10-Q 1 rrd-10q_20140331.htm 10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x

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

For the quarterly period ended March 31, 2014

OR

¨

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

Commission File Number 1-4694

 

R.R. DONNELLEY & SONS COMPANY

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

36-1004130

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

111 South Wacker Drive,

Chicago, Illinois

 

60606

(Address of principal executive offices)

 

(Zip code)

(312) 326-8000

(Registrant’s telephone number, including area code)

 

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

    Yes   x    No  ¨

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

    Yes  x    No  ¨

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

 

Large Accelerated filer

 

x

  

Accelerated filer

 

¨

 

 

 

  

 

 

 

 

 

 

 

Non-Accelerated filer

 

¨  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

¨

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

    Yes  ¨    No  x

As of April 25, 2014, 199.6 million shares of common stock were outstanding.

 

 

 

 

 


R.R. DONNELLEY & SONS COMPANY

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2014

TABLE OF CONTENTS

 

 

 

 

Page

 

 

PART I

 

 

FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1:

 

Condensed Consolidated Financial Statements (unaudited)

3

 

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of March 31, 2014 and December 31, 2013

3

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations for the three months ended March 31, 2014 and 2013

4

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2014 and 2013

5

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2014 and 2013

6

 

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

7

 

 

 

 

 

 

Item 2:

 

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

28

 

 

 

 

 

 

Item 3:

 

Quantitative and Qualitative Disclosures About Market Risk

46

 

 

 

 

 

 

Item 4:

 

Controls and Procedures

46

 

 

 

 

 

 

 

 

PART II

 

 

 

 

 

 

 

 

 

OTHER INFORMATION

 

 

 

 

 

Item 1:

 

Legal Proceedings

47

 

 

 

 

 

 

Item 2:

 

Unregistered Sales of Equity Securities and Use of Proceeds

47

 

 

 

 

 

 

Item 4:

 

Mine Safety Disclosures

47

 

 

 

 

 

 

Item 6:

 

Exhibits

47

 

 

 

 

 

 

Signatures

51

 

 

 

2

 


 

PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

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

CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions, except per share data)

(UNAUDITED)

 

 

March 31,
2014

 

  

December 31,
2013

 

ASSETS

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

Cash and cash equivalents

$

308.4

  

  

$

1,028.4

  

Receivables, less allowances for doubtful accounts of $47.6 in 2014 (2013—$44.8)

 

2,018.9

  

  

 

1,832.3

  

Inventories (Note 3)

 

581.7

  

  

 

501.2

  

Prepaid expenses and other current assets

 

   269.3

  

  

 

199.7

  

Total current assets

 

   3,178.3

  

  

 

3,561.6

  

Property, plant and equipment-net (Note 4)

 

1,699.6

  

  

 

1,430.1

  

Goodwill (Note 5)

 

1,735.5

  

  

 

1,436.3

  

Other intangible assets-net (Note 5)

 

502.3

  

  

 

315.9

  

Deferred income taxes

 

87.5

  

  

 

118.8

  

Other noncurrent assets

 

   391.2

  

  

 

375.5

  

Total assets

$

   7,594.4

  

  

$

7,238.2

  

LIABILITIES

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

Accounts payable

$

1,104.9

  

  

$

1,143.0

  

Accrued liabilities

 

   815.1

  

  

 

814.8

  

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

 

278.3

  

  

 

270.9

  

Total current liabilities

 

   2,198.3

  

  

 

2,228.7

  

Long-term debt (Note 14)

 

3,627.2

  

  

 

3,587.0

  

Pension liabilities

 

233.0

  

  

 

245.2

  

Other postretirement benefits plan liabilities

 

171.0

  

  

 

174.1

  

Other noncurrent liabilities

 

   479.4

  

  

 

349.5

  

Total liabilities

 

   6,708.9

  

  

 

6,584.5

  

Commitments and Contingencies (Note 13)

 

 

 

  

 

 

 

EQUITY (Note 9)

 

 

 

  

 

 

 

RR Donnelley shareholders’ equity

 

 

 

  

 

 

 

Preferred stock, $1.00 par value

 

 

 

  

 

 

 

Authorized: 2.0 shares; Issued: None

 

-

  

  

 

-  

  

Common stock, $1.25 par value

 

 

 

  

 

 

 

Authorized: 500.0 shares;

 

 

 

  

 

 

 

Issued: 259.0 shares in 2014 (2013 – 243.0 shares)

 

323.7

  

  

 

303.7

  

Additional paid-in-capital

 

3,034.2

  

  

 

2,802.4

  

Accumulated deficit

 

(549.7

)

  

 

(473.4

Accumulated other comprehensive loss

 

(496.1

)

  

 

(488.1

Treasury stock, at cost, 59.4 shares in 2014 (2013 – 61.2 shares)

 

(1,446.2

)

  

 

(1,512.8

Total RR Donnelley shareholders’ equity

 

865.9

  

  

 

631.8

  

Noncontrolling interests

 

19.6

  

  

 

21.9

  

Total equity

 

885.5

  

  

 

653.7

  

