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On October 1, 2016 (the “separation date”), R. R. Donnelley & Sons Company (“RRD” or the “Parent”) completed the previously announced separation (the “separation”) into three separate independent publicly-traded companies: (i) its publishing and retail-centric print services and office products business (“LSC Communications”); (ii) its financial communications services business (“Donnelley Financial Solutions, Inc.” or “Donnelley Financial”) and (iii) a global, customized multichannel communications management company, which is the business of RRD after the separation. To effect the separation, RRD undertook a series of transactions to separate net assets and legal entities. RRD completed the distribution (the “distribution”) of 80.75%, of the outstanding common stock of LSC Communications and Donnelley Financial to RRD stockholders on October 1, 2016. RRD retained a 19.25% ownership stake in both LSC Communications and Donnelley Financial. On October 1, 2016, RRD stockholders of record as of the close of business on September 23, 2016 (“the record date”) received one share of LSC Communications common stock and one share of Donnelley Financial common stock for every eight shares of RRD common stock held as of the record date.

On March 28, 2017, RRD completed the sale of approximately 6.2 million shares of LSC Communications common stock, representing its entire 19.25% retained ownership. In connection with the over-allotment option granted to the underwriters as part of the secondary sale by RRD, LSC Communications also sold approximately 0.9 million shares of common stock, receiving proceeds of $18 million, that were used for general corporate purposes.

In connection with the separation, LSC Communications, RRD and Donnelley Financial entered into commercial arrangements, transition services agreements and various other agreements related to the separation that remain in effect. Final copies of such agreements are filed as exhibits to the annual report on Form 10-K, as filed with the Securities and Exchange Commission (“SEC”) on February 22, 2018.

The Company serves the needs of publishers, merchandisers, cataloguers and retailers with product and service offerings that include traditional and digital print, e-services, logistics, warehousing, fulfillment and supply chain management services. The Company utilizes a broad portfolio of technology capabilities coupled with consultative attention to clients' needs to increase speed to market, reduce costs, provide postal savings to customers, and improve efficiencies. The Company prints magazines, catalogs, retail inserts, books, and directories and its office products offerings include filing products, envelopes, note-taking products, binder products, and forms.

Magazines, catalogs and retail inserts: We are one of the largest producers of magazines, catalogs and retail inserts in North America. These products are manufactured to customers’ specifications using offset, digital or gravure printing processes in combination with either on-press finishing, saddle-stitch binding or patent binding.

In the U.S., we have a network of production facilities enabling the optimal combination of regional and national distribution. Additionally, we have production facilities in Poland and Mexico that efficiently produce goods for international distribution.

Logistics: We provide logistics solutions to the Company and other third parties in the United States.

Books: We are the largest producer of books in the U.S. Our book customers generally are publishers who seek to print hardcover and softcover books for the education, trade, religious and testing sectors. We believe we are well positioned to meet our book customers’ specific needs, whether they be colors, page counts, trim size, binding styles or quantities. Consumer trade books are typically produced using either offset or digital printing processes, and are bound in a variety of formats. Educational books include softcover and traditional casebound textbooks utilized by primary and secondary school and college students, as well as workbooks, teachers’ editions, and other formats.

Directories: We produce directories that are mainly phone directories that support local and small business advertising. Our customers for directory printing are generally marketing solution providers that publish online as well as printed directories.

Print-related services: In addition to printed products, we provide a number of print-related services. Our supply chain management offering includes procurement, warehousing, distribution, and inventory management for book publishers. We also provide e-book formatting, and distribution services. Our print management and sourcing offering serves customers looking to outsource non-core functions and add scale to their marketing efforts. Our premedia offering includes high quality color retouching and other premedia services for both print and digitally delivered content to publishers and retailers. Our mail services offering includes list processing, and mail sortation services that, combined with our production scale, optimize postal costs for magazine and catalog customers. Our primary mail sortation facility is located in Bolingbrook, Illinois. Because of our scale of production, we are frequently able to provide cross-customer sortation that reduces postal costs for our customers compared to what an individual customer could obtain.

Office Products: We produce a wide range of branded and private label products, primarily within the five categories below, and uses e-commerce distribution for certain sales:

Filing products: Our filing products include a variety of presentation and storage materials for professionals and students. We sell our filing products under the Pendaflex™ and other brands, as well as under private label brands for third parties.

Envelopes: We produce envelopes for businesses within North America. Our key brands used for envelopes are Quality Park™ (since its acquisition in November 2017) and Ampad™, and we also produce private label envelopes for third parties. We enhanced our filing offering during 2017 by our acquisition of NECI, LLC (“NECI”), a supplier of commodity and specialty filing supplies.

Note-taking products: Our note-taking products include legal pads, journals, index cards, spiral notebooks, composition books and notebook filler paper. We sell our note-taking products under the TOPS™, Ampad, Oxford™, and other brands, as well as under private label brands for third parties.

Binder products: Our binder products include a variety of binders and binder accessories for professionals and students. We sell our binder products under the Cardinal™, Oxford and other brands, as well as under private label brands for third parties.

Forms: We produce business forms, tax forms, message and memo pads, financial forms, and recordkeeping materials for businesses within North America. Our key brand used for forms is Adams™, and we also produce private label forms for third parties.

The Company’s operating and reporting segments are aligned with how the chief operating decision maker of the Company currently manages the business. The Company’s operating and reportable segments are summarized below:

The Magazines, Catalogs and Logistics segment primarily produces magazines and catalogs, as well as provides logistics solutions to the Company and other third parties. The segment also provides certain other print-related services, including mail-list management and sortation. The segment has operations primarily in the U.S. The Magazines, Catalogs and Logistics segment is divided into two reporting units: magazines and catalogs; and logistics. The Magazines, Catalogs and Logistics segment accounted for approximately 44% of the Company’s consolidated net sales in 2017.

The Book segment produces books for publishers primarily in the U.S. The segment also provides supply-chain management services and warehousing and fulfillment services, as well as e-book formatting for book publishers. The Book segment accounted for approximately 28% of the Company’s consolidated net sales in 2017.

The Office Products segment manufactures and sells branded and private label products in five core categories. The Office Products segment accounted for approximately 14% of the Company’s consolidated net sales in 2017.

The Other grouping consists of the following non-reportable segments: Europe, Directories, Mexico, and Print Management. Europe produces magazines, catalogs and directories and provides packaging and pre-media services. Mexico produces magazines, catalogs, statements, forms, and labels. Print Management provides outsourced print procurement and management services. The Other grouping consists of approximately 14% of the Company’s consolidated net sales in 2017.

Corporate consists of unallocated selling, general and administrative activities and associated expenses including, in part, executive, legal, finance, communications, certain facility costs and Last-in, First-out (“LIFO”) inventory provisions. In addition, share-based compensation expense is included in Corporate and not allocated to the operating segments. Prior to the separation, many of these costs were based on allocations from RRD, however, the Company has incurred such costs directly after the separation.

Financial and other information related to these segments is included in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and in Note 17, Segment Information, to the consolidated and combined financial statements.

On November 9, 2017, the Company acquired Quality Park, a producer of envelopes, mailing supplies and assorted packaging items. The total purchase price was $41 million in cash.

On August 21, 2017, the Company acquired the assets of NECI, a supplier of commodity and specialty filing supplies. The total purchase price was $6 million in cash.

On August 17, 2017, the Company acquired CREEL, an offset and digital printing company. The total purchase price was $79 million in cash.

On July 28, 2017, the Company acquired Fairrington, a full-service, printer-independent mailing logistics provider in the United States. The purchase price was $19 million in cash and approximately 1.0 million shares of LSC Communications common stock, for a total transaction value of $39 million.

On March 1, 2017, the Company acquired HudsonYards, a digital and print premedia production company that provides high-quality creative retouching, computer-generated imagery, mechanical creation, press-ready file preparation, and interactive production services, for $3 million in cash.

On December 2, 2016, the Company acquired Continuum Management Company, LLC (“Continuum”), a print procurement and management business, for $7 million in cash. An additional $2 million was paid during the three months ended March 31, 2017 as part of a final working capital adjustment for a total purchase price of $9 million in cash.

On June 8, 2015, RRD acquired Courier Corporation (“Courier”), a leader in digital printing and publishing primarily in the United States that specializes in educational, religious and trade books, for $137 million in cash and 8 million shares of RRD common stock, for a total transaction value of $292 million.

For further information on the above acquisitions, refer to Note 3, Business Combinations, to the consolidated and combined financial statements.

According to the June 2017 IBIS World industry report “Printing in the U.S.,” estimated total annual printing industry revenue is approximately $77 billion, of which approximately $13 billion relates to our core segments of the print market and an additional approximately $31 billion pertains to related segments of the print market in which we are able to offer certain products. Despite consolidation in recent years, including several acquisitions completed by LSC Communications, the industry remains highly fragmented and LSC Communications is one of the largest players in our segment of the print market. The print and related services industry, in general, continues to have excess capacity and LSC Communications remains diligent in proactively identifying plant consolidation opportunities to keep our capacity in line with demand. Across the Company’s range of print products and services, competition is based primarily on the ability to deliver products for the lowest total cost, a factor driven not only by price, but also by materials and distribution costs. We expect that prices for print products and services will continue to be a focal point for customers in coming years.

Value-added services, such as LSC Communications’ co-mail, logistics and supply chain management offerings, enable customers to lower their total costs. Technological changes, including the electronic distribution of documents and data, online distribution and hosting of media content, and advances in digital printing, print-on-demand and internet technologies, continue to impact the market for our products and services. The impact of digital technologies has been felt in many print products. Digital technologies have impacted printed magazines as some advertising spending has moved from print to electronic media. Catalogs have experienced volume reductions as our customers allocate more of their spending to online resources and also face stiff competition from online retailers resulting in retailer compression. Educational books within the college market continue to be impacted by electronic substitution and other trends. The K-12 educational sector continues to be focused on increasing digital distribution but there has been inconsistent adoption across school systems. E-book substitution has impacted overall consumer print trade book volume, although e-book adoption rates have stabilized and industry-wide print book volume has been growing in recent years. In addition, retail inserts have experienced volume reductions primarily as a result of store closures and reduced newspaper circulation. Electronic communication and transaction technology has also continued to drive electronic substitution in directory printing, in part driven by cost pressures at key customers.

The future impact of technology on our business is difficult to predict and could result in additional expenditures to restructure impacted operations or develop new technologies. In addition, we have made targeted acquisitions and investments in our existing business to offer customers innovative services and solutions. Such acquisitions and investments include the acquisitions of Clark Group, Quality Park, Publishers Press, NECI, CREEL, Fairrington, and HudsonYards in 2017, which expanded our logistics, printing, digital, office products, and premedia capabilities, and Continuum in 2016, which expanded our print management capabilities. These and other targeted acquisitions and investments further secure our position as a technology leader in the industry.

Technological advancement and innovation has affected the overall demand for most of the products in our Office Products segment. While these changes continue to impact demand, the overall market for our products remains large and we believe share growth is attainable. We compete against a range of both domestic and international competitors in each of our product categories within the segment. Due to the increasing percentage of private label products in the market, resellers have created a highly competitive environment where purchasing decisions are based largely on price, quality and the supplier’s ability to service the customer. As consumer preferences shift towards private label, resellers have increased the pressure on suppliers to better differentiate their product offering, oftentimes through product exclusivity, product innovation and development of private label products. We have experienced robust growth within our e-commerce channel, where a significant majority of our sales are branded products.

We have implemented a number of strategic initiatives to reduce our overall cost structure and improve efficiency, including the restructuring, reorganization and integration of operations and streamlining of administrative and support activities. Future cost reduction initiatives could include the reorganization of operations and the consolidation of facilities. Implementing such initiatives might result in future restructuring or impairment charges, which may be substantial. We also review our operations and management structure on a regular basis to appropriately balance risks and opportunities to maximize efficiencies and to support our long-term strategic goals.

Advertising and consumer spending trends affect demand in several of the end-markets served by LSC Communications. Historically, demand for printing of magazines, catalogs, retail inserts, books and office products is higher in the second half of the year, driven by increased advertising pages within magazines, holiday volume in catalogs and retail inserts, and back-to-school demand in books and office products. These typical seasonal patterns can be impacted by overall trends in the U.S. and world economy.

The primary raw materials we use in our printed products are paper and ink. We negotiate with leading paper suppliers to maximize our purchasing efficiencies and use a wide variety of paper grades and formats. In addition, a substantial amount of paper used in our printed products is supplied directly by customers. Variations in the cost and supply of certain paper grades used in the manufacturing process may affect our consolidated financial results. Generally, customers directly absorb the impact of changing prices on customer-supplied paper. For paper that we purchase, we have historically passed most changes in price through to our customers. Contractual arrangements and industry practice should support our continued ability to pass on any future paper price increases, but there is no assurance that market conditions will continue to enable us to successfully do so. Higher paper prices and tight paper supplies may have an impact on customers’ demand for printed products. We also resell waste paper and other print-related by-products and may be impacted by changes in prices for these by-products.

We negotiate with leading suppliers to maximize our purchasing efficiencies and use a wide variety of ink formulations and colors. Variations in the cost and supply of certain ink formulations used in the manufacturing process may affect our consolidated financial results. We have undertaken various strategic initiatives to try to mitigate any foreseeable supply disruptions with respect to our ink requirements, including entering into a long term supply arrangement with a single supplier for a substantial portion of our ink supply. Certain contractual protections exist in our relationship with such supplier, such as price and quality protections and an ability to seek alternative sources of ink if the supplier breaches or is unable to perform certain of its obligations, which are intended to mitigate the risk of ink-related supply disruptions.

The primary materials used in the Office Products segment are paper, steel and polypropylene substrates. We negotiate with leading paper, plastic and steel suppliers to maximize our purchasing efficiencies. All of these materials are available from a number of domestic and international suppliers and we are not dependent upon any single supplier for any of these materials. We believe that adequate supply is available for each of these materials for the foreseeable future, although higher paper prices may have an impact on demand for our products.

Except for our long-term supply arrangement regarding ink, we do not consider ourselves to be dependent upon any single vendor as a source of supply for our businesses, and we believe that sufficient alternative sources for the same, similar or alternative products are available.

Changes in the price of raw materials, crude oil and other energy costs impact our ink suppliers and manufacturing costs. Crude oil and energy prices continue to be volatile. Should prices increase, we generally cannot pass on to customers the impact of higher energy prices on our manufacturing costs. We do enter into fixed price contracts for a portion of our natural gas purchases to mitigate the impact of changes in energy prices. We cannot predict sudden changes in energy prices and the impact that possible future changes in energy prices might have upon either future operating costs or customer demand and the related impact either will have on the Company’s consolidated balance sheets, statements of operations and cash flows.

Our printed products service retailers, including catalogers and merchandisers, publishers of magazines, books and directories and online retailers. Our customer base includes seven of the top ten catalogers in the United States, seven of the top ten magazine publishers in the United States, and eight of the top ten book publishers based in North America and Europe. Our printed products are distributed through the United States Postal Service (“USPS”) or foreign postal services or to our customers by direct shipment, typically in bulk, to customer facilities and warehouses.

Our Office Products segment primarily services office superstores, office supply wholesalers, independent contract stationers, mass merchandisers and retailers and e-commerce resellers. The products that make up our Office Products segment are distributed to our customers by direct shipment, typically in bulk, to customer facilities and warehouses.

For each of the years ended December 31, 2017, 2016 and 2015, no customer accounted for 10% or more of the Company’s consolidated and combined net sales.

The Company has a broad portfolio of technology capabilities that are utilized in the delivery of products and services to our customers. We believe that proprietary technology is required where it will provide a competitive advantage or where the desired technology is not readily available in the marketplace, and, as such, our proprietary technology portfolio contains an array of applications and technological capabilities that were developed to perform different functions, including storefront, digital asset management and distribution, manufacturing systems, warehousing, logistics and list management services and data analytics solutions. Our technology strategy is focused on the continued investment in key technologies that support services and solutions that allow for creation, management, production, distribution and analytics of publisher content in multi-channels to maximize their distribution and return for each title. We are also focusing our technology capabilities on developments that will allow us to pursue strategic relationships and expand service offerings, such as our recent relationship with a leading education, business and consumer publishing company, that has enabled our further expansion into end-to-end supply chain management and development of an end to end platform for book publishers that addresses piracy issues in their supply chain. This solution, IntercepTag℠, uses digitally printed or labeled secured unique identification codes to provide registration at point of manufacture and enables supply chain participants and consumers to validate the authenticity of textbooks. To implement our research and development strategy, we expect to primarily invest in the maintenance and enhancement of our technology footprint within our facilities and in development activities that allow us to create new and differentiating technology capabilities.

Our cybersecurity program is designed to meet the needs and expectations of our customers who entrust us with certain sensitive business information. Our infrastructure and technology, expansive and highly trained workforce and comprehensive security and compliance program make us qualified to safely process, store and protect this customer information.

Our infrastructure and technology security capabilities are bolstered by our relationship with a leading data center services provider. Furthermore, our networks are monitored by intrusion detection services around the clock, and our systems and applications are routinely tested for vulnerabilities and are operated under a strict patch management program.

We employ a highly skilled IT workforce to implement our cybersecurity programs and to handle specific security responsibilities. As a result of annual mandatory security awareness training, our IT workforce is qualified to address security and compliance-related issues as they arise. Additionally, all of our IT employees are carefully screened, undergo a thorough background check and are bound by a nondisclosure agreement that details such employee’s security and legal responsibilities with regards to information handling. We believe our security and compliance team also diminishes the risk of system compromise and data exposure by rapidly and effectively addressing security incidents as they arise.

We consider patents, trademarks and other proprietary rights to be important to our business. We own over 150 patents worldwide, the majority of which are concentrated in our Office Products segment, with the remainder falling into the following categories:

We also own approximately 400 trademarks worldwide, the majority of which are concentrated within our Office Products segment. Several of our most significant trademarks include registrations for the Adams, Ampad, Cardinal Brands, Oxford, Pendaflex, Quality Park, and TOPS office products brands. Additionally, we own the rights to a group of trademarks relating to our e-media publishing services, such as Newsstand™, LibreDigital™, LibreMarket™, LibrePublish™, and LibreAccess™.

While we consider our patents, trademarks and other proprietary rights to be valuable assets, we do not believe that our profitability and operations are dependent upon any single patent, trademark or other proprietary right.

Our operations are subject to various international, federal, state and local laws and regulations relating to the protection of the environment, including those governing discharges to air and water, the management and disposal of hazardous materials, the cleanup of contaminated sites and health and safety matters. In the United States, these laws and regulations include the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act and Superfund (the environmental program established in the Comprehensive Environmental Response, Compensation, and Liability Act to address abandoned hazardous waste sites), which imposes joint and severable liability on each potentially responsible party. We are committed to complying with these and all other applicable environmental, health, and safety laws, and in order to reduce the risk of non-compliance, we maintain an Environmental, Health and Safety management system that includes an appropriate policy and standards, staff dedicated to environmental, health, and safety issues, and other measures.

While it is our policy to conduct our global operations in accordance with all applicable laws, regulations and other requirements, from time to time, our properties, products or operations may be affected by environmental issues. It is not possible to quantify with certainty the potential impact of actions regarding environmental matters, particularly remediation and other compliance efforts that we may undertake in the future. However, in the opinion of management, compliance with the present environmental protection laws, before taking into account estimated recoveries from third parties, will not have a material adverse effect on our consolidated financial statements.

As of December 31, 2017, the Company had approximately 24,000 total employees in the global workforce, of which approximately 19,000 employees were in the U.S. and approximately 5,000 were in international locations. Of the U.S. and international employees, approximately 4.0% and 30.0% were covered by collective bargaining agreements, respectively. We have collective bargaining agreements with unionized employees in Canada, Mexico and Poland. We have not experienced a work stoppage during the past five years. Management believes that we have good relationships with our employees and collective bargaining groups.

The Company maintains an Internet website at www.lsccom.com where the Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on form 8-K and all amendments to those reports are available without charge, as soon as reasonably practicable following the time they are filed with, or furnished to, the Securities and Exchange Commission (“SEC”). The Principles of Corporate Governance of the Company’s Board of Directors, the charters of the Audit, Human Resources and Corporate Responsibility and Governance Committees of the Board of Directors and the Company’s Principles of Ethical Business Conduct are also available on the Investor Relations portion of www.lsccom.com, and will be provided, free of charge, to any stockholder who requests a copy. References to the Company’s website address do not constitute incorporation by reference of the information contained on the website, and the information contained on the website is not part of this document.

The Company has made forward-looking statements in this current report on Form 8-K, that are subject to risks and uncertainties. These statements are based on the beliefs and assumptions of the Company. Generally, forward-looking statements include information concerning possible or assumed future actions, events, or results of operations of the Company.

These statements may include, or be preceded or followed by, the words “anticipates,” “estimates,” “expects,” “projects,” “forecasts,” “intends,” “plans,” “continues,” “believes,” “may,” “will,” “goals” or variations of such words and similar expressions. Examples of forward-looking statements include, but are not limited to, statements, beliefs and expectations regarding our business strategies, market potential, future financial performance, dividends, costs to be incurred in connection with the separation, results of pending legal matters, our goodwill and other intangible assets, price volatility and cost environment, our liquidity, our funding sources, expected pension contributions, capital expenditures and funding, our financial covenants, repayments of debt, off-balance sheet arrangements and contractual obligations, our accounting policies, general views about future operating results and other events or developments that we expect or anticipate will occur in the future. These forward-looking statements are subject to a number of important factors, including those factors disclosed in “Item 1A. Risk Factors.” Other information could cause our actual results to differ materially from those indicated in any such forward-looking statements. These factors include, but are not limited to:

Because forward-looking statements are subject to assumptions and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. Undue reliance should not be placed on such statements, which speak only as of the date of this document or the date of any document that may be incorporated by reference into this document.

Consequently, readers of the annual report on Form 10-K, as filed with the SEC on February 22, 2018, should consider these forward-looking statements only as the Company’s current plans, estimates and beliefs. The Company does not undertake and specifically declines any obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect future events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. The Company undertakes no obligation to update or revise any forward-looking statements in the annual report on Form 10-K, as filed with the SEC on February 22, 2018, to reflect any new events or any change in conditions or circumstances.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of LSC Communications’ financial condition and results of operation should be read together with the consolidated and combined financial statements and Notes to those statements included in Item 15, Exhibits, Financial Statement Schedules, in this current report on Form 8-K.

For a description of the Company’s business, segments and product offerings, refer to Item 1, Business, in this current report on Form 8-K.

