10-Q 1 rrd-10q_20130331.htm FORM 10-Q

   

      

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

      

FORM 10-Q

      

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2013

OR

 

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-4694

      

R.R. DONNELLEY & SONS COMPANY

(Exact name of registrant as specified in its charter)

      

   

 

   

   

Delaware

36-1004130

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

   

   

111 South Wacker Drive,

Chicago, Illinois

60606

(Address of principal executive offices)

(Zip code)

(312) 326-8000

(Registrant’s telephone number, including area code)

      

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

   

 

   

   

   

   

Large Accelerated filer

x

Accelerated filer

¨

   

   

   

   

Non-Accelerated Filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No x

As of April 19, 2013, 181.5 million shares of common stock were outstanding.

   

      

   

   


   

R.R. DONNELLEY & SONS COMPANY

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2013

TABLE OF CONTENTS

   

 

   

   

   

Page

   

PART I

FINANCIAL INFORMATION

3

   

   

   

Item 1:

Condensed Consolidated Financial Statements (unaudited)  

3

   

   

   

Condensed Consolidated Balance Sheets as of March 31, 2013 and December 31, 2012  

3

   

   

   

Condensed Consolidated Statements of Operations for the three months ended March 31, 2013 and 2012  

4

   

   

   

Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2013 and 2012  

5

   

   

   

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2013 and 2012  

6

   

   

   

Notes to Condensed Consolidated Financial Statements  

7

   

   

   

Item 2:

Management’s Discussion and Analysis of Financial Condition and Results of Operations  

42

   

   

   

Item 3:

Quantitative and Qualitative Disclosures About Market Risk  

61

   

   

   

Item 4:

Controls and Procedures  

61

   

PART II

   

   

OTHER INFORMATION

   

   

   

Item 2:

Unregistered Sales of Equity Securities and Use of Proceeds  

62

   

   

   

Item 4:

Mine Safety Disclosures  

62

   

   

   

Item 6:

Exhibits  

62

   

   

Signatures  

66

   

   

2  


   

PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (“RR DONNELLEY”)

CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions, except share data)

(UNAUDITED)

   

 

   

March 31,

   

December 31,

   

2013 

   

2012 

ASSETS

   

   

   

   

   

Cash and cash equivalents

  $

302.9 

   

  $

430.7 

Receivables, less allowances for doubtful accounts of $ 50.6 in 2013 (2012—$49.6)

   

1,851.8 

   

   

1,878.8 

Inventories (Note 3)

   

504.4 

   

   

510.2 

Prepaid expenses and other current assets

   

155.3 

   

   

157.7 

Total current assets

   

2,814.4 

   

   

2,977.4 

Property, plant and equipment-net (Note 4)

   

1,544.9 

   

   

1,616.6 

Goodwill (Note 5)

   

1,431.9 

   

   

1,436.4 

Other intangible assets-net (Note 5)

   

366.4 

   

   

382.9 

Deferred income taxes

   

447.9 

   

   

445.1 

Other noncurrent assets

   

401.3 

   

   

404.3 

Total assets

  $

7,006.8 

   

  $

7,262.7 

LIABILITIES

   

   

   

   

   

Accounts payable

  $

1,030.9 

   

  $

1,210.3 

Accrued liabilities

   

698.4 

   

   

825.2 

Short-term and current portion of long-term debt (Note 14)

   

21.6 

   

   

18.4 

Total current liabilities

   

1,750.9 

   

   

2,053.9 

Long-term debt (Note 14)

   

3,512.2 

   

   

3,420.2 

Pension liabilities

   

1,126.0 

   

   

1,150.5 

Other postretirement benefits plan liabilities

   

240.4 

   

   

241.7 

Other noncurrent liabilities

   

326.9 

   

   

327.7 

Total liabilities

   

6,956.4 

   

   

7,194.0 

Commitments and Contingencies (Note 13)

   

   

   

   

   

EQUITY (Note 9)

   

   

   

   

   

RR Donnelley shareholders’ equity

   

   

   

   

   

Preferred stock, $1.00 par value

   

   

   

   

   

Authorized: 2.0 shares; Issued: None

   

—   

   

   

—   

Common stock, $1.25 par value

   

   

   

   

   

Authorized: 500.0 shares;

   

   

   

   

   

Issued: 243.0 shares in 2013 and 2012

   

303.7 

   

   

303.7 

Additional paid-in-capital

   

2,796.4 

   

   

2,839.4 

Accumulated deficit

   

(515.9)

   

   

(496.1)

Accumulated other comprehensive loss

   

(1,022.9)

   

   

(1,029.2)

Treasury stock, at cost, 61.6 shares in 2013 (2012 – 62.6 shares)

   

(1,524.2)

   

   

(1,565.0)

Total RR Donnelley shareholders’ equity

   

37.1 

   

   

52.8 

Noncontrolling interests

   

13.3 

   

   

15.9 

Total equity

   

50.4 

   

   

68.7 

Total liabilities and equity

  $

7,006.8 

   

  $

7,262.7 

   

(See Notes to Condensed Consolidated Financial Statements)

3  


   

R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (“RR DONNELLEY”)

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions)

(UNAUDITED)

   

 

   

Three Months Ended

   

March 31,

   

2013 

   

2012 

Products net sales

  $

2,129.7 

   

  $

2,196.5 

Services net sales

   

408.8 

   

   

328.4 

Total net sales

   

2,538.5 

   

   

2,524.9 

   

   

   

   

   

   

Products cost of sales (exclusive of depreciation and amortization)

   

1,668.3 

   

   

1,702.9 

Services cost of sales (exclusive of depreciation and amortization)

   

311.9 

   

   

242.1 

Total cost of sales

   

1,980.2 

   

   

1,945.0 

   

   

   

   

   

   

Products gross profit

   

461.4 

   

   

493.6 

Services gross profit

   

96.9 

   

   

86.3 

Total gross profit

   

558.3 

   

   

579.9 

Selling, general and administrative expenses (exclusive of depreciation and amortization)

   

282.2 

   

   

283.5 

Restructuring and impairment charges-net (Note 6)

   

22.7 

   

   

50.0 

Depreciation and amortization

   

113.6 

   

   

125.0 

Income from operations

   

139.8 

   

   

121.4 

Interest expense-net

   

62.8 

   

   

60.7 

Investment and other expense (income)-net

   

3.5 

   

   

(1.2)

Loss on debt extinguishment

   

35.6 

   

   

12.1 

Earnings before income taxes

   

37.9 

   

   

49.8 

Income tax expense

   

12.6 

   

   

11.9 

Net earnings

   

25.3 

   

   

37.9 

Less: Income (loss) attributable to noncontrolling interests

   

(1.8)

   

   

0.5 

Net earnings attributable to RR Donnelley common shareholders

  $

27.1 

   

  $

37.4 

   

   

   

   

   

   

Net earnings per share attributable to RR Donnelley common shareholders (Note 10):

   

   

   

   

   

Basic net earnings per share

  $

0.15 

   

  $

0.21 

Diluted net earnings per share

  $

0.15 

   

  $

0.21 

   

   

   

   

   

   

Dividends declared per common share

  $

0.26 

   

  $

0.26 

   

   

   

   

   

   

Weighted average number of common shares outstanding:

   

   

   

   

   

Basic

   

181.2 

   

   

179.4 

Diluted

   

182.9 

   

   

180.4 

   

   

   

   

   

   

   

(See Notes to Condensed Consolidated Financial Statements)

   

4  


   

R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (“RR DONNELLEY”)

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in millions)

(UNAUDITED)

   

 

   

Three Months Ended

   

March 31,

   

2013 

   

2012 

Net earnings

  $

25.3 

   

  $

37.9 

   

   

   

   

   

   

Other comprehensive income, net of tax (Note 11):

   

   

   

   

   

Translation adjustments

   

7.1 

   

   

41.8 

Adjustment for net periodic pension and other postretirement benefits plan cost

   

(0.9)

   

   

0.7 

Change in fair value of derivatives

   

0.1 

   

   

0.3 

Other comprehensive income

   

6.3 

   

   

42.8 

Comprehensive income

   

31.6 

   

   

80.7 

Less: comprehensive income (loss) attributable to noncontrolling interests

   

(1.8)

   

   

0.6 

Comprehensive income attributable to RR Donnelley common shareholders

  $

33.4 

   

