10-K 1 rrd-10k_20191231.htm 10-K rrd-10k_20191231.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019

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.)

 

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 if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes      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  

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      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 (§229.405 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 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.    

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 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 Act).    Yes      No  

The aggregate market value of the shares of registrant’s common stock held by non-affiliates based on the sale price of the common stock on June 30, 2019 was $137,855,455.

As of February 21, 2020, 70,911,552 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 14, 2020 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

  

 

16

  

 

 

Item 2.

    

Properties

  

 

16

  

 

 

Item 3.

    

Legal Proceedings

  

 

16

  

 

 

Item 4.

    

Mine Safety Disclosures

  

 

17

  

 

 

 

    

Information About Our Executive Officers

  

 

18

  

 

Part II

 

 

    

 

  

 

 

 

 

 

Item 5.

    

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

  

 

19

  

 

 

Item 6.

    

Selected Financial Data

  

 

20

  

 

 

Item 7.

    

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

  

 

21

  

 

 

Item 7A.

    

Quantitative and Qualitative Disclosures about Market Risk

  

 

35

  

 

 

Item 8.

    

Financial Statements and Supplementary Data

  

 

35

  

 

 

Item 9.

    

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

  

 

35

  

 

 

Item 9A.

    

Controls and Procedures

  

 

36

  

 

 

Item 9B.

    

Other Information

  

 

38

  

 

Part III

 

 

    

 

  

 

 

 

 

 

Item 10.

    

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

  

 

38

  

 

 

Item 11.

    

Executive Compensation

  

 

38

  

 

 

Item 12.

    

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

  

 

38

  

 

 

Item 13.

    

Certain Relationships and Related Transactions, and Director Independence

  

 

39

  

 

 

Item 14.

    

Principal Accounting Fees and Services

  

 

39

  

 

Part IV

 

 

    

 

  

 

 

 

 

 

Item 15.

    

Exhibits, Financial Statement Schedules

  

 

39

  

 

 

Item 16.

    

Form 10-K Summary

  

 

39

  

 

 

 

 

Signatures

 

 

43

 

 

 

 

 

 

 

 

 

 

 

 

 

2


 

PART I

 

ITEM  1.

BUSINESS

Company Overview

R. R. Donnelley & Sons Company (“RRD,” 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 its clients. We assist clients in developing and executing multichannel communication strategies that engage audiences, reduce costs, drive revenues and enhance compliance. Our innovative content management offering, production platform, logistics services, supply chain management, outsourcing capabilities and customized consultative expertise assists our clients in the delivery of integrated messages across multiple media to highly targeted audiences at optimal times to their customers in virtually every private and public sector. We have strategically located operations that provide local service and responsiveness while leveraging the economic, geographic and technological advantages of a global organization.

Competitive Strategy

Our key strategic focus areas, which leverage our long-standing client relationships and comprehensive portfolio of capabilities, are as follows:

 

Driving Profitable Growth: We intend to drive profitable growth in each of our core businesses and shift our portfolio mix toward higher growth segments.

 

Extending our Capabilities: We intend to extend the range of our capabilities, products and service offerings to fuel organic growth from our global client base.

 

Expanding Print and Digital Technology Platforms: We intend to continue expanding our print and digital technology platforms, with innovative content management, data analytics, and multichannel capabilities for targeted markets.

 

Optimizing Business Performance: We intend to optimize our business performance by providing exceptional service and product quality to our clients while aggressively reducing our costs in order to improve margins and fund our transformation efforts.

 

Disciplined Capital Allocation: We intend to maintain a disciplined approach to capital allocation with an added focus on reducing our leverage, while also investing in our future through strategic acquisitions and business partnerships.

Segment Descriptions

Our reportable segments and their product and service offerings are summarized below.

Business Services

Our Business Services segment provides customized solutions at scale to help clients inform, service and transact with their customers. The segment’s primary product and service offerings include commercial print, logistics, packaging, statement printing, labels, supply chain management, forms and business process outsourcing. This segment also includes all of our operations in Asia, Canada, Europe and Latin America. In 2019, our Business Services segment accounted for 79.6% of our consolidated net sales.

Commercial Print

We provide 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. Commercial print accounted for 33.9% of our Business Services segment’s net sales for the fiscal year ended December 31, 2019.

Logistics

We provide 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. Logistics accounted for 16.3% of our Business Services segment’s net sales for the fiscal year ended December 31, 2019.

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Packaging

We provide packaging solutions, ranging from rigid boxes to in-box print materials, for clients in consumer electronics, life sciences, cosmetics and consumer packaged goods industries. Packaging accounted for 13.4% of our Business Services segment’s net sales for the year ended December 31, 2019.

Statements

We create 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. Statements accounted for 10.9% of our Business Services segment’s net sales for the fiscal year ended December 31, 2019.

Labels

We produce 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. Labels accounted for 10.0% of our Business Services segment’s net sales for the fiscal year ended December 31, 2019.

Supply Chain Management

We provide workflow design to assembly, configuration, kitting and fulfillment for clients in consumer electronics, telecommunications, life sciences, cosmetics, education and industrial industries. Supply chain management accounted for 6.0% of our Business Services segment’s net sales for the fiscal year ended December 31, 2019.

Forms

We produce a variety of forms including invoices, order forms and other business forms that support both the private and public sectors for clients in financial, government, retail, healthcare and business services industries. Forms accounted for 4.9% of our Business Services segment’s net sales for the fiscal year ended December 31, 2019.

Business Process Outsourcing

We provide outsourcing services including creative services, research and analytics, financial management and other services for legal providers, insurance, telecommunications, utilities, retail and financial services companies. Business process outsourcing accounted for 4.6% of our Business Services segment’s net sales for the fiscal year ended December 31, 2019.

Marketing Solutions

Our Marketing Solutions segment leverages an integrated portfolio of data analytics, creative services and multichannel execution to deliver comprehensive, end-to-end solutions. The segment’s primary product and service offerings include direct marketing, in-store marketing, digital print, kitting, fulfillment, digital and creative solutions and list services. In 2019, our Marketing Solutions segment accounted for 20.4% of our consolidated net sales.

Direct Marketing

We provide audience segmentation, creative development, program testing, print production, postal optimization and performance analytics for large-scale personalized direct mail programs. Direct marketing accounted for 52.9% of our Marketing Solutions segment’s net sales for the fiscal year ended December 31, 2019.

Digital Print and Fulfillment

Using digital and offset production capabilities, we provide 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. Digital print and fulfillment accounted for 38.4% of our Marketing Solutions segment’s net sales for the fiscal year ended December 31, 2019.

Digital and Creative Solutions

We help clients manage their customer data in order to better understand their customers and guide more effective marketing communications efforts. In addition, we create, edit and manage 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. Digital and creative solutions accounted for 8.7% of our Marketing Solutions segment’s net sales for the year ended December 31, 2019.

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Corporate

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

Business Dispositions and Acquisition

On October 25, 2019, we completed the sale of substantially all of the Global Document Solutions (“GDS”) business within the Business Services segment. GDS primarily provided statements and print management services in Europe. Additionally, during the year ended December 31, 2019, we sold the R&D business and our subsidiary, RR Donnelley Editora e Grafica Ltda., filed for bankruptcy liquidation in bankruptcy court in Brazil. The operations of these two businesses were included in the Business Services segment. During 2019, we also acquired a business within the Business Services segment, which was not material.

On July 2, 2018, we sold the Print Logistics business within the Business Services segment.

For further information on the above dispositions and acquisition, see Note 2, Dispositions and Acquisition, to the Consolidated Financial Statements.

Competitive Environment

The print and related services industry, in general, continues to have excess capacity and remains highly competitive and fragmented. Our clients operate in an evolving and ever-changing market. While the market is large and fragmented, there are tremendous changes occurring in how organizations need to create, manage, deliver and measure their communications. Some of the key factors facing our clients include regulatory changes, sensitivity to economic conditions, raw material pricing volatility and United States Postal Service (“USPS”) actions. In addition, 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 many of our products and services.

We believe that, across our range of products and services, competition is based primarily on quality and the ability to service the special needs of clients at a competitive price. Therefore, we believe we need to continue to differentiate our product and service offerings and aggressively manage our cost structure to remain competitive. Our business is differentiated by the wide array of quality communications products and services, including print and content management, we provide for our clients. We work with our clients to create, manage, deliver and optimize their multichannel communications strategies by providing innovative solutions to meet increasing customer demands in light of the large and evolving marketplace. We also continue to develop and expand our creative and design, content management, digital and print production, supply chain management and distribution services to address our clients evolving needs while supporting the strategic objective of becoming a leading global provider of integrated communication products and services.

Seasonality

Advertising and consumer spending trends affect demand in several of the end-markets we serve. As such, we have some seasonality in our business, mostly in the second half of the year, despite the breadth of our product and service offerings.

Raw Materials

The primary raw materials we use in our print businesses are paper and ink. We negotiate with leading suppliers to maximize our purchasing efficiencies. Some of the paper we use is supplied directly by clients. Variations in the cost and supply of certain paper grades and ink formulations used in the manufacturing process may affect our consolidated financial results. Paper prices have fluctuated over the past few years and we expect continued volatility in the foreseeable future. Generally, clients directly absorb the impact of changing prices on client-supplied paper. With respect to paper we purchase, we have historically passed most changes in price through to our clients although in many cases there is a delay based on terms within individual client contracts. We believe contractual arrangements and industry practice will support our continued ability to pass on any future paper price increases, but there is no assurance that market conditions will continue to enable us to successfully do so. We believe 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 clients’ demand for printed products. We have undertaken various strategic initiatives to mitigate any foreseeable supply disruptions with respect to our paper and ink requirements.

