UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2014March 31, 2015
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 1-4694
R.R. DONNELLEY & SONS COMPANY
(Exact name of registrant as specified in its charter)
Delaware |
| 36-1004130 |
(State or other jurisdiction of incorporation or organization) |
| (I.R.S. Employer Identification No.) |
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111 South Wacker Drive, Chicago, Illinois |
| 60606 |
(Address of principal executive offices) |
| (Zip code) |
(312) 326-8000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated filer |
| x |
| Accelerated filer |
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Non-Accelerated filer |
| ¨ (Do not check if a smaller reporting company) |
| Smaller reporting company |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x
As of October 31, 2014, 199.8May 1, 2015, 200.6 million shares of common stock were outstanding.
R.R. DONNELLEY & SONS COMPANY
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2014MARCH 31, 2015
TABLE OF CONTENTS
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FINANCIAL INFORMATION |
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Item 1: |
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Item 2: |
| Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3: |
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Item 4: |
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Item 1: |
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Item 2: |
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Item 4: |
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Item 6: |
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2
Item 1. Condensed Consolidated Financial Statements
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (“RR DONNELLEY”)
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except per share data)
(UNAUDITED)
| September 30, |
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| December 31, |
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| March 31, |
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| December 31, |
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| 2014 |
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| 2013 |
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| 2015 |
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| 2014 |
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ASSETS |
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Cash and cash equivalents | $ | 269.2 |
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| $ | 1,028.4 |
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| $ | 268.7 |
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| $ | 527.9 |
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Receivables, less allowances for doubtful accounts of $42.1 in 2014 (2013 - $44.8) |
| 2,169.6 |
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| 1,832.3 |
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Receivables, less allowances for doubtful accounts of $48.0 in 2015 (2014 - $44.3) |
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| 1,981.6 |
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| 2,033.8 |
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Inventories (Note 3) |
| 652.8 |
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| 501.2 |
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| 560.2 |
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| 586.2 |
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Prepaid expenses and other current assets |
| 231.8 |
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| 199.7 |
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| 233.2 |
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| 225.4 |
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Total current assets |
| 3,323.4 |
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| 3,561.6 |
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| 3,043.7 |
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| 3,373.3 |
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Property, plant and equipment-net (Note 4) |
| 1,579.9 |
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| 1,430.1 |
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| 1,455.5 |
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| 1,515.5 |
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Goodwill (Note 5) |
| 1,729.1 |
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| 1,436.3 |
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| 1,697.9 |
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| 1,706.6 |
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Other intangible assets-net (Note 5) |
| 458.6 |
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| 315.9 |
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| 402.5 |
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| 423.7 |
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Deferred income taxes |
| 83.3 |
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| 118.8 |
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| 227.2 |
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| 234.1 |
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Other noncurrent assets |
| 392.6 |
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| 375.5 |
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| 378.5 |
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| 386.1 |
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Total assets | $ | 7,566.9 |
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| $ | 7,238.2 |
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| $ | 7,205.3 |
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| $ | 7,639.3 |
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LIABILITIES |
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Accounts payable | $ | 1,219.8 |
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| $ | 1,143.0 |
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| $ | 1,100.1 |
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| $ | 1,296.6 |
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Accrued liabilities |
| 862.4 |
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| 814.8 |
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| 727.5 |
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| 867.3 |
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Short-term and current portion of long-term debt (Note 14) |
| 333.5 |
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| 270.9 |
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| 203.3 |
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| 203.4 |
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Total current liabilities |
| 2,415.7 |
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| 2,228.7 |
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| 2,030.9 |
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| 2,367.3 |
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Long-term debt (Note 14) |
| 3,427.3 |
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| 3,587.0 |
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| 3,431.0 |
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| 3,429.1 |
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Pension liabilities |
| 178.8 |
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| 245.2 |
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| 589.4 |
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| 616.1 |
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Other postretirement benefits plan liabilities |
| 176.8 |
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| 174.1 |
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| 204.7 |
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| 210.8 |
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Other noncurrent liabilities |
| 449.9 |
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| 349.5 |
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| 390.7 |
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| 395.6 |
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Total liabilities |
| 6,648.5 |
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| 6,584.5 |
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| 6,646.7 |
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| 7,018.9 |
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Commitments and Contingencies (Note 13) |
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EQUITY (Note 9) |
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RR Donnelley shareholders' equity |
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Preferred stock, $1.00 par value |
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Authorized: 2.0 shares; Issued: None |
| — |
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| — |
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| — |
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Common stock, $1.25 par value |
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Authorized: 500.0 shares; |
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Issued: 259.0 shares in 2014 (2013 - 243.0 shares) |
| 323.7 |
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| 303.7 |
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Issued: 259.0 shares in 2015 and 2014 |
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| 323.7 |
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| 323.7 |
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Additional paid-in-capital |
| 3,036.9 |
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| 2,802.4 |
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| 3,011.0 |
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| 3,041.5 |
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Accumulated deficit |
| (526.6 | ) |
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| (473.4 | ) |
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| (588.8 | ) |
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| (559.1 | ) |
Accumulated other comprehensive loss |
| (499.8 | ) |
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| (488.1 | ) |
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| (794.2 | ) |
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| (773.6 | ) |
Treasury stock, at cost, 59.2 shares in 2014 (2013 - 61.2 shares) |
| (1,438.8 | ) |
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| (1,512.8 | ) | ||||||||
Treasury stock, at cost, 58.4 shares in 2015 (2014 - 59.2 shares) |
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| (1,408.8 | ) |
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| (1,438.7 | ) | |||||||
Total RR Donnelley shareholders' equity |
| 895.4 |
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| 631.8 |
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| 542.9 |
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| 593.8 |
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Noncontrolling interests |
| 23.0 |
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| 21.9 |
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| 15.7 |
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| 26.6 |
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Total equity |
| 918.4 |
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| 653.7 |
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| 558.6 |
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| 620.4 |
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Total liabilities and equity | $ | 7,566.9 |
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| $ | 7,238.2 |
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| $ | 7,205.3 |
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| $ | 7,639.3 |
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(See Notes to Condensed Consolidated Financial Statements)
3
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (“RR DONNELLEY”)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)
(UNAUDITED)
| Three Months Ended |
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| Nine Months Ended |
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| September 30, |
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| September 30, |
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| 2014 |
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| 2013 |
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| 2014 |
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| 2013 |
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Products net sales | $ | 2,480.7 |
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| $ | 2,178.3 |
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| $ | 7,147.1 |
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| $ | 6,443.0 |
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Services net sales |
| 477.1 |
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| 436.6 |
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| 1,387.0 |
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| 1,282.0 |
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Total net sales |
| 2,957.8 |
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| 2,614.9 |
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| 8,534.1 |
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| 7,725.0 |
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Products cost of sales (exclusive of depreciation and amortization) |
| 1,942.1 |
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| 1,709.7 |
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| 5,570.8 |
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| 5,019.7 |
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Services cost of sales (exclusive of depreciation and amortization) |
| 368.1 |
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| 334.8 |
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| 1,080.3 |
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| 978.4 |
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Total cost of sales |
| 2,310.2 |
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| 2,044.5 |
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| 6,651.1 |
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| 5,998.1 |
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Products gross profit |
| 538.6 |
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| 468.6 |
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| 1,576.3 |
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| 1,423.3 |
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Services gross profit |
| 109.0 |
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| 101.8 |
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| 306.7 |
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| 303.6 |
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Total gross profit |
| 647.6 |
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| 570.4 |
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| 1,883.0 |
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| 1,726.9 |
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Selling, general and administrative expenses (exclusive of depreciation and amortization) |
| 334.4 |
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| 291.4 |
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| 990.2 |
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| 867.8 |
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Restructuring, impairment and other charges-net (Note 6) |
| 19.9 |
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| 38.1 |
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| 87.9 |
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| 80.6 |
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Depreciation and amortization |
| 119.6 |
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| 106.3 |
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| 357.0 |
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| 330.9 |
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Income from operations |
| 173.7 |
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| 134.6 |
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| 447.9 |
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| 447.6 |
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Interest expense-net |
| 71.2 |
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| 65.6 |
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| 213.0 |
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| 193.9 |
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Investment and other (income) expense-net |
| 2.0 |
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| (0.3 | ) |
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| 8.9 |
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| 9.2 |
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Loss on debt extinguishment |
| — |
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| 46.3 |
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| 77.1 |
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| 81.9 |
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Earnings before income taxes |
| 100.5 |
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| 23.0 |
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| 148.9 |
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| 162.6 |
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Income tax expense |
| 35.7 |
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| 5.0 |
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| 51.7 |
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| 52.8 |
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Net earnings |
| 64.8 |
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| 18.0 |
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| 97.2 |
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| 109.8 |
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Less: Income (loss) attributable to noncontrolling interests |
| 2.6 |
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| 3.3 |
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| (0.7 | ) |
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| 2.6 |
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Net earnings attributable to RR Donnelley common shareholders | $ | 62.2 |
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| $ | 14.7 |
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| $ | 97.9 |
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| $ | 107.2 |
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Net earnings per share attributable to RR Donnelley common shareholders (Note 10): |
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Basic net earnings per share | $ | 0.31 |
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| $ | 0.08 |
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| $ | 0.49 |
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| $ | 0.59 |
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Diluted net earnings per share | $ | 0.31 |
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| $ | 0.08 |
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| $ | 0.49 |
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| $ | 0.58 |
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Dividends declared per common share | $ | 0.26 |
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| $ | 0.26 |
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| $ | 0.78 |
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| $ | 0.78 |
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Weighted average number of common shares outstanding: |
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Basic |
| 200.3 |
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| 182.3 |
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| 197.9 |
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| 181.8 |
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Diluted |
| 201.6 |
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| 183.9 |
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| 199.4 |
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| 183.3 |
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(See Notes to Condensed Consolidated Financial Statements)
4
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (“RR DONNELLEY”)
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
(UNAUDITED)
| Three Months Ended |
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| Nine Months Ended |
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| September 30, |
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| September 30, |
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| 2014 |
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| 2013 |
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| 2014 |
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| 2013 |
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Net earnings | $ | 64.8 |
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| $ | 18.0 |
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| $ | 97.2 |
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| $ | 109.8 |
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Other comprehensive income (loss), net of tax (Note 11): |
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Translation adjustments |
| (15.0 | ) |
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| (1.1 | ) |
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| (15.3 | ) |
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| (19.8 | ) |
Adjustment for net periodic pension and other postretirement benefits plan cost |
| 1.0 |
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| 5.6 |
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| 3.3 |
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| 9.5 |
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Change in fair value of derivatives |
| — |
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| 0.2 |
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| 0.1 |
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| 0.3 |
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Other comprehensive income (loss) |
| (14.0 | ) |
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| 4.7 |
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| (11.9 | ) |
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| (10.0 | ) |
Comprehensive income |
| 50.8 |
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| 22.7 |
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| 85.3 |
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| 99.8 |
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Less: comprehensive income (loss) attributable to noncontrolling interests |
| 2.6 |
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| 3.3 |
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| (0.9 | ) |
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| 2.7 |
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Comprehensive income attributable to RR Donnelley common shareholders | $ | 48.2 |
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| $ | 19.4 |
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| $ | 86.2 |
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| $ | 97.1 |
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| Three Months Ended |
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| March 31, |
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| 2015 |
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| 2014 |
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Products net sales |
| $ | 2,260.3 |
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| $ | 2,225.7 |
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Services net sales |
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| 485.8 |
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| 448.1 |
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Total net sales |
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| 2,746.1 |
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| 2,673.8 |
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Products cost of sales (exclusive of depreciation and amortization) |
|
| 1,780.3 |
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| 1,745.9 |
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Services cost of sales (exclusive of depreciation and amortization) |
|
| 386.1 |
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| 354.7 |
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Total cost of sales |
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| 2,166.4 |
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| 2,100.6 |
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Products gross profit |
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| 480.0 |
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| 479.8 |
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Services gross profit |
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| 99.7 |
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| 93.4 |
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Total gross profit |
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| 579.7 |
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| 573.2 |
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Selling, general and administrative expenses (exclusive of depreciation and amortization) |
|
| 330.9 |
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| 316.5 |
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Restructuring, impairment and other charges-net (Note 6) |
|
| 19.8 |
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| 45.2 |
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Depreciation and amortization |
|
| 113.4 |
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| 115.5 |
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Income from operations |
|
| 115.6 |
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| 96.0 |
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Interest expense-net |
|
| 69.0 |
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| 71.0 |
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Investment and other expense-net |
|
| 28.3 |
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| 4.6 |
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Loss on debt extinguishment |
|
| — |
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| 77.1 |
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Earnings (loss) before income taxes |
|
| 18.3 |
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| (56.7 | ) |
Income tax expense (benefit) |
|
| 6.4 |
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|
| (23.5 | ) |
Net earnings (loss) |
|
| 11.9 |
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|
| (33.2 | ) |
Less: Loss attributable to noncontrolling interests |
|
| (10.4 | ) |
|
| (4.2 | ) |
Net earnings (loss) attributable to RR Donnelley common shareholders |
| $ | 22.3 |
|
| $ | (29.0 | ) |
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Net earnings (loss) per share attributable to RR Donnelley common shareholders (Note 10): |
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Basic net earnings (loss) per share |
| $ | 0.11 |
|
| $ | (0.15 | ) |
Diluted net earnings (loss) per share |
| $ | 0.11 |
|
| $ | (0.15 | ) |
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Dividends declared per common share |
| $ | 0.26 |
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| $ | 0.26 |
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Weighted average number of common shares outstanding: |
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Basic |
|
| 200.6 |
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|
| 193.1 |
|
Diluted |
|
| 202.1 |
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|
| 193.1 |
|
(See Notes to Condensed Consolidated Financial Statements)
5
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (“RR DONNELLEY”)
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
(UNAUDITED)
| Three Months Ended |
| |||||
| March 31, |
| |||||
| 2015 |
|
| 2014 |
| ||
Net earnings (loss) | $ | 11.9 |
|
| $ | (33.2 | ) |
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Other comprehensive (loss) income, net of tax (Note 11): |
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Translation adjustments |
| (22.6 | ) |
|
| (9.0 | ) |
Adjustment for net periodic pension and postretirement benefits plan cost |
| 2.2 |
|
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| 0.9 |
|
Other comprehensive loss |
| (20.4 | ) |
|
| (8.1 | ) |
Comprehensive loss |
| (8.5 | ) |
|
| (41.3 | ) |
Less: comprehensive loss attributable to noncontrolling interests |
| (10.2 | ) |
|
| (4.3 | ) |
Comprehensive income (loss) attributable to RR Donnelley common shareholders | $ | 1.7 |
|
| $ | (37.0 | ) |
(See Notes to Condensed Consolidated Financial Statements)
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (“RR DONNELLEY”)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(UNAUDITED)
| Nine Months Ended |
| Three Months Ended |
| |||||||||||
| September 30, |
|
| March 31, |
| ||||||||||
| 2014 |
|
| 2013 |
|
| 2015 |
|
| 2014 |
| ||||
OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings | $ | 97.2 |
|
| $ | 109.8 |
| ||||||||
Adjustments to reconcile net earnings to net cash provided by operating activities: |
|
|
|
|
|
|
| ||||||||
Net earnings (loss) |
| $ | 11.9 |
|
| $ | (33.2 | ) | |||||||
Adjustments to reconcile net earnings (loss) to net cash used in operating activities: |
|
|
|
|
|
|
|
| |||||||
Impairment charges |
| 10.1 |
|
|
| 16.6 |
|
|
| 0.8 |
|
|
| 6.6 |
|
Depreciation and amortization |
| 357.0 |
|
|
| 330.9 |
|
|
| 113.4 |
|
|
| 115.5 |
|
Provision for doubtful accounts receivable |
| 10.8 |
|
|
| 11.8 |
|
|
| 5.9 |
|
|
| 2.4 |
|
Share-based compensation |
| 13.8 |
|
|
| 15.6 |
|
|
| 3.5 |
|
|
| 3.8 |
|
Deferred income taxes |
| (32.6 | ) |
|
| (18.0 | ) |
|
| (8.0 | ) |
|
| (3.2 | ) |
Changes in uncertain tax positions |
| (2.5 | ) |
|
| (1.4 | ) |
|
| (1.5 | ) |
|
| (2.9 | ) |
Loss on investments and other assets – net |
| 0.8 |
|
|
| 3.2 |
| ||||||||
Loss related to Venezuela currency remeasurement – net |
| 18.0 |
|
|
| 3.2 |
| ||||||||
Gain on investments and other assets – net |
|
| (0.2 | ) |
|
| (0.8 | ) | |||||||
Loss related to Venezuela currency remeasurement-net |
|
| 29.9 |
|
|
| 21.8 |
| |||||||
Loss on debt extinguishment |
| 77.1 |
|
|
| 81.9 |
|
|
| — |
|
|
| 77.1 |
|
Net pension and other postretirement benefits plan income |
| (35.5 | ) |
|
| (13.4 | ) |
|
| (10.8 | ) |
|
| (11.3 | ) |
Gain on bargain purchase |
| (9.5 | ) |
|
| — |
|
|
| — |
|
|
| (16.6 | ) |
Other |
| 50.3 |
|
|
| 8.0 |
|
|
| 11.8 |
|
|
| 6.4 |
|
Changes in operating assets and liabilities - net of acquisitions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable – net |
| (154.7 | ) |
|
| (63.8 | ) | ||||||||
Accounts receivable - net |
|
| 9.8 |
|
|
| 23.1 |
| |||||||
Inventories |
| (74.3 | ) |
|
| (30.7 | ) |
|
| (1.0 | ) |
|
| 6.1 |
|
Prepaid expenses and other current assets |
| (35.4 | ) |
|
| (1.6 | ) |
|
| (3.4 | ) |
|
| (9.1 | ) |
Accounts payable |
| (10.8 | ) |
|
| (106.1 | ) |
|
| (173.7 | ) |
|
| (145.0 | ) |
Income taxes payable and receivable |
| 14.0 |
|
|
| (3.8 | ) |
|
| 4.1 |
|
|
| (33.1 | ) |
Accrued liabilities and other |
| (6.1 | ) |
|
| (14.6 | ) |
|
| (128.5 | ) |
|
| (73.8 | ) |
Pension and other postretirement benefits plan contributions |
| (33.8 | ) |
|
| (20.5 | ) |
|
| (8.3 | ) |
|
| (14.2 | ) |
Net cash provided by operating activities |
| 253.9 |
|
|
| 307.1 |
| ||||||||
Net cash used in operating activities |
|
| (144.3 | ) |
|
| (80.4 | ) | |||||||
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
| (164.5 | ) |
|
| (139.6 | ) |
|
| (48.5 | ) |
|
| (49.0 | ) |
Acquisitions of businesses, net of cash acquired |
| (380.4 | ) |
|
| 0.4 |
|
|
| (2.0 | ) |
|
| (381.6 | ) |
Dispositions of businesses |
| (3.4 | ) |
|
| — |
| ||||||||
Proceeds from sale of investments and other assets |
| 20.9 |
|
|
| 10.0 |
| ||||||||
Transfers (to)/from restricted cash – net |
| (12.3 | ) |
|
| 3.3 |
| ||||||||
Disposition of businesses |
|
| (0.2 | ) |
|
| 1.7 |
| |||||||
Proceeds from sales of investments and other assets |
|
| 5.4 |
|
|
| 1.5 |
| |||||||
Other investing activities |
| (1.1 | ) |
|
| (0.2 | ) |
|
| (0.4 | ) |
|
| — |
|
Net cash used in investing activities |
| (540.8 | ) |
|
| (126.1 | ) |
|
| (45.7 | ) |
|
| (427.4 | ) |
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of long-term debt |
| 400.0 |
|
|
| 847.8 |
|
|
| — |
|
|
| 400.0 |
|
Net change in short-term debt |
| (0.4 | ) |
|
| 2.2 |
|
|
| 1.7 |
|
|
| 0.1 |
|
Payments of current maturities and long-term debt |
| (811.3 | ) |
|
| (830.2 | ) |
|
| (0.3 | ) |
|
| (552.5 | ) |
Net proceeds from credit facility borrowings |
| 130.0 |
|
|
| — |
|
|
| — |
|
|
| 10.0 |
|
Debt issuance costs |
| (13.4 | ) |
|
| (14.7 | ) |
|
| — |
|
|
| (6.2 | ) |
Dividends paid |
| (151.1 | ) |
|
| (141.3 | ) |
|
| (52.0 | ) |
|
| (47.3 | ) |
Other financing activities |
| (0.5 | ) |
|
| (4.7 | ) |
|
| 3.0 |
|
|
| (0.9 | ) |
Net cash used in financing activities |
| (446.7 | ) |
|
| (140.9 | ) |
|
| (47.6 | ) |
|
| (196.8 | ) |
Effect of exchange rate on cash and cash equivalents |
| (25.6 | ) |
|
| (8.0 | ) |
|
| (21.6 | ) |
|
| (15.4 | ) |
Net increase (decrease) in cash and cash equivalents |
| (759.2 | ) |
|
| 32.1 |
| ||||||||
Net decrease in cash and cash equivalents |
|
| (259.2 | ) |
|
| (720.0 | ) | |||||||
Cash and cash equivalents at beginning of year |
| 1,028.4 |
|
|
| 430.7 |
|
|
| 527.9 |
|
|
| 1,028.4 |
|
Cash and cash equivalents at end of period | $ | 269.2 |
|
| $ | 462.8 |
|
| $ | 268.7 |
|
| $ | 308.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental non-cash disclosure: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuances of 17.0 million shares of RR Donnelley stock for acquisitions of businesses | $ | 319.0 |
|
| $ | — |
|
| $ | — |
|
| $ | 319.0 |
|
(See Notes to Condensed Consolidated Financial Statements)
6
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (“RR DONNELLEY”)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in millions, except per share data, unless otherwise indicated)
The accompanying unaudited condensed consolidated interim financial statements include the accounts of R.R. Donnelley & Sons Company and its subsidiaries (the “Company” or “RR Donnelley”) and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in accordance with the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. These unaudited condensed consolidated interim financial statements reflect all normal and recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods and should be read in conjunction with the consolidated financial statements and the related notes thereto included in the Company’s latest Annual Report on Form 10-K and Form 10-K/A for the year ended December 31, 20132014 filed with the SEC on February 26, 2014 and February 27, 2014, respectively.25, 2015. Operating results for the three and nine months ended September 30, 2014March 31, 2015 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2014.2015. All significant intercompany transactions have been eliminated in consolidation. These unaudited condensed consolidated interim financial statements include estimates and assumptions of management that affect the amounts reported in the condensed consolidated financial statements. Actual results could differ from these estimates.
Note 2. Acquisitions and Dispositions
2014 Dispositions2015 Acquisitions
On August 15, 2014,February 5, 2015, the Company sold the assets and liabilities of Journalism Online, LLCannounced that it had entered into a definitive agreement to acquire Courier Corporation (“Journalism Online”Courier”), a provider of online subscriptionleader in digital printing, publishing and content management services, for net proceeds of $10.7 million, of which $7.7 million was received as of September 30, 2014, resulting in a gain of $11.2 million. The gain was included in net investment and other (income) expenseprimarily in the Consolidated StatementUnited States, specializing in educational, religious and trade books. Based on the Company’s closing share price on March 31, 2015, the total transaction value is approximately $290.5 million in cash and RR Donnelley shares, plus the assumption of Operations.Courier’s net debt. The operationscompletion of the Journalism Online business were included in the Strategic Services segment.transaction is subject to customary closing conditions, including approval of Courier’s shareholders.
On August 11, 2014, the Company’s subsidiary, RR Donnelley Argentina S.A. (“RRDA”), filed for bankruptcy liquidation in bankruptcy court in Argentina. The bankruptcy petition was approved by the court shortly thereafter and a bankruptcy trustee was appointed. As a result of the bankruptcy liquidation, the Company recorded a loss of $16.4 million in net investment and other (income) expense forFor the three months ended September 30, 2014. Effective asMarch 31, 2015, the Company recorded $10.5 million of the court’s approval, the operating results of RRDA are no longer includedacquisition-related expenses associated with acquisitions completed or contemplated, within selling, general and administrative expenses in the Company’s consolidated results of operations. RRDA had net sales of $22.1 million and a loss before income taxes of $3.4 million for the nine months ended September 30, 2014, compared to net sales of $40.8 million and a loss before income taxes of $3.1 million for the nine months ended September 30, 2013. The operations of RRDA were included in the International segment.
On February 7, 2014, the Company sold the assets and liabilities of Office Tiger Global Real Estate Service Inc. (“GRES”), its commercial and residential real estate advisory services, for net proceeds of $2.3 million and a loss of $0.8 million, which was recognized in net investment and other (income) expense in theCondensed Consolidated Statements of Operations. The operations of the GRES business were included in the International segment.
2014 Acquisitions
On March 25, 2014, the Company acquired substantially all of the North American operations of Esselte Corporation (“Esselte”), a developer and manufacturer of nationally branded and private label office and stationery products. The acquisition, combined with the Company’s existing products, created a more competitive and efficient office products supplier capable of supplying enhanced offerings across the combined customer base. The purchase price for Esselte included $82.3 million in cash and 1.0 million shares of RR Donnelley common stock, or a total transaction value of $100.6 million based on the Company’s closing share price on March 24, 2014. Esselte’s operations are included in the Variable Print segment.
On March 10, 2014, the Company acquired the assets of MultiCorpora R&D Inc. and MultiCorpora International Inc. (together “MultiCorpora”) for approximately $6.0 million. MultiCorpora is an international provider of translation technology solutions. The acquisition of MultiCorpora expanded the capabilities of the Company’s translation services offering which supports clients’ multi-lingual communications. MultiCorpora’s operations are included in the Strategic Services segment.
7
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (“RR DONNELLEY”)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in millions, except per share data, unless otherwise indicated)
On January 31, 2014, the Company acquired Consolidated Graphics, Inc. (“Consolidated Graphics”), a provider of digital and commercial printing, fulfillment services, print management and proprietary Internet-based technology solutions, with operations in North America, Europe and Asia. The acquisition enhanced the Company’s ability to provide integrated communications solutions for its customers. The purchase price for Consolidated Graphics was $359.9 million in cash and 16.0 million shares of RR Donnelley common stock, or a total transaction value of $660.6 million based on the Company’s closing share price on January 30, 2014, plus the assumption of Consolidated Graphics’ debt of $118.4 million. Immediately following the acquisition, the Company repaid substantially all of the debt assumed. Consolidated Graphics’ operations are primarily included in the Variable Print segment. Insegment, with the second quarterexception of 2014, Consolidated Graphics’ operations in the Czech Republic and Japan were moved from the Variable Print segment to the Europe and Asia reporting units, respectively, withinwhich are included in the International segment to reflect corresponding changes in the management reporting structure of the organization.segment.
For the ninethree months ended September 30,March 31, 2014, the Company recorded $8.2$7.7 million of acquisition-related expenses associated with acquisitions completed or contemplated within selling, general and administrative expenses in the Condensed Consolidated Statements of Operations. Acquisition-related expenses for the three months ended September 30, 2014 were de minimis.
7
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (“RR DONNELLEY”)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in millions, except per share data, unless otherwise indicated)
The Esselte, MultiCorpora and Consolidated Graphics 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 applicable acquisition date. The excess of the cost of the MultiCorpora and Consolidated Graphics acquisitions over the net amounts assigned to the fair value of the assets acquired was recorded as goodwill. The goodwill associated with these acquisitions is primarily attributable to the synergies expected to arise as a result of the acquisitions.
For Esselte, the fair value of the identifiable net assets acquired of approximately $110.1 million exceeded the purchase price of $100.6 million, resulting in a bargain purchase gain of $9.5 million for the nine monthsyear ended September 30,December 31, 2014, which was recorded in net investment and other (income) expense. A $1.0 million reduction in this gain was recognized as a loss during the three months ended September 30, 2014 as a result of finalizing the working capital settlement. The gain on the bargain purchase was primarily attributable to the Company’s ability to utilize certain tax operating losses.
The tax deductible goodwill related to the Consolidated Graphics, Esselte and MultiCorpora acquisitions was $74.1$73.4 million.
Based on the valuations, the final purchase price allocations for these acquisitions as well as the purchase price allocation for an insignificant acquisition were as follows:
Accounts receivable | $ | 241.4 |
|
| $ | 242.0 |
|
Inventories |
| 89.6 |
|
|
| 89.6 |
|
Prepaid expenses and other current assets |
| 17.3 |
|
|
| 17.5 |
|
Property, plant and equipment |
| 334.1 |
|
|
| 337.0 |
|
Other intangible assets |
| 205.0 |
|
|
| 205.0 |
|
Other noncurrent assets |
| 11.9 |
|
|
| 11.9 |
|
Goodwill |
| 300.1 |
|
|
| 300.1 |
|
Accounts payable and accrued liabilities |
| (218.0 | ) |
|
| (221.0 | ) |
Other noncurrent liabilities |
| (57.5 | ) |
|
| (57.5 | ) |
Deferred taxes-net |
| (96.6 | ) | ||||
Deferred taxes--net |
|
| (96.6 | ) | |||
Total purchase price-net of cash acquired |
| 827.3 |
|
|
| 828.0 |
|
Less: debt assumed |
| 118.4 |
|
|
| 118.4 |
|
Less: value of common stock issued |
| 319.0 |
|
|
| 319.0 |
|
Less: gain on bargain purchase |
| 9.5 |
|
|
| 9.5 |
|
Net cash paid | $ | 380.4 |
|
| $ | 381.1 |
|
8
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (“RR DONNELLEY”)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in millions, except per share data, unless otherwise indicated)
The fair values of other intangible assets, technology and goodwill associated with the acquisitions of Esselte, MultiCorpora and Consolidated Graphics were determined to be Level 3 under the fair value hierarchy. The following table presents the fair values,value, valuation techniques and related unobservable inputs for these Level 3 measurements:
| Fair Value |
|
| Valuation Technique |
| Unobservable Input |
| Range |
| ||
Customer relationships | $ | 178.2 |
|
| Excess earnings |
| Discount rate Attrition rate |
| 17.0% - 21.0% 5.0% - 9.5% |
| |
Trade names |
| 26.5 |
|
| Relief-from-royalty method |
| Discount rate Royalty rate (after-tax) |
| 19.0% 0.5% - 1.5% |
| |
Technology |
| 1.1 |
|
| Excess earnings |
| Discount rate |
|
| 17.0% |
|
The fair values of property, plant and equipment associated with the Consolidated Graphics, Esselte, and MultiCorpora acquisitions were determined to be Level 3 under the fair value hierarchy. Property, plant and equipment values were estimated using either the cost or market approach, if a secondhand market existed.
2013 Disposition
During the fourth quarter of 2013,8
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (“RR DONNELLEY”)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in millions, except per share data, unless otherwise indicated)
2014 Dispositions
On August 15, 2014, the Company sold the assets and liabilities of R.R.Journalism Online, LLC (“Journalism Online”), a provider of online subscription management services, for net proceeds of $10.7 million, of which $9.3 million was received as of March 31, 2015, resulting in a gain of $11.2 million during the year ended December 31, 2014. The gain was included in net investment and other expense in the Consolidated Statement of Operations. The operations of the Journalism Online business were included in the Strategic Services segment.
On August 11, 2014, the Company’s subsidiary, RR Donnelley SASArgentina S.A. (“MRM France”RRDA”), its direct mail business locatedfiled for bankruptcy liquidation in Cosne sur Loire, France, forbankruptcy court in Argentina. The bankruptcy petition was approved by the court shortly thereafter and a bankruptcy trustee was appointed. As a result of the bankruptcy liquidation, the Company recorded a loss of $17.9$16.4 million in net investment and other expense for the year ended December 31, 2014. Effective as of the court’s approval, the operating results of RRDA are no longer included in the Company’s consolidated results of operations. RRDA had net sales of $9.6 million and a loss before income taxes of $1.4 million for the three months ended March 31, 2014. The operations of RRDA were included in the International segment.
On February 7, 2014, the Company sold the assets and liabilities of Office Tiger Global Real Estate Service Inc. (“GRES”), its commercial and residential real estate advisory services, for net proceeds of $1.8 million and a loss of $0.8 million, which was recognized in net investment and other (income) expense in the Consolidated Statements of Operations. The loss included cash incentive payments due toOperations for the purchaser of $18.8 million, of which $16.4 million was paid as of September 30, 2014 with the remaining balance to be paid by January 2016.year ended December 31, 2014. The operations of the MRM FranceGRES business were included in the International segment.
For the three and nine months ended September 30, 2013, the Company recorded $1.1 million and $2.2 million of acquisition-related expenses, respectively, associated with acquisitions contemplated within selling, general and administrative expenses in the Condensed Consolidated Statements of Operations.
Pro forma results
The following unaudited pro forma financial information for the three and nine months ended September 30,March 31, 2014 and 2013 presents the combined results of operations of the Company and the 2014 acquisitions described above, as if the acquisitions had occurred atas of January 1 2013.of the year prior to acquisition.
The unaudited pro forma financial information is not intended to represent or be indicative of the Company’s consolidated results of operations or financial condition that would have been reported had these acquisitions been completed as of the beginning of the periodsperiod presented and should not be taken as indicative of the Company’s future consolidated results of operations or financial condition. Pro forma adjustments are tax-effected at the applicable statutory tax rates.
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||||||
| September 30, |
|
| September 30, |
| ||||||||||||||
| 2014 |
|
| 2013 |
|
| 2014 |
|
| 2013 |
|
| Three Months Ended March 31, 2014 |
| |||||
Net sales | $ | 2,957.8 |
|
| $ | 2,952.8 |
|
| $ | 8,686.9 |
|
| $ | 8,699.2 |
|
| $ | 2,826.6 |
|
Net earnings attributable to RR Donnelley common shareholders |
| 68.5 |
|
|
| 16.6 |
|
|
| 127.3 |
|
|
| 83.2 |
| ||||
Net earnings per share attributable to RR Donnelley common shareholders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net loss attributable to RR Donnelley common shareholders |
|
| (17.7 | ) | |||||||||||||||
Net loss per share attributable to RR Donnelley common shareholders: |
|
|
|
| |||||||||||||||
Basic | $ | 0.34 |
|
| $ | 0.08 |
|
| $ | 0.64 |
|
| $ | 0.42 |
|
| $ | (0.09 | ) |
Diluted | $ | 0.34 |
|
| $ | 0.08 |
|
| $ | 0.63 |
|
| $ | 0.42 |
|
| $ | (0.09 | ) |
The following table outlines unaudited pro forma financial information for the three months ended March 31, 2014:
|
| Three Months Ended March 31, 2014 |
| |
Amortization of purchased intangibles |
| $ | 20.5 |
|
Restructuring, impairment and other charges |
|
| 30.1 |
|
9
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (“RR DONNELLEY”)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in millions, except per share data, unless otherwise indicated)
The unaudited pro forma financial information includes amortization of purchased intangibles of $19.9 million and $60.8 million for the three and nine months ended September 30, 2014, respectively and $21.2 million and $64.0 million for the three and nine months ended September 30, 2013, respectively. The unaudited pro forma financial information includes restructuring, impairment and other charges from operations of $13.6 million and $61.5 million for the three and nine months ended September 30, 2014, respectively and $47.1 million and $111.9 million for the three and nine months ended September 30, 2013, respectively.