  $

80.1 

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

(See Notes to Condensed Consolidated Financial Statements)

   

5  


   

R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (“RR DONNELLEY”)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

(UNAUDITED)

   

 

   

Three Months Ended

   

March 31,

   

2013  

   

2012  

OPERATING ACTIVITIES

   

   

   

   

   

Net earnings

  $

25.3  

   

  $

37.9  

Adjustments to reconcile net earnings to net cash used in operating activities:

   

   

   

   

   

Impairment charges

   

4.1  

   

   

9.4  

Depreciation and amortization

   

113.6  

   

   

125.0  

Provision for doubtful accounts receivable

   

2.7  

   

   

2.7  

Share-based compensation

   

4.0  

   

   

7.4  

Deferred income taxes

   

(8.8) 

   

   

8.4  

Changes in uncertain tax positions

   

0.8  

   

   

2.2  

Loss (gain) on sale of investments and other assets—net

   

0.3  

   

   

(0.6) 

Loss related to Venezuela currency devaluation

   

3.2  

   

   

—    

Loss on debt extinguishment

   

35.6  

   

   

12.1  

Net pension and other postretirement benefits plan income

   

(4.6) 

   

   

(11.6) 

Other

   

4.5  

   

   

12.4  

Changes in operating assets and liabilities—net of acquisitions:

   

   

   

   

   

Accounts receivable—net

   

8.9  

   

   

1.7  

Inventories

   

4.6  

   

   

(2.5) 

Prepaid expenses and other current assets

   

(0.7) 

   

   

(6.4) 

Accounts payable

   

(170.2) 

   

   

(104.8) 

Income taxes payable and receivable

   

(11.1) 

   

   

(21.3) 

Accrued liabilities and other

   

(99.5) 

   

   

(107.4) 

Pension and other postretirement benefits plan contributions

   

(8.5) 

   

   

(16.6) 

Net cash used in operating activities

   

(95.8) 

   

   

(52.0) 

INVESTING ACTIVITIES

   

   

   

   

   

Capital expenditures

   

(37.9) 

   

   

(45.3) 

Acquisitions of business, net of cash acquired

   

0.3  

   

   

0.5  

Proceeds from return of capital and sale of investments and other assets

   

1.1  

   

   

1.1  

Other investing activities

   

3.4  

   

   

(2.6) 

Net cash used in investing activities

   

(33.1) 

   

   

(46.3) 

FINANCING ACTIVITIES

   

   

   

   

   

Proceeds from issuance of long-term debt

   

447.8  

   

   

450.0  

Net change in short-term debt

   

3.8  

   

   

(0.5) 

Payments of current maturities and long-term debt

   

(386.5) 

   

   

(621.3) 

Net proceeds from credit facility borrowings

   

—    

   

   

262.0  

Debt issuance costs

   

(7.8) 

   

   

(7.0) 

Dividends paid

   

(46.9) 

   

   

(46.4) 

Other financing activities

   

(6.7) 

   

   

15.2  

Net cash provided by financing activities

   

3.7  

   

   

52.0  

Effect of exchange rate on cash and cash equivalents

   

(2.6) 

   

   

11.6  

Net decrease in cash and cash equivalents

   

(127.8) 

   

   

(34.7) 

Cash and cash equivalents at beginning of year

   

430.7  

   

   

449.7  

Cash and cash equivalents at end of period

  $

302.9  

   

  $

415.0  

   

   

   

(See Notes to Condensed Consolidated Financial Statements)

   

   

   

6  


R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (“RR DONNELLEY”)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in millions, except per share data, unless otherwise indicated)

   

   

   

   

   

   

   

1. Basis of Presentation

The accompanying unaudited condensed consolidated interim financial statements include the accounts of R.R. Donnelley & Sons Company and its subsidiaries (the “Company” or “RR Donnelley”) and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in accordance with the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. These unaudited condensed consolidated interim financial statements reflect all normal and recurring adjustments, as well as an other than normal adjustment as described in the paragraph below, that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods and should be read in conjunction with the consolidated financial statements and the related notes thereto included in the Company’s latest Annual Report on Form 10-K for the year ended December 31, 2012 filed with the SEC on February 26, 2013. Operating results for the three months ended March 31, 2013 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2013. All significant intercompany transactions have been eliminated in consolidation. These unaudited condensed consolidated interim financial statements include estimates and assumptions of management that affect the amounts reported in the condensed consolidated financial statements. Actual results could differ from these estimates.

During the first quarter of 2012, the Company identified and recognized $19.8 million to correct an over-accrual for rebates owed to certain office products customers, which understated accounts receivable and net sales during the years 2008 through 2011. Following qualitative and quantitative review, the Company concluded that the over-accrual was not material to any prior period or to the full year 2012 or the trend of annual operating results.

2. Acquisitions

For the three months ended March 31, 2013, the Company recorded $1.0 million of acquisition-related expenses associated with contemplated acquisitions within selling, general and administrative expenses in the Condensed Consolidated Statements of Operations.

2012 Acquisitions

On December 28, 2012, the Company acquired Presort Solutions (“Presort”), a provider of mail presorting services to businesses in various industries. The acquisition of Presort expanded the range of logistics co-mailing capabilities that the Company

 

7  

   

   

   

   

   

   


R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (“RR DONNELLEY”)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in millions, except per share data, unless otherwise indicated)

   

   

   

   

   

   

   

can provide to its customers and enhanced its integrated offerings. The purchase price for Presort was $11.9 million, net of cash acquired of $0.8 million. Presort’s operations are included in the U.S. Print and Related Services segment.

On December 17, 2012, the Company acquired Meisel Photographic Corporation (“Meisel”), a provider of custom designed visual graphics products to the retail market. The acquisition of Meisel expanded and enhanced the range of services the Company offers to its customers. The purchase price for Meisel was $25.4 million, net of cash acquired of $1.0 million. Meisel’s operations are included in the U.S. Print and Related Services segment.

On September 6, 2012, the Company acquired Express Postal Options International (“XPO”), a provider of international outbound mailing services to pharmaceutical, e-commerce, financial services, information technology, catalog, direct mail and other businesses. The acquisition of XPO expanded the range of logistics capabilities that the Company can provide to its customers and enhanced its integrated offerings. The purchase price for XPO, which includes the Company’s estimate of contingent consideration, was $23.4 million, net of cash acquired of $1.0 million. The former owners of XPO may receive contingent consideration in the form of cash payments of up to $4.0 million subject to XPO achieving certain gross profit targets. As of the acquisition date, the Company estimated the fair value of the contingent consideration to be $3.5 million using a probability weighting of the potential payouts. Subsequent changes in the estimated contingent consideration from the final purchase price allocation will be recognized in selling, general and administrative expenses in the Condensed Consolidated Statements of Operations. XPO’s operations are included in the U.S. Print and Related Services segment.

On August 14, 2012, the Company acquired EDGAR Online, a leading provider of disclosure management services, financial data and enterprise risk analytics software and solutions. The acquisition of EDGAR Online expanded and enhanced the range of services that the Company offers to its customers. The purchase price for EDGAR Online was $71.5 million, including debt assumed of $1.4 million and net of cash acquired of $2.1 million. Immediately following the acquisition, the Company repaid the $1.4 million of debt assumed. EDGAR Online’s operations are included in the U.S. Print and Related Services segment.

For the three months ended March 31, 2012, the Company recorded $0.3 million of acquisition-related expenses associated with acquisitions contemplated or completed in subsequent periods within selling, general and administrative expenses in the Condensed Consolidated Statements of Operations.

The Presort, Meisel, XPO and EDGAR Online 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

 

8  

   

   

   

   

   

   


R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (“RR DONNELLEY”)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in millions, except per share data, unless otherwise indicated)

   

   

   

   

   

   

   

acquisitions and the fair value of the contingent consideration over the net amounts assigned to the fair value of the assets acquired was recorded as goodwill. The tax deductible goodwill related to these acquisitions was $23.7 million.

