10-Q 1 rrd-10q_20170930.htm 10-Q rrd-10q_20170930.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

For the quarterly period ended September 30, 2017

OR

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

Commission File Number 1-4694

 

R.R. DONNELLEY & SONS COMPANY

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

36-1004130

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

35 West Wacker Drive,

Chicago, Illinois

 

60601

(Address of principal executive offices)

 

(Zip code)

(312) 326-8000

(Registrant’s telephone number, including area code)

 

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

Yes       No  

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

Yes      No  

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

 

Large Accelerated filer

 

  

Accelerated filer

 

 

 

 

  

 

 

 

Non-Accelerated filer

 

  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

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

Yes      No  

As of October 27, 2017, 70.1 million shares of common stock were outstanding.  

 

 

 

 


R.R. DONNELLEY & SONS COMPANY

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2017

TABLE OF CONTENTS

 

 

 

 

Page

 

 

PART I

 

FINANCIAL INFORMATION

 

 

 

 

 

Item 1:

 

Condensed Consolidated Financial Statements (unaudited)

3

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016

3

 

 

 

 

 

 

Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2017 and 2016

4

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2017 and 2016

5

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016

6

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

7

 

 

 

 

Item 2:

 

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

28

 

 

 

 

Item 3:

 

Quantitative and Qualitative Disclosures About Market Risk

52

 

 

 

 

Item 4:

 

Controls and Procedures

52

 

 

 

 

 

 

PART II

 

 

 

 

 

OTHER INFORMATION

 

 

 

Item 1:

 

Legal Proceedings

53

 

 

 

 

Item 2:

 

Unregistered Sales of Equity Securities and Use of Proceeds

53

 

 

 

 

Item 4:

 

Mine Safety Disclosures

53

 

 

 

 

Item 6:

 

Exhibits

54

 

 

 

 

Signatures

55

 

 

 

 

2


PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

 

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

CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions, except per share data)

(UNAUDITED)

 

 

 

September 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

225.8

 

 

$

317.5

 

Receivables, less allowances for doubtful accounts of $33.0 in 2017 (2016 - $35.9)

 

 

1,382.9

 

 

 

1,331.3

 

Inventories (Note 4)

 

 

457.1

 

 

 

386.8

 

Prepaid expenses and other current assets

 

 

152.8

 

 

 

136.7

 

Investment in LSC and Donnelley Financial (Note 2)

 

 

 

 

 

 

328.7

 

Total current assets

 

 

2,218.6

 

 

 

2,501.0

 

Property, plant and equipment-net (Note 5)

 

 

624.6

 

 

 

650.3

 

Goodwill (Note 6)

 

 

587.6

 

 

 

602.0

 

Other intangible assets-net (Note 6)

 

 

150.5

 

 

 

171.9

 

Deferred income taxes

 

 

123.2

 

 

 

108.9

 

Other noncurrent assets

 

 

252.2

 

 

 

234.7

 

Total assets

 

$

3,956.7

 

 

$

4,268.8

 

LIABILITIES

 

 

 

 

 

 

 

 

Accounts payable

 

$

996.5

 

 

$

985.3

 

Accrued liabilities

 

 

463.9

 

 

 

541.7

 

Short-term and current portion of long-term debt (Note 15)

 

 

17.9

 

 

 

8.2

 

Total current liabilities

 

 

1,478.3

 

 

 

1,535.2

 

Long-term debt (Note 15)

 

 

2,232.2

 

 

 

2,379.2

 

Pension liabilities

 

 

103.2

 

 

 

119.4

 

Other postretirement benefits plan liabilities

 

 

130.2

 

 

 

134.1

 

Other noncurrent liabilities

 

 

175.8

 

 

 

193.1

 

Total liabilities

 

 

4,119.7

 

 

 

4,361.0

 

Commitments and Contingencies (Note 14)

 

 

 

 

 

 

 

 

EQUITY (Note 10)

 

 

 

 

 

 

 

 

RRD stockholders' equity

 

 

 

 

 

 

 

 

Preferred stock, $1.00 par value

 

 

