Quad/Graphics, Inc. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Following discussion of the financial condition and results of operations of Quad should be read together with Quad’s audited consolidated financial statements for each of the three years in the period ended December 31, 2020, including the notes thereto, included in Part II, Item 8, “Financial Statements and Supplementary Data,” of this Annual Report on Form 10-K. This discussion contains forward-looking statements that reflect the Company’s plans, estimates and beliefs. The Company’s actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed in “Forward-Looking Statements” and Part I, Item 1A, “Risk Factors,” included earlier within this Annual Report on Form 10-K. Management’s discussion and analysis of financial condition and results of operations is provided as a supplement to the Company’s consolidated financial statements and accompanying notes to help provide an understanding of the Company’s financial condition, the changes in the Company’s financial condition and the Company’s results of operations. This discussion and analysis is organized as follows: • Overview. This section includes a general description of the Company’s business and segments, an overview of key performance metrics the Company’s management measures and utilizes to evaluate business performance, and an overview of trends affecting the Company, including management’s actions related to the trends. • Results of Operations. This section contains an analysis of the Company’s results of operations by comparing the results for the year ended December 31, 2020, to the year ended December 31, 2019. The comparability of the Company’s results of operations between periods was impacted by acquisitions, strategic investments and divestitures, including the the divestiture of the Omaha, Nebraska packaging plant, which was sold on January 31, 2020, and the additional investment in Rise in June 2020. The results of operations of the packaging plant divestiture are included in the Company’s consolidated results until the date of disposition, and the results of operations of the investment in Rise reflect the Company’s ownership interest from the respective dates of change in ownership. The results of the Company’s United States Book business (“Book buiness”) have been reported as discontinued operations for all periods presented. Forward-looking statements providing a general description of recent and projected industry and Company developments that are important to understanding the Company’s results of operations are included in this section. This section also provides a discussion of EBITDA and EBITDA margin, financial measures that the Company uses to assess the performance of its business that are not prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). • Liquidity and Capital Resources. This section provides an analysis of the Company’s capitalization, cash flows and a discussion and table of outstanding debt and commitments. Forward-looking statements important to understanding the Company’s financial condition are included in this section. This section also provides a discussion of Free Cash Flow and Debt Leverage Ratio, non-GAAP financial measures that the Company uses to assess liquidity and capital allocation and deployment. • Critical Accounting Policies and Estimates. This section contains a discussion of the accounting policies that the Company’s management believes are important to the Company’s financial condition and results of operations, as well as allowances and reserves that require significant judgment and estimates on the part of the Company’s management. In addition, all of the Company’s significant accounting policies, including critical accounting policies, are summarized in Note 1, “Basis of Presentation and Summary of Significant Accounting Policies,” to the consolidated financial statements in Part II, Item 8, “Financial Statements and Supplementary Data,” of this Annual Report on Form 10-K. 35 Table of Contents Overview Business Overview As a worldwide marketing solutions partner, Quad leverages its 50-year heritage of platform excellence, innovation, strong culture and social purpose to create a better way for its clients, employees and communities. The Company’s integrated marketing platform helps brands and marketers reduce complexity, increase efficiency and enhance marketing spend effectiveness. For a full description of the Company’s business overview, refer to Part I, Item 1, “Business,” of this Annual Report on Form 10-K. The Company’s operating and reportable segments are aligned with how the chief operating decision maker of the Company currently manages the business. The Company’s operating and reportable segments, including their product and service offerings, and a “Corporate” category, are summarized below. The United States Print and Related Services segment is predominantly comprised of the Company’s United States printing operations and is managed as one integrated platform. This includes retail inserts, publications, catalogs, special interest publications, journals, direct mail, directories, in-store marketing and promotion, packaging, newspapers, custom print products, other commercial and specialty printed products and global paper procurement, together with marketing and other complementary services, including consumer insights, audience targeting, personalization, media planning and placement, process optimization, campaign planning and creation, pre-media production, videography, photography, digital execution, print execution and logistics. This segment also includes the manufacture of ink. The United States Print and Related Services segment accounted for approximately 90% of the Company’s consolidated net sales during the year ended December 31, 2020. The International segment consists of the Company’s printing operations in Europe and Latin America, including operations in England, France, Germany, Poland, Argentina, Colombia, Mexico and Peru, as well as investments in printing operations in Brazil and India. This segment provides printed products and marketing and other complementary services consistent with the United States Print and Related Services segment. The International segment accounted for approximately 10% of the Company’s consolidated net sales during the year ended December 31, 2020. Corporate consists of unallocated general and administrative activities and associated expenses including, in part, executive, legal and finance, as well as certain expenses and income from frozen employee retirement plans, such as pension benefit plans. Key Performance Metrics Overview The Company’s management believes the ability to generate net sales growth, profit increases and positive cash flow, while maintaining the appropriate level of debt, are key indicators of the successful execution of the Company’s business strategy and will increase shareholder value. The Company uses period-over-period net sales growth, EBITDA, EBITDA margin, net cash provided by operating activities, Free Cash Flow and Debt Leverage Ratio as metrics to measure operating performance, financial condition and liquidity. EBITDA, EBITDA margin, Free Cash Flow and Debt Leverage Ratio are non-GAAP financial measures (see the definitions of EBITDA, EBITDA margin and the reconciliation of net earnings (loss) attributable to Quad common shareholders to EBITDA in the “Results of Operations” section below, and see the definitions of Free Cash Flow and Debt Leverage Ratio, the reconciliation of net cash provided by operating activities to Free Cash Flow, and the calculation of Debt Leverage Ratio in the “Liquidity and Capital Resources” section below). Net sales growth. The Company uses period-over-period net sales growth as a key performance metric. The Company’s management assesses net sales growth based on the ability to generate increased net sales through increased sales to existing clients, sales to new clients, sales of new or expanded solutions to existing and new clients, and opportunities to expand sales through strategic investments, including acquisitions. 36 Table of Contents EBITDA and EBITDA margin. The Company uses EBITDA and EBITDA margin as metrics to assess operating performance. The Company’s management assesses EBITDA and EBITDA margin based on the ability to increase revenues while controlling variable expense growth. Net cash provided by operating activities. The Company uses net cash provided by operating activities as a metric to assess liquidity. The Company’s management assesses net cash provided by operating activities based on the ability to meet recurring cash obligations while increasing available cash to fund debt service requirements, capital expenditures, cash restructuring requirements related to cost reduction activities, World Color Press single employer pension plan contributions, World Color Press MEPPs withdrawal liabilities, acquisitions and other investments in future growth, shareholder dividends and share repurchases. Net cash provided by operating activities can be significantly impacted by the timing of non-recurring or infrequent receipts or expenditures. Free Cash Flow. The Company uses Free Cash Flow as a metric to assess liquidity and capital deployment. The Company’s management assesses Free Cash Flow as a measure to quantify cash available for strengthening the balance sheet (debt and pension liability reduction), for strategic capital allocation and deployment through investments in the business (acquisitions and strategic investments) and for returning capital to the shareholders (dividends and share repurchases). The Company’s priorities for capital allocation and deployment will change as circumstances dictate for the business, and Free Cash Flow can be significantly impacted by the Company’s restructuring activities and other unusual items. Debt Leverage Ratio. The Company uses the Debt Leverage Ratio as a metric to assess liquidity and the flexibility of its balance sheet. Consistent with other liquidity metrics, the Company monitors the Debt Leverage Ratio as a measure to determine the appropriate level of debt the Company believes is optimal to operate its business, and accordingly, to quantify debt capacity available for strengthening the balance sheet (debt and pension liability reduction), for strategic capital allocation and deployment through investments in the business (capital expenditures, acquisitions and strategic investments), and for returning capital to the shareholders (dividends and share repurchases). The Company’s priorities for capital allocation and deployment will change as circumstances dictate for the business, and the Debt Leverage Ratio can be significantly impacted by the amount and timing of large expenditures requiring debt financing, as well as changes in profitability. The Company remains disciplined with its debt leverage. The Company’s consolidated debt and finance lease obligations decreased by $184 million during the year ended December 31, 2020, primarily due to the use of cash proceeds from the sale of the Omaha packaging plant and from the sale of the Book business to reduce debt obligations, and due to the redemption of certain of its senior notes under the Master Note and Security Agreement, at par (the outstanding principal balance as of the date of payment). Since the Company completed the World Color Press acquisition in July 2010, the Company has reduced debt and finance lease obligations by $811 million and has reduced the obligations for pension, postretirement and MEPPs by $470 million, for a total obligation reduction since July 2010 of approximately $1.3 billion. Overview of Trends Affecting Quad As consumer media consumption habits change, marketing services providers face increased demand to offer end-to-end marketing services, from strategy and creative through execution, across all channels, traditional and digital. As new marketing and advertising channels emerge, marketing services providers must expand their services beyond traditional channels, such as for television, newspapers, print publications and radio, to digital channels, such as mobile, internet search, internet display and video, to create effective multichannel campaigns for their clients. This trend greatly influences Quad’s ongoing efforts to redefine the future of integrated marketing and create greater value for its clients who are looking for less complexity, greater transparency and accountability from their business partners. The Company leverages its data-driven print expertise as part of an integrated marketing platform that helps its clients not only plan and produce marketing programs, but also deploy, manage and measure them across all media