UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 20162017

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-4694

 

R.R. DONNELLEY & SONS COMPANY

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

36-1004130

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

35 West Wacker Drive,

Chicago, Illinois

 

60601

(Address of principal executive offices)

 

(Zip code)

(312) 326-8000

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes       No  

Indicate by check mark whether the registrant has submitted electronically 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      No  

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

 

  

Accelerated filer

 

 

 

 

  

 

 

 

Non-Accelerated filer

 

  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

Emerging growth company

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

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

Yes      No  

As of October 31, 2016, 69.827, 2017, 70.1 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, 20162017

TABLE OF CONTENTS

 

 

 

 

Page

 

 

PART I

 

FINANCIAL INFORMATION

 

 

 

 

 

Item 1:

 

Condensed Consolidated Financial Statements (unaudited)

3

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 20162017 and December 31, 20152016

3

 

 

 

 

 

 

Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 20162017 and 20152016

4

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 20162017 and 20152016

5

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 20162017 and 20152016

6

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

7

 

 

 

 

Item 2:

 

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

3128

 

 

 

 

Item 3:

 

Quantitative and Qualitative Disclosures About Market Risk

5952

 

 

 

 

Item 4:

 

Controls and Procedures

5952

 

 

 

 

 

 

PART II

 

 

 

 

 

OTHER INFORMATION

 

 

 

Item 1:

 

Legal Proceedings

59

Item 1A:

Risk Factors

5953

 

 

 

 

Item 2:

 

Unregistered Sales of Equity Securities and Use of Proceeds

6853

 

 

 

 

Item 4:

 

Mine Safety Disclosures

6853

 

 

 

 

Item 6:

 

Exhibits

6954

 

 

 

 

Signatures

7455

 

 

 

 

2


PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

 

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

CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions, except per share data)

(UNAUDITED)

 

 

September 30,

 

 

December 31,

 

 

September 30,

 

 

December 31,

 

 

2016

 

 

2015

 

 

2017

 

 

2016

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

411.8

 

 

$

389.6

 

 

$

225.8

 

 

$

317.5

 

Receivables, less allowances for doubtful accounts of $53.6 in 2016 (2015 - $41.5)

 

 

2,109.3

 

 

 

2,000.4

 

Inventories (Note 3)

 

 

651.1

 

 

 

592.0

 

Receivables, less allowances for doubtful accounts of $33.0 in 2017 (2016 - $35.9)

 

 

1,382.9

 

 

 

1,331.3

 

Inventories (Note 4)

 

 

457.1

 

 

 

386.8

 

Prepaid expenses and other current assets

 

 

140.3

 

 

 

119.7

 

 

 

152.8

 

 

 

136.7

 

Investment in LSC and Donnelley Financial (Note 2)

 

 

 

 

 

 

328.7

 

Total current assets

 

 

3,312.5

 

 

 

3,101.7

 

 

 

2,218.6

 

 

 

2,501.0

 

Property, plant and equipment-net (Note 4)

 

 

1,342.3

 

 

 

1,448.1

 

Goodwill (Note 5)

 

 

1,787.3

 

 

 

1,743.6

 

Other intangible assets-net (Note 5)

 

 

403.3

 

 

 

438.0

 

Property, plant and equipment-net (Note 5)

 

 

624.6

 

 

 

650.3

 

Goodwill (Note 6)

 

 

587.6

 

 

 

602.0

 

Other intangible assets-net (Note 6)

 

 

150.5

 

 

 

171.9

 

Deferred income taxes

 

 

211.1

 

 

 

178.2

 

 

 

123.2

 

 

 

108.9

 

Other noncurrent assets

 

 

416.0

 

 

 

369.7

 

 

 

252.2

 

 

 

234.7

 

Total assets

 

$

7,472.5

 

 

$

7,279.3

 

 

$

3,956.7

 

 

$

4,268.8

 

LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,172.7

 

 

$

1,322.3

 

 

$

996.5

 

 

$

985.3

 

Accrued liabilities

 

 

793.3

 

 

 

780.4

 

 

 

463.9

 

 

 

541.7

 

Short-term and current portion of long-term debt (Note 13)

 

 

255.6

 

 

 

234.6

 

Short-term and current portion of long-term debt (Note 15)

 

 

17.9

 

 

 

8.2

 

Total current liabilities

 

 

2,221.6

 

 

 

2,337.3

 

 

 

1,478.3

 

 

 

1,535.2

 

Long-term debt (Note 13)

 

 

3,635.3

 

 

 

3,188.3

 

Long-term debt (Note 15)

 

 

2,232.2

 

 

 

2,379.2

 

Pension liabilities

 

 

554.7

 

 

 

514.4

 

 

 

103.2

 

 

 

119.4

 

Other postretirement benefits plan liabilities

 

 

163.3

 

 

 

168.8

 

 

 

130.2

 

 

 

134.1

 

Other noncurrent liabilities

 

 

359.2

 

 

 

373.9

 

 

 

175.8

 

 

 

193.1

 

Total liabilities

 

 

6,934.1

 

 

 

6,582.7

 

 

 

4,119.7

 

 

 

4,361.0

 

Commitments and Contingencies (Note 12)

 

 

 

 

 

 

 

 

EQUITY (Note 8)

 

 

 

 

 

 

 

 

RR Donnelley stockholders' equity

 

 

 

 

 

 

 

 

Commitments and Contingencies (Note 14)

 

 

 

 

 

 

 

 

EQUITY (Note 10)

 

 

 

 

 

 

 

 

RRD stockholders' equity

 

 

 

 

 

 

 

 

Preferred stock, $1.00 par value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Authorized: 2.0 shares; Issued: None

 

 

 

 

 

 

 

 

 

 

 

 

Common stock, $0.01 par value in 2016 (2015 - $1.25)

 

 

 

 

 

 

 

 

Common stock, $0.01 par value

 

 

 

 

 

 

 

 

Authorized: 165.0 shares;

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issued: 89.0 shares in 2016 and 2015

 

 

0.9

 

 

 

111.2

 

Issued: 89.0 shares in 2017 and 2016

 

 

0.9

 

 

 

0.9

 

Additional paid-in-capital

 

 

3,473.8

 

 

 

3,386.8

 

 

 

3,450.7

 

 

 

3,468.5

 

Accumulated deficit

 

 

(765.6

)

 

 

(620.6

)

 

 

(2,160.6

)

 

 

(2,155.4

)

Accumulated other comprehensive loss

 

 

(815.7

)

 

 

(793.2

)

 

 

(126.5

)

 

 

(55.7

)

Treasury stock, at cost, 19.2 shares in 2016 (2015 - 19.4 shares)

 

 

(1,369.0

)

 

 

(1,401.5

)

Total RR Donnelley stockholders' equity

 

 

524.4

 

 

 

682.7

 

Treasury stock, at cost, 19.0 shares in 2017 (2016 - 19.1 shares)

 

 

(1,341.4

)

 

 

(1,364.0

)

Total RRD stockholders' equity

 

 

(176.9

)

 

 

(105.7

)

Noncontrolling interests

 

 

14.0

 

 

 

13.9

 

 

 

13.9

 

 

 

13.5

 

Total equity

 

 

538.4

 

 

 

696.6

 

 

 

(163.0

)

 

 

(92.2

)

Total liabilities and equity

 

$

7,472.5

 

 

$

7,279.3

 

 

$

3,956.7

 

 

$

4,268.8

 

 

(See Notes to Condensed Consolidated Financial Statements)

 

 

 

 

3


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

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions, except per share data)

(UNAUDITED)

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

September 30,

 

 

September 30,

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products net sales

 

$

2,281.6

 

 

$

2,359.0

 

 

$

6,706.3

 

 

$

6,883.8

 

 

$

1,322.0

 

 

$

1,327.8

 

 

$

3,830.9

 

 

$

3,772.5

 

Services net sales

 

 

490.8

 

 

 

469.0

 

 

 

1,447.2

 

 

 

1,438.4

 

 

 

412.9

 

 

 

397.8

 

 

 

1,182.9

 

 

 

1,201.6

 

Total net sales

 

 

2,772.4

 

 

 

2,828.0

 

 

 

8,153.5

 

 

 

8,322.2

 

 

 

1,734.9

 

 

 

1,725.6

 

 

 

5,013.8

 

 

 

4,974.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products cost of sales (exclusive of depreciation and amortization)

 

 

1,780.5

 

 

 

1,844.8

 

 

 

5,237.2

 

 

 

5,386.5

 

 

 

1,064.1

 

 

 

1,030.7

 

 

 

3,065.7

 

 

 

2,958.1

 

Services cost of sales (exclusive of depreciation and amortization)

 

 

384.2

 

 

 

363.3

 

 

 

1,134.4

 

 

 

1,120.3

 

 

 

346.4

 

 

 

330.7

 

 

 

992.8

 

 

 

1,002.9

 

Total cost of sales

 

 

2,164.7

 

 

 

2,208.1

 

 

 

6,371.6

 

 

 

6,506.8

 

 

 

1,410.5

 

 

 

1,361.4

 

 

 

4,058.5

 

 

 

3,961.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products gross profit

 

 

501.1

 

 

 

514.2

 

 

 

1,469.1

 

 

 

1,497.3

 

 

 

257.9

 

 

 

297.1

 

 

 

765.2

 

 

 

814.4

 

Services gross profit

 

 

106.6

 

 

 

105.7

 

 

 

312.8

 

 

 

318.1

 

 

 

66.5

 

 

 

67.1

 

 

 

190.1

 

 

 

198.7

 

Total gross profit

 

 

607.7

 

 

 

619.9

 

 

 

1,781.9

 

 

 

1,815.4

 

 

 

324.4

 

 

 

364.2

 

 

 

955.3

 

 

 

1,013.1

 

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

 

 

333.4

 

 

 

328.4

 

 

 

1,099.9

 

 

 

972.4

 

 

 

207.7

 

 

 

218.1

 

 

 

643.6

 

 

 

681.0

 

Restructuring, impairment and other charges-net (Note 6)

 

 

15.0

 

 

 

52.9

 

 

 

38.4

 

 

 

104.9

 

Restructuring, impairment and other charges-net (Note 7)

 

 

33.8

 

 

 

10.8

 

 

 

46.7

 

 

 

24.3

 

Depreciation and amortization

 

 

101.5

 

 

 

115.3

 

 

 

312.5

 

 

 

341.5

 

 

 

47.0

 

 

 

51.0

 

 

 

143.1

 

 

 

153.5

 

Other operating expense (income)

 

 

0.3

 

 

 

 

 

 

(12.0

)

 

 

 

 

 

 

 

 

0.3

 

 

 

 

 

 

(12.0

)

Income from operations

 

 

157.5

 

 

 

123.3

 

 

 

343.1

 

 

 

396.6

 

 

 

35.9

 

 

 

84.0

 

 

 

121.9

 

 

 

166.3

 

Interest expense-net

 

 

67.1

 

 

 

69.0

 

 

 

204.1

 

 

 

207.2

 

 

 

43.5

 

 

 

48.8

 

 

 

137.3

 

 

 

150.6

 

Investment and other (income) expense-net

 

 

(0.6

)

 

 

3.0

 

 

 

0.4

 

 

 

43.2

 

Investment and other income -net

 

 

(2.8

)

 

 

(1.0

)

 

 

(47.2

)

 

 

(0.4

)

Loss on debt extinguishments

 

 

85.3

 

 

 

 

 

 

85.3

 

 

 

 

 

 

6.5

 

 

 

 

 

 

20.1

 

 

 

 

Earnings before income taxes

 

 

5.7

 

 

 

51.3

 

 

 

53.3

 

 

 

146.2

 

Income tax expense

 

 

12.5

 

 

 

39.7

 

 

 

34.3

 

 

 

79.1

 

(Loss) earnings before income taxes

 

 

(11.3

)

 

 

36.2

 

 

 

11.7

 

 

 

16.1

 

Income tax (benefit) expense

 

 

(3.5

)

 

 

13.9

 

 

 

(7.4

)

 

 

12.9

 

Net (loss) earnings from continuing operations

 

 

(7.8

)

 

 

22.3

 

 

 

19.1

 

 

 

3.2

 

(Loss) income from discontinued operations, net of tax (Note 2)

 

 

 

 

 

(29.1

)

 

 

 

 

 

15.8

 

Net (loss) earnings

 

 

(6.8

)

 

 

11.6

 

 

 

19.0

 

 

 

67.1

 

 

 

(7.8

)

 

 

(6.8

)

 

 

19.1

 

 

 

19.0

 

Less: Income (loss) attributable to noncontrolling interests

 

 

0.3

 

 

 

(2.7

)

 

 

0.8

 

 

 

(13.0

)

Net (loss) earnings attributable to RR Donnelley common stockholders

 

$

(7.1

)

 

$

14.3

 

 

$

18.2

 

 

$

80.1

 

Less: Income attributable to noncontrolling interests

 

 

0.2

 

 

 

0.3

 

 

 

0.7

 

 

 

0.8

 

Net (loss) earnings attributable to RRD common stockholders

 

$

(8.0

)

 

$

(7.1

)

 

$

18.4

 

 

$

18.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) earnings per share attributable to RR Donnelley common

stockholders (Note 9):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net (loss) earnings per share(1)

 

$

(0.10

)

 

$

0.21

 

 

$

0.26

 

 

$

1.18

 

Diluted net (loss) earnings per share(1)

 

$

(0.10

)

 

$

0.20

 

 

$

0.26

 

 

$

1.17

 

Basic net (loss) earnings per share attributable to RRD common stockholders (Note 11):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

(0.11

)

 

$

0.31

 

 

$

0.26

 

 

$

0.03

 

Discontinued operations

 

 

 

 

 

(0.41

)

 

 

 

 

 

0.23

 

Net (loss) earnings attributable to RRD stockholders

 

 

(0.11

)

 

 

(0.10

)

 

 

0.26

 

 

 

0.26

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share(1)

 

$

0.78

 

 

$

0.78

 

 

$

2.34

 

 

$

2.34

 

Diluted net (loss) earnings per share attributable to RRD common stockholders (Note 11):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

(0.11

)

 

$

0.31

 

 

$

0.26

 

 

$

0.03

 

Discontinued operations

 

 

 

 

 

(0.41

)

 

 

 

 

 

0.23

 

Net (loss) earnings attributable to RRD

 

 

(0.11

)

 

 

(0.10

)

 

 

0.26

 

 

 

0.26

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.14

 

 

$

0.78

 

 

$

0.42

 

 

$

2.34

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic(1)

 

 

70.0

 

 

 

69.7

 

 

 

70.0

 

 

 

68.1

 

Diluted(1)

 

 

70.0

 

 

 

70.1

 

 

 

70.5

 

 

 

68.5

 

Basic

 

 

70.2

 

 

 

70.0

 

 

 

70.1

 

 

 

70.0

 

Diluted

 

 

70.2

 

 

 

70.5

 

 

 

70.3

 

 

 

70.5

 

 

(1)

Earnings per share amounts, dividends declared per share amounts and adjusted weighted average common shares outstanding for all periods reflect RR Donnelley's 1-for-3 reverse stock split, which was effective October 1, 2016.

(See Notes to Condensed Consolidated Financial Statements)

 

 

4


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

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in millions)

(UNAUDITED)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Net (loss) earnings

 

$

(6.8

)

 

$

11.6

 

 

$

19.0

 

 

$

67.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive (loss) income, net of tax (Note 10):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Translation adjustments

 

 

(4.4

)

 

 

(37.5

)

 

 

(9.0

)

 

 

(42.5

)

Adjustment for net periodic pension and postretirement benefits plan cost

 

 

(19.4

)

 

 

2.2

 

 

 

(13.3

)

 

 

10.4

 

Change in fair value of derivatives

 

 

 

 

 

0.1

 

 

 

 

 

 

0.1

 

Other comprehensive loss

 

 

(23.8

)

 

 

(35.2

)

 

 

(22.3

)

 

 

(32.0

)

Comprehensive (loss) income

 

 

(30.6

)

 

 

(23.6

)

 

 

(3.3

)

 

 

35.1

 

Less: comprehensive income (loss) attributable to noncontrolling interests

 

 

0.3

 

 

 

(3.7

)

 

 

1.0

 

 

 

(14.0

)

Comprehensive (loss) income attributable to RR Donnelley

   common stockholders

 

$

(30.9

)

 

$

(19.9

)

 

$

(4.3

)

 

$

49.1

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Net (loss) earnings

 

$

(7.8

)

 

$

(6.8

)

 

$

19.1

 

 

$

19.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax (Note 12):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Translation adjustments

 

 

17.7

 

 

 

(4.4

)

 

 

46.8

 

 

 

(9.0

)

Adjustment for available-for-sale securities

 

 

(1.8

)

 

 

 

 

 

(119.3

)

 

 

 

Adjustment for net periodic pension and postretirement benefits plan cost

 

 

0.7

 

 

 

(19.4

)

 

 

2.1

 

 

 

(13.3

)

Other comprehensive income (loss)

 

 

16.6

 

 

 

(23.8

)

 

 

(70.4

)

 

 

(22.3

)

Comprehensive income (loss)

 

 

8.8

 

 

 

(30.6

)

 

 

(51.3

)

 

 

(3.3

)

Less: comprehensive income attributable to noncontrolling interests

 

 

0.3

 

 

 

0.3

 

 

 

1.1

 

 

 

1.0

 

Comprehensive income (loss) attributable to RRD common stockholders

 

$

8.5

 

 

$

(30.9

)

 

$

(52.4

)

 

$

(4.3

)

  

(See Notes to Condensed Consolidated Financial Statements)

 

 

 

 

5


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

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

(UNAUDITED)

 

 

Nine Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2016

 

 

2015

 

 

2017

 

 

2016

 

OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

19.0

 

 

$

67.1

 

 

$

19.1

 

 

$

19.0

 

Adjustments to reconcile net earnings to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Impairment charges

 

 

0.8

 

 

 

29.4

 

Adjustments to reconcile net earnings to net cash (used in) provided by operating activities:

 

 

 

 

 

 

 

 

Impairment charges - net

 

 

21.8

 

 

 

0.8

 

Depreciation and amortization

 

 

312.5

 

 

 

341.5

 

 

 

143.1

 

 

 

312.5

 

Provision for doubtful accounts receivable

 

 

20.4

 

 

 

12.5

 

 

 

1.7

 

 

 

20.4

 

Share-based compensation

 

 

13.4

 

 

 

13.6

 

 

 

6.4

 

 

 

13.4

 

Deferred income taxes

 

 

(33.5

)

 

 

(43.0

)

 

 

(10.1

)

 

 

(33.5

)

Changes in uncertain tax positions

 

 

(0.4

)

 

 

9.4

 

 

 

0.7

 

 

 

(0.4

)

(Gain) loss on investments and other assets - net

 

 

(13.0

)

 

 

13.1

 

Loss related to Venezuela currency remeasurement-net

 

 

 

 

 

30.3

 

Gain on investments and other assets - net

 

 

(2.8

)

 

 

(13.0

)

Realized gain on disposition of available-for-sale securities - net

 

 

(42.4

)

 

 

 

Loss on debt extinguishments

 

 

20.1

 

 

 

85.3

 

Net pension and other postretirement benefits plan income

 

 

(55.1

)

 

 

(33.2

)

 

 

(11.0

)

 

 

(55.1

)

Net loss on pension and other postretirement benefits plan settlements and curtailments (Note 7)

 

 

78.8

 

 

 

 

Loss on debt extinguishments

 

 

85.3

 

 

 

 

Net loss on pension and other postretirement benefits plan settlements and curtailments (Note 8)

 

 

 

 

 

78.8

 

Other

 

 

9.6

 

 

 

20.8

 

 

 

14.7

 

 

 

9.6

 

Changes in operating assets and liabilities - net of acquisitions:

 

 

 

 

 

 

 

 

Changes in operating assets and liabilities - net of dispositions and acquisitions:

 

 

 

 

 

 

 

 

Accounts receivable - net

 

 

(126.0

)

 

 

(54.9

)

 

 

(26.3

)

 

 

(122.4

)

Inventories

 

 

(57.6

)

 

 

(29.1

)

 

 

(62.5

)

 

 

(60.0

)

Prepaid expenses and other current assets

 

 

(9.2

)

 

 

5.5

 

 

 

(6.3

)

 

 

(9.2

)

Accounts payable

 

 

(159.6

)

 

 

(72.3

)

 

 

(18.9

)

 

 

(160.8

)

Income taxes payable and receivable

 

 

(35.6

)

 

 

18.8

 

 

 

(11.4

)

 

 

(35.6

)

Accrued liabilities and other

 

 

(23.4

)

 

 

(105.5

)

 

 

(36.1

)

 

 

(23.4

)

Pension and other postretirement benefits plan contributions

 

 

(18.6

)

 

 

(19.8

)

 

 

(12.4

)

 

 

(18.6

)

Net cash provided by operating activities

 

 

7.8

 

 

 

204.2

 

Net cash (used in) provided by operating activities

 

 

(12.6

)

 

 

7.8

 

INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(147.9

)

 

 

(152.8

)

 

 

(77.2

)

 

 

(147.9

)

Acquisitions of businesses, net of cash acquired

 

 

(47.5

)

 

 

(118.3

)

 

 

 

 

 

(47.5

)

Dispositions of businesses

 

 

13.7

 

 

 

0.6

 

Disposition of businesses

 

 

 

 

 

13.7

 

Proceeds from sales of investments and other assets

 

 

3.7

 

 

 

17.4

 

 

 

127.6

 

 

 

3.7

 

Transfers from restricted cash

 

 

13.7

 

 

 

 

Transfers (to) from restricted cash

 

 

(2.4

)

 

 

13.7

 

Other investing activities

 

 

(3.6

)

 

 

(7.9

)

 

 

 

 

 

(3.6

)

Net cash used in investing activities

 

 

(167.9

)

 

 

(261.0

)

Net cash provided by (used in) investing activities

 

 

48.0

 

 

 

(167.9

)

FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change in short-term debt

 

 

5.7

 

 

 

12.9

 

 

 

10.2

 

 

 

5.7

 

Payments of current maturities and long-term debt

 

 

(786.6

)

 

 

(271.8

)

 

 

(200.9

)

 

 

(786.6

)

Proceeds from issuance of long-term debt

 

 

1,164.0

 

 

 

 

Net proceeds from credit facility borrowings

 

 

 

 

 

225.0

 

Proceeds from issuances of long-term debt

 

 

 

 

 

1,164.0

 

Payments on Credit Agreement borrowings

 

 

(1,000.0

)

 

 

 

Proceeds from Credit Agreement borrowings

 

 

1,165.0

 

 

 

 

Proceeds from termination of interest rate swaps

 

 

2.5

 

 

 

 

 

 

 

 

 

2.5

 

Debt issuance costs

 

 

(37.5

)

 

 

 

 

 

(4.4

)

 

 

(37.5

)

Dividends paid

 

 

(163.2

)

 

 

(158.4

)

 

 

(29.4

)

 

 

(163.2

)

Net transfer of cash and cash equivalents to LSC and Donnelley Financial

 

 

(78.0

)

 

 

 

Other financing activities

 

 

2.5

 

 

 

3.5

 

 

 

(1.6

)

 

 

2.5

 

Net cash provided by (used in) financing activities

 

 

187.4

 

 

 

(188.8

)

Net cash (used in) provided by financing activities

 

 

(139.1

)

 

 

187.4

 

Effect of exchange rate on cash and cash equivalents

 

 

(5.1

)

 

 

(25.0

)

 

 

12.0

 

 

 

(5.1

)

Net decrease in cash and cash equivalents

 

 

22.2

 

 

 

(270.6

)

Net (decrease) increase in cash and cash equivalents

 

 

(91.7

)

 

 

22.2

 

Cash and cash equivalents at beginning of year

 

 

389.6

 

 

 

527.9

 

 

 

317.5

 

 

 

389.6

 

Cash and cash equivalents at end of period

 

$

411.8

 

 

$

257.3

 

 

$

225.8

 

 

$

411.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental non-cash disclosure:

 

 

 

 

 

 

 

 

SUPPLEMENTAL NON-CASH DISCLOSURE:

 

 

 

 

 

 

 

 

Assumption of warehousing equipment related to customer contract

 

$

8.8

 

 

$

 

 

$

 

 

$

8.8

 

Debt-for-debt exchange, including debt issuance costs of $5.5 million

 

$

300.0

 

 

$

 

Issuance of 2.7 million shares of RR Donnelley stock for acquisition of business

 

$

 

 

$

154.2

 

Debt-for-equity exchange

 

 

132.9

 

 

 

 

Debt-for-debt exchanges, including debt issuance costs of $5.5 million in 2016

 

 

 

 

 

300.0

 

(See Notes to Condensed Consolidated Financial Statements)

 

6


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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in millions, except per share data, unless otherwise indicated)

 

1. BasisBasis of Presentation

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”“RRD”) 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 for the year ended December 31, 20152016 filed with the SEC on February 25, 2016.28, 2017. Operating results for the nine months ended September 30, 20162017 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2016.2017. 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.

Spinoff Transactions

On October 1, 2016, the Company completed the previously announced separation of its financial communications and data services business (“Donnelley Financial Solutions, Inc.” or “Donnelley Financial”) and the publishing and retail-centric print services and office products business (“LSC Communications, Inc.” or “LSC”) into two separate publicly-traded companies (the "Separation"). The Company completed the tax freetax-free distribution of approximately 26.2 million shares, or 80.75%, of the outstanding common stock of each Donnelley Financial and 26.2 million shares, or 80.75%, of the outstanding common stock of LSC to the Company’s stockholders (the “Distribution”). The Distribution was made to the Company’s stockholders of record as of the close of business on September 23, 2016 who received one share of each Donnelley Financial common stock and one share of LSC common stock for every eight shares of RR DonnelleyRRD common stock heldowned as of the record date. As a resultdate (the “Distribution”). The Company retained 19.25% of the Distribution,outstanding common stock of each Donnelley Financial and LSC are now independent public companies trading under the symbols “DFIN” and “LKSD”, respectively, on the New York Stock Exchange. Immediately following the Distribution, the Company held 6.2 million shares of Donnelley Financial Solutions common stock and 6.2 million shares of LSC common stock.LSC. The Company will account for these investments as available-for-sale equity securities. The value of the Company’s investment in Donnelley Financial and LSC was approximately $350.1 million, calculated using the mid-point stock price for each company’s common stock on October 3, 2016.

The accompanying unaudited condensed consolidated interimhistorical financial statements include the historical results of Donnelley Financial and LSC asprior to the Separation, did not take place until October 1, 2016. In future filings,are presented as discontinued operations on the historicalCondensed Consolidated Statements of Operations and, as such, have been excluded from both continuing operations and segment results offor all periods presented. Sales from RRD to Donnelley Financial and LSC will be presentedpreviously eliminated in consolidation have been recast and are now shown as discontinuedexternal sales within the financial results of continuing operations. As a result ofThese net sales were $72.5 million and $150.4 million for the Separation,three and nine months ended September 30, 2016, respectively. Unless indicated otherwise, the accompanying unaudited interim condensed consolidated interim financial statements are not indicative ofinformation in the Notes to Condensed Consolidated Financial Statements relates to the Company's future financial position, results of operations or cash flows.

