EX-99.1 2 d153003dex991.htm EX-99.1 EX-99.1
Table of Contents

Exhibit 99.1

R. R. DONNELLEY & SONS COMPANY

35 WEST WACKER DRIVE

CHICAGO, ILLINOIS 60601

[●], 2016

Dear R. R. Donnelley & Sons Company Stockholder,

In August 2015 the board of directors of R. R. Donnelley & Sons Company, or RRD, announced its intent to spin-off our publishing and retail-centric print services and office products company, LSC Communications, Inc., or LSC, and our financial communications and data services company, Donnelley Financial Solutions, Inc., or Donnelley Financial. I am pleased to report that on [●], 2016, the spun-off companies, LSC and Donnelley Financial, will become separate public companies. RRD will continue as a global, customized multichannel communications management provider.

Donnelley Financial’s common stock will be listed on [●] under the ticker symbol “DFIN” and LSC’s common stock will be listed on [●] under the ticker symbol “LKSD”. RRD’s common stock will continue to be listed under the ticker symbol “RRD”.

RRD will distribute at least 80% of Donnelley Financial’s common stock in connection with the spin-off of Donnelley Financial. Holders of record of RRD’s common stock, par value $1.25 per share, as of the close of business, New York City time, on [●], 2016, which will be the record date for the spin-offs, will receive [●] share(s) of common stock, par value, $0.01 per share, of Donnelley Financial and [●] share(s) of common stock, par value, $0.01 per share, of LSC for every [●] share(s) of RRD common stock held. No action is required on your part to receive your shares of Donnelley Financial common stock and LSC common stock. You will not be required to pay anything for the new shares or to surrender any shares of RRD common stock. No fractional shares of Donnelley Financial common stock or LSC common stock will be issued. If you otherwise would own a fractional share, you will receive a check for the cash value thereof, which generally will be taxable to you.

The enclosed Information Statement describes the spin-off of Donnelley Financial and contains important information about Donnelley Financial, including financial statements. I suggest you read it carefully and in its entirety. You will receive a separate Information Statement describing the spin-off of LSC. If you have any questions regarding the spin-offs, please contact RRD’s transfer agent, [●].

Thank you for your continued support as we launch these three great new companies.

Thomas J. Quinlan III

President and

Chief Executive Officer

R. R. Donnelley & Sons Company


Table of Contents

DONNELLEY FINANCIAL SOLUTIONS, INC.

35 WEST WACKER DRIVE

CHICAGO, ILLINOIS 60601

[●], 2016

Dear Future Donnelley Financial Stockholder,

On behalf of Donnelley Financial, it is our great pleasure to welcome you as a stockholder of our company.

From our first day as an independent public company, Donnelley Financial will be a global leader in financial communications and data services. Our company has a great heritage with a strong brand recognition, and we believe it has an even greater future with competitive advantages from scale, track record of innovation and cost leadership.

As an industry-leading financial communications services company, we serve capital market and investment market clients by delivering products and services to help create, manage and deliver accurate and timely financial communications to investors and regulators. We also provide virtual data rooms to facilitate the deal management requirements of capital markets and mergers and acquisitions transactions, we provide data and analytics services that help professionals uncover intelligence from disclosure contained within public filings made with the United States Securities and Exchange Commission, and we provide language solutions through which we can translate documents and create content in up to 140 different languages for our clients.

Donnelley Financial will have the opportunity to drive sales growth and create value by providing significant scale and the highest level of service and expertise. Our business strategy focuses on generating sales growth and value through: (1) increasing the range of solutions provided to existing and potential clients; (2) expanding our products and services into new markets; (3) pursuing selective strategic relationships and acquisition opportunities; and (4) utilizing our technology and operational expertise to drive efficiencies.

We believe that our separation from RRD will, among other benefits, allow us to focus on our distinct strategic priorities, afford us direct access to the capital markets and facilitate our ability to capitalize on growth opportunities and effect future acquisitions, facilitate incentive compensation arrangements for our employees more directly tied to the performance of our business, and enable us to concentrate our financial resources solely on our own operations.

Our common stock will trade on [●] under the symbol “DFIN”.

Our management team is excited to be a part of this great company. We invite you to get to know our company better by reading our Information Statement. Thank you for your support of Donnelley Financial, and we look forward to having you as a fellow stockholder.

Sincerely,

Daniel N. Leib

Chief Executive Officer

Donnelley Financial Solutions, Inc.


Table of Contents

Information contained herein is subject to completion or amendment. A Registration Statement on Form 10 relating to these securities has been filed with the U.S. Securities and Exchange Commission.

 

PRELIMINARY INFORMATION STATEMENT

SUBJECT TO COMPLETION, DATED MARCH 31, 2016

INFORMATION STATEMENT

Donnelley Financial Solutions, Inc.

Distribution of

Common Stock

Par Value $0.01 Per Share

We are sending you this Information Statement in connection with R. R. Donnelley & Sons Company’s (RRD) spin-off of its wholly-owned subsidiary, Donnelley Financial Solutions, Inc. (Donnelley Financial). RRD will effect the spin-off by distributing on a pro rata basis to holders of its common stock, par value $1.25 per share, at least 80% of the outstanding shares of Donnelley Financial common stock, par value $0.01 per share. Prior to such distribution, RRD will undertake a series of internal transactions following which we will own the financial communications and data services businesses of RRD, as described in this Information Statement. This distribution is part of a series of transactions by RRD, which we refer to as the Separation, following which there will be three independent, publicly traded companies: our company, Donnelley Financial, which will be focused on financial communications and data services; LSC Communications, Inc., which will be focused on publishing and retail-centric print services and office products; and RRD, which will be focused on customized multichannel communications management. The distribution of Donnelley Financial common stock to RRD stockholders is intended to be tax-free to RRD’s stockholders for U.S. federal income tax purposes, except for cash that stockholders receive in lieu of fractional shares.

At least 80% of our shares of common stock will be distributed to holders of RRD common stock of record as of the close of business, New York City time, on [●], 2016, which will be the record date. Each such holder will receive [●] share(s) of our common stock for every [●] share(s) of RRD’s common stock held on the record date. We refer to this distribution of securities as the Distribution. The Distribution will be effective at 12:01 a.m. on [●], 2016.

For RRD stockholders who own common stock in registered form, in most cases RRD’s transfer agent will credit their shares of Donnelley Financial common stock to book entry accounts established to hold their Donnelley Financial common stock. Our distribution agent will send these stockholders a statement reflecting their Donnelley Financial common stock ownership shortly after [●], 2016. For stockholders who own RRD common stock through a broker or other nominee, their shares of Donnelley Financial common stock will be credited to their accounts by their broker or other nominee. Stockholders will receive cash in lieu of fractional shares, which generally will be taxable. See “The Separation and the Distribution—Material U.S. Federal Income Tax Consequences of the Distribution.”

No stockholder approval of the Separation or Distribution is required or sought. We are not asking you for a proxy and you are requested not to send us a proxy in connection with the Separation or Distribution. RRD stockholders will not be required to pay for the shares of our common stock to be received by them in the Distribution, or to surrender or to exchange shares of RRD common stock in order to receive our common stock, or to take any other action in connection with the Separation or Distribution.

There is currently no trading market for Donnelley Financial common stock. We expect, however, that a limited trading market for Donnelley Financial common stock, commonly known as a “when-issued” trading market, will develop prior to the record date for the Distribution and we expect “regular way” trading of Donnelley Financial common stock will begin on the effective date of the distribution. We intend to list our common stock on [●] under the symbol “DFIN”.

IN REVIEWING THIS INFORMATION STATEMENT, YOU SHOULD CAREFULLY CONSIDER THE MATTERS DESCRIBED UNDER THE CAPTION “RISK FACTORS” BEGINNING ON PAGE 20. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS INFORMATION STATEMENT IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

THIS INFORMATION STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES.

Stockholders of RRD with inquiries related to the Separation or Distribution should contact RRD’s transfer agent, [●].

The date of this Information Statement is [●], 2016.


Table of Contents

TABLE OF CONTENTS

 

     Page  

SUMMARY

     1   

QUESTIONS AND ANSWERS ABOUT THE SEPARATION AND THE DISTRIBUTION

     15   

RISK FACTORS

     20   

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

     33   

THE SEPARATION AND THE DISTRIBUTION

     35   

BUSINESS

     43   

DIVIDEND POLICY

     55   

CAPITALIZATION

     56   

UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION

     57   

SELECTED HISTORICAL COMBINED FINANCIAL DATA

     61   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     63   

CORPORATE GOVERNANCE AND MANAGEMENT

     82   

EXECUTIVE COMPENSATION

     88   

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     95   

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

     102   

SHARES ELIGIBLE FOR FUTURE SALE

     104   

DESCRIPTION OF CAPITAL STOCK

     105   

INDEMNIFICATION OF DIRECTORS AND OFFICERS

     109   

AVAILABLE INFORMATION

     110   

INDEX TO COMBINED FINANCIAL STATEMENTS

     F-1   

 

-i-


Table of Contents

TRADEMARKS AND TRADE NAMES

We own or have rights to certain trademarks and trade names that we use in conjunction with the operations of our business. Each trademark, trade name or service mark of any other company appearing in this Information Statement belongs to its holder. Solely for convenience, trademarks and trade names referred to in this Information Statement may appear without the “®”, “” and “SM” symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent possible under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names. We do not intend our use or display of other companies’ trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, any other companies.

 

-ii-


Table of Contents

SUMMARY

The following is a summary of certain of the information contained in this Information Statement. This summary is included for convenience only and should not be considered complete. This summary is qualified in its entirety by more detailed information contained elsewhere in this Information Statement, which should be read in its entirety, particularly the discussion of “Risk Factors” beginning on page 20 of this Information Statement, and our audited historical combined financial statements and unaudited pro forma combined financial statements and the notes to those statements appearing elsewhere in this Information Statement.

In this Information Statement, unless the context otherwise requires:

 

    “Donnelley Financial Solutions,” “Donnelley Financial,” the “Company,” “we,” “our” and “us” refer to Donnelley Financial Solutions, Inc. and its combined subsidiaries, after giving effect to the Distribution;

 

    “LSC Communications” and “LSC” refer to LSC Communications, Inc., a Delaware corporation, and its combined subsidiaries, after giving effect to the distribution of its common stock by RRD in the Separation;

 

    “RRD” refers to R. R. Donnelley & Sons Company, a Delaware corporation, and its consolidated subsidiaries, other than for all periods following the Separation, LSC and Donnelley Financial; and

 

    “Internal Reorganization” refers to a series of internal reorganization transactions RRD will undertake prior to the completion of the Separation in order to facilitate the Separation. These internal reorganization steps will result in Donnelley Financial owning the assets and liabilities relating to RRD’s current financial communications and data services business and LSC owning substantially all of the assets and liabilities of RRD’s current publishing and retail-centric print services and office products business. This internal reorganization will also result in RRD retaining the assets and liabilities associated with its customized multichannel communications management business. Some of these internal reorganization transactions have commenced and will continue until just prior to completion of the Separation.

Prior to RRD’s distribution of the shares of our common stock to its stockholders, or the “Distribution,” RRD will undertake the Internal Reorganization, following which:

 

    Donnelley Financial Solutions is expected to consist of RRD’s current financial reporting unit of RRD’s Strategic Services segment.

 

    LSC Communications is expected to consist of:

 

    substantially all of RRD’s current Publishing and Retail Services segment, as well as the office products reporting unit from RRD’s Variable Print segment;

 

    certain publishing and e-book services currently within the digital and creative solutions reporting unit of RRD’s Strategic Services segment;

 

    substantially all of the operations currently within the Europe reporting unit of RRD’s International segment;

 

    certain Mexican operations currently within the Latin America reporting unit of RRD’s International segment; and

 

    the co-mail and related list services operations currently within the logistics reporting unit of RRD’s Strategic Services segment.

 



 

1


Table of Contents
    RRD is expected to consist of:

 

    its current Variable Print segment, except for the office products reporting unit that will become part of LSC Communications;

 

    the logistics reporting unit within its current Strategic Services segment, except for the operations that will become part of LSC Communications;

 

    the sourcing and digital and creative solutions reporting units within its current Strategic Services segment, except for the operations that will become part of LSC Communications; and

 

    its current International segment except for substantially all of the Europe reporting unit and certain Mexican operations that will become part of LSC Communications.

The RRD Board believes that the Separation will deliver the following strategic and financial benefits:

 

    allows each business to focus on its distinct strategic priorities, driving opportunities to accelerate growth and enhance long-term value;

 

    permits even more focused brand strategy to support each business’s marketing plan;

 

    provides each business with an independent equity structure that will afford it direct access to the capital markets and facilitate the ability of each company to capitalize on its growth opportunities and effect future acquisitions;

 

    facilitates incentive compensation arrangements for employees of each business more directly tied to the performance of the relevant company’s business and may enhance employee hiring and retention by, among other things, improving the alignment of management and employee incentives with performance and growth objectives;

 

    allows investors to separately value each business based on their unique investment identities, including the merits, performance and future prospects of their respective businesses. The Separation will also provide investors with three distinct and targeted investment opportunities;

 

    gives greater flexibility to execute tailored business strategies and compete in evolving markets;

 

    provides tailored capital structures reflective of each business’s financial and growth profiles; and

 

    enables each business to concentrate its financial resources solely on its own operations, providing greater flexibility to invest capital in its business in a time and manner appropriate for its distinct strategy and business needs and facilitate a more efficient allocation of capital.

OUR COMPANY

Donnelley Financial is a financial communications and data services company serving both the investment and capital markets worldwide. Our clientele is primarily focused in three areas: global capital markets (GCM), global investment markets (GIM), and language solutions. Our business is diversified across a range of products and services, including content management, multi-channel content distribution, data management and analytics services, collaborative workflow and business reporting tools, and translations and other language services in support of our clients’ communication requirements.

Our GCM clients consist mainly of domestic and international companies that are subject to the filing and reporting requirements of the Securities Act of 1933, or the Securities Act, and the Securities Exchange Act of 1934, or the Exchange Act. We also support public and private companies throughout the mergers and

 



 

2


Table of Contents

acquisitions transaction process and in public and private capital markets transactions with deal management solutions focused on aiding transactional efficiency from inception to completion. We support GIM clients operating in the global investment markets within the United States and internationally, including United States based mutual funds, hedge and alternative investment funds, insurance companies and overseas investment structures for collective investments. Our language solutions offerings support domestic and international businesses in a variety of industries by helping them adapt their business content into different languages for specific countries, markets and regions through a complete suite of language products and services.

In 2015, we generated net sales of $1.0 billion, net earnings of $104.3 million and adjusted earnings before interest, taxes, depreciation and amortization, or adjusted EBITDA, of $218.9 million. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Measures.” Our United States segment accounted for approximately 86% and our International segment accounted for 14% of our 2015 combined net sales.

Donnelley Financial operates in two business segments:

 

    United States. Our United States segment is comprised of three reporting units: capital markets, investment markets, and language solutions and other. We serve capital market and investment market clients in the United States by delivering products and services to help create, manage and deliver accurate and timely financial communications to investors and regulators. We also provide virtual data rooms to facilitate the deal management requirements of capital markets and mergers and acquisitions transactions, and we provide data and analytics services that help professionals uncover intelligence from disclosure contained within public filings made with the United States Securities and Exchange Commission, or the SEC. Our United States segment also includes language solutions capabilities, through which we can translate documents and create content in up to 140 different languages for our clients.

 

    International. Our International segment includes our operations in Asia, Europe, Latin America, Australia and Canada. Our international business is primarily focused on working with international capital markets clients on capital markets offerings and regulatory compliance related activities into or within the United States. In addition, we provide services to international investment market clients to allow them to comply with applicable SEC regulations, and we provide language solutions to international clients.

Our Strengths

 

    Significant Scale. Our scale provides us with significant benefits, allowing us to cost-efficiently serve a large number of clients and add clients to our existing services. We have significant scalability within our cloud-based solutions, which we believe will result in minimal costs to add new clients. In 2015, we had net sales of $1.0 billion.

 

    Diverse Product Profile. Our business is diversified across a wide range of product offerings that enable us to work with companies and their advisors at different points throughout the business lifecycle, including private companies, public companies and companies that have filed for bankruptcy. We design, package and deliver our products and services in ways that address our clients’ unique needs, providing integrated solutions to their critical business issues, and we offer a “one-stop shop” approach for content creation and collaboration, content management, translation services and content distribution. We have also diversified our business by serving adjacent client categories like brokers and financial advisors.

 

   

Tailored Proprietary Technologies. We believe we have cultivated a strong reputation for innovation through our commitment to tailored and scalable technologies. We apply common technology

 



 

3


Table of Contents
 

platforms across our offerings and then add industry and client specific functionality that provides our clients with a flexible platform that can be further tailored to meet their specific needs. We believe our technological innovation, intellectual property and tailored proprietary technologies contribute to the appeal of our offerings for our clients.

 

    Global Footprint. Our global footprint provides us with a “close to client” local platform and capability in each of our geographies. We believe our global footprint strengthens our client relationships by accelerating response times relative to our competitors and allowing us to assist our clients with projects that span across multiple locations in our global network. We believe we have the industry’s broadest global footprint in terms of regional presence, breadth of product offerings and applications, and diversity of end markets, giving us significant competitive advantages in scale and scope. We operate in 18 countries around the world and have client service centers in 41 cities worldwide.

 

    Strong Client Relationships and Customer Service. We believe we have strong brand recognition and that our clients associate our brand with quality and client-focused and reliable customer service. Our regulatory expertise, commitment, discretion and responsiveness, particularly for projects involving highly sensitive information, have enabled us to develop strong, long-standing relationships with our clients, often at senior levels in their organizations. Our product and service offerings for financial communications are often used over the lifetime of our clients, including in connection with their initial public offerings, mergers and acquisitions transactions, public and private capital markets transactions, strategic transactions and SEC compliance obligations. We believe our ability to retain our current client base and to attract new clients is directly related to our sales force and customer service personnel, and we devote extensive resources to recruiting, developing and retaining experienced sales and service professionals.

 

    Deep Domain Expertise. Our team has deep experience in the understanding of the financial reporting process and the related aspects of the rapidly changing regulatory requirements and expertise in the creation and distribution of key financial communications documents. For the past five years we have been the leader in IPO and Draft Registration Statements (DRS) filings and a leader in supporting worldwide mergers. We believe we have extensive EDGAR and XBRL regulatory filing expertise, and we have relationships with many of the largest fund companies, annuities, and third party administrators. Our broad experience also uniquely qualifies us to help our clients navigate the ongoing transition in the regulatory world from documents to data, whether through a new accounting standard or a new output type (from HTML to HTML+XBRL to iXBRL). In each of these instances, we have launched new capabilities to the market, and as a result, we believe we are well positioned to manage the transition to new data driven disclosure output types required by the SEC for their reporting modernization initiative.

Our Strategy

 

    Expand the Existing Range of Solutions Provided to Clients. While clients may engage us to use specific solutions, we believe there are opportunities for us to increase our sales of existing solutions to these clients and clients currently working with competitors. By leveraging our strong client relationships, we expect to grow our share of client spend by expanding our suite of transaction and compliance services. For example, many of our GCM clients utilizing our EDGAR filing services are also active in mergers and acquisitions transactions, as well as public and private capital markets transactions, and we believe our virtual data room offering, Venue, is a helpful tool for these clients to manage the materials used in the due diligence process for these various types of transactions. Further, many of our GIM clients utilizing our EDGAR filing services may or could also rely on our FundSuiteArc products to more efficiently manage their content in a central online repository, providing a single platform to create, review and publish critical disclosures.

 



 

4


Table of Contents
    Develop New Services and Products. We seek to capitalize on our technological expertise and operational competencies to broaden the array of services we offer our existing and prospective client base. We expect to continue to increase the software products and services that we offer, which we believe will provide us with increased net sales and profits. Our ActiveDisclosure solution provides a web-based platform for document collaboration, allowing our clients to work more closely with us during the drafting of disclosures, long before submission to the SEC or other regulatory bodies. We plan to leverage our existing relationships and brand reliability to combine our existing technology with other services. Recent examples of this strategy include our investments in Peloton Document Solutions LLC, or Peloton Documents, and in Mediant Communications, Inc., or Mediant, and our acquisition of Multicorpora. These investments have expanded our offerings to include deal marketing services associated with our Venue virtual data room, enhanced our broker-dealer and financial advisor services, and broadened our language solutions offerings by implementing technology advancements.

 

    Focus on Growth and Expansion into New Markets. We believe our products and services are well-suited to our target markets, particularly those markets involving significant amounts of regulatory oversight, electronic documentation and collaboration of tailored marketing, compliance or business communication materials. We believe our capabilities position us well as requirements change to new standards of data driven disclosure in new markets. New regulations, such as the SEC’s reporting modernization proposal, which continues the recent emphasis on the submission of structured data for financial disclosures (rather than unstructured documents) and the Digital Accountability and Transparency Act of 2014, or the Data Act, which expands the structured data approach into government agencies outside of the SEC and the Federal Deposit Insurance Corporation, or the FDIC, are examples of these standards. We believe we are well-positioned to handle these new compliance and regulatory requirements with our track-record of developing technology offerings to meet industry and client demands. We also intend to increase our penetration in our existing markets by expanding geographically and to enter new markets that are adjacent to and share similar attributes to our existing markets.

 

    Pursue Selective Strategic Relationships and Acquisition Opportunities. Since 2009, we have acquired four companies, Prospectus Central, LLC (an e-delivery company), Bowne (a traditional financial printer), EDGAR Online (which specializes in EDGAR and XBRL filings with the SEC) and MultiCorpora (a translations and language solutions company), expanding our service offerings and broadening our market reach. In addition, we have made strategic investments in Peloton Documents (a media and interactive communications provider) and Mediant (a provider of electronic and printed shareholder communications), allowing us to enhance our end-to-end deal solutions offerings and our proxy management and regulatory compliance services. We intend to continue to pursue such strategic relationships and acquisitions, and given the relative fragmentation of many of our target markets, we believe we will be able to continue to identify and capitalize on complementary strategic relationships and acquisition opportunities in the future.

 

    Use our Technology and Operational Expertise to Drive Efficiencies. We believe many of our technology-based services are scalable to support additional growth. Since 2010, we have managed our cost structure to be more variable in nature, increasing financial flexibility and delivering strong profitability. We plan to continue to identify technology and process improvements that would allow us to become more efficient.

Key Challenges

Following the Distribution, we may face a number of challenges, both pre-existing and as a result of the Distribution, including:

 

   

Market Volatility. Unfavorable economic conditions could harm our operating results. For example, our GCM transactional net sales, including virtual data rooms, depends in part on the volume of public

 



 

5


Table of Contents
 

financings, particularly debt and equity financings, and mergers and acquisitions, which are influenced by corporate funding needs, stock market fluctuations, prevailing interest rates and other general and economic factors. Our GIM business can be affected by fluctuations in the inflow and outflow of money into investment management funds which determines the number of new funds that are opened, as well as, conversely, closed. As has happened in the past, any future prolonged period of capital market uncertainty and volatility could reduce transactional activity and cause a number of investment management funds to close and consequently adversely affect our operating results and our financial condition. Our International segment is particularly susceptible to capital market volatility as most of our International business is driven by capital markets transactions.

 

    Regulatory Risks. Our net sales from transaction and compliance related documents is subject to volatility in demand due to the rules and regulations of the SEC and other regulatory bodies, which could adversely affect our operating and financial results. Our transaction and compliance net sales are primarily derived from the composition, filing and distribution of documents in electronic and printed form. Demand for the printing and distribution portions of this business is affected in part by the rules and regulations of the SEC and other regulatory bodies. We are uncertain as to whether or how pending rules will impact the practices of issuers, underwriters, broker-dealers and investors, the financial communications industry in general or our business in particular.

 

    Data Security. A breach in our security measures could harm our business and operating results. Most of our products and services require us to capture, transmit, handle and store confidential, personal or sensitive information regarding our clients or our clients’ customers. A breach in our security systems resulting in the inadvertent or intentional disclosure of confidential information could severely harm our business and result in reputational damage and potential liability for us. A compromise of our security or a perceived compromise of our security could also result in negative publicity, causing us to lose clients and business. A party who is able to circumvent our security measures could misappropriate proprietary information that could be valuable to competitors or other similar companies.

In addition, we may be required to expend significant capital and other resources to continue to keep our security measures up to date and to protect the Company against the threat of a security breach. Increasingly, more of our financial services and other clients have been focusing on implementation of more extensive security measures. Implementation of these measures and the performance of client audits of these measures require a significant amount of time and resources.

The use of insider information is highly regulated in the United States and abroad, and violations of securities laws and regulations may result in civil and criminal penalties. If we, or any of our employees, fail to keep our clients’ proprietary information confidential, we may lose existing clients and potential new clients and may expose clients to significant liability and loss of revenue based on the premature release of confidential information.

The centralized nature of our information systems requires the routine flow of information about our clients and our clients’ customers across national borders. Changes in the worldwide legal and regulatory environment in the areas of consumer privacy, data security and cross-border data flows, or a failure by us to comply with the regulatory environment, could have a material adverse effect on our business.

 

    Competition and Self-Reliance. We face competition from smaller competitors who compete on price and pressure margins on software or other services we provide. In addition, changes in content management technologies offered by our competitors are enabling our clients to take work in-house that was historically performed by us.

 

   

Acquisition Integration Challenges. We have in the past acquired and intend in the future to acquire other businesses that have technologies and product lines complementary to our core businesses,

 



 

6


Table of Contents
 

expand the breadth of our markets, enhance our technical capabilities or offer us other growth and diversification opportunities. The benefits of any future acquisitions may take more time than expected to develop, and we cannot guarantee that any future acquisition will in fact produce any intended benefits.

Please see “Risk Factors” for a more detailed description of the challenges and risks described above.

Company Information

We are a Delaware corporation with our principal executive offices at 35 West Wacker Drive, Chicago, IL 60601. Our telephone number is [●].

Donnelley Financial was incorporated on February 22, 2016 as a direct, wholly-owned subsidiary of RRD. Prior to the Distribution, RRD will undertake the Internal Reorganization, after which we will own the subsidiaries, businesses and other assets currently owned and operated by RRD, directly or indirectly, that are described in this Information Statement. Although many of these transfers will not take place until just prior to the Distribution, for the avoidance of doubt, where we describe in this Information Statement our business activities, we do so as if these transfers have already occurred.

The distribution of our shares of common stock to RRD stockholders is part of a series of transactions by RRD, which we refer to as the Separation, following which there will be three independent, publicly traded companies: our Company, Donnelley Financial, which will be focused on financial communications and data services; LSC, which will be focused on publishing and retail-centric print services and office products; and RRD, which will be focused on customized multichannel communications management. Concurrently with the Distribution, RRD will make an additional distribution to holders of shares of RRD’s common stock, par value $1.25 per share, of shares of LSC’s common stock, par value $0.01 per share. You will receive a separate information statement describing the distribution and business of LSC.

 



 

7


Table of Contents

THE SEPARATION AND THE DISTRIBUTION

Please see “The Separation and the Distribution” for a more detailed description of the matters described below.

 

Distributing Company

RRD.

 

Distributed Company

Donnelley Financial, a wholly-owned direct subsidiary of RRD, which will own and operate the financial communications and data services business currently owned and operated by RRD, as described in this Information Statement. Please see “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for information concerning this business.

 

Distribution Ratio

Each holder of RRD common stock will receive a distribution of [●] share(s) of our common stock for every [●] share(s) of RRD common stock held on the record date.

 

Securities to Be Distributed

Based on [●] shares of RRD common stock issued and outstanding on [●], 2016, approximately [●] shares of our common stock will be distributed. RRD will distribute at least 80% of our common stock in the Distribution and may retain up to 20% of our common stock following the Distribution. RRD stockholders will not be required to pay for the shares of our common stock to be received by them in the Distribution, or to surrender or exchange shares of RRD common stock in order to receive our common stock, or to take any other action in connection with the Separation or Distribution.

 

Fractional Shares

Fractional shares of our common stock will not be distributed. Fractional shares of our common stock will be aggregated and sold in the public market by the distribution agent, and stockholders will receive a cash payment in lieu of fractional shares. The aggregate net cash proceeds of these sales will be distributed ratably to the stockholders who would otherwise have received fractional interests. These proceeds generally will be taxable to those stockholders.

 

Distribution Agent, Transfer Agent and Registrar for the Shares

[●] will be the distribution agent, transfer agent and registrar for the shares of our common stock.

 

Record Date

The record date is the close of business, New York City time, on [●], 2016.

 

Distribution Date

The Distribution will be effective at 12:01 a.m. on [●], 2016.

 

Material U.S. Federal Income Tax Consequences of the Distribution

It is a condition to the Distribution that RRD receive (i) a private letter ruling from the Internal Revenue Service (the IRS) satisfactory to the RRD board of directors (the RRD Board) regarding certain U.S. federal income tax matters relating to the Distribution and related transactions and (ii) an opinion of Sullivan & Cromwell LLP, in form

 



 

8


Table of Contents
 

and substance satisfactory to the RRD Board, regarding the U.S. federal income tax treatment of the Distribution and certain related transactions, as transactions that are generally tax-free, for U.S. federal income tax purposes under Sections 355 and 368(a)(1)(D) of the U.S. Internal Revenue Code of 1986, as amended (the Code). Assuming that the Distribution, together with certain related transactions, so qualifies for U.S. federal income tax purposes, no gain or loss will be recognized by you, and no amount will be included in your income, upon the receipt of shares of Donnelley Financial common stock pursuant to the Distribution. You will, however, recognize gain or loss for U.S. federal income tax purposes with respect to cash received in lieu of fractional shares of Donnelley Financial common stock. The opinion and the private letter ruling will rely on factual representations and reasonable assumptions, which if incorrect or inaccurate may jeopardize the ability to rely on such opinion and private letter ruling. The opinion will not be binding on the IRS or the courts. You should consult your own tax advisor as to the particular consequences of the Distribution to you, including the applicability and effect of any U.S. federal, state and local tax laws, as well as any foreign tax laws. For more information regarding the material U.S. federal income tax consequences of the Distribution, see the section entitled “The Separation and the Distribution—Material U.S. Federal Income Tax Consequences of the Distribution.”

 

Stock Exchange Listing

There is not currently a public market for our common stock. We will apply for our common stock to be listed on [●] under the symbol “DFIN”. It is anticipated that trading will commence on a when-issued basis prior to the Distribution. On the effective date of the Distribution, when-issued trading in respect of our common stock will end and regular-way trading will begin.

 

The Separation

The Separation is a series of transactions by RRD which will result in three independent companies after RRD spins-off its financial communications and data services company, which will be the Company, and its publishing and retail-centric print services and office products company, which will be LSC. On [●], 2016, the spun-off companies, Donnelley Financial and LSC, will become separate public companies. RRD will continue as a global, customized multichannel communications management provider.

 

Relationship Between RRD, LSC and Us After the Separation

Following the Separation, we will be a public company and RRD may retain up to a 20% continuing stock ownership interest in us. Prior to the Separation, we, LSC and RRD intend to enter into several agreements related to the Separation and Distribution, which will govern the relationship between RRD, LSC and us up to and after completion of the Separation and allocate between RRD, LSC and us various assets, liabilities, rights and obligations. These agreements include:

 

   

a separation and distribution agreement (the Separation and Distribution Agreement) for the purpose of accomplishing the

 



 

9


Table of Contents
 

distribution of our common stock and the distribution of LSC’s common stock to RRD’s common stockholders. This agreement also will govern our relationships with RRD and LSC with respect to pre-Separation matters and provide for the allocation of employee benefit, tax, litigation and other liabilities and obligations attributable to periods prior to the Separation. The Separation and Distribution Agreement will include an agreement that we, RRD and LSC agree to provide each other with appropriate indemnities with respect to liabilities arising out of the businesses being distributed and retained by RRD in the Separation. The Separation and Distribution Agreement will also address employee compensation and benefits matters;

 

    one or more agreements that will provide for the receipt and provision of certain transition services for up to 24 months following the Separation (the Transition Services Agreements);

 

    a Tax Disaffiliation Agreement that will allocate responsibility for taxes incurred before and after the Separation and include indemnification rights with respect to tax matters and restrictions to preserve the tax-free status of the Separation;

 

    a Patent, Copyright and Trade Secret Assignment and License Agreement, a Trademark Assignment and License Agreement, a Data Rights Assignment and License Agreement and one or more other intellectual property agreements, in each case, that will provide for ownership, licensing and other arrangements to facilitate RRD’s, LSC’s and our ongoing use of intellectual property;

 

    we also will be party to other commercial arrangements with RRD and its subsidiaries and with LSC and its subsidiaries. See “Certain Relationships and Related Party Transactions;” and

 

    to the extent RRD retains any of our common stock following the Distribution, a Stockholder and Registration Rights Agreement with RRD relating to any shares of our common stock it retains.

 

  See “Certain Relationships and Related Party Transactions—Certain Relationships and Potential Conflicts of Interest—Related Party Transaction Approval Policy” for a discussion of the policies that will be in place for dealing with potential conflicts of interest that may arise from our ongoing relationship with RRD and LSC.

 

Conditions to the Distribution

The Distribution is subject to the satisfaction of the following conditions or the RRD Board’s waiver of the following conditions:

 

    the RRD Board will, in its sole and absolute discretion, have authorized and approved (i) the Internal Reorganization described under “Certain Relationships and Related Party Transactions—Separation Transactions—Separation and Distribution Agreement,” (ii) any other transfers of assets and assumptions of liabilities contemplated by the Separation and Distribution Agreement and any related agreements and (iii) the Distribution, and will not have withdrawn that authorization and approval;

 



 

10


Table of Contents
    the RRD Board will have declared the distribution of at least 80% of the outstanding shares of our common stock to RRD’s stockholders;

 

    the SEC will have declared our registration statement on Form 10, of which this Information Statement is a part, effective under the Exchange Act, no stop order suspending the effectiveness of the registration statement will be in effect, and no proceedings for that purpose will be pending before or threatened by the SEC;

 

    the applicable Canadian securities regulatory authorities will have issued (including having been deemed to have issued) a final receipt in connection with the filing of a prospectus prepared in accordance with applicable Canadian securities laws as required to qualify the distribution of Donnelley Financial common stock to RRD’s Canadian stockholders, and no order, ruling or determination having the effect of prohibiting, ceasing or suspending the distribution or trading of the Donnelley Financial common stock will have been issued by any securities regulatory authority in Canada and no proceedings for that purpose will have been instituted or threatened by any securities regulatory authority in Canada;

 

    [●] or another national securities exchange approved by the RRD Board will have accepted our common stock for listing, subject to official notice of issuance;

 

    the Internal Reorganization will have been completed;

 

    RRD shall have received (i) a private letter ruling from the Internal Revenue Service satisfactory to the RRD Board regarding certain U.S. federal income tax matters relating to the Distribution and related transactions and (ii) an opinion of Sullivan & Cromwell LLP, in form and substance satisfactory to the RRD Board, regarding the U.S. federal income tax treatment of the Distribution and certain related transactions;

 

    no order, injunction or decree that would prevent the completion of the Distribution will be threatened, pending or issued (and still in effect) by any governmental entity of competent jurisdiction, no other legal restraint or prohibition preventing the completion of the Distribution will be in effect, and no other event outside the control of RRD will have occurred or failed to occur that prevents the completion of the Distribution;

 

    no other events or developments will have occurred prior to the Distribution that, in the judgment of the RRD Board, would result in the Distribution having a material adverse effect on RRD or its stockholders;

 

   

to the extent applicable, RRD, LSC and we will have executed and delivered the Separation and Distribution Agreement, the Stockholder and Registration Rights Agreement, the Tax Disaffiliation Agreement, the Patent, Copyright and Trade Secret

 



 

11


Table of Contents
 

Assignment and License Agreement, the Trademark Assignment and License Agreement, the Data Rights Assignment and License Agreement, the Transition Services Agreements and all other ancillary agreements related to the Separation;

 

    our existing directors will have duly appointed to the Donnelley Financial board of directors, or the Board, the individuals listed as members of our Board, post-Distribution, in this Information Statement, and those individuals will become members of our Board in connection with the Distribution;

 

    each individual who will be an employee of RRD or LSC after the Distribution and who is a director or officer of Donnelley Financial will have resigned or been removed from the directorship and/or office held by that person, effective no later than immediately prior to the Distribution; and

 

    immediately prior to the Distribution, our amended and restated certificate of incorporation, or our Certificate of Incorporation, and amended and restated by-laws, or our By-laws, each in substantially the form filed as an exhibit to the registration statement on Form 10 of which this Information Statement is a part, will be in effect.

 

  The fulfillment of the above conditions will not create any obligation on RRD’s part to effect the Separation or the Distribution. The distribution of Donnelley Financial common stock is not conditioned upon the distribution of LSC common stock, nor will the distribution of LSC common stock be conditioned upon the Distribution of our common stock. We are not aware of any material federal, foreign or state regulatory requirements with which we must comply, other than SEC rules and regulations, or any material approvals that we must obtain, other than [●] approval for listing of our common stock and the SEC’s declaration of the effectiveness of the registration statement and the applicable Canadian securities regulatory authorities’ issuance of a final receipt in connection with the filing of a prospectus, in connection with the Distribution. RRD has the right not to complete the Separation or the Distribution if, at any time, the RRD Board determines, in its sole and absolute discretion, that the Separation or the Distribution is not in the best interests of RRD or its stockholders or is otherwise not advisable.

 

Post-Distribution Dividend Policy

Following the Distribution, the timing, declaration, amount and payment of any future dividends to Donnelley Financial stockholders will fall within the discretion of our Board. See “Risk Factors—Risks Relating to Our Common Stock and the Securities Market—We cannot assure you that we will pay dividends on our common stock, and our indebtedness could limit our ability to pay dividends on our common stock” and “Dividend Policy.”

 

Risk Factors

Stockholders should carefully consider the matters discussed under “Risk Factors.”

 



 

12


Table of Contents

SUMMARY HISTORICAL COMBINED FINANCIAL DATA

The following table presents Donnelley Financial’s selected historical combined financial data. The selected historical combined statements of operations data for the years ended December 31, 2015, 2014 and 2013 and the selected combined balance sheet data as of December 31, 2015 and 2014 are derived from its combined financial statements, which are included in the “Index to Combined Financial Statements” section of this Information Statement. The selected historical combined statements of operations data for the years ended December 31, 2012 and 2011 and the selected combined balance sheet data as of December 31, 2013, 2012 and 2011 are derived from Donnelley Financial’s unaudited combined financial statements that are not included in this Information Statement. The unaudited combined financial statement data has been prepared on a basis consistent with which Donnelley Financial’s combined financial statements have been prepared.

