10-K 1 rrd-10k_20141231.htm 10-K

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

x

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2014

OR

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to                     

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)

Registrant’s telephone number, including area code—(312) 326-8000

Securities registered pursuant to Section 12(b) of the Act:

 

 

Title of each
Class

 

 

 

Name of each exchange on which
registered

 

Common Stock (Par Value $1.25)

 

NASDAQ

 

Indicated by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  þ    No  ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 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  þ    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 (§229.405 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  þ    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a 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 þ

 

Accelerated filer ¨

 

Non-accelerated filer ¨

 

Smaller reporting company ¨

 

 

 

 

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  þ

The aggregate market value of the shares of common stock (based on the closing price of these shares on the NASDAQ Stock Exchange—Composite Transactions) on June 30, 2014, the last business day of the registrant’s most recently completed second fiscal quarter, held by nonaffiliates was $3,364,349,044.

As of February 20, 2015, 199,811,821 shares of common stock were outstanding.

Documents Incorporated By Reference

Portions of the registrant’s proxy statement related to its annual meeting of stockholders scheduled to be held on May 21, 2015 are incorporated by reference into Part III of this Form 10-K.

 

 

 

 

 

 


TABLE OF CONTENTS

 

 

 

 

Form 10-K
Item No.

    

Name of Item

 

  

Page

 

Part I

 

 

    

 

  

 

 

 

 

 

Item 1.

    

Business

  

 

3

  

 

 

Item 1A.

    

Risk Factors

  

 

9

  

 

 

Item 1B.

    

Unresolved Staff Comments

  

 

13

  

 

 

Item 2.

    

Properties

  

 

13

  

 

 

Item 3.

    

Legal Proceedings

  

 

13

  

 

 

Item 4.

    

Mine Safety Disclosures

  

 

13

  

 

 

 

    

Executive Officers of R.R. Donnelley & Sons Company

  

 

14

  

 

Part II

 

 

    

 

  

 

 

 

 

 

Item 5.

    

Market for R.R. Donnelley & Sons Company’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

  

 

15

  

 

 

Item 6.

    

Selected Financial Data

  

 

17

  

 

 

Item 7.

    

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

  

 

18

  

 

 

Item 7A.

    

Quantitative and Qualitative Disclosures about Market Risk

  

 

49

  

 

 

Item 8.

    

Financial Statements and Supplementary Data

  

 

49

  

 

 

Item 9.

    

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

  

 

50

  

 

 

Item 9A.

    

Controls and Procedures

  

 

50

  

 

 

Item 9B.

    

Other Information

  

 

52

  

 

Part III

 

 

    

 

  

 

 

 

 

 

Item 10.

    

Directors and Executive Officers of R.R. Donnelley & Sons Company and Corporate Governance

  

 

53

  

 

 

Item 11.

    

Executive Compensation

  

 

53

  

 

 

Item 12.

    

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

  

 

53

  

 

 

Item 13.

    

Certain Relationships and Related Transactions, and Director Independence

  

 

53

  

 

 

Item 14.

    

Principal Accounting Fees and Services

  

 

54

  

 

Part IV

 

 

    

 

  

 

 

 

 

 

Item 15.

    

Exhibits, Financial Statement Schedules

  

 

55

  

 

 

 

    

Signatures

  

 

56

  

 

 

 

2


 

PART I

 

ITEM 1.  BUSINESS

Company Overview

R.R. Donnelley & Sons Company (“RR Donnelley,” the “Company,” “we,” “us,” and “our”), a Delaware corporation, helps organizations communicate more effectively by working to create, manage, produce, distribute and process content on behalf of our customers. The Company assists customers in developing and executing multichannel communication strategies that engage audiences, reduce costs, drive revenues and increase compliance. R.R. Donnelley’s innovative technologies enhance digital and print communications to deliver integrated messages across multiple media to highly targeted audiences at optimal times for clients in virtually every private and public sector. Strategically located operations provide local service and responsiveness while leveraging the economic, geographic and technological advantages of a global organization.

Segment Descriptions

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

Publishing and Retail Services

The Publishing and Retail Services segment’s primary product offerings include magazines, catalogs, retail inserts, books, directories and packaging. The Publishing and Retail Services segment accounted for 22.7% of the Company’s consolidated net sales in 2014.

Variable Print

The Variable Print segment includes the Company’s U.S. short-run and transactional printing operations. This segment’s primary product offerings include commercial and digital print, direct mail, office products, labels, statement printing, forms and packaging. The Variable Print segment accounted for 32.5% of the Company’s consolidated net sales in 2014.

Strategic Services

The Strategic Services segment includes the Company’s logistics services, financial print products and related services, print management offerings and digital and creative solutions. The Strategic Services segment accounted for 22.5% of the Company’s consolidated net sales in 2014.

International

The International segment includes the Company’s non-U.S. printing operations in Asia, Europe, Latin America and Canada. This segment’s primary product and service offerings include magazines, catalogs, retail inserts, books, directories, direct mail, packaging, forms, labels, manuals, statement printing, commercial and digital print, logistics services and digital and creative solutions. Additionally, this segment includes the Company’s business process outsourcing and Global Turnkey Solutions operations. Business process outsourcing provides transactional print and outsourcing services, statement printing, direct mail and print management offerings through its operations in Europe, Asia and North America. Global Turnkey Solutions provides outsourcing capabilities, including product configuration, customized kitting and order fulfillment for technology, medical device and other companies around the world through its operations in Europe, North America and Asia. The International segment accounted for 22.3% of the Company’s consolidated net sales in 2014.

Corporate

Corporate consists of unallocated selling, general and administrative activities and associated expenses including, in part, executive, legal, finance, communications, certain facility costs and LIFO inventory provisions. In addition, certain costs and earnings of employee benefit plans, such as pension and other postretirement benefits plan expense and share-based compensation, are included in Corporate and not allocated to the operating segments. Corporate also manages the Company’s cash pooling structures, which enables participating international locations to draw on the Company’s overseas cash resources to meet local liquidity needs.

Financial and other information related to these segments is included in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and in Note 19, Segment Information, to the Consolidated Financial Statements. Additional information related to the Company’s International operations is included in Note 20, Geographic Area and Products and Services Information, to the Consolidated Financial Statements.

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Business Acquisitions and Dispositions

On February 5, 2015, the Company announced that it had entered into a definitive agreement to acquire Courier Corporation (“Courier”) for a total transaction value of approximately $261.0 million in cash and RR Donnelley shares, plus the assumption of Courier’s net debt and payout of outstanding equity awards.  Courier is a leader in digital printing, publishing and content management in the United States, specializing in educational, religious and trade books.  The completion of the transaction is subject to customary closing conditions, including regulatory approval and approval of Courier’s shareholders.

2014 Acquisitions

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 purchase price included $82.3 million in cash and 1.0 million shares of RR Donnelley common stock, or a total transaction value of $100.6 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 $6.0 million. MultiCorpora is an international provider of translation technology solutions. 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 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, with the exception of operations in the Czech Republic and Japan which are included in the International segment.

2014 Dispositions

On August 15, 2014, the Company sold the assets and liabilities of Journalism Online, LLC (“Journalism Online”), a provider of online subscription management services, for net proceeds of $10.7 million, of which $9.5 million was received as of December 31, 2014, resulting in a gain of $11.2 million. The operations of the Journalism Online business were included in the Strategic Services segment.

On August 11, 2014, the Company’s subsidiary, RR Donnelley Argentina S.A. (“RRDA”), filed for bankruptcy liquidation in bankruptcy court in Argentina.  The bankruptcy petition was approved by the court shortly thereafter and a bankruptcy trustee was appointed.  As a result of the bankruptcy liquidation, the Company recorded a loss of $16.4 million for the year ended December 31, 2014. Effective as of the court’s approval, the operating results of RRDA are no longer included in the Company’s consolidated results of operations. The operations of RRDA were included in the International 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 $1.8 million and a loss of $0.8 million. The operations of the GRES business were included in the International segment.

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 included cash incentive payments due to the purchaser of $18.8 million, of which $16.4 million was paid as of December 31, 2014 with the remaining balance to be paid by January 2016. The operations of the MRM France business were included in the International segment.

2012 Acquisitions

On December 28, 2012, the Company acquired Presort Solutions (“Presort”), a provider of mail presorting services to businesses in various industries. Presort’s operations are included in the Strategic Services segment.

On December 17, 2012, the Company acquired Meisel Photographic Corporation (“Meisel”), a provider of custom designed visual graphics products to the retail market. Meisel’s operations are included in the Variable Print segment.

On September 6, 2012, the Company acquired Express Postal Options International (“XPO”), a provider of international outbound mailing services to pharmaceutical, e-commerce, financial services, information technology, catalog, direct mail and other businesses. XPO’s operations are included in the Strategic Services segment.

4


 

On August 14, 2012, the Company acquired EDGAR Online, a leading provider of disclosure management services, financial data and enterprise risk analytics software and solutions. EDGAR Online’s operations are included in the Strategic Services segment.

Competition and Strategy

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 the Company’s products and services. One of the Company’s competitive strengths is that it offers a wide array of communications products and services, including print, which provide differentiated solutions for its customers. The Company works with its customers to create, manage, deliver and optimize their multi-channel communications strategies. The Company has and will continue to develop and expand its creative and design, content management, digital and print production, supply chain management and distribution services to address its customers evolving needs while supporting the strategic objective of becoming a leading global provider of integrated communication services.

The print and related services industry, in general, continues to have excess capacity and remains highly competitive. Despite consolidation in recent years, the industry remains highly fragmented. Across the Company’s range of products and services, competition is based primarily on price in addition to quality and the ability to service the special needs of customers. Management expects that prices for the Company’s products and services will continue to be a focal point for customers in coming years. Therefore, the Company believes it needs to continue to lower its cost structure and continue to differentiate its product and service offerings.

The impact of digital technologies has been felt in many print products. Electronic communication and transaction technology has eliminated or reduced the role of many traditional printed products and has continued to drive electronic substitution in directory and statement printing, in part driven by environmental concerns and cost pressures at key customers. In addition, e-book substitution is having a continuing impact on consumer print book volume, though adoption rates are stabilizing, and a limited impact on educational and specialty books. Digital technologies have also impacted printed magazines, as advertiser spending has moved from print to electronic media. The future impact of technology on the Company’s business is difficult to predict and could result in additional expenditures to restructure impacted operations or develop new technologies. In addition, the Company has made targeted acquisitions and investments in the Company’s existing business to offer customers innovative services and solutions that further secure the Company’s position as a technology leader in the industry.

The acquisitions of Consolidated Graphics, Esselte and MultiCorpora support the Company’s strategic objective of generating profitable growth and improved cash flow and liquidity through targeted acquisitions. These acquisitions have enhanced the Company’s existing capabilities and ability to serve its customers and have provided cost savings through the combination of best practices, complementary products and manufacturing and distribution capabilities.

The Company has implemented a number of strategic initiatives to reduce its overall cost structure and improve efficiency, including the restructuring, reorganization and integration of operations and streamlining of administrative and support activities. Future cost reduction initiatives could include the reorganization of operations and the consolidation of facilities. Implementing such initiatives might result in future restructuring or impairment charges, which may be substantial. Management also reviews the Company’s operations and management structure on a regular basis to balance appropriate risks and opportunities to maximize efficiencies and to support the Company’s long-term strategic goals.

Seasonality

Advertising and consumer spending trends affect demand in several of the end-markets served by the Company. Historically, demand for printing of magazines, catalogs, retail inserts and books is higher in the second half of the year driven by increased advertising pages within magazines, and holiday volume in catalogs, retail inserts and books. Partially offsetting this pattern, demand for financial print and related services is typically stronger in the first half of the year due to annual compliance requirements. As a result of the acquisition of Consolidated Graphics, which provides significant campaign-related printed products, quarterly and annual results may also be impacted by U.S. election cycles. These typical seasonal patterns can be impacted by overall trends in the U.S. and world economy. The seasonal pattern in 2014 was in line with historical patterns.

5


 

Raw Materials

The primary raw materials the Company uses in its print businesses are paper and ink. The Company negotiates with leading suppliers to maximize its purchasing efficiencies and uses a wide variety of paper grades, formats, ink formulations and colors. In addition, a substantial amount of paper used by the Company is supplied directly by customers. Variations in the cost and supply of certain paper grades and ink formulations used in the manufacturing process may affect the Company’s consolidated financial results. Paper prices fluctuated during 2014, and volatility in the future is expected. Generally, customers directly absorb the impact of changing prices on customer-supplied paper. With respect to paper purchased by the Company, the Company has historically passed most changes in price through to its customers. Contractual arrangements and industry practice should support the Company’s continued ability to pass on any future paper price increases, but there is no assurance that market conditions will continue to enable the Company to successfully do so. Management believes that the paper supply is consolidating, and there may be shortfalls in the future in supplies necessary to meet the demands of the entire marketplace. Higher paper prices and tight paper supplies may have an impact on customers’ demand for printed products. The Company has undertaken various strategic initiatives to mitigate any foreseeable supply disruptions with respect to the Company’s ink requirements. The Company also resells waste paper and other print-related by-products and may be impacted by changes in prices for these by-products.

The Company continues to monitor the impact of changes in the price of crude oil and other energy costs, which impact the Company’s ink suppliers, logistics operations and manufacturing costs. Crude oil and energy prices continue to be volatile. The Company believes its logistics operations will continue to be able to pass a substantial portion of any increases in fuel prices directly to its customers in order to offset the impact of related cost increases. Decreases in fuel prices are also passed on to customers which negatively impacts sales. The Company generally cannot pass on to customers the impact of higher energy prices on its manufacturing costs. However, the Company enters into fixed price contracts for a portion of its natural gas purchases to mitigate the impact of changes in energy prices. The Company cannot predict sudden changes in energy prices and the impact that possible future changes in energy prices might have upon either future operating costs or customer demand and the related impact either will have on the Company’s consolidated annual results of operations, financial position or cash flows.