 

 

 

 

 

 

Authorized: 2.0 shares; Issued: None

 

 

 

 

 

 

Common stock, $0.01 par value

 

 

 

 

 

 

 

 

Authorized: 165.0 shares;

 

 

 

 

 

 

 

 

Issued: 89.0 shares in 2017 and 2016

 

 

0.9

 

 

 

0.9

 

Additional paid-in-capital

 

 

3,450.7

 

 

 

3,468.5

 

Accumulated deficit

 

 

(2,160.6

)

 

 

(2,155.4

)

Accumulated other comprehensive loss

 

 

(126.5

)

 

 

(55.7

)

Treasury stock, at cost, 19.0 shares in 2017 (2016 - 19.1 shares)

 

 

(1,341.4

)

 

 

(1,364.0

)

Total RRD stockholders' equity

 

 

(176.9

)

 

 

(105.7

)

Noncontrolling interests

 

 

13.9

 

 

 

13.5

 

Total equity

 

 

(163.0

)

 

 

(92.2

)

Total liabilities and equity

 

$

3,956.7

 

 

$

4,268.8

 

 

(See Notes to Condensed Consolidated Financial Statements)

 

 

 

 

3


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

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions, except per share data)

(UNAUDITED)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products net sales

 

$

1,322.0

 

 

$

1,327.8

 

 

$

3,830.9

 

 

$

3,772.5

 

Services net sales

 

 

412.9

 

 

 

397.8

 

 

 

1,182.9

 

 

 

1,201.6

 

Total net sales

 

 

1,734.9

 

 

 

1,725.6

 

 

 

5,013.8

 

 

 

4,974.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products cost of sales (exclusive of depreciation and amortization)

 

 

1,064.1

 

 

 

1,030.7

 

 

 

3,065.7

 

 

 

2,958.1

 

Services cost of sales (exclusive of depreciation and amortization)

 

 

346.4

 

 

 

330.7

 

 

 

992.8

 

 

 

1,002.9

 

Total cost of sales

 

 

1,410.5

 

 

 

1,361.4

 

 

 

4,058.5

 

 

 

3,961.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products gross profit

 

 

257.9

 

 

 

297.1

 

 

 

765.2

 

 

 

814.4

 

Services gross profit

 

 

66.5

 

 

 

67.1

 

 

 

190.1

 

 

 

198.7

 

Total gross profit

 

 

324.4

 

 

 

364.2

 

 

 

955.3

 

 

 

1,013.1

 

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

 

 

207.7

 

 

 

218.1

 

 

 

643.6

 

 

 

681.0

 

Restructuring, impairment and other charges-net (Note 7)

 

 

33.8

 

 

 

10.8

 

 

 

46.7

 

 

 

24.3

 

Depreciation and amortization

 

 

47.0

 

 

 

51.0

 

 

 

143.1

 

 

 

153.5

 

Other operating expense (income)

 

 

 

 

 

0.3

 

 

 

 

 

 

(12.0

)

Income from operations

 

 

35.9

 

 

 

84.0

 

 

 

121.9

 

 

 

166.3

 

Interest expense-net

 

 

43.5

 

 

 

48.8

 

 

 

137.3

 

 

 

150.6

 

Investment and other income -net

 

 

(2.8

)

 

 

(1.0

)

 

 

(47.2

)

 

 

(0.4

)

Loss on debt extinguishments

 

 

6.5

 

 

 

 

 

 

20.1

 

 

 

 

(Loss) earnings before income taxes

 

 

(11.3

)

 

 

36.2

 

 

 

11.7

 

 

 

16.1

 

Income tax (benefit) expense

 

 

(3.5

)

 

 

13.9

 

 

 

(7.4

)

 

 

12.9

 

Net (loss) earnings from continuing operations

 

 

(7.8

)

 

 

22.3

 

 

 

19.1

 

 

 

3.2

 

(Loss) income from discontinued operations, net of tax (Note 2)

 

 

 

 

 

(29.1

)

 

 

 

 

 

15.8

 

Net (loss) earnings

 

 

(7.8

)