Based on the valuations, the final purchase price allocations for these acquisitions were as follows:

   

 

   

   

   

   

Accounts receivable

  $

18.3  

Inventories

   

   

2.0  

Prepaid expenses and other current assets

4.3  

Property, plant and equipment

10.4  

Amortizable other intangible assets

37.5  

Other noncurrent assets

   

   

15.1  

Goodwill

55.8  

Accounts payable and accrued liabilities

   

   

(21.5)

Other noncurrent liabilities

   

   

(0.1)

Deferred taxes-net

   

   

10.4  

Total purchase price-net of cash acquired

   

   

132.2  

Less: debt assumed

1.4  

Less: fair value of contingent consideration

   

   

3.5  

Net cash paid

  $

127.3  

The fair values of technology, amortizable other intangible assets, contingent consideration and goodwill associated with the acquisitions of Presort, Meisel, XPO and EDGAR Online were determined to be Level 3 under the fair value hierarchy.

   

 

9  

   

   

   

   

   

   


R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (“RR DONNELLEY”)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in millions, except per share data, unless otherwise indicated)

   

   

   

   

   

   

   

The following table presents the fair value, valuation techniques and related unobservable inputs for these Level 3 measurements:

   

 

   

Fair Value

   

Valuation Technique

   

Unobservable  Input

   

Range

Customer relationships

$

31.4

   

Excess earnings, with and without method

   

Discount rate

Attrition rate

   

16.0% - 17.0%

7.0% - 20.0%

   

   

   

   

   

   

   

   

   

Technology

   

14.5

   

Excess earnings, relief-from-royalty method, cost approach

   

Discount rate

Obsolescence factor

Royalty rate (after-tax)

   

16.0% - 17.0%

10.0% - 20.0%

4.5%

   

   

   

   

   

   

   

   

   

Trade names

   

3.5

   

Relief-from-royalty method

   

Discount rate

Royalty rate (after-tax)

   

15.5% - 17.0%

0.3% - 1.2%

   

   

   

   

   

   

   

   

   

Non-compete agreements

   

2.6

   

Excess earnings, with and without method

   

Discount rate

   

16.0% - 17.0%

   

   

   

   

   

   

   

   

   

Contingent consideration

   

3.5

   

Probability weighted discounted future cash flows

   

Discount rate

   

4.5%

Pro forma

If the 2012 acquisitions described above had occurred at January 1, 2011, the Company’s pro forma net sales for the three months ended March 31, 2012 would have been $2,591.7 million.

The unaudited pro forma net sales are not intended to represent or be indicative of the Company’s consolidated results of operations or financial condition that would have been reported had these acquisitions been completed as of the beginning of the periods presented and should not be taken as indicative of the Company’s future consolidated results of operations or financial condition.

   

 

10  

   

   

   

   

   

   


R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (“RR DONNELLEY”)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in millions, except per share data, unless otherwise indicated)

   

   

   

   

   

   

   

3. Inventories

The components of the Company’s inventories at March 31, 2013 and December 31, 2012 were as follows:

   

 

   

March 31,

   

December 31,

   

2013 

   

2012 

Raw materials and manufacturing supplies

  $

222.0 

   

  $

214.2 

Work in process

   

161.4 

   

   

158.8 

Finished goods

   

215.5 

   

   

229.3 

LIFO reserve

   

(94.5)

   

   

(92.1)

Total

  $

504.4 

   

  $

510.2 

   

4. Property, Plant and Equipment

The components of the Company’s property, plant and equipment at March 31, 2013 and December 31, 2012 were as follows:

   

 

   

March 31,

   

December 31,

   

2013 

   

2012 

Land

  $

96.2 

   

  $

98.7 

Buildings

   

1,159.3 

   

   

1,167.0 

Machinery and equipment

   

6,000.1 

   

   

6,022.7 

   

   

7,255.6 

   

   

7,288.4 

Accumulated depreciation

   

(5,710.7)

   

   

(5,671.8)

Total

  $

1,544.9 

   

  $

1,616.6 

 

11  

   

   

   

   

   

   


R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (“RR DONNELLEY”)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in millions, except per share data, unless otherwise indicated)

   

   

   

   

   

   

   

During the three months ended March 31, 2013 and 2012, depreciation expense was $88.5 million and $95.4 million, respectively.

Assets Held for Sale

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 $24.1 million and $19.2 million at March 31, 2013 and December 31, 2012, respectively. These assets were included in other current assets in the Condensed Consolidated Balance Sheets at March 31, 2013 and December 31, 2012 at the lower of their historical net book value or their estimated fair value, less estimated costs to sell.

5. Goodwill and Other Intangible Assets

The changes in the carrying amount of goodwill for the three months ended March 31, 2013 were as follows:

      

 

   

   

U.S. Print and

   

   

   

   

   

   

Related Services

   

International

   

Total

Net book value as of December 31, 2012

   

   

   

   

   

   

   

   

   

Goodwill

   

  $

3,299.2 

   

  $

1,321.5 

   

  $

4,620.7 

Accumulated impairment losses

   

   

(1,989.9)

   

   

(1,194.4)

   

   

(3,184.3)

Total

   

   

1,309.3 

   

   

127.1 

   

   

1,436.4 

Foreign exchange and other adjustments

   

   

(2.2)

   

   

(2.3)

   

   

(4.5)

Net book value as of March 31, 2013

   

   

   

   

   

   

   

   

   

Goodwill

   

   

3,297.0 

   

   

1,278.1 

   

   

4,575.1 

Accumulated impairment losses

   

   

(1,989.9)

   

   

(1,153.3)

   

   

(3,143.2)

Total

   

  $

1,307.1 

   

  $

124.8 

   

  $

1,431.9 

 

12  

   

   

   

   

   

   


R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (“RR DONNELLEY”)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in millions, except per share data, unless otherwise indicated)

   

   

   

   

   

   

   

   

The components of other intangible assets at March 31, 2013 and December 31, 2012 were as follows:

   

 

   

March 31, 2013

   

   

December 31, 2012

   

Gross

   

   

   

   

   

   

   

Gross

   

   

   

   

   

   

Carrying

   

Accumulated

   

Net Book

   

Carrying

   

Accumulated

   

Net Book

   

Amount

   

Amortization

   

Value

   

Amount

   

Amortization

   

Value

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Customer relationships

  $

723.6 

   

  $

(395.7)

   

  $

327.9 

   

  $

731.1 

   

  $

(388.0)

   

  $

343.1 

Patents

   

98.3 

   

   

(98.1)

   

   

0.2 

   

   

98.3 

   

   

(98.1)

   

   

0.2 

Trademarks, licenses and agreements

   

31.4 

   

   

(26.6)

   

   

4.8 

   

   

31.7 

   

   

(26.1)

   

   

5.6 

Trade names

   

26.9 

   

   

(11.5)

   

   

15.4 

   

   

27.1 

   

   

(11.2)

   

   

15.9 

Total amortizable other intangible assets

   

880.2 

   

   

(531.9)

   

   

348.3 

   

   

888.2 

   

   

(523.4)

   

   

364.8 

Indefinite-lived trade names

   

18.1 

   

   

—   

   

   

18.1 

   

   

18.1 

   

   

—   

   

   

18.1 

Total other intangible assets

  $

898.3 

   

  $

(531.9)

   

  $

366.4 

   

  $

906.3 

   

  $

(523.4)

   

  $

382.9 

Amortization expense for other intangible assets was $16.3 million and $24.3 million for the three months ended March 31, 2013 and 2012, respectively.

