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, 2018
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
OR
Commission file number 1-37729
LSC Communications, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
191 N. Wacker Drive, Suite 1400, Chicago, IL
(Address of principal executive offices)
36-4829580
(I.R.S. Employer
Identification No.)
60606
(ZIP Code)
Registrant’s telephone number, including area code—(773) 272-9200
Securities registered pursuant to Section 12(b) of the Act:
Title of each Class
Common Stock (Par Value $0.01)
___________________________________________________
Name of each exchange on which registered
NYSE
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, 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
Non-accelerated filer
Emerging growth company
☑
☐
☐
Accelerated filer ☐
Smaller reporting company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised
financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☑
The aggregate market value of the shares of common stock (based on the closing price of these shares on the New York Stock Exchange—Composite Transactions) on
June 30, 2018, the last business day of the registrant’s most recently completed second fiscal quarter, held by nonaffiliates was $512,138,094.
As of February 15, 2019, 33,315,949 shares of common stock were outstanding.
Documents Incorporated By Reference
Portions of the registrant’s proxy statement related to its annual meeting of stockholders are incorporated by reference into Part III of this Form 10-K.
Part I
Part II
Part III
Part IV
TABLE OF CONTENTS
PART I
Form 10-K
Item No.
Name of Item
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Executive Officers of LSC Communications, Inc.
Item 5.
Market for LSC Communications’ Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.
Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures about Market Risk
Financial Statements and Supplementary Data
Changes in Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors and Executive Officers of LSC Communications and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions and Director Independence
Principal Accounting Fees and Services
Exhibits, Financial Statement Schedules
Signatures
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S-1
ITEM 1. BUSINESS
Company
Overview
PAR T I
The principal business of LSC Communications, Inc., a Delaware corporation, and its direct or indirect wholly-owned subsidiaries (“LSC Communications,”
“the Company,” “we,” “our” and “us”) is to offer a broad scope of traditional and digital print, print-related services and office products.
On Octob er 1, 2016 (the “separation date”), R. R. Donnelley & Sons Company (“RRD” or the “Parent”) completed the previously announced separation
(the “separation”) into three separate independent publicly-traded companies: (i) its publishing and retail-centric print services and office products business (“LSC
Communications”); (ii) its financial communications services business (“Donnelley Financial Solutions, Inc.” or “Donnelley Financial”) and (iii) a global,
customized multichannel communications management company, which is the business of RRD after the separation. To effect the separation, RRD undertook a
series of transactions to separate net assets and legal entities. RRD completed the distribution (the “distribution”) of 80.75% of the outstanding common stock of
LSC Communications and Donnelley Financial to RRD stockholders on October 1, 2016. RRD retained a 19.25% ownership stake in both LSC Communications
and Donnelley Financial. On October 1, 2016, RRD stockholders of record as of the close of business on September 23, 2016 (“the record date”) received
one share of LSC Communications common stock and one share of Donnelley Financial common stock for every eight shares of RRD common stock held as of the
record date. On March 28, 2017, RRD completed the sale of approximately 6.2 million shares of LSC Communications common stock, representing its entire
19.25% retained ownership.
Merger
Agreement
On October 30, 2018, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Quad/Graphics, Inc. (“Quad/Graphics”),
and QLC Merger Sub, Inc., a direct, wholly-owned subsidiary of Quad/Graphics (“Merger Sub”). Pursuant to the Merger Agreement, subject to the terms and
conditions therein, Merger Sub will merge with and into the Company (the “Merger”), with the Company continuing as the surviving corporation. Subject to the
terms and conditions set forth in the Merger Agreement, at the effective time of the Merger (the “Effective Time”), each share of the Company’s common stock
issued and outstanding immediately prior to the Effective Time, will be converted into the right to receive 0.625 shares of class A common stock of Quad/Graphics,
without interest and subject to adjustment as provided in the Merger Agreement.
The Company and Quad/Graphics have made customary representations, warranties and covenants in the Merger Agreement. Subject to certain exceptions
outlined in the Merger Agreement, the Company has agreed to covenants relating to the Company’s business during the period between the execution of the Merger
Agreement and the consummation of the Merger, including restrictions on its ability to issue any shares of its capital stock, repurchase any shares of its capital
stock and incurring additional indebtedness outside the ordinary course of business. The Merger Agreement allows the Company to continue paying a regular
quarterly dividend up to $0.26 per share.
On October 30, 2018, concurrently with the execution of the Merger Agreement, the Company and the trustees (the “Trustees”) under the Amended and
Restated Voting Trust Agreement, dated as of June 25, 2010, pursuant to which certain shares of capital stock of Quad/Graphics are held by the Quad/Graphics,
Inc. Voting Trust (the “Voting Trust”), entered into a voting and support agreement (the “Voting Agreement”). Pursuant to the Voting Agreement, the Trustees
will vote all of the shares of Quad/Graphics held by the Voting Trust, which they have, directly or indirectly, the right to vote or direct the voting thereof, in favor
of the issuance of class A shares of Quad/Graphics common stock in the Merger, and against any alternative acquisition proposal involving Quad/Graphics or other
action that would reasonably be expected to breach the obligations of Quad/Graphics under the Merger Agreement or the Trustees under the Voting Agreement, or
otherwise reasonably be expected to delay or adversely affect the Merger or the other transactions contemplated by the Merger Agreement.
The Company and Quad/Graphics filed notification and report forms in connection with the transactions contemplated by the Merger Agreement with the
U.S. Department of Justice (the “ DOJ ”) and the U.S. Federal Trade Commission pursuant to the Hart-Scott-Rodino Antitrust Improvement Act of 1976, as
amended (the “ HSR Act ”) on November 13, 2018. On December 13, 2018, the Company and Quad/Graphics each received a request for additional information
and documentary material (the “ Second Request ”) from the DOJ in connection with the DOJ’s review of the transactions contemplated by the Merger Agreement.
3
Issuance of the Second Request extends the waiting period under the HSR Act until 30 days after both the Company and Quad/Graphics have substantially
complied with the Second Request or such later time as the parties may agree with the DOJ, unless the waiting period is terminated earlier by th e DOJ. The
Company continues to expect the Merger to be consummated in mid-2019.
Consummation of the Merger remains subject to the adoption of the Merger Agreement by the Company stockholders, the approval by Quad/Graphics
shareholders of the issuance of Quad/Graphics shares as contemplated by the Merger Agreement, the expiration of the waiting period under the HSR Act and other
required regulatory approvals, and the satisfaction or waiver of the other closing conditions specified in the Merger Agreement.
Business
Overview
The Company serves the needs of publishers, merchandisers, cataloguers and retailers with product and service offerings that include traditional and digital
print, e-services, logistics, warehousing, fulfillment and supply chain management services. The Company utilizes a broad portfolio of technology capabilities
coupled with consultative attention to clients' needs to increase speed to market, reduce costs, provide postal savings to customers, and improve efficiencies. The
Company prints magazines, catalogs, retail inserts, books, and directories and its office products offerings include filing products, envelopes, note-taking products,
binder products, and forms.
The Company’s product and service offerings include:
Magazines, catalogs and retail inserts: We are one of the largest producers of magazines and catalogs in North America. These products are manufactured
to customers’ specifications using offset, digital or gravure printing processes in combination with either on-press finishing, saddle-stitch binding or patent binding.
• Our catalog customers include retailers and other direct-to-buyer sellers who design their own catalogs and use our production capabilities to print and
distribute their catalogs to customers through the mail.
• Our magazine customers are publishers who design their own magazines and use our production capabilities to print and distribute their magazines
through the mail directly to their subscribers and through wholesalers to retailers and other “newsstands” for purchase by non-subscribers.
• Until the Company sold its retail offset printing facilities on June 5, 2018, our retail insert customers included retailers who distribute their inserts in
newspapers distributed to newspaper subscribers and via in-store distribution.
• We made a number of acquisitions during 2017 that expanded and enhanced our product and service offerings:
o Through our acquisition of CREEL Printing, LLC (“CREEL”), we expanded our customer base to include financial services firms, direct
marketers, consumers and other types of customers who utilize targeted, personalized digital and sheetfed printing.
o Our acquisition of Publishers Press, LLC enabled us to enhance our printing capabilities, especially in the short-run magazine category.
o Our acquisition of HudsonYards Studios, LLC (“HudsonYards”) allowed us to enhance our digital and print premedia capabilities, by providing
high-quality creative retouching, computer-generated imagery, mechanical creation, press-ready file preparation, and interactive production
services to our customers.
In the U.S., we have a network of production facilities enabling the optimal combination of regional and national distribution. Additionally, we have
production facilities in Mexico that efficiently produce goods for distribution in Latin America.
Logistics: We provide logistics solutions to the Company and other third parties in the United States.
• We acquired RRD’s Print Logistics business (“Print Logistics”) during 2018. During 2017, we acquired The Clark Group, Inc. (“Clark Group”),
Fairrington Transportation Corp., F.T.C. Transport, Inc. and F.T.C. Services, Inc. (“Fairrington”) that expanded and enhanced our logistics offerings.
Books: We are the largest producer of books in the U.S. Our book customers generally are publishers who seek to print hardcover and softcover books for
the education, trade, religious and testing sectors. We believe we are well positioned to meet our book customers’ specific needs, whether they be colors, page
counts, trim size, binding styles or quantities. Consumer trade books are typically produced using either offset or digital printing processes, and are bound in a
variety of formats. Educational books include softcover and traditional casebound textbooks utilized by primary and secondary school and college students, as well
as workbooks, teachers’ editions, and other formats.
4
Directories: We produce directories that are mainly phone directories that support local and small business advertising. Our customers for directory printing
are generally marketing solution providers that publish on line as well as printed directories.
Print-related services: In addition to printed products, we provide a number of print-related services.
• Our supply chain management offering includes procurement, warehousing, distribution, and inventory management for book publishers.
• We provide e-book formatting and distribution services.
• Our print management and sourcing offering serves customers looking to outsource non-core functions and add scale to their marketing efforts.
• Our premedia offering includes high quality color retouching and other premedia services for both print and digitally delivered content to publishers and
retailers.
• Our mail services offering includes list processing, and mail sortation services that, combined with our production scale, optimize postal costs for
magazine and catalog customers.
• Our primary mail sortation facility is located in Bolingbrook, Illinois. Because of our scale of production, we are frequently able to provide cross-
customer sortation that reduces postal costs for our customers compared to what an individual customer could obtain.
Office Products: We produce a wide range of branded and private label products, primarily within the five categories below, and use e-commerce
distribution for certain sales:
• Filing products: Our filing products include a variety of presentation and storage materials for professionals and students. We sell our filing products
under the Pendaflex™ and other brands, as well as under private label brands for third parties. We enhanced our filing offering during 2017 by our
acquisition of NECI, LLC (“NECI”), a supplier of commodity and specialty filing supplies.
• Envelopes: We produce envelopes for businesses and consumers within North America. Our key brands used for envelopes are Quality Park™ (since its
acquisition in November 2017) and Ampad™, and we also produce private label envelopes for third parties.
• Note-taking products: Our note-taking products include legal pads, journals, index cards, spiral notebooks, composition books and notebook filler paper.
We sell our note-taking products under the TOPS™, Ampad, Oxford™, and other brands, as well as under private label brands for third parties.
• Binder products: Our binder products include a variety of binders and binder accessories for professionals and students. We sell our binder products
under the Cardinal™, Oxford and other brands, as well as under private label brands for third parties.
• Forms: We produce business forms, tax forms, message and memo pads, financial forms, and recordkeeping materials for businesses within North
America. Our key brand used for forms is Adams™, and we also produce private label forms for third parties.
Segment
Descriptions
During the third quarter of 2018, the Company realigned the reportable segments and reporting units to reflect its evolution since its separation from RRD in
2016, as well as changes from recent acquisition and disposal activity. All prior year amounts have been reclassified to conform to the Company’s current
reporting structure.
The Company’s segments and their product offerings are summarized below:
Magazines,
Catalogs
and
Logistics
The Magazines, Catalogs and Logistics segment primarily produces magazines and catalogs, as well as provides logistics services to the Company and other
third-parties. The segment also provides certain other print-related services, including mail-list management and sortation. The segment has operations primarily
in the U.S. The Magazines, Catalogs and Logistics segment is divided into two reporting units: magazines and catalogs; and logistics.
5
Book
The Book segment produces books for publishers primarily in the U.S. The segment also provides supply-chain management services and warehousing and
fulfillment services, as well as e-book formatting for book publishers.
Office
Products
The Office Products segment manufactures and sells branded and private label products in five core categories: filing products, envelopes, note-taking
products, binder products, and forms.
Other
The Other grouping consists of the following non-reportable segments: Europe, Directories, Mexico, and Print Management. Mexico produces magazines,
catalogs, statements, forms, and labels. Print Management provides outsourced print procurement and management services. The Company disposed of its
European printing business in the third quarter of 2018.
Corporate
Corporate 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 (“LIFO”) inventory provisions. In addition, share-based compensation expense is included in
Corporate and not allocated to the operating segments. Prior to the separation, many of these costs were based on allocations from RRD, however, the Company
has incurred such costs directly after the separation.
Financial and other information related to these segments is included in Item 7, Management’s
Discussion
and
Analysis
of
Financial
Condition
and
Results
of
Operations
, and in Note 18, Segment
Information
, to the consolidated and combined financial statements.
Business
Acquisitions
and
Dispositions
The following table lists the Company’s acquisitions since the beginning of 2017:
Date
July 2, 2018
Company
Print Logistics
November 29, 2017
Clark Group
November 9, 2017
Quality Park
September 7, 2017
Publishers Press, LLC
August 21, 2017
August 17, 2017
NECI
CREEL
July 28, 2017
Fairrington
March 1, 2017
HudsonYards
Description
Integrated logistics services provider with distribution
network
Third-party logistics provider of distribution, consolidation,
transportation management and international freight
forwarding services
Producer of envelopes, mailing supplies and assorted
packaging items
Printing provider with capabilities such as web-offset
printing, prepress and distribution services for magazines
and retail brands
Supplier of commodity and specialty filing supplies
Offset and digital printing company
Full-service, printer-independent mailing logistics provider
in the United States
Digital and print premedia production company that
provides high-quality creative retouching, computer-
generated imagery, mechanical creation, press-ready file
preparation, and interactive production services
6
Purchase Price
$52 million in cash
$25 million in cash
$41 million in cash
$68 million in cash
$6 million in cash
$79 million in cash
$19 million in cash and ~1.0 million
shares of LSC common stock (total
value $39 million)
$3 million in cash
The Company sold its European printing busine ss on September 28, 2018 for $47 million in cash. The Company sold its retail offset printing facilities on
June 5, 2018.
For further information on the above acquisitions and European disposition, see Note 3, Business
Combinations
and
Disposition
, to the consolidated and
combined financial statements.
Competitive
Environment
According to the September 2018 IBIS World industry report “Printing
in
the
U.S.,”
estimated total annual printing industry revenue is approximately $76
billion, of which approximately $12 billion relates to our core segments of the print market and an additional approximately $31 billion pertains to related segments
of the print market in which we are able to offer certain products. Despite consolidation in recent years, including several acquisitions completed by LSC
Communications, the industry remains highly fragmented and LSC Communications is one of the largest players in our segment of the print market. The print and
related services industry, in general, continues to have excess capacity and LSC Communications remains diligent in proactively identifying plant consolidation
opportunities to keep our capacity in line with demand. Across the Company’s range of print products and services, competition is based primarily on the ability to
deliver products for the lowest total cost, a factor driven not only by price, but also by materials and distribution costs. We expect that prices for print products and
services will continue to be a focal point for customers in coming years.
Value-added services, such as LSC Communications’ co-mail, logistics and supply chain management offerings, enable customers to lower their total costs.
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 our products and services. The impact of digital technologies has been felt
in many print products. Digital technologies have impacted printed magazines as some advertising spending has moved from print to electronic media. Catalogs
have experienced volume reductions as our customers allocate more of their spending to online resources and also face stiff competition from online retailers
resulting in retailer compression. Educational books within the college market continue to be impacted by electronic substitution and other trends. The K-12
educational sector continues to be focused on increasing digital distribution but there has been inconsistent adoption across school systems. E-book substitution
has impacted overall consumer print trade book volume, although e-book adoption rates have stabilized and industry-wide print book volume has been growing in
recent years. In addition, retail inserts have experienced volume reductions primarily as a result of store closures and reduced newspaper circulation. Electronic
communication and transaction technology has also continued to drive electronic substitution in directory printing, in part driven by cost pressures at key
customers.
The future impact of technology on our business is difficult to predict and could result in additional expenditures to restructure impacted operations or
develop new technologies. In addition, we have made targeted acquisitions and investments in our existing business to offer customers innovative services and
solutions. Such acquisitions and investments include the acquisitions of Print Logistics in 2018 and Clark Group, Quality Park, Publishers Press, LLC, NECI,
CREEL, Fairrington, and HudsonYards in 2017, which expanded our logistics, printing, digital, office products, and premedia capabilities, and Continuum
Management Company, LLC (“Continuum”) in 2016, which expanded our print management capabilities. These acquisitions and investments further secure our
position as a technology leader in the industry.
Technological advancement and innovation has affected the overall demand for most of the products in our Office Products segment. While these changes
continue to impact demand, the overall market for our products remains large and we believe share growth is attainable. We compete against a range of both
domestic and international competitors in each of our product categories within the segment. Due to the increasing percentage of private label products in the
market, resellers have created a highly competitive environment where purchasing decisions are based largely on price, quality and the supplier’s ability to service
the customer. As consumer preferences shift towards private label, resellers have increased the pressure on suppliers to better differentiate their product offering,
oftentimes through product exclusivity, product innovation and development of private label products. We have experienced robust growth within our e-commerce
channel, where a significant majority of our sales are branded products.
We have implemented a number of strategic initiatives to reduce our overall cost structure and improve efficiency, including the
restructuring, reorganization and integration of operations and streamlining of administrative and support activities. Future cost reduction initiatives could include
the reorganization of operations and the consolidation of facilities. Implementing such initiatives might result in future restructuring or impairment charges, which
may be substantial. We also review our operations and management structure on a regular basis to appropriately balance risks and opportunities to maximize
efficiencies and to support our long-term strategic goals.
7
Seasonality
Advertising and consumer spending trends affect demand in several of the end-markets served by LSC Communications. Historically, demand for printing
of magazines, catalogs, retail inserts, books and office products is higher in the second half of the year, driven by increased advertising pages within magazines,
holiday volume in catalogs and retail inserts, and back-to-school demand in books and office products. These typical seasonal patterns can be impacted by overall
trends in the U.S. and world economy.
Raw
Materials
We negotiate with suppliers to maximize our purchasing efficiencies. The primary raw materials we use in our printed products are paper and ink. We
negotiate with paper suppliers to maximize our purchasing efficiencies and use a wide variety of paper grades and formats. In addition, a substantial amount of
paper used in our printed products is supplied directly by customers. Variations in the cost and supply of certain paper grades used in the manufacturing process
may affect our consolidated financial results. Generally, customers directly absorb the impact of changing prices on customer-supplied paper. For paper that we
purchase, we have historically passed most changes in price through to our customers. Contractual arrangements and industry practice should 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.
Higher paper prices and tight paper supplies may have an impact on customers’ demand for printed products. We also resell waste paper and other print-related by-
products and may be impacted by changes in prices for these by-products.
We use a wide variety of ink formulations and colors in our manufacturing processes. Variations in the cost and supply of certain ink formulations may
affect our consolidated financial results. We have undertaken various strategic initiatives to try to mitigate any foreseeable supply disruptions with respect to our
ink requirements, including entering into a long term supply arrangement with a single supplier for a substantial portion of our ink supply. Certain contractual
protections exist in our relationship with such supplier, such as price and quality protections and an ability to seek alternative sources of ink if the supplier breaches
or is unable to perform certain of its obligations, which are intended to mitigate the risk of ink-related supply disruptions.
The primary materials used in the Office Products segment are paper, steel and polypropylene substrates. We negotiate with leading paper, plastic and steel
suppliers to maximize our purchasing efficiencies. All of these materials are available from a number of domestic and international suppliers and we are not
dependent upon any single supplier for any of these materials. We believe that adequate supply is available for each of these materials for the foreseeable future,
although higher paper prices may have an impact on demand for our products.
Changes in material prices, including paper and freight, may impact the Company’s operating margins as there may be a lag between when the Company
experiences the changes and when they are absorbed by our customers.
Except for our long-term suppl y arrangement regarding ink, we do not consider ourselves to be dependent upon any single vendor as a source of supply for
our businesses, and we believe that sufficient alternative sources for the same, similar or alternative products are available.
Cha nges in the price of raw materials, crude oil and other energy costs impact our manufacturing costs. Crude oil and energy prices continue to be volatile.
Should prices increase, we generally cannot pass on to customers the impact of higher energy prices on our manufacturing costs. We do enter into fixed price
contracts for a portion of our natural gas purchases to mitigate the impact of changes in energy prices. 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 customer demand and the related impact either will have on
the Company’s consolidated statements of operations, balance sheets and cash flows.
Customers
Our printed products service retailers, including catalogers and merchandisers, publishers of magazines, books and directories and online retailers. Our
customer base includes seven of the top ten catalogers in the United States, eight of the top ten magazine publishers in the United States, and all of the top ten book
publishers based in North America. Our printed products are distributed through the United States Postal Service (“USPS”) or foreign postal services or to our
customers by direct shipment, typically in bulk, to customer facilities and warehouses.
8
Our Office Products segment primarily services office superstores, office supply wholesalers, independent contract stationers, mass merchandisers and
retailers and e-commerce resellers. The products that make up our Office Products segment are distributed to our customers by direct shipment, typically in bulk, to
customer facilities and warehouses.
For each of the years ended December 31, 2018, 2017 and 2016, no customer accounted for 10% or more of the Company’s consolidated and combined net
sales.
Technology,
Research
and
Development
The Company has a broad portfolio of technology capabilities that are utilized in the delivery of products and services to our customers. We believe that
proprietary technology is required where it will provide a competitive advantage or where the desired technology is not readily available in the marketplace, and, as
such, our proprietary technology portfolio contains an array of applications and technological capabilities that were developed to perform different functions,
including storefront, digital asset management and distribution, manufacturing systems, warehousing, logistics and list management services and data analytics
solutions. Our technology strategy is focused on the continued investment in key technologies that support services and solutions that allow for creation,
management, production, distribution and analytics of publisher content in multi-channels to maximize their distribution and return for each title. We are also
focusing our technology capabilities on developments that will allow us to pursue strategic relationships and expanded services, such as our full supply chain
management offering within our book platform. Our continued activities in our Unified Technology Platform aligns investments across several offerings to support
publishers including; order to cash for publishing, digital analytics offered through Harvest View, anti-piracy for publishers through our IntercepTag℠ solution and
integrated warehouse offerings in our book fulfillment platform complementing our offset and digital print capabilities. To implement our research and
development strategy, we expect to primarily invest in the maintenance and enhancement of our technology footprint within our facilities and in development
activities that allow us to create new and differentiating technology capabilities.
Cybersecurity
Our cybersecurity program is designed to meet the needs and expectations of our customers who entrust us with certain sensitive business information. Our
infrastructure and technology, expansive and highly trained workforce and comprehensive security and compliance program make us qualified to safely process,
store and protect this customer information.
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 qualified to address security and compliance-related issues as they arise. Additionally, all of 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 regards to information handling. We believe our security and compliance team also diminishes the risk of system compromise and data
exposure by rapidly and effectively addressing security incidents as they arise.
Intellectual
Property
We consider patents, trademarks and other proprietary rights to be important to our business. We own over 150 patents worldwide, the majority of which are
concentrated in our Office Products segment (utility and design patents), with the remainder falling into the following categories:
• Printing and binding patents: relate to manufacturing processes and systems used in the production of books, magazines and catalogs.
• Co-mailing patents: relate to combining printed publications in an efficient manner to achieve postal savings.
• New media patents: relate to methods for creating and formatting digital content for electronic publications.
We also own over 350 trademarks worldwide, the majority of which are concentrated within our Office Products segment. Several of our most significant
trademarks include registrations for the Adams, Ampad, Cardinal Brands, Oxford, Pendaflex, Quality Park, and TOPS office products brands. Additionally, we own
the rights to a group of trademarks relating to our e-media publishing services, such as Newsstand™, LibreDigital™, LibreMarket™, LibrePublish™, and
LibreAccess™.
9
While we consider our patents, trademarks and other proprietary rights to be valuable assets, we do not believe that our profitability and operations are
dependent upon any single patent, trademark or other proprietary right.
Environmental
Compliance
Our operations are subject to various international, federal, state and local laws and regulations relating to the protection of the environment, including those
governing discharges to air and water, the management and disposal of hazardous materials, the cleanup of contaminated sites and health and safety matters. In the
United States, these laws and regulations include the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act and Superfund (the
environmental program established in the Comprehensive Environmental Response, Compensation, and Liability Act to address abandoned hazardous waste sites),
which imposes joint and severable liability on each potentially responsible party. We are committed to complying with these and all other applicable environmental,
health, and safety laws, and in order to reduce the risk of non-compliance, we maintain an Environmental, Health and Safety management system that includes an
appropriate policy and standards, staff dedicated to environmental, health, and safety issues, and other measures.
While it is our policy to conduct our global operations in accordance with all applicable laws, regulations and other requirements, from time to time, our
properties, products or operations may be affected by environmental issues. It is not possible to quantify with certainty the potential impact of actions regarding
environmental matters, particularly remediation and other compliance efforts that we may undertake in the future. However, in the opinion of management,
compliance with the present environmental protection laws, before taking into account estimated recoveries from third parties, will not have a material adverse
effect on our consolidated financial statements.
Employees
As of December 31, 2018, the Company had approximately 22,000 total employees in the global workforce, of which approximately 18,700 employees were
in the U.S. and approximately 3,300 were in international locations. Of the U.S. and international employees, approximately 3% and 70% were covered by
collective bargaining agreements, respectively. We have collective bargaining agreements with unionized employees in Canada and Mexico. We have not
experienced a work stoppage during the past five years. Management believes that we have good relationships with our employees and collective bargaining
groups.
Available
Information
The Company maintains an Internet website at www.lsccom.com where the Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on form 8-K and all amendments to those reports are available without charge, as soon as reasonably practicable following the time they are filed
with, or furnished to, the Securities and Exchange Commission (“SEC”). The Principles of Corporate Governance of the Company’s Board of Directors, the
charters of the Audit, Human Resources and Corporate Responsibility and Governance Committees of the Board of Directors and the Company’s Principles of
Ethical Business Conduct are also available on the Investor Relations portion of www.lsccom.com, and will be provided, free of charge, to any stockholder who
requests a copy. References to the Company’s website address do not constitute incorporation by reference of the information contained on the website, and the
information contained on the website is not part of this document.
Special
Note
Regarding
Forward-Looking
Statements
The Company has made forward-looking statements in this annual report on Form 10-K that are subject to risks and uncertainties. These statements are
based on the beliefs and assumptions of the Company. Generally, forward-looking statements include information concerning possible or assumed future actions,
events, or results of operations of the Company.
These statements may include, or be preceded or followed by, the words “anticipates,” “estimates,” “expects,” “projects,” “forecasts,” “intends,” “plans,”
“continues,” “believes,” “may,” “will,” “goals” or variations of such words and similar expressions. Examples of forward-looking statements include, but are not
limited to, statements, beliefs and expectations regarding our business strategies, market potential, future financial performance, dividends, costs to be incurred in
connection with the separation, results of pending legal matters, our goodwill and other intangible assets, price volatility and cost environment, our liquidity, our
funding sources, expected pension contributions, capital expenditures and funding, our financial covenants, repayments of debt, off-balance sheet arrangements and
contractual obligations, our accounting policies, general views about future operating results and other events or developments that we expect or anticipate will
occur in the future. These forward-looking statements are subject to a number of important factors, including those factors disclosed in Item 1A, Risk
Factors
,
that could cause our actual results to differ materially from those indicated in any such forward-looking statements. These factors include, but are not limited to:
10
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the competitive market for our products and industry fragmentation affecting our prices;
inability to improve operating efficiency to meet changing market conditions;
changes in technology, including electronic substitution and migration of paper based documents to digital data formats;
the volatility and disruption of the capital and credit markets, and adverse changes in the global economy;
the effects of global market and economic conditions on our customers;
the effect of economic weakness and constrained advertising;
uncertainty about future economic conditions;
increased competition as a result of consolidation among our competitors;
our ability to successfully integrate recent and future acquisitions;
factors that affect customer demand, including changes in postal rates, postal regulations, delivery systems and service levels, changes in advertising
markets and customers’ budgetary constraints;
our ability to access debt and the capital markets due to adverse credit market conditions;
the effects of seasonality on our core businesses;
the effects of increases in capital expenditures;
changes in the availability or costs of key print and office products production materials (such as paper, ink, energy, and other raw materials), the tight
labor market, the availability of labor at our vendors or in prices received for the sale of by-products;
performance issues with key suppliers;
our ability to maintain our brands and reputation;
the retention of existing, and continued attraction of additional customers and key employees, including management;
the effect of economic and political conditions on a regional, national or international basis;
the effects of operating in international markets, including fluctuations in currency exchange rates;
changes in environmental laws and regulations affecting our business;
the ability to gain customer acceptance of our new products and technologies;
the effect of a material breach of or disruption to the security of any of our or our vendors’ systems;
the failure to properly use and protect customer and employee information and data;
the effect of increased costs of providing health care and other benefits to our employees;
the effect of catastrophic events;
the impact of the U.S. Tax Cuts and Jobs Act (“Tax Act”);
increases in requirements to fund or pay withdrawal costs or required contributions related to the Company’s pension plans;
11
• we may be unable to consummate the merger;
•
•
the merger agreement limits LSC's ability to pursue alternatives to the merger that might result in greater value to LSC stockholders than the merger;
failure to consummate the merger could negatively impact the stock price and the future business and financial results of LSC;
• LSC may incur significant transaction and merger-related costs in connection with the merger, which may be in excess of those anticipated; and
• LSC may be a target of further securities class action and derivative lawsuits which could result in substantial costs and may delay or prevent the merger
from being consummated.
Because forward-looking statements are subject to assumptions and uncertainties, actual results may differ materially from those expressed or implied by
such forward-looking statements. Undue reliance should not be placed on such statements, which speak only as of the date of this document or the date of any
document that may be incorporated by reference into this document.
Consequently, readers of this annual report on Form 10-K should consider these forward-looking statements only as the Company’s current plans, estimates
and beliefs. The Company does not undertake and specifically declines any obligation to publicly release the results of any revisions to these forward-looking
statements that may be made to reflect future events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated
events. The Company undertakes no obligation to update or revise any forward-looking statements in this annual report on Form 10-K to reflect any new events or
any change in conditions or circumstances.
ITEM 1A. RISK FACTORS
The Company’s consolidated statements of operations, balance sheets and cash flows can be adversely affected by various risks. These risks include the
principal factors listed below and the other matters set forth in this annual report on Form 10-K. You should carefully consider all of these risks.
Risks Relating to the Business of the Company
The
highly
competitive
market
for
our
products
and
industry
fragmentation
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. Management believes that excess
capacity in our markets, as well as increasing consolidation of our customer base has caused downward price pressure for our products and that 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 as a result
of synergies achieved.
We
may
be
unable
to
improve
our
operating
efficiency
rapidly
enough
to
meet
market
conditions.
Because the markets in which we compete 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, which could negatively impact the Company’s consolidated
statements of operations, balance sheets and cash flows.
The
substitution
of
electronic
delivery
for
printed
materials
may
continue
to
adversely
affect
our
businesses.
Electronic delivery of documents and data, including the online distribution and hosting of media content, offer alternatives to traditional delivery of print
materials. Consumers continue to accept electronic substitution in directory printing and are replacing traditional reading of print materials with online, hosted
media content or e-reading devices. The extent to which consumers will continue to accept electronic delivery is uncertain and it is difficult to predict future rates of
acceptance of these alternatives. Electronic delivery has negatively impacted some of our products, such as directories and books. Digital technologies have also
impacted printed magazines, as some advertising spending has started transitioning from print to electronic media. To the extent that consumers and customers
continue to accept these alternatives, our consolidated statements of operations, balance sheets and cash flows could be negatively impacted.
12
Global
market
and
economic
conditions,
as
well
as
the
effects
of
these
conditions
on
our
customers’
businesses,
could
adversely
affect
us,
as
the
financial
condition
of
our
customers
may
deteriorate.
Global economic conditions affect our customers’ businesses and the markets they serve. Because a significant part of our business relies on advertising
spending, which is driven in part by economic conditions and consumer spending, a prolonged downturn in the global economy and an uncertain economic outlook
could further reduce the demand for the printing and related services that we provide. Delays or reductions in customers’ spending would have an adverse effect on
demand for our products and services, which could be material, and consequently could negatively impact our results of consolidated statements of operations,
balance sheets and cash flows . Economic weakness and constrained advertising spending may result in decreased net sales, operating margin, earnings and growth
rates and difficulty in managing inventory levels and collecting accounts receivable. Our exposure to industries experiencing financial difficulties and certain
financially troubled customers could negatively impact our consolidated statements of operations, balance sheets and cash flows . Further, a lack of liquidity in the
capital markets or a sustained period of unfavorable economic conditions could increase our exposure to credit risks of our customers and result in increases in bad
debt write-offs and allowances for doubtful accounts receivable. We may experience operating margin declines, reflecting the effect of items such as competitive
price pressures, inventory write-downs, cost increases for wages and materials, and increases in pension plan funding requirements. Economic downturns may also
result in restructuring actions and associated expenses and impairment of long-lived assets, including goodwill and other intangibles. Uncertainty about future
economic conditions makes it difficult for us to forecast operating results and to make decisions about future investments.
Adverse
credit
market
conditions
may
limit
the
Company’s
ability
to
obtain
future
financing.
We may, from time to time, depend on access to the credit markets. Uncertainty and volatility in global financial markets may cause financial markets
institutions to fail or may cause lenders to hoard capital and reduce lending. The failure of a financial institution that supports the Company’s existing credit
agreement would reduce the size of its committed facility unless a replacement institution were added.
Our
business
is
subject
to
risks
associated
with
seasonality,
which
could
negatively
impact
our
consolidated
statements
of
operations,
balance
sheets
and
cash
flows.
Our sales and cash flows are affected by seasonality, as print demand is affected by advertising and consumer spending trends. Historically, demand for
printing of magazines, catalogs, retail inserts, books and office products is higher in the second half of the year, driven by increased advertising pages within
magazines, holiday volume in catalogs and retail inserts, and back-to-school demand in books and office products. These typical seasonal patterns can be impacted
by overall trends in the U.S. and world economy. For these reasons, sequential quarterly comparisons are not a good indication of our performance or how we may
perform in the future. If we are unable to obtain access to financing sources to fund our working capital needs or if seasonal fluctuations are greater than
anticipated, this could negatively impact our consolidated statements of operations, balance sheets and cash flows .
Increases
in
the
prices
of
paper,
ink,
energy
and
other
raw
materials
may
adversely
impact
us.
Purchases of paper, ink, energy and other raw materials represent a large portion of our costs. Increases in the prices of these inputs may increase our costs,
and we may not be able to pass these increased costs on to customers through higher prices, or to the extent we pass along such costs by increasing our prices to our
customers, it may adversely impact customers’ demand for our printing and related services.
Decreases
in
the
market
prices
for
waste
paper
or
other
byproducts
may
adversely
impact
us.
Decreases in the prices paid by third parties for waste paper and other print-related byproducts may make it infeasible for us to sell, or adversely impact the
amounts we are paid, from sales of such byproducts.
13
We
may
be
adversely
affected
by
a
decline
in
the
availability
of
raw
materials.
We are dependent on the availability of paper, ink and other raw materials to support our operations. Unforeseen developments in these markets could result
in a decrease in the supply of paper, ink or other raw materials and could cause us to be unable to meet contractual commitments to our customers or result in a
decline in our net sales.
We
rely
on
a
key
supplier
for
ink
and
if
such
supplier
breaches
or
is
unable
to
perform
certain
obligations
under
our
arrangement
with
them,
we
may
be
unable
to
procure
comparable
supply
from
another
supplier
in
a
timely
fashion,
or
when
we
are
able
to
procure
such
supply,
such
supply
may
be
on
worse
terms.
A significant portion of our ink comes from a single supplier pursuant to a multi-year supply agreement. The ink industry has faced significant challenges in
recent years, as the demand for ink has declined while the costs of raw materials used to manufacture ink have fluctuated. We rely on this ink supplier to meet a
significant portion of our ink needs, and have negotiated a contract that provides us with favorable terms and certain contingencies from supply disruption. A
disruption in the supply of ink from this supplier, either from natural disaster, financial bankruptcy or other supply interruption, may require us to purchase a
significant amount of ink from other suppliers or assume the production ourselves, which in either case, may be on worse terms and slow our production, either of
which could have a negative impact on our consolidated statements of operations, balance sheets 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 the day-to-day operations of the Company. In addition, the process of integrating
operations may cause an interruption of, or loss of momentum in, the activities of one or more of the Company’s businesses and the loss of key personnel from the
Company or the acquired businesses. Further, employee uncertainty and lack of focus during the integration process may disrupt the businesses of the Company or
the acquired businesses.
The Company’s strategy is, in part, predicated on the Company’s ability to realize cost savings and to increase net sales through the acquisition of
businesses that add to the breadth and depth of the Company’s products and services. Achieving these cost savings and net sales increases is dependent upon a
number of factors, many of which are beyond the Company’s control. In particular, the Company may not be able to realize the benefits of more comprehensive
product and service offerings, anticipated integration of sales forces, asset rationalization and systems integration.
We
may
be
subject
to
more
intensive
competition
if
our
competitors
pursue
consolidations.
We currently have a large number of competitors in the markets in which we operate. We believe that selectively pursuing acquisitions is an important
strategy for our business, as evidenced by our pending merger with Quad/Graphics. If our competitors are able to successfully combine with one another, and we
are not successful with our own efforts to consolidate or adapt effectively to increased competition, the competitive landscape we face could be significantly
altered. Such consolidation could create stronger competitors with greater financial resources and broader manufacturing and distribution capabilities than our own,
and the resulting increase in competitive pressures could negatively impact our consolidated statements of operations, balance sheets and cash flows .
14
Our
business
is
dependent
upon
brand
recognition
and
reputation,
and
the
failure
to
maintain
or
enhance
our
brands
or
reputation
would
likely
have
an
adverse
effect
on
our
business.
Our brand recognition, particularly in our Office Products segment, and reputation generally are important aspects of our business. Maintaining and further
enhancing our brands and reputation will be important to retaining and attracting customers for our products. We also believe that the importance of our brand
recognition and reputation for products will continue to increase as competition in the market for our products continues to increase. Our success in this area will be
dependent on a wide range of factors, some of which are out of our control, including our ability to retain existing and obtain new customers and strategic partners,
the quality and perceived value of our products, actions of our competitors, and positive or negative publicity. Our reputation also depends on the quality of our
customer service, and if our customer service declines, our reputation may also decline. Damage to our reputation and loss of brand equity may reduce demand for
our products and could negatively impact our consolidated statements of operations, balance sheets and cash flows .
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 skilled employees. The loss of a significant number of our
employees or the inability to attract, hire, develop, train and retain skilled personnel could have a serious negative effect on our business. Various locations may
encounter competition with other manufacturers for skilled labor. Many of these manufacturers 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 have significant industry experience that is valuable to our
competitors. Our executive officers have non-solicitation agreements contractually prohibiting them from soliciting our customers and employees for a specified
period of time after they leave the Company. If one or more members of our senior management team leave and cannot be replaced with a suitable candidate
quickly, we could experience difficulty in managing our business properly, which could negatively impact our consolidated statements of operations, balance sheets
and cash flows .
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 could 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 customers, and create
inefficiencies in our supply chain. An event of this nature could also prevent us from maintaining ongoing operations and from 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 could affect our ability to conduct normal business
operations, which could negatively impact our consolidated statements of operations, balance sheets and cash flows .
There
are
risks
associated
with
operations
outside
the
United
States.
Net sales from our operations in geographic regions outside the United States accounted for approximately 9% of our consolidated net sales for the year
ended December 31, 2018. As a result, we are subject to the risks inherent in conducting business outside the United States, including the impact of economic and
political instability of those countries in which we operate. Our operations outside of the United States during the year ended December 31, 2018 were primarily in
Poland and Mexico. As mentioned in Item 1, Business
, the Company completed the sale of its European printing business on September 28, 2018. Security
disruptions within the regions in Mexico in which we operate may interfere with operations, which could negatively impact our supply chain.
We are also subject to risks that could materially affect our operations and operating results with respect to potential changes in United States government
trade policy and legislation, including changes to tax laws, withdrawal from or modification of certain international trade agreements, including the North American
Free Trade Agreement (“NAFTA”), the imposition of additional tariffs or other restrictions on trade on goods produced outside the United States for import into the
United States and any changes in diplomatic relations with countries in which we operate or do business and compliance with applicable anti-corruption and
sanctions laws and regulations.
15
We
are
exposed
to
risks
related
to
potential
adverse
changes
in
currency
exchange
rates.
We are exposed to market risks resulting from changes in the currency exchange rates of the currencies in the countries in which we do business. Although
operating in local currencies may limit the impact of currency rate fluctuations on the operating results of our non-U.S. subsidiaries, fluctuations in such rates may
affect the translation of these results into our consolidated financial statements. To the extent borrowings, sales, purchases, net sales and expenses or other
transactions are not in the applicable local currency, we may enter into foreign currency spot and forward contracts to hedge the currency risk. Management cannot
be sure, however, that our efforts at hedging will be successful, and such efforts could, in certain circumstances, lead to losses.
The
trend
of
increasing
costs
to
provide
health
care
and
other
benefits
to
our
employees
may
continue.
We provide health care and other benefits to our employees. For many years, costs for health care have increased more rapidly than general inflation in the
U.S. economy. If this trend in health care costs continues, our cost to provide such benefits could increase, adversely impacting our profitability. Changes to health
care regulations in the U.S. may also increase our cost of providing such benefits. The full effect that a full or partial repeal of the Affordable Care Act or changes
to other healthcare laws and regulations would have on our business remains unclear at this time, and could negatively impact our consolidated statements of
operations, balance sheets and cash flows.
Changes
in
market
conditions,
changes
in
discount
rates,
or
lower
returns
on
assets
may
increase
required
pension
plan
contributions
in
future
periods.
The funded status of our pension plans is dependent upon many factors, including returns on invested assets and the level of certain interest rates. As
experienced in prior years, declines in the market value of the securities held by the plans coupled with historically low interest rates have substantially reduced,
and in the future could further reduce, the funded status of the plans. These reductions may increase the level of expected required pension plan contributions in
future years. Various conditions may lead to changes in the discount rates used to value the year-end benefit obligations of the plans, which could partially mitigate,
or worsen, the effects of lower asset returns. If adverse conditions were to continue for an extended period of time, our costs and required cash contributions
associated with pension plans may substantially increase in future periods.
A
decline
in
our
expected
profitability
or
the
expected
profitability
of
our
individual
reporting
units
could
result
in
the
impairment
of
assets,
including
goodwill,
other
long-lived
assets
and
deferred
tax
assets.
We hold goodwill, other long-lived assets and deferred tax assets on our balance sheet. A decline in expected profitability, particularly if there is a decline in
the global economy, could call into question the recoverability of our related 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 an
occurrence has had and could continue to have a negative impact on our consolidated statements of operations, balance sheets and cash flows .
Changes
in
postal
rates,
regulations
and
delivery
systems
may
adversely
impact
demand
for
our
products
and
services.
Postal costs are a significant component of many of our customer’s cost structure. Postal rate changes and USPS regulations that result in higher overall
costs can influence the volume that these clients will be willing to print and ultimately send through the USPS.
Current federal law limits postal rate increases (outside of an "exigent circumstance") to the increase in the Consumer Price Index. This cap works to ensure
funding stability and predictability for mailers. Under this current federal law, the USPS implemented a rate adjustment in early 2019 affecting all market dominant
classes (periodicals, standard mail, first class mail, package services and special services), which was based on an average inflation-based rate increase for each
class of mail.
In December 2018, the U.S. Department of the Treasury released the White House Task Force report on the United States Postal System. The report
provides a series of recommendations to overhaul the United States Postal Service’s business model in order to return it to sustainability without shifting additional
costs to taxpayers. The effects of this report on postal rates, regulations and delivery systems are not yet known.
16
Federal law requires the Postal Regulatory Commission ("PRC") to conduct a periodic review of the overall rate-making structure for the USPS. The PRC
issued a proposal in 2018 to increase inflation-based pricing to include an additional 2% – 5% per year. The proposal remains open and it is not known whether the
PRC will move forward with such proposal or make modifications. Until the PRC's final determination, mailers have an uncertain future relative to budgeting for
postal expenses.
The result of such determination may be reduced demand for printed products, co-mail and freight services as our customers may move more aggressively
into other delivery methods such as the many digital and mobile options now available to consumers, which may have an adverse effect on our business.
We
are
subject
to
environmental
regulation
and
environmental
compliance
expenditures,
which
could
increase
our
costs
and
subject
us
to
liabilities.