 

 

(6.8

)

 

 

19.1

 

 

 

19.0

 

Less: Income attributable to noncontrolling interests

 

 

0.2

 

 

 

0.3

 

 

 

0.7

 

 

 

0.8

 

Net (loss) earnings attributable to RRD common stockholders

 

$

(8.0

)

 

$

(7.1

)

 

$

18.4

 

 

$

18.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net (loss) earnings per share attributable to RRD common stockholders (Note 11):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

(0.11

)

 

$

0.31

 

 

$

0.26

 

 

$

0.03

 

Discontinued operations

 

 

 

 

 

(0.41

)

 

 

 

 

 

0.23

 

Net (loss) earnings attributable to RRD stockholders

 

 

(0.11

)

 

 

(0.10

)

 

 

0.26

 

 

 

0.26

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted net (loss) earnings per share attributable to RRD common stockholders (Note 11):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

(0.11

)

 

$

0.31

 

 

$

0.26

 

 

$

0.03

 

Discontinued operations

 

 

 

 

 

(0.41

)

 

 

 

 

 

0.23

 

Net (loss) earnings attributable to RRD

 

 

(0.11

)

 

 

(0.10

)

 

 

0.26

 

 

 

0.26

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.14

 

 

$

0.78

 

 

$

0.42

 

 

$

2.34

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

70.2

 

 

 

70.0

 

 

 

70.1

 

 

 

70.0

 

Diluted

 

 

70.2

 

 

 

70.5

 

 

 

70.3

 

 

 

70.5

 

 

(See Notes to Condensed Consolidated Financial Statements)

 

 

4


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

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in millions)

(UNAUDITED)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Net (loss) earnings

 

$

(7.8

)

 

$

(6.8

)

 

$

19.1

 

 

$

19.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax (Note 12):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Translation adjustments

 

 

17.7

 

 

 

(4.4

)

 

 

46.8

 

 

 

(9.0

)

Adjustment for available-for-sale securities

 

 

(1.8

)

 

 

 

 

 

(119.3

)

 

 

 

Adjustment for net periodic pension and postretirement benefits plan cost

 

 

0.7

 

 

 

(19.4

)

 

 

2.1

 

 

 

(13.3

)

Other comprehensive income (loss)

 

 

16.6

 

 

 

(23.8

)

 

 

(70.4

)

 

 

(22.3

)

Comprehensive income (loss)

 

 

8.8

 

 

 

(30.6

)

 

 

(51.3

)

 

 

(3.3

)

Less: comprehensive income attributable to noncontrolling interests

 

 

0.3

 

 

 

0.3

 

 

 

1.1

 

 

 

1.0

 

Comprehensive income (loss) attributable to RRD common stockholders

 

$

8.5

 

 

$

(30.9

)

 

$

(52.4

)

 

$

(4.3

)

  

(See Notes to Condensed Consolidated Financial Statements)

 

 

 

 

5


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

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

(UNAUDITED)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2017

 

 

2016

 

OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

Net earnings

 

$

19.1

 

 

$

19.0

 

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

 

 

 

 

 

 

 

 

Impairment charges - net

 

 

21.8

 

 

 

0.8

 

Depreciation and amortization

 

 

143.1

 

 

 

312.5

 

Provision for doubtful accounts receivable

 

 

1.7

 

 

 

20.4

 

Share-based compensation

 

 

6.4

 

 

 

13.4

 

Deferred income taxes

 

 

(10.1

)

 

 

(33.5

)

Changes in uncertain tax positions

 

 

0.7

 

 

 

(0.4

)

Gain on investments and other assets - net

 

 

(2.8

)

 

 

(13.0

)

Realized gain on disposition of available-for-sale securities - net

 

 

(42.4

)

 

 

 

Loss on debt extinguishments

 

 

20.1

 

 

 

85.3

 

Net pension and other postretirement benefits plan income

 

 

(11.0

)

 

 

(55.1

)

Net loss on pension and other postretirement benefits plan settlements and curtailments (Note 8)

 

 

 

 

 

78.8

 