In conjunction withcontinuing operations. Prior periods have been recast to reflect the Separation,Company's current segment reporting structure. See Note 2, Discontinued Operations, for more information on the Company entered into certain agreements with Donnelley Financial and LSC, to implement the legal and structural separation from Donnelley Financial and LSC, govern the relationship between the Company, Donnelley Financial and LSC up to and after the completion of the Separation, and allocate between the Company, Donnelley Financial and LSC various assets, liabilities and obligations, including, among other things, employee benefits, intellectual property and tax-related assets and liabilities. These agreements included the Separation and Distribution Agreement, Transition Services Agreement, Tax Disaffiliation Agreement, Patent Assignment and License Agreement, Trademark Assignment and License Agreement, Data Assignment and License Agreement, Software, Copyright and Trade Secret Assignment and License Agreement, Stockholder and Registration Rights Agreement and commercial and other arrangements and agreements.Separation.

Reverse Stock Split

Immediately following the Distribution on October 1, 2016, the Company effectedaffected a one for threeone-for-three reverse stock split for RR DonnelleyRRD common stock (the “Reverse Stock Split”). The Reverse Stock Split was approved by the Company’s Board of Directors on September 14, 2016 and previously approved by the Company’s stockholders at the annual meeting on May 19, 2016.

As a result of the Reverse Stock Split, the number of issued and outstanding and treasury shares of the Company’s common stock will bewas reduced proportionally based on the Reverse Stock Split ratio of one share for every three shares of common stock held before the Reverse Stock Split. No fractional shares of RR Donnelley common stock were distributed to stockholders in connectionSplit.

 

7


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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in millions, except per share data, unless otherwise indicated)

 

withRevision of Net Sales and Cost of Sales

During the Reverse Stock Split, but instead, all fractional shares were aggregated bythird quarter of 2017, the Company’s transfer agent and sold at the prevailing priceCompany identified an error in the open-marketaccounting for certain contracts with an inventory buy-back option within the Asia reporting unit, which is in the International segment. As a result, the error, which was determined by management to be immaterial to the previously issued financial statements, has been corrected herein from the amounts previously reported. There was no impact to net earnings (loss) or net earnings (loss) per share, or the Consolidated Statements of Comprehensive Income or Stockholders’ Equity. The following table presents the impact of the revision on October 6, 2016. net sales and cost of sales:  

 

As Reported

 

Adjustments

 

As Revised

 

Three months ended March 31, 2016

 

Products net sales

$

1,242.7

 

$

13.1

 

$

1,229.6

 

Total net sales

 

1,645.6

 

 

13.1

 

 

1,632.5

 

Products cost of sales

 

971.9

 

 

13.1

 

 

958.8

 

Total cost of sales

 

1,313.1

 

 

13.1

 

 

1,300.0

 

Three months ended June 30, 2016

 

Products net sales

$

1,231.7

 

$

16.6

 

$

1,215.1

 

Total net sales

 

1,632.6

 

 

16.6

 

 

1,616.0

 

Products cost of sales

 

985.2

 

 

16.6

 

 

968.6

 

Total cost of sales

 

1,316.2

 

 

16.6

 

 

1,299.6

 

Three months ended September 30, 2016

 

Products net sales

$

1,343.4

 

$

15.6

 

$

1,327.8

 

Total net sales

 

1,741.2

 

 

15.6

 

 

1,725.6

 

Products cost of sales

 

1,046.3

 

 

15.6

 

 

1,030.7

 

Total cost of sales

 

1,377.0

 

 

15.6

 

 

1,361.4

 

Three months ended December 31, 2016

 

Products net sales

$

1,470.3

 

$

17.4

 

$

1,452.9

 

Total net sales

 

1,876.3

 

 

17.4

 

 

1,858.9

 

Products cost of sales

 

1,161.0

 

 

17.4

 

 

1,143.6

 

Total cost of sales

 

1,512.6

 

 

17.4

 

 

1,495.2

 

Three months ended March 31, 2017

 

Products net sales

$

1,288.9

 

$

17.4

 

$

1,271.5

 

Total net sales

 

1,676.3

 

 

17.4

 

 

1,658.9

 

Products cost of sales

 

1,024.3

 

 

17.4

 

 

1,006.9

 

Total cost of sales

 

1,348.5

 

 

17.4

 

 

1,331.1

 

Three months ended June 30, 2017

 

Products net sales

$

1,263.4

 

$

26.0

 

$

1,237.4

 

Total net sales

 

1,646.0

 

 

26.0

 

 

1,620.0

 

Products cost of sales

 

1,020.7

 

 

26.0

 

 

994.7

 

Total cost of sales

 

1,342.9

 

 

26.0

 

 

1,316.9

 

The total numberfollowing table presents the impact of aggregatedthe related balance sheet revision on the December 31, 2016 Condensed Consolidated Balance Sheet:

 

As Reported

 

Adjustments

 

As Revised

 

Receivables, less allowance for doubtful accounts

$

1,354.4

 

$

(23.1

)

$

1,331.3

 

Inventories

 

379.6

 

 

7.2

 

 

386.8

 

Accounts payable

 

1,001.2

 

 

(15.9

)

 

985.3

 

The September 30, 2016 Consolidated Statement of Cash Flows has also been revised to reflect the impact of the above balance sheet revision.


8


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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in millions, except per share data, unless otherwise indicated)

2. Discontinued Operations

Immediately following the Distribution, the Company held approximately 6.2 million shares of the Company’sDonnelley Financial common stock and approximately 6.2 million shares of 3,088LSC common stock. The Company accounted for these investments as available-for-sale equity securities. In March 2017, the Company sold the 6.2 million shares was soldof LSC common stock it retained upon spinoff for total net cash proceeds of less than $0.1$121.4 million, resulting in a realized loss of $51.6 million, which was then paidrecorded within investment and other income-net in the Condensed Consolidated Statements of Operations for the nine months ended September 30, 2017. In June 2017, the Company completed a non-cash debt-for-equity exchange in which RRD exchanged 6,143,208 of its retained shares of Donnelley Financial common stock for the extinguishment of $111.6 million in aggregate principal amount of RRD indebtedness. In August 2017, the Company disposed of its remaining 99,594 shares of Donnelley Financial common stock in exchange for the extinguishment of $1.9 million in aggregate principal amount of RRD indebtedness.  See Note 15, Debt, for additional details of these debt-for-equity transactions. As of September 30, 2017, the Company no longer held any shares of LSC or Donnelley Financial.  

The following details the financial results of discontinued operations:

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30, 2016

 

September 30, 2016

 

 

Net sales

$

1,122.6

 

$

3,303.4

 

 

Cost of sales

 

879.1

 

 

2,534.7

 

 

Operating expenses (a)

 

170.0

 

 

592.0

 

 

Interest and other expense net (b)

 

104.0

 

 

139.5

 

 

(Loss) earnings before income taxes

 

(30.5

)

 

37.2

 

 

Income tax (benefit) expense

 

(1.4

)

 

21.4

 

 

Net (loss) earnings from discontinued operations

$

(29.1

)

$

15.8

 

 

(a)

Includes spinoff transaction costs incurred of $27.0 million and $57.3 million during the three and nine month periods ended September 30, 2016, respectively.  

(b)

Includes the related interest expense of the corporate level debt which was retired in connection with the Separation totaling $17.8 million and $53.6 million for the three and nine months ended September 30, 2016, respectively. Also includes the losses on the extinguishment of corporate level debt executed in conjunction with the spinoff transactions totaling $85.3 million, for the three and nine months ended September 30, 2016.  

The significant non-cash items and capital expenditures of discontinued operations were as follows:

 

Nine Months Ended

 

 

September 30, 2016

 

Depreciation and amortization

$

159.0

 

Pension settlement charges

 

77.7

 

Impairment charges

 

1.5

 

Loss on debt extinguishments

 

85.3

 

Assumption of warehousing equipment related to customer contract

 

8.8

 

Purchase of property, plant and equipment

 

49.0

 

In connection with the Separation, the Company entered into transition services agreements with Donnelley Financial and LSC under which the companies will provide one another with certain services to stockholdershelp ensure an orderly transition following the Separation (the “Transition Services Agreements”). The charges for these services are intended to allow the companies, as applicable, to recover the direct and indirect costs incurred in an amount equalproviding such services. The Transition Services Agreements generally provide for a term of services starting at the Separation date and continuing for a period of up to their respective pro ratatwenty-four months following the Separation. During the three and nine months ended September 30, 2017, the Company recognized $1.4 million and $6.4 million, respectively, as a reduction of costs within selling, general and administrative expenses within the Condensed Consolidated Statements of Operations from the Transition Services Agreement.

9


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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in millions, except per share ofdata, unless otherwise indicated)

The Company also entered into various commercial agreements which govern sales transactions between the totalcompanies. Under these commercial agreements, the Company recognized the following transactions with LSC and Donnelley Financial during the three and nine months ended September 30, 2017:

 

Three Months Ended

 

Nine Months Ended

 

 

September 30, 2017

 

September 30, 2017

 

Net sales to LSC and Donnelley Financial

$

67.2

 

$

236.3

 

Purchases from LSC and Donnelley Financial

 

36.2

 

 

105.2

 

The Company also recognized $83.0 million of net cash proceeds. All referencesinflow from Donnelley Financial and LSC within operating activities in these unaudited condensed consolidated interim financial statements to the numberCondensed Consolidated Statements of shares of common stock and per share amounts have been retroactively adjusted to give effect toCash Flows during the Reverse Stock Split.nine months ended September 30, 2017.

 

2.3. Acquisitions and Dispositions

2016 AcquisitionsAcquisition

OnOn August 4, 2016, the Company acquired Precision Dialogue Holdings, LLC (“Precision Dialogue”), a provider of email marketing, direct mail marketing and other services with operations in the United States for a purchase price, net of cash acquired, of approximately $58.6$59.2 million. The acquisition expanded the Company’s ability to help its customers measure communications effectiveness and audience engagement. During the three and nine months ended September 30, 2017, Precision Dialogue contributed $8.2$17.0 million and $44.5 million, respectively, in net sales and a lossearnings before income taxes of $1.1$2.9 million duringand $4.4 million, respectively. During both the three and nine months ended September 30, 2016, Precision Dialogue contributed $8.4 million in net sales and earnings before income taxes of $0.6 million. Precision Dialogue is included within the operating results of the Variable Print segment.

The Precision Dialogue acquisition was recorded by allocating the cost of the acquisition to the assets acquired, including other intangible assets, based on their estimated fair values at the acquisition date.  The excess of the cost over the net amounts assigned to the fair value of the assets acquired was recorded as goodwill. The goodwill associated with this acquisition is primarily attributable to the synergies expected to arise as a result of the acquisition. The total tax deductible goodwill related to the Precision Dialogue acquisition was $8.8 million.

Based on the valuation, the preliminary purchase price allocation for the Precision Dialogue acquisition was as follows:

 

 

 

 

 

Accounts receivable

 

$

11.8

 

Inventories

 

 

0.4

 

Prepaid expenses and other current assets

 

 

1.0

 

Property, plant and equipment

 

 

6.9

 

Other intangible assets

 

 

14.7

 

Other noncurrent assets

 

 

1.2

 

Goodwill

 

 

41.0

 

Accounts payable and accrued liabilities

 

 

(11.1

)

Deferred taxes--net

 

 

(7.3

)

Total purchase price-net of cash acquired

 

 

58.6

 

Less: debt assumed

 

 

11.1

 

Net cash paid

 

$

47.5

 

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)and Strategic Services segments.

 

The purchase price allocation is preliminary as the Company is still in the process of obtaining data to finalize the estimated fair values of certain intangible assets.

The fair values of other intangible assets, technology and goodwill associated with the Precision Dialogue acquisition were determined to be Level 3 under the fair value hierarchy.  The following table presents the fair value, valuation techniques and related unobservable inputs for these Level 3 measurements:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value

 

 

Valuation Technique

 

Unobservable Input

 

Range

 

Customer relationships

$

11.6

 

 

Excess earnings

 

Discount rate

Attrition rate

 

16.0%

7.0% - 8.0%

 

Trade names

 

1.4

 

 

Relief-from-royalty method

 

Discount rate

Royalty rate (pre-tax)

 

16.0%

0.75% - 1.25%

 

Technology

 

0.6

 

 

Relief-from-royalty method

 

Discount rate

Royalty rate (pre-tax)

Obsolescence factor

 

16.0%

15.0%

0.0% - 40.0%

 

Non-compete agreements

 

1.7

 

 

With and without method

 

Discount rate

 

 

16.0%

 

The fair values of property, plant and equipment associated with the 2016 acquisitions were determined to be Level 3 under the fair value hierarchy and were estimated using either the market approach, if a secondhand market existed, or the cost approach.

For the three and nine months ended September 30, 2016, the Company recorded $0.7 million and $2.7 million of acquisition-related expenses, respectively, associated with completed or contemplated acquisitions within selling, general and administrative expenses in the Condensed Consolidated Statements of Operations.

2016 Dispositions

OnOn January 11, 2016, the Company sold two entities within the business process outsourcing reporting unit for net proceeds of $13.4 million, allmillion. This resulted in a net gain of which was received as of September 30, 2016. Additionally,$12.3 million during the threenine months ended September 30, 2016, the Company sold three immaterial entities for proceeds of $0.3 million. The dispositions of these entities resulted in a loss of $0.3 million and a net gain of $12.0 million during the three and nine month periods ended September 30, 2016, respectively, which werewas recorded in other operating income in the Condensed Consolidated Statements of Operations. The operationsAdditionally, in the third quarter of these2016, the Company sold three immaterial entities were included in the International segment.

2015 Acquisitions

On June 8, 2015, the Company acquired Courier Corporation (“Courier”),segment, which resulted in a leader in digital printing and publishing primarily in the United States, specializing in educational, religious and trade books. The acquisition expanded the Company’s digital printing and content management capabilities. The purchase price for Courier was $137.3net loss of $0.3 million in cash and 2.7 million shares of RR Donnelley common stock, or a total transaction value of $291.5 million based on the Company’s closing share price on June 5, 2015, plus the assumption of Courier’s debt of $78.2 million. Courier had $20.9 million of cash as of the date of acquisition. Immediately following the acquisition, the Company repaid substantially all of the debt assumed. Courier’s book manufacturing operations are included in the Publishing and Retail Services segment, publishing operations are included in the Strategic Services segment and Brazilian operations are included in the International segment.

Forduring the three and nine months ended September 30, 2015, the Company recorded $0.3 million and $14.1 million of acquisition-related expenses, respectively, associated with acquisitions completed or contemplated, within selling, general and administrative expenses in the Condensed Consolidated Statements of Operations.

The Courier acquisition was recorded by allocating the cost of the acquisition to the assets acquired, including other intangible assets, based on their estimated fair values at the acquisition date.  The excess of the cost over the net amounts assigned to the fair value of the assets acquired was recorded as goodwill. The goodwill associated with this acquisition is primarily attributable to the synergies expected to arise as a result of the acquisition.    

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)

In addition to the acquisition of Courier, the Company completed three insignificant acquisitions in 2015, one of which included the settlement of accounts receivable in exchange for the acquisition of the business.

The tax deductible goodwill related to 2015 acquisitions was $15.0 million.

Based on the valuations, the final purchase price allocation for the 2015 acquisitions was as follows:

Accounts receivable

 

$

36.2

 

Inventories

 

 

59.0

 

Prepaid expenses and other current assets

 

 

38.8

 

Property, plant and equipment

 

 

163.8

 

Other intangible assets

 

 

108.8

 

Other noncurrent assets

 

 

7.9

 

Goodwill

 

 

66.3

 

Accounts payable and accrued liabilities

 

 

(24.6

)

Other noncurrent liabilities

 

 

(10.5

)

Deferred taxes--net

 

 

(83.7

)

Total purchase price-net of cash acquired

 

 

362.0

 

Less: debt assumed

 

 

80.2

 

Less: settlement of accounts receivable for acquisition of a

   business

 

 

8.6

 

Less: value of common stock issued

 

 

155.2

 

Net cash paid

 

$

118.0

 

The fair values of other intangible assets, technology and goodwill associated with the acquisition of Courier were determined to be Level 3 under the fair value hierarchy.  The following table presents the fair value, valuation techniques and related unobservable inputs for these Level 3 measurements:

 

Fair Value

 

 

Valuation Technique

 

Unobservable Input

 

Range

 

Customer relationships

$

98.4

 

 

Excess earnings

 

Discount rate

Attrition rate

 

14.0% - 17.0%

0.0% - 7.5%

 

Trade names

 

10.1

 

 

Relief-from-royalty method

 

Discount rate

Royalty rate (pre-tax)

 

12.0%

0.3% - 1.0%

 

Technology

 

1.6

 

 

Relief-from-royalty method

 

Discount rate

Royalty rate (pre-tax)

 

11.0%

15.0%

 

Non-compete agreement

0.3

 

 

Excess earnings

 

Discount rate

 

 

17.0%

 

The fair values of property, plant and equipment associated with the Courier acquisition were determined to be Level 3 under the fair value hierarchy and were estimated using either the market approach, if a secondhand market existed, or the cost approach.

2015 Disposition

On April 29, 2015, the Company sold its 50.1% interest in its Venezuelan operating entity. The proceeds were de minimis, and the sale resulted in a net loss of $14.7 million, which was recognized in net investment and other expense in the Consolidated Statement of Operations for the year ended December 31, 2015. The Company’s Venezuelan operations had net sales of $16.3 million and a loss before income taxes of $38.4 million, including the net loss as a result of the sale, for the nine months ended September 30, 2015.2016.

 

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)

Pro forma results

The following unaudited pro forma financial information for the three and nine months ended September 30, 2015 presents the combined results of operations of the Company and the 2015 acquisitions described above, as if the acquisitions had occurred as of January 1 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 period 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 September 30,

 

 

Nine Months Ended September 30,

 

 

 

2015

 

 

2015

 

Net sales

 

$

2,828.0

 

 

$

8,445.5

 

Net earnings attributable to RR Donnelley

   common stockholders

 

 

22.5

 

 

 

118.0

 

Net earnings per share attributable to RR Donnelley

   common stockholders:

 

 

 

 

 

 

 

 

Basic

 

$

0.32

 

 

$

1.69

 

Diluted

 

$

0.32

 

 

$

1.68

 

The following table outlines unaudited pro forma financial information for the three and nine months ended September 30, 2015:

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2015

 

 

2015

 

Amortization of purchased intangibles

 

$

20.4

 

 

$

63.0

 

Restructuring, impairment and other charges

 

 

48.4

 

 

 

76.7

 

Additionally, the pro forma adjustments affecting net earnings attributable to RR Donnelley common stockholders for the three and nine months ended September 30, 2015 were as follows:

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2015

 

 

2015

 

Depreciation and amortization of purchased assets, pre-tax

 

$

2.0

 

 

$

2.4

 

Acquisition-related expenses, pre-tax

 

 

0.2

 

 

 

18.8

 

Restructuring, impairment  and other charges, pre-tax

 

 

4.5

 

 

 

28.6

 

Inventory fair value adjustment, pre-tax

 

 

6.7

 

 

 

9.9

 

Other pro forma adjustments, pre-tax

 

 

 

 

 

1.2

 

Income taxes

 

 

(4.8

)

 

 

(15.0

)

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)

3.4. Inventories

The components of the Company’s inventories, net of excess and obsolescence reserves for raw materials and finished goods, at September 30, 20162017 and December 31, 20152016 were as follows:

 

September 30,

 

 

December 31,

 

 

September 30,

 

 

December 31,

 

 

2016

 

 

2015

 

 

2017

 

 

2016

 

Raw materials and manufacturing supplies

 

$

250.4

 

 

$

247.2

 

 

$

168.6

 

 

$

141.0

 

Work in process

 

 

202.6

 

 

 

156.1

 

 

 

114.7

 

 

 

84.4

 

Finished goods

 

 

281.1

 

 

 

275.2

 

 

 

190.1

 

 

 

179.4

 

LIFO reserve

 

 

(83.0

)

 

 

(86.5

)

 

 

(16.3

)

 

 

(18.0

)

Total

 

$

651.1

 

 

$

592.0

 

 

$

457.1

 

 

$

386.8

 

 

  

 

4. Property, Plant and Equipment

The components of the Company’s property, plant and equipment at September 30, 2016 and December 31, 2015 were as follows:

 

 

September 30,

 

 

December 31,

 

 

 

2016

 

 

2015

 

Land

 

$

111.4

 

 

$

113.6

 

Buildings

 

 

1,215.2

 

 

 

1,224.7

 

Machinery and equipment

 

 

6,148.1

 

 

 

6,160.3

 

 

 

 

7,474.7

 

 

 

7,498.6

 

Less: Accumulated depreciation

 

 

(6,132.4

)

 

 

(6,050.5

)

Total

 

$

1,342.3

 

 

$

1,448.1

 

During the three and nine months ended September 30, 2016, depreciation expense was $74.9 million and $230.6 million, respectively. During the three and nine months ended September 30, 2015, depreciation expense was $84.3 million and $249.7 million, respectively.

5. Goodwill and Other Intangible Assets

The changes in the carrying amount of goodwill by segment for the nine months ended September 30, 2016 were as follows:  

 

 

Publishing and Retail

 

 

Variable

 

 

Strategic

 

 

 

 

 

 

 

 

 

 

 

Services

 

 

Print

 

 

Services

 

 

International

 

 

Total

 

Net book value as of December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

$

739.2

 

 

$

1,914.0

 

 

$

991.5

 

 

$

1,123.6

 

 

$

4,768.3

 

Accumulated impairment losses

 

 

(688.0

)

 

 

(1,105.2

)

 

 

(219.7

)

 

 

(1,011.8

)

 

 

(3,024.7

)

Total

 

 

51.2

 

 

 

808.8

 

 

 

771.8

 

 

 

111.8

 

 

 

1,743.6

 

Acquisitions

 

 

 

 

 

41.0

 

 

 

 

 

 

 

 

 

41.0

 

Foreign exchange and other adjustments

 

 

 

 

 

0.6

 

 

 

0.3

 

 

 

1.8

 

 

 

2.7

 

Net book value as of September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

 

739.2

 

 

 

1,955.6

 

 

 

990.8

 

 

 

1,083.9

 

 

 

4,769.5

 

Accumulated impairment losses

 

 

(688.0

)

 

 

(1,105.2

)

 

 

(218.7

)

 

 

(970.3

)

 

 

(2,982.2

)

Total

 

$

51.2

 

 

$

850.4

 

 

$

772.1

 

 

$

113.6

 

 

$

1,787.3

 

1210


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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in millions, except per share data, unless otherwise indicated)

 

.

5. Property, Plant and Equipment

The components of the Company’s property, plant and equipment at September 30, 2017 and December 31, 2016 were as follows:

 

September 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Land

 

$

56.1

 

 

$

56.0

 

Buildings

 

 

415.0

 

 

 

403.0

 

Machinery and equipment

 

 

1,869.2

 

 

 

1,805.4

 

 

 

 

2,340.3

 

 

 

2,264.4

 

Less: Accumulated depreciation

 

 

(1,715.7

)

 

 

(1,614.1

)

Total

 

$

624.6

 

 

$

650.3

 

During the three and nine months ended September 30, 2017, depreciation expense was $34.6 million and $105.2 million, respectively.  During the three and nine months ended September 30, 2016, depreciation expense was $37.6 million and $116.2 million, respectively.  

6. Goodwill and Other Intangible Assets

The changes in the carrying amount of goodwill for the nine months ended September 30, 2017 were as follows:  

 

 

Variable

 

 

Strategic

 

 

 

 

 

 

 

 

 

 

 

Print

 

 

Services

 

 

International

 

 

Total

 

Net book value as of December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

$

1,823.0

 

 

$

365.2

 

 

$

1,017.9

 

 

$

3,206.1

 

Accumulated impairment losses

 

 

(1,550.5

)

 

 

(148.7

)

 

 

(904.9

)

 

 

(2,604.1

)

Total

 

 

272.5

 

 

 

216.5

 

 

 

113.0

 

 

 

602.0

 

Foreign exchange and other adjustments

 

 

 

 

 

 

 

 

6.9

 

 

 

6.9

 

Impairment charges

 

 

 

 

 

(21.3

)

 

 

 

 

 

(21.3

)

Net book value as of September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

 

1,824.1

 

 

 

365.2

 

 

 

1,090.3

 

 

 

3,279.6

 

Accumulated impairment losses

 

 

(1,551.6

)

 

 

(170.0

)

 

 

(970.4

)

 

 

(2,692.0

)

Total

 

$

272.5

 

 

$

195.2

 

 

$

119.9

 

 

$

587.6

 

During the third quarter of 2017, the Company recorded non-cash charges of $21.3 million to reflect the impairment of goodwill in the Strategic Services segment. See Note 7, Restructuring, Impairment and Other Charges, for further information.

The components of other intangible assets at September 30, 20162017 and December 31, 20152016 were as follows:

 

September 30, 2016

 

 

December 31, 2015

 

 

September 30, 2017

 

 

December 31, 2016

 

 

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

 

$

935.2

 

 

$

(593.0

)

 

$

342.2

 

 

$

932.1

 

 

$

(555.3

)

 

$

376.8

 

 

$

532.9

 

 

$

(404.8

)

 

$

128.1

 

 

$

517.9

 

 

$

(370.7

)

 

$

147.2

 

Patents

 

 

2.0

 

 

 

(2.0

)

 

 

 

 

 

98.3

 

 

 

(98.3

)

 

 

 

 

 

2.0

 

 

 

(2.0

)

 

 

 

 

 

2.0

 

 

 

(2.0

)

 

 

 

Trademarks, licenses and agreements

 

 

29.4

 

 

 

(27.3

)

 

 

2.1

 

 

 

30.6

 

 

 

(29.9

)

 

 

0.7

 

 

 

26.2

 

 

 

(24.9

)

 

 

1.3

 

 

 

26.2

 

 

 

(24.4

)

 

 

1.8

 

Trade names

 

 

47.8

 

 

 

(20.9

)

 

 

26.9

 

 

 

47.5

 

 

 

(19.1

)

 

 

28.4

 

 

 

36.8

 

 

 

(15.7

)

 

 

21.1

 

 

 

36.8

 

 

 

(13.9

)

 

 

22.9

 

Total amortizable other intangible assets

 

 

1,014.4

 

 

 

(643.2

)

 

 

371.2

 

 

 

1,108.5

 

 

 

(702.6

)

 

 

405.9

 

Indefinite-lived trade names

 

 

32.1

 

 

 

 

 

 

32.1

 

 

 

32.1

 

 

 

 

 

 

32.1

 

Total other intangible assets

 

$

1,046.5

 

 

$

(643.2

)

 

$

403.3

 

 

$

1,140.6

 

 

$

(702.6

)

 

$

438.0

 

 

$

597.9

 

 

$

(447.4

)

 

$

150.5

 

 

$

582.9

 

 

$

(411.0

)

 

$

171.9

 

During the nine months ended September 30, 2016 the Company recorded additions to other intangible assets of which the components and the related weighted average amortization periods are as follows:

 

 

September 30, 2016

 

 

 

Amount

 

 

Weighted Average Amortization Period

 

Customer relationships

 

$

11.6

 

 

 

10.5

 

Trade names

 

 

1.4

 

 

   4.7

 

Non-compete agreements

 

 

1.7

 

 

 

3.3

 

Total additions

 

$

14.7

 

 

 

 

 

Amortization expense for other intangible assets was $15.6$7.1 million and $20.4$21.6 million for the three and nine months ended September 30, 2016 and 2015, respectively, and $49.62017, respectively. Amortization expense for other intangible assets was $8.0 million and $58.6$25.7 million for the three and nine months ended September 30, 2016, and 2015, respectively.

