 


Table of Contents

QUAD/GRAPHICS, INC.
FORM 10-Q INDEX
For the Quarter Ended March 31, 2019

 
 
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



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PART I — FINANCIAL INFORMATION

ITEM 1.
Condensed Consolidated Financial Statements (Unaudited)

QUAD/GRAPHICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)
(UNAUDITED)
 
Three Months Ended March 31,
 
2019
 
2018
Net sales
 
 
 
Products
$
805.1

 
$
801.1

Services
199.6

 
166.4

Total net sales
1,004.7

 
967.5

Cost of sales
 
 
 
Products
695.0

 
665.2

Services
142.1

 
127.2

Total cost of sales
837.1

 
792.4

Operating expenses
 
 
 
Selling, general and administrative expenses
97.9

 
86.9

Depreciation and amortization
59.2

 
56.2

Restructuring, impairment and transaction-related charges
7.6

 
24.9

Total operating expenses
1,001.8

 
960.4

Operating income
2.9

 
7.1

Interest expense
21.8

 
17.3

Net pension income
(1.5
)
 
(3.1
)
Loss on debt extinguishment
15.9

 

Loss before income taxes and equity in loss (earnings) of unconsolidated entity
(33.3
)
 
(7.1
)
Income tax benefit
(10.6
)
 
(3.3
)
Loss before equity in loss (earnings) of unconsolidated entity
(22.7
)
 
(3.8
)
Equity in loss (earnings) of unconsolidated entity
0.1

 
(0.3
)
Net loss
(22.8
)
 
(3.5
)
Less: net loss attributable to noncontrolling interests
(0.3
)
 

Net loss attributable to Quad common shareholders
$
(22.5
)
 
$
(3.5
)
 
 
 
 
Loss per share attributable to Quad common shareholders
 
 
 
Basic and diluted
$
(0.45
)
 
$
(0.07
)
 
 
 
 
Weighted average number of common shares outstanding
 
 
 
Basic and diluted
49.6

 
50.1

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


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QUAD/GRAPHICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in millions)
(UNAUDITED)
 
Three Months Ended March 31,
 
2019
 
2018
Net loss
$
(22.8
)
 
$
(3.5
)
 
 
 
 
Other comprehensive (loss) income
 
 
 
Translation adjustments
(0.3
)
 
5.6

Interest rate swap adjustments
(3.7
)
 
3.7

Other comprehensive (loss) income, before tax
(4.0
)
 
9.3

 
 
 
 
Income tax impact related to items of other comprehensive (loss) income
0.9

 
(0.8
)
 
 
 
 
Other comprehensive (loss) income, net of tax
(3.1
)
 
8.5

 
 
 
 
Total comprehensive (loss) income
(25.9
)
 
5.0

 
 
 
 
Less: comprehensive loss attributable to noncontrolling interests
(0.3
)
 

 
 
 
 
Comprehensive (loss) income attributable to Quad common shareholders
$
(25.6
)
 
$
5.0

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



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QUAD/GRAPHICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions)
(UNAUDITED)
 
March 31,
2019
 
December 31,
2018
ASSETS
 
 
 
Cash and cash equivalents
$
10.4

 
$
69.5

Receivables, less allowances for doubtful accounts of $28.0 million at March 31, 2019, and $27.6 million at December 31, 2018
512.3

 
528.7

Inventories
283.0

 
300.6

Prepaid expenses and other current assets
50.2

 
47.8

Total current assets
855.9

 
946.6

 
 
 
 
Property, plant and equipment—net
1,235.9

 
1,257.4

Operating lease right-of-use assets—net
127.3

 

Goodwill
114.8

 
54.6

Other intangible assets—net
172.6

 
112.6

Equity method investment in unconsolidated entity
3.9

 
4.0

Other long-term assets
92.8

 
93.9

Total assets
$
2,603.2

 
$
2,469.1

 
 
 
 
LIABILITIES AND SHAREHOLDERS EQUITY
 
 
 
Accounts payable
$
419.3

 
$
511.0

Accrued liabilities
247.8

 
292.3

Short-term debt and current portion of long-term debt
52.4

 
42.9

Current portion of finance lease obligations
5.1

 
5.1

Current portion of operating lease obligations
33.6

 

Total current liabilities
758.2

 
851.3

 
 
 
 
Long-term debt
1,074.5

 
882.6

Finance lease obligations
9.8

 
10.3

Operating lease obligations
97.2

 

Deferred income taxes
19.9

 
32.1

Other long-term liabilities
223.7

 
232.6

Total liabilities
2,183.3

 
2,008.9

 
 
 
 
Commitments and contingencies (Note 8)


 


 
 
 
 
Shareholders equity
 
 
 
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
836.2

 
861.3

Treasury stock, at cost
(29.9
)
 
(56.6
)
Accumulated deficit
(249.9
)
 
(211.4
)
Accumulated other comprehensive loss
(155.3
)
 
(152.2
)
Quads shareholders equity
402.5

 
442.5

Noncontrolling interests
17.4

 
17.7

Total shareholders equity and noncontrolling interests
419.9

 
460.2

Total liabilities and shareholders equity
$
2,603.2

 
$
2,469.1

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


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QUAD/GRAPHICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(UNAUDITED)
 
Three Months Ended March 31,
 
2019
 
2018
OPERATING ACTIVITIES
 
 
 
Net loss
$
(22.8
)
 
$
(3.5
)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
 
 
 
Depreciation and amortization
59.2

 
56.2

Employee stock ownership plan contribution

 
22.3

Impairment charges
1.7

 
7.9

Amortization of debt issuance costs and original issue discount
1.1

 
0.9

Loss on debt extinguishment
15.9

 

Stock-based compensation
5.0

 
5.4

Gain from property insurance claims
(0.8
)
 
(17.2
)
Gain on the sale or disposal of property, plant and equipment
(3.0
)
 
(2.2
)
Deferred income taxes
(10.7
)
 
0.9

Equity in loss (earnings) of unconsolidated entity
0.1

 
(0.3
)
Changes in operating assets and liabilities—net of acquisitions
(104.3
)
 
(68.2
)
Net cash (used in) provided by operating activities
(58.6
)
 
2.2

 
 
 
 
INVESTING ACTIVITIES
 
 
 
Purchases of property, plant and equipment
(45.3
)
 
(24.2
)
Proceeds from the sale of property, plant and equipment
7.8

 
4.3

Proceeds from property insurance claims
0.3

 
13.4

Acquisition of businesses—net of cash acquired
(121.0
)
 
(73.9
)
Net cash used in investing activities
(158.2
)
 
(80.4
)
 
 
 
 
FINANCING ACTIVITIES
 
 
 
Proceeds from issuance of long-term debt
490.4

 

Payments of long-term debt
(534.3
)
 
(5.0
)
Payments of finance lease obligations
(1.6
)
 
(1.6
)
Borrowings on revolving credit facilities
1,239.3

 
245.5

Payments on revolving credit facilities
(990.1
)
 
(174.0
)
Payments of debt issuance costs and financing fees
(20.2
)
 

Proceeds from stock options exercised

 
4.0

Equity awards redeemed to pay employees tax obligations
(6.6
)
 
(7.5
)
Payment of cash dividends
(19.2
)
 
(17.2
)
Net cash provided by financing activities
157.7

 
44.2

 
 
 
 
Effect of exchange rates on cash and cash equivalents

 
(0.2
)
Net decrease in cash and cash equivalents
(59.1
)
 
(34.2
)
Cash and cash equivalents at beginning of period
69.5

 
64.4

Cash and cash equivalents at end of period
$
10.4

 
$
30.2

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


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QUAD/GRAPHICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
AND NONCONTROLLING INTERESTS
(in millions)
(UNAUDITED)

Condensed Consolidated Statement of Shareholders’ Equity For the Three Months Ended March 31, 2019
 
 
Common Stock
 
Additional
Paid-in
Capital
 
Treasury Stock
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Loss
 
Shareholders’
Equity
 
Noncontrolling
Interests
 
 
Shares
 
Amount
 
 
Shares
 
Amount
 
 
 
 
Balance at January 1, 2019
 
54.3

 
$
1.4

 
$
861.3

 
(2.7
)
 
$
(56.6
)
 
$
(211.4
)
 
$
(152.2
)
 
$
442.5

 
$
17.7

Net loss
 

 

 

 

 

 
(22.5
)
 

 
(22.5
)
 
(0.3
)
Foreign currency translation adjustments
 

 