5


 

We continue to monitor the impact of changes in the price of crude oil and other energy costs, which impact our ink suppliers, logistics operations and manufacturing costs. Crude oil, energy prices and market cost of transportation continue to be volatile. We believe our logistics operations will continue to be able to pass a substantial portion of any increases in fuel prices directly to our clients in order to offset the impact of related cost increases. Decreases in fuel prices are also passed on to clients which negatively impact sales. However, our logistics operation is restricted in its ability to pass on increased cost of transportation costs to some clients in the short term. Therefore, increases in the market cost of transportation will negatively impact income from operations. We generally cannot pass on to clients the impact of higher energy prices on our manufacturing costs. We 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 client demand or the related impact either will have on our consolidated annual results of operations, financial position or cash flows.

Distribution

Our products are distributed to end-users through U.S. and foreign postal services, through retail channels, electronically or by direct shipment to client facilities. In cooperation with trusted logistics vendors, we manage the distribution of most client products we print in the U.S. and Canada to maximize efficiency and reduce costs for clients.

As a leading mail service provider of both First-Class and Marketing mail, we are ranked by the USPS as one of the largest preparers of mailings in the U.S. We work closely with our clients and the USPS to offer innovative products and mail preparation services to minimize postage costs. While we do not directly absorb the impact of higher postal rates on our clients’ mailings, demand for products distributed through the U.S. or foreign postal services has been negatively impacted by increases in postal rates, as postal costs are a significant component of many clients’ cost structures.

In accordance with the 2006 Postal Accountability and Enhancement Act (“PAEA”), the Postal Regulatory Commission (“PRC”) adjusted and approved USPS filings for a CPI based average price increase of 1.5% to 1.9% depending on the major class of mail. The new prices took effect on January 26, 2020.

Additionally, as required on the 10-year anniversary of PAEA, the PRC initiated a comprehensive review of PAEA on December 20, 2016, to determine if the current system for regulating rates and classes for market-dominant products is still achieving the original objectives of the law. The PRC issued its findings on December 1, 2017 and concluded that the current system was not meeting all of PAEA’s original objectives. To remedy this situation, the PRC proposed recommendations, which among other things, allows the Postal Service pricing flexibility of “CPI + 2%” on market-dominant mail products for a 5-year period of time. The PRC asked for industry stakeholder input, comments and alternative suggestions to these recommendations which were due by March 1, 2018. The industry reaction to the PRC’s recommendations was overwhelmingly negative, which in turn caused the PRC to reconsider and issue an amended proposal on December 12, 2019, nearly 21 months later. Industry stakeholders are expected to reply to the newest proposal by March 2020.

In other developments, the Trump administration on April 12, 2018 issued an Executive Order establishing a Task Force (“TF”) to evaluate the USPS. On December 4, 2018, the TF issued a formal report calling for a total reevaluation of the Postal Service business model to make the organization more viable and sustainable going into the future. No further action related to the TF report occurred in 2019.

Clients

We have more than 50,000 clients worldwide, including 94% of the Fortune 100, 85% of the Fortune 500 and 74% of the Fortune 1000. Our products and services enable some of the world’s largest companies to create, manage and deliver comprehensive and cost-effective multi-channel communications around the world. For each of the years ended December 31, 2019, 2018 and 2017, no single client accounted for 10% or more of consolidated net sales.

Technology, Research and Development

We invest in technology and research and development as a key strategy for our business. We believe that investing in new technologies allows us to remain on the forefront of content management and data analytics, while also allowing us to support our clients’ growing utilization of digital and print technologies. In addition, these technologies help expand our capabilities to provide additional services to clients as customers’ needs evolve. Our cost for research and development activities is not material to our consolidated annual results of operations, financial position or cash flows. In addition, we do not believe that our business is dependent upon any single patent or group of patents. We actively monitor the registrations of our trademark and patent portfolio to ensure that our intellectual property is appropriately protected and maintained.

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Cybersecurity

Our cybersecurity program is designed for needs and expectations of our clients who entrust us with highly sensitive information. Furthermore, our healthcare and insurance printing businesses are subject to industry-specific data regulations, including the Health Care Insurance Portability and Accountability Act of 1996, which could subject us and our clients to liability should sensitive customer or patient information be publicly disclosed. Our infrastructure and technology, expansive and highly-trained global workforce and comprehensive security and compliance program enable us to safely process, store and protect customer information in compliance with relevant regulations.

Our infrastructure and technology security capabilities are bolstered by our relationship with a leading data center services provider. Furthermore, our networks are monitored by intrusion detection services around the clock, and our systems and applications are routinely tested for vulnerabilities and are operated under a strict patch management program.

We employ a highly skilled IT workforce to implement our cybersecurity programs and to handle specific security responsibilities. As a result of annual mandatory security awareness training, our IT workforce is trained to address security and compliance-related issues as they arise. Additionally, our IT employees are carefully screened, undergo a thorough background check and are bound by a nondisclosure agreement that details such employee’s security and legal responsibilities with regard to information handling.

Environmental Compliance

It is our policy to conduct our global operations in accordance with all applicable laws, regulations and other requirements. It is not possible to quantify with certainty the impact of potential failures regarding environmental matters, particularly remediation and other compliance efforts that we may undertake in the future. However, in our opinion, compliance with the present environmental protection laws, before taking into account estimated recoveries from third parties, will not have a material adverse effect on our consolidated annual results of operations, financial position or cash flows.

Employees

As of December 31, 2019, we had 36,400 employees.

As of December 31, 2019, 431 of our U.S. employees were covered by collective bargaining agreements at 10 of our U.S. facilities, representing 2.8% of our U.S. workforce. We also have collective bargaining agreements with unionized employees in China, Canada, Mexico, Chile and Europe. We have not experienced a work stoppage during the past five years. We believe that our relationships with our employees and collective bargaining groups are good.

Available Information

We maintain an Internet website at www.rrd.com where our 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”). Reports, proxy and information statements and other information that is filed electronically with the SEC are available on the SEC’s website at www.sec.gov.

The Principles of Corporate Governance of our Board of Directors, the Charters of the Audit, Human Resources and Corporate Responsibility & Governance Committees of the Board of Directors and our Principles of Ethical Business Conduct are also available on the Investor Relations portion of www.rrd.com, and will be provided, free of charge, to any stockholder who requests a copy. References to our 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.

Forward-Looking Statements

This Annual Report on Form 10-K and any documents incorporated by reference contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties and are based on our beliefs and assumptions. Generally, forward-looking statements include information concerning possible or assumed future actions, events, or results of operations of ours. 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. We claim 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 factors identified below are believed to be significant factors, but not necessarily all of the significant factors, that could cause actual results to differ materially from those expressed in any forward-looking statement. Unpredictable or unknown factors could also have material effects on us.

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The following important factors, in addition to those discussed elsewhere in this Annual Report on Form 10-K, could affect our future results and could cause those results or other outcomes to differ materially from those expressed or implied in our forward-looking statements:

 

adverse changes in global economic conditions and the resulting effect on the businesses of our clients;

 

changes in customer preferences or a failure to otherwise manage relationships with our significant clients;

 

loss of brand reputation and decreases in quality of client support and service offerings;

 

political and regulatory risks and uncertainty in the countries in which we operate or sell our products and services;

 

taxation related risks in multiple jurisdictions;

 

adverse credit market conditions and other issues that may affect our ability to obtain future financing on favorable terms;

 

limitations on our borrowing capacity in our credit facilities;

 

increases in interest rates;

 

our ability to make payments on, reduce or extinguish any of our material indebtedness;

 

changes in the availability or costs of key materials (such as ink, paper and fuel) or increases in shipping costs;

 

our ability to improve operating efficiency rapidly enough to meet market conditions;

 

impairment of assets as a result of a decline in our individual reporting units’ expected profitability;

 

our ability and/or our vendors’ ability to implement and maintain information technology and security measures sufficient to protect against breaches and data leakage or the failure to properly use and protect customer, Company and employee information and data;

 

a failure in or breach of data held in the computer systems we and our vendors maintain;

 

increased pricing pressure as a result of the competitive environment in which we operate;

 

successful negotiation, execution and integration of acquisitions;

 

our ability to execute on our portfolio optimization strategies, including potential sales of non-core assets;

 

increasing health care and benefits costs for employees and retirees;

 

changes in our pension and OPEB obligations;

 

adverse trends or events in our operations outside of the United States;

 

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

 

catastrophic events which may damage our facilities or otherwise disrupt the business;

 

the effect of changes in laws and regulations, including changes in accounting standards, trade, tax, environmental compliance, health and welfare benefits, price controls and other regulatory matters and the cost, which could be substantial, of complying with these laws and regulations;

 

changes in the regulations applicable to our clients, which may adversely impact demand for our products and services;

 

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

 

failures or errors in our products and services;

 

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

 

inability to hire and retain employees;

 

potential contingent obligations related to leases;

 

the spinoffs resulting in significant tax liability; and

 

other risks and uncertainties detailed from time to time in our filings with the SEC.

8


 

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 our current plans, estimates and beliefs. We do not undertake and specifically disclaim 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. We undertake 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.

ITEM  1A.

RISK FACTORS

Our 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 related to our business

Global market and economic conditions, as well as the effects of these conditions on our clients’ businesses, may adversely affect us.

In general, demand for our products and services is highly correlated with general economic conditions. Because a significant part of our business relies on our clients’ advertising spending, which is driven in part by economic conditions and customer spending, a prolonged downturn in the global economy and an uncertain economic outlook may further reduce the demand for printing and related services that we provide to these clients. Delays or reductions in clients’ spending could have an adverse effect on demand for our products and services which may adversely affect our results of operations, financial position and cash flows. 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. In addition, client difficulties may result in increases in bad debt write-offs and allowances for doubtful accounts receivable. 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 us to forecast operating results and to make decisions about future investments.

Changes in customer preferences have reduced, and may continue to reduce, demand for our products and services in certain markets. In addition, failure to manage changes in our relationships with our significant clients may have an adverse effect on our results of operations.

Many of the end markets in which our clients compete are experiencing changes due to technological progress and changes in customer preferences. In order to grow and remain competitive, we will need to continue to adapt to future changes in technology, enhance our existing offerings and introduce new offerings to address the changing demands of clients. If we are unable to continue to utilize new and existing technologies to adapt to new distribution methods and address changing customer preferences, our business may be adversely affected.

