Quad/Graphics(QUAD) - 2024 Q2 - Quarterly Report

PART I FINANCIAL INFORMATION This part covers Quad/Graphics, Inc.'s unaudited condensed consolidated financial statements and management's discussion for H1 2024 ITEM 1. Condensed Consolidated Financial Statements (Unaudited) This section presents Quad/Graphics, Inc.'s unaudited condensed consolidated financial statements for Q2 and H1 2024, along with explanatory notes Condensed Consolidated Statements of Operations (Unaudited) This statement details Quad/Graphics, Inc.'s unaudited financial performance for Q2 and H1 2024, covering net sales, operating income, and net loss Condensed Consolidated Statements of Operations (Unaudited) – Key Figures (in millions): | Metric | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | |:---|:---|:---|:---|:---| | Total Net Sales | $634.2 | $703.1 | $1,289.0 | $1,469.6 | | Total Cost of Sales | $493.9 | $569.8 | $1,015.2 | $1,187.3 | | Operating Income | $15.1 | $8.4 | $4.4 | $8.5 | | Net Loss | $(2.8) | $(6.1) | $(30.9) | $(30.7) | | Basic and Diluted Loss per Share | $(0.06) | $(0.12) | $(0.65) | $(0.62) | Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) This statement presents Quad/Graphics, Inc.'s unaudited comprehensive income (loss) for Q2 and H1 2024, including net loss and other comprehensive items Condensed Consolidated Statements of Comprehensive Income (Loss) – Key Figures (in millions): | Metric | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | |:---|:---|:---|:---|:---| | Net Loss | $(2.8) | $(6.1) | $(30.9) | $(30.7) | | Other Comprehensive Income (Loss), net of tax | $(7.3) | $7.6 | $(6.6) | $14.8 | | Comprehensive Income (Loss) | $(10.1) | $1.5 | $(37.5) | $(15.9) | Condensed Consolidated Balance Sheets (Unaudited) This statement presents Quad/Graphics, Inc.'s unaudited financial position as of June 30, 2024, and December 31, 2023, detailing assets, liabilities, and equity Condensed Consolidated Balance Sheets – Key Figures (in millions): | Metric | June 30, 2024 | December 31, 2023 | |:---|:---|:---| | Total Current Assets | $518.7 | $587.7 | | Total Assets | $1,367.9 | $1,509.7 | | Total Current Liabilities | $611.8 | $790.8 | | Total Liabilities | $1,288.8 | $1,390.2 | | Total Shareholders' Equity | $79.1 | $119.5 | Condensed Consolidated Statements of Cash Flows (Unaudited) This statement presents Quad/Graphics, Inc.'s unaudited cash flows for H1 2024, detailing operating, investing, and financing activities Condensed Consolidated Statements of Cash Flows – Key Figures (in millions): | Metric | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | |:---|:---|:---| | Net Cash Provided by (Used in) Operating Activities | $(48.3) | $0.3 | | Net Cash Used in Investing Activities | $(6.2) | $(42.7) | | Net Cash Provided by Financing Activities | $14.5 | $28.3 | | Net Decrease in Cash and Cash Equivalents | $(40.1) | $(13.9) | | Cash and Cash Equivalents at End of Period | $12.8 | $11.3 | Condensed Consolidated Statements of Shareholders' Equity (Unaudited) This statement presents changes in Quad/Graphics, Inc.'s unaudited shareholders' equity from December 31, 2023, to June 30, 2024 Condensed Consolidated Statements of Shareholders' Equity – Key Figures (in millions): | Metric | Balance at December 31, 2023 | Balance at June 30, 2024 | |:---|:---|:---| | Common Stock | $1.4 | $1.4 | | Additional Paid-in Capital | $842.7 | $839.6 | | Treasury Stock, at cost | $(33.1) | $(27.7) | | Accumulated Deficit | $(573.9) | $(610.0) | | Accumulated Other Comprehensive Loss | $(117.6) | $(124.2) | | Total Shareholders' Equity | $119.5 | $79.1 | Notes to Condensed Consolidated Financial Statements (Unaudited) These notes provide detailed explanations and disclosures for Quad/Graphics, Inc.'s unaudited condensed consolidated financial statements for H1 2024 Note 1. Basis of Presentation These unaudited financial statements follow SEC interim rules, with results subject to seasonality, typically peaking in the second half - The Company's financial results are seasonal, with net sales and operating income typically higher in the second half of the calendar year, especially the fourth quarter, due to increased catalogs and retail inserts for back-to-school and holiday promotions[18] Note 2. Revenue Recognition Revenue is disaggregated by segment and offering, recognized upon transfer of control or service completion, with contract costs amortized Disaggregated Revenue by Segment and Offering (in millions): | Category | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | |:---|:---|:---|:---|:---| | Total Products | $497.6 | $559.9 | $1,004.8 | $1,167.8 | | US Print Products | $411.9 | $449.3 | $847.8 | $953.8 | | International Products | $85.7 | $110.6 | $157.0 | $214.0 | | Total Services | $136.6 | $143.2 | $284.2 | $301.8 | | US Print Services | $132.4 | $139.2 | $275.4 | $292.3 | | International Services | $4.2 | $4.0 | $8.8 | $9.5 | | Total Net Sales | $634.2 | $703.1 | $1,289.0 | $1,469.6 | - The Company's product offerings include retail inserts, catalogs, publications, direct mail, packaging, and global paper procurement. Service offerings encompass logistics, marketing services (data & analytics, technology, media, creative), and medical services[24] Costs to Obtain Contracts (in millions): | Activity | Costs to Obtain Contracts | |:---|:---| | Balance at December 31, 2023 | $1.8 | | Amortization of costs to obtain contracts | $(0.5) | | Balance at June 30, 2024 | $1.3 | Note 3. Restructuring, Impairment and Transaction-Related Charges Restructuring, impairment, and transaction-related charges increased in Q2 and H1 2024, driven