Item 1. Business
Overview
As a worldwide marketing solutions partner, Quad leverages its more than 50-year heritage of platform excellence, innovation, strong culture and social purpose to create a better way for its clients, employees and communities. The Company’s integrated marketing platform removes friction throughout the marketing process thereby helping brands and marketers reduce complexity, increase efficiency and enhance marketing spend effectiveness. Quad provides its clients with a complete through-the-line marketing offering, providing unmatched scale for on-site services and expanded subject expertise in marketing strategy, creative solutions, media deployment and marketing management services. With a client-centric approach that drives the Company to continuously hone and evolve its offering, combined with leading-edge technology, advanced data and analytics and single-source simplicity, the Company has the resources and knowledge to help a wide variety of clients target, more deeply engage and grow audiences in multiple verticals, including those in established and emerging industries, such as retail, publishing, consumer technology, consumer packaged goods, financial services, insurance, healthcare and direct-to-consumer.
Quad was founded in Pewaukee, Wisconsin, as a Wisconsin corporation, in 1971 by the late Harry V. Quadracci. As of January 31, 2022, the Quadracci family, through the Quad/Graphics, Inc. Amended and Restated Voting Trust Agreement (“Quad Voting Trust”), has voting control of approximately 71%, which the Company believes provides it with continued stability and flexibility as Quad works to achieve its long-term strategic vision. As of December 31, 2021, the Company had approximately 15,100 full-time equivalent employees in North America (including Mexico and the Dominican Republic), South America, Europe and Asia, and served a diverse base of approximately 4,600 clients. Quad locations span 14 countries, including 45 manufacturing and distribution facilities and more than 90 client-based on-site locations, with additional investments in printing operations in India.
During Quad’s first 40 years, the Company grew rapidly through greenfield growth, built a premier manufacturing and distribution platform equipped with the latest technology, established its reputation as one of the printing industry’s foremost innovators and created a strong Company culture based on enduring values and commitment to social purpose that remains in place today.
Beginning in 2010, Quad strategically expanded its offerings to create enhanced value for its clients. Quad saw an opportunity to participate in industry consolidation in response to economic and industry pressures following the great recession of 2008 and 2009 that severely impacted print volumes and accelerated the impact of media disruption. Through a series of disciplined consolidating acquisitions that included World Color Press, Inc., Vertis Holdings Inc. and Brown Printing Company, the Company added experienced talent and enhanced and expanded its print-based product and service offerings while removing inefficient and underutilized capacity by transitioning work to more efficient facilities, and reducing costs. This period of consolidation created a disciplined cost reduction philosophy and advanced investment in the highly automated and efficient manufacturing and distribution capabilities the Company operates today.
Beginning in 2014, Quad focused on strategic investments in marketing services, talent and technology to accelerate its transformation as a marketing solutions partner. During this transformation period, known as Quad 3.0, Quad made several growth acquisitions including a premier marketing services provider specializing in customized marketing and business process outsourcing with unmatched scale for on-site marketing services; a top five independent creative agency offering world-class capabilities in strategy, including media buying and analytics, creative and account management, and packaging design and premedia services; and a leading performance marketing agency specializing in media, analytics and customer experience in digital channels. In addition, the Company hired business professionals with client-side marketing experience and consulting expertise to strategically expand its integrated marketing offering, enter new market verticals, and change product-centric conversations with clients to a solutions-based approach. To reflect its transformation to a marketing solutions partner with a strong foundation in print, the Company evolved its brand from Quad/Graphics to Quad in 2019.
Today, Quad provides brands and marketers with a more efficient and effective way to go to market and reach consumers. Through its integrated marketing platform, the Company creates greater value for clients by removing friction in the marketing process and speeding the overall marketing journey by delivering all the elements of a successful campaign under one roof. For Quad clients, this:
•Reduces the complexities of working with multiple agency partners and vendors.
•Increases process efficiencies through workflow re-engineering, content production and process optimization.
•Enhances marketing spend effectiveness through integrated solutions that help clients target, more deeply engage and grow audiences; plan and measure marketing; strategize, create and activate big ideas; produce content at scale; and connect with consumers in the most appropriate channels and with the right amplitude for eliciting maximum response.
As a good corporate citizen, Quad also creates societal value through a strong commitment to proactively addressing environmental, social and governance matters. This dedication to driving positive, sustainable change in its business and in the world aligns with Quad’s long-standing commitment to create a better way – a hallmark of the Company’s culture.
In 2021, the Company delivered strong financial results while navigating the COVID-19 pandemic, paper and supply chain disruptions, inflationary cost pressures and labor shortages. Despite these challenges, Quad worked thoughtfully and diligently to mitigate these impacts on the business and proactively manage client expectations. Quad continued to grow print segment share because of its dependable performance, operational and financial stability, and ongoing investments in its platform. It also continued to expand its marketing solutions with new and existing accounts, providing clients with the simplicity, efficiency and effectiveness of an integrated approach. Further, Quad shared how it is creating a better way to drive positive change in its business and the world through a comprehensive environmental, social and governance report featuring commitments in key areas integral to its business strategy as a marketing solutions partner. Quad believes it will be able to maintain its leading competitive position through its consistent business strategy, dedicated and passionate employees, and integrated marketing platform, providing stability and innovative solutions for clients into the future.
More information regarding Quad is available on the Company’s website at QUAD.com. Quad is not including the information contained on or available through its website as part of, or incorporating such information by reference into, this Annual Report on Form 10-K. The Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those reports are made available to the public at no charge through a link appearing on the Investor Relations section of the Company’s website. Quad provides access to such materials through its website as soon as reasonably practicable after electronically filing such material with, or furnishing it to, the SEC.
Industry and Competition
According to an October 2021 Dun & Bradstreet First Research report, the U.S. advertising and marketing services industry is forecast to grow at an annual compounded rate of 4% between 2021 and 2026, as compared to portions of the printing industry which are in secular decline. The secular decline of the printing industry has accelerated due to the COVID-19 pandemic and the further migration of advertising dollars from print to digital channels. These industry dynamics support Quad’s transformation as a marketing solutions partner.
The advertising and marketing services industry is highly fragmented. According to the October 2021 Dun & Bradstreet First Research report, the top 50 companies in the U.S. advertising and marketing services industry generate approximately 40% of industry revenue. Services in this industry include advertising for print, broadcast and online media (about 43% of industry sales); public relations (12%); and direct marketing (10%). Other services include display advertising, media buying (reselling advertising time or space), and media representation (selling advertising time or space on behalf of media outlet owners). The U.S. advertising and marketing services industry includes about 38,000 establishments (single-location companies and units of multi-location companies), with combined annual revenue of about $110 billion.
The commercial print industry is also highly fragmented. According to the October 2021 Printing in the U.S. IBISWorld industry report, the United States commercial printing industry, in the aggregate, generates an estimated $78 billion in annual revenue, employs approximately 350,000 people and is comprised of over 45,000 companies. The report also states that no printing company accounts for more than 5% of total commercial print industry annual revenue in the United States.
In addition to being highly fragmented, competition in the printing industry remains intense, and the Company believes that there are indicators of heightened competitive pressures. The Company faces competition due to the increased accessibility and quality of digital alternatives to traditional delivery of printed documents through the online distribution and hosting of media content, and the digital distribution of documents and data. The Company faces competition from print management and marketing consulting firms that look to streamline processes and reduce the overall print spend of the Company’s clients.
The commercial print industry has moved toward a demand for shorter print runs, faster product turnaround and increased production efficiency of products with lower page counts and increased complexity. This, combined with increases in postage expenses and the increased use of digital marketing and communication channels, has led to excess manufacturing capacity in the print industry. This excess capacity has allowed certain larger competitors, like Quad, with economies of scale, strong balance sheets and access to capital markets, the ability to invest in automation and more efficient equipment, take advantage of consolidating acquisition opportunities to remove excess, inefficient and/or underutilized capacity, and reduce overall costs.
Competition in both the advertising and marketing services and print industries is affected by real gross domestic product growth, as economic activity and advertising spending are key drivers of consumer demand. In times of economic prosperity, advertisers may increase spending to build brand awareness and to drive sales. Conversely, in times of global economic uncertainty and budget pressures, advertisers may reduce spending or shift their spending to other forms of media, as demonstrated during the COVID-19 pandemic. For print specifically, magazine publishers that face diminished advertising pages reduce total page counts and frequency; catalog marketers reduce page counts, circulation or frequency of print campaigns; retailers curb investments in store inventory and cut back on retail insert newspaper circulation and advertising; and other advertisers reduce their direct mail volume. It is possible that these customers instead decide to move advertising spend to digital alternatives.
Marketing services providers face pressure to satisfy major clients’ needs, as the win or loss of a major client account can impact revenue significantly. Another challenge facing marketing service providers relates to public concern and general annoyance with advertising methods. For example, data collection of personal information for marketing purposes is an issue under scrutiny from federal and state legislation, and marketing service providers are facing future restrictions on certain types of data they collect. In Europe, the European Union enforces data protection through the General Data Protection Regulations.
The Company faces competition in the advertising and marketing services industry based on access to a skilled workforce, pricing, adapting quickly to new technology, creating unique and effective campaigns and offering superior customer service. Across Quad’s range of printed products, competition is based on total price of printing, materials and distribution; availability of materials; quality; distribution capabilities; customer service; access to a highly skilled workforce; availability of labor; availability to schedule work on appropriate equipment; on-time production and delivery; and state-of-the-art technology to meet a client’s business objectives, including the ability to adopt new technology quickly.
As consumer media consumption habits change, marketing services providers face increased demand to offer end-to-end marketing services, from strategy and creative through execution, across all channels, traditional and digital. As new marketing and advertising channels emerge, marketing services providers must expand their services beyond traditional channels, such as for television, newspapers, print publications and radio, to digital channels, such as mobile, internet search, internet display and video, to create effective multichannel campaigns for their clients.
Quad believes that business users of print and print-related services are focused on generating and tracking the highest returns on their marketing spend. Quad believes it is well positioned to help clients achieve greater process efficiencies and marketing spend effectiveness through data-driven integrated marketing solutions. The Company believes that its clients receive the greatest return on their marketing spend when they start with a strong marketing strategy that uses print in combination with other media channels, informed by customer data, to create targeted and relevant multichannel marketing campaigns.
Seasonality
Quad is subject to seasonality in its quarterly results as net sales and operating income are higher in the third and fourth quarters of the calendar year as compared to the first and second quarters. The fourth quarter is typically the highest seasonal quarter for cash flows from operating activities and Free Cash Flow due to the reduction of working capital requirements that reach peak levels during the third quarter. Seasonality is driven by increased retail inserts and catalogs primarily due to back-to-school and holiday-related advertising and promotions. The Company expects this seasonality impact to continue in future years. Due to the continued uncertainty surrounding the continuing COVID-19 pandemic and supply chain shortages, the Company anticipates this seasonality may be further impacted in future periods, as the Company is heavily dependent on consumer demand.
Strategic Priorities
Quad’s overarching business strategy and singular vision as a marketing solutions partner is achieved through the execution of the following five consistent strategic priorities:
Walk in the Shoes of Clients
The Company encourages all employees, regardless of job title, to walk in the shoes of clients by putting a priority on listening to clients’ needs and challenges, doing what they can to make it easy to work with Quad, and making the client experience enjoyable and inclusive at every touchpoint. With a focus on solving problems and removing friction wherever a client experiences it in the marketing process, Quad seeks to become an invaluable strategic marketing partner for its clients, helping them successfully navigate today’s constantly evolving media landscape through innovative data-driven solutions, produced and deployed efficiently across multiple media channels. 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 requirements, including their diversity, equity and inclusion goals, and broader environmental, social and governance objectives. The Company also believes its proactive thought leadership in the key issues facing its clients, including data-driven marketing, mar-tech and postal reform, will foster loyalty to the Quad brand.
