10-Q 1 rrd-10q_20190930.htm 10-Q rrd-10q_20190930.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, 2019

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)

 

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

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common Stock, par value $0.01 per share

 

RRD

 

New York Stock Exchange

Preferred Stock Purchase Rights

 

 

 

New York Stock Exchange

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

Yes      No  

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

 

Large Accelerated filer

  

Accelerated filer

 

 

  

 

 

Non-Accelerated filer

  

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

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

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

Yes      No  

As of October 28, 2019, 70.9 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, 2019

TABLE OF CONTENTS

 

 

 

 

Page

 

 

PART I

 

 

 

 

 

Item 1.

 

Condensed Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018

3

 

 

Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2019 and 2018

4

 

 

Condensed Consolidated Statements of Comprehensive (Loss) Income for the three and nine months ended September 30, 2019 and 2018

5

 

 

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

28

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

42

Item 4.

 

Controls and Procedures

42

 

 

 

 

 

 

PART II

 

 

 

 

 

Item 1.

 

Legal Proceedings

43

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

43

Item 4.

 

Mine Safety Disclosures

43

Item 6.

 

Exhibits

44

 

 

 

 

Signatures

45

 

 

 

 

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,

 

 

 

2019

 

 

2018

 

ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

144.7

 

 

$

370.6

 

Receivables, less allowances for doubtful accounts of $23.5 in 2019 (2018 - $25.9)

 

 

1,248.9

 

 

 

1,298.3

 

Inventories (Note 3)

 

 

338.7

 

 

 

329.7

 

Prepaid expenses and other current assets

 

 

111.7

 

 

 

101.1

 

Total current assets

 

 

1,844.0

 

 

 

2,099.7

 

Property, plant and equipment-net (Note 4)

 

 

513.6

 

 

 

531.3

 

Goodwill (Note 5)

 

 

554.9

 

 

 

553.4

 

Other intangible assets-net (Note 5)

 

 

105.6

 

 

 

113.3

 

Deferred income taxes

 

 

57.4

 

 

 

66.9

 

Operating lease assets (Note 13)

 

 

197.1

 

 

 

 

Other noncurrent assets

 

 

267.9

 

 

 

276.2

 

Total assets

 

$

3,540.5

 

 

$

3,640.8

 

LIABILITIES

 

 

 

 

 

 

 

 

Accounts payable

 

$

803.2

 

 

$

987.3

 

Accrued liabilities and other

 

 

348.8

 

 

 

347.4

 

Short-term operating lease liabilities (Note 13)

 

 

67.8

 

 

 

 

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

 

 

100.6

 

 

 

216.2

 

Total current liabilities

 

 

1,320.4

 

 

 

1,550.9

 

Long-term debt (Note 14)

 

 

1,928.5

 

 

 

1,875.3

 

Pension liabilities

 

 

87.9

 

 

 

97.9

 

Other postretirement benefits plan liabilities

 

 

66.2

 

 

 

67.8

 

Long-term income tax liability

 

 

76.2

 

 

 

91.1

 

Long-term operating lease liabilities (Note 13)

 

 

133.1

 

 

 

 

Other noncurrent liabilities

 

 

205.1

 

 

 

203.2

 

Total liabilities

 

 

3,817.4

 

 

 

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

 

 

3,357.3

 

 

 

3,404.0

 

Accumulated deficit

 

 

(2,244.7

)

 

 

(2,225.7

)

Accumulated other comprehensive loss

 

 

(173.9

)

 

 

(153.8

)

Treasury stock, at cost, 18.2 shares in 2019 (2018 - 18.6 shares)

 

 

(1,230.4

)

 

 

(1,285.5

)

Total RRD stockholders' equity

 

 

(290.8

)

 

 

(260.1

)

Noncontrolling interests

 

 

13.9

 

 

 

14.7

 

Total equity

 

 

(276.9

)

 

 

(245.4

)

Total liabilities and equity

 

$

3,540.5

 

 

