Quad/Graphics(QUAD) - 2023 Q2 - Quarterly Report

PART I — FINANCIAL INFORMATION This section presents the unaudited condensed consolidated financial statements and related notes for the company ITEM 1. Condensed Consolidated Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements for Quad/Graphics, Inc. for the three and six months ended June 30, 2023 and 2022, including statements of operations, comprehensive income (loss), balance sheets, cash flows, and shareholders' equity, along with detailed notes explaining the basis of presentation, revenue recognition, restructuring, debt, income taxes, financial instruments, employee retirement plans, earnings per share, equity incentive programs, shareholders' equity, accumulated other comprehensive loss, and segment information Condensed Consolidated Statements of Operations (Unaudited) This statement provides a detailed breakdown of revenues, costs, and net earnings or losses over specific periods Three Months Ended June 30, 2023 vs. 2022 (in millions): | Metric | 2023 | 2022 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total Net Sales | $703.1 | $757.7 | $(54.6) | (7.2)% | | Cost of Sales | $569.8 | $618.1 | $(48.3) | (7.8)% | | Operating Income | $8.4 | $14.2 | $(5.8) | (40.8)% | | Net Earnings (Loss) | $(6.1) | $5.3 | $(11.4) | (215.1)% | | Basic and Diluted EPS | $(0.12) | $0.10 | $(0.22) | (220.0)% | Six Months Ended June 30, 2023 vs. 2022 (in millions): | Metric | 2023 | 2022 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total Net Sales | $1,469.6 | $1,501.9 | $(32.3) | (2.2)% | | Cost of Sales | $1,187.3 | $1,237.7 | $(50.4) | (4.1)% | | Operating Income | $8.5 | $19.6 | $(11.1) | (56.6)% | | Net Earnings (Loss) | $(30.7) | $4.3 | $(35.0) | (814.0)% | | Basic and Diluted EPS | $(0.62) | $0.08 | $(0.70) | (875.0)% | Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) This statement presents net earnings or loss and other comprehensive income or loss components for the period Comprehensive Income (Loss) (in millions): | Period | 2023 | 2022 | | :--- | :--- | :--- | | Three Months Ended June 30, | $1.5 | $(0.1) | | Six Months Ended June 30, | $(15.9) | $0.8 | - For the three months ended June 30, 2023, comprehensive income was $1.5 million, a significant improvement from a loss of $0.1 million in the prior year, primarily driven by positive translation adjustments[13] - For the six months ended June 30, 2023, comprehensive loss was $15.9 million, compared to income of $0.8 million in the prior year, despite positive translation adjustments, indicating other factors contributing to the overall loss[13] Condensed Consolidated Balance Sheets (Unaudited) This statement provides a snapshot of the company's assets, liabilities, and shareholders' equity at specific dates Condensed Consolidated Balance Sheets (in millions): | Asset/Liability | June 30, 2023 | December 31, 2022 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Cash and Cash Equivalents | $11.3 | $25.2 | $(13.9) | (55.2)% | | Total Current Assets | $574.8 | $704.5 | $(129.7) | (18.4)% | | Total Assets | $1,537.3 | $1,701.8 | $(164.5) | (9.7)% | | Total Current Liabilities | $715.2 | $795.4 | $(80.2) | (10.1)% | | Long-Term Debt | $451.6 | $506.7 | $(55.1) | (10.9)% | | Total Liabilities | $1,383.7 | $1,528.9 | $(145.2) | (9.5)% | | Total Shareholders' Equity | $153.6 | $172.9 | $(19.3) | (11.2)% | Condensed Consolidated Statements of Cash Flows (Unaudited) This statement details the cash inflows and outflows from operating, investing, and financing activities Six Months Ended June 30, 2023 vs. 2022 (in millions): | Activity | 2023 | 2022 | Change ($) | | :--- | :--- | :--- | :--- | | Net Cash Provided by (Used in) Operating Activities | $0.3 | $(23.5) | $23.8 | | Net Cash Used in Investing Activities | $(42.7) | $(31.2) | $(11.5) | | Net Cash Provided by (Used in) Financing Activities | $28.3 | $(113.2) | $141.5 | | Net Decrease in Cash and Cash Equivalents | $(13.9) | $(168.1) | $154.2 | - Operating cash flow significantly improved, moving from a net use of $23.5 million in 2022 to a net provision of $0.3 million in 2023[18] - Financing activities shifted from a net use of $113.2 million in 2022 to a net provision of $28.3 million in 2023, primarily due to increased net borrowings of debt and lease obligations[18][204] Condensed Consolidated Statements of Shareholders' Equity (Unaudited) This statement outlines changes in shareholders' equity components, including accumulated deficit and comprehensive loss Shareholders' Equity Changes (Six Months Ended June 30, 2023 vs. Dec 31, 2022) (in millions): | Item | Dec 31, 2022 | June 30, 2023 | Change ($) | | :--- | :--- | :--- | :--- | | Total Shareholders' Equity | $172.9 | $153.6 | $(19.3) | | Accumulated Deficit | $(518.5) | $(549.2) | $(30.7) | | Accumulated Other Comprehensive Loss | $(128.3) | $(113.5) | $14.8 | | Treasury Stock | $(23.5) | $(24.9) | $(1.4) | - The accumulated deficit increased by $30.7 million, reflecting the net loss incurred during the period[20] - Accumulated other comprehensive loss improved by $14.8 million, primarily due to foreign currency translation adjustments and interest