Distribution

The Company’s products are distributed to end-users through the U.S. or foreign postal services, through retail channels, electronically or by direct shipment to customer facilities. Through its logistics operations, the Company manages the distribution of most customer products printed by the Company in the U.S. and Canada to maximize efficiency and reduce costs for customers.

Postal costs are a significant component of many customers’ cost structures and postal rate changes can influence the number of pieces that the Company’s customers are willing to print and mail. On January 27, 2013, the United States Postal Service (“USPS”) increased postage rates across all classes of mail by approximately 2.6%, on average. Under the 2006 Postal Accountability and Enhancement Act, it had been anticipated that postage would increase annually by an amount equal to or slightly less than the Consumer Price Index (the “CPI”). However, on December 24, 2013, the Postal Regulatory Commission (the “PRC”) approved the USPS Board of Governors’ request under the Exigency Provision in the applicable law for price increases of 4.3%. The exigent rate increase was implemented in addition to a 1.7% rate increase, equal to the CPI, for total price increases of 6.0%, on average, across all significant mail categories, effective January 26, 2014. According to the PRC’s ruling, which is currently being appealed, the USPS must develop a plan to phase out the exigent rate increase once it has produced the revenue justified by the request. As of December 31, 2014, the USPS has not presented a plan for the required phase out. On January 15, 2015, the USPS filed for a CPI rate increase of 2.0%, which if approved by the PRC, will be effective April 26, 2015. As a leading provider of print logistics and among the largest mailers of standard mail in the U.S., the Company works closely with its customers and the USPS to offer innovative products and services to minimize postage costs. While the Company does not directly absorb the impact of higher postal rates on its customers’ mailings, demand for products distributed through the U.S. or foreign postal services has been negatively impacted by changes in postal rates. The impact to the Company of the USPS’s restructuring plans, many of which require legislative action, cannot currently be estimated. Mail delivery services through the USPS accounted for approximately 44% of the Company’s logistics revenues during the year ended December 31, 2014.

During the year ended December 31, 2014, the Company experienced an increase in its costs of transportation, largely as a result of an industry-wide shortage of drivers resulting from regulations restricting the number of hours drivers can work and the severe winter weather in the first quarter. The Company’s ability to pass on these increased costs to its customers varies based on contractual arrangements. Industry practice should support the Company’s ability to pass on these cost increases when contractually allowed, but there is no assurance that market conditions will continue to enable the Company to successfully do so.

Customers

For each of the years ended December 31, 2014, 2013 and 2012, no customer accounted for 10% or more of the Company’s consolidated net sales.

6


 

Technology, Research and Development

The Company has a research facility that supports the development and implementation of new technologies to meet customer needs and improve operating efficiencies. The Company’s cost for research and development activities is not material to the Company’s consolidated annual results of operations, financial position or cash flows.

Environmental Compliance

It is the Company’s policy to conduct its global operations in accordance with all applicable laws, regulations and other requirements. 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 adverse effect on the Company’s consolidated annual results of operations, financial position or cash flows.

Employees

As of December 31, 2014, the Company had approximately 68,000 employees.

Available Information

The Company maintains an Internet website at www.rrdonnelley.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 Securities and Exchange Commission (“SEC”). The Principles of Corporate Governance of the Company’s Board of Directors, the charters of the Audit, Human Resources and Corporate Responsibility & 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.rrdonnelley.com, and will be provided, free of charge, to any shareholder 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.

Special Note Regarding Forward-Looking Statements

The Company has made forward-looking statements in this Annual Report on Form 10-K 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 “may,” “will,” “should,” “might,” “could,” “would,” “potential,” “possible,” “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “hope” or similar expressions. The Company claims the protection of the Safe Harbor for Forward-Looking Statements contained in the Private Securities Litigation Reform Act of 1995 for all forward-looking statements.

Forward-looking statements are not guarantees of performance. The following important factors, in addition to those discussed elsewhere in this Annual Report on Form 10-K, could affect the future results of the Company and could cause those results or other outcomes to differ materially from those expressed or implied in its forward-looking statements:

·

the volatility and disruption of the capital and credit markets, and adverse changes in the global economy;

·

successful execution of acquisitions and negotiation of future acquisitions;

·

the ability of the Company to integrate operations of acquisitions successfully and achieve enhanced earnings or effect cost savings;

·

the ability to implement comprehensive plans for the integration of sales forces, cost containment, asset rationalization, systems integration and other key strategies;

·

the ability to divest non-core businesses;

·

future growth rates in the Company’s core businesses;

·

competitive pressures in all markets in which the Company operates;

·

the Company’s ability to access debt and the capital markets and the ability of its counterparties to perform their contractual obligations under the Company’s lending and insurance agreements;

·

changes in technology, including electronic substitution and migration of paper based documents to digital data formats;

7


 

·

factors that affect customer demand, including changes in postal rates, postal regulations and service levels, changes in the capital markets, changes in advertising markets, customers’ budgetary constraints and changes in customers’ short-range and long-range plans;

·

the ability to gain customer acceptance of the Company’s new products and technologies;

·

the ability to secure and defend intellectual property rights and, when appropriate, license required technology;

·

customer expectations and financial strength;

·

performance issues with key suppliers;

·

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

·

changes in ratings of the Company or the Company’s debt securities;

·

the ability of the Company to comply with covenants under its Credit Agreement and indentures governing its debt securities;

·

the ability to generate cash flow or obtain financing to fund growth;

·

the effect of inflation, changes in currency exchange rates and changes in interest rates;

·

the effect of changes in laws and regulations, including changes in accounting standards, trade, tax, environmental compliance (including the emission of greenhouse gases and other air pollution controls), health and welfare benefits (including the Patient Protection and Affordable Care Act, as modified by the Health Care and Education Reconciliation Act, and further healthcare reform initiatives), price controls and other regulatory matters and the cost, which could be substantial, of complying with these laws and regulations;

·

contingencies related to actual or alleged environmental contamination;

·

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

·

the effect of a material breach of security of any of the Company’s or its vendors’ systems;

·

the failure to properly use and protect customer information and data;

·

the failure to properly protect the Company’s and its employees’ information and data;

·

the effect of labor disruptions or shortages;

·

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

·

the effect of economic weakness and constrained advertising;

·

uncertainty about future economic conditions;

·

the possibility of future terrorist activities or the possibility of a future escalation of hostilities in Eastern Europe, the Middle East or elsewhere;

·

the possibility of a regional or global health pandemic outbreak;

·

disruptions to the Company’s operations resulting from possible natural disasters, interruptions in utilities and similar events;

·

adverse outcomes of pending and threatened litigation; and

·

other risks and uncertainties detailed from time to time in the Company’s filings with the SEC.

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 Annual Report on Form 10-K 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 Annual Report on Form 10-K to reflect any new events or any change in conditions or circumstances.

 

8


 

ITEM 1A.   RISK FACTORS

The Company’s consolidated results of operations, financial position and cash flows can be adversely affected by various risks. These risks include the principal factors listed below and the other matters set forth in this Annual Report on Form 10-K. You should carefully consider all of these risks.

Risks Relating to the Businesses of the Company

Global market and economic conditions, as well as the effects of these conditions on customers’ businesses could adversely affect the Company.

Global economic conditions affect customers’ businesses and the markets they serve. Demand for advertising tends to correlate with changes in the level of economic activity in the markets customers serve. Because a significant part of the Company’s business relies on its customers’ advertising spending, a prolonged downturn in the global economy and an uncertain economic outlook could further reduce the demand for printing and related services that the Company provides to these customers. Economic weakness and constrained advertising spending may result in decreased revenue, operating margin, earnings and growth rates and difficulty in managing inventory levels and collecting accounts receivable. The Company may experience reduced demand for its products and services due to economic conditions and other macroeconomic factors affecting consumers’ and businesses’ spending behavior. In addition, customer difficulties could result in increases in bad debt write-offs and allowances for doubtful accounts receivable. In particular, the Company’s exposure to certain industries currently experiencing financial difficulties and certain financially troubled customers could have an adverse effect on the Company’s results of operations. The Company may experience operating margin declines in certain businesses, reflecting the effect of items such as competitive price pressures, inventory write-downs, cost increases for wages and materials, and increases in pension and other postretirement benefits plan funding requirements. Economic downturns may also result in restructuring actions and associated expenses and impairment of long-lived assets, including goodwill and other intangibles. Uncertainty about future economic conditions makes it difficult for the Company to forecast operating results and to make decisions about future investments. Delays or reductions in customers’ spending would have an adverse effect on demand for the Company’s products and services, which could be material, and consequently impact the Company’s consolidated results of operations, financial position and cash flow.

Adverse credit market conditions may limit the Company’s ability to obtain future financing.

Uncertainty and volatility in global financial markets may cause financial markets institutions to fail or may cause lenders to hoard capital and reduce lending. The failure of a financial institution that supports the Company’s existing credit agreement would reduce the size of its committed facility unless a replacement institution were added.

The Company’s operating performance and creditworthiness may limit its ability to obtain future financing and the cost of any such capital may be higher than in past periods.

The Company’s access to future financing will depend on a variety of factors such as the general availability of credit, its credit ratings and credit capacity at the time it pursues such financing. The Company’s current Corporate credit ratings are below investment grade and, as a result, the Company’s borrowing costs may further increase or ability to borrow may be limited. The Company’s obligations under its current $1.5 billion senior secured revolving credit facility (the “Credit Agreement”) which expires September 9, 2019, are guaranteed by material and certain other domestic subsidiaries and are secured by a pledge of the equity interests of certain subsidiaries, including most of its domestic subsidiaries, and a security interest in substantially all of the domestic current assets and mortgages of certain domestic real property of the Company. The Credit Agreement is subject to a number of covenants, including a minimum Interest Coverage Ratio and a maximum Leverage Ratio, that, in part, restrict the Company’s ability to incur additional indebtedness, create liens, engage in mergers and consolidations, make restricted payments, dispose of certain assets and may also limit the use of proceeds. The Credit Agreement generally allows annual dividend payments of up to $225.0 million in aggregate, though additional dividends may be allowed subject to certain conditions. If adequate capital is not available to the Company and its internal sources of liquidity prove to be insufficient, or if future financings require more restrictive covenants, such combination of events could adversely affect the Company’s ability to (i) acquire new businesses or enter new markets, (ii) service or refinance its existing debt, (iii) pay dividends on common stock, (iv) make necessary capital investments, and (v) make other expenditures necessary for the ongoing conduct of its business.

9


 

The indentures governing the notes and debentures the Company issues do not contain restrictive covenants and the Company may incur substantially more debt or take other actions, including engaging in mergers and acquisitions, paying dividends and making other distributions to holders of equity securities, and disposing of certain assets, which may adversely affect the Company’s ability to satisfy its obligations under the notes and debentures issued under its indentures.

Although the Credit Agreement is subject to a number of negative and financial covenants, including a minimum interest coverage ratio and a maximum leverage ratio, and covenants that restrict the Company’s ability to incur additional indebtedness, engage in mergers and acquisitions, pay dividends and make other distributions to the holders of the Company’s equity securities, and dispose of certain assets, the indentures governing the Company’s notes and debentures do not contain financial or operating covenants or restrictions on the incurrence of indebtedness, the payment of dividends or making other distributions, or the disposition of certain assets. In addition, the limited covenants applicable to the notes and debentures do not require the Company to achieve or maintain any minimum financial results relating to its financial position or results of operations.

In carrying out the Company’s strategy focused on maximizing long-term shareholder value, the Company may enter into transactions which may increase its financial leverage. The Company’s ability to recapitalize, incur additional debt and take a number of other actions that are not limited by the terms of the indentures governing its notes and debentures could have the effect of diminishing the Company’s ability to make payments on those notes and debentures when due, and require the Company to dedicate a substantial portion of its cash flow from operations to payments on its indebtedness, which would reduce the availability of cash flow to fund the Company’s operations, working capital and capital expenditures.

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

Purchases of paper, ink, energy and other raw materials represent a large portion of the Company’s costs. Increases in the costs of these inputs may increase the Company’s costs and the Company may not be able to pass these costs on to customers through higher prices. In addition, the Company may not be able to resell waste paper and other print-related by-products or may be adversely impacted by decreases in the prices for these by-products. Increases in the cost of materials may adversely impact customers’ demand for the Company’s printing and related services.

The Company may be adversely affected by a decline in the availability of raw materials.

The Company is dependent on the availability of paper, ink and other raw materials to support its operations. Unforeseen developments in these markets could result in a decrease in the supply of paper, ink or other raw materials and could cause a decline in the Company’s revenues.

The financial condition of the Company’s customers may deteriorate.

Many of the Company’s customers participate in highly competitive markets, and their financial condition may deteriorate as a result. A decline in the financial condition of the Company’s customers would hinder the Company’s ability to collect amounts owed by customers. In addition, such a decline would result in lower demand for the Company’s products and services. A lack of liquidity in the capital markets or a sustained period of unfavorable economic conditions will increase the Company’s exposure to credit risks and result in increases in bad debt write-offs and allowances for doubtful accounts receivable.

The Company may be unable to improve its operating efficiency rapidly enough to meet market conditions.

Because the markets in which the Company competes are highly competitive, the Company must continue to improve its operating efficiency in order to maintain or improve its profitability. There is no assurance that the Company will be able to do so in the future. In addition, the need to reduce ongoing operating costs may result in significant up-front costs to reduce workforce, close or consolidate facilities, or upgrade equipment and technology.

