rrd-10q_20190331.htm

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.

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

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

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).

	March 31,			December 31,
	2019			2018
ASSETS
Cash and cash equivalents	$	274.3		$	370.6
Receivables, less allowances for doubtful accounts of $25.5 in 2019 (2018 - $25.9)		1,203.6			1,298.3
Inventories (Note 3)		326.1			329.7
Prepaid expenses and other current assets		122.2			101.1
Total current assets		1,926.2			2,099.7
Property, plant and equipment-net (Note 4)		530.9			531.3
Goodwill (Note 5)		552.4			553.4
Other intangible assets-net (Note 5)		106.9			113.3
Deferred income taxes		65.9			66.9
Operating lease assets (Note 13)		214.3			—
Other noncurrent assets		270.8			276.2
Total assets	$	3,667.4		$	3,640.8
LIABILITIES
Accounts payable	$	771.8		$	987.3
Accrued liabilities and other		326.4			347.4
Short-term operating lease liabilities (Note 13)		69.5			—
Short-term and current portion of long-term debt (Note 14)		38.1			216.2
Total current liabilities		1,205.8			1,550.9
Long-term debt (Note 14)		2,133.7			1,875.3
Pension liabilities		94.6			97.9
Other postretirement benefits plan liabilities		67.2			67.8
Long-term income tax liability		91.1			91.1
Long-term operating lease liabilities (Note 13)		146.2			—
Other noncurrent liabilities		178.8			203.2
Total liabilities		3,917.4			3,886.2
Commitments and Contingencies (Note 13)
EQUITY (Note 9)
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 2019 and 2018		0.9			0.9
Additional paid-in-capital		3,352.7			3,404.0
Accumulated deficit		(2,234.0	)		(2,225.7	)
Accumulated other comprehensive loss		(152.4	)		(153.8	)
Treasury stock, at cost, 18.2 shares in 2019 (2018 - 18.6 shares)		(1,231.7	)		(1,285.5	)
Total RRD stockholders' equity		(264.5	)		(260.1	)
Noncontrolling interests		14.5			14.7
Total equity		(250.0	)		(245.4	)
Total liabilities and equity	$	3,667.4		$	3,640.8

	Three Months Ended
	March 31,
	2019			2018
Products net sales	$	1,230.9		$	1,286.6
Services net sales		291.0			421.2
Total net sales		1,521.9			1,707.8

Products cost of sales (exclusive of depreciation and amortization)		1,008.8			1,051.9
Services cost of sales (exclusive of depreciation and amortization)		234.8			361.2
Total cost of sales		1,243.6			1,413.1

Products gross profit		222.1			234.7
Services gross profit		56.2			60.0
Total gross profit		278.3			294.7
Selling, general and administrative expenses (exclusive of depreciation and amortization)		199.6			214.6
Restructuring and other-net (Note 6)		17.1			0.8
Depreciation and amortization		42.7			47.2
Other operating income		(4.4	)		(0.1	)
Income from operations		23.3			32.2
Interest expense-net		40.1			41.7
Investment and other income-net		(4.5	)		(5.6	)
Loss on debt extinguishment		—			0.1
Loss before income taxes		(12.3	)		(4.0	)
Income tax (benefit) expense		(3.8	)		5.3
Net loss		(8.5	)		(9.3	)
Less: Income attributable to noncontrolling interests		0.3			0.3
Net loss attributable to RRD common stockholders	$	(8.8	)	$	(9.6	)

Net loss per share attributable to RRD common stockholders (Note 10):
Basic net loss per share	$	(0.12	)	$	(0.14	)
Diluted net loss per share	$	(0.12	)	$	(0.14	)

Weighted average number of common shares outstanding:
Basic		70.8			70.3
Diluted		70.8			70.3

	Three Months Ended
	March 31,
	2019			2018
Net loss	$	(8.5	)	$	(9.3	)

Other comprehensive income, net of tax (Note 11):
Translation adjustments		1.2			18.9
Adjustment for net periodic pension and postretirement benefits plan cost		(0.2	)		2.6
Other		0.6			—
Other comprehensive income		1.6			21.5
Comprehensive (loss) income		(6.9	)		12.2
Less: comprehensive income attributable to noncontrolling interests		0.5			0.8
Comprehensive (loss) income attributable to RRD common stockholders	$	(7.4	)	$	11.4