rate derivatives adjustments[20][13] Notes to Condensed Consolidated Financial Statements (Unaudited) This section provides detailed explanations and disclosures supporting the condensed consolidated financial statements Note 1. Basis of Presentation This note details the company's policies and information regarding basis of presentation - The Company's financial results are subject to seasonality, with net sales and operating income typically higher in the second half of the calendar year, driven by increased catalogs and retail inserts for back-to-school and holiday promotions[24] - Macroeconomic conditions, including weakened demand, supply chain disruptions, rising inflationary costs, labor pressures, and recessionary concerns, have impacted the Company, leading to ongoing evaluation of cost reduction measures[26] Note 2. Revenue Recognition This note details the company's policies and information regarding revenue recognition Disaggregated Revenue by Segment and Offering (Three Months Ended June 30, in millions): | Category | United States Print and Related Services | International | Total | | :--- | :--- | :--- | :--- | | 2023 | | | | | Total Products | $449.3 | $110.6 | $559.9 | | Total Services | $139.2 | $4.0 | $143.2 | | Total Net Sales | $588.5 | $114.6 | $703.1 | | 2022 | | | | | Total Products | $490.6 | $103.3 | $593.9 | | Total Services | $158.8 | $5.0 | $163.8 | | Total Net Sales | $649.4 | $108.3 | $757.7 | Disaggregated Revenue by Segment and Offering (Six Months Ended June 30, in millions): | Category | United States Print and Related Services | International | Total | | :--- | :--- | :--- | :--- | | 2023 | | | | | Total Products | $953.8 | $214.0 | $1,167.8 | | Total Services | $292.3 | $9.5 | $301.8 | | Total Net Sales | $1,246.1 | $223.5 | $1,469.6 | | 2022 | | | | | Total Products | $983.9 | $190.9 | $1,174.8 | | Total Services | $316.6 | $10.5 | $327.1 | | Total Net Sales | $1,300.5 | $201.4 | $1,501.9 | - Product offerings include various print operations and global paper procurement, while services include logistics, marketing services (data & analytics, technology, media, creative, managed services), and medical services[31][32] Note 3. Restructuring, Impairment and Transaction-Related Charges This note details the company's policies and information regarding restructuring, impairment, and transaction-related charges Restructuring, Impairment and Transaction-Related Charges (in millions): | Charge Type | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Employee Termination Charges | $1.9 | $0.5 | $15.0 | $1.6 | | Impairment Charges | $1.1 | $0.0 | $10.6 | $0.1 | | Transaction-Related Charges | $0.0 | $0.3 | $0.6 | $0.5 | | Integration Costs | $0.5 | $0.0 | $1.0 | $0.0 | | Other Restructuring Charges | $6.1 | $2.4 | $8.4 | $4.6 | | Total | $9.6 | $3.2 | $35.6 | $6.8 | - Total restructuring, impairment, and transaction-related charges significantly increased to $9.6 million for the three months and $35.6 million for the six months ended June 30, 2023, compared to $3.2 million and $6.8 million respectively in 2022, primarily due to higher employee termination and impairment charges[34] - Impairment charges in 2023 included $1.1 million (three months) and $10.6 million (six months) for property, machinery, and equipment no longer utilized due to facility consolidations and capacity reductions[37][38] Note 4. Receivables This note details the company's policies and information regarding receivables Allowance for Credit Losses (in millions): | Item | Amount | | :--- | :--- | | Balance at December 31, 2022 | $26.4 | | Provisions | $1.5 | | Write-offs | $(0.8) | | Translation | $0.2 | | Balance at June 30, 2023 | $27.3 | - The allowance for credit losses increased to $27.3 million as of June 30, 2023, from $26.4 million at December 31, 2022, reflecting provisions for potential uncollectible accounts[46] Note 5. Inventories This note details the company's policies and information regarding inventories Components of Inventories (in millions): | Category | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Raw Materials and Manufacturing Supplies | $130.9 | $173.7 | | Work in Process | $30.8 | $38.3 | | Finished Goods | $38.9 | $48.7 | | Total | $200.6 | $260.7 | - Total inventories decreased to $200.6 million at June 30, 2023, from $260.7 million at December 31, 2022, with reductions across all categories, particularly raw materials[47] Note 6. Commitments and Contingencies This note details the company's policies and information regarding commitments and contingencies - The Company is involved in various lawsuits in the normal course of business, but management does not expect the liabilities to have a material impact on the financial statements[48] - Environmental reserves are provided for probable and reasonably estimable remediation obligations, and the Company believes it is in material compliance with environmental laws[49] Note 7. Debt This note details the company's policies and information regarding debt - The Senior Secured Credit Facility's reference rate transitioned from LIBOR to SOFR effective February 1, 2023, with no material impact on