10


 

The Company may be unable to successfully integrate the operations of acquired businesses and may not achieve the cost savings and increased revenues anticipated as a result of these acquisitions.

Achieving the anticipated benefits of acquisitions will depend in part upon the Company’s ability to integrate these businesses in an efficient and effective manner. The integration of companies that have previously operated independently may result in significant challenges, and the Company may be unable to accomplish the integration smoothly or successfully. In particular, the coordination of geographically dispersed organizations with differences in corporate cultures and management philosophies may increase the difficulties of integration. The integration of acquired businesses may also require the dedication of significant management resources, which may temporarily distract management’s attention from the day-to-day operations of the Company. In addition, the process of integrating operations may cause an interruption of, or loss of momentum in, the activities of one or more of the Company’s businesses and the loss of key personnel from the Company or the acquired businesses. Further, employee uncertainty and lack of focus during the integration process may disrupt the businesses of the Company or the acquired businesses. The Company’s strategy is, in part, predicated on the Company’s ability to realize cost savings and to increase revenues through the acquisition of businesses that add to the breadth and depth of the Company’s products and services. Achieving these cost savings and revenue increases is dependent upon a number of factors, many of which are beyond the Company’s control. In particular, the Company may not be able to realize the benefits of more comprehensive product and service offerings, anticipated integration of sales forces, asset rationalization and systems integration.

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

The Company’s success depends, in part, on its general ability to attract, develop, motivate and retain highly skilled employees. The loss of a significant number of the Company’s employees or the inability to attract, hire, develop, train and retain additional skilled personnel could have a serious negative effect on the Company. Various locations may encounter competition with other manufacturers for skilled labor. Many of these competitors may be able to offer significantly greater compensation and benefits or more attractive lifestyle choices than the Company offers. In addition, many members of the Company’s management have significant industry experience that is valuable to the Company’s competitors. The Company enters into non-solicitation and, as appropriate, non-competition agreements with its executive officers, prohibiting them contractually from soliciting the Company’s customers and employees and from leaving and joining a competitor within a specified period. If one or more members of the Company’s senior management team leave and cannot be replaced with a suitable candidate quickly, the Company could experience difficulty in managing its business properly, which could harm business prospects and the Company’s consolidated results of operations.

The trend of increasing costs to provide health care and other benefits to the Company’s employees and retirees may continue.

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

Changes in market conditions or lower returns on assets may increase required pension and other postretirement benefits plan contributions in future periods.

The funded status of the Company’s pension and other postretirement benefits plans is dependent upon many factors, including returns on invested assets and the level of certain market interest rates. As experienced in prior years, declines in the market value of the securities held by the plans coupled with historically low interest rates have substantially reduced, and in the future could further reduce, the funded status of the plans. These reductions have increased the level of expected required pension and other postretirement benefits plan contributions in future years. Market conditions may lead to changes in the discount rates used to value the year-end benefit obligations of the plans, which could partially mitigate or worsen the effects of lower asset returns. If adverse market conditions were to continue for an extended period of time, the Company’s costs and required cash contributions associated with pension and other postretirement benefits plans may substantially increase in future periods.

There are risks associated with operations outside the United States.

The Company has significant operations outside the United States. Revenues from the Company’s operations in geographic regions outside the United States accounted for approximately 23% of the Company’s consolidated net sales for the year ended December 31, 2014. As a result, the Company is subject to the risks inherent in conducting business outside the United States, including the impact of economic and political instability of those countries in which the Company operates. The volatile economic environment has increased the risk of disruption and losses resulting from hyper-inflation, currency devaluation and tax or regulatory changes in certain countries in which the Company has operations.

11


 

The Company is exposed to significant risks related to potential adverse changes in currency exchange rates.

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

A decline in expected profitability of the Company or individual reporting units of the Company could result in the impairment of assets, including goodwill, other long-lived assets and deferred tax assets.

The Company holds material amounts of goodwill, other long-lived assets and deferred tax assets on its balance sheet. A decline in expected profitability, particularly if there is a decline in the global economy, could call into question the recoverability of the Company’s related goodwill, other long-lived tangible and intangible assets or deferred tax assets and require the write down or write off these assets or, in the case of deferred tax assets, recognition of a valuation allowance through a charge to income. Such an occurrence has had and could continue to have a material adverse effect on the Company’s consolidated results of operations, financial position and cash flows.

Risks Related to the Printing and Related Services Industry

The highly competitive market for the Company’s products and industry consolidation may continue to create adverse price pressures.

The markets for the majority of the Company’s product categories are highly fragmented and the Company has a large number of competitors. Management believes that excess capacity in the Company’s markets has caused downward price pressure and that this trend is likely to continue. In addition, consolidation in the markets in which the Company competes may increase competitive price pressures due to competitors lowering prices as a result of synergies achieved.

The substitution of electronic delivery for printed materials may continue to adversely affect the Company’s businesses.

Electronic delivery of documents and data, including the online distribution and hosting of media content, offer alternatives to traditional delivery of printed documents. Consumers continue to accept electronic substitution in directory and statement printing and are replacing traditional reading of print materials with online, hosted media content or e-reading devices. The extent to which consumers will continue to accept electronic delivery is uncertain and it is difficult to predict future rates of acceptance of these alternatives. Electronic delivery has negatively impacted the Company’s products, such as directories, books, forms and statement printing. Digital technologies have also impacted printed magazines, as advertising spending has moved from print to electronic media. To the extent that consumers, customers and regulators continue to accept these alternatives, the Company’s products will be adversely affected.

Changes in the rules and regulations to which the Company is subject may increase the Company’s costs.

The Company is subject to numerous rules and regulations, including, but not limited to, product safety, environmental and health and welfare benefit regulations. These rules and regulations may be changed by local, state or federal governments in countries in which the Company operates. Changes in these regulations may result in a significant increase in the Company’s costs to comply. Compliance with changes in rules and regulations could require increases to the Company’s workforce, increased cost for compensation and benefits, or investments in new or upgraded equipment. In addition, growing concerns about climate change, including the impact of global warming, may result in new regulations with respect to greenhouse gas emissions (including carbon dioxide) and/or “cap and trade” legislation. Compliance with new rules and regulations or changes in existing rules and regulations could result in additional costs to the Company.

Declines in general economic conditions or political unrest may adversely impact the Company’s business.

In general, demand for the Company’s products and services are highly correlated with general economic conditions. Declines in economic conditions in the U.S., or in other countries in which the Company operates, may adversely impact the Company’s consolidated financial results. Because such declines in demand are difficult to predict, the Company or the industry may have increased excess capacity as a result. An increase in excess capacity may result in declines in prices for the Company’s products and services. The overall business climate may also be impacted by wars or acts of terrorism. Such acts may have sudden and unpredictable adverse impacts on demand for the Company’s products and services.

12


 

Changes in the rules and regulations to which customers are subject may impact demand for the Company’s products and services.

Many of the Company’s customers are subject to rules and regulations requiring certain printed or electronic communications governing the form of such communications and protecting the privacy of consumers. Changes in these regulations may impact customers’ business practices and could reduce demand for the Company’s printed products and related services. Changes in such regulations could eliminate the need for certain types of printed communications altogether or such changes may impact the quantity or format of printed communications.

Changes in postal rates, regulations and delivery structure may adversely impact demand for the Company’s products and services.

Postal costs are a significant component of many of the Company’s customers’ cost structures and postal rate changes can influence the number of pieces and types of mailings that the Company’s customers mail. On December 24, 2013, the PRC approved the USPS Board of Governors’ request for an exigent price increase of 4.3%. This exigent rate increase was implemented in addition to a 1.7% rate increase, equal to the CPI, for total price increases of 6.0%, on average, across all mail categories, effective January 26, 2014. On January 15, 2015, the USPS filed for a CPI rate increase of 2.0%, which if approved by the PRC, will be effective April 26, 2015. In addition, the USPS has incurred significant financial losses in recent years and may, as a result, implement significant changes to the breadth or frequency of its mail delivery. The USPS is continuing to pursue its previously announced plans to restructure its mail delivery network, including the closure of many post office facilities and a possible suspension of Saturday service. The impact to the Company of the USPS’s restructuring plans, many of which require legislative action, cannot currently be estimated. If implemented, such changes could impact customers’ ability or willingness to communicate by mail. Declines in print volumes mailed would have an adverse effect on the Company’s business.

A failure to adapt to technological changes to address the changing demands of customers may adversely impact the Company’s business.

Many of the end markets in which customers of the Company compete are experiencing changes due to technological progress and changes in consumer preferences.  In order to grow and remain competitive, the Company will need to continue to adapt to future changes in technology, enhance the Company's existing offerings and introduce new offerings to address the changing demands of customers.  If the Company is unable to continue to exploit new and existing technologies to distinguish its products and services from those of its competitors or adapt to new distribution methods, the Company’s business may be adversely affected.

Technological developments and changing demands of customers may require additional investment in new equipment and technologies. The Company must monitor changes in its customers’ markets and develop new solutions to meet customers’ needs. The development of such solutions may be costly and there is no assurance that these solutions will be accepted by customers. If the Company is unable to adapt to technological changes on a timely basis or at an acceptable cost, customers’ demand for the Company’s products and services may be adversely affected.

 

 

ITEM 1B.   UNRESOLVED STAFF COMMENTS

The Company has no unresolved written comments from the SEC staff regarding its periodic or current reports under the Securities Exchange Act of 1934.

 

ITEM 2.   PROPERTIES

The Company’s corporate office is located in leased office space in Chicago, Illinois. As of December 31, 2014, the Company leased or owned 355 U.S. facilities, some of which had multiple buildings and warehouses, and these U.S. facilities encompassed approximately 41.4 million square feet. The Company leased or owned 149 international facilities encompassing approximately 10.8 million square feet in Canada, Latin America, Europe and Asia. Of the Company’s U.S. and international facilities, approximately 30.5 million square feet of space was owned, while the remaining 21.7 million square feet of space was leased.

 

ITEM 3.   LEGAL PROCEEDINGS

For a discussion of certain litigation involving the Company, see Note 10, Commitments and Contingencies, to the Consolidated Financial Statements.

 

 

ITEM 4.   MINE SAFETY DISCLOSURES

Not applicable.


13


 

EXECUTIVE OFFICERS OF R.R. DONNELLEY & SONS COMPANY

 

Name, Age and

Positions with the Company

  

Officer
Since

 

  

Business Experience During

Past Five Years

Thomas J. Quinlan, III

52, President and Chief Executive Officer

  

 

2004

  

  

Served as RR Donnelley’s President and Chief Executive Officer since April 2007. Prior to this, served as Group President, Global Services since October 2006 and Chief Financial Officer since April 2006. Prior to this, served as Executive Vice President, Operations since February 2004.

 

 

 

Suzanne S. Bettman

50, Executive Vice President, General Counsel, Corporate Secretary and Chief Compliance Officer

  

 

2004

  

  

Served as RR Donnelley’s Executive Vice President, General Counsel, Corporate Secretary and Chief Compliance Officer since January 2007. Served previously as Senior Vice President, General Counsel since March 2004.

 

 

 

Andrew B. Coxhead

46, Senior Vice President and Chief Accounting Officer

  

 

2007

  

  

Served as RR Donnelley’s Senior Vice President and Chief Accounting Officer since October 2007, and Corporate Controller from October 2007 to January 2013. Prior to this, served as Vice President, Assistant Controller since September 2006. Prior to this, from 1995 until 2006, served in various capacities with RR Donnelley in financial planning, accounting, manufacturing management, operational finance and mergers and acquisitions.

 

 

 

Daniel L. Knotts

50, Chief Operating Officer

  

 

2007

  

  

Served as RR Donnelley’s Chief Operating Officer since January 2013. Prior to this, served as Group President from April 2007 to December 2012 and Chief Operating Officer, Global Print Solutions from January 2007 to April 2007. Prior to this, from 1986 until 2007, served in various capacities with RR Donnelley, including Group Executive Vice President, Operations, Publishing and Retail Services and President, Catalog/Retail/Magazine Solutions, RR Donnelley Print Solutions.

 

 

 

Daniel N. Leib

48, Executive Vice President and Chief Financial Officer

  

 

2009

  

  

Served as RR Donnelley’s Executive Vice President and Chief Financial Officer since May 2011. Prior to this, served as Group Chief Financial Officer and Senior Vice President, Mergers and Acquisitions since August 2009 and Treasurer from June 2008 to February 2010. Prior to this, served as RR Donnelley’s Senior Vice President, Treasurer, Mergers and Acquisitions and Investor Relations since July 2007. Prior to this, from May 2004 to 2007, served in various capacities in financial management, corporate strategy and investor relations.

 

14


 

PART II

 

ITEM 5.

MARKET FOR R.R. DONNELLEY & SONS COMPANY’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

RR Donnelley’s common stock is listed and traded on the NASDAQ Stock Market.

As of February 20, 2015, there were 7,138 stockholders of record of the Company’s common stock. Quarterly closing prices of the Company’s common stock, as reported on NASDAQ, and dividends paid per share during the years ended December 31, 2014 and 2013, are contained in the chart below:

 

 

 

 

 

 

 

 

 

 

Closing Common Stock Prices

 

 

Dividends Paid

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

 

High

 

 

Low

 

 

High

 

 

Low

 

First Quarter

$

0.26

 

 

$

0.26

 

 

$

20.38

 

 

$

17.15

 

 

$

12.05

 

 

$

8.72

 

Second Quarter

 

0.26

 

 

 

0.26

 

 

 

18.30

 

 

 

15.10

 

 

 

14.07

 

 

 

10.98

 

Third Quarter

 

0.26

 

 

 

0.26

 

 

 

17.82

 

 

 

15.85

 

 

 

19.26

 

 

 

14.23

 

Fourth Quarter

 

0.26

 

 

 

0.26

 

 

 

17.70

 

 

 

15.02

 

 

 

20.60

 

 

 

15.74

 

The Credit Agreement generally allows annual dividend payments of up to $225.0 million in aggregate, though additional dividends may be allowed subject to certain conditions. For more detail refer to the Credit Agreement and its amendments filed as exhibits to this Annual Report on Form 10-K.