by employee terminations, asset impairments, and professional fees Restructuring, Impairment and Transaction-Related Charges (in millions): | Charge Type | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | |:---|:---|:---|:---|:---| | Employee termination charges | $3.2 | $1.9 | $16.9 | $15.0 | | Impairment charges | $1.1 | $1.1 | $13.7 | $10.6 | | Transaction-related charges | $0.4 | $0.0 | $0.9 | $0.6 | | Integration costs | $0.1 | $0.5 | $0.2 | $1.0 | | Other restructuring charges | $5.3 | $6.1 | $10.9 | $8.4 | | Total | $10.1 | $9.6 | $42.6 | $35.6 | - Impairment charges for H1 2024 were $13.7 million, primarily for property, plant, and equipment ($11.4 million) and operating lease right-of-use assets ($2.3 million) due to facility consolidations and capacity reductions[31] Restructuring Reserves Activity (in millions) for Six Months Ended June 30, 2024: | Category | Balance at Dec 31, 2023 | Expense, net | Cash payments, net | Non-cash adjustments/reclassifications | Balance at June 30, 2024 | |:---|:---|:---|:---|:---|:---| | Employee Termination Charges | $17.6 | $16.9 | $(24.9) | $0.0 | $9.6 | | Impairment Charges | $0.0 | $13.7 | $0.0 | $(13.7) | $0.0 | | Transaction-Related Charges | $2.5 | $0.9 | $(2.7) | $0.0 | $0.7 | | Integration Costs | $0.0 | $0.2 | $(0.2) | $0.0 | $0.0 | | Other Restructuring Charges | $11.8 | $10.9 | $(12.2) | $(0.5) | $10.0 | | Total | $31.9 | $42.6 | $(40.0) | $(14.2) | $20.3 | Note 4. Goodwill Goodwill is tested annually for impairment, with the US Print segment's DART acquisition goodwill adjusted in H1 2024 Goodwill Activity (in millions) for Six Months Ended June 30, 2024: | Segment | Balance at Dec 31, 2023 | DART acquisition | Balance at June 30, 2024 | |:---|:---|:---|:---| | United States Print and Related Services | $103.0 | $(2.7) | $100.3 | | International | $0.0 | $0.0 | $0.0 | | Total | $103.0 | $(2.7) | $100.3 | Note 5. Receivables The Company manages credit risk with provisions for credit losses, which decreased in Q2 and H1 2024 - Credit loss expense decreased to $0.4 million for Q2 2024 (from $0.6 million in Q2 2023) and $0.5 million for H1 2024 (from $1.5 million in H1 2023)[40] Allowance for Credit Losses (in millions) for Six Months Ended June 30, 2024: | Activity | Allowance for Credit Losses | |:---|:---| | Balance at December 31, 2023 | $25.7 | | Provisions | $0.5 | | Write-offs | $(0.3) | | Translation | $(0.2) | | Balance at June 30, 2024 | $25.7 | Note 6. Inventories Total inventories slightly decreased to $174.5 million at June 30, 2024, with shifts in work in process and finished goods Components of Inventories (in millions): | Component | June 30, 2024 | December 31, 2023 | |:---|:---|:---| | Raw materials and manufacturing supplies | $102.7 | $102.7 | | Work in process | $35.9 | $30.1 | | Finished goods | $35.9 | $46.0 | | Total | $174.5 | $178.8 | Note 7. Commitments and Contingencies The Company faces lawsuits and environmental regulations, but management expects no material financial statement impact - Management believes that liabilities from ongoing lawsuits and environmental remediation obligations will not materially impact the Company's financial statements[43][44] Note 8. Debt The Company amended its Senior Secured Credit Facility and entered new press financing arrangements in Q1 2024 - Eighth amendment to Senior Secured Credit Facility on January 4, 2024, added $25.0 million to Term Loan A (maturing Nov 2, 2026)[46] - Revolving credit facility capacity reduced to $342.5 million as of January 31, 2024, following a portion maturing[46] - Entered into two new press financing arrangements in Q1 2024: $13.8 million at 8.31% fixed (maturing 2028) and $14.0 million at 9.27% variable (maturing 2031)[47] Note 9. Income Taxes Income tax expense for H1 2024 reflects the effective tax rate, with unrecognized tax benefits decreasing to $16.4 million - Unrecognized tax benefits liability decreased by $0.3 million to $16.4 million as of June 30, 2024, from $16.7 million at December 31, 2023[49] - The Company anticipates a $6.7 million decrease in unrecognized tax benefits liability within the next twelve months due to audit resolutions or statute expirations[49] Note 10. Financial Instruments and Fair Value Measurements The Company uses fair value measurements for assets and liabilities, employing interest rate swaps and collars to hedge variable rate debt - The Company holds one active interest rate swap contract ($50.0 million notional, 4.67% fixed rate, effective April 30, 2024, terminating March 31, 2027) designated as a cash flow hedge[53] Fair Value of Active Interest Rate Swap (in millions): | Balance Sheet Location | June 30, 2024 | December 31, 2023 | |:---|:---|:---| | Interest rate swap liabilities | $(0.5) | $0.0 | - Two interest rate collars ($75.0 million notional each) are active, effective February 1, 2023, with floor rates of 2.09% and 2.25% and ceiling rates of 5.00%[59] Fair Value of Interest Rate Collars (in millions): | Balance Sheet Location | June 30, 2024 | December 31, 2023 | |:---|:---|:---| | Interest rate collar assets | $0.4 | $0.0 | | Interest rate collar liabilities | $0.0 | $(0.2) | - As of June 30, 2024, there were no open foreign currency exchange contracts[62] - The fair value of the Company's total debt was approximately $0.5 billion at June 30, 2024, and December 31, 2023, measured using Level 2 inputs[64] Note 11. Employee Retirement Plans The Company manages defined contribution and pension plans, reporting $0.4 million net pension income and a $22.6 million MEPPs withdrawal liability Net Pension Income (in millions): | Metric | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | |:---|:---|:---|:---|:---| | Interest cost | $(4.1) | $(4.4) | $(8.2) | $(8.8) | | Expected return on plan assets | $4.5 | $5.0 | $9.0 | $10.0 | | Net periodic pension income | $0.4 | $0.6 | $0.8 | $1.2 | | Amortization of actuarial loss | $(0.2) | $(0.2) | $(0.4) | $(0.4) | | Net pension income | $0.2 | $0.4 | $0.4 | $0.8 | - The Company has a total MEPPs withdrawal liability of $22.6 million as of June 30, 2024, with $20.5 million long-term and $2.1 million current[69] - Payments to the GCIU MEPP are scheduled until April 2032; the final payment to GCC MEPP was made in February 2024[69] Note 12. Loss Per Share Due to net losses, all equity incentive instruments were anti-dilutive and excluded from diluted loss per share for Q2 and H1 2024 and 2023 Loss Per Share (in millions, except per share data): | Metric | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | |:---|:---|:---|:---|:---| | Net Loss | $(2.8) | $(6.1) | $(30.9) | $(30.7) | | Basic and Diluted Loss per Share | $(0.06) | $(0.12) | $(0.65) | $(0.62) | | Weighted Average Common Shares Outstanding (Basic and Diluted) | 47.7 | 49.3 | 47.4 | 49.2 | | Cash Dividends Paid per Common Share | $0.05 | $0.00 | $0.10 | $0.00 | Note 13. Equity Incentive Programs Equity incentive compensation expense for H1 2024 increased to $4.4 million, with $10.4 million estimated for future RS and RSU awards Equity Incentive Compensation Expense (in millions): | Expense Type | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | |:---|:---|:---|:---|:---| | RS and RSU equity awards expense | $1.5 | $1.2 | $3.3 | $2.1 | | DSU awards expense | $1.1 | $1.1 | $1.1 | $1.2 | | Total | $2.6 | $2.3 | $4.4 | $3.3 | - Total future compensation expense for equity incentive programs is estimated at $10.4 million, primarily for RS and RSU awards, with $3.1 million expected for the remainder of 2024[72] Note 14. Shareholders' Equity The Company has three common stock classes, reinstated quarterly dividends, and made no share repurchases in H1 2024 Common Stock Shares (in millions): | Class | June 30, 2024 (Outstanding) | December 31, 2023 (Outstanding) | |:---|:---|:---| | Class A | 38.9 | 37.4 | | Class B | 13.3 | 13.6 | | Class C | 0.0 | 0.0 | - The Board of Directors reinstated quarterly dividends on February 15, 2024, declaring $0.05 per common share for Q1 and Q2 2024[78][80] - No share repurchases occurred during the three and six months ended June 30, 2024. $77.5 million remains authorized under the share repurchase program[217] Note 15. Accumulated Other Comprehensive Loss Accumulated other comprehensive loss increased to $(124.2) million at June 30, 2024, due to translation and interest rate derivative adjustments Changes in Accumulated Other Comprehensive Loss (in millions) for Six Months Ended June 30, 2024: | Component | Balance at Dec 31, 2023 | Other comprehensive income (loss) before reclassifications | Amounts reclassified to net loss | Net other comprehensive income (loss) | Balance at June 30, 2024 | |:---|:---|:---|:---|:---|:---| | Translation Adjustments | $(75.5) | $(7.5) | $0.0 | $(7.5) | $(83.0) | | Interest Rate Derivatives Adjustments | $(2.1) | $0.1 | $0.4 | $0.5 | $(1.6) | | Pension Benefit Plan Adjustments | $(40.0) | $0.0 | $0.4 | $0.4 | $(39.6) | | Total | $(117.6) | $(7.4) | $0.8 | $(6.6) | $(124.2) | Note 16. Segment Information Quad operates two segments: US Print (86-87% of net sales) and International (13-14%), offering print, logistics, and marketing services - United States Print and Related Services segment accounted for approximately 86% and 87% of consolidated net sales for the three and six months ended June 30, 2024, respectively[117] - International segment accounted for approximately 14% and 13% of consolidated net sales for the three and six months ended June 30, 2024, respectively, covering operations in Europe and Latin America[118] Segment Net Sales and Operating Income (in millions): | Segment | Three Months Ended June 30, 2024 (Net Sales) | Three Months Ended June 30, 2024 (Operating Income) | Six Months Ended June 30, 2024 (Net Sales) | Six Months Ended June 30, 2024 (Operating Income) | |:---|:---|:---|:---|:---| | United States Print and Related Services | $544.3 | $25.4 | $1,123.2 | $24.1 | | International | $89.9 | $2.3 | $165.8 | $5.7 | | Corporate | $0.0 | $(12.6) | $0.0 | $(25.4) | | Total | $634.2 | $15.1 | $1,289.0 | $4.4 | Note 17. Strategic Investments Quad sold its minority equity interest in Manipal Technologies Limited for $22.2 million in April 2024, realizing a $4.1 million gain - Sold minority equity interest in Manipal Technologies Limited for $22.2 million on April 16, 2024[92] - Realized a gain of $4.1 million from the sale of the investment[92] Note 18. New Accounting Pronouncements The Company is evaluating new FASB ASUs on Segment Reporting (ASU 2023-07) and Income Tax Disclosures (ASU 2023-09) - Evaluating ASU 2023-07 'Segment Reporting' (effective for fiscal years beginning after Dec 15, 2023) for enhanced segment expense disclosures[93] - Evaluating ASU 2023-09 'Income Taxes' (effective for fiscal years beginning after Dec 15, 2024) for improved income tax disclosures, including rate reconciliation and disaggregation of taxes paid[94] Note 19. Subsequent Events On July 22, 2024, the Company declared a quarterly dividend of $0.05 per share, payable on September 6, 2024 - Declared a quarterly dividend of $0.05 per share on July 22, 2024, payable September 6, 2024[94] ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's analysis of Quad's financial condition and