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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q  

    

(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, 2020  

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)

 

Securities registered pursuant to Section 12(b) of the Act: None

 

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 has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  

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

  

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

Emerging growth company

 

 

 

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 24, 2020, 33,586,062 shares of common stock were outstanding.          

 

 

 

 


 

LSC COMMUNICATIONS, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2020

 

TABLE OF CONTENTS

 

 

 

 

 

 

Page

PART I. FINANCIAL INFORMATION

 

 

Item 1:

 

Condensed Consolidated Financial Statements (unaudited) (Debtor-in-Possession)

 

3

 

 

Condensed Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019

 

3

 

 

Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2020 and 2019

 

4

 

 

Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2020 and 2019

 

5

 

 

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2020 and 2019

 

6

 

 

Condensed Consolidated Statements of Stockholders' Equity for the three and six months ended June 30, 2020 and 2019

 

7

 

 

Notes to Condensed Consolidated Financial Statements

 

8

Item 2:

 

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

 

41

Item 3:

 

Quantitative and Qualitative Disclosures About Market Risk

 

60

Item 4:

 

Controls and Procedures

 

60

Part II. Other Information

 

61

Item 1:

 

Legal Proceedings

 

61

Item 1A:

 

Risk Factors

 

61

Item 2:

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

65

Item 4:

 

Mine Safety Disclosures

 

65

Item 6:

 

Exhibits

 

66

 

 

Signatures

 

70

 

 

2


 

  

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

  

LSC COMMUNICATIONS, INC.  

(DEBTOR-IN-POSSESSION)

CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions, except share and per share data)        

(UNAUDITED)                  

 

 

 

June 30,

 

 

December 31,

 

 

 

2020

 

 

2019 (1)

 

ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

97

 

 

$

105

 

Receivables

 

 

 

 

 

 

 

 

     Amortized cost

 

 

426

 

 

 

484

 

     Less: Allowance for credit losses

 

 

(15

)

 

 

(12

)

     Receivables, net

 

 

411

 

 

 

472

 

Inventories (Note 5)

 

 

141

 

 

 

170

 

Income tax receivable

 

 

3

 

 

 

5

 

Prepaid expenses and other current assets

 

 

45

 

 

 

36

 

Total current assets

 

 

697

 

 

 

788

 

Property, plant and equipment-net (Note 6)

 

 

409

 

 

 

440

 

Goodwill (Note 7)

 

 

52

 

 

 

52

 

Other intangible assets-net (Note 7)

 

 

112

 

 

 

120

 

Right-of-use assets for operating leases

 

 

140

 

 

 

163

 

Deferred income taxes

 

 

7

 

 

 

9

 

Other noncurrent assets

 

 

68

 

 

 

77

 

Total assets

 

$

1,485

 

 

$

1,649

 

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

 

Accounts payable

 

$

88

 

 

$

175

 

Accrued liabilities

 

 

170

 

 

 

211

 

Short-term debt and current portion of long-term debt (Note 10)

 

 

1

 

 

 

465

 

Short-term operating lease liabilities

 

 

32

 

 

 

42

 

Total current liabilities

 

 

291

 

 

 

893

 

Long-term debt (Note 10)

 

 

 

 

 

445

 

Pension liabilities

 

 

1

 

 

 

156

 

Restructuring and multi-employer pension liabilities (Note 8)

 

 

 

 

 

42

 

Long-term operating lease liabilities

 

 

113

 

 

 

129

 

Other noncurrent liabilities

 

 

47

 

 

 

56

 

Liabilities subject to compromise (Note 2)

 

 

1,222

 

 

 

 

Total liabilities

 

$

1,674

 

 

$

1,721

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 9)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EQUITY

 

 

 

 

 

 

 

 

Common stock, $0.01 par value

 

 

 

 

 

 

 

 

Authorized: 65,000,000

 

 

 

 

 

 

 

 

Issued: 35,719,936 shares in 2020 (2019: 35,559,052)

 

$

 

 

$

 

Additional paid-in capital

 

 

837

 

 

 

835

 

Accumulated deficit

 

 

(480

)

 

 

(365

)

Accumulated other comprehensive loss (Note 14)

 

 

(521

)

 

 

(517

)

Treasury stock, at cost: 2,133,874 shares in 2020 (2019: 2,084,055)

 

 

(25

)

 

 

(25

)

Total equity

 

 

(189

)

 

 

(72

)

Total liabilities and equity

 

$

1,485

 

 

$

1,649

 

 

(1) As Adjusted, see Impact of Change in Accounting Principle in Note 1    

 

See Notes to the Condensed Consolidated Financial Statements    

3


 

LSC COMMUNICATIONS, INC.

(DEBTOR-IN-POSSESSION)

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions, except per share data)      

(UNAUDITED)     

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2020

 

 

2019 (1)

 

 

2020

 

 

2019 (1)

 

Net sales

 

$

532

 

 

$

869

 

 

$

1,233

 

 

$

1,714

 

Cost of sales

 

 

468

 

 

 

750

 

 

 

1,084

 

 

 

1,485

 

Selling, general and administrative expenses (exclusive of

     depreciation and amortization)

 

 

61

 

 

 

80

 

 

 

136

 

 

 

165

 

Restructuring, impairment and other charges-net (Note 8)

 

 

32

 

 

 

24

 

 

 

58

 

 

 

37

 

Depreciation and amortization

 

 

28

 

 

 

31

 

 

 

55

 

 

 

62

 

(Loss) from operations

 

 

(57

)

 

 

(16

)

 

 

(100

)

 

 

(35

)

Interest expense-net (Note 10)

 

 

3

 

 

 

19

 

 

 

21

 

 

 

38

 

Settlement of retirement benefit obligations (Note 12)

 

 

 

 

 

1

 

 

 

 

 

 

133

 

Investment and other (income)-net

 

 

(11

)

 

 

(8

)

 

 

(21

)

 

 

(16

)

Reorganization items, net (Note 2)

 

 

14

 

 

 

 

 

 

14

 

 

 

 

(Loss) before income taxes

 

 

(63

)

 

 

(28

)

 

 

(114

)

 

 

(190

)

Income tax (benefit) expense

 

 

 

 

 

(3

)

 

 

1

 

 

 

(40

)

Net (loss)

 

$

(63

)

 

$

(25

)

 

$

(115

)

 

$

(150

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) per common share (Note 11)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net (loss) per share

 

$

(1.86

)

 

$

(0.72

)

 

$

(3.42

)

 

$

(4.49

)

Diluted net (loss) per share

 

$

(1.86

)

 

$

(0.72

)

 

$

(3.42

)

 

$

(4.49

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

33.7

 

 

 

33.5

 

 

 

33.6

 

 

 

33.4

 

Diluted

 

33.7

 

 

 

33.5

 

 

 

33.6

 

 

 

33.4

 

 

                            

(1) As Adjusted, see Impact of Change in Accounting Principle in Note 1         

      

    

  

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See Notes to the Condensed Consolidated Financial Statements

4


 

LSC COMMUNICATIONS, INC.

(DEBTOR-IN-POSSESSION)

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in millions)

(UNAUDITED)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2020

 

 

2019 (1)

 

 

2020

 

 

2019 (1)

 

Net (loss)

 

$

(63

)

 

$

(25

)

 

$

(115

)

 

$

(150

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax (Note 14):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Translation adjustments

 

 

1

 

 

 

1

 

 

 

(10

)

 

 

2

 

Adjustment for net periodic pension plan cost

 

 

3

 

 

 

4

 

 

 

6

 

 

 

110

 

Other comprehensive income (loss)

 

 

4

 

 

 

5

 

 

 

(4

)

 

 

112

 

Comprehensive (loss) income

 

$

(59

)

 

$

20

 

 

$

(119

)

 

$

(38

)

   

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, 2020, respectively.  The adjustments for net pension plan cost were net of income tax expense of $1 million and $37 million for the three and six months ended June 30, 2019, respectively.  The tax expense for the six months ended June 30, 2019 was primarily due to the settlements of retirement benefit obligations that are disclosed in Note 14, Comprehensive Income.

 

  

(1) As Adjusted, see Impact of Change in Accounting Principle in Note 1  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See Notes to the Condensed Consolidated Financial Statements

5


 

LSC COMMUNICATIONS, INC.

(DEBTOR-IN-POSSESSION)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

(UNAUDITED)

 

 

Six Months Ended

 

 

 

 

June 30,

 

 

 

 

2020

 

 

2019 (1)

 

 

Cash Flows from Operating Activities

 

 

 

 

 

 

 

 

 

Net (loss)

 

$

(115

)

 

$

(150

)

 

Adjustments to reconcile net (loss) to net cash provided by operating activities:

 

 

 

 

 

 

 

 

 

Impairment charges

 

 

2

 

 

 

19

 

 

Depreciation and amortization

 

 

55

 

 

 

62

 

 

Provision for doubtful accounts receivable

 

 

3

 

 

 

4

 

 

Share-based compensation

 

 

2

 

 

 

4

 

 

Deferred income taxes

 

 

(1

)

 

 

(39

)

 

Settlement of retirement benefit obligations

 

 

 

 

 

133

 

 

Non-cash reorganization items, net

 

 

7

 

 

 

 

 

Other

 

 

1

 

 

 

1

 

 

Changes in operating assets and liabilities - net of acquisitions and dispositions:

 

 

 

 

 

 

 

 

 

Accounts receivable-net

 

 

53

 

 

 

32

 

 

Inventories

 

 

28

 

 

 

(15

)

 

Prepaid expenses and other current assets

 

 

(14

)

 

 

1

 

 

Accounts payable

 

 

43

 

 

 

(13

)

 

Income taxes payable and receivable

 

 

1

 

 

 

(3

)

 

Accrued liabilities and other

 

 

(15

)

 

 

(33

)

 

Changes in liabilities subject to compromise

 

 

(40

)

 

 

 

 

Net cash  provided by operating activities

 

 

10

 

 

 

3

 

 

 

 

 

 

 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(17

)

 

 

(49

)

 

Acquisitions of businesses, net of cash acquired

 

 

 

 

 

(3

)

 

Net proceeds from sales and purchases of investments and other assets

 

 

2

 

 

 

 

 

Net cash (used in) investing activities

 

 

(15

)

 

 

(52

)

 

 

 

 

 

 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

 

 

 

 

Payments of current maturities and long-term debt

 

 

 

 

 

(22

)

 

Net proceeds from credit facility borrowings

 

 

3

 

 

 

84

 

 

Debt issuance costs

 

 

(1

)

 

 

 

 

Dividends paid

 

 

 

 

 

(17

)

 

Other financing activities

 

 

 

 

 

(1

)

 

Net cash provided by financing activities

 

 

2

 

 

 

44

 

 

 

 

 

 

 

 

 

 

 

 

Effect of exchange rate on cash and cash equivalents

 

 

(2

)

 

 

1

 

 

Net (decrease) in cash, cash equivalents and restricted cash

 

 

(5

)

 

 

(4

)

 

Cash, cash equivalents and restricted cash at beginning of year

 

 

106

 

 

 

24

 

 

Cash, cash equivalents and restricted cash at end of period

 

$

101

 

 

$

20

 

 

 

 

 

 

 

 

 

 

 

 

Reconciliation to the Consolidated Balance Sheets

 

As of

 

 

 

 

June 30, 2020

 

 

December 31, 2019

 

 

Cash and cash equivalents

 

$

97

 

 

$

105

 

 

Restricted cash included in prepaid expenses and other current assets

 

 

4

 

 

 

1

 

 

Total cash, cash equivalents and restricted cash shown in the condensed consolidated

     statements of cash flows

 

$

101

 

 

$

106

 

 

 

(1) As Adjusted, see Impact of Change in Accounting Principle in Note 1  

 

 

 

 

 

See Notes to the Condensed Consolidated Financial Statements    

6


 

LSC COMMUNICATIONS, INC.

(DEBTOR-IN-POSSESSION)

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(in millions)

(UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

Common Stock

 

 

Paid-in

 

 

Treasury Stock

 

 

(Accumulated

 

 

Comprehensive

 

 

Total

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Shares

 

 

Amount

 

 

Deficit)

 

 

(Loss) Income

 

 

Equity

 

Balance at December 31, 2019

 

 

36

 

 

$

 

 

$

835

 

 

 

2

 

 

$

(25

)

 

$

(365

)

 

$

(517

)

 

$

(72

)

Net (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(52

)

 

 

 

 

 

(52

)

Share-based compensation

 

 

 

 

 

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

 

Other comprehensive (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8

)

 

 

(8

)

Balance at March 31, 2020

 

 

36

 

 

$

 

 

$

836

 

 

 

2

 

 

$

(25

)

 

$

(417

)

 

$

(525

)

 

$

(131

)

Net (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(63

)

 

 

 

 

 

(63

)

Share-based compensation

 

 

 

 

 

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4

 

 

 

4

 

Balance at June 30, 2020

 

 

36

 

 

$

 

 

$

837

 

 

 

2

 

 

$

(25

)

 

$

(480

)

 

$

(521

)

 

$

(189

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

Common Stock

 

 

Paid-in

 

 

Treasury Stock

 

 

(Accumulated

 

 

Comprehensive

 

 

Total

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Shares

 

 

Amount

 

 

Deficit)

 

 

(Loss) Income

 

 

Equity

 

Balance at December 31, 2018

 

35

 

 

$

 

 

$

828

 

 

 

2

 

 

$

(24

)

 

$

(51

)

 

$

(575

)

 

$

178

 

Net (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(125

)

 

 

 

 

 

(125

)

Issuance of share-based awards,

     net of withholdings and other

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

(1

)

 

 

 

 

 

 

 

 

(1

)

Share-based compensation

 

 

 

 

 

 

 

 

3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3

 

Cash dividends paid

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(9

)

 

 

 

 

 

(9

)

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

107

 

 

 

107

 

Balance at March 31, 2019

 

 

36

 

 

$

 

 

$

831

 

 

 

2

 

 

$

(25

)

 

$

(185

)

 

$

(468

)

 

$

153

 

Net (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(25

)

 

 

 

 

 

(25

)

Share-based compensation

 

 

 

 

 

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

 

Cash dividends paid

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8

)

 

 

 

 

 

(8

)

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5

 

 

 

5

 

Balance at June 30, 2019

 

 

36

 

 

$

 

 

$

832

 

 

 

2

 

 

$

(25

)

 

$

(218

)

 

$

(463

)

 

$

126

 

 

Refer to Impact of Change in Accounting Principle in Note 1, Overview and Basis of Presentation, for information on the adjustments made to accumulated deficit and accumulated other comprehensive loss in both periods.

 

There were dividends declared per common share of $0.26 and $0.52 during the three and six months ended June 30, 2019 (none during the three and six months ended June 30, 2020).   

 

 

 

 

 

 

 

 

 

See Notes to the Condensed Consolidated Financial Statements

 

7


 

LSC Communications, Inc.

(DEBTOR-IN-POSSESSION)

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Six Months Ended June 30, 2020 and 2019

(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 services.  The Company utilizes a broad portfolio of technology capabilities coupled with consultative attention to clients' needs to increase speed to market, reduce costs, provide postal savings to customers and improve efficiencies.  The Company prints magazines, catalogs, books and directories, and its office products offerings include filing products, envelopes, note-taking products, binder products, and forms. 

 

 

Voluntary Reorganization under Chapter 11

 

On April 13, 2020 (the “Petition Date”), the Company and certain of its subsidiaries filed voluntary petitions for relief under Chapter 11 of title 11 of the United States Code, 11 U.S.C. §§ 101-1532 (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”) (collectively, the “Chapter 11 Cases”).  Refer to Note 2, Voluntary Reorganization under Chapter 11, for more information on the Chapter 11 Cases and impact to the Company’s ability to continue as a going concern.

 

 

Going Concern

 

The accompanying condensed consolidated financial statements were prepared assuming that the Company will continue as a going concern and contemplate the continuity of our operations, realization of assets and satisfaction of liabilities and commitments in the normal course of business.  Our ability to continue as a going concern is contingent upon our ability to comply with the covenants of the Debtor-in-Possession Credit Agreement described in Note 10, Debt, and our ability to implement, subject to the Bankruptcy Court’s approval, a plan of reorganization, among other factors.

 

While operating as debtors-in-possession under Chapter 11, we may sell or otherwise dispose of or liquidate assets or settle liabilities, subject to the approval of the Bankruptcy Court or as otherwise permitted in the ordinary course of business (and subject to restrictions in our debt agreements), for amounts other than those reflected in the accompanying condensed consolidated financial statements.  Further, the plan of reorganization could materially change the amounts and classifications of assets and liabilities reported in the condensed consolidated financial statements.

 

As a result of the factors noted above, we believe there is substantial doubt about the Company’s ability to continue as a going concern.  The condensed consolidated financial statements included in this quarterly report on Form 10-Q do not include any adjustments related to the recoverability and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. 

 

 

8


LSC Communications, Inc.

(DEBTOR-IN-POSSESSION)

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Six Months Ended June 30, 2020 and 2019

(tabular amounts in millions, except per share data)

 

Coronavirus Pandemic (“COVID-19”)  

 

During and subsequent to the six months ended June 30, 2020, the novel coronavirus strain, known as COVID-19, continues to impact the world at an increasing rate. Measures taken by governmental authorities and private actors to limit the spread of this virus may interfere with the ability of the Company's employees, suppliers, and other business providers to carry out their assigned tasks or supply materials at ordinary levels of performance relative to the conduct of the business which may cause a material curtailment to certain business operations. Moreover, as a large part of the Company's business involves sales of books and other products used in schools and school facilities, if COVID-19 related measures continue to result in widespread and lengthy school closings, the Company's consolidated results of operations and financial condition will be adversely impacted.  Books sold in retail stores have also been adversely impacted as both large chains and independent stores have been forced to close.  Additionally, as COVID-19 has significantly impacted retailers' stores, distribution centers and supply chains, the Company has experienced an adverse impact on our catalogs and office products businesses.  Disruption across many other industries has also significantly impact demand for advertising, which is expected to result in page count and volume reductions in magazines.

 

We continue to monitor the situation, to assess further possible implications to our business and customers, and to take actions in an effort to mitigate adverse consequences. The Company has expanded its work-from-home policy for its non-manufacturing employees, has focused on obtaining protective equipment and implementing social distancing and other policies for its manufacturing employees and continues to adhere to guidance issued by governmental authorities.  

 

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law.  Refer to Note 13, Taxes, for more information on the CARES Act.

 

 

Basis of Presentation      

 

The condensed consolidated financial statements include the balance sheets and statements of operations, stockholders’ equity 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.  

 

As a result of the Company’s segment analysis in the fourth quarter of 2019, Mexico met the requirements to be classified as a reportable segment (previously included as a non-reportable segment).  All prior year amounts have been reclassified to conform to the Company’s current reporting structure.  Refer to Note 15, Segment Information, for reclassified balances for the three and six months ended June 30, 2019.

 

The Company adopted Accounting Standards Update No. 2016-13 “Financial Instruments-Credit Losses (Topic 326)” (“ASU 2016-13” or “ASC 326”) on January 1, 2020 using the modified retrospective adoption method.  As a result of the adoption, the Company separately disclosed the amortized cost amount of total receivables separately from the allowance for credit losses in the condensed consolidated balance sheet.  Refer to Note 3, Revenue Recognition, for more information.  

  

  

9


LSC Communications, Inc.

(DEBTOR-IN-POSSESSION)

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Six Months Ended June 30, 2020 and 2019

(tabular amounts in millions, except per share data)

 

Impact of Change in Accounting Principle

 

Beginning in the first quarter of 2020, the Company changed the method of accounting for the market-related value of assets for a class of assets within the U.S. Qualified Plan and Non-Qualified plans.  This class of assets is currently comprised of liability-hedging investments, which represents approximately 60% of the plans’ assets. Liability-hedging investments provide a natural hedge against the changes in the recorded amount of net periodic pension cost.  Refer to Note 12, Retirement Plans, in the Company’s Form 10-K for the fiscal year ended December 31, 2019 for disclosure by asset classifications.  The previous method of accounting was to use the market-related value of assets for all the plans’ assets by recognizing changes in fair value of plan assets ratably over a five-year period.  As a result of the change in method of accounting the Company will no longer use the market-related value of liability-hedging investments.  Instead, the fair value of liability-hedging investments was immediately included in the calculation of net periodic pension cost. This change in accounting method is preferable because it accelerated the recognition of the fair value for this class of assets into net income or loss.  No change was made to the accounting principle for the other classes of pension assets, which represent the remaining 40% of the pension asset portfolio for the plan.

 

The change in accounting principle requires retrospective application and prospective disclosure. Refer below for the restatements on previously issued financial statements.  Retrospective application was applied to periods beginning in 2017 as it was determined not to be possible to go further than that date due to the Company’s separation in 2016 from its prior parent company.  Prior to the separation in 2016, the U.S. Qualified and Non-Qualified pension plans were legally owned by the Company’s prior parent company.

 

The cumulative effect of the change on accumulated deficit was an increase in deficit of $9 million as of January 1, 2019 and a $9 million decrease in accumulated other comprehensive loss, as shown in the condensed statement of stockholders’ equity.  

 

The historical statements of cash flows are also being retrospectively restated as changes in net (loss) income, expense related to settlement of retirement obligations and pension income flow through the operating activities section with an offsetting impact to the change in accrued liabilities and other. There is no net impact to cash flows provided by (used in) operating activities.