channels. Competition in the printing industry remains highly fragmented and intense, and the Company believes that 37 Table of Contents there are indicators of heightened competitive pressures. The industry has excess manufacturing capacity created by continued declines in industry volumes, compounded by the COVID-19 pandemic, which, in turn, have created accelerated downward pricing pressures. The Company faces competition due to the increased accessibility and quality of digital alternatives to traditional delivery of printed documents through the online distribution and hosting of media content, and the digital distribution of documents and data. The Company faces competition from print management and marketing consulting firms that look to streamline processes and reduce the overall print spend of the Company’s clients. For a full description of the Company’s industry and competition overview, refer to Part I, Item 1, “Business,” of this Annual Report on Form 10-K. The Company believes that a disciplined approach for capital management and a strong balance sheet are critical to be able to invest in profitable growth opportunities and technological advances, thereby providing the highest return for shareholders. Management balances the use of cash between deleveraging the Company’s balance sheet (through reduction in debt and pension obligations), compelling investment opportunities (through capital expenditures, acquisitions and strategic investments) and returns to shareholders (through quarterly dividends and share repurchases). The Company continues to make progress on integrating and streamlining all aspects of its business, thereby lowering its cost structure by consolidating its manufacturing platform into its most efficient facilities, as well as realizing purchasing, mailing and logistics efficiencies by centralizing and consolidating print manufacturing volumes and eliminating redundancies in its administrative and corporate operations. The Company has continued to evolve its manufacturing platform, equipping facilities to be product line agnostic, which enables the Company to maximize equipment utilization. Quad believes that the large plant size of certain of its key printing facilities allows the Company to drive savings in certain product lines (such as publications and catalogs) due to economies of scale and from investments in automation and technology. The Company continues to focus on proactively aligning its cost structure to the realities of the top-line pressures it faces in the printing industry through Lean Manufacturing and sustainable continuous improvement programs. Restructuring actions initiated by the Company beginning in 2010 have resulted in the announcement of 50 plant closures through December 31, 2020. The Company believes it will continue to drive productivity improvements and sustainable cost reduction initiatives into the future through an engaged workforce and ongoing adoption of the latest manufacturing automation and technology. Through this strategy, the Company believes it can maintain the strongest, most efficient print manufacturing platform to remain a high-quality, low-cost producer. Integrated distribution with the postal service is an important component of the Company’s business. Any material change in the current service levels provided by the postal service could impact the demand that clients have for print services. The USPS continues to experience financial problems. Without increased revenues or action by Congress to reform the USPS’ cost structure, these losses will continue into the future. As a result of these financial difficulties, the USPS has come under increased pressure to adjust its postal rates and service levels. Additional price increases may result in clients reducing mail volumes and exploring the use of alternative methods for delivering a larger portion of their products, such as continued diversion to the internet and other alternative media channels in order to ensure that they stay within their expected postage budgets. There are also continued risks of delivery delays due to ongoing COVID-19 impacts on daily operational staffing at the USPS. Federal statute requires the PRC to conduct reviews of the overall rate-making structure for the USPS to ensure funding stability. As a result of those reviews, the PRC has authorized a new five year rate-making structure that would provide the USPS with additional pricing flexibility over the current Consumer Price Index cap, which may result in a substantially altered rate structure for mailers. The newly revised rate authority that is effective as a result of new rules issued by the PRC includes a higher overall rate cap on the USPS’ ability to increase rates from year to year. This may lead to price spikes for mailers and may also reduce the incentive for the USPS to continue to take out costs and instead continue to rely on postage to cover the costs of an outdated postal service that does not reflect the industry’s ability or willingness to pay. The uncertainty as to the actual rate increases due to competing lawsuits from both industry and the USPS, as well as how much of the authority the USPS will use, also creates potential volume declines as rate predictability with respect to cost and timing is no longer known for mailers. The result may be reduced demand for printed products as clients may move more aggressively into other delivery methods, such as the many digital and mobile options now available to consumers. 38 Table of Contents The Company has invested significantly in its mail preparation and distribution capabilities to mitigate the impact of increases in postage costs, and to help clients successfully navigate the ever-changing postal environment. Through its data analytics, unique software to merge mail streams on a large scale, advanced finishing capabilities and technology, and in-house transportation and logistics operations, the Company manages the mail preparation and distribution of most of its clients’ products to maximize efficiency, to enable on-time and consistent delivery and to partially reduce these costs; however, the net impact of increasing postal costs may create a decrease in client demand for print and mail products. During 2020, the Company continued to focus on providing brands and marketers with a more efficient and effective way to go to market and reach consumers. Through its integrated marketing platform, the Company creates greater value for clients by helping them reduce the complexities of working with multiple agency partners and vendors; reduce process inefficiencies through workflow re-engineering, content production and process optimization; and improve marketing spend effectiveness through demand-driving ideas and integrated solutions that help clients target audiences, plan and measure marketing, strategize, create and activate big ideas, produce content at scale, and connect with consumers through multiple channels. Throughout 2020, the Company also continued to make strategic investments in its manufacturing platform as part of its ongoing commitment to maintaining the most efficient, automated and dependable manufacturing and distribution platform in the printing industry. These investments, which included digital press technology to help clients gain a competitive edge with data-driven, personalized print marketing and quick-makeready wide-web offset press technology, help Quad sustain its position as a high-quality, low-cost producer. During 2020, the Company also completed the sale of the Omaha packaging plant and the Book business as a part of an ongoing process to review its business portfolio and divest assets not core to its transformation strategy. The Company’s results of operations have been and continue to be adversely impacted as a result of the COVID-19 pandemic. Through the Company’s Crisis Management Team, including executive and operations leadership, the Company has been executing business continuity plans focused on protecting the health and well-being of our employees, while also continuing to service clients, and protect the long-term financial health of the Company as the COVID-19 pandemic continues. As a part of the business continuity plans, the Company implemented cost reduction and cash conservation initiatives, including implementing a COVID-19 Temporary Furlough Program through which employees take an unpaid leave of absence, the length of which varies upon business needs; temporary salary reductions for leaders through the end of July 2020, including a 50% salary reduction for the Chief Executive Officer and a 35% salary reduction for named executive officers; a temporary 50% reduction in retainer fees for the Company’s non-employee directors; temporarily suspending use of vacation and vacation payouts through the end of June 2020; temporarily suspending production at several manufacturing facilities where declining client volume or other effects of the pandemic impacted the Company’s ability to operate, all of which resumed operations by the end of September 2020; suspending quarterly dividend payments through the Covenant Relief Period; and delaying capital spending projects. The Company also announced the permanent closures of the facilities located in the following locations as a result of ongoing volume declines, particularly in retail, that have been exacerbated by the COVID-19 pandemic during the year ended December 31, 2020: (1) Taunton, Massachusetts; (2) Fernley, Nevada; (3) Nashville, Tennessee; (4) Oklahoma City, Oklahoma; and (5) Charlotte, North Carolina. In addition, the Company also amended its Senior Secured Credit Facility in the second quarter of 2020 to provide for certain financial covenant relief through a Covenant Relief Period. The Company is continuing to evaluate its cost structure and expects to implement additional cost reduction measures as necessary. As the pandemic continues to evolve, the extent of the impact on the Company’s business, financial condition, cash flows, results of operations and supply chain will depend on future developments, all of which are still highly uncertain and cannot be predicted. 39 Table of Contents Results of Operations for the Year Ended December 31, 2020, Compared to the Year Ended December 31, 2019 Summary Results The Company’s operating income (loss) from continuing operations, operating margin, net loss attributable to Quad common shareholders (computed using a 25% normalized tax rate for all items subject to tax) and diluted loss per share attributable to Quad common shareholders for the year ended December 31, 2020, changed from the year ended December 31, 2019, as follows (dollars in millions, except per share data): Operating Income (Loss) from Continuing Operations Operating Margin Net Loss Attributable to Quad Common Shareholders Diluted Loss Per Share Attributable to Quad Common Shareholders For the year ended December 31, 2019 $ 34.7 0.9 % $ (156.3) $ (3.12) Restructuring, impairment and transaction-related charges (1) (34.7) (1.9) % (26.1) (0.50) Interest expense (2) N/A N/A 15.9 0.33 Net pension income (3) N/A N/A 3.4 0.07 2020 loss on debt extinguishment (4) N/A N/A (1.4) (0.03) 2019 loss on debt extinguishment (4) N/A N/A 22.9 0.46 Income taxes (5) N/A N/A (31.3) (0.62) Loss from discontinued operations, net of tax (6) N/A N/A 78.7 1.58 Investments in unconsolidated entity and noncontrolling interests, net of tax (7) N/A N/A 0.3 0.01 Operating loss from continuing operations (8) (46.0) (0.6) % (34.4) (0.71) For the year ended December 31, 2020 $ (46.0) (1.6) % $ (128.3) $ (2.53) ______________________________ (1) Restructuring, impairment and transaction-related charges increased $34.7 million ($26.1 million, net of tax), to $124.1 million during the year ended December 31, 2020, and included the following: a. A $12.5 million increase in employee termination charges from $22.2 million during the year ended December 31, 2019, to $34.7 million during the year ended December 31, 2020; b. A $56.2 million increase in impairment charges from $7.9 million during the year ended December 31, 2019, to $64.1 million during the year ended December 31, 2020; c. A $50.2 million decrease in transaction-related charges from $51.6 million during the year ended December 31, 2019, to $1.4 million during the year ended December 31, 2020; d. A $1.4 million decrease in integration-related charges from $3.3 million during the year ended December 31, 2019, to $1.9 million during the year ended December 31, 2020; and e. A $17.6 million increase in various other restructuring charges from $4.4 million during the year ended December 31, 2019, to $22.0 million during the year ended December 31, 2020. The Company expects to incur additional restructuring and integration costs in future reporting periods in connection with eliminating excess manufacturing capacity and properly aligning its cost structure in conjunction with the Company’s acquisitions and strategic investments, and other cost reduction programs. (2) Interest expense decreased $21.2 million ($15.9 million, net of tax) during the year ended December 31, 2020, to $68.8 million. This change was due to lower average debt levels and a lower weighted average interest rate on borrowings, partially offset by a $6.9 million increase in interest expense related to the interest rate swaps during the year ended December 31, 2020, as compared to the year ended December 31, 2019. 