Other

 

 

14.7

 

 

 

9.6

 

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

 

 

 

 

 

 

 

 

Accounts receivable - net

 

 

(26.3

)

 

 

(122.4

)

Inventories

 

 

(62.5

)

 

 

(60.0

)

Prepaid expenses and other current assets

 

 

(6.3

)

 

 

(9.2

)

Accounts payable

 

 

(18.9

)

 

 

(160.8

)

Income taxes payable and receivable

 

 

(11.4

)

 

 

(35.6

)

Accrued liabilities and other

 

 

(36.1

)

 

 

(23.4

)

Pension and other postretirement benefits plan contributions

 

 

(12.4

)

 

 

(18.6

)

Net cash (used in) provided by operating activities

 

 

(12.6

)

 

 

7.8

 

INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(77.2

)

 

 

(147.9

)

Acquisitions of businesses, net of cash acquired

 

 

 

 

 

(47.5

)

Disposition of businesses

 

 

 

 

 

13.7

 

Proceeds from sales of investments and other assets

 

 

127.6

 

 

 

3.7

 

Transfers (to) from restricted cash

 

 

(2.4

)

 

 

13.7

 

Other investing activities

 

 

 

 

 

(3.6

)

Net cash provided by (used in) investing activities

 

 

48.0

 

 

 

(167.9

)

FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Net change in short-term debt

 

 

10.2

 

 

 

5.7

 

Payments of current maturities and long-term debt

 

 

(200.9

)

 

 

(786.6

)

Proceeds from issuances of long-term debt

 

 

 

 

 

1,164.0

 

Payments on Credit Agreement borrowings

 

 

(1,000.0

)

 

 

 

Proceeds from Credit Agreement borrowings

 

 

1,165.0

 

 

 

 

Proceeds from termination of interest rate swaps

 

 

 

 

 

2.5

 

Debt issuance costs

 

 

(4.4

)

 

 

(37.5

)

Dividends paid

 

 

(29.4

)

 

 

(163.2

)

Net transfer of cash and cash equivalents to LSC and Donnelley Financial

 

 

(78.0

)

 

 

 

Other financing activities

 

 

(1.6

)

 

 

2.5

 

Net cash (used in) provided by financing activities

 

 

(139.1

)

 

 

187.4

 

Effect of exchange rate on cash and cash equivalents

 

 

12.0

 

 

 

(5.1

)

Net (decrease) increase in cash and cash equivalents

 

 

(91.7

)

 

 

22.2

 

Cash and cash equivalents at beginning of year

 

 

317.5

 

 

 

389.6

 

Cash and cash equivalents at end of period

 

$

225.8

 

 

$

411.8

 

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL NON-CASH DISCLOSURE:

 

 

 

 

 

 

 

 

Assumption of warehousing equipment related to customer contract

 

$

 

 

$

8.8

 

Debt-for-equity exchange

 

 

132.9

 

 

 

 

Debt-for-debt exchanges, including debt issuance costs of $5.5 million in 2016

 

 

 

 

 

300.0

 

(See Notes to Condensed Consolidated Financial Statements)

 

6


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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

 

1. Basis of Presentation

The accompanying unaudited condensed consolidated interim financial statements include the accounts of R.R. Donnelley & Sons Company and its subsidiaries (the “Company” or “RRD”) and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in accordance with the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. These unaudited condensed consolidated interim financial statements reflect all normal and recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods and should be read in conjunction with the consolidated financial statements and the related notes thereto included in the Company’s latest Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC on February 28, 2017. Operating results for the nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2017. All significant intercompany transactions have been eliminated in consolidation. These unaudited condensed consolidated interim financial statements include estimates and assumptions of management that affect the amounts reported in the condensed consolidated financial statements. Actual results could differ from these estimates.