 Total liabilities and equity

$

   7,594.4

  

  

$

7,238.2

  

 

 

 

(See Notes to Condensed Consolidated Financial Statements)

3

 


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

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions, except per share data)

(UNAUDITED)

 

 

Three Months Ended
March 31,

 

 

2014

 

 

2013

 

Products net sales

$

2,225.7

 

 

$

2,129.7

 

Services net sales

 

448.1

 

 

 

408.8

 

Total net sales

 

2,673.8

 

 

 

2,538.5

 

 

 

 

 

 

 

 

 

Products cost of sales (exclusive of depreciation and amortization)

 

   1,745.9

 

 

 

1,668.3

 

Services cost of sales (exclusive of depreciation and amortization)

 

   354.7

 

 

 

311.9

 

Total cost of sales

 

2,100.6

 

 

 

1,980.2

 

 

 

 

 

 

 

 

 

Products gross profit

 

   479.8

 

 

 

461.4

 

Services gross profit

 

93.4

 

 

 

96.9

 

Total gross profit

 

573.2

 

 

 

558.3

 

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

 

316.5

 

 

 

282.2

 

Restructuring, impairment and other charges-net (Note 6)

 

45.2

 

 

 

22.7

 

Depreciation and amortization

 

115.5

 

 

 

113.6

 

Income from operations

 

96.0

 

 

 

139.8

 

Interest expense-net

 

71.0

 

 

 

62.8

 

Investment and other expense-net

 

4.6

 

 

 

3.5

 

Loss on debt extinguishment

 

77.1

 

 

 

35.6

 

Earnings (loss) before income taxes

 

(56.7

)

 

 

37.9

 

Income tax expense (benefit)

 

(23.5

)

 

 

12.6

 

Net earnings (loss)

 

(33.2

)

 

 

25.3

 

Less: Loss attributable to noncontrolling interests

 

(4.2

)

 

 

(1.8

)

Net earnings (loss) attributable to RR Donnelley common shareholders

$

(29.0

)

 

$

27.1

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net earnings (loss) per share

$

(0.15

)

 

$

0.15

 

Diluted net earnings (loss) per share

$

(0.15

)

 

$

0.15

 

 

 

 

 

 

 

 

 

Dividends declared per common share

$

0.26

 

 

$

0.26

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding (Note 10):

 

 

 

 

 

 

 

Basic

 

193.1

 

 

 

181.2

 

Diluted

 

193.1

 

 

 

182.9

 

 

(See Notes to Condensed Consolidated Financial Statements)

4

 


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

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in millions)

(UNAUDITED)

 

 

Three Months Ended
March 31,

 

 

2014

 

 

2013

 

Net earnings (loss)

$

(33.2

)

 

$

25.3

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

Translation adjustments

 

(9.0

)

 

 

7.1

 

Adjustment for net periodic pension and other postretirement benefits plan cost

 

0.9

 

 

 

(0.9

)

Change in fair value of derivatives

 

 

 

 

0.1

 

Other comprehensive income (loss)

 

(8.1

)

 

 

6.3

 

Comprehensive income (loss)

 

(41.3

)

 

 

31.6

 

Less: comprehensive loss attributable to noncontrolling interests

 

(4.3

)

 

 

(1.8

)

 

 

 

 

 

 

 

 

Comprehensive income (loss) attributable to RR Donnelley common shareholders

$

(37.0

)

 

$

33.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(See Notes to Condensed Consolidated Financial Statements)

5

 


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

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

(UNAUDITED)

 

 

Three Months Ended
March 31,

 

 

2014

 

  

2013

 

OPERATING ACTIVITIES

 

 

 

  

 

 

 

Net earnings (loss)

$

(33.2

)  

  

$

25.3

  

Adjustments to reconcile net earnings (loss) to net cash used in operating activities:

 

 

 

  

 

 

 

Impairment charges

 

6.6

  

  

 

4.1

  

Depreciation and amortization

 

115.5

  

  

 

113.6

  

Provision for doubtful accounts receivable

 

2.4

  

  

 

2.7

  

Share-based compensation

 

3.8

  

  

 

4.0

  

Deferred income taxes

 

(3.2

)  

  

 

(8.8

)  

Changes in uncertain tax positions

 

(2.9

)  

  

 

0.8

 

Loss (gain) on investments and other assets—net

 

(0.8

)  

  

 

0.3

  

Loss related to Venezuela currency remeasurement

 

21.8

  

  

 

3.2

  

Loss on debt extinguishment

 

77.1

  

  

 

35.6

  

Net pension and other postretirement benefits plan income

 

(11.3

)  

  

 

(4.6

Gain on bargain purchase

 

(16.6

)  

  

 

  

Other

 

6.4

  

  

 

4.5

  

Changes in operating assets and liabilities—net of acquisitions:

 

 

 

  

 

 

 

Accounts receivable—net

 

23.1

  

  

 

8.9

 

Inventories

 

6.1

  

  

 

4.6

  

Prepaid expenses and other current assets

 

(9.1

)  

  

 

(0.7

Accounts payable

 

(145.0

)  

  

 