 

 

 

 

 
(0.3
)
 
(0.3
)
 

Interest rate swap adjustments, net of tax
 

 

 

 

 

 

 
(2.8
)
 
(2.8
)
 

Cash dividends declared ($0.30 per common share)
 

 

 

 

 

 
(16.0
)
 

 
(16.0
)
 

Stock-based compensation
 

 

 
5.0

 

 

 

 

 
5.0

 

Issuance of share-based awards, net of other activity
 

 

 
(30.1
)
 
1.7

 
33.3

 

 

 
3.2

 

Awards redeemed to pay employees’ tax obligations
 

 

 

 
(0.5
)
 
(6.6
)
 

 

 
(6.6
)
 

Balance at March 31, 2019
 
54.3

 
$
1.4

 
$
836.2

 
(1.5
)
 
$
(29.9
)
 
$
(249.9
)
 
$
(155.3
)
 
$
402.5

 
$
17.4



Condensed Consolidated Statement of Shareholders’ Equity For the Three Months Ended March 31, 2018
 
 
Common Stock
 
Additional
Paid-in
Capital
 
Treasury Stock
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Loss
 
Shareholders’
Equity
 
Noncontrolling
Interests
 
 
Shares
 
Amount
 
 
Shares
 
Amount
 
 
 
 
Balance at January 1, 2018
 
54.3

 
$
1.4

 
$
861.1

 
(2.3
)
 
$
(52.8
)
 
$
(156.8
)
 
$
(127.3
)
 
$
525.6

 
$

Net loss
 

 

 

 

 

 
(3.5
)
 

 
(3.5
)
 

Consolidation of Rise
 

 

 

 

 

 

 

 

 
30.0

Foreign currency translation adjustments
 

 

 

 

 

 

 
5.6

 
5.6

 

Interest rate swap adjustments, net of tax
 

 

 

 

 

 

 
2.9

 
2.9

 

Cash dividends declared ($0.30 per common share)
 

 

 

 

 

 
(16.1
)
 

 
(16.1
)
 

Stock-based compensation
 

 

 
5.4

 

 

 

 

 
5.4

 

Employee stock ownership plan contribution
 

 

 

 
1.0

 
22.3

 

 

 
22.3

 

Stock options exercised
 

 

 
(3.3
)
 
0.3

 
7.3

 

 

 
4.0

 

Issuance of share-based awards, net of other activity
 

 

 
(12.8
)
 
0.6

 
12.8

 

 

 

 

Awards redeemed to pay employees’ tax obligations
 

 

 

 
(0.3
)
 
(7.5
)
 

 

 
(7.5
)
 

Balance at March 31, 2018
 
54.3

 
$
1.4

 
$
850.4

 
(0.7
)
 
$
(17.9
)
 
$
(176.4
)
 
$
(118.8
)
 
$
538.7

 
$
30.0


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



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QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2019
(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”) 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, 2018, and notes thereto included in the Company’s latest Annual Report on Form 10-K filed with the SEC on February 20, 2019.

The Company is subject to seasonality in its quarterly results as net sales and operating income are higher in the third and fourth quarters of the calendar year as compared to the first and second quarters. The fourth quarter is typically the highest seasonal quarter for cash flows from operating activities due to the reduction of working capital requirements that reach peak levels during the third quarter. Seasonality is driven by increased magazine advertising page counts, retail inserts, catalogs and books primarily due to back-to-school and holiday-related advertising and promotions. The Company expects this seasonality impact to continue in future years.

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 months ended March 31, 2019 and 2018. All of these adjustments are of a normal recurring nature, except as otherwise noted. All 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.

Leases

On January 1, 2019, the Company adopted Accounting Standards Update 2016-02, “Leases (Topic 842)” (“Topic 842”), which establishes a right-of-use model requiring a lessee to record a right-of-use asset and a lease liability on the balance sheet for all leases with terms longer than twelve months. Leases are classified as either finance or operating, with classification affecting the pattern of expense recognition. The Company adopted Topic 842 using the modified retrospective approach and applied the new guidance to those contracts existing at, or entered into after, January 1, 2019. See Note 10, “Leases,” for additional accounting policy and transition disclosures.



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QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2019
(In millions, except share and per share data and unless otherwise indicated)

Note 2. Revenue Recognition

Revenue Disaggregation

The following table provides information about disaggregated revenue by the Company’s operating segments and major products and services offerings for the three months ended March 31, 2019 and 2018:
 
United States Print
and Related Services
 
International
 
Total
Three months ended March 31, 2019
 
 
 
 
 
Catalog, publications, retail inserts, and directories
$
485.7

 
$
71.3

 
$
557.0

Direct mail, books and other printed products
211.1

 
30.4

 
241.5

Other
6.5

 
0.1

 
6.6

Total Products
703.3

 
101.8

 
805.1

Logistics services
100.3

 
4.1

 
104.4

Imaging, marketing services and other services
95.1

 
0.1

 
95.2

Total Services
195.4

 
4.2

 
199.6

Total Net Sales
$
898.7

 
$
106.0

 
$
1,004.7

 
 
 
 
 
 
Three months ended March 31, 2018
 
 
 
 
 
Catalog, publications, retail inserts, and directories
$
510.1

 
$
76.5

 
$
586.6

Direct mail, books and other printed products
189.7

 
17.9

 
207.6

Other
6.8

 
0.1

 
6.9

Total Products
706.6

 
94.5

 
801.1

Logistics services
97.8

 
5.2

 
103.0

Imaging, marketing services and other services
63.4

 

 
63.4

Total Services
161.2

 
5.2

 
166.4

Total Net Sales
$
867.8

 
$
99.7

 
$
967.5


Nature of Products and Services

The Company recognizes its products and services revenue based on when the transfer of control passes to the customer or when the service is completed and accepted by the customer.
The products offering is predominantly comprised of the Company’s print operations which includes retail inserts, publications, catalogs, special interest publications, journals, direct mail, books, directories, in-store marketing and promotion, packaging, newspapers, custom print products, other commercial and specialty printed products and global paper procurement.
The Company considers its logistic operations as services, which include the delivery of printed material. The Services offering also includes revenues related to the Company’s imaging operations, which include digital content management, photography, color services, page production, marketing services, media planning and placement, facilities management and medical services.



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QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2019
(In millions, except share and per share data and unless otherwise indicated)

Costs to Obtain Contracts

In accordance with Accounting Standards Codification (“ASC”) 606 — Revenue from Contracts with Customers, the Company capitalizes certain sales incentives of the sales compensation packages for costs that are directly attributed to being awarded a customer contract or renewal and would not have been incurred had the contract not been obtained. The Company also defers certain contract acquisition costs paid to the customer at contract inception. Costs to obtain contracts with a duration of less than one year are expensed as incurred. For all contract costs with contracts over one year, the Company amortizes the costs to obtain contracts on a straight-line basis over the estimated life of the contract and reviews quarterly for impairment. Activity impacting costs to obtain contracts for the three months ended March 31, 2019, was as follows:
 
Costs to Obtain Contracts
Balance at January 1, 2019
$
21.7

Costs to obtain contracts
1.7

Amortization of costs to obtain contracts
(2.4
)
Balance at March 31, 2019
$
21.0


Remaining Performance Obligations

For certain performance obligations related to print contracts, the Company has elected not to disclose the value of unsatisfied performance obligations for the following: (1) contracts that have an original expected length of one year or less; (2) contracts where revenue is recognized as invoiced; or (3) contracts with variable consideration related to unsatisfied performance obligations. The Company had approximately $415.0 million in volume commitments in contracts that extend beyond one year as of March 31, 2019. The Company expects to recognize approximately 31% of these volume commitments in contracts as revenue by the end of 2019, an additional 38% by the end of 2021, and the balance thereafter.

Note 3. Acquisitions and Strategic Investments

2019 Acquisition of Periscope

On January 3, 2019, the Company completed the acquisition of Periscope, Inc. (“Periscope”), a creative agency headquartered in Minneapolis, Minnesota, for $121.0 million cash paid. Periscope provides a comprehensive service offering, including media buying and analytics, creative and account management. Periscope also has packaging design and premedia services that complement Quad’s print-production capabilities. The preliminary purchase price of $134.0 million includes $9.8 million of acquired cash and non-cash equity incentive awards with a grant date fair value of $3.2 million. Included in the preliminary purchase price allocation are $70.5 million of identifiable other intangible assets, which are amortized over their estimated useful lives, ranging from five to six years, and $60.2 million of goodwill, all of which is deductible for tax purposes. The preliminary allocation of the purchase price is based on valuations performed to determine the fair value of the net assets as of the acquisition date. The purchase price, as well as the purchase price allocation, is subject to the final determination of acquired working capital and completion of the final valuation of the net assets acquired. The net assets acquired, excluding acquired cash, were classified as Level 3 in the valuation hierarchy (see Note 12, “Financial Instruments and Fair Value Measurements,” for the definition of Level 3 inputs). Periscope’s operations are included in the United States Print and Related Services segment.