$

3,640.8

 

 

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,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Products net sales

 

$

1,328.8

 

 

$

1,329.8

 

 

$

3,774.4

 

 

$

3,881.6

 

Services net sales

 

 

290.6

 

 

 

319.7

 

 

 

875.6

 

 

 

1,155.2

 

Total net sales

 

 

1,619.4

 

 

 

1,649.5

 

 

 

4,650.0

 

 

 

5,036.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products cost of sales (exclusive of depreciation and amortization)

 

 

1,073.5

 

 

 

1,076.8

 

 

 

3,076.4

 

 

 

3,167.7

 

Services cost of sales (exclusive of depreciation and amortization)

 

 

235.0

 

 

 

257.3

 

 

 

706.2

 

 

 

968.4

 

Total cost of sales

 

 

1,308.5

 

 

 

1,334.1

 

 

 

3,782.6

 

 

 

4,136.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products gross profit

 

 

255.3

 

 

 

253.0

 

 

 

698.0

 

 

 

713.9

 

Services gross profit

 

 

55.6

 

 

 

62.4

 

 

 

169.4

 

 

 

186.8

 

Total gross profit

 

 

310.9

 

 

 

315.4

 

 

 

867.4

 

 

 

900.7

 

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

 

 

190.5

 

 

 

203.8

 

 

 

589.1

 

 

 

626.4

 

Restructuring and other (income) expense-net (Note 6)

 

 

(2.3

)

 

 

11.0

 

 

 

30.8

 

 

 

22.8

 

Depreciation and amortization

 

 

43.5

 

 

 

44.2

 

 

 

126.2

 

 

 

137.5

 

Other operating expense (income)

 

 

5.4

 

 

 

(4.5

)

 

 

3.3

 

 

 

(4.6

)

Income from operations

 

 

73.8

 

 

 

60.9

 

 

 

118.0

 

 

 

118.6

 

Interest expense-net

 

 

37.4

 

 

 

42.0

 

 

 

115.6

 

 

 

125.7

 

Investment and other income-net

 

 

(4.6

)

 

 

(5.5

)

 

 

(11.3

)

 

 

(14.7

)

Loss on debt extinguishment

 

 

0.8

 

 

 

 

 

 

0.8

 

 

 

0.1

 

Income before income taxes

 

 

40.2

 

 

 

24.4

 

 

 

12.9

 

 

 

7.5

 

Income tax expense (benefit)

 

 

27.3

 

 

 

(10.4

)

 

 

15.9

 

 

 

(5.4

)

Net income (loss)

 

 

12.9

 

 

 

34.8

 

 

 

(3.0

)

 

 

12.9

 

Less: income attributable to noncontrolling interests

 

 

0.3

 

 

 

0.5

 

 

 

0.2

 

 

 

1.2

 

Net income (loss) attributable to RRD common stockholders

 

$

12.6

 

 

$

34.3

 

 

$

(3.2

)

 

$

11.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share attributable to RRD common stockholders (Note 10):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net income (loss) per share

 

$

0.18

 

 

$

0.49

 

 

$

(0.04

)

 

$

0.17

 

Diluted net income (loss) per share

 

$

0.18

 

 

$

0.49

 

 

$

(0.04

)

 

$

0.17

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

71.4

 

 

 

70.6

 

 

 

71.2

 

 

 

70.5

 

Diluted

 

 

71.4

 

 

 

70.7

 

 

 

71.2

 

 

 

70.8

 

 

See Notes to Condensed Consolidated Financial Statements

 

4


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

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(in millions)

(UNAUDITED)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Net income (loss)

 

$

12.9

 

 

$

34.8

 

 

$

(3.0

)

 

$

12.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Translation adjustments

 

 

(19.9

)

 

 

(8.4

)

 

 

(21.9

)

 

 

(31.1

)

Adjustments for net periodic pension and postretirement benefits plan cost

 

 

(0.2

)

 

 

1.6

 

 

 

(0.6

)

 

 