financial statements[50] - In 2022, the Company repurchased and repaid all outstanding $209.1 million of its 7.0% Senior Unsecured Notes due May 1, 2022, using revolving credit facility liquidity and cash on hand[51][52] Note 8. Income Taxes This note details the company's policies and information regarding income taxes - For the six months ended June 30, 2023, income tax expense was recorded using the actual year-to-date effective income tax rate, which differs from the statutory rate due to non-deductible expenses, GILTI, and net increases in valuation allowance reserves[53] - The liability for unrecognized tax benefits increased to $11.5 million as of June 30, 2023, from $11.1 million at December 31, 2022, with an anticipated $0.1 million decrease within the next twelve months[56] Note 9. Financial Instruments and Fair Value Measurements This note details the company's policies and information regarding financial instruments and fair value measurements - The Company holds an interest rate swap (notional $130.0 million, fixed rate 2.40%) to reduce variable-rate debt interest variability, which was de-designated as a cash flow hedge in 2020 and now has fair value changes recognized in interest expense[59][60] - Two interest rate collar contracts (each notional $75.0 million, floor 2.09%/2.25%, ceiling 5.00%) became effective February 1, 2023, designated as cash flow hedges to manage variable-rate debt interest payments[61][62] - The fair value of total debt was approximately $0.6 billion at June 30, 2023, and December 31, 2022, measured using Level 2 inputs (interest rates for similar borrowings)[65] Note 10. Employee Retirement Plans This note details the company's policies and information regarding employee retirement plans Net Pension Income (in millions): | Component | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Interest Cost | $(4.4) | $(2.4) | $(8.8) | $(4.8) | | Expected Return on Plan Assets | $5.0 | $5.5 | $10.0 | $11.1 | | Net Periodic Pension Income | $0.6 | $3.1 | $1.2 | $6.3 | | Amortization of Actuarial Loss | $(0.2) | $0.0 | $(0.4) | $0.0 | | Net Pension Income | $0.4 | $3.1 | $0.8 | $6.3 | - Net pension income decreased significantly to $0.4 million for the three months and $0.8 million for the six months ended June 30, 2023, compared to $3.1 million and $6.3 million respectively in 2022, primarily due to increased interest cost on pension liabilities and decreased expected return on plan assets[70] - The Company has reserved $26.3 million for multiemployer pension plan (MEPPs) withdrawal liability as of June 30, 2023, with payments scheduled until April 2032 for GCIU and February 2024 for GCC[71] Note 11. Earnings (Loss) Per Share This note details the company's policies and information regarding earnings (loss) per share Earnings (Loss) Per Share (EPS): | Period | 2023 | 2022 | | :--- | :--- | :--- | | Basic and Diluted EPS (3 Months Ended June 30) | $(0.12) | $0.10 | | Basic and Diluted EPS (6 Months Ended June 30) | $(0.62) | $0.08 | | Basic Weighted Average Shares Outstanding (3 Months) | 49.3 million | 52.1 million | | Diluted Weighted Average Shares Outstanding (3 Months) | 49.3 million | 54.1 million | | Basic Weighted Average Shares Outstanding (6 Months) | 49.2 million | 51.8 million | | Diluted Weighted Average Shares Outstanding (6 Months) | 49.2 million | 53.8 million | - Due to net losses in the three and six months ended June 30, 2023, all equity incentive instruments were anti-dilutive and excluded from diluted EPS calculations[73] Note 12. Equity Incentive Programs This note details the company's policies and information regarding equity incentive programs Total Equity Incentive Compensation Expense (in millions): | Period | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Restricted Stock and RSU Equity Awards | $1.2 | $1.2 | $2.1 | $2.9 | | DSU Awards | $1.1 | $0.7 | $1.2 | $0.7 | | Total | $2.3 | $1.9 | $3.3 | $3.8 | - Total equity incentive compensation expense for the six months ended June 30, 2023, was $3.3 million, a decrease from $3.8 million in the prior year[75] - Future compensation expense related to equity incentive programs is estimated at $9.4 million as of June 30, 2023, with $2.6 million expected for the remainder of 2023[75] Note 13. Shareholders' Equity This note details the company's policies and information regarding shareholders' equity Common Stock Shares (in millions): | Class | Authorized Shares | Outstanding (June 30, 2023) | Outstanding (Dec 31, 2022) | | :--- | :--- | :--- | :--- | | Class A | 105.0 | 39.0 | 39.2 | | Class B | 80.0 | 13.6 | 13.6 | | Class C | 20.0 | 0.0 | 0.0 | - The Company repurchased 1,408,048 shares of Class A common stock for $5.0 million during the six months ended June 30, 2023, with $85.0 million remaining under the authorized repurchase program[80] - Quarterly dividends have been suspended since the second quarter of 2020[81] Note 14. Accumulated Other Comprehensive Loss This note details the company's policies and information regarding accumulated other comprehensive loss Changes in Accumulated Other Comprehensive Loss (Six Months Ended June 30, 2023 vs. Dec 31, 2022) (in millions): | Component | Dec 31, 2022 | June 30, 2023 | | :--- | :--- | :--- | | Translation Adjustments | $(88.6) | $(75.8) | | Interest Rate Derivatives Adjustments | $(4.1) | $(2.3) | | Pension Benefit Plan Adjustments | $(35.6) | $(35.4) | | Total | $(128.3) | $(113.5) | - Accumulated other comprehensive loss improved by $14.8 million, primarily driven by positive translation adjustments ($12.8 million) and interest rate derivatives adjustments ($1.8 million) during the six months ended June 30, 2023[83] Note 15. Segment Information This note details the company's policies and information regarding segment information - Quad operates with two reportable segments: United States Print and Related Services (84-85% of consolidated net sales) and International (15-16% of consolidated net sales), plus a Corporate category[84][115] Segment Operating Income (Three Months Ended June 30, in millions): | Segment | 2023 Operating Income | 2022 Operating Income | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | United States Print and Related Services | $11.8 | $19.9 | $(8.1) | (40.7)% | | International | $8.3 | $6.2 | $2.1 | 33.9% | | Corporate | $(11.7) | $(11.9) | $0.2 | (1.7)% | | Total | $8.4 | $14.2 | $(5.8) | (40.8)% | Segment Operating Income (Six Months Ended June 30, in millions): | Segment | 2023 Operating Income | 2022 Operating Income | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | United States Print and Related Services | $19.1 | $31.7 | $(12.6) | (39.7)% | | International | $16.0 | $9.9 | $6.1 | 61.6% | | Corporate | $(26.6) | $(22.0) | $(4.6) | 20.9% | | Total | $8.5 | $19.6 | $(11.1) | (56.6)% | ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on Quad/Graphics, Inc.'s financial condition and results of operations, covering an overview of the business, key performance metrics, industry trends, and a detailed analysis of financial performance for the three and six months ended June 30, 2023, compared to the prior year. It also discusses liquidity, capital resources, debt obligations, and compliance with covenants Cautionary Statement Regarding Forward-Looking Statements This section outlines the risks and uncertainties associated with forward-looking statements in the report - The report contains forward-looking statements subject to risks and uncertainties, including decreasing demand for printed materials, fluctuations in costs and raw material availability, macroeconomic conditions (inflation, interest rates, recession), increased business complexity, and the inability to reduce costs rapidly[94][95][96] - Other risks include changes in postal rates, failure to attract talent, cyber incidents, decline in distribution channels, digital media impact, negative publicity, client contract performance, international operation risks, and challenges in managing acquisitions or divestitures[96] Overview This section provides a high-level summary of the company's business, key metrics, and industry trends Business Overview This section describes Quad's global marketing solutions and strategic priorities for growth and shareholder value - Quad is a global marketing experience company providing integrated marketing solutions from strategy to execution across offline and online channels, serving over 2,900 clients in various industries[101] - The Company's strategic priorities include: walking in clients' shoes, growing the business profitably, advancing its integrated marketing platform, empowering employees, and enhancing financial strength to create shareholder value[102][103][104][107][112] - The United States Print and Related Services segment accounts for approximately 84-85% of consolidated net sales, while the International segment accounts for 15-16%[115] Key Performance Metrics Overview This section identifies the primary financial and operational metrics used by management to assess company performance - Key performance metrics used by management include net sales growth, EBITDA, EBITDA margin, net cash provided by (used in) operating activities, Free Cash Flow, and Debt Leverage Ratio[116] - Free Cash Flow is used to quantify cash available for debt reduction, strategic investments, and returning capital to shareholders[120] - The Debt Leverage Ratio assesses liquidity and balance sheet flexibility, with a target range of 2.0x to 2.5x[121][213] Overview of Trends Affecting Quad This section discusses macroeconomic conditions, market demand shifts, and regulatory changes impacting the company's operations - The Company faces increased demand for end-to-end marketing services across traditional and digital channels, driving its integrated marketing platform strategy[124] - Macroeconomic conditions, including inflation, rising interest rates, and supply chain disruptions, have weakened demand and increased costs for raw materials (paper, ink), distribution, and labor[133][134][135] - Postal rate increases and service level adjustments by the USPS may reduce demand for printed products, prompting clients to explore alternative delivery methods[129][131] Results of Operations for the Three Months Ended June 30, 2023, Compared to the Three Months Ended June 30, 2022 This