Quad/Graphics, Inc.: Form 10-Q for the period ended Jun 30, 2024

The following discussion of the financial condition and results of operations of Quad should be read together with (1) the condensed consolidated financial statements for the three and six months ended June 30, 2024 and 2023, including the notes thereto, included in Item 1, “Condensed Consolidated Financial Statements (Unaudited),” of this Quarterly Report on Form 10-Q; and (2) the audited consolidated annual financial statements as of and for the year ended December 31, 2023, and notes thereto included in the Company’s Annual Report on Form 10-K, filed with the SEC on February 22, 2024.

Management’s discussion and analysis of financial condition and results of operations is provided as a supplement to the Company’s condensed 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:

• Cautionary Statement Regarding Forward-Looking Statements.
• 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 (1) the three months ended June 30, 2024, to the three months ended June 30, 2023; and (2) the six months ended June 30, 2024, to the six months ended June 30, 2023. 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, non-GAAP 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 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.

Cautionary Statement Regarding Forward-Looking Statements

To the extent any statements in this Quarterly Report on Form 10-Q contain information that is not historical, these statements are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements relate to, among other things, the objectives, goals, strategies, beliefs, intentions, plans, estimates, prospects, projections and outlook of the Company, and can generally be identified by the use of words such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “plan,” “foresee,” “believe” or “continue” or the negatives of these terms, variations on them and other similar expressions. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements.

These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond the control of the Company. These risks, uncertainties and other factors could cause actual results to differ materially from those expressed or implied by those forward-looking statements. Among risks, uncertainties and other factors that may impact Quad are those described in Part I, Item 1A, “Risk Factors,” of the Company’s 2023 Annual Report on Form 10-K, filed with the SEC on February 22, 2024, as such may be amended or supplemented in Part II, Item 1A, “Risk Factors,” of the Company’s subsequently filed Quarterly Reports on Form 10-Q (including this report), and the following:

• The impact of decreasing demand for printing services and significant overcapacity in a highly competitive environment creates downward pricing pressures and potential under-utilization of assets;
• The impact of increased business complexity as a result of the Company’s transformation to a marketing experience company, including adapting marketing offerings and business processes as required by new markets and technologies, such as artificial intelligence;
• The impact of changes in postal rates, service levels or regulations, including delivery delays;
• The impact of fluctuations in costs (including labor and labor-related costs, energy costs, freight rates and raw materials, including paper and the materials to manufacture ink) and the impact of fluctuations in the availability of raw materials, including paper, parts for equipment and the materials to manufacture ink;
• The impact macroeconomic conditions, including inflation, high interest rates and recessionary concerns, as well as cost and labor pressures, distribution challenges and the price and availability of paper, have had, and may continue to have, on the Company’s business, financial condition, cash flows and results of operations (including future uncertain impacts);
• The inability of the Company to reduce costs and improve operating efficiency rapidly enough to meet market conditions;
• The impact of a data-breach of sensitive information, ransomware attack or other cyber incident on the Company;
• The fragility and decline in overall distribution channels;
• The failure to attract and retain qualified talent across the enterprise;
• The impact of digital media and similar technological changes, including digital substitution by consumers;
• The failure of clients to perform under contracts or to renew contracts with clients on favorable terms or at all;
• The impact of risks associated with the operations outside of the United States (“U.S.”), including trade restrictions, currency fluctuations, the global economy, costs incurred or reputational damage suffered due to improper conduct of its employees, contractors or agents, and geopolitical events like war and terrorism;
• The failure to successfully identify, manage, complete and integrate acquisitions, investment opportunities or other significant transactions, as well as the successful identification and execution of strategic divestitures;
• The impact negative publicity could have on our business and brand reputation;
• Significant capital expenditures and investments may be needed to sustain and grow the Company’s platforms, processes, systems, client and product technology, marketing and talent, and to remain technologically and economically competitive;
• The impact of the various restrictive covenants in the Company’s debt facilities on the Company’s ability to operate its business, as well as the uncertain negative impacts macroeconomic conditions may have on the Company’s ability to continue to be in compliance with these restrictive covenants;
• The impact of an other than temporary decline in operating results and enterprise value that could lead to non-cash impairment charges due to the impairment of property, plant and equipment and other intangible assets;
• The impact of regulatory matters and legislative developments or changes in laws, including changes in cyber-security, privacy and environmental laws; and
• The impact on the holders of Quad’s class A common stock of a limited active market for such shares and the inability to independently elect directors or control decisions due to the voting power of the class B common stock.

Quad cautions that the foregoing list of risks, uncertainties and other factors is not exhaustive, and you should carefully consider the other factors detailed from time to time in Quad’s filings with the SEC and other uncertainties and potential events when reviewing the Company’s forward-looking statements.

Because forward-looking statements are subject to assumptions and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. You are cautioned not to place undue reliance on such statements, which speak only as of the date of this Quarterly Report on Form 10-Q. Except to the extent required by the federal securities laws, Quad undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Overview

Business Overview

Quad is a global marketing experience (MX) company that helps brands make consumer connections, from household to in-store to online. The Company is focused on providing a better marketing experience for its clients, so they can focus on delivering the best customer experience to theirs. Quad does this with a suite of marketing solutions that is flexible, scalable and connected. Supported by state-of-the-art technology and data-driven intelligence, these solutions are designed to streamline the complexities of marketing and remove friction from wherever it occurs in the marketing journey. Quad tailors its solutions to its clients’ objectives, driving cost efficiencies, improving speed to market, strengthening marketing effectiveness, and delivering value on their investments. Quad employs approximately 13,000 people in 14 countries and serves approximately 2,700 clients including industry-leading blue-chip companies that serve both businesses and consumers across multiple industry verticals, with a particular focus on commerce, including retail, consumer packaged goods and direct to-consumer; financial services; and health.

As an MX company, Quad intends to expand its capabilities and develop its platform through executing on the three pillars of its growth strategy:

Deliver Integrated Service Excellence

Quad focuses on solving problems and removing pain points and sources of friction wherever a client experiences them in the marketing process. Quad seeks to become an invaluable strategic marketing partner by helping its clients successfully navigate today’s constantly evolving media landscape through innovative, data-driven omnichannel solutions that are scalable and efficiently produced and deployed — from household to in-store to online. A key component of Quad’s client-facing strategy is to strengthen relationships at higher levels within a client’s organization so the Company can better understand, anticipate and satisfy the organization’s business objectives.