40 Table of Contents (3) Net pension income increased $4.5 million ($3.4 million, net of tax) during the year ended December 31, 2020, to $10.5 million. This was due to a $3.9 million decrease from interest cost on pension plan liabilities and a $0.7 million increase from the change in the expected long-term return on pension plan assets. (4) The $1.8 million loss on debt extinguishment ($1.4 million, net of tax) recognized during the year ended December 31, 2020, relates to a $2.4 million loss on debt extinguishment from the fourth amendment to the Company’s April 28, 2014 Senior Secured Credit Facility, completed on June 29, 2020, partially offset by a $0.6 million gain on debt extinguishment recorded during the first quarter of 2020, primarily related to the repurchase of the Company’s unsecured 7.0% senior notes due May 1, 2022. A $30.5 million loss on debt extinguishment ($22.9 million, net of tax) was recognized during the year ended December 31, 2019, and includes $15.9 million relating to the third amendment to the Company’s April 28, 2014 Senior Secured Credit Facility, completed on January 31, 2019; and $14.6 million relating to the retirement of the Term Loan B, completed on July 26, 2019. (5) The $31.3 million decrease in income tax benefit as calculated in the following table is primarily due to the following: (1) a $32.6 million decrease from increased valuation allowance reserves; (2) a $5.8 million decrease from equity award activity; and (3) a $3.3 million decrease in the Company’s liability for unrecognized tax benefits in 2019 that did not repeat in 2020. These decreases were partially offset by a $14.3 million income tax benefit related to the Coronavirus Aid, Relief, and Economic Security Act net operating loss carry back provisions. Year Ended December 31, 2020 2019 $ Change Loss from continuing operations before income taxes and equity in loss of unconsolidated entity $ (106.1) $ (79.8) $ (26.3) Normalized tax rate 25.0 % 25.0 % Income tax benefit at normalized tax rate (26.6) (20.0) (6.6) Less: Income tax expense (benefit) from the consolidated statements of operations 0.3 (24.4) 24.7 Impact of income taxes $ (26.9) $ 4.4 $ (31.3) (6) The decrease in loss from discontinued operations, net of tax, of $78.7 million during the year ended December 31, 2020, primarily due to a $75.7 million decrease in restructuring, impairment and transaction-related charges. (7) The decrease from investments in unconsolidated entity and noncontrolling interests, net of tax, of $0.3 million during the year ended December 31, 2020, was primarily due to a $0.2 million increase in loss attributed to noncontrolling interests in the Company’s consolidated statements of operations related to the Company’s majority ownership of Rise and a $0.1 million decrease in earnings at the Company’s investment in Plural Industria Gráfica Ltda. (“Plural”), the Company’s Brazilian joint venture. (8) Operating income from continuing operations, excluding restructuring, impairment and transaction-related charges, decreased $46.0 million ($34.4 million, net of tax) primarily due to the following: (1) lower print volume, pricing and print service sales; (2) a $12.1 million decrease in paper byproduct recoveries; and (3) a $10.8 million increase in production hourly wages in our most competitive labor markets. These decreases were partially offset by the following: (1) a $62.5 million decrease in selling, general and administrative expenses, including a $3.9 million net benefit in 2020 in gains from property insurance claims and the receipt of a $2.2 million COVID-19 related government subsidy in Poland; (2) a $14.7 million net reduction in the cost of worker’s compensation claims from improved production safety procedures; (3) a $9.4 million net benefit from a change in the hourly production employee vacation policy; and (4) savings from other cost reduction initiatives. 41 Table of Contents Operating Results From Continuing Operations The following table sets forth certain information from the Company’s consolidated statements of operations on an absolute dollar basis and as a relative percentage of total net sales for each noted period, together with the relative percentage change in such information between the periods set forth below: Year Ended December 31, 2020 2019 (dollars in millions) Amount % of Net Sales Amount % of Net Sales $ Change % Change Net sales: Products $ 2,228.7 76.1 % $ 3,098.3 79.0 % $ (869.6) (28.1) % Services 700.9 23.9 % 825.1 21.0 % (124.2) (15.1) % Total net sales 2,929.6 100.0 % 3,923.4 100.0 % (993.8) (25.3) % Cost of sales: Products 1,831.5 62.5 % 2,615.6 66.7 % (784.1) (30.0) % Services 503.3 17.2 % 576.6 14.7 % (73.3) (12.7) % Total cost of sales 2,334.8 79.7 % 3,192.2 81.4 % (857.4) (26.9) % Selling, general & administrative expenses 335.1 11.4 % 397.6 10.1 % (62.5) (15.7) % Depreciation and amortization 181.6 6.2 % 209.5 5.3 % (27.9) (13.3) % Restructuring, impairment and transaction-related charges 124.1 4.2 % 89.4 2.3 % 34.7 38.8 % Total operating expenses 2,975.6 101.5 % 3,888.7 99.1 % (913.1) (23.5) % Operating income (loss) from continuing operations $ (46.0) (1.6) % $ 34.7 0.9 % $ (80.7) (232.6) % Net Sales Product sales decreased $869.6 million, or 28.1%, for the year ended December 31, 2020, compared to the year ended December 31, 2019, primarily due to the following: (1) a $402.4 million decrease from pass-through paper sales; (2) a $388.8 million decrease in sales in the Company’s print product lines due to ongoing industry volume and pricing pressures, including the ongoing impacts from the COVID-19 pandemic; (3) a $68.9 million decrease in sales due to the divestiture of the Company’s Omaha packaging plant; and (4) $9.5 million in unfavorable foreign exchange impacts. Service sales, which primarily consist of logistics, distribution, marketing services, imaging and medical services, decreased $124.2 million, or 15.1%, for the year ended December 31, 2020, compared to the year ended December 31, 2019, primarily due to the following: (1) a $72.0 million decrease in logistics sales; (2) a $24.9 million decrease of sales of marketing services; and (3) an $21.4 million decrease in print imaging services. Cost of Sales Cost of product sales decreased $784.1 million, or 30.0%, for the year ended December 31, 2020, compared with the year ended December 31, 2019, primarily due to the following: (1) a decrease in pass-through paper costs; (2) lower print volume; (3) the impact from the divestiture of the Omaha packaging plant; (4) a $9.4 million net benefit from a change in the hourly production employee vacation policy; (5) a $14.7 million net reduction in the cost of worker’s compensation claims from improved production safety procedures; and (6) other cost reduction initiatives. These decreases were partially offset by a $12.1 million decrease in paper byproduct recoveries and a $10.8 million increase in production hourly wages in our most competitive labor markets. 42 Table of Contents Cost of service sales decreased $73.3 million, or 12.7%, for the year ended December 31, 2020, compared with the year ended December 31, 2019, primarily due to lower logistics, marketing services and print imaging sales. Selling, General and Administrative Expenses Selling, general and administrative expenses decreased $62.5 million, or 15.7%, for the year ended December 31, 2020, compared with the year ended December 31, 2019, primarily due to the following: (1) a $68.6 million decrease in employee-related costs; (2) a $3.9 million net benefit in 2020 in gains from property insurance claims; (3) savings from other cost reduction initiatives; and (4) the receipt of a $2.2 million COVID-19 related government subsidy in Poland. These decreases were partially offset by a $9.4 million increase in legal expenses, a $3.5 million increase in credit loss expense (primarily due to specific client credit reviews) and a $3.2 million increase from foreign translation losses. Selling, general and administrative expenses as a percentage of net sales increased from 10.1% for the year ended December 31, 2019, to 11.4% for the year ended December 31, 2020. Depreciation and Amortization Depreciation and amortization decreased $27.9 million, or 13.3%, for the year ended December 31, 2020, compared with the year ended December 31, 2019, due to a $22.2 million decrease in depreciation expense from property, plant and equipment becoming fully depreciated over the past year, and a $5.7 million decrease in amortization expense. Restructuring, Impairment and Transaction-Related Charges Restructuring, impairment and transaction-related charges increased $34.7 million, or 38.8%, for the year ended December 31, 2020, compared to the year ended December 31, 2019, primarily due to the following: Year Ended December 31, 2020 2019 $ Change Employee termination charges $ 34.7 $ 22.2 $ 12.5 Impairment charges (a) 64.1 7.9 56.2 Transaction-related charges (b) 1.4 51.6 (50.2) Integration costs 1.9 3.3 (1.4) Other restructuring charges Vacant facility carrying costs and lease exit charges 11.5 9.5 2.0 Equipment and infrastructure removal costs 1.1 0.4 0.7 Gains on the sale of facilities (c) (1.6) (6.1) 4.5 Other restructuring activities (d) 11.0 0.6 10.4 Other restructuring charges 22.0 4.4 17.6 Total restructuring, impairment and transaction-related charges $ 124.1 $ 89.4 $ 34.7 ______________________________ (a) Includes $22.1 million and $7.6 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 during the years ended December 31, 2020 and 2019, respectively; and $42.0 million and $0.3 million of land and building impairment charges during the years ended December 31, 2020 and 2019, respectively. $56.6 million of the impairment charges recorded during the year ended December 31, 2020 were related to property, plant and equipment for the Oklahoma City, Oklahoma facility. (b) Includes a $45 million reverse termination fee paid during the year ended December 31, 2019, in connection with the termination of the definitive agreement pursuant to which Quad would have acquired LSC Communications, Inc. (“LSC”). (c) Includes an $0.8 million gain on the sale of the Shakopee, Minnesota facility and an $0.8 million gain on the sale of the Midland, Michigan facility during the year ended December 31, 2020; and a $3.5 million gain on the sale of the Hazleton, Pennsylvania facility and a $2.5 million gain on the sale of the Franklin, Kentucky facility during the year ended December 31, 2019. 43 Table of Contents (d) Includes a $2.9 million loss on the sale of a business during the year ended December 31, 2020; and includes $2.3 million in charges related to a value-added tax assessment for a closed facility, as well as other restructuring activities, net of an $8.4 million gain on the sale of a business during the year ended December 31, 2019. EBITDA and EBITDA Margin—Consolidated EBITDA is defined as net earnings (loss) attributable to Quad common shareholders, excluding (1) interest expense, (2) income tax expense (benefit) and (3) depreciation and amortization. EBITDA margin represents EBITDA as a percentage of net sales. EBITDA and EBITDA margin are presented to provide additional information regarding Quad’s performance. Both are important measures by which Quad gauges the profitability and assesses the performance of its business. EBITDA and EBITDA margin are non-GAAP financial measures and should not be considered alternatives to net earnings (loss) as a measure of operating performance, or to cash flows provided by operating activities as a measure of liquidity. Quad’s calculation of EBITDA and EBITDA margin may be different from the calculations used by other companies, and therefore, comparability may be limited. EBITDA and EBITDA margin for the year ended December 31, 2020, compared to the year ended December 31, 2019, were as follows: Year Ended December 31, 2020 2019 Amount % of Net Sales Amount % of Net Sales (dollars in millions) EBITDA and EBITDA margin (non-GAAP) $ 122.4 4.2 % $ 118.8 3.0 % EBITDA increased $3.6 million for the year ended December 31, 2020, compared to the year ended December 31, 2019, primarily due to the following: (1) a $78.7 million decrease in loss from discontinued operations, net of tax; (2) a $62.5 million decrease in selling, general and administrative expenses, including a $3.9 million net benefit in 2020 in gains from property insurance claims and the receipt of a $2.2 million COVID-19 related government subsidy in Poland; (3) a $9.4 million net benefit from a change in the hourly production employee vacation policy; (4) a $14.7 million net reduction in the cost of worker’s compensation claims from improved production safety procedures; and (5) savings from other cost reduction initiatives. These increases were partially offset by the following: (1) lower print volume, pricing and print service sales; (2) $34.7 million of increased restructuring, impairment and transaction-related charges; (3) a $12.1 million decrease in paper byproduct recoveries; and (4) a $10.8 million increase in production hourly wages in our most competitive labor markets. 