	Three Months Ended
	March 31,
	2019			2018
OPERATING ACTIVITIES
Net loss	$	(8.5	)	$	(9.3	)
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization		42.7			47.2
Provision for doubtful accounts receivable		3.9			8.4
Share-based compensation		3.4			1.2
Deferred income taxes		1.8			3.9
Net pension and other postretirement benefits plan income		(4.0	)		(3.8	)
Other		1.1			(0.7	)
Changes in operating assets and liabilities:
Accounts receivable-net		88.6			74.0
Inventories		1.4			15.4
Prepaid expenses and other current assets		(6.9	)		(5.8	)
Accounts payable		(213.3	)		(240.9	)
Income taxes payable and receivable		(30.9	)		(0.8	)
Accrued liabilities and other		(7.3	)		(22.8	)
Pension and other postretirement benefits plan contributions		(2.0	)		(6.3	)
Net cash used in operating activities		(130.0	)		(140.3	)
INVESTING ACTIVITIES
Capital expenditures		(37.4	)		(21.5	)
Proceeds from sales of investments and other assets		0.3			47.7
Disposition of businesses		(0.7	)		0.3
Other investing activities		(0.3	)		1.2
Net cash (used in) provided by investing activities		(38.1	)		27.7
FINANCING ACTIVITIES
Proceeds from other short-term debt		—			38.9
Payments on other short-term debt		(6.5	)		(3.5	)
Payments of current maturities and long-term debt		(173.7	)		(0.1	)
Proceeds from credit facility borrowings		512.0			366.0
Payments on credit facility borrowings		(253.0	)		(324.0	)
Dividends paid		(2.1	)		(9.8	)
Payments of withholding taxes on share-based compensation		(0.9	)		(0.7	)
Other financing activities		(1.0	)		(0.7	)
Net cash provided by financing activities		74.8			66.1
Effect of exchange rate on cash, cash equivalents and restricted cash		2.5			4.4
Net decrease in cash, cash equivalents and restricted cash		(90.8	)		(42.1	)
Cash, cash equivalents and restricted cash at beginning of year		403.6			301.5
Cash, cash equivalents and restricted cash at end of period	$	312.8		$	259.4

The accompanying unaudited condensed consolidated interim financial statements include the accounts of R.R. Donnelley & Sons Company and its subsidiaries (“RRD,” the “Company,” “we,” “us,” and “our”) 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 our latest Annual Report on Form 10-K for the year ended December 31, 2018 filed with the SEC on February 27, 2019. Operating results for the three months ended March 31, 2019 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2019. 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.

The following table provides a reconciliation of cash, cash equivalents and restricted cash at March 31, 2019 and December 31, 2018 reported within the Condensed Consolidated Balance Sheets that sum to the total of the same such amounts shown in the Condensed Consolidated Statement of Cash Flows.

Cash payments for income taxes were $26.4 million and $9.2 million for the three months ended March 31, 2019 and 2018, respectively. Cash refunds for income taxes were $0.7 million and $7.1 million for the three months ended March 31, 2019 and 2018, respectively. Income taxes receivable of $27.9 million and $11.7 million as of March 31, 2019 and December 31, 2018, respectively, are included within Prepaid expenses and other current assets.

On January 1, 2018, we adopted ASC Topic 606, “Revenue from Contracts with Customers” using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. All revenue recognized in the Condensed Statements of Operations is considered to be revenue from contracts with clients.

We recorded a net increase to opening retained earnings of $12.9 million as of January 1, 2018 due to the cumulative impact of adopting Topic 606, with the impact primarily related to the timing of revenue recognition for certain inventory that has been billed but not yet shipped.

	Three Months Ended
	March 31,
	2019		2018
Products
Commercial print	$	422.4	$	462.2
Statements		149.5		159.8
Direct marketing		148.5		148.1
Packaging		139.5		141.4
Labels		120.5		117.5
Digital print and fulfillment		109.6		110.8
Supply chain management		78.5		79.8
Forms		62.4		67.0
Total products net sales	$	1,230.9	$	1,286.6
Services
Logistics	$	201.7	$	327.2
Business process outsourcing		61.8		61.2
Digital and creative solutions		27.5		32.8
Total services net sales	$	291.0	$	421.2
Total net sales	$	1,521.9	$	1,707.8

Our products revenue is primarily recognized at a point in time. We generally recognize revenue for products upon the transfer of control of the products to the client which typically occurs upon transfer of title and risk of ownership, which is generally upon shipment to the client. For certain products, we are able to recognize revenue for completed inventory billed but not yet shipped at the client’s direction.

We generate revenue by providing various commercial printing products and offer a full range of branded materials including manuals, publications, brochures, business cards, flyers, post cards, posters and promotional items.