To serve clients’ disparate needs, Quad continues to make disciplined and compelling investments across its integrated marketing platform. These investments take many forms, including new equipment, technology and service capabilities. The Company also makes investments in its talent, such as hiring business professionals with transformation, innovation, and client-side marketing and consulting expertise to enhance its position as an MX company, as well as investments to attract new employees and increase existing employee engagement, retention and productivity.

As the Company has transformed its offering to better meet the needs of brands and marketers, it has also made strategic decisions to divest of businesses that could not be easily leveraged as part of its greater integrated marketing platform. These decisions free up cash flow for disciplined investments that the Company believes will lead to sustainable growth.

Accelerate Market Penetration

Quad’s ability to acquire new and expand existing account relationships is critical to the Company’s growth strategy. The Company has made significant strides in recent years, introducing a growing number of brands and marketers to its suite of solutions. The Company is particularly focused on expanding in key vertical industries where it believes the biggest opportunities for new business exist. These include commerce, including consumer packaged goods, direct-to-consumer and retail; financial services; and health. Key investments to accelerate market penetration include:

• Fortifying business development efforts through strategic personnel hires in Sales, Sales Operations, Marketing and Agency Solutions to give the Company wider visibility as an MX company within its current client base, as well as with companies in its targeted growth verticals;
• Expanding awareness of Quad’s differentiated capabilities through a large-scale marketing and advertising effort centered on the campaign “Built on Quad”; and
• Providing brand visibility and thought leadership at global industry events, such as the Cannes Lions Festival of Creativity, the premier gathering of the global advertising and creative communications industry.

Leverage Culture as an MX Company

The Company’s culture continues to be a driver for growth as Quad accelerates its competitive position as an MX company. Core aspects of its unique culture are:

• Walk in the shoes of clients: Quad delivers service excellence by encouraging all employees, regardless of job title, to prioritize listening to clients’ needs and challenges, and do what they can to make it easy to work with Quad at every touchpoint.
• Empower employees: Quad continues to position itself as the workplace for the marketing industry’s best talent and empowers its employees to think like owners and take responsibility for how they can help propel the business forward. By embracing employees’ unique perspectives and experiences, fostering a sense of belonging through inclusion, and providing growth opportunities through skill development and career advancement, Quad believes employees are more fully engaged in their day-to-day activities, producing better results for clients while helping grow the business.
• Continuously improve: Through its foundation in manufacturing, Quad’s has built a “maker” culture that embraces attention to detail, expert execution and a commitment to continuous improvement. All employees are encouraged to identify opportunities, however small, that can improve processes and create efficiencies. It’s this long-standing commitment to continuous improvement that enables Quad to confidently identify and remove friction from clients’ workflows.
• Collaborate to innovate: The close, personal relationships employees form with one another is a foundational aspect of Quad’s culture. The Company recognizes that the more effectively teams work together across the entire organization, the better it can serve its clients. Accordingly, Quad encourages employees to connect and collaborate with others both inside and outside of their immediate department and/or business area. Integrated workflows and inter-departmental collaboration speed the Company’s ability to innovate and evolve as an MX company.
• Communicate a unified vision forward: The Company sends timely, transparent communications to all employees through a variety of channels to maintain employee engagement and connectivity, and maintain trust. These communication efforts not only detail matters of personal importance (e.g., total rewards), but also keep employees informed on business operations and the Company’s strategic direction. By articulating the role that each business area plays in the Company’s suite of interconnected solutions, Quad crafts a unified vision that everyone can rally behind. Communication channels include InsideQuad, the employee intranet; executive blogs and video logs (vlogs); executive town halls; department meetings; “lunch and learn” events; email; in-plant electronic and print signage; and in-home mailings.

Enhance Financial Strength and Create Shareholder Value

Quad follows a disciplined approach to maintaining and enhancing financial strength to create shareholder value. This strategy is centered on the Company’s ability to drive profitable growth and maximize net earnings, Free Cash Flow, and operating margins; maintain consistent financial policies to ensure a strong balance sheet, liquidity level and access to capital; and retain the financial flexibility needed to strategically allocate and deploy capital as circumstances change. The priorities for capital allocation and deployment are balanced according to prevailing circumstances and what the Company thinks is best for shareholder value creation at any point in time. These priorities currently include using Free Cash Flow and cash proceeds from any asset sales to continue reducing debt while investing in scaling the business as an MX company to fuel net sales growth and drive profitability; and pursuing opportunities to return capital to shareholders through stock buybacks or dividends.

To provide ongoing improvement in productivity and, ultimately, maximize operating margins, the Company applies holistic continuous improvement and lean enterprise methodologies to further streamline its processes and maximize operating margins. These same methodologies are applied to its selling, general and administrative functions. The Company continually works to lower its cost structure by consolidating manufacturing operations into its most efficient facilities, as well as realizing purchasing, mailing and logistics synergies by centralizing and consolidating print manufacturing volumes, and eliminating redundancies in its administrative and corporate operations. Quad believes that its focused efforts to be the high-quality, low-cost producer generates increased Free Cash Flow and allows the Company to maintain a strong balance sheet through debt reduction. The Company’s disciplined financial approach also allows it to maintain sufficient liquidity and to reduce refinancing risk. The Company had total liquidity of $241.6 million as of June 30, 2024, which consisted of up to $228.8 million of unused capacity under its revolving credit agreement, which was net of $28.5 million of issued letters of credit, and cash and cash equivalents of $12.8 million. Total liquidity is reduced to $222.3 million under the Company’s most restrictive debt covenants. Quad is proud of its strong and trusted banking relationships, which provide the Company with increased financial flexibility to make strategic investments to accelerate its growth and drive profitability as an MX company.

Segments

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 print execution and logistics for retail inserts, catalogs, long-run publications, special interest publications, journals, direct mail, directories, in-store marketing and promotion, packaging, newspapers, custom print products, as well as other commercial and specialty printed products, along with global paper procurement, and marketing and other complementary services, such as data intelligence and analytics, technology solutions, media planning, placement and optimization, creative strategy and content creation, as well as execution in non-print channels (e.g., digital and broadcast). This segment also includes the manufacture of ink. The United States Print and Related Services segment accounted for approximately 86% and 87% of the Company’s consolidated net sales during the three and six months ended June 30, 2024, respectively.
• The International segment consists of the Company’s printing operations in Europe and Latin America, including operations in England, France, Germany, Poland, Colombia, Mexico and Peru. 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 14% and 13% of the Company’s consolidated net sales during the three and six months ended June 30, 2024, respectively.
• 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 (used in) 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 loss 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 (used in) 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.