ISSUER PURCHASES OF EQUITY SECURITIES

There were no repurchases of equity securities during the three months ended December 31, 2014.

EQUITY COMPENSATION PLANS

For information regarding equity compensation plans, see Item 12 of Part III of this Annual Report on Form 10-K.

PEER PERFORMANCE TABLE

The graph below compares five-year returns of the Company’s common stock with those of the S&P 500 Index and a selected peer group of companies. The comparison assumes all dividends have been reinvested, and an initial investment of $100 on December 31, 2009. The returns of each company in the peer group have been weighted to reflect their market capitalizations.

Because the Company’s services and customers are so diverse, the Company does not believe that any single published industry index is appropriate for comparing stockholder return. Therefore, the peer group used in the performance graph combines two industry groups identified by Value Line Publishing, Inc., the publishing group (including printing companies) and the newspaper group. The Company itself has been excluded, and its contributions to the indices cited have been subtracted out. Changes in the peer group from year to year result from companies being added to or deleted from the Value Line publishing group or newspaper group.

15


 

Comparison of Five-Year Cumulative Total Return Among RR Donnelley, S&P 500 Index and Peer Group*

 

 

 

Base

Period

 

Fiscal Years Ended December 31,

 

Company Name/Index

2009

 

2010

 

 

2011

 

 

2012

 

 

2013

 

 

2014

 

RR Donnelley

100

 

 

83.17

 

 

 

73.11

 

 

 

50.03

 

 

 

122.05

 

 

 

107.41

 

Standard & Poor's 500

100

 

 

115.06

 

 

 

117.49

 

 

 

136.30

 

 

 

180.44

 

 

 

205.14

 

Peer Group

100

 

 

109.00

 

 

 

113.73

 

 

 

138.67

 

 

 

215.33

 

 

 

241.52

 

Below are the specific companies included in the peer group.

 

*Peer Group Companies

 

 

 

A.H. Belo Corp.

 

McClatchy Co.

American Greetings(a)

 

McGraw-Hill Financial Inc.(c)

Consolidated Graphics Inc. (b)

 

Media General Inc.

Deluxe Corp.

 

Meredith Corp.

Scripps (E.W.) Co.

 

New York Times Co.

Gannett Co.

 

Scholastic Corp.

Graham Holdings Co.

 

John Wiley & Sons Co.

Journal Communications Inc.

 

 

(a)

American Greetings was included through August 9, 2013, when American Greetings went private.

(b)

Consolidated Graphics Inc. was included through January 31, 2014, when it was acquired by RR Donnelley.

(c)

Name change from the McGraw-Hill Companies

__________________

 

16


 

ITEM 6.   SELECTED FINANCIAL DATA

SELECTED FINANCIAL DATA

(in millions, except per share data)

 

 

2014

 

 

2013

 

 

2012

 

 

2011

 

 

2010

 

Net sales

$

11,603.4

 

 

$

10,480.3

 

 

$

10,221.9

 

 

$

10,611.0

 

 

$

10,018.9

 

Net earnings (loss) attributable to RR Donnelley common shareholders

 

117.4

 

 

 

211.2

 

 

 

(651.4

)

 

 

(122.6

)

 

 

221.7

 

Net earnings (loss) attributable to RR Donnelley

   common shareholders per diluted share

 

0.59

 

 

 

1.15

 

 

 

(3.61

)

 

 

(0.63

)

 

 

1.06

 

Total assets

 

7,639.3

 

 

 

7,238.2

 

 

 

7,262.7

 

 

 

8,281.7

 

 

 

9,083.2

 

Long-term debt

 

3,429.1

 

 

 

3,587.0

 

 

 

3,420.2

 

 

 

3,416.8

 

 

 

3,398.6

 

Cash dividends per common share

 

1.04

 

 

 

1.04

 

 

 

1.04

 

 

 

1.04

 

 

 

1.04

 

Reflects results of acquired businesses from the relevant acquisition dates.

 

Includes the following significant items:

·

For 2014: Pre-tax restructuring, impairment and other charges of $133.7 million ($97.0 million after-tax), $95.7 million pre-tax settlement charges ($58.4 million after-tax) on lump-sum pension settlement payments, $77.1 million pre-tax loss ($49.8 million after-tax) on the repurchases of $361.1 million of senior notes, $18.4 million pre-tax loss ($13.8 million after-tax) on the currency remeasurement in Venezuela, pre-tax loss of $16.4 million ($14.2 million after-tax) as a result of the bankruptcy liquidation of RRDA, a subsidiary of RR Donnelley, pre-tax charges of $14.3 million ($9.1 million after-tax) for inventory purchase accounting adjustments for Consolidated Graphics and Esselte, $10.4 million net pre-tax gain ($6.4 million after-tax) on the sale of Journalism Online and GRES, pre-tax gain of $9.5 million ($9.5 million after-tax) related to the acquisition of Esselte, $15.2 million tax benefit related to the decline in value of an entity within the Strategic Services segment, pre-tax charges of $8.6 million ($6.9 million after-tax) for acquisition related expenses, a pre-tax gain of $3.0 million ($1.9 million after-tax) from the sale of the Company’s shares of a previously impaired equity investment and a pre-tax loss of $1.3 million ($0.8 million after-tax) from the impairment of an equity investment;

·

For 2013: Pre-tax restructuring, impairment and other charges of $133.5 million ($88.2 million after-tax), $81.9 million pre-tax loss ($53.9 million after-tax) on the repurchases of $753.7 million of senior notes, $58.5 million income tax benefit related to the decline in value and reorganization of certain entities within the Publishing and Retail Services segment and a $7.2 million benefit for previously unrecognized tax benefits related to the expected resolution of certain federal tax matters, pre-tax loss of $17.9 million ($12.3 million after-tax) on the disposal of the MRM France direct mail business in the International segment, pre-tax charges of $5.9 million ($5.2 million after-tax) for acquisition-related expenses, pre-tax impairment loss on equity investments of $5.5 million ($3.6 million after-tax) and a $3.2 million pre-tax loss ($2.0 million after-tax) on the currency devaluation in Venezuela;

·

For 2012: Pre-tax restructuring, impairment and other charges of $1,118.5 million ($981.9 million after-tax), $16.1 million pre-tax loss ($10.6 million after-tax) on the repurchases of $441.8 million of senior notes and termination of the Company’s previous $1.75 billion unsecured revolving credit agreement (the “Previous Credit Agreement”) which was due to expire on December 17, 2013, $4.8 million net benefit from income tax adjustments including the recognition of $26.1 million of previously unrecognized tax benefits due to the resolution of certain U.S. federal uncertain tax positions and a $22.4 million benefit related to the decline in value and reorganization of certain entities within the International segment, partially offset by a valuation allowance provision of $32.7 million on certain deferred tax assets in Latin America and an $11.0 million provision related to certain foreign earnings no longer considered to be permanently reinvested, $4.1 million pre-tax impairment loss ($2.6 million after-tax) on an equity investment, $3.7 million pre-tax gain ($2.8 million after-tax) on pension curtailment and pre-tax charges of $2.5 million ($2.2 million after-tax) for acquisition-related expenses;

·

For 2011: Pre-tax restructuring, impairment and other charges of $667.8 million ($532.8 million after-tax), $74.8 million recognition of income tax benefits due to the expiration of U.S. federal statutes of limitations for certain years, $69.9 million pre-tax loss ($44.1 million after-tax) on the repurchases of $427.8 million of senior notes, pre-tax gain on pension curtailment of $38.7 million ($24.3 million after-tax), $15.3 million of pre-tax expense ($9.7 million after-tax) for contingent compensation earned by the prior owners of an acquired business, $9.8 million pre-tax gain ($9.5 million after-tax) on the Helium investment and pre-tax charges of $2.2 million ($2.0 million after-tax) for acquisition-related expenses; and

·

For 2010: Pre-tax restructuring, impairment and other charges of $157.9 million ($130.0 million after-tax), pre-tax charges of $13.5 million ($11.8 million after-tax) for acquisition-related expenses, $8.9 million pre-tax loss ($8.1 million after-tax) on the currency devaluation in Venezuela, including an increase in loss attributable to noncontrolling interests of $3.6 million, and a pre-tax $1.1 million write-down ($0.7 million after-tax) of affordable housing investments.

 

17


 

ITEM 7.

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

The following discussion of RR Donnelley’s financial condition and results of operations should be read together with the consolidated financial statements and notes to those statements included in Item 15 of Part IV of this Annual Report on Form 10-K.

Business

For a description of the Company’s business, segments and product and service offerings, see Item 1, Business, of Part I of this Annual Report on Form 10-K.

The Company separately reports its net sales, related costs of sales and gross profit for its product and service offerings. The Company’s product offerings primarily consist of magazines, catalogs, retail inserts, commercial and digital print, books, financial print, statement printing, direct mail, labels, office products, packaging, forms, manuals and other related products procured through the Company’s print management offering and directories. The Company’s service offerings primarily consist of logistics, EDGAR-related and eXtensible Business Reporting Language (“XBRL”) financial services, certain business outsourcing services and digital and creative solutions.

Executive Overview

2014 OVERVIEW

Net sales increased by 10.7% in 2014 compared to 2013, including a $47.8 million, or 0.4%, decrease due to changes in foreign exchange rates. The net sales increase was primarily due to the acquisitions of Consolidated Graphics and Esselte. On a pro forma basis, the Company’s net sales decreased by approximately 0.5% (see Note 2, Acquisitions and Dispositions, to the Consolidated Financial Statements). The net sales decrease on a pro forma basis was primarily due to price pressures, volume declines in the Publishing and Retail Services segment, the impact of dispositions in the International segment and decreases in pass-through paper sales in the Publishing and Retail Services segment, partially offset by increased volume in the Strategic Services and International segments.

The Company made significant progress in the integration of Consolidated Graphics and Esselte during the year ended December 31, 2014. Restructuring actions to eliminate duplicate facilities and personnel have been implemented throughout the affected operations. Along with the Company’s continuing focus on productivity improvement, these actions are expected to result in significant cost savings. In addition, the Company has benefited from an enhanced ability to serve local print markets and broader product and service offerings as a result of these acquisitions.

Net cash provided by operating activities for the year ended December 31, 2014 was $722.7 million as compared to $694.8 million for the year ended December 31, 2013. The increase in net cash provided by operating activities reflected timing of supplier payments and cash collections, partially offset by an increase in pension and other postretirement benefits plan contributions and higher payments in 2014 related to 2013 incentive compensation.

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

18


 

2014 Financial Performance

The changes in the Company’s income from operations, operating margin, net earnings attributable to RR Donnelley common shareholders and net earnings attributable to RR Donnelley common shareholders per diluted share for the year ended December 31, 2014, from the year ended December 31, 2013, were due to the following:

 

 

Income from Operations

 

 

Operating Margin

 

 

Net Earnings Attributable to RR Donnelley Common Shareholders

 

 

Net Earnings Attributable to RR Donnelley Shareholders Per Diluted Share

 

 

(in millions, except margin and per share data)

 

For the year ended December 31, 2013

$

579.7

 

 

 

5.5

%

 

$

211.2

 

 

$

1.15

 

2014 restructuring, impairment and other charges - net

 

(133.7

)

 

 

(1.2

%)

 

 

(97.0

)

 

 

(0.49

)

2013 restructuring, impairment and other charges - net

 

133.5

 

 

 

1.3

%

 

 

88.2

 

 

 

0.48

 

Acquisition-related expenses

 

(2.7

)

 

 

0.0

%

 

 

(1.7

)

 

 

 

Pension settlement charges

 

(95.7

)

 

 

(0.8

%)

 

 

(58.4

)

 

 

(0.29

)

Purchase accounting inventory adjustments

 

(14.3

)

 

 

(0.1

%)

 

 

(9.1

)

 

 

(0.05

)

Net gain on disposal of businesses

 

 

 

 

 

 

 

18.7

 

 

 

0.10

 

Loss on bankruptcy of subsidiary

 

 

 

 

 

 

 

(14.2

)

 

 

(0.07

)

Gain on bargain purchase

 

 

 

 

 

 

 

9.5

 

 

 

0.05

 

Venezuela currency remeasurement

 

 

 

 

 

 

 

(7.2

)

 

 

(0.03

)

Net gain on investments

 

 

 

 

 

 

 

4.7

 

 

 

0.03

 

Loss on debt extinguishment

 

 

 

 

 

 

 

4.1

 

 

 

0.04

 

Income tax adjustments

 

 

 

 

 

 

 

(50.5

)

 

 

(0.28

)

Operations

 

49.1

 

 

 

(0.3

%)

 

 

19.1

 

 

 

(0.05

)

For the year ended December 31, 2014

$

515.9

 

 

 

4.4

%

 

$

117.4

 

 

$

0.59

 

2014 restructuring, impairment and other charges - net: included $35.5 million for other estimated charges related to the decision to withdraw from certain multi-employer pension plans serving facilities that are currently operating; $30.3 million for employee termination costs; $20.8 million of lease termination and other restructuring costs, including charges related to multi-employer pension plan withdrawal obligations as a result of facility closures; $18.1 million for the impairment of goodwill in the magazines, catalogs and retail inserts reporting unit; $14.0 million for impairment of other long-lived assets, primarily for buildings and machinery and equipment associated with facility closures; $13.6 million for the impairment of acquired customer relationship intangible assets; and $1.4 million for the impairment of acquired tradenames.