The conduct of our businesses is subject to various environmental laws and regulations administered by federal, state and local government agencies in the
United States, as well as to foreign laws and regulations administered by government entities and agencies in markets in which we operate. These laws and
regulations and interpretations thereof may change, sometimes dramatically, as a result of political, economic or social events. Changes in laws, regulations or
governmental policy and the related interpretations may alter the environment in which we do business and, therefore, may impact our results or increase our costs
and liabilities.
Various laws and regulations addressing climate change are being considered at the federal and state levels. Proposals under consideration include
limitations on the amount of greenhouse gas that can be emitted. Such proposals may have a negative impact on our consolidated statements of operations, balance
sheets and cash flows if capital spend or increased resources are required for compliance.
The
competitiveness,
success
and
growth
of
our
business
may
depend
on
our
ability
to
refurbish
or
replace
our
infrastructure,
which
could
result
in
an
increase
in
our
capital
expenditures
and
such
capital
expenditures
could
be
substantial.
We
may
be
required
to
invest
more
in
capital
expenditures
than
we
have
done
historically.
Capital expenditures, such as software upgrades or machinery replacements, may be necessary from time to time to preserve the competitiveness, success
and growth of our business. The industry in which we operate is highly competitive and is expected to remain competitive. We may be required to invest amounts
in capital expenditures that exceed our recent spending levels to replace worn out or obsolete machinery or otherwise remain competitive. If cash from operations is
insufficient to provide for needed levels of capital expenditures and we are unable to obtain funds for such purposes elsewhere, we may be unable to make
necessary upgrades or repairs to our software and facilities. An increase in capital expenditures could affect our ability to compete effectively and could have a
negative impact on our consolidated statements of operations, balance sheets and cash flows .
The
failure
to
adapt
to
technological
changes
to
address
the
changing
demands
of
customers
or
the
failure
to
implement
new
required
processes
or
procedures
in
connection
with
the
expansion
of
our
products
and
services
into
new
areas
may
adversely
impact
our
business.
Many of the end markets in which our customers compete are experiencing changes due to technological progress and changes in consumer preferences. In
order to 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 customers. If we are unable to continue to exploit new and existing technologies to distinguish our products and services from
those of our competitors or adapt to new distribution methods, our business may be adversely affected.
Technological developments, changing demands of customers and the expansion of our products and services into new areas may require additional
investment in new equipment and technologies, as well as the implementation of additional necessary or required compliance procedures and processes to which we
are not currently subject. The development of such solutions may be costly and there is no assurance that these solutions will be accepted by customers.
Furthermore, our compliance with new procedures and processes may increase our costs and, in the event we are unable to comply, may reduce our customers’
willingness to work with us. If we are unable to adapt to technological changes on a timely basis or at an acceptable cost, or if we cannot comply with these
necessary or required procedures or processes, customers’ demand for our products and services may be adversely affected.
17
Our
services
depend
on
the
reliability
of
computer
systems
maintained
by
us
and
our
vendors
and
the
ability
to
implement
and
maintain
information
technology
and
security
measures
to
protect
against
security
breaches
and
data
leakage.
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, or a security breach or a data leak that compromises the confidential and sensitive information of ours and of our customers stored in those systems,
could disrupt our business, harm our reputation with customers and adversely impact our ability to compete. These systems include systems that we own and
operate, as well as those systems of our vendors.
Our systems are integral to the operation of our business, because they allow us to share information that may be confidential in nature to our customers
across our offices worldwide, which allows us to increase global reach for our customers, or they allow us to offer products that are dependent upon access to the
systems. Such systems are susceptible to malfunctions and interruptions due to equipment damage, power outages and a range of other hardware, software and
network problems. Those systems are also susceptible to cybercrime, or threats of intentional disruption, which are increasing in terms of sophistication and
frequency. Our systems are also susceptible to breaches due to intentional employee misconduct. For any of these reasons, we may experience systems
malfunctions or interruptions or leakage of confidential information. A significant or large-scale malfunction or interruption of any one of our computer or data
processing systems, or the leakage of confidential information due to a malfunction or breach of our systems or employee misconduct, could adversely affect our
ability to manage and keep our operations running efficiently, and damage our reputation if we are unable to track transactions, deliver products and safeguard our
customers’ confidential information. A malfunction that results in a wider or sustained disruption to our business could negatively impact our consolidated
statements of operations, balance sheets and cash flows .
In addition, we may from time to time acquire companies or businesses that do not have cybersecurity practices and procedures consistent with ours, and we
may need to invest in bringing those businesses onto our existing systems or updating them to comply with ours. Such systems may be more vulnerable to attack or
malfunction than our systems until such time as we are able to integrate the business.
We
have
incurred
substantial
indebtedness
and
the
degree
to
which
we
are
currently
leveraged
may
materially
and
adversely
affect
our
business
and
consolidated
statements
of
operations,
balance
sheets
and
cash
flows
.
We have $767 million of indebtedness as of December 31, 2018. Our ability to make payments on and to refinance our indebtedness, including the debt
incurred in connection with the separation, as well as any future debt that we may incur, will depend on our ability to generate cash in the future from operations,
financings or asset sales. Our ability to generate cash is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond
our control. We may not generate sufficient funds to service our debt and meet our business needs, such as funding working capital or the expansion of our
operations. If we are not able to repay or refinance our debt as it becomes due we may be forced to take disadvantageous actions, including facility closures, staff
reductions, reducing financing in the future for working capital, capital expenditures and general corporate purposes, selling assets or dedicating an unsustainable
level of our cash flow from operations to the payment of principal and interest on our indebtedness, and restricting future capital return to stockholders. In addition,
our ability to withstand competitive pressures and to react to changes in the print and related services industry could be impaired. The lenders who hold our debt
could also accelerate amounts due in the event that we default, which could potentially trigger a default or acceleration of the maturity of our other debt.
In addition, our leverage could put us at a competitive disadvantage compared to our competitors who may be less leveraged. These competitors could have
greater financial flexibility to pursue strategic acquisitions and secure additional financing for their operations. Our leverage could also impede our ability to
withstand downturns in our industry or the economy in general.
The
agreements
and
instruments
that
govern
our
debt
impose
restrictions
that
may
limit
our
operating
and
financial
flexibility.
The Credit Agreement that governs our Senior Secured Credit Facilities and the indenture that governs the Senior Secured Notes contain a number of
significant restrictions and covenants that limit our ability to:
incur additional debt;
pay dividends, make other distributions or repurchase or redeem our capital stock;
prepay, redeem or repurchase certain debt;
•
•
•
• make loans and investments;
•
•
sell, transfer or otherwise dispose of assets;
incur or permit to exist certain liens;
18
•
•
•
enter into certain types of transactions with affiliates;
enter into agreements restricting our subsidiaries’ ability to pay dividends; and
consolidate, merge or sell all or substantially all of our assets.
These covenants can have the effect of limiting our flexibility in planning for or reacting to changes in our business and the markets in which we compete.
In addition, the Credit Agreement that governs our Senior Secured Credit Facilities requires us to comply with certain financial maintenance covenants. Operating
results below current levels or other adverse factors, including a significant increase in interest rates, could result in our being unable to comply with the financial
covenants contained in our Term Loan Facility and indenture. If we violate covenants under our Senior Secured Credit Facilities and indenture and are unable to
obtain a waiver from our lenders, our debt under our Senior Secured Credit Facilities and indenture would be in default and could be accelerated by our lenders.
Because of cross-default provisions in the agreements and instruments governing our debt, a default under one agreement or instrument could result in a default
under, and the acceleration of, our other debt.
If our debt is accelerated, we may not be able to repay our debt or borrow sufficient funds to refinance it. Even if we are able to obtain new financing, it may
not be on commercially reasonable terms, on terms that are acceptable to us, or at all. If our debt is in default for any reason, our business and consolidated
statements of operations, balance sheets and cash flows could be materially and adversely affected. In addition, complying with these covenants may also cause us
to take actions that are not favorable to holders of the notes and may make it more difficult for us to successfully execute our business strategy and compete against
companies that are not subject to such restrictions.
The
anticipated
changes
to
London
Inter-Bank
Offered
Rate
(“LIBOR”)
after
2021
could
impact
the
cost
of
our
variable
rate
indebtedness.
Some of our debt, including our credit facility, has a variable rate of interest linked to the LIBOR as a benchmark for establishing the rate. In July 2017, the
United Kingdom’s Financial Conduct Authority (FCA), which regulates LIBOR, announced that it intends to stop persuading or compelling banks to submit rates
for the calculation of LIBOR to the administrator of LIBOR after 2021. It is likely that banks will not continue to provide submissions for the calculation of
LIBOR after 2021 and possible that they may not provide submissions before then. It is impossible to predict whether LIBOR will continue to be viewed as an
acceptable market benchmark, what effects any changes to LIBOR or the transition to alternative reference rates may have on the on variable rate credit facility
loans or on our business, financial condition or results of operations. The consequence of these developments cannot be entirely predicted but could include an
increase in the cost of our variable rate indebtedness.
If LIBOR rates are no longer available or viewed as an acceptable market benchmark, and our lenders are required, or exercise discretion, to implement
substitute reference rates for the calculation of interest rates under our credit facility, we may incur significant expenses in effecting the transition, and may be
subject to disputes or litigation with lenders over the appropriateness or comparability to LIBOR of the substitute reference rates, which could have an adverse
effect on our business, financial condition or results of operations.
Despite
our
substantial
indebtedness,
we
may
be
able
to
incur
substantially
more
debt.
Despite our substantial amount of indebtedness, we may be able to incur substantial additional debt, including secured debt, in the future. Although the
indenture governing our Senior Notes and the Credit Agreement governing the Senior Secured Credit Facilities restrict the incurrence of additional debt, these
restrictions are subject to a number of qualifications and exceptions. Also, these restrictions do not prevent us from incurring obligations that do not constitute
indebtedness. In addition, as of December 31, 2018, we had $214 million available for additional borrowing under our Revolving Facility. The more indebtedness
we incur, the further exposed we become to the risks associated with substantial leverage described above.
The
ongoing
effects
of
the
Tax
Act
and
the
refinement
of
provisional
estimates
could
make
our
results
difficult
to
predict.
Our effective tax rate may fluctuate in the future as a result of the Tax Act, which was enacted on December 22, 2017. The Tax Act introduced significant
changes to U.S. income tax law that had a meaningful i mpact on our provision for income taxes. Further, the U.S. Treasury Department, the Internal Revenue
Service (“IRS”) and other standard-setting bodies may issue guidance or regulations on how the provisions of the Tax Act will be applied or otherwise administered
that is different from our interpretation. Accounting for the income tax effects of the Tax Act requires significant judgments and estimates in the interpretation and
calculations of the provisions of the Tax Act.
19
Risks Relating to Our Common Stock and the Securities Market
We
cannot
assure
you
that
we
will
continue
to
pay
dividends
on
our
common
stock,
and
our
indebtedness
could
limit
our
ability
to
pay
dividends
on
our
common
stock.
The timing, declaration, amount and payment of any future dividends to LSC Communications stockholders will fall within the discretion of our Board of
Directors. Our Board’s decisions regarding the payment of future dividends will depend on many factors, including our financial condition, future prospects,
earnings, capital requirements and debt service obligations, as well as legal requirements, regulatory constraints, industry practice and other factors that our Board
deems relevant. In addition, the terms of the agreements governing our debt or debt that we may incur in the future may continue to limit or prohibit the payment of
dividends. While our Board declared a quarterly cash dividend of $0.26 per common share on January 17, 2019 payable on March 4, 2019, there can be no
assurance that we will continue to pay a dividend.
Delaware
law
and
anti-takeover
provisions
in
our
organizational
documents
may
discourage
our
acquisition
by
a
third
party,
which
could
make
it
more
difficult
to
acquire
us
and
limit
your
ability
to
sell
your
shares
at
a
premium.
Certain provisions of our Certificate of Incorporation and By-laws and Delaware law may discourage, delay or prevent a merger or acquisition that is
opposed by our board of directors. These provisions include:
•
•
•
•
•
•
the ability of our board of directors to issue preferred stock in one or more series with such rights, obligations and preferences as the board of directors
may determine, without further vote or action by our stockholders;
the initial classification of our board of directors, which effectively prevents stockholders from electing a majority of the directors at any one annual
meeting of stockholders until the second annual meeting of stockholders after the separation;
advanced notice procedures for stockholders to nominate candidates for election to the board of directors and for stockholders to submit proposals for
consideration at a meeting of stockholders;
inability of stockholders to act by written consent;
restrictions on the ability of our stockholders to call a special meeting of stockholders; and
the absence of cumulative voting rights for our stockholders.
We are also subject to Section 203 of the Delaware General Corporation Law which, subject to certain exceptions, prohibits “business combinations”
between a publicly-held Delaware corporation and an “interested stockholder,” which is generally defined as a stockholder who becomes a beneficial owner of 15%
or more of a Delaware corporation’s voting stock for a three-year period following the date that such stockholder became an interested stockholder. This statute, as
well as the provisions in our organizational documents, could have the effect of delaying, deterring or preventing certain potential acquisitions or a change in
control of us.
Stockholders’
percentage
ownership
in
LSC
Communications
may
be
diluted
in
the
future.
Stockholders’ percentage ownership in LSC Communications may be diluted in the future because of equity securities we issue, either as consideration for
acquisitions, in connection with capital raises or for equity awards that we may grant to our directors, officers and employees. Further, to the extent that LSC
Communications raises additional capital through the sale of equity or convertible debt securities, existing ownership interests will be diluted, and the terms of such
financings may include liquidation or other preferences that adversely affect the rights of existing stockholders. Any such transaction will dilute stockholders’
ownership in LSC Communications.
20
Risks Relating to the Merger
Because
the
exchange
ratio
is
fixed
and
because
the
market
price
of
Quad/Graphics
class
A
common
stock
may
fluctuate,
LSC
stockholders
cannot
be
certain
of
the
precise
value
of
the
merger
consideration
they
may
receive.
Under the terms of the merger agreement, at the time the merger is consummated, each eligible share of LSC common stock will be converted into the right
to receive 0.625 shares of Quad/Graphics class A common stock, subject to adjustment for any reorganization, recapitalization, reclassification, stock dividend,
stock split, reverse stock split or other similar change in capitalization. The exchange ratio will not be adjusted for changes in the market price of Quad/Graphics
class A common stock or LSC common stock prior to the consummation of the merger. If the merger is consummated, there will be a time lapse between each of
the date of the Company’s Proxy Statement relating to the Merger, as filed with the SEC on January 22, 2019 (the “Merger Proxy”), the dates on which LSC
stockholders vote to approve the merger agreement proposal at the LSC special meeting and Quad/Graphics shareholders vote to approve the share issuance
proposal at the Quad/ Graphics special meeting, and the date on which LSC stockholders entitled to receive the merger consideration actually receive the merger
consideration. The market value of shares of Quad/Graphics class A common stock may fluctuate during and after these periods as a result of a variety of factors,
including general market and economic conditions, changes in Quad/Graphics’ businesses, operations and prospects and regulatory considerations. Such factors are
difficult to predict and in many cases may be beyond the control of Quad/Graphics and LSC. Consequently, at the time LSC stockholders must decide whether to
approve the merger agreement proposal, they will not know the actual market value of any merger consideration they will receive when the merger is
consummated. The actual value of any merger consideration received by LSC stockholders at the consummation of the merger will depend on the market value of
the shares of Quad/Graphics class A common stock at that time. This market value may differ, possibly materially, from the market value of shares of
Quad/Graphics class A common stock at the time the merger agreement was entered into or at any other time. LSC stockholders should obtain current stock
quotations for shares of Quad/Graphics class A common stock before voting their shares of LSC common stock.
The
market
price
of
Quad/Graphics
class
A
common
stock
will
continue
to
fluctuate
after
the
merger.
Upon consummation of the merger, holders of LSC common stock who receive the merger consideration will become holders of shares of Quad/Graphics
class A common stock. The market price of Quad/Graphics class A common stock may fluctuate significantly following consummation of the merger and holders
of LSC common stock could lose some or all of the value of their investment in Quad/Graphics class A common stock.
LSC
stockholders
will
have
a
reduced
ownership
and
voting
interest
in
Quad/Graphics
following
the
merger
compared
to
their
ownership
in
LSC
and
will
exercise
less
influence
over
management.
Currently, LSC stockholders have the right to vote in the election of LSC’s board of directors and the power to approve or reject any matters requiring
stockholder approval under Delaware law and under LSC’s certificate of incorporation and bylaws. Upon consummation of the merger, each LSC stockholder who
receives the merger consideration will become a shareholder of Quad/Graphics with a percentage ownership of Quad/Graphics that is smaller than the LSC
stockholder’s current percentage ownership of LSC. Based on the number of issued and outstanding shares of Quad/Graphics class A common stock and the
number of shares of LSC common stock outstanding as of January 7, 2019, and the exchange ratio, after the merger, LSC stockholders are expected to, collectively,
become owners of approximately 29.6% of the economic ownership of Quad/Graphics following the merger, and approximately 11.1% of the voting power of
Quad/Graphics following the merger, in each case, without giving effect to any shares of Quad/Graphics class A common stock held by LSC stockholders prior to
the consummation of the merger. Even if all former LSC stockholders voted together on all matters presented to Quad/Graphics shareholders, the former LSC
stockholders would exercise significantly less influence over Quad/Graphics after the consummation of the merger relative to their influence over LSC prior to the
consummation of the merger, and thus would have a less significant impact on the approval or rejection of future Quad/Graphics proposals submitted to a
shareholder vote. Further, while Quad/Graphics has agreed under the merger agreement to increase the size of the Quad/Graphics board of directors in order to
cause two current members of the LSC board of directors mutually agreed by LSC and Quad/Graphics, at the direction of the trustees of the Quad/Graphics voting
trust, to be appointed to the Quad/Graphics board of directors, there is no assurance that such directors will remain as members of the Quad/Graphics board of
directors beyond their initial term.
21
Shares
of
Quad/Graphics
class
A
common
st
ock
received
by
LSC
stockholders
as
a
result
of
the
merger
will
have
different
rights
from
shares
of
LSC
common
stock.
Upon consummation of the merger, LSC stockholders will no longer be stockholders of LSC and will become shareholders of Quad/Graphics. There are
important differences between the current rights of LSC stockholders and the rights to which such stockholders will be entitled as shareholders of Quad/Graphics.
For a discussion of the different rights associated with the shares of Quad/Graphics class A common stock, see the section entitled “Comparison of the Rights of
Quad/Graphics Shareholders and LSC Stockholders” in the Merger Proxy.
The
merger
agreement
may
be
terminated
in
accordance
with
its
terms
and
the
merger
may
not
be
consummated.
The merger agreement is subject to a number of conditions that must be fulfilled in order to consummate the merger, which are described in the section
entitled “The Merger Agreement—Conditions to the Consummation of the Merger” in the Merger Proxy. Those conditions include, among others: (i) the adoption
of the merger agreement by LSC stockholders, (ii) the approval of the share issuance proposal by Quad/Graphics’ shareholders, (iii) the expiration of the applicable
waiting period under the HSR Act, and other required regulatory approvals, (iv) the absence of any governmental order or law that precludes, restrains, enjoins or
otherwise prohibits, the consummation of the merger or the other transactions contemplated by the merger agreement, and (v) Quad/Graphics’ shares of class A
common stock issuable in the merger having been approved for listing on the NYSE. These conditions to the closing of the merger may not be fulfilled in a timely
manner or at all, and, accordingly the merger may be delayed or may not be consummated.
In addition, the parties can mutually decide to terminate the merger agreement at any time, before or after obtaining shareholder approval, or, if the merger is
not consummated by October 30, 2019, either Quad/Graphics or LSC may choose to terminate the merger agreement and not proceed with the merger.
Quad/Graphics or LSC may also elect to terminate the merger agreement in certain other circumstances as further detailed in the section entitled “The Merger
Agreement—Termination” in the Merger Proxy.
The
merger
agreement
limits
LSC’s
ability
to
pursue
alternatives
to
the
merger.
The merger agreement contains provisions that may discourage a third party from submitting an acquisition proposal (as defined in the section titled “The
Merger Agreement—Non-Solicitation of Acquisition Proposals; Changes of Recommendation—Definition of Acquisition Proposal” in the Merger Proxy) to LSC
that might result in greater value to LSC stockholders than the merger, or may result in a potential competing acquirer of LSC proposing to pay a lower per share
price to acquire LSC than it might otherwise have proposed to pay. These provisions include a general prohibition on LSC soliciting or, subject to certain
exceptions relating to the exercise of fiduciary duties by the LSC board of directors, furnishing information with respect to LSC or entering into discussions with
any third party regarding any acquisition proposal or offer for a competing transaction. LSC also has an unqualified obligation to submit the merger agreement
proposal to a vote by LSC stockholders, even if LSC receives an alternative acquisition proposal that the LSC board of directors believes is superior to the merger,
unless the merger agreement is terminated in accordance with its terms prior to such time. In the event that LSC terminates the merger agreement to enter into an
alternative acquisition that the LSC board of directors believes is superior to the merger, LSC will be required by the merger agreement to pay Quad/Graphics a
termination fee of $12.5 million plus reimburse Quad/Graphics up to $2 million for reasonable and documented out-of-pocket expenses related to the merger
agreement and the transactions contemplated thereby.
Failure
to
consummate
the
merger
could
negatively
impact
the
stock
price
and
the
future
business
and
financial
results
of
Quad/Graphics
and
LSC.
The merger agreement contains a number of conditions that must be satisfied or waived prior to the consummation of the merger. There can be no assurance
that all of the conditions to the consummation of the merger will be so satisfied or waived. If the conditions to the merger are not satisfied or waived,
Quad/Graphics and LSC will be unable to consummate the merger and the merger agreement may be terminated.
If the merger is not consummated for any reason, the ongoing businesses of LSC may be adversely affected and, without realizing any of the benefits of
having consummated the merger, LSC will be subject to a number of risks, including the following:
• LSC may experience negative reactions from the financial markets, including negative impacts on the market price of shares of LSC common stock;
22
•
•
the manner in which customers, vendors, business partners and other third parties perceive LSC may be negatively impacted, which in turn could affect
LSC’s marketing operations and their ability to compete for new business or obtain rene wals in the marketplace more broadly;
customers, suppliers and other third parties who have business relationships with LSC may decide not to renew such relationships or seek to terminate,
change and/or renegotiate their relationships with LSC as a result of the transaction, whether pursuant to the terms of their existing agreements with LSC
or otherwise;
• LSC may experience negative reactions from employees;
• LSC may be required to pay Quad/Graphics a termination fee of $12.5 million and reimburse Quad/Graphics for its out-of-pocket expenses up to $2
million, and LSC may only receive from Quad/Graphics a termination fee of $45 million if the merger is terminated under certain circumstances;
•
• LSC may be required to pay certain costs relating to the merger, even if the merger is not consummated;
•
under the merger agreement, LSC is subject to certain restrictions on the conduct of their businesses prior to consummating the merger, which may affect
our ability to execute certain of their business strategies; and
the attention of LSC management may be directed towards the consummation of the merger and merger-related considerations and may be diverted from
the day-to-day business operations of LSC, and matters related to the merger may require commitments of time and resources that could otherwise have
been devoted to other opportunities that might have been beneficial to LSC. If the merger is not consummated, the price of LSC common stock may
decline to the extent that the current market price reflects a market assumption that the merger will be consummated and that the related benefits will be
realized, or to the extent there is a market perception that the merger was not consummated due to an adverse change in the business of LSC.
The
regulatory
approvals
required
for
the
consummation
of
the
merger
may
not
be
obtained
or
may
take
longer
than
expected
to
be
received.
In
addition,
an
adverse
outcome
of
any
antitrust
or
similar
review
undertaken
by
a
governmental
authority
could
prevent
the
merger
from
being
consummated
or
have
an
adverse
effect
on
Quad/Graphics
following
the
merger.
Consummation of the merger is conditional upon receipt of certain regulatory approvals, including, without limitation, the expiration or termination of the
waiting period under the HSR Act in the United States and Mexico antitrust approval. Although Quad/Graphics and LSC have agreed to use their reasonable best
efforts to obtain the requisite regulatory approvals, there can be no assurance that these approvals will be obtained.
In addition, the regulatory authorities from which these approvals are required may impose conditions on the consummation of the merger or require
changes to the terms of the merger. In attempting to obtain the requisite regulatory approvals, neither Quad/Graphics nor any of its subsidiaries will be required to
make any divestiture, sale or other disposition of its assets or businesses. However, although it is not required under the merger agreement to do so, if
Quad/Graphics agrees to such conditions in order to obtain any approvals required to consummate the merger, then the business and results of operations of
Quad/Graphics following the merger may be adversely affected.
Furthermore, if the merger agreement is terminated under certain circumstances as further detailed in the section entitled “The Merger Agreement—
Termination” in the Merger Proxy due to failure to obtain regulatory approvals or the material breach of Quad/Graphics of its obligations in respect of obtaining
regulatory approvals, Quad/Graphics will pay LSC a reverse termination fee of $45 million.
The
synergies
expected
to
be
produced
may
not
be
realized
or
may
require
Quad/Graphics
after
the
consummation
of
the
merger
to
incur
additional
costs
that
may
adversely
affect
the
value
of
Quad/Graphics’
class
A
common
stock.
The success of the merger will depend, in part, on Quad/Graphics’ ability to realize the synergies expected to be produced from integrating LSC’s
businesses with Quad/Graphics’ existing business through capacity rationalization, the elimination of duplicative functions, greater operational efficiencies and
greater efficiencies in supply chain management, among other areas. Quad/Graphics has identified approximately $135 million of annualized net synergies that are
expected to be achieved in less than 24 months after the consummation of the merger.
Quad/Graphics’ management estimates that the total cost to Quad/Graphics of achieving the annualized net synergies will be approximately $135 million in
integration costs. Quad/Graphics’ estimates are based on a number of assumptions, which may prove incorrect.
Following the merger, Quad/Graphics may also incur additional and/or unexpected costs in order to realize the anticipated synergies. While Quad/Graphics’
management believes that the annualized net synergies are achievable, it may be unable to realize all of the synergies within the time frame expected or at all. The
integration process will be complex, costly and time-consuming. The difficulties of integrating LSC’s businesses may include, among others:
23
•
•
•
•
•
•
unanticipated issues in integrating manufacturing, logistics, information, communications, and other systems;
unanticipated changes in applicable laws and regulations;
failure to retain key employees, which might adversely affect operations and the ability to retain other employees;
preserving significant business relationships;
consolidating corporate and administrative functions; and
other unanticipated issues, expenses and liabilities.
Quad/Graphics may not accomplish the integration of LSC’s businesses smoothly, successfully or within the anticipated cost range or timeframe. The
diversion of the attention of Quad/Graphics’ management from current operations to the integration effort and any difficulties encountered in combining operations
could prevent Quad/Graphics from realizing the full benefits anticipated to result from the merger and could adversely affect its business.
Quad/Graphics
and
LSC
will
incur
significant
transaction
and
merger-related
costs
in
connection
with
the
merger,
which
may
be
in
excess
of
those
anticipated.
Both Quad/Graphics and LSC have incurred and will incur substantial expenses in connection with negotiation and consummation of the transactions
contemplated by the merger agreement, including financial and legal advisor fees, financing costs and the costs and expenses of filing, printing and mailing of the
joint proxy statement/prospectus relating to the Merger.
Quad/Graphics and LSC expect to continue to incur a number of non-recurring costs associated with consummating the merger, combining the operations of
the two companies and achieving desired synergies. These fees and costs have been, and will continue to be, substantial. The substantial majority of the non-
recurring expenses will consist of transaction costs related to the merger and include, among others, financing costs, employee retention costs, fees paid to financial,
legal, and public relations advisors, severance and benefit costs and filing fees.
Quad/Graphics and LSC will also incur transaction fees and costs related to formulating and implementing integration plans. Additional unanticipated costs
also may be incurred while the merger is pending and for a period thereafter for the integration of the two companies’ businesses. Although Quad/Graphics and
LSC expect that the elimination of duplicative costs, as well as the realization of other efficiencies related to the integration of the businesses, should allow the
companies to offset integration-related costs over time, this net benefit may not be achieved in the near-term, or at all. Certain of these costs will be borne by each
of Quad/Graphics and LSC even if the merger is not consummated
Lawsuits
have
been
filed
against
LSC,
the
LSC
board
of
directors,
Quad/Graphics
and
merger
sub
challenging
the
adequacy
or
completeness
of
the
disclosures
made
in
the
initial
version
of
the
joint
proxy/prospectus
filed
in
connection
with
the
merger
on
December
11,
2018,
and
other
lawsuits
may
be
filed
against
LSC,
Quad/Graphics
and/or
their
respective
boards
challenging
the
merger.
An
adverse
ruling
in
any
such
lawsuit
may
prevent
the
merger
from
being
consummated.
Three substantially similar actions were filed by an alleged LSC stockholder against some or all of LSC, the directors of LSC, Quad/Graphics and merger
sub in the U.S. District Court for the Northern District of Illinois, the U.S. District Court for the Southern District of New York and the U.S. District Court for the
District of Delaware challenging the adequacy or completeness of the disclosures to LSC stockholders made in the initial version of the joint proxy
statement/prospectus filed on December 11, 2018 regarding the merger. Among other remedies, the plaintiffs seek to enjoin the merger until additional information
relating to the merger is disclosed.
Additional lawsuits arising out of the merger may be filed in the future. See the section entitled “The Merger—Transaction Litigation” in the Merger Proxy
for more information about litigation related to the merger that has been commenced. There can be no assurance that any of the defendants will be successful in the
outcome of the pending or any potential future lawsuits. A preliminary injunction could delay or jeopardize the consummation of the merger, and an adverse
judgment granting permanent injunctive relief could indefinitely enjoin the consummation of the merger.
24
LSC
and/or
Quad/Graphics
may
be
targets
of
further
securities
class
action
and
derivative
lawsuits
which
could
result
in
substantial
costs
and
may
delay
or
prevent
the
merger
from
being
consum
mated.
Securities class action lawsuits and derivative lawsuits are often brought against public companies that have entered into merger agreements. Even if the
lawsuits are without merit, defending against these claims can result in substantial costs and divert management time and resources. An adverse judgement could
result in monetary damages, which could have a negative impact on Quad/Graphics’ and LSC’s respective liquidity and financial condition. Additionally, if a
plaintiff is successful in obtaining an injunction prohibiting consummation of the merger, then that injunction may delay or prevent the merger from being
consummated, which may adversely affect Quad/Graphics’ and LSC’s respective business, financial position and results of operations.
ITEM 1B. UNRESOLVED STAFF COMMENTS
The Company has no unresolved written comments from the SEC staff regarding its periodic or current reports under the Securities Exchange Act of 1934.
ITEM 2. PROPERTIES
The Company’s principal executive office is currently located in leased office space at 191 N. Wacker Drive, Suite 1400, Chicago, IL 60606. The Company
operates or owns the following:
•
108 leased or owned locations in approximately 30 states in the U.S., which encompass approximately 26 million square feet, of which 41 are production
facilities.
o Approximately 9 million square feet of space is leased, comprised of 73 U.S. locations.
o Approximately 17 million square feet of space is owned in 35 locations in the U.S.
•
10 international locations in 2 countries which encompass approximately 2 million square feet, of which 6 are manufacturing facilities.
o Approximately 1 million square feet of space is leased, comprised of 5 international locations.
o Approximately 1 million square feet of space is owned in 5 international locations.
o 6 of our international locations service our Office Products segment.
o 3 of our international locations service our Mexico segment, which is included in the Other grouping.
o 1 of our international locations services our Book segment.
o In Mexico, the Company has 6 production facilities.
The Company’s facilities are reasonably maintained and suitable for the operations conducted in them. While the Company has a facility that provides the
majority of our mailing services, which is located in Bolingbrook, Illinois, the Company does not believe that this facility, or any other facility, is individually
material to our business. In addition, the Company owns or leases additional land for use as parking lots and other purposes in the U.S.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company’s customers and others file voluntary petitions for reorganization under United States bankruptcy laws. In such cases,
certain pre-petition payments received by the Company from these parties could be considered preference items and subject to return. In addition, the Company
may be party to certain litigation arising in the ordinary course of business. Management believes that the final resolution of these preference items and litigation
will not have a material effect on the Company’s consolidated statements of operations, balance sheets and cash flows.
For a discussion of certain litigation involving the Company, including litigation associated with the merger, refer to Note 11,
Commitments
and
Contingencies,
to the consolidated and combined financial statements.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
25
EXECUTIVE OFFICERS OF L SC COMMUNICATIONS, INC.
Name, Age and
Positions with the Company
Thomas J. Quinlan, III
56, President, Chief Executive Officer and Chairman of the Board of
Directors
Suzanne S. Bettman
54, Chief Administrative Officer and General Counsel
Andrew B. Coxhead
50, Chief Financial Officer
Kent A. Hansen
47, Chief Accounting Officer and Controller
Richard T. Lane
62, Chief Strategy and Supply Chain Officer
Business Experience
Served as Chairman of the Board and Chief Executive Officer since October 2016.
Prior to this, served as RRD’s President and Chief Executive Officer since April 2007
and from 2004 in various other positions, including Group President, Chief Financial
Officer since April 2006 and Executive Vice President, Operations since February
2004.
Served as Chief Administrative Officer and General Counsel since October 2016.
Prior to this, served as RRD’s Executive Vice President, General Counsel, Corporate
Secretary and Chief Compliance Officer since January 2007 and as its Senior Vice
President, General Counsel since March 2004.
Served as Chief Financial Officer since October 2016. Prior to this, served as RRD’s
Senior Vice President and Chief Accounting Officer since October 2007, and
Corporate Controller from October 2007 to January 2013 and from 1995 in various
other positions including in financial planning, accounting, manufacturing
management, operational finance and mergers and acquisitions, including as Vice
President, Assistant Controller.
Served as Chief Accounting Officer and Controller since October 2016. Prior to this,
served as Vice President, Assistant Controller, of Baxalta, Incorporated, a
biopharmaceutical company from 2015 to 2016. Prior to this, served in various
finance and accounting roles from 2006 to 2015 with Scientific Games Corporation
(formerly WMS Industries, Inc.), including Director of Accounting and SEC
Reporting, Assistant Controller, and Group Chief Financial Officer. Prior to this,
previous experience included roles in accounting and financial reporting at Accenture
and as an auditor at Ernst and Young LLP.
Served as Chief Strategy and Supply Chain Officer since October 2016. Prior to this,
served as RRD’s Executive Vice President of Global Business Solutions and was
responsible for Product and Materials sourcing, Customer Service and Global Print
Management Sales and Operations and from 1989 to 1997 and since 2005 in various
capacities within RRD in sales, strategy and operations, and from 1997 to 2005, with
other companies in strategic sales and operations roles.
26
PART II
ITEM 5. MARKET FOR LSC COMMUNICATIONS’ COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
Principal Market
The principal market for LSC Communications’ common stock is the New York Stock Exchange (NYSE). LSC Communications began when issued
trading on September 21, 2016 and regular way trading under the symbol “LKSD” on October 3, 2016.
Stockholders
As of February 15, 2019, there were 4,500 stockholders of record of the Company’s common stock.
Dividends
The Credit Agreement generally allows annual dividend payments of up to $50 million in aggregate, though additional dividends may be allowed subject to
certain conditions. The timing, declaration, amount and payment of any future dividends to the Company’s stockholders falls within the discretion of the
Company’s Board of Directors. The Company declared and paid quarterly dividends of $0.26 per common share totaling $35 million during the year ended
December 31, 2018. On January 17, 2019, the Board of Directors declared a quarterly cash dividend of $0.26 per common share, payable on March 4, 2019 to
stockholders of record on February 15, 2019. For more information on the Credit Agreement, refer to the Credit Agreement referenced as an exhibit to this annual
report on Form 10-K.
Issuer Purchases of Equity Securities
October 1, 2018 - October 31, 2018
November 1, 2018 - November 30, 2018
December 1, 2018 - December 31, 2018
Total
Total Number
of Shares
Purchased (a)
Total Number
of Shares Purchased
Dollar Value of Shares
as Part of
that May Yet be
Average Price
Paid per Share
Publicly Announced
Purchased Under the
Plans or Programs
Plans or Programs
54,044 $
—
—
54,044 $
10.57
—
—
—
— $
— $
— $
—
—
—
—
(a)
Shares withheld for tax liability upon vesting of equity awards
Equity Compensation Plans
For information regarding equity compensation plans, refer to Item 12 of Part III of this annual report on Form 10-K.
Peer Performance Table
The graph below compares the cumulative total stockholder return on the Company’s common stock from October 3, 2016, when regular way trading in the
Company’s common stock commenced on the NYSE, through December 31, 2018, with the comparable cumulative return of the S&P SmallCap 600 index and a
selected peer group of companies. The comparison assumes all dividends have been reinvested, and an initial investment of $100 on October 3, 2016. The returns
of each company in the peer group have been weighted to reflect their market capitalizations. The Company itself has been excluded, and its contributions to the
S&P SmallCap 600 index have been subtracted out. The peer group was determined by the Company's senior management team as a group of companies within
the printing, publishing, and office products industries that most closely align with the Company’s business model.
27
Company / Index
LSC Communications, Inc.
S&P SmallCap 600 Index
Peer Group
Base
Period
10/3/16
100
100
100
Indexed Returns
Quarter Ending
12/31/2016
12/31/2017
12/31/2018
105.22
111.52
103.39
56.58
126.28
102.82
28.61
115.57
71.81
Below are the specific companies included in the peer group.
Peer Group
ACCO Brands Corp
Deluxe Corp
Houghton Mifflin Harcourt Co
InnerWorkings, Inc.
John Wiley & Sons Inc.
McClatchy Co
Meredith Corp
Office Depot, Inc.
Quad/Graphics, Inc.
R.R. Donnelley & Sons Co
Scholastic Corp
ITEM 6. SELECTED FINANCIAL DATA
2018
2017
2016
2015
2014
in millions, except per share data
$
Net sales
Net (loss) income
Net (loss) earnings per basic share (a)
Net (loss) earnings per diluted share (a)
Total assets
Long-term debt
Cash dividends per common share
3,826 $
(23)
(0.67)
(0.67)
1,754
659
1.04
28
3,603 $
(57)
(1.69)
(1.69)
2,014
699
1.00
3,654 $
106
3.25
3.23
1,952
742
0.25
3,743 $
74
2.27
2.27
2,011
3
—
3,853
58
1.79
1.79
1,869
—
—
Reflects results of acquired businesses from the relevant acquisition dates. Refer to Note 3, Business
Combinations
and
Disposition
, to the consolidated and
combined financial statements for information on acquisitions.
The Company adopted Accounting Standards Update No. 2014-09 “Revenue from Contracts with Customers (Topic 606)” (“ASC 606”, or the “standard”)
on January 1, 2018 using the modified retrospective method for all contracts not completed as of the date of adoption. The reported results for 2018 reflect the
application of ASC 606 guidance while the reported results for years prior to 2018 were prepared and continue to be reported under the guidance of ASC 605,
Revenue Recognition, which is also referred to herein as "previous guidance."
(a) On October 1, 2016, RRD distributed approximately 26.2 million shares of LSC Communications common stock to RRD stockholders. RRD retained
an additional 6.2 million shares that were sold on March 28, 2017. The computation of net earnings per basic and diluted shares for periods prior to the
separation was calculated using the 32.4 million shares distributed and retained by RRD on October 1, 2016. Refer to Note 1, Overview
and
Basis
of
Presentation
, to the consolidated and combined financial statements for information on the separation.
Includes the following significant items:
•
•
•
•
•
2018: Pre-tax restructuring, impairment and other charges of $35 million ($27 million after-tax); pre-tax charge of $3 million ($2 million after-tax) for
purchase accounting inventory step-up adjustments and changes to purchase price allocations related to prior acquisitions; pre-tax charge of $10 million
($8 million after-tax) for acquisition, merger and disposition-related expenses; and a $25 million non-cash charge recorded primarily for the write-off of
a deferred tax asset associated with the disposition of the Company's European printing business.
2017: Pre-tax restructuring, impairment and other charges of $129 million ($92 million after-tax); pre-tax charge of $4 million ($3 million after-tax) for
separation-related expenses, pre-tax benefit (net) of $1 million ($1 million after-tax benefit (net)) for purchase accounting adjustments, pre-tax charge of
$5 million ($3 million after-tax) for acquisition-related expenses; and pre-tax loss of $3 million ($2 million after-tax) related to debt extinguishment; tax
expense of $24 million related to U.S. tax reform legislation;
2016: Pre-tax restructuring, impairment and other charges of $18 million ($12 million after-tax); pre-tax charge of $5 million ($3 million after-tax) for
separation-related expenses; and pre-tax charge of $1 million ($0 million after-tax) for lump-sum pension settlement payments;
2015: Pre-tax restructuring, impairment and other charges of $57 million ($39 million after-tax); pre-tax charges of $14 million for acquisition-related
expenses ($13 million after-tax); pre-tax charges of $11 million ($7 million after-tax) for inventory purchase accounting adjustments for Courier; and tax
expense of $6 million was recorded due to the receipt of an unfavorable court decision related to payment of prior year taxes in an international
jurisdiction;
2014: Pre-tax restructuring, impairment and other charges of $132 million ($100 million after-tax); pre-tax gain on bargain purchase of $9 million ($9
million after-tax) related to the acquisition of Esselte Corporation (“Esselte”); pre-tax charges of $2 million ($1 million after-tax) for inventory purchase
accounting adjustments for Esselte; and pre-tax charges of $2 million ($1 million after-tax) for acquisition-related expenses.
29
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of LSC Communications’ financial condition and results of operation should be read together with the consolidated and combined
financial statements and Notes to those statements included in Item 15, Exhibits,
Financial
Statement
Schedules
, of Part IV of this annual report on Form 10-K.
Business
For a description of the Company’s business, segments and product offerings, refer to Item 1, Business
, of Part I of this annual report on Form 10-K.
Merger
Agreement
On October 30, 2018, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Quad/Graphics, Inc. (“Quad/Graphics”),
and QLC Merger Sub, Inc., a direct, wholly-owned subsidiary of Quad/Graphics (“Merger Sub”). Pursuant to the Merger Agreement, subject to the terms and
conditions therein, Merger Sub will merge with and into the Company (the “Merger”), with the Company continuing as the surviving corporation. Subject to the
terms and conditions set forth in the Merger Agreement, at the effective time of the Merger (the “Effective Time”), each share of the Company’s common stock
issued and outstanding immediately prior to the Effective Time, will be converted into the right to receive 0.625 shares of class A common stock of Quad/Graphics,
without interest and subject to adjustment as provided in the Merger Agreement.
The Company and Quad/Graphics have made customary representations, warranties and covenants in the Merger Agreement. Subject to certain exceptions
outlined in the Merger Agreement, the Company has agreed to covenants relating to the Company’s business during the period between the execution of the Merger
Agreement and the consummation of the Merger, including restrictions on its ability to issue any shares of its capital stock, repurchase any shares of its capital
stock and incurring additional indebtedness outside the ordinary course of business. The Merger Agreement allows the Company to continue paying a regular
quarterly dividend up to $0.26 per share.
On October 30, 2018, concurrently with the execution of the Merger Agreement, the Company and the trustees (the “Trustees”) under the Amended and
Restated Voting Trust Agreement, dated as of June 25, 2010, pursuant to which certain shares of capital stock of Quad/Graphics are held by the Quad/Graphics,
Inc. Voting Trust (the “Voting Trust”), entered into a voting and support agreement (the “Voting Agreement”). Pursuant to the Voting Agreement, the Trustees
will vote all of the shares of Quad/Graphics held by the Voting Trust, which they have, directly or indirectly, the right to vote or direct the voting thereof, in favor
of the issuance of class A shares of Quad/Graphics common stock in the Merger, and against any alternative acquisition proposal involving Quad/Graphics or other
action that would reasonably be expected to breach the obligations of Quad/Graphics under the Merger Agreement or the Trustees under the Voting Agreement, or
otherwise reasonably be expected to delay or adversely affect the Merger or the other transactions contemplated by the Merger Agreement.
The Company and Quad/Graphics filed notification and report forms in connection with the transactions contemplated by the Merger Agreement with the
U.S. Department of Justice (the “DOJ”) and the U.S. Federal Trade Commission pursuant to the Hart-Scott-Rodino Antitrust Improvement Act of 1976, as amended
(the “HSR Act”) on November 13, 2018. On December 13, 2018, the Company and Quad/Graphics each received a request for additional information and
documentary material (the “Second Request”) from the DOJ in connection with the DOJ’s review of the transactions contemplated by the Merger Agreement.
Issuance of the Second Request extends the waiting period under the HSR Act until 30 days after both the Company and Quad/Graphics have substantially
complied with the Second Request or such later time as the parties may agree with the DOJ, unless the waiting period is terminated earlier by the DOJ. The
Company continues to expect the Merger to be consummated in mid-2019.
Consummation of the Merger remains subject to the adoption of the Merger Agreement by the Company stockholders, the approval by Quad/Graphics
shareholders of the issuance of Quad/Graphics shares as contemplated by the Merger Agreement, the expiration of the waiting period under the HSR Act and other
required regulatory approvals, and the satisfaction or waiver of the other closing conditions specified in the Merger Agreement.
30
Segment
Information
During the third quarter of 2018, the Company realigned the reportable segments and reporting units to reflect its evolution since its separation from RRD in
2016, as well as changes from recent acquisition and disposal activity. All prior year amounts have been reclassified to conform to the Company’s current
reporting structure.