section analyzes the company's financial performance for the three months ended June 30, 2023, compared to the prior year Summary Results This section provides a concise overview of key financial changes and their primary drivers for the period Summary of Financial Changes (Three Months Ended June 30, 2023 vs. 2022) (in millions, except per share): | Metric | 2022 | Change from 2022 | 2023 | | :--- | :--- | :--- | :--- | | Operating Income | $14.2 | $(5.8) | $8.4 | | Operating Margin | 1.9% | (0.7)% | 1.2% | | Net Earnings (Loss) | $5.3 | $(11.4) | $(6.1) | | Diluted EPS | $0.10 | $(0.22) | $(0.12) | - Operating income decreased by $5.8 million, and net earnings shifted to a loss of $6.1 million, primarily due to a $6.4 million increase in restructuring, impairment, and transaction-related charges and a $6.1 million increase in interest expense[137][139] Operating Results (Consolidated) This section details consolidated revenues, costs, and operating income, highlighting significant changes and contributing factors Consolidated Operating Results (Three Months Ended June 30, in millions): | Metric | 2023 | 2022 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total Net Sales | $703.1 | $757.7 | $(54.6) | (7.2)% | | Total Cost of Sales | $569.8 | $618.1 | $(48.3) | (7.8)% | | SG&A Expenses | $83.3 | $86.9 | $(3.6) | (4.1)% | | Depreciation and Amortization | $32.0 | $35.3 | $(3.3) | (9.3)% | | Restructuring, Impairment, Transaction-Related Charges | $9.6 | $3.2 | $6.4 | 200.0% | | Operating Income | $8.4 | $14.2 | $(5.8) | (40.8)% | - Total net sales decreased by $54.6 million (7.2%), driven by a $34.0 million decrease in product sales (mainly paper sales and decreased print volumes) and a $20.6 million decrease in service sales (primarily logistics)[143][144] - Cost of sales decreased by $48.3 million (7.8%), largely due to lower paper costs, the Argentina divestiture, lower print volumes, and improved manufacturing productivity[145][146] EBITDA and EBITDA Margin—Consolidated This section presents consolidated EBITDA and EBITDA margin, explaining changes and their impact on profitability Consolidated EBITDA and EBITDA Margin (Three Months Ended June 30, in millions): | Metric | 2023 | % of Net Sales | 2022 | % of Net Sales | | :--- | :--- | :--- | :--- | :--- | | EBITDA (non-GAAP) | $40.8 | 5.8% | $52.6 | 6.9% | - EBITDA decreased by $11.8 million to $40.8 million, and EBITDA margin declined to 5.8% from 6.9%, primarily due to increased restructuring, impairment, and transaction-related charges, and lower logistics and print volumes[151] United States Print and Related Services Segment Analysis This section analyzes the financial performance of the United States Print and Related Services segment, including sales and operating income US Print and Related Services Segment (Three Months Ended June 30, in millions): | Metric | 2023 | 2022 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Product Sales | $449.3 | $490.6 | $(41.3) | (8.4)% | | Service Sales | $139.2 | $158.8 | $(19.6) | (12.3)% | | Operating Income | $11.8 | $19.9 | $(8.1) | (40.7)% | | Operating Margin | 2.0% | 3.1% | N/A | N/A | | Restructuring, Impairment, Transaction-Related Charges | $8.6 | $1.6 | $7.0 | nm | - Operating income for this segment decreased by $8.1 million (40.7%), and operating margin fell to 2.0%, mainly due to a $7.0 million increase in restructuring, impairment, and transaction-related charges and decreased print volumes[156][157] International Segment Analysis This section analyzes the financial performance of the International segment, including sales and operating income International Segment (Three Months Ended June 30, in millions): | Metric | 2023 | 2022 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Product Sales | $110.6 | $103.3 | $7.3 | 7.1% | | Service Sales | $4.0 | $5.0 | $(1.0) | (20.0)% | | Operating Income | $8.3 | $6.2 | $2.1 | 33.9% | | Operating Margin | 7.2% | 5.7% | N/A | N/A | | Restructuring, Impairment, Transaction-Related Charges | $1.0 | $1.3 | $(0.3) | (23.1)% | - International segment operating income increased by $2.1 million (33.9%), and operating margin improved to 7.2%, driven by a $17.0 million increase in print product volume and pricing, mainly in Mexico, and favorable foreign exchange impacts[160][162] Corporate Segment Analysis This section analyzes the financial performance of the Corporate segment, including operating expenses and charges Corporate Operating Expenses (Three Months Ended June 30, in millions): | Metric | 2023 | 2022 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Operating Expenses | $11.7 | $11.9 | $(0.2) | (1.7)% | | Restructuring, Impairment, Transaction-Related Charges | $0.0 | $0.3 | $(0.3) | nm | - Corporate operating expenses decreased by $0.2 million (1.7%), primarily due to a $0.3 million decrease in restructuring, impairment, and transaction-related charges[165] Results of Operations for the Six Months Ended June 30, 2023, Compared to the Six Months Ended June 30, 2022 This section analyzes the company's financial performance for the six months ended June 30, 2023, compared to the prior year Summary Results This section