44 Table of Contents A reconciliation of EBITDA to net loss attributable to Quad common shareholders for the years ended December 31, 2020 and 2019, was as follows: Year Ended December 31, 2020 2019 (dollars in millions) Net loss attributable to Quad common shareholders (1) $ (128.3) $ (156.3) Interest expense 68.8 90.0 Income tax expense (benefit) 0.3 (24.4) Depreciation and amortization 181.6 209.5 EBITDA (non-GAAP) $ 122.4 $ 118.8 ______________________________ (1) Net loss attributable to Quad common shareholders included the following: a. Restructuring, impairment and transaction-related charges of $124.1 million and $89.4 million for the years ended December 31, 2020 and 2019, respectively; b. Net pension income of $10.5 million and $6.0 million for the years ended December 31, 2020 and 2019, respectively; c. Loss on debt extinguishment of $1.8 million and $30.5 million for the years ended December 31, 2020 and 2019, respectively; d. Equity in loss of unconsolidated entity of $0.2 million and $0.3 million for the years ended December 31, 2020 and 2019, respectively; e. Loss from discontinued operations, net of tax, of $21.9 million and $100.6 million for the years ended December 31, 2020 and 2019, respectively; and f. Net loss attributable to noncontrolling interests of $0.2 million for the year ended December 31, 2020. United States Print and Related Services The following table summarizes net sales, operating income from continuing operations, operating margin and certain items impacting comparability within the United States Print and Related Services segment: Year Ended December 31, 2020 2019 (dollars in millions) Amount Amount $ Change % Change Net sales: Products $ 1,944.0 $ 2,713.3 $ (769.3) (28.4) % Services 683.6 807.7 (124.1) (15.4) % Operating income from continuing operations (including restructuring, impairment and transaction-related charges) 1.7 130.1 (128.4) (98.7) % Operating margin 0.1 % 3.7 % N/A N/A Restructuring, impairment and transaction-related charges $ 110.1 $ 24.6 $ 85.5 347.6 % Net Sales Product sales for the United States Print and Related Services segment decreased $769.3 million, or 28.4%, for the year ended December 31, 2020, compared to the year ended December 31, 2019, primarily due to the following (1) a $350.8 million decrease from pass-through paper sales; (2) a $349.6 million decrease in sales in the Company’s print product lines due to ongoing industry volume and pricing pressures, including the ongoing impacts from the COVID-19 pandemic; and (3) a $68.9 million decrease in sales due to the divestiture of the Company’s Omaha packaging plant. Service sales for the United States Print and Related Services segment decreased $124.1 million, or 15.4%, for the year ended December 31, 2020, compared to the year ended December 31, 2019, primarily due to the following: (1) a $72.2 million decrease in logistics sales; (2) a $24.6 million decrease of sales of marketing services; and (3) an $21.4 million decrease in print imaging services. Operating Income from Continuing Operations Operating income from continuing operations for the United States Print and Related Services segment decreased $128.4 million, or 98.7%, for the year ended December 31, 2020, compared to the year ended December 31, 2019, primarily due to the following: (1) lower print volume and pricing due to ongoing industry pressures, including the ongoing impacts from the COVID-19 pandemic; (2) an $85.5 million increase in restructuring, impairment and transaction-related charges; (3) a $12.1 million decrease in paper byproduct recoveries; (4) a $10.8 million increase in production hourly wages in our most competitive labor markets; and (5) lower print service sales. These decreases were partially offset by the following: (1) a $14.7 million net reduction in the cost of worker’s compensation claims from improved production safety procedures; (2) a $9.4 million net benefit from a change in the hourly production employee vacation policy; (3) a $3.9 million net benefit in 2020 in gains from property insurance claims; and (4) savings from other cost reduction initiatives. The operating margin for the United States Print and Related Services segment decreased to 0.1% for the year ended December 31, 2020, from 3.7% for the year ended December 31, 2019, primarily due to the reasons provided above. Restructuring, Impairment and Transaction-Related Charges Restructuring, impairment and transaction-related charges for the United States Print and Related Services segment increased $85.5 million, or 347.6%, for the year ended December 31, 2020, compared to the year ended December 31, 2019, primarily due to the following: Year Ended December 31, 2020 2019 $ Change Employee termination charges $ 30.0 $ 20.9 $ 9.1 Impairment charges (a) 64.0 4.5 59.5 Transaction-related charges 0.1 — 0.1 Integration costs 1.9 3.3 (1.4) Other restructuring charges (income) Vacant facility carrying costs and lease exit charges 11.5 9.2 2.3 Equipment and infrastructure removal costs 1.1 0.4 0.7 Gains on the sale of facilities (b) (1.6) (5.8) 4.2 Other restructuring activities (c) 3.1 (7.9) 11.0 Other restructuring charges 14.1 (4.1) 18.2 Total restructuring, impairment and transaction-related charges $ 110.1 $ 24.6 $ 85.5 ______________________________ (a) Includes $22.0 million and $4.5 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 during the years ended December 31, 2020 and 2019, respectively; and $42.0 million of land and building impairment charges during the year ended December 31, 2020. $56.6 million of the impairment charges recorded during the year ended December 31, 2020 were related to property, plant and equipment for the Oklahoma City, Oklahoma facility. (b) Includes an $0.8 million gain on the sale of the Shakopee, Minnesota facility and an $0.8 million gain on the sale of the Midland, Michigan facility during the year ended December 31, 2020; and a $3.5 million gain on the sale of the Hazleton, Pennsylvania facility and a $2.5 million gain on the sale of the Franklin, Kentucky facility during the year ended December 31, 2019. (c) Includes a $2.9 million loss on the sale of a business during the year ended December 31, 2020; and a $8.4 million gain on the sale of a business during the year ended December 31, 2019. International The following table summarizes net sales, operating income from continuing operations, operating margin, certain items impacting comparability and equity in loss of unconsolidated entities within the International segment: Year Ended December 31, 2020 2019 (dollars in millions) Amount Amount $ Change % Change Net sales: Products $ 284.7 $ 385.0 $ (100.3) (26.1) % Services 17.3 17.4 (0.1) (0.6) % Operating income (including restructuring, impairment and transaction-related charges) (0.8) 8.6 (9.4) (109.3) % Operating margin (0.3) % 2.1 % N/A N/A Restructuring, impairment and transaction-related charges $ 12.2 $ 10.0 $ 2.2 22.0 % Equity in loss of unconsolidated entity 0.2 0.3 (0.1) (33.3) % Net Sales Product sales for the International segment decreased $100.3 million, or 26.1%, for the year ended December 31, 2020, compared to the year ended December 31, 2019, primarily due to the following (1) a $51.6 million decrease in pass-through paper sales; (2) a $39.2 million decrease in volume, primarily in Europe, Peru and Colombia, including the ongoing impacts from the COVID-19 pandemic; and (3) $9.5 million in unfavorable foreign exchange impacts, primarily in Argentina, Europe and Mexico. Service sales for the International segment decreased $0.1 million, or 0.6%, for the year ended December 31, 2020, compared to the year ended December 31, 2019, primarily due to a decrease in marketing services sales in Europe. Operating Income from Continuing Operations Operating income from continuing operations for the International segment decreased $9.4 million for the year ended December 31, 2020, compared to the year ended December 31, 2019, primarily due to lower print volume and pricing due to ongoing industry pressures, including the ongoing impacts from the COVID-19 pandemic, a $2.2 million increase in restructuring, impairment and transaction-related charges, partially offset by the receipt of a $2.2 million COVID-19 related government subsidy in Poland. Restructuring, Impairment and Transaction-Related Charges Restructuring, impairment and transaction-related charges for the International segment increased $2.2 million, or 22.0%, for the year ended December 31, 2020, compared to the year ended December 31, 2019, primarily due to the following: Year Ended December 31, 2020 2019 $ Change Employee termination charges $ 4.5 $ 1.3 $ 3.2 Impairment charges (a) 0.1 0.4 (0.3) Other restructuring charges (b) 7.6 8.3 (0.7) Total restructuring, impairment and transaction-related charges $ 12.2 $ 10.0 $ 2.2 ______________________________ (a) Includes $0.1 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 during the years ended December 31, 2020 and 2019; and $0.3 million of land and building impairment charges during the year ended December 31, 2019. (b) Includes $5.9 million and $2.8 million in charges from foreign currency losses as result of the economy in Argentina being classified as highly inflationary during the years ended December 31, 2020 and 2019, respectively; and includes $2.3 million in charges related to a value-added tax assessment for a closed facility during the year ended December 31, 2019. Equity in Loss of Unconsolidated Entities Investments in entities where Quad has the ability to exert significant influence, but not control, are accounted for using the equity method of accounting. The Company holds a 49% ownership interest in Plural, a commercial printer based in São Paulo, Brazil. The equity in loss of unconsolidated entity in the International segment decreased $0.1 million for the year ended December 31, 2020, compared to the year ended December 31, 2019, due to a decrease in earnings at the Company’s investment in Plural. Unrestricted Subsidiaries As of December 31, 2020, the Company has no unrestricted subsidiaries as defined in the Senior Unsecured Notes indenture. 45 Table of Contents Corporate The following table summarizes unallocated operating expenses presented as Corporate: Year Ended December 31, 2020 2019 (dollars in millions) Amount Amount $ Change % Change Operating expenses (including restructuring, impairment and transaction-related charges) $ 46.9 $ 104.0 $ (57.1) (54.9) % Restructuring, impairment and transaction-related charges 1.8 54.8 (53.0) (96.7) % Operating Expenses Corporate operating expenses decreased $57.1 million, or 54.9%, for the year ended December 31, 2020, compared with the year ended December 31, 2019, primarily due to the following: (1) a $53.0 million decrease in restructuring, impairment and transaction-related charges, (2) a $2.5 million decrease in employee-related costs, and (3) other cost reduction initiatives. Restructuring, Impairment and Transaction-Related Charges Corporate restructuring, impairment and transaction-related charges decreased $53.0 million, or 96.7%, for the year ended December 31, 2020, compared to the year ended December 31, 2019, primarily due to the following: Year Ended December 31, 2020 2019 $ Change Employee termination charges $ 0.2 $ — $ 0.2 Impairment charges (a) — 3.0 (3.0) Transaction-related charges (b) 1.3 51.6 (50.3) Other restructuring charges 0.3 0.2 0.1 Total restructuring, impairment and transaction-related charges $ 1.8 $ 54.8 $ (53.0) ______________________________ (a) Includes $3.0 million of impairment charges for equipment during the year ended December 31, 2019. (b) Includes a $45.0 million reverse termination fee paid during the year ended December 31, 2019, in connection with the termination of the definitive agreement pursuant to which Quad would have acquired LSC. Liquidity and Capital Resources The Company utilizes cash flows from operating activities and borrowings under its credit facilities to satisfy its liquidity and capital requirements. The Company had total liquidity of $516.6 million as of December 31, 2020, which consisted of up to $461.4 million of unused capacity under its revolving credit arrangement, which was net of $38.6 million of issued letters of credit, and cash and cash equivalents of $55.2 million. Total liquidity is reduced to $382.9 million under the Company’s most restrictive debt covenants, and consists of $55.2 million in cash and cash equivalents and $327.7 million available under its revolving credit arrangement. There were no borrowings under the $500.0 million revolving credit facility as of December 31, 2020, and peak borrowings were $150.0 million during the year ended December 31, 2020. 