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 (used in) operating activities. The Company uses net cash provided by (used in) operating activities as a metric to assess liquidity. The Company’s management assesses net cash provided by (used in) 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 (used in) 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 increased by $22.5 million during the six months ended June 30, 2024, primarily due to $48.3 million in cash used in operating activities and $33.5 million in purchases of property, plant and equipment, partially offset by $52.8 million in proceeds from the issuance of long-term debt.

Overview of Trends Affecting Quad

As consumer media consumption habits change, advertising and marketing services providers face increased demand to offer end-to-end marketing services, from strategy and creative through execution. As new marketing channels emerge, these providers must expand their capabilities to create effective multichannel campaigns for their clients and providers face increased client demand to offer integrated, end-to-end marketing services (i.e., from strategy and creative through execution). These trends greatly influence Quad’s ongoing efforts to help brands reduce the complexities of working with multiple agency partners and vendors, increase marketing process efficiency and maximize marketing effectiveness.

Competition in the commercial printing industry remains highly fragmented, and the Company believes that there are indicators of heightened competitive pressures. The commercial printing industry has moved toward a demand for shorter print runs, faster product turnaround and increased production efficiencies of products with lower page counts and increased complexity. This — combined with increases in postage and paper costs as well as marketers’ increasing use of online marketing and communication channels — has led to excess manufacturing capacity.

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 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 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. 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 United States Postal Service (“USPS”) 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. The passing of the Postal Service Reform Act of 2022, signed in April 2022, gave the USPS considerable financial relief as well as significant other relief over the next ten years. While the legislative postal reform helps considerably, without decreased operational cost structures, increased efficiencies or increased volumes and revenues, these losses will potentially continue into the future. As a result of these financial difficulties, the USPS has continued to adjust its postal rates and service levels. Price increases, especially those above the consumer price index, such as the approved 7.8% average increase across several USPS mailing products implemented during July 2024 (whereas the consumer price index was only 1.6% of the overall increase), 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, digital and mobile channels and other alternative media channels, in order to ensure that they stay within their expected postage budgets.

Federal statute requires the Postal Regulatory Commission (“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 authorized a five year rate-making structure that provides the USPS with additional pricing flexibility over the Consumer Price Index cap, which has resulted in a substantially altered rate structure for mailers. The revised rate authority that is effective as a result of the rules issued by the PRC includes a higher overall rate cap on the USPS’ ability to increase rates from year to year. The USPS has used these additional rate authorities to implement twice a year increases and are expected to continue to do so in the future. This has led 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. Given the significant amount of concern that has been expressed by the mailing industry, in April 2024, the PRC opened a proceeding to start the next rate system review. The Company believes the continued use of all available rate authority by the USPS will continue to increase the potential volume declines as rate predictability with respect to cost is no longer known for mailers.

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.

The Company continues to face several other industry challenges that have been, and are expected to continue to, adversely impact the Company’s results of operation. The Company continues to operate in a high interest rate environment, which is expected to continue through 2024. Additionally, the price and availability of paper has been, and may continue to be, adversely affected by paper mills’ permanent or temporary closures, and mills’ access to raw materials, conversion to produce other types of paper, and ability to transport paper produced. Postal rate increases, along with the previously described industry challenges, have led to reduced demand for printed products and has caused clients to move more aggressively into other delivery methods, such as the many digital and mobile options now available to consumers. This reduced volume has driven the Company to institute several cost saving measures through its restructuring program, including plant closures and headcount reductions. Through these cost saving measures and proceeds from asset sales, the Company has been able to maintain focus on its transformation into an MX company, with flexibility to invest into the growing business, as well as continuing to be advantageous in its efforts to return capital to shareholders and reduce debt. The Company is also dependent on its production personnel to print the Company’s products in a cost-effective and efficient manner that allows the Company to obtain new clients and to drive sales from existing clients. The Company is unable to predict the full future impact these challenges will have on its business, financial condition, cash flows and results of operations, but expects them to continue through 2024.

Results of Operations for the Three Months Ended June 30, 2024, Compared to the Three Months Ended June 30, 2023

Summary Results

The Company’s operating income, operating margin, net loss (computed using a 25% normalized tax rate for all items subject to tax) and diluted loss per share for the three months ended June 30, 2024, changed from the three months ended June 30, 2023, as follows (dollars in millions, except margin and per share data):

(1) Restructuring, impairment and transaction-related charges increased $0.5 million ($0.4 million, net of tax), to $10.1 million during the three months ended June 30, 2024, and included the following:

a. A $1.3 million increase in employee termination charges from $1.9 million during the three months ended June 30, 2023, to $3.2 million during the three months ended June 30, 2024;

b. Impairment charges of $1.1 million for the three months ended June 30, 2023 and June 30, 2024;

c. A $0.4 million increase in transaction-related charges from zero during the three months ended June 30, 2023, to $0.4 million during the three months ended June 30, 2024;

d. A $0.4 million decrease in integration costs from $0.5 million during the three months ended June 30, 2023, to $0.1 million during the three months ended June 30, 2024;

e. A $0.8 million decrease in various other restructuring charges from $6.1 million during the three months ended June 30, 2023, to $5.3 million during the three months ended June 30, 2024.

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) Other operating income elements increased $7.2 million ($5.4 million, net of tax) primarily due to the following: (1) impacts from improved manufacturing productivity; (2) a $5.6 million decrease in depreciation and amortization expense; and (3) savings from other cost reduction initiatives; partially offset by the impact from the decrease in print product volume and a $5.4 million increase in selling, general and administrative expenses.

(3) Interest expense increased $0.2 million ($0.1 million, net of tax) during the three months ended June 30, 2024, to $17.2 million. This change was due to a higher weighted average interest rate on borrowings and a $0.1 million increase in interest expense related to the interest rate swaps, partially offset by lower average debt levels in the three months ended June 30, 2024, as compared to the three months ended June 30, 2023.

(4) Net pension income decreased $0.2 million ($0.2 million, net of tax) during the three months ended June 30, 2024, to $0.2 million. This was due to a $0.5 million decrease from the expected long-term return on pension plan assets, partially offset by a $0.3 million decrease from interest cost on pension plan liabilities during the three months ended June 30, 2024, as compared to the three months ended June 30, 2023.

(5) The $1.4 million increase in income tax expense as calculated in the following table is primarily due to a $4.8 million increase from income from foreign branches and a $3.9 million increase from the impact of non-deductible expenses. These increases were partially offset by the following: (1) a $4.0 million decrease from valuation allowance reserves; (2) a $1.4 million decrease from differences in foreign statutory income tax rates; (3) a $1.3 million decrease from income tax credits; and (4) a $0.5 million decrease in the Company’s liability for audit assessments and unrecognized tax benefits.