The following table outlines the estimated annual amortization expense related to other intangible assets as of September 30, 2016: 

For the year ending December 31,

 

Amount

 

2016

 

$

65.4

 

2017

 

 

60.7

 

2018

 

 

54.7

 

2019

 

 

50.4

 

2020

 

 

46.5

 

2021 and thereafter

 

 

143.1

 

Total

 

$

420.8

 

 

 

1311


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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in millions, except per share data, unless otherwise indicated)

 

6.

7. Restructuring, Impairment and Other Charges

Restructuring, Impairment and Other Charges Recognized in Results of Operations

For the three months ended September 30, 20162017 and 2015,2016, the Company recorded the following net restructuring, impairment and other charges:

 

Three Months Ended

 

Employee

 

 

Other

Restructuring

 

 

Total

Restructuring

 

 

 

 

 

 

Other

 

 

 

 

 

 

Employee

 

 

Other

Restructuring

 

 

Total

Restructuring

 

 

 

 

 

 

Other

 

 

 

 

 

September 30, 2016

 

Terminations

 

 

Charges

 

 

Charges

 

 

Impairment

 

 

Charges

 

 

Total

 

Publishing and Retail Services

 

$

 

 

$

1.2

 

 

$

1.2

 

 

$

 

 

$

0.8

 

 

$

2.0

 

September 30, 2017

 

Terminations

 

 

Charges

 

 

Charges

 

 

Impairment

 

 

Charges

 

 

Total

 

Variable Print

 

 

1.2

 

 

 

0.3

 

 

 

1.5

 

 

 

 

 

 

0.6

 

 

 

2.1

 

 

$

3.0

 

 

$

0.6

 

 

$

3.6

 

 

$

0.2

 

 

$

0.4

 

 

$

4.2

 

Strategic Services

 

 

2.6

 

 

 

0.4

 

 

 

3.0

 

 

 

 

 

 

0.1

 

 

 

3.1

 

 

 

0.7

 

 

 

 

 

 

0.7

 

 

 

21.3

 

 

 

0.1

 

 

 

22.1

 

International

 

 

0.9

 

 

 

0.3

 

 

 

1.2

 

 

 

 

 

 

 

 

 

1.2

 

 

 

1.9

 

 

 

0.3

 

 

 

2.2

 

 

 

 

 

 

 

 

 

2.2

 

Corporate

 

 

6.5

 

 

 

0.1

 

 

 

6.6

 

 

 

 

 

 

 

 

 

6.6

 

 

 

5.1

 

 

 

0.2

 

 

 

5.3

 

 

 

 

 

 

 

 

 

5.3

 

Total

 

$

11.2

 

 

$

2.3

 

 

$

13.5

 

 

$

 

 

$

1.5

 

 

$

15.0

 

 

$

10.7

 

 

$

1.1

 

 

$

11.8

 

 

$

21.5

 

 

$

0.5

 

 

$

33.8

 

 

Three Months Ended

 

Employee

 

 

Other

Restructuring

 

 

Total

Restructuring

 

 

 

 

 

 

Other

 

 

 

 

 

 

Employee

 

 

Other

Restructuring

 

 

Total

Restructuring

 

 

 

 

 

 

Other

 

 

 

 

 

September 30, 2015

 

Terminations

 

 

Charges

 

 

Charges

 

 

Impairment

 

 

Charges

 

 

Total

 

Publishing and Retail Services

 

$

2.1

 

 

$

1.0

 

 

$

3.1

 

 

$

2.0

 

 

$

0.7

 

 

$

5.8

 

September 30, 2016

 

Terminations

 

 

Charges

 

 

Charges

 

 

Impairment

 

 

Charges

 

 

Total

 

Variable Print

 

 

0.5

 

 

 

2.1

 

 

 

2.6

 

 

 

(0.1

)

 

 

0.4

 

 

 

2.9

 

 

$

1.1

 

 

$

0.3

 

 

$

1.4

 

 

$

 

 

$

0.5

 

 

$

1.9

 

Strategic Services

 

 

1.9

 

 

 

0.5

 

 

 

2.4

 

 

 

0.9

 

 

 

0.2

 

 

 

3.5

 

 

 

1.2

 

 

 

 

 

 

1.2

 

 

 

 

 

 

0.1

 

 

 

1.3

 

International

 

 

13.1

 

 

 

0.8

 

 

 

13.9

 

 

 

25.4

 

 

 

 

 

 

39.3

 

 

 

0.9

 

 

 

0.2

 

 

 

1.1

 

 

 

 

 

 

 

 

 

1.1

 

Corporate

 

 

1.2

 

 

 

0.2

 

 

 

1.4

 

 

 

 

 

 

 

 

 

1.4

 

 

 

6.5

 

 

 

0.1

 

 

 

6.6

 

 

 

(0.1

)

 

 

 

 

 

6.5

 

Total

 

$

18.8

 

 

$

4.6

 

 

$

23.4

 

 

$

28.2

 

 

$

1.3

 

 

$

52.9

 

 

$

9.7

 

 

$

0.6

 

 

$

10.3

 

 

$

(0.1

)

 

$

0.6

 

 

$

10.8

 

For the nine months ended September 30, 20162017 and 2015,2016, the Company recorded the following net restructuring, impairment and other charges:

Nine Months Ended

 

Employee

 

 

Other

Restructuring

 

 

Total

Restructuring

 

 

 

 

 

 

Other

 

 

 

 

 

 

Employee

 

 

Other

Restructuring

 

 

Total

Restructuring

 

 

 

 

 

 

Other

 

 

 

 

 

September 30, 2016

 

Terminations

 

 

Charges

 

 

Charges

 

 

Impairment

 

 

Charges

 

 

Total

 

Publishing and Retail Services

 

$

2.1

 

 

$

2.8

 

 

$

4.9

 

 

$

1.1

 

 

$

2.4

 

 

$

8.4

 

September 30, 2017

 

Terminations

 

 

Charges

 

 

Charges

 

 

Impairment

 

 

Charges

 

 

Total

 

Variable Print

 

 

1.5

 

 

 

1.8

 

 

 

3.3

 

 

 

0.1

 

 

 

1.5

 

 

 

4.9

 

 

$

4.0

 

 

$

0.9

 

 

$

4.9

 

 

$

(0.1

)

 

$

1.4

 

 

$

6.2

 

Strategic Services

 

 

4.1

 

 

 

1.1

 

 

 

5.2

 

 

 

0.6

 

 

 

0.4

 

 

 

6.2

 

 

 

1.8

 

 

 

0.3

 

 

 

2.1

 

 

 

21.8

 

 

 

0.3

 

 

 

24.2

 

International

 

 

7.0

 

 

 

2.9

 

 

 

9.9

 

 

 

(2.5

)

 

 

 

 

 

7.4

 

 

 

6.4

 

 

 

2.2

 

 

 

8.6

 

 

 

 

 

 

 

 

 

8.6

 

Corporate

 

 

10.2

 

 

 

0.1

 

 

 

10.3

 

 

 

1.2

 

 

 

 

 

 

11.5

 

 

 

7.3

 

 

 

0.4

 

 

 

7.7

 

 

 

 

 

 

 

 

 

7.7

 

Total

 

$

24.9

 

 

$

8.7

 

 

$

33.6

 

 

$

0.5

 

 

$

4.3

 

 

$

38.4

 

 

$

19.5

 

 

$

3.8

 

 

$

23.3

 

 

$

21.7

 

 

$

1.7

 

 

$

46.7

 

 

Nine Months Ended

 

Employee

 

 

Other

Restructuring

 

 

Total

Restructuring

 

 

 

 

 

 

Other

 

 

 

 

 

 

Employee

 

 

Other

Restructuring

 

 

Total

Restructuring

 

 

 

 

 

 

Other

 

 

 

 

 

September 30, 2015

 

Terminations

 

 

Charges

 

 

Charges

 

 

Impairment

 

 

Charges

 

 

Total

 

Publishing and Retail Services

 

$

5.3

 

 

$

2.5

 

 

$

7.8

 

 

$

1.5

 

 

$

18.5

 

 

$

27.8

 

September 30, 2016

 

Terminations

 

 

Charges

 

 

Charges

 

 

Impairment

 

 

Charges

 

 

Total

 

Variable Print

 

 

3.6

 

 

 

5.4

 

 

 

9.0

 

 

 

1.6

 

 

 

1.3

 

 

 

11.9

 

 

$

1.5

 

 

$

1.5

 

 

$

3.0

 

 

$

0.3

 

 

$

1.4

 

 

$

4.7

 

Strategic Services

 

 

5.7

 

 

 

1.6

 

 

 

7.3

 

 

 

0.9

 

 

 

3.3

 

 

 

11.5

 

 

 

1.7

 

 

 

 

 

 

1.7

 

 

 

 

 

 

0.3

 

 

 

2.0

 

International

 

 

22.3

 

 

 

2.5

 

 

 

24.8

 

 

 

25.0

 

 

 

 

 

 

49.8

 

 

 

7.4

 

 

 

1.3

 

 

 

8.7

 

 

 

(2.5

)

 

 

 

 

 

6.2

 

Corporate

 

 

2.9

 

 

 

1.0

 

 

 

3.9

 

 

 

 

 

 

 

 

 

3.9

 

 

 

10.1

 

 

 

0.1

 

 

 

10.2

 

 

 

1.2

 

 

 

 

 

 

11.4

 

Total

 

$

39.8

 

 

$

13.0

 

 

$

52.8

 

 

$

29.0

 

 

$

23.1

 

 

$

104.9

 

 

$

20.7

 

 

$

2.9

 

 

$

23.6

 

 

$

(1.0

)

 

$

1.7

 

 

$

24.3

 

 

1412


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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in millions, except per share data, unless otherwise indicated)

 

Restructuring and Impairment Charges

For the three and nine months ended September 30, 2017, the Company recorded net restructuring charges of $10.7 million and $19.5 million, respectively, for employee termination costs. These charges primarily relate to the reorganization of selling, general and administrative functions primarily within the Corporate, International and Variable Print segments, the termination of the Company’s relationship in a joint venture within the International segment and a facility closure in the Strategic Services segment. For the three and nine months ended September 30, 2017, the Company recorded net impairment charges of $21.5 million and $21.7 million, respectively, primarily related to the $21.3 million impairment of the goodwill for the digital and creative solutions (“DCS”) reporting unit, which is included within the Strategic Services segment. The goodwill impairment charge in the DCS reporting unit was due to the notification from a major customer that they will be transitioning their business away from DCS beginning in the fourth quarter of 2017 as well as declines in sales with other existing customers which resulted in lower expectations of future revenues, profitability and cash flows compared to expectations as of the October 31, 2016 annual goodwill impairment test. As of September 30, 2017, the DCS reporting unit had no remaining goodwill. The goodwill impairment charges were determined using Level 3 inputs, including comparable marketplace fair value data and a discounted cash flow analysis. The remaining impairment charges recorded for the three and nine months ended September 30, 2017, were primarily due to the impairment of equipment associated with the facility closure in the Strategic Services segment. Additionally, the Company incurred lease termination and other restructuring charges of $1.1 million and $3.8 million, respectively, for the three and nine months ended September 30, 2017.

For the three and nine months ended September 30, 2016, the Company recorded net restructuring charges of $11.2$9.7 million and $24.9$20.7 million, respectively, for employee termination costs for an aggregate of 870 employees, of whom 843 were terminated as of September 30, 2016.costs. These charges primarily related to the reorganization of certain administrative functions and operations, two facility closures in the International segment and one facility closure in the Publishing and Retail Services segment. Additionally, the Company incurred lease termination and other restructuring charges of $2.3 million and $8.7 million, respectively, for the three and nine months ended September 30, 2016. For the nine months ended September 30, 2016 the Company also recorded $0.5 million of net impairment charges primarily related to buildings and machinery and equipment associated with facility closures, as well as gains on the sale of previously impaired assets.

For the three and nine months ended September 30, 2015, the Company recorded net restructuring charges of $18.8 million and $39.8 million, respectively, for employee termination costs for 1,829 employees, all of whom were terminated as of September 30, 2016. These charges primarily related to two facility closures, both in the International segment, one facility closure in the Variable Print segment and the reorganization of certain administrative functions and operations. Additionally, the Company incurred lease termination and other restructuring charges of $4.6$0.6 million and $13.0 million, respectively, for the three and nine months ended September 30, 2015. For the three and nine months ended September 30, 2015, the Company also recorded $7.9 million and $8.7 million, respectively, of net impairment charges primarily related to buildings and machinery and equipment associated with facility closures. 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.  

As the result of the Company’s interim goodwill impairment review, the Company recorded non-cash charges of $13.7 million and $4.3$2.9 million for the three and nine months ended September 30, 2015 to recognize the impairment of goodwill in the Europe and Latin America reporting units, respectively, both of which are within the International segment. The goodwill impairment charge in the Europe reporting unit was due to the announced reorganization of certain operations which resulted in a reduction in the estimated fair value of the reporting unit based on lower expectations of future revenue, profitability and cash flows as compared to the expectations as of the October 31, 2014 annual goodwill impairment test. As of September 30, 2015, the Europe and Latin America reporting units had no remaining goodwill. The goodwill impairment charges were determined using Level 3 inputs, including discounted cash flow analyses, comparable marketplace fair value data and management’s assumptions in valuing the significant tangible and intangible assets. Additionally, for the three and nine months ended September 30, 2015, the Company recorded $2.3 million for the impairment of intangible assets, substantially all of which related to the impairment of acquired customer relationship intangible assets and trade names in the Latin America reporting unit within the International segment.

Other Charges

2016, respectively. For the three and nine months ended September 30, 2016, the Company recognized $0.1 million and $1.0 million, respectively, of net gains on the sale of previously impaired assets, partially offset by impairment charges related to buildings and machinery and equipment associated with facility closures.

Other Charges

For the three and nine months ended September 30, 2017 and 2016, the Company recorded other charges of $1.5$0.5 million and $4.3$1.7 million and $0.6 million and $1.7 million, respectively, for multi-employer withdrawal pension plan withdrawal obligations unrelated to facility closures. The total liabilities for the withdrawal obligations associated with the Company’s decision to withdraw from multi-employer pension plans included in accrued liabilities and other noncurrent liabilities are $11.0$5.1 million and $78.4$32.4 million, respectively, as of September 30, 20162017

For the three and nine months ended September 30, 2015, the Company recorded other charges of $1.3 million and $23.1 million, respectively, including integration charges of $19.1 million for payments made to certain Courier employees upon the termination of Courier’s executive severance plan, immediately prior to the acquisition.

The Company’s multi-employer pension plan 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.

As a resultRestructuring Reserve

The restructuring reserve as of December 31, 2016 and September 30, 2017, and changes during the acquisitionnine months ended September 30, 2017, were as follows:

 

 

 

 

 

 

 

 

 

 

Foreign

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

Restructuring

 

 

Exchange and

 

 

Cash

 

 

September 30,

 

 

 

2016

 

 

Charges

 

 

Other

 

 

Paid

 

 

2017

 

Employee terminations

 

$

7.6

 

 

$

19.5

 

 

$

 

 

$

(13.5

)

 

$

13.6

 

Multi-employer pension withdrawal obligations

 

 

11.8

 

 

 

0.6

 

 

 

(0.1

)

 

 

(1.1

)

 

 

11.2

 

Lease terminations and other

 

 

1.6

 

 

 

3.2

 

 

 

1.2

 

 

 

(2.8

)

 

 

3.2

 

Total

 

$

21.0

 

 

$

23.3

 

 

$

1.1

 

 

$

(17.4

)

 

$

28.0

 

The current portion of Courier,restructuring reserves of $14.4 million at September 30, 2017 was included in accrued liabilities, while the Company participates in twolong-term portion of $13.6 million, primarily related to multi-employer pension plans,plan withdrawal obligations related to facility closures, was included in one of which the Company's contributions account for approximately 85% of the total plan contributions.  Both plans are estimated to be underfunded and have a Pension Protection Act zone status of critical (“red”). Red status identifies plans that are less than 65% funded. other noncurrent liabilities at September 30, 2017.

 

1513


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

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, 2015 and September 30, 2016, and changes during the nine months ended September 30, 2016, were as follows:

 

 

 

 

 

 

 

 

 

 

Foreign

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

Restructuring

 

 

Exchange and

 

 

Cash

 

 

September 30,

 

 

 

2015

 

 

Charges

 

 

Other

 

 

Paid

 

 

2016

 

Employee terminations

 

$

20.2

 

 

$

24.9

 

 

$

0.3

 

 

$

(27.6

)

 

$

17.8

 

Multi-employer pension withdrawal obligations

 

 

32.9

 

 

 

1.6

 

 

 

 

 

 

(3.6

)

 

 

30.9

 

Lease terminations and other

 

 

10.6

 

 

 

7.1

 

 

 

(0.1

)

 

 

(9.9

)

 

 

7.7

 

Total

 

$

63.7

 

 

$

33.6

 

 

$

0.2

 

 

$

(41.1

)

 

$

56.4

 

The current portion of restructuring reserves of $22.9 million at September 30, 2016 was included in accrued liabilities, while the long-term portion of $33.5 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, 2016.

The Company anticipates that payments associated with the employee terminations reflected in the above table will be substantially completed by September 2017.2018.

Payments on all of the Company’s multi-employer pension plan withdrawal obligations are scheduled to be completed by 2034.2036. 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, and other facility closing costs and contract termination costs. Payments on certain of the lease obligations are scheduled to continue until 2026.2020. 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.

 

 

7.8. Employee Benefits

The components of the estimated net pension and other postretirement benefits plan expense (income)income for the three and nine months ended September 30, 20162017 and 20152016 were as follows:

 

Three Months Ended

 

 

Nine Months Ended

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

September 30,

 

 

September 30,

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Pension expense (income)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension (income) expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

0.3

 

 

$

0.5

 

 

$

0.9

 

 

$

1.6

 

$

0.1

 

 

$

0.3

 

 

$

0.5

 

 

$

0.8

 

Interest cost

 

 

36.8

 

 

 

44.5

 

 

 

110.5

 

 

 

133.9

 

 

8.0

 

 

 

37.9

 

 

 

23.7

 

 

 

105.3

 

Expected return on plan assets

 

 

(58.6

)

 

 

(61.4

)

 

 

(180.0

)

 

 

(184.7

)

 

(12.7

)

 

 

(58.2

)

 

 

(37.6

)

 

 

(171.2

)

Amortization, net

 

 

7.8

 

 

 

10.1

 

 

 

23.5

 

 

 

30.5

 

 

1.9

 

 

 

7.6

 

 

 

5.4

 

 

 

23.4

 

Settlements

 

 

1.6

 

 

 

 

 

 

98.5

 

 

 

 

Net pension (income) expense

 

$

(12.1

)

 

$

(6.3

)

 

$

53.4

 

 

$

(18.7

)

Other postretirement benefits plan expense (income)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Settlements and curtailments

 

 

 

 

1.6

 

 

 

 

 

 

98.0

 

Less: income (expense) attributable to discontinued operations

 

 

 

 

10.2

 

 

 

 

 

 

(43.3

)

Net pension (income) expense - continuing operations

$

(2.7

)

 

$

(0.6

)

 

$

(8.0

)

 

$

13.0

 

Other postretirement benefits plan income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

1.0

 

 

$

1.1

 

 

$

3.0

 

 

$

3.5

 

$

0.4

 

 

$

1.0

 

 

$

1.0

 

 

$

3.0

 

Interest cost

 

 

3.1

 

 

 

4.0

 

 

 

9.2

 

 

 

12.0

 

 

2.7

 

 

 

3.1

 

 

 

8.3

 

 

 

9.2

 

Expected return on plan assets

 

 

(3.4

)

 

 

(3.3

)

 

 

(10.2

)

 

 

(9.8

)

 

(3.4

)

 

 

(3.4

)

 

 

(10.1

)

 

 

(10.2

)

Amortization, net

 

 

(4.0

)

 

 

(6.7

)

 

 

(12.0

)

 

 

(20.2

)

 

(0.7

)

 

 

(4.0

)

 

 

(2.2

)

 

 

(12.0

)

Curtailments

 

 

(19.7

)

 

 

 

 

 

(19.7

)

 

 

 

 

 

 

 

(19.7

)

 

 

 

 

 

(19.7

)

Net other postretirement benefits plan income

 

$

(23.0

)

 

$

(4.9

)

 

$

(29.7

)

 

$

(14.5

)

Net other postretirement benefit income - continuing operations

$

(1.0

)

 

$

(23.0

)

 

$

(3.0

)

 

$

(29.7

)

 

The Company expects to make cash contributions of approximately $17.0 million to its pension and other postretirement benefit plans in 2017. During the nine months ended September 30, 2017, the Company contributed $12.4 million to its benefit plans.

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)

In the fourth quarter of 2015, the Company communicated to certain former employees the option to receive a lump-sum pension payment or annuity with payments computed in accordance with statutory requirements, beginning in the second quarter of 2016.  Payments to eligible participants who elected to receive a lump-sum pension payment or annuity were funded from existing pension plan assets and constituted a complete settlement of the Company’s pension liabilities with respect to these participants. The Company’s pension assets and liabilities were remeasured as of the payout date. The discount rates and actuarial assumptions used to calculate the payouts were determined in accordance with federal regulations. As of the remeasurement date, the reduction in the reported pension obligation for these participants was $354.8 million, compared to payout amounts of approximately $328.4 million. The Companycompany recorded total non-cash settlement charges of $1.6$1.6 million and $98.5$98.0 million, inof which $0.3 million and $20.7 million is included within selling, general and administrative expenses during and $1.3 million and $77.3 million is included within income from discontinued operations, net of tax in the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2016, respectively,in connection with the settlement payments.respectively. These charges resulted from the recognition in earnings of a portion of the actuarial losses recorded in accumulated other comprehensive loss based on the proportion of the obligation settled.

During the fourth quarter of 2015, the Company changed the method used to estimate the interest cost components of net pension and other postretirement benefits plan expense for its defined benefit pension and other postretirement benefit plans. Historically, the interest cost components were estimated using a single weighted-average discount rate derived from the yield curve used to measure the projected benefit obligation at the beginning of the period. Beginning in the first quarter of 2016, the Company has elected to use a full yield curve approach in the estimation of these interest components of net pension and other postretirement benefits plan expense by applying the specific spot rates along the yield curve used in the determination of the projected benefit obligation to the relevant projected cash flows. The Company made this change to improve the correlation between projected benefit cash flows and the corresponding yield curve spot rates and to provide a more precise measurement of interest costs. This change does not affect the measurement and calculation of the Company’s total benefit obligations. The Company has accounted for this change prospectively as a change in estimate.

During the third quarter of 2016, the Company announced the discontinuation of retiree medical, prescription drug and life insurance benefits for individuals retiring on or after October 1, 2016.  This change was accounted for as a significant plan amendment and the other postemployment benefit plan obligations were remeasured as of September 30, 2016.  This remeasurement resulted in a reduction to the other postemployment benefit plan obligations of $35.0 million and a curtailment gain of $16.4 million within cost of sales and $3.3 million in selling, general and administrative expenses during the three and nine months ended September 30, 2016.

 

8. Equity

The Company’s equity as of December 31, 2015 and September 30, 2016, and changes during the nine months ended September 30, 2016, were as follows:

 

 

RR Donnelley

 

 

 

 

 

 

 

 

 

 

 

Stockholders'

 

 

Noncontrolling

 

 

 

 

 

 

 

Equity

 

 

Interest

 

 

Total Equity

 

Balance at December 31, 2015

 

$

682.7

 

 

$

13.9

 

 

$

696.6

 

Net earnings

 

 

18.2

 

 

 

0.8

 

 

 

19.0

 

Other comprehensive (loss) income

 

 

(22.5

)

 

 

0.2

 

 

 

(22.3

)

Share-based compensation

 

 

13.4

 

 

 

 

 

 

13.4

 

Issuance of share-based awards, net of withholdings and other

 

 

(4.2

)

 

 

 

 

 

(4.2

)

Cash dividends paid

 

 

(163.2

)

 

 

 

 

 

(163.2

)

Distributions to noncontrolling interests

 

 

 

 

 

(0.9

)

 

 

(0.9

)

Balance at September 30, 2016

 

$

524.4

 

 

$

14.0

 

 

$

538.4

 

On May 31, 2016, the Company reduced the par value of the authorized shares of RR Donnelley’s common stock from $1.25 per share to $0.01 per share.

1714


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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in millions, except per share data, unless otherwise indicated)

 

9. Share-Based Compensation

Share-based compensation expense from continuing operations totaled $2.1 million for both the three months ended September 30, 2017 and 2016, respectively, and $6.4 million and $7.9 million for the nine months ended September 30, 2017 and 2016, respectively.

In March 2017, the Company awarded its annual share-based compensation grants, which consisted of 569,594 restricted stock units with a grant date fair value of $16.30 per unit and 304,425 performance share units with a grant date fair value of $16.30 per unit. The restricted stock units are subject to a three year graded vesting period. The performance share units are subject to a 34 month cliff vesting period. Additionally, during the nine months ended September 30, 2017, the Company awarded 102,191 restricted stock units with a weighted average grant date fair value of $11.77 per share and a weighted average vesting period of 1.5 years.

10. Equity

The Company’s equity as of December 31, 20142016 and September 30, 2015,2017, and changes during the nine months ended September 30, 2015,2017, were as follows:

 

 

 

RR Donnelley

 

 

 

 

 

 

 

 

 

 

 

Stockholders'

 

 

Noncontrolling

 

 

 

 

 

 

 

Equity

 

 

Interest

 

 

Total Equity

 

Balance at December 31, 2014

 

$

593.8

 

 

$

26.6

 

 

$

620.4

 

Net earnings (loss)

 

 

80.1

 

 

 

(13.0

)

 

 

67.1

 

Other comprehensive loss

 

 

(31.0

)

 

 

(1.0

)

 

 

(32.0

)

Share-based compensation

 

 

13.6

 

 

 

 

 

 

13.6

 

Issuance of common stock

 

 

154.2

 

 

 

 

 

 

154.2

 

Issuance of share-based awards, net of withholdings and other

 

 

(3.4

)

 

 

 

 

 

(3.4

)

Cash dividends paid

 

 

(158.4

)

 

 

 

 

 

(158.4

)

Noncontrolling interests in acquired business

 

 

 

 

 

4.6

 

 

 

4.6

 

Noncontrolling interests in disposed businesses

 

 

 

 

 

(2.4

)

 

 

(2.4

)

Distributions to noncontrolling interests

 

 

 

 

 

(1.0

)

 

 

(1.0

)

Balance at September 30, 2015

 

$

648.9

 

 

$

13.8

 

 

$

662.7

 

 

 

RRD

 

 

 

 

 

 

 

 

 

 

 

Stockholders'

 

 

Noncontrolling

 

 

 

 

 

 

 

Equity

 

 

Interest

 

 

Total Equity

 

Balance at December 31, 2016

 

$

(105.7

)

 

$

13.5

 

 

$

(92.2

)

Net earnings

 

 

18.4

 

 

 

0.7

 

 

 

19.1

 

Other comprehensive (loss) income

 

 

(70.8

)

 

 

0.4

 

 

 

(70.4

)

Share-based compensation

 

 

6.4

 

 

 

 

 

 

6.4

 

Spinoff adjustments

 

 

5.9

 

 

 

 

 

 

5.9

 

Issuance of share-based awards, net of withholdings and other

 

 

(1.7

)

 

 

 

 

 

(1.7

)

Cash dividends paid

 

 

(29.4

)

 

 

 

 

 

(29.4

)

Distributions to noncontrolling interests

 

 

 

 

 

(0.7

)

 

 

(0.7

)

Balance at September 30, 2017

 

$

(176.9

)

 

$

13.9

 

 

$

(163.0

)

During the threenine months ended JuneSeptember 30, 2015,2017, the Company issued stock in conjunction withrecorded certain spinoff related adjustments within equity primarily resulting from the Courier acquisition with a closing date value of $154.2 million.  final pension asset valuation as required by the Separation and Distribution Agreement.