The selected historical combined financial data includes certain expenses of RRD that were allocated to Donnelley Financial for certain corporate functions, including general corporate expenses related to information technology, finance, legal, human resources, internal audit, treasury, tax, investor relations and executive oversight. These costs may not be representative of the future costs Donnelley Financial may incur as an independent, publicly traded company. In addition, Donnelley Financial’s historical financial information does not reflect changes that Donnelley Financial expects to experience in the future as a result of Donnelley Financial’s separation from RRD, including changes in Donnelley Financial’s cost structure, personnel needs, tax structure, financing and business operations. Accordingly, these historical results should not be relied upon as an indicator of Donnelley Financial’s future performance.

The historical combined financial statements do not reflect the allocation of certain net liabilities between Donnelley Financial and RRD as reflected under “Unaudited Pro Forma Combined Financial Information” in this Information Statement. As a result, the combined financial information included herein may not completely reflect Donnelley Financial’s financial position, results of operations and cash flows in the future or what our financial position, results of operations and cash flows would have been had we been an independent, publicly traded company during the periods presented.

For a better understanding, this section should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the “Unaudited Pro Forma Combined Financial Information” and accompanying notes included elsewhere in this Information Statement.

 

     Year Ended December 31,  
     2015      2014      2013      2012      2011  

(in millions)

              

Combined statements of operations data:

              

Net sales

   $ 1,049.5       $ 1,080.1       $ 1,085.4       $ 1,061.0       $ 1,138.9   

Net earnings

     104.3         57.4         96.3         71.7         64.5   

Combined balance sheet data:

              

Total assets

     817.6         994.2         880.5         926.7         1,045.1   

Note payable with an RRD affiliate

     29.2         44.0         58.7         73.1         —       

Reflects results of acquired businesses from the relevant acquisition dates.

Includes the following significant items:

 

    For 2015: Pre-tax restructuring, impairment and other charges of $4.4 million ($2.8 million after-tax);

 

   

For 2014: Pre-tax restructuring, impairment and other charges of $4.8 million ($3.1 million after-tax), $95.7 million pre-tax settlement charges ($58.4 million after-tax) on lump-sum pension settlement

 



 

13


Table of Contents
 

payments; $6.1 million pre-tax gain ($3.7 million after-tax) on the sale of a building, pre-tax gain of $3.0 million ($1.8 million after-tax) on an equity investment;

 

    For 2013: Pre-tax restructuring, impairment and other charges of $13.0 million ($8.0 million after-tax);

 

    For 2012: Pre-tax restructuring, impairment and other charges of $14.0 million ($8.5 million after-tax), pre-tax loss of $4.0 million ($2.4 million after-tax) on an equity investment; and

 

    For 2011: Pre-tax restructuring, impairment and other charges of $62.7 million ($40.0 million after-tax), pre-tax loss of $1.0 million ($0.6 million after-tax) on an equity investment.

Non-GAAP Measures

The Company believes that certain non-GAAP measures, such as Non-GAAP adjusted EBITDA, when presented in conjunction with comparable GAAP measures, are useful because they are appropriate measures for evaluating the Company’s operating performance. Internally, the Company uses non-GAAP information as an indicator of business performance, and evaluates management’s effectiveness with specific reference to these indicators. These measures should be considered in addition to, not a substitute for, or superior to measures of financial performance prepared in accordance with GAAP.

Non-GAAP adjusted EBITDA excludes restructuring, impairment and other charges-net, pension settlement charges, the gain on the sale of a building and the gain on an equity investment. A reconciliation of GAAP net earnings to Non-GAAP adjusted EBITDA for the years ended December 31, 2015, 2014 and 2013 for these adjustments is presented in the following table:

 

     For the Year Ended
December 31,
 
     2015      2014      2013  

Net earnings

   $ 104.3       $ 57.4       $ 96.3   

Restructuring, impairment and other charges—net

     4.4         4.8         13.0   

Pension settlement charges

     —           95.7         —     

Gain on sale of building

     —           (6.1      —     

Gain on equity investment

     —           (3.0      —     

Depreciation and amortization

     41.7         40.7         37.1   

Interest expense—net

     1.1         1.5         2.2   

Income tax expense

     67.4         35.0         62.6   
  

 

 

    

 

 

    

 

 

 

Non-GAAP adjusted EBITDA

   $ 218.9       $ 226.0       $ 211.2   
  

 

 

    

 

 

    

 

 

 

 



 

14


Table of Contents

QUESTIONS AND ANSWERS ABOUT THE SEPARATION AND THE DISTRIBUTION

 

Q: What is the Separation?

 

A: The Separation is a series of transactions by RRD which will result in three independent companies by spinning-off our Company, a financial communications and data services company, which is referred to as Donnelley Financial, and a publishing and retail-centric print services and office products company, which is referred to as LSC. On [●], 2016, the spun-off companies, Donnelley Financial and LSC will become separate public companies. RRD will continue as a global, customized multichannel communications management provider. In particular:

 

    Our Company, Donnelley Financial, is expected to consist of the current financial reporting unit of RRD’s Strategic Services segment.

 

    LSC is expected to consist of:

 

    substantially all of RRD’s current Publishing and Retail Services segment, as well as the office products reporting unit from RRD’s Variable Print segment;

 

    certain publishing and e-book services currently within the digital and creative solutions reporting unit of RRD’s Strategic Services segment;

 

    substantially all of the operations currently within the Europe reporting unit of RRD’s International segment;

 

    certain Mexican operations currently within the Latin America reporting unit of RRD’s International segment; and

 

    the co-mail and related list services operations currently within the logistics reporting unit of RRD’s Strategic Services segment.

 

    RRD is expected to consist of:

 

    its current Variable Print segment, except for the office products reporting unit that will become part of LSC Communications;

 

    the logistics reporting unit within its current Strategic Services segment, except for the operations that will become part of LSC Communications;

 

    the sourcing and digital and creative solutions reporting units within its current Strategic Services segment, except for the operations that will become part of LSC Communications; and

 

    its current International segment, except for substantially all of the Europe reporting unit and certain Mexican operations that will become part of LSC Communications.

 

Q: What is the Distribution?

 

A: The Distribution is the method by which RRD will distribute to its stockholders at least 80% of the shares of our common stock. We will be a separate company from RRD, and RRD may retain up to 20% ownership interest in us. The number of shares of RRD common stock you own will not change as a result of the Distribution.

 

Q: What is being distributed in the Distribution?

 

A: Approximately [●] million shares of Donnelley Financial common stock will be distributed in the Distribution, based upon the number of shares of RRD common stock issued and outstanding on [●], 2016. The shares of our common stock to be distributed by RRD will constitute at least 80% of the issued and outstanding shares of our common stock immediately after the Distribution. For more information on the shares being distributed in the Distribution, see “Description of Capital Stock—Description of Common Stock.” There will be a separate distribution of LSC common stock to stockholders of RRD.

 

15


Table of Contents
Q: What will I receive in the Distribution?

 

A: Holders of RRD common stock will receive a distribution of [●] share(s) of our common stock for every [●] share(s) of RRD common stock held by them on the record date. As a result of the Distribution, your proportionate interest in RRD will not change. For a more detailed description, see “The Separation and the Distribution.”

 

Q: What is the record date for the Distribution?

 

A: Record ownership will be determined as of the close of business, New York City time, on [●], 2016, or the record date. The person in whose name shares of RRD common stock are registered at the close of business on the record date is the person to whom shares of Donnelley Financial’s common stock will be issued in the Distribution. As described below, RRD common stock will not trade on an ex-dividend basis with respect to our common stock and, as a result, if a record holder of RRD common stock sells those shares after the record date and on or prior to the Distribution Date, the seller will be obligated to deliver to the purchaser the shares of our common stock that are issued in respect of the transferred RRD common stock.

 

Q: Where can I find more information about LSC and the distribution of LSC common stock?

 

A: As a stockholder of RRD, you will receive a separate information statement describing the spin-off of RRD’s publishing and retail-centric print services and office products company, LSC. That information statement will describe the business and financial condition of LSC. This Information Statement relates only to the distribution of Donnelley Financial’s common stock to RRD’s stockholders.

 

Q: When will the Separation and the Distribution occur?

 

A: We expect that shares of our common stock will be distributed by the distribution agent, on behalf of RRD, effective at 12:01 a.m. on [●], 2016, or the Distribution Date. Various steps of the Separation will occur prior to the Distribution, which is the final step of the Separation.

 

Q: What will the relationship between RRD, LSC and us be following the Separation?

 

A: Following the Separation, we will be a public company, LSC will be a public company and RRD will be a public company. RRD may retain up to a 20% continuing stock ownership interest in each of LSC and us. In connection with the Separation, we, RRD and LSC will enter into a Separation and Distribution Agreement and several other agreements for the purpose of accomplishing the Separation, including the Distribution of our common stock to RRD’s common stockholders. These agreements also will govern our relationship with RRD and LSC with respect to pre-Separation matters and provide for the allocation of employee benefit, tax, litigation and other liabilities and obligations attributable to periods prior to the Separation. The Separation and Distribution Agreement will provide that we, RRD and LSC agree to provide each other with appropriate indemnities with respect to liabilities arising out of the businesses being distributed and retained by RRD. See “Certain Relationships and Related Party Transactions.” These agreements will also include arrangements with respect to transition services under Transition Services Agreements and a number of agreements with respect to ongoing commercial relationships. To the extent RRD retains any of our common stock following the Distribution, we will also enter into a Stockholder and Registration Rights Agreement with RRD pursuant to which, among other things, we will agree that, upon the request of RRD, we will use our reasonable best efforts to effect the registration, under applicable securities laws, of any shares of common stock retained by RRD. We will also enter into a Tax Disaffiliation Agreement, a Patent, Copyright and Trade Secret Assignment and License Agreement, a Trademark Assignment and License Agreement, and a Data Rights Assignment and License Agreement. We describe these agreements in more detail under “Certain Relationships and Related Party Transactions—Separation Transactions” included elsewhere in this Information Statement.

 

16


Table of Contents
Q: What does RRD intend to do with any shares of Donnelley Financial common stock that it retains?

 

A: RRD expects to dispose of any of the Donnelley Financial common stock that it retains after the Distribution within the 12-month period following the Distribution. Such disposition could include one or more subsequent exchanges for debt, or otherwise using the common stock to satisfy RRD’s outstanding obligations.

 

Q: How will RRD vote any shares of Donnelley Financial common stock that it retains?

 

A: RRD will agree to vote any shares of Donnelley Financial common stock that it retains in proportion to the votes cast by Donnelley Financial’s other stockholders and to grant Donnelley Financial a proxy with respect to such shares. For additional information see “Certain Relationships and Related Party Transactions—Separation Transactions—Stockholder and Registration Rights Agreement” included elsewhere in this Information Statement.

 

Q: What do I have to do to participate in the Distribution?

 

A: No action is required on your part and no stockholder vote is required in order to effect the Separation or Distribution. Stockholders of RRD on the record date for the Distribution are not required to pay any cash or deliver any other consideration, including any shares of RRD common stock, for the shares of our common stock to be distributed to them in the Distribution. You are not being asked to vote on any matter at this time, nor is any proxy being solicited from you in connection with the Separation or Distribution.

 

Q: If I sell, on or before the Distribution Date, shares of RRD common stock that I held on the record date for the Distribution, am I still entitled to receive shares of Donnelley Financial common stock distributable with respect to such shares of RRD common stock?

 

A: No. No ex-dividend market will be established for our common stock until the first trading day following the Distribution Date. Therefore, if you own shares of RRD common stock on the record date and thereafter sell those shares on or prior to the Distribution Date, you will also be selling the shares of our common stock that would have been distributed to you in the Distribution with respect to the shares of RRD common stock you sell. Conversely, a person who purchases shares of RRD common stock after the record date and on or prior to the Distribution Date will be entitled to receive from the seller of those shares the shares of our common stock issued in the Distribution with respect to the transferred RRD common stock.

 

Q: How will fractional shares be treated in the Distribution?

 

A: If you would be entitled to receive a fractional share of our common stock in the Distribution, you will instead receive a cash payment. See “The Separation and the Distribution—Manner of Effecting the Distribution” for an explanation of how the cash payments will be determined.

 

Q: How will RRD distribute shares of Donnelley Financial common stock to me?

 

A: Holders of shares of RRD common stock on the record date will receive shares of our common stock in book-entry form. See “The Separation and the Distribution—Manner of Effecting the Distribution” for a more detailed explanation.

 

Q: What is the reason for the Separation?

 

A: The RRD Board believes that the creation of these three independent businesses, RRD, LSC and Donnelley Financial, will deliver the following strategic and financial benefits:

 

    allows each business to focus on its distinct strategic priorities, driving opportunities to accelerate growth and enhance long-term value;

 

17


Table of Contents
    permits even more focused brand strategy to support each business’s marketing plan;

 

    provides each business with an independent equity structure that will afford it direct access to the capital markets and facilitate the ability of each company to capitalize on its growth opportunities and effect future acquisitions;

 

    facilitates incentive compensation arrangements for employees of each business more directly tied to the performance of the relevant company’s business and may enhance employee hiring and retention by, among other things, improving the alignment of management and employee incentives with performance and growth objectives;

 

    allows investors to separately value each business based on their unique investment identities, including the merits, performance and future prospects of their respective businesses. The Separation will also provide investors with three distinct and targeted investment opportunities;

 

    gives greater flexibility to execute tailored business strategies and compete in evolving markets;

 

    provides tailored capital structures reflective of each business’s financial and growth profiles; and

 

    enables each business to concentrate its financial resources solely on its own operations, providing greater flexibility to invest capital in its business in a time and manner appropriate for its distinct strategy and business needs and facilitate a more efficient allocation of capital.

 

Q: What are the federal income tax consequences to me of the Distribution?

 

A: It is a condition to the Distribution that RRD receive (i) a private letter ruling from the IRS satisfactory to the RRD Board regarding certain U.S. federal income tax matters relating to the Distribution and related transactions and (ii) an opinion of Sullivan & Cromwell LLP, in form and substance satisfactory to the RRD Board, regarding the U.S. federal income tax treatment of the Distribution and certain related transactions, as transactions that are generally tax-free for U.S. federal income tax purposes under Sections 355 and 368(a)(1)(D) of the Code. Assuming that the Distribution, together with certain related transactions, so qualifies for U.S. federal income tax purposes, no gain or loss will be recognized by you, and no amount will be included in your income, upon the receipt of shares of Donnelley Financial common stock pursuant to the Distribution. You will, however, recognize gain or loss for U.S. federal income tax purposes with respect to cash received in lieu of fractional shares of Donnelley Financial common stock. The opinion and the private letter ruling will rely on factual representations and reasonable assumptions, which if incorrect or inaccurate may jeopardize the ability to rely on such opinion and private letter ruling. The opinion will not be binding on the IRS or the courts. You should consult your own tax advisor as to the particular consequences of the Distribution to you, including the applicability and effect of any U.S. federal, state and local tax laws, as well as any foreign tax laws. For more information regarding the material U.S. federal income tax consequences of the Distribution, see the section entitled “The Separation and the Distribution—Material U.S. Federal Income Tax Consequences of the Distribution.”

 

Q: Does Donnelley Financial intend to pay cash dividends?

 

A: Following the Separation, the timing, declaration, amount and payment of any future dividends to Donnelley Financial stockholders will fall within the discretion of our Board. See “Risk Factors—Risks Relating to Our Common Stock and the Securities Market—We cannot assure you that we will pay dividends on our common stock, and our indebtedness could limit our ability to pay dividends on our common stock” and “Dividend Policy.”

 

Q: How will Donnelley Financial common stock trade?

 

A: There is not currently a public market for our common stock. We will apply to list our common stock on [●] under the symbol “DFIN”. It is anticipated that trading will commence on a when-issued basis prior to the Distribution. On the effective date of the Distribution, when-issued trading in respect of our common stock will end and regular-way trading will begin.

 

18


Table of Contents
Q: Will the Separation and Distribution affect the trading price of my RRD common stock?

 

A: Yes. After the Separation and Distribution, the trading price of RRD common stock may be lower than the trading price of RRD common stock immediately prior to the Separation and Distribution. Moreover, until the market has evaluated the operations of RRD without the operations of its financial communications and data services businesses, which will be operated by us following the Distribution, and its publishing and retail-centric print services and office products businesses, which will be operated by LSC following the Separation, the trading price of RRD common stock may fluctuate significantly. RRD believes that the Separation offers its stockholders the greatest long-term value. However, the combined trading prices of RRD common stock, Donnelley Financial common stock and LSC common stock after the Separation may be lower than the trading price of RRD common stock prior to the Separation. See “Risk Factors,” beginning on page 20.

 

Q: Do I have appraisal rights?

 

A: No. Holders of RRD common stock are not entitled to appraisal rights in connection with the Distribution.

 

Q: Who is the transfer agent for Donnelley Financial common stock?

 

A: [●].

 

Q: Where can I get more information?

 

A: If you have questions relating to the mechanics of the Distribution, you should contact the distribution agent:

[●].

Before the Distribution, if you have questions relating to the Distribution, you should contact:

R. R. Donnelley & Sons Company

Investor Relations Department

35 West Wacker Drive, Chicago, Illinois 60601

Telephone: 1-800-742-4455

Website: www.investor.rrd.com

After the Distribution, if you have questions relating to Donnelley Financial, you should contact:

Donnelley Financial Solutions, Inc.

Investor Relations Department

35 West Wacker Drive, Chicago, Illinois 60601

Telephone: [●]

Website: [●]

 

19


Table of Contents

RISK FACTORS

You should carefully consider the following risk factors and all the other information contained in this Information Statement in evaluating us and our common stock.

Risks Relating to Our Business

A significant part of our business is derived from the use of our products and services in connection with financial and strategic business transactions. Economic trends that affect the volume of these transactions may negatively impact the demand for our products and services.

A significant portion of our net sales depends on the purchase of our products and use of our services by parties involved in global capital markets (GCM) compliance and transactions. As a result, our business is largely dependent on the global market for IPOs, secondary offerings, mergers and acquisitions, public and private debt offerings, leveraged buyouts, spinouts, bankruptcy and claims processing and other transactions. These transactions are often tied to economic conditions and dependent upon the performance of the overall economy, and the resulting volume of these types of transactions drives demand for our products and services. Downturns in the financial markets, global economy or in the economies of the geographies in which we do business and reduced equity valuations all create risks that could negatively impact our business. For example, in the past, economic volatility has led to a decline in the financial condition of a number of our clients and led to the postponement of their capital markets transactions. To the extent that there is continued volatility, we may face increasing volume pressure. Furthermore, our offerings for global investment markets (GIM) clients can be affected by fluctuations in the inflow and outflow of money into investment management funds which determines the number of new funds that are opened, as well as, closed. As a result, we are not able to predict the impact any potential worsening of macroeconomic conditions could have on our results of operations. The level of activity in the financial communications services industry, including the financial transactions and related compliance needs our products and services are used to support, is sensitive to many factors beyond our control, including interest rates, regulatory policies, general economic conditions, our clients’ competitive environments, business trends, terrorism and political change. In addition, a weak economy could hinder our ability to collect amounts owed by clients. Failure of our clients to pay the amounts owed to us, or to pay such amounts in a timely manner, may increase our exposure to credit risks and result in bad debt write-offs. Unfavorable conditions or changes in any of these factors could negatively impact our results of operations, financial position and cash flow.

The quality of our customer support and services offerings is important to our clients, and if we fail to offer high quality customer support and services, clients may not use our solutions and our net sales may decline.

A high level of customer support is critical for the successful marketing and sale of our solutions. If we are unable to provide a level of customer support and service to meet or exceed the expectations of our clients, we could experience a loss of clients and market share, a failure to attract new clients, including in new geographic regions and increased service and support costs and a diversion of resources. Any of these results could negatively impact our results of operations, financial position and cash flow.

A substantial part of our business depends on clients continuing their use of our products and services. Any decline in our client retention would harm our future operating results.

We do not have long term contracts with most of our GCM and GIM clients, and therefore rely on their continued use of our products and services, particularly for compliance related services. As a result, client retention, particularly during periods of declining transactional volume, is an important part of our strategic business plan. There can be no assurance that our clients will continue to use our products and services to meet their ongoing needs, particularly in the face of competitors’ products and services offerings. Our client retention rates may decline due to a variety of factors, including:

 

    our inability to demonstrate to our clients the value of our solutions;

 

20


Table of Contents
    the price, performance and functionality of our solutions;

 

    the availability, price, performance and functionality of competing products and services;

 

    our clients’ ceasing to use or anticipating a declining need for our services in their operations;

 

    consolidation in our client base;

 

    the effects of economic downturns and global economic conditions; or

 

    reductions in our clients’ spending levels.

If our retention rates are lower than anticipated or decline for any reason, our net sales may decrease and our profitability may be harmed, which could negatively impact our results of operations, financial position and cash flow.

Our business may be adversely affected by new technologies enabling clients to produce and file documents on their own.

The Company’s business may be adversely affected as clients seek out opportunities to produce and file regulatory documentation on their own and begin to implement technologies that assist them in this process. For example, clients and their financial advisors have increasingly relied on web-based services which allow clients to autonomously file and distribute Exchange Act reports, prospectuses and other materials as a replacement for using our EDGAR filing services. If technologies are further developed to provide our clients with the ability to autonomously produce and file documents to meet their regulatory obligations, and we do not develop products or provide services to compete with such new technologies, our business may be adversely affected by those clients who choose alternative solutions, including self-serving or filing themselves.

Our performance and growth depend on our ability to generate client referrals and to develop referenceable client relationships that will enhance our sales and marketing efforts.

We depend on users of our solutions to generate client referrals for our services. We depend in part on the financial institutions, law firms and other third parties who use our products and services to recommend our solutions to their client base, which allows us to reach a larger client base than we can reach through our direct sales and internal marketing efforts. For instance, a portion of our net sales from GCM clients is derived from referrals by investment banks, financial advisors and law firms that have utilized our services in connection with prior transactions. These referrals are an important source of new clients for our services.

A decline in the number of referrals we receive could require us to devote substantially more resources to the sales and marketing of our services, which would increase our costs, potentially lead to a decline in our net sales, slow our growth and negatively impact our results of operations, financial position and cash flow.

Following the Distribution, we will no longer operate as part of a globally diversified printing company and therefore may be more vulnerable to adverse events and trends affecting our business segments.

Following the Distribution, our business will focus on financial communication services. As a more diversified company, RRD has historically been insulated against adverse events and trends in any particular region or with respect to any particular business line. After separating from RRD, however, we may be more susceptible to adverse economic climate, financial market performance, regulations, and other adverse events because of the smaller scale and less diversified nature of our business.

We will encounter the risks that currently face the financial communications services components of RRD’s business. In particular, market volatility resulting from unfavorable economic conditions could negatively impact our GCM transactional net sales by reducing transactional activity and our GIM net sales by reducing the number of investment management funds and therefore, the number of our GIM clients. Our International segment is particularly susceptible to capital market volatility as most of our International business is capital markets transaction focused.

 

21


Table of Contents

The highly competitive market for our products and services and industry fragmentation may continue to create adverse price pressures.

The financial communications services industry is highly competitive with relatively low barriers to entry, and the industry remains highly fragmented in North America and internationally. Management expects that competition will increase from existing competitors, as well as new and emerging entrants. Additionally, as we expand our product and service offerings, we may face competition from new and existing competitors. As a result, competition may lead to additional pricing pressure on our products and services, which could negatively impact our results of operations, financial position and cash flow.

A failure to adapt to technological changes to address the changing demands of clients may adversely impact our business, and if we fail to successfully develop, introduce or integrate new services or enhancements to our products and services platforms, systems or applications, Donnelley Financial’s reputation, net sales and operating income may suffer.

Our ability to attract new clients and increase sales to existing clients will depend in large part on our ability to enhance and improve our existing products and services platforms, including our application solutions, and to introduce new functionality either by acquisition or internal development. Our operating results would suffer if our innovations are not responsive to the needs of our clients, are not appropriately timed with market opportunities or are not brought to market effectively. In addition, it is possible that our assumptions about the features that we believe will drive purchasing decisions for our potential clients or renewal decisions for our existing clients could be incorrect. In the past, we have experienced delays in the planned release dates of new products and services and upgrades to such products and services. There can be no assurance that new products or services, or upgrades to our products or services, will be released on schedule or that, when released, they will not contain defects as a result of poor planning, execution or other factors during the product development lifecycle. If any of these situations were to arise, we could suffer adverse publicity, damage to our reputation, loss of net sales, delay in market acceptance or claims by clients brought against us. Moreover, upgrades and enhancements to our platforms may require substantial investment and there can be no assurance that our investments will help us achieve or sustain a durable competitive advantage in our products and services offerings. If clients do not widely adopt our solutions or new innovations to our solutions, we may not be able to justify the investments we have made. If we are unable to develop, license or acquire new solutions or enhancements to existing services on a timely and cost-effective basis, or if our new or enhanced solutions do not achieve market acceptance, our business, results of operations and financial condition will be materially negatively impacted.

Undetected errors or failures found in our products and services may result in loss of or delay in market acceptance of our products and services that could seriously harm our business.

Our products and services may contain undetected errors or scalability limitations at any point in their lives, but particularly when first introduced or as new versions are released. We frequently release new versions of our products and different aspects of our platform are in various stages of development. Despite testing by us and by current and potential clients, errors may not be found in new products and services until after commencement of commercial availability or use, resulting in a loss of or a delay in market acceptance, damage to our reputation, client dissatisfaction and reductions in net sales and margins, any of which could negatively impact our business.

Changes in the rules and regulations to which clients or potential clients are subject may impact demand for our products and services.

Many of our clients are subject to rules and regulations requiring certain printed or electronic communications governing the form, content and delivery methods of such communications. Changes in these regulations may impact clients’ business practices and could reduce demand for our products and services. Changes in such regulations could eliminate the need for certain types of communications altogether or such changes may impact the quantity or format of communications.

 

22


Table of Contents

Our failure to maintain the confidentiality, integrity and availability of our systems, software and solutions could seriously damage our reputation and affect our ability to retain clients and attract new business.

Maintaining the confidentiality, integrity and availability of our systems, software and solutions is an issue of critical importance for us and for our clients and users who rely on our systems to prepare regulatory filings and store and exchange large volumes of information, much of which is proprietary, confidential and may constitute material nonpublic information for our clients. Inadvertent disclosure of the information maintained on our systems due to human error, breach of our systems through hacking or cybercrime or a leak of confidential information due to employee misconduct, could seriously damage our reputation and could cause significant reputational harm for our clients. Techniques used to obtain unauthorized access to, or to sabotage, systems change frequently and generally are not recognized until launched against a target. Like all software solutions, our software may be vulnerable to these types of attacks. An attack of this type could disrupt the proper functioning of our software solutions, cause errors in the output of our clients’ work, allow unauthorized access to sensitive, proprietary or confidential information of ours or our clients and other undesirable or destructive outcomes. Furthermore, our systems allow us to share information that may be confidential in nature to our clients across our offices worldwide. This design allows us to increase global reach for our clients and increase our responsiveness to client demands, but also increases the risk of a security breach or a leak of such information because it allows additional points of access to information by increasing the number of employees and facilities working on certain jobs. In addition, our systems leverage third party outsourcing arrangements, which expedites our responsiveness but exposes information to additional access points. If an actual or perceived information leak or breach of our security were to occur, our reputation could suffer, clients could stop using our products and services and we could face lawsuits and potential liability, any of which could cause our financial performance to be negatively impacted. Though we maintain professional liability insurance that includes coverage if a cybersecurity incident were to occur, there can be no assurance that insurance coverage will be available, responsive, or that available coverage will be sufficient to cover losses and claims related to any cybersecurity incidents we may experience.

A number of core processes, such as software development, sales and marketing, client service and financial transactions, rely on our IT, infrastructure and applications. Defects or malfunctions in our IT infrastructure and applications could cause our products and services offerings not to perform as our clients expect, which could harm our reputation and business. In addition, malicious software, sabotage and other cybersecurity breaches of the types described above could cause an outage of our infrastructure, which could lead to a substantial denial of service and ultimately downtimes, recovery costs and client claims, any of which could negatively impact our results of operations, financial position and cash flow.

Some of our systems and services are developed by third parties or supported by third party hardware and software and our business and reputation could suffer if these third party systems and services fail to perform properly or are no longer available to us.

Some of our systems and services are developed by third parties or rely on hardware purchased or leased and software licensed from third parties. These systems and services, or the hardware and software required to run our existing systems and services, may not continue to be available on commercially reasonable terms or at all. Any loss of the right to use any of this hardware or software could result in delays in the provisioning of our services, which could negatively affect our business until equivalent technology is either developed by us or, if available, is identified, obtained and integrated. In addition, it is possible that our hardware vendors or the licensors of third party software could increase the prices they charge, which could have an adverse impact on our business, operating results and financial condition. Further, changing hardware vendors or software licensors could detract from management’s ability to focus on the ongoing operations of our business or could cause delays in the operations of our business.

 

23


Table of Contents

Additionally, third party software underlying our services can contain undetected errors or bugs. We may be forced to delay commercial release of our services until any discovered problems are corrected and, in some cases, may need to implement enhancements or modifications to correct errors that we do not detect until after deployment of our services.

Adverse credit market conditions may limit our ability to obtain future financing.

We expect to put in place an appropriate capital structure in connection with the Distribution. Following that time, we may, from time to time, depend on access to credit markets. Uncertainty and volatility in global financial markets may cause financial markets institutions to fail or may cause lenders to hoard capital and reduce lending. As a result, we may not obtain financing on terms and conditions that are favorable to us, or at all.

Fluctuations in the costs and availability of paper, ink, energy and other raw materials may adversely impact us.

Increases in the costs of these inputs may increase our costs and we may not be able to pass these costs on to clients through higher prices. Moreover, rising raw materials’ costs, and any consequent impact on our pricing, could lead to a decrease in demand for our products and services.

If we are unable to protect our proprietary technology and other rights, the value of our business and our competitive position may be impaired.

If we are unable to protect our intellectual property, our competitors could use our intellectual property to market products and services similar to ours, which could decrease demand for our services. We rely on a combination of patents, trademarks, licensing and other proprietary rights laws, as well as third party nondisclosure agreements and other contractual provisions and technical measures, to protect our intellectual property rights. These protections may not be adequate to prevent our competitors from copying or reverse-engineering our technology and services to create similar offerings. Additionally, any of our pending or future patent applications may not be issued with the scope of protection we seek, if at all. The scope of patent protection, if any, we may obtain from our patent applications is difficult to predict and our patents may be found invalid, unenforceable or of insufficient scope to prevent competitors from offering similar services. Our competitors may independently develop technologies that are substantially equivalent or superior to our technology. To protect our proprietary information, we require employees, consultants, advisors, independent contractors and collaborators to enter into confidentiality agreements and maintain policies and procedures to limit access to our trade secrets and proprietary information. These agreements and the other actions we take may not provide meaningful protection for our proprietary information or know-how from unauthorized use, misappropriation or disclosure. Further, existing patent laws may not provide adequate or meaningful protection in the event competitors independently develop technology, products or services similar to ours. Even if the laws governing intellectual property rights provide protection, we may have insufficient resources to take the legal actions necessary to protect our interests. In addition, our intellectual property rights and interests may not be afforded the same protection under the laws of foreign countries as they are under the laws of the United States.

We have in the past acquired and intend in the future to acquire other businesses, and we may be unable to successfully integrate the operations of these businesses and may not achieve the cost savings and increased net sales anticipated as a result of these acquisitions.

Achieving the anticipated benefits of acquisitions will depend in part upon our ability to integrate these businesses in an efficient and effective manner. The integration of companies that have previously operated independently may result in significant challenges, and we may be unable to accomplish the integration smoothly or successfully. In particular, the coordination of geographically dispersed organizations with differences in corporate cultures and management philosophies may increase the difficulties of integration. The integration of

 

24


Table of Contents

acquired businesses may also require the dedication of significant management resources, which may temporarily distract management’s attention from the day-to-day operations of the Company. In addition, the process of integrating operations may cause an interruption of, or loss of momentum in, the activities of one or more of the Company’s businesses and the loss of key personnel from the Company or the acquired businesses. Further, employee uncertainty and lack of focus during the integration process may disrupt the businesses of the Company or the acquired businesses. The Company’s strategy is, in part, predicated on the Company’s ability to realize cost savings and to increase net sales through the acquisition of businesses that add to the breadth and depth of the Company’s products and services. Achieving these cost savings and net sales increases is dependent upon a number of factors, many of which are beyond the Company’s control. In particular, the Company may not be able to realize the benefits of more comprehensive product and service offerings, anticipated integration of sales forces, asset rationalization and systems integration.

Our business is dependent upon brand recognition and reputation, and the failure to maintain or enhance our brand or reputation would likely have an adverse effect on our business.

Our brand recognition and reputation are important aspects of our business. Maintaining and further enhancing our brands and reputation will be important to retaining and attracting clients for our products. We also believe that the importance of our brand recognition and reputation for products will continue to increase as competition in the market for our products and industry continues to increase. Our success in this area will be dependent on a wide range of factors, some of which are out of our control, including the efficacy of our marketing efforts, our ability to retain existing and obtain new clients and strategic partners, human error, the quality and perceived value of our products and services, actions of our competitors and positive or negative publicity. Damage to our reputation and loss of brand equity may reduce demand for our products and services and negatively impact our results of operations, financial position and cash flow.

We may be unable to hire and retain talented employees, including management.

Our success depends, in part, on our general ability to attract, develop, motivate and retain highly skilled employees. The loss of a significant number of our employees or the inability to attract, hire, develop, train and retain additional skilled personnel could have a serious negative effect on our business. We believe our ability to retain our client base and to attract new clients is directly related to our sales force and client service personnel, and if we cannot retain these key employees, our business could suffer. In addition, many members of our management have significant industry experience that is valuable to our competitors. We expect that our executive officers will have non-solicitation agreements contractually prohibiting them from soliciting our clients and employees within a specified period of time after they leave Donnelley Financial. If one or more members of our senior management team leave and cannot be replaced with a suitable candidate quickly, we could experience difficulty in managing our business properly, which could negatively impact our results of operations, financial position and cash flow.

The trend of increasing costs to provide health care and other benefits to our employees and retirees may continue.

We provide health care and other benefits to both employees and retirees. For many years, costs for health care have increased more rapidly than general inflation in the U.S. economy. If this trend in health care costs continues, our cost to provide such benefits could increase, adversely impacting our profitability. Changes to health care regulations in the U.S. and internationally may also increase our cost of providing such benefits.

Changes in market conditions, changes in discount rates, or lower returns on assets may increase required pension and other post-retirement benefits plan contributions in future periods.

The funded status of our pension and other post-retirement benefits plans is dependent upon many factors, including returns on invested assets and the level of certain interest rates. As experienced in prior years, declines

 

25


Table of Contents

in the market value of the securities held by the plans coupled with historically low interest rates have substantially reduced, and in the future could further reduce, the funded status of the plans. These reductions may increase the level of expected required pension and other post-retirement benefits plan contributions in future years. Various conditions may lead to changes in the discount rates used to value the year-end benefit obligations of the plans, which could partially mitigate, or worsen, the effects of lower asset returns. If adverse conditions were to continue for an extended period of time, our costs and required cash contributions associated with pension and other post-retirement benefits plans may substantially increase in future periods.

We are exposed to risks related to potential adverse changes in currency exchange rates.

We are exposed to market risks resulting from changes in the currency exchange rates of the currencies in the countries in which we do business. Although operating in local currencies may limit the impact of currency rate fluctuations on the operating results of our non-U.S. activities, fluctuations in such rates may affect the translation of these results into our financial statements. To the extent borrowings, sales, purchases, net sales and expenses or other transactions are not in the applicable local currency, we may enter into foreign currency spot and forward contracts to hedge the currency risk. Management cannot be sure, however, that our efforts at hedging will be successful, and such efforts could, in certain circumstances, lead to losses.

There are risks associated with operations outside the United States.

We have operations outside the United States. We work with capital markets clients around the world, and in 2015 our International segment accounted for 14% of our combined net sales. Our operations outside of the United States are primarily focused in Asia, Europe, Latin America, Australia and Canada. As a result, we are subject to the risks inherent in conducting business outside the United States, including:

 

    costs of customizing products and services for foreign countries;

 

    difficulties in managing and staffing international operations;

 

    increased infrastructure costs including legal, tax, accounting and information technology;

 

    reduced protection for intellectual property rights in some countries;

 

    potentially greater difficulties in collecting accounts receivable, including currency conversion and cash repatriation from foreign jurisdictions;

 

    increased licenses, tariffs and other trade barriers;

 

    potentially adverse tax consequences;

 

    increased burdens of complying with a wide variety of foreign laws, including employment-related laws, which may be more stringent than U.S. laws;

 

    unexpected changes in regulatory requirements; and

 

    political and economic instability.

We cannot be sure that our investments or operations in other countries will produce desired levels of net sales or that one or more of the factors listed above will not affect our global business.

Risks Relating to the Separation and the Distribution

Because there has not been any public market for our common stock, the market price and trading volume of our common stock may be volatile and you may not be able to resell your shares at or above the initial market price of our stock following the Distribution.

Prior to the Distribution, we will not have had any securities traded on any exchange and, as a result, have no trading history. We cannot predict the extent to which investors’ interest will lead to a liquid trading market or

 

26


Table of Contents

whether the market price of our common stock will be volatile. The market price of our common stock could fluctuate significantly for many reasons, including in response to the risk factors listed in this Information Statement or for reasons unrelated to our specific performance, such as reports by industry analysts, investor perceptions, or negative developments for our clients, competitors or suppliers, as well as general economic and industry conditions.

The combined post-Separation value of RRD, LSC and Donnelley Financial shares may not equal or exceed the pre-Separation value of RRD shares.

After the Distribution, RRD common stock will continue to be publicly traded under the symbol “RRD”. We will apply to list Donnelley Financial common stock on [●] under the symbol “DFIN” and LSC is expected to apply to list its common stock on [●] under the symbol “LKSD”. We cannot assure you that the combined trading prices of RRD common stock, Donnelley Financial common stock and LSC common stock after the Separation, as adjusted for any changes in the combined capitalization of these companies or any ownership interest in Donnelley Financial or LSC retained by RRD, will be equal to or greater than the trading price of RRD common stock prior to the Separation. Until the market has fully evaluated the business of RRD without the business of Donnelley Financial and LSC, the price at which RRD common stock trades may fluctuate significantly. Similarly, until the market has fully evaluated the business of Donnelley Financial and LSC, the price at which shares of Donnelley Financial common stock and LSC common stock, respectively, trade may fluctuate significantly.