Grow the Business Profitably
This strategic priority centers on Quad’s ability to defend against significant media disruption, deploy balanced use of capital, including disciplined and compelling investments, and grow the business as a marketing solutions partner. Key components of this priority are:
•Acquire new and expand existing account relationships by introducing clients to the Company’s complete through-the-line marketing offering – from strategy and creative through production, execution and analytics – that helps them market more efficiently and effectively. To this end, Quad is focused on ensuring it has the right talent in the right positions to facilitate strategic marketing conversations and tailored solutions based on a better understanding of their needs.
•Expand in key vertical industries with growth opportunities, such as consumer technology, consumer-packaged goods, financial services, insurance, healthcare and direct-to-consumer, while continuing to capitalize on the Company’s established expertise in retail and publishing. Through existing and new offerings, Quad delivers solutions dedicated to solving client marketing and process challenges.
•Make disciplined and compelling investments that take many different forms. The Company intends to continue to pursue growth investments that help expand and strengthen its integrated marketing platform. In addition, the Company intends to continue making long-term investments in its talent, such as hiring business professionals with client-side marketing experience and consulting expertise to enhance its position as a marketing solutions partner, as well as investments to attract new employees and increase existing employee engagement, retention and productivity.
Bolster Platform Strength
The Company operates what it believes to be a superior and unparalleled integrated marketing platform, which it has consciously built to remove friction in the marketing process and speed the overall marketing journey through reduced complexity, increased efficiencies and enhanced marketing spend effectiveness across channels. Through this unique platform, the Company offers a complete through-the-line marketing offering featuring agency, consulting and implementation solutions encompassing marketing strategy, including consumer insights and data analytics; creative solutions for producing quality content at scale; and media deployment and optimization for all channels, including print, broadcast, digital, in-store, out-of-home and packaging supported by 24/7 global production, including industry-leading print manufacturing and mail-distribution capabilities. Quad uses a disciplined return on capital framework to make regular, strategic investments in this platform, resulting in what it believes is the most integrated, automated, efficient, innovative and modern marketing platform of its kind. The Company’s long-standing, disciplined culture of holistic Continuous Improvement and commitment to Lean Enterprise methodologies, along with ongoing, strategic investments in talent, technology, products and services to accelerate its position as a marketing solutions partner.
To strengthen its offering, the Company continually seeks to enhance its product portfolio, especially in the direct marketing, in-store and packaging spaces, with innovations that support clients’ ability to stand out in a consumer’s mailbox or front doorstep, or on the store shelf. These innovations include proprietary solutions unavailable anywhere else in the marketing, communications or printing industries.
Additionally, Quad has chosen to strategically divest of those businesses that cannot be easily leveraged as part of its greater integrated marketing platform, such as the QuadExpress third-party logistics business Quad sold in 2021. Through these types of optimization efforts, Quad maintains a superior, unparalleled platform that delivers value to clients and, ultimately, their customers.
Empower Employees
Quad’s strategic priority to empower employees throughout their career journey builds on the key aspects of the Company’s distinct corporate culture, which the Company views as a competitive advantage. These aspects include the Company’s enduring values, which are centered on trust, innovation, growth, believing in people and doing the right thing. The Company understands that its employees perform better at work when they can simply be themselves – confident in their abilities, comfortable sharing their ideas, opinions and beliefs, and able to bring their truest and best selves to the workplace – all of which leads to a more inclusive environment and better engagement, decision-making and business outcomes. The Company embraces forward-thinking workplace practices, such as flexible work models for the long-term future of work; implements innovative talent acquisition strategies to meet its labor and business needs; and provides training and reward programs to engage, develop and retain its employees. Employees are encouraged to take advantage of the Company’s continuous growth environment, which not only teaches critical on-the-job and leadership skills, but also helps them respond to rapid change, cultivate effective networks, and create high-quality relationships necessary for personal, professional and company growth. The Company believes its approach to continuous growth for each employee is advantageously distinct from other employers. With the Company’s encouragement to do things differently, to be something greater and to create a better way, employees are more fully engaged in their day-to-day activities, producing better results for clients and advancing the Company’s strategic priorities. Additionally, the Company engages employees and fosters corporate pride by supporting community activities, initiatives and organizations that improve the quality of life near Quad’s operations.
Enhance Financial Strength and Create Shareholder Value
Quad follows a disciplined approach to maintaining and enhancing financial strength to create shareholder value, which is essential given ongoing media disruption, including printing industry challenges. 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 particular point in time. Those priorities currently include: deleveraging the Company’s balance sheet through debt and pension liability reductions; making compelling investments that drive profitable organic growth and productivity in the Company’s print manufacturing and distribution operations, as well as expansion into higher-growth marketing services; and paying dividends and stock buybacks over the long term.
To provide ongoing improvement in manufacturing productivity and, ultimately, maximize operating margins, the Company applies holistic Continuous Improvement and Lean Enterprise methodologies to simplify and streamline processes. These same methodologies are applied to its selling, general and administrative functions to create a truly Lean Enterprise. The Company continually works to lower its cost structure by consolidating its manufacturing operations 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. 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 and pension liability reduction. The Company’s disciplined financial approach also allows it to maintain sufficient liquidity and to reduce refinancing risk, with the nearest significant debt maturity of $211.5 million occurring in May 2022 and of which the Company is well-positioned to address at or before maturity due to its liquidity. The Company had total liquidity of $576.6 million as of December 31, 2021, which consisted of up to $396.7 million of unused capacity under its revolving credit arrangement, which was net of $35.8 million of issued letters of credit, and cash and cash equivalents of $179.9 million. In addition, the Company completed the amendment of its $1 billion bank debt agreement, extending the maturity to November 2026. Quad is proud of its strong and trusted banking relationships, which provide the Company with increased financial flexibility to continue to pay down debt and to make strategic investments to accelerate its position as a marketing solutions partner.
Competitive Advantages
Quad’s strategic priorities are powered by three key competitive advantages that the Company believes distinguish it from its competitors: a commitment to integrated marketing platform excellence, a commitment to ongoing innovation, and a commitment to its culture and social purpose.
Commitment to Integrated Marketing Platform Excellence
Through a 24/7 “always on” global platform featuring strategic consulting, creative talent, and production and implementation resources across North America, South America, Europe and Asia, Quad provides a better way to solve clients’ marketing and process challenges. The Company’s data-driven integrated marketing platform enables clients to strategically plan, produce, deploy, manage and measure their content across multiple media channels – rapidly, at scale and without handoffs that compromise quality, consistency and timeliness. Through this platform, Quad gives brands and marketers a more efficient, effective and frictionless way to go to market and reach consumers using its unmatched scale in client on-site services and expanded subject matter expertise in:
•Marketing Strategy, including customer insights and analytics, campaign planning and media services, to understand and connect with a target audience;
•Creative Solutions, including campaign development, photo and video production, adaptive design and cross-media production to produce quality content quickly and at scale;
•Media Deployment, including print, broadcast, all forms of digital, in-store, out-of-home and packaging, to reach multi-channel consumers while maximizing budgets; and
•Marketing Management Services, including dedicated marketing services teams, sourcing and procurement, and print and paper management, to remove friction in the process so clients can focus on other critical aspects of their business.
A key aspect of Quad’s integrated marketing platform is dedicated client on-site and near-site teams, including a network of photography and video production studios. These teams serve as a natural extension of a client’s internal marketing department, fulfilling traditional agency executional roles while also providing production efficiencies at scale for content creation, creative production and marketing execution. These teams also offer seamless access to the Company’s other integrated services and subject matter experts, removing friction in the marketing process. The Company believes this model increases process efficiencies and enables clients to focus on what they do best: sell more products, services and content. Quad has more than 500 professionals embedded at more than 90 on-site locations covering grocery, sporting goods, mass merchandisers and publishers.
Over its more than 50 year heritage, the Company also has led the industry in its printing and print distribution capabilities – the most capital intensive part of Quad’s integrated marketing platform, but also a key point of differentiation with traditional creative agencies and agency holding companies. Unlike traditional agencies or agency holding companies that develop creative and then outsource production, or traditional consulting firms that provide strategy and then outsource implementation, Quad provides all campaign elements for seamless, expedited execution. As far as printing, Quad continually invests in its equipment, automation and leading-edge technology to enhance print product features, including personalization, while maximizing labor productivity, increasing throughput and reducing labor costs. For example, through ongoing investments in digital press technology, the Company provides marketers and publishers a full range of options to produce and deliver more relevant content faster, in smaller print-run quantities, and more cost-effectively versus conventional web offset press technology. Recent investments in digital press technology also have enabled Quad to enter markets in which it previously was not as competitive. These ongoing investments, along with innovative front-end toolsets and data workflows, and industry-best, back-end logistics and postal optimization, have enabled Quad to better serve the needs of today’s leading marketers who prize direct access to consumers’ home mailboxes. Quad carries over this commitment to print media to other forms of media, including all forms of digital, broadcast, in-store and out-of-home.
Another key aspect of the Company’s manufacturing capabilities is the operation of very large facilities (greater than one million square feet) that produce multiple different product lines under one roof to maximize utilization of equipment and labor resources, while also driving savings in certain product lines (such as publications and catalogs) due to economies of scale. The Company has continued to strengthen its manufacturing operations by:
•Removing excess and/or under-utilized capacity, and by consolidating work into facilities where it can achieve the greatest manufacturing and distribution efficiencies.
•Reconfiguring and re-equipping manufacturing facilities for growth segments, such as direct mail, in-store and packaging. This includes recent investments in advanced digital sheetfed press technology that is new to the North America continent.
Postal rates are a significant component of many clients’ cost structures, and Quad believes that postal costs influence the number of pieces that its clients print and mail. Therefore, the Company has invested significantly in its mailing and distribution platform to mitigate increasing postage costs, and to help clients successfully navigate the ever-changing postal environment. One of Quad’s postal optimization programs is co-mailing, which involves the sorting and bundling of multiple printed products to be mailed to consumers in order to facilitate better integration with the United States Postal Service (“USPS”). In return, the USPS offers significant work-sharing discounts for this sorting, bundling and drop-shipping. Quad’s co-mail program is the largest in the print industry (based on information published or otherwise made available from competitors). Due to the continuously increasing costs of utilizing the USPS and to help control costs for its clients, Quad continues to expand its alternate delivery service for clients that altogether bypasses the USPS to deliver products to consumers’ doorsteps.
Commitment to Ongoing Innovation
At the forefront of innovation for more than 50 years, Quad believes its commitment to ongoing innovation drives its purpose to create a better way, which benefits all stakeholders.
Marketing Solutions
When it comes to marketing solutions, Quad takes a disciplined approach to (1) expand its existing product offerings; (2) develop and commercialize new products offerings; and (3) deliver integrated solutions that solve clients’ marketing and process challenges in the areas of Marketing Strategy, Creative Solutions, Media Deployment and Marketing Management.
The Company has hired talent with client-side marketing experience and consulting expertise to help advance conversations with clients to be more solutions-based. Quad’s Sales team is focused on understanding client pain points, and aims to expand relationships with higher-level executives responsible for corporate strategy, including Chief Executive Officers and Chief Marketing Officers, to create and implement solutions that incorporate a broad range of Quad’s products and services. Through these relationships, the Company is able to gain insights into additional client marketing needs, and then uses a disciplined process to develop and commercialize those solutions to expand and deepen Quad’s relationships. These solutions include media products, and innovative solutions for cost-effective mailing and distribution, as well as online and cloud-based solutions for effectively integrating multichannel campaigns.
Marketing Strategy: The Company has made recent investments in its data and analytics capabilities, including campaign planning and media services, to improve marketing execution and drive stronger results for clients and advertisers. The Company’s data-driven customer insights and analytics services not only help clients identify their optimal target audience based on behaviors and demographics, but also the best content and mix of channels to reach and engage that audience at the moment they are most receptive across all paid, owned and earned touchpoints. Proprietary and highly valuable household-level data and insights are derived from Quad’s unique data set, Profile Collective – a database of in-home resident media and mobile engagements, including QR code scans, that only Quad can compile. This unique information is augmented with existing third-party data and clients’ first-party information to create an unparalleled audience and household targeting tool.