5.9

 

Other

 

 

0.6

 

 

 

 

 

 

2.1

 

 

 

 

Other comprehensive loss

 

 

(19.5

)

 

 

(6.8

)

 

 

(20.4

)

 

 

(25.2

)

Comprehensive (loss) income

 

 

(6.6

)

 

 

28.0

 

 

 

(23.4

)

 

 

(12.3

)

Less: comprehensive (loss) income attributable to noncontrolling interests

 

 

(0.1

)

 

 

0.1

 

 

 

(0.1

)

 

 

0.7

 

Comprehensive (loss) income attributable to RRD common stockholders

 

$

(6.5

)

 

$

27.9

 

 

$

(23.3

)

 

$

(13.0

)

 

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,

 

 

 

2019

 

 

2018

 

OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(3.0

)

 

$

12.9

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

126.2

 

 

 

137.5

 

Provision for doubtful accounts receivable

 

 

6.9

 

 

 

10.6

 

Share-based compensation

 

 

9.3

 

 

 

6.4

 

Deferred income taxes

 

 

9.8

 

 

 

7.3

 

Net pension and other postretirement benefits plan income

 

 

(12.1

)

 

 

(15.9

)

Other

 

 

(3.1

)

 

 

(5.9

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable-net

 

 

17.7

 

 

 

(5.7

)

Inventories

 

 

(21.1

)

 

 

(16.6

)

Prepaid expenses and other current assets

 

 

(11.4

)

 

 

(5.9

)

Accounts payable

 

 

(172.3

)

 

 

(150.7

)

Current income taxes

 

 

(41.1

)

 

 

(26.7

)

Accrued liabilities and other

 

 

11.5

 

 

 

2.3

 

Pension and other postretirement benefits plan contributions

 

 

(5.1

)

 

 

(13.5

)

Net cash used in operating activities

 

 

(87.8

)

 

 

(63.9

)

INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(107.4

)

 

 

(72.7

)

Acquisition of business

 

 

(3.0

)

 

 

 

Proceeds from sales of investments and other assets

 

 

32.8

 

 

 

49.9

 

Disposition of businesses

 

 

10.4

 

 

 

50.5

 

Payments related to company-owned life insurance

 

 

(1.3

)

 

 

(1.8

)

Net cash (used in) provided by investing activities

 

 

(68.5

)

 

 

25.9

 

FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Proceeds from other short-term debt

 

 

 

 

 

56.5

 

Payments on other short-term debt

 

 

(8.0

)

 

 

(12.2

)

Payments of current maturities and long-term debt

 

 

(221.6

)

 

 

(0.2

)

Proceeds from credit facility borrowings

 

 

1,061.8

 

 

 

975.1

 

Payments on credit facility borrowings

 

 

(897.8

)

 

 

(949.1

)

Dividends paid

 

 

(6.4

)

 

 

(21.8

)

Payments of withholding taxes on share-based compensation

 

 

(0.9

)

 

 

(0.7

)

Other financing activities

 

 

(1.0

)

 

 

(0.9

)

Net cash (used in) provided by financing activities

 

 

(73.9

)

 

 

46.7

 

Effect of exchange rate on cash, cash equivalents and restricted cash

 

 

(6.3

)

 

 

(14.0

)

Net decrease in cash, cash equivalents and restricted cash

 

 

(236.5

)

 

 

(5.3

)

Cash, cash equivalents and restricted cash at beginning of year

 

 

403.6

 

 

 

301.5

 

Cash, cash equivalents and restricted cash at end of period

 

$

167.1

 

 

$

296.2

 

 

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 (“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 nine months ended September 30, 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.

Cash, Cash Equivalents and Restricted Cash

The following table provides a reconciliation of cash, cash equivalents and restricted cash at September 30, 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.

