UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2018
OR
☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number
001-37729
LSC Communications, Inc.
(Exact name of registrant as specified in its charter)
Delaware |
36-4829580 |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification Number) |
191 N. Wacker Drive, Suite 1400
Chicago, IL 60606
(Address of principal executive offices, including zip code)
(773) 272-9200
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
☒ |
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Accelerated filer |
☐ |
Non-accelerated filer |
☐ |
(Do not check if a smaller reporting company) |
Smaller reporting company |
☐ |
Emerging growth company |
☐ |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
As of July 27, 2018, 33,371,218 shares of common stock were outstanding.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2018
TABLE OF CONTENTS
PART I
2
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
LSC COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except share and per share data)
(UNAUDITED)
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June 30, |
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December 31, |
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2018 |
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2017 |
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ASSETS |
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Cash and cash equivalents |
|
$ |
22 |
|
|
$ |
34 |
|
Receivables, less allowances for doubtful accounts of $15 in 2018 (2017: $11) |
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682 |
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727 |
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Inventories (Note 4) |
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252 |
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238 |
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Prepaid expenses and other current assets |
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53 |
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47 |
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Total current assets |
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1,009 |
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1,046 |
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Property, plant and equipment-net (Note 5) |
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544 |
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576 |
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Goodwill (Note 6) |
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82 |
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82 |
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Other intangible assets-net (Note 6) |
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151 |
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|
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160 |
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Deferred income taxes |
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39 |
|
|
|
51 |
|
Other noncurrent assets |
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96 |
|
|
|
99 |
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Total assets |
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$ |
1,921 |
|
|
$ |
2,014 |
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LIABILITIES |
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Accounts payable |
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$ |
324 |
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$ |
406 |
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Accrued liabilities |
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203 |
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239 |
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Short-term and current portion of long-term debt (Note 9) |
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234 |
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123 |
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Total current liabilities |
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761 |
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768 |
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Long-term debt (Note 9) |
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680 |
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699 |
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Pension liabilities |
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145 |
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182 |
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Restructuring and multi-employer pension liabilities (Note 7) |
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47 |
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49 |
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Other noncurrent liabilities |
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67 |
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68 |
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Total liabilities |
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1,700 |
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1,766 |
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Commitments and contingencies (Note 8) |
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EQUITY (Note 10) |
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Common stock, $0.01 par value |
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Authorized: 65,000,000 shares; |
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Issued: 34,882,123 shares in 2018 (2017: 34,610,931) |
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— |
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— |
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Additional paid-in-capital |
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823 |
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|
816 |
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Accumulated deficit |
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(5 |
) |
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(90 |
) |
Accumulated other comprehensive loss (Note 13) |
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|
(574 |
) |
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(476 |
) |
Treasury stock, at cost: 1,834,161 shares in 2018 (2017: 100,256) |
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(23 |
) |
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(2 |
) |
Total equity |
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221 |
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|
248 |
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Total liabilities and equity |
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$ |
1,921 |
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$ |
2,014 |
|
See Notes to the Condensed Consolidated Financial Statements
3
LSC COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)
(UNAUDITED)
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Three Months Ended June 30, |
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Six Months Ended June 30, |
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2018 |
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2017 |
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2018 |
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2017 |
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Net sales |
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$ |
943 |
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$ |
848 |
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$ |
1,872 |
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$ |
1,669 |
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Cost of sales |
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798 |
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|
705 |
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1,606 |
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1,397 |
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Selling, general and administrative expenses (exclusive of depreciation and amortization) |
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82 |
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76 |
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165 |
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152 |
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Restructuring, impairment and other charges-net (Note 7) |
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11 |
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21 |
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17 |
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27 |
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Depreciation and amortization |
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34 |
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39 |
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72 |
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79 |
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Income from operations |
|
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18 |
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7 |
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12 |
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14 |
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Interest expense-net |
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18 |
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16 |
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38 |
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33 |
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Investment and other (income)-net |
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(13 |
) |
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(12 |
) |
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(24 |
) |
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(23 |
) |
Income (loss) before income taxes |
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13 |
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3 |
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(2 |
) |
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4 |
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Income tax expense (benefit) |
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5 |
|
|
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(2 |
) |
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|
1 |
|
|
|
— |
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Net income (loss) |
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$ |
8 |
|
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$ |
5 |
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$ |
(3 |
) |
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$ |
4 |
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Net earnings (loss) per common share (Note 11): |
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Basic net earnings (loss) per share |
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$ |
0.24 |
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$ |
0.13 |
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$ |
(0.09 |
) |
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$ |
0.11 |
|
Diluted net earnings (loss) per share |
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$ |
0.23 |
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$ |
0.12 |
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$ |
(0.09 |
) |
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$ |
0.11 |
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Dividends declared per common share |
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$ |
0.26 |
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$ |
0.25 |
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$ |
0.52 |
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$ |
0.50 |
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Weighted average number of common shares outstanding: |
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Basic |
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34.0 |
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33.5 |
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34.3 |
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33.1 |
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|||
Diluted |
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34.3 |
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33.8 |
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34.3 |
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33.4 |
|
See Notes to the Condensed Consolidated Financial Statements
4
LSC COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
(UNAUDITED)
|
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Three Months Ended June 30, |
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Six Months Ended June 30, |
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2018 |
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2017 |
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2018 |
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2017 |
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||||
Net income (loss) |
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$ |
8 |
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|
$ |
5 |
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$ |
(3 |
) |
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$ |
4 |
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Other comprehensive (loss) income, net of tax (Note 13) |
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Translation adjustments |
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(14 |
) |
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9 |
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(9 |
) |
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18 |
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Adjustments for net periodic pension plan cost |
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4 |
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2 |
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8 |
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5 |
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Other comprehensive (loss) income |
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(10 |
) |
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11 |
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(1 |
) |
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23 |
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Comprehensive (loss) income |
|
$ |
(2 |
) |
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$ |
16 |
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$ |
(4 |
) |
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$ |
27 |
|
The adjustments for net pension plan cost were net of income tax expense of $1 million and $2 million for the three and six months ended June 30, 2018, respectively. The adjustments for net pension plan cost were net of income tax expense of $2 million and $3 million for the three and six months ended June 30, 2017, respectively.
See Notes to the Condensed Consolidated Financial Statements
5
LSC COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(UNAUDITED)
|
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Six Months Ended June 30, |
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2018 |
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2017 |
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||
Cash Flows from Operating Activities |
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Net (loss) income |
|
$ |
(3 |
) |
|
$ |
4 |
|
Adjustments to reconcile net loss (income) to net cash (used in) provided by operating activities: |
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Depreciation and amortization |
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72 |
|
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79 |
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Provision for doubtful accounts receivable |
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4 |
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1 |
|
Share-based compensation |
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8 |
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7 |
|
Deferred income taxes |
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4 |
|
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(1 |
) |
Other |
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4 |
|
|
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(2 |
) |
Changes in operating assets and liabilities - net of acquisitions: |
|
|
|
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Accounts receivable – net |
|
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61 |
|
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|
66 |
|
Inventories |
|
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(49 |
) |
|
|
(4 |
) |
Prepaid expenses and other current assets |
|
|
(4 |
) |
|
|
(3 |
) |
Accounts payable |
|
|
(81 |
) |
|
|
(4 |
) |
Income taxes payable and receivable |
|
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2 |
|
|
|
(10 |
) |
Accrued liabilities and other |
|
|
(44 |
) |
|
|
(55 |
) |
Net cash (used in) provided by operating activities |
|
|
(26 |
) |
|
|
78 |
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities |
|
|
|
|
|
|
|
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Capital expenditures |
|
|
(37 |
) |
|
|
(36 |
) |
Acquisitions of businesses, net of cash acquired |
|
|
4 |
|
|
|
(5 |
) |
Proceeds from sales of investments |
|
|
— |
|
|
|
3 |
|
Proceeds from sales of other assets |
|
|
1 |
|
|
|
6 |
|
Net cash (used in) investing activities |
|
|
(32 |
) |
|
|
(32 |
) |
|
|
|
|
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|
|
|
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Cash Flows from Financing Activities |
|
|
|
|
|
|
|
|
Payments of current maturities and long-term debt |
|
|
(26 |
) |
|
|
(52 |
) |
Net proceeds from credit facility borrowings |
|
|
115 |
|
|
|
— |
|
Proceeds from issuance of common stock |
|
|
— |
|
|
|
18 |
|
Payments for repurchase of common stock |
|
|
(20 |
) |
|
|
— |
|
Dividends paid |
|
|
(18 |
) |
|
|
(16 |
) |
Other financing activities |
|
|
(1 |
) |
|
|
— |
|
Payments from RRD – net |
|
|
— |
|
|
|
3 |
|
Net cash provided by (used in) financing activities |
|
|
50 |
|
|
|
(47 |
) |
|
|
|
|
|
|
|
|
|
Effect of exchange rate on cash and cash equivalents |
|
|
(2 |
) |
|
|
4 |
|
Net (decrease) increase in cash, cash equivalents and restricted cash |
|
|
(10 |
) |
|
|
3 |
|
Cash, cash equivalents and restricted cash at beginning of year |
|
|
35 |
|
|
|
97 |
|
Cash, cash equivalents and restricted cash at end of period |
|
$ |
25 |
|
|
$ |
100 |
|
Reconciliation to the Condensed Consolidated Balance Sheets |
|
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|
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As of June 30, 2018 |
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As of December 31, 2017 |
|
||
Cash and cash equivalents |
|
$ |
22 |
|
|
$ |
34 |
|
Restricted cash included in prepaid expenses and other current assets |
|
|
3 |
|
|
|
1 |
|
Total cash, cash equivalents and restricted cash shown in the statement of cash flows |
|
$ |
25 |
|
|
$ |
35 |
|
See Notes to the Condensed Consolidated Financial Statements
6
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three and Six Months Ended June 30, 2018 and 2017
(tabular amounts in millions, except per share data)
Note 1. Overview and Basis of Presentation
Description of Business
The principal business of LSC Communications, Inc., a Delaware corporation, and its direct or indirect wholly-owned subsidiaries (“LSC Communications,” “the Company,” “we,” “our” and “us”) is to offer a broad scope of traditional and digital print, print-related services and office products. The Company serves the needs of publishers, merchandisers and retailers worldwide with a service offering that includes e-services, logistics, warehousing and fulfillment and supply chain management. The Company utilizes a broad portfolio of technology capabilities coupled with consultative attention to clients' needs to increase speed to market, reduce costs, provide postal savings to customers and improve efficiencies. The Company prints magazines, catalogs, books, directories, and retail inserts and its office products offerings include filing products, envelopes, note-taking products, binder products, and forms.
Description of Separation
On October 1, 2016 (the “separation date”), R. R. Donnelley & Sons Company (“RRD” or the “Parent”) completed the previously announced separation (the “separation”) into three separate independent publicly-traded companies: (i) its publishing and retail-centric print services and office products business (“LSC Communications”); (ii) its financial communications services business (“Donnelley Financial Solutions, Inc.” or “Donnelley Financial”) and (iii) a global, customized multichannel communications management company, which is the business of RRD after the separation. To effect the separation, RRD undertook a series of transactions to separate net assets and legal entities. RRD completed the distribution (the “distribution”) of 80.75% of the outstanding common stock of LSC Communications and Donnelley Financial to RRD stockholders on October 1, 2016. RRD retained a 19.25% ownership stake in both LSC Communications and Donnelley Financial. On October 1, 2016, RRD stockholders of record as of the close of business on September 23, 2016 (“the record date”) received one share of LSC Communications common stock and one share of Donnelley Financial common stock for every eight shares of RRD common stock held as of the record date. On March 28, 2017, RRD completed the sale of approximately 6.2 million shares of LSC Communications common stock, representing its entire 19.25% retained ownership.
Basis of Presentation
The condensed consolidated financial statements include the balance sheets, statements of operations and cash flows in conformity with accounting principles generally accepted in the United States (“GAAP”). All intercompany transactions have been eliminated in consolidation. These unaudited condensed consolidated interim financial statements include estimates and assumptions of management that affect the amounts reported in the condensed consolidated financial statements. Actual results could differ from these estimates.
Certain prior year amounts were restated to conform to the Company’s current statement of operations and cash flows classifications.
The Company adopted Accounting Standards Update No. 2017-07 “Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost” (“ASU 2017-07”) in the first quarter of 2018. As a result of the adoption of ASU 2017-07, the Company will reclassify $46 million and $45 million related to the years ended December 31, 2017 and 2016, respectively, of net pension income out of income from operations to investment and other (income)-net, resulting in no impact to net income. The Company reclassified $12 million and $23 million of net pension income from selling, general and administrative expenses to investment and other income-net in the condensed consolidated statement of operations for the three and six months ended June 30, 2017.
The Company adopted Accounting Standards Update No. 2016-18 “Statements of Cash Flows (Topic 230): Restricted Cash” (“ASU 2016-18”) in the first quarter of 2018. The standard requires amounts generally described as restricted cash and restricted cash equivalents to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The standard does not provide a definition of restricted cash or restricted cash equivalents. The standard requires a retrospective transition method to be applied to each period presented. The Company included a reconciliation of beginning-of-period and end-of-period amounts in condensed consolidated statements of cash flows to the condensed consolidated balance sheets.
7
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three and Six Months Ended June 30, 2018 and 2017
(tabular amounts in millions, except per share data)
U.S. Tax Cuts and Jobs Act (“Tax Act”)
The Company’s accounting for the Tax Act remains provisional for amounts recorded as of December 31, 2017. As disclosed in the Company’s annual report on Form 10-K (Note 14, Income Taxes) for the year ended December 31, 2017, the Company was able to reasonably estimate certain effects, and therefore, recorded provisional adjustments associated with the one-time transition tax on the deemed repatriation of post-1986 undistributed earnings of foreign subsidiaries and the remeasurement of deferred taxes. The Company has not recorded any potential deferred tax effects related to global intangible low-taxed income (“GILTI”) and has not made a policy decision regarding whether to record deferred taxes on GILTI or in the period in which the tax is incurred.
The Company has not made any additional measurement-period adjustments related to these items during the six months ended June 30, 2018. The Company is continuing to gather additional information to complete the accounting for these items and expects to complete the accounting within the prescribed measurement period.
Note 2. Business Combinations
2017 Acquisitions
On November 29, 2017, the Company acquired The Clark Group, (“Clark Group”), a third-party logistics provider of distribution, consolidation, transportation management and international freight forwarding services. The acquisition enhanced the Company’s logistics service offering. The total purchase price was $25 million in cash, of which $16 million was recorded in goodwill.
On November 9, 2017, the Company acquired Quality Park, a producer of envelopes, mailing supplies and assorted packaging items. The acquisition enhanced the Company’s office products offerings. The total purchase price was $41 million in cash, resulting in a bargain purchase gain of $2 million. We reassessed the recognition and measurement of identifiable assets and liabilities acquired and concluded that all acquired assets and liabilities were recognized and that the valuation procedures and resulting estimates were appropriate.
On September 7, 2017, the Company acquired Publishers Press, a printing provider with capabilities such as web-offset printing, prepress and distribution services for magazines and retail brands. The acquisition enhanced the Company’s printing capabilities. The total purchase price was $68 million in cash, of which $1 million was recorded in goodwill.
On August 21, 2017, the Company acquired the assets of NECI, LLC (“NECI”), a supplier of commodity and specialty filing supplies. The acquisition enhanced the Company’s office products offerings. The purchase price, which included the Company’s estimate of contingent consideration, was $6 million in cash, of which $1 million was recorded in goodwill.
On August 17, 2017, the Company acquired CREEL Printing (“CREEL”), an offset and digital printing company. The acquisition enhanced the capabilities of the Company’s offset and digital production platform and brought enhanced technologies to support our clients’ evolving needs, specifically in the magazine media and retail marketing industries. CREEL’s capabilities include full-color web and sheetfed printing, regionally distributed variable digital production, large-format printing, and integrated digital solutions. The purchase price, which included the Company’s estimate of contingent consideration, was $79 million in cash, of which $26 million was recorded in goodwill.
On July 28, 2017, the Company acquired Fairrington Transportation Corp., F.T.C. Transport, Inc. and F.T.C. Services, Inc. (“Fairrington”), a full-service, printer-independent mailing logistics provider in the United States. The acquisition enhanced the Company’s logistics service offering. The purchase price was $19 million in cash and approximately 1.0 million shares of LSC Communications common stock, for a total transaction value of $39 million. Of the total purchase price, $22 million was recorded in goodwill.
On March 1, 2017, the Company acquired HudsonYards Studios (“HudsonYards”), a digital and print premedia production company that provides high-quality creative retouching, computer-generated imagery, mechanical creation, press-ready file preparation, and interactive production services. The acquisition enhanced the Company’s digital and premedia capabilities. The purchase price for HudsonYards was $3 million in cash, of which $2 million was recorded in goodwill.
8
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three and Six Months Ended June 30, 2018 and 2017
(tabular amounts in millions, except per share data)
The operations of Clark Group, Publishers Press, CREEL, Fairrington, and HudsonYards are included in the Print segment; specifically the magazines, catalogs and retail inserts reporting unit. The operations of Quality Park and NECI are included in the Office Products segment.
The acquisitions were recorded by allocating the cost of the acquisitions to the assets acquired, including other intangible assets, based on their estimated fair values at the acquisition date. The excess of the cost of the acquisitions over the net amounts assigned to the fair value of the assets acquired was recorded in goodwill. The goodwill is primarily attributable to the synergies expected to arise as a result of the acquisitions.
The preliminary tax deductible goodwill related to the Clark Group, Quality Park, Publishers Press, NECI, CREEL, Fairrington, and HudsonYards acquisitions was $38 million.
The purchase price allocation for Quality Park is preliminary as of June 30, 2018 as the finalization of the working capital adjustment is pending. The primary areas that are not yet finalized relate to the valuation of certain assets and liabilities. The final purchase price allocation may differ from what is currently reflected in the condensed consolidated financial statements and could affect goodwill impairment in the future. The purchase price allocations for the Clark Group, Publishers Press, NECI, CREEL, Fairrington, and HudsonYards are final as of June 30, 2018. There were no significant changes to the purchase price allocations for all acquisitions as of June 30, 2018 compared to the disclosed purchase price allocations in the Company’s annual report on Form 10-K for the year ended December 31, 2017.
The purchase price allocations for the material acquisitions noted above were as follows:
|
|
Clark Group |
|
|
Quality Park |
|
|
Publishers Press |
|
|
CREEL |
|
|
Fairrington |
|
|||||
Accounts Receivable |
|
$ |
6 |
|
|
$ |
19 |
|
|
$ |
27 |
|
|
$ |
12 |
|
|
$ |
6 |
|
Inventories |
|
|
— |
|
|
|
27 |
|
|
|
13 |
|
|
|
5 |
|
|
|
— |
|
Prepaid expenses and other current assets |
|
|
— |
|
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
|
|
— |
|
Property, plant and equipment |
|
|
— |
|
|
|
8 |
|
|
|
36 |
|
|
|
20 |
|
|
|
6 |
|
Other intangible assets |
|
|
14 |
|
|
|
1 |
|
|
|
— |
|
|
|
23 |
|
|
|
17 |
|
Other noncurrent assets |
|
|
— |
|
|
|
— |
|
|
|
1 |
|
|
|
— |
|
|
|
1 |
|
Goodwill (bargain purchase) |
|
|
16 |
|
|
|
(2 |
) |
|
|
1 |
|
|
|
26 |
|
|
|
22 |
|
Accounts payable and accrued liabilities |
|
|
(8 |
) |
|
|
(11 |
) |
|
|
(14 |
) |
|
|
(9 |
) |
|
|
(4 |
) |
Deferred taxes – net |
|
|
(3 |
) |
|
|
(2 |
) |
|
|
— |
|
|
|
— |
|
|
|
(9 |
) |
Purchase price, net of cash acquired |
|
$ |
25 |
|
|
$ |
41 |
|
|
$ |
65 |
|
|
$ |
78 |
|
|
$ |
39 |
|
Less: value of common stock issued |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
20 |
|
Less: accrued but unpaid contingent consideration |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1 |
|
|
|
— |
|
Net cash paid |
|
$ |
25 |
|
|
$ |
41 |
|
|
$ |
65 |
|
|
$ |
77 |
|
|
$ |
19 |
|
In accordance with ASC 350, Intangibles — Goodwill and Other, the Company is required to test its goodwill for impairment annually, or more often if there is an indication that goodwill might be impaired. Given the historical valuations of the magazines, catalogs and retail inserts reporting unit that have resulted in goodwill impairment in prior years, combined with the change in the composition of the carrying value of the reporting unit due to the acquisitions completed during the year ended December 31, 2017, the Company determined it necessary to perform goodwill impairment reviews on this reporting unit as of September 30, 2017, and again as of December 31, 2017 due to the acquisitions that were completed after September 30, 2017.
As a result of the goodwill impairment tests, and consistent with prior goodwill impairment tests, the magazines, catalogs and retail inserts reporting unit’s fair value continued to be at a value below its carrying value. This is primarily due to the negative revenue trends experienced in recent years that are only partially offset by the impact of the new acquisitions. The charges to recognize the impairment of goodwill in the magazines, catalogs and retail inserts reporting unit were $55 million and $18 million during the three months ended September 30, 2017 and December 31, 2017, respectively. The total charge was $73 million for 2017, resulting in zero goodwill associated with the magazines, catalogs and retail inserts reporting unit as of December 31, 2017.
9
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three and Six Months Ended June 30, 2018 and 2017
(tabular amounts in millions, except per share data)
The fair values of goodwill, other intangible assets and property, plant and equipment associated with the acquisitions were determined to be Level 3 under the fair value hierarchy, which included discounted cash flow analyses, comparable marketplace fair value data and management’s assumptions for the goodwill impairment charges. Property, plant and equipment values were estimated using either the cost or market approach, if a secondhand market existed.
For the three and six months ended June 30, 2018, the Company recorded $1 million and $2 million of acquisition-related expenses, respectively, associated with the completed and contemplated acquisitions within selling, general and administrative expenses in the condensed consolidated statements of operations. For both the three and six months ended June 30, 2017, there were $1 million of acquisition-related expenses associated with the completed and contemplated acquisitions.
Pro forma results
The following unaudited pro forma financial information for the three and six months ended June 30, 2018 and 2017 presents the condensed consolidated statements of operations of the Company and the acquisitions described above, as if the acquisitions had occurred as of January 1 of the year prior to the acquisitions.
The unaudited pro forma financial information is not intended to represent or be indicative of the Company’s condensed consolidated statements of operations that would have been reported had these acquisitions been completed as of the beginning of the period presented and should not be taken as indicative of the Company’s future condensed consolidated statements of operations. Pro forma adjustments are tax-effected at the applicable statutory tax rates.
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
|
June 30, |
|
|
June 30, |
|
||||||||||
|
|
|
2018 |
|
|
|
2017 |
|
|
|
2018 |
|
|
|
2017 |
|
Net sales |
|
$ |
943 |
|
|
$ |
967 |
|
|
$ |
1,872 |
|
|
$ |
1,909 |
|
Net income (loss) |
|
|
8 |
|
|
|
3 |
|
|
|
(2 |
) |
|
|
(1 |
) |
Net earnings (loss) per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.24 |
|
|
$ |
0.09 |
|
|
$ |
(0.06 |
) |
|
$ |
(0.03 |
) |
Diluted |
|
$ |
0.23 |
|
|
$ |
0.09 |
|
|
$ |
(0.06 |
) |
|
$ |
(0.03 |
) |
The following table outlines unaudited pro forma financial information for the three and six months ended June 30, 2018 and 2017:
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
|
June 30, |
|
|
June 30, |
|
||||||||||
|
|
2018 |
|
|
2017 |
|
|
2018 |
|
|
2017 |
|
||||
Amortization of purchased intangibles |
|
$ |
4 |
|
|
$ |
5 |
|
|
$ |
9 |
|
|
$ |
11 |
|
The nonrecurring pro forma adjustments affecting net loss for the three and six months ended June 30, 2018 and 2017 were de minimis.
10
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three and Six Months Ended June 30, 2018 and 2017
(tabular amounts in millions, except per share data)
Note 3. Revenue Recognition
Financial Statement Impact of Adopting ASC 606
The Company adopted Accounting Standards Update No. 2014-09 “Revenue from Contracts with Customers (Topic 606)” (“ASC 606”, or the “standard”) on January 1, 2018 using the modified retrospective method for all contracts not completed as of the date of adoption. The reported results for 2018 reflect the application of ASC 606 guidance while the reported results for 2017 were prepared and continue to be reported under the guidance of ASC 605, Revenue Recognition, which is also referred to herein as "previous guidance."
The Company assessed all aspects of the standard’s potential impact and focused further assessment on customized products, deferred revenue and certain items in inventory, which are areas that were determined could have had a material impact on the Company’s accounting for revenue. Potential impacts of other aspects of the standard have not had a material impact to the Company’s accounting for revenue.
The Company completed the evaluation of whether the accounting for revenue from customized products should be over time or at a point in time under the standard. Based on analysis of specific terms associated with current customer contracts, the Company concluded that revenue should be recognized at a point in time for substantially all customized products. This treatment is consistent with revenue recognition under previous guidance, where revenue was recognized when the products were completed and shipped to the customer (dependent upon specific shipping terms). Any contracts whereby revenue for customized products should be recognized over time, as opposed to a point in time, are immaterial due to the de minimis nature of any particular order under such contracts in production at any given point in time. As revenue recognition is dependent upon individual contractual terms, the Company will continue its evaluation of any new or amended contracts entered into, including contracts that the Company might assume as a result of acquisition activity.
With respect to deferred revenue and certain items in inventory, the Company determined ASC 606 impacted the following situations:
|
• |
Completed production billed to the customer but not yet shipped: Under previous guidance, for a majority of these situations the Company deferred revenue for completed production items for which the customer had requested to be billed (or for which the Company is entitled to bill under the contract), but for which the production items had not yet shipped to the customer. Under ASC 606, based upon our evaluation of the contractual terms, the Company is typically able to recognize revenue once it completes production depending on the specific facts and circumstances. |
|
• |
Completed production held in inventory (including consigned inventory): With certain customer contracts, the Company is permitted to complete a pre-defined amount of product and hold such inventory until the customer requests shipment (which generally is required to be delivered in the same year as production). For these items, the Company has the contractual right to receive payment once the production is completed, regardless of the ultimate delivery date. Under previous guidance, the Company held this as inventory and recognized revenue upon shipment to the customer. Under ASC 606, based upon our evaluation of the contractual terms, the Company is able to recognize revenue once it completes production. |
|
• |
Safety stock: In very limited situations, the Company is permitted to produce and hold in inventory a pre-defined amount of safety stock. Similar to completed production held in inventory, for these items the Company has the contractual right to receive payment for the pre-defined amount once the production is completed, regardless of the ultimate delivery date. Under previous guidance, the Company held this as inventory and recognized revenue upon shipment to the customer. Under ASC 606, based upon our evaluation of the contractual terms, the Company is able to recognize revenue once it completes production. |
11
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three and Six Months Ended June 30, 2018 and 2017
(tabular amounts in millions, except per share data)
Upon adoption of ASC 606, the Company eliminated any deferred revenue and inventory associated with the above three categories against its accumulated deficit within total equity. Based upon the balances that existed as of December 31, 2017, the Company recorded adjustments to the following accounts as of January 1, 2018:
|
|
As Reported |
|
|
Adjustments |
|
|
Adjusted |
|
|||
|
|
December 31, |
|
|
Adoption of |
|
|
January 1, |
|
|||
|
|
2017 |
|
|
ASC 606 |
|
|
2018 |
|
|||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
Receivables, net |
|
$ |
727 |
|
|
$ |
32 |
|
|
$ |
759 |
|
Inventories |
|
|
238 |
|
|
|
(32 |
) |
|
|
206 |
|
Deferred income taxes |
|
|
51 |
|
|
|
(3 |
) |
|
|
48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Accrued liabilities |
|
$ |
239 |
|
|
$ |
(12 |
) |
|
$ |
227 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity |
|
|
|
|
|
|
|
|
|
|
|
|
(Accumulated deficit) retained earnings |
|
$ |
(90 |
) |
|
$ |
9 |
|
|
$ |
(81 |
) |
As a result of the above adjustments, total assets decreased by $3 million, total liabilities decreased by $12 million and total equity increased by $9 million. The equity adjustment was net of tax of $3 million.
The following tables compare impacted accounts from the reported condensed consolidated balance sheet and statement of operations, as of and for the six months ended June 30, 2018, to their pro forma amounts had the previous guidance been in effect:
|
|
June 30, 2018 |
|
|||||||||
|
|
As Reported |
|
|
Adjustments Adoption of ASC 606 |
|
|
Pro forma as if the previous standard was in effect |
|
|||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
Receivables, net |
|
$ |
682 |
|
|
$ |
(33) |
|
|
$ |
649 |
|
Inventories |
|
|
252 |
|
|
|
13 |
|
|
|
265 |
|
Deferred income taxes |
|
|
39 |
|
|
|
3 |
|
|
|
42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Accrued liabilities |
|
$ |
203 |
|
|
$ |
6 |
|
|
$ |
209 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity |
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated deficit |
|
$ |
(5 |
) |
|
$ |
(7 |
) |
|
$ |
(12 |
) |
12
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three and Six Months Ended June 30, 2018 and 2017
(tabular amounts in millions, except per share data)
The difference between the reported balances and the pro forma balances above is due to the deferred revenue and inventory in the pro forma balances associated with completed production billed to the customer but not yet shipped, completed production held in inventory (including consigned inventory) and safety stock.
|
|
Three Months Ended June 30, 2018 |
|
|
Six Months Ended June 30, 2018 |
|
||||||||||||||||||
|
|
As Reported |
|
|
Adjustments Adoption of ASC 606 |
|
|
Pro forma as if the previous standard was in effect |
|
|
As Reported |
|
|
Adjustments Adoption of ASC 606 |
|
|
Pro forma as if the previous standard was in effect |
|
||||||
Net sales |
|
$ |
943 |
|
|
$ |
(4) |
|
|
$ |
939 |
|
|
$ |
1,872 |
|
|
$ |
6 |
|
|
$ |
1,878 |
|
Cost of sales |
|
|
798 |
|
|
|
(4 |
) |
|
|
794 |
|
|
|
1,606 |
|
|
|
4 |
|
|
|
1,610 |
|
Income tax expense |
|
|
5 |
|
|
|
— |
|
|
|
5 |
|
|
|
1 |
|
|
|
— |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net earnings (loss) per share |
|
$ |
0.24 |
|
|
$ |
— |
|
|
$ |
0.24 |
|
|
$ |
(0.09 |
) |
|
$ |
0.06 |
|
|
$ |
(0.03 |
) |
Diluted net earnings (loss) per share |
|
|
0.23 |
|
|
|
— |
|
|
|
0.23 |
|
|
|
(0.09 |
) |
|
|
0.06 |
|
|
|
(0.03 |
) |
The differences between the reported balances and the pro forma balances above are due to the following impacts:
|
• |
The completed production items for which control has passed to the customer and the customer had requested to be billed (or for which the Company is entitled to bill under the contract), but for which the production items had not yet shipped. Under ASC 606, the Company recognizes revenue for items for which control has passed to the customer, which is typically once it completes production, while under previous guidance revenue would have been deferred until the production items were shipped. |
|
• |
Variable consideration relating to paper over-consumption penalties and under-consumption credits that are part of certain customer contracts and were previously recorded in cost of sales are now recorded within revenue. |
The adoption of ASC 606 had no impact on the Company’s cash flows from operating activities.
Revenue Recognition Policy
The Company recognizes revenue at a point in time for substantially all customized products. The point in time when revenue is recognized is when the performance obligation has been completed and the customer obtains control of the products, which is generally upon shipment to the customer (dependent upon specific shipping terms).
Under agreements with certain customers, custom products may be stored by the Company for future delivery. Based upon contractual terms, the Company is typically able to recognize revenue once the performance obligation is satisfied and the customer obtains control of the completed product, usually when it completes production (depending on the specific facts and circumstances). In these situations, the Company may also receive a logistics or warehouse management fee for the services it provides, which the Company recognizes over time as the services are provided.
With certain customer contracts, the Company is permitted to complete a pre-defined amount of custom products and hold such inventory until the customer requests shipment (which generally is required to be delivered in the same year as production). For these items, which include consigned inventory, the Company has the contractual right to receive payment once the production is completed, regardless of the ultimate delivery date. Based upon contractual terms, the Company recognizes revenue once the performance obligation has been satisfied and the customer obtains control of the completed products, usually when production is completed.
13
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three and Six Months Ended June 30, 2018 and 2017
(tabular amounts in millions, except per share data)
In very limited situations, the Company is permitted to produce and hold in inventory a pre-defined amount of custom products as safety stock. Similar to completed production held in inventory, for these items the Company has the contractual right to receive payment for the pre-defined amount once the production is completed, regardless of the ultimate delivery date. Based upon our evaluation of the contractual terms, the Company is able to recognize revenue once the performance obligation has been satisfied and the customer obtains control of the completed products, usually when production is completed.
Revenue from the Company’s print related services (including list processing, mail sortation services and supply chain management) is recognized as services are completed over time.
Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods or providing services, which is based on transaction prices set forth in contracts with customers and an estimate of variable consideration, as applicable.
Variable consideration resulting from volume rebates, fixed rebates, penalties or credits for paper consumption, and sales discounts that are offered within contracts between the Company and its customers is recognized in the period the related revenue is recognized. Estimates of variable consideration are based on stated contract terms and an analysis of historical experience. The amount of variable consideration is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period.
A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The majority of our contracts have a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts and, therefore, not distinct. For contracts with multiple performance obligations, such as co-mail and catalog production, the transaction price allocated to each performance obligation is based on the price stated in the customer contract, which represents the Company’s best estimate of the standalone selling price of each distinct good or service in the contract.
Billings for shipping and handling costs are recorded gross. The Company made an accounting policy election under ASC 606 to account for shipping and handling after the customer obtains control of the good as fulfillment activities rather than as a separate service to the customer. As a result, the Company accrues the costs of the shipping and handling if revenue is recognized for the related good before the fulfillment activities occur.
Many of the Company’s operations process materials, primarily paper, that may be supplied directly by customers or may be purchased by the Company and sold to customers as part of the end product. No revenue is recognized for customer-supplied paper, but revenues for Company-supplied paper are recognized on a gross basis. As a result, the Company’s reported sales and margins may be impacted by the mix of customer-supplied paper and Company-supplied paper.
The Company records taxes collected from customers and remitted to governmental authorities on a net basis.
Contracts do not contain a significant financing component as payment terms on invoiced amounts are typically between 30 to 120 days, based on the Company’s credit assessment of individual customers, as well as industry expectations.
The timing of revenue recognition, billings and cash collections results in accounts receivable and unbilled receivables (contract assets), and customer advances and deposits (contract liabilities) on the condensed consolidated balance sheet. Revenue recognition generally coincides with the Company’s contractual right to consideration and the issuance of invoices to customers. Depending on the nature of the performance obligation and arrangements with customers, the timing of the issuance of invoices may result in contract assets or contract liabilities. Contract assets related to unbilled receivables are recognized for satisfied performance obligations for which the Company cannot yet issue an invoice. Contract liabilities result from advances or deposits from customers on performance obligations not yet satisfied.
Because the majority of the Company’s products are customized, product returns are not significant; however, the Company accrues for the estimated amount of customer returns at the time of sale.