Spinoff Transactions

On October 1, 2016, the Company completed the separation of its financial communications and data services business (“Donnelley Financial Solutions, Inc.” or “Donnelley Financial”) and the publishing and retail-centric print services and office products business (“LSC Communications, Inc.” or “LSC”) into two separate publicly-traded companies (the "Separation"). The Company completed the tax-free distribution of 80.75% of the outstanding common stock of each Donnelley Financial and LSC to the Company’s stockholders of record on September 23, 2016 who received one share of each Donnelley Financial and LSC for every eight shares of RRD common stock owned as of the record date (the “Distribution”). The Company retained 19.25% of the outstanding common stock of each Donnelley Financial and LSC. The historical financial results of Donnelley Financial and LSC prior to the Separation, are presented as discontinued operations on the Condensed Consolidated Statements of Operations and, as such, have been excluded from both continuing operations and segment results for all periods presented. Sales from RRD to Donnelley Financial and LSC previously eliminated in consolidation have been recast and are now shown as external sales within the financial results of continuing operations. These net sales were $72.5 million and $150.4 million for the three and nine months ended September 30, 2016, respectively. Unless indicated otherwise, the information in the Notes to Condensed Consolidated Financial Statements relates to the Company's continuing operations. Prior periods have been recast to reflect the Company's current segment reporting structure. See Note 2, Discontinued Operations, for more information on the Separation.

Reverse Stock Split

Immediately following the Distribution on October 1, 2016, the Company affected a one-for-three reverse stock split for RRD common stock (the “Reverse Stock Split”). The Reverse Stock Split was approved by the Company’s Board of Directors on September 14, 2016 and previously approved by the Company’s stockholders at the annual meeting on May 19, 2016. As a result of the Reverse Stock Split, the number of issued and outstanding and treasury shares of the Company’s common stock was reduced proportionally based on the Reverse Stock Split ratio of one share for every three shares of common stock held before the Reverse Stock Split.  

 

7


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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

Revision of Net Sales and Cost of Sales

During the third quarter of 2017, the Company identified an error in the accounting for certain contracts with an inventory buy-back option within the Asia reporting unit, which is in the International segment. As a result, the error, which was determined by management to be immaterial to the previously issued financial statements, has been corrected herein from the amounts previously reported. There was no impact to net earnings (loss) or net earnings (loss) per share, or the Consolidated Statements of Comprehensive Income or Stockholders’ Equity. The following table presents the impact of the revision on net sales and cost of sales:  

 

As Reported

 

Adjustments

 

As Revised

 

Three months ended March 31, 2016

 

Products net sales

$

1,242.7

 

$

13.1

 

$

1,229.6

 

Total net sales

 

1,645.6

 

 

13.1

 

 

1,632.5

 

Products cost of sales

 

971.9

 

 

13.1

 

 

958.8

 

Total cost of sales

 

1,313.1

 

 

13.1

 

 

1,300.0

 

Three months ended June 30, 2016

 

Products net sales

$

1,231.7

 

$

16.6

 

$

1,215.1

 

Total net sales

 

1,632.6

 

 

16.6

 

 

1,616.0

 

Products cost of sales

 

985.2

 

 

16.6

 

 

968.6

 

Total cost of sales

 

1,316.2

 

 

16.6

 

 

1,299.6

 

Three months ended September 30, 2016

 

Products net sales

$

1,343.4

 

$

15.6

 

$

1,327.8

 

Total net sales

 

1,741.2

 

 

15.6

 

 

1,725.6

 

Products cost of sales

 

1,046.3

 

 

15.6

 

 

1,030.7

 

Total cost of sales

 

1,377.0

 

 

15.6

 

 

1,361.4

 

Three months ended December 31, 2016

 

Products net sales

$

1,470.3

 

$

17.4

 

$

1,452.9

 

Total net sales

 

1,876.3

 

 

17.4

 

 

1,858.9

 

Products cost of sales

 

1,161.0

 

 

17.4

 

 

1,143.6

 

Total cost of sales

 

1,512.6

 

 

17.4

 

 

1,495.2

 

Three months ended March 31, 2017

 

Products net sales

$

1,288.9

 

$

17.4

 

$

1,271.5

 

Total net sales

 

1,676.3

 

 

17.4

 

 

1,658.9

 

Products cost of sales

 

1,024.3

 

 

17.4

 