 

 

 

September 30, 2019

 

 

December 31, 2018

 

Cash and cash equivalents

 

$

144.7

 

 

$

370.6

 

Restricted cash - current (a)

 

 

22.3

 

 

 

32.9

 

Restricted cash - noncurrent (b)

 

 

0.1

 

 

 

0.1

 

Total cash, cash equivalents and restricted cash

 

$

167.1

 

 

$

403.6

 

 

(a)

Included within Prepaid expenses and other current assets within the Condensed Consolidated Balance Sheets

(b)

Included within Other noncurrent assets within the Condensed Consolidated Balance Sheets

Cash payments for income taxes were $54.5 million and $28.4 million for the nine months ended September 30, 2019 and 2018, respectively. Cash refunds for income taxes were $7.7 million and $14.0 million for the nine months ended September 30, 2019 and 2018, respectively. Income taxes receivable of $25.5 million and $11.7 million as of September 30, 2019 and December 31, 2018, respectively, are included within Prepaid expenses and other current assets.

 

2. Revenue Recognition

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 had been billed but not yet shipped.

 

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)

 

Disaggregation of Revenue

The following table presents net sales disaggregated by products and services:

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Products

 

 

 

 

 

 

 

 

 

Commercial print

$

442.9

 

 

$

496.4

 

 

$

1,278.8

 

 

$

1,421.3

 

Direct marketing

 

193.5

 

 

 

142.7

 

 

 

479.0

 

 

 

424.1

 

Packaging

 

182.1

 

 

 

179.7

 

 

 

484.2

 

 

 

474.0

 

Statements

 

134.0

 

 

 

133.5

 

 

 

417.1

 

 

 

436.4

 

Labels

 

124.0

 

 

 

118.8

 

 

 

364.1

 

 

 

355.5

 

Digital print and fulfillment

 

122.5

 

 

 

113.5

 

 

 

347.2

 

 

 

332.6

 

Supply chain management

 

69.8

 

 

 

81.5

 

 

 

222.4

 

 

 

242.2

 

Forms

 

60.0

 

 

 

63.7

 

 

 

181.6

 

 

 

195.5

 

Total products net sales

$

1,328.8

 

 

$

1,329.8

 

 

$

3,774.4

 

 

$

3,881.6

 

Services

 

 

 

 

 

 

 

 

 

Logistics

$

204.6

 

 

$

229.1

 

 

$

614.3

 

 

$

880.3

 

Business process outsourcing

 

58.6

 

 

 

60.5

 

 

 

181.0

 

 

 

183.1

 

Digital and creative solutions

 

27.4

 

 

 

30.1

 

 

 

80.3

 

 

 

91.8

 

Total services net sales

$

290.6

 

 

$

319.7

 

 

$

875.6

 

 

$

1,155.2

 

Total net sales

$

1,619.4

 

 

$

1,649.5

 

 

$

4,650.0

 

 

$

5,036.8

 

 

 

Products

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.

The following is a description of our products:

Commercial Print

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.

Direct Marketing

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.

Packaging

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.

Statements

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.

 

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)

 

Labels

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.

Digital Print and Fulfillment

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 MotifTM, we also create custom photobooks.

Supply Chain Management

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.

Forms

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.

Services

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.

Logistics

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.

Business Process Outsourcing

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.

Digital and Creative Solutions

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.

Variable Consideration

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.

 

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)

 

Contract Balances

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

 

 

Contract Assets

 

 

Contract Liabilities

 

 

Short-Term

 

 

Short-Term

 

 

Long-Term

 

Balance at December 31, 2018

$

2.7

 

 

$

16.5

 

 

$

0.6

 

Balance at September 30, 2019

 

3.1

 

 

 

24.9

 

 

 

0.5

 

 

 

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 nine months ended September 30, 2019 from amounts included in contract liabilities at the beginning of the period was approximately $14.0 million. During the nine months ended September 30, 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.