2013 restructuring, impairment and other charges—net: included pre-tax charges of $40.4 million for employee termination costs primarily related to the closing of two manufacturing facilities within the Publishing and Retail Services segment and one manufacturing facility within the Variable Print segment and the reorganization of certain operations; $38.4 million for other estimated charges related to the decision to partially withdraw from certain multi-employer pension plans; $33.8 million of lease termination and other restructuring costs, of which $14.7 million related to multi-employer pension plan withdrawal charges primarily attributable to manufacturing facility closures; $17.6 million for impairment of other long-lived assets, primarily for buildings and machinery and equipment associated with facility closures and charges of $3.3 million for the impairment of other intangible assets in the financial reporting unit within the Strategic Services segment.

Acquisition-related expenses: included pre-tax charges of $8.6 million ($6.9 million after-tax) related to legal, accounting and other expenses for the year ended December 31, 2014 associated with completed or contemplated acquisitions. For the year ended December 31, 2013, these pre-tax charges were $5.9 million ($5.2 million after-tax).

Pension settlement charges: included pre-tax charges of $95.7 million ($58.4 million after-tax) for the year ended December 31, 2014, related to lump-sum pension settlement payments.

Purchase accounting inventory adjustments: included pre-tax charges of $14.3 million ($9.1 million after-tax) for the year ended December 31, 2014 as a result of inventory purchase accounting adjustments for Consolidated Graphics and Esselte.

Net gain on disposal of businesses: included a pre-tax gain on the sale of Journalism Online of $11.2 million ($6.9 million after-tax) offset by a pre-tax loss on the sale of GRES of $0.8 million ($0.5 million after-tax) for the year ended December 31, 2014. The year ended December 31, 2013 included a pre-tax loss on the disposal of the MRM France direct mail business in the International segment of $17.9 million ($12.3 million after-tax).

Loss on bankruptcy of subsidiary: included a pre-tax loss of $16.4 million ($14.2 million after-tax) for the year ended December 31, 2014 as a result of the bankruptcy liquidation of RRDA, a subsidiary of RR Donnelley.

Gain on bargain purchase: acquisition of Esselte resulted in a pre-tax gain of $9.5 million ($9.5 million after-tax) for the year ended December 31, 2014.

19


 

Venezuela currency remeasurement: currency remeasurement in Venezuela resulted in a pre-tax loss, net of foreign exchange gains, of $18.4 million ($13.8 million after-tax), of which $5.6 million was included in loss attributable to noncontrolling interests for the year ended December 31, 2014. For the year ended December 31, 2013, the currency devaluation in Venezuela resulted in a pre-tax loss of $3.2 million ($2.0 million after-tax), of which $1.0 million was included in income attributable to noncontrolling interests.

Net gain on investments: pre-tax gain of $3.0 million ($1.9 million after-tax) resulting from the sale of the Company’s shares of a previously impaired equity investment offset by a pre-tax loss of $1.3 million ($0.8 million after-tax) from the impairment of an equity investment for the year ended December 31, 2014 and impairment losses on equity investments of $5.5 million ($3.6 million after-tax) for the year ended December 31, 2013.

Loss on debt extinguishment: included a pre-tax loss of $77.1 million ($49.8 million after-tax) for the year ended December 31, 2014, related to the premiums paid, unamortized debt issuance costs and other expenses due to the repurchase of $211.1 million of the 8.25% senior notes due March 15, 2019, $100.0 million of the 7.25% senior notes due May 15, 2018 and $50.0 million of the 7.625% senior notes due June 15, 2020. For the year ended December 31, 2013, a pre-tax loss of $81.9 million ($53.9 million after-tax) was recognized related to the premiums paid, unamortized debt issuance costs and other expenses due to the repurchase of $273.5 million of the 6.125% senior notes due January 15, 2017, $250.0 million of the 7.25% senior notes due May 15, 2018, $130.2 million of the 8.60% senior notes due August 15, 2016 and $100.0 million of the 5.50% senior notes due May 15, 2015.

Income tax adjustments: for the year ended December 31, 2014, income tax adjustments include a tax benefit related to the decline in value of an entity within the Strategic Services segment, of $15.2 million. For the year ended December 31, 2013, income tax adjustments included the recognition of a $58.5 million benefit related to the decline in value and reorganization of certain entities within the Publishing and Retail Services segment and a $7.2 million benefit for previously unrecognized tax benefits related to the expected resolution of certain federal tax matters for the year ended December 31, 2013.

Operations: reflected price pressures primarily in the International, Publishing and Retail Services and Variable Print segments, wage and other inflation in the International segment, an increase in depreciation and amortization expense and volume declines in the Publishing and Retail Services and Variable Print segments, partially offset by increases due to the acquisitions of Consolidated Graphics and Esselte, cost control initiatives, lower healthcare costs and increased volume in the Strategic Services segment. See further details in the review of operating results by segment that follows below.

OUTLOOK

Vision and Strategy

RR Donnelley’s vision is to improve on its existing position as a global provider of integrated communications by providing its customers with the highest quality products and services. The Company offers a wide array of communications products and services, including print, which provide differentiated solutions for its customers. The Company works with its customers to create, manage, deliver and optimize their multi-channel communications strategies. The Company has and will continue to develop and expand its creative and design, content management, digital and print production, supply chain management and distribution services to address its customers’ evolving needs while supporting the strategic objective of becoming a leading global provider of integrated communication services.

The Company’s long-term strategy is focused on maximizing long-term shareholder value by building on its core strategic advantages, which are summarized below, along with more specific areas of focus.

 

Core Strategic Advantages

  

Areas of Focus

Industry-Leading Scale

  

—Largest player in a highly fragmented market

—Drive cost advantage from platform flexibility and economies of scale in procurement, production and distribution

 

 

Breadth and Depth of Product and Service Offerings

  

 

—Strong customer relationships; single-source provider

—Broadest offering  of industry-leading products and services

—Use technology to continue to increase integration and customer value

—Differentiate front-end logistics capabilities

 

 

Attractive Financial Profile

  

 

—Strong cash flow generation

—Achieve a gross leverage ratio within the targeted range

—Limit annual debt maturities

—Prudent deployment of capital

—Disciplined approach to mergers and acquisitions

20


 

As the largest player in the highly-fragmented market for print and related services, the Company enjoys scale advantages in procurement, production, and distribution. Management believes productivity improvement and cost reduction are critical to the Company’s continued competitiveness, and the flexibility of its platform enhances the value the Company delivers to its customers. The Company continues to implement strategic initiatives across all platforms to reduce its overall cost structure and enhance productivity, including restructuring, consolidation, reorganization and integration of operations, and streamlining of administrative and support activities.

The Company’s global platform provides differentiated solutions for its customers through its broad range of complementary print-related services, strong logistics capabilities, and its innovative leadership in both conventional and digital technologies. The Company is focusing its information technology efforts on projects that facilitate integration and make it easier for customers to manage their full range of communication needs. The Company is also working to broaden customer relationships by more fully integrating its sales efforts.

The Company seeks to deploy its capital using a balanced approach in order to ensure financial flexibility and provide returns to shareholders. Priorities for capital deployment, over time, include principal and interest payments on debt obligations, distributions to shareholders, targeted acquisitions and capital expenditures. The Company believes that a strong financial condition is important to customers focused on establishing or growing long-term relationships with a stable provider of integrated communications. The Company also expects to make targeted acquisitions that extend its capabilities, drive cost savings and reduce future capital spending needs. The Company’s acquisitions of Consolidated Graphics and Esselte have and are expected to continue to enhance existing capabilities and improve the ability to serve customers.

The Company uses several key indicators to gauge progress toward achieving these objectives. These indicators include organic sales growth, operating margins, cash flow from operations and capital expenditures. The Company targets long-term net sales growth at or above industry levels, while managing operating margins by achieving productivity improvements that offset the impact of price declines and cost inflation. Cash flows from operations are expected to be stable over time, however, cash flows from operations in any given year can be significantly impacted by the timing of non-recurring or infrequent receipts and expenditures, the level of required pension and other postretirement benefits plan contributions and the impact of working capital management efforts.

The Company faces many challenges and risks as a result of competing in highly competitive global markets. Refer to Item 1A, Risk Factors, of Part I of this Annual Report on Form 10-K for further discussion.

2015 Outlook

In 2015, the Company expects net sales to increase over 2014 driven by the acquisitions of Consolidated Graphics, Esselte and MultiCorpora, as well as organic growth across most product and service offerings in the Strategic Services, International and Variable Print segments that are expected to more than offset the anticipated continuing volume declines and price pressures in the Publishing and Retail Services segment. The sales growth in the International segment will be partially offset by the negative impact of fluctuations in foreign exchange rates. The highly competitive market conditions and unused industry capacity will continue to put price pressure on both transactional work and contract renewals across all segments. The Company’s outlook assumes that the U.S. and European economies will grow modestly in 2015, with a decline in growth expected in developing countries and China. The Company will continue to leverage its customer relationships in order to provide a larger share of its customers’ communications needs. In addition, the Company expects to continue cost control and productivity initiatives, including selected facility consolidations.

The Company initiated several restructuring actions in 2014 and 2013 to further reduce the Company’s overall cost structure. These restructuring actions included the closures of nine manufacturing facilities during 2014 as well as the reorganization of certain operations. These and future cost reduction actions are expected to have a positive impact on operating earnings in 2015 and in future years. In addition, the Company expects to identify other cost reduction opportunities and possibly take further actions in 2015, which may result in significant additional restructuring charges. These restructuring actions will be funded by cash generated from operations and cash on hand or, if necessary, by utilizing the Company’s credit facilities.

Publishing and Retail Services

Net sales in the Publishing and Retail Services segment are expected to decrease in 2015 driven by volume declines and price pressures, partially offset by an increase in pass-through paper sales. Net sales in magazines, catalogs and retail inserts are expected to decline due to price reductions on major contract renewals and unfavorable mix. Lower volume is expected in magazines, due to an expected decrease in advertising spending and the recent increase in postage prices, and directories, due to the impact of electronic substitution. Net sales in educational books are expected to decline due to fewer major adoptions in 2015, a continued shift of state and local budgets to lower cost products and a shift in the college market to a digital base.

21


 

The Company expects operating income in the Publishing and Retail Services segment to decrease from 2014 as a result of lower volume and continued price pressures that will be partially offset by an improved cost structure from ongoing productivity efforts and lower depreciation and amortization expense.

Variable Print

Net sales in the Variable Print segment are expected to increase in 2015 driven by the acquisitions of Consolidated Graphics and Esselte as well as organic growth in certain products. Higher volume in in-store marketing materials and packaging is also expected in 2015 as well as continued volume growth in labels, filing products and binders. These increases are expected to be partially offset by the continued decline of forms and statement printing volume, due to the impact of electronic substitution.

Operating income for the Variable Print segment is expected to increase from 2014 due to the acquisitions of Consolidated Graphics and Esselte, including cost savings from synergies and other cost control initiatives, as well as organic growth in certain products as described above.

Strategic Services

Net sales in the Strategic Services segment are expected to increase from 2014 primarily due to higher logistics volume, largely driven by continuing growth in freight brokerage services and co-mail services. Net sales in logistics are expected to be negatively impacted by expected declines in fuel prices. Net sales in financial are expected to increase in 2015 as compared to 2014. Slight growth in capital markets transactions activity is currently expected in 2015, but the level of such activity across the full year will depend on continued favorable market conditions. An increase in compliance volume is also expected due to enhanced service offerings and targeted sales efforts. Net sales for digital and creative solutions and sourcing are expected to increase compared to 2014 due to higher volume.

Operating income in the Strategic Services segment is expected to increase in 2015 as compared to 2014 consistent with the expected organic sales growth described above as well as cost control initiatives, partially offset by continued increases in the cost of transportation.

International

Net sales in the International segment are expected to increase from 2014 primarily driven by anticipated volume increases in Asia, Global Turnkey Solutions and business process outsourcing, as well as the impact of price inflation in Latin America. Fluctuations in foreign exchange rates are expected to negatively impact net sales in all reporting units with foreign currency denominated sales. Net sales in Asia are expected to increase due to volume growth in book export and labels, partially offset by price pressures. Higher net sales are expected in Global Turnkey Solutions due to volume increases from both new and existing customers. Business process outsourcing net sales are expected to increase due to higher volume in outsourcing services, transactional print, print management and creative services, partially offset by an unfavorable impact of changes in foreign exchange rates. A net sales decrease in Europe is expected primarily due to the unfavorable impact of foreign exchange rates, partially offset by increased volume in publishing and packaging and higher pass through paper sales. Net sales in Canada are expected to remain constant or slightly decrease as increases in labels and statement printing volume are expected to be offset by declines in commercial and digital print volume and price pressures.

Operating income in the International segment is expected to remain constant or slightly increase from 2014 as unfavorable mix, wage and other inflation in certain countries and price declines are expected to offset higher volume and cost control initiatives.

Other

Cash flows from operations in 2015 are expected to benefit from the expected decrease in pension and other postretirement benefits plan contributions, increased operating cash flow from the acquisitions of Consolidated Graphics and Esselte and improved profitability driven by organic net sales growth. The expected increases in cash flows are expected to be more than offset by higher cash tax payments and higher payments for incentive compensation. The Company expects capital expenditures to be in the range of $225 million to $250 million in 2015.