 

9.11. Earnings per Share

Basic earnings per share is calculated by dividing net earnings attributable to RR DonnelleyRRD common stockholders by the weighted average number of common shares outstanding for the period. In computing diluted earnings per share, basic earnings 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 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. In periods when the Company is in a net loss from continuing operations, share-based awards are excluded from the calculation of earnings per share as their inclusion would have an anti-dilutive effect.

During the nine months ended September 30, 20162017 and 2015,2016, 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, 2015, the Company issued 2.7 million shares of stock in conjunction with the Courier acquisition.

 

1815


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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in millions, except per share data, unless otherwise indicated)

 

The reconciliation of the numerator and denominator of the basic and diluted earnings per share calculation and the anti-dilutive share-based awards for the three and nine months ended September 30, 20162017 and 20152016 was as follows:

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2016 (1)

 

 

2015 (1)

 

 

2016 (1)

 

 

2015 (1)

 

Net (loss) earnings per share attributable to RR Donnelley

   common stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.10

)

 

$

0.21

 

 

$

0.26

 

 

$

1.18

 

Diluted

 

$

(0.10

)

 

$

0.20

 

 

$

0.26

 

 

$

1.17

 

Dividends declared per common share

 

$

0.78

 

 

$

0.78

 

 

$

2.34

 

 

$

2.34

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) earnings attributable to RR Donnelley common stockholders

 

$

(7.1

)

 

$

14.3

 

 

$

18.2

 

 

$

80.1

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding

 

 

70.0

 

 

 

69.7

 

 

 

70.0

 

 

 

68.1

 

Dilutive options and awards

 

 

 

 

 

0.4

 

 

 

0.5

 

 

 

0.4

 

Diluted weighted average number of common shares outstanding

 

 

70.0

 

 

 

70.1

 

 

 

70.5

 

 

 

68.5

 

Weighted average number of anti-dilutive share-based awards:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options

 

 

0.8

 

 

 

0.7

 

 

 

0.7

 

 

 

0.7

 

Performance share units

 

 

0.2

 

 

 

0.4

 

 

 

0.2

 

 

 

0.4

 

Restricted stock units

 

 

0.3

 

 

 

 

 

 

 

 

 

 

Total

 

 

1.3

 

 

 

1.1

 

 

 

0.9

 

 

 

1.1

 

(1)

Earnings per share amounts, dividends declared per common share and adjusted weighted average common shares outstanding for all periods reflect RR Donnelley's 1-for-3 reverse stock split, which was effective October 1, 2016.

 

 

Three Months Ended

 

 

Nine Months Ended

 

  

 

September 30,

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

 

2017

 

 

 

2016

 

Basic net (loss) earnings per share attributable to RRD common stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

(0.11

)

 

$

0.31

 

 

$

0.26

 

 

$

0.03

 

Discontinued operations

 

 

 

 

 

(0.41

)

 

 

 

 

 

0.23

 

Net (loss) earnings attributable to RRD stockholders

 

$

(0.11

)

 

$

(0.10

)

 

$

0.26

 

 

$

0.26

 

Diluted net (loss) earnings per share attributable to RRD common stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

(0.11

)

 

$

0.31

 

 

$

0.26

 

 

$

0.03

 

Discontinued operations

 

 

 

 

 

(0.41

)

 

 

 

 

 

0.23

 

Net (loss) earnings attributable to RRD stockholders

 

$

(0.11

)

 

$

(0.10

)

 

$

0.26

 

 

$

0.26

 

Numerator

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) earnings attributable to RRD common stockholders - continuing operations

 

$

(8.0

)

 

$

22.0

 

 

$

18.4

 

 

$

2.4

 

Net (loss) earnings from discontinued operations, net of income taxes

 

 

 

 

 

(29.1

)

 

 

 

 

 

15.8

 

Net (loss) earnings attributable to RRD common stockholders

 

$

(8.0

)

 

$

(7.1

)

 

$

18.4

 

 

$

18.2

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding

 

 

70.2

 

 

 

70.0

 

 

 

70.1

 

 

 

70.0

 

Dilutive options and awards

 

 

 

 

 

0.5

 

 

 

0.2

 

 

 

0.5

 

Diluted weighted average number of common shares outstanding

 

 

70.2

 

 

 

70.5

 

 

 

70.3

 

 

 

70.5

 

Weighted average number of anti-dilutive share-based awards:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options

 

 

1.3

 

 

 

0.8

 

 

 

1.0

 

 

 

0.7

 

Performance share units

 

 

0.3

 

 

 

0.2

 

 

 

0.3

 

 

 

0.2

 

Restricted stock units

 

 

1.1

 

 

 

0.3

 

 

 

0.7

 

 

 

 

Total

 

 

2.7

 

 

 

1.3

 

 

 

2.0

 

 

 

0.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.14

 

 

$

0.78

 

 

$

0.42

 

 

$

2.34

 

 

10.

12. Other Comprehensive (Loss) Income

The components of other comprehensive lossincome (loss) and income tax (benefit) expense allocated to each component for the three and nine months ended September 30, 20162017 and 20152016 were as follows:

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30, 2016

 

 

September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Before Tax

 

 

Income Tax

 

 

Net of Tax

 

 

Before Tax

 

 

Income Tax

 

 

Net of Tax

 

 

Amount

 

 

Expense

 

 

Amount

 

 

Amount

 

 

Expense

 

 

Amount

 

Translation adjustments

$

(4.4

)

 

$

 

 

$

(4.4

)

 

$

(9.0

)

 

$

 

 

$

(9.0

)

Adjustment for net periodic pension and other

   postretirement benefits plan cost

 

(32.4

)

 

 

(13.0

)

 

 

(19.4

)

 

 

(16.3

)

 

 

(3.0

)

 

 

(13.3

)

Other comprehensive loss

$

(36.8

)

 

$

(13.0

)

 

$

(23.8

)

 

$

(25.3

)

 

$

(3.0

)

 

$

(22.3

)

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30, 2017

 

 

September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Before Tax

 

 

Income Tax

 

 

Net of Tax

 

 

Before Tax

 

 

Income Tax

 

 

Net of Tax

 

 

Amount

 

 

Expense

 

 

Amount

 

 

Amount

 

 

Expense

 

 

Amount

 

Translation adjustments

$

17.7

 

 

$

 

 

$

17.7

 

 

$

46.8

 

 

$

 

 

$

46.8

 

Adjustment for net periodic pension and other postretirement benefits plan cost

 

1.2

 

 

 

0.5

 

 

 

0.7

 

 

 

3.2

 

 

 

1.1

 

 

 

2.1

 

Adjustments for available-for-sale securities

 

(1.8

)

 

 

 

 

 

(1.8

)

 

 

(122.3

)

 

 

(3.0

)

 

 

(119.3

)

Other comprehensive income (loss)

$

17.1

 

 

$

0.5

 

 

$

16.6

 

 

$

(72.3

)

 

$

(1.9

)

 

$

(70.4

)

 

16


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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in millions, except per share data, unless otherwise indicated)

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30, 2016

 

 

September 30, 2016

 

 

Before Tax

 

 

Income Tax

 

 

Net of Tax

 

 

Before Tax

 

 

Income Tax

 

 

Net of Tax

 

 

Amount

 

 

Expense

 

 

Amount

 

 

Amount

 

 

Expense

 

 

Amount

 

Translation adjustments

$

(4.4

)

 

$

 

 

$

(4.4

)

 

$

(9.0

)

 

$

 

 

$

(9.0

)

Adjustment for net periodic pension and other

   postretirement benefits plan cost

 

(32.4

)

 

 

(13.0

)

 

 

(19.4

)

 

 

(16.3

)

 

 

(3.0

)

 

 

(13.3

)

Other comprehensive loss

$

(36.8

)

 

$

(13.0

)

 

$

(23.8

)

 

$

(25.3

)

 

$

(3.0

)

 

$

(22.3

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

During the nine months ended September 30, 2016, translation adjustments and income tax expense on pension and other postretirement benefits plan cost were adjusted to reflect previously recorded deferred taxes at their historical exchange rates.

Accumulated other comprehensive loss by component as of December 31, 2016 and September 30, 2017, and changes during the nine months ended September 30, 2017, were as follows:

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30, 2015

 

 

September 30, 2015

 

 

Before Tax

 

 

Income Tax

 

 

Net of Tax

 

 

Before Tax

 

 

Income Tax

 

 

Net of Tax

 

 

Amount

 

 

Expense

 

 

Amount

 

 

Amount

 

 

Expense

 

 

Amount

 

Translation adjustments

$

(37.5

)

 

$

 

 

$

(37.5

)

 

$

(42.5

)

 

$

 

 

$

(42.5

)

Adjustment for net periodic pension and other

   postretirement benefits plan cost

 

3.4

 

 

 

1.2

 

 

 

2.2

 

 

 

16.1

 

 

 

5.7

 

 

 

10.4

 

Change in fair value of derivatives

 

 

 

 

(0.1

)

 

 

0.1

 

 

 

0.1

 

 

 

 

 

 

0.1

 

Other comprehensive (loss) income

$

(34.1

)

 

$

1.1

 

 

$

(35.2

)

 

$

(26.3

)

 

$

5.7

 

 

$

(32.0

)

 

Changes in the Fair Value of Available-for-Sale Securities

 

 

Pension and Other Postretirement

Benefits Plan Cost

 

 

Translation Adjustments

 

 

Total

 

Balance at December 31, 2016

$

119.3

 

 

$

(159.5

)

 

$

(15.5

)

 

$

(55.7

)

Other comprehensive (loss) income before reclassifications

 

(48.5

)

 

 

 

 

 

43.6

 

 

 

(4.9

)

Amounts reclassified from accumulated other comprehensive loss

 

(70.8

)

 

 

2.1

 

 

 

2.8

 

 

 

(65.9

)

Net change in accumulated other comprehensive loss

 

(119.3

)

 

 

2.1

 

 

 

46.4

 

 

 

(70.8

)

Balance at September 30, 2017

$

 

 

$

(157.4

)

 

$

30.9

 

 

$

(126.5

)

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)

Accumulated other comprehensive loss by component as of December 31, 2015 and September 30, 2016, and changes during the nine months ended September 30, 2016, were as follows:

Pension and Other Postretirement

Benefits Plan Cost

 

 

Translation Adjustments

 

 

Total

 

Pension and Other Postretirement

Benefits Plan Cost

 

 

Translation Adjustments

 

 

Total

 

Balance at December 31, 2015

$

(727.5

)

 

$

(65.7

)

 

$

(793.2

)

$

(727.5

)

 

$

(65.7

)

 

$

(793.2

)

Other comprehensive loss before reclassifications

 

(69.7

)

 

 

(8.5

)

 

 

(78.2

)

 

(69.7

)

 

 

(8.5

)

 

 

(78.2

)

Amounts reclassified from accumulated other

comprehensive loss

 

55.2

 

 

 

 

 

 

55.2

 

 

55.2

 

 

 

 

 

 

55.2

 

Amounts reclassified due to the disposition of businesses

 

1.2

 

 

 

(0.7

)

 

 

0.5

 

Amounts reclassified due to disposition of a business

 

1.2

 

 

 

(0.7

)

 

 

0.5

 

Net change in accumulated other comprehensive loss

 

(13.3

)

 

 

(9.2

)

 

 

(22.5

)

 

(13.3

)

 

 

(9.2

)

 

 

(22.5

)

Balance at September 30, 2016

$

(740.8

)

 

$

(74.9

)

 

$

(815.7

)

$

(740.8

)

 

$

(74.9

)

 

$

(815.7

)

 

Accumulated other comprehensive loss by component as of December 31, 2014 and September 30, 2015, and changes during the nine months ended September 30, 2015, were as follows:

 

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

 

 

 

 

 

 

 

(54.6

)

 

 

(54.6

)

Amounts reclassified from accumulated other comprehensive

   loss

 

0.1

 

 

 

6.6

 

 

 

 

 

 

6.7

 

Amounts reclassified due to disposition of a business

 

 

 

 

3.8

 

 

 

13.1

 

 

 

16.9

 

Net change in accumulated other comprehensive loss

 

0.1

 

 

 

10.4

 

 

 

(41.5

)

 

 

(31.0

)

Balance at September 30, 2015

$

 

 

$

(751.9

)

 

$

(52.7

)

 

$

(804.6

)

Reclassifications from accumulated other comprehensive loss for the three and nine months ended September 30, 2016 and 2015 were as follows:

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

Classification in the Condensed Consolidated Statements of

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

Operations

Amortization of pension and other

   postretirement benefits plan cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net actuarial loss

$

7.8

 

 

$

10.1

 

 

$

23.5

 

 

$

30.5

 

 

(a)

Net prior service credit

 

(4.0

)

 

 

(6.7

)

 

 

(12.0

)

 

 

(20.2

)

 

(a)

Curtailments

 

(19.7

)

 

 

 

 

 

(19.7

)

 

 

 

 

(a)

Settlements

 

1.6

 

 

 

 

 

 

98.5

 

 

 

 

 

(a)

Reclassifications before tax

 

(14.3

)

 

 

3.4

 

 

 

90.3

 

 

 

10.3

 

 

 

Income tax (benefit) expense

 

(7.9

)

 

 

1.2

 

 

 

35.1

 

 

 

3.7

 

 

 

Reclassifications, net of tax

$

(6.4

)

 

$

2.2

 

 

$

55.2

 

 

$

6.6

 

 

 

(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 7, Employee Benefits).

2017


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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in millions, except per share data, unless otherwise indicated)

 

11.Reclassifications from accumulated other comprehensive loss for the three and nine months ended September 30, 2017 and 2016 were as follows:

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

Classification in the Condensed Consolidated

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

Statements of Operations

Translation Adjustments:

 

 

 

Net realized loss

$

2.8

 

 

 

 

 

$

2.8

 

 

 

 

 

Selling, general and administrative expenses

Reclassifications before tax

 

2.8

 

 

 

 

 

 

2.8

 

 

 

 

 

 

Income tax benefit

 

 

 

 

 

 

 

 

 

 

 

 

 

Reclassification, net of tax

$

2.8

 

 

$

 

 

$

2.8

 

 

$

 

 

 

Amortization of pension and other postretirement benefits plan cost:

 

 

 

Net actuarial loss

$

1.9

 

 

$

7.8

 

 

$

5.4

 

 

$

23.5

 

 

Cost of sales; Selling, general and administrative expenses

Net prior service credit

 

(0.7

)

 

 

(4.0

)

 

 

(2.2

)

 

 

(12.0

)

 

Cost of sales; Selling, general and administrative expenses

Settlements

 

 

 

 

1.6

 

 

 

 

 

 

98.5

 

 

Cost of sales; Selling, general and administrative expenses

Curtailments

 

 

 

 

(19.7

)

 

 

 

 

 

(19.7

)

 

Cost of sales; Selling, general and administrative expenses

Reclassifications before tax

 

1.2

 

 

 

(14.3

)

 

 

3.2

 

 

 

90.3

 

 

 

Income tax expense (benefit)

 

0.5

 

 

 

(7.9

)

 

 

1.1

 

 

 

35.1

 

 

 

Reclassification, net of tax

$

0.7

 

 

$

(6.4

)

 

$

2.1

 

 

$

55.2

 

 

 

Available-for-sale securities:

 

 

 

Net realized gain on equity securities

 

(1.8

)

 

 

 

 

 

(52.8

)

 

 

 

 

Investment and other income-net

Reclassifications before tax

 

(1.8

)

 

 

 

 

 

(52.8

)

 

 

 

 

 

Income tax benefit

 

 

 

 

 

 

 

18.0

 

 

 

 

 

 

Reclassification, net of tax

 

(1.8

)

 

 

 

 

 

(70.8

)

 

 

 

 

 

Total reclassifications, net of tax

$

1.7

 

 

$

(6.4

)

 

$

(65.9

)

 

$

55.2

 

 

 

13. Segment Information

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 PrintThis 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, office products, labels, statement printing, forms and packaging.

Strategic Services

The Strategic ServicesThis segment includes the Company’s logistics services, financial print products and related services, print management offerings and digital and creative solutions and book publishing.solutions.

International

The InternationalThis segment includes the Company’s non-U.S. printing operations in Asia, Europe, Latin America, Canada and Canada.Europe. This segment’s primary product and service offerings include packaging, books, catalogs, magazines, catalogs, retail inserts, books, directories, direct mail, packaging, forms, labels, manuals, statement printing, commercial and digital print, forms, labels, logistics services, anddirectories, digital and creative solutions.solutions, and direct mail. 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.

18


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

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 enable participating international locations to draw on the Company’s overseas cash resources to meet local liquidity needs.

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)

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.

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (Loss)

 

 

Depreciation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (Loss)

 

 

Depreciation

 

 

 

 

 

 

Total

 

 

Intersegment

 

 

Net

 

 

from

 

 

and

 

 

Capital

 

 

Total

 

 

Intersegment

 

 

Net

 

 

from

 

 

and

 

 

Capital

 

 

Sales

 

 

Sales

 

 

Sales

 

 

Operations

 

 

Amortization

 

 

Expenditures

 

 

Sales

 

 

Sales

 

 

Sales

 

 

Operations

 

 

Amortization

 

 

Expenditures

 

Three Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Publishing and Retail Services

 

$

717.0

 

 

$

(45.0

)

 

$

672.0

 

 

$

39.0

 

 

$

34.7

 

 

$

11.9

 

Three Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Variable Print

 

 

931.8

 

 

 

(17.5

)

 

 

914.3

 

 

 

64.2

 

 

 

34.7

 

 

 

15.8

 

 

$

771.7

 

 

$

(4.2

)

 

$

767.5

 

 

$

39.3

 

 

$

28.5

 

 

$

6.3

 

Strategic Services

 

 

731.9

 

 

 

(85.3

)

 

 

646.6

 

 

 

39.8

 

 

 

15.0

 

 

 

3.9

 

 

 

483.5

 

 

 

(39.8

)

 

 

443.7

 

 

 

(14.8

)

 

 

3.8

 

 

 

(0.2

)

International

 

 

567.9

 

 

 

(28.4

)

 

 

539.5

 

 

 

34.4

 

 

 

15.9

 

 

 

8.3

 

 

 

532.6

 

 

 

(8.9

)

 

 

523.7

 

 

 

20.6

 

 

 

13.7

 

 

 

11.9

 

Total operating segments

 

 

2,948.6

 

 

 

(176.2

)

 

 

2,772.4

 

 

 

177.4

 

 

 

100.3

 

 

 

39.9

 

 

 

1,787.8

 

 

 

(52.9

)

 

 

1,734.9

 

 

 

45.1

 

 

 

46.0

 

 

 

18.0

 

Corporate

 

 

 

 

 

 

 

 

 

 

 

(19.9

)

 

 

1.2

 

 

 

6.6

 

 

 

 

 

 

 

 

 

 

 

 

(9.2

)

 

 

1.0

 

 

 

5.0

 

Total operations

 

$

2,948.6

 

 

$

(176.2

)

 

$

2,772.4

 

 

$

157.5

 

 

$

101.5

 

 

$

46.5

 

 

$

1,787.8

 

 

$

(52.9

)

 

$

1,734.9

 

 

$

35.9

 

 

$

47.0

 

 

$

23.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (Loss)

 

 

Depreciation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (Loss)

 

 

Depreciation

 

 

 

 

 

 

Total

 

 

Intersegment

 

 

Net

 

 

from

 

 

and

 

 

Capital

 

 

Total

 

 

Intersegment

 

 

Net

 

 

from

 

 

and

 

 

Capital

 

 

Sales

 

 

Sales

 

 

Sales

 

 

Operations

 

 

Amortization

 

 

Expenditures

 

 

Sales

 

 

Sales

 

 

Sales

 

 

Operations

 

 

Amortization

 

 

Expenditures

 

Three Months Ended September 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Publishing and Retail Services

 

$

694.8

 

 

$

(9.9

)

 

$

684.9

 

 

$

33.4

 

 

$

40.1

 

 

$

5.9

 

Three Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Variable Print

 

 

949.4

 

 

 

(13.5

)

 

 

935.9

 

 

 

58.0

 

 

 

38.0

 

 

 

18.7

 

 

$

796.8

 

 

$

(6.5

)

 

$

790.3

 

 

$

50.1

 

 

$

30.5

 

 

$

15.0

 

Strategic Services

 

 

685.6

 

 

 

(50.0

)

 

 

635.6

 

 

 

51.5

 

 

 

15.8

 

 

 

4.8

 

 

 

486.9

 

 

 

(41.9

)

 

 

445.0

 

 

 

13.3

 

 

 

4.3

 

 

 

-

 

International

 

 

599.0

 

 

 

(27.4

)

 

 

571.6

 

 

 

(8.4

)

 

 

20.5

 

 

 

16.7

 

 

 

501.5

 

 

 

(11.2

)

 

 

490.3

 

 

 

36.0

 

 

 

14.8

 

 

 

6.3

 

Total operating segments

 

 

2,928.8

 

 

 

(100.8

)

 

 

2,828.0

 

 

 

134.5

 

 

 

114.4

 

 

 

46.1

 

 

 

1,785.2

 

 

 

(59.6

)

 

 

1,725.6

 

 

 

99.4

 

 

 

49.6

 

 

 

21.3

 

Corporate

 

 

 

 

 

 

 

 

 

 

 

(11.2

)

 

 

0.9

 

 

 

5.6

 

 

 

 

 

 

 

 

 

 

 

 

(15.4

)

 

 

1.4

 

 

 

7.4

 

Total operations

 

$

2,928.8

 

 

$

(100.8

)

 

$

2,828.0

 

 

$

123.3

 

 

$

115.3

 

 

$

51.7

 

 

$

1,785.2

 

 

$

(59.6

)

 

$

1,725.6

 

 

$

84.0

 

 

$

51.0

 

 

$

28.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (Loss)

 

 

 

 

 

 

Depreciation

 

 

 

 

 

 

 

Total

 

 

Intersegment

 

 

Net

 

 

from

 

 

Assets of

 

 

and

 

 

Capital

 

 

 

Sales

 

 

Sales

 

 

Sales

 

 

Operations

 

 

Operations

 

 

Amortization

 

 

Expenditures

 

Nine Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Publishing and Retail Services

 

$

1,956.0

 

 

$

(66.7

)

 

$

1,889.3

 

 

$

85.9

 

 

$

1,291.6

 

 

$

108.8

 

 

$

23.6

 

Variable Print

 

 

2,750.1

 

 

 

(50.6

)

 

 

2,699.5

 

 

 

189.4

 

 

 

2,570.1

 

 

 

103.3

 

 

 

47.9

 

Strategic Services

 

 

2,152.7

 

 

 

(165.6

)

 

 

1,987.1

 

 

 

161.0

 

 

 

1,528.1

 

 

 

47.0

 

 

 

27.2

 

International

 

 

1,659.6

 

 

 

(82.0

)

 

 

1,577.6

 

 

 

97.7

 

 

 

1,533.3

 

 

 

50.4

 

 

 

28.7

 

Total operating segments

 

 

8,518.4

 

 

 

(364.9

)

 

 

8,153.5

 

 

 

534.0

 

 

 

6,923.1

 

 

 

309.5

 

 

 

127.4

 

Corporate

 

 

 

 

 

 

 

 

 

 

 

(190.9

)

 

 

549.4

 

 

 

3.0

 

 

 

20.5

 

Total operations

 

$

8,518.4

 

 

$

(364.9

)

 

$

8,153.5

 

 

$

343.1

 

 

$

7,472.5

 

 

$

312.5

 

 

$

147.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (Loss)

 

 

Depreciation

 

 

 

 

 

 

 

Total

 

 

Intersegment

 

 

Net

 

 

from

 

 

and

 

 

Capital

 

 

 

Sales

 

 

Sales

 

 

Sales

 

 

Operations

 

 

Amortization

 

 

Expenditures

 

Nine Months Ended September 30, 2017

 

Variable Print

 

$

2,291.9

 

 

$

(12.3

)

 

$

2,279.6

 

 

$

114.2

 

 

$

86.2

 

 

$

21.8

 

Strategic Services

 

 

1,394.4

 

 

 

(120.1

)

 

 

1,274.3

 

 

 

(7.0

)

 

 

12.6

 

 

 

6.0

 

International

 

 

1,488.1

 

 

 

(28.2

)

 

 

1,459.9

 

 

 

53.8

 

 

 

41.1

 

 

 

34.3

 

Total operating segments

 

 

5,174.4

 

 

 

(160.6

)

 

 

5,013.8

 

 

 

161.0

 

 

 

139.9

 

 

 

62.1

 

Corporate

 

 

 

 

 

 

 

 

 

 

 

(39.1

)

 

 

3.2

 

 

 

15.1

 

Total operations

 

$

5,174.4

 

 

$

(160.6

)

 

$

5,013.8

 

 

$

121.9

 

 

$

143.1

 

 

$

77.2

 

 

2219


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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in millions, except per share data, unless otherwise indicated)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (Loss)

 

 

 

 

 

 

Depreciation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (Loss)

 

 

Depreciation

 

 

 

 

 

 

Total

 

 

Intersegment

 

 

Net

 

 

from

 

 

Assets of

 

 

and

 

 

Capital

 

 

Total

 

 

Intersegment

 

 

Net

 

 

from

 

 

and

 

 

Capital

 

 

Sales

 

 

Sales

 

 

Sales

 

 

Operations

 

 

Operations

 

 

Amortization

 

 

Expenditures

 

 

Sales

 

 

Sales

 

 

Sales

 

 

Operations

 

 

Amortization

 

 

Expenditures

 

Nine Months Ended September 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Publishing and Retail Services

 

$

1,861.3

 

 

$

(20.9

)

 

$

1,840.4

 

 

$

47.8

 

 

$

1,434.1

 

 

$

109.1

 

 

$

27.9

 

Nine Months Ended September 30, 2016

Nine Months Ended September 30, 2016

 

Variable Print

 

 

2,837.6

 

 

 

(41.6

)

 

 

2,796.0

 

 

 

183.6

 

 

 

2,542.3

 

 

 

115.5

 

 

 

43.1

 

 

$

2,326.3

 

 

$

(14.5

)

 

$

2,311.8

 

 

$

144.0

 

 

$

90.5

 

 

$

45.5

 

Strategic Services

 

 

2,119.1

 

 

 

(118.6

)

 

 

2,000.5

 

 

 

189.3

 

 

 

1,420.4

 

 

 

50.4

 

 

 

33.0

 

 

 

1,343.9

 

 

 

(114.3

)

 

 

1,229.6

 

 

 

25.3

 

 

 

14.0

 

 

 

13.1

 

International

 

 

1,768.5

 

 

 

(83.2

)

 

 

1,685.3

 

 

 

25.9

 

 

 

1,655.3

 

 

 

63.7

 

 

 

36.7

 

 

 

1,465.7

 

 

 

(33.0

)

 

 

1,432.7

 

 

 

101.8

 

 

 

46.7

 

 

 

23.8

 

Total operating segments

 

 

8,586.5

 

 

 

(264.3

)

 

 

8,322.2

 

 

 

446.6

 

 

 

7,052.1

 

 

 

338.7

 

 

 

140.7

 

 

 

5,135.9

 

 

 

(161.8

)

 

 

4,974.1

 

 

 

271.1

 

 

 

151.2

 

 

 

82.4

 

Corporate

 

 

 

 

 

 

 

 

 

 

 

(50.0

)

 

 

418.5

 

 

 

2.8

 

 

 

12.1

 

 

 

 

 

 

 

 

 

 

 

 

(104.8

)

 

 

2.3

 

 

 

16.5

 

Total operations

 

$

8,586.5

 

 

$

(264.3

)

 

$

8,322.2

 

 

$

396.6

 

 

$

7,470.6

 

 

$

341.5

 

 

$

152.8

 

 

$

5,135.9

 

 

$

(161.8

)

 

$

4,974.1

 

 

$

166.3

 

 

$

153.5

 

 

$

98.9

 

Restructuring, impairment and other charges by segment for the three and nine months ended September 30, 2016 and 2015 are described in Note 6,7, Restructuring, Impairment and Other Charges.