(dollars in millions)

Operating Results

The following table sets forth certain information from the Company’s condensed 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:

(dollars in millions)

Net Sales

Product sales decreased $62.3 million, or 11.1%, for the three months ended June 30, 2024, compared to the three months ended June 30, 2023, primarily due to a $34.0 million decrease in sales in the Company’s print product lines, mainly due to decreased print volumes and a higher mix of lower unit price gravure versus offset print in our magazine and catalog print offerings, and a $29.0 million decrease from paper sales, partially offset by $0.7 million in favorable foreign exchange impacts.

Service sales, which primarily consist of logistics, distribution, marketing services, imaging and medical services, decreased $6.6 million, or 4.6%, for the three months ended June 30, 2024, compared to the three months ended June 30, 2023, primarily due to a $7.5 million decrease in marketing services and medical services, partially offset by a $0.9 million increase in logistics sales.

Cost of Sales

Cost of product sales decreased $68.5 million, or 14.4%, for the three months ended June 30, 2024, compared to the three months ended June 30, 2023, primarily due to the following: (1) the impact from lower print volumes; (2) a decrease in paper costs; (3) impacts from improved manufacturing productivity; and (4) other cost reduction initiatives.

Cost of service sales decreased $7.4 million, or 7.9%, for the three months ended June 30, 2024, compared to the three months ended June 30, 2023, primarily due to the impact from lower marketing services.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $5.4 million, or 6.5%, for the three months ended June 30, 2024, compared to the three months ended June 30, 2023, primarily due to the following: (1) a $5.8 million increase from unfavorable foreign exchange impacts; (2) $1.7 million in retention credits and unclaimed property recoveries that occurred in 2023, that did not reoccur in 2024; and (3) a $1.0 million increase in employee-related costs; partially offset by a $4.1 million gain on the sale of an investment in 2024. Selling, general and administrative expenses as a percentage of net sales increased to 14.0% for the three months ended June 30, 2024, compared to 11.8% for the three months ended June 30, 2023.

Depreciation and Amortization

Depreciation and amortization decreased $5.6 million, or 17.5%, for the three months ended June 30, 2024, compared to the three months ended June 30, 2023, due to a $2.9 million decrease in depreciation expense, primarily due to impacts from plant closures and from property, plant and equipment becoming fully depreciated over the past year, and a $2.7 million decrease in amortization expense.

Restructuring, Impairment and Transaction-Related Charges

Restructuring, impairment and transaction-related charges increased $0.5 million, or 5.2%, for the three months ended June 30, 2024, compared to the three months ended June 30, 2023, primarily due to the following:

(dollars in millions)

(a) Includes $1.1 million of impairment charges during the three months ended June 30, 2024 and 2023, which consisted of $0.6 million and $1.1 million, respectively, for property, plant and equipment no longer being utilized in production as a result of facility consolidations, as well as other capacity reduction activities, and $0.5 million for operating lease right-of-use assets in 2024.

EBITDA and EBITDA Margin—Consolidated

EBITDA is defined as net earnings (loss), 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 (used in) 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 three months ended June 30, 2024, compared to the three months ended June 30, 2023, were as follows:

(dollars in millions)

EBITDA increased $0.9 million for the three months ended June 30, 2024, compared to the three months ended June 30, 2023, primarily due to impacts from improved manufacturing productivity and savings from other cost reduction initiatives, partially offset by impacts from lower print volumes and $0.5 million of increased restructuring, impairment and transaction-related charges.

A reconciliation of EBITDA to net loss for the three months ended June 30, 2024 and 2023, was as follows:

(dollars in millions)

(1) Net loss included the following:

a. Restructuring, impairment and transaction-related charges of $10.1 million and $9.6 million for the three months ended June 30, 2024 and 2023, respectively.

United States Print and Related Services

The following table summarizes net sales, operating income, operating margin and certain items impacting comparability within the United States Print and Related Services segment:

(dollars in millions)

Net Sales

Product sales for the United States Print and Related Services segment decreased $37.4 million, or 8.3%, for the three months ended June 30, 2024, compared to the three months ended June 30, 2023, primarily due to a $21.9 million decrease in sales in the Company’s print product lines, mainly due to decreased print volumes and a higher mix of lower unit price gravure versus offset print in our magazine and catalog print offerings, and a $15.5 million decrease from paper sales.

Service sales for the United States Print and Related Services segment decreased $6.8 million, or 4.9%, for the three months ended June 30, 2024, compared to the three months ended June 30, 2023, primarily due to a $7.6 million decrease in marketing services and medical services, partially offset by a $0.8 million increase in logistics sales.

Operating Income

Operating income for the United States Print and Related Services segment increased $13.6 million, or 115.3%, for the three months ended June 30, 2024, compared to the three months ended June 30, 2023, primarily due to the following: (1) a $5.1 million decrease in depreciation and amortization expense; (2) impacts from improved manufacturing productivity; and (3) savings from other cost reduction initiatives; partially offset by the impact from a decrease in print volumes and a $0.7 million increase in restructuring, impairment and transaction-related charges.

Operating margin for the United States Print and Related Services segment increased to 4.7% for the three months ended June 30, 2024, from 2.0% for the three months ended June 30, 2023, 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 $0.7 million, or 8.1%, for the three months ended June 30, 2024, compared to the three months ended June 30, 2023, primarily due to the following:

(dollars in millions)

(a) Includes $1.0 million and $1.1 million of impairment charges during the three months ended June 30, 2024 and 2023, respectively, which consisted of $0.5 million and $1.1 million, respectively, for property, plant and equipment no longer being utilized in production as a result of facility consolidations, as well as other capacity reduction activities, and $0.5 million for operating lease right-of-use assets in 2024.

International

The following table summarizes net sales, operating income, operating margin, certain items impacting comparability within the International segment:

(dollars in millions)

Net Sales

Product sales for the International segment decreased $24.9 million, or 22.5%, for the three months ended June 30, 2024, compared to the three months ended June 30, 2023, primarily 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, partially offset by $0.7 million in favorable foreign exchange impacts, primarily in Colombia and Mexico.

Service sales for the International segment increased $0.2 million, or 5.0%, for the three months ended June 30, 2024, compared to the three months ended June 30, 2023, primarily due to a $0.1 million increase in logistics sales and a $0.1 million increase in marketing services sales.

Operating Income

Operating income for the International segment decreased $6.0 million, or 72.3%, for the three months ended June 30, 2024, compared to the three months ended June 30, 2023, primarily due to a $6.2 million decrease in operating income from decreased print product volume, mainly in Mexico, Peru and Colombia, partially offset by a $0.2 million decrease in restructuring, impairment and transaction-related charges.