Accordingly, the Company is able to outline the ideas, places, spaces and experiences that can deliver a communications strategy for maximizing end-customer value and behavior change (i.e., response). As far as measurement, the Company can provide a unified view of campaign, channel and individual tactic performance. Complementing these services are advanced testing capabilities, including a proprietary online testing platform that allows clients to rapidly test print alternatives to identify precisely what combination of format, offer, messaging and imagery will be most successful. The Company has innovated media buying by providing in-house media services for all channels, creating a single point of accountability for streamlined planning, execution, measurement and testing of all marketing efforts while reducing cycle time, leading to more opportunities to iterate, adjust and optimize spend across all channels and segments.
Creative Solutions: With its premier marketing, advertising and creative talent, Quad creates world-class campaigns that attract attention and activate audiences, and then implements those campaigns using processes that save money and time to get in market faster. Technology plays a key role in Quad’s Creative Solutions which include content workflow solutions that simplify and optimize the creative process, from concept through production; content production services that enable clients to generate high-volume, high-quality content with a noncompetitive, complementary partner; creative services that seamlessly connect strategy, concept and design; and mar-tech solutions centered on solving client challenges in the areas of marketing operations, content accessibility, content production (including but not limited to copywriting, videography and photography), content workflows, asset management, content deployment and data optimization. Clients credit the Company’s creative solutions for providing a more integrated, channel agnostic, content-first approach.
Media Deployment: Unlike traditional creative agencies or agency holding companies, Quad has the ability to seamlessly activate through-the-line media – both online and offline – and create value by understanding how every touchpoint in a client’s marketing and media mix is performing at a particular moment in time and then guiding how to optimize that investment to provide the greatest return. The Company manages hundreds of millions of dollars of gross media billings annually on behalf of its clients. As the number of marketing channels expands, each with its own return-on-investment measurement, the Company continues to innovate mar-tech solutions that help marketers know where to allocate their marketing budget to achieve their business goals. For example, through Connex, its proprietary cross-channel media optimization platform, Quad helps digital marketers eliminate the noise of disparate data sets and helps marketers identify the specific value-driving actions they need to take in real time to drive revenue and grow their business.
Quad’s maintains its leadership in print by leveraging its expertise in every facet of print production and deployment. Quad’s own Smartools® proprietary enterprise resource planning system provides seamless, real-time information flow across print sales and estimating, production planning, scheduling, manufacturing, warehousing, logistics, invoicing, reporting and customer service. Quad also has applied robotic process automation to streamline data processing and report generation. Where appropriate, Quad also leverages artificial intelligence in areas such as labor management, scheduling and predictive machine maintenance.
Quad continues to make investments in the most advanced and efficient print manufacturing and distribution capabilities in the industry, averaging 2% of its annual net sales for capital expenditures over the past five years. These investments, which include automated guided vehicles, robotic palletizers and efficient digital and wide-web offset presses, have resulted in what the Company believes is the most advanced and efficient print manufacturing and distribution capabilities in the industry and have allowed the Company to reduce the amount invested in recent years without impacting its leading technological excellence. These investments also have enabled it to remain the print industry’s high-quality, low-cost producer.
Marketing Management: Quad leverages its deep expertise and expansive network to help clients manage their operations the way it runs its own – with diligence toward efficiency and cost-savings. Through this innovative approach, Quad removes friction in the process, offering clients its network of in-house experts and capabilities for marketing and production outsourcing; sourcing and procurement of goods and services; and print and paper management. As a result, clients can focus on other critical aspects of business while leveraging Quad’s expertise and purchasing power.
Vertically Integrated Capabilities
A commitment to innovation and creating a better way to do business has also helped to expand Quad’s vertically-integrated print and non-print capabilities. Through ongoing innovation in prepress/premedia services, paper procurement and ink manufacturing (through Quad’s Chemical ResearchTechnology subsidiary), the Company maintains a competitive advantage in delivering lower costs and enhanced customer service for its clients while providing the Company with substantial control over critical links in the overall print supply chain to help control the quality, cost and availability of key inputs in the printing process.
The Company created a health and wellness subsidiary, QuadMed, LLC (“QuadMed”) in 1990 to address its own employees’ needs for quality, cost-effective health care. Today, QuadMed provides worksite health care solutions nationally for approximately 60 employers of all sizes and across all industries, including private and public sector employers. These solutions include onsite, near-site and virtual health delivery of comprehensive primary and preventive care, condition management, wellness programs and coaching, physical therapy, behavioral health, pharmacy services, occupational health and more. During the COVID-19 pandemic, Quad, its employees and their dependents have benefited from guidance and best practices provided by QuadMed, which maintains relationships with leading health care organizations and research organizations across the country.
Commitment to Culture and Social Purpose
Quad believes its ability to create value is not limited to generating economic value, but also social and environmental value, and that the Company can do good in the world while doing well as a business. Quad’s long-standing focus on “creating a better way” – a hallmark of the Company’s culture for more than 50 years – has inspired creativity in how it addresses environmental, social and business challenges and contributed to good corporate citizenship. Further, the Company believes that its distinct corporate culture, which evolved from a core set of values conceived by the Company’s late founder Harry V. Quadracci, drives thoughtful decision-making, especially with regard to its disciplined approach to managing operations, innovating solutions for clients, and better positioning the Company to prevail in a dynamic marketplace.
In this Annual Report on Form 10-K, the Company reports on its commitment to culture and social purpose through achievements in environmental, social (Human Capital Management) and governance matters as outlined below.
Environmental
Quad believes that doing what is good for the environment is good for business, and seeks to operate in an environmentally responsible manner by challenging itself to find new and better ways to conduct business that better serves the environment and reflect the values of its clients and their customers. This approach focuses on conserving raw materials, minimizing waste, recycling and reusing products and materials, and reducing environmental impacts wherever possible across Quad’s integrated marketing platform. Examples of Quad’s commitment to environmental responsibility and sustainability include:
•Aligning the Company’s efforts and initiatives with environmentally focused United Nations Sustainable Development Goals (SDG) such as SDG 12: Responsible Consumption and Production and SDG 15: Life on Land.
•Partnering with federal, state and local regulatory agencies; educational institutions; industry trade groups; and non-profit organizations to share information, best-management practices, development of new tools and metrics, and innovative technology that lead to the reduction or elimination of environmental impacts.
•Benchmarking environmental performance to evaluate the effectiveness of current environmental management programs and to identify program areas that need improvement or need to be developed.
•Reclaiming materials and diverting them from the landfill through industrial and office recycling programs.
•Becoming a founding member of Forests in Focus, a sustainability verification tool that offers the first landscape-level assessment of U.S. timberlands, giving brands reliable data on sustainability risks that may be present in the forest where they source wood fiber, the raw material used to make paper and packaging.
•Maintaining chain-of-custody certifications for sourcing materials from responsibly managed forests (Forest Stewardship Council®, Sustainable Forest Initiative, and Program for the Endorsement of Forest Certification).
•Formulating its own brand of Envirotech™ inks that contain a high percentage of renewable resource (i.e., vegetable) content.
•Developing a co-mailing program - now believed to be the largest in the printing industry - that helps consolidate loads of mail and, thereby, reduce greenhouse gas emissions impact by putting fewer trucks on the road.
•Equipping the Company’s web offset presses with dryers that can collect volatile organic compounds and use them as a supplementary fuel source to natural gas.
•Becoming a founding partner of the U.S. Department of Energy’s Better Plants Program, a voluntary program to save energy and money, and reduce the Company’s environmental footprint.
•Being an active participant in the State of Wisconsin’s Focus on Energy program, an energy efficiency and renewable resource program through which the Company has implemented multiple energy-saving upgrades to its facilities and operations.
•Becoming ISO 50001 Ready through the U.S. Department of Energy in the Company’s Hartford and West Allis, Wis., facilities, recognizing that these plants have created sound energy policies, established objectives and built structured improvements to generate deep, sustained energy savings.
•Helping clients meet their sustainability goals through sourcing sustainable materials and reporting how the Company’s performance affects their carbon footprint.
•Putting the Company’s 300-acre plus “Camp Quad” recreational center into conservancy through non-profit Tall Pines Conservancy, ensuring the land will remain undeveloped and will always be managed as a private preserve for plant life and wildlife.
•Proactively managing water consumption through a combination of best practices, capital investments, efficient platform and efforts.
•Continually educating clients, employees and communities on environmental sustainability matters. These include providing access to internal experts for consultations; hosting symposiums and other educational events at which the clients, suppliers and employees learn about the latest challenges and trends in sustainability; and advancing community education initiatives through non-profits such as Pine View Wildlife Rehabilitation and Education Center in southeastern Wisconsin which creates awareness of sustainability’s importance in daily life.
As the owner, lessee or operator of various real properties and facilities, Quad is subject to various federal, state and local environmental laws and regulations, including those relating to air emissions; waste generation, handling, management and disposal; sanitary and storm water discharge; and remediation of contaminated sites. Historically, compliance with these laws and regulations has not had a material adverse effect on the Company’s results of operations, financial position or cash flows. Compliance with existing or new environmental laws and regulations may require the Company to make future expenditures.
Human Capital Management
The Company continually invests in and supports its employees. Its people-focused, values-driven culture is a key competitive advantage that the Company believes distinguishes itself from its competitors.
Attracting, Developing and Retaining Highly Qualified Talent
Quad relies on highly qualified, skilled and knowledgeable talent to advance its strategic priorities and maintain its competitive advantage. Accordingly, the Company heavily invests in efforts to attract, develop and retain employees, and in tools, technologies, processes, training and education to increase engagement, productivity and efficiency.
As of December 31, 2021, the Company had approximately 15,100 full-time equivalent (“FTE”) employees in the following geographies:
| | | | | |
| Geographic Region | Number of FTE Employees |
| North America (Includes Mexico, Central America and the Caribbean) | 12,700 | |
| Europe, Middle East and Africa | 1,500 | |
| South America | 800 | |
| Asia | 100 | |
The ways in which Quad attracts, develops and retains highly qualified talent include, among others, the following:
•Providing and maintaining a world-class culture and environment for health and safety. The Company strives for zero workplace injuries and illnesses through its Safety Accountability for All Employees (SAFE) policy which states that no department is considered properly managed – regardless of proficiency in other managerial areas – unless it maintains an acceptable level of safety performance. All employees, from entry-level through senior management, are held accountable for adhering to the Company’s safety policies. In 2020, the Company also implemented a Safe at Work program in response to the COVID-19 pandemic, which prioritizes the health and safety of employees through a variety of initiatives. (For additional information on this program, see “COVID-19” below).
•Creating jobs with competitive pay and innovative benefits that support families, strengthen communities and provide long-term career growth opportunities. The Company regularly evaluates its pay practices and structures, including implementing a new wage structure over the past few years for hourly manufacturing employees in its most competitive labor markets.
•Offering career development through a variety of programs, including Accelerated Career Training, which provides a fast-track for career advancement in manufacturing positions; People Leading People that focuses on best-in-class manager behaviors; Corporate Trainee Program, which develops skills and leadership abilities through a series of agency and corporate rotations; and hands-on, mentor-led manufacturing apprenticeship programs, including registered apprenticeships and youth apprenticeships.
•Listening to employees through annual engagement surveys and open forums at department and company-wide meetings to help better understand what employees like about working for the Company, what it can improve, and what could drive greater job satisfaction, and acting on that employee feedback.
•Fostering pride through employee recognition programs, including a new engagement and retention award for manufacturing locations that work to create an engaging workplace; employee and family events; and community outreach activities.
•Offering a new flexible work model (aka The Future of Work @ Quad) for office-based employees who have been working remotely during the pandemic that provides benefits to both employees and the business by emphasizing flexibility based on roles, technology requirements and responsibilities.
Compensation and Benefits
The Company invests in its workforce by offering market competitive compensation, regularly conducting total compensation benchmarking as part of its basic operations, as well as offering a comprehensive benefits package as part of its Total Rewards program. Features of this program include:
•Comprehensive medical, prescription, dental and vision coverage to employees, including access to 24/7 telemedicine and virtual care being piloted in certain regions.