 

1,006.9

 

Total cost of sales

 

1,348.5

 

 

17.4

 

 

1,331.1

 

Three months ended June 30, 2017

 

Products net sales

$

1,263.4

 

$

26.0

 

$

1,237.4

 

Total net sales

 

1,646.0

 

 

26.0

 

 

1,620.0

 

Products cost of sales

 

1,020.7

 

 

26.0

 

 

994.7

 

Total cost of sales

 

1,342.9

 

 

26.0

 

 

1,316.9

 

The following table presents the impact of the related balance sheet revision on the December 31, 2016 Condensed Consolidated Balance Sheet:

 

As Reported

 

Adjustments

 

As Revised

 

Receivables, less allowance for doubtful accounts

$

1,354.4

 

$

(23.1

)

$

1,331.3

 

Inventories

 

379.6

 

 

7.2

 

 

386.8

 

Accounts payable

 

1,001.2

 

 

(15.9

)

 

985.3

 

The September 30, 2016 Consolidated Statement of Cash Flows has also been revised to reflect the impact of the above balance sheet revision.


 

8


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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

2. Discontinued Operations

Immediately following the Distribution, the Company held approximately 6.2 million shares of Donnelley Financial common stock and approximately 6.2 million shares of LSC common stock. The Company accounted for these investments as available-for-sale equity securities. In March 2017, the Company sold the 6.2 million shares of LSC common stock it retained upon spinoff for net proceeds of $121.4 million, resulting in a realized loss of $51.6 million, which was recorded within investment and other income-net in the Condensed Consolidated Statements of Operations for the nine months ended September 30, 2017. In June 2017, the Company completed a non-cash debt-for-equity exchange in which RRD exchanged 6,143,208 of its retained shares of Donnelley Financial common stock for the extinguishment of $111.6 million in aggregate principal amount of RRD indebtedness. In August 2017, the Company disposed of its remaining 99,594 shares of Donnelley Financial common stock in exchange for the extinguishment of $1.9 million in aggregate principal amount of RRD indebtedness.  See Note 15, Debt, for additional details of these debt-for-equity transactions. As of September 30, 2017, the Company no longer held any shares of LSC or Donnelley Financial.  

 

The following details the financial results of discontinued operations:

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30, 2016

 

September 30, 2016

 

 

Net sales

$

1,122.6

 

$

3,303.4

 

 

Cost of sales

 

879.1

 

 

2,534.7

 

 

Operating expenses (a)

 

170.0

 

 

592.0

 

 

Interest and other expense net (b)

 

104.0

 

 

139.5

 

 

(Loss) earnings before income taxes

 

(30.5

)

 

37.2

 

 

Income tax (benefit) expense

 

(1.4

)

 

21.4

 

 

Net (loss) earnings from discontinued operations

$

(29.1

)

$

15.8

 

 

 

(a)

Includes spinoff transaction costs incurred of $27.0 million and $57.3 million during the three and nine month periods ended September 30, 2016, respectively.  

 

(b)

Includes the related interest expense of the corporate level debt which was retired in connection with the Separation totaling $17.8 million and $53.6 million for the three and nine months ended September 30, 2016, respectively. Also includes the losses on the extinguishment of corporate level debt executed in conjunction with the spinoff transactions totaling $85.3 million, for the three and nine months ended September 30, 2016.  

  

The significant non-cash items and capital expenditures of discontinued operations were as follows:

 

Nine Months Ended

 

 

September 30, 2016

 

Depreciation and amortization

$

159.0

 

Pension settlement charges

 

77.7

 

Impairment charges

 

1.5

 

Loss on debt extinguishments

 

85.3

 

Assumption of warehousing equipment related to customer contract

 

8.8

 

Purchase of property, plant and equipment

 

49.0

 

 

In connection with the Separation, the Company entered into transition services agreements with Donnelley Financial and LSC under which the companies will provide one another with certain services to help ensure an orderly transition following the Separation (the “Transition Services Agreements”). The charges for these services are intended to allow the companies, as applicable, to recover the direct and indirect costs incurred in providing such services. The Transition Services Agreements generally provide for a term of services starting at the Separation date and continuing for a period of up to twenty-four months following the Separation. During the three and nine months ended September 30, 2017, the Company recognized $1.4 million and $6.4 million, respectively, as a reduction of costs within selling, general and administrative expenses within the Condensed Consolidated Statements of Operations from the Transition Services Agreement.