The Company’s pension and other postretirement benefits plans were underfunded by $610.4 million and $212.0 million, respectively, as of December 31, 2014, as reported on the Company’s Consolidated Balance Sheets and further described in Note 11, Retirement Plans, to the Consolidated Financial Statements. Governmental regulations for measuring pension plan funded status differ from those required under accounting principles generally accepted in the United States of America (“GAAP”) for financial statement preparation. Based on the plans’ regulatory funded status, required contributions in 2015 under all pension and other postretirement benefits plans are expected to be approximately $25.0 million to $30.0 million, which is a decrease compared to contributions made in 2014 of $41.9 million.

22


 

Significant Accounting Policies and Critical Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company’s most critical accounting policies are those that are most important to the portrayal of its financial condition and results of operations, and which require the Company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. The Company has identified the following as its most critical accounting policies and judgments. Although management believes that its estimates and assumptions are reasonable, they are based upon information available when they are made, and therefore, actual results may differ from these estimates under different assumptions or conditions.

Revenue Recognition

The Company recognizes revenue for the majority of its products upon the transfer of title and risk of ownership, which is generally upon shipment to the customer. Because substantially all of the Company’s products are customized, product returns are not significant; however, the Company accrues for the estimated amount of customer credits at the time of sale. Revenue from services is recognized as services are performed. Refer to Note 1, Basis of Presentation and Summary of Significant Accounting Policies, to the Consolidated Financial Statements for further discussion.

Certain revenues earned by the Company require significant judgment to determine if revenue should be recorded gross, as a principal, or net of related costs, as an agent. Billings for third-party shipping and handling costs as well as certain postage costs, primarily in the Company’s logistics operations, and out-of-pocket expenses are recorded gross. In the Company’s Global Turnkey Solutions operations, each contract is evaluated using various criteria to determine if revenue for components and other materials should be recognized on a gross or net basis. In general, these revenues are recognized on a gross basis if the Company has control over selecting vendors and pricing, is the primary obligor in the arrangement and bears credit risk and the risk of loss for inventory in its possession. Revenue from contracts that do not meet these criteria is recognized on a net basis. Many of the Company’s operations process materials, primarily paper, that may be supplied directly by customers or may be purchased by the Company and sold to customers. No revenue is recognized for customer-supplied paper, but revenues for Company-supplied paper are recognized on a gross basis. As a result, the Company’s reported sales and margins may be impacted by the mix of customer-supplied paper and Company-supplied paper.

Goodwill and Other Long-Lived Assets

The Company’s methodology for allocating the purchase price of acquisitions is based on established valuation techniques that reflect the consideration of a number of factors, including valuations performed by third-party appraisers when appropriate. Goodwill is measured as the excess of the cost of an acquired entity over the fair value assigned to identifiable assets acquired and liabilities assumed. Based on its current organization structure, the Company has identified nineteen reporting units for which cash flows are determinable and to which goodwill may be allocated. Goodwill is either assigned to a specific reporting unit or allocated between reporting units based on the relative excess fair value of each reporting unit.

The Company performs its goodwill impairment tests annually as of October 31, or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. The Company also performs an interim review for indicators of impairment each quarter to assess whether an interim impairment review is required for any reporting unit.  As part of its interim reviews, management analyzes potential changes in the value of individual reporting units based on each reporting unit’s operating results for the period compared to expected results as of the prior year’s annual impairment test. In addition, management considers how other key assumptions, including discount rates and expected long-term growth rates, used in the last annual impairment test, could be impacted by changes in market conditions and economic events. Based on these interim assessments, management concluded that as of the interim periods, no events or changes in circumstances indicated that it was more likely than not that the fair value for any reporting unit had declined below its carrying value.

As of October 31, 2014, twelve reporting units had goodwill. The books, directories, forms, sourcing, business process outsourcing, Latin America and Canada reporting units had no goodwill as of October 31, 2014. The reporting units with goodwill were reviewed for impairment using either a qualitative or quantitative assessment.

Qualitative Assessment for Impairment

For the financial, office products and labels reporting units, the Company performed a qualitative assessment to determine whether it was more likely than not that the fair values of the reporting units were less than their carrying values. In performing this analysis, the Company considered various factors, including the effect of market or industry changes and the reporting units’ actual results compared to projected results.

23


 

As part of the qualitative review of impairment, management analyzed the potential changes in fair value of the financial, office products and labels reporting units based on their operating results for the ten months ended October 31, 2014 compared to expected results. As of October 31, 2013, the fair value of the financial, office products and forms and labels reporting units under the Company’s previous organization structure, prior to the reorganization of the Company’s reportable segments in the fourth quarter of 2013 (the “Previous Organization Structure”), exceeded their carrying values by 138.8%, 15.4% and 116.2%, respectively, according to a valuation performed by a third-party appraisal firm. The 2014 acquisition of Esselte increased the fair value and carrying value of the office products reporting unit, however it did not add any incremental goodwill as the acquisition resulted in a bargain purchase recorded as a gain in the Consolidated Statement of Operations.   Management considered the expected synergies from the acquisition and the performance of the reporting unit since the acquisition as part of its qualitative review. In addition, management considered how other key assumptions used in the 2013 impairment test could be impacted by changes in market conditions and economic events.

Based on its qualitative assessment, management concluded that as of October 31, 2014, it was more likely than not that the fair values of the financial, office products and labels reporting units were greater than their carrying values. The goodwill balances of the financial, office products and labels reporting units were $448.0 million, $30.0 million and $7.2 million, respectively, as of October 31, 2014.

Quantitative Assessment for Impairment

For the remaining nine reporting units with goodwill, a two-step method was used for determining goodwill impairment. In the first step (“Step One”), the Company compared the estimated fair value of each reporting unit to its carrying value, including goodwill. If the carrying value of a reporting unit exceeded the estimated fair value, the second step (“Step Two”) is completed to determine the amount of the impairment charge. Step Two requires the allocation of the estimated fair value of the reporting unit to the assets, including any unrecognized intangible assets, and liabilities in a hypothetical purchase price allocation. Any remaining unallocated fair value represents the implied fair value of goodwill, which is compared to the corresponding carrying value of goodwill to compute the goodwill impairment charge.

As part of its impairment test for these reporting units, the Company engaged a third-party appraisal firm to assist in the Company’s determination of the estimated fair value. This determination included estimating the fair value using both the income and market approaches. The income approach requires management to estimate a number of factors for each reporting unit, including projected future operating results, economic projections, anticipated future cash flows, discount rates and the allocation of shared or corporate items. The market approach estimates fair value using comparable marketplace fair value data from within a comparable industry grouping. The Company weighted both the income and market approach equally to estimate the concluded fair value of each reporting unit.

The determination of fair value in Step One and the allocation of that value to individual assets and liabilities in Step Two, if necessary, 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. The allocation of fair value under Step Two requires several analyses to determine the fair value of assets and liabilities including, among others, trade names, customer relationships, and property, plant and equipment.

As a result of the 2014 annual goodwill impairment test, the Company recognized a total non-cash charge of $18.1 million for the impairment of goodwill in the magazines, catalogs and retail inserts reporting unit. The goodwill impairment charge resulted from reductions in the estimated fair value of the reporting unit based on lower expectations for future revenue, profitability and cash flows as compared to expectations as of the last annual goodwill impairment test. The lower expectations for the magazines, catalogs and retail inserts reporting unit were due to accelerating volume declines and increasing price pressures resulting from declining demand, primarily in catalogs and magazines.  Revenue and income from operations in the magazines, catalogs and retail inserts reporting unit for the year ended December 31, 2014 were lower than previous expectations due to volume declines and price pressures. The negative trends experienced in 2014 are expected to continue in future years. As of December 31, 2014, the magazines, catalogs and retail inserts reporting unit had no remaining goodwill.

Goodwill Impairment Assumptions

Although the Company believes its estimates of fair value are reasonable, actual financial results could differ from those estimates due to the inherent uncertainty involved in making such estimates. Changes in assumptions concerning future financial results or other underlying assumptions could have a significant impact on either the fair value of the reporting units, the amount of the goodwill impairment charge, or both. Future declines in the overall market value of the Company’s equity and debt securities may also result in a conclusion that the fair value of one or more reporting units has declined below its carrying value.

24


 

One measure of the sensitivity of the amount of goodwill impairment charges to key assumptions is the amount by which each reporting unit “passed” (fair value exceeds the carrying value) or “failed” (the carrying value exceeds fair value) Step One of the goodwill impairment test. Eight reporting units passed Step One, with fair values that exceeded the carrying values by between 24.8% and 195.1% of their respective estimated fair values. Relatively small changes in the Company’s key assumptions would not have resulted in any additional reporting units failing Step One.

Generally, changes in estimates of expected future cash flows would have a similar effect on the estimated fair value of the reporting unit. That is, a 1.0% decrease in estimated annual future cash flows would decrease the estimated fair value of the reporting unit by approximately 1.0%. The estimated long-term net sales growth rate can have a significant impact on the estimated future cash flows, and therefore, the fair value of each reporting unit. A 1.0% decrease in the long-term net sales growth rate would have resulted in no reporting units failing Step One of the goodwill impairment test. Of the other key assumptions that impact the estimated fair values, most reporting units have the greatest sensitivity to changes in the estimated discount rate. The estimated discount rates for the reporting units with operations primarily located in the U.S. ranged from 8.0% to 8.5% as of October 31, 2014. Estimated discount rates for reporting units with operations primarily in foreign locations ranged from 9.5% to 11.0%. A 1.0% increase in estimated discount rates would have resulted in no additional reporting units failing Step One. The Company believes that its estimates of future cash flows and discount rates are reasonable, but future changes in the underlying assumptions could differ due to the inherent uncertainty in making such estimates. Additionally, further price deterioration or lower volume could have a significant impact on the fair values of the reporting units.

Other Long-Lived Assets

The Company evaluates the recoverability of other long-lived assets, including property, plant and equipment and certain identifiable intangible assets, whenever events or changes in circumstances indicate that the carrying value of an asset or asset group may not be recoverable. The Company performs impairment tests of indefinite-lived intangible assets on an annual basis or more frequently in certain circumstances. Factors which could trigger an impairment review include significant underperformance relative to historical or projected future operating results, significant changes in the manner of use of the assets or the strategy for the overall business, a significant decrease in the market value of the assets or significant negative industry or economic trends. When the Company determines that the carrying value of long-lived assets may not be recoverable based upon the existence of one or more of the indicators, the assets are assessed for impairment based on the estimated future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. If the carrying value of an asset exceeds its estimated future undiscounted cash flows, an impairment loss is recorded for the excess of the asset’s carrying value over its fair value. During the year ended December 31, 2014, the Company recognized non-cash impairment charges of $7.8 million, $4.1 million and $1.7 million related to the impairment of certain acquired customer relationship intangible assets in the Canada reporting unit within the International segment, the commercial and digital print reporting unit within the Variable Print segment and the financial reporting unit within the Strategic Services segment, respectively. The impairment of the customer relationship intangible assets resulted from a decline in expected future revenue and certain customer losses in the Canada reporting unit, the loss of certain customers in the commercial and digital print reporting unit and a decline in Latin America’s expected future capital markets transactions revenue in the financial reporting unit. During the year ended December 31, 2014, the Company also recognized non-cash impairment charges of $1.4 million related to acquired tradenames in the commercial and digital print reporting unit within the Variable Print segment. In addition, the Company recognized non-cash impairment charges of $17.9 million during the year ended December 31, 2014, related to land, buildings, machinery and equipment and leasehold improvements, primarily as a result of restructuring actions.

Pension and Other Postretirement Benefits Plans

The Company records annual income and expense amounts relating to its pension and other postretirement benefits plans based on calculations which include various actuarial assumptions including discount rates, expected long-term rates of return, turnover rates, health care cost trend rates and compensation increases. The Company reviews its actuarial assumptions on an annual basis as of December 31 (or more frequently if a significant event requiring remeasurement occurs) and modifies the assumptions based on current rates and trends when it is appropriate to do so. The effects of modifications are recognized immediately on the Consolidated Balance Sheet, but are generally amortized into operating earnings over future periods, with the deferred amount recorded in accumulated other comprehensive income (loss). During the year ended December 31, 2014, the Company adopted the Society of Actuaries RP-2014 mortality tables which were used in the calculation of the Company’s U.S pension obligations. The Company also adopted updated mortality tables for the Canadian pension plans. The new mortality tables increased the expected life of plan participants, extending the length of time that payments may be required and increasing the plans’ total expected benefit payments. The updated mortality assumptions increased the benefit obligations for the U.S and Canadian pension plans by approximately $310.0 million as of December 31, 2014. The Company believes that the assumptions utilized in recording its obligations under its plans are reasonable based on its experience, market conditions and input from its actuaries and investment advisors. The Company determines its assumption for the discount rate to be used for purposes of computing pension and other postretirement benefits plan obligations based on an index of high-quality corporate bond yields and matched-funding yield curve analysis. The discount rates for pension benefits at December 31, 2014 and 2013 were 4.1% and 5.0%, respectively. The discount rates for other postretirement benefits plans at December 31, 2014 and 2013 were 3.9% and 4.5%, respectively.

25


 

A one-percentage point change in the discount rates at December 31, 2014 would have the following effects on the accumulated benefit obligation and projected benefit obligation:

Pension Plans

 

 

1.0%

Increase

 

 

1.0%

Decrease

 

 

(in millions)

 

Accumulated benefit obligation

$

(523.7

)

 

$

661.7

 

Projected benefit obligation

 

(526.2

)

 

 

669.2

 

Other Postretirement Benefits Plans

 

 

1.0%

Increase

 

 

1.0%

Decrease

 

 

(in millions)

 

Accumulated benefit obligation

$

(42.4

)

 

$

51.1

 

 

The Company’s U.S. pension plans are frozen and the Company has transitioned to a risk management approach for its U.S. pension plan assets. The overall investment objective of this approach is to further reduce the risk of significant decreases in the plan’s funded status by allocating a larger portion of the plan’s assets to investments expected to hedge the impact of interest rate risks on the plan’s obligation. Over time, the target asset allocation percentage for the pension plan is expected to decrease for equity and other “return seeking” investments and increase for fixed income and other “hedging” investments. The assumed long-term rate of return for plan assets, which is determined annually, is likely to decrease as the asset allocation shifts over time.