•On-site and near-site primary and specialty healthcare, pharmacy, dental, vision and physical therapy services and fitness centers at several large-scale employee locations, owned and operated by the Company’s health and wellness subsidiary, QuadMed.
•Robust holistic wellness programming for physical, emotional, financial and social well-being through the company’s QLife Wellness Program.
•401(k) retirement savings program with annual discretionary Company match as well as retirement planning and financial wellness resources and webinars.
•Paid vacation time and holidays.
•Short- and long-term disability insurance, and employer-paid life insurance.
•On-site affordable childcare and summer camps for school-aged children at some of the Company’s largest manufacturing locations.
Diversity, Equity and Inclusion
Diversity, Equity and Inclusion (DEI) is part of Quad’s overall business strategy and a key driver behind specific business outcomes, including attracting and retaining talent, strengthening and protecting its brand reputation, increasing employee productivity, and competing in growth verticals. Quad’s DEI strategy is focused on (1) achieving a workforce that reflects the communities where employees live and work, as well as the clients who trust Quad with their business; (2) ensuring that procedures, processes and distribution of resources create equal opportunities and fair and just outcomes; and (3) creating a safe and open environment where all Quad employees can bring their truest and best selves to work every day, consistent with the Company’s long-standing values.
The Company is focused on the following areas to ensure it achieves its stated DEI goals:
•Launching a DEI task force to build and execute a more comprehensive and sustainable strategy that supports learning and development, intercultural awareness and growth, removes inhibitors to true inclusion in areas such as workforce policies and procedures, procurement and how the Company serves its clients, creates a consistent and common language throughout the organization to increase understanding, and establishes metric reporting.
•Strengthening Quad’s commitment to DEI through partnerships with nationally recognized DEI experts, consultants and researchers that include tailored learning and development programs for employees.
•Supporting employee-led Business Resource Groups (BRGs), which are designed to cultivate an open company culture for employees who share common interests and can easily and regularly connect to encourage the growth and development of each other. The Company currently has six BRGs supporting women, military veterans and their families, the LGBTQIA+ community, Black employees, Hispanic / Latinx employees and working parents.
•Investing in programs to support underserved communities, such as Milwaukee-based Running Rebels’ Pipeline2Promise workforce development program where Quad connects people to jobs, and provides the tools, training and transportation to set them up for success.
•Engaging employees in DEI-related topics through I am. We Are., an internal education and communication platform.
•Supporting the education and advancement of talent from underrepresented communities in the creative industry through scholarships at institutions committed to diversifying the talent pipeline and talent development programs, such as The Brandlab, a non-profit that introduces young people who are racially or ethnically diverse or from lower-income households to viable creative careers.
•Growing a more inclusive supplier base by developing mutually beneficial relationships with suppliers representing women-, minority-, LGBTQIA+, veteran- and disability-owned businesses.
Building Strong Communities
The Company continuously seeks to build strong relationships with the communities where employees live and work through volunteerism, outreach, philanthropy, pro bono and in-kind services, and charitable giving. Through its efforts, the Company has made a meaningful difference through support of:
•Important community pillars, such as firefighters, schools, libraries and military veterans groups;
•Organizations that help underserved communities, such as non-profits dedicated to improving educational or employment opportunities for individuals who are racially or ethnically diverse or from lower-income households; and
•Employees who are involved in local volunteer efforts and charitable events, from stocking food pantries to assembling care packages for military service members to participating in fundraisers and holiday toy and clothing drives.
Communication
The Company believes that timely, transparent communication with all employees is an important engagement tool, and uses a variety of channels to inform and educate employees about business operations and matters of personal importance (e.g., benefits). These channels include InsideQuad, the employee intranet; executive blogs and video logs (vlogs); executive town halls; department meetings; email; text messaging; in-plant electronic and print signage; and in-home mailings. Quad’s CEO hosts regular town halls for all employees, accessible online and also posts video and written messages.
Corporate Governance
Effective corporate governance has been a part of Quad since its founding and is informed by the Company’s values, especially Do the Right Thing, which strengthens partnerships, reduces risk and creates sustainable value for the long term. Key aspects of Quad’s approach to strong governance practices include:
•Maintaining consistent, stable leadership that is focused on making decisions in the best long-term interest of the Company. It is able to do this because of the Quadracci family voting control, which enables the Company to manage its strategy and disciplined financial policy by being able to avoid the pitfalls of short-term decision making that could potentially jeopardize the stability and longevity of the Company.
•Retaining an experienced management team with a proven track record that is committed to preserving the Company’s values-based culture. The senior management team includes entrepreneurially minded leaders with a long tenure at Quad combined with strategic new hires or leaders from recent acquisitions, further supplemented by managers and employees committed to advancing the Company as a marketing solutions partner. The Company believes the experience and stability of senior management, paired with next-generation talent, will contribute to its long-term success.
•Sustaining a disciplined approach to managing operations and commitment to innovating solutions to drive growth for clients and the Company.
•Reducing risk to the business and to clients through a formal enterprise risk management program that is guided by a team that takes a strategic role in risk identification and response planning, and is managed by an executive risk steering committee with overall program responsibility.
•Maintaining a high standard for corporate compliance and ethical business practices to keep the business healthy and protect the Company and its stakeholders from risk. The Company’s values, especially Do the Right Thing, serve as the foundation for Quad’s ethical approach to decision-making and business practices. The Company’s Code of Conduct appears on the employee intranet and corporate website, and explicitly states that Quad is committed to a workplace where every employee, regardless of job title or position, is responsible for doing the right thing.
•Training all employees annually on a suite of ethics and compliance topics, including Code of Conduct, anti-harassment, conflict of interest, C-TPAT, data privacy, HIPAA, information security and physical security, acceptable use policy for technology assets, and, where relevant, fraud, waste and abuse training, and anti-bribery and anti-corruption training.
•Making it safe and easy for employees to report violations of the Code of Conduct through multiple channels, including a 24/7 Ethics and Compliance Hotline or web-based reporting tool with guidance in multiple languages.
•Continually updating and strengthening the Company’s information and data security program to address the fast-changing threat landscape and ensure oversight. The program includes ongoing employee
education to ensure physical and digital workspaces remain secure, valuable data remains private, spot potential phishing and malware threats, and avoid risky behaviors.
•Creating a Supplier Code of Conduct to ensure suppliers, vendors, contractors, consultants, agents and other providers of goods and services follow the Company’s policies related to business integrity, ethical labor and human rights practices, associate health and safety, and environmental management. This Code also includes anti-corruption and anti-bribery policies.
COVID-19
Throughout the ongoing COVID-19 pandemic, Quad has prioritized protecting employees’ health and well-being while also protecting the financial health and long-term viability of the Company. The Company’s COVID-19 response is led by an internal Crisis Management Team consisting of leaders from Risk Management, Human Resources, Legal, Manufacturing, Agency Solutions and Communications, as well as medical professionals from QuadMed, the Company’s health and wellness subsidiary. The Company’s response is informed by guidance from the public health professionals, including the Centers for Disease Control and Prevention, local health authorities, and direction from federal and state governments, along with best practices and recommendations from QuadMed, which maintains relationships with leading health care organizations and research universities across the country.
Quad’s Safe at Work program, updated throughout the pandemic, provides for the health and safety of employees while we continue to meet the needs of clients. This program:
•Strongly encourages all employees and family members to get the COVID-19 vaccine and booster, making it as easy as possible to do so through the Company’s own QuadMed health clinics and on-site vaccination events. Quad also offered incentives and a competition between manufacturing facilities to achieve higher vaccination rates.
•Details policies and procedures for mask wearing, social distancing, good hygiene, daily disinfecting and more to protect against COVID-19.
•Features an internal Rapid Response Team of HR and other professionals to assess each potential COVID-19 case, perform contact tracing, and support and track employees through their return to work at the appropriate time.
•Includes a branded communication strategy built on transparent, frequent and consistent communication across multiple channels and regularly featuring QuadMed healthcare professionals.
•Equips any employee able to perform their duties remotely to work from home to prevent the spread of the virus, especially during times of high transmission rates.
Clients
Quad enjoys long-standing relationships with a diverse base of clients, which includes both national and regional corporations in North America, South America, Europe and Asia. The Company’s clients include industry-leading blue chip companies that operate in a wide range of industries and serve both businesses and consumers, including retailers, publishers and direct marketers. The Company’s relationships with its largest clients average over 17 years in duration.
In 2021, Quad served approximately 4,600 clients, and its ten largest clients accounted for approximately 16% of consolidated sales, with none representing more than 5% individually. The Company believes that its large and diverse client base, broad geographic coverage and extensive range of marketing capabilities are competitive strengths.
Patents, Trademarks and Trade Names
Quad operates research and development facilities that support the development of new equipment, process improvements, raw materials and content management, and distribution technologies to better meet client needs and improve operating efficiencies. The Company continues to innovate within the printing and print-related industry and, as a result, has developed what it believes to be one of the most powerful patent portfolios in the print industry.
Quad currently holds or has rights to commercialize a wide variety of worldwide patents and applications relating to its business. The Company intends to continue to file patent applications that it believes will help ensure the continued strength of the Company and its portfolio. Additionally, the Company markets products, services and capabilities under a number of trademarks and trade names. Quad aggressively defends its intellectual property rights and intends to continue to do so in the future.
Raw Materials
The primary raw materials that Quad 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; however, based on market conditions, the current supply is under pressure due to supply chain shortages and higher than expected inflation. The Company generally buys these raw materials based upon market prices that are established with the vendor as part of the procurement process.
Approximately half of the paper used in the printing process is supplied directly by the Company’s 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 Company generally cannot 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 logistic operations, however, the Company is able to pass a substantial portion of any increase in fuel prices directly to its clients.
Strategic Investments
On June 15, 2020, the Company purchased units of equity in Rise Interactive Media & Analytics, LLC (“Rise”) from a previous holder in the form of a $15.9 million note payable paid in full on October 1, 2020, and $1.0 million cash paid on June 15, 2020. In addition, on June 15, 2020, Rise purchased and retired units of equity from previous holders of Rise for $5.4 million in cash. These transactions resulted in the Company’s ownership interest changing from 57% to 99%. On April 30, 2021, Rise purchased and retired units of equity from previous holders of Rise for $1.9 million in cash. This transaction resulted in the Company’s ownership interest changing from 99% to 100%. The Company began consolidating the results of Rise in the Company’s consolidated financial statements when its equity ownership increased to 57% on March 14, 2018. The portion of Rise’s operating results not owned by the Company of 43% through June 15, 2020 and of 1% from June 15, 2020 through April 30, 2021, was recorded as net earnings (loss) attributable to noncontrolling interests on the consolidated statement of operations. The portion of net assets not owned by the Company was recorded as noncontrolling interests as of the December 31, 2020 consolidated balance sheet.
For additional information related to the Company’s strategic investment activity, see Note 3, “Strategic Investments,” to the consolidated financial statements in Part II, Item 8, “Financial Statements and Supplementary Data,” of this Annual Report on Form 10-K.