 

12.14. 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 thirteenthree active federal and state Superfund and other multiparty remediation sites. In addition to these sites, the Company may also have the obligation to remediate elevenseven other previously and currently owned facilities. At the Superfund sites, the Comprehensive Environmental Response, Compensation and Liability Act provides that the Company’s liability could be joint and several, meaning that the Company could be required to pay an amount in excess of its proportionate share of the remediation costs.    

The Company’s understanding of the financial strength of other potentially responsible parties at the multiparty sites and of other liable parties at the previously owned facilities has been considered, where appropriate, in the determination of the Company’s estimated liability. The Company established reserves, recorded in accrued liabilities and other noncurrent liabilities, that it believes are adequate to cover its share of the potential costs of remediation at each of the multiparty sites and the previously and currently owned facilities. It is not possible to quantify with certainty the potential impact of actions regarding environmental matters, particularly remediation and other compliance efforts that the Company may undertake in the future. However, in the opinion of management, compliance with the present environmental protection laws, before taking into account estimated recoveries from third parties, will not have a material effect on the Company’s consolidated 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 be party to certain litigation arising in the ordinary course of business. Management believes that the final resolution of these preference items and litigation will not have a material effect on the Company’s consolidated results of operations, financial position or cash flows.  

 

 

 

2320


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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in millions, except per share data, unless otherwise indicated)

 

13.15. Debt

The Company’s debt at September 30, 20162017 and December 31, 20152016 consisted of the following:

 

 

September 30,

 

 

December 31,

 

 

September 30,

 

 

December 31,

 

 

2016

 

 

2015

 

 

2017

 

 

2016

 

Borrowings under the Credit Agreement

 

$

 

 

$

 

 

$

350.0

 

 

$

185.0

 

8.60% senior notes due August 15, 2016

 

 

 

 

 

219.6

 

6.125% senior notes due January 15, 2017

 

 

155.1

 

 

 

251.2

 

7.25% senior notes due May 15, 2018

 

 

45.8

 

 

 

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

 

 

21.3

 

 

 

238.9

 

7.625% senior notes due June 15, 2020

 

 

350.0

 

 

 

350.0

 

 

 

238.4

 

 

 

350.0

 

7.875% senior notes due March 15, 2021

 

 

448.7

 

 

 

448.5

 

 

 

447.1

 

 

 

448.8

 

8.875% debentures due April 15, 2021

 

 

80.9

 

 

 

80.9

 

 

 

80.9

 

 

 

80.9

 

7.00% senior notes due February 15, 2022

 

 

140.0

 

 

 

400.0

 

 

 

140.0

 

 

 

140.0

 

6.50% senior notes due November 15, 2023

 

 

350.0

 

 

 

350.0

 

 

 

290.6

 

 

 

350.0

 

6.00% senior notes due April 1, 2024

 

 

400.0

 

 

 

400.0

 

 

 

298.3

 

 

 

400.0

 

6.625% debentures due April 15, 2029

 

 

199.5

 

 

 

199.5

 

 

 

157.9

 

 

 

199.5

 

8.820% debentures due April 15, 2031

 

 

69.0

 

 

 

69.0

 

 

 

69.0

 

 

 

69.0

 

Donnelley Financial 8.250% senior notes due 2024

 

 

300.0

 

 

 

 

LSC 8.750% senior notes due 2023

 

 

450.0

 

 

 

 

Donnelley Financial and LSC term loan B facilities

 

 

713.9

 

 

 

 

Other (b)

 

 

38.3

 

 

 

18.7

 

 

 

17.9

 

 

 

8.5

 

Unamortized debt issuance costs

 

 

(43.8

)

 

 

(25.6

)

 

 

(12.2

)

 

 

(16.5

)

Total debt

 

 

3,890.9

 

 

 

3,422.9

 

 

 

2,250.1

 

 

 

2,387.4

 

Less: current portion

 

 

(255.6

)

 

 

(234.6

)

 

 

(17.9

)

 

 

(8.2

)

Long-term debt

 

$

3,635.3

 

 

$

3,188.3

 

 

$

2,232.2

 

 

$

2,379.2

 

(a)

As of September 30, 20162017 and December 31, 2015,2016, the interest rate on the 11.25% senior notes due February 1, 2019 was 13.0% and 12.75%13.25%, respectively,the maximum rate on these notes, as a result of downgrades in the ratings of the notes by the rating agencies.downgrades.

(b)

Includes miscellaneous debt obligations and capital leases. The balance as of December 31, 2015 also included the fair value adjustments to the 8.25% senior notes due March 15, 2019 related to the Company’s fair value hedges, which were terminated as of September 30, 2016.

 

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 $120.9$38.9 million and $4.3 million at September 30, 20162017 and less than its book value by approximately $39.7 million at December 31, 2015.2016, respectively.

In connection withOn September 29, 2017, the Company entered into an asset-based revolving credit facility pursuant to the spin-off transactions, on September 30, 2016, Donnelley Financial issued 8.250% senior notes due 2024 with an aggregate principal of $300.0 million (the “DFS Notes”)second amended and incurred a senior secured term loan B facility (the “DFS Term Loan Facility”) under its newrestated credit agreement in an aggregate principal of $350.0 million, under(the “Credit Agreement”) which Donnelley Financial will borrow at 4.00% over LIBOR, subject to a LIBOR floor of 1.00%. Donnelley Financial’s credit agreement also includes a $300.0amended and restated the Company’s $800.0 million senior secured revolving credit facility which was undrawn as ofdated September 30, 2016. Additionally on September 30, 2016, LSC issued 8.750% senior secured notes due 2023 with an aggregate principal of $450.0 million (the “LSC Notes”) and incurredThe Credit Agreement provides for a senior secured term loan Basset-based revolving credit facility (the “LSC Term Loan Facility”) under its new credit agreement in an aggregate principal of $375.0up to $800.0 million under which LSC will borrow at 6.00% over LIBOR, subject to a LIBOR floorborrowing base. The amount available to be borrowed under the Credit Agreement is equal to the lesser of 1.00%. LSC’s credit agreement also includes(a) $800.0 million and (b) the aggregate amount of accounts receivable, inventory, machinery and equipment and fee-owned real estate of the Company and certain of its domestic subsidiaries (the “Guarantors”) (collectively, the “Borrowing Base”), subject to certain eligibility criteria and advance rates. The aggregate amount of real estate, machinery and equipment that can be included in the Borrowing Base cannot exceed $200.0 million. As a $400.0result of the amendment, the Company recognized a $6.2 million senior secured revolving credit facility which was undrawn asloss related to unamortized debt issuance costs and other expenses within loss on debt extinguishments in the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2016. The net proceeds from2017. Additionally, the sale of the LSC Notes and the borrowings under the DFS Term Loan Facility and the LSC Term Loan Facility were distributed to their parent company, RR Donnelley in connection with the spinoff transactions. RR Donnelley used these proceeds to reduce its existing debt. Additionally, there wereCompany had approximately $4.5$0.6  million of accrued financing fees as ofSeptember 30, 20162017 related to these transactions.this transaction.

The Credit Agreement is scheduled to mature on September 29, 2022, at which time all outstanding amounts under the Credit Agreement will be due and payable. The proceeds of the loans under the Credit Agreement may be used for working capital and general corporate purposes.

Any borrowings under the Credit Agreement will bear interest at a rate dependent on the average quarterly availability under the Credit Agreement and will be calculated according to a base rate or a Eurocurrency rate plus an applicable margin. The applicable margin for base rate loans ranges from 0.25% to 0.50% and the applicable margin for Eurocurrency loans ranges from 1.25% to 1.50%. In addition, an unused line fee is payable quarterly on the unused portion of the amount available to be borrowed under the Credit Agreement. The unused line fee accrues at a rate of either 0.250% or 0.375% depending upon the average usage of the facility.

The Company’s obligations under the Credit Agreement are guaranteed by the Guarantors and are secured by a security interest in certain assets of the Company and its domestic subsidiaries, including accounts receivable, inventory, deposit accounts, securities

 

2421


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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in millions, except per share data, unless otherwise indicated)

 

On August 31, 2016,accounts, investment property, machinery and equipment and, to the extent related to the foregoing, general intangibles, documents, instruments and chattel paper, as well as 65% of the equity interests of their first-tier foreign subsidiaries.

The Credit Agreement contains customary restrictive covenants, including a covenant which requires the Company to maintain a minimum fixed charge coverage ratio under certain circumstances. In addition, the Company’s ability to undertake certain actions, including, among other things, prepay certain junior debt, incur additional unsecured indebtedness and make certain restricted payments depends on satisfaction of certain conditions, including, among other things, meeting minimum availability thresholds under the Credit Agreement.

The weighted average interest rate on borrowings under the credit facilities was 3.7% and 2.2% during the nine months ended September 30, 2017 and 2016, respectively.

On June 7, 2017, the Company repurchased $41.7 million of the 6.625% debentures due April 15, 2029, $59.4 million of the 6.50% senior notes due November 15, 2023 and $101.7 million of the 6.00% senior notes due April 1, 2024 using borrowings under the prior credit agreement. The repurchases resulted in a net gain of $0.8 million which was recognized within loss on debt extinguishments in the Condensed Consolidated Statements of Operations for the nine months ended September 30, 2017 related to the difference between the fair value of the debt repurchased and the principal outstanding, partially offset by the premiums paid, unamortized debt issuance costs and other expenses.

On May 22, 2017, certain third party financial institutions (such financial institutions collectively, the “Third Party Purchasers”), launched cash tender offers for certain of the Company’s outstanding debt securities, including the Company’s 6.125%7.625% senior notes due JanuaryJune 15, 2017 (the “2017 Notes”), 7.250% senior notes due May 15, 2018 the (“2018 Notes”), 8.250%2020 and 7.875% senior notes due March 15, 2019 (the “2019 Notes”) and 7.000% senior notes due February 15, 2022 (the “2022 Notes”).2021. On September 16, 2016,June 7, 2017, the Third Party Purchasers purchased $274.4$111.6 million in aggregate principal amount of the 2017 Notes and 2018 Notes7.625% senior notes due June 15, 2020 (the “Third Party Purchase Notes”). On September 30, 2016,June 21, 2017, the Company purchased approximately $503.6 million in aggregate principal amountexchanged 6,143,208 of the 2017 Notes, the 2018 Notes, the 2019 Notes and the 2022 Notes (the “Company Purchase Notes”), and exchanged $300.0 million in aggregate principal amountits retained shares of the DFS NotesDonnelley Financial for the Third Party Purchase Notes. The Company cancelled the Third Party Purchase Notes and Company Purchase Notes on September 30, 2016.June 21, 2017. As a result, the Company recognized an $83.9a $14.4 million loss on debt extinguishment in the Condensed Consolidated Statements of Operations during the nine months ended September 30, 2017 related to premiums paid, unamortized debt issuance costs and other expenses. In addition, the Company recognized a net realized gain of $92.4 million resulting from the disposition of these retained shares of Donnelley Financial common stock within investment and other income-net in the Condensed Consolidated Statements of Operations during the nine months ended September 30, 2017.

On August 4, 2017, the Company disposed of its remaining 99,594 shares of Donnelley Financial common stock in exchange for $1.9 million in aggregate principal of the Company’s 7.875% senior notes due March 15, 2021 which were cancelled. As a result, the Company recognized a $0.3 million loss on debt extinguishments in the three months ended September 30, 2016 related to premiums and other related transaction costs.

On October 6, 2016, the Company redeemed the outstanding $45.8 million principal amountCondensed Consolidated Statements of the 2018 Notes and the outstanding $21.3 principal amount of the 2019 Notes plus accrued and unpaid interest. Additionally, the Company redeemed the outstanding $155.2 million aggregate principal of the 2017 Notes on November 2, 2016. As a result, the Company expects to recognize an estimated $9.0 million loss on debt extinguishments in the fourth quarter of 2016.

On September 30, 2016, the Company entered into an amended and restated Credit Agreement (the “Credit Agreement”) providing for $800.0 million in credit facilities (the “Revolving Facility”). The Revolving Facility matures on September 30, 2021. Interest rates on borrowings are equal to, at the Company’s option, a base rate plus a margin ranging from 1.125% to 1.50%, or LIBOR plus a margin ranging from 2.125% to 2.50%, in either case based upon the leverage ratio of RR Donnelley. In addition, the Company will pay a facility fee on the actual daily amount of the aggregate revolving commitments regardless of usage ranging from 0.375% to 0.50%, based upon the leverage ratio of the Company. As a result of the reduction in borrowing capacity, the Company recognized a $1.4 million loss related to unamortized debt issuance costs within loss on debt extinguishments in the condensed consolidated statements of operations forOperations during the three months ended September 30, 2016. Additionally, the Company had approximately $0.8 million of accrued financing fees as of September 30, 2016 related to this transaction.

The Credit Agreement contains a number of restrictive covenants, including a maximum secured leverage ratio, as defined in and calculated pursuant to the Credit Agreement, that, in part, restrict the Company’s ability to incur additional indebtedness, create liens, engage in mergers and consolidations, make restricted payments and dispose of certain assets. The Credit Agreement generally allows annual dividend payments of $60.0 million in aggregate though additional dividends may be permitted subject to certain conditions.

The weighted average interest rate on borrowings under the prior Credit Agreement was 2.2% and 2.0% during the nine months ended September 30, 20162017, related to premiums paid, unamortized debt issuance costs and 2015, respectively.other expenses. In addition, the Company recognized a net realized gain of $1.6 million resulting from the disposition of these retained shares of Donnelley Financial common stock within investment and other income-net in the Condensed Consolidated Statements of Operations during the three and nine months ended September 30, 2017.

Interest income was $1.3$0.8 million and $4.2$2.3 million for the three and nine months ended September 30, 2017, respectively, and $1.9 million and $3.8 million for the three and nine months ended September 30, 2016, and 2015, respectively.

Cash on hand and borrowings under the Credit Agreement were used to pay the $219.8 million of 8.6% senior notes that matured on August 15, 2016.respectively.  

 

16. Income Taxes

25The Company’s effective income tax rate was 31.0% and 38.4% for the three months ended September 30, 2017 and 2016, respectively and (63.2%) and 80.1% for the nine months ended September 30, 2017 and 2016, respectively. The effective income tax rate for the nine months ended September 30, 2017 reflects the impact of the disposition of the Donnelley Financial and LSC retained shares. The retained shares of Donnelley Financial were disposed in non-taxable debt-for-equity exchanges during the three and nine months ended September 30, 2017. See Note 15, Debt, for additional details regarding the dispositions of the Donnelley Financial retained shares of common stock. The sale of LSC shares generated a capital loss which will be carried forward; however, it is more likely than not that the benefit of such deferred tax asset will not be realized and a valuation allowance was recorded. See Note 2, Discontinued Operations, for additional information regarding the sale of the LSC retained shares. The effective income tax rate for the three months ended September 30, 2017 reflects the impact of the impairment of goodwill in the DCS reporting unit and the inability to recognize a tax benefit on certain losses. The effective income tax rate for the three and nine months ended September 30, 2016 reflects the impact of income generated in higher taxing jurisdictions and the inability to recognize a tax benefit on certain losses.

22


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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in millions, except per share data, unless otherwise indicated)

 

14.17. 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, forward and swap contracts to hedge exposures resulting from foreign exchange fluctuations. Accordingly, the 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, borrowings and net investments in foreign subsidiaries. The Company does not use derivative financial instruments for trading or speculative purposes. The aggregate notional value of the forwardforeign currency contracts at September 30, 20162017 and December 31, 20152016 was $260.4$136.7 million and $268.4$172.2 million, respectively. The fair values of foreign exchange forwardcurrency contracts were determined to be Level 2 under the fair value hierarchy and are valued using market exchange rates.

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 value 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 2014, the Company repurchased $211.1 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.  During the three months ended September 30, 2016, in connection with the tender of the Company’s 8.25% senior notes due March 15, 2019, the Company terminated the remaining $190.0 million notional value of the interest rate swap agreements which resulted in cash received of $2.5 million for the fair value of the interest rate swaps.  

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. On 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.

The Company’s foreign exchange forwardcurrency 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 forwardcurrency contracts on a net basis when possible. Foreign exchange forwardcurrency contracts that can be settled on a net basis are presented net in the Condensed Consolidated Balance Sheets. Interest rate swaps arewere settled on a gross basis and presented gross in the Condensed Consolidated Balance Sheets.

 

2623


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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in millions, except per share data, unless otherwise indicated)

 

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 wherewhereby 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.weakened.

At September 30, 20162017 and December 31, 2015,2016, the total fair value of the Company’s foreign exchange forwardcurrency 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, werewas as follows:

 

September 30, 2016

 

 

December 31, 2015

 

 

September 30, 2017

 

 

December 31, 2016

 

Derivatives not designated as hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Prepaid expenses and other current assets

 

$

0.1

 

 

$

1.8

 

 

$

1.5

 

 

$

1.7

 

Accrued liabilities

 

 

1.9

 

 

 

1.5

 

 

 

1.0

 

 

 

1.5

 

Derivatives designated as fair value hedges

 

 

 

 

 

 

 

 

Other noncurrent assets

 

$

 

 

$

0.4

 

The pre-tax (gains) losses related to derivatives not designated as hedges recognized in the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 20162017 and 20152016 were as follows:

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

Classification of (Gain) Loss Recognized in the

 

September 30,

 

 

September 30,

 

Classification of (Gain) Loss Recognized in the

 

September 30,

 

 

September 30,

 

Condensed Consolidated Statements of Operations

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Condensed Consolidated Statements of Operations

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Derivatives not designated as hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedges

 

Foreign exchange forward contracts

Selling, general and administrative expenses

 

$

0.8

 

 

$

1.3

 

 

$

3.4

 

 

$

(22.2

)

Foreign currency contracts

Selling, general and administrative expenses

 

$

0.5

 

 

$

0.8

 

 

$

1.1

 

 

$

3.4

 

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) loss on the related interest rate swaps for the three and nine months ended September 30, 20162017 and 20152016 were as follows:

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

Classification of (Gain) Loss Recognized in the

 

September 30,

 

 

September 30,

 

Classification of (Gain) Loss Recognized in the

 

September 30,

 

 

September 30,

 

Condensed Consolidated Statements of Operations

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Condensed Consolidated Statements of Operations

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Fair Value Hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

Investment and other (income) expense-net

 

$

3.6

 

 

$

(2.2

)

 

$

0.4

 

 

$

(3.6

)

Investment and other income-net

 

$

 

 

$

3.6

 

 

$

 

 

$

0.4

 

Hedged items

Investment and other (income) expense-net

 

 

(4.3

)

 

 

2.4

 

 

 

(0.8

)

 

 

3.4

 

Investment and other income-net

 

 

 

 

 

(4.3

)

 

 

 

 

 

(0.8

)

Total (gain) loss recognized as

ineffectiveness in the Condensed

Consolidated Statements of

Operations

Investment and other (income) expense-net

 

$

(0.7

)

 

$

0.2

 

 

$

(0.4

)

 

$

(0.2

)

Total ineffectiveness recognized

Investment and other income-net

 

$

 

 

$

(0.7

)

 

$

 

 

$

(0.4

)

The Company also recognized a net reduction to interest expense of $0.2 million and $1.0 million for the three and nine months ended September 30, 2016, respectively, and $0.5 million and $1.6 million for the three and nine months ended September 30, 2015, 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.

 

 

2724


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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in millions, except per share data, unless otherwise indicated)

 

15. Venezuela Currency Remeasurement18. Fair Value Measurements

Certain assets and liabilities are required to be recorded at fair value on a recurring basis. The following tables summarize the bases used to measure financial assets and liabilities that are carried at fair value on a recurring basis in the Condensed Consolidated Balance Sheets:

 

 

 

 

 

Basis of Fair Value Measurement

 

 

Balance as of September 30, 2017

 

 

Significant Other Observable Inputs

(Level 2)

 

Assets

 

 

 

 

 

 

 

Foreign currency contracts

$

1.5

 

 

$

1.5

 

Total assets

$

1.5

 

 

$

1.5

 

Liabilities

 

 

 

 

 

 

 

Foreign currency contracts

 

1.0

 

 

 

1.0

 

Total liabilities

$

1.0

 

 

$

1.0

 

 

 

 

 

 

Basis of Fair Value Measurement

 

 

Balance as of December 31, 2016

 

 

Significant Other Observable Inputs

(Level 2)

 

Assets

 

 

 

 

 

 

 

Foreign currency contracts

$

1.7

 

 

$

1.7

 

Available-for-sale securities

328.7

 

 

328.7

 

Total assets

$

330.4

 

 

$

330.4

 

Liabilities

 

 

 

 

 

 

 

Foreign currency contracts

1.5

 

 

1.5

 

Total liabilities

$

1.5

 

 

$

1.5

 

As described in Note 2, Acquisitions and Dispositions, on April 29, 2015of September 30, 2017, the Company sold its 50.1% interestno longer held investments in its Venezuelan operating entity.

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 were 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.  

During the 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 was available to all entities for all transactions.  The Venezuelan government indicated that the official rate of 6.3 Bolivars per U.S. Dollar would be reserved only for settlement of U.S. Dollar denominated purchases of “essential goods and services.”LSC or Donnelley Financial common stock.  As of December 31, 2014, the SICAD 1 and SICAD 2 exchange rates were 12.0 and 50.0 Bolivars per U.S. Dollar, respectively. Beginning March 31, 2014, certain assets of2016, the Company’s Venezuelan subsidiariesinvestment in LSC and Donnelley Financial common stock were remeasured atcategorized as Level 2 securities as these shares were not registered and were valued based upon the SICAD 2 rateclosing stock price on the balance sheet date as they represented an identical equity instrument registered under the Company believed those assets would ultimately be utilized to settle U.S. Dollar denominated liabilities using SICAD 2.  Remaining net monetary assets were remeasured at the SICAD 1 rate,Securities Act of 1933, as the Company believed SICAD 1 would be applicable for future transactions, and dividend remittances, if any, from the Company’s Venezuelan subsidiaries.  During the three months ended June 30, 2014, certain transactions pending approval at the official rate of 6.3 Bolivars per U.S. Dollar were approved, resulting in foreign exchange gains.  

In February 2015, the Venezuelan government discontinued the SICAD 2 rate and introduced a new currency exchange rate mechanism (“SIMADI”).  As of February 28, 2015, monetary assets and liabilities of the Company’s Venezuelan subsidiaries were remeasured at the SIMADI rate as the Company believed the SIMADI was the exchange 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 Bolivars per U.S. Dollar.amended.

As a result of the remeasurement at the SIMADI rate and the related impact of the devaluation, during the nine months ended September 30, 2015, a pre-tax loss of $30.3 million ($27.5 million after-tax) was recognized in net investment and other expense, of which $10.5 million was included in loss attributable to noncontrolling interests.

16.19. New Accounting Pronouncements

In February 2016,March 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-07 “Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,” which changes the presentation of net periodic pension and postretirement benefit cost (net benefit cost) within the Statement of Operations. Under the current guidance, net benefit cost is reported as an employee cost within operating income. The amendment requires the bifurcation of net benefit cost, with the service cost component to be presented with other employee compensation costs in operating income while the other components will be reported separately outside of income from operations. ASU No. 2017-07 will be effective in the first quarter of 2018 and is required to be retrospectively adopted. Had this guidance been adopted as of January 1, 2017, income from operations within the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2017 would have been lower by $4.2 million and $12.5 million, respectively, and other non-operating income would have increased $4.2 million and $12.5 million, respectively.  

In January 2017, the FASB issued ASU No. 2017-04 “Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” which eliminates Step 2 from the current goodwill impairment test, including determining the implied fair value of goodwill and comparing it with the carrying amount of that goodwill. The standard requires entities to record impairment charges based on the excess of a reporting unit’s carrying amount over its fair value. ASU No. 2017-04 will be effective in the first quarter of 2020; however early adoption is permitted for interim and annual goodwill impairment tests performed after January 1, 2017. The adoption of ASU 2017-04 may impact the results of future goodwill impairment tests and therefore could impact the Company’s consolidated financial position and results of operations. The Company has elected to early adopt this guidance and will apply this guidance to all impairment analyses performed after January 1, 2017.

25


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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in millions, except per share data, unless otherwise indicated)

In November 2016, the FASB issued ASU No. 2016-18 “Statement of Cash Flows (Topic 230): Restricted Cash.” This update requires that restricted cash and cash equivalents be included as components of total cash and cash equivalents as presented on the statement of cash flows. ASU No. 2016-18 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017 and a retrospective transition method is required. Early adoption is permitted, including adoption in an interim period. The Company currently presents changes in restricted cash and cash equivalents in the investing section of its Condensed Consolidated Statement of Cash Flows. The new guidance will not impact financial results, but will result in a change in the presentation of restricted cash and restricted cash equivalents within the Condensed Consolidated Statements of Cash Flows.

In August 2016, the FASB issued ASU No. 2016-15 “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” This update addresses whether to present certain specific cash flow items as operating, investing or financing activities. The amendments in this update are effective for public entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017 and are required to be retroactively adopted. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the impact of ASU No. 2016-15 on its Condensed Consolidated Statements of Cash Flows.

In March 2016, the FASB issued ASU No. 2016-09 “Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” Under the new guidance, when awards vest or are settled, the excess tax benefits and tax deficiencies are recorded as income tax expense or benefit in the income statement instead of within additional paid-in capital. This guidance will be applied prospectively. Furthermore, the guidance requires excess tax benefits to be presented as an operating activity on the statement of cash flows rather than as a financing activity, which can be applied retrospectively or prospectively. Under the new guidance, an election can be made regarding whether to account for forfeitures of share-based payments by recognizing forfeitures of awards as they occur or estimate the number of awards expected to be forfeited, as is currently required. This guidance is to be applied using a modified retrospective transition method, with a cumulative adjustment to retained earnings. The Company has adopted this guidance as of January 1, 2017. The adoption had an immaterial impact on the Company’s Condensed Consolidated financial statements.  