The Company works with its customers to offer a broad scope of print and print-related capabilities and manage their full range of communication needs. The Company is focused on enhancing its strong customer relationships by expanding to a broader range of offerings. The Company will focus on further expanding its supply chain offerings and driving growth in core and related businesses. The Company will continue to seek opportunities to grow by utilizing core capabilities to expand print and print-related products and services, grow core businesses, strategically increase our geographic coverage, and focus on the expansion of the office products brands. For instance, our end-to-end supply chain services offerings combine print, warehousing, fulfillment and supply chain management into a single workflow designed to increase speed to the market and improve efficiencies across the distribution process. Ongoing investments via organic growth and strategic acquisition in our digital print technology will be an integral part of supporting growth across the Magazines, Catalogs and Logistics and Book segments. Further, other innovative offerings and investments such as co-mailing services and logistics solutions help our catalogers and magazine publisher customers reduce their overall cost of producing and distributing their product as postage expense often accounts for approximately half of these publishers’ costs to produce and deliver a catalog or magazine. We have been developing technologies to help book clients reduce the incidence of book piracy. We have also begun offering end-to-end fulfillment of subscription boxes to address client demand, which we believe will provide additional opportunity for us.

Management believes productivity improvement and cost reduction are critical to the Company’s continued competitiveness, and the flexibility of its platform enhances the value the Company delivers to its customers. Since 2015, our plant rationalization process has resulted in the closure of 7 facilities, which we believe has allowed us to realize meaningful cost savings. These cost savings primarily arise from facility related costs, such as overhead, employee costs and selling, general and administrative expenses. The Company continues to implement strategic initiatives across all platforms to reduce its overall cost structure, focus on safety initiatives and enhance productivity, including restructuring, consolidation, reorganization and integration of operations and streamlining of administrative and support activities.

The Company seeks to deploy its capital using a balanced and disciplined approach in order to ensure financial flexibility and provide returns to stockholders. Priorities for capital deployment, over time, include principal and interest payments on debt obligations, distributions to stockholders, targeted acquisitions and capital expenditures. The Company believes that a strong financial condition is important to customers focused on establishing or growing long-term relationships. The Company also expects to make targeted acquisitions that extend its capabilities, drive cost savings and reduce future capital spending needs. We believe these acquisitions may also allow us to achieve synergies.

Management uses several key indicators to gauge progress toward achieving these objectives. These indicators include organic sales growth, operating margins, cash flow from operations, capital expenditures, and Non-GAAP adjusted EBITDA. The Company targets long-term net sales growth at or above industry levels, while managing operating margins by achieving productivity improvements that offset the impact of price declines and cost inflation. Cash flows from operations are targeted to be stable over time, however, cash flows from operations in any given year can be significantly impacted by the timing of non-recurring or infrequent receipts and expenditures, the level of required pension plan contributions, volatility in the cost of raw materials, and the impact of working capital management efforts.

In 2018, the Company expects overall net sales to increase as compared to 2017 driven by the strategic acquisitions that occurred in 2017 and our expanded range of print related service offerings, offset by anticipated continuing volume declines and price pressures across both segments. In the Magazines, Catalogs and Logistics segment, the Company expects moderate organic net sales declines driven by the ongoing shift in advertiser spend from print to electronic media and declines in circulation and page counts. For the Book segment, the Company expects net sales to decline slightly driven by ongoing electronic substitution of content in the education sector, offset by expected growth in our digital print and supply chain services offerings. Office Products net sales are expected to increase in 2018 as compared to 2017 as a result of the acquisition of Quality Park, offset by volume declines driven by the continuing shift in volume from the traditional office products retailers to the online channel, which will likely result in further store consolidations and reductions in retail channel inventories.

Declining price levels along with cost inflation driven by tighter labor market conditions will continue to pressure operating margins during 2018. In order to partially offset this margin pressure, the Company initiated several restructuring actions in 2017 and 2016 to further reduce the Company’s overall cost structure. These restructuring actions included the closure of four manufacturing facilities during 2017 in the Book and Magazines, Catalogs and Logistics segments and the reorganization of certain business units. These and future cost reduction actions are expected to have a positive impact on operating earnings in 2018 and in future years. In addition, the Company expects to identify other cost reduction opportunities and take further actions in 2018, which may result in significant additional restructuring charges. These restructuring actions will be funded by cash generated from operations and cash on hand or, if necessary, by utilizing the Company’s credit facilities.

Cash flows from operations in 2018 are expected to be relatively consistent with 2017, primarily due to the positive impact of lower federal tax payments due to U.S. tax reform being offset by the impact of significant working capital reductions achieved in 2017. The Company expects capital expenditures to be in the range of $65 million to $75 million in 2018, consistent with our stated financial policy range for capital expenditures of 1.5% to 2.0% of annual net sales. Refer to Note 14, Income Taxes, for information on U.S. tax reform.

The Company’s net pension liability was $187 million as of December 31, 2017, as reported on the Company’s consolidated balance sheet and further described in Note 13, Retirement Plans, to the consolidated and combined financial statements. Governmental regulations for measuring pension plan funded status differ from those required under accounting principles generally accepted in the United States of America (“GAAP”) for financial statement preparation. Based on the plans’ regulatory funded status, there are no required contributions for the Company’s primary Qualified Plan in 2018. The required contributions in 2018, primarily for the Non-Qualified Plan, are expected to be approximately $6 million.

The preparation of consolidated and combined financial statements, in conformity with GAAP, requires the extensive use of management’s estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from these estimates. Estimates are used when accounting for items and matters including, but not limited to, allowance for uncollectible accounts receivable, inventory obsolescence, asset valuations and useful lives, taxes, restructuring and other provisions and contingencies.

The Company’s most critical accounting policies are those that are most important to the portrayal of its financial condition and results of operations, and that require the Company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. The Company has identified the following as its most critical accounting policies and judgments. Although management believes that its estimates and assumptions are reasonable, they are based upon information available when they are made, and therefore, actual results may differ from these estimates under different assumptions or conditions.

Prior to the separation, the combined financial statements were prepared on a stand-alone basis and were derived from RRD’s consolidated financial statements and accounting records. They included certain expenses of RRD that were allocated to LSC Communications for certain corporate functions, including healthcare and pension benefits, information technology, finance, legal, human resources, internal audit, treasury, tax, investor relations and executive oversight. These expenses were allocated to the Company on the basis of direct usage, when available, with the remainder allocated on a pro rata basis by revenue, employee headcount, or other measures. After the separation, the Company no longer records allocated amounts from RRD.

The Company recognizes revenue for the majority of its products upon the transfer of title and risk of ownership, which is generally upon shipment to the customer. Because the majority of the Company’s products are customized, product returns are not significant; however, the Company accrues for the estimated amount of customer credits at the time of sale. Revenue from the Company’s co-mail and list services operations is recognized when services are completed. Refer to Note 2, Significant Accounting Policies, to the consolidated and combined financial statements for further discussion.

Billings for shipping and handling costs are recorded gross. Many of the Company’s operations process materials, primarily paper, that may be supplied directly by customers or may be purchased by the Company and sold to customers. No revenue is recognized for customer-supplied paper, but revenues for Company-supplied paper are recognized on a gross basis. As a result, the Company’s reported sales and margins may be impacted by the mix of customer-supplied paper and Company-supplied paper.

Refer to Note 20, New Accounting Pronouncements, to the consolidated and combined financial statements for information related to the Company’s adoption in the first quarter of 2018 of ASU 2014-09 “Revenue from Contracts with Customers (Topic 606).”

The Company’s methodology for allocating the purchase price of acquisitions is based on established valuation techniques that reflect the consideration of a number of factors, including valuations performed by third-party appraisers when appropriate. Goodwill is measured as the excess of the cost of an acquired entity over the fair value assigned to identifiable assets acquired and liabilities assumed. Based on its current organization structure, the Company has identified seven reporting units for which cash flows are determinable and to which goodwill may be allocated. Goodwill is assigned to a specific reporting unit, depending on the nature of the underlying acquisition.

The Company performs its goodwill impairment tests annually as of October 31, or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. The Company also performs an interim review for indicators of impairment each quarter to assess whether an interim impairment review is required for any reporting unit. As part of its interim reviews, management analyzes potential changes in the value of individual reporting units based on each reporting unit’s operating results for the period compared to expected results as of the prior year’s annual impairment test. In addition, management considers how other key assumptions, including discount rates and expected long-term growth rates, used in the last annual impairment test could be impacted by changes in market conditions and economic events.

Given the historical valuations of the Company’s former magazines, catalogs and retail inserts reporting unit that have resulted in goodwill impairment in prior years, combined with the change in the composition of the carrying value of the reporting unit due to the acquisitions completed during the quarter ended September 30, 2017, the Company determined it necessary to perform an interim goodwill impairment review on this former reporting unit as of September 30, 2017.

For purposes of the goodwill impairment test, goodwill is not tested based upon the individual transactions that gave rise to the goodwill, but rather based upon the reporting unit’s total goodwill and the characteristics of the reporting unit in which the goodwill resides. Therefore, the level at which goodwill is tested for impairment is different from the level that originally created the goodwill. In the Company’s case, the test is performed based upon the total carrying value of the former magazines, catalogs and retail inserts reporting unit and that reporting unit’s total estimated fair value. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. As a result of the interim goodwill impairment test as of September 30, 2017, and consistent with prior goodwill impairment tests, the Company’s former magazines, catalogs and retail inserts reporting unit’s fair value continued to be at a value below the carrying value. This is primarily due to the negative revenue trends experienced in recent years that are only partially offset by the expected benefits of the new acquisitions. As a result, the Company recorded a charge of $55 million to recognize the impairment of goodwill in the former magazines, catalogs and retail inserts reporting unit.

For the quarter ended December 31, 2017, the Company completed an acquisition that became part of the former magazines, catalogs and retail inserts reporting unit. Given the amount by which the carrying amount of the reporting unit exceeded its fair value in the impairment test performed as of September 30, 2017, combined with the fact that management’s assessment of the fair value did not materially change, an additional charge of $18 million was recorded in the period ended December 31, 2017, which represents all of the goodwill arising from The Clark Group acquisition and additional amounts related to acquisitions completed during the quarter ended September 30, 2017.

The total charge to recognize the impairment of goodwill in the former magazines, catalogs and retail inserts reporting unit was $73 million for 2017, resulting in zero goodwill associated with the former magazines, catalogs and retail inserts reporting unit. Refer to Note 8, Restructuring, Impairment and Other Charges, for more information, and to Note 3, Business Combinations, for a summary of these charges recognized under the new reporting unit structure.

As of October 31, 2017, only two reporting units had goodwill: Book and Office Products. The goodwill balances as of October 31, 2017 for the Book and Office Products reporting units were $51 million and $31 million, respectively. Management assessed goodwill impairment risk by first performing a qualitative review of entity specific, industry, market and general economic factors for each reporting unit. In cases where the Company is not able to conclude that it is more likely than not that the fair values of our reporting units are greater than their carrying values, a one-step method for determining goodwill impairment is applied.

For the Book and Office Products reporting units, the Company compared the estimated fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of a reporting unit is greater than zero and its fair value exceeds its carrying amount, goodwill of the reporting unit is considered not impaired. However, if the carrying amount of a reporting unit exceeds its fair value, the goodwill is considered impaired and a full or partial write-off of goodwill would be required.

As part of its impairment test for these reporting units, the Company engaged a third-party valuation firm to assist in the Company’s determination of the estimated fair values. This determination included estimating the fair value of each reporting unit using both the income and market approaches. The income approach requires management to estimate a number of factors for each reporting unit, including projected future operating results, economic projections, anticipated future cash flows, discount rates and the allocation of shared or corporate items. The market approach estimates fair value using comparable marketplace fair value data from within a comparable industry grouping. The Company weighted both the income and market approach equally to estimate the concluded fair value of each reporting unit.

The determination of fair value and the allocation of that value to individual assets and liabilities requires the Company to make significant estimates and assumptions. These estimates and assumptions primarily include, but are not limited to: the selection of appropriate peer group companies; control premiums appropriate for acquisitions in the industries in which the Company competes; the discount rate; terminal growth rates; and forecasts of revenue, operating income, depreciation and amortization, restructuring charges and capital expenditures.

As a result of the 2017 annual goodwill impairment test for Book and Office Products, the Company did not recognize any goodwill impairment charges as the estimated fair values of the reporting units exceeded their respective carrying values.

Although the Company believes its estimates of fair value are reasonable, actual financial results could differ from those estimates due to the inherent uncertainty involved in making such estimates. Changes in assumptions concerning future financial results or other underlying assumptions could have a significant impact on either the fair value of the reporting units, the amount of the goodwill impairment charge, or both. Future declines in the overall market value of the Company’s equity and debt securities may also result in a conclusion that the fair value of one or more reporting units has declined below its carrying value.

One measure of the sensitivity of the amount of goodwill impairment charges to key assumptions is the amount by which each reporting unit “passed” (fair value exceeds the carrying value) or “failed” (the carrying value exceeds fair value) the goodwill impairment test. Book and Office Products passed with fair values that exceeded their carrying values by 43% and 17%, respectively.

Generally, changes in estimates of expected future cash flows would have a similar effect on the estimated fair value of the reporting unit. The estimated discount rate for both the Book and Office Products reporting units was 10% as of October 31, 2017. A 1.0% increase in estimated discount rates would not have resulted in Book or Office Products failing the goodwill impairment test. The Company believes that its estimates of future cash flows and discount rates are reasonable, but future changes in the underlying assumptions could differ due to the inherent uncertainty in making such estimates. Additionally, further price deterioration or lower volume could have a significant impact on the fair values of the reporting units.

The Company evaluates the recoverability of other long-lived assets, including property, plant and equipment and certain identifiable intangible assets, whenever events or changes in circumstances indicate that the carrying value of an asset or asset group may not be recoverable. The Company performs impairment tests of indefinite-lived intangible assets on an annual basis or more frequently in certain circumstances.

Factors that could trigger an impairment review include significant underperformance relative to historical or projected future operating results, significant changes in the manner of use of the assets or the strategy for the overall business, a significant decrease in the market value of the assets or significant negative industry or economic trends. When the Company determines that the carrying value of long-lived assets may not be recoverable based upon the existence of one or more of the indicators, the assets are assessed for impairment based on the estimated future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. If the carrying value of an asset exceeds its estimated future undiscounted cash flows, an impairment loss is recorded for the excess of the asset’s carrying value over its fair value.

The Company recognized impairment charges of $7 million during the year ended December 31, 2017 related to machinery and equipment. Additionally, the Company recorded charges of $8 million for the impairment of certain acquired indefinite-lived tradename intangible assets, including $5 million in Book and $3 million in Office Products.

The Company is the sole sponsor of certain defined benefit plans, which have been reflected in the consolidated balance sheets at December 31, 2017 and 2016. The Company records annual income and expense amounts relating to its pension plans based on calculations that include various actuarial assumptions, including discount rates, mortality, assumed rates of return, compensation increases, and turnover rates. The Company reviews its actuarial assumptions on an annual basis and makes modifications to the assumptions based on current rates and trends when it is deemed appropriate to do so. The effects of modifications on the value of plan obligations and assets is recognized immediately within other comprehensive income (loss) and amortized in investment and other income-net over future periods. The Company believes that the assumptions utilized in recording its obligations under its plans are reasonable based on its experience, market conditions and input from its actuaries and investment advisors.

Prior to the separation, certain employees of the Company participated in certain pension and postretirement health care plans sponsored by RRD. In the company’s combined financial statements, these plans were accounted for as multiemployer benefit plans and no net liabilities were reflected in the Company’s combined balance sheets as there were no unfunded contributions due at the end of any reporting period. The Company’s combined statements of operations included expense allocations for these benefits. These expenses were funded through intercompany transactions with RRD and were reflected within net parent company investment in LSC Communications. At the separation date, the Company assumed and recorded certain pension obligations and plan assets in single employer plans for the Company’s employees and certain former employees and retirees of RRD. Additionally, the U.K. pension plan was transferred from the Company to RRD.

The weighted-average discount rates used to calculate all pension benefits were 3.7% and 4.3% at December 31, 2017 and 2016, respectively.

A one-percentage point change in the discount rates at December 31, 2017 would have the following effects on the accumulated benefit obligation and projected benefit obligation:

The Company’s U.S. pension plans are frozen and the Company has previously transitioned to a risk management approach for its U.S. pension plan assets. The overall investment objective of this approach is to further reduce the risk of significant decreases in the plan’s funded status by allocating a larger portion of the plan’s assets to investments expected to hedge the impact of interest rate risks on the plan’s obligation. Over time, the target asset allocation percentage for the pension plan is expected to decrease for equity and other “return seeking” investments and increase for fixed income and other “hedging” investments. The assumed long-term rate of return for plan assets, which is determined annually, is likely to decrease as the asset allocation shifts over time. The impact of a change in discount rates on the accumulated benefit obligation and projected benefit obligation would be partially offset by the corresponding impact on the fair value of pension assets of hedging investments. The impact of a change in discount rates would increase or decrease the fair value of pension assets of return-seeking investments.

The expected long-term rate of return for plan assets is based upon many factors including expected asset allocations, historical asset returns, current and expected future market conditions and risk. In addition, the Company considered the impact of the current interest rate environment on the expected long-term rate of return for certain asset classes, particularly fixed income. The target asset allocation percentage for the primary U.S. Qualified Plan was approximately 55.0% for return seeking investments and approximately 45.0% for hedging investments. The expected long-term rate of return on plan assets assumption used to calculate net pension plan expense in 2017 was 7.0% for the Company’s primary U.S. Qualified pension plan. The expected long-term rate of return on plan assets assumption that will be used to calculate net pension plan expense in 2018 is 6.75% for the Company’s primary U.S. Qualified pension plan.

A 0.25% change in the expected long-term rate of return on plan assets at December 31, 2017 would have the following effects on 2017 and 2018 pension plan (income)/expense in the Company’s primary U.S. pension plan:

The Company has recorded deferred tax assets related to future deductible items, including domestic and foreign tax loss and credit carryforwards. The Company evaluates these deferred tax assets by tax jurisdiction. The utilization of these tax assets is limited by the amount of taxable income expected to be generated within the allowable carryforward period and other factors. Accordingly, management has provided a valuation allowance to reduce certain of these deferred tax assets when management has concluded that, based on the weight of available evidence, it is more likely than not that the deferred tax assets will not be fully realized. If actual results differ from these estimates, or the estimates are adjusted in future periods, adjustments to the valuation allowance might need to be recorded. As of December 31, 2017 and 2016, valuation allowances of $115 million and $87 million, respectively, were recorded in the Company’s consolidated balance sheets.

Significant judgment is required in determining the provision for income taxes and related accruals, deferred tax assets and liabilities and any valuation allowance recorded against deferred tax assets. In the ordinary course of business, there are transactions and calculations where the ultimate tax outcome is uncertain. Additionally, the Company’s tax returns are subject to audit by various U.S. and foreign tax authorities. The Company recognizes a tax position in its financial statements when it is more likely than not (a likelihood of more than fifty percent) that the position would be sustained upon examination by tax authorities. This recognized tax position is then measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Although management believes that its estimates are reasonable, the final outcome of uncertain tax positions may be materially different from that which is reflected in the Company’s consolidated and combined financial statements. The Company classifies interest expense and any related penalties related to income tax uncertainties as a component of income tax expense.

Prior to the separation in the Company’s combined financial statements, income tax expense and deferred tax balances were calculated on a separate return basis, although with respect to certain entities, the Company’s operations have historically been included in the tax returns filed by the respective RRD entities of which the Company’s business was previously a part. For periods after the separation, the Company has and will continue to file tax returns on its own behalf. The provision for income tax and income tax balances after the separation represent the Company's tax liabilities as an independent company.

Refer to Note 14, Income Taxes, for information on the enactment of the U.S. Tax Cuts and Jobs Act (“Tax Act”) on December 22, 2017.

The Company is subject to lawsuits, investigations and other claims related to environmental, employment, commercial and other matters, as well as preference claims related to amounts received from customers and others prior to their seeking bankruptcy protection. Periodically, the Company reviews the status of each significant matter and assesses the potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and the related liability is estimable, the Company accrues a liability for the estimated loss. Because of uncertainties related to these matters, accruals are based on the best information available at the time. As additional information becomes available, the Company reassesses the related potential liability and may revise its estimates.

With respect to claims made under the Company’s third-party insurance for workers’ compensation, automobile and general liability, the Company is responsible for the payment of claims below and above insured limits, and consulting actuaries are utilized to assist the Company in estimating the obligation associated with any such incurred losses, which are recorded in accrued and other non-current liabilities. Historical loss development factors for both the Company and the industry are utilized to project the future development of such incurred losses, and these amounts are adjusted based upon actual claims experience and settlements. If actual experience of claims development is significantly different from these estimates, an adjustment in future periods may be required. Expected recoveries of such losses are recorded in other current and other non-current assets.

The Company records restructuring charges when liabilities are incurred as part of a plan approved by management with the appropriate level of authority for the elimination of duplicative functions, the closure of facilities, or the exit of a line of business, generally in order to reduce the Company’s overall cost structure. Total restructuring charges were $37 and $15 million for the years ended December 31, 2017 and 2016, respectively.

The restructuring liabilities may change in future periods based on several factors that could differ from original estimates and assumptions. These include, but are not limited to: contract settlements on terms different than originally expected; ability to sublease properties based on market conditions at rates or on timelines different than originally estimated; or changes to original plans as a result of acquisitions or other factors. Such changes may result in reversals of or additions to restructuring charges that could affect amounts reported in the consolidated statements of operations of future periods.

The Company maintains an allowance for doubtful accounts receivable, which is reviewed for estimated losses resulting from the inability of its customers to make required payments for products and services. Specific customer provisions are made when a review of significant outstanding amounts, utilizing information about customer creditworthiness and current economic trends, indicates that collection is doubtful. In addition, provisions are made at differing rates, based upon the age of the receivable and the Company’s past collection experience. The allowance for doubtful accounts receivable was $11 million and $10 million at December 31, 2017 and 2016, respectively. The Company’s estimates of the recoverability of accounts receivable could change, and additional changes to the allowance could be necessary in the future if any major customer’s creditworthiness deteriorates or actual defaults are higher than the Company’s historical experience.

Other than non-cancelable operating lease commitments, the Company does not have off-balance sheet arrangements, financings or special purpose entities.

In the financial review that follows, the Company discusses its consolidated and combined statements of operations, balance sheets, cash flows and certain other information. This discussion should be read in conjunction with the Company’s consolidated and combined financial statements and the related notes that begin on page F-1.

Results of Operations for the Year Ended December 31, 2017 as Compared to the Year Ended December 31, 2016

The following table shows the results of operations for the year ended December 31, 2017 and 2016, which reflects the results of acquired businesses from the relevant acquisition dates:

Net sales for the year ended December 31, 2017 were $3,603 million, a decrease of $51 million or 1.4% compared to the year ended December 31, 2016. Net sales were impacted by:

On a pro forma basis, the Company’s net sales for the year ended December 31, 2017 decreased by approximately $294 million or 6.9% compared to the year ended December 31, 2016 (refer to Note 3, Business Combinations, to the consolidated and combined financial statements).