   

 

13  

   

   

   

   

   

   


R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (“RR DONNELLEY”)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in millions, except per share data, unless otherwise indicated)

   

   

   

   

   

   

   

The following table outlines the estimated annual amortization expense related to other intangible assets as of March 31, 2013:

   

 

For the year ending December 31,

Amount

2013

  $

64.1

2014

   

63.2

2015

   

57.6

2016

   

39.2

2017

   

32.8

2018 and thereafter

   

107.7

Total

  $

364.6

   

6. Restructuring and Impairment Charges

Restructuring and Impairment Costs Charged to Results of Operations

For the three months ended March 31, 2013 and 2012, the Company’s net restructuring and impairment charges were as follows:

   

 

   

March 31, 2013

   

March 31, 2012

   

Employee

   

Other

   

   

   

   

   

Employee

   

Other

   

   

   

   

   

Terminations

   

Charges

   

Impairment

   

Total

   

Terminations

   

Charges

   

Impairment

   

Total

U.S. Print and Related Services

  $

7.1 

   

  $

8.5 

   

  $

3.9 

   

  $

19.5 

   

  $

28.4 

   

  $

3.3 

   

  $

8.0 

   

  $

39.7 

International

   

1.7 

   

   

0.5 

   

   

(0.2)

   

   

2.0 

   

   

3.8 

   

   

0.6 

   

   

1.0 

   

   

5.4 

Corporate

   

—   

   

   

0.8 

   

   

0.4 

   

   

1.2 

   

   

4.6 

   

   

—   

   

   

0.3 

   

   

4.9 

Total

  $

8.8 

   

  $

9.8 

   

  $

4.1 

   

  $

22.7 

   

  $

36.8 

   

  $

3.9 

   

  $

9.3 

   

  $

50.0 

 

14  

   

   

   

   

   

   


R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (“RR DONNELLEY”)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in millions, except per share data, unless otherwise indicated)

   

   

   

   

   

   

   

For the three months ended March 31, 2013, the Company recorded net restructuring charges of $8.8 million for employee termination costs for 393 employees, of whom 127 were terminated as of March 31, 2013. These charges primarily related to the closing of two manufacturing facilities within the U.S. Print and Related Services segment and the reorganization of certain operations. Additionally, the Company incurred lease termination and other restructuring charges of $9.8 million for the three months ended March 31, 2013, including charges related to multi-employer pension plan withdrawal obligations. The Company also recorded $4.1 million of impairment charges primarily related to buildings and machinery and equipment associated with the facility closings for the three months ended March 31, 2013. 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 three months ended March 31, 2012, the Company recorded net restructuring charges of $36.8 million for employee termination costs for 1,365 employees, substantially all of whom were terminated as of March 31, 2013. These charges primarily related to actions resulting from the reorganization of sales and administrative functions across all segments, the closing of two manufacturing facilities within the U.S. Print and Related Services segment and one manufacturing facility within the International segment and the reorganization of certain operations. Additionally, the Company incurred lease termination and other restructuring charges of $3.9 million for the three months ended March 31, 2012. The Company also recorded $9.3 million of impairment charges primarily related to machinery and equipment associated with the facility closings for the three months ended March 31, 2012. The fair values of the machinery and equipment were determined to be Level 3 under the fair value hierarchy and were estimated based on discussions with machinery and equipment brokers, dealer quotes and internal expertise related to the current marketplace conditions.

   

 

15  

   

   

   

   

   

   


R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (“RR DONNELLEY”)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in millions, except per share data, unless otherwise indicated)

   

   

   

   

   

   

   

Restructuring Reserve

Activity impacting the Company’s restructuring reserve for the three months ended March 31, 2013 was as follows:

   

 

   

   

   

   

   

   

   

Foreign

   

   

   

   

   

   

   

December 31,

   

Restructuring

   

Exchange and

   

Cash

   

March 31,

   

2012 

   

Charges

   

Other

   

Paid

   

2013 

Employee terminations

  $

23.4 

   

  $

8.8 

   

  $

—   

   

  $

(9.1)

   

  $

23.1 

Multi-employer pension withdrawal obligations

   

25.1 

   

   

5.5 

   

   

—   

   

   

(0.7)

   

   

29.9 

Lease terminations and other

   

30.0 

   

   

4.3 

   

   

0.6 

   

   

(7.0)

   

   

27.9 

Total

  $

78.5 

   

  $

18.6 

   

  $

0.6 

   

  $

(16.8)

   

  $

80.9 

The current portion of restructuring reserves of $31.6 million at March 31, 2013 was included in accrued liabilities, while the long-term portion of $49.3 million, primarily related to multi-employer pension plan complete or partial withdrawal obligations and lease termination costs, was included in other noncurrent liabilities at March 31, 2013.

The Company anticipates that payments associated with the employee terminations reflected in the above table will be substantially completed by March of 2014. Payments on the multi-employer pension plan complete or partial withdrawal obligations are scheduled to be substantially completed by 2032.

As of March 31, 2013, the restructuring liabilities classified as “lease terminations and other” consisted of lease terminations, other facility closing costs and contract termination costs. Payments on certain of the lease obligations are scheduled to continue until 2026. Market conditions and the Company’s ability to sublease these properties could affect the ultimate charge related to the lease obligations. Any potential recoveries or additional charges could affect amounts reported in the Condensed Consolidated Financial Statements of future periods.

 

16  

   

   

   

   

   

   


R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (“RR DONNELLEY”)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in millions, except per share data, unless otherwise indicated)

   

   

   

   

   

   

   

7. Employee Benefits

The components of the estimated net pension and other postretirement benefits plan income for the three months ended March 31, 2013 and 2012 were as follows:

   

 

   

Three Months Ended

   

March 31,

   

2013 

   

2012 

Pension (income) expense

   

   

   

   

   

Service cost

  $

0.8 

   

  $

1.9 

Interest cost

   

44.6 

   

   

47.4 

Expected return on plan assets

   

(60.6)

   

   

(65.8)

Amortization, net

   

12.6 

   

   

7.1 

Net pension income

  $

(2.6)

   

  $

(9.4)

   

   

   

   

   

   

Other postretirement benefits plan (income) expense

   

   

   

   

   

Service cost

  $

1.8 

   

  $

1.7 

Interest cost

   

4.1 

   

   

4.6 

Expected return on plan assets

   

(3.0)

   

   

(3.5)

Amortization, net

   

(4.9)

   

   

(5.0)

Net other postretirement benefits plan income

  $

(2.0)

   

  $

(2.2)

   

 

17  

   

   

   

   

   

   


R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (“RR DONNELLEY”)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in millions, except per share data, unless otherwise indicated)

   

   

   

   

   

   

   

8. Share-Based Compensation

The Company recognizes compensation expense based on estimated grant date fair values for all share-based awards issued to employees and directors, including stock options, restricted stock units and performance share units. The total compensation expense related to all share-based compensation plans was $4.0 million and $7.4 million for the three months ended March 31, 2013 and 2012, respectively.

Stock Options

There were no options granted during the three months ended March 31, 2013. The Company granted 1,221,000 stock options, with a grant date fair market value of $2.96, during the three months ended March 31, 2012. The fair market value of each stock option award was estimated based on the assumptions below as of the grant date using the Black-Scholes-Merton option pricing model. The assumptions used to determine the fair market value of the stock options granted during the three months ended March 31, 2012 were as follows:

   

 

   

   

   

2012   

Expected volatility

   

   

39.71%

Risk-free interest rate

   

   

1.18%

Expected life (years)

   

   

6.25   

Expected dividend yield

   

   

5.06%

   

   

 

18  

   

   

   

   

   

   


R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (“RR DONNELLEY”)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in millions, except per share data, unless otherwise indicated)

   

   

   

   

   

   

   

Stock option awards as of December 31, 2012 and March 31, 2013, and changes during the three months ended March 31, 2013, were as follows:

   

 

   

   

   

   

   

   

   

Weighted

   

   

   

   

   

   

   

   

   

   

Average

   

   

   

   

   

   

   

Weighted

   

Remaining

   

Aggregate

   

   

   

   

Average

   

Contractual

   

Intrinsic

   

   

Shares Under Option

   

Exercise

   

Term

   

Value

   

   

(thousands)

   

Price

   

(years)

   

(millions)

Outstanding at December 31, 2012

   

4,726 

   

  $

18.90 

   

6.2 

   

  $

2.1 

Cancelled/forfeited/expired

   

(345)

   

   

18.42 

   

   

   

   

   

Outstanding at March 31, 2013

   

4,381 

   

   

18.93 

   

6.4 

   

   

5.4 

Vested and expected to vest at March 31, 2013

   

4,332 

   

   

19.00 

   

6.4 

   

   

5.4 

Exercisable at March 31, 2013

   

1,093 

   

  $

7.09 

   

5.9 

   

  $

5.4 

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 March 31, 2013 and December 31, 2012, 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 March 31, 2013 and December 31, 2012. This amount will change in future periods based on the fair market value of the Company’s stock and the number of options outstanding. Total intrinsic value of options exercised for the three months ended March 31, 2012 was $1.2 million. There were no options exercised during the three months ended March 31, 2013.

Compensation expense related to stock options for the three months ended March 31, 2013 and 2012 was $0.4 million and $1.1 million, respectively. As of March 31, 2013, $2.8 million of total unrecognized compensation expense related to 1.1 million stock options with a weighted average fair market value of $3.31, is expected to be recognized over a weighted average period of 2.4 years.