Additionally, the pro forma adjustments affecting net earningsloss attributable to RR Donnelley common shareholders for the three and nine months ended September 30,March 31, 2014 and 2013 were as follows:
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||||||
| September 30, |
|
| September 30, |
| ||||||||||||||
| 2014 |
|
| 2013 |
|
| 2014 |
|
| 2013 |
|
| Three Months Ended March 31, 2014 |
| |||||
Depreciation and amortization of purchased assets, pre-tax | $ | 1.3 |
|
| $ | (2.7 | ) |
| $ | 2.9 |
|
| $ | (7.2 | ) |
| $ | (0.2 | ) |
Acquisition-related expenses, pre-tax |
| (0.1 | ) |
|
| 2.1 |
|
|
| 18.8 |
|
|
| (14.4 | ) |
|
| 18.6 |
|
Restructuring, impairment and other charges, pre-tax |
| 6.3 |
|
|
| (6.2 | ) |
|
| 28.4 |
|
|
| (27.4 | ) | ||||
Inventory fair value adjustments, pre-tax |
| — |
|
|
| — |
|
|
| 14.3 |
|
|
| (14.3 | ) | ||||
Restructuring and impairment charges, pre-tax |
|
| 17.1 |
| |||||||||||||||
Inventory fair value adjustment, pre-tax |
|
| 12.1 |
| |||||||||||||||
Other pro forma adjustments, pre-tax |
| 2.2 |
|
|
| (7.7 | ) |
|
| (2.3 | ) |
|
| (6.3 | ) |
|
| (10.6 | ) |
Income taxes |
| (3.4 | ) |
|
| 1.4 |
|
|
| (17.1 | ) |
|
| 19.3 |
|
|
| (10.2 | ) |
3. Inventories
The components of the Company’s inventories, net of excess and obsolescence reserves for raw materials and finished goods, at September 30, 2014March 31, 2015 and December 31, 20132014 were as follows:
| September 30, |
|
| December 31, |
| March 31, |
|
| December 31, |
| ||||
| 2014 |
|
| 2013 |
| 2015 |
|
| 2014 |
| ||||
Raw materials and manufacturing supplies | $ | 287.3 |
|
| $ | 212.6 |
| $ | 250.0 |
|
| $ | 261.7 |
|
Work in process |
| 203.2 |
|
|
| 145.2 |
|
| 155.4 |
|
|
| 157.5 |
|
Finished goods |
| 254.8 |
|
|
| 235.4 |
|
| 249.1 |
|
|
| 260.6 |
|
LIFO reserve |
| (92.5 | ) |
|
| (92.0 | ) |
| (94.3 | ) |
|
| (93.6 | ) |
Total | $ | 652.8 |
|
| $ | 501.2 |
| $ | 560.2 |
|
| $ | 586.2 |
|
4. Property, Plant and Equipment
The components of the Company’s property, plant and equipment at September 30, 2014March 31, 2015 and December 31, 20132014 were as follows:
| September 30, |
|
| December 31, |
| March 31, |
|
| December 31, |
| ||||
| 2014 |
|
| 2013 |
| 2015 |
|
| 2014 |
| ||||
Land | $ | 116.0 |
|
| $ | 94.3 |
| $ | 111.1 |
|
| $ | 112.1 |
|
Buildings |
| 1,222.7 |
|
|
| 1,160.6 |
|
| 1,206.7 |
|
|
| 1,214.8 |
|
Machinery and equipment |
| 6,182.5 |
|
|
| 6,024.0 |
|
| 6,123.8 |
|
|
| 6,142.8 |
|
|
| 7,521.2 |
|
|
| 7,278.9 |
|
| 7,441.6 |
|
|
| 7,469.7 |
|
Accumulated depreciation |
| (5,941.3 | ) |
|
| (5,848.8 | ) | |||||||
Less: Accumulated depreciation |
| (5,986.1 | ) |
|
| (5,954.2 | ) | |||||||
Total | $ | 1,579.9 |
|
| $ | 1,430.1 |
| $ | 1,455.5 |
|
| $ | 1,515.5 |
|
During the three and nine months ended September 30,March 31, 2015 and 2014, depreciation expense was $88.5$82.9 million and $267.8$87.9 million, respectively. During the three
Assets Held for Sale
Primarily as a result of restructuring actions, certain facilities and nine months ended September 30, 2013 depreciation expenseequipment are considered held for sale. The net book value of assets held for sale was $81.7$3.4 million and $256.6$7.2 million at March 31, 2015 and December 31, 2014, respectively. These assets were included in other current assets in the Condensed Consolidated Balance Sheets at March 31, 2015 and December 31, 2014 at the lower of their historical net book value or their estimated fair value, less estimated costs to sell.
10
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (“RR DONNELLEY”)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in millions, except per share data, unless otherwise indicated)
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 $22.4 million and $18.5 million at September 30, 2014 and December 31, 2013, respectively. These assets were included in other current assets in the Condensed Consolidated Balance Sheets at September 30, 2014 and December 31, 2013 at the lower of their historical net book value or their estimated fair value, less estimated costs to sell.
5. Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill by segment for the ninethree months ended September 30, 2014March 31, 2015 were as follows:
| Publishing and |
|
|
|
|
|
| Strategic |
|
|
|
|
|
|
|
|
|
| Publishing & Retail |
|
|
|
| Strategic |
|
| International |
|
|
|
|
| |||||||
| Retail Services |
|
| Variable Print |
|
| Services |
|
| International |
|
| Total |
|
| Services |
|
| Solutions |
|
| Services |
|
| Services |
|
| Total |
| ||||||||||
Net book value as of December 31, 2013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Net book value as of December 31, 2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Goodwill | $ | 688.0 |
|
| $ | 1,638.6 |
|
| $ | 1,005.4 |
|
| $ | 1,275.9 |
|
| $ | 4,607.9 |
|
| $ | 688.0 |
|
|
| 1,914.1 |
|
|
| 987.5 |
|
| $ | 1,213.9 |
|
| $ | 4,803.5 |
|
Accumulated impairment losses |
| (669.9 | ) |
|
| (1,105.2 | ) |
|
| (243.5 | ) |
|
| (1,153.0 | ) |
|
| (3,171.6 | ) |
|
| (688.0 | ) |
|
| (1,105.2 | ) |
|
| (222.4 | ) |
|
| (1,081.3 | ) |
|
| (3,096.9 | ) |
Total |
| 18.1 |
|
|
| 533.4 |
|
|
| 761.9 |
|
|
| 122.9 |
|
|
| 1,436.3 |
|
|
| — |
|
|
| 808.9 |
|
|
| 765.1 |
|
|
| 132.6 |
|
|
| 1,706.6 |
|
Acquisitions |
| — |
|
|
| 276.2 |
|
|
| 3.4 |
|
|
| 20.5 |
|
|
| 300.1 |
|
|
| — |
|
|
| — |
|
|
| 1.2 |
|
|
| — |
|
|
| 1.2 |
|
Foreign exchange and other adjustments |
| — |
|
|
| (0.1 | ) |
|
| — |
|
|
| (7.2 | ) |
|
| (7.3 | ) |
|
| — |
|
|
| (1.2 | ) |
|
| (0.4 | ) |
|
| (8.3 | ) |
|
| (9.9 | ) |
Net book value at September 30, 2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Net book value as of March 31, 2015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Goodwill |
| 688.0 |
|
|
| 1,914.7 |
|
|
| 989.0 |
|
|
| 1,254.7 |
|
|
| 4,846.4 |
|
|
| 688.0 |
|
|
| 1,912.9 |
|
|
| 986.0 |
|
|
| 1,151.1 |
|
|
| 4,738.0 |
|
Accumulated impairment losses |
| (669.9 | ) |
|
| (1,105.2 | ) |
|
| (223.7 | ) |
|
| (1,118.5 | ) |
|
| (3,117.3 | ) |
|
| (688.0 | ) |
|
| (1,105.2 | ) |
|
| (220.1 | ) |
|
| (1,026.8 | ) |
|
| (3,040.1 | ) |
Total | $ | 18.1 |
|
| $ | 809.5 |
|
| $ | 765.3 |
|
| $ | 136.2 |
|
| $ | 1,729.1 |
|
| $ | — |
|
| $ | 807.7 |
|
| $ | 765.9 |
|
| $ | 124.3 |
|
| $ | 1,697.9 |
|
The components of other intangible assets at September 30, 2014March 31, 2015 and December 31, 20132014 were as follows:
| September 30, 2014 |
|
| December 31, 2013 |
|
| March 31, 2015 |
|
| December 31, 2014 |
| ||||||||||||||||||||||||||||||||||||
| Gross |
|
|
|
|
|
|
|
|
|
| Gross |
|
|
|
|
|
|
|
|
|
| Gross |
|
|
|
|
|
|
|
|
|
| Gross |
|
|
|
|
|
|
|
|
| ||||
| Carrying |
|
| Accumulated |
|
| Net Book |
|
| Carrying |
|
| Accumulated |
|
| Net Book |
|
| Carrying |
|
| Accumulated |
|
| Net Book |
|
| Carrying |
|
| Accumulated |
|
| Net Book |
| ||||||||||||
| Amount |
|
| Amortization |
|
| Value |
|
| Amount |
|
| Amortization |
|
| Value |
|
| Amount |
|
| Amortization |
|
| Value |
|
| Amount |
|
| Amortization |
|
| Value |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships | $ | 895.3 |
|
| $ | (494.3 | ) |
| $ | 401.0 |
|
| $ | 728.8 |
|
| $ | (448.5 | ) |
| $ | 280.3 |
|
| $ | 850.5 |
|
| $ | (503.3 | ) |
| $ | 347.2 |
|
| $ | 865.6 |
|
| $ | (498.0 | ) |
| $ | 367.6 |
|
Patents |
| 98.3 |
|
|
| (98.3 | ) |
|
| — |
|
|
| 98.3 |
|
|
| (98.3 | ) |
|
| — |
|
|
| 98.3 |
|
|
| (98.3 | ) |
|
| — |
|
|
| 98.3 |
|
|
| (98.3 | ) |
|
| — |
|
Trademarks, licenses and agreements |
| 31.5 |
|
|
| (29.4 | ) |
|
| 2.1 |
|
|
| 31.4 |
|
|
| (28.2 | ) |
|
| 3.2 |
|
|
| 31.8 |
|
|
| (29.9 | ) |
|
| 1.9 |
|
|
| 31.5 |
|
|
| (29.7 | ) |
|
| 1.8 |
|
Trade names |
| 43.8 |
|
|
| (15.1 | ) |
|
| 28.7 |
|
|
| 27.1 |
|
|
| (12.8 | ) |
|
| 14.3 |
|
|
| 42.9 |
|
|
| (16.2 | ) |
|
| 26.7 |
|
|
| 43.1 |
|
|
| (15.6 | ) |
|
| 27.5 |
|
Total amortizable other intangible assets |
| 1,068.9 |
|
|
| (637.1 | ) |
|
| 431.8 |
|
|
| 885.6 |
|
|
| (587.8 | ) |
|
| 297.8 |
|
|
| 1,023.5 |
|
|
| (647.7 | ) |
|
| 375.8 |
|
|
| 1,038.5 |
|
|
| (641.6 | ) |
|
| 396.9 |
|
Indefinite-lived trade names |
| 26.8 |
|
|
| — |
|
|
| 26.8 |
|
|
| 18.1 |
|
|
| — |
|
|
| 18.1 |
|
|
| 26.7 |
|
|
| — |
|
|
| 26.7 |
|
|
| 26.8 |
|
|
| — |
|
|
| 26.8 |
|
Total other intangible assets | $ | 1,095.7 |
|
| $ | (637.1 | ) |
| $ | 458.6 |
|
| $ | 903.7 |
|
| $ | (587.8 | ) |
| $ | 315.9 |
|
| $ | 1,050.2 |
|
| $ | (647.7 | ) |
| $ | 402.5 |
|
| $ | 1,065.3 |
|
| $ | (641.6 | ) |
| $ | 423.7 |
|
The Company recorded additions to other intangible assets of $205.0 million for acquisitions during the nine months ended September 30, 2014, the components of which were as follows:
| September 30, 2014 |
| |||||
|
|
|
|
| Weighted Average |
| |
| Amount |
|
| Amortization Period |
| ||
Customer relationships | $ | 178.2 |
|
|
| 9.7 |
|
Trade names (amortizable) |
| 17.8 |
|
|
| 10.0 |
|
Trade names (indefinite-lived) |
| 8.7 |
|
| n/a |
| |
Non-compete agreements |
| 0.3 |
|
|
| 3.0 |
|
Total additions | $ | 205.0 |
|
|
|
|
|
Amortization expense for other intangible assets was $19.9$19.0 million and $16.0$18.3 million for the three months ended September 30,March 31, 2015 and 2014, and 2013, respectively, and $58.7 million and $48.4 million forrespectively.
The following table outlines the nine months ended September 30, 2014 and 2013, respectively.estimated annual amortization expense related to other intangible assets as of March 31, 2015:
For the year ending December 31, | Amount |
| ||
2015 | $ |
| 73.6 |
|
2016 |
|
| 56.2 |
|
2017 |
|
| 50.2 |
|
2018 |
|
| 45.0 |
|
2019 |
|
| 41.5 |
|
2020 and thereafter |
|
| 128.3 |
|
Total | $ |
| 394.8 |
|
11
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (“RR DONNELLEY”)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in millions, except per share data, unless otherwise indicated)
The following table outlines the estimated annual amortization expense related to other intangible assets as of September 30, 2014:
For the year ending December 31, | Amount |
| |
2014 | $ | 78.7 |
|
2015 |
| 77.3 |
|
2016 |
| 59.1 |
|
2017 |
| 52.8 |
|
2018 |
| 47.6 |
|
2019 and thereafter |
| 175.0 |
|
Total | $ | 490.5 |
|
6. Restructuring, Impairment and Other Charges
Restructuring, Impairment and Other Charges Recognized in Results of Operations
For the three months ended September 30,March 31, 2015 and 2014, and 2013, the Company recorded the following net restructuring, impairment and other charges:
|
|
|
|
| Other |
|
| Total |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||
Three Months Ended | Employee |
|
| Restructuring |
|
| Restructuring |
|
|
|
|
|
| Other |
|
|
|
|
|
| Employee |
|
| Other Restructuring |
|
| Total Restructuring |
|
|
|
|
|
| Other |
|
|
| ||||||||||
September 30, 2014 | Terminations |
|
| Charges |
|
| Charges |
|
| Impairment |
|
| Charges |
|
| Total |
| ||||||||||||||||||||||||||||||
March 31, 2015 |
| Terminations |
|
| Charges |
|
| Charges |
|
| Impairment |
|
| Charges |
|
| Total |
| |||||||||||||||||||||||||||||
Publishing and Retail Services | $ | (0.2 | ) |
| $ | 1.8 |
|
| $ | 1.6 |
|
| $ | (1.2 | ) |
| $ | 7.4 |
|
| $ | 7.8 |
|
| $ | 2.8 |
|
| $ | 1.1 |
|
| $ | 3.9 |
|
| $ | (0.4 | ) |
| $ | 0.8 |
|
| $ | 4.3 |
|
Variable Print |
| 1.6 |
|
|
| 2.8 |
|
|
| 4.4 |
|
|
| 1.7 |
|
|
| 2.2 |
|
|
| 8.3 |
|
|
| 2.0 |
|
|
| 1.3 |
|
|
| 3.3 |
|
|
| 1.3 |
|
|
| 0.4 |
|
|
| 5.0 |
|
Strategic Services |
| 0.9 |
|
|
| 0.2 |
|
|
| 1.1 |
|
|
| — |
|
|
| 0.1 |
|
|
| 1.2 |
|
|
| 1.6 |
|
|
| 0.5 |
|
|
| 2.1 |
|
|
| — |
|
|
| 0.1 |
|
|
| 2.2 |
|
International |
| 1.9 |
|
|
| 0.2 |
|
|
| 2.1 |
|
|
| (0.2 | ) |
|
| — |
|
|
| 1.9 |
|
|
| 7.7 |
|
|
| 0.2 |
|
|
| 7.9 |
|
|
| (0.2 | ) |
|
| — |
|
|
| 7.7 |
|
Corporate |
| 0.6 |
|
|
| 0.1 |
|
|
| 0.7 |
|
|
| — |
|
|
| — |
|
|
| 0.7 |
|
|
| 0.1 |
|
|
| 0.5 |
|
|
| 0.6 |
|
|
| — |
|
|
| — |
|
|
| 0.6 |
|
Total | $ | 4.8 |
|
| $ | 5.1 |
|
| $ | 9.9 |
|
| $ | 0.3 |
|
| $ | 9.7 |
|
| $ | 19.9 |
|
| $ | 14.2 |
|
| $ | 3.6 |
|
| $ | 17.8 |
|
| $ | 0.7 |
|
| $ | 1.3 |
|
| $ | 19.8 |
|
|
|
|
|
| Other |
|
| Total |
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Three Months Ended | Employee |
|
| Restructuring |
|
| Restructuring |
|
|
|
|
|
| Other |
|
|
|
|
| ||||
September 30, 2013 | Terminations |
|
| Charges |
|
| Charges |
|
| Impairment |
|
| Charges |
|
| Total |
| ||||||
Publishing and Retail Services | $ | 13.5 |
|
| $ | 3.1 |
|
| $ | 16.6 |
|
| $ | 6.2 |
|
| $ | — |
|
| $ | 22.8 |
|
Variable Print |
| — |
|
|
| 2.8 |
|
|
| 2.8 |
|
|
| 0.6 |
|
|
| — |
|
|
| 3.4 |
|
Strategic Services |
| 0.6 |
|
|
| 0.7 |
|
|
| 1.3 |
|
|
| 0.9 |
|
|
| 4.7 |
|
|
| 6.9 |
|
International |
| 4.0 |
|
|
| 0.6 |
|
|
| 4.6 |
|
|
| 0.2 |
|
|
| — |
|
|
| 4.8 |
|
Corporate |
| (0.2 | ) |
|
| 0.4 |
|
|
| 0.2 |
|
|
| — |
|
|
| — |
|
|
| 0.2 |
|
Total | $ | 17.9 |
|
| $ | 7.6 |
|
| $ | 25.5 |
|
| $ | 7.9 |
|
| $ | 4.7 |
|
| $ | 38.1 |
|
For the nine months ended September 30, 2014 and 2013, the Company recorded the following net restructuring, impairment and other charges:
|
|
|
|
| Other |
|
| Total |
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Nine Months Ended | Employee |
|
| Restructuring |
|
| Restructuring |
|
|
|
|
|
| Other |
|
|
|
|
| ||||
September 30, 2014 | Terminations |
|
| Charges |
|
| Charges |
|
| Impairment |
|
| Charges |
|
| Total |
| ||||||
Publishing and Retail Services | $ | 0.2 |
|
| $ | 5.6 |
|
| $ | 5.8 |
|
| $ | 2.4 |
|
| $ | 23.7 |
|
| $ | 31.9 |
|
Variable Print |
| 15.7 |
|
|
| 6.2 |
|
|
| 21.9 |
|
|
| 6.9 |
|
|
| 6.3 |
|
|
| 35.1 |
|
Strategic Services |
| 3.3 |
|
|
| 1.7 |
|
|
| 5.0 |
|
|
| — |
|
|
| 4.0 |
|
|
| 9.0 |
|
International |
| 5.9 |
|
|
| 0.8 |
|
|
| 6.7 |
|
|
| 0.8 |
|
|
| — |
|
|
| 7.5 |
|
Corporate |
| 2.7 |
|
|
| 1.7 |
|
|
| 4.4 |
|
|
| — |
|
|
| — |
|
|
| 4.4 |
|
Total | $ | 27.8 |
|
| $ | 16.0 |
|
| $ | 43.8 |
|
| $ | 10.1 |
|
| $ | 34.0 |
|
| $ | 87.9 |
|
12
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (“RR DONNELLEY”)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in millions, except per share data, unless otherwise indicated)
|
|
|
|
| Other |
|
| Total |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||
Nine Months Ended | Employee |
|
| Restructuring |
|
| Restructuring |
|
|
|
|
|
| Other |
|
|
|
|
| ||||||||||||||||||||||||||||
September 30, 2013 | Terminations |
|
| Charges |
|
| Charges |
|
| Impairment |
|
| Charges |
|
| Total |
| ||||||||||||||||||||||||||||||
Three Months Ended |
| Employee |
|
| Other Restructuring |
|
| Total Restructuring |
|
|
|
|
|
| Other |
|
|
|
|
| |||||||||||||||||||||||||||
March 31, 2014 |
| Terminations |
|
| Charges |
|
| Charges |
|
| Impairment |
|
| Charges |
|
| Total |
| |||||||||||||||||||||||||||||
Publishing and Retail Services | $ | 17.0 |
|
| $ | 10.9 |
|
| $ | 27.9 |
|
| $ | 10.7 |
|
| $ | — |
|
| $ | 38.6 |
|
| $ | 0.2 |
|
| $ | 2.1 |
|
| $ | 2.3 |
|
| $ | 2.2 |
|
|
| 16.3 |
|
| $ | 20.8 |
|
Variable Print |
| 1.8 |
|
|
| 10.0 |
|
|
| 11.8 |
|
|
| 1.0 |
|
|
| — |
|
|
| 12.8 |
|
|
| 11.1 |
|
|
| 0.9 |
|
|
| 12.0 |
|
|
| 4.5 |
|
|
| 4.1 |
|
|
| 20.6 |
|
Strategic Services |
| 2.2 |
|
|
| 2.0 |
|
|
| 4.2 |
|
|
| 2.7 |
|
|
| 4.7 |
|
|
| 11.6 |
|
|
| 1.0 |
|
|
| 0.5 |
|
|
| 1.5 |
|
|
| — |
|
|
| 0.1 |
|
|
| 1.6 |
|
International |
| 9.6 |
|
|
| 1.9 |
|
|
| 11.5 |
|
|
| 0.9 |
|
|
| — |
|
|
| 12.4 |
|
|
| 1.1 |
|
|
| 0.5 |
|
|
| 1.6 |
|
|
| — |
|
|
| — |
|
|
| 1.6 |
|
Corporate |
| 3.4 |
|
|
| 1.4 |
|
|
| 4.8 |
|
|
| 0.4 |
|
|
| — |
|
|
| 5.2 |
|
|
| 0.5 |
|
|
| 0.1 |
|
|
| 0.6 |
|
|
| — | �� |
|
| — |
|
|
| 0.6 |
|
Total | $ | 34.0 |
|
| $ | 26.2 |
|
| $ | 60.2 |
|
| $ | 15.7 |
|
| $ | 4.7 |
|
| $ | 80.6 |
|
| $ | 13.9 |
|
| $ | 4.1 |
|
| $ | 18.0 |
|
| $ | 6.7 |
|
| $ | 20.5 |
|
| $ | 45.2 |
|
Restructuring and Impairment Charges
For the three and nine months ended September 30,March 31, 2015, the Company recorded net restructuring charges of $14.2 million for employee termination costs for 894 employees, of whom 735 were terminated as of March 31, 2015. These charges primarily related to one facility closure in the International segment, one facility closure in the Variable Print segment and the reorganization of certain operations. Additionally, the Company incurred lease termination and other restructuring charges of $3.6 million for the three months ended March 31, 2015. For the three months ended March 31, 2015, the Company also recorded $0.7 million of net impairment charges primarily related to buildings and machinery and equipment associated with facility closures.
For the three months ended March 31, 2014, the Company recorded net restructuring charges of $4.8$13.9 million and $27.8 million, respectively, for employee termination costs for 546278 employees, substantially all of whom 518 were terminated as of September 30, 2014.March 31, 2015. These charges primarily related to the integration of Consolidated Graphics, including the closure of seventhree Consolidated Graphics facilities as well as one additional facility closure within the Variable Print segment, one facility closure in the Publishing and Retail Services segment and the reorganization of certain operations. Additionally, the Company incurred lease termination and other restructuring charges of $5.1$4.1 million and $16.0 million, respectively, for the three and nine months ended September 30, 2014, including charges related to multi-employer pension plan withdrawal obligations as a result of facility closures.March 31, 2014. For the three and nine months ended September 30,March 31, 2014, the Company also recorded $0.3$6.7 million and $10.1 million, respectively, of impairment charges primarily related to buildings and machinery and equipment and trade names associated with facility closures. The impairment charges are net of gains related to the sale of previously impaired other long-lived assets.closings. 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.
For the three and nine months ended September 30, 2013, the Company recorded net restructuring charges of $17.9 million and $34.0 million, respectively, for employee termination costs for 1,276 employees, substantially all of whom were terminated as of September 30, 2014. These charges primarily related to the closing of two manufacturing facilities within the Publishing and Retail Services segment and one manufacturing facility within the Variable Print segment and the reorganization of certain operations. Additionally, the Company incurred lease termination and other restructuring charges of $7.6 million and $26.2 million, respectively, for the three and nine months ended September 30, 2013, including charges related to multi-employer pension plan withdrawal obligations. For the three and nine months ended September 30, 2013, the Company also recorded $7.9 million and $15.7 million, respectively, of impairment charges primarily related to buildings and machinery and equipment associated with facility closures.
Other Charges
For the three and nine months ended September 30,March 31, 2015 and 2014, the Company recorded other charges of $9.7$1.3 million and $34.0$20.5 million, respectively, as a result of its decision to withdraw from all multi-employer pension plans serving facilities that are currently operating. These charges for multi-employer pension plan withdrawal obligations unrelated to facility closures, represent the Company’s best estimate of the expected settlement of these withdrawal liabilities.closures. The total liabilities for the withdrawal obligations associated with the Company’s decision to withdraw from all multi-employer pension plans included in accrued liabilities and other noncurrent liabilities are $8.9$10.9 million and $95.5$86.6 million, respectively, as of September 30, 2014.March 31, 2015.
12
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (“RR DONNELLEY”)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in millions, except per share data, unless otherwise indicated)
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 multi-employer 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, consolidated results of operations, financial position or cash flows.
13
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (“RR DONNELLEY”)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in millions, except per share data, unless otherwise indicated)
Restructuring Reserve
The restructuring reserve as of December 31, 20132014 and September 30, 2014,March 31, 2015, and changes during the ninethree months ended September 30, 2014,March 31, 2015, were as follows:
|
|
|
|
|
|
|
|
|
| Foreign |
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
|
| December 31, |
|
| Restructuring |
|
| Exchange and |
|
| Cash |
|
| March 31, |
| ||||||||||||||||||||||||
| December 31, 2013 |
|
| Restructuring Charges |
|
| Foreign Exchange and Other |
|
| Cash Paid |
|
| September 30, 2014 |
|
| 2014 |
|
| Charges |
|
| Other |
|
| Paid |
|
| 2015 |
| ||||||||||
Employee terminations | $ | 19.7 |
|
| $ | 27.8 |
|
| $ | 1.0 |
|
| $ | (31.2 | ) |
| $ | 17.3 |
|
| $ | 13.0 |
|
| $ | 14.2 |
|
| $ | (0.8 | ) |
| $ | (11.1 | ) |
| $ | 15.3 |
|
Multi-employer pension withdrawal obligations |
| 36.8 |
|
|
| 2.6 |
|
|
| (0.6 | ) |
|
| (3.4 | ) |
|
| 35.4 |
|
|
| 34.6 |
|
|
| 0.5 |
|
|
| (0.1 | ) |
|
| (1.5 | ) |
|
| 33.5 |
|
Lease terminations and other |
| 21.1 |
|
|
| 13.4 |
|
|
| 1.5 |
|
|
| (19.6 | ) |
|
| 16.4 |
|
|
| 15.1 |
|
|
| 3.1 |
|
|
| — |
|
|
| (5.4 | ) |
|
| 12.8 |
|
Total | $ | 77.6 |
|
| $ | 43.8 |
|
| $ | 1.9 |
|
| $ | (54.2 | ) |
| $ | 69.1 |
|
| $ | 62.7 |
|
| $ | 17.8 |
|
| $ | (0.9 | ) |
| $ | (18.0 | ) |
| $ | 61.6 |
|
The current portion of restructuring reserves of $27.0$23.7 million at September 30, 2014March 31, 2015 was included in accrued liabilities, while the long-term portion of $42.1$37.9 million, primarily related to multi-employer pension plan withdrawal obligations related to facility closures and lease termination costs, was included in other noncurrent liabilities at September 30, 2014.March 31, 2015.
The Company anticipates that payments associated with the employee terminations reflected in the above table will be substantially completed by September 2015.March 2016.
Payments on all of the Company’s multi-employer pension plan withdrawal obligations are scheduled to be substantially completed by 2034. Changes based on uncertainties in these estimated withdrawal obligations could affect the ultimate charges related to multi-employer pension plan withdrawals.
The restructuring liabilities classified as “lease terminations and other” consisted of lease terminations, other facility closing costs and contract termination costs. Payments on certain of the lease obligations are scheduled to continue until 2026. Market conditions and the Company’s ability to sublease these properties could affect the ultimate charges related to the lease obligations. Any potential recoveries or additional charges could affect amounts reported in the Company’s financial statements.
7. Employee Benefits
The components of the estimated net pension and other postretirement benefits plan income for the three and nine months ended September 30, 2014 and 2013 were as follows:
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||
| September 30, |
|
| September 30, |
| ||||||||||
| 2014 |
|
| 2013 |
|
| 2014 |
|
| 2013 |
| ||||
Pension (income) expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost | $ | 0.5 |
|
| $ | 0.7 |
|
| $ | 1.6 |
|
| $ | 2.3 |
|
Interest cost |
| 49.7 |
|
|
| 44.6 |
|
|
| 146.3 |
|
|
| 133.7 |
|
Expected return on plan assets |
| (65.9 | ) |
|
| (60.6 | ) |
|
| (195.1 | ) |
|
| (181.8 | ) |
Amortization, net |
| 7.8 |
|
|
| 12.4 |
|
|
| 24.1 |
|
|
| 37.6 |
|
Settlements |
| — |
|
|
| 0.8 |
|
|
| — |
|
|
| 0.8 |
|
Net pension income | $ | (7.9 | ) |
| $ | (2.1 | ) |
| $ | (23.1 | ) |
| $ | (7.4 | ) |
Other postretirement benefits plan (income) expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost | $ | 1.1 |
|
| $ | 1.8 |
|
| $ | 3.4 |
|
| $ | 5.5 |
|
Interest cost |
| 4.2 |
|
|
| 4.1 |
|
|
| 12.6 |
|
|
| 12.2 |
|
Expected return on plan assets |
| (2.9 | ) |
|
| (3.0 | ) |
|
| (9.1 | ) |
|
| (8.9 | ) |
Amortization, net |
| (6.4 | ) |
|
| (4.9 | ) |
|
| (19.3 | ) |
|
| (14.8 | ) |
Net other postretirement benefits plan income | $ | (4.0 | ) |
| $ | (2.0 | ) |
| $ | (12.4 | ) |
| $ | (6.0 | ) |
1413
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (“RR DONNELLEY”)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in millions, except per share data, unless otherwise indicated)
As the majority7. Employee Benefits
The components of the Company’s pension plans have been frozen as of December 31, 2012, the Company continues to transition 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 obligations. Over time, the target asset allocation percentage for the pension plan is expected to decrease for equity and other securities and increase for fixed income 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.
In June 2014 the Company communicated to certain former employees the option to receive a lump-sum pension payment or annuity, with payments beginning in the fourth quarter of 2014. To the extent eligible individuals elect the option to receive a lump-sum pension payment or annuity, the Company’s pension obligations will be reduced. Payments to eligible participants who elect to participate in the offer will be funded from existing pension plan assets and will constitute a complete settlement of the Company’s pension liabilities with respect to these participants. The discount rates and actuarial assumptions used to calculate the payouts will be determined according to federal regulations. The reduction in the reported pension obligation is expected to be approximately $395 million to $415 million, compared to expected payout amounts of approximately $295 million to $310 million. The Company expects to record a non-cash settlement charge of approximately $105 million to $115 million in the fourth quarter in connection with the settlement payments. This charge will result from the recognition in earnings of a portion of the losses recorded in accumulated other comprehensive loss based on the proportion of the obligation settled. The actual amount of this charge will depend on the discount rate and asset values on the settlement date.
On August 8, 2014, the Highway and Transportation Funding Act (the “Act”) was signed into law. The Act includes certain pension-related provisions designed to lower the pension plan contributions that plan-sponsoring companies are required to make by delaying a scheduled phase-down of the existing formula for calculating required minimum contributions. The Company anticipates that provisions in the Act will significantly reduce the minimum required annual contributions related to its defined benefit pension plans in 2014. The Company expects to make cash contributions of approximately $39 million to itsestimated net pension and other postretirement benefits plansplan income for the full year 2014, of which $33.8 million were made during the ninethree months ended September 30, 2014. The Company estimates that it will make cash contributions totaling approximately $25 million to its pensionMarch 31, 2015 and other postretirement benefits plans in 2015.2014 were as follows:
| Three Months Ended |
| |||||
| March 31, |
| |||||
| 2015 |
|
| 2014 |
| ||
Pension (income) expense |
|
|
|
|
|
|
|
Service cost | $ | 0.6 |
|
| $ | 0.5 |
|
Interest cost |
| 44.8 |
|
|
| 47.7 |
|
Expected return on assets |
| (61.6 | ) |
|
| (63.1 | ) |
Amortization, net |
| 10.2 |
|
|
| 7.8 |
|
Net pension income | $ | (6.0 | ) |
| $ | (7.1 | ) |
Other postretirement benefits plan (income) expense |
|
|
|
|
|
|
|
Service cost | $ | 1.2 |
|
| $ | 1.1 |
|
Interest cost |
| 4.0 |
|
|
| 4.2 |
|
Expected return on plan assets |
| (3.3 | ) |
|
| (3.1 | ) |
Amortization, net |
| (6.7 | ) |
|
| (6.4 | ) |
Net other postretirement benefits plan income | $ | (4.8 | ) |
| $ | (4.2 | ) |
8. Share-Based Compensation
The Company recognizes compensation expense based on estimated grant date fair values for all share-based awards issued to employees and directors, including stock options, restricted stock units and performance share units. The total compensation expense related to all share-based compensation plans was $3.9$3.5 million and $13.8$3.8 million for the three and nine months ended September 30,March 31, 2015 and 2014, respectively. The total compensation expense related to all share-based compensation plans was $4.5 million and $15.6 million for the three and nine months ended September 30, 2013, respectively.
Stock Options
There were no options granted during the ninethree months ended September 30, 2014March 31, 2015 and 2013.2014.