Shares of Donnelley Financial’s common stock are or will be eligible for future sale, and substantial sales of such shares may cause the price of Donnelley Financial’s common stock to decline.

Any sales of substantial amounts of Donnelley Financial’s common stock in the public market or the perception that such sales might occur, in connection with the Distribution or otherwise, may cause the market price of Donnelley Financial’s common stock to decline. Upon completion of the Distribution, Donnelley Financial expects that it will have an aggregate of approximately [●] shares of its common stock issued and outstanding based upon the number of shares of RRD common stock issued and outstanding on [●], 2016. These shares will be freely tradable without restriction or further registration under the Securities Act, unless the shares are owned by one of Donnelley Financial’s “affiliates,” as that term is defined in Rule 405 under the Securities Act. Donnelley Financial is unable to predict whether large amounts of its common stock will be sold in the open market following the Distribution. Donnelley Financial is also unable to predict whether a sufficient number of buyers would be in the market at that time.

In connection with the Distribution, RRD may retain up to 20% of Donnelley Financial’s total shares outstanding. RRD expects to dispose of any of the Donnelley Financial common stock that it retains after the Distribution within the 12-month period following the Distribution. Such disposition could include one or more subsequent exchanges of Donnelley Financial common stock for debt of RRD, or otherwise using the common stock to satisfy RRD’s outstanding obligations. To the extent RRD retains any of our common stock following the Distribution, RRD and Donnelley Financial will enter into a Stockholder and Registration Rights Agreement wherein Donnelley Financial will agree, upon the request of RRD, to use reasonable best efforts to effect a registration under applicable federal and state securities laws of any shares of Donnelley Financial’s common stock retained by RRD. See “Certain Relationships and Related Party Transactions—Separation Transactions—Stockholder and Registration Rights Agreement” for additional information.

Dispositions of significant amounts of Donnelley Financial’s common stock or the perception in the market that this will occur may result in the lowering of the market price of Donnelley Financial’s common stock.

The Distribution could result in significant tax liability.

It is a condition to the Distribution that RRD receive (i) a private letter ruling from the IRS satisfactory to the RRD Board regarding certain U.S. federal income tax matters relating to the Distribution and related

 

27


Table of Contents

transactions and (ii) an opinion of Sullivan & Cromwell LLP, in form and substance satisfactory to the RRD Board, regarding the U.S. federal income tax treatment of the Distribution and certain related transactions, as transactions that are generally tax-free for U.S. federal income tax purposes under Sections 355 and 368(a)(1)(D) of the Code. Assuming that the Distribution, together with certain related transactions, so qualifies for U.S. federal income tax purposes, no gain or loss will be recognized by you, and no amount will be included in your income, upon the receipt of shares of Donnelley Financial common stock pursuant to the Distribution. You will, however, recognize gain or loss for U.S. federal income tax purposes with respect to cash received in lieu of fractional shares of Donnelley Financial common stock. The opinion and the private letter ruling will rely on factual representations and reasonable assumptions, which if incorrect or inaccurate may jeopardize the ability to rely on such opinion and private letter ruling. The opinion will not be binding on the IRS or the courts. You should consult your own tax advisor as to the particular consequences of the Distribution to you, including the applicability and effect of any U.S. federal, state and local tax laws, as well as any foreign tax laws. For more information regarding the material U.S. federal income tax consequences of the Distribution, see the section entitled “The Separation and the Distribution—Material U.S. Federal Income Tax Consequences of the Distribution.”

If the Distribution does not qualify for tax-free treatment for U.S. federal income tax purposes, then, in general, RRD would recognize taxable gain in an amount equal to the excess of the fair market value of our common stock over RRD’s tax basis therein (i.e., as if it had sold our common stock in a taxable sale for its fair market value). In addition, the receipt by RRD stockholders of our common stock would be a taxable distribution, and each U.S. holder that participated in the Distribution would recognize a taxable distribution as if the U.S. holder had received a distribution equal to the fair market value of our common stock that was distributed to it, which generally would be treated first as a taxable dividend to the extent of RRD’s earnings and profits, then as a non-taxable return of capital to the extent of each U.S. holder’s tax basis in its RRD common stock, and thereafter as capital gain with respect to any remaining value. It is expected that the amount of any such taxes to RRD stockholders and RRD would be substantial. See “The Separation and the Distribution—Material U.S. Federal Income Tax Consequences of the Distribution.”

We may have a significant indemnity obligation to RRD if the Distribution is treated as a taxable transaction.

We will enter into a Tax Disaffiliation Agreement with RRD, which will set out each party’s rights and obligations with respect to deficiencies and refunds, if any, of federal, state, local or foreign taxes for periods before and after the Distribution and related matters, such as the filing of tax returns and the conduct of IRS and other audits. Pursuant to the Tax Disaffiliation Agreement, we will be required to indemnify RRD for losses and taxes of RRD resulting from the breach of certain covenants and for certain taxable gain recognized by RRD, including as a result of certain acquisitions of our stock or assets. If we are required to indemnify RRD under the circumstances set forth in the Tax Disaffiliation Agreement, we may be subject to substantial liabilities, which would materially adversely affect our financial position.

The tax rules applicable to the Distribution may restrict us from engaging in certain corporate transactions or from raising equity capital beyond certain thresholds for a period of time after the Distribution.

To preserve the tax-free treatment of the Distribution to RRD and its stockholders, under the Tax Disaffiliation Agreement with RRD, for the two-year period following the Distribution, we will be subject to restrictions with respect to:

 

    taking any action that would result in our ceasing to be engaged in the active conduct of our business, with the result that we are not engaged in the active conduct of a trade or business within the meaning of certain provisions of the Code;

 

    redeeming or otherwise repurchasing any of our outstanding stock, other than through certain stock purchases of widely held stock on the open market;

 

28


Table of Contents
    amending our Certificate of Incorporation (or other organizational documents) that would affect the relative voting rights of separate classes of our stock or would convert one class of our stock into another class of our stock;

 

    liquidating or partially liquidating;

 

    merging with any other corporation (other than in a transaction that does not affect the relative shareholding of our shareholders), selling or otherwise disposing of (other than in the ordinary course of business) our assets, or taking any other action or actions if such merger, sale, other disposition or other action or actions in the aggregate would have the effect that one or more persons acquire (or have the right to acquire), directly or indirectly, as part of a plan or series of related transactions, assets representing one-half or more our asset value;

 

    taking any other action or actions that in the aggregate would have the effect that one or more persons acquire (or have the right to acquire), directly or indirectly, as part of a plan or series of related transactions, stock of ours possessing (i) at least 50% of the total combined voting power of all classes of stock or equity interests of ours entitled to vote, or (ii) at least 50% of the total value of shares of all classes of stock or of the total value of all equity interests of ours, other than an acquisition of our shares in the Distribution solely by reason of holding RRD common stock (but not including such an acquisition if such RRD common stock, before such acquisition, was itself acquired as part of a plan (or series of related transactions) pursuant to which one or more persons acquire, directly or indirectly, shares of our stock meeting the voting and value threshold tests listed previously in this bullet); and

 

    taking any action that (or failing to take any action the omission of which) would be inconsistent with the Distribution qualifying as, or that would preclude the Distribution from qualifying as, a transaction that is generally tax-free to RRD and the holders of RRD common stock for U.S. federal income tax purposes.

These restrictions may limit our ability during such period to pursue strategic transactions of a certain magnitude that involve the issuance or acquisition of our stock or engage in new businesses or other transactions that might increase the value of our business. These restrictions may also limit our ability to raise significant amounts of cash through the issuance of stock, especially if our stock price were to suffer substantial declines, or through the sale of certain of our assets. For more information, see the sections entitled “The Separation and the Distribution—Material U.S. Federal Income Tax Consequences of the Distribution” and “Certain Relationships and Related Party Transactions—Separation Transactions—Tax Disaffiliation Agreement.”

We do not have an operating history as a public company.

In the past, our operations have been a part of RRD and RRD provided us with various financial, operational and managerial resources for conducting our businesses. Following the Distribution, we will maintain our own credit and banking relationships and perform our own financial and operational functions. We cannot assure you that we will be able to successfully put in place the financial, operational and managerial resources necessary to operate as a public company or that we will be able to be profitable doing so.

Our historical financial results included in our combined financial statements have been derived from consolidated financial statements and accounting records of RRD and may not be representative of our future results as a stand-alone financial company.

The historical financial information we have included in this Information Statement has been derived from the consolidated financial statements and accounting records of RRD and does not necessarily reflect what our financial position, results of operations or cash flow would have been had we been a separate, stand-alone company during the periods presented. Although RRD did account for Donnelley Financial’s business as a separate reporting unit of RRD’s Strategic Services segment, we were not operated as a separate, stand-alone company for the historical periods presented. The historical costs and expenses reflected in our combined

 

29


Table of Contents

financial statements include an allocation for certain corporate functions historically provided by RRD, including general corporate expenses and employee benefits. These allocations were based on what we, LSC and RRD considered to be reasonable reflections of the historical utilization levels of these services required in support of our business. The historical information does not necessarily indicate what our results of operations, financial position, cash flows or costs and expenses will be in the future. Our pro forma financial information set forth under “Unaudited Pro Forma Combined Financial Information” reflects changes to our funding and operations as a result of the Separation. However, there can be no assurances that this unaudited pro forma combined financial information will appropriately reflect our costs as a publicly traded company.

We may incur material costs and expenses as a result of our separation from RRD.

We may incur costs and expenses greater than those we currently incur as a result of our separation from RRD. These increased costs and expenses may arise from various factors, including financial reporting and costs associated with complying with federal securities laws (including compliance with the Sarbanes-Oxley Act of 2002, as amended (the Sarbanes-Oxley Act)). In addition, we expect to either maintain similar or have increased corporate and administrative costs and expenses to those we incurred or were allocated while part of RRD, even though following the Distribution, Donnelley Financial will be a smaller, stand-alone company. We cannot assure you that these costs will not be material to our business.

If, following the Distribution, we are unable to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act, or our internal control over financial reporting is not effective, the reliability of our financial statements may be questioned and our stock price may suffer.

Section 404 of the Sarbanes-Oxley Act requires any company subject to the reporting requirements of the U.S. securities laws to do a comprehensive evaluation of its and its consolidated subsidiaries’ internal control over financial reporting. To comply with this statute, we will be required to document and test our internal control procedures, our management will be required to assess and issue a report concerning our internal control over financial reporting, and our independent auditors will be required to issue an opinion on our internal controls over financial reporting. The rules governing the standards that must be met for management to assess our internal control over financial reporting are complex and require significant documentation, testing and possible remediation to meet the detailed standards under the rules. During the course of its testing, our management may identify material weaknesses or deficiencies which may not be remedied in time to meet the deadline imposed by the Sarbanes-Oxley Act. If our management cannot favorably assess the effectiveness of our internal control over financial reporting or our auditors identify material weaknesses in our internal controls, investor confidence in our financial results may weaken, and our stock price may suffer.

We may be unable to achieve some or all of the benefits that we expect to achieve from the Separation.

We believe that our Separation from RRD will, among other benefits, allow us to focus on our distinct strategic priorities; afford us direct access to the capital markets and facilitate our ability to capitalize on growth opportunities and effect future acquisitions utilizing our common stock; facilitate incentive compensation arrangements for our employees more directly tied to the performance of our business; and enable us to concentrate our financial resources solely on our own operations. However, we may be unable to achieve some or all of these benefits. For example, in order to prepare ourselves for the Separation, we are undertaking a series of strategic, structural and process realignment and restructuring actions within our operations. These actions may not provide the benefits we currently expect, and could lead to disruption of our operations, loss of, or inability to recruit, key personnel needed to operate and grow our businesses following the Separation, weakening of our internal standards, controls or procedures and impairment of our key client and supplier relationships. In addition, completion of the proposed Separation will require significant amounts of management’s time and effort, which may divert management’s attention from operating and growing our businesses. If we fail to achieve some or all of the benefits that we expect to achieve as an independent company, or do not achieve them in the time we expect, it could negatively impact our results of operations, financial position and cash flow.

 

30


Table of Contents

RRD or LSC may not satisfy their respective obligations under the Transition Services Agreements that will be entered into as part of the Separation, or we may not have necessary systems and services in place when the transition services terms expire.

In connection with the Separation, we expect to enter into Transition Services Agreements with each of RRD and LSC. See “Certain Relationships and Related Party Transactions.” These Transition Services Agreements will provide for the performance of services by each company for the benefit of the other for a period of time after the Separation. We will rely on RRD and LSC to satisfy their respective performance and payment obligations under these Transition Services Agreements. If RRD or LSC is unable to satisfy its respective obligations under these Transition Services Agreements, we could incur operational difficulties.

Further, if we do not have our own systems and services in place, or if we do not have agreements in place with other providers of these services when the term of a particular transition service terminates, we may not be able to operate our business effectively, which could negatively impact our results of operations, financial position and cash flow. We will create our own, or engage third parties to provide, systems and services to replace many of the systems and services RRD and LSC will initially provide. We may not be successful in effectively or efficiently implementing these systems and services or in transitioning data from RRD’s or LSC’s systems to our systems, as the case may be, which could disrupt our business and have a negative impact on our results of operations and financial condition. These systems and services may also be more expensive or less efficient than the systems and services RRD and LSC are expected to provide during the transition period.

We will incur substantial indebtedness in connection with the Separation and the degree to which we will be leveraged following the completion of the Distribution may materially and adversely affect our business, financial condition and results of operations.

We will incur substantial indebtedness in connection with the Separation. We have historically relied upon RRD for working capital requirements on a short-term basis and for other financial support functions. After the Distribution, we will not be able to rely on RRD’s earnings, assets or cash flow, and we will be responsible for managing our capital deployment, including servicing our own debt and obtaining and maintaining sufficient working capital.

Our ability to make payments on and to refinance our indebtedness, including the debt incurred in connection with the Separation, as well as any future debt that we may incur, will depend on our ability to generate cash in the future from operations, financings or asset sales. Our ability to generate cash is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. We may not generate sufficient funds to service our debt and meet our business needs, such as funding working capital or the expansion of our operations. If we are not able to repay or refinance our debt as it becomes due, we may be forced to take disadvantageous actions, including facility closure, staff reductions, reducing financing in the future for working capital, capital expenditures and general corporate purposes, selling assets or dedicating an unsustainable level of our cash flow from operations to the payment of principal and interest on our indebtedness, and restricting future capital return to stockholders. In addition, our ability to withstand competitive pressures could be impaired. The lenders who hold our debt could also accelerate amounts due in the event that we default, which could potentially trigger a default or acceleration of the maturity of our other debt.

In addition, our leverage could put us at a competitive disadvantage compared to our competitors who may be less leveraged. These competitors could have greater financial flexibility to pursue strategic acquisitions and secure additional financing for their operations. Our leverage could also impede our ability to withstand downturns in our industry or the economy in general.

 

31


Table of Contents

Risks Relating to Our Common Stock and the Securities Market

Substantial sales of our common stock may occur in connection with the Separation, which could cause our stock price to decline.

RRD stockholders receiving shares of our common stock in the Distribution generally may sell those shares immediately in the public market. RRD may retain up to 20% of our common stock, and may sell or transfer its shares in certain circumstances. It is possible that some RRD stockholders, including some of our larger stockholders, will sell our common stock received in the Distribution if, for reasons such as our business profile, market capitalization as an independent company or the size or rate of return of our dividend, we do not fit their investment objectives, or—in the case of index funds—we are not a participant in the index in which they are investing. The sales of significant amounts of our common stock relating to the above events or the perception in the market that such sales will occur may decrease the market price of our common stock.

We cannot assure you that we will pay dividends on our common stock, and our indebtedness could limit our ability to pay dividends on our common stock.

The timing, declaration, amount and payment of any future dividends to Donnelley Financial stockholders will fall within the discretion of our Board. Our Board’s decisions regarding the payment of future dividends will depend on many factors, including our financial condition, future prospects, earnings, capital requirements and debt service obligations, as well as legal requirements, regulatory constraints, industry practice and other factors that our Board deems relevant. In addition, the terms of the agreements governing our new debt that we expect to put in place in connection with the Separation or debt that we may incur in the future may limit or prohibit the payment of dividends. There can be no assurance that we will pay a dividend in the future or that we will continue to pay any dividend if we do commence paying dividends. Further, even if we do pay dividends, there can be no assurance that the total dividends you receive from us, LSC and RRD will equal or exceed the amount of the dividend currently paid by RRD.

Your percentage ownership in Donnelley Financial may be diluted in the future.

Your percentage ownership in Donnelley Financial may be diluted in the future because of equity securities we issue, either as consideration for acquisitions, in connection with capital raises or for equity awards that we expect to grant to our directors, officers and employees. Prior to the Separation, we expect to approve equity incentive plans that will provide for the grant of common stock-based equity awards to our directors, officers and other employees. We also may issue equity securities as consideration in an acquisition. Further, to the extent that Donnelley Financial raises additional capital through the sale of equity or convertible debt securities, existing ownership interests will be diluted, and the terms of such financings may include liquidation or other preferences that adversely affect the rights of existing stockholders. Any such transaction will dilute your ownership in Donnelley Financial.

 

32


Table of Contents

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

This Information Statement contains “forward-looking statements.” Words such as “anticipates,” “estimates,” “expects,” “projects,” “forecasts,” “intends,” “plans,” “continues,” “believes,” “may,” “will,” “goals” and variations of such words and similar expressions are intended to identify our forward-looking statements. Examples of forward-looking statements include, but are not limited to, statements, beliefs and expectations regarding the completion of the Separation and Distribution and 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 discussed in detail under “Risk Factors” in this Information Statement, that 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:

 

    the volatility of the global economy and financial markets, and its impact on transactional volume;

 

    failure to offer high quality customer support and services;

 

    the retention of existing, and continued attraction of additional clients and key employees;

 

    the growth of new technologies with which we may be able to adequately compete;

 

    our inability to maintain client referrals;

 

    vulnerability to adverse events as a result of becoming a stand-alone company following the Separation from RRD;

 

    the competitive market for our products and industry fragmentation affecting our prices;

 

    the ability to gain client acceptance of our new products and technologies;

 

    delay in market acceptance of our products and services due to undetected errors or failures found in our products and services;

 

    failure to maintain the confidentiality, integrity and availability of our systems, software and solutions;

 

    failure to properly use and protect client and employee information and data;

 

    the effect of a material breach of security or other performance issues of any of our or our vendors’ systems;

 

    factors that affect client demand, including changes in economic conditions, national or international regulations and clients’ budgetary constraints;

 

    our ability to access debt and the capital markets due to adverse credit market conditions;

 

    changes in the availability or costs of key materials (such as ink and paper) or in prices received for the sale of by-products;

 

    failure to protect our proprietary technology;

 

    failure to successfully integrate acquired businesses into our business;

 

    availability to maintain our brands and reputation;

 

    the retention of existing, and continued attraction of, key employees;

 

    the effects of operating in international markets, including fluctuations in currency exchange rates;

 

33


Table of Contents
    the effect of economic and political conditions on a regional, national or international basis;

 

    lack of market for our common stock;

 

    potential tax liability of the Distribution;

 

    lack of history as an operating company and costs associated with being an independent company;

 

    failure to achieve certain intended benefits of the Separation; and

 

    failure of RRD or LSC to satisfy their respective obligations under transition services agreements.

We disclaim and do not undertake any obligation to update or revise any forward-looking statement in this Information Statement, except as required by applicable law or regulation.

 

34


Table of Contents

THE SEPARATION AND THE DISTRIBUTION

The Separation and the Distribution

The Separation is a series of transactions by RRD which will result in three independent companies by spinning-off our Company, Donnelley Financial, a financial communications and data services company, and LSC, a publishing and retail-centric print services and office products company. On [●], 2016, the spun-off companies, LSC and Donnelley Financial will become separate public companies. RRD will continue as a global, customized multichannel communications management provider. In particular:

 

    Our Company, Donnelley Financial, is expected to consist of RRD’s current financial reporting unit of RRD’s Strategic Services segment.

 

    LSC is expected to consist of:

 

    substantially all of RRD’s current Publishing and Retail Services segment, as well as the office products reporting unit from RRD’s Variable Print segment;

 

    certain publishing and e-book services currently within the digital and creative solutions reporting unit of RRD’s Strategic Services segment;

 

    substantially all of the operations currently within the Europe reporting unit of RRD’s International segment;

 

    certain Mexican operations currently within the Latin America reporting unit of RRD’s International segment; and

 

    the co-mail and related list services operations currently within the logistics reporting unit of RRD’s Strategic Services segment.

 

    RRD is expected to consist of:

 

    its current Variable Print segment except for the office products reporting unit that will become part of LSC Communications;

 

    the logistics reporting unit within its current Strategic Services segment except for the operations that will become part of LSC Communications;

 

    the sourcing and digital and creative solutions reporting units within its current Strategic Services segment except for the operations that will become part of LSC Communications; and

 

    its current International segment except for substantially all of the Europe reporting unit and certain Mexican operations that will become part of LSC Communications.

As part of the Separation, RRD will distribute at least 80% of the outstanding shares of our common stock to the holders of RRD common stock and may retain up to 20% of our common stock. We refer to this distribution of securities as the Distribution. In the Distribution, each holder of RRD common stock will receive a distribution of [●] share(s) of our common stock for every [●] share(s) of RRD common stock held as of the close of business, New York City time, on [●], 2016, which will be the record date.

Prior to the completion of the Separation, RRD will undertake the Internal Reorganization. The Internal Reorganization will result in our Company, Donnelley Financial, owning the assets and liabilities relating to RRD’s current financial communications and data services business and LSC owning substantially all of the assets and liabilities of RRD’s current publishing and retail-centric print services and office products business. This Internal Reorganization will also result in RRD retaining the assets and liabilities associated with its customized multichannel communications management business. Some of these internal reorganization transactions have commenced and will continue until just prior to the Distribution.

 

35


Table of Contents

Reasons for the Separation

The creation of these three independent companies is expected to deliver the following strategic and financial benefits:

 

    allows each business to focus on its distinct strategic priorities, driving opportunities to accelerate growth and enhance long-term value;

 

    permits even more focused brand strategy to support each business’s marketing plan;

 

    provides each business with an independent equity structure that will afford it direct access to the capital markets and facilitate the ability of each company to capitalize on its growth opportunities and effect future acquisitions;

 

    facilitates incentive compensation arrangements for employees of each business more directly tied to the performance of the relevant company’s business and may enhance employee hiring and retention by, among other things, improving the alignment of management and employee incentives with performance and growth objectives;

 

    allows investors to separately value each business based on their unique investment identities, including the merits, performance and future prospects of their respective businesses. The Separation will also provide investors with three distinct and targeted investment opportunities;

 

    gives greater flexibility to execute tailored business strategies and compete in evolving markets;

 

    provides tailored capital structures reflective of each business’s financial and growth profiles; and

 

    enables each business to concentrate its financial resources solely on its own operations, providing greater flexibility to invest capital in its business in a time and manner appropriate for its distinct strategy and business needs and facilitate a more efficient allocation of capital.

Manner of Effecting the Distribution

The general terms and conditions relating to the Distribution are set forth in the Separation and Distribution Agreement between us, LSC and RRD. Under the Separation and Distribution Agreement, the Distribution will be effective at 12:01 a.m. on [●], 2016. For most RRD stockholders who own RRD common stock in registered form on the record date, our transfer agent will credit their shares of our common stock to book entry accounts established to hold these shares. Our distribution agent will send these stockholders a statement reflecting their ownership of our common stock. Book entry refers to a method of recording stock ownership in our records in which no physical certificates are used. For stockholders who own RRD common stock through a broker or other nominee, their shares of our common stock will be credited to these stockholders’ accounts by the broker or other nominee. As further discussed below, fractional shares will not be distributed. Following the Distribution, stockholders whose shares are held in book entry form may request that their shares of our common stock be transferred to a brokerage or other account at any time, as well as request delivery of physical stock certificates for their shares, in each case without charge. The Separation and Distribution Agreement will address certain employee and benefits matters in connection with the Separation, and we will also enter into certain ancillary agreements with RRD and Donnelley Financial to address certain intellectual property and information technology matters and tax disaffiliation matters. See “Certain Relationships and Related Party Transactions—Separation Transactions” for additional information.

NO STOCKHOLDER APPROVAL OF THE SEPARATION OR DISTRIBUTION IS REQUIRED OR SOUGHT. WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A PROXY IN CONNECTION WITH THE SEPARATION OR DISTRIBUTION. RRD STOCKHOLDERS WILL NOT BE REQUIRED TO PAY FOR SHARES OF OUR COMMON STOCK RECEIVED IN THE DISTRIBUTION, OR TO SURRENDER OR EXCHANGE SHARES OF RRD COMMON STOCK IN ORDER TO RECEIVE OUR COMMON STOCK, OR TO TAKE ANY OTHER ACTION IN CONNECTION WITH

 

36


Table of Contents

THE SEPARATION OR DISTRIBUTION. NO VOTE OF RRD STOCKHOLDERS IS REQUIRED OR SOUGHT IN CONNECTION WITH THE SEPARATION OR DISTRIBUTION, AND RRD STOCKHOLDERS HAVE NO APPRAISAL RIGHTS IN CONNECTION WITH THE SEPARATION OR DISTRIBUTION.

Fractional shares of our common stock will not be issued to RRD stockholders as part of the Distribution or credited to book entry accounts. In lieu of receiving fractional shares, each holder of RRD common stock who would otherwise be entitled to receive a fractional share of our common stock will receive cash for the fractional interest, which generally will be taxable to such holder. An explanation of the tax consequences of the Distribution can be found below in the subsection captioned “—Material U.S. Federal Income Tax Consequences of the Distribution.” The distribution agent will, as soon as practicable after the Distribution, aggregate fractional shares of our common stock into whole shares and sell them in the open market at the prevailing market prices and distribute the aggregate proceeds, net of brokerage fees, ratably to RRD stockholders otherwise entitled to fractional interests in our common stock.

The Separation and Distribution Agreement will also address treatment of outstanding RRD equity awards. See “Executive Compensation—Compensation Discussion and Analysis—Treatment of RRD Equity Awards in Connection with the Separation,” for a discussion of how outstanding RRD options, restricted shares, restricted stock units and performance awards will be affected by the Distribution.

In order to be entitled to receive shares of our common stock in the Distribution, RRD stockholders must be stockholders of record of RRD common stock at the close of business New York City time, on the record date, [●], 2016. No ex-dividend market will be established for our common stock until the first trading day following the Distribution Date. Therefore, if you own shares of RRD common stock on the record date and thereafter sell those shares on or prior to the Distribution Date, you will also be selling the shares of our common stock that would have been distributed to you in the Distribution with respect to the shares of RRD common stock you sell. Conversely, a person who purchases shares of RRD common stock after the record date and on or prior to the Distribution Date will be entitled to receive from the seller of those shares the shares of our common stock issued in the Distribution with respect to the transferred RRD common stock.

Results of the Separation and the Distribution

After the Separation and the Distribution, we will be a public company owning and operating the financial communications and data services business currently owned and operated by RRD. RRD may retain up to a 20% continuing stock ownership interest in us. Immediately after the Distribution, we expect to have approximately [●] holders of record of our common stock and approximately [●] million shares of common stock outstanding, based on the number of stockholders of record and outstanding shares of RRD common stock on [●], 2016. The actual number of shares to be distributed will be determined on the record date. You can find information regarding options, restricted stock units and restricted stock that will be outstanding after the Distribution in the section captioned, “Executive Compensation—Compensation Discussion and Analysis.”

Prior to the Distribution, we will enter into agreements with RRD and LSC, pursuant to which we, RRD and LSC will provide, and we, RRD and LSC will receive, transition services for a period of up to 24 months following completion of the Separation, including with respect to such areas as employee matters, information technology, accounting and finance, tax and other services. In addition, we expect to enter into certain commercial arrangements with RRD and LSC. See “Certain Relationships and Related Party Transactions—Separation Transactions—Other Arrangements and Agreements with RRD” and “Certain Relationships and Related Party Transactions—Separation Transactions—Other Arrangements and Agreements with LSC”.

The Distribution will not affect the number of outstanding shares of RRD common stock or any rights of RRD stockholders.

 

37


Table of Contents

Material U.S. Federal Income Tax Consequences of the Distribution

The following is a summary of the material U.S. federal income tax consequences of the Distribution to us, RRD and RRD stockholders. This summary is based on the Code, the regulations promulgated under the Code by the U.S. Department of Treasury, and interpretations of such authorities by the courts and the IRS, all as of the date of this Information Statement and all of which are subject to change at any time, possibly with retroactive effect. This summary is limited to holders of RRD common stock that are U.S. holders, as defined below, that hold their shares of RRD common stock as capital assets, within the meaning of section 1221 of the Code. Further, this summary does not discuss all tax considerations that may be relevant to holders of RRD common stock in light of their particular circumstances, nor does it address the consequences to holders of RRD common stock subject to special treatment under the U.S. federal income tax laws, such as tax-exempt entities, partnerships (including arrangements or entities treated as partnerships for U.S. federal income tax purposes), persons who acquired such shares of RRD common stock pursuant to the exercise of employee stock options or otherwise as compensation, financial institutions, insurance companies, dealers or traders in public securities, and persons who hold their shares of RRD common stock as part of a straddle, hedge, conversion, constructive sale, synthetic security, integrated investment or other risk-reduction transaction for U.S. federal income tax purposes. This summary does not address any U.S. federal estate, gift or other non-income tax consequences or any applicable state, local, foreign, or other tax consequences. Each stockholder’s individual circumstances may affect the tax consequences of the Distribution.

For purposes of this summary, a “U.S. holder” is a beneficial owner of RRD common stock that is, for U.S. federal income tax purposes:

 

    an individual who is a citizen or a resident of the United States;

 

    a corporation, or other entity taxable as a corporation for U.S. federal income tax purposes, created or organized under the laws of the United States or any state or political subdivision thereof;

 

    an estate, the income of which is subject to United States federal income taxation regardless of its source; or

 

    a trust, if (i) a court within the United States is able to exercise primary jurisdiction over its administration and one or more U.S. persons have the authority to control all of its substantial decisions, or (ii) it has a valid election in place under applicable U.S. Department of Treasury regulations to be treated as a U.S. person.

If a partnership (including any arrangement or entity treated as a partnership for U.S. federal income tax purposes) holds shares of RRD common stock, the tax treatment of a partner in the partnership generally will depend upon the status of the partner and the activities of the partnership. A partner of a partnership holding shares of RRD common stock should consult its tax advisor regarding the tax consequences of the Distribution.

It is a condition to the Distribution that RRD receive (i) a private letter ruling from the IRS satisfactory to the RRD Board regarding certain U.S. federal income tax matters relating to the Distribution and related transactions and (ii) an opinion of Sullivan & Cromwell LLP, in form and substance satisfactory to the RRD Board, regarding the U.S. federal income tax treatment of the Distribution and certain related transactions as transactions that are generally tax-free, for U.S. federal income tax purposes under Sections 355 and 368(a)(1)(D) of the Code. Assuming that the Distribution, together with certain related transactions, so qualifies for U.S. federal income tax purposes, no gain or loss will be recognized by you, and no amount will be included in your income, upon the receipt of shares of Donnelley Financial common stock pursuant to the Distribution. You will, however, recognize gain or loss for U.S. federal income tax purposes with respect to cash received in lieu of fractional shares of Donnelley Financial common stock. The opinion and the private letter ruling will rely on factual representations and reasonable assumptions, which if incorrect or inaccurate may jeopardize the ability to rely on such opinion and private letter ruling. The opinion will not be binding on the IRS or the courts.

 

38


Table of Contents

On the basis of the opinion and the ruling we expect to receive, and assuming the Distribution, together with certain related transactions, qualifies as a transaction that is generally tax-free for U.S. federal income tax purposes under Sections 355 and 368(a)(1)(D) of the Code, the U.S. federal income tax consequences of the Distribution generally are as follows

 

    Except for any cash received in lieu of fractional shares of our common stock, a RRD stockholder will not recognize any income, gain or loss as a result of the receipt of our common stock in the Distribution.

 

    A RRD stockholder’s holding period for our common stock received in the Distribution will include the period for which that stockholder’s RRD common stock was held.

 

    A RRD stockholder’s tax basis for our common stock received in the Distribution will be determined by allocating to that common stock, on the basis of the relative fair market values of RRD common stock and our common stock at the time of the Distribution, a portion of the stockholder’s basis in its RRD common stock. A RRD stockholder’s basis in its RRD common stock will be decreased by the portion allocated to our common stock. Within a reasonable period of time after the Distribution, RRD will provide its stockholders who receive our common stock pursuant to the Distribution with a worksheet for calculating their tax bases in our common stock and their RRD common stock.

 

    The receipt of cash in lieu of fractional shares of our common stock generally will be treated as a sale of the fractional share of our common stock, and a RRD stockholder will recognize gain or loss equal to the difference between the amount of cash received and the stockholder’s basis in the fractional share of our common stock, as determined above. The gain or loss will be long-term capital gain or loss if the holding period for the fractional share of our common stock, as determined above, is more than one year.

 

    The Distribution will not be a taxable transaction to us or RRD.

If the Distribution does not qualify for tax-free treatment for U.S. federal income tax purposes, then, in general, RRD would recognize taxable gain in an amount equal to the excess of the fair market value of the common stock of our Company over RRD’s tax basis therein (i.e., as if it had sold the common stock of our Company in a taxable sale for its fair market value.) In addition, the receipt by RRD stockholders of common stock of our Company would be a taxable distribution, and each U.S. holder that participated in the Distribution would recognize a taxable distribution as if the U.S. holder had received a distribution equal to the fair market value of our common stock that was distributed to it, which generally would be treated first as a taxable dividend to the extent of RRD’s earnings and profits, then as a non-taxable return of capital to the extent of each U.S. holder’s tax basis in its RRD common stock, and thereafter as capital gain with respect to any remaining value.

Even if the Distribution otherwise qualifies for tax-free treatment under the Code, the Distribution may be disqualified as tax-free to RRD and would result in a significant U.S. federal income tax liability to RRD (but not to the RRD stockholders) under Section 355(e) of the Code if the Distribution were deemed to be part of a plan (or series of related transactions) pursuant to which one or more persons acquire, directly or indirectly, stock representing a 50% or greater interest by vote or value, in RRD or us. For this purpose, any acquisitions of RRD’s stock or our stock within the period beginning two years before the Distribution and ending two years after the Distribution are presumed to be part of such a plan, although RRD or we may be able to rebut that presumption. The process for determining whether a prohibited acquisition has occurred under the rules described in this paragraph is complex, inherently factual and subject to interpretation of the facts and circumstances of a particular case. RRD or we might inadvertently cause or permit a prohibited change in the ownership of RRD or us to occur, thereby triggering tax to RRD, which could have a material adverse effect. If such an acquisition of our stock or RRD’s stock triggers the application of Section 355(e), RRD would recognize taxable gain equal to the excess of the fair market value of the common stock of our Company held by it immediately before the Distribution over RRD’s tax basis therein, but the Distribution would be tax-free to each RRD stockholder. In certain circumstances, under the Tax Disaffiliation Agreement between RRD and us, we

 

39


Table of Contents

would be required to indemnify RRD against that taxable gain if it were triggered by an acquisition of our stock or if we otherwise violated certain covenants in the Tax Disaffiliation Agreement. Please see “Certain Relationships and Related Party Transactions—Separation Transactions—Tax Disaffiliation Agreement” for a more detailed discussion of the Tax Disaffiliation Agreement between RRD and us.

Payments of cash in lieu of fractional shares of any common stock of our Company made in connection with the Distribution may, under certain circumstances, be subject to backup withholding, unless a holder provides proof of an applicable exception or a correct taxpayer identification number, and otherwise complies with the applicable requirements of the backup withholding rules. Any amounts withheld under the backup withholding rules are not additional tax and may be refunded or credited against the holder’s U.S. federal income tax liability, provided that the holder furnishes the required information to the IRS.

U.S. Treasury regulations require certain RRD stockholders with significant ownership in RRD that receive shares of our stock in the Distribution to attach to their U.S. federal income tax return for the year in which such stock is received a detailed statement setting forth such data as may be appropriate to show that the Distribution is tax-free under the Code. Within a reasonable period of time after the Distribution, RRD will provide its stockholders who receive our common stock pursuant to the Distribution with the information necessary to comply with such requirement.

EACH RRD STOCKHOLDER SHOULD CONSULT ITS TAX ADVISOR ABOUT THE PARTICULAR CONSEQUENCES OF THE DISTRIBUTION TO SUCH STOCKHOLDER, INCLUDING THE APPLICATION OF STATE, LOCAL AND FOREIGN TAX LAWS, AND POSSIBLE CHANGES IN TAX LAW THAT MAY AFFECT THE TAX CONSEQUENCES DESCRIBED ABOVE.

Listing and Trading of Our Common Stock

There is not currently a public market for our common stock. We will apply for our common stock to be listed on [●] under the symbol “DFIN”. Assuming that such listing application is approved, it is anticipated that trading will commence on a when-issued basis prior to the Distribution. The Distribution will be effective at 12:01 a.m. New York City time on [●], 2016. On the effective date of the Distribution, when-issued trading in our common stock will end and regular-way trading will begin. “When-issued” trading refers to trading which occurs before a security is actually issued. These transactions are conditional with settlement to occur if and when the security is actually issued and [●] determines transactions are to be settled.

We cannot assure you as to the price at which our common stock will trade before, on or after the Distribution Date. Until our common stock is fully distributed and an orderly market develops in our common stock, the price at which such stock trades may fluctuate significantly. In addition, the combined trading prices of our common stock, RRD common stock and LSC common stock held by stockholders after the Distribution may be less than, equal to, or greater than the trading price of the RRD common stock prior to the Distribution.

The shares of our common stock distributed to RRD stockholders will be freely transferable, except for shares received by people who would be considered an “affiliate” of ours under Rule 144 under the Securities Act or shares subject to contractual restrictions. People who may be considered our affiliates after the Distribution generally include individuals or entities that control, are controlled by, or are under common control with us. This may include certain of our officers, directors and significant stockholders. Persons who are our affiliates will be permitted to sell their shares only pursuant to an effective registration statement under the Securities Act, an exemption from the registration requirements of the Securities Act, or in compliance with Rule 144 under the Securities Act. As described under “Shares Eligible for Future Sale—Stockholder and Registration Rights Agreement,” in the event RRD retains any of our common stock following the Separation, we expect that RRD and its permitted transferees will have registration rights with respect to our common stock.