OUTLOOK
Vision
and
Strategy
The Company works with its customers to offer a broad scope of print and print-related capabilities and manage their full range of communication needs.
The Company is focused on enhancing its strong customer relationships by expanding to a broader range of offerings. The Company will focus on further
expanding its supply chain offerings and driving growth in core and related businesses. The Company will continue to seek opportunities to grow by utilizing core
capabilities to expand print and print-related products and services, grow core businesses, strategically increase our geographic coverage, and focus on the
expansion of the office products brands. For instance, our end-to-end supply chain services offerings combine print, warehousing, fulfillment and supply chain
management into a single workflow designed to increase speed to the market and improve efficiencies across the distribution process. Ongoing investments via
organic growth and strategic acquisition in our digital print technology will be an integral part of supporting growth across the Magazines, Catalogs and Logistics
and Book segments. Further, other innovative offerings and investments such as co-mailing services and logistics solutions help catalogers and magazine
publishers reduce their overall cost of producing and distributing their product as postage expense often accounts for approximately half of these publishers’ costs
to produce and deliver a catalog or magazine. We have also developed and deployed technologies to help book clients reduce the incidence of book piracy. We
have also begun offering end-to-end fulfillment of subscription boxes to address client demand, which we believe will provide additional opportunity for us.
Management believes productivity improvement and cost reduction are critical to the Company’s continued competitiveness, and the flexibility of its
platform enhances the value the Company delivers to its customers. Our plant rationalization process has resulted in the closure of several facilities in recent years,
which we believe has allowed us to realize meaningful cost savings. These cost savings primarily arise from facility related costs, such as overhead, employee
costs and selling, general and administrative expenses. The Company continues to implement strategic initiatives across all platforms to reduce its overall cost
structure, focus on safety initiatives and enhance productivity, including restructuring, consolidation, reorganization and integration of operations and streamlining
of administrative and support activities.
The Company seeks to deploy its capital using a balanced and disciplined approach in order to ensure financial flexibility and provide returns to
stockholders. Priorities for capital deployment, over time, include principal and interest payments on debt obligations, distributions to stockholders, targeted
acquisitions and capital expenditures. The Company believes that a strong financial condition is important to customers focused on establishing or growing long-
term relationships. The Company also expects to make targeted acquisitions that extend its capabilities, drive cost savings and reduce future capital spending
needs. We believe these acquisitions may also allow us to achieve synergies. Subject to certain exceptions outlined in the Merger Agreement, the Company has
agreed to covenants relating to the Company’s business during the period between the execution of the Merger Agreement and the consummation of the Merger,
including restrictions on its ability to issue any shares of its capital stock, repurchase any shares of its capital stock, make acquisitions, and incur additional
indebtedness outside the ordinary course of business. The Merger Agreement allows the Company to continue paying a regular quarterly dividend up to $0.26 per
share.
Management uses several key indicators to gauge progress toward achieving these objectives. These indicators include organic sales growth, operating
margins, cash flow from operations, capital expenditures, and Non-GAAP adjusted EBITDA. The Company targets long-term net sales growth at or above industry
levels, while managing operating margins by achieving productivity improvements that offset the impact of price declines and cost inflation. Cash flows from
operations are targeted to be stable over time, however, cash flows from operations in any given year can be significantly impacted by the timing of non-recurring
or infrequent receipts and expenditures, the level of required pension plan contributions, volatility in the cost of raw materials, and the impact of working capital
management efforts.
31
During late 2018 and early 2019, the Company performed a comprehensive review of the Company’s entire operations to identify new rev enue
opportunities and cost savings. This review covered substantially all aspects of the Company – both operational and support functions – and involved key
personnel from throughout the organization. The resulting revenue opportunities and cost savings initiatives were approved by senior management in the first
quarter of 2019 and are expected to be implemented over the next three years. While the Company expects to realize the benefits beginning in 2019 and at various
points over the next three years, management also anticipates incurring certain one-time expenses, which may be significant, during 2019 relating to the review and
implementation of the identified initiatives.
2019
Outlook
The Company’s 2019 Outlook is prepared on the assumption that the Merger with Quad/Graphics has not been consummated. This 2019 Outlook does not
reflect any changes to the business that may occur as a result of consummation of the Merger.
In 2019, the Company expects overall net sales to decrease as compared to 2018 driven by the dispositions of our European Printing business and retail
offset print facilities in 2018, continuing volume declines in magazines catalogs and office products and price pressures in magazines and catalogs. In the
magazines, catalogs and logistics segment, the Company expects an organic net sales decline driven by the ongoing shift in advertiser spend from print to electronic
media and declines in circulation and page counts. For the book reporting unit, the Company expects overall net sales to be consistent with 2018 levels as growth
in volume for elementary and secondary education materials is largely offset by volume declines in college and religious books. Office Products net sales are
expected to decrease in 2019 as compared to 2018 as a result of volume declines driven by continuing secular decline, partially offset by the impact of price
increases.
While cost inflation driven primarily by tight labor market conditions will continue to pressure operating margins during 2019, the Company also expect to
realize significant cost savings from integration of recent acquisitions, restructuring initiatives, and ongoing productivity efforts. The Company has initiated several
restructuring actions during 2018 and early in 2019 to further reduce the Company’s overall cost structure. These restructuring actions included the closure of two
manufacturing facilities in the Magazine, Catalog and Logistics segment. These cost reduction actions are expected to have a positive impact on operating earnings
in 2019 and in future years. In addition, the Company expects to realize other cost reduction opportunities through its ongoing focus on productivity improvement,
including initiatives identified as part of management’s comprehensive review of operations performed in 2018 and early 2019. The Company’s cost reduction
initiatives may result in significant additional restructuring charges. These restructuring actions will be funded by cash generated from operations and cash on hand
or, if necessary, by utilizing the Company’s credit facilities.
Cash flows from operations in 2019 are expected to be slightly below those of 2018, primarily due to the impact of significant working capital reductions
achieved in 2018. The Company expects capital expenditures to be in the range of $75 million to $85 million in 2019. Capital expenditures are expected to be
primarily directed towards increased automation and productivity, equipment to enable cost reduction through facility closures, and growth opportunities driven
mainly by specific customer needs.
The Company’s net pension liability was $137 million as of December 31, 2018, as reported on the Company’s consolidated balance sheet and further
described in Note 14, Retirement
Plans
, to the consolidated and combined financial statements. Governmental regulations for measuring pension plan funded status
differ from those required under accounting principles generally accepted in the United States of America (“GAAP”) for financial statement preparation. Based on
the plans’ regulatory funded status, there are no required contributions for the Company’s U.S. Qualified Plan in 2019. The Company does expect to make
approximately $6 million of pension contributions in 2019, primarily for its non-qualified plan.
In the first quarter of 2019, the Company completed a partial settlement of its retirement benefit obligations by purchasing a group annuity contract for
certain retirees and beneficiaries from a third-party insurance company. As a result, the Company’s pension assets and liabilities are required to be remeasured as of
the settlement date. As of the remeasurement date, the reduction in the reported pension obligation for the participants under the annuity contract was
approximately $477 million and the reduction in plan assets was approximately $466 million. The Company expects to record a non-cash settlement charge in the
range of approximately $130 million to $140 million in the first quarter of 2019. This charge results from the recognition in earnings of a portion of the actuarial
losses recorded in accumulated other comprehensive loss based on the proportion of the obligation settled. The settlement accounting is expected be completed in
the first quarter of 2019. In 2019, the Company expects annual non-cash net pension income to decrease by approximately $13 million, to $35 million, due to the
reduction in pension trust assets related to the transaction combined with a lower expected return on plan assets due to a change in asset allocation as part of the
Company’s pension de-risking strategy.
32
SIGNIFICANT ACCOUNTING POLICIES AND CRITICAL ESTIMATES
Basis
of
Presentation
The preparation of consolidated and combined financial statements, in conformity with GAAP, requires the extensive use of management’s estimates and
assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the
reported amounts of revenue and expenses during the reporting periods. Actual results could differ from these estimates. Estimates are used when accounting for
items and matters including, but not limited to, allowance for uncollectible accounts receivable, inventory obsolescence, asset valuations and useful lives, taxes,
restructuring and other provisions and contingencies.
The Company’s most critical accounting policies are those that are most important to the portrayal of its financial condition and results of operations, and
that require the Company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently
uncertain. The Company has identified the following as its most critical accounting policies and judgments. Although management believes that its estimates and
assumptions are reasonable, they are based upon information available when they are made, and therefore, actual results may differ from these estimates under
different assumptions or conditions.
Prior to the separation, the combined financial statements were prepared on a stand-alone basis and were derived from RRD’s consolidated financial
statements and accounting records. They included certain expenses of RRD that were allocated to LSC Communications for certain corporate functions, including
healthcare and pension benefits, information technology, finance, legal, human resources, internal audit, treasury, tax, investor relations and executive
oversight. These expenses were allocated to the Company on the basis of direct usage, when available, with the remainder allocated on a pro rata basis by revenue,
employee headcount, or other measures. After the separation, the Company no longer records allocated amounts from RRD.
Revenue
Recognition
As previously mentioned, the Company adopted ASC 606 on January 1, 2018 using the modified retrospective method for all contracts not completed as of
the date of adoption. The reported results for 2018 reflect the application of ASC 606 guidance while the reported results for years prior to 2018 were prepared and
continue to be reported under the previous guidance.
The Company recognizes revenue at a point in time for substantially all customized products. The point in time when revenue is recognized is when
the performance obligation has been completed and the customer obtains control of the products, which is generally upon shipment to the customer (dependent
upon specific shipping terms).
Under agreements with certain customers, custom products may be stored by the Company for future delivery. Based upon contractual terms, the Company
is typically able to recognize revenue once the performance obligation is satisfied and the customer obtains control of the completed product, usually when it
completes production (depending on the specific facts and circumstances). In these situations, the Company may also receive a logistics or warehouse management
fee for the services it provides, which the Company recognizes over time as the services are provided.
With certain customer contracts, the Company is permitted to complete a pre-defined amount of custom products and hold such inventory until the customer
requests shipment (which generally is required to be delivered in the same year as production). For these items, which include consigned inventory, the Company
has the contractual right to receive payment once the production is completed, regardless of the ultimate delivery date. Based upon contractual terms, the Company
recognizes revenue once the performance obligation has been satisfied and the customer obtains control of the completed products, usually when production is
completed.
In very limited situations, the Company is permitted to produce and hold in inventory a pre-defined amount of custom products as safety stock. Similar to
completed production held in inventory, for these items, the Company has the contractual right to receive payment for the pre-defined amount once the production
is completed, regardless of the ultimate delivery date. Based upon our evaluation of the contractual terms, the Company is able to recognize revenue once the
performance obligation has been satisfied and the customer obtains control of the completed product, usually when production is completed.
Revenue from the Company’s print related services (including list processing, mail sortation services and supply chain management) is recognized as
services are completed over time.
33
Revenue is measured as the amount of consideration the Company expects to receive i n exchange for transferring goods or providing services, which is
based on transaction prices set forth in contracts with customers and an estimate of variable consideration, as applicable.
Variable consideration resulting from volume rebates, fixed rebates, penalties or credits for paper consumption, and sales discounts that are offered within
contracts between the Company and its customers is recognized in the period the related revenue is recognized. Estimates of variable consideration are based on
stated contract terms and an analysis of historical experience. The amount of variable consideration is included in the net sales price only to the extent that it is
probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period.
A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is
satisfied. The majority of our contracts have a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable
from other promises in the contracts and, therefore, not distinct. For contracts with multiple performance obligations, such as co-mail and catalog production, the
transaction price allocated to each performance obligation is based on the price stated in the customer contract, which represents the Company’s best estimate of the
standalone selling price of each distinct good or service in the contract.
Billings for shipping and handling costs are recorded gross. The Company made an accounting policy election under ASC 606 to account for shipping and
handling after the customer obtains control of the good as fulfillment activities rather than as a separate service to the customer. As a result, the Company accrues
the costs of the shipping and handling if revenue is recognized for the related good before the fulfillment activities occur.
Many of the Company’s operations process materials, primarily paper, that may be supplied directly by customers or may be purchased by the Company and
sold to customers as part of the end product. No revenue is recognized for customer-supplied paper, but revenues for Company-supplied paper are recognized on a
gross basis. As a result, the Company’s reported sales and margins may be impacted by the mix of customer-supplied paper and Company-supplied paper.
The Company records taxes collected from customers and remitted to governmental authorities on a net basis.
Contracts do not contain a significant financing component as payment terms on invoiced amounts are typically between 30 to 120 days, based on the
Company’s credit assessment of individual customers, as well as industry expectations.
The timing of revenue recognition, billings and cash collections results in accounts receivable and unbilled receivables (contract assets), and customer
advances and deposits (contract liabilities) on the consolidated balance sheet. Revenue recognition generally coincides with the Company’s contractual right to
consideration and the issuance of invoices to customers. Depending on the nature of the performance obligation and arrangements with customers, the timing of the
issuance of invoices may result in contract assets or contract liabilities. Contract assets related to unbilled receivables are recognized for satisfied performance
obligations for which the Company cannot yet issue an invoice. Contract liabilities result from advances or deposits from customers on performance obligations
not yet satisfied.
Because the majority of the Company’s products are customized, product returns are not significant; however, the Company accrues for the estimated
amount of customer returns at the time of sale.
Refer to Note 4, Revenue
Recognition
, to the consolidated and combined financial statements for information related to new standard.
Goodwill
and
Other
Long-Lived
Assets
Goodwill
–
Overview
The Company’s methodology for allocating the purchase price of acquisitions is based on established valuation techniques that reflect the consideration of a
number of factors, including valuations performed by third-party appraisers when appropriate. Goodwill is measured as the excess of the cost of an acquired entity
over the fair value assigned to identifiable assets acquired and liabilities assumed. Based on its current organization structure as of December 31, 2018, the
Company has identified seven reporting units for which cash flows are determinable and to which goodwill may be allocated. Goodwill is assigned to a specific
reporting unit, depending on the nature of the underlying acquisition.
34
The Company performs its goodwill impairment tests annually as of October 31, or more frequently if an event occurs or c ircumstances change that would
more likely than not reduce the fair value of a reporting unit below its carrying value. The Company also performs an interim review for indicators of impairment
each quarter to assess whether an interim impairment review is required for any reporting unit. As part of its interim reviews, management analyzes potential
changes in the value of individual reporting units based on each reporting unit’s operating results for the period compared to expected results as of the prior y ear’s
annual impairment test. In addition, management considers how other key assumptions, including discount rates and expected long-term growth rates, used in the
last annual impairment test could be impacted by changes in market conditions and economic events.
Goodwill
-
Logistics,
Book
and
Office
Products
Reporting
Units
As of October 31, 2018, only three reporting units had goodwill: logistics, Book and Office Products. The goodwill balances as of October 31, 2018 for the
logistics, Book and Office Products reporting units were $24 million, $51 million and $31 million, respectively. The goodwill balance in logistics resulted from the
Company’s acquisition of Print Logistics on July 2, 2018.
For the logistics, Book and Office Products reporting units, management assessed goodwill impairment risk by first performing a qualitative review of entity
specific, industry, market and general economic factors for each reporting unit. For Book and Office Products, the Company was not able to conclude that it is more
likely than not that the fair values of our reporting units are greater than their carrying values, and therefore, a one-step method for determining goodwill
impairment was applied as of October 31, 2018. The Company compared the estimated fair value of a reporting unit with its carrying amount, including
goodwill. If the carrying amount of a reporting unit is greater than zero and its fair value exceeds its carrying amount, goodwill of the reporting unit is considered
not impaired. However, if the carrying amount of a reporting unit exceeds its fair value, the goodwill is considered impaired and a full or partial write-off of
goodwill would be required.
The fair value determinations included estimating the fair value of each reporting unit using both the income and market approaches. The income approach
requires management to estimate a number of factors for each reporting unit, including projected future operating results, economic projections, anticipated future
cash flows, discount rates and the allocation of shared or corporate items. The market approach estimates fair value using comparable marketplace fair value data
from within a comparable industry grouping. The Company weighted both the income and market approach equally to estimate the concluded fair value of each
reporting unit.
The determination of fair value and the allocation of that value to individual assets and liabilities requires the Company to make significant estimates and
assumptions. These estimates and assumptions primarily include, but are not limited to: the selection of appropriate peer group companies; control premiums
appropriate for acquisitions in the industries in which the Company competes; the discount rate; terminal growth rates; and forecasts of revenue, operating income,
depreciation and amortization, restructuring charges and capital expenditures. As part of its impairment test for these reporting units, the Company engaged a third-
party valuation firm to assist in the Company’s determination of certain assumptions used to estimate fair values.
As a result of the 2018 annual impairment tests for Book and Office Products, the Company did not recognize any goodwill impairment charges as the
estimated fair values of the reporting units exceeded their respective carrying values.
Goodwill
Impairment
Assumptions
Although the Company believes its estimates of fair value are reasonable, actual financial results could differ from those estimates due to the inherent
uncertainty involved in making such estimates. Changes in assumptions concerning future financial results or other underlying assumptions could have a significant
impact on either the fair value of the reporting units, the amount of the goodwill impairment charge, or both. Future declines in the overall market value of the
Company’s equity and debt securities may also result in a conclusion that the fair value of one or more reporting units has declined below its carrying value.
One measure of the sensitivity of the amount of goodwill impairment charges to key assumptions is the amount by which each reporting unit “passed” (fair
value exceeds the carrying value) or “failed” (the carrying value exceeds fair value) the goodwill impairment test. Book and Office Products passed with fair
values that exceeded their carrying values by 15.9% and 13.6%, respectively.
35
Generally, changes in estimates of expected future cash flows would have a similar effect on the estimated fair value of the reporting unit. The e stimated
discount rate for the Book and Office Products reporting units was 11.0% and 10.5%, respectively, as of October 31, 2018. A 1.0% increase in estimated discount
rates would not have resulted in book or Office Products failing the goodwill impairment test. The Company believes that its estimates of future cash flows and
discount rates are reasonable, but future changes in the underlying assumptions could differ due to the inherent uncertainty in making such estimates. Additionally,
further price deterioration or lower volume co uld have a significant impact on the fair values of the reporting units.
Other
Long-Lived
Assets
The Company evaluates the recoverability of other long-lived assets, including property, plant and equipment and certain identifiable intangible assets,
whenever events or changes in circumstances indicate that the carrying value of an asset or asset group may not be recoverable. The Company performs impairment
tests of indefinite-lived intangible assets on an annual basis or more frequently in certain circumstances.
Factors that could trigger an impairment review include significant underperformance relative to historical or projected future operating results, significant
changes in the manner of use of the assets or the strategy for the overall business, a significant decrease in the market value of the assets or significant negative
industry or economic trends. When the Company determines that the carrying value of long-lived assets may not be recoverable based upon the existence of one or
more of the indicators, the assets are assessed for impairment based on the estimated future undiscounted cash flows expected to result from the use of the asset and
its eventual disposition. If the carrying value of an asset exceeds its estimated future undiscounted cash flows, an impairment loss is recorded for the excess of the
asset’s carrying value over its fair value.
The Company recognized impairment charges of $3 million during the year ended December 31, 2018 related to machinery and equipment.
Pension
The Company is the sole sponsor of certain defined benefit plans, which have been reflected in the consolidated balance sheets at December 31, 2018 and
2017. The Company records annual income and expense amounts relating to its pension plans based on calculations that include various actuarial assumptions,
including discount rates, mortality, assumed rates of return, compensation increases, and turnover rates. The Company reviews its actuarial assumptions on an
annual basis and makes modifications to the assumptions based on current rates and trends when it is deemed appropriate to do so. The effects of modifications on
the value of plan obligations and assets is recognized immediately within other comprehensive income (loss) and amortized into investment and other (income)-net
over future periods. The Company believes that the assumptions utilized in recording its obligations under its plans are reasonable based on its experience, market
conditions and input from its actuaries and investment advisors.
Prior to the separation, certain employees of the Company participated in certain pension and postretirement health care plans sponsored by RRD. In the
company’s combined financial statements, these plans were accounted for as multiemployer benefit plans and no net liabilities were reflected in the Company’s
combined balance sheets as there were no unfunded contributions due at the end of any reporting period. The Company’s combined statements of operations
included expense allocations for these benefits. These expenses were funded through intercompany transactions with RRD and were reflected within net parent
company investment in LSC Communications. At the separation date, the Company assumed and recorded certain pension obligations and plan assets in single
employer plans for the Company’s employees and certain former employees and retirees of RRD. Additionally, the U.K. pension plan was transferred from the
Company to RRD.
The weighted-average discount rates used to determine the net benefit obligations for all pension benefit plans were 4.4% and 3.7% at December 31, 2018
and 2017, respectively.
36
A one-percentage point change in the dis count rates at December 31, 2018 would have the following effects on the accumulated benefit obligation and
projected benefit obligation for all pension benefit plans :
Accumulated benefit obligation
Projected benefit obligation
Qualified
$
(243) $
(243)
1% Increase
Non-
Qualified
&
International
(in millions)
Total
Qualified
(8) $
(8)
(251) $
(251)
294 $
294
1% Decrease
Non-
Qualified
&
International
9 $
10
Total
303
304
The Company’s U.S. pension plans are frozen and the Company has previously transitioned to a risk management approach for its U.S. pension plan assets.
The overall investment objective of this approach is to further reduce the risk of significant decreases in the plan’s funded status by allocating a larger portion of the
plan’s assets to investments expected to hedge the impact of interest rate risks on the plan’s obligation. Over time, the target asset allocation percentage for the
pension plan is expected to decrease for equity and other “return seeking” investments and increase for fixed income and other “hedging” investments. The
assumed long-term rate of return for plan assets, which is determined annually, is likely to decrease as the asset allocation shifts over time. The impact of a change
in discount rates on the accumulated benefit obligation and projected benefit obligation would be partially offset by the corresponding impact on the fair value of
pension assets of hedging investments. The impact of a change in discount rates would increase or decrease the fair value of pension assets of return-seeking
investments.
The expected long-term rate of return for plan assets is based upon many factors including expected asset allocations, historical asset returns, current and
expected future market conditions and risk. In addition, the Company considered the impact of the current interest rate environment on the expected long-term rate
of return for certain asset classes, particularly fixed income. The target asset allocation percentage for the U.S. Qualified Plan was approximately 40.0% for return
seeking investments and approximately 60.0% for hedging investments. The expected long-term rate of return on plan assets assumption used to calculate net
pension plan expense in 2018 was 6.75% for the Company’s U.S. Qualified pension plan. The expected long-term rate of return on plan assets assumption that will
be used to calculate net pension plan expense in 2019 is 6.50% for the Company’s U.S. Qualified pension plan.
A 0.25% change in the expected long-term rate of return on plan assets at December 31, 2018 would have the following effects on 2018 and 2019 pension
plan (income)/expense in the Company’s pension benefit plans:
2018
2019
0.25% Increase
0.25% Decrease
$
in millions
(6) $
(6)
6
6
The amounts for the year ended December 31, 2019 in the table above exclude the impact of the partial settlement described in the 2019
Outlook
section
above.
Accounting
for
Income
Taxes
The Company has recorded deferred tax assets related to future deductible items, including domestic and foreign tax loss and credit carryforwards. The
Company evaluates these deferred tax assets by tax jurisdiction. The utilization of these tax assets is limited by the amount of taxable income expected to be
generated within the allowable carryforward period and other factors. Accordingly, management has provided a valuation allowance to reduce certain of these
deferred tax assets when management has concluded that, based on the weight of available evidence, it is more likely than not that the deferred tax assets will not be
fully realized. If actual results differ from these estimates, or the estimates are adjusted in future periods, adjustments to the valuation allowance might need to be
recorded. As of December 31, 2018 and 2017, valuation allowances of $11 million and $115 million, respectively, were recorded in the Company’s consolidated
balance sheets.
Significant judgment is required in determining the provision for income taxes and related accruals, deferred tax assets and liabilities and any valuation
allowance recorded against deferred tax assets. In the ordinary course of business, there are transactions and calculations where the ultimate tax outcome is
uncertain. Additionally, the Company’s tax returns are subject to audit by various U.S. and foreign tax authorities. The Company recognizes a tax position in its
financial statements when it is more likely than not (a likelihood of more than fifty percent) that the position would be sustained upon examination by tax
authorities. This recognized tax position is then measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate
settlement. Although management believes that its estimates are reasonable, the final outcome of uncertain tax positions may be materially different from that
which is reflected in the Company’s consolidated financial statements. The Company classifies interest expense and any related penalties related to income tax
uncertainties as a component of income tax expense.
37
Prior to the separation in the Company’s combined financial statements, income tax expense and deferred tax balances were calculated on a separate return
basis, although with respect to certain entities, the Company’s operations have historically been included in the tax returns filed by the respective RRD entities of
which the Company’s business was previously a part. For periods after the separation, the Company has and will continue to file tax returns on its own behalf. The
provision for income tax and income tax balances after the separation represent the Company's tax liabilities as an independent company.
Refer to Note 15, Income
Taxes
, for discussion on the impact of the Tax Act.
Commitments
and
Contingencies
The Company is subject to lawsuits, investigations and other claims related to environmental, employment, commercial and other matters, as well as
preference claims related to amounts received from customers and others prior to their seeking bankruptcy protection. Periodically, the Company reviews the status
of each significant matter and assesses the potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and the
related liability is estimable, the Company accrues a liability for the estimated loss. Because of uncertainties related to these matters, accruals are based on the best
information available at the time. As additional information becomes available, the Company reassesses the related potential liability and may revise its estimates.
With respect to claims made under the Company’s third-party insurance for workers’ compensation, automobile and general liability, the Company is
responsible for the payment of claims below and above insured limits, and consulting actuaries are utilized to assist the Company in estimating the obligation
associated with any such incurred losses, which are recorded in accrued and other non-current liabilities. Historical loss development factors for both the Company
and the industry are utilized to project the future development of such incurred losses, and these amounts are adjusted based upon actual claims experience and
settlements. If actual experience of claims development is significantly different from these estimates, an adjustment in future periods may be required. Expected
recoveries of such losses are recorded in other current and other non-current assets.
Restructuring
The Company records restructuring charges when liabilities are incurred as part of a plan approved by management with the appropriate level of authority
for the elimination of duplicative functions, the closure of facilities, or the exit of a line of business, generally in order to reduce the Company’s overall cost
structure. Total restructuring charges were $28 million and $37 million for the years ended December 31, 2018 and 2017, respectively.
The restructuring liabilities may change in future periods based on several factors that could differ from original estimates and assumptions. These include,
but are not limited to: contract settlements on terms different than originally expected; ability to sublease properties based on market conditions at rates or on
timelines different than originally estimated; or changes to original plans as a result of acquisitions or other factors. Such changes may result in reversals of or
additions to restructuring charges that could affect amounts reported in the consolidated statements of operations of future periods.
Accounts
Receivable
The Company maintains an allowance for doubtful accounts receivable, which is reviewed for estimated losses resulting from the inability of its customers
to make required payments for products and services. Specific customer provisions are made when a review of significant outstanding amounts, utilizing
information about customer creditworthiness and current economic trends, indicates that collection is doubtful. In addition, provisions are made at differing rates,
based upon the age of the receivable and the Company’s collection experience. The allowance for doubtful accounts receivable was $14 million and $11 million at
December 31, 2018 and 2017, respectively. The Company’s estimates of the recoverability of accounts receivable could change, and additional changes to the
allowance could be necessary in the future if any major customer’s creditworthiness deteriorates or actual defaults are higher than the Company’s historical
experience.
38
Off-Balance
Sheet
Arrangements
Other than non-cancelable operating lease commitments, the Company does not have off-balance sheet arrangements, financings or special purpose entities.
FINANCIAL REVIEW
In the financial review that follows, the Company discusses its consolidated and combined statements of operations, balance sheets, cash flows and certain
other information. This discussion should be read in conjunction with the Company’s consolidated and combined financial statements and the related notes that
begin on page F-1.
Results of Operations for the Year Ended December 31, 2018 as Compared to the Year Ended December 31, 2017
The following table shows the results of operations for the year ended December 31, 2018 and 2017, which reflects the results of acquired businesses from
the relevant acquisition dates:
Net sales
Cost of sales
Cost
of
sales
as
a
%
of
net
sales
Selling, general and administrative expenses (exclusive of depreciation
and amortization)
Selling,
general
and
administrative
expenses
as
a
%
of
net
sales
Restructuring, impairment and other charges-net
Depreciation and amortization
Income (loss) from operations
Consolidated
Results
2018
2017
$ Change
% Change
(in millions, except percentages)
$
$
3,826
3,283
85.8%
328
8.6%
35
138
42
$
$
$
3,603
3,026
84.0%
307
8.5%
129
160
(19) $
223
257
21
(94)
(22)
61
6.2%
8.5%
6.8%
(72.9%)
(13.8%)
(321.1%)
Net sales for the year ended December 31, 2018 were $3,826 million, an increase of $223 million or 6.2% compared to the year ended December 31,
2017. Net sales were impacted by:
•
Increases due to the acquisitions of Print Logistics in 2018, and Clark Group, CREEL, Publishers Press, LLC, and Fairrington in 2017 (together with
Print Logistics the “MCL acquired companies”), and Quality Park and NECI in 2017 (the “Office Products acquired companies”), higher sales in
outsourced print procurement and management services, and a $10 million increase in pass-through paper sales;
• Partially offset by the dispositions of the Company’s European printing business and retail offset printing facilities, and lower volume; and
• A $10 million, or 0.3%, increase due to changes in foreign exchange rates, primarily in Polish zloty.
On a pro forma basis, the Company’s net sales for the year ended December 31, 2018 decreased by approximately $203 million or 4.9% compared to the
year ended December 31, 2017 (refer to Note 3, Business
Combinations
and
Disposition
, to the consolidated and combined financial statements).
Total cost of sales increased $257 million, or 8.5%, for the year ended December 31, 2018 compared to the year ended December 31, 2017, including a $10
million, or 0.3%, increase due to changes in foreign exchange rates, primarily due to costs incurred by the acquired companies, increased costs of raw materials,
increased labor costs and the negative impact on productivity related to workforce turnover, and mix of volume. The increase was partially offset by a gain related
to the sale of assets and the disposition of the European printing business and retail offset printing facilities.
Selling, general and administrative expenses increased $21 million, or 6.8%, to $328 million for the year ended December 31, 2018, primarily driven by
expenses incurred by the acquired companies and higher acquisition and merger-related expenses, partially offset by lower separation-related expenses. As a
percentage of net sales, selling, general and administrative remained increased from 8.5% for the year ended December 31, 2017 to 8.6% for the year ended
December 31, 2018.
39
For the year ended December 31, 2018, the Company recorded restructuring, impairment and other charges of $35 million. The charges included:
• Employee-related charges of $14 million for an aggregate of 811 employees, of whom 282 were terminated as of or prior to December 31, 2018,
primarily related to two facility closures in the Magazines, Catalogs and Logistics segment, one facility closure in the Office Products segment and the
reorganization of certain business units and corporate functions.
• Other restructuring charges of $14 million primarily due to charges related to facility costs, a loss related to the Company's disposition of its retail offset
•
printing facilities and pension withdrawal obligations related to facility closures;
$3 million to recognize impairment charges primarily related to machinery and equipment associated with facility closings in the Magazines, Catalogs
and Logistics segment; and
$3 million to recognize the impairment of certain acquired indefinite-lived tradenames intangible assets in the Office Products segment.
•
• The charges above were partially offset by a reduction of $1 million of goodwill impairment charges as a result of a $1 million adjustment of previously
recorded goodwill associated with the 2017 acquisitions.
For the year ended December 31, 2017, the Company recorded restructuring, impairment and other charges of $129 million. The charges included:
•
•
•
$68 million to recognize the impairment of goodwill in the Magazines, Catalogs and Logistics segment and $5 million in the Other grouping. Given the
historical valuations of the Company’s former magazines, catalogs and retail inserts reporting unit that have resulted in goodwill impairment in prior
years, combined with the change in the composition of the carrying value of the reporting unit due to the recent acquisitions, the Company determined it
necessary to perform interim goodwill impairment reviews on this former reporting unit during the year ended December 31, 2017. Refer to Note 12,
Restructuring,
Impairment
and
Other
Charges
, for more information;
$8 million to recognize the impairment of intangibles in the Book and Office Products segments;
$7 million to recognize the impairment of machinery and equipment. The impairment was primarily recorded in the magazines and catalogs reporting
unit, which is included in the Magazines, Catalogs and Logistics segment;
• Other restructuring charges of $24 million, primarily related to the exit from certain operations and facilities, as well as charges incurred as a result of a
•
terminated supplier contract;
$13 million for employee termination costs for an aggregate of 776 employees, substantially all of whom were terminated as of or prior to December 31,
2018, primarily related to three facility closures in the Book segment, one facility closure in the Magazines, Catalogs and Logistics segment and the
reorganization of certain business units; and
• Other charges of $4 million for multi-employer pension plan withdrawal obligations unrelated to facility closures .
Depreciation and amortization decreased $22 million to $138 million for the year ended December 31, 2018 compared to the year ended December 31, 2017
due to decreased capital spending in recent years compared to historical levels, partially offset by depreciation and amortization incurred by the MCL and Office
Products acquired companies.
Interest expense-net
Investment and other (income)-net
2018
2017
$ Change
% Change
(in millions, except percentages)
$
80 $
(48)
72 $
(47)
8
(1)
11.1%
2.1%
The Company recorded net interest expense of $80 million and $72 million for the years ended December 31, 2018 and 2017, respectively. The increase
was primarily due to due to increased borrowings on the Company’s $400 million senior secured revolving credit facility (the “Revolving Credit Facility”). Refer
to Note 12, Debt
, to the consolidated and combined financial statements. Investment and other (income)-net primarily relates to the Company’s pension benefit
plans in both years.
2018
2017
$ Change
Net income (loss) before income taxes
Income tax expense
Effective income tax rate
$
10
33
319.4%
(44)
13
(30.5%)
(in millions, except percentages)
$
$
54
20
The effective income tax rate was 319.4% for the year ended December 31, 2018 and reflects a $25 million non-cash tax provision related to the disposition
of the Company’s European printing business.
40
The effective income tax rate for the year ended December 31, 2017 was (30.5%). In connection with our initial analysis of the impact of the Tax Act, the
Company recorded a provisional net tax expense of $24 million in the year ended December 31, 2017. T his amount consists of a provisional expense of $16
million for the one-time transition tax, as a result of deemed repatriation of the Company’s foreign earnings, and a net provisional expense of $8 million for the
remeasurement of deferred taxes associate d with the reduced U.S. federal corporate tax rate from 35.0% to 21.0%. The 2017 effective income tax rate was also
impacted by the non-deductible goodwill impairment charges.
Refer to Note 15, Income
Taxes
, for information regarding the Tax Act.
Information
by
Segment
The following tables summarize net sales, income (loss) from operations and certain items impacting comparability within each of the reportable segments
and Corporate. The descriptions of the reporting units generally reflect the primary products provided by each reporting unit.
Magazines,
Catalogs
and
Logistics
Net sales
(Loss) from operations
Operating margin
Restructuring, impairment and other charges-net
Purchase accounting inventory adjustments
$
2018
2017
Change
(in millions, except percentages)
$
1,767
(31)
(1.8%)
20
—
$
1,583
(73)
(4.6%)
86
1
184
42
280 bps
(66)
(1)
Net sales for the Magazines, Catalogs and Logistics segment for the year ended December 31, 2018 were $1,767 million, an increase of $184 million, or
11.6%, compared to 2017. Net sales increased primarily due to the MCL acquired companies, higher sales in co-mail and premedia and a $13 million increase in
pass-through paper sales, partially offset by the disposition of the Company’s retail offset printing facilities, lower volume in catalogs and magazines, and price
pressures.
The decrease in Magazines, Catalogs and Logistics segment loss from operations and change in operating margins was primarily due to lower restructuring,
impairment and other charges, and a gain related to the sale of assets, partially offset by cost increases as a result of the labor market conditions and price
pressures.
Book
2018
2017
Change
Net sales
Income from operations
Operating margin
Restructuring, impairment and other charges-net
$
1,055
58
5.5%
6
1,022
62
6.1%
15
(in millions, except percentages)
$
$
33
(4)
(60 bps)
(9)
Net sales for the Book segment for the year ended December 31, 2018 were $1,055 million, an increase of $33 million, or 3.2%, compared to 2017, largely
as a result of higher volume in educational books, higher volume in digital products and increased fulfillment services, and a $10 million increase in pass-through
paper sales, partially offset by price pressures.
Book segment income from operations and operating margins decreased for the year ended December 31, 2018 compared to 2017 due to cost increases as a
result of the labor market conditions, price declines, mix of volume, and a gain on the sales of assets recorded in 2017.
41
Office
Products
2018
2017
Change
Net sales
Income from operations
Operating margin
Restructuring, impairment and other charges-net
Purchase accounting adjustments
$
562
40
7.1%
6
1
495
42
8.5%
4
1
67
(2)
(140 bps)
2
—
(in millions, except percentages)
$
$
Net sales for the Office Products segment for the year ended December 31, 2018 were $562 million, an increase of $67 million, or 13.5%, compared to
2017, largely as a result of the Office Products acquired companies and pass-through price increases, partially offset by lower volume in filing and notetaking
products.
The decrease in income from operations and operating margin was primarily due to increased costs of raw materials, primarily in paper, and in freight, as
well as mix of volume, partially offset by synergies realized from the integration of the Office Products acquired companies.
Other
2018
2017
Change
Net sales
Income from operations
Operating margin
Restructuring, impairment and other charges-net
$
444
26
5.9%
1
503
28
5.6%
7
(in millions, except percentages)
$
$
(59)
(2)
30 bps
(6)
Net sales for the Other grouping for the year ended December 31, 2018 were $444 million, a decrease of $59 million, or 11.7%, compared to 2017, largely
as a result of the Company’s disposition of its European printing business on September 28, 2018, lower directories volume and a $13 million decrease in pass-
through paper sales, partially offset by higher sales in outsourced print procurement and management services and a $10 million increase due to changes in foreign
exchange rates primarily for Polish zloty.
The decrease in income from operations was primarily due to price pressures and a gain on the sale of assets recorded in 2017, partially offset by
productivity and cost control initiatives, which helped to improve the operating margin compared to 2017.
Corporate
The following table summarizes unallocated operating expenses and certain items impacting comparability within the activities presented as Corporate:
Total operating expenses
Significant components of total operating
expenses:
Restructuring, impairment and other charges-net
Share-based compensation expenses
Acquisition, merger and disposition-related
expenses
LIFO (benefit)
Separation-related expenses
2018
2017
Change
$
(in millions, except percentages)
78 $
51
$
2
12
10
(5)
—
17
13
5
(1)
4
(27)
(15)
(1)
5
(4)
(4)
Corporate operating expenses for the year ended December 31, 2018 were $51 million, compared to $78 million during the year ended December 31,
2017. The most significant charges are shown above and were partially offset by reductions in other corporate expenses.
42
Results of Operations for the Year Ended December 31, 2017 as Compared to the Year Ended December 31, 2016
The following table shows the results of operations for the year ended December 31, 2017 and 2016, which reflects the results of acquired businesses from
the relevant acquisition dates:
Net sales
Cost of sales
Cost
of
sales
as
a
%
of
net
sales
Selling, general and administrative expenses (exclusive of depreciation and
amortization)
Selling,
general
and
administrative
expenses
as
a
%
of
net
sales
Restructuring, impairment and other charges-net
Depreciation and amortization
(Loss)income from operations
Consolidated
and
Combined
Results
2017
2016
$ Change
% Change
(in millions, except percentages)
$
$
3,603
3,026
84.0%
$
3,654
3,031
83.0%
(51)
(5)
(1.4%)
(0.2%)
307
8.5%
129
160
(19) $
304
8.3%
18
171
130
$
3
1.0%
111
(11)
(149)
616.7%
(6.4%)
(114.6%)
$
Net sales for the year ended December 31, 2017 were $3,603 million, a decrease of $51 million, or 1.4%, compared to the year ended December 31,
2016. Net sales were impacted by:
• Decreases resulting from lower volume, pricing pressures and a $28 million decrease in pass-through paper sales;
•
Increases due to the acquisitions of Clark Group, CREEL, Publishers Press, LLC, Fairrington, and HudsonYards in 2017 (the “MCL acquisitions”) and
Continuum in 2016, and the acquisitions of Quality Park and NECI in 2017 (together with the MCL acquisitions and Continuum the “acquired
companies”); and
• A $10 million, or 0.3%, increase due to changes in foreign exchange rates, primarily in Polish zloty.
On a pro forma basis, the Company’s net sales for the year ended December 31, 2017 decreased by approximately $294 million, or 6.9%, compared to the
year ended December 31, 2016.
Total cost of sales decreased $5 million, or 0.2%, for the year ended December 31, 2017 compared to the year ended December 31, 2016, including a $10
million, or 0.3%, increase due to changes in foreign exchange rates. Cost of sales also decreased due to lower volume, a decline in paper pass-through sales and
gains from the sales of assets. This was partially offset by cost of sales incurred by the acquired companies and higher purchase accounting inventory adjustments.
Selling, general and administrative expenses increased $3 million, or 1.0%, to $307 million for the year ended December 31, 2017, primarily driven by i
ncreases in costs to operate as an independent public company due to the separation, expenses incurred by the acquired companies and higher acquisition-related
expenses of $5 million. The increase in selling, general and administrative expenses was partially offset by lower selling expense.
As a percentage of net sales, selling, general and administrative expenses increased from 8.3% for the year ended December 31, 2016 to 8.5% for the year
ended December 31, 2017 primarily due to lower sales and increases in costs to operate as an independent public company due to the separation.
For the year ended December 31, 2017, the Company recorded restructuring, impairment and other charges of $129 million. The charges included:
•
•
$68 million to recognize the impairment of goodwill in the Magazines, Catalogs and Logistics segment and $5 million in the Other grouping. Given the
historical valuations of the Company’s former magazines, catalogs and retail inserts reporting unit that have resulted in goodwill impairment in prior
years, combined with the change in the composition of the carrying value of the reporting unit due to the recent acquisitions, the Company determined it
necessary to perform interim goodwill impairment reviews on this former reporting unit during the year ended December 31, 2017. Refer to Note 9,
Restructuring,
Impairment
and
Other
Charges
, for more information;
$8 million to recognize the impairment of intangibles in the Book and Office Products segments;
43
•
$7 million to recognize the impairment of machinery and equipm ent. The impairment was primarily recorded in the magazines and catalogs reporting
unit, which is included in the Magazines, Catalogs and Logistics segment;
• Other restructuring charges of $24 million, primarily related to the exit from certain operations and facilities, as well as charges incurred as a result of a
•
terminated supplier contract;
$13 million for employee termination costs for an aggregate of 776 employees, of whom 459 were terminated as of or prior to December 31, 2017,
primarily related to three facility closures in the Book segment, one facility closure in the Magazines, Catalogs and Logistics segment and the
reorganization of certain business units; and
• Other charges of $4 million for multi-employer pension plan withdrawal obligations unrelated to facility closures .
For the year ended December 31, 2016, the Company recorded restructuring, impairment and other charges of $18 million. The charges included:
• Net restructuring charges of $8 million for employee termination costs for an aggregate of 222 employees, substantially all of whom were terminated as
of or prior to December 31, 2017, primarily related to one facility closure in the Other grouping, the expected closure of another facility in the first
quarter of 2017 in the Magazines, Catalogs and Logistics segment and the reorganization of certain operations;
• Lease termination and other restructuring charges of $7 million; and
• Other charges of $3 million for multi-employer pension plan withdrawal obligations unrelated to facility closures.
Depreciation and amortization decreased $11 million to $160 million for the year ended December 31, 2017 compared to the year ended December 31, 2016
due to decreased capital spending in recent years compared to historical levels, partially offset by acquisitions.
(Loss) income from operations for the year ended December 31, 2017 decreased by $149 million, or 114.6%, to a loss of $19 million as compared to the
year ended December 31, 2016. The decrease was due to lower volume in the Book and Office Products segments, higher restructuring, impairment and other
charges, price pressures, and higher acquisition expenses, partially offset by gains from the sales of assets.
2017
2016
$ Change
% Change
Interest expense-net
Investment and other (income)-net
$
(in millions, except percentages)
18 $
(45)
54
(2)
72 $
(47)
300.0%
4.4%
The Company recorded net interest expense of $72 million and $18 million for the years ended December 31, 2017 and 2016, respectively. The increase
was primarily due to debt incurred in relation to the separation. Refer to Note 12, Debt
, to the consolidated and combined financial statements. Investment and
other (income)-net primarily relates to the Company’s pension benefit plans in both years.
2017
2016
$ Change
% Change
(Loss) income before income taxes
Income tax expense
Effective income tax rate
$
(44)
13
(30.5%)
157
51
32.5%
(in millions, except percentages)
$
$
(201)
(38)
(128.0%)
(74.5%)
The effective income tax rate for the year ended December 31, 2017 was (30.5%) compared to 32.5% for the year ended December 31, 2016. In connection
with our initial analysis of the impact of the Tax Act, the Company recorded a provisional net tax expense of $24 million in the year ended December 31,
2017. This amount consists of a provisional expense of $16 million for the one-time transition tax, as a result of deemed repatriation of the Company’s foreign
earnings, and a net provisional expense of $8 million for the remeasurement of deferred taxes associated with the reduced U.S. federal corporate tax rate from
35.0% to 21.0%. The 2017 effective income tax rate was also impacted by the non-deductible goodwill impairment charges. Refer to Note 15, Income
Taxes
,
for information regarding the Tax Act.