(170.2

Income taxes payable and receivable

 

(33.1

)  

  

 

(11.1

Accrued liabilities and other

 

(73.8

)  

  

 

(99.5

Pension and other postretirement benefits plan contributions

 

(14.2

)  

  

 

(8.5

Net cash used in operating activities

 

(80.4

)  

  

 

(95.8

)  

INVESTING ACTIVITIES

 

 

 

  

 

 

 

Capital expenditures

 

(49.0

)  

  

 

(37.9

Acquisitions of businesses, net of cash acquired

 

(381.6

)  

  

 

0.3

 

Disposition of business

 

1.7

 

 

 

 

Proceeds from sale of investments and other assets

 

1.5

  

  

 

1.1

  

Other investing activities

 

  

  

 

3.4

 

Net cash used in investing activities

 

(427.4

)  

  

 

(33.1

FINANCING ACTIVITIES

 

 

 

  

 

 

 

Proceeds from issuance of long-term debt

 

400.0

  

  

 

447.8

  

Net change in short-term debt

 

0.1

  

  

 

3.8

 

Payments of current maturities and long-term debt

 

(552.5

)  

  

 

(386.5

Net proceeds from credit facility borrowings

 

10.0

 

 

 

 

Debt issuance costs

 

(6.2

)  

  

 

(7.8

Dividends paid

 

(47.3

)  

  

 

(46.9

Other financing activities

 

(0.9

)  

  

 

(6.7

)  

Net cash provided by (used in) financing activities

 

(196.8

)  

  

 

3.7

  

Effect of exchange rate on cash and cash equivalents

 

(15.4

)  

  

 

(2.6

Net decrease in cash and cash equivalents

 

(720.0

)  

  

 

(127.8

Cash and cash equivalents at beginning of year

 

1,028.4

  

  

 

430.7

  

Cash and cash equivalents at end of period

$

308.4

  

  

$

302.9

  

 

 

 

 

 

 

 

 

Supplemental non-cash disclosure:

 

 

 

 

 

 

 

Issuances of 17.0 million shares of RR Donnelley stock for acquisitions of businesses

$

319.0

  

  

$

  

 

(See Notes to Condensed Consolidated Financial Statements)

 

 

6

 


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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

1. Basis of Presentation

The accompanying unaudited condensed consolidated interim financial statements include the accounts of R.R. Donnelley & Sons Company and its subsidiaries (the “Company” or “RR Donnelley”) and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in accordance with the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. These unaudited condensed consolidated interim financial statements reflect all normal and recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods and should be read in conjunction with the consolidated financial statements and the related notes thereto included in the Company’s latest Annual Report on Form 10-K and Form 10-K/A for the year ended December 31, 2013 filed with the SEC on February 26, 2014 and February 27, 2014, respectively. Operating results for the three months ended March 31, 2014 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2014. All significant intercompany transactions have been eliminated in consolidation. These unaudited condensed consolidated interim financial statements include estimates and assumptions of management that affect the amounts reported in the condensed consolidated financial statements. Actual results could differ from these estimates.

 

  

Note 2. Acquisitions and Dispositions

 

On March 25, 2014, the Company acquired substantially all of the North American operations of Esselte Corporation (“Esselte”), a developer and manufacturer of nationally branded and private label office and stationery products. The acquisition, combined with the Company’s existing products, created a more competitive and efficient office products supplier capable of supplying enhanced offerings across the combined customer base. The purchase price for Esselte was $78.2 million in cash and 1.0 million shares of RR Donnelley common stock, or a total transaction value of $96.5 million based on the Company’s closing share price on March 24, 2014. Esselte’s operations are included in the Variable Print segment.

 

On March 10, 2014, the Company acquired the assets of MultiCorpora R&D Inc. and MultiCorpora International Inc. (together “MultiCorpora”) for approximately $6.1 million.  MultiCorpora is an international provider of translation technology solutions. The acquisition of MultiCorpora expanded the capabilities of the Company’s translation services offering which supports clients’ multi-lingual communications. MultiCorpora’s operations are included in the Strategic Services segment.  

 

On January 31, 2014, the Company acquired Consolidated Graphics, Inc. (“Consolidated Graphics”), a provider of digital and commercial printing, fulfillment services, print management and proprietary Internet-based technology solutions, with operations in North America, Europe and Asia. The acquisition enhanced the Company’s ability to provide integrated communications solutions for its customers. The purchase price for Consolidated Graphics was $359.9 million in cash and 16.0 million shares of RR Donnelley common stock, or a total transaction value of $660.6 million based on the Company’s closing share price on January 30, 2014, plus the assumption of Consolidated Graphics’ debt of $118.4 million.  Immediately following the acquisition, the Company repaid substantially all of the debt assumed.  Consolidated Graphics’ operations are included in the Variable Print segment.

 

On February 7, 2014, the Company sold the assets and liabilities of Office Tiger Global Real Estate Service Inc. (“GRES”), its commercial and residential real estate advisory services, for net proceeds of $1.7 million and a loss of $0.8 million.  The operations of the GRES business were included in the International segment.