Information About Our Executive Officers
The following table sets forth the names, ages (as of January 31, 2022) and positions of Quad’s executive officers. | | | | | | | | | | | | | | |
| Name | | Age | | Position |
| J. Joel Quadracci | | 53 | | Chairman, President and Chief Executive Officer |
| Eric N. Ashworth | | 56 | | Executive Vice President of Product and Market Strategy, and President of Quad Agency Solutions |
| Julie A. Currie | | 59 | | Executive Vice President and Chief Revenue Officer |
| Joshua J. Golden | | 50 | | Chief Marketing Officer |
| David J. Honan | | 53 | | Executive Vice President and Chief Operating Officer |
| Jennifer J. Kent | | 50 | | Executive Vice President and Chief People & Legal Officer |
| Donald M. McKenna | | 49 | | Executive Vice President and Chief Administrative Officer |
| Anthony C. Staniak | | 49 | | Chief Financial Officer |
| Kelly A. Vanderboom | | 47 | | Executive Vice President, President of Logistics and Treasurer |
| Anne M. Bauer | | 57 | | Vice President and Chief Accounting Officer |
| Steven D. Jaeger | | 57 | | Vice President and Chief Information Officer |
Mr. Quadracci has been a director of Quad since 2003, its President since January 2005, its President and Chief Executive Officer since July 2006 and its Chairman, President and Chief Executive Officer since January 2010. Mr. Quadracci joined Quad in 1991 and, prior to becoming President and Chief Executive Officer, served in various capacities, including Sales Manager, Regional Sales Strategy Director, Vice President of Print Sales, Senior Vice President of Sales and Administration, and President and Chief Operating Officer. He serves on the board of directors for Plexus Corp., Pixability, Inc., Road America, Inc., Children’s Hospital of Wisconsin, the National Association of Manufacturers, and the Metropolitan Milwaukee Association of Commerce. He also serves on the board of trustees for the Milwaukee Art Museum and on the advisory council of the Smithsonian National Postal Museum and is a member of the Greater Milwaukee Committee. Mr. Quadracci received a Bachelor of Arts in Philosophy from Skidmore College in 1991. Mr. Quadracci is the brother of Kathryn Quadracci Flores, M.D., a director of Quad, and the brother-in-law of Christopher B. Harned, a director of Quad. Quad believes that Mr. Quadracci’s experience in the printing industry and in leadership positions within Quad qualify him for service as a director of Quad.
Mr. Ashworth has served as Executive Vice President of Product and Market Strategy since joining Quad in 2015, and President of Quad Agency Solutions since April 2016. Mr. Ashworth also serves on the board of directors of Ash+Ames, and is a board member of the Chicago Children’s Choir. Prior to joining Quad, Mr. Ashworth was President of SGK, Inc. (formerly Schawk, Inc.) from July 2012 to July 2015, Chief Growth and Strategy Officer of SGK from September 2009 to July 2012, and Global Chief Growth Officer of Anthem Worldwide (a division of SGK) from November 2003 to 2010. Prior thereto, Mr. Ashworth was Co-founder and President of BlueMint Associates from June 2002 through November 2003, after serving in various marketing roles at Fitch San Francisco, Addis Interaction, Levi Strauss & Co., Clorox, Colgate-Palmolive and National Semiconductor.
Ms. Currie has served as Executive Vice President and Chief Revenue Officer since November 2020. She previously served as Executive Consultant of FCM, LLC from 2019 to 2020. Prior thereto, Ms. Currie served as Senior VP of Global Retail Product Leadership from 2016 to 2019, as Senior VP, Global Loyalty Commercial Director from 2012 to 2016, as Senior VP, Global Business Services North America from 2008 to 2012, as VP, National Accounts Group Client Director from 2003 to 2007, and as VP, Group Client Director from 2001 to 2003 of The Nielsen Company. Ms. Currie also serves on the board of Boys & Girls Club of Lake County.
Mr. Golden has served as Chief Marketing Officer since joining Quad in July 2021. Prior to joining Quad, Mr. Golden was the President & Publisher of Ad Age from 2016 to 2021. Prior thereto, Mr. Golden served as VP, Global Digital Marketing & Communications of Xerox from March 2015 to June 2016; as Chief Marketing Officer of Story Worldwide from September 2011 to March 2015; as Chief Digital Officer of Grey Worldwide from September 2010 to September 2011; as Managing Director, Digital of Euro RSCG Worldwide from December 2007 to September 2010; as Group Director of Digital Marketing of NBC Universal from January 2006 to December 2007; and as Integrated Account Director, AT&T and Xerox at Young & Rubicam from November 2000 to January 2006.
Mr. Honan has served as Executive Vice President and Chief Operating Officer since January 2022. He previously served as Executive Vice President and Chief Financial Officer from January 2015 to December 2021; Vice President and Chief Financial Officer from March 2014 to January 2015; Vice President and Chief Accounting Officer from July 2010 to March 2014; Vice President and Corporate Controller from December 2009 to July 2010; and Corporate Controller from when he joined Quad in May 2009 until December 2009. Currently, he serves on the Advisory board of FM Global. Prior to joining Quad, Mr. Honan served as Vice President, General Manager and Chief Financial Officer of Journal Community Publishing Group, a subsidiary of media conglomerate Journal Communications Inc., for five years. Before joining Journal Community Publishing Group, Mr. Honan worked in executive-level roles in investor relations and corporate development at Newell Rubbermaid, a global marketer of consumer and commercial products. Prior thereto, Mr. Honan worked at the accounting firm Arthur Andersen LLP for 11 years.
Ms. Kent has served as Executive Vice President and Chief People & Legal Officer since January 2022 and has served in this role since June 2015 under its previous title of Executive Vice President of Administration and General Counsel. She previously served as Vice President and General Counsel from December 2013 to June 2015, and as Quad’s Assistant General Counsel from when she joined Quad in August 2010 until December 2013. Ms. Kent serves on the board of directors of Mayville Engineering Company, Inc. (NYSE: MEC), a manufacturer of tooling, production fabrication, coating, assembly and aftermarket components, and Building Brave, a non-profit virtual community for professional women. Prior to joining Quad, Ms. Kent held various positions in the legal department at Harley-Davidson Motor Company from March 2003 to July 2010. Prior thereto, Ms. Kent served as an Assistant United States Attorney for the Eastern District of Wisconsin and practiced law at Foley & Lardner LLP, a Milwaukee-based law firm.
Mr. McKenna has served as Executive Vice President and Chief Administrative Officer of Quad since January 2022, and Senior Vice President of Sales Administration of Quad since August 2018. He previously served as Vice President of Sales Administration from June 2013 to August 2018, and Product Planning Manager from March 2010 to June 2013. Prior to joining Quad, Mr. McKenna worked at J.S. Eliezer Associates, a print consulting firm in Stamford, Conn., beginning in 1998 and was named President of the firm in 2004.
Mr. Staniak has served as Chief Financial Officer of Quad since January 2022. Previously, he served as Vice President of Finance from March 2017 until January 2022. Joining the company in 2009 as Director of External Reporting, Mr. Staniak was subsequently named Director of Internal Audit in 2011; Executive Director – Financial
Controller in 2013; Chief Accounting Officer in 2014; and Vice President and Chief Accounting Officer in 2015. Prior to joining Quad, Mr. Staniak was CFO of data consulting firm Sagence, Inc. He began his career at the accounting firm Arthur Andersen in 1995. Mr. Staniak is a member of the Wisconsin Institute of Certified Public Accountants and the Board of Directors for the Zoological Society of Milwaukee.
Mr. Vanderboom has served as Executive Vice President since 2018, and Treasurer and President of Logistics since March 2014. Mr. Vanderboom was put in charge of leading Quad’s EBITDA initiatives in October of 2019. Since joining Quad in 1993, he has served in various leadership capacities, including Controller of Quad’s Distribution and Facilities departments from 2004 until 2006; Director of Treasury, Risk & Planning, beginning in 2007, and Vice President, beginning in 2008.
Ms. Bauer has served as Vice President since January 2022 and Chief Accounting Officer since March 2017. She previously served as Director - Corporate Controller of Quad from May 2016 until March 2017 and then as Executive Director and Chief Accounting Officer until January 2022. She joined Quad in September 2011, serving as Director of Corporate Accounting until May 2016. Prior to joining Quad, Ms. Bauer held various accounting positions at Journal Communications, Inc. during her 18 years there, including Vice President and Controller from June 2000 until September 2011.
Mr. Jaeger has served as Vice President and Chief Information Officer since November 2015. He previously served as Executive Vice President, President of Direct Marketing and Chief Information Officer from November 2014 to November 2015; as Executive Vice President, President of Direct Marketing and Media Solutions and Chief Information Officer from March 2014 to November 2014; as Corporate Vice President of Information and Technology since 2013; as Vice President of Information Systems and Infrastructure from 2007 to 2012; and as President of Quad/Direct from August 2007 until 2013. Prior thereto, Mr. Jaeger served as Quad’s Vice President of Information Systems from 1998 to 2006 and worked in various other capacities since he joined Quad in 1994. Prior to joining Quad, Mr. Jaeger worked for Andersen Consulting for eight years.
Executive officers of Quad are elected by and serve at the discretion of Quad’s Board of Directors. Other than described above, there are no family relationships between any directors or executive officers of Quad.
Item 1A. Risk Factors
You should carefully consider each of the risks described below, together with all of the other information contained in this Annual Report on Form 10-K, before making an investment decision with respect to Quad’s securities. If any of the following risks develop into actual events, the Company’s business, financial condition or results of operations could be materially and adversely affected, and you may lose all or part of your investment.
Risks Relating to Quad’s Business, Operations and Industry
The Company may be adversely affected by increases in its operating costs, including the cost and availability of paper, ink components and other raw materials, labor-related costs, fuel and other energy costs and freight rates.
The primary raw materials that the Company uses in its print business are paper, ink and energy. 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. The price and availability of ink and ink components may be adversely affected by the availability of component raw materials, labor and transportation, all of which have been negatively impacted by the continuing COVID-19 pandemic.
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 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 may have an impact on client demand for printed products. If the Company passes along increases in the cost of paper and the price of the Company’s products and services increases as a result, client demand could be adversely affected, and thereby, negatively impact the Company’s financial performance. If the Company is unable to continue to pass along increases in the cost of paper to its clients, future increases in paper costs would adversely affect its margins and profits.
Due to the significance of paper in the Company’s print business, it is dependent on the availability of paper. In periods of high demand, certain paper grades have been in short supply, including grades used in the Company’s business. In addition, during periods of tight supply, many paper producers allocate shipments of paper based upon historical purchase levels of clients. Additionally, the declining number of paper suppliers has resulted in a contraction in the overall paper manufacturing industry. This contraction of suppliers may cause overall supply issues, may cause certain paper grades to be in short supply or unavailable, and may cause paper prices to substantially increase.
Although historically the Company generally has not experienced significant difficulty in obtaining adequate quantities of paper, continued decline in suppliers, changes in United States import or trade regulations, or other developments in the overall paper markets (such as the continuing COVID-19 pandemic) could result in a decrease in the supply of paper and could adversely affect the Company’s revenues or profits. In addition, the Company may not be able to resell waste paper and other by-products or the prices received for their sale may decline substantially.
The Company is dependent upon the vendors within the Company’s supply chain to maintain a steady supply of inventory, parts and materials. Many of the Company’s products are dependent upon a limited number of vendors, and significant disruptions could adversely affect operations (including as a result of the continuing COVID-19 pandemic). Under current market conditions, and in light of the COVID-19 pandemic, it is possible that one or more of the Company’s vendors will be unable to fulfill their operating obligations due to financial hardships, liquidity issues or other reasons.
The Company generally cannot 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.
Labor represents a significant component of the cost structure of the Company. Increases in wages, salaries and the cost of medical, dental, pension and other post-retirement benefits, including increases from the continuing COVID-19 pandemic, may impact the Company’s financial performance. Changes in interest rates, investment returns or the regulatory environment may impact the amounts the Company will be required to contribute to the pension plans that it sponsors and may affect the solvency of these pension plans. The Company may be unable to achieve labor productivity targets, to retain employees or labor may not be adequately available in locations in which the Company operates, which could negatively impact the Company’s financial performance.
Freight rates and fuel costs also represent a significant component of the Company’s cost structure and the COVID-19 pandemic has resulted in upward price pressure on freight, as the number of available drivers have been reduced. In general, the Company has been able to pass along increases in the cost of freight and fuel to many of its clients. If the Company is not able to pass along a substantial portion of increases in freight rates or in the price of fuel, future increases in these items would adversely impact the Company’s margin and profits. If the Company passes along increases in the cost of freight and fuel and the price of the Company’s products and services increases as a result, client demand could be adversely affected, and thereby, negatively impact the Company’s financial performance.
Decreasing demand for printing services caused by factors outside of the Company’s control, including the substitution of printed products with digital content, the continuing COVID-19 pandemic and prior recessions, as well as significant downward pricing pressure, may continue to adversely affect the Company.