44
Information by Segment
The following tables summarize net sales, income (loss) from operations and certain items impacting comparability within each of the reportable segments
and Corporate. The descriptions of the reporting unit generally reflect the primary products provided by each reporting unit.
Magazines,
Catalogs
and
Logistics
Net sales
(Loss) income from operations
Operating margin
Restructuring, impairment and other charges-net
Purchase accounting inventory adjustments
$
Years Ended December 31,
2017
2016
(in millions, except percentages)
$
1,583
(73)
(4.6%)
86
1
1,526
28
1.8%
4
—
Net sales for the Magazines, Catalogs and Logistics segment for the year ended December 31, 2017 were $1,583 million, an increase of $57 million, or
3.7%, compared to 2016 primarily as a result of higher volume due to the MCL acquisitions and a $3 million increase in pass-through paper sales, partially offset
by price pressures.
Magazines, Catalogs and Logistics segment income from operations decreased by $101 million for the year ended December 31, 2017 primarily due to
higher restructuring, impairment and other charges of $82 million, the majority of which related to goodwill impairment recorded in the segment. Refer to Note 9,
Restructuring,
Impairment
and
Other
Charges
, for more information. Income from operations also decreased due to price declines. Operating margins decreased
from 1.8% for the year ended December 31, 2016 to (4.6%) for the year ended December 31, 2017 primarily due to higher restructuring, impairment and other
charges and price declines.
Book
Net sales
Income from operations
Operating margin
Restructuring, impairment and other charges-net
Years Ended December 31,
2017
2016
(in millions, except percentages)
$
$
1,022
62
6.1%
15
1,097
86
7.8%
6
Net sales for the Book segment for the year ended December 31, 2017 were $1,022 million, a decrease of $75 million, or 6.8%, compared to 2016 primarily
due to lower volume within the educational and religious markets and coloring products, a $21 million decrease in pass-through paper sales, and price pressures,
partially offset by higher revenues from digital and supply chain management and fulfillment services.
Book segment income from operations and operating margins decreased for the year ended December 31, 2017 compared to 2016 due to lower volume,
higher restructuring, impairment and other charges and price declines, partially offset by gains from the sale of assets.
45
Office
Products
Net sales
Income from operations
Operating margin
Restructuring, impairment and other charges-net
Purchase accounting inventory adjustments
$
Years Ended December 31,
2017
2016
(in millions, except percentages)
$
495
42
8.5%
4
1
527
54
10.2%
—
—
Net sales for the Office Products segment for the year ended December 31, 2017 were $495 million, a decrease of $32 million, or 6.1%, compared to 2016,
due to lower volume, primarily in note-taking products, filing products and binder products, and price pressures. The decreases were partially offset by the
acquisitions of Quality Park and NECI in the fourth and third quarters of 2017, respectively.
Office Products segment income from operations decreased $12 million for the year ended December 31, 2017, mainly due to lower volume and higher
restructuring, impairment and other charges, partially offset by cost control initiatives. Operating margins decreased from 10.2% for the year ended December 31,
2016 to 8.5% for the year ended December 31, 2017 due to price pressures and higher restructuring, impairment and other charges, partially offset by cost control
initiatives.
Other
Net sales
Income from operations
Operating margin
Restructuring, impairment and other charges-net
Years Ended December 31,
2017
2016
(in millions, except percentages)
$
$
503
28
5.6%
7
504
27
5.4%
5
Net sales for the Other grouping for the year ended were $503 million, a decrease of $1 million, or 0.2%, compared to 2016 primarily due to lower Europe
and directories volume, including the impact of certain customer contracts previously managed by European operations that were assigned to RRD entities as of the
separation, a $10 million decrease in pass-through paper sales, and price pressures, partially offset by higher volume due to the acquisition of Continuum in the
fourth quarter of 2016 and a $10 million increase due to changes in foreign exchange rates, primarily in Polish zloty.
Income from operations and operating margin for the Other grouping increased for the year ended December 31, 2017 compared to 2016 primarily due to
the gains from the sale of assets, partially offset by declining prices.
Corporate
The following table summarizes unallocated operating expenses and certain items impacting comparability within the activities presented as Corporate:
Total operating expenses
Significant components of total operating
expenses:
Restructuring, impairment and other charges-net
Separation-related expenses
Share-based compensation expenses
Acquisition-related expenses
Years Ended December 31,
2017
2016
(in millions, except percentages)
$
78
$
17
4
13
5
46
65
3
5
8
—
Corporate operating expenses for the year ended December 31, 2017 were $78 million, compared to $65 million during the year ended December 31,
2016. The most significant charges are shown above and were partially offset by reductions in other corporate expenses. Additionally, the change was also driven
by higher costs incurred during the year ended December 31, 2017 as a result of costs to operate as an independent public company.
Prior to the separation from RRD, many of the Corporate operating expenses were based on allocations from RRD, however, the Company has incurred such
costs directly after the separation.
Non-GAAP Measures
The Company believes that certain non-GAAP measures, such as Non-GAAP adjusted EBITDA, provide useful information about the Co mpany’s
operating results and enhance the overall ability to assess the Company’s financial performance. The Company uses these measures, together with other measures
of performance under GAAP, to compare the relative performance of operations in planning, budgeting and reviewing the performance of its business. Non-GAAP
adjusted EBITDA allows investors to make a more meaningful comparison between the Company’s core business operating results over different periods of time.
The Company believes that Non-GAAP adjusted EBITDA, when viewed with the Company’s results under GAAP and the accompanying reconciliations, provides
useful information about the Company’s business without regard to potential distortions. By eliminating potential differences in results of operations between
periods caused by factors such as depreciation and amortization methods and restructuring, impairment and other charges, the Company believes that Non-GAAP
adjusted EBITDA can provide a useful additional basis for comparing the current performance of the underlying operations being evaluated.
Non-GAAP adjusted EBITDA is not presented in accordance with GAAP and has important limitations as an analytical tool. Readers should not consider
these measures in isolation or as a substitute for analysis of our results as reported under GAAP. In addition, these measures are defined differently by different
companies in our industry and, accordingly, such measures may not be comparable to similarly-titled measures of other companies.
Non-GAAP adjusted EBITDA excludes restructuring, impairment and other charges-net, separation-related expenses, purchase accounting adjustments,
acquisition-related expenses, loss on debt extinguishment, and a pension settlement charge. A reconciliation of GAAP net income to non-GAAP adjusted EBITDA
for the years ended December 31, 2018, 2017 and 2016 is presented in the following table:
Net (loss) income
Restructuring, impairment and other charges-
net
Acquisition, merger and disposition-related
expenses
Purchase accounting adjustments
Separation-related expenses
Loss on debt extinguishment
Pension settlement charge
Depreciation and amortization
Interest expense-net
Income tax expense
Non-GAAP adjusted EBITDA
2018
2017
2016
$
(23) $
(57) $
35
10
3
—
—
—
138
80
33
276 $
129
5
(1)
4
3
—
160
72
13
328 $
$
106
18
—
—
5
—
1
171
18
51
370
Years
Ended
December
31,
2018,
2017
and
2016
• Refer to Results
of
Operations
for information on restructuring, impairment and other charges for the years ended December 31, 2018, 2017 and 2016.
• Acquisition, merger and disposition-related expenses: The year ended December 31, 2018 included charges of $10 million related to legal, accounting
and other expenses associated with completed and contemplated acquisitions and costs associated with the merger and the disposition of the Company’s
European printing business. The year ended December 31, 2017 included charges of $5 million related to legal, accounting and other expenses
associated with completed and contemplated acquisitions.
47
• Purchase accounting adjustments: The year ende d December 31, 2018 included charges of $ 3 million as a result of purchase accounting inventory step-
up adjustments and changes to purchase price allocations related to prior acquisitions. The year ended December 31, 2017 included net (benefit) charges
of $(1) million as a result of purchase accounting inventory adjustments and a gain on acquisition.
• Separation-related expenses: The years ended December 31, 2017 and 2016 included charges of $4 million and $5 million, respectively, for one-time
transaction costs associated with becoming a standalone company.
• Loss on debt extinguishment: The year ended December 31, 2017 included a loss of $3 million related to a partial debt extinguishment. Refer to Note
12, Debt
, for more information.
• Pension settlement charge: The year ended December 31, 2016 included a pension settlement charge of $1 million related to lump-sum pension
•
settlement payments for a pension plan from a company acquired in 2014.
Income tax expense: The year ended December 31, 2018 included a $25 million non-cash provision recorded primarily for the write-off of a deferred tax
asset associated with the disposition of the Company's European printing business.
LIQUIDITY AND CAPITAL RESOURCES
The Company believes it has sufficient liquidity to support its ongoing operations and to invest in future growth to create value for its stockholders.
Operating cash flows and the Revolving Credit Facility are the Company’s primary sources of liquidity and are expected to be used for, among other things,
payments of interest and principal on the Company’s debt obligations, distributions to stockholders that may be approved by the Board of Directors and in
accordance with the Merger Agreement, capital expenditures necessary to support productivity improvement and growth, and completion of restructuring programs.
The following sections describe the Company’s cash flows for the years ended December 31, 2018, 2017 and 2016.
Net cash provided by operating activities
Net cash (used in) investing activities
Net cash (used in) provided by financing
activities
$
2018
2017
2016
162 $
(55)
(116)
205 $
(278)
6
231
(49)
(187)
Cash
flows
from
Operating
Activities
Operating cash inflows are largely attributable to sales of the Company’s products. Operating cash outflows are largely attributable to recurring
expenditures for raw materials, labor, rent, interest, taxes and other operating activities.
2018
compared
to
2017
Net cash provided by operating activities was $162 million for the year ended December 31, 2018 compared to $205 million for the same period in 2017.
The decrease in net cash provided by operating activities reflected the timing of supplier payments and an increase in inventory costs as a result of higher paper
prices, partially offset by improved cash collections.
2017
compared
to
2016
Net cash provided by operating activities was $205 million for the year ended December 31, 2017 compared to $231 million for the same period in
2016. The decrease in net cash provided by operating activities was driven by an increase in interest payments, reflecting a full year on interest payments primarily
related to the issuance of long-term debt as of September 30, 2016, partially offset by the timing of customer and supplier payments.
Beginning on October 1, 2016, transactions with RRD and Donnelley Financial are considered third-party and are settled in cash, whereas prior to that date
transactions were net settled among the three companies.
48
Cash
flows
from
Investing
Activities
2018
compared
to
2017
Net cash used in investing activities for the year ended December 31, 2018 was $55 million compared to $278 million for the same period in
2017. Significant changes are as follows:
• Cash paid for acquisitions of businesses, net of cash acquired, was impacted by the acquisition of Print Logistics in 2018, several acquisitions in 2017
and purchase price adjustments resulting from finalization of working capital calculations in each period;
• Proceeds of $47 million for the year ended December 31, 2018 for the disposition of the Company’s European printing business; and
• Net proceeds from the sales and purchase of investments and other assets of $9 million for the year ended December 31, 2018 compared to $18 million
for the year ended December 31, 2017.
2017
compared
to
2016
Net cash used in investing activities for the year ended December 31, 2017 was $278 million compared to $49 million for the same period in
2016. Significant changes are as follows:
• Cash paid for acquisitions of businesses, net of cash acquired, was $236 million during the year ended December 31, 2017, of which $234 million was
for the 2017 acquisitions and $2 million was paid as part of a final working capital adjustment for the 2016 acquisition of Continuum. Cash paid for
acquisition of business, net of cash acquired, was $8 million during the year ended December 31, 2016 for the acquisition of Continuum;
• Capital expenditures were $60 million during the year ended December 31, 2017, an increase of $12 million compared to the same period in 2016,
primarily due to increased spend on machinery and equipment in the Magazines, Catalogs and Logistics segment and software expenditures in the
Corporate segment; and
• Net proceeds from the sales and purchase of investments and other assets were $18 million during the year ended December 31, 2017, compared to $6
million during the year ended December 31, 2016.
Cash
flows
from
Financing
Activities
2018
compared
to
2017
Net cash used in financing activities for the year ended December 31, 2018 was $116 million compared to cash provided by financing activities of $6
million for the same period in 2017. Significant changes are as follows:
• The Company paid down $50 million of long-term debt and current maturities during the year ended December 31, 2018, compared to $118 million
during the year ended December 31, 2017
• The Company made net payments for credit facility borrowings of $9 million during the year ended December 31, 2018 compared to receiving proceeds
of $75 million during the year ended December 31, 2017;
• The Company paid $20 million to repurchase common stock during the year ended December 31, 2018;
• There were $65 million of proceeds from issuance of long-term debt during the year ended December 31, 2017; and
• The Company received proceeds of $18 million for the issuance of common stock on March 28, 2017 in connection with the secondary offering of shares
retained by RRD at the separation.
2017
compared
to
2016
Net cash provided by financing activities for the year ended December 31, 2017 was $6 million compared to $187 million of cash used by financing
activities for the same period in 2016.
• There were $65 million of proceeds and $1 million debt issuance costs during the year ended December 31, 2017, compared to $816 million and $20
million of proceeds and debt issuance costs, respectively, during the year ended December 31, 2016 as a result of issuance of long-term debt as of
September 30, 2016;
• The Company paid $118 million of long-term debt and current maturities during the year ended December 31, 2017, compared to $17 million during the
year ended December 31, 2016;
• There were $75 million of net proceeds under the Revolving Credit Facility during the year ended December 31, 2017;
49
• The Company received proceeds of $18 million for the issuance of common stock on March 28, 2017 in connection with the secondary offering of shares
retained by RRD at the separation;
• The Company paid $34 million in dividends to stockholders during the year ended December 31, 2017, compared to $8 million during the year ended
December 31, 2016;
• The Company received $3 million in net cash proceeds from RRD during the year ended December 31, 2017, compared to net cash payments of $13
million made to RRD during the year ended December 31, 2016. The proceeds and payments were primarily pursuant to the terms of the separation
agreement with RRD;
• There were other financing activities of $2 million during the year ended December 31, 2017; and
• There were $945 million of net transfers to parent and affiliates during the year ended December 31, 2016.
Dividends
Cash dividends declared and paid to stockholders during the year ended December 31, 2018 totaled $35 million. On January 17, 2019, the Board of
Directors declared a quarterly cash dividend of $0.26 per common share, payable on March 4, 2019 to stockholders of record on February 15, 2019.
The Credit Agreement generally allows annual dividend payments of up to $50 million in aggregate, though additional dividends may be allowed subject to
certain conditions. The timing, declaration, amount and payment of any future dividends to the Company’s stockholders falls within the discretion of the
Company’s Board of Directors. The decisions of the Company’s Board of Directors regarding the payment of future dividends depends on many factors, including
but not limited to the Company’s financial condition, future prospects, earnings, capital requirements and debt service obligations, as well as legal requirements,
regulatory constraints, industry practice and other factors that the Board of Directors may deem relevant. In addition, the terms of the agreements governing the
Company’s existing debt or debt that the Company may incur in the future may limit or prohibit the payment of dividends. There can be no assurance that the
Company will continue to pay a dividend.
Contractual Cash Obligations and Other Commitments and Contingencies
The following table quantifies the Company’s future contractual obligations as of December 31, 2018:
Debt (a)
Interest due on debt (b)
Multi-employer pension withdrawals
obligations
Operating leases (c)
Deferred compensation
Pension plan contributions (d)
Incentive compensation
Outsourced services
Other (e)
Total as of December 31, 2018
Total
2019
2020
2021
2022
2023
Thereafter
Payments Due In
$
$
782
253
112
307
6
12
5
28
43
1,548
$
$
110
59
9
88
1
6
5
21
43
342
$
$
$
(in millions)
43
52
$
8
50
—
—
—
2
—
155
$
$
43
56
9
60
—
6
—
3
—
177
136
47
8
37
—
—
—
2
—
230
$
$
450
39
8
22
—
—
—
—
—
519
$
$
—
—
70
50
5
—
—
—
—
125
(a) Excludes unamortized debt issuance costs of $4 million and $6 million related to the Company’s Term Loan Facility and 8.75% Senior Notes due
October 15, 2023, respectively, and a discount of $5 million related to the Company’s Term Loan Facility. These amounts do not represent contractual
obligations with a fixed amount or maturity date.
Includes scheduled interest payments for the 8.75% Senior Notes and estimates for the Term Loan Facility.
Includes obligations to landlords.
Includes the estimated pension plan contributions for 2019 and 2020 and does not include the obligations for subsequent periods as the Company is
unable to reasonably estimate the ultimate amounts.
(b)
(c)
(d)
(e) Other primarily includes employee restructuring-related severance payments ($8 million) and purchases of property, plant and equipment ($35
million).
50
Liquidity
Cash and cash equivalents were $21 million and $34 million as of December 31, 2018 and 2017, respectively.
The Company’s cash balances are held in several locations throughout the world, including amounts held outside of the United States. Cash and cash
equivalents as of December 31, 2018 included $12 million in the U.S. and $9 million at international locations.
The Company maintains cash pooling structures that enable participating international locations to draw on the pools’ cash resources to meet local liquidity
needs. Foreign cash balances may be loaned from certain cash pools to U.S. operating entities on a temporary basis in order to reduce the Company’s short-term
borrowing costs or for other purposes. As of December 31, 2018, $17 million of international cash was loaned to U.S. operating entities.
Debt
Issuances
On September 30, 2016, the Company issued $450 million of Senior Secured Notes (the “Senior Notes”).
On September 30, 2016 the Company entered into a credit agreement (the “Credit Agreement”) that provides for (i) a senior secured term loan B facility in
an aggregate principal amount of $375 million (the “Term Loan Facility”) and (ii) a senior secured revolving credit facility in an aggregate principal amount of
$400 million (the “Revolving Credit Facility”). The debt issuance costs and original issue discount are being amortized over the life of the facilities using the
effective interest method.
The Credit Agreement is subject to a number of covenants, including, but not limited to, a minimum Interest Coverage Ratio and a Consolidated Leverage
Ratio, as defined in and calculated pursuant to the Credit Agreement, that, in part, restrict the Company’s ability to incur additional indebtedness, create liens,
engage in mergers and consolidations, make restricted payments and dispose of certain assets. The Credit Agreement generally allows annual dividend payments of
up to $50 million in the aggregate, though additional dividends may be allowed subject to certain conditions. Each of these covenants is subject to important
exceptions and qualifications.
Credit
Agreement
On December 20, 2018, the Company amended the Credit Agreement to, among other things, defer certain changes of the minimum Interest Coverage Ratio
and the maximum Consolidated Leverage Ratio. As a result, the maximum Consolidated Leverage Ratio will be reduced to 3.00 to 1.00 with respect to any fiscal
quarter ending on or after March 31, 2020, as opposed to March 31, 2019, as originally contemplated in the Credit Agreement. The minimum Interest Coverage
Ratio will be increased to 3.50 to 1.00 with respect to any test period ending on or after March 31, 2020, as opposed to March 31, 2019, as originally contemplated
in the Credit Agreement. Other terms, including the outstanding principal, maturity date and other debt covenants remain the same.
On November 17, 2017, the Company amended the Credit Agreement to reduce the interest rate for the Term Loan Facility by 50 basis points and the
LIBOR “floor” was also reduced by 25 basis points. Other terms, including the outstanding principal, maturity date and debt covenants were not amended.
Select terms of the Term Loan Facility before and after amendment include:
Interest rate (Company's option)
LIBOR floor
Amortization
Maturity
Before Amendment
Base rate + 5.00%; or
LIBOR + 6.00%
1.00%
$13 million, first eight quarters;
$11 million quarterly thereafter
(as of original effective date)
September 30, 2022
After Amendment
Base rate + 4.50%; or
LIBOR + 5.50%
0.75%
$13 million, first eight quarters;
$11 million quarterly thereafter
(as of original effective date)
September 30, 2022
Under the terms of the Term Loan Facility, each of the syndicated lenders is deemed to have loaned a specific amount to the Company and has the right to
repayment from the Company directly. Therefore, we concluded that the Term Loan Facility is a loan syndication under GAAP. As such, in order to determine
whether the debt was modified or extinguished as a result of the amendment, we examined the amount of principal pre- and post-amendment by individual
lender. As a result, we determined that $65 million of outstanding principal had been extinguished as of November 17, 2017, even though the total outstanding
principal amongst all lenders pre- and post-amendment remained unchanged.
51
Consequently, the amendment resulted in a pre-tax loss on debt extinguishment of $3 million related to the unamortized discount and debt issuance costs
attributable to the $65 million of outstanding principal that had been considered extinguished. There was no net impact as of November 17, 2017 to cash and cash
equivalents, total outstanding principal remained unchanged, and no cash was exchanged between the lenders and the Company (other than customary
administrative fees).
On Fe bruary 2, 2017, the Company paid in advance for the Term Loan Facility the full amount of required amortization payments, $50 million, for the year
ended December 31, 2017.
Additional
Debt
Issuances
Information
There were $64 million of borrowings under the Revolving Credit Facility as of December 31, 2018. Based on the Company’s consolidated statements of
operations for the year ended December 31, 2018 and existing debt, the Company would have had the ability to utilize $278 million of the $400 million Revolving
Credit Facility and not have been in violation of the terms of the agreement. Availability under the Revolving Credit Facility was reduced by $64 million in
borrowings.
The current availability under the Revolving Credit Facility and net availability as of December 31, 2018 is shown in the table below:
Availability
Stated amount of the Revolving Credit Facility
Less: availability reduction from covenants
Amount available under the Revolving Credit Facility
Usage
Borrowings under the Revolving Credit Facility
Impact on availability related to outstanding letters of credit
Total usage
Current availability at December 31, 2018
Cash
Net Available Liquidity
December 31, 2018
(in millions)
400
122
278
64
—
64
214
21
235
$
$
$
$
$
$
The Company was in compliance with its debt covenants as of December 31, 2018, and expects to remain in compliance based on management’s estimates
of operating and financial results for 2019 and the foreseeable future. However, declines in market and economic conditions or demand for certain of the
Company’s products could impact the Company’s ability to remain in compliance with its debt covenants in future periods . As a result of the Company’s
amendment of its Credit Agreement during the fourth quarter of 2018, the maximum Consolidated Leverage Ratio steps down to 3.00 on March 31, 2020, one year
later from the previous date of March 31, 2019 and the minimum Interest Coverage Ratio will be increased to 3.50 to 1.00 with respect to any test period ending on
or after March 31, 2020, as opposed to March 31, 2019. As of December 31, 2018, the Company’s leverage as defined in the Credit Agreement was 2.54,
compared to a maximum permitted ratio under the Credit Agreement of 3.25. The full definition of the Consolidated Leverage Ratio and amended agreement are
included in the Credit Agreement filed as an exhibit to this annual report on Form 10-K. As of December 31, 2018, the Company met all the conditions required
to borrow under the Credit Agreement and management expects the Company to continue to meet the applicable borrowing conditions.
The failure of a financial institution supporting the Credit Agreement would reduce the size of the Company’s committed facility unless a replacement
institution were added. Currently, the Credit Agreement is supported by fifteen U.S. and international financial institutions.
As of December 31, 2018, the Company had $51 million in outstanding letters of credit issued under the Revolving Credit Facility, all of which reduced the
availability thereunder. As of December 31, 2018, the Company also had $6 million in other uncommitted credit facilities, all of which were outside the U.S. (the
“Other Facilities”). As of December 31, 2018, letters of credit and guarantees of $2 million were issued and reduced availability under the Other Facilities.
52
Other
The Merger Agreement permits the Company to continue paying a quarterly dividend up to $0.26 per share and restricts the Company from incurring
additional indebtedness outside of the ordinary course of business.
On February 15, 2018, the Company’s Board of Directors approved an initial share repurchase authorization o f up to $20 million of common stock under
which the Company may buy back LSC Communications’ shares at its discretion from February 15, 2018 through August 15, 2019. The $20 million repurchase
was completed on May 31, 2018.
Management
of
Market
Risk
The Company is exposed to interest rate risk on its variable debt and price risk on its fixed-rate debt. At December 31, 2018, the Company’s variable-
interest borrowings were $330 million, or approximately 42.2%, of the Company’s total debt.
The Company assesses market risk based on changes in interest rates utilizing a sensitivity analysis that measures the potential loss in earnings, fair values
and cash flows based on a hypothetical 10% change in interest rates. Using this sensitivity analysis, such changes would not have a material effect on interest
income or expense and cash flows and would change the fair values of fixed-rate debt at December 31, 2018 by approximately $14 million.
The Company is exposed to the impact of foreign currency fluctuations in certain countries in which it operates. The exposure to foreign currency
movements is limited in many countries because the operating revenues and expenses of its various subsidiaries and business units are substantially in the local
currency of the country in which they operate. To the extent that borrowings, sales, purchases, revenues, expenses or other transactions are not in the local currency
of the subsidiary, the Company is exposed to currency risk and may enter into foreign exchange forward contracts to hedge the currency risk. The Company is
primarily exposed to the currencies of the Canadian dollar and Mexican peso, and was exposed to the currency of the Polish zloty until the sale of the Company’s
European printing business in the third quarter of 2018. The Company does not use derivative financial instruments for trading or speculative purposes .
OTHER INFORMATION
Environmental, Health and Safety
For a discussion of certain environmental, health and safety issues involving the Company, refer to Note 11, Commitments
and
Contingencies,
to the
consolidated and combined financial statements.
Litigation and Contingent Liabilities
For a discussion of certain litigation involving the Company, refer to Note 11, Commitments
and
Contingencies,
to the consolidated and combined financial
statements.
New Accounting Pronouncements and Pending Accounting Standards
Recently issued accounting standards and their estimated effect on the Company’s consolidated and combined financial statements are also described in
Note 21, New
Accounting
Pronouncements
, and throughout the notes to the consolidated and combined financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to a variety of market risks that may adversely impact the Company's results of operations and financial condition, including
changes in interest and foreign currency exchange rates, changes in the economic environment that would impact credit positions and changes in the prices of
certain commodities. The Company's management takes an active role in the risk management process and has developed policies and procedures that require
specific administrative and business functions to assist in the identification, assessment and control of various risks. These risk management strategies may not fully
insulate the Company from adverse impacts due to market risks.
53
Interest Rate Risk
The Company is exposed to interest rate risk on variable rate debt obligations and price risk on fixed rate debt. As of December 31, 2018, the Company had:
• Fixed rate debt outstanding of $450 million at a current weighted average interest rate of 8.75%; and
• Variable rate debt outstanding of $330 million at December 31, 2018, which is comprised primarily of $265 million remaining on the Term Loan Facility
and $64 million outstanding on the Revolving Credit Facility.
For the year ended December 31, 2018, the Term Loan and the Revolving Credit Facility had current weighted-average interest rates of 7.47% and 5.19%,
respectively. Refer to Debt
Issuances,
included in Item 7. Management’s
Discussion
and
Analysis
of
Financial
Condition
and
Results
of
Operations
, and Note 12 ,
Debt,
for more information. A hypothetical 10% change in interest rates in the near term would not have a material effect on interest expense or cash flows. A
hypothetical 10% adverse change in interest rates in the near term would change the fair value of fixed rate debt at December 31, 2018, by
approximately $14 million.
Foreign Currency Risk and Translation Exposure
The Company is exposed to the impact of foreign currency fluctuations in certain countries in which it operates. The exposure to foreign currency
movements is limited in most countries because the operating revenues and expenses of its various subsidiaries and business units are substantially in the local
currency of the country in which they operate.
Although operating in local currencies may limit the impact of currency rate fluctuations on the results of operations of the Company's non-United States
subsidiaries and business units, rate fluctuations may impact the consolidated financial position as the assets and liabilities of its foreign operations are translated
into U.S. dollars in preparing the Company's consolidated balance sheets. As of December 31, 2018, the Company's foreign subsidiaries had net current assets
(defined as current assets less current liabilities) subject to foreign currency translation risk of $12 million. The potential decrease in net current assets as
of December 31, 2018, from a hypothetical 10% adverse change in quoted foreign currency exchange rates in the near term would be approximately $1 million.
This sensitivity analysis assumes a parallel shift in all major foreign currency exchange rates verses the U.S. dollar. Exchange rates rarely move in the same
direction relative to the U.S. dollar due to positive and negative correlations of the various global currencies. This assumption may overstate the impact of changing
exchange rates on individual assets and liabilities denominated in a foreign currency.
These international operations are subject to risks typical of international operations, including, but not limited to, differing economic conditions, changes in
political climate, potential restrictions on the movement of funds, differing tax structures, and other regulations and restrictions. Accordingly, future results could be
adversely impacted by changes in these or other factors.
Credit Risk
Credit risk is the possibility of loss from a customer's failure to make payments according to contract terms. Prior to granting credit, each customer is
evaluated, taking into consideration the prospective customer's financial condition, payment experience, credit bureau information and other financial and
qualitative factors that may affect the customer's ability to pay. Specific credit reviews and standard industry credit scoring models are used in performing this
evaluation. Customers' financial condition is continuously monitored as part of the normal course of business. Some of the Company's customers are highly
leveraged or otherwise subject to their own operating and regulatory risks. Based on those customer account reviews and due to the continued uncertainty of the
global economy, the Company has established an allowance for doubtful accounts of $14 million as of December 31, 2018.
The Company has a large, diverse customer base and does not have a high degree of concentration with any single customer account. During the year
ended December 31, 2018, the Company's largest customer accounted for less than 10% of the Company's net sales. Even if the Company's credit review and
analysis mechanisms work properly, the Company may experience financial losses in its dealings with customers and other parties. Any increase in nonpayment or
nonperformance by customers could adversely impact the Company's results of operations and financial condition. Economic disruptions in the near term could
result in significant future charges.
54
Commodity Risk
The primary raw materials used by the Company are paper and ink. At this time, the Company's supply of raw materials is readily available from numerous
vendors; however, based on market conditions, that could change in the future. The Company generally buys these raw materials based upon market prices that are
established with the vendor as part of the procurement process.
To reduce price risk caused by market fluctuations, the Company has incorporated price adjustment clauses in certain sales contracts. Although the
Company is able to pass commodity cost increases through to its customers, management believes a hypothetical 10% adverse change in the price of paper and
other raw materials in the near term would have a significant effect on demand for the Company’s products due to the increase in total costs to our customers.
Management is not able to quantify the likely impact of such a change in raw material prices on the Company’s consolidated statements of operations or cash flows.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial information required by Item 8 is contained in Item 15 of Part IV of this annual report on Form 10-K.
ITEM 9. CHANGES IN DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
55
ITEM 9A. CONTROL S AND PROCEDURES
Disclosure Controls and Procedures
As required by Rule 13a-15(b) and Rule 15d-15(e) of the Securities Exchange Act of 1934, the Company’s management, including the Chief Executive
Officer and Chief Financial Officer, is responsible for establishing and maintaining effective disclosure controls and procedures, as defined under Rules 13a-15(e)
and 15d-15(e) of the Securities Exchange Act of 1934. As of December 31, 2018, an evaluation was performed under the supervision and with the participation of
management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure
controls and procedures. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that disclosure controls and procedures as of
December 31, 2018 were effective in ensuring information required to be disclosed in the Company’s SEC reports was recorded, processed, summarized, and
reported within the time periods specified in the SEC’s rules and forms, and that such information was accumulated and communicated to management, including
the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. The evaluation as of
December 31, 2018 excludes the companies acquired during the year ended December 31, 2018. Refer to the Report
of
Management
on
Internal
Control
Over
Financial
Reporting
for more information.
Changes in Internal Control Over Financial Reporting
There were no other changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) during the quarter ended December 31, 2018 that have materially affected, or are reasonably likely to materially affect, the Company’s internal
control over financial reporting.
Report of Management on Internal Control Over Financial Reporting
The management of the Company, including the Company’s Chief Executive Officer and Chief Financial Officer, is responsible for establishing and
maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934).
Management of the Company, including the Company’s Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of the Company’s
internal control over financial reporting as of December 31, 2018. Management based this assessment on criteria for effective internal control over financial
reporting described in the “Internal Control—Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Under the rules and regulations of the SEC, LSC Communications has elected to exclude from its assessment of effectiveness of the Company’s internal
control over financial reporting as of December 31, 2018 the companies acquired during the year ended December 31, 2018. The companies acquired include Print
Logistics and TriLiteral, LLC. These acquisitions constitute 4% of net sales, 3% of total assets and -24% of net loss (Print Logistics and TriLiteral, LLC had net
income) in the consolidated balance sheets and statements of operations as of and for the year ended December 31, 2018. In its annual report on Form 10-K for the
year ending December 31, 2019, management and the Company’s independent registered public accounting firm will be required to provide an assessment as to the
effectiveness of the company’s internal control over financial reporting, inclusive of the acquired companies.
Based on management’s assessment, management determined that, as of December 31, 2018, the Company maintained effective internal control over
financial reporting with the exception noted above for acquired companies.
Deloitte & Touche LLP, an independent registered public accounting firm, who audited the consolidated financial statements of the Company included in
this annual report on Form 10-K, has also audited the effectiveness of the Company’s internal control over financial reporting as stated in its report appearing
below.
February 19, 2019
56
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of LSC Communications, Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of LSC Communications, Inc. and subsidiaries (the “Company”) as of December 31, 2018,
based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018,
based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated and
combined financial statements as of and for the year ended December 31, 2018, of the Company and our report dated February 19, 2019, expressed an unqualified
opinion on those financial statements and included explanatory paragraphs related to the change in accounting principle due to the adoption of Accounting
Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, and the basis of presentation of the consolidated and combined financial
statements.
As described in the Report of Management on Internal Control over Financial Reporting, management excluded from its assessment the internal control over
financial reporting at Print Logistics and TriLiteral, LLC, which were acquired during 2018 and whose financial statements constitute approximately 4% of net
sales, 3% of total assets, and -24% of net loss (Print Logistics and TriLiteral, LLC had net income) of the consolidated financial statement amounts as of and for the
year ended December 31, 2018. Accordingly, our audit did not include the internal control over financial reporting at Print Logistics or TriLiteral, LLC.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in the accompanying Report of Management on Internal Control over Financial Reporting. Our responsibility is to
express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and
are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
/s/ DELOITTE
&
TOUCHE
LLP
Chicago, IL
February 19, 2019
57
ITEM 9B. OTHER INFORMATION
None.
58
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF LSC COMMUNICATIONS AND CORPORATE GOVERNANCE
Information regarding directors and executive officers of the Company is incorporated herein by reference to the descriptions under “Proposal 1: Election of
Directors,” “About the Continuing Directors,” “The Board’s Committees and their Functions” and “Section 16(a) Beneficial Ownership Reporting Compliance” of
the Company’s Proxy Statement for the Annual Meeting of Stockholders (the “2019 Proxy Statement”). See also the information with respect to the Company’s
executive officers at the end of Part I of this annual report on Form 10-K under the caption “Executive Officers of LSC Communications, Inc.”
The Company has adopted a policy statement entitled Code
of
Ethics
that applies to its chief executive officer and senior financial officers. In the event that
an amendment to, or a waiver from, a provision of the Code
of
Ethics
is made or granted, the Company intends to post such information on its web site,
www.lsccom.com
. A copy of the Company’s Code
of
Ethics
has been filed as an exhibit to this annual report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive and director compensation is incorporated by reference to the material under the captions “Compensation Discussion and
Analysis,” “Human Resources Committee Report,” “Executive Compensation,” “Potential Payments Upon Termination or Change in Control,” “Director
Compensation,” and “2018 CEO Pay Ratio” of the 2019 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information regarding security ownership of certain beneficial owners and management is incorporated herein by reference to the material under the heading
“Stock Ownership” of the 2019 Proxy Statement.
Information as of December 31, 2018 concerning compensation plans under which LSC Communications’ equity securities are authorized for issuance are
as follows:
Plan Category
Equity compensation plan approved by security
holders
Number of Securities
to Be Issued upon
Exercise of
Weighted-Average
Exercise Price of
Number of Securities
Remaining Available for
Future Issuance under
Equity Compensation Plans
Outstanding Options,
Outstanding Options,
(Excluding Securities
Warrants and Rights
Warrants and Rights (b)
Reflected in Column (1))
(1)
(2)
(3)
1,740,475 (a) $
24.47
1,064,640 (c)
(a) Includes 1,463,200 shares issuable upon the vesting of restricted stock units.
(b) Restricted stock units were excluded when determining the weighted-average exercise price of outstanding options, warrants and rights.
(c) The 2016 Performance Incentive Plan allows grants in the form of cash or bonus awards, stock options, stock appreciation rights, restricted stock, stock
units or combinations thereof. The maximum number of shares of common stock that may be granted with respect to bonus awards, including
performance awards or fixed awards in the form of restricted stock or other form, is 3,500,000 in the aggregate, of which 1,064,640 remain available for
issuance.
59
ITEM 13. CERTAIN RELATIONSHIPS AND RELATE D TRANSACTIONS AND DIRECTOR INDEPENDENCE
Information regarding certain relationships and related transactions and director independence is incorporated herein by reference to the material under the
heading “Certain Relationships and Related Party Transactions,” “The Board’s Committees and Their Functions” and “Corporate Governance—Director
Independence” of the 2019 Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information regarding principal accounting fees and services is incorporated herein by reference to the material under the heading “The Company’s
Independent Registered Public Accounting Firm - Fees” of the 2019 Proxy Statement.
60
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)
1. Financial Statements
PART IV
The financial statements listed in the accompanying index (page F-1) to the financial statements are filed as part of this annual report on Form 10-K.
(b) Exhibits
The exhibits listed on the accompanying index (pages E-1 through E-4) are filed as part of this annual report on Form 10-K.
(c) Financial Statement Schedules omitted
Certain schedules have been omitted because the required information is included in the consolidated and combined financial statements and notes thereto or
because they are not applicable or not required.
61
ITEM 15(a). INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated and Combined Statements of Operations for each of the three years in the period ended December 31, 2018
Consolidated and Combined Statements of Comprehensive Income for each of the three years in the period ended December 31, 2018
Consolidated Balance Sheets as of December 31, 2018 and 2017
Consolidated and Combined Statements of Cash Flows for each of the three years in the period ended December 31, 2018
Consolidated and Combined Statements of Stockholders’ Equity for each of the three years in the period ended December 31, 2018
Notes to Consolidated and Combined Financial Statements
Unaudited Interim Financial Information
Page
F-2
F-3
F-4
F-5
F-6
F-7
F-8
F-51
F-1
REPORT OF INDEPENDENT REGIST ERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of LSC Communications, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of LSC Communications, Inc. and subsidiaries (the "Company") as of December 31, 2018
and 2017, the related consolidated and combined statements of operations, comprehensive income, stockholders’ equity and cash flows, for each of the three years
in the period ended December 31, 2018, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present
fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's
internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control — Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 19, 2019, expressed an unqualified opinion on the Company's
internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 1 to the financial statements, the Company has changed its method of accounting for revenue in 2018 due to the adoption of
Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, using the modified retrospective method.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial
statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to
assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe
that our audits provide a reasonable basis for our opinion.
Basis of Presentation of the Consolidated and Combined Financial Statements
As discussed in Note 1, prior to October 1, 2016, the accompanying consolidated and combined financial statements have been derived from the
consolidated financial statements and accounting records of R.R. Donnelley & Sons Company. The consolidated and combined financial statements include the
allocation of certain assets, liabilities, expenses and income that have historically been held at the R.R. Donnelley & Sons Company corporate level but which are
specifically identifiable or attributable to the Company. The consolidated and combined financial statements also include expense allocations for certain corporate
functions historically provided by R.R. Donnelley & Sons Company. These costs and allocations may not be reflective of the actual expense which would have
been incurred had the Company operated as a separate unaffiliated entity apart from R.R. Donnelley & Sons Company.
/s/ DELOITTE
&
TOUCHE
LLP
Chicago, Illinois
February 19, 2019
We have served as the Company's auditor since 2015.
F-2
LSC COMMUNICATIONS, INC.
CONSOLIDATED AND C OMBINED STATEMENTS OF OPERATIONS
(in millions, except per share data)
Net sales
Cost of sales
Selling, general and administrative expenses (exclusive of
depreciation and amortization)
Restructuring, impairment and other charges-net (Note 9)
Depreciation and amortization
Income (loss) from operations
Interest expense-net (Note 12)
Investment and other (income)-net
Income (loss) before income taxes
Income tax expense
Net (loss) income
Net (loss) earnings per common share (Note 13)
Basic net (loss) earnings per share
Diluted net (loss) earnings per share
Weighted-average number of common shares outstanding:
Basic
Diluted
$
$
$
$
Year Ended December 31,
2018
2017
2016
3,826 $
3,283
328
35
138
42
80
(48)
10
33
(23) $
3,603 $
3,026
307
129
160
(19)
72
(47)
(44)
13
(57) $
(0.67) $
(0.67) $
(1.69) $
(1.69) $
33.8
33.8
33.8
33.8
3,654
3,031
304
18
171
130
18
(45)
157
51
106
3.25
3.23
32.5
32.8
Refer to Notes to the Consolidated and Combined Financial Statements
F-3
LSC COMMUNICATIONS, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(in millions)
Net (loss) income
Year Ended December 31,
2018
2017
2016
$
(23)
$
(57) $
106
Other comprehensive (loss) income, net of tax (Note 16):
Translation adjustments
Adjustment for net periodic pension plan cost, net of tax benefit of $1 million for the year
ended December 31, 2018, and tax expense of $15 million and $28 million for the years ended
December 31, 2017 and 2016, respectively
Other comprehensive (loss) income
Comprehensive (loss) income
(7)
(4)
$
(11)
(34)
$
21
34
55
(2) $
5
35
40
146
Refer to Notes to the Consolidated and Combined Financial Statements
F-4
LSC COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(in millions, except share and per share data)
December 31,
2018
2017
ASSETS
Cash and cash equivalents
Receivables, less allowances for doubtful accounts of $14 in 2018 (2017 - $11)
Inventories (Note 6)
Income tax receivable
Prepaid expenses and other current assets
Total current assets
Property, plant and equipment-net (Note 7)
Goodwill (Note 8)
Other intangible assets-net (Note 8)
Deferred income taxes
Other noncurrent assets
Total assets
LIABILITIES
Accounts payable
Accrued liabilities (Note 10)
Short-term debt and current portion of long-term debt (Note 12)
Total current liabilities
Long-term debt (Note 12)
Pension liabilities
Restructuring and multi-employer pension liabilities (Note 9)
Other noncurrent liabilities
Total liabilities
Commitments and Contingencies (Note 11)
EQUITY
Common stock, $0.01 par value
Authorized: 65,000,000
Issued: 35,029,565 shares in 2018 (2017: 34,610,931)
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive loss (Note 16)
Treasury stock, at cost: 1,888,205 shares in 2018 (2017: 100,256)
Total equity
Total liabilities and equity
$
$
$
$
$
$
$
21
617
197
4
28
867
508
103
156
27
93
1,754
$
372
199
108
679
659
132
45
61
1,576
—
828
(42)
(584)
(24)
178
1,754
$
$
$
$
34
727
238
16
31
1,046
576
82
160
51
99
2,014
406
239
123
768
699
182
49
68
1,766
—
816
(90)
(476)
(2)
248
2,014
Refer to Notes to the Consolidated and Combined Financial Statements
F-5
LSC COMMUNICATIONS, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(in millions)
Cash Flows from Operating Activities
Net (loss) income
Adjustments to reconcile net (loss) income to net cash provided by operating
activities:
Impairment charges
Depreciation and amortization
Provision for doubtful accounts receivable
Share-based compensation
Deferred income taxes
Gain on sale of investments and other assets - net
Other
Changes in operating assets and liabilities - net of acquisitions and dispositions:
Accounts receivable-net
Inventories
Prepaid expenses and other current assets
Accounts payable
Income taxes payable and receivable
Accrued liabilities and other
Net cash provided by operating activities
Cash Flows from Investing Activities
Capital expenditures
Acquisitions of businesses, net of cash acquired
Disposition of business
Net proceeds from sales and purchase of investments and other assets
Other investing activities
Net cash (used in) investing activities
Cash Flows from Financing Activities
Proceeds from issuance of long-term debt
Payments of current maturities and long-term debt
Net (payments) proceeds from credit facility borrowings
Debt issuance costs
Proceeds from issuance of common stock
Payments for repurchase of common stock
Dividends paid
Other financing activities
Payments from RRD-net
Net transfers to Parent and affiliates
Net cash (used in) provided by financing activities
Effect of exchange rate on cash and cash equivalents
Net (decrease) in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash at beginning of year
Cash, cash equivalents and restricted cash at end of period
Reconciliation to the Consolidated Balance Sheets
Cash and cash equivalents
Restricted cash included in prepaid expenses and other current assets
Total cash, cash equivalents and restricted cash shown in the consolidated
statements of cash flows
Supplemental non-cash disclosure:
Issuance of approximately 1.0 million shares of LSC Communications, Inc. common stock
for acquisition of a business
Assumption of warehousing equipment related to customer contract
2018
Year Ended December 31,
2017
2016
$
(23) $
(57) $
6
138
7
12
21
(3)
7
103
(6)
(2)
(38)
11
(71)
162
(63)
(48)
47
9
—
(55)
—
(50)
(9)
(1)
—
(20)
(35)
(1)
—
—
(116)
88
160
3
13
(15)
(10)
5
(7)
5
(1)
103
(7)
(75)
205
(60)
(236)
—
18
—
(278)
65
(118)
75
(1)
18
—
(34)
(2)
3
—
6
(2)
(11)
35
24 $
5
(62)
97
35 $
$
106
—
171
6
8
(18)
—
(2)
(52)
29
(7)
13
1
(24)
231
(48)
(8)
—
6
1
(49)
816
(17)
—
(20)
—
—
(8)
—
(13)
(945)
(187)
(3)
(8)
105
97
As of
December 31, 2017
As of
December 31, 2018
$
21 $
3
$
$
$
24 $
— $
— $
34
1
35
20 $
— $
—
9
Refer to Notes to the Consolidated and Combined Financial Statements
F-6
LSC COMMUNICATIONS, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in millions)
Retained
Common Stock
Additional
Paid-in
Treasury Stock
Accumulated
Other
Net Parent
Earnings
Company (Accumulated Comprehensive
Investment
Deficit)
1,482
(Loss) Income
Total
Equity
Shares
Amount
$
—
—
—
—
—
— $
—
—
—
—
$
97
(934)
122
(767)
— $
9
—
—
—
—
—
—
—
— $
—
—
—
—
—
—
—
— $
—
2
—
—
—
—
— $
—
—
—
(2)
—
—
—
(2) $
—
(20)
—
—
—
—
— $
—
—
—
—
—
—
—
— $
—
—
—
—
(8)
—
1 $
(57)
—
—
—
—
(34)
—
(90) $
(23)
—
(205) $
—
—
(366)
—
—
—
—
40
(531) $
—
—
—
—
—
—
55
(476) $
—
—
—
1,277
106
(934)
(244)
—
—
3
(8)
40
240
(57)
(5)
38
(2)
13
(34)
55
248
(23)
(20)
9
Shares
Amount
$
$
—
—
—
—
—
—
—
—
—
—
32
—
—
—
32 $
—
—
2
1
—
—
—
35 $
—
—
—
—
—
—
—
— $
—
—
—
—
—
—
—
— $
—
—
—
Capital
—
—
—
—
767
—
3
—
—
770
—
(5)
38
—
13
—
—
816
—
—
Balance at December 31, 2015
Net income
Net transfers to parent company
Separation-related adjustments
Reclassification of net parent
investment to
additional paid-in capital
Issuance of common stock upon
separation
Share-based compensation
Cash dividends paid
Other comprehensive income
Balance at December 31, 2016
Net loss
Separation-related adjustments
Issuance of common stock
Issuance of share-based awards,
net of withholdings and
other
Share-based compensation
Cash dividends paid
Other comprehensive income
Balance at December 31, 2017
Net loss
Repurchase of common stock
Revenue recognition
adjustments
Reclassification of tax rate
change to accumulated
deficit
Issuance of share-based awards,
net of withholdings and
other
Share-based compensation
Cash dividends paid
Other comprehensive income
Balance at December 31, 2018
—
—
—
—
9
—
—
—
—
—
—
97
(97)
—
—
—
—
—
35 $
—
—
—
—
— $
—
12
—
—
828
—
—
—
—
2 $
(2)
—
—
—
(24) $
—
—
—
—
— $
—
—
(35)
—
(42) $
—
—
—
(11)
(584) $
(2)
12
(35)
(11)
178
There were dividends declared per common share of $1.04, $1.00 and $0.25 for the years ended December 31, 2018, 2017 and 2016, respectively.