14
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three and Six Months Ended June 30, 2018 and 2017
(tabular amounts in millions, except per share data)
Disaggregated Revenue
The following table provides information about disaggregated revenue by major products/service lines and timing of revenue recognition, and includes a reconciliation of the disaggregated revenue with reportable segments.
|
|
Three Months Ended June 30, 2018 |
|
|
Six Months Ended June 30, 2018 |
|
||||||||||||||||||
|
|
|
|
|
Office Products |
|
|
Total |
|
|
|
|
|
Office Products |
|
|
Total |
|
||||||
Major Products/Service Lines |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book (a) |
|
$ |
266 |
|
|
$ |
— |
|
|
$ |
266 |
|
|
$ |
515 |
|
|
$ |
— |
|
|
$ |
515 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Magazines, Catalogs and Retail Inserts (b) |
|
$ |
493 |
|
|
$ |
— |
|
|
$ |
493 |
|
|
$ |
1,019 |
|
|
$ |
— |
|
|
$ |
1,019 |
|
North America |
|
|
442 |
|
|
|
— |
|
|
|
442 |
|
|
|
910 |
|
|
|
— |
|
|
|
910 |
|
Europe |
|
|
51 |
|
|
|
— |
|
|
|
51 |
|
|
|
109 |
|
|
|
— |
|
|
|
109 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Directories |
|
$ |
30 |
|
|
$ |
— |
|
|
$ |
30 |
|
|
$ |
61 |
|
|
$ |
— |
|
|
$ |
61 |
|
North America |
|
|
25 |
|
|
|
— |
|
|
|
25 |
|
|
|
52 |
|
|
|
— |
|
|
|
52 |
|
Europe |
|
|
5 |
|
|
|
— |
|
|
|
5 |
|
|
|
9 |
|
|
|
— |
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office Products |
|
$ |
— |
|
|
$ |
154 |
|
|
$ |
154 |
|
|
$ |
— |
|
|
$ |
277 |
|
|
$ |
277 |
|
Total |
|
$ |
789 |
|
|
$ |
154 |
|
|
$ |
943 |
|
|
$ |
1,595 |
|
|
$ |
277 |
|
|
$ |
1,872 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Timing of Revenue Recognition |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products and services transferred at a point in time |
|
$ |
683 |
|
|
$ |
154 |
|
|
$ |
837 |
|
|
$ |
1,385 |
|
|
$ |
277 |
|
|
$ |
1,662 |
|
Products and services transferred over time |
|
|
106 |
|
|
|
— |
|
|
|
106 |
|
|
|
210 |
|
|
|
— |
|
|
|
210 |
|
Total |
|
$ |
789 |
|
|
$ |
154 |
|
|
$ |
943 |
|
|
$ |
1,595 |
|
|
$ |
277 |
|
|
$ |
1,872 |
|
|
(a) |
Includes the premedia services, e-book formatting and supply chain management associated with book production. |
|
(b) |
Includes premedia, co-mail and logistics services associated with the production of catalogs and magazines. |
Contract Balances
The following table provides information about receivables, contract assets and contract liabilities from contracts with customers:
|
|
June 30, 2018 |
|
|
January 1, 2018 |
|
||
Trade receivables |
|
$ |
554 |
|
|
$ |
647 |
|
Short-term contract assets |
|
|
33 |
|
|
|
31 |
|
Long-term contract assets |
|
|
35 |
|
|
|
36 |
|
Short-term contract liabilities |
|
|
19 |
|
|
|
21 |
|
15
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three and Six Months Ended June 30, 2018 and 2017
(tabular amounts in millions, except per share data)
Significant changes in the contract assets and the contract liabilities balances during the period are as follows:
|
|
Six Months Ended June 30, |
|
|||||
|
|
Contract Assets |
|
|
Contract Liabilities |
|
||
Revenue recognized that was included in contract liabilities as of January 1, 2018 |
|
$ |
— |
|
|
$ |
(17 |
) |
Increases due to cash received |
|
|
— |
|
|
|
15 |
|
Payment of contract acquisition costs |
|
|
5 |
|
|
|
— |
|
Additions to unbilled accounts receivable |
|
|
22 |
|
|
|
— |
|
Amortization of contract acquisition costs |
|
|
(6 |
) |
|
|
— |
|
Unbilled accounts receivable recognized as receivables |
|
|
(20 |
) |
|
|
— |
|
Transactions affecting the allowances for doubtful accounts receivable balance during the six months ended June 30, 2018 were as follows:
|
|
June 30, 2018 |
|
|
Balance, beginning of year |
|
$ |
11 |
|
Provisions charged to expense |
|
|
4 |
|
Balance, end of period |
|
$ |
15 |
|
Contract Acquisition Costs
In connection with the adoption of ASC 606, the Company is required to capitalize certain contract acquisition costs. As of December 31, 2017 under previous guidance, the Company had capitalized $36 million in contract acquisition costs related to contracts that were not completed. The Company did not have any other costs that were required to be capitalized on January 1, 2018 with the adoption of ASC 606. For contracts that have a duration of less than one year, the Company follows the ASC 606 practical expedient approach and expenses these costs when incurred; for contracts with life exceeding one year, the Company records these costs in proportion to each completed contract performance obligation. For the three and six months ended June 30, 2018, the amount of amortization was $3 million and $6 million, respectively, and there was no impairment loss in relation to costs capitalized.
Note 4. Inventories
The components of the Company’s inventories, net of excess and obsolescence reserves for raw materials and finished goods, at June 30, 2018 and December 31, 2017 were as follows:
|
|
June 30, |
|
|
December 31, |
|
||
|
|
2018 |
|
|
2017 |
|
||
Raw materials and manufacturing supplies |
|
$ |
154 |
|
|
$ |
114 |
|
Work in process |
|
|
64 |
|
|
|
69 |
|
Finished goods |
|
|
92 |
|
|
|
112 |
|
Last in, first out ("LIFO") reserve |
|
|
(58 |
) |
|
|
(57 |
) |
Total |
|
$ |
252 |
|
|
$ |
238 |
|
16
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three and Six Months Ended June 30, 2018 and 2017
(tabular amounts in millions, except per share data)
Note 5. Property, Plant and Equipment
The components of the Company’s property, plant and equipment at June 30, 2018 and December 31, 2017 were as follows:
|
|
June 30, |
|
|
December 31, |
|
||
|
|
2018 |
|
|
2017 |
|
||
Land |
|
$ |
44 |
|
|
$ |
45 |
|
Buildings |
|
|
732 |
|
|
|
739 |
|
Machinery and equipment |
|
|
3,956 |
|
|
|
4,012 |
|
|
|
|
4,732 |
|
|
|
4,796 |
|
Accumulated depreciation |
|
|
(4,188 |
) |
|
|
(4,220 |
) |
Total |
|
$ |
544 |
|
|
$ |
576 |
|
During the three and six months ended June 30, 2018, depreciation expense was $28 million and $59 million, respectively. During the three and six months ended June 30, 2017, depreciation expense was $33 million and $68 million, respectively.
Assets Held for Sale
Primarily as a result of restructuring actions, certain facilities and equipment are considered held for sale. The net book value of assets held for sale was $10 million at June 30, 2018 and $7 million at December 31, 2017. These assets were included in prepaid expenses and other current assets in the condensed consolidated balance sheets at the lower of their historical net book value or their estimated fair value, less estimated costs to sell.
Note 6. Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill for the six months ended June 30, 2018 were as follows:
|
|
|
|
|
Office Products |
|
|
Total |
|
|||
Net book value as of December 31, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
$ |
934 |
|
|
$ |
110 |
|
|
$ |
1,044 |
|
Accumulated impairment losses |
|
|
(883 |
) |
|
|
(79 |
) |
|
|
(962 |
) |
Total |
|
|
51 |
|
|
|
31 |
|
|
|
82 |
|
Net book value as of June 30, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
|
929 |
|
|
|
110 |
|
|
|
1,039 |
|
Accumulated impairment losses |
|
|
(878 |
) |
|
|
(79 |
) |
|
|
(957 |
) |
Total |
|
$ |
51 |
|
|
$ |
31 |
|
|
$ |
82 |
|
The components of other intangible assets at June 30, 2018 and December 31, 2017 were as follows:
|
|
June 30, 2018 |
|
|
December 31, 2017 |
|
||||||||||||||||||
|
|
Gross Carrying |
|
|
Accumulated |
|
|
Net Book |
|
|
Gross Carrying |
|
|
Accumulated |
|
|
Net Book |
|
||||||
|
|
Amount |
|
|
Amortization |
|
|
Value |
|
|
Amount |
|
|
Amortization |
|
|
Value |
|
||||||
Customer relationships |
|
$ |
256 |
|
|
$ |
(133 |
) |
|
$ |
123 |
|
|
$ |
256 |
|
|
$ |
(125 |
) |
|
$ |
131 |
|
Trade names |
|
|
9 |
|
|
|
(5 |
) |
|
|
4 |
|
|
|
9 |
|
|
|
(4 |
) |
|
|
5 |
|
Total amortizable other intangible assets |
|
|
265 |
|
|
|
(138 |
) |
|
|
127 |
|
|
|
265 |
|
|
|
(129 |
) |
|
|
136 |
|
Indefinite-lived trade names |
|
|
24 |
|
|
|
— |
|
|
|
24 |
|
|
|
24 |
|
|
|
— |
|
|
|
24 |
|
Total other intangible assets |
|
$ |
289 |
|
|
$ |
(138 |
) |
|
$ |
151 |
|
|
$ |
289 |
|
|
$ |
(129 |
) |
|
$ |
160 |
|
During the three and six months ended June 30, 2018, amortization expense for other intangible assets was $4 million and $9 million, respectively. During the three and six months ended June 30, 2017, amortization expense for other intangible assets was $4 million and $8 million, respectively.
17
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three and Six Months Ended June 30, 2018 and 2017
(tabular amounts in millions, except per share data)
The following table outlines the estimated annual amortization expense related to other intangible assets:
For the year ending December 31, |
|
Amount |
|
|
2018 |
|
$ |
17 |
|
2019 |
|
|
16 |
|
2020 |
|
|
16 |
|
2021 |
|
|
14 |
|
2022 |
|
|
13 |
|
2023 and thereafter |
|
|
60 |
|
Total |
|
$ |
136 |
|
Note 7. Restructuring, Impairment and Other Charges
For the three and six months ended June 30, 2018 and 2017, the Company recorded the following net restructuring, impairment and other charges:
Three Months Ended June 30, 2018 |
|
Employee Terminations |
|
|
Other Restructuring Charges |
|
|
Total Restructuring Charges |
|
|
Impairment |
|
|
Other Charges |
|
|
Total |
|
||||||
|
|
$ |
2 |
|
|
$ |
6 |
|
|
$ |
8 |
|
|
$ |
— |
|
|
$ |
1 |
|
|
$ |
9 |
|
Office Products |
|
|
— |
|
|
|
1 |
|
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
|
1 |
|
Corporate |
|
|
1 |
|
|
|
— |
|
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
|
1 |
|
Total |
|
$ |
3 |
|
|
$ |
7 |
|
|
$ |
10 |
|
|
$ |
— |
|
|
$ |
1 |
|
|
$ |
11 |
|
Three Months Ended June 30, 2017 |
|
Employee Terminations |
|
|
Other Restructuring Charges |
|
|
Total Restructuring Charges |
|
|
Impairment |
|
|
Other Charges |
|
|
Total |
|
||||||
|
|
$ |
3 |
|
|
$ |
2 |
|
|
$ |
5 |
|
|
$ |
— |
|
|
$ |
1 |
|
|
$ |
6 |
|
Corporate |
|
|
— |
|
|
|
15 |
|
|
|
15 |
|
|
|
— |
|
|
|
— |
|
|
|
15 |
|
Total |
|
$ |
3 |
|
|
$ |
17 |
|
|
$ |
20 |
|
|
$ |
— |
|
|
$ |
1 |
|
|
$ |
21 |
|
Six Months Ended June 30, 2018 |
|
Employee Terminations |
|
|
Other Restructuring Charges |
|
|
Total Restructuring Charges |
|
|
Impairment |
|
|
Other Charges |
|
|
Total |
|
||||||
|
|
$ |
5 |
|
|
$ |
9 |
|
|
$ |
14 |
|
|
$ |
(1 |
) |
|
$ |
1 |
|
|
$ |
14 |
|
Office Products |
|
|
1 |
|
|
|
1 |
|
|
|
2 |
|
|
|
— |
|
|
|
— |
|
|
|
2 |
|
Corporate |
|
|
1 |
|
|
|
— |
|
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
|
1 |
|
Total |
|
$ |
7 |
|
|
$ |
10 |
|
|
$ |
17 |
|
|
$ |
(1 |
) |
|
$ |
1 |
|
|
$ |
17 |
|
Six Months Ended June 30, 2017 |
|
Employee Terminations |
|
|
Other Restructuring Charges |
|
|
Total Restructuring Charges |
|
|
Impairment |
|
|
Other Charges |
|
|
Total |
|
||||||
|
|
$ |
6 |
|
|
$ |
3 |
|
|
$ |
9 |
|
|
$ |
— |
|
|
$ |
2 |
|
|
$ |
11 |
|
Office Products |
|
|
1 |
|
|
|
— |
|
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
|
1 |
|
Corporate |
|
|
— |
|
|
|
15 |
|
|
|
15 |
|
|
|
— |
|
|
|
— |
|
|
|
15 |
|
Total |
|
$ |
7 |
|
|
$ |
18 |
|
|
$ |
25 |
|
|
$ |
— |
|
|
$ |
2 |
|
|
$ |
27 |
|
18
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three and Six Months Ended June 30, 2018 and 2017
(tabular amounts in millions, except per share data)
Restructuring and Impairment Charges
For the three and six months ended June 30, 2018, the Company incurred employee-related restructuring charges of $3 million and $7 million for an aggregate of 304 employees, of whom 224 were terminated as of or prior to June 30, 2018. These charges primarily related to the closure of one facility in the Print segment and the reorganization of certain business units and corporate functions. The Company incurred other restructuring charges of $7 million and $10 million for the three and six months ended June 30, 2018 for facility costs, a loss related to the Company's disposition of its retail offset printing facilities and pension withdrawal obligations related to facility closures.
For the three and six months ended June 30, 2017, the Company incurred employee-related restructuring charges of $3 million and $7 million for an aggregate of 504 employees, substantially all of whom were terminated as of or prior to June 30, 2018. These charges primarily related to the announcement of one facility closure in the Print segment and the reorganization of certain business units and corporate functions. Additionally, the Company incurred other restructuring charges of $17 million and $18 million for the three and six months ended June 30, 2017, respectively, primarily related to charges incurred as a result of a terminated supplier contract and the exit from certain operations and facilities.
Other Charges
For each of the three and six months ended June 30, 2018, the Company recorded $1 million of other charges for multiemployer pension plan withdrawal obligations unrelated to facility closures. The total liability for the withdrawal obligations associated with the Company’s decision to withdraw from certain multiemployer pension plans included $3 million in accrued liabilities and $19 million in restructuring and multiemployer pension liabilities at June 30, 2018.
The Company’s withdrawal liabilities could be affected by the financial stability of other employers participating in such plans and any decisions by those employers to withdraw from such plans in the future. While it is not possible to quantify the potential impact of future events or circumstances, reductions in other employers’ participation in multiemployer pension plans, including certain plans from which the Company has previously withdrawn, could have a material effect on the Company’s previously estimated withdrawal liabilities and condensed consolidated balance sheets, statements of operations and cash flows.
For the three and six months ended June 30, 2017, the Company recorded other charges of $1 million and $2 million, respectively, for multiemployer pension plan withdrawal obligations unrelated to facility closures.
Restructuring Reserve
The restructuring reserve as of June 30, 2018 and December 31, 2017, and changes during the six months ended June 30, 2018 were as follows:
|
|
December 31, 2017 |
|
|
Restructuring Charges |
|
|
Other |
|
|
Cash Paid |
|
|
June 30, 2018 |
|
|||||
Employee terminations |
|
$ |
8 |
|
|
$ |
7 |
|
|
$ |
— |
|
|
$ |
(9 |
) |
|
$ |
6 |
|
Multiemployer pension plan withdrawal obligations |
|
|
16 |
|
|
|
1 |
|
|
|
19 |
|
|
|
(3 |
) |
|
|
33 |
|
Other |
|
|
2 |
|
|
|
6 |
|
|
|
— |
|
|
|
(5 |
) |
|
|
3 |
|
Total |
|
$ |
26 |
|
|
$ |
14 |
|
|
$ |
19 |
|
|
$ |
(17 |
) |
|
$ |
42 |
|
The current portion of restructuring reserves of $14 million at June 30, 2018 was included in accrued liabilities, while the long-term portion of $28 million, which primarily related to multiemployer pension plan withdrawal obligations related to facility closures, was included in restructuring and multiemployer pension liabilities at June 30, 2018.
During the three months ended March 31, 2018, the Company reclassified $19 million of multiemployer pension plan withdrawal obligations from non-restructuring liabilities to restructuring liabilities, of which $3 million and $16 million were recorded in the current and long-term portions of the reserves, respectively. The reclassification was primarily due to a facility closure in the Print segment during the three months ended March 31, 2018.
19
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three and Six Months Ended June 30, 2018 and 2017
(tabular amounts in millions, except per share data)
The Company anticipates that payments associated with the employee terminations reflected in the above table will be substantially completed by June 30, 2019.
Payments on all of the Company’s multiemployer pension plan withdrawal obligations are scheduled to be completed by 2034. Changes based on uncertainties in these estimated withdrawal obligations could affect the ultimate charges related to multiemployer pension plan withdrawals.
The restructuring liabilities classified as “other” consisted of other facility closing costs.
Note 8. Commitments and Contingencies
The Company is subject to laws and regulations relating to the protection of the environment. The Company accrues for expenses associated with environmental remediation obligations when such amounts are probable and can be reasonably estimated. Such accruals are adjusted as new information develops or circumstances change and are generally not discounted. The Company has been designated as a potentially responsible party or has received claims in ten active federal and state Superfund and other multiparty remediation sites. In addition to these sites, the Company may also have the obligation to remediate three other previously and currently owned facilities. At the Superfund sites, the Comprehensive Environmental Response, Compensation and Liability Act provides that the Company’s liability could be joint and several, meaning that the Company could be required to pay an amount in excess of its proportionate share of the remediation costs.
The Company’s understanding of the financial strength of other potentially responsible parties at the multiparty sites and of other liable parties at the previously owned facilities has been considered, where appropriate, in the determination of the Company’s estimated liability. The Company established reserves, recorded in accrued liabilities and other noncurrent liabilities, that it believes are adequate to cover its share of the potential costs of remediation at each of the multiparty sites and the previously and currently owned facilities. It is not possible to quantify with certainty the potential impact of actions regarding environmental matters, particularly remediation and other compliance efforts that the Company may undertake in the future. However, in the opinion of management, compliance with the present environmental protection laws, before taking into account estimated recoveries from third parties, will not have a material effect on the Company’s condensed consolidated balance sheets, statements of operations and cash flows.
From time to time, the Company’s customers and others file voluntary petitions for reorganization under United States bankruptcy laws. In such cases, certain pre-petition payments received by the Company from these parties could be considered preference items and subject to return. In addition, the Company may be party to certain litigation arising in the ordinary course of business. Management believes that the final resolution of these preference items and litigation will not have a material effect on the Company’s condensed consolidated balance sheets, statements of operations and cash flows.
Note 9. Debt
The Company’s debt at June 30, 2018 and December 31, 2017 consisted of the following:
|
|
June 30, 2018 |
|
|
December 31, 2017 |
|
||
Borrowings under the Revolving Credit Facility |
|
$ |
190 |
|
|
$ |
75 |
|
Term Loan Facility due September 30, 2022 (a) |
|
|
282 |
|
|
|
306 |
|
8.75% Senior Secured Notes due October 15, 2023 |
|
|
450 |
|
|
|
450 |
|
Capital lease and other obligations |
|
|
3 |
|
|
|
3 |
|
Unamortized debt issuance costs |
|
|
(11 |
) |
|
|
(12 |
) |
Total debt |
|
|
914 |
|
|
|
822 |
|
Less: current portion |
|
|
(234 |
) |
|
|
(123 |
) |
Long-term debt |
|
$ |
680 |
|
|
$ |
699 |
|
|
(a) |
The borrowings under the Term Loan Facility are subject to a variable interest rate. As of June 30, 2018 and December 31, 2017, the interest rate was 7.59% and 7.07%, respectively. |
__________________________________
20
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three and Six Months Ended June 30, 2018 and 2017
(tabular amounts in millions, except per share data)
On September 30, 2016, the Company issued $450 million of Senior Secured Notes (the “Senior Notes”).
On September 30, 2016 the Company entered into a credit agreement (the “Credit Agreement”) that provides for (i) a senior secured term loan B facility in an aggregate principal amount of $375 million (the “Term Loan Facility”) and (ii) a senior secured revolving credit facility in an aggregate principal amount of $400 million (the “Revolving Credit Facility”). The debt issuance costs and original issue discount are being amortized over the life of the facilities using the effective interest method.
The Credit Agreement is subject to a number of covenants, including, but not limited to, a minimum Interest Coverage Ratio and a Consolidated Leverage Ratio, as defined in and calculated pursuant to the Credit Agreement, that, in part, restrict the Company’s ability to incur additional indebtedness, create liens, engage in mergers and consolidations, make restricted payments and dispose of certain assets. The Credit Agreement generally allows annual dividend payments of up to $50 million in aggregate, though additional dividends may be allowed subject to certain conditions. Each of these covenants is subject to important exceptions and qualifications.
Term Loan Facility
On November 17, 2017, the Company amended the Credit Agreement to reduce the interest rate for the Term Loan Facility by 50 basis points and the LIBOR “floor” was also reduced by 25 basis points. Other terms, including the outstanding principal, maturity date and debt covenants were not amended. Select terms on the Term Loan Facility before and after the amendment include:
|
Before Amendment |
After Amendment |
|
Interest rate (Company's option) |
Base rate + 5.00%; or LIBOR + 6.00% |
Base rate + 4.50%; or LIBOR + 5.50% |
|
LIBOR floor |
1.00% |
0.75% |
|
Amortization |
$13 million, first eight quarters; $11 million quarterly thereafter (as of original effective date) |
$13 million, first eight quarters; $11 million quarterly thereafter (as of original effective date) |
|
Maturity |
September 30, 2022 |
September 30, 2022 |
|
Under the terms of the Term Loan Facility, each of the syndicated lenders is deemed to have loaned a specific amount to the Company and has the right to repayment from the Company directly. Therefore, we concluded that the Term Loan Facility is a loan syndication under U.S. GAAP. As such, in order to determine whether the debt was modified or extinguished as a result of the amendment, we examined the amount of principal pre- and post-amendment by individual lender. As a result, we determined that $65 million of outstanding principal had been extinguished as of November 17, 2017, even though the total outstanding principal amongst all lenders pre- and post-amendment remained unchanged.
Consequently, the amendment resulted in a pre-tax loss on debt extinguishment of $3 million related to the unamortized discount and debt issuance costs attributable to the $65 million of outstanding principal that had been considered extinguished. There was no net impact as of November 17, 2017 to cash and cash equivalents, total outstanding principal remained unchanged, and no cash was exchanged between the lenders and the Company (other than customary administrative fees).
On February 2, 2017, the Company paid in advance the full amount of required amortization payments, $50 million, for the year ended December 31, 2017 for the Term Loan Facility.
Additional Debt Issuances Information
The fair values of the Senior Notes and Term Loan Facility that were determined using the market approach based upon interest rates available to the Company for borrowings with similar terms and maturities, were determined to be Level 2 under the fair value hierarchy. The fair value of the Company’s debt was less than and greater than its book value by approximately $2 million and $20 million at June 30, 2018 and December 31, 2017, respectively.
21
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three and Six Months Ended June 30, 2018 and 2017
(tabular amounts in millions, except per share data)
There were $190 million and $75 million of borrowings under the Revolving Credit Facility as of June 30, 2018 and December 31, 2017, respectively. The weighted-average interest rate on borrowings under the Company’s Revolving Credit Facility was 4.89% during the six months ended June 30, 2018.
There were $18 million and $38 million of net interest expense during the three and six months ended June 30, 2018, respectively. There were $16 million and $33 million of net interest expense during the three and six months ended June 30, 2017, respectively.
Note 10. Equity
The Company’s equity balances and changes were as follows:
|
|
Total Equity 2018 |
|
|
Total Equity 2017 |
|
||
Balance at December 31 |
|
$ |
248 |
|
|
$ |
240 |
|
Net (loss) income |
|
|
(3 |
) |
|
|
4 |
|
Other comprehensive (loss) income |
|
|
(1 |
) |
|
|
23 |
|
Share-based compensation |
|
|
8 |
|
|
|
7 |
|
Issuance of share-based awards, net of withholdings and other |
|
|
(2 |
) |
|
|
(1 |
) |
Repurchase of common stock |
|
|
(20 |
) |
|
|
— |
|
Revenue recognition adjustments |
|
|
9 |
|
|
|
— |
|
Cash dividends paid |
|
|
(18 |
) |
|
|
(16 |
) |
Issuance of common stock |
|
|
— |
|
|
|
18 |
|
Separation-related adjustments |
|
|
— |
|
|
|
(12 |
) |
Balance at June 30 |
|
$ |
221 |
|
|
$ |
263 |
|
On May 31, 2018, the Company completed the repurchase approved by the Board of Directors of 1.6 million shares of common stock for a total cost of $20 million.
During the three months ended March 31, 2018, the Company recorded $9 million in equity adjustments as a result of the adoption of ASC 606. Refer to Note 3, Revenue Recognition, for more information.
On March 28, 2017, in connection with the over-allotment option granted to the underwriters as part of the secondary sale by RRD, LSC Communications completed the sale of approximately 0.9 million shares of common stock, receiving proceeds of $18 million.
During the six months ended June 30, 2017, the Company recorded certain separation-related adjustments related to the adjustment of assets and liabilities resulting from transactions with RRD.
Note 11. Earnings Per Share
On May 31, 2018, the Company completed the repurchase approved by the Board of Directors of 1.6 million shares of common stock for a total cost of $20 million. There were no shares of common stock purchased by the Company during the six months ended June 30, 2017. During the six months ended June 30, 2018 and 2017, a de minimis amount of shares were withheld from employees for tax liabilities upon vesting of equity awards.
Basic earnings per share (“EPS”) is calculated by dividing net earnings attributable to the Company’s stockholders by the weighted average number of common shares outstanding for the period. In computing diluted EPS, basic EPS is adjusted for the assumed issuance of all potentially dilutive share-based awards, including stock options, restricted stock, RSUs, and PSUs.
22
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three and Six Months Ended June 30, 2018 and 2017
(tabular amounts in millions, except per share data)
The following table shows the calculation of basic and diluted EPS, as well as a reconciliation of basic shares to diluted shares:
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
|
June 30, |
|
|
June 30, |
|
||||||||||
|
|
2018 |
|
|
2017 |
|
|
2018 |
|
|
2017 |
|
||||
Net earnings (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.24 |
|
|
$ |
0.13 |
|
|
$ |
(0.09 |
) |
|
$ |
0.11 |
|
Diluted |
|
$ |
0.23 |
|
|
$ |
0.12 |
|
|
$ |
(0.09 |
) |
|
$ |
0.11 |
|
Dividends declared per common share |
|
$ |
0.26 |
|
|
$ |
0.25 |
|
|
$ |
0.52 |
|
|
$ |
0.50 |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
8 |
|
|
$ |
5 |
|
|
$ |
(3 |
) |
|
$ |
4 |
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding |
|
|
34.0 |
|
|
|
33.5 |
|
|
|
34.3 |
|
|
|
33.1 |
|
Dilutive options and awards |
|
|
0.3 |
|
|
|
0.3 |
|
|
|
— |
|
|
|
0.3 |
|
Diluted weighted average number of common shares outstanding |
|
|
34.3 |
|
|
|
33.8 |
|
|
|
34.3 |
|
|
|
33.4 |
|
Weighted-average number of anti-dilutive share-based awards: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock units |
|
|
0.5 |
|
|
|
0.1 |
|
|
|
— |
|
|
|
— |
|
Options |
|
|
0.2 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Note 12. Retirement Plans
The Company is the sole sponsor of certain defined benefit pension plans that are included in the condensed consolidated balance sheets as of June 30, 2018 and December 31, 2017. The components of the estimated net pension (income) loss for the three and six months ended June 30, 2018 and 2017 were as follows:
|
|
Three Months Ended June 30, 2018 |
|
|
Six Months Ended June 30, 2018 |
|
||||||||||||||||||
|
|
Qualified |
|
|
Non-Qualified & International |
|
|
Total |
|
|
Qualified |
|
|
Non-Qualified & International |
|
|
Total |
|
||||||
Interest cost |
|
$ |
21 |
|
|
$ |
1 |
|
|
$ |
22 |
|
|
$ |
42 |
|
|
$ |
2 |
|
|
$ |
44 |
|
Expected return on plan assets |
|
|
(39 |
) |
|
|
— |
|
|
|
(39 |
) |
|
|
(78 |
) |
|
|
— |
|
|
|
(78 |
) |
Amortization of actuarial loss |
|
|
5 |
|
|
|
— |
|
|
|
5 |
|
|
|
10 |
|
|
|
— |
|
|
|
10 |
|
Net periodic benefit (income) loss |
|
$ |
(13 |
) |
|
$ |
1 |
|
|
$ |
(12 |
) |
|
$ |
(26 |
) |
|
$ |
2 |
|
|
$ |
(24 |
) |
|
|
Three Months Ended June 30, 2017 |
|
|
Six Months Ended June 30, 2017 |
|
||||||||||||||||||
|
|
Qualified |
|
|
Non-Qualified & International |
|
|
Total |
|
|
Qualified |
|
|
Non-Qualified & International |
|
|
Total |
|
||||||
Interest cost |
|
$ |
21 |
|
|
$ |
1 |
|
|
$ |
22 |
|
|
$ |
43 |
|
|
$ |
2 |
|
|
$ |
45 |
|
Expected return on plan assets |
|
|
(38 |
) |
|
|
— |
|
|
|
(38 |
) |
|
|
(76 |
) |
|
|
— |
|
|
|
(76 |
) |
Amortization of actuarial loss |
|
|
4 |
|
|
|
— |
|
|
|
4 |
|
|
|
8 |
|
|
|
— |
|
|
|
8 |
|
Net periodic benefit (income) loss |
|
$ |
(13 |
) |
|
$ |
1 |
|
|
$ |
(12 |
) |
|
$ |
(25 |
) |
|
$ |
2 |
|
|
$ |
(23 |
) |
The total net periodic income for the three and six months ended June 30, 2018 and 2017 is included in the investment and other income-net line item in the condensed consolidated statements of operations.
23
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three and Six Months Ended June 30, 2018 and 2017
(tabular amounts in millions, except per share data)
Note 13. Comprehensive Income
The following table summarizes accumulated other comprehensive loss by component as of December 31, 2017 and June 30, 2018 and changes during the six months ended June 30, 2018.
|
|
Pension Plan Cost |
|
|
Translation Adjustments |
|
|
Total |
|
|||
Balance at December 31, 2017 |
|
$ |
(428 |
) |
|
$ |
(48 |
) |
|
$ |
(476 |
) |
Other comprehensive loss before reclassifications |
|
|
— |
|
|
|
(9 |
) |
|
|
(9 |
) |
Amounts reclassified from accumulated other comprehensive loss |
|
|
8 |
|
|
|
— |
|
|
|
8 |
|
Reclassification to accumulated deficit |
|
|
(97 |
) |
|
|
— |
|
|
|
(97 |
) |
Net change in accumulated other comprehensive loss |
|
|
(89 |
) |
|
|
(9 |
) |
|
|
(98 |
) |
Balance at June 30, 2018 |
|
$ |
(517 |
) |
|
$ |
(57 |
) |
|
$ |
(574 |
) |
The Company adopted ASU 2018-02 “Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“ASU 2018-02”) in the first quarter of 2018. As a result of applying this standard in the period of adoption, the Company reclassified $97 million relating to the change in tax rate from accumulated other comprehensive loss to accumulated deficit in the Company’s condensed consolidated balance sheet during the three months ended March 31, 2018. ASU 2018-02 eliminates the stranded tax effects resulting from the Tax Act and will improve the usefulness of information reported to financial statement users.
The following table summarizes accumulated other comprehensive loss by component as of December 31, 2016 and June 30, 2017 and changes during the six months ended June 30, 2017.
|
|
Pension Plan Cost |
|
|
Translation Adjustments |
|
|
Total |
|
|||
Balance at December 31, 2016 |
|
$ |
(462 |
) |
|
$ |
(69 |
) |
|
$ |
(531 |
) |
Other comprehensive income before reclassifications |
|
|
— |
|
|
|
18 |
|
|
|
18 |
|
Amounts reclassified from accumulated other comprehensive loss |
|
|
5 |
|
|
|
— |
|
|
|
5 |
|
Net change in accumulated other comprehensive loss |
|
|
5 |
|
|
|
18 |
|
|
|
23 |
|
Balance at June 30, 2017 |
|
$ |
(457 |
) |
|
$ |
(51 |
) |
|
$ |
(508 |
) |
Refer to the condensed consolidated statements of comprehensive income for the components of comprehensive income for the three and six months ended June 30, 2018 and 2017.
Reclassifications from accumulated other comprehensive loss for the three and six months ended June 30, 2018 and 2017 were as follows:
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
2018 |
|
|
2017 |
|
|
2018 |
|
|
2017 |
|
||||
Amortization of pension plan cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss (a) |
|
$ |
5 |
|
|
$ |
4 |
|
|
$ |
10 |
|
|
$ |
8 |
|
Reclassifications before tax |
|
|
5 |
|
|
|
4 |
|
|
|
10 |
|
|
|
8 |
|
Income tax expense |
|
|
1 |
|
|
|
2 |
|
|
|
2 |
|
|
|
3 |
|
Reclassifications, net of tax |
|
$ |
4 |
|
|
$ |
2 |
|
|
$ |
8 |
|
|
$ |
5 |
|
|
(a) |
These accumulated other comprehensive income components are included in the calculation of net periodic pension plan (income) expense that is recognized substantially all in investment and other income-net in the condensed consolidated statements of operations (see Note 12, Retirement Plans). |
24
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three and Six Months Ended June 30, 2018 and 2017
(tabular amounts in millions, except per share data)
Note 14. Segment Information
The Company’s segment and product and service offerings are summarized below:
The Print segment produces magazines, catalogs, books, directories, and retail inserts. The segment also provides supply-chain management, logistics and certain other print-related services, including mail-list management and sortation, e-book formatting and distribution. The segment has operations in the U.S., Europe and Mexico. The Print segment is divided into the magazines, catalogs and retail inserts, book, Europe and directories reporting units.
Office Products
The Office Products segment manufactures and sells branded and private label products in five core categories: filing products, envelopes, note-taking products, binder products, and forms.
Corporate
Corporate consists of unallocated selling, general and administrative activities and associated expenses including, in part, executive, legal, finance, communications, certain facility costs and LIFO inventory provisions. In addition, certain costs and earnings of employee benefit plans, such as pension benefit plan income and share-based compensation, are included in Corporate and not allocated to the operating segments.