 

The tables below represent the impact of the change in accounting principle on the condensed consolidated balance sheets and statement of stockholders’ equity for certain periods since 2018:

 

 

 

 

Previously Disclosed in Form 10-K

 

 

 

 

 

 

As Reported with Change

 

 

 

As of December 31, 2018

 

 

Impact of Change

 

 

As of December 31, 2018

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

(Accumulated deficit)

 

$

(42

)

 

$

(9

)

 

$

(51

)

Accumulated other comprehensive (loss)

     income

 

 

(584

)

 

 

9

 

 

 

(575

)

 

 

 

 

Previously Disclosed in Form 10-K

 

 

 

 

 

 

As Reported with Change

 

 

 

As of December 31, 2019

 

 

Impact of Change

 

 

As of December 31, 2019

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

(Accumulated deficit)

 

$

(354

)

 

$

(11

)

 

$

(365

)

Accumulated other comprehensive (loss)

     income

 

 

(528

)

 

 

11

 

 

 

(517

)

 

 

10


LSC Communications, Inc.

(DEBTOR-IN-POSSESSION)

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Six Months Ended June 30, 2020 and 2019

(tabular amounts in millions, except per share data)

 

 

 

Previously Disclosed in Form 10-Q

 

 

 

 

 

 

As Reported with Change

 

 

 

As of March 31, 2019

 

 

Impact of Change

 

 

As of March 31, 2019

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

(Accumulated deficit)

 

$

(177

)

 

$

(8

)

 

$

(185

)

Accumulated other comprehensive (loss)

     income

 

 

(476

)

 

 

8

 

 

 

(468

)

 

 

 

 

Previously Disclosed in Form 10-Q

 

 

 

 

 

 

As Reported with Change

 

 

 

As of June 30, 2019

 

 

Impact of Change

 

 

As of June 30, 2019

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

(Accumulated deficit)

 

$

(209

)

 

$

(9

)

 

$

(218

)

Accumulated other comprehensive (loss)

     income

 

 

(472

)

 

 

9

 

 

 

(463

)

 

The tables below represent the impact of the change in accounting principle on the condensed consolidated statements of operations and comprehensive income for the three and six months ended June 30, 2019:

 

 

 

Previously Disclosed in Form 10-Q

 

 

 

 

 

 

As Reported with Change

 

 

 

Three Months Ended June 30, 2019

 

 

Impact of Change

 

 

Three Months Ended June 30, 2019

 

Settlement of retirement benefit obligations

 

$

1

 

 

$

 

 

$

1

 

Investment and other (income) expense

 

 

(9

)

 

 

1

 

 

 

(8

)

(Loss) before income taxes

 

 

(27

)

 

 

(1

)

 

 

(28

)

Income tax (benefit)

 

 

(3

)

 

 

 

 

 

(3

)

Net (loss)

 

 

(24

)

 

 

(1

)

 

 

(25

)

Basic net (loss) per share

 

 

(0.69

)

 

 

(0.03

)

 

 

(0.72

)

Diluted net (loss) per share

 

 

(0.69

)

 

 

(0.03

)

 

 

(0.72

)

Adjustment for net periodic pension plan

     cost

 

 

3

 

 

 

1

 

 

 

4

 

Other comprehensive income

 

 

4

 

 

 

1

 

 

 

5

 

Comprehensive (loss)

 

 

(20

)

 

 

 

 

 

(20

)

 

 

 

 

Previously Disclosed in Form 10-Q

 

 

 

 

 

 

As Reported with Change

 

 

 

Six Months Ended June 30, 2019

 

 

Impact of Change

 

 

Six Months Ended June 30, 2019

 

Settlement of retirement benefit obligations

 

$

136

 

 

$

(3

)

 

$

133

 

Investment and other (income) expense

 

 

(19

)

 

 

3

 

 

 

(16

)

(Loss) before income taxes

 

 

(190

)

 

 

 

 

 

(190

)

Income tax (benefit)

 

 

(40

)

 

 

 

 

 

(40

)

Net (loss)

 

 

(150

)

 

 

 

 

 

(150

)

Basic net (loss) per share

 

 

(4.48

)

 

 

(0.01

)

 

 

(4.49

)

Diluted net (loss) per share

 

 

(4.48

)

 

 

(0.01

)

 

 

(4.49

)

Adjustment for net periodic pension plan

     cost

 

 

110

 

 

 

 

 

 

110

 

Other comprehensive income

 

 

112

 

 

 

 

 

 

112

 

Comprehensive (loss)

 

 

(38

)

 

 

 

 

 

(38

)

 

11


LSC Communications, Inc.

(DEBTOR-IN-POSSESSION)

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Six Months Ended June 30, 2020 and 2019

(tabular amounts in millions, except per share data)

 

 

The tables below represent the impact of the change in accounting principle on the condensed consolidated balance sheet as of June 30, 2020 and the statements of operations and comprehensive income for the three and six months ended June 30, 2020:

 

 

 

Previous Accounting Method

 

 

 

 

 

 

As Reported

 

 

 

June 30, 2020

 

 

Impact of Change

 

 

June 30, 2020

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

(Accumulated deficit)

 

$

(473

)

 

$

(7

)

 

$

(480

)

Accumulated other comprehensive (loss)

     income

 

 

(530

)

 

 

9

 

 

 

(521

)

Liabilities subject to compromise (a)

 

 

1,225

 

 

 

(3

)

 

 

1,222

 

 

(a) Pension liabilities related to the U.S. Qualified Plan and Non-Qualified plans were classified as liabilities subject to compromise in the condensed consolidated balance sheet at June 30, 2020.

 

 

 

 

Previous Accounting Method

 

 

 

 

 

 

As Reported

 

 

 

Three Months Ended June 30, 2020

 

 

Impact of Change

 

 

Three Months Ended June 30, 2020

 

Investment and other (income)

 

$

(9

)

 

$

(2

)

 

$

(11

)

(Loss) income before income taxes

 

 

(65

)

 

 

2

 

 

 

(63

)

Income tax (benefit) expense

 

 

(1

)

 

 

1

 

 

 

 

Net (loss) income

 

 

(64

)

 

 

1

 

 

 

(63

)

Basic net (loss) income per share

 

 

(1.91

)

 

 

0.05

 

 

 

(1.86

)

Diluted net (loss) income per share

 

 

(1.91

)

 

 

0.05

 

 

 

(1.86

)

Adjustment for net periodic pension plan

     cost

 

 

3

 

 

 

 

 

 

3

 

Other comprehensive income

 

 

4

 

 

 

 

 

 

4

 

Comprehensive (loss) income

 

 

(60

)

 

 

1

 

 

 

(59

)

 

  

 

 

Previous Accounting Method

 

 

 

 

 

 

As Reported

 

 

 

Six Months Ended June 30, 2020

 

 

Impact of Change

 

 

Six Months Ended June 30, 2020

 

Investment and other (income)

 

$

(17

)

 

$

(4

)

 

$

(21

)

(Loss) income before income taxes

 

 

(118

)

 

 

4

 

 

 

(114

)

Income tax expense

 

 

 

 

 

1

 

 

 

1

 

Net (loss) income

 

 

(118

)

 

 

3

 

 

 

(115

)

Basic net (loss) income per share

 

 

(3.52

)

 

 

0.10

 

 

 

(3.42

)

Diluted net (loss) income per share

 

 

(3.52

)

 

 

0.10

 

 

 

(3.42

)

Adjustment for net periodic pension plan cost

 

 

7

 

 

 

(1

)

 

 

6

 

Other comprehensive (loss)

 

 

(3

)

 

 

(1

)

 

 

(4

)

Comprehensive (loss) income

 

 

(121

)

 

 

2

 

 

 

(119

)

 

 

12


LSC Communications, Inc.

(DEBTOR-IN-POSSESSION)

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Six Months Ended June 30, 2020 and 2019

(tabular amounts in millions, except per share data)

 

Note 2. Voluntary Reorganization under Chapter 11

 

Background Information

 

The Chapter 11 Cases are being jointly administered under the caption In re LSC Communications, Inc., 20-10950.  We and our subsidiaries that are involved in the Chapter 11 Cases will continue to operate our businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code.

 

 

Significant Bankruptcy Court Actions

 

On April 15, 2020, the Bankruptcy Court entered orders granting interim approval of certain motions (the “First Day Motions”), enabling us to conduct our business activities in the ordinary course, subject to the terms and conditions of such orders, including authorizing us to pay employee wages and benefits, to pay taxes and certain governmental fees and charges, to continue to operate our cash management system in the ordinary course, and to pay prepetition claims of certain of our vendors.  The First Day Motions were subsequently approved by the Bankruptcy Court on a final basis at hearings on May 12, 2020 and June 2, 2020.  

 

 

Proposed Sale

 

On June 5, 2020, the Bankruptcy Court entered an order granting approval for a sale and bidding process through which we are authorized to determine the highest or otherwise best offer for the sale of all or substantially all of our assets pursuant to Section 363 of the Bankruptcy Code or a Chapter 11 plan of reorganization.  The auction, if one is held, is currently scheduled for August 25, 2020, and a hearing approving the sale is currently scheduled for September 1, 2020.

 

 

Debtor-In-Possession

 

The Debtors are currently operating as debtors in possession in accordance with the applicable provisions of the Bankruptcy Code. The Bankruptcy Court has approved motions filed by the Debtors that were designed primarily to mitigate the impact of the Chapter 11 Cases on the Company’s operations, customers and employees. In general, as debtors-in-possession under the Bankruptcy Code, the Debtors are authorized to continue to operate as an ongoing business, but may not engage in transactions outside the ordinary course of business without the prior approval of the Bankruptcy Court. Although payment of prepetition claims generally is not permitted, the Bankruptcy Court granted us authority to pay certain pre-petition claims in designated categories and subject to certain terms and conditions.  This relief generally was designed to preserve the value of our business and assets. Among other things, the Bankruptcy Court authorized, but did not require, the Company to pay certain prepetition claims relating to employee wages and benefits, taxes, and certain vendors.  

 

The Company and its debtor subsidiaries have filed monthly financial reports with the Bankruptcy Court since the filing date.

 

 

Debtor-In-Possession Financing

 

As previously disclosed, on April 15, 2020, we obtained debtor-in-possession financing of up to $100 million which, together with our normal operating cash flows, will provide liquidity for the Company to operate as usual and fulfill ongoing commitments to stakeholders during the pendency of the Chapter 11 Cases.  The debtor-in-possession financing facility was approved on a final basis on June 2, 2020.  Refer to Note 10, Debt, for information on the debtor-in-possession financing facility.

 

 

13


LSC Communications, Inc.

(DEBTOR-IN-POSSESSION)

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Six Months Ended June 30, 2020 and 2019

(tabular amounts in millions, except per share data)

 

Automatic Stay  

 

During the pendency of the Chapter 11 Cases, attempts to prosecute, collect, secure or enforce remedies with respect to prepetition claims against the debtors, including litigation relating to the entities involved in the Chapter 11 Cases, are subject to the automatic stay provisions of section 362(a) of the Bankruptcy Code, as modified or amended by the terms of any order entered in the Chapter 11 Cases.  For goods and services provided following the Petition Date, the Company expects to continue to pay vendors under normal terms.  

 

 

Executory Contracts

 

Subject to certain exceptions, under the Bankruptcy Code, the Debtors may assume, amend or reject certain executory contracts and unexpired leases subject to the approval of the Bankruptcy Court and certain other conditions. Generally, the rejection of an executory contract or unexpired lease is treated as a pre-petition breach of such executory contract or unexpired lease and, subject to certain exceptions, relieves the Debtors from performing their future obligations under such executory contract or unexpired lease but entitles the contract counterparty or lessor to a prepetition general unsecured claim for damages caused by such deemed breach. Generally, the assumption of an executory contract or unexpired lease requires the Debtors to cure existing monetary defaults under such executory contract or unexpired lease and provide adequate assurance of future performance. Accordingly, any description of an executory contract or unexpired lease with the Debtors in this document, including, where applicable, a quantification of the Company’s obligations under any such executory contract or unexpired lease of the Debtors, is qualified by any overriding rejection rights the Company has under the Bankruptcy Code.

 

 

Potential Claims

 

Debtors have filed with the Bankruptcy Court schedules and statements setting forth, among other things, the assets and liabilities of each of the debtors, subject to the assumptions filed in connection therewith. These schedules and statements may be subject to further amendment or modification after filing.  Differences in amounts recorded and claims filed by creditors will be investigated and resolved, including through the filing of objections with the Bankruptcy Court, where appropriate. The Bankruptcy Court does not allow for claims that have been acknowledged as duplicates. In addition, the Company may ask the Bankruptcy Court to disallow claims that the Company believes have been later amended or superseded, are without merit, are overstated or should be disallowed for other reasons.  In addition, as a result of this process, the Company may identify additional liabilities that will need to be recorded or reclassified to liabilities subject to compromise in the Company’s condensed consolidated balance sheet. In light of the substantial number of claims filed, and expected to be filed, the claims resolution process may take considerable time to complete and likely will continue after the Chapter 11 Cases emerge from bankruptcy.

 

 

Accounting Considerations

 

The Company has applied Accounting Standards Codification (“ASC”) Topic 852, Reorganizations (“ASC 852”), in preparing the condensed consolidated financial statements.  ASC 852 requires the financial statements, for periods subsequent to the commencement of the Chapter 11 Cases, to distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business.  Accordingly, certain charges incurred during 2020 related to the Chapter 11 Cases are recorded as reorganization items, net in the Company’s condensed consolidated statement of operations.  

 

In addition, pre-petition debtor obligations that may be impacted by the Chapter 11 Cases have been classified as liabilities subject to compromise in the Company’s condensed consolidated balance sheet at June 30, 2020.  Generally, actions to enforce or otherwise effect payment of pre-petition liabilities are stayed.  These liabilities are reported at the amounts the Company anticipates will be allowed by the Bankruptcy Court, even if they may be settled for lesser amounts.  These amounts represent our current estimate of known or potential obligations to be resolved in connection with the Chapter 11 Cases, and may differ from actual future settlement amounts paid.  Differences between liabilities estimated and claims filed, or to be filed, will be investigated and resolved in connection with the claims resolution process.  We will continue to evaluate these liabilities throughout the Chapter 11 process and adjust amounts as necessary.  Such adjustments may be material.  These liabilities subject to compromise may not be fully secured and have a possibility of not being repaid at the full claim amount.

14


LSC Communications, Inc.

(DEBTOR-IN-POSSESSION)

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Six Months Ended June 30, 2020 and 2019

(tabular amounts in millions, except per share data)

 

 

ASC 852 requires certain additional reporting for financial statements prepared between the Petition Date and the date of emergence from bankruptcy, including:

 

 

Reclassification of debtor pre-petition liabilities that are unsecured, under-secured or where it cannot be determined that the liabilities are fully secured, to a separate line item in the condensed consolidated balance sheet called, "Liabilities subject to compromise"; and

 

Segregation of reorganization items, net as a separate line in the condensed consolidated statement of operations, outside of loss from operations.

 

See below for more information regarding balances disclosed as reorganization items, net and liabilities subject to compromise.

 

 

Reorganization Items, Net  

 

The debtors have incurred and will continue to incur significant costs associated with the reorganization. The amount of these charges, which since the Petition Date are being expensed as incurred, may significantly affect the Company’s results of operations. In accordance with applicable guidance, costs associated with the Chapter 11 Cases have been recorded as reorganization items, net within the Company's condensed consolidated statements of operations for the three and six months ended June 30, 2020.  See below for a summary of charges:

 

 

 

Three and Six Months Ended

 

 

 

June 30, 2020

 

Professional fees

 

$

22

 

Adjustments of other claims

 

 

(8

)

Debt fees

 

 

1

 

Other net (gain)

 

 

(1

)

Reorganization items, net

 

$

14

 

 

Professional fees included in reorganization items, net represent fees for post-petition expenses related to the Chapter 11 Cases.  Adjustments of other claims represents net gains on trade accounts payable claims that have been settled by the Bankruptcy Court.  Debt fees are related to the Company’s DIP Credit Agreement.  Other net (gain) includes amounts related to the Company’s key employee incentive and retention plans and gains related to the income statement impact of writing off leases that have been rejected by the Bankruptcy Court.

 

Cash paid for reorganization items, net was $7 million during the three and six months ended June 30, 2020.  

 

 

Liabilities Subject to Compromise

 

Liabilities subject to compromise at June 30, 2020 consisted of the following:

 

 

 

 

June 30, 2020

 

Debt

 

$

910

 

Accrued interest payable

 

 

21

 

Accounts Payable

 

 

87

 

Pension liabilities

 

 

131

 

Restructuring and multiemployer

     pension liabilities

 

 

60

 

Employee-related liabilities

 

 

7

 

Other liabilities

 

 

6

 

Total liabilities subject to compromise

 

$

1,222

 

 

15


LSC Communications, Inc.

(DEBTOR-IN-POSSESSION)

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Six Months Ended June 30, 2020 and 2019

(tabular amounts in millions, except per share data)

 

Refer to Note 10, Debt, for more information on the debt balances classified as liabilities subject to compromise.  Accrued interest payable relates to the Company’s debt.  Pension liabilities relate to the Company’s U.S. Qualified Plan and Non-Qualified Plan.  Restructuring liabilities consist of employee termination accruals. Multiemployer pension liabilities consist of withdrawal obligations that are either related or unrelated to facility closures.  Employee-related liabilities primarily relate to the Company’s incentive compensation. Other liabilities include miscellaneous operating accruals.

 

 

Debtor-in-Possession Financial Information

 

The financial statements below represent the condensed combined financial statements of the debtors.  The financial statements exclude the results of the Company’s subsidiaries that are not included in the Chapter 11 Cases.  Intercompany transactions among the debtors have been eliminated in the financial statements contained herein.  Intercompany transactions among the debtors and the non-filing entities have not been eliminated in the condensed combined financial statements below.

 

 

16


LSC Communications, Inc.

(DEBTOR-IN-POSSESSION)

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Six Months Ended June 30, 2020 and 2019

(tabular amounts in millions, except per share data)

 

Debtor’s Balance Sheet

 

 

 

June 30,

 

 

 

2020

 

ASSETS

 

 

 

 

Cash and cash equivalents

 

$

85

 

Receivables

 

 

 

 

     Amortized cost

 

 

386

 

     Less: Allowance for credit losses

 

 

(14

)

     Receivables, net

 

 

372

 

Receivables, net from non-filing entities

 

 

58

 

Inventories

 

 

107

 

Income tax receivable

 

 

2

 

Prepaid expenses and other current assets

 

 

43

 

Total current assets

 

 

667

 

Property, plant and equipment-net

 

 

386

 

Goodwill

 

 

52

 

Other intangible assets-net

 

 

111

 

Right-of-use assets for operating leases

 

 

128

 

Investment in non-filing subsidiaries

 

 

211

 

Other noncurrent assets

 

 

67

 

Total assets

 

$

1,622

 

 

 

 

 

 

LIABILITIES

 

 

 

 

Accounts payable

 

$

71

 

Accrued liabilities

 

 

156

 

Short-term debt and current portion of long-term debt

 

 

1

 

Short-term operating lease liabilities

 

 

30

 

Total current liabilities

 

 

258

 

Long-term operating lease liabilities

 

 

103

 

Other noncurrent liabilities

 

 

45

 

Liabilities subject to compromise

 

 

1,289

 

Total liabilities

 

$

1,695

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

EQUITY

 

 

 

 

Common stock, $0.01 par value

 

 

 

Additional paid-in capital

 

 

842

 

Accumulated deficit

 

 

(423

)

Accumulated other comprehensive loss

 

 

(467

)

Treasury stock, at cost

 

 

(25

)

Total equity

 

 

(73

)

Total liabilities and equity

 

$

1,622

 

 

 

17


LSC Communications, Inc.

(DEBTOR-IN-POSSESSION)

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Six Months Ended June 30, 2020 and 2019

(tabular amounts in millions, except per share data)

 

Debtor’s Statements of Operations

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30, 2020

 

 

June 30, 2020

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

500

 

 

$

1,154

 

Cost of sales

 

 

443

 

 

 

1,025

 

Selling, general and administrative expenses (exclusive of

     depreciation and amortization)

 

 

57

 

 

 

128

 

Restructuring, impairment and other charges-net

 

 

32

 

 

 

56

 

Depreciation and amortization

 

 

26

 

 

 

52

 

(Loss) from operations

 

 

(58

)

 

 

(107

)

Interest expense-net

 

 

3

 

 

 

21

 

Investment and other (income)-net

 

 

(11

)

 

 

(21

)

Reorganization items, net

 

 

14

 

 

 

14

 

(Loss) before income taxes

 

 

(64

)

 

 

(121

)

Income tax (benefit)

 

 

(1

)

 

 

(2

)

Net (loss)

 

$

(63

)

 

$

(119

)

 

18


LSC Communications, Inc.