7

 


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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

For the three months ended March 31, 2014, the Company’s Condensed Consolidated Financial Statements included net sales of $157.9 million and an operating loss of $21.7 million related to the Consolidated Graphics acquisition, including restructuring, impairment and other charges of $17.1 million and a charge of $12.1 million resulting from an inventory purchase accounting adjustment.  Operating results for Esselte were not included in the Company’s Condensed Consolidated Financial Statements for the three months ended March 31, 2014, as they were not material to the Condensed Consolidated Financial Statements.

For the three months ended March 31, 2014, the Company recorded $7.7 million of acquisition-related expenses associated with acquisitions completed or contemplated, within selling, general and administrative expenses in the Condensed Consolidated Statements of Operations.

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

For Esselte, the preliminary fair value of the identifiable net assets acquired of approximately $113.1 million exceeded the purchase price of $96.5 million, resulting in a bargain purchase gain of $16.6 million, which was recorded in net investment and other expense for the three months ended March 31, 2014.  The gain on the bargain purchase was primarily attributable to the Company’s ability to utilize certain tax operating losses.  

The purchase price allocations for Esselte and Consolidated Graphics are preliminary because the evaluations necessary to assess the fair values of the net assets acquired are still in process.  The primary areas that are not yet finalized relate to the completion of the independent valuations of the property, plant and equipment acquired and other intangible assets, the acquired tax assets as the tax returns have yet to be completed and filed and certain accrued liabilities.  For Esselte, any changes to the fair value assessments will affect the gain on the bargain purchase.  The final purchase price allocations may differ from what is currently reflected in the condensed consolidated financial statements.  

MultiCorpora’s purchase price allocation is also preliminary, as the Company is still in the process of obtaining data to finalize the estimated fair values of certain account balances.  

The preliminary tax deductible goodwill related to the Consolidated Graphics, Esselte and MultiCorpora acquisitions was $73.5 million.

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

 

Accounts receivable

  

$

241.1

 

Inventories

  

 

89.8

 

Prepaid expenses and other current assets

  

 

14.0

 

Property, plant and equipment

  

 

341.4

 

Other intangible assets

  

 

205.3

 

Other noncurrent assets

  

 

7.4

 

Goodwill

  

 

298.8

 

Accounts payable and accrued liabilities

  

 

(211.2

)

Other noncurrent liabilities

  

 

(56.6

)

Deferred taxes-net

  

 

(94.4

)

Total purchase price-net of cash acquired

  

 

835.6

 

Less: debt assumed

  

 

118.4

 

Less: value of common stock issued

 

 

319.0

 

Less: gain on the bargain purchase

 

 

16.6

 

Net cash paid

  

$

381.6

 

 

 

8

 


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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

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

 

 

  

Fair Value

 

  

Valuation Technique

  

Unobservable Input

  

Range

Customer relationships

  

$

178.1

  

  

Excess earnings

  

Discount rate
Attrition rate

  

19.0% - 21.0%

5.0%

 

 

 

 

 

 

 

 

 

 

 

Trade names

  

 

26.5

  

  

Relief-from-royalty method

  

Discount rate
Royalty rate (after-tax)

  

19.0%

0.5% - 1.5%

 

 

 

 

 

 

 

 

 

 

 

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

2013 Disposition

During the fourth quarter of 2013, the Company sold the assets and liabilities of R.R. Donnelley SAS (“MRM France”), its direct mail business located in Cosne sur Loire, France, for a loss of $17.9 million, which was recognized in net investment and other expense (income) in the Consolidated Statements of Operations. The loss included cash incentive payments due to the purchaser of $18.8 million, of which $12.0 million was paid as of March 31, 2014. The operations of the MRM France business were included in the International segment.

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

Pro forma results

The following unaudited pro forma financial information for the three months ended March 31, 2014 and 2013 presents the combined results of operations of the Company and the 2014 acquisitions described above, as if the acquisitions had occurred at January 1, 2013.

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

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

2014

 

2013

 

Net sales

$

2,826.6

 

$

2,858.6

 

Net earnings (loss) attributable to RR Donnelley common shareholders

 

(17.7

)

 

8.7

 

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

 

 

 

 

 

 

Basic

$

(0.09

)

$

0.04

 

Diluted

$

(0.09

)

$

0.04

 

 

9

 


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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

The unaudited pro forma financial information for the three months ended March 31, 2014 and 2013 includes $20.5 million and $21.5 million, respectively, for the amortization of purchased intangibles.  The unaudited pro forma financial information includes restructuring, impairment and other charges from operations of $30.1 million and $39.0 million for the three months ended March 31, 2014 and 2013, respectively.  Additionally, the pro forma adjustments affecting net earnings (loss) attributable to RR Donnelley common shareholders for the three months ended March 31, 2014 and 2013 were as follows:

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

2014

 

2013

 

Depreciation and amortization of purchased assets, pre-tax

$

(0.2

)

$

(1.9

)

Acquisition-related expenses, pre-tax

 

18.6

 

 

(16.6

)

Restructuring, impairment and other charges, pre-tax

 

17.1

 

 