Total cost of sales decreased $5 million, or 0.2%, for the year ended December 31, 2017 compared to the year ended December 31, 2016, including a $10 million, or 0.3%, increase due to changes in foreign exchange rates. Cost of sales also decreased due to lower volume, a decline in paper pass-through sales and gains from the sales of assets. This was partially offset by cost of sales incurred by the acquired companies and higher purchase accounting inventory adjustments.

Selling, general and administrative expenses increased $3 million, or 1.0%, to $307 million for the year ended December 31, 2017, primarily driven by increases in costs to operate as an independent public company due to the separation, expenses incurred by the acquired companies and higher acquisition-related expenses of $5 million. The increase in selling, general and administrative expenses was partially offset by lower selling expense.

As a percentage of net sales, selling, general and administrative expenses increased from 8.3% for the year ended December 31, 2016 to 8.5% for the year ended December 31, 2017 primarily due to lower sales and increases in costs to operate as an independent public company due to the separation.

For the year ended December 31, 2017, the Company recorded restructuring, impairment and other charges of $129 million. The charges included:

For the year ended December 31, 2016, the Company recorded restructuring, impairment and other charges of $18 million. The charges included:

Depreciation and amortization decreased $11 million to $160 million for the year ended December 31, 2017 compared to the year ended December 31, 2016 due to decreased capital spending in recent years compared to historical levels, partially offset by acquisitions.

(Loss) income from operations for the year ended December 31, 2017 decreased by $149 million, or 114.6%, to a loss of $19 million as compared to the year ended December 31, 2016. The decrease was due to lower volume in the Book and Office Products segments, higher restructuring, impairment and other charges, price pressures, and higher acquisition expenses, partially offset by gains from the sales of assets.

The Company recorded net interest expense of $72 million and $18 million for the years ended December 31, 2017 and 2016, respectively. The increase was primarily due to debt incurred in relation to the separation. Refer to Note 11, Debt, to the consolidated and combined financial statements. Investment and other (income)-net primarily relates to the Company’s pension benefit plans in both years.

The effective income tax rate for the year ended December 31, 2017 was (30.5%) compared to 32.5% for the year ended December 31, 2016. In connection with our initial analysis of the impact of the Tax Act, the Company recorded a provisional net tax expense of $24 million in the year ended December 31, 2017. This amount consists of a provisional expense of $16 million for the one-time transition tax, as a result of deemed repatriation of the Company’s foreign earnings, and a net provisional expense of $8 million for the remeasurement of deferred taxes associated with the reduced U.S. federal corporate tax rate from 35.0% to 21.0%. The 2017 effective income tax rate was also impacted by the non-deductible goodwill impairment charges. Refer to Note 14, Income Taxes, for information regarding the Tax Act.

The following tables summarize net sales, (loss) income from operations and certain items impacting comparability within each of the reportable segments and Corporate. The descriptions of the reporting units generally reflect the primary products provided by each reporting unit.

Net sales for the Magazines, Catalogs and Logistics segment for the year ended December 31, 2017 were $1,583 million, an increase of $57 million, or 3.7%, compared to 2016 primarily as a result of higher volume due to the MCL acquisitions and a $3 million increase in pass-through paper sales, partially offset by price pressures.

Magazines, Catalogs and Logistics segment income from operations decreased by $101 million for the year ended December 31, 2017 primarily due to higher restructuring, impairment and other charges of $82 million, the majority of which related to goodwill impairment recorded in the segment. Refer to Note 8, Restructuring, Impairment and Other Charges, for more information. Income from operations also decreased due to price declines. Operating margins decreased from 1.8% for the year ended December 31, 2016 to (4.6%) for the year ended December 31, 2017 primarily due to higher restructuring, impairment and other charges and price declines.

Net sales for the Book segment for the year ended December 31, 2017 were $1,022 million, a decrease of $75 million, or 6.8%, compared to 2016 primarily due to lower volume within the educational and religious markets and coloring products, a $21 million decrease in pass-through paper sales, and price pressures, partially offset by higher revenues from digital and supply chain management and fulfillment services.

Book segment income from operations and operating margins decreased for the year ended December 31, 2017 compared to 2016 due to lower volume, higher restructuring, impairment and other charges and price declines, partially offset by gains from the sale of assets.

Net sales for the Office Products segment for the year ended December 31, 2017 were $495 million, a decrease of $32 million, or 6.1% compared to 2016, due to lower volume, primarily in note-taking products, filing products and binder products, and price pressures. The decreases were partially offset by the acquisitions of Quality Park and NECI in the fourth and third quarters of 2017, respectively.

Office Products segment income from operations decreased $12 million for the year ended December 31, 2017, mainly due to lower volume and higher restructuring, impairment and other charges, partially offset by cost control initiatives. Operating margins decreased from 10.2% for the year ended December 31, 2016 to 8.5% for the year ended December 31, 2017 due to price pressures and higher restructuring, impairment and other charges, partially offset by cost control initiatives.

Net sales for the Other grouping for the year ended were $503 million, a decrease of $1 million, or 0.2%, compared to 2016 primarily due to lower Europe and directories volume, including the impact of certain customer contracts previously managed by European operations that were assigned to RRD entities as of the separation, a $10 million decrease in pass-through paper sales, and price pressures, partially offset by higher volume due to the acquisition of Continuum in the fourth quarter of 2016 and a $10 million increase due to changes in foreign exchange rates, primarily in Polish zloty.

Income from operations and operating margin for the Other grouping increased for the year ended December 31, 2017 compared to 2016 primarily due to the gains from the sale of assets, partially offset by declining prices.

The following table summarizes unallocated operating expenses and certain items impacting comparability within the activities presented as Corporate:

Corporate operating expenses for the year ended December 31, 2017 were $78 million, compared to $65 million during the year ended December 31, 2016. The most significant charges are shown above and were partially offset by reductions in other corporate expenses. Additionally, the change was also driven by higher costs incurred during the year ended December 31, 2017 as a result of costs to operate as an independent public company.

Prior to the separation from RRD, many of the Corporate operating expenses were based on allocations from RRD, however, the Company has incurred such costs directly after the separation.

Results of Operations for the Year Ended December 31, 2016 as Compared to the Year Ended December 31, 2015

The following table shows the results of operations for the year ended December 31, 2016 and 2015, which reflects the results of acquired businesses from the relevant acquisition dates:

Net sales for the year ended December 31, 2016 were $3,654 million, a decrease of $89 million or 2.4% compared to the year ended December 31, 2015. Net sales were impacted by:

Total cost of sales decreased $59 million, or 1.9%, for the year ended December 31, 2016 compared to the year ended December 31, 2015, including a $28 million, or 0.9%, decrease due to changes in foreign exchange rates. Additionally, cost of sales decreased due to a decline in paper pass-through sales, lower volume in the Office Products and Magazines, Catalogs and Logistics segments and the Other grouping, lower purchase accounting inventory adjustments and synergies from the integration of Courier. This was partially offset by increases from the acquisition of Courier and higher supply chain management and fulfillment volume in the Book segment.

Selling, general and administrative expenses decreased $5 million, or 1.6%, to $304 million for the year ended December 31, 2016, primarily driven by lower selling expense, a decrease in acquisition-related expenses of $14 million, and a $3 million, or 1.0%, decrease due to changes in foreign exchange rates. The results from the favorable expense drivers were partially offset by increases in costs to operate as an independent public company due to the separation and higher expenses as a result of the acquisition of Courier.

For the year ended December 31, 2016, the Company recorded restructuring, impairment and other charges of $18 million compared to $57 million for the same period in 2015. The charges included:

For the year ended December 31, 2015, the Company recorded restructuring, impairment and other charges of $57 million. The charges included:

Depreciation and amortization decreased $10 million to $171 million for the year ended December 31, 2016 compared to the year ended December 31, 2015 due to decreased capital spending in recent years compared to historical levels, partially offset by the acquisitions of Courier and Esselte.

Income from operations for the year ended December 31, 2016 increased by $24 million, or 22.6%, to $130 million as compared to the year ended December 31, 2015. The increase was due to higher volume as a result of the acquisition of Courier, lower restructuring, impairment and other charges, synergies from the integration of Courier, and a decline in acquisition-related expenses, partially offset by price pressures and lower volume in the Office Products and Magazines, Catalogs and Logistics segments and the Other grouping.

The Company recorded net interest expense of $18 million and net interest income of $3 million for the years ended December 31, 2016 and 2015, respectively. The change was primarily due to debt incurred in relation to the separation. Refer to Note 11, Debt, to the consolidated and combined financial statements. Investment and other (income)-net relates to the Company’s pension benefit plans in both years.

The effective income tax rate for the year ended December 31, 2016 was 32.5% compared to 46.5% for the year ended December 31, 2015. The 2015 effective income tax rate reflected a tax expense of $6 million that was recorded due to an unfavorable court decision related to payment of prior year taxes in Mexico, the establishment of a valuation allowance on certain international net operating loss deferred tax assets and acquisition-related expenses of $14 million, most of which were not tax deductible.

The following tables summarize net sales, income (loss) from operations and certain items impacting comparability within each of the reportable segments and Corporate. The descriptions of the reporting unit generally reflect the primary products provided by each reporting unit.

Net sales for the Magazines, Catalogs and Logistics segment for the year ended December 31, 2016 were $1,526 million, a decrease of $170 million, or 10.0%, compared to 2016 primarily as a result of a $67 million decrease in pass-through paper sales, price declines and lower volume.

The decrease in Magazines, Catalogs and Logistics segment income from operations and operating margin for the year ended December 31, 2016 compared to 2015 was primarily due to price declines and lower volume, partially offset by lower restructuring, impairment and other charges.

Net sales for the Book segment for the year ended December 31, 2016 were $1,097 million, an increase of $172 million, or 18.6%, compared to 2015 primarily due to the acquisition of Courier, increased volume in supply chain management and fulfillment, and a $35 million increase in pass-through paper sales, partially offset by lower volume in educational books and price declines.

Book segment income from operations and operating margin increased for the year ended December 31, 2016 compared to 2015 primarily due to the acquisition of Courier, purchase accounting inventory adjustments recorded in prior year and lower restructuring, impairment and other charges, partially offset by price declines.

Net sales for the Office Products segment for the year ended December 31, 2016 were $527 million, a decrease of $35 million, or 6.2% compared to 2015, including a $3 million, or 0.5%, decrease due to changes in foreign exchange rates. Net sales also decreased as a result of lower volume, primarily in filing products, envelopes and binders products, and price pressures.

Office Products segment income from operations increased $7 million for the year ended December 31, 2016, mainly due to cost control initiatives and lower restructuring, impairment and other charges, partially offset by lower volume. Operating margins increased from 8.4% for the year ended December 31, 2015 to 10.2% for the year ended December 31, 2016 due to cost control initiatives and lower restructuring, impairment and other charges.

Net sales for the Other grouping for the year ended were $504 million, a decrease of $56 million, or 10.0%, compared to 2016, primarily due to a $31 million decrease due to foreign exchange rates in the Mexican Peso and Polish Zloty, lower volume, a $9 million decline in pass-through paper sales, and price pressures.

Income from operations and operating margin for the Other grouping increased for the year ended December 31, 2016 compared to 2015 primarily due to lower restructuring, impairment and other charges, partially offset by price declines.

The following table summarizes unallocated operating expenses and certain items impacting comparability within the activities presented as Corporate:

Corporate operating expense for the year ended December 31, 2016 was $65 million, compared to $37 million during the same period in 2015. The most significant charges are shown above and were partially offset by reductions in other corporate expenses. The increase was mostly driven by one-time transaction costs associated with becoming a standalone company, a $7 million LIFO inventory benefit in 2015, the unfavorable impact of a prior year workers’ compensation adjustment, increased bad debt expense, and higher restructuring costs, partially offset by lower acquisition-related expenses.

Prior to the separation from RRD, many of the Corporate operating expenses were based on allocations from RRD, however, the Company has incurred such costs directly after the separation.

The Company believes that certain non-GAAP measures, such as Non-GAAP adjusted EBITDA, provide useful information about the Company’s operating results and enhance the overall ability to assess the Company’s financial performance. The Company uses these measures, together with other measures of performance under GAAP, to compare the relative performance of operations in planning, budgeting and reviewing the performance of its business. Non-GAAP adjusted EBITDA allows investors to make a more meaningful comparison between the Company’s core business operating results over different periods of time. The Company believes that Non-GAAP adjusted EBITDA, when viewed with the Company’s results under GAAP and the accompanying reconciliations, provides useful information about the Company’s business without regard to potential distortions. By eliminating potential differences in results of operations between periods caused by factors such as depreciation and amortization methods and restructuring, impairment and other charges, the Company believes that Non-GAAP adjusted EBITDA can provide a useful additional basis for comparing the current performance of the underlying operations being evaluated.

Non-GAAP adjusted EBITDA is not presented in accordance with GAAP and has important limitations as an analytical tool. You should not consider these measures in isolation or as a substitute for analysis of our results as reported under GAAP. In addition, these measures are defined differently by different companies in our industry and, accordingly, such measures may not be comparable to similarly-titled measures of other companies.

Non-GAAP adjusted EBITDA excludes restructuring, impairment and other charges-net, separation-related expenses, purchase accounting adjustments, acquisition-related expenses, loss on debt extinguishment, and a pension settlement charge. A reconciliation of GAAP net income to non-GAAP adjusted EBITDA for the years ended December 31, 2017, 2016 and 2015 is presented in the following table:

Refer to Results of Operations for information on restructuring, impairment and other charges for the years ended December 31, 2017, 2016 and 2015.

Separation-related expenses: The years ended December 31, 2017 and 2016 included charges of $4 million and $5 million, respectively, for one-time transaction costs associated with becoming a standalone company.

Purchase accounting adjustments: The years ended December 31, 2017 and December 31, 2015 included net (benefit) charges of $(1) million and $11 million, respectively, as a result of purchase accounting inventory adjustments and a gain on acquisition.

Acquisition-related expenses: The years ended December 31, 2017 and 2015 included charges of $5 million and $14 million, respectively, related to legal, accounting and other expenses associated with the completed and contemplated acquisitions.

Loss on debt extinguishment: The year ended December 31, 2017 included a loss of $3 million related to debt extinguishment. Refer to Note 11, Debt, for more information.

Pension settlement charge: The year ended December 31, 2016 included a pension settlement charge of $1 million related to lump-sum pension settlement payments for a pension plan from a company acquired in 2014.

The Company believes it has sufficient liquidity to support its ongoing operations and to invest in future growth to create value for its stockholders. Operating cash flows and the Company’s Revolving Credit Facility are the Company’s primary sources of liquidity and are expected to be used for, among other things, payments of interest and principal on the Company’s debt obligations, distributions to stockholders that may be approved by the Board of Directors, acquisitions, capital expenditures necessary to support productivity improvement, and growth and completion of restructuring programs.

The following sections describe the Company’s cash flows for the years ended December 31, 2017, 2016 and 2015.

Operating cash inflows are largely attributable to sales of the Company’s products. Operating cash outflows are largely attributable to recurring expenditures for raw materials, labor, rent, interest, taxes and other operating activities.

Net cash provided by operating activities was $205 million for the year ended December 31, 2017 compared to $231 million for the same period in 2016. The decrease in net cash provided by operating activities was driven by an increase in interest payments, reflecting a full year on interest payments primarily related to the issuance of long-term debt as of September 30, 2016, partially offset by the timing of customer and supplier payments.

Beginning on October 1, 2016, transactions with RRD and Donnelley Financial are considered third-party and are settled in cash, whereas prior to that date transactions were net settled among the three companies.

Net cash provided by operating activities was $231 million for the year ended December 31, 2016 compared to $275 million for the same period in 2015. The decrease in net cash provided by operating activities reflected the timing of supplier payments and cash collections, increased costs related to the separation and interest payments in 2016.

Net cash used in investing activities for the year ended December 31, 2017 was $278 million compared to $49 million for the same period in 2016. Significant changes are as follows:

Net cash used in investing activities for the year ended December 31, 2016 was $49 million compared to $122 million for the same period in 2015. Significant changes are as follows:

Net cash provided by financing activities for the year ended December 31, 2017 was $6 million compared to $187 million used in financing activities for the same period in 2016. Significant changes are as follows:

Net cash used in financing activities for the year ended December 31, 2016 was $187 million compared to $172 million for the same period in 2015. Significant changes are as follows:

Cash dividends declared and paid to stockholders during the year ended December 31, 2017 totaled $34 million. On January 18, 2018, the Board of Directors declared a quarterly cash dividend of $0.26 per common share, payable on March 2, 2018 to stockholders of record on February 15, 2018.

The Credit Agreement generally allows annual dividend payments of up to $50 million in aggregate, though additional dividends may be allowed subject to certain conditions. The timing, declaration, amount and payment of any future dividends to the Company’s stockholders falls within the discretion of the Company’s Board of Directors. The decisions of the Company’s Board of Directors regarding the payment of future dividends depends on many factors, including but not limited to the Company’s financial condition, future prospects, earnings, capital requirements and debt service obligations, as well as legal requirements, regulatory constraints, industry practice and other factors that the Board of Directors may deem relevant. In addition, the terms of the agreements governing the Company’s existing debt or debt that the Company may incur in the future may limit or prohibit the payment of dividends. There can be no assurance that the Company will continue to pay a dividend.

The following table quantifies the Company’s future contractual obligations as of December 31, 2017:

	Payments Due In
	Total		2018		2019		2020		2021		2022		Thereafter
	(in millions)
Debt _(a)	$	840	$	124	$	43	$	43	$	43	$	137	$	450
Interest due on debt _(b)		309		61		58		54		51		46		39
Multi-employer pension withdrawals obligations		118		9		8		8		8		8		77
Operating leases _(c)		213		53		48		36		30		22		24
Deferred compensation		8		1		—		—		—		1		6
Pension plan contributions _(d)		12		6		6		—		—		—		—
Incentive compensation		5		5		—		—		—		—		—
Outsourced services		42		35		3		2		2		—		—
Other _(e)		20		19		1		—		—		—		—
Total as of December 31, 2017	$	1,567	$	313	$	167	$	143	$	134	$	214	$	596

As a result of the Tax Act, the Company recorded a one-time transition tax expense of $16 million during the fourth quarter of 2017. The Company will make an election to pay the transition tax liability in installments over eight years and, therefore, $15 million of the resulting income taxes liability was recorded as noncurrent income taxes payable in the consolidated balance sheet as of December 31, 2017.

Cash and cash equivalents were $34 million and $95 million as of December 31, 2017 and December 31, 2016, respectively.

The Company’s cash balances are held in several locations throughout the world, including amounts held outside of the United States. Cash and cash equivalents as of December 31, 2017 included $15 million in the U.S. and $19 million at international locations.

The Company maintains cash pooling structures that enable participating international locations to draw on the pools’ cash resources to meet local liquidity needs. Foreign cash balances may be loaned from certain cash pools to U.S. operating entities on a temporary basis in order to reduce the Company’s short-term borrowing costs or for other purposes. As of December 31, 2017, $40 million of international cash was loaned to U.S. operating entities.

On September 30, 2016, the Company issued $450 million of Senior Secured Notes (the “Senior Notes”). Net proceeds from the offering of the Senior Notes (the “Notes Offering”) were distributed to RRD in the form of a dividend. The Company did not retain any proceeds from the Notes Offering. Select terms on the Senior Notes include:

The Senior Notes were issued pursuant to an indenture where certain wholly-owned domestic subsidiaries of the Company guarantee the Senior Notes (the “Guarantors”). The Senior Notes are fully and unconditionally guaranteed, on a senior secured basis, jointly and severally, by the Guarantors, which are comprised of each of the Company’s existing and future direct and indirect wholly-owned U.S. subsidiaries that guarantee the Company’s obligations. The Senior Notes are not guaranteed by the Company’s foreign subsidiaries or unrestricted subsidiaries. The Senior Notes and the related guarantees are secured on a first-priority lien basis by substantially all assets of the Company and the Guarantors, subject to certain exceptions and permitted liens. The Indenture governing the Senior Notes contains certain covenants applicable to the Company and its restricted subsidiaries, including limitations on: (1) liens; (2) indebtedness; (3) mergers, consolidations and acquisitions; (4) sales, transfers and other dispositions of assets; (5) loans and other investments; (6) dividends and other distributions, stock repurchases and redemptions and other restricted payments; (7) restrictions affecting subsidiaries; (8) transactions with affiliates; and (9) designations of unrestricted subsidiaries. Each of these covenants is subject to important exceptions and qualifications. The Indenture is filed as an exhibit to the annual report on Form 10-K, as filed with the SEC on February 22, 2018.

On September 30, 2016 the Company entered into a credit agreement (the “Credit Agreement”) that provides for (i) a new senior secured term loan B facility in an aggregate principal amount of $375 million (the “Term Loan Facility”) and (ii) a new senior secured revolving credit facility in an aggregate principal amount of $400 million (the “Revolving Credit Facility”). The proceeds of any collection or other realization of collateral received in connection with the exercise of remedies and any distribution in respect of collateral in any bankruptcy proceeding will be applied first to repay amounts due under the Revolving Credit Facility before the lenders under the Term Loan Facility or the holders of the Senior Notes receive such proceeds.

The Company used the net proceeds from the Term Loan Facility to fund a cash dividend to RRD and to pay fees and expenses both related to the separation from RRD in October 2016. The Company intends to use any additional borrowings under the Credit Facilities for general corporate purposes, including the financing of permitted investments.

The debt issuance costs and original issue discount are being amortized over the life of the facilities using the effective interest method.

The Credit Agreement is subject to a number of covenants, including, but not limited to, a minimum Interest Coverage Ratio and a Consolidated Leverage Ratio, as defined in and calculated pursuant to the Credit Agreement, that, in part, restrict the Company’s ability to incur additional indebtedness, create liens, engage in mergers and consolidations, make restricted payments and dispose of certain assets. The Credit Agreement generally allows annual dividend payments of up to $50 million in aggregate, though additional dividends may be allowed subject to certain conditions. Each of these covenants is subject to important exceptions and qualifications. The Credit Agreement is filed as an exhibit to the annual report on Form 10-K, as filed with the SEC on February 22, 2018.

On November 17, 2017, the Company amended the Credit Agreement to reduce the interest rate for the Term Loan Facility by 50 basis points and the LIBOR “floor” was also reduced by 25 basis points. Other terms, including the outstanding principal, maturity date and debt covenants were not amended. Select terms on the Term Loan Facility before and after amendment include:

The Credit Agreement – and therefore the Term Loan Facility – comprises a syndication of various lenders. Under the terms of the Term Loan Facility, each lender is deemed to have loaned a specific amount to the Company and has the right to repayment from the Company directly. Therefore, we concluded that the Term Loan Facility is a loan syndication under GAAP. As such, in order to determine whether the debt was modified or extinguished as a result of the amendment, we examined the amount of principal pre- and post-amendment by individual lender. As a result, we determined that $65 million of outstanding principal had been extinguished, even though the total outstanding principal amongst all lenders pre- and post-amendment remained unchanged.