Stock option awards as of December 31, 20132014 and September 30, 2014,March 31, 2015, and changes during the ninethree months ended September 30, 2014,March 31, 2015, were as follows:
| Shares Under Option (thousands) |
|
| Weighted Average Exercise Price Per Share |
|
| Weighted Average Remaining Contractual Term (years) |
|
| Aggregate Intrinsic Value |
| ||||
Outstanding at December 31, 2013 |
| 4,139 |
|
| $ | 19.39 |
|
|
| 5.6 |
|
| $ | 21.2 |
|
Exercised |
| (144 | ) |
|
| 10.90 |
|
|
|
|
|
|
|
|
|
Cancelled/forfeited/expired |
| (140 | ) |
|
| 27.55 |
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2014 |
| 3,855 |
|
|
| 19.42 |
|
|
| 5.0 |
|
|
| 11.9 |
|
Vested and expected to vest at September 30, 2014 |
| 3,828 |
|
|
| 19.46 |
|
|
| 5.0 |
|
|
| 11.9 |
|
Exercisable at September 30, 2014 |
| 1,363 |
|
| $ | 8.95 |
|
|
| 5.3 |
|
| $ | 10.2 |
|
|
|
|
|
|
|
|
|
| Weighted |
|
|
|
|
| |
|
|
|
|
|
|
|
|
| Average |
|
|
|
|
| |
|
|
|
|
| Weighted |
|
| Remaining |
|
| Aggregate |
| |||
|
|
|
|
| Average |
|
| Contractual |
|
| Intrinsic |
| |||
| Shares Under Option |
|
| Exercise |
|
| Term |
|
| Value |
| ||||
| (Thousands) |
|
| Price |
|
| (Years) |
|
| (millions) |
| ||||
Outstanding at December 31, 2014 |
| 3,847 |
|
| $ | 19.43 |
|
|
| 4.7 |
|
| $ | 12.6 |
|
Exercised |
| (92 | ) |
|
| 13.21 |
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2015 |
| 3,755 |
|
|
| 19.58 |
|
|
| 4.4 |
|
|
| 16.6 |
|
Vested and expected to vest at March 31, 2015 |
| 3,745 |
|
|
| 19.60 |
|
|
| 4.4 |
|
|
| 16.6 |
|
Exercisable at March 31, 2015 |
| 1,729 |
|
| $ | 10.48 |
|
|
| 5.2 |
|
| $ | 15.1 |
|
15
14
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (“RR DONNELLEY”)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in millions, except per share data, unless otherwise indicated)
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on September 30, 2014March 31, 2015 and December 31, 2013,2014, respectively, and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their in-the-money options on September 30, 2014March 31, 2015 and December 31, 2013.2014. This amount will change in future periods based on the fair market value of the Company’s stock and the number of options outstanding. Total intrinsic value of options exercised for the three and nine months ended September 30,March 31, 2015 and 2014 was $0.1$0.5 million and $1.1 million, respectively. Total intrinsic value of options exercised for the three and nine months ended September 30, 2013 was $0.3 million and $0.7$1.0 million, respectively. Excess tax benefits on stock option exercises, shown as financing cash inflows in the Condensed Consolidated Statements of Cash Flows were $0.3$0.1 million and $0.1 for the nine months ended September 30, 2014 and 2013, respectively. Excess tax benefits on stock option exercises$0.3 million for the three months ended September 30,March 31, 2015 and 2014, and 2013 were de minimis. respectively.
Compensation expense related to stock options for the three and nine months ended September 30,March 31, 2015 and 2014 was $0.2 million and $0.7$0.3 million, respectively. Compensation expense related to stock options for the three and nine months ended September 30, 2013 was $0.3 million and $1.1 million, respectively. As of September 30, 2014, $0.9March 31, 2015, $0.5 million of total unrecognized compensation expense related to stock options is expected to be recognized over a weighted average period of 1.30.9 years.
Restricted Stock Units
Nonvested restricted stock unit awards as of December 31, 20132014 and September 30, 2014,March 31, 2015, and changes during the ninethree months ended September 30, 2014,March 31, 2015, were as follows:
| Shares (thousands) |
|
| Weighted Average Grant Date Fair Value Per Share |
| ||
Nonvested at December 31, 2013 |
| 2,495 |
|
| $ | 11.97 |
|
Granted |
| 729 |
|
|
| 16.53 |
|
Vested |
| (1,168 | ) |
|
| 13.82 |
|
Forfeited |
| (4 | ) |
|
| 16.27 |
|
Nonvested at September 30, 2014 |
| 2,052 |
|
| $ | 12.53 |
|
|
|
|
|
|
| Weighted Average |
| |
|
| Shares |
|
| Grant Date |
| ||
|
| (Thousands) |
|
| Fair Value |
| ||
Nonvested at December 31, 2014 |
|
| 2,045 |
|
| $ | 12.54 |
|
Granted |
|
| 575 |
|
|
| 16.73 |
|
Vested |
|
| (880 | ) |
|
| 12.94 |
|
Nonvested at March 31, 2015 |
|
| 1,740 |
|
| $ | 13.71 |
|
Compensation expense related to restricted stock units for the three and nine months ended September 30,March 31, 2015 and 2014 was $2.7$2.6 million and $10.5$2.9 million, respectively. Compensation expense related to restricted stock units for the three and nine months ended September 30, 2013 was $3.6 million and $12.8 million, respectively. As of September 30, 2014,March 31, 2015, there was $15.4$19.7 million of unrecognized share-based compensation expense related to approximately 2.01.7 million of restricted stock units,unit awards, with a weighted average grant date fair market value of $12.52,$13.71, that are expected to vest over a weighted average period of 2.32.5 years. 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.
Excess tax benefits on restricted stock units that vested, shown as financing cash inflows in the Condensed Consolidated Statements of Cash Flows, were $2.5$2.1 million and $2.2 million for the ninethree months ended September 30,March 31, 2015 and 2014, respectively.
Performance Share Units
Nonvested performance share unit awards as of December 31, 2014 and 2013, respectively. No restricted stock units vestedMarch 31, 2015, and changes during the three months ended September 30, 2014 and 2013, respectively. March 31, 2015, were as follows:
16
|
|
|
|
|
| Weighted Average |
| |
|
| Shares |
|
| Grant Date |
| ||
|
| (Thousands) |
|
| Fair Value |
| ||
Nonvested at December 31, 2014 |
|
| 804 |
|
| $ | 11.87 |
|
Granted |
|
| 418 |
|
|
| 16.73 |
|
Nonvested at March 31, 2015 |
|
| 1,222 |
|
| $ | 13.53 |
|
15
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (“RR DONNELLEY”)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in millions, except per share data, unless otherwise indicated)
Performance Share Units
Nonvested performance share unit awards as of December 31, 2013 and September 30, 2014, and changes duringDuring the ninethree months ended September 30, 2014, were as follows:
| Shares (thousands) |
|
| Weighted Average Grant Date Fair Value Per Share |
| ||
Nonvested at December 31, 2013 |
| 953 |
|
| $ | 10.81 |
|
Granted |
| 319 |
|
|
| 16.46 |
|
Expired |
| (114 | ) |
|
| 15.54 |
|
Vested |
| (121 | ) |
|
| 15.54 |
|
Nonvested at September 30, 2014 |
| 1,037 |
|
| $ | 11.48 |
|
During the nine months ended September 30, 2014, 319,000March 31, 2015, 418,000 performance share unit awards were granted to certain executive and senior officers, payable upon the achievement of certain established performance targets. The performance period for the shares awarded is January 1, 20142015 through December 31, 2016.2017. Distributions under these awards are payable at the end of the performance period in common stock or cash, at the Company’s discretion. The total potential payouts for awards granted during the ninethree months ended September 30, 2014March 31, 2015 range from 154,500209,000 to 319,000627,000 shares, should certain performance targets be achieved. 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 termination without cause, death or permanent disability or retirement of the grantee or a change in control of the Company. In addition, certain of these awards provide for continued vesting upon same terms and conditions that would have applied had grantee's employment not terminated upon a termination without cause by the Company or for good reason by the grantee.
Compensation expense for the performance share unit awards granted in 2015 is being recognized based on 100% payout or 418,000 shares. Compensation expense for the performance share unit awards granted in 2014 2013, and 20122013 is being recognized based on the maximum estimated payout of 319,000 485,000, and 233,000485,000 shares, for each respective grant year. Compensation expense for awards granted during 2011 was recognized based on the achieved target of 52%, or 121,431 shares, which were distributed during the three months ended March 31, 2014.period. Compensation expense related to performance share unit awards for the three and nine months ended September 30,March 31, 2015 and 2014 was $1.0$0.7 million and $2.6 million, respectively. Compensation expense related to performance share unit awards for the three and nine months ended September 30, 2013 was $0.6 million and $1.7 million, respectively. As of September 30, 2014,March 31, 2015, there was $6.2$11.1 million of unrecognized compensation expense related to performance share unit awards, which is expected to be recognized over a weighted average period of 1.92.3 years.
9. Equity
The Company’s equity as of December 31, 20132014 and September 30, 2014,March 31, 2015, and changes during the nine months ended September 30, 2014, were as follows:
| RR Donnelley |
|
|
|
|
|
|
|
|
| |
| Shareholders' |
|
| Noncontrolling |
|
|
|
|
| ||
| Equity |
|
| Interest |
|
| Total Equity |
| |||
Balance at December 31, 2013 | $ | 631.8 |
|
| $ | 21.9 |
|
| $ | 653.7 |
|
Net earnings (loss) |
| 97.9 |
|
|
| (0.7 | ) |
|
| 97.2 |
|
Other comprehensive loss |
| (11.7 | ) |
|
| (0.2 | ) |
|
| (11.9 | ) |
Share-based compensation |
| 13.8 |
|
|
| — |
|
|
| 13.8 |
|
Issuances of common stock |
| 300.7 |
|
|
| — |
|
|
| 300.7 |
|
Issuances of treasury stock |
| 18.3 |
|
|
| — |
|
|
| 18.3 |
|
Issuance of share-based awards, net of withholdings and other |
| (4.3 | ) |
|
| — |
|
|
| (4.3 | ) |
Cash dividends paid |
| (151.1 | ) |
|
| — |
|
|
| (151.1 | ) |
Noncontrolling interests in acquired business |
| — |
|
|
| 2.7 |
|
|
| 2.7 |
|
Distributions to noncontrolling interests |
| — |
|
|
| (0.7 | ) |
|
| (0.7 | ) |
Balance at September 30, 2014 | $ | 895.4 |
|
| $ | 23.0 |
|
| $ | 918.4 |
|
During the three months ended March 31, 2014, the Company issued stock in conjunction with the Consolidated Graphics and Esselte acquisitions with closing date values of $300.7 million and $18.3 million, respectively.2015, were as follows:
17
| RR Donnelley |
|
|
|
|
|
|
|
|
| |
| Shareholders' |
|
| Noncontrolling |
|
|
|
|
| ||
| Equity |
|
| Interest |
|
| Total Equity |
| |||
Balance at December 31, 2014 | $ | 593.8 |
|
| $ | 26.6 |
|
|
| 620.4 |
|
Net earnings (loss) |
| 22.3 |
|
|
| (10.4 | ) |
|
| 11.9 |
|
Other comprehensive loss |
| (20.6 | ) |
|
| 0.2 |
|
|
| (20.4 | ) |
Share-based compensation |
| 3.5 |
|
|
| — |
|
|
| 3.5 |
|
Issuance of share-based awards, net of withholdings and other |
| (4.1 | ) |
|
| — |
|
|
| (4.1 | ) |
Cash dividends paid |
| (52.0 | ) |
|
| — |
|
|
| (52.0 | ) |
Distributions to noncontrolling interests |
| — |
|
|
| (0.7 | ) |
|
| (0.7 | ) |
Balance at March 31, 2015 | $ | 542.9 |
|
| $ | 15.7 |
|
| $ | 558.6 |
|
16
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (“RR DONNELLEY”)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in millions, except per share data, unless otherwise indicated)
The Company’s equity as of December 31, 20122013 and September 30, 2013,March 31, 2014, and changes during the ninethree months ended September 30, 2013,March 31, 2014, were as follows:
| RR Donnelley |
|
|
|
|
|
|
|
|
| RR Donnelley |
|
|
|
|
|
|
|
|
| ||
| Shareholders' |
|
| Noncontrolling |
|
|
|
|
| Shareholders' |
|
| Noncontrolling |
|
|
|
|
| ||||
| Equity |
|
| Interest |
|
| Total Equity |
| Equity |
|
| Interest |
|
| Total Equity |
| ||||||
Balance at December 31, 2012 | $ | 52.8 |
|
| $ | 15.9 |
|
| $ | 68.7 |
| |||||||||||
Net earnings |
| 107.2 |
|
|
| 2.6 |
|
|
| 109.8 |
| |||||||||||
Other comprehensive income (loss) |
| (10.1 | ) |
|
| 0.1 |
|
|
| (10.0 | ) | |||||||||||
Balance at December 31, 2013 | $ | 631.8 |
|
| $ | 21.9 |
|
| $ | 653.7 |
| |||||||||||
Net loss |
| (29.0 | ) |
|
| (4.2 | ) |
|
| (33.2 | ) | |||||||||||
Other comprehensive loss |
| (8.0 | ) |
|
| (0.1 | ) |
|
| (8.1 | ) | |||||||||||
Share-based compensation |
| 15.6 |
|
|
| — |
|
|
| 15.6 |
|
| 3.8 |
|
|
| — |
|
|
| 3.8 |
|
Issuances of common stock |
| 300.7 |
|
|
| — |
|
|
| 300.7 |
| |||||||||||
Issuances of treasury stock |
| 18.3 |
|
|
| — |
|
|
| 18.3 |
| |||||||||||
Issuance of share-based awards, net of withholdings and other |
| (5.3 | ) |
|
| — |
|
|
| (5.3 | ) |
| (4.4 | ) |
|
| — |
|
|
| (4.4 | ) |
Cash dividends paid |
| (141.3 | ) |
|
| — |
|
|
| (141.3 | ) |
| (47.3 | ) |
|
| — |
|
|
| (47.3 | ) |
Noncontrolling interests in acquired business |
| — |
|
|
| 2.7 |
|
|
| 2.7 |
| |||||||||||
Distributions to noncontrolling interests |
| — |
|
|
| (1.1 | ) |
|
| (1.1 | ) |
| — |
|
|
| (0.7 | ) |
|
| (0.7 | ) |
Balance at September 30, 2013 | $ | 18.9 |
|
| $ | 17.5 |
|
| $ | 36.4 |
| |||||||||||
Balance at March 31, 2014 | $ | 865.9 |
|
| $ | 19.6 |
|
| $ | 885.5 |
|
During the three months ended March 31, 2014, the Company issued stock in conjunction with the Consolidated Graphics and Esselte acquisitions with closing date values of $300.7 million and $18.3 million, respectively.
10. Earnings per Share
Basic earnings (loss) per share is calculated by dividing net earnings (loss) attributable to RR Donnelley common shareholders by the weighted average number of common shares outstanding for the period. In computing diluted earnings (loss) per share, basic earnings (loss) per share is adjusted for the assumed issuance of all potentially dilutive share-based awards, including stock options, restricted stock units and performance share units. Performance share units are considered anti-dilutive and excluded if the performance targets upon which the issuance of the shares is contingent have not yet been achieved and the respective performance period has not been completed as of the end of the current period. Additionally, stock options are considered anti-dilutive when the exercise price exceeds the average of the Company’s stock price during the applicable period.
During the ninethree months ended September 30,March 31, 2015 and 2014, and 2013, no shares of common stock were purchased by the Company; however, shares were withheld for tax liabilities upon the vesting of equity awards. During the nine months ended September 30, 2014, the Company issued stock
17
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (“RR DONNELLEY”)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in conjunction with the Consolidated Graphics and Esselte acquisitions of 16.0 million shares and 1.0 million shares, respectively.millions, except per share data, unless otherwise indicated)
The reconciliation of the numerator and denominator of the basic and diluted earnings (loss) per share calculation and the anti-dilutive share-based awards for the three and nine months ended September 30,March 31, 2015 and 2014 and 2013 were as follows:
| Three Months Ended |
|
| Nine Months Ended |
|
| Three Months Ended |
| |||||||||||||||
| September 30, |
|
| September 30, |
|
| March 31, |
| |||||||||||||||
| 2014 |
|
| 2013 |
|
| 2014 |
|
| 2013 |
|
| 2015 |
|
| 2014 |
| ||||||
Net earnings per share attributable to RR Donnelley common shareholders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Net earnings (loss) per share attributable to RR Donnelley common shareholders: |
|
|
|
|
|
|
|
| |||||||||||||||
Basic | $ | 0.31 |
|
| $ | 0.08 |
|
| $ | 0.49 |
|
| $ | 0.59 |
|
| $ | 0.11 |
|
| $ | (0.15 | ) |
Diluted | $ | 0.31 |
|
| $ | 0.08 |
|
| $ | 0.49 |
|
| $ | 0.58 |
|
| $ | 0.11 |
|
| $ | (0.15 | ) |
Dividends declared per common share | $ | 0.26 |
|
| $ | 0.26 |
|
| $ | 0.78 |
|
| $ | 0.78 |
|
| $ | 0.26 |
|
| $ | 0.26 |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings attributable to RR Donnelley common shareholders | $ | 62.2 |
|
| $ | 14.7 |
|
| $ | 97.9 |
|
| $ | 107.2 |
| ||||||||
Net earnings (loss) attributable to RR Donnelley common shareholders |
| $ | 22.3 |
|
| $ | (29.0 | ) | |||||||||||||||
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding |
| 200.3 |
|
|
| 182.3 |
|
|
| 197.9 |
|
|
| 181.8 |
|
|
| 200.6 |
|
|
| 193.1 |
|
Dilutive options and awards |
| 1.3 |
|
|
| 1.6 |
|
|
| 1.5 |
|
|
| 1.5 |
|
|
| 1.5 |
|
|
| — |
|
Diluted weighted average number of common shares outstanding |
| 201.6 |
|
|
| 183.9 |
|
|
| 199.4 |
|
|
| 183.3 |
|
|
| 202.1 |
|
|
| 193.1 |
|
Weighted average number of anti-dilutive share-based awards: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
| 2.0 |
|
|
| 4.1 |
| |||||||||||||||
Performance share units |
|
| 0.9 |
|
|
| 1.0 |
| |||||||||||||||
Restricted stock units |
| 1.2 |
|
|
| 1.4 |
|
|
| 1.2 |
|
|
| 1.6 |
|
|
| — |
|
|
| 2.3 |
|
Performance share units |
| 1.0 |
|
|
| 1.0 |
|
|
| 1.0 |
|
|
| 0.8 |
| ||||||||
Stock options |
| 3.4 |
|
|
| 3.7 |
|
|
| 3.4 |
|
|
| 4.0 |
| ||||||||
Total |
| 5.6 |
|
|
| 6.1 |
|
|
| 5.6 |
|
|
| 6.4 |
|
|
| 2.9 |
|
|
| 7.4 |
|
11. Comprehensive Income
The components of other comprehensive (loss) income and income tax expense allocated to each component for the three months ended March 31, 2015 and 2014 were as follows:
| Three Months Ended |
| |||||||||
| March 31, 2015 |
| |||||||||
| Before Tax |
|
| Income Tax |
|
| Net of Tax |
| |||
| Amount |
|
| Expense |
|
| Amount |
| |||
Translation adjustments | $ | (22.6 | ) |
| $ | — |
|
| $ | (22.6 | ) |
Adjustment for net periodic pension and other postretirement benefits plan cost |
| 3.5 |
|
|
| 1.3 |
|
|
| 2.2 |
|
Change in fair value of derivatives |
| 0.1 |
|
|
| 0.1 |
|
|
| — |
|
Other comprehensive (loss) income | $ | (19.0 | ) |
| $ | 1.4 |
|
| $ | (20.4 | ) |
| Three Months Ended |
| |||||||||
| March 31, 2014 |
| |||||||||
| Before Tax |
|
| Income Tax |
|
| Net of Tax |
| |||
| Amount |
|
| Expense |
|
| Amount |
| |||
Translation adjustments | $ | (9.0 | ) |
| $ | — |
|
| $ | (9.0 | ) |
Adjustment for net periodic pension and other postretirement benefits plan cost |
| 1.4 |
|
|
| 0.5 |
|
|
| 0.9 |
|
Change in fair value of derivatives |
| 0.1 |
|
|
| 0.1 |
|
|
| — |
|
Other comprehensive (loss) income | $ | (7.5 | ) |
| $ | 0.6 |
|
| $ | (8.1 | ) |
18
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (“RR DONNELLEY”)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in millions, except per share data, unless otherwise indicated)
11. Comprehensive Income
The components ofAccumulated other comprehensive income (loss)loss by component as of December 31, 2014 and income tax expense allocated to each component forMarch 31, 2015, and changes during the three and nine months ended September 30, 2014 and 2013 wasMarch 31, 2015, were as follows:
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||||||||||
| September 30, 2014 |
|
| September 30, 2014 |
| ||||||||||||||||||
| Before Tax |
|
| Income Tax |
|
| Net of Tax |
|
| Before Tax |
|
| Income Tax |
|
| Net of Tax |
| ||||||
| Amount |
|
| Expense |
|
| Amount |
|
| Amount |
|
| Expense |
|
| Amount |
| ||||||
Translation adjustments | $ | (15.0 | ) |
| $ | — |
|
| $ | (15.0 | ) |
| $ | (15.3 | ) |
| $ | — |
|
| $ | (15.3 | ) |
Adjustment for net periodic pension and other postretirement benefits plan cost |
| 1.4 |
|
|
| 0.4 |
|
|
| 1.0 |
|
|
| 4.8 |
|
|
| 1.5 |
|
|
| 3.3 |
|
Change in fair value of derivatives |
| — |
|
|
| — |
|
|
| — |
|
|
| 0.2 |
|
|
| 0.1 |
|
|
| 0.1 |
|
Other comprehensive income (loss) | $ | (13.6 | ) |
| $ | 0.4 |
|
| $ | (14.0 | ) |
| $ | (10.3 | ) |
| $ | 1.6 |
|
| $ | (11.9 | ) |
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||||||||||
| September 30, 2013 |
|
| September 30, 2013 |
| ||||||||||||||||||
| Before Tax |
|
| Income Tax |
|
| Net of Tax |
|
| Before Tax |
|
| Income Tax |
|
| Net of Tax |
| ||||||
| Amount |
|
| Expense |
|
| Amount |
|
| Amount |
|
| Expense |
|
| Amount |
| ||||||
Translation adjustments | $ | (1.1 | ) |
| $ | — |
|
| $ | (1.1 | ) |
| $ | (19.8 | ) |
| $ | — |
|
| $ | (19.8 | ) |
Adjustment for net periodic pension and other postretirement benefits plan cost |
| 8.5 |
|
|
| 2.9 |
|
|
| 5.6 |
|
|
| 23.9 |
|
|
| 14.4 |
|
|
| 9.5 |
|
Change in fair value of derivatives |
| 0.3 |
|
|
| 0.1 |
|
|
| 0.2 |
|
|
| 0.5 |
|
|
| 0.2 |
|
|
| 0.3 |
|
Other comprehensive income (loss) | $ | 7.7 |
|
| $ | 3.0 |
|
| $ | 4.7 |
|
| $ | 4.6 |
|
| $ | 14.6 |
|
| $ | (10.0 | ) |
| Changes in the Fair Value of Derivatives |
|
| Pension and Other Postretirement Benefits Plan Cost |
|
| Translation Adjustments |
|
| Total |
| ||||
Balance at December 31, 2014 | $ | (0.1 | ) |
| $ | (762.3 | ) |
| $ | (11.2 | ) |
| $ | (773.6 | ) |
Other comprehensive loss before reclassifications |
| — |
|
|
| — |
|
|
| (22.8 | ) |
|
| (22.8 | ) |
Amounts reclassified from accumulated other comprehensive loss |
| — |
|
|
| 2.2 |
|
|
| — |
|
|
| 2.2 |
|
Net change in accumulated other comprehensive loss |
| — |
|
|
| 2.2 |
|
|
| (22.8 | ) |
|
| (20.6 | ) |
Balance at March 31, 2015 | $ | (0.1 | ) |
| $ | (760.1 | ) |
| $ | (34.0 | ) |
| $ | (794.2 | ) |
Accumulated other comprehensive income (loss) by component as of December 31, 2013 and September 30,March 31, 2014, and changes forduring the ninethree months ended September 30,March 31, 2014, were as follows:
| Changes in the Fair Value of Derivatives |
|
| Pension and Other Postretirement Benefits Plan Cost |
|
| Translation Adjustments |
|
| Total |
| Changes in the Fair Value of Derivatives |
|
| Pension and Other Postretirement Benefits Plan Cost |
|
| Translation Adjustments |
|
| Total |
| ||||||||
Balance at December 31, 2013 | $ | (0.2 | ) |
| $ | (521.4 | ) |
| $ | 33.5 |
|
| $ | (488.1 | ) | $ | (0.2 | ) |
| $ | (521.4 | ) |
| $ | 33.5 |
|
| $ | (488.1 | ) |
Other comprehensive loss before reclassifications |
| — |
|
|
| — |
|
|
| (15.1 | ) |
|
| (15.1 | ) |
| — |
|
|
| — |
|
|
| (8.9 | ) |
|
| (8.9 | ) |
Amount reclassified from accumulated other comprehensive loss |
| 0.1 |
|
|
| 3.3 |
|
|
| — |
|
|
| 3.4 |
| |||||||||||||||
Amounts reclassified from accumulated other comprehensive loss |
| — |
|
|
| 0.9 |
|
|
| — |
|
|
| 0.9 |
| |||||||||||||||
Net change in accumulated other comprehensive loss |
| 0.1 |
|
|
| 3.3 |
|
|
| (15.1 | ) |
|
| (11.7 | ) |
| — |
|
|
| 0.9 |
|
|
| (8.9 | ) |
|
| (8.0 | ) |
Balance at September 30, 2014 | $ | (0.1 | ) |
| $ | (518.1 | ) |
| $ | 18.4 |
|
| $ | (499.8 | ) | |||||||||||||||
Balance at March 31, 2014 | $ | (0.2 | ) |
| $ | (520.5 | ) |
| $ | 24.6 |
|
| $ | (496.1 | ) |
Accumulated other comprehensive income (loss) by component as of December 31, 2012 and September 30, 2013, and changes for the nine months ended September 30, 2013, were as follows:
| Changes in the Fair Value of Derivatives |
|
| Pension and Other Postretirement Benefits Plan Cost |
|
| Translation Adjustments |
|
| Total |
| ||||
Balance at December 31, 2012 | $ | (0.6 | ) |
| $ | (1,085.1 | ) |
| $ | 56.5 |
|
| $ | (1,029.2 | ) |
Other comprehensive loss before reclassifications |
| — |
|
|
| (5.6 | ) |
|
| (19.9 | ) |
|
| (25.5 | ) |
Amount reclassified from accumulated other comprehensive loss |
| 0.3 |
|
|
| 15.1 |
|
|
| — |
|
|
| 15.4 |
|
Net change in accumulated other comprehensive loss |
| 0.3 |
|
|
| 9.5 |
|
|
| (19.9 | ) |
|
| (10.1 | ) |
Balance at September 30, 2013 | $ | (0.3 | ) |
| $ | (1,075.6 | ) |
| $ | 36.6 |
|
| $ | (1,039.3 | ) |
19
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (“RR DONNELLEY”)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in millions, except per share data, unless otherwise indicated)
Reclassifications from accumulated other comprehensive loss for the three and nine months ended September 30,March 31, 2015 and 2014 and 2013 were as follows:
| Three Months Ended |
|
| Nine Months Ended |
|
| Classification in the Condensed | |||||||||||||||||||
| September 30, |
|
| September 30, |
|
| Consolidated | Three Months Ended March 31, |
|
| Classification in the Condensed | |||||||||||||||
| 2014 |
|
| 2013 |
|
| 2014 |
|
| 2013 |
|
| Statements of Operations | 2015 |
|
| 2014 |
|
| Consolidated Statements of Operations | ||||||
Amortization of pension and other postretirement benefits plan cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss | $ | 7.8 |
|
| $ | 12.4 |
|
| $ | 24.1 |
|
| $ | 37.6 |
|
| (a) | $ | 10.2 |
|
| $ | 7.8 |
|
| (a) |
Net prior service credit |
| (6.4 | ) |
|
| (4.9 | ) |
|
| (19.3 | ) |
|
| (14.8 | ) |
| (a) |
| (6.7 | ) |
|
| (6.4 | ) |
| (a) |
Settlements |
| — |
|
|
| 0.8 |
|
|
| — |
|
|
| 0.8 |
|
|
| |||||||||
Reclassifications before tax |
| 1.4 |
|
|
| 8.3 |
|
|
| 4.8 |
|
|
| 23.6 |
|
|
|
| 3.5 |
|
|
| 1.4 |
|
|
|
Income tax expense |
| 0.4 |
|
|
| 2.9 |
|
|
| 1.5 |
|
|
| 8.5 |
|
|
|
| 1.3 |
|
|
| 0.5 |
|
|
|
Reclassifications, net of tax | $ | 1.0 |
|
| $ | 5.4 |
|
| $ | 3.3 |
|
| $ | 15.1 |
|
|
| $ | 2.2 |
|
| $ | 0.9 |
|
|
|
(a) | These accumulated other comprehensive income (loss) components are included in the calculation of net periodic pension and other postretirement benefits plan income recognized in cost of sales and selling, general and administrative expenses in the Condensed Consolidated Statements of Operations (see Note |
19
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (“RR DONNELLEY”)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in millions, except per share data, unless otherwise indicated)
12. Segment Information
The Company operates primarily in the print and related services industry, with product and service offerings designed to offer customers complete solutions for communicating their messages to target audiences.
The Company’s segments and their product and service offerings are summarized below:
Publishing and Retail Services
The Publishing and Retail Services segment’s primary product offerings include magazines, catalogs, retail inserts, books, directories and packaging.
Variable Print
The Variable Print segment includes the Company’s U.S. short-run and transactional printing operations. This segment’s primary product offerings include commercial and digital print, office products, direct mail, labels, statement printing, office products, forms and packaging.
Strategic Services
The Strategic Services segment includes the Company’s logistics services, financial print products and related services, logistics services,print management offerings and digital and creative solutions and print management offerings.solutions.
International
The International segment includes the Company’s non-U.S. printing operations in Asia, Europe, Latin America and Canada. This segment’s primary product and service offerings include magazines, catalogs, retail inserts, books, directories, direct mail, packaging, forms, labels, manuals, statement printing, commercial and digital print, logistics services and digital and creative solutions. Additionally, this segment includes the Company’s business process outsourcing and Global Turnkey Solutions operations. Business process outsourcing provides transactional print and outsourcing services, statement printing, direct mail and print management offerings through its operations in Europe, Asia and North America. Global Turnkey Solutions provides outsourcing capabilities, including product configuration, customized kitting and order fulfillment for technology, medical device and other companies around the world through its operations in Europe, North America and Asia.
20
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (“RR DONNELLEY”)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in millions, except per share data, unless otherwise indicated)
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, certain costs and earnings of employee benefit plans, such as pension and other postretirement benefits plan expense (income) and share-based compensation, are included in Corporate and not allocated to the operating segments. Corporate also manages the Company’s cash pooling structures, which enables participating international locations to draw on the Company’s overseas cash resources to meet local liquidity needs.
20
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (“RR DONNELLEY”)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in millions, except per share data, unless otherwise indicated)
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 within the Condensed Consolidated Financial Statements.
In the second quarter of 2014, Consolidated Graphics’ operations in the Czech Republic and Japan were moved from the Variable Print segment to the Europe and Asia reporting units, respectively, within the International segment to reflect corresponding changes in the management reporting structure of the organization. All prior periods have been reclassified to conform to the current reporting structure.