Refer to Notes to the Consolidated and Combined Financial Statements
F-7
LSC Communications, Inc.
Notes to Consolidated and Combined Financial Statements
(tabular amounts in millions, except per share data)
Note 1. Overview and Basis of Presentation
Description
of
Business
The principal business of LSC Communications, Inc., a Delaware corporation, and its direct or indirect wholly-owned subsidiaries (“LSC Communications,”
“the Company,” “we,” “our” and “us”) is to offer a broad scope of traditional and digital print, print-related services and office products. The Company serves the
needs of publishers, merchandisers and retailers worldwide with a service offering that includes e-services, logistics, warehousing and fulfillment and supply chain
management. The Company utilizes a broad portfolio of technology capabilities coupled with consultative attention to clients' needs to increase speed to market,
reduce costs, provide postal savings to customers and improve efficiencies. The Company prints magazines, catalogs, books, directories, and its office products
offerings include filing products, envelopes, note-taking products, binder products, and forms.
Description
of
Separation
On October 1, 2016 (the “separation date”), R. R. Donnelley & Sons Company (“RRD” or the “Parent”) completed the previously announced separation (the
“separation”) into three separate independent publicly-traded companies: (i) its publishing and retail-centric print services and office products business (“LSC
Communications”); (ii) its financial communications services business (“Donnelley Financial Solutions, Inc.” or “Donnelley Financial”) and (iii) a global,
customized multichannel communications management company, which is the business of RRD after the separation. To effect the separation, RRD undertook a
series of transactions to separate net assets and legal entities. RRD completed the distribution (the “distribution”) of 80.75% of the outstanding common stock of
LSC Communications and Donnelley Financial to RRD stockholders on October 1, 2016. RRD retained a 19.25 % ownership stake in both LSC Communications
and Donnelley Financial. On October 1, 2016, RRD stockholders of record as of the close of business on September 23, 2016 (“the record date”) received
one share of LSC Communications common stock and one share of Donnelley Financial common stock for every eight shares of RRD common stock held as of the
record date. On March 28, 2017, RRD completed the sale of approximately 6.2 million shares of LSC Communications common stock, representing its entire
19.25% retained ownership .
Merger
Agreement
On October 30, 2018, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Quad/Graphics, Inc. (“Quad/Graphics”),
and QLC Merger Sub, Inc., a direct, wholly-owned subsidiary of Quad/Graphics (“Merger Sub”). Pursuant to the Merger Agreement, subject to the terms and
conditions therein, Merger Sub will merge with and into the Company (the “Merger”), with the Company continuing as the surviving corporation. Subject to the
terms and conditions set forth in the Merger Agreement, at the effective time of the Merger (the “Effective Time”), each share of the Company’s common stock
issued and outstanding immediately prior to the Effective Time, will be converted into the right to receive 0.625 shares of class A common stock of Quad/Graphics,
without interest and subject to adjustment as provided in the Merger Agreement.
The Company and Quad/Graphics have made customary representations, warranties and covenants in the Merger Agreement. Subject to certain exceptions
outlined in the Merger Agreement, the Company has agreed to covenants relating to the Company’s business during the period between the execution of the Merger
Agreement and the consummation of the Merger, including restrictions on its ability to issue any shares of its capital stock, repurchase any shares of its capital
stock and incurring additional indebtedness outside the ordinary course of business. The Merger Agreement allows the Company to continue paying a regular
quarterly dividend up to $0.26 per share.
On October 30, 2018, concurrently with the execution of the Merger Agreement, the Company and the trustees (the “Trustees”) under the Amended and
Restated Voting Trust Agreement, dated as of June 25, 2010, pursuant to which certain shares of capital stock of Quad/Graphics are held by the Quad/Graphics,
Inc. Voting Trust (the “Voting Trust”), entered into a voting and support agreement (the “Voting Agreement”). Pursuant to the Voting Agreement, the Trustees
will vote all of the shares of Quad/Graphics held by the Voting Trust, which they have, directly or indirectly, the right to vote or direct the voting thereof, in favor
of the issuance of class A shares of Quad/Graphics common stock in the Merger, and against any alternative acquisition proposal involving Quad/Graphics or other
action that would reasonably be expected to breach the obligations of Quad/Graphics under the Merger Agreement or the Trustees under the Voting Agreement, or
otherwise reasonably be expected to delay or adversely affect the Merger or the other transactions contemplated by the Merger Agreement.
F-8
The Company and Quad/Graphics filed notification and report forms in connection with the transactions contemplated by the Merger Agreement with the
U.S. Department of Justice (the “DOJ”) and the U.S. Federal Trade Commission pursuant to the Hart-Scott-Rodino Antitrust Improvement Act of 1976, as amended
(the “HSR Act”) on November 13, 2018. On December 13, 2018, the Company and Quad/Graphics each received a request for additional information and
documentary material (the “Second Request”) from the DOJ in connection with the DOJ’s review of the transactions contemplated by the Merger Agreement.
Issuance of the Second Request extends the waiting period under the HSR Act until 30 days after both the Company and Quad/Graphics have substantially
complied with the Second Request or such later time as the parties may agree with the DOJ, unless the waiting period is terminated earlier by the DOJ. The
Company continues to expect the Merger to be consummated in mid-2019.
Consummation of the Merger remains subject to the adoption of the Merger Agreement by the Company stockholders, the approval by Quad/Graphics
shareholders of the issuance of Quad/Graphics shares as contemplated by the Merger Agreement, the expiration of the waiting period under the HSR Act and other
required regulatory approvals, and the satisfaction or waiver of the other closing conditions specified in the Merger Agreement.
Basis
of
Presentation
The accompanying consolidated and combined financial statements reflect the consolidated balance sheets and statements of operations of the Company as
an independent, publicly traded company for the periods after the separation, and the combined statements of operations of the Company as a combined reporting
entity of RRD for the periods prior to the separation. The consolidated and combined financial statements include the balance sheets, statements of operations and
cash flows in conformity with accounting principles generally accepted in the United States (“GAAP”). All intercompany transactions have been eliminated in
consolidation.
During the third quarter of 2018, management changed the Company’s reportable segments and reporting units and restated prior year amounts to conform
to the new segment structure. Refer to Note 18, Segment
Information
, for more information. Additionally, certain prior year amounts were restated to conform to
the Company’s current statement of operations and cash flows classifications.
The Company adopted Accounting Standards Update No. 2014-09 “Revenue from Contracts with Customers (Topic 606)” (“ASC 606”, or the “standard”)
on January 1, 2018 using the modified retrospective method for all contracts not completed as of the date of adoption. Refer to Note 4, Revenue
Recognition
, for
more information.
The Company retrospectively adopted Accounting Standards Update No. 2017-07 “Compensation—Retirement Benefits (Topic 715): Improving the
Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost” (“ASU 2017-07”) in the first quarter of 2018. As a result of the adoption
of ASU 2017-07, the Company reclassified $46 million and $45 million related to the years ended December 31, 2017 and 2016, respectively, of net pension
income from selling, general and administrative expenses to investment and other income-net, resulting in no impact to net income.
The Company retrospectively adopted Accounting Standards Update No. 2016-18 “Statements of Cash Flows (Topic 230): Restricted Cash” (“ASU 2016-
18”) in the first quarter of 2018. The standard requires amounts generally described as restricted cash and restricted cash equivalents to be included with cash and
cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The standard does not provide a
definition of restricted cash or restricted cash equivalents. The standard requires a retrospective transition method to be applied to each period presented. The
Company included a reconciliation of beginning-of-period and end-of-period amounts in the consolidated and combined statements of cash flows to the
consolidated balance sheets.
Prior
to
the
Separation
The combined financial statements were prepared on a stand-alone basis and were derived from RRD’s consolidated financial statements and accounting
records. They include expenses of RRD that were allocated to LSC Communications for certain corporate functions, including healthcare and pension benefits,
information technology, finance, legal, human resources, internal audit, treasury, tax, investor relations and executive oversight. These expenses were allocated to
the Company on the basis of direct usage, when available, with the remainder allocated on a pro rata basis by revenue, employee headcount, or other measures. The
Company considered the allocation methodologies and results to be reasonable for all periods presented, however, these allocations may not be indicative of the
actual expenses that LSC Communications would have incurred as an independent public company or the costs it may incur in the future.
F-9
The income tax amounts in these combined financial statements were calculated based on a separate income tax return methodology and presented as if the
Company’s operations were separate taxpayers in the respective j urisdictions.
All intracompany transactions between LSC Communications, RRD and Donnelley Financial are considered to be effectively settled in the combined
financial statements at the time the transaction is recorded. The total net effect of the settlement of these intracompany transactions is reflected in the combined
statements of cash flows as a financing activity. Net parent company investment was primarily impacted by contributions from RRD which were the result of
treasury activities and net funding provided by or distributed to RRD. In connection with the separation, the net parent investment balance was transferred to
additional paid-in-capital on October 1, 2016 and is reflected in the consolidated and combined statements of equity.
Note 2. Significant Accounting Policies
Use
of
Estimates
—The preparation of the consolidated and combined financial statements, in conformity with GAAP, requires the extensive use of
management’s estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the
financial statements, and reported amounts of revenue and expenses during the reporting periods.
Actual results could differ from these estimates. Estimates are used when accounting for items and matters including, but not limited to, allowance for
uncollectible accounts receivable, inventory obsolescence, asset valuations and useful lives, employee benefits, self-insurance reserves, taxes, restructuring and
other provisions and contingencies.
Foreign
Operations
—Assets and liabilities denominated in foreign currencies are translated into U.S. dollars at the exchange rates existing at the respective
balance sheet dates. Income and expense items are translated at the average rates during the respective periods. Translation adjustments resulting from fluctuations
in exchange rates are recorded as a separate component of other comprehensive income (loss) while transaction gains and losses are recorded in net earnings.
Fair
Value
Measurements—
Certain assets and liabilities are required to be recorded at fair value on a recurring basis. Fair value is determined based on the
exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability
in an orderly transaction between market participants. The Company records the fair value of its pension plan assets on a recurring basis. Assets measured at fair
value on a nonrecurring basis include long-lived assets held and used, long-lived assets held for sale, goodwill and other intangible assets. The fair value of cash
and cash equivalents, accounts receivable, short-term debt and accounts payable approximate their carrying values. The three-tier value hierarchy, which prioritizes
valuation methodologies based on the reliability of the inputs, is:
Level 1 —
Valuations based on quoted prices for identical assets and liabilities in active markets.
Level 2 —Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in
active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by
observable market data.
Level 3 —Valuations based on unobservable inputs reflecting the Company’s own assumptions, consistent with reasonably available assumptions made by
other market participants.
Revenue
Recognition
— As explained in Note 1, Overview
and
Basis
of
Presentation
, the Company adopted ASC 606, on January 1, 2018 using the
modified retrospective method for all contracts not completed as of the date of adoption. The reported results for 2018 reflect the application of ASC 606 guidance
while the reported results for 2017 were prepared and continue to be reported under previous guidance.
The Company recognizes revenue at a point in time for substantially all customized products. The point in time when revenue is recognized is when
the performance obligation has been completed and the customer obtains control of the products, which is generally upon shipment to the customer (dependent
upon specific shipping terms).
Under agreements with certain customers, custom products may be stored by the Company for future delivery. Based upon contractual terms, the Company
is typically able to recognize revenue once the performance obligation is satisfied and the customer obtains control of the completed product, usually when it
completes production (depending on the specific facts and circumstances). In these situations, the Company may also receive a logistics or warehouse management
fee for the services it provides, which the Company recognizes over time as the services are provided.
F-10
With certain custo mer contracts, the Company is permitted to complete a pre-defined amount of custom products and hold such inventory until the
customer requests shipment (which generally is required to be delivered in the same year as production). For these items, which i nclude consigned inventory, the
Company has the contractual right to receive payment once the production is completed, regardless of the ultimate delivery date. Based upon contractual terms, the
Company recognizes revenue once the performance obligation h as been satisfied and the customer obtains control of the completed products, usually when
production is completed.
In very limited situations, the Company is permitted to produce and hold in inventory a pre-defined amount of custom products as safety stock. Similar to
completed production held in inventory, for these items, the Company has the contractual right to receive payment for the pre-defined amount once the production
is completed, regardless of the ultimate delivery date. Based upon our evaluation of the contractual terms, the Company is able to recognize revenue once the
performance obligation has been satisfied and the customer obtains control of the completed product, usually when production is completed.
Revenue from the Company’s print related services (including list processing, mail sortation services and supply chain management) is recognized as
services are completed over time.
Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods or providing services, which is
based on transaction prices set forth in contracts with customers and an estimate of variable consideration, as applicable.
Variable consideration resulting from volume rebates, fixed rebates, penalties or credits for paper consumption, and sales discounts that are offered within
contracts between the Company and its customers is recognized in the period the related revenue is recognized. Estimates of variable consideration are based on
stated contract terms and an analysis of historical experience. The amount of variable consideration is included in the net sales price only to the extent that it is
probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period.
A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is
satisfied. The majority of our contracts have a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable
from other promises in the contracts and, therefore, not distinct. For contracts with multiple performance obligations, such as co-mail and catalog production, the
transaction price allocated to each performance obligation is based on the price stated in the customer contract, which represents the Company’s best estimate of the
standalone selling price of each distinct good or service in the contract.
Billings for shipping and handling costs are recorded gross. The Company made an accounting policy election under ASC 606 to account for shipping and
handling after the customer obtains control of the good as fulfillment activities rather than as a separate service to the customer. As a result, the Company accrues
the costs of the shipping and handling if revenue is recognized for the related good before the fulfillment activities occur.
Many of the Company’s operations process materials, primarily paper, that may be supplied directly by customers or may be purchased by the Company and
sold to customers as part of the end product. No revenue is recognized for customer-supplied paper, but revenues for Company-supplied paper are recognized on a
gross basis. As a result, the Company’s reported sales and margins may be impacted by the mix of customer-supplied paper and Company-supplied paper.
The Company records taxes collected from customers and remitted to governmental authorities on a net basis.
Contracts do not contain a significant financing component as payment terms on invoiced amounts are typically between 30 to 120 days, based on the
Company’s credit assessment of individual customers, as well as industry expectations.
The timing of revenue recognition, billings and cash collections results in accounts receivable and unbilled receivables (contract assets), and customer
advances and deposits (contract liabilities) on the consolidated balance sheet. Revenue recognition generally coincides with the Company’s contractual right to
consideration and the issuance of invoices to customers. Depending on the nature of the performance obligation and arrangements with customers, the timing of the
issuance of invoices may result in contract assets or contract liabilities. Contract assets related to unbilled receivables are recognized for satisfied performance
obligations for which the Company cannot yet issue an invoice. Contract liabilities result from advances or deposits from customers on performance obligations
not yet satisfied.
Because the majority of the Company’s products are customized, product returns are not significant; however, the Company accrues for the estimated
amount of customer returns at the time of sale.
Refer to Note 4, Revenue
Recognition
, for further discussion .
F-11
By-product
recoveries
—The Company records the sale of by-products as a reduction of cost of sales.
Cash
and
cash
equivalents
—The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents.
Short-term securities consist of investment grade instruments of governments, financial institutions and corporations.
Receivables—
Receivables are stated net of allowances for doubtful accounts and primarily include trade receivables, notes receivable and miscellaneous
receivables from suppliers. No single customer comprised more than 10% of our net sales in 2018, 2017 or 2016. Specific customer provisions are made when a
review of significant outstanding amounts, utilizing information about customer creditworthiness and current economic trends, indicates that collection is doubtful.
In addition, provisions are made at differing rates, based upon the age of the receivable and the Company’s historical collection experience. Refer to Note 5,
Accounts
Receivable,
for details of activity affecting the allowance for doubtful accounts receivable.
Inventories
—Inventories include material, labor and factory overhead and are stated at the lower of cost or market and net of excess and obsolescence
reserves for raw materials and finished goods. Provisions for excess and obsolete inventories are made at differing rates, utilizing historical data and current
economic trends, based upon the age and type of the inventory. Specific excess and obsolescence provisions are also made when a review of specific balances
indicates that the inventories will not be utilized in production or sold.
The cost of 63.0% and 63.9% of the inventories at December 31, 2018 and 2017, respectively, has been determined using the Last-In, First-Out (“LIFO”)
method. The LIFO method is intended to reflect the effect of inventory replacement costs within the consolidated and combined statements of operations;
accordingly, charges to cost of sales generally reflect recent costs of material, labor and factory overhead. The Company uses an external-index method of valuing
LIFO inventories. The remaining inventories, primarily related to certain acquired and international operations, are valued using the First-In, First-Out (“FIFO”) or
specific identification methods.
Long-Lived
Assets
—The Company assesses potential impairments to its long-lived assets if events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Indefinite-lived intangible assets are reviewed annually for impairment or more frequently if events or changes in
circumstances indicate that the carrying value may not be recoverable. An impaired asset is written down to its estimated fair value based upon the most recent
information available. Estimated fair market value is generally measured by discounting estimated future cash flows. Long-lived assets, other than goodwill and
other intangible assets, that are held for sale, are recorded at the lower of the carrying value or the fair market value less the estimated cost to sell.
Property,
plant
and
equipment
—Property, plant and equipment are recorded at cost and depreciated on a straight-line basis over their estimated useful lives.
Useful lives range from 15 to 40 years for buildings, the lesser of 7 years or the lease term for leasehold improvements and from 3 to 15 years for machinery and
equipment. Maintenance and repair costs are charged to expense as incurred. Major overhauls that extend the useful lives of existing assets are capitalized. When
properties are retired or disposed, the costs and accumulated depreciation are eliminated and the resulting profit or loss is recognized in the results of operations.
Goodwill
—Goodwill is assigned to a specific reporting unit, depending on the nature of the acquired company.
Goodwill is reviewed for impairment annually as of October 31 or more frequently if events or changes in circumstances indicate that it is more likely than
not that the fair value of a reporting unit is below its carrying value.
For certain reporting units, the Company may perform a qualitative, rather than quantitative, assessment to determine whether it is more likely than not that
the fair value of a reporting unit is less than its carrying amount. In performing this qualitative analysis, the Company considers various factors, including the
excess of prior year estimates of fair value compared to carrying value, the effect of market or industry changes and the reporting unit’s actual results compared to
projected results. Based on this qualitative analysis, if management determines that it is more likely than not that the fair value of the reporting unit is greater than
its carrying value, no further impairment testing is performed.
For the remaining reporting units, the Company compares each reporting unit’s fair value, estimated based on comparable company market valuations and
expected future discounted cash flows to be generated by the reporting unit, to its carrying value. As a result of the Company’s early adoption of ASU 2017-04
“Intangibles – Goodwill and Other (Topic 350)” during the third quarter of 2017, if the carrying value exceeds the reporting unit’s fair value, the Company
recognizes an impairment charge equal to the amount by which the carrying value exceeds the reporting unit’s fair value not to exceed the total amount of goodwill
recorded.
F-12
Re fer to Note 9 , Restructuring,
Impairment
and
Other
Charges,
for more information regar ding the Company’s annual impairment reviews.
Amortization
—Certain costs to acquire and develop internal-use computer software are capitalized and amortized over their estimated useful life using the
straight-line method, up to a maximum of 3 years. Amortization expense, primarily related to internally-developed software and excluding amortization expense
related to other intangible assets, was $9 million, $5 million and $5 million for the years ended December 31, 2018, 2017 and 2016, respectively. Deferred debt
issuance costs are amortized over the term of the related debt.
Other intangible assets, except for those intangible assets with indefinite lives, are recognized separately from goodwill and are amortized over their
estimated useful lives. Other intangible assets with indefinite lives are not amortized. Refer to Note 8 ,
Goodwill
and
Other
Intangible
Assets,
for further discussion
of other intangible assets and the related amortization expense.
Share-Based
Compensation
— The Company recognizes compensation expense for share-based awards expected to vest on a straight-line basis over the
requisite service period of the award based on their grant date fair value. Prior to the separation, RRD maintained an incentive share-based compensation program
for certain individuals, including certain LSC Communications employees. The share-based compensation expense was allocated to the Company based on the
awards and terms previously granted to the Company’s employees, as well as an allocation of expense related to RRD’s corporate and shared functional
employees. Refer to Note 17, Stock
and
Incentive
Programs,
for further discussion.
Pension
and
Other
Postretirement
Benefits
Plans
— At the separation date, the Company recorded net benefit obligations transferred from RRD. T he
Company records annual income and expense amounts relating to its pension plans based on calculations that include various actuarial assumptions, including
discount rates, mortality, assumed rates of return, compensation increases, and turnover rates. The Company reviews its actuarial assumptions on an annual basis
and makes modifications to the assumptions based on current rates and trends when it is deemed appropriate to do so. The effect of modifications on the value of
plan obligations and assets is recognized immediately within other comprehensive income (loss) and amortized into operating earnings over future periods. The
Company believes that the assumptions utilized in recording its obligations under its plans are reasonable based on its experience, market conditions and input from
its actuaries and investment advisors. Refer to Note 14, Retirement
Plans
, for information on a partial settlement completed by the Company in the first quarter of
2019.
Prior to the separation, certain employees of the Company participated in various pension and postretirement health care plans sponsored by RRD. In the
Company’s combined financial statements, these plans were accounted for as multiemployer benefit plans and no net liabilities were reflected in the Company’s
combined balance sheets as there were no unfunded contributions due at the end of any reporting period. The Company’s statements of operations included expense
allocations for these benefits. These expenses were funded through intercompany transactions with RRD and were reflected within net parent company investment
in LSC Communications. Certain plans in LSC Communications’ Mexico and U.S. operations were direct obligations of LSC Communications and were recorded
in the combined financial statements. Refer to Note 14, Retirement
Plans
, for further discussion.
Taxes
on
Income
—The Company has recorded deferred tax assets related to future deductible items, including domestic and foreign tax loss and credit
carryforwards. The Company evaluates these deferred tax assets by tax jurisdiction. The utilization of these tax assets is limited by the amount of taxable income
expected to be generated within the allowable carryforward period and other factors. Accordingly, management has provided a valuation allowance to reduce
certain of these deferred tax assets when management has concluded that, based on the weight of available evidence, it is more likely than not that the deferred tax
assets will not be fully realized. If actual results differ from these estimates, or the estimates are adjusted in future periods, adjustments to the valuation allowance
might need to be recorded.
Significant judgment is required in determining the provision for income taxes and related accruals, deferred tax assets and liabilities and any valuation
allowance recorded against deferred tax assets. In the ordinary course of business, there are transactions and calculations where the ultimate tax outcome is
uncertain. Additionally, the Company’s tax returns are subject to audit by various U.S. and foreign tax authorities. The Company recognizes a tax position in its
financial statements when it is more likely than not (a likelihood of more than fifty percent) that the position would be sustained upon examination by tax
authorities. This recognized tax position is then measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate
settlement. Although management believes that its estimates are reasonable, the final outcome of uncertain tax positions may be materially different from that
which is reflected in the Company’s consolidated financial statements. The Company classifies interest expense and any related penalties related to income tax
uncertainties as a component of income tax expense. Refer to Note 15 ,
Income
Taxes,
for further discussion.
F-13
Prior to the separation, in the Company’s combined financial statements, income tax expense and deferred tax balances were calculated on a separate return
basis, although with respect to certain entities, the Company’s operations were historically included in the tax returns filed by the respective RRD entities of which
the Company’s business was formerly a part. For periods after the separation, the Company has and will continue to file tax returns on its own behalf. The provision
for income tax and income tax balances after the separation represent the Company's tax liabilities as an independent company.
Comprehensive
Income
(Loss)
—Comprehensive income (loss) for the Company consists of net earnings, unrecognized actuarial gains and losses and
foreign currency translation adjustments. Refer to Note 16 ,
Comprehensive
Income,
for further discussion.
Note 3. Business Combinations and Disposition
2018
Acquisition
On July 2, 2018, the Company completed the acquisition of RRD's Print Logistics business (“Print Logistics”), an integrated logistics services provider to
the print industry with an expansive distribution network. The acquisition enhanced the Company’s logistics service offering. The original total purchase price
was $58 million in cash, which was reduced to $52 million as a result of a $6 million net working capital settlement in the fourth quarter of 2018. As of
December 31, 2018, $21 million was recorded in goodwill related to this acquisition. For the year ended December 31, 2018 , the Company’s consolidated
statement of operations included net sales of $159 million and $5 million of income from operations attributable to the acquisition of Print Logistics.
2018
Disposition
On September 28, 2018, the Company completed the sale of its European printing business, which included web offset manufacturing facilities, a logistics
and warehousing site and a location dedicated to premedia services, for proceeds of $47 million. For the nine months ended September 30, 2018, the European
printing business had $178 million and $3 million of net sales and income from operations, respectively. See Note 15, Income
Taxes
, for information related to a
$25 million non-cash provision recorded primarily for the write-off of a deferred tax asset associated with the disposition.
2017
Acquisitions
On November 29, 2017, the Company acquired The Clark Group, Inc. (“Clark Group”), a third-party logistics provider of distribution, consolidation,
transportation management and international freight forwarding services. The acquisition enhanced the Company’s logistics service offering. The total purchase
price was $25 million in cash, of which $16 million was recorded in goodwill.
On November 9, 2017, the Company acquired Quality Park, a producer of envelopes, mailing supplies and assorted packaging items. The acquisition
enhanced the Company’s office products offerings. The total purchase price was $41 million in cash, resulting in a bargain purchase gain of $2 million. We
reassessed the recognition and measurement of identifiable assets and liabilities acquired and concluded that all acquired assets and liabilities were recognized and
that the valuation procedures and resulting estimates were appropriate.
On September 7, 2017, the Company acquired Publishers Press, LLC, a printing provider with capabilities such as web-offset printing, prepress and
distribution services for magazines and retail brands. The acquisition enhanced the Company’s printing capabilities. The total purchase price was $68 million in
cash, of which $1 million was recorded in goodwill.
On August 21, 2017, the Company acquired the assets of NECI, LLC (“NECI”), a supplier of commodity and specialty filing supplies . The acquisition
enhanced the Company’s office products offerings. The purchase price, which included the Company’s estimate of contingent consideration, was $6 million in
cash, of which $1 million was recorded in goodwill.
On August 17, 2017, the Company acquired CREEL Printing, LLC (“CREEL”), an offset and digital printing company. The acquisition enhanced the
capabilities of the Company’s offset and digital production platform and brought enhanced technologies to support our clients’ evolving needs, specifically in the
magazine media and retail marketing industries. CREEL’s capabilities include full-color web and sheetfed printing, regionally distributed variable digital
production, large-format printing, and integrated digital solutions. The purchase price, which included the Company’s estimate of contingent consideration, was
$79 million in cash, of which $26 million was recorded in goodwill.
F-14
On July 28, 2017, the Company acquired Fairrington Transportation Corp., F.T.C. Transport, Inc. and F.T.C. Services, Inc. (“Fairrington”), a full-service,
printer-independent mailing logistics provider in the United States. The acquisition enhanced the Company’s logistics service offering. The purchase price was $19
million in cash and approximately 1.0 million shares of LSC Communications common stock, for a total transaction value of $39 million. Of the total purchase
price, $22 million was recorded in goodwill.
On March 1, 2017, the Company acquired HudsonYards Studios, LLC (“HudsonYards”), a digital and print premedia production company that
provides high-quality creative retouching, computer-generated imagery, mechanical creation, press-ready file preparation, and interactive production services. The
acquisition enhanced the Company’s digital and premedia capabilities. The purchase price for HudsonYards was $3 million in cash, of which $2 million was
recorded in goodwill.
Refer below for a summary of the segments and reporting units where the acquisitions are included as of December 31, 2018.
Print Logistics
Clark Group
Quality Park
Publishers Press
NECI
CREEL
Fairrington
HudsonYards
Segment
Magazines, Catalogs and Logistics
Magazines, Catalogs and Logistics
Office Products
Magazines, Catalogs and Logistics
Office Products
Magazines, Catalogs and Logistics
Magazines, Catalogs and Logistics
Magazines, Catalogs and Logistics
Reporting Unit
Logistics
Logistics
Office Products
Magazines and Catalogs
Office Products
Magazines and Catalogs
Logistics
Magazines and Catalogs
The acquisitions were recorded by allocating the cost of the acquisitions to the assets acquired, including other intangible assets, based on their estimated
fair values at the acquisition date. The excess of the cost of the acquisitions over the net amounts assigned to the fair value of the assets acquired was recorded in
goodwill. The goodwill is primarily attributable to the synergies expected to arise as a result of the acquisitions.
The tax deductible goodwill related to the Print Logistics, Clark Group, Quality Park, Publishers Press, NECI, CREEL, Fairrington, and HudsonYards
acquisitions was $63 million.
The purchase price allocations for all acquisitions are final as of December 31, 2018. There were no significant changes to the purchase price allocations for
the 2017 acquisitions as of December 31, 2018 compared to the disclosed purchase price allocations in the Company’s annual report on Form 10-K for the year
ended December 31, 2017. As previously mentioned, there was a $6 million net working capital settlement related to Print Logistics in the fourth quarter of 2018.
The purchase price allocations for several of the acquisitions noted above were as follows:
Accounts Receivable
Inventories
Prepaid expenses and other current
assets
Property, plant and equipment
Other intangible assets
Other noncurrent assets
Goodwill (bargain purchase)
Accounts payable and accrued liabilities
Deferred taxes - net
Purchase price, net of cash acquired
Less: value of common stock issued
Less: accrued but unpaid contingent
consideration
Net cash paid
Print Logistics
$
40 $
—
1
8
17
—
21
(35)
—
52 $
—
—
52 $
$
$
Clark Group
6 $
Quality Park Publishers Press
19 $
27
27 $
13
—
1
8
1
—
(2)
(11)
(2)
41 $
—
—
41 $
1
36
—
1
1
(14)
—
65 $
—
—
65 $
—
—
14
—
16
(8)
(3)
25 $
—
—
25 $
F-15
CREEL
Fairrington
12 $
5
1
20
23
—
26
(9)
—
78 $
—
1
77 $
6
—
—
6
17
1
22
(4)
(9)
39
20
—
19
In accordance with ASC 350, I
ntangibles
—
Goodwill
and
Other
, the Company is required to test its goodwill for impairment annually, or more often if
there is an indication that goodwill might be impaired. Given the historical valuations of the Company’s former magazines, catalogs and retail inserts reporting unit
that have resulted in goodwill impairment in prior years, combined with the change in the composition of the carrying value of the reporting unit due to the
acquisitions completed during the year ended December 31, 2017, the Company determined it necessary to perform goodwill impairment reviews on this former
reporting unit as of September 30, 2017, and again as of December 31, 2017 due to the ac quisitions that were completed in the second half of 2017 .
As a result of the goodwill impairment tests, and consistent with prior goodwill impairment tests, the Company’s former magazines, catalogs and retail
inserts reporting unit’s fair value continued to be at a value below its carrying value. This is primarily due to the negative revenue trends experienced in recent
years that are only partially offset by the impact of the new acquisitions. The charges to recognize the impairment of goodwill in the former magazines, catalogs
and retail inserts reporting unit were $55 million and $18 million during the three months ended September 30, 2017 and December 31, 2017, respectively. The
total charge was $73 million for 2017, resulting in zero goodwill associated with the former magazines, catalogs and retail inserts reporting unit as of December
31, 2017.
As a result of the Company’s change in reportable segments and reporting units during the third quarter of 2018, as discussed in Note 18, Segment
Information
, the impairment charges recognized during the three months ended September 30, 2017 and the year ended December 31, 2017 in the Company’s
former magazines, catalogs and retail inserts reporting units were restated in 2018 to the reporting units below:
Three Months Ended
September 30, 2017
Year Ended
December 31, 2017
Magazines and Catalogs
Logistics
Other
Total
$
$
28 $
22
5
55 $
30
38
5
73
The Company performed its annual goodwill tests in the fourth quarter of 2018 based on the new reporting unit structure.
The fair values of goodwill, other intangible assets and property, plant and equipment associated with the acquisitions were determined to be Level 3 under
the fair value hierarchy, which included discounted cash flow analyses, comparable marketplace fair value data and management’s assumptions for the goodwill
impairment charges. Property, plant and equipment values were estimated using either the cost or market approach, if a secondhand market existed. The following
table presents the fair value, valuation techniques and related unobservable inputs for these Level 3 measurements associated with the 2018 Print Logistics
acquisition:
Customer relationships
Fair Value
Valuation Technique
$
17 Multi-period excess earnings
Unobservable Input
Existing customer growth rate
method
Attrition rate
Discount rate
Value
(3.5%)
7.5%
18.0%
For the years ended December 31, 2018, 2017 and 2016, the Company recorded $2 million, $5 million and a de minimis amount, respectively, associated
with the completed and contemplated acquisitions within selling, general and administrative expenses in the consolidated and combined statements of operations.
Pro
forma
results
The following unaudited pro forma financial information for the year ended December 31, 2018 and 2017 presents the consolidated statements of operations
of the Company and the acquisitions described above, as if the acquisitions had occurred as of January 1 of the year prior to the acquisitions.
F-16
The unaudited pro forma financial informati on is not intended to represent or be indicative of the Com pany’s consolidated statements of operations that
would have been reported had these acquisitions been completed as of the beginning of the period presented and should not be taken as indicative of the Company’s
future consolidated statements of operations . Pro forma adjustments are tax-effected at the applicable statutory tax rates.
Net sales
Net (loss)
Net (loss) per common share
Basic
Diluted
Year Ended December 31,
2018
2017
$
$
$
3,911 $
(26)
(0.77) $
(0.77) $
4,114
(56)
(1.66)
(1.66)
The following table outlines unaudited pro forma financial information for the years ended December 31, 2018 and 2017:
Amortization of purchased intangibles
$
19 $
24
Year Ended December 31,
2018
2017
Additionally, the nonrecurring pro forma adjustments affecting net income for the years ended December 31, 2018 and 2017 were as follows:
Restructuring, impairment and other
charges, pre-tax
Other pro forma adjustments, pre-tax
Income taxes
Acquisition-related expenses, pre-tax
Inventory fair value adjustments,
pre-tax
Year Ended December 31,
2018
2017
$
— $
—
—
—
—
(1)
2
3
(1)
2
Note: A negative number in the table above represents a decrease to income in pro forma net income.
Note 4. Revenue Recognition
Financial Statement Impact of Adopting ASC 606
As part of the adoption of ASC 606, the Company assessed all aspects of the standard’s potential impact and focused further assessment on customized
products, deferred revenue and certain items in inventory, which are areas that were determined could have had a material impact on the Company’s accounting for
revenue. Potential impacts of other aspects of the standard have not had a material impact to the Company’s accounting for revenue.
The Company completed the evaluation of whether the accounting for revenue from customized products should be over time or at a point in time under the
standard. Based on analysis of specific terms associated with current customer contracts, the Company concluded that revenue should be recognized at a point in
time for substantially all customized products. This treatment is consistent with revenue recognition under previous guidance, where revenue was recognized when
the products were completed and shipped to the customer (dependent upon specific shipping terms). Any contracts whereby revenue for customized products
should be recognized over time, as opposed to a point in time, are immaterial due to the de minimis nature of any particular order under such contracts in
production at any given point in time. As revenue recognition is dependent upon individual contractual terms, the Company will continue its evaluation of any new
or amended contracts entered into, including contracts that the Company might assume as a result of acquisition activity.
F-17
With respect to deferred revenue and certain items in inventory, the Company determined ASC 606 impacted the following situations:
• Completed production billed to the customer but not yet shipped: Under previous guidance, for a majority of these situations the Company deferred
revenue for completed production items for which the customer had requested to be billed (or for which the Company is entitled to bill under the
contract), but for which the production items had not yet shipped to the customer. Under ASC 606, based upon our evaluation of the contractual terms,
the Company is typically able to recognize revenue once it completes production depending on the specific facts and circumstances.
• Completed production held in inventory (including consigned inventory): With certain customer contracts, the Company is permitted to complete a pre-
defined amount of product and hold such inventory until the customer requests shipment (which generally is required to be delivered in the same year as
production). For these items, the Company has the contractual right to receive payment once the production is completed, regardless of the ultimate
delivery date. Under previous guidance, the Company held this as inventory and recognized revenue upon shipment to the customer. Under ASC 606,
based upon our evaluation of the contractual terms, the Company is able to recognize revenue once it completes production.
• Safety stock: In very limited situations, the Company is permitted to produce and hold in inventory a pre-defined amount of safety stock. Similar to
completed production held in inventory, for these items the Company has the contractual right to receive payment for the pre-defined amount once the
production is completed, regardless of the ultimate delivery date. Under previous guidance, the Company held this as inventory and recognized revenue
upon shipment to the customer. Under ASC 606, based upon our evaluation of the contractual terms, the Company is able to recognize revenue once it
completes production.
Upon adoption of ASC 606, the Company eliminated any deferred revenue and inventory associated with the above three categories against its accumulated
deficit within total equity. Based upon the balances that existed as of December 31, 2017, the Company recorded adjustments to the following accounts as of
January 1, 2018:
Assets
Receivables, net
Inventories
Deferred income taxes
Liabilities
Accrued liabilities
Equity
(Accumulated deficit) retained earnings
As Reported
December 31,
2017
Adjustments
Adoption of
ASC 606
Adjusted
January 1,
2018
$
$
$
$
727
238
51
$
32
(32)
(3)
239
$
(12)
$
(90)
$
9
$
759
206
48
227
(81)
As a result of the above adjustments, total assets decreased by $3 million, total liabilities decreased by $12 million and total equity increased by $9
million. The equity adjustment was net of tax of $3 million.
The following tables compare impacted accounts from the reported consolidated balance sheet and statement of operations, as of and for the year ended
December 31, 2018, to their pro forma amounts had the previous guidance been in effect:
Assets
Receivables, net
Inventories
Deferred income taxes
Liabilities
Accounts payable
Accrued liabilities
Equity
Accumulated deficit
December 31, 2018
Adjustments
Adoption of
As if the
previous standard
As Reported
ASC 606
was in effect
$
$
$
F-18
$
617
197
27
372 $
199
$
(44)
39
4
(1) $
12
573
236
31
371
211
(42)
$
(12)
$
(54)
The difference between the reported balances and the pro forma balances above is due to the deferred revenue and inventory in the pro forma balances
associated with completed production billed to the customer but not yet shipped, completed production held in inventory (including consigned inventory) and safety
stock.
Year Ended
December 31, 2018
Adjustments
from
Adoption of
ASC 606
As if the
previous
standard
was in effect
(8) $
(4)
(1)
(0.09) $
(0.09)
3,818
3,279
32
(0.76)
(0.76)
$
$
As Reported
3,826 $
3,283
33
(0.67) $
(0.67)
Net sales
Cost of sales
Income tax expense (benefit)
Net (loss) per common share
Basic net (loss) per share
Diluted net (loss) per share
The differences between the reported balances and the pro forma balances above are due to the following impacts:
• The completed production items for which control has passed to the customer and the customer had requested to be billed (or for which the Company is
entitled to bill under the contract), but for which the production items had not yet shipped: Under ASC 606, the Company recognizes revenue for items
for which control has passed to the customer, which is typically once it completes production, while under previous guidance revenue would have been
deferred until the produced items were shipped.
• Variable consideration relating to paper over-consumption penalties and under-consumption credits that are part of certain customer contracts and were
previously recorded in cost of sales are now recorded within revenue.
• The adoption of ASC 606 had no impact on the Company’s cash flows from operating activities.
F-19
Disaggregated Revenue
The following table provides information about disaggregated revenue by major products/service lines and timing of revenue recognition, and includes a
reconciliation of the disaggregated revenue with reportable segments.
Year Ended
December 31, 2018
Magazines,
Catalogs
and
Logistics
Book
Office
Products
Other
Corporate
Total
$
$
$
$
$
$
— $
1,055 $
— $
— $
— $
1,055
1,497 $
— $
— $
338 $
— $
1,835
1,497
—
—
—
—
—
174
164
270 $
— $
— $
— $
— $
— $
— $
106 $
—
—
—
—
—
—
92
14
—
—
— $
— $
—
—
1,671
164
270
106
92
14
— $
1,767 $
— $
1,055 $
562 $
562 $
— $
444 $
(2) $
(2) $
560
3,826
Major Products / Service Lines
Book (a)
Magazines and Catalogs (b)
North
America
Europe
Logistics
Directories
North
America
Europe
Office Products
Total
Timing of Revenue Recognition
Products and services transferred at a point in time $
Products and services transferred over time
Total
$
1,371 $
396
1,767 $
929 $
126
1,055 $
562 $
—
562 $
367 $
77
444 $
(2) $
—
(2) $
3,227
599
3,826
(a) Includes e-book formatting and supply chain management associated with book production
(b) Includes premedia and co-mail
F-20
Contract Balances
The following table provides changes in contract assets and liabilities during the year ended December 31, 2018.
Short-Term Contract
Assets
Long-Term
Contract Assets
Contract Liabilities
$
Beginning Balance, January 1, 2018
Additions to unbilled accounts receivable
Unbilled accounts receivable recognized in
trade receivables
Payment of contract acquisition costs
Amortization of contract acquisition costs
Revenue recognized that was included in
contract liabilities as of January 1, 2018
Increases due to cash received
32 $
42
(30)
—
—
—
—
36 $
—
—
5
(11)
—
—
Ending Balance, December 31, 2018
$
44 $
30 $
21
—
—
—
—
(18)
13
16
The trade receivables balances as of January 1, 2018 and December 31, 2018 were $647 million and $488 million, respectively.