(DEBTOR-IN-POSSESSION)

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Six Months Ended June 30, 2020 and 2019

(tabular amounts in millions, except per share data)

 

 

Debtor’s Statement of Cash Flows

 

 

 

Six Months Ended

 

 

 

June 30, 2020

 

Cash Flows from Operating Activities

 

 

 

 

Net (loss)

 

$

(119

)

Adjustments to reconcile net (loss) to net cash provided by operating activities:

 

 

 

 

Impairment charges

 

 

2

 

Depreciation and amortization

 

 

52

 

Provision for doubtful accounts receivable

 

 

3

 

Share-based compensation

 

 

2

 

Deferred income taxes

 

 

(1

)

Non-cash reorganization items, net

 

 

7

 

Other

 

 

1

 

Changes in operating assets and liabilities - net of acquisitions and dispositions:

 

 

 

 

Accounts receivable-net

 

 

58

 

Inventories

 

 

25

 

Prepaid expenses and other current assets

 

 

(14

)

Accounts payable

 

 

49

 

Income taxes payable and receivable

 

 

1

 

Accrued liabilities and other

 

 

(2

)

Changes in liabilities subject to compromise

 

 

(40

)

Net cash provided by operating activities

 

 

24

 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

Capital expenditures

 

 

(17

)

Net proceeds from sales and purchases of investments and other assets

 

 

2

 

Net cash (used in) investing activities

 

 

(15

)

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

Net proceeds from credit facility borrowings

 

 

3

 

Debt issuance costs

 

 

(1

)

Other financing activities

 

 

(8

)

Net cash (used in) financing activities

 

 

(6

)

 

 

 

 

 

Effect of exchange rate on cash and cash equivalents

 

 

 

Net increase in cash, cash equivalents and restricted cash

 

 

3

 

Cash, cash equivalents and restricted cash at beginning of year

 

 

85

 

Cash, cash equivalents and restricted cash at end of period

 

$

88

 

 

 

 

 

 

Reconciliation to the Debtor's Balance Sheet

 

As of

 

 

 

June 30, 2020

 

Cash and cash equivalents

 

$

85

 

Restricted cash included in prepaid expenses and other current assets

 

 

3

 

Total cash, cash equivalents and restricted cash shown in the Debtor's

     statement of cash flows

 

$

88

 

 

 

19


LSC Communications, Inc.

(DEBTOR-IN-POSSESSION)

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Six Months Ended June 30, 2020 and 2019

(tabular amounts in millions, except per share data)

 

Note 3.  Revenue Recognition  

    

Disaggregated Revenue

 

The following tables provide information about disaggregated revenue by major products/service lines and timing of revenue recognition, and include a reconciliation of the disaggregated revenue with reportable segments for the three and six months ended June 30, 2020 and 2019.  

 

 

 

Three Months Ended

 

 

 

June 30, 2020

 

 

 

Magazines,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Catalogs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and

 

 

 

 

 

 

Office

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Logistics

 

 

Book

 

 

Products

 

 

Mexico

 

 

Other

 

 

Total

 

Major Products / Service Lines

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Book (a)

 

$

 

 

$

198

 

 

$

 

 

$

 

 

$

 

 

$

198

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Magazines and Catalogs (b)

 

$

164

 

 

$

 

 

$

 

 

$

16

 

 

$

13

 

 

$

193

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Logistics

 

$

50

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

50

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Directories

 

$

 

 

$

 

 

$

 

 

$

 

 

$

10

 

 

$

10

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Office Products

 

$

 

 

$

 

 

$

81

 

 

$

 

 

$

 

 

$

81

 

Total

 

$

214

 

 

$

198

 

 

$

81

 

 

$

16

 

 

$

23

 

 

$

532

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Timing of Revenue Recognition

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products and services

     transferred at a point in time

 

$

146

 

 

$

169

 

 

$

81

 

 

$

16

 

 

$

10

 

 

$

422

 

Products and services

     transferred over time

 

 

68

 

 

 

29

 

 

 

 

 

 

 

 

 

13

 

 

 

110

 

Total

 

$

214

 

 

$

198

 

 

$

81

 

 

$

16

 

 

$

23

 

 

$

532

 

20


LSC Communications, Inc.

(DEBTOR-IN-POSSESSION)

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Six Months Ended June 30, 2020 and 2019

(tabular amounts in millions, except per share data)

 

 

 

 

 

Six Months Ended

 

 

 

June 30, 2020

 

 

 

Magazines,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Catalogs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and

 

 

 

 

 

 

Office

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Logistics

 

 

Book

 

 

Products

 

 

Mexico

 

 

Other

 

 

Total

 

Major Products / Service Lines

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Book (a)

 

$

 

 

$

402

 

 

$

 

 

$

 

 

$

 

 

$

402

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Magazines and Catalogs (b)

 

 

414

 

 

 

 

 

 

 

 

 

39

 

 

 

34

 

 

 

487

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Logistics

 

 

127

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

127

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Directories

 

 

 

 

 

 

 

 

 

 

 

 

 

 

24

 

 

 

24

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Office Products

 

 

 

 

 

 

 

 

193

 

 

 

 

 

 

 

 

 

193

 

Total

 

$

541

 

 

$

402

 

 

$

193

 

 

$

39

 

 

$

58

 

 

$

1,233

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Timing of Revenue Recognition

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products and services

     transferred at a point in time

 

$

371

 

 

$

341

 

 

$

193

 

 

$

39

 

 

$

24

 

 

$

968

 

Products and services

     transferred over time

 

 

170

 

 

 

61

 

 

 

 

 

 

 

 

 

34

 

 

 

265

 

Total

 

$

541

 

 

$

402

 

 

$

193

 

 

$

39

 

 

$

58

 

 

$

1,233

 

21


LSC Communications, Inc.

(DEBTOR-IN-POSSESSION)

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Six Months Ended June 30, 2020 and 2019

(tabular amounts in millions, except per share data)

 

 

 

 

Three Months Ended

 

 

 

June 30, 2019

 

 

 

Magazines,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Catalogs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and

 

 

 

 

 

 

Office

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Logistics

 

 

Book

 

 

Products

 

 

Mexico

 

 

Other

 

 

Total

 

Major Products / Service Lines

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Book (a)

 

$

 

 

$

289

 

 

$

 

 

$

 

 

$

 

 

$

289

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Magazines and Catalogs (b)

 

$

297

 

 

$

 

 

$

 

 

$

25

 

 

$

19

 

 

$

341

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Logistics

 

$

83

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

83

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Directories

 

$

 

 

$

 

 

$

 

 

$

 

 

$

17

 

 

$

17

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Office Products

 

$

 

 

$

 

 

$

139

 

 

$

 

 

$

 

 

$

139

 

Total

 

$

380

 

 

$

289

 

 

$

139

 

 

$

25

 

 

$

36

 

 

$

869

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Timing of Revenue Recognition

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products and services transferred at a

     point in time

 

$

268

 

 

$

253

 

 

$

139

 

 

$

25

 

 

$

17

 

 

$

702

 

Products and services transferred over

     time

 

 

112

 

 

 

36

 

 

 

 

 

 

 

 

 

19

 

 

 

167

 

Total

 

$

380

 

 

$

289

 

 

$

139

 

 

$

25

 

 

$

36

 

 

$

869

 

 

22


LSC Communications, Inc.

(DEBTOR-IN-POSSESSION)

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Six Months Ended June 30, 2020 and 2019

(tabular amounts in millions, except per share data)

 

 

 

Six Months Ended

 

 

 

June 30, 2019

 

 

 

Magazines,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Catalogs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and

 

 

 

 

 

 

Office

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Logistics

 

 

Book

 

 

Products

 

 

Mexico

 

 

Other

 

 

Total

 

Major Products / Service Lines

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Book (a)

 

$

 

 

$

549

 

 

$

 

 

$

 

 

$

 

 

$

549

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Magazines and Catalogs (b)

 

$

616

 

 

$

 

 

$

 

 

$

49

 

 

$

39

 

 

$

704

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Logistics

 

$

167

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

167

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Directories

 

$

 

 

$

 

 

$

 

 

$

 

 

$

36

 

 

$

36

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Office Products

 

$

 

 

$

 

 

$

258

 

 

$

 

 

$

 

 

$

258

 

Total

 

$

783

 

 

$

549

 

 

$

258

 

 

$

49

 

 

$

75

 

 

$

1,714

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Timing of Revenue Recognition

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products and services transferred at a

     point in time

 

$

556

 

 

$

481

 

 

$

258

 

 

$

49

 

 

$

36

 

 

$

1,380

 

Products and services transferred over

     time

 

 

227

 

 

 

68

 

 

 

 

 

 

 

 

 

39

 

 

 

334

 

Total

 

$

783

 

 

$

549

 

 

$

258

 

 

$

49

 

 

$

75

 

 

$

1,714

 

 

 

(a)

Includes e-book formatting and supply chain management associated with book production    

 

(b)

Includes premedia and co-mail        

 

 

Accounts Receivable

 

As disclosed in Note 1, Overview and Basis of Presentation, the Company adopted ASU 2016-13 on January 1, 2020 using the modified retrospective adoption method.  As a result of the adoption, the Company now records an allowance for credit losses on unbilled receivables which resulted in a de minimis amount of expense for each of the three and six months ended June 30, 2020.  There were no changes to the Company’s policy relating to its receivables.  To recognize the initial adoption, the Company recorded a de minimis increase to its January 1, 2020 balance for allowance for credit losses and an offsetting impact to accumulated deficit in the condensed consolidated balance sheet.    

 

Transactions affecting the allowances for doubtful accounts receivable balance during the six months ended June 30, 2020 were as follows:

 

 

 

Six Months Ended

 

 

 

June 30, 2020

 

Balance, beginning of year

 

$

12

 

Provisions charged to expense

 

 

3

 

Balance, end of period

 

$

15

 

 

There was a de minimis amount of write-offs and recoveries during the six months ended June 30, 2020.

 

 

23


LSC Communications, Inc.

(DEBTOR-IN-POSSESSION)

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Six Months Ended June 30, 2020 and 2019

(tabular amounts in millions, except per share data)

 

Contract Balances

 

The following table provides changes in contract assets and liabilities during the six months ended June 30, 2020:

 

 

 

Short-Term

Contract Assets

 

 

Long-Term

Contract Assets

 

 

Contract

Liabilities

 

Beginning Balance, January 1, 2020

 

$

40

 

 

$

14

 

 

$

17

 

Additions to unbilled accounts receivable

 

 

19

 

 

 

 

 

 

 

Unbilled accounts receivable recognized in

     trade receivables

 

 

(33

)

 

 

 

 

 

 

Amortization of contract acquisition costs

 

 

 

 

 

(6

)

 

 

 

Revenue recognized that was included in

     contract liabilities as of January 1, 2020

 

 

 

 

 

 

 

 

(12

)

Increases due to cash received

 

 

 

 

 

 

 

 

13

 

Ending Balance, June 30, 2020

 

$

26

 

 

$

8

 

 

$

18

 

 

The trade receivables balance was $342 million and $366 million as of June 30, 2020 and December 31, 2019, respectively. There was a de minimis amount of credit losses recognized on short-term contract assets recorded during the three and six months ended June 30, 2020.   

 

 

Note 4.  Leases

  

Lease Expense

 

The components of total net lease expense were as follows:

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Operating lease expense

 

$

16

 

 

$

18

 

 

$

33

 

 

$

35

 

Sublease (income)

 

 

(1

)

 

 

(2

)

 

 

(3

)

 

 

(4

)

Variable lease expense

 

 

3

 

 

 

2

 

 

 

5

 

 

 

5

 

Total net lease expense

 

$

18

 

 

$

18

 

 

$

35

 

 

$

36

 

 

During each of the three and six months ended June 30, 2020 and 2019, the Company incurred a de minimis amount of finance lease cost, consisting of finance lease ROU asset amortization and interest on finance lease liabilities, and a de minimis amount of cost associated with short-term leases.

   

24


LSC Communications, Inc.

(DEBTOR-IN-POSSESSION)

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Six Months Ended June 30, 2020 and 2019

(tabular amounts in millions, except per share data)

 

Cash Flow Information

 

Supplemental non-cash information related to leases is included below:

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2020

 

 

2019

 

ROU assets acquired in exchange for

     lease obligations:

 

 

 

 

 

 

 

 

ROU assets

 

 

 

 

 

 

 

 

Operating leases

 

$

6

 

 

$

9

 

 

 

 

 

 

 

 

 

 

Lease obligations

 

 

 

 

 

 

 

 

Operating leases

 

$

6

 

 

$

9

 

 

During the six months ended June 30, 2020 and 2019, the Company recorded $27 million and $31 million of operating cash outflows from operating leases, respectively.    

 

During each of the six months ended June 30, 2020 and 2019, the Company recorded a de minimis amount of cash outflows from financing leases.  No finance lease ROU assets or obligations were acquired during the six months ended June 30, 2020.

 

 

Lease Terms and Discount Rates

 

Supplemental information regarding the weighted average lease term and discount rate for the lease liabilities as of June 30, 2020 is included below:  

 

 

 

June 30, 2020

 

Weighted Average Remaining Lease Term (years)

 

 

 

 

Operating leases

 

 

5.1

 

Financing leases

 

 

1.9

 

 

 

 

 

 

Weighted Average Discount Rate

 

 

 

 

Operating leases

 

 

8.7

%

Financing leases

 

 

6.9

%

 

 

Lease Maturities

 

The annual maturities of lease liabilities as of June 30, 2020 were as follows:    

 

 

 

Operating Leases

 

2020

 

$

22

 

2021

 

 

42

 

2022

 

 

36

 

2023

 

 

27

 

2024

 

 

23

 

2025 & thereafter

 

 

29

 

Total undiscounted lease payments

 

 

179

 

Imputed interest

 

 

(34

)

Total lease liabilities

 

$

145

 

 

25


LSC Communications, Inc.

(DEBTOR-IN-POSSESSION)

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Six Months Ended June 30, 2020 and 2019

(tabular amounts in millions, except per share data)

 

During the six months ended June 30, 2020, the Company recorded a de minimis amount of maturities for finance lease liabilities.  As of June 30, 2020, the Company has additional operating leases that have not commenced for an undiscounted amount of $3 million.

 

 

Note 5.  Inventories

 

The components of the Company’s inventories, net of excess and obsolescence reserves for raw materials and finished goods, at June 30, 2020 and December 31, 2019 were as follows:        

 

 

 

June 30,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Raw materials and manufacturing supplies

 

$

60

 

 

$

91

 

Work in process

 

 

37

 

 

 

38

 

Finished goods

 

 

80

 

 

 

87

 

Last in, first out reserve

 

 

(36

)

 

 

(46

)

Total

 

$

141

 

 

$

170

 

            

Note 6.  Property, Plant and Equipment

 

The components of the Company’s property, plant and equipment at June 30, 2020 and December 31, 2019 were as follows:

 

 

 

June 30,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Land

 

$

34

 

 

$

35

 

Buildings

 

 

663

 

 

 

663

 

Machinery and equipment

 

 

2,925

 

 

 

3,006

 

 

 

 

3,622

 

 

 

3,704

 

Less: Accumulated depreciation

 

 

(3,213

)

 

 

(3,264

)

Total

 

$

409

 

 

$

440

 

 

During the three and six months ended June 30, 2020, depreciation expense was $21 million and $42 million, respectively.  During the three and six months ended June 30, 2019, depreciation expense was $24 million and $48 million, respectively.   Refer to Note 8, Restructuring, Impairment and Other Charges, for a discussion on impairment reviews performed as of June 30, 2020.  

 

On July 15, 2020, the Bankruptcy Court approved the sale of one of the Company’s manufacturing facilities located in Philadelphia, Pennsylvania for $13 million. The sale is expected to occur in the fourth quarter of 2020.  The facility was not included in assets held for sale as of June 30, 2020 as it was not approved by the Bankruptcy Court until the third quarter.

 

          

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 $6 million and $9 million at June 30, 2020 and December 31, 2019, respectively.  These assets are 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.     

 

    

26


LSC Communications, Inc.

(DEBTOR-IN-POSSESSION)

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Six Months Ended June 30, 2020 and 2019

(tabular amounts in millions, except per share data)

 

Note 7.  Goodwill and Other Intangible Assets  

   

The changes in the carrying amount of goodwill for the six months ended June 30, 2020 were as follows:

 

 

 

Magazines,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Catalogs

 

 

 

 

 

 

Office

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and Logistics

 

 

Book

 

 

Products

 

 

Mexico

 

 

Other

 

 

Total

 

Net book value as of December 31,

     2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

$

523

 

 

$

354

 

 

$

110

 

 

$

 

 

$

5

 

 

$

992

 

Accumulated impairment losses

 

 

(502

)

 

 

(354

)

 

 

(79

)

 

 

 

 

 

(5

)

 

 

(940

)

Total

 

 

21

 

 

 

 

 

 

31

 

 

 

 

 

 

 

 

 

52

 

Net book value as of June 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

 

523

 

 

 

354

 

 

 

110

 

 

 

 

 

 

5

 

 

 

992

 

Accumulated impairment losses

 

 

(502

)

 

 

(354

)

 

 

(79

)

 

 

 

 

 

(5

)

 

 

(940

)

Total

 

$

21

 

 

$

 

 

$

31

 

 

$

 

 

$

 

 

$

52

 

 

The components of other intangible assets at June 30, 2020 and December 31, 2019 were as follows:  

 

 

 

June 30, 2020

 

 

December 31, 2019

 

 

 

Gross  Carrying

 

 

Accumulated

 

 

Net Book

 

 

Gross  Carrying

 

 

Accumulated

 

 

Net Book

 

 

 

Amount

 

 

Amortization

 

 

Value

 

 

Amount

 

 

Amortization

 

 

Value

 

Customer relationships

 

$

248

 

 

$

(156

)

 

$

92

 

 

$

248

 

 

$

(149

)

 

$

99

 

Trade names

 

 

29

 

 

 

(9

)

 

 

20

 

 

 

29

 

 

 

(8

)

 

 

21

 

Total other intangible assets

 

$

277

 

 

$

(165

)

 

$

112

 

 

$

277

 

 

$

(157

)

 

$

120

 

  

During the three and six months ended June 30, 2020, amortization expense for other intangible assets was $4 million and $8 million, respectively.  During the three months ended June 30, 2019, amortization expense was $4 million and $9 million, respectively.

 

The following table outlines the estimated annual amortization expense related to all amortizable intangible assets:

 

For the year ending December 31,

 

Amount

 

2020

 

$

17

 

2021

 

 

15

 

2022

 

 

14

 

2023

 

 

13

 

2024

 

 

13

 

2025 and thereafter

 

 

48

 

Total

 

$

120

 

 

Refer to Note 8, Restructuring, Impairment and Other Charges, for information on the goodwill and intangible asset impairment reviews performed as of June 30, 2020.   

 

 

27


LSC Communications, Inc.

(DEBTOR-IN-POSSESSION)

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Six Months Ended June 30, 2020 and 2019

(tabular amounts in millions, except per share data)

 

Note 8.  Restructuring, Impairment and Other Charges

 

For the three and six months ended June 30, 2020 and 2019, the Company recorded the following net restructuring, impairment and other charges disclosed in the condensed consolidated statements of operations:     

  

 

 

 

 

 

 

Other

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Employee

 

 

Restructuring

 

 

Restructuring

 

 

 

 

 

 

Other

 

 

 

 

 

June 30, 2020

 

Terminations

 

 

Charges

 

 

Charges

 

 

Impairment

 

 

Charges

 

 

Total

 

Magazines, Catalogs and Logistics

 

$

7

 

 

$

12

 

 

$

19

 

 

$

1

 

 

$

 

 

$

20

 

Book

 

 

1

 

 

 

 

 

 

1

 

 

 

 

 

 

1

 

 

 

2

 

Office Products

 

 

 

 

 

1

 

 

 

1

 

 

 

 

 

 

 

 

 

1

 

Mexico

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate

 

 

 

 

 

9

 

 

 

9

 

 

 

 

 

 

 

 

 

9

 

Total

 

$

8

 

 

$

22

 

 

$

30

 

 

$

1

 

 

$

1

 

 

$

32

 

 

 

 

 

 

 

 

Other

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

Employee

 

 

Restructuring

 

 

Restructuring

 

 

 

 

 

 

Other

 

 

 

 

 

June 30, 2020

 

Terminations

 

 

Charges

 

 

Charges

 

 

Impairment

 

 

Charges

 

 

Total

 

Magazines, Catalogs and Logistics

 

$

7

 

 

$

22

 

 

$

29

 

 

$

2

 

 

$

 

 

$

31

 

Book

 

 

2

 

 

 

2

 

 

 

4

 

 

 

 

 

 

1

 

 

 

5

 

Office Products

 

 

2

 

 

 

1

 

 

 

3

 

 

 

 

 

 

 

 

 

3

 

Mexico

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate

 

 

 

 

 

19

 

 

 

19

 

 

 

 

 

 

 

 

 

19

 

Total

 

$

11

 

 

$

44

 

 

$

55

 

 

$

2

 

 

$

1

 

 

$

58

 

 

 

 

 

 

 

Other

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Employee

 

 

Restructuring

 

 

Restructuring

 

 

 

 

 

 

Other

 

 

 

 

 

June 30, 2019

 

Terminations

 

 

Charges

 

 

Charges

 

 

Impairment

 

 

Charges

 

 

Total

 

Magazines, Catalogs and Logistics

 

$

 

 

$

3

 

 

$

3

 

 

$

17

 

 

$

 

 

$

20

 

Book

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

 

 

 

1

 

Office Products

 

 

 

 

 

1

 

 

 

1

 

 

 

 

 

 

 

 

 

1

 

Mexico

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate

 

 

 

 

 

2

 

 

 

2

 

 

 

 

 

 

 

 

 

2

 

Total

 

$

 

 

$

6

 

 

$

6

 

 

$

17

 

 

$

1

 

 

$

24

 

 

 

 

 

 

 

 

Other

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

Employee

 

 

Restructuring

 

 

Restructuring

 

 

 

 

 

 

Other

 

 

 

 

 

June 30, 2019

 

Terminations

 

 

Charges

 

 

Charges

 

 

Impairment

 

 

Charges

 

 

Total

 

Magazines, Catalogs and Logistics

 

$

5

 

 

$

7

 

 

$

12

 

 

$

19

 

 

$

 

 

$

31

 

Book

 

 

 

 

 

1

 

 

 

1

 

 

 

 

 

 

1

 

 

 

2

 

Office Products

 

 

 

 

 

1

 

 

 

1

 

 

 

 

 

 

 

 

 

1

 

Mexico

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate

 

 

 

 

 

3

 

 

 

3

 

 

 

 

 

 

 

 

 

3

 

Total

 

$

5

 

 

$

12

 

 

$

17

 

 

$

19

 

 

$

1

 

 

$

37

 

 

28


LSC Communications, Inc.