2018 Ivie & Associates, LLC Acquisition

The Company completed the acquisition of Ivie & Associates, LLC (“Ivie”) on February 21, 2018, for $90.0 million cash paid, which is subject to a potential earn-out of up to an additional $16.0 million, to the extent that certain financial metrics are achieved post-integration. Ivie is headquartered in Flower Mound, Texas and provides a full array of marketing services, including creative and production services, studio services, sourcing, procurement, staff enhancement, media services, public


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QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2019
(In millions, except share and per share data and unless otherwise indicated)

relations, digital services, technology solutions and project management for many leading brands throughout the world. The purchase price of $105.4 million includes $13.6 million of acquired cash and an estimated $15.4 million of future cash payments related to the acquisition. Included in the purchase price allocation are $79.6 million of identifiable other intangible assets, which are amortized over their estimated useful lives, ranging from three to eight years, and $28.3 million of goodwill, of which $26.4 million is deductible for tax purposes. The final allocation of the purchase price was based on valuations performed to determine the fair value of the net assets as of the acquisition date. The net assets acquired, excluding acquired cash, were classified as Level 3 in the valuation hierarchy (see Note 12, “Financial Instruments and Fair Value Measurements,” for the definition of Level 3 inputs). Ivie’s operations are included in the United States Print and Related Services segment.

2018 Investment in Rise Interactive and Analytics, LLC

On March 14, 2018, the Company increased its equity position in Rise Interactive and Analytics, LLC (“Rise”) from 19% to 57% for the conversion of $9.3 million of loans to equity ownership and $8.7 million cash paid. The Company had historically accounted for Rise as a cost method investment. Rise is a digital marketing agency headquartered in Chicago, Illinois, that specializes in digital media, analytics and customer experience, and helps enterprise marketers see, shape, and act on opportunities in digital media. The Company has consolidated the results of Rise as of the date the Company obtained controlling financial interest in Rise and accounts for the 43% portion of Rise’s results not owned by the Company as noncontrolling interest in the condensed consolidated financial statements. The fair value of the assets and liabilities of, and noncontrolling interest in, Rise is estimated to be $48.5 million, including $13.7 million of acquired cash. Also included in the fair value allocation are $23.1 million of identifiable other intangible assets, which are amortized over their estimated useful lives, ranging from five to six years, and $26.3 million of goodwill, which is not deductible for tax purposes. The final allocation of the purchase price was based on valuations performed to determine the fair value of the net assets as of the acquisition date. The net assets acquired, excluding acquired cash, were classified as Level 3 in the valuation hierarchy (see Note 12, “Financial Instruments and Fair Value Measurements,” for the definition of Level 3 inputs). Rise’s operations are included in the United States Print and Related Services segment.

Note 4. Restructuring, Impairment and Transaction-Related Charges

The Company recorded restructuring, impairment and transaction-related charges for the three months ended March 31, 2019 and 2018, as follows:
 
Three Months Ended March 31,
 
2019
 
2018
Employee termination charges
$
4.3

 
$
10.6

Impairment charges
1.7

 
7.9

Transaction-related charges
1.5

 
0.7

Integration costs
0.8

 
0.1

Other restructuring (income) charges
(0.7
)
 
5.6

Total
$
7.6

 
$
24.9


The costs related to these activities have been recorded in the condensed consolidated statements of operations as restructuring, impairment and transaction-related charges. See Note 19, “Segment Information,” for restructuring, impairment and transaction-related charges by segment.



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QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2019
(In millions, except share and per share data and unless otherwise indicated)

Restructuring Charges

The Company began a restructuring program in 2010 related to eliminating excess manufacturing capacity and properly aligning its cost structure. The Company has announced a total of 43 plant closures since 2010. The Company recorded the following charges as a result of plant closures and other restructuring programs:

Employee termination charges of $4.3 million and $10.6 million were recorded during the three months ended March 31, 2019 and 2018, respectively. The Company reduced its workforce through facility consolidations and separation programs.

Integration costs of $0.8 million and $0.1 million were recorded during the three months ended March 31, 2019 and 2018, respectively, primarily for the integration of acquired companies.

Other restructuring (income) charges are presented net of the gains on the sale of facilities, including a $3.5 million gain on the sale of the Hazleton, Pennsylvania facility during the three months ended March 31, 2019, and a $2.2 million gain on the sale of the San Ixhuatepec, Mexico facility during the three months ended March 31, 2018. The components of other restructuring (income) charges consisted of the following during the three months ended March 31, 2019 and 2018:
 
Three Months Ended March 31,
 
2019
 
2018
Vacant facility carrying costs and lease exit charges
$
1.3

 
$
6.6

Equipment and infrastructure removal costs
0.1

 
0.8

Gains on the sale of facilities
(3.5
)
 
(2.2
)
Other restructuring activities
1.4

 
0.4

Other restructuring (income) charges
$
(0.7
)
 
$
5.6


The restructuring charges recorded were based on plans that have been committed to by management and were, 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 Company expects to incur additional restructuring charges related to these and other initiatives.

Impairment Charges

The Company recognized impairment charges of $1.7 million during the three months ended March 31, 2019, primarily for machinery and equipment no longer being utilized in production as a result of facility consolidations, as well as other capacity reduction restructuring activities.

The Company recognized impairment charges of $7.9 million during the three months ended March 31, 2018, which consisted of $2.4 million of land and building impairment charges and $5.5 million of impairment charges for machinery and equipment no longer being utilized in production as a result of facility consolidations, as well as other capacity reduction restructuring activities.

The fair values of the impaired assets were determined by the Company to be Level 3 under the fair value hierarchy (see Note 12, “Financial Instruments and Fair Value Measurements,” for the definition of Level 3 inputs) and were estimated based on internal discounted cash flow estimates, quoted market prices where available and independent appraisals, as appropriate. These assets were adjusted to their estimated fair values at the time of impairment. If estimated fair values subsequently decline, the carrying values of the assets are adjusted accordingly.



12

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QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2019
(In millions, except share and per share data and unless otherwise indicated)

Transaction-Related Charges

The Company incurs transaction-related charges primarily consisting of professional service fees related to business acquisition and divestiture activities. Transaction-related charges of $1.5 million and $0.7 million were recorded during the three months ended March 31, 2019 and 2018, respectively. The transaction-related charges were expensed as incurred in accordance with the applicable accounting guidance on business combinations.

Restructuring Reserves

Activity impacting the Company’s restructuring reserves for the three months ended March 31, 2019, was as follows:
 
Employee
Termination
Charges
 
Impairment
Charges
 
Transaction-Related
Charges
 
Integration
Costs
 
Other
Restructuring
(Income)
Charges
 
Total
Balance at December 31, 2018
$
9.3

 
$

 
$
1.2

 
$
0.2

 
$
17.1

 
$
27.8

Expense (income), net
4.3

 
1.7

 
1.5

 
0.8

 
(0.7
)
 
7.6

Cash payments, net
(3.9
)
 

 
(1.1
)
 
(1.0
)
 
(0.6
)
 
(6.6
)
Non-cash adjustments/reclassifications
(0.5
)
 
(1.7
)
 
0.6

 

 
(5.0
)
 
(6.6
)
Balance at March 31, 2019
$
9.2

 
$

 
$
2.2

 
$

 
$
10.8

 
$
22.2


The Company’s restructuring reserves at March 31, 2019, included a short-term and a long-term component. The short-term portion included $19.5 million in accrued liabilities (see Note 13, “Accrued Liabilities and Other Long-Term Liabilities”) and $2.5 million in accounts payable in the condensed consolidated balance sheets as the Company expects these reserves to be paid within the next twelve months. The long-term portion of $0.2 million is included in other long-term liabilities (see Note 13, “Accrued Liabilities and Other Long-Term Liabilities”) in the condensed consolidated balance sheets. Included in the above table is a $2.0 million non-cash reclassification to transition lease liabilities previously accounted for under ASC 420 — Exit or Disposal Cost Obligations, to operating lease obligations, in accordance with the new guidance under Topic 842. See Note 10, “Leases,” for additional accounting policy and transition disclosures.