provides a concise overview of key financial changes and their primary drivers for the six-month period Summary of Financial Changes (Six Months Ended June 30, 2023 vs. 2022) (in millions, except per share): | Metric | 2022 | Change from 2022 | 2023 | | :--- | :--- | :--- | :--- | | Operating Income | $19.6 | $(11.1) | $8.5 | | Operating Margin | 1.3% | (0.7)% | 0.6% | | Net Earnings (Loss) | $4.3 | $(35.0) | $(30.7) | | Diluted EPS | $0.08 | $(0.70) | $(0.62) | - Operating income decreased by $11.1 million, and net earnings shifted to a loss of $30.7 million, primarily due to a $28.8 million increase in restructuring, impairment, and transaction-related charges, a $13.1 million increase in interest expense, and a $5.5 million decrease in net pension income[168][170] Operating Results (Consolidated) This section details consolidated revenues, costs, and operating income for the six-month period, highlighting significant changes Consolidated Operating Results (Six Months Ended June 30, in millions): | Metric | 2023 | 2022 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total Net Sales | $1,469.6 | $1,501.9 | $(32.3) | (2.2)% | | Total Cost of Sales | $1,187.3 | $1,237.7 | $(50.4) | (4.1)% | | SG&A Expenses | $172.5 | $166.0 | $6.5 | 3.9% | | Depreciation and Amortization | $65.7 | $71.8 | $(6.1) | (8.5)% | | Restructuring, Impairment, Transaction-Related Charges | $35.6 | $6.8 | $28.8 | nm | | Operating Income | $8.5 | $19.6 | $(11.1) | (56.6)% | - Total net sales decreased by $32.3 million (2.2%), primarily due to a $7.0 million decrease in product sales (paper sales, Argentina divestiture) and a $25.3 million decrease in service sales (logistics volumes)[173][174] - Cost of sales decreased by $50.4 million (4.1%), driven by lower paper costs, Argentina divestiture impact, improved manufacturing productivity, and other cost reduction initiatives[175][176] EBITDA and EBITDA Margin—Consolidated This section presents consolidated EBITDA and EBITDA margin for the six-month period, explaining changes and their impact Consolidated EBITDA and EBITDA Margin (Six Months Ended June 30, in millions): | Metric | 2023 | % of Net Sales | 2022 | % of Net Sales | | :--- | :--- | :--- | :--- | :--- | | EBITDA (non-GAAP) | $75.0 | 5.1% | $97.7 | 6.5% | - EBITDA decreased by $22.7 million to $75.0 million, and EBITDA margin declined to 5.1% from 6.5%, primarily due to a $28.8 million increase in restructuring, impairment, and transaction-related charges[182] United States Print and Related Services Segment Analysis This section analyzes the financial performance of the United States Print and Related Services segment for the six-month period US Print and Related Services Segment (Six Months Ended June 30, in millions): | Metric | 2023 | 2022 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Product Sales | $953.8 | $983.9 | $(30.1) | (3.1)% | | Service Sales | $292.3 | $316.6 | $(24.3) | (7.7)% | | Operating Income | $19.1 | $31.7 | $(12.6) | (39.7)% | | Operating Margin | 1.5% | 2.4% | N/A | N/A | | Restructuring, Impairment, Transaction-Related Charges | $31.1 | $3.3 | $27.8 | nm | - Operating income for this segment decreased by $12.6 million (39.7%), and operating margin fell to 1.5%, primarily due to a $27.8 million increase in restructuring, impairment, and transaction-related charges[188][189] International Segment Analysis This section analyzes the financial performance of the International segment for the six-month period International Segment (Six Months Ended June 30, in millions): | Metric | 2023 | 2022 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Product Sales | $214.0 | $190.9 | $23.1 | 12.1% | | Service Sales | $9.5 | $10.5 | $(1.0) | (9.5)% | | Operating Income | $16.0 | $9.9 | $6.1 | 61.6% | | Operating Margin | 7.2% | 4.9% | N/A | N/A | | Restructuring, Impairment, Transaction-Related Charges | $3.6 | $2.9 | $0.7 | 24.1% | - International segment operating income increased by $6.1 million (61.6%), and operating margin improved to 7.2%, driven by a $25.8 million increase in print volume, primarily in Mexico and Peru, and a $5.2 million increase in paper sales[192][194] Corporate Segment Analysis This section analyzes the financial performance of the Corporate segment for the six-month period, including operating expenses Corporate Operating Expenses (Six Months Ended June 30, in millions): | Metric | 2023 | 2022 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Operating Expenses | $26.6 | $22.0 | $4.6 | 20.9% | | Restructuring, Impairment, Transaction-Related Charges | $0.9 | $0.6 | $0.3 | 50.0% | - Corporate operating expenses increased by $4.6 million (20.9%), primarily due to a $3.2 million increase in employee-related costs and a $0.3 million increase in restructuring, impairment, and transaction-related charges[198] Liquidity and Capital Resources This section discusses the company's cash flows, debt, and financial flexibility, including capital allocation strategies Net Cash Provided by (Used in) Operating Activities This section details cash flows generated from or used in the company's primary business operations - Net cash provided by operating