We generate revenue by providing packaging solutions, ranging from rigid boxes to in-box print materials, for clients in consumer electronics, life sciences, cosmetics and consumer packaged goods industries.

We generate revenue by creating critical business communications, including customer billings, financial statements, healthcare communications and insurance documents. Our capabilities include design and composition, variable imaging, email, archival and digital mail interaction, as well as our innovative RRDigital solution set.

We generate revenue by providing audience segmentation, creative development, program testing, print production, postal optimization and performance analytics for large-scale personalized direct mail programs.

We generate revenue by producing custom labels for clients across multiple industries including warehouse and distribution, retail, pharmaceutical, manufacturing and consumer packaging. We offer distribution and shipping labels, healthcare and durable goods labels, promotional labels and consumer product goods packaging labels.

We generate revenue by providing in-store marketing materials, including signage and point-of-purchase materials, as well as custom marketing kits that require multiple types of marketing collateral. Under the trade name Motif^TM, we also create custom photobooks.

We generate revenue by providing workflow design to assembly, configuration, kitting and fulfillment for clients in consumer electronics, telecommunications, life sciences, cosmetics, education and industrial industries.

We generate revenue by producing a variety of forms including invoices, order forms and business forms that support both the private and public sectors for clients in financial, government, retail, healthcare and business services industries.

Our services revenue is recognized both at a point in time and over time. Our logistics revenue is primarily recognized over time as the performance obligation is completed. Due to the short transit period of logistics performance obligations, the timing of revenue recognition does not require significant judgment. Our business process outsourcing and digital and creative solutions revenue is recognized over time or at a point in time, depending on the nature of the service which could be either recurring or project-based.

We generate revenue by providing specialized transportation and distribution services using our third party logistics solutions. These services are comprised of freight services, including truckload, less-than-truckload, intermodal and international freight forwarding; international mail and parcel distribution; and courier services including same day and next day delivery. As discussed in Note 16, Dispositions, we sold our Print Logistics business on July 2, 2018. Print Logistics services included the distribution of retail and newsstand printed materials.

We generate revenue by providing outsourcing services including creative services, research and analytics, financial management and other services for legal providers, insurance, telecommunications, utilities, retail and financial services companies.

We generate revenue by creating and managing content for delivery across multiple marketing communications channels including print and digital advertising, direct marketing and mail, packaging, sales collateral, in-store marketing and social media.

Certain clients may receive volume-based rebates or early payment discounts, which are accounted for as variable consideration. We estimate these amounts based on the expected amount to be earned by our clients and reduce revenue accordingly. We do not expect significant changes to estimates of variable consideration. Given the nature of our products and the history of returns, product returns are not significant.

The following table provides information about contract assets and liabilities from contracts with clients:

Contract liabilities primarily relate to client advances received prior to completion of performance obligations. Reductions in contract liabilities are a result of our completion of performance obligations.

Revenue recognized during the three months ended March 31, 2019 from amounts included in contract liabilities at the beginning of the period was approximately $9.6 million. During the three months ended March 31, 2019, we reclassified $2.7 million of contract assets to receivables as a result of the completion of the performance obligation and the right to the consideration becoming unconditional.

The components of inventories, net of excess and obsolescence reserves for raw materials and finished goods, at March 31, 2019 and December 31, 2018 were as follows:

The components of property, plant and equipment at March 31, 2019 and December 31, 2018 were as follows:

During the three months ended March 31, 2019 and 2018 depreciation expense was $28.3 million and $33.3 million, respectively.

During the fourth quarter of 2017, we entered into an agreement to sell a printing facility in Shenzhen, China and transfer the related land use rights. During the three months ended March 31, 2018, we received non-refundable deposits in accordance with the terms of the agreement of approximately $32.1 million which are recorded in Other noncurrent liabilities on the Consolidated Balance Sheets. As of March 31, 2019, we continue to classify the carrying cost of the building within property, plant and equipment and record depreciation expense. The combined carrying cost of the building and land use rights is not significant.