In February 2016, the FASB issued ASU No. 2016-02 “Leases (Topic 842)” (“ASU 2016-02”) which requires lessees to put most leases on the balance sheet but recognize expense on the income statement in a manner similar to current accounting. For lessors, ASU 2016-02 also modifies the classification criteria and the accounting for sales-type and direct financing leases. The standard requires a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements and is effective in the first quarter of 2019. Early adoption of ASU 2016-02 is permitted; however the Company plans to adopt the standard in the first quarter of 2019. The Company is currently evaluating the impact of ASU 2016-02.

In May 2014, the FASB issued Accounting Standards UpdateASU 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. In August 2015,During 2016, the FASB issued Accounting Standards Update No.ASU 2016-08 “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” ASU 2016-10 “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing,” and ASU 2016-12 “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients,” which clarify the revenue recognition implementation guidance on principal versus agent considerations, identifying performance obligations, determining whether an entity's promise to grant a license provides a customer with either a right to use or a right to access the entity's intellectual property, assessing the collectability criteria, presentation of sales and similar taxes, noncash consideration and various other items. The amendments in these ASUs affect the guidance in ASU 2014-09, and the effective date and transition requirements are the same as those for ASU 2014-09 which, as amended by ASU 2015-14 “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date,” which defers thewill be effective date of ASU 2014-09 to January 1, 2018. Early adoption of ASU 2014-09 is permitted in the first quarter of 2017; howeverfor the Company plans to adopt the standard in the first quarter ofon January 1, 2018. 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 evaluating the impact of the provisions of ASU 2014-09 and currently anticipates applying the modified retrospective approach when adopting the standard.

 

2826


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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in millions, except per share data, unless otherwise indicated)

 

The following recently issued standards are not expected to have a material impact onBased upon preliminary results of management’s evaluation, the Company’s Consolidated Financial Statements:

Accounting Standards Update No. 2016-17 “Consolidation (Topic 810): Interests Held through Related Parties That Are Under Common Control”

Accounting Standards Update No. 2016-16 “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory” 

Accounting Standards Update No. 2016-15 “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts an Cash Payments (a consensusmost impactful aspects of the Emerging Issues Task Force)”

Accounting Standards Update No. 2016-13 “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”

Accounting Standards Update No. 2016-09 “Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”

Accounting Standards Update No. 2016-07 “Investments—Equity Method and Joint Ventures (Topic 323): Simplifying the transitionguidance relate to the Equity Methodtiming of Accounting”

Accounting Standards Update No. 2016-06 “Derivativesrecognition for the revenue from customized products over time versus at a point in time, as well as inventory billed but not yet shipped. The Company has amounts of customized products in the Variable Print and Hedging (Topic 815): Contingent PutInternational segments which are currently recognized when the products are completed and Call Options in Debt Instruments”

Accounting Standards Update No. 2016-05 “Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships”

Accounting Standards Update No. 2016-01 “Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities”

Accounting Standards Update No. 2015-12 “Plan Accounting (Topics 960, 962, and 965): (Part I) Fully Benefit-Responsive Investment Contracts, (Part II) Plan Investment Disclosures, (Part III) Measurement Date Practical Expedient”

Accounting Standards Update No. 2015-11 “Inventory (Topic 330): Simplifyingshipped to the Measurement of Inventory”

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”

The following standards have been effective for and adopted bycustomer. Currently, the Company defers revenue for inventory billed but not yet shipped which under the new revenue standard, the Company may be able to recognize revenue for certain inventory billed but not yet shipped. The actual revenue recognition treatment required under this new standard will be dependent on contract specific terms. The Company is still in 2016. the process of evaluating and designing the necessary changes to its business processes, systems and controls to support recognition and disclosure under the new standard.The adoptionCompany will adopt the standard in the first quarter of these standards did not have a material impact on2018 and currently anticipates applying the Company’s consolidated financial position, results of operations or cash flows:

Accounting Standards Update No. 2015-16 “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments”

Accounting Standards Update No. 2015-07 “Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)”

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”

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. 2014-16 “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”modified retrospective approach.

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”

 

 

 

 


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Company Overview

R.R. Donnelley & Sons Company (“RR Donnelley,RRD,” the “Company,” “we,” “us,” and “our”), a Delaware corporation, helps organizations communicate more effectively by working to create, manage, produce, distribute and process content on behalf of our customers. The Company assistsWe assist customers in developing and executing multichannel communication strategies that engage audiences, reduce costs, drive revenues and increase compliance. R.R. Donnelley’sOur innovative technologies enhance digitalcontent management offering, production platform, logistics services, supply chain management, outsourcing capabilities and print communications to delivercustomized consultative expertise assists our customers in the delivery of integrated messages across multiple media to highly targeted audiences at optimal times for clientscustomers in virtually every private and public sector. StrategicallyWe have strategically located operations that provide local service and responsiveness while leveraging the economic, geographic and technological advantages of a global organization.

Spinoff Transactions

On October 1, 2016, the Companywe completed the previously announced separation of itsour financial communications and data services business (“Donnelley Financial Solutions, Inc.” or “Donnelley Financial”) and theour publishing and retail-centric print services and office products business (“LSC Communications, Inc.” or “LSC”) into two separate publicly-traded companies (the "Separation"). The CompanyWe completed the tax free distribution of approximately 26.2 million shares, or 80.75%, of the outstanding common stock of Donnelley Financial and 26.2 million shares, or 80.75%, of the outstanding common stock of LSC, to the Company’sRRD stockholders (the “Distribution”). The Distribution was made to the Company’sRRD stockholders of record as of the close of business on September 23, 2016, who received one share of Donnelley Financial common stock and one share of LSC common stock for every eight shares of RR DonnelleyRRD common stock held as of the record date. As a result of the Distribution, Donnelley Financial and LSC are now independent public companies trading under the symbols “DFIN” and “LKSD”, respectively, on the New York Stock Exchange. Immediately following the Distribution, the Companywe held 6.2 million shares of Donnelley Financial Solutions common stock and 6.2 million shares of LSC common stock. As of September 30, 2017, we no longer held any shares of LSC or Donnelley Financial common stock.    

The Company will account for these investments as available-for-sale equity securities. The valuefinancial results of the Company’s investments in Donnelley Financial and LSC was approximately $350.1 million, calculated usingfor periods prior to the mid-point stock price for each company’s common stock on October 3, 2016.

TheDistribution have been reflected within the disclosures withinof this Management’s Discussion and Analysis of Financial Condition and Results of Operations are on a consolidated Company basis which includes the results ofas discontinued operations. Additionally, sales from RRD to Donnelley Financial and LSC previously eliminated in consolidation have been recast and do not take into accountare now shown as external sales of RRD within the Separation. In future filings, the historicalfinancial results of Donnelley Financial and LSC will be presented as discontinuedcontinuing operations. As a result of the Separation, the accompanying unaudited interim condensed consolidated interim financial statements are not indicative of the Company's future financial position, results of operations orThe Company’s cash flows. See Item 1A, Risk Factors, of Part I of the Company’s 2015 Form 10-K filed on February 25, 2016 and Item 1A of Part II under “Risk Factors” belowflows for certain risk factors relatingall periods prior to the Separation.October 1, 2016 Distribution include the impact of LSC and Donnelley Financial. See Note 1, Basis of Presentation, and Note 2, Discontinued Operations, to these Condensed Consolidated Financial Statements for additional information.

Reverse Stock Split

Immediately following the Distribution on October 1, 2016, the Company effectedwe affected a one for threeone-for-three reverse stock split for RR DonnelleyRRD common stock (the “Reverse Stock Split”). The Reverse Stock Split was approved by the Company’sour Board of Directors on September 14, 2016 and previously approved by the Company’sour stockholders at the annual meeting on May 19, 2016.

As a result of the Reverse Stock Split, the number of issued and outstanding and treasury shares of the Company’sour common stock will bewas reduced proportionally based on the Reverse Stock Split ratio of one share for every three shares of common stock held before the Reverse Stock Split. Refer to Note 1, Basis of Presentation, to the Condensed Consolidated Financial Statements for additional information regarding the Reverse Stock Split.All references

Revision of Net Sales and Cost of Sales

During the third quarter of 2017, the Company identified an error in these unaudited condensed consolidated interimthe accounting for certain contracts with an inventory buy-back option within the Asia reporting unit, which is in the International segment. As a result, the error, which was determined by management to be immaterial to the previously issued financial statements, has been corrected herein from the amounts previously reported. Refer to Note 1, Basis of Presentation, to the number of shares of common stock and per share amounts have been retroactively adjusted to give effect toCondensed Consolidated Financial Statements for additional information regarding the Reverse Stock Split.revision.

Segment Descriptions

The Company’sOur segments and their respective 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 PrintThis segment includes the Company’sour 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 ServicesThis segment includes the Company’sour logistics services, financial print products and related services, print management offerings and digital and creative solutions and book publishing.solutions.

International

The InternationalThis segment includes the Company’sour non-U.S. printing operations in Asia, Europe, Latin America, Canada and Canada.Europe. This segment’s primary product and service offerings include packaging, books, catalogs, magazines, catalogs, retail inserts, books, directories, direct mail, packaging, forms, labels, manuals, statement printing, commercial and digital print, forms, labels, logistics services, anddirectories, digital and creative solutions.solutions, and direct mail. Additionally, this segment includes the Company’sour business process outsourcing business 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’sour overseas cash resources to meet local liquidity needs.

Products and Services

The CompanyWe separately reports itsreport our net sales, related costs of sales and gross profit for itsour product and service offerings. The Company’sOur product offerings primarily consist of commercial and digital print, statement printing, direct mail, packaging, labels, forms, magazines, catalogs, retail inserts, commercial and digital print, books, financial print, statement printing, office products, direct mail, labels, packaging, forms,directories, manuals and other related products procured through the Company’sour print management offering and directories. The Company’soffering. Our 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

On August 4, 2016, the Company acquired Precision Dialogue, a provider of email marketing, direct mail marketing and other services with operations in the United States.

On January 11, 2016, the Company sold two entities within the business process outsourcing reporting unit.

On June 8, 2015, the Company acquired Courier Corporation, a leader in digital printing and publishing primarily in the United States, specializing in educational, religious and trade books.

On April 29, 2015, the Company sold its 50.1% interest in its Venezuelan operating entity.

For further information on the above acquisitions and dispositions, see Note 2,3, Acquisitions and Dispositions, to the Condensed Consolidated Financial Statements.

Executive Overview

Third Quarter Overview

Net sales decreasedincreased by $55.6$9.3 million, or 2.0%0.5%, for the third quarter of 20162017 compared to the same period in the prior year. There was a $22.2$5.3 million, or 0.8%0.3%, decreaseincrease due to changes in foreign exchange rates. In addition toAfter including the impact of changes in foreign exchange rates, the decrease


increase in net sales was due to increased volume in the International segment driven by the Asia reporting unit, partially offset by lower volume in the Publishing and Retail Services, Variable Print and International segments, price pressures, a decreasesegment, lower postage pass-through sales in fuel surcharges in the logistics reporting unit within the Strategic Services segment and a $4.4 million decline in pass-through paper sales. These items were partially offset by increased volume inprice pressures across the Strategic Services segment.segments.

The Company continues to take actions across all segmentsstrategically assess opportunities to reduce its cost structure and enhance productivity.productivity throughout the business. During the nine months ended September 30, 2016,2017, the Company realized cost savings from previous restructuring activities including the reorganization of administrative and support functions across all segments, andas well as facility consolidations. Additional cost savings were realized as a result of synergies from the integration of Courier.  

Net cash provided byused in operating activities for the nine months ended September 30, 20162017 was $7.8$12.6 million as compared to net cash provided by operating activities of $204.2$7.8 million for the nine months ended September 30, 2015.2016. The decrease in net cash provided byflow from operating activities reflectedwas driven by lower cash earnings, partially offset by the timing of supplier and customer payments higher spinoff-related transaction expenses and higher payments for taxes, partially offset by lower payments for incentive compensation.

In connection with the spinoff transactions, the Company incurred spinoff-related transaction expenses of $27.0 million and $57.3 million during the three and nine months ended September 30, 2016, respectively.  The Company expects to incur approximately $30.0 million to $40.0 million of additionalinterest, spinoff-related transaction and transition expenses in the fourth quarter of 2016, including advisory and other expenses.tax payments.

As a result of the spin-off transactions of Donnelley Financial and LSC on October 1, 2016, the Company is re-evaluating the realizability of its domestic deferred tax assets during the fourth quarter of 2016.


Financial Performance: Three Months Ended September 30, 20162017

The changes in the Company’s income from operations, operating margin, net earnings (loss) earnings attributable to RR DonnelleyRRD common stockholders and net earnings (loss) earnings attributable to RR DonnelleyRRD common stockholders per diluted share for the three months ended September 30, 2016,2017, from the three months ended September 30, 2015,2016, were due to the following:

 

Income from Operations

 

 

Operating Margin

 

 

Net Earnings (Loss) From Continuing Operations Attributable to RRD Common Stockholders

 

 

Net Earnings (Loss) Attributable to RRD Stockholders Per Diluted Share

 

 

(in millions, except margin and per share data)

 

For the Three Months Ended September 30, 2016

$

84.0

 

 

 

4.9

%

 

$

22.0

 

 

$

0.31

 

2017 restructuring, impairment and other charges - net

 

(33.8

)

 

 

(1.9

%)

 

 

(26.5

)

 

 

(0.37

)

2016 restructuring, impairment and other charges - net

 

10.8

 

 

 

0.6

%

 

 

2.2

 

 

 

0.03

 

OPEB curtailment gains

 

(19.7

)

 

 

(1.1

%)

 

 

(12.2

)

 

 

(0.17

)

Pension settlement charges

 

0.3

 

 

 

 

 

 

0.3

 

 

 

 

Acquisition-related expenses

 

0.7

 

 

 

 

 

 

0.4

 

 

 

0.01

 

Loss on disposition of businesses

 

0.3

 

 

 

 

 

 

0.1

 

 

 

 

Loss on debt extinguishments

 

 

 

 

 

 

 

(4.3

)

 

 

(0.06

)

Net gain on investments

 

 

 

 

 

 

 

1.7

 

 

 

0.02

 

Operations, including the impact of foreign exchange

 

(6.7

)

 

 

(0.4

%)

 

 

8.3

 

 

 

0.12

 

For the Three Months Ended September 30, 2017

$

35.9

 

 

 

2.1

%

 

$

(8.0

)

 

$

(0.11

)

2017 restructuring, impairment and other charges - net: included pre-tax charges of $21.3 million for the impairment of goodwill in the digital and creative solutions reporting unit within the Strategic Services segment; $10.7 million for employee termination costs; $1.1 million of lease termination and other restructuring costs; $0.5 million for multi-employer pension plan withdrawal obligations unrelated to facility closures; and $0.2 million impairment charges of other long-lived assets related to facility closures. See Note 7,Restructuring, Impairment and Other Charges, to the Condensed Consolidated Financial Statements for additional details.

 

Income from Operations

 

 

Operating Margin

 

 

Net Earnings (Loss) Attributable to RR Donnelley Common Stockholders

 

 

Net Earnings (Loss) Attributable to RR Donnelley Stockholders Per Diluted Share

 

 

(in millions, except margin and per share data)

 

For the three months ended September 30, 2015

$

123.3

 

 

 

4.4

%

 

$

14.3

 

 

$

0.21

 

2016 restructuring, impairment and other charges - net

 

(15.0

)

 

 

(0.5

%)

 

 

(11.1

)

 

 

(0.16

)

2015 restructuring, impairment and other charges - net

 

52.9

 

 

 

1.9

%

 

 

41.0

 

 

 

0.58

 

Spinoff-related transaction expenses

 

(20.3

)

 

 

(0.7

%)

 

 

(21.1

)

 

 

(0.30

)

Acquisition-related expenses

 

(0.4

)

 

 

 

 

 

(0.3

)

 

 

 

Purchase accounting inventory adjustments

 

6.7

 

 

 

0.2

%

 

 

4.3

 

 

 

0.06

 

Loss on debt extinguishments

 

 

 

 

 

 

 

(51.9

)

 

 

(0.74

)

OPEB curtailment gains

 

19.7

 

 

 

0.7

%

 

 

12.0

 

 

 

0.17

 

Pension settlement charges

 

(1.6

)

 

 

(0.1

%)

 

 

(0.9

)

 

 

(0.01

)

Loss on dispositions of businesses

 

(0.3

)

 

 

0.0

%

 

 

(0.1

)

 

 

 

Loss on investment

 

 

 

 

 

 

 

2.8

 

 

 

0.04

 

Income tax adjustment

 

 

 

 

 

 

 

9.0

 

 

 

0.13

 

Operations

 

(7.5

)

 

 

(0.2

%)

 

 

(5.1

)

 

 

(0.08

)

For the three months ended September 30, 2016

$

157.5

 

 

 

5.7

%

 

$

(7.1

)

 

$

(0.10

)

 

2016 restructuring, impairment and other charges - net: included pre-tax charges of $11.2$9.7 million for employee termination costs; $2.3$0.1 million for a net gain on the sale of previously impaired other long-lived assets; $0.6 million of lease termination and other restructuring costs; and $1.5 million for multi-employer pension plan withdrawal obligations unrelated to facility closures.

2015 restructuring, impairment and other charges - net: included pre-tax charges of $18.8 million for employee termination costs; $18.0 million for the impairment of goodwill in the Europe and Latin America reporting units, respectively, within the International segment; $7.9 million for net impairment charges of other long-lived assets, primarily for buildings and machinery and equipment associated with facility closures; $4.6 million of lease termination and other restructuring costs; $2.3 million for the


impairment of intangibles in the Latin America reporting unit within the International segment; and $1.3$0.6 million of other charges for multi-employer pension plan withdrawal obligations unrelated to facility closures. See Note 7,Restructuring, Impairment and Other Charges, to the Condensed Consolidated Financial Statements for additional details.

Spinoff-related transactionOther postretirement benefit plan obligation (OPEB) curtailment gains:  included a pretax gain of $19.7 million ($12.2 million after-tax) as a result of curtailments of the Company’s OPEB plans during the three months ended September 30, 2016.  

Pension settlement charges: included pre-tax charges of $0.3 million ($0.3 million after-tax) for the three months ended September 30, 2016, related to lump-sum pension settlement payments.

Acquisition-related expenses: included pre-tax charges of $27.0$0.7 million ($25.5 million after-tax, of which $6.9 million related to certain international spinoff-related tax entity restructuring activities) and $6.7 million ($4.40.4 million after-tax) related to consulting, tax advice, legal, accounting and other expenses for the three months ended September 30, 2016 and 2015, respectively, associated with contemplated or completed acquisitions.

Loss on dispositions of businesses: included a pre-tax loss on the spinoff transactions.sale of entities of $0.3 million ($0.1 million after-tax) for the three months ended September 30, 2016.

Loss on debt extinguishments: included a pre-tax net loss of $6.5 million ($4.3 million after-tax) for the three months ended September 30, 2017 related to unamortized debt issuance costs, tender premiums and other expenses associated with the amendment and restatement of the credit agreement and the debt-for-equity exchange of senior notes during the three months ended September 30, 2017. See Note 15, Debt, to the Condensed Consolidated Financial Statements for additional details.

Net gain on investments: included a pre-tax non-cash net realized gain of $1.6 million ($1.7 million after-tax) for the three months ended September 30, 2017, resulting from the debt-for-equity exchange of the remaining portion of the Company’s retained shares of Donnelley Financial for certain outstanding senior notes. See Note 15, Debt, to the Condensed Consolidated Financial Statements for additional details of the debt-for-equity exchange.


Operations: reflected lower volume in certain reporting units within the International and Variable Print segments, price pressures, start-up costs within the Asia reporting unit and higher transactional foreign currency expense, partially offset by lower corporate and other overhead costs related to our operations prior to the Separation, higher volume in the Asia reporting unit, lower healthcare and depreciation and amortization expense and cost control initiatives. See further details in the review of operating results by segment that follows below.  

Financial Performance: Nine Months Ended September 30, 2017

The changes in the Company’s income from operations, operating margin, net earnings (loss) attributable to RRD common stockholders and net earnings (loss) attributable to RRD common stockholders per diluted share for the nine months ended September 30, 2017, from the nine months ended September 30, 2016, were due to the following:

 

Income from Operations

 

 

Operating Margin

 

 

Net Earnings (Loss) From Continuing Operations Attributable to RRD Common Stockholders

 

 

Net Earnings (Loss) Attributable to RRD Stockholders Per Diluted Share

 

 

(in millions, except margin and per share data)

 

For the Nine Months Ended September 30, 2016

$

166.3

 

 

 

3.3

%

 

$

2.4

 

 

$

0.03

 

2017 restructuring, impairment and other charges - net

 

(46.7

)

 

 

(0.9

%)

 

 

(38.9

)

 

 

(0.55

)

2016 restructuring, impairment and other charges - net

 

24.3

 

 

 

0.5

%

 

 

20.5

 

 

 

0.29

 

Spinoff-related transaction expenses

 

(3.3

)

 

 

(0.1

%)

 

 

(2.1

)

 

 

(0.03

)

OPEB curtailment gains

 

(19.7

)

 

 

(0.4

%)

 

 

(12.2

)

 

 

(0.17

)

Pension settlement charges

 

20.7

 

 

 

0.4

%

 

 

12.3

 

 

 

0.17

 

Acquisition-related expenses

 

2.7

 

 

 

0.1

%

 

 

1.8

 

 

 

0.03

 

Net gain on disposal of businesses

 

(12.0

)

 

 

(0.2

%)

 

 

(12.2

)

 

 

(0.17

)

Loss on debt extinguishments

 

 

 

 

 

 

 

(12.8

)

 

 

(0.18

)

Net gain on investments

 

 

 

 

 

 

 

45.1

 

 

 

0.64

 

Operations, including the impact of foreign exchange

 

(10.4

)

 

 

(0.3

%)

 

 

14.5

 

 

 

0.20

 

For the Nine Months Ended September 30, 2017

$

121.9

 

 

 

2.4

%

 

$

18.4

 

 

$

0.26

 

2017 restructuring, impairment and other charges - net: included pre-tax charges of $85.3$21.3 million for the impairment of goodwill in the digital and creative solutions reporting unit within the Strategic Services segment; $19.5 million for employee termination costs; $3.8 million of lease termination and other restructuring costs; $1.7 million for multi-employer pension plan withdrawal obligations unrelated to facility closures; and $0.4 million of net impairment charges of long-lived assets. See Note 7,Restructuring, Impairment and Other Charges, to the Condensed Consolidated Financial Statements for additional details.

2016 restructuring, impairment and other charges - net: included pre-tax charges of $20.7 million for employee termination costs; $1.0 million for a net gain on the sale of previously impaired other long-lived assets, partially offset by impairment charges related to buildings and machinery and equipment associated with facility closures; $2.9 million of lease termination and other restructuring costs; and $1.7 million of other charges for multi-employer pension plan withdrawal obligations unrelated to facility closures. See Note 7,Restructuring, Impairment and Other Charges, to the Condensed Consolidated Financial Statements for additional details.

Spinoff-related transaction expenses: included pre-tax charges of $3.3 million ($51.92.1 million after-tax) related to consulting and other expenses for the nine months ended September 30, 2017 associated with the Separation and Distribution.

Other postretirement benefit plan obligation (OPEB) curtailment gains:  included a pre-tax gain of $19.7 million ($12.2 million after-tax) as a result of curtailments of the Company’s OPEB plans during the nine months ended September 30, 2016.  

Pension settlement charges: included pre-tax charges of $20.7 million ($12.3 million after-tax) for the nine months ended September 30, 2016 related to lump-sum pension settlement payments.

Acquisition-related expenses: included pre-tax charges of $2.7 million ($1.8 million after-tax) related to legal, accounting and other expenses for the nine months ended September 30, 2016 associated with contemplated or completed acquisitions.


Net gain on disposal of businesses: included a pre-tax gain on the sale of entities in the International segment of $12.0 million ($12.2 million after-tax) for the nine months ended September 30, 2016.

Loss on debt extinguishments: included a pre-tax net loss of $20.1 million ($12.8 million after-tax) related to the premiums paid in connection with the tenders, unamortized debt issuance costs and other expenses due to the repurchasedebt-for-equity exchange of senior notes, and amendments to the senior secured revolving credit facility (the “Credit Agreement”) during the three months ended September 30, 2016.

Acquisition-related expenses: included pre-tax charges of $0.7 million ($0.5 million after-tax) related to legal, accounting and other expenses for the three months ended September 30, 2016 associated with contemplated or completed acquisitions. For the three months ended September 30, 2015, these pre-tax charges were $0.3 million ($0.2 million after-tax) for acquisitions completed or contemplated.

Other postretirement benefit plan obligation (OPEB) curtailment gains: included a pre-tax gain of $19.7 million ($12.0 million after-tax) as a result of curtailments of the Company’s OPEB plans during the three months ended September 30, 2016.

Pension settlement charges: included pre-tax charges of $1.6 million ($0.9 million after-tax) for the three months ended September 30, 2016, related to lump-sum pension settlement payments.

Purchase accounting inventory adjustments: included pre-tax charges of $6.7 million ($4.3 million after-tax) as a result of inventory purchase accounting adjustments for Courier for the three months ended September 30, 2015.

Loss on dispositions of businesses: included a pre-tax loss on the sale of immaterial entities of $0.3 million ($0.1 million after-tax) for the three months ended September 30, 2016.

Loss on investments: included a pre-tax loss of $2.8 million ($2.8 million after-tax) resulting from the impairment of the Company’s investment in the Brazilian operations of Courier during the three months ended September 30, 2015.

Income tax adjustment: tax expense of $9.0 million was recorded due to the receipt of an unfavorable court decision relating to payment of prior year taxes in the International segment for the three months ended September 30, 2015.

Operations: reflected price pressures, unfavorable mix in the Strategic Services segment, lower volume in the Publishing and Retail Services and Variable Print segments, partially offset by lower depreciation and amortization expense and cost saving initiatives. See further details in the review of operating results by segment that follows below.