Restructuring, Impairment and Transaction-Related Charges

Restructuring, impairment and transaction-related charges for the International segment decreased $0.2 million, or 20.0%, for the three months ended June 30, 2024, compared to the three months ended June 30, 2023, primarily due to the following:

(dollars in millions)

(a) Includes $0.1 million of impairment charges for certain property, plant and equipment no longer being utilized in production as a result of facility consolidations, as well as other capacity reduction activities, during the three months ended June 30, 2024. There were no impairment charges during the three months ended June 30, 2023.

Corporate

The following table summarizes unallocated operating expenses presented as Corporate:

(dollars in millions)

Operating Expenses

Corporate operating expenses increased $0.9 million, or 7.7%, for the three months ended June 30, 2024, compared to the three months ended June 30, 2023, primarily due to a $0.7 million increase in employee-related costs.

Results of Operations for the Six Months Ended June 30, 2024, Compared to the Six Months Ended June 30, 2023

Summary Results

The Company’s operating income, operating margin, net loss (computed using a 25% normalized tax rate for all items subject to tax) and diluted loss per share for the six months ended June 30, 2024, changed from the six months ended June 30, 2023, as follows (dollars in millions, except margin and per share data):

(1) Restructuring, impairment and transaction-related charges increased $7.0 million ($5.3 million, net of tax), to $42.6 million during the six months ended June 30, 2024, and included the following:

a. A $1.9 million increase in employee termination charges from $15.0 million during the six months ended June 30, 2023, to $16.9 million during the six months ended June 30, 2024;

b. A $3.1 million increase in impairment charges from $10.6 million during the six months ended June 30, 2023, to $13.7 million during the six months ended June 30, 2024;

c. A $0.3 million increase in transaction-related charges from $0.6 million during the six months ended June 30, 2023, to $0.9 million during the six months ended June 30, 2024;

d. A $0.8 million decrease in integration costs from $1.0 million during the six months ended June 30, 2023, to $0.2 million during the six months ended June 30, 2024;

e. A $2.5 million increase in various other restructuring charges from $8.4 million during the six months ended June 30, 2023, to $10.9 million during the six months ended June 30, 2024.

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) Other operating income elements increased $2.9 million ($2.2 million, net of tax impact) during the six months ended June 30, 2024, primarily due to the following: (1) a $10.7 million decrease in depreciation and amortization expense; (2) impacts from improved manufacturing productivity; (3) savings from other cost reduction initiatives; and (4) a $0.7 million decrease in selling, general and administrative expenses; partially offset by print volume decreases.

(3) Interest expense decreased $0.9 million ($0.7 million, net of tax) during the six months ended June 30, 2024, to $32.4 million. This was primarily due to lower average debt levels and a $0.4 million decrease in interest expense related to the interest rate swap, partially offset by higher weighted average interest rates on borrowings in the six months ended June 30, 2024, as compared to the six months ended June 30, 2023.

(4) Net pension income decreased $0.4 million ($0.3 million, net of tax) during the six months ended June 30, 2024, to $0.4 million. This was due to a $1.0 million decrease from the expected long-term return on pension plan assets, partially offset by a $0.6 million decrease from interest cost on pension plan liabilities.

(5) The $2.5 million decrease in income tax expense as calculated in the following table is primarily due to a $1.5 million decrease from the impact of non-deductible expenses and a $0.9 million decrease in the Company’s liability for audit assessments and unrecognized tax benefits.

(dollars in millions)

Operating Results

The following table sets forth certain information from the Company’s condensed 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:

(dollars in millions)

Net Sales

Product sales decreased $163.0 million, or 14.0%, for the six months ended June 30, 2024, compared to the six months ended June 30, 2023, primarily due to an $86.3 million decrease from paper sales and a $79.6 million decrease in sales in the Company’s print product lines, mainly due to decreased print volumes and a higher mix of lower unit price gravure versus offset print in our magazine and catalog print offerings, partially offset by $2.9 million in favorable foreign exchange impacts.

Service sales, which primarily consist of logistics, distribution, marketing services, imaging and medical services, decreased $17.6 million, or 5.8%, for the six months ended June 30, 2024, compared to the six months ended June 30, 2023, primarily due to a $16.5 million decrease in marketing services and medical services and a $1.1 million decrease in logistics sales from lower print volumes.

Cost of Sales

Cost of product sales decreased $158.1 million, or 15.9%, for the six months ended June 30, 2024, compared to the six months ended June 30, 2023, primarily due to the following: (1) a decrease in paper costs; (2) the impact from lower print volumes; (3) impacts from improved manufacturing productivity; and (4) other cost reduction initiatives.

Cost of service sales decreased $14.0 million, or 7.2%, for the six months ended June 30, 2024, compared to the six months ended June 30, 2023, primarily due to the impact from lower marketing services and decreased freight volumes.

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased $0.7 million, or 0.4%, for the six months ended June 30, 2024, compared to the six months ended June 30, 2023, primarily due to the following: (1) a $4.1 million gain on the sale of an investment in 2024; (2) a $3.6 million decrease in employee-related costs; (3) a $1.4 million increase from the gain on the sale of property, plant and equipment; (4) a $1.0 million decrease in credit loss expense; and (5) a $1.0 million decrease in professional fees; partially offset by a $6.0 million increase from unfavorable foreign exchange impacts and $3.9 million in retention credits and unclaimed property recoveries that occurred in 2023 than did not reoccur in 2024. Selling, general and administrative expenses as a percentage of net sales increased to 13.3% for the six months ended June 30, 2024, compared to 11.7% for the six months ended June 30, 2023.

Depreciation and Amortization

Depreciation and amortization decreased $10.7 million, or 16.3%, for the six months ended June 30, 2024, compared to the six months ended June 30, 2023, due to a $6.4 million decrease in depreciation expense, primarily due to impacts from plant closures and from property, plant and equipment becoming fully depreciated over the past year, and a $4.3 million decrease in amortization expense.

Restructuring, Impairment and Transaction-Related Charges

Restructuring, impairment and transaction-related charges increased $7.0 million, or 19.7%, for the six months ended June 30, 2024, compared to the six months ended June 30, 2023, primarily due to the following:

(dollars in millions)

(a) Includes $13.7 million and $10.6 million of impairment charges during the six months ended June 30, 2024 and 2023, respectively, which consisted of $11.4 million and $10.6 million, respectively, for certain property, plant and equipment no longer being utilized in production as a result of facility consolidations, as well as other capacity reduction activities, and $2.3 million for operating lease right-of-use assets in 2024.