The carrying amount of goodwill at March 31, 2019 and December 31, 2018 were as follows:

	Business Services			Marketing Solutions			Total
Net book value as of December 31, 2018
Goodwill	$	2,604.3		$	519.5		$	3,123.8
Accumulated impairment losses		(2,316.3	)		(254.1	)		(2,570.4	)
Total		288.0			265.4			553.4
Foreign exchange		(1.0	)		—			(1.0	)

Net book value as of March 31, 2019
Goodwill		2,618.4			519.5			3,137.9
Accumulated impairment losses		(2,331.4	)		(254.1	)		(2,585.5	)
Total	$	287.0		$	265.4		$	552.4

The components of other intangible assets at March 31, 2019 and December 31, 2018 were as follows:

	March 31, 2019							December 31, 2018
	Gross							Gross
	Carrying		Accumulated			Net Book		Carrying		Accumulated			Net Book
	Amount		Amortization			Value		Amount		Amortization			Value

Client relationships	$	513.5	$	(424.5	)	$	89.0	$	520.3	$	(425.5	)	$	94.8
Patents		2.0		(2.0	)		—		2.0		(2.0	)		—
Trademarks, licenses and agreements		25.2		(24.8	)		0.4		25.7		(25.2	)		0.5
Trade names		34.7		(17.2	)		17.5		34.6		(16.6	)		18.0
Total other intangible assets	$	575.4	$	(468.5	)	$	106.9	$	582.6	$	(469.3	)	$	113.3

Amortization expense for other intangible assets was $6.4 million and $7.0 million for the three months ended March 31, 2019 and 2018, respectively.

For the three months ended March 31, 2019 and 2018, we recorded the following net restructuring and other expenses:

	Three Months Ended
	March 31, 2019
	Employee		Other Restructuring		Multi-Employer Pension Plan
	Terminations		Charges		Charges		Other		Total
Business Services	$	7.8	$	4.7	$	0.6	$	0.1	$	13.2
Marketing Solutions		0.1		—		0.1		—		0.2
Corporate		0.2		3.5		—		—		3.7
Total	$	8.1	$	8.2	$	0.7	$	0.1	$	17.1

	Three Months Ended
	March 31, 2018
	Employee		Other Restructuring		Multi-Employer Pension Plan
	Terminations		Charges		Charges		Other			Total
Business Services	$	1.8	$	0.8	$	0.7	$	(4.9	)	$	(1.6	)
Marketing Solutions		1.1		—		0.1		0.3			1.5
Corporate		0.3		0.6		—		—			0.9
Total	$	3.2	$	1.4	$	0.8	$	(4.6	)	$	0.8

For the three months ended March 31, 2019, we recorded net restructuring charges of $8.1 million for employee termination costs. These charges primarily relate to the planned relocation of a printing facility in Shenzhen, China, other announced facility closures in the Business Services segment and the reorganization of selling, general and administrative functions across each segment. Other restructuring charges of $8.2 million are primarily comprised of increased reserves for employee termination litigation, environmental matters and lease terminations. We also recorded multi-employer pension plan (“MEPP”) withdrawal obligation charges of $0.7 million and impairment charges related to facility closures of $0.1 million for the three months ended March 31, 2019.

For the three months ended March 31, 2018, we recorded net restructuring charges of $3.2 million for employee termination costs. These charges primarily related to the reorganization of selling, general and administrative functions across each segment and an announced facility closure in the Business Services segment. We also incurred charges for lease termination and other restructuring of $1.4 million and MEPP withdrawal obligations of $0.8 million for the three months ended March 31, 2018. Additionally, we recorded a $4.9 million net gain on the sale of previously impaired assets in the Business Services segment. These assets were impaired in 2015.

Restructuring and MEPP reserves as of December 31, 2018 and March 31, 2019, and changes during the three months ended March 31, 2019, were as follows:

			Restructuring		Foreign
	December 31,		and Other		Exchange and			Cash			March 31,
	2018		Charges		Other			Paid			2019
Employee terminations	$	4.8	$	8.1	$	(1.1	)	$	(2.4	)	$	9.4
MEPP withdrawal obligations		44.2		0.7		—			(1.6	)		43.3
Lease terminations and other		6.2		8.2		0.1			(3.5	)		11.0
Total	$	55.2	$	17.0	$	(1.0	)	$	(7.5	)	$	63.7

The current portion of restructuring reserves of $22.9 million at March 31, 2019 was included in Accrued liabilities and other, while the long-term portion of $40.8 million, primarily related to MEPP withdrawal obligations, employee terminations in litigation and lease termination costs, was included in Other noncurrent liabilities at March 31, 2019. The total liabilities for the withdrawal obligations associated with our decision to withdraw from all MEPPs included in Accrued liabilities and other and Other noncurrent liabilities are $6.6 million and $36.7 million, respectively, as of March 31, 2019.

We anticipate that payments associated with the employee terminations reflected in the above table will be substantially completed by March 2020, excluding employee terminations in litigation within the Business Services segment.