46 Table of Contents The Company implemented cost reduction and cash conservation initiatives as previously described herein in response to the impact of the COVID-19 pandemic on its business. These actions include, among many others, delaying capital spending projects and temporarily suspending the Company’s quarterly dividend. The Company believes its expected future cash flows from operating activities, cost reduction and cash preservation initiatives, and its current liquidity and capital resources, are sufficient to fund ongoing operating requirements and service debt and pension requirements. Net Cash Provided by Operating Activities Year Ended December 31, 2020, Compared to Year Ended December 31, 2019 Net cash provided by operating activities was $190.2 million for the year ended December 31, 2020, compared to $155.5 million for the year ended December 31, 2019, resulting in a $34.7 million increase in cash provided by operating activities. The increase was primarily due to a $37.4 million increase in cash from earnings, partially offset by a $2.7 million decrease in cash flows from changes in operating assets and liabilities. Net Cash Provided by (Used in) Investing Activities Year Ended December 31, 2020, Compared to Year Ended December 31, 2019 Net cash provided by investing activities was $9.7 million for the year ended December 31, 2020, compared to $208.1 million used in investing activities for the year ended December 31, 2019, resulting in a $217.8 million increase in cash provided by investing activities. The increase was primarily due to the following: (1) a $118.8 million decrease from the acquisition of businesses; (2) a $50.2 million increase in the proceeds from the sale of businesses; (3) a $50.0 million decrease in purchases of property, plant and equipment; (4) a $5.0 million decrease in loan to an unconsolidated entity; and (5) a $4.5 million increase in the proceeds from property insurance claims. These increases were partially offset by (1) a $10.1 million decrease in proceeds from the sale of property, plant and equipment; (2) a $0.5 million investment in an unconsolidated entity; and (3) a $0.1 million decrease in other investing activities. Net Cash Provided by (Used in) Financing Activities Year Ended December 31, 2020, Compared to Year Ended December 31, 2019 Net cash used in financing activities was $223.6 million for the year ended December 31, 2020, compared to $61.8 million provided by financing activities for the year ended December 31, 2019, resulting in a $285.4 million increase in cash used in financing activities. The increase was primarily due to a $336.4 million decrease in net borrowings of debt and lease obligations in 2020 compared to 2019, and a $22.4 million increase in cash used in changes in ownership of noncontrolling interests. These increases were partially offset by (1) a $47.6 million decrease in payment of cash dividends; (2) a $17.5 million decrease in payments of debt issuance costs and financing fees; (3) a $5.6 million decrease in equity awards redeemed to pay employees’ tax obligations; and (4) a $2.7 million decrease in other financing activities. Free Cash Flow Free Cash Flow is defined as net cash provided by operating activities less purchases of property, plant and equipment, plus LSC-related payments. The Company’s management assesses Free Cash Flow as a measure to quantify cash available for (1) strengthening the balance sheet (debt reduction), (2) strategic capital allocation and deployment through investments in the business (acquisitions and strategic investments) and (3) returning capital to the shareholders (dividends and share repurchases). The priorities for capital allocation and deployment will change as circumstances dictate for the business, and Free Cash Flow can be significantly impacted by the Company’s restructuring activities and other unusual items. 47 Table of Contents Free Cash Flow is a non-GAAP financial measure and should not be considered an alternative to cash flows provided by operating activities as a measure of liquidity. Quad’s calculation of Free Cash Flow may be different from similar calculations used by other companies, and therefore, comparability may be limited. Free Cash Flow for the years ended December 31, 2020 and 2019, was as follows: Year Ended December 31, 2020 2019 (dollars in millions) Net cash provided by operating activities $ 190.2 $ 155.5 Less: purchases of property, plant and equipment (61.0) (111.0) Plus: LSC-related payments (1) — 61.3 Free Cash Flow (non-GAAP) $ 129.2 $ 105.8 ______________________________ (1) LSC-related payments include transaction-related costs associated with the proposed, but now terminated, acquisition of LSC, including the $45.0 million reverse termination fee and incremental interest payments associated with the 2019 amended debt refinancing. Free Cash Flow increased $23.4 million for the year ended December 31, 2020, compared to the year ended December 31, 2019, primarily due to a $50.0 million decrease in capital expenditures, partially offset by a $26.6 million decrease in net cash provided by operating activities, when excluding $61.3 million in LSC-related payments. See the “Net Cash Provided by Operating Activities” section above for further explanations of the change in operating cash flows and the “Net Cash Used in Investing Activities” section above for further explanations of the changes in purchases of property, plant and equipment. The above calculation of Free Cash Flow includes the cash flows related to the Book business for all periods presented. Debt Leverage Ratio The Debt Leverage Ratio is defined as total debt and finance lease obligations less cash and cash equivalents (Net Debt) divided by the trailing twelve months Adjusted EBITDA, comprised of the sum of the following: (1) the last twelve months of EBITDA (see the definition of EBITDA and the reconciliation of net earnings (loss) attributable to Quad common shareholders to EBITDA in the “Results of Operations” section above); (2) restructuring, impairment and transaction-related charges; (3) earnings (loss) from discontinued operations, net of tax; (4) net pension income; (5) employee stock ownership plan contributions; (6) loss (gain) on debt extinguishment; (7) equity in (earnings) loss of unconsolidated entity; (8) Adjusted EBITDA for unconsolidated equity method investments (calculated in a consistent manner with the calculation for Quad); and (9) net earnings (loss) attributable to noncontrolling interests. The Company uses the Debt Leverage Ratio as a metric to assess liquidity and the flexibility of its balance sheet. Consistent with other liquidity metrics, the Company monitors the Debt Leverage Ratio as a measure to determine the appropriate level of debt the Company believes is optimal to operate its business, and accordingly, to quantify debt capacity available for strategic capital allocation and deployment through investments in the business (capital expenditures, acquisitions and strategic investments), for strengthening the balance sheet (pension liability reduction), and for returning capital to the shareholders (dividends and share repurchases). The priorities for capital allocation and deployment will change as circumstances dictate for the business, and the Debt Leverage Ratio can be significantly impacted by the amount and timing of large expenditures requiring debt financing, as well as changes in profitability. The Debt Leverage Ratio is a non-GAAP measure, and should not be considered an alternative to cash flows provided by operating activities as a measure of liquidity. Quad’s calculation of the Debt Leverage Ratio may be different from similar calculations used by other companies and, therefore, comparability may be limited. 48 Table of Contents The Debt Leverage Ratio calculated below differs from the Total Leverage Ratio, the Total Net Leverage Ratio and Senior Secured Leverage Ratio included in the Company’s debt covenant calculations (see Note 12, “Debt,” to the consolidated financial statements in Part II, Item 8, “Financial Statements and Supplementary Data,” of this Annual Report on Form 10-K for further information on debt covenants). The Total Leverage Ratio included in the Company’s debt covenants includes interest rate swap liabilities, letters of credit and surety bonds as debt, excludes non-cash stock-based compensation expense from EBITDA and includes net income (loss) attributable to noncontrolling interests in EBITDA. The Total Net Leverage Ratio includes and excludes the same adjustments as the Total Leverage Ratio, in addition to netting domestic unrestricted cash with debt. Similarly, the Senior Secured Leverage Ratio includes and excludes the same adjustments as the Total Leverage Ratio, in addition to the exclusion of the outstanding balance of the Senior Unsecured Notes and surety bonds from debt and netting domestic unrestricted cash with debt. The Debt Leverage Ratio as of December 31, 2020 and 2019, was as follows: December 31, 2020 December 31, 2019 (dollars in millions) Total debt and finance lease obligations on the consolidated balance sheets $ 928.2 $ 1,112.2 Less: Cash and cash equivalents 55.2 78.7 Net Debt (non-GAAP) $ 873.0 $ 1,033.5 Divided by: Adjusted EBITDA for the year ended (non-GAAP) $ 260.4 $ 334.9 Debt Leverage Ratio (non-GAAP) 3.35 x 3.09 x The calculation of Adjusted EBITDA for the years ended December 31, 2020 and 2019, was as follows: Year Ended December 31, 2020 2019 (dollars in millions) Net loss attributable to Quad common shareholders $ (128.3) $ (156.3) Interest expense 68.8 90.0 Income tax benefit 0.3 (24.4) Depreciation and amortization 181.6 209.5 EBITDA (non-GAAP) $ 122.4 $ 118.8 Restructuring, impairment and transaction-related charges 124.1 89.4 Loss from discontinued operations, net of tax 21.9 100.6 Net pension income (10.5) (6.0) Loss on debt extinguishment 1.8 30.5 Other (1) 0.7 1.6 Adjusted EBITDA (non-GAAP) $ 260.4 $ 334.9 ______________________________ (1) Other is comprised of equity in loss of unconsolidated entity, Adjusted EBITDA for unconsolidated equity method investments and net loss attributable to noncontrolling interests. 