(16.2

)

Inventory fair value adjustments, pre-tax

 

12.1

 

 

(14.3

)

Other pro forma adjustments, pre-tax

 

(10.6

)

 

9.9

 

Income taxes

 

(10.2

)

 

18.4

 

 

 

3. Inventories

The components of the Company’s inventories, net of excess and obsolescence reserves for raw materials and finished goods, at March 31, 2014 and December 31, 2013 were as follows:

 

 

March 31,

2014

 

  

December 31,

2013

 

Raw materials and manufacturing supplies

$

266.0

 

  

$

212.6

 

Work in process

 

164.4

 

  

 

145.2

 

Finished goods

 

244.6

 

  

 

235.4

 

LIFO reserve

 

(93.3

)

  

 

(92.0

)

Total

$

581.7

 

  

$

501.2

 

 

 

 

4. Property, Plant and Equipment

The components of the Company’s property, plant and equipment at March 31, 2014 and December 31, 2013 were as follows:

 

 

March 31,
2014

 

  

December 31,
2013

 

Land

$

117.5

 

  

$

94.3

 

Buildings

 

1,228.7

 

  

 

1,160.6

 

Machinery and equipment

 

6,255.8

 

  

 

6,024.0

 

 

 

7,602.0

 

  

 

7,278.9

 

Accumulated depreciation

(5,902.4

)

  

 

(5,848.8

)

Total

$

1,699.6

 

  

$

1,430.1

  

During the three months ended March 31, 2014 and 2013, depreciation expense was $87.9 million and $88.5 million, respectively.

 

Assets Held for Sale

Primarily as a result of restructuring actions, certain facilities and equipment are considered held for sale. The net book value of assets held for sale was $23.9 million and $18.5 million at March 31, 2014 and December 31, 2013, respectively. These assets were included in other current assets in the Condensed Consolidated Balance Sheets at March 31, 2014 and December 31, 2013 at the lower of their historical net book value or their estimated fair value, less estimated costs to sell.

 

10

 


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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

5. Goodwill and Other Intangible Assets

The changes in the carrying amount of goodwill for the three months ended March 31, 2014 were as follows:

 

 

 

Publishing and Retail Services

 

 

Variable Print

 

 

Strategic
Services

 

 

International

 

 

Total

 

Net book value at December 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

$

688.0

 

 

$

1,638.6

 

 

$

1,005.4

 

 

$

1,275.9

 

 

$

4,607.9

  

Accumulated impairment losses

 

 

(669.9

)

 

 

(1,105.2

)

 

 

(243.5

)

 

 

(1,153.0

)

 

 

(3,171.6

Total

 

 

18.1

 

 

 

533.4

 

 

 

761.9

 

 

 

122.9

 

 

 

1,436.3

  

Acquisitions

 

 

 

 

 

295.9

 

 

 

2.9

 

 

 

 

 

 

298.8

 

Foreign exchange and other adjustments

 

 

 

 

 

0.7

 

 

 

 

 

 

(0.3

)

 

 

0.4

 

Net book value at March 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

 

688.0

 

 

 

1,935.2

 

 

 

1,008.6

 

 

 

1,265.8

 

 

 

4,897.6

  

Accumulated impairment losses

 

 

(669.9

)

 

 

(1,105.2

)

 

 

(243.8

)

 

 

(1,143.2

)

 

 

(3,162.1

Total

 

$

18.1

 

 

$

830.0

 

 

$

764.8

 

 

$

122.6

 

 

$

1,735.5

  

The components of other intangible assets at March 31, 2014 and December 31, 2013 were as follows:

 

 

 

March 31, 2014

 

 

December 31, 2013

 

 

 

Gross
Carrying
Amount

 

 

Accumulated
Amortization

 

 

Net Book
Value

 

 

Gross
Carrying
Amount

 

 

Accumulated
Amortization

 

 

Net Book
Value

 

Customer relationships

  

$

906.4

  

  

$

(465.6

)  

  

$

440.8

  

  

$

728.8

  

  

$

(448.5

 

$

280.3

  

Patents

  

 

98.3

  

  

 

(98.3

)  

  

 

  

  

 

98.3

  

  

 

(98.3

 

 

  

Trademarks, licenses and agreements

  

 

32.0

  

  

 

(28.7

)  

  

 

3.3

  

  

 

31.4

  

  

 

(28.2

 

 

3.2

  

Trade names

  

 

44.9

  

  

 

(13.6

)  

  

 

31.3

  

  

 

27.1

  

  

 

(12.8

 

 

14.3

  

Total amortizable other intangible assets

  

 

1,081.6

  

  

 

(606.2

)  

  

 

475.4

  

  

 

885.6

  

  

 

(587.8

 

 

297.8

  

Indefinite-lived trade names

  

 

26.9

  

  

 

  

  

 

26.9

  

  

 

18.1

  

  

 

  

 

 

18.1

  

Total other intangible assets

  

$

1,108.5

  

  

$

(606.2

)  

  

$

502.3

  

  

$

903.7

  

  

$

(587.8

 

$

315.9

  

The Company recorded additions to other intangible assets of $205.3 million for acquisitions during the three months ended March 31, 2014.