Information by Segment
The Company has disclosed income (loss) from operations as the primary measure of segment earnings (loss). This is the measure of profitability used by the Company’s chief operating decision-maker and is most consistent with the presentation of profitability reported with the condensed consolidated financial statements.
|
|
Net Sales |
|
|
Income (loss) from Operations |
|
|
Depreciation and Amortization |
|
|
Capital Expenditures |
|
||||
Three Months Ended June 30, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
789 |
|
|
$ |
20 |
|
|
$ |
30 |
|
|
$ |
15 |
|
Office Products |
|
|
154 |
|
|
|
13 |
|
|
|
3 |
|
|
|
1 |
|
Total operating segments |
|
|
943 |
|
|
|
33 |
|
|
|
33 |
|
|
|
16 |
|
Corporate |
|
|
— |
|
|
|
(15 |
) |
|
|
1 |
|
|
|
1 |
|
Total operations |
|
$ |
943 |
|
|
$ |
18 |
|
|
$ |
34 |
|
|
$ |
17 |
|
|
|
Net Sales |
|
|
Income (loss) from Operations |
|
|
Depreciation and Amortization |
|
|
Capital Expenditures |
|
||||
Three Months Ended June 30, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
723 |
|
|
$ |
22 |
|
|
$ |
36 |
|
|
$ |
12 |
|
Office Products |
|
|
125 |
|
|
|
12 |
|
|
|
3 |
|
|
|
2 |
|
Total operating segments |
|
|
848 |
|
|
|
34 |
|
|
|
39 |
|
|
|
14 |
|
Corporate |
|
|
— |
|
|
|
(27 |
) |
|
|
— |
|
|
|
1 |
|
Total operations |
|
$ |
848 |
|
|
$ |
7 |
|
|
$ |
39 |
|
|
$ |
15 |
|
25
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three and Six Months Ended June 30, 2018 and 2017
(tabular amounts in millions, except per share data)
|
|
Net Sales |
|
|
Income (loss) from Operations |
|
|
Assets of Operations |
|
|
Depreciation and Amortization |
|
|
Capital Expenditures |
|
|||||
Six Months Ended June 30, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,595 |
|
|
$ |
22 |
|
|
$ |
1,483 |
|
|
$ |
64 |
|
|
$ |
34 |
|
Office Products |
|
|
277 |
|
|
|
15 |
|
|
|
367 |
|
|
|
7 |
|
|
|
1 |
|
Total operating segments |
|
|
1,872 |
|
|
|
37 |
|
|
|
1,850 |
|
|
|
71 |
|
|
|
35 |
|
Corporate |
|
|
— |
|
|
|
(25 |
) |
|
|
71 |
|
|
|
1 |
|
|
|
2 |
|
Total operations |
|
$ |
1,872 |
|
|
$ |
12 |
|
|
$ |
1,921 |
|
|
$ |
72 |
|
|
$ |
37 |
|
|
|
Net Sales |
|
|
Income (loss) from Operations |
|
|
Assets of Operations |
|
|
Depreciation and Amortization |
|
|
Capital Expenditures |
|
|||||
Six Months Ended June 30, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,433 |
|
|
$ |
34 |
|
|
$ |
1,440 |
|
|
$ |
71 |
|
|
$ |
32 |
|
Office Products |
|
|
236 |
|
|
|
21 |
|
|
|
297 |
|
|
|
7 |
|
|
|
2 |
|
Total operating segments |
|
|
1,669 |
|
|
|
55 |
|
|
|
1,737 |
|
|
|
78 |
|
|
|
34 |
|
Corporate |
|
|
— |
|
|
|
(41 |
) |
|
|
114 |
|
|
|
1 |
|
|
|
2 |
|
Total operations |
|
$ |
1,669 |
|
|
$ |
14 |
|
|
$ |
1,851 |
|
|
$ |
79 |
|
|
$ |
36 |
|
Restructuring, impairment and other charges by segment for the three and six months ended June 30, 2018 and 2017 are disclosed in Note 7, Restructuring, Impairment and Other Charges.
Note 15. Related Parties
On March 28, 2017, RRD completed the sale of approximately 6.2 million shares of LSC Communications common stock, representing its entire 19.25% retained ownership.
Transactions with RRD
Revenues and Purchases
Given that RRD sold its remaining stake in LSC Communications on March 28, 2017, the following information is presented for the three months ended March 31, 2017 only.
LSC Communications generates net revenue from sales to RRD’s subsidiaries. Net revenues from related party sales were $32 million for the three months ended March 31, 2017.
LSC Communications utilizes RRD for freight, logistics and premedia services. There were cost of sales of $51 million related to freight, logistics and premedia services purchased from RRD for the three months ended March 31, 2017. These amounts are included in the condensed consolidated statements of operations.
26
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three and Six Months Ended June 30, 2018 and 2017
(tabular amounts in millions, except per share data)
Note 16. New Accounting Pronouncements
In February 2016, the FASB issued Accounting Standards Update No. 2016-02 “Leases (Topic 842) Section A—Leases: Amendments to the FASB Accounting Standards Codification” (“ASU 2016-02”), which requires lessees to put most leases on the balance sheet but recognize expense on the income statement in a manner similar to current accounting. For lessors, ASU 2016-02 also modifies the classification criteria and the accounting for sales-type and direct financing leases. The standard is effective in the first quarter of 2019. Early adoption of ASU 2016-02 is permitted, however, the Company plans to adopt the standard in the first quarter of 2019.
The Company is currently evaluating the impact of the provisions of ASU 2016-02 and anticipates it will be able to complete its analysis of all potential impacts of the standard, implement any system and process changes that might be necessary and educate the appropriate employees with respect to the new standard in order to effectively adopt the standard beginning in the first quarter of 2019.
Note 17. Subsequent Events
On July 2, 2018, the Company completed the acquisition of RRD’s Print Logistics business, a leading integrated logistics services provider to the print industry with an expansive distribution network. The total purchase price, $58 million in cash, was funded with a combination of cash on hand and drawings under the Revolving Credit Facility. The Company is in process of completing the purchase price allocation.
On July 19, 2018, the Company announced that it has entered into a definitive agreement to sell its European printing business, which represents the Company’s entire Europe reporting unit. The proceeds from the sale are dependent upon the assets and liabilities present at the time of closing and any subsequent working capital adjustments. The Company does not expect a material gain or loss on the sale, other than the impact on the income tax provision related to the reversal of the estimated $25 million of net deferred tax assets associated with this business as of June 30, 2018. The sale has not been completed as of August 2, 2018, the date of filing of the Form 10-Q for the quarter ended June 30, 2018.
27
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is management’s discussion and analysis of the financial condition of LSC Communications, Inc. as of June 30, 2018 and December 31, 2017 and the results of operations for the three and six months ended June 30, 2018 and 2017. This commentary should be read in conjunction with the condensed consolidated financial statements and accompanying notes included in Item 1 Condensed Consolidated Financial Statements. Refer to the Company’s annual report on Form 10-K, as filed with the Securities and Exchange Commission on February 22, 2018, for management’s discussion and analysis of the financial condition of the company as of December 31, 2017 and December 31, 2016, and the results of operations for the years ended December 31, 2017, 2016 and 2015.
Company Overview
The principal business of LSC Communications, Inc., a Delaware corporation, and its direct or indirect wholly-owned subsidiaries (“LSC Communications,” “the Company,” “we,” “our” and “us”) is to offer a broad scope of traditional and digital print, print-related services and office products.
On October 1, 2016 (the “separation date”), R. R. Donnelley & Sons Company (“RRD” or the “Parent”) completed the previously announced separation (the “separation”) into three separate independent publicly-traded companies: (i) its publishing and retail-centric print services and office products business (“LSC Communications”); (ii) its financial communications services business (“Donnelley Financial Solutions, Inc.” or “Donnelley Financial”) and (iii) a global, customized multichannel communications management company, which is the business of RRD after the separation. To effect the separation, RRD undertook a series of transactions to separate net assets and legal entities. RRD completed the distribution (the “distribution”) of 80.75% of the outstanding common stock of LSC Communications and Donnelley Financial to RRD stockholders on October 1, 2016. RRD retained a 19.25% ownership stake in both LSC Communications and Donnelley Financial. On October 1, 2016, RRD stockholders of record as of the close of business on September 23, 2016 (“the record date”) received one share of LSC Communications common stock and one share of Donnelley Financial common stock for every eight shares of RRD common stock held as of the record date. On March 28, 2017, RRD completed the sale of approximately 6.2 million shares of LSC Communications common stock, representing its entire 19.25% retained ownership.
Segment Descriptions
The Company’s segments and their product offerings are summarized below:
We are the largest producer of books in the U.S. and one of the largest producers of catalogs, magazines and retail inserts in North America. The Print segment produces magazines, catalogs, books, directories, and retail inserts. The segment also provides supply-chain management, logistics and certain other print-related services, including mail-list management and sortation, e-book formatting and distribution. The segment has operations in the U.S., Europe and Mexico. The Print segment is divided into the magazines, catalogs and retail inserts, book, Europe and directories reporting units.
Office Products
The Office Products segment manufactures and sells branded and private label products in five core categories: filing products, envelopes, note-taking products, binder products, and forms.
Corporate
Corporate consists of unallocated selling, general and administrative activities and associated expenses including, in part, executive, legal, finance, communications, certain facility costs and LIFO inventory provisions. In addition, certain costs and earnings of employee benefit plans, such as pension benefit plan income and share-based compensation, are included in Corporate and not allocated to the operating segments.
28
Business Combinations
The following table lists the Company’s acquisitions since the beginning of 2017:
Date |
Company |
Description |
Purchase Price |
November 29, 2017 |
The Clark Group (“Clark Group”) |
Third-party logistics provider of distribution, consolidation, transportation management and international freight forwarding services |
$25 million in cash |
November 9, 2017 |
Quality Park |
Producer of envelopes, mailing supplies and assorted packaging items |
$41 million in cash |
September 7, 2017 |
Publishers Press |
Printing provider with capabilities such as web-offset printing, prepress and distribution services for magazines and retail brands |
$68 million in cash |
August 21, 2017 |
NECI, LLC ("NECI") |
Supplier of commodity and specialty filing supplies |
$6 million in cash |
August 17, 2017 |
CREEL Printing ("CREEL") |
Offset and digital printing company |
$79 million in cash |
July 28, 2017 |
Fairrington Transportation Corp., F.T.C. Transport, Inc. and F.T.C. Services, Inc. (“Fairrington”) |
Full-service, printer-independent mailing logistics provider in the United States |
$19 million in cash and ~1.0 million shares of LSC common stock (total value $39 million) |
March 1, 2017 |
HudsonYards Studios ("HudsonYards") |
Digital and print premedia production company that provides high-quality creative retouching, computer-generated imagery, mechanical creation, press-ready file preparation, and interactive production services |
$3 million in cash |
For further information on the above acquisitions, see Note 2, Business Combinations, to the condensed consolidated financial statements.
In addition, on July 2, 2018, the Company completed the acquisition of RRD’s Print Logistics business.
Outlook
Competitive Environment
According to the January 2018 IBIS World industry report “Printing in the U.S.,” estimated total annual printing industry revenue is approximately $75 billion, of which approximately $12 billion relates to our core segments of the print market and an additional approximately $31 billion pertains to related segments of the print market in which we are able to offer certain products. Despite consolidation in recent years, including several acquisitions completed by LSC Communications, the industry remains highly fragmented and LSC Communications is one of the largest players in our segment of the print market. The print and related services industry, in general, continues to have excess capacity and LSC Communications remains diligent in proactively identifying plant consolidation opportunities to keep our capacity in line with demand. Across the Company’s range of Print segment products and services, competition is based primarily on the ability to deliver products for the lowest total cost, a factor driven not only by price, but also by materials and distribution costs. We expect that prices for print products and services will continue to be a focal point for customers in coming years.
29
Value-added services, such as LSC Communications’ co-mail, logistics and supply chain management offerings, enable customers to lower their total costs. Technological changes, including the electronic distribution of documents and data, online distribution and hosting of media content, and advances in digital printing, print-on-demand and internet technologies, continue to impact the market for our products and services. The impact of digital technologies has been felt in many print products. Digital technologies have impacted printed magazines as some advertising spending has moved from print to electronic media. Catalogs have experienced volume reductions as our customers allocate more of their spending to online resources and also face stiff competition from online retailers resulting in retailer compression. Educational books within the college market continue to be impacted by electronic substitution and other trends. The K-12 educational sector continues to be focused on increasing digital distribution but there has been inconsistent adoption across school systems. E-book substitution has impacted overall consumer print trade book volume, although e-book adoption rates have stabilized and industry-wide print book volume has been growing in recent years. In addition, retail inserts have experienced volume reductions primarily as a result of store closures and reduced newspaper circulation. Electronic communication and transaction technology has also continued to drive electronic substitution in directory printing, in part driven by cost pressures at key customers.
The future impact of technology on our business is difficult to predict and could result in additional expenditures to restructure impacted operations or develop new technologies. In addition, we have made targeted acquisitions and investments in our existing business to offer customers innovative services and solutions. Such acquisitions and investments include the acquisitions of Clark Group, Quality Park, Publishers Press, NECI, CREEL, Fairrington, and HudsonYards in 2017, which expanded our logistics, printing, digital, office products, and premedia capabilities, and Continuum Management Company, LLC (“Continuum”) in 2016, which expanded our print management capabilities. These acquisitions and investments further secure our position as a technology leader in the industry.
Technological advancement and innovation has affected the overall demand for most of the products in our Office Products segment. While these changes continue to impact demand, the overall market for our products remains large and we believe share growth is attainable. We compete against a range of both domestic and international competitors in each of our product categories within the segment. Due to the increasing percentage of private label products in the market, resellers have created a highly competitive environment where purchasing decisions are based largely on price, quality and the supplier’s ability to service the customer. As consumer preferences shift towards private label, resellers have increased the pressure on suppliers to better differentiate their product offering, oftentimes through product exclusivity, product innovation and development of private label products. We have experienced robust growth within our e-commerce channel, where a significant majority of our sales are branded products.
We have implemented a number of strategic initiatives to reduce our overall cost structure and improve efficiency, including the restructuring, reorganization and integration of operations and streamlining of administrative and support activities. Future cost reduction initiatives could include the reorganization of operations and the consolidation of facilities. Implementing such initiatives might result in future restructuring or impairment charges, which may be substantial. We also review our operations and management structure on a regular basis to appropriately balance risks and opportunities to maximize efficiencies and to support our long-term strategic goals.
Seasonality
Advertising and consumer spending trends affect demand in several of the end-markets served by LSC Communications. Historically, demand for printing of magazines, catalogs, retail inserts, books and office products is higher in the second half of the year, driven by increased advertising pages within magazines, holiday volume in catalogs and retail inserts, and back-to-school demand in books and office products. These typical seasonal patterns can be impacted by overall trends in the U.S. and world economy. The Company expects the seasonal impact in 2018 to be in line with historical patterns.
Raw Materials
The primary raw materials we use in our Print segment are paper and ink. We negotiate with leading paper suppliers to maximize our purchasing efficiencies and use a wide variety of paper grades and formats. In addition, a substantial amount of paper used in our print business is supplied directly by customers. Variations in the cost and supply of certain paper grades used in the manufacturing process may affect our consolidated financial results. Generally, customers directly absorb the impact of changing prices on customer-supplied paper. For paper that we purchase, we have historically passed most changes in price through to our customers. Contractual arrangements and industry practice should support our continued ability to pass on any future paper price increases, but there is no assurance that market conditions will continue to enable us to successfully do so. Higher paper prices and tight paper supplies – as currently being experienced - may have an impact on customers’ demand for printed products. We also resell waste paper and other print-related by-products and may be impacted by changes in prices for these by-products.
30
We negotiate with leading suppliers to maximize our purchasing efficiencies and use a wide variety of ink formulations and colors. Variations in the cost and supply of certain ink formulations used in the manufacturing process may affect our consolidated financial results. We have undertaken various strategic initiatives to try to mitigate any foreseeable supply disruptions with respect to our ink requirements, including entering into a long term supply arrangement with a single supplier for a substantial portion of our ink supply. Certain contractual protections exist in our relationship with such supplier, such as price and quality protections and an ability to seek alternative sources of ink if the supplier breaches or is unable to perform certain of its obligations, which are intended to mitigate the risk of ink-related supply disruptions.
The primary materials used in the Office Products segment are paper, steel and polypropylene substrates. We negotiate with leading paper, plastic and steel suppliers to maximize our purchasing efficiencies. All of these materials are available from a number of domestic and international suppliers and we are not dependent upon any single supplier for any of these materials. We believe that adequate supply is available for each of these materials for the foreseeable future, although higher paper prices may have an impact on demand for our products.
Changes in material prices, including paper, may impact the Company’s operating margins as there may be a lag between when the Company experiences the changes and when they are absorbed by our customers.
Except for our long-term supply arrangement regarding ink, we do not consider ourselves to be dependent upon any single vendor as a source of supply for our businesses, and we believe that sufficient alternative sources for the same, similar or alternative products are available.
Changes in the price of raw materials, crude oil and other energy costs impact our ink suppliers and manufacturing costs. Crude oil and energy prices continue to be volatile. Should prices increase, we generally cannot pass on to customers the impact of higher energy prices on our manufacturing costs. We do enter into fixed price contracts for a portion of our natural gas purchases to mitigate the impact of changes in energy prices. We cannot predict sudden changes in energy prices and the impact that possible future changes in energy prices might have upon either future operating costs or customer demand and the related impact either will have on the Company’s consolidated balance sheets, statements of operations and cash flows.
Pension Benefit Plans
The funded status of the Company’s pension benefit plans is dependent upon many factors, including returns on invested assets and the level of certain market interest rates. Market conditions may lead to changes in the discount rates (used to value the year-end benefit obligations of the plans) and the market value of the securities held by the plans, which could significantly increase or decrease the funded status of the plans. The Company reviews its actuarial assumptions on an annual basis as of December 31. Based on current estimates, the Company expects to make cash contributions of approximately $6 million to its pension benefit plans for the full year in 2018, of which $3 million has been contributed during six months ended June 30, 2018.
Based on the fair value of assets and the estimated discount rate used to value benefit obligations as of June 30, 2018, the Company estimates the unfunded status of the pension benefit plans to be approximately $90 million compared to $187 million at December 31, 2017.
See Note 12, Retirement Plans, for more information on the Company’s pension benefit plans.
Significant Accounting Policies
There have been no changes to the Company’s significant accounting policies disclosed in the annual report on Form 10-K for the year-ended December 31, 2017, with the exception of revenue recognition. During the first quarter of 2018, the Company adopted ASU 2014-09 “Revenue from Contracts with Customers (Topic 606) (“ASC 606”, or the “standard”), as discussed in the Company’s annual report on Form 10-K. The adoption of ASC 606 did not have a material impact on the Company’s financial position or results of operations. See Note 3, Revenue Recognition, for more information.
FINANCIAL REVIEW
In the financial review that follows, the Company discusses its condensed consolidated balance sheets, statements of operations, cash flows and certain other information. This discussion should be read in conjunction with the Company’s condensed consolidated financial statements and the related notes.
31
Results of Operations for the Three Months Ended June 30, 2018 as Compared to the Three Months Ended June 30, 2017
The following table shows the results of operations for the three months ended June 30, 2018 and 2017, which reflects the results of the acquired businesses from the relevant acquisition dates:
|
|
Three Months Ended June 30, |
|
|
|
|
|
|
|
|
|
|||||
|
|
2018 |
|
|
2017 |
|
|
$ Change |
|
|
% Change |
|
||||
|
|
(in millions, except percentages) |
|
|||||||||||||
Net sales |
|
$ |
943 |
|
|
$ |
848 |
|
|
$ |
95 |
|
|
|
11.2 |
% |
Cost of sales |
|
|
798 |
|
|
|
705 |
|
|
|
93 |
|
|
|
13.2 |
% |
Cost of sales as a % of net sales |
|
|
84.6 |
% |
|
|
83.1 |
% |
|
|
|
|
|
|
|
|
Selling, general and administrative expenses (exclusive of depreciation and amortization) |
|
|
82 |
|
|
|
76 |
|
|
|
6 |
|
|
|
7.9 |
% |
Selling, general and administrative expenses as a % of net sales |
|
|
8.7 |
% |
|
|
9.0 |
% |
|
|
|
|
|
|
|
|
Restructuring, impairment and other charges-net |
|
|
11 |
|
|
|
21 |
|
|
|
(10 |
) |
|
|
(47.6 |
%) |
Depreciation and amortization |
|
|
34 |
|
|
|
39 |
|
|
|
(5 |
) |
|
|
(12.8 |
%) |
Income from operations |
|
$ |
18 |
|
|
$ |
7 |
|
|
$ |
11 |
|
|
|
157.1 |
% |
Condensed Consolidated Results
Net sales for the three months ended June 30, 2018 were $943 million, an increase of $95 million, or 11.2%, compared to the three months ended June 30, 2017. Net sales were impacted by:
|
• |
Increases due to the acquisitions of Clark Group, CREEL, Publishers Press, and Fairrington in 2017 (the “MCR 2017 acquisitions”), and the acquisitions of Quality Park and NECI in 2017 (the “Office Products 2017 acquisitions”) (together with the MCR 2017 acquisitions, the “2017 acquired companies”), partially offset by the disposition of the Company’s retail offset printing facilities in June 2018, a $5 million decrease in pass-through paper sales and price declines; and |
|
• |
A $4 million increase due to changes in foreign exchange rates, primarily in Polish Zloty. |
Additionally, on a pro forma basis, the Company’s net sales decreased by approximately $24 million or 2.5% (see Note 2, Business Combinations, to the condensed consolidated financial statements).
Total cost of sales increased $93 million, or 13.2%, for the three months ended June 30, 2018 compared to the three months ended June 30, 2017, primarily due to the cost of sales incurred by the 2017 acquired companies, a $3 million increase due to changes in foreign exchange rates, primarily in Polish Zloty, increased costs of raw materials, primarily paper, and the mix of volume.
As a percentage of net sales, cost of sales increased from 83.1% for the three months ended June 30, 2017 to 84.6% for the three months ended June 30, 2018 primarily due to price pressures and increased costs of raw materials.
Selling, general and administrative expenses increased $6 million to $82 million for the three months ended June 30, 2018 compared to the three months ended June 30, 2017, primarily driven by expenses incurred by the 2017 acquired companies, partially offset by lower separation-related expenses.
As a percentage of net sales, selling, general and administrative expenses decreased from 9.0% for the three months ended June 30, 2017 to 8.7% for the three months ended June 30, 2018 primarily due to cost control initiatives.
For the three months ended June 30, 2018, the Company recorded restructuring, impairment and other charges of $11 million. The charges primarily included:
|
• |
Other restructuring charges of $7 million for facility costs, a loss related to the Company’s disposition of its retail offset printing facilities, and multiemployer withdrawal obligations related to facility closures; and |
|
• |
Employee termination costs of $3 million related to an aggregate of 108 employees, of whom 85 were terminated as of or prior to June 30, 2018, primarily related to the reorganization of certain business units and corporate functions. |
32
For the three months ended June 30, 2017, the Company recorded restructuring, impairment and other charges of $21 million. The charges included:
|
• |
Other restructuring charges of $17 million primarily related to charges incurred as a result of a terminated supplier contract and the exit from certain operations and facilities; |
|
• |
Net restructuring charges of $3 million for employee termination costs for an aggregate of 306 employees, substantially all of whom were terminated as of or prior to June 30, 2018, primarily related to the announcement of one facility closure in the Print segment and the reorganization of certain business units and corporate functions; and |
|
• |
$1 million for multiemployer pension plan withdrawal obligations unrelated to facility closures. |
Depreciation and amortization decreased $5 million to $34 million for the three months ended June 30, 2018 compared to the three months ended June 30, 2017 due to decreased capital spending in recent years compared to historical levels, partially offset by depreciation and amortization incurred by the 2017 acquired companies.
|
|
Three Months Ended June 30, |
|
|
|
|
|
|
|
|
|
|||||
|
|
2018 |
|
|
2017 |
|
|
$ Change |
|
|
% Change |
|
||||
|
|
(in millions, except percentages) |
|
|||||||||||||
Interest expense-net |
|
$ |
18 |
|
|
$ |
16 |
|
|
$ |
2 |
|
|
|
12.5 |
% |
Investment and other (income)-net |
|
|
(13 |
) |
|
|
(12 |
) |
|
|
(1) |
|
|
|
8.3 |
% |
Net interest expense increased by $2 million for the three months ended June 30, 2018 compared to the three months ended June 30, 2017 due to increased borrowings on the Company’s $400 million senior secured revolving credit facility (the “Revolving Credit Facility”). Investment and other (income)-net primarily relates to the Company’s pension benefit plans in both years.
|
|
Three Months Ended June 30, |
|
|
|
|
|
|||||
|
|
2018 |
|
|
2017 |
|
|
$ Change |
|
|||
|
|
(in millions, except percentages) |
|
|||||||||
Net income before income taxes |
|
$ |
13 |
|
|
$ |
3 |
|
|
$ |
10 |
|
Income tax expense (benefit) |
|
|
5 |
|
|
|
(2 |
) |
|
|
7 |
|
Effective income tax rate |
|
|
35.3 |
% |
|
|
(91.3 |
%) |
|
|
|
|
The effective income tax rate for the three months ended June 30, 2018 was 35.3% compared to (91.3%) for the three months ended June 30, 2017. The effective income tax rate for the three months ended June 30, 2018 reflects the impact of the U.S. Tax Cuts and Jobs Act (“Tax Act”) including the reduction of the U.S. federal corporate tax rate from 35.0% to 21.0%, partially offset by the tax resulting from the inclusion of certain foreign-sourced earnings, referred to as the global intangible low-taxed income ("GILTI") tax, as well as changes in deductions and permanent book-to-tax differences.
The effective income tax rate for the three months ended June 30, 2017 reflects the favorable impact associated with a reorganization of certain entities in 2017.
Information by Segment
The following tables summarize net sales, income (loss) from operations and certain items impacting comparability within each of the reportable segments and Corporate. The descriptions of the reporting units generally reflect the primary products provided by each reporting unit.
33
|
|
Three Months Ended June 30, |
|
|
|
|
|
|||||
|
|
2018 |
|
|
2017 |
|
|
Change |
|
|||
|
|
(in millions, except percentages) |
|
|||||||||
Net sales |
|
$ |
789 |
|
|
$ |
723 |
|
|
$ |
66 |
|
Income from operations |
|
|
20 |
|
|
|
22 |
|
|
|
(2 |
) |
Operating margin |
|
|
2.5 |
% |
|
|
3.0 |
% |
|
(50 bps) |
|
|
Restructuring, impairment and other charges-net |
|
|
9 |
|
|
|
6 |
|
|
|
3 |
|
|
|
Net Sales for the Three Months Ended June 30, |
|
|
|
|
|
|
|
|
|
|||||
Reporting unit |
|
2018 |
|
|
2017 |
|
|
$ Change |
|
|
% Change |
|
||||
|
|
(in millions, except percentages) |
|
|
|
|
|
|||||||||
Magazines, catalogs and retail inserts |
|
$ |
442 |
|
|
$ |
378 |
|
|
$ |
64 |
|
|
|
16.9 |
% |
Book |
|
|
266 |
|
|
|
262 |
|
|
|
4 |
|
|
|
1.5 |
% |
Europe |
|
|
56 |
|
|
|
56 |
|
|
|
— |
|
|
|
0.0 |
% |
Directories |
|
|
25 |
|
|
|
27 |
|
|
|
(2 |
) |
|
|
(7.4 |
%) |
Total Print |
|
$ |
789 |
|
|
$ |
723 |
|
|
$ |
66 |
|
|
|
9.1 |
% |
Net sales for the Print segment for the three months ended June 30, 2018 were $789 million, an increase of $66 million, or 9.1%, compared to the three months ended June 30, 2017. Print segment net sales were impacted as follows by changes in the net sales of its reporting units:
|
• |
Magazines, catalogs and retail inserts: Sales increased due to the MCR 2017 acquisitions and a $3 million increase in pass-through paper sales, partially offset by lower volume, the disposition of the Company’s retail offset printing facilities in June 2018, price declines, and a decrease due to changes in foreign exchange rates in the Mexican peso. |
|
• |
Book: Sales increased due to higher volume in religious books and digital products, partially offset by a $4 million decrease in paper sales and price pressures. |
|
• |
Europe: Sales remained consistent primarily as a result of a $4 million increase due to changes in foreign exchange rates for Polish Zloty, partially offset by a $4 million decrease in pass-through paper sales. |
|
• |
Directories: Sales decreased primarily due to lower volume. |
The decrease in Print segment income from operations and operating margins was primarily due to mix of volume and price pressures.
Office Products
|
|
Three Months Ended June 30, |
|
|
|
|
|
|||||
|
|
2018 |
|
|
2017 |
|
|
Change |
|
|||
|
|
(in millions, except percentages) |
|
|||||||||
Net sales |
|
$ |
154 |
|
|
$ |
125 |
|
|
$ |
29 |
|
Income from operations |
|
|
13 |
|
|
|
12 |
|
|
|
1 |
|
Operating margin |
|
|
8.4 |
% |
|
|
9.6 |
% |
|
(120 bps) |
|
|
Restructuring, impairment and other charges-net |
|
|
1 |
|
|
|
— |
|
|
|
1 |
|
Net sales for the Office Products segment for the three months ended June 30, 2018 were $154 million, an increase of $29 million, or 23.2%, compared to the three months ended June 30, 2017, largely as a result of the Office Products 2017 acquisitions, partially offset by lower volume in filing and notetaking products.
The increase in Office Products’ segment income from operations was primarily due to higher volume largely as a result of the Office Products 2017 acquisitions, partially offset by increased costs of raw materials, primarily in paper. The decrease in operating margin is primarily due to lower margins in the Office Products 2017 acquisitions and higher materials costs, partially offset by overhead cost reductions.
34
Corporate
The following table summarizes unallocated operating expenses and certain items impacting comparability within the activities presented as Corporate:
|
|
Three Months Ended June 30, |
|
|||||
|
|
2018 |
|
|
2017 |
|
||
|
|
(in millions) |
|
|||||
Total operating expenses |
|
$ |
15 |
|
|
$ |
27 |
|
Significant components of total operating expenses: |
|
|
|
|
|
|
|
|
Restructuring, impairment and other charges-net |
|
|
1 |
|
|
|
15 |
|
Share-based compensation expenses |
|
|
5 |
|
|
|
4 |
|
Acquisition-related expenses |
|
|
1 |
|
|
|
1 |
|
Separation-related expenses |
|
|
— |
|
|
|
2 |
|
35
Results of Operations for the Six Months Ended June 30, 2018 as Compared to the Six Months Ended June 30, 2017
The following table shows the results of operations for the six months ended June 30, 2018 and 2017, which reflects the results of the acquired businesses from the relevant acquisition dates:
|
|
Six Months Ended June 30, |
|
|
|
|
|
|
|
|
|
|||||
|
|
2018 |
|
|
2017 |
|
|
$ Change |
|
|
% Change |
|
||||
|
|
(in millions, except percentages) |
|
|||||||||||||
Net sales |
|
$ |
1,872 |
|
|
$ |
1,669 |
|
|
$ |
203 |
|
|
|
12.2 |
% |
Cost of sales |
|
|
1,606 |
|
|
|
1,397 |
|
|
|
209 |
|
|
|
15.0 |
% |
Cost of sales as a % of net sales |
|
|
85.8 |
% |
|
|
83.7 |
% |
|
|
|
|
|
|
|
|
Selling, general and administrative expenses (exclusive of depreciation and amortization) |
|
|
165 |
|
|
|
152 |
|
|
|
13 |
|
|
|
8.6 |
% |
Selling, general and administrative expenses as a % of net sales |
|
|
8.8 |
% |
|
|
9.1 |
% |
|
|
|
|
|
|
|
|
Restructuring, impairment and other charges-net |
|
|
17 |
|
|
|
27 |
|
|
|
(10 |
) |
|
|
(37.0 |
%) |
Depreciation and amortization |
|
|
72 |
|
|
|
79 |
|
|
|
(7 |
) |
|
|
(8.9 |
%) |
Income from operations |
|
$ |
12 |
|
|
$ |
14 |
|
|
$ |
(2 |
) |
|
|
(14.3 |
%) |
Condensed Consolidated Results
Net sales for the six months ended June 30, 2018 were $1,872 million, an increase of $203 million, or 12.2%, compared to the six months ended June 30, 2017. Net sales were impacted by:
|
• |
Increases due to the 2017 acquired companies, partially offset by price declines, the disposition of the Company’s retail offset printing facilities in June 2018, and a $6 million decrease in pass-through paper sales; and |
|
• |
A $16 million increase due to changes in foreign exchange rates, primarily in Polish Zloty. |
Additionally, on a pro forma basis, the Company’s net sales decreased by approximately $37 million or 1.9% (see Note 2, Business Combinations, to the condensed consolidated financial statements).
Total cost of sales increased $209 million, or 15.0%, for the six months ended June 30, 2018 compared to the six months ended June 30, 2017, primarily due to the cost of sales incurred by the 2017 acquired companies, an $14 million increase due to changes in foreign exchange rates, primarily in Polish Zloty, increased costs of raw materials, and mix of volume.
As a percentage of net sales, cost of sales increased from 83.7% for the six months ended June 30, 2017 to 85.8% for the six months ended June 30, 2018 primarily due to price pressures and increased costs of raw materials.
Selling, general and administrative expenses increased $13 million to $165 million for the six months ended June 30, 2018 compared to the six months ended June 30, 2017, primarily driven by expenses incurred by the 2017 acquired companies, partially offset by lower separation-related expenses.
As a percentage of net sales, selling, general and administrative expenses decreased from 9.1% for the six months ended June 30, 2017 to 8.8% for the six months ended June 30, 2018 primarily due to cost control initiatives.
For the six months ended June 30, 2018, the Company recorded restructuring, impairment and other charges of $17 million. The charges primarily included:
|
• |
Other restructuring charges of $10 million for facility costs, a loss related to the Company’s disposition of its retail offset printing facilities, and multiemployer withdrawal obligations related to facility closures; and |
|
• |
Employee termination costs of $7 million related to an aggregate of 304 employees, of whom 224 were terminated as of or prior to June 30, 2018. These charges primarily related to one facility closure in the Print segment and the reorganization of certain business units and corporate functions. |
36
For the six months ended June 30, 2017, the Company recorded restructuring, impairment and other charges of $27 million. The charges included:
|
• |
Other restructuring charges of $18 million primarily related to charges incurred as a result of a terminated supplier contract and the exit from certain operations and facilities; |
|
• |
Employee termination costs of $7 million for an aggregate of 504 employees, substantially all of whom were terminated as of or prior to June 30, 2018. These charges primarily related to the announcement of one facility closure in the Print segment and the reorganization of certain business units and corporate functions; and |
|
• |
Other charges of $2 million primarily related to multiemployer pension withdrawal obligations unrelated to facility closures. |
Depreciation and amortization decreased $7 million to $72 million for the six months ended June 30, 2018 compared to the six months ended June 30, 2017 due to decreased capital spending in recent years compared to historical levels, partially offset by depreciation and amortization incurred by the 2017 acquired companies.
|
|
Six Months Ended June 30, |
|
|
|
|
|
|
|
|
|
|||||
|
|
2018 |
|
|
2017 |
|
|
$ Change |
|
|
% Change |
|
||||
|
|
(in millions, except percentages) |
|
|||||||||||||
Interest expense-net |
|
$ |
38 |
|
|
$ |
33 |
|
|
$ |
5 |
|
|
|
15.2 |
% |
Investment and other (income)-net |
|
|
(24 |
) |
|
|
(23 |
) |
|
|
(1 |
) |
|
|
4.3 |
% |
Net interest expense increased by $5 million for the six months ended June 30, 2018 compared to the six months ended June 30, 2017 due to increased borrowings on the Company’s $400 million senior secured revolving credit facility (the “Revolving Credit Facility”). Investment and other (income)-net primarily relates to the Company’s pension benefit plans in both years.
|
|
Six Months Ended June 30, |
|
|
|
|
|
|||||
|
|
2018 |
|
|
2017 |
|
|
$ Change |
|
|||
|
|
(in millions, except percentages) |
|
|||||||||
Net (loss) income before income taxes |
|
$ |
(2 |
) |
|
$ |
4 |
|
|
$ |
(6 |
) |
Income tax expense |
|
|
1 |
|
|
|
— |
|
|
|
1 |
|
Effective income tax rate |
|
|
(35.7 |
%) |
|
|
(3.8 |
%) |
|
|
|
|
The effective income tax rate for the six months ended June 30, 2018 was (35.7%) compared to (3.8%) for the six months ended June 30, 2017. The effective income tax rate for the six months ended June 30, 2018 reflects the impact of the Tax Act including the reduction of the U.S. federal corporate tax rate from 35.0% to 21.0%, partially offset by the tax resulting from the inclusion of certain foreign-sourced earnings, referred to as the GILTI tax, as well as changes in deductions and permanent book-to-tax differences.