operational results for Q2 and H1 2024, including key metrics and liquidity Cautionary Statement Regarding Forward-Looking Statements This statement warns that forward-looking statements are subject to risks like decreasing demand, business complexity, cost fluctuations, and macroeconomic conditions - Forward-looking statements are subject to risks such as decreasing demand for printing services, increased business complexity from the marketing experience (MX) transformation, changes in postal rates, and fluctuations in costs and raw material availability[101] - Macroeconomic conditions (inflation, high interest rates, recession concerns) and the inability to reduce costs quickly enough are also significant risk factors[101] Overview Quad is a global marketing experience (MX) company focused on integrated omnichannel solutions, driving growth through service excellence and financial strength - Quad is a global marketing experience (MX) company aiming to streamline marketing complexities for clients through flexible, scalable, and connected solutions, supported by technology and data-driven intelligence[105] - The Company's growth strategy involves three pillars: delivering integrated service excellence, accelerating market penetration in key verticals (commerce, financial services, health), and leveraging its unique 'maker' culture[106][108][109][110][111][112] - Financial strength is enhanced by driving profitable growth, maximizing Free Cash Flow and operating margins, maintaining a strong balance sheet, and strategically allocating capital to debt reduction, business investments, and shareholder returns (dividends/buybacks)[113] - Total liquidity as of June 30, 2024, was $241.6 million, comprising $228.8 million unused revolving credit capacity (net of $28.5 million letters of credit) and $12.8 million cash and cash equivalents[115] Business Overview Quad, a global MX company, offers flexible marketing solutions to 2,700 clients, focusing on integrated service excellence and market penetration - Quad serves approximately 2,700 clients across multiple industry verticals, with a focus on commerce (retail, CPG, D2C), financial services, and health[105] - Key investments to accelerate market penetration include fortifying business development, expanding brand awareness through the 'Built on Quad' campaign, and thought leadership at global industry events[108] Segments Quad's operating segments are US Print (86-87% of net sales) and International (13-14%), offering print, logistics, and marketing services - The United States Print and Related Services segment comprises the majority of the Company's consolidated net sales (86-87% for Q2 and H1 2024)[117] - The International segment includes printing operations in Europe and Latin America, contributing 13-14% of consolidated net sales for Q2 and H1 2024[118] Key Performance Metrics Overview Management uses net sales growth, EBITDA, Free Cash Flow, and Debt Leverage Ratio to evaluate performance, financial condition, and liquidity - Key performance metrics include net sales growth, EBITDA, EBITDA margin, net cash provided by (used in) operating activities, Free Cash Flow, and Debt Leverage Ratio[119] - The Company's consolidated debt and finance lease obligations increased by $22.5 million during the six months ended June 30, 2024, primarily due to cash used in operating activities and capital expenditures, partially offset by proceeds from long-term debt issuance[125] Overview of Trends Affecting Quad Quad faces challenges from changing consumer media habits, competitive printing pressures, rising postal/paper costs, and digital diversion, expecting continued adverse impacts - Trends include increased demand for end-to-end marketing services and multichannel campaigns due to changing consumer media consumption habits[126] - The commercial printing industry faces high fragmentation, competitive pressures, demand for shorter print runs, and increased postal and paper costs, leading to excess manufacturing capacity[127] - The USPS's increased pricing flexibility and twice-yearly rate increases are expected to continue, potentially leading to reduced mail volumes and diversion to digital channels[131] - The Company expects continued adverse impacts from a high interest rate environment, fluctuating paper prices and availability, and reduced demand for printed products, necessitating ongoing cost-saving measures and strategic investments[134] Results of Operations for the Three Months Ended June 30, 2024, Compared to the Three Months Ended June 30, 2023 Quad's Q2 2024 net loss improved to $(2.8) million despite a 9.8% sales decrease, with operating income rising due to productivity and cost reductions - Other operating income elements increased by $7.2 million, driven by improved manufacturing productivity, a $5.6 million decrease in depreciation and amortization, and other cost reduction initiatives[37] Summary Results Quad's Q2 2024 net loss improved to $(2.8) million, with operating income rising to $15.1 million despite increased restructuring charges Q2 2024 vs. Q2 2023 Summary Results (in millions, except per share data): | Metric | Q2 2024 | Q2 2023 | Change ($) | Change (%) | |:---|:---|:---|:---|:---| | Operating Income | $15.1 | $8.4 | $6.7 | 79.8% | | Operating Margin | 2.4% | 1.2% | 1.2 pp | N/A | | Net Loss | $(2.8) | $(6.1) | $3.3 | 54.1% | | Diluted Loss Per Share | $(0.06) | $(0.12) | $0.06 | 50.0% | - Restructuring, impairment, and transaction-related charges increased by $0.5 million to $10.1 million in Q2 2024, primarily due to a $1.3 million increase in employee termination