3. Inventories

The components of inventories, net of excess and obsolescence reserves for raw materials and finished goods, at September 30, 2019 and December 31, 2018 were as follows:

 

 

 

September 30, 2019

 

 

December 31, 2018

 

Raw materials and manufacturing supplies

 

$

145.8

 

 

$

153.1

 

Work in process

 

 

83.1

 

 

 

75.1

 

Finished goods

 

 

129.2

 

 

 

120.1

 

LIFO reserve

 

 

(19.4

)

 

 

(18.6

)

Total inventories

 

$

338.7

 

 

$

329.7

 

 

4. Property, Plant and Equipment

The components of property, plant and equipment at September 30, 2019 and December 31, 2018 were as follows:

 

 

 

September 30, 2019

 

 

December 31, 2018

 

Land

 

$

47.8

 

 

$

51.0

 

Buildings

 

 

380.7

 

 

 

389.5

 

Machinery and equipment

 

 

1,778.4

 

 

 

1,797.1

 

 

 

 

2,206.9

 

 

 

2,237.6

 

Less: Accumulated depreciation

 

 

(1,693.3

)

 

 

(1,706.3

)

Total property, plant and equipment-net

 

$

513.6

 

 

$

531.3

 

 

During the three and nine months ended September 30, 2019 depreciation expense was $30.2 million and $85.4 million, respectively. During the three and nine months ended September 30, 2018 depreciation expense was $30.9 million and $96.5 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. As of September 30, 2019, we have received non-refundable deposits in accordance with the terms of the agreement of approximately $68.3 million which is recorded in Other noncurrent liabilities on the Consolidated Balance Sheets. As of September 30, 2019, the carrying cost of the building and land use rights is recorded in Other noncurrent assets and is not material.

 

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. Goodwill and Other Intangible Assets

The carrying amount of goodwill at September 30, 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

 

Acquisition

 

 

4.1

 

 

 

 

 

 

 

 

4.1

 

Foreign exchange

 

 

(2.6

)

 

 

 

 

 

 

 

(2.6

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net book value as of September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

 

2,598.2

 

 

 

519.5

 

 

 

 

 

3,117.7

 

Accumulated impairment losses

 

 

(2,308.7

)

 

 

(254.1

)

 

 

 

 

(2,562.8

)

Total

 

$

289.5

 

 

$

265.4

 

 

 

 

$

554.9

 

The components of other intangible assets at September 30, 2019 and December 31, 2018 were as follows:

 

 

 

September 30, 2019

 

 

December 31, 2018

 

 

 

Gross

 

 

 

 

 

 

 

 

 

 

Gross

 

 

 

 

 

 

 

 

 

 

 

Carrying

 

 

Accumulated

 

 

Net Book

 

 

Carrying

 

 

Accumulated

 

 

Net Book

 

 

 

Amount

 

 

Amortization

 

 

Value

 

 

Amount

 

 

Amortization

 

 

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Client relationships

 

$

518.3

 

 

$

(429.1

)

 

$

89.2

 

 

$

520.3

 

 

$

(425.5

)

 

$

94.8

 

Patents

 

 

2.0

 

 

 

(2.0

)

 

 

 

 

 

2.0

 

 

 

(2.0

)

 

 

 

Trademarks, licenses and agreements

 

 

24.6

 

 

 

(24.4

)

 

 

0.2

 

 

 

25.7

 

 

 

(25.2

)

 

 

0.5

 

Trade names

 

 

31.8

 

 

 

(15.6

)

 

 

16.2

 

 

 

34.6

 

 

 

(16.6

)

 

 

18.0

 

Total other intangible assets

 

$

576.7

 

 

$

(471.1

)

 

$

105.6

 

 

$

582.6

 

 

$

(469.3

)

 

$

113.3

 

Amortization expense for other intangible assets was $5.9 million and $18.1 million for the three and nine months ended September 30, 2019, respectively, and was $6.8 million and $20.7 million for the three and nine months ended September 30, 2018, respectively.

6. Restructuring and Other

For the three months ended September 30, 2019 and 2018, we recorded the following net restructuring and other (income) expenses:

 

 

 

Three Months Ended

 

 

 

September 30, 2019