The effective income tax rate for the six months ended June 30, 2017 reflects the favorable impact associated with a reorganization of certain entities in 2017, partially offset by an unfavorable impact associated with share-based compensation awards that lapsed in 2017.
Information by Segment
The following tables summarize net sales, income (loss) from operations and certain items impacting comparability within each of the reportable segments and Corporate. The descriptions of the reporting units generally reflect the primary products provided by each reporting unit.
37
|
|
Six Months Ended June 30, |
|
|
|
|
|
|||||
|
|
2018 |
|
|
2017 |
|
|
Change |
|
|||
|
|
(in millions, except percentages) |
|
|||||||||
Net sales |
|
$ |
1,595 |
|
|
$ |
1,433 |
|
|
$ |
162 |
|
Income from operations |
|
|
22 |
|
|
|
34 |
|
|
|
(12 |
) |
Operating margin |
|
|
1.4 |
% |
|
|
2.4 |
% |
|
(100 bps) |
|
|
Restructuring, impairment and other charges-net |
|
|
14 |
|
|
|
11 |
|
|
|
3 |
|
|
|
Net Sales for the Six Months Ended June 30, |
|
|
|
|
|
|
|
|
|
|||||
Reporting unit |
|
2018 |
|
|
2017 |
|
|
$ Change |
|
|
% Change |
|
||||
|
|
(in millions, except percentages) |
|
|
|
|
|
|||||||||
Magazines, catalogs and retail inserts |
|
$ |
910 |
|
|
$ |
761 |
|
|
$ |
149 |
|
|
|
19.6 |
% |
Book |
|
|
515 |
|
|
|
501 |
|
|
|
14 |
|
|
|
2.8 |
% |
Europe |
|
|
118 |
|
|
|
112 |
|
|
|
6 |
|
|
|
5.4 |
% |
Directories |
|
|
52 |
|
|
|
59 |
|
|
|
(7 |
) |
|
|
(11.9 |
%) |
Total Print |
|
$ |
1,595 |
|
|
$ |
1,433 |
|
|
$ |
162 |
|
|
|
11.3 |
% |
Net sales for the Print segment for the six months ended June 30, 2018 were $1,595 million, an increase of $162 million, or 11.3%, compared to the six months ended June 30, 2017. Print segment net sales were impacted as follows by changes in the net sales of its reporting units:
|
• |
Magazines, catalogs and retail inserts: Sales increased due to the MCR 2017 acquisitions, a $3 million increase in pass-through paper sales, and an increase due to changes in foreign exchange rates in the Mexican peso, partially offset by lower volume, the disposition of the Company’s retail offset printing facilities in June 2018 and price declines. |
|
• |
Book: Sales increased due to higher volume in digital products, trade and educational books, partially offset by price pressures and as a $2 million decrease in pass-through paper sales. |
|
• |
Europe: Sales increased primarily as a result of a $14 million increase due to changes in foreign exchange rates for Polish Zloty, that was partially offset by a $5 million decrease in pass-through paper sales and lower volume. |
|
• |
Directories: Sales decreased due to lower volume and a $2 million decrease in pass-through paper sales. |
The decrease in Print segment income from operations and operating margins was primarily due to mix of volume and price pressures.
Office Products
|
|
Six Months Ended June 30, |
|
|
|
|
|
|||||
|
|
2018 |
|
|
2017 |
|
|
Change |
|
|||
|
|
(in millions, except percentages) |
|
|||||||||
Net sales |
|
$ |
277 |
|
|
$ |
236 |
|
|
$ |
41 |
|
Income from operations |
|
|
15 |
|
|
|
21 |
|
|
|
(6 |
) |
Operating margin |
|
|
5.4 |
% |
|
|
8.9 |
% |
|
(350 bps) |
|
|
Restructuring, impairment and other charges-net |
|
|
2 |
|
|
|
1 |
|
|
|
1 |
|
Purchase accounting inventory adjustments |
|
|
1 |
|
|
|
— |
|
|
|
1 |
|
Net sales for the Office Products segment for the six months ended June 30, 2018 were $277 million, an increase of $41 million, or 17.4%, compared to the six months ended June 30, 2017, largely as a result of the Office Products 2017 acquisitions and an increase due to changes in foreign exchange rates in the Canadian dollar, partially offset by lower volume in filing and notetaking products.
The decrease in Office Products segment income from operations and operating margins was due to increased costs of raw materials, primarily in paper, and mix of volume.
38
Corporate
The following table summarizes unallocated operating expenses and certain items impacting comparability within the activities presented as Corporate:
|
|
Six Months Ended June 30, |
|
|||||
|
|
2018 |
|
|
2017 |
|
||
|
|
(in millions) |
|
|||||
Total operating expenses |
|
$ |
25 |
|
|
$ |
41 |
|
Significant components of total operating expenses: |
|
|
|
|
|
|
|
|
Restructuring, impairment and other charges-net |
|
|
1 |
|
|
|
15 |
|
Share-based compensation expenses |
|
|
8 |
|
|
|
7 |
|
Acquisition-related expenses |
|
|
2 |
|
|
|
1 |
|
Separation-related expenses |
|
|
— |
|
|
|
3 |
|
Non-GAAP Measures
The Company believes that certain non-GAAP measures, such as Non-GAAP adjusted EBITDA, provide useful information about the Company’s operating results and enhance the overall ability to assess the Company’s financial performance. The Company uses these measures, together with other measures of performance under GAAP, to compare the relative performance of operations in planning, budgeting and reviewing the performance of its business. Non-GAAP adjusted EBITDA allows investors to make a more meaningful comparison between the Company’s core business operating results over different periods of time. The Company believes that Non-GAAP adjusted EBITDA, when viewed with the Company’s results under GAAP and the accompanying reconciliations, provides useful information about the Company’s business without regard to potential distortions. By eliminating potential differences in results of operations between periods caused by factors such as depreciation and amortization methods and restructuring, impairment and other charges, the Company believes that Non-GAAP adjusted EBITDA can provide a useful additional basis for comparing the current performance of the underlying operations being evaluated.
Non-GAAP adjusted EBITDA is not presented in accordance with GAAP and has important limitations as an analytical tool. Readers should not consider these measures in isolation or as a substitute for analysis of our results as reported under GAAP. In addition, these measures are defined differently by different companies in our industry and, accordingly, such measures may not be comparable to similarly-titled measures of other companies.
Non-GAAP adjusted EBITDA excludes restructuring, impairment and other charges-net, purchase accounting adjustments, acquisition-related expenses, and separation-related expenses. A reconciliation of GAAP net income to non-GAAP adjusted EBITDA for the three and six months ended June 30, 2018 and 2017 is presented in the following table:
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
2018 |
|
|
2017 |
|
|
2018 |
|
|
2017 |
|
||||
Net income (loss) |
|
$ |
8 |
|
|
$ |
5 |
|
|
$ |
(3 |
) |
|
$ |
4 |
|
Restructuring, impairment and other charges – net |
|
|
11 |
|
|
|
21 |
|
|
|
17 |
|
|
|
27 |
|
Purchase accounting adjustments |
|
|
— |
|
|
|
— |
|
|
|
3 |
|
|
|
— |
|
Acquisition-related expenses |
|
|
1 |
|
|
|
1 |
|
|
|
2 |
|
|
|
1 |
|
Separation-related expenses |
|
|
— |
|
|
|
2 |
|
|
|
— |
|
|
|
3 |
|
Depreciation and amortization |
|
|
34 |
|
|
|
39 |
|
|
|
72 |
|
|
|
79 |
|
Interest expense-net |
|
|
18 |
|
|
|
16 |
|
|
|
38 |
|
|
|
33 |
|
Income tax expense (benefit) |
|
|
5 |
|
|
|
(2 |
) |
|
|
1 |
|
|
|
— |
|
Non-GAAP adjusted EBITDA |
|
$ |
77 |
|
|
$ |
82 |
|
|
$ |
130 |
|
|
$ |
147 |
|
39
The adjustments to arrive at non-GAAP adjusted EBITDA are summarized below:
|
• |
Restructuring, impairment and other charges-net: Refer to Results of Operations for the Three Months Ended June 30, 2018 as Compared to the Three Months Ended June 30, 2017 and Results of Operations for the Six Months Ended June 30, 2018 as Compared to the Six Months Ended June 30, 2017 for information on charges. |
|
• |
Purchase accounting adjustments: The six months ended June 30, 2018 included charges of $3 million as a result of purchase accounting inventory step-up adjustments and changes to purchase price allocations related to prior acquisitions. There were no charges during the three months ended June 30, 2018. |
|
• |
Acquisition-related expenses: The three and six months ended June 30, 2018 included charges of $1 million and $2 million, respectively, related to legal, accounting and other expenses associated with completed and contemplated acquisitions. There were $1 million in charges during each of the three and six months ended June 30, 2017. |
|
• |
Separation-related expenses: The three and six months ended June 30, 2017 included charges of $2 million and $3 million, respectively, for one-time transaction costs associated with becoming a standalone company. |
LIQUIDITY AND CAPITAL RESOURCES
The Company believes it has sufficient liquidity to support its ongoing operations and to invest in future growth to create value for its stockholders. Operating cash flows and the Company’s Revolving Credit Facility are the Company’s primary sources of liquidity and are expected to be used for, among other things, payments of interest and principal on the Company’s debt obligations, distributions to stockholders that may be approved by the Board of Directors, acquisitions, capital expenditures necessary to support productivity improvement and growth, and completion of restructuring programs.
The following sections describe the Company’s cash flows for the six months ended June 30, 2018 and 2017.
|
|
Six Months Ended June 30, 2018 |
|
|||||
|
|
2018 |
|
|
2017 |
|
||
Net cash (used in) provided by operating activities |
|
$ |
(26 |
) |
|
$ |
78 |
|
Net cash (used in) investing activities |
|
|
(32 |
) |
|
|
(32) |
|
Net cash provided by (used in) financing activities |
|
|
50 |
|
|
|
(47) |
|
Cash Flows from Operating Activities
Operating cash inflows are largely attributable to sales of the Company’s products. Operating cash outflows are largely attributable to recurring expenditures for raw materials, labor, rent, interest, taxes and other operating activities.
Net cash used in operating activities was $26 million for the six months ended June 30, 2018 compared to $78 million provided by operating activities for the same period in 2017. The decrease in net cash provided by operating activities was largely driven by the timing of customer and supplier payments and increase in inventories as a result of higher paper prices and facility consolidations to fulfill the demands for our products.
Cash Flows from Investing Activities
Net cash used in investing activities for each of the six months ended June 30, 2018 and 2017 was $32 million. Significant changes are as follows:
|
• |
Capital expenditures were $37 million for the six months ended June 30, 2018, an increase of $1 million compared to the same period in 2017; |
|
• |
Cash paid for acquisitions of businesses, net of cash acquired was impacted by purchase price adjustments resulting from finalization of working capital calculations in each period and the acquisition of HudsonYards in 2017; |
|
• |
Proceeds from the sales of other assets were $1 million for the six months ended June 30, 2018 and $6 million for the same period in 2017 which primarily related to the sale of land and a building; and |
|
• |
Net proceeds of $3 million related to the sales of investments for the six months ended June 30, 2017. |
40
Cash Flows from Financing Activities
Net cash provided by financing activities for the six months ended June 30, 2018 was $50 million compared to $47 million used in financing activities for the same period in 2017. Significant changes are as follows:
|
• |
The Company paid down $26 million of long-term debt and current maturities during the six months ended June 30, 2018, compared to $52 million for the prior period; |
|
• |
The Company received net proceeds from credit facility borrowings of $115 million for the six months ended June 30, 2018 and none in the prior period; |
|
• |
The Company paid $20 million to repurchase common stock during the six months ended June 30, 2018; |
|
• |
The Company received proceeds of $18 million for the issuance of common stock on March 28, 2017 in connection with the secondary offering of shares retained by RRD at the separation; and |
|
• |
The Company received $3 million in net cash payments from RRD related to the separation from RRD on October 1, 2016 during the six months ended June 30, 2017. |
Dividends
Cash dividends declared and paid to stockholders during the six months ended June 30, 2018 totaled $18 million. On July 19, 2018, the Board of Directors declared a quarterly cash dividend of $0.26 per common share, payable on September 5, 2018 to stockholders of record on August 15, 2018.
The Credit Agreement generally allows annual dividend payments of up to $50 million in aggregate, though additional dividends may be allowed subject to certain conditions. The timing, declaration, amount and payment of any future dividends to the Company’s stockholders falls within the discretion of the Company’s Board of Directors. The decisions of the Company’s Board of Directors regarding the payment of future dividends depends on many factors, including but not limited to the Company’s financial condition, future prospects, earnings, capital requirements and debt service obligations, as well as legal requirements, regulatory constraints, industry practice and other factors that the Board of Directors may deem relevant. In addition, the terms of the agreements governing the Company’s existing debt or debt that the Company may incur in the future may limit or prohibit the payment of dividends. There can be no assurance that the Company will continue to pay a dividend.
LIQUIDITY
Cash and cash equivalents were $22 million and $34 million as of June 30, 2018 and December 31, 2017, respectively.
The Company’s cash balances are held in several locations throughout the world, including amounts held outside of the United States. Cash and cash equivalents as of June 30, 2018 included $7 million in the U.S. and $15 million at international locations.
The Company maintains cash pooling structures that enable participating international locations to draw on the pools’ cash resources to meet local liquidity needs. Foreign cash balances may be loaned from certain cash pools to U.S. operating entities on a temporary basis in order to reduce the Company’s short-term borrowing costs or for other purposes. As of June 30, 2018, $15 million of international cash was loaned to U.S. operating entities.
Debt Issuances
On September 30, 2016, the Company issued $450 million of Senior Secured Notes (the “Senior Notes”).
On September 30, 2016 the Company entered into a credit agreement (the “Credit Agreement”) that provides for (i) a senior secured term loan B facility in an aggregate principal amount of $375 million (the “Term Loan Facility”) and (ii) a senior secured revolving credit facility in an aggregate principal amount of $400 million (the “Revolving Credit Facility”). The debt issuance costs and original issue discount are being amortized over the life of the facilities using the effective interest method.
The Credit Agreement is subject to a number of covenants, including, but not limited to, a minimum Interest Coverage Ratio and a Consolidated Leverage Ratio, as defined in and calculated pursuant to the Credit Agreement, that, in part, restrict the Company’s ability to incur additional indebtedness, create liens, engage in mergers and consolidations, make restricted payments and dispose of certain assets. The Credit Agreement generally allows annual dividend payments of up to $50 million in aggregate, though additional dividends may be allowed subject to certain conditions. Each of these covenants is subject to important exceptions and qualifications.
41
Term Loan Facility
On November 17, 2017, the Company amended the Credit Agreement to reduce the interest rate for the Term Loan Facility by 50 basis points and the LIBOR “floor” was also reduced by 25 basis points. Other terms, including the outstanding principal, maturity date and debt covenants were not amended. Select terms on the Term Loan Facility before and after amendment include:
|
Before Amendment |
After Amendment |
|
Interest rate (Company's option) |
Base rate + 5.00%; or LIBOR + 6.00% |
Base rate + 4.50%; or LIBOR + 5.50% |
|
LIBOR floor |
1.00% |
0.75% |
|
Amortization |
$13 million, first eight quarters; $11 million quarterly thereafter (as of original effective date) |
$13 million, first eight quarters; $11 million quarterly thereafter (as of original effective date) |
|
Maturity |
September 30, 2022 |
September 30, 2022 |
|
Under the terms of the Term Loan Facility, each of the syndicated lenders is deemed to have loaned a specific amount to the Company and has the right to repayment from the Company directly. Therefore, we concluded that the Term Loan Facility is a loan syndication under GAAP. As such, in order to determine whether the debt was modified or extinguished as a result of the amendment, we examined the amount of principal pre- and post-amendment by individual lender. As a result, we determined that $65 million of outstanding principal had been extinguished as of November 17, 2017, even though the total outstanding principal amongst all lenders pre- and post-amendment remained unchanged.
Consequently, the amendment resulted in a pre-tax loss on debt extinguishment of $3 million related to the unamortized discount and debt issuance costs attributable to the $65 million of outstanding principal that had been considered extinguished. There was no net impact as of November 17, 2017 to cash and cash equivalents, total outstanding principal remained unchanged, and no cash was exchanged between the lenders and the Company (other than customary administrative fees).
On February 2, 2017, the Company paid in advance the full amount of required amortization payments, $50 million, for the year ended December 31, 2017 for the Term Loan Facility.
Additional Debt Issuances Information
There were $190 million of borrowings under the Revolving Credit Facility as of June 30, 2018. Based on the Company’s condensed consolidated statements of operations for the six months ended June 30, 2018 and existing debt, the Company would have had the ability to utilize the entire $400 million Revolving Credit Facility and not have been in violation of the terms of the agreement. Availability under the Revolving Credit Facility was reduced by $190 million in borrowings and $40 million related to outstanding letters of credit.
The current availability under the Revolving Credit Facility and net availability as of June 30, 2018 is shown in the table below:
|
|
June 30, 2018 |
|
|
|
|
(in millions) |
|
|
Availability |
|
|
|
|
Stated amount of the Revolving Credit Facility |
|
$ |
400 |
|
Less: availability reduction from covenants |
|
|
— |
|
Amount available under the Revolving Credit Facility |
|
$ |
400 |
|
|
|
|
|
|
Usage |
|
|
|
|
Borrowings under the Revolving Credit Facility |
|
$ |
190 |
|
Impact on availability related to outstanding letters of credit |
|
|
40 |
|
|
|
$ |
230 |
|
|
|
|
|
|
Current availability at June 30, 2018 |
|
$ |
170 |
|
Cash |
|
|
22 |
|
Net Available Liquidity |
|
$ |
192 |
|
42
The Company was in compliance with its debt covenants as of June 30, 2018, and expects to remain in compliance based on management’s estimates of operating and financial results for 2018 and the foreseeable future. However, declines in market and economic conditions or demand for certain of the Company’s products could impact the Company’s ability to remain in compliance with its debt covenants in future periods. As of June 30, 2018, the Company’s leverage as defined in the Credit Agreement was 2.57, compared to a maximum permitted ratio under the Credit Agreement of 3.25, which steps down to 3.00 on March 31, 2019. The full definition of the Consolidated Leverage Ratio is included in the Credit Agreement filed as an exhibit to this quarterly report on Form 10-Q. As of June 30, 2018, the Company met all the conditions required to borrow under the Credit Agreement and management expects the Company to continue to meet the applicable borrowing conditions.
The failure of a financial institution supporting the Revolving Credit Facility would reduce the size of the Company’s committed facility unless a replacement institution were added. Currently, the Revolving Credit Facility is supported by fifteen U.S. and international financial institutions.
As of June 30, 2018, the Company had $40 million in outstanding letters of credit issued under the Revolving Credit Facility, all of which reduced the availability thereunder. As of June 30, 2018, the Company also had $16 million in other uncommitted credit facilities, all of which were outside the U.S. (the “Other Facilities”). As of June 30, 2018, letters of credit and guarantees of a de minimis amount were issued and reduced availability under the Other Facilities.
The Company’s debt maturities as of June 30, 2018 are shown in the following table:
|
|
Debt Maturity Schedule |
|
|||||||||||||||||||||||||
|
|
Total |
|
|
2018 |
|
|
2019 |
|
|
2020 |
|
|
2021 |
|
|
2022 |
|
|
Thereafter |
|
|||||||
Borrowings under the Credit Agreement |
|
$ |
477 |
|
|
$ |
213 |
|
|
$ |
43 |
|
|
$ |
43 |
|
|
$ |
43 |
|
|
$ |
135 |
|
|
$ |
— |
|
Senior secured notes |
|
|
450 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
450 |
|
Capital lease obligations |
|
|
3 |
|
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total (a) |
|
$ |
930 |
|
|
$ |
214 |
|
|
$ |
44 |
|
|
$ |
44 |
|
|
$ |
43 |
|
|
$ |
135 |
|
|
$ |
450 |
|
|
(a) |
Excludes unamortized debt issuance costs of $4 million and $7 million related to the Company’s Term Loan Facility and 8.75% Senior Notes due October 15, 2023, respectively, and a discount of $5 million related to the Company’s Term Loan Facility. These amounts do not represent contractual obligations with a fixed amount or maturity date. |
On July 2, 2018, the Company completed the acquisition of RRD’s Print Logistics business for $58 million in cash. The total purchase price was funded with a combination of cash on hand and drawings under the Revolving Credit Facility.
On June 5, 2018, the Company completed the sale of its retail offset printing facilities, which were included in the Company’s magazines, catalogs and retail inserts reporting unit, to Trend Offset Printing.
Other
On February 15, 2018, the Company’s Board of Directors approved an initial share repurchase authorization of up to $20 million of common stock under which the Company may buy back LSC Communications’ shares at its discretion from February 15, 2018 through August 15, 2019. The $20 million repurchase was completed on May 31, 2018.
MANAGEMENT OF MARKET RISK
The Company is exposed to interest rate risk on its variable debt and price risk on its fixed-rate debt. At June 30, 2018, the Company’s variable-interest borrowings were $477 million, or approximately 51.3%, of the Company’s total debt.
The Company assesses market risk based on changes in interest rates utilizing a sensitivity analysis that measures the potential loss in earnings, fair values and cash flows based on a hypothetical 10% change in interest rates. Using this sensitivity analysis, such changes would not have a material effect on interest income or expense and cash flows and would change the fair values of fixed-rate debt at June 30, 2018 by approximately $16 million.
43
The Company is exposed to the impact of foreign currency fluctuations in certain countries in which it operates. The exposure to foreign currency movements is limited in many countries because the operating revenues and expenses of its various subsidiaries and business units are substantially in the local currency of the country in which they operate. To the extent that borrowings, sales, purchases, revenues, expenses or other transactions are not in the local currency of the subsidiary, the Company is exposed to currency risk and may enter into foreign exchange forward contracts to hedge the currency risk. The Company is primarily exposed to the currencies of the Canadian dollar, Mexican peso and Polish Zloty. The Company does not use derivative financial instruments for trading or speculative purposes.
OTHER INFORMATION
Litigation and Contingent Liabilities
For a discussion of certain litigation involving the Company, see Note 8, Commitments and Contingencies, to the condensed consolidated financial statements.
New Accounting Pronouncements and Pending Accounting Standards
Recently issued accounting standards and their estimated effect on the Company’s condensed consolidated financial statements are also described in Note 16, New Accounting Pronouncements, and throughout the notes to the condensed consolidated financial statements.
CAUTIONARY STATEMENT
The Company has made forward-looking statements in this quarterly report on Form 10-Q that are subject to risks and uncertainties. These statements are based on the beliefs and assumptions of the Company. Generally, forward-looking statements include information concerning possible or assumed future actions, events, or results of operations of the Company.
These statements may include, or be preceded or followed by, the words “anticipates,” “estimates,” “expects,” “projects,” “forecasts,” “intends,” “plans,” “continues,” “believes,” “may,” “will,” “goals” or variations of such words and similar expressions. Examples of forward-looking statements include, but are not limited to, statements, beliefs and expectations regarding our business strategies, market potential, future financial performance, dividends, costs to be incurred in connection with the separation, results of pending legal matters, our goodwill and other intangible assets, price volatility and cost environment, our liquidity, our funding sources, expected pension contributions, capital expenditures and funding, our financial covenants, repayments of debt, off-balance sheet arrangements and contractual obligations, our accounting policies, general views about future operating results and other events or developments that we expect or anticipate will occur in the future. These forward-looking statements are subject to a number of important factors, including those factors disclosed in “Item 1A Risk Factors” in section Part I in the Company’s annual report on Form 10-K for the year ended December 31, 2017, as filed with the SEC on February 22, 2018, 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 competitive market for our products and industry fragmentation affecting our prices; |
|
• |
inability to improve operating efficiency to meet changing market conditions; |
|
• |
changes in technology, including electronic substitution and migration of paper based documents to digital data formats; |
|
• |
the volatility and disruption of the capital and credit markets, and adverse changes in the global economy; |
|
• |
the effects of global market and economic conditions on our customers; |
|
• |
the effect of economic weakness and constrained advertising; |
|
• |
uncertainty about future economic conditions; |
|
• |
increased competition as a result of consolidation among our competitors; |
44
|
• |
our ability to successfully integrate recent and future acquisitions; |
|
• |
factors that affect customer demand, including changes in postal rates, postal regulations, delivery systems and service levels, changes in advertising markets and customers’ budgetary constraints; |
|
• |
vulnerability to adverse events as a result of becoming a stand-alone company after separation from RRD, including the inability to obtain as favorable of terms from third-party vendors; |
|
• |
our ability to access debt and the capital markets due to adverse credit market conditions; |
|
• |
the effects of seasonality on our core businesses; |
|
• |
the effects of increases in capital expenditures; |
|
• |
changes in the availability or costs of key materials (such as paper, ink, energy, and other raw materials) or in prices received for the sale of by-products; |
|
• |
performance issues with key suppliers; |
|
• |
our ability to maintain our brands and reputation; |
|
• |
the retention of existing, and continued attraction of additional customers and key employees, including management; |
|
• |
the effect of economic and political conditions on a regional, national or international basis; |
|
• |
the effects of operating in international markets, including fluctuations in currency exchange rates; |
|
• |
changes in environmental laws and regulations affecting our business; |
|
• |
the ability to gain customer acceptance of our new products and technologies; |
|
• |
the effect of a material breach of or disruption to the security of any of our or our vendors’ systems; |
|
• |
the failure to properly use and protect customer and employee information and data; |
|
• |
the effect of increased costs of providing health care and other benefits to our employees; |
|
• |
the effect of catastrophic events; |
|
• |
potential tax liability of the separation; |
|
• |
the impact of the U.S. Tax Cuts and Jobs Act (“Tax Act”); |
|
• |
lack of history as an operating company and costs and other issues associated with being an independent company; |
|
• |
failure to achieve certain intended benefits of the separation; |
|
• |
failure of RRD or Donnelley Financial to satisfy their respective obligations under agreements entered into in connection with the separation; and |
|
• |
increases in requirements to fund or pay withdrawal costs or required contributions related to the Company’s pension plans. |
Because forward-looking statements are subject to assumptions and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. Undue reliance should not be placed on such statements, which speak only as of the date of this document or the date of any document that may be incorporated by reference into this document.
45
Consequently, readers of this quarterly report on Form 10-Q should consider these forward-looking statements only as the Company’s current plans, estimates and beliefs. The Company does not undertake and specifically declines any obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect future events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. The Company undertakes no obligation to update or revise any forward-looking statements in this quarterly report on Form 10-Q to reflect any new events or any change in conditions or circumstances.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations of Part I under “Management of Market Risk.” There have been no significant changes to the Company’s market risk since December 31, 2017. For a discussion of exposure to market risk, refer to Part II, Item 7A Quantitative and Qualitative Disclosures about Market Risk disclosed in the Company’s annual report on Form 10-K for the year ended December 31, 2017, as filed with the SEC on February 22, 2018.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15(b) and Rule 15d-15(e) of the Securities Exchange Act of 1934, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining effective disclosure controls and procedures, as defined under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. As of June 30, 2018 an evaluation was performed under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that disclosure controls and procedures as of June 30, 2018 were effective in ensuring information required to be disclosed in the Company’s SEC reports was recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information was accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended June 30, 2018 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
46
For a discussion of certain litigation involving the Company, see Note 8, Commitments and Contingencies, to the condensed consolidated financial statements.
There have been no material changes to the risk factors disclosed in the Company’s annual report on Form 10-K for the year ended December 31, 2017, as filed with the SEC on February 22, 2018.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
|
|
Total Number of Shares Purchased |
|
|
Average Price Paid per Share |
|
|
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
|
|
Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs |
|
||||
April 1 , 2018 - April 30, 2018 |
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
20,000,000 |
|
May 1, 2018 - May 31, 2018 |
|
|
1,632,190 |
|
|
|
12.23 |
|
|
|
1,632,190 |
|
|
$ |
— |
|
June 1, 2018 - June 30, 2018 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
$ |
— |
|
Total |
|
|
1,632,190 |
|
|
$ |
12.23 |
|
|
|
1,632,190 |
|
|
|
|
|
On February 15, 2018, the Company’s Board of Directors approved an initial share repurchase authorization of up to $20 million of common stock under which the Company may buy back LSC Communications’ shares at its discretion from February 15, 2018 through August 15, 2019. The Company completed the repurchase on May 31, 2018 from a combination of cash on hand, cash flow and borrowings under its $400 million Revolving Credit Facility.
Dividends
The Credit Agreement generally allows annual dividend payments of up to $50 million in aggregate, though additional dividends may be allowed subject to certain conditions. The decisions of the Company’s Board of Directors regarding the payment of future dividends depends on many factors, including but not limited to the Company’s financial condition, future prospects, earnings, capital requirements and debt service obligations, as well as legal requirements, regulatory constraints, industry practice and other factors that the Board of Directors may deem relevant.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable
47
48
49
101.INS |
XBRL Instance Document |
50
101.SCH |
XBRL Taxonomy Extension Schema Document |
101.CAL |
XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF |
XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB |
XBRL Taxonomy Extension Label Linkbase Document |
101.PRE |
XBRL Taxonomy Extension Presentation Linkbase Document |
___________________________
* Management contract or compensatory plan or arrangement
51
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
LSC COMMUNICATIONS, INC. |
||
|
|
|
By: |
|
/s/ ANDREW B. COXHEAD |
|
|
Andrew B. Coxhead |
|
|
Chief Financial Officer |
|
|
|
By: |
|
/s/ KENT A. HANSEN |
|
|
Kent A. Hansen |
|
|
Chief Accounting Officer and Controller |
Date: August 2, 2018
52
Exhibit 10.5
LSC Deferred Compensation Plan
Amended and Restated Effective as of August 1, 2018
LSC COMMUNICATIONS, INC.
NONQUALIFIED DEFERRED COMPENSATION PLAN
TABLE OF CONTENTS
Page
ARTICLE I |
PURPOSE |
1 |
||
|
|
|
||
ARTICLE II |
DEFINITIONS |
1 |
||
|
|
|
||
ARTICLE III |
ELIGIBILITY, ENROLLMENT, PARTICIPATION |
9 |
||
|
|
|
|
|
|
Section 3.1. |
Eligibility |
9 |
|
|
Section 3.2. |
Enrollment and Commencement of Participation |
9 |
|
|
Section 3.3. |
Termination of Eligibility |
10 |
|
|
|
|
||
ARTICLE IV |
DEFERRALS, COMPANY CONTRIBUTIONS, DEEMED INVESTMENTS, TAXES, ETC. |
11 |
||
|
|
|
|
|
|
Section 4.1. |
Participant Annual Deferral Amounts |
11 |
|
|
Section 4.2. |
Short Plan Year |
11 |
|
|
Section 4.3. |
Deferral Elections |
11 |
|
|
Section 4.4. |
Withholding and Crediting of Deferral Amounts |
12 |
|
|
Section 4.5. |
Leave of Absence |
13 |
|
|
Section 4.6. |
Company Contribution Amount |
13 |
|
|
Section 4.7. |
Vesting |
14 |
|
|
Section 4.8. |
Deemed Investments |
15 |
|
|
Section 4.9. |
No Crediting to Accounts After Distribution |
17 |
|
|
Section 4.10. |
FICA and Other Taxes |
17 |
|
|
Section 4.11. |
Spin-Off |
18 |
|
|
|
|
||
ARTICLE V |
RETIREMENT BENEFIT |
18 |
||
|
|
|
|
|
|
Section 5.1. |
Retirement Benefit |
18 |
|
|
Section 5.2. |
Time and Form of Retirement Benefit Payment |
19 |
|
|
|
|
||
ARTICLE VI |
SEPARATION FROM SERVICE BENEFIT |
19 |
||
|
|
|
|
|
|
Section 6.1. |
Separation from Service Benefit |
19 |
|
|
Section 6.2. |
Time and Form of Separation from Service Benefit Payment |
19 |
|
|
|
|
||
ARTICLE VII |
CHANGE IN CONTROL BENEFIT |
20 |
||
|
|
|
|
|
|
Section 7.1. |
Change in Control Benefit |
20 |
|
|
Section 7.2. |
Time and Form of Change in Control Benefit Payment |
21 |
-i-
|
|
|
||
ARTICLE VIII |
SCHEDULED DISTRIBUTIONS; UNFORESEEABLE EMERGENCY PAYMENTS |
21 |
||
|
|
|
|
|
|
Section 8.1. |
Scheduled Distributions |
21 |
|
|
Section 8.2. |
Other Payments Take Precedence Over Scheduled Distributions |
21 |
|
|
Section 8.3. |
Unforeseeable Emergency |
22 |
|
|
|
|
||
ARTICLE IX |
CHANGES IN THE FORM OR TIMING OF PAYMENTS |
23 |
||
|
|
|
|
|
|
Section 9.1. |
Election Changes |
23 |
|
|
Section 9.2. |
Other Changes |
23 |
|
|
|
|
||
ARTICLE X |
DEATH BENEFIT |
25 |
||
|
|
|
|
|
|
Section 10.1. |
Death Benefit |
25 |
|
|
Section 10.2. |
Payment of Death Benefit |
25 |
|
|
|
|
||
ARTICLE XI |
BENEFICIARY DESIGNATION |
25 |
||
|
|
|
|
|
|
Section 11.1. |
Beneficiary Designation |
25 |
|
|
Section 11.2. |
Spousal Consent |
26 |
|
|
Section 11.3. |
Acknowledgment |
26 |
|
|
Section 11.4. |
No Beneficiary Designation |
26 |
|
|
Section 11.5. |
Discharge of Obligations |
27 |
|
|
|
|
||
ARTICLE XII |
PLAN AMENDMENT, TERMINATION OR LIQUIDATION |
27 |
||
|
|
|
|
|
|
Section 12.1. |
Amendment |
27 |
|
|
Section 12.2. |
Termination and Liquidation of Plan |
27 |
|
|
Section 12.3. |
Effect of Payment |
30 |
|
|
|
|
||
ARTICLE XIII |
ADMINISTRATION |
30 |
||
|
|
|
|
|
|
Section 13.1. |
Benefits Committee |
30 |
|
|
Section 13.2. |
Administration Upon Change In Control |
31 |
|
|
Section 13.3. |
Agents |
31 |
|
|
Section 13.4. |
Binding Effect of Decisions |
31 |
|
|
Section 13.5. |
Indemnity |
32 |
|
|
Section 13.6. |
Employer Information |
32 |
|
|
|
|
||
ARTICLE XIV |
COORDINATION WITH OTHER BENEFITS |
32 |
||
|
|
|
||
ARTICLE XV |
CLAIMS AND APPEALS PROCEDURES |
33 |
||
|
|
|
|
|
|
Section 15.1. |
Authority to Submit Claims |
33 |
-ii-
|
Section 15.2. |
Procedure for Filing a Claim |
33 |
|
|
Section 15.3. |
Initial Claim Review |
33 |
|
|
Section 15.4. |
Claim Determination |
33 |
|
|
Section 15.5. |
Manner and Content of Notification of Adverse Determination of a Claim |
34 |
|
|
Section 15.6. |
Procedure for Filing an Appeal of an Adverse Determination |
34 |
|
|
Section 15.7. |
Appeal Procedure |
35 |
|
|
Section 15.8. |
Timing and Notification of the Determination of an Appeal |
35 |
|
|
Section 15.9. |
Manner and Content of Notification of Adverse Determination of Appeal |
36 |
|
|
Section 15.10. |
Delivery and Receipt |
36 |
|
|
Section 15.11. |
Limitation on Actions |
37 |
|
|
Section 15.12. |
Failure to Exhaust Administrative Remedies |
37 |
|
|
|
|
||
ARTICLE XVI |
TRUST |
37 |
||
|
|
|
|
|
|
Section 16.1. |
Establishment of the Trust |
37 |
|
|
Section 16.2. |
Investment of Trust Assets |
38 |
|
|
Section 16.3. |
Interrelationship of the Plan and the Trust |
38 |
|
|
Section 16.4. |
Distributions From the Trust |
38 |
|
|
|
|
||
ARTICLE XVII |
MISCELLANEOUS |
38 |
||
|
|
|
|
|
|
Section 17.1. |
Status of Plan |
38 |
|
|
Section 17.2. |
Unsecured General Creditor |
39 |
|
|
Section 17.3. |
Employer’s Liability |
39 |
|
|
Section 17.4. |
Nonassignability |
39 |
|
|
Section 17.5. |
Withholding for Taxes |
40 |
|
|
Section 17.6. |
Immunity of Benefits Committee Members |
40 |
|
|
Section 17.7. |
Not a Contract of Employment |
40 |
|
|
Section 17.8. |
Furnishing Information |
41 |
|
|
Section 17.9. |
Terms |
41 |
|
|
Section 17.10. |
Captions |
41 |
|
|
Section 17.11. |
Governing Law |
41 |
|
|
Section 17.12. |
Notice |
41 |
|
|
Section 17.13. |
Successors |
42 |
|
|
Section 17.14. |
Spouse’s Interest |
42 |
|
|
Section 17.15. |
Validity |
42 |
|
|
Section 17.16. |
Incompetent |
42 |
|
|
Section 17.17. |
Court Order |
43 |
|
|
Section 17.18. |
Insurance |
43 |
|
|
Section 17.19. |
Legal Fees To Enforce Rights After Change in Control |
43 |
-iii-
LSC COMMUNICATIONS, INC.