49 Table of Contents The Debt Leverage Ratio, at December 31, 2020, increased 0.26x to 3.35x compared to December 31, 2019, primarily due to a $74.5 million decrease in Adjusted EBITDA, partially offset by a $160.5 million decrease in debt and finance lease obligations. The Debt Leverage Ratio, at December 31, 2020, is above management’s desired target Debt Leverage Ratio range of 2.0x to 2.5x; however, the Company expects to operate above the Debt Leverage Ratio target range due to the ongoing impacts from the COVID-19 pandemic. The Company will also operate at times above the Debt Leverage Ratio target range depending on the timing of compelling strategic investment opportunities, as well as seasonal working capital needs. Description of Significant Outstanding Debt Obligations as of December 31, 2020 As of December 31, 2020, the Company utilized a combination of debt instruments to fund cash requirements, including the following: • Senior Secured Credit Facility: ◦ $500.0 million revolving credit facility (no outstanding balance as of December 31, 2020); and ◦ $825.0 million Term Loan A ($657.6 million outstanding as of December 31, 2020); • Senior Unsecured Notes ($238.7 million outstanding as of December 31, 2020); and • Master Note and Security Agreement ($15.6 million outstanding as of December 31, 2020). Senior Secured Credit Facility On April 28, 2014, the Company entered into its Senior Secured Credit Facility, which included a revolving credit facility, Term Loan A and Term Loan B. The Company completed the third amendment to the 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, but now terminated, acquisition of 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 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 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 intended that the loans available under the amended revolving credit facility would be used to repay, refinance, repurchase, redeem, exchange or otherwise terminate LSC’s existing indebtedness in connection with the consummation of the merger, and to pay transaction expenses. On July 26, 2019, following the termination of the proposed acquisition of LSC, Quad fully funded the $825.0 million delayed draw Term Loan A to retire the entire amount outstanding on the $500.0 million Term Loan B and reduced the borrowings under the revolving credit facility. The Company completed the fourth amendment to the Senior Secured Credit Facility on June 29, 2020. The Senior Secured Credit Facility was amended to (a) provide for certain financial covenant relief through the fiscal quarter ending September 30, 2021 (the Covenant Relief Period); (b) reduce the aggregate amount of the existing revolving credit facility from $800.0 million to $500.0 million; (c) make certain adjustments to pricing such as the addition of a 0.75% LIBOR floor; and (d) prohibit repurchases of capital stock and payments of cash dividends during the Covenant 50 Table of Contents Relief Period. Certain amendments were also made to the quarterly financial covenants to which the Company is subject, which are further described below. At December 31, 2020, the Company had no outstanding borrowings on the revolving credit facility, and had $38.6 million of issued letters of credit, leaving $461.4 million available for future borrowings. Borrowings under the revolving credit facility and delayed draw Term Loan A made under the Senior Secured Credit Facility at December 31, 2020, bear interest at 2.50% in excess of reserve adjusted LIBOR, with a LIBOR floor of 0.75%, or 1.50% in excess of an alternate base rate. The Senior Secured Credit Facility is 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. Senior Unsecured Notes The Company issued $300.0 million aggregate principal amount of its Senior Unsecured Notes due May 1, 2022, on April 28, 2014, of which $238.7 million is outstanding as of December 31, 2020. The Senior Unsecured Notes bear interest at 7.0%, and interest is payable semi-annually. The Senior Unsecured Notes were issued to extend and stagger the Company’s debt maturity profile, further diversify its capital structure and provide more borrowing capacity to better position the Company to execute on its strategic goals. The Company received $294.8 million in net proceeds from the sale of the Senior Unsecured Notes, after deducting the initial purchasers’ discounts and commissions. The proceeds from the Senior Unsecured Notes were used for the same purposes detailed above for the Senior Secured Credit Facility. The Company repurchased $4.7 million of its outstanding Senior Unsecured Notes in the open market, resulting in a net gain on debt extinguishment of $0.8 million during the year ended December 31, 2020. All repurchased Senior Unsecured Notes were canceled. The Company used cash flows from operating activities and borrowings under its revolving credit facility to fund the repurchases. These repurchases were primarily completed to reallocate debt to the lower interest rate revolving credit facility and thereby reduce interest expense based on current LIBOR rates. Each of the Company’s existing and future domestic subsidiaries that is a borrower or guarantees indebtedness under the Company’s Senior Secured Credit Facility or that guarantees certain of the Company’s other indebtedness or indebtedness of the Company’s restricted subsidiaries (other than intercompany indebtedness) fully and unconditionally guarantee or, in the case of future subsidiaries, will guarantee, on a joint and several basis, the Senior Unsecured Notes (the “Guarantor Subsidiaries”). All of the Guarantor Subsidiaries are 100% owned by the Company. Guarantor Subsidiaries will be automatically released from these guarantees upon the occurrence of certain events. Master Note and Security Agreement On September 1, 1995, and as last amended on November 24, 2014, the Company entered into the Master Note and Security Agreement pursuant to which the Company issued over time senior notes in an aggregate principal amount of $1.1 billion in various tranches, of which $15.6 million was outstanding as of December 31, 2020. The senior notes under the Master Note and Security Agreement had a weighted average interest rate of 7.78% at December 31, 2020, which is fixed to maturity, with interest payable semiannually. Principal payments commenced September 1997 and extend through April 2026 in various tranches. The notes are collateralized by certain United States press equipment under the terms of the Master Note and Security Agreement. The Company redeemed $37.6 million of its senior notes under the Master Note and Security Agreement, at par (the outstanding principal balance as of the date of payment), during the year ended December 31, 2020. There was no direct gain or loss recognized as a result of the tender as all notes were redeemed at par; however, $0.2 million of unamortized debt issuance costs related to the tendered notes were recognized as a loss on debt extinguishment during the year ended December 31, 2020. All tendered senior notes under the Master Note and Security Agreement were canceled. The Company used cash flows from operating activities and borrowings under its revolving credit facility to fund the tender. The tender was primarily completed to reallocate debt to the lower interest rate revolving credit facility and thereby reduce interest expense based on current LIBOR rates. 51 Table of Contents 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 December 31, 2020: • Maximum Total Net Leverage Ratio. On a rolling twelve-month basis, the Maximum Total Net Leverage Ratio, defined as consolidated total indebtedness, net of no more than $75.0 million of unrestricted cash, to consolidated EBITDA, shall not exceed (i) 4.50 to 1.00 for the quarters ending December 31, 2020 and March 31, 2021, (ii) 4.25 to 1.00 for the quarter ending June 30, 2021, and (iii) 4.125 to 1.00 for the quarter ending September 30, 2021 (for the twelve months ended December 31, 2020, the Company’s Maximum Total Net Leverage Ratio was 3.29 to 1.00). After the Covenant Relief Period, the Company will be required to comply with the Total Leverage Ratio covenant, defined as consolidated total indebtedness to consolidated EBITDA which shall not exceed 3.75 to 1.00. • 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 consolidated senior secured net indebtedness to consolidated EBITDA, shall not exceed 3.50 to 1.00 (for the twelve months ended December 31, 2020, the Company’s Senior Secured Leverage Ratio was 2.41 to 1.00). • Interest Coverage Ratio. On a rolling twelve-month basis, the Interest Coverage Ratio, defined as consolidated EBITDA to cash consolidated interest expense, shall not be less than 3.00 to 1.00 (for the twelve months ended December 31, 2020, the Company’s Interest Coverage Ratio was 4.64 to 1.00). The indenture underlying the 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. The Company was in compliance with all financial covenants in its debt agreements as of December 31, 2020. While the Company currently expects to be in compliance in future periods with all of the financial covenants, there can be no assurance that these covenants will continue to be met. The Company’s failure to maintain compliance with the covenants could prevent the Company from borrowing additional amounts and could result in a default under any of the debt agreements. Such default could cause the outstanding indebtedness to become immediately due and payable, by virtue of cross-acceleration or cross-default provisions. 52 Table of Contents In addition to those covenants, the Senior Secured Credit Facility also includes certain limitations on acquisitions, indebtedness, liens, dividends and repurchases of capital stock. The following limitations utilize a Total Net Leverage Ratio calculation, which, on a rolling twelve-month basis, is defined as consolidated net indebtedness to consolidated EBITDA (for the twelve months ended December 31, 2020, the Company’s Total Net Leverage Ratio was 3.30 to 1.00). • If the Company’s Total Net Leverage Ratio is greater than 2.75 to 1.00, the Company is prohibited from making greater than $60.0 million of annual dividend payments, capital stock repurchases and certain other payments. If the Total Net Leverage Ratio is less than 2.75 to 1.00, there are no such restrictions, provided, however, that no such restricted payments shall be made during the Covenant Relief Period. As the Company’s Total Net Leverage Ratio as of December 31, 2020, was 3.30 to 1.00, and we are in the Covenant Relief Period, the limitations described above are currently applicable. • If the Company’s Senior Secured Leverage Ratio is greater than 3.00 to 1.00 or the Company’s Total Net Leverage Ratio is greater than 3.50 to 1.00, 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 Net Leverage Ratio is less than 3.50 to 1.00, there are no such restrictions. The limitations described above are currently not applicable, as the Company’s Senior Secured Leverage Ratio was 2.41 to 1.00 and Total Net Leverage Ratio was 3.30 to 1.00, as of December 31, 2020 . Net Pension Obligations The net underfunded pension and MEPPs obligations decreased by $30.7 million during the year ended December 31, 2020, from $123.0 million at December 31, 2019, to $92.3 million at December 31, 2020. This decrease in overall pension obligations was primarily due to an actual return on pension plan assets of 17.0% during the year ended December 31, 2020, which was above the expected return on plan assets assumption of 5.75%, payments totaling $11.4 million made to the MEPPs and $7.8 million in employer pension contributions during the year ended December 31, 2020. The decrease was partially offset by an 83 basis point decrease in the pension discount rate from 3.20% at December 31, 2019, to 2.37% at December 31, 2020. The Company continues to focus on reducing pension obligations through cash contributions to the plans, lump-sum settlements and plan design changes. Share Repurchase Program On July 30, 2018, 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. Under the authorization, share repurchases may be made at the Company’s discretion, from time to time, in the open market and/or in privately negotiated transactions as permitted by federal securities laws and other legal requirements. The timing, manner, price and amount of any repurchase will depend on economic and market conditions, share price, trading volume, applicable legal requirements and other factors. The program may be suspended or discontinued at any time. The Company is currently prohibited from repurchasing capital stock through the Covenant Relief Period, in accordance with the fourth amendment to the April 28, 2014 Senior Secured Credit Facility, completed on June 29, 2020. There were no shares of the Company’s class A stock repurchased during the years December 31, 2020 and 2019. As of December 31, 2020, there were $100.0 million of authorized repurchases remaining under the program. Risk Management For a discussion of the Company’s exposure to market risks and management of those market risks, see Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” of this Annual Report on Form 10-K. 53 Table of Contents Off-Balance Sheet Arrangements Except as set forth below in the Contractual Obligations and Other Commitments table, the Company has no off-balance sheet arrangements, financings or special purpose entities that the Company expects to have a material current or future effect on financial condition, changes in financial condition, results of operations, liquidity, capital expenditures, capital resources or significant components of sales or expenses. Contractual Obligations and Other Commitments The Company’s contractual cash obligations at December 31, 2020, were as follows (in millions): Payments Due by Period Total 2021 2022 2023 2024 2025 Thereafter Debt obligations (1) $ 1,036.6 $ 67.8 $ 317.7 $ 109.7 $ 539.8 $ 1.1 $ 0.5 Operating lease obligations (2) 93.7 31.1 23.1 16.6 9.6 6.8 6.5 MEPPs withdrawal obligations (3) 51.2 6.2 6.2 6.2 4.0 3.8 24.8 Pension benefit obligations (4) 12.2 4.0 0.7 0.7 0.6 6.2 — Finance lease obligations (5) 5.1 2.9 1.6 0.4 0.1 0.1 — Purchase obligations (6) 11.1 10.4 0.3 0.3 0.1 — — Business acquisitions (7) 7.7 7.7 — — — — — Total (8)(9) $ 1,217.6 $ 130.1 $ 349.6 $ 