Note 5. Goodwill and Other Intangible Assets

Goodwill

Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired in a business combination. Goodwill is assigned to specific reporting units and 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.

The Company recorded $60.2 million of preliminary goodwill within the United States Print and Related Services segment related to the Periscope acquisition completed during the three months ended March 31, 2019. The amount of preliminary goodwill is subject to the final determination of acquired working capital and completion of the final valuation of the net assets acquired. There was no other activity impacting goodwill for the three months ended March 31, 2019.



13

Table of Contents


QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2019
(In millions, except share and per share data and unless otherwise indicated)

The accumulated goodwill impairment losses and the carrying value of goodwill at March 31, 2019, and December 31, 2018, were as follows:
 
March 31, 2019
 
December 31, 2018
 
United States Print and Related Services
 
International
 
Total
 
United States Print and Related Services
 
International
 
Total
Goodwill
$
893.1

 
$
30.0

 
$
923.1

 
$
832.9

 
$
30.0

 
$
862.9

Accumulated goodwill impairment loss
(778.3
)
 
(30.0
)
 
(808.3
)
 
(778.3
)
 
(30.0
)
 
(808.3
)
Goodwill, net of accumulated goodwill impairment loss
$
114.8

 
$

 
$
114.8

 
$
54.6

 
$

 
$
54.6


Other Intangible Assets

The components of finite-lived intangible assets at March 31, 2019, and December 31, 2018, were as follows:
 
March 31, 2019
 
December 31, 2018
 
Weighted
Average
Amortization
Period
(Years)
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Book
Value
 
Weighted
Average
Amortization
Period
(Years)
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Book
Value
Trademarks, patents, licenses and agreements
6
 
$
68.9

 
$
(25.1
)
 
$
43.8

 
7
 
$
59.8

 
$
(22.4
)
 
$
37.4

Capitalized software
5
 
15.4

 
(5.9
)
 
9.5

 
5
 
15.3

 
(5.1
)
 
10.2

Customer relationships
6
 
576.8

 
(457.5
)
 
119.3

 
6
 
514.7

 
(449.7
)
 
65.0

Total
 
 
$
661.1

 
$
(488.5
)
 
$
172.6

 
 
 
$
589.8

 
$
(477.2
)
 
$
112.6


During the three months ended March 31, 2019, the gross carrying amount of other intangible assets increased primarily due to $70.5 million of acquired identifiable finite-lived intangible assets as discussed in Note 3, “Acquisitions and Strategic Investments.” The gross carrying amount and accumulated amortization within other intangible assets—net in the condensed consolidated balance sheets at March 31, 2019, and December 31, 2018, differs from the value originally recorded at acquisition due to impairment charges recorded in prior years and the effects of currency fluctuations since the purchase date.

Other intangible assets are evaluated for potential impairment whenever events or circumstances indicate that the carrying value may not be recoverable. There were no impairment charges recorded on finite-lived intangible assets for the three months ended March 31, 2019 and 2018.



14

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QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2019
(In millions, except share and per share data and unless otherwise indicated)

Amortization expense for other intangible assets was $11.6 million and $5.8 million for the three months ended March 31, 2019 and 2018, respectively. The estimated future amortization expense related to other intangible assets as of March 31, 2019, was as follows:
 
Amortization Expense
Remainder of 2019
$
33.4

2020
39.3

2021
31.0

2022
28.5

2023
24.2

2024 and thereafter
16.2

Total
$
172.6


Note 6. Inventories

The components of inventories at March 31, 2019, and December 31, 2018, were as follows:
 
March 31,
2019
 
December 31,
2018
Raw materials and manufacturing supplies
$
162.2

 
$
170.8

Work in process
47.5

 
48.9

Finished goods
73.3

 
80.9

Total
$
283.0

 
$
300.6


Note 7. Property, Plant and Equipment

The components of property, plant and equipment at March 31, 2019, and December 31, 2018, were as follows:
 
March 31,
2019
 
December 31,
2018
Land
$
112.9

 
$
115.3

Buildings
884.6

 
908.5

Machinery and equipment
3,550.2

 
3,549.1

Other(1)
181.5

 
178.6

Construction in progress
48.5

 
42.0

Property, plant and equipment—gross
$
4,777.7

 
$
4,793.5

Less: accumulated depreciation
(3,541.8
)
 
(3,536.1
)
Property, plant and equipment—net
$
1,235.9

 
$
1,257.4

______________________________
(1) 
Other consists of computer equipment, vehicles, furniture and fixtures, leasehold improvements and communication-related equipment.

The Company recorded impairment charges of $1.7 million and $7.9 million for the three months ended March 31, 2019, and 2018 respectively, to reduce the carrying amounts of certain property, plant and equipment no longer utilized in production to fair value (see Note 4, “Restructuring, Impairment and Transaction-Related Charges,” for further discussion on impairment charges).

The Company recognized depreciation expense of $47.6 million and $50.4 million for the three months ended March 31, 2019 and 2018, respectively.


15

Table of Contents


QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2019
(In millions, except share and per share data and unless otherwise indicated)


Assets Held for Sale

The Company considered certain closed facilities for held for sale classification on the condensed consolidated balance sheets. The net book value of assets held for sale was $3.9 million as of March 31, 2019, and there were no assets held for sale as of December 31, 2018. These assets are carried at the lesser of original cost or fair value, less the estimated costs to sell. The fair values were determined by the Company to be Level 3 under the fair value hierarchy (see Note 12, “Financial Instruments and Fair Value Measurements,” for the definition of Level 3 inputs) and were estimated based on internal discounted cash flow estimates, quoted market prices when available and independent appraisals as appropriate. Assets held for sale are included in prepaid expenses and other current assets in the condensed consolidated balance sheets.

Note 8. Commitments and Contingencies

Litigation

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

In April 2016, the Company self-reported to the SEC and to the United States Department of Justice (“DOJ”) certain Foreign Corrupt Practices Act (“FCPA”) issues, and a resulting internal investigation, related to its operations managed from Peru. These operations had approximate annual sales ranging from $95.0 million to $135.0 million from the date that the Company acquired those operations in July 2010 until the date the issues were discovered. The self-reported issues were identified by the Company’s financial internal controls. The Company, under the oversight of its Audit Committee and Board of Directors, proactively initiated an investigation into this matter with the assistance of external legal counsel and external forensic accountants. Additional compliance issues arising out of the Peru subsidiary have been identified during the course of the investigation and are known to the SEC and DOJ. During the course of its internal investigation, the Company has also identified, and self-reported to the DOJ and SEC, transactions raising similar issues involving certain sales made in its Quad/Tech China operations. For the period 2011 through 2015, the approximate annual sales of these China operations ranged from $2.0 million to $3.0 million. During the course of its internal investigation, the Company has also identified and informed the Office of Foreign Assets Control (“OFAC”), the DOJ and the SEC, of certain transactions involving Cuba, and continues to investigate the propriety of such transactions under United States trade sanctions. The Peruvian antitrust authority (“INDECOPI”) currently is conducting an investigation into certain alleged past collusive activities among printers in Peru, including Quad/Graphics Peru. In connection with these matters, the Company has made, and continues to evaluate, certain enhancements to its compliance program. The Company is fully cooperating with the OFAC, the SEC, the DOJ and INDECOPI. At this time, the Company does not anticipate any material adverse effect on its business or financial condition as a result of these matters.

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 environmental 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 as circumstances change. The 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 condensed consolidated financial position.



16

Table of Contents


QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2019
(In millions, except share and per share data and unless otherwise indicated)

Note 9. Debt

The components of long-term debt as of March 31, 2019, and December 31, 2018, were as follows:
 
March 31,
2019
 
December 31,
2018
Master note and security agreement
$
94.4

 
$
96.2

Term loan A
32.4

 
281.3

Term loan B
485.4

 
279.5

Revolving credit facility
250.7

 

Senior unsecured notes
243.5

 
243.5

International term loans
19.8

 
17.8

International revolving credit facilities
10.2

 
11.8

Other
2.3

 
2.6

Debt issuance costs
(11.8
)
 
(7.2
)
Total debt
$
1,126.9

 
$
925.5

Less: short-term debt and current portion of long-term debt
(52.4
)
 
(42.9
)
Long-term debt
$
1,074.5

 
$
882.6


Fair Value of Debt

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 $1.1 billion and $0.9 billion at March 31, 2019, and December 31, 2018, respectively. The fair value determination of the Company’s total debt was categorized as Level 2 in the fair value hierarchy (see Note 12, “Financial Instruments and Fair Value Measurements,” for the definition of Level 2 inputs).