NONQUALIFIED DEFERRED COMPENSATION PLAN
(effective as of August 1, 2018)
The purpose of the Plan is to provide specified payments to a select group of management or highly compensated Employees who contribute materially to the continued growth, development and success of LSC Communications, Inc., a Delaware corporation, and its subsidiaries that participate in the Plan. The Plan shall be unfunded for tax purposes and for purposes of Title I of ERISA. Pursuant to the terms of the Separation and Distribution Agreement by and among R.R. Donnelley & Sons Company, LSC Communications, Inc. and Donnelley Financial Solutions, Inc. dated as of September 14, 2016 (the “Separation Agreement”), as of October 1, 2016 (the “Effective Date”) the Company assumed, and transferred to the Plan and Trust, all assets, liabilities and obligations of R.R. Donnelley & Sons Company accrued as of the Effective Date under the R.R. Donnelley & Sons Company Nonqualified Deferred Compensation Plan (the “RRD Plan”) with respect to any Transferred LSC Participant (as defined below).
For the purposes of the Plan, unless otherwise clearly apparent from the context, the following phrases or terms shall have the meanings set forth below.
2.1 |
“Account” shall mean an account established on the Company’s books and records on behalf of a Participant equal to the sum of the Participant’s (i) Deferral Account and (ii) Company Contribution Account. |
-1-
2.2 |
“Administrator” shall be the person appointed pursuant to Section 13.2 to administer the Plan upon a Change in Control. |
2.3 |
“Adverse Determination” means a Determination that is a denial, reduction or termination of, or a failure to provide or make payment (in whole or in part) with respect to a Claim, including any such denial, reduction, termination or failure to provide or make payment that is based on a determination of an Employee’s or former Employee’s eligibility to participate in the Plan. |
2.4 |
“Affiliate” shall mean (a) a corporation that is a member of the same controlled group of corporations (within the meaning of section 414(b) of the Code) as an Employer, (b) a trade or business (whether or not incorporated) under common control (within the meaning of section 414(c) of the Code) with an Employer, (c) any organization (whether or not incorporated) that is a member of an affiliated service group (within the meaning of section 414(m) of the Code) that includes (i) an Employer, (ii) a corporation described in clause (a) of this definition or (iii) a trade or business described in clause (b) of this definition, or (d) any other entity that is required to be aggregated with an Employer pursuant to regulations promulgated under section 414(o) of the Code by the U.S. Treasury Department. A corporation, trade or business or entity shall be an Affiliated employer only for such period or periods of time during which such corporation, trade or business or entity is described in the preceding sentence. |
2.6 |
“Annual Deferral Amount” shall mean that portion of a Participant’s Base Salary and Annual Bonus that the Participant defers for a Plan Year and is withheld from the Participant’s compensation in accordance with Article IV. |
2.7 |
“Appeal” shall mean a request by a Claimant to the Benefits Committee to review an Adverse Determination. |
-2-
amounts shall be considered Base Salary only to the extent that had there been no such plan, the amount would have been payable in cash to the Participant. |
2.9 |
“Beneficial Owner” shall have the meaning defined in Rule 13d-3 under the Securities Exchange Act of 1934. |
2.10 |
“Beneficiary” shall mean one or more persons, trusts, estates or other entities, designated in accordance with Article XI, entitled to receive benefits under the Plan upon the death of a Participant. |
2.11 |
“Benefits Committee” shall mean the committee described in Section 13.1. |
2.12 |
“Board” shall mean the board of directors of the Company. |
2.13 |
“Change in Control” shall be deemed to have occurred with respect to a Participant on the date the conditions set forth in any one of the following subparagraphs shall have been satisfied. |
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A Change in Control shall also occur if any of the four circumstances described in clause (a), (b), (c) or (d) above shall occur with respect to (i) the Company and any other corporation that is a direct or indirect owner of more than fifty percent (50%) of the total fair market value and total voting power of the Employer of the Participant or (ii) the corporation(s) that are liable for the payment of the Participant’s vested Account balance. The foregoing to the contrary notwithstanding, a Change in Control shall not occur with respect to a Participant if (i) a Potential Change in Control related to such Change in Control involves a publicly announced transaction or publicly announced proposed transaction which at the time of the announcement has not been previously approved by the Board and (ii) the Participant is part of the purchasing group proposing such a transaction. A Change in Control also shall not occur with respect to a Participant if he or she is part of a purchasing group that consummates the Change in Control transaction. A Participant shall be a part of the purchasing group for purposes of the two preceding sentences if he or she is an equity participant, or has agreed to become an equity participant, in the purchasing group (except for passive ownership of less than five percent (5%) of the equity of the purchasing group).
Notwithstanding the foregoing, the Benefits Committee shall interpret all provisions relating to a Change in Control in a manner that is consistent with applicable tax law.
2.14 |
“Change in Control Benefit” shall have the meaning set forth in Article VII. |
2.15 |
“Claim” shall mean an initial request to the Benefits Committee for a payment or for a request of a determination of eligibility to participate in the Plan. If the procedure described in Section 15.2 is not followed by a Claimant, then the Claimant’s request shall not be considered. |
2.16 |
“Claimant” shall have the meaning set forth in Section 15.1. |
2.17 |
“Code” shall mean the Internal Revenue Code of 1986, as amended from time to time. |
2.18 |
“Company” shall mean LSC Communications, Inc., a Delaware corporation, and any successor to all or substantially all of the Company’s assets or business. |
2.19 |
“Company Contribution Account” shall mean an account established on the Company’s books and records on behalf of a Participant to which amounts are credited in accordance with Section 4.6, as adjusted for earnings and losses and distributions made pursuant to the Plan. |
2.20 |
“Company Contribution Amount” shall mean, for any Plan Year, the amount described in Section 4.6. |
2.21 |
“Crediting Date” shall mean the date that is on or before the forty-fifth (45th) day occurring immediately after the end of the twelve-month period in which the annual compensation of a Participant is payable as set forth in the Participant’s employment agreement with an Employer. |
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2.23 |
“Determination” means the Claims Administrator’s decision with respect to a Claim or an Appeal. |
2.24 |
“Director” shall mean the Company’s Vice President, Benefits. In the event of the temporary absence of the Director, whether due to illness, disability or otherwise, or upon the resignation or removal of the Director, the individual who performs substantially similar duties with respect to the Plan (regardless of the individual’s title with the Company) shall be deemed to be the Director. |
2.25 |
“Distribution Date” shall mean the date on which a Participant’s Account balance shall become distributable. Subject to Section 9.2, the Distribution Date shall be: |
|
(c) |
notwithstanding Section 2.25(a) or (b), if (i) the Participant, as the case may be, has elected a Change in Control Benefit and (ii) a Change in Control occurs before his or her Separation from Service or Retirement, the date on which the Change in Control occurs; |
|
(d) |
notwithstanding Section 2.25(a) or (b), in the case of a Scheduled Distribution, the business day occurring immediately before the date of the Scheduled Distribution; or |
|
(e) |
if the Participant dies before the distribution of his or her Account balance occurs or commences, the date on which the Benefits Committee is provided with evidence satisfactory to the Benefits Committee of his or her death. |
2.26 |
“Election Form” shall mean the form established from time to time by the Benefits Committee that each Participant must complete, sign and return to the Benefits Committee in order to make a valid deferral and distribution election under the Plan. Initial investment elections applicable to such elective deferrals shall also be made on the Election Form. Such term shall also refer to any electronic means of making deferral or distribution elections that is approved by the Benefits Committee. |
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2.27 |
“Employee” shall mean an individual (i) whose employment relationship with an Employer is, under common law, that of an employee and (ii) who has not experienced a Separation from Service. |
2.28 |
“Employer” shall mean the Company or any subsidiary of the Company that participates in the Plan. |
2.29 |
“ERISA” shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time. |
2.30 |
“Measurement Fund” shall mean a common trust fund, mutual fund or other collective investment vehicle selected by the Benefits Committee to serve as a benchmark for determining the rate of return on a Participant’s Account, to the extent such account is deemed to be invested in such Measurement Fund in accordance with Section 4.8. |
2.31 |
“Participant” shall mean any Employee who satisfies the eligibility criteria established by the Benefits Committee to be eligible to participate in the Plan as a Participant and who has elected to participate in the Plan pursuant to Section 3.2(a). In connection with the spin-off and distribution of the Company by R.R. Donnelley & Sons Company (the “Spin-Off”) and pursuant to the terms of the Separation Agreement, each Employee as of the Effective Date who was participating in the RRD Plan as of the Effective Date (each, a “Transferred LSC Participant”) shall automatically become a Participant as of the Effective Date. |
2.32 |
“Person” shall have the meaning given in section 3(a)(9) of the Securities Exchange Act of 1934, as modified and used in sections 13(d) and 14(d) thereof; provided, however, that a Person shall not include (i) the Company or any of its Affiliates; (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its Affiliates; (iii) an underwriter temporarily holding securities pursuant to an offering of such securities; or (iv) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company. |
2.33 |
“Plan” shall mean the LSC Deferred Compensation Plan, effective as of August 1, 2018, which shall be evidenced by this instrument, as it may be amended from time to time. |
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such additional benefits or benefit limitations must be agreed to by both parties and be clearly set forth in such Plan Agreement. |
2.35 |
“Plan Year” shall mean a period beginning on January 1 of each calendar year and continuing through December 31 of such calendar year. |
2.36 |
“Potential Change in Control” shall be deemed to have occurred if the conditions set forth in any one of the following paragraphs shall have been satisfied: |
|
(a) |
the Employer of a Participant enters into an agreement, the consummation of which would result in the occurrence of a Change in Control; |
|
(b) |
the Employer of a Participant or any other Person publicly announces an intention to take or to consider taking actions which, if consummated, would constitute a Change in Control; or |
|
(c) |
any Person who is or becomes the Beneficial Owner, directly or indirectly, of securities of the Employer of a Participant representing 9.5% or more of the combined voting power of such Employer’s then outstanding securities increases such Person’s beneficial ownership of such securities by 5% or more over the percentage so owned by such Person on the date hereof. |
2.38 |
“Retirement” shall mean an Employee’s separation from service with the Employers, as described in Treasury Regulation § 1.409A-1(h), on or after age 55 with five Years of Service, for any reason other than a leave of absence or death. |
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Years after the end of the Plan Year to which the deferral election relates. For example, if a Participant elects a Scheduled Distribution of his or her Account balance attributable to the Annual Deferral Amount earned in the Plan Year commencing January 1, 2017, the earliest Plan Year that may be elected by the Participant for the Scheduled Distribution is 2021, and the Scheduled Distribution would become payable on January 1, 2021. |
2.40 |
“Separation from Service” shall mean an Employee’s separation from service with the Employers, as described in Treasury Regulation § 1.409A-1(h) or in Section 4.5, whichever is later, other than a Retirement. |
2.41 |
“Specified Employee” shall mean any individual who is determined to be a “specified employee” within the meaning of section 409A(a)(2)(B)(i) of the Code, in accordance with the terms of the document entitled “Section 409A: Policy of LSC Communications, Inc. and its Affiliates Regarding Specified Employees.” |
2.42 |
“Treasurer” shall mean the Treasurer of the Company. In the event of the temporary absence of the Treasurer, whether due to illness, disability or otherwise, or upon the resignation or removal of the Treasurer, the individual who performs substantially similar duties with respect to the Plan (regardless of the individual’s title with the Company) shall be deemed to be the Treasurer for purposes of the Plan. |
2.43 |
“Trust” shall mean one or more trusts established pursuant to the Master Trust Agreement dated as of September 6, 2016 between the Company and the Trustee. |
2.44 |
“Trustee” shall have the same meaning as that term is defined in the Trust, as amended from time to time. |
2.45 |
“Unforeseeable Emergency” shall mean a severe financial hardship to a Participant resulting from (i) an illness or accidental injury of such an individual or his or her spouse, dependent or Beneficiary, (ii) a loss of such Participant’s property due to casualty (or the need to rebuild a home following damage not otherwise covered by insurance), or (iii) other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of such Participant, all as determined in the sole discretion of the Benefits Committee. |
2.46 |
“Years of Service” shall mean the total number of full years in which a Participant has been employed by one or more Employers. For purposes of this definition, a year of employment shall be a 365-day period (or 366-day period in the case of a leap year) that, for the first year of employment, commences on the hire date of such Participant and that, for any subsequent year, commences on an anniversary of that hire date. The Benefits Committee may make a determination as to whether any partial year of employment of an Employee shall be counted as a Year of Service. If the Benefits Committee does not make a determination, partial years of employment shall be disregarded. |
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ARTICLE III
ELIGIBILITY, ENROLLMENT, PARTICIPATION
Section 3.1.Eligibility. The Benefits Committee shall establish criteria for participation in the Plan whereby a select group of management or highly compensated Employees will be eligible to participate in the Plan as Participants. Prior to the beginning of each Plan Year, the Benefits Committee shall determine which Employees, if any, shall be eligible to participate in the Plan for such Plan Year, and no Employees shall participate in the Plan for any Plan Year unless and until such determination is made.
Section 3.2.Enrollment and Commencement of Participation.
(a)Participants. An Employee who is eligible to participate in the Plan as a Participant who first elects to participate in the Plan for a Plan Year shall complete, execute and return to the Benefits Committee, no later than the date selected by the Benefits Committee in its sole discretion, an Election Form and a Beneficiary designation form before the first day of such Plan Year. The Employee shall indicate on the Election Form the percentages of his or her Base Salary and Annual Bonus, or both, that will be earned by the Employee in such Plan Year that he or she elects to defer the receipt thereof in accordance with his or her election and the terms of the Plan, including Section 4.3(a).
(b)Initial Eligibility. An Employee who first is selected to participate in the Plan after the first day of a Plan Year must complete the requirements described in Section 3.2(a) within 30 days after he or she first becomes eligible to participate in the Plan, or earlier, as may be required by the Benefits Committee, in its sole discretion, in order to participate in the Plan for such Plan Year. Such an Employee shall not be
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permitted to defer receipt of any portion of his or her compensation that is earned for services performed before the Employee commences participation in the Plan. In addition, the Benefits Committee shall establish from time to time such other enrollment requirements as it determines, in its sole discretion, are necessary or desirable.
(c)Commencement of Participation. Each Employee who enrolls in the Plan pursuant to Section 3.2 shall commence participation in the Plan on the date that the Benefits Committee determines, in its sole discretion, that the Employee has met all enrollment requirements set forth in the Plan and as required by the Benefits Committee, including returning all required documents to the Benefits Committee within the specified time period. If an Employee fails to meet all requirements contained in this Section 3.2 within the period required, then the Employee shall not be eligible to participate in the Plan during the relevant Plan Year.
Section 3.3.Termination of Eligibility. If the Benefits Committee determines that a Participant no longer qualifies as a member of a select group of management or highly compensated employees (within the meaning of sections 201(2), 301(a)(3) and 401(a)(1) of ERISA), then to the extent permitted under section 409A of the Code, the Benefits Committee shall (i) terminate any deferral election that such Participant has made for the remainder of the Plan Year in which the Benefits Committee makes such determination and (ii) take any further action that the Benefits Committee deems appropriate. In the event that a Participant becomes ineligible to defer compensation under the Plan, his or her Account balance shall continue to be governed by the terms of the Plan until such time as such Account balance is paid in accordance with the terms of the Plan.
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ARTICLE IV
DEFERRALS, COMPANY CONTRIBUTIONS, DEEMED INVESTMENTS, TAXES, ETC.
Section 4.1.Participant Annual Deferral Amounts. A Participant may elect to defer for a Plan Year the receipt of (i) any whole percentage of his or her Base Salary; or (ii) any whole percentage of his or her Annual Bonus; or (iii) both, provided that the percentage of Base Salary that may be deferred cannot exceed 50% of Base Salary and the percentage of Annual Bonus that may be deferred cannot exceed 90% of the Annual Bonus. The minimum Annual Deferral Amount is $2,000, in any combination of whole percentages of Base Salary and Annual Bonus. The Participant’s election shall apply to Base Salary earned in the Plan Year with respect to which the election applies and the Base Salary earned in the immediately succeeding Plan Year to the extent that the last payroll period beginning in the Plan Year to which the Participant’s election applies extends into such succeeding Plan Year.
Section 4.2.Short Plan Year. Notwithstanding Section 4.1, except the last sentence thereof, if an Employee becomes a Participant after the first day of a Plan Year, the minimum Annual Deferral Amount shall be an amount equal to $2,000, in any combination of whole percentages of Base Salary and Annual Bonus earned in the Plan Year multiplied by a fraction, the numerator of which is the number of complete months remaining in the Plan Year after the Employee becomes a Participant and the denominator of which is 12.
Section 4.3.Deferral Elections.
(a)First Plan Year. In connection with a Participant’s commencement of participation in the Plan, the Participant shall make an irrevocable election on an Election Form specifying the whole percentages of Base Salary or Annual Bonus or both (to the maximum percentages set forth in Section 4.1) for the Plan Year in which participation
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commences, earned after the date the election is made, that the Participant wishes to defer. Each Participant also shall specify on the Election Form the payment form in which his or her Account balance shall be paid on account of his or her Separation from Service and the form in which the payment shall be made on account of his or her Retirement. For an election to be valid, the Election Form must be completed and signed by the Participant, timely delivered to the Benefits Committee (in accordance with Section 3.2), and accepted by the Benefits Committee.
(b)Subsequent Plan Years. For each succeeding Plan Year with respect to which an Employee is a Participant, an irrevocable deferral election for such a Plan Year, and such other elections as the Benefits Committee deems necessary or desirable under the Plan, shall be made by timely delivering a new Election Form to the Benefits Committee, in accordance with its rules and procedures, before the end of the Plan Year preceding the Plan Year with respect to which the election applies with respect to an Employee. If no valid election applies with respect to an Employee for a Plan Year, then no compensation earned by the Employee in such Plan Year amount shall be deferred.
Section 4.4.Withholding and Crediting of Deferral Amounts. For each Plan Year, the Base Salary portion of a Participant’s Annual Deferral Amount shall be withheld from each of the Participant’s regularly scheduled Base Salary payments in substantially equal amounts, as adjusted from time to time for increases and decreases in his or her Base Salary, and a credit to the Participant’s Deferral Account shall be made equal to such amount on the applicable Base Salary payment date. The Annual Bonus portion of the Annual Deferral Amount shall be withheld on the date the Annual Bonus is or otherwise would be paid to the Participant, and a credit to the Participant’s Deferral Account shall be made equal to each amount on such date.
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(a)Paid Leave. If a Participant is authorized by his or her Employer to take a paid leave of absence from employment, the Annual Deferral Amount, as applicable, shall continue to be withheld during such paid leave of absence in accordance with Section 4.4 for a period not to exceed six months or, if longer, the period of such leave of absence as set forth in a written agreement between the Participant and his or her Employer. Upon the expiration of such relevant period, the Participant shall be deemed to have a Separation from Service if he or she has not returned to employment before such expiration.
(b)Unpaid Leave. If a Participant is authorized by his or her Employer to take an unpaid leave of absence from the employment of the Employer for any reason, his or her deferral election shall be cancelled for the remainder of the Plan Year. The Participant, as applicable, shall be deemed to have a Separation from Service six months after the beginning of such leave of absence if the duration of the leave is six months or longer, except that if the maximum period of the leave of absence is set forth in a written agreement between the Participant and his or her Employer, the Participant shall not have a Separation from Service due to the leave unless he or she does not return to work with an Employer before the expiration of the maximum leave of absence set forth in such agreement.
Section 4.6.Company Contribution Amount.
(a)Employment Agreements. For each Plan Year, the Company shall credit amounts to a Participant’s Company Contribution Account in accordance with an employment or other agreement entered into between such an individual and his or her
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Employer. If such an agreement provides that such amounts are subject to a vesting schedule, such amounts credited under the Plan shall be subject to such vesting schedule. Such amounts shall be credited to a Participant’s Company Contribution Account on the date or dates prescribed by the applicable agreement. If no Crediting Date is prescribed by an agreement, an amount deferred in a Plan Year shall be credited as of the last day of such Plan Year.
(b)Discretionary. For each Plan Year, the Company, in its sole discretion, may, but is not required to, credit any amount it desires to the Company Contribution Account of any Participant. The amount so credited may be smaller or larger than the amount credited to the Company Contribution Account of any other Participant, and the amount credited to any Participant’s Company Contribution Account for a Plan Year may be zero, even though one or more other Participants are credited with a Company Contribution Amount for that Plan Year. A Company Contribution Amount described in this Section 4.6(b), if any, shall be credited as of the last day of the Plan Year. If a Participant is not employed by an Employer as of the last day of a Plan Year, then the Company Contribution Amount for that Plan Year for such Participant shall be zero. Notwithstanding the previous sentence, if a Participant’s Retirement occurs within a Plan Year, or if he or she dies within a Plan Year, then a pro-rated portion of the Company Contribution Amount for that Plan Year for such Participant shall be credited as of the last day of the Plan Year.
Section 4.7.Vesting. Each Participant shall at all times be 100% vested in his or her Account(s).
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Section 4.8.Deemed Investments.
(a)Investment Elections. Each Participant in connection with his or her deferral elections pursuant to Section 4.3 shall elect on the Election Form the percentage, in increments of 1%, of his or her Annual Deferral Amount and Company Contribution Amount that shall be deemed to be invested in one or more Measurement Funds. If a Participant does not elect any Measurement Fund, such amounts credited to his or her Account(s) shall automatically be deemed invested in the lowest-risk Measurement Fund (the “default Measurement Fund”), as determined by the Benefits Committee in its sole discretion.
(b)Changing Investments. A Participant may elect, by use of any medium approved by the Benefits Committee, to change the portion of the balance of his or her Account(s) that is deemed to be invested in one or more Measurement Funds by specifying the whole percentage of such amounts or Account balances that is to be deemed invested in each Measurement Fund. Any such election shall apply as of the first business day deemed reasonably practicable by the Benefits Committee, in its sole discretion, and shall continue to apply thereafter for each subsequent day in which the Participant participates in the Plan, unless changed in accordance with the previous sentence.
(c)Selection of Measurement Funds. The Benefits Committee may, in its sole discretion, discontinue, substitute or add a Measurement Fund at any time. Each discontinuance, substitution or addition of a Measurement Fund shall take effect as of the first day of the first calendar month that begins at least 30 days after the day on which the
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Benefits Committee gives Participants written notice of such discontinuance, substitution or addition.
(d)Crediting or Debiting Method. The performance of each Measurement Fund (either positive or negative) shall be determined by the Director of Global Trust Investments, in its reasonable discretion, based on the performance of the investment vehicles upon which the Measurement Funds are based. In determining the value of each Measurement Fund, the Benefits Committee may establish the value of the Measurement Fund at a lower amount than the investment vehicle upon which such Measurement Fund is based to take into account expenses incurred in the administration of the Plan. Each Participant’s Account shall be credited or debited on each business day to the extent values are available for the investments upon which the Measurement Funds elected (or the default Measurement Fund deemed elected) by him or her are based.
(e)No Actual Investment. Notwithstanding any other provision of the Plan that may be interpreted to the contrary, the Measurement Funds are to be used for measurement purposes only and shall not be considered or construed in any manner as an actual investment of a Participant’s Account. In the event that the Company or the Trustee decides to invest funds of the Trust in any or all of the investments on which the Measurement Funds are based or in U.S. Treasury Notes with a maturity of five years, no Participant shall have any rights in or to such investments. Without limiting the foregoing, each Participant’s Account shall at all times be a bookkeeping entry only and shall not represent any investment made on his or her behalf by the Company or the Trust.
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(f)Unsecured Creditors. Participants shall at all times be unsecured creditors of the Employers.
Section 4.9.No Crediting to Accounts After Distribution. Notwithstanding any provision in the Plan to the contrary, should the complete distribution of a Participant’s Account balance occur before the date on which any amount would otherwise be credited to such Account, such amount, other than a Company Contribution Amount, shall be paid to the former Participant on or before the March 15th occurring immediately after the end of the Plan Year in which such amount would have been credited to the account. Any Company Contribution Amount that otherwise would have been credited to a Company Contribution Account of a Participant and any amount representing earnings that would otherwise have been credited to a Company Contribution Account or a Deferral Account after the Distribution Date shall be forfeited.
Section 4.10.FICA and Other Taxes.
(a)Annual Deferral Amounts. For each Plan Year in which an Annual Deferral Amount is being withheld from a Participant’s current compensation, the Participant’s Employer shall withhold, in a manner determined by the Company, from the Participant’s Base Salary and Annual Bonus that are not being deferred, as applicable, the Participant’s share of FICA and other taxes on such Annual Deferral Amount.
(b)Distributions. Each Participant’s Employer, or the Trustee, shall withhold from any payments under the Plan made to such Participant all federal, state and local income, employment and other taxes required to be withheld by the Employer or the Trustee, in connection with such payments, in amounts and in a manner to be determined in the sole discretion of the Company or the Trustee.
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Section 4.11.Spin-Off. Pursuant to the terms of the Separation Agreement, as of the Effective Date, the Company assumed, and transferred to the Plan and Trust, all assets, liabilities and obligations of R.R. Donnelley & Sons Company under the RRD Plan with respect to any Transferred LSC Participant, and any such obligations shall be administered and paid under the terms of this Plan; provided, however, that all deferral, investment and distribution elections made by such Transferred LSC Participants under the RRD Plan with respect to any Plan Year occurring prior to the Effective Date and the Plan Year in which the Effective Date occurs will continue to apply and shall be administered under this Plan. All service and compensation that would be taken into account for purposes of determining the amount of a Transferred LSC Participant’s benefit under the RRD Plan as of the Effective Date shall be taken into account for the same purposes under this Plan. For the avoidance of doubt, no Transferred LSC Participant shall be treated as incurring a Separation from Service, Retirement, or similar event for purposes of determining the right to a distribution, benefits or any other purpose under the Plan as a result of the Spin-Off or the transfer of the Transferred LSC Participant’s employment to the Company or any subsidiary of the Company. As of the Effective Date, the Plan shall assume and honor the terms of all domestic relations orders in effect under the RRD Plan in respect of Transferred LSC Participants.
Section 5.1.Retirement Benefit. Each Participant who has a Retirement shall be entitled to receive his or her Account balance calculated as of the close of business on the business day immediately preceding the Participant’s Distribution Date.
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Section 5.2.Time and Form of Retirement Benefit Payment. Each Participant, in connection with his or her commencement of participation in the Plan, shall elect on an Election Form to receive his or her Account balance on account of Retirement in a cash lump sum or pursuant to the Quarterly Installment Method for a maximum period of 15 years. Subject to Article IX, payment of a Participant’s Account balance on account of such Participant’s Retirement shall be made, or shall commence, within 60 days of the Distribution Date according to his or her direction on the most recently filed Election Form, provided that the conditions set forth in Article IX are satisfied, and provided further that if the amount of such Account, added together with the interests of the Participant, under all other plans and arrangements of the same type within the meaning of Treasury Regulation § 1.409A-1(c)(2), is not greater than the then applicable dollar limit under section 402(g)(1)(B) of the Code, then the Participant’s Account balance shall be paid in a cash lump sum on the applicable Distribution Date. If there is no valid election regarding the form of payment on account of Retirement (or the election does not satisfy the conditions set forth in Article IX), then the Account balance shall be paid, subject to Section 9.2, in a cash lump sum within 60 days of the applicable Distribution Date.
ARTICLE VI
SEPARATION FROM SERVICE BENEFIT
Section 6.1.Separation from Service Benefit. Each Participant who has a Separation from Service shall be entitled to receive his or her Account balance calculated as of the close of business on the business day immediately preceding the Participant’s Distribution Date.
Section 6.2.Time and Form of Separation from Service Benefit Payment. Each Participant, in connection with his or her commencement of participation in the Plan, shall elect
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on an Election Form to receive his or her Account balance on account of his or her Separation from Service in a cash lump sum or pursuant to the Quarterly Installment Method for a maximum period of five years. Subject to Article IX, payment of a Participant’s Account balance on account of his or her Separation from Service shall be made, or shall commence, within 60 days of the Distribution Date according to his or her direction on the most recently filed Election Form, provided that the conditions set forth in Article IX are satisfied, and provided further that if the amount of such Account added together with the interests of the Participant under all other plans and arrangements of the same type within the meaning of Treasury Regulation § 1.409A-1(c)(2), is not greater than the then applicable dollar limit under section 402(g)(1)(B) of the Code, then the Participant’s Account balance, shall be paid in a cash lump sum on the applicable Distribution Date. If there is no valid election regarding the form of payment on account of his or her Separation from Service (or the election does not satisfy the conditions set forth in Article IX), then the Account balance shall be paid, subject to Section 9.2, in a cash lump sum within 60 days of the applicable Distribution Date.
ARTICLE VII
CHANGE IN CONTROL BENEFIT
Section 7.1.Change in Control Benefit. Each Participant, in connection with his or her commencement of participation in the Plan, shall elect on an Election Form whether to (i) receive a Change in Control Benefit or (ii) have his or her Account balance remain in the Plan, subject to its terms and conditions, upon the occurrence of a Change in Control. If a Participant does not timely submit an election with respect to the payment of the Change in Control Benefit, then such Participant’s Account balance shall remain in the Plan upon a Change in Control and shall continue to be subject to the terms and conditions of the Plan.
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Section 7.2.Time and Form of Change in Control Benefit Payment. The Change in Control Benefit for a Participant shall be equal to the Participant’s Account balance, as applicable, calculated as of the close of business on the date of the Change in Control, and shall be paid in a cash lump sum within 60 days of the Participant’s Distribution Date.
ARTICLE VIII
SCHEDULED DISTRIBUTIONS; UNFORESEEABLE EMERGENCY PAYMENTS
Section 8.1.Scheduled Distributions. In connection with each election to defer an Annual Deferral Amount, a Participant may irrevocably elect to receive a Scheduled Distribution from the Plan with respect to all or a portion of such Annual Deferral Amount, adjusted for deemed earnings and losses. A Scheduled Distribution shall be paid in cash lump sum, calculated as of the close of business on the Distribution Date, in an amount equal to the portion of the Annual Deferral Amount that the Participant elected to have distributed in a Scheduled Distribution. Subject to the other terms and conditions of the Plan, including Section 9.2, each Scheduled Distribution shall be paid within 60 days of the date of the Distribution Date.
Section 8.2.Other Payments Take Precedence Over Scheduled Distributions. If a Distribution Date occurs that triggers a payment under Article V, VI, VII or X, or a payment is to be made pursuant to Section 8.3, then any amount subject to a Scheduled Distribution election shall not be paid in accordance with Section 8.1, to the extent it is payable pursuant to such other applicable Article or Section 8.3. If a payment on account of an Unforeseeable Emergency is to be made pursuant to Section 8.3, then to the extent necessary to satisfy the Unforeseeable Emergency, any amount subject to a Scheduled Distribution election shall not be paid in accordance with Section 8.1, but shall be paid in accordance with Section 8.3. Notwithstanding
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the foregoing, the Benefits Committee shall interpret this Section 8.2 in a manner that is consistent with applicable law.
Section 8.3.Unforeseeable Emergency.
(a)In General. A Participant who experiences an Unforeseeable Emergency may file a request with the Benefits Committee to receive a distribution, from his or her Account balance, equal to an amount reasonably necessary to satisfy his or her emergency financial need and pay any taxes and penalties reasonably anticipated as a result of the distribution. The Director, in his or her sole discretion, shall determine whether the Participant has experienced an Unforeseeable Emergency. The Benefits Committee shall not make a distribution on account of an Unforeseeable Emergency to the extent that the Director determines that the emergency need may be relieved through reimbursement or compensation from insurance or otherwise, by liquidation of the assets of the Participant (to the extent such liquidation would not cause severe financial hardship), or by cessation of the Participant’s deferrals under the Plan. In making his or her determination, the Director is not required to consider any amounts that are available under a tax-qualified plan (including any amount that may be available by obtaining a loan under such a plan) or under another nonqualified deferred compensation plan. The payment of any amount under this Section 8.3 shall be subject to Section 9.2. If the Director grants a request for a payment on account of an Unforeseeable Emergency, then the deferral election of the requesting Participant shall be cancelled for the remainder of the Plan Year or, if longer, for six months.
(b)Coordination with 401(k) Plan. Effective prior to January 1, 2019, if a Participant receives a hardship distribution within the meaning of Treasury Regulation
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§ 1.401(k)-1(d)(3) under the LSC Savings Plan or any other plan with a cash or deferred arrangement within the meaning of section 401(k) of the Code that is maintained by an Employer or an Affiliate, then his or her deferral election under the Plan shall be cancelled, and he or she shall not be permitted to defer any amounts under the Plan for a period of six months after the receipt of the hardship distribution. Effective prior to January 1, 2019, the Employee shall be again eligible to defer compensation under the Plan upon the expiration of such six-month period if he or she is then eligible to participate.
ARTICLE IX
CHANGES IN THE FORM OR TIMING OF PAYMENTS
Section 9.1.Election Changes. Each Participant may change the form or timing of a payment of his or her Account balance only in accordance with this Section 9.1. Such an individual who wishes to change the time or form of a previously elected payment must submit a new Election Form to the Benefits Committee, in accordance with any rules and procedures established by the Benefits Committee, at least 12 months before the payment would otherwise be made, except that any change in the form of Retirement payment must be made before the individual attains age 50. The first payment pursuant to a new election must be at least five years after the time the payment would otherwise have been made, and the new election shall have no effect until at least 12 months after the date on which such election is made.