Payments on all of our MEPP withdrawal obligations are scheduled to be substantially completed by 2034. Changes based on uncertainties in these estimated withdrawal obligations could affect the ultimate charges related to MEPP withdrawals.

The restructuring liabilities classified as “lease terminations and other” consisted of lease terminations, other facility closing costs and contract termination costs. Payments on certain of the lease obligations are scheduled to continue until 2020. Market conditions and our ability to sublease these properties could affect the ultimate charges related to the lease obligations. Any potential recoveries or additional charges could affect amounts reported in our consolidated financial statements.

Components of net pension and other postretirement benefits plan (“OPEB”) income for the three months ended March 31, 2019 and 2018 were as follows:

	Three Months Ended
	March 31,
	2019			2018
Pension expense (income):
Service cost	$	0.2		$	0.2
Interest cost		8.4			7.8
Expected return on plan assets		(11.6	)		(12.6	)
Amortization, net		1.5			2.0
Settlements		—			0.3
Net pension income	$	(1.5	)	$	(2.3	)

OPEB expense (income):
Service cost	$	—		$	0.4
Interest cost		2.6			2.6
Expected return on plan assets		(3.3	)		(3.5	)
Amortization, net		(1.8	)		(0.7	)
Net OPEB income	$	(2.5	)	$	(1.2	)

During the three months ended March 31, 2019, we contributed $2.0 million to our retirement plans.

Share-based compensation expense totaled $3.4 million and $1.2 million for the three months ended March 31, 2019 and 2018, respectively.

In March 2019, we awarded our annual share-based compensation grants, which consisted of 0.6 million restricted stock units with a grant date fair value of $4.77 per unit and 0.6 million performance share units also with a grant date fair value of $4.77 per unit. The restricted stock units are subject to a three year graded vesting period and the performance share units are subject to a 34 month cliff vesting period. Dividends are not paid on restricted stock units.

In addition, during the three months ended March 31, 2019, we granted 1.3 million cash-settled restricted stock units (“phantom restricted stock units”) and 0.4 million cash-settled performance stock units (“phantom performance stock units”). Our share price on the date of grant was $5.03. The phantom restricted stock units vest and are payable in three equal installments over a period of three years after the grant date. The phantom performance stock units are subject to a 34 month cliff vesting period. Phantom stock units are not shares of our common stock and therefore the recipients of these awards do not receive ownership interest in the Company or stockholder voting rights. Phantom stock unit awards are subject to forfeiture upon termination of employment prior to vesting, subject in some cases to early vesting upon specified events, including death or permanent disability of the grantee, termination of the grantee’s employment under certain circumstances or a change in control of the Company. All phantom stock unit awards are classified as liability awards due to their expected settlement in cash, and are included in Accrued liabilities and other in the Condensed Consolidated Balance Sheets. Compensation expense for these awards is measured based upon the fair value of the awards at the end of each reporting period. Dividends are not paid on phantom stock units.

Our equity as of December 31, 2018 and March 31, 2019, and changes during the three months ended March 31, 2019, were as follows:

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)

Large Accelerated filer	☐	Accelerated filer	☒

Non-Accelerated filer	☐	Smaller reporting company	☐

		Emerging growth company	☐

		Page
	PART I

Item 1.	Condensed Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018	3
	Condensed Consolidated Statements of Operations for the three months ended March 31, 2019 and 2018	4
	Condensed Consolidated Statements of Comprehensive (Loss) Income for the three months ended March 31, 2019 and 2018	5
	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	35
Item 4.	Controls and Procedures	35

	PART II

Item 1.	Legal Proceedings	36
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36
Item 4.	Mine Safety Disclosures	36
Item 6.	Exhibits	37

Signatures		38

	Contract Assets		Contract Liabilities
	Short-Term		Short-Term		Long-Term
Balance at December 31, 2018	$	2.7	$	16.5	$	0.6
Balance at March 31, 2019		3.7		12.0		0.5

	March 31, 2019			December 31, 2018
Raw materials and manufacturing supplies	$	142.2		$	153.1
Work in process		75.0			75.1
Finished goods		127.5			120.1
LIFO reserve		(18.6	)		(18.6	)
Total inventories	$	326.1		$	329.7

	March 31, 2019			December 31, 2018
Land	$	51.1		$	51.0
Buildings		395.1			389.5
Machinery and equipment		1,807.6			1,797.1
		2,253.8			2,237.6
Less: Accumulated depreciation		(1,722.9	)		(1,706.3	)
Total property, plant and equipment-net	$	530.9		$	531.3