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

In addition, electronic delivery of documents and data, including the online distribution and hosting of media content, offer alternatives to traditional delivery of printed documents. Customers continue to accept electronic substitution in statement printing and forms while online and digital advertising is impacting clients’ printed advertising spend. The extent to which customers will continue to accept electronic delivery is uncertain and it is difficult to predict future acceptance of these alternatives. Electronic delivery has adversely affected our products, such as forms and statement printing. To the extent that customers, clients and regulators continue to accept these alternatives, demand for our products and services may be further adversely affected.

During 2019, our five largest clients accounted for 9.5% of our net sales in the aggregate. There can be no assurance that our clients will continue to purchase our products in the same mix or quantities or on the same terms as in the past. The loss of or disruptions related to significant clients may result in a reduction in sales or change in the mix of products we sell to significant clients. This may adversely affect our results of operations, financial condition and cash flows.

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Additionally, disputes with significant suppliers, including those related to pricing or performance, may adversely affect our ability to supply products to our clients and also our results of operations, financial condition and cash flows.

Our business is dependent upon brand reputation and the quality of our client support and services offerings. If we fail to offer effective client support and services, our brand reputation could be harmed and clients may not use our products and services, which may have an adverse effect on our results of operations.

A high level of client support and service is critical for the successful marketing and sale of our solutions and the maintenance and enhancement of our brand reputation. If we are unable to provide a level of client support and service to meet or exceed the expectations of our clients, we may experience a loss of clients and market share and a decline in our brand reputation which may result in reduced client demand for our products and services. Furthermore, our brand reputation may be impacted by a wide range of factors, some of which are out of our control, including actions of our competitors and third party providers and positive or negative publicity, any or all of which could adversely affect our operations.

Our operations are subject to political and regulatory risks in the countries in which we operate.

Our operations may be substantially affected by both domestic and international political or regulatory risk including general political conditions in the countries in which we operate; unexpected legal, regulatory or tax changes; governmental actions which have the effect of restriction on our business or opportunities or make it more expensive for us to operate in those jurisdictions; and changes in tax laws that would reduce net income due to withholding requirements or the imposition of tariffs or other restrictions.

In addition, potential political uncertainty in our developed markets, or the perception of such uncertainty, has had and may continue to have an adverse effect on global economic conditions and the stability of global financial markets. This may reduce global market liquidity and restrict the ability of key market participants to operate in certain financial markets. Any of these factors may adversely affect our results of operations, financial position and cash flows. Our success will depend, in part, on our ability to effectively anticipate and manage these and other risks associated with our domestic and international operations.

We are subject to taxation related risks in multiple jurisdictions.

We are a U.S.-based global company subject to tax in multiple U.S. and foreign tax jurisdictions. Significant judgment is required in determining our global provision for income taxes, deferred tax assets and liabilities and in evaluating our tax positions on a worldwide basis. While we believe our tax positions are consistent with the tax laws in the jurisdictions in which we conduct our business, it is possible that these positions may be overturned by jurisdictional tax authorities, which may have a significant impact on our global provision for income taxes.

Tax laws are dynamic and subject to change as new laws are passed and new interpretations of the law are issued or applied. The Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was signed into law on December 22, 2017 and represents the most significant change to U.S. tax law since 1986. During 2017, we recorded provisional estimates of the impact of the Tax Act, and during the fourth quarter of 2018, we finalized our accounting analysis for the income tax effects of the Tax Act. However, in the future, we may be subject to additional taxes as required under the Tax Act, based upon new regulations and guidance which may adversely affect our results of operations, financial position and cash flows.

Many countries are actively considering changes to existing tax laws that, if enacted, could increase our tax obligations in countries where we do business. If U.S. or other foreign tax authorities change applicable tax laws, our overall taxes could increase, which may adversely affect our business, results of operations, financial position and cash flows.

Adverse financial market conditions, our operating performance and our creditworthiness may limit our ability to obtain future financing and the cost of any such capital may be higher than in past periods.

We have a substantial amount of outstanding debt which could adversely affect our business, results of operations, financial condition and cash flows. Uncertainty and volatility in global financial markets may cause financial institutions to fail, lenders to reduce lending or investors to reinvest in assets that are considered less risky. The failure of a financial institution that is a lender under our existing senior secured asset-based revolving credit facility (the “ABL Credit Facility”) would reduce its size unless another financial institution was willing to replace such commitments. Future capital markets transactions are dependent on our financial performance as well as market conditions, which may result in receiving financing on terms less favorable to us than our existing financings. In addition, our access to future financing and our ability to refinance existing debt will depend on a variety of factors such as our financial performance, the general availability of credit, our credit ratings and credit capacity at the time we pursue such financing.

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Our current corporate credit ratings are below investment grade and, as a result, our financing costs may further increase and our ability to obtain financing may be limited. If adequate capital is not available to us on reasonable terms and our internal sources of liquidity prove to be insufficient, or if future financings require more restrictive covenants, such combination of events could adversely affect our ability to (i) acquire new businesses or enter new markets, (ii) service or refinance our existing debt, (iii) pay dividends on common stock, (iv) make necessary capital investments, and (v) make other expenditures necessary for the ongoing conduct of our business.

Our ABL Credit Agreement limits our borrowing capacity to the value of certain of our assets. In addition, our obligations under our ABL Credit Agreement and Term Loan Credit Agreement are secured by substantially all of the assets of the Company and our material domestic subsidiaries and lenders may exercise remedies against the collateral if an event of default occurs.

Our borrowing capacity under our ABL Credit Agreement is equal to the lesser of (i) $800.0 million and (ii) a borrowing base formula based on the amount of accounts receivable, inventory, machinery, equipment and, if we were to so elect in the future subject to the satisfaction of certain conditions, fee-owned real estate of the Company and our material domestic subsidiaries that are guarantors under the ABL Credit Agreement, subject to certain eligibility criteria and advance rates (collectively, the “Borrowing Base”). In the event of any material decrease in the amount of or appraised value of the assets in the Borrowing Base, our borrowing capacity would similarly decrease, which could adversely affect our business and liquidity.

If an event of a default occurs under our ABL Credit Agreement or Term Loan Credit Agreement (collectively, the “Credit Agreements”), the lenders’ commitment to extend further credit under our ABL Credit Agreement could be terminated, our outstanding obligations under either or both of the Credit Agreements could become immediately due and payable, outstanding letters of credit issued under our ABL Credit Agreement may be required to be cash collateralized, and remedies may be exercised against the collateral securing either or both of the Credit Agreements. If we are unable to borrow under our ABL Credit Agreement, we may not have the necessary cash resources to fund our operations or to meet scheduled repayments of other outstanding indebtedness and, if any event of default occurs under either Credit Agreement, there is no assurance that we would have the cash resources available to repay such accelerated obligations, refinance such indebtedness on commercially reasonable terms, or at all, or cash collateralize our letters of credit issued under the ABL Credit Agreement, which would have a material adverse effect on our business, financial condition, results of operations and liquidity.

Restrictive covenants in our ABL Credit Agreement and Term Loan Credit Agreement could limit our financial and operating flexibility.

Our ABL Credit Agreement and Term Loan Credit Agreement contain various affirmative and negative covenants applicable to us and our subsidiaries. Certain restrictions on operations become applicable if our borrowing availability under the ABL Credit Agreement falls below certain thresholds. These restrictions could impose significant operating and financial limitations and restrictions on us, including restrictions on our ability to enter into particular transactions and to engage in other actions that we may believe are advisable or necessary for our business.

An increase in interest rates could have a material adverse effect on our business.

Borrowings under our Credit Agreements bear interest at rates that are calculated based on the London Interbank Offered Rate (LIBOR) or a base rate plus, in each case, an applicable margin which, in the case of the ABL Credit Agreement, is dependent on the average quarterly borrowing availability under our ABL Credit Agreement. As a result, we are exposed to risks associated with fluctuations in interest rates, including if the U.S. Federal Reserve raises its benchmark interest rate. We may utilize derivative financial instruments, such as interest rate swaps, to manage our interest rate risk. There can be no assurance, however, that increases in interest rates will not adversely affect our business, financial position and results of operations by causing an increase in interest expense. Significantly higher interest rates may also, among other things, reduce the availability and increase the cost of obtaining new debt and refinancing existing indebtedness, as well as negatively impact the market price of our common stock.

 

In July 2017 the United Kingdom Financial Conduct Authority (the “FCA”), which regulates LIBOR, announced that the FCA intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. It is unknown whether any banks will continue to voluntarily submit rates for the calculation of LIBOR after 2021 or whether LIBOR will continue to be published by its administrator based on these submissions or on any other basis. It is not possible to predict the effect of these changes, other reforms, or the establishment of alternative reference rates, but the potential phase out of LIBOR could cause market volatility or disruption, which could adversely affect our current or future floating rate debt obligations, including obligations under our ABL Credit Agreement and Term Loan Agreement, our current or future derivative financial instruments that utilize LIBOR, and our overall cost of funding.

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We may not be able to reduce or extinguish our material indebtedness, and as a result we may have increased financial leverage, which may adversely affect our business.

We have substantial indebtedness and our interest and principal payments are significant. In addition, our Term Loan Credit Agreement requires us to make quarterly principal payments and to make prepayments with excess cash flow and asset sale proceeds in certain circumstances. If we are unable to reduce this indebtedness, we will continue to have increased financial leverage, which may limit or restrict our ability to operate our business. In addition, our ability to make payments on, repay or refinance, such debt, will depend largely upon our future operating performance.

We may be adversely affected by a decline in the availability of raw materials or by fluctuations in the costs of paper, ink, energy and other raw materials.

We are dependent on the availability of paper, ink and other raw materials to support our operations. As such, purchases of paper, ink, energy and other raw materials represent a large portion of our costs. Increases in the costs of these inputs may increase our costs and we may not be able to pass these costs on to clients through higher prices. Increases in the cost of materials may adversely affect clients’ demand for our printing and related services. Other unforeseen developments in these markets may result in a decrease in the supply of paper, ink or other raw materials which may adversely affect our results of operations, financial position and cash flows.