 

19  

   

   

   

   

   

   


R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (“RR DONNELLEY”)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in millions, except per share data, unless otherwise indicated)

   

   

   

   

   

   

   

Restricted Stock Units

Nonvested restricted stock unit awards as of December 31, 2012 and March 31, 2013, and changes during the three months ended March 31, 2013, were as follows:

   

 

   

   

Shares

   

Weighted Average Grant

   

   

(thousands)

   

Date Fair Value

Nonvested at December 31, 2012

   

3,246 

   

  $

11.85 

Granted

   

1,175 

   

   

9.08 

Vested

   

(1,706)

   

   

9.69 

Forfeited

   

(34)

   

   

11.88 

Nonvested at March 31, 2013

   

2,681 

   

  $

12.00 

Compensation expense related to restricted stock units for the three months ended March 31, 2013 and 2012 was $3.2 million and $5.8 million, respectively. As of March 31, 2013, there was $23.1 million of unrecognized share-based compensation expense related to approximately 2.5 million of restricted stock unit awards, with a weighted average grant date fair market value of $11.97, that are expected to vest over a weighted average period of 2.5 years. 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.

 

20  

   

   

   

   

   

   


R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (“RR DONNELLEY”)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in millions, except per share data, unless otherwise indicated)

   

   

   

   

   

   

   

Performance Share Units

Nonvested performance share unit awards as of December 31, 2012 and March 31, 2013, and changes during the three months ended March 31, 2013, were as follows:

 

   

   

   

   

   

   

   

   

   

 

Shares
(thousands)

   

   

Weighted Average
Grant Date
Fair Value

Nonvested at December 31, 2012

   

468

   

  $

12.84

Granted

   

485

   

8.85

Nonvested at March 31, 2013

   

953

   

  $

10.81

During the three months ended March 31, 2013, 485,000 performance share unit awards were granted to certain executive officers, payable upon the achievement of certain established performance targets. The performance period for the shares awarded is January 1, 2013 through December 31, 2015. Distributions under these awards are payable at the end of the performance period in common stock or cash, at the Company’s discretion. The total potential payouts for awards granted during the three months ended March 31, 2013 range from 242,500 to 485,000 shares, should certain performance targets be achieved. 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 a change in control of the Company.

Compensation expense for the performance share unit awards granted in 2013 and 2012 is currently being recognized based on the maximum estimated payout of 485,000 and 233,000 shares, for each respective period. Compensation expense for awards granted during 2011 is currently being recognized based on an estimated payout of 50%, or 117,500 shares. Compensation expense related to performance share unit awards for the three months ended March 31, 2013 and 2012 was $0.4 million and $0.5 million, respectively. As of March 31, 2013, there was $5.6 million of unrecognized compensation expense related to performance share unit awards, which is expected to be recognized over a weighted average period of 2.4 years.

 

21  

   

   

   

   

   

   


R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (“RR DONNELLEY”)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in millions, except per share data, unless otherwise indicated)

   

   

   

   

   

   

   

9. Equity

The Company’s equity as of December 31, 2012 and March 31, 2013 and changes during the three months ended March 31, 2013 were as follows:

   

 

   

   

RR Donnelley

   

   

   

   

   

   

   

   

Shareholders

   

Noncontrolling

   

   

   

   

   

Equity

   

Interest

   

Total Equity

Balance at December 31, 2012

   

  $

52.8 

   

  $

15.9 

   

  $

68.7 

Net earnings

   

   

27.1 

   

   

(1.8)

   

   

25.3 

Other comprehensive income

   

   

6.3 

   

   

—   

   

   

6.3 

Share-based compensation

   

   

4.0 

   

   

—   

   

   

4.0 

Issuance of share-based awards, net of withholdings and other

   

   

(6.2)

   

   

—   

   

   

(6.2)

Cash dividends paid

   

   

(46.9)

   

   

—   

   

   

(46.9)

Distributions to noncontrolling interests

   

   

—   

   

   

(0.8)

   

   

(0.8)

Balance at March 31, 2013

   

  $

37.1 

   

  $

13.3 

   

  $

50.4 

   

 

22  

   

   

   

   

   

   


R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (“RR DONNELLEY”)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in millions, except per share data, unless otherwise indicated)

   

   

   

   

   

   

   

The Company’s equity as of December 31, 2011 and March 31, 2012 and changes during the three months ended March 31, 2012 were as follows:

   

 

   

   

RR Donnelley

   

   

   

   

   

   

   

   

Shareholders

   

Noncontrolling

   

   

   

   

   

Equity

   

Interest

   

Total Equity

Balance at December 31, 2011

   

  $

1,042.7 

   

  $

19.5 

   

  $

1,062.2 

Net earnings

   

   

37.4 

   

   

0.5 

   

   

37.9 

Other comprehensive income

   

   

42.7 

   

   

0.1 

   

   

42.8 

Share-based compensation

   

   

7.4 

   

   

—   

   

   

7.4 

Issuance of share-based awards, net of withholdings and other

   

   

(11.4)

   

   

—   

   

   

(11.4)

Cash dividends paid

   

   

(46.4)

   

   

—   

   

   

(46.4)

Distributions to noncontrolling interests

   

   

—   

   

   

(0.7)

   

   

(0.7)

Balance at March 31, 2012

   

  $

1,072.4 

   

  $

19.4 

   

  $

1,091.8 

   

10. Earnings per Share

Basic earnings per share is calculated by dividing net earnings attributable to RR Donnelley common shareholders by the weighted average number of common shares outstanding for the period. In computing diluted earnings per share, basic earnings per share is adjusted for the assumed issuance of all potentially dilutive share-based awards, including stock options, restricted stock units and performance share units. Performance share units are considered anti-dilutive and excluded if the performance targets upon which the issuance of the shares is contingent have not yet been achieved as of the end of the current period. Additionally, stock options are considered anti-dilutive when the exercise price exceeds the average of the Company’s stock price during the applicable period.

During the three months ended March 31, 2013 and 2012, no shares of common stock were purchased by the Company.

 

23  

   

   

   

   

   

   


R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (“RR DONNELLEY”)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in millions, except per share data, unless otherwise indicated)

   

   

   

   

   

   

   

The reconciliation of the numerator and denominator of the basic and diluted earnings per share calculation and the anti-dilutive share-based awards for the three months ended March 31, 2013 and 2012 were as follows:

   

 

   

   

Three Months Ended

   

   

March 31,

   

   

2013

   

2012

Net earnings per share attributable to RR Donnelley common shareholders

   

   

   

   

   

   

Basic

   

  $

0.15

   

  $

0.21

Diluted

   

  $

0.15

   

  $

0.21

   

   

   

   

   

   

   

Dividends declared per common share

   

  $

0.26

   

  $

0.26

Numerator:

   

   

   

   

   

   

Net earnings attributable to RR Donnelley common shareholders

   

  $

27.1

   

  $

37.4

Denominator:

   

   

   

   

   

   

Weighted average number of common shares outstanding

   

   

181.2

   

   

179.4

Dilutive options and awards

   

   

1.7

   

   

1.0

Diluted weighted average number of common shares outstanding

   

   

182.9

   

   

180.4

Weighted average number of anti-dilutive share-based awards:

   

   

   

   

   

   

Restricted stock units

   

   

1.6

   

   

2.8

Performance share units

   

   

0.6

   

   

0.4

Stock options

   

   

4.4

   

   

4.4

Total

   

   

6.6

   

   

7.6

   

 

24  

   

   

   

   

   

   


R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (“RR DONNELLEY”)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in millions, except per share data, unless otherwise indicated)

   

   

   

   

   

   

   

   

11. Comprehensive Income

Income tax expense allocated to each component of other comprehensive income for the three months ended March 31, 2013 and 2012 was as follows:

   

 

   

   

Three Months Ended

   

   

March 31, 2013

   

   

Before Tax

   

Income Tax

   

Net of Tax

   

   

Amount

   

Expense

   

Amount

Translation adjustments

   

  $

7.1 

   

  $

—   

   

  $

7.1 

Adjustment for net periodic pension and other postretirement benefits plan cost

   

   

7.8 

   

   

8.7 

   

   

(0.9)

Change in fair value of derivatives

   

   

0.1 

   

   

—   

   

   

0.1 

Other comprehensive income

   

  $

15.0 

   

  $

8.7 

   

  $

6.3 

During the three months ended March 31, 2013, translation adjustments and income tax expense on pension and other postretirement benefits plan cost were adjusted to reflect previously recorded changes at their historical exchange rates.