charges and a $0.4 million increase in transaction-related charges[37][147] Operating Results Total net sales decreased by 9.8% to $634.2 million in Q2 2024, driven by lower product and service sales, with SG&A expenses increasing Q2 2024 vs. Q2 2023 Operating Results (in millions): | Metric | Q2 2024 | Q2 2023 | Change ($) | Change (%) | |:---|:---|:---|:---|:---| | Total Net Sales | $634.2 | $703.1 | $(68.9) | (9.8)% | | Product Sales | $497.6 | $559.9 | $(62.3) | (11.1)% | | Service Sales | $136.6 | $143.2 | $(6.6) | (4.6)% | | Total Cost of Sales | $493.9 | $569.8 | $(75.9) | (13.3)% | | Selling, General & Administrative Expenses | $88.7 | $83.3 | $5.4 | 6.5% | | Depreciation and Amortization | $26.4 | $32.0 | $(5.6) | (17.5)% | | Restructuring, Impairment and Transaction-Related Charges | $10.1 | $9.6 | $0.5 | 5.2% | | Operating Income | $15.1 | $8.4 | $6.7 | 79.8% | - Product sales decreased by $62.3 million (11.1%) due to lower print volumes ($34.0 million) and decreased paper sales ($29.0 million)[141] - Service sales decreased by $6.6 million (4.6%), primarily from a $7.5 million decrease in marketing and medical services[143] - Selling, general and administrative expenses increased by $5.4 million (6.5%), mainly due to $5.8 million in unfavorable foreign exchange impacts and $1.7 million in non-recurring credits from 2023[145] EBITDA and EBITDA Margin—Consolidated Consolidated EBITDA increased by $0.9 million to $41.7 million in Q2 2024, with margin rising to 6.6%, driven by productivity and cost reductions Consolidated EBITDA and EBITDA Margin (non-GAAP, in millions): | Metric | Q2 2024 | % of Net Sales | Q2 2023 | % of Net Sales | |:---|:---|:---|:---|:---| | EBITDA | $41.7 | 6.6% | $40.8 | 5.8% | - EBITDA increased by $0.9 million, primarily due to improved manufacturing productivity and cost reduction initiatives, partially offset by lower print volumes and increased restructuring charges[151] Reconciliation of EBITDA to Net Loss (in millions): | Metric | Q2 2024 | Q2 2023 | |:---|:---|:---| | Net Loss | $(2.8) | $(6.1) | | Interest expense | $17.2 | $17.0 | | Income tax expense (benefit) | $0.9 | $(2.1) | | Depreciation and amortization | $26.4 | $32.0 | | EBITDA (non-GAAP) | $41.7 | $40.8 | United States Print and Related Services The US Print segment's operating income increased by 115.3% to $25.4 million in Q2 2024, despite sales decreases, driven by lower depreciation and productivity US Print and Related Services Segment Performance (in millions): | Metric | Q2 2024 | Q2 2023 | Change ($) | Change (%) | |:---|:---|:---|:---|:---| | Product Sales | $411.9 | $449.3 | $(37.4) | (8.3)% | | Service Sales | $132.4 | $139.2 | $(6.8) | (4.9)% | | Operating Income | $25.4 | $11.8 | $13.6 | 115.3% | | Operating Margin | 4.7% | 2.0% | 2.7 pp | N/A | | Restructuring, Impairment and Transaction-Related Charges | $9.3 | $8.6 | $0.7 | 8.1% | - Product sales decreased by $37.4 million (8.3%) due to lower print volumes ($21.9 million) and paper sales ($15.5 million)[155] - Operating income increased by $13.6 million (115.3%), primarily due to a $5.1 million decrease in depreciation and amortization, improved manufacturing productivity, and cost reduction initiatives[156] International The International segment's operating income decreased by 72.3% to $2.3 million in Q2 2024, primarily due to a 22.5% drop in product sales and lower print volumes International Segment Performance (in millions): | Metric | Q2 2024 | Q2 2023 | Change ($) | Change (%) | |:---|:---|:---|:---|:---| | Product Sales | $85.7 | $110.6 | $(24.9) | (22.5)% | | Service Sales | $4.2 | $4.0 | $0.2 | 5.0% | | Operating Income | $2.3 | $8.3 | $(6.0) | (72.3)% | | Operating Margin | 2.6% | 7.2% | (4.6) pp | N/A | | Restructuring, Impairment and Transaction-Related Charges | $0.8 | $1.0 | $(0.2) | (20.0)% | - Product sales decreased by $24.9 million (22.5%) due to a $13.5 million decrease in paper sales and a $12.1 million decrease in print product volume and pricing, mainly in Europe and Mexico[160] - Operating income decreased by $6.0 million (72.3%), primarily due to a $6.2 million decrease in operating income from decreased print product volume, mainly in Mexico, Peru, and Colombia[161] Corporate Corporate operating expenses increased by $0.9 million (7.7%) to $12.6 million in Q2 2024, mainly due to higher employee costs Corporate Operating Expenses (in millions): | Metric | Q2 2024 | Q2 2023 | Change ($) | Change (%) | |:---|:---|:---|:---|:---| | Operating expenses | $12.6 | $11.7 | $0.9 | 7.7% | - The increase in corporate operating expenses was primarily driven by a $0.7 million increase in employee-related costs[164] Results of Operations for the Six Months Ended June 30, 2024, Compared to the Six Months Ended June 30, 2023 Quad's H1 2024 net loss was $(30.9) million, with total net sales decreasing by 12.3% and operating income falling to $4.4 million - Restructuring, impairment, and transaction-related charges increased by $7.0 million to $42.6 million in H1 2024, driven by increases in employee termination charges ($1.9 million), impairment charges ($3.1 million), and other restructuring charges ($2.5 million)[166][175] - Other operating income elements increased by $2.9 million, primarily due to a $10.7 million decrease in depreciation and amortization, improved manufacturing productivity, and other cost reduction initiatives[167] Summary Results Quad's H1 2024 net loss was $(30.9) million, with operating income decreasing to $4.4 million due to increased restructuring charges H1 2024 vs. H1 2023 Summary Results (in millions, except per share