(DEBTOR-IN-POSSESSION)

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Six Months Ended June 30, 2020 and 2019

(tabular amounts in millions, except per share data)

 

Restructuring Charges

    

For the three and six months ended June 30, 2020, the Company incurred net other restructuring charges of $22 million and $44 million, primarily due to facility costs and costs to move equipment, professional fees, and expenses associated with new revenue opportunities and cost savings initiatives implemented in 2019.  For the three and six months ended June 30, 2020, the Company incurred charges of $8 million and $11 million for an aggregate of 1,032 employees, of whom 443 were terminated as of or prior to June 30, 2020, primarily related to the closure of two facilities in the Magazines, Catalogs and Logistics segment and one facility in the Office Products segment, and the reorganization of certain business units and corporate functions.

 

For the three and six months ended June 30, 2019, the Company incurred net other restructuring charges of $6 million and $12 million, respectively, primarily due to charges related to facility costs, as well as costs associated with new revenue opportunities and cost savings initiatives implemented in 2019, and pension withdrawal obligations related to facility closures.  For the six months ended June 30, 2019, the Company incurred charges of $5 million for an aggregate of 234 employees, substantially all of whom were terminated as of or prior to June 30, 2020, primarily related to the closure of one facility in the Magazines, Catalogs and Logistics segment. The Company recorded $2 million of net impairment charges for the six months ended June 30, 2019 related to machinery and equipment associated with facility closings in the Magazines, Catalogs and Logistics segment.    

 

  

Impairment Reviews

 

The Company performs interim reviews of goodwill for indicators of impairment each quarter to assess whether an interim impairment review is required for any reporting unit.  Additionally, the Company evaluates the recoverability of other long-lived assets, including property, plant and equipment and certain identifiable intangible assets, whenever events or changes in circumstances indicate that the carrying value of an asset or asset group may not be recoverable. As part of its interim reviews, management analyzes operating results for the period compared to expected results as of the prior year’s review, key assumptions such as discount rates and expected long-term growth rates, changes in the overall market value of the Company’s equity and debt securities, significant negative industry and economic trends, as well as other factors. 

 

 

Goodwill

 

As of June 30, 2020, only two reporting units had goodwill: Office Products ($31 million) and logistics ($21 million).  For the Office Products and logistics reporting units, management assessed goodwill impairment risk by first performing a qualitative review of entity specific, industry, market and general economic factors for each reporting unit. For both reporting units, the Company was not able to conclude that it is more likely than not that the fair values of our reporting units are greater than their carrying values, and therefore, a one-step method for determining goodwill impairment was applied as of June 30, 2020.

 

The Company performed a Step 1 impairment test of goodwill in accordance with ASC Topic 350, Intangibles-Goodwill and Other, which includes comparing the estimated fair value of each reporting unit to its carrying amount, including goodwill.  If the carrying amount of a reporting unit is greater than zero and its fair value exceeds its carrying amount, goodwill of the reporting unit is considered not impaired. However, if the carrying amount of a reporting unit exceeds its fair value, the goodwill is considered impaired and a full or partial write-off of goodwill would be required.  

 

The Company determines the fair value of its reporting units using both the income approach and the market approach. The determination of the fair value using the income approach requires management to make significant estimates and assumptions related to projected operating results (including forecasted revenue and operating income), anticipated future cash flows, and discount rates. The determination of the fair value using the market approach requires management to make significant assumptions related to the multiples of earnings before interest, income taxes, depreciation and amortization (“EBITDA”) used in the calculation.  Additionally, the market approach estimates fair value using comparable marketplace fair value data from within a comparable industry grouping. The Company weighs both the income and market approach equally to estimate the concluded fair value of each reporting unit.

 

29


LSC Communications, Inc.

(DEBTOR-IN-POSSESSION)

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Six Months Ended June 30, 2020 and 2019

(tabular amounts in millions, except per share data)

 

The determination of fair value and the allocation of that value to individual assets and liabilities requires the Company to make significant estimates and assumptions. These estimates and assumptions primarily include, but are not limited to: the selection of appropriate peer group companies; control premiums appropriate for acquisitions in the industries in which the Company competes; the discount rate; terminal growth rates; and forecasts of revenue, operating income, depreciation and amortization, restructuring charges and capital expenditures. As part of its impairment test for its reporting units, the Company engages a third-party valuation firm to assist in the Company’s determination of certain assumptions used to estimate fair values.

 

As a result of the interim impairment tests Office Products and logistics, the Company did not recognize any goodwill impairment charges as the estimated fair values of the reporting units exceeded their respective carrying values by 8% and 44%, respectively.

 

 

Other Intangible Assets and Property, Plant and Equipment

 

Quarter Ended June 30, 2020

 

The Company performed a review of property, plant and equipment and right-of-use assets for operating leases and determined that indicators of impairment were present and a test for recoverability was appropriate during the second quarter of 2020.  The Company performed a Step 1 recoverability test in accordance with ASC Topic 360, Property, Plant and Equipment.  The recoverability test compares the estimated future undiscounted cash flows expected to result from the use of the asset group and its eventual disposition to the carrying value of the asset group. If the carrying value of the asset group exceeds its estimated future undiscounted cash flows, an impairment loss is recorded for the excess of the asset group’s carrying value over its fair value.  We applied a probability-weighted approach as there are alternative courses of action to recover the carrying amount of the long-lived asset groups following Chapter 11 proceedings. Based upon management’s probability-weighted cash flows for the relevant asset groups, management determined that the estimated future undiscounted cash flows were in excess of the asset groups’ carrying values, resulting in no impairment loss as a result of these tests in the second quarter of 2020.

 

In addition to the interim tests noted above, the Company reviewed all intangible assets for recoverability. There were no impairment charges recorded as a result of the recoverability tests.

 

The Company recorded $1 million and $2 million of impairment during the three and six months ended June 30, 2020, respectively, on machinery and equipment primarily due to facility closings in the Magazines, Catalogs and Logistics segment.

 

 

Quarter Ended June 30, 2019

 

Due to the unprecedented drop in demand in the magazines and catalogs reporting unit, management determined that a further review of the reporting unit’s intangible assets for recoverability was appropriate during the second quarter of 2019.  As a result of the faster pace of decline in demand, negative revenue trends and lower expectations of future revenue to be derived from certain customer relationships, management determined that a certain definite-lived customer relationship intangible asset was not recoverable.  This resulted in the Company recording a $17 million impairment charge for the three months ended June 30, 2019, which fully impaired the asset.  The impairment was determined using Level 3 inputs and estimated based on cash flow analyses, which included management’s assumptions related to future revenues and profitability.  

30


LSC Communications, Inc.

(DEBTOR-IN-POSSESSION)

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Six Months Ended June 30, 2020 and 2019

(tabular amounts in millions, except per share data)

 

 

 

Future Interim Reviews

 

The Company will continue to perform interim reviews of goodwill for indicators of impairment each quarter to assess whether an interim impairment test is required for its goodwill balances or if recoverability tests are required for long-lived assets, including property, plant and equipment, and certain identifiable intangible assets, whenever events or changes in circumstances indicate that the carrying value of an asset or asset group may not be recoverable.  The Bankruptcy Court entered an order granting approval for a sale and bidding process for the Company or components of the Company. The auction, if one is held, is scheduled for August 25, 2020, and a hearing approving the sale is currently scheduled for September 1, 2020.  The Company’s cash flows could significantly change and materially impact the fair value of the Company’s reporting units, intangible assets and long-lived assets.

 

 

Other Charges  

 

For each of the three and six months ended June 30, 2020 and 2019, 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 is $20 million at June 30, 2020 and is disclosed as liabilities subject to compromise in the Company’s condensed consolidated balance sheet.  Refer to Note 2, Voluntary Reorganization under Chapter 11, for more information on liabilities subject to compromise.  

 

 

Restructuring Reserve

 

The restructuring reserve as of December 31, 2019 and June 30, 2020, and changes during the six months ended June 30, 2020 were as follows:

 

 

 

December 31,

 

 

Restructuring

 

 

Reclass to Liabilities

 

 

Cash

 

 

June 30,

 

 

 

2019

 

 

Charges

 

 

Subject to Compromise

 

 

Paid

 

 

2020

 

Employee terminations

 

$

29

 

 

$

11

 

 

$

(2

)

 

$

(16

)

 

$

22

 

Multiemployer pension plan withdrawal

     obligations

 

 

31

 

 

 

 

 

 

(29

)

 

 

(2

)

 

 

 

Other and lease termination

 

 

2

 

 

 

37

 

 

 

(9

)

 

 

(30

)

 

 

 

Total

 

$

62

 

 

$

48

 

 

$

(40

)

 

$

(48

)

 

$

22

 

 

The current portion of restructuring reserves of $22 million at June 30, 2020 was included in accrued liabilities.  As a result of the Company’s voluntary reorganization, $40 million of restructuring liabilities were reclassed to liabilities subject to compromise on the Company’s condensed consolidated balance sheet at June 30, 2020. Refer to Note 2, Voluntary Reorganization under Chapter 11, for more information on liabilities subject to compromise.       

      

The Company anticipates that payments associated with the employee terminations reflected in the above table will be substantially completed by June 30, 2021.  

 

The restructuring liabilities classified as “other” consisted of other facility closing costs, expenses to move equipment, professional fees, and costs associated with new revenue opportunities and cost savings initiatives implemented in 2019.

 

 

31


LSC Communications, Inc.

(DEBTOR-IN-POSSESSION)

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Six Months Ended June 30, 2020 and 2019

(tabular amounts in millions, except per share data)

 

Note 9.  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 eight 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, which are recorded in liabilities subject to compromise as of June 30, 2020, 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 consolidated balance sheets, statements of operations and cash flows.

 

 

Note 10.  Debt

 

The Company’s debt at June 30, 2020 and December 31, 2019 consisted of the following:   

 

 

 

June 30,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Borrowings under the Revolving Credit Facility

 

$

 

 

$

249

 

Term Loan Facility due September 30, 2022

 

 

 

 

 

218

 

8.75% Senior Secured Notes due October 15, 2023

 

 

 

 

 

450

 

Finance lease and other obligations

 

 

1

 

 

 

2

 

Unamortized debt issuance costs

 

 

 

 

 

(9

)

Total debt

 

 

1

 

 

 

910

 

Less: current portion

 

 

(1

)

 

 

(465

)

Long-term debt

 

$

 

 

$

445

 

 

Liabilities Subject to Compromise

 

As a result of the Company’s reorganization filing, the debt balances below were reclassed from short-term and current portion of long-term debt and long-term debt to liabilities subject to compromise on the condensed consolidated balance sheet.  

 

32


LSC Communications, Inc.

(DEBTOR-IN-POSSESSION)

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Six Months Ended June 30, 2020 and 2019

(tabular amounts in millions, except per share data)

 

 

 

June 30,

 

 

 

2020

 

Borrowings under the Revolving Credit Facility

 

$

252

 

Term Loan Facility

 

 

219

 

Senior Secured Notes

 

 

450

 

Unamortized debt issuance costs

 

 

(11

)

Total debt in liabilities subject to compromise

 

$

910

 

 

Refer to Note 2, Voluntary Reorganization under Chapter 11, for more information on liabilities subject to compromise.

 

 

Historical Information

 

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”), which was reduced to $300 million per the amendment effective on August 5, 2019.  

 

 

Additional Debt Issuances Information

 

Prior to the reorganization, 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 lower than its book value by approximately $277 million at December 31, 2019.  

 

Prior to the reorganization, the borrowings under the Term Loan Facility were subject to a variable interest rate.  As of December 31, 2019, the interest rate was 7.12%.        

 

 

Voluntary Reorganization under Chapter 11

 

The commencement of the Chapter 11 Cases constituted an event of default with respect to the Senior Notes, the Term Loan Facility and the Revolving Credit Facility (the “Debt Instruments”).  The Debt Instruments provide that as a result of the commencement of the Chapter 11 Cases, the principal and interest due thereunder shall be immediately due and payable.  Any efforts to enforce payment obligations under the Debt Instruments will be automatically stayed as a result of the commencement of the Chapter 11 Cases, and the creditors’ right of enforcement in respect of the Debt Instruments are subject to the applicable provisions of the Bankruptcy Code.

 

 

Debtor-in-Possession Financing

  

As previously disclosed, on April 15, 2020 (the “Closing Date”), the Company entered into a Superpriority Secured Debtor-in-Possession Credit Agreement (the “DIP Credit Agreement”), upon the entry of an interim order of the Bankruptcy Court granting interim approval of the DIP Credit Agreement, among the Company, as borrower, the lenders from time to time party thereto (the “DIP Lenders”) and Bank of America, N.A. as administrative agent (in such capacity, the “DIP Agent”), pursuant to which the DIP Lenders committed to provide a senior secured superpriority debtor-in-possession credit facility in an aggregate principal amount not to exceed $100 million (the “DIP Facility”).  The DIP Facility was approved on a final basis on June 2, 2020.

 

The DIP Facility consists of (i) revolving loans not to exceed an aggregate amount of $55 million (the “Revolving Loans”), and (ii) letters of credit not to exceed an aggregate amount of $45 million, with $5 million of that amount being available for the issuance of new letters of credit (together with the Revolving Loans, the “DIP Loan Commitments”).  

33


LSC Communications, Inc.

(DEBTOR-IN-POSSESSION)

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Six Months Ended June 30, 2020 and 2019

(tabular amounts in millions, except per share data)

 

 

Borrowings under the DIP Facility bear interest at a rate per annum equal to, at the Company’s option, either (i) the Alternate Base Rate (as defined in the DIP Credit Agreement) plus 5.75%, or (ii) LIBOR plus 6.75%.  Upon an event of default under the DIP Credit Agreement (an “Event of Default”), an additional 2.00% may be added to the Interest Rate.  In addition, the Company is required to pay (i) an unused line fee of 0.50% per annum (payable quarterly in arrears) on the average daily unused portion of the DIP Loan Commitments, (ii) a commitment fee of (x) 1.00% per annum on the DIP Loan Commitments, regardless of usage, plus (y) $100,000 per week for the first 20 weeks after the Closing Date, in each case, payable quarterly in arrears, (iii) a participation fee equal to 6.75% multiplied by the amounts available to be drawn under outstanding letters of credit, payable quarterly, and (iv) a fronting fee equal to 0.125% per annum on amounts available to be drawn under outstanding letters of credit, payable quarterly.

 

Proceeds of the loans made under the DIP Facility may be used only for the following purposes: (i) working capital and other general corporate purposes, including the payment of professional fees and expenses, (ii) to pay the reasonable fees and expenses of the DIP Agent and the DIP Lenders (including the reasonable fees and expenses of counsel and financial advisors), (iii) to pay claims in respect of certain prepetition creditors, (iv) to repay indebtedness owed to holders of the Prepetition Priority Payment Obligations (as defined in the DIP Credit Agreement) (the “Prepetition Revolving Lenders”), and (v) making adequate protection payments to the Prepetition Revolving Lenders, the Prepetition Term Lenders and the Prepetition Secured Noteholders (each as defined in the DIP Credit Agreement).

 

In connection with the DIP Credit Agreement, certain subsidiaries of the Company became parties to a guarantee agreement as guarantors (collectively, the “Guarantors,” and together with the Company, the “DIP Credit Parties”). Each of the Guarantors is a debtor and debtor-in-possession in the Chapter 11 Cases.  The Guarantors have guaranteed, on a joint and several basis, all of the obligations under the DIP Facility.  To secure the obligations under the DIP Facility, the Company and the Guarantors have granted liens on substantially all of their assets, whether now owned or hereafter acquired.

 

The DIP Facility will mature on the earlier of (i) the date upon which any Plan of Reorganization (as defined in the DIP Credit Agreement) becomes effective, or (ii) the six-month anniversary following the Petition Date; provided that such maturity may be extended with the consent of the Required Lenders (as defined in the DIP Credit Agreement) to a date no later than nine months after the Petition Date.

 

The DIP Credit Agreement contains representations, warranties and covenants that are customary for debtor-in-possession facilities of this type, including, but not limited to, certain case milestones, specified restrictions on indebtedness, liens, guarantee obligations, liquidations and dissolutions, sales of assets, leases, payment of dividends and other restricted payments, voluntary payments of other indebtedness, investments, loans and advances, transactions with affiliates, sale and leaseback transactions and compliance with case milestones. The DIP Credit Agreement also contains customary events of default for facilities of this type, including failure to achieve the milestones and the occurrence of certain events in the Chapter 11 Cases.

 

The Company did not have borrowings related to the DIP Facility as of June 30, 2020.

 

 

Interest expense

 

There was $3 million and $21 million of net interest expense during the three and six months ended June 30, 2020, respectively.  There was $19 million and $38 million of net interest expense during the three months ended June 30, 2019, respectively.  If the Company was not under voluntary reorganization, it would have incurred an additional $15 million of interest expense during the three and six months ended June 30, 2020 related to its debt that is now classified as liabilities subject to compromise on the condensed consolidated balance sheet.  

 

 

Note 11.  Earnings Per Share

 

During the six months ended June 30, 2020 and 2019, no shares of common stock were purchased by the Company; however, a de minimis amount of shares were withheld from employees for tax liabilities upon vesting of equity awards. The Company’s plan of reorganization related to the Chapter 11 Cases may include the issuance of common stock.

 

34


LSC Communications, Inc.

(DEBTOR-IN-POSSESSION)

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Six Months Ended June 30, 2020 and 2019

(tabular amounts in millions, except per share data)

 

Basic (loss) 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, restricted stock units, and performance share units.   

      

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,

 

 

 

2020

 

 

2019 (1)

 

 

2020

 

 

2019 (1)

 

Net (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Basic

 

$

(1.86

)

 

$

(0.72

)

 

$

(3.42

)

 

$

(4.49

)

     Diluted

 

$

(1.86

)

 

$

(0.72

)

 

$

(3.42

)

 

$

(4.49

)

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Net (loss)

 

$

(63

)

 

$

(25

)

 

$

(115

)

 

$

(150

)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Weighted average number of common shares

          outstanding

 

 

33.7

 

 

 

33.5

 

 

 

33.6

 

 

 

33.4

 

     Dilutive options and awards

 

 

 

 

 

 

 

 

 

 

 

 

     Diluted weighted average number of common

          shares outstanding

 

 

33.7

 

 

 

33.5

 

 

 

33.6

 

 

 

33.4

 

 

(1) Refer to Note 1, Overview and Basis of Presentation, for information on the restated balances for the three and six months ended June 30, 2019.

 

 

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, 2020 and December 31, 2019.  The assets and certain obligations of the defined benefit pension plans includes plans qualified under Section 401(a) of the Internal Revenue Code of 1986, the U.S. Qualified Plan and related non-qualified benefits (the “Non-Qualified Plan”).

 

The components of the estimated net pension loss (income) for the three and six months ended June 30, 2020 and 2019 were as follows:

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30, 2020

 

 

June 30, 2020

 

 

 

Qualified

 

 

Non-Qualified

& International

 

 

Total

 

 

Qualified

 

 

Non-Qualified

& International

 

 

Total

 

Interest cost

 

$

16

 

 

$

 

 

$

16

 

 

$

31

 

 

$

1

 

 

$

32

 

Expected return on plan assets

 

 

(30

)

 

 

 

 

 

(30

)

 

 

(60

)

 

 

 

 

 

(60

)

Amortization of actuarial loss

 

 

3

 

 

 

1

 

 

 

4

 

 

 

7

 

 

 

1

 

 

 

8

 

Net periodic benefit (income) loss

 

$

(11

)

 

$

1

 

 

$

(10

)

 

$

(22

)

 

$

2

 

 

$

(20

)

 

35


LSC Communications, Inc.

(DEBTOR-IN-POSSESSION)

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Six Months Ended June 30, 2020 and 2019

(tabular amounts in millions, except per share data)

 

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30, 2019

 

 

June 30, 2019

 

 

 

Qualified

 

 

Non-Qualified

& International

 

 

Total

 

 

Qualified

 

 

Non-Qualified

& International

 

 

Total

 

Interest cost

 

$

18

 

 

$

1

 

 

$

19

 

 

$

38

 

 

$

2

 

 

$

40

 

Expected return on plan assets

 

 

(30

)

 

 

 

 

 

(30

)

 

 

(61

)

 

 

 

 

 

(61

)

Amortization of actuarial loss

 

 

3

 

 

 

 

 

 

3

 

 

 

6

 

 

 

 

 

 

6

 

Settlement of retirement obligations

 

 

1

 

 

 

 

 

 

 

1

 

 

 

133

 

 

 

 

 

 

133

 

Net periodic benefit (income) loss

 

$

(8

)

 

$

1

 

 

$

(7

)

 

$

116

 

 

$

2

 

 

$

118

 

  

In the first quarter of 2020, the Company adopted a change in method of accounting for the market-related value of assets for a class of assets within the U.S. Qualified Plan and Non-Qualified plans.  The change in accounting method was retrospectively applied to periods in 2017, 2018 and 2019, and as a result, pension income shown above for the three and six months ended June 30, 2019 has been restated.  Refer to Impact of Change in Accounting Principle in Note 1, Overview and Basis of Presentation, for more information.