 

40


Table of Contents

Conditions to the Distribution

The Distribution is subject to the satisfaction of the following conditions or the RRD Board’s waiver of the following conditions:

 

    the RRD Board will, in its sole and absolute discretion, have authorized and approved (i) the internal reorganization described under “Certain Relationships and Related Party Transactions—Separation Transactions—Separation and Distribution Agreement”, (ii) any other transfers of assets and assumptions of liabilities contemplated by the Separation and Distribution Agreement and any related agreements and (iii) the Distribution, and will not have withdrawn that authorization and approval;

 

    the RRD Board will have declared the distribution of at least 80% of the outstanding shares of our common stock to RRD’s stockholders;

 

    the SEC will have declared our registration statement on Form 10, of which this Information Statement is a part, effective under the Exchange Act, no stop order suspending the effectiveness of the registration statement will be in effect, and no proceedings for that purpose will be pending before or threatened by the SEC;

 

    the applicable Canadian securities regulatory authorities will have issued (including having been deemed to have issued) a final receipt in connection with the filing of a prospectus prepared in accordance with applicable Canadian securities laws as required to qualify the distribution of Donnelley Financial common stock to RRD’s Canadian stockholders, and no order, ruling or determination having the effect of prohibiting, ceasing or suspending the distribution or trading of the Donnelley Financial common stock will have been issued by any securities regulatory authority in Canada and no proceedings for that purpose will have been instituted or threatened by any securities regulatory authority in Canada;

 

    [●] or another national securities exchange approved by the RRD Board will have accepted our common stock for listing, subject to official notice of issuance;

 

    the Internal Reorganization will have been completed;

 

    RRD shall have received (i) a private letter ruling from the Internal Revenue Service satisfactory to the RRD Board regarding certain U.S. federal income tax matters relating to the Distribution and related transactions and (ii) an opinion of Sullivan & Cromwell LLP, in form and substance satisfactory to the RRD Board, regarding the U.S. federal income tax treatment of the Distribution and certain related transactions;

 

    no order, injunction or decree that would prevent the completion of the Distribution will be threatened, pending or issued (and still in effect) by any governmental entity of competent jurisdiction, no other legal restraint or prohibition preventing the completion of the Distribution will be in effect, and no other event outside the control of RRD will have occurred or failed to occur that prevents the completion of the Distribution;

 

    no other events or developments will have occurred prior to the Distribution that, in the judgment of the RRD Board, would result in the Distribution having a material adverse effect on RRD or its stockholders;

 

    to the extent applicable, RRD, LSC and we will have executed and delivered the Separation and Distribution Agreement, the Stockholder and Registration Rights Agreement, the Tax Disaffiliation Agreement, the Patent, Copyright and Trade Secret Assignment and License Agreement, the Trademark Assignment and License Agreement, the Data Rights Assignment and License Agreement, the Transition Services Agreements, and all other ancillary agreements related to the Separation;

 

    our existing directors will have duly appointed to our Board the individuals listed as members of our Board, post-Distribution, in this Information Statement, and those individuals will become members of our Board in connection with the Distribution;

 

41


Table of Contents
    each individual who will be an employee of RRD or LSC after the Distribution and who is a director or officer of Donnelley Financial will have resigned or been removed from the directorship and/or office held by that person, effective no later than immediately prior to the Distribution; and

 

    immediately prior to the Distribution, our Certificate of Incorporation and our By-laws, each in substantially the form filed as an exhibit to the registration statement on Form 10 of which this Information Statement is a part, will be in effect.

We are not aware of any material federal, foreign or state regulatory requirements with which we must comply, other than SEC rules and regulations, or any material approvals that we must obtain, other than [●] approval for listing of our common stock, the SEC’s declaration of the effectiveness of the registration statement and the applicable Canadian securities regulatory authorities’ issuance of a final receipt in connection with the filing of a prospectus, in connection with the Distribution. The fulfillment of the above conditions will not create any obligation on RRD’s part to effect the Separation or the Distribution.

The distribution of Donnelley Financial common stock is not conditioned upon the distribution of LSC common stock, nor will the distribution of LSC common stock be conditioned upon the Distribution of our common stock. RRD has the right not to complete the Separation or the Distribution if, at any time, the RRD Board determines, in its sole and absolute discretion, that the Separation is not in the best interests of RRD or its stockholders or is otherwise not advisable.

Reason for Furnishing This Information Statement

This Information Statement is being furnished solely to provide information to stockholders of RRD who will receive shares of our common stock in the Distribution. It is not, and is not to be construed as, an inducement or encouragement to buy or sell any of our securities. We and RRD will not update the information in this Information Statement except in the normal course of our and RRD’s respective public disclosure obligations and practices.

 

42


Table of Contents

BUSINESS

We are a Delaware corporation with our principal executive offices at 35 West Wacker Drive, Chicago, IL 60601. Our telephone number is [●].

Donnelley Financial Solutions, Inc. was incorporated on February 22, 2016 as a direct, wholly-owned subsidiary of RRD. Prior to the distribution of our outstanding shares of common stock to holders of RRD’s common stock, we will acquire the subsidiaries, businesses and other assets owned by RRD, directly or indirectly, that are described in this Information Statement.

The distribution of our shares of common stock to RRD stockholders is part of a series of transactions by RRD, following which there will be three independent, publicly traded companies: one business focused on financial communications and data services, which will be called Donnelley Financial Solutions, Inc., or Donnelley Financial; one business focused on publishing and retail-centric print services and office products, which will be called LSC Communications, Inc., or LSC; and one business focused on customized multichannel communications management, which will continue to be called RRD. Concurrently with the Distribution, RRD will make an additional distribution to its stockholders of shares of common stock of LSC. We refer to these steps, of which the Distribution is a part, as the Separation.

General

We are a financial communications services company that supports global capital markets compliance and transaction needs for our corporate clients and their advisors (such as law firms and investment bankers) and global investment markets compliance and analytics needs for mutual fund companies, variable annuity providers and broker/dealers. We provide content management, multi-channel content distribution, data management and analytics services, collaborative workflow and business reporting tools, and translations and other language services in support of our clients’ communications requirements. In 2015, we generated net sales of $1.0 billion, net earnings of $104.3 million and adjusted EBITDA of $218.9 million. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Measures.” We operate in two business segments:

 

    United States. Our United States segment is comprised of three reporting units: capital markets, investment markets, and language solutions and other. We service capital market and investment market clients in the United States by delivering products and services to help create, manage and deliver accurate and timely financial communications to investors and regulators. We provide our capital market and investment market clients with communication tools and services to allow them to comply with their ongoing regulatory filings, primarily with the SEC. In addition, we provide our clients with communications services to create, manage and deliver registration statements, prospectuses, proxies and other communications to the SEC and their current and potential shareholders and investors. We also provide virtual data rooms to facilitate the deal management requirements of capital markets and mergers and acquisitions transactions, and we provide data and analytics services that help professionals uncover intelligence from financial disclosure contained within public filings made with the SEC. Our United States segment also includes language solutions capabilities, through which we can translate documents and create content in up to 140 different languages for our clients. In 2015, our United States segment accounted for approximately 86% of our combined net sales.

 

    International. Our International segment includes our operations in Asia, Europe, Latin America, Australia and Canada. Our international business is primarily focused on working with international capital markets clients on capital markets offerings and regulatory compliance related activities into or within the United States. In addition, we provide services to international investment market clients to allow them to comply with applicable SEC regulations, and we provide language solutions to international clients. We work with capital markets clients around the world, and in 2015 our International segment accounted for 14% of our combined net sales.

 

43


Table of Contents

We report certain unallocated selling, general and administrative activities and associated expenses within “Corporate,” including, in part, executive, legal, finance, communications and certain facility costs. In addition, certain costs and earnings of employee benefit plans, such as pension and other postretirement benefits plan expense and share-based compensation, are included in Corporate and are not allocated to the reportable segments. Prior to the Separation, many of these costs were based on allocations from RRD; however, we will incur such costs directly upon the completion of the Separation.

Our Strengths

Our financial services clients’ communication requirements are driven by government and market regulations and transactional events, for which accuracy, security, timeliness, and transparency are critical. As a result, clients and their advisors are looking for collaborative and easy to use technology solutions that are supported by world-class service and regulatory filing compliance experts who can manage their content, documents and data in a secure manner across multiple communication channels. As the leader in this industry, we have the scale, service model, regulatory filing expertise and technology offering to meet our clients’ needs and pursue growth.

 

    Significant Scale. Our scale provides us with significant benefits, allowing us to cost-efficiently serve a large number of clients and add clients to our existing services. We have significant scalability within our cloud-based solutions, which we believe will result in minimal costs to add new clients. In 2015, we had net sales of $1.0 billion.

 

    Diverse Product Profile. Our business is diversified across a wide range of product offerings that enable us to work with companies and their advisors at different points throughout the business lifecycle, including private companies, public companies and companies that have filed for bankruptcy. We design, package and deliver our products and services in ways that address our clients’ unique challenges, providing integrated solutions to their critical business issues, and we offer a “one-stop shop” approach for content creation and collaboration, content management, translation services and content distribution. We have also diversified our business by serving adjacent client categories like brokers and financial advisors.

 

    Tailored Proprietary Technologies. We believe we have cultivated a strong reputation for innovation through our commitment to tailored and scalable technologies. We apply common technologies across our businesses and then add industry and client specific functionality that provides our clients with a flexible platform that can be further tailored to meet their specific needs. We believe our technological innovation, intellectual property and tailored proprietary technologies contribute to the appeal of our offerings for our clients.

 

    Global Footprint. Our global footprint provides us with a “close to client” local platform and capability in each of our geographies. We believe our global footprint strengthens our client relationships by accelerating response times relative to our competitors and allowing us to assist our clients with projects that span across multiple locations in our global network. We believe we have the industry’s broadest global footprint in terms of regional presence, breadth of product offerings and applications, and diversity of end markets, giving us significant competitive advantages in scale and scope. We operate in 18 countries around the world and have client service centers in 41 cities worldwide.

 

   

Strong Client Relationships and Customer Service. We believe we have strong brand recognition and that our clients associate our brand with quality and client-focused and reliable customer service. Our regulatory expertise, commitment, discretion and responsiveness, particularly for projects involving highly sensitive information, have enabled us to develop strong, long-standing relationships with our clients, often at senior levels in their organizations. Our product and service offerings for financial communications are often used over the lifetime of our clients, including in connection with their initial public offerings, mergers and acquisitions transactions, public and private capital markets transactions strategic transactions and SEC compliance obligations. We believe our ability to retain our current

 

44


Table of Contents
 

client base and to attract new clients is directly related to our sales force and customer service personnel, and we devote extensive resources to recruiting, developing and retaining experienced sales and service professionals.

 

    Deep Domain Expertise. Our team has deep experience in the understanding of the financial reporting process and the related aspects of the rapidly changing regulatory requirements and expertise in the creation and distribution of key financial communications documents. For the past five years, we have been the leader in IPO and Draft Registration Statements (DRS) filings and a leader in supporting worldwide mergers. We believe we have extensive EDGAR and XBRL regulatory filing expertise, and we have relationships with many of the largest fund companies, annuities, and third party administrators. Our broad experience also uniquely qualifies us to help our clients navigate the ongoing transition in the regulatory world from documents to data, whether through a new accounting standard or a new output type (from HTML to HTML+XBRL to iXBRL). In each of these instances, we have launched new capabilities to the market, and as a result, we believe we are well positioned to manage the transition to new data driven disclosure output types required by the SEC for their reporting modernization initiative.

Our Strategy

 

    Expand the Existing Range of Solutions Provided to Clients. While clients may engage us to use specific solutions, we believe there are opportunities for us to increase our sales of existing solutions to these clients and clients currently working with competitive solutions. By leveraging our strong client relationships, we expect to grow our share of client spend by expanding our suite of transaction and compliance services. For example, many of our GCM clients utilizing our EDGAR filing services are also active in mergers and acquisitions transactions, as well as public and private capital markets transactions, and we believe our virtual data room offering, Venue, is a helpful tool for these clients to manage the materials used in the due diligence process for these various types of transactions. Further, many of our GIM clients utilizing our EDGAR filing services may or could also rely on our FundSuiteArc products to more efficiently manage their content in a central online repository, providing a single platform to create, review and publish critical disclosures.

 

    Develop New Services and Products. We seek to capitalize on our technological expertise and operational competencies to broaden the array of services we offer our existing and prospective client base. We expect to continue to increase the software products and services that we offer, which we believe will provide us with increased net sales and profits. Our ActiveDisclosure solution provides a web-based platform for document collaboration, allowing our clients to work more closely with us during the drafting of disclosures, long before submission to the SEC or other regulatory bodies. We plan to leverage our existing relationships and brand reliability to combine our existing technology with other services. Recent examples of this strategy include our investments in Peloton Documents and in Mediant, and our acquisition of Multicorpora. These investments have expanded our offerings to include deal marketing services associated with our Venue virtual data room, enhanced our broker-dealer and financial advisor services, and broadened our language solutions offerings by implementing technology advancements.

 

   

Focus on Growth and Expansion into New Markets. We believe our products and services are well-suited to our target markets, particularly those markets involving significant amounts of regulatory oversight, electronic documentation and collaboration of tailored marketing, compliance or business communication materials. We believe our capabilities position us well as requirements change to new standards of data driven disclosure in new markets. New regulations, such as the SEC’s reporting modernization proposal, which continues the recent emphasis on the submission of structured data for financial disclosures (rather than unstructured documents) and the Data Act, which expands the structured data approach into government agencies outside of the SEC and FDIC, are examples of these standards. We believe we are well-positioned to handle these new compliance and regulatory requirements with our track-record of developing technology offerings to meet industry and client

 

45


Table of Contents
 

demands. We also intend to increase our penetration in our existing markets by expanding geographically and to enter new markets that are adjacent to and share similar attributes to our existing markets.

 

    Pursue Selective Strategic Relationships and Acquisition Opportunities. Since 2009, we have acquired four companies, Prospectus Central, LLC (an e-delivery company), Bowne (a traditional financial printer), EDGAR Online (which specializes in EDGAR and XBRL filings with the SEC) and MultiCorpora (a translations and language solutions company), expanding our service offerings and broadening our market reach. In addition, we have made strategic investments in Peloton Documents (a media and interactive communications provider) and Mediant (a provider of electronic and printed shareholder communications), allowing us to enhance our end-to-end deal solutions offerings and our proxy management and regulatory compliance services. We intend to continue to pursue such strategic relationships and acquisitions, and given the relative fragmentation of many of our target markets, we believe we will be able to continue to identify and capitalize on complementary strategic relationships and acquisition opportunities in the future.

 

    Use our Technology and Operational Expertise to Drive Efficiencies. We believe many of our technology-based services are scalable to support additional growth. Since 2010, we have managed our cost structure to be more variable in nature, increasing financial flexibility and delivering strong profitability. We plan to continue to identify technology and process improvements that would allow us to become more efficient.

Key Challenges

Following the Distribution, we may face a number of challenges, both pre-existing and as a result of the Distribution, including:

 

    Market Volatility. Unfavorable economic conditions could harm our operating results. For example, our GCM transactional net sales, including virtual data rooms, depends in part on the volume of public financings, particularly debt and equity financings, and mergers and acquisitions, which are influenced by corporate funding needs, stock market fluctuations, prevailing interest rates and other general and economic factors. Our GIM business can be affected by fluctuations in the inflow and outflow of money into investment management funds which determines the number of new funds that are opened as well as, conversely, closed. As has happened in the recent past, any future prolonged period of capital market uncertainty and volatility could reduce transactional activity and cause a number of investment management funds to close and consequently adversely affect the operating results and our financial condition. Our International segment is particularly susceptible to capital market volatility as most of our International business is capital markets transaction focused.

 

    Regulatory Risks. Our net sales from transaction and related compliance documents is subject to volatility in demand due to the rules and regulations of the SEC and other regulatory bodies, which could adversely affect our operating and financial results. Our transaction and compliance net sales are primarily derived from the composition, filing and distribution of documents in electronic and printed form. Demand for the printing and distribution portions of this business is affected in part by the rules and regulations of the SEC and other regulatory bodies. We are uncertain as to whether pending rules will impact the practices of issuers, underwriters, broker-dealers and investors, the financial communications industry in general or our business in particular.

 

   

Data Security. A breach in our security measures could harm our business and operating results. Most of our products and services require us to capture, transmit, handle and store confidential, personal or sensitive information regarding our clients or our clients’ customers. Any breach in our security systems resulting in the inadvertent or intentional disclosure of confidential information could severely harm our business and result in reputational damage and potential liability for us. A compromise of our security or a perceived compromise of our security could also result in negative publicity, causing us to

 

46


Table of Contents
 

lose clients and business. A party who is able to circumvent our security measures could misappropriate proprietary information that could be valuable to competitors or other similar companies.

In addition, we may be required to expend significant capital and other resources to continue to keep our security measures up to date and to protect us against the threat of a security breach. Increasingly, more of our financial services and other clients have been focusing on implementation of more extensive security measures. Implementation of these measures and the performance of client audits of these measures require a significant amount of time and resources.

The use of inside information is highly regulated in the United States and abroad, and violations of securities laws and regulations may result in civil and criminal penalties. If we, or any of our employees, fail to keep our clients’ proprietary information confidential, we may lose existing clients and potential new clients and may expose them to significant liability and loss of revenue based on the premature release of confidential information.

The centralized nature of our information systems requires the routine flow of information about our clients and our clients’ customers across national borders. Changes in the worldwide legal and regulatory environment in the areas of consumer privacy, data security and cross-border data flows, or a failure by us to comply with the regulatory environment, could have a material adverse effect on our business.

 

    Competition and Self-Reliance. We face competition from smaller competitors who compete on price and pressure margins on software or other services we provide. In addition, changes in content management technologies offered by our competitors are enabling our clients to take work in-house that was historically performed by us.

 

    Acquisition Integration Challenges. We have in the past acquired and intend in the future to acquire other businesses that have technologies and product lines complementary to our core businesses, expand the breadth of our markets, enhance our technical capabilities or offer us other growth and diversification opportunities. The benefits of any future acquisitions may take more time than expected to develop, and we cannot guarantee that any future acquisitions will in fact produce any intended benefits.

Our History

RRD has been involved in the production of financial communications since 1936. In 1973, the company opened its first financial printing sales office in New York, New York, with a facility in Lancaster, Pennsylvania (originally Rudisill Printing Company, which was acquired by RRD in 1959) serving as the primary manufacturing plant. In 1983, RRD created the Financial Printing Services Group, marked by the geographic expansion of the business to provide a physical presence in certain major financial centers across the globe.

RRD’s financial communications business continued to grow into the new millennium. Since 2004, the business has made key acquisitions including the financial communications division of Canadian Bank Note in 2006, e-delivery company Prospectus Central in 2009, data and analytics provider EDGAR Online in 2012, and Multicorpora, an international provider of translation technology solutions, in 2014. The business acquired Bowne & Co., Inc., a financial communications firm, in 2010, which significantly increased the size of the Company and expanded the scope of relationships with our clients.

Looking forward, Donnelley Financial will continue its evolution, servicing the business communication needs of public companies, law firms, investment banks, private investors and investment management companies.

 

47


Table of Contents

Client Services

Our business is diversified across a range of products and services that enable us to work with companies and their advisors at different points throughout the business lifecycle, including private companies, public companies and companies that have filed for bankruptcy. Our clientele is primarily focused in three areas: capital markets, investment markets, and language solutions, and we also provide clients with Data and Analytics services and products. We service clients in each of these areas with distinct, proprietary solutions tailored to meet their varying regulatory, transactional and communications needs and are able to achieve operational leverage through the use of common technology and service platforms.

Global Capital Markets

Our GCM clients consist mainly of companies that are subject to the filing and reporting requirements of the Securities Act and the Exchange Act. We also support public and private companies throughout the mergers and acquisitions transaction process and in public and private capital markets transactions with deal management solutions focused on aiding transactional efficiency from inception to completion. We provide a comprehensive suite of products and services to help our GCM clients comply with disclosure obligations, create, manage and deliver accurate and timely financial communications and manage public and private transaction processes. We also provide GCM clients with data and analytics services focused on uncovering intelligence from financial disclosures and offering distribution of company data and public filings.

Many of our GCM clients are companies required by the SEC to file reports pursuant to the Exchange Act, through the SEC’s Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system. The EDGAR system requires filers to prepare and submit filings using the SEC’s specified file formats. Our EDGAR filing services assist our GCM clients in preparing Exchange Act filings that are compatible with the EDGAR system, and our employees have expertise and significant experience navigating this process with companies and their advisors. Specifically, many of our GCM clients are required to file proxy statements pursuant to the Exchange Act, and our Proxy Design service allows our clients to tailor these proxies by helping them to identify and match an appropriate style and format to their unique corporate culture and proxy-related objectives. We serve our GCM clients from local offices in most major cities in the U.S. and international jurisdictions in which we have operations. We believe our local teams set the standard for reliable and efficient service and convenience.

As part of their regulatory filing requirements, our GCM clients who submit Exchange Act reports are also required to submit tagged files in the SEC-mandated eXtensible Business Reporting Language (XBRL) format. We provide these clients with a suite of tagging, review and validation tools to assist them with the XBRL requirements, and we have teams of accounting and financing professionals that assist our GCM clients with the processes of tag selection, tag review, file creation, validation and distribution, if required for their Exchange Act filings with the SEC.

In addition to the EDGAR filing services we provide, in which we format and manage the content of the filings on behalf of our clients, we also offer a cloud-based disclosure management system called ActiveDisclosure that allows our GCM clients to collaboratively create, review and distribute financial communication and regulatory compliance documents on their own systems and then file directly on the SEC’s EDGAR system, with assistance from our experienced professionals as needed.

We provide services for GCM clients throughout the course of public and private business transactions, including those transactions that are subject to the requirements of the Securities Act. We assist many of our clients with certain transaction-related EDGAR filing and print services (including registration statements, prospectuses, offering circulars, proxy statements and XBRL-tagged filings), as well as with the technical aspects of the regulatory filing process. We have conferencing facilities in most major cities in the U.S. and the international jurisdictions in which we have operations for in-person working groups to meet to strategize and prepare documents for the transactional deal stream. Our sites are outfitted to provide EDGAR filing capabilities, typesetting, meeting rooms and around-the-clock service.

 

48


Table of Contents

In addition, for both public and private transactions, many of our GCM clients use our line of Venue products and services to manage the transaction process and increase efficiency. Our Venue Virtual Data Room product is a cloud-based service that allows companies to securely organize, manage, distribute and track corporate governance, financing, legal and other documents in an online workspace accessible to internal and outside advisors alike. Our GCM clients use Venue Virtual Data Rooms for capital markets transactions, mergers and acquisition transactions and other transactions to facilitate their document management and due diligence processes.

Venue Deal Marketing is a service provided through Peloton Documents, a company in which we have made a strategic investment. The Peloton solution creates interactive transaction related documents that enable companies, investors and advisors to communicate a company’s value and market and manage large, complex deals directly from their data room. Peloton’s technology leverages video and other rich media content as the vehicle to illustrate the value of a business by enabling the user to tell a more dynamic company story to better gauge interest from potential buyers and investors. Users include some of the world’s largest investment banks and private equity firms.

Global Investment Markets

We provide products and services to clients operating in global investment markets within the United States and internationally, including United States based mutual funds, hedge and alternative investment funds, insurance companies and overseas investment structures for collective investments (similar to mutual funds in the United States). We also provide products to third party service providers and custodians who support investment managers, and we sell products and distribution services to the broker networks and financial advisors that distribute and sell investment products. We service the top variable annuity and variable life providers and many funds use our software products to create reports, prospectuses, fact sheets and other marketing and disclosure documents for distribution or submission to investors and regulators. Our teams currently support clients in the United States, Canada, Ireland, the United Kingdom, Luxembourg, India and Australia.

We offer our GIM clients a comprehensive set of products and services, including our FundSuiteArc software platform. FundSuiteArc is a suite of online content management products, which enable our GIM clients to store and manage information in a self-service, central repository so that compliance and regulatory documents can be easily edited, assembled, accessed, translated, rendered, and submitted to regulators.

In the United States, mutual funds, variable annuity products, and qualifying institutional hedge funds are required by the SEC to file registration forms and subsequent ongoing disclosures as well as XBRL-formatted filings pursuant to the 1940 Act, through the SEC’s EDGAR system. Using our filing capabilities, we work with many of our GIM clients to prepare and submit these 1940 Act and XBRL filings using the SEC’s specified file formats.

Changes in how investors consume information have led to new ways for investors to receive disclosure documents. GIM offers various technology and electronic delivery products and services to make the distribution of documents and content more efficient. Through an investment in and an agreement with Mediant, we provide a suite of software to brokers and financial advisors which enable them to monitor and view shareholder communications and support the distribution and tabulation of corporate elections for shareholders.

Language Solutions

We support domestic and international businesses in a variety of industries by helping them adapt their business content into different languages for specific countries, markets and regions through a complete suite of language products and services. Our suite of services includes translation, editing, interpreting, proof-reading and multilingual typesetting, plus specialized content services such as transcreation (cultural adaptation of marketing materials), copywriting, linguistic validation by subject matter experts (specifically in the medical sector),

 

49


Table of Contents

transcription, voice-over, subtitling, and localization (website software adaptation for a specific market). We also provide application testing and quality assurance, which enable consistent performance of web, desktop and mobile applications, as well as cultural consulting services, helping corporations with their cross-cultural communications. We generally provide our suite of services to clients through project-by-project or preferred vendor arrangements, with the majority of our net sales from language solutions derived from our International segment.

We engage as independent contractors a network of over 5,000 accredited, in-country linguists to support our clients in over 140 languages and provide a 24/7/365 service delivery platform to assist our clients at all times, enabling a shorter time-to-market. Our language solutions services are supported by our innovative language technology, including a market leading proprietary Translation Management System (MultiTrans) with terminology management and translation memory features. This state-of-the-art system stores terminology preferences and reduces costs by using previously-translated content. In addition, we offer a website translation service which is a cloud-based platform that enables dynamic website translation. We also continually drive innovation with new technologies, such as machine translation, to generate translations at the click of a button, post-machine translation editing to improve the quality of computer-generated translations, and voice recognition to gain efficiencies in audio-to-text solutions.

Data and Analytics

We also help professionals uncover intelligence from financial disclosures, offering distribution of company data and public filings for equities, mutual funds and other publicly traded assets through Application Program Interfaces, or APIs, online subscriptions and data licenses. We extract critical company data in real time, verify its accuracy, convert it to value-added formats like XML, JSON and XBRL, securely store the information and then provide clients access to the data through various delivery methods.

We are able to leverage proprietary technology to create robust, timely and accurate data sets, distributing high quality, interactive financial data and services to the investment community. With deep experience and knowledge, we are advancing how financial data is consumed, delivered and analyzed, helping to transform data points into constructive, valuable information.

In addition to access to data sets, we provide subscription-based proprietary desktop and web tools for data analysis. EDGARPro enables investors, analysts, lawyers, auditors and corporate executives to access detailed company information, as-reported and standardized financial data, SEC filings, stock quotes and news. I-Metrix, a Microsoft Excel plugin, provides quick and accurate XBRL-tagged financial statement data via an easy-to-use web interface for data downloads, enabling simple or complex modeling with the goal of providing better, faster and smarter financial analysis and company research. Our additional offerings include solutions for E-Prospectus, Investor Relations websites and XBRL data set creation and validation for use outside of SEC filings.

Clients

For each of the years ended December 31, 2015, 2014, and 2013, no client accounted for 10% or more of our combined net sales.

Competition

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. One of our competitive strengths is that we offer a wide array of communications products and services, including electronic and print, which provide differentiated solutions for our clients.

 

50


Table of Contents

The financial communications services industry, in general, continues to remain highly competitive, with relatively low barriers to entry. Despite consolidation in recent years, the industry remains highly fragmented in the United States and even more so internationally with many in-country alternative providers. We expect competition to increase from existing competitors, as well as new and emerging market entrants. In addition, as we expand our product and service offerings, we may face competition from new and existing competitors. We compete primarily on product quality and functionality, service levels, security and compliance characteristics, price and reputation.

The impact of digital technologies has been felt in many print products, most acutely in our GIM business. Historically, we have been a high-touch, service oriented business. Technology changes have provided many alternatives to our clients that allow them to manage more of the financial disclosure process themselves through collaborative document management solutions, holding on to a document for a longer period of time and often even filing it themselves. For years, we have invested in our own applications like ActiveDisclosure and FundSuiteArc to provide our clients more options and therefore increase retention, and to explore adjacent growth opportunities, through products like Venue and Proxy Design and through our investment in Mediant. 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, Donnelley Financial has made targeted acquisitions and investments in our existing business to offer clients innovative services and solutions, including EDGAR Online and MultiCorpora, that further secure our position as a technology leader in the industry.

Our competitors for SEC filing services for GCM clients fall into three general categories. The first category is full service financial communications providers, such as Merrill Corporation, Toppan Vite, Summit Financial, RDG Filings and Vintage Filings. The second category is technology solution providers focused on financial communications, including a number of small to midsized companies providing governance, risk and compliance solutions like Certent, Trintech and Workiva, companies focused on the virtual data room space, the largest of which is IntraLinks. The third category is general technology providers, which include a number of large companies that offer point solutions that are usually part of a larger enterprise solution set, including IBM Cognos, SAP and Oracle and, in the virtual data room space, Dropbox and Box.com.

Our competitors for SEC filing services for GIM clients fall into three general categories. The first category is full service traditional providers, including Command Financial, Merrill Corporation, Toppan Vite, Millennium and DG3. The second category is small niche technology providers providing technology products and content management platforms to serve the early parts of the communication process or providing filing or document hosting tools and services for the distribution part of the communication process, including Confluence, Kneip, Data Communique and Workiva. The third category is local and regional print providers that bid against us for printing, mailing and fulfillment services, including VG Reed, Wurst, Mcardle, Marek Group, FGS, Universal Wilde, Fitzgerald Marketing and Allied Printing.

Language solutions competes with global and local language service providers (LSPs) and language/globalization software vendors. LSPs provide translation and interpreting services and our main competition in the LSP realm is from the multi-language vendors that provide a one-stop solution. Language/Globalization software vendors provide solutions to support the translation activity (such as translation memory, machine translation, translation management, and terminology management), localization (engineering, visual localization aids, proxy servers, and snippet-based website tools), and interpreting (interpreter scheduling and management, mobile apps). There also are full-service providers like Donnelley Financial that provide both services and technology. Our biggest competitors overall include a mix of LSP, Language/Globalization software vendors and full-service providers, including TransPerfect, Lionbridge, SDL, Moravia, Hogarth, thebigword, Across, Welocalize, Sajan, ProjectOpen,Wordbee, Cloudwords, Smartling and Memsource.

 

51


Table of Contents

Market Volatility/ Cyclicality

We are subject to market volatility in the United States and world economy, as the success of our transactional business is largely dependent on the global market for IPOs, secondary offerings, mergers and acquisitions, public and private debt offerings, leveraged buyouts, spinouts and additional miscellaneous transactions. We mitigate some of that risk by offering services in higher demand during a down market, like document management tools for the bankruptcy/restructuring process, and also moving upstream from the filing process with products like Venue. We also attempt to balance this volatility through supporting the quarterly/annual public company reporting process through our EDGAR filing services and ActiveDisclosure product, and we continue to expand into adjacent growth businesses like language solutions and data and analytics, which are not as susceptible to market volatility and cycles. This quarterly/annual public company reporting process work also subjects us to filing cyclicality shortly after the end of each fiscal quarter, with peak periods during the course of the year that have operational implications. Such operational implications include the need to increase staff during peak periods through a combined strategy of hiring additional full-time and temporary personnel, increasing the premium time of existing staff, and outsourcing production for a number of services. Our International segment is particularly susceptible to capital market volatility as most of our International business is capital markets transaction focused. Additionally, clients and their financial advisors have begun to increasingly rely on web-based services which allow clients to autonomously file and distribute Exchange Act reports, prospectuses and other materials as a replacement for using our EDGAR filing services. While we believe that our ActiveDisclosure product is competitive in this space, our competitors are continuing to develop technologies that aim to improve clients’ ability to autonomously produce and file documents to meet their regulatory obligations.

Raw Materials

The primary raw materials we use in our printed products are paper and ink. Our paper and ink supply is sourced from a small set of select suppliers in order to ensure quality consistency that meets our performance expectations and provides for continuity of supply. We believe that the risk of incurring material losses as a result of a shortage in raw materials is unlikely and that the losses, if any, would not have a materially negative impact on our business.

Employees

As of December 31, 2015, we had 3,539 employees in our Company.

The table below summarizes the number of our full-time and part-time employees as of the end of the periods indicated.

 

As of December 31,

   2015      2014      2013      2012      2011  

Full-Time Employees

     3,515         3,409         3,437         3,721         3,613   

Part-Time Employees

     24         24         39         45         72   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Employees

     3,539         3,433         3,476         3,766         3,685   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The table below summarizes the number of our U.S. and international employees as of the end of the periods indicated.

 

As of December 31,

   2015      2014      2013      2012      2011  

U.S. Employees

     2,913         2,847         2,941         3,259         3,193   

International Employees

     626         586         535         507         492   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Employees

     3,539         3,433         3,476         3,766         3,685   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

52


Table of Contents

In addition, we hire part-time employees throughout the year to meet seasonal demands. None of our U.S. or international employees are unionized. There are no collective bargaining agreements with unions and no current relationships between us and any unions.

Technology

We invest resources in developing software to improve our services. We invest in our core composition systems and client facing solutions and have also adopted market-leading third party systems which have improved the efficiency of our sales and operations processes.

Cybersecurity

Given the highly sensitive nature of the data we process for our clients, security of our systems is of key importance. We continually focus on and invest in cybersecurity to protect our clients’ information and reputations, which is our highest priority. Our integrated approach to cybersecurity combines people, processes and technology as evidenced by our SOC 2 Type II Assurance Report for ActiveDisclosure.

Our cybersecurity program is designed to meet the needs and expectations of the most demanding clients across industries with highly sensitive personal and business information. Our advanced infrastructure and technology, expansive and highly trained global workforce and comprehensive security and compliance program make us uniquely qualified to safely process, store and protect client information.

Our infrastructure and technology security capabilities are bolstered by our relationships with several leading data center services providers. Furthermore, our networks are monitored by Intrusion Detection and distributed denial of service (DDoS) prevention services around the clock, and our systems and applications are routinely tested for vulnerabilities and are operated under a strict patch management program.

All Donnelley Financial employees undergo a thorough background check, employment eligibility verification and pre-employment drug testing and are also bound by a nondisclosure agreement that details such employee’s security and legal responsibilities with regards to information handling.

In addition to our advanced infrastructure and technology and highly trained staff is our enterprise-wide security and compliance program. With the help of a dedicated security and compliance team, Donnelley Financial’s security and compliance program includes a SOC2/AT101 Type II audit against the AICPA Trust Principles of Data Security, Data Confidentiality and Data Availability, which is completed on an annual basis. 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.

Intellectual Property

We consider patents, trademarks, licenses and other proprietary rights to be important to our business. Donnelley Financial owns approximately 15 patents worldwide, the majority of which are focused on XBRL tagging methods and online search tools related to our compliance services and data and analytic services. We also own over 100 trademarks, the most significant of which include our FundSuite family of marks, MultiTrans and Venue. Like our ownership rights to our patents, we own the rights to our trademarks in the United States and many other countries throughout the world.

In addition to developing our patent and trademark portfolios, we also license intellectual property from third parties as we deem appropriate. For example, we are licensed by the SEC to use the registered mark EDGAR in connection with Donnelley Financial’s family of compound EDGAR marks, including EDGAR Online, EDGAR Access, EDGAR Pro and EDGAR Explorer.

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

 

53


Table of Contents

Environmental Compliance

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.

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. While 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, based on information currently available, it is the opinion of management that compliance with the present environmental protection laws, before taking into account estimated recoveries from third parties, will not have a material adverse effect on Donnelley Financial’s combined annual results of operations, financial position or cash flows.

Properties

Donnelley Financial’s principle executive office is located at 35 West Wacker Drive, Chicago, IL 60601. We operate in 37 leased or owned facilities in 20 states in the United States which encompass approximately 1,200,000 square feet, of which 260,000 square feet is owned. Of these 37 facilities, we own two manufacturing facilities located in Lancaster, Pennsylvania (Steel Way) and Secaucus, New Jersey and lease two manufacturing facilities located in Lancaster, Pennsylvania (Horseshoe Road) and Charlotte, North Carolina. Our manufacturing locations provide printing, binding, fulfillment and related services. In addition, we own one production facility located in Phoenix, Arizona and lease one production facility located in Rockville, Maryland. The Phoenix location provides composition, XBRL tagging and related services while the Rockville location provides XBRL tagging and related services. We also lease 31 office and customer service locations in the United States. We lease 24 international facilities in 15 countries which encompass approximately 110,000 square feet. Our facilities are reasonably maintained and suitable for the operations conducted in them. We do not believe that any of these facilities are individually material to our business. In addition, we lease additional land for use as parking lots and other purposes in the U.S.

Legal Proceedings

From time to time, Donnelley Financial’s clients and others file voluntary petitions for reorganization under United States bankruptcy laws. In such cases, certain pre-petition payments received by Donnelley Financial from these parties could be considered preference items and subject to return. In addition, Donnelley Financial is 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 Donnelley Financial’s combined results of operations, financial position or cash flows.

 

54


Table of Contents

DIVIDEND POLICY

The timing, declaration, amount and payment of any future dividends to Donnelley Financial stockholders will fall within the discretion of our Board. Our Board’s decisions regarding the payment of future dividends will depend on many factors, including our financial condition, earnings, capital requirements and debt service obligations, as well as legal requirements, regulatory constraints, industry practice and other factors that our Board deems relevant. In addition, the terms of the agreements governing our new debt or debt that we may incur in the future may limit or prohibit the payment of dividends. There can be no assurance that we will pay a dividend in the future or that we will continue to pay any dividend if we do commence paying dividends. See “Risk Factors—Risks Relating to Our Common Stock and the Securities Market—We cannot assure you that we will pay dividends on our common stock, and our indebtedness could limit our ability to pay dividends on our common stock.”