We may be unable to improve our operating efficiency rapidly enough to meet market conditions.

Because the markets in which we operate are highly competitive, we must continue to improve our operating efficiency in order to maintain or improve our profitability. There is no assurance that we 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.

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

During 2019 and in prior years we have recorded significant goodwill and other long-lived asset impairments and continue to hold goodwill, other long-lived assets and deferred tax assets on our balance sheet. A decline in expected profitability may call into question the recoverability of our remaining goodwill, other long-lived tangible and intangible assets or deferred tax assets and require the write down or write off of these assets or, in the case of deferred tax assets, recognition of a valuation allowance through a charge to income. Such events have had and may continue to have an adverse effect on our results of operations and financial position.

Our services depend on the reliability of computer systems we and our vendors maintain. If our systems fail or are unreliable, our operations may be adversely affected.

We depend on our information technology and data processing systems to operate our business, and a significant malfunction or disruption in the operation of our systems may disrupt our business and adversely affect our ability to operate and compete in the markets we serve. These systems include systems that we own and operate, as well as those systems of our vendors. Such systems are susceptible to malfunctions and interruptions due to equipment damage and power outages and a range of other hardware, software and network problems, as well as human error, employee misconduct, hacking and cybercrime. We also periodically upgrade and install new systems, which if installed or programmed incorrectly, may cause significant disruptions. If a disruption occurs, we may incur losses and costs for interruption of our operations, which may adversely affect our results of operations, financial condition and cash flows.

We may suffer a material data breach of sensitive information. If our efforts to protect the security of such information are unsuccessful, any such material failures may result in significant costs to investigate and remediate the data-breach, private litigation expense and costly government enforcement actions and penalties, and may have an adverse effect on our operations and reputation.

Maintaining the confidentiality, integrity and availability of our systems, software and solutions is an issue of critical importance for us and our clients and users who rely on us to protect the confidentiality of certain information they provide us. Many of our clients’ industries are highly regulated and have established standards and requirements for safeguarding the confidentiality, integrity and availability of information relating to their businesses and customers. Confidential and sensitive information stored in our systems are susceptible to cybercrime, or threats of intentional disruption, which are increasing in terms of sophistication and frequency. Disclosure of the information maintained on our systems due to human error, breach of our systems through hacking or cybercrime, a leak of confidential information due to employee misconduct or other such events may damage our reputation, subject us to regulatory enforcement action and cause significant reputational harm for our clients, all of which may materially affect our results of operations, financial condition and cash flows. In addition, as security threats continue to evolve and increase in terms of sophistication, we may invest additional resources in the security of our systems. The level of investment could also adversely affect our results of operations, financial condition and cash flows.

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The highly competitive market for our products and industry consolidation may continue to create adverse price pressures.

The markets for the majority of our product categories are highly fragmented and we have a large number of competitors. We believe excess capacity in our markets has caused downward price pressure and this trend is likely to continue. In addition, consolidation in the markets in which we compete may increase competitive price pressures due to competitors lowering prices.

We believe that selectively pursuing acquisitions is an important strategy for us. If our competitors are able to successfully combine with one another or otherwise consolidate, the competitive landscape would be significantly altered. Such consolidation would create stronger competitors with greater financial resources and broader manufacturing and distribution capabilities than our own, and, if we are not successful with our own efforts to consolidate or adapt effectively to increased competition, the resulting increase in competitive pressures may adversely affect our results of operations, financial position and cash flows.

We have in the past acquired, and intend in the future to acquire, other businesses, and we may be unable to successfully integrate the operations of these businesses and may not achieve the cost savings and increased net sales anticipated as a result of these acquisitions.

Achieving the anticipated benefits of acquisitions will depend in part upon our 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 we 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 our day-to-day operations. In addition, the process of integrating operations may cause an interruption of, or loss of momentum in, the activities of one or more of our businesses and the loss of our key personnel or the acquired businesses. Further, employee uncertainty and lack of focus during the integration process may disrupt our operations or the operations of the acquired businesses. Our strategy is, in part, predicated on our ability to realize cost savings and to increase net sales through the acquisition of businesses that add to the breadth and depth of our products and services. Achieving these cost savings and net sales increases is dependent upon a number of factors, many of which are beyond our control. In particular, we 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 trend of increasing costs to provide health care and other benefits to our employees and retirees may continue.

We provide health care and other benefits to employees and retirees. Costs for health care have increased more rapidly than general inflation in the U.S. economy. If this trend in health care costs continues, our cost to provide such benefits may increase, adversely affecting our profitability. Changes to health care regulations in the U.S. may also increase our cost of providing such benefits.

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

The funded status of our pension and OPEB plans is dependent upon many factors, including returns on invested assets and the level of certain market interest rates. Market conditions may lead to changes in the discount rates used to value the year-end benefit obligations of the plans, which may partially mitigate or worsen the effects of lower asset returns. If adverse market conditions were to continue for an extended period of time, our costs and required cash contributions associated with pension and OPEB plans may substantially increase in future periods, adversely impacting our financial condition.

We may be more vulnerable to adverse events and trends associated with operations outside the U.S.

We have significant operations outside the U.S. Conducting business outside the U.S. subjects us to a number of additional risks and challenges, including:

 

periodic changes in a specific country's or region's economic conditions, such as recession;

 

compliance with a wide variety of domestic and foreign laws and regulations (including those of municipalities or provinces where we have operations) and unexpected changes in those laws and regulatory requirements, including uncertainties regarding taxes, social insurance contributions and other payroll taxes and fees to governmental entities, tariffs, quotas, export controls, export licenses and other trade barriers;

 

unanticipated restrictions on our ability to sell to foreign clients where sales of products and the provision of services may require export licenses;

 

certification requirements;

 

fluctuations in foreign currency exchange rates, including those resulting from inflation and currency devaluation activities;

 

inadequate protection of intellectual property rights in some countries;

13


 

 

effects of the United Kingdom’s exit from the European Union and related potential disruption to trade;

 

potential political, legal and economic instability, foreign conflicts, terrorism and the impact of regional and global infectious illnesses in the countries in which we and our clients, suppliers and contract manufacturers are located;

 

difficulties and costs of staffing and managing international operations across different geographic areas and cultures, including assuring compliance with the U.S. Foreign Corrupt Practices Act and other U. S. and foreign anticorruption laws; and

 

fluctuations in freight rates and transportation disruptions.

These factors, individually or in combination, may impair our ability to effectively deliver our products and services, result in unexpected expenses, or cause an unexpected decline in the demand for our products in certain countries or regions. Specifically with respect to our operations in China, our financial performance may be adversely impacted as a result of the following risks, among others, regulation of foreign investment and business activities by the Chinese government, including scrutiny of foreign companies, may limit our ability to expand our business in China; uncertainties with respect to the legal system in China may limit the legal protections available to us in China; government restrictions on the remittance of currency out of China and the ability of any subsidiary we may establish in China to pay dividends and make other distributions to us; unfavorable result of ongoing trade negotiations between the U.S. and China; and potential unfavorable tax and tariff consequences as a result of our operations in China.

Further, our business could be adversely affected by the recent outbreak of the respiratory illness caused by COVID-19, which was first identified in Wuhan, China. This situation is evolving and any further significant spread of this virus may have a material and adverse effect on our business and may include temporary closures of our facilities or the facilities of our suppliers and clients, restrictions on our ability to distribute and sell our products, and other disruptions caused to us, our suppliers or clients as a result of this virus. This may adversely affect our results of operations, financial position and cash flows.

We are exposed to significant risks related to potential adverse changes in currency exchange rates.

We are exposed to the impact of foreign currency fluctuations based on our global operations. Although the results in our Consolidated Financial Statements are reported in U.S. dollars, we also earn revenues, pay expenses, own assets and incur liabilities in various foreign currencies. Fluctuations in currency exchange rates have had, and will continue to have, an impact on our results expressed in U.S. dollars. We may enter into derivative instruments, such as foreign currency forward contracts, to hedge certain exposures to exchange rate fluctuations. There can be no assurance, however, that our efforts at hedging will be successful and that currency exchange rate fluctuations will not adversely affect our results of operations, financial position and cash flows.  

We also face risks arising from the imposition of exchange controls, which may limit our ability to convert foreign currencies into U.S. dollars or to remit dividends and other payments by our foreign subsidiaries or businesses located in or conducted within a country imposing controls.

Catastrophic events may damage or destroy our factories, distribution centers or other facilities, which may disrupt our business.

Natural disasters, conflicts, wars, terrorist attacks, fires or other catastrophic events may cause damage or disruption to our factories, distribution centers or other facilities, which may adversely affect our ability to manage logistics, cause delays in the delivery of products and services to our clients, and create inefficiencies in our supply chain. An event of this nature may also prevent us from maintaining ongoing operations and performing critical business functions. While we maintain backup systems and operate out of multiple facilities to reduce the potentially adverse effect of these types of events, a catastrophic event that results in the destruction of any of our major factories, distribution centers or other facilities would affect our ability to conduct normal business operations, which may adversely affect our results of operations, financial position and cash flows.

Changes in rules and regulations to which we are subject may increase our costs, which may adversely affect us.

We are 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 we operate. Changes in these regulations may result in a significant increase in our costs to comply. Compliance with changes in rules and regulations may require increases to our 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, including 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, as well as the need to address any violations thereof, may result in additional costs, which may adversely affect our results of operations, financial condition and cash flows.

14


 

Many of our clients are subject to rules and regulations requiring certain printed or electronic communications, governing the form of such communications and protecting the privacy of customers. For instance, our healthcare and insurance printing businesses are subject to such regulations. Changes in these regulations may impact clients’ business practices and may reduce demand for our products and services. Changes in such regulations may eliminate the need for certain types of communications altogether or may impact the quantity or format of such communications.