The expected long-term rate of return for plan assets is based upon many factors including expected asset allocations, historical asset returns, current and expected future market conditions and risk. In addition, the Company considered the impact of the current interest rate environment on the expected long-term rate of return for certain asset classes, particularly fixed income. The target asset allocation percentage for the primary U.S. pension plan was approximately 60.0% for return seeking investments and approximately 40.0% for hedging investments. The expected long-term rate of return on plan assets assumption used to calculate net pension and other postretirement benefits plan expense in 2014 was 7.75% and 7.25%, respectively, for the Company’s major U.S. pension and other postretirement benefits plans. The expected long-term rate of return on plan assets assumption that will be used to calculate net pension and other postretirement benefits plan expense in 2015 is 7.50% and 7.25%, respectively, for the Company’s major U.S. pension and other postretirement benefits plans.

A 0.25% change in the expected long-term rate on plan assets at December 31, 2014 would have the following effects on 2014 and 2015 pension and other postretirement benefit plan (income)/expense:

 

 

0.25%

Increase

 

 

0.25%

Decrease

 

 

(in millions)

 

2014

 

 

 

 

 

 

 

U.S. pension plans

$

(7.3

)

 

$

7.3

 

Other postretirement benefit plans

 

(0.4

)

 

 

0.4

 

 

 

 

 

 

 

 

 

2015

 

 

 

 

 

 

 

U.S. pension plans

$

(7.5

)

 

$

7.5

 

Other postretirement benefit plans

 

(0.5

)

 

 

0.5

 

The Company also maintains several pension plans in other international locations. The expected returns on plan assets and discount rates for those plans are determined based on each plan’s investment approach, local interest rates and plan participant profiles.

26


 

Accounting for Income Taxes

Significant judgment is required in determining the provision for income taxes and related accruals, deferred tax assets and liabilities and any valuation allowance recorded against deferred tax assets. In the ordinary course of business, there are transactions and calculations where the ultimate tax outcome is uncertain. Additionally, the Company’s tax returns are subject to audit by various U.S. and foreign tax authorities. The Company recognizes a tax position in its financial statements when it is more likely than not (i.e., a likelihood of more than fifty percent) that the position would be sustained upon examination by tax authorities. This recognized tax position is then measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Although management believes that its estimates are reasonable, the final outcome of uncertain tax positions may be materially different from that which is reflected in the Company’s historical financial statements.

The Company has recorded deferred tax assets related to future deductible items, including domestic and foreign tax loss and credit carryforwards. The Company evaluates these deferred tax assets by tax jurisdiction. The utilization of these tax assets is limited by the amount of taxable income expected to be generated within the allowable carryforward period and other factors. Accordingly, management has provided a valuation allowance to reduce certain of these deferred tax assets when management has concluded that, based on the weight of available evidence, it is more likely than not that the deferred tax assets will not be fully realized. If actual results differ from these estimates, or the estimates are adjusted in future periods, adjustments to the valuation allowance might need to be recorded. As of December 31, 2014 and 2013, valuation allowances of $257.8 million and $268.2 million, respectively, were recorded in the Company’s Consolidated Balance Sheets.

Deferred U.S. income taxes and foreign taxes are not provided on the excess of the investment value for financial reporting over the tax basis of investments in those foreign subsidiaries for which such excess is considered to be permanently reinvested in those operations. The Company has recognized deferred tax liabilities of $2.6 million as of December 31, 2014 related to local taxes on certain foreign earnings that are not considered to be permanently reinvested. Management regularly evaluates whether foreign earnings are expected to be permanently reinvested. This evaluation requires judgment about the future operating and liquidity needs of the Company’s foreign subsidiaries. Changes in economic and business conditions, foreign or U.S. tax laws, or the Company’s financial situation could result in changes to these judgments and the need to record additional tax liabilities.

Commitments and Contingencies

The Company is subject to lawsuits, investigations and other claims related to environmental, employment, commercial and other matters, as well as preference claims related to amounts received from customers and others prior to their seeking bankruptcy protection. Periodically, the Company reviews the status of each significant matter and assesses potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and the related liability is estimable, the Company accrues a liability for the estimated loss. Because of uncertainties related to these matters, accruals are based on the best information available at the time. As additional information becomes available, the Company reassesses the related potential liability and may revise its estimates.

With respect to claims made under the Company’s third-party insurance for workers’ compensation, automobile and general liability, the Company is responsible for the payment of claims below and above insured limits, and consulting actuaries are utilized to assist the Company in estimating the obligation associated with any such incurred losses, which are recorded in accrued and other non-current liabilities. Historical loss development factors for both the Company and the industry are utilized to project the future development of such incurred losses, and these amounts are adjusted based upon actual claims experience and settlements. If actual experience of claims development is significantly different from these estimates, an adjustment in future periods may be required. Expected recoveries of such losses are recorded in other current and other non-current assets.

Restructuring

The Company records restructuring charges when liabilities are incurred as part of a plan approved by management with the appropriate level of authority for the elimination of duplicative functions, the closure of facilities, or the exit of a line of business, generally in order to reduce the Company’s overall cost structure. Total restructuring charges were $51.1 million for the year ended December 31, 2014. The restructuring liabilities might change in future periods based on several factors that could differ from original estimates and assumptions. These include, but are not limited to: contract settlements on terms different than originally expected; ability to sublease properties based on market conditions at rates or on timelines different than originally estimated; or changes to original plans as a result of acquisitions. Such changes might result in reversals of or additions to restructuring charges that could affect amounts reported in the Consolidated Statements of Operations of future periods.

27


 

Accounts Receivable

The Company maintains an allowance for doubtful accounts receivable, which is reviewed for estimated losses resulting from the inability of its customers to make required payments for products and services. Specific customer provisions are made when a review of significant outstanding amounts, utilizing information about customer creditworthiness and current economic trends, indicates that collection is doubtful. In addition, provisions are made at differing rates, based upon the age of the receivable and the Company’s past collection experience. The allowance for doubtful accounts receivable was $44.3 million at December 31, 2014. The Company’s estimates of the recoverability of accounts receivable could change, and additional changes to the allowance could be necessary in the future, if any major customer’s creditworthiness deteriorates or actual defaults are higher than the Company’s historical experience.

Share-Based Compensation

The amount of expense recognized for share-based awards is determined by the Company’s estimates of several factors, including expected performance compared to target for performance share units, future forfeitures of awards, expected volatility of the Company’s stock and the average life of options prior to expiration. The total compensation expense related to all share-based compensation plans was $17.7 million for the year ended December 31, 2014. See Note 17, Stock and Incentive Programs for Employees, to the Consolidated Financial Statements for further discussion.

Off-Balance Sheet Arrangements

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

Financial Review

In the financial review that follows, the Company discusses its consolidated results of operations, financial position, cash flows and certain other information. This discussion should be read in conjunction with the Company’s Consolidated Financial Statements and related notes that begin on page F-1.

RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2014 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 2013

The following table shows the results of operations for the years ended December 31, 2014 and 2013, which reflects the results of acquired businesses from the relevant acquisition dates:

 

 

2014

 

 

2013

 

 

$ Change

 

 

% Change

 

 

(in millions, except percentages)

 

Products net sales

$

9,715.2

 

 

$

8,765.8

 

 

$

949.4

 

 

 

10.8

%

Services net sales

 

1,888.2

 

 

 

1,714.5

 

 

 

173.7

 

 

 

10.1

%

Total net sales

 

11,603.4

 

 

 

10,480.3

 

 

 

1,123.1

 

 

 

10.7

%

Products cost of sales (exclusive of depreciation and amortization)

 

7,581.6

 

 

 

6,816.9

 

 

 

764.7

 

 

 

11.2

%

Services cost of sales (exclusive of depreciation and amortization)

 

1,471.2

 

 

 

1,332.9

 

 

 

138.3

 

 

 

10.4

%

Total cost of sales

 

9,052.8

 

 

 

8,149.8

 

 

 

903.0

 

 

 

11.1

%

Products gross profit

 

2,133.6

 

 

 

1,948.9

 

 

 

184.7

 

 

 

9.5

%

Services gross profit

 

417.0

 

 

 

381.6

 

 

 

35.4

 

 

 

9.3

%

Total gross profit

 

2,550.6

 

 

 

2,330.5

 

 

 

220.1

 

 

 

9.4

%

Selling, general and administrative expenses (exclusive of depreciation

   and amortization)

 

1,427.0

 

 

 

1,181.5

 

 

 

245.5

 

 

 

20.8

%

Restructuring, impairment and other charges-net

 

133.7

 

 

 

133.5

 

 

 

0.2

 

 

 

0.1

%

Depreciation and amortization

 

474.0

 

 

 

435.8

 

 

 

38.2

 

 

 

8.8

%

Income from operations

$

515.9

 

 

$

579.7

 

 

$

(63.8

)

 

 

(11.0

%)

Net sales of products for the year ended December 31, 2014 increased $949.4 million, or 10.8%, to $9,715.2 million versus the same period in the prior year, including a $51.0 million, or 0.6%, decrease due to changes in foreign exchange rates. Net sales of products increased due to the acquisitions of Consolidated Graphics and Esselte and price increases driven by inflation in Latin America within the International segment, partially offset by lower volume in the Publishing and Retail Services segment and price pressures in the International, Publishing and Retail Services and Variable Print segments.

28


 

Net sales from services for the year ended December 31, 2014 increased $173.7 million, or 10.1%, to $1,888.2 million versus the same period in the prior year, including a $3.2 million, or 0.2%, increase due to changes in foreign exchange rates. The increase in net sales from services was primarily due to higher volume in the Strategic Services segment, driven by the logistics and financial reporting units. These increases were partially offset by the disposition of GRES, previously included in the International segment, in the first quarter of 2014.

Products gross profit increased $184.7 million to $2,133.6 million for the year ended December 31, 2014 versus the same period in the prior year due to the acquisitions of Consolidated Graphics and Esselte and cost control initiatives, partially offset by price pressures, volume declines in the Publishing and Retail Services segment and wage and other inflation in the International segment. Products gross margin decreased slightly from 22.2% to 22.0% reflecting price pressures, wage and other inflation in the International segment and the impact of inventory purchase accounting adjustments, mostly offset by cost control initiatives.

Services gross profit increased $35.4 million to $417.0 million for the year ended December 31, 2014 versus the same period in the prior year due to higher volume in the Strategic Services segment driven by the logistics and financial reporting units.   These increases were partially offset by increased transportation costs. Services gross margin decreased slightly from 22.3% to 22.1%, reflecting increased transportation costs, mostly offset by favorable mix in the Strategic Services segment.

Selling, general and administrative expenses increased $245.5 million to $1,427.0 million, and from 11.3% to 12.3% as a percentage of net sales, for the year ended December 31, 2014 versus the same period in the prior year reflecting increased costs as a result of the Consolidated Graphics and Esselte acquisitions, pension settlement charges of $95.7 million and wage and other inflation in the International segment, partially offset by cost control initiatives.

For the year ended December 31, 2014, the Company recorded net restructuring, impairment and other charges of $133.7 million compared to $133.5 million in the same period in 2013. In 2014, these charges included $35.5 million of other charges as a result of its decision to withdraw from certain multi-employer pension plans serving facilities that are currently operating. Additionally, the Company incurred $30.3 million of employee termination costs for 654 employees, of whom 633 were terminated as of December 31, 2014. These charges were the result of the integration of Consolidated Graphics, including the closure of seven 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. The Company also recorded lease termination and other restructuring charges of $20.8 million for the year ended December 31, 2014, including charges related to multi-employer pension plan withdrawal obligations as a result of facility closures. In addition, the Company recorded $18.1 million of non-cash charges for the impairment of goodwill in the magazines, catalogs and retail inserts reporting unit within the Publishing and Retail Services segment. The goodwill impairment charge resulted from reductions in the estimated fair value of the reporting unit based on lower expectations for future revenue, profitability and cash flows as compared to expectations as of the last annual goodwill impairment test. The lower expectations were due to an expected increase in volume declines and increasing price pressures resulting from declining demand, primarily in catalogs and magazines.  Revenue and income from operations in the magazines, catalogs and retail inserts reporting unit for the year ended December 31, 2014 were lower than previous expectations due to volume declines and price pressures. The negative trends experienced in 2014 are expected to continue in future years. The Company also recorded non-cash charges of $7.8 million, $4.1 million and $1.7 million related to the impairment of acquired customer relationship intangible assets in the Canada reporting unit within the International segment, the commercial and digital print reporting unit within the Variable Print segment and the financial reporting unit within the Strategic Services segment, respectively, for the year ended December 31, 2014. Additionally, the Company recorded $1.4 million of impairment charges related to acquired tradenames in the commercial and digital print reporting unit within the Variable Print segment and $14.0 million of impairment charges primarily related to buildings, machinery and equipment as a result of facility closures for the year ended December 31, 2014.  

For the year ended December 31, 2013, the Company recorded net restructuring, impairment and other charges of $133.5 million. These charges included $40.4 million of employee termination costs for 1,382 employees, of whom 1,363 were terminated as of December 31, 2013. These charges were the result of the closure of two manufacturing facilities within the Publishing and Retail Services segment and one manufacturing facility within the Variable Print segment and the reorganization of certain operations. Additionally, the Company recorded $38.4 million of other charges for estimated obligations related to the decision to withdraw from certain multi-employer pension plans. For the year ended December 31, 2013, the Company also incurred lease termination and other restructuring charges of $33.8 million, of which $14.7 million related to multi-employer pension plan complete or partial withdrawal charges as a result of facility closures, and $17.6 million of impairment charges primarily related to buildings and machinery and equipment associated with facility closures. In addition, the Company recorded non-cash impairment charges of $3.3 million related to acquired customer relationship intangible assets in the financial reporting unit within the Strategic Services segment.