Consequently, the amendment resulted in a pre-tax loss on debt extinguishment of $3 million related to the unamortized discount and debt issuance costs attributable to the $65 million of outstanding principal that had been considered extinguished. There was no net impact to cash and cash equivalents, total outstanding principal remained unchanged, and no cash was exchanged between the lenders and the Company (other than customary administrative fees). However, the statement of cash flows for the year ended December 31, 2017 will reflect $65 million in proceeds from the issuance of long-term debt, with an offsetting amount included in payments of current maturities of long-term debt.

On February 2, 2017, the Company paid in advance the full amount of required amortization payments, $50 million, for the year ended December 31, 2017 for the Term Loan Facility.

There were $75 million of borrowings under the Revolving Credit Facility as of December 31, 2017. Based on the Company’s consolidated statements of operations for the year ended December 31, 2017 and existing debt, the Company would have had the ability to utilize the entire $400 million Revolving Credit Facility and not have been in violation of the terms of the agreement. Availability under the Revolving Credit Facility was reduced by $75 million in borrowings and $53 million related to outstanding letters of credit.

The current availability under the Revolving Credit Facility and net availability as of December 31, 2017 is shown in the table below:

The Company was in compliance with its debt covenants as of December 31, 2017, and expects to remain in compliance based on management’s estimates of operating and financial results for 2018 and the foreseeable future. However, declines in market and economic conditions or demand for certain of the Company’s products could impact the Company’s ability to remain in compliance with its debt covenants in future periods. As of December 31, 2017, the Company met all the conditions required to borrow under the Credit Agreement and management expects the Company to continue to meet the applicable borrowing conditions.

The failure of a financial institution supporting the Credit Agreement would reduce the size of the Company’s committed facility unless a replacement institution were added. Currently, the Credit Agreement is supported by fifteen U.S. and international financial institutions.

As of December 31, 2017, the Company had $53 million in outstanding letters of credit issued under the Revolving Credit Facility, all of which reduced the availability thereunder. As of December 31, 2017, the Company also had $16 million in other uncommitted credit facilities, all of which were outside the U.S. (the “Other Facilities”). As of December 31, 2017, letters of credit and guarantees of a de minimis amount were issued and reduced availability under the Other Facilities.

On February 15, 2018, the Company’s Board of Directors approved an initial share repurchase authorization of up to $20 million of common stock under which the Company may buy back LSC Communications’ shares at its discretion from February 15, 2018 through August 15, 2019. The Company expects to fund the repurchases, if any, from a combination of cash on hand, cash flow and borrowings under its Revolving Credit Facility.

The Company is exposed to interest rate risk on its variable debt and price risk on its fixed-rate debt. At December 31, 2017, the Company’s variable-interest borrowings were $387 million, or approximately 46.1%, of the Company’s total debt.

The Company assesses market risk based on changes in interest rates utilizing a sensitivity analysis that measures the potential loss in earnings, fair values and cash flows based on a hypothetical 10% change in interest rates. Using this sensitivity analysis, such changes would not have a material effect on interest income or expense and cash flows and would change the fair values of fixed-rate debt at December 31, 2017 by approximately $17 million.

The Company is exposed to the impact of foreign currency fluctuations in certain countries in which it operates. The exposure to foreign currency movements is limited in many countries because the operating revenues and expenses of its various subsidiaries and business units are substantially in the local currency of the country in which they operate. To the extent that borrowings, sales, purchases, revenues, expenses or other transactions are not in the local currency of the subsidiary, the Company is exposed to currency risk and may enter into foreign exchange forward contracts to hedge the currency risk. The Company is primarily exposed to the currencies of the Canadian dollar, Polish zloty and Mexican peso. The Company does not use derivative financial instruments for trading or speculative purposes.

For a discussion of certain environmental, health and safety issues involving the Company, refer to Note 10, Commitments and Contingencies, to the consolidated and combined financial statements.

For a discussion of certain litigation involving the Company, refer to Note 10, Commitments and Contingencies, to the consolidated and combined financial statements.

Recently issued accounting standards and their estimated effect on the Company’s consolidated and combined financial statements are also described in Note 20, New Accounting Pronouncements, to the consolidated and combined financial statements.

We have audited the accompanying consolidated and combined balance sheets of LSC Communications, Inc. and subsidiaries (the "Company") as of December 31, 2017 and 2016, the related consolidated and combined statements of operations, comprehensive income, stockholders’ equity and cash flows, for each of the three years in the period ended December 31, 2017, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 1, prior to October 1, 2016, the accompanying consolidated and combined financial statements have been derived from the consolidated financial statements and accounting records of R.R. Donnelley & Sons Company. The consolidated and combined financial statements include the allocation of certain assets, liabilities, expenses and income that have historically been held at the R.R. Donnelley & Sons Company corporate level but which are specifically identifiable or attributable to the Company. The consolidated and combined financial statements also include expense allocations for certain corporate functions historically provided by R.R. Donnelley & Sons Company. These costs and allocations may not be reflective of the actual expense which would have been incurred had the Company operated as a separate unaffiliated entity apart from R.R. Donnelley & Sons Company.

February 22, 2018 (December 11, 2018 as to the effects of the segment change as described in Note 17, Segment Information, and the adoption of Accounting Standards Updates 2017-07 and 2016-18 as described in Note 20, New Accounting Pronouncements)

	Year Ended December 31,
	2017			2016			2015
Net sales	$	3,603		$	3,654		$	3,743
Cost of sales		3,026			3,031			3,090
Selling, general and administrative expenses (exclusive of depreciation and amortization)		307			304			309
Restructuring, impairment and other charges-net (Note 8)		129			18			57
Depreciation and amortization		160			171			181
(Loss) income from operations		(19	)		130			106
Interest expense (income)-net (Note 11)		72			18			(3	)
Investment and other (income)-net		(47	)		(45	)		(29	)
(Loss) income before income taxes		(44	)		157			138
Income tax expense (Note 14)		13			51			64
Net (loss) income	$	(57	)	$	106		$	74

Net (loss) income per common share(Note 12)
Basic (loss) net earnings per share	$	(1.69	)	$	3.25		$	2.27
Diluted (loss) net earnings per share	$	(1.69	)	$	3.23		$	2.27

Dividends declared per common share	$	1.00		$	0.25		$	—

Weighted average number of common shares outstanding
Basic		33.8			32.5			32.4
Diluted		33.8			32.8			32.4

The adjustments for net pension plan cost were net of income tax expense of $15 million and $28 million for the years ended December 31, 2017 and 2016, respectively, and net of income tax benefit of $1 million for the year ended December 31, 2015.

	December 31,
	2017			2016
ASSETS
Cash and cash equivalents	$	34		$	95
Receivables, less allowances for doubtful accounts of $11 in 2017 (2016: $10)		727			667
Inventories (Note 5)		238			193
Prepaid expenses and other current assets		47			21
Total current assets		1,046			976
Property, plant and equipment-net (Note 6)		576			608
Goodwill (Note 7)		82			84
Other intangible assets-net (Note 7)		160			131
Deferred income taxes		51			57
Other noncurrent assets		99			96
Total assets	$	2,014		$	1,952
LIABILITIES
Accounts payable	$	406		$	294
Accrued liabilities (Note 9)		239			237
Short-term and current portion of long-term debt (Note 11)		123			52
Total current liabilities		768			583
Long-term debt (Note 11)		699			742
Pension liabilities		182			279
Deferred income taxes		1			2
Restructuring and multi-employer pension liabilities		49			54
Other noncurrent liabilities		67			52
Total liabilities		1,766			1,712

Commitments and contingencies (Note 10)

EQUITY
Common stock, $0.01 par value
Authorized: 65,000,000 shares;
Issued: 34,610,931 shares in 2017 (2016: 32,449,669)		—			—
Additional paid-in-capital		816			770
(Accumulated deficit) retained earnings		(90	)		1
Accumulated other comprehensive loss (Note 15)		(476	)		(531	)
Treasury stock, at cost: 100,256 shares in 2017		(2	)		—
Total equity		248			240
Total liabilities and equity	$	2,014		$	1,952

	Year Ended December 31,
	2017			2016			2015
Cash Flows from Operating Activities
Net (loss) income	$	(57	)	$	106		$	74
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Impairment charges		88			—			8
Depreciation and amortization		160			171			181
Provision for doubtful accounts receivable		3			6			3
Share-based compensation		13			8			6
Deferred income taxes		(15	)		(18	)		(38	)
Changes in uncertain tax positions		—			—			7
Gain on sale of investments and other assets - net		(10	)		—			—
Other		5			(2	)		(1	)
Changes in operating assets and liabilities - net of acquisitions:
Accounts receivable- net		(7	)		(52	)		(2	)
Inventories		5			29			24
Prepaid expenses and other current assets		(1	)		(7	)		21
Accounts payable		103			13			2
Income taxes payable and receivable		(7	)		1			11
Accrued liabilities and other		(75	)		(24	)		(21	)
Net cash provided by operating activities		205			231			275
Cash Flows from Investing Activities
Capital expenditures		(60	)		(48	)		(42	)
Acquisition of businesses, net of cash acquired		(236	)		(8	)		(111	)
Net proceeds from sales/purchase of investments and other assets		18			6			8
Other investing activities		—			1			23
Net cash used in investing activities		(278	)		(49	)		(122	)
Cash Flows from Financing Activities
Proceeds from issuance of long-term debt		65			816			—
Payments of current maturities and long-term debt		(118	)		(17	)		(72	)
Net proceeds from credit facility borrowings		75			—			—
Debt issuance costs		(1	)		(20	)		—
Proceeds from issuance of common stock		18			—			—
Dividends paid		(34	)		(8	)		—
Payments from (to) RRD-net		3			(13	)		—
Other financing activities		(2	)		—			—
Net transfers to Parent and affiliates		—			(945	)		(100	)
Net cash provided by (used in) financing activities		6			(187	)		(172	)

Effect of exchange rate on cash and cash equivalents		5			(3	)		(12	)
Net decrease in cash and cash equivalents		(62	)		(8	)		(31	)
Cash, cash equivalents and restricted cash at beginning of year		97			105			136
Cash, cash equivalents and restricted cash at end of period	$	35		$	97		$	105

Supplemental Non-Cash Disclosure:
Issuance of approximately 1.0 million shares of LSC Communications, Inc. common stock for acquisition of a business	$	20		$	—		$	—
Assumption of warehousing equipment related to customer contract	$	—		$	9		$	—
Issuance of approximately 8.0 million shares of R. R. Donnelley & Sons common stock for acquisition of a business	$	—		$	—		$	154

Reconciliation to the Consolidated and Combined Balance Sheets
	As of			As of
	December 31, 2017			December 31, 2016
Cash and cash equivalents	$	34		$	95
Restricted cash included in prepaid expenses and other current assets		1			2
Total cash, cash equivalents and restricted cash shown in the consolidated and combined statements of cash flows	$	35		$	97

	Common Stock				Additional Paid-in-			Treasury Stock					Net Parent Company			Retained Earnings (Accumulated			Accumulated Other Comprehensive			Total
	Shares		Amount		Capital			Shares		Amount			Investment			Deficit)			(Loss) Income			Equity
Balance at December 31, 2014		—	$	—	$	—			—	$	—		$	1,343		$	—		$	(168	)	$	1,175
Net income		—		—		—								74			—			—			74
Net transfers from parent company		—		—		—								65			—			—			65
Other comprehensive loss		—		—		—								—			—			(37	)		(37	)
Balance at December 31, 2015		—	$	—	$	—			—	$	—		$	1,482		$	—		$	(205	)	$	1,277
Net income		—		—		—			—		—			97			9			—			106
Net transfers to parent company		—		—		—			—		—			(934	)		—			—			(934	)
Separation-related adjustments		—		—		—			—		—			122			—			(366	)		(244	)
Reclassification of net parent investment to additional paid-in capital		—		—		767			—		—			(767	)		—			—			—
Issuance of common stock upon separation		32		—		—			—		—			—			—			—			—
Share-based compensation		—		—		3			—		—			—			—			—			3
Cash dividends paid		—		—		—			—		—			—			(8	)		—			(8	)
Other comprehensive income		—		—		—			—		—			—			—			40			40
Balance at December 31, 2016		32	$	—	$	770			—	$	—		$	—		$	1		$	(531	)	$	240
Net loss		—		—		—			—		—			—			(57	)		—			(57	)
Separation-related adjustments		—		—		(5	)		—		—			—			—			—			(5	)
Issuance of common stock		2		—		38			—		—			—			—			—			38
Issuance of share-based awards, withholding and other		1		—		—			—		(2	)		—			—			—			(2	)
Share-based compensation		—		—		13			—		—			—			—			—			13
Cash dividends paid		—		—		—			—		—			—			(34	)		—			(34	)
Other comprehensive income		—		—		—			—		—			—			—			55			55
Balance at December 31, 2017		35	$	—	$	816			—	$	(2	)	$	—		$	(90	)	$	(476	)	$	248

The principal business of LSC Communications, Inc., a Delaware corporation, and its direct or indirect wholly-owned subsidiaries (“LSC Communications,” “the Company,” “we,” “our” and “us”) is to offer a broad scope of traditional and digital print, print-related services and office products. The Company serves the needs of publishers, merchandisers and retailers worldwide with a service offering that includes e-services, logistics, warehousing and fulfillment and supply chain management. The Company utilizes a broad portfolio of technology capabilities coupled with consultative attention to clients' needs to increase speed to market, reduce costs, provide postal savings to customers and improve efficiencies. The Company prints magazines, catalogs, retail inserts, books, and directories and its office products offerings include filing products, envelopes, note-taking products, binder products, and forms.

The accompanying consolidated and combined financial statements reflect the consolidated balance sheets and statements of operations of the Company as an independent, publicly traded company for the periods after the separation, and the combined statements of operations of the Company as a combined reporting entity of RRD for the periods prior to the separation. The consolidated and combined financial statements include the balance sheets, statements of operations and cash flows in conformity with accounting principles generally accepted in the United States (“GAAP”). All intercompany transactions have been eliminated in consolidation. Certain prior year amounts were restated to conform to the Company’s current consolidated balance sheet and statement of operations classifications.

On October 1, 2016, the Company recorded separation-related adjustments primarily for certain assets and liabilities that were distributed as part of the separation from RRD. The adjustments primarily related to the assumption of certain pension obligations and plan assets in single employer plans for the Company’s employees and certain former employees and retirees of RRD. Additional separation-related adjustments were recorded after the separation in 2016 and during the year ended 2017 due to adjustments of assets and liabilities recorded as of the separation date. Refer to the separation-related adjustments disclosed in the consolidated and combined statements of equity.

The combined financial statements were prepared on a stand-alone basis and were derived from RRD’s consolidated financial statements and accounting records. They include expenses of RRD that were allocated to LSC Communications for certain corporate functions, including healthcare and pension benefits, information technology, finance, legal, human resources, internal audit, treasury, tax, investor relations and executive oversight. These expenses were allocated to the Company on the basis of direct usage, when available, with the remainder allocated on a pro rata basis by revenue, employee headcount, or other measures. The Company considered the allocation methodologies and results to be reasonable for all periods presented, however, these allocations may not be indicative of the actual expenses that LSC Communications would have incurred as an independent public company or the costs it may incur in the future.

The income tax amounts in these combined financial statements were calculated based on a separate income tax return methodology and presented as if the Company’s operations were separate taxpayers in the respective jurisdictions.

All intracompany transactions between LSC Communications, RRD and Donnelley Financial are considered to be effectively settled in the combined financial statements at the time the transaction is recorded. The total net effect of the settlement of these intracompany transactions is reflected in the combined statements of cash flows as a financing activity. Net parent company investment was primarily impacted by contributions from RRD which were the result of treasury activities and net funding provided by or distributed to RRD. In connection with the separation, the net parent investment balance was transferred to additional paid-in-capital on October 1, 2016 and is reflected in the consolidated and combined statements of equity.

Use of Estimates—The preparation of the consolidated and combined financial statements, in conformity with GAAP, requires the extensive use of management’s estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and reported amounts of revenue and expenses during the reporting periods.

Actual results could differ from these estimates. Estimates are used when accounting for items and matters including, but not limited to, allowance for uncollectible accounts receivable, inventory obsolescence, asset valuations and useful lives, employee benefits, self-insurance reserves, taxes, restructuring and other provisions and contingencies.

Foreign Operations—Assets and liabilities denominated in foreign currencies are translated into U.S. dollars at the exchange rates existing at the respective balance sheet dates. Income and expense items are translated at the average rates during the respective periods. Translation adjustments resulting from fluctuations in exchange rates are recorded as a separate component of other comprehensive income (loss) while transaction gains and losses are recorded in net earnings.

Fair Value Measurements—Certain assets and liabilities are required to be recorded at fair value on a recurring basis. Fair value is determined based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. The Company records the fair value of its pension plan assets on a recurring basis. Assets measured at fair value on a nonrecurring basis include long-lived assets held and used, long-lived assets held for sale, goodwill and other intangible assets. The fair value of cash and cash equivalents, accounts receivable, short-term debt and accounts payable approximate their carrying values. The three-tier value hierarchy, which prioritizes valuation methodologies based on the reliability of the inputs, is:

Level 1—Valuations based on quoted prices for identical assets and liabilities in active markets.

Level 2—Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

Level 3—Valuations based on unobservable inputs reflecting the Company’s own assumptions, consistent with reasonably available assumptions made by other market participants.

Revenue Recognition—The Company recognizes revenue for the majority of its products upon transfer of title and the passage of the risk of ownership, which is generally upon shipment to the customer. Contracts generally specify F.O.B. shipping point terms. Under agreements with certain customers, custom products may be stored by the Company for future delivery. In these situations, the Company may also receive a logistics or warehouse management fee for the services it provides. In certain of these cases, delivery and billing schedules are outlined in the customer agreement and product revenue is recognized when manufacturing is complete, title and risk of ownership transfer to the customer, and there is a reasonable assurance as to collectability. Because the majority of products are customized, product returns are not significant; however, the Company accrues for the estimated amount of customer credits at the time of sale.

Revenue from the Company’s co-mail and list services operations is recognized when services are completed.

The Company records deferred revenue in situations where amounts are invoiced but the revenue recognition criteria outlined above are not met. Such revenue is recognized when all criteria are subsequently met.

The Company records taxes collected from customers and remitted to governmental authorities on a net basis.

Refer to Note 20, New Accounting Pronouncements, for information related to the Company’s upcoming adoption in the first quarter of 2018 of ASU 2014-09 “Revenue from Contracts with Customers (Topic 606).”

By-product recoveries—The Company records the sale of by-products as a reduction of cost of sales.

Cash and cash equivalents—The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Short-term securities consist of investment grade instruments of governments, financial institutions and corporations.

Receivables—Receivables are stated net of allowances for doubtful accounts and primarily include trade receivables, notes receivable and miscellaneous receivables from suppliers. No single customer comprised more than 10% of our net sales in 2017, 2016 or 2015. Specific customer provisions are made when a review of significant outstanding amounts, utilizing information about customer creditworthiness and current economic trends, indicates that collection is doubtful. In addition, provisions are made at differing rates, based upon the age of the receivable and the Company’s historical collection experience. Refer to Note 4, Accounts Receivable, for details of activity affecting the allowance for doubtful accounts receivable.

Inventories—Inventories include material, labor and factory overhead and are stated at the lower of cost or market and net of excess and obsolescence reserves for raw materials and finished goods. Provisions for excess and obsolete inventories are made at differing rates, utilizing historical data and current economic trends, based upon the age and type of the inventory. Specific excess and obsolescence provisions are also made when a review of specific balances indicates that the inventories will not be utilized in production or sold.

The cost of 63.9% and 85.5% of the inventories at December 31, 2017 and 2016, respectively, has been determined using the Last-In, First-Out (“LIFO”) method. The decrease in 2017 is primarily due to inventory associated with acquisitions during the year ended December 31, 2017 that is not determined using the LIFO method. The LIFO method is intended to reflect the effect of inventory replacement costs within the consolidated and combined statements of operations; accordingly, charges to cost of sales generally reflect recent costs of material, labor and factory overhead. The Company uses an external-index method of valuing LIFO inventories. The remaining inventories, primarily related to certain acquired and international operations, are valued using the First-In, First-Out (“FIFO”) or specific identification methods.

Long-Lived Assets—The Company assesses potential impairments to its long-lived assets if events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Indefinite-lived intangible assets are reviewed annually for impairment or more frequently if events or changes in circumstances indicate that the carrying value may not be recoverable. An impaired asset is written down to its estimated fair value based upon the most recent information available. Estimated fair market value is generally measured by discounting estimated future cash flows. Long-lived assets, other than goodwill and other intangible assets, that are held for sale, are recorded at the lower of the carrying value or the fair market value less the estimated cost to sell.

Property, plant and equipment—Property, plant and equipment are recorded at cost and depreciated on a straight-line basis over their estimated useful lives. Useful lives range from 15 to 40 years for buildings, the lesser of 7 years or the lease term for leasehold improvements and from 3 to 15 years for machinery and equipment. Maintenance and repair costs are charged to expense as incurred. Major overhauls that extend the useful lives of existing assets are capitalized. When properties are retired or disposed, the costs and accumulated depreciation are eliminated and the resulting profit or loss is recognized in the results of operations.

Goodwill—Goodwill is assigned to a specific reporting unit, depending on the nature of the acquired company. Prior to the separation, the Company’s goodwill balances for certain reporting units were reallocated based on the relative fair values of the businesses.

Goodwill is reviewed for impairment annually as of October 31 or more frequently if events or changes in circumstances indicate that it is more likely than not that the fair value of a reporting unit is below its carrying value.

For certain reporting units, the Company may perform a qualitative, rather than quantitative, assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. In performing this qualitative analysis, the Company considers various factors, including the excess of prior year estimates of fair value compared to carrying value, the effect of market or industry changes and the reporting unit’s actual results compared to projected results. Based on this qualitative analysis, if management determines that it is more likely than not that the fair value of the reporting unit is greater than its carrying value, no further impairment testing is performed.

For the remaining reporting units, the Company compares each reporting unit’s fair value, estimated based on comparable company market valuations and expected future discounted cash flows to be generated by the reporting unit, to its carrying value. Prior to the Company’s early adoption of ASU 2017-04 “Intangibles – Goodwill and Other (Topic 350)” during the third quarter of 2017, if the carrying value exceeded the reporting unit’s fair value, the Company performed an additional fair value measurement calculation to determine the impairment loss, that was charged to operations in the period identified. As a result of early adoption of ASU 2017-04, if the carrying value exceeds the reporting unit’s fair value, the Company recognizes an impairment charge equal to the amount by which the carrying value exceeds the reporting unit’s fair value not to exceed the total amount of goodwill recorded.