Changes in postal rates, regulations and delivery structure may adversely affect demand for our products and services.

Postal costs are a significant component of many of our clients’ cost structure and postal rate changes can influence the number of pieces and types of mailings that our clients mail. In accordance with the 2006 PAEA, the PRC adjusted and approved USPS filings for a CPI based average price increase of 1.5% to 1.9% depending on the major class of mail. The new prices took effect on January 26, 2020.

Additionally, as required on the 10-year anniversary of PAEA, the PRC initiated a comprehensive review of PAEA on December 20, 2016, to determine if the current system for regulating rates and classes for market-dominant products is still achieving the original objectives of the law. The PRC issued its findings on December 1, 2017 and concluded that the current system was not meeting all of PAEA’s original objectives. To remedy this situation, the PRC proposed recommendations, which among other things, allows the Postal Service pricing flexibility of “CPI + 2%” on market-dominant mail products for a 5-year period of time. The PRC asked for industry stakeholder input, comments and alternative suggestions to these recommendations which were due by March 1, 2018. The industry reaction to the PRC’s recommendations was overwhelmingly negative, which in turn caused the PRC to reconsider and issue an amended proposal on December 12, 2019, nearly 21 months later. Industry stakeholders are expected to reply to the newest proposal by March 2020.

In other developments, the Trump administration on April 12, 2018 issued an Executive Order establishing a Task Force (“TF”) to evaluate the USPS. On December 4, 2018, the TF issued a formal report calling for a total reevaluation of the Postal Service business model to make the organization more viable and sustainable going into the future. No further action related to the TF report occurred in 2019.

The impact of any restructuring of the USPS, which may require legislative action, cannot currently be estimated. If implemented, certain changes may impact our clients’ ability or willingness to communicate by mail. Declines in print volumes mailed would have an adverse effect on our results of operations, financial condition and cash flows.

Increased transportation costs and changes in the relationships with independent shipping companies may have an adverse effect on our business.

We rely upon third party carriers for timely delivery of our product shipments. As a result, we are subject to carrier disruptions and increased costs due to factors that are beyond our control, including employee strikes, inclement weather and increased fuel costs. Any failure to deliver products to our clients in a timely and accurate manner may damage our reputation and brand and may cause us to lose clients. If our relationship with any of these third party carriers is terminated or impaired, or if any of these third parties are unable to ship products for us, we would be required to use alternative, and possibly more expensive, carriers for the shipment of products. We may be unable to engage alternative carriers on a timely basis or on terms favorable to us, if at all, which may have an adverse effect on our results of operations, financial condition and cash flows.

Furthermore, shipping costs represent a significant operational expense for us. Changes in shipping terms, or the inability of these third party shippers to perform effectively (whether as a result of mechanical failure, casualty loss, labor stoppage, or any other reason), may have an adverse effect on our results of operations, financial condition and cash flows. Additionally, deterioration of the financial condition of these third-party carriers may have an adverse effect on our shipping costs. Any future increases in shipping rates may have an adverse effect on our results of operations, financial condition and cash flows, particularly if we are unable to pass on these higher costs to our clients.

Undetected errors or failures found in our products and services may result in loss of or delay in market acceptance of our products and services that may seriously harm our business.

Our products and services may contain undetected errors or scalability limitations at any point, but particularly when first introduced or as new versions are released. We frequently release new versions of our products and different aspects of our platform are in various stages of development. Despite testing by us and by current and potential clients, errors may not be found in new products and services until after commencement of commercial availability or use, resulting in a loss of or a delay in market acceptance, damage to our reputation, client dissatisfaction and reductions in net sales and margins, any of which may have an adverse effect on our results of operations, financial condition and cash flows.

15


 

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

Our success depends, in part, on our general ability to attract, develop, motivate and retain highly skilled employees. The loss of a significant number of our employees or the inability to attract, hire, develop, train and retain skilled personnel, particularly during strong economic periods, may have an adverse effect on us. 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 we offer. In addition, many members of our management team have significant industry experience that is valuable to our competitors. We enter into non-solicitation and, as appropriate, non-competition agreements with certain of our executive officers, prohibiting them contractually from soliciting our clients and employees and from leaving and joining a competitor within a specified period. Our inability to hire and retain talented employees or the loss of senior members of our senior management team may result in challenges or temporary difficulty in managing our business, which may adversely affect our results of operations, financial condition or cash flows.

We may be contingently liable for various LSC Communications, Inc. and Donnelley Financial Solutions, Inc. operating leases.

Subsequent to the spinoff of LSC Communications, Inc. (“LSC”) and Donnelley Financial Solutions, Inc. (“Donnelley Financial”), we may be contingently liable for obligations under various operating leases for office, warehouse and manufacturing locations of LSC and Donnelley Financial. In the event that LSC or Donnelley Financial fail to make lease payments or fail to pay other obligations under these lease agreements, we may be required to satisfy those obligations to the lessor. Under various agreements executed at the time of the spinoff, LSC and Donnelley Financial agreed to fully indemnify us in the event that we would be required to make a payment on their behalf; however, there can be no assurance that the indemnities from LSC and Donnelley Financial will be sufficient to satisfy the full amount of any such contingent obligations. Our exposure to these potential contingent liabilities will decrease over time as LSC and Donnelley Financial pay monthly lease obligations and as the leases expire. As of December 31, 2019, these potential contingent obligations were approximately $78.8 million and $5.5 million for LSC and Donnelley Financial, respectively. If we are required to make payments pursuant to these arrangements, it may adversely affect our results of operations, financial condition or cash flows.

The spinoff transactions of LSC and Donnelley Financial in October 2016 could result in significant tax liability.

We obtained an opinion from our outside legal counsel substantially to the effect that, among other things, the distributions in connection with the spinoff transactions qualify as tax-free distributions under the U.S. Internal Revenue Code of 1986, as amended (the “Code”). The opinion will not be binding on the IRS or the courts. Additionally, we have received a private letter ruling from the IRS concluding that certain limited aspects of the distributions will not prevent the distributions from satisfying certain requirements for tax-free treatment under the Code. The opinion and the private letter ruling rely on customary factual representations and assumptions, which if incorrect or inaccurate may jeopardize the ability to rely on such opinion and letter ruling.

If either or both of the distributions do not qualify for tax-free treatment for U.S. federal income tax purposes, then, in general, we would be subject to tax as if we had sold the common stock of such spun-off entity in a taxable sale for its fair value. In that case, we expect that RRD stockholders would be subject to tax as if they had received a distribution equal to the fair value of the spun-off entity’s common stock that was distributed to them, which generally would be treated first as a taxable dividend to the extent of our earnings and profits, then as a non-taxable return of capital to the extent of each holder’s tax basis in its Company common stock, and thereafter as capital gain with respect to any remaining value. We expect that the amount of any such taxes to RRD stockholders and us would be substantial if this were to occur.

ITEM  1B.

UNRESOLVED STAFF COMMENTS

We have no unresolved written comments from the SEC staff regarding our periodic or current reports under the Securities Exchange Act of 1934.

ITEM  2.

PROPERTIES

Our corporate office is located in leased office space in Chicago, Illinois. As of December 31, 2019, we leased or owned 198 U.S. facilities, some of which had multiple buildings and warehouses, and these U.S. facilities encompassed approximately 15.3 million square feet. We leased or owned 63 international facilities, some of which had multiple buildings and warehouses, encompassing approximately 5.6 million square feet primarily in Asia, Canada, Europe and Latin America. Of our U.S. and international facilities, approximately 8.9 million square feet of space was owned, while the remaining 12.0 million square feet of space was leased.

ITEM  3.

LEGAL PROCEEDINGS

From time to time, our clients and others file voluntary petitions for reorganization under United States bankruptcy laws. In such cases, certain pre-petition payments we received from these parties could be considered preference items and subject to return. In addition,

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we are party to certain litigation arising in the ordinary course of business. We believe that the final resolution of these preference items and litigation will not have a material effect on our consolidated results of operations, financial position or cash flows.

For a discussion of certain litigation involving us, see Note 8, Commitments and Contingencies, to the Consolidated Financial Statements.

ITEM  4.

MINE SAFETY DISCLOSURES

Not applicable.

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INFORMATION ABOUT OUR EXECUTIVE OFFICERS (As of February 1, 2020)

 

Name and

Positions with the Company

  

Age

 

  

Business Experience

Daniel L. Knotts

President and Chief Executive Officer

  

 

55

  

  

Since October 2016, Mr. Knotts has served as the Chief Executive Officer of RRD and a member of our board of directors. Prior to this, Mr. Knotts was our Chief Operating Officer from 2013 to 2016.

 

 

 

Terry D. Peterson

Executive Vice President and Chief Financial Officer

  

 

55

  

  

Since October 2016, Mr. Peterson has served as RRD’s Executive Vice President and Chief Financial Officer. Prior to joining RRD, Mr. Peterson served as Senior Vice President and Chief Financial Officer of Deluxe Corporation from 2009 to 2016. 

 

 

 

 

 

 

 

Kenneth O’Brien

Executive Vice President and Chief Information Officer

 

 

59

 

 

Since February 2004, Mr. O’Brien has served as RRD’s Executive Vice President and Chief Information Officer.

 

 

 

 

 

 

 

John Pecaric

President, RRD Business Services

  

 

57

  

  

Since April 2018, Mr. Pecaric has served as President of RRD Business Services. Prior to this, Mr. Pecaric was our Executive Vice President, Chief Commercial Officer and President of International from 2016 to 2018. From 2014 to 2016, Mr. Pecaric was Group President – International where he led RRD’s businesses outside the United States. From 2012 to 2014, Mr. Pecaric was Senior Vice President of Canada, Latin America, Book and Office Products.

 

 

 

 

 

 

 

J. Glynn Perry

Executive Vice President, Domestic Operations and Chief Supply Chain Officer

 

 

60

 

 

Since October 2016, Mr. Perry has served as RRD’s Executive Vice President of Domestic Operations and Chief Supply Chain Officer. Prior to this, Mr. Perry served in various capacities at RRD including President of Commercial & Variable Print from 2014 to 2016.