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income (Loss) |
|
|
|
|
|
| Depreciation |
|
|
|
|
| ||
|
| Total |
|
| Intersegment |
|
| Net |
|
| from |
|
| Assets of |
|
| and |
|
| Capital |
| |||||||
|
| Sales |
|
| Sales |
|
| Sales |
|
| Operations |
|
| Operations |
|
| Amortization |
|
| Expenditures |
| |||||||
Three Months Ended March 31, 2015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Publishing and Retail Services |
| $ | 577.8 |
|
| $ | (4.0 | ) |
| $ | 573.8 |
|
| $ | 11.8 |
|
| $ | 1,153.9 |
|
| $ | 34.3 |
|
| $ | 12.5 |
|
Variable Print |
|
| 964.2 |
|
|
| (15.4 | ) |
|
| 948.8 |
|
|
| 66.2 |
|
|
| 2,585.7 |
|
|
| 39.0 |
|
|
| 9.5 |
|
Strategic Services |
|
| 694.8 |
|
|
| (27.5 | ) |
|
| 667.3 |
|
|
| 55.0 |
|
|
| 1,419.5 |
|
|
| 17.4 |
|
|
| 11.9 |
|
International |
|
| 581.2 |
|
|
| (25.0 | ) |
|
| 556.2 |
|
|
| 12.1 |
|
|
| 1,586.8 |
|
|
| 21.7 |
|
|
| 12.2 |
|
Total operating segments |
|
| 2,818.0 |
|
|
| (71.9 | ) |
|
| 2,746.1 |
|
|
| 145.1 |
|
|
| 6,745.9 |
|
|
| 112.4 |
|
|
| 46.1 |
|
Corporate |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (29.5 | ) |
|
| 459.4 |
|
|
| 1.0 |
|
|
| 2.4 |
|
Total operations |
| $ | 2,818.0 |
|
| $ | (71.9 | ) |
| $ | 2,746.1 |
|
| $ | 115.6 |
|
| $ | 7,205.3 |
|
| $ | 113.4 |
|
| $ | 48.5 |
|
Three Months Ended September 30, 2014 | Total Sales |
|
| Intersegment Sales |
|
| Net Sales |
|
| Income (Loss) from Operations |
|
| Depreciation and Amortization |
|
| Capital Expenditures |
| ||||||
Publishing and Retail Services | $ | 685.3 |
|
| $ | (4.3 | ) |
| $ | 681.0 |
|
| $ | 34.1 |
|
| $ | 35.8 |
|
| $ | 9.8 |
|
Variable Print |
| 1,003.8 |
|
|
| (15.7 | ) |
|
| 988.1 |
|
|
| 68.8 |
|
|
| 40.8 |
|
|
| 15.2 |
|
Strategic Services |
| 665.1 |
|
|
| (34.4 | ) |
|
| 630.7 |
|
|
| 56.5 |
|
|
| 16.1 |
|
|
| 10.5 |
|
International |
| 684.3 |
|
|
| (26.3 | ) |
|
| 658.0 |
|
|
| 24.7 |
|
|
| 25.2 |
|
|
| 19.9 |
|
Total operating segments |
| 3,038.5 |
|
|
| (80.7 | ) |
|
| 2,957.8 |
|
|
| 184.1 |
|
|
| 117.9 |
|
|
| 55.4 |
|
Corporate |
| — |
|
|
| — |
|
|
| — |
|
|
| (10.4 | ) |
|
| 1.7 |
|
|
| 2.8 |
|
Total operations | $ | 3,038.5 |
|
| $ | (80.7 | ) |
| $ | 2,957.8 |
|
| $ | 173.7 |
|
| $ | 119.6 |
|
| $ | 58.2 |
|
Three Months Ended September 30, 2013 | Total Sales |
|
| Intersegment Sales |
|
| Net Sales |
|
| Income (Loss) from Operations |
|
| Depreciation and Amortization |
|
| Capital Expenditures |
| ||||||
Publishing and Retail Services | $ | 718.0 |
|
| $ | (3.0 | ) |
| $ | 715.0 |
|
| $ | 34.3 |
|
| $ | 40.9 |
|
| $ | 14.8 |
|
Variable Print |
| 658.7 |
|
|
| (14.9 | ) |
|
| 643.8 |
|
|
| 46.8 |
|
|
| 24.9 |
|
|
| 16.0 |
|
Strategic Services |
| 612.2 |
|
|
| (30.5 | ) |
|
| 581.7 |
|
|
| 43.0 |
|
|
| 14.5 |
|
|
| 10.3 |
|
International |
| 694.4 |
|
|
| (20.0 | ) |
|
| 674.4 |
|
|
| 42.3 |
|
|
| 24.8 |
|
|
| 11.8 |
|
Total operating segments |
| 2,683.3 |
|
|
| (68.4 | ) |
|
| 2,614.9 |
|
|
| 166.4 |
|
|
| 105.1 |
|
|
| 52.9 |
|
Corporate |
| (0.1 | ) |
|
| 0.1 |
|
|
| — |
|
|
| (31.8 | ) |
|
| 1.2 |
|
|
| 2.4 |
|
Total operations | $ | 2,683.2 |
|
| $ | (68.3 | ) |
| $ | 2,614.9 |
|
| $ | 134.6 |
|
| $ | 106.3 |
|
| $ | 55.3 |
|
Nine Months Ended September 30, 2014 | Total Sales |
|
| Intersegment Sales |
|
| Net Sales |
|
| Income (Loss) from Operations |
|
| Assets of Operations |
|
| Depreciation and Amortization |
|
| Capital Expenditures |
| |||||||
Publishing and Retail Services | $ | 1,958.3 |
|
| $ | (8.7 | ) |
| $ | 1,949.6 |
|
| $ | 71.8 |
|
| $ | 1,337.4 |
|
| $ | 110.7 |
|
| $ | 32.0 |
|
Variable Print |
| 2,784.8 |
|
|
| (47.2 | ) |
|
| 2,737.6 |
|
|
| 158.2 |
|
|
| 2,719.6 |
|
|
| 117.4 |
|
|
| 44.3 |
|
Strategic Services |
| 2,035.0 |
|
|
| (97.1 | ) |
|
| 1,937.9 |
|
|
| 193.0 |
|
|
| 1,403.4 |
|
|
| 48.5 |
|
|
| 28.4 |
|
International |
| 1,979.8 |
|
|
| (70.8 | ) |
|
| 1,909.0 |
|
|
| 79.6 |
|
|
| 1,939.7 |
|
|
| 75.0 |
|
|
| 50.3 |
|
Total operating segments |
| 8,757.9 |
|
|
| (223.8 | ) |
|
| 8,534.1 |
|
|
| 502.6 |
|
|
| 7,400.1 |
|
|
| 351.6 |
|
|
| 155.0 |
|
Corporate |
| — |
|
|
| — |
|
|
| — |
|
|
| (54.7 | ) |
|
| 166.8 |
|
|
| 5.4 |
|
|
| 9.5 |
|
Total operations | $ | 8,757.9 |
|
| $ | (223.8 | ) |
| $ | 8,534.1 |
|
| $ | 447.9 |
|
| $ | 7,566.9 |
|
| $ | 357.0 |
|
| $ | 164.5 |
|
21
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (“RR DONNELLEY”)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in millions, except per share data, unless otherwise indicated)
Nine Months Ended September 30, 2013 | Total Sales |
|
| Intersegment Sales |
|
| Net Sales |
|
| Income (Loss) from Operations |
|
| Assets of Operations |
|
| Depreciation and Amortization |
|
| Capital Expenditures |
| |||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income (Loss) |
|
|
|
|
|
| Depreciation |
|
|
|
|
| |||||||||||||||||||||||||||||
|
| Total |
|
| Intersegment |
|
| Net |
|
| from |
|
| Assets of |
|
| and |
|
| Capital |
| ||||||||||||||||||||||||||||||||||
|
| Sales |
|
| Sales |
|
| Sales |
|
| Operations |
|
| Operations |
|
| Amortization |
|
| Expenditures |
| ||||||||||||||||||||||||||||||||||
Three Months Ended March 31, 2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||
Publishing and Retail Services | $ | 2,035.4 |
|
| $ | (6.7 | ) |
| $ | 2,028.7 |
|
| $ | 93.8 |
|
| $ | 1,443.3 |
|
| $ | 126.6 |
|
| $ | 39.0 |
|
| $ | 643.5 |
|
| $ | (0.8 | ) |
| $ | 642.7 |
|
| $ | 9.9 |
|
| $ | 1,303.6 |
|
| $ | 37.7 |
|
| $ | 11.9 |
|
Variable Print |
| 1,961.4 |
|
|
| (43.0 | ) |
|
| 1,918.4 |
|
|
| 142.7 |
|
|
| 1,595.2 |
|
|
| 79.2 |
|
|
| 40.8 |
|
|
| 809.0 |
|
|
| (16.9 | ) |
|
| 792.1 |
|
|
| 27.7 |
|
|
| 2,723.6 |
|
|
| 35.1 |
|
|
| 10.4 |
|
Strategic Services |
| 1,929.8 |
|
|
| (95.4 | ) |
|
| 1,834.4 |
|
|
| 182.1 |
|
|
| 1,391.6 |
|
|
| 44.2 |
|
|
| 23.5 |
|
|
| 650.6 |
|
|
| (30.9 | ) |
|
| 619.7 |
|
|
| 55.4 |
|
|
| 1,427.0 |
|
|
| 16.1 |
|
|
| 9.9 |
|
International |
| 2,010.5 |
|
|
| (67.0 | ) |
|
| 1,943.5 |
|
|
| 99.5 |
|
|
| 2,028.3 |
|
|
| 76.7 |
|
|
| 30.0 |
|
|
| 639.4 |
|
|
| (20.1 | ) |
|
| 619.3 |
|
|
| 30.2 |
|
|
| 1,919.5 |
|
|
| 24.9 |
|
|
| 12.0 |
|
Total operating segments |
| 7,937.1 |
|
|
| (212.1 | ) |
|
| 7,725.0 |
|
|
| 518.1 |
|
|
| 6,458.4 |
|
|
| 326.7 |
|
|
| 133.3 |
|
|
| 2,742.5 |
|
|
| (68.7 | ) |
|
| 2,673.8 |
|
|
| 123.2 |
|
|
| 7,373.7 |
|
|
| 113.8 |
|
|
| 44.2 |
|
Corporate |
| — |
|
|
| — |
|
|
| — |
|
|
| (70.5 | ) |
|
| 643.6 |
|
|
| 4.2 |
|
|
| 6.3 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (27.2 | ) |
|
| 220.7 |
|
|
| 1.7 |
|
|
| 4.8 |
|
Total operations | $ | 7,937.1 |
|
| $ | (212.1 | ) |
| $ | 7,725.0 |
|
| $ | 447.6 |
|
| $ | 7,102.0 |
|
| $ | 330.9 |
|
| $ | 139.6 |
|
| $ | 2,742.5 |
|
| $ | (68.7 | ) |
| $ | 2,673.8 |
|
| $ | 96.0 |
|
| $ | 7,594.4 |
|
| $ | 115.5 |
|
| $ | 49.0 |
|
Restructuring, impairment and other charges by segment for the three and nine months ended September 30,March 31, 2015 and 2014 and 2013 are described in Note 6.6, Restructuring, Impairment and Other Charges.
13. Commitments and Contingencies
The Company is subject to laws and regulations relating to the protection of the environment. The Company provides 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 twelve active federal and state Superfund and other multiparty remediation sites. In addition to these sites, the Company may also have the obligation to remediate tennine other previously orand 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.
21
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (“RR DONNELLEY”)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in millions, except per share data, unless otherwise indicated)
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 results of operations, financial position or cash flows.
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 beis 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 results of operations, financial position or cash flows.
22
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (“RR DONNELLEY”)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in millions, except per share data, unless otherwise indicated)
14. Debt
The Company’s debt at September 30, 2014March 31, 2015 and December 31, 20132014 consisted of the following:
| September 30, |
|
| December 31, |
| March 31, |
|
| December 31, |
| ||||
| 2014 |
|
| 2013 |
| 2015 |
|
| 2014 |
| ||||
Borrowings under the Credit Agreement | $ | 130.0 |
|
| $ | — |
| |||||||
4.95% senior notes due April 1, 2014 |
| — |
|
|
| 258.2 |
| |||||||
5.50% senior notes due May 15, 2015 |
| 200.0 |
|
|
| 200.0 |
| $ | 200.0 |
|
| $ | 200.0 |
|
8.60% senior notes due August 15, 2016 |
| 219.0 |
|
|
| 218.7 |
|
| 219.2 |
|
|
| 219.1 |
|
6.125% senior notes due January 15, 2017 |
| 251.0 |
|
|
| 250.8 |
|
| 251.1 |
|
|
| 251.0 |
|
7.25% senior notes due May 15, 2018 |
| 250.0 |
|
|
| 350.0 |
|
| 250.0 |
|
|
| 250.0 |
|
11.25% senior notes due February 1, 2019 (a) |
| 172.2 |
|
|
| 172.2 |
|
| 172.2 |
|
|
| 172.2 |
|
8.25% senior notes due March 15, 2019 |
| 238.9 |
|
|
| 450.0 |
|
| 238.9 |
|
|
| 238.9 |
|
7.625% senior notes due June 15, 2020 |
| 350.0 |
|
|
| 400.0 |
|
| 350.0 |
|
|
| 350.0 |
|
7.875% senior notes due March 15, 2021 |
| 448.2 |
|
|
| 448.0 |
|
| 448.3 |
|
|
| 448.3 |
|
8.875% debentures due April 15, 2021 |
| 80.9 |
|
|
| 80.9 |
|
| 80.9 |
|
|
| 80.9 |
|
7.00% senior notes due February 15, 2022 |
| 400.0 |
|
|
| 400.0 |
|
| 400.0 |
|
|
| 400.0 |
|
6.50% senior notes due November 15, 2023 |
| 350.0 |
|
|
| 350.0 |
|
| 350.0 |
|
|
| 350.0 |
|
6.00% senior notes due April 1, 2024 |
| 400.0 |
|
|
| — |
|
| 400.0 |
|
|
| 400.0 |
|
6.625% debentures due April 15, 2029 |
| 199.4 |
|
|
| 199.4 |
|
| 199.5 |
|
|
| 199.5 |
|
8.820% debentures due April 15, 2031 |
| 69.0 |
|
|
| 69.0 |
|
| 69.0 |
|
|
| 69.0 |
|
Other (b) |
| 2.2 |
|
|
| 10.7 |
|
| 5.2 |
|
|
| 3.6 |
|
Total debt |
| 3,760.8 |
|
|
| 3,857.9 |
|
| 3,634.3 |
|
|
| 3,632.5 |
|
Less: current portion |
| (333.5 | ) |
|
| (270.9 | ) |
| (203.3 | ) |
|
| (203.4 | ) |
Long-term debt | $ | 3,427.3 |
|
| $ | 3,587.0 |
| $ | 3,431.0 |
|
| $ | 3,429.1 |
|
(a) | As of |
(b) | Includes fair value |
The fair values of the senior notes and debentures, which 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 $306.9$357.1 million and $343.4$259.5 million at September 30, 2014March 31, 2015 and December 31, 2013,2014, respectively.
Effective September 9, 2014, the aggregate revolving commitments of the Lenders under the Company’s senior secured revolving credit facility (the “Credit Agreement”) were increased from $1.15 billion to $1.5 billion and the expiration date of the Credit Agreement was extended from October 15, 2017 to September 9, 2019.
22
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (“RR DONNELLEY”)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in millions, except per share data, unless otherwise indicated)
The Credit Agreement is subject to a number of covenants, including a minimum Interest Coverage Ratio and a maximum Leverage Ratio, as defined 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 $225.0 million in aggregate, though additional dividends may be allowed subject to certain conditions.
The weighted average interest rate on borrowings under the Company’s $1.5 billion Credit Agreement was 2.0%2.1% during the ninethree months ended September 30, 2014March 31, 2015 and 2013.2014.
On April 1, 2014, cash on hand and borrowings under the Credit Agreement were used to pay the $258.2 million 4.95% senior notes that matured on April 1, 2014.
On March 20, 2014, the Company issued $400.0 million of 6.00% senior notes due April 1, 2024. Interest on the notes is payable semi-annually on April 1 and October 1, and commenced on October 1, 2014. The net proceeds from the offering along with borrowings under the Credit Agreement were used to repurchase $211.1$211.0 million of the 8.25% senior notes due March 15, 2019, $100.0 million of the 7.25% senior notes due May 15, 2018, and $50.0 million of the 7.625% senior notes due June 15, 2020. The repurchases resulted in a pre-tax loss on debt extinguishment of $77.1 million for the ninethree months ended September 30,March 31, 2014 related to the premiums paid, unamortized debt issuance costs, elimination of the $2.8 million fair value adjustment on the 8.25% senior notes and other expenses.
23
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (“RR DONNELLEY”)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in millions, except per share data, unless otherwise indicated)
On November 12, 2013, the Company issued $350.0Interest income was $1.7 million of 6.50% senior notes due November 15, 2023. Interest on the notes is payable semi-annually on May 15 and November 15 of each year. The net proceeds from the offering, along with cash on hand, were used to finance the cash portion of the acquisition of Consolidated Graphics.
On August 26, 2013, the Company issued $400.0 million of 7.00% senior notes due February 15, 2022. Interest on the notes is payable semi-annually on February 15 and August 15 of each year. The net proceeds from the offering were used to repurchase $200.0 million of the 7.25% senior notes due May 15, 2018, $100.0 million of the 5.50% senior notes due May 15, 2015 and $100.0 million of the 6.125% senior notes due January 15, 2017. The repurchases resulted in a pre-tax loss on debt extinguishment of $46.3 million for the year ended December 31, 2013 related to the premiums paid, unamortized debt issuance costs and other expenses.
On March 14, 2013, the Company issued $450.0 million of 7.875% senior notes due March 15, 2021. Interest on the notes is payable semi-annually on March 15 and September 15 of each year. The net proceeds from the offering were used to repurchase $173.5 million of the 6.125% senior notes due January 15, 2017, $130.2 million of the 8.60% senior notes due August 15, 2016 and $50.0 million of the 7.25% senior notes due May 15, 2018 and to reduce borrowings under the Credit Agreement. The repurchases resulted in a pre-tax loss on debt extinguishment of $35.6$2.5 million for the three months ended March 31, 2013 related to the premiums paid, unamortized debt issuance costs2015 and other expenses.
Interest income was $1.9 million and $6.6 million for the three and nine months ended September 30, 2014, respectively. Interest income was $2.1 million and $8.4 million for the three and nine months ended September 30, 2013, respectively.
15. Derivatives
All derivatives are recorded as other current or noncurrent assets or other current or noncurrent liabilities in the Condensed Consolidated Balance Sheets at their respective fair values. Unrealized gains and losses related to derivatives are recorded in other comprehensive income (loss), net of applicable income taxes, or in the Condensed Consolidated Statements of Operations, depending on the purpose for which the derivative is held. For derivatives designated and that qualify as cash flow hedges, the effective portion of the unrealized gain or loss related to the derivatives are generally recorded in other comprehensive income (loss) until the transaction affects earnings. For derivatives designated and that qualify as fair value hedges, the gain or loss on the derivative, as well as the offsetting gain or loss on the hedged item attributable to the hedged risk, are recognized in the Condensed Consolidated Statements of Operations. Changes in the fair value of derivatives that do not meet the criteria for designation as a hedge at inception, or fail to meet the criteria thereafter, are recognized currently in the Condensed Consolidated Statements of Operations. At the inception of a hedge transaction, the Company formally documents the hedge relationship and the risk management objective for undertaking the hedge. In addition, the Company assesses both at inception of the hedge and on an ongoing basis, whether the derivative in the hedging transaction has been highly effective in offsetting changes in fair value or cash flows of the hedged item and whether the derivative is expected to continue to be highly effective. The impact of any ineffectiveness is also recognized currently in the Condensed Consolidated Statements of Operations.
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 borrowings, sales, purchases, revenues, expenses or other transactions are not in the local currency of the subsidiary or operating unit, the Company is exposed to currency risk. Periodically, the Company uses foreign exchange spot and forward contracts to hedge exposures resulting from foreign exchange fluctuations. Accordingly, the implied gains and losses associated with the fair values of foreign currency exchange contracts are recognized currently in the Condensed Consolidated Statements of Operations and are generally offset by gains and losses on underlying payables, receivables and net investments in foreign subsidiaries. The Company does not use derivative financial instruments for trading or speculative purposes.
The Company has entered into foreign exchange forward contracts in order to manage the currency exposure of certain assets and liabilities. The foreign exchange forward contracts were not designated as hedges, and accordingly, the fair value gains or losses from these foreign currency derivatives are recognized currently in the Condensed Consolidated Statements of Operations, generally offsetting the foreign exchange gains or losses on the exposures being managed. The aggregate notional amountvalue of the forward contracts at September 30, 2014March 31, 2015 and December 31, 20132014 was $349.1$342.9 million and $372.1$377.2 million, respectively. The fair values of foreign exchange forward contracts were determined to be Level 2 under the fair value hierarchy and are valued using market exchange rates.
24
23
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (“RR DONNELLEY”)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in millions, except per share data, unless otherwise indicated)
On March 13, 2012, the Company entered into interest rate swap agreements to manage interest rate risk exposure, effectively changing the interest rate on $400.0 million of its fixed-rate senior notes to a floating-rate based on LIBOR plus a basis point spread. The interest rate swaps, with a notional amountvalue of $400.0 million at inception, were designated as fair value hedges against changes in the value of the Company’s $450.0 million 8.25% senior notes due March 15, 2019, which were attributable to changes in the benchmark interest rate. During the ninethree months ended September 30,March 31, 2014, the Company repurchased $211.1$211.0 million of the 8.25% senior notes due March 15, 2019, and related interest rate swaps with a notional amount of $210.0 million were terminated, resulting in payments of $4.2 million for the fair value of the interest rate swaps. As a result of the termination, the remaining notional amountvalue of the interest rate swap agreements as of September 30, 2014March 31, 2015 was $190.0 million. The interest rate swaps were designated as fair value hedges against changes in the value of $238.9$239.0 million of the Company’s 8.25% senior notes due March 15, 2019.
On April 9, 2010, the Company entered into interest rate swap agreements to manage interest rate risk exposure, effectively changing the interest rate on $600.0 million of its fixed-rate senior notes to a floating-rate LIBOR plus a basis point spread. The interest rate swaps, with a notional amountvalue of $600.0 million at inception, wereare designated as fair value hedges against changes in the value of the Company’s 4.95% senior notes due April 1, 2014, which wereare attributable to changes in the benchmark interest rate. During March 2012, the Company repurchased $341.8 million of the 4.95% senior notes due April 1, 2014, and related interest rate swaps with a notional amountvalue of $342.0 million were terminated, resulting in proceeds of $11.0 million for the fair value of the interest rate swaps. In conjunction with the 4.95% senior notesnotes’ maturity in April 2014, the remaining interest rate swap agreements matured.
The fair values of interest rate swaps were determined to be Level 2 under the fair value hierarchy and were developed using the market standard methodology of netting the discounted future fixed cash payments and the discounted expected variable cash receipts. The variable cash receipts are based on the expectation of future interest rates derived from observed market interest rate curves. In addition, credit valuation adjustments, which consider the impact of any credit enhancements to the contracts, are incorporated in the fair values to account for potential nonperformance risk. TheOn at least a quarterly basis, the Company evaluates the credit value adjustments of the interest rate swap agreements, which take into account the possibility of counterparty and the Company’s own default, on at least a quarterly basis.default.
The Company’s foreign exchange forward contracts and interest rate swaps are subject to enforceable master netting agreements that allow the Company to settle positive and negative positions with the respective counterparties. The Company settles foreign exchange forward contracts on a net basis when possible. Foreign exchange forward contracts that can be settled on a net basis are presented net in the Condensed Consolidated Balance Sheets. Interest rate swaps are settled on a gross basis and presented gross in the Condensed Consolidated Balance Sheets.
The Company manages credit risk for its derivative positions on a counterparty-by-counterparty basis, considering the net portfolio exposure with each counterparty, consistent with its risk management strategy for such transactions. The Company’s agreements with each of its counterparties contain a provision where the Company could be declared in default on its derivative obligations if it either defaults or, in certain cases, is capable of being declared in default of any of its indebtedness greater than specified thresholds. These agreements also contain a provision where the Company could be declared in default subsequent to a merger or restructuring type event if the creditworthiness of the resulting entity is materially weaker.
At September 30, 2014March 31, 2015 and December 31, 2013,2014, the total fair value of the Company’s foreign exchange forward contracts, which were the only derivatives not designated as hedges, and fair value hedges, along with the accounts in the Condensed Consolidated Balance Sheets in which the fair value amounts were included, were as follows:
| September 30, 2014 |
|
| December 31, 2013 |
|
| March 31, 2015 |
|
| December 31, 2014 |
| ||||
Derivatives not designated as hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets | $ | 20.6 |
|
| $ | 0.4 |
|
| $ | 37.2 |
|
| $ | 7.0 |
|
Accrued liabilities |
| 0.3 |
|
|
| 1.5 |
|
|
| 0.3 |
|
|
| 0.5 |
|
Derivatives designated as fair value hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets | $ | — |
|
| $ | 1.3 |
| ||||||||
Other noncurrent assets |
| $ | 1.0 |
|
| $ | — |
| |||||||
Other noncurrent liabilities |
| 2.9 |
|
|
| 9.1 |
|
|
| — |
|
|
| 1.2 |
|
25
24
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (“RR DONNELLEY”)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in millions, except per share data, unless otherwise indicated)
The gross and net amounts of foreign exchange forward contracts and interest rate swaps recognized in the Condensed Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013 were as follows:
September 30, 2014 | Gross Amounts of Assets and Liabilities |
|
| Impact of Netting |
|
| Net Amounts of Assets and Liabilities Presented in the Condensed Consolidated Balance Sheet |
|
| All Other Amounts Subject to Master Netting Agreements |
|
| Potential Net Amounts of Assets and Liabilities |
| |||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts reported gross | $ | 20.6 |
|
| $ | — |
|
| $ | 20.6 |
|
| $ | (1.9 | ) |
| $ | 18.7 |
|
Interest rate swaps |
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Total | $ | 20.6 |
|
| $ | — |
|
| $ | 20.6 |
|
| $ | (1.9 | ) |
| $ | 18.7 |
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts reported gross | $ | 0.3 |
|
| $ | — |
|
| $ | 0.3 |
|
| $ | (0.1 | ) |
| $ | 0.2 |
|
Interest rate swaps |
| 2.9 |
|
|
| — |
|
|
| 2.9 |
|
|
| (1.8 | ) |
|
| 1.1 |
|
Total | $ | 3.2 |
|
| $ | — |
|
| $ | 3.2 |
|
| $ | (1.9 | ) |
| $ | 1.3 |
|
December 31, 2013 | Gross Amounts of Assets and Liabilities |
|
| Impact of Netting |
|
| Net Amounts of Assets and Liabilities Presented in the Condensed Consolidated Balance Sheet |
|
| All Other Amounts Subject to Master Netting Agreements |
|
| Potential Net Amounts of Assets and Liabilities |
| |||||
Assets |
|
|
|
|
|
| �� |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts reported gross | $ | 0.4 |
|
| $ | — |
|
| $ | 0.4 |
|
| $ | (0.4 | ) |
| $ | — |
|
Interest rate swaps |
| 1.3 |
|
|
| — |
|
|
| 1.3 |
|
|
| (0.2 | ) |
|
| 1.1 |
|
Total | $ | 1.7 |
|
| $ | — |
|
| $ | 1.7 |
|
| $ | (0.6 | ) |
| $ | 1.1 |
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts reported gross | $ | 1.5 |
|
| $ | — |
|
| $ | 1.5 |
|
| $ | (0.2 | ) |
| $ | 1.3 |
|
Interest rate swaps |
| 9.1 |
|
|
| — |
|
|
| 9.1 |
|
|
| (0.4 | ) |
|
| 8.7 |
|
Total | $ | 10.6 |
|
| $ | — |
|
| $ | 10.6 |
|
| $ | (0.6 | ) |
| $ | 10.0 |
|
The pre-tax (gains) lossesgains related to derivatives not designated as hedges recognized in the Condensed Consolidated Statements of Operations for the three and nine months ended September 30,March 31, 2015 and 2014 and 2013 were as follows:
|
|
| Three Months Ended |
|
| Nine Months Ended |
|
|
| Three Months Ended |
| |||||||||||||||
| Classification of (Gain) Loss Recognized in the |
| September 30, |
|
| September 30, |
| Classification of Gain Recognized in the |
| March 31, |
| |||||||||||||||
| Condensed Consolidated Statements of Operations |
| 2014 |
|
| 2013 |
|
| 2014 |
|
| 2013 |
| Condensed Consolidated Statements of Operations |
| 2015 |
|
| 2014 |
| ||||||
Derivatives not designated as hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts | Selling, general and administrative expenses |
| $ | (19.8 | ) |
| $ | 14.2 |
|
| $ | (21.3 | ) |
| $ | 8.7 |
| Selling, general and administrative expenses |
| $ | (31.7 | ) |
| $ | (0.4 | ) |
26
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (“RR DONNELLEY”)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in millions, except per share data, unless otherwise indicated)
For derivatives designated as fair value hedges, the pre-tax (gains) losses related to the hedged items, attributable to changes in the hedged benchmark interest rate and the offsetting gain or(gain) loss on the related interest rate swaps for the three and nine months ended September 30,March 31, 2015 and 2014 and 2013 were as follows:
|
|
| Three Months Ended |
|
| Nine Months Ended |
|
|
| Three Months Ended |
| |||||||||||||||
| Classification of (Gain) Loss Recognized in the |
| September 30, |
|
| September 30, |
| Classification of (Gain) Loss Recognized in the |
| March 31, |
| |||||||||||||||
| Condensed Consolidated Statements of Operations |
| 2014 |
|
| 2013 |
|
| 2014 |
|
| 2013 |
| Condensed Consolidated Statements of Operations |
| 2015 |
|
| 2014 |
| ||||||
Fair Value Hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps | Investment and other (income) expense-net |
| $ | 1.3 |
|
| $ | (0.6 | ) |
| $ | (0.4 | ) |
| $ | 17.0 |
| Investment and other expense-net |
| $ | (2.3 | ) |
| $ | (0.1 | ) |
Hedged items | Investment and other (income) expense-net |
|
| (1.5 | ) |
|
| 0.6 |
|
|
| (0.4 | ) |
|
| (16.1 | ) | Investment and other expense-net |
| $ | 2.1 |
|
|
| (0.6 | ) |
Total (gain) loss recognized as ineffectiveness in the Condensed Consolidated Statements of Operations | Investment and other (income) expense-net |
| $ | (0.2 | ) |
| $ | — |
|
| $ | (0.8 | ) |
| $ | 0.9 |
| |||||||||
Total gain recognized as ineffectiveness in the Condensed Consolidated Statements of Operations | Investment and other expense-net |
| $ | (0.2 | ) |
| $ | (0.7 | ) |
The Company also recognized a net reduction to interest expense of $0.5$0.6 million and $3.3$2.3 million for the three and nine months ended September 30,March 31, 2015 and 2014, respectively, and $2.0 million and $6.5 million for the three and nine months ended September 30, 2013, respectively, related to the Company’s fair value hedges, which included interest accruals on the derivatives and amortization of the basis in the hedged items.
16. Fair Value Measurement
Certain assets and liabilities are required to be recorded at fair value on a recurring basis. The Company’s assets and liabilities required to be adjusted to fair value on a recurring basis are pension and other postretirement benefits plan assets, foreign exchange forward contracts and interest rate swaps. See Note 15, Derivatives, for further discussion on the fair value of the Company’s foreign exchange forward contracts and interest rate swaps as of September 30, 2014March 31, 2015 and December 31, 2013.2014. See Note 14,Debt, for the fair value of the Company’s debt, which is recorded at book value.
In addition to assets and liabilities that are recorded at fair value on a recurring basis, the Company is required to record certain assets and liabilities at fair value on a nonrecurring basis, generally as a result of acquisitions or the remeasurement of assets resulting in impairment charges. See Note 2, Acquisitions and Dispositions, for further discussion on the fair value of assets and liabilities associated with acquisitions.
The fair value as of the measurement date, net book value as of September 30,March 31, 2015 and 2014 and 2013 and related impairment chargecharges for assets measured at fair value on a nonrecurring basis subsequent to initial recognition during the three and nine months ended September 30,March 31, 2015 and 2014 and 2013 were as follows:
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
| Three Months Ended September 30, 2014 |
|
| Nine Months Ended September 30, 2014 |
|
| As of September 30, 2014 |
| Three Months Ended March 31, 2015 |
|
| As of March 31, 2015 |
| |||||||||||||||||
| Impairment Charge |
|
| Fair Value Measurement (Level 3) |
|
| Impairment Charge |
|
| Fair Value Measurement (Level 3) |
|
| Net Book Value |
| Impairment Charge |
|
| Fair Value Measurement (Level 3) |
|
| Net Book Value |
| ||||||||
Long-lived assets held and used | $ | — |
|
| $ | — |
|
| $ | 1.9 |
|
| $ | 1.4 |
|
| $ | 1.2 |
| $ | 0.7 |
|
| $ | 3.1 |
|
| $ | 2.9 |
|
Long-lived assets held for sale or disposal |
| 2.1 |
|
|
| 2.3 |
|
|
| 9.3 |
|
|
| 13.7 |
|
|
| 5.4 |
|
| 1.1 |
|
|
| 0.4 |
|
|
| 0.4 |
|
Other intangible assets |
| — |
|
|
| — |
|
|
| 1.0 |
|
|
| — |
|
|
| — |
| |||||||||||
Total | $ | 2.1 |
|
| $ | 2.3 |
|
| $ | 12.2 |
|
| $ | 15.1 |
|
| $ | 6.6 |
| $ | 1.8 |
|
| $ | 3.5 |
|
| $ | 3.3 |
|
|
|
|
|
|
|
|
|
|
| ||||||||||
| Three Months Ended September 30, 2013 |
|
| Nine Months Ended September 30, 2013 |
|
| As of September 30, 2013 |
| |||||||||||
| Impairment Charge |
|
| Fair Value Measurement (Level 3) |
|
| Impairment Charge |
|
| Fair Value Measurement (Level 3) |
|
| Net Book Value |
| |||||
Long-lived assets held and used | $ | 3.2 |
|
| $ | 3.7 |
|
| $ | 4.4 |
|
| $ | 4.6 |
|
| $ | 4.4 |
|
Long-lived assets held for sale or disposal |
| 5.4 |
|
|
| 5.2 |
|
|
| 12.6 |
|
|
| 18.8 |
|
|
| 17.1 |
|
Total | $ | 8.6 |
|
| $ | 8.9 |
|
| $ | 17.0 |
|
| $ | 23.4 |
|
| $ | 21.5 |
|
2725
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (“RR DONNELLEY”)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in millions, except per share data, unless otherwise indicated)
| Three Months Ended March 31, 2014 |
|
| As of March 31, 2014 |
| ||||||
| Impairment Charge |
|
| Fair Value Measurement (Level 3) |
|
| Net Book Value |
| |||
Long-lived assets held and used | $ | 4.7 |
|
| $ | 5.8 |
|
| $ | 5.7 |
|
Long-lived assets held for sale or disposal |
| 1.9 |
|
|
| 4.2 |
|
|
| 3.9 |
|
Total | $ | 6.6 |
|
| $ | 10.0 |
|
| $ | 9.6 |
|
The fair valuesvalue of long-lived assets held for sale that were remeasured during the three and nine months ended September 30,March 31, 2015 and 2014 were reduced by estimated costs to sell of $0.2 million and $0.8 million, respectively. The fair values of long-lived assets held for sale that were remeasured during the three and nine months ended September 30, 2013 were reduced by estimated costs to sell of $0.4 million and $1.3$0.3 million, respectively.
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 fair values of the long-lived assets held and used and long-lived assets held for sale or disposal were determined using Level 3 inputs 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. Unobservable inputs obtained from third parties are adjusted as necessary for the condition and attributes of the specific asset.
17. Venezuela Currency Remeasurement
Since January 1, 2010, the three-year cumulative inflation for Venezuela using the blended Consumer Price Index and National Consumer Price Index has exceeded 100%. As a result, Venezuela’s economy is considered highly inflationary and the financial statements of the Company’s Venezuelan subsidiaries are remeasured as if the functional currency were the U.S. Dollar. Prior to March 31, 2014, the financial statements were remeasured based on the official rate determined by the government of Venezuela. On February 8, 2013, the government of Venezuela changed its primary fixed exchange rate from 4.3 Bolivars per U.S. Dollar to 6.3 Bolivars per U.S. Dollar, devaluing the Bolivar by 32%. This devaluation resulted in a pre-tax loss of $3.2 million ($2.0 million after-tax), of which $1.0 million was recognized as a loss attributable to noncontrolling interests during the nine months ended September 30, 2013.
During the three months ended March 31,first quarter of 2014, the Venezuelan government expanded the operation of the Supplementary System for the Administration of Foreign Currency (“SICAD 1”) currency exchange mechanism for use with certain transactions. In addition, the Venezuelan government also began operating the SICAD 2 exchange which the government indicated iswas available to all entities for all transactions. The Venezuelan government has indicated that the official rate of 6.3 Bolivars per U.S. Dollar willwould be reserved only for settlement of U.S. Dollar denominated purchases of “essential goods and services.” As of September 30, 2014, the SICAD 1 and SICAD 2 exchange rates were 11.7 and 50.0 Bolivars per U.S. Dollar, respectively. While there iswas considerable uncertainty as to the nature, amount and timing of transactions that willcould be settled through SICAD 1 and SICAD 2, beginning March 31, 2014, certain assets of the Company’s Venezuelan subsidiaries were remeasured at the SICAD 2 rate as the Company believesbelieved those assets willwould ultimately be utilized to settle U.S. Dollar denominated liabilities using SICAD 2. Remaining net monetary assets were remeasured at the SICAD 1 rate, as the Company believesbelieved SICAD 1 willwould be applicable for future transactions, and dividend remittances, if any, from the Company’s Venezuelan subsidiaries.
During As of March 31, 2014, the three months ended June 30, 2014, certain transactions pending approval at the official rate of 6.3SICAD 1 and SICAD 2 exchange rates were 10.7 and 49.8 Bolivars per U.S. Dollar, respectively.
In February 2015, the Venezuelan government discontinued the SICAD 2 rate and introduced a new currency exchange rate mechanism (“SIMADI”). While considerable uncertainty still exists as to the nature, amount and timing of transactions that could be settled through the various currency exchange rate mechanisms, as of February 28, 2015, monetary assets and liabilities of the Company’s Venezuelan subsidiaries were approved, resulting in foreignremeasured at the SIMADI rate as the Company believes the SIMADI is the exchange gains. rate mechanism most likely to be available to the Company’s Venezuelan subsidiaries to settle U.S. Dollar denominated transactions. As of March 31, 2015 the SIMADI rate was 193.0.
As a result of the remeasurement at the SICAD 1SIMADI rate and SICAD 2 ratesthe related impact of the devaluation, during the three months ended September 30, 2014, a net pre-tax gain of $0.6 million was recognized in net investment and other (income) expense, of which $0.4 million was recognized as income attributable to noncontrolling interests during the three months ended September 30, 2014. During the nine months ended September 30, 2014,March 31, 2015, a pre-tax loss net of foreign exchange gains, of $18.0$29.9 million ($14.026.3 million after-tax) was recognized in net investment and other (income) expense, of which $6.0$10.3 million was included in loss attributable to noncontrolling interests as a result of the remeasurement at the SICAD 1 and SICAD 2 rates.interests.