 

In the first quarter of 2019, the Company completed a partial settlement of its retirement benefit obligations related to the U.S. Qualified Plan by purchasing a group annuity contract for certain retirees and beneficiaries from a third-party insurance company. As a result, the Company’s pension assets and liabilities were remeasured as of the settlement date.  As of the remeasurement date, the reduction in the reported pension obligation for the participants under the annuity contract was $477 million, and the reduction in plan assets was $466 million.  The Company recorded a non-cash settlement charge of $132 million in settlement of retirement benefit obligations in the condensed consolidated statement of operations in the first quarter of 2019.  This charge resulted from the recognition in earnings of a portion of the actuarial losses recorded in accumulated other comprehensive loss based on the proportion of the obligation settled.  

 

There were additional immaterial lump-sum settlements related to the U.S. Qualified Plan (unrelated to the transaction noted above) during the three months ended June 30, 2019 that resulted in a non-cash settlement charge of $1 million. 

 

Settlement of retirement obligations is disclosed separately in the condensed consolidated statements of operations, while the remaining net periodic (loss) income for the three and six months ended June 30, 2020 and 2019 is included in the investment and other (income)-net.   

 

 

Note 13. Taxes

 

The CARES Act is intended to provide emergency relief to both businesses and individuals impacted by the COVID-19 pandemic.  

 

 

Income Taxes

 

The CARES Act enacted several provisions that may impact corporations including the carryback of certain net operating losses and the expensing of additional interest under certain circumstances.  The Company has estimated that these provisions will not result in a benefit for the six months ended June 30, 2020.  As the Company assesses additional guidance issued by the U.S. Treasury Department, the IRS and other standard-setting bodies related to the CARES Act, it may record an impact to the income tax provision.  

 

 

36


LSC Communications, Inc.

(DEBTOR-IN-POSSESSION)

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Six Months Ended June 30, 2020 and 2019

(tabular amounts in millions, except per share data)

 

Payroll Taxes

 

The CARES Act allows companies to defer payments of the employer share (6.2% of wages) of Social Security payroll taxes from the date of enactment through December 31, 2020.  Fifty percent of the taxes deferred are required to be paid by December 31, 2021 with the remaining fifty percent by December 31, 2022. As of June 30, 2020, the Company accrued $10 million of payroll taxes that will benefit from this adoption. The Company expects to continue to defer payroll taxes through the end of 2020.

 

 

Note 14.  Comprehensive Income

The following table summarizes accumulated other comprehensive loss by component as of December 31, 2019 and June 30, 2020 and changes during the six months ended June 30, 2020.       

 

 

 

Pension

 

 

Translation

 

 

 

 

 

 

 

Plan Cost

 

 

Adjustments

 

 

Total

 

Balance at December 31, 2019

 

$

(464

)

 

$

(53

)

 

$

(517

)

Other comprehensive (loss) before reclassifications

 

 

 

 

 

(10

)

 

 

(10

)

Amounts reclassified from accumulated other comprehensive loss

 

 

6

 

 

 

 

 

 

6

 

Net change in accumulated other comprehensive income (loss)

 

 

6

 

 

 

(10

)

 

 

(4

)

Balance at June 30, 2020

 

$

(458

)

 

$

(63

)

 

$

(521

)

 

The following table summarizes accumulated other comprehensive loss by component as of December 31, 2018 and June 30, 2019 and changes during the six months ended June 30, 2019.

 

 

 

Pension

 

 

Translation

 

 

 

 

 

 

 

Plan Cost

 

 

Adjustments

 

 

Total

 

Balance at December 31, 2018

 

$

(520

)

 

$

(55

)

 

$

(575

)

Other comprehensive income before reclassifications

 

 

105

 

 

 

2

 

 

 

107

 

Amounts reclassified from accumulated other comprehensive loss

 

 

5

 

 

 

 

 

 

5

 

Net change in accumulated other comprehensive loss

 

 

110

 

 

 

2

 

 

 

112

 

Balance at June 30, 2019

 

$

(410

)

 

$

(53

)

 

$

(463

)

  

In the first quarter of 2020, the Company adopted a change in method of accounting for the market-related value of assets for a class of assets within the U.S. Qualified Plan and Non-Qualified plans.  The change in accounting method was retrospectively applied to periods in 2017, 2018 and 2019, and as a result, the pension rollforward for accumulated other comprehensive loss above and reclassification table below have been restated for the three and six months ended June 30, 2019.  Refer to Notes 1, Overview and Basis of Presentation, and 12, Retirement Plans, for more information.    

 

In the first quarter of 2019, the Company completed a partial settlement of its retirement benefit obligations and, as a result, the Company’s pension assets and liabilities were remeasured as of the settlement date.  The impact, net of tax, to the Company’s accumulated other comprehensive loss was a decrease of $104 million during the three months ended March 31, 2019 (including the restatement noted above).  Additional immaterial lump-sum settlements during the three months ended June 30, 2019 increased the balance by $1 million to a total net of tax impact of $105 million.  Refer to Note 12, Retirement Plans, for more information.

 

Refer to the condensed consolidated statements of comprehensive income for the components of comprehensive (loss) income for the three and six months ended June 30, 2020 and 2019.   

37


LSC Communications, Inc.

(DEBTOR-IN-POSSESSION)

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Six Months Ended June 30, 2020 and 2019

(tabular amounts in millions, except per share data)

 

Reclassifications from accumulated other comprehensive loss for the three and six months ended June 30, 2020 and 2019 were as follows:  

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2020

 

 

2019 (1)

 

 

2020

 

 

2019 (1)

 

Amortization of pension plan cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net actuarial loss (a)

 

$

4

 

 

$

3

 

 

$

8

 

 

$

6

 

Reclassifications before tax

 

 

4

 

 

 

3

 

 

 

8

 

 

 

6

 

Income tax expense

 

 

1

 

 

 

 

 

 

2

 

 

 

1

 

Reclassifications, net of tax

 

$

3

 

 

$

3

 

 

$

6

 

 

$

5

 

 

(a) Amortization of pension plan cost is included in the calculation of net periodic pension plan (income) expense that is recognized in investment and other income-net in the condensed consolidated statements of operations (see Note 12, Retirement Plans).    

(1) As Adjusted – Refer to the narrative above on the change in accounting principle.    

 

 

Note 15.  Segment Information

 

As a result of the Company’s segment analysis in the fourth quarter of 2019, Mexico met the requirements to be classified as a reportable segment (previously included as a non-reportable segment).  All prior year amounts have been reclassified to conform to the Company’s current reporting structure.  

 

The Company’s segment and product and service offerings are summarized below:

 

Magazines, Catalogs and Logistics

 

The Magazines, Catalogs and Logistics segment primarily produces magazines and catalogs and provides logistics solutions to the Company and other third parties.  The segment also provides certain other print-related services, including mail services.  The segment has operations primarily in the U.S.  The Magazines, Catalogs and Logistics segment is divided into two reporting units: magazines and catalogs; and logistics.

 

 

Book

 

The Book segment produces books for publishers primarily in the U.S.  The segment also provides supply-chain management services and warehousing and fulfillment services, as well as e-book formatting for book publishers.  

 

 

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. 

 

 

Mexico

 

Mexico produces magazines, catalogs, statements, forms, and labels. 

 

 

38


LSC Communications, Inc.

(DEBTOR-IN-POSSESSION)

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Six Months Ended June 30, 2020 and 2019

(tabular amounts in millions, except per share data)

 

Other

 

The Other grouping consists of the following non-reportable segments: Directories and Print Management.  Print Management provides outsourced print procurement and management services.  

 

  

Corporate

 

Corporate consists of unallocated selling, general and administrative activities and associated expenses including executive, legal, finance, communications, certain facility costs and LIFO inventory provisions.  In addition, share-based compensation expense is included in Corporate and not allocated to the operating segments.

 

 

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.   

  

 

 

 

 

 

 

Income (Loss)

 

 

Depreciation

 

 

 

 

 

Three Months Ended

 

Net

 

 

from

 

 

and

 

 

Capital

 

June 30, 2020

 

Sales

 

 

Operations

 

 

Amortization

 

 

Expenditures

 

Magazines, Catalogs and Logistics

 

$

214

 

 

$

(57

)

 

$

13

 

 

$

3

 

Book

 

 

198

 

 

 

4

 

 

 

11

 

 

 

2

 

Office Products

 

 

81

 

 

 

 

 

 

3

 

 

 

 

Mexico

 

 

16

 

 

 

3

 

 

 

 

 

 

 

Total reportable segments

 

 

509

 

 

 

(50

)

 

 

27

 

 

 

5

 

Other

 

 

23

 

 

 

2

 

 

 

 

 

 

 

Corporate

 

 

 

 

 

(9

)

 

 

1

 

 

 

1

 

Total operations

 

$

532

 

 

$

(57

)

 

$

28

 

 

$

6

 

 

  

 

 

 

 

 

 

Income (Loss)

 

 

 

 

 

 

Depreciation

 

 

 

 

 

Six Months Ended

 

Net

 

 

from

 

 

Assets of

 

 

and

 

 

Capital

 

June 30, 2020

 

Sales

 

 

Operations

 

 

Operations

 

 

Amortization

 

 

Expenditures

 

Magazines, Catalogs and Logistics

 

$

541

 

 

$

(92

)

 

$

508

 

 

$

24

 

 

$

10

 

Book

 

 

402

 

 

 

(5

)

 

 

467

 

 

 

23

 

 

 

6

 

Office Products

 

 

193

 

 

 

7

 

 

 

283

 

 

 

6

 

 

 

 

Mexico

 

 

39

 

 

 

6

 

 

 

53

 

 

 

1

 

 

 

 

Total reportable segments

 

 

1,175

 

 

 

(84

)

 

 

1,311

 

 

 

54

 

 

 

16

 

Other

 

 

58

 

 

 

5

 

 

 

23

 

 

 

 

 

 

 

Corporate

 

 

 

 

 

(21

)

 

 

151

 

 

 

1

 

 

 

1

 

Total operations

 

$

1,233

 

 

$

(100

)

 

$

1,485

 

 

$

55

 

 

$

17

 

39


LSC Communications, Inc.

(DEBTOR-IN-POSSESSION)

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Six Months Ended June 30, 2020 and 2019

(tabular amounts in millions, except per share data)

 

 

 

 

 

 

 

 

 

Income (Loss)

 

 

Depreciation

 

 

 

 

 

Three Months Ended

 

Net

 

 

from

 

 

and

 

 

Capital

 

June 30, 2019

 

Sales

 

 

Operations

 

 

Amortization

 

 

Expenditures

 

Magazines, Catalogs and Logistics

 

$

380

 

 

$

(42

)

 

$

13

 

 

$

12

 

Book

 

 

289

 

 

 

18

 

 

 

13

 

 

 

7

 

Office Products

 

 

139

 

 

 

13

 

 

 

3

 

 

 

1

 

Mexico

 

 

25

 

 

 

4

 

 

 

1

 

 

 

 

Total reportable segments

 

 

833

 

 

 

(7

)

 

 

30

 

 

 

20

 

Other

 

 

36

 

 

 

4

 

 

 

 

 

 

 

Corporate

 

 

 

 

 

(13

)

 

 

1

 

 

 

1

 

Total operations

 

$

869

 

 

$

(16

)

 

$

31

 

 

$

21

 

 

 

 

 

 

 

 

 

 

Income (Loss)

 

 

 

 

 

 

Depreciation

 

 

 

 

 

Six Months Ended

 

Net

 

 

from

 

 

Assets of

 

 

and

 

 

Capital

 

June 30, 2019

 

Sales

 

 

Operations

 

 

Operations

 

 

Amortization

 

 

Expenditures

 

Magazines, Catalogs and Logistics

 

$

783

 

 

$

(73

)

 

$

734

 

 

$

28

 

 

$

22

 

Book

 

 

549

 

 

 

31

 

 

 

637

 

 

 

25

 

 

 

24

 

Office Products

 

 

258

 

 

 

21

 

 

 

339

 

 

 

6

 

 

 

1

 

Mexico

 

 

49

 

 

 

7

 

 

 

71

 

 

 

2

 

 

 

1

 

Total reportable segments

 

 

1,639

 

 

 

(14

)

 

 

1,781

 

 

 

61

 

 

 

48

 

Other

 

 

75

 

 

 

5

 

 

 

6

 

 

 

 

 

 

 

Corporate

 

 

 

 

 

(26

)

 

 

92

 

 

 

1

 

 

 

1

 

Total operations

 

$

1,714

 

 

$

(35

)

 

$

1,879

 

 

$

62

 

 

$

49

 

 

Restructuring, impairment and other charges by segment for the three and six months ended June 30, 2020 and 2019 are disclosed in Note 8, Restructuring, Impairment and Other Charges.

  

 

Note 16.  New Accounting Pronouncements

      

In August 2018, the FASB issued Accounting Standards Update No. 2018-14 “Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans” (“ASU 2018-14”).  ASU 2018-14 modifies the annual disclosure requirements for employers that sponsor defined benefit pension plans.  ASU 2018-14 is effective for 2020 year-end disclosures.  Early adoption of ASU 2018-14 is permitted; however, the Company plans to adopt the standard for the 2020 year-end disclosures. The Company does not anticipate a significant impact.

  

In December 2019, the FASB issued Accounting Standards Update No. 2019-12 Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes ("ASU 2019-12").  ASU 2019-12 removes certain exceptions for intraperiod tax allocations and interim calculations, and adds guidance to reduce complexity in accounting for income taxes, including a modification in the guidance for franchise taxes that are partially based on income and recognizing deferred taxes for a subsequent step-up in the tax basis of goodwill.  ASU 2019-12 is effective in the first quarter of 2021.  Early adoption of ASU 2019-12 is permitted; however, the Company plans to adopt the standard in the first quarter of 2021.  The Company is in the process of assessing the impact of the new standard.  

  

 

 

40


 

-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, 2020 and December 31, 2019 and the results of operations for the three and six months ended June 30, 2020 and 2019.  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 (“SEC”) on March 2, 2020, for management’s discussion and analysis of the financial condition of the company as of December 31, 2019 and December 31, 2018, and the results of operations for the years ended December 31, 2019, 2018 and 2017.                                     

                          

                        

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.

 

 

Voluntary Reorganization under Chapter 11

 

Background Information

 

On April 13, 2020 (the “Petition Date”), the Company and certain of its subsidiaries filed voluntary petitions for relief under Chapter 11 of title 11 of the United States Code, 11 U.S.C. §§ 101-1532 (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”) (collectively, the “Chapter 11 Cases”).  Refer to Note 2, Voluntary Reorganization under Chapter 11, for more information on the Chapter 11 Cases and impact to the Company’s ability to continue as a going concern.

 

The Chapter 11 Cases are being jointly administered under the caption In re LSC Communications, Inc., 20-10950.  We and our subsidiaries that are involved in the Chapter 11 Cases will continue to operate our businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code.

 

As a result of the commencement of the Chapter 11 Cases, the Company’s operations and ability to develop and execute its business plan are subject to the risks and uncertainties associated with the reorganization process under the Bankruptcy Code.  Following the outcome of the Chapter 11 Cases, the amount and composition of the Company’s assets, liabilities, officers and/or directors, and the description of the Company’s operations, properties, liquidity and capital resources included in this quarterly report may be significantly different.

 

Refer to Note 2, Voluntary Reorganization under Chapter 11, for more information.

 

 

Significant Bankruptcy Court Actions

 

On April 15, 2020, the Bankruptcy Court entered orders granting interim approval of certain motions (the “First Day Motions”), enabling us to conduct our business activities in the ordinary course, subject to the terms and conditions of such orders, including authorizing us to pay employee wages and benefits, to pay taxes and certain governmental fees and charges, to continue to operate our cash management system in the ordinary course, and to pay prepetition claims of certain of our vendors.  The First Day Motions were subsequently approved by the Bankruptcy Court on a final basis at hearings on May 12, 2020 and June 2, 2020.  

 

 

Proposed Sale

 

On June 5, 2020, the Bankruptcy Court entered an order granting approval for a sale and bidding process through which we are authorized to determine the highest or otherwise best offer for the sale of all or substantially all of our assets pursuant to Section 363 of the Bankruptcy Code or a Chapter 11 plan of reorganization.  The auction, if one is held, is currently scheduled for August 25, 2020, and a hearing approving the sale is currently scheduled for September 1, 2020.

 

 

41


 

DIP Financing

 

See Note 10, Debt, for information on the DIP Facility, which provides up to $100 million of financing in the form of revolving loans and letters of credit.

 

 

Going Concern

 

The accompanying condensed consolidated financial statements were prepared assuming that the Company will continue as a going concern and contemplate the continuity of our operations, realization of assets and satisfaction of liabilities and commitments in the normal course of business.  Our ability to continue as a going concern is contingent upon our ability to comply with the covenants of the DIP Credit Agreement described in Note 10, Debt, and our ability to implement, subject to the Bankruptcy Court’s approval, a restructuring plan, among other factors.

 

While operating as debtors-in-possession under Chapter 11, we may sell or otherwise dispose of or liquidate assets or settle liabilities, subject to the approval of the Bankruptcy Court or as otherwise permitted in the ordinary course of business (and subject to restrictions in our debt agreements), for amounts other than those reflected in the accompanying condensed consolidated financial statements.  Further, the restructuring plan could materially change the amounts and classifications of assets and liabilities reported in the condensed consolidated financial statements.

 

As a result of the factors noted above, we believe there is substantial doubt about the Company’s ability to continue as a going concern.  The condensed consolidated financial statements included in this quarterly report on Form 10-Q do not include any adjustments related to the recoverability and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. 

 

 

Coronavirus Pandemic (“COVID-19”)

 

During and subsequent to the six months ended June 30, 2020, the novel coronavirus strain, known as COVID-19, continues to spread across the globe at an increasing rate. Measures taken by governmental authorities and private actors to limit the spread of this virus may interfere with the ability of the Company's employees, suppliers, and other business providers to carry out their assigned tasks or supply materials at ordinary levels of performance relative to the conduct of the business which may cause a material curtailment to certain business operations. Moreover, as a large part of the Company's business involves sales of books and other products used in schools and school facilities, if COVID-19 related measures continue to result in widespread and lengthy school closings, the Company's condensed consolidated results of operations and financial condition will be adversely impacted.  Books sold in retail stores have also been adversely impacted as both large chains and independent stores have been forced to close.  Additionally, as COVID-19 has significantly impacted retailers' stores, distribution centers and supply chains, the Company has experienced an adverse impact on our catalogs and office products businesses.  Disruption across many other industries has also significantly impact demand for advertising, which is expected to result in page count and volume reductions in magazines.

 

We continue to monitor the situation, to assess further possible implications to our business and customers, and to take actions in an effort to mitigate adverse consequences. The Company has expanded its work-from-home policy for its non-manufacturing employees, has focused on obtaining protective equipment and implementing social distancing and other policies for its manufacturing employees and continues to adhere to guidance issued by governmental authorities.  

 

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law.  Refer to Note 13, Taxes, for more information on the CARES Act.

 

 

Segment Descriptions

 

As a result of the Company’s segment analysis in the fourth quarter of 2019, Mexico met the requirements to be classified as a reportable segment (previously included as a non-reportable segment).  All prior year amounts have been reclassified to conform to the Company’s current reporting structure.  

 

The Company’s segment and product and service offerings are summarized below:

 

  

42


 

Magazines, Catalogs and Logistics

 

The Magazines, Catalogs and Logistics segment primarily produces magazines and catalogs and provides logistics solutions to the Company and other third parties.  The segment also provides certain other print-related services, including mail services.  The segment has operations primarily in the U.S.  The Magazines, Catalogs and Logistics segment is divided into two reporting units: magazines and catalogs; and logistics.

 

 

Book

 

The Book segment produces books for publishers primarily in the U.S.  The segment also provides supply-chain management services and warehousing and fulfillment services, as well as e-book formatting for book publishers.  

 

 

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. 

 

 

Mexico

 

Mexico produces magazines, catalogs, statements, forms, and labels. 

 

 

Other

 

The Other grouping consists of the following non-reportable segments: Directories and Print Management.  Print Management provides outsourced print procurement and management services.  

 

    

Corporate

 

Corporate consists of unallocated selling, general and administrative activities and associated expenses including executive, legal, finance, communications, certain facility costs and last in, first out (“LIFO”) inventory provisions.  In addition, share-based compensation expense is included in Corporate and not allocated to the operating segments.