 

 

 

 

 

 

 

Sheila M. Rutt

Executive Vice President and Chief Human Resources Officer

 

 

51

 

 

Since July 2017, Ms. Rutt has served as RRD’s Executive Vice President and Chief Human Resources Officer. Prior to joining RRD, Ms. Rutt served as Chief Human Resources Officer of Diebold Nixdorf from 2005 to 2017.

 

 

 

Doug Ryan

President, RRD Marketing Solutions

 

 

 

57

 

 

Since April 2018, Mr. Ryan has served as President of RRD Marketing Solutions. Prior to this, Mr. Ryan was our Executive Vice President of Marketing Services from 2017 to 2018. Prior to joining RRD, Mr. Ryan served as President of North America for Digitas from 2016 to 2017 and President of San Francisco and Chicago for Digitas from 2010 to 2016.

 

 

 

Michael J. Sharp

Senior Vice President, Controller and Chief Accounting Officer

 

 

58

 

 

Since November 2017, Mr. Sharp has served as RRD’s Senior Vice President, Controller and Chief Accounting Officer. Prior to joining RRD, Mr. Sharp served in various capacities at AAR Corporation including, Vice President and Chief Financial Officer from 2015 to 2016 and Vice President, Controller and Chief Accounting Officer from 1999 to 2015.

 

 

 

Deborah L. Steiner

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

 

 

49

 

 

Since October 2016, Ms. Steiner has served as RRD’s Executive Vice President, General Counsel, Secretary and Chief Compliance Officer. Prior to this, Ms. Steiner was our Vice President, Associate General Counsel from 2012 to 2016.

18


 

PART II

 

ITEM  5.

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

Our common stock is listed and traded on the New York Stock Exchange (NYSE) under the symbol “RRD”. As of February 21, 2020, there were 3,617 stockholders of record of our common stock.

ISSUER PURCHASES OF EQUITY SECURITIES

There were no repurchases of equity securities during the three months ended December 31, 2019.

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 our common stock with those of the S&P SmallCap 600 and the S&P 1500 Industrials Index. The comparison assumes an initial investment of $100 on December 31, 2014 and that all dividends have been reinvested. Our performance through September 30, 2016 has been adjusted for the spinoffs of LSC and Donnelley Financial which occurred on October 1, 2016 and are reflected in the table below as a dividend. Additionally, our performance has been adjusted for the 1-for-3 reverse stock split for our stock which also occurred on October 1, 2016.

 

 

 

Base

Period

 

Fiscal Years Ended December 31,

 

Company Name/Index

2014

 

2015

 

 

2016

 

 

2017

 

 

2018

 

 

2019

 

RR Donnelley

100

 

 

93.12

 

 

 

76.61

 

 

 

45.99

 

 

 

20.65

 

 

 

21.40

 

S&P SmallCap 600

100

 

 

98.03

 

 

 

124.06

 

 

 

140.48

 

 

 

128.56

 

 

 

157.85

 

S&P 1500 Industrials Index

100

 

 

97.29

 

 

 

117.14

 

 

 

141.81

 

 

 

122.84

 

 

 

159.45

 

 

19


 

ITEM 6.

SELECTED FINANCIAL DATA

SELECTED FINANCIAL DATA

(in millions, except per share data)

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

Continuing Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

$

6,276.2

 

 

$

6,800.2

 

 

$

6,939.6

 

 

$

6,833.0

 

 

$

6,880.7

 

Net loss from continuing operations(1)

 

(92.7

)

 

 

(9.6

)

 

 

(33.2

)

 

 

(484.9

)

 

 

(31.7

)

Net loss attributable to RRD common stockholders per diluted share(1),(2)

 

(1.31

)

 

 

(0.16

)

 

 

(0.49

)

 

 

(6.95

)

 

 

(0.28

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Position and Other Data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets(3)

 

3,330.1

 

 

 

3,640.8

 

 

 

3,904.5

 

 

 

4,268.8

 

 

 

7,264.6

 

Long-term debt(3)

 

1,747.2

 

 

 

1,875.3

 

 

 

2,098.9

 

 

 

2,379.2

 

 

 

3,188.3

 

Cash dividends per common share(2)

 

0.12

 

 

 

0.34

 

 

 

0.56

 

 

 

2.48

 

 

 

3.12

 

(1)

Includes the following significant items:

 

2019

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

Restructuring, impairment and other charges-net

$

135.3

 

 

$

38.8

 

 

$

53.0

 

 

$

584.3

 

 

$

62.7

 

Other operating expenses(4)

 

21.0

 

 

 

 

 

 

 

 

 

 

 

 

 

Spinoff-related transaction expenses

 

 

 

 

 

 

 

3.3

 

 

 

8.0

 

 

 

 

Pension settlement and plan amendments charges

 

(0.1

)

 

 

1.9

 

 

 

1.6

 

 

 

21.1

 

 

 

 

OPEB curtailment gain

 

 

 

 

 

 

 

 

 

 

(19.5

)

 

 

 

Gain on disposal of businesses

 

(9.2

)

 

 

(3.7

)

 

 

 

 

 

(11.9

)

 

 

 

Loss on Venezuela currency remeasurement

 

 

 

 

 

 

 

 

 

 

 

 

 

30.3

 

Loss primarily related to the disposal of the Venezuelan operating entity

 

 

 

 

 

 

 

 

 

 

 

 

 

15.7

 

Gain from the sale of certain of our affordable housing investments

 

(0.2

)

 

 

(0.4

)

 

 

(1.3

)

 

 

(0.1

)

 

 

(3.9

)

Net loss (gain) on sale of LSC and Donnelley Financial shares

 

2.1

 

 

 

 

 

 

(42.4

)

 

 

 

 

 

 

Loss from the impairment of equity investments

 

 

 

 

 

 

 

 

 

 

1.4

 

 

 

1.3

 

Loss from the impairment of our investment in the Brazilian operations of Courier

 

 

 

 

 

 

 

 

 

 

 

 

 

2.8

 

Loss on debt extinguishment

 

0.8

 

 

 

32.4

 

 

 

20.1

 

 

 

 

 

 

 

Other

 

0.7

 

 

 

0.1

 

 

 

 

 

 

2.7

 

 

 

0.5

 

Total charges before taxes

$

150.4

 

 

$

69.1

 

 

$

34.3

 

 

$

586.0

 

 

$

109.4

 

Total after-tax impact of the above charges, excluding the impact of noncontrolling interests

 

140.3

 

 

 

61.4

 

 

 

11.2

 

 

 

534.9

 

 

 

87.9

 

Deferred income tax benefit

 

 

 

 

(6.4

)

 

 

(3.0

)

 

 

(0.4

)

 

 

 

Tax expense related to the enactment of the Tax Act

 

 

 

 

5.7

 

 

 

110.3

 

 

 

 

 

 

 

Total charges, net of taxes

$

140.3

 

 

$

60.7

 

 

$

118.5

 

 

$

534.5

 

 

$

87.9

 

 

(2)

Earnings per share amounts and dividends paid per share amounts occurring prior to October 1, 2016 have been adjusted to reflect our 1-for-3 reverse stock split. See Note 1, Basis of Presentation and Summary of Significant Accounting Policies, to the Consolidated Financial Statements.

(3)

On October 1, 2016, we completed the separation of LSC and Donnelley Financial into two separate publicly-traded companies. The balances of these companies are included here for periods prior to the October 1, 2016 Distribution.

(4)

Primarily includes expenses related to the ongoing SEC and Department of Justice (“DOJ”) investigations and reserves for an unfavorable state sales tax matter.

20


 

ITEM  7.

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

The following discussion of our 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 our business, segments and product and service offerings, see Item 1, Business, of Part I of this Annual Report on Form 10-K.

We separately report our net sales, related costs of sales and gross profit for our product and service offerings. Our product offerings primarily consist of commercial print, packaging, statements, direct marketing, labels, digital print and fulfillment, supply chain management and forms. Our service offerings primarily consist of logistics, business process outsourcing and digital and creative solutions.

Executive Overview

2019 OVERVIEW

Net sales for the year ended December 31, 2019 were $6,276.2 million, a decrease of $524.0 million, or 7.7%, compared to the year ended December 31, 2018. Net sales decreased $307.3 million due to business dispositions and $54.9 million due to changes in foreign exchange rates. Net sales also decreased due to lower volume in commercial print due to ongoing secular pressure and the continued planned reductions in low margin sales, as well as price pressures. Decreases in net sales were partially offset by higher volume in direct marketing primarily attributable to the 2020 Census contract.

Income from operations for the year ended December 31, 2019 was $98.6 million, a decrease of $110.0 million compared to the year ended December 31, 2018. Income from operations decreased due to a non-cash charge of $98.5 million to recognize the impairment of goodwill in the logistics reporting unit within the Business Services segment, as well as cost inflation, price pressures and lower sales volume, partially offset by lower selling, general and administrative expenses and lower depreciation and amortization expense.

We continue to assess opportunities to reduce our cost structure and enhance productivity throughout the business. During the year ended December 31, 2019, we realized cost savings from previous restructuring activities, including the reorganization of administrative and support functions across all segments, as well as facility consolidations.

Net cash provided by operating activities for the year ended December 31, 2019 was $139.3 million as compared to $203.5 million for the year ended December 31, 2018. The decrease in net cash flow from operating activities related primarily to higher tax and restructuring payments, partially offset by lower interest payments.

OUTLOOK

Vision and Strategy

We work with our clients to create, manage, deliver and optimize their multichannel communications strategies. We have and will continue to develop our creative and design, content management, digital and print production, supply chain management and distribution services to address our clients’ evolving needs.

Our global platform provides differentiated solutions for our clients through our broad range of complementary communications services and innovative leadership in both conventional print and digital technologies. This platform has enabled RRD to develop strong client relationships, and we are focused on expanding these relationships to a broader range of our offerings. The flexibility of our platforms enhances the value we deliver to our clients and we intend to expand our capabilities in order to make it easier for clients to manage their full range of communication needs.