Contract Acquisition Costs
In connection with the adoption of ASC 606, the Company is required to capitalize certain contract acquisition costs. As of December 31, 2017 under
previous guidance, the Company had capitalized $36 million in contract acquisition costs related to contracts that were not completed. The Company did not have
any other costs that were required to be capitalized on January 1, 2018 with the adoption of ASC 606. For contracts that have a duration of less than one year, the
Company follows the ASC 606 practical expedient approach and expenses these costs when incurred; for contracts with life exceeding one year, the Company
records these costs in proportion to each completed contract performance obligation. For the year ended December 31, 2018, the amount of amortization was $11
million and there was no impairment loss in relation to costs capitalized.
Note 5. Accounts Receivable
Transactions affecting the allowances for doubtful accounts receivable balance during the years ended December 31, 2018, 2017 and 2016 were as follows:
Balance, beginning of year
Provisions charged to expense
Write-offs and other
Balance, end of year
Note 6. Inventories
$
$
2018
2017
2016
11 $
7
(4)
14 $
10 $
3
(2)
11 $
11
6
(7)
10
The components of the Company’s inventories, net of excess and obsolescence reserves for raw materials and finished goods, at December 31, 2018 and
2017 were as follows:
Raw materials and manufacturing supplies
Work in process
Finished goods
LIFO reserve
Total
2018
2017
119
50
80
(52)
197
$
$
114
69
112
(57)
238
$
$
F-21
During the years ended December 31, 2018, 2017 and 2016 , the Company recognized a LIFO benefit of $5 million, $1 million and $1 million,
respectively.
Note 7. Property, Plant and Equipment
The components of the Company’s property, plant and equipment at December 31, 2018 and 2017 were as follows:
Land
Buildings
Machinery and equipment
Less: Accumulated depreciation
Total
2018
2017
$
$
43 $
709
3,759
4,511
(4,003)
508 $
45
739
4,012
4,796
(4,220)
576
During the years ended December 31, 2018, 2017 and 2016, depreciation expense was $112 million, $137 million and $149 million, respectively.
Refer to Note 9, Restructuring,
Impairment
and
Other
Charges
, for information on impairment recorded during the years ended December 31, 2018 and
2017. There was no impairment recoded during the year ended December 31, 2016.
Assets
Held
for
Sale
Primarily as a result of restructuring actions, certain facilities and equipment are considered held for sale. The net book value of assets held for sale was $3
million and $7 million at December 31, 2018 and 2017, respectively. These assets were included in other current assets in the consolidated balance sheets at the
lower of their historical net book value or their estimated fair value, less estimated costs to sell.
Note 8. Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill for the years ended December 31, 2018 and 2017 were as follows:
Net book value as of January 1, 2017
Goodwill
Accumulated impairment losses
Total
Acquisition
Impairment charges
Net book value as of December 31, 2017
Goodwill
Accumulated impairment losses
Total
Acquisition
Net book value as of December 31, 2018
Goodwill
Accumulated impairment losses
Total
Magazines,
Catalogs
and Logistics
Book
Office Products
Other
Total
$
$
$
434
(434)
—
68
(68)
502
(502)
—
21
523
(502)
21
$
$
$
354
(303)
51
—
—
354
(303)
51
—
354
(303)
51
$
$
$
109
(79)
30
1
—
110
(79)
31
—
110
(79)
31
$
$
$
64
(61)
3
2
(5)
78
(78)
—
—
5
(5)
—
$
$
$
961
(877)
84
71
(73)
1,044
(962)
82
21
992
(889)
103
The goodwill balances for the Other grouping were impacted by changes in foreign currencies, which net to $0 on a net goodwill basis.
F-22
As a result of the Company’s disposition of its European printing business on September 28, 2018, Europe’s goodwill (included in the Other grouping) as of
the disposition date, $73 million of gross goodwill and ac cumulated impairment losses for a net $0 balance, was written off on the disposition date.
The components of other intangible assets at December 31, 2018 and 2017 were as follows:
December 31, 2018
December 31, 2017
Gross Carrying
Amount
Accumulated
Amortization
Net Book
Value
Gross Carrying
Amount
Accumulated
Amortization
Net Book
Value
Customer relationships
Trade names
Total amortizable other intangible
assets
Indefinite-lived trade names
Total other intangible assets
$
$
268 $
9
277
22
299 $
(137) $
(6)
(143)
—
(143) $
131 $
3
134
22
156 $
256 $
9
265
24
289 $
(125) $
(4)
(129)
—
(129) $
131
5
136
24
160
The Company recorded customer relationships additions to other intangible assets of $17 million for the Print Logistics acquisition during the year ended
December 31, 2018, that has an amortization period of 10 years.
Amortization expense for other intangible assets was $18 million, $18 million and $16 million for the years ended December 31, 2018, 2017 and 2016,
respectively.
The following table outlines the estimated annual amortization expense related to other intangible assets as of December 31, 2018:
For the year ending December 31,
2019
2020
2021
2022
2023
2024 and thereafter
Total
$
$
Amount
17
17
15
15
14
56
134
Refer to Note 9 , Restructuring,
Impairment
and
Other
Charges
, for discussion of goodwill and intangibles impairment charges recorded during the years
ended December 31, 2018 and 2017.
Note 9. Restructuring, Impairment and Other Charges
Calendar Year 2018
Employee
Terminations
Other
Total
Restructuring
Restructuring
Charges
Charges
Impairment
Other
Charges
Total
Magazines, Catalogs and Logistics
Book
Office Products
Other
Corporate
Total
$
$
$
10
—
1
1
2
14 $
$
8
4
2
—
—
14 $
F-23
18
$
4
3
1
2
28 $
$
2
—
3
—
—
5 $
—
$
2
—
—
—
2 $
20
6
6
1
2
35
Restructuring
Charges
For the year ended December 31, 2018, the Company incurred employee-related charges of $14 million for an aggregate of 811 employees, of whom 282
were terminated as of or prior to December 31, 2018, primarily related to two facility closures in the Magazines, Catalogs and Logistics segment, one facility
closure in the Office Products segment and the reorganization of certain business units and corporate functions. The Company also incurred other restructuring
charges of $14 million primarily due to charges related to facility costs, a loss related to the Company's disposition of its retail offset printing facilities and pension
withdrawal obligations related to facility closures.
Impairment
Charges
For the year ended December 31, 2018, the Company recorded the following net impairment charges, which are explained further below:
Magazines, Catalogs and Logistics
Office Products
Total
$
$
3 $
—
3 $
— $
3
3 $
(1) $
—
(1) $
2
3
5
Property, Plant
Other Intangible
and Equipment
Assets
Goodwill
Total
Property,
Plant
and
Equipment
The net charges of $3 million primarily related to machinery and equipment associated with facility closings in the Magazines, Catalogs and Logistics
segment.
Other
Intangible
Assets
–
Indefinite-Lived
Tradenames
The Company recorded charges of $3 million for the impairment of certain acquired indefinite-lived tradenames intangible assets in the Office Products
segment. The impairment of the indefinite-lived tradenames intangible assets resulted from negative revenue trends experienced in recent years and lower
expectations of future revenue to be derived from those tradenames. The impairment was determined using Level 3 inputs and estimated based on cash flow
analyses, which included management’s assumptions related to future revenues and profitability. After recording the impairment charges, remaining indefinite-
lived tradenames in the Office Products segment is $21 million.
Goodwill
The year ended December 31, 2018 included a reduction of $1 million of goodwill impairment charges as a result of a $1 million adjustment of previously
recorded goodwill associated with the 2017 acquisitions.
F-24
Fair
Value
Measurements
The fair value as of the measurement date, net book value as of the end of the year and related impairment charge for assets measured at fair value on a
nonrecurring basis subsequent to initial recognition during the year ended December 31, 2018 is disclosed below.
Year Ended
December 31, 2018
As of
December 31, 2018
Impairment
Charge
Fair Value
Measurement
(Level 3)
Net Book
Value
Long-lived assets held and used
Indefinite-lived tradenames
Total
$
$
3 $
3
6 $
— $
21
21 $
—
21
21
The table above excludes the reduction of $1 million of goodwill impairment charges mentioned in the above section Goodwill
.
The fair values of the buildings and machinery and equipment were determined to be Level 3 under the fair value hierarchy and were estimated based on
discussions with real estate brokers, review of comparable properties, if available, discussions with machinery and equipment brokers, dealer quotes and internal
expertise related to the current marketplace conditions.
The Company’s accounting and finance management determines the valuation policies and procedures for Level 3 fair value measurements and is
responsible for the development and determination of unobservable inputs. The following table presents the fair value, valuation techniques and related
unobservable inputs for these Level 3 measurements for the year ended December 31, 2018:
Indefinite-lived tradenames
Other
Charges
Fair Value
$
22
Valuation
Technique
Relief-from-
royalty
Unobservable
Input
Royalty Rate
Range
0.5% - 1.5%
For the year ended December 31, 2018, the Company recorded other charges of $2 million for multiemployer pension plan withdrawal obligations unrelated
to facility closures. The total liability for the withdrawal obligations associated with the Company’s decision to withdraw from certain multiemployer pension
plans included in accrued liabilities and restructuring and multiemployer pension plan liabilities are $3 million and $19 million, respectively, at December 31,
2018. Refer to Note 14, Retirement
Plans
, for further discussion of multi-employer pension plans.
The Company’s withdrawal liabilities could be affected by the financial stability of other employers participating in such plans and any decisions by those
employers to withdraw from such plans in the future. While it is not possible to quantify the potential impact of future events or circumstances, reductions in other
employers’ participation in multiemployer pension plans, including certain plans from which the Company has previously withdrawn, could have a material effect
on the Company’s previously estimated withdrawal liabilities and consolidated statements of operations, balance sheets and cash flows.
Calendar Year 2017
Other
Total
Employee
Terminations
Restructuring
Charges
Restructuring
Charges
Impairment
Other
Charges
Total
Magazines, Catalogs and Logistics
Book
Office Products
Other
Corporate
Total
$
$
6 $
5
1
1
—
13 $
4 $
2
—
1
17
24 $
F-25
10 $
7
1
2
17
37 $
75 $
5
3
5
—
88 $
1 $
3
—
—
—
4 $
86
15
4
7
17
129
Restructuring
Charges
For the year ended December 31, 2017, the Company incurred employee-related restructuring charges of $13 million for an aggregate of 776 employees,
substantially all of whom were terminated as of or prior to December 31, 2018. These charges primarily related to three facility closures in the Book segment, one
facility closure in the Magazines, Catalogs and Logistics segment and the reorganization of certain business units. The Company also incurred other restructuring
charges of $24 million primarily related to the exit from certain operations and facilities, as well as charges as a result of a terminated supplier contact.
Impairment
Charges
For the year ended December 31, 2017, the Company recorded the following net impairment charges, which are explained further below:
Property, Plant
and Equipment
Other
Intangible
Assets
Magazines, Catalogs and Logistics
Book
Office Products
Other
Total
$
$
7
—
—
—
7 $
— $
5
3
—
8 $
Goodwill
Total
68 $
—
—
5
73 $
75
5
3
5
88
Property,
Plant
and
Equipment
The net charges of $7 million primarily related to impairment of machinery and equipment in the Company’s magazines and catalogs reporting unit, which
is included in the Magazines, Catalogs and Logistics segment, resulting from general volume declines.
Other
Intangible
Assets
-
Indefinite-Lived
Tradenames
The Company also recorded charges of $8 million for the impairment of certain acquired indefinite-lived tradename intangible assets, including $3 million
in the Office Products segment and $5 million in the Book segment. The impairment of the indefinite-lived tradename intangible assets resulted from negative
revenue trends experienced in recent years and lower expectations of future revenue to be derived from those tradenames. The impairment was determined using
Level 3 inputs and estimated based on cash flow analyses, which included management’s assumptions related to future revenues and profitability. After recording
the impairment charges, remaining indefinite-lived tradenames in the Office Products and Book segments were $23 million and $1 million, respectively.
Goodwill
With respect to the goodwill impairment charges, as explained in Note 3, Business
Combinations
and
Disposition
, the Company completed several
acquisitions during the year ended December 31, 2017, five of which were included in the Company’s former magazines, catalogs and retail inserts reporting unit,
which was part of the former Print segment. The goodwill arising from each acquisition was determined on a stand-alone basis for each particular transaction based
on each transaction’s individual facts and circumstances, in accordance with ASC 805, Business
Combinations
. Per the guidance in ASC 805, goodwill was
recognized on each transaction given that the consideration transferred for each transaction was in excess of the net amounts of the identifiable assets acquired and
the liabilities assumed. Furthermore, the consideration transferred, the identifiable assets acquired and the liabilities assumed were all measured at the acquisition-
date fair value, which is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction, between market participants, at the
acquisition date.
F-26
In accordance with ASC 350, Intangibles
—
Goodwill
and
Other
, the Company is required to test its goodwill for impairment annually, or more often if
there is an indication that goodwill might be impaired. For purposes of the goodwill impair ment test, goodwill is not tested based upon the individual transactions
that gave rise to the goodwill, but rather based upon the reporting unit’s total goodwill and the characteristics of the reporting unit in which the goodwill
resides. Therefore, the level at which goodwill is tested for impairment is different from the level that originally created the goodwill. In the Company’s case, the
test is performed based upon the total carrying value of the former magazines, catalogs and retail inserts report ing unit and that former reporting unit’s total
implied fair value. Carrying value is determined based upon the net book value of assets and liabilities required for the operations of the former magazines,
catalogs and retail inserts reporting unit, while fair value is determined based upon a discounted cash flows analysis of the former magazines, catalogs and retail
inserts reporting unit. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized in an amount equ al to that excess, limited
to the total amount of goodwill allocated to that reporting unit.
Prior to the acquisitions completed within the last twelve months, the former magazines, catalogs and retail inserts reporting unit had zero goodwill
recorded, as goodwill associated with this reporting unit had been fully impaired in prior years. Given the historical valuations of the former magazines, catalogs
and retail inserts reporting unit that have resulted in goodwill impairment in prior years, combined with the change in the composition of the carrying value of the
former reporting unit due to the acquisitions completed as of September 30, 2017, the Company determined it necessary to perform an interim goodwill impairment
review on this former reporting unit as of September 30, 2017.
As a result of the interim goodwill impairment test, and consistent with prior goodwill impairment tests, the former magazines, catalogs and retail inserts
reporting unit’s fair value continued to be at a value below its carrying value. This is primarily due to the negative revenue trends experienced in recent years that
are only partially offset by the impact of the new acquisitions. As such, the Company recorded charges of $55 million to recognize the impairment of goodwill in
this former reporting unit as of September 30, 2017. The goodwill impairment charges were determined using Level 3 inputs, including discounted cash flow
analyses, comparable marketplace fair value data and management’s assumptions.
For the quarter ended December 31, 2017, the Company completed the acquisition of the Clark Group that became part of the former magazines, catalogs
and retail inserts reporting unit. Given the amount by which the carrying amount of the former reporting unit exceeded its fair value in the goodwill impairment test
performed as of September 30, 2017, combined with the fact that management’s assessment of the fair value did not materially change since that date, an additional
goodwill impairment charge of $18 million was recorded in the period ended December 31, 2017, which represents all of the goodwill arising from the Clark Group
acquisition and additional amounts related to acquisitions completed during the quarter ended September 30, 2017.
The total charge to recognize the impairment of goodwill in the former magazines, catalogs and retail inserts reporting unit was $73 million for 2017,
resulting in zero goodwill associated with former the magazines, catalogs and retail inserts reporting unit as of December 31, 2017. Refer to Note 3, Business
Combinations
and
Disposition
, for a summary of these charges by reporting unit as of December 31, 2017.
Fair
Value
Measurement
The fair value as of the measurement date, net book value as of the end of the year and related impairment charge for assets measured at fair value on a
nonrecurring basis subsequent to initial recognition during the year ended December 31, 2017 is disclosed below.
Long-lived assets held and used
Goodwill
Indefinite-lived tradenames
Total
Year Ended
December 31, 2017
As of
December 31, 2017
Impairment
Charge
Fair Value
Measurement
(Level 3)
Net Book
Value
$
$
7 $
73
8
88 $
— $
—
23
23 $
—
—
23
23
The fair values of the buildings and machinery and equipment were determined to be Level 3 under the fair value hierarchy and were estimated based on
discussions with real estate brokers, review of comparable properties, if available, discussions with machinery and equipment brokers, dealer quotes and internal
expertise related to the current marketplace conditions.
F-27
The Company’s accounting and finance management determines the valuation policies and procedures for Level 3 fair value measurements and is
responsible for the development and determination of unobservable inputs. The following table presents the fair value, valuation techniques and related
unobservable inputs for these Level 3 measurements for the year ended December 31, 2017:
Indefinite-lived tradenames
Other
Charges
Fair Value
$
24
Valuation
Technique
Relief-from-
royalty
Unobservable
Input
Royalty Rate
Range
0.5% - 1.5%
For the year ended December 31, 2017, the Company recorded other charges of $4 million for multiemployer pension plan withdrawal obligations unrelated
to facility closures. The total liability for the withdrawal obligations associated with the Company’s decision to withdraw from certain multiemployer pension
plans included in accrued liabilities and restructuring and multiemployer pension plan liabilities are $6 million and $37 million, respectively, at December 31,
2017. Refer to Note 14, Retirement
Plans
, for further discussion of multi-employer pension plans.
Calendar Year 2016
Magazines, Catalogs and Logistics
Book
Other
Corporate
Total
$
$
Restructuring
Charges
Other
Total
Employee
Terminations
Restructuring
Charges
Restructuring
Charges
Impairment
Other
Charges
Total
3 $
1
2
2
8 $
— $
3
3
1
7 $
3 $
4
5
3
15 $
— $
—
—
—
— $
1 $
2
—
—
3 $
4
6
5
3
18
For the year ended December 31, 2016, the Company recorded net restructuring charges of $8 million for employee termination costs for an aggregate of
222 employees, substantially all of whom were terminated as of or prior to December 31, 2018. These charges primarily related to one facility closure in the Other
grouping, the expected closure of another facility in the first quarter of 2017 in the Magazines, Catalogs and Logistics segment and the reorganization of certain
operations. Additionally, the Company recorded lease termination and other restructuring charges of $7 million. The fair values of the buildings and machinery and
equipment were determined to be Level 3 under the fair value hierarchy and were estimated based on discussions with real estate brokers, review of comparable
properties, if available, discussions with machinery and equipment brokers, dealer quotes and internal expertise related to the current marketplace conditions.
Other
Charges
For the year ended December 31, 2016, the Company recorded other charges of $3 million for multi-employer pension plan withdrawal obligations
unrelated to facility closures. The total liability for the withdrawal obligations associated with the Company’s decision to withdraw from certain multi-employer
pension plans included in accrued liabilities and restructuring and multiemployer pension plan liabilities are $6 million and $39 million, respectively, at December
31, 2016. Refer to Note 14, Retirement
Plans
, for further discussion of multiemployer pension plans.
F-28
Restructuring
Reserve
The restructuring reserve as of December 31, 2017 and 2018, and changes during the year ended December 31, 2018, were as follows:
December 31,
Restructuring
2017
Charges
Other
Cash
Paid
December 31,
2018
Employee terminations
Multiemployer pension plan withdrawal
obligations
Other
Total
$
$
8 $
16
2
26 $
14
$
3
8
25 $
— $
(14) $
19
—
19 $
(6)
(9)
(29) $
8
32
1
41
The current portion of restructuring reserves of $15 million at December 31, 2018 was included in accrued liabilities, while the long-term portion of $26
million, which primarily related to multi-employer pension plan withdrawal obligations related to facility closures, was included in restructuring and multiemployer
pension plan liabilities at December 31, 2018.
During the three months ended March 31, 2018, the Company reclassified $19 million of multiemployer pension plan withdrawal obligations from non-
restructuring liabilities to restructuring liabilities, of which $3 million and $16 million were recorded in the current and long-term portions of the reserves,
respectively. The reclassification was primarily due to facility closures in the Magazines, Catalogs and Logistics and Book segments during the three months ended
March 31, 2018.
The Company anticipates that payments associated with the employee terminations reflected in the above table will be substantially completed by December
31, 2019.
Payments on all of the Company’s multiemployer pension plan withdrawal obligations are scheduled to be completed by 2034. Changes based on
uncertainties in these estimated withdrawal obligations could affect the ultimate charges related to multiemployer pension plan withdrawals. Refer to Note 14 ,
Retirement
Plans,
for further discussion of multiemployer pension plans.
The restructuring liabilities classified as “other” primarily consisted of other facility closing costs.
The restructuring reserve as of December 31, 2017 and 2016, and changes during the year ended December 31, 2017, were as follows:
Employee terminations
Multiemployer pension plan withdrawal
obligations
Other
Total
December 31,
2016
Restructuring
Charges
Cash
Paid
December 31,
2017
$
$
8 $
18
2
28 $
13 $
1
18
32 $
(13) $
(3)
(18)
(34) $
8
16
2
26
The current portion of restructuring reserves of $14 million at December 31, 2017 was included in accrued liabilities, while the long-term portion of $12
million, which primarily related to multi-employer pension plan withdrawal obligations related to facility closures and lease termination costs, was included in
restructuring and multiemployer pension plan liabilities at December 31, 2017.
Note 10. Accrued Liabilities
The components of the Company’s accrued liabilities at December 31, 2018 and 2017 were as follows:
Employee-related liabilities
Customer-related liabilities
Deferred revenue
Restructuring liabilities
Other
Total accrued liabilities
2018
2017
71
38
15
15
60
199
$
$
87
40
33
14
65
239
$
$
F-29
Employee-related liabilities consist primarily of payroll, employee benefits, workers’ compensation, and incentive compensation. Incentive compensation
accruals include amounts earned pursuant to the Company’s primary employee incentive compensation plans. Customer-related liabilities include accruals for
rebates, volume discounts and other customer discounts. Other accrued liabilities include miscellaneous operating accruals, other tax liabilities and accrued interest.
Note 11. Commitments and Contingencies
As of December 31, 2018, the Company had commitments of $8 million for severance payments related to employee restructuring activities. In addition, as
of December 31, 2018, the Company had commitments of approximately $35 million for the purchase of property, plant and equipment related to incomplete
projects. The Company also has contractual commitments of approximately $28 million for outsourced services, including professional, maintenance and other
services.
Future minimum rental commitments under operating leases are as follows:
Year Ended December 31
2019
2020
2021
2022
2023
2024 and thereafter
Total
$
$
Amount
88
60
50
37
22
50
307
The Company has operating lease commitments, including those for vacated facilities, totaling $307 million and extending through various periods to
2028. There are minimum non-cancelable sublease rentals aggregating approximately $17 million related to the operating leases. The Company remains
secondarily liable under these leases in the event that the sub-lessee defaults under the sublease terms. The Company does not believe that material payments will
be required as a result of the secondary liability provisions of the primary lease agreements.
Rent expense for facilities in use and equipment was $58 million, $46 million and $39 million for the years ended December 31, 2018, 2017 and 2016,
respectively.
Litigation
The Company is subject to laws and regulations relating to the protection of the environment. The Company accrues for expenses associated with
environmental remediation obligations when such amounts are probable and can be reasonably estimated. Such accruals are adjusted as new information develops
or circumstances change and are generally not discounted. The Company has been designated as a potentially responsible party or has received claims in eleven
active federal and state Superfund and other multiparty remediation sites. In addition to these sites, the Company may also have the obligation to remediate three
other previously and currently owned facilities. At the Superfund sites, the Comprehensive Environmental Response, Compensation and Liability Act provides that
the Company’s liability could be joint and several, meaning that the Company could be required to pay an amount in excess of its proportionate share of the
remediation costs.
The Company’s understanding of the financial strength of other potentially responsible parties at the multiparty sites and of other liable parties at the
previously owned facilities has been considered, where appropriate, in the determination of the Company’s estimated liability. The Company established reserves,
recorded in accrued liabilities and other noncurrent liabilities, that it believes are adequate to cover its share of the potential costs of remediation at each of the
multiparty sites and the previously and currently owned facilities. It is not possible to quantify with certainty the potential impact of actions regarding
environmental matters, particularly remediation and other compliance efforts that the Company may undertake in the future. However, in the opinion of
management, compliance with the present environmental protection laws, before taking into account estimated recoveries from third parties, will not have a
material effect on the Company’s consolidated statements of operations, balance sheets and cash flows.
F-30
From time to time, the Company’s cu stomers and others file voluntary petitions for reorganization under United States bankruptcy laws. In such cases,
certain pre-petition payments received by the Company from these parties could be considered preference items and subject to return. In addi tion, the Company
may be party to certain litigation arising in the ordinary course of business. Management believes that the final resolution of these preference items and litigation
will not have a material effect on the Company’s consolidated statements of operations, balance sheets and cash flows.
Merger
Litigation
Three substantially similar actions have been filed by an alleged LSC stockholder against some or all of LSC, the directors of LSC, Quad/Graphics and
merger sub. On December 21, 2018, an action captioned Joe Waters v. LSC, et al. , No. 1:18-cv-08419, was filed in the U.S. District Court for the Northern
District of Illinois against LSC, the directors of LSC, Quad/Graphics and merger sub on behalf of a putative class of LSC stockholders. On January 2, 2019, an
action captioned David Wefer v. LSC, et al. , No. 1:19-cv-00007, was filed in the U.S. District Court for the Southern District of New York against LSC and the
directors of LSC. On January 7, 2019, an action captioned Patrick Plumley v. LSC, et al. , No. 1:19-cv-00030-UNA, was filed in the U.S. District Court for the
District of Delaware against LSC, the directors of LSC, Quad/Graphics and merger sub on behalf of a putative class of LSC stockholders. The lawsuits include
similar allegations challenging the adequacy or completeness of the disclosures to LSC stockholders made in the initial version of this joint proxy
statement/prospectus filed on December 11, 2018 regarding the merger, and the complaints assert claims under Section 14(a) and 20(a) of the Exchange Act against
some or all of LSC, the members of the LSC board and Quad/Graphics. The complaints allege, among other things, that the initial version of this joint proxy
statement/prospectus filed on December 11, 2018 misstated or omitted material information regarding the financial projections prepared by LSC management, the
value of shares of LSC common stock and the financial analyses performed by LSC’s financial advisor and the sales process leading up to the merger. The
complaints seek injunctive relief, including to enjoin the merger, damages in the event the merger is consummated and an award of attorneys’ fees, in addition to
other relief.
Note 12. Debt
The Company’s debt at December 31, 2018 and 2017 consisted of the following:
Borrowings under the Revolving Credit Facility (a)
Term Loan Facility due September 30, 2022 (b)
8.75% Senior Secured Notes due October 15, 2023
Capital lease and other obligations
Unamortized debt issuance costs
Total debt
Less: current portion
Long-term debt
2018
2017
$
$
64
260
450
4
(11)
767
(108)
659
$
$
75
306
450
3
(12)
822
(123)
699
(a) The weighted-average interest rate on borrowings under the Company’s Revolving Credit Facility was 5.19% and 4.47% during the year ended
December 31, 2018 and 2017, respectively.
(b) The borrowings under the Term Loan Facility are subject to a variable interest rate. As of December 31, 2018 and 2017, the interest rate was 8.02% and
7.07%, respectively.
On September 30, 2016, the Company issued $450 million of Senior Secured Notes (the “Senior Notes”).
On September 30, 2016 the Company entered into a credit agreement (the “Credit Agreement”) that provides for (i) a senior secured term loan B facility in
an aggregate principal amount of $375 million (the “Term Loan Facility”) and (ii) a senior secured revolving credit facility in an aggregate principal amount of
$400 million (the “Revolving Credit Facility”). The debt issuance costs and original issue discount are being amortized over the life of the facilities using the
effective interest method.
The Credit Agreement is subject to a number of covenants, including, but not limited to, a minimum Interest Coverage Ratio and a Consolidated Leverage
Ratio, as defined in and calculated pursuant to the Credit Agreement, that, in part, restrict the Company’s ability to incur additional indebtedness, create liens,
engage in mergers and consolidations, make restricted payments and dispose of certain assets. The Credit Agreement generally allows annual dividend payments of
up to $50 million in the aggregate, though additional dividends may be allowed subject to certain conditions. Each of these covenants is subject to important
exceptions and qualifications.
F-31
Credit
Agreement
On December 20, 2018, the Company amended the Credit Agreement to, among other things, defer certain changes of the minimum Interest Coverage Ratio
and the maximum Consolidated Leverage Ratio. As a result, the maximum Consolidated Leverage Ratio will be reduced to 3.00 to 1.00 with respect to any fiscal
quarter ending on or after March 31, 2020, as opposed to March 31, 2019, as originally contemplated in the Credit Agreement. The minimum Interest Coverage
Ratio will be increased to 3.50 to 1.00 with respect to any test period ending on or after March 31, 2020, as opposed to March 31, 2019, as originally contemplated
in the Credit Agreement. Other terms, including the outstanding principal, maturity date and other debt covenants remain the same.
On November 17, 2017, the Company amended the Credit Agreement to reduce the interest rate for the Term Loan Facility by 50 basis points and the
LIBOR “floor” was also reduced by 25 basis points. Other terms, including the outstanding principal, maturity date and debt covenants were not amended.
Select terms of the Term Loan Facility before and after the amendment include:
Interest rate (Company's option)
LIBOR floor
Amortization
Maturity
Before Amendment
Base rate + 5.00%; or
LIBOR + 6.00%
1.00%
$13 million, first eight quarters;
$11 million quarterly thereafter
(as of original effective date)
September 30, 2022
After Amendment
Base rate + 4.50%; or
LIBOR + 5.50%
0.75%
$13 million, first eight quarters;
$11 million quarterly thereafter
(as of original effective date)
September 30, 2022
Under the terms of the Term Loan Facility, each of the syndicated lenders is deemed to have loaned a specific amount to the Company and has the right to
repayment from the Company directly. Therefore, we concluded that the Term Loan Facility is a loan syndication under U.S. GAAP. As such, in order to
determine whether the debt was modified or extinguished as a result of the amendment, we examined the amount of principal pre- and post-amendment by
individual lender. As a result, we determined that $65 million of outstanding principal had been extinguished as of November 17, 2017, even though the total
outstanding principal amongst all lenders pre- and post-amendment remained unchanged.
Consequently, the amendment resulted in a pre-tax loss on debt extinguishment of $3 million related to the unamortized discount and debt issuance costs
attributable to the $65 million of outstanding principal that had been considered extinguished. There was no net impact as of November 17, 2017 to cash and cash
equivalents, total outstanding principal remained unchanged, and no cash was exchanged between the lenders and the Company (other than customary
administrative fees).
On February 2, 2017, the Company paid in advance for the Term Loan Facility the full amount of required amortization payments, $50 million, for the
year ended December 31, 2017.
Additional
Debt
Issuances
Information
The fair values of the Senior Notes and Term Loan Facility that were determined using the market approach based upon interest rates available to the
Company for borrowings with similar terms and maturities, were determined to be Level 2 under the fair value hierarchy. The fair value of the Company’s debt
was greater than its book value by approximately $22 million and $20 million at December 31, 2018 and 2017, respectively.
As of December 31, 2018, the Company had $51 million in outstanding letters of credit issued under the Revolving Credit Facility. As of December 31,
2018, the Company also had $6 million in other uncommitted credit facilities, all of which were outside the U.S. (the “Other Facilities”). As of December 31, 2018,
letters of credit and guarantees of $2 million were issued and reduced availability under the Other Facilities. As of December 31, 2018, there were $66 million of
borrowings under the Revolving Credit Facility and the Other Facilities (the “Combined Facilities”).
F-32
At December 31, 2018 , the future maturities of debt, including capitalized leases, were as follows:
2019
2020
2021
2022
2023
2024 and thereafter
Total (a )
Amount
$
$
110
43
43
136
450
—
782
(a) Excludes unamortized debt issuance costs of $4 million and $6 million related to the Company’s Term Loan Facility and 8.75% Senior Notes due
October 15, 2023, respectively, and a discount of $5 million related to the Company’s Term Loan Facility. These amounts do not represent contractual
obligations with a fixed amount or maturity date.
The following table summarizes interest expense included in the consolidated and combined statements of operations:
Interest incurred
Less: interest income
Interest expense-net
2018
2017
2016
$
$
82 $
(2)
80 $
73 $
(1)
72 $
19
(1)
18
Interest paid, net of interest received, was $76 million, $69 million and $7 million for the years ended December 31, 2018, 2017 and 2016, respectively.
Note 13. Earnings Per Share
On May 31, 2018, the Company completed the repurchase approved by the Board of Directors of 1.6 million shares of common stock for a total cost of $20
million. During the year ended December 31, 2017, the Company issued approximately 1.0 million shares of common stock in conjunction with the Fairrington
acquisition and did not purchase shares of common stock. During the years ended December 31, 2018 and 2017, a de minimis amount of shares were withheld
from employees for tax liabilities upon vesting of equity awards.
Basic earnings per share (“EPS”) is calculated by dividing net earnings attributable to the Company’s stockholders by the weighted average number of
common shares outstanding for the period. In computing diluted EPS, basic EPS is adjusted for the assumed issuance of all potentially dilutive share-based awards,
including stock options, restricted stock, RSUs, and PSUs. The computations of basic and diluted EPS for periods prior to the separation were calculated using the
shares distributed and retained by RRD on October 1, 2016. The same number of shares was used to calculate basic and diluted earnings per share since there were
no LSC Communications equity awards outstanding prior to the separation.
The following table shows the calculation of basic and diluted EPS, as well as a reconciliation of basic shares to diluted shares:
Net (loss) earnings per common share:
Basic
Diluted
Dividends declared per common share
Numerator:
Net (loss) income
Denominator:
Weighted average number of common shares
outstanding
Dilutive options and awards
Diluted weighted average number of common shares
outstanding
2018
2017
2016
$
$
$
$
(0.67) $
(0.67) $
1.04 $
(1.69) $
(1.69) $
1.00 $
(23) $
(57) $
33.8
—
33.8
33.8
—
33.8
3.25
3.23
0.25
106
32.5
0.3
32.8
F-33
Note 14. Retirement Plans
Defined
Benefits
Overview
The Company is the sole sponsor of certain defined benefit pension plans that are included in the consolidated balance sheets as of December 31, 2018 and
2017. The Company’s primary single employer defined benefit pension plans are frozen. No new employees will be permitted to enter these plans and participants
will earn no additional benefits. The assets and certain obligations of the defined benefit pension plans includes plans qualified under Section 401(a) of the Internal
Revenue Code of 1986, as amended (the “Qualified Plan”) and related non-qualified benefits (the “Non-Qualified Plan”). The Qualified Plan will be funded in
conformity with the applicable government regulations, such that the Company from time to time contributes at least the minimum amount required using actuarial
cost methods and assumptions acceptable under government regulations. The Non-Qualified Plan is unfunded, and the Company pays retiree benefits as they
become due.
The Company engages outside actuaries to assist in the determination of the obligations and costs under these plans. The Company records annual income
and expense amounts relating to its pension plans based on calculations that include various actuarial assumptions such as discount rates, mortality, assumed rate of
return, compensation increases, and turnover rates. The Company reviews its actuarial assumptions on an annual basis and makes modifications to the assumptions
based on current rates and trends when it is deemed appropriate to do so. The effect of modifications on the value of plan obligations and assets is recognized
immediately within other comprehensive income (loss) and amortized into investment and other (income)-net over future periods. The Company believes that the
assumptions utilized in recording its obligations under its plans are reasonable based on its experience, market conditions and input from its actuaries and
investment advisors.
The benefit plan obligations are calculated using generally accepted actuarial methods and are measured as of December 31. Prior to the plan freezes,
actuarial gains and losses were amortized using the corridor method over the average remaining service life of active plan participants. Actuarial gains and losses
for frozen plans are amortized using the corridor method over the average remaining expected life of active plan participants.
In the first quarter of 2019, the Company completed a partial settlement of its retirement benefit obligations by purchasing a group annuity contract for
certain retirees and beneficiaries from a third-party insurance company. As a result, the Company’s pension assets and liabilities are required to be remeasured as of
the settlement date. As of the remeasurement date, the reduction in the reported pension obligation for the participants under the annuity contract was
approximately $477 million, and the reduction in plan assets was approximately $466 million. The Company expects to record a non-cash settlement charge in the
range of approximately $130 million to $140 million in the first quarter of 2019. This charge results from the recognition in earnings of a portion of the actuarial
losses recorded in accumulated other comprehensive loss based on the proportion of the obligation settled. The settlement accounting is expected be completed in
the first quarter of 2019. In 2019, the Company expects annual non-cash net pension income to decrease by approximately $13 million to $35 million, due to the
reduction in pension trust assets related to the transaction combined with a lower expected return on plan assets due to a change in asset allocation as part of the
Company’s pension de-risking strategy.
The Company recorded non-cash settlement charges of $1 million in selling, general and administrative expenses in the three months ended June 30, 2016 in
connection with settlement payments from an early buyout of certain former employees related to the 2014 acquisition of Esselte Corporation. These charges
resulted from the recognition in earnings of a portion of the actuarial losses recorded in accumulated other comprehensive loss based on the proportion of the
obligation settled.
At the separation date, the Company assumed and recorded certain pension obligations and plan assets in single employer plans for the Company’s
employees and certain former employees and retirees of RRD. The Company recorded a net benefit plan obligation of $358 million as of October 1, 2016 related to
these plans. Additionally, the Company’s United Kingdom pension plan was transferred to RRD at the separation date, and as a result, the Company recorded a
reduction in its net benefit plan asset of $7 million as of October 1, 2016.
Prior to the separation, for RRD sponsored defined benefit and post-employment plans, the Company recorded net pension and postretirement income of
$28 million for the nine months ended September 30, 2016. This amount is reflected all in investment and other (income)-net in the consolidated and combined
statements of operations.
The Company made contributions totaling $6 million to its pension plans during the year ended December 31, 2018. Based on the plans’ regulatory funded
status, there are no required contributions for the Company’s U.S. Qualified Plan in 2019. The required contributions in 2019, primarily for the Non-Qualified
Plan, are expected to be approximately $6 million to its pension plans.
F-34
Defined
Benefit
Plans
–
Financial
Informati
on
Financial information regarding the Qualified, Non-Qualified and International plans is shown below:
2018
Non-
Qualified
&
International
3
$
Qualified
84
$
Total
$
87
Qualified
86
$
2017
Non-
Qualified
&
International
3
$
Total
$
89
Qualified
24
$
2016
Non-
Qualified
&
International
6
$
Total
$
30
(155)
19
—
—
1
—
(155)
(153)
20
—
17
—
—
1
—
(153)
(48)
(7)
(55)
18
—
6
1
1
—
7
1
$
(52) $
4
$
(48) $
(50) $
4
$
(46) $
(17) $
—
$
(17)
3.5%
3.8%
3.5%
4.3%
4.3%
4.3%
3.8%
3.8%
3.8%
6.7%
7.8%
6.7%
6.9%
7.9%
6.9%
7.2%
7.2%
7.2%
Interest cost
Expected return on plan
assets
Amortization of actuarial
loss
Settlement
Net periodic benefit (income)
expense
Weighted average assumption
used to calculate net periodic
benefit (income) expense:
Discount rate
Expected return on plan
assets
The accumulated benefit obligation for the LSC Communications sponsored defined benefit Qualified Plan was $2,318 million and $2,572 million at
December 31, 2018 and 2017, respectively. The accumulated benefit obligation for the LSC Communications sponsored defined benefit Non-Qualified and
international pension plans was $86 million and $94 million at December 31, 2018 and 2017, respectively.
Benefit obligation at beginning of year
Interest cost
Actuarial loss (gain)
Benefits paid
Benefit obligation at end of year
Fair value of plan assets at beginning of year
Actual return on assets
Employer contributions
Foreign currency translation
Separation-related adjustment
Benefits paid
Fair value of plan assets at end of year
Unfunded status at end of year
$
$
$
$
$
2018
Non-Qualified
Qualified
& International
Total
Qualified
2017
Non-Qualified
& International
Total
2,572 $
84
(211)
(127)
2,318 $
2,478 $
(86)
—
—
—
(127)
2,265
95 $
3
(6)
(4)
88 $
2 $
—
6
—
—
(4)
4 $
2,667 $
87
(217)
(131)
2,406 $
2,480 $
(86)
6
—
—
(131)
2,269 $
2,439 $
86
169
(122)
2,572 $
2,249 $
357
—
—
(6)
(122)
2,478 $
92 $
3
5
(5)
95 $
2 $
—
6
(1)
—
(5)
2 $
2,531
89
174
(127)
2,667
2,251
357
6
(1)
(6)
(127)
2,480
(53) $
(84) $
(137) $
(94) $
(93) $
(187)
F-35
Accrued benefit cost (included in
accrued liabilities)
Pension liabilities
Net liabilities recognized in the
consolidated balance sheets
2018
Non-Qualified
Qualified
& International
Total
Qualified
2017
Non-Qualified
& International
Total
—
(53)
(5)
(79)
(5)
(132)
—
(94)
(5)
(88)
(5)
(182)
$
(53) $
(84) $
(137) $
(94) $
(93) $
(187)
The amounts included in accumulated other comprehensive loss in the consolidated balance sheets, excluding tax effects, that have not been recognized as
components of net periodic cost at December 31, 2018 and 2017 were as follows:
2018
Non-Qualified
Qualified
& International
Total
Qualified
2017
Non-Qualified
& International
Total
Accumulated other comprehensive loss
Net actuarial loss
Total
$
$
(686) $
(686) $
(22) $
(22) $
(708) $
(708) $
(674) $
(674) $
(29) $
(29) $
(703)
(703)
The pre-tax amounts recognized in other comprehensive loss in 2018 as components of net periodic costs were as follows:
Amortization of:
Net actuarial loss
Amounts arising during the period:
Net actuarial (loss) gain
Total
Qualified
Non-Qualified
& International
Total
$
$
19 $
(31)
(12) $
1 $
6
7 $
20
(25)
(5)
Actuarial gains and losses in excess of 10.0% of the greater of the projected benefit obligation or the market-related value of plan assets were recognized as
a component of net periodic benefit costs over the average remaining service period of a plan’s active employees. Unrecognized prior service costs or credits are
also recognized as a component of net periodic benefit cost over the average remaining service period of a plan’s active employees. The amounts in accumulated
other comprehensive loss that are expected to be recognized as components of net periodic benefit costs in 2019 are shown below. They are based on balances as
of December 31, 2018 and do not include the impact of the partial settlement.
Amortization of:
Net actuarial loss
Qualified
Non-
Qualified
&
International
Total
$
12
$
1 $
13
The weighted-average assumptions used to determine the net benefit obligation at the measurement date were as follows:
Discount rate
4.4%
4.5%
4.4%
3.7%
3.8%
3.7%
2018
Non-Qualified
& International
Qualified
Total
Qualified
2017
Non-Qualified
& International
Total
F-36
The following table provides a summary of pension plans with projected benefit obligations in excess of plan assets as of December 31, 2018 and 2017:
Projected benefit obligation
Fair value of plan assets
$
2,318 $
2,265
85 $
—
2,403 $
2,265
2,572 $
2,478
95 $
2 $
2018
Non-Qualified
& International
Qualified
Total
Qualified
2017
Non-Qualified
& International
Total
2,667
2,480
The following table provides a summary of pension plans with accumulated benefit obligations in excess of plan assets as of December 31, 2018 and 2017:
Accumulated benefit obligation
Fair value of plan assets
$
2,318 $
2,265
85 $
—
2,403 $
2,265
2,572 $
2,478
94 $
2
2018
Non-Qualified
Qualified
& International
Total
Qualified
2017
Non-Qualified
& International
Total
2,666
2,480
The Company determines its assumption for the discount rate to be used for purposes of computing annual service and interest costs based on an index of
high-quality corporate bond yields and matched-funding yield curve analysis as of the measurement date.
Benefit payments are expected to be paid as follows:
2019
2020
2021
2022
2023
2024-2028
Defined Benefit Plans - Plan Assets
Qualified
$
130 $
134
136
141
144
743
Non-
Qualified
&
International
5 $
6
6
6
6
30
Total
135
140
142
147
150
773
The Company’s overall inv estment approach for its U.S. Qualified Plan is to reduce the risk of significant decreases in the plan’s funded status by allocating
a larger portion of the plan’s assets to investments expected to hedge the impact of interest rate risks on the plan’s obligation. Over time, the target asset allocation
percentage for the pension plan is expected to decrease for equity and other “return seeking” investments and increase for fixed income and other “hedging”
investments. The assumed long-term rate of return for plan assets, which is determined annually, is likely to decrease as the asset allocation shifts over time. The
expected long-term rate of return for plan assets is based upon many factors including asset allocation, historical asset returns, current and expected future market
conditions, risk and active management premiums. The target asset allocation percentage as of December 31, 2018 for the U.S. Qualified Plan was
approximately 40.0% for return seeking investments and approximately 60.0% for hedging investments. Management reviews the performance of its investments
on a quarterly basis.
The Company segregated its plan assets by the following major categories and levels for determining their fair value as of December 31, 2018 and 2017:
Cash
and
cash
equivalents
—Carrying value approximates fair value. As such, these assets were classified as Level 1. The Company also invests in certain
short-term investments that are valued using the amortized cost method. As such, these assets were classified as Level 2.
Equity—
The value of individual equity securities was based on quoted prices in active markets. As such, these assets are classified as Level 1.