2019 Senior Secured Credit Facility Amendment

The Company completed the third amendment to the April 28, 2014 Senior Secured Credit Facility on January 31, 2019. This third amendment was completed to provide Quad with the liquidity and structural flexibility to consummate the proposed acquisition of LSC Communications, Inc. (“LSC”) and to extend existing maturities by (a) increasing the aggregate amount of the existing revolving credit facility from $725.0 million to $800.0 million in two tranches, with the first tranche of approximately $82.8 million maturing on January 4, 2021, and the second tranche of approximately $717.2 million, with a term of five years, maturing on January 31, 2024; (b) increasing the aggregate amount of the existing Term Loan A from $375.0 million to $825.0 million in two tranches, with the first tranche of approximately $32.4 million maturing on January 4, 2021, and the second tranche of approximately $792.6 million, with a delayed draw feature and term of five years, maturing on January 31, 2024; and (c) increasing the aggregate amount of the existing Term Loan B from $300.0 million to $500.0 million with a term of seven years, maturing on January 31, 2026. The Company intends that the loans available under the amended revolving credit facility will be used to repay, refinance, repurchase, redeem, exchange or otherwise terminate LSC’s existing indebtedness prior to, in connection with or following the consummation of the merger, and to pay transaction expenses. Certain amendments were made to the quarterly financial covenants to which the Company is subject (all financial terms, numbers and ratios are as defined in the Senior Secured Credit Facility, as amended by the third amendment).

Borrowings under the revolving credit facility and delayed draw Term Loan A made under the Senior Secured Credit Facility will initially bear interest at 2.50% in excess of reserve adjusted London Interbank Offered Rate (“LIBOR”), or 1.50% in excess of an alternate base rate, and borrowing under the Term Loan B will initially bear interest at 5.00% in excess of reserve adjusted LIBOR, or 4.00% in excess of an alternative base rate at the Company’s option.



17

Table of Contents


QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2019
(In millions, except share and per share data and unless otherwise indicated)

The Senior Secured Credit Facility remains secured by substantially all of the unencumbered assets of the Company. The Senior Secured Credit Facility also requires the Company to provide additional collateral to the lenders in certain limited circumstances.

The Company incurred $20.2 million in debt issuance costs in conjunction with the third amendment to the Company’s Senior Secured Credit Facility. In accordance with the accounting guidance for the treatment of debt issuance costs in a debt extinguishment, of the $20.2 million in new debt issuance costs, $6.0 million was classified as a reduction of long-term debt in the condensed consolidated balance sheets and $14.2 million was expensed and was classified as loss on debt extinguishment in the condensed consolidated statements of operations during the three months ended March 31, 2019. In addition, a new original issue discount of $15.0 million related to the Term Loan B of the Senior Secured Credit Facility was classified as a reduction of long-term debt in the condensed consolidated balance sheets.

Debt Issuance Costs and Original Issue Discount

Activity impacting the Company’s debt issuance costs for the three months ended March 31, 2019, was as follows:
 
Capitalized Debt
Issuance Costs
Balance at December 31, 2018
$
7.2

Debt issuance costs from January 31, 2019 debt financing arrangement
6.0

Loss on debt extinguishment from February 10, 2017 debt financing arrangement
(0.7
)
Amortization of debt issuance costs
(0.7
)
Balance at March 31, 2019
$
11.8


Activity impacting the Company’s original issue discount for the three months ended March 31, 2019, was as follows:
 
Original Issue Discount
Balance at December 31, 2018
$
1.0

Original issue discount from January 31, 2019 debt financing arrangement
15.0

Loss on debt extinguishment from February 10, 2017 debt financing arrangement
(1.0
)
Amortization of original issue discount
(0.4
)
Balance at March 31, 2019
$
14.6


2019 Loss on Debt Extinguishment

The loss on debt extinguishment recorded during the three months ended March 31, 2019, was comprised of the following:
 
Loss on Debt Extinguishment
Debt issuance costs:
 
Debt issuance costs from February 10, 2017 debt financing arrangement
$
0.7

Debt issuance costs from January 31, 2019 debt financing arrangement
14.2

Original issue discount:
 
Original issue discount from February 10, 2017 debt financing arrangement
1.0

Total
$
15.9




18

Table of Contents


QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2019
(In millions, except share and per share data and unless otherwise indicated)

Covenants and Compliance

The Company’s various lending arrangements include 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 March 31, 2019:

Total Leverage Ratio. On a rolling twelve-month basis, the total leverage ratio, defined as total consolidated debt to consolidated EBITDA, shall not exceed 3.75 to 1.00 (for the twelve months ended March 31, 2019, the Company’s total leverage ratio was 2.90 to 1.00).

Liquidity. The Company is required to maintain liquidity, defined as unrestricted cash and permitted investments of the Company and its subsidiaries (subject to certain conditions) plus the aggregate amount of the unused revolving credit facility commitments, of not less than $300.0 million at any time during the period from six months prior to the maturity date of the Company’s unsecured 7.0% senior notes maturing on May 1, 2022, (the “Senior Unsecured Notes”) until the earlier of the date on which (a) such Senior Unsecured Notes are repaid in full or (b) the maturity date of such Senior Unsecured Notes is extended to a date that is at least 91 days later than the latest maturity date under the Senior Secured Credit Facility. As of March 31, 2019, the liquidity covenant is not applicable, as the Company is not within the six month period prior to the May 1, 2022, maturity date of the Senior Unsecured Notes.

If there is any amount outstanding on the Revolving Credit Facility or Term Loan A, or if any lender has any revolving credit exposure or Term Loan A credit exposure, the Company is required to maintain the following:
Senior Secured Leverage Ratio. On a rolling twelve-month basis, the senior secured leverage ratio, defined as senior secured net debt to consolidated EBITDA, shall not exceed 3.50 to 1.00 (for the twelve months ended March 31, 2019, the Company’s senior secured leverage ratio was 2.26 to 1.00).
Interest Coverage Ratio. On a rolling twelve-month basis, the 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 March 31, 2019, the Company’s interest coverage ratio was 5.38 to 1.00).

The indenture underlying the Company’s $300.0 million aggregate principal amount of Senior Unsecured Notes contains various covenants, including, but not limited to, covenants that, subject to certain exceptions, limit the Company’s and its restricted subsidiaries’ ability to incur and/or guarantee additional debt; pay dividends, repurchase stock or make certain other restricted payments; enter into agreements limiting dividends and certain other restricted payments; prepay, redeem or repurchase subordinated debt; grant liens on assets; enter into sale and leaseback transactions; merge, consolidate, transfer or dispose of substantially all of the Company’s consolidated assets; sell, transfer or otherwise dispose of property and assets; and engage in transactions with affiliates.

In addition to those covenants, the Senior Secured Credit Facility also includes certain limitations on acquisitions, indebtedness, liens, dividends and repurchases of capital stock, including the following:

If the Company’s total leverage ratio is greater than 2.75 to 1.00 (as defined in the Senior Secured Credit Facility), 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 2.75 to 1.00, there are no such restrictions. As the Company’s total leverage ratio as of March 31, 2019, was 2.90 to 1.00, the limitations described above are currently applicable.



19

Table of Contents


QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2019
(In millions, except share and per share data and unless otherwise indicated)

If the Company’s senior secured leverage ratio is greater than 3.00 to 1.00 or the Company’s total leverage ratio is greater than 3.50 to 1.00 (these ratios as defined in the Senior Secured Credit Facility), the Company is prohibited from voluntarily prepaying any of the Senior Unsecured Notes and from voluntarily prepaying any other unsecured or subordinated indebtedness, with certain exceptions (including any mandatory prepayments on the Senior Unsecured Notes or any other unsecured or subordinated debt). If the senior secured leverage ratio is less than 3.00 to 1.00 and the total leverage ratio is less than 3.50 to 1.00, there are no such restrictions.

Note 10. Leases

The Company determines if an arrangement is or contains a lease at contract inception. The Company recognizes a right-of-use (“ROU”) asset and a lease liability at the lease commencement date.