 

   

   

Three Months Ended

   

   

March 31, 2012

   

   

Before Tax

   

Income Tax

   

Net of Tax

   

   

Amount

   

Expense

   

Amount

Translation adjustments

   

  $

41.8

   

  $

—  

   

  $

41.8

Adjustment for net periodic pension and other postretirement benefits plan cost

   

   

1.6

   

   

0.9

   

   

0.7

Change in fair value of derivatives

   

   

0.5

   

   

0.2

   

   

0.3

Other comprehensive income

   

  $

43.9

   

  $

1.1

   

  $

42.8

 

25  

   

   

   

   

   

   


R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (“RR DONNELLEY”)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in millions, except per share data, unless otherwise indicated)

   

   

   

   

   

   

   

   

Changes in accumulated other comprehensive loss by component for the three months ended March 31, 2013 and 2012 were as follows:

   

 

   

   

Changes in the
Fair Value of
Derivatives

   

Pension and
Other
Postretirement
Benefits Plan
Cost

   

Translation
Adjustments

   

Total

Balance at December 31, 2012

   

  $

(0.6)

   

  $

(1,085.1)

   

  $

56.5 

   

  $

(1,029.2)

Other comprehensive income (loss) before reclassifications

   

   

—   

   

   

(5.7)

   

   

7.1 

   

   

1.4 

Amount reclassified from accumulated other comprehensive loss

   

   

0.1 

   

   

4.8 

   

   

—   

   

   

4.9 

Net change in accumulated other comprehensive loss

   

   

0.1 

   

   

(0.9)

   

   

7.1 

   

   

6.3 

Balance at March 31, 2013

   

  $

(0.5)

   

  $

(1,086.0)

   

  $

63.6 

   

  $

(1,022.9)

   

 

   

   

Changes in the
Fair Value of
Derivatives

   

Pension and
Other
Postretirement
Benefits Plan
Cost

   

Translation
Adjustments

   

Total

Balance at December 31, 2011

   

  $

(1.1) 

   

  $

(907.5) 

   

  $

45.3  

   

  $

(863.3) 

Other comprehensive income (loss) before reclassifications

   

   

—    

   

   

(0.8) 

   

   

41.7  

   

   

40.9  

Amount reclassified from accumulated other comprehensive loss

   

   

0.3  

   

   

1.5  

   

   

—    

   

   

1.8  

Net change in accumulated other comprehensive loss

   

   

0.3  

   

   

0.7  

   

   

41.7  

   

   

42.7  

Balance at March 31, 2012

   

  $

(0.8) 

   

  $

(906.8) 

   

  $

87.0  

   

  $

(820.6) 

 

26  

   

   

   

   

   

   


R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (“RR DONNELLEY”)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in millions, except per share data, unless otherwise indicated)

   

   

   

   

   

   

   

   

Reclassifications from accumulated other comprehensive loss for the three months ended March 31, 2013 and 2012 were as follows:

   

 

   

   

Three Months Ended

March 31,

   

Classification in the Condensed Consolidated Statements of Operations

   

   

2013 

   

2012 

   

Amortization of pension and other postretirement benefits plan cost:

   

   

   

   

   

   

   

   

   

Net actuarial loss

   

  $

12.6 

   

  $

7.1 

   

(a)

   

Net prior service credit

   

   

(4.9)

   

   

(5.0)

   

(a)

   

Reclassifications before tax

   

   

7.7 

   

   

2.1 

   

   

   

Income tax expense

   

   

2.9 

   

   

0.6 

   

   

   

Reclassifications, net of tax

   

  $

4.8 

   

  $

1.5 

   

   

   

 

(a)

These accumulated other comprehensive income components are included in the calculation of net periodic pension and other postretirement benefits plan income recognized in cost of sales and selling, general and administrative expenses in the Condensed Consolidated Statements of Operations (see Note 7).

   

   

 

27  

   

   

   

   

   

   


R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (“RR DONNELLEY”)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in millions, except per share data, unless otherwise indicated)

   

   

   

   

   

   

   

12. Segment Information

The Company operates primarily in the printing industry, with related product and service offerings designed to offer customers complete solutions for communicating their messages to target audiences. The Company’s reportable segments reflect the management reporting structure of the organization and the manner in which the chief operating decision-maker regularly assesses information for decision-making purposes, including the allocation of resources. The Company’s segments and their product and service offerings are summarized below:

U.S. Print and Related Services

The U.S. Print and Related Services segment includes the Company’s U.S. printing operations, managed as one integrated platform, along with logistics, premedia, print management and other print related services. This segment’s product and related service offerings include magazines, catalogs, retail inserts, books, directories, financial printing and related services, direct mail, forms, labels, office products, packaging, statement printing, premedia and logistics services.

International

The International segment includes the Company’s non-U.S. printing operations in Asia, Europe, Latin America and Canada. This segment’s product and related service offerings include magazines, catalogs, retail inserts, books, directories, financial printing and related services, direct mail, forms, labels, packaging, manuals, statement printing, premedia and logistics services. Additionally, this segment includes the Company’s business process outsourcing and Global Turnkey Solutions operations. Business process outsourcing provides transactional print and outsourcing services, statement printing, direct mail and print management services through its operations in Europe, Asia and North America. Global Turnkey Solutions provides outsourcing capabilities, including product configuration, customized kitting and order fulfillment for technology, medical device and other companies around the world through its operations in Europe, North America and Asia.

Corporate

Corporate consists of unallocated general and administrative activities and associated expenses including, in part, executive, legal, finance, information technology, human resources, certain facility costs and LIFO inventory provisions. In addition, certain costs and earnings of employee benefit plans are included in Corporate and not allocated to operating segments. Corporate manages the Company’s cash pooling structure, which enables participating international locations to draw on the Company’s overseas cash resources to meet local liquidity needs.

 

28  

   

   

   

   

   

   


R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (“RR DONNELLEY”)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in millions, except per share data, unless otherwise indicated)

   

   

   

   

   

   

   

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 consistent with the presentation of profitability reported within the Condensed Consolidated Financial Statements.

   

 

   

   

   

   

   

   

   

   

   

   

Income (Loss)

   

   

   

Depreciation

   

   

   

Three months ended

Total

   

Intersegment

   

Net

   

from

   

Assets of

   

and

   

Capital

March 31, 2013

Sales

   

Sales

   

Sales

   

Operations

   

Operations

   

Amortization

   

Expenditures

U.S. Print and Related Services

  $

1,880.4 

   

  $

(7.9)

   

  $

1,872.5 

   

  $

145.0 

   

  $

4,542.3 

   

  $

75.0 

   

  $

21.2 

International

   

689.6 

   

   

(23.6)

   

   

666.0 

   

   

32.1 

   

   

1,951.8 

   

   

26.4 

   

   

11.3 

Total operating segments

   

2,570.0 

   

   

(31.5)

   

   

2,538.5 

   

   

177.1 

   

   

6,494.1 

   

   

101.4 

   

   

32.5 

Corporate

   

—   

   

   

—   

   

   

—   

   

   

(37.3)

   

   

512.7 

   

   

12.2 

   

   

5.4 

Total operations

  $

2,570.0 

   

  $

(31.5)

   

  $

2,538.5 

   

  $

139.8 

   

  $

7,006.8 

   

  $

113.6 

   

  $

37.9 

   

 

   

   

   

   

   

   

   

   

   

   

Income (Loss)

   

   

   

Depreciation

   

   

   

Three months ended

Total

   

Intersegment

   

Net

   

from

   

Assets of

   

and

   

Capital

March 31, 2012

Sales

   

Sales

   

Sales

   

Operations

   

Operations

   

Amortization

   

Expenditures

U.S. Print and Related Services

  $

1,890.7 

   

  $

(9.3)

   

  $

1,881.4 

   

  $

139.2 

   

  $

5,646.6 

   

  $

87.6 

   

  $

27.1 

International

   

664.0 

   

   

(20.5)

   

   

643.5 

   

   

30.6 

   

   

2,318.9 

   

   

27.5 

   

   

11.1 

Total operating segments

   

2,554.7 

   

   

(29.8)

   

   

2,524.9 

   

   

169.8 

   

   

7,965.5 

   

   

115.1 

   

   

38.2 

Corporate

   

—   

   

   

—   

   

   

—   

   

   

(48.4)

   

   

247.3 

   

   

9.9 

   

   

7.1 

Total operations

  $

2,554.7 

   

  $

(29.8)

   

  $

2,524.9 

   

  $

121.4 

   

  $

8,212.8 

   

  $

125.0 

   

  $

45.3 

Restructuring and impairment charges by segment for the three months ended March 31, 2013 and 2012 are described in Note 6.