 

55


Table of Contents

CAPITALIZATION

The following table sets forth the unaudited cash and capitalization of Donnelley Financial as of December 31, 2015, on a historical basis and on a pro forma basis to give effect to the Separation and the Distribution as if they occurred on December 31, 2015. You can find an explanation of the pro forma adjustments made to our historical combined financial statements under “Unaudited Pro Forma Combined Financial Information.” You should review the following table in conjunction with “Unaudited Pro Forma Combined Financial Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our historical combined financial statements and accompanying notes included elsewhere in this Information Statement.

 

     As of December 31, 2015
     Historical    Pro Forma
     (audited)    (unaudited)

Cash and cash equivalents

     
  

 

  

 

Indebtedness:

     

Capital leases

     

Total indebtedness

     
  

 

  

 

Equity:

     

Common stock, par value $0.01 per share

     

Additional paid-in capital

     

Net parent company investment

     

Accumulated other comprehensive earnings (losses)

     

Total equity

     
  

 

  

 

Total capitalization

     
  

 

  

 

 

56


Table of Contents

UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION 

The following unaudited pro forma condensed combined balance sheet as of December 31, 2015 and the unaudited pro forma condensed combined statement of operations for the year ended December 31, 2015 are based on the historical combined financial statements of Donnelley Financial. The unaudited pro forma combined financial statements presented below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our combined annual financial statements and corresponding notes thereto included elsewhere in this Information Statement. The unaudited pro forma combined financial statements reflect certain known impacts as a result of the Separation of the Company from RRD and Donnelley Financial. The unaudited pro forma combined financial statements have been prepared giving effect to the Separation and the Distribution as if the transaction had occurred as of January 1, 2015 for the unaudited pro forma combined statement of operations for the year ended December 31, 2015, and as of December 31, 2015 for the unaudited pro forma condensed combined balance sheet.

The unaudited pro forma combined financial information set forth below has been derived from the combined annual financial statements of Donnelley Financial including the audited combined balance sheet as of December 31, 2015 and the audited combined statement of operations for the year ended December 31, 2015 included elsewhere in this Information Statement. The unaudited pro forma combined financial information also reflects certain assumptions that we believe are reasonable given the information currently available.

The costs to operate our business as an independent public entity are expected to exceed the historical allocations, including corporate and administrative charges from RRD of approximately $[●] million for the year ended December 31, 2015 reflected in the accompanying annual combined financial statements presented elsewhere in this Information Statement and principally relate to areas that include, but are not limited to:

 

    additional personnel including finance, accounting, compliance, tax, treasury, internal audit and legal;

 

    additional professional fees associated with audits, tax, legal and other services;

 

    increased insurance premiums;

 

    costs relating to board of directors’ fees;

 

    stock market listing fees, investor relations costs and fees for preparing and distributing periodic filings with the SEC; and

 

    other administrative costs and fees, including anticipated incremental executive compensation costs related to existing and new executive management and excluding future share-based compensation expense (see pro forma adjustment [●] below).

The preliminary estimates for these net incremental expenses range between approximately $[●] million and $[●] million on an annual basis going forward. The pro forma impact of such incremental costs has not been reflected herein as many of the costs expected to comprise this increase are not factually supportable at this time. Actual expenses could vary from this range estimate and such variations could be material.

Costs related to the Separation of approximately $13.6 million have been incurred by RRD for the year ended December 31, 2015. These costs include accounting, legal and consulting fees. Of these costs, $0.9 million are included in Donnelley Financial’s combined statement of operations for the year ended December 31, 2015. Donnelley Financial expects to incur additional transaction related costs of approximately $[●] million prior to the Separation.

The unaudited pro forma combined financial information is for illustrative and informational purposes only and is not intended to represent or be indicative of what our financial condition or results of operations would have been had Donnelley Financial operated historically as a company independent of RRD or if the Separation and the Distribution had occurred on the dates indicated. The unaudited pro forma combined financial information also should not be considered representative of our future combined financial condition or combined results of operations.

 

57


Table of Contents

Donnelley Financial Solutions

Unaudited Pro Forma Combined Statement of Operations

For the Year Ended December 31, 2015

 

     Historical     Pro Forma
Adjustments
   Pro Forma

Services net sales

   $ 628.6        

Products net sales

     420.9        
  

 

 

   

 

  

 

Net sales

     1,049.5        

Services cost of sales (exclusive of depreciation and amortization)

     291.9        

Services cost of sales with RRD affiliates (exclusive of depreciation and amortization)

     40.4        

Products cost of sales (exclusive of depreciation and amortization)

     230.9        

Products cost of sales with RRD affiliates (exclusive of depreciation and amortization)

     68.3        
  

 

 

   

 

  

 

Cost of sales

     631.5        

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

     199.2        

Restructuring, impairment and other charges—net

     4.4        

Depreciation and amortization

     41.7        
  

 

 

   

 

  

 

Income from operations

     172.7        

Interest expense—net

     1.1        

Investment and other income—net

     (0.1     
  

 

 

   

 

  

 

Earnings before income taxes

     171.7        

Income tax expense

     67.4        
  

 

 

   

 

  

 

Net earnings

   $ 104.3        
  

 

 

   

 

  

 

Unaudited Pro Forma Earnings Per Share

       

Basic

     —          

Diluted

     —          

Average number of shared used in calculating earnings per share

       

Basic

     —          

Diluted

     —          

 

58


Table of Contents

Donnelley Financial Solutions

Unaudited Pro Forma Combined Balance Sheet

As of December 31, 2015

 

     Historical     Pro Forma
Adjustments
   Pro Forma

ASSETS

       

Cash and cash equivalents

   $ 15.1        

Receivables, less allowances for doubtful accounts

     146.2        

Inventories

     22.2        

Prepaid expenses and other current assets

     7.3        
  

 

 

   

 

  

 

Total current assets

     190.8        
  

 

 

   

 

  

 

Property, plant and equipment—net

     33.0        

Goodwill

     446.8        

Other intangible assets—net

     69.3        

Software—net

     43.4        

Deferred income taxes

     10.6        

Other noncurrent assets

     23.7        
  

 

 

   

 

  

 

Total assets

   $ 817.6        
  

 

 

   

 

  

 

LIABILITIES

       

Accounts payable

     39.5        

Accrued liabilities

     75.4        

Short-term debt

     8.8        
  

 

 

   

 

  

 

Total current liabilities

     123.7        
  

 

 

   

 

  

 

Note payable with an RRD affiliate

     29.2        

Deferred compensation liabilities

     28.5        

Pension liabilities

     —          

Other noncurrent liabilities

     12.7        
  

 

 

   

 

  

 

Total liabilities

     194.1        
  

 

 

   

 

  

 

Commitments and Contingencies (Note 11)

       

EQUITY

       

Accumulated other comprehensive loss

     (16.0     

Additional Paid-in Capital

     —          

Common Stock

     —          

Net parent company investment

     639.5        
  

 

 

   

 

  

 

Total equity

     623.5        
  

 

 

   

 

  

 

Total liabilities and equity

   $ 817.6        
  

 

 

   

 

  

 

 

59


Table of Contents

Donnelley Financial Solutions

Notes to Unaudited Pro Forma Financial Statements

[To come]

 

60


Table of Contents

SELECTED HISTORICAL COMBINED FINANCIAL DATA

The following table presents Donnelley Financial’s selected historical combined financial data. The selected historical combined statements of operations data for the years ended December 31, 2015, 2014 and 2013 and the selected combined balance sheet data as of December 31, 2015 and 2014 are derived from its combined financial statements, which are included in the “Index to Combined Financial Statements” section of this Information Statement. The selected historical combined statements of operations data for the years ended December 31, 2012 and 2011 and the selected combined balance sheet data as of December 31, 2013, 2012 and 2011 are derived from Donnelley Financial’s unaudited combined financial statements that are not included in this Information Statement. The unaudited combined financial statement data has been prepared on a basis consistent with which Donnelley Financial’s combined financial statements have been prepared.

The selected historical combined financial data includes certain expenses of RRD that were allocated to Donnelley Financial for certain corporate functions, including general corporate expenses related to information technology, finance, legal, human resources, internal audit, treasury, tax, investor relations and executive oversight. These costs may not be representative of the future costs Donnelley Financial may incur as an independent, publicly traded company. In addition, Donnelley Financial’s historical financial information does not reflect changes that Donnelley Financial expects to experience in the future as a result of Donnelley Financial’s separation from RRD, including changes in Donnelley Financial’s cost structure, personnel needs, tax structure, financing and business operations. Accordingly, these historical results should not be relied upon as an indicator of Donnelley Financial’s future performance.

The historical combined financial statements do not reflect the allocation of certain net liabilities between Donnelley Financial and RRD as reflected under “Unaudited Pro Forma Combined Financial Information” in this Information Statement. As a result, the combined financial information included herein may not completely reflect Donnelley Financial’s financial position, results of operations and cash flows in the future or what our financial position, results of operations and cash flows would have been had we been an independent, publicly traded company during the periods presented.

For a better understanding, this section should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the “Unaudited Pro Forma Combined Financial Information” and accompanying notes included elsewhere in this Information Statement.

 

     Year Ended December 31,  
     2015      2014      2013      2012      2011  

(in millions)

              

Combined statements of operations data:

              

Net sales

   $ 1,049.5       $ 1,080.1       $ 1,085.4       $ 1,061.0       $ 1,138.9   

Net earnings

     104.3         57.4         96.3         71.7         64.5   

Combined balance sheet data:

              

Total assets

     817.6         994.2         880.5         926.7         1,045.1   

Note payable with an RRD affiliate

     29.2         44.0         58.7         73.1         —     

Reflects results of acquired businesses from the relevant acquisition dates.

Includes the following significant items:

 

    For 2015: Pre-tax restructuring, impairment and other charges of $4.4 million ($2.8 million after-tax);

 

    For 2014: Pre-tax restructuring, impairment and other charges of $4.8 million ($3.1 million after-tax), $95.7 million pre-tax settlement charges ($58.4 million after-tax) on lump-sum pension settlement payments; $6.1 million pre-tax gain ($3.7 million after-tax) on the sale of a building, pre-tax gain of $3.0 million ($1.8 million after-tax) on an equity investment;

 

61


Table of Contents
    For 2013: Pre-tax restructuring, impairment and other charges of $13.0 million ($8.0 million after-tax);

 

    For 2012: Pre-tax restructuring, impairment and other charges of $14.0 million ($8.5 million after-tax), pre-tax loss of $4.0 million ($2.4 million after-tax) on an equity investment; and

 

    For 2011: Pre-tax restructuring, impairment and other charges of $62.7 million ($40.0 million after-tax), pre-tax loss of $1.0 million ($0.6 million after-tax) on an equity investment.

 

62


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the combined financial statements and corresponding notes, and the unaudited annual pro forma combined financial statements and corresponding notes included elsewhere in this Information Statement. Any forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about our industry, business and future financial results. Any forward-looking statements are subject to a number of important factors, including those factors discussed under “Risk Factors” and “Cautionary Statement Concerning Forward-Looking Statements,” that could cause our actual results to differ materially from those indicated in such forward-looking statements. We believe the assumptions underlying the unaudited annual pro forma combined financial statements and corresponding notes are reasonable.

Spin-off Transaction

On August 4, 2015, RRD announced that its Board intends to create three independent public companies through the Separation: (i) the Company, which will be a financial communications and data services company, (ii) LSC Communications, which will be a publishing and retail-centric print services and office product company and (iii) a global, customized multichannel communications management company, which will be the business of RRD after the Separation. The transactions are expected to take the form of a tax-free distribution to RRD shareholders of at least 80% of the shares of common stock in the Company and LSC Communications. The transactions are subject to customary conditions, including obtaining a private letter ruling from the Internal Revenue Service and tax opinions, execution of intercompany agreements and final approval by RRD’s Board. For a description of the conditions, see “The Separation and the Distribution—Conditions to the Distribution.”

Structure of Transaction

Donnelley Financial was incorporated on February 22, 2016 as a wholly-owned subsidiary of RRD. Prior to the distribution of at least 80% of Donnelley Financial’s outstanding shares of common stock to holders of RRD’s common stock, which we refer to as the Distribution, following a series of internal restructuring transactions Donnelley Financial will own the subsidiaries, businesses and other assets owned by RRD, directly or indirectly, that are described in this Information Statement.

Basis of Presentation

The accompanying combined financial statements have been prepared on a stand-alone basis and are derived from RRD’s consolidated financial statements and accounting records. The combined financial statements include the financial position, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States (“GAAP”).

The combined financial statements include the allocation of certain assets and liabilities that have historically been held at the RRD corporate level but which are specifically identifiable or attributable to the Company. Cash and cash equivalents held by RRD were not allocated to Donnelley Financial unless they were held in a legal entity that will be transferred to Donnelley Financial. All intercompany transactions and accounts have been eliminated. All intracompany transactions between RRD and Donnelley Financial are considered to be effectively settled in the combined financial statements at the time the transaction is recorded, with the exception of a note payable with an RRD affiliate. The total net effect of the settlement of these intracompany transactions is reflected in the combined statements of cash flows as a financing activity and in the combined balance sheets as net parent company investment. Net parent company investment is primarily impacted by contributions from RRD which are the result of treasury activities and net funding provided by or distributed to RRD.

The combined financial statements include certain expenses of RRD which were allocated to Donnelley Financial for certain functions, including general corporate expenses related to information technology, finance,

 

63


Table of Contents

legal, human resources, internal audit, treasury, tax, investor relations and executive oversight. These expenses have been allocated to the Company on the basis of direct usage, when available, with the remainder allocated on the pro rata basis of revenue, employee headcount, or other measures. We consider the expense methodology and results to be reasonable for all periods presented. However these allocations may not be indicative of the actual expenses that we would have incurred as an independent public company or the costs we may incur in the future.

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

RRD maintains various benefit and share-based compensation plans at a corporate level. Donnelley Financial employees participate in those programs and a portion of the cost of those plans is included in Donnelley Financial’s combined financial statements. However, Donnelley Financial’s combined balance sheets do not include any equity related to share-based compensation plans or any net benefit plan obligations unless Donnelley Financial is the sole sponsor of the plan. See Note 12, Retirement Plans, and Note 15, Stock and Incentive Programs for Employees, to the combined financial statements for a further description of the accounting for the benefit and share-based compensation plans, respectively.

Donnelley Financial generates a portion of net revenue from sales to RRD’s subsidiaries. Additionally, Donnelley Financial utilizes RRD for freight and logistics, production of certain printed products and outsourced business services functions. Included in the combined financial statements are net revenues from intercompany sales of $7.8 million, $8.0 million and $8.9 million and cost of sales to RRD and its affiliates of $108.7 million, $115.8 million and $127.1 million for the years ended December 31, 2015, 2014 and 2013, respectively. Intercompany receivables and payables with RRD are reflected within net parent company investment in the accompanying combined financial statements. See Note 18, Related Parties, to the combined financial statements for a further description of related party transactions.

Business Overview

Donnelley Financial is an industry leading financial communications and data services company that supports global capital markets compliance and transaction needs for our corporate clients and their advisors (such as law firms and investment bankers) and global investment markets compliance and analytics needs for mutual fund companies, variable annuity providers and broker/dealers. The Company provides content management, multi-channel content distribution, data management and analytics services, collaborative workflow and business reporting tools, and translations and other language services in support of our clients’ communications requirements. The Company operates in two business segments:

 

    United States. The United States segment is comprised of three reporting units: capital markets, investment markets, and language solutions and other. The Company services capital market and investment market clients in the United States by delivering products and services to help create, manage and deliver financial communications to investors and regulators. The Company provides capital market and investment market clients with communication tools and services to allow them to comply with their ongoing regulatory filings. In addition, the U.S. segment provides clients with communications services to create, manage and deliver registration statements, prospectuses, proxies and other communications to regulators and investors. The U.S. segment also includes language solutions and commercial printing capabilities.

 

    International. The International segment includes operations in Asia, Europe, Latin America, Australia and Canada. The international business is primarily focused on working with international capital markets clients on capital markets offerings and regulatory compliance related activities into or within the United States. In addition, the International segment provides services to international investment market clients to allow them to comply with applicable SEC regulations, as well as language solutions to international clients.

 

64


Table of Contents

For a more detailed description of the Company’s business segments and product and service offerings, see “Business.”

The Company separately reports its net sales and related cost of sales for its products and services offerings. The Company’s product offerings primarily consist of conventional and digital printed products and related shipping costs. The Company’s services offerings consist of all non-print offerings, including document composition, compliance related EDGAR filing services, transaction solutions, data and analytics, content storage services and language solutions.

Factors Affecting Operating Results

The operating results of Donnelley Financial are dependent in part on general economic conditions, and the effect of these conditions on our customers. Many of our revenue streams depend in part on the volume of public financings, particularly debt and equity financings, and mergers and acquisitions, which are influenced by corporate funding needs, stock market fluctuations, prevailing interest rates and other general economic factors. An economic downturn could adversely affect results of operations, financial condition and cash flow.

Our revenue from transaction and compliance documents is subject to volatility in demand due to rules and regulations of the SEC and other regulatory bodies. Demand for the printing and distribution portions of our business has declined in recent years due to regulatory shift from documents to data and will continue to be impacted by pending rules and other actions by regulatory bodies, which could adversely affect our business and the results of operations.

The Company has implemented a number of strategic initiatives to reduce its overall cost structure and improve efficiency, including the restructuring, reorganization and integration of operations and streamlining of administrative and support activities.

For a further discussion on trends, uncertainties and other factors that could impact our operating results, see the section entitled “Risk Factors” included elsewhere in this Information Statement.

Non-GAAP Measures

The Company believes that certain non-GAAP measures, such as Non-GAAP adjusted EBITDA, when presented in conjunction with comparable GAAP measures, are useful because they are appropriate measures for evaluating the Company’s operating performance. Internally, the Company uses non-GAAP information as an indicator of business performance, and evaluates management’s effectiveness with specific reference to these indicators. These measures should be considered in addition to, not a substitute for, or superior to measures of financial performance prepared in accordance with GAAP.

 

65


Table of Contents

Non-GAAP adjusted EBITDA excludes restructuring, impairment and other charges-net, pension settlement charges, the gain on a sale of a building and the gain on an equity investment. A reconciliation of GAAP net earnings to Non-GAAP adjusted EBITDA for the years ended December 31, 2015, 2014 and 2013 for these adjustments is presented in the following table:

 

     For the Year Ended December 31,  
     2015      2014      2013  

Net earnings

   $ 104.3       $ 57.4       $ 96.3   

Restructuring, impairment and other charges—net

     4.4         4.8         13.0   

Pension settlement charges

     —           95.7         —     

Gain on sale of building

     —           (6.1      —     

Gain on equity investment

     —           (3.0      —     

Depreciation and amortization

     41.7         40.7         37.1   

Interest expense—net

     1.1         1.5         2.2   

Income tax expense

     67.4         35.0         62.6   
  

 

 

    

 

 

    

 

 

 

Non-GAAP adjusted EBITDA

   $ 218.9       $ 226.0       $ 211.2   
  

 

 

    

 

 

    

 

 

 

2015 Restructuring, impairment and other charges—net. The year ended December 31, 2015 included $2.3 million for employee termination costs related to the reorganization of certain administrative functions; $1.9 million of lease termination and other restructuring costs and $0.2 million for other charges associated with the Company’s decision to withdraw in 2013 from certain multi-employer pension plans serving facilities that continued to operate.

2014 Restructuring, impairment and other charges—net. The year ended December 31, 2014 included $2.1 million of lease termination and other restructuring costs; $1.7 million for the impairment of an acquired customer relationship intangible asset; $0.7 million for employee termination costs related to the integration of Multicorpora and the reorganization of certain operations and $0.3 million for other charges associated with the Company’s decision to withdraw in 2013 from certain multi-employer pension plans serving facilities that continued to operate.

2013 Restructuring, impairment and other charges—net. The year ended December 31, 2013 included $3.3 million for the impairment of an acquired customer relationship intangible asset; $3.4 million related to the decision to withdraw from certain multi-employer pension plans serving facilities that continued to operate; $2.4 million of impairment charges primarily related to buildings and machinery and equipment associated with facility closings; $2.0 million of lease termination and other restructuring charges and $1.9 million for employee termination costs primarily related to the reorganization of certain administrative functions.

Pension settlement charges. Included pre-tax charges of $95.7 million for the year ended December 31, 2014, related to lump-sum pension settlement payments. See Note 12, Retirement Plans, to the combined financial statements for further discussion.

Gain on sale of a building. Included a gain of $6.1 million related to the sale of a building for the year ended December 31, 2014.

Gain on an equity investment. Included a gain of $3.0 million related to the sale of an equity investment for the year ended December 31, 2014.

Significant Accounting Policies and Critical Estimates

The preparation of 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 and disclosure

 

66


Table of Contents

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, pension, asset valuations and useful lives, income taxes, restructuring and other provisions and contingencies.

Revenue Recognition

The Company manages highly-customized data and materials, such as Exchange Act, Securities Act and Investment Company Act filings with the SEC on behalf of our customers, manages virtual and physical data rooms and performs XBRL and related services. Clients are provided with EDGAR filing services, XBRL compliance services and translation, editing, interpreting, proof-reading and multilingual typesetting services, among others. Our products include our ActiveDisclosure solution and our Venue Virtual Data Room product, among others. Revenue for services is recognized upon completion of the service performed or following final delivery of the related printed product. The Company recognizes revenue for the majority of its products upon the transfer of title or risk of ownership, which is generally upon shipment to the customer. Because substantially all 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. Refer to Note 2, Summary of Significant Accounting Policies, to the combined financial statements for further discussion.

Certain revenues earned by the Company require significant judgment to determine if revenue should be recorded gross, as a principal, or net of related costs, as an agent. Billings for shipping and handling costs as well as certain postage costs and out-of-pocket expenses are recorded gross.

Goodwill and Other Long-Lived Assets

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. Goodwill is either assigned to a specific reporting unit or allocated between reporting units based on the relative fair value of each reporting unit. Based on its current organization structure, the Company has identified four reporting units for which cash flows are determinable and to which goodwill may be allocated.

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.

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 two-step method for determining goodwill impairment is applied. The first step compares the reporting unit’s estimated fair value with its carrying value. Determining the estimated fair value of individual reporting units requires the Company to make significant assumptions and estimates, which primarily include: the selection of appropriate peer group companies, control premiums appropriate for acquisitions in our industry; the discount rate, terminal growth rates, forecasts of revenue, operating income, depreciation and amortization and capital expenditures. If the carrying value of a reporting unit’s net assets exceeds its fair value, the second step is applied

 

67


Table of Contents

to measure the difference between the carrying value and implied fair value of goodwill. If the carrying value of goodwill exceeds its implied fair value, the goodwill is considered impaired and reduced to its implied fair value. As of October 31, 2015, each of the four reporting units had goodwill. Based on the fair value analysis completed in the fourth quarter of 2015, management concluded that fair value exceeded carrying value for all reporting units and that no reporting units were at risk of goodwill impairment.

Other Long-Lived Assets

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. Factors which 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. There was no impairment charge related to intangible assets for the year ended December 31, 2015.

Pension and Other Postretirement Benefits Plans

Our Participation in RRD’s Pension and Postretirement Benefits Plans

Donnelley Financial employees participate in various pension and other postretirement healthcare plans sponsored by RRD. In Donnelley Financial’s combined financial statements, these plans are accounted for as multiemployer benefit plans and as a result the related net benefit obligations are not reflected in Donnelley Financial’s combined balance sheets. Donnelley Financial’s combined statements of operations include expense allocations for these benefits. These expenses were funded through intercompany transactions with RRD which are reflected within net parent company investment. At the separation date, Donnelley Financial expects to record net benefit plan obligations transferred from RRD.

Donnelley Financial’s Pension Plans

Effective December 31, 2013, RRD merged its primary qualified defined benefit pension plan with a separate defined benefit pension plan sponsored by Donnelley Financial. As a result of this merger, Donnelley Financial became the plan sponsor and primary legal obligor of this combined plan. Donnelley Financial’s combined balance sheets reflect the net obligations of the combined plan as of December 31, 2014 and 2013. During 2015, the sponsorship of this combined plan was transferred to RRD, which became the primary legal obligor. Accordingly, the obligations of this combined plan are not reflected in the combined balance sheets of Donnelley Financial as of December 31, 2015.

The annual income and expense amounts relating to the pension plan are based on calculations which include various actuarial assumptions including, mortality expectations, discount rates and expected long-term rates of return. The Company reviews its actuarial assumptions on an annual basis as of December 31 (or more frequently if a significant event requiring remeasurement occurs) and modifies the assumptions based on current rates and trends when it is appropriate to do so. The effects of modifications are recognized immediately on the combined balance sheets, but are amortized into operating earnings over future periods, with the deferred amount recorded in accumulated other comprehensive income (loss). Total pension (income) expense was ($27.0) million, $62.1 million and ($0.7) million in 2015, 2014 and 2013, respectively, and we have allocated ($25.2) million, ($31.0) million and $0.4 million in the year ended December 31, 2015, 2014 and 2013, respectively to RRD and its subsidiaries.

 

68


Table of Contents

In June 2014, RRD communicated to certain former employees the option to receive a lump-sum pension payment or annuity computed in accordance with statutory requirements, with payments beginning in the fourth quarter of 2014. Payments to eligible participants who elected to receive a lump-sum pension payment or annuity were funded from existing pension plan assets and constituted a complete settlement of the Company’s pension liabilities with respect to these participants. The Company’s pension assets and liabilities were remeasured as of the payout dates. The discount rates and actuarial assumptions used to calculate the payouts were determined in accordance with federal regulations. As of the remeasurement dates, the reductions in the reported pension obligations for these participants was $404.0 million, compared to payout amounts of approximately $317.7 million. The Company recorded non-cash settlement charges of $95.7 million included in selling, general and administrative expenses in the fourth quarter of 2014 in connection with the settlement payments. These charges resulted from the recognition in earnings of a portion of the losses recorded in accumulated other comprehensive loss based on the proportion of the obligation settled.

During the year ended December 31, 2014, the Company adopted the Society of Actuaries RP-2014 mortality tables which were used in the calculation of the Company’s combined plans’ pension obligations. The new mortality tables include an increased life expectancy of plan participants, extending the length of time that payments are expected to be required and increasing the plans’ total expected benefit payments. The updated mortality assumptions increased the benefit obligation for the combined pension plans by approximately $274.0 million as of December 31, 2014. The Company believes that the assumptions utilized in recording its obligations under its combined plans are reasonable based on its experience, market conditions and input from its actuaries and investment advisors. The Company determines its assumption for the discount rate to be used for purposes of computing pension plan obligations based on an index of high-quality corporate bond yields and matched-funding yield curve analysis. The discount rates for pension benefits at December 31, 2014 and 2013 were 5.0%, and 4.2%, respectively.

RRD’s combined pension plan is frozen and the plan has transitioned to a risk management approach for its pension plan assets. The overall investment objective of this approach is to further reduce the risk of significant decreases in the combined plan’s funded status by allocating a larger portion of the combined plan’s assets to investments expected to hedge the impact of interest rate risks on the combined plan’s obligation. Over time, the target asset allocation percentage for the combined pension plan is expected to decrease for equity and other “return seeking” investments and increase for fixed income and other “hedging” investments.

The expected long-term rate of return for the combined 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 combined pension plan was approximately 60.0% for return seeking investments and approximately 40.0% for hedging investments.

Accounting for Income Taxes

In the Company’s combined financial statements, income tax expense and deferred tax balances have been calculated on a separate income tax 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 a part. In the future, as a standalone entity, the Company will file tax returns on its own behalf and its deferred taxes and effective tax rate may differ from those in historical periods.

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

 

69


Table of Contents

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, 2015 and 2014, valuation allowances of $4.9 million and $5.3 million, respectively, were recorded in the Company’s combined balance sheets.

Deferred U.S. income taxes and foreign taxes are not provided on the excess of the investment value for financial reporting over the tax basis of investments in those foreign subsidiaries because such excess is considered to be permanently reinvested in those operations. Certain cash balances of foreign subsidiaries may be subject to U.S. or local country taxes if repatriated to the U.S. In addition, repatriation of some foreign cash balances is further restricted by local laws. Management regularly evaluates whether foreign earnings are expected to be permanently reinvested. This evaluation requires judgment about the future operating and liquidity needs of the Company and its foreign subsidiaries. Changes in economic and business conditions, foreign or U.S. tax laws, or the Company’s financial situation could result in changes to these judgments and the need to record additional tax liabilities.

Commitments and Contingencies

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 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.

Restructuring

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 $4.2 million for the year ended December 31, 2015. The restructuring liabilities might 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 might result in reversals of or additions to restructuring charges that could affect amounts reported in the combined statements of operations of future periods.

Accounts Receivable

The Company maintains an allowance for doubtful accounts receivable to account 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 $4.6 million at December 31, 2015 and $3.9 million at December 31, 2014. The Company also maintains a reserve for potential credit memos and disputed items. The credit memo and disputed items reserve is based on historical credit memos relative to billings and was $8.3 million at December 31, 2015 and $6.6 million at December 31, 2014. 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.

 

70


Table of Contents

Share-Based Compensation

RRD maintains an incentive share-based compensation program for the benefit of its officers, directors, and certain employees including certain Donnelley Financial employees. Share-based compensation expense has been allocated to the Company based on the awards and terms previously granted to the Company’s employees as well as an allocation of compensation expense related to RRD’s corporate and shared functional employees. The total compensation expense related to all share-based compensation plans was $1.6 million for the year ended December 31, 2015. See Note 15, Stock and Incentive Programs for Employees, to the Combined Financial Statements for further discussion.

Off-Balance Sheet Arrangements

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

Financial Review

In the financial review that follows, the Company discusses its combined results of operations, cash flows and certain other information. The Company has not previously operated as an independent, stand-alone company, but rather as a part of RRD. There are limitations inherent in the preparation of all carve out financial statements due to the fact that the Company’s business was previously part of a larger organization. This discussion should be read in conjunction with the Company’s combined financial statements and the related notes that begin on page F-1.

Results of Operations for the Year Ended December 31, 2015 as Compared to the Year Ended December 31, 2014

The following table shows the results of operations for the year ended December 31, 2015 and 2014, which reflects the results of acquired businesses from the relevant acquisition dates:

 

     2015      2014      $ Change      % Change  
     (in millions, except percentages)  

Services net sales

   $ 628.6       $ 638.2       $ (9.6      (1.5 %) 

Products net sales

     420.9         441.9         (21.0      (4.8 %) 
  

 

 

    

 

 

    

 

 

    

Net sales

     1,049.5         1,080.1         (30.6      (2.8 %) 

Services cost of sales (exclusive of depreciation and amortization)

     291.9         301.2         (9.3      (3.1 %) 

Services cost of sales with RRD affiliates (exclusive of depreciation and amortization)

     40.4         39.3         1.1         2.8

Products cost of sales (exclusive of depreciation and amortization)

     230.9         236.3         (5.4      (2.3 %) 

Products cost of sales with RRD affiliates (exclusive of depreciation and amortization)

     68.3         76.5         (8.2      (10.7 %) 
  

 

 

    

 

 

    

 

 

    

Cost of sales

     631.5         653.3         (21.8      (3.3 %) 

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

     199.2         290.5         (91.3      (31.4 %) 

Restructuring, impairment and other charges—net

     4.4         4.8         (0.4      (8.3 %) 

Depreciation and amortization

     41.7         40.7         1.0         2.5
  

 

 

    

 

 

    

 

 

    

Income from operations

   $ 172.7       $ 90.8       $ 81.9         90.2
  

 

 

    

 

 

    

 

 

    

 

71


Table of Contents

Combined

Net sales of services for the year ended December 31, 2015 decreased $9.6 million, or 1.5%, to $628.6 million, versus the year ended December 31, 2014 including an $8.7 million, or 1.4%, decrease due to changes in foreign exchange rates. Additionally, net sales of services decreased due to lower capital market transactions volume, partially offset by volume growth in translation services, virtual data room services and mutual fund content management services.

Net sales of products for the year ended December 31, 2015 decreased $21.0 million, or 4.8%, to $420.9 million versus the year ended December 31, 2014, including a $6.8 million, or 1.5%, decrease due to changes in foreign exchange rates. The decline in net sales of products was primarily due to lower healthcare and mutual funds print volume, price pressures in investment markets and lower commercial print volume.

Services cost of sales decreased $8.2 million, or 2.4% for the year ended December 31, 2015, versus the prior year. Services cost of sales decreased due to lower capital market transactions volume in both segments and cost savings initiatives, partially offset by wage and other cost inflation and higher translation services volume. As a percentage of net sales, services cost of sales decreased 0.5% primarily due to cost savings initiatives that more than offset wage and other cost inflation.

Products cost of sales decreased $13.6 million or 4.3% for the year ended December 31, 2015, versus the prior year. Products cost of sales decreased primarily due to lower print volume and cost savings initiatives, partially offset by wage and other inflationary increases. As a percentage of net sales, products cost of sales increased 0.3% primarily due to wage and other cost inflation, the impact of price pressures and lower volume, mostly offset by cost reductions.

Selling, general and administrative expenses decreased $91.3 million, or 31.4%, to $199.2 million, for the year ended December 31, 2015, as compared to the year ended December 31, 2014, primarily due to the 2014 impact of the pension settlement charge of $95.7 million and cost control initiatives, partially offset by the impact of the sale of a building of $6.1 million in 2014. As a percentage of net sales, selling, general, and administrative expenses decreased 7.9 percentage points to 19.0%. The impact of the 2014 pension settlement charge and gain on sale of a building drove a decrease of 8.3 percentage points, which was partially offset by the impact of lower volume and price pressures.

For the year ended December 31, 2015, the Company recorded net restructuring, impairment and other charges of $4.4 million, as compared to $4.8 million in the year ended December 31, 2014. In 2015, these charges included $2.3 million of employee termination costs for 64 employees, all of whom were terminated as of December 31, 2015. These charges were primarily the result of the reorganization of certain administrative functions. The Company also incurred lease termination and other restructuring charges of $1.9 million and other charges of $0.2 million associated with the Company’s decision to withdraw in 2013 from certain multi-employer pension plans during the year ended December 31, 2015. The 2014 charges included lease termination and other restructuring charges of $2.1 million and charges of $1.7 million for the impairment of an acquired customer relationship intangible asset in 2014. The Company also incurred $0.7 million of employee termination costs as a result of the integration of MultiCorpora and the reorganization of certain operations and other charges of $0.3 million associated with the Company’s decision to withdraw in 2013 from certain multi-employer pension plans during the year ended December 31, 2014.

Depreciation and amortization increased $1.0 million, or 2.5%, to $41.7 million for the year ended December 31, 2015 compared to the year ended December 31, 2014. Depreciation and amortization included $15.4 million and $16.6 million, respectively, of amortization of other intangible assets related to customer relationships, trade names, and non-compete agreements for the years ended December 31, 2015 and 2014.

Income from operations for the year ended December 31, 2015 increased $81.9 million or 90.2% to $172.7 million versus the year ended December 31, 2014, due to the favorable impact of the prior year pension

 

72


Table of Contents

settlement charges of $95.7 million, higher translation services in both segments and cost control initiatives that were more than offset by the unfavorable impact of the prior year sale of a building of $6.1 million, price pressures and lower volume in capital market transactions across both segments and domestic investment management volume.

 

     2015      2014      $ Change      % Change  
     (in millions, except percentages)  

Interest expense—net

   $ 1.1       $ 1.5       $ (0.4      (26.7 %) 

Investment and other income—net

     0.1         3.1         (3.0      (96.8 %) 

Net interest expense decreased by $0.4 million for the year ended December 31, 2015 versus the year ended December 31, 2014, primarily due to a decrease in average outstanding debt with an RRD affiliate.

Net investment and other income for the year ended December 31, 2015 decreased $3.0 million versus the year ended December 31, 2014, due to the impact of a 2014 gain on the sale of an equity investment.

 

     2015     2014     $ Change      % Change  
     (in millions, except percentages)  

Income before income taxes

   $ 171.7      $ 92.4      $ 79.3         85.8

Income tax expense

     67.4        35.0        32.4         92.6

Effective income tax rate

     39.3     37.9     

The effective income tax rate for the year ended December 31, 2015 was 39.3%, as compared to 37.9% for the year ended December 31, 2014. This increase resulted from a lower proportion of taxable earnings in international jurisdictions which have lower statutory tax rates than the U.S., for the year ended December 31, 2015.

Information by Segment

The following tables summarize net sales, income (loss) from operations and certain items impacting comparability within each of the operating segments and Corporate.

U.S.

 

     Year Ended
December 31,
 
     2015     2014  
     (in millions, except
percentages)
 

Net sales

   $ 900.8      $ 916.3   

Income from operations

     160.3        175.7   

Operating margin

     17.8     19.2

Restructuring, impairment and other charges—net

     3.5        2.5   

Gain on sale of building

     —          6.1   

 

     Net Sales for the
Year Ended December 31
               

Reporting unit

       2015              2014          $ Change      % Change  
     (in millions, except percentages)  

Capital Markets

   $ 517.4       $ 526.8       $ (9.4      (1.8 %) 

Investment Markets

     339.3         348.0         (8.7      (2.5 %) 

Language Solutions and other

     44.1         41.5         2.6         6.3
  

 

 

    

 

 

    

 

 

    

Total U.S.

   $ 900.8       $ 916.3       $ (15.5      (1.7 %) 
  

 

 

    

 

 

    

 

 

    

 

73


Table of Contents

Net sales for the U.S. segment for the year ended December 31, 2015 were $900.8 million, a decrease of $15.5 million, or 1.7%, compared to the year ended December 31, 2014. Net sales decreased due to lower capital markets and investment markets volume and price pressures. An analysis of net sales by reporting unit follows:

 

    Capital Markets: Sales decreased primarily due to lower transactional and data and analytics volume, partially offset by an increase in compliance and virtual data room services.

 

    Investment Markets: Sales decreased due to lower healthcare and mutual funds volume and price pressures, partially offset by an increase in content management services volume.

 

    Language Solutions and other: Sales increased due to higher translation services volume, mostly offset by lower commercial print volume.

U.S. segment income from operations decreased $15.4 million or 8.8% for the year ended December 31, 2015 as compared to the year ended December 31, 2014 primarily due to the 2014 $6.1 million gain on a sale of a building, the decreases in capital markets transactions volume and investment markets volume, as well as price pressures, partially offset by the impact of cost control initiatives.