133.9 $ 554.2 $ 18.0 $ 31.8 ______________________________ (1) Debt obligations include $106.3 million for anticipated future interest payments, including $14.7 million of estimated interest payments from the interest rate swaps, and excludes $6.9 million for future amortization of debt issuance costs. During 2020, the Company paid in advance the full amount of required amortization payments on its Term Loan A, totaling $67.1 million for the year ended December 31, 2021. The Company also paid in advance $43.6 million of required amortization payments on its Term Loan A for the year ended December 31, 2022. Amounts included in “Thereafter” include principal payments and estimated interest expense through April 2026. (2) Operating lease obligations include $10.8 million for anticipated future interest payments. (3) MEPPs withdrawal obligations include $15.5 million for anticipated future interest payments. See Note 16, “Employee Retirement Plans,” to the consolidated financial statements in Part II, Item 8, “Financial Statements and Supplementary Data,” of this Annual Report on Form 10-K for further discussion of the MEPPs withdrawal liability. (4) For the pension benefit obligations, contributions and benefit payments to be funded from Company assets included in the table have been actuarially estimated over a five year period. While benefit payments under these benefit plans are expected to continue beyond 2025, the Company believes that an estimate beyond this period is unreasonable. (5) Finance lease obligations include $0.3 million for anticipated future interest payments. (6) Purchase obligations consist primarily of $8.7 million in firm commitments to purchase press and finishing equipment and $2.4 million of other purchase obligations. (7) Business acquisitions represents an estimated $7.7 million of future cash payments associated with the acquisition of Ivie. (8) The contractual obligations table above does not include reserves for uncertain tax positions recorded in accordance with the accounting guidance on uncertainties in income taxes. The Company has taken tax positions for which the ultimate amount and the year(s) any necessary payments will be made that pertain to those tax positions is uncertain. The reserve for uncertain tax positions prior to interest and penalties was $11.6 million as of December 31, 2020, of which $5.2 million was included in other long-term liabilities, $6.1 million was included in deferred income taxes and $0.3 million was included in accrued liabilities in the consolidated balance sheets. The Company has also recorded reserves for interest and penalties related to uncertain tax positions of $0.6 million and $0.1 million, respectively, as of December 31, 2020. 54 Table of Contents (9) The contractual obligations table above does not include the share repurchase program as no repurchases are required under the program. See the “Share Repurchase Program” section above for further discussion, including the maximum potential cash payments under the program. Critical Accounting Policies and Estimates The Company’s consolidated financial statements are prepared in accordance with GAAP. The Company’s most critical accounting policies are those that are most important to the portrayal of its financial condition and results of operations, and which require the Company to make its most difficult and subjective estimates. Management is required to make judgments and estimates that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the statements, and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. The Company’s management believes that such judgments and estimates are made with consistent and appropriate methods based on information available at the time, and that any reasonable deviation from those judgments and estimates would not have a material impact on the Company’s consolidated financial position or results of operations. Actual results may differ from these estimates under different assumptions or conditions. To the extent that the estimates used differ from actual results, adjustments to the consolidated statements of operations and corresponding consolidated balance sheets would be necessary. These adjustments would be made in future statements. The Company has identified the following as its critical accounting policies and estimates. Revenue Recognition Performance Obligations At contract inception, the Company assesses the products and services promised in its contracts with customers and identifies performance obligations for each promise to transfer to the customer a product or service that is distinct. To identify the performance obligations, the Company considers the goods or services promised in the contract regardless of whether they are explicitly stated or are implied by customary business practices. The Company determined that the following distinct products and services represent separate performance obligations: • Pre-Press Services • Print • Other Services For Pre-Press and Other Services, the Company recognizes revenue at point-in-time upon completion of the performed service and acceptance by the customer. The Company considers transfer of control to occur once the service is performed as the Company has right to payment and the customer has legal title and risk and reward of ownership. The Company recognizes its Print revenues upon transfer of title and the passage of risk of loss, which is point-in-time upon shipment to the customer, and when there is a reasonable assurance as to collectability. Revenues related to the Company’s logistics operations, which includes the delivery of printed material, are included in the Print performance obligation and are also recognized at point-in-time as services are completed. Revenues related to the Company’s imaging operations, which include digital content management, photography, color services and page production, are recognized in accordance with the terms of the contract, typically upon completion of the performed service and acceptance by the customer. Under agreements with certain customers, products may be stored by the Company for future delivery. In these situations, the Company may receive warehouse management fees for the services it provides. Certain revenues earned by the Company require judgment to determine if revenue should be recorded gross as principal or net of related costs as an agent. Billings for third-party shipping and handling costs, primarily in the Company’s logistics operations, and out-of-pocket expenses are recorded gross in net sales and cost of sales in the consolidated statements of operations in Item 8, “Financial Statements and Supplementary Data,” of this Annual Report 55 Table of Contents on Form 10-K. Many of the Company’s operations process materials, primarily paper, that may be supplied directly by customers or may be purchased by the Company and sold to customers. No revenue is recognized for customer-supplied paper. Revenues for the Company-supplied paper are recognized on a gross basis. In some instances, the Company will deliver print work for a customer and bill the customer for postage. In these cases, the Company is acting as an agent and billings are recorded on a net basis in net sales. Significant Payment Terms Payment terms and conditions for contracts with customers vary. The Company typically offers standard terms of net 30 days. It is not the Company’s standard business practice to offer extended payment terms longer than one year. The Company may offer cash discounts or prepayment and extended terms depending on certain facts and circumstances. As such, when the timing of the Company’s delivery of products and services differs from the timing of payment, the Company will record either a contract asset or a contract liability. Variable Consideration When evaluating the transaction price, the Company analyzes on a contract by contract basis all applicable variable considerations and non-cash consideration and also performs a constraint analysis. The nature of the Company’s contracts give rise to variable consideration, including, volume rebates, credits, discounts, and other similar items that generally decrease the transaction price. These variable amounts generally are credited to the customer, based on achieving certain levels of sales activity, when contracts are signed, or making payments within specific terms. Product returns are not significant because the products are customized; however, the Company accrues for the estimated amount of customer allowances at the time of sale based on historical experience and known trends. When the transaction price requires allocation to multiple performance obligations, the Company uses the estimated stand-alone selling prices using the adjusted market assessment approach. Costs to Obtain Contracts 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. Impairment of Goodwill Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired in a business combination and is assigned to specific reporting units. Changes in management’s estimates or judgments, including changes based on actual results differing from the estimates and judgments used in the purchase price allocation process, could result in an impairment charge, and such a charge could have a material adverse effect on the Company's results of operations. In accordance with accounting guidance, the Company performs an annual impairment test for goodwill 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. Within the United States Print and Related Services Segment, the Company has identified three reporting units: (1) Core Print and Related Services; (2) Specialty Print and Related Services; and (3) Other United States Products and Services. As of December 31, 2020, goodwill totaled $103.0 million and was allocated to the Core Print and Related Services. The Specialty Print and Related Services reporting unit and the Other United States Products and Services reporting unit have no goodwill allocated to them. Additionally, there is no goodwill in the International segment on the consolidated balance sheets. 56 Table of Contents Due to the decline in the Company’s stock price and the uncertainty and impacts of the COVID-19 pandemic on the Company and the global economy, an interim goodwill impairment test was completed on the goodwill in the Core Print and Related Services reporting unit during the first quarter of 2020. As a result, the Company determined the fair value of the Core Print and Related Services reporting unit exceeded the carrying value, and therefore no impairment was recorded. The Company completed its annual impairment test as of October 31, 2020, and identified no indicators of impairment in any of the Company's reporting units during the year ended December 31, 2020. In determining the fair value of the Core Print and Related Services reporting unit as of October 31, 2020, the Company used an equal weighting of both the income and market approaches. Significant assumptions used under the income approach included: estimated future cash flows including expected future revenue growth, profit margins, capital expenditures, working capital levels, terminal value multiples and an 11.1% after-tax weighted average cost of capital for the Core Print and Related Services. Estimated future cash flows were based on the Company's internal projection models, industry projections and other assumptions deemed reasonable by management. Significant assumptions used under the market approach included: a control premium based on similar transactions, selection of the guideline public companies and selected market multiples. This fair value determination was categorized as Level 3 in the fair value hierarchy (see Note 15, “Financial Instruments and Fair Value Measurements,” to the consolidated financial statements in Item 8, “Financial Statements and Supplementary Data,” of this Annual Report on Form 10-K for the definition of Level 3 inputs). After completing the annual evaluation, the estimated fair value of the Core Print and Related Services reporting unit in the United States Print and Related Services segment was determined to exceed the carrying value of the reporting unit. In addition, the Company performed a sensitivity analysis as of October 31, 2020, on the material assumptions used in the discounted cash flow valuation models. In performing the annual goodwill impairment assessment, the percentage by which estimated fair value exceeded carrying value in the Core Print and Related Services reporting unit was more than 50%. As such, management concluded that no impairment existed as of October 31, 2020. No additional indications of impairment were identified between October 31, 2020, and December 31, 2020. Impairment of