Because the SICAD exchanges are auction-based and auctions are held periodically during each quarter, the
26
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (“RR DONNELLEY”)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in millions, except per share data, unless otherwise indicated)
The exchange ratesrate available through SICADSIMADI will fluctuate, over time, which will causecausing additional remeasurements of the Company’s Venezuelan subsidiaries’ local currency-denominated net monetary assets and further impact ongoing results. The operating results of the Venezuelan subsidiaries, one of which is the operating entity and a 50.1% owned joint venture, are not significant to the Company’s consolidated results of operations.
On April 29, 2015, the Company sold its 50.1% interest in the Venezuelan operating entity. The Company estimates that it will recognize a net loss of approximately $15.0 million, in net investment and other expense in the Consolidated Statements of Operations during the second quarter of 2015. The operations of the Venezuela business were included in the International segment.
28
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (“RR DONNELLEY”)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in millions, except per share data, unless otherwise indicated)
18. New Accounting Pronouncements
In August 2014,April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-15 “Presentation2015-03 “Interest—Imputation of Financial Statements—Going ConcernInterest (Subtopic 205-40)835-30): DisclosureSimplifying the Presentation of Uncertainties about an Entity’s Ability to Continue as a Going Concern”Debt Issuance Costs” (“ASU 2014-15”2015-03”), which requires managementdebt issuance costs to assess whether there are conditions or events, consideredbe presented in the aggregate, that raise substantial doubt about the entity’s ability to continuebalance sheet as a going concern within one year afterdirect deduction from the financial statements are issued. If substantial doubt exists, additional disclosures are required. ASU 2014-15 will be effective for the Company in the fourth quarter of 2016. The adoption of ASU 2014-15 is not expected to have a material impact on the Company’s consolidated financial position, results of operations, cash flows or disclosures.
In June 2014, the FASB issued Accounting Standards Update No. 2014-12 “Compensation—Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period” (“ASU 2014-12”), which requires that a performance target that affects vesting and that could be achieved after the requisite service period is treated as a performance condition and, as a result, should not be included in the estimation of the grant-date faircarrying value of the award. associated debt liability. ASU 2014-122015-03 requires retrospective application and represents a change in accounting principle. The update becomes effective on January 1, 2016. Based on the balances as of March 31, 2015, the adoption will be effective forrequire the Company in the first quarterto reclassify $45.2 million of 2016. The standard may be applied either prospectivelyunamortized debt issuance costs from "Other noncurrent assets" to all awards granted or modified after the effective date or retrospectively, to all periods presented. The adoption of ASU 2014-12 is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows."Long-term debt."
In May 2014, the FASB issued Accounting Standards Update No. 2014-09 “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”), which outlines a single comprehensive model for entities to use in accounting for revenue using a five-step process that supersedes virtually all existing revenue guidance. ASU 2014-09 also requires additional quantitative and qualitative disclosures. On April 1, 2015, the FASB proposed a one year deferral of the effective date of ASU 2014-09 to January 1, 2018. Early adoption of the standard will be effective for the Companypermitted in the first quarter of 2017. The standard allows the option of either a full retrospective adoption, meaning the standard is applied to all periods presented, or a modified retrospective adoption, meaning the standard is applied only to the most current period. The Company is currently evaluating the impact of the provisions of ASU 2014-09 and determining which transition method will be used.the related deferral and currently anticipates applying the modified retrospective approach when adopting the standard.
In April 2014, the FASBThe following recently issued Accounting Standards Update No. 2014-08 “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity” (“ASU 2014-08”), which modifies the requirements for disposals to qualify as discontinued operations and expands related disclosure requirements. ASU 2014-08 will be effective for the Company in the first quarter of 2015. The adoption of ASU 2014-08 may impact whether future disposals qualify as discontinued operations and therefore could impact the Company’s financial statement presentation and disclosures.
In January 2014, the FASB issued Accounting Standards Update No. 2014-01 “Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects” (“ASU 2014-01”), which modifies the criteria an entity must meet in order to account for its investments in qualified affordable housing projects using the proportional amortization method. ASU 2014-01 will be effective for the Company in the first quarter of 2015. The adoption of ASU 2014-01 isstandards are not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.Consolidated Financial Statements:
· | Accounting Standards Update No. 2015-05 “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement” |
· | Accounting Standards Update No. 2015-04 “Compensation—Retirement Benefits (Topic 715): Practical Expedient for the Measurement Date of an Employer’s Defined Benefit Obligation and Plan Assets” |
· | Accounting Standards Update No. 2015-02 “Consolidation (Topic 810): Amendments to the Consolidation Analysis” |
· | Accounting Standards Update No. 2015-01 “Income Statement—Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items” |
· | Accounting Standards Update No. 2014-17 “Business Combinations (Topic 805): Pushdown Accounting” |
· | Accounting Standards Update No. 2014-16 “Derivatives and Hedging (Topic 815): Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity” |
· | Accounting Standards Update No. 2014-15 “Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern” |
· | Accounting Standards Update No. 2014-12 “Compensation—Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period” |
In July 2013, the FASB issued Accounting Standards Update No. 2013-11 “Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists” (“ASU 2013-11”), which requires an unrecognized tax benefit to be presented as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward that the entity intends to use and is available for settlement at the reporting date. ASU 2013-11 wasThe following standards were effective for and adopted by the Company in the first quarter of 2014.2015. The adoption of ASU 2013-11these standards did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.flows:
In March 2013, the FASB issued Accounting Standards Update No. 2013-05 “Foreign Currency Matters (Topic 830): Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity” (“ASU 2013-05”), which requires the release of cumulative translation adjustments into net income when an entity ceases to have a controlling financial interest resulting in the complete or substantially complete liquidation of a subsidiary or group of assets within a foreign entity. ASU 2013-05 was effective for and adopted by the Company in the first quarter of 2014. The adoption of ASU 2013-05 did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
29
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (“RR DONNELLEY”)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in millions, except per share data, unless otherwise indicated)
· | Accounting Standards Update No. 2014-08 “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity” |
· | Accounting Standards Update No. 2014-01 “Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects” |
In February 2013, the FASB issued Accounting Standards Update No. 2013-04 “Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date” (“ASU 2013-04”), which requires the measurement of joint and several liability arrangements, when the total amount of the obligation is fixed as of the reporting date, as the sum of the amount the entity has agreed to pay as well as any additional amounts expected to be paid on behalf of co-obligors. ASU 2013-04 was effective for and adopted by the Company in the first quarter of 2014. The adoption of ASU 2013-04 did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations
Company Overview
R.R. Donnelley & Sons Company (“RR Donnelley,” the “Company,” “we,” “us,” and “our”), a Delaware corporation, helps organizations communicate more effectively by working to create, manage, produce, distribute and process content on behalf of our customers. The Company assists customers in developing and executing multichannel communication strategies that engage audiences, reduce costs, drive revenues and increase compliance. RRR.R. Donnelley’s innovative technologies enhance digital and print communications to deliver integrated messages across multiple media to highly targeted audiences at optimal times for clients in virtually every private and public sector. Strategically located operations provide local service and responsiveness while leveraging the economic, geographic and technological advantages of a global organization.
Segment Descriptions
The Company’s segments and their product and service offerings are summarized below:
Publishing and Retail Services
The Publishing and Retail Services segment’s primary product offerings include magazines, catalogs, retail inserts, books, directories and packaging.
Variable Print
The Variable Print segment includes the Company’s U.S. short-run and transactional printing operations. This segment’s primary product offerings include commercial and digital print, office products, direct mail, labels, statement printing, forms and packaging.
Strategic Services
The Strategic Services segment includes the Company’s logistics services, financial print products and related services, print management offerings and digital and creative solutions.
International
The International segment includes the Company’s non-U.S. printing operations in Asia, Europe, Latin America and Canada. This segment’s primary product and service offerings include magazines, catalogs, retail inserts, books, directories, direct mail, packaging, forms, labels, manuals, statement printing, commercial and digital print, logistics services and digital and creative solutions. Additionally, this segment includes the Company’s business process outsourcing and Global Turnkey Solutions operations. Business process outsourcing provides transactional print and outsourcing services, statement printing, direct mail and print management offerings through its operations in Europe, Asia and North America. Global Turnkey Solutions provides outsourcing capabilities, including product configuration, customized kitting and order fulfillment for technology, medical device and other companies around the world through its operations in Europe, North America and Asia.
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, certain costs and earnings of employee benefit plans, such as pension and other postretirement benefits plan expense and share-based compensation, are included in Corporate and not allocated to the operating segments. Corporate also manages the Company’s cash pooling structures, which enables participating international locations to draw on the Company’s overseas cash resources to meet local liquidity needs.
Products and Services
The Company separately reports its net sales, related costs of sales and gross profit for its product and service offerings. The Company’s product offerings primarily consist of magazines, catalogs, retail inserts, commercial and digital print, books, financial print, statement printing, direct mail, labels, office products, packaging, forms, manuals and other related products procured through the Company’s print management offering and directories. The Company’s service offerings primarily consist of logistics, EDGAR-related and eXtensible Business Reporting Language (“XBRL”) financial services, certain business outsourcing services and digital and creative solutions.
Business Acquisitions and Dispositions
2014 Dispositions
On August 15, 2014, the Company sold the assets and liabilities of Journalism Online, LLC (“Journalism Online”), a provider of online subscription management services, for net proceeds of $10.7 million, of which $7.7 million was received as of September 30, 2014, resulting in a gain of $11.2 million. The operations of the Journalism Online business were included in the Strategic Services segment.
On August 11, 2014, the Company’s subsidiary, RR Donnelley Argentina S.A. (“RRDA”), filed for bankruptcy liquidation in bankruptcy court in Argentina. The bankruptcy petition was approved by the court shortly thereafter and a bankruptcy trustee was appointed. As a result of the bankruptcy liquidation, the Company recorded a loss of $16.4 million for the three months ended September 30, 2014. Effective as of the court’s approval, the operating results of RRDA are no longer included in the Company’s consolidated results of operations. The operations of RRDA were included in the International segment.2015 Acquisitions
On February 7, 2014,5, 2015, the Company soldannounced that it had entered into a definitive agreement to acquire Courier Corporation (“Courier”), a leader in digital printing, publishing and content management primarily in the assetsUnited States, specializing in educational, religious and liabilitiestrade books. Based on the Company’s closing share price on March 31, 2015, the total transaction value is approximately $290.5 million in cash and RR Donnelley shares, plus the assumption of Office Tiger Global Real Estate Service Inc. (“GRES”), its commercial and residential real estate advisory services, forCourier’s net proceeds of $2.3 million and a loss of $0.8 million.debt. The operationscompletion of the GRES business were included in the International segment.transaction is subject to customary closing conditions, including approval of Courier’s shareholders.
2014 Acquisitions
On March 25, 2014, the Company acquired substantially all of the North American operations of Esselte Corporation (“Esselte”), a developer and manufacturer of nationally branded and private label office and stationery products. The purchase price included $82.3 million in cash and 1.0 million shares of RR Donnelley common stock, or a total transaction value of $100.6 million based on the Company’s closing share price on March 24, 2014. Esselte’s operations are included in the Variable Print segment.
On March 10, 2014, the Company acquired the assets of MultiCorpora R&D Inc. and MultiCorpora International Inc. (together “MultiCorpora”) for $6.0 million. MultiCorpora is an international provider of translation technology solutions. MultiCorpora’s operations are included in the Strategic Services segment.
On January 31, 2014, the Company acquired Consolidated Graphics, Inc. (“Consolidated Graphics”), a provider of digital and commercial printing, fulfillment services, print management and proprietary Internet-based technology solutions, with operations in North America, Europe and Asia. The purchase price for Consolidated Graphics was $359.9 million in cash and 16.0 million shares of RR Donnelley common stock, or a total transaction value of $660.6 million based on the Company’s closing share price on January 30, 2014, plus the assumption of Consolidated Graphics’ debt of $118.4 million. Immediately following the acquisition, the Company repaid substantially all of the debt assumed. Consolidated Graphics’ operations are primarily included in the Variable Print segment. Insegment, with the second quarterexception of 2014, Consolidated Graphics’ operations in the Czech Republic and Japan were moved from the Variable Print segment to the Europe and Asia reporting units, respectively, withinwhich are included in the International segment to reflect corresponding changes in the management reporting structure of the organization. All prior periods have been reclassified to conform to the current reporting structure.segment.
2013 Disposition2014 Dispositions
During the fourth quarter of 2013,On August 15, 2014, the Company sold the assets and liabilities of R.R. Donnelley SASJournalism Online, LLC (“MRM France”Journalism Online”), its direct mail business located in Cosne sur Loire, France,a provider of online subscription management services, for a lossnet proceeds of $17.9 million, which included cash incentive payments due to the purchaser of $18.8$10.7 million, of which $16.4$9.3 million were paidwas received as of September 30, 2014 withMarch 31, 2015, resulting in a gain of $11.2 million during the remaining balance to be paid by January 2016.year ended December 31, 2014. The operations of the MRM FranceJournalism Online business were included in the International segment.
Segment Descriptions
The Company operates primarily in the print and related services industry, with product and service offerings designed to offer customers complete solutions for communicating their messages to target audiences.
The Company’s segments and their product and service offerings are summarized below:
Publishing and Retail Services
The Publishing and Retail Services segment’s primary product offerings include magazines, catalogs, retail inserts, books, directories and packaging.
Variable Print
The Variable Print segment includes the Company’s U.S. short-run and transactional printing operations. This segment’s primary product offerings include commercial and digital print, direct mail, labels, statement printing, office products, forms and packaging.
Strategic Services
The Strategic Services segment includes the Company’s financial print products and related services, logistics services, digital and creative solutions and print management offerings.
International
The International segment includes the Company’s non-U.S. printing operations in Asia, Europe, Latin America and Canada. This segment’s product and service offerings include magazines, catalogs, retail inserts, books, directories, direct mail, packaging, forms, labels, manuals, statement printing, commercial and digital print, logistics services and digital and creative solutions. Additionally, this segment includes the Company’s business process outsourcing and Global Turnkey Solutions operations. Business process outsourcing provides transactional print and outsourcing services, statement printing, direct mail and print management offerings through its operations in Europe, Asia and North America. Global Turnkey Solutions provides outsourcing capabilities, including product configuration, customized kitting and order fulfillment for technology, medical device and other companies around the world through its operations in Europe, North America and Asia.
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, certain costs and earnings of employee benefit plans, such as pension and other postretirement benefits plan expense (income) and share-based compensation, are included in Corporate and not allocated to the operating segments. Corporate also manages the Company’s cash pooling structures, which enables participating international locations to draw on the Company’s overseas cash resources to meet local liquidity needs.
Products and Services
The Company separately reports its net sales, related costs of sales and gross profit for its product and service offerings. The Company’s product offerings primarily consist of magazines, catalogs, retail inserts, direct mail, statement printing, books, directories, financial print, labels, forms, commercial and digital print, packaging, office products, manuals and other related products procured through the Company’s print management offering. The Company’s service offerings primarily consist of logistics, EDGAR-related and eXtensible Business Reporting Language (“XBRL”) financial services, certain business outsourcing services and digital and creative solutions.
Executive Summary
Financial Performance: Three Months Ended September 30, 2014
The changes in the Company’s income from operations, operating margin, net earnings attributable to RR Donnelley common shareholders and net earnings attributable to RR Donnelley common shareholders per diluted share for the three months ended September 30, 2014, from the three months ended September 30, 2013, were due to the following:
| Income from Operations |
|
| Operating Margin |
|
| Net Earnings Attributable to RR Donnelley Common Shareholders |
|
| Net Earnings Attributable to RR Donnelley Shareholders Per Diluted Share |
| ||||
| (in millions, except margin and per share data) |
| |||||||||||||
For the three months ended September 30, 2013 | $ | 134.6 |
|
|
| 5.1 | % |
| $ | 14.7 |
|
| $ | 0.08 |
|
2014 restructuring, impairment and other charges - net |
| (19.9 | ) |
|
| (0.7 | %) |
|
| (9.8 | ) |
|
| (0.05 | ) |
2013 restructuring, impairment and other charges - net |
| 38.1 |
|
|
| 1.5 | % |
|
| 23.4 |
|
|
| 0.13 |
|
Acquisition-related expenses |
| 1.1 |
|
|
| 0.0 | % |
|
| 1.1 |
|
|
| 0.01 |
|
Loss on bankruptcy of subsidiary |
| — |
|
|
| — |
|
|
| (14.2 | ) |
|
| (0.07 | ) |
Net gain on disposal of businesses |
| — |
|
|
| — |
|
|
| 6.8 |
|
|
| 0.03 |
|
Gain on investment |
| — |
|
|
| — |
|
|
| 1.9 |
|
|
| 0.01 |
|
Gain-net on bargain purchase |
| — |
|
|
| — |
|
|
| (1.0 | ) |
|
| — |
|
Venezuela currency remeasurement |
| — |
|
|
| — |
|
|
| (0.4 | ) |
|
| — |
|
Loss on debt extinguishment |
| — |
|
|
| — |
|
|
| 30.1 |
|
|
| 0.16 |
|
Operations |
| 19.8 |
|
|
| (0.0 | %) |
|
| 9.6 |
|
|
| 0.01 |
|
For the three months ended September 30, 2014 | $ | 173.7 |
|
|
| 5.9 | % |
| $ | 62.2 |
|
| $ | 0.31 |
|
2014 restructuring, impairment and other charges - net: included $9.7 million for other estimated charges related to the decision to withdraw from certain multi-employer pension plans serving facilities that are currently operating; $5.1 million of lease termination and other restructuring costs; $4.8 million for employee termination costs; and $0.3 million for impairment of other long-lived assets, primarily for buildings and machinery and equipment associated with facility closures.
2013 restructuring, impairment and other charges - net: included pre-tax charges of $17.9 million for employee termination costs; $7.9 million for impairment of other long-lived assets, primarily for buildings and machinery and equipment associated with facility closures; $7.6 million of lease termination and other restructuring costs, including charges related to multi-employer pension plan withdrawal obligations as a result of facility closures; and $4.7 million for other estimated charges related to the decision to partially withdraw from certain multi-employer pension plans.
Acquisition-related expenses: included pre-tax charges of $1.1 million ($1.1 million after-tax) related to legal, accounting and other expenses for the three months ended September 30, 2013 associated with contemplated acquisitions.
Loss on bankruptcy of subsidiary: included a pre-tax loss of $16.4 million ($14.2 million after-tax) for the three months ended September 30, 2014 as a result of the bankruptcy liquidation of RRDA, a subsidiary of RR Donnelley.
Net gain on disposal of businesses: net pre-tax gain of $11.1 million ($6.8 million after-tax) for the three months ended September 30, 2014 on the sale of Journalism Online and GRES.
Gain on investment: pre-tax gain of $3.0 million ($1.9 million after-tax) resulting from the sale of the Company’s shares of a previously impaired equity investment for the three months ended September 30, 2014.
Gain - net on bargain purchase: pre-tax reduction in the previously recorded gain of $1.0 million ($1.0 million after-tax) for the three months ended September 30, 2014 as a result of finalizing the working capital settlement on the acquisition of Esselte.
Venezuela currency remeasurement: currency remeasurement in Venezuela resulted in a net pre-tax gain of $0.6 million ($0.0 million after-tax) of which $0.4 million was included in income attributable to noncontrolling interests for the three months ended September 30, 2014.
Loss on debt extinguishment: included a pre-tax loss of $46.3 million ($30.1 million after-tax) for the three months ended September 30, 2013 due to the repurchase of $200.0 million of the 7.25% senior notes due May 15, 2018, $100.0 million of the 5.50% senior notes due May 15, 2015 and $100.0 million of the 6.125% senior notes due January 15, 2017.
Operations: reflected the acquisitions of Consolidated Graphics and Esselte, cost control initiatives, lower healthcare costs and higher pension and other postretirement benefits plan income, partially offset by price pressures primarily in the International and Publishing and Retail Services segments, unfavorable mix and lower volume in the Publishing and Retail Services segment and a shift in timing of a customer’s annual project. See further details in the review of operating results by segment below.
Financial Performance: Nine Months Ended September 30, 2014
The changes in the Company’s income from operations, operating margin, net earnings attributable to RR Donnelley common shareholders and net earnings attributable to RR Donnelley common shareholders per diluted share for the nine months ended September 30, 2014, from the nine months ended September 30, 2013, were due to the following:
| Income from Operations |
|
| Operating Margin |
|
| Net Earnings Attributable to RR Donnelley Common Shareholders |
|
| Net Earnings Attributable to RR Donnelley Shareholders Per Diluted Share |
| ||||
| (in millions, except margin and per share data) |
| |||||||||||||
For the nine months ended September 30, 2013 | $ | 447.6 |
|
|
| 5.8 | % |
| $ | 107.2 |
|
| $ | 0.58 |
|
2014 restructuring, impairment and other charges - net |
| (87.9 | ) |
|
| (1.0 | %) |
|
| (55.1 | ) |
|
| (0.28 | ) |
2013 restructuring, impairment and other charges - net |
| 80.6 |
|
|
| 1.0 | % |
|
| 51.5 |
|
|
| 0.28 |
|
Acquisition-related expenses |
| (6.0 | ) |
|
| (0.1 | %) |
|
| (4.5 | ) |
|
| (0.02 | ) |
Purchase accounting inventory adjustments |
| (14.3 | ) |
|
| (0.2 | %) |
|
| (9.1 | ) |
|
| (0.05 | ) |
Loss on bankruptcy of subsidiary |
| — |
|
|
| — |
|
|
| (14.2 | ) |
|
| (0.07 | ) |
Gain on bargain purchase |
| — |
|
|
| — |
|
|
| 9.5 |
|
|
| 0.05 |
|
Net gain on disposal of businesses |
| — |
|
|
| — |
|
|
| 6.4 |
|
|
| 0.03 |
|
Venezuela currency remeasurement |
| — |
|
|
| — |
|
|
| (5.8 | ) |
|
| (0.03 | ) |
Net gain on investments |
| — |
|
|
| — |
|
|
| 5.5 |
|
|
| 0.03 |
|
Loss on debt extinguishment |
| — |
|
|
| — |
|
|
| 3.4 |
|
|
| 0.04 |
|
Operations |
| 27.9 |
|
|
| (0.3 | %) |
|
| 3.1 |
|
|
| (0.07 | ) |
For the nine months ended September 30, 2014 | $ | 447.9 |
|
|
| 5.2 | % |
| $ | 97.9 |
|
| $ | 0.49 |
|
2014 restructuring, impairment and other charges - net: included pre-tax charges of $34.0 million related to the decision to withdraw from certain multi-employer pension plans serving facilities that are currently operating; $27.8 million for employee termination costs; $16.0 million of lease termination and other restructuring costs, including charges related to multi-employer pension plan withdrawal obligations as a result of facility closures; and $10.1 million for impairment of other long-lived assets, primarily for buildings and machinery and equipment associated with facility closures.
2013 restructuring, impairment and other charges - net: included pre-tax charges of $34.0 million for employee termination costs; $26.2 million of lease termination and other restructuring costs, including charges related to multi-employer pension plan withdrawal obligations as a result of facility closures; $15.7 million for impairment of other long-lived assets, primarily for buildings and machinery and equipment associated with facility closures; and $4.7 million for other estimated charges related to the decision to partially withdraw from certain multi-employer pension plans.
Acquisition-related expenses: included pre-tax charges of $8.2 million ($6.7 million after-tax) related to legal, accounting and other expenses for the nine months ended September 30, 2014 associated with completed or contemplated acquisitions. For the nine months ended September 30, 2013, these pre-tax charges were $2.2 million ($2.2 million after-tax) for acquisitions contemplated or completed in subsequent periods.
Purchase accounting inventory adjustments: included pre-tax charges of $14.3 million ($9.1 million after-tax) for the nine months ended September 30, 2014 as a result of inventory purchase accounting adjustments for Consolidated Graphics and Esselte.
Loss on bankruptcy of subsidiary: included a pre-tax loss of $16.4 million ($14.2 million after-tax) for the nine months September 30, 2014 as a result of the bankruptcy liquidation of RRDA, a subsidiary of RR Donnelley.
Gain on bargain purchase: acquisition of Esselte resulted in a pre-tax gain of $9.5 million ($9.5 million after-tax) for the nine months ended September 30, 2014.
Net gain on disposal of businesses: included a pre-tax gain on the sale of Journalism Online of $11.2 million ($6.9 million after-tax) offset by a pre-tax loss on the sale of GRES of $0.8 million ($0.5 million after-tax) for the nine months ended September 30, 2014.
Venezuela currency remeasurement: currency remeasurement in Venezuela resulted in a pre-tax loss, net of foreign exchange gains, of $18.0 million ($14.0 million after-tax), of which $6.0 million was included in loss attributable to noncontrolling interests for the nine months ended September 30, 2014. For the nine months ended September 30, 2013, the currency devaluation in Venezuela resulted in a pre-tax loss of $3.2 million ($3.2 million after-tax), of which $1.0 million was included in loss attributable to noncontrolling interests.
Net gain on investments: pre-tax gain of $3.0 million ($1.9 million after-tax) resulting from the sale of the Company’s shares of a previously impaired equity investment for the nine months ended September 30, 2014 and impairment losses on equity investments of $5.5 million ($3.6 million after-tax) for the nine months ended September 30, 2013.
Loss on debt extinguishment: included a pre-tax loss of $77.1 million ($49.8 million after-tax) for the nine months ended September 30, 2014, related to the premiums paid, unamortized debt issuance costs and other expenses due to the repurchase of $211.1 million of the 8.25% senior notes due March 15, 2019, $100.0 million of the 7.25% senior notes due May 15, 2018 and $50.0 million of the 7.625% senior notes due June 15, 2020. For the nine months ended September 30, 2013, a pre-tax loss of $81.9 million ($53.2 million after-tax) was recognized related to the premiums paid, unamortized debt issuance costs and other expenses due to the repurchase of $273.5 million of the 6.125% senior notes due January 15, 2017, $250.0 million of the 7.25% senior notes due May 15, 2018, $130.2 million of the 8.60% senior notes due August 15, 2016 and $100.0 million of the 5.50% senior notes due May 15, 2015.
Operations: reflected the acquisitions of Consolidated Graphics and Esselte, cost control initiatives, increased volume in the Strategic Services and International segments, higher pension and other postretirement benefits plan income and lower healthcare costs, partially offset by price pressures in the International, Publishing and Retail Services and Variable Print segments and wage and other inflation in the International segment. See further details in the review of operating results by segment below.
Overview
Net sales increased in the third quarter of 2014 compared to the same period in the prior year primarily due to the acquisitions of Consolidated Graphics and Esselte. On a pro forma basis, the Company’s net sales increased by approximately 0.2% (see Note 2 to the Condensed Consolidated Financial Statements). The net sales increase on a pro forma basis was primarily due to increased volume in the Strategic Services and International segments, partially offset by price pressures, volume declines in the Publishing and Retail Services segment, the shift in timing of a customer’s annual project in the International segment and the impact of dispositions.
The Company made significant progress in the integration of Consolidated Graphics and Esselte during the second and third quarters. Restructuring actions to eliminate duplicate facilities and personnel have been implemented throughout the affected operations. Along with the Company’s continuing focus on productivity improvement, these actions are expected to result in significant cost savings.
Effective September 9, 2014, the aggregate revolving commitments of the Lenders under the Company’s senior secured revolving credit facility (the “Credit Agreement”) were increased from $1.15 billion to $1.5 billion and the expiration date of the Credit Agreement was extended from October 15, 2017 to September 9, 2019.
On August 11, 2014, the Company’s subsidiary, RRDA,RR Donnelley Argentina S.A. (“RRDA”), filed for bankruptcy liquidation in bankruptcy court in Argentina. The bankruptcy petition was approved by the court shortly thereafter and a bankruptcy trustee was appointed. As a result of the bankruptcy liquidation, the Company recorded a loss of $16.4 million for the three monthsyear ended September 30,December 31, 2014. Effective as of the court’s approval, the operating results of RRDA are no longer included in the Company’s consolidated results of operations. The operations of RRDA hadwere included in the International segment.
On February 7, 2014, the Company sold the assets and liabilities of Office Tiger Global Real Estate Service Inc. (“GRES”), its commercial and residential real estate advisory services, for net salesproceeds of $22.1$1.8 million and a loss before income taxes of $3.4$0.8 million for the nine monthsyear ended September 30, 2014,December 31, 2014. The operations of the GRES business were included in the International segment.
Executive Overview
First Quarter Overview
Net sales increased by 2.7% in the first quarter of 2015 compared to the same period in the prior year, including a $57.0 million, or 2.1%, decrease due to foreign exchange rates. The net sales increase was primarily due to the acquisitions of $40.8 millionConsolidated Graphics and Esselte. On a loss before income taxesproforma basis, the Company’s net sales decreased by approximately 2.8% (see Note 2, Acquisitions and Dispositions, to the Condensed Consolidated Financial Statements). The net sales decrease on a proforma basis was primarily due to the impact of $3.1 million for the nine months ended September 30, 2013.
In June 2014, the Company communicated to certain former employees the option to receive a lump-sum pension payment or annuity, with payments beginningforeign exchange rates, volume declines and decreases in pass-through paper sales in the fourth quarter of 2014. To the extent eligible individuals elect the option to receive a lump-sum pension payment or annuity, the Company’s pension obligations will be reduced. The reductionPublishing and Retail Services segment and price pressures, partially offset by increased volume in the reported pension obligation is expected to be approximately $395 million to $415 million, compared to expected payout amounts of approximately $295 million to $310 million. The Company expects to record a non-cash settlement charge of approximately $105 million to $115 million in the fourth quarter in connection with the settlement payments. This charge will result from the recognition in earnings of a portion of the losses recorded in accumulated other comprehensive loss based on the proportion of the obligation settled. The actual amount of this charge will depend on the discount rate and asset values on the settlement date.Strategic Services segment.
Net cash provided byused in operating activities for the ninethree months ended September 30, 2014March 31, 2015 was $253.9$144.3 million as compared to $307.1$80.4 million for the ninethree months ended September 30, 2013. March 31, 2014. The decreaseincrease in net cash provided byused in operating activities reflected higher inventory levels, the timing of supplier and customer payments, higher payments for incentive compensation and cash collections, higheracquisition-related costs, partially offset by lower pension and other postretirement contributionsbenefit plan contributions.
Financial Performance: Three Months Ended March 31, 2015
The changes in the Company’s income from operations, operating margin, net earnings (loss) attributable to RR Donnelley common shareholders and higher paymentsnet earnings (loss) attributable to RR Donnelley common shareholders per diluted share for the three months ended March 31, 2015, from the three months ended March 31, 2014, were due to the following:
| Income from Operations |
|
| Operating Margin |
|
| Net Earnings (Loss) Attributable to RR Donnelley Common Shareholders |
|
| Net Earnings (Loss) Attributable to RR Donnelley Shareholders Per Diluted Share |
| ||||
| (in millions, except margin and per share data) |
| |||||||||||||
For the three months ended March 31, 2014 | $ | 96.0 |
|
|
| 3.6 | % |
| $ | (29.0 | ) |
| $ | (0.15 | ) |
2015 restructuring, impairment and other charges - net |
| (19.8 | ) |
|
| (0.7 | %) |
|
| (3.1 | ) |
|
| (0.02 | ) |
2014 restructuring, impairment and other charges - net |
| 45.2 |
|
|
| 1.6 | % |
|
| 33.5 |
|
|
| 0.18 |
|
Acquisition-related expenses |
| (2.8 | ) |
|
| (0.1 | %) |
|
| (4.3 | ) |
|
| (0.02 | ) |
Purchase accounting inventory adjustment |
| 12.1 |
|
|
| 0.5 | % |
|
| 7.6 |
|
|
| 0.04 |
|
Venezuela currency remeasurement |
| — |
|
|
| — |
|
|
| (8.2 | ) |
|
| (0.04 | ) |
Loss on debt extinguishment |
| — |
|
|
| — |
|
|
| 49.8 |
|
|
| 0.26 |
|
Gain on bargain purchase |
| — |
|
|
| — |
|
|
| (16.6 | ) |
|
| (0.09 | ) |
Loss on disposal of business |
| — |
|
|
| — |
|
|
| 0.4 |
|
|
| — |
|
Operations |
| (15.1 | ) |
|
| (0.7 | %) |
|
| (7.8 | ) |
|
| (0.05 | ) |
For the three months ended March 31, 2015 | $ | 115.6 |
|
|
| 4.2 | % |
| $ | 22.3 |
|
| $ | 0.11 |
|
2015 restructuring, impairment and other charges - net: included pre-tax charges of $14.2 million for employee termination costs; $3.6 million of lease termination and other restructuring costs; $1.3 million for multi-employer pension plan withdrawal obligations; and $0.7 million for net impairment charges of other long-lived assets, primarily for buildings and machinery and equipment associated with facility closures.
2014 restructuring, impairment and other charges - net: included pre-tax charges of $20.5 million related to interestthe decision to withdraw from certain multi-employer pension plans; $13.9 million for employee termination costs; $6.7 million for impairment of other long-lived assets, primarily for buildings and incentive compensation. Similarmachinery and equipment associated with facility closures; and $4.1 million of lease termination and other restructuring costs.
Acquisition-related expenses: included pre-tax charges of $10.5 million ($10.5 million after-tax) related to 2013, higher net cash inflows from operationslegal, accounting and other expenses for the three months ended March 31, 2015 associated with completed or contemplated acquisitions. For the three months ended March 31, 2014, these pre-tax charges were $7.7 million ($6.2 million after-tax) for acquisitions completed or contemplated.
Purchase accounting inventory adjustment: included pre-tax charges of $12.1 million ($7.6 million after-tax) for the three months ended March 31, 2014 as a result of an inventory purchase accounting adjustment.
Venezuela currency remeasurement: currency remeasurement in Venezuela and the related impact of the devaluation resulted in a pre-tax loss of $29.9 million ($26.3 million after-tax) for the three months ended March 31, 2015, of which $10.3 million was included in loss attributable to noncontrolling interests. For the three months ended March 31, 2014, currency remeasurement in Venezuela resulted in a pre-tax loss of $21.8 million ($14.9 million after-tax), of which $7.1 million was included in loss attributable to noncontrolling interests.
Loss on debt extinguishment: included a pre-tax loss of $77.1 million ($49.8 million after-tax) for the three months ended March 31, 2014, related to the premiums paid, unamortized debt issuance costs and other expenses due to the repurchase of $211.0 million of the 8.25% senior notes due March 15, 2019, $100.0 million of the 7.25% senior notes due May 15, 2018 and $50.0 million of the 7.625% senior notes due June 15, 2020.
Gain on bargain purchase: acquisition of Esselte resulted in a pre-tax gain of $16.6 million ($16.6 million after-tax) for the three months ended March 31, 2014.
Loss on disposal of business: included a pre-tax loss on the disposal of GRES in the thirdInternational segment of $0.8 million ($0.4 million after-tax) for the three months ended March 31, 2014.
Operations: reflected price pressures and fourth quarter of 2014 are expected as comparedwage and other inflation in the International segment, partially offset by an increase in volume due to the firstacquisitions of Consolidated Graphics and second quartersEsselte and cost control initiatives resulting from the reorganization of 2014, due to normalcertain operations and the integration of Consolidated Graphics and Esselte. See further details in the review of operating cycles of the Company’s business.results by segment that follows below.