Financial Performance: Nine Months Ended September 30, 2016

The changes in the Company’s income from operations, operating margin, net earnings attributable to RR Donnelley common stockholders and net earnings attributable to RR Donnelley common stockholders per diluted share for the nine months ended September 30, 2016, from the nine months ended September 30, 2015, were due to the following:

 

Income from Operations

 

 

Operating Margin

 

 

Net Earnings Attributable to RR Donnelley Common Stockholders

 

 

Net Earnings Attributable to RR Donnelley Stockholders Per Diluted Share

 

 

(in millions, except margin and per share data)

 

For the nine months ended September 30, 2015

$

396.6

 

 

 

4.8

%

 

$

80.1

 

 

$

1.17

 

2016 restructuring, impairment and other charges - net

 

(38.4

)

 

 

(0.5

%)

 

 

(32.2

)

 

 

(0.46

)

2015 restructuring, impairment and other charges - net

 

104.9

 

 

 

1.3

%

 

 

65.3

 

 

 

0.95

 

Spinoff-related transaction expenses

 

(50.6

)

 

 

(0.6

%)

 

 

(44.5

)

 

 

(0.63

)

Pension settlement charges

 

(98.5

)

 

 

(1.2

%)

 

 

(59.9

)

 

 

(0.85

)

Acquisition-related expenses

 

11.4

 

 

 

0.2

%

 

 

11.0

 

 

 

0.16

 

Purchase accounting inventory adjustments

 

9.9

 

 

 

0.1

%

 

 

6.4

 

 

 

0.09

 

Net gain on dispositions of businesses

 

12.0

 

 

 

0.2

%

 

 

12.2

 

 

 

0.17

 

Loss on debt extinguishments

 

 

 

 

 

 

 

(51.9

)

 

 

(0.74

)

OPEB curtailment gains

 

19.7

 

 

 

0.2

%

 

 

12.0

 

 

 

0.17

 

Loss on disposal of Venezuelan entity

 

 

 

 

 

 

 

15.7

 

 

 

0.23

 

Venezuela currency remeasurement

 

 

 

 

 

 

 

17.0

 

 

 

0.25

 

Net gain on investments

 

 

 

 

 

 

 

0.3

 

 

 

 

Income tax adjustment

 

 

 

 

 

 

 

9.0

 

 

 

0.13

 

Operations

 

(23.9

)

 

 

(0.3

%)

 

 

(22.3

)

 

 

(0.38

)

For the nine months ended September 30, 2016

$

343.1

 

 

 

4.2

%

 

$

18.2

 

 

$

0.26

 

2016 restructuring, impairment and other charges - net: included pre-tax charges of $24.9 million for employee termination costs; $8.7 million of lease termination and other restructuring costs; $4.3 million for multi-employer pension plan withdrawal obligations unrelated to facility closures; and $0.5 million of net impairment charges of long-lived assets.

2015 restructuring, impairment and other charges - net: included pre-tax charges of $39.8 million for employee termination costs; $23.1 million of other charges, primarily for integration charges related to the Courier acquisition; $18.0 million for the impairment of goodwill in the Europe and Latin America reporting units, respectively, within the International segment; $13.0 million of lease termination and other restructuring costs; $8.7 million for net impairment charges of other long-lived assets, primarily for buildings and machinery and equipment associated with facility closures; and $2.3 million for the impairment of intangibles in the Latin America reporting unit within the International segment.

Spinoff-related transaction expenses: included pre-tax charges of $57.3 million ($48.9 million after-tax, of which $6.9 million related to certain international spinoff-related tax entity restructuring activities) and $6.7 million ($4.4 million after-tax) related to consulting, tax advice, legal and other expenses for the nine months ended September 30, 2016 and 2015, respectively, associated with the spinoff transactions.

Pension settlement charges: included pre-tax charges of $98.5 million ($59.9 million after-tax) for the nine months ended September 30, 2016, related to lump-sum pension settlement payments.

Loss on debt extinguishments: included pre-tax charges of $85.3 million ($51.9 million after-tax) related to the premiums paid in connection with the tenders, unamortized debt issuance costs and other expenses due to the repurchase of debentures and senior notes and amendments to the Credit Agreementamendment and restatement of the credit agreement during the nine months ended September 30, 2016.2017. See Note 15,

Acquisition-related expenses: Debt,included pre-tax charges of $2.7 million ($2.4 million after-tax) and $14.1 million ($13.4 million after-tax) related to legal, accounting and other expenses for the nine months ended September 30, 2016 and 2015, respectively, associated with contemplated or completed acquisitions.

OPEB curtailment gains: included a pre-tax gain of $19.7 million ($12.0 million after-tax) as a result of curtailments of the Company’s OPEB plans during the nine months ended September 30, 2016.


Purchase accounting inventory adjustments: included pre-tax charges of $9.9 million ($6.4 million after-tax) for the nine months ended September 30, 2015 as a result of inventory purchase accounting adjustments for Courier.

Net gain on disposition of businesses: included a pre-tax net gain on the sale of entities of $12.0 million ($12.2 million after-tax) for the nine months ended September 30, 2016.

Loss on disposal of Venezuelan entity: The nine months ended September 30, 2015 included a $15.7 million ($15.7 million after-tax) loss primarily related to the disposal of the Venezuelan operating entity in the International segment.

Venezuela currency remeasurement: currency remeasurement in Venezuela and the related impact of the devaluation resulted in a pre-tax loss of $30.3 million ($27.5 million after-tax)Condensed Consolidated Financial Statements for the nine months ended September 30, 2015, of which $10.5 million was included in loss attributable to noncontrolling interests.additional details.

Net gain on investments: included a pre-tax gainsnon-cash net realized gain of $0.1$94.0 million ($0.196.1 million after-tax) resulting from the debt-for-equity exchange of the Company’s retained shares of Donnelley Financial for certain outstanding senior notes and $3.9a pre-tax gain of $1.3 million ($2.60.7 million after-tax) resulting from the sale of certain of the Company’s affordable housing investments, partially offset by a pre-tax loss of $51.6 million ($51.6 million after-tax) resulting from the sale of the Company’s retained shares in LSC during the nine months ended September 30, 2016 and 2015, respectively. Additionally during the2017. The nine months ended September 30, 2015, the Company recorded a2016 included pre-tax lossgain of $2.8$0.1 million ($2.80.1 million after-tax) resulting from the impairmentsale of certain of the Company’s investment in the Brazilian operations of Courier.

Income tax adjustment: tax expense of $9.0 million was recorded due to the receipt of an unfavorable court decision relating to payment of prior year taxes in the International segment for the nine months ended September 30, 2015.affordable housing investments.

Operations: reflected the impact of price pressures, unfavorable revenue mix in the Strategic Services segment, lower volume in certain reporting units within the International and Variable Print segments, price pressures and higher bad debt and legal expenses,transactional foreign currency expense, partially offset by lower corporate and other overhead costs related to our operations prior to the acquisition of Courier, including synergies fromSeparation, higher volume in the integration,Asia reporting unit, reduced bad debt, legal and lower depreciation and amortization expense. See further details in the review of operating results by segment that follows below.expenses and cost control initiatives.  

OUTLOOK

Competitive Environment

TechnologicalOur customers are in an evolving market. While the market is large and fragmented, there are tremendous changes occurring in how organizations need to create, manage, deliver and measure their communications. Key factors facing our customers include regulatory changes, sensitivity to economic conditions, raw material pricing volatility and USPS actions. In addition, technological changes, including the electronic distribution of documents and data, online distribution and hosting of media content, and advances in digital printing, print-on-demand and Internetinternet technologies, continue to impact the market for the Company’ssome of our products and services.services, such as statement printing and forms.

We work with our customers to create, manage, deliver and optimize their multichannel communications strategies by providing innovative solutions to meet increasing customer demands in light of the large and evolving marketplace. One of the Company’sour competitive strengths is that it offerswe offer a wide array of communications products and services, including print and content management, which provide differentiated solutions for itsour customers. The Company works with itsWe are also able to manage the storage and distribution of products for our customers by offering warehousing and inventory management solutions that allow customers to create, manage, deliverstore printed materials and optimize their multi-channel communications strategies. The Company hasto efficiently ship them using our platform. Our logistics business offers our customers access to our proprietary technology that is designed to determine the most efficient and cost-effective method of shipping depending on our customers’ needs. We believe our breadth of offerings provides us with a distinct competitive advantage. We have and will continue to develop and expand itsour creative and design, content management, digital and print production, supply chain management and distribution services to address itsour customers’ evolving needs while supporting the strategic objective of becoming a leading global provider of integrated communication products and services.

The print and related services industry, in general, continues to have excess capacity and remains highly competitive. Despite consolidation in recent years, the industry remains highlycompetitive and fragmented. Across the Company’s

We believe that, across our range of products and services, competition is based primarily on price in addition to quality and the ability to service the special needs of customers. Management expects that prices for the Company’s products and services will continue to becustomers at a focal point for customers in coming years.competitive price. Therefore, the Company believes it needswe believe we need to continue to lower its cost structure and continue to differentiate itsour product and service offerings.offerings and aggressively manage our cost structure to remain competitive.

Digital technologies have impacted printed retail inserts, magazinesWe also operate in a highly competitive and catalogsfragmented market for commercial freight transportation and third-party logistics services. Primary competitors to our services include other national non-asset based third-party logistics companies, as some advertiser spending has moved from print to electronic media. Electronic communicationwell as regional or niche freight brokerages, asset-based carriers offering brokerage and/or logistics services, wholesale intermodal transportation service providers 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 recent years, the trend in e-book substitution has shifted and the publishing industry has experienced growth in consumer print book volume, while sales of e-books have declined. 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.rail carriers. In addition, the Company has made targeted acquisitions and investmentswe may from time to offer customers innovative services and solutions that further secure the Company’s position as a technology leader in the industry.

The acquisition of Courier supports the Company’s strategic objective of generating profitable growth and improved cash flow and liquidity through targeted acquisitions. The acquisition has enhanced the Company’s existing capabilities and ability to serve its


customers and has provided cost savings through the 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 restructuringtime compete against carriers’ internal sales forces 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. Additionally, to align with its long-term strategic goals, the Company split into three independent public companies effective October 1, 2016.  The spinoff transactions will allow each business to pursue their own strategies and invest according to the unique dynamics of their respective industries. Refer to Spinoff Transactions for further details regarding the spinoff transactions.shippers’ internal transportation departments.

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 higherwe serve.  As such, we have some seasonality in the second half of the year driven by increased advertising pages within magazines, and holiday volume in catalogs, retail inserts and books. Partially 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. Additionally, the Company’s Commercial and Digital Print reporting unit produces campaign-related printed products. Therefore, quarterly and annual results may be impacted by U.S. election cycles. These seasonal patterns can also be impacted by overall trends in the U.S. and world economy. The Company expects the seasonality impact in 2016 and future years to be in line with historical patterns. However, due toour business, despite the breadth of our productsproduct and services offerings, we generally have not experienced significant seasonality in our business.offerings.


Raw Materials

The primary raw materials the Company useswe use in itsour print businesses are paper and ink. The Company negotiatesWe negotiate with leading suppliers to maximize itsour purchasing efficiencies and uses a wide varietyefficiencies. Some of the paper grades, formats, ink formulations and colors. In addition, a substantial amount of paper used by the Companywe use 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 nine months of 2016,2017 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 haswe purchase, we have historically passed most changes in price through to itsour customers. ContractualWe believe contractual arrangements and industry practice shouldwill support the Company’sour continued ability to pass on any future paper price increases, but there is no assurance that market conditions will continue to enable the Companyus to successfully do so. Management believesWe believe that the paper industrysupply 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 hasWe resell waste paper and other print-related by-products. We also have undertaken various strategic initiatives to mitigate any foreseeable supply disruptions with respect to the Company’sour ink requirements. The Company also resells waste paper and other print-related by-products andWe may be impacted by changes in prices for these by-products.by-products in the future.

The Company continuesWe continue to monitor the impact of changes in the price of crude oil and other energy costs, which impact the Company’sour ink suppliers, logistics operations and manufacturing costs. Crude oil, and energy prices and market cost of transportation continue to be volatile. The Company believes itsWe believe our logistics operations will continue to be able to pass a substantial portion of any increases in fuel prices directly to itsour 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 Companyimpact sales and income from operations. However, our logistics operations is restricted in its ability to pass on increased cost of transportation costs to some customers in the short term. Therefore, increases in the market cost of transportation will negatively impact income from operations. We generally cannot pass on to customers the impact of higher energy prices on itsour manufacturing costs, however, the Company enters into fixed price contracts for a portion of its natural gas purchases to mitigate the impact of changes in energy prices. The Companycosts. We cannot predict sudden changes in energy prices and the impact that possible future changes in energy prices might have upon either future operating costs or customer demand andor the related impact either will have on the Company’sour consolidated annual results of operations, financial position or cash flows.

Distribution

The Company’sOur products are distributed to end-users through the U.S. orand foreign postal services, through retail channels, electronically or by direct shipment to customer facilities. Through itsour logistics operations, the Company manageswe manage the distribution of most customer products printed by the Companywe print in the U.S. and Canada to maximize efficiency and reduce costs for customers.

As a leading provider of print logistics and among the largest mailers of standard mailStandard Mail in the U.S., the Company workswe work closely with itsour customers and the United States Postal Service (“USPS”)USPS to offer innovative products and mail preparation services to


minimize postage costs. While the Company doeswe do not directly absorb the impact of higher postal rates on itsour customers’ mailings, demand for products distributed through the U.S. or foreign postal services has been negatively impacted by increases in postal rates, as postal costs are a significant component of many customers’ cost structures.

Under the 2006 Postal Accountability and Enhancement Act (“PAEA”), it had been anticipated that postage for its Market Dominantmarket dominant mail categories would increase annually by an amount equal to or slightly less than the Consumer Price Index (the “CPI”). On January 15, 2015, the USPS filed for a CPI rate increase of approximately 2.0%, which was approved by the Postal Regulatory Commission (the “PRC”) on May 7, 2015, and became effective on May 31, 2015. On April 10, 2016, the USPS removed the exigent surcharge, which was approved in December 2013, resulting in a 4.3% decrease in postage rates for all significant mail categories.

The USPS has announced that it will seekimplemented a CPI postage increase on January 22, 2017 of approximately 1.0%. In addition, there is a pending bi-partisan legislative proposal that seeks to stabilize the financial condition of the USPS, which among other things calls for restoring a 2.15% increase (approximately half of the exigent surcharge) on market dominantmarket-dominant mail categories. Congressional passageproducts. Absent such legislative changes, the USPS filed with the Postal Regulatory Commission on October 6, 2017 for a price increase of this legislation1.905% for First-Class Mail, 1.908% for Marketing Mail (aka Standard Mail), 1.924% for Periodicals Mail, 1.960% for Package Services Mail and 1.986% for Special Services to become effective January 21, 2018.

 Additionally, as required by PAEA, the Postal Regulatory Commission began a comprehensive review of the law on December 20, 2016, its 10 year anniversary, to determine if the current system for regulating rates and classes for market-dominant products is unlikelyachieving the original objectives of the law. The study still in 2016.The USPS has temporarily suspended its previously announced plans to restructure its mail delivery network, includingprocess and their recommendations are due by the closureend of many post office facilities. These restructuring plans may resume in 2017. The impact to the Company of the USPS’s restructuring plans, many of which require legislative action,these actions cannot currently be estimated.

Mail deliverytransportation services throughto the USPS facilities across the country accounted for approximately 41%31% of the Company’s logistics revenues during the nine months ended September 30, 2016.2017.


Goodwill Impairment Assessment

The Company performs itsWe perform our 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 the value of individual reporting units with goodwill based on each reporting unit’s operating results for the nine months ended September 30, 20162017 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. During the third quarter of 2017, the Company recognized a non-cash charge of $21.3 million for the impairment of goodwill in the digital and creative solutions reporting unit which is included within the Strategic Services segment. The goodwill impairment charge in the digital and creative solutions reporting unit was due to the notification from a major customer that they will be transitioning their business away from digital and creative solutions beginning in the fourth quarter of 2017, as well as declines in sales with other existing customers which resulted in lower expectations of future revenues, profitability and cash flows as compared to the expectations as of the October 31, 2016 annual goodwill impairment test. As of September 30, 2017, the digital and creative solutions reporting unit had no remaining goodwill. Based on thisthe September 30, 2017 interim assessment, management concluded that as of September 30, 2016,other than the goodwill impairment recognized in the digital and creative solutions reporting unit, 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 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 in a future interim period or as of October 31, 2016,2017, the Company’s next annual measurement date.

In particular, the commercial and digital print, statement printing and digital and creative solutions reporting units have experienced declines in sales primarily due to decreased volume. Continued negative trends could impact the estimated fair values of these reporting units and could result in future impairment charges.  As of the October 31, 2015 annual goodwill impairment test, the fair values of the commercial and digital print, statement printing and digital and creative solutions reporting units exceeded their respective book values by approximately 20%, 17% and 27%. As of September 30, 2016, $416.3 million, $126.9 million and $25.5 million of goodwill was allocated to the commercial and digital print, statement printing and digital and creative solutions reporting units, respectively. The commercial and digital print and statement printing reporting units are part of the Variable Print segment. The digital and creative solutions reporting unit is part of the Strategic Services segment.

Pension and Other Postretirement Benefit Plans

The funded status of the Company’sour 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 itsWe review the actuarial assumptions on an annual basis as of December 31. Based on current estimates, the Company expectswe expect to make cash contributions of approximately $25.0$17.0 million to $30.0 million to itsour pension and other postretirement benefits plans for the full year 2016,2017, of which $18.6$12.4 million has been contributed during the nine months ended September 30, 2016.2017.  

During the third quarterIncome taxes

As of December 31, 2016 the Company announcedhad approximately $70.0 million of U.S. deferred tax assets which at this time, we believe is more likely than not that we will realize these deferred tax assets. However, in the discontinuationnext twelve months we may be required to establish a valuation allowance to reduce the carrying value of retiree medical, prescription drug and life insurance benefits for individuals retiring on or after October 1, 2016. This change was accounted for as a significant plan amendment and the other postemployment benefit plan obligation was remeasured as of September 30, 2016. This remeasurement resulted in a reduction to the other postemployment benefit plan obligations of $35.0 million and a curtailment gain of $16.4 million within cost of sales and $3.3 million in selling, general and administrative expenses during the three and nine months ended September 30, 2016.certain U.S. deferred tax assets.

 


During the fourth quarter of 2015, the Company communicated to retirees the option to receive a lump-sum pension payment or annuity with payments beginning in the second quarter of 2016. A portion of the eligible participants elected to receive a lump-sum pension payment or annuity and as a result the Company’s pension assets and liabilities were remeasured as of the payout date. As a result of the remeasurement, the Company recorded a non-cash settlement charge of $1.6 million and $98.5 million in selling, general and administrative expenses during the three and nine months ended September 30, 2016 (see Note 7, Employee Benefits, to the Condensed Consolidated Financial Statements).

During the fourth quarter of 2015, the Company changed the method used to estimate the interest cost components of net pension and other postretirement benefits plan expense for its defined benefit pension and other postretirement benefit plans. Historically, the interest cost components were estimated using a single weighted-average discount rate derived from the yield curve used to measure the projected benefit obligation at the beginning of the period. The Company has elected to use a full yield curve approach in the estimation of these interest components of net pension and other postretirement benefits plan expense by applying the specific spot rates along the yield curve used in the determination of the projected benefit obligation to the relevant projected cash flows. The Company made this change to improve the correlation between projected benefit cash flows and the corresponding yield curve spot rates and to provide a more precise measurement of interest costs. This change does not affect the measurement and calculation of the Company’s total benefit obligations. The Company has accounted for this change as a change in estimate, which prospectively started in the first quarter of 2016. The reduction in the interest cost components of net pension and other postretirement benefits plan expense for 2016 associated with this change in estimate is approximately $34.0 million.

Financial Review

In the financial review that follows, the Company discusses itswe discuss our consolidated results of operations, financial position, cash flows and certain other information and does not give effect to the spinoff transactions which occurred on October 1, 2016.information. This discussion should be read in conjunction with the Company’sour Condensed Consolidated Financial Statements and related notes.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 20162017 AS COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 20152016

The following table shows the results of continuing operations for the three months ended September 30, 20162017 and 2015,2016, which reflects the results of acquired businesses from the relevant acquisition dates:

Three Months Ended September 30,

 

Three Months Ended September 30,

 

2016

 

 

2015

 

 

$ Change

 

 

% Change

 

2017

 

 

2016

 

 

$ Change

 

 

% Change

 

(in millions, except percentages)

 

(in millions, except percentages)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products net sales

$

2,281.6

 

 

$

2,359.0

 

 

$

(77.4

)

 

 

(3.3

%)

$

1,322.0

 

 

$

1,327.8

 

 

$

(5.8

)

 

 

(0.4

%)

Services net sales

 

490.8

 

 

 

469.0

 

 

 

21.8

 

 

 

4.6

%

 

412.9

 

 

 

397.8

 

 

 

15.1

 

 

 

3.8

%

Total net sales

 

2,772.4

 

 

 

2,828.0

 

 

 

(55.6

)

 

 

(2.0

%)

 

1,734.9

 

 

 

1,725.6

 

 

 

9.3

 

 

 

0.5

%

Products cost of sales (exclusive of depreciation and amortization)

 

1,780.5

 

 

 

1,844.8

 

 

 

(64.3

)

 

 

(3.5

%)

 

1,064.1

 

 

 

1,030.7

 

 

 

33.4

 

 

 

3.2

%

Services cost of sales (exclusive of depreciation and amortization)

 

384.2

 

 

 

363.3

 

 

 

20.9

 

 

 

5.8

%

 

346.4

 

 

 

330.7

 

 

 

15.7

 

 

 

4.7

%

Total cost of sales

 

2,164.7

 

 

 

2,208.1

 

 

 

(43.4

)

 

 

(2.0

%)

 

1,410.5

 

 

 

1,361.4

 

 

 

49.1

 

 

 

3.6

%

Products gross profit

 

501.1

 

 

 

514.2

 

 

 

(13.1

)

 

 

(2.5

%)

 

257.9

 

 

 

297.1

 

 

 

(39.2

)

 

 

(13.2

%)

Services gross profit

 

106.6

 

 

 

105.7

 

 

 

0.9

 

 

 

0.9

%

 

66.5

 

 

 

67.1

 

 

 

(0.6

)

 

 

(0.9

%)

Total gross profit

 

607.7

 

 

 

619.9

 

 

 

(12.2

)

 

 

(2.0

%)

 

324.4

 

 

 

364.2

 

 

 

(39.8

)

 

 

(10.9

%)

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

 

333.4

 

 

 

328.4

 

 

 

5.0

 

 

 

1.5

%

 

207.7

 

 

 

218.1

 

 

 

(10.4

)

 

 

(4.8

%)

Restructuring, impairment and other charges-net

 

15.0

 

 

 

52.9

 

 

 

(37.9

)

 

 

(71.6

%)

 

33.8

 

 

 

10.8

 

 

 

23.0

 

 

nm

 

Depreciation and amortization

 

101.5

 

 

 

115.3

 

 

 

(13.8

)

 

 

(12.0

%)

 

47.0

 

 

 

51.0

 

 

 

(4.0

)

 

 

(7.8

%)

Other operating expense

 

0.3

 

 

 

 

 

 

0.3

 

 

 

100.0

%

 

 

 

 

0.3

 

 

 

(0.3

)

 

nm

 

Income from operations

$

157.5

 

 

$

123.3

 

 

$

34.2

 

 

 

27.7

%

$

35.9

 

 

$

84.0

 

 

$

(48.1

)

 

 

(57.3

%)

Consolidated

Net sales of products for the three months ended September 30, 20162017 decreased $77.4$5.8 million, or 3.3%0.4%, to $2,281.6$1,322.0 million versus the same period in 2015,2016, including a $20.6$5.1 million, or 0.9%0.4%, decreaseincrease due to changes in foreign exchange rates. Net sales of products decreased due to higher volume within the Asia reporting unit, partially offset by lower volume acrossin the Variable Print and Strategic Services segments and certain other reporting units within the International and Publishing and Retail segments,segment, as well as price pressures and a $4.4 million decrease in pass-through paper sales.pressures.


Net sales from services for the three months ended September 30, 20162017 increased $21.8$15.1 million, or 4.6%3.8%, to $490.8$412.9 million versus the same period in 2015,2016, including a $1.6$0.2 million, or 0.3%0.1%, decreaseincrease due to changes in foreign exchange rates. Net sales increased primarily due to an increasehigher volume as well as increased fuel surcharges in volume in freight brokerage services and increased volume in data room and translation services,logistics, partially offset by lower postage pass-through sales within logistics, lower volume in the business process outsourcing reporting unit.and price pressures.

Products cost of sales decreased $64.3increased $33.4 million, or 3.5%3.2%, for the three months ended September 30, 20162017 versus the same period in the prior year, primarily due to higher volume and start-up costs within the Asia reporting unit as well as cost inflation, partially offset by lower volume in the Variable Print segment and International segments and cost controls, partially offset by higher volume primarily in supply chain management and fulfillmentcertain reporting units within the Publishing and Retail ServicesInternational segment, andalong with cost inflation.control initiatives across the organization. As a percentage of net sales, products cost of sales decreased 0.2%increased 2.9 percentage points for the three months ended September 30, 20162017 versus the same period in 2015,2016, primarily due to a favorablean unfavorable mix inacross the Publishing and Retail Services segment.segments.

Services cost of sales increased $20.9$15.7 million, or 5.8%4.7%, for the three months ended September 30, 20162017 versus the same period in the prior year. Services cost of sales increased primarily due to higher volume in freight brokerage services withinand higher costs of transportation in the logistics reporting unit.unit, partially offset by lower postage pass-through sales within logistics and reduced business process outsourcing volume. As a percentage of net sales, services cost of sales increased 0.8%0.8 percentage points for the three months ended September 30, 20162017 versus the same period in 2015,2016, primarily due to an unfavorable revenue mix in the Strategic Services segment.business process outsourcing.

Products gross profit decreased $13.1$39.2 million to $501.1$257.9 million for the three months ended September 30, 20162017 versus the same period in 20152016 primarily due to price pressures and lower volume,an unfavorable mix in the Variable Print and International segments, partially offset by cost control initiatives. Products gross margin increaseddecreased from 21.8%22.4% to 22.0%19.5%, driven by a favorableprice pressures and an unfavorable revenue mix within the International and cost control initiatives,Variable Print segment, partially offset by price pressures.cost control initiatives.

Services gross profit increased $0.9decreased $0.6 million to $106.6$66.5 million for the three months ended September 30, 20162017 versus the same period in 20152016 due to higher in volume in freight brokerage services and increased volume in data room and translation services, partially offset by lowerdecreased volume in the business processing outsourcing reporting unit, an unfavorable revenue mix and higher


costs of transportation in the logistics reporting unit and price pressures, partially offset by increased fuel surcharges in the logistics reporting unit. Services gross margin decreased from 22.5%16.9% to 21.7%16.1%, reflecting an unfavorable revenue mix in the Strategic Services segment.and price pressures.

Selling, general and administrative expenses increased $5.0decreased $10.4 million to $333.4$207.7 million for the three months ended September 30, 20162017 versus the same period in 20152016 reflecting an increase of $20.3 million in spinoff-related transaction expenses,lower corporate and other overhead costs related to our operations prior to the Separation, lower healthcare costs and cost control initiatives, partially offset by higher pension incometransactional foreign currency expense and the curtailment gain.higher variable incentive compensation. As a percentage of net sales, selling, general and administrative expenses increaseddecreased from 11.6%12.6% to 12.0% for the three months ended September 30, 20162017 versus the same period in 2015,2016, due to the impact of the aforementioned expenses.

For the three months ended September 30, 2017, the Company recorded net restructuring, impairment and other charges of $33.8 million. These charges included a non-cash charge of $21.3 million for the impairment of goodwill in the digital and creative solutions reporting unit within the Strategic Services segment. The charges also included $10.7 million for employee termination costs, which were related to the reorganization of selling, general and administrative functions primarily within the Corporate and International segments. The Company also incurred lease termination and other restructuring costs of $1.1 million and net impairment charges for other long-lived assets of $0.2 million primarily related to the impairment of equipment in the Variable Print segment during the three months ended September 30, 2017. Additionally, the Company recorded $0.5 million of other charges for multi-employer pension plan withdrawal obligations unrelated to facility closures. Refer to Note 7, Restructuring, Impairment and Other Charges, within the Notes to the Condensed Consolidated Financial Statements for additional information.