The components of other intangible assets added during the three months ended March 31, 2014 were as follows:

 

 

March 31, 2014

 

 

 

 

Amount

 

 

Weighted Average Amortization Period

 

 

Customer relationships

 

$

178.1

  

  

9.7

  

  

  

Trade names (amortizable)

  

 

17.7

  

  

10.0

  

  

  

Trade names (indefinite-lived)

  

 

8.8

  

  

n/a

  

  

  

Non-compete agreements

  

 

0.7

  

  

3.0

  

  

  

Total additions

  

$

205.3

  

  

 

  

  

  

Amortization expense for other intangible assets was $18.3 million and $16.3 million for the three months ended March 31, 2014 and 2013, respectively.

11

 


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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

The following table outlines the estimated annual amortization expense related to other intangible assets as of March 31, 2014:

 

For the year ending December 31,

 

Amount

 

2014

  

$

79.0

  

2015

  

 

78.2

  

2016

  

 

59.5

  

2017

  

 

53.0

  

2018

  

 

47.8

  

2019 and thereafter

  

 

176.2

  

Total

  

$

493.7

  

 

 

 

6. Restructuring, Impairment and Other Charges

Restructuring, Impairment and Other Charges Recognized in Results of Operations

For the three months ended March 31, 2014 and 2013, the Company recorded the following net restructuring, impairment and other charges:

 

Three Months Ended

March 31, 2014

 

  

Employee
Terminations

 

 

Other
Restructuring
Charges

 

 

Total
Restructuring
Charges

 

 

Impairment

 

 

Other
Charges

 

 

Total

 

Publishing and Retail Services

  

$

0.2

  

  

$

2.1

  

  

$

2.3

  

  

$

2.2

  

  

$

16.3

  

  

$

20.8

  

Variable Print

  

 

11.1

  

  

 

0.9

  

  

 

12.0

  

  

 

4.5

  

 

 

4.1

 

 

 

20.6

  

Strategic Services

  

 

1.0

  

  

 

0.5

  

  

 

1.5

  

  

 

  

 

 

0.1

 

 

 

1.6

  

International

  

 

1.1

  

  

 

0.5

  

  

 

1.6

  

  

 

  

 

 

 

 

 

1.6

  

Corporate

  

 

0.5

  

  

 

0.1

  

  

 

0.6

  

  

 

  

 

 

 

 

 

0.6

  

Total

  

$

13.9

  

  

$

4.1

  

  

$

18.0

  

  

$

6.7

  

 

$

20.5

 

 

$

45.2

  

 

Three Months Ended

March 31, 2013

 

 

  

Employee
Terminations

 

 

Other
Restructuring
Charges

 

 

Total
Restructuring
Charges

 

 

Impairment

 

 

Other
Charges

 

 

Total

 

Publishing and Retail Services

  

$

3.5

  

  

$

6.6

  

  

$

10.1

  

  

$

3.2

  

 

$

 

 

$

13.3

  

Variable Print

  

 

1.4

  

  

 

1.0

  

  

 

2.4

  

  

 

0.3

  

 

 

 

 

 

2.7

  

Strategic Services

  

 

  

  

 

0.7

  

  

 

0.7

  

  

 

0.4

  

 

 

 

 

 

1.1

  

International

  

 

1.7

  

  

 

0.5

  

  

 

2.2

  

  

 

(0.2

)  

 

 

 

 

 

2.0

  

Corporate

  

 

2.2

  

  

 

1.0

  

  

 

3.2

  

  

 

0.4

  

 

 

 

 

 

3.6

  

Total

  

$

8.8

  

  

$

9.8

  

  

$

18.6

  

  

$

4.1

  

 

$

 

 

$

22.7

  

Restructuring and Impairment Charges

For the three months ended March 31, 2014, the Company recorded net restructuring charges of $13.9 million for employee termination costs for 278 employees, of whom 87 were terminated as of March 31, 2014. These charges primarily related to the integration of Consolidated Graphics, including the closure of three Consolidated Graphics facilities as well as one additional facility closure within the Variable Print segment, one facility closure in the Publishing and Retail Services segment and the reorganization of certain operations. Additionally, the Company incurred lease termination and other restructuring charges of $4.1 million for the three months ended March 31, 2014. For the three months ended March 31, 2014, the Company also recorded $6.7 million of impairment charges primarily related to buildings and machinery and equipment associated with facility closings. The fair values of the buildings and machinery and equipment were determined to be Level 3 under the fair value hierarchy and were estimated based on discussions with real estate brokers, review of comparable properties, if available, discussions with machinery and equipment brokers, dealer quotes and internal expertise related to the current marketplace conditions.

For the three months ended March 31, 2013, the Company recorded net restructuring charges of $8.8 million for employee termination costs for 393 employees, all of whom were terminated as of March 31, 2014. These charges primarily related to the closing of one manufacturing facility within each of the Publishing and Retail Services and Variable Print segments and the reorganization of certain operations. Additionally, the Company incurred lease termination and other restructuring charges of $9.8 million for the three months ended March 31, 2013, including charges related to multi-employer pension plan withdrawal obligations.