Operating margins for the year ended December 31, 2015 decreased from 19.2% to 17.8% for the year ended December 31, 2015 as compared to the year ended December 31, 2014. The 2014 building sale and higher restructuring, impairment and other charges negatively impacted margins by 0.8 percentage points in 2015 compared to 2014. Operating margins also decreased due to the lower capital markets transactions volume, unfavorable mix and price pressures, partially offset by the impact of cost control initiatives.

International

 

     Year Ended
December 31,
 
     2015     2014  
     (in millions, except
percentages)
 

Net sales

   $ 148.7      $ 163.8   

Income from operations

     15.3        17.2   

Operating margin

     10.3     10.5

Restructuring, impairment and other charges—net

     0.9        2.3   

Net sales for the International segment for the year ended December 31, 2015 were $148.7 million, a decrease of $15.1 million, or 9.2%, compared to the year ended December 31, 2014 including a $15.5 million, or 9.5% decrease due to changes in foreign exchange rates. In addition, an increase in international translation services and compliance volume was partially offset by a decline in capital market transactions volume.

International segment income from operations decreased $1.9 million or 11.0% compared to the year ended December 31, 2014 due to the decline in capital markets transactions volume and the impact of foreign exchange rates, partially offset by increased volume in translation services, cost control initiatives, and lower restructuring, impairment and other charges.

Operating margins decreased slightly from 10.5% for the year ended December 31, 2014 to 10.3% for the year ended December 31, 2015, as the reduced volume in capital markets transactions was largely offset by cost control actions and lower restructuring, impairment and other charges.

 

74


Table of Contents

Corporate

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

 

     Year Ended
December 31,
 
     2015      2014  
     (in millions)  

Operating expenses

   $ 2.9       $ 102.1   

Pension settlement charges

     —           95.7   

Corporate operating expenses in the year ended December 31, 2015 were $2.9 million, a decrease of $99.2 million compared to the year ended December 31, 2014. The decrease was driven by the favorable impact of $95.7 million related to the 2014 pension settlement charge described above and lower employee benefit costs.

Results of Operations for the Year Ended December 31, 2014 as Compared to the Year Ended December 31, 2013

 

     2014      2013      $ Change      % Change  
     (in millions, except percentages)  

Services net sales

   $ 638.2       $ 615.6       $ 22.6         3.7

Products net sales

     441.9         469.8         (27.9      (5.9 %) 
  

 

 

    

 

 

    

 

 

    

Net sales

     1,080.1         1,085.4         (5.3      (0.5 %) 

Services cost of sales (exclusive of depreciation and amortization)

     301.2         315.6         (14.4      (4.6 %) 

Services cost of sales with RRD affiliates (exclusive of depreciation and amortization)

     39.3         36.6         2.7         7.4

Products cost of sales (exclusive of depreciation and amortization)

     236.3         242.1         (5.8      (2.4 %) 

Products cost of sales with RRD affiliates (exclusive of depreciation and amortization)

     76.5         90.5         (14.0      (15.5 %) 
  

 

 

    

 

 

    

 

 

    

Cost of sales

     653.3         684.8         (31.5      (4.6 %) 

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

     290.5         189.7         100.8         53.1

Restructuring, impairment and other charges—net

     4.8         13.0         (8.2      (63.1 %) 

Depreciation and amortization

     40.7         37.1         3.6         9.7
  

 

 

    

 

 

    

 

 

    

Income from operations

   $ 90.8       $ 160.8       $ (70.0      (43.5 %) 
  

 

 

    

 

 

    

 

 

    

Combined

Net sales from services for the year ended December 31, 2014 increased $22.6 million, or 3.7%, to $638.2 million compared to the year ended December 31, 2013, including a $0.7 million, or 0.1%, increase due to changes in foreign exchange rates. The increase in net sales from services was primarily due to higher capital markets transactions volume in the U.S. and International segments along with higher virtual data room and translation services volume partially offset by lower XBRL compliance services volume.

Net sales of products for the year ended December 31, 2014 decreased $27.9 million or 5.9% to $441.9 million, compared to the year ended December 31, 2013, including a $1.4 million, or 0.3%, decrease due to changes in foreign exchange rates. Net sales of products decreased due to lower print volume for mutual funds

 

75


Table of Contents

and corporate compliance documents and price pressures, partially offset by an increase in volume for healthcare plans, in part driven by customers’ implementation of the Affordable Care Act.

Services cost of sales decreased $11.7 million, or 3.3% for the year ended December 31, 2014 compared to the year ended December 31, 2013. Services cost of sales decreased due to cost savings initiatives and restructuring actions, partially offset by volume increases. As a percentage of net sales, services cost of sales decreased 3.9% primarily due to cost control initiatives and favorable work mix driven by the increase in capital market transactions volume which were partially offset by wage and other cost inflation.

Products cost of sales decreased $19.8 million, or 6.0%, for the year ended December 31, 2014, compared to the year ended December 31, 2013. Products cost of sales decreased primarily due to lower volume in the U.S. segment and cost savings initiatives. As a percentage of net sales, products cost of sales remained constant as the impact of price pressures and cost inflation was offset by cost reductions.

Selling, general and administrative expenses increased $100.8 million, or 53.1%, to $290.5 million, and from 17.5% to 26.9% as a percentage of net sales, for the year ended December 31, 2014 compared to the year ended December 31, 2013. The increase in these expenses reflected the pension settlement charges of $95.7 million, higher incentive compensation expense and higher bad debt expense, partially offset by a $6.1 million gain on the sale of a building and cost control initiatives. As a percentage of net sales, the pension settlement charges and gain on the sale of a building drove 8.3 percentage points of the increase. The remaining increase reflected the impact of higher incentive compensation costs and bad debt expense, as well as the impact of lower prices on net sales.

For the year ended December 31, 2014, the Company recorded net restructuring, impairment and other charges of $4.8 million, compared to $13.0 million in the same period in 2013. In 2014, these charges included lease termination and other reorganization charges of $2.1 million, non-cash charges of $1.7 million for the impairment of an acquired customer relationship intangible asset, $0.7 million of employee termination costs for 9 employees, and other charges of $0.3 million associated with the Company’s decision to withdraw in 2013 from certain multi-employer pension plans serving facilities that continued to operate. In 2013, the Company recorded non-cash charges of $3.4 million associated with its decision to withdraw from multi-employer pension plans servicing facilities that continue to operate, $3.3 million for the impairment of an acquired customer relationship intangible asset, $2.4 million of impairment charges primarily related to buildings and machinery and equipment associated with facility closures, lease termination and other charges of $2.0 million and $1.9 million of employee termination costs for 37 employees as a result of facility closures and the reorganization of certain facilities.

Depreciation and amortization increased $3.6 million, or 9.7%, to $40.7 million for the year ended December 31, 2014, as compared to the year ended December 31, 2013 primarily due to higher information technology spend largely associated with further enhancements to the Company’s XBRL and content management services platforms. Depreciation and amortization included $16.6 million and $19.3 million, respectively, of amortization of other intangible assets related to customer relationships, trade names, trademarks, licenses and agreements for the year ended December 31, 2014 and 2013, respectively.

Income from operations for the year ended December 31, 2014 was $90.8 million, a decrease of $70.0 million, compared to the year ended December 31, 2013. The decrease was due to the pension settlement charges of $95.7 million and reduced compliance volume, partially offset by increased international and U.S. capital markets transactions volume, a gain on the sale of a building of $6.1 million and cost control initiatives.

 

     2014      2013      $ Change      % Change  
     (in millions, except percentages)  

Interest expense—net

   $ 1.5       $ 2.2       $ (0.7      (31.8 %) 

Investment and other income—net

     3.1         0.3         2.8         933.3

 

76


Table of Contents

Net interest expense decreased by $0.7 million for the year ended December 31, 2014 versus the year ended December 31, 2013, primarily due to a decrease in average outstanding debt with an RRD affiliate.

Net investment and other income for the year ended December 31, 2014 and 2013 increased $2.8 million primarily due to the $3.0 million gain on the 2014 sale of an equity investment.

 

     2014     2013     $ Change      % Change  
     (in millions, except percentages)  

Earnings before income taxes

   $ 92.4      $ 158.9      $ (66.5      (41.9 %) 

Income tax expense

     35.0        62.6        (27.6      (44.1 %) 

Effective income tax rate

     37.9     39.4     

The effective income tax rate for the year ended December 31, 2014 was 37.9%, as compared to 39.4% for the year ended December 31, 2013. This decrease resulted from a higher proportion of taxable earnings in international jurisdictions which have lower statutory tax rates than the U.S., for the year ended December 31, 2014.

Information by Segment

The following tables summarize net sales, income (loss) from operations and certain items impacting comparability within each of the operating segments and Corporate.

U.S.

 

     Year Ended
December 31,
 
     2014     2013  
     (in millions)  

Net sales

   $ 916.3      $ 937.2   

Income from operations

     175.7        158.5   

Operating margin

     19.2     16.9

Restructuring, impairment and other charges—net

     2.5        12.3   

Gain on sale of building

     6.1        —     

 

     Net Sales for the
Year Ended December 31
               

Reporting unit

       2014              2013          $ Change      % Change  
     (in millions, except percentages)  

Capital Markets

   $ 526.8       $ 546.1       $ (19.3      (3.5 %) 

Investment Markets

     348.0         347.1         0.9         0.3

Language Solutions and other

     41.5         44.0         (2.5      (5.7 %) 
  

 

 

    

 

 

    

 

 

    

Total U.S.

   $ 916.3       $ 937.2       $ (20.9      (2.2 %) 
  

 

 

    

 

 

    

 

 

    

Net sales for the U.S. segment for the year ended December 31, 2014 were $916.3 million, a decrease of $20.9 million, or 2.2%, versus the year ended December 31, 2013. Net sales decreased due to lower compliance and investment markets volume, partially offset by an increase in capital markets transaction activity. An analysis of net sales by reporting unit follows:

 

    Capital Markets: Sales decreased primarily due to lower compliance services volume partially offset by an increase in capital markets transactions activity and increased virtual data room services volume.

 

    Investment Markets: Sales increased slightly due to higher volume of content management services for mutual funds, mostly offset by price pressures.

 

    Language Solutions and other: Sales decreased primarily due to lower commercial print volume.

 

77


Table of Contents

U.S. segment income from operations increased $17.2 million for the year ended December 31, 2014 compared to the year ended December 31, 2013, due to lower restructuring, impairment and other charges, a gain on the sale of a building of $6.1 million and cost control initiatives, partially offset by price pressures primarily in Investment Markets. Operating margins increased from 16.9% to 19.2% of which 1.7 percentage points were due to lower restructuring, impairment and other charges and the gain on the sale of a building. The remainder of the increase was attributable to cost control initiatives partially offset by price pressures.

International

 

     Year Ended
December 31,
 
     2014     2013  

Net sales

   $ 163.8      $ 148.2   

Income from operations

     17.2        12.8   

Operating margin

     10.5     8.6

Restructuring, impairment and other charges—net

     2.3        0.7   

Net sales for the International segment for the year ended December 31, 2014 were $163.8 million, an increase of $15.6 million, or 10.5%, compared to the year ended December 31, 2013, including a $0.7 million or 0.5% decrease due to foreign exchange rates. Net sales increased due to higher capital markets transactions activity in Asia and Canada, and higher language solutions volume in Europe and Canada, partially offset by lower compliance volume in Canada.

International segment income from operations increased $4.4 million or 34.4% for the year ended December 31, 2014 compared to the year ended December 31, 2013 due to higher capital markets transactions volume, partially offset by higher restructuring, impairment and other charges.

Operating margins increased from 8.6% to 10.5%, including the impact of higher restructuring, impairment and other charges, which unfavorably impacted margins by 0.9 percentage points. The increase was driven by the impact of higher capital markets volume and cost control initiatives.

Corporate

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

 

     Year Ended
December 31,
 
     2014      2013  
     (in millions)  

Operating expenses

   $ 102.1       $ 10.5   

Pension settlement charges

     95.7         —     

Corporate operating expenses in the year ended December 31, 2014 increased $91.6 million versus the same period in 2013. The increase was driven by the pension settlement charges of $95.7 million, partially offset by higher pension income and lower employee benefit expenses.

Liquidity and Capital Resources

The following describes the Company’s cash flows for the years ended December 31, 2015, 2014 and 2013.

Cash Flows from Operating Activities

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

 

78


Table of Contents

activities. Allocations of operating expenses from RRD are also reflected as operating cash inflows or outflows, including those for pension costs and current income taxes payable.

2015 compared to 2014

Net cash provided by operating activities was $120.9 million for the year ended December 31, 2015 compared to $125.3 million for the year ended December 31, 2014. The decrease in net cash provided by operating activities reflected the timing of cash collections, the impact of lower volume and unfavorable work mix and the impact of expenses allocated to or from RRD, partially offset by the timing of supplier payments. Operating cash flows related to allocated expenses resulted in a decrease in cash provided by operating activities in 2015, driven primarily by higher current income tax deemed settlements, partially offset by pension and postretirement benefit income allocations.

2014 compared to 2013

Net cash provided by operating activities was $125.3 million for the year ended December 31, 2014 compared to $139.3 million for the year ended December 31, 2013. The decrease in net cash provided by operating activities reflected the unfavorable impact of expenses allocated to or from RRD in 2014, partially offset by the increased volume in services, cost savings initiatives and favorable work mix. Operating cash flows related to allocated expenses resulted in a decrease in cash provided by operating activities in 2014, primarily related to pension and postretirement benefit allocations, partially offset by lower current income tax deemed settlements.

Cash Flows Used For Investing Activities

2015 compared to 2014

Net cash used in investing activities for the year ended December 31, 2015 was $37.1 million compared to $29.5 million for the year ended December 31, 2014. The increase was due to a $10.0 million purchase of an equity investment for the year ended December 31, 2015 compared to $6.0 million used for the acquisition of MultiCorpora in 2014 and proceeds received from the sale of other assets in 2014.

2014 compared to 2013

Net cash used in investing activities for the year ended December 31, 2014 was $29.5 million compared to $11.1 million for the year ended December 31, 2013. The increase for the year ended December 31, 2014 was primarily due to a $9.2 million increase in capital expenditures and the $6.0 million paid for the acquisition of MultiCorpora in 2014. Cash provided by investing activities included proceeds from the sale of other assets of $5.3 million during the year ended December 31, 2014 as compared to $6.9 million for the year ended December 31, 2013, primarily related to the sales of property and other assets.

Cash Flows From Financing Activities

2015 compared to 2014

Net cash used in financing activities for the year ended December 31, 2015 was $94.8 million compared to $90.4 million for the year ended December 31, 2014. The increase was due to changes in short-term debt, partially offset by a $6.9 million decrease in net transfers to RRD and its affiliates.

2014 compared to 2013

Net cash used in financing activities for the year ended December 31, 2014 was $90.4 million compared to $131.7 million for the year ended December 31, 2013. The decrease was primarily due to a $49.5 million decrease in net transfers to RRD and its affiliates, partially offset by changes in short-term debt.

 

79


Table of Contents

Contractual Cash Obligations and Other Commitments on Contingencies

The following table quantifies the Company’s future contractual obligations as of December 31, 2015:

 

     Payments Due In  
     Total      2016      2017      2018      2019      2020      Thereafter  
     (in millions)  

Operating leases (a)

   $ 117.7       $ 30.1       $ 21.7       $ 12.9       $ 10.3       $ 8.6       $ 34.1   

Deferred compensation

     35.3         5.3         3.9         5.3         3.9         1.3         15.6   

Debt and related interest

     39.0         24.1         14.9         —           —           —           —     

Multi-employer pension plan withdrawal obligations

     6.8         0.4         0.4         0.4         0.4         0.4         4.8   

Incentive compensation

     2.5         2.5         —           —           —           —           —     

Pension plan contributions

     3.2         1.1         1.1         1.0         —           —           —     

Outsourced services

     1.1         0.8         0.3         —           —           —           —     

Other (b)

     6.3         6.3         —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total as of December 31, 2015

   $ 211.9       $ 70.6       $ 42.3       $ 19.6       $ 14.6       $ 10.3       $ 54.5   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) Operating leases include obligations to landlords.
(b) Other includes purchases of property, plant and equipment ($3.2 million), employee restructuring-related severance payments ($0.9 million) and miscellaneous other obligations.

Amounts in the table above do not include any debt that will be incurred in connection with the spin-off transaction.

Liquidity

Historically, RRD has provided financing, cash management and other treasury services to Donnelley Financial. Our cash balances are swept by RRD and we have received funding from RRD for our operating and investing cash needs. Substantially all of the cash and cash equivalents recorded on the combined balance sheets are in international jurisdictions. Cash transferred to and from RRD has been recorded as intercompany payables and receivables which are reflected in the net parent company investment in the accompanying combined financial statements.

We have not recognized deferred tax liabilities related to local taxes on certain foreign earnings as foreign earnings are considered to be permanently reinvested. Certain cash balances of foreign subsidiaries may be subject to U.S. or local country taxes if repatriated to the U.S. In addition, repatriation of some foreign cash balances is further restricted by local laws. Management regularly evaluates whether foreign earnings are expected to be permanently reinvested. This evaluation requires judgment about the future operating and liquidity needs of the Company and its foreign subsidiaries. Changes in economic and business conditions, foreign or U.S. tax laws, or the Company’s financial situation could result in changes to these judgments and the need to record additional tax liabilities.

In connection with the Separation, we intend to raise debt and distribute the net proceeds to RRD. To effect this redistribution, we currently expect to incur an estimated range of $650.0 million to $750.0 million of debt through a combination of either or both, senior notes and syndicated loans. In addition, we intend to enter in to a credit agreement to be used for general corporate purposes, including working capital needs, acquisitions and letters of credit.

We believe that cash generated from our operating activities and financing available from RRD prior to the Distribution will provide sufficient liquidity to meet our working capital needs, planned capital expenditures and future contractual and other obligations during the next 12-month period. Subsequent to the Distribution, we will no longer participate in cash management and funding arrangements with RRD. Our ability to fund our operations and capital needs will depend on our ongoing ability to generate cash from operations as well as access to a credit facility and the capital markets. We believe that future cash from operations and access to a

 

80


Table of Contents

credit facility will be the primary sources of liquidity and are expected to be used for, among other things, payment of interest and principal on the Company’s debt obligations, acquisitions, capital expenditures necessary to support productivity improvement and growth, completion of restructuring programs and distribution to shareholders, all of which will need to be approved by the Board.

Risk Management

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 several 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.

Other Information

Environmental, Health and Safety

For a discussion of certain environmental, health and safety issues involving the Company, see Note 11, Commitments and Contingencies, to the combined financial statements.

Litigation and Contingent Liabilities

For a discussion of certain litigation involving the Company, see Note 11, Commitments and Contingencies, to the combined financial statements.

New Accounting Pronouncements

Recently issued accounting standards and their estimated effect on the Company’s combined financial statements are also described in Note 19, New Accounting Pronouncements, to the combined financial statements.

Quantitative and Qualitative Disclosures About Market Risk

Market Risk

The Company is exposed to the impact of foreign currency fluctuations in certain countries in which it operates. The Company discusses risk management in various places throughout this document, including discussions in this Information Statement concerning liquidity and capital resources.

Credit Risk

The Company is exposed to credit risk on accounts receivable balances. This risk is mitigated due to the Company’s large, diverse customer base, dispersed over various geographic regions and industrial sectors. No single customer comprised more than 10% of the Company’s combined net sales in 2015, 2014 or 2013. The Company maintains provisions for potential credit losses and such losses to date have normally been within the Company’s expectations. The Company evaluates the solvency of its customers on an ongoing basis to determine if additional allowances for doubtful accounts receivable need to be recorded. Significant economic disruptions or a slowdown in the economy could result in significant additional charges.

Commodities

The primary raw materials used by the Company are paper and ink. To reduce price risk caused by market fluctuations, the Company has incorporated price adjustment clauses in certain sales contracts. Management believes a hypothetical 10% change in the price of paper and other raw materials would not have a significant effect on the Company’s combined annual results of operations or cash flows as these costs are generally passed through to its customers. However, such an increase could have an impact on our customers’ demand for printed products, and we are not able to quantify the impact of such potential change in demand on our combined annual results of operations or cash flows.

 

81


Table of Contents

CORPORATE GOVERNANCE AND MANAGEMENT

Corporate Governance

General

We will apply to list our common stock on [●] under the symbol “DFIN”. As a result, we are generally subject to [●] corporate governance listing standards.

Our Executive Officers Following the Separation

The following table sets forth those individuals who will be our executive officers commencing on the Distribution Date:

 

Name

  

Age

    

Position(s)

Daniel N. Leib

     50      

Chief Executive Officer

Thomas F. Juhase

     56       Chief Operating Officer

David A. Gardella

     46       Chief Financial Officer

Jennifer B. Reiners

     50       General Counsel

The business experience and certain other background information regarding our executive officers is set forth below.

Daniel N. Leib will be Chief Executive Officer of Donnelley Financial. Mr. Leib has served as RRD’s Executive Vice President and Chief Financial Officer since May 2011. Prior to this, he served as Group Chief Financial Officer and Senior Vice President, Mergers and Acquisitions since August 2009 and Treasurer from June 2008 to February 2010. Mr. Leib served as RRD’s Senior Vice President, Treasurer, Mergers and Acquisitions and investor relations since July 2007. Prior to this, from May 2004 to 2007, Mr. Leib served in various capacities in financial management, corporate strategy and investor relations.

Thomas F. Juhase will be Chief Operating Officer. Mr. Juhase has served as RRD’s President, Financial, Global Outsourcing and Document Solutions since 2010. He served as President, Financial and Global Outsourcing from 2007 to 2010, as President, Global Capital Market, Financial Print Solutions from 2004 to 2007. From 1991 to 2004, Mr. Juhase served in various capacities with RRD in sales and operations in the U.S. and internationally.

David A. Gardella will be Chief Financial Officer. Mr. Gardella has served as RRD’s Senior Vice President, Investor Relations & Mergers and Acquisitions since 2011. He served as Vice President, Investor Relations from 2009 to 2011 and as Vice President, Corporate Finance from 2008 to 2009. From 1992 to 2004 and then from 2005 to 2008, Mr. Gardella served in various capacities in financial management and financial planning & analysis.

Jennifer B. Reiners will be General Counsel. Ms. Reiners has served as RRD’s Senior Vice President, Deputy General Counsel since 2008 and as Vice President, Deputy General Counsel from 2005 to 2008. Prior to this she served in various capacities in the legal department from 1997 to 2008.

Our Directors Following the Separation

The following individuals are expected to be elected to serve as directors of the Company commencing on the Distribution Date:

 

Name

  

Age

    

Position(s)

  

Director Class

Richard L. Crandall

     72      

Chairman

  

 

82


Table of Contents

The business experience and certain other background information regarding our directors is set forth below.

Richard L. Crandall will be Chairman of the Donnelley Financial Board. Mr. Crandall is the founder and Chairman of Enterprise Software Roundtable, a CEO roundtable for the software industry, and as a founding Managing Director of Arbor Partners, a high technology venture capital firm. Mr. Crandall has also been a technology advisor to the U.S. Chamber of Commerce and a founder of Comshare, Inc., a decision support software company, where he served as CEO for 24 years and Chairman for three years. Mr. Crandall has been involved in leadership roles, including having served as Chairman of Giga Information Group, a technology advisory firm and Novell. He currently serves on the boards of Diebold, Inc., Pelstar LLC and several tech ventures. Mr. Crandall has been a Director of RRD since 2012 and currently serves on RRD’s Governance, Responsibility & Technology Committee.

[Biographical information of other directors to come]

Nomination, Election and Term of Directors

Our Certificate of Incorporation will provide for a classified Board consisting of three classes of directors. Class I directors will serve until the first annual meeting of stockholders following the Distribution. Class II directors and Class III directors, which together with Class I directors are referred to as the Initial Directors, will serve until the second and the third annual meeting of stockholders following the Distribution, respectively. Following the expiration of the terms of the Initial Directors, our stockholders will elect successor directors to one year terms. Our Certificate of Incorporation will provide that our Board will fully declassify upon the expiration of the terms of our Class III directors.

It will be the policy of the Corporate Responsibility and Governance Committee to consider candidates for director recommended by stockholders. The committee will evaluate candidates recommended for director by stockholders in the same way that it will evaluate any other candidate. The committee will also consider candidates recommended by management and members of the Board.

In identifying and evaluating nominees for director, the committee will take into account the applicable requirements for directors under the listing rules of the [●]. In addition, the committee will consider other criteria as it deems appropriate and which may vary over time depending on the Board’s needs, including certain core competencies and other criteria such as the personal and professional qualities, experience and education of the nominees, as well as the mix of skills and experience on the Board prior to and after the addition of the nominees. Although not part of any formal policy, the goal of the committee will be a balanced and diverse Board, with members whose skills, viewpoint, background and experience complement each other and, together, contribute to the Board’s effectiveness as a whole.

The Corporate Responsibility and Governance Committee from time to time may engage third-party search firms to identify candidates for director, and may use search firms to do preliminary interviews and background and reference reviews of prospective candidates.

Board Committees

The Board will have three standing committees: the Audit Committee, the Corporate Responsibility and Governance Committee and the Human Resources Committee. Each committee will operate under a written charter that will be reviewed annually and posted on the Company’s web site at the following address: www.[●].com. A print copy of each charter will be available upon request.

 

83


Table of Contents

Audit Committee

The Audit Committee will assist the Board in its oversight of (1) the integrity of the Company’s financial statements and the Company’s accounting and financial reporting processes and financial statement audits; (2) the qualifications and independence of the Company’s independent registered public accounting firm; and (3) the performance of the Company’s internal auditing department and the independent registered public accounting firm.

The committee will select, compensate, evaluate and, when appropriate, replace the Company’s independent registered public accounting firm. Pursuant to its charter, the Audit Committee will be authorized to obtain advice and assistance from internal or external legal, accounting or other advisors and to retain third-party consultants, and will have the authority to engage independent auditors for special audits, reviews and other procedures.

We expect our Board to determine that each member of the Audit Committee upon the Distribution is “independent” within the meaning of the rules of both the [●] and the SEC. We expect our Board to also determine that at least one member of the Audit Committee is an “audit committee financial expert” within the meaning of the rules of the SEC.

Commencing on the Distribution, we will have [●] members on our Audit Committee.

Our Audit Committee did not exist in 2015.

Corporate Responsibility and Governance Committee

The Corporate Responsibility and Governance Committee will (1) make recommendations to the Board regarding nominees for election to the Board and recommend policies governing matters affecting the Board; (2) develop and implement governance principles for the Company and the Board; (3) conduct the regular review of the performance of the Board, its committees and its members; (4) oversee the Company’s responsibilities to its employees and to the environment; and (5) recommend director compensation to the Board. Pursuant to its charter, the Corporate Responsibility and Governance Committee will be authorized to obtain advice and assistance from internal or external legal or other advisors and to retain third-party consultants and will have the sole authority to approve the terms and conditions under which it engages director search firms.

We expect our Board to determine that each member of the Corporate Responsibility and Governance Committee upon the Distribution is “independent” within the meaning of the rules of the [●].

Commencing on the Distribution Date, we will have [●] members on our Corporate Responsibility and Governance Committee.

Our Corporate Responsibility and Governance Committee did not exist in 2015.

Human Resources Committee

The Human Resources Committee will (1) establish the Company’s overall compensation strategy; (2) establish the compensation of the Company’s chief executive officer, other senior officers and key management employees; and (3) adopt amendments to, and approve terminations of, the Company’s employee benefit plans.

Pursuant to its charter, the Human Resources Committee will be authorized to obtain advice and assistance from internal or external legal or other advisors and has the sole authority to engage counsel, experts or consultants in matters related to the compensation of the chief executive officer and other executive officers of

 

84


Table of Contents

the Company and will have sole authority to approve any such firm’s fees and other retention terms. Pursuant to its charter, prior to selecting or receiving any advice from any committee adviser (other than in-house legal counsel) and on an annual basis thereafter, the Human Resources Committee must assess the independence of such committee advisers in compliance with any applicable [●] listing rules and the federal securities laws. The Human Resources Committee must also review and approve, in advance, any engagement of any compensation consultant by the Company for any services other than providing advice to the committee regarding executive officer compensation.

The Human Resources Committee will review management’s preliminary recommendations and make final compensation decisions. The Human Resources Committee, with the assistance of its consultants, will review and evaluate the Company’s executive and employee compensation practices and will determine, based on this review, whether any risks associated with such practices are likely to have a material adverse effect on the Company.

We expect our Board to determine that each member of the Human Resources Committee upon the Distribution is “independent” within the meaning of the rules of both the [●] and the SEC. In addition, in accordance with [●] listing rules, the Board will consider all factors specifically relevant to determining whether a director has a relationship to the Company which is material to that director’s ability to be independent from management in connection with the duties of a Human Resources Committee member to affirmatively determine each member of the Human Resources Committee is independent.

Commencing on the Distribution Date, we will have [●] members on our Human Resources Committee.

Our Human Resources Committee did not exist in 2015.

Principles of Corporate Governance

The Board will adopt a set of Principles of Corporate Governance to provide guidelines for the Company and the Board to ensure effective corporate governance. The Principles of Corporate Governance will cover topics including, but not limited to, director qualification standards, Board and committee composition, director access to management and independent advisors, director orientation and continuing education, director retirement age, succession planning and the annual evaluations of the Board and its committees.

The Corporate Responsibility and Governance Committee will be responsible for overseeing and reviewing the Principles of Corporate Governance and recommending to the Board any changes to those principles. The full text of the Principles of Corporate Governance will be available through the Corporate Governance link on the Investors page of the Company’s web site at the following address: www.[●].com and a print copy will be available upon request.

Principles of Ethical Business Conduct and Code of Ethics

In accordance with [●] listing requirements and SEC rules, the Company will adopt and maintain a set of Principles of Ethical Business Conduct. The policies referred to therein will apply to all directors, officers and employees of the Company. In addition, the Company will adopt and maintain a Code of Ethics that applies to its chief executive officer and senior financial officers. The Principles of Ethical Business Conduct and the Code of Ethics will cover all areas of professional conduct, including, but not limited to, conflicts of interest, disclosure obligations, insider trading and confidential information, as well as compliance with all laws, rules and regulations applicable to our business. The Company will encourage all employees, officers and directors to promptly report any violations of any of the Company’s policies. In the event that an amendment to, or a waiver from, a provision of the Code of Ethics is necessary, the Company intends to post such information on its web site. The full text of each of the Principles of Ethical Business Conduct and our Code of Ethics will be available

 

85


Table of Contents

through the Corporate Governance link on the Investors page of the Company’s web site at the following address: www.[●].com and a print copy will be available upon request.

Director Independence

The Company’s Principles of Corporate Governance will provide that the Board must be composed of a majority of independent directors. No director qualifies as independent unless the Board affirmatively determines that the director has no relationship which, in the opinion of the Board, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. On the Distribution Date, we expect that [●] members of our Board will be independent in accordance with [●] requirements.

Human Resources Committee Interlocks and Insider Participation

[To come]

Executive Sessions

The Company’s independent directors are expected to meet regularly in executive sessions without management. Executive sessions will be led by the chairman of the Board. An executive session is expected to be held in conjunction with each regularly scheduled Board meeting. Each committee of the Board also is expected to meet in executive session without management in conjunction with each regularly scheduled committee meeting and such sessions will be led by the chair of such committee.

Board Leadership

We expect the Board to determine that having an independent director serve as chairman of the Board is in the best interest of stockholders at this time. The structure ensures a greater role for the independent directors in the oversight of the Company and active participation of the independent directors in setting agendas and establishing priorities and procedures for the work of the Board. No single leadership model is right for all companies and at all times, however, the Board conducts an annual evaluation in order to determine whether it and its committees are functioning effectively and recognizes that, depending on the circumstances, other leadership models might be appropriate. Accordingly, the Board periodically reviews its leadership structure. The Board’s Principles of Corporate Governance will provide that, generally, no director may serve as chairman of the Board or any committee for more than three years, provided that the Corporate Responsibility and Governance Committee may recommend to the Board, and the Board may approve, a single extension of the term of a chairman of the Board or any committee for an additional three years once the chairman’s initial three-year term has ended and the Corporate Governance and Responsibility Committee may recommend to the Board, and the Board may approve, extending the term of the chairman of the Board or any committee beyond six years if it deems such an extension to be in the best interest of the stockholders and the Company.

Board’s Role in Risk Oversight

The Board will be actively involved in oversight of risks inherent in the operation of the Company’s businesses and the implementation of its strategic plan. The Board will perform this oversight role by using several different levels of review. In connection with its reviews of the operations of the Company’s business units and corporate functions, the Board will address the primary risks associated with those units and functions. In addition, the Board will review the key risks associated with the Company’s strategic plan annually and periodically throughout the year as part of its consideration of the strategic direction of the Company, as well as reviewing the output of the Company’s risk management process each year.

The Board is expected to delegate to the Audit Committee oversight of the Company’s risk management process. Among its duties, the Audit Committee will review with management (1) Company policies with respect to risk assessment and management of risks that may be material to the Company, (2) the Company’s system of disclosure controls and system of internal controls over financial reporting, and (3) the Company’s compliance with legal and regulatory requirements.

 

86


Table of Contents

Each of the other Board committees will also oversee the management of Company risks that fall within the committee’s areas of responsibility. In performing this function, each committee will have full access to management, as well as the ability to engage advisors, and each committee will report back to the full Board. The Audit Committee will oversee risks related to the Company’s financial statements, the financial reporting process, other financial matters, certain compliance issues and accounting and legal matters. The Audit Committee, along with the Corporate Responsibility and Governance Committee, will also be responsible for reviewing certain major legislative and regulatory developments that could materially impact the Company’s contingent liabilities and risks. The Corporate Responsibility and Governance Committee will also oversee risks related to the Company’s governance structure and processes, related person transactions, certain compliance issues and Board and committee structure to ensure appropriate oversight of risk. The Human Resources Committee will consider risks related to the attraction and retention of key management and employees and risks relating to the design of compensation programs and arrangements, as well as developmental and succession planning for possible successors to the position of chief executive officer and planning for other key senior management positions.

Communications with the Board of Directors

The Board will establish procedures for stockholders and other interested parties to communicate with the Board. A stockholder or other interested party may contact the Board by writing to the chairman of the Corporate Responsibility and Governance Committee or the other non-management members of the Board to their attention at the Company’s principal executive offices at 35 West Wacker Drive, Chicago, IL 60601. Any stockholder must include the number of shares of the Company’s common stock he or she holds and any interested party must detail his or her relationship with the Company in any communication to the Board. Communications received in writing will be distributed to the chairman of the Corporate Responsibility and Governance Committee or non-management directors of the Board as a group, as appropriate, unless such communications are considered, in the reasonable judgment of the Company’s Secretary, improper for submission to the intended recipient(s). Examples of communications that would be considered improper for submission include, without limitation, client complaints, solicitations, communications that do not relate directly or indirectly to the Company or the Company’s business or communications that relate to improper or irrelevant topics.

Indemnification of Officer and Directors

Our Certificate of Incorporation will include provisions that limit the personal liability of our directors for monetary damages for breach of their fiduciary duties as directors, except to the extent that such limitation is not permitted under the General Corporation Law of the State of Delaware, or the DGCL. Such limitation shall not apply, except to the extent permitted by the DGCL, to (i) any breach of a director’s duty of loyalty to us or our stockholders, (ii) acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, (iii) any unlawful payment of a dividend or unlawful stock repurchase or redemption, as provided in Section 174 of the DGCL, or (iv) any transaction from which the director derived an improper personal benefit. These provisions will have no effect on the availability of equitable remedies such as an injunction or rescission based on a director’s breach of his or her duty of care.

Our By-laws will provide for indemnification to the fullest extent permitted by the DGCL, of any person made or threatened to be made a party to any action, suit or proceeding by reason of the fact that such person is or was a director, officer, employee or agent of the Company, or, at the request of the Company, serves or served as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or any other enterprise, against all expenses, judgments, fines, amounts paid in settlement and other losses actually and reasonably incurred in connection with the defense or settlement of such action, suit or proceeding. Our By-laws will also provide that the Company must advance reasonable expenses to its directors and officers, subject to its receipt of an undertaking from the indemnified party as may be required under the DGCL. In addition, we intend to enter into indemnification agreements with each of our executive officers and directors pursuant to which we will agree to indemnify each such executive officer and director to the fullest extent permitted by the DGCL.

 

87


Table of Contents

EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

Introduction

Prior to the Distribution, RRD’s senior management and the Human Resources Committee of the RRD Board, or RRD’s HR Committee, determined our historical compensation strategy. Since the information presented in the compensation tables of this Information Statement relates to the 2015 fiscal year, which ended on December 31, 2015, this Compensation Discussion and Analysis focuses primarily on RRD’s compensation programs and decisions with respect to 2015 and the processes for determining 2015 compensation while we were part of RRD. In connection with the Distribution, we expect that our Human Resources Committee (the HR Committee) will determine our executive compensation strategy following the Distribution.

This Compensation Discussion and Analysis presents historical information regarding compensation received from RRD in 2015 for the following individuals, or our named executive officers; or NEOs:

 

    Daniel N. Leib, who will serve as our chief executive officer, or CEO; and

 

    Thomas F. Juhase, who will serve as our chief operating officer, or COO.

Compensation Program Design Prior to the Distribution

[To come.]

Treatment of RRD Equity Awards in Connection with the Distribution

RRD has granted options to purchase common stock of RRD. In connection with the Distribution, each outstanding RRD option held immediately prior to the Distribution by our executives and employees will be converted as follows. Outstanding options granted in 2007 and 2008 will remain as options to purchase common stock of RRD. Options granted from 2009 to 2012 will be converted into three options: one will be an option to purchase common stock of Donnelley Financial, one will be an option to purchase common stock of RRD and one will be an option to purchase common stock of LSC. The exercise price and number of shares subject to each option will be adjusted pursuant to the formula described in the employee matters section of the Separation and Distribution Agreement in order to preserve the aggregate intrinsic value (that is, the difference between the exercise price of the option and the market price of the shares for which the option may be exercised) of the converted options immediately after the Distribution to be the same as the intrinsic value of the RRD options immediately prior to the Distribution. All other terms and conditions of the options will remain the same. The Donnelley Financial, RRD and LSC options will not be exercisable during a period beginning on a date prior to the Distribution determined by RRD in its discretion and continuing until the exercise prices of the Donnelley Financial, RRD and LSC options are determined after the Distribution.