13. Commitments and Contingencies

The Company is subject to laws and regulations relating to the protection of the environment. The Company provides for expenses associated with environmental remediation obligations when such amounts are probable and can be reasonably estimated.

 

29  

   

   

   

   

   

   


R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (“RR DONNELLEY”)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in millions, except per share data, unless otherwise indicated)

   

   

   

   

   

   

   

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 eleven active federal and state Superfund and other multiparty remediation sites. In addition to these sites, the Company may also have the obligation to remediate eleven 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 results of operations, financial position or 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 results of operations, financial position or cash flows.

   

 

30  

   

   

   

   

   

   


R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (“RR DONNELLEY”)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in millions, except per share data, unless otherwise indicated)

   

   

   

   

   

   

   

14. Debt

The Company’s debt at March 31, 2013 and December 31, 2012 consisted of the following:

      

 

   

   

March 31,

   

December 31,

   

   

2013 

   

2012 

4.95% senior notes due April 1, 2014

   

  $

258.1 

   

  $

258.1 

5.50% senior notes due May 15, 2015

   

   

299.9 

   

   

299.9 

8.60% senior notes due August 15, 2016

   

   

218.4 

   

   

347.4 

6.125% senior notes due January 15, 2017

   

   

350.4 

   

   

523.3 

7.25% senior notes due May 15, 2018

   

   

550.0 

   

   

600.0 

11.25% debentures due February 1, 2019 (a)

   

   

172.2 

   

   

172.2 

8.25% senior notes due March 15, 2019

   

   

450.0 

   

   

450.0 

7.625% senior notes due June 15, 2020

   

   

400.0 

   

   

400.0 

7.875% senior notes due March 15, 2021

   

   

447.8 

   

   

—   

8.875% debentures due April 15, 2021

   

   

80.9 

   

   

80.9 

6.625% debentures due April 15, 2029

   

   

199.4 

   

   

199.4 

8.820% debentures due April 15, 2031

   

   

69.0 

   

   

69.0 

Other (b)

   

   

37.7 

   

   

38.4 

Total debt

   

   

3,533.8 

   

   

3,438.6 

Less: current portion

   

   

(21.6)

   

   

(18.4)

Long-term debt

   

  $

3,512.2 

   

  $

3,420.2 

   

 

(a)

On May 17, 2011, June 14, 2012, August 2, 2012 and September 20, 2012, the interest rate on the 11.25% senior notes due February 1, 2019 was increased to 11.75%, 12.0%, 12.25% and 12.50%, respectively, as a result of downgrades in the ratings of the notes by the rating agencies.

 

(b)

Includes miscellaneous debt obligations, fair value adjustments to the 4.95% senior notes due April 1, 2014 and 8.25% senior notes due March 15, 2019 related to the Company’s fair value hedges and capital leases.

   

 

31  

   

   

   

   

   

   


R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (“RR DONNELLEY”)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in millions, except per share data, unless otherwise indicated)

   

   

   

   

   

   

   

The fair values of the senior notes and debentures, which 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 $217.3 million and less than its book value by approximately $3.7 million at March 31, 2013 and December 31, 2012, respectively.

On March 14, 2013, the Company issued $450.0 million of 7.875% senior notes due March 15, 2021. Interest on the notes is payable semi-annually on March 15 and September 15 of each year, commencing on September 15, 2013. The net proceeds from the offering were used to repurchase $173.5 million of the 6.125% senior notes due January 15, 2017, $130.2 million of the 8.60% senior notes due August 15, 2016 and $50.0 million of the 7.25% senior notes due May 15, 2018 and to reduce borrowings under the Company’s $1.15 billion senior secured revolving credit facility (the “Credit Agreement”). The repurchases resulted in a pre-tax loss on debt extinguishment of $35.6 million for the three months ended March 31, 2013 related to the premiums paid, unamortized debt issuance costs and other expenses.

There were no borrowings outstanding under the Credit Agreement as of March 31, 2013 or December 31, 2012.

On March 13, 2012, the Company issued $450.0 million of 8.25% senior notes due March 15, 2019. Interest on the notes is payable semi-annually on March 15 and September 15 of each year, commencing on September 15, 2012. The net proceeds from the offering and cash on hand were used to repurchase $341.8 million of the 4.95% senior notes due April 1, 2014 and $100.0 million of the 5.50% senior notes due May 15, 2015. The repurchases resulted in a pre-tax loss on debt extinguishment of $12.1 million for the three months ended March 31, 2012, consisting of a loss of $23.2 million related to the premiums paid, unamortized debt issuance costs and other expenses, partially offset by the elimination of $11.1 million of the fair value adjustment on the 4.95% senior notes.

On January 15, 2012, proceeds from borrowings under the Company’s previous $1.75 billion revolving credit agreement were used to pay the $158.6 million 5.625% senior notes that matured on January 15, 2012.

Interest income was $3.8 million and $3.6 million for the three months ended March 31, 2013 and 2012, respectively.

15. Derivatives

All derivatives are recorded as other current or noncurrent assets or other current or noncurrent liabilities in the Condensed Consolidated Balance Sheets at their respective fair values. Unrealized gains and losses related to derivatives are recorded in other comprehensive income (loss), net of applicable income taxes, or in the Condensed Consolidated Statements of Operations, depending

 

32  

   

   

   

   

   

   


R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (“RR DONNELLEY”)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in millions, except per share data, unless otherwise indicated)

   

   

   

   

   

   

   

on the purpose for which the derivative is held. For derivatives designated and that qualify as cash flow hedges, the effective portion of the unrealized gain or loss related to the derivatives are generally recorded in other comprehensive income (loss) until the transaction affects earnings. For derivatives designated and that qualify as fair value hedges, the gain or loss on the derivative, as well as the offsetting gain or loss on the hedged item attributable to the hedged risk, are recognized in the Condensed Consolidated Statements of Operations. Changes in the fair value of derivatives that do not meet the criteria for designation as a hedge at inception, or fail to meet the criteria thereafter, are recognized currently in the Condensed Consolidated Statements of Operations. At the inception of a hedge transaction, the Company formally documents the hedge relationship and the risk management objective for undertaking the hedge. In addition, the Company assesses both at inception of the hedge and on an ongoing basis, whether the derivative in the hedging transaction has been highly effective in offsetting changes in fair value or cash flows of the hedged item and whether the derivative is expected to continue to be highly effective. The impact of any ineffectiveness is also recognized currently in the Condensed Consolidated Statements of Operations.

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 borrowings, sales, purchases, revenues, expenses or other transactions are not in the local currency of the subsidiary or operating unit, the Company is exposed to currency risk. Periodically, the Company uses foreign exchange spot and forward contracts to hedge exposures resulting from foreign exchange fluctuations. Accordingly, the implied gains and losses associated with the fair values of foreign currency exchange contracts are generally offset by gains and losses on underlying payables, receivables and net investments in foreign subsidiaries. The Company does not use derivative financial instruments for trading or speculative purposes.

The Company has entered into foreign exchange forward contracts in order to manage the currency exposure of certain assets and liabilities. The foreign exchange forward contracts were not designated as hedges, and accordingly, the fair value gains or losses from these foreign currency derivatives are recognized currently in the Condensed Consolidated Statements of Operations, generally offsetting the foreign exchange gains or losses on the exposures being managed. The aggregate notional value of the forward contracts at March 31, 2013 and December 31, 2012 was $515.6 million and $654.2 million, respectively. The fair values of foreign exchange forward contracts were determined to be Level 2 under the fair value hierarchy and are valued using market exchange rates.

On March 13, 2012, the Company entered into interest rate swap agreements to manage interest rate risk exposure, effectively changing the interest rate on $400.0 million of its fixed-rate senior notes to a floating rate based on LIBOR plus a basis point spread.