data): | Metric | H1 2024 | H1 2023 | Change ($) | Change (%) | |:---|:---|:---|:---|:---| | Operating Income | $4.4 | $8.5 | $(4.1) | (48.2)% | | Operating Margin | 0.3% | 0.6% | (0.3) pp | N/A | | Net Loss | $(30.9) | $(30.7) | $(0.2) | (0.7)% | | Diluted Loss Per Share | $(0.65) | $(0.62) | $(0.03) | (4.8)% | - Restructuring, impairment, and transaction-related charges increased by $7.0 million to $42.6 million in H1 2024[166] Operating Results Total net sales decreased by 12.3% to $1,289.0 million in H1 2024, driven by lower product and service sales, with SG&A expenses slightly decreasing H1 2024 vs. H1 2023 Operating Results (in millions): | Metric | H1 2024 | H1 2023 | Change ($) | Change (%) | |:---|:---|:---|:---|:---| | Total Net Sales | $1,289.0 | $1,469.6 | $(180.6) | (12.3)% | | Product Sales | $1,004.8 | $1,167.8 | $(163.0) | (14.0)% | | Service Sales | $284.2 | $301.8 | $(17.6) | (5.8)% | | Total Cost of Sales | $1,015.2 | $1,187.3 | $(172.1) | (14.5)% | | Selling, General & Administrative Expenses | $171.8 | $172.5 | $(0.7) | (0.4)% | | Depreciation and Amortization | $55.0 | $65.7 | $(10.7) | (16.3)% | | Restructuring, Impairment and Transaction-Related Charges | $42.6 | $35.6 | $7.0 | 19.7% | | Operating Income (Loss) | $4.4 | $8.5 | $(4.1) | (48.2)% | - Product sales decreased by $163.0 million (14.0%) due to an $86.3 million decrease from paper sales and a $79.6 million decrease in print product lines[171] - Service sales decreased by $17.6 million (5.8%), primarily due to a $16.5 million decrease in marketing and medical services[171] - Selling, general and administrative expenses decreased by $0.7 million (0.4%), benefiting from a $4.1 million gain on investment sale and a $3.6 million decrease in employee-related costs, partially offset by $6.0 million in unfavorable foreign exchange impacts[173] EBITDA and EBITDA Margin—Consolidated Consolidated EBITDA decreased by $15.2 million to $59.8 million in H1 2024, with margin falling to 4.6%, due to lower print volumes and increased restructuring charges Consolidated EBITDA and EBITDA Margin (non-GAAP, in millions): | Metric | H1 2024 | % of Net Sales | H1 2023 | % of Net Sales | |:---|:---|:---|:---|:---| | EBITDA | $59.8 | 4.6% | $75.0 | 5.1% | - EBITDA decreased by $15.2 million, primarily due to lower print volumes and marketing services net sales, and $7.0 million of increased restructuring, impairment, and transaction-related charges[178] Reconciliation of EBITDA to Net Loss (in millions): | Metric | H1 2024 | H1 2023 | |:---|:---|:---| | Net Loss | $(30.9) | $(30.7) | | Interest expense | $32.4 | $33.3 | | Income tax expense | $3.3 | $6.7 | | Depreciation and amortization | $55.0 | $65.7 | | EBITDA (non-GAAP) | $59.8 | $75.0 | United States Print and Related Services The US Print segment's operating income increased by 26.2% to $24.1 million in H1 2024, despite sales decreases, driven by lower depreciation and productivity US Print and Related Services Segment Performance (in millions): | Metric | H1 2024 | H1 2023 | Change ($) | Change (%) | |:---|:---|:---|:---|:---| | Product Sales | $847.8 | $953.8 | $(106.0) | (11.1)% | | Service Sales | $275.4 | $292.3 | $(16.9) | (5.8)% | | Operating Income | $24.1 | $19.1 | $5.0 | 26.2% | | Operating Margin | 2.1% | 1.5% | 0.6 pp | N/A | | Restructuring, Impairment and Transaction-Related Charges | $40.9 | $31.1 | $9.8 | 31.5% | - Product sales decreased by $106.0 million (11.1%) due to a $57.0 million decrease in print product lines and a $49.0 million decrease in paper sales[182] - Operating income increased by $5.0 million (26.2%), primarily due to a $9.7 million decrease in depreciation and amortization, improved manufacturing productivity, and cost reduction initiatives[183] International The International segment's operating income decreased by 64.4% to $5.7 million in H1 2024, primarily due to a 26.6% drop in product sales and lower print volumes International Segment Performance (in millions): | Metric | H1 2024 | H1 2023 | Change ($) | Change (%) | |:---|:---|:---|:---|:---| | Product Sales | $157.0 | $214.0 | $(57.0) | (26.6)% | | Service Sales | $8.8 | $9.5 | $(0.7) | (7.4)% | | Operating Income | $5.7 | $16.0 | $(10.3) | (64.4)% | | Operating Margin | 3.4% | 7.2% | (3.8) pp | N/A | | Restructuring, Impairment and Transaction-Related Charges | $1.6 | $3.6 | $(2.0) | (55.6)% | - Product sales decreased by $57.0 million (26.6%) due to a $37.3 million decrease in paper sales and a $22.6 million decrease in print volume, primarily in Mexico and Europe[187] - Operating income decreased by $10.3 million (64.4%), primarily due to an $8.3 million decrease from lower print product volume, mainly in Mexico and Peru[188] Corporate Corporate operating expenses decreased by $1.2 million (4.5%) to $25.4 million in H1 2024, mainly due to lower employee costs Corporate Operating Expenses (in millions): | Metric | H1 2024 | H1 2023 | Change ($) | Change (%) | |:---|:---|:---|:---|:---| | Operating expenses | $25.4 | $26.6 | $(1.2) | (4.5)% | | Restructuring, Impairment and Transaction-Related Charges | $0.1 | $0.9 | $(0.8) | (88.9)% | - The decrease in corporate operating expenses was primarily due to a $1.0 million decrease in employee-related costs[192] Liquidity and Capital Resources Quad's total liquidity was $241.6 million as of June 30, 2024, with shifts in cash flows from operating, investing, and financing activities - Total liquidity as of June 30, 2024, was $241.6 million, consisting of $12.8 million cash and cash equivalents and $228.8 million unused revolving credit capacity[195] - Net cash used in operating activities