Outstanding RRD restricted stock unit (RSU) and performance share unit (PSU) awards held immediately prior to the Distribution by our executives, employees and directors will be converted as follows. Unvested portions of RSU awards granted in 2013 and 2014 and PSU awards granted in 2014 (with satisfaction of performance conditions determined through a date prior to the Distribution Date to be determined by RRD) will be converted into RSUs of Donnelley Financial, RRD and LSC on the same basis as shares held by RRD stockholders are converted into common stock of Donnelley Financial, RRD and LSC. Such RSUs will be subject to the same terms and conditions (including with respect to vesting) immediately following the Distribution Date as applicable to the corresponding RRD award immediately prior to the Distribution Date, except that awards that were originally RRD PSU awards will only remain subject to time-based vesting for the remainder of the applicable performance period.

 

88


Table of Contents

RSU awards granted in 2015 and 2016 and PSU awards granted in 2015 (with satisfaction of performance conditions determined through a date prior to the Distribution Date to be determined by RRD) outstanding immediately prior to the Distribution will be converted into (i) Donnelley Financial RSUs if such award is held by a Donnelley Financial employee, (ii) RRD RSUs if such award is held by an RRD employee and (iii) LSC RSUs if such award is held by an LSC employee and shall, in each case, be subject to the same terms and conditions (including with respect to vesting) associated with the original RRD award, except that awards that were originally RRD PSU awards will only remain subject to time-based vesting for the remainder of the applicable performance period. The RRD awards will be converted into awards of Donnelley Financial, RRD and LSC common stock, as applicable, as described in the employee matters section of the Separation and Distribution Agreement in order to preserve the aggregate intrinsic value of the original award, as measured immediately before and immediately after the Distribution.

Treatment of RRD Cash Awards in Connection with the Separation

RRD has granted cash long term incentive and retention awards to executives and employees. In connection with the Distribution, each outstanding RRD cash long term incentive and retention award held immediately prior to the Distribution by our executives and employees will be converted into (i) a Donnelley Financial long term incentive or retention cash award, as applicable, if such award is held by a Donnelley Financial employee, (ii) an RRD long term incentive or retention cash award, as applicable, if such award is held by an RRD employee and (iii) an LSC long term incentive or retention cash award, as applicable, if such award is held by an LSC employee. Each cash long term incentive award will be subject to the same terms and conditions (including with respect to vesting) associated with the original RRD award, as described below.

The 2013 and 2014 cash long term incentive awards vest and become payable in four equal installments over four years. Such awards vest and pay in full if the grantee’s employment is terminated due to death or disability, and continue vesting on the same schedule upon a grantee’s retirement. The 2015 and 2016 cash long term incentive awards vest and become payable in full on March 2, 2018 and March 2, 2019, respectively. Such awards vest and pay in full if the grantee’s employment is terminated due to death or disability, and are forfeited upon a grantee’s retirement. All cash long term incentive awards are forfeited if the grantee’s employment is terminated for any reason except as described above.

The 2013 cash retention awards vest and become payable in full on March 2, 2017, with full vesting if the grantee’s employment is terminated without cause, pro-rated vesting if the grantee’s employment is terminated due to death or disability and continued vesting on the same schedule upon a grantee’s retirement. The 2014 cash retention awards vest and were and will become payable in three equal installments on January 1st of 2015, 2016 and 2017, with full vesting if the grantee’s employment is terminated without cause or due to death or disability and continued vesting on the same schedule upon a grantee’s retirement.

Anticipated Compensation Program Design Following the Separation

Our HR Committee has not yet been established and therefore has not established a specific set of objectives or principles for our executive compensation program. In connection with the Separation, RRD’s HR Committee will make certain compensation decisions and take actions regarding our compensation philosophy, principles and program design and following the Distribution, we expect that our HR Committee will make additional compensation decisions and actions.

It is anticipated that after the Distribution, our HR Committee will establish objectives and principles similar to the objectives and principles that RRD maintained for its compensation program in 2015, as described in this Compensation Discussion and Analysis.

We expect that our executive compensation program following the Distribution will generally include the same elements as RRD’s executive compensation program. In connection with the Distribution, we expect to

 

89


Table of Contents

adopt a performance incentive plan under which various stock-based awards may be granted to our employees and directors. We expect that the terms of the plan will be similar to those of RRD’s performance incentive plan.

We expect to adopt stock ownership guidelines in connection with the Separation similar to those adopted by RRD.

Summary Compensation Table

SUMMARY COMPENSATION TABLE

 

Name

and

Principal

Position

(a)

  Year
(b)
  Salary
($)

(c)
  Bonus
($)

(d)
  Stock
Awards
($)

(e)
  Option
Awards
($)

(f)
  Non-Equity
Incentive Plan
Compensation
($)

(g)
  Change in
Pension Value
and
Nonqualified
Deferred
Compensation
Earnings ($)

(h)
  All Other
Compensation
($)

(i)
  Total
($)

(j)

Daniel N. Leib, Executive Vice President and CFO of RRD

                 
                 
                 

Thomas F. Juhase, President of Financial, Global Outsourcing and Document Solutions of RRD

                 

Grants of Plan-Based Awards

GRANTS OF PLAN-BASED AWARDS

 

Name   Grant
Date
  Estimated Future Payouts
Under Non-Equity
Incentive Plan Awards
  Estimated Future Payouts
Under Equity Incentive
Plan Awards
  All
Other
Stock
Awards:
Number
of
Shares
of Stock
or Units
(#)
  All Other
Option
Awards:
Number of
Securities
Underlying
Options
(#)
  Exercise
or Base
Price of
Option
Awards
($/Sh)
  Grant
Date
Fair
Value
of
Stock
and
Option
Awards
    Threshold
($)
  Target
($)
  Maximum
($)
  Threshold
(#)
  Target
(#)
  Maximum
(#)
       

(a)

  (b)   (c)   (d)   (e)   (f)   (g)   (h)   (i)   (j)   (k)   (l)

Daniel N. Leib, Executive Vice President and CFO of RRD

                     

Thomas F. Juhase, President of Financial, Global Outsourcing and Document Solutions of RRD

                     

 

90


Table of Contents

Outstanding Equity Awards at Fiscal Year-End

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

 

    Option Awards   Stock Awards

Name

(a)

  Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisable

(b)
  Number of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable

(c)
  Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options
(#)

(d)
  Option
Exercise
Price
($)

(e)
  Option
Expiration
Date

(f)
  Number
of
Shares
or Units
of Stock
That
Have
Not
Vested
(#)

(g)
  Market
Value
of
Shares
or
Units
of
Stock
That
Have
Not
Vested
($)

(h)
  Equity
Incentive
Plan
Awards:
Number
of
Unearned
Shares,
Units or
Other
Rights
That
Have Not
Vested
(#)

(i)
  Equity
Incentive
Plan
Awards:
Market
or Payout
Value of
Unearned
Shares,
Units or
Other
Rights
That
Have Not
Vested
($)

(j)
                 

Daniel N. Leib, Executive Vice President and CFO of RRD

                 

Thomas F. Juhase, President of Financial, Global Outsourcing and Document Solutions of RRD

                 

Option Exercises and Stock Vested

OPTION EXERCISES AND STOCK VESTED

 

     Option Awards    Stock Awards
Name    Number of
Shares
Acquired on
Exercise
(#)
   Value
Realized on
Exercise
($)
   Number of
Shares
Acquired on
Vesting
(#)
   Value
Realized on
Vesting
($)

(a)

   (b)    (c)    (d)    (e)

Daniel N. Leib, Executive Vice
President and CFO of RRD

           

Thomas F. Juhase, President of Financial, Global Outsourcing and Document Solutions of RRD

           

Pension Benefits

RRD Pension Benefits

Generally, effective December 31, 2011, RRD froze benefit accruals under all of its then existing federal income tax qualified U.S. defined benefit pension plans (collectively referred to as the RRD Qualified Retirement Plans) that were still open to accruals. Therefore, beginning January 1, 2012, participants generally ceased earning additional benefits under the RRD Qualified Retirement Plans. Thereafter, the RRD Qualified Retirement Plans were merged into one RRD Qualified Retirement Plan and generally no new participants will enter this plan. Before the RRD Qualified Retirement Plans were frozen, accrual rates varied based on age and service. Accruals for the plans were calculated using compensation that generally included salary and annual cash bonus awards.

 

91


Table of Contents

The amount of annual earnings that may be considered in calculating benefits under a qualified pension plan is limited by law. The RRD Qualified Retirement Plan is funded entirely by RRD with contributions made to a trust fund from which the benefits of participants are paid.

The U.S. Internal Revenue Code places limitations on pensions that can be accrued under tax qualified plans. Prior to being frozen, to the extent an employee’s pension would have accrued under one of the RRD Qualified Retirement Plans if it were not for such limitations, the additional benefits were accrued under an unfunded supplemental pension plan (referred to as the RRD SERP). Prior to a change of control of RRD, the RRD SERP is unfunded and provides for payments to be made out of RRD’s general assets. Because RRD froze the RRD Qualified Retirement Plans as of December 31, 2011, generally no additional benefits will accrue under the RRD Qualified Retirement Plan or the related RRD SERP.

Some participants, including those that have a cash balance or pension equity benefit, can elect to receive either a life annuity or a lump sum amount upon termination. Other participants will receive their plan benefit in the form of a life annuity. Under a life annuity benefit, benefits are paid monthly after retirement for the life of the participant or, if the participant is married or chooses an optional benefit form, generally in a reduced amount for the lives of the participant and surviving spouse or other named survivor.

Pension Benefits following the Separation

Prior to the Distribution, we expect to adopt defined benefit pension plans for Donnelley Financial employees following the Distribution that are substantially similar to those maintained by RRD (including with respect to being frozen for future benefit accruals). In connection with the Separation, assets and liabilities of Donnelley Financial allocated employees and former employees will be transferred to, and assumed by, such Donnelley Financial pension plans in accordance with applicable law and as set forth in the employee matters section of the Separation and Distribution Agreement and RRD and LSC pension plans, as applicable, will retain or assume assets and liabilities of RRD and LSC allocated employees and former employees in accordance with applicable law and as set forth in the employee matters section of the Separation and Distribution Agreement.

PENSION BENEFITS

 

Name    Plan Name    Number of
Years
Credited
Service
(#)
   Present
Value of
Accumulated
Benefit
($)
   Payments
During Last
Fiscal Year
($)

(a)

   (b)    (c)    (d)    (e)

Daniel N. Leib, Executive Vice
President and CFO of RRD

           

Thomas F. Juhase, President of Financial, Global Outsourcing and Document Solutions of RRD

           

Nonqualified Deferred Compensation

RRD Nonqualified Deferred Compensation Plans

The 2015 Nonqualified Deferred Compensation table presents amounts deferred under RRD’s Deferred Compensation Plan, under which participants were able to defer up to 50% of base salary and 90% of annual incentive bonus payments. Deferred amounts are credited with earnings or losses based on the rate of return of mutual funds selected by the executive, which the executive may change at any time. RRD did not, and we will not, make contributions to participants’ accounts under the RRD Deferred Compensation Plan. Distributions generally are paid in a lump sum distribution upon the latter of the first day of the year following the year in which the NEO’s employment with RRD terminates or the six-month anniversary of such termination unless the NEO elects that a distribution be made three years after a deferral under certain circumstances.

 

92


Table of Contents

Deferred Compensation Benefits following the Separation

[To come.]

NONQUALIFIED DEFERRED COMPENSATION

 

Name    Executive
Contributions
in Last FY
($)
   Registrant
Contributions
in Last FY
($)
   Aggregate
Earnings
in Last
FY
($)
   Aggregate
Withdrawals/
Distributions
($)
   Aggregate
Balance
at Last FYE
($)

(a)

   (b)    (c)    (d)    (e)    (f)

Daniel N. Leib, Executive Vice
President and CFO of RRD

              

Thomas F. Juhase, President of Financial, Global Outsourcing and Document Solutions of RRD

              

Potential Payments upon Termination or Change in Control

[To come.]

 

Name

  Resignation
for

Good Reason
or

Termination
Without
Cause($)
  Resignation
for

Good
Reason or

Termination
Without
Cause after

Change in
Control($)
  Change in
Control($)
  Retirement($)   Disability($)   Death($)

Daniel N. Leib, Executive Vice
President and CFO of RRD

           
 

[Cash]

           
 

[Equity]

           
 

[Benefits/Perquisites]

           
 

[Total]

           

Thomas F. Juhase, President of Financial, Global Outsourcing and Document Solutions of RRD

           
 

[Cash]

           
 

[Equity]

           
 

[Benefits/Perquisites]

           
 

[Total]

           

 

93


Table of Contents

Equity Compensation Plan Information

[To come.]

Director Compensation

Annual compensation for the Company’s non-employee directors following the Distribution will initially consist of cash and restricted stock unit awards. The annual retainer for non-employee directors will consist of $80,000 and RSUs, with a value at grant of $110,000, with the number of shares granted calculated pursuant to the terms of the Company’s incentive plan in effect on the date of grant. The chairman of the Board will receive an additional cash retainer of $50,000 and an additional annual RSU grant with a value of $50,000. The chairman of the Audit Committee and the chairman of the HR Committee will each receive an additional cash retainer of $20,000 and the chairman of the Corporate Responsibility & Governance Committee will receive an additional cash retainer of $15,000 in recognition of the responsibilities required in those roles.

The RSUs will be granted on the date of the Company’s Annual Meeting of Stockholders. Under the terms of the grant agreements, each RSU will vest and be payable in full in the form of Company common stock on the first anniversary of the grant date. The RSUs will also vest and be payable in full on the earlier of the date a director ceases to be a director of the Company and a change in control (as defined in the Company’s incentive plan). Dividend equivalents on the RSUs will be deferred and credited with interest quarterly (at the same rate as five year U.S. government bonds) and paid out in cash at the same time the corresponding portion of the RSU award becomes payable.

The Company’s Corporate Responsibility & Governance Committee will periodically review directors’ compensation and recommend changes as appropriate. The Company’s directors will also be subject to stock ownership guidelines to be established following the Distribution.

 

94


Table of Contents

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

Relationship Between RRD and Us After the Separation

Following the Separation, we will be a public company and RRD may retain up to a 20% continuing common stock ownership interest in us. For purposes of governing the ongoing relationships between RRD and us after the Separation and to provide for an orderly transition, RRD and we will enter into the agreements described in this section prior to the Separation. All of the agreements summarized in this section will be filed prior to the Distribution as exhibits to the registration statement of which this Information Statement forms a part, and the following summaries of those agreements are qualified in their entirety by reference to the agreements that will be filed prior to the Distribution.

Relationship Between LSC and Us After the Separation

Following the Separation, we will no longer be affiliated with LSC. For purposes of governing the ongoing relationships between LSC and us after the Separation and to provide for an orderly transition, LSC and we will enter into the agreements described in this section prior to the Separation. All of the agreements summarized in this section will be filed prior to the Distribution as exhibits to the registration statement of which this Information Statement forms a part, and the following summaries of those agreements are qualified in their entirety by reference to the agreements that will be filed prior to the Distribution.

Separation Transactions

Separation and Distribution Agreement

We will enter into the Separation and Distribution Agreement with RRD and LSC as part of a series of transactions following which we will own the subsidiaries, businesses and other assets of RRD that constitute our business.

 

    Donnelley Financial is expected to consist of RRD’s current financial reporting unit of RRD’s Strategic Services segment.

 

    LSC is expected to consist of:

 

    substantially all of RRD’s current Publishing and Retail Services segment, as well as the office products reporting unit from RRD’s Variable Print segment;

 

    certain publishing and e-book services currently within the digital and creative solutions reporting unit of RRD’s Strategic service segment;

 

    substantially all of the operations currently within the Europe reporting unit of RRD’s International segment;

 

    certain Mexican operations currently within the Latin America reporting unit of RRD’s International segment; and

 

    the co-mail and related list services operations currently within the logistics reporting unit of RRD’s Strategic Services segment.

 

    RRD is expected to consist of:

 

    its current Variable Print segment except for the office products reporting unit that will become part of LSC Communications;

 

    the logistics reporting unit within its current Strategic Services segment except for the operations that will become part of LSC Communications;

 

    the sourcing and digital and creative solutions reporting units within its current Strategic Services segment except for the operations that will become part of LSC Communications; and

 

95


Table of Contents
    its current International segment except for substantially all of the Europe reporting unit and certain Mexican operations that will become part of LSC Communications.

The Separation and Distribution Agreement will set forth our agreements with RRD and LSC regarding the principal transactions necessary to separate us from RRD.

The Separation. The Separation and Distribution Agreement will provide for assets to be transferred, liabilities to be assumed and contracts to be assigned to each of us, LSC and RRD as part of the Separation of RRD into three companies, and will describe when and how these transfers, assumptions and assignments will occur, although many of the transfers, assumptions and assignments will have already occurred as part of the Plan of Reorganization prior to the parties’ entering into the Separation and Distribution Agreement.

Certain Actions at or Prior to the Distributions. The Separation and Distribution Agreement will also provide for certain actions to occur at or prior to the Distribution and the distribution of LSC common stock. These actions include: (i) the filing of the Certificate of Incorporation and adoption of the By-laws for us and LSC, (ii) the appointment of directors to our Board and the board of directors of LSC, (iii) the resignation of employees serving as directors or officers of various entities, (iv) adjustment of cash balances and (v) the entry into ancillary agreements.

The Distributions. The Separation and Distribution Agreement will also govern distribution of our common stock and Donnelley Financial common stock. RRD will cause the distribution of at least 80% of the outstanding shares of Donnelley Financial common stock on the Distribution Date, and RRD will cause the distribution of at least 80% of the outstanding shares of LSC common stock on the date of the distribution of LSC common stock. Each holder of RRD common stock will receive [●] share(s) of our common stock for every [●] share(s) of RRD’s common stock held on the record date. Stockholders that would be entitled to fractional shares will receive cash in lieu of fractional shares. The Separation and Distribution Agreement also conditions the distribution on the satisfaction of certain conditions described under “The Separation and Distribution.” We currently expect the Distribution of our common stock and the distribution of LSC common stock to occur on the same date. However, the Distribution of our common stock is not conditioned upon the distribution of the LSC common stock, nor is the distribution of LSC common stock conditioned upon the distribution of our common stock.

Employee Matters. The employee matters section of the Separation and Distribution Agreement will allocate liabilities and responsibilities relating to employee compensation and benefits plans and programs and other related matters in connection with the Separation. The section will govern certain compensation and employee benefit obligations with respect to the current and former employees and non-employee directors of each company, including the treatment of certain outstanding long-term incentive awards, existing deferred compensation obligations, pension and retirement plans and certain health, welfare and other benefits obligations. The Separation and Distribution Agreement also will provide that outstanding RRD share options, restricted stock unit, performance share unit and deferred stock unit awards will be adjusted equitably in connection with the Distribution. See “Executive Compensation—Compensation Discussion and Analysis—Treatment of RRD Equity Awards in Connection with the Separation.”

Certain Covenants. The Separation and Distribution Agreement will also govern the solicitation or hiring of RRD, LSC or Donnelley Financial employees, the use of corporate names, the administration of shared expenses and cooperation and assistance between the parties.

Releases and Indemnification. Except as otherwise provided in the Separation and Distribution Agreement or any ancillary agreement, each party will release and forever discharge each other party and its respective subsidiaries and affiliates from all liabilities existing or arising from any acts or events occurring or failing to occur or alleged to have occurred, or to have failed to occur or any conditions existing or alleged to have existed on or before the Separation. The releases will not extend to obligations or liabilities under any agreements between the parties that remain in effect following the Separation pursuant to the Separation and Distribution

 

96


Table of Contents

Agreement or any ancillary agreement or to ordinary course trade payables and receivables. In addition, the Separation and Distribution Agreement will provide for cross-indemnities principally designed to place financial responsibility for the obligations and liabilities of our business with us and financial responsibility for the obligations and liabilities of RRD’s business and LSC’s business with RRD and LSC, respectively. Specifically, each party will, and will cause its subsidiaries and affiliates to, indemnify, defend and hold harmless the other parties, their respective affiliates and subsidiaries and each of their respective officers, directors, employees and agents for any losses arising out of or otherwise in connection with the liabilities each such party assumed or retained pursuant to the Separation and Distribution Agreement; and any breach by such party of the Separation and Distribution Agreement.

Further Assurances. To the extent that the Internal Reorganization transactions contemplated by the Separation and Distribution Agreement and the Plan of Reorganization have not been consummated on or prior to the Distribution Date, the parties will agree to cooperate to effect such transactions as promptly as practicable. In addition, each of the parties will agree to cooperate with each other and use commercially reasonable efforts to take or to cause to be taken all actions, and to do, or to cause to be done, all things reasonably necessary under applicable law or contractual obligations to consummate and make effective the transactions contemplated by the Separation and Distribution Agreement and the ancillary agreements.

Legal Matters. Each party to the Separation and Distribution Agreement will assume the liability for, and control of, all pending and threatened legal matters related to its own business or assumed or retained liabilities and will indemnify the other parties for any liability arising out of or resulting from such assumed legal matters.

Dispute Resolution. In the event of any dispute arising out of the Separation and Distribution Agreement, the general counsels of the parties and such other representatives as the parties designate will negotiate to resolve any disputes among the parties. If the parties are unable to resolve the dispute in this manner within 45 days then, unless agreed otherwise by the parties, the parties will submit the dispute to mediation for an additional period of 30 days. If the parties are unable to resolve the dispute in this manner, until certain litigation related to shared contingent liabilities is finally resolved, the dispute will be resolved through binding arbitration and in all matters involving only claims for monetary damages the parties will be required to each submit a proposal and the arbitrators shall be limited to awarding only one of the proposals submitted. Following resolution of such shared contingent liabilities, the parties will not be bound to arbitrate and may elect to resolve any disputes by litigation.

Insurance. The Separation and Distribution Agreement will provide for the rights of the parties to report claims under existing insurance policies written by non-affiliates of RRD for occurrences prior to the Separation and set forth procedures for the administration of insured claims. In addition, the agreement will allocate among the parties the right to insurance policy proceeds based on reported claims and the obligations to incur deductibles under certain insurance policies. The Separation and Distribution Agreement also will provide that RRD will obtain, subject to the terms of the agreement, certain executive risk insurance policies, namely directors and officers, fiduciary, employment practices policies and professional liability policies, to apply against certain pre-Separation claims, if any.

Other Matters Governed by the Separation and Distribution Agreement. The Separation and Distribution Agreement also provides that RRD will have the sole and absolute discretion to determine whether to proceed with the Separation and the Distribution, including the form, structure and terms of any transactions to effect the Separation and the Distribution and the timing of and satisfaction of conditions to the completion of the Separation and the Distribution. The Separation and Distribution Agreement also provides for management of contingent assets and contingent liabilities.

Tax Disaffiliation Agreement

We will enter into a Tax Disaffiliation Agreement with RRD that will govern RRD’s and our respective rights, responsibilities and obligations with respect to taxes and tax benefits, the filing of tax returns, the control of audits and other tax matters. References in this summary description of the Tax Disaffiliation Agreement to the terms “tax” or “taxes” mean taxes as well as any interest, penalties, additions to tax or additional amounts in respect of such taxes.

 

97


Table of Contents

We and our eligible subsidiaries currently join with RRD in the filing of certain consolidated, combined, and unitary returns for federal, state, local, and other applicable tax purposes. However, for periods (or portions thereof) beginning after the Distribution, we generally will not join with RRD in the filing of any federal, state, local or other applicable consolidated, combined or unitary tax returns.

Under the Tax Disaffiliation Agreement, with certain exceptions, RRD generally will be responsible for all of our U.S. federal, state, local and other applicable income taxes for any taxable period or portion of such period ending on or before the Distribution Date. We will be generally responsible for all taxes that are attributable to us or one of our subsidiaries after the Distribution Date.

Finally, the Tax Disaffiliation Agreement will require that neither we nor any of our subsidiaries take any action that (or fail to take any action the omission of which) would be inconsistent with the Distribution qualifying as or that would preclude the Distribution from qualifying as a transaction that is generally tax-free to RRD and the holders of RRD common stock for U.S. federal income tax purposes.

Additionally, for the two-year period following the Distribution, we may not engage in certain activities that may jeopardize the tax-free treatment of the Distribution to RRD and its stockholders, unless we receive RRD’s consent or otherwise obtain a ruling from the IRS or a legal opinion, in either case reasonably satisfactory to the RRD Board, that the activity will not alter the tax-free status of the Distribution to RRD and its stockholders. Such restricted activities include:

 

    taking any action that would result in our ceasing to be engaged in the active conduct of our business, with the result that we are not engaged in the active conduct of a trade or business within the meaning of certain provisions of the Code;

 

    redeeming or otherwise repurchasing any of our outstanding stock, other than through certain stock purchases of widely held stock on the open market;

 

    amending our Certificate of Incorporation (or other organizational documents) that would affect the relative voting rights of separate classes of our stock or would convert one class of our stock into another class of our stock;

 

    liquidating or partially liquidating;

 

    merging with any other corporation (other than in a transaction that does not affect the relative stockholding of our stockholders), selling or otherwise disposing of (other than in the ordinary course of business) our assets, or taking any other action or actions if such merger, sale, other disposition or other action or actions in the aggregate would have the effect that one or more persons acquire (or have the right to acquire), directly or indirectly, as part of a plan or series of related transactions, assets representing one-half or more our asset value; and

 

    taking any other action or actions that in the aggregate would have the effect that one or more persons acquire (or have the right to acquire), directly or indirectly, as part of a plan or series of related transactions, stock of ours possessing (i) at least 50% of the total combined voting power of all classes of stock or equity interests of ours entitled to vote, or (ii) at least 50% of the total value of shares of all classes of stock or of the total value of all equity interests of ours, other than an acquisition of our shares in the Distribution solely by reason of holding RRD common stock (but not including such an acquisition if such RRD common stock, before such acquisition, was itself acquired as part of a plan (or series of related transactions) pursuant to which one or more persons acquire, directly or indirectly, shares of our stock meeting the voting and value threshold tests listed previously in this bullet).

Moreover, we must indemnify RRD and its subsidiaries, officers and directors for any taxes of RRD arising from a final determination that the Distribution failed to be generally tax-free to RRD and the holders of RRD common stock for U.S. federal income tax purposes, if such taxes result from a violation of the restrictions set forth above.

 

98


Table of Contents

Patent, Copyright and Trade Secret Assignment and License Agreement

We intend to enter into a Patent, Copyright and Trade Secret Assignment and License Agreement with RRD that will provide for ownership, licensing and other arrangements regarding the patents, copyrights, trade secrets and know-how that we and RRD use in conducting our businesses.

This agreement will assign certain patents, patent applications, copyrights, copyright applications, trade secrets and know-how to us. We and RRD will grant licenses to one another to use certain patents, copyrights, trade secrets and know-how in connection with our respective businesses. The licenses will generally be perpetual, subject to certain termination triggers, and will include geographical and field limitations based on our respective current and anticipated businesses. With certain exceptions, the licenses will be royalty-free. In certain circumstances, we and RRD will have a limited right to grant non-exclusive sub-licenses to certain third parties. We and RRD will also agree not to disclose confidential information related to the copyrights, trade secrets and know-how to third parties except in specific circumstances.

Trademark Assignment and License Agreement

We intend to enter into a Trademark Assignment and License Agreement with RRD that will provide for ownership, licensing and other arrangements regarding the trademarks that we and RRD use in conducting our businesses.

This agreement will assign certain trademarks and trademark applications to us. We and RRD will grant licenses to one another to use certain trademarks in connection with our respective businesses. The licenses will generally be for a limited duration to allow the licensee to transition out of the use of the trademarks in a commercially reasonable manner, subject to certain termination triggers. The licenses will include geographical and field limitations based on our respective current and anticipated businesses. With certain exceptions, the licenses to the trademarks will be royalty-free.

The agreement will include quality control, usage, approval and inspection provisions governing the trademarks that we and RRD license to each other. In addition, the agreement will contain restrictions on us and RRD with respect to filing trademark applications that are identical or confusingly similar to any trademark owned by the other party.

In certain circumstances, we and RRD will have a limited right to grant non-exclusive sub-licenses to certain third parties, but otherwise the agreement will contain sub-licensing and assignment restrictions.

Data Rights Assignment and License Agreement

We intend to enter into a Data Rights Assignment and License Agreement with RRD that will provide for ownership, licensing and other arrangements regarding the data that we and RRD use in conducting our businesses.

This agreement will assign rights with respect to certain existing data to us. We and RRD will grant licenses to one another to use certain data in connection with our respective businesses. The licenses will generally be perpetual, subject to certain termination triggers, and will include geographical and field limitations based on our respective current and anticipated businesses. With certain exceptions, the licenses will be royalty-free. In certain circumstances, we and RRD will have a limited right to grant non-exclusive sub-licenses to certain third parties. We and RRD will also agree not to disclose confidential data to third parties except in specific circumstances.

Transition Services Agreements

In addition to the Separation and Distribution Agreement, we will enter into agreements relating to transition services with each of RRD and LSC under which, in exchange for the fees specified in such

 

99


Table of Contents

agreements, RRD will agree to provide certain services to us and we will agree to provide certain services to RRD and LSC, including, but not limited to, such areas as tax, information technology, risk management, treasury, legal, human resources, accounting, purchasing, communications, security and compensation and benefits. We, LSC and RRD, as parties receiving services under the agreements, will agree to indemnify the party providing services for losses incurred by such party that arise out of or are otherwise in connection with the provision by such party of services under the agreement, except to the extent that such losses result from the providing party’s gross negligence, willful misconduct or bad faith. Similarly, each party providing services under the agreement will agree to indemnify the party receiving services for losses incurred by such party where such losses result from gross negligence, willful misconduct or bad faith of the party providing services. The terms for each transition service will be set forth in the applicable transition services agreement, but will not exceed 24 months from the date of the Separation.

Stockholder and Registration Rights Agreement

Prior to the Distribution, we and RRD will enter into a Stockholder and Registration Rights Agreement with respect to any of our common stock retained by RRD pursuant to which we will agree that, upon the request of RRD, we will use our reasonable best efforts to effect the registration under applicable federal and state securities laws of the shares of our common stock retained by RRD after the Distribution. In addition, we expect that RRD will grant us a proxy to vote the shares of our common stock that RRD retains immediately after the distribution in proportion to the votes cast by our other stockholders. This proxy, however, will be automatically revoked as to a particular share upon any sale or transfer of such share from RRD to a person other than RRD, and neither the voting agreement nor the proxy will limit or prohibit any such sale or transfer.

Other Arrangements and Agreements with RRD

We will also enter into a number of commercial and other arrangements and agreements with RRD and its subsidiaries. These will include arrangements for the provision of services, including global outsourcing and logistics services, printing and binding, digital printing, composition and access to technology. We also expect that RRD will be a client of ours following the Separation and will utilize financial communication services we provide to all of our clients.

Other Arrangements and Agreements with LSC

We will also enter into a number of commercial and other arrangements and agreements with LSC and its subsidiaries. These will include agreements pursuant to which LSC will print and bind products for us. We also expect that LSC will be a client of ours following the Separation and will utilize financial communication services we provide to all of our clients.

Certain Relationships and Potential Conflicts of Interest

Related Party Transaction Approval Policy

The Company will have a written policy relating to approval or ratification of all transactions involving an amount in excess of $120,000 in which the Company is a participant and in which a related person has or will have a direct or indirect material interest, including without limitation any financial transaction, arrangement or relationship (including any indebtedness or guarantee of indebtedness) or any series of similar transactions, arrangements or relationships, subject to certain enumerated exclusions. Under the policy, such related person transactions must be approved or ratified by (i) the Corporate Responsibility and Governance Committee or (ii) if the Corporate Responsibility and Governance Committee determines that the approval or ratification of such transaction should be considered by all of the disinterested members of the Board, such disinterested members of the Board by a majority vote. Related persons include any of our directors or certain executive officers, certain of our stockholders and their immediate family members.

 

100


Table of Contents

In considering whether to approve or ratify any related person transaction, the Corporate Responsibility and Governance Committee or such disinterested directors, as applicable, may consider all factors that they deem relevant to the transaction, including, but not limited to, the size of the transaction and the amount payable to or receivable from a related person, the nature of the interest of the related person in the transaction, whether the transaction may involve a conflict of interest; and whether the transaction involves the provision of goods or services to the Company that are available from unaffiliated third parties and, if so, whether the transaction is on terms and made under circumstances that are at least as favorable to the Company as would be available in comparable transactions with or involving unaffiliated third parties.

To identify related person transactions, at least once a year all directors and executive officers of the Company are required to complete questionnaires seeking, among other things, disclosure with respect to such transactions of which such director or executive officer may be aware. In addition, each executive officer of the Company is required to advise the chairman of the Corporate Responsibility and Governance Committee of any related person transaction of which he or she becomes aware.

 

101


Table of Contents

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Beneficial Ownership Of Stock

This table shows the number and percentage of shares of our common stock that will be owned of record and beneficially at the time of the Distribution by each director and executive officer of the Company. The table also shows the name, address and the number and percentage of shares owned by persons beneficially owning more than 5% of any class at the time of Distribution. All information in the table and related footnotes is based solely upon the Company’s review of SEC filings as of [●], 2016 as to the ownership of RRD common stock and is presented as if the Distribution has occurred prior to the dates of ownership information used in the table.

 

Name

   Shares(1)     Restricted
Share
Units(2)
     Stock
Options
Exercisable
on or Prior
to [
]/16
     Total
Shares(3)
   Total
Shares
(including
Director
Restricted
Share
Units)
   % of Total
Outstanding

R. R. Donnelley & Sons Company

                

Daniel N. Leib

                

Richard L. Crandall

                
                
                
                
                
                
                
                
                
                
                
                
                

All directors and executive officers as a group

                

Blackrock, Inc. and certain subsidiaries

                  (9)      0         0            

Capital Research Global Investors

              (10)              

Capital World Investors

              (11)      0         0            

The Vanguard Group.

              (12)      0         0            

TD Asset Management Inc

              (13)      0         0            

 

* Less than one percent.
1.
2.
3.
4.
5.
6.
7.
8.
9. Blackrock, Inc.(Blackrock) is an investment advisor with a principal business office at 55 East 52nd Street, New York, New York 10022. This amount reflects the total shares held by Blackrock clients. Blackrock has sole investment authority over all shares, sole voting authority over [●] shares and no voting authority over [●] shares.

 

102


Table of Contents
10. Capital Research Global Investors (Capital Research) is an investment advisor with a principal business office at 333 South Hope Street, Los Angeles, California 90071. This amount reflects the total shares held by Capital Research clients. Capital Research has sole investment authority over all shares and sole voting authority over all shares. Capital Research is a division of Capital Research and Management Company.
11. Capital World Investors (Capital World) is an investment advisor with a principal business office at 333 South Hope Street, Los Angeles, California 90071. This amount reflects the total shares held by Capital World clients. Capital World has sole investment authority over all shares and sole voting authority over all shares. Capital World is a division of Capital Research and Management Company.
12. The Vanguard Group (Vanguard) is an investment advisor with a principal business office at 100 Vanguard Boulevard, Malvern, Pennsylvania 19355. This amount reflects the total shares held by Vanguard clients. Vanguard has sole investment authority over [●] shares and shared investment authority over [●] shares, sole voting authority over [●] shares and no voting authority over [●] shares.
13. TD Asset Management Inc. (TDAM) is a corporation with a principal business office at Canada Trust Tower, BCE Place, 161 Bay Street, 35th Floor, Toronto, Ontario, M5J 2T2. Epoch Investment Partners, Inc. (Epoch) is a corporation with a principal business office at 399 Park Avenue, New York, New York 10022. Both TDAM and Epoch are wholly-owned subsidiaries of TD Bank Financial Group and jointly filed a Schedule 13G. TDAM has sole dispositive power and sole voting power over [●] shares. Epoch has sole dispositive power and sole voting power over [●] shares.

 

103


Table of Contents

SHARES ELIGIBLE FOR FUTURE SALE

Sales or the availability for sale of substantial amounts of our common stock in the public market could adversely affect the prevailing market price for our common stock. Upon completion of the Distribution, we will have outstanding an aggregate of approximately [●] million shares of our common stock based upon the shares of RRD common stock issued and outstanding on [●], 2016, excluding treasury stock and assuming no exercise of outstanding options. All of the shares of our common stock will be freely tradable without restriction or further registration under the Securities Act unless the shares are owned by our “affiliates” as that term is defined in the rules under the Securities Act (which may include RRD depending on the percentage of shares of our common stock it may retain following the Distribution). Shares held by “affiliates” may be sold in the public market only if registered or if they qualify for an exemption from registration or in compliance with Rule 144 under the Securities Act which is summarized below. Further, as described below, we plan to file a registration statement to cover the shares issued under our equity incentive plan.

Stockholder and Registration Rights Agreement

RRD may retain up to 20% of our common stock following the Distribution. Prior to the Separation and Distribution, we and RRD will enter into a Stockholder and Registration Rights Agreement pursuant to which we will agree that, upon the request of RRD, we will use our reasonable best efforts to effect the registration under applicable federal and state securities laws of the shares of any of our common stock retained by RRD after the Distribution. In addition, RRD will grant us a proxy to vote the shares of our common stock that RRD retains immediately after the distribution in proportion to the votes cast by our other stockholders. This proxy, however, will be automatically revoked as to a particular share upon any sale or transfer of such share from RRD to a person other than RRD, and neither the voting agreement nor the proxy will limit or prohibit any such sale or transfer.

Rule 144

In general, under Rule 144 as currently in effect, an affiliate would be entitled to sell within any three-month period a number of shares of common stock that does not exceed the greater of:

 

    1% of the number of shares of our common stock then outstanding; or

 

    the average weekly trading volume of our common stock on [●] during the four calendar weeks preceding the filing of a notice of Form 144 with respect to such sale.

Sales under Rule 144 are also subject to certain holding period requirements, manner of sale provisions and notice requirements and the availability of current public information about us.

Employee and Non-Employee Director Stock Awards

As described under “Executive Compensation—Compensation Discussion and Analysis—Treatment of RRD Equity Awards in Connection with the Separation,” in connection with the Distribution we will issue under our equity incentive plan options with respect to approximately [●] shares of our common stock in respect of previously granted awards to employees by RRD and restricted stock units with respect to approximately [●] shares of our common stock in respect of previously granted awards to employees by RRD. In addition, we anticipate making other equity based awards to our employees and non-employee directors in the future. We currently expect to file a registration statement under the Securities Act to register shares to be issued under our equity incentive plan, including the options and restricted stock units that were assumed in connection with the Distribution. Shares covered by such registration statement, other than shares issued to affiliates, generally will be freely tradable without further registration under the Securities Act.