 

Outlook

 

Competitive Environment

 

According to the June 2020 IBIS World industry report “Printing in the U.S.,” estimated total annual printing industry revenue is approximately $73 billion, of which approximately $12 billion relates to our core segments of the print market and an additional approximately $30 billion pertains to related segments of the print market in which we are able to offer certain products. Despite consolidation in recent years, including several acquisitions completed by LSC Communications, the industry remains highly fragmented and LSC Communications is one of the largest players in our segment of the print market.  The print and related services industry, in general, continues to have excess capacity and LSC Communications remains diligent in proactively identifying plant consolidation opportunities to keep our capacity in line with demand.  Across the Company’s range of print products and services, competition is based primarily on the ability to deliver products for the lowest total cost, a factor driven not only by price, but also by materials and distribution costs.  We expect that prices for print products and services will continue to be a focal point for customers in coming years. 

 

Value-added services, such as LSC Communications’ co-mail, logistics and supply chain management offerings, enable customers to lower their total costs. Technological changes, including the electronic distribution of documents and data, online distribution and hosting of media content, and advances in digital printing, print-on-demand and internet technologies, continue to impact the market for our products and services.  

 

The Company’s product and service offerings have been impacted by the following:

43


 

 

 

The impact of digital technologies has been felt in many print products.  Digital technologies have impacted printed magazines as advertising spending continues to move from print to electronic media.  

 

Catalogs have experienced volume reductions as our customers allocate more of their spending to online resources and also face competition from online retailers resulting in retailer compression.

 

The effect of COVID-19 in 2020 on the industries the Company services.

 

The Company has seen an unprecedented drop in demand for magazines and catalogs, with the faster pace of decline in demand primarily due to the accelerated impact of digital disruption of demand for printed materials.

 

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.  

 

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; however, it is likely to 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 Print Logistics in 2018 and Clark Group, Quality Park, Publishers Press, CREEL, Fairrington, and HudsonYards in 2017, which expanded our logistics, printing, digital, office products, and premedia capabilities, and Continuum in 2016, which expanded our print management capabilities.  These acquisitions and investments further secure our position as a technology leader in the industry.

 

Technological advancement and innovation continues to affect the overall demand for most of the products in our Office Products segment.  However, 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 are likely to 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.

 

During late 2018 and early 2019, the Company performed a comprehensive review of the Company’s entire operations to identify new revenue opportunities and cost savings.  This review covered substantially all aspects of the Company – both operational and support functions – and involved key personnel from throughout the organization.  The resulting revenue opportunities and cost savings initiatives were approved by senior management in the first quarter of 2019 and are expected to be implemented over the next three years.  While the Company realized the benefits beginning in 2019 and expects to realize benefits at various points over the next three years, the Company has incurred $14 million of expense, of which $4 million was recorded during the six months ended June 30, 2020, relating to the implementation of certain identified initiatives.  As the Company continues to implement the identified initiatives, the Company expects to incur additional expense; however, the Company expects the resulting benefits (additional revenue and/or cost savings) to significantly exceed the additional expense.

 

 

Raw Materials  

 

We negotiate with suppliers to maximize our purchasing efficiencies.  The primary raw materials we use in our printed products are paper and ink.  We negotiate with paper suppliers to maximize our purchasing efficiencies and use a wide variety of paper grades and formats. In addition, a substantial amount of paper used in our printed products is supplied directly by customers.  Variations in the cost and supply of certain paper grades used in the manufacturing process may affect our consolidated financial results.  Generally, customers directly absorb the impact of changing prices on customer-supplied paper.  For paper that we purchase, we have historically passed most changes in price through to our customers.  

44


 

Contractual arrangements and industry practice should support our continued ability to pass on any future paper price increases, but there is no assurance that market conditions will continue to enable us to successfully do so.  Higher paper prices and tight paper supplies may have an impact on customers’ demand for printed products.  We also resell waste paper and other print-related by-products and may be impacted by changes in prices for these by-products.

 

We use a wide variety of ink formulations and colors in our manufacturing processes. Variations in the cost and supply of certain ink formulations 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.

 

We recently consolidated our adhesive spend to improve supply security across our manufacturing platforms.

 

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, adhesives and paper consignment agreement, 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 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 condensed consolidated statements of operations, balance sheets 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 estimates developed prior to the Company’s voluntary reorganization, the Company expected to make cash contributions of approximately $6 million to its pension benefit plans for the full year in 2020.  Through the Petition Date, $1 million has been contributed and no further contributions will be made until a determination is made by the Bankruptcy Court.

 

Beginning in the first quarter of 2020, the Company changed the method of accounting for the market-related value of assets for a class of assets within the U.S. Qualified Plan and Non-Qualified plans.  The change in accounting method was retrospectively applied to periods in 2017, 2018 and 2019.  Refer to Impact of Change in Accounting Principle in Note 1, Overview and Basis of Presentation, for more information.

 

Based on the fair value of assets and the estimated discount rate used to value benefit obligations as of June 30, 2020, the Company estimates the unfunded status of the pension benefit plans to be approximately $120 million compared to $162 million at December 31, 2019.     

 

See Note 12, Retirement Plans, for more information on the Company’s pension benefit plans.

 

 

45


 

Significant Accounting Policies

 

Other than the policies implemented as a result of the Company’s Chapter 11 Cases, 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, 2019.  Refer to Note 2, Voluntary Reorganization under Chapter 11, for information on the policies for balances affected by the voluntary reorganization.   

46


 

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.

  

 

Results of Operations for the Three Months Ended June 30, 2020 as Compared to the Three Months Ended June 30, 2019

  

The following table shows the results of operations for the three months ended June 30, 2020 and 2019, which reflects the results of the acquired businesses from the relevant acquisition dates:

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

 

 

 

 

 

2020

 

 

2019

 

 

$ Change

 

 

% Change

 

 

 

(in millions, except percentages)

 

Net sales

 

$

532

 

 

$

869

 

 

$

(337

)

 

 

(38.8

%)

Cost of sales

 

 

468

 

 

 

750

 

 

 

(282

)

 

 

(37.6

%)

Cost of sales as a % of net sales

 

 

88.0

%

 

 

86.3

%

 

 

 

 

 

 

 

 

Selling, general and administrative expenses (exclusive of

     depreciation and amortization)

 

 

61

 

 

 

80

 

 

 

(19

)

 

 

(23.8

%)

Selling, general and administrative expenses as a % of net sales

 

 

11.5

%

 

 

9.2

%

 

 

 

 

 

 

 

 

Restructuring, impairment and other charges-net

 

 

32

 

 

 

24

 

 

 

8

 

 

 

33.3

%

Depreciation and amortization

 

 

28

 

 

 

31

 

 

 

(3

)

 

 

(9.7

%)

(Loss) from operations

 

$

(57

)

 

$

(16

)

 

$

(41

)

 

 

256.3

%

 

Condensed Consolidated Results               

 

Net sales for the three months ended June 30, 2020 were $532 million, a decrease of $337 million, or 38.8%, compared to the three months ended June 30, 2019.  Net sales were impacted by lower volume, which was partially caused by the impact of COVID-19, and a $74 million decrease in pass-through paper sales.  

 

Total cost of sales decreased $282 million, or 37.6%, for the three months ended June 30, 2020 compared to the three months ended June 30, 2019, primarily driven by lower volume and cost control initiatives.

 

As a percentage of net sales, cost of sales increased from 86.3% for the three months ended June 30, 2019 to 88.0% for the three months ended June 30, 2020 primarily due to lower volume.

 

Selling, general and administrative expenses decreased $19 million, or 23.8%, for the three months ended June 30, 2020 compared to the three months ended June 30, 2019, primarily due to lower volume, higher expenses in 2019 related to the previously terminated merger agreement, and cost control initiatives.

 

For the three months ended June 30, 2020, the Company recorded restructuring, impairment and other charges of $32 million. The charges primarily included:  

 

 

Net other restructuring charges of $22 million primarily due to facility costs and expenses to move equipment; and

 

Employee termination costs of $8 million related to an aggregate of 641 employees, of whom 246 were terminated as of or prior to June 30, 2020 primarily related to the closure of two facilities in the Magazines, Catalogs and Logistics segment.

 

For the three months ended June 30, 2019, the Company recorded restructuring, impairment and other charges of $24 million. The charges primarily included:  

 

 

Net other restructuring charges of $6 million primarily due to facility costs, costs associated with new revenue opportunities and cost savings initiatives implemented during the quarter, and multiemployer withdrawal obligations related to facility closures; and

 

$17 million for the impairment of certain definite-lived customer relationships intangible assets in the Magazines, Catalogs and Logistics segment.

 

47


 

Depreciation and amortization decreased $3 million to $28 million for the three months ended June 30, 2020 compared to the three months ended June 30, 2019, due to decreased capital spending in recent years compared to historical levels.

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

 

 

 

 

 

2020

 

 

2019 (1)

 

 

$ Change

 

 

% Change

 

 

 

(in millions, except percentages)

 

Interest expense-net

 

$

3

 

 

$

19

 

 

$

(16

)

 

 

(84.2

%)

Settlement of retirement benefit obligations

 

 

 

 

 

1

 

 

 

(1

)

 

 

(100.0

%)

Investment and other (income)-net

 

 

(11

)

 

 

(8

)

 

 

(3

)

 

 

37.5

%

Reorganization items, net

 

 

14

 

 

 

 

 

 

14

 

 

 

100.0

%

 

Interest expense is lower for the three months ended June 30, 2020 compared to the three months ended June 30, 2019 primarily due to the Company’s voluntary reorganization.  Refer to Note 10, Debt, for more information.  Refer to Note 12, Retirement Plans, for information on the non-cash settlement charge related to retirement benefit obligations. Investment and other (income)-net primarily relates to the Company’s pension benefit plans in both years.  Refer to Note 2, Voluntary Reorganization under Chapter 11, for information on reorganization items.

 

 

 

Three Months Ended

 

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

 

2020

 

 

2019 (1)

 

 

$ Change

 

 

 

(in millions, except percentages)

 

(Loss) before income taxes

 

$

(63

)

 

$

(28

)

 

$

(35

)

Income tax (benefit)

 

 

 

 

 

(3

)

 

 

3

 

Effective income tax rate

 

 

0.9

%

 

 

13.9

%

 

 

 

 

  

The effective income tax rate for the three months ended June 30, 2020 was 0.9% compared to 13.9% for the three months ended June 30, 2019.  The effective income tax rate for the three months ended June 30, 2020 reflects the Company’s limited ability to benefit U.S. results as the Company has a valuation allowance recorded on its U.S. deferred tax assets.  

 

The effective rate for three months ended June 30, 2019 reflects the impact of nondeductible costs associated with the terminated Merger Agreement.

 

(1) As Adjusted - Refer to Impact of Change in Accounting Principle in Note 1, Overview and Basis of Presentation, for information on restated balances for settlement of retirement benefit obligations and investment and other (income)-net.

 

 

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.  

 

  

Magazines, Catalogs and Logistics  

 

 

 

Three Months Ended

 

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

 

2020

 

 

2019

 

 

Change

 

 

 

(in millions, except percentages)

 

Net sales

 

$

214

 

 

$

380

 

 

$

(166

)

(Loss) income from operations

 

 

(57

)

 

 

(42

)

 

 

(15

)

Operating margin

 

 

(26.6

%)

 

 

(11.1

%)

 

(1550 bps)

 

Restructuring, impairment and other charges-net

 

 

20

 

 

 

20

 

 

 

 

 

48


 

Net sales for the Magazines, Catalogs and Logistics segment for the three months ended June 30, 2020 were $214 million, a decrease of $166 million, or 43.8%, compared to the three months ended June 30, 2019.  The Magazines, Catalogs and Logistics segment’s net sales decreased primarily due to lower volume in magazines, catalogs and logistics which was partially caused by the impact of COVID-19, and a $44 million decrease in pass-through paper sales.

 

The change in Magazines, Catalogs and Logistics segment loss from operations and operating margins was primarily due to lower volume, partially offset by cost control initiatives.    

 

 

 

Book

 

 

 

Three Months Ended

 

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

 

2020

 

 

2019

 

 

Change

 

 

 

(in millions, except percentages)

 

Net sales

 

$

198

 

 

$

289

 

 

$

(91

)

Income from operations

 

 

4

 

 

 

18

 

 

 

(14

)

Operating margin

 

 

2.0

%

 

 

6.2

%

 

(420 bps)

 

Restructuring, impairment and other charges-net

 

 

2

 

 

 

1

 

 

 

1

 

 

Net sales for the Book segment for the three months ended June 30, 2020 were $198 million, a decrease of $91 million, or 31.7%, compared to the three months ended June 30, 2019, primarily due to lower volume which was partially caused by the impact of COVID-19 and a $25 million decrease in pass-through paper sales.

 

The decrease in the operating income and margins was driven by lower volume, partially offset by cost control initiatives.

 

 

Office Products

 

 

 

Three Months Ended

 

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

 

2020

 

 

2019

 

 

Change

 

 

 

(in millions, except percentages)

 

Net sales

 

$

81

 

 

$

139

 

 

$

(58

)

Income from operations

 

 

 

 

 

13

 

 

 

(13

)

Operating margin

 

 

---

%

 

 

9.4

%

 

(940 bps)

 

Restructuring, impairment and other charges-net

 

 

1

 

 

 

1

 

 

 

 

 

Net sales for the Office Products segment for the three months ended June 30, 2020 were $81 million, a decrease of $58 million, or 42.2%, compared to the three months ended June 30, 2019.  The decrease was largely as a result of lower volume across several products, which was primarily caused by the impact of COVID-19.

 

The decrease in Office Products segment income from operations and operating margin was primarily due to lower volume and expenses incurred due to COVID-19, partially offset by cost control initiatives.

 

 

Mexico

 

 

 

Three Months Ended

 

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

 

2020

 

 

2019

 

 

Change

 

 

 

(in millions, except percentages)

 

Net sales

 

$

16

 

 

$

25

 

 

$

(9

)

Income from operations

 

 

3

 

 

 

4

 

 

 

(1

)

Operating margin

 

 

18.8

%

 

 

16.0

%

 

280 bps

 

 

49


 

Net sales for the Mexico segment were $16 million for the six months ended June 30, 2020, a decrease of $9 million or 33.0%, compared to the three months ended June 30, 2019.  The decrease in net sales was due to lower volume primarily caused by the impact of COVID-19 and a $4 million decrease due to changes in foreign exchange rates.  The decrease in income from operations was primarily due to lower volume, and was partially offset by cost control initiatives which improved the operating margin.

 

 

Other

 

 

 

Three Months Ended

 

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

 

2020

 

 

2019

 

 

Change

 

 

 

(in millions, except percentages)

 

Net sales

 

$

23

 

 

$

36

 

 

$

(13

)

Income from operations

 

 

2

 

 

 

4

 

 

$

(2

)

Operating margin

 

 

8.7

%

 

 

11.1

%

 

240 bps

 

 

Net sales for the Other grouping for the three months ended June 30, 2020 were $23 million, a decrease of $13 million, or 35.2%, compared to the three months ended June 30, 2019, primarily due to lower sales in outsourced services which were partially impacted by COVID-19, a $5 million decrease in pass-through paper sales and lower directories volume.

 

The change in income from operations and operating margin was primarily due to lower volume.

 

 

Corporate    

 

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

  

 

 

Three Months Ended

 

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

 

2020

 

 

2019

 

 

Change

 

 

 

(in millions, except percentages)

 

Total operating expenses

 

$

9

 

 

$

13

 

 

$

(4

)

Significant components of total operating

     expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Restructuring, impairment and other charges-net

 

 

9

 

 

 

2

 

 

 

7

 

Share-based compensation expenses

 

 

1

 

 

 

1

 

 

 

 

Expenses related to acquisitions, the Merger

     Agreement and dispositions

 

 

 

 

 

5

 

 

 

(5

)

 

50


 

 

Results of Operations for the Six Months Ended June 30, 2020 as Compared to the Six Months Ended June 30, 2019

  

The following table shows the results of operations for the six months ended June 30, 2020 and 2019, which reflects the results of the acquired businesses from the relevant acquisition dates:

 

 

 

Six Months Ended

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

 

 

 

 

 

2020

 

 

2019

 

 

$ Change

 

 

% Change

 

 

 

(in millions, except percentages)

 

Net sales

 

$

1,233

 

 

$

1,714

 

 

$

(481

)

 

 

(28.1

%)

Cost of sales

 

 

1,084

 

 

 

1,485

 

 

 

(401

)

 

 

(27.0

%)

Cost of sales as a % of net sales

 

 

87.9

%

 

 

86.6

%

 

 

 

 

 

 

 

 

Selling, general and administrative expenses (exclusive of

     depreciation and amortization)

 

 

136

 

 

 

165

 

 

 

(29

)

 

 

(17.6

%)

Selling, general and administrative expenses as a % of net sales

 

 

11.0

%

 

 

9.6

%

 

 

 

 

 

 

 

 

Restructuring, impairment and other charges-net

 

 

58

 

 

 

37

 

 

 

21

 

 

 

56.8

%

Depreciation and amortization

 

 

55

 

 

 

62

 

 

 

(7

)

 

 

(11.3

%)

(Loss) from operations

 

$

(100

)

 

$

(35

)

 

$

(65

)

 

 

185.7

%

 

Condensed Consolidated Results              

 

Net sales for the six months ended June 30, 2020 were $1,233 million, a decrease of $481 million, or 28.1%, compared to the six months ended June 30, 2019.  Net sales were impacted by lower volume, which was partially caused by the impact of COVID-19, and a $115 million decrease in pass-through paper sales.

 

Total cost of sales decreased $401 million, or 27.0%, for the six months ended June 30, 2020 compared to the six months ended June 30, 2019, primarily driven by lower volume and cost control initiatives.

 

As a percentage of net sales, cost of sales increased from 86.6% for the six months ended June 30, 2019 to 87.9% for six months ended June 30, 2020 primarily due to lower volume.

 

Selling, general and administrative expenses decreased $29 million, or 17.6%, for the six months ended June 30, 2020 compared to the six months ended June 30, 2019, primarily due to lower volume, higher expenses in 2019 related to the previously terminated merger agreement, and cost control initiatives.

 

For the six months ended June 30, 2020, the Company recorded restructuring, impairment and other charges of $58 million. The charges primarily included:  

 

 

Net other restructuring charges of $44 million primarily due to facility costs, expenses to move equipment, costs associated with new revenue opportunities and cost savings initiatives implemented in 2019; and

 

Employee termination costs of $11 million related to an aggregate of 1,032 employees, of whom 443 were terminated as of or prior to June 30, 2020 primarily related to the closure of two facilities in the Magazines, Catalogs and Logistics segment and one facility in the Office Products segment; and

 

$2 million of net impairment charges related to machinery and equipment associated with facility closings in the Magazines, Catalogs and Logistics segment.

 

For the six months ended June 30, 2019, the Company recorded restructuring, impairment and other charges of $37 million. The charges primarily included:  

 

 

Net other restructuring charges of $12 million primarily due to facility costs, costs associated with new revenue opportunities and cost savings initiatives implemented in 2019, and multiemployer withdrawal obligations related to facility closures;

 

Employee termination costs of $5 million related to an aggregate of 234 employees, substantially all of whom were terminated as of or prior to June 30, 2020 primarily related to the closure of one facility in the Magazines, Catalogs and Logistics segment;

 

$17 million for the impairment of certain definite-lived customer relationships intangible assets in the Magazines, Catalogs and Logistics segment; and

51


 

 

$2 million of net impairment charges related to machinery and equipment associated with facility closings in the Magazines, Catalogs and Logistics segment.

 

Depreciation and amortization decreased $7 million to $55 million for the six months ended June 30, 2020 compared to the six months ended June 30, 2019, due to decreased capital spending in recent years compared to historical levels.

 

 

 

Six Months Ended

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

 

 

 

 

 

2020

 

 

2019 (1)

 

 

$ Change

 

 

% Change

 

 

 

(in millions, except percentages)

 

Interest expense-net

 

$

21

 

 

$

38

 

 

$

(17

)

 

 

(44.7

%)

Settlement of retirement benefit obligations

 

 

 

 

 

133

 

 

 

(133

)

 

 

(100.0

%)

Investment and other (income)-net

 

 

(21

)

 

 

(16

)

 

 

(5

)

 

 

31.3

%

Reorganization items, net

 

 

14

 

 

 

 

 

 

14

 

 

 

100.0

%

 

Interest expense is lower for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 primarily due to the Company’s voluntary reorganization.  Refer to Note 10, Debt, for more information.  Refer to Note 12, Retirement Plans, for information on the non-cash settlement charge related to retirement benefit obligations. Investment and other (income)-net primarily relates to the Company’s pension benefit plans in both years.  Refer to Note 2, Voluntary Reorganization under Chapter 11, for information on reorganization items.

 

 

 

Six Months Ended

 

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

 

2020

 

 

2019 (1)

 

 

$ Change

 

 

 

(in millions, except percentages)

 

Net (loss) before income taxes

 

$

(114

)

 

$

(190

)

 

$

76

 

Income tax expense (benefit)

 

 

1

 

 

 

(40

)

 

 

41

 

Effective income tax rate

 

 

(0.7

%)

 

 

21.4

%

 

 

 

 

  

The effective income tax rate for the six months ended June 30, 2020 was (0.7%) compared to 21.4% for the six months ended June 30, 2019.  The effective income tax rate for the six months ended June 30, 2020 reflects the Company’s limited ability to benefit U.S. results as the Company has a valuation allowance recorded on its U.S. deferred tax assets.  

 

The effective income tax rate for the six months ended June 30, 2019 reflects the impact of nondeductible costs associated with the terminated Merger Agreement.