F-37
Fixed
income—
Fixed income securities are typically priced based on a valuation model rather than a last trade basis and are not exchange-traded. These
valuation models involve utilizing dealer quotes, analyzing market information, estimating prepayment speeds and evaluating underlying collateral. Accordingly,
the Company classified these fixed in come securities as Level 2. Fixed income securities also include investments in various asset-backed securities that are part of
a government sponsored program. The prices of these asset-backed securities were obtained by independent third parties using mu lti-dimensional, collateral
specific prepayments tables. Inputs include monthly payment information and collateral performance. As the values of these assets was determined based on
models incorporating observable inputs, these assets were classified as Le vel 2. Additionally, this category includes underlying securities in trust owned life
insurance policies that are invested in certain fixed income securities. These investments are not quoted on active markets; therefore, they are classified as Level 2.
Derivatives
and
other—
This category includes investments in commodity and structured credit funds that are not quoted on active markets; therefore, they
are classified as Level 2.
Investments
measured
at
NAV
as
a
practical
expedient—
The Company invests in certain equity, fixed income, real estate and private equity funds that are
valued at calculated NAV per share. In accordance with FASB guidance investments that are measured at fair value using the NAV per share as a practical
expedient have not been classified in the fair value hierarchy.
The valuation methodologies described above may generate a fair value calculation that may not be indicative of net realizable value or future fair values.
While the Company believes the valuation methodologies used are appropriate, the use of different methodologies or assumptions in calculating fair value could
result in different amounts. The Company invests in various assets in which valuation is determined by NAV. The Company believes that the NAV is representative
of fair value at the reporting date, as there are no significant restrictions on redemption of these investments or other reasons to indicate that the investment would
be redeemed at an amount different than the NAV.
The fair values of the Company’s pension plan assets at December 31, 2018 and 2017, by asset category were as follows:
Asset Category
Cash and cash equivalents
Equity
Fixed income
Derivatives and other
Investments measurement at
NAV as a practical expedient
Total
Other
Plans
December 31, 2018
December 31, 2017
Level 1
Level 2
Total
Level 1
Level 2
Total
$
54 $
343
—
—
—
397 $
$
17 $
—
1,389
1
—
1,407 $
71 $
52 $
343
1,389
1
465
2,269 $
636
—
—
—
688 $
30 $
—
1,062
1
—
1,093 $
82
636
1,062
1
699
2,480
Employer
401(k)
Savings
Plan—
Effective September 2, 2016, LSC Communications initiated its own 401(k) plan. Under the LSC Savings Plan (the
“Plan”), eligible employees have the option to contribute a percentage of eligible compensation on both a before-tax and after-tax basis. Effective January 1, 2017,
LSC Communications amended the Plan to provide a company match equal to $0.50 of every pre-tax and Roth 401(k) dollar a participating employee contributes to
the Plan on up to the first 3.0% of such participant’s pay.
Multiemployer
Pension
Plans
—Multiemployer plans receive contributions from two or more unrelated employers pursuant to one or more collective
bargaining agreements and the assets contributed by one employer may be used to fund the benefits of all employees covered within the plan. The risk and level of
uncertainty related to participating in these multiemployer pension plans differs significantly from the risk associated with the Company-sponsored defined benefit
plans. For example, investment decisions are made by parties unrelated to the Company and the financial stability of other employers participating in a plan may
affect the Company’s obligations under the plan.
During the years ended December 31, 2018, 2017 and 2016, the Company recorded restructuring, impairment and other charges relating to multiemployer
pension plan withdrawal obligations of:
Year Ended
December 31,
2018
2017
2016
$
$
$
Unrelated to
Facility Closures
Related to
Facility Closures
Total
2
4
3
$
$
$
F-38
3
1
2
$
$
$
5
5
5
Refer to Note 9 ,
Restructuring,
Impairment
and
Other
Charges,
for further details of charges related to complete or partial multiemployer pension plan
withdrawal liabilities recognized in the consolidated and combined statements of operations.
The Company’s withdrawal liabilities could be affected by the financial stability of other employers participating in the plans and any decisions by those
employers to withdraw from the plans in the future. While it is not possible to quantify the potential impact of future events or circumstances, reductions in other
employers’ participation in multiemployer pension plans, including certain plans from which the Company has previously withdrawn, could have a material impact
on the Company’s previously estimated withdrawal liabilities, may affect consolidated and combined statements of operations, balance sheets or cash flows.
As a result of the acquisition of Courier, the Company participates in two multiemployer pension plans, one of which the Company’s contributions are over
85% of the total plan contributions. Both plans are estimated to be underfunded and have a red zone status, designated as a result of low contribution funding levels,
under the Pension Protection Act.
During the years ended December 31, 2018, 2017 and 2016, the Company made de minimis contributions to these multiemployer pension plans and other
plans from which the Company has completely withdrawn as of December 31, 2018.
Note 15. Income Taxes
U.S.
Tax
Cuts
and
Jobs
Act
(“Tax
Act”)
The Tax Act enacted on December 22, 2017 introduced significant changes to U.S. federal income tax law. Effective in 2018, the Tax Act reduced the U.S.
federal corporate tax rate from 35.0% to 21.0% and created new taxes on certain foreign-sourced earnings and certain related-party payments, which are referred to
as the global intangible low-taxed income (“GILTI”) tax and the base erosion anti-abuse tax, respectively. In addition, in 2017, the Company was subject to a one-
time transition tax on accumulated foreign subsidiary earnings not previously subject to U.S. federal income tax.
The SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant did not have
the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects
of the Tax Act. The Company recognized provisional tax impacts related to the deemed repatriated earnings and the revaluation of deferred tax assets and liabilities
in its consolidated financial statements for the year ended December 31, 2017. Adjustments made to the provisional amounts allowed under SAB 118 were
identified and recorded as discrete adjustments during the year ended December 31, 2018. The accounting was completed in the fourth quarter of 2018 and the
adjustments are as follows:
• Transition tax. A one-time transition tax on the deemed repatriation of post-1986 undistributed earnings of foreign subsidiaries. As a result of this one-
time deemed repatriation, the Company recorded a provisional tax expense of $16 million during the fourth quarter of 2017. The final transition tax
expense was $17 million. The additional $1 million was recorded during the fourth quarter of 2018.
• Remeasurement of deferred taxes. A reduction in the U.S. federal corporate tax rate from a maximum of 35.0% to a flat rate of 21.0% beginning in
2018. The Company recorded a one-time net provisional tax expense of $8 million as a result of the revaluation of the Company’s deferred tax assets and
liabilities to reflect the impact of the lower future U.S. federal corporate tax rates. Upon the filing of the 2017 tax returns, the final tax expense was $9
million. The additional $1 million was recorded during the fourth quarter of 2018.
• Taxation of certain GILTI entities beginning in 2018. The Company has the ability to determine its policy election with respect to whether to record
deferred taxes for basis differences expected to reverse as a result of the GILTI provision in future years, or in the period in which the tax is incurred.
The Company determined its policy is to record taxes in the period in which they are incurred.
Prior to the enactment of the Tax Act, the Company treated the undistributed earnings from foreign subsidiaries as indefinitely reinvested. The Tax Act
imposed a mandatory transition tax on deferred foreign earnings and generally eliminated U.S. tax on foreign subsidiary distributions to the U.S. Accordingly, the
Company has recognized the tax consequences of the Tax Act on all foreign unremitted earnings. To the extent there is cash available, management has no specific
plans to indefinitely reinvest the unremitted earnings of our foreign subsidiaries as of the balance sheet date. As such, a withholding tax accrual has been recorded
where appropriate and is not significant. The Company has not provided for deferred taxes on outside basis differences in our investments in our foreign
subsidiaries that are unrelated to unremitted earnings as these basis differences will be indefinitely reinvested. A determination of the unrecognized deferred taxes
related to these other components of our outstanding basis differences is not practicable to calculate.
F-39
2018
Disposition
As described in Note 3, Business
Combinations
and
Disposition
, the Company completed the sale of its European printing business on September 28,
2018. The 2018 tax provision reflects the impact of the sale which includes the elimination of tax balances related to the sold entities. A $25 million non-cash
provision was recorded primarily for the write-off of a deferred tax asset associated with the entities disposed. As part of the write-off, tax carryforwards of $125
million and the associated valuation allowances of $108 million were disposed of as part of the sale.
Income
tax
expense
(benefit)
information
Income taxes have been based on the following components of earnings from operations before income taxes for the years ended December 31, 2018, 2017
and 2016:
U.S.
Foreign
Total
2018
2017
2016
$
$
(18) $
28
10 $
(71) $
27
(44) $
129
28
157
Prior to the separation, in the Company’s combined financial statements, income tax expense and deferred tax balances were calculated on a separate return
basis, although with respect to certain entities, the Company’s operations have historically been included in the tax returns filed by the respective RRD entities of
which the Company’s business was a part.
The components of income tax expense (benefit) from operations for the years ended December 31, 2018, 2017 and 2016 were as follows:
Current
U.S. federal
U.S. state and local
Foreign
Current income tax expense
Deferred
U.S. federal
U.S. state and local
Foreign
Deferred income tax expense (benefit)
Income tax expense
2018
2017
2016
$
$
4 $
1
7
12
(3)
(2)
26
21
33 $
20 $
1
7
28
(11)
(4)
—
(15)
13 $
54
10
5
69
(17)
(3)
2
(18)
51
Refer to Note 16, Comprehensive
Income
, for details of the income tax expense or benefit allocated to each component of other comprehensive loss.
F-40
The following table outlines the reconciliation of differences between the Fed eral statutory tax rate and the Company’s effective income tax rate:
2018
2017
2016
Federal statutory tax rate
Disposition of European printing business
Non-deductible share-based compensation
Foreign tax rate differential
Impact of the Tax Act
Transition tax
Deferred tax effects
Section 162(m) limitation
International investment tax credit
Fringe benefits disallowance
Meals and entertainment disallowance
Withholding taxes
Impairment charges
Domestic manufacturing deduction
Change in valuation allowances
State and local income taxes, net of U.S.
federal income tax benefit
Other
Effective income tax rate
21.0%
242.4
11.4
9.6
9.0
4.4
8.2
6.2
4.5
4.4
3.2
1.3
—
(5.0)
35.0%
—
(8.9)
6.5
(36.2)
(19.2)
(5.1)
25.9
—
(1.3)
—
(21.8)
1.3
(22.6)
(12.0)
10.8
319.4%
4.0
11.9
(30.5%)
Deferred
income
taxes
The significant deferred tax assets and liabilities at December 31, 2018 and 2017 were as follows:
2018
2017
Deferred tax assets:
Pension plan liabilities
Accrued liabilities
Net operating losses and other tax carryforwards
Interest expense carryforward
Foreign depreciation
Other
Total deferred tax assets
Valuation allowances
Net deferred tax assets
Deferred tax liabilities:
Accelerated depreciation
Other intangible assets
Inventories
Other
Total deferred tax liabilities
Net deferred tax assets
$
$
$
$
F-41
$
$
$
41
35
17
15
6
3
117
(11)
106
(38)
(25)
(7)
(9)
(79)
27
$
35.0%
—
—
(1.4)
—
—
0.3
(1.6)
—
0.1
—
—
(3.1)
0.9
3.1
(0.8)
32.5%
58
33
138
—
13
4
246
(115)
131
(40)
(30)
(6)
(5)
(81)
50
Transactions affecting the valuation allowances on deferred tax assets during t he years ended December 31, 2018, 2017 and 2016 were as follows:
Balance, beginning of year
Current year expense-net
Transfer of U.K. entity to parent company
Disposition of European printing business
Foreign exchange and other
Balance, end of year
$
$
115 $
—
—
(108)
4
11 $
87 $
9
—
—
19
115 $
106
1
(7)
—
(13)
87
2018
2017
2016
As of December 31, 2018, the Company had domestic and foreign net operating loss deferred tax assets and other tax carryforwards of approximately $17
million and $0 million ($7 million and $131 million, respectively, at December 31, 2017), of which $10 million expires between 2019 and 2028. Limitations on the
utilization of these tax assets may apply. The Company has provided valuation allowances to reduce the carrying value of certain deferred tax assets, as
management has concluded that, based on the weight of available evidence, it is more likely than not that the deferred tax assets will not be fully realized.
Cash payments for income taxes were $11 million, $36 million and $14 million during the years ended December 31, 2018, 2017 and 2016, respectively.
There were no amounts settled with RRD for 2018 and 2017. Total amounts settled with RRD were $57 million for 2016. Cash refunds for income taxes were $10
million, a de minimis amount and $3 million during the years ended December 31, 2018, 2017 and 2016, respectively.
Uncertain
tax
positions
During the year ended December 31, 2016, the entire $5 million balance of unrecognized tax benefits was settled. There have been no additional
unrecognized tax benefits recorded for the years ended December 31, 2018 and 2017.
The Company classifies interest expense and any related penalties related to income tax uncertainties as a component of income tax expense. There was no
interest expense, net of tax benefits, related to tax uncertainties recognized in the consolidated and combined statements of operations for the years ended
December 31, 2018, 2017 and 2016. No benefits were recognized for the years ended December 31, 2018, 2017 and 2016 from the reversal of accrued
penalties. There was no interest accrued related to income tax uncertainties at December 31, 2018 and 2017. There were no accrued penalties related to income tax
uncertainties for the years ended December 31, 2018, 2017 and 2016.
The Company has tax years from 2012 that remain open and subject to examination by the IRS, certain state taxing authorities or certain foreign tax
jurisdictions.
F-42
Note 1 6 . Comprehensive Income
The following table summarizes the change in accumulated other comprehensive loss by component for the years ended December 31, 2018, 2017 and
2016.
Balance at December 31, 2015
Other comprehensive income before reclassifications
Amounts reclassified from accumulated other comprehensive loss
Transfer of pension plan from parent company, net
Transfer of U.K. entity to parent company, net
Net change in accumulated other comprehensive loss
Balance at December 31, 2016
Other comprehensive income before reclassifications
Amounts reclassified from accumulated other comprehensive loss
Net change in accumulated other comprehensive loss
Balance at December 31, 2017
Other comprehensive loss before reclassifications
Amounts reclassified from accumulated other comprehensive loss
Reclassification to accumulated deficit
Net change in accumulated other comprehensive loss
Balance at December 31, 2018
Pension
Plan Cost
Translation
Adjustments
Total
$
$
$
$
(46)
29
6
(495)
44
(416)
(462)
23
11
34
(428)
(19)
15
(97)
(101)
(529)
$
$
$
$
(159)
5
—
—
85
90
(69)
21
—
21
(48)
(7)
—
—
(7)
(55)
$
$
$
$
(205)
34
6
(495)
129
(326)
(531)
44
11
55
(476)
(26)
15
(97)
(108)
(584)
The Company adopted ASU 2018-02 “Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from
Accumulated Other Comprehensive Income (“ASU 2018-02”) in the first quarter of 2018. As a result of applying this standard in the period of adoption, the
Company reclassified $97 million relating to the change in tax rate from accumulated other comprehensive loss to accumulated deficit in the Company’s
consolidated balance sheet during the three months ended March 31, 2018. ASU 2018-02 eliminates the stranded tax effects resulting from the Tax Act and will
improve the usefulness of information reported to financial statement users.
Refer to the statements of comprehensive income for the components of comprehensive income for the years ended December 31, 2018, 2017 and 2016.
Reclassifications from accumulated other comprehensive loss for the years ended December 31, 2018, 2017 and 2016 were as follows:
Amortization of pension plan cost:
Net actuarial loss (a)
Settlement
Reclassifications before tax
Income tax expense
Reclassifications, net of tax
2018
2017
2016
$
$
20 $
—
20
5
15 $
18 $
—
18
7
11 $
7
1
8
2
6
(a) These accumulated other comprehensive income components are included in the calculation of net periodic pension benefits plan (income) expense that
is recognized all in investment and other (income)-net in the consolidated and combined statements of operations (refer to Note 14, Retirement
Plans
).
F-43
Note 1 7 . Stock and Incentive Programs
General
Terms
of
the
Awards
The Company’s employees participate in the Company’s 2016 Performance Incentive Plan (the “2016 PIP”). Under the 2016 PIP, the Company may grant
cash or bonus awards, stock options, stock appreciation rights, restricted stock awards (“RSAs”), restricted stock units (“RSUs”), performance awards or
combinations thereof to certain officers, directors and key employees. The Human Resources Committee of the Company’s Board of Directors has discretion to
establish the terms and conditions for grants, including the number of shares, vesting and required service or other performance criteria. The maximum term of any
award under the 2016 PIP is ten years. Options generally expire ten years from the date of grant or five years after the date of retirement, whichever is earlier.
The rights granted to the recipient of RSAs, RSUs and performance restricted stock (“PRS”) generally accrue ratably over the restriction or vesting period,
which is generally three years. RSUs and RSAs are subject to forfeiture upon termination of employment prior to vesting, subject in some cases to early vesting
upon specified events, including death or permanent disability of the grantee, termination of the grantee’s employment under certain circumstances or a change in
control of the Company. Compensation expense is based on the fair market value of the awards on the date of grant expensed ratably over the periods during which
restrictions lapse.
Prior to the separation, RRD maintained an incentive stock program for certain individuals, including the Company’s employees. A portion of the
Company’s employees participated in RRD’s non-qualified stock options, RSUs and performance share units (“PSUs”) programs. Share based compensation
expense included expense attributable to the Company based on the award terms previously granted to the Company’s employees and an allocation of
compensation expense associated with RRD’s corporate and shared functional employees. As the share-based compensation plans were RRD’s plans, the amounts
were recognized through net parent company investment on the combined balance sheets. In periods after the separation, the Company records share-based
compensation expense relating to LSC Communications, RRD and Donnelley Financial awards held by its employees, officers and directors.
In connection with the separation, outstanding RRD stock options, RSUs and PSUs previously issued under RRD’s incentive stock program were adjusted
and converted into new LSC Communications stock-based awards or a basket of LSC Communications, RRD and Donnelley Financial stock-based awards using a
formula designed to preserve the intrinsic value and fair value of the awards immediately prior to the separation.
At the separation date, outstanding RRD options related to the 2009, 2010, 2011, and 2012 grants were modified and converted into stock options in all three
companies at a conversion rate outlined in the separation and distribution agreement. Outstanding RRD RSUs granted in 2013 and 2014 were modified and
converted into RSUs in all three companies as outlined in the separation and distribution agreement. Outstanding RRD RSUs related to 2015 and 2016 grant dates
were converted into RSUs in the company that the grantees were employed by at the separation date.
Modifications were made to the RRD PSUs so that as of the separation date, the performance period for the 2014 and 2015 PSU grants ended. The
applicable performance was measured as of the separation date against revised cumulative free cash flow targets approved by the RRD Board of Directors. The
2014 PSUs converted into RSUs in all three companies in accordance with the separation and distribution agreement. The 2015 PSUs converted into RSUs in the
company that the grantees were employed by at the separation date.
Share-Based
Compensation
Expense
Total compensation expense related to all share based compensation plans for the Company’s employees, officers and directors was $12 million, $13 million
and $8 million for the years ended December 31, 2018, 2017 and 2016, respectively. The expense in 2016 includes $5 million of expense allocated from RRD prior
to the separation. There were net tax benefits of $1 million, $2 million and $3 million, respectively, for the years ended December 31, 2018, 2017 and 2016,
respectively.
Stock
Options
There was no significant activity related to stock options during the year December 31, 2018.
F-44
Restricted
Stock
Units
A summary of the Company’s RSU activity for LSC Communications, RRD and Donnelley Financial employees, officers and directors as of December 31,
2017 and 2018, and changes during the year ended December 31, 2018 is presented below.
Nonvested at December 31, 2017
Granted
Vested
Forfeited
Nonvested at December 31, 2018
Shares
(thousands)
Weighted
Average Grant
Date Fair Value
704 $
460
(219)
(48)
897 $
28.64
12.34
33.25
19.27
19.65
During the year ended December 31, 2018, 459,855 RSUs were granted to certain executive officers and senior management. The shares are subject to time-
based vesting and will cliff vest on March 2, 2021. As of December 31, 2018, the total potential payout for the awards granted during the year ended December 31,
2018 is 433,385 RSUs. The fair value of these awards was determined based on the Company’s stock price on the grant date reduced by the present value of
expected dividends through the vesting period. These awards are subject to forfeiture upon termination of employment prior to vesting, subject in some cases to
early vesting upon specified events, including death, permanent disability or retirement of the grantee or change of control of the Company.
Compensation expense related to LSC Communications, RRD and Donnelley Financial RSUs held by Company employees, officers and directors was $6
million, $9 million and $7 million for the years ended December 31, 2018, 2017 and 2016, respectively. As of December 31, 2018, there was $6 million of
unrecognized share-based compensation expense related to approximately 0.9 million RSUs outstanding, with a weighted-average grant date fair value of $19.65,
that are expected to vest over a weighted-average period of 1.3 years.
Restricted
Stock
Awards
A summary of RSA activity for the Company’s employees as of December 31, 2017 and 2018, and changes during the year ended December 31, 2018 is
presented below.
Nonvested at December 31, 2017
Vested
Forfeited
Nonvested at December 31, 2018
Shares
(thousands)
Weighted
Average Grant
Date Fair Value
112 $
(49)
(18)
45 $
26.26
26.26
26.26
26.26
Compensation expense related to RSAs for the years ended December 31, 2018, 2017 and 2016 was $1 million, $1 million and a de minimis amount,
respectively. As of December 31, 2018, there was $1 million of unrecognized compensation expense related to RSAs, which is expected to be recognized over a
weighted average period of 0.8 years.
Performance
Restricted
Stock
A summary of PRS activity for the Company’s employees as of December 31, 2017 and 2018, and changes during the year ended December 31, 2018 is
presented below.
Nonvested at December 31, 2017
Vested
Nonvested at December 31, 2018
F-45
Shares
(thousands)
Weighted
Average Grant
Date Fair Value
222 $
(89)
133 $
26.80
26.26
27.16
During the years ended December 31, 2017 and 2016, 44,760 and 266,072 shares of PRS were granted to certain executive officers, payable upon the
achievement of certain established performance targets. The performance periods for the shares awarded in 2017 and 2016 are January 1, 2017 to December 31,
2017 and October 1, 2016 to September 30, 2019, respectively. In addition to being subject to achievement of the performance target, the shares awarded in 2017
are also subject to time-based vesting on March 2, 2020. In addition to being subject to achievement of the performance target, the shares awarded in 2016 are also
subject to time-based vesting in 3 even tranches on October 1, 2017, October 1, 2018 and October 1, 2019. 88,691 shares vested on October 1, 2018. For all
awards, the performance-based vesting and the time-based vesting must be met for the PRS to vest.
The fair value of these awards was determined on the date of grant based on the Company’s stock price. These awards are subject to forfeiture upon
termination of employment prior to vesting, subject in some cases to early vesting upon specified events, including death, permanent disability or retirement of the
grantee or change of control of the Company.
Compensation expense for the awards granted during the year ended December 31, 2017 is being recognized based on an estimated payout of 44,760 shares.
Compensation expense for the awards granted during the year ended December 31, 2016 is being recognized based on an estimated payout of 266,072
shares. Compensation expense related to PRS for the years ended December 31, 2018, 2017 and 2016 was $3 million, $3 million and $1 million, respectively. As
of December 31, 2018, there was $2 million of unrecognized compensation expense related to PRS, which is expected to be recognized over a weighted average
period of 0.9 years.
Performance
Share
Units
A summary of PSU activity for the Company’s employees as of December 31, 2017 and 2018, and changes during the year ended December 31, 2018 is
presented below.
Nonvested at December 31, 2017
Granted
Forfeited
Nonvested at December 31, 2018
Shares
(thousands)
Weighted
Average Grant
Date Fair Value
29 $
249
(20)
258 $
26.72
12.67
17.71
13.85
The 2018 and 2017 grants consisted of 248,583 and 28,520 PSUs, respectively, granted during the years ended December 31, 2018 and 2017 to certain
members of senior management, respectively, payable upon the achievement of certain established performance targets. The performance period for 242,965 of the
units awarded in 2018 is January 1, 2018 to December 31, 2020. The performance period for 5,618 of the units awarded in 2018 that relate to the 2017 grant and all
units awarded in 2017 is January 1, 2017 to December 31, 2017, respectively. As of December 31, 2018, compensation expense for the PSUs granted in 2017 is
being recognized based on an estimated payout of 27,192 shares. Compensation expense is being recognized as of December 31, 2018 based on an estimated
payout of 121,483 for the 2018 grant, which is 50% of the original granted shares. In addition to being subject to achievement of the performance target, the PSUs
granted in 2018 and 2017 are also subject to time-based vesting on March 2, 2021 and March 2, 2020, respectively. Both the performance-based vesting and the
time-based vesting must be met for the PSUs to vest.
The fair value of these awards was determined based on the Company’s stock price on the grant date reduced by the present value of expected dividends
through the vesting period. These awards are subject to forfeiture upon termination of employment prior to vesting, subject in some cases to early vesting upon
specified events, including death, permanent disability or retirement of the grantee or change of control of the Company.
There was $1 million and a de minimis amount of compensation expense related to PSUs for each of the years ended December 31, 2018 and 2017,
respectively. As of December 31, 2018, there was $1 million of unrecognized compensation expense related to PSUs, which is expected to be recognized over a
weighted average period of 2.1 years.
F-46
Note 18 . Segment Information
During the third quarter of 2018, the Company realigned the reportable segments and reporting units to reflect its evolution since its separation from RRD in
2016, as well as changes from recent acquisition and disposal activity. All prior year amounts have been reclassified to conform to the Company’s current
reporting structure.
The Company’s segment and product and service offerings are summarized below:
Magazines,
Catalogs
and
Logistics
The Magazines, Catalogs and Logistics segment primarily produces magazines and catalogs, as well as provides logistics solutions to the Company and
other third parties. The segment also provides certain other print-related services, including mail-list management and sortation. The segment has operations
primarily in the U.S. The Magazines, Catalogs and Logistics segment is divided into two reporting units: magazines and catalogs; and logistics. The Magazines,
Catalogs and Logistics segment accounted for approximately 45% of the Company’s consolidated net sales in 2018.
Book
The Book segment produces books for publishers primarily in the U.S. The segment also provides supply-chain management services and warehousing and
fulfillment services, as well as e-book formatting for book publishers. The Book segment accounted for approximately 28% of the Company’s consolidated net
sales in 2018.
Office
Products
The Office Products segment manufactures and sells branded and private label products in five core categories: filing products, envelopes, note-taking
products, binder products, and forms. The Office Products segment accounted for approximately 15% of the Company’s consolidated net sales in 2018.
Other
The Other grouping consists of the following non-reportable segments: Europe, Directories, Mexico, and Print Management. Europe produces magazines,
catalogs and directories and provides packaging and pre-media services. Mexico produces magazines, catalogs, statements, forms, and labels. Print Management
provides outsourced print procurement and management services. The Company disposed of its European printing business in the third quarter of 2018. The Other
grouping consists of approximately 12% of the Company’s consolidated net sales in 2018.
Corporate
Corporate consists of unallocated selling, general and administrative activities and associated expenses including, in part, executive, legal, finance,
communications, certain facility costs and LIFO inventory provisions. In addition, share-based compensation expense is included in Corporate and not allocated to
the operating segments. Prior to the separation, many of these costs were based on allocations from RRD, however, the Company has incurred such costs directly
after the separation.
F-47
Information
by
Segment
The Company has disclosed income (loss) from operations as the primary measure of segment earnings (loss). This is the measure of profitability used by
the Company’s chief operating decision-maker and is most consistent with the presentation of profitability reported with the consolidated and combined financial
statements.
Year
Ended
December
31,
2018
Magazines, Catalogs and Logistics
Book
Office Products
Total reportable segments
Other
Corporate
Total operations
Year
Ended
December
31,
2017
Magazines, Catalogs and Logistics
Book
Office Products
Total reportable segments
Other
Corporate
Total operations
Year
Ended
December
31,
2016
Magazines, Catalogs and Logistics
Book
Office Products
Total reportable segments
Other
Corporate
Total operations
Net
Sales
Income (Loss)
from
Operations
Assets of
Operations
Depreciation
and
Capital
Amortization
Expenditures
$
1,767
1,055
562
3,384
444
(2)
3,826 $
(31) $
58
40
67
26
(51)
42 $
$
726
572
298
1,596
78
80
1,754 $
$
62
52
13
127
10
1
138 $
Net
Sales
Income (loss)
from
Operations
Assets of
Operations
Depreciation
and
Amortization
$
1,583
1,022
495
3,100
503
—
3,603 $
$
(73)
62
42
31
28
(78)
(19) $
$
780
553
377
1,710
222
82
2,014 $
72
60
15
147
11
2
160 $
Capital
Expenditures
$
Net
Sales
Income (loss)
from
Operations
Assets of
Operations
Depreciation
and
Amortization
$
1,526
1,097
527
3,150
504
—
3,654 $
$
28
86
54
168
27
(65)
130 $
$
638
626
323
1,587
237
128
1,952 $
76
67
15
158
12
1
171 $
Capital
Expenditures
$
24
31
1
56
3
4
63
24
13
5
42
10
8
60
19
10
3
32
10
6
48
$
$
$
$
$
$
Corporate assets primarily consisted of the following items at December 31, 2018, 2017 and 2016:
Receivables, less allowances for doubtful
accounts
Software
Cash and cash equivalents
Long-term investments
Property, plant and equipment, net
LIFO reserves
Deferred income tax assets, net of valuation
allowance
2018
2017
2016
$
$
17
19
11
14
14
(52)
22
$
19
17
12
13
14
(57)
19
54
13
45
19
15
(58)
24
Restructuring, impairment and other charges by segment for the year ended December 31, 2018, 2017 and 2016 are described in Note 9, Restructuring,
Impairment
and
Other
Charges.
F-48
Note 19. Geographic Areas
The table below presents net sales and long-lived assets by geographic region.
2018
Net sales
Long-lived assets (a)
2017
Net sales
Long-lived assets (a)
2016
Net sales
Long-lived assets (a)
North America (b)
Europe
Mexico
Consolidated
& Combined
$
$
$
3,495 $
571
3,226 $
607
3,286 $
651
225 $
—
271 $
32
272 $
30
106 $
30
106 $
36
96 $
23
3,826
601
3,603
675
3,654
704
(a) Includes net property, plant and equipment and other noncurrent assets.
(b) North America includes the United States and Canada.
As explained in Note 3, Business
Combinations
and
Disposition
, the Company completed the sale of its European printing business on September 28, 2018.
Note 20. Related Parties
On March 28, 2017, RRD completed the sale of approximately 6.2 million shares of LSC Communications common stock, representing its entire 19.25%
retained ownership.
Allocations
from
RRD
Prior to the separation, RRD provided LSC Communications certain services, which included, but were not limited to, information technology, finance,
legal, human resources, internal audit, treasury, tax, investor relations and executive oversight. RRD charged the Company for these services based on direct usage,
when available, with the remainder allocated on a pro rata basis by revenue, headcount, or other measures. These allocations were reflected as follows in the
consolidated and combined statement of operations:
Costs of goods sold
Selling, general and administrative
Depreciation and amortization
Total allocations from RRD
Nine months ended
September 30, 2016
67
114
5
186
$
$
The Company considered the expense methodologies and financial results to be reasonable. However, these allocations may not be indicative of the actual
expenses that may have been incurred as an independent public company or the costs LSC Communications may incur in the future.
After the separation, the Company no longer receives or records allocations from RRD. The Company records transactions with RRD as external arms-
length transactions in the Company’s consolidated financial statements.
F-49
Transactions
with
RRD
Revenues
and
Purchases
Given that RRD sold its remaining stake in LSC Communications on March 28, 2017, the following information is presented for the three months ended
March 31, 2017 and year ended December 31, 2016 only.
LSC Communications generates net revenue from sales to RRD’s subsidiaries. Net revenues from related party sales were $32 million and $87 million for
the three months ended March 31, 2017 and year ended December 31, 2016, respectively.
LSC Communications utilizes RRD for freight and premedia services, and utilized RRD for logistics services prior to LSC Communications’ acquisition of
Print Logistics in 2018. There were cost of sales of $51 million and $208 million for the three months ended March 31, 2017 and year ended December 31, 2016,
respectively, related to freight, logistics and premedia services purchased from RRD. These amounts are included in the consolidated and combined statements of
operations.
Note 21. New Accounting Pronouncements
In February 2016, the FASB issued Accounting Standards Update No. 2016-02 “Leases (Topic 842) Section A—Leases: Amendments to the FASB
Accounting Standards Codification” (“ASU 2016-02”), which requires lessees to put most leases on the balance sheet but recognize expense on the income
statement in a manner similar to current accounting. For lessors, ASU 2016-02 also modifies the classification criteria and the accounting for sales-type and direct
financing leases.
The standard is effective in the first quarter of 2019. Early adoption of ASU 2016-02 is permitted, however, the Company will adopt the standard in the first
quarter of 2019. In July 2018, the FASB issued Accounting Standards Update No. 2018-11 “Leases (Topic 842): Targeted Improvements” (“ASU 2018-11”),
which permits companies to initially apply the new leases standard at the adoption date and not restate periods prior to adoption. The Company will adopt ASU
2018-11.
The new standard provides a number of optional practical expedients in transition and in ongoing accounting. The Company will elect the ‘package of
practical expedients’, which permits the Company not to reassess under the new standard the prior conclusions about lease identification, lease classification and
initial direct costs. The Company will not elect the use-of-hindsight or the practical expedient pertaining to land easements. Related to ongoing accounting, the
Company will make an accounting policy election to keep leases with an initial term of 12 months or less off of the balance sheet and will also elect the practical
expedient to not separate lease and non-lease components for all of our leases. When calculating the balance sheet right of use assets and lease liabilities, the
Company will apply an incremental borrowing rate commensurate with the original lease term and lease payments.
Upon adoption of ASC 842, the Company is required to recognize all right of use assets and lease liabilities on the balance sheet. Based upon the balances
that existed as of December 31, 2018, the Company will record an increase of approximately $206 million to both right of use assets and lease liabilities in the first
quarter of 2019. We anticipate that the adoption of ASC 842 will not have a material impact to the future consolidated net earnings and will not have a material
impact on our liquidity or our debt-covenant compliance under our current agreements.
F-50
2018
Net sales
Cost of sales
(Loss) income from operations
Net (loss) income
Net (loss) earnings per basic share
Net (loss) earnings per diluted share
2017
Net sales
Cost of sales
Income (loss) from operations
Net (loss) income
Net (loss) earnings per basic share
Net (loss) earnings per diluted share
UNAUDITED INTERIM FI NANCIAL INFORMATION
(tabular amounts in millions, except per share data)
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Full Year
$
$
929 $
808
(6)
(11)
(0.32)
(0.32)
821 $
692
7
(1)
(0.02)
(0.02)
943 $
798
18
8
0.24
0.23
848 $
705
7
5
0.13
0.12
1,015 $
862
41
(4)
(0.12)
(0.12)
935 $
778
(18)
(3)
(0.07)
(0.07)
939 $
815
(11)
(16)
(0.47)
(0.47)
999 $
851
(15)
(58)
(1.68)
(1.68)
3,826
3,283
42
(23)
(0.67)
(0.67)
3,603
3,026
(19)
(57)
(1.69)
(1.69)
The amounts above reflect the results of acquired businesses from the relevant acquisition dates and include the following significant items:
2018
Purchase accounting adjustments
Acquisition, merger and
disposition-related expenses
Restructuring, impairment and
other charges-net
First
Quarter
Second
Quarter
Pre-tax
Third
Quarter
Fourth
Quarter
Full
Year
First
Quarter
Second
Quarter
After-tax
Third
Quarter
Fourth
Quarter
Full
Year
$
3 $
— $
1 $
(1) $
3 $
2 $
— $
1 $
(1) $
1
1
6
11
2
1
6
10
—
17
35
4
1
8
2
1
5
14
27
2
8
2017
Separation-related expenses
Purchase accounting adjustments
Acquisition-related expenses
Loss on debt extinguishment
Restructuring, impairment and
other charges-net
First
Quarter
Second
Quarter
Pre-tax
Third
Quarter
Fourth
Quarter
Full
Year
First
Quarter
Second
Quarter
After-tax
Third
Quarter
Fourth
Quarter
Full
Year
$
1 $
—
—
—
2 $
—
1
—
1 $
1
2
—
— $
(2)
2
3
4 $
(1)
5
3
6
21
60
42
129
1 $
1 $
—
—
—
3
—
1
—
14
1 $
1
1
—
— $
(2)
1
2
3
(1)
3
2
25
50
92
F-51
2.1
2.2
2.3
2.4
2.5
2.6
2.7
2.8
3.1
3.2
4.1
4.2
10.1
10.2
INDEX TO EXHIBITS
Separation and Distribution Agreement, dated as of September 14, 2016, by and among R. R. Donnelley & Sons Company, LSC
Communications, Inc. and Donnelley Financial Solutions, Inc. (the “Separation Agreement”) (incorporated by reference to Exhibit 2.1 to the
Company’s Current Report on Form 8-K filed on October 3, 2016)
Transition Services Agreement, dated as of September 14, 2016, between LSC Communications, Inc. and R. R. Donnelley & Sons Company
(incorporated by reference to Exhibit 2.2 to the Company’s Current Report on Form 8-K filed on October 3, 2016)
Transition Services Agreement, dated as of September 14, 2016, between LSC Communications, Inc. and Donnelley Financial Solutions, Inc.
(incorporated by reference to Exhibit 2.3 to the Company’s Current Report on Form 8-K filed on October 3, 2016)
Tax Disaffiliation Agreement, dated as of September 14, 2016, between LSC Communications, Inc. and R. R. Donnelley & Sons Company
(incorporated by reference to Exhibit 2.4 to the Company’s Current Report on Form 8-K filed on October 3, 2016)
Patent Assignment and License Agreement, dated as of September 27, 2016, between LSC Communications US, LLC and R. R. Donnelley &
Sons Company (incorporated by reference to Exhibit 2.5 to the Company’s Current Report on Form 8-K filed on October 3, 2016)
Trademark Assignment and License Agreement, dated as of September 27, 2016, between LSC Communications US, LLC and R. R.
Donnelley & Sons Company (incorporated by reference to Exhibit 2.6 to the Company’s Current Report on Form 8-K filed on October 3,
2016)
Data Assignment and License Agreement, dated as of September 27, 2016, between LSC Communications US, LLC and R. R. Donnelley &
Sons Company (incorporated by reference to Exhibit 2.7 to the Company’s Current Report on Form 8-K filed on October 3, 2016)
Software, Copyright and Trade Secret Assignment and License Agreement, dated as of September 27, 2016, between LSC Communications
US, LLC and R. R. Donnelley & Sons Company (incorporated by reference to Exhibit 2.8 to the Company’s Current Report on Form 8-K
filed on October 3, 2016)
Amended and Restated Certificate of Incorporation of LSC Communications, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s
Current Report on Form 8-K filed on October 3, 2016)
Amended and Restated By-laws of LSC Communications, Inc. (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on
Form 8-K filed on October 3, 2016)
Indenture, dated as of September 30, 2016, among LSC Communications, Inc., the subsidiary guarantors party thereto and Wells Fargo Bank,
National Association, as Trustee and as Collateral Agent (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form
8-K filed on October 3, 2016)
Registration Rights Agreement, dated as of July 28, 2017, by and among LSC Communications, Inc. Victor G. Warren Revocable Trust
Dated July 14, 1993, James Reifenberg, Mark Nickel, Phillip Warren and James M. Slattery (incorporated by reference to Exhibit 4.1 to the
Company’s Registration Statement on Form S-3 filed on October 2, 2017)
Credit Agreement, dated as of September 30, 2016, among LSC Communications, Inc., the lenders party thereto, Bank Of America, N.A., as
Administrative Agent Swing Line Lender and an L/C Issuer, Citigroup Global Markets Inc. and JPMorgan Chase Bank, N.A., as Co-
Syndication Agents (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 3, 2016)
Amendment No. 1 to Credit Agreement dated as of November 17, 2017, by and among LSC Communications, Inc., the other Loan Parties,
the 2017 Refinancing Term Lenders party thereto and Bank of America, N.A., as administrative agent and collateral agent (incorporated by
reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2018, filed on May 3, 2018)
E-1
10.3
10. 4
10. 5
10. 6
10. 7
10. 8
10. 9
10. 10
10 .1 1
10.1 2
10.1 3
10.1 4
10.1 5
10.1 6
10.1 7
10.1 8
10.1 9
Amendment No. 2 to Credit Agreement dated as of December 20, 2018, by and among LSC Communications, Inc. the other Loan Parties, the
Lenders party thereto and Bank of America, N. A., as administrative agent and collateral agent (filed herewith)
2016 LSC Communications, Inc. Performance Incentive Plan (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on
Form 8-K filed on October 3, 2016)*
Amended and Restated LSC Communications, Inc. 2016 Performance Incentive Plan (incorporated by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed on May 23, 2017)*
LSC Communications, Inc. Nonqualified Deferred Compensation Plan, amended and restated effective as of August 1, 2018 (incorporated by
reference to Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q filed on August 2, 2018)*
LSC Unfunded Supplemental Pension Plan effective October 1, 2016 (incorporated by reference to Exhibit 10.4 to the Company’s Annual
Report on Form 10-K for the fiscal year ended December 31, 2016, filed on February 23, 2017)*
Supplemental Executive Retirement Plan-B for Designated Executives effective January 1, 2001 as amended effective December 31, 2004,
January 1, 2005 and September 30, 2016 (the “SERP-B”) (incorporated by reference to Exhibit 10.5 to the Company’s Annual Report on
Form 10-K for the fiscal year ended December 31, 2016, filed on February 23, 2017)*
LSC Communications Annual Incentive Plan as amended and restated effective January 17, 2019 (filed herewith)*
Assignment of Employment Agreement and Acceptance of Assignment, dated as of September 29, 2016, between LSC Communications,
Inc., R. R. Donnelley & Sons Company and Thomas J. Quinlan III (incorporated by reference to Exhibit 10.5 to the Company’s Current
Report on Form 8-K filed on October 3, 2016)*
Amendment to Employment Agreement, dated as of October 25, 2017, between LSC Communications, Inc. and Thomas J. Quinlan III
(incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 31, 2017)*
Key Employee Severance Plan effective October 25, 2017 (incorporated by reference to Exhibit 10.15 to the Company’s Quarterly Report on
Form 10-Q for the quarter ended September 30, 2017, filed on November 2, 2017)*
Form of Participation Agreement for the Key Employee Severance Plan (incorporated by reference to Exhibit 10.1 to the Company’s Current
Report on Form 8-K, filed on January 19, 2018)*
Participation Agreement between Suzanne S. Bettman and the Company, dated as of January 24, 2018 (incorporated by reference to Exhibit
10.1 to the Company’s Current Report on Form 8-K filed on January 26, 2018)*
Participation Agreement between Andrew B. Coxhead and the Company, dated as of January 24, 2018 (incorporated by reference to Exhibit
10.2 to the Company’s Current Report on Form 8-K filed on January 26, 2018)*
Participation Agreement between Kent A. Hansen and the Company, dated as of January 24, 2018 (incorporated by reference to Exhibit 10.3
to the Company’s Current Report on Form 8-K filed on January 26, 2018)*
Participation Agreement between Richard T. Lane and the Company, dated as of January 24, 2018 (incorporated by reference to Exhibit 10.4
to the Company’s Current Report on Form 8-K filed on January 26, 2018)*
Form of Stock Option Award Agreement (for 2009 to 2012) converted from R. R. Donnelley & Sons Company to the Company pursuant to
the Separation Agreement (incorporated by reference to Exhibit 10.17 to the Company’s Annual Report on Form 10-K for the fiscal year
ended December 31, 2016, filed on February 23, 2017)*
Form of Founder’s Award (Restricted Stock) Agreement (incorporated by reference to Exhibit 10.25 to the Company’s Annual Report on
Form 10-K for the fiscal year ended December 31, 2016, filed on February 23, 2017)*
E-2
10. 20
10.2 1
10.2 2
10.2 3
10.2 4
10.25
10.2 6
10.2 7
10.2 8
10.2 9
10. 30
10. 31
14.1
21.1
23.1
24.1
31.1
31.2
32.1
Form of Performance Restricted Stock Award (for 2017) (incorporated by reference to Exhibit 10.29 to the Company’s Quarterly Report on
Form 10-Q for the quarter ended March 31, 2017, filed on May 4, 2017)*
Form of Performance Unit Award Agreement (for 2018) (incorporated by reference to Exhibit 10.20 to the Company’s Annual Report on
Form 10-K for the fiscal year ended December 31, 2017, filed on February 22, 2018)*
Form of Stock Unit Award Agreement (for 2016) converted from R. R. Donnelley & Sons Company to the Company pursuant to the
Separation Agreement (incorporated by reference to Exhibit 10.22 to the Company’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2016, filed on February 23, 2017)*
Form of Stock Unit Award Agreement (for 2017) (incorporated by reference to Exhibit 10.30 to the Company’s Quarterly Report on Form
10-Q for the quarter ended March 31, 2017, filed on May 4, 2017)*
Form of Restricted Stock Unit Award Agreement (for 2018) (incorporated by reference to Exhibit 10.25 to the Company’s Annual Report on
Form 10-K for the fiscal year ended December 31, 2017, filed on February 22, 2018)*
Form of Restricted Stock Unit Award Agreement (for 2019) (filed herewith)*
Form of Director Indemnification Agreement (incorporated by reference to Exhibit 10.9 to the Company’s Quarterly Report on Form 10-Q
for the quarter ended September 30, 2016, filed on November 10, 2016)*
Policy on Retirement Benefits, Phantom Stock Grants and Stock Options for Directors as amended to March 2000 (incorporated by reference
to Exhibit 10.16 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, filed on February 23, 2017)*
Non-Employee Director Compensation Plan effective as of October 30, 2018 (filed herewith)*
Form of Director Restricted Stock Unit Award as amended (for 2004-2007) converted from R. R. Donnelley & Sons Company to the
Company pursuant to the Separation Agreement (incorporated by reference to Exhibit 10.12 to the Company’s Annual Report on Form 10-K
for the fiscal year ended December 31, 2016, filed on February 23, 2017)*
Form of Director Restricted Stock Unit Award (for 2014-2016) converted from R. R. Donnelley & Sons Company to the Company pursuant
to the Separation Agreement (incorporated by reference to Exhibit 10.13 to the Company’s Annual Report on Form 10-K for the fiscal year
ended December 31, 2016, filed on February 23, 2017)*
Form of Director Restricted Stock Unit Award Agreement (for 2018) (incorporated by reference to Exhibit 10.21 to the Company’s Quarterly
Report on Form 10-Q for the quarter ended September 30, 2017, filed on November 2, 2017)*
Code of Ethics for the Chief Executive Officer and Senior Financial Officers (incorporated by reference to Exhibit 14.1 to the Company’s
Annual Report on Form 10-K for the fiscal year ended December 31, 2016, filed on February 23, 2017)
Subsidiaries of the Company (filed herewith)
Consent of Deloitte & Touche LLP (filed herewith)
Powers of Attorney (filed herewith)
Certification by Thomas J. Quinlan, III, Chief Executive Officer, required by Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange
Act of 1934 (filed herewith)
Certification by Andrew B. Coxhead, Chief Financial Officer, required by Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act
of 1934 (filed herewith)
Certification by Thomas J. Quinlan, III, Chief Executive Officer, required by Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange
Act of 1934 and Section 1350 of Chapter 63 of Title 18 of the United States Code (filed herewith)
E-3
32.2
Certification by Andrew B. Coxhead, Chief Financial Officer, required by Rule 13a-14(b) or Rule 15d-14(b) of the S ecurities Exchange Act
of 1934 and Section 1350 of Chapter 63 of Title 18 of the United States Code (filed herewith)
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
* Management contract or compensatory plan or arrangement
E-4
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, on the 19th day of February 2019.