 

33  

   

   

   

   

   

   


R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (“RR DONNELLEY”)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in millions, except per share data, unless otherwise indicated)

   

   

   

   

   

   

   

The interest rate swaps, with a notional value of $400.0 million, are designated as fair value hedges against changes in the value of the Company’s $450.0 million 8.25% senior notes due March 15, 2019, which are attributable to changes in the benchmark interest rate.

On April 9, 2010, the Company entered into interest rate swap agreements to manage interest rate risk exposure, effectively changing the interest rate on $600.0 million of its fixed-rate senior notes to a floating rate LIBOR plus a basis point spread. The interest rate swaps, with a notional value of $600.0 million at inception, are designated as fair value hedges against changes in the value of the Company’s 4.95% senior notes due April 1, 2014, which are attributable to changes in the benchmark interest rate. During March 2012, the Company repurchased $341.8 million of the 4.95% senior notes due April 1, 2014, and related interest rate swaps with a notional amount of $342.0 million were terminated, resulting in proceeds of $11.0 million for the fair value of the interest rate swaps.

The fair values of interest rate swaps were determined to be Level 2 under the fair value hierarchy and were developed using the market standard methodology of netting the discounted future fixed cash payments and the discounted expected variable cash receipts. The variable cash receipts are based on the expectation of future interest rates derived from observed market interest rate curves. In addition, credit valuation adjustments, which consider the impact of any credit enhancements to the contracts, are incorporated in the fair values to account for potential nonperformance risk. The Company evaluates the credit value adjustments of the interest rate swap agreements, which take into account the possibility of counterparty and the Company’s own default, on at least a quarterly basis.

The Company’s foreign exchange forward contracts and interest rate swaps are subject to enforceable master netting agreements that allow the Company to settle positive and negative positions with the respective counterparties. The Company settles foreign exchange forward contracts on a net basis when possible. Foreign exchange forward contracts that can be settled on a net basis are presented net in the Condensed Consolidated Balance Sheets. Interest rate swaps are settled on a gross basis and presented gross in the Condensed Consolidated Balance Sheets.

The Company manages credit risk for its derivative positions on a counterparty-by-counterparty basis, considering the net portfolio exposure with each counterparty, consistent with its risk management strategy for such transactions. The Company’s agreements with each of its counterparties contain a provision where the Company could be declared in default on its derivative obligations if it either defaults or, in certain cases, is capable of being declared in default of any of its indebtedness greater than specified thresholds. These agreements also contain a provision where the Company could be declared in default subsequent to a merger or restructuring type event if the creditworthiness of the resulting entity is materially weaker.

 

34  

   

   

   

   

   

   


R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (“RR DONNELLEY”)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in millions, except per share data, unless otherwise indicated)

   

   

   

   

   

   

   

At March 31, 2013 and December 31, 2012, the total fair value of the Company’s foreign exchange forward contracts, which were the only derivatives not designated as hedges, and fair value hedges, along with the accounts in the Condensed Consolidated Balance Sheets in which the fair value amounts were included, were as follows:

   

 

   

   

March 31, 2013

   

December 31, 2012

Derivatives not designated as hedges

   

   

   

   

   

   

Prepaid expenses and other current assets

   

  $

0.2

   

  $

0.6

Accrued liabilities

   

   

4.3

   

   

24.0

Derivatives designated as fair value hedges

   

   

   

   

   

   

Other noncurrent assets

   

  $

10.4

   

  $

14.7

   

   

   

   

   

   

   

 

35  

   

   

   

   

   

   


R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (“RR DONNELLEY”)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in millions, except per share data, unless otherwise indicated)

   

   

   

   

   

   

   

The gross and net amounts of foreign exchange forward contracts and interest rate swaps recognized in the Condensed Consolidated Balance Sheets as of March 31, 2013 and December 31, 2012 were as follows:

 

March 31, 2013

   

Gross Amounts of Assets and Liabilities

   

Impact of Netting

   

Net Amounts of Assets and Liabilities Presented in the Condensed Consolidated Balance Sheet

   

All Other Amounts Subject to Master Netting Agreements

   

Potential Net Amounts of Assets and Liabilities

Assets

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Foreign exchange forward contracts reported gross

   

  $

0.2 

   

  $

—   

   

  $

0.2 

   

  $

(0.1)

   

  $

0.1 

Foreign exchange forward contracts reported net

   

   

0.7 

   

   

(0.7)

   

   

—   

   

   

—   

   

   

—   

Total foreign exchange forward contracts

   

   

0.9 

   

   

(0.7)

   

   

0.2 

   

   

(0.1)

   

   

0.1 

Interest rate swaps

   

   

10.4 

   

   

—   

   

   

10.4 

   

   

(2.8)

   

   

7.6 

Total

   

  $

11.3 

   

  $

(0.7)

   

  $

10.6 

   

  $

(2.9)

   

  $

7.7 

   

   

   

   

   

   

   

   

   

   

   

   

   

Liabilities

   

   

   

   

   

   

   

   

   

   

   

   

Foreign exchange forward contracts reported gross

   

  $

2.7 

   

  $

—   

   

  $

2.7 

   

  $

(1.5)

   

  $

1.2 

Foreign exchange forward contracts reported net

   

   

2.3 

   

   

(0.7)

   

   

1.6 

   

   

(1.4)

   

   

0.2 

Total foreign exchange forward contracts

   

  $

5.0 

   

  $

(0.7)

   

  $

4.3 

   

  $

(2.9)

   

  $

1.4 

 

36  

   

   

   

   

   

   


R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (“RR DONNELLEY”)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in millions, except per share data, unless otherwise indicated)

   

   

   

   

   

   

   

   

 

December 31, 2012

   

Gross Amounts of Assets and Liabilities

   

Impact of Netting

   

Net Amounts of Assets and Liabilities Presented in the Condensed Consolidated Balance Sheet

   

All Other Amounts Subject to Master Netting Agreements

   

Potential Net Amounts of Assets and Liabilities

Assets

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Foreign exchange forward contracts reported gross

   

  $

0.6 

   

  $

—   

   

  $

0.6 

   

  $

(0.1)

   

  $

0.5 

Interest rate swaps

   

   

14.7 

   

   

—   

   

   

14.7 

   

   

(3.5)

   

   

11.2 

Total

   

  $

15.3 

   

  $

—   

   

  $

15.3 

   

  $

(3.6)

   

  $

11.7 

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Liabilities

   

Foreign exchange forward contracts reported gross

   

  $

24.0 

   

  $

—   

   

  $

24.0 

   

  $

(3.6)

   

  $

20.4 

   

   

   

   

   

   

   

   

   

   

The pre-tax gains related to derivatives not designated as hedges recognized in the Condensed Consolidated Statements of Operations for the three months ended March 31, 2013 and 2012 were as follows:

   

 

   

Classification of Gain Recognized in the

   

Three Months Ended

March 31,

   

Condensed Consolidated Statements of Operations

   

   

2013  

   

   

2012  

Derivatives not designated as hedges

   

   

   

   

   

   

   

Foreign exchange forward contracts

Selling, general and administrative expenses

   

  $

(12.8) 

   

  $

(0.7) 

 

37  

   

   

   

   

   

   


R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (“RR DONNELLEY”)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in millions, except per share data, unless otherwise indicated)

   

   

   

   

   

   

   

For derivatives designated as fair value hedges, the pre-tax (gains) losses related to the hedged items, attributable to changes in the hedged benchmark interest rate and the offsetting gain or loss on the related interest rate swaps for the three months ended March 31, 2013 and 2012 were as follows:

   

 

   

Classification of (Gain) Loss Recognized in the

   

Three Months Ended

March 31,

   

Condensed Consolidated Statements of Operations

   

   

2013 

   

   

2012 

Fair Value Hedges

   

   

   

   

   

   

   

   

   

   

   

   

Interest rate swaps

Investment and other expense (income) -net

   

  $

4.3 

   

  $

5.2 

Hedged items

Investment and other expense (income) -net

   

   

(3.7)

   

   

(6.2)

Total (gain) loss recognized as

   

   

   

   

   

   

   

   

   

   

   

   

ineffectiveness in the condensed consolidated statements of operations

Investment and other expense (income) -net

   

  $

0.6