OUTLOOK
Competition and Strategy
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 the Company’s products and services. One of the Company’s competitive strengths is that it offers a wide array of communications products and services, including print, which provide differentiated solutions for its customers. The Company works with its customers to create, manage, deliver and optimize their multi-channel communications strategies. The Company has and will continue to develop and expand its creative and design, content management, digital and print production, supply chain management and distribution services to address its customers’ evolving needs while supporting the strategic objective of becoming a leading global provider of integrated communication services.
The print and related services industry, in general, continues to have excess capacity and remains highly competitive. Despite some consolidation in recent years, the industry remains highly fragmented. Across the Company’s range of products and services, competition is based primarily on price in addition to quality and the ability to service the unique and variedspecial needs of customers. Management expects that prices for the Company’s products and services will continue to be a focal point for customers in coming years. Therefore, the Company believes it needs to continue to lower its cost structure and continue to differentiate its product and service offerings.
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 the Company’s products and services. The Company seeks to utilize the distinctive capabilities of its products and services to improve its customers’ communications, whether in paper or electronic form. The Company’s goal remains to help its customers succeed by delivering effective and targeted communications in the right format to the right audiences at the right time. Management believes that with the Company’s competitive strengths, including its broad range of complementary print-related services, strong logistics capabilities, technology leadership, depth of management experience, customer relationships and economies of scale, the Company has developed and can further develop valuable, differentiated solutions for its customers. The Company seeks to draw on its unified platform and strong customer relationships in order to serve a larger share of its customers’ print and related services’ needs.
The impact of digital technologies has been felt in many print products. Electronic communication and transaction technology has eliminated or reduced the role of many traditional printed products and has continued to drive electronic substitution in directory and statement printing, in part driven by environmental concerns and cost pressures at key customers. In addition, e-book substitution is having a continuing impact on consumer print book volume, though adoption rates are stabilizing, and a limited impact on educational and specialty books. Digital technologies have also impacted printed magazines, as advertiser spending has moved from print to electronic media. The future impact of technology on the Company’s business is difficult to predict and could result in additional expenditures to restructure impacted operations or develop new technologies. In addition, the Company has made targeted acquisitions and investments in the Company’s existing business to offer customers innovative services and solutions that further secure the Company’s position as a technology leader in the industry.
The acquisitions of Consolidated Graphics, Esselte and MultiCorpora support the Company’s strategic objective of generating profitable growth and improved cash flow and liquidity through targeted acquisitions. These acquisitions are expected to enhancehave enhanced the Company’s existing capabilities and ability to serve its customers as well as provideand have provided cost savings opportunities onthrough the combined operations.combination of best practices, complementary products and manufacturing and distribution capabilities.
The Company has implemented a number of strategic initiatives to reduce its 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. Management also reviews the Company’s operations and management structure on a regular basis to balance appropriate risks and opportunities to maximize efficiencies and to support the Company’s long-term strategic goals.
Seasonality
Advertising and consumer spending trends affect demand in several of the end-markets served by the Company. Historically, demand for printing of magazines, catalogs, retail inserts and books is higher in the second half of the year driven by increased advertising pages within magazines, and holiday volume in catalogs, retail inserts and books. ThisPartially offsetting this pattern, demand for financial print and related services is typically stronger in the first half of the year due to annual compliance requirements. As a result of the acquisition of Consolidated Graphics, which provides significant campaign-related printed products, quarterly and annual results may also be impacted by U.S. election cycles. These typical seasonal patternpatterns can be impacted by overall trends in the U.S. and world economy. The Company expects the seasonality impact in 20142015 and future years to be in line with historical patterns, however, as a result of the acquisition of Consolidated Graphics, the Company expects 2014 and future years to be affected by the impact of election cycles on election-related print business.patterns.
Raw materialsMaterials
The primary raw materials the Company uses in its print businesses are paper and ink. The Company negotiates with leading suppliers to maximize its purchasing efficiencies and uses a wide variety of paper grades, formats, ink formulations and colors. In addition, a substantial amount of paper used by the Company is supplied directly by customers. Variations in the cost and supply of certain paper grades and ink formulations used in the manufacturing process may affect the Company’s consolidated financial results. Paper prices fluctuated during the first ninethree months of 2014,2015, and volatility in the future is expected. Generally, customers directly absorb the impact of changing prices on customer-supplied paper. With respect to paper purchased by the Company, the Company has historically passed most changes in price through to its customers. Contractual arrangements and industry practice should support the Company’s continued ability to pass on any future paper price increases, but there is no assurance that market conditions will continue to enable the Company to successfully do so. Management believes that the paper supply is consolidating, and there may be shortfalls in the future in supplies necessary to meet the demands of the entire marketplace. Higher paper prices and tight paper supplies may have an impact on customers’ demand for printed products. The Company has undertaken various strategic initiatives to mitigate any foreseeable supply disruptions with respect to the Company’s ink requirements. The Company also resells waste paper and other print-related by-products and may be impacted by changes in prices for these by-products.
The Company continues to monitor the impact of changes in the price of crude oil and other energy costs, which impact the Company’s ink suppliers, logistics operations and manufacturing costs. Crude oil and energy prices continue to be volatile. The Company believes its logistics operations will continue to be able to pass a substantial portion of any increases in fuel prices directly to its customers in order to offset the impact of related cost increases. Decreases in fuel prices are also passed on to customers which negatively impacts sales. The Company generally cannot pass on to customers the impact of higher energy prices on its manufacturing costs. TheHowever, the Company has enteredenters into fixed price contracts for a portion of its natural gas purchases to mitigate the impact of changes in energy prices. The Company cannot predict sudden changes in energy prices and the impact that theypossible 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 annual results of operations, financial position or cash flows.
Distribution
The Company’s products are distributed to end-users through the U.S. or foreign postal services, through retail channels, electronically or by direct shipment to customer facilities. Through its logistics operations, the Company manages the distribution of most customer products printed by the Company in the U.S. and Canada to maximize efficiency and reduce costs for customers.
Postal costs are a significant component of many customers’ cost structures and postal rate changes can influence the quantitynumber of pieces that the Company’s customers are willing to print and mail. On January 27, 2013, the United States Postal Service (“USPS”) increased postage rates across all classes of mail by approximately 2.6%, on average. Under the 2006 Postal Accountability and Enhancement Act, it had been anticipated that postage would increase annually by an amount equal to or slightly less than the Consumer Price Index (the “CPI”). However, on December 24, 2013, the Postal Regulatory Commission (the “PRC”) approved the USPS Board of Governors’ request under the Exigency Provision in the applicable law for price increases of 4.3%. The exigent rate increase was implemented in addition to a 1.7% rate increase, equal to the CPI, for total price increases of 6.0%, on average, across all significant mail categories, effective January 26, 2014. According to the PRC’s ruling, which is currently being appealed, the USPS must develop a plan to phase out the exigent rate increase once it has produced the revenue justified by the request. As of September 30, 2014,March 31, 2015, the USPS has not presented a plan for the required phase out.out which the PRC is evaluating. On January 15, 2015, the USPS filed for a CPI rate increase of 2.0%, which if approved by the PRC, will be effective May 31, 2015. As a leading provider of print logistics and among the largest mailers of standard mail in the U.S., the Company works closely with its customers and the USPS to offer innovative products and services to minimize postage costs. While the Company does not directly absorb the impact of higher postal rates on its customers’ mailings, demand for products distributed through the U.S. or foreign postal services is expected to behas been negatively impacted by changesincreases in postal rates. The impact to the Company of the USPS’s restructuring plans, many of which require legislative action, cannot currently be estimated. Mail delivery services through the USPS accounted for approximately 45%44% of the Company’s logistics revenues during the ninethree months ended September 30, 2014.March 31, 2015.
During the nine months ended September 30, 2014, the Company experienced an increase in its costs of transportation, largely as a result of the severe winter weather in the first quarter, an industry-wide shortage of drivers and regulations restricting the number of hours drivers can work. The Company’s ability to pass on these increased costs to its customers varies based on contractual arrangements. Industry practice should support the Company’s ability to pass on these cost increases when contractually allowed, but there is no assurance that market conditions will continue to enable the Company to successfully do so.
Goodwill Impairment Assessment
The Company performs its goodwill impairment tests annually as of October 31, or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. As part of its interim review for indicators of impairment, management analyzed potential changes in value of individual reporting units with goodwill based on each reporting unit’s operating results for the ninethree months ended September 30, 2014March 31, 2015 compared to expected results. In addition, management considered how other key assumptions, including discount rates and expected long-term growth rates, used in the last fiscal year’s impairment analysis, could be impacted by changes in market conditions and economic events.
Management considered trends in these factors when performing its assessment of whether an interim impairment review was required for any reporting unit. Based on this interim assessment, management concluded that as of September 30, 2014,March 31, 2015, no events or changes in circumstances indicated that it was more likely than not that the fair value for any reporting unit had declined below its carrying value. Nevertheless, significant changes in global economic and market conditions could result in changes to expectations of future financial results and key valuation assumptions. Such changes could result in revisions of management’s estimates of the fair value of the Company’s reporting units and could result in a material impairment of goodwill as of October 31, 2014,2015, the Company’s next annual measurement date.
In particular, the magazines, catalogsThe digital and retail insertscreative solutions reporting unit has continued to experience declinesbeen impacted by a decline in expected full year net sales due to price pressures, primarily in catalogs and magazines, reduced volume in retail inserts, magazines and catalogs and a decrease in pass-through paper sales. Continuedas the result of the bankruptcy of two premedia services customers. Further negative trends could havedevelopments having a significant impact on the estimated fair value of this reporting unit and could result in future goodwill impairment charges. As of the October 31, 20132014 annual goodwill impairment test, the magazines, catalogsdigital and retail insertscreative solutions reporting unit’s estimated fair value exceeded book value by approximately 75%29.4%. As of September 30, 2014, $18.1March 31, 2015, $25.5 million of goodwill was allocated to the magazines, catalogsdigital and retail insertscreative solutions reporting unit, which is included within the Publishing and RetailStrategic Services segment.
Pension and Other Postretirement Benefit Plans
The funded status of the Company’s pension and other postretirement benefits plans is dependent upon many factors, including returns on invested assets and the level of certain market interest rates. Market conditions may lead to changes in the discount rates (used to value the year-end benefit obligations of the plans) and the market value of the securities held by the plans, which could significantly increase or decrease the funded status of the plans. The Company reviews its actuarial assumptions on an annual basis as of December 31.
As Based on current estimates, the majority of the Company’s pension plans have been frozen as of December 31, 2012, the Company continues to transition 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 securities and increase for fixed income 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.
In June 2014, the Company communicated to certain former employees the option to receive a lump-sum pension payment or annuity with payments beginning in the fourth quarter of 2014. To the extent eligible individuals elect the option to receive a lump-sum pension payment or annuity, the Company’s pension obligations will be reduced. Payments to eligible participants who elect to participate in the offer will be funded from existing pension plan assets and will constitute a complete settlement of the Company’s pension liabilities with respect to these participants. The discount rates and actuarial assumptions used to calculate the payouts will be determined according to federal regulations. The reduction in the reported pension obligation is expected to be approximately $395 million to $415 million, compared to expected payout amounts of approximately $295 million to $310 million. The Company expects to record a non-cash settlement charge of approximately $105 million to $115 million in the fourth quarter in connection with the settlement payments. This charge will result from the recognition in earnings of a portion of the losses recorded in accumulated other comprehensive loss based on the proportion of the obligation settled. The actual amount of this charge will depend on the discount rate and asset values on the settlement date.
On August 8, 2014, the Highway and Transportation Funding Act (“the Act”) was signed into law. The Act includes certain pension-related provisions designed to lower the pension plan contributions that plan-sponsoring companies are required to make by delaying a scheduled phase-down of the existing formula for calculating required minimum contributions. The Company anticipates that provisions in the Act will significantly reduce the minimum required annual contributions related to its defined benefit pension plans in 2014. The Company expects to make cash contributions of approximately $39$25.0 million to $30.0 million to its pension and other postretirement benefits plans for the full year 2014,2015, of which $33.8$8.3 million were madehas been contributed during the ninethree months ended September 30, 2014. The Company estimates that it will make cash contributions totaling approximately $25 million to its pension and other postretirement benefits plans inMarch 31, 2015.
During the nine months ended September 30, 2014, the Company recorded restructuring, impairment and other charges of $36.6 million associated with its estimated liability for withdrawing from four defined benefit multi-employer pension plans. The Company no longer participates in any active defined benefit multi-employer pension plans.
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 multi-employer 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, consolidated results of operations, financial position or cash flows.
Financial Review
In the financial review that follows, the Company discusses its consolidated results of operations, financial position, cash flows and certain other information. This discussion should be read in conjunction with the Company’s Condensed Consolidated Financial Statements and related notes.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2014MARCH 31, 2015 AS COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2013MARCH 31, 2014
The following table shows the results of operations for the three months ended September 30,March 31, 2015 and 2014, and 2013, which includesreflects the results of acquired businesses from the relevant acquisition dates:
| Three Months Ended March 31, |
| ||||||||||||||||||||||||||||
| Three Months Ended September 30, |
| 2015 |
|
| 2014 |
|
| $ Change |
|
| % Change |
| |||||||||||||||||
| 2014 |
|
| 2013 |
|
| $ Change |
|
| % Change |
| (in millions, except percentages) |
| |||||||||||||||||
| (in millions, except percentages) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Products net sales | $ | 2,480.7 |
|
| $ | 2,178.3 |
|
| $ | 302.4 |
|
|
| 13.9 | % | $ | 2,260.3 |
|
| $ | 2,225.7 |
|
| $ | 34.6 |
|
|
| 1.6 | % |
Services net sales |
| 477.1 |
|
|
| 436.6 |
|
|
| 40.5 |
|
|
| 9.3 | % |
| 485.8 |
|
|
| 448.1 |
|
|
| 37.7 |
|
|
| 8.4 | % |
Total net sales |
| 2,957.8 |
|
|
| 2,614.9 |
|
|
| 342.9 |
|
|
| 13.1 | % |
| 2,746.1 |
|
|
| 2,673.8 |
|
|
| 72.3 |
|
|
| 2.7 | % |
Products cost of sales (exclusive of depreciation and amortization) |
| 1,942.1 |
|
|
| 1,709.7 |
|
|
| 232.4 |
|
|
| 13.6 | % |
| 1,780.3 |
|
|
| 1,745.9 |
|
|
| 34.4 |
|
|
| 2.0 | % |
Services cost of sales (exclusive of depreciation and amortization) |
| 368.1 |
|
|
| 334.8 |
|
|
| 33.3 |
|
|
| 9.9 | % |
| 386.1 |
|
|
| 354.7 |
|
|
| 31.4 |
|
|
| 8.9 | % |
Total cost of sales |
| 2,310.2 |
|
|
| 2,044.5 |
|
|
| 265.7 |
|
|
| 13.0 | % |
| 2,166.4 |
|
|
| 2,100.6 |
|
|
| 65.8 |
|
|
| 3.1 | % |
Products gross profit |
| 538.6 |
|
|
| 468.6 |
|
|
| 70.0 |
|
|
| 14.9 | % |
| 480.0 |
|
|
| 479.8 |
|
|
| 0.2 |
|
|
| 0.0 | % |
Services gross profit |
| 109.0 |
|
|
| 101.8 |
|
|
| 7.2 |
|
|
| 7.1 | % |
| 99.7 |
|
|
| 93.4 |
|
|
| 6.3 |
|
|
| 6.7 | % |
Total gross profit |
| 647.6 |
|
|
| 570.4 |
|
|
| 77.2 |
|
|
| 13.5 | % |
| 579.7 |
|
|
| 573.2 |
|
|
| 6.5 |
|
|
| 1.1 | % |
Selling, general and administrative expenses (exclusive of depreciation and amortization) |
| 334.4 |
|
|
| 291.4 |
|
|
| 43.0 |
|
|
| 14.8 | % |
| 330.9 |
|
|
| 316.5 |
|
|
| 14.4 |
|
|
| 4.5 | % |
Restructuring, impairment and other charges - net |
| 19.9 |
|
|
| 38.1 |
|
|
| (18.2 | ) |
|
| (47.8 | %) | |||||||||||||||
Restructuring, impairment and other charges-net |
| 19.8 |
|
|
| 45.2 |
|
|
| (25.4 | ) |
|
| (56.2 | %) | |||||||||||||||
Depreciation and amortization |
| 119.6 |
|
|
| 106.3 |
|
|
| 13.3 |
|
|
| 12.5 | % |
| 113.4 |
|
|
| 115.5 |
|
|
| (2.1 | ) |
|
| (1.8 | %) |
Income from operations | $ | 173.7 |
|
| $ | 134.6 |
|
| $ | 39.1 |
|
|
| 29.0 | % | $ | 115.6 |
|
| $ | 96.0 |
|
| $ | 19.6 |
|
|
| 20.4 | % |
Consolidated
Net sales of products for the three months ended September 30, 2014March 31, 2015 increased $302.4$34.6 million, or 13.9%1.6%, to $2,480.7$2,260.3 million versus the same period in 2013,2014, including a $2.2$50.8 million, or 0.1%2.2%, decrease due to changes in foreign exchange rates. Net sales of products increased due to the acquisitions of Consolidated Graphics and Esselte, partially offset by price pressures in the International and Publishing and Retail Services segments, lower volume in the Publishing and Retail Services segment, a $15.7 million, or 0.7% decrease due to a decline in pass-through paper sales and a shift in timing of a customer’s annual project from the third quarter in 2013 to the fourth quarter in 2014 in the International segment.price pressures.
Net sales from services for the three months ended September 30, 2014March 31, 2015 increased $40.5$37.7 million, or 9.3%8.4%, to $477.1$485.8 million versus the same period in 2013,2014, including a $2.0$6.2 million, or 0.5%1.3%, increasedecrease due to changes in foreign exchange rates. The increase in net sales from services was primarily due to higher volume in the Strategic Services segment, primarily driven by the logistics and financial reporting units. These increases were partially offset by the disposition of GRES in the first quarter of 2014.unit.
Products gross profitcost of sales increased $70.0$34.4 million, to $538.6 millionor 0.4% as a percentage of net sales of products for the three months ended September 30, 2014March 31, 2015 versus the same period in 2013the prior year. Products cost of sales increased primarily due primarily to the acquisitions of Consolidated Graphics and Esselte partially offset by price pressures, unfavorable mix and lower volume in the Publishing and Retail Services segment, a shift in timing of a customer’s annual project and wage and other inflation in the International segment. Products gross margin increased slightly from 21.5% to 21.7%, reflecting the acquisitions of Consolidated Graphics and Esselte and cost control initiatives,segment, partially offset by price pressuresthe impact from the prior year $12.1 million purchase accounting inventory adjustment and wage inflation in the International segment.lower incentive compensation expense.
Services gross profitcost of sales increased $7.2$31.4 million, to $109.0 millionor 0.3% as a percentage of net sales from services for the three months ended September 30, 2014March 31, 2015 versus the same period in 2013the prior year. Services cost of sales increased primarily due to higher volume in the Strategic Services segment driven by the logistics reporting unit.
Products gross profit increased $0.2 million to $480.0 million for the three months ended March 31, 2015 versus the same period in 2014 primarily due to the acquisitions of Consolidated Graphics and Esselte, the impact from the prior year $12.1 million purchase accounting inventory adjustment and lower incentive compensation expense, mostly offset by volume declines in the Publishing and Retail Services segment, price pressures and wage and other inflation in the International segment. Products gross margin decreased from 21.6% to 21.2%, reflecting volume declines in the Publishing and Retail Services segment, price pressures and wage and other inflation in the International segment.
Services gross profit increased $6.3 million to $99.7 million for the three months ended March 31, 2015 versus the same period in 2014 due to higher volume in the Strategic Services segment driven by the financial and logistics reporting units, and royalties for the licensing of intellectual property, partially offset by increased transportation costs. Services gross margin decreased from 23.3%20.8% to 22.8% due to20.5%, reflecting increased transportation costs, partially offset by increased volume in the Strategic Services segment.costs.
Selling, general and administrative expenses increased $43.0$14.4 million to $334.4$330.9 million, and from 11.1%11.8% to 11.3%12.0% as a percentage of net sales, for the three months ended September 30, 2014March 31, 2015 versus the same period in 20132014 reflecting increased costs as a result of$2.8 million increase in acquisition-related expenses and wage and other inflation in the Consolidated Graphics and Esselte acquisitions,International segment, partially offset by an increase in pension and other postretirement benefits plan income.lower incentive compensation expense.
For the three months ended September 30, 2014,March 31, 2015, the Company recorded net restructuring, impairment and other charges of $19.9$19.8 million compared to $38.1$45.2 million in the same period in 2013.2014. In 2014,2015, these charges included $9.7$14.2 million of otheremployee termination costs for 894 employees, of whom 735 were terminated as of March 31, 2015. These charges for estimated obligations related towere primarily the decision to withdraw fromresult of one facility closure in the International segment, one facility closure in the Variable Print segment and the reorganization of certain multi-employer pension plans.operations. Additionally, the Company incurred lease termination and other restructuring charges of $5.1$3.6 million for the three months ended September 30, 2014.March 31, 2015. The Company also recorded $4.8$1.3 million of employee termination costsother charges for 139 employees,multi-employer pension plan withdrawal obligations and $0.7 million of whom 113 were terminated as of September 30, 2014. These charges were the result of the integration of Consolidated Graphics, including the closure of one Consolidated Graphics facility and the reorganization of certain operations and $0.3 million ofnet impairment charges primarily related to buildings and machinery and equipment associated with facility closures for the three months ended September 30, 2014.March 31, 2015.
NetFor the three months ended March 31, 2014, the Company recorded net restructuring, impairment and other charges for the three months ended September 30, 2013of $45.2 million. In 2014, these charges included $17.9$13.9 million of employee termination costs for 697278 employees, substantially all of whom were terminated as of September 30, 2014.March 31, 2015. These charges were the result of the integration of Consolidated Graphics, including the closure of three Consolidated Graphics facilities as well as one manufacturingadditional facility closure within the Variable Print segment, one facility closure in the Publishing and Retail Services segment and the reorganization of certain operations. Additionally, the Company incurred lease termination and other restructuring charges of $7.6$4.1 million for the three months ended September 30, 2013,March 31, 2014, including charges related to multi-employer pension plan withdrawal obligations as a result of facility closures. The Company also recorded $7.9$20.5 million of other charges as a result of its decision to withdraw from certain multi-employer pension plans and $6.7 million of impairment charges primarily related to buildings and machinery and equipment associated with facility closures and $4.7 million of other charges for estimated obligations related to the decision to partially withdraw from certain multi-employer pension plans.three months ended March 31, 2014.
Depreciation and amortization increased $13.3decreased $2.1 million to $119.6$113.4 million for the three months ended September 30, 2014March 31, 2015 compared to the same period in 2013,2014 primarily due to the impact of changes in foreign exchange rates, mostly offset by increases due to the acquisitions of Consolidated Graphics and Esselte, partially offset by the impact of lower capital spending in recent years compared to historical levels.Esselte. Depreciation and amortization included $19.9$19.0 million and $16.0$18.3 million of amortization of other intangible assets related to customer relationships, trade names, trademarks, licenses and agreements for the three months ended September 30,March 31, 2015 and 2014, and 2013, respectively.
Income from operations for the three months ended September 30, 2014March 31, 2015 was $173.7$115.6 million, an increase of 29.0%20.4% compared to the three months ended September 30, 2013.March 31, 2014. The increase was due to lower restructuring, impairment and other charges, the acquisitions of Consolidated Graphics and Esselte cost control initiatives, lower restructuring, impairment and other charges, lower healthcare costs and higher pension and other postretirement benefits plan income,the impact of the prior year purchase accounting inventory adjustment, partially offset by price pressures primarilyand wage and other inflation in the International and Publishing and Retail Services segments, unfavorable mix and lower volume in the Publishing and Retail Services segment and a shift in timing of a customer’s annual project.segment.
| Three Months Ended September 30, |
|
|
|
|
|
|
|
|
| Three Months Ended March 31, |
|
|
|
|
|
|
|
|
| ||||||||||
| 2014 |
|
| 2013 |
|
| $ Change |
|
| % Change |
| 2015 |
|
| 2014 |
|
| $ Change |
|
| % Change |
| ||||||||
| (in millions, except percentages) |
| (in millions, except percentages) |
| ||||||||||||||||||||||||||
Interest expense-net | $ | 71.2 |
|
| $ | 65.6 |
|
| $ | 5.6 |
|
|
| 8.5% |
| $ | 69.0 |
|
| $ | 71.0 |
|
| $ | (2.0 | ) |
|
| (2.8 | %) |
Investment and other (income) expense-net |
| 2.0 |
|
|
| (0.3 | ) |
|
| 2.3 |
|
| nm |
| ||||||||||||||||
Investment and other expense-net |
| 28.3 |
|
|
| 4.6 |
|
|
| 23.7 |
|
| nm |
| ||||||||||||||||
Loss on debt extinguishment |
| — |
|
|
| 77.1 |
|
|
| (77.1 | ) |
|
| (100.0 | %) |
Net interest expense increaseddecreased by $5.6$2.0 million for the three months ended September 30, 2014March 31, 2015 versus the same period in 2013,2014, primarily due to an increasea decrease in debt, including higher average credit facility borrowings and lower interest income.outstanding debt.
Net investment and other (income) expense for the three months ended September 30,March 31, 2015 and 2014 and 2013 was expense of $2.0$28.3 million and income of $0.3$4.6 million, respectively. For the three months ended September 30,March 31, 2015, the Company recorded a loss of $29.9 million related to the currency remeasurement in Venezuela and the related impact of the devaluation. For the three months ended March 31, 2014, the Company recorded a loss on the bankruptcy liquidation of RRDA of $16.4$21.8 million and a $1.0 million reductionrelated to the previously recorded Esselte bargain purchase gain,remeasurement of the Venezuelan currency, partially offset by a $16.6 million bargain purchase gain related to the Esselte acquisition.
For the three months ended March 31, 2014, loss on debt extinguishment, related to the salepremiums paid, unamortized debt issuance costs and other expenses, was $77.1 million due to the repurchase of Journalism Online of $11.2$211.0 million and a gain of $3.0 million resulting from the sale of the Company’s shares8.25% senior notes due March 15, 2019, $100.0 million of a previously impaired equity investment.the 7.25% senior notes due May 15, 2018 and $50.0 million of the 7.625% senior notes due June 15, 2020.
| Three Months Ended September 30, |
|
|
|
|
|
|
|
|
| |||||
| 2014 |
|
| 2013 |
|
| $ Change |
|
| % Change |
| ||||
| (in millions, except percentages) |
| |||||||||||||
Earnings before income taxes | $ | 100.5 |
|
| $ | 23.0 |
|
| $ | 77.5 |
|
|
| 337.0 | % |
Income tax expense |
| 35.7 |
|
|
| 5.0 |
|
|
| 30.7 |
|
|
| 614.0 | % |
Effective income tax rate |
| 35.5 | % |
|
| 21.7 | % |
|
|
|
|
|
|
|
|
| Three Months Ended March 31, |
|
|
|
|
|
|
|
|
| |||||
| 2015 |
|
| 2014 |
|
| $ Change |
|
| % Change |
| ||||
| (in millions, except percentages) |
| |||||||||||||
Earnings (loss) before income taxes | $ | 18.3 |
|
| $ | (56.7 | ) |
| $ | 75.0 |
|
|
| (132.3 | %) |
Income tax expense (benefit) |
| 6.4 |
|
|
| (23.5 | ) |
|
| 29.9 |
|
|
| (127.2 | %) |
Effective income tax rate |
| 35.0 | % |
|
| 41.4 | % |
|
|
|
|
|
|
|
|
The effective income tax rate for the three months ended September 30, 2014March 31, 2015 was 35.5%35.0% compared to 21.7%41.4% in the same period in 2013.2014. The income tax ratebenefit for the period ended September 30, 2013 reflectedMarch 31, 2014 reflects the recognition of previously unrecognized tax benefitsbenefit related to the reorganization of certain state tax matters.entities.
IncomeLoss attributable to noncontrolling interests was $2.6$10.4 million and $3.3$4.2 million for the three months ended September 30,March 31, 2015 and 2014, respectively. For the three months ended March 31, 2015 and 2013, respectively. The decrease2014, the remeasurement of the Venezuelan currency resulted in incomelosses attributable to noncontrolling interests is primarily due to a decrease in Venezuela’s earnings, caused partially by wageof $10.3 million and other cost inflation.$7.1 million, respectively.
Net earnings attributable to RR Donnelley common shareholders for the three months ended September 30, 2014March 31, 2015 was $62.2$22.3 million, or $0.31$0.11 per diluted share, compared to $14.7net loss of $29.0 million, or $0.08$0.15 per diluted share, for the three months ended September 30, 2013.March 31, 2014. In addition to the factors described above, the per share results reflect an increase in weighted average diluted shares outstanding of 17.79.0 million, primarily as a result of shares issued in conjunction with the acquisitions of Consolidated Graphics and Esselte acquisitions.Esselte.
Information by Segment
The following tables summarize net sales, income (loss) from operations and certain items impacting comparability within each of the operating segments and Corporate. The amounts included in the net sales by reporting unit tables and the descriptions of the reporting units included therein generally reflect the primary products or services provided by each reporting unit. Included in these net sales amounts are sales of other products or services that may be produced within a reporting unit to meet customer needs and improve operating efficiency.
Publishing and Retail Services
| Three Months Ended |
|
| Three Months Ended |
| ||||||||||
| September 30, |
|
| March 31, |
| ||||||||||
| 2014 |
|
| 2013 |
|
| 2015 |
|
| 2014 |
| ||||
| (in millions, except percentages) |
|
| (in millions, except percentages) |
| ||||||||||
Net sales | $ | 681.0 |
|
| $ | 715.0 |
|
| $ | 573.8 |
|
| $ | 642.7 |
|
Income from operations |
| 34.1 |
|
|
| 34.3 |
|
|
| 11.8 |
|
|
| 9.9 |
|
Operating margin |
| 5.0 | % |
|
| 4.8 | % |
|
| 2.1 | % |
|
| 1.5 | % |
Restructuring, impairment and other charges - net |
| 7.8 |
|
|
| 22.8 |
| ||||||||
Restructuring, impairment and other charges-net |
|
| 4.3 |
|
|
| 20.8 |
|
|
| Net Sales for the Three Months Ended |
|
|
|
|
|
|
|
|
| |||||
|
| March 31, |
|
|
|
|
|
|
|
|
| |||||
Reporting unit |
| 2015 |
|
| 2014 |
|
| $ Change |
|
| % Change |
| ||||
|
| (in millions, except percentages) |
| |||||||||||||
Magazines, catalogs and retail inserts |
| $ | 349.6 |
|
| $ | 393.5 |
|
| $ | (43.9 | ) |
|
| (11.2 | %) |
Books |
|
| 191.9 |
|
|
| 209.0 |
|
|
| (17.1 | ) |
|
| (8.2 | %) |
Directories |
|
| 32.3 |
|
|
| 40.2 |
|
|
| (7.9 | ) |
|
| (19.7 | %) |
Total Publishing and Retail Services |
| $ | 573.8 |
|
| $ | 642.7 |
|
| $ | (68.9 | ) |
|
| (10.7 | %) |
| Net Sales for the Three Months |
|
|
|
|
|
|
|
|
| |||||
| Ended September 30, |
|
|
|
|
|
|
|
|
| |||||
Reporting unit | 2014 |
|
| 2013 |
|
| $ Change |
|
| % Change |
| ||||
| (in millions, except percentages) |
| |||||||||||||
Magazines, catalogs and retail inserts | $ | 400.4 |
|
| $ | 423.8 |
|
| $ | (23.4 | ) |
|
| (5.5 | %) |
Books |
| 243.3 |
|
|
| 250.4 |
|
|
| (7.1 | ) |
|
| (2.8 | %) |
Directories |
| 37.3 |
|
|
| 40.8 |
|
|
| (3.5 | ) |
|
| (8.6 | %) |
Total Publishing and Retail Services | $ | 681.0 |
|
| $ | 715.0 |
|
| $ | (34.0 | ) |
|
| (4.8 | %) |
Net sales for the Publishing and Retail Services segment for the three months ended September 30, 2014March 31, 2015 were $681.0$573.8 million, a decrease of $34.0$68.9 million, or 4.8%10.7%, compared to the three months ended September 30, 2013.2014. Net sales decreased due to lower volume in magazines, catalogs and retail inserts, books and directories and decreases in pass through paper sales in magazines, catalogs and retail inserts and educational books and price pressures primarily in catalogs and magazines.directories. An analysis of net sales by reporting unit follows:
· | Magazines, catalogs and retail inserts: Sales declined due to |
· | Books: Sales decreased as a result of reduced volume |
· | Directories: Sales decreased primarily as a result of |
Publishing and Retail Services segment income from operations decreased slightlyincreased by $0.2$1.9 million for the three months ended September 30, 2014March 31, 2015 due to unfavorable mixlower restructuring, impairment and other charges and incentive compensation expense, mostly offset by price pressures and volume declines in magazines, catalogs and retail inserts a decline in vendor rebates, price pressures and lowerreduced volume in educational books partially offset byand directories. Operating margins increased from 1.5% for the three months ended March 31, 2014 to 2.1% for the three months ended March 31, 2015. While lower restructuring, impairment and other charges cost control initiatives and lower depreciation and amortization expense. Operating margins increased from 4.8% for the three months ended September 30, 2013 to 5.0% for the three months ended September 30, 2014. Lower restructuring, impairment and other charges increasedimproved operating margins 2.1by 2.6 percentage points. Thepoints, the remaining decline in operating margins reflected unfavorable mixwas due to price pressures and a decline in volume declines in magazines, catalogs and retail inserts a declineand reduced volume in vendor rebatesbooks and price pressures, partially offset by cost control initiatives and lower depreciation and amortization expense.directories.