 

104


Table of Contents

DESCRIPTION OF CAPITAL STOCK

We are currently authorized to issue 100 shares of common stock. Prior to the Distribution we will amend and restate our Certificate of Incorporation to provide authorization for us to issue [●] shares of capital stock, of which [●] shares will be common stock, par value $0.01 per share and [●] shares will be preferred stock, par value $[●] per share. Our Certificate of Incorporation will provide that our common stock and preferred stock will have the rights described below. Unless otherwise indicated, the description of our capital stock described in the section assumes our Certificate of Incorporation and By-laws are in effect.

Description of Common Stock

All shares of our common stock currently outstanding are fully paid and non-assessable, not subject to redemption and without preemptive or other rights to subscribe for or purchase any proportionate part of any new or additional issues of stock of any class or of securities convertible into stock of any class. Upon completion of the Distribution and adoption of our Certificate of Incorporation, we will be authorized to issue [●] shares of common stock.

Our common stock has the following rights and privileges:

Voting: Each holder of shares of common stock is entitled to one vote for each share owned of record on all matters submitted to a vote of stockholders. Except as otherwise required by law or as described below, holders of shares of common stock will vote together as a single class on all matters presented to the stockholders for their vote or approval, including the election of directors. There are no cumulative voting rights. Accordingly, the holders of a majority of the total shares of common stock voting for the election of directors can elect all the directors if they choose to do so, subject to the voting rights of holders of any preferred stock to elect directors.

Dividends and distributions: The holders of shares of common stock have the right to receive dividends and distributions, whether payable in cash or otherwise, as may be declared from time to time by our Board from legally available funds.

Liquidation, dissolution or winding-up: In the event of our liquidation, dissolution or winding-up, holders of the shares of common stock are entitled to share equally, share-for-share, in the assets available for distribution after payment of all creditors and the liquidation preferences of our preferred stock.

Restrictions on transfer: Neither our Certificate of Incorporation nor our By-laws contain any restrictions on the transfer of shares of common stock. In the case of any transfer of shares, there may be restrictions imposed by applicable securities laws.

Redemption, conversion or preemptive rights: Holders of shares of common stock have no redemption or conversion rights or preemptive rights to purchase or subscribe for our securities.

Other provisions: There are no redemption provisions or sinking fund provisions applicable to the common stock, nor is the common stock subject to calls or assessments by us.

Preferred Stock

Shares of preferred stock may be issued in one or more series at such time or times, and for such consideration or considerations, as the Board may determine. The Board is expressly authorized at any time, and from time to time, to provide for the issuance of shares of preferred stock in one or more series with such designations, preferences and relative, participating, optional or other special rights and qualifications, limitations or restrictions thereof as shall be stated and expressed in the resolution or resolutions providing for

 

105


Table of Contents

the issue thereof adopted by the Board, and as are not stated and expressed in our Certificate of Incorporation or any amendment thereto including, but not limited to, determination of any of the following:

 

    the distinctive serial designation and the number of shares constituting a series;

 

    the dividend rate or rates, whether dividends shall be cumulative and, if so, from what date, the payment date or dates for dividends, and the participating or other special rights, if any, with respect to dividends;

 

    the voting powers, full or limited, if any, of the shares of such series;

 

    whether the shares shall be redeemable and, if so, the price or prices at which, and the terms and conditions on which, the shares may be redeemed;

 

    the amount or amounts payable upon the shares in the event of voluntary or involuntary liquidation, dissolution or winding up of the corporation prior to any payment or distribution of the assets of the corporation to any class or classes of stock of the corporation ranking junior to the preferred stock;

 

    whether the shares shall be entitled to the benefit of a sinking or retirement fund to be applied to the purchase or redemption of shares of a series and, if so entitled, the amount of such fund and the manner of its application, including the price or prices at which the shares may be redeemed or purchased through the application of such fund;

 

    whether the shares shall be convertible into, or exchangeable for, shares of any other class or classes or of any other series of the same or any other class or classes of stock of the corporation or any other corporation, and if so convertible or exchangeable, the conversion price or prices, or the rates of exchange, and adjustments thereof, if any, at which such conversion or exchange may be made, and any other terms and conditions of such conversion or exchange; and

 

    any other preferences, privileges and powers, and relative, participating, optional or other special rights, and qualifications, limitations or restrictions of such series, as the Board may deem advisable and as shall not be inconsistent with the provisions of the Certificate of Incorporation.

Shares of preferred stock which have been issued and reacquired in any manner by the corporation (excluding, until the corporation elects to retire them, shares which are held as treasury shares but including shares redeemed, shares purchased and retired and shares which have been converted into shares of RRD common stock) shall have the status of authorized but unissued shares of preferred stock and may be reissued.

Nomination, Election and Term of Directors

Our Certificate of Incorporation will provide for a classified Board consisting of three classes of directors. Class I directors will serve until the first annual meeting of stockholders following the Separation and Distribution. The Class II and Class III directors will serve until the second and the third annual meeting of stockholders following the Distribution, respectively. Following the expiration of the terms of the Initial Directors, our stockholders will elect successor directors to one year terms. Our Certificate of Incorporation will provide that our Board will fully declassify upon the expiration of the terms of our Class III directors.

It will be the policy of the Corporate Responsibility and Governance Committee to consider candidates for director recommended by stockholders. The committee will evaluate candidates recommended for director by stockholders in the same way that it will evaluate any other candidate. The committee will also consider candidates recommended by management and members of the Board.

In identifying and evaluating nominees for director, the committee will take into account the applicable requirements for directors under the listing rules of the [●]. In addition, the committee will consider other criteria as it deems appropriate and which may vary over time depending on the Board’s needs, including certain core competencies and other criteria such as the personal and professional qualities, experience and education of the nominees, as well as the mix of skills and experience on the Board prior to and after the addition of the

 

106


Table of Contents

nominees. Although not part of any formal policy, the goal of the committee will be a balanced and diverse Board, with members whose skills, viewpoint, background and experience complement each other and, together, contribute to the Board’s effectiveness as a whole.

The Corporate Responsibility and Governance Committee from time to time may engage third-party search firms to identify candidates for director, and may use search firms to do preliminary interviews and background and reference reviews of prospective candidates.

Advance Notification of Stockholder Nominations and Proposals

Our By-laws will establish advance notice procedures with respect to stockholder proposals and nomination of candidates for election as directors other than nominations made by or at the direction of our Board. In particular, stockholders must notify our corporate secretary in writing prior to the meeting at which the matters are to be acted upon or directors are to be elected. The notice must contain the information specified in our By-laws. To be timely, the notice must be received by our corporate secretary not less than 90 or more than 120 days prior to the first anniversary date of the annual meeting for the preceding year, unless the annual meeting is not scheduled to be held within a period that commences 30 days before such anniversary date and ends 30 days after such anniversary date, then notice shall be given by the later of the close of business 90 days prior to the meeting date or the tenth day following notice of the annual meeting. Our initial annual meeting of stockholders shall be held on [●], 2017 and for the initial annual meeting of stockholders notice must be received by our corporate secretary no earlier than [●], 2017 and no later than [●], 2017.

Limits on Written Consents

Our Certificate of Incorporation will provide that, except as otherwise provided as to any series of preferred stock in the terms of that series, no action of stockholders required or permitted to be taken at any annual or special meeting of stockholders may be taken without a meeting of stockholders, without prior notice and without a vote, and the power of the stockholders to consent in writing to the taking of any action without a meeting is specifically denied.

Special Stockholder Meetings

Our By-laws will provide that stockholders holding at least 25% of our issued and outstanding common stock may call a special meeting of stockholders subject to certain notice requirements.

Forum Selection

Our By-laws will provide that, unless we consent in writing to the selection of an alternative forum, the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee to us or our stockholders, (iii) any action asserting a claim arising pursuant to any provision of the DGCL, our Certificate of Incorporation or our By-laws, in each case, as amended from time to time, or (iv) any action asserting a claim governed by the internal affairs doctrine shall be a state or federal court located within the State of Delaware, in all cases subject to the court’s having personal jurisdiction over the indispensable parties named as defendants. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock shall be deemed to have notice and consented to the foregoing forum selection provisions.

Anti-Takeover Effects of Certain Provisions

Some of the provisions of our Certificate of Incorporation and By-laws could make it more difficult to acquire us by means of a tender offer, a proxy contest or otherwise, or to remove incumbent officers and directors. These provisions, including our ability to issue preferred stock and the initial classification of our Board, are designed to discourage coercive takeover practices and inadequate takeover bids. These provisions are also designed to encourage persons seeking to acquire control in us to first negotiate with the Board. We believe

 

107


Table of Contents

that the benefits of increased protection will give us the potential ability to negotiate with the proponent of an unfriendly or unsolicited proposal to acquire or restructure us, and that the benefits of this increased protection will outweigh the disadvantages of discouraging those proposals, because negotiation of those proposals could result in an improvement of their terms.

Section 203 of the Delaware General Corporation Law

Section 203 of the General Corporation Law of the State of Delaware prohibits certain transactions between a Delaware corporation and an “interested stockholder.” An “interested stockholder” for this purpose is a stockholder who is directly or indirectly a beneficial owner of 15% or more of the aggregate voting power of a Delaware corporation. This provision prohibits certain business combinations between an interested stockholder and a corporation for a period of three years after the date on which the stockholder became an interested stockholder, unless: (1) prior to the time that a stockholder became an interested stockholder, either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder is approved by the Company’s Board, (2) the interested stockholder acquired at least 85% of the aggregate voting power of the Company in the transaction in which the stockholder became an interested stockholder, or (3) the business combination is approved by a majority of the Board and the affirmative vote of the holders of two-thirds of the aggregate voting power not owned by the interested stockholder at or subsequent to the time that the stockholder became an interested stockholder. These restrictions do not apply if, among other things, the Company’s certificate of incorporation contains a provision expressly electing not to be governed by Section 203. Our Certificate of Incorporation will not contain such an election.

Limitation on Personal Liability

Our Certificate of Incorporation will include provisions that limit the personal liability of our directors for monetary damages for breach of their fiduciary duties as directors, except to the extent that such limitation is not permitted under the DGCL. Such limitation shall not apply, except to the extent permitted by the DGCL, to (i) any breach of a director’s duty of loyalty to us or our stockholders, (ii) acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, (iii) any unlawful payment of a dividend or unlawful stock repurchase or redemption, as provided in Section 174 of the DGCL, or (iv) any transaction from which the director derived an improper personal benefit. These provisions will have no effect on the availability of equitable remedies such as an injunction or rescission based on a director’s breach of his or her duty of care.

Our By-laws will provide for indemnification to the fullest extent permitted by the DGCL, of any person made or threatened to be made a party to any action, suit or proceeding by reason of the fact that such person is or was a director, officer, employee or agent of the Company, or, at the request of the Company, serves or served as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or any other enterprise, against all expenses, judgments, fines, amounts paid in settlement and other losses actually and reasonably incurred in connection with the defense or settlement of such action, suit or proceeding. Our By-laws will also provide that the Company must advance reasonable expenses to its directors and officers, subject to its receipt of an undertaking from the indemnified party as may be required under the DGCL. In addition, we intend to enter into indemnification agreements with each of our executive officers and directors pursuant to which we will agree to indemnify each such executive officer and director to the fullest extent permitted by the DGCL.

Transfer Agent

The transfer agent and registrar for the common stock is [●].

Listing

We intend to list our common stock on the [●] under the symbol “DFIN”.

 

108


Table of Contents

INDEMNIFICATION

OF DIRECTORS AND OFFICERS

Section 145 of the Delaware General Corporation Law provides that a corporation may indemnify any current or former director, officer or employee or other individual against expenses, judgments, fines and amounts paid in settlement in connection with civil, criminal, administrative or investigative actions or proceedings, other than a derivative action by or in the right of the corporation, if the director, officer, employee or other individual acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, if he or she had no reasonable cause to believe his or her conduct was unlawful. A similar standard is applicable in the case of derivative actions, except that indemnification only extends to expenses incurred in connection with the defense or settlement of such actions, and the statute requires court approval before there can be any indemnification where the person seeking indemnification has been found liable to the corporation. The statute provides that it is not exclusive of other indemnification that may be granted by a corporation’s By-laws, disinterested director vote, stockholder vote, agreement or otherwise.

Our Certificate of Incorporation will include provisions that limit the personal liability of our directors for monetary damages for breach of their fiduciary duties as directors, except to the extent that such limitation is not permitted under the DGCL. Such limitation shall not apply, except to the extent permitted by the DGCL, to (i) any breach of a director’s duty of loyalty to us or our stockholders, (ii) acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, (iii) any unlawful payment of a dividend or unlawful stock repurchase or redemption, as provided in Section 174 of the DGCL, or (iv) any transaction from which the director derived an improper personal benefit. These provisions will have no effect on the availability of equitable remedies such as an injunction or rescission based on a director’s breach of his or her duty of care.

Our By-laws will provide for indemnification to the fullest extent permitted by the DGCL, of any person made or threatened to be made a party to any action, suit or proceeding by reason of the fact that such person is or was a director, officer, employee or agent of the Company, or, at the request of the Company, serves or served as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or any other enterprise, against all expenses, judgments, fines, amounts paid in settlement and other losses actually and reasonably incurred in connection with the defense or settlement of such action, suit or proceeding. Our By-laws will also provide that the Company must advance reasonable expenses to its directors and officers, subject to its receipt of an undertaking from the indemnified party as may be required under the DGCL. In addition, we intend to enter into indemnification agreements with each of our executive officers and directors pursuant to which we will agree to indemnify each such executive officer and director to the fullest extent permitted by the DGCL.

 

109


Table of Contents

AVAILABLE INFORMATION

We have filed with the SEC a registration statement, of which this Information Statement forms a part, under the Exchange Act and the rules and regulations promulgated under the Exchange Act with respect to the shares of our common stock being distributed to RRD stockholders in the Distribution. This Information Statement does not contain all of the information set forth in the registration statement and its exhibits and schedules, to which reference is made hereby. Statements in this Information Statement as to the contents of any contract, agreement or other document are qualified in all respects by reference to such contract, agreement or document. If we have filed any of those contracts, agreements or other documents as an exhibit to the registration statement, you should read the full text of such contract, agreement or document for a more complete understanding of the document or matter involved. For further information with respect to us and our common stock, we refer you to the registration statement, of which this Information Statement forms a part, including the exhibits and the schedules filed as a part of it.

We intend to furnish the holders of our common stock with annual reports and proxy statements containing financial statements audited by an independent public accounting firm and file with the SEC quarterly reports for the first three quarters of each fiscal year containing interim unaudited financial information. We also intend to furnish other reports as we may determine or as required by law.

The registration statement, of which this Information Statement forms a part, and its exhibits and schedules, and other documents which we file with the SEC can be inspected and copied at, and copies can be obtained from, the SEC’s public reference room. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. In addition, our SEC filings are available to the public at the SEC’s web site at http://www.sec.gov. You can also obtain reports, proxy statements and other information about us at our web site at [●].

Information that we file with the SEC after the date of this Information Statement may supersede the information in this Information Statement. You may read these reports, proxy statements and other information and obtain copies of such documents and information as described above.

No person is authorized to give any information or to make any representations other than those contained in this Information Statement, and, if given or made, such information or representations must not be relied upon as having been authorized. Neither the delivery of this Information Statement nor any distribution of securities made hereunder shall imply that there has been no change in the information set forth or in our affairs since the date hereof.

 

110


Table of Contents

INDEX TO COMBINED FINANCIAL STATEMENTS

 

     Page  

Combined Statements of Operations for each of the three years ended December 31, 2015

     F-3   

Combined Statements of Comprehensive Income for each of the three years ended December 31, 2015

     F-4   

Combined Balance Sheets as of December 31, 2015 and 2014

     F-5   

Combined Statements of Cash Flows for each of the three years ended December 31, 2015

     F-6   

Combined Statements of Parent Company Equity for each of the three years ended December 31, 2015

     F-7   

Notes to Combined Financial Statements

     F-8   

 

F-1


Table of Contents

To the Board of Directors and Shareholders of

R. R. Donnelley & Sons Company

Chicago, Illinois

We have audited the accompanying combined balance sheets of the Donnelley Financial Solutions operations (the “Company” or “Donnelley Financial Solutions”) of R. R. Donnelley and Sons Company as of December 31, 2015 and 2014, and the related combined statements of operations, comprehensive income, parent company equity, and cash flows for each of the three years in the period ended December 31, 2015. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such combined financial statements present fairly, in all material respects, the financial position of Donnelley Financial Solutions as of December 31, 2015 and 2014, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2015, in conformity with accounting principles generally accepted in the United States of America.

As described in Note 1, the accompanying combined financial statements have been derived from the consolidated financial statements and accounting records of R. R. Donnelley & Sons Company. The 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 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.

/s/ DELOITTE & TOUCHE LLP

Chicago, Illinois

March 31, 2016

 

F-2


Table of Contents

Donnelley Financial Solutions

Combined Statements of Operations

For the Years Ended December 31, 2015, 2014 and 2013

(in millions)

 

     Year Ended December 31,  
     2015     2014     2013  

Services net sales

   $ 628.6      $ 638.2      $ 615.6   

Products net sales

     420.9        441.9        469.8   
  

 

 

   

 

 

   

 

 

 

Net sales

     1,049.5        1,080.1        1,085.4   

Services cost of sales (exclusive of depreciation and amortization)

     291.9        301.2        315.6   

Services cost of sales with RRD affiliates (exclusive of depreciation and amortization)

     40.4        39.3        36.6   

Products cost of sales (exclusive of depreciation and amortization)

     230.9        236.3        242.1   

Products cost of sales with RRD affiliates (exclusive of depreciation and amortization)

     68.3        76.5        90.5   
  

 

 

   

 

 

   

 

 

 

Cost of sales

     631.5        653.3        684.8   

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

     199.2        290.5        189.7   

Restructuring, impairment and other charges—net

     4.4        4.8        13.0   

Depreciation and amortization

     41.7        40.7        37.1   
  

 

 

   

 

 

   

 

 

 

Income from operations

     172.7        90.8        160.8   

Interest expense—net

     1.1        1.5        2.2   

Investment and other income—net

     (0.1     (3.1     (0.3
  

 

 

   

 

 

   

 

 

 

Earnings before income taxes

     171.7        92.4        158.9   

Income tax expense

     67.4        35.0        62.6   
  

 

 

   

 

 

   

 

 

 

Net earnings

   $ 104.3      $ 57.4      $ 96.3   
  

 

 

   

 

 

   

 

 

 

See accompanying Notes to the Combined Financial Statements.

 

F-3


Table of Contents

Donnelley Financial Solutions

Combined Statements of Comprehensive Income

For the Years Ended December 31, 2015, 2014 and 2013

(in millions)

 

     Year Ended December 31,  
     2015     2014     2013  

Net earnings

   $ 104.3      $ 57.4      $ 96.3   

Other comprehensive income (loss), net of tax

      

Translation adjustments

     (7.5     (2.9     (3.9

Adjustments for net pension and other post-retirement benefits plan cost

     27.5        (169.9     23.4   
  

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     20.0        (172.8     19.5   
  

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ 124.3      $ (115.4   $ 115.8   
  

 

 

   

 

 

   

 

 

 

See accompanying Notes to the Combined Financial Statements.

 

F-4


Table of Contents

Donnelley Financial Solutions

Combined Balance Sheets

As of December 31, 2015 and 2014

(in millions)

 

     December 31,  
     2015     2014  

ASSETS

    

Cash and cash equivalents

   $ 15.1      $ 28.6   

Receivables, less allowances for doubtful accounts of $4.6 in 2015 (2014—$3.9)

     146.2        138.4   

Inventories

     22.2        22.5   

Prepaid expenses and other current assets

     7.3        13.6   
  

 

 

   

 

 

 

Total current assets

     190.8        203.1   
  

 

 

   

 

 

 

Property, plant and equipment—net

     33.0        36.5   

Goodwill

     446.8        448.8   

Other intangible assets—net

     69.3        86.1   

Software—net

     43.4        36.6   

Deferred income taxes

     10.6        169.0   

Other noncurrent assets

     23.7        14.1   
  

 

 

   

 

 

 

Total assets

   $ 817.6      $ 994.2   
  

 

 

   

 

 

 

LIABILITIES

    

Accounts payable

   $ 39.5      $ 34.5   

Accrued liabilities

     75.4        73.8   

Short-term debt

     8.8        32.9   
  

 

 

   

 

 

 

Total current liabilities

     123.7        141.2   
  

 

 

   

 

 

 

Note payable with an RRD affiliate

     29.2        44.0   

Deferred compensation liabilities

     28.5        31.2   

Pension liabilities

     —          411.2   

Other noncurrent liabilities

     12.7        15.1   
  

 

 

   

 

 

 

Total liabilities

     194.1        642.7   
  

 

 

   

 

 

 

Commitments and Contingencies (Note 11)

    

EQUITY

    

Accumulated other comprehensive loss

     (16.0     (673.7

Net parent company investment

     639.5        1,025.2   
  

 

 

   

 

 

 

Total equity

     623.5        351.5   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 817.6      $ 994.2   
  

 

 

   

 

 

 

See accompanying Notes to the Combined Financial Statements.

 

F-5


Table of Contents

Donnelley Financial Solutions

Combined Statements of Cash Flows

For the Years Ended December 31, 2015, 2014 and 2013

(in millions)

 

     Year Ended December 31,  
     2015     2014     2013  

OPERATING ACTIVITIES

      

Net earnings

   $ 104.3      $ 57.4      $ 96.3   

Adjustments to reconcile net earnings to net cash provided by operating activities:

      

Impairment charges

     —          1.7        5.7   

Depreciation and amortization

     41.7        40.7        37.1   

Provision for doubtful accounts receivable

     0.5        1.4        2.7   

Share-based compensation

     1.6        2.1        2.1   

Deferred income taxes

     10.2        (12.9     (5.7

Changes in uncertain tax positions

     0.3        (0.3     (0.6

Gain on investments and other assets—net

     —          (9.0     —     

Loss on pension settlement

     —          95.7        —     

Other

     0.2        0.7        —     

Changes in operating assets and liabilities—net of acquisitions:

      

Accounts receivable—net

     (10.2     3.9        5.4   

Inventories

     0.2        0.9        (0.6

Prepaid expenses and other current assets

     0.9        (1.1     0.8   

Accounts payable

     5.1        (6.0     4.1   

Income taxes payable and receivable

     (0.7     1.5        2.3   

Accrued liabilities and other

     (33.2     (51.4     (10.3
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     120.9        125.3        139.3   
  

 

 

   

 

 

   

 

 

 

INVESTING ACTIVITIES

      

Capital expenditures

     (27.1     (28.8     (19.6

Acquisition of business, net of cash acquired

     —          (6.0     —     

Proceeds from sales of other assets

     —          5.3        6.9   

Transfers from restricted cash

     —          —          1.6   

Purchase of equity investment

     (10.0     —          —     
  

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (37.1     (29.5     (11.1
  

 

 

   

 

 

   

 

 

 

FINANCING ACTIVITIES

      

Net change in short-term debt

     (24.0     (12.8     (4.9

Payments on note payable with an RRD affiliate

     (14.8     (14.7     (14.4

Net transfers to Parent and affiliates

     (56.0     (62.9     (112.4
  

 

 

   

 

 

   

 

 

 

Net cash used in financing activities

     (94.8     (90.4     (131.7
  

 

 

   

 

 

   

 

 

 

Effect of exchange rate on cash and cash equivalents

     (2.5     2.0        (2.5

Net (decrease) increase in cash and cash equivalents

     (13.5     7.4        (6.0

Cash and cash equivalents at beginning of year

     28.6        21.2        27.2   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 15.1      $ 28.6      $ 21.2   
  

 

 

   

 

 

   

 

 

 

See accompanying Notes to the Combined Financial Statements.

 

F-6


Table of Contents

Donnelley Financial Solutions

Combined Statements of Parent Company Equity

For the Years Ended December 31, 2015, 2014 and 2013

(in millions)

 

     Net Parent
Company
Investment
    Accumulated
Other
Comprehensive
Loss
    Total
Equity
 

Balance at January 1, 2013

   $ 603.6      $ (27.1   $ 576.5   

Net earnings

     96.3        —          96.3   

Transfers to parent company, net

     (120.8     —          (120.8

Transfer of pension plan from parent company, net

     446.4        (493.3     (46.9

Other comprehensive (loss) income

     —          19.5        19.5   
  

 

 

   

 

 

   

 

 

 

Balance at December 31, 2013

     1,025.5        (500.9     524.6   

Net earnings

     57.4        —          57.4   

Transfers to parent company, net

     (57.7     —          (57.7

Other comprehensive (loss) income

     —          (172.8     (172.8
  

 

 

   

 

 

   

 

 

 

Balance at December 31, 2014

     1,025.2        (673.7     351.5   

Net earnings

     104.3        —          104.3   

Transfers to parent company, net

     (53.2     —          (53.2

Transfer of pension plan to parent company, net

     (436.8     637.7        200.9   

Other comprehensive (loss) income

     —          20.0        20.0   
  

 

 

   

 

 

   

 

 

 

Balance at December 31, 2015

   $ 639.5      $ (16.0   $ 623.5   
  

 

 

   

 

 

   

 

 

 

See accompanying Notes to the Combined Financial Statements.

 

F-7


Table of Contents

Donnelley Financial Solutions

Notes to Combined Financial Statements

For the Years Ended December 31, 2015, 2014 and 2013

(in millions)

Note 1. Overview and Basis of Presentation

Description of Business and Separation

Donnelley Financial Solutions (“Donnelley Financial,” “the Company” and “we”) is a financial communications services company that supports global capital markets compliance and transaction needs for its corporate clients and their advisors (such as law firms and investment bankers) and global investment markets compliance and analytics needs for mutual fund companies, variable annuity providers and broker/dealers. Donnelley Financial provides content management, multi-channel content distribution, data management and analytics services, collaborative workflow and business reporting tools, and translations and other language services in support of clients’ communications requirements.

On August 4, 2015, R. R. Donnelley & Sons Company (“RRD” or the “Parent”) announced that its Board of Directors intends to create three independent public companies: (i) the Company, which will be a financial communications and data services company, (ii) LSC Communications, Inc., which will be a publishing and retail-centric print services and office product company (“LSC Communications”), and (iii) a global, customized multichannel communications management company, which will be the business of RRD after the Separation. The transactions are expected to take the form of a tax-free distribution to RRD shareholders of at least 80% of the shares of common stock in the Company and LSC Communications. The transactions are subject to customary conditions, including obtaining rulings from the Internal Revenue Service and/or tax opinions, execution of inter-company agreements and final approval by RRD’s Board of Directors. RRD expects to complete the transactions in October 2016, but there can be no assurance that the transactions will be completed on the anticipated timeline, or at all, or that the terms of the transaction will not change.

Structure of Transaction

Donnelley Financial was incorporated on February 22, 2016 as a wholly-owned subsidiary of RRD. Prior to the distribution of at least 80% of Donnelley Financial’s outstanding shares of common stock to holders of RRD’s common stock, which we refer to as the Distribution, following a series of internal restructuring transactions Donnelley Financial will own the subsidiaries, businesses and other assets owned by RRD, directly or indirectly, that are described in this Information Statement.

Basis of Presentation

The accompanying combined financial statements have been prepared on a stand-alone basis and are derived from RRD’s consolidated financial statements and accounting records. The combined financial statements include the financial position, results of operations, and cash flows in conformity with GAAP.

The combined financial statements include the allocation of certain assets and liabilities that have historically been held at the RRD corporate level but which are specifically identifiable or attributable to the Company. Cash and cash equivalents held by RRD were not allocated to Donnelley Financial unless they were held in a legal entity that will be transferred to Donnelley Financial. All intercompany transactions and accounts have been eliminated. All intracompany transactions between RRD and Donnelley Financial are considered to be effectively settled in the combined financial statements at the time the transaction is recorded, with the exception of a note payable with an RRD affiliate. The total net effect of the settlement of these intracompany transactions is reflected in the combined statements of cash flows as a financing activity, and in the combined balance sheets as net parent investment. Net parent company investment is primarily impacted by contributions from RRD which are the result of treasury activities and net funding provided by or distributed to RRD.

 

F-8


Table of Contents

Donnelley Financial Solutions

Notes to Combined Financial Statements

For the Years Ended December 31, 2015, 2014 and 2013

(in millions)

 

The combined financial statements include certain expenses of RRD which were allocated to Donnelley Financial for certain functions, including general corporate expenses related to information technology, finance, legal, human resources, internal audit, treasury, tax, investor relations and executive oversight. These expenses have been allocated to Donnelley Financial on the basis of direct usage, when available, with the remainder allocated on the pro rata basis of revenue, employee headcount, or other measures. Management considers the expense allocation methodology and results to be reasonable for all periods presented. However these allocations may not be indicative of the actual expenses that Donnelley Financial 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 have been calculated based on a separate income tax return methodology and presented as if the Company’s operations were separate taxpayers in the applicable jurisdictions.

RRD maintains various benefit and share-based compensation plans at a corporate level. Donnelley Financial employees participate in those programs and a portion of the cost of those plans is included in Donnelley Financial’s combined financial statements. However, Donnelley Financial’s combined balance sheets do not include any equity related to share-based compensation plans or any net benefit plan obligations unless Donnelley Financial is the sole sponsor of the plan. See Note 12, Retirement Plans, and Note 15, Stock and Incentive Programs for Employees, for a further description of the accounting for benefit and share-based compensation plans.

Donnelley Financial generates a portion of net revenue from sales to RRD’s subsidiaries. Additionally, Donnelley Financial utilizes RRD for freight and logistics, production of certain printed products and outsourced services business functions. Included in the combined financial statements were net revenues from intercompany sales of $7.8 million, $8.0 million and $8.9 million and cost of sales to RRD’s subsidiaries of $108.7 million, $115.8 million and $127.1 million for the years ended December 31, 2015, 2014 and 2013, respectively. Intercompany receivables and payables with RRD are reflected within net parent company investment in the accompanying combined financial statements.

Note 2. Significant Accounting Policies

Use of Estimates—The preparation of 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 and 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.

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. Deferred taxes are not provided on cumulative foreign currency translation adjustments when the Company expects foreign earnings to be permanently reinvested.

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

 

F-9


Table of Contents

Donnelley Financial Solutions

Notes to Combined Financial Statements

For the Years Ended December 31, 2015, 2014 and 2013

(in millions)

 

orderly transaction between market participants. The Company records the fair value of its pension plan assets and other postretirement 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 files highly-customized materials, such as regulatory S-filings and IPOs with the SEC on behalf of its customers, and performs XBRL and related services. Revenue is recognized for these services upon completion of the service performed or following final delivery of the related printed product. The Company also provides virtual data room services and other content management services, for which revenue is recognized as the service is performed. 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 substantially all 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.

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.

Certain revenues earned by the Company require judgment to determine if revenue should be recorded gross, as a principal, or net of related costs, as an agent. Billings for shipping and handling costs as well as certain postage costs, and out-of-pocket expenses are recorded gross. The Company’s printing operations process 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.

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 the Company’s net sales in 2015, 2014 or 2013. 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. See Note 6, 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

 

F-10


Table of Contents

Donnelley Financial Solutions

Notes to Combined Financial Statements

For the Years Ended December 31, 2015, 2014 and 2013

(in millions)

 

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. Inventory is 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, 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 either assigned to a specific reporting unit or allocated between reporting units based on the relative fair value of each reporting unit. The Company’s goodwill balances for certain reporting units were reallocated from RRD’s historical reporting units 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 units’ 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. If the carrying value exceeds the reporting unit’s fair value, the Company performs an additional fair value measurement calculation to determine the impairment loss, which is charged to operations in the period identified.

The Company also performs an interim review for indicators of impairment at each quarter-end to assess whether an interim impairment review is required for any reporting unit. In the Company’s annual review at October 31, 2015, and its interim review for indicators of impairment as of December 31, 2015, management concluded that there were no indicators that the fair value of any of the reporting units with goodwill was more likely than not below its carrying value.

 

F-11


Table of Contents

Donnelley Financial Solutions

Notes to Combined Financial Statements

For the Years Ended December 31, 2015, 2014 and 2013

(in millions)

 

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 $17.2 million, $14.6 million and $12.0 million for the years ended December 31, 2015, 2014 and 2013, respectively. Other intangible assets are recognized separately from goodwill and are amortized over their estimated useful lives. See Note 5, Goodwill and Other Intangible Assets, for further discussion of other intangible assets and the related amortization expense.

Share-Based Compensation—RRD maintains an incentive share-based compensation program for the benefit of its officers, directors, and certain employees, including certain Donnelley Financial employees. Share-based compensation expense has been allocated to the company based on the awards and terms previously granted to the Company’s employees as well as an allocation of compensation expense to RRD’s corporate and shared functional employees. See Note 15, Stock and Incentive Programs for Employees, for further discussion.

Pension and Other Postretirement Benefits Plans—Donnelley Financial employees participate in various pension and other postretirement healthcare plans sponsored by RRD. In Donnelley Financial’s statements of operations, these plans are accounted for as multiemployer benefit plans and, except as described in Note 12, Retirement Plans, no net liabilities have been reflected in Donnelley Financial’s combined balance sheets as there were no unfunded contributions due at the end of the year of any reporting period. Donnelley Financial’s statements of operations include expense allocations for these benefits. These expenses were funded through intercompany transactions with RRD which are reflected within net parent company investment. At the separation date, Donnelley Financial expects to record net benefit plan obligations transferred from RRD.

Effective December 31, 2013, RR Donnelley merged its primary qualified defined benefit pension plan with a separate defined benefit pension plan sponsored by Donnelley Financial. As a result of this merger, Donnelley Financial became the plan sponsor and primary legal obligor of this combined plan. The Company’s combined balance sheets reflect the net obligations of the combined plan as of December 31, 2014 and 2013. During 2015, the sponsorship of this combined plan was transferred to RR Donnelley, which became the primary legal obligor. Accordingly, the obligations of this combined plan are not reflected in the combined balance sheet of Donnelley Financial as of December 31, 2015.

Donnelley Financial 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 and other postretirement benefits plans based on calculations which include various actuarial assumptions including discount rates, expected long-term rates of return, turnover rates, health care cost trend rates and compensation increases. The Company reviews its actuarial assumptions on an annual basis as of December 31 (or more frequently if a significant event requiring remeasurement occurs) and modifies the assumptions based on current rates and trends when it is appropriate to do so. The effects of modifications are recognized immediately on the combined balance sheets, but are generally amortized into operating earnings over future periods, with the deferred amount recorded in accumulated other comprehensive income (loss).

Taxes on Income—In the Company’s combined financial statements, income tax expense and deferred tax balances have been calculated on a separate income tax return basis although 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 a part. In the future, as a standalone entity, the Company will file tax returns on its own behalf and its deferred taxes and effective tax rate may differ from those in historical periods.

 

F-12


Table of Contents

Donnelley Financial Solutions

Notes to Combined Financial Statements

For the Years Ended December 31, 2015, 2014 and 2013

(in millions)

 

Deferred taxes are recognized for the future tax effects of temporary differences between financial and income tax reporting based on enacted tax laws and rates. The Company maintains valuation allowances unless it is more likely than not that the deferred tax asset will be realized.

The Company maintains an income taxes payable or receivable account in each jurisdiction and, with the exception of certain entities outside the U.S. that will transfer to the Company at Separation, the Company is deemed to settle current tax balances with the RRD tax paying entities in the respective jurisdictions. These settlements are reflected as changes in net parent company investment in the combined balance sheets. The Company classifies interest expense and any related penalties related to income tax uncertainties as a component of income tax expense.

The Company is regularly audited by foreign and domestic tax authorities. These audits occasionally result in proposed assessments where the ultimate resolution might result in the Company owing additional taxes, including in some cases, penalties and interest. The Company recognizes a tax position in its financial statements when it is more likely than not (i.e., 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 financial statements. The Company adjusts such reserves upon changes in circumstances that would cause a change to the estimate of the ultimate liability, upon effective settlement or upon the expiration of the statute of limitations, in the period in which such event occurs. See Note 13, Income Taxes, for further discussion.

Comprehensive Income (Loss)—Comprehensive income (loss) for the Company consists of net earnings, unrecognized actuarial gains and losses and foreign currency translation adjustments. See Note 14, Comprehensive Income, for further discussion.

Note 3. Business Combinations

2014 Acquisition

On March 10, 2014, the Company acquired the assets of MultiCorpora R&D Inc. and MultiCorpora International Inc. (together “MultiCorpora”) for approximately $6.0 million. MultiCorpora is an international provider of translation technology solutions. The acquisition of MultiCorpora expanded the capabilities of the Company’s language solutions offering which supports clients’ multi-lingual communications. MultiCorpora’s operations are included in the International segment.

The MultiCorpora 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 applicable acquisition date. The Company recorded intangible assets of $0.9 million and acquired software of $1.1 million. The excess of the cost of the MultiCorpora acquisition over the net amounts assigned to the fair value of the assets acquired was recorded as goodwill. Goodwill of $3.5 million resulted from this acquisition which is primarily attributable to the synergies expected to arise as a result of the acquisition.

 

F-13


Table of Contents

Donnelley Financial Solutions

Notes to Combined Financial Statements

For the Years Ended December 31, 2015, 2014 and 2013

(in millions)

 

Note 4. Restructuring, Impairment and Other Charges

Restructuring, Impairment and Other Charges recognized in Results of Operations

 

2015

   Employee
Terminations
     Other
Restructuring
Charges
     Total
Restructuring
Charges
     Other
Charges
     Total  

U.S.

   $ 1.4       $ 1.9       $ 3.3       $ 0.2       $ 3.5   

International

     0.9         —           0.9         —           0.9   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2.3       $ 1.9       $ 4.2       $ 0.2       $ 4.4   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Restructuring Charges

For the year ended December 31, 2015, the Company recorded net restructuring charges of $2.3 million for employee termination costs for 64 employees, all of whom were terminated as of December 31, 2015. These charges primarily related to the reorganization of certain administrative functions. Additionally, the Company incurred lease termination and other restructuring charges of $1.9 million for the year ended December 31, 2015.

 

2014

   Employee
Terminations
     Other
Restructuring
Charges
     Total
Restructuring
Charges
     Impairment      Other
Charges
     Total  

U.S.

   $ 0.1       $ 2.1       $ 2.2