We believe productivity improvements and cost reductions are critical to our competitiveness. We continue to implement strategic initiatives across each of our segments to reduce our overall cost structure and enhance productivity primarily through restructuring which includes consolidations, reorganizations and integrations of operations and streamlining of administrative and support activities.

We seek to deploy our capital using a balanced approach in order to ensure financial flexibility and provide returns to stockholders. Priorities for capital deployment, over time, include capital expenditures, principal and interest payments on debt obligations, distributions to stockholders and targeted acquisitions. We believe that a strong financial condition is important to clients focused on establishing or growing long-term relationships. We also expect to make targeted acquisitions that extend our capabilities, drive cost savings and reduce future capital spending needs.

21


 

We use 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. We target long-term net sales growth, while managing operating margins by achieving productivity improvements that offset the impact of price declines and cost inflation. Cash flows from operations are targeted to be stable over time, but 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 OPEB plan contributions, the timing of tax payments and the impact of working capital changes.

We face 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.

2020 Outlook

In 2020, we expect net sales to be lower as compared to 2019 primarily due to current year dispositions. On an organic basis, we expect net sales to range from a slight decrease to a slight increase as compared to 2019 primarily driven by expected growth in our direct marketing, packaging and labels products. We also expect continued secular declines in our commercial print and forms products and continued price pressures in most parts of the business. The highly competitive market conditions and unused industry capacity will continue to put price pressure on both transactional work and contract renewals across both segments. Our outlook assumes that the U.S. economy and the economies of the foreign countries in which we operate will remain stable. We will continue to leverage our client relationships in order to provide a larger share of their communications needs. In addition, we expect to continue cost control and productivity initiatives, including selected facility consolidations.

We initiated several restructuring actions during the years ended December 31, 2019, 2018 and 2017, to further reduce our overall cost structure. These restructuring actions included the closures of manufacturing facilities as well as the reorganization and consolidation of certain operations. These and future cost reduction actions are expected to have a positive impact on operating earnings in 2020 and in future years. In addition, we expect to identify other cost reduction opportunities and possibly take further actions, 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 our credit facilities.

We expect lower interest expense on lower average borrowings and a lower average interest rate in 2020 and we expect the effective tax rate to be significantly higher than the statutory rate primarily due to anticipated limitations on our domestic interest expense deduction as a result of the Tax Act.

Cash flows from operations in 2020 are expected to be higher versus 2019 as lower interest and tax payments and targeted working capital improvements are expected to more than offset higher restructuring payments. We expect capital expenditures to be significantly lower in 2020 as the 2019 expenditures associated with building the new printing facility in China and additional investments related to the 2020 Census contract will not repeat in 2020. Also, as part of our agreement to sell the printing facility in China, we expect to collect one additional non-refundable deposit of $24 million in 2020 and we expect to continue generating additional proceeds from monetizing other assets including proceeds from selling additional facilities.

22


 

RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2019 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 2018

Consolidated

The following table shows the results of operations for the years ended December 31, 2019 and 2018:

 

 

Year Ended December 31,

 

 

 

 

 

 

 

 

 

 

2019

 

 

2018

 

 

$ Change

 

 

% Change

 

 

(in millions, except percentages)

 

Products net sales

$

5,117.6

 

 

$

5,317.7

 

 

$

(200.1

)

 

 

(3.8

%)

Services net sales

 

1,158.6

 

 

 

1,482.5

 

 

 

(323.9

)

 

 

(21.8

%)

Total net sales

 

6,276.2

 

 

 

6,800.2

 

 

 

(524.0

)

 

 

(7.7

%)

Products cost of sales (exclusive of depreciation and amortization)

 

4,150.6

 

 

 

4,315.8

 

 

 

(165.2

)

 

 

(3.8

%)

Services cost of sales (exclusive of depreciation and amortization)

 

934.7

 

 

 

1,229.0

 

 

 

(294.3

)

 

 

(23.9

%)

Total cost of sales

 

5,085.3

 

 

 

5,544.8

 

 

 

(459.5

)

 

 

(8.3

%)

Products gross profit

 

967.0

 

 

 

1,001.9

 

 

 

(34.9

)

 

 

(3.5

%)

Services gross profit

 

223.9

 

 

 

253.5

 

 

 

(29.6

)

 

 

(11.7

%)

Total gross profit

 

1,190.9

 

 

 

1,255.4

 

 

 

(64.5

)

 

 

(5.1

%)

Selling, general and administrative expenses (exclusive of depreciation

   and amortization)

 

776.2

 

 

 

830.4

 

 

 

(54.2

)

 

 

(6.5

%)

Restructuring, impairment and other charges-net

 

135.3

 

 

 

38.8

 

 

 

96.5

 

 

nm

 

Depreciation and amortization

 

169.2

 

 

 

181.4

 

 

 

(12.2

)

 

 

(6.7

%)

Other operating expense (income)

 

11.6

 

 

 

(3.8

)

 

 

15.4

 

 

nm

 

Income from operations

$

98.6

 

 

$

208.6

 

 

$

(110.0

)

 

 

(52.7

%)

Net sales of products for the year ended December 31, 2019 decreased $200.1 million, or 3.8%, to $5,117.6 million versus the same period in 2018. Net sales from products decreased $91.2 million due to business dispositions, including the bankruptcy liquidation of RRD Brazil and $50.4 million due to changes in foreign exchange rates. Net sales of products also decreased due to lower volume in commercial print due to ongoing secular pressure and continued planned reductions in low margin sales, as well as price pressure, partially offset by higher volume in direct marketing primarily attributable to the 2020 Census contract.

Net sales from services for the year ended December 31, 2019 decreased $323.9 million, or 21.8%, to $1,158.6 million versus the same period in 2018. Net sales from services decreased $216.1 million due to business dispositions, primarily Print Logistics. Net sales from services also decreased due to lower volume in the remaining logistics business.

Products cost of sales decreased $165.2 million, or 3.8%, for the year ended December 31, 2019 versus the same period in 2018 primarily due to the reduction in net sales. As a percentage of net sales, products cost of sales decreased 0.1 percentage point for the year ended December 31, 2019 versus the same period in 2018.

Services cost of sales decreased $294.3 million, or 23.9%, for the year ended December 31, 2019 versus the same period in 2018, primarily due to the disposition of the Print Logistics business and cost control initiatives. As a percentage of net sales, services cost of sales decreased 2.2 percentage points for the year ended December 31, 2019 versus the same period in 2018.

Products gross profit decreased $34.9 million to $967.0 million for the year ended December 31, 2019 versus the same period in 2018, primarily due to lower volume, unfavorable product mix, cost inflation and price pressures, partially offset by cost control initiatives. Products gross margin increased slightly from 18.8% to 18.9%.

Services gross profit decreased $29.6 million to $223.9 million for the year ended December 31, 2019 versus the same period in 2018, primarily due to lower volume in our logistics business. Services gross margin increased from 17.1% to 19.3%.

Selling, general and administrative expenses decreased $54.2 million to $776.2 million for the year ended December 31, 2019 versus the same period in 2018 reflecting cost control initiatives and business dispositions. As a percentage of net sales, selling, general and administrative expenses increased from 12.2% to 12.4% for the year ended December 31, 2019 versus the same period in 2018.

For the year ended December 31, 2019, net restructuring, impairment and other charges of $135.3 million primarily included a non-cash charge of $98.5 million to recognize the impairment of goodwill in the logistics reporting unit within the Business Services segment, $22.3 million for employee termination costs and $16.6 million for other restructuring charges. There were no goodwill impairment charges in 2018. See Note 4, Restructuring, Impairment and Other Charges, to the Consolidated Financial Statements for further discussion.

23


 

Depreciation and amortization decreased $12.2 million to $169.2 million for the year ended December 31, 2019 versus the same period in 2018, primarily due to lower capital spending in recent years compared to historical levels.  

Other operating expense for the year ended December 31, 2019 was $11.6 million compared to other operating income of $3.8 million for the same period in 2018. The expense in 2019 was primarily related to the ongoing SEC and DOJ investigations, an increase in reserves for an unfavorable state sales tax matter and expenses related to the ongoing bankruptcy liquidation of RRD Brazil, partially offset by the gains from business dispositions. The prior year amount primarily included a $3.6 million pre-tax gain on the sale of the Print Logistics business in July 2018.

Income from operations for the year ended December 31, 2019 declined $110.0 million from 2018 to $98.6 million as a result of the factors discussed above.

 

 

Year Ended December 31,

 

 

 

 

 

 

 

 

 

 

2019

 

 

2018

 

 

$ Change

 

 

% Change

 

 

(in millions, except percentages)

 

Interest expense-net

$

150.6

 

 

$

168.3

 

 

$

(17.7

)

 

 

(10.5

%)

Investment and other income-net

 

(16.7

)

 

 

(20.4

)

 

 

3.7

 

 

 

(18.1

%)

Loss on debt extinguishment

 

0.8

 

 

 

32.4

 

 

 

(31.6

)

 

 

(97.5

%)

Net interest expense decreased by $17.7 million for the year ended December 31, 2019 versus the same period in 2018, primarily due to lower average borrowings and interest rates during the year ended December 31, 2019.

Investment and other income, net for the years ended December 31, 2019 and 2018 was $16.7 million and $20.4 million, respectively, and principally comprised of net pension and OPEB income.

Loss on debt extinguishment for the year ended December 31, 2019 was $0.8 million which related to the repurchase of senior notes and debentures. Loss on debt extinguishment for the year ended December 31, 2018 was $32.4 million which primarily related to premiums paid in connection with tenders, unamortized debt issuance costs and other expenses associated with the October 2018 tender offer. See Note 11, Debt, to the Consolidated Financial Statements for further discussion.