The Company and the overall printing industry continues to experience a reduction in demand for printed materials and overcapacity due to various factors including the sustained and increasing shift of digital substitution by marketers and advertisers (to both replace and augment campaigns that were historically focused on print), as well as the continuing COVID-19 pandemic and prior recessions (which have severely impacted print volumes and further accelerated the impact of media disruption). The impacts of overcapacity, as well as intense competition, have led to the Company experiencing significant downward pricing pressures for printing services in recent years and such pricing may continue to decline from current levels. Any future increases in the supply of printing services or decreases in demand could cause prices to continue to decline, and prolonged periods of low prices, weak demand and/or excess supply could have a material adverse effect on the Company’s business growth, results of operations and liquidity.
The media landscape is experiencing rapid change due to the impact of digital media and content on printed products. Improvements in the accessibility and quality of digital media through the online distribution and hosting of media content, mobile technologies, e-reader technologies, digital retailing and the digital distribution of documents and data has resulted and may continue to result in increased consumer substitution. Continued consumer acceptance of such digital media, as an alternative to print materials, is uncertain and difficult to predict and may decrease the demand for the Company’s printed products, result in reduced pricing for its printing services and additional excess capacity in the printing industry, and adversely affect the results of the Company’s operations.
The COVID-19 pandemic has had, and will continue to have, a negative impact on the Company’s business, financial condition, cash flows, results of operations and supply chain.
The COVID-19 pandemic resulted in national, state and local government authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, border closings, restrictions on public gatherings, quarantining of people who may have been exposed to the virus, shelter-in-place restrictions, and limitations or shutdowns of business operations. These measures, some of which are continuing or being re-implemented in light of new variants of the virus, have impacted and may further impact the Company’s workforce and operations, the operations of its clients, and those of its suppliers. Quad has significant operations in the United States and printing operations or investments in printing operations in England, France, Germany, Poland, Argentina, Colombia, Mexico, Peru, Brazil and India, and each of these countries has been affected by the pandemic and taken measures to try to contain it, resulting in disruptions at some of the Company’s printing facilities and support operations. There is still uncertainty regarding the full impact and duration of such measures and potential future measures, and restrictions on the Company’s access to its facilities or on its support operations or workforce, or similar limitations for Quad’s suppliers.
The COVID-19 pandemic has weakened demand for the Company’s products and services, which has resulted in a decline in sales, and it remains uncertain what impact this weakened demand will have on future sales once conditions continue to further improve. The pandemic has also disrupted the Company’s supply chain and resulted in rising inflationary cost pressures within the Company’s raw materials, distribution and labor.
The COVID-19 pandemic has had, and will continue to have, a negative impact on the Company’s business, financial condition, cash flows, results of operations, supply chain and raw materials availability, although the full extent is still uncertain. As the pandemic continues to evolve and new variants continue to emerge, the extent of the impact on the Company’s business, financial condition, cash flows, results of operations and supply chain will depend on future developments, including, but not limited to, the continued duration of the pandemic, government actions to contain the virus and/or treat its impact, restrictions on travel, the duration, timing and severity of the impact on client spending and consumer demand, and how quickly and to what extent normal economic and operating conditions can resume, all of which are still uncertain and cannot be predicted.
In addition to the COVID-19 pandemic, future natural disasters, epidemics, other public health crises, conflicts, wars, terrorist attacks, fires or other catastrophic events affecting the Company’s plants, distribution centers or other facilities, could also materially disrupt the Company’s operations and result in an adverse impact on its financial
condition, results of operations and cash flows, which could force the Company to reassess its strategic alternatives involving certain of its operations.
The Company operates in a highly competitive environment.
The advertising and marketing services industries are highly competitive and are expected to remain so. Any failure on the part of the Company to compete effectively in the markets it serves could have a material adverse effect on its results of operations, financial condition or cash flows and could require changes to the way it conducts its business or require it to reassess strategic alternatives involving its operations.
The Company operates primarily in the commercial print portion of the printing industry, which is highly fragmented and competitive in both the United States and internationally. The Company competes for business not only with large and mid-sized printers, but also with smaller regional printers and the growing forms of digital alternatives to print. In certain circumstances, due primarily to factors such as freight rates and client preference for local services, printers with better access to certain regions of a given country may be preferred by clients in such regions.
Some of the industries that the Company services have been subject to consolidation efforts, leading to a smaller number of potential clients. Furthermore, if the smaller clients of the Company are consolidated with larger companies using other printing companies, the Company could lose its clients to competing printing companies.
Failure to attract and retain qualified talent across the enterprise could materially adversely affect the Company’s business, competitive position, financial condition and results of operations.
The Company continues to be substantially 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 the Company’s existing clients. The Company believes that there is significant competition for production personnel with the skills and technical knowledge that the Company requires, especially in light of the labor shortages resulting from the COVID-19 pandemic. The Company’s ability to continue efficient operations, reduce production costs, and consolidate operations will depend, in large part, on the Company’s success in recruiting, training, integrating and retaining sufficient numbers of production personnel to support the Company’s production, cost savings and consolidation targets. New hires require extensive training and it may take significant time before they achieve full productivity. In addition, an increase in the wages paid by competing employers, including as a result of the COVID-19 pandemic, could result in an increase in the wage rates that the Company must pay. As a result, the Company may incur additional costs to attract, train and retain employees, including expenditures related to salaries and benefits, and the Company may lose new, as well as existing, employees to competitors or other companies before the Company realizes the benefit of its investment in recruiting and training them. If the Company is unable to hire and train sufficient numbers of personnel, the Company’s business would be adversely affected.
The Company’s future success also depends on its continuing ability to identify, hire, develop, and retain its executive management team, including its Chief Executive Officer, and other personnel for all areas of the organization.
Approximately 1,300 of the Company’s United States and international employees are covered by an industry wide agreement, a collective bargaining agreement or through a works council or similar arrangement. While the Company believes its employee relations are good and that the Company maintains an employee-centric culture, and there has not been any material disruption in operations resulting from labor disputes, a strike or other forms of labor protest affecting the Company’s United States or international plants, distribution centers or other facilities in the future could materially disrupt the Company’s operations and result in an adverse impact on its financial condition, results of operations and cash flows, which could force the Company to reassess its strategic alternatives involving certain of its operations.
The Company’s transformation to a marketing solutions partner increases the complexity of the Company’s business, and if the Company is unable to successfully adapt its business processes as required by these new markets, the Company will be at a competitive disadvantage and its ability to grow will be adversely affected.
As the Company expands its integrated marketing platform, the overall complexity of the Company’s business increases at an accelerated rate and the Company becomes subject to different market dynamics. The new markets into which the Company is expanding, or may expand, may have different characteristics from the markets in which the Company historically competed. These different characteristics may include, among other things, demand volume requirements, demand seasonality, product generation development rates, client concentrations and performance and compatibility requirements. The Company’s failure to make the necessary adaptations to its business model to address these different characteristics, complexities and new market dynamics could adversely affect the Company’s operating results.
The Company may not be able to reduce costs and improve its operating efficiency rapidly enough to meet market conditions.
Because the markets in which the Company competes are highly competitive, the Company will need to continue to improve its operating efficiency in order to maintain or improve its profitability. There can be no assurance that the Company’s continuing cost reduction efforts will continue to be beneficial to the extent anticipated, or that the estimated productivity, cost savings or cash flow improvements will be realized as anticipated or at all. If the Company’s efforts are not successful, it could have an adverse effect on the Company’s operations and competitive position. In addition, the need to reduce ongoing operating costs have and, in the future, may continue to result in significant up-front costs to reduce workforce, close or consolidate facilities, or upgrade equipment and technology.
Changes in postal rates, postal regulations and postal services may adversely impact clients’ demand for print products and services.
Postal costs are a significant component of the cost structures of many of the Company’s clients and potential clients. Postal rate changes and USPS regulations that result in higher overall costs can influence the volume that these clients will be willing to print and ultimately send through the USPS.
Integrated distribution with the 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. Without decreased operational costs structures, increased efficiencies, increased revenues or action by Congress to reform the USPS’ cost structure, these losses will continue into the future. As a result of these financial difficulties, the USPS has come under increased pressure to adjust its postal rates and service levels. Additional price increases may result in clients reducing mail volumes and exploring the use of alternative methods for delivering a larger portion of their products, such as continued diversion to the internet and other alternative media channels in order to ensure that they stay within their expected postage budgets. There are also continued risks of delivery delays due to ongoing COVID-19 impacts on daily operational staffing at the USPS.
The USPS offers “work-share” discounts that provide incentives to co-mail and place product as far down the mail-stream as possible. Discounts are earned as a result of less handling of the mail, and therefore, lower costs for the USPS. As a result, the Company has made substantial investments in co-mailing technology and equipment to ensure clients benefit from these discounts. As the USPS reacts to its financial difficulties, it often revises design standards for mail entering its system. These design standards often increase costs for clients and, in turn, decrease the value of the cost reductions that the Company’s co-mailing services provide. If the incentives to co-mail are decreased by USPS regulations, the overall cost to mail printed products will increase and may result in print volumes declining.
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 may result 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. This may lead to price spikes for mailers and may also reduce the incentive for the USPS to continue to take out costs and instead continue to rely on postage to cover the costs of an outdated postal service that does not reflect the industry’s ability or willingness to pay. The uncertainty as to how much of the authority the USPS will use also creates potential volume declines as rate predictability with respect to cost is no longer known for mailers. The result may be reduced demand for printed products as clients may move more aggressively into other delivery methods, such as the many digital and mobile options now available to consumers.
The Company may suffer a data-breach of sensitive information, ransomware attack or other cyber incident. If the Company’s efforts to protect the security of information or systems are unsuccessful, any such failure may result in costly government enforcement actions and/or private litigation, and the Company’s business and reputation could suffer.
The Company and its clients are subject to various United States and foreign cyber-security laws, which require the Company to maintain adequate protections for electronically held information. The Company may not be able to anticipate techniques used to gain access to the Company’s systems or facilities, the systems of the Company’s clients or vendors, or implement adequate prevention measures. Moreover, unauthorized parties may attempt to access the Company’s systems or facilities, or the systems of the Company’s clients or vendors, through fraud or deception. In the event and to the extent that a data breach, ransomware attack or other cyber incident occurs, such breach could have an adverse effect on the Company’s business and results of operations. Complying with these various laws could cause the Company to incur substantial costs or require changes to the Company’s business practices in a manner adverse to the Company’s business.
Negative publicity could have an adverse impact on the Company’s business.
Unfavorable publicity, whether accurate or not, related to the Company or the Company’s executive management team, employees, board of directors, operations, business or prospects, or to the Quadracci family shareholders of the Company, could negatively affect the Company’s reputation, stock price, ability to attract new clients from growth vertical industries, ability to attract and retain high-quality talent, or the performance of the Company’s business.
In addition, there has been a substantial increase in the use of social media platforms, including blogs, social media websites, and other forms of internet-based and mobile communications, which allow individuals access to a broad audience of consumers and other interested persons. Many social media platforms immediately publish the content their subscribers’ and participants’ post, often without filters or checks on accuracy of the content posted. Information or commentary posted on such platforms at any time may be adverse to the Company’s interests or may be inaccurate, each of which may harm the Company’s reputation, business or prospects. The harm may be immediate without affording the Company an opportunity for redress or correction.
Future declines in economic conditions may adversely affect the Company’s results of operations.