increased by $48.6 million to $48.3 million for H1 2024, compared to $0.3 million provided in H1 2023[196] - Net cash used in investing activities decreased by $36.5 million to $6.2 million for H1 2024, primarily due to $22.2 million from an investment sale and an $11.7 million decrease in capital expenditures[197] - Net cash provided by financing activities decreased by $13.8 million to $14.5 million for H1 2024, mainly due to a $13.9 million decrease in net borrowings and a $4.6 million increase in cash dividends[198] Net Cash Provided by (Used in) Operating Activities Net cash used in operating activities increased to $48.3 million in H1 2024, primarily due to changes in operating assets and liabilities - Net cash used in operating activities increased by $48.6 million, from $0.3 million provided in H1 2023 to $48.3 million used in H1 2024[196] Net Cash Used in Investing Activities Net cash used in investing activities decreased significantly to $6.2 million in H1 2024, driven by investment sale proceeds and lower capital expenditures - Net cash used in investing activities decreased by $36.5 million, from $42.7 million in H1 2023 to $6.2 million in H1 2024[197] - Key drivers for the decrease include $22.2 million in proceeds from an investment sale and an $11.7 million decrease in purchases of property, plant, and equipment[197] Net Cash Provided by Financing Activities Net cash provided by financing activities decreased by $13.8 million to $14.5 million in H1 2024, mainly due to lower net borrowings and increased dividends - Net cash provided by financing activities decreased by $13.8 million, from $28.3 million in H1 2023 to $14.5 million in H1 2024[198] - The decrease was primarily due to a $13.9 million decrease in net borrowings of debt and lease obligations and a $4.6 million increase in cash dividends[198] Free Cash Flow Free Cash Flow (non-GAAP) decreased by $36.9 million to $(81.8) million in H1 2024, primarily due to increased net cash used in operations Free Cash Flow (non-GAAP, in millions): | Metric | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | |:---|:---|:---| | Net cash provided by (used in) operating activities | $(48.3) | $0.3 | | Less: purchases of property, plant and equipment | $33.5 | $45.2 | | Free Cash Flow (non-GAAP) | $(81.8) | $(44.9) | - Free Cash Flow decreased by $36.9 million, primarily due to a $48.6 million increase in net cash used in operating activities, partially offset by an $11.7 million decrease in capital expenditures[201] Debt Leverage Ratio The Debt Leverage Ratio (non-GAAP) increased to 2.36x at June 30, 2024, exceeding the target, due to higher Net Debt and reduced Adjusted EBITDA Debt Leverage Ratio (non-GAAP, in millions, except ratio): | Metric | June 30, 2024 | December 31, 2023 | |:---|:---|:---| | Total debt and finance lease obligations | $545.2 | $522.7 | | Less: Cash and cash equivalents | $12.8 | $52.9 | | Net Debt (non-GAAP) | $532.4 | $469.8 | | Divided by: Adjusted EBITDA (non-GAAP) | $225.5 | $233.7 | | Debt Leverage Ratio—Net Debt (non-GAAP) | 2.36x | 2.01x | - The Debt Leverage Ratio increased by 0.35x, primarily due to a $62.6 million increase in Net Debt and an $8.2 million reduction in trailing twelve months Adjusted EBITDA[208] - The ratio of 2.36x is currently above management's desired target range of 1.75x to 2.25x[208] Debt Obligations As of June 30, 2024, the Company's debt obligations included $85.2 million on its revolving credit facility and $419.7 million on Term Loan A - Outstanding debt includes $85.2 million on the revolving credit facility and $419.7 million on Term Loan A as of June 30, 2024[209] Covenants and Compliance As of June 30, 2024, Quad was in compliance with all financial covenants, including Total Leverage, Senior Secured Leverage, and Interest Coverage Ratios - Total Leverage Ratio was 2.35 to 1.00 (maximum 3.75 to 1.00)[211] - Senior Secured Leverage Ratio was 2.34 to 1.00 (maximum 3.25 to 1.00)[212] - Interest Coverage Ratio was 4.00 to 1.00 (minimum 3.00 to 1.00)[212] - The Company was in compliance with all financial covenants as of June 30, 2024[213] Share Repurchase Program The Company's $100.0 million share repurchase program had $77.5 million remaining authorization, with no repurchases in H1 2024 - Share repurchase program authorized for up to $100.0 million of Class A common stock[217] - No share repurchases occurred during the three and six months ended June 30, 2024[217] - $77.5 million of authorized repurchases remained as of June 30, 2024[217] Risk Management This section refers to Item 3 for a discussion of the Company's exposure to market risks and their management New Accounting Pronouncements This section refers to Note 18 for details on new accounting pronouncements ITEM 3. Quantitative and Qualitative Disclosures About Market Risk Quad is exposed to interest rate, foreign currency, credit, and commodity risks, managed through policies and financial instruments, with potential impacts on financial position - The Company is exposed to interest rate risk on variable rate debt, foreign currency risk, credit risk, and commodity risk (paper, ink, energy)[220] - As of June 30, 2024, $322.0 million of variable rate debt was outstanding at a weighted average interest rate of 7.7%, and $223.2 million of fixed rate debt and finance leases at 7.5%[221] - A hypothetical 10% increase in market interest rates on variable rate debt would not have a material impact on interest expense[221] - A hypothetical 10% adverse change in foreign currency exchange rates could decrease net current assets of foreign subsidiaries by