 

 

Year Ended December 31,

 

 

 

 

 

 

 

 

 

 

2019

 

 

2018

 

 

$ Change

 

 

% Change

 

 

(in millions, except percentages)

 

(Loss) income before income taxes

$

(36.1

)

 

$

28.3

 

 

$

(64.4

)

 

nm

 

Income tax expense

 

56.6

 

 

 

37.9

 

 

 

18.7

 

 

 

49.3

%

Effective income tax rate

 

156.8

%

 

 

133.9

%

 

 

 

 

 

 

 

 

The effective income tax rate for the year ended December 31, 2019 was an expense of 156.8% and is primarily driven by limitations on the interest expense deduction as a result of the Tax Act. Non-deductible interest expense will be carried forward; however it is more likely than not that the benefit of such deferred tax asset will not be fully realized and full valuation allowance was recorded in 2019. The income tax expense also reflects a non-deductible goodwill impairment charge.

The effective income tax rate for the year ended December 31, 2018 was an expense of 133.9% and is primarily driven by limitations on the interest expense deduction as a result of the Tax Act. Non-deductible interest expense will be carried forward; however, it is more likely than not that the benefit of such deferred tax asset will not be fully realized and a valuation allowance of $23.9 million was recorded in 2018. The income tax expense also reflects final adjustments associated with the enactment of the Tax Act of $4.2 million to the one-time transition tax on foreign earnings, as well as $1.5 million to net deferred tax assets for the reduced corporate income tax rate. Additionally, the income tax expense reflects the inability to recognize a tax benefit on certain losses.

Income attributable to noncontrolling interests was $0.5 million and $1.4 million for the years ended December 31, 2019 and 2018, respectively.

Net loss for the year ended December 31, 2019 was $92.7 million compared to $9.6 million for the year ended December 31, 2018.

24


 

Information by Segment

Business Services

 

 

Year Ended December 31,

 

 

 

2019

 

 

2018

 

 

 

(in millions, except percentages)

 

Net sales

 

$

4,995.7

 

 

$

5,619.1

 

Income from operations

 

 

132.7

 

 

 

242.3

 

Operating margin

 

 

2.7

%

 

 

4.3

%

Restructuring, impairment and other charges-net

 

 

123.6

 

 

 

25.8

 

Net sales for the Business Services segment for the year ended December 31, 2019 were $4,995.7 million, a decrease of $623.4 million, or 11.1%, compared to 2018. Net sales decreased $307.3 million due to business dispositions, primarily the Print Logistics business, and $54.9 million due to changes in foreign exchange rates. The remaining decrease in net sales was primarily due to lower volume in commercial print due to ongoing secular pressure, continued planned reductions in low margin sales, lower volume in the remaining logistics business and price pressures. The following table summarizes net sales by products and services in the Business Services segment:

 

 

 

Year Ended December 31,

 

 

 

 

 

 

 

 

 

Products and Services

 

2019

 

 

2018

 

 

$ Change

 

 

% Change

 

 

 

(in millions, except percentages)

 

Commercial print

 

$

1,694.5

 

 

$

1,935.6

 

 

$

(241.1

)

 

 

(12.5

%)

Logistics

 

 

814.6

 

 

 

1,109.3

 

 

 

(294.7

)

 

 

(26.6

%)

Packaging

 

 

668.5

 

 

 

672.0

 

 

 

(3.5

)

 

 

(0.5

%)

Statements

 

 

545.4

 

 

 

584.2

 

 

 

(38.8

)

 

 

(6.6

%)

Labels

 

 

497.4

 

 

 

481.4

 

 

 

16.0

 

 

 

3.3

%

Supply chain management

 

 

298.7

 

 

 

321.0

 

 

 

(22.3

)

 

 

(6.9

%)

Forms

 

 

244.3

 

 

 

267.5

 

 

 

(23.2

)

 

 

(8.7

%)

Business process outsourcing

 

 

232.3

 

 

 

248.1

 

 

 

(15.8

)

 

 

(6.4

%)

Total Business Services

 

$

4,995.7

 

 

$

5,619.1

 

 

$

(623.4

)

 

 

(11.1

%)

Business Services segment income from operations decreased $109.6 million for the year ended December 31, 2019 compared to the same period in 2018, primarily due to a charge of $98.5 million recognized for the impairment of goodwill, as well as lower volume, price pressures and cost inflation, partially offset by changes in foreign exchange rates, lower depreciation and amortization expense and cost control initiatives.

Marketing Solutions

 

 

Year Ended December 31,

 

 

 

2019

 

 

2018

 

 

 

(in millions, except percentages)

 

Net sales

 

$

1,280.5

 

 

$

1,181.1

 

Income from operations

 

 

67.0

 

 

 

54.6

 

Operating margin

 

 

5.2

%

 

 

4.6

%

Restructuring, impairment and other charges-net

 

 

1.0

 

 

 

3.9

 

Net sales for the Marketing Solutions segment for the year ended December 31, 2019 were $1,280.5 million, an increase of $99.4 million, or 8.4%, compared to 2018. Net sales increased primarily due to higher volume in direct marketing primarily attributable to the 2020 Census contract. The following table summarizes net sales by products and services in the Marketing Solutions segment:

 

 

 

Year Ended December 31,

 

 

 

 

 

 

 

 

 

Products and Services

 

2019

 

 

2018

 

 

$ Change

 

 

% Change

 

 

 

(in millions, except percentages)

 

Direct marketing

 

$

676.7

 

 

$

581.6

 

 

$

95.1

 

 

 

16.4

%

Digital print and fulfillment

 

 

492.1

 

 

 

474.4

 

 

 

17.7

 

 

 

3.7

%

Digital and creative solutions

 

 

111.7

 

 

 

125.1

 

 

 

(13.4

)

 

 

(10.7

%)

Total Marketing Solutions

 

$

1,280.5

 

 

$

1,181.1

 

 

$

99.4

 

 

 

8.4

%

Marketing Solutions segment income from operations increased $12.4 million for the year ended December 31, 2019 compared to the same period in 2018, primarily due to higher volume in direct marketing.

25


 

Corporate

Corporate operating expenses in the year ended December 31, 2019 were $101.1 million, an increase of $12.8 million compared to the same period in 2018. The increase was primarily driven by higher other operating expense which related to the ongoing SEC and DOJ investigations, an increase in reserves for an unfavorable state sales tax matter and expenses related to the ongoing bankruptcy liquidation of RRD Brazil, partially offset by the gains from business dispositions. The following table summarizes unallocated operating expenses and certain items impacting comparability within the activities presented as Corporate:

 

 

 

Year Ended December 31,

 

 

 

2019

 

 

2018

 

 

 

(in millions)

 

Operating expenses

 

$

101.1

 

 

$

88.3

 

Restructuring, impairment and other charges-net

 

 

10.7

 

 

 

9.1

 

Other operating expense

 

 

13.9

 

 

 

 

2018 Compared with 2017

Our comparison of 2018 results to 2017 results is included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, under Part II Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations.

LIQUIDITY AND CAPITAL RESOURCES

We believe that we have sufficient liquidity to support our ongoing operations and to invest in future growth to create value for our stockholders. Our operating cash flows, existing cash balances and available capacity under our asset-based senior secured revolving credit facility (the “ABL Credit Facility”) are our primary sources of liquidity and are expected to be used for, among other things, capital expenditures necessary to support productivity improvement and growth, completion of restructuring programs, acquisitions, payment of interest and principal on our long-term debt obligations, and distributions to stockholders that require approval by the Board of Directors.

The following describes our cash flows for the years ended December 31, 2019, 2018 and 2017.

 

 

Year Ended December 31,

 

 

2019

 

 

2018

 

 

2017

 

 

(in millions)

 

Net cash provided by operating activities

$

139.3

 

 

$

203.5

 

 

$

217.9

 

Net cash (used in) provided by investing activities

 

(25.8

)

 

 

(7.4

)

 

 

24.7

 

Net cash used in financing activities

 

(289.4

)

 

 

(77.2

)

 

 

(294.3

)

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

 

(3.9

)

 

 

(16.8

)

 

 

17.3

 

Net (decrease) increase in cash, cash equivalents and restricted cash

$

(179.8

)

 

$

102.1

 

 

$

(34.4

)

Operating cash inflows are largely attributable to sales of our products and services. Operating cash outflows are largely attributable to recurring expenditures for raw materials, labor, rent, interest, taxes and other operating activities.

Net cash provided by operating activities in 2019 was $64.2 million lower than in 2018, primarily due to higher tax and restructuring payments, partially offset by lower interest payments.

Included in net cash provided by operating activities were the following operating cash (outflows) inflows:

 

 

Year Ended December 31,

 

 

2019

 

 

2018

 

 

2017

 

 

(in millions)

 

Income tax payments, net of tax refunds

$

(60.9

)

 

$

15.2

 

 

$

(2.8

)

Interest payments

 

(158.6

)

 

 

(173.0

)

 

 

(180.1

)

Performance-based compensation payments

 

(45.4

)

 

 

(36.8

)

 

 

(31.3

)

Restructuring and MEPP payments

 

(42.6

)

 

 

(32.7

)

 

 

(26.9

)

Pension and other postretirement benefits plan contributions

 

(8.6

)

 

 

(17.9

)

 

 

(16.4

)

26


 

Significant cash (outflows) inflows included in investing and financing activities for each period were as follows:

 

 

Year Ended December 31,

 

 

2019

 

 

2018

 

 

2017

 

 

(in millions)

 

Capital expenditures

$

(138.8

)

 

$

(104.4

)

 

$

(108.5

)

Acquisition of business

 

(3.0

)

 

 

 

 

 

 

Dispositions of businesses, net of cash disposed

 

50.6

 

 

 

44.1

 

 

 

 

Proceeds from sales of investments and other assets

 

65.4

 

 

 

54.5

 

 

 

140.4

 

Proceeds from issuance of long-term debt

 

 

 

 

544.5

 

 

 

 

Proceeds from other short-term debt

 

 

 

 

94.5

 

 

 

20.7

 

Payments on other short-term debt

 

(37.9

)

 

 

(62.4

)