Variable Print
| Three Months Ended |
|
| Three Months Ended |
| ||||||||||
| September 30, |
|
| March 31, |
| ||||||||||
| 2014 |
|
| 2013 |
|
| 2015 |
|
| 2014 |
| ||||
| (in millions, except percentages) |
|
| (in millions, except percentages) |
| ||||||||||
Net sales | $ | 988.1 |
|
| $ | 643.8 |
|
| $ | 948.8 |
|
| $ | 792.1 |
|
Income from operations |
| 68.8 |
|
|
| 46.8 |
|
|
| 66.2 |
|
|
| 27.7 |
|
Operating margin |
| 7.0 | % |
|
| 7.3 | % |
|
| 7.0 | % |
|
| 3.5 | % |
Restructuring, impairment and other charges - net |
| 8.3 |
|
|
| 3.4 |
| ||||||||
Restructuring, impairment and other charges-net |
|
| 5.0 |
|
|
| 20.6 |
| |||||||
Purchase accounting inventory adjustment |
|
| — |
|
|
| 12.1 |
|
| Net Sales for the Three Months |
|
|
|
|
|
|
|
|
| |||||
| Ended September 30, |
|
|
|
|
|
|
|
|
| |||||
Reporting unit | 2014 |
|
| 2013 |
|
| $ Change |
|
| % Change |
| ||||
| (in millions, except percentages) |
| |||||||||||||
Commercial and digital print | $ | 426.9 |
|
| $ | 179.6 |
|
| $ | 247.3 |
|
|
| 137.7 | % |
Direct mail |
| 160.5 |
|
|
| 138.4 |
|
|
| 22.1 |
|
|
| 16.0 | % |
Office products |
| 142.3 |
|
|
| 61.4 |
|
|
| 80.9 |
|
|
| 131.8 | % |
Labels |
| 112.0 |
|
|
| 109.4 |
|
|
| 2.6 |
|
|
| 2.4 | % |
Statement printing |
| 89.9 |
|
|
| 91.8 |
|
|
| (1.9 | ) |
|
| (2.1 | %) |
Forms |
| 56.5 |
|
|
| 63.2 |
|
|
| (6.7 | ) |
|
| (10.6 | %) |
Total Variable Print | $ | 988.1 |
|
| $ | 643.8 |
|
| $ | 344.3 |
|
|
| 53.5 | % |
|
| Net Sales for the Three Months Ended |
|
|
|
|
|
|
|
|
| |||||
|
| March 31, |
|
|
|
|
|
|
|
|
| |||||
Reporting unit |
| 2015 |
|
| 2014 |
|
| $ Change |
|
| % Change |
| ||||
|
| (in millions, except percentages) |
| |||||||||||||
Commercial and digital print (a) |
| $ | 412.7 |
|
| $ | 346.5 |
|
| $ | 66.2 |
|
|
| 19.1 | % |
Office products |
|
| 137.3 |
|
|
| 54.5 |
|
|
| 82.8 |
|
|
| 151.9 | % |
Direct mail (a) |
|
| 126.8 |
|
|
| 118.0 |
|
|
| 8.8 |
|
|
| 7.5 | % |
Statement printing |
|
| 112.1 |
|
|
| 107.7 |
|
|
| 4.4 |
|
|
| 4.1 | % |
Labels |
|
| 107.5 |
|
|
| 105.1 |
|
|
| 2.4 |
|
|
| 2.3 | % |
Forms |
|
| 52.4 |
|
|
| 60.3 |
|
|
| (7.9 | ) |
|
| (13.1 | %) |
Total Variable Print |
| $ | 948.8 |
|
| $ | 792.1 |
|
| $ | 156.7 |
|
|
| 19.8 | % |
(a) Certain prior year amounts were restated to conform to the Company’s current reporting unit structure.
_______________________
Net sales for the Variable Print segment for the three months ended September 30, 2014March 31, 2015 were $988.1$948.8 million, an increase of $344.3$156.7 million, or 53.5%19.8%, compared to 2013,2014, including a $1.1$2.7 million, or 0.1%0.3% decrease due to changes in foreign exchange rates. Net sales increased primarily due to the acquisitions of Consolidated Graphics and Esselte and higher volume in direct mail and in-store marketing materials,office products, partially offset by price pressures and lower volume in forms and statement printing.forms. An analysis of net sales by reporting unit follows:
· | Commercial and digital print: Sales increased |
· | Office products: Sales increased as a result of the acquisition of Esselte and |
· | Direct mail: Sales increased as a result of |
· |
|
· | Labels: Sales increased |
|
|
· | Forms: Sales decreased due to lower volume, primarily as a result of electronic substitution. |
Variable Print segment income from operations increased $22.0$38.5 million for the three months ended September 30, 2014March 31, 2015 mainly due to higher volume resulting from the acquisitions of Consolidated Graphics and Esselte, lower restructuring, impairment and other charges and the impact of the prior year purchase accounting inventory adjustment, partially offset by higher depreciation and amortization expense, price pressures in statement printing and lower volume in forms and statement printing.forms. Operating margins decreasedincreased from 7.3%3.5% for the three months ended September 30, 2013March 31, 2014 to 7.0% for the three months ended September 30, 2014 primarilyMarch 31, 2015, of which 2.0 percentage points were due to price declines and higherlower restructuring, impairment and other charges partiallyand 1.5 percentage points were due to the favorable impact of the prior year purchase accounting inventory adjustment. Additionally, changes in operating margins reflected higher volume resulting from the acquisitions of Consolidated Graphics and Esselte and cost control initiatives resulting from the integration of Consolidated Graphics and Esselte, mostly offset by cost control initiatives.higher depreciation and amortization expense, price pressures in statement printing and lower volume in forms.
Strategic Services
| Three Months Ended |
|
| Three Months Ended |
| ||||||||||
| September 30, |
|
| March 31, |
| ||||||||||
| 2014 |
|
| 2013 |
|
| 2015 |
|
| 2014 |
| ||||
| (in millions, except percentages) |
|
| (in millions, except percentages) |
| ||||||||||
Net sales | $ | 630.7 |
|
| $ | 581.7 |
|
| $ | 667.3 |
|
| $ | 619.7 |
|
Income from operations |
| 56.5 |
|
|
| 43.0 |
|
|
| 55.0 |
|
|
| 55.4 |
|
Operating margin |
| 9.0 | % |
|
| 7.4 | % |
|
| 8.2 | % |
|
| 8.9 | % |
Restructuring, impairment and other charges - net |
| 1.2 |
|
|
| 6.9 |
| ||||||||
Restructuring, impairment and other charges-net |
|
| 2.2 |
|
|
| 1.6 |
| |||||||
|
|
|
|
|
|
|
|
|
| Net Sales for the Three Months |
|
|
|
|
|
|
|
|
|
| Net Sales for the Three Months Ended |
|
|
|
|
|
|
|
|
| ||||||||||
| Ended September 30, |
|
|
|
|
|
|
|
|
|
| March 31, |
|
|
|
|
|
|
|
|
| ||||||||||
Reporting unit | 2014 |
|
| 2013 |
|
| $ Change |
|
| % Change |
|
| 2015 |
|
| 2014 |
|
| $ Change |
|
| % Change |
| ||||||||
| (in millions, except percentages) |
|
| (in millions, except percentages) |
| ||||||||||||||||||||||||||
Logistics | $ | 300.5 |
|
| $ | 270.3 |
|
| $ | 30.2 |
|
|
| 11.2 | % |
| $ | 320.7 |
|
| $ | 283.2 |
|
| $ | 37.5 |
|
|
| 13.2 | % |
Financial |
| 229.0 |
|
|
| 221.4 |
|
|
| 7.6 |
|
|
| 3.4 | % |
|
| 250.8 |
|
|
| 246.3 |
|
|
| 4.5 |
|
|
| 1.8 | % |
Sourcing |
|
| 56.9 |
|
|
| 45.2 |
|
|
| 11.7 |
|
|
| 25.9 | % | |||||||||||||||
Digital and creative solutions |
| 51.9 |
|
|
| 47.5 |
|
|
| 4.4 |
|
|
| 9.3 | % |
|
| 38.9 |
|
|
| 45.0 |
|
|
| (6.1 | ) |
|
| (13.6 | %) |
Sourcing |
| 49.3 |
|
|
| 42.5 |
|
|
| 6.8 |
|
|
| 16.0 | % | ||||||||||||||||
Total Strategic Services | $ | 630.7 |
|
| $ | 581.7 |
|
| $ | 49.0 |
|
|
| 8.4 | % |
| $ | 667.3 |
|
| $ | 619.7 |
|
| $ | 47.6 |
|
|
| 7.7 | % |
Net sales for the Strategic Services segment for the three months ended September 30, 2014March 31, 2015 were $630.7$667.3 million, an increase of $49.0$47.6 million, or 8.4%7.7%, compared to the three months ended September 30, 2013,2014, including a $0.2$3.8 million, increaseor 0.6%, decrease due to changes in foreign exchange rates. Net sales increased primarily due to higher volume in logistics, the sourcing of commercial print products and higher investment management products volume, partially offset by a decline in compliance volume in financial. An analysis of net sales by reporting unit follows:
|
|
|
|
|
|
|
|
Strategic Services segment income from operations increased $13.5 million for the three months ended September 30, 2014 due to lower restructuring, impairment and other charges, royalties for the licensing of intellectual property and increased volume in logistics, partially offset by higher costs of transportation. Operating margins increased from 7.4% to 9.0%, of which 1.0 percentage points were due to lower restructuring, impairment, and other charges. The remaining increase in operating margins reflected royalties for the licensing of intellectual property, partially offset by increases in costs of transportation.
International
| Three Months Ended |
| |||||
| September 30, |
| |||||
| 2014 |
|
| 2013 |
| ||
| (in millions, except percentages) |
| |||||
Net sales | $ | 658.0 |
|
| $ | 674.4 |
|
Income from operations |
| 24.7 |
|
|
| 42.3 |
|
Operating margin |
| 3.8 | % |
|
| 6.3 | % |
Restructuring, impairment and other charges - net |
| 1.9 |
|
|
| 4.8 |
|
| Net Sales for the Three Months |
|
|
|
|
|
|
|
|
| |||||
| Ended September 30, |
|
|
|
|
|
|
|
|
| |||||
Reporting unit | 2014 |
|
| 2013 |
|
| $ Change |
|
| % Change |
| ||||
| (in millions, except percentages) |
| |||||||||||||
Asia | $ | 205.8 |
|
| $ | 190.3 |
|
| $ | 15.5 |
|
|
| 8.1 | % |
Business process outsourcing |
| 116.1 |
|
|
| 115.8 |
|
|
| 0.3 |
|
|
| 0.3 | % |
Latin America |
| 101.4 |
|
|
| 136.9 |
|
|
| (35.5 | ) |
|
| (25.9 | %) |
Europe |
| 94.6 |
|
|
| 95.6 |
|
|
| (1.0 | ) |
|
| (1.0 | %) |
Global Turnkey Solutions |
| 86.2 |
|
|
| 80.1 |
|
|
| 6.1 |
|
|
| 7.6 | % |
Canada |
| 53.9 |
|
|
| 55.7 |
|
|
| (1.8 | ) |
|
| (3.2 | %) |
Total International | $ | 658.0 |
|
| $ | 674.4 |
|
| $ | (16.4 | ) |
|
| (2.4 | %) |
Net sales in the International segment for the three months ended September 30, 2014 were $658.0 million, a decrease of $16.4 million, or 2.4%, compared to the same period in 2013, including a $0.7 million or 0.1% increase due to changes in foreign exchange rates. The net sales decrease was due to lower volume in Latin America partially due to a shift in timing of a customer’s annual project from the third quarter in 2013 to the fourth quarter in 2014, the bankruptcy liquidation of RRDA in the third quarter of 2014, price pressures in Asia, the sale of GRES in the first quarter of 2014 and the sale of MRM France during the fourth quarter of 2013. These decreases were partially offset by higher volume within Asia and Global Turnkey Solutions. An analysis of net sales by reporting unit follows:
|
|
|
|
|
|
|
|
|
|
|
|
International segment income from operations decreased $17.6 million due to price pressures, a shift in timing of a customer’s annual project in Latin America from the third quarter in 2013 to the fourth quarter in 2014 and wage inflation, primarily in Latin America and Asia, partially offset by higher volume in Asia, cost control initiatives and lower restructuring, impairment and other charges. Operating margins decreased from 6.3% for the three months ended September 30, 2013 to 3.8% for the three months ended September 30, 2014, reflecting price pressures in Asia, a shift in timing of a customer’s annual project in Latin America and the impact of wage inflation, partially offset by higher volume in Asia and cost control initiatives.
Corporate
| Three Months Ended |
| |||||
| September 30, |
| |||||
| 2014 |
|
| 2013 |
| ||
| (in millions) |
| |||||
Operating expenses | $ | 10.4 |
|
| $ | 31.8 |
|
Restructuring, impairment and other charges - net |
| 0.7 |
|
|
| 0.2 |
|
Acquisition-related expenses |
| — |
|
|
| 1.1 |
|
Corporate operating expenses in the three months ended September 30, 2014 were $10.4 million, a decrease of $21.4 million compared to the same period in 2013. The decrease was driven by lower healthcare costs, higher pension and other postretirement benefits plan income and lower workers’ compensation expense, partially offset by higher long-term compensation expense.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2014 AS COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2013
The following table shows the results of operations for the nine months ended September 30, 2014 and 2013, which includes the results of acquired businesses from the relevant acquisition dates:
| Nine Months Ended September 30, |
| |||||||||||||
| 2014 |
|
| 2013 |
|
| $ Change |
|
| % Change |
| ||||
| (in millions, except percentages) |
| |||||||||||||
Products net sales | $ | 7,147.1 |
|
| $ | 6,443.0 |
|
| $ | 704.1 |
|
|
| 10.9 | % |
Services net sales |
| 1,387.0 |
|
|
| 1,282.0 |
|
|
| 105.0 |
|
|
| 8.2 | % |
Total net sales |
| 8,534.1 |
|
|
| 7,725.0 |
|
|
| 809.1 |
|
|
| 10.5 | % |
Products cost of sales (exclusive of depreciation and amortization) |
| 5,570.8 |
|
|
| 5,019.7 |
|
|
| 551.1 |
|
|
| 11.0 | % |
Services cost of sales (exclusive of depreciation and amortization) |
| 1,080.3 |
|
|
| 978.4 |
|
|
| 101.9 |
|
|
| 10.4 | % |
Total cost of sales |
| 6,651.1 |
|
|
| 5,998.1 |
|
|
| 653.0 |
|
|
| 10.9 | % |
Products gross profit |
| 1,576.3 |
|
|
| 1,423.3 |
|
|
| 153.0 |
|
|
| 10.7 | % |
Services gross profit |
| 306.7 |
|
|
| 303.6 |
|
|
| 3.1 |
|
|
| 1.0 | % |
Total gross profit |
| 1,883.0 |
|
|
| 1,726.9 |
|
|
| 156.1 |
|
|
| 9.0 | % |
Selling, general and administrative expenses (exclusive of depreciation and amortization) |
| 990.2 |
|
|
| 867.8 |
|
|
| 122.4 |
|
|
| 14.1 | % |
Restructuring, impairment and other charges - net |
| 87.9 |
|
|
| 80.6 |
|
|
| 7.3 |
|
|
| 9.1 | % |
Depreciation and amortization |
| 357.0 |
|
|
| 330.9 |
|
|
| 26.1 |
|
|
| 7.9 | % |
Income from operations | $ | 447.9 |
|
| $ | 447.6 |
|
| $ | 0.3 |
|
|
| 0.1 | % |
Consolidated
Net sales of products for the nine months ended September 30, 2014 increased $704.1 million, or 10.9%, to $7,147.1 million versus the same period in 2013, including a $16.2 million, or 0.3%, decrease due to changes in foreign exchange rates. Net sales of products increased due to the acquisitions of Consolidated Graphics and Esselte and increased volume in the International segment, partially offset by lower volume in the Publishing and Retail Services segment and price pressures in the Publishing and Retail Services, International and Variable Print segments.
Net sales from services for the nine months ended September 30, 2014 increased $105.0 million, or 8.2%, to $1,387.0 million versus the same period in 2013, including a $5.7 million, or 0.4%, increase due to changes in foreign exchange rates. The increase in net sales from services was primarily due to higher volume in the Strategic Services segment, driven by the logistics and financial reporting units. These increases were partially offset by the disposition of GRES in the first quarter of 2014.
Products gross profit increased $153.0 million to $1,576.3 million for the nine months ended September 30, 2014 versus the same period in 2013 due to the acquisitions of Consolidated Graphics and Esselte, cost control initiatives and increased volume in the International segment, partially offset by price pressures in the International, Publishing and Retail Services and Variable Print segments and wage and other inflation in the International segment. Products gross margin remained constant at 22.1% reflecting price pressures, wage inflation in the International segment and the impact of inventory purchase accounting adjustments, offset by cost control initiatives.
Services gross profit increased $3.1 million to $306.7 million for the nine months ended September 30, 2014 versus the same period in 2013 due to higher volume in the Strategic Services segment driven by the logistics and financial reporting units. These increases were partially offset by increased transportation costs. Services gross margin decreased from 23.7% to 22.1% due to increased transportation costs, partially offset by favorable mix in the Strategic Services segment.
Selling, general and administrative expenses increased $122.4 million to $990.2 million, and from 11.2% to 11.6% as a percentage of net sales, for the nine months ended September 30, 2014 versus the same period in 2013 reflecting increased costs as a result of the Consolidated Graphics and Esselte acquisitions, wage and other inflation in the International segment, higher acquisition-related expenses and the prior year reversal of an earnout from an acquisition, partially offset by an increase in pension and other postretirement benefits plan income.
For the nine months ended September 30, 2014, the Company recorded net restructuring, impairment and other charges of $87.9 million compared to $80.6 million in the same period in 2013. In 2014, these charges included $34.0 million of other charges as a result of its decision to withdraw from certain multi-employer pension plans serving facilities that are currently operating. Additionally, the Company incurred $27.8 million of employee termination costs for 546 employees, of whom 518 were terminated as of September 30, 2014. These charges were the result of the integration of Consolidated Graphics, including the closure of seven Consolidated Graphics facilities as well as one additional facility closure within the Variable Print segment, one facility closure in the Publishing and Retail Services segment and the reorganization of certain operations. The Company also recorded lease termination and other restructuring charges of $16.0 million for the nine months ended September 30, 2014, including charges related to multi-employer pension plan withdrawal obligations as a result of facility closures and $10.1 million of impairment charges primarily related to buildings, machinery and equipment and trade names associated with facility closures for the nine months ended September 30, 2014.
Net restructuring, impairment and other charges for the nine months ended September 30, 2013 included $34.0 million of employee termination costs for 1,276 employees, substantially all of whom were terminated as of September 30, 2014. These charges were primarily the result of the closing of two manufacturing facilities within the Publishing and Retail Services segment and one manufacturing facility within the Variable Print segment and the reorganization of certain operations. Additionally, the Company incurred lease termination and other restructuring charges of $26.2 million for the nine months ended September 30, 2013, including charges related to multi-employer pension plan withdrawal obligations as a result of facility closures. For the nine months ended September 30, 2013, the Company also recorded $15.7 million of impairment charges primarily related to buildings and machinery and equipment associated with facility closures and $4.7 million of other charges for estimated obligations related to the decision to partially withdraw from certain multi-employer pension plans.
Depreciation and amortization increased $26.1 million to $357.0 million for the nine months ended September 30, 2014 compared to the same period in 2013, primarily due to the acquisitions of Consolidated Graphics and Esselte, partially offset by the impact of lower capital spending in recent years compared to historical levels. Depreciation and amortization included $58.7 million and $48.4 million of amortization of other intangible assets related to customer relationships, trade names, trademarks, licenses and agreements for the nine months ended September 30, 2014 and 2013, respectively.
Income from operations for the nine months ended September 30, 2014 was $447.9 million, an increase of $0.3 million, or 0.1%, compared to the nine months ended September 30, 2013. The increase was due to the acquisitions of Consolidated Graphics and Esselte, cost control initiatives, increased volume in the Strategic Services and International segments, higher pension and other postretirement benefits plan income and lower healthcare costs, partially offset by price pressures in the International, Publishing and Retail Services and Variable Print segments and wage and other inflation in the International segment.
| Nine Months Ended September 30, |
|
|
|
|
|
|
|
|
| |||||
| 2014 |
|
| 2013 |
|
| $ Change |
|
| % Change |
| ||||
| (in millions, except percentages) |
| |||||||||||||
Interest expense-net | $ | 213.0 |
|
| $ | 193.9 |
|
| $ | 19.1 |
|
|
| 9.9 | % |
Investment and other expense-net |
| 8.9 |
|
|
| 9.2 |
|
|
| (0.3 | ) |
|
| (3.3 | %) |
Loss on debt extinguishment |
| 77.1 |
|
|
| 81.9 |
|
|
| (4.8 | ) |
|
| (5.9 | %) |
Net interest expense increased by $19.1 million for the nine months ended September 30, 2014 versus the same period in 2013, primarily due to an increase in debt, including higher average credit facility borrowings, and lower interest income.
Net investment and other expense for the nine months ended September 30, 2014 and 2013 was $8.9 million and $9.2 million, respectively. The loss related to the Venezuelan currency remeasurement, net of foreign exchange gains, for the nine months ended September 30, 2014, of $18.0 million and the loss on the bankruptcy liquidation of RRDA of $16.4 million were partially offset by a gain on the sale of Journalism Online of $11.2 million, a $9.5 million bargain purchase gain related to the Esselte acquisition and a gain of $3.0 million resulting from the sale of the Company’s shares of a previously impaired equity investment. For the nine months ended September 30, 2013, the Company recorded $5.5 million of impairment losses on equity investments and a $3.2 million loss related to the devaluation of the Venezuelan currency.
Loss on debt extinguishment, related to the premiums paid, unamortized debt issuance costs and other expenses for the nine months ended September 30, 2014, was $77.1 million due to the repurchase of $211.1 million of the 8.25% senior notes due March 15, 2019, $100.0 million of the 7.25% senior notes due May 15, 2018 and $50.0 million of the 7.625% senior notes due June 15, 2020. Loss on debt extinguishment for the nine months ended September 30, 2013 was $81.9 million related to the premiums paid, unamortized debt issuance costs and other expenses due to the repurchase of $273.5 million of the 6.125% senior notes due January 15, 2017, $250.0 million of the 7.25% senior notes due May 15, 2018, $130.2 million of the 8.60% senior notes due August 15, 2016 and $100.0 million of the 5.50% senior notes due May 15, 2015.
| Nine Months Ended September 30, |
|
|
|
|
|
|
|
|
| |||||
| 2014 |
|
| 2013 |
|
| $ Change |
|
| % Change |
| ||||
| (in millions, except percentages) |
| |||||||||||||
Earnings before income taxes | $ | 148.9 |
|
| $ | 162.6 |
|
| $ | (13.7 | ) |
|
| (8.4 | %) |
Income tax expense |
| 51.7 |
|
|
| 52.8 |
|
|
| (1.1 | ) |
|
| (2.1 | %) |
Effective income tax rate |
| 34.7 | % |
|
| 32.5 | % |
|
|
|
|
|
|
|
|
The effective income tax rate for the nine months ended September 30, 2014 was 34.7% compared to 32.5% in the same period in 2013. The tax rate in 2013 reflected the recognition of previously unrecognized tax benefits related to certain state tax matters.
Income (loss) attributable to noncontrolling interests was a loss of $0.7 million for the nine months ended September 30, 2014 and income of $2.6 million for the nine months ended September 30, 2013. For the nine months ended September 30, 2014 and 2013, the Venezuelan currency remeasurement, net of foreign exchange gains, resulted in losses attributable to noncontrolling interests of $6.0 million and $1.0 million, respectively. The impacts of the remeasurements were partially offset for the nine months ended September 30, 2014 and 2013 by increases in the Company’s operating earnings in Venezuela.
Net earnings attributable to RR Donnelley common shareholders for the nine months ended September 30, 2014 was $97.9 million, or $0.49 per diluted share, compared to $107.2 million, or $0.58 per diluted share, for the nine months ended September 30, 2013. In addition to the factors described above, the per share results reflect an increase in weighted average diluted shares outstanding of 16.1 million as a result of shares issued in conjunction with the Consolidated Graphics and Esselte acquisitions.
Information by Segment
The following tables summarize net sales, income (loss) from operations and certain items impacting comparability within each of the operating segments and Corporate. The amounts included in the net sales by reporting unit tables and the descriptions of the reporting units included therein generally reflect the primary products or services provided by each reporting unit. Included in these net sales amounts are sales of other products or services that may be produced within a reporting unit to meet customer needs and improve operating efficiency.
Publishing and Retail Services
| Nine Months Ended |
| |||||
| September 30, |
| |||||
| 2014 |
|
| 2013 |
| ||
| (in millions, except percentages) |
| |||||
Net sales | $ | 1,949.6 |
|
| $ | 2,028.7 |
|
Income from operations |
| 71.8 |
|
|
| 93.8 |
|
Operating margin |
| 3.7 | % |
|
| 4.6 | % |
Restructuring, impairment and other charges - net |
| 31.9 |
|
|
| 38.6 |
|
| Net Sales for the Nine Months |
|
|
|
|
|
|
|
|
| |||||
| Ended September 30, |
|
|
|
|
|
|
|
|
| |||||
Reporting unit | 2014 |
|
| 2013 |
|
| $ Change |
|
| % Change |
| ||||
| (in millions, except percentages) |
| |||||||||||||
Magazines, catalogs and retail inserts | $ | 1,191.4 |
|
| $ | 1,235.9 |
|
| $ | (44.5 | ) |
|
| (3.6 | %) |
Books |
| 649.2 |
|
|
| 662.9 |
|
|
| (13.7 | ) |
|
| (2.1 | %) |
Directories |
| 109.0 |
|
|
| 129.9 |
|
|
| (20.9 | ) |
|
| (16.1 | %) |
Total Publishing and Retail Services | $ | 1,949.6 |
|
| $ | 2,028.7 |
|
| $ | (79.1 | ) |
|
| (3.9 | %) |
Net sales for the Publishing and Retail Services segment for the nine months ended September 30, 2014 were $1,949.6 million, a decrease of $79.1 million, or 3.9%, compared to 2013. Net sales decreased due to lower volume in educational books, magazines, catalogs and retail inserts and directories, price pressures in magazines, catalogs and retail inserts and decreases in pass-through paper sales, partially offset by higher volume in consumer books. An analysis of net sales by reporting unit follows:
|
|
|
|
|
|
Publishing and Retail Services segment income from operations decreased $22.0 million for the nine months ended September 30, 2014 due to price pressures and volume declines in educational books, magazines, catalogs and retail inserts and directories. These decreases were partially offset by lower depreciation and amortization expense and restructuring, impairment and other charges and cost control initiatives. Operating margins decreased from 4.6% for the nine months ended September 30, 2013 to 3.7% for the nine months ended September 30, 2014 due to price pressures and volume declines in educational books, catalogs and magazines, partially offset by lower depreciation and amortization expense and restructuring, impairment and other charges and cost savings from restructuring activities.
Variable Print
| Nine Months Ended |
| |||||
| September 30, |
| |||||
| 2014 |
|
| 2013 |
| ||
| (in millions, except percentages) |
| |||||
Net sales | $ | 2,737.6 |
|
| $ | 1,918.4 |
|
Income from operations |
| 158.2 |
|
|
| 142.7 |
|
Operating margin |
| 5.8 | % |
|
| 7.4 | % |
Purchase accounting inventory adjustments |
| 14.3 |
|
|
| — |
|
Restructuring, impairment and other charges - net |
| 35.1 |
|
|
| 12.8 |
|
Acquisition-related expenses |
| 0.1 |
|
|
| — |
|
| Net Sales for the Nine Months |
|
|
|
|
|
|
|
|
| |||||
| Ended September 30, |
|
|
|
|
|
|
|
|
| |||||
Reporting unit | 2014 |
|
| 2013 |
|
| $ Change |
|
| % Change |
| ||||
| (in millions, except percentages) |
| |||||||||||||
Commercial and digital print | $ | 1,159.4 |
|
| $ | 534.4 |
|
| $ | 625.0 |
|
|
| 117.0 | % |
Direct mail |
| 435.3 |
|
|
| 395.6 |
|
|
| 39.7 |
|
|
| 10.0 | % |
Office products |
| 355.4 |
|
|
| 182.9 |
|
|
| 172.5 |
|
|
| 94.3 | % |
Labels |
| 322.9 |
|
|
| 319.5 |
|
|
| 3.4 |
|
|
| 1.1 | % |
Statement printing |
| 290.3 |
|
|
| 297.7 |
|
|
| (7.4 | ) |
|
| (2.5 | %) |
Forms |
| 174.3 |
|
|
| 188.3 |
|
|
| (14.0 | ) |
|
| (7.4 | %) |
Total Variable Print | $ | 2,737.6 |
|
| $ | 1,918.4 |
|
| $ | 819.2 |
|
|
| 42.7 | % |
Net sales for the Variable Print segment for the nine months ended September 30, 2014 were $2,737.6 million, an increase of $819.2 million, or 42.7%, compared to 2013, including a $3.4 million, or 0.1% decrease due to changes in foreign exchange rates. Net sales increased due to the acquisitions of Consolidated Graphics and Esselte and higher volume in direct mail, in-store marketing materials and office products, partially offset by price pressures and lower volume in statement printing and forms. An analysis of net sales by reporting unit follows:
|
|
|
|
|
|
|
|
|
|
|
|
Variable Print segment income from operations increased $15.5 million for the nine months ended September 30, 2014 mainly due to higher volume resulting from the acquisitions of Consolidated Graphics and Esselte and cost control initiatives, partially offset by higher restructuring, impairment and other charges, $14.3 million of charges resulting from purchase accounting inventory adjustments from the Consolidated Graphics and Esselte acquisitions and price pressures. Operating margins decreased from 7.4% for the nine months ended September 30, 2013 to 5.8% for the nine months ended September 30, 2014, of which 1.2 percentage points were due to higher restructuring, impairment and other charges and 0.7 percentage points were due to the purchase accounting inventory adjustments. These decreases were partially offset by higher volume and cost control initiatives.
Strategic Services
| Nine Months Ended |
| |||||
| September 30, |
| |||||
| 2014 |
|
| 2013 |
| ||
| (in millions, except percentages) |
| |||||
Net sales | $ | 1,937.9 |
|
| $ | 1,834.4 |
|
Income from operations |
| 193.0 |
|
|
| 182.1 |
|
Operating margin |
| 10.0 | % |
|
| 9.9 | % |
Restructuring, impairment and other charges - net |
| 9.0 |
|
|
| 11.6 |
|
| Net Sales for the Nine Months |
|
|
|
|
|
|
|
|
| |||||
| Ended September 30, |
|
|
|
|
|
|
|
|
| |||||
Reporting unit | 2014 |
|
| 2013 |
|
| $ Change |
|
| % Change |
| ||||
| (in millions, except percentages) |
| |||||||||||||
Logistics | $ | 876.4 |
|
| $ | 795.0 |
|
| $ | 81.4 |
|
|
| 10.2 | % |
Financial |
| 779.8 |
|
|
| 779.6 |
|
|
| 0.2 |
|
|
| - |
|
Sourcing |
| 143.7 |
|
|
| 124.5 |
|
|
| 19.2 |
|
|
| 15.4 | % |
Digital and creative solutions |
| 138.0 |
|
|
| 135.3 |
|
|
| 2.7 |
|
|
| 2.0 | % |
Total Strategic Services | $ | 1,937.9 |
|
| $ | 1,834.4 |
|
| $ | 103.5 |
|
|
| 5.6 | % |
Net sales for the Strategic Services segment for the nine months ended September 30, 2014 were $1,937.9 million, an increase of $103.5 million, or 5.6%, compared to the nine months ended September 30, 2013, including a $0.4 million increase due to changes in foreign exchange rates. Net sales increased primarily due to higher volume in logistics, an increase in capital markets transactions activity in financial and higher volume in commercial print sourcing products and translation services in financial,capital markets transactions activity, partially offset by a declinedecrease in compliancefuel surcharges and investment management productslower volume in financial.digital and creative solutions. An analysis of net sales by reporting unit follows:
· | Logistics: Sales increased primarily due to higher volume in freight brokerage services, pass-through postage sales and international mail services, |
· | Financial: Sales increased |
· | Sourcing: Sales increased primarily due to higher print-management volume |
· | Digital and creative solutions: Sales |
Strategic Services segment income from operations increased $10.9decreased $0.4 million for the ninethree months ended September 30, 2014March 31, 2015, mainly due to unfavorable revenue mix across the segment, lower volume in digital and creative solutions and increased costs of transportation, partially offset by higher volume in logistics and increased volume in capital markets transactions activity,activity. Operating margins decreased from 8.9% to 8.2% as a result of unfavorable revenue mix across the segment, lower volume in digital and creative solutions and increased costs of transportation. These decreases were partially offset by higher costs of transportation, the prior year reversal of an earnout from an acquisition and higher depreciation and amortization expense. Operating margins increased slightly from 9.9% to 10.0% due to a favorable mixvolume in logistics partially offset by an increase in transportation costs and the prior year reversal of an earnout from an acquisition.capital markets transaction activity.
International
| Nine Months Ended |
|
| Three Months Ended |
| ||||||||||
| September 30, |
|
| March 31, |
| ||||||||||
| 2014 |
|
| 2013 |
|
| 2015 |
|
| 2014 |
| ||||
| (in millions, except percentages) |
|
| (in millions, except percentages) |
| ||||||||||
Net sales | $ | 1,909.0 |
|
| $ | 1,943.5 |
|
| $ | 556.2 |
|
| $ | 619.3 |
|
Income from operations |
| 79.6 |
|
|
| 99.5 |
|
|
| 12.1 |
|
|
| 30.2 |
|
Operating margin |
| 4.2 | % |
|
| 5.1 | % |
|
| 2.2 | % |
|
| 4.9 | % |
Restructuring, impairment and other charges - net |
| 7.5 |
|
|
| 12.4 |
| ||||||||
Restructuring, impairment and other charges-net |
|
| 7.7 |
|
|
| 1.6 |
| |||||||
Acquisition-related expenses |
| 0.4 |
|
|
| — |
|
|
| — |
|
|
| 0.2 |
|
|
| Net Sales for the Three Months Ended |
|
|
|
|
|
|
|
|
| |||||
|
| March 31, |
|
|
|
|
|
|
|
|
| |||||
Reporting unit |
| 2015 |
|
| 2014 |
|
| $ Change |
|
| % Change |
| ||||
|
| (in millions, except percentages) |
| |||||||||||||
Asia |
| $ | 164.9 |
|
| $ | 168.9 |
|
| $ | (4.0 | ) |
|
| (2.4 | %) |
Business process outsourcing |
|
| 107.1 |
|
|
| 116.7 |
|
|
| (9.6 | ) |
|
| (8.2 | %) |
Latin America |
|
| 74.1 |
|
|
| 108.7 |
|
|
| (34.6 | ) |
|
| (31.8 | %) |
Global Turnkey Solutions |
|
| 80.5 |
|
|
| 75.0 |
|
|
| 5.5 |
|
|
| 7.3 | % |
Europe |
|
| 74.8 |
|
|
| 91.4 |
|
|
| (16.6 | ) |
|
| (18.2 | %) |
Canada |
|
| 54.8 |
|
|
| 58.6 |
|
|
| (3.8 | ) |
|
| (6.5 | %) |
Total International |
| $ | 556.2 |
|
| $ | 619.3 |
|
| $ | (63.1 | ) |
|
| (10.2 | %) |
| Net Sales for the Nine Months |
|
|
|
|
|
|
|
|
| |||||
| Ended September 30, |
|
|
|
|
|
|
|
|
| |||||
Reporting unit | 2014 |
|
| 2013 |
|
| $ Change |
|
| % Change |
| ||||
| (in millions, except percentages) |
| |||||||||||||
Asia | $ | 556.2 |
|
| $ | 531.2 |
|
| $ | 25.0 |
|
|
| 4.7 | % |
Business process outsourcing |
| 352.3 |
|
|
| 372.1 |
|
|
| (19.8 | ) |
|
| (5.3 | %) |
Latin America |
| 315.4 |
|
|
| 358.3 |
|
|
| (42.9 | ) |
|
| (12.0 | %) |
Europe |
| 279.3 |
|
|
| 273.5 |
|
|
| 5.8 |
|
|
| 2.1 | % |
Global Turnkey Solutions |
| 238.9 |
|
|
| 231.5 |
|
|
| 7.4 |
|
|
| 3.2 | % |
Canada |
| 166.9 |
|
|
| 176.9 |
|
|
| (10.0 | ) |
|
| (5.7 | %) |
Total International | $ | 1,909.0 |
|
| $ | 1,943.5 |
|
| $ | (34.5 | ) |
|
| (1.8 | %) |
Net sales in the International segment for the ninethree months ended September 30, 2014March 31, 2015 were $1,909.0$556.2 million, a decrease of $34.5$63.1 million, or 1.8%10.2%, compared to the same period in 2013,2014, including a $7.5$50.5 million, or 0.4%8.3%, decrease due to changes in foreign exchange rates. The net sales decrease was also due to the 2014 bankruptcy liquidation of RRDA, which had net sales of $9.6 million for the three months ended March 31, 2014, and lower volume and price pressures in Asia, lower volume in Latin America partially due to a shift in timing of a customer’s annual project from the third quarter in 2013 to the fourth quarter in 2014, lower pass-through print management volume in business process outsourcing, the sale of MRM France during the fourth quarter of 2013 and the sale of GRES in the first quarter of 2014. These decreases were partially offset by increased labels, packaging products and book export volume in Asia, price increases driven by inflation in Latin America, higher volume in Global Turnkey Services and higher pass-through paper sales in Europe.Solutions. An analysis of net sales by reporting unit follows:
| Asia: Sales |
| Business process outsourcing: Sales decreased due to |
| Latin America: Sales decreased primarily due to the impact of the Venezuelan currency devaluation, changes in foreign exchange rates across the region and |
|
|
| Global Turnkey Solutions: Sales increased due to higher volume |
| Europe: Sales decreased primarily due to changes in foreign exchange rates and price pressures, partially offset by an increase in volume due to the acquisition of Consolidated Graphics and an increase in pass-through paper sales. |
● | Canada: Sales decreased due to changes in foreign exchange rates, |
International segment income from operations decreased $19.9$18.1 million primarily due to price pressures primarilythe impact of the currency devaluation in Asia,Venezuela, wage inflation in Latin America, Asia, and business process outsourcing, price pressures in Asia and Europe and changes in foreign exchange rates, and a shift in timing of a customer’s annual project from the third quarter in 2013 to the fourth quarter in 2014, partially offset by lower incentive compensation expense. Operating margins decreased from 4.9% for the three months ended March 31, 2014 to 2.2% for the three months ended March 31, 2015, of which 1.0 percentage points were due to higher volume in Asia and lower restructuring, impairment and other charges. OperatingThe remaining decrease in operating margins decreased from 5.1% to 4.2% due to price pressures andreflected wage inflation in Latin America, Asia, and Asia, mostly offset by higher volumebusiness process outsourcing, price pressures in Asia and lower restructuring, impairmentEurope and other charges.changes in foreign exchange rates.