approximately $8.9 million[223] - The allowance for credit losses was $25.7 million as of June 30, 2024, reflecting ongoing client creditworthiness monitoring[225] - Management believes a hypothetical 10% change in paper and other raw material prices would not have a significant direct impact on consolidated annual results, but significant increases could influence future client demand[231] Interest Rate Risk Quad manages interest rate risk on variable debt using collars and swaps, with $200.0 million effectively fixed, and a 10% rate increase would not materially impact interest expense - Variable rate debt outstanding at June 30, 2024, was $322.0 million (7.7% weighted average interest rate), and fixed rate debt was $223.2 million (7.5% weighted average interest rate), including $200.0 million hedged from variable to fixed[221] - A hypothetical 10% increase in market interest rates on variable rate debt would not materially impact the Company's interest expense[221] Foreign Currency Risk and Translation Exposure Foreign currency exposure is limited, but rate fluctuations can impact consolidated financial position, with a 10% adverse change potentially decreasing foreign net current assets by $8.9 million - Foreign currency exposure is limited as operating revenues and expenses are largely in local currencies[222] - A hypothetical 10% adverse change in foreign currency exchange rates could decrease net current assets of foreign subsidiaries by approximately $8.9 million[223] Credit Risk Credit risk is managed through client evaluations and monitoring, with a $25.7 million allowance for credit losses and a diverse client base - The Company evaluates client creditworthiness and continuously monitors financial condition to manage credit risk[225] - Allowance for credit losses was $25.7 million as of June 30, 2024[225] - The largest client accounted for less than 5% of net sales during the three and six months ended June 30, 2024, indicating a diverse client base[226] Commodity Risk The Company faces commodity price fluctuations for paper, ink, and energy; while paper risk is mitigated, energy price increases may impact costs, and a 10% change could affect client demand - Primary raw materials are paper, ink, and energy, with prices fluctuating beyond the Company's control[227] - Price adjustment clauses in sales contracts generally mitigate paper price risk, and the Company produces most of its own ink[229][230] - Increases in electric and natural gas energy prices may not be fully passed on to clients, potentially impacting manufacturing costs[230] - A hypothetical 10% change in paper and other raw material prices is not expected to have a significant direct impact on consolidated annual results, but could influence future client demand[231] ITEM 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of June 30, 2024, with no material changes in internal control over financial reporting - The Company's disclosure controls and procedures were evaluated and deemed effective as of June 30, 2024[232] - No material changes in internal control over financial reporting occurred during the fiscal quarter ended June 30, 2024[233] Disclosure Controls and Procedures Management concluded that the Company's disclosure controls and procedures were effective as of June 30, 2024 - Disclosure controls and procedures were evaluated and found effective as of June 30, 2024[232] Changes in Internal Control Over Financial Reporting No material changes in the Company's internal control over financial reporting occurred during the quarter ended June 30, 2024 - No material changes in internal control over financial reporting occurred during the fiscal quarter ended June 30, 2024[233] PART II — OTHER INFORMATION This part contains additional information including risk factors, equity sales, other disclosures, and exhibits for the quarterly report ITEM 1A. Risk Factors No material changes to the risk factors previously disclosed in the Company's 2023 Annual Report on Form 10-K have occurred - No material changes to risk factors previously disclosed in the 2023 Annual Report on Form 10-K[235] ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds No unregistered equity sales occurred, and no share repurchases were made in Q2 2024, with $77.5 million remaining authorized - No unregistered sales of equity securities occurred[235] - No shares were repurchased during the three months ended June 30, 2024, under the $100.0 million share repurchase program[236] - $77.5 million of authorized repurchases remained as of June 30, 2024[236] ITEM 5. Other Information No director or Section 16 officer adopted or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during Q2 2024 - No director or Section 16 officer adopted or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during Q2 2024[238] ITEM 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including CEO and CFO certifications and iXBRL financial statements - Exhibits include CEO and CFO certifications (31.1, 31.2), a written statement (32), and financial statements in iXBRL format (101, 104)[240][241] Exhibit Index The Exhibit Index details documents filed with the Form 10-Q, including certifications and iXBRL formatted financial statements - The Exhibit Index lists certifications (CEO, CFO), a written statement, and iXBRL formatted financial statements[240] Signatures The report was signed on July 31, 2024, by J. Joel Quadracci (Chairman, President, and CEO) and Anthony C. Staniak (CFO) - The report was signed by J. Joel Quadracci (Chairman, President, and CEO) and Anthony C. Staniak (CFO) on July 31, 2024[244]