 

(1) As Adjusted - Refer to Impact of Change in Accounting Principle in Note 1, Overview and Basis of Presentation, for information on restated balances for settlement of retirement benefit obligations and investment and other (income)-net.

 

 

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.

 

  

Magazines, Catalogs and Logistics  

 

 

 

Six Months Ended

 

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

 

2020

 

 

2019

 

 

Change

 

 

 

(in millions, except percentages)

 

Net sales

 

$

541

 

 

$

783

 

 

$

(242

)

(Loss) from operations

 

 

(92

)

 

 

(73

)

 

 

(19

)

Operating margin

 

 

(17.0

%)

 

 

(9.3

%)

 

(770) bps

 

Restructuring, impairment and other charges-net

 

 

31

 

 

 

31

 

 

 

 

52


 

 

Net sales for the Magazines, Catalogs and Logistics segment for the six months ended June 30, 2020 were $541 million, a decrease of $242 million, or 30.9%, compared to the six months ended June 30, 2019.  The Magazines, Catalogs and Logistics segment’s net sales decreased primarily due to lower volume in magazines, catalogs and logistics which was partially caused by the impact of COVID-19, and a $72 million decrease in pass-through paper sales.

 

The change in Magazines, Catalogs and Logistics segment loss from operations and operating margins was primarily due to lower volume, partially offset by cost control initiatives.    

 

 

Book

 

 

 

Six Months Ended

 

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

 

2020

 

 

2019

 

 

Change

 

 

 

(in millions, except percentages)

 

Net sales

 

$

402

 

 

$

549

 

 

$

(147

)

(Loss) income from operations

 

 

(5

)

 

 

31

 

 

 

(36

)

Operating margin

 

 

(1.2

%)

 

 

5.6

%

 

(680 bps)

 

Restructuring, impairment and other charges-net

 

 

5

 

 

 

2

 

 

 

3

 

 

Net sales for the Book segment for the six months ended June 30, 2020 were $402 million, a decrease of $147 million, or 26.9%, compared to the six months ended June 30, 2019, primarily due to lower volume which was partially caused by the impact of COVID-19 and a $34 million decrease in pass-through paper sales.

 

The decrease in the operating income and margins was driven by lower volume and higher restructuring, impairment and other charges.

 

 

Office Products

 

 

 

Six Months Ended

 

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

 

2020

 

 

2019

 

 

Change

 

 

 

(in millions, except percentages)

 

Net sales

 

$

193

 

 

$

258

 

 

$

(65

)

Income from operations

 

 

7

 

 

 

21

 

 

 

(14

)

Operating margin

 

 

3.6

%

 

 

8.1

%

 

(450) bps

 

Restructuring, impairment and other charges-net

 

 

3

 

 

 

1

 

 

 

2

 

 

Net sales for the Office Products segment for the six months ended June 30, 2020 were $193 million, a decrease of $65 million, or 25.3%, compared to the six months ended June 30, 2019. The decrease was largely as a result of lower volume across several products, which was primarily caused by the impact of COVID-19.

 

The decrease in Office Products segment income from operations and operating margin was primarily due to lower volume and higher restructuring, impairment and other charges, partially offset by cost control initiatives.

 

 

Mexico

 

 

 

Six Months Ended

 

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

 

2020

 

 

2019

 

 

Change

 

 

 

(in millions, except percentages)

 

Net sales

 

$

39

 

 

$

49

 

 

$

(10

)

Income from operations

 

 

6

 

 

 

7

 

 

 

(1

)

Operating margin

 

 

15.4

%

 

 

14.3

%

 

110 bps

 

 

53


 

Net sales for the Mexico segment were $39 million for the six months ended June 30, 2020, a decrease of $10 million or 18.6%, compared to the six months ended June 30, 2019.  The decrease in net sales was due to lower volume primarily caused by the impact of COVID-19 and a $4 million decrease due to changes in foreign exchange rates.  The decrease in income from operations was primarily due to lower volume, and was partially offset by cost control initiatives which improved the operating margin.

 

 

Other

 

 

 

Six Months Ended

 

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

 

2020

 

 

2019

 

 

Change

 

 

 

(in millions, except percentages)

 

Net sales

 

$

58

 

 

$

75

 

 

$

(17

)

Income from operations

 

 

5

 

 

 

5

 

 

 

 

Operating margin

 

 

8.6

%

 

 

6.7

%

 

190 bps

 

 

Net sales for the Other grouping for the six months ended June 30, 2020 were $58 million, a decrease of $17 million, or 22.5%, compared to the three months ended June 30, 2019, primarily due to a $9 million decrease in pass-through paper sales, lower sales in outsourced services which were partially impacted by COVID-19 and lower directories volume. The change in operating margin was primarily due to mix of work.

 

 

Corporate   

 

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

 

 

Six Months Ended

 

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

 

2020

 

 

2019

 

 

Change

 

 

 

(in millions)

 

Total operating expenses

 

$

21

 

 

$

26

 

 

$

(5

)

Significant components of total operating

     expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Restructuring, impairment and other charges-net

 

 

19

 

 

 

3

 

 

 

16

 

Share-based compensation expenses

 

 

2

 

 

 

4

 

 

 

(2

)

Expenses related to acquisitions, merger agreement

     and dispositions

 

 

 

 

 

12

 

 

 

(12

)

 

 

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.          

 

54


 

Non-GAAP adjusted EBITDA excludes restructuring, impairment and other charges-net, reorganization items, net, share-based compensation expense, settlement of retirement benefit obligations, and expenses related to acquisitions, merger agreement and dispositions.  In the first quarter of 2020, the Company began including share-based compensation expense as a non-GAAP measure.  As the share-based compensation expense recorded in the current period represents expense for previously issued grants that will vest at a lower share price than originally expensed, management determined that share-based compensation expense represents a non-GAAP measure.  The reconciliation for the three and six months ended June 30, 2019 below has been restated to reflect this change.

 

A reconciliation of GAAP net income to non-GAAP adjusted EBITDA for the three and six months ended June 30, 2020 and 2019 is presented in the following table:

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2020

 

 

2019 (1)

 

 

2020

 

 

2019 (1)

 

 

 

(in millions)

 

 

(in millions)

 

Net (loss)

 

$

(63

)

 

$

(25

)

 

$

(115

)

 

$

(150

)

Restructuring, impairment and other charges-

     net

 

 

32

 

 

 

24

 

 

 

58

 

 

 

37

 

Reorganization items, net

 

 

14

 

 

 

 

 

 

14

 

 

 

 

Share-based compensation expense

 

 

1

 

 

 

1

 

 

 

2

 

 

 

4

 

Settlement of retirement benefit obligations

 

 

 

 

 

1

 

 

 

 

 

 

133

 

Expenses related to acquisitions, merger

     agreement and dispositions

 

 

 

 

 

5

 

 

 

 

 

 

12

 

Depreciation and amortization

 

 

28

 

 

 

31

 

 

 

55

 

 

 

62

 

Interest expense-net

 

 

3

 

 

 

19

 

 

 

21

 

 

 

38

 

Income tax expense (benefit)

 

 

 

 

 

(3

)

 

 

1

 

 

 

(40

)

Non-GAAP adjusted EBITDA

 

$

15

 

 

$

53

 

 

$

36

 

 

$

96

 

 

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 and Six Months Ended June 30, 2020 as Compared to the Three and Six Months Ended June 30, 2019 for information on the charges.

 

Reorganization items, net: The Company recorded net reorganization items of $14 million for certain charges directly related to the Chapter 11 Cases during each of the three and six months ended June 30, 2020.  Refer to Note 2, Voluntary Reorganization under Chapter 11, for more information.

 

Share-based compensation expenses: The Company incurred $1 million and $2 million of expenses during the three and six months ended June 30, 2020, respectively, in relation to its share-based compensation plans.  The Company incurred $1 million and $4 million of expenses during the three and six months ended June 30, 2019, respectively.  There were no new plans granted in 2020.

 

Settlement of retirement obligations: Refer to Note 12, Retirement Plans, for more information on the settlement charges.

 

Expenses related to acquisitions, merger agreement and dispositions: The three and six months ended June 30, 2019 included charges of $5 million and $12 million primarily related to the previously terminated merger agreement.

 

(1) As Adjusted - Refer to Impact of Change in Accounting Principle in Note 1, Overview and Basis of Presentation, for information on restated balances.

 

 

LIQUIDITY AND CAPITAL RESOURCES  

 

The following sections describe the Company’s cash flows for the six months ended June 30, 2020 and 2019.

 

55


 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2020

 

 

2019

 

 

 

(in millions)

 

Net cash provided by operating activities

 

$

10

 

 

$

3

 

Net cash (used in) investing activities

 

 

(15

)

 

 

(52

)

Net cash provided by financing

     activities

 

 

2

 

 

 

44

 

    

            

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 provided by operating activities was $10 million for the six months ended June 30, 2020 compared to $3 million for the six months ended June 30, 2019. The change was primarily due to an increase in accounts payable, decreases in inventory, and improved collections on AR, partially offset by lower sales volume and payments made on liabilities subject to compromise.

 

 

Cash Flows from Investing Activities

 

Net cash used in investing activities for the six months ended June 30, 2020 was $15 million compared to $52 million for the same period in 2019.  The decrease was primarily due to $32 million of lower capital expenditures during the six months ended June 30, 2020 compared to the same period in 2019.

 

 

Cash Flows from Financing Activities

 

Net cash provided by financing activities for the six months ended was $2 million compared to $44 million for the same period in 2019. There was minimal financing activity during the six months ended June 30, 2020 compared to the following significant activity during the six months ended June 30, 2019:

 

 

$84 million of net proceeds from credit facility borrowings;

 

$22 million in payments of current maturities and long-term debt; and

 

$17 million of dividends paid.

 

 

Dividends

 

As a result of the DIP Credit Agreement, the Company is restricted from issuing dividend payments.

 

  

LIQUIDITY

 

Cash and cash equivalents were $97 million and $105 million as of June 30, 2020 and December 31, 2019, 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, 2020 included $85 million in the U.S. and $12 million at international locations.

 

Until September 30, 2019, the Company maintained cash pooling structures that enabled participating international locations to draw on the pools’ cash resources to meet local liquidity needs.  Foreign cash balances were permitted to 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.  The pooling structure was discontinued in October 2019.

 

 

56


 

Historical Information

 

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”), which was reduced to $300 million per the amendment effective on August 5, 2019.  

 

 

Voluntary Reorganization under Chapter 11

 

The commencement of the Chapter 11 Cases constituted an event of default with respect to the Senior Notes, the Term Loan Facility and the Revolving Credit Facility (the “Debt Instruments”).  The Debt Instruments provide that as a result of the commencement of the Chapter 11 Cases, the principal and interest due thereunder shall be immediately due and payable.  Any efforts to enforce payment obligations under the Debt Instruments will be automatically stayed as a result of the commencement of the Chapter 11 Cases, and the creditors’ right of enforcement in respect of the Debt Instruments are subject to the applicable provisions of the Bankruptcy Code.

 

As a result of the Company’s reorganization filing, the debt balances below were reclassed from short-term and current portion of long-term debt and long-term debt to liabilities subject to compromise on the condensed consolidated balance sheet.

 

 

June 30,

 

 

 

2020

 

Borrowings under the Revolving Credit Facility

 

$

252

 

Term Loan Facility

 

 

219

 

Senior Secured Notes

 

 

450

 

Unamortized debt issuance costs

 

 

(11

)

Total debt in liabilities subject to compromise

 

$

910

 

 

Debtor-in-Possession Financing

  

As previously disclosed, on April 15, 2020 (the “Closing Date”), the Company entered into a Superpriority Secured Debtor-in-Possession Credit Agreement (the “DIP Credit Agreement”), upon the entry of an interim order of the Bankruptcy Court granting interim approval of the DIP Credit Agreement, among the Company, as borrower, the lenders from time to time party thereto (the “DIP Lenders”) and Bank of America, N.A. as administrative agent (in such capacity, the “DIP Agent”), pursuant to which the DIP Lenders committed to provide a senior secured superpriority debtor-in-possession credit facility in an aggregate principal amount not to exceed $100 million (the “DIP Facility”).  The DIP Facility was approved on a final basis on June 2, 2020.

 

The DIP Facility consists of (i) revolving loans not to exceed an aggregate amount of $55 million (the “Revolving Loans”), and (ii) letters of credit not to exceed an aggregate amount of $45 million, with $5 million of that amount being available for the issuance of new letters of credit (together with the Revolving Loans, the “DIP Loan Commitments”).  

 

Borrowings under the DIP Facility bear interest at a rate per annum equal to, at the Company’s option, either (i) the Alternate Base Rate (as defined in the DIP Credit Agreement) plus 5.75%, or (ii) LIBOR plus 6.75%.  Upon an event of default under the DIP Credit Agreement (an “Event of Default”), an additional 2.00% may be added to the Interest Rate.  In addition, the Company is required to pay (i) an unused line fee of 0.50% per annum (payable quarterly in arrears) on the average daily unused portion of the DIP Loan Commitments, (ii) a commitment fee of (x) 1.00% per annum on the DIP Loan Commitments, regardless of usage, plus (y) $100,000 per week for the first 20 weeks after the Closing Date, in each case, payable quarterly in arrears, (iii) a participation fee equal to 6.75% multiplied by the amounts available to be drawn under outstanding letters of credit, payable quarterly, and (iv) a fronting fee equal to 0.125% per annum on amounts available to be drawn under outstanding letters of credit, payable quarterly.

 

57


 

Proceeds of the loans made under the DIP Facility may be used only for the following purposes: (i) working capital and other general corporate purposes, including the payment of professional fees and expenses, (ii) to pay the reasonable fees and expenses of the DIP Agent and the DIP Lenders (including the reasonable fees and expenses of counsel and financial advisors), (iii) to pay claims in respect of certain prepetition creditors, (iv) to repay indebtedness owed to holders of the Prepetition Priority Payment Obligations (as defined in the DIP Credit Agreement) (the “Prepetition Revolving Lenders”), and (v) making adequate protection payments to the Prepetition Revolving Lenders, the Prepetition Term Lenders and the Prepetition Secured Noteholders (each as defined in the DIP Credit Agreement).

 

In connection with the DIP Credit Agreement, certain subsidiaries of the Company became parties to a guarantee agreement as guarantors (collectively, the “Guarantors,” and together with the Company, the “DIP Credit Parties”). Each of the Guarantors is a debtor and debtor-in-possession in the Chapter 11 Cases.  The Guarantors have guaranteed, on a joint and several basis, all of the obligations under the DIP Facility.  To secure the obligations under the DIP Facility, the Company and the Guarantors have granted liens on substantially all of their assets, whether now owned or hereafter acquired.

 

The DIP Facility will mature on the earlier of (i) the date upon which any Plan of Reorganization (as defined in the DIP Credit Agreement) becomes effective, or (ii) the six-month anniversary following the Petition Date; provided that such maturity may be extended with the consent of the Required Lenders (as defined in the DIP Credit Agreement) to a date no later than nine months after the Petition Date.

 

The DIP Credit Agreement contains representations, warranties and covenants that are customary for debtor-in-possession facilities of this type, including, but not limited to, certain case milestones, specified restrictions on indebtedness, liens, guarantee obligations, liquidations and dissolutions, sales of assets, leases, payment of dividends and other restricted payments, voluntary payments of other indebtedness, investments, loans and advances, transactions with affiliates, sale and leaseback transactions and compliance with case milestones. The DIP Credit Agreement also contains customary events of default for facilities of this type, including failure to achieve the milestones and the occurrence of certain events in the Chapter 11 Cases.

 

The Company did not have borrowings related to the DIP Facility as of June 30, 2020.

 

 

MANAGEMENT OF MARKET RISK

 

As a result of the Company’s voluntary reorganization, the majority of its debt obligations were reclassed to liabilities subject to compromise on the condensed consolidated balance sheet as of June 30, 2020.  As a result, the Company is not currently exposed to interest rate risk.

 

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 and Mexican peso.  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 9, 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 described in Note 16, New Accounting Pronouncements, and throughout the notes to the condensed consolidated financial statements.  

 

 

58


 

Available Information

 

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

 

 

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, 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 II of this quarterly report on Form 10-Q, and Item 1A, Risk Factors, in section Part I in the Company’s annual report on Form 10-K for the year ended December 31, 2019, as filed with the SEC on March 2, 2020, 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 effects of the Bankruptcy Court rulings in the Chapter 11 Cases and the outcome of the proceedings in general;

 

the potential adverse effects of the Chapter 11 Cases on our liquidity or results of operations or our ability to pursue business strategies, maintain business and operational relationships and retain key executives;

 

our ability to complete definitive documentation in connection with any Chapter 11 transaction satisfactory to the Company and our stakeholders, and our ability to obtain requisite support for any proposed transaction from various stakeholders and confirm and consummate that transaction in accordance with its terms;

 

our ability to obtain a new credit facility, or “exit financing” upon our emergence from Chapter 11;

 

our ability to generate sufficient liquidity to satisfy our obligations as they become due;

 

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;

 

our ability to successfully integrate 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;

 

the effects of seasonality on our core businesses;

 

the effects of increases in capital expenditures;

 

changes in the availability or costs of key print production materials (such as paper, ink, energy, and other raw materials), the tight labor market, the availability of labor at our vendors 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;

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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;

 

the ability to maintain adequate payment terms with key vendors in light of recent credit downgrades;

 

the impact of tax legislation, including the CARES Act;

 

increases in requirements to fund or pay withdrawal costs or required contributions related to the Company’s pension plans; and

 

the effect of COVID-19 on our business.

 

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

 

Consequently, readers of 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 Management of Market Risk in Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations.  There have been no significant changes to the Company’s market risk since December 31, 2019.  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, 2019, as filed with the SEC on March 2, 2020.  

 

 

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, 2020 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, 2020 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, 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.      

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PART II – OTHER INFORMATION

 

 

For a discussion of certain litigation involving the Company, see Note 9, Commitments and Contingencies, to the condensed consolidated financial statements.     

 

  

Voluntary Reorganization under Chapter 11  

 

As discussed more fully in Note 2, Voluntary Reorganization under Chapter 11, to the condensed consolidated financial statements, on April 13, 2020 (the “Petition Date”), the Company and certain of its subsidiaries filed voluntary petitions for relief under Chapter 11 of title 11 of the United States Code, 11 U.S.C. §§ 101-1532 (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”) (collectively, the “Chapter 11 Cases”).  The Chapter 11 Cases are being jointly administered under the caption In re LSC Communications, Inc., 20-10950.  We and our subsidiaries that are involved in the Chapter 11 Cases will continue to operate our businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code.

 

On April 15, 2020, the Bankruptcy Court entered orders granting interim approval of certain motions (the “First Day Motions”), enabling us to conduct our business activities in the ordinary course, subject to the terms and conditions of such orders, including authorizing us to pay employee wages and benefits, to pay taxes and certain governmental fees and charges, to continue to operate our cash management system in the ordinary course, and to pay prepetition claims of certain of our vendors.  The First Day Motions were subsequently approved by the Bankruptcy Court on a final basis at hearings on May 12, 2020 and June 2, 2020.  

 

On June 5, 2020, the Bankruptcy Court entered an order granting approval for a sale and bidding process through which we are authorized to determine the highest or otherwise best offer for the sale of all or substantially all of our assets pursuant to Section 363 of the Bankruptcy Code or a Chapter 11 plan of reorganization.  The auction, if one is held, is currently scheduled for August 25, 2020, and a hearing approving the sale is currently scheduled for September 1, 2020.

 

 

ITEM 1A. RISK FACTORS  

 

Other than the risk factors noted below, there have been no significant changes to the risk factors disclosed in the Company’s annual report on Form 10-K for the year ended December 31, 2019, as filed with the SEC on March 2, 2020:

 

 

We are subject to the risks and uncertainties associated with Chapter 11 proceedings.

 

For the duration of the Chapter 11 Cases, our operations and our ability to develop and execute our business plan, as well as our continuation as a going concern, are subject to the risks and uncertainties associated with bankruptcy, including:

 

 

our ability to develop, confirm and consummate a Chapter 11 plan of reorganization or alternative restructuring transaction;

 

our ability to obtain Bankruptcy Court approval with respect to motions filed in the Chapter 11 Cases from time to time;

 

our ability to maintain our relationships with our suppliers, service providers, customers, employees and other third parties;

 

our ability to maintain contracts that are critical to our operations;

 

our ability to develop and execute our business plan;

 

our ability to obtain acceptable and appropriate financing;

 

the ability of third parties to seek and obtain Bankruptcy Court approval to terminate contracts and other agreements with us;

 

the ability of third parties to seek and obtain Bankruptcy Court approval to terminate or shorten the exclusivity period for us to propose and confirm a Chapter 11 plan, to appoint a Chapter 11 trustee, or to convert the Chapter 11 Cases to a Chapter 7 proceeding; and

 

the actions and decisions of our creditors and other third parties who have interests in our Chapter 11 Cases that may be inconsistent with our plans.

 

Because of the risks and uncertainties associated with the Chapter 11 Cases, we cannot accurately predict or quantify the ultimate impact of events that will occur during the Chapter 11 Cases that may be inconsistent with our plans.

 

 

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Operating under Bankruptcy Court protection for a long period of time may harm our business.