12

 


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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

The Company also recorded $4.1 million of impairment charges primarily related to buildings and machinery and equipment associated with facility closings for the three months ended March 31, 2013. The fair values of the buildings and machinery and equipment were determined to be Level 3 under the fair value hierarchy and were estimated based on discussions with real estate brokers, review of comparable properties, if available, discussions with machinery and equipment brokers, dealer quotes and internal expertise related to the current marketplace conditions.

Other Charges

For the three months ended March 31, 2014, the Company recorded other charges of $20.5 million as a result of its decision to withdraw from certain multi-employer pension plans.  These charges for multi-employer pension plan withdrawal obligations, unrelated to facility closures, represent the Company’s best estimate of the expected settlement of these withdrawal liabilities. The liabilities for these withdrawal obligations included $3.8 million and $88.2 million in accrued liabilities and other noncurrent liabilities, respectively, as of March 31, 2014.

It is reasonably possible that the Company will withdraw from the remaining multi-employer pension plans in the near term, with a potential liability ranging from $5 million to $10 million in the aggregate. The Company’s withdrawal liability may be disproportionate to its current costs of continuing to participate in the plans and could be affected by the financial stability of other employers participating in the plans and any decision by other participating employers to withdraw from the plans in the future.  While it is not possible to quantify the potential impact of future events or circumstances, further reductions in participation or withdrawals from multi-employer pension plans could have a material impact on the Company’s consolidated annual results of operations, financial position or cash flows.

Restructuring Reserve

The restructuring reserve as of December 31, 2013 and March 31, 2014, and changes during the three months ended March 31, 2014, were as follows:

 

 

  

December 31,
2013

 

 

Restructuring
Charges

 

 

Foreign
Exchange and
Other

 

 

Cash
Paid

 

 

March 31,
2014

 

Employee terminations

  

$

19.7

  

  

$

13.9

  

  

$

1.3

  

  

$

(6.9

)  

  

$

28.0

  

Multi-employer pension plan withdrawal obligations

  

 

36.8

  

  

 

0.5

  

  

 

  

  

 

(1.2

)  

  

 

36.1

  

Lease terminations and other

  

 

21.1

  

  

 

3.6

  

  

 

(0.1

)  

  

 

(6.3

)  

  

 

18.3

  

Total

  

$

77.6

  

  

$

18.0

  

  

$

1.2

  

  

$

(14.4

)  

  

$

82.4

  

The current portion of restructuring reserves of $36.1 million at March 31, 2014 was included in accrued liabilities, while the long-term portion of $46.3 million, primarily related to multi-employer pension plan complete or partial withdrawal obligations related to facility closures and lease termination costs, was included in other noncurrent liabilities at March 31, 2014.

The Company anticipates that payments associated with the employee terminations reflected in the above table will be substantially completed by March 2015.

Payments on all of the Company’s multi-employer pension plan complete or partial withdrawal obligations are scheduled to be substantially completed by 2034. Changes based on uncertainties in these estimated withdrawal obligations could affect the ultimate charges related to multi-employer pension plan withdrawals.

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

 

 

 

 

13

 


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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

7. Employee Benefits

The components of the estimated net pension and other postretirement benefits plan income for the three months ended March 31, 2014 and 2013 were as follows:

 

 

Three Months Ended
March  31,

 

 

2014

 

 

2013

 

Pension (income) expense

 

 

 

 

 

 

 

Service cost

$

0.5

 

 

$

0.8

 

Interest cost

 

47.7

 

 

 

44.6

 

Expected return on plan assets

 

(63.1

)

 

 

(60.6

)

Amortization, net

 

7.8

 

 

 

12.6

 

Net pension income

$

(7.1

)

 

$

(2.6

)

Other postretirement benefits plan (income) expense

 

 

 

 

 

 

 

Service cost

$

1.1

 

 

$

1.8

 

Interest cost

 

4.2

 

 

 

4.1

 

Expected return on plan assets

 

(3.1

)

 

 

(3.0

)

Amortization, net

 

(6.4

)

 

 

(4.9

)

Net other postretirement benefits plan income

$

(4.2

)

 

$

(2.0

)

 

 

8. Share-Based Compensation

The Company recognizes compensation expense based on estimated grant date fair values for all share-based awards issued to employees and directors, including stock options, restricted stock units and performance share units. The total compensation expense related to all share-based compensation plans was $3.8 million and $4.0 million for the three months ended March 31, 2014 and 2013, respectively.  

 

Stock Options

There were no options granted during the three months ended March 31, 2014 and 2013.