activities increased by $23.8 million, from $23.5 million used in 2022 to $0.3 million provided in 2023, primarily due to a $52.6 million increase in cash flows from changes in operating assets and liabilities[202] Net Cash Used in Investing Activities This section details cash flows related to the acquisition and disposal of long-term assets and investments - Net cash used in investing activities increased by $11.5 million to $42.7 million, mainly due to an $11.7 million increase in purchases of property, plant, and equipment[203] Net Cash Provided by (Used in) Financing Activities This section details cash flows related to debt, equity, and dividend transactions affecting the company's capital structure - Net cash provided by financing activities increased by $141.5 million, shifting from a $113.2 million use in 2022 to a $28.3 million provision in 2023, primarily due to a $143.5 million increase in net borrowings of debt and lease obligations[204] Free Cash Flow This section presents the non-GAAP measure of cash available for debt reduction, strategic investments, and shareholder returns Free Cash Flow (non-GAAP) (Six Months Ended June 30, in millions): | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Net Cash Provided by (Used in) Operating Activities | $0.3 | $(23.5) | | Less: Purchases of Property, Plant and Equipment | $45.2 | $33.5 | | Free Cash Flow | $(44.9) | $(57.0) | - Free Cash Flow improved by $12.1 million, from $(57.0) million in 2022 to $(44.9) million in 2023, due to increased operating cash flows, partially offset by higher capital expenditures[208] Debt Leverage Ratio This section analyzes the company's debt leverage ratio, assessing its financial health and compliance with covenants Debt Leverage Ratio (non-GAAP): | Metric | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total Debt and Finance Lease Obligations | $615.4 | $570.2 | | Less: Cash and Cash Equivalents | $11.3 | $25.2 | | Net Debt | $604.1 | $545.0 | | Divided by: Adjusted EBITDA (Trailing Twelve Months) | $258.3 | $252.2 | | Debt Leverage Ratio | 2.34x | 2.16x | - The Debt Leverage Ratio increased to 2.34x at June 30, 2023, from 2.16x at December 31, 2022, primarily due to a $59.1 million increase in Net Debt, while remaining within management's target range of 2.0x to 2.5x[213] Debt Obligations This section provides an overview of the company's outstanding debt instruments and their key terms - As of June 30, 2023, the Company's debt instruments included $59.9 million outstanding on the revolving credit facility and $536.9 million on Term Loan A under the Senior Secured Credit Facility, plus $2.5 million under a Master Note and Security Agreement[214] Covenants and Compliance This section confirms the company's adherence to financial covenants under its debt agreements - As of June 30, 2023, the Company was in compliance with all financial covenants, including a Total Leverage Ratio of 2.34x (max 3.75x), Senior Secured Leverage Ratio of 2.32x (max 3.50x), and Interest Coverage Ratio of 5.27x (min 3.00x)[215][217] - The Company's Total Leverage Ratio of 2.34x means restrictions on dividend payments, capital stock repurchases, and certain other payments are not currently applicable[218] Share Repurchase Program This section details the company's share repurchase activities and remaining authorization under its program - During the three months ended June 30, 2023, the Company repurchased 1,343,777 shares of Class A common stock for $4.7 million, with $85.0 million remaining under the $100.0 million authorized program[220] Risk Management This section outlines the company's exposure to market risks and its strategies for mitigation - The Company is exposed to market risks from changes in interest rates, foreign currency exchange rates, economic conditions impacting credit, and commodity prices, which are actively managed through policies and procedures[224] Contractual Obligations This section summarizes the company's significant contractual commitments and payment obligations - Contractual obligations have not materially changed from those listed in the Company's 2022 Annual Report on Form 10-K[222] New Accounting Pronouncements This section reports on the impact of recently issued accounting standards on the company's financial statements - As of June 30, 2023, there have been no new accounting pronouncements requiring disclosure in this Quarterly Report on Form 10-Q[223] ITEM 3. Quantitative and Qualitative Disclosures About Market Risk This section details Quad/Graphics, Inc.'s exposure to various market risks, including interest rate, foreign currency, credit, and commodity risks, and outlines the Company's strategies for managing these exposures. It provides quantitative and qualitative information on potential impacts from hypothetical changes in market conditions Interest Rate Risk This section details the company's exposure to interest rate fluctuations on its debt and hedging strategies - The Company is exposed to interest rate risk on $319.5 million of variable rate debt (weighted average 7.3%) and price risk on $295.9 million of fixed rate debt and finance leases (weighted average 