EBITDA and EBITDA Margin—Consolidated

EBITDA is defined as net earnings (loss), excluding (1) interest expense, (2) income tax expense 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 (used in) 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 six months ended June 30, 2024, compared to the six months ended June 30, 2023, were as follows:

(dollars in millions)

EBITDA decreased $15.2 million for the six months ended June 30, 2024, compared to the six months ended June 30, 2023, primarily due to the impacts from lower print volumes and marketing services net sales and $7.0 million of increased restructuring, impairment and transaction-related charges, partially offset by impacts from improved manufacturing productivity and savings from other cost reduction initiatives.

A reconciliation of EBITDA to net loss for the six months ended June 30, 2024 and 2023, was as follows:

(dollars in millions)

(1) Net loss included the following:

a. Restructuring, impairment and transaction-related charges of $42.6 million and $35.6 million for the six months ended June 30, 2024 and 2023, respectively.

United States Print and Related Services

The following table summarizes net sales, operating income, operating margin and certain items impacting comparability within the United States Print and Related Services segment:

(dollars in millions)

Net Sales

Product sales for the United States Print and Related Services segment decreased $106.0 million, or 11.1%, for the six months ended June 30, 2024, compared to the six months ended June 30, 2023, primarily due to a $57.0 million decrease in sales in the Company’s print product lines, mainly due to decreased print volumes and a higher mix of lower unit price gravure versus offset print in our magazine and catalog print offerings, and a $49.0 million decrease in paper sales.

Service sales for the United States Print and Related Services segment decreased $16.9 million, or 5.8%, for the six months ended June 30, 2024, compared to the six months ended June 30, 2023, primarily due to a $16.5 million decrease in marketing services and medical services and a $0.4 million decrease in logistics sales from lower print volumes.

Operating Income

Operating income for the United States Print and Related Services segment increased $5.0 million, or 26.2%, for the six months ended June 30, 2024, compared to the six months ended June 30, 2023, primarily due to the following: (1) a $9.7 million decrease in depreciation and amortization expense; (2) impacts from improved manufacturing productivity; and (3) savings from other cost reduction initiatives; partially offset by the impact from decreased print volumes and a $9.8 million increase in restructuring, impairment and transaction-related charges.

The operating margin for the United States Print and Related Services segment increased to 2.1% for the six months ended June 30, 2024, compared to 1.5% for the six months ended June 30, 2023, 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 $9.8 million, or 31.5%, for the six months ended June 30, 2024, compared to the six months ended June 30, 2023, primarily due to the following:

(dollars in millions)

(a) Includes $13.6 million and $8.6 million of impairment charges during the six months ended June 30, 2024 and 2023, respectively, which consisted of $11.3 million and $8.6 million, respectively, for certain property, plant and equipment no longer being utilized in production as a result of facility consolidations, as well as other capacity reduction activities, and $2.3 million for operating lease right-of-use assets in 2024.

International

The following table summarizes net sales, operating income, operating margin, and certain items impacting comparability within the International segment:

(dollars in millions)

Net Sales

Product sales for the International segment decreased $57.0 million, or 26.6%, for the six months ended June 30, 2024, compared to the six months ended June 30, 2023, due to a $37.3 million decrease in paper sales and a $22.6 million decrease in print volume, primarily in Mexico and Europe, partially offset by $2.9 million in favorable foreign exchange impacts, primarily in Mexico and Colombia.

Service sales for the International segment decreased $0.7 million, or 7.4%, for the six months ended June 30, 2024, when compared to the six months ended June 30, 2023, primarily due to a $0.7 million decrease in logistics sales.

Operating Income

Operating income for the International segment decreased $10.3 million, or 64.4%, for the six months ended June 30, 2024, compared to the six months ended June 30, 2023, primarily due to an $8.3 million decrease in operating income from decreased print product volume, primarily in Mexico and Peru, and a $2.0 million decrease in restructuring, impairment and transaction-related charges.

Restructuring, Impairment and Transaction-Related Charges

Restructuring, impairment and transaction-related charges for the International segment decreased $2.0 million, or 55.6%, for the six months ended June 30, 2024, compared to the six months ended June 30, 2023, primarily due to the following:

(dollars in millions)

(a) Includes $0.1 million and $2.0 million of impairment charges for certain property, plant and equipment no longer being utilized in production as a result of facility consolidations, as well as other capacity reduction activities, during the six months ended June 30, 2024 and 2023, respectively.

Corporate

The following table summarizes unallocated operating expenses presented as Corporate:

(dollars in millions)

Operating Expenses

Corporate operating expenses decreased $1.2 million, or 4.5%, for the six months ended June 30, 2024, compared to the six months ended June 30, 2023, primarily due to a $1.0 million decrease in employee-related costs.

Restructuring, Impairment and Transaction-Related Charges

Corporate restructuring, impairment and transaction-related charges decreased $0.8 million, or 88.9%, for the six months ended June 30, 2024, compared to the six months ended June 30, 2023, primarily due to the following:

(dollars in millions)

50

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 $241.6 million as of June 30, 2024, which consisted of up to $228.8 million of unused capacity under its revolving credit agreement, which was net of $28.5 million of issued letters of credit, and cash and cash equivalents of $12.8 million. Total liquidity is reduced to $222.3 million under the Company’s most restrictive debt covenants. There were $85.2 million of borrowings under the $342.5 million revolving credit facility as of June 30, 2024.

The Company believes its expected future cash flows from operating activities and its current liquidity and capital resources, are sufficient to fund ongoing operating requirements and service debt and pension requirements for both the next 12 months and beyond.

Net Cash Provided by (Used in) Operating Activities

Six Months Ended June 30, 2024, Compared to Six Months Ended June 30, 2023

Net cash used in operating activities increased $48.6 million, from $0.3 million provided by operating activities for the six months ended June 30, 2023, to $48.3 million used in operating activities for the six months ended June 30, 2024. This increase was due to a $33.7 million increase in cash flows used in changes in operating assets and liabilities and a $14.9 million decrease in cash from earnings.

Net Cash Used in Investing Activities

Six Months Ended June 30, 2024, Compared to Six Months Ended June 30, 2023

Net cash used in investing activities decreased $36.5 million, from $42.7 million for the six months ended June 30, 2023, to $6.2 million for the six months ended June 30, 2024. The decrease was primarily due to the following: (1) a $22.2 million increase in proceeds from the sale of an investment; (2) an $11.7 million decrease in purchases of property, plant and equipment; (3) a $5.0 million decrease in cash used in other investing activities; and (4) a $0.3 million decrease in cost investment in unconsolidated entities. These decreases were partially offset by a $2.7 million decrease in proceeds from the sale of property, plant, and equipment.