For operating and finance leases, the lease liability is initially measured at the present value of the unpaid lease payments at the lease commencement date, and is subsequently measured at amortized cost using the effective interest method.

Key estimates and judgments include how the Company determines (1) the discount rate, (2) lease term and (3) lease payments.

Topic 842 requires a lessee to discount its unpaid lease payments using the interest rate implicit in the lease or, if that rate cannot be readily determined, its incremental borrowing rate. Generally, the Company cannot determine the implicit interest rate as it does not have access to the lessor’s estimated residual value or the amount of the lessor’s deferred initial direct costs. Therefore, the Company generally uses its incremental borrowing rate as the discount rate for the lease. The Company’s incremental borrowing rate for a lease is the rate of interest it would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms based on the published United States Treasury rates as well as the Company’s credit rating at implementation or at the lease inception date.

The lease term for all of the Company’s leases includes the noncancelable period of the lease, plus or minus any additional periods covered by an option to extend or terminate the lease that the Company is reasonably certain to exercise.

Lease payments included in the lease liability are comprised of fixed payments as well as any exercise price of a Company option to purchase the underlying asset if the Company is reasonably certain to exercise. The Company’s leases do not contain variable lease payments.

ROU assets are initially measured at cost, which comprises the initial amount of the lease liability adjusted for lease payments made at or before the lease commencement date, plus any initial direct costs incurred less any lease incentives received. For Operating leases, the ROU asset is subsequently amortized by the straight-line lease expense adjusted by the lease liability accretion over the lease term.

For finance leases, the ROU asset is subsequently amortized on a straight-line basis from the lease commencement date to the earlier of the end of its useful life or the end of the lease term. Amortization of the ROU asset is recognized and presented separately from interest expense on the lease liability.

The Company’s ROU assets for both operating and finance leases are reviewed for impairment losses on a quarterly basis in line with ASC 360-10 — Property, Plant, and Equipment — Overall. The Company has not recognized any impairment losses to date.

The Company also monitors its leases for events or changes in circumstances that require a reassessment of the lease. When a reassessment results in the remeasurement of a lease liability, a corresponding adjustment is made to the carrying amount of the ROU asset.


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QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2019
(In millions, except share and per share data and unless otherwise indicated)


Operating leases are included in operating lease right-of-use assets, other current liabilities, and operating lease liabilities in our consolidated balance sheets. Finance leases are included in property and equipment, net, current portion of finance lease obligations, and finance lease obligations in our condensed consolidated balance sheets.

The Company has elected not to recognize ROU assets and lease liabilities for short-term leases that have an original lease term of 12 months or less. Therefore, the Company recognizes the lease payments associated with these short-term leases as an expense over the lease term on the consolidated statement of operations.

Adoption of Topic 842 — Transition Approach

The Company adopted Topic 842 as of January 1, 2019 using the additional optional transition method pursuant to ASU 2018-11, meaning that restatement of prior period consolidated financial statements or presentation of comparative disclosures is not necessary. During adoption, the Company elected the following practical expedients allowed:

The Company elected the practical expedient package and therefore did not reassess for any existing leases:
whether contracts are or contain leases;
the lease classification for any existing leases; and
any initial direct costs.

The Company elected the practical expedient related to land easements, allowing to carry forward the accounting treatment for land easements on existing agreements.

The Company used “hindsight” judgments that impact the lease term.

The Company elected to combine lease and non-lease components into one lease component for select underlying lease asset categories. Real estate leases are accounted for separately while all other leases, primarily equipment, leases with separate lease and non-lease components are accounted for as a single lease component.

Adoption of the new standard resulted in the recording of operating lease right-of-use assets and operating lease obligations of $130.8 million and $132.4 million, respectively, as of January 1, 2019. The transition had no impact to the condensed consolidated statement of operations.

Leases Financial Information

The Company enters into various lease agreements for real estate, such as office space and manufacturing facilities, as well as equipment leases, including press, finishing and transportation equipment. Many of these leases provide the Company with options to renew, terminate, or in the case of equipment leases, purchase the related equipment at the termination value, as defined, and at various early buyout dates during the term of the lease. In general, the Company has determined these options were not reasonably certain to be exercised, and therefore are not included in the determination of the lease term.



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QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2019
(In millions, except share and per share data and unless otherwise indicated)

The following summarizes certain lease information for the three months ended, March 31, 2019:
 
Three Months Ended
 
March 31, 2019
Lease cost
 
Finance lease cost:
 
Amortization of right-of-use assets
$
1.4

Interest on lease liabilities
0.2

Operating lease cost
10.9

Short-term lease cost
0.1

Sublease income
(0.6
)
Total lease cost
$
12.0

 
 
Other information
 
Cash paid for amounts included in the measurement of lease liabilities
 
Operating cash flows from finance leases
$

Operating cash flows from operating leases
11.3

Financing cash flows from finance leases
1.6

Right-of-use assets obtained in exchange for new finance lease liabilities
1.1

Right-of-use assets obtained in exchange for new operating lease liabilities
6.0

Weighted-average remaining lease term — finance leases
3.1 years

Weighted-average remaining lease term — operating leases
5.4 years

Weighted-average discount rate — finance leases
6.5
%
Weighted-average discount rate — operating leases
6.7
%

Future maturities of lease liabilities at March 31, 2019 were as follows:
 
Future Maturities of Operating Leases
 
Future Maturities of Finance Leases
Remainder of 2019
$
32.9

 
$
4.5

2020
36.0

 
5.1

2021
24.7

 
4.4

2022
18.2

 
2.0

2023
14.0

 
0.2

2024 and thereafter
31.9

 

Total minimum payments
157.7

 
16.2

Less: present value discount
(26.9
)
 
(1.3
)
Lease liability
$
130.8

 
$
14.9


The following tables summarize certain lease information for the year ended December 31, 2018, prior to the implementation of Topic 842.



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QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2019
(In millions, except share and per share data and unless otherwise indicated)

The components of finance lease assets at December 31, 2018, were as follows:
 
2018
Leased equipment—gross
$
33.4

Less: accumulated depreciation
(18.9
)
Leased equipment—net
$
14.5


The future maturities of finance leases at December 31, 2018, were as follows:
 
Future Maturities of Finance Leases
2019
$
5.9

2020
4.9

2021
4.1

2022
2.0

2023
0.2

2024 and thereafter

Total minimum payments
17.1

Less: amounts representing interest
(1.7
)
Present value of minimum payments
15.4

Less: current portion
(5.1
)
Long-term finance lease obligations
$
10.3


The Company has various operating lease agreements. Future minimum rental commitments under non-cancelable leases at December 31, 2018, were as follows:
 
Future Minimum Rental Commitments
2019
$
38.2

2020
33.4

2021
23.9

2022
17.8

2023
13.7

2024 and thereafter
31.1

Total
$
158.1


Note 11. Income Taxes

The Company records income tax (benefit) expense on an interim basis. The estimated effective income tax rate is adjusted quarterly, and items discrete to a specific quarter are reflected in income tax (benefit) expense for that interim period.

The effective income tax rate for the interim period can differ from the statutory tax rate, as it reflects discrete items, such as changes in the liability for unrecognized tax benefits related to the establishment and settlement of income tax exposures and benefits related to share-based compensation.

The Company’s liability for unrecognized tax benefits as of March 31, 2019, was $14.3 million. The Company anticipates a $4.6 million decrease to its liability for unrecognized tax benefits within the next twelve months due to the resolution of income tax audits or statute expirations.


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QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2019
(In millions, except share and per share data and unless otherwise indicated)


Note 12. 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. GAAP also classifies the inputs used to measure fair value into the following hierarchy:

Level 1:
Quoted prices in active markets for identical assets or liabilities.

Level 2:
Quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability.

Level 3:
Unobservable inputs for the asset or liability. There were no Level 3 recurring measurements of assets or liabilities as of March 31, 2019.