(a)Section 162(m). The Company shall delay a payment to a Participant to the extent the Company reasonably anticipates that if the payment were made as scheduled, the Employer of such individual would not be permitted fully to deduct the
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payment under section 162(m) of the Code, provided that the payment is made, at the Company’s discretion, either (i) during the first taxable year of the individual in which the Company reasonably anticipates that the payment would be deductible for such year or (ii) during the period beginning with the date of the Separation from Service or Retirement of the individual and ending on the later of (w) the last day of the Employer’s taxable year in which the such Separation from Service or Retirement occurs and (x) the fifteenth day of the third month following such Separation from Service or Retirement. If a payment is delayed to a date on or after such Separation from Service or Retirement, however, and the individual is a Specified Employee on the date of his or her Separation from Service or Retirement, then the payment shall be treated as a payment on account of the his or her Separation from Service or Retirement. Thus, in the case of a delayed payment to such an individual, the payment shall be made during the period beginning with the date that is six months after such Separation from Service or Retirement and ending on the later of (y) the last day of the Employer’s taxable year in which occurs the last day of the sixth month period beginning on the date after such Separation from Service or Retirement and (z) the fifteenth day of the third month following the last day of the sixth month beginning on the date after such Separation from Service or Retirement. The Participant’s Account shall continue to be adjusted in accordance with Section 4.8 until it is fully paid.
(b)Payment upon Income Inclusion Under Section 409A. To the extent an amount deferred under the Plan is included in the income of a Participant as a result of a failure to comply with section 409A of the Code, the Plan shall distribute to the
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Participant, in the year of inclusion, an amount equal to the lesser of the amount included in his or her income and the amount of the Participant’s Account balance.
(c)Payments That Would Violate Applicable Law. If the Company reasonably anticipates that a payment would violate a federal securities law or other applicable law, then the payment shall be delayed until the earliest date the Company reasonably anticipates that the payment can be made without a violation of law.
Section 10.1.Death Benefit. In the case of a Participant who dies before his or her Account balance has been paid in full, his or her Beneficiary shall be entitled to receive the remainder of such Account balance, calculated as of the close of business of the business day immediately preceding the Distribution Date of such Participant.
Section 10.2.Payment of Death Benefit. The Death Benefit in respect of a Participant shall be paid to his or her Beneficiary in a cash lump sum within 60 days of the Distribution Date.
ARTICLE XI
BENEFICIARY DESIGNATION
Section 11.1.Beneficiary Designation. Each Participant shall have the right, at any time, to designate his or her Beneficiary (primary, as well as contingent) to receive his or her Account balance upon such Participant’s death. Each Participant shall designate his or her Beneficiary by completing and signing the Beneficiary designation form and returning it to the Benefits Committee or its designated agent. Each Participant shall have the right to change a Beneficiary by completing, signing, and otherwise complying with the terms of the Beneficiary
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designation form and the Benefits Committee’s rules and procedures, as in effect from time to time. If a Participant designates more than one person to be his or her primary Beneficiary and one or more of those persons predeceases such Participant, then the share of such deceased persons shall be allocated pro rata to such surviving persons.
Section 11.2.Spousal Consent. If a Participant names someone other than his or her spouse as a Beneficiary, then the Benefits Committee may, in its sole discretion, determine that spousal consent is required to be provided in a form designated by the Benefits Committee, executed by such spouse and returned to the Benefits Committee. Upon the acceptance by the Benefits Committee of a new Beneficiary designation form from a Participant, all Beneficiary designations previously filed by such Participant shall be canceled. The Benefits Committee shall be entitled to rely on the last Beneficiary designation form filed by a Participant and accepted by the Benefits Committee prior to his or her death.
Section 11.3.Acknowledgment. No designation or change in designation of a Beneficiary shall be effective until received and acknowledged in writing by the Benefits Committee or its designated agent.
Section 11.4.No Beneficiary Designation. If a Participant fails to designate a Beneficiary, or if no Beneficiary survives the Participant (or if no Beneficiary survives until the complete distribution of the Participant’s Account balance), then the Participant’s Beneficiary shall be deemed to be his or her surviving spouse. If the deceased Participant has no surviving spouse, then the Participant’s Account balance, as the case may be, shall be payable to the executor or personal representative of the deceased Participant’s estate.
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Section 11.5.Discharge of Obligations. The payment of a deceased Participant’s Account balance shall fully and completely discharge all Employers and the Benefits Committee from all obligations under the Plan with respect to such Participant.
ARTICLE XII
PLAN AMENDMENT, TERMINATION OR LIQUIDATION
Section 12.1.Amendment. The Company shall have the right, at any time, to amend the Plan in whole or in part by the action of its board of directors, its Human Resources Committee or the Benefits Committee; provided, however, that: (i) no amendment shall be effective to decrease the value of a Participant’s Account balance (the value of such balance(s) calculated as if the participant had experienced a Separation from Service as of the effective date of the amendment) and (ii) no amendment to this Section 12.1 or Section 13.2 after a Change in Control shall be effective, and provided further, that the Company’s Vice President, Benefits shall have the right to amend the Plan, but only to the extent that such amendment: (i) is required or deemed advisable as the result of legislation or regulation; (ii) concerns solely routine ministerial or administrative matters; or (iii) does not concern routine ministerial or administrative matters but does not materially increase any cost to any Employer. No amendment to the Plan shall affect any Participant or Beneficiary who has become entitled to the payments under the Plan on or before the earlier of (i) the date of the amendment and (ii) the effective date of the amendment.
Section 12.2.Termination and Liquidation of Plan. The Plan may be terminated and payments hereunder may be accelerated in connection with the termination of the Plan (such payment acceleration referred to herein as a “liquidation” of the Plan) only if the conditions of subsection (a), (b), (c) or (d) of this Section 12.2 are satisfied. Until 60 days before the Plan is
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completely liquidated, or such other time reasonably anticipated by the Benefits Committee to permit an orderly liquidation of the Plan, the Measurement Funds available to Participants immediately before the termination of the Plan shall be comparable in number and type to those Measurement Funds available in the Plan Year preceding the Plan Year in which the termination of the Plan becomes effective.
(a)Corporate Dissolution or Bankruptcy Court Approval. The Company may terminate and liquidate the Plan with respect to a Participants who are Employees of an Employer (i) within 12 months of the dissolution of such Employer that is taxed to stockholders under section 331 of the Code or (ii) with the approval of a bankruptcy court pursuant to 11 U.S.C. § 503(b)(1)(A), provided that all payments to each affected Participant are included in his or her gross income at the earlier of (x) the taxable year in which the payment is actually or constructively received by him or her and (y) the latest of the following: (1) the calendar year in which the Plan termination and liquidation occurs; (2) the first calendar year in which the amount of the payment is no longer subject to a substantial risk of forfeiture; and (3) the first calendar year in which the payment is administratively practicable.
(b)Change in Control. The Plan may be terminated and liquidated with respect to Participants who are Employees of an Employer that experiences a Change in Control at any time within 30 days before and 12 months after such Change in Control by the person who after the Change in Control is primarily liable for the payments under the Plan, provided that all plans, agreements and other arrangements that are of the same type (within the meaning of Treasury Regulation § 1.409A-1(c)(2)) as the Plan are terminated and liquidated with respect to each Participant affected by the Change in Control, and
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provided further that all such Participants receive all compensation deferred under the Plan and all plans, agreements, and other arrangements of the same type as the Plan within 12 months of the date all necessary actions to terminate and liquidate the Plan and such other plans, agreements, and arrangements are irrevocably taken by the person primarily responsible for the payments thereunder.
(c)No New Plan for Three Years. The Company may liquidate and terminate the Plan with respect to an Employer only if the following five conditions are satisfied: (i) there is not a downturn in the financial health of such Employer; (ii) all plans, programs, and arrangements of the same type (within the meaning of Treasury Regulation § 1.409A-1(c)(2)) as the Plan in which any Participant employed by such Employer participates are also terminated and liquidated; (iii) no payments are made under the Plan within 12 months following the date the Company terminates the Plan with respect to such Employer, other than payments that would be made if the Plan had not been terminated with the intent to liquidate the Plan; (iv) all payments are made within 24 months following the date of Plan termination; and (v) such Employer does not establish a new plan of the same type for those Employees of such Employer who had participated in the Plan within the three-year period following the date the Company takes all necessary action to terminate and liquidate the Plan with respect to such Employer.
(d)Other Permissible Events. The Company may terminate and liquidate the Plan upon any other event or condition that the Internal Revenue Service may provide in a regulation, ruling or notice or other publication in the Internal Revenue Bulletin.
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Section 12.3.Effect of Payment. The full payment of a Participant’s Account balance shall completely discharge all obligations to such Participant and his or her Beneficiary under the Plan, and the Participant’s Plan Agreement shall terminate.
Section 13.1.Benefits Committee. Except as otherwise provided in this Article XIII, the Plan shall be administered by the Benefits Committee.
(a)Members. The Treasurer and Director shall be members of the Benefits Committee. The Benefits Committee may appoint additional members to the Benefits Committee and may replace vacancies pursuant to procedures established in its by-laws.
(b)Benefits Committee Duties and Actions. The Benefits Committee shall have the authority to (i) make, amend, interpret and enforce all appropriate rules and regulations for the administration of the Plan; (ii) decide or resolve any and all questions, including interpretations of the Plan, as may arise in connection with the Plan; and (iii) take any action as may be required or advisable for the proper administration of the Plan. Any individual serving on the Benefits Committee who is a Participant shall not vote or act on any matter relating solely to himself or herself. When making a determination or calculation, the Benefits Committee shall be entitled to rely on information furnished by a Participant or the Company. Any action taken by the Benefits Committee with respect to any one or more Participants shall not be binding on the Benefits Committee as to any action to be taken with respect to any other Participant. Each determination required or permitted under the Plan shall be made by the Benefits Committee in its sole and absolute discretion. The members of the Benefits Committee may allocate their responsibilities
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and may designate any other person or committee, including employees of the Company, to carry out any of their responsibilities with respect to administration of the Plan.
Section 13.2.Administration Upon Change In Control. Upon and after the occurrence of a Change in Control, the Plan shall be administered by an independent third party selected by the Trustee and approved by the individual who, immediately prior to the Change in Control, was the Company’s highest ranking officer (the “Ex-CEO”). Such independent third party (the “Administrator”) shall have the discretionary power to determine all questions arising in connection with the administration of the Plan and the interpretation of the Plan and Trust including, but not limited to benefit entitlement determinations. Upon a Change in Control and for a period of three years thereafter, the Administrator may be terminated (and a replacement appointed) by the Trustee only with the approval of the Ex-CEO. Upon a Change in Control and for a period of three years thereafter, the Company may not terminate the services of the Administrator.
Section 13.3.Agents. In the administration of the Plan, the Benefits Committee or the Administrator, may from time to time employ agents and delegate to them such administrative duties as it sees fit (including acting through a duly appointed representative) and may from time to time consult with counsel who may be counsel to any Employer.
Section 13.4.Binding Effect of Decisions. Any decision or action of the Benefits Committee or the Administrator with respect to any matter arising out of or in connection with the administration, interpretation and application of the Plan shall be final, binding and conclusive upon all persons having any interest in the Plan and all persons claiming under any Participant, former Participant, or Beneficiary.
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Section 13.5.Indemnity. The Company shall: (i) pay all reasonable administrative expenses and fees of the Benefits Committee or the Administrator; and (ii) indemnify and hold harmless the Benefits Committee or the Administrator (or any agent or delegate of either the Benefits Committee or the Administrator) against any and all claims, losses, damages, costs, expenses and liabilities including, without limitation, attorney’s fees and expenses arising in connection with the performance of its duties hereunder, except with respect to matters resulting from the gross negligence or willful misconduct of the Benefits Committee, the Administrator, or the employees, delegates or agents of either.
Section 13.6.Employer Information. To enable the Benefits Committee or the Administrator to perform its functions, the Company and each Employer shall supply full and timely information to the Benefits Committee or the Administrator as requested, on all matters relating to the compensation of the Participants, the date and circumstances of the Retirement, disability, death or Separation from Service of the Participants, and such other pertinent information as the Benefits Committee or Administrator may reasonably require.
ARTICLE XIV
COORDINATION WITH OTHER BENEFITS
The benefits provided to a Participant or to his or her Beneficiary under the Plan are in addition to any other benefits available to such Participant or Beneficiary under any other plan or program for employees of such Participant’s Employer. The Plan shall supplement and shall not supersede, modify or amend any other such plan or program except as may otherwise be expressly provided.
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ARTICLE XV
CLAIMS AND APPEALS PROCEDURES
Section 15.1.Authority to Submit Claims. Any Participant or Beneficiary who believes that he or she is entitled to a payment under the Plan, including a payment greater than the payment initially determined by the Benefits Committee, may (or his or her duly authorized representative may) file a Claim in writing with the Benefits Committee. The Benefits Committee shall determine whether an individual is duly authorized to act on behalf of a Participant or Beneficiary in connection with the Claim and may establish reasonable procedures for making such a determination. Any such Participant, Beneficiary or duly authorized representative is referred to in the Plan as a Claimant.
Section 15.2.Procedure for Filing a Claim. In order for a communication from a Claimant to constitute a valid Claim, the communication must be delivered to the Benefits Committee in writing on the form designated by the Benefits Committee or in such other form as may be acceptable to the Benefits Committee.
Section 15.3.Initial Claim Review. The initial Claim review shall be conducted by the Benefits Committee, with or without the presence of the Claimant, as determined by the Benefits Committee in its discretion. The Benefits Committee shall consider the applicable terms and provisions of the Plan, information and evidence that is presented by the Claimant and any other information the Benefits Committee deems relevant. In reviewing the Claim, the Benefits Committee shall also consider determinations made within the immediately preceding 24 months of Claims of similarly situated Claimants.
Section 15.4.Claim Determination.
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(a)The Benefits Committee shall make a Determination regarding a Claim and notify the Claimant of such Determination within a reasonable period of time, but in any event (except as described in Section 15.4(b) below) within 90 days after the Benefits Committee receives the Claim.
(b)The Benefits Committee may extend the period for making a Determination to a maximum of 90 additional days if the Benefits Committee determines that circumstances require an extension of time. The Benefits Committee shall notify the Claimant before the end of the initial 90-day period of the circumstances requiring the extension of time and the date by which the Benefits Committee expects to render a Determination.
Section 15.5.Manner and Content of Notification of Adverse Determination of a Claim. The Benefits Committee shall provide a Claimant with written or electronic notice of an Adverse Determination. Such notice shall:
|
(i) |
specify the specific reason or reasons for the Adverse Determination; |
|
(ii) |
reference the specific provision(s) of the Plan on which the Adverse Determination is based; |
|
(iii) |
describe any additional material or information necessary for the Claimant to perfect the Claim and explain of why such material or information is necessary; and |
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(iv) |
describe the Plan’s appeal procedure and the time limits applicable to such procedure, and include a statement describing the Claimant’s right to bring a civil action under section 502(a) of ERISA after an Adverse Determination of an appeal of a Claim. |
Section 15.6.Procedure for Filing an Appeal of an Adverse Determination. In order for a communication from a Claimant to constitute a valid appeal, the communication must be submitted by a Claimant in writing on the form designated by the Benefits Committee, or in such other form as may be acceptable to the Benefits Committee, and delivered to the Benefits
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Committee within 60 days of the Claimant’s receipt of the notice of the Adverse Determination on the Claim. If the Benefits Committee does not receive a valid appeal within 60 days of the delivery to the Claimant of the notice of the Adverse Determination for the related Claim, the Claimant shall be barred from filing an appeal of such Claim, and he or she shall be deemed to have failed to exhaust all administrative remedies under the Plan.
Section 15.7.Appeal Procedure. An appeal of an Adverse Determination shall be conducted by the Benefits Committee, with or without the presence of the Claimant, as determined by the Benefits Committee in its discretion. The Benefits Committee shall consider the applicable terms and provisions of the Plan, information and evidence that is presented by the Claimant (including all comments, documents, records and other information submitted by the Claimant without regard to whether such information was submitted or considered in the initial Determination) and any other information the Benefits Committee deems relevant. The Claimant shall be provided, upon request and free of charge, reasonable access to and copies of all relevant documents and shall be allowed to submit any supporting comments, documents, records and other information.
Section 15.8.Timing and Notification of the Determination of an Appeal.
(a)The Benefits Committee shall make a Determination regarding an appeal and notify the Claimant of its Determination within a reasonable period of time, but in any event (except as described in Section 15.8(b) below) within 60 days after the Benefits Committee receives the appeal.
(b)The Benefits Committee may extend the period for making the Determination of the appeal of a denied Claim to a maximum of 60 additional days if the Benefits Committee determines that circumstances require an extension of time. The
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Benefits Committee shall notify the Claimant before the end of the initial 60-day period of the circumstances requiring the extension of time and the date by which the Benefits Committee expects to render a decision. If such an extension is due to a failure of the Claimant to submit information necessary to decide the appeal, the period in which the Benefits Committee is required to make a decision shall be tolled by the Benefits Committee from the date on which the Benefits Committee notifies the Claimant until the date the Benefits Committee has received the requested information from the Claimant. If the Claimant fails to respond to the Benefits Committee’s request for additional information within a reasonable time, the Benefits Committee may, in its discretion, render a Determination on the appeal based on the record before the Benefits Committee.
Section 15.9.Manner and Content of Notification of Adverse Determination of Appeal. The Benefits Committee shall provide a Claimant with written or electronic notice of any Adverse Determination of an appeal of a denial of a Claim. Such notice shall:
|
(i) |
specify the reason or reasons for the Adverse Determination; |
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(ii) |
reference the specific provision(s) of the Plan on which the Adverse Determination is based; |
|
(iii) |
state that the Claimant is entitled to receive, upon request and free of charge, reasonable access to and copies of all relevant documents; and |
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(iv) |
state that the Claimant has a right to bring a civil action under section 502(a) of ERISA. |
Section 15.10.Delivery and Receipt. For purposes of the Article XV, any notice, Claim or document may be delivered in person; provided, however, that any notice sent by the Benefits Committee related to a Claim may be sent by facsimile or by electronic mail if there is a verifiable confirmation that such notice was received and the facsimile or electronic mail is followed by a hard copy sent by next business day courier service no later than the next business
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day. Any Claim or document sent to a Claimant shall be sent to the Claimant’s last known address. Any Claim or document that satisfies the requirements described in this Section 15.10 shall be deemed delivered and received on the earliest of (a) the date of its actual receipt, if receipt is evidenced in writing; (b) 10 days after deposit in the United States Mail, first class postage prepaid and return receipt requested; and (c) the date of confirmation of successful transmission of a facsimile or electronic mail. If the requirements described in this Section 15.10 are not satisfied, then the notice, Claim or document shall be deemed not delivered or received and not be effective.
Section 15.11.Limitation on Actions. No legal action, including without limitation any lawsuit, may be brought by a Claimant more than two years after the date the Claimant has received an Adverse Determination of his or her appeal of a Claim denial.
Section 15.12.Failure to Exhaust Administrative Remedies. No legal action may be brought by a Claimant who has not timely filed a Claim and an appeal of the denial of such Claim and otherwise exhausted all administrative remedies under the Plan.
Section 16.1.Establishment of the Trust. The Company shall maintain the Trust, and each Employer shall at least annually transfer over to the Trust such assets as the Company determines, in its sole discretion, are necessary to provide for the Employer’s liabilities created with respect to the Annual Deferral Amounts and Company Contribution Amounts for such Employer’s Participants, taking into consideration the value of the assets in the Trust attributable to such Employer’s liabilities at the time of the transfer.
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Section 16.2.Investment of Trust Assets. The Trustee of the Trust shall be authorized, upon written instructions received from the Benefits Committee or investment manager appointed by the Benefits Committee, to invest and reinvest the assets of the Trust in accordance with the Trust Agreement.
Section 16.3.Interrelationship of the Plan and the Trust. The provisions of the Plan shall govern the rights of each Participant to receive distributions pursuant to the Plan. The provisions of the Trust shall govern the rights of the Employers and the creditors of the Employers to the assets transferred to the Trust. Each Employer shall at all times remain liable to carry out its obligations under the Plan and Trust.
Section 16.4.Distributions From the Trust. Each Employer’s obligations under the Plan may be satisfied with Trust assets distributed pursuant to the terms of the Trust, and any such distribution shall reduce the Employer’s obligations under the Plan.
Section 17.1.Status of Plan. The Plan is intended to be a plan that is not qualified within the meaning of section 401(a) of the Code and that “is unfunded and is maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees” within the meaning of sections 201(2), 301(a)(3) and 401(a)(1) of ERISA. The Plan is also intended to comply with section 409A of the Code and the regulations promulgated thereunder. The Plan shall be administered and interpreted to the extent possible in a manner consistent with the intent expressed in this Section 17.1.
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Section 17.2.Unsecured General Creditor. Participants and their Beneficiaries, heirs, successors and assigns shall have no legal or equitable rights, interests or claims in any property or assets of any Employer. For purposes of the payment of benefits under the Plan, any and all of an Employer’s assets shall be, and remain, the general, unpledged unrestricted assets of the Employer. An Employer’s obligation under the Plan shall be merely that of an unfunded and unsecured promise to pay money in the future, and Participants and their Beneficiaries, heirs, successors and assigns shall at all times be unsecured creditors of the Employers.
Section 17.3.Employer’s Liability. An Employer’s liability for the payment of benefits shall be defined by only the Plan and the Plan Agreements. An Employer shall have no obligation to a Participant or any Beneficiary under the Plan except as expressly provided in the Plan or in a Plan Agreement.
Section 17.4.Nonassignability. No Participant, Beneficiary or any other person shall have any right to commute, sell, assign, transfer, pledge, anticipate, mortgage or otherwise encumber, transfer, hypothecate, alienate or convey in advance of actual receipt, the amounts payable hereunder or any part thereof, which are, and all rights to which are expressly declared to be, unassignable and non-transferable. No part of the amounts payable shall, prior to actual payment, be subject to seizure, attachment, garnishment or sequestration for the payment of any debts, judgments, alimony or separate maintenance owed by a Participant, Beneficiary or any other person, be transferable by operation of law in the event of his or her bankruptcy or insolvency or be transferable to a spouse as a result of a property settlement or otherwise. Any attempt to commute, sell, assign, transfer, pledge, anticipate, mortgage or otherwise encumber, transfer, hypothecate, alienate or convey in advance of actual receipt, except as specifically permitted under the Plan, shall be null and void and without legal effect.
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Section 17.5.Withholding for Taxes. Notwithstanding anything contained in the Plan to the contrary, the Employers shall withhold from payments to be made under the Plan such amount or amounts as may be required for purposes of complying with the tax withholding provisions of the Code or any applicable State law for purposes of paying any tax attributable to any amounts payable or creditable under the Plan. The Company may reduce a Participant’s Account in the amount of employment taxes payable with respect to compensation deferred before the Participant’s Separation from Service.
Section 17.6.Immunity of Benefits Committee Members. The members of the Benefits Committee may rely upon any information, report or opinion supplied to them by any officer of the Company or any legal counsel, independent public accountant or actuary, and shall be fully protected in relying upon any such information, report or opinion. No member of the Benefits Committee shall have any liability to the Company or any Participant, former Participant, any Beneficiary, or to any person claiming under or through any Participant, former Participant, or any Beneficiary or other person interested or concerned in connection with any decision made by such member of the Benefits Committee pursuant to the Plan which was based upon any such information, report or opinion if such member of the Benefits Committee relied thereon in good faith.
Section 17.7.Not a Contract of Employment. The terms and conditions of the Plan shall not be deemed to constitute a contract of employment between any Employer and a Participant. Employment of a Participant is hereby acknowledged to be an “at will” employment relationship that can be terminated at any time for any reason or no reason, with or without cause, and with or without notice, unless expressly provided otherwise in a written employment agreement. Nothing in the Plan shall be deemed to give a Participant the right to be retained in
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the service of any Employer or to interfere with the right of any Employer to discipline or discharge the Participant at any time.
Section 17.8.Furnishing Information. A Participant or his or her Beneficiary will cooperate with the Benefits Committee by furnishing any and all information requested by the Benefits Committee and take such other actions as may be requested in order to facilitate the administration of the Plan and payments hereunder, including but not limited to taking such physical examinations as the Benefits Committee may deem necessary in connection with the purchase of insurance, as described in Section 17.18.
Section 17.9.Terms. Whenever any words are used herein in the masculine, they shall be construed as though they were in the feminine in all cases where they would so apply. Whenever any word is used herein in the singular, it shall be construed as though it was used in the plural, in all cases where it would reasonably so apply; and whenever any word is used herein in the plural, it shall be construed as though it was used in the singular, in all cases where it would so reasonably apply.
Section 17.10.Captions. The captions of the articles, sections and paragraphs of the Plan are for convenience only and shall not control or affect the meaning or construction of any of its provisions.
Section 17.11.Governing Law. The provisions of the Plan shall be construed and interpreted according to the internal laws of the State of Illinois without regard to its conflicts of laws principles, to the extent not preempted by any applicable federal law.
Section 17.12.Notice. Any notice or filing required or permitted to be given to the Benefits Committee under the Plan shall be sufficient if in writing and hand-delivered, or sent by registered or certified mail, to the address below:
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Attn: Vice President, Benefits
Suite 1400
191 N. Wacker Drive
Chicago, IL 60606
Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark on the receipt for registration or certification.
Any notice or filing required or permitted to be given to a Participant, any former Participant, or any Beneficiary under the Plan shall be sufficient if in writing and hand-delivered, or sent by mail, to his or her last known address.
Section 17.13.Successors. The provisions of the Plan shall bind and inure to the benefit of the Employers and their successors and assigns and to the Participants and their Beneficiaries.
Section 17.14.Spouse’s Interest. The interest in the benefits hereunder of a spouse of a Participant who has predeceased such Participant shall automatically pass to the Participant, as applicable, and shall not be transferable by such spouse in any manner, including but not limited to such spouse’s will, nor shall such interest pass under the laws of intestate succession.
Section 17.15.Validity. In case any provision of the Plan shall be illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining parts hereof, but the Plan shall be construed and enforced as if such illegal or invalid provision had never been inserted herein.
Section 17.16.Incompetent. If the Benefits Committee determines in its discretion that a payment under the Plan is to be made to a minor, a person declared incompetent, or a person incapable of handling the disposition of such person’s property, the Benefits Committee may direct that such payment be made to the guardian, legal representative or person having the care and custody of such minor, incompetent, or incapable person. The Benefits Committee may
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require proof of minority, incompetence, incapacity, or guardianship, as it may deem appropriate prior to such payment. Any payment made shall be for the account of the Participant or his or her Beneficiary, and shall be a complete discharge of any liability under the Plan for such payment.
Section 17.17.Court Order. The Benefits Committee is authorized to comply with any court order in any action in which the Plan or the Benefits Committee has been named as a party, including any action involving a determination of a Participant’s rights or interests under the Plan. Notwithstanding the foregoing, the Benefits Committee shall interpret this provision in a manner that is consistent with applicable tax law, including but not limited to guidance issued after the effective date of the Plan or any amendment or restatement thereof.
Section 17.18.Insurance. The Employers, on their own behalf or on behalf of the Trustee, and, in their sole discretion, may apply for and procure insurance on the life of a Participant, in such amounts and in such forms as the Trust may choose. The Employers or the Trustee, as the case may be, shall be the sole owner and beneficiary of any such insurance. Such Participant shall have no interest whatsoever in any such policy or policies, and at the request of his or her Employer shall submit to medical examinations and supply such information and execute such documents as may be required by the insurance company or companies to whom the Employers have applied for insurance.
Section 17.19.Legal Fees To Enforce Rights After Change in Control. The Company and each Employer are aware that upon the occurrence of a Change in Control, the Board or the board of directors of an Employer (which might then be composed of new members) or a shareholder of the Company or an Employer, or of any successor corporation might then cause or attempt to cause the Company, an Employer or such successor to refuse to comply with its
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obligations under the Plan and might cause or attempt to cause the Company or an Employer to institute, or may institute, litigation seeking to deny Participants the payments intended under the Plan. In these circumstances, the purpose of the Plan could be frustrated. Accordingly, if following a Change in Control, it should appear to any Participant that the Company, the Participant’s Employer, or any successor corporation has failed to comply with any of its obligations under the Plan or any Plan Agreement thereunder, or if the Company, such Employer, or any other person takes any action to declare the Plan void or unenforceable or institutes any litigation or other legal action designed to deny, diminish, or recover from any Participant the payments intended to be provided, then the Company and the Participant’s Employer irrevocably authorize such Participant to retain counsel of his or her choice at the expense of the Company and the Participant’s Employer (which shall be jointly and severally liable) to represent such Participant in connection with the initiation or defense of any litigation or other legal action, whether by or against the Company, the Participant’s Employer, or any director, officer, shareholder, or other person affiliated with the Company, the Participant’s Employer, or any successor thereto in any jurisdiction.
IN WITNESS WHEREOF, the Company has signed this Plan document as of August 1, 2018.
LSC Communications, Inc.
By: /s/ Margery F. Rodino
Title: Vice President, Benefits
LSC Communications US, LLC
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Exhibit 31.1
Certification Pursuant to Rule 13a-14(a) and Rule 15d-14(a)
of the Securities Exchange Act of 1934
I, Thomas J. Quinlan, III, certify that:
1. |
I have reviewed this Quarterly Report on Form 10-Q of LSC Communications, Inc.; |
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
(a) |
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
(b) |
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
(c) |
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
(d) |
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
|
(a) |
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
|
(b) |
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: August 2, 2018
/s/ THOMAS J. QUINLAN, III |
Thomas J. Quinlan, III Chairman and Chief Executive Officer |
Exhibit 31.2
Certification Pursuant to Rule 13a-14(a) and Rule 15d-14(a)
of the Securities Exchange Act of 1934
I, Andrew B. Coxhead, certify that:
1. |
I have reviewed this Quarterly Report on Form 10-Q of LSC Communications, Inc.; |
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
(a) |
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
(b) |
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
(c) |
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
(d) |
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
|
(a) |
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
|
(b) |
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: August 2, 2018
/s/ ANDREW B. COXHEAD |
Andrew B. Coxhead Chief Financial Officer |
Exhibit 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
CERTIFICATION PURSUANT TO RULE 13a-14(b) OR RULE 15d-14(b)
AND SECTION 1350 OF CHAPTER 63 OF TITLE 18
OF THE UNITED STATES CODE (18 U.S.C. 1350),
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of LSC Communications, Inc. (the “Company”) on Form 10-Q for the period ended June 30, 2018 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Thomas J. Quinlan, III, Chairman and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
|
(1) |
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
|
(2) |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
August 2, 2018
/s/ THOMAS J. QUINLAN, III |
Thomas J. Quinlan, III |
Chairman and Chief Executive Officer |
Exhibit 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
CERTIFICATION PURSUANT TO RULE 13a-14(b) OR RULE 15d-14(b)
AND SECTION 1350 OF CHAPTER 63 OF TITLE 18
OF THE UNITED STATES CODE (18 U.S.C. 1350),
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of LSC Communications (the “Company”) on Form 10-Q for the period ended June 30, 2018 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Andrew B. Coxhead, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
|
(1) |
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
|
(2) |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
August 2, 2018
/s/ ANDREW B. COXHEAD |
Andrew B. Coxhead |
Chief Financial Officer |
Document and Entity Information - shares |
6 Months Ended | |
---|---|---|
Jun. 30, 2018 |
Jul. 27, 2018 |
|
Document And Entity Information [Abstract] | ||
Document Type | 10-Q | |
Amendment Flag | false | |
Document Period End Date | Jun. 30, 2018 | |
Document Fiscal Year Focus | 2018 | |
Document Fiscal Period Focus | Q2 | |
Trading Symbol | LKSD | |
Entity Registrant Name | LSC Communications, Inc. | |
Entity Central Index Key | 0001669812 | |
Current Fiscal Year End Date | --12-31 | |
Entity Filer Category | Large Accelerated Filer | |
Entity Common Stock, Shares Outstanding | 33,371,218 |
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (Parenthetical) - USD ($) $ in Millions |
Jun. 30, 2018 |
Dec. 31, 2017 |
---|---|---|
Statement Of Financial Position [Abstract] | ||
Receivables, allowance for doubtful accounts | $ 15 | $ 11 |
Common stock, par value | $ 0.01 | $ 0.01 |
Common stock, Authorized | 65,000,000 | 65,000,000 |
Common stock, Issued | 34,882,123 | 34,610,931 |
Treasury stock, shares | 1,834,161 | 100,256 |
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) - USD ($) shares in Millions, $ in Millions |
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2018 |
Jun. 30, 2017 |
Jun. 30, 2018 |
Jun. 30, 2017 |
|
Income Statement [Abstract] | ||||
Net sales | $ 943 | $ 848 | $ 1,872 | $ 1,669 |
Type of Revenue [Extensible List] | lksd:ProductAndServicesMember | lksd:ProductAndServicesMember | lksd:ProductAndServicesMember | lksd:ProductAndServicesMember |
Cost of sales | $ 798 | $ 705 | $ 1,606 | $ 1,397 |
Type of Cost, Good or Service [Extensible List] | lksd:ProductAndServicesMember | lksd:ProductAndServicesMember | lksd:ProductAndServicesMember | lksd:ProductAndServicesMember |
Selling, general and administrative expenses (exclusive of depreciation and amortization) | $ 82 | $ 76 | $ 165 | $ 152 |
Restructuring, impairment and other charges-net (Note 7) | 11 | 21 | 17 | 27 |
Depreciation and amortization | 34 | 39 | 72 | 79 |
Income from operations | 18 | 7 | 12 | 14 |
Interest expense-net | 18 | 16 | 38 | 33 |
Investment and other (income)-net | (13) | (12) | (24) | (23) |
Income (loss) before income taxes | 13 | 3 | (2) | 4 |
Income tax expense (benefit) | 5 | (2) | 1 | 0 |
Net income (loss) | $ 8 | $ 5 | $ (3) | $ 4 |
Net earnings (loss) per common share (Note 11): | ||||
Basic net earnings (loss) per share | $ 0.24 | $ 0.13 | $ (0.09) | $ 0.11 |
Diluted net earnings (loss) per share | 0.23 | 0.12 | (0.09) | 0.11 |
Dividends declared per common share | $ 0.26 | $ 0.25 | $ 0.52 | $ 0.50 |
Weighted average number of common shares outstanding: | ||||
Basic | 34.0 | 33.5 | 34.3 | 33.1 |
Diluted | 34.3 | 33.8 | 34.3 | 33.4 |
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) - USD ($) $ in Millions |
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2018 |
Jun. 30, 2017 |
Jun. 30, 2018 |
Jun. 30, 2017 |
|
Statement Of Income And Comprehensive Income [Abstract] | ||||
Net income (loss) | $ 8 | $ 5 | $ (3) | $ 4 |
Other comprehensive (loss) income, net of tax (Note 13) | ||||
Translation adjustments | (14) | 9 | (9) | 18 |
Adjustments for net periodic pension plan cost | 4 | 2 | 8 | 5 |
Other comprehensive (loss) income | (10) | 11 | (1) | 23 |
Comprehensive (loss) income | $ (2) | $ 16 | $ (4) | $ 27 |
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) (Parenthetical) - USD ($) $ in Millions |
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2018 |
Jun. 30, 2017 |
Jun. 30, 2018 |
Jun. 30, 2017 |
|
Statement Of Income And Comprehensive Income [Abstract] | ||||
Adjustments for net pension plan cost, tax expense | $ 1 | $ 2 | $ 2 | $ 3 |
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Parenthetical) - USD ($) $ in Millions |
Jun. 30, 2018 |
Dec. 31, 2017 |
---|---|---|
Reconciliation to the Condensed Consolidated Balance Sheets | ||
Cash and cash equivalents | $ 22 | $ 34 |
Restricted cash included in prepaid expenses and other current assets | $ 3 | $ 1 |
Restricted Cash Equivalents, Current, Asset, Statement of Financial Position [Extensible List] | us-gaap:PrepaidExpenseAndOtherAssetsCurrent | us-gaap:PrepaidExpenseAndOtherAssetsCurrent |
Total cash, cash equivalents and restricted cash shown in the statement of cash flows | $ 25 | $ 35 |
Overview and Basis of Presentation |
6 Months Ended |
---|---|
Jun. 30, 2018 | |
Accounting Policies [Abstract] | |
Overview and Basis of Presentation | Note 1. Overview and Basis of Presentation
Description of Business
The principal business of LSC Communications, Inc., a Delaware corporation, and its direct or indirect wholly-owned subsidiaries (“LSC Communications,” “the Company,” “we,” “our” and “us”) is to offer a broad scope of traditional and digital print, print-related services and office products. The Company serves the needs of publishers, merchandisers and retailers worldwide with a service offering that includes e-services, logistics, warehousing and fulfillment and supply chain management. The Company utilizes a broad portfolio of technology capabilities coupled with consultative attention to clients' needs to increase speed to market, reduce costs, provide postal savings to customers and improve efficiencies. The Company prints magazines, catalogs, books, directories, and retail inserts and its office products offerings include filing products, envelopes, note-taking products, binder products, and forms.