Refer to Note 8, Restructuring, Impairment and Other Charges, for more information regarding the Company’s annual and interim impairment reviews.

Amortization—Certain costs to acquire and develop internal-use computer software are capitalized and amortized over their estimated useful life using the straight-line method, up to a maximum of five years. Amortization expense, primarily related to internally-developed software and excluding amortization expense related to other intangible assets, was $5 million each for the years ended December 31, 2017, 2016 and 2015, respectively. Deferred debt issuance costs are amortized over the term of the related debt.

Other intangible assets, except for those intangible assets with indefinite lives, are recognized separately from goodwill and are amortized over their estimated useful lives. Other intangible assets with indefinite lives are not amortized. Refer to Note 7, Goodwill and Other Intangible Assets, for further discussion of other intangible assets and the related amortization expense.

Share-Based Compensation— The Company recognizes compensation expense for share-based awards expected to vest on a straight-line basis over the requisite service period of the award based on their grant date fair value. Prior to the separation, RRD maintained an incentive share-based compensation program for certain individuals, including certain LSC Communications employees. The share-based compensation expense was allocated to the Company based on the awards and terms previously granted to the Company’s employees, as well as an allocation of expense related to RRD’s corporate and shared functional employees. Refer to Note 16, Stock and Incentive Programs, for further discussion.

Pension and Other Postretirement Benefits Plans— At the separation date, the Company recorded net benefit obligations transferred from RRD. The Company records annual income and expense amounts relating to its pension plans based on calculations that include various actuarial assumptions, including discount rates, mortality, assumed rates of return, compensation increases, and turnover rates. The Company reviews its actuarial assumptions on an annual basis and makes modifications to the assumptions based on current rates and trends when it is deemed appropriate to do so. The effect of modifications on the value of plan obligations and assets is recognized immediately within other comprehensive income (loss) and amortized in investment and other income-net over future periods. The Company believes that the assumptions utilized in recording its obligations under its plans are reasonable based on its experience, market conditions and input from its actuaries and investment advisors.

Prior to the separation, certain employees of the Company participated in various pension and postretirement health care plans sponsored by RRD. In the Company’s combined financial statements, these plans were accounted for as multiemployer benefit plans and no net liabilities were reflected in the Company’s combined balance sheets as there were no unfunded contributions due at the end of any reporting period. The Company’s statements of operations included expense allocations for these benefits. These expenses were funded through intercompany transactions with RRD and were reflected within net parent company investment in LSC Communications. Certain plans in LSC Communications’ Mexico and U.S. operations were direct obligations of LSC Communications and were recorded in the consolidated and combined financial statements. Refer to Note 13, Retirement Plans, for further discussion.

Taxes on Income—The Company has recorded deferred tax assets related to future deductible items, including domestic and foreign tax loss and credit carryforwards. The Company evaluates these deferred tax assets by tax jurisdiction. The utilization of these tax assets is limited by the amount of taxable income expected to be generated within the allowable carryforward period and other factors. Accordingly, management has provided a valuation allowance to reduce certain of these deferred tax assets when management has concluded that, based on the weight of available evidence, it is more likely than not that the deferred tax assets will not be fully realized. If actual results differ from these estimates, or the estimates are adjusted in future periods, adjustments to the valuation allowance might need to be recorded.

Prior to the separation, in the Company’s combined financial statements, income tax expense and deferred tax balances were calculated on a separate return basis, although with respect to certain entities, the Company’s operations were historically included in the tax returns filed by the respective RRD entities of which the Company’s business was formerly a part. For periods after the separation, the Company has and will continue to file tax returns on its own behalf. The provision for income tax and income tax balances after the separation represent the Company's tax liabilities as an independent company.

Refer to Note 14, Income Taxes, for information on the enactment of the Tax Cuts and Jobs Act (the “Tax Act”) of 2017 on December 22, 2017.

Comprehensive Income (Loss)—Comprehensive income (loss) for the Company consists of net earnings, unrecognized actuarial gains and losses and foreign currency translation adjustments. Refer to Note 15, Comprehensive Income, for further discussion.

On November 29, 2017, the Company acquired The Clark Group, (“Clark Group”), a third-party logistics provider of distribution, consolidation, transportation management and international freight forwarding services. The acquisition enhanced the Company’s logistics service offering. The total purchase price was $25 million in cash, of which $16 million was recorded in goodwill. For the year ended December 31, 2017, the Company’s consolidated statement of operations included net sales of $4 million and a de minimis amount of income from operations attributable to the acquisition of Clark Group.

On November 9, 2017, the Company acquired Quality Park, a producer of envelopes, mailing supplies and assorted packaging items. The acquisition enhanced the Company’s office products offerings. The total purchase price was $41 million in cash, resulting in a bargain purchase gain of $3 million for the year ended December 31, 2017, that was recorded in net investment and other (income) expense in the Company’s consolidated statement of income. The Company reassessed the recognition and measurement of identifiable assets and liabilities acquired and concluded that all acquired assets and liabilities were recognized and that the valuation procedures and resulting estimates were appropriate. For the year ended December 31, 2017, the Company’s consolidated statement of operations included net sales of $16 million and a de minimis loss from operations attributable to the acquisition of Quality Park.

On September 7, 2017, the Company acquired Publishers Press, a printing provider with capabilities such as web-offset printing, prepress and distribution services for magazines and retail brands. The acquisition enhanced the Company’s printing capabilities. The total purchase price was $70 million in cash, of which $2 million was recorded in goodwill. For the year ended December 31, 2017, the Company’s consolidated statement of operations included net sales of $53 million and income from operations of $1 million attributable to the acquisition of Publishers Press.

On August 21, 2017, the Company acquired the assets of NECI, LLC (“NECI”), a supplier of commodity and specialty filing supplies. The acquisition enhanced the Company’s office products offerings. The purchase price, which included the Company’s estimate of contingent consideration, was $6 million in cash, of which $1 million was recorded in goodwill. Contingent consideration in the form of cash payments up to $1 million will be due to the sellers if and to the extent certain financial targets are achieved. As of the acquisition date, the Company estimated the fair value of the contingent consideration to be $1 million using a probability weighting of potential payouts and recorded $1 million as a liability as of December 31, 2017. For the year ended December 31, 2017, the Company’s consolidated statement of operations included net sales of $2 million and loss from operations of $1 million attributable to the acquisition of NECI.

On August 17, 2017, the Company acquired CREEL Printing (“CREEL”), an offset and digital printing company. The acquisition enhanced the capabilities of the Company’s offset and digital production platform and brought enhanced technologies to support our clients’ evolving needs, specifically in the magazine media and retail marketing industries. CREEL’s capabilities include full-color web and sheetfed printing, regionally distributed variable digital production, large-format printing, and integrated digital solutions. The purchase price, which included the Company’s estimate of contingent consideration, was $79 million in cash, of which $26 million was recorded in goodwill. Contingent consideration in the form of cash payments up to $10 million will be due to the sellers if and to the extent certain financial targets are achieved. As of the acquisition date, the Company estimated the fair value of the contingent consideration to be $1 million using a probability weighting of the potential payouts and recorded $1 million as a liability as of December 31, 2017. For the year ended December 31, 2017, the Company’s consolidated statement of operations included net sales of $47 million and a de minimis amount of income from operations attributable to the acquisition of CREEL.

On July 28, 2017, the Company acquired Fairrington Transportation Corp., F.T.C. Transport, Inc. and F.T.C. Services, Inc. (“Fairrington”), a full-service, printer-independent mailing logistics provider in the United States. The acquisition enhanced the Company’s logistics service offering. The purchase price was $19 million in cash and approximately 1.0 million shares of LSC Communications common stock, for a total transaction value of $39 million. Of the total purchase price, $22 million was recorded in goodwill. For the year ended December 31, 2017, the Company’s consolidated statement of income included net sales of $28 million and income from operations of $1 million attributable to the acquisition of Fairrington.

On March 1, 2017, the Company acquired HudsonYards Studios (“HudsonYards”), a digital and print premedia production company that provides high-quality creative retouching, computer-generated imagery, mechanical creation, press-ready file preparation, and interactive production services. The acquisition enhanced the Company’s digital and premedia capabilities. The purchase price for HudsonYards was $3 million in cash, of which $2 million was recorded in goodwill. For the year ended December 31, 2017, the Company’s consolidated statement of income included net sales of $8 million and loss from operations of $1 million attributable to the acquisition of HudsonYards.

Refer below for a summary of the segments and reporting units where the acquisitions are included as of December 31, 2017.

The acquisitions were recorded by allocating the cost of the acquisitions to the assets acquired, including other intangible assets, based on their estimated fair values at the acquisition date. The excess of the cost of the acquisitions over the net amounts assigned to the fair value of the assets acquired was recorded in goodwill. The goodwill is primarily attributable to the synergies expected to arise as a result of the acquisitions.

The preliminary tax deductible goodwill related to the Clark Group, Quality Park, Publishers Press, NECI, CREEL, Fairrington, and HudsonYards acquisitions was $39 million.

The purchase price allocations for Clark Group, Quality Park, Publishers Press, and CREEL are preliminary as of December 31, 2017 because the valuations necessary to assess the fair values of the net assets and liabilities acquired are still in process. The primary areas that are not yet finalized relate to the valuation of certain assets and liabilities. The final purchase price allocations may differ from what is currently reflected in the consolidated financial statements, and could affect goodwill impairment in the future. The purchase price allocations for NECI, Fairrington and HudsonYards are final as of December 31, 2017. There were no significant changes to the purchase price allocations for Publishers Press, CREEL and Fairrington as of December 31, 2017 compared to the disclosed purchase price allocations in the Company’s quarterly report on Form 10-Q for the quarter ended September 30, 2017.

These purchase price allocations for the material acquisitions noted above were as follows:

	Clark Group			Quality Park			Publishers Press			CREEL			Fairrington
Accounts Receivable	$	6		$	20		$	27		$	12		$	6
Inventories		—			27			13			5			—
Prepaid expenses and other current assets		1			1			1			1			—
Property, plant and equipment		—			8			36			20			6
Other intangible assets		14			1			—			23			17
Other noncurrent assets		—			—			1			—			1
Goodwill (bargain purchase)		16			(3	)		2			26			22
Accounts payable and accrued liabilities		(9	)		(11	)		(13	)		(9	)		(4	)
Other noncurrent liabilities		—			—			—			(1	)		—
Deferred taxes-net		(3	)		(2	)		—			—			(9	)
Purchase price, net of cash acquired	$	25		$	41			67			77			39
Less: value of common stock issued		—			—			—			—			20
Less: accrued but unpaid contingent consideration		—			—			—			1			—
Net cash paid:	$	25		$	41		$	67		$	76		$	19

For the quarter ended December 31, 2017, the Company completed the acquisition of the Clark Group that became part of the Company’s former magazines, catalogs and retail inserts reporting unit. Given the amount by which the carrying amount of the former reporting unit exceeded its fair value in the goodwill impairment test performed as of September 30, 2017, combined with the fact that management’s assessment of the fair value did not materially change since that date, an additional goodwill impairment charge of $18 million was recorded in the period ended December 31, 2017, which represents all of the goodwill arising from The Clark Group acquisition and additional amounts related to acquisitions completed during the quarter ended September 30, 2017.

The total charge to recognize the impairment of goodwill in the former magazines, catalogs and retail inserts reporting unit was $73 million for 2017, resulting in zero goodwill associated with the former magazines, catalogs and retail inserts reporting unit as of December 31, 2017. Refer to Note 8, Restructuring, Impairment and Other Charges, for more information.

As a result of the Company’s change in reportable segments and reporting units during the third quarter of 2018, as discussed in Item 8.01, Other Events, the impairment charges recognized during the three months ended September 30, 2017 and the year ended December 31, 2017 in the Company’s former magazines, catalogs and retail inserts reporting units were reclassified to the new reporting units below:

Goodwill will be tested in future periods based on the new reporting unit structure. Refer to Note 17, Segment Information, for more information on the segment structure.

The fair values of other intangible assets and goodwill associated with the acquisitions were determined to be Level 3 under the fair value hierarchy. The following table presents the fair value, valuation techniques and related unobservable inputs for these Level 3 measurements:

The fair values of property, plant and equipment associated with the acquisitions were determined to be Level 3 under the fair value hierarchy. Property, plant and equipment values were estimated using either the cost or market approach, if a secondhand market existed.

On December 2, 2016, the Company acquired Continuum Management Company, LLC (“Continuum”), a print procurement and management business. The acquisition enhanced the Company’s print management’s capabilities. The Company paid $7 million in cash in 2016. An additional $2 million in cash was paid during the three months ended March 31, 2017 as part of a final working capital adjustment for a total purchase price of $9 million, of which $5 million was recorded in goodwill. The operations of Continuum are included in the Print Management segment, which is part of the Other grouping, as described in Note 17, Segment Information.

On June 8, 2015, RRD acquired Courier Corporation (“Courier”), a leader in digital printing and publishing primarily in the United States, specializing in educational, religious and trade books. The acquisition expanded the Company’s digital printing capabilities. Courier’s book manufacturing operations and publishing operations are included in LSC Communications’ consolidated and combined financial statements, within the Book segment. Courier’s Brazilian operations are not part of LSC Communications; therefore, the Company’s consolidated and combined financial statements do not include Courier’s Brazilian operations. The purchase price for Courier was $137 million in cash and 8 million shares of RRD common stock, or a total transaction value of $292 million (including $6 million related to Brazil) based on RRD’s closing share price on June 5, 2015, plus the assumption of Courier’s debt of $78 million (including $2 million related to Brazil). Courier had $21 million (including a de minimis amount related to Brazil) of cash as of the date of acquisition. Immediately following the acquisition, substantially all of the debt assumed was repaid.

The Courier acquisition was recorded by allocating the cost of the acquisition to the assets acquired, including other intangible assets, based on their estimated fair values at the acquisition date. The excess of the cost over the net amounts assigned to the fair value of the assets acquired was recorded as goodwill. The goodwill associated with this acquisition is primarily attributable to the synergies expected to arise as a result of the acquisition.

For the years ended December 31, 2017, 2016 and 2015, the Company recorded $5 million, a de minimis amount and $14 million, respectively, of acquisition-related expenses associated with the completed and contemplated acquisitions described above within selling, general and administrative expenses in the consolidated and combined statements of income.

The following unaudited pro forma financial information for the year ended December 31, 2017 and 2016 presents the consolidated and combined statements of income of the Company and the acquisitions described above, as if the acquisitions had occurred as of January 1 of the year prior to the acquisitions.

The unaudited pro forma financial information is not intended to represent or be indicative of the Company’s consolidated and combined statements of income that would have been reported had these acquisitions been completed as of the beginning of the period presented and should not be taken as indicative of the Company’s future consolidated statements of income. Pro forma adjustments are tax-effected at the applicable statutory tax rates.

The following table outlines unaudited pro forma financial information for the years ended December 31, 2017 and 2016:

Additionally, the nonrecurring pro forma adjustments affecting net income for the years ended December 31, 2017 and 2016 were as follows:

Note: A negative number in the table above represents a decrease to income in pro forma net income.

Transactions affecting the allowances for doubtful accounts receivable balance during the years ended December 31, 2017, 2016 and 2015 were as follows:

The components of the Company’s inventories, net of excess and obsolescence reserves for raw materials and finished goods, at December 31, 2017 and 2016 were as follows:

During the years ended December 31, 2017, 2016 and 2015, the Company recognized a LIFO benefit of $1 million, $1 million and $7 million, respectively.

The components of the Company’s property, plant and equipment at December 31, 2017 and 2016 were as follows:

During the years ended December 31, 2017, 2016 and 2015, depreciation expense was $137 million, $149 million and $160 million, respectively.

Refer to Note 8, Restructuring, Impairment and Other Charges, for information on impairment recorded during the years ended December 31, 2017 and 2015. There was no impairment recoded during the year ended December 31, 2016.

Primarily as a result of restructuring actions, certain facilities and equipment are considered held for sale. The net book value of assets held for sale was $7 million and $2 million at December 31, 2017 and 2016, respectively. These assets were included in other current assets in the consolidated balance sheets at the lower of their historical net book value or their estimated fair value, less estimated costs to sell.

The changes in the carrying amount of goodwill for the years ended December 31, 2017 and 2016 were as follows:

	Magazines,
	Catalogs
	and Logistics			Book			Office Products			Other			Total
Net book value as of January 1, 2016
Goodwill	$	434		$	354		$	109		$	57		$	954
Accumulated impairment losses		(434	)		(303	)		(79	)		(57	)		(873	)
Total	$	—		$	51		$	30		$	—		$	81
Acquisition		—			—			—			3			3
Net book value as of December 31, 2016
Goodwill	$	434		$	354		$	109		$	64		$	961
Accumulated impairment losses		(434	)		(303	)		(79	)		(61	)		(877	)
Total	$	—		$	51		$	30			3		$	84
Acquisition		68			—			1			2			71
Impairment charges		(68	)		—			—			(5	)		(73	)
Net book value as of December 31, 2017
Goodwill	$	502		$	354		$	110		$	78		$	1,044
Accumulated impairment losses		(502	)		(303	)		(79	)		(78	)		(962	)
Total		—			51			31			—			82

Refer to Note 17, Segment Information, and Note 8, Restructuring, Impairment and Other Charges, for further discussion regarding impairment charges. There was no impairment of goodwill during the years ended December 31, 2016 and 2015.

The Other grouping’s goodwill and accumulated impairment balances are impacted by changes in foreign currencies.

The components of other intangible assets at December 31, 2017 and 2016 were as follows:

	December 31, 2017							December 31, 2016
	Gross Carrying		Accumulated			Net Book		Gross Carrying		Accumulated			Net Book
	Amount		Amortization			Value		Amount		Amortization			Value

Customer relationships	$	256	$	(125	)	$	131	$	205	$	(109	)	$	96
Trade names		9		(4	)		5		5		(2	)		3
Total amortizable other intangible assets		265		(129	)		136		210		(111	)		99
Indefinite-lived trade names		24		—			24		32		—			32
Total other intangible assets	$	289	$	(129	)	$	160	$	242	$	(111	)	$	131

For the year ended December 31, 2017, the Company recorded charges of $8 million primarily for the impairment of certain acquired indefinite tradename intangible assets, including $3 million in the Office Products segment and $5 million in the Book segment. Refer to Note 8, Restructuring, Impairment and Other Charges, for further discussion regarding impairment charges. There was no impairment recorded during the years ended December 31, 2016 and 2015.

The Company recorded additions to other intangible assets of $55 million for acquisitions during the year ended December 31, 2017. The components of other intangible assets added during the year ended December 31, 2017 were as follows:

Amortization expense for other intangible assets was $18 million, $16 million and $17 million for the years ended December 31, 2017, 2016 and 2015, respectively.

The following table outlines the estimated annual amortization expense related to other intangible assets as of December 31, 2017:

			Other		Total
	Employee		Restructuring		Restructuring				Other
2017	Terminations		Charges		Charges		Impairment		Charges		Total
Magazines, Catalogs and Logistics	$	6	$	4	$	10	$	75	$	1	$	86
Book		5		2		7		5		3		15
Office Products		1		—		1		3		—		4
Other		1		1		2		5		—		7
Corporate		—		17		17		—		—		17
Total	$	13	$	24	$	37	$	88	$	4	$	129

For the year ended December 31, 2017, the Company incurred employee-related restructuring charges of $13 million for an aggregate of 776 employees, of whom 459 were terminated as of or prior to December 31, 2017. These charges primarily related to three facility closures in the Book segment, one facility closure in the Magazines Catalogs and Logistics segment and the reorganization of certain business units. The Company also incurred other restructuring charges of $24 million primarily related to the exit from certain operations and facilities, as well as charges as a result of a terminated supplier contact.

For the year ended December 31, 2017, the Company recorded the following net impairment charges, which are explained further below:

The net charges of $7 million primarily related to impairment of machinery and equipment in the Company’s magazines and catalogs reporting unit, which is included in the Magazines, Catalogs and Logistics segment, resulting from general volume declines.

The Company also recorded charges of $8 million for the impairment of certain acquired indefinite-lived tradename intangible assets, including $3 million in the Office Products segment and $5 million in the Book segment. The impairment of the indefinite-lived tradename intangible assets resulted from negative revenue trends experienced in recent years and lower expectations of future revenue to be derived from those tradenames. The impairment was determined using Level 3 inputs and estimated based on cash flow analyses, which included management’s assumptions related to future revenues and profitability. After recording the impairment charges, remaining indefinite-lived tradenames in the Office Products and Book segments were $23 million and $1 million, respectively.

With respect to the goodwill impairment charges, as explained in Note 3, Business Combinations, the Company completed several acquisitions during the year ended December 31, 2017, five of which were included in the Company’s former magazines, catalogs and retail inserts reporting unit, which was part of the former Print segment. The goodwill arising from each acquisition was determined on a stand-alone basis for each particular transaction based on each transaction’s individual facts and circumstances, in accordance with ASC 805, Business Combinations. Per the guidance in ASC 805, goodwill was recognized on each transaction given that the consideration transferred for each transaction was in excess of the net amounts of the identifiable assets acquired and the liabilities assumed. Furthermore, the consideration transferred, the identifiable assets acquired and the liabilities assumed were all measured at the acquisition-date fair value, which is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction, between market participants, at the acquisition date.

In accordance with ASC 350, Intangibles — Goodwill and Other, the Company is required to test its goodwill for impairment annually, or more often if there is an indication that goodwill might be impaired. For purposes of the goodwill impairment test, goodwill is not tested based upon the individual transactions that gave rise to the goodwill, but rather based upon the reporting unit’s total goodwill and the characteristics of the reporting unit in which the goodwill resides. Therefore, the level at which goodwill is tested for impairment is different from the level that originally created the goodwill. In the Company’s case, the test is performed based upon the total carrying value of the former magazines, catalogs and retail inserts reporting unit and that former reporting unit’s total implied fair value. Carrying value is determined based upon the net book value of assets and liabilities required for the operations of the former magazines, catalogs and retail inserts reporting unit, while fair value is determined based upon a discounted cash flows analysis of the former magazines, catalogs and retail inserts reporting unit. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit.

Prior to the acquisitions completed within the last twelve months, the former magazines, catalogs and retail inserts reporting unit had zero goodwill recorded, as goodwill associated with this reporting unit had been fully impaired in prior years. Given the historical valuations of the former magazines, catalogs and retail inserts reporting unit that have resulted in goodwill impairment in prior years, combined with the change in the composition of the carrying value of the former reporting unit due to the acquisitions completed as of

September 30, 2017, the Company determined it necessary to perform an interim goodwill impairment review on this former reporting unit as of September 30, 2017.