 

 

9


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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

The Company also entered into various commercial agreements which govern sales transactions between the companies. Under these commercial agreements, the Company recognized the following transactions with LSC and Donnelley Financial during the three and nine months ended September 30, 2017:

 

Three Months Ended

 

Nine Months Ended

 

 

September 30, 2017

 

September 30, 2017

 

Net sales to LSC and Donnelley Financial

$

67.2

 

$

236.3

 

Purchases from LSC and Donnelley Financial

 

36.2

 

 

105.2

 

The Company also recognized $83.0 million of net cash inflow from Donnelley Financial and LSC within operating activities in the Condensed Consolidated Statements of Cash Flows during the nine months ended September 30, 2017.

 

3. Acquisitions and Dispositions

2016 Acquisition

On August 4, 2016, the Company acquired Precision Dialogue Holdings, LLC (“Precision Dialogue”), a provider of email marketing, direct mail marketing and other services with operations in the United States for a purchase price, net of cash acquired, of approximately $59.2 million. The acquisition expanded the Company’s ability to help its customers measure communications effectiveness and audience engagement. During the three and nine months ended September 30, 2017, Precision Dialogue contributed $17.0 million and $44.5 million, respectively, in net sales and earnings before income taxes of $2.9 million and $4.4 million, respectively. During both the three and nine months ended September 30, 2016, Precision Dialogue contributed $8.4 million in net sales and earnings before income taxes of $0.6 million. Precision Dialogue is included within the operating results of the Variable Print and Strategic Services segments.

 2016 Dispositions

On January 11, 2016, the Company sold two entities within the business process outsourcing reporting unit for net proceeds of $13.4 million. This resulted in a net gain of $12.3 million during the nine months ended September 30, 2016, which was recorded in other operating income in the Condensed Consolidated Statements of Operations. Additionally, in the third quarter of 2016, the Company sold three immaterial entities in the International segment, which resulted in a net loss of $0.3 million during the three and nine months ended September 30, 2016.

 

4. Inventories

The components of the Company’s inventories, net of excess and obsolescence reserves for raw materials and finished goods, at September 30, 2017 and December 31, 2016 were as follows:

 

 

September 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Raw materials and manufacturing supplies

 

$

168.6

 

 

$

141.0

 

Work in process

 

 

114.7

 

 

 

84.4

 

Finished goods

 

 

190.1

 

 

 

179.4

 

LIFO reserve

 

 

(16.3

)

 

 

(18.0

)

Total

 

$

457.1

 

 

$

386.8

 

 

  

 

 

10


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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

.

5. Property, Plant and Equipment

The components of the Company’s property, plant and equipment at September 30, 2017 and December 31, 2016 were as follows:

 

September 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Land

 

$

56.1

 

 

$

56.0

 

Buildings

 

 

415.0

 

 

 

403.0

 

Machinery and equipment

 

 

1,869.2

 

 

 

1,805.4

 

 

 

 

2,340.3

 

 

 

2,264.4

 

Less: Accumulated depreciation

 

 

(1,715.7

)

 

 

(1,614.1

)

Total

 

$

624.6

 

 

$

650.3

 

 

During the three and nine months ended September 30, 2017, depreciation expense was $34.6 million and $105.2 million, respectively.  During the three and nine months ended September 30, 2016, depreciation expense was $37.6 million and $116.2 million, respectively.  

 

6. Goodwill and Other Intangible Assets

The changes in the carrying amount of goodwill for the nine months ended September 30, 2017 were as follows:  

 

 

Variable

 

 

Strategic

 

 

 

 

 

 

 

 

 

 

 

Print

 

 

Services

 

 

International

 

 

Total

 

Net book value as of December 31, 2016