Property, Plant and Equipment and Finite-lived Intangible Assets The Company performs impairment evaluations of its long-lived assets whenever business conditions, events or circumstances indicate that those assets may be impaired, including whether the estimated useful life of such long-lived assets may warrant revision or whether the remaining balance of an asset may not be recoverable. The Company’s most significant long-lived assets are property, plant and equipment and customer relationship intangible assets recorded in conjunction with an acquisition. Assessing the impairment of long-lived assets requires the Company to make important estimates and assumptions, including, but not limited to, the expected future cash flows that the assets will generate, how the assets will be used based on the strategic direction of the Company, their remaining useful life and their residual value, if any. Considerable judgment is also applied in incorporating the potential impact of the current economic climate on customer demand and selling prices, the cost of production and the limited activity on secondary markets for the assets and on the cost of capital. When the estimated future undiscounted cash flows to be generated by the assets are less than the carrying value of the long-lived assets, the assets are written down to fair value and a charge is recorded to current operations. The Company uses internal discounted cash flow estimates, quoted market prices when available and independent appraisals, as appropriate, to determine fair value. This fair value determination was categorized as Level 3 in the fair value hierarchy (see Note 15, “Financial Instruments and Fair Value Measurements,” to the consolidated financial statements in Part II, Item 8, “Financial Statements and Supplementary Data,” of this Annual Report on Form 10-K for the definition of Level 3 inputs). The Company classifies long-lived assets to be sold as held for sale in the period in which: (i) there is an approved plan to sell the asset and the Company is committed to that plan, (ii) the asset is available for immediate sale in its present condition, (iii) an active program to locate a buyer and other actions required to sell the asset have been initiated, (iv) the sale of the asset is probable, (v) the asset is being actively marketed for sale at a price that is reasonable in relation to its current fair value, and (vi) it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. Assets held for sale are initially measured at the lower of the carrying value or the fair value less cost to sell. Losses resulting from this measurement are recognized in the period in which the held for sale criteria are met while gains are not recognized until the date of sale. Once designated as held for sale, the Company stops recording 57 Table of Contents depreciation expense on the property, plant and equipment. The fair value less cost to sell of long-lived assets held for sale is assessed at each reporting period until it no longer meets this classification. Based on the assessments completed during the years ended December 31, 2020, and 2019, the Company recognized property, plant and equipment impairment charges from continuing operations of $64.1 million and $7.9 million, respectively, primarily related to facility consolidations, as well as other capacity and strategic reduction restructuring initiatives. There were no finite-lived intangible asset impairment charges recorded during the years ended December 31, 2020 and 2019. The Company continues to monitor groups of assets to identify any new events or changes in circumstances that could indicate that their carrying values are not recoverable, particularly in light of potential declines in profitability that may result from the highly competitive industry landscape and continued uncertainty in the global economy. In the event that there are significant and unanticipated changes in circumstances, such as significant adverse changes in business climate, adverse actions by regulators, unanticipated competition, loss of key customers and/or changes in technology or markets, or that actual results differ from management’s estimates, a provision for impairment could be required in a future period. Pension Plans As a result of the acquisition of World Color Press, the Company acquired multiple underfunded pension plans. Pension plan costs are determined using actuarial methods and are funded through contributions determined in accordance with the projected benefit method pro-rated based on service. The Company records amounts relating to its pension plans based on calculations which include various actuarial assumptions. The Company believes that the two most critical assumptions are the discount rate and assumed rate of return on assets. Changes in these assumptions are primarily influenced by factors outside of the Company’s control and can have a significant effect on the amounts reported in the financial statements. The Company reviews its actuarial assumptions on an annual basis and modifies the assumptions based on current rates and trends when it is appropriate to do so. The effects of modifications are recognized immediately on the consolidated balance sheets, but are generally amortized into operating income over future periods, with the deferred amount recorded in accumulated other comprehensive loss on the consolidated balance sheets included in Item 8, “Financial Statements and Supplementary Data,” of this Annual Report on Form 10-K. The Company believes that the assumptions utilized in recording its obligations under its plans are reasonable based on its experience, market conditions and input from its actuaries and investment advisors. When an event gives rise to both a curtailment and a settlement, the curtailment is accounted for prior to the settlement. The Company’s measurement date to measure the defined benefit plan assets and the projected benefit obligation is December 31. For the purposes of calculating the expected return on plan assets, those assets are valued at fair value. The Company determines its assumption for the discount rate to be used for purposes of computing annual service and interest costs for each pension plan based on an index of high-quality corporate bond yields and matched-funding yield curve analysis as of that date. The Company measures interest costs for pension benefits by applying the specific spot rates along that yield curve to the plans’ liability cash flows. The weighted average discount rate used to determine benefit obligations for the pension plans at December 31, 2020, was 2.37%, a 83 basis point decrease from the discount rate of 3.20% at December 31, 2019. A one-percentage point change in the discount rate would have the following impact on the projected benefit obligation and the net periodic benefit cost as of December 31, 2020: 1.0% Increase 1.0% Decrease (in millions) Projected benefit obligation $ (47.9) $ 55.9 Net pension income $ (3.4) $ 2.6 58 Table of Contents The Company employs a total return on investment approach for its pension plans whereby a diversified mix of equity securities and debt securities are used to maximize the long-term pension plan assets. The intent of this strategy is to outperform the growth in plan liabilities over the long run, such that plan contributions can be decreased, balanced with maintaining a lower degree of investment risk. Risk tolerance is established through careful consideration of plan liabilities, plan funded status, and corporate financial condition. Equity securities are diversified across geography and market capitalization through investments in United States large-capitalization stocks, United States small-capitalization stocks and international securities. Investment risk is measured and monitored on an ongoing basis through annual liability measurements, periodic asset/liability studies and quarterly investment portfolio reviews. The expected long-term rate of return for plan assets is based upon many factors including expected asset allocations, historical asset returns, current and expected future market conditions and risk. The current target asset allocation for plan assets on a weighted average basis are 30% equity securities and 70% debt securities. The actual asset allocation as of December 31, 2020, was approximately 30% equity securities and 70% debt securities. The expected return on plan assets assumption was 5.75% and 6.25% at December 31, 2020 and 2019, respectively, for the Company’s funded United States pension plans. Actual return on plan assets was 17.00% and 21.28% for the years ended December 31, 2020 and 2019, respectively. Certain pension plans are unfunded (those plans do not hold plan assets). A 25 basis point change in the expected return on plan assets would have the following impact on net pension income for the year ended December 31, 2020: 0.25% Increase 0.25% Decrease (in millions) Net pension income $ 1.1 $ (1.1) The Company also participated in MEPPs as a result of the acquisition of World Color Press. 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 GCIU and the 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 the estimated withdrawal liability based on information provided by each plan’s trustee. In 2016, the Company and the GCC reached a settlement agreement for all claims, with scheduled payments until February 2024. In 2019, the Company and the GCIU reached a settlement agreement for all claims, with scheduled payments until April 2032. New Accounting Pronouncements See Note 23, “New Accounting Pronouncements,” to the consolidated financial statements in Part II, Item 8, “Financial Statements and Supplementary Data,” of this Annual Report on Form 10-K. 59 Table of Contents Summarized Financial Information of Subsidiary Guarantors Indebtedness On April 28, 2014, Quad completed an offering of the Senior Unsecured Notes (see Note 12, “Debt,” for further details on the Senior Unsecured Notes). Each of the Company’s Guarantor Subsidiaries fully and unconditionally guarantee or, in the case of future subsidiaries, will guarantee, on a joint and several basis, the Senior Unsecured Notes. All of the current Guarantor Subsidiaries are 100% owned by the Company. Guarantor Subsidiaries will be automatically released from these guarantees upon the occurrence of certain events, including the following: • the designation of any of the Guarantor Subsidiaries as an unrestricted subsidiary; • the release or discharge of any guarantee or indebtedness that resulted in the creation of the guarantee of the Senior Unsecured Notes by any of the Guarantor Subsidiaries; or • the sale or disposition, including the sale of substantially all the assets, of any of the Guarantor Subsidiaries. The following tables present summarized financial information for Quad and the Guarantor Subsidiaries on a combined basis after intercompany transactions have been eliminated, including adjustments to remove the equity in earnings from the Non-Guarantor Subsidiaries. During the year ended December 31, 2020, six Non-Guarantor subsidiaries of the Company became Guarantor subsidiaries. Accordingly, the material supplemental financial information for all periods presented below has been recast to reflect subsidiaries per the Senior Unsecured Notes agreement that were Guarantor Subsidiaries as of December 31, 2020. Year Ended Statement of Operations Financial Information December 31, 2020 December 31, 2019 Net sales $ 2,660.6 $ 3,580.2 Cost of sales 2,114.4 2,906.8 Gross Profit 546.2 673.4 Net earnings (loss) from continuing operations (106.5) (62.0) Loss from discontinued operations, net of tax (21.9) (100.6) Net earnings (loss) (128.4) (162.6) Less: net earnings (loss) attributable to noncontrolling interests (0.2) — Net earnings (loss) attributable to Quad common shareholders $ (128.2) $ (162.6) Balance Sheet Financial Information December 31, 2020 December 31, 2019 Total current assets $ 580.0 $ 794.9 Total long-term assets 1,555.5 1,911.2 Total current liabilities 598.1 729.8 Total long-term liabilities 1,143.3 1,335.7 Noncontrolling interests 0.7 17.7 Included in long-term assets in the table above are $11.6 million and $12.5 million of current intercompany loan receivables due to Quad from the Non-Guarantor Subsidiaries as of December 31, 2020 and 2019, respectively. Also included in long-term assets are $428.8 million and $427.9 million of intercompany investments by Quad and the Guarantor Subsidiaries in the Non-Guarantor Subsidiaries. Included in current liabilities are $2.9 million and $16.3 million of current intercompany payables due to the Non-Guarantor Subsidiaries from Quad and the Guarantor Subsidiaries as of December 31, 2020 and 2019, respectively. 60 Table of Contents