As a result of the interim goodwill impairment test, and consistent with prior goodwill impairment tests, the former magazines, catalogs and retail inserts reporting unit’s fair value continued to be at a value below its carrying value. This is primarily due to the negative revenue trends experienced in recent years that are only partially offset by the impact of the new acquisitions. As such, the Company recorded charges of $55 million to recognize the impairment of goodwill in this former reporting unit as of September 30, 2017. The goodwill impairment charges were determined using Level 3 inputs, including discounted cash flow analyses, comparable marketplace fair value data and management’s assumptions.

For the quarter ended December 31, 2017, the Company completed the acquisition of the Clark Group that became part of the former magazines, catalogs and retail inserts reporting unit. Given the amount by which the carrying amount of the former reporting unit exceeded its fair value in the goodwill impairment test performed as of September 30, 2017, combined with the fact that management’s assessment of the fair value did not materially change since that date, an additional goodwill impairment charge of $18 million was recorded in the period ended December 31, 2017, which represents all of the goodwill arising from the Clark Group acquisition and additional amounts related to acquisitions completed during the quarter ended September 30, 2017.

The total charge to recognize the impairment of goodwill in the former magazines, catalogs and retail inserts reporting unit was $73 million for 2017, resulting in zero goodwill associated with former the magazines, catalogs and retail inserts reporting unit as of December 31, 2017. Refer to Note 3, Business Combinations, for a summary of these charges by reporting unit as of December 31, 2017.

The fair value as of the measurement date, net book value as of the end of the year and related impairment charge for assets measured at fair value on a nonrecurring basis subsequent to initial recognition during the year ended December 31, 2017 is disclosed below.

The fair values of the buildings and machinery and equipment were determined to be Level 3 under the fair value hierarchy and were estimated based on discussions with real estate brokers, review of comparable properties, if available, discussions with machinery and equipment brokers, dealer quotes and internal expertise related to the current marketplace conditions.

The Company’s accounting and finance management determines the valuation policies and procedures for Level 3 fair value measurements and is responsible for the development and determination of unobservable inputs. The following table presents the fair value, valuation techniques and related unobservable inputs for these Level 3 measurements for the year ended December 31, 2017:

For the year ended December 31, 2017, the Company recorded other charges of $4 million for multiemployer pension plan withdrawal obligations unrelated to facility closures. The total liability for the withdrawal obligations associated with the Company’s decision to withdraw from certain multiemployer pension plans included in accrued liabilities and other noncurrent liabilities are $6 million and $37 million, respectively, at December 31, 2017. Refer to Note 13, Retirement Plans, for further discussion of multi-employer pension plans.

The Company’s withdrawal liabilities could be affected by the financial stability of other employers participating in such plans and any decisions by those employers to withdraw from such plans in the future. While it is not possible to quantify the potential impact of future events or circumstances, reductions in other employers’ participation in multiemployer pension plans, including certain plans from which the Company has previously withdrawn, could have a material effect on the Company’s previously estimated withdrawal liabilities and consolidated balance sheets, statements of operations and cash flows.

			Other		Total
	Employee		Restructuring		Restructuring				Other
2016	Terminations		Charges		Charges		Impairment		Charges		Total
Magazines, Catalogs and Logistics	$	3	$	—	$	3	$	—	$	1	$	4
Book		1		3		4		—		2		6
Other		2		3		5		—		—		5
Corporate		2		1		3		—		—		3
Total	$	8	$	7	$	15	$	—	$	3	$	18

For the year ended December 31, 2016, the Company recorded net restructuring charges of $8 million for employee termination costs for an aggregate of 222 employees, substantially all of whom were terminated as of or prior to December 31, 2017. These charges primarily related to one facility closure in the Other grouping, the expected closure of another facility in the first quarter of 2017 in the Magazines, Catalogs and Logistics segment and the reorganization of certain operations. Additionally, the Company recorded lease termination and other restructuring charges of $7 million. The fair values of the buildings and machinery and equipment were determined to be Level 3 under the fair value hierarchy and were estimated based on discussions with real estate brokers, review of comparable properties, if available, discussions with machinery and equipment brokers, dealer quotes and internal expertise related to the current marketplace conditions.

For the year ended December 31, 2016, the Company recorded other charges of $3 million for multi-employer pension plan withdrawal obligations unrelated to facility closures. The total liability for the withdrawal obligations associated with the Company’s decision to withdraw from certain multi-employer pension plans included in accrued liabilities and other noncurrent liabilities are $6 million and $39 million, respectively, at December 31, 2016. Refer to Note 13, Retirement Plans, for further discussion of multiemployer pension plans.

			Other		Total
	Employee		Restructuring		Restructuring				Other
2015	Terminations		Charges		Charges		Impairment		Charges		Total
Magazines, Catalogs and Logistics	$	4	$	2	$	6	$	—	$	1	$	7
Book		2		3		5		2		21		28
Office Products		1		2		3		1		—		4
Other		13		—		13		5		—		18
Total	$	20	$	7	$	27	$	8	$	22	$	57

For the year ended December 31, 2015, the Company recorded net restructuring charges of $20 million for employee termination costs for 766 employees, substantially all of whom were terminated as of December 31, 2017. These charges primarily related to the closure of one facility in the Book segment, one facility in the Other grouping, the integration of Courier and the reorganization of certain operations. Additionally, the Company incurred lease termination and other restructuring charges of $7 million for the year ended December 31, 2015, including charges related to multiemployer pension plan withdrawal obligations as a result of facility closures. For the year ended December 31, 2015, the Company also recorded $8 million of impairment charges primarily related to buildings and machinery and equipment associated with facility closings.

For the year ended December 31, 2015, the Company recorded charges of $22 million, including integration charges of $19 million for payments made to certain Courier employees upon the termination of Courier’s executive severance plan immediately prior to the acquisition and $3 million of charges for multiemployer pension plan withdrawal obligations unrelated to facility closures. The total liability for the withdrawal obligations associated with the Company’s decision to withdraw from all multiemployer pension plans included in accrued liabilities and other noncurrent liabilities are $6 million and $42 million, respectively. Refer to Note 13, Retirement Plans, for further discussion of multiemployer pension plans.

The restructuring reserve as of December 31, 2017 and 2016, and changes during the year ended December 31, 2017, were as follows:

The current portion of restructuring reserves of $14 million at December 31, 2017 was included in accrued liabilities, while the long-term portion of $12 million, which primarily related to multi-employer pension plan withdrawal obligations related to facility closures and lease termination costs, was included in other noncurrent liabilities at December 31, 2017.

Payments on all of the Company’s multiemployer pension plan withdrawal obligations are scheduled to be completed by 2034. Changes based on uncertainties in these estimated withdrawal obligations could affect the ultimate charges related to multiemployer pension plan withdrawals. Refer to Note 13, Retirement Plans, for further discussion of multiemployer pension plans.

The restructuring liabilities classified as “lease terminations and other” consisted of lease terminations and other facility closing costs. Payments on certain of the lease obligations are scheduled to continue until 2018. Market conditions and the Company’s ability to sublease these properties could affect the ultimate charges related to the lease obligations. Any potential recoveries or additional charges could affect amounts reported in the Company’s consolidated financial statements.

The restructuring reserve as of December 31, 2016 and 2015, and changes during the year ended December 31, 2016, were as follows:

The current portion of restructuring reserves of $13 million at December 31, 2016 was included in accrued liabilities, while the long-term portion of $15 million, which primarily related to multi-employer pension plan withdrawal obligations related to facility closures and lease termination costs, was included in other noncurrent liabilities at December 31, 2016.

The components of the Company’s accrued liabilities at December 31, 2017 and 2016 were as follows:

Employee-related liabilities consist primarily of payroll, employee benefits, workers’ compensation, and incentive compensation. Incentive compensation accruals include amounts earned pursuant to the Company’s primary employee incentive compensation plans. Customer-related liabilities include accruals for volume discounts, rebates and other customer discounts. Other accrued liabilities include miscellaneous operating accruals, other tax liabilities and accrued interest.

As of December 31, 2017, the Company had commitments of $8 million for severance payments related to employee restructuring activities. In addition, as of December 31, 2017, the Company had commitments of approximately $10 million for the purchase of property, plant and equipment related to incomplete projects. The Company also has contractual commitments of approximately $42 million for outsourced services, including professional, maintenance and other services.

The Company has operating lease commitments, including those for vacated facilities, totaling $184 million and extending through various periods to 2037. There are minimum non-cancelable sublease rentals aggregating approximately $11 million related to the operating leases. The Company remains secondarily liable under these leases in the event that the sub-lessee defaults under the sublease terms. The Company does not believe that material payments will be required as a result of the secondary liability provisions of the primary lease agreements.

Rent expense for facilities in use and equipment was $46 million, $39 million and $29 million for the years ended December 31, 2017, 2016 and 2015, respectively.

The Company is subject to laws and regulations relating to the protection of the environment. The Company accrues for expenses associated with environmental remediation obligations when such amounts are probable and can be reasonably estimated. Such accruals are adjusted as new information develops or circumstances change and are generally not discounted. The Company has been designated as a potentially responsible party or has received claims in nine active federal and state Superfund and other multiparty remediation sites. In addition to these sites, the Company may also have the obligation to remediate three other previously and currently owned facilities. At the Superfund sites, the Comprehensive Environmental Response, Compensation and Liability Act provides that the Company’s liability could be joint and several, meaning that the Company could be required to pay an amount in excess of its proportionate share of the remediation costs.

The Company’s understanding of the financial strength of other potentially responsible parties at the multiparty sites and of other liable parties at the previously owned facilities has been considered, where appropriate, in the determination of the Company’s estimated liability. The Company established reserves, recorded in accrued liabilities and other noncurrent liabilities, that it believes are adequate to cover its share of the potential costs of remediation at each of the multiparty sites and the previously and currently owned facilities. It is not possible to quantify with certainty the potential impact of actions regarding environmental matters, particularly remediation and other compliance efforts that the Company may undertake in the future. However, in the opinion of management, compliance with the present environmental protection laws, before taking into account estimated recoveries from third parties, will not have a material effect on the Company’s consolidated and combined balance sheets, statements of operations and cash flows.

From time to time, the Company’s customers and others file voluntary petitions for reorganization under United States bankruptcy laws. In such cases, certain pre-petition payments received by the Company from these parties could be considered preference items and subject to return. In addition, the Company may be party to certain litigation arising in the ordinary course of business. Management believes that the final resolution of these preference items and litigation will not have a material effect on the Company’s consolidated statements of operations, balance sheets and cash flows.

The Senior Notes were issued pursuant to an indenture where certain wholly-owned domestic subsidiaries of the Company guarantee the Senior Notes (the “Guarantors”). The Senior Notes are fully and unconditionally guaranteed, on a senior secured basis, jointly and severally, by the Guarantors, which are comprised of each of the Company’s existing and future direct and indirect wholly-owned U.S. subsidiaries that guarantee the Company’s obligations. The Senior Notes are not guaranteed by the Company’s foreign subsidiaries or unrestricted subsidiaries. The Senior Notes and the related guarantees are secured on a first-priority lien basis by the collateral, subject to certain exceptions and permitted liens. The Indenture governing the Senior Notes contains certain covenants applicable to the Company and its restricted subsidiaries, including limitations on: (1) liens; (2) indebtedness; (3) mergers, consolidations and acquisitions; (4) sales, transfers and other dispositions of assets; (5) loans and other investments; (6) dividends and other distributions, stock repurchases and redemptions and other restricted payments; (7) restrictions affecting subsidiaries; (8) transactions with affiliates; and (9) designations of unrestricted subsidiaries. Each of these covenants is subject to important exceptions and qualifications. The Indenture is filed as an exhibit to the annual report on Form 10-K, as filed with the SEC on February 22, 2018.

The proceeds of any collection or other realization of collateral received in connection with the exercise of remedies and any distribution in respect of collateral in any bankruptcy proceeding will be applied first to repay amounts due under the Revolving Credit Facility before the lenders under the Term Loan Facility or the holders of the Senior Notes receive such proceeds.

The debt issuance costs and original issue discount are being amortized over the life of the facilities using the effective interest method.

On February 2, 2017, the Company paid in advance the full amount of required amortization payments, $50 million, for the year ended December 31, 2017 for the Term Loan Facility.

The fair values of the Senior Notes and Term Loan Facility, that were determined using the market approach based upon interest rates available to the Company for borrowings with similar terms and maturities, were determined to be Level 2 under the fair value hierarchy. The fair value of the Company’s debt was greater than its book value by approximately $20 million and $22 million at December 31, 2017 and December 31, 2016, respectively.

There were $75 million of borrowings under the Revolving Credit Facility as of December 31, 2017 and no borrowings as of December 31, 2016. The weighted-average interest rate on borrowings under the Company’s Revolving Credit Facility was 4.47% during the year ended December 31, 2017 and 3.5% during the three months ended December 31, 2016.

As of December 31, 2017, the Company had $53 million in outstanding letters of credit issued under the Revolving Credit Facility. As of December 31, 2017, the Company also had $16 million in other uncommitted credit facilities, all of which were outside the U.S. (the “Other Facilities”). As of December 31, 2017, letters of credit and guarantees of a de minimis amount were issued and reduced availability under the Other Facilities. As of December 31, 2017, there were $75 million of borrowings under the Revolving Credit Facility and the Other Facilities (the “Combined Facilities”).

At December 31, 2017, the future maturities of debt, including capitalized leases, were as follows:

The following table summarizes interest expense included in the consolidated and combined statements of operations:

Interest paid, net of interest received, was $69 million and $7 million for the years ended December 31, 2017 and 2016, respectively. Interest received, net of interest paid, was $1 million for the year ended December 31, 2015 as interest received was greater than interest payments for this year.

During the year ended December 31, 2017, the Company issued approximately 1.0 million shares of common stock in conjunction with the Fairrington acquisition. During the year ended December 31, 2017, no shares of common stock were purchased by the Company, however, a de minimis amount of shares were withheld from employees for tax liabilities upon vesting of equity awards.

Basic earnings per share (“EPS”) is calculated by dividing net earnings attributable to the Company’s stockholders by the weighted average number of common shares outstanding for the period. In computing diluted EPS, basic EPS is adjusted for the assumed issuance of all potentially dilutive share-based awards, including stock options, restricted stock, RSUs, and PSUs. The computations of basic and diluted EPS for periods prior to the separation were calculated using the shares distributed and retained by RRD on October 1, 2016. The same number of shares was used to calculate basic and diluted earnings per share since there were no LSC Communications equity awards outstanding prior to the separation.

The following table shows the calculation of basic and diluted EPS, as well as a reconciliation of basic shares to diluted shares:

The Company is the sole sponsor of certain defined benefit pension plans that are included in the consolidated balance sheets as of December 31, 2017 and 2016. The Company’s primary single employer defined benefit pension plans are frozen. No new employees will be permitted to enter those plans and participants will earn no additional benefits. The assets and certain obligations of the defined benefit pension plans include plans qualified under Section 401(a) of the Internal Revenue Code of 1986, as amended (the “Qualified Plans”) and related non-qualified benefits (the “Non-Qualified Plan”). The Qualified Plans will be funded in conformity with the applicable government regulations, such that the Company from time to time contributes at least the minimum amount required using actuarial cost methods and assumptions acceptable under government regulations. The Non-Qualified Plan is unfunded, and the Company pays retiree benefits as they become due.

The Company engages outside actuaries to assist in the determination of the obligations and costs under these plans. The Company records annual income and expense amounts relating to its pension plans based on calculations that include various actuarial assumptions such as discount rates, mortality, assumed rate of return, compensation increases, and turnover rates. The Company reviews its actuarial assumptions on an annual basis and makes modifications to the assumptions based on current rates and trends when it is deemed appropriate to do so. The effect of modifications on the value of plan obligations and assets is recognized immediately within other comprehensive income (loss) and amortized substantially all in investment and other income-net over future periods. The Company believes that the assumptions utilized in recording its obligations under its plans are reasonable based on its experience, market conditions and input from its actuaries and investment advisors.

The benefit plan obligations are calculated using generally accepted actuarial methods and are measured as of December 31. Prior to the plan freezes, actuarial gains and losses were amortized using the corridor method over the average remaining service life of active plan participants. Actuarial gains and losses for frozen plans are amortized using the corridor method over the average remaining expected life of active plan participants.

As of December 31, 2015, the Company changed the method used to estimate the interest cost components of net pension plan expense for its defined benefit pension plans. Historically, the interest cost components were estimated using a single weighted-average discount rate derived from the yield curve used to measure the projected benefit obligation at the beginning of the period. The Company has elected to use a full yield curve approach in the estimation of these interest components of net pension plan expense by applying the specific spot rates along the yield curve used in the determination of the projected benefit obligation to the relevant projected cash flows. The Company made this change to improve the correlation between projected benefit cash flows and the corresponding yield curve spot rates and to provide a more precise measurement of interest costs. This change does not affect the measurement and calculation of the Company’s total benefit obligations. The Company accounted for this change as a change in estimate and accordingly accounted for it prospectively starting in the first quarter of 2016.

The Company recorded non-cash settlement charges of $1 million in selling, general and administrative expenses in the three months ended June 30, 2016 in connection with settlement payments from an early buyout of certain former Esselte employees. These charges resulted from the recognition in earnings of a portion of the actuarial losses recorded in accumulated other comprehensive loss based on the proportion of the obligation settled.

At the separation date, the Company assumed and recorded certain pension obligations and plan assets in single employer plans for the Company’s employees and certain former employees and retirees of RRD. The Company recorded a net benefit plan obligation of $358 million as of October 1, 2016 related to these plans. Additionally, the Company’s United Kingdom pension plan was transferred to RRD at the separation date, and as a result, the Company recorded a reduction in its net benefit plan asset of $7 million as of October 1, 2016.

Prior to the separation, for RRD sponsored defined benefit and post-employment plans, the Company recorded net pension and postretirement income of $28 million for the nine months ended September 30, 2016 and $22 million for the year ended December 31, 2015. These amounts are recognized substantially all in investment and other income-net in the consolidated and combined statements of operations.

The Company made contributions totaling $6 million to its pension plans during the year ended December 31, 2017. Based on the plans’ regulatory funded status, there are no required contributions for the Company’s primary U.S. Qualified Plan in 2018. The required contributions in 2018, primarily for the Non-Qualified Plan, are expected to be approximately $6 million to its pension plans.

Financial information regarding the Qualified, Non-Qualified and International plans is shown below:


	2017						2016						2015
	Qualified			Non-Qualified & International			Qualified			Non-Qualified & International			Qualified			Non-Qualified & International
Interest cost		86			3			24			6			7			9
Expected return on plan assets		(153	)		—			(48	)		(7	)		(11	)		(13	)
Amortization of actuarial loss		17			1			6			1			—			1
Settlement		—			—			1			—			—			—
Net periodic benefit income	$	(50	)	$	4		$	(17	)	$	—		$	(4	)	$	(3	)

Weighted average assumption used to calculate net periodic benefit expense:
Discount rate		4.3	%		4.3	%		3.8	%		3.8	%		4.2	%		3.8	%
Expected return on plan assets		6.9	%		7.9	%		7.2	%		7.2	%		6.5	%		6.3	%

The accumulated benefit obligation for the LSC Communications sponsored defined benefit Qualified Plans was $2,572 million and $2,439 million at December 31, 2017 and 2016, respectively. The accumulated benefit obligation for the LSC Communications sponsored defined benefit Non-Qualified and international pension plans was $94 million and $90 million at December 31, 2017 and 2016, respectively.


	2017						2016
	Qualified			Non-Qualified & International			Qualified			Non-Qualified & International
Benefit obligation at beginning of year	$	2,439		$	92		$	168		$	220
Interest cost		86			3			24			6
Actuarial loss (gain)		169			5			(186	)		(7	)
Settlement		—			—			(30	)		—
Foreign currency translation		—			—			—			(27	)
Benefits paid		(122	)		(5	)		(39	)		(10	)
Plan transfers from parent company		—			—			2,502			97
Plan transfers to parent company		—			—			—			(187	)
Benefit obligation at end of year	$	2,572		$	95		$	2,439		$	92

Fair value of plan assets at beginning of year	$	2,249		$	2		$	169		$	220
Actual return on assets		357			—			(93	)		9
Settlement		—			—			(30	)		—
Employer contributions		—			6			1			4
Foreign currency translation		—			(1	)		—			(27	)
Separation-related adjustment		(6	)		—			—			—
Plan transfers from parent company		—			—			2,241			—
Plan transfers to parent company		—			—			—			(194	)
Benefits paid		(122	)		(5	)		(39	)		(10	)
Fair value of plan assets at end of year	$	2,478			2		$	2,249		$	2

Unfunded status at end of year	$	(94	)	$	(93	)	$	(190	)	$	(90	)

The amounts included in accumulated other comprehensive loss in the consolidated balance sheets, excluding tax effects, that have not been recognized as components of net periodic cost at December 31, 2017 and 2016 were as follows:

The pre-tax amounts recognized in other comprehensive loss in 2017 as components of net periodic costs were as follows:

Actuarial gains and losses in excess of 10.0% of the greater of the projected benefit obligation or the market-related value of plan assets were recognized as a component of net periodic benefit costs over the average remaining service period of a plan’s active employees. Unrecognized prior service costs or credits are also recognized as a component of net periodic benefit cost over the average remaining service period of a plan’s active employees. The amounts in accumulated other comprehensive loss that are expected to be recognized as components of net periodic benefit costs in 2018 are shown below:

The weighted-average assumptions used to determine the net benefit obligation at the measurement date were as follows:

The following table provides a summary of pension plans with projected benefit obligations in excess of plan assets as of December 31, 2017 and 2016:

The following table provides a summary of pension plans with accumulated benefit obligations in excess of plan assets as of December 31, 2017 and 2016:

The Company determines its assumption for the discount rate to be used for purposes of computing annual service and interest costs based on an index of high-quality corporate bond yields and matched-funding yield curve analysis as of the measurement date.

The Company’s overall investment approach for its primary U.S. Qualified Plan is to reduce the risk of significant decreases in the plan’s funded status by allocating a larger portion of the plan’s assets to investments expected to hedge the impact of interest rate risks on the plan’s obligation. Over time, the target asset allocation percentage for the pension plan is expected to decrease for equity and other “return seeking” investments and increase for fixed income and other “hedging” investments. The assumed long-term rate of return for plan assets, which is determined annually, is likely to decrease as the asset allocation shifts over time. The expected long-term rate of return for plan assets is based upon many factors including asset allocation, historical asset returns, current and expected future market conditions, risk and active management premiums. The target asset allocation percentage as of December 31, 2017 for the primary U.S. Qualified Plan was approximately 55.0% for return seeking investments and approximately 45.0% for hedging investments. Management reviews the performance of its investments on a quarterly basis.