In general, demand for the Company’s products and services is highly related to general economic conditions in the markets the Company’s clients serve. Declines in economic conditions in the United States or in other countries in which the Company operates, including as a result of the continuing COVID-19 pandemic, may adversely impact the Company’s financial results, and these impacts may be material. Because such declines in demand are difficult to predict, the Company or the industry may have increased excess capacity as a result. An increase in excess capacity has resulted, and may continue to result, in declines in prices for the Company’s products and services. In addition, a prolonged decline in the global economy and an uncertain economic outlook, including as a result of the COVID-19 pandemic, has and could further reduce the demand in the printing industry. Economic weakness and constrained advertising spending have resulted, and may in the future result, in decreased revenue, operating margin, earnings and growth rates and difficulty in managing inventory levels and collecting accounts receivable. The Company has experienced, and expects to experience in the future, excess capacity and lower demand due to economic factors affecting consumers’ and businesses’ spending behavior, including as a result of the continuing COVID-19 pandemic. Uncertainty about future economic conditions makes it difficult for the Company to predict results of operations, financial position and cash flows and to make strategic decisions regarding the allocation and deployment of capital.
The Company’s business depends substantially on client contract renewals and/or client retention. Any contract non-renewals, renewals on different terms and conditions or decline in the Company’s client retention or expansion could materially adversely affect the Company’s results of operations, financial condition and cash flows.
The Company has historically derived a significant portion of its revenue from long-term contracts with significant clients. If the Company loses significant clients (including as a result of reduced demand for a client’s products or services), is unable to renew such contracts on similar terms and conditions, or at all, or is not awarded new long-term contracts with important clients in the future, its results of operations, financial condition and cash flows may be adversely affected.
The Company is exposed to risks of loss in the event of nonperformance by its clients. Some of the Company’s clients are highly leveraged or otherwise subject to their own operating and regulatory risks. Even if the Company’s credit review and analysis mechanisms work properly, the Company may experience financial losses and loss of future business if its clients become bankrupt, insolvent or otherwise are unable to pay the Company for its work performed, including as a result of the continuing COVID-19 pandemic. Any increase in the nonpayment or nonperformance by clients could adversely affect the Company’s results of operations and financial condition.
Certain industries in which the Company’s clients operate are experiencing consolidation. When client consolidation occurs, it is possible that the volume of work performed by the Company for a client after the consolidation will be less than it was before the consolidation or that the client’s work will be completely moved to competitors. In addition, new and enhanced technologies, including search, web and infrastructure computing services, digital content, and electronic devices, may affect clients. The internet facilitates competitive entry and comparison shopping, and the reliance on digital retailing may reduce clients’ volume. Any such reduction or loss of work could adversely affect the Company’s results of operations and financial condition.
The fragility of and decline in overall distribution channels may adversely impact clients’ access to cost effective distribution of their advertising materials, and therefore may adversely impact the Company’s business.
The distribution channels of print products and services, including the newspaper industry, face significant competition from other sources of news, information and entertainment content delivery. If overall distribution channels, including newspaper distribution channels, continue to decline, the Company’s clients may be adversely impacted by the lack of access to cost effective distribution of their advertising materials. In turn, this decline in cost effective distribution channels may force clients to use other avenues of distribution that may be at significantly higher cost, which may decrease demand for the Company’s products and services, and thus adversely affect the Company’s financial condition, results of operations and cash flows.
If the Company fails to identify, manage, complete and integrate acquisitions, investment opportunities or other significant transactions, as well as identify and execute strategic divestitures, it may adversely affect the Company’s future results and ability to implement its business strategy.
The Company may pursue acquisitions of, investment opportunities in, or other significant transactions with, companies that are complementary to the Company’s business, as well as divestitures of businesses, product lines or other assets. In order to pursue this strategy successfully, the Company must identify attractive acquisition or investment opportunities, successfully complete the transaction, some of which may be large and complex, and manage post-closing issues such as integration of the acquired company or employees. The Company may not be able to identify or complete appealing acquisition or investment opportunities given the intense competition for these transactions. Even if the Company identifies and completes suitable corporate transactions, the Company may not be able to successfully address inherent risks in a timely manner, or at all. These inherent risks include, among other things: failure to achieve all or any projected synergies, performance targets or other anticipated benefits of the acquisition, investment or divestiture; failure to successfully integrate the purchased operations, technologies, products or services and maintain uniform standard controls, policies and procedures; substantial unanticipated integration costs; loss of key employees, including those of an acquired business; diversion of management’s attention from other business concerns; failure to retain the clients of the acquired business; additional debt and/or assumption of known or unknown liabilities; potential dilutive issuances of equity securities; and a write-off of goodwill, client lists, other intangibles and amortization of expenses. If the Company
fails to successfully integrate an acquisition, the Company may not realize all or any of the anticipated benefits of the acquisition, and the Company’s future results of operations could be adversely affected.
In addition, the acceleration of the Company’s transformation to a marketing solutions partner is partially dependent upon the Company’s continued ability to identify and execute strategic divestiture opportunities to generate cash and related benefits. There can be no assurance whether the strategic benefits and expected financial impact of any divestitures will be achieved.
There are additional risks associated with the Company’s operations outside of the United States.
Net sales from the Company’s wholly-owned subsidiaries outside of the United States accounted for approximately 11% and 10% of its consolidated net sales for the years ended December 31, 2021 and 2020, respectively.
As a result, the Company is subject to the risks inherent in conducting business outside of the United States, including, but not limited to: the impact of economic and political instability; fluctuations in currency values, foreign-currency exchange rates, devaluation and conversion restrictions; exchange control regulations and other limits on the Company’s ability to import raw materials or finished product; tariffs and other trade barriers; trade restrictions and economic embargoes by the United States or other countries; health concerns regarding infectious diseases (such as COVID-19), adverse weather or natural disasters; social unrest, acts of terrorism, force majeure, war or other armed conflicts; inflation and fluctuations in interest rates; language barriers; difficulties in staffing, training, employee retention and managing international operations; logistical and communications challenges; differing local business practices and cultural consideration; restrictions on the ability to repatriate funds; foreign ownership restrictions and the potential for nationalization or expropriation of property or other resources; longer accounts receivable payment cycles; potential adverse tax consequences and being subject to different legal and regulatory regimes that may preclude or make more costly certain initiatives or the implementation of certain elements of its business strategy.
Financial Risks
The Company may be required to make investments, including capital expenditures and in the development and implementation of new systems, client technology, product technology and marketing to sustain and grow its platforms and processes, in part to keep pace with industry developments and client expectations, and to remain technologically and economically competitive, which may increase its costs, reduce its profits, disrupt its operations or adversely affect its ability to implement its business strategy.
The printing and marketing services industries are experiencing rapid change as new digital technologies are developed that offer clients an array of choices for their marketing and publication needs. In order to remain competitive, the Company will need to adapt to future changes, especially with regard to technology, to enhance the Company’s existing offerings and introduce new offerings to address the changing demands of clients. In order to remain technologically and economically competitive, the Company may need to make significant capital expenditures and other investments as it develops and continues to maintain its platforms and processes, and to develop and integrate new technologies. In order to accomplish this effectively, the Company will need to deploy its resources efficiently, maintain effective cost controls and bear potentially significant market and raw material risks. If the Company’s revenues decline, it may impact the Company’s ability to expend the capital necessary to develop and implement new technology and be economically competitive. Debt or equity financing, or cash generated from operations, may not be available or sufficient for these requirements or for other corporate purposes or, if debt or equity financing is available, it may not be on terms favorable to the Company. In addition, even if capital is available to the Company, there is risk that the Company’s vendors will have discontinued the production of parts needed for repairs, replacements or improvements to the Company’s existing platforms, leading the Company to expend more capital than expected to perform such repairs, replacements or improvements. The Company’s business and operating results may be adversely affected if the Company is unable to keep pace with relevant technological and industry changes or if the technologies or business strategies that the Company adopts or services it promotes do not receive widespread market acceptance.
If the Company is unable to make the capital expenditures and other investments necessary to adapt to industry and technological developments, the Company may experience a decline in demand for its services, be unable to
implement its business strategy and its business operating results may be adversely affected. Additionally, if the Company is unable to meet future challenges from competing technologies on a timely basis or at an acceptable cost, the Company could lose clients to competitors. In general, the development of new communication channels inside and outside the printing and media solutions industry requires the Company to anticipate and respond to the varied and continually changing demands of clients. The Company may not be able to accurately predict technological trends or the success of new services in the market.
The Company’s debt facilities include various covenants imposing restrictions that may affect the Company’s ability to operate its business.
On September 1, 1995, and as last amended on November 24, 2014, the Company entered into a senior secured note agreement (the “Master Note and Security Agreement”) pursuant to which the Company has issued over time senior notes in an aggregate principal amount of $1.1 billion in various tranches. As of December 31, 2021, the borrowings outstanding under the Master Note and Security Agreement were $7.2 million. On April 28, 2014, and as last amended on November 2, 2021, the Company entered into a senior secured credit facility (the “Senior Secured Credit Facility,”) which includes two different loan facilities: a $825.0 million Term Loan A and a $432.5 million revolving credit facility. As a result of the November 2, 2021 amendment to the Senior Secured Credit Facility, the Term Loan A and revolving credit facility were both broken into two separate maturity dates. Borrowing from lenders who elected to not extend the maturity date will mature on January 31, 2024, whereas borrowing from lenders who elected to extend the maturity date will now mature on November 2, 2026. As of December 31, 2021, the borrowings outstanding under the Senior Secured Credit Facility were $575.4 million. On April 28, 2014, the Company issued $300.0 million aggregate principal amount of its unsecured 7.0% senior notes due May 1, 2022 (“Senior Unsecured Notes,”), of which $211.5 million remained outstanding as of December 31, 2021.
The Company’s various lending arrangements include certain financial covenants. In addition to the financial covenants, the debt facilities also include certain limitations on acquisitions, indebtedness, liens, dividends and repurchases of capital stock. As of December 31, 2021, the Company was in compliance with all financial covenants in its debt agreements. 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.
The Company may be adversely affected by interest rates, particularly floating interest rates, and foreign exchange rates.
As of December 31, 2021, 24% of the Company’s borrowings were subject to variable interest rates. As a result, the Company is exposed to market risks associated with fluctuations in interest rates, and increases in interest rates could adversely affect the Company.
The Company currently holds two interest rate swap contracts. The purpose of entering into these contracts is to reduce the variability of cash flows from interest payments related to a portion of the Company’s variable-rate debt. The swaps convert the notional value of the Company’s variable rate debt based on one-month London Interbank Offered Rate (“LIBOR”) to a fixed rate, including a spread on underlying debt, and a monthly reset in the variable interest rate.
Because a portion of the Company’s operations are outside of the United States, significant revenues and expenses are denominated in local currencies. 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, fluctuations in such rates may affect the translation of these results into the Company’s consolidated financial statements. 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. There can be no assurance, however, that the Company’s efforts at hedging will be successful. There is always a possibility that attempts to hedge currency risks will lead to greater losses than predicted.
The Company’s revenue, operating income from continuing operations and cash flows are subject to cyclical and seasonal variations.
The Company’s business is seasonal, with the Company recognizing the majority of its operating income from continuing operations in the third and fourth quarters of the financial year, primarily as a result of the increased magazine advertising page counts and retail inserts and catalogs from back-to-school and holiday-related advertising and promotions. The fourth quarter is typically the highest seasonal quarter for cash flows from operating activities and Free Cash Flow due to the reduction of working capital requirements that reach peak levels during the third quarter. If the Company does not successfully manage the increased workflow, necessary increases in paper and ink inventory, production capacity flows and other business elements during these high seasons of activity, this seasonality could adversely affect the Company’s cash flows and results of operations.
An other than temporary decline in operating results and enterprise value could lead to non-cash impairment charges due to the impairment of property, plant and equipment, goodwill and other intangible assets.
The Company has a material amount of property, plant, equipment, goodwill and other intangible assets on its balance sheet, due in part to acquisitions. As of December 31, 2021, the Company had the following long-lived assets on its consolidated balance sheet included in Part II, Item 8, “Financial Statements and Supplementary Data,” of this Annual Report on Form 10-K: (a) property, plant and equipment of $727.0 million; (b) goodwill of $86.4 million; and (c) other intangible assets, primarily representing the value of customer relationships acquired, of $75.3 million.