6.1%) as of June 30, 2023[225] - Interest rate swaps and collars are used to hedge variable-rate debt, converting $280.0 million to fixed rate, and a hypothetical 10% increase in market interest rates would not materially impact interest expense or the fair value of fixed rate debt[225] Foreign Currency Risk and Translation Exposure This section describes the company's exposure to foreign currency exchange rate changes and its hedging practices - Foreign currency exposure is limited in most countries as operating revenues and expenses are primarily in local currencies, with foreign exchange contracts used to hedge net exposures[226][228] - A hypothetical 10% adverse change in foreign currency exchange rates would result in an approximate $9.9 million decrease in net current assets subject to translation risk ($98.9 million as of June 30, 2023)[227] Credit Risk This section outlines the company's management of credit risk associated with its receivables and client base - Credit risk is managed through client evaluations, credit reviews, and credit scoring models, with an allowance for credit losses of $27.3 million as of June 30, 2023[230] - The Company has a diverse client base, with no single client accounting for more than 5% of net sales during the three and six months ended June 30, 2023[231] Commodity Risk This section discusses the company's exposure to price volatility in raw materials and energy, and mitigation strategies - The primary raw materials are paper, ink, and energy, with supply currently under pressure due to shortages and inflation; price adjustment clauses in sales contracts generally mitigate paper price risk[232][233] - The Company produces most of its ink internally to control quality, cost, and supply, and mitigates energy price risk through natural gas hedges and passing fuel cost increases to clients in logistics[234][235] - 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 significant increases could influence future client demand[237] ITEM 4. Controls and Procedures This section confirms the effectiveness of Quad/Graphics, Inc.'s disclosure controls and procedures and reports no material changes in internal control over financial reporting during the quarter ended June 30, 2023 Disclosure Controls and Procedures This section confirms the effectiveness of the company's controls for ensuring timely and accurate financial disclosures - Management, with the CEO and CFO, evaluated and concluded that the Company's disclosure controls and procedures were effective as of June 30, 2023[238] Changes in Internal Control Over Financial Reporting This section reports on any material changes to the company's internal control over financial reporting during the quarter - There were no changes in the Company's internal control over financial reporting during the fiscal quarter ended June 30, 2023, that materially affected or are reasonably likely to materially affect it[239] PART II — OTHER INFORMATION This section includes other required disclosures such as risk factors, equity sales, and exhibits ITEM 1A. Risk Factors This section states that there have been no material changes to the risk factors previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2022 - No material changes to risk factors were reported since the Annual Report on Form 10-K filed on February 27, 2023[241] ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds This section provides details on the Company's repurchases of its Class A common stock during the quarter ended June 30, 2023, under its authorized share repurchase program Issuer Purchases of Equity Securities (Class A Common Stock): | Period | Total Number of Shares Purchased | Average Price Paid Per Share | Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | | :--- | :--- | :--- | :--- | | April 1, 2023 to April 30, 2023 | — | — | $89,805,953 | | May 1, 2023 to May 31, 2023 | 412,731 | $3.27 | $88,454,515 | | June 1, 2023 to June 30, 2023 | 931,046 | $3.67 | $85,036,595 | | Total (Quarter) | 1,343,777 | | | - During the quarter ended June 30, 2023, the Company repurchased 1,343,777 shares of Class A common stock for a total purchase price of $4.7 million, with $85.0 million remaining under the $100.0 million authorized program[220][242] ITEM 5. Other Information This section indicates that there is no other information to report under this item - No other information was reported under this item[245] ITEM 6. Exhibits This section lists the exhibits filed as part of the Quarterly Report on Form 10-Q, including amended bylaws, CEO and CFO certifications, and financial statements in iXBRL format - Exhibits include Amended Bylaws, CEO and CFO certifications (Rule 13a-14(a) or 15d-14(a) and 18 U.S.C. Section 1350), and financial statements in iXBRL format[247] Signatures This section contains the signatures of the Chairman, President, and Chief Executive Officer, J. Joel Quadracci, and the Chief Financial Officer, Anthony C. Staniak, certifying the filing of the report - The report is signed by J. Joel Quadracci, Chairman, President and Chief Executive Officer, and Anthony C. Staniak, Chief Financial Officer, on August 2, 2023[250]