Description of Separation
On October 1, 2016 (the “separation date”), R. R. Donnelley & Sons Company (“RRD” or the “Parent”) completed the previously announced separation (the “separation”) into three separate independent publicly-traded companies: (i) its publishing and retail-centric print services and office products business (“LSC Communications”); (ii) its financial communications services business (“Donnelley Financial Solutions, Inc.” or “Donnelley Financial”) and (iii) a global, customized multichannel communications management company, which is the business of RRD after the separation. To effect the separation, RRD undertook a series of transactions to separate net assets and legal entities. RRD completed the distribution (the “distribution”) of 80.75% of the outstanding common stock of LSC Communications and Donnelley Financial to RRD stockholders on October 1, 2016. RRD retained a 19.25% ownership stake in both LSC Communications and Donnelley Financial. On October 1, 2016, RRD stockholders of record as of the close of business on September 23, 2016 (“the record date”) received one share of LSC Communications common stock and one share of Donnelley Financial common stock for every eight shares of RRD common stock held as of the record date. On March 28, 2017, RRD completed the sale of approximately 6.2 million shares of LSC Communications common stock, representing its entire 19.25% retained ownership.
Basis of Presentation
The condensed consolidated financial statements include the balance sheets, statements of operations and cash flows in conformity with accounting principles generally accepted in the United States (“GAAP”). All intercompany transactions have been eliminated in consolidation. These unaudited condensed consolidated interim financial statements include estimates and assumptions of management that affect the amounts reported in the condensed consolidated financial statements. Actual results could differ from these estimates.
Certain prior year amounts were restated to conform to the Company’s current statement of operations and cash flows classifications.
The Company adopted Accounting Standards Update No. 2017-07 “Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost” (“ASU 2017-07”) in the first quarter of 2018. As a result of the adoption of ASU 2017-07, the Company will reclassify $46 million and $45 million related to the years ended December 31, 2017 and 2016, respectively, of net pension income out of income from operations to investment and other (income)-net, resulting in no impact to net income. The Company reclassified $12 million and $23 million of net pension income from selling, general and administrative expenses to investment and other income-net in the condensed consolidated statement of operations for the three and six months ended June 30, 2017.
The Company adopted Accounting Standards Update No. 2016-18 “Statements of Cash Flows (Topic 230): Restricted Cash” (“ASU 2016-18”) in the first quarter of 2018. The standard requires amounts generally described as restricted cash and restricted cash equivalents to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The standard does not provide a definition of restricted cash or restricted cash equivalents. The standard requires a retrospective transition method to be applied to each period presented. The Company included a reconciliation of beginning-of-period and end-of-period amounts in condensed consolidated statements of cash flows to the condensed consolidated balance sheets.
U.S. Tax Cuts and Jobs Act (“Tax Act”)
The Company’s accounting for the Tax Act remains provisional for amounts recorded as of December 31, 2017. As disclosed in the Company’s annual report on Form 10-K (Note 14, Income Taxes) for the year ended December 31, 2017, the Company was able to reasonably estimate certain effects, and therefore, recorded provisional adjustments associated with the one-time transition tax on the deemed repatriation of post-1986 undistributed earnings of foreign subsidiaries and the remeasurement of deferred taxes. The Company has not recorded any potential deferred tax effects related to global intangible low-taxed income (“GILTI”) and has not made a policy decision regarding whether to record deferred taxes on GILTI or in the period in which the tax is incurred.
The Company has not made any additional measurement-period adjustments related to these items during the six months ended June 30, 2018. The Company is continuing to gather additional information to complete the accounting for these items and expects to complete the accounting within the prescribed measurement period. |
Business Combinations |
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Business Combinations [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Business Combinations | Note 2. Business Combinations
2017 Acquisitions
On November 29, 2017, the Company acquired The Clark Group, (“Clark Group”), a third-party logistics provider of distribution, consolidation, transportation management and international freight forwarding services. The acquisition enhanced the Company’s logistics service offering. The total purchase price was $25 million in cash, of which $16 million was recorded in goodwill.
On November 9, 2017, the Company acquired Quality Park, a producer of envelopes, mailing supplies and assorted packaging items. The acquisition enhanced the Company’s office products offerings. The total purchase price was $41 million in cash, resulting in a bargain purchase gain of $2 million. We reassessed the recognition and measurement of identifiable assets and liabilities acquired and concluded that all acquired assets and liabilities were recognized and that the valuation procedures and resulting estimates were appropriate.
On September 7, 2017, the Company acquired Publishers Press, a printing provider with capabilities such as web-offset printing, prepress and distribution services for magazines and retail brands. The acquisition enhanced the Company’s printing capabilities. The total purchase price was $68 million in cash, of which $1 million was recorded in goodwill.
On August 21, 2017, the Company acquired the assets of NECI, LLC (“NECI”), a supplier of commodity and specialty filing supplies. The acquisition enhanced the Company’s office products offerings. The purchase price, which included the Company’s estimate of contingent consideration, was $6 million in cash, of which $1 million was recorded in goodwill.
On August 17, 2017, the Company acquired CREEL Printing (“CREEL”), an offset and digital printing company. The acquisition enhanced the capabilities of the Company’s offset and digital production platform and brought enhanced technologies to support our clients’ evolving needs, specifically in the magazine media and retail marketing industries. CREEL’s capabilities include full-color web and sheetfed printing, regionally distributed variable digital production, large-format printing, and integrated digital solutions. The purchase price, which included the Company’s estimate of contingent consideration, was $79 million in cash, of which $26 million was recorded in goodwill.
On July 28, 2017, the Company acquired Fairrington Transportation Corp., F.T.C. Transport, Inc. and F.T.C. Services, Inc. (“Fairrington”), a full-service, printer-independent mailing logistics provider in the United States. The acquisition enhanced the Company’s logistics service offering. The purchase price was $19 million in cash and approximately 1.0 million shares of LSC Communications common stock, for a total transaction value of $39 million. Of the total purchase price, $22 million was recorded in goodwill.
On March 1, 2017, the Company acquired HudsonYards Studios (“HudsonYards”), a digital and print premedia production company that provides high-quality creative retouching, computer-generated imagery, mechanical creation, press-ready file preparation, and interactive production services. The acquisition enhanced the Company’s digital and premedia capabilities. The purchase price for HudsonYards was $3 million in cash, of which $2 million was recorded in goodwill.
The operations of Clark Group, Publishers Press, CREEL, Fairrington, and HudsonYards are included in the Print segment; specifically the magazines, catalogs and retail inserts reporting unit. The operations of Quality Park and NECI are included in the Office Products segment.
The acquisitions were recorded by allocating the cost of the acquisitions to the assets acquired, including other intangible assets, based on their estimated fair values at the acquisition date. The excess of the cost of the acquisitions over the net amounts assigned to the fair value of the assets acquired was recorded in goodwill. The goodwill is primarily attributable to the synergies expected to arise as a result of the acquisitions.
The preliminary tax deductible goodwill related to the Clark Group, Quality Park, Publishers Press, NECI, CREEL, Fairrington, and HudsonYards acquisitions was $38 million.
The purchase price allocation for Quality Park is preliminary as of June 30, 2018 as the finalization of the working capital adjustment is pending. The primary areas that are not yet finalized relate to the valuation of certain assets and liabilities. The final purchase price allocation may differ from what is currently reflected in the condensed consolidated financial statements and could affect goodwill impairment in the future. The purchase price allocations for the Clark Group, Publishers Press, NECI, CREEL, Fairrington, and HudsonYards are final as of June 30, 2018. There were no significant changes to the purchase price allocations for all acquisitions as of June 30, 2018 compared to the disclosed purchase price allocations in the Company’s annual report on Form 10-K for the year ended December 31, 2017.
The purchase price allocations for the material acquisitions noted above were as follows:
In accordance with ASC 350, Intangibles — Goodwill and Other, the Company is required to test its goodwill for impairment annually, or more often if there is an indication that goodwill might be impaired. Given the historical valuations of the magazines, catalogs and retail inserts reporting unit that have resulted in goodwill impairment in prior years, combined with the change in the composition of the carrying value of the reporting unit due to the acquisitions completed during the year ended December 31, 2017, the Company determined it necessary to perform goodwill impairment reviews on this reporting unit as of September 30, 2017, and again as of December 31, 2017 due to the acquisitions that were completed after September 30, 2017.
As a result of the goodwill impairment tests, and consistent with prior goodwill impairment tests, the magazines, catalogs and retail inserts reporting unit’s fair value continued to be at a value below its carrying value. This is primarily due to the negative revenue trends experienced in recent years that are only partially offset by the impact of the new acquisitions. The charges to recognize the impairment of goodwill in the magazines, catalogs and retail inserts reporting unit were $55 million and $18 million during the three months ended September 30, 2017 and December 31, 2017, respectively. The total charge was $73 million for 2017, resulting in zero goodwill associated with the magazines, catalogs and retail inserts reporting unit as of December 31, 2017.
The fair values of goodwill, other intangible assets and property, plant and equipment associated with the acquisitions were determined to be Level 3 under the fair value hierarchy, which included discounted cash flow analyses, comparable marketplace fair value data and management’s assumptions for the goodwill impairment charges. Property, plant and equipment values were estimated using either the cost or market approach, if a secondhand market existed.
For the three and six months ended June 30, 2018, the Company recorded $1 million and $2 million of acquisition-related expenses, respectively, associated with the completed and contemplated acquisitions within selling, general and administrative expenses in the condensed consolidated statements of operations. For both the three and six months ended June 30, 2017, there were $1 million of acquisition-related expenses associated with the completed and contemplated acquisitions.
Pro forma results
The following unaudited pro forma financial information for the three and six months ended June 30, 2018 and 2017 presents the condensed consolidated statements of operations of the Company and the acquisitions described above, as if the acquisitions had occurred as of January 1 of the year prior to the acquisitions.
The unaudited pro forma financial information is not intended to represent or be indicative of the Company’s condensed consolidated statements of operations that would have been reported had these acquisitions been completed as of the beginning of the period presented and should not be taken as indicative of the Company’s future condensed consolidated statements of operations. Pro forma adjustments are tax-effected at the applicable statutory tax rates.
The following table outlines unaudited pro forma financial information for the three and six months ended June 30, 2018 and 2017:
The nonrecurring pro forma adjustments affecting net loss for the three and six months ended June 30, 2018 and 2017 were de minimis. |
Revenue Recognition |
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Revenue From Contract With Customer [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Revenue Recognition |
Note 3. Revenue Recognition
Financial Statement Impact of Adopting ASC 606
The Company adopted Accounting Standards Update No. 2014-09 “Revenue from Contracts with Customers (Topic 606)” (“ASC 606”, or the “standard”) on January 1, 2018 using the modified retrospective method for all contracts not completed as of the date of adoption. The reported results for 2018 reflect the application of ASC 606 guidance while the reported results for 2017 were prepared and continue to be reported under the guidance of ASC 605, Revenue Recognition, which is also referred to herein as "previous guidance."
The Company assessed all aspects of the standard’s potential impact and focused further assessment on customized products, deferred revenue and certain items in inventory, which are areas that were determined could have had a material impact on the Company’s accounting for revenue. Potential impacts of other aspects of the standard have not had a material impact to the Company’s accounting for revenue.
The Company completed the evaluation of whether the accounting for revenue from customized products should be over time or at a point in time under the standard. Based on analysis of specific terms associated with current customer contracts, the Company concluded that revenue should be recognized at a point in time for substantially all customized products. This treatment is consistent with revenue recognition under previous guidance, where revenue was recognized when the products were completed and shipped to the customer (dependent upon specific shipping terms). Any contracts whereby revenue for customized products should be recognized over time, as opposed to a point in time, are immaterial due to the de minimis nature of any particular order under such contracts in production at any given point in time. As revenue recognition is dependent upon individual contractual terms, the Company will continue its evaluation of any new or amended contracts entered into, including contracts that the Company might assume as a result of acquisition activity.
With respect to deferred revenue and certain items in inventory, the Company determined ASC 606 impacted the following situations:
Upon adoption of ASC 606, the Company eliminated any deferred revenue and inventory associated with the above three categories against its accumulated deficit within total equity. Based upon the balances that existed as of December 31, 2017, the Company recorded adjustments to the following accounts as of January 1, 2018:
As a result of the above adjustments, total assets decreased by $3 million, total liabilities decreased by $12 million and total equity increased by $9 million. The equity adjustment was net of tax of $3 million.
The following tables compare impacted accounts from the reported condensed consolidated balance sheet and statement of operations, as of and for the six months ended June 30, 2018, to their pro forma amounts had the previous guidance been in effect:
The difference between the reported balances and the pro forma balances above is due to the deferred revenue and inventory in the pro forma balances associated with completed production billed to the customer but not yet shipped, completed production held in inventory (including consigned inventory) and safety stock.
The differences between the reported balances and the pro forma balances above are due to the following impacts:
The adoption of ASC 606 had no impact on the Company’s cash flows from operating activities.
Revenue Recognition Policy
The Company recognizes revenue at a point in time for substantially all customized products. The point in time when revenue is recognized is when the performance obligation has been completed and the customer obtains control of the products, which is generally upon shipment to the customer (dependent upon specific shipping terms).
Under agreements with certain customers, custom products may be stored by the Company for future delivery. Based upon contractual terms, the Company is typically able to recognize revenue once the performance obligation is satisfied and the customer obtains control of the completed product, usually when it completes production (depending on the specific facts and circumstances). In these situations, the Company may also receive a logistics or warehouse management fee for the services it provides, which the Company recognizes over time as the services are provided.
With certain customer contracts, the Company is permitted to complete a pre-defined amount of custom products and hold such inventory until the customer requests shipment (which generally is required to be delivered in the same year as production). For these items, which include consigned inventory, the Company has the contractual right to receive payment once the production is completed, regardless of the ultimate delivery date. Based upon contractual terms, the Company recognizes revenue once the performance obligation has been satisfied and the customer obtains control of the completed products, usually when production is completed.
In very limited situations, the Company is permitted to produce and hold in inventory a pre-defined amount of custom products as safety stock. Similar to completed production held in inventory, for these items the Company has the contractual right to receive payment for the pre-defined amount once the production is completed, regardless of the ultimate delivery date. Based upon our evaluation of the contractual terms, the Company is able to recognize revenue once the performance obligation has been satisfied and the customer obtains control of the completed products, usually when production is completed.
Revenue from the Company’s print related services (including list processing, mail sortation services and supply chain management) is recognized as services are completed over time.
Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods or providing services, which is based on transaction prices set forth in contracts with customers and an estimate of variable consideration, as applicable.
Variable consideration resulting from volume rebates, fixed rebates, penalties or credits for paper consumption, and sales discounts that are offered within contracts between the Company and its customers is recognized in the period the related revenue is recognized. Estimates of variable consideration are based on stated contract terms and an analysis of historical experience. The amount of variable consideration is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period.
A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The majority of our contracts have a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts and, therefore, not distinct. For contracts with multiple performance obligations, such as co-mail and catalog production, the transaction price allocated to each performance obligation is based on the price stated in the customer contract, which represents the Company’s best estimate of the standalone selling price of each distinct good or service in the contract.
Billings for shipping and handling costs are recorded gross. The Company made an accounting policy election under ASC 606 to account for shipping and handling after the customer obtains control of the good as fulfillment activities rather than as a separate service to the customer. As a result, the Company accrues the costs of the shipping and handling if revenue is recognized for the related good before the fulfillment activities occur.
Many of the Company’s operations process materials, primarily paper, that may be supplied directly by customers or may be purchased by the Company and sold to customers as part of the end product. No revenue is recognized for customer-supplied paper, but revenues for Company-supplied paper are recognized on a gross basis. As a result, the Company’s reported sales and margins may be impacted by the mix of customer-supplied paper and Company-supplied paper.
The Company records taxes collected from customers and remitted to governmental authorities on a net basis.
Contracts do not contain a significant financing component as payment terms on invoiced amounts are typically between 30 to 120 days, based on the Company’s credit assessment of individual customers, as well as industry expectations.
The timing of revenue recognition, billings and cash collections results in accounts receivable and unbilled receivables (contract assets), and customer advances and deposits (contract liabilities) on the condensed consolidated balance sheet. Revenue recognition generally coincides with the Company’s contractual right to consideration and the issuance of invoices to customers. Depending on the nature of the performance obligation and arrangements with customers, the timing of the issuance of invoices may result in contract assets or contract liabilities. Contract assets related to unbilled receivables are recognized for satisfied performance obligations for which the Company cannot yet issue an invoice. Contract liabilities result from advances or deposits from customers on performance obligations not yet satisfied.
Because the majority of the Company’s products are customized, product returns are not significant; however, the Company accrues for the estimated amount of customer returns at the time of sale.
Disaggregated Revenue
The following table provides information about disaggregated revenue by major products/service lines and timing of revenue recognition, and includes a reconciliation of the disaggregated revenue with reportable segments.
Contract Balances
The following table provides information about receivables, contract assets and contract liabilities from contracts with customers:
Significant changes in the contract assets and the contract liabilities balances during the period are as follows:
Transactions affecting the allowances for doubtful accounts receivable balance during the six months ended June 30, 2018 were as follows:
Contract Acquisition Costs
In connection with the adoption of ASC 606, the Company is required to capitalize certain contract acquisition costs. As of December 31, 2017 under previous guidance, the Company had capitalized $36 million in contract acquisition costs related to contracts that were not completed. The Company did not have any other costs that were required to be capitalized on January 1, 2018 with the adoption of ASC 606. For contracts that have a duration of less than one year, the Company follows the ASC 606 practical expedient approach and expenses these costs when incurred; for contracts with life exceeding one year, the Company records these costs in proportion to each completed contract performance obligation. For the three and six months ended June 30, 2018, the amount of amortization was $3 million and $6 million, respectively, and there was no impairment loss in relation to costs capitalized. |
Inventories |
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Inventories | Note 4. Inventories
The components of the Company’s inventories, net of excess and obsolescence reserves for raw materials and finished goods, at June 30, 2018 and December 31, 2017 were as follows:
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Property, Plant and Equipment |
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Property, Plant and Equipment | Note 5. Property, Plant and Equipment
The components of the Company’s property, plant and equipment at June 30, 2018 and December 31, 2017 were as follows:
During the three and six months ended June 30, 2018, depreciation expense was $28 million and $59 million, respectively. During the three and six months ended June 30, 2017, depreciation expense was $33 million and $68 million, respectively.
Assets Held for Sale
Primarily as a result of restructuring actions, certain facilities and equipment are considered held for sale. The net book value of assets held for sale was $10 million at June 30, 2018 and $7 million at December 31, 2017. These assets were included in prepaid expenses and other current assets in the condensed consolidated balance sheets at the lower of their historical net book value or their estimated fair value, less estimated costs to sell.
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Goodwill and Other Intangible Assets | Note 6. Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill for the six months ended June 30, 2018 were as follows:
The components of other intangible assets at June 30, 2018 and December 31, 2017 were as follows:
During the three and six months ended June 30, 2018, amortization expense for other intangible assets was $4 million and $9 million, respectively. During the three and six months ended June 30, 2017, amortization expense for other intangible assets was $4 million and $8 million, respectively.
The following table outlines the estimated annual amortization expense related to other intangible assets:
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Restructuring And Related Activities [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Restructuring, Impairment and Other Charges | Note 7. Restructuring, Impairment and Other Charges
For the three and six months ended June 30, 2018 and 2017, the Company recorded the following net restructuring, impairment and other charges:
Restructuring and Impairment Charges
For the three and six months ended June 30, 2018, the Company incurred employee-related restructuring charges of $3 million and $7 million for an aggregate of 304 employees, of whom 224 were terminated as of or prior to June 30, 2018. These charges primarily related to the closure of one facility in the Print segment and the reorganization of certain business units and corporate functions. The Company incurred other restructuring charges of $7 million and $10 million for the three and six months ended June 30, 2018 for facility costs, a loss related to the Company's disposition of its retail offset printing facilities and pension withdrawal obligations related to facility closures.
For the three and six months ended June 30, 2017, the Company incurred employee-related restructuring charges of $3 million and $7 million for an aggregate of 504 employees, substantially all of whom were terminated as of or prior to June 30, 2018. These charges primarily related to the announcement of one facility closure in the Print segment and the reorganization of certain business units and corporate functions. Additionally, the Company incurred other restructuring charges of $17 million and $18 million for the three and six months ended June 30, 2017, respectively, primarily related to charges incurred as a result of a terminated supplier contract and the exit from certain operations and facilities.
Other Charges
For each of the three and six months ended June 30, 2018, the Company recorded $1 million of other charges for multiemployer pension plan withdrawal obligations unrelated to facility closures. The total liability for the withdrawal obligations associated with the Company’s decision to withdraw from certain multiemployer pension plans included $3 million in accrued liabilities and $19 million in restructuring and multiemployer pension liabilities at June 30, 2018.
The Company’s withdrawal liabilities could be affected by the financial stability of other employers participating in such plans and any decisions by those employers to withdraw from such plans in the future. While it is not possible to quantify the potential impact of future events or circumstances, reductions in other employers’ participation in multiemployer pension plans, including certain plans from which the Company has previously withdrawn, could have a material effect on the Company’s previously estimated withdrawal liabilities and condensed consolidated balance sheets, statements of operations and cash flows.
For the three and six months ended June 30, 2017, the Company recorded other charges of $1 million and $2 million, respectively, for multiemployer pension plan withdrawal obligations unrelated to facility closures.
Restructuring Reserve
The restructuring reserve as of June 30, 2018 and December 31, 2017, and changes during the six months ended June 30, 2018 were as follows:
The current portion of restructuring reserves of $14 million at June 30, 2018 was included in accrued liabilities, while the long-term portion of $28 million, which primarily related to multiemployer pension plan withdrawal obligations related to facility closures, was included in restructuring and multiemployer pension liabilities at June 30, 2018.
During the three months ended March 31, 2018, the Company reclassified $19 million of multiemployer pension plan withdrawal obligations from non-restructuring liabilities to restructuring liabilities, of which $3 million and $16 million were recorded in the current and long-term portions of the reserves, respectively. The reclassification was primarily due to a facility closure in the Print segment during the three months ended March 31, 2018.
The Company anticipates that payments associated with the employee terminations reflected in the above table will be substantially completed by June 30, 2019.
Payments on all of the Company’s multiemployer pension plan withdrawal obligations are scheduled to be completed by 2034. Changes based on uncertainties in these estimated withdrawal obligations could affect the ultimate charges related to multiemployer pension plan withdrawals.
The restructuring liabilities classified as “other” consisted of other facility closing costs.
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Commitments and Contingencies |
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Jun. 30, 2018 | |
Commitments And Contingencies Disclosure [Abstract] | |
Commitments and Contingencies | Note 8. Commitments and Contingencies
The Company is subject to laws and regulations relating to the protection of the environment. The Company accrues for expenses associated with environmental remediation obligations when such amounts are probable and can be reasonably estimated. Such accruals are adjusted as new information develops or circumstances change and are generally not discounted. The Company has been designated as a potentially responsible party or has received claims in ten active federal and state Superfund and other multiparty remediation sites. In addition to these sites, the Company may also have the obligation to remediate three other previously and currently owned facilities. At the Superfund sites, the Comprehensive Environmental Response, Compensation and Liability Act provides that the Company’s liability could be joint and several, meaning that the Company could be required to pay an amount in excess of its proportionate share of the remediation costs.
The Company’s understanding of the financial strength of other potentially responsible parties at the multiparty sites and of other liable parties at the previously owned facilities has been considered, where appropriate, in the determination of the Company’s estimated liability. The Company established reserves, recorded in accrued liabilities and other noncurrent liabilities, that it believes are adequate to cover its share of the potential costs of remediation at each of the multiparty sites and the previously and currently owned facilities. It is not possible to quantify with certainty the potential impact of actions regarding environmental matters, particularly remediation and other compliance efforts that the Company may undertake in the future. However, in the opinion of management, compliance with the present environmental protection laws, before taking into account estimated recoveries from third parties, will not have a material effect on the Company’s condensed consolidated balance sheets, statements of operations and cash flows.
From time to time, the Company’s customers and others file voluntary petitions for reorganization under United States bankruptcy laws. In such cases, certain pre-petition payments received by the Company from these parties could be considered preference items and subject to return. In addition, the Company may be party to certain litigation arising in the ordinary course of business. Management believes that the final resolution of these preference items and litigation will not have a material effect on the Company’s condensed consolidated balance sheets, statements of operations and cash flows.
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Debt |
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Debt Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Debt | Note 9. Debt
The Company’s debt at June 30, 2018 and December 31, 2017 consisted of the following:
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On September 30, 2016, the Company issued $450 million of Senior Secured Notes (the “Senior Notes”).
On September 30, 2016 the Company entered into a credit agreement (the “Credit Agreement”) that provides for (i) a senior secured term loan B facility in an aggregate principal amount of $375 million (the “Term Loan Facility”) and (ii) a senior secured revolving credit facility in an aggregate principal amount of $400 million (the “Revolving Credit Facility”). The debt issuance costs and original issue discount are being amortized over the life of the facilities using the effective interest method.
The Credit Agreement is subject to a number of covenants, including, but not limited to, a minimum Interest Coverage Ratio and a Consolidated Leverage Ratio, as defined in and calculated pursuant to the Credit Agreement, that, in part, restrict the Company’s ability to incur additional indebtedness, create liens, engage in mergers and consolidations, make restricted payments and dispose of certain assets. The Credit Agreement generally allows annual dividend payments of up to $50 million in aggregate, though additional dividends may be allowed subject to certain conditions. Each of these covenants is subject to important exceptions and qualifications.
Term Loan Facility
On November 17, 2017, the Company amended the Credit Agreement to reduce the interest rate for the Term Loan Facility by 50 basis points and the LIBOR “floor” was also reduced by 25 basis points. Other terms, including the outstanding principal, maturity date and debt covenants were not amended. Select terms on the Term Loan Facility before and after the amendment include:
Under the terms of the Term Loan Facility, each of the syndicated lenders is deemed to have loaned a specific amount to the Company and has the right to repayment from the Company directly. Therefore, we concluded that the Term Loan Facility is a loan syndication under U.S. GAAP. As such, in order to determine whether the debt was modified or extinguished as a result of the amendment, we examined the amount of principal pre- and post-amendment by individual lender. As a result, we determined that $65 million of outstanding principal had been extinguished as of November 17, 2017, even though the total outstanding principal amongst all lenders pre- and post-amendment remained unchanged.
Consequently, the amendment resulted in a pre-tax loss on debt extinguishment of $3 million related to the unamortized discount and debt issuance costs attributable to the $65 million of outstanding principal that had been considered extinguished. There was no net impact as of November 17, 2017 to cash and cash equivalents, total outstanding principal remained unchanged, and no cash was exchanged between the lenders and the Company (other than customary administrative fees).
On February 2, 2017, the Company paid in advance the full amount of required amortization payments, $50 million, for the year ended December 31, 2017 for the Term Loan Facility.
Additional Debt Issuances Information
The fair values of the Senior Notes and Term Loan Facility that were determined using the market approach based upon interest rates available to the Company for borrowings with similar terms and maturities, were determined to be Level 2 under the fair value hierarchy. The fair value of the Company’s debt was less than and greater than its book value by approximately $2 million and $20 million at June 30, 2018 and December 31, 2017, respectively.
There were $190 million and $75 million of borrowings under the Revolving Credit Facility as of June 30, 2018 and December 31, 2017, respectively. The weighted-average interest rate on borrowings under the Company’s Revolving Credit Facility was 4.89% during the six months ended June 30, 2018.
There were $18 million and $38 million of net interest expense during the three and six months ended June 30, 2018, respectively. There were $16 million and $33 million of net interest expense during the three and six months ended June 30, 2017, respectively.
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Equity | Note 10. Equity
The Company’s equity balances and changes were as follows:
On May 31, 2018, the Company completed the repurchase approved by the Board of Directors of 1.6 million shares of common stock for a total cost of $20 million.
During the three months ended March 31, 2018, the Company recorded $9 million in equity adjustments as a result of the adoption of ASC 606. Refer to Note 3, Revenue Recognition, for more information.
On March 28, 2017, in connection with the over-allotment option granted to the underwriters as part of the secondary sale by RRD, LSC Communications completed the sale of approximately 0.9 million shares of common stock, receiving proceeds of $18 million.
During the six months ended June 30, 2017, the Company recorded certain separation-related adjustments related to the adjustment of assets and liabilities resulting from transactions with RRD. |
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Earnings Per Share [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Earnings Per Share | Note 11. Earnings Per Share
On May 31, 2018, the Company completed the repurchase approved by the Board of Directors of 1.6 million shares of common stock for a total cost of $20 million. There were no shares of common stock purchased by the Company during the six months ended June 30, 2017. During the six months ended June 30, 2018 and 2017, a de minimis amount of shares were withheld from employees for tax liabilities upon vesting of equity awards.
Basic earnings per share (“EPS”) is calculated by dividing net earnings attributable to the Company’s stockholders by the weighted average number of common shares outstanding for the period. In computing diluted EPS, basic EPS is adjusted for the assumed issuance of all potentially dilutive share-based awards, including stock options, restricted stock, RSUs, and PSUs.
The following table shows the calculation of basic and diluted EPS, as well as a reconciliation of basic shares to diluted shares:
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Compensation And Retirement Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Retirement Plans | Note 12. Retirement Plans
The Company is the sole sponsor of certain defined benefit pension plans that are included in the condensed consolidated balance sheets as of June 30, 2018 and December 31, 2017. The components of the estimated net pension (income) loss for the three and six months ended June 30, 2018 and 2017 were as follows:
The total net periodic income for the three and six months ended June 30, 2018 and 2017 is included in the investment and other income-net line item in the condensed consolidated statements of operations. |
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Comprehensive Income | Note 13. Comprehensive Income
The following table summarizes accumulated other comprehensive loss by component as of December 31, 2017 and June 30, 2018 and changes during the six months ended June 30, 2018.
The Company adopted ASU 2018-02 “Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“ASU 2018-02”) in the first quarter of 2018. As a result of applying this standard in the period of adoption, the Company reclassified $97 million relating to the change in tax rate from accumulated other comprehensive loss to accumulated deficit in the Company’s condensed consolidated balance sheet during the three months ended March 31, 2018. ASU 2018-02 eliminates the stranded tax effects resulting from the Tax Act and will improve the usefulness of information reported to financial statement users.
The following table summarizes accumulated other comprehensive loss by component as of December 31, 2016 and June 30, 2017 and changes during the six months ended June 30, 2017.
Refer to the condensed consolidated statements of comprehensive income for the components of comprehensive income for the three and six months ended June 30, 2018 and 2017.
Reclassifications from accumulated other comprehensive loss for the three and six months ended June 30, 2018 and 2017 were as follows:
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Segment Information |
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Segment Reporting [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Segment Information | Note 14. Segment Information
The Company’s segment and product and service offerings are summarized below:
The Print segment produces magazines, catalogs, books, directories, and retail inserts. The segment also provides supply-chain management, logistics and certain other print-related services, including mail-list management and sortation, e-book formatting and distribution. The segment has operations in the U.S., Europe and Mexico. The Print segment is divided into the magazines, catalogs and retail inserts, book, Europe and directories reporting units.
Office Products
The Office Products segment manufactures and sells branded and private label products in five core categories: filing products, envelopes, note-taking products, binder products, and forms.
Corporate
Corporate consists of unallocated selling, general and administrative activities and associated expenses including, in part, executive, legal, finance, communications, certain facility costs and LIFO inventory provisions. In addition, certain costs and earnings of employee benefit plans, such as pension benefit plan income and share-based compensation, are included in Corporate and not allocated to the operating segments.
Information by Segment
The Company has disclosed income (loss) from operations as the primary measure of segment earnings (loss). This is the measure of profitability used by the Company’s chief operating decision-maker and is most consistent with the presentation of profitability reported with the condensed consolidated financial statements.
Restructuring, impairment and other charges by segment for the three and six months ended June 30, 2018 and 2017 are disclosed in Note 7, Restructuring, Impairment and Other Charges. |
Related Parties |
6 Months Ended |
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Jun. 30, 2018 | |
Related Party Transactions [Abstract] | |
Related Parties | Note 15. Related Parties
On March 28, 2017, RRD completed the sale of approximately 6.2 million shares of LSC Communications common stock, representing its entire 19.25% retained ownership.
Transactions with RRD
Revenues and Purchases
Given that RRD sold its remaining stake in LSC Communications on March 28, 2017, the following information is presented for the three months ended March 31, 2017 only.
LSC Communications generates net revenue from sales to RRD’s subsidiaries. Net revenues from related party sales were $32 million for the three months ended March 31, 2017.
LSC Communications utilizes RRD for freight, logistics and premedia services. There were cost of sales of $51 million related to freight, logistics and premedia services purchased from RRD for the three months ended March 31, 2017. These amounts are included in the condensed consolidated statements of operations.
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New Accounting Pronouncements |
6 Months Ended |
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Jun. 30, 2018 | |
Accounting Changes And Error Corrections [Abstract] | |
New Accounting Pronouncements | Note 16. New Accounting Pronouncements
In February 2016, the FASB issued Accounting Standards Update No. 2016-02 “Leases (Topic 842) Section A—Leases: Amendments to the FASB Accounting Standards Codification” (“ASU 2016-02”), which requires lessees to put most leases on the balance sheet but recognize expense on the income statement in a manner similar to current accounting. For lessors, ASU 2016-02 also modifies the classification criteria and the accounting for sales-type and direct financing leases. The standard is effective in the first quarter of 2019. Early adoption of ASU 2016-02 is permitted, however, the Company plans to adopt the standard in the first quarter of 2019.
The Company is currently evaluating the impact of the provisions of ASU 2016-02 and anticipates it will be able to complete its analysis of all potential impacts of the standard, implement any system and process changes that might be necessary and educate the appropriate employees with respect to the new standard in order to effectively adopt the standard beginning in the first quarter of 2019. |
Subsequent Events |
6 Months Ended |
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Jun. 30, 2018 | |
Subsequent Events [Abstract] | |
Subsequent Events | Note 17. Subsequent Events
On July 2, 2018, the Company completed the acquisition of RRD’s Print Logistics business, a leading integrated logistics services provider to the print industry with an expansive distribution network. The total purchase price, $58 million in cash, was funded with a combination of cash on hand and drawings under the Revolving Credit Facility. The Company is in process of completing the purchase price allocation.
On July 19, 2018, the Company announced that it has entered into a definitive agreement to sell its European printing business, which represents the Company’s entire Europe reporting unit. The proceeds from the sale are dependent upon the assets and liabilities present at the time of closing and any subsequent working capital adjustments. The Company does not expect a material gain or loss on the sale, other than the impact on the income tax provision related to the reversal of the estimated $25 million of net deferred tax assets associated with this business as of June 30, 2018. The sale has not been completed as of August 2, 2018, the date of filing of the Form 10-Q for the quarter ended June 30, 2018.