Net Cash Provided by Financing Activities

Six Months Ended June 30, 2024, Compared to Six Months Ended June 30, 2023

Net cash provided by financing activities decreased $13.8 million, from $28.3 million for the six months ended June 30, 2023, to $14.5 million for the six months ended June 30, 2024. The decrease was primarily due to the following: (1) a $13.9 million decrease in net borrowings of debt and lease obligations; (2) a $4.6 million increase in the payment of cash dividends; and (3) a $0.4 million increase in equity awards redeemed to pay employees’ tax obligations. These decreases were partially offset by a $5.0 million decrease in cash used for the purchase of treasury stock and a $0.1 million decrease in cash used for other financing activities.

Free Cash Flow

Free Cash Flow is defined as net cash provided by (used in) operating activities less purchases of property, plant and equipment.

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.

Free Cash Flow is a non-GAAP financial measure and should not be considered an alternative to cash flows provided by (used in) 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 six months ended June 30, 2024, compared to the six months ended June 30, 2023, was as follows:

(dollars in millions)

Free Cash Flow decreased $36.9 million for the six months ended June 30, 2024, compared to the six months ended June 30, 2023, 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. See the “Net Cash Provided by (Used In) Operating Activities” section above for further explanations of the change in operating cash flows.

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 last twelve months of EBITDA (see the definition of EBITDA and the reconciliation of net loss to EBITDA in the “Results of Operations” section above) and restructuring, impairment and transaction-related charges.

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 through debt and pension liability reduction, for strategic capital allocation and deployment through investments in the business, and for returning capital to shareholders. 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 (used in) 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.

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 “Covenants and Compliance” section below for further information on debt covenants). The Total Leverage Ratio included in the Company’s debt covenants includes interest rate derivative liabilities and letters of credit as debt and excludes non-cash stock-based compensation expense from 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 surety bonds from debt and netting domestic unrestricted cash with debt.

The Debt Leverage Ratio at June 30, 2024, and December 31, 2023, was as follows:

(dollars in millions)

The calculation of Adjusted EBITDA for the trailing twelve months ended June 30, 2024, and December 31, 2023, was as follows:

(1) Financial information for the year ended December 31, 2023, is included as reported in the Company’s 2023 Annual Report on Form 10-K filed with the SEC on February 22, 2024.

The Debt Leverage Ratio at June 30, 2024, increased 0.35x, compared to December 31, 2023, primarily due to a $62.6 million increase in Net Debt and a $8.2 million reduction in trailing twelve months Adjusted EBITDA. The Debt Leverage Ratio at June 30, 2024, is above management’s desired target Debt Leverage Ratio range of 1.75x to 2.25x; however, the Company will 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.

Debt Obligations

As of June 30, 2024, the Company utilized a combination of debt instruments to fund cash requirements, including the following:

• Senior Secured Credit Facility:
• Revolving credit facility ($85.2 million outstanding as of June 30, 2024); and
• Term Loan A ($419.7 million outstanding as of June 30, 2024);
• Master Note and Security Agreement ($1.5 million outstanding as of June 30, 2024).

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 June 30, 2024:

• Total Leverage Ratio. On a rolling twelve-month basis, the Total Leverage Ratio, defined as consolidated total indebtedness to consolidated EBITDA, shall not exceed 3.75 to 1.00 (for the twelve months ended June 30, 2024, the Company’s Total Leverage Ratio was 2.35 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 four-quarter basis, the Senior Secured Leverage Ratio, defined as the ratio of consolidated senior secured net indebtedness to consolidated EBITDA, shall not exceed 3.25 to 1.00 for any fiscal quarter ending on or after December 31, 2023 (other than any fiscal quarter ending September 30 of any year, which shall be subject to a maximum Senior Secured Leverage Ratio not to exceed 3.50 to 1.00) (for the twelve months ended June 30, 2024, the Company’s Senior Secured Leverage Ratio was 2.34 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 June 30, 2024, the Company’s Interest Coverage Ratio was 4.00 to 1.00).

The Company was in compliance with all financial covenants in its debt agreements as of June 30, 2024. 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.

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

• If the Company’s Total Leverage Ratio is greater than 2.75 to 1.00, the Company is prohibited from making greater than $60.0 million of dividend payments, capital stock repurchases and certain other payments, over the course of the agreement. If the Company’s Total Leverage Ratio is above 2.50 to 1.00 but below 2.75 to 1.00, the Company is prohibited from making greater than $100.0 million of dividend payments, capital stock repurchases and certain other payments, over the course of the agreement. If the Total Leverage Ratio is less than 2.50 to 1.00, there are no such restrictions. As the Company’s Total Leverage Ratio as of June 30, 2024, was 2.35 to 1.00, the limitations described above are not 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 which, on a rolling twelve-month basis, is defined as consolidated net indebtedness to consolidated EBITDA, is greater than 3.50 to 1.00, the Company is prohibited from voluntarily prepaying any unsecured or subordinated indebtedness, with certain exceptions (including any mandatory prepayments on any 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 not currently applicable, as the Company’s Senior Secured Leverage Ratio was 2.34 to 1.00 and the Total Net Leverage Ratio was 2.34 to 1.00, as of June 30, 2024.

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.

There were no share repurchases during the three and six months ended June 30, 2024, and the following repurchases occurred during the three and six months ended June 30, 2023:

As of June 30, 2024, there were $77.5 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 3, “Quantitative and Qualitative Disclosures About Market Risk,” of this Quarterly Report on Form 10-Q.

New Accounting Pronouncements

See Note 18, “New Accounting Pronouncements,” to the condensed consolidated financial statements in Item 1, “Condensed Consolidated Financial Statements (Unaudited),” of this Quarterly Report on Form 10-Q.

The Company is exposed to a variety of market risks which may adversely impact the Company’s results of operations and financial condition, including changes in interest and foreign currency exchange rates, changes in the economic environment that would impact credit positions and changes in the prices of certain commodities. The Company’s management takes an active role in the risk management process and has developed policies and procedures that require specific administrative and business functions to assist in the identification, assessment and control of various risks. These risk management strategies may not fully insulate the Company from adverse impacts due to market risks.