Interest Rate Swaps

The Company currently holds two interest rate swap contracts designated as cash flow hedges, as the purpose is to reduce the variability of cash flows from interest payments related to a portion of Quad’s variable-rate debt. The swaps effectively convert the notional value of the Company’s variable rate debt based on one-month LIBOR to a fixed rate, including a spread on underlying debt, and a monthly reset in the variable interest rate. The key terms of the interest rate swaps are as follows:
 
March 19, 2019
Interest Rate Swap
 
February 7, 2017
Interest Rate Swap
Effective date
March 29, 2019
 
February 28, 2017
Termination date
March 28, 2024
 
February 28, 2022
Term
5 years
 
5 years
Notional amount
$130.0
 
$250.0
Fixed swap rate
2.43%
 
1.89%

The Company classifies the interest rate swaps as Level 2 because the inputs into the valuation model are observable or can be derived or corroborated utilizing observable market data at commonly quoted intervals. The fair value of the interest rate swaps classified as Level 2 as of March 31, 2019, and December 31, 2018, were as follows:
 
Balance Sheet Location
 
March 31,
2019
 
December 31,
2018
Interest rate swap assets
Prepaid expenses and other current assets
 
$
2.1

 
$
4.3

Interest rate swap liabilities
Other long-term liabilities
 
$
(1.5
)
 
$




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QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2019
(In millions, except share and per share data and unless otherwise indicated)

The interest rate swaps were highly effective as of March 31, 2019. No amount of ineffectiveness has been recorded into earnings related to these cash flow hedges. The cash flows associated with the interest rate swaps have been recognized as an adjustment to interest expense (income) in the condensed consolidated statements of operations, and the changes in the fair value of the interest rate swaps have been included in other comprehensive income (loss) in the condensed consolidated statements of comprehensive income:
 
Three Months Ended March 31,
 
2019
 
2018
Net interest paid (received)
$
(0.4
)
 
$
0.2

Gain (loss) recognized in other comprehensive income (loss)
$
(3.7
)
 
$
3.7


Foreign Exchange Contracts

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. There were no open foreign currency exchange contracts as of March 31, 2019.

Natural Gas Forward Contracts

The Company periodically enters into natural gas forward purchase contracts to hedge against increases in commodity costs. The Company’s commodity contracts qualified for the exception related to normal purchases and sales during the three months ended March 31, 2019 and 2018, as the Company takes delivery in the normal course of business.

Debt

The Company measures fair value on its debt instruments using interest rates available to the Company for borrowings with similar terms and maturities and is categorized as Level 2. See Note 9, “Debt,” for the fair value of the Company’s debt as of March 31, 2019.

Nonrecurring Fair Value Measurements

In addition to assets and liabilities that are recorded at fair value on a recurring basis, the Company is required to record certain assets and liabilities at fair value on a nonrecurring basis, generally as a result of acquisitions or the remeasurement of assets resulting in impairment charges. See Note 3, “Acquisitions and Strategic Investments,” for further discussion on acquisitions. See Note 4, “Restructuring, Impairment and Transaction-Related Charges” and Note 7, “Property, Plant and Equipment” for further discussion on impairment charges recorded as a result of the remeasurement of certain long-lived assets.

Other Estimated Fair Value Measurements

The Company records the fair value of its forward contracts and pension plan assets on a recurring basis. The fair value of cash and cash equivalents, receivables, inventories, accounts payable and accrued liabilities approximate their carrying values as of March 31, 2019, and December 31, 2018.



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QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2019
(In millions, except share and per share data and unless otherwise indicated)

Note 13. Accrued Liabilities and Other Long-Term Liabilities

The components of accrued and other long-term liabilities as of March 31, 2019, and December 31, 2018, were as follows:
 
March 31, 2019
 
December 31, 2018
 
Accrued Liabilities
 
Other
Long-Term Liabilities
 
Total
 
Accrued Liabilities
 
Other
Long-Term Liabilities
 
Total
Employee-related liabilities (1)
$
95.0

 
$
62.7

 
$
157.7

 
$
126.4

 
$
62.8

 
$
189.2

Single employer pension plan obligations
1.7

 
79.2

 
80.9

 
1.7

 
80.9

 
82.6

Multiemployer pension plans – withdrawal liability
8.5

 
40.7

 
49.2

 
8.4

 
42.5

 
50.9

Tax-related liabilities
30.5

 
7.8

 
38.3

 
29.6

 
8.1

 
37.7

Restructuring liabilities
19.5

 
0.2

 
19.7

 
23.1

 
2.9

 
26.0

Interest and rent liabilities
11.3

 
0.5

 
11.8

 
6.0

 
1.4

 
7.4

Other
81.3

 
32.6

 
113.9

 
97.1

 
34.0

 
131.1

Total
$
247.8

 
$
223.7

 
$
471.5

 
$
292.3

 
$
232.6

 
$
524.9

______________________________
(1) 
Employee-related liabilities consist primarily of payroll, bonus, vacation, health and workers’ compensation.

Note 14. Employee Retirement Plans

Defined Contribution Plans

The Quad/Graphics, Inc. Employee Stock Ownership Plan (“ESOP”) holds profit sharing contributions of Company stock, which are made at the discretion of the Company’s Board of Directors. The Company made a non-cash contribution of 1,006,061 shares of Company class A common stock at a stock price of $22.18 per share for a total value of $22.3 million to the ESOP during the three months ended March 31, 2018. There were no profit sharing contributions during the three months ended March 31, 2019.

Pension Plans

The Company assumed various funded and unfunded frozen pension plans for a portion of its full-time employees in the United States as part of the acquisition of World Color Press Inc. (“World Color Press”) in 2010. Benefits are generally based upon years of service and compensation. These plans are funded in conformity with the applicable government regulations. The Company funds at least the minimum amount required for all qualified plans using actuarial cost methods and assumptions acceptable under government regulations.

The components of net pension income for the three months ended March 31, 2019 and 2018, were as follows:
 
Three Months Ended March 31,
 
2019
 
2018
Interest cost
$
(4.4
)
 
$
(4.0
)
Expected return on plan assets
5.9

 
7.1

Net pension income
$
1.5

 
$
3.1


The Company made $0.3 million in benefit payments to its non-qualified defined benefit pension plans and made no contributions to its qualified defined benefit pension plans during the three months ended March 31, 2019.


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QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2019
(In millions, except share and per share data and unless otherwise indicated)


Multiemployer Pension Plans (“MEPPs”)

The Company has withdrawn from all significant MEPPs and replaced these union sponsored “promise to pay in the future” defined benefit plans with a Company sponsored “pay as you go” defined contribution plan. The two MEPPs, the Graphic Communications International Union – Employer Retirement Fund (“GCIU”) and the Graphic Communications Conference of the International Brotherhood of Teamsters National Pension Fund (“GCC”), are significantly underfunded, and require the Company to pay a withdrawal liability to fund its pro rata share of the underfunding as of the plan year the full withdrawal was completed. As a result of the decision to withdraw, the Company accrued a withdrawal liability based on information provided by each plan’s trustee. The Company has reserved $49.2 million for the total MEPPs withdrawal liability as of March 31, 2019, of which $40.7 million was recorded in other long-term liabilities and $8.5 million was recorded in accrued liabilities in the condensed consolidated balance sheets. The Company is scheduled to make payments to the GCIU and GCC until April 2032 and February 2024, respectively. The Company made payments totaling $2.6 million and $3.9 million for the three months ended March 31, 2019 and 2018, respectively.

Note 15. Loss Per Share Attributable to Quad Common Shareholders

Basic earnings (loss) per share attributable to Quad common shareholders is computed as net earnings (loss) attributable to Quad common shareholders divided by the basic weighted average common shares outstanding. The calculation of diluted earnings (loss) per share attributable to Quad common shareholders 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 the amount the employee must pay upon exercise of the award and the amount of unearned stock-based compensation costs attributable to future services.

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 during periods with net earnings, and accordingly, the Company excludes them from the calculation. Due to the net loss incurred during the three months ended March 31, 2019 and 2018, the assumed exercise of all equity incentive instruments was anti-dilutive and therefore, not included in the diluted loss per share calculation for that period.