During the year ended December 31, 2016, the Company adopted ASU 2015-07 “Fair Value Measurement: Disclosures for Investments in Certain Entities that Calculate Net Asset Value per Share (or Its Equivalent)”. The new guidance requires for investments valued using net asset value (“NAV”) to be classified as a reconciling item between the fair value hierarchy table shown below and the amount of investments in the balance sheet.

The Company segregated its plan assets by the following major categories and levels for determining their fair value as of December 31, 2017 and 2016:

Cash and cash equivalents—Carrying value approximates fair value. As such, these assets were classified as Level 1. The Company also invests in certain short-term investments that are valued using the amortized cost method. As such, these assets were classified as Level 2.

Equity—The value of individual equity securities were based on quoted prices in active markets. As such, these assets are classified as Level 1. Additionally, this category includes underlying securities in trust-owned life insurance policies that are invested in certain equity securities. These investments are not quoted on active markets; therefore, they are classified as Level 2.

Fixed income—Fixed income securities are typically priced based on a valuation model rather than a last trade basis and are not exchange-traded. These valuation models involve utilizing dealer quotes, analyzing market information, estimating prepayment speeds and evaluating underlying collateral. Accordingly, the Company classified these fixed income securities as Level 2. Fixed income securities also include investments in various asset-backed securities that are part of a government sponsored program. The prices of these asset-backed securities were obtained by independent third parties using multi-dimensional, collateral specific prepayments tables. Inputs include monthly payment information and collateral performance. As the values of these assets was determined based on models incorporating observable inputs, these assets were classified as Level 2. Additionally, this category includes underlying securities in trust owned life insurance policies that are invested in certain fixed income securities. These investments are not quoted on active markets; therefore, they are classified as Level 2.

Derivatives and other—This category includes investments in commodity and structured credit funds that are not quoted on active markets; therefore, they are classified as Level 2.

Real estate—The fair market value of real estate investment trusts is based on observable inputs for similar assets in active markets, for instance, appraisals and market comparables. Accordingly, the real estate investments were categorized as Level 2.

Investments measured at NAV as a practical expedient—The Company invests in certain equity, real estate and private equity funds that are valued at calculated NAV per share. In accordance with FASB guidance investments that are measured at fair value using the NAV per share as a practical expedient have not been classified in the fair value hierarchy.

The valuation methodologies described above may generate a fair value calculation that may not be indicative of net realizable value or future fair values. While the Company believes the valuation methodologies used are appropriate, the use of different methodologies or assumptions in calculating fair value could result in different amounts. The Company invests in various assets in which valuation is determined by NAV. The Company believes that the NAV is representative of fair value at the reporting date, as there are no significant restrictions on redemption of these investments or other reasons to indicate that the investment would be redeemed at an amount different than the NAV.

The fair values of the Company’s pension plan assets at December 31, 2017 and 2016, by asset category were as follows:

	December 31, 2017						December 31, 2016
Asset Category	Total		Level 1		Level 2		Total		Level 1		Level 2
Cash and cash equivalents	$	82	$	52	$	30	$	80	$	50	$	30
Equity		636		636		—		595		595		—
Fixed income		1,062		—		1,062		802		—		802
Derivatives and other		1		—		1		—		—		—
Investments measurement at NAV as a practical expedient		699		—		—		774		—		—
Total	$	2,480	$	688	$	1,093	$	2,251	$	645	$	832

Employer 401(k) Savings Plan—Effective September 2, 2016, LSC Communications initiated its own 401(k) plan. Under the LSC Savings Plan (the “Plan”), eligible employees have the option to contribute a percentage of eligible compensation on both a before-tax and after-tax basis. Effective January 1, 2017, LSC Communications amended the Plan to provide a company match equal to $0.50 of every pre-tax and Roth 401(k) dollar a participating employee contributes to the Plan on up to the first 3.0% of such participant’s pay.

Multiemployer Pension Plans—Multiemployer plans receive contributions from two or more unrelated employers pursuant to one or more collective bargaining agreements and the assets contributed by one employer may be used to fund the benefits of all employees covered within the plan. The risk and level of uncertainty related to participating in these multiemployer pension plans differs significantly from the risk associated with the Company-sponsored defined benefit plans. For example, investment decisions are made by parties unrelated to the Company and the financial stability of other employers participating in a plan may affect the Company’s obligations under the plan.

During the years ended December 31, 2017, 2016 and 2015, the Company recorded restructuring, impairment and other charges relating to multiemployer pension plan withdrawal obligations of:

Refer to Note 8, Restructuring, Impairment and Other Charges, for further details of charges related to complete or partial multiemployer pension plan withdrawal liabilities recognized in the consolidated and combined statements of operations.

The Company’s withdrawal liabilities could be affected by the financial stability of other employers participating in the plans and any decisions by those employers to withdraw from the plans in the future. While it is not possible to quantify the potential impact of future events or circumstances, reductions in other employers’ participation in multiemployer pension plans, including certain plans from which the Company has previously withdrawn, could have a material impact on the Company’s previously estimated withdrawal liabilities, may affect consolidated and combined statements of operations, balance sheets or cash flows.

As a result of the acquisition of Courier, the Company participates in two multiemployer pension plans, one of which the Company’s contributions are approximately 85% of the total plan contributions. Both plans are estimated to be underfunded and have a red zone status, designated as a result of low contribution funding levels, under the Pension Protection Act.

During the years ended December 31, 2017, December 31, 2016 and December 31, 2015, the Company made de minimis contributions to these multiemployer pension plans and other plans from which the Company has completely withdrawn as of December 31, 2017.

The Tax Act was enacted on December 22, 2017 and introduces significant changes to U.S. federal income tax law. Effective in 2018, the Tax Act reduces the U.S. federal corporate tax rate from 35.0% to 21.0% and creates new taxes on certain foreign-sourced earnings and certain related-party payments, which are referred to as the global intangible low-taxed income (“GILTI”) tax and the base erosion anti-abuse tax, respectively. In addition, in 2017, the Company was subject to a one-time transition tax on accumulated foreign subsidiary earnings not previously subject to U.S. federal income tax.

Due to the timing of the enactment and the complexity involved in applying the provisions of the Tax Act, the Company has made reasonable estimates of the effects and recorded provisional amounts in its financial statements for the year ended December 31, 2017. As the Company collects and prepares necessary data, and interprets the Tax Act and any additional guidance issued by the U.S. Treasury Department, the IRS and other standard-setting bodies, it may make adjustments to the provisional amounts. Those adjustments may materially impact the Company’s provision for income taxes and effective tax rate in the period in which the adjustments are made. The accounting for the tax effects of the Tax Act are expected to be completed in 2018.

The more significant tax law changes resulting from the Tax Act and related impacts to the Company in 2017 are as follows:

The net provisional tax expense recognized in 2017 related to the Tax Act was $24 million. As the Company completes its analysis of the Tax Act and incorporates additional guidance that may be issued by the U.S. Treasury Department, the IRS and other standard-setting bodies, it may identify additional effects not reflected for the year ended December 31, 2017.

Prior to the year ended December 31, 2017, the Company did not record deferred U.S., foreign or local income taxes on the book-over-tax outside basis differences of its foreign subsidiaries because such excess was considered to be indefinitely reinvested in the local country businesses. Given the one-time transition tax under the Tax Act as noted above, the Company now has the ability to repatriate to the U.S. parent the foreign cash associated with these foreign earnings with minimal additional taxes as these earnings have already been subject to U.S. federal taxes. The Company is currently analyzing its foreign capital structure in order to determine the amount that can be repatriated to the U.S. with minimal additional taxes.

Income taxes have been based on the following components of earnings from operations before income taxes for the years ended December 31, 2017, 2016 and 2015:

The components of income tax expense (benefit) from operations for the years ended December 31, 2017, 2016 and 2015 were as follows:

Refer to Note 15, Comprehensive Income, for details of the income tax expense or benefit allocated to each component of other comprehensive loss.

The following table outlines the reconciliation of differences between the Federal statutory tax rate and the Company’s effective income tax rate:

	2017		2016		2015
Federal statutory tax rate	35.0	%	35.0	%	35.0	%
International investment tax credit	25.9		(1.6	)	(1.8	)
Foreign tax rate differential	6.5		(1.4	)	0.8
State and local income taxes, net of U.S. federal income tax benefit	4.0		3.1		3.8
Domestic manufacturing deduction	1.3		(3.1	)	(4.4	)
Adjustment of uncertain tax positions and interest	—		—		4.4
Acquisition-related expenses	—		—		3.0
Section 162(m) limitation	(5.1	)	0.3		0.5
Impairment charges	(21.8	)	—		—
Change in valuation allowances	(22.6	)	0.9		2.5
Impact of the Tax Act
Deferred tax effects	(19.2	)	—		—
Transition tax	(36.2	)	—		—
Other	1.7		(0.7	)	2.7
Effective income tax rate	(30.5)	%	32.5	%	46.5	%

Included in 2015 is a tax expense of $6 million that was recorded due to the receipt of an unfavorable court decision related to payment of prior year taxes in an international jurisdiction.

The significant deferred tax assets and liabilities at December 31, 2017 and 2016 were as follows:

Transactions affecting the valuation allowances on deferred tax assets during the years ended December 31, 2017, 2016 and 2015 were as follows:

As of December 31, 2017, the Company had domestic and foreign net operating loss deferred tax assets and other tax carryforwards of approximately $7 million and $131 million ($5 million and $101 million, respectively, at December 31, 2016), of which $133 million expires between 2018 and 2027. Limitations on the utilization of these tax assets may apply. The Company has provided valuation allowances to reduce the carrying value of certain deferred tax assets, as management has concluded that, based on the weight of available evidence, it is more likely than not that the deferred tax assets will not be fully realized.

Cash payments for income taxes were $36 million, $14 million and $3 million during the years ended December 31, 2017, 2016 and 2015, respectively. There were no amounts settled with RRD for 2017. Total amounts settled with RRD were $57 million and $88 million for 2016 and 2015, respectively. Cash refunds for income taxes were de minimis during the year ended December 31, 2017. There were cash refunds for income taxes of $3 million and $5 million during the years ended December 31, 2016 and 2015, respectively.

Changes in the Company’s unrecognized tax benefits at December 31, 2017, 2016 and 2015 were as follows:

The Company classifies interest expense and any related penalties related to income tax uncertainties as a component of income tax expense. The total interest expense, net of tax benefits, related to tax uncertainties recognized in the consolidated and combined statements of operations was expense of $0 million, $0 million and $1 million for the years ended December 31, 2017, 2016 and 2015. No benefits were recognized for the years ended December 31, 2017, 2016, and 2015, from the reversal of accrued penalties. There was no interest accrued related to income tax uncertainties at December 31, 2017 and 2016. There were no accrued penalties related to income tax uncertainties for years ended December 31, 2017 and 2016.

The Company has tax years from 2012 that remain open and subject to examination by the IRS, certain state taxing authorities or certain foreign tax jurisdictions.

The following table summarizes the change in accumulated other comprehensive loss by component for the years ended December 31, 2017, 2016 and 2015.

	Pension Plan Cost			Translation Adjustments			Total
Balance at December 31, 2014	$	(37	)	$	(131	)	$	(168	)
Other comprehensive loss before reclassifications		(10	)		(28	)		(38	)
Amounts reclassified from accumulated other comprehensive loss		1			—			1
Net change in accumulated other comprehensive loss		(9	)		(28	)		(37	)
Balance at December 31, 2015	$	(46	)	$	(159	)	$	(205	)
Other comprehensive income before reclassifications		29			5			34
Amounts reclassified from accumulated other comprehensive loss		6			—			6
Transfer of pension plan from parent company, net		(495	)		—			(495	)
Transfer of U.K. entity to parent company, net		44			85			129
Net change in accumulated other comprehensive loss		(416	)		90			(326	)
Balance at December 31, 2016	$	(462	)	$	(69	)	$	(531	)
Other comprehensive income before reclassifications		23			21			44
Amounts reclassified from accumulated other comprehensive loss		11			—			11
Net change in accumulated other comprehensive loss		34			21			55
Balance at December 31, 2017	$	(428	)	$	(48	)	$	(476	)

On October 1, 2016, the other comprehensive loss balances related to the primary qualified and non-qualified pension plans were transferred from RRD to the Company. Additionally, the other comprehensive loss balance related to the United Kingdom pension plan was transferred from the Company to RRD. Refer to Note 13, Retirement Plans, for further information on the pension plans’ transfers.

Refer to the statements of comprehensive income for the components of comprehensive income for the years ended December 31, 2017, 2016 and 2015.

Reclassifications from accumulated other comprehensive loss for the years ended December 31, 2017, 2016 and 2015 were as follows:

The Company’s employees participate in the Company’s 2016 Performance Incentive Plan (the “2016 PIP”). Under the 2016 PIP, the Company may grant cash or bonus awards, stock options, stock appreciation rights, restricted stock awards (“RSAs”), restricted stock units (“RSUs”), performance awards or combinations thereof to certain officers, directors and key employees. The Human Resources Committee of the Company’s Board of Directors has discretion to establish the terms and conditions for grants, including the number of shares, vesting and required service or other performance criteria. The maximum term of any award under the 2016 PIP is ten years. Options generally expire ten years from the date of grant or five years after the date of retirement, whichever is earlier.

The rights granted to the recipient of RSAs, RSUs and performance restricted stock (“PRS”) generally accrue ratably over the restriction or vesting period, which is generally three years. RSUs and RSAs are subject to forfeiture upon termination of employment prior to vesting, subject in some cases to early vesting upon specified events, including death or permanent disability of the grantee, termination of the grantee’s employment under certain circumstances or a change in control of the Company. Compensation expense is based on the fair market value of the awards on the date of grant expensed ratably over the periods during which restrictions lapse.

Prior to the separation, RRD maintained an incentive stock program for certain individuals, including the Company’s employees. A portion of the Company’s employees participated in RRD’s non-qualified stock options, RSUs and performance share units (“PSUs”) programs. Share based compensation expense included expense attributable to the Company based on the award terms previously granted to the Company’s employees and an allocation of compensation expense associated with RRD’s corporate and shared functional employees. As the share-based compensation plans were RRD’s plans, the amounts were recognized through net parent company investment on the combined balance sheets. In periods after the separation, the Company records share-based compensation expense relating to LSC Communications, RRD and Donnelley Financial awards held by its employees, officers and directors.

In connection with the separation, outstanding RRD stock options, RSUs and PSUs previously issued under RRD’s incentive stock program were adjusted and converted into new LSC Communications stock-based awards or a basket of LSC Communications, RRD and Donnelley Financial stock-based awards using a formula designed to preserve the intrinsic value and fair value of the awards immediately prior to the separation.

At the separation date, outstanding RRD options related to the 2009, 2010, 2011, and 2012 grants were modified and converted into stock options in all three companies at a conversion rate outlined in the separation and distribution agreement. Outstanding RRD RSUs granted in 2013 and 2014 were modified and converted into RSUs in all three companies as outlined in the separation and distribution agreement. Outstanding RRD RSUs related to 2015 and 2016 grant dates were converted into RSUs in the company that the grantees were employed by at the separation date.

Modifications were made to the RRD PSUs so that as of the separation date, the performance period for the 2014 and 2015 PSU grants ended. The applicable performance was measured as of the separation date against revised cumulative free cash flow targets approved by the RRD Board of Directors. The 2014 PSUs converted into RSUs in all three companies in accordance with the separation and distribution agreement. The 2015 PSUs converted into RSUs in the company that the grantees were employed by at the separation date.

Total compensation expense related to all share based compensation plans for the Company’s employees, officers and directors was $13 million and $8 million for the years ended December 31, 2017 and 2016. The expense in 2016 includes $5 million of expense allocated from RRD prior to the separation. The Company was allocated share-based compensation expense from RRD related to all share-based compensation plans of $6 million for the year ended December 31, 2015. There were net tax benefits of $2 million, $3 million and $2 million for the years ended December 31, 2017, 2016 and 2015, respectively.

There were no options granted during the years ended December 2017, 2016 and 2015.

A summary of the Company’s stock option activity for LSC Communications, RRD and Donnelley Financial employees, officers and directors as of December 31, 2017 and 2016 and changes during the year ended December 31, 2017 is presented below.

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on December 31, 2017 and 2016, respectively, and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their in-the-money options on December 31, 2017 and 2016. This amount will change in future periods based on the fair market value of LSC Communications stock and the number of options outstanding. Total intrinsic value of options exercised for the years ended December 31, 2017 and 2016 was de minimis.

There was no compensation expense related to stock options for the year ended December 31, 2017. Compensation expense for the years ended December 31, 2016 and 2015 was de minimis.

A summary of the Company’s RSU activity for LSC Communications, RRD and Donnelley Financial employees, officers and directors as of December 31, 2017 and 2016 and changes during the year ended December 31, 2017 is presented below.

During the year ended December 31, 2017, 145,120 RSUs were granted to certain executive officers and senior management. The shares are subject to time-based vesting and will cliff vest on March 2, 2020. The total potential payout for the awards is 139,090 shares as of December 31, 2017. The fair value of these awards was determined based on the Company’s stock price on the grant date reduced by the present value of expected dividends through the vesting period. These awards are subject to forfeiture upon termination of employment prior to vesting, subject in some cases to early vesting upon specified events, including death, permanent disability or retirement of the grantee or change of control of the Company.

Compensation expense related to LSC Communications, RRD and Donnelley Financial RSUs held by Company employees, officers and directors was $9 million, $7 million and $4 million for the years ended December 31, 2017, 2016 and 2015, respectively. As of December 31, 2017, there was $7 million of unrecognized share-based compensation expense related to approximately 0.7 million RSUs, with a weighted-average grant date fair value of $28.64, that are expected to vest over a weighted average period of 1.0 years.

A summary of RSA activity for the Company’s employees as of December 31, 2017 and 2016, and changes during the year ended December 31, 2017 is presented below.

Compensation expense related to RSAs for the years ended December 31, 2017 and 2016 was $1 million and a de minimis amount, respectively. As of December 31, 2017, there was $2 million of unrecognized compensation expense related to RSAs, which is expected to be recognized over a weighted average period of 1.8 years.

A summary of PRS activity for the Company’s employees as of December 31, 2017 and 2016, and changes during the year months ended December 31, 2017 is presented below.

During the years ended December 31, 2017 and 2016, 44,760 and 266,072 shares of PRS were granted to certain executive officers, payable upon the achievement of certain established performance targets. The performance periods for the shares awarded in 2017 and 2016 are January 1, 2017 to December 31, 2017 and October 1, 2016 to September 30, 2019, respectively. In addition to being subject to achievement of the performance target, the shares awarded in 2017 are also subject to time-based vesting on March 2, 2020. In addition to being subject to achievement of the performance target, the shares awarded in 2016 are also subject to time-based vesting in 3 even tranches on October 1, 2017, October 1, 2018 and October 1, 2019. 88,687 shares vested on October 1, 2017. For all awards, the performance-based vesting and the time-based vesting must be met for the PRS to vest.

The fair value of these awards was determined on the date of grant based on the Company’s stock price. These awards are subject to forfeiture upon termination of employment prior to vesting, subject in some cases to early vesting upon specified events, including death, permanent disability or retirement of the grantee or change of control of the Company.

Compensation expense for the awards granted during the year ended December 31, 2017 is being recognized based on an estimated payout of 44,760 shares. Compensation expense for the awards granted during the year ended December 31, 2016 is being recognized based on an estimated payout of 266,072 shares. Compensation expense related to PRS for the years ended December 31, 2017 and 2016 was $3 million and $1 million, respectively. As of December 31, 2017, there was $5 million of unrecognized compensation expense related to PRS, which is expected to be recognized over a weighted average period of 1.8 years.

A summary of PSU activity for the Company’s employees as of December 31, 2017 and 2016, and changes during the year ended December 31, 2017 is presented below.

During the year ended December 31, 2017, 28,520 PSUs were granted to certain members of senior management, payable upon the achievement of certain established performance targets. The performance period for the shares is January 1, 2017 to December 31, 2017. In addition to being subject to achievement of the performance target, the shares are also subject to time-based vesting on March 2, 2020. Both the performance-based vesting and the time-based vesting must be met for the PSUs to vest.

The fair value of these awards was determined based on the Company’s stock price on the grant date reduced by the present value of expected dividends through the vesting period. These awards are subject to forfeiture upon termination of employment prior to vesting, subject in some cases to early vesting upon specified events, including death, permanent disability or retirement of the grantee or change of control of the Company.

Compensation expense for the awards granted during the year ended December 31, 2017 is being recognized based on an estimated payout of 28,520 shares. There was a de minimis amount of compensation expense related to PSUs for the year ended December 31, 2017. As of December 31, 2017, there was $1 million of unrecognized compensation expense related to PSUs, which is expected to be recognized over a weighted average period of 2.2 years.

The Company changed its reportable segments and reporting units during the third quarter of 2018, as discussed in Item 8.01, Current Events. The Company’s segment, product and service offerings are summarized below:

The Office Products segment manufactures and sells branded and private label products in five core categories: filing products, envelopes, note-taking products, binder products, and forms. The Office Products segment accounted for approximately 14% of the Company’s consolidated net sales in 2017.

Corporate consists of unallocated selling, general and administrative activities and associated expenses including, in part, executive, legal, finance, communications, certain facility costs and LIFO inventory provisions. In addition, share-based compensation expense is included in Corporate and not allocated to the operating segments. Prior to the separation, many of these costs were based on allocations from RRD, however, the Company has incurred such costs directly after the separation.

The Company has disclosed income (loss) from operations as the primary measure of segment earnings (loss). This is the measure of profitability used by the Company’s chief operating decision-maker and is most consistent with the presentation of profitability reported with the condensed consolidated and combined financial statements.

			Income (loss)					Depreciation
Year Ended	Net		from			Assets of		and		Capital
December 31, 2017	Sales		Operations			Operations		Amortization		Expenditures
Magazines, Catalogs and Logistics	$	1,583	$	(73	)	$	780	$	72	$	24
Book		1,022		62			553		60		13
Office Products		495		42			377		15		5
Total reportable segments		3,100		31			1,710		147		42
Other		503		28			222		11		10
Corporate		—		(78	)		82		2		8
Total operations	$	3,603	$	(19)		$	2,014	$	160	$	60

			Income (loss)				Depreciation
Year Ended	Net		from		Assets of		and		Capital
December 31, 2016	Sales		Operations		Operations		Amortization		Expenditures
Magazines, Catalogs and Logistics	$	1,526	$	28	$	638	$	76	$	19
Book		1,097		86		626		67		10
Office Products		527		54		323		15		3
Total reportable segments		3,150		168		1,587		158		32
Other		504		27		237		12		10
Corporate		—		(65)		128		1		6
Total operations	$	3,654	$	130	$	1,952	$	171	$	48

			Income (loss)					Depreciation
Year Ended	Net		from			Assets of		and		Capital
December 31, 2015	Sales		Operations			Operations		Amortization		Expenditures
Magazines, Catalogs and Logistics	$	1,696	$	42		$	721	$	94	$	22
Book		925		42			594		54		10
Office Products		562		47			324		16		4
Total reportable segments		3,183		131			1,639		164		36
Other		560		12			332		16		6
Corporate		—		(37	)		40		1		—
Total operations	$	3,743	$	106		$	2,011	$	181	$	42

Corporate assets primarily consisted of the following items at December 31, 2017, 2016 and 2015:

Restructuring, impairment and other charges by segment for the year ended December 31, 2017, 2016 and 2015 are described in Note 4, Restructuring, Impairment and Other Charges.