 

A long period of operations under Bankruptcy Court protection could have a material adverse effect on our business, financial condition, results of operations and liquidity.  During the pendency of the Chapter 11 Cases, our senior management will be required to spend a significant amount of time and effort dealing with the reorganization instead of focusing exclusively on our business operations.  A prolonged period of operating under Bankruptcy Court protection also may make it more difficult to retain management and other key personnel necessary to the success and growth of our business.  In addition, the longer the Chapter 11 Cases continue, the more likely it is that our customers and suppliers will lose confidence in our ability to reorganize our business successfully and will seek to establish alternative commercial relationships.  Furthermore, so long as the Chapter 11 Cases continue, we will be required to incur substantial costs for professional fees and other expenses associated with the administration of the Chapter 11 Cases.

 

 

We may not be able to obtain confirmation of a Chapter 11 plan of reorganization or complete any Bankruptcy Court-approved sales of our Company or assets, or we may not be able to realize adequate consideration for such sales.

 

In connection with the Chapter 11 Cases, we may attempt to sell all or certain of our assets pursuant to a sale under section 363 of the Bankruptcy Code or otherwise reorganize the Company pursuant to a Chapter 11 plan of reorganization (each, a “Transaction”).  There can be no assurance that we will be successful in completing any Transactions because there may not be buyers willing to enter into any Transactions, we may not receive sufficient consideration for such assets, or there may be objections from our stakeholders.  If we are unable to complete these Transactions, it may be necessary to seek additional funding sources or possibly convert to a Chapter 7 liquidation process.  If these Transactions are completed, they may not generate the anticipated or desired outcomes.

 

Additionally, to successfully obtain confirmation of a plan of reorganization, we must meet certain statutory requirements with respect to adequacy of disclosure with respect to the Chapter 11 plan of reorganization, solicit and obtain the requisite acceptances of such a plan and fulfill other statutory conditions for confirmation of such plan, which have not occurred to date.  

 

 

Even if a Chapter 11 plan of reorganization is consummated, we may not be able to achieve our stated goals and there is substantial doubt regarding our ability to continue as a going concern.

 

Even if a Chapter 11 plan of reorganization is consummated, we may continue to face a number of risks, such as further deterioration in economic conditions, changes in our industry, changes in demand for our products and increasing expenses.  Some of these risks become more acute when a case under the Bankruptcy Code continues for a protracted period without indication of how or when the case may be completed.  As a result of these risks and others, we cannot guarantee that any Chapter 11 plan of reorganization will achieve our stated goals.

 

 

As a result of the Chapter 11 Cases, our financial results may be volatile and may not reflect historical trends.

 

During the Chapter 11 Cases, we expect our financial results to continue to be volatile as restructuring activities and expenses, contract terminations and rejections, and claims assessments significantly impact our consolidated financial statements.  As a result, our historical financial performance is likely not indicative of our financial performance after the date of the bankruptcy filing.  In addition, if we emerge from the Chapter 11 Cases, the amounts reported in subsequent consolidated financial statements may materially change relative to historical consolidated financial statements, including as a result of revisions to our operating plans pursuant to a plan of reorganization.  We also may be required to adopt fresh-start accounting, in which case our assets and liabilities will be recorded at fair value as of the fresh start reporting date, which may differ materially from the recorded values of assets and liabilities on our consolidated balance sheets.  Our financial results after the application of fresh-start accounting also may be different from historical trends.

 

 

We may be subject to claims that will not be discharged in the Chapter 11 proceedings, which could have a material adverse effect on our financial condition and results of operations.

 

The Bankruptcy Code provides that the confirmation of a plan of reorganization discharges a debtor from substantially all debts arising prior to confirmation.  With few exceptions, all claims that arose prior to confirmation of a plan of reorganization (i) would be subject to compromise and/or treatment under the plan of reorganization and/or (ii) would be discharged in accordance with the terms of such plan of reorganization.  Any claims not ultimately discharged through the plan of reorganization could be asserted against the reorganized entities and may have an adverse effect on our financial condition and results of operations on a post-reorganization basis.

 

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We may experience increased levels of employee attrition as a result of the Chapter 11 Cases.

 

As a result of the Chapter 11 Cases, we may experience increased levels of employee attrition, and our employees likely will face considerable distraction and uncertainty.  A loss of key personnel or material erosion of employee morale could adversely affect our business and results of operations.  Our ability to engage, motivate and retain key employees or take other measures intended to motivate and incent key employees to remain with us through the pendency of the Chapter 11 Cases is limited by restrictions on implementation of incentive programs under the Bankruptcy Code.  The loss of services of members of our senior management team could impair our ability to execute our strategy and implement operational initiatives, which would be likely to have a material adverse effect on our business, financial condition and results of operations.

 

 

In certain instances, a Chapter 11 proceeding may be converted to a proceeding under Chapter 7.

 

There can be no assurance as to whether we will successfully reorganize and emerge from the Chapter 11 Cases or, if we do successfully reorganize, as to when we would emerge from the Chapter 11 Cases.  If the Bankruptcy Court finds that it would be in the best interest of creditors and/or the Debtors, the Bankruptcy Court may convert our Chapter 11 Cases to proceedings under Chapter 7. In such event, a Chapter 7 trustee would be appointed or elected to liquidate the Debtors’ assets for distribution in accordance with the priorities established by the Bankruptcy Code.  The Debtors believe that liquidation under Chapter 7 would result in significantly smaller distributions being made to the Debtors’ creditors than those provided for in a Chapter 11 plan of reorganization because of (i) the likelihood that the assets would have to be sold or otherwise disposed of in a disorderly fashion over a short period of time rather than reorganizing or selling in a controlled manner the Debtors’ businesses as a going concern, (ii) additional administrative expenses

involved in the appointment of a Chapter 7 trustee, and (iii) additional expenses and claims, some of which would be entitled to priority, that would be generated during the liquidation and from the rejection of leases and other executory contracts in connection with a cessation of operations.

 

 

We are subject to risks and uncertainties with respect to the actions and decisions of our creditors and other third parties who have interests in our Chapter 11 Cases that may be inconsistent with our plans.

 

These risks and uncertainties could significantly affect our business and operations in various ways.  For example, negative publicity or events associated with the Chapter 11 Cases have adversely affected, and could continue to adversely affect, our relationships with our vendors and employees, as well as with customers, which in turn could adversely affect our operations and financial condition.  In addition, pursuant to the Bankruptcy Code, we need Bankruptcy Court approval for transactions outside the ordinary course of business, which may limit our ability to respond to certain events in a timely manner or take advantage of certain opportunities.  Because of the risks and uncertainties associated with the Chapter 11 Cases, we cannot predict or quantify the ultimate impact that events occurring during the pendency of the Chapter 11 Cases will have on our business, financial condition, results of operations, or the certainty as to our ability to continue as a going concern.  As a result of the Chapter 11 Cases, realization of assets and liquidation of liabilities are subject to uncertainty.  While operating under the protection of the Bankruptcy Code, and subject to Bankruptcy Court approval or otherwise as permitted in the normal course of business, we may sell or otherwise dispose of a portion

or all of our assets and liquidate or settle liabilities for amounts other than those reflected in our consolidated financial statements. Further, a plan of reorganization could materially change the amounts and classifications reported in our consolidated historical financial statements, which do not give effect to any adjustments to the carrying value of assets or amounts of liabilities that might be necessary as a consequence of confirmation of a plan of reorganization.

 

 

Trading in our securities during the pendency of the Chapter 11 Cases poses substantial risks.  

 

The Company’s stockholders are cautioned that it is possible that the Company’s stockholders will receive nothing in exchange for their common stock upon the Company’s emergence from bankruptcy and that the common stock will have no value and that trading in securities of the Company during the pendency of the Chapter 11 Cases will be highly speculative and will pose substantial risks.  It is possible the Company’s outstanding common stock and other securities may be cancelled and extinguished upon confirmation of a restructuring plan by the Bankruptcy Court.  In such an event, the Company’s stockholders and other security holders would not be entitled to receive or retain any cash, securities or other property on account of their cancelled securities.  Trading prices for the Company’s common stock and other securities may bear little or no relation to actual recovery, if any, by holders thereof in the Company’s Chapter 11 Cases.  Accordingly, the Company urges extreme caution with respect to existing and future investments in its securities.

 

 

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The Debtors may be unable to comply with restrictions or with budget, liquidity or other covenants imposed by the agreements governing the DIP Facility.  Such non-compliance could result in an event of default under the DIP Credit Agreement that, if not cured or waived, would have a material adverse effect on our business, financial condition and results of operations.

 

The agreements governing the DIP Facility impose a number of restrictions on the Debtors.  Specifically, the terms of the credit agreements governing the DIP financing impose certain obligations including, among other things, affirmative covenants requiring the Company to provide financial information, budgets and other information to the agents under the DIP financing, and negative covenants restricting the Debtors’ ability to incur additional indebtedness, grant liens, dispose of assets, pay dividends or take certain other actions, in each case except as permitted by the terms and conditions of the DIP Credit Agreement.  Covenants under the DIP Credit Agreement include general affirmative covenants such as compliance with all applicable laws, preservation and maintenance of collateral and property (including maintenance of adequate insurance policies regarding collateral), preservation of the Debtors’ corporate existence, compliance with certain case milestones and use of the loans under the DIP Facility in accordance with the approved budget, as well as negative covenants such as prohibiting the Debtors from incurring or permitting any other debt, investments, liens or dispositions unless specifically permitted.  

 

The DIP Credit Agreement includes a series of milestones related to the Chapter 11 Cases.  The milestones require the Company to achieve a series of intermediate milestones and failure to comply with these covenants or milestones would result in an event of default under the DIP Credit Agreement and permit the DIP Lenders to accelerate the loans and otherwise exercise remedies under the loan documentation for the DIP Facility.  Our ability to comply with these provisions may be affected by events beyond our control and our failure to comply, or obtain a waiver in the event we cannot comply with a covenant or achieve a milestone, could result in an event of default under the agreements governing the DIP Facility.

 

 

We may not have sufficient cash to maintain our operations during the Chapter 11 Cases or fund our emergence from the bankruptcy.

 

Because of our financial condition, we will have heightened exposure to, and less ability to withstand, the operating risks that are customary in our industry, such as fluctuations in input prices and currency exchange rates.  Any of these factors could result in the need for substantial additional funding.  A number of other factors, including the Chapter 11 Cases, our financial results in recent years, our substantial indebtedness and the competitive environment we face, adversely affect the availability and terms of funding that might be available to us during, and upon emergence from, Chapter 11.  As such, we may not be able to source capital at rates acceptable to us, or at all, to fund our current operations or our exit from bankruptcy.  The inability to obtain necessary additional funding on acceptable terms would have a material adverse impact on us and on our ability to sustain our operations.

 

 

Our business, results of operations and financial condition may be adversely affected by pandemic infectious diseases, particularly the novel coronavirus strain known as COVID-19.

 

Pandemic infectious diseases, such as the current COVID-19 strain, may adversely impact our business, condensed consolidated results of operations and financial condition. COVID-19, as well as measures taken by governmental authorities and private actors to limit the spread of this virus, may interfere with the ability of our employees, suppliers, and other business providers to carry out their assigned tasks or supply materials at ordinary levels of performance relative to the conduct of our business which may cause us to materially curtail certain of our business operations. Moreover, as a large part of the Company's business involves sales of books and other products used in schools and school facilities, if COVID-19 related measures continue to result in widespread and lengthy school closings, the Company's condensed consolidated results of operations and financial condition will be adversely impacted.  Additionally, as COVID-19 has significantly impacted retailers' stores, distribution centers and supply chains, the Company expects to experience an adverse impact on our catalogs and office products businesses.  Disruption across many other industries has also significantly impact demand for advertising, which is expected to result in page count and volume reductions in magazines.

 

 

 

 

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

Issuer Purchases of Equity Securities

  

There were no repurchases during the three months ended June 30, 2020.

 

 

Dividends

 

As a result of the DIP Credit Agreement, the Company is restricted from issuing dividend payments.

 

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable     

    

 

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ITEM 6. EXHIBITS

 

3.1

Amended and Restated Certificate of Incorporation of LSC Communications, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on October 3, 2016)

 

3.2

Amended and Restated By-laws of LSC Communications, Inc. (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed on October 3, 2016)  

  

4.1

Indenture, dated as of September 30, 2016, among LSC Communications, Inc., the subsidiary guarantors party thereto and Wells Fargo Bank, National Association, as Trustee and as Collateral Agent (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on October 3, 2016)

 

4.2

Description of the LSC Communications, Inc. Securities Registered under Section 12 of the Exchange Act (incorporated by reference to Exhibit 4.2 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019, filed on March 2, 2020)

 

4.3

Rights Agreement, which includes as Exhibit A the forms of Rights Certificate and Election to Exercise and as Exhibit B the form of Certificate of Designation and Terms of the Participating Preferred Stock. (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on March 2, 2020)

 

10.1    

Credit Agreement, dated as of September 30, 2016, among LSC Communications, Inc., the lenders party thereto, Bank Of America, N.A., as Administrative Agent Swing Line Lender and an L/C Issuer, Citigroup Global Markets Inc. and JPMorgan Chase Bank, N.A., as Co-Syndication Agents (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 3, 2016)

 

10.2

Amendment No. 1 to Credit Agreement dated as of November 17, 2017, by and among LSC Communications, Inc., the other Loan Parties, the 2017 Refinancing Term Lenders party thereto and Bank of America, N.A., as administrative agent and collateral agent (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2018, filed on May 3, 2018)

 

10.3

Amendment No. 2 to Credit Agreement dated as of December 20, 2018, by and among LSC Communications, Inc. the other Loan Parties, the Lenders party thereto and Bank of America, N. A., as administrative agent and collateral agent (incorporated by reference to Exhibit 10.3 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018, filed on February 19, 2019))

 

10.4

Amendment No. 3 to Credit Agreement dated as of August 2, 2019, by and among LSC Communications, Inc., the other Loan Parties, the Lenders party thereto and Bank of America, N. A., as administrative agent and collateral agent (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on August 5, 2019)

 

10.5

Waiver, Forbearance Agreement and Fourth Amendment to Credit Agreement dated as of March 2, 2020, by and among LSC Communications, Inc., the other Loan Parties, the Lenders party thereto and Bank of America, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.5 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019, filed on March 2, 2020)

 

10.6

Superpriority Secured Debtor-in-Possession Credit Agreement dated as of April 15, 2020 among the LSC Communications, Inc., as borrower, the lenders from time to time party thereto and Bank of America, N.A., as administrative agent and issuing bank (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 17, 2020)

 

10.7

Instrument of Resignation, Appointment and Acceptance, dated as of June 16, 2020, among LSC Communications, Inc., the Subsidiary Guarantors party thereto, Wilmington Trust, National Association and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on June 19, 2020)

 

10.8

Amended and Restated LSC Communications, Inc. 2016 Performance Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on May 23, 2017)*

 

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10.9

Amendment to Amended and Restated LSC Communications, Inc. 2016 Performance Incentive Plan dated October 17, 2019 (incorporated by reference to Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q filed on November 7, 2019)*

 

10.10

LSC Communications, Inc. Nonqualified Deferred Compensation Plan, amended and restated effective as of August 1, 2018 (incorporated by reference to Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q filed on August 2, 2018)*  

 

10.11

LSC Unfunded Supplemental Pension Plan effective October 1, 2016 (incorporated by reference to Exhibit 10.4 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, filed on February 23, 2017)*

 

10.12

Supplemental Executive Retirement Plan-B for Designated Executives effective January 1, 2001 as amended effective December 31, 2004, January 1, 2005 and September 30, 2016 (the “SERP-B”) (incorporated by reference to Exhibit 10.5 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, filed on February 23, 2017)*

 

10.13

LSC Communications Annual Incentive Plan as amended and restated effective January 17, 2019 (incorporated by reference to Exhibit 10.9 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018, filed on February 19, 2019)*

 

10.14

Assignment of Employment Agreement and Acceptance of Assignment, dated as of September 29, 2016, between LSC Communications, Inc., R. R. Donnelley & Sons Company and Thomas J. Quinlan III (incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed on October 3, 2016)*

 

10.15

Amendment to Employment Agreement, dated as of October 25, 2017, between LSC Communications, Inc. and Thomas J. Quinlan III (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 31, 2017)*  

 

10.16

Employment Agreement Waiver, dated as of April 1, 2020, between LSC Communications, Inc. and Thomas J. Quinlan III (incorporated by reference to Exhibit 10.14 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, filed on May 6, 2020)*

 

10.17

Key Employee Severance Plan effective October 25, 2017 (incorporated by reference to Exhibit 10.15 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017, filed on November 2, 2017)*

 

10.18

Form of Participation Agreement for the Key Employee Severance Plan (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on January 19, 2018)*

 

10.19

Participation Agreement between Suzanne S. Bettman and the Company, dated as of January 24, 2018 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on January 26, 2018)*

 

10.20

Participation Agreement between Andrew B. Coxhead and the Company, dated as of January 24, 2018 (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on January 26, 2018)*

 

10.21

Participation Agreement between David B. McCree and the Company, dated as of February 26, 2018 (incorporated by reference to Exhibit 10.19 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, filed on May 6, 2020)*

 

10.22

Participation Agreement between Matthew K. Roberts and the Company, dated as of January 21, 2019 (incorporated by reference to Exhibit 10.20 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, filed on May 6, 2020)*

 

10.23

Participation Agreement between George B. Zengo and the Company, dated as of March 1, 2018 (incorporated by reference to Exhibit 10.21 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, filed on May 6, 2020)*

 

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10.24

Participation Agreement between Sarah L. Hoxie and the Company, dated as of January 23, 2020 (incorporated by reference to Exhibit 10.20 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019, filed on March 2, 2020)*

 

10.25

LSC Communications, Inc. Key Employee Incentive Plan effective as of June 2, 2020 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on June 26, 2020)*

 

10.26

Form of Award Letter for the Key Employee Incentive Plan (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on June 26, 2020)*

 

10.27

Form of Stock Option Award Agreement (for 2009 to 2012) converted from R. R. Donnelley & Sons Company to the Company pursuant to the Separation Agreement (incorporated by reference to Exhibit 10.17 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, filed on February 23, 2017)*

 

10.28

Form of Performance Unit Award Agreement (for 2018) (incorporated by reference to Exhibit 10.20 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017, filed on February 22, 2018)*

 

10.29

Form of Restricted Stock Unit Award Agreement (for 2018) (incorporated by reference to Exhibit 10.25 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017, filed on February 22, 2018)*

 

10.30

Form of Restricted Stock Unit Award Agreement (for 2019) (incorporated by reference to Exhibit 10.25 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018, filed on February 19, 2019)*

 

10.31

Form of LTIP Performance-Vested Award Agreement (for 2020) (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on February 18, 2020)*

 

10.32

Form of LTIP Cash-Vested Award Agreement (for 2020) (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on February 18, 2020)*

 

10.33

Form of Director Indemnification Agreement (incorporated by reference to Exhibit 10.9 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2016, filed on November 10, 2016)*

 

10.34

Policy on Retirement Benefits, Phantom Stock Grants and Stock Options for Directors as amended to March 2000 (incorporated by reference to Exhibit 10.16 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, filed on February 23, 2017)*

 

10.35

Non-Employee Director Compensation Plan effective as of October 30, 2018 (incorporated by reference to Exhibit 10.28 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018, filed on February 19, 2019)*

 

10.36

Non-Employee Director Compensation Plan effective as of February 12, 2020 (incorporated by reference to Exhibit 10.32 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019, filed on March 2, 2020)*

 

10.37

Form of Director Restricted Stock Unit Award (for 2014-2016) converted from R. R. Donnelley & Sons Company to the Company pursuant to the Separation Agreement (incorporated by reference to Exhibit 10.13 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, filed on February 23, 2017)*  

 

10.38

Form of Director Restricted Stock Unit Award Agreement (for 2018) (incorporated by reference to Exhibit 10.21 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017, filed on November 2, 2017)*

 

10.39

Form of Retention Bonus Letter (incorporated by reference to Exhibit 10.31 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2019, filed on August 8, 2019)*

 

14.1

Code of Ethics for the Chief Executive Officer and Senior Financial Officers (incorporated by reference to Exhibit 14.1 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, filed on February 23, 2017)

 

68


 

18

Preferability Letter of Independent Registered Public Accounting Firm dated May 6, 2020 (incorporated by reference to Exhibit 18 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, filed on May 6, 2020)

 

31.1

Certification by Thomas J. Quinlan, III, Chief Executive Officer, required by Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934 (filed herewith)

 

31.2

Certification by Andrew B. Coxhead, Chief Financial Officer, required by Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934 (filed herewith)

 

32.1

Certification by Thomas J. Quinlan, III, Chief Executive Officer, required by Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and Section 1350 of Chapter 63 of Title 18 of the United States Code (filed herewith)

 

32.2

Certification by Andrew B. Coxhead, Chief Financial Officer, required by Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and Section 1350 of Chapter 63 of Title 18 of the United States Code (filed herewith)

 

101.INS

XBRL Instance Document – The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

 

101.SCH

Inline XBRL Taxonomy Extension Schema Document

 

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document

 

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document

 

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document

 

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document

 

104

The cover page from the Company’s Quarterly Report on Form 10-Q for the three and six months ended June 30, 2020, has been formatted in Inline XBRL.

 

 

* Management contract or compensatory plan or arrangement

 

69


 

SIGNATURES

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/ SARAH L. HOXIE

 

 

Sarah L. Hoxie

 

 

Corporate Controller and Principal Accounting Officer

Date: July 30, 2020

  

 

70