Stock option awards as of December 31, 2013 and March 31, 2014, and changes during the three months ended March 31, 2014, were as follows:

 

 

 

Shares Under Option
(thousands)

 

 

Weighted
Average
Exercise
Price

 

  

Weighted
Average
Remaining
Contractual
Term
(years)

 

  

Aggregate
Intrinsic
Value
(millions)

 

Outstanding at December 31, 2013

 

4,139

  

 

$

19.39

 

  

 

5.6

 

  

$

21.2

  

Exercised

 

(118

)

 

 

10.39

 

 

 

 

 

 

 

 

 

Cancelled/forfeited/expired

 

(109

)

 

 

27.92

 

  

 

 

 

  

 

 

 

Outstanding at March 31, 2014

 

3,912

  

 

 

19.43

 

  

 

5.5

 

  

 

14.8

  

Vested and expected to vest at March 31, 2014

 

3,885

  

 

 

19.47

 

  

 

5.4

 

  

 

14.7

  

Exercisable at March 31, 2014

 

1,395

  

 

$

9.05

 

  

 

5.9

 

  

$

12.4

  

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on March 31, 2014 and December 31, 2013, respectively, and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their in-the-money options on March 31, 2014 and December 31, 2013. This amount will change in future periods based on the fair market value of the Company’s stock and the number of options outstanding. Total intrinsic value of options exercised for the three months ended March 31, 2014 was $1.0 million. There were no options exercised during the three months ended March 31, 2013. Excess tax benefits

14

 


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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

on stock option exercises, shown as financing cash inflows in the Condensed Consolidated Statements of Cash Flows were $0.3 million for the three months ended March 31, 2014.

Compensation expense related to stock options for the three months ended March 31, 2014 and 2013 was $0.3 million and $0.4 million, respectively. As of March 31, 2014, $1.4 million of total unrecognized compensation expense related to stock options is expected to be recognized over a weighted average period of 1.8 years.

 

 

Restricted Stock Units

Nonvested restricted stock unit awards as of December 31, 2013 and March 31, 2014, and changes during the three months ended March 31, 2014, were as follows:

 

 

Shares
(thousands)

 

 

Weighted
Average Grant
Date Fair Value

 

Nonvested at December 31, 2013

 

2,495

  

 

$

11.97

  

Granted

 

582

  

 

 

16.82

  

Vested

 

(1,020

 

 

13.59

  

Forfeited

 

(3

 

 

16.43

  

Nonvested at March 31, 2014

 

2,054

  

 

$

12.53

  

Compensation expense related to restricted stock units for the three months ended March 31, 2014 and 2013 was $2.9 million and $3.2 million, respectively. As of March 31, 2014, there was $21.1 million of unrecognized share-based compensation expense related to approximately 1.9 million of restricted stock unit awards, with a weighted average grant date fair market value of $12.54, that are expected to vest over a weighted average period of 2.6 years. The fair value of these awards was determined based on the Company’s stock price on the grant date reduced by the present value of expected dividends through the vesting period.

Excess tax benefits on restricted stock units that vested, shown as financing cash inflows in the Condensed Consolidated Statements of Cash Flows, were $2.2 million and $1.3 million for the three months ended March 31, 2014 and 2013, respectively.

Performance Share Units

Nonvested performance share unit awards as of December 31, 2013 and March 31, 2014, and changes during the three months ended March 31, 2014, were as follows:

 

 

Shares
(thousands)

 

  

Weighted
Average Grant

 Date Fair Value

 

Nonvested at December 31, 2013

 

953

  

  

$

10.81

  

Granted

 

319

  

  

 

16.46

  

Expired

 

(114

)

  

 

15.54

  

Vested

 

(121

)

 

 

15.54

 

Nonvested at March 31, 2014

 

1,037

  

  

$

11.48

  

During the three months ended March 31, 2014, 319,000 performance share unit awards were granted to certain executive officers, payable upon the achievement of certain established performance targets. The performance period for the shares awarded is January 1, 2014 through December 31, 2016. Distributions under these awards are payable at the end of the performance period in common stock or cash, at the Company’s discretion. The total potential payouts for awards granted during the three months ended March 31, 2014 range from 154,500 to 319,000 shares, should certain performance targets be achieved. The fair value of these awards was determined based on the Company’s stock price on the grant date reduced by the present value of expected dividends through the vesting period. These awards are subject to forfeiture upon termination of employment prior to vesting, subject in some cases to early vesting upon specified events, including termination without cause, death, permanent disability or retirement of the grantee or a change in control of the Company.

15

 


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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

Compensation expense for the performance share unit awards granted in 2014, 2013, and 2012 is being recognized based on the maximum estimated payout of 319,000, 485,000, and 233,000 shares, for each respective period.  Compensation expense for awards granted during 2011 was recognized based on the achieved target of 52%, or 121,431 shares, which were distributed during the three months ended March 31, 2014. Compensation expense related to performance share unit awards for the three months ended March 31, 2014 and 2013 was $0.6 million and $0.4 million, respectively. As of March 31, 2014, there was $8.2 million of unrecognized compensation expense related to performance share unit awards, which is expected to be recognized over a weighted average period of 2.4 years.

 

 

9. Equity

The Company’s equity as of December 31, 2013 and March 31, 2014, and changes during the three months ended March 31, 2014, were as follows:

 

 

RR Donnelley
Shareholders’
Equity

 

 

Noncontrolling
Interest

 

 

Total Equity

 

Balance at December 31, 2013

$

631.8

 

 

$

21.9