Corporate
| Nine Months Ended |
|
| Three Months Ended |
| ||||||||||
| September 30, |
|
| March 31, |
| ||||||||||
| 2014 |
|
| 2013 |
|
| 2015 |
|
| 2014 |
| ||||
| (in millions) |
|
| (in millions) |
| ||||||||||
Operating expenses | $ | 54.7 |
|
| $ | 70.5 |
|
| $ | 29.5 |
|
| $ | 27.2 |
|
Restructuring, impairment and other charges - net |
| 4.4 |
|
|
| 5.2 |
| ||||||||
Restructuring, impairment and other charges-net |
|
| 0.6 |
|
|
| 0.6 |
| |||||||
Acquisition-related expenses |
| 7.7 |
|
|
| 2.2 |
|
|
| 10.5 |
|
|
| 7.5 |
|
Corporate operating expenses in the ninethree months ended September 30, 2014March 31, 2015 were $54.7$29.5 million, a decreasean increase of $15.8$2.3 million compared to the same period in 2013.2014. The decreaseincrease was driven by higher pensionan increase in acquisition-related expenses and other postretirement benefits plan income and lower healthcare costs, partially offset by higher bad debt expense, long-termlower incentive compensation expense and acquisition-related expenses.expense.
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 shareholders. Operating cash flows and the Credit Agreement, which was amended effective September 9, 2014 to increase the aggregate revolving commitments of the lenders from $1.15 billion toCompany’s $1.5 billion and to extend the expiration date from October 15, 2017 to September 9, 2019,senior secured revolving credit facility (the “Credit Agreement”) are the Company’s primary sources of liquidity and are expected to be used for, among other things, payment of interest and principal on the Company’s long-term debt obligations, distributions to shareholders that may be approved by the Board of Directors, acquisitions, capital expenditures as necessary to support productivity improvement and growth and completion of restructuring programs.
The following describes the Company’s cash flows for the ninethree months ended September 30, 2014March 31, 2015 and 2013.2014.
Cash Flows From Operating Activities
Operating cash inflows are largely attributable to sales of the Company’s products and services. Operating cash outflows are largely attributable to recurring expenditures for raw materials, labor, rent, interest, taxes and other operating activities.
Net cash provided byused in operating activities was $253.9$144.3 million for the ninethree months ended September 30, 2014,March 31, 2015, compared to $307.1$80.4 million used for the same period in 2013.2014. The decreaseincrease in net cash provided byused in operating activities reflected higher inventory levels, the timing of supplier and customer payments, higher payments for incentive compensation and cash collections, higheracquisition-related costs, partially offset by lower pension and other postretirement contributions and higher payments related to interest and incentive compensation.benefit plan contributions.
Cash Flows From Investing Activities
Net cash used in investing activities for the ninethree months ended September 30, 2014March 31, 2015 was $540.8$45.7 million compared to $126.1$427.4 million for the ninethree months ended September 30, 2013. NetMarch 31, 2014. During the three months ended March 31, 2014, net cash used for the acquisitions of Consolidated Graphics, Esselte and MultiCorpora was $380.4 million during the nine months ended September 30, 2014.$381.6 million. Capital expenditures were $164.5$48.5 million during the first ninethree months of 2014, an increase2015, a decrease of $24.9$0.5 million as compared to the same period of 2013, primarily due to the acquisition of Consolidated Graphics.2014. The Company expects that capital expenditures for 20142015 will be approximately $225 million to $250 million, compared to $216.6$223.6 million in 2013.2014.
Cash Flows From Financing Activities
Net cash used in financing activities for the ninethree months ended September 30, 2014March 31, 2015 was $446.7$47.6 million compared to $140.9net cash used in financing activities of $196.8 million in the same period in 2013. Cash on hand and borrowings under2014. During the Credit Agreement were used to pay $258.2 million of the 4.95% senior notes that matured during the second quarter. Additionally, during the ninethree months ended September 30,March 31, 2014, the Company received proceeds of $400.0 million from the issuance of 6.00% senior notes due April 1, 2024, which were used to repurchase $211.1$211.0 million of the 8.25% senior notes due March 15, 2019, $100.0 million of the 7.25% senior notes due May 15, 2018, and $50.0 million of the 7.625% senior notes due June 15, 2020. The Company also repaid $118.3 million of debt and interest assumed from the Consolidated Graphics acquisition during the ninethree months ended September 30,March 31, 2014. During the nine months ended September 30, 2013, the Company received proceeds of $847.8 million from the issuance of 7.875% senior notes due March 15, 2021 and 7.00% senior notes due February 15, 2022, which were used to repurchase $273.5 million of the 6.125% senior notes due January 15, 2017, $250.0 million of the 7.25% senior notes due May 15, 2018, $130.2 million of the 8.60% senior notes due August 15, 2016 and $100.0 million of the 5.50% senior notes due May 15, 2015 and to reduce borrowing under the Credit Agreement.
LIQUIDITY
Cash and cash equivalents of $269.2$268.7 million as of September 30, 2014March 31, 2015 included $40.1$65.1 million in the U.S. and $229.1$203.6 million at international locations. In the fourth quarter of 2014, theThe Company’s foreign subsidiaries are expected to make intercompany payments to the U.S. of approximately $40 million from foreign cash balances available at September 30, 2014. In aggregate, approximately $240$250.0 million in payments are expected to be made in 20142015 and in future years in satisfaction of intercompany obligations. The Company has recognized deferred tax liabilities of $5.4$2.6 million as of September 30, 2014March 31, 2015 related to local taxes on certain foreign earnings that are not considered to be permanently reinvested. Certain other cash balances of foreign subsidiaries may be subject to U.S. or local country taxes if repatriated to the U.S. In addition, repatriation of some foreign cash balances is further restricted by local laws. Management regularly evaluates whether foreign earnings are expected to be permanently reinvested. This evaluation requires judgment about the future operating and liquidity needs of the Company and its foreign subsidiaries. Changes in economic and business conditions, foreign or U.S. tax laws, or the Company’s financial situation could result in changes to these judgments and the need to record additional tax liabilities.
Included in cash and cash equivalents of $269.2$268.7 million at September 30, 2014March 31, 2015 were $50.6$14.7 million of short-term investments. These investments, which primarily consist of short-term deposits and money market funds thatfunds. These investments are held at institutions with sound credit ratings and are expected to be highly liquid.
The Company’s debt maturities as of September 30, 2014March 31, 2015 are shown in the following table:
| Debt Maturity Schedule |
| Debt Maturity Schedule |
| ||||||||||||||||||||||||||||||||||||||||||||||||||
| Total |
|
| 2014 |
|
| 2015 |
|
| 2016 |
|
| 2017 |
|
| 2018 |
|
| Thereafter |
| Total |
|
| 2015 |
|
| 2016 |
|
| 2017 |
|
| 2018 |
|
| 2019 |
|
| Thereafter |
| ||||||||||||||
| (in millions) |
| (in milions) |
| ||||||||||||||||||||||||||||||||||||||||||||||||||
Senior notes, debentures and borrowings under the Credit Agreement (a) | $ | 3,762.4 |
|
| $ | 130.0 |
|
| $ | 200.0 |
|
| $ | 219.8 |
|
| $ | 251.5 |
|
| $ | 250.0 |
|
| $ | 2,711.1 |
| |||||||||||||||||||||||||||
Senior notes and debentures and borrowings under the Credit Agreement (a) | $ | 3,632.4 |
|
| $ | 200.0 |
|
| $ | 219.8 |
|
| $ | 251.5 |
|
| $ | 250.0 |
|
| $ | 411.1 |
|
| $ | 2,300.0 |
| |||||||||||||||||||||||||||
Capital lease obligations |
| 2.1 |
|
|
| 0.1 |
|
|
| 1.1 |
|
|
| 0.8 |
|
|
| 0.1 |
|
|
| — |
|
|
| — |
|
| 1.6 |
|
|
| 0.8 |
|
|
| 0.7 |
|
|
| 0.1 |
|
| — |
|
| — |
|
| — |
| |||
Miscellaneous debt obligations |
| 2.6 |
|
|
| 2.6 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
| 2.2 |
|
|
| 2.2 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
| |||||
Total | $ | 3,767.1 |
|
| $ | 132.7 |
|
| $ | 201.1 |
|
| $ | 220.6 |
|
| $ | 251.6 |
|
| $ | 250.0 |
|
| $ | 2,711.1 |
| $ | 3,636.2 |
|
| $ | 203.0 |
|
| $ | 220.5 |
|
| $ | 251.6 |
|
| $ | 250.0 |
|
| $ | 411.1 |
|
| $ | 2,300.0 |
|
(a) | Excludes a discount of |
The Company has a senior secured revolving Credit Agreement which was amended effective September 9, 2014 to increase the aggregate revolving commitments of the lenders from $1.15 billion to $1.5 billion and to extend the expiration date from October 15, 2017 to September 9, 2019. Additionally, in order to provide greater flexibility due to the increased size of the Company as a result of the acquisitions of Consolidated Graphics and Esselte, certain terms of the Credit Agreement were amended effective April 11, 2014 (see Exhibits 4.7 and 4.8 for the amendments).
On April 1, 2014, cashCash on hand and borrowings under the Credit Agreement werewill be used to pay the $258.2$200 million 4.95%5.50% senior notes that matured on April 1, 2014. In conjunction with the debt maturity, the related interest rate swaps with a notional amount of $258.0 million also matured.due May 15, 2015.
Borrowings under the Credit Agreement bear interest at a base or Eurocurrency rate plus an applicable margin determined at the time of the borrowing. In addition, the Company pays facility commitment fees which fluctuate dependent on the Credit Agreement’s credit ratings. The Credit Agreement is used for general corporate purposes, including acquisitions and letters of credit. The Company’s obligations under the Credit Agreement are guaranteed by its material and certain other domestic subsidiaries and are secured by a pledge of the equity interests of certain subsidiaries, including most of its domestic subsidiaries, and a security interest in substantially all of the domestic current assets equipment and mortgages of certain domestic real property of the Company.
The Credit Agreement is subject to a number of covenants, including a minimum interest coverage ratioInterest Coverage Ratio and a maximum leverage ratio,Leverage Ratio, as defined 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.
There were $130.0 million inno borrowings under the Credit Agreement as of September 30, 2014.March 31, 2015. Based on the Company’s results of operations for the twelve months ended September 30, 2014March 31, 2015 and existing debt, the Company would have had the ability to utilize an additional $1.2approximately $1.0 billion of the $1.5 billion Credit Agreement and not have been in violation of the terms of the Credit Agreement.agreement.
The current availability as of September 30, 2014 under the Credit Agreement as of March 31, 2015 is shown in the table below:
|
| September 30, 2014 |
|
| March 31, 2015 |
| ||
Availability |
| (in millions) |
|
| (in millions) |
| ||
Committed Credit Agreement |
| $ | 1,500.0 |
|
| $ | 1,500.0 |
|
Availability reduction from covenants |
|
| 178.2 |
|
|
| 508.3 |
|
|
| $ | 1,321.8 |
|
| $ | 991.7 |
|
Usage |
|
|
|
|
|
|
|
|
Borrowings under the Credit Agreement |
|
| 130.0 |
|
|
| — |
|
Impact on availability related to outstanding letters of credit |
|
| — |
|
|
| — |
|
|
|
| 130.0 |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
Current availability at September 30, 2014 |
| $ | 1,191.8 |
| ||||
Current availability at March 31, 2015 |
| $ | 991.7 |
|
The Company was in compliance with its debt covenants as of September 30, 2014,March 31, 2015, and expects to remain in compliance based on management’s estimates of operating and financial results for 20142015 and the foreseeable future. However, declines in market and economic conditions or demand for certain of the Company’s products and services could impact the Company’s ability to remain in compliance with its debt covenants in future periods. As of September 30, 2014,March 31, 2015, 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 seventeen U.S. and international financial institutions.
As of September 30, 2014,March 31, 2015, the Company had $106.1$92.0 million in outstanding letters of credit and bank guarantees, of which $57.6$55.9 million were issued under the Credit Agreement. The letters of credit used under the Credit Agreement did not reduce availability under the Credit Agreement as of March 31, 2015, as the amounts issued were less than the reduction in availability from the Leverage Ratio covenant. As of September 30, 2014,March 31, 2015, the Company also had $190.7$173.9 million in other uncommitted credit facilities, primarily outside the U.S. (the “Other Facilities”). As of September 30, 2014,March 31, 2015, bank acceptance drafts, letters of credit and guarantees and bank acceptance drafts of $77.9$44.6 million were issued, and reduced availability, under the Company’s Other Facilities. Total borrowings under the Credit Agreement and the Other Facilities (the “Combined Facilities”) were $132.6$2.2 million as of September 30, 2014.March 31, 2015.
The Company’s Standard & Poor’s Rating Services (“S&P”) and Moody’s Investor Service (“Moody’s”) credit ratings as of September 30, 2014March 31, 2015 are shown in the table below:
| S&P |
| Moody's |
Long-term corporate credit rating | BB-, stable outlook |
| Ba2, negative outlook |
Senior unsecured debt | BB- |
| Ba3 |
Credit Agreement | BB+ |
| Baa2 |
As a result of previous downgrades by Moody’s and S&P, the interest rate on the Company’s 11.25% senior notes due February 1, 2019 was 12.75% as of September 30, 2014 and December 31, 2013. The applicable margin used in the calculation of interest on borrowings under the Credit Agreement and rate for the related facility commitment fees fluctuate dependent on the Credit Agreement’s credit ratings. The terms and conditions of future borrowings may also be impacted as a result of ratings downgrades.
Dividends
During the ninethree months ended September 30, 2014,March 31, 2015, the Company paid cash dividends of $151.1$52.0 million. On October 29, 2014,April 16, 2015, the Board of Directors of the Company declared a quarterly cash dividend of $0.26 per common share payable on DecemberJune 1, 20142015 to RR Donnelley shareholders of record on November 14, 2014.
The April 11, 2014 amendment to the Credit Agreement increased the allowable annual dividend from $200.0 million to $225.0 million. Additional dividends continue to be allowed subject to certain conditions. The Company’s Board of Directors must review and approve future dividend payments and will determine whether to declare additional dividends based on the Company’s operating performance, expected future cash flows, debt levels, liquidity needs and investment opportunities.May 15, 2015.
Acquisitions and Dispositions
During the nine monthsyear ended September 30,December 31, 2014, the Company paid $380.4$380.8 million of total cash purchase prices, net of cash acquired, to purchasesubstantially all for the acquisitions of Consolidated Graphics, Esselte and MultiCorpora. The Company financed the cash portion of these acquisitions with a combination of cash on hand, including net proceeds from the $350.0 million 6.50% senior note issuance on November 12, 2013, and borrowings under the Credit Agreement.
During the nine monthsyear ended September 30,December 31, 2014, the Company sold the assets and liabilities of Journalism Online, a provider of online subscription management services, for net proceeds of $10.7 million, of which $7.7$9.3 million was received as of September 30, 2014.March 31, 2015. The Company also sold the assets and liabilities of GRES, its commercial and residential real estate advisory services, for net proceeds of $2.3$1.8 million.
During the three months ended December 31, 2013, the Company sold the assets and liabilities of MRM France, resulting in cash incentive payments due to the purchaser of $18.8 million, of which $16.4 million was paid as of September 30, 2014 with the remaining balance to be paid by January 2016.
Debt Issuances
On March 20, 2014, the Company issued $400.0 million of 6.00% senior notes due April 1, 2024. Interest on the notes is payable semi-annually on April 1 and October 1, and commenced on October 1, 2014. The net proceeds from the offering along with borrowings under the Credit Agreement were used to repurchase $211.1$211.0 million of the 8.25% senior notes due March 15, 2019, $100.0 million of the 7.25% senior notes due May 15, 2018 and $50.0 million of the 7.625% senior notes due June 15, 2020.
On November 12, 2013, the Company issued $350.0 million of 6.50% senior notes due November 15, 2023. Interest on the notes is payable semi-annually on May 15 and November 15 of each year. The net proceeds from the offering, along with cash on hand, were used to finance the cash portion of the acquisition of Consolidated Graphics.
On August 26, 2013, the Company issued $400.0 million of 7.00% senior notes due February 15, 2022. Interest on the notes is payable semi-annually on February 15 and August 15 of each year. The net proceeds from the offering were used to repurchase $200.0 million of the 7.25% senior notes due May 15, 2018, $100.0 million of the 5.50% senior notes due May 15, 2015 and $100.0 million of the 6.125% senior notes due January 15, 2017.
On March 14, 2013, the Company issued $450.0 million of 7.875% senior notes due March 15, 2021. Interest on the notes is payable semi-annually on March 15 and September 15 of each year. The net proceeds from the offering were used to repurchase $173.5 million of the 6.125% senior notes due January 15, 2017, $130.2 million of the 8.60% senior notes due August 15, 2016 and $50.0 million of the 7.25% senior notes due May 15, 2018 and to reduce borrowings under the Credit Agreement.
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 September 30, 2014,March 31, 2015, the Company was exposed to interest rate fluctuations on variable-interest borrowings of $322.6$192.2 million, including $190.0 million notional amount of interest rate swap agreements (See(see Note 15, Derivatives, to the Condensed Consolidated Financial Statements) and $132.6$2.2 million in borrowings under the Combined Facilities and other long-term debt.Facilities. Including the effect of the fixed to floating interest rate swaps, approximately 90%95% of the Company’s outstanding term debt was comprised of fixed-rate debt as of September 30, 2014.March 31, 2015.
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 September 30,March 31, 2015 and 2014 and 2013 by approximately $103.9$92.3 million and $99.9$106.7 million, respectively.
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 spot and forward contracts to hedge the currency risk. As of September 30, 2014March 31, 2015 and December 31, 2013,2014, the aggregate notional amount of outstanding foreign exchange forward contracts was approximately $349.1$342.9 million and $372.1$377.2 million, respectively (see Note 15, Derivatives, to the Condensed Consolidated Financial Statements). Net unrealized gains from these foreign exchange forward contracts were $20.3$36.9 million as of September 30, 2014. Net unrealized losses from these foreign exchange forward contracts were $1.1and $6.5 million at March 31, 2015 and December 31, 2013.2014, respectively. The Company does not use derivative financial instruments for trading or speculative purposes.
OTHER INFORMATION
Litigation and Contingent Liabilities
For a discussion of certain litigation involving the Company, see Note 13, Commitments and Contingencies, to the Condensed Consolidated Financial Statements and Part II, Item 1, Legal Proceedings.Statements.
New Accounting Pronouncements and Pending Accounting Standards
Accounting standards adopted during the nine months ended September 30, 2014 and pendingRecently issued accounting standards and their estimated effect on the Company’s consolidated financial statements are described in Note 18, New Accounting Pronouncements, to the Condensed Consolidated Financial Statements.
CAUTIONARY STATEMENT
The Company has made forward-looking statements in this Quarterly Report on Form 10-Q 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 “may,” “will,” “should,” “might,” “could,” “would,” “potential,” “possible,” “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “hope” or similar expressions. The Company claims the protection of the Safe Harbor for Forward-Looking Statements contained in the Private Securities Litigation Reform Act of 1995 for all forward-looking statements.
Forward-looking statements are not guarantees of performance. The following important factors, in addition to those discussed elsewhere in this Quarterly Report on Form 10-Q, could affect the future results of the Company and could cause those results or other outcomes to differ materially from those expressed or implied in our forward-looking statements:
· | the volatility and disruption of the capital and credit markets, and adverse changes in the global economy; |
· | successful execution of acquisitions and negotiation of future acquisitions; |
· | the ability of the Company to integrate operations of acquisitions successfully and achieve enhanced earnings or effect cost |
· | the ability to implement comprehensive plans for the integration of sales forces, cost containment, asset rationalization, systems integration and other key strategies; |
· | the ability to divest non-core businesses; |
· | future growth rates in the Company’s core businesses; |
· | competitive pressures in all markets in which the Company operates; |
· | the Company’s ability to access debt and the capital markets and the ability of its counterparties to perform their contractual obligations under the Company’s lending and insurance agreements; |
· | changes in technology, including electronic substitution and migration of paper based documents to digital data formats; |
· | factors that affect customer demand, including changes in postal rates, postal regulations and service levels, changes in the capital markets, changes in advertising markets, customers’ budgetary constraints and changes in customers’ short-range and long-range plans; |
· | the ability to gain customer acceptance of the Company’s new products and technologies; |
· | the ability to secure and defend intellectual property rights and, when appropriate, license required technology; |
· | customer expectations and financial strength; |
· | performance issues with key suppliers; |
· | changes in the availability or costs of key materials (such as ink, paper and fuel) or in prices received for the sale of by-products; |
· | changes in ratings of the Company or the Company’s debt securities; |
· | the ability of the Company to comply with covenants under its Credit Agreement and indentures governing its debt securities; |
· | the ability to generate cash flow or obtain financing to fund growth; |
· | the effect of inflation, changes in currency exchange rates and changes in interest rates; |
· | the effect of changes in laws and regulations, including changes in accounting standards, trade, tax, environmental compliance (including the emission of greenhouse gases and other air pollution controls), health and welfare benefits (including the Patient Protection and Affordable Care Act, as modified by the Health Care and Education Reconciliation Act, and further healthcare reform initiatives), price controls and other regulatory matters and the cost, which could be substantial, of complying with these laws and regulations; |
· | contingencies related to actual or alleged environmental contamination; |
· | the retention of existing, and continued attraction of additional customers and key employees; |
· | the effect of a material breach of security of any of the Company’s or its vendors’ systems; |
· | the failure to properly use and protect customer information and data; |
· | the failure to properly protect the Company’s and its employees’ information and data; |
· | the effect of labor disruptions or shortages; |
· | the effect of economic and political conditions on a regional, national or international basis; |
· | the effect of economic weakness and constrained advertising; |
· | uncertainty about future economic conditions; |
· | the possibility of future terrorist activities or the possibility of a future escalation of hostilities in Eastern Europe, the Middle East or elsewhere; |
· | the possibility of a regional or global health pandemic outbreak; |
· | disruptions to the Company’s operations resulting from possible natural disasters, interruptions in utilities and similar events; |
· | adverse outcomes of pending and threatened litigation; and |
· | other risks and uncertainties detailed from time to time in the Company’s filings with the SEC. |
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 Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q to reflect any new events or any change in conditions or circumstances.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
See Item 2 of Part I under “Management of Market Risk.” There have been no significant changes to the Company’s market risk since December 31, 2013.2014. For a discussion of exposure to market risk, refer to Part II, Item 7A – Quantitative and Qualitative Disclosures about Market Risk, set forthfor in the Company’s 20132014 Form 10-K.
Item 4. Controls and Procedures
(a) | 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 September 30, 2014,March 31, 2015, 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 September 30, 2014March 31, 2015 were effective in ensuring information required to be disclosed in our 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 our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
(b) | Changes in internal control over financial reporting. |
The Company acquired Consolidated Graphics on January 31, 2014. Consolidated Graphics operated with a significantly different internal control environment than that of RR Donnelley. The Company’s evaluation of Consolidated Graphics’ internal controls over financial reporting and integration of Consolidated Graphics into the Company’s internal control structure is ongoing. Otherwise, thereThere have not been any changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) that occurred during the quarter ended September 30, 2014March 31, 2015 that had materially affected, or were reasonably likely to materially affect, the Company’s internal control over financial reporting.
For a discussion of certain litigation involving the Company, see Note 13, Commitments and Contingencies, to the Condensed Consolidated Financial Statements.
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
There were no repurchases during the three months ended September 30, 2014.
ISSUER PURCHASES OF EQUITY SECURITIES |
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Period | Total Number of Shares Purchased (a) |
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| Average Price Paid per Share |
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| Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
| Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs |
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January 1, 2015 - January 31, 2015 | — |
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| $ | — |
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| — |
| $ | — |
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February 1, 2015 - February 28, 2015 | — |
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| — |
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| — |
| $ | — |
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March 1, 2015 - March 31, 2015 |
| 434,197 |
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| 19.05 |
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| — |
| $ | — |
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Total |
| 434,197 |
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| $ | 19.05 |
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| — |
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(a) | Shares withheld for tax liabilities upon vesting of equity awards |
Effective April 11, 2014, theThe Credit Agreement was amended, increasing the allowablegenerally allows annual dividend from $200.0 millionpayments of up to $225.0 million. Additionalmillion in aggregate, though additional dividends continue tomay be allowed subject to certain conditions. See Exhibits 4.6, 4.7For more detail refer to the Credit Agreement and 4.8 for additional details.its amendments filed as exhibits to this Quarterly Report on Form 10-Q.
Item 4: Mine Safety Disclosures
Not applicable
2.1 | Agreement and Plan of Merger by and among Courier Corporation, R. R. Donnelley & Sons Company, Raven Solutions, Inc. and Raven Ventures LLC, dated as of February 5, 2015 (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K dated February 11, 2015) | |
3.1 |
| Restated Certificate of Incorporation (incorporated by reference to Exhibit A to the Company’s Current Report on Form 8-K dated September 26, 2014, filed on September 26, 2014) |
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3.2 |
| By-Laws of R.R. Donnelley & Sons Company, as amended as of February 20, 2014 (incorporated by reference to Exhibit 3.2 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013, filed on February 26, 2014) |
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4.1 |
| Instruments, other than those defining the rights of holders of long-term debt not registered under the Securities Exchange Act of 1934 of the registrant and of all subsidiaries for which consolidated or unconsolidated financial statements are required to be filed are being omitted pursuant to paragraph (4)(iii)(A) of Item 601 of Regulation S-K. Registrant agrees to furnish a copy of any such instrument to the Commission upon request. |
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4.2 |
| Indenture dated as of November 1, 1990 between the Company and Citibank, N.A., as Trustee (incorporated by reference to Exhibit 4 filed with the Company’s Form SE filed on March 26, 1992) |
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4.3 |
| Indenture dated as of March 10, 2004 between the Company and LaSalle National Bank Association, as Trustee (incorporated by reference to Exhibit 4.4 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2004, filed on May 10, 2004) |
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4.4 |
| Indenture dated as of May 23, 2005 between the Company and LaSalle Bank National Association, as Trustee (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K dated May 23, 2005, filed on May 25, 2005) |
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4.5 |
| Indenture dated as of January 3, 2007 between the Company and LaSalle Bank National Association, as Trustee (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-3 filed on January 3, 2007) |
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4.6 |
| Credit Agreement dated October 15, 2012, among the Company, as the borrower, certain of its subsidiaries, as guarantors, the lenders party thereto, and Bank of America, N.A., as administrative agent (incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K dated October 15, 2012, filed on October 16, 2012) |
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4.7 |
| Amendment No. 1 to the Credit Agreement and Amendment No. 1 to the Security Agreement dated April 11, 2014, among the Company, as the borrower, certain of its subsidiaries, as guarantors, the lenders party thereto, and Bank of America, N.A., as administrative agent (incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K dated April 11, 2014, filed on April 14, 2014) |
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4.8 |
| Amendment No. 2 to the Credit Agreement dated September 9, 2014, among the Company, as the borrower, certain of its subsidiaries, as guarantors, the lenders party thereto, and Bank of America, N.A., as administrative agent (incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K dated September 9, 2014, filed on September 15, 2014) |
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10.1 |
| Policy on Retirement Benefits, Phantom Stock Grants and Stock Options for Directors (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2008, filed on August 6, 2008)* |
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10.2 |
| Non-Employee Director Compensation Plan |
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10.3 |
| Directors’ Deferred Compensation Agreement, as amended (incorporated by reference to Exhibit 10(b) to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, filed on November 12, 1998)* |
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10.4 |
| Amended and Restated Non-Qualified Deferred Compensation Plan |
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10.5 |
| 2012 Performance Incentive Plan (incorporated by reference to Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013, filed on July 30, 2013)* |
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10.6 |
| 2004 Performance Incentive Plan (incorporated by reference to Exhibit 10.9 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2008, filed on February 25, 2009)* |
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10.7 |
| Amended and Restated R.R. Donnelley & Sons Company Unfunded Supplemental Benefit Plan (incorporated by reference to Exhibit 10.11 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2010, filed on November 3, 2010)* |
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10.8 |
| Amendment to Amended and Restated R.R. Donnelley & Sons Company Unfunded Supplemental Benefit Plan (incorporated by reference to Exhibit 10.12 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2010, filed on November 3, 2010)* |
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10.9 |
| Supplemental Executive Retirement Plan for Designated Executives—B (incorporated by reference to Exhibit 10.1 to Moore Wallace Incorporated’s (Commission file number 1-8014) Quarterly Report on Form 10-Q for the quarter ended September 30, 2001, filed on November 14, 2001)* |
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10.10 |
| Form of Option Agreement for certain executive officers (incorporated by reference to Exhibit 10.17 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004, filed on March 14, 2005)* |
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10.11 |
| Form of Restricted Stock Unit Award Agreement for certain executive officers, as amended (incorporated by reference to Exhibit 10.17 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008, filed on February 25, 2009)* |
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10.12 |
| Form of Restricted Stock Unit Award Agreement for certain executive officers (filed herewith)* |
10.13 | Form of Restricted Stock Unit Award Agreement for directors (incorporated by reference to Exhibit 10.21 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004, filed on March 14, 2005)* | |
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| Form of Restricted Stock Unit Award Agreement for directors (incorporated by reference to Exhibit 10.25 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007, filed on February 27, 2008)* |
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| Form of Amendment to Director Restricted Stock Unit Awards dated May 21, 2009 (incorporated by reference to Exhibit 10.23 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2009, filed on August 5, 2009)* |
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| Form of Amendment to Director Restricted Stock Unit Awards (incorporated by reference to Exhibit 10.22 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008, filed on February 25, 2009)* |
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| Form of Restricted Stock Unit Award Agreement for directors (incorporated by reference to Exhibit 10.23 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008, filed on February 25, 2009)* |
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| Form of Director Restricted Stock Unit Awards (incorporated by reference to Exhibit 10.26 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2009, filed on August 5, 2009)* |
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| Form of Performance Share Unit Award Agreement (filed herewith)* |
10.20 | Form of Performance Share Unit Award Agreement (incorporated by reference to Exhibit | |
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| Form of Performance Share Unit Award Agreement (incorporated by reference to Exhibit 10.20 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2013, filed on April 25, 2013)* |
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| Form of Cash Retention Award Agreement (incorporated by reference to Exhibit 10.21 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2013, filed on April 25, 2013)* |
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| Form of Cash Bonus Award Agreement for certain executive officers (incorporated by reference to Exhibit 10.30 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, filed on May 2, 2012)* |
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| Form of Long Term Incentive Cash Award Agreement (incorporated by reference to Exhibit 10.22 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014, filed on May 1, 2014)* |
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| Amended and Restated Employment Agreement dated as of November 30, 2008 between the Company and Thomas J. Quinlan, III (incorporated by reference to Exhibit 10.24 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008, filed on February 25, 2009)* | |
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| Amended and Restated Employment Agreement dated as of November 28, 2008 between the Company and Daniel L. Knotts (incorporated by reference to Exhibit 10.26 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008, filed on February 25, 2009)* |
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| Amended and Restated Employment Agreement dated as of December 18, 2008 between the Company and Suzanne S. Bettman (incorporated by reference to Exhibit 10.27 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008, filed on February 25, 2009)* |
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10.29 |
| Amended and Restated Employment Agreement dated as of May 3, 2011 between the Company and Daniel N. Leib (incorporated by reference to Exhibit 10.34 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2011, filed |
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10.30 |
| Amended and Restated Employment Agreement dated as of November 21, 2008 between the Company and Andrew B. Coxhead (incorporated by reference to Exhibit 10.30 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2013, filed |
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10.31 |
| Form of Amended and Restated Indemnification Agreement for directors (incorporated by reference to Exhibit 10.31 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013, filed on February 26, 2014)* |
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10.32 |
| Amended and Restated |
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14 |
| Code of Ethics (incorporated by reference to Exhibit 14 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003, filed on March 1, 2004) |
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21 |
| Subsidiaries of the Company (incorporated by reference to Exhibit 21 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, |
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31.1 |
| Certification by Thomas J. Quinlan, III, President and Chief Executive Officer, required by Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934 (filed herewith) |
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31.2 |
| Certification by Daniel N. Leib, Executive Vice President and Chief Financial Officer, required by Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934 (filed herewith) |
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32.1 |
| Certification by Thomas J. Quinlan, III, President and 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) |
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32.2 |
| Certification by Daniel N. Leib, Executive Vice President and Chief Financial 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) |
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101.INS |
| XBRL Instance Document |
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101.SCH |
| XBRL Taxonomy Extension Schema Document |
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101.CAL |
| XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF |
| XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB |
| XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE |
| XBRL Taxonomy Extension Presentation Linkbase Document |
* | Management contract or compensatory plan or arrangement. |
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
R.R. DONNELLEY & SONS COMPANY | ||
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By: |
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| Daniel N. Leib |
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| Executive Vice President and Chief Financial Officer |
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By: |
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| Andrew B. Coxhead |
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| Senior Vice President and Chief Accounting Officer |
Date: November 5, 2014May 7, 2015
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