As of December 31, 2021, these assets represented approximately 47% of the Company’s total assets. The Company assesses impairment of property, plant and equipment, goodwill and other intangible assets based upon the expected future cash flows of the respective assets. These valuations include management’s estimates of sales, profitability, cash flow generation, capital structure, cost of debt, interest rates, capital expenditures and other assumptions. A decline in expected profitability, significant negative industry or economic trends (including the negative impacts of the continuing COVID-19 pandemic), inability to effectively integrate acquired businesses, unexpected significant changes or planned changes in use of the assets or in entity structure, divestitures and discontinued operations may adversely impact the assumptions used in the valuations. As a result, the recoverability of these assets could be called into question, and the Company could be required to write down or write off these assets. Such an occurrence could have a material adverse effect on the Company’s results of operations and financial position.
The Company has significant liabilities with respect to defined benefit pension plans that could cause the Company to incur additional costs.
As a result of the 2010 acquisition of World Color Press, the Company assumed frozen single employer defined benefit pension plans for certain of its employees in the United States. The majority of the plans’ assets are held in North American and global equity securities and debt securities. The asset allocation as of December 31, 2021, was approximately 26% equity securities and 74% debt securities.
As of December 31, 2021, the Company had underfunded pension liabilities of $19.2 million for single employer defined benefit plans in the United States. Under current United States pension law, pension funding deficits are generally required to be funded over a seven-year period. These pension deficits may increase or decrease depending on changes in the levels of interest rates, pension plan investment performance, pension legislation and other factors. Declines in global debt and equity markets would increase the Company’s potential pension funding obligations. Any significant increase in the Company’s required contributions could have a material adverse impact on its business, financial condition, results of operations and cash flows.
In addition to the single employer defined benefit plans described above, the Company has previously participated in multiemployer pension plans (“MEPPs”) in the United States, including the Graphic Communications International Union - Employer Retirement Fund (“GCIU”) and the Graphic Communications Conference of the International Brotherhood of Teamsters National Pension Fund (“GCC”). Prior to the acquisition of World Color Press by the Company, World Color Press received notice that certain plans in which it participated were in critical status, as defined in Section 432 of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”). As a result,
the Company could have been subject to increased contribution rates associated with these plans or other MEPPs suffering from declines in their funding levels. Due to the significantly underfunded status of the United States multiemployer plans and the potential increased contribution rates, the Company withdrew from participation in these multiemployer plans and has replaced these pension benefits with a Company-sponsored “pay as you go” defined contribution plan, which is historically the form of retirement benefit provided to the Company’s employees. As of December 31, 2021, the Company estimates and has recorded in its financial statements a pre-tax withdrawal liability for all United States MEPPs of $32.2 million in the aggregate. The Company is scheduled to make payments to the GCIU and GCC until April 2032 and February 2024, respectively.
The Company may not be able to utilize deferred tax assets to offset future taxable income.
As of December 31, 2021, the Company had deferred tax assets, net of valuation allowances, of $105.0 million. The Company expects to utilize the deferred tax assets to reduce consolidated income tax liabilities in future taxable years. However, the Company may not be able to fully utilize the deferred tax assets if its future taxable income and related income tax liability is insufficient to permit their use. In addition, in the future, the Company may be required to record a valuation allowance against the deferred tax assets if the Company believes it is unable to utilize them, which would have an adverse effect on the Company’s results of operations and financial position.
Legal and Regulatory Risks
The Company and its facilities are subject to various consumer protection and privacy laws and regulations, and will become subject to additional laws and regulations in the future. If the Company’s efforts to comply with such laws or protect the security of information are unsuccessful, any failure may subject the Company to material liability, require it to incur material costs or otherwise adversely affect its results of operations as a result of compliance with such laws, costly enforcement actions and private litigation.
The nature of the Company’s business includes the receipt and storage of information about the Company’s clients, vendors and the end-users of the Company’s products and services. The Company and its clients are subject to various United States and foreign consumer protection, information security, data privacy and “do not mail” requirements at the federal, states, provincial and local levels. The Company is subject to many legislative and regulatory laws and regulations around the world concerning data protection and privacy. In addition, the interpretation and application of consumer and data protection laws in the United States and elsewhere are often fluid and uncertain. To the extent that the Company or its clients become subject to additional or more stringent requirements or that the Company is not successful in its efforts to comply with existing requirements or protect the security of information, demand for the Company’s services may decrease and the Company’s reputation may suffer, which could adversely affect the Company’s results of operations. In addition, such laws may be interpreted and applied in a manner inconsistent with the Company’s internal policies. If so, the Company could suffer costly enforcement actions (including an order requiring changes to the Company’s data practices) and private litigation, which could have an adverse effect on the Company’s business and results of operations. Complying with these various laws could cause the Company to incur substantial costs or require changes to the Company’s business practices in a manner adverse to the Company’s business.
Unfavorable outcomes in legal proceedings could result in substantial costs and may harm the Company’s financial condition.
The Company’s financial condition may be affected by the outcome of pending and future litigation, claims, investigations, legal and administrative cases and proceedings, whether civil or criminal, or lawsuits by governmental agencies or private parties. Defending against any such claims, or any legal proceedings to which the Company is subject, can result in substantial costs and divert management time and resources. An adverse judgment could result in monetary damages, which could have a negative impact on the Company’s liquidity and financial condition and/or cause significant reputational harm to the Company’s business.
The Company may incur costs or suffer reputational damage due to improper conduct of its employees, contractors or agents under laws governing business practices, including the United States Foreign Corrupt Practices Act.
The Company could be adversely affected by engaging in business practices that are in violation of United States or foreign anti-corruption laws, including the United States Foreign Corrupt Practices Act. The Company operates in parts of the world with developing economies that have experienced governmental corruption to some degree, and in certain circumstances, strict compliance with anti-corruption laws may conflict with local customs and practices. In certain countries, the Company does substantial business with government entities or instrumentalities, which creates increased risk of a violation of the Foreign Corrupt Practices Act and international laws. There can be no assurance that all of the Company’s employees, contractors or agents, including those representing the Company in countries where practices which violate anti-corruption laws may be customary, will not take actions that violate the Company’s policies and procedures. The failure to comply with the laws governing international business practices may result in substantial penalties and fines.
Changes in the legal and regulatory environment could limit the Company’s business activities, increase its operating costs, reduce demand for its products or result in litigation.
The conduct of the Company’s businesses is subject to various laws and regulations administered by federal, state and local government agencies in the United States, as well as to foreign laws and regulations administered by government entities and agencies in markets in which the Company operates. These laws and regulations and interpretations thereof may change, sometimes dramatically, as a result of political, economic or social events, such as the election of the new administration. Such regulatory environment changes may include changes in taxation requirements, accounting and disclosure standards, immigration laws and policy, environmental laws, and requirements of United States and foreign occupational health and safety laws. Changes in laws, regulations or governmental policy and the related interpretations may alter the environment in which the Company does business, and therefore, may impact its results or increase its costs or liabilities.
In addition, the Company and its subsidiaries are party to a variety of legal and environmental remediation obligations arising in the normal course of business, as well as environmental remediation and related indemnification proceedings in connection with certain historical activities, former facilities and contractual obligations of acquired businesses. Permits are required for the operation of certain parts of the Company’s business, and these permits are subject to renewal, modification and, in some circumstances, revocation. Due to regulatory complexities, uncertainties inherent in litigation and the risk of unidentified contaminants on current and former properties, the potential exists for remediation, liability and indemnification costs to differ materially from the costs the Company has estimated. The Company cannot assure you that the Company’s costs in relation to these matters will not exceed its established liabilities or otherwise have an adverse effect on its results of operations.
Various laws and regulations addressing climate change are being considered at the federal and state levels. Proposals under consideration include limitations on the amount of greenhouse gas that can be emitted (so-called “caps”) together with systems of trading allowed emissions capacities. The impacts of such proposals could have a material adverse impact on the Company’s financial condition and results of operations.
If QuadMed, a wholly-owned subsidiary of the Company, fails to comply with applicable healthcare laws and regulations, the Company could face substantial penalties, and its business, reputation, operations, prospects and financial condition of the Company’s subsidiary could be adversely affected.
QuadMed provides employer-sponsored healthcare solutions in the United States to employers of all sizes, including the Company and other private and public-sector companies. These solutions include, but are not limited to, on-site and near-site healthcare clinics, occupational health services, telemedicine, and health and wellness programs. The healthcare industry is heavily regulated, constantly evolving and subject to significant change and fluctuation. The United States federal and state healthcare laws and regulations that impact the QuadMed subsidiary business include, among others, those: (a) regarding privacy, security and transmission of individually identifiable health information; (b) prohibiting, among other things, soliciting, receiving or providing remuneration to induce the referral of an individual for an item or service or the purchasing or ordering of an item or service for which payment may be made under healthcare programs; (c) prohibiting, among other things, knowingly presenting or causing to be presented claims for payment from third-party payors that are false or fraudulent; and (d) prohibiting the corporate practice of medicine.
Risks Relating to Quad’s Common Stock
Holders of class A common stock are not able to independently elect directors of the Company or control any of the Company’s management policies or business decisions because the holders of class A common stock have substantially less voting power than the holders of the Company’s class B common stock, all of which is owned by certain members of the Quadracci family, trusts for their benefit or other affiliates of the Company, whose interests may be different from the holders of class A common stock.
The Company’s outstanding stock is divided into two classes of common stock: class A common stock (“class A stock”) and class B common stock (“class B stock”). The class B stock has ten votes per share on all matters and the class A stock is entitled to one vote per share. As of January 31, 2022, the class B stock constitutes approximately 76% of the Company’s total voting power. As a result, holders of class B stock are able to exercise a controlling influence over the Company’s business, have the power to elect its directors and indirectly control decisions such as whether to issue additional shares, declare and pay dividends or enter into corporate transactions. All of the class B stock is owned by certain members of the Quadracci family or trusts for their benefit, whose interests may differ from the interests of the holders of class A stock.
As of January 31, 2022, approximately 93% of the outstanding class B stock was held of record by the Quad Voting Trust, and that constitutes approximately 71% of the Company’s total voting power. The trustees of the Quad Voting Trust have the authority to vote the stock held by the Quad Voting Trust. Accordingly, the trustees of the Quad Voting Trust are able to exercise a controlling influence over the Company’s business, have the power to elect its directors and indirectly control decisions such as whether to issue additional shares, declare and pay dividends or enter into corporate transactions.
Furthermore, in response to recent public focus on dual class capital structures, certain stock index providers are implementing limitations on the inclusion of dual class share structures in their indices and certain institutional shareholder advisory firms are updating their voting guidelines to generally withhold support for directors of companies with dual class voting rights. If these restrictions increase or these guidelines are followed, they may impact who buys and holds the Company’s stock.
The Company is a controlled company within the meaning of the rules of the New York Stock Exchange (“NYSE”) and, as a result, it relies on exemptions from certain corporate governance requirements that provide protection to shareholders of other companies.
Since the Quad Voting Trust owns more than 50% of the total voting power of the Company’s stock, the Company is considered a controlled company under the corporate governance listing standards of the NYSE. As a controlled company, an exception under the NYSE listing standards exempts the Company from the obligation to comply with certain of the NYSE’s corporate governance requirements, including the requirements that (a) the Company have a corporate governance and nominating committee that is composed entirely of independent directors with a written
charter addressing the committee’s purpose and responsibilities; and (b) the Company have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities.
Accordingly, for so long as the Company is a controlled company, holders of class A stock may not have the same protections afforded to shareholders of companies that are subject to all of the corporate governance requirements of the NYSE.
Currently, there is a limited active market for Quad’s class A common stock and, as a result, shareholders may be unable to sell their class A common stock without losing a significant portion of their investment.
The Company’s class A stock has been traded on the NYSE under the symbol “QUAD” since July 6, 2010. However, there is currently a limited active market for the class A common shares. The Company cannot predict the extent to which investor interest in the Company will lead to the development of a more active trading market for its class A common stock on the NYSE or how liquid that market will become. If a more active trading market does not develop, shareholders may have difficulty selling any class A stock without negatively affecting the stock price, and thereby, losing a significant portion of their investment.