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Revenue Recognition (Policies) |
6 Months Ended |
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Jun. 30, 2018 | |
Accounting Policies [Abstract] | |
Revenue Recognition Policy | Revenue Recognition Policy
The Company recognizes revenue at a point in time for substantially all customized products. The point in time when revenue is recognized is when the performance obligation has been completed and the customer obtains control of the products, which is generally upon shipment to the customer (dependent upon specific shipping terms).
Under agreements with certain customers, custom products may be stored by the Company for future delivery. Based upon contractual terms, the Company is typically able to recognize revenue once the performance obligation is satisfied and the customer obtains control of the completed product, usually when it completes production (depending on the specific facts and circumstances). In these situations, the Company may also receive a logistics or warehouse management fee for the services it provides, which the Company recognizes over time as the services are provided.
With certain customer contracts, the Company is permitted to complete a pre-defined amount of custom products and hold such inventory until the customer requests shipment (which generally is required to be delivered in the same year as production). For these items, which include consigned inventory, the Company has the contractual right to receive payment once the production is completed, regardless of the ultimate delivery date. Based upon contractual terms, the Company recognizes revenue once the performance obligation has been satisfied and the customer obtains control of the completed products, usually when production is completed.
In very limited situations, the Company is permitted to produce and hold in inventory a pre-defined amount of custom products as safety stock. Similar to completed production held in inventory, for these items the Company has the contractual right to receive payment for the pre-defined amount once the production is completed, regardless of the ultimate delivery date. Based upon our evaluation of the contractual terms, the Company is able to recognize revenue once the performance obligation has been satisfied and the customer obtains control of the completed products, usually when production is completed.
Revenue from the Company’s print related services (including list processing, mail sortation services and supply chain management) is recognized as services are completed over time.
Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods or providing services, which is based on transaction prices set forth in contracts with customers and an estimate of variable consideration, as applicable.
Variable consideration resulting from volume rebates, fixed rebates, penalties or credits for paper consumption, and sales discounts that are offered within contracts between the Company and its customers is recognized in the period the related revenue is recognized. Estimates of variable consideration are based on stated contract terms and an analysis of historical experience. The amount of variable consideration is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period.
A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The majority of our contracts have a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts and, therefore, not distinct. For contracts with multiple performance obligations, such as co-mail and catalog production, the transaction price allocated to each performance obligation is based on the price stated in the customer contract, which represents the Company’s best estimate of the standalone selling price of each distinct good or service in the contract.
Billings for shipping and handling costs are recorded gross. The Company made an accounting policy election under ASC 606 to account for shipping and handling after the customer obtains control of the good as fulfillment activities rather than as a separate service to the customer. As a result, the Company accrues the costs of the shipping and handling if revenue is recognized for the related good before the fulfillment activities occur.
Many of the Company’s operations process materials, primarily paper, that may be supplied directly by customers or may be purchased by the Company and sold to customers as part of the end product. No revenue is recognized for customer-supplied paper, but revenues for Company-supplied paper are recognized on a gross basis. As a result, the Company’s reported sales and margins may be impacted by the mix of customer-supplied paper and Company-supplied paper.
The Company records taxes collected from customers and remitted to governmental authorities on a net basis.
Contracts do not contain a significant financing component as payment terms on invoiced amounts are typically between 30 to 120 days, based on the Company’s credit assessment of individual customers, as well as industry expectations.
The timing of revenue recognition, billings and cash collections results in accounts receivable and unbilled receivables (contract assets), and customer advances and deposits (contract liabilities) on the condensed consolidated balance sheet. Revenue recognition generally coincides with the Company’s contractual right to consideration and the issuance of invoices to customers. Depending on the nature of the performance obligation and arrangements with customers, the timing of the issuance of invoices may result in contract assets or contract liabilities. Contract assets related to unbilled receivables are recognized for satisfied performance obligations for which the Company cannot yet issue an invoice. Contract liabilities result from advances or deposits from customers on performance obligations not yet satisfied.
Because the majority of the Company’s products are customized, product returns are not significant; however, the Company accrues for the estimated amount of customer returns at the time of sale. |
Business Combinations (Tables) |
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Business Acquisition [Line Items] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Pro Forma Financial Information | The unaudited pro forma financial information is not intended to represent or be indicative of the Company’s condensed consolidated statements of operations that would have been reported had these acquisitions been completed as of the beginning of the period presented and should not be taken as indicative of the Company’s future condensed consolidated statements of operations. Pro forma adjustments are tax-effected at the applicable statutory tax rates.
The following table outlines unaudited pro forma financial information for the three and six months ended June 30, 2018 and 2017:
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Business Acquisition [Line Items] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Purchase Price Allocation for Acquisitions | The purchase price allocations for the material acquisitions noted above were as follows:
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Revenue Recognition (Tables) |
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Schedule of Disaggregated Revenue |
The following table provides information about disaggregated revenue by major products/service lines and timing of revenue recognition, and includes a reconciliation of the disaggregated revenue with reportable segments.
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Schedule of Information About Receivables, Contract Assets, Contract Liabilities and Changes in Contract with Customers | The following table provides information about receivables, contract assets and contract liabilities from contracts with customers:
Significant changes in the contract assets and the contract liabilities balances during the period are as follows:
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Schedule of Transactions Affecting Allowance for Doubtful Accounts Receivable | Transactions affecting the allowances for doubtful accounts receivable balance during the six months ended June 30, 2018 were as follows:
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ASU 2014-09 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Impact of Adoption of ASC 606 on Financial Statements |
The following tables compare impacted accounts from the reported condensed consolidated balance sheet and statement of operations, as of and for the six months ended June 30, 2018, to their pro forma amounts had the previous guidance been in effect:
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Inventories (Tables) |
6 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Inventory Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Components of the Company's Inventories |
The components of the Company’s inventories, net of excess and obsolescence reserves for raw materials and finished goods, at June 30, 2018 and December 31, 2017 were as follows:
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Property, Plant and Equipment (Tables) |
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Jun. 30, 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Property Plant And Equipment [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Components of Company's Property, Plant and Equipment | The components of the Company’s property, plant and equipment at June 30, 2018 and December 31, 2017 were as follows:
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Goodwill and Other Intangible Assets (Tables) |
6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Goodwill And Intangible Assets Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Changes in the Carrying Amount of Goodwill | The changes in the carrying amount of goodwill for the six months ended June 30, 2018 were as follows:
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Components of Other Intangible Assets | The components of other intangible assets at June 30, 2018 and December 31, 2017 were as follows:
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Schedule of Estimated Annual Amortization Expense Related to Other Intangible Assets | The following table outlines the estimated annual amortization expense related to other intangible assets:
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Restructuring, Impairment and Other Charges (Tables) |
6 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Restructuring And Related Activities [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Net Restructuring, Impairment and Other Charges | For the three and six months ended June 30, 2018 and 2017, the Company recorded the following net restructuring, impairment and other charges:
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Schedule of Changes in the Restructuring Reserve | The restructuring reserve as of June 30, 2018 and December 31, 2017, and changes during the six months ended June 30, 2018 were as follows:
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Debt (Tables) |
6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Debt Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of the Company's Debt | The Company’s debt at June 30, 2018 and December 31, 2017 consisted of the following:
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Equity (Tables) |
6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of the Company's Equity Activity | The Company’s equity balances and changes were as follows:
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Earnings Per Share (Tables) |
6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Earnings Per Share [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Calculation of Basic and Diluted EPS as Well as Reconciliation of Basic Shares to Diluted Shares | The following table shows the calculation of basic and diluted EPS, as well as a reconciliation of basic shares to diluted shares:
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Retirement Plans (Tables) |
6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Compensation And Retirement Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Components of Estimated Net Pension (Income) Loss | The components of the estimated net pension (income) loss for the three and six months ended June 30, 2018 and 2017 were as follows:
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Comprehensive Income (Tables) |
6 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Summary of Changes in Accumulated Other Comprehensive Loss | The following table summarizes accumulated other comprehensive loss by component as of December 31, 2017 and June 30, 2018 and changes during the six months ended June 30, 2018.
The Company adopted ASU 2018-02 “Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“ASU 2018-02”) in the first quarter of 2018. As a result of applying this standard in the period of adoption, the Company reclassified $97 million relating to the change in tax rate from accumulated other comprehensive loss to accumulated deficit in the Company’s condensed consolidated balance sheet during the three months ended March 31, 2018. ASU 2018-02 eliminates the stranded tax effects resulting from the Tax Act and will improve the usefulness of information reported to financial statement users.
The following table summarizes accumulated other comprehensive loss by component as of December 31, 2016 and June 30, 2017 and changes during the six months ended June 30, 2017.
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Schedule of Reclassification From Accumulated Other Comprehensive Loss | Reclassifications from accumulated other comprehensive loss for the three and six months ended June 30, 2018 and 2017 were as follows:
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Segment Information (Tables) |
6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Segment Reporting [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Segment Reporting Information |
The Company has disclosed income (loss) from operations as the primary measure of segment earnings (loss). This is the measure of profitability used by the Company’s chief operating decision-maker and is most consistent with the presentation of profitability reported with the condensed consolidated financial statements.
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Business Combinations - Pro Forma Financial Information (Detail) - USD ($) $ / shares in Units, $ in Millions |
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2018 |
Jun. 30, 2017 |
Jun. 30, 2018 |
Jun. 30, 2017 |
|
Business Combinations [Abstract] | ||||
Net sales | $ 943 | $ 967 | $ 1,872 | $ 1,909 |
Net income (loss) | $ 8 | $ 3 | $ (2) | $ (1) |
Net earnings (loss) per common share | ||||
Basic | $ 0.24 | $ 0.09 | $ (0.06) | $ (0.03) |
Diluted | $ 0.23 | $ 0.09 | $ (0.06) | $ (0.03) |
Amortization of purchased intangibles | $ 4 | $ 5 | $ 9 | $ 11 |
Revenue Recognition - Summary of Companys adjusted accounts upon Adoption of ASC 606 (Detail) - USD ($) $ in Millions |
Jun. 30, 2018 |
Jan. 01, 2018 |
Dec. 31, 2017 |
---|---|---|---|
ASSETS | |||
Receivables, net | $ 682 | $ 727 | |
Inventories | 252 | 238 | |
Deferred income taxes | 39 | 51 | |
LIABILITIES | |||
Accrued liabilities | 203 | 239 | |
EQUITY (Note 10) | |||
(Accumulated deficit) retained earnings | (5) | $ (90) | |
ASU 2014-09 | |||
ASSETS | |||
Receivables, net | $ 759 | ||
Inventories | 206 | ||
Deferred income taxes | 48 | ||
LIABILITIES | |||
Accrued liabilities | 227 | ||
EQUITY (Note 10) | |||
(Accumulated deficit) retained earnings | (81) | ||
ASU 2014-09 | Adjustments Adoption of ASC 606 | |||
ASSETS | |||
Receivables, net | (33) | 32 | |
Inventories | 13 | (32) | |
Deferred income taxes | 3 | (3) | |
LIABILITIES | |||
Accrued liabilities | 6 | (12) | |
EQUITY (Note 10) | |||
(Accumulated deficit) retained earnings | $ (7) | $ 9 |
Revenue Recognition - Additional Information (Detail) - USD ($) |
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2018 |
Jun. 30, 2018 |
Jan. 01, 2018 |
Dec. 31, 2017 |
|
Disaggregation Of Revenue [Line Items] | ||||
Payment terms on invoiced amounts description | between 30 to 120 days | |||
Customer-Supplied Paper | ||||
Disaggregation Of Revenue [Line Items] | ||||
Revenue recognized | $ 0 | $ 0 | ||
ASU 2014-09 | ||||
Disaggregation Of Revenue [Line Items] | ||||
Contract acquisition costs capitalized | $ 0 | $ 36,000,000 | ||
Amortization expense | 3,000,000 | 6,000,000 | ||
Impairment loss amount | 0 | 0 | ||
ASU 2014-09 | Adjustments Adoption of ASC 606 | ||||
Disaggregation Of Revenue [Line Items] | ||||
Amount of total assets decreased | 3,000,000 | |||
Amount of total liabilities decreased | 12,000,000 | |||
Amount of total equity increased | 9,000,000 | |||
Equity adjustment, net | $ 3,000,000 | $ 3,000,000 |
Revenue Recognition - Schedule of Comparison Between Select Accounts from Reported Statements to Proforma Amounts in Effect of Previous Guidance - Balance Sheet (Detail) - USD ($) $ in Millions |
Jun. 30, 2018 |
Jan. 01, 2018 |
Dec. 31, 2017 |
---|---|---|---|
ASSETS | |||
Receivables, net | $ 682 | $ 727 | |
Inventories | 252 | 238 | |
Deferred income taxes | 39 | 51 | |
LIABILITIES | |||
Accrued liabilities | 203 | 239 | |
EQUITY (Note 10) | |||
Accumulated deficit | (5) | $ (90) | |
ASU 2014-09 | |||
ASSETS | |||
Receivables, net | $ 759 | ||
Inventories | 206 | ||
Deferred income taxes | 48 | ||
LIABILITIES | |||
Accrued liabilities | 227 | ||
EQUITY (Note 10) | |||
Accumulated deficit | (81) | ||
ASU 2014-09 | Adjustments Adoption of ASC 606 | |||
ASSETS | |||
Receivables, net | (33) | 32 | |
Inventories | 13 | (32) | |
Deferred income taxes | 3 | (3) | |
LIABILITIES | |||
Accrued liabilities | 6 | (12) | |
EQUITY (Note 10) | |||
Accumulated deficit | (7) | $ 9 | |
ASU 2014-09 | Pro Forma as if the Previous Standard was in Effect | |||
ASSETS | |||
Receivables, net | 649 | ||
Inventories | 265 | ||
Deferred income taxes | 42 | ||
LIABILITIES | |||
Accrued liabilities | 209 | ||
EQUITY (Note 10) | |||
Accumulated deficit | $ (12) |
Revenue Recognition - Schedule of Information About Receivables, Contract Assets, Contract Liabilities from Contract with Customers (Detail) - USD ($) $ in Millions |
Jun. 30, 2018 |
Jan. 01, 2018 |
---|---|---|
Revenue From Contract With Customer [Abstract] | ||
Trade receivables | $ 554 | $ 647 |
Short-term contract assets | 33 | 31 |
Long-term contract assets | 35 | 36 |
Short-term contract liabilities | $ 19 | $ 21 |
Revenue Recognition - Schedule of Significant Changes in the Contract Assets and Contract Liabilities (Detail) $ in Millions |
6 Months Ended |
---|---|
Jun. 30, 2018
USD ($)
| |
Contract Assets | |
Payment of contract acquisition costs | $ 5 |
Additions to unbilled accounts receivable | 22 |
Amortization of contract acquisition costs | (6) |
Unbilled accounts receivable recognized as receivables | (20) |
Contract Liabilities | |
Revenue recognized that was included in contract liabilities as of January 1, 2018 | (17) |
Increases due to cash received | $ 15 |
Revenue Recognition - Schedule of Transactions Affecting Allowance for Doubtful Accounts Receivable (Detail) - USD ($) $ in Millions |
6 Months Ended | |
---|---|---|
Jun. 30, 2018 |
Jun. 30, 2017 |
|
Revenue From Contract With Customer [Abstract] | ||
Balance, beginning of year | $ 11 | |
Provision for doubtful accounts receivable | 4 | $ 1 |
Balance, end of period | $ 15 |
Inventories - Components of the Company's Inventories (Detail) - USD ($) $ in Millions |
Jun. 30, 2018 |
Dec. 31, 2017 |
---|---|---|
Inventory Net [Abstract] | ||
Raw materials and manufacturing supplies | $ 154 | $ 114 |
Work in process | 64 | 69 |
Finished goods | 92 | 112 |
Last in, first out ("LIFO") reserve | (58) | (57) |
Total | $ 252 | $ 238 |
Property, Plant and Equipment - Components of the Company's Property, Plant and Equipment (Detail) - USD ($) $ in Millions |
Jun. 30, 2018 |
Dec. 31, 2017 |
---|---|---|
Property Plant And Equipment [Abstract] | ||
Land | $ 44 | $ 45 |
Buildings | 732 | 739 |
Machinery and equipment | 3,956 | 4,012 |
Property, plant and equipment, gross | 4,732 | 4,796 |
Accumulated depreciation | (4,188) | (4,220) |
Total | $ 544 | $ 576 |
Property, Plant and Equipment - Narrative (Detail) - USD ($) $ in Millions |
3 Months Ended | 6 Months Ended | |||
---|---|---|---|---|---|
Jun. 30, 2018 |
Jun. 30, 2017 |
Jun. 30, 2018 |
Jun. 30, 2017 |
Dec. 31, 2017 |
|
Property Plant And Equipment [Line Items] | |||||
Depreciation expense | $ 28 | $ 33 | $ 59 | $ 68 | |
Prepaid expenses and other current assets | |||||
Property Plant And Equipment [Line Items] | |||||
Net book value of assets held for sale | $ 10 | $ 10 | $ 7 |
Goodwill and Other Intangible Assets - Schedule of Changes in the Carrying Amount of Goodwill (Detail) - USD ($) $ in Millions |
Jun. 30, 2018 |
Dec. 31, 2017 |
---|---|---|
Goodwill [Line Items] | ||
Goodwill gross | $ 1,039 | $ 1,044 |
Accumulated impairment losses | (957) | (962) |
Goodwill | 82 | 82 |
Goodwill [Line Items] | ||
Goodwill gross | 929 | 934 |
Accumulated impairment losses | (878) | (883) |
Goodwill | 51 | 51 |
Office Products | ||
Goodwill [Line Items] | ||
Goodwill gross | 110 | 110 |
Accumulated impairment losses | (79) | (79) |
Goodwill | $ 31 | $ 31 |
Goodwill and Other Intangible Assets - Narrative (Detail) - USD ($) $ in Millions |
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2018 |
Jun. 30, 2017 |
Jun. 30, 2018 |
Jun. 30, 2017 |
|
Goodwill And Intangible Assets Disclosure [Abstract] | ||||
Amortization expense for other intangible assets | $ 4 | $ 4 | $ 9 | $ 8 |
Goodwill and Other Intangible Assets - Schedule of Estimated Annual Amortization Expense Related to Other Intangible Assets (Detail) $ in Millions |
Jun. 30, 2018
USD ($)
|
---|---|
Goodwill And Intangible Assets Disclosure [Abstract] | |
2018 | $ 17 |
2019 | 16 |
2020 | 16 |
2021 | 14 |
2022 | 13 |
2023 and thereafter | 60 |
Total | $ 136 |
Restructuring, Impairment and Other Charges - Narrative (Detail) $ in Millions |
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2018
USD ($)
Employee
|
Jun. 30, 2017
USD ($)
|
Jun. 30, 2018
USD ($)
Employee
Facility
|
Jun. 30, 2017
USD ($)
Employee
Facility
|
|
Restructuring Cost And Reserve [Line Items] | ||||
Other Restructuring Charges | $ | $ 7 | $ 17 | $ 10 | $ 18 |
Employee-related termination costs | $ | $ 3 | $ 3 | $ 7 | $ 7 |
Number of employees used to determine employee termination costs | Employee | 304 | 504 | ||
Restructuring Cost And Reserve [Line Items] | ||||
Number of facilities closed | Facility | 1 | 1 | ||
Termination One | ||||
Restructuring Cost And Reserve [Line Items] | ||||
Number of employees who were terminated as of date | Employee | 224 | 224 |
Restructuring, Impairment and Other Charges - Other Charges - Narrative (Detail) - USD ($) $ in Millions |
3 Months Ended | 6 Months Ended | |||
---|---|---|---|---|---|
Jun. 30, 2018 |
Jun. 30, 2017 |
Jun. 30, 2018 |
Jun. 30, 2017 |
Dec. 31, 2017 |
|
Restructuring Cost And Reserve [Line Items] | |||||
Accrued liabilities | $ 203 | $ 203 | $ 239 | ||
Other noncurrent liabilities | 67 | 67 | $ 68 | ||
Other Charges | 1 | $ 1 | 1 | $ 2 | |
Multiemployer pension plan withdrawal obligations | |||||
Restructuring Cost And Reserve [Line Items] | |||||
Accrued liabilities | 3 | 3 | |||
Other noncurrent liabilities | 19 | 19 | |||
Other Charges | $ 1 | $ 1 | $ 1 | $ 2 |
Restructuring, Impairment and Other Charges - Schedule of Changes in the Restructuring Reserve (Detail) $ in Millions |
6 Months Ended |
---|---|
Jun. 30, 2018
USD ($)
| |
Restructuring Cost And Reserve [Line Items] | |
Balance at the beginning | $ 26 |
Restructuring Charges | 14 |
Other | 19 |
Cash Paid | (17) |
Balance at the end | 42 |
Employee terminations | |
Restructuring Cost And Reserve [Line Items] | |
Balance at the beginning | 8 |
Restructuring Charges | 7 |
Other | 0 |
Cash Paid | (9) |
Balance at the end | 6 |
Other | |
Restructuring Cost And Reserve [Line Items] | |
Balance at the beginning | 2 |
Restructuring Charges | 6 |
Other | 0 |
Cash Paid | (5) |
Balance at the end | 3 |
Multiemployer pension plan withdrawal obligations | |
Restructuring Cost And Reserve [Line Items] | |
Balance at the beginning | 16 |
Restructuring Charges | 1 |
Other | 19 |
Cash Paid | (3) |
Balance at the end | $ 33 |
Restructuring, Impairment and Other Charges - Restructuring Reserve - Narrative (Detail) - USD ($) $ in Millions |
Jun. 30, 2018 |
Mar. 31, 2018 |
Dec. 31, 2017 |
---|---|---|---|
Restructuring Cost And Reserve [Line Items] | |||
Current restructuring reserve | $ 14 | ||
Noncurrent restructuring reserve | 28 | ||
Restructuring Reserve | 42 | $ 26 | |
Restructuring Liabilities | |||
Restructuring Cost And Reserve [Line Items] | |||
Current restructuring reserve | $ 3 | ||
Noncurrent restructuring reserve | 16 | ||
Multiemployer pension plan withdrawal obligations | |||
Restructuring Cost And Reserve [Line Items] | |||
Restructuring Reserve | $ 33 | $ 16 | |
Multiemployer pension plan withdrawal obligations | Restructuring Liabilities | |||
Restructuring Cost And Reserve [Line Items] | |||
Restructuring Reserve | $ 19 |
Commitments and Contingencies - Narrative (Detail) |
Jun. 30, 2018
Facility
|
---|---|
Commitments And Contingencies Disclosure [Abstract] | |
Number of sites cited as potentially responsible party | 10 |
Number of previously and currently owned sites with potential remediation obligations | 3 |
Debt - Schedule of the Company's Debt Obligations (Detail) - USD ($) $ in Millions |
Jun. 30, 2018 |
Dec. 31, 2017 |
Sep. 30, 2016 |
||
---|---|---|---|---|---|
Debt Instrument [Line Items] | |||||
Capital lease and other obligations | $ 3 | $ 3 | |||
Unamortized debt issuance costs | (11) | (12) | |||
Total debt | 914 | 822 | |||
Less: current portion | (234) | (123) | |||
Long-term debt | 680 | 699 | |||
Borrowings under the Revolving Credit Facility | |||||
Debt Instrument [Line Items] | |||||
Term Loan Facility | 190 | 75 | |||
Term Loan Facility due September 30, 2022 | |||||
Debt Instrument [Line Items] | |||||
Term Loan Facility | [1] | 282 | 306 | ||
8.75% Senior Secured Notes due October 15, 2023 | |||||
Debt Instrument [Line Items] | |||||
Senior Secured Notes | $ 450 | $ 450 | $ 450 | ||
|
Debt - Schedule of the Company's Debt (Parenthetical) (Detail) |
6 Months Ended | |
---|---|---|
Jun. 30, 2018 |
Dec. 31, 2017 |
|
Term Loan Facility due September 30, 2022 | ||
Debt Instrument [Line Items] | ||
Debt instrument, maturity date | Sep. 30, 2022 | |
Debt instrument, variable interest rate | 7.59% | 7.07% |
8.75% Senior Secured Notes due October 15, 2023 | ||
Debt Instrument [Line Items] | ||
Debt instrument, interest rate | 8.75% | |
Debt instrument, maturity date | Oct. 15, 2023 |
Equity - Schedule of the Company's Equity Activity (Detail) - USD ($) $ in Millions |
3 Months Ended | 6 Months Ended | |||
---|---|---|---|---|---|
May 31, 2018 |
Jun. 30, 2018 |
Jun. 30, 2017 |
Jun. 30, 2018 |
Jun. 30, 2017 |
|
Equity [Abstract] | |||||
Balance | $ 248 | $ 240 | |||
Net (loss) income | $ 8 | $ 5 | (3) | 4 | |
Other comprehensive (loss) income | (10) | 11 | (1) | 23 | |
Share-based compensation | 8 | 7 | |||
Issuance of share-based awards, net of withholdings and other | (2) | (1) | |||
Repurchase of common stock | $ (20) | (20) | 0 | ||
Revenue recognition adjustments | 9 | 0 | |||
Cash dividends paid | (18) | (16) | |||
Issuance of common stock | 0 | 18 | |||
Separation-related adjustments | 0 | (12) | |||
Balance | $ 221 | $ 263 | $ 221 | $ 263 |
Equity - Narrative (Detail) - USD ($) $ in Millions |
3 Months Ended | 6 Months Ended | |||
---|---|---|---|---|---|
May 31, 2018 |
Mar. 28, 2017 |
Mar. 31, 2018 |
Jun. 30, 2018 |
Jun. 30, 2017 |
|
Equity [Line Items] | |||||
Repurchase of common stock, shares | 1,600,000 | 0 | |||
Total repurchase cost | $ 20 | $ 20 | $ 0 | ||
Revenue recognition adjustments | 9 | 0 | |||
Issuance of common stock, value | $ 0 | $ 18 | |||
Over-allotment Option | |||||
Equity [Line Items] | |||||
Issuance of common stock, shares | 900,000 | ||||
Issuance of common stock, value | $ 18 | ||||
ASU 2014-09 | |||||
Equity [Line Items] | |||||
Revenue recognition adjustments | $ 9 |
Earnings Per Share - Narrative (Detail) - USD ($) $ in Millions |
6 Months Ended | ||
---|---|---|---|
May 31, 2018 |
Jun. 30, 2018 |
Jun. 30, 2017 |
|
Earnings Per Share [Abstract] | |||
Repurchase of common stock, shares | 1,600,000 | 0 | |
Total repurchase cost | $ 20 | $ 20 | $ 0 |
Earnings Per Share - Calculation of Basic and Diluted EPS as Well as Reconciliation of Basic Shares to Diluted Shares (Detail) - USD ($) $ / shares in Units, shares in Millions, $ in Millions |
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2018 |
Jun. 30, 2017 |
Jun. 30, 2018 |
Jun. 30, 2017 |
|
Net earnings (loss) per common share: | ||||
Basic | $ 0.24 | $ 0.13 | $ (0.09) | $ 0.11 |
Diluted | 0.23 | 0.12 | (0.09) | 0.11 |
Dividends declared per common share | $ 0.26 | $ 0.25 | $ 0.52 | $ 0.50 |
Numerator: | ||||
Net income (loss) | $ 8 | $ 5 | $ (3) | $ 4 |
Denominator: | ||||
Weighted average number of common shares outstanding | 34.0 | 33.5 | 34.3 | 33.1 |
Dilutive options and awards | 0.3 | 0.3 | 0.0 | 0.3 |
Diluted weighted average number of common shares outstanding | 34.3 | 33.8 | 34.3 | 33.4 |
Restricted Stock Units | ||||
Weighted-average number of anti-dilutive share-based awards: | ||||
Weighted-average number of anti-dilutive share-based awards | 0.5 | 0.1 | 0.0 | 0.0 |
Options | ||||
Weighted-average number of anti-dilutive share-based awards: | ||||
Weighted-average number of anti-dilutive share-based awards | 0.2 | 0.0 | 0.0 | 0.0 |
Retirement Plans - Components of Estimated Net Pension (Income) Loss (Detail) - Pension Benefits - USD ($) $ in Millions |
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2018 |
Jun. 30, 2017 |
Jun. 30, 2018 |
Jun. 30, 2017 |
|
Defined Benefit Plan Disclosure [Line Items] | ||||
Interest cost | $ 22 | $ 22 | $ 44 | $ 45 |
Expected return on plan assets | (39) | (38) | (78) | (76) |
Amortization of actuarial loss | 5 | 4 | 10 | 8 |
Net periodic benefit (income) loss | (12) | (12) | (24) | (23) |
Qualified | ||||
Defined Benefit Plan Disclosure [Line Items] | ||||
Interest cost | 21 | 21 | 42 | 43 |
Expected return on plan assets | (39) | (38) | (78) | (76) |
Amortization of actuarial loss | 5 | 4 | 10 | 8 |
Net periodic benefit (income) loss | (13) | (13) | (26) | (25) |
Non-Qualified & International | ||||
Defined Benefit Plan Disclosure [Line Items] | ||||
Interest cost | 1 | 1 | 2 | 2 |
Expected return on plan assets | 0 | 0 | 0 | 0 |
Amortization of actuarial loss | 0 | 0 | 0 | 0 |
Net periodic benefit (income) loss | $ 1 | $ 1 | $ 2 | $ 2 |
Defined Contribution Plan, Sponsor Location [Extensible List] | us-gaap:ForeignPlanMember | us-gaap:ForeignPlanMember | us-gaap:ForeignPlanMember | us-gaap:ForeignPlanMember |
Comprehensive Income - Schedule of Changes in Accumulated Other Comprehensive Loss (Detail) - USD ($) $ in Millions |
6 Months Ended | |
---|---|---|
Jun. 30, 2018 |
Jun. 30, 2017 |
|
Accumulated Other Comprehensive Income Loss [Line Items] | ||
Balance | $ 248 | $ 240 |
Balance | 221 | 263 |
Pension Plan Cost | ||
Accumulated Other Comprehensive Income Loss [Line Items] | ||
Balance | (428) | (462) |
Other comprehensive income (loss) before reclassifications | 0 | 0 |
Amounts reclassified from accumulated other comprehensive loss | 8 | 5 |
Reclassification to accumulated deficit | (97) | |
Net change in accumulated other comprehensive loss | (89) | 5 |
Balance | (517) | (457) |
Translation Adjustments | ||
Accumulated Other Comprehensive Income Loss [Line Items] | ||
Balance | (48) | (69) |
Other comprehensive income (loss) before reclassifications | (9) | 18 |
Amounts reclassified from accumulated other comprehensive loss | 0 | 0 |
Reclassification to accumulated deficit | 0 | |
Net change in accumulated other comprehensive loss | (9) | 18 |
Balance | (57) | (51) |
Accumulated Other Comprehensive Loss | ||
Accumulated Other Comprehensive Income Loss [Line Items] | ||
Balance | (476) | (531) |
Other comprehensive income (loss) before reclassifications | (9) | 18 |
Amounts reclassified from accumulated other comprehensive loss | 8 | 5 |
Reclassification to accumulated deficit | (97) | |
Net change in accumulated other comprehensive loss | (98) | 23 |
Balance | $ (574) | $ (508) |
Comprehensive Income - Additional Information (Detail) $ in Millions |
3 Months Ended |
---|---|
Mar. 31, 2018
USD ($)
| |
ASU 2018-02 | |
Accumulated Other Comprehensive Income Loss [Line Items] | |
Cummulative effect on equity or net asset upon adoption of accounting standard | $ 97 |
Comprehensive Income - Schedule of Reclassification From Accumulated Other Comprehensive Loss (Detail) - USD ($) $ in Millions |
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2018 |
Jun. 30, 2017 |
Jun. 30, 2018 |
Jun. 30, 2017 |
|
Amortization of Pension Plan Cost: Net Actuarial Loss | ||||
Reclassification from Accumulated Other Comprehensive Loss | ||||
Reclassifications before tax | $ 5 | $ 4 | $ 10 | $ 8 |
Accumulated Defined Benefit Plans Adjustment | ||||
Reclassification from Accumulated Other Comprehensive Loss | ||||
Reclassifications before tax | 5 | 4 | 10 | 8 |
Income tax expense | 1 | 2 | 2 | 3 |
Reclassifications, net of tax | $ 4 | $ 2 | $ 8 | $ 5 |
Segment Information - Narrative (Detail) |
6 Months Ended |
---|---|
Jun. 30, 2018
Category
| |
Office Products | |
Segment Reporting Information [Line Items] | |
Number of core product categories | 5 |
Segment Information - Schedule of Segment Reporting Information (Detail) - USD ($) $ in Millions |
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2018 |
Jun. 30, 2017 |
Jun. 30, 2018 |
Jun. 30, 2017 |
|
Segment Reporting Information [Line Items] | ||||
Net sales | $ 943 | $ 848 | $ 1,872 | $ 1,669 |
Income (loss) from Operations | 18 | 7 | 12 | 14 |
Assets of Operations | 1,921 | 1,851 | 1,921 | 1,851 |
Depreciation and Amortization | 34 | 39 | 72 | 79 |
Capital Expenditures | 17 | 15 | 37 | 36 |
Total Operating Segments | ||||
Segment Reporting Information [Line Items] | ||||
Net sales | 943 | 848 | 1,872 | 1,669 |
Income (loss) from Operations | 33 | 34 | 37 | 55 |
Assets of Operations | 1,850 | 1,737 | 1,850 | 1,737 |
Depreciation and Amortization | 33 | 39 | 71 | 78 |
Capital Expenditures | 16 | 14 | 35 | 34 |
Total Operating Segments | Print | ||||
Segment Reporting Information [Line Items] | ||||
Net sales | 789 | 723 | 1,595 | 1,433 |
Income (loss) from Operations | 20 | 22 | 22 | 34 |
Assets of Operations | 1,483 | 1,440 | 1,483 | 1,440 |
Depreciation and Amortization | 30 | 36 | 64 | 71 |
Capital Expenditures | 15 | 12 | 34 | 32 |
Total Operating Segments | Office Products | ||||
Segment Reporting Information [Line Items] | ||||
Net sales | 154 | 125 | 277 | 236 |
Income (loss) from Operations | 13 | 12 | 15 | 21 |
Assets of Operations | 367 | 297 | 367 | 297 |
Depreciation and Amortization | 3 | 3 | 7 | 7 |
Capital Expenditures | 1 | 2 | 1 | 2 |
Corporate | ||||
Segment Reporting Information [Line Items] | ||||
Net sales | 0 | 0 | 0 | 0 |
Income (loss) from Operations | (15) | (27) | (25) | (41) |
Assets of Operations | 71 | 114 | 71 | 114 |
Depreciation and Amortization | 1 | 0 | 1 | 1 |
Capital Expenditures | $ 1 | $ 1 | $ 2 | $ 2 |
Related Parties - Narrative (Detail) - USD ($) shares in Millions, $ in Millions |
3 Months Ended | |
---|---|---|
Mar. 28, 2017 |
Mar. 31, 2017 |
|
RRD | Principal Owner | ||
Related Party Transaction [Line Items] | ||
Number of common stock shares sold | 6.2 | |
Ownership percentage | 19.25% | |
Freight, logistics and premedia services purchased | $ 51 | |
RRD's subsidiaries | Subsidiary of Common Parent | ||
Related Party Transaction [Line Items] | ||
Net revenues from related party sales | $ 32 |
Subsequent Events - Narrative (Detail) - USD ($) $ in Millions |
Jul. 02, 2018 |
Jun. 30, 2018 |
---|---|---|
Print | Europe | ||
Subsequent Event [Line Items] | ||
Impact on income tax provision related to reversal of estimated net deferred tax assets | $ 25 | |
RRD’s Print Logistics Business | Subsequent Events | ||
Subsequent Event [Line Items] | ||
Purchase price of acquisition, cash | $ 58 |
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