Reconciliations of the numerator and the denominator of the basic and diluted per share computations for the Company’s common stock, for the three months ended March 31, 2019 and 2018, are summarized as follows:
 
Three Months Ended March 31,
 
2019
 
2018
Numerator
 
 
 
Net loss attributable to Quad common shareholders
$
(22.5
)
 
$
(3.5
)
 
 
 
 
Denominator
 
 
 
Basic weighted average number of common shares outstanding for all classes of common shares
49.6

 
50.1

Plus: effect of dilutive equity incentive instruments

 

Diluted weighted average number of common shares outstanding for all classes of common shares
49.6

 
50.1

 
 
 
 
Loss per share attributable to Quad common shareholders
 
 
 
Basic and diluted
$
(0.45
)
 
$
(0.07
)
 
 
 
 
Cash dividends paid per common share for all classes of common shares
$
0.30

 
$
0.30




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Table of Contents


QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2019
(In millions, except share and per share data and unless otherwise indicated)

Note 16. Equity Incentive Programs

The shareholders of the Company approved the Quad/Graphics, Inc. 2010 Omnibus Incentive Plan (“Omnibus Plan”) for two complementary purposes: (1) to attract and retain outstanding individuals to serve as directors, officers and employees; and (2) to increase shareholder value. The Omnibus Plan provides for an aggregate 10,871,652 shares of class A common stock reserved for issuance under the Omnibus Plan. Awards under the Omnibus Plan may consist of incentive awards, stock options, stock appreciation rights, performance shares, performance share units, shares of class A common stock, restricted stock (“RS”), restricted stock units (“RSU”), deferred stock units (“DSU”) or other stock-based awards as determined by the Company’s Board of Directors. Each stock option 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. The Board of Directors is seeking approval from the Company’s shareholders at the annual meeting of shareholders to be held in May 2019 of an amendment to the Omnibus Plan to increase the number of shares of class A common stock authorized for issuance under the 2010 Plan by 1,800,000 shares, which would leave 1,606,490 shares available for issuance under the Omnibus Plan as of March 31, 2019. Authorized unissued shares or treasury shares may be used for issuance under the Company’s equity incentive programs. The Company plans to either use treasury shares of its class A common stock or issue shares of class A common stock to meet the stock requirements of its awards in the future.

The Company recognizes compensation expense based on estimated grant date fair values for all share-based awards issued to employees and non-employee directors, including stock options, performance shares, performance share units, RS awards, RSU awards and DSU awards. The Company recognizes these compensation costs for only those awards expected to vest, on a straight-line basis over the requisite three to four year service period of the awards, except deferred stock units, which are fully vested and expensed on the grant date. 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.

Equity Incentive Compensation Expense

The total compensation expense recognized related to all equity incentive programs was $5.0 million and $5.4 million for the three months ended March 31, 2019 and 2018, respectively, and was recorded primarily in selling, general and administrative expenses in the condensed consolidated statements of operations. Total future compensation expense related to all equity incentive programs granted as of March 31, 2019, was estimated to be $26.3 million, which consists entirely of expense for RS and RSU awards. Estimated future compensation expense is $10.5 million for the remainder of 2019, $9.8 million for 2020, $5.3 million for 2021 and $0.7 million for 2022.

Stock Options

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. Options expire no later than the tenth anniversary of the grant date, 24 months after termination for death, 36 months after termination for normal retirement or disability and 90 days after termination of employment for any other reason. Options are not credited with dividend declarations, except for the November 18, 2011 grants. Stock options are only to be granted to employees.

There were no stock options granted, and no compensation expense was recognized related to stock options for the three months ended March 31, 2019 and 2018. There is no future compensation expense for stock options as of March 31, 2019.



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Table of Contents


QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2019
(In millions, except share and per share data and unless otherwise indicated)

The following table is a summary of the stock option activity for the three months ended March 31, 2019:
 
Shares Under
Option
 
Weighted Average
Exercise
Price
 
Weighted Average
Remaining
Contractual Term
(years)
 
Aggregate
Intrinsic Value
(millions)
Outstanding at December 31, 2018
942,315

 
$
24.31

 
1.8
 
$

Granted

 

 
 
 
 
Exercised

 

 
 
 
 
Canceled/forfeited/expired
(144,900
)
 
18.27

 
 
 
 
Outstanding and exercisable at March 31, 2019
797,415

 
$
25.41

 
1.8
 
$


The intrinsic value of options outstanding and exercisable at March 31, 2019, and December 31, 2018, was based on the fair value of the stock price. All outstanding options are vested as of March 31, 2019.

The following table is a summary of the stock option exercise activity for the three months ended March 31, 2019 and 2018:
 
Three Months Ended March 31,
 
2019
 
2018
Total intrinsic value of stock options exercised
$

 
$
3.6

Proceeds from stock options exercised

 
4.0


Restricted Stock and Restricted Stock Units

Restricted stock and restricted stock unit 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. 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. Grantees receiving RS awards are able to exercise full voting rights and receive full credit for dividends during the vesting period. All such dividends will be paid to the RS grantee within 45 days of full vesting. Grantees receiving RSU awards are not entitled to vote, but do earn dividends. Upon vesting, RSU awards will be settled either through cash payment equal to the fair market value of the RSU awards on the vesting date or through issuance of the Company’s class A common stock.



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Table of Contents


QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2019
(In millions, except share and per share data and unless otherwise indicated)

The following table is a summary of RS and RSU award activity for the three months ended March 31, 2019:
 
Restricted Stock
 
Restricted Stock Units
 
Shares
 
Weighted-
Average
Grant Date
Fair Value
Per Share
 
Weighted-
Average
Remaining
Contractual
Term (years)
 
Units
 
Weighted-
Average
Grant Date
Fair Value
Per Share
 
Weighted-
Average
Remaining
Contractual
Term (years)
Nonvested at December 31, 2018
2,335,916

 
$
17.36

 
1.0
 
107,092

 
$
16.70

 
0.8
Granted (1)
1,500,434

 
12.32

 
 
 
186,807

 
12.33

 
 
Vested
(1,118,071
)
 
9.46

 
 
 
(57,500
)
 
9.30

 
 
Forfeited
(963
)
 
26.88

 
 
 
(963
)
 
26.88

 
 
Nonvested at March 31, 2019
2,717,316

 
$
17.83

 
2.3
 
235,436

 
$
15.00

 
2.6
______________________________
(1) 
Includes 1,238,757 RS awards and 49,923 RSU awards granted that are contingent upon shareholder approval at the annual meeting of shareholders to be held in May 2019.

In the first quarter of 2019, the Company issued RSU awards in connection with the acquisition of Periscope that are accounted for as a liability and will vest on March 1, 2022. The awards were recorded at fair value on the initial issuance date and are adjusted to fair value at each reporting period, with the change in fair value being recorded in selling, general and administrative expense in the condensed consolidated statements of operations. As of March 31, 2019, the fair value of the RSU awards classified as a liability was $1.6 million and was included in other long-term liabilities on the condensed consolidated balance sheets.

In general, RS and RSU awards 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. Compensation expense recognized for RS and RSU awards was $4.1 million and $4.5 million for the three months ended March 31, 2019 and 2018, respectively.

Deferred Stock Units

Deferred stock units are awards of rights to shares of the Company’s class A common stock and are awarded to non-employee directors of the Company. The following table is a summary of DSU award activity for the three months ended March 31, 2019:
 
Deferred Stock Units
 
Units
 
Weighted-Average Grant Date Fair Value Per Share
Outstanding at December 31, 2018
236,561

 
$
19.40

Granted (1)
72,464

 
12.32

Dividend equivalents granted (2)
7,572

 
12.22

Settled
(30,676
)
 
22.53

Outstanding at March 31, 2019
285,921

 
$
17.08

______________________________
(1) 
Includes 72,464 DSU awards granted that are contingent upon shareholder approval at the annual meeting of shareholders to be held in May 2019.
(2) 
Includes 1,776 dividend equivalents granted that are contingent upon shareholder approval at the annual meeting of shareholders to be held in May 2019.



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QUAD/GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2019
(In millions, except share and per share data and unless otherwise indicated)

Each DSU award 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, death or disability as defined in the individual DSU grant agreement. Grantees of DSU awards may not exercise voting rights, but are credited with dividend equivalents, and those dividend equivalents will be converted into additional DSU awards based on the closing price of the class A common stock. Compensation expense recognized for DSU awards was $0.9 million during the three months ended March 31, 2019 and 2018. As DSU awards are fully vested on the grant date, all compensation expense was recognized at the date of grant.

Note 17. Shareholders’ Equity

The Company has three classes of common stock as follows (share data in millions):
 
 
 
Issued Common Stock
 
Authorized Shares
 
Outstanding
 
Treasury
 
Total Issued Shares
Class A stock ($0.025 par value)
80.0

 
 
 
 
 
 
March 31, 2019
 
 
39.3

 
1.0

 
40.3

December 31, 2018
 
 
38.1

 
2.2

 
40.3

 
 
 
 
 
 
 
 
Class B stock ($0.025 par value)
80.0

 
 
 
 
 
 
March 31, 2019
 
 
13.5

 

 
13.5

December 31, 2018
 
 
13.5

 

 
13.5

 
 
 
 
 
 
 
 
Class C stock ($0.025 par value)
20.0