	North America_(b)		Europe		Mexico		Consolidated & Combined
2017
Net sales	$	3,226	$	271	$	106	$	3,603
Long-lived assets _(a)		607		32		36		675

2016
Net sales	$	3,286	$	272	$	96	$	3,654
Long-lived assets _(a)		651		30		23		704

2015
Net sales	$	3,319	$	305	$	119	$	3,743
Long-lived assets _(a)		722		43		21		786

On March 28, 2017, RRD completed the sale of approximately 6.2 million shares of LSC Communications common stock, representing its entire 19.25% retained ownership.

Prior to the separation, RRD provided LSC Communications certain services, which included, but were not limited to, information technology, finance, legal, human resources, internal audit, treasury, tax, investor relations and executive oversight. RRD charged the Company for these services based on direct usage, when available, with the remainder allocated on a pro rata basis by revenue, headcount, or other measures. These allocations were reflected as follows in the combined statements of operations:

The Company considered the expense methodologies and financial results to be reasonable for all periods presented. However, these allocations may not be indicative of the actual expenses that may have been incurred as an independent public company or the costs LSC Communications may incur in the future.

After the separation, the Company no longer receives or records allocations from RRD. The Company records transactions with RRD as external arms-length transactions in the Company’s consolidated financial statements.

Given that RRD sold its remaining stake in LSC Communications on March 28, 2017, the following information is presented through March 31, 2017 only.

LSC Communications generates net revenue from sales to RRD’s subsidiaries. Net revenues from related party sales were $32 million for the three months ended March 31, 2017. Net revenues from related party sales were $87 million and $44 million for the years ended December 31, 2016 and 2015 respectively.

LSC Communications utilizes RRD for freight, logistics and premedia services. Included in the consolidated and combined financial statements were costs of sales related to freight, logistics and premedia services purchased from RRD of $51 million for the three months ended March 31, 2017. Such amounts were $208 million and $216 million for the years ended December 31, 2016 and 2015, respectively. These amounts are included in the consolidated and combined statements of operations.

The following pronouncements require retrospective restatement upon adoption and are therefore reflected in this current report on Form 8-K.

In March 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2017-07 “Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost” (“ASU 2017-07”). This ASU requires entities to disaggregate the service cost component from other components of net benefit cost and present it with other employee compensation costs. All other components of net benefit cost will need to be presented elsewhere on the income statement outside of income from operations. Only the service cost component would be eligible for capitalization into inventory. The standard is effective in the first quarter of 2018. As a result of the adoption of ASU 2017-07, the Company reclassified approximately $46 million, $45 million and $29 million related to the years ended December 31, 2017, 2016 and 2015, respectively, of net pension income out of income from operations to investment and other income-net, resulting in no impact to net income.

In November 2016, FASB issued Accounting Standards Update No. 2016-18 “Statements of Cash Flows (Topic 230): Restricted Cash” (“ASU 2016-18”). The standard requires amounts generally described as restricted cash and restricted cash equivalents to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The standard does not provide a definition of restricted cash or restricted cash equivalents. The Company included a reconciliation of beginning-of-period and end-of-period amounts in the consolidated and combined statements of cash flows to the consolidated and combined balance sheets.

The following pronouncements do not require retrospective restatement upon adoption and are therefore excluded from this current report on Form 8-K, were previously adopted or have a future effective date.

In January 2017, the FASB issued Accounting Standards Update No. 2017-04 “Intangibles – Goodwill and Other (Topic 350) Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”). The standard eliminates Step 2 of the goodwill impairment test, and instead, recognizes an impairment charge for the amount by which the carrying value exceeds the reporting unit’s fair value not to exceed the total amount of goodwill allocated. The standard is effective in the first quarter of 2020, with early adoption permitted on testing dates after January 1, 2017. The Company adopted ASU 2017-04 during the third quarter of 2017.

In January 2017, the FASB issued Accounting Standards Update No. 2017-01 "Business Combinations (Topic 805): Clarifying the Definition of a Business" (“ASU 2017-01”) in order to clarify the definition of a business as it relates to whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The standard becomes effective in the first quarter of 2018. The Company plans to adopt the standard in the first quarter of 2018. The impact is not expected to be material.

In August 2016, the FASB issued Accounting Standards Update No. 2016-15 “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments” (“ASU 2016-15”), which provided guidance on eight specific cash flow classification issues to reduce existing diversity in practice. The standard becomes effective in the first quarter of 2018. Early adoption of ASU 2016-15 is permitted, however, the Company plans to adopt the standard in the first quarter of 2018. The Company does not expect a significant impact to presentation on its condensed and consolidated statements of cash flows.

In March 2016, the FASB issued Accounting Standards Update No. 2016-09 “Stock Compensation (Topic 718) – Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”) which simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures and statutory withholding requirements, as well as the classification of share-based payment transactions on the statement of cash flows. The standard became effective in the first quarter of 2017. As early adoption of ASU 2016-09 is permitted, the Company adopted the standard in the fourth quarter of 2016. The election to early adopt ASU 2016-09 requires any adjustments as of January 1, 2016, the beginning of the annual period that includes the interim period of adoption, to be reflected. The requirements of ASU 2016-09 did not have a material impact to any of the periods presented.

In February 2016, the FASB issued Accounting Standards Update No. 2016-02 “Leases (Topic 842) Section A—Leases: Amendments to the FASB Accounting Standards Codification” (“ASU 2016-02”), which requires lessees to put most leases on the balance sheet but recognize expense on the income statement in a manner similar to current accounting. For lessors, ASU 2016-02 also modifies the classification criteria and the accounting for sales-type and direct financing leases. The standard requires a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements and is effective in the first quarter of 2019. Early adoption of ASU 2016-02 is permitted, however, the Company plans to adopt the standard in the first quarter of 2019. The Company is currently evaluating the impact of the provisions of ASU 2016-02 and anticipates it will be able to complete its analysis of all potential impacts of the standard, implement any system and process changes that might be necessary and educate the appropriate employees with respect to the new standard in order to effectively adopt the standard beginning in the first quarter of 2019.

In May 2014, the FASB issued Accounting Standards Update No. 2014-09 “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”), which outlines a single comprehensive model for entities to use in accounting for revenue using a five-step process that supersedes virtually all existing revenue guidance. ASU 2014-09 also requires additional quantitative and qualitative disclosures. In August 2015, the FASB issued Accounting Standards Update No. 2015-14 “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date” (“ASU 2015-14”), which defers the effective date of ASU 2014-09 to January 1, 2018.

The Company will adopt the standard in the first quarter of 2018. The standard allows the option of either a full retrospective adoption, meaning the standard is applied to all periods presented, or a modified retrospective adoption approach, meaning the standard is applied only to the most current period. The Company will adopt the standard using the modified retrospective adoption approach.

The Company assessed all aspects of the standard’s potential impact and focused further assessment on customized products, deferred revenue and certain items in inventory, which are areas that were determined could have had a material impact on the Company’s accounting for revenue. Potential impacts on other aspects of the standard are not expected to have a material impact to the Company’s accounting for revenue.

The Company completed the evaluation of whether the accounting for revenue of customized products should be over time or at a point in time under the new standard. Based on analysis of specific terms associated with current customer contracts, the Company has concluded that revenue should be recognized at a point in time for substantially all customized products. This treatment is consistent with revenue recognition under the current guidance, where revenue is recognized when the products are completed and shipped to the customer (dependent upon specific shipping terms). As revenue recognition is dependent upon individual contractual terms, the Company will continue its evaluation of any new or amended contracts entered into, including contracts that the Company might assume as a result of acquisition activity. Any contracts whereby revenue for customized products should be recognized over time, as opposed to a point in time, are expected to be immaterial due to the de minimis nature of any particular order under such contracts in production at any given point in time.

With respect to deferred revenue and certain items in inventory, the Company has determined the following situations will be impacted by ASC 606:

Upon adoption of ASC 606, the Company is required to eliminate any deferred revenue and inventory associated with the above three categories against its accumulated deficit within total equity. Based upon the balances that existed as of December 31, 2017, the Company will record a decrease (i.e. credit) to accumulated deficit of $12 million ($9 million net of tax) in the first quarter of 2018.

The Company completed an analysis of historical periods, assuming the guidance under ASC 606 was applied to those historical periods for the three categories mentioned above. The analysis yielded an immaterial difference in the timing and amount of revenue and gross margin recognized under current guidance and that under ASC 606 guidance. Therefore, we anticipate that the adoption of ASC 606 will not have a material impact to the Company in future periods with respect to the three categories mentioned above; however, we are not able to predict whether such historical patterns, timing and level of activity will continue into future periods. Regardless, adoption of ASC 606 will not impact the timing of cash flows as the billing terms with our customers remain unchanged.

	First Quarter			Second Quarter		Third Quarter			Fourth Quarter			Full Year
2017
Net sales	$	821		$	848	$	935		$	999		$	3,603
Cost of sales		692			705		778			851			3,026
Income (loss) from operations _(a)		7			7		(18	)		(15	)		(19)
Net (loss) income		(1	)		5		(3	)		(58	)		(57	)
Net (loss) earnings per basic share ₍_b₎		(0.02	)		0.13		(0.07	)		(1.68	)		(1.69	)
Net (loss) earnings per diluted share ₍_b₎		(0.02	)		0.12		(0.07	)		(1.68	)		(1.69	)

2016
Net sales	$	880		$	906	$	949		$	919		$	3,654
Cost of sales		722			745		783			781			3,031
Income from operations _(a)		35			34		48			13			130
Net income		31			28		38			9			106
Net earnings per basic share ₍_b₎		0.95			0.87		1.17			0.26			3.25
Net earnings per diluted share ₍_b₎		0.95			0.87		1.17			0.26			3.23

(a) As a result of the adoption of ASU 2017-07 in the first quarter of 2018, the Company reclassified net pension income out of income (loss) from operations to investment and other (income)-net, resulting in no impact to net income. The Company retrospectively restated income (loss) from operations for the periods in 2017 and 2016 in this current report on Form 8-K. Refer below for a reconciliation of previously reported balances to the restated balances shown above:

	First Quarter			Second Quarter			Third Quarter			Fourth Quarter			Full Year
2017
Previously reported: Income (loss) from operations	$	18		$	19		$	(7	)	$	(3	)	$	27
Pension income reclass		(11	)		(12	)		(11	)		(12	)		(46	)
Restated: Income (loss) from operations	$	7		$	7		$	(18	)	$	(15	)	$	(19	)

2016
Previously reported: Income from operations	$	47		$	44		$	57		$	27		$	175
Pension income reclass		(12	)		(10	)		(9	)		(14	)		(45	)
Restated: Income from operations	$	35		$	34		$	48		$	13		$	130

(b) On October 1, 2016, RRD distributed approximately 26.2 million shares of LSC Communications common stock to RRD stockholders. RRD retained an additional 6.2 million shares that were sold on March 28, 2017. The computation of net (loss) earnings per basic and diluted shares for periods prior to the separation was calculated using the shares distributed and retained by RRD on October 1, 2016, 32.4 million. As basic and diluted EPS were computed independently for each of the periods presented, the sum of the quarterly EPS amounts do not equal the total. Refer to Note 1, Overview and Basis of Presentation, to the consolidated and combined financial statements for information on the separation.

The amounts above reflect the results of acquired businesses from the relevant acquisition dates and include the following

	Pre-tax												After-tax
Year ended December 31, 2017	First Quarter		Second Quarter		Third Quarter		Fourth Quarter			Full Year			First Quarter		Second Quarter		Third Quarter		Fourth Quarter			Full Year
Separation-related expenses	$	1	$	2	$	1	$	—		$	4		$	1	$	1	$	1	$	—		$	3
Purchase accounting adjustments		—		—		1		(2	)		(1	)		—		—		1		(2	)		(1	)
Acquisition-related expenses		—		1		2		2			5			—		1		1		1			3
Loss on debt extinguishment		—		—		—		3			3			—		—		—		2			2
Restructuring, impairment and other charges-net		6		21		60		42			129			3		14		25		50			92

	Pre-tax												After-tax
Year ended December 31, 2016	First Quarter		Second Quarter		Third Quarter		Fourth Quarter			Full Year			First Quarter		Second Quarter		Third Quarter		Fourth Quarter			Full Year
Separation-related expenses	$	—	$	—	$	1	$	4		$	5		$	—	$	—	$	1	$	2		$	3
Pension settlement charge		—		1		—		—			1			—		—		—		—			—
Restructuring, impairment and other charges-net		3		5		3		7			18			2		3		3		4			12

Interest Rate	8.75%
Interest due	Semi-annually on April 15 and October 15 (from April 15, 2017)
Amortization	$450 million lump-sum at maturity
Maturity	October 15, 2023

	Before Amendment	After Amendment
Interest rate (Company's option)	Base rate + 5.00%; or LIBOR + 6.00%	Base rate + 4.50%; or LIBOR + 5.50%
LIBOR floor	1.00%	0.75%
Amortization	$13 million, first eight quarters; $11 million quarterly thereafter (as of original effective date)	$13 million, first eight quarters; $11 million quarterly thereafter (as of original effective date)
Maturity	September 30, 2022	September 30, 2022

		Page
Report of Independent Registered Public Accounting Firm		F-2
Consolidated and Combined Statements of Operations for each of the three years in the period ended December 31, 2017		F-3
Consolidated and Combined Statements of Comprehensive Income for each of the three years in the period ended December 31, 2017		F-4
Consolidated and Combined Balance Sheets as of December 31, 2017 and 2016		F-5
Consolidated and Combined Statements of Cash Flows for each of the three years in the period ended December 31, 2017		F-6
Consolidated and Combined Statements of Stockholders’ Equity for each of the three years in the period ended December 31, 2017		F-7
Notes to Consolidated and Combined Financial Statements		F-8
Unaudited Interim Financial Information		F-48

	Fair Value		Valuation Technique	Unobservable Input	Range
Customer relationships	$	51	Multi-period excess earnings method	Growth rate	(5.0)% - 7.5%
				Attrition rate	5.0% - 10.0%
				Discount rate	13.0% - 35.0%
Trade names		4	Relief-from-royalty method	Royalty rate	0.5% - 1.5%
				Discount rate	13.0% - 35.0%

	2017			2016
Land	$	45		$	42
Buildings		739			762
Machinery and equipment		4,012			4,173
		4,796			4,977
Accumulated depreciation		(4,220	)		(4,369	)
Total	$	576		$	608

	1% Increase						1% Decrease
	(in millions)
	Qualified			Non-Qualified & International			Qualified		Non-Qualified & International
Accumulated benefit obligation	$	(290	)	$	(9	)	$	356	$	11
Projected benefit obligation		(290	)		(10	)		356		11

	0.25% Increase			0.25% Decrease
	(in millions)
2017	$	(5	)	$	5
2018	$	(6	)	$	6

	2017			2016			$ Change			% Change
	(in millions, except percentages)
Net sales	$	3,603		$	3,654		$	(51	)		(1.4	%)
Cost of sales		3,026			3,031			(5	)		(0.2	%)
Cost of sales as a % of net sales		84.0	%		83.0	%
Selling, general and administrative expenses (exclusive of depreciation and amortization)		307			304			3			1.0	%
Selling, general and administrative expenses as a % of net sales		8.5	%		8.3	%
Restructuring, impairment and other charges-net		129			18			111			616.7	%
Depreciation and amortization		160			171			(11	)		(6.4	%)
(Loss) income from operations	$	(19	)	$	130		$	(149	)		(114.6	%)

	Years Ended December 31,
	2017			2016
	(in millions, except percentages)
Net sales	$	1,583		$	1,526
(Loss) income from operations		(73	)		28
Operating margin		(4.6	%)		1.8	%
Restructuring, impairment and other charges-net		86			4
Purchase accounting inventory adjustments		1			—

	For the Year Ended December 31,
	2017			2016		2015
Net (loss) income	$	(57	)	$	106	$	74
Restructuring, impairment and other charges – net		129			18		57
Separation-related expenses		4			5		—
Purchase accounting adjustments		(1	)		—		11
Acquisition-related expenses		5			—		14
Loss on debt extinguishment		3			—		—
Pension settlement charge		—			1		—
Depreciation and amortization		160			171		181
Interest expense (income) – net		72			18		(3	)
Income tax expense		13			51		64
Non-GAAP adjusted EBITDA	$	328		$	370	$	398

	December 31, 2017
Availability	(in millions)
Stated amount of the Revolving Credit Facility	$	400
Less: availability reduction from covenants		—
Amount available under the Revolving Credit Facility	$	400

Usage
Borrowings under the Revolving Credit Facility	$	75
Impact on availability related to outstanding letters of credit		53
		128

Availability at December 31, 2017	$	272
Cash		34
Net Available Liquidity	$	306

	Segment	Reporting Unit
Clark Group	Magazines, Catalogs and Logistics	Logistics
Quality Park	Office Products	Office Products
Publishers Press	Magazines, Catalogs and Logistics	Magazines and Catalogs
NECI	Office Products	Office Products
CREEL	Magazines, Catalogs and Logistics	Magazines and Catalogs
Fairrington	Magazines, Catalogs and Logistics	Logistics
HudsonYards	Magazines, Catalogs and Logistics	Magazines and Catalogs

	Three Months Ended		Year Ended
	September 30, 2017		December 31, 2017
Magazines and Catalogs	$	28	$	30
Logistics		22		38
Other		5		5
Total	$	55	$	73

	2017			2016
Raw materials and manufacturing supplies	$	114		$	100
Work in process		69			58
Finished goods		112			93
LIFO reserve		(57	)		(58	)
Total	$	238		$	193

	December 31, 2017
	Amount		Weighted Average Amortization Period (in years)
Customer relationships	$	51		11.1
Trade names (amortizable)		4		4.5
Total additions	$	55

For the year ending December 31,	Amount
2018	$	16
2019		16
2020		16
2021		14
2022		13
2023 and thereafter		61
Total	$	136

	Property, Plant and Equipment		Other Intangible Assets		Goodwill		Total
Magazines, Catalogs and Logistics	$	7		—	$	68	$	75
Book		—	5			—		5
Office Products		—	3			—		3
Other		—		—		5		5
Total	$	7	$	8	$	73	$	88

	Year Ended December 31, 2017				As of December 31, 2017
	Impairment Charge		Fair Value Measurement (Level 3)		Net Book Value
Long-lived assets held and used	$	7	$	—	$	—
Goodwill		73		—		—
Indefinite-lived tradenames		8		23		23
Total	$	88	$	23	$	23

	Year Ended December 31, 2015				As of December 31, 2015
	Impairment Charge		Fair Value Measurement (Level 3)		Net Book Value
Long-lived assets held for sale or disposal	$	9	$	15	$	14
Total	$	9	$	15	$	14

	December 31, 2016		Restructuring Charges		Foreign Exchange and Other		Cash Paid			December 31, 2017
Employee terminations	$	8	$	13	$	—	$	(13	)	$	8
Multi-employer pension plan withdrawal obligations		18		1		—		(3	)		16
Lease terminations and other		2		18		—		(18	)		2
Total	$	28	$	32	$	—	$	(34	)	$	26

	December 31, 2015		Restructuring Charges		Foreign Exchange and Other		Cash Paid			December 31, 2016
Employee terminations	$	13	$	8	$	2	$	(15	)	$	8
Multi-employer pension plan withdrawal obligations		20		2		—		(4	)		18
Lease terminations and other		4		5		—		(7	)		2
Total	$	37	$	15	$	2	$	(26	)	$	28

		2017		2016
Employee-related liabilities	$	87	$	87
Customer-related liabilities		40		37
Deferred revenue		33		33
Restructuring liabilities		14		13
Other		65		67
Total accrued liabilities	$	239	$	237

Year Ended December 31	Amount
2018	$	47
2019		42
2020		30
2021		25
2022		18
2023 and thereafter		22
Total	$	184


	Qualified		Non-Qualified & International
Amortization of:
Net actuarial loss	$	17	$	1
Amounts arising during the period:
Net actuarial gain (loss)		36		(5	)
Total	$	53	$	(4	)

Year Ended December 31	Unrelated to Facility Closures		Related to Facility Closures		Total
2017	$	4	$	1	$	5
2016	$	3	$	2	$	5
2015	$	3	$	1	$	4

		2017			2016
Deferred tax assets:
Net operating losses and other tax carryforwards	$	138		$	106
Pension plan liabilities		58			126
Accrued liabilities		33			57
Foreign depreciation		13			10
Other		4			6
Total deferred tax assets		246			305
Valuation allowances		(115	)		(87	)
Net deferred tax assets	$	131		$	218

Deferred tax liabilities:
Accelerated depreciation	$	(40	)	$	(91	)
Other intangible assets		(30	)		(56	)
Inventories		(6	)		(11	)
Other		(5	)		(5	)
Total deferred tax liabilities		(81	)		(163	)

Net deferred tax assets	$	50		$	55

							Classification in the Consolidated
	2017		2016			2015	and Combined Statements of Operations
Amortization of pension plan cost:
Net actuarial loss	$	18	$	7	$	1	(a)
Settlement		—		1		—
Reclassifications before tax	$	18	$	8		1
Income tax expense		7		2		—
Reclassifications, net of tax	$	11	$	6	$	1

	Shares Under Option (thousands)			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (years)		Aggregate Intrinsic Value (millions)
Outstanding at December 31, 2016		299		$	25.32		3.3	$	2
Cancelled/forfeited/expired		(2	)		—
Outstanding at December 31, 2017		297			25.32		2.3		—
Vested and expected to vest at December 31, 2017		297			25.32		2.3		—
Exercisable at December 31, 2017		297		$	25.32		2.3	$	—

	Shares (thousands)			Weighted Average Grant Date Fair Value
Outstanding at December 31, 2016		652		$	28.39
Granted		145			28.94
Vested		(86	)		27.22
Forfeited		(7	)		29.45
Nonvested at December 31, 2017		704		$	28.64

	Shares (thousands)			Weighted Average Grant Date Fair Value
Nonvested at December 31, 2016	159			$	26.26
Granted	9				26.26
Vested		(56	)		26.26
Nonvested at December 31, 2017	112			$	26.26

	Nine months ended September 30,		Year ended December 31,
		2016		2015
Costs of goods sold	$	67	$	78
Selling, general and administrative		114		158
Depreciation and amortization		5		7
Total allocations from RRD	$	186	$	243