Depreciation and amortization increased $38.2 million to $474.0 million for the year ended December 31, 2014 compared to the same period in 2013, primarily due to the acquisitions of Consolidated Graphics and Esselte, partially offset by the impact of lower capital spending in recent years compared to historical levels. Depreciation and amortization included $78.1 million and $64.0 million of amortization of other intangible assets related to customer relationships, trade names, trademarks, licenses and agreements for the year ended December 31, 2014 and 2013, respectively.

29


 

Income from operations for the year ended December 31, 2014 was $515.9 million, a decrease of $63.8 million, compared to the year ended December 31, 2013.  The decrease was due to pension settlement charges, price pressures primarily in the International, Publishing and Retail Services and Variable Print segments, wage and other inflation in the International segment, an increase in depreciation and amortization expense and volume declines in the Publishing and Retail Services and Variable Print segments, partially offset by increases due to the acquisitions of Consolidated Graphics and Esselte, cost control initiatives, lower healthcare costs and increased volume in the Strategic Services segment.

 

 

2014

 

 

2013

 

 

$ Change

 

 

% Change

 

 

(in millions, except percentages)

 

Interest expense-net

$

282.1

 

 

$

261.4

 

 

$

20.7

 

 

 

7.9

%

Investment and other expense-net

 

9.6

 

 

 

27.4

 

 

 

(17.8

)

 

 

(65.0

%)

Loss on debt extinguishment

 

77.1

 

 

 

81.9

 

 

 

(4.8

)

 

 

(5.9

%)

Net interest expense increased by $20.7 million for the year ended December 31, 2014 versus the same period in 2013, primarily due to an increase in average outstanding debt, including higher average credit facility borrowings, and an increase in fixed rate debt, including the effect of fixed to floating interest rate swaps.

Net investment and other expense for the year ended December 31, 2014 and 2013 was $9.6 million and $27.4 million, respectively. The loss related to the Venezuelan currency remeasurement, net of foreign exchange gains, for the year ended December 31, 2014, of $18.4 million and the loss on the bankruptcy liquidation of RRDA of $16.4 million were partially offset by a gain on the sale of Journalism Online of $11.2 million, a $9.5 million bargain purchase gain related to the Esselte acquisition and a gain of $3.0 million resulting from the sale of the Company’s shares of a previously impaired equity investment. For the year ended December 31, 2013, the Company recorded a loss on the disposal of the MRM France direct mail business in the International segment of $17.9 million, impairment losses on equity investments of $5.5 million and a $3.2 million loss related to the devaluation of the Venezuelan currency.

Loss on debt extinguishment, related to the premiums paid, unamortized debt issuance costs and other expenses for year ended December 31, 2014 was $77.1 million due to the repurchase of $361.1 million of senior notes. Loss on debt extinguishment for the year ended December 31, 2013 was $81.9 million related to the premiums paid, unamortized debt issuance costs and other expenses due to the repurchase of $753.7 million of senior notes.

 

 

2014

 

 

2013

 

 

$ Change

 

 

% Change

 

 

(in millions, except percentages)

 

Income before income taxes

$

147.1

 

 

$

209.0

 

 

$

(61.9

)

 

 

(29.6

%)

Income tax expense (benefit)

 

26.3

 

 

 

(9.2

)

 

 

35.5

 

 

nm

 

Effective income tax rate

 

17.9

%

 

 

(4.4

%)

 

 

 

 

 

 

 

 

The effective income tax rate for the year ended December 31, 2014 was 17.9% compared to negative 4.4% in the same period in 2013. The tax rate in 2014 was impacted by a $15.2 million tax benefit related to the decline in value of an entity within the Strategic Services segment. The tax rate in 2013 was impacted by a $58.5 million benefit related to the decline in value and reorganization of certain entities within the Publishing and Retail Services segment, a benefit of $7.2 million for the recognition of previously unrecognized tax benefits related to the expected resolution of certain federal matters, the release of valuation allowances related to certain deferred tax assets and the recognition of previously unrecognized tax benefits related to the expected resolution of certain state tax matters.

Income attributable to noncontrolling interests was income of $3.4 million for the year ended December 31, 2014 and income of $7.0 million for the year ended December 31, 2013. For the year ended December 31, 2014 and 2013, the Venezuelan currency remeasurement, net of foreign exchange gains, resulted in losses attributable to noncontrolling interests of $5.6 million and $1.0 million, respectively. The impacts of the remeasurements were partially offset for the year ended December 31, 2014 and 2013 by increases in the Company’s operating earnings in Venezuela.  

Net earnings attributable to RR Donnelley common shareholders for the year ended December 31, 2014 was $117.4 million, or $0.59 per diluted share, compared to $211.2 million, or $1.15 per diluted share, for the year ended December 31, 2013. In addition to the factors described above, the per share results reflect an increase in weighted average diluted shares outstanding of 16.5 million primarily as a result of shares issued in conjunction with the Consolidated Graphics and Esselte acquisitions.

30


 

Information by Segment

The following tables summarize net sales, income (loss) from operations and certain items impacting comparability within each of the operating segments and Corporate. The descriptions of the reporting units generally reflect the primary products or services provided by each reporting unit. Included in these net sales amounts are sales of other products or services that may be produced within a reporting unit to meet customer needs and improve operating efficiency.

Publishing and Retail Services

 

 

 

 

 

 

 

 

Year Ended

 

 

 

 

 

 

 

 

December 31

 

 

 

 

 

 

 

 

2014

 

 

2013

 

 

 

 

 

 

 

 

(in millions, except percentages)

 

Net sales

 

 

 

 

 

 

 

 

$

2,632.3

 

 

 

$

2,774.8

 

Income from operations

 

 

 

 

 

 

 

 

 

86.1

 

 

 

 

109.6

 

Operating margin

 

 

 

 

 

 

 

 

 

3.3

%

 

 

 

3.9

%

Restructuring and impairment and other charges--net

 

 

 

 

 

 

 

 

 

50.7

 

 

 

 

73.7

 

 

 

 

Net Sales for the Year Ended

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31

 

 

 

 

 

 

 

 

 

 

 

Reporting unit

 

2014

 

 

2013

 

 

$ Change

 

 

% Change

 

 

 

(in millions, except percentages)

 

Magazines, catalogs and retail inserts

 

$

 

1,646.0

 

 

$

 

1,724.7

 

 

$

 

(78.7

)

 

 

 

(4.6

%)

Books

 

 

 

841.9

 

 

 

 

875.2

 

 

 

 

(33.3

)

 

 

 

(3.8

%)

Directories

 

 

 

144.4

 

 

 

 

174.9

 

 

 

 

(30.5

)

 

 

 

(17.4

%)

Total Publishing & Retail Services

 

$

 

2,632.3

 

 

$

 

2,774.8

 

 

$

 

(142.5

)

 

 

 

(5.1

%)

Net sales for the Publishing and Retail Services segment for the year ended December 31, 2014 were $2,632.3 million, a decrease of $142.5 million, or 5.1%, compared to 2013. Net sales decreased due to lower volume in magazines, catalogs and retail inserts and educational books, price pressures in magazines, catalogs and retail inserts, decreases in pass-through paper sales and lower volume in directories. An analysis of net sales by reporting unit follows:

·

Magazines, catalogs and retail inserts: Sales decreased due to reduced volume, price pressures primarily in catalogs and magazines and a decrease in pass-through paper sales.

·

Books: Sales decreased as a result of reduced volume in educational books primarily as a result of a shift in product types funded by states for educational materials, decreased volume in consumer books, partially offset by growth in packaging and book fulfillment.

·

Directories: Sales decreased primarily as a result of lower volume as a result of electronic substitution, a decline in pass-through paper sales and price pressures.

Publishing and Retail Services segment income from operations decreased $23.5 million for the year ended December 31, 2014 due to price pressures primarily in magazines, catalogs and retail inserts and volume declines in magazines, catalogs and retail inserts, educational books and directories. These decreases were partially offset by cost control initiatives, lower restructuring, impairment and other charges and lower depreciation and amortization expense. Operating margins decreased from 3.9% for the year ended December 31, 2013 to 3.3% for the year ended December 31, 2014. While lower restructuring, impairment and other charges improved operating margins by 0.8 percentage points, the remaining decline in operating margins was due to price pressures primarily in magazines, catalogs and retail inserts and volume declines in magazines, catalogs and retail inserts, educational books and directories, partially offset by cost control initiatives and lower depreciation and amortization expense.

31


 

Variable Print

 

 

 

 

 

 

 

 

Year Ended

 

 

 

 

 

 

 

 

December 31

 

 

 

 

 

 

 

 

2014

 

 

2013

 

 

 

 

 

 

 

 

(in millions, except percentages)

 

Net sales

 

 

 

 

 

 

 

 

$

3,767.9

 

 

 

$

2,592.8

 

Income from operations

 

 

 

 

 

 

 

 

 

240.8

 

 

 

 

197.9

 

Operating margin

 

 

 

 

 

 

 

 

 

6.4

%

 

 

 

7.6

%

Purchase accounting inventory adjustments

 

 

 

 

 

 

 

 

 

14.3

 

 

 

 

-

 

Restructuring and impairment and other charges--net

 

 

 

 

 

 

 

 

 

44.8

 

 

 

 

15.6

 

Acquisition-related expenses

 

 

 

 

 

 

 

 

 

0.1

 

 

 

 

-

 

 

 

 

 

Net Sales for the Year Ended

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31

 

 

 

 

 

 

 

 

 

 

 

Reporting unit

 

2014

 

 

2013

 

 

$ Change

 

 

% Change

 

 

 

(in millions, except percentages)

 

Commercial and digital print

 

 

$

1,616.4

 

 

 

$

722.9

 

 

 

$

893.5

 

 

 

 

123.6

%

Direct mail

 

 

 

599.5

 

 

 

 

548.7

 

 

 

 

50.8

 

 

 

 

9.3

%

Office products

 

 

 

496.3

 

 

 

 

238.9

 

 

 

 

257.4

 

 

 

 

107.7

%

Labels

 

 

 

436.4

 

 

 

 

432.5

 

 

 

 

3.9

 

 

 

 

0.9

%

Statement printing

 

 

 

390.4

 

 

 

 

396.5

 

 

 

 

(6.1

)

 

 

 

(1.5

%)

Forms

 

 

 

228.9

 

 

 

 

253.3

 

 

 

 

(24.4

)

 

 

 

(9.6

%)

Total Variable Print

 

 

$

3,767.9

 

 

 

$

2,592.8

 

 

 

$

1,175.1

 

 

 

 

45.3

%

Net sales for the Variable Print segment for the year ended December 31, 2014 were $3,767.9 million, an increase of $1,175.1 million, or 45.3%, compared to 2013, including a $5.3 million, or 0.1% decrease due to changes in foreign exchange rates. Net sales increased due to the acquisitions of Consolidated Graphics and Esselte and higher volume in direct mail, in-store marketing materials and office products, partially offset by price pressures and lower volume in forms and statement printing. An analysis of net sales by reporting unit follows:

·

Commercial and digital print: Sales increased due to the acquisition of Consolidated Graphics and higher volume of in-store marketing materials, partially offset by price pressures.

·

Direct mail: Sales increased due to the acquisition of Consolidated Graphics and higher volume, partially offset by price pressures.

·

Office products: Sales increased due to the acquisition of Esselte and higher volume in binder and note-taking products.

·

Labels: Sales increased due to higher volume, partially offset by price pressures.

·

Statement printing: Sales decreased as a result of price pressures and lower volume from existing customers, partially offset by higher pass-through postage sales.

·

Forms: Sales decreased due to lower volume, primarily as a result of electronic substitution.

Variable Print segment income from operations increased $42.9 million for the year ended December 31, 2014 mainly due to higher volume resulting from the acquisitions of Consolidated Graphics and Esselte and cost control initiatives, partially offset by higher depreciation and amortization expense, higher restructuring, impairment and other charges, volume declines, price pressures, $14.3 million of charges resulting from purchase accounting inventory adjustments from the Consolidated Graphics and Esselte acquisitions and higher incentive compensation expense. Operating margins decreased from 7.6% for the year ended December 31, 2013 to 6.4% for the year ended December 31, 2014, of which 1.1 percentage points were due to higher restructuring, impairment and other charges and 0.6 percentage points were due to the purchase accounting inventory adjustments.  These decreases were offset by higher volume resulting from the acquisitions of Consolidated Graphics and Esselte and cost control initiatives.

32


 

Strategic Services

 

 

 

 

 

 

 

 

Year Ended

 

 

 

 

 

 

 

 

December 31

 

 

 

 

 

 

 

 

2014

 

 

2013

 

 

 

 

 

 

 

 

(in millions, except percentages)

 

Net sales

 

 

 

 

 

 

 

 

$

2,607.5

 

 

 

$

2,453.0

 

Income from operations

 

 

 

 

 

 

 

 

 

257.4

 

 

 

 

232.8

 

Operating margin

 

 

 

 

 

 

 

 

 

9.9

%

 

 

 

9.5

%

Restructuring and impairment and other charges--net

 

 

 

 

 

 

 

 

 

11.6

 

 

 

 

19.2

 

 

 

 

Net Sales for the Year Ended

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31

 

 

 

 

 

 

 

 

 

 

 

Reporting unit

 

2014