Interest Rate Risk

The Company is exposed to interest rate risk on variable rate debt obligations and price risk on fixed rate debt and finance leases. The variable rate debt outstanding at June 30, 2024, was primarily comprised of $419.7 million outstanding on the Term Loan A. As of June 30, 2024, there was also $85.2 million outstanding on the revolving credit facility. In order to reduce the variability of cash flows from interest payments related to a portion of Quad’s variable rate debt, the Company entered into two $75.0 million interest rate collars in February 2023, and a $50.0 million interest rate swap in April 2024, and has classified $200.0 million of the Company’s variable rate debt as fixed rate debt. Including the impact of the $200.0 million interest rate hedges of variable rate to fixed rate debt, Quad had variable rate debt outstanding of $322.0 million at a current weighted average interest rate of 7.7% and fixed rate debt and finance leases outstanding of $223.2 million at a current weighted average interest rate of 7.5% as of June 30, 2024. A hypothetical 10% increase in the market interest rates impacting the Company’s current weighted average interest rate on variable rate debt obligations would not have a material impact on the Company’s interest expense. In addition, a hypothetical 10% change in market interest rates would change the fair value of fixed rate debt at June 30, 2024, by approximately $0.4 million.

Foreign Currency Risk and Translation Exposure

The Company is exposed to the impact of foreign currency fluctuations in certain countries in which it operates. The exposure to foreign currency movements is limited in most countries because the operating revenues and expenses of its various subsidiaries and business units are substantially in the local currency of the country in which they operate. To the extent revenues and expenses are not in the applicable local currency, the Company may enter into foreign exchange forward contracts to hedge the currency risk.

Although operating in local currencies may limit the impact of currency rate fluctuations on the results of operations of the Company’s non-United States subsidiaries and business units, rate fluctuations may impact the consolidated financial position as the assets and liabilities of its foreign operations are translated into U.S. dollars in preparing the Company’s condensed consolidated balance sheets. As of June 30, 2024, the Company’s foreign subsidiaries had net current assets (defined as current assets less current liabilities) subject to foreign currency translation risk of $88.8 million. The potential decrease in net current assets as of June 30, 2024, from a hypothetical 10% adverse change in quoted foreign currency exchange rates, would be approximately $8.9 million. This sensitivity analysis assumes a parallel shift in all major foreign currency exchange rates versus the U.S. dollar. Exchange rates rarely move in the same direction relative to the U.S. dollar due to positive and negative correlations of the various global currencies. This assumption may overstate or understate the impact of changing exchange rates on individual assets and liabilities denominated in a foreign currency.

The Company’s hedging operations have historically not been material, and gains or losses from these operations have not been material to the Company’s results of operations, financial position or cash flows. The Company does not use derivative financial instruments for trading or speculative purposes.

These international operations are subject to risks typical of international operations, including, but not limited to, differing economic conditions, changes in political climate, potential restrictions on the movement of funds, differing tax structures, and other regulations and restrictions. Accordingly, future results could be adversely impacted by changes in these or other factors.

Credit Risk

Credit risk is the possibility of loss from a client’s failure to make payments according to contract terms. Prior to granting credit, each client is evaluated in an underwriting process, taking into consideration the prospective client’s financial condition, past payment experience, credit bureau information and other financial and qualitative factors that may affect the client’s ability to pay. Specific credit reviews and standard industry credit scoring models are used in performing this evaluation. Clients’ financial condition is continuously monitored as part of the normal course of business. Some of the Company’s clients are highly leveraged or otherwise subject to their own operating and regulatory risks. Based on those client account reviews and the continued uncertainty of the global economy, the Company has established an allowance for credit losses of $25.7 million as of June 30, 2024 and December 31, 2023.

The Company has a large, diverse client base and does not have a high degree of concentration with any single client account. During the three and six months ended June 30, 2024, the Company’s largest client accounted for less than 5% of the Company’s net sales. Even if the Company’s credit review and analysis mechanisms work properly, the Company may experience financial losses in its dealings with clients and other parties. Any increase in nonpayment or nonperformance by clients could adversely impact the Company’s results of operations and financial condition. Economic disruptions could result in significant future charges.

Commodity Risk

The primary raw materials that the Company uses in its print business are paper, ink and energy. At this time, the Company’s supply of raw materials are available from numerous vendors. The Company generally buys these raw materials based upon market prices that are established with the vendor as part of the procurement process. The price of such raw materials has fluctuated over time and has caused fluctuations in the Company’s net sales and cost of sales. This volatility may continue and the Company may experience increases in the costs of its raw materials in the future as prices in the overall paper, ink and energy markets are expected to remain beyond its control. The price and availability of paper may also be adversely affected by paper mills’ permanent or temporary closures, and mills’ access to raw materials, conversion to produce other types of paper, and ability to transport paper produced.

Approximately half of the paper used by the Company is supplied directly by its clients. For those clients that do not directly supply their own paper, the Company makes use of its purchasing efficiencies to supply paper by negotiating with leading paper vendors, uses a wide variety of paper grades, weights and sizes, and does not rely on any one vendor. In addition, the Company generally includes price adjustment clauses in sales contracts for paper and other critical raw materials in the printing process. Although these clauses generally mitigate paper price risk, higher paper prices and tight paper supplies, as well as changes in the United States import or trade regulations may have an impact on client demand for printed products. The Company’s working capital requirements, including the impact of seasonality, are partially mitigated through the direct purchasing of paper by its clients.

The Company produces the majority of ink used in its print production, allowing it to control the quality, cost and supply of key inputs. Raw materials for the ink manufacturing process are purchased externally from a variety of vendors. The price and availability of ink and ink components may be adversely affected by the availability of component raw materials, labor and transportation.

The Company may not be able to fully pass on to clients the impact of higher electric and natural gas energy prices on its manufacturing costs, and increases in energy prices result in higher manufacturing costs for certain of its operations. The Company mitigates its risk through natural gas hedges when appropriate. In its logistics operations, however, the Company is able to pass a substantial portion of any increase in fuel prices directly to its clients.

To the extent the cost of other raw materials increase and the Company is not able to increase selling prices of its products, then the Company may experience margin declines.

Management believes a hypothetical 10% change in the price of paper and other raw materials would not have a significant direct impact on the Company’s consolidated annual results of operations or cash flows; however, significant increases in commodity pricing or tight supply could influence future client demand for printed products.

Disclosure Controls and Procedures

The Company’s management, with the participation of the Company’s principal executive officer and principal financial officer, has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report and has concluded that, as of the end of such period, the Company’s disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting

There were no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) that occurred during the fiscal quarter ended June 30, 2024, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

There have been no material changes to the risk factors previously disclosed in Part I, Item 1A, “Risk Factors,” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, which was filed with the SEC on February 22, 2024.