SIGNA TURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated, on the 19th day of February 2019.
LSC COMMUNICATIONS, INC.
By:
/ S / ANDREW B. COXHEAD
Andrew B. Coxhead
Chief Financial Officer
(Principal
Financial
Officer)
Signature and Title
/ S / T HOMAS J. Q UINLAN III
Thomas J. Quinlan III
President and Chief Executive Officer
Chairman of the Board, Director
(Principal
Executive
Officer)
/ S / A NDREW B. C OXHEAD
Andrew B. Coxhead
Chief Financial Officer
(Principal
Financial
Officer)
/ S / K ENT A. H ANSEN
Kent A. Hansen
Chief Accounting Officer and Controller
(Principal
Accounting
Officer)
/ S / M. S HÂN A TKINS *
M. Shân Atkins
Director
/ S / M ARGARET A. B REYA *
Margaret A. Breya
Director
/ S / J UDITH H. H AMILTON *
Judith H. Hamilton
Director
Signature and Title
/ S / F RANCIS J. J ULES *
Francis J. Jules
Director
/ S / T HOMAS F. O’T OOLE *
Thomas F. O’Toole
Director
/ S / R ICHARD K. P ALMER *
Richard K. Palmer
Director
/ S / D OUGLAS W. S TOTLAR *
Douglas W. Stotlar
Director
/ S / S HIVAN S. S UBRAMANIAM *
Shivan S. Subramaniam
Director
By:
/ S / SUzANNE S. BETTMAN
Suzanne S. Bettman
As
Attorney-in-Fact
*
By Suzanne S. Bettman as Attorney-in-Fact pursuant to Powers of Attorney executed by the directors listed above, which Powers of Attorney have been filed
with the Securities and Exchange Commission
S-1
Exhibit 10.3
EXECUTION VERSION
AMENDMENT NO. 2 TO CREDIT AGREEMENT
AMENDMENT NO. 2 TO CREDIT AGREEMENT (this “ Amendment No. 2 ”), dated as of December 20, 2018, by
and among LSC Communications, Inc. (the “ Borrower ”), the other Loan Parties, the Lenders party hereto and Bank of America, N.A. (“
BofA ”), as administrative agent and collateral agent (in such capacities, including any permitted successor thereto, the “ Administrative
Agent ”).
PRELIMINARY STATEMENTS
WHEREAS, the Borrower has entered into that certain Credit Agreement, dated as of September 30, 2016, among the
Borrower, the other parties thereto, the Lenders party thereto from time to time , BofA, as Administrative Agent, Swing Line Lender and as an
Issuing Bank and the other Issuing Banks party thereto from time to time (as amended, restated, amended and restated, supplemented or
otherwise modified from time to time prior to, but not including, the date hereof, the “ Credit Agreement ”) (capitalized terms used without
definition herein have the meanings given such terms by the Credit Agreement); and
WHEREAS, the Borrower has requested that the Credit Agreement be amended as set forth herein (the Credit
Agreement, as amended by this Amendment No. 2, the “ Amended Credit Agreement ”) and the Lenders party hereto (constituting the
Required Lenders and Required Revolving Lenders) have consented to this Amendment No. 2;
NOW, THEREFORE, for good and valuable consideration, the receipt and adequacy of which is acknowledged by each
party hereto, it is agreed:
.
AmendmentS to Credit AgREEMENT
Effective as of the Amendment No. 2 Effective Date (as defined below), the Credit Agreement is hereby amended as follows:
(a) Section 1.01 of the Credit Agreement is hereby amended by inserting the following new definitions in their correct
alphabetical order:
“ Beneficial Ownership Certification ” means a certification regarding beneficial ownership required by the Beneficial
Ownership Regulation.
“ Beneficial Ownership Regulation ” means 31 C.F.R. § 1010.230.
(b) Article III of the Credit Agreement is hereby amended by inserting the following Section 3.24:
“Section 3.24 Beneficial Ownership Certificate. As of the Amendment No. 2 Effective Date, the information
included in the Beneficial Ownership Certification, if applicable, is true and correct in all respects.”
(c) Section 5.01 of the Credit Agreement is hereby amended by inserting the following clause (h) immediately following
clause (g):
Promptly following any request therefor, provide information and documentation reasonably requested by
“(h)
the Administrative Agent or any Lender for purposes of compliance with applicable “know your customer” and anti-
money-laundering rules and regulations, including, without limitation, the PATRIOT Act and the Beneficial Ownership
Regulation.”
(d) Section 6.10 of the Credit Agreement is hereby replaced in its entirety with the following:
“(a)
The Borrower will not permit the Consolidated Leverage Ratio as of the last day of any fiscal quarter of the
Borrower, commencing with the fiscal quarter ending December 31, 2016 to exceed (i) with respect to any fiscal quarter
ending prior to March 31, 2020, 3.25 to 1.00 and (ii) with respect to any fiscal quarter ending on or after March 31,
2020, 3.00 to 1.00; and
(b)
For so long as any Revolving Commitments are outstanding or any Lender has any Outstanding Revolving
Credit, the Borrower will not permit the Interest Coverage Ratio for any Test Period, commencing with the Test Period
ending December 31, 2016 to be less than (i) with respect to any Test Period ending prior to March 31, 2018, 3.00 to
1.00, (ii) with respect to any Test Period ending on or after March 31, 2018 and prior to March 31, 2020, 3.25 to 1.00
and (iii) with respect to any Test Period ending on or after March 31, 2020, 3.50 to 1.00.”.
Reference to and Effect on the Credit Agreement
. On and after the Amendment No. 2 Effective Date, each reference in the Credit Agreement to “this Agreement,”
“hereunder,” “hereof” and each reference to the “Credit Agreement” in any other Loan Document and, in each case, any text of like import
referring to the Credit Agreement shall mean and be a reference to the Credit Agreement as amended by this Amendment No. 2. This
Amendment No. 2 shall for all purposes constitute a “Loan Document” under and as defined in the Credit Agreement and the other Loan
Documents.
Representations & Warranties
.
In order to induce the Lenders party hereto and the Administrative Agent to enter into this Amendment No. 2, each Loan Party
hereby represents and warrants to the Lenders and the Administrative Agent on and as of the Amendment No. 2 Effective Date that each of
the representations and warranties made by any Loan Party set forth in Article III of the Credit Agreement or in any other Loan Document
shall be true and correct in all material respects ( provided
that, any representation and warranty that is qualified by “materiality,” “material
adverse effect” or similar language shall be true and correct in all respects (after giving effect to any such qualification therein)) on and as of
the Amendment No. 2 Effective Date with the same effect as though made on and as of such date, except to the extent such representations
and warranties expressly relate to an earlier date (in which case such representations and warranties shall be true and correct in all material
respects ( or if any such representation and warranty is qualified by “materiality,” “material adverse effect” or similar language, shall be true
and correct in all respects (after giving effect to any such qualification therein)) on and as of such earlier date); provided
that all references in
the representations set forth in Sections 3.02 , and 3.03 of the Credit Agreement to “Loan Documents” shall be deemed to be references to this
Amendment No. 2 and the other Loan Documents (including the Credit Agreement) as amended by this Amendment No. 2.
Conditions Precedent .
This Amendment No. 2 shall become effective as of the first date (the “ Amendment No. 2 Effective Date ”) when each of the
conditions set forth in this Section 4 shall have been satisfied:
(a) The Administrative Agent shall have received a duly authorized, executed and delivered counterpart of the signature page to
this Amendment No. 2 from each Loan Party, the
2
Administrative Agent and Lenders constituting the Required Lenders and Required Revolving Lenders.
(b) All costs, fees and expenses (including, without limitation, legal fees and expenses) contemplated and to the extent required by
the Credit Agreement shall have been paid to the extent due.
(c) The Administrative Agent shall have received from the Borrower, for the account of each Lender that has validly returned an
executed counterpart to this Amendment No. 2 to the Administrative Agent prior to 5:00 p.m., New York City time, on
December 17, 2018 a fee equal to 0.10% of the aggregate Revolving Credit Commitments and Term Loans of such Lender on
the Amendment No. 2 Effective Date.
(d) No Default or Event of Default shall have occurred or be continuing or would occur immediately after giving effect to the
effectiveness of this Amendment No. 2 on the Amendment No. 2 Effective Date.
(e) Each of the representations and warranties made by any Loan Party set forth in Section 3 hereof shall be true and correct in all
material respects ( provided
that, any representation and warranty that is qualified by “materiality,” “material adverse effect” or
similar language shall be true and correct in all respects (after giving effect to any such qualification therein)) on and as of the
Amendment No. 2 Effective Date with the same effect as though made on and as of such date, except to the extent such
representations and warranties expressly relate to an earlier date (in which case such representations and warranties shall be
true and correct in all material respects ( or if any such representation and warranty is qualified by “materiality,” “material
adverse effect” or similar language, shall be true and correct in all respects (after giving effect to any such qualification
therein)) on and as of such earlier date).
(f) The Administrative Agent shall have received a certificate of the Borrower, dated the Amendment No. 2 Effective Date,
executed by a Responsible Officer of the Borrower certifying compliance with the requirements set forth in clauses (d) and (e)
of this Section 4.
(g) At least 3 business days prior to the Amendment No. 2 Effective Date, any Borrower that qualifies as a “legal entity customer”
under the Beneficial Ownership Regulation shall deliver, to each Lender that so requests, a Beneficial Ownership Certification
in relation to such Borrower.
Reaffirmation .
(a) To induce the Lenders and the Administrative Agent to enter into this Amendment No. 2, each of the Loan Parties hereby
acknowledges and reaffirms its obligations under each Loan Document to which it is a party, including, without limitation, any
prior grant, prior pledge or prior collateral assignment of a lien or security interest, as applicable, contained therein, in each
case as amended, restated, amended and restated, supplemented or otherwise modified prior to or as of the date hereof
(including as amended pursuant to this Amendment No. 2). Each Loan Party acknowledges and agrees that each of the Loan
Documents to which it is a party or otherwise bound shall continue in full force and effect and that all of its obligations
thereunder shall not be impaired or limited by the execution or effectiveness of this Amendment No. 2. Each Guarantor (other
than the Borrower) acknowledges and agrees that (i) such Guarantor is not required by the terms of the Credit Agreement or
any other Loan Document to consent to this Amendment No. 2 and (ii) nothing in the Credit Agreement, this Amendment No.
2 or any other Loan Document shall be deemed to require the consent of such Guarantor to any future amendment, consent or
waiver of the terms of the Credit Agreement.
Miscellaneous Provisions .
3
(a) Ratification . This Amendment No. 2 is limited to the matters specified herein and shall not constitute acceptance or waiver,
or, to the extent not expressly set forth herein, an amendment or modification, of any other provision of the Credit Agreement
or any other Loan Document.
(b) Governing Law; Submission to Jurisdiction, Consent to Service of Process, Waiver of Jury Trial, Etc. Sections 9.10 and 9.11 of
the Credit Agreement are incorporated by reference herein as if such Sections appeared herein, mutatis
mutandis
.
(c) Severability . Section 9.08 of the Credit Agreement is incorporated by reference herein as if such Section appeared herein,
mutatis
mutandis
.
(d) Expenses; Indemnity; Damage Waiver; No Advisory or Fiduciary Relationship. Sections 9.04 and 9.16 of the Credit
Agreement are incorporated by reference herein as if such Sections appeared herein, and shall apply to the activities of BofA
and its Related Parties in connection with this Amendment No. 2, mutatis
mutandis
.
(e) Counterparts; Headings . This Amendment No. 2 may be executed in counterparts (and by different parties hereto on different
counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single contract.
Delivery of an executed counterpart of a signature page of this Amendment No. 2 by telecopy or other electronic transmission
(including in .pdf format) shall be effective as delivery of a manually executed counterpart of this Amendment No. 2. Article
and Section headings used herein are for convenience of reference only, and are not part of this Amendment No. 2 and shall not
affect the construction of, or be taken into consideration in interpreting, this Amendment No. 2.
(f) Amendment, Modification and Waiver . This Amendment No. 2 may not be amended nor may any provision hereof be waived
except pursuant to a writing signed by each of the parties hereto.
[ Remainder
of
page
intentionally
blank;
signatures
begin
next
page
]
4
authorized officers as of the date first above written.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 2 to be duly executed by their respective
LSC COMMUNICATIONS, INC. , as Borrower
By: /s/ Suzanne S. Bettman
Name: Suzanne S. Bettman
Title: Chief Compliance Officer; Secretary; General Counsel
WITH RESPECT TO SECTION 5:
COURIER COMMUNICATIONS LLC ,
COURIER KENDALLVILLE, INC.,
COURIER NEW MEDIA, INC.,
CREEL PRINTING, LLC
DOVER PUBLICATIONS, INC.,
FAIRRINGTON, LLC,
LSC COMMUNICATIONS MM LLC,
LSC COMMUNICATIONS US, LLC,
LSC INTERNATIONAL HOLDINGS, INC.,
NATIONAL PUBLISHING COMPANY,
PUBLISHERS PRESS, LLC, and
QUALITY PARK, LLC,
each as a Loan Party
By: /s/ Janet M. Halpin
Name: Janet M. Halpin
Title: Treasurer
BANK OF AMERICA, N.A., as Administrative Agent and Collateral
Agent
By /s/Angela Larkin
BANK OF AMERICA, N.A., as Lender
By /s/ Kyle Oberkrom
Name: Angela Larkin
Title: Vice President
Name: Kyle Oberkrom
Title: Associate
[LENDER SIGNATURE PAGES ON FILE WITH ADMINISTRATIVE AGENT]
LSC COMMUNICATIONS, INC.
ANNUAL INCENTIVE PLAN
(As
amended
and
restated
effective
January
17,
2019)
Exhibit 10.9
OVERVIEW
The LSC Communications Annual Incentive Plan (the “Annual Incentive Plan” or the “Plan”) is designed to promote the growth and
profitability of LSC Communications, Inc. and its subsidiaries (the “Company” or “LSC Communications”) with incentives to
reward and enhance the retention of eligible employees. Awards are made depending on the Company’s financial performance and
on how well an eligible employee performs against individual goals that link to and support the Company’s strategic and financial
priorities.
The Plan is a sub-plan of the LSC Communications Amended and Restated 2016 Performance Incentive Plan (the “2016 PIP”) and is
subject to all of the performance conditions established pursuant to the 2016 PIP and the limitations set forth therein.
The Human Resources Committee of the Board of Directors of the Company (the “Committee”) administers the Plan. The
Committee has authority to establish rules and regulations for the Plan’s implementation and administration, including the authority
to impose limitations and conditions, with respect to competitive employment or otherwise, that are not inconsistent with the Plan’s
purposes.
PARTICIPATION
Eligibility is limited to executive officers selected by the Committee and other employees designated as eligible by position in the
organization.
TARGET AWARD PERCENTAGE AND PLAN FUNDING
Each eligible participant’s target incentive opportunity under the Annual Incentive Plan is a percentage of such participant’s base
salary as of December 31 of the Plan Year, or such other amount as determined by the Committee. This is referred to as the “Target
Award Percentage” and will be communicated to eligible participants annually. Eligible wages do not include disability benefit
payments. The “Plan Year” for any year is the calendar year. The portion of any Target Award Percentage that is dependent upon
achievement of personal goals may vary based on the participant’s level in the Company (the “Personal Goal Percentage”) and will
be communicated to eligible participants annually.
Subject to the performance conditions established under the 2016 PIP and the limitations set forth therein, the Company must fund
the Plan for a Plan Year for participants to receive an award for that Plan Year. The decision whether or not to fund the Plan for a
particular Plan Year,
as well as the Plan’s funding level, is made by the Committee in its sole discretion based on financial performance targets set by the
Committee, which may not be amended after the end of
the Plan Year. Plan funding is based upon the Company’s actual financial performance for the Plan Year against the previously set
targets and if the Committee determines that the financial targets have been met, the Plan will be funded.
If the Plan is funded, Plan awards will be made based upon the Plan’s funding level and the participant’s achievement level of his or
her personal goals, up to 150% of the participant’s Target Award Percentage (or such other percentage as determined by the
Committee).
PERSONAL GOALS
Personal goals are established for each participant each Plan Year to link and support LSC Communications’ strategic and financial
priorities. A participant’s personal goals are determined each year in consultation with the participant and his or her manager and are
communicated to the participant in writing as part of the goal-setting process. The portion of any Target Award Percentage that is
dependent upon achievement of personal goals may vary based on the participant’s level in the Company and will be communicated
to eligible participants annually. The Committee’s determination of whether a participant has attained, in whole or in part, the
participant’s personal goals for a Plan Year, shall be final and binding.
AWARD AMOUNT AND PAYMENT
Awards are paid following the Plan Year after the Company has determined the achievement of performance goals under the 2016
PIP and the Plan funding decisions and personal performance goals have been made. Except as otherwise provided herein, or by the
Committee, at any time prior to the end of such Plan Year, any award to be paid under the Plan shall be paid to recipients within 2 1 /
2 months after the end of the Plan Year (i.e., by March 15). A participant must be on the payroll of the Company as of the end of the
Plan Year (i.e. as of December 31) to receive an award, except as otherwise determined by the Company. Special provisions apply to
retirees and in the case of a participant’s death or Disability. (Please
refer
to
the
Changes
in
Employment
Status
section
of
this
document
for
details.)
The Committee has the discretionary authority prior to the end of the Plan Year to determine to pay any award in installment
payments over a specified period of time. The Committee also has discretionary authority to increase or decrease the amount of the
award otherwise payable if it determines prior to the end of the Plan Year that an adjustment is appropriate to better reflect the actual
performance of the Company and/or the participant; provided further, the Committee has discretionary authority to decrease the
amount of the award otherwise payable at any time for any person designated as an executive officer of the Company for purposes of
Section 16 of the Securities Exchange Act of 1934, including after the end of the Plan Year. Additionally, the Committee has
discretionary authority to reduce the amount of the award otherwise payable if it determines that any participant engaged in
misconduct.
BENEFITS AND TAX TREATMENT
Award payments are subject to applicable deductions, including social security taxes and federal and applicable state and local
income tax withholding.
2
The treatment of award payments as compensation for purposes of other LSC Communications employee benefits plans is
determined by the terms of the applicable plans.
CHANGES IN EMPLOYMENT STATUS
A. PROMOTIONS, DEMOTIONS, TRANSFERS, CHANGES IN ASSIGNMENT
If a participant is promoted, demoted, transferred to or between business units or from corporate during the year, any award
payout normally will be calculated by prorating the payouts for each eligible position based on the time assigned to that
position. Promotions on to the AIP Plan on or after October 1 of the Plan Year will not be eligible to participate in the Annual
Incentive Plan until the following such Plan Year.
B. NEW HIRE
Employees hired prior to October 1 st of the Plan Year shall be eligible to participate in the Annual Incentive Plan in the year
of hire if designated. Eligible employees hired on or after October 1 of the Plan Year will not be able to participate in the
Annual Incentive Plan until the following such Plan Year.
C. RETIREMENT, DEATH or DISABILITY
A participant’s retirement*, death, or Disability** during a Plan Year or prior to the payment date will not disqualify a
participant from eligibility to receive any award that otherwise would be due under the Plan.
*
For purposes of the Plan, “retirement” means separation from service with the Company (i) at age 65, or (ii) at or after age 55
with 5 or more years of continuous service, except in each case as determined by the Committee.
**
For purposes of the Plan, “Disability” means disability as defined as in the Company’s long-term disability policy as in effect at
the time of the participant’s disability.
D. OTHER TERMINATION
Except as otherwise determined by the Company, if a participant’s employment terminates for reasons other than retirement
(as defined above), death, or Disability (as defined above) prior to the end of the Plan Year, no award shall be payable.
ADMINISTRATION
The Committee has full discretionary authority to administer the Plan, including the authority to determine the performance
achievement attained under the Plan. The Committee may delegate to members of LSC Communications’ management the authority
to administer the Plan and determine performance under the Plan.
3
LSC Communications retains the right to amend or terminate the Plan at any time; provided, however, that awards for any Plan Year
may not be amended or terminated after the completion of such Plan Year except in cases of misconduct of the participant.
4
This Restricted Stock Unit Award (“Award”) is granted as of XXXXXX, 20XX (the “Grant Date”), by LSC
Communications, Inc., a Delaware corporation (the “Company”), to XXXXXX (“Grantee”).
LSC COMMUNICATIONS, INC.
RESTRICTED STOCK UNIT AWARD (2016 PIP)
1. Grant of Award . This Award is in recognition of your hard work and dedication to the Company and is granted as an
incentive for Grantee to remain an employee of the Company and share in the future success of the Company. The Company hereby
credits to Grantee XXXXXX restricted stock units (the “Restricted Stock Units”), subject to the restrictions and on the terms and
conditions set forth herein. This Award is made pursuant to the provisions of the Company’s Amended and Restated 2016
Performance Incentive Plan (the “2016 PIP”). Capitalized terms not defined herein shall have the meanings ascribed to them in the
2016 PIP, unless specified otherwise. Grantee shall indicate acceptance of this Award by signing and returning a copy hereof.
Exhibit 10.25
2. Vesting; Distribution of Award .
(a) Subject to Sections 3 and 4 below, the Restricted Stock Units shall vest 100% on XXXXXX.
(b) As soon as practicable, but not more than 30 days following the vesting date, the Company shall issue one share of
common stock of the Company (“Common Stock”) to Grantee for each Restricted Stock Unit that has vested on such
date. Each Restricted Stock Unit shall be cancelled upon the earlier to occur of the issuance of a share of Common Stock
with respect thereto and the forfeiture of this Award prior to vesting.
3. Treatment Upon Separation from Service.
(a) If Grantee has a separation from service (within the meaning of Treasury Regulation § 1.409A-1(h), hereinafter a
“Separation from Service”) by reason of death or Disability (as defined in the applicable Company long-term disability
policy as in effect at the time of Grantee’s disability), the Restricted Stock Units shall become fully vested of the date of
such Separation from Service.
(b) If Grantee has a Separation from Service other than as specified in Section 3(a) above or Section 4 below, the
Restricted Stock Units, if unvested, shall be forfeited.
4. Treatment upon Change in Control .
(a) At the Effective Time (as defined in that certain Agreement and Plan of Merger by and among Quad/Graphics, Inc.,
QLC Merger Sub, Inc., and LSC Communications, Inc., dated as of October 30, 2018 (the “Merger Agreement”)), the
Restricted Stock Units shall be converted into a restricted stock unit denominated in shares of Quad/Graphics, Inc. class A
common stock, as set forth in Section 6.2(d) of the Merger
SC1:4849638.2
Agreement.
(b) If Grantee’s employment is terminated by the Company without Cause or Grantee resigns his or her employment for
Good Reason (each as defined in Grantee’s Employment Agreement or Participation Agreement under the Company’s Key
Employee Severance Plan, as applicable) within 24 months of the Closing Date (as defined in the Merger Agreement), a
prorated portion of the Restricted Stock Units shall immediately vest and become nonforfeitable. Such prorated portion
shall equal the number of Restricted Stock Units multiplied by a fraction, the numerator of which is the number of days
elapsed between the Grant Date and the date of such termination or resignation, and the denominator of which is 1,095.
5. Dividends . No dividends or dividend equivalents will accrue with respect to the Restricted Stock Units.
6. Rights as a Shareholder . Unless and until distribution with respect to this Award is made in Common Stock pursuant
to paragraph 2(b) above, Grantee shall not have the right to vote, nor have any other rights of ownership in, the shares of Common
Stock represented by the Restricted Stock Units.
7. Withholding Taxes .
(a) As a condition precedent to the issuance to Grantee of any shares of Common Stock pursuant to this Award, Grantee
shall, upon request by the Company, pay to the Company such amount of cash as the Company may be required, under all
applicable federal, state, local or other laws or regulations, to withhold and pay over as income or other withholding taxes
(the “Required Tax Payments”) with respect to the Award. If Grantee shall fail to advance the Required Tax Payments
after request by the Company, the Company may, in its discretion, deduct any Required Tax Payments from any amount
then or thereafter payable by the Company to Grantee.
(b) Grantee may elect to satisfy his or her obligation to advance the Required Tax Payments by any of the following
means: (1) a cash payment to the Company, (2) delivery to the Company of previously owned whole shares of Common
Stock for which Grantee has good title, free and clear of all liens and encumbrances, having a fair market value,
determined as of the date the obligation to withhold or pay taxes first arises in connection with the Award (the “Tax
Date”), equal to the Required Tax Payments, (3) directing the Company to withhold a number of shares of Common Stock
otherwise issuable to Grantee pursuant to this Award having a fair market value, determined as of the Tax Date, equal to
the Required Tax Payments or (4) any combination of (1)-(3). Any fraction of a share of Common Stock which would be
required to satisfy such an obligation shall be disregarded and the remaining amount due shall be paid in cash by
Grantee. No certificate representing a share of Common Stock shall be delivered until the Required Tax Payments have
been satisfied in full. For purposes of this Award, the fair market value of a share of Common Stock on a specified date
shall be determined by reference to the closing stock price in trading of the Common Stock on such date or, if no such
trading in the Common Stock occurred on such date, then on the next preceding date when such trading occurred.
2
8. Non-Solicitation . Grantee and the Company recognize that, due to the nature of Grantee’s employment and relationship
with the Company, Grantee will have access to and develop confidential business information, proprietary information, and trade
secrets relating to the business and operations of the Company and its affiliates. Grantee acknowledges that such information is
valuable to the business of the Company and its affiliates, and that disclosure to, or use for the benefit of, any person or entity other
than the Company or its affiliates, would cause substantial damage to the Company. Grantee further acknowledges that his or her
duties for the Company include the opportunity to develop and maintain relationships with the Company’s customers, employees,
representatives and agents on behalf of the Company and that access to and development of those close relationships with the
Company’s customers render Grantee’s services special, unique and extraordinary. As a result of Grantee’s position and customer
contacts, Grantee recognizes that he or she will gain valuable information about (i) the Company’s relationship with its customers,
their buying habits, special needs, and purchasing policies, (ii) the Company’s pricing policies, purchasing policies, profit structures,
and margin needs, (iii) the skills, capabilities and other employment-related information relating to Company employees, and (iv)
other matters of which Grantee would not otherwise know and that is not otherwise readily available. Grantee recognizes that the
good will and relationships described herein are assets and extremely valuable to the Company, and that loss of or damage to those
relationships would destroy or diminish the value of the Company. In consideration for the grant of this Award, Grantee agrees as
follows:
(a) Non-Solicitation
of
Customers.
Grantee shall not, while employed by the Company and for a period of one year from
the date of his or her Separation from Service for any reason, including Separation from Service initiated by the Company
with or without Cause, directly or indirectly, either on Grantee’s own behalf or on behalf of any other person, firm or
entity, solicit or provide services that are the same as or similar to the services the Company provided or offered while
Grantee was employed by the Company to any customer or prospective customer of the Company (i) with whom Grantee
had direct contact during the last two years of Grantee’s employment with the Company or about whom Grantee learned
confidential information as a result of his or her employment with the Company, or (ii) with whom any person over whom
Grantee had supervisory authority at any time had direct contact during the last two years of Grantee’s employment with
the Company or about whom such person learned confidential information as a result of his or her employment with the
Company.
(b) Non-Solicitation
of
Employees.
Grantee shall not, while employed by the Company and for a period of two years
following his or her Separation from Service for any reason, including his or her Separation from Service initiated by the
Company with or without Cause, either directly or indirectly solicit, induce or encourage any individual who was a
Company employee at the time of, or within six months prior to, Grantee’s Separation from Service, to terminate their
employment with the Company or accept employment with any entity, including but not limited to a competitor, supplier
or customer of the Company, nor shall Grantee cooperate with any others in doing or attempting to do so. As used herein,
the term “solicit, induce or encourage” includes, but is not limited to, (i) initiating communications with a Company
employee relating to possible employment, (ii) offering bonuses or other compensation to encourage a Company employee
to terminate his or her employment with the Company and accept
3
employment with any entity, including but not limited to a competitor, supplier or customer of the Company, or (iii)
referring Company employees to personnel or agents employed by any entity, including but not limited to competitors,
suppliers or customers of the Company.
9. Miscellaneous .
(a) The Company shall pay all original issue or transfer taxes with respect to the issuance or delivery of shares of Common
Stock pursuant hereto and all other fees and expenses necessarily incurred by the Company in connection therewith, and
will use reasonable efforts to comply with all laws and regulations which, in the opinion of counsel for the Company, shall
be applicable thereto.
(b) Nothing in this Award shall confer upon Grantee any right to continue in the employ of the Company or any other
company that is controlled, directly or indirectly, by the Company or to interfere in any way with the right of the Company
to terminate Grantee’s employment at any time.
(c) This Award shall be governed in accordance with the laws of the state of Delaware.
(d) This Award shall be binding upon and inure to the benefit of any successor or successors to the Company. For the
avoidance of doubt, following the Effective Time, references herein to the “Company” shall refer to Quad/Graphics, Inc.
and QLC Merger Sub, Inc.
(e) Neither this Award nor the Restricted Stock Units nor any rights hereunder or thereunder may be transferred or
assigned by Grantee other than by will or the laws of descent and distribution or pursuant to beneficiary designation
procedures approved by the Company or other procedures approved by the Company. Any other transfer or attempted
assignment, pledge or hypothecation, whether or not by operation of law, shall be void.
(f) The Committee, as from time to time constituted, shall have the right to determine any questions which arise in
connection with this Agreement or the Restricted Stock Units. This Agreement and the Restricted Stock Units are subject
to the provisions of the 2016 PIP and shall be interpreted in accordance therewith.
(g) For the avoidance of doubt, Grantee agrees and acknowledges that the Restricted Stock Units and any shares of
Common Stock that may be delivered to Grantee upon vesting pursuant to this Agreement are subject to the Company’s
policies in place at the time of grant of this Award.
(h) If Grantee is a resident of Canada, Grantee further agrees and represents that any acquisitions of Common Stock
hereunder are for his or her own account for investment, and without the present intention of distributing or selling such
Common Stock or any of them. Further, the Company and its subsidiaries expressly reserve the right at any time to
dismiss Grantee free from any liability, or any claim under this Award, except
4
as provided herein or in any agreement entered into hereunder. Any obligation of the Company under this Award to make
any payment at any future date or issue Common Stock merely constitutes the unfunded and unsecured promise of the
Company to make such payment or issue such Common Stock; any payment shall be from the Company’s general assets in
accordance with this Award and the issuance of any Common Stock shall be subject to the Company’s compliance with all
applicable laws including securities law and the laws its jurisdiction of incorporation or continuance, as applicable, and no
Grantee shall have any interest in, or lien or prior claim upon, any property of the Company or any subsidiary by reason of
that obligation. If Grantee is a resident of Canada, Grantee hereby indemnifies the Company against and agrees to hold it
free and harmless from any loss, damage, expense or liability resulting to the Company if any sale or distribution of the
Common Stock by Grantee is contrary to the representations and agreements referred to above.
(i) If there is any conflict between the terms and conditions of this Award (including, for the avoidance of doubt, treatment
upon termination of employment) and the terms and conditions of Grantee’s employment agreement, Participation
Agreement under the Company’s Key Employee Severance Plan, employment letter or other similar agreement with the
Company, the terms and conditions of such agreement shall control.
(j) This Award is intended to be exempt from section 409A of the Internal Revenue Code of 1986, as amended (the
“Code”), and the regulations promulgated thereunder, as a “short-term deferral.” This Award shall be administered and
interpreted to the extent possible in a manner consistent with the intent expressed in this paragraph. If any compensation
or benefits provided by this Award may result in the application of section 409A of the Code, the Company shall, in
consultation with you, modify this Award as necessary in order to exclude such compensation from the definition of
“deferred compensation” within the meaning of such section 409A of the Code or in order to comply with the provisions of
section 409A of the Code. By signing this Agreement you acknowledge that if any amount paid or payable to you
becomes subject to section 409A of the Code, you are solely responsible for the payment of any taxes and interest due as a
result.
5
IN WITNESS WHEREOF, the Company has caused this Award to be duly executed by its duly authorized officer.
LSC Communications, Inc.
By:
Name: Suzanne S. Bettman
Title: Chief Administrative Officer
All of the terms of this Award are accepted as of this ___ day of ______, 2019.
______________________________
Grantee:
6
LSC Communications, Inc.
Non-Employee Director Compensation Plan
Exhibit 10.28
Explanatory
Note
: Pursuant to the Agreement and Plan of Merger by and among Quad/Graphics, Inc., QLC Merger Sub,
Inc. and LSC Communications, Inc. (the “Company”), dated as of October 30, 2018 (the “Merger Agreement”), if the
closing of the transaction contemplated by the Merger Agreement has not occurred by May 22, 2019, the Company may
grant and pay its non-employee directors the annual cash retainers, including additional cash retainers equal to the value of
the equity retainer(s) such directors otherwise would have been entitled to receive, in each case in the amounts set forth
below pursuant to the terms of this Non-Employee Director Compensation Plan. Such amounts would be paid on May 23,
2019. The terms of this plan otherwise remain unchanged.
Each director shall receive (A) an annual cash retainer (a “Cash Retainer”) and (B) an annual equity retainer (an “Equity
Retainer”) to be paid in the form of a grant of Restricted Stock Units (“RSUs”) each on the date of the Company’s Annual
Meeting of Stockholders, as described further below and pursuant to the Company’s Performance Incentive Plan in effect
on such date (the “Plan”).
1) Cash Retainer .
a)
Each director shall be entitled to a Cash Retainer equal to $90,000.
b) Any director in a leadership role shall be entitled to an additional Cash Retainer in the applicable amount
described in the table below:
Lead Director
Chairman of the Audit Committee
Chairman of the Human Resources Committee
Chairman of the Corporate Responsibility & Governance
Committee
$62,500
$25,000
$25,000
$20,000
2) Equity Retainer .
a)
b)
c)
Each director shall be entitled to an Equity Retainer equal to $135,000.
The Lead Director shall be entitled to an additional Equity Retainer equal to $62,500.
The number of shares granted shall be calculated pursuant to the terms of the Plan and shall be rounded down to
the nearest share.
d) RSUs will vest and be payable on the first anniversary of the grant date , but will be payable in full on the earlier
of (i) the date the director ceases to be a Director of the Company and (ii) a Change in Control (as defined in the
Plan).
e) Dividend equivalents on the RSUs issued hereunder are deferred, credited with interest quarterly at the same rate
as five-year U.S. government bonds and paid out in cash at the same time the corresponding portion of the
award becomes payable.
f)
g)
The Company shall make payment of the RSUs in Company common stock.
Each director may, subject to any conditions deemed appropriate from time to time by the Human Resources
Committee, defer the delivery of the Equity
Effective as of October 30, 2018
Retainer until the termination of such director’s service on the Board in accordance with Section 409A of the
Internal Revenue Code of 1986, as amended ( including the appl icable regulations thereunder ) using such
deferral election form as approved by the Human Resources Committee from time to time .
3) General .
a)
If any director joins the Board on a date other than the date of the Company’s Annual Meeting, then a pro-rata
portion of each of the applicable Cash Retainer and Equity Retainer from the date joined to the next Annual
Meeting date shall be granted.
Each director is expected to comply with the terms of any stock ownership guidelines for non-employee directors that are established
by the Company, as in effect from time to time.
Effective as of October 30, 2018
Entity Name
American Pad and Paper de Mexico S. de R.L. de C.V.
Cardinal Brands Fabricacion S. de R.L. de C.V.
Clark Distribution Systems, Inc.
Clark Group, Inc., The
Clark Holdings Inc.
Clark Worldwide Transportation, Inc.
Continuum Management Company, LLC
Courier Communications LLC
Courier Companies, Inc.
Courier Kendallville, Inc.
Courier New Media, Inc.
Courier Properties, Inc.
Courier Publishing, Inc.
Creel Printing, LLC
Dover Publications, Inc.
F.T.C. Services, Inc.
F.T.C. Transport, Inc.
Fairrington, LLC
LibreDigital, Inc.
LSC Communications Almacen, S. de R.L. de C.V.
LSC Communications Canada Corporation
LSC Communications Canada Holdings ULC
LSC Communications Holdings B.V.
LSC Communications MM LLC
LSC Communications Netherlands B.V.
LSC Communications OP sp. z.o.o.
LSC Communications Pendaflex Mexico, S. de R.L. de C.V.
LSC Communications Printing Company
LSC Communications sp. z o.o.
LSC Communications UK Limited
LSC Communications US, LLC
LSC International Holdings, Inc.
LSC Pendaflex de Reynosa, S. de R.L. de C.V.
Moore-Langen Printing Company, Inc.
National Publishing Company
Print LSC Communications, S. de R.L. de C.V.
Print LSC Mexico S. de R.L. de C.V.
Print LSC Operaciones, S. de R.L. de C.V.
Publishers Press, LLC
Quality Park, LLC
Research & Education Association, Inc.
TOPS SLT Holdings S. de R.L. de C.V.
TriLiteral LLC
LSC Communications, Inc.
Subsidiaries as of February 19, 2019
Entity Type
Limited Liability Company
Limited Liability Company
Corporation
Corporation
Corporation
Corporation
Limited Liability Company
Limited Liability Company
Corporation
Corporation
Corporation
Corporation
Corporation
Limited Liability Company
Corporation
Corporation
Corporation
Limited Liability Company
Corporation
Limited Liability Company
Unlimited Company
Unlimited Company
Private Limited Liability Company
Limited Liability Company
Private Limited Liability Company
Limited Liability Company
Limited Liability Company
Corporation
Limited Liability Company
Private Limited Company
Limited Liability Company
Corporation
Limited Liability Company
Corporation
Corporation
Limited Liability Company
Limited Liability Company
Limited Liability Company
Limited Liability Company
Limited Liability Company
Corporation
Limited Liability Company
Limited Liability Company
Domestic Jurisdiction
Mexico
Tamaulipas
Delaware
Delaware
Delaware
Pennsylvania
Delaware
Massachusetts
Massachusetts
Indiana
Massachusetts
Massachusetts
Massachusetts
Delaware
New York
Illinois
Illinois
Delaware
Delaware
Mexico
Nova Scotia
Nova Scotia
Netherlands
Delaware
Netherlands
Poland
Mexico
Delaware
Poland
England and Wales
Delaware
Delaware
Mexico
Indiana
Pennsylvania
Mexico
Mexico
Mexico
Delaware
Delaware
Delaware
Mexico
Delaware
Exhibit 21.1
Country
Mexico
Mexico
United States
United States
United States
United States
United States
United States
United States
United States
United States
United States
United States
United States
United States
United States
United States
United States
United States
Mexico
Canada
Canada
Netherlands
United States
Netherlands
Poland
Mexico
United States
Poland
United Kingdom
United States
United States
Mexico
United States
United States
Mexico
Mexico
Mexico
United States
United States
United States
Mexico
United States
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement No. 333-213913 on Form S-8, and Registration Statement No. 333-220762 on Form S-3
filed by LSC Communications, Inc., and Registration Statement No. 333-228752 on Form S-4 filed by Quad/Graphics, Inc. of our report dated February 19, 2019,
relating to (1) the consolidated and combined financial statements of LSC Communications, Inc. and subsidiaries (the “Company”) (which report expresses an
unqualified opinion and includes explanatory paragraphs related to the change in accounting principle due to the adoption of Accounting Standards Update (ASU)
No. 2014-09, Revenue from Contracts with Customers, and the basis of presentation of the consolidated and combined financial statements) and (2) the
effectiveness of the Company’s internal control over financial reporting, appearing in this Annual Report on Form 10-K of LSC Communications, Inc. for the year
ended December 31, 2018.
Exhibit 23.1
/s/ DELOITTE & TOUCHE LLP
Chicago, Illinois
February 19, 2019
POWER OF ATTORNEY
Exhibit 24.1
KNOW ALL BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Suzanne S.
Bettman, Andrew B. Coxhead and Kent A. Hansen, or any of them, his or her true and lawful attorney-in-fact and agent, with full
power of substitution and resubstitution, in any and all capacities, to sign the Annual Report on Form 10-K of LSC Communications,
Inc. for its fiscal year ended December 31, 2018 and any and all amendments thereto, and to file the same with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and
agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent, or her substitute, may lawfully do or cause to be done by virtue hereof. This Power of Attorney shall be
effective from the date on which it is signed until June 30, 2019.
Dated: February 14, 2019
/s/ M. Shân Atkins
M. Shân Atkins
/s/ Margaret A. Breya
Margaret A. Breya
/s/ Judith H. Hamilton
Judith H. Hamilton
/s/ Francis J. Jules
Francis J. Jules
/s/ Thomas F. O’Toole
Thomas F. O’Toole
/s/ Richard K. Palmer
Richard K. Palmer
/s/ Douglas W. Stotlar
Douglas W. Stotlar
/s/ Shivan S. Subramaniam
Shivan S. Subramaniam
Certification Pursuant to Rule 13a-14(a) and Rule 15d-14(a)
of the Securities Exchange Act of 1934
Exhibit 31.1
I, Thomas J. Quinlan, III, certify that:
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of LSC Communications, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
(a)
(b)
(c)
(d)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially
affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)
(b)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control
over financial reporting.
Date: February 19, 2019
/s/ T HOMAS J. Q UINLAN , III
Thomas J. Quinlan, III
Chairman and Chief Executive Officer
Certification Pursuant to Rule 13a-14(a) and Rule 15d-14(a)
of the Securities Exchange Act of 1934
Exhibit 31.2
I, Andrew B. Coxhead, certify that:
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of LSC Communications, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
(a)
(b)
(c)
(d)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect,
the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)
(b)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely
to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
Date: February 19, 2019
/s/ A NDREW B. C OXHEAD
Andrew B. Coxhead
Chief Financial Officer
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
CERTIFICATION PURSUANT TO RULE 13a-14(b) OR RULE 15d-14(b)
AND SECTION 1350 OF CHAPTER 63 OF TITLE 18
OF THE UNITED STATES CODE (18 U.S.C. 1350),
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Report of LSC Communications, Inc. (the “Company”) on Form 10-K for the period ending December 31, 2018 as filed
with the Securities and Exchange Commission on the date hereof (the “Report”), I, Thomas J. Quinlan, III, President and Chief Executive Officer of the Company,
certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
(1)
(2)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
February 19, 2019
/s/ T HOMAS J. Q UINLAN , III
Thomas J. Quinlan, III
Chairman and Chief Executive Officer
CERTIFICATION OF CHIEF FINANCIAL OFFICER
CERTIFICATION PURSUANT TO RULE 13a-14(b) OR RULE 15d-14(b)
AND SECTION 1350 OF CHAPTER 63 OF TITLE 18
OF THE UNITED STATES CODE (18 U.S.C. 1350),
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
In connection with the Annual Report of LSC Communications (the “Company”) on Form 10-K for the period ended December 31, 2018 as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), I, Andrew B. Coxhead, Executive Vice President and Chief Financial Officer of the
Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
(1)
(2)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
February 19, 2019
/s/ A NDREW B. COXHEAD
Andrew B. Coxhead
Chief Financial Officer