For the three months ended September 30, 2016, the Company recorded net restructuring, impairment and other charges of $15.0$10.8 million. These charges included $11.2The Company recorded $9.7 million forof employee termination costs, for 174 employees, of whom 167 were terminated as of September 30, 2016. These charges were primarily the result ofrelated to the reorganization of certain administrative functions and operations. The Company also incurred lease termination and other restructuring costs of $2.3 million for the three months ended September 30, 2016. Additionally, the Company recorded $1.5 million of other charges for multi-employer pension plan withdrawal obligations.

For the three months ended September 30, 2015, the Company recorded net restructuring, impairment and other charges of $52.9 million. The Company recorded $18.8 million of employee termination costs for 628 employees, all of whom were terminated as of September 30, 2016. These charges were primarily due two facility closures in the International segment. Additionally, the Company incurred net impairment charges of $28.2 million, including $18.0 million for the impairment of goodwill in the Europe and Latin America reporting units within the International segment, $7.9 million of impairment charges for other long-lived assets, primarily for buildings and machinery and equipment associated with facility closures and $2.3 million for the impairment of intangibles in the Latin America reporting unit within the International segment for the three months ended September 30, 2015. The Company also recorded lease termination and other restructuring charges of $4.6$0.6 million and $1.3$0.6 million of other charges related to multi-employer pension plan withdrawal obligations unrelated to facility closures for the three months ended September 30, 2015.2016. Additionally, the Company recorded $0.1 million of net gains related to buildings and machinery and equipment associated with facility closures. Refer to Note 7, Restructuring, Impairment and Other Charges, within the Notes to the Condensed Consolidated Financial Statements for additional information.

Depreciation and amortization decreased $13.8$4.0 million to $101.5$47.0 million for the three months ended September 30, 20162017 compared to the same period in 20152016 primarily due to lower capital spending in recent years compared to historical levels.levels and certain International customer relationship intangible assets becoming fully amortized since the prior year. Depreciation and amortization included $15.6$7.1 million and $20.4$8.0 million of amortization of other intangible assets related to customer relationships, trade names, trademarks, licenses and agreements for the three months ended September 30, 20162017 and 2015,2016, respectively.

For the three months ended September 30, 2016, other operating expense was $0.3 million, which related to theconsisted of a net loss on the sale of immaterial entities.entities in the International segment.


Income from operations for the three months ended September 30, 20162017 was $157.5$35.9 million, an increasea decrease of $34.2$48.1 million, or 27.7%57.3%, compared to the three months ended September 30, 2015.2016. The increasedecrease was due to lowerhigher restructuring, impairment and other charges, the prior year OPEB curtailment gain,gains, lower volume in certain reporting units within the International and Variable Print segments, price pressures, start-up costs within the Asia reporting unit and higher transactional foreign currency expense, partially offset by lower corporate and other overhead costs related to our operations prior to the Separation, higher volume in the Asia reporting unit, lower healthcare costs and depreciation and amortization expense and cost controls, partially offset by price pressures, higher spinoff-related transaction expenses, unfavorable mix in the Strategic Services segment and lower volume in the Publishing and Retail Services and Variable Print segments.  

control initiatives.   

Three Months Ended September 30,

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

 

 

 

 

 

 

 

 

2016

 

 

2015

 

 

$ Change

 

 

% Change

 

2017

 

 

2016

 

 

$ Change

 

 

% Change

 

(in millions, except percentages)

 

(in millions, except percentages)

 

Interest expense-net

$

67.1

 

 

$

69.0

 

 

$

(1.9

)

 

 

(2.8

%)

$

43.5

 

 

$

48.8

 

 

$

(5.3

)

 

 

(10.9

%)

Investment and other (income) expense-net

 

(0.6

)

 

 

3.0

 

 

 

(3.6

)

 

 

(120.0

%)

Investment and other income-net

 

(2.8

)

 

 

(1.0

)

 

 

1.8

 

 

nm

 

Loss on debt extinguishments

 

85.3

 

 

 

 

 

 

85.3

 

 

 

100.0

%

 

6.5

 

 

 

 

 

 

6.5

 

 

nm

 

Net interest expense decreased by $1.9$5.3 million for the three months ended September 30, 20162017 versus the same period in 2015,2016, primarily due to a decrease in average senior notes outstanding, partially offset by higher average borrowings under the Credit Agreement.outstanding.

Net investment


Investment and other (income) expenseincome-net for the three months ended September 30, 2017 and 2016 and 2015 was income of $0.6$2.8 million and expense of $3.0$1.0 million, respectively. ForDuring the three months ended September 30, 2015,2017, the Company recordedrecognized a lossnon-cash net realized gain of $2.8$1.6 million on the retained shares of Donnelley Financial exchanged for the impairmentcertain of the Company’s investment insenior notes outstanding. See Note 15, Debt, to the Brazilian operationsCondensed Consolidated Financial Statements for additional details of Courier.the debt-for-equity exchange.

Loss on debt extinguishments related to premiums paid, unamortized debt issuance costs and other expenses for the three months ended September 30, 20162017 was $85.3$6.5 million duewhich related to unamortized debt issuance costs, premiums paid and other expenses associated with the tendersamendment and restatement of the credit agreement as well as the debt-for-equity exchange of senior notes andduring the amendmentsthree months ended September 30, 2017. Refer to Note 15, Debt, to the Credit Agreement.

Condensed Consolidated Financial Statements for additional details.

 

Three Months Ended September 30,

 

 

 

 

 

 

 

 

 

 

2016

 

 

2015

 

 

$ Change

 

 

% Change

 

 

(in millions, except percentages)

 

Earnings before income taxes

$

5.7

 

 

$

51.3

 

 

$

(45.6

)

 

 

(88.9

%)

Income tax expense

 

12.5

 

 

 

39.7

 

 

 

(27.2

)

 

 

(68.5

%)

Effective income tax rate

 

219.3

%

 

 

77.4

%

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

 

 

 

 

 

 

 

2017

 

 

2016

 

 

$ Change

 

 

% Change

 

(in millions, except percentages)

(Loss) earnings before income taxes

$

(11.3

)

 

$

36.2

 

 

$

(47.5

)

 

nm

Income tax (benefit) expense

 

(3.5

)

 

 

13.9

 

 

 

17.4

 

 

nm

Effective income tax rate

 

31.0

%

 

 

38.4

%

 

 

 

 

 

 

The effective income tax rate for the three months ended September 30, 20162017 was 219.3%31.0% compared to 77.4%38.4% in the same period in 2015.2016. The effective income tax rate for the period ended September 30, 2017 reflects the impact of the impairment of goodwill in the digital and creative solutions reporting unit and the inability to recognize a tax benefit on certain losses. The income tax provision for the period ended September 30, 2016 reflects the impact of certain non-deductible spinoff-related transaction expenses, income taxes for certain internal reorganization transactionsgenerated in preparation for the spinoff transactions within the International segmenthigher taxing jurisdictions and the adjustment of valuation allowances in the International segment. The incomeinability to recognize a tax provision for the period ended September 30, 2015 reflects charges for unrecognized tax positions of $9.0 million due to the receipt of an unfavorable court decision relating to payment of prior year taxes in the International segment as well as the impact of the non-deductible goodwill impairment charges.benefit on certain losses.

Income (loss) attributable to noncontrolling interests was income of$0.2 million and $0.3 million for the three months ended September 30, 2017 and 2016, and a loss of $2.7 million for the three months ended September 30, 2015. For the three months ended September 30, 2015, the Company recorded a loss of $2.6 million for the impairment of the Company’s investment in the Brazilian operations of Courier.respectively.

The net loss from continuing operations, excluding the impact from non-controlling interests, attributable to RR DonnelleyRRD common stockholders for the three months ended September 30, 20162017 was $7.1$8.0 million, or $0.10$0.11 per diluted share, compared to net earnings of $14.3$22.0 million, or $0.20$0.31 per diluted share, for the three months ended September 30, 2015.2016.

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 descriptions of the reporting units 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.

Variable Print

 

 

Three Months Ended

 

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

 

(in millions, except percentages)

 

Net sales

 

$

767.5

 

 

$

790.3

 

Income from operations

 

 

39.3

 

 

 

50.1

 

Operating margin

 

 

5.1

%

 

 

6.3

%

Restructuring, impairment and other charges-net

 

 

4.2

 

 

 

1.9

 

 

 

Net Sales for the Three Months Ended

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

 

 

 

 

 

 

 

Reporting unit

 

2017

 

 

2016

 

 

$ Change

 

 

% Change

 

 

 

(in millions, except percentages)

 

Commercial and digital print

 

$

395.9

 

 

$

414.9

 

 

$

(19.0

)

 

 

(4.6

%)

Direct mail

 

 

139.5

 

 

 

144.5

 

 

 

(5.0

)

 

 

(3.5

%)

Statement printing

 

 

90.2

 

 

 

85.9

 

 

 

4.3

 

 

 

5.0

%

Labels

 

 

101.2

 

 

 

98.7

 

 

 

2.5

 

 

 

2.5

%

Forms

 

 

40.7

 

 

 

46.3

 

 

 

(5.6

)

 

 

(12.1

%)

Total Variable Print

 

$

767.5

 

 

$

790.3

 

 

$

(22.8

)

 

 

(2.9

%)

Net sales for the Variable Print segment for the three months ended September 30, 2017 were $767.5 million, a decrease of $22.8 million, or 2.9%, compared to 2016, including a $0.3 million increase due to changes in foreign exchange rates. Net sales


decreased due to lower volume primarily in commercial and digital print, direct mail and forms and price pressures, partially offset by higher volume in statement printing and labels. An analysis of net sales by reporting unit follows:

Commercial and digital print: Sales decreased as a result of lower volume and price pressures.

Direct mail: Sales decreased as a result of lower volume and price pressures, partially offset by incremental sales from the 2016 acquisition of Precision Dialogue.

Statement printing: Sales increased as a result of higher volume.

Labels: Sales increased as a result of higher pressure sensitive, prime and integrated labels volume, partially offset by price pressures.

Forms: Sales decreased as a result of lower volume.

Variable Print segment income from operations decreased $10.8 million for the three months ended September 30, 2017, primarily due to lower volume and unfavorable mix within commercial and digital print and price pressures, partially offset by a favorable mix within statement printing. Operating margins decreased from 6.3% for the three months ended September 30, 2016 to 5.1% for the three months ended September 30, 2017 due to an unfavorable mix within commercial and digital print and price pressures, partially offset by cost control initiatives and a favorable mix within statement printing. Higher restructuring, impairment and other charges unfavorably impacted operating margins by 0.3 percentage points.

Strategic Services

 

 

Three Months Ended

 

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

 

(in millions, except percentages)

 

Net sales

 

$

443.7

 

 

$

445.0

 

Income from operations

 

 

(14.8

)

 

 

13.3

 

Operating margin

 

 

(3.3

%)

 

 

3.0

%

Restructuring, impairment and other charges-net

 

 

22.1

 

 

 

1.3

 

 

 

Net Sales for the Three Months Ended

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

 

 

 

 

 

 

 

Reporting unit

 

2017

 

 

2016

 

 

$ Change

 

 

% Change

 

 

 

(in millions, except percentages)

 

Logistics

 

$

312.9

 

 

$

303.6

 

 

$

9.3

 

 

 

3.1

%

Sourcing

 

 

92.2

 

 

 

105.5

 

 

 

(13.3

)

 

 

(12.6

%)

Digital and creative solutions

 

 

38.6

 

 

 

35.9

 

 

 

2.7

 

 

 

7.5

%

Total Strategic Services

 

$

443.7

 

 

$

445.0

 

 

$

(1.3

)

 

 

(0.3

%)

Net sales for the Strategic Services segment for the three months ended September 30, 2017 were $443.7 million, a decrease of $1.3 million, or 0.3%, compared to 2016. Net sales decreased primarily due to lower postage pass-through sales in logistics, lower volume in sourcing and digital and creative solutions and price pressures, partially offset by higher volume in freight brokerage and increased fuel surcharges in logistics. An analysis of net sales by reporting unit follows:

Logistics: Sales increased primarily due to higher volume in freight brokerage and an increase in fuel surcharge revenues, partially offset by a decrease in postage pass-through sales, lower volume in print logistics and price pressures.

Sourcing: Sales decreased primarily due to lower volume.

Digital and creative solutions: Sales increased slightly due to incremental revenue from the acquisition of Precision Dialogue in August 2016, partially offset by lower photo and prepress volume.

Strategic Services segment income from operations decreased $28.1 million for the three months ended September 30, 2017, mainly due to the $21.3 million impairment of goodwill in the digital and creation solutions reporting unit, an unfavorable revenue mix, higher cost of transportation and price pressures within logistics and lower volume in digital and creative solutions, partially offset by increased fuel surcharges. Operating margins decreased from 3.0% to (3.3%), primarily due to higher restructuring, impairment and other charges, an unfavorable revenue mix within the segment and price pressures, partially offset by favorable fuel surcharges in logistics, productivity and cost control initiatives. Higher restructuring, impairment and other charges favorably impacted operating margins by 4.7 percentage points.


International

 

 

Three Months Ended

 

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

 

(in millions, except percentages)

 

Net sales

 

$

523.7

 

 

$

490.3

 

Income from operations

 

 

20.6

 

 

 

36.0

 

Operating margin

 

 

3.9

%

 

 

7.3

%

Gain on sale of businesses

 

 

 

 

 

(0.3

)

OPEB curtailment gain

 

 

 

 

 

(0.1

)

Restructuring, impairment and other charges-net

 

 

2.2

 

 

 

1.1

 

 

 

Net Sales for the Three Months Ended

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

 

 

 

 

 

 

 

Reporting unit

 

2017

 

 

2016

 

 

$ Change

 

 

% Change

 

 

 

(in millions, except percentages)

 

Asia

 

$

228.2

 

 

$

183.1

 

 

$

45.1

 

 

 

24.6

%

Global Turnkey Solutions

 

 

119.7

 

 

 

128.1

 

 

 

(8.4

)

 

 

(6.6

%)

Business process outsourcing

 

 

96.1

 

 

 

99.8

 

 

 

(3.7

)

 

 

(3.7

%)

Canada

 

 

45.2

 

 

 

46.2

 

 

 

(1.0

)

 

 

(2.2

%)

Latin America

 

 

34.5

 

 

 

33.1

 

 

 

1.4

 

 

 

4.2

%

Total International

 

$

523.7

 

 

$

490.3

 

 

$

33.4

 

 

 

6.8

%

Net sales in the International segment for the three months ended September 30, 2017 were $523.7 million, an increase of $33.4 million, or 6.8%, compared to the same period in 2016, inclusive of a $5.0 million, or 1.0%, increase due to changes in foreign exchange rates. Net sales increased due to higher volume in Asia, partially offset by lower volume in Global Turnkey Solutions, business process outsourcing and Canada, as well as price pressures. An analysis of net sales by reporting unit follows:

Asia: Sales increased due to higher volume primarily in packaging and book products, partially offset by price pressures.

Global Turnkey Solutions: Sales decreased primarily due to lower volume in supply chain, books and packaging, partially offset by favorable changes in foreign exchange rates.

Business process outsourcing: Sales decreased due to lower volume and price pressures.

Canada: Sales decreased due to lower volume in commercial print and statement printing, partially offset by favorable changes in foreign exchange rates.

Latin America: Sales increased primarily due to favorable changes in foreign exchange rates across the region and higher volume.

International segment income from operations decreased $15.4 million primarily due to lower volume in Global Turnkey Solutions and business process outsourcing, cost inflation, higher transactional foreign currency expense, price pressures and start-up costs in Asia, partially offset by increased volume in Asia. Operating margins decreased from 7.3% to 3.9%, driven by lower volume in Global Turnkey Solutions and business process outsourcing, higher transactional foreign currency expense, price pressures, start-up costs in Asia and higher restructuring, impairment and other charges, partially offset by increased volume in Asia. Higher restructuring, impairment and other charges unfavorably impacted operating margins by 0.2 percentage points.


Corporate

 

 

Three Months Ended

 

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

 

(in millions)

 

Operating expenses

 

$

(9.2

)

 

$

(15.4

)

Pension settlement

 

 

 

 

 

0.3

 

Restructuring, impairment and other charges-net

 

 

5.3

 

 

 

6.5

 

OPEB curtailment gain

 

 

 

 

 

(19.6

)

Loss on the sale of businesses

 

 

 

 

 

0.6

 

Acquisition-related expenses

 

 

 

 

 

0.7

 

Corporate operating expenses in the three months ended September 30, 2017 were $9.2 million, a decrease of $6.2 million compared to the same period in 2016. The decrease was primarily driven by lower corporate and other overhead costs related to the pre-Separation combined entity, cost control initiatives and lower healthcare costs, partially offset by the prior year OPEB curtailment gains and lower pension and postretirement plan income.

RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017 AS COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2016

The following table shows the results of operations for the nine months ended September 30, 2017 and 2016, which reflects the results of acquired businesses from the relevant acquisition dates:

 

Nine Months Ended September 30,

 

 

2017

 

 

2016

 

 

$ Change

 

 

% Change

 

 

(in millions, except percentages)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products net sales

$

3,830.9

 

 

$

3,772.5

 

 

$

58.4

 

 

 

1.5

%

Services net sales

 

1,182.9

 

 

 

1,201.6

 

 

 

(18.7

)

 

 

(1.6

%)

Total net sales

 

5,013.8

 

 

 

4,974.1

 

 

 

39.7

 

 

 

0.8

%

Products cost of sales (exclusive of depreciation and

   amortization)

 

3,065.7

 

 

 

2,958.1

 

 

 

107.6

 

 

 

3.6

%

Services cost of sales (exclusive of depreciation and

   amortization)

 

992.8

 

 

 

1,002.9

 

 

 

(10.1

)

 

 

(1.0

%)

Total cost of sales

 

4,058.5

 

 

 

3,961.0

 

 

 

97.5

 

 

 

2.5

%

Products gross profit

 

765.2

 

 

 

814.4

 

 

 

(49.2

)

 

 

(6.0

%)

Services gross profit

 

190.1

 

 

 

198.7

 

 

 

(8.6

)

 

 

(4.3

%)

Total gross profit

 

955.3

 

 

 

1,013.1

 

 

 

(57.8

)

 

 

(5.7

%)

Selling, general and administrative expenses

   (exclusive of depreciation and amortization)

 

643.6

 

 

 

681.0

 

 

 

(37.4

)

 

 

(5.5

%)

Restructuring, impairment and other charges-net

 

46.7

 

 

 

24.3

 

 

 

22.4

 

 

 

92.2

%

Depreciation and amortization

 

143.1

 

 

 

153.5

 

 

 

(10.4

)

 

 

(6.8

%)

Other operating income

 

 

 

 

(12.0

)

 

 

12.0

 

 

nm

 

Income from operations

$

121.9

 

 

$

166.3

 

 

$

(44.4

)

 

 

(26.7

%)

Consolidated

Net sales of products for the nine months ended September 30, 2017 increased $58.4 million, or 1.5%, to $3,830.9 million versus the prior year period, including a $7.9 million, or 0.2%, decrease due to changes in foreign exchange rates. Net sales of products increased due to higher volume within the Asia and sourcing reporting units, partially offset by lower volume in the Variable Print segment and certain other reporting units within the International segment, as well as price pressures.  

Net sales from services for the nine months ended September 30, 2017 decreased $18.7 million to $1,182.9 million versus the same period in 2016, including an $8.2 million, or 0.7%, decrease due to change in foreign exchange rates. Net sales decreased primarily due to lower postage pass-through sales within logistics, lower volume in business process outsourcing and price pressures, partially offset by higher volume in freight brokerage and courier services as well as increased fuel surcharges within the logistics reporting unit.  


Products cost of sales increased $107.6 million, or 3.6%, for the nine months ended September 30, 2017 versus the same period in the prior year, primarily due to higher volume within the Asia and sourcing reporting units as well as cost inflation, partially offset by lower volume in the Variable Print segment and certain reporting units within the International segment and cost control initiatives across the organization. As a percentage of net sales, products cost of sales increased 1.6% for the nine months ended September 30, 2017 versus the same period in the prior year, primarily due to an unfavorable mix across the segments.    

Services cost of sales decreased $10.1 million, or 1.0%, for the nine months ended September 30, 2017 versus the same period in the prior year. Services cost of sales decreased primarily due to lower postage pass-through sales within logistics and reduced business process outsourcing volume, partially offset by higher volume in freight brokerage and courier services and higher costs of transportation in the logistics reporting unit. As a percentage of net sales, services cost of sales increased 0.4% for the nine months ended September 30, 2017 versus the same period in the prior year driven by an unfavorable revenue mix in business process outsourcing and the logistics reporting unit.

Products gross profit decreased $49.2 million to $765.2 million for the nine months ended September 30, 2017 versus the same period in 2016 primarily due to price pressures and lower volume in certain International reporting units and the Variable Print segment, partially offset by higher volume in the Asia reporting unit and cost control initiatives. Products gross margin decreased from 21.6% to 20.0%, driven by price pressures and an unfavorable revenue mix within much of the International and Variable Print segments and the sourcing reporting unit, partially offset by cost control initiatives.  

Services gross profit decreased $8.6 million to $190.1 million for the nine months ended September 30, 2017 versus the same period in 2016 due to lower business process outsourcing volume and price pressures, partially offset by increased fuel surcharges within the logistics reporting unit. Services gross margin decreased from 16.5% to 16.1%, primarily reflecting an unfavorable revenue mix.

Selling, general and administrative expenses decreased $37.4 million to $643.6 million for the nine months ended September 30, 2017 versus the same period in 2016, due to the pension settlement charge in the prior year period, lower corporate and other overhead costs related to our operations prior to the Separation, lower bad debt and legal expenses and cost control initiatives, partially offset by higher transactional foreign currency expense, higher variable incentive compensation expense and lower pension and other post-retirement benefits income. As a percentage of net sales, selling, general and administrative expenses decreased from 13.7% to 12.8% for the nine months ended September 30, 2017 versus the same period in 2016, due to the impact of the aforementioned expenses.  

For the nine months ended September 30, 2017, the Company recorded net restructuring, impairment and other charges of $46.7 million. These charges included a non-cash charge of $21.3 million for the impairment of goodwill in the digital and creative solutions reporting unit within the Strategic Services segment as well as $19.5 million of employee termination costs, which were related to the reorganization of selling, general and administrative functions primarily within the Corporate, International and Variable Print segments, ceasing the Company’s relationship in a joint venture within the International segment and one facility closure in the Strategic Services segment. The Company also incurred lease termination and other restructuring charges of $3.8 million and net impairment charges for other long-lived assets of $0.4 million for impairment of equipment primarily related to a facility closure in the Strategic Services segment, partially offset by a net gain recognized on the sale of previously impaired equipment during the nine months ended September 30, 2017. Additionally, the Company recorded $1.7 million of other charges for multi-employer pension plan withdrawal obligations unrelated to facility closures.  Refer to Note 7, Restructuring, Impairment and Other Charges, within the Notes to the Condensed Consolidated Financial Statements for additional information.  

For the nine months ended September 30, 2016, the Company recorded net restructuring, impairment and other charges of $24.3 million. The Company recorded $20.7 million of employee termination costs, primarily due to two facility closures in the International segment and the reorganization of certain administrative functions and operations.  The Company also recorded lease termination and other restructuring charges of $2.9 million and $1.7 million of other charges related to multi-employer pension plan withdrawal obligations unrelated to facility closures for the nine months ended September 30, 2016. Additionally, the Company recorded $1.0 million of net gains on the sale of previously impaired assets, partially offset by impairment charges related to buildings and machinery and equipment associated with facility closures.  Refer to Note 7, Restructuring, Impairment and Other Charges, within the Notes to the Condensed Consolidated Financial Statements for additional information.  

Depreciation and amortization decreased $10.4 million to $143.1 million for the nine months ended September 30, 2017 compared to the same period in 2016 primarily due to lower capital spending in recent years compared to historical levels and certain International customer relationship intangible assets becoming fully amortized since the prior year quarter. Depreciation and amortization included $21.6 million and $25.7 million of amortization of other intangible assets related to customer relationships, trade names, trademarks, licenses and agreements for the nine months ended September 30, 2017 and 2016, respectively.

For the nine months ended September 30, 2016, other operating income was $12.0 million, which consisted of a net gain on the sale of entities in the International segment.


Income from operations for the nine months ended September 30, 2017 was $121.9 million, a decrease of $44.4 million, or 26.7%, compared to the nine months ended September 30, 2016. The decrease was due to lower volume in certain reporting units within the International and Variable Print segments, price pressures, higher restructuring, impairment and other charges, the prior year OPEB curtailment gains, the prior year net gain on the sale of entities in the International segment and higher transactional foreign currency expense, partially offset by the prior year pension settlement charge, lower corporate and other overhead costs related to our operations prior to the Separation, higher volume in the Asia reporting unit, reduced bad debt, legal and depreciation and amortization expenses and cost control initiatives.

 

Nine Months Ended September 30,

 

 

 

 

 

 

 

 

 

 

2017

 

 

2016

 

 

$ Change

 

 

% Change

 

 

(in millions, except percentages)

 

Interest expense-net

$

137.3

 

 

$

150.6

 

 

$

(13.3

)

 

 

(8.8

%)

Investment and other income-net

 

(47.2

)

 

 

(0.4

)

 

 

46.8

 

 

nm

 

Loss on debt extinguishments

 

20.1

 

 

 

 

 

 

20.1

 

 

nm

 

Net interest expense decreased by $13.3 million for the nine months ended September 30, 2017 versus the same period in 2016, primarily due to lower average borrowings and a lower weighted average interest rate during the nine months ended September 30, 2017.  

Net investment and other income-net for the nine months ended September 30, 2017 and 2016 of $47.2 million and $0.4 million, respectively. For the nine months ended September 30, 2017, the Company recorded a non-cash net realized gain of $94.0 million on the retained shares of Donnelley Financial exchanged for certain of the Company’s senior notes outstanding and a gain of $1.3 million resulting from the sale of certain of the Company’s affordable housing investments, partially offset by a net realized loss of $51.6 million resulting from the sale of the Company’s retained shares of LSC.  

Loss on debt extinguishments for the nine months ended September 30, 2017 was $20.1 million which related to premiums paid in connection with the tenders, unamortized debt issuance costs and other expenses associated with the debt-for-equity exchange of senior notes, the repurchase of debentures and senior notes and the amendment and restatement of the credit agreement. Refer to Note 15, Debt, to the Condensed Consolidated Financial Statements for additional details.

 

Nine Months Ended September 30,

 

 

 

 

 

 

 

 

 

 

2017

 

 

2016

 

 

$ Change

 

 

% Change

 

 

(in millions, except percentages)

 

Earnings before income taxes

$

11.7

 

 

$

16.1

 

 

$

(4.4

)

 

 

(27.3

%)

Income tax (benefit) expense

 

(7.4

)

 

 

12.9

 

 

 

20.3

 

 

nm

 

Effective income tax rate

 

(63.2

%)

 

 

80.1

%

 

 

 

 

 

 

 

 

The effective income tax rate for the nine months ended September 30, 2017 was (63.2%) compared to 80.1% in the same period in 2016. The income tax rate for the period ended nine months ended September 30, 2017 reflects the impact of impairment of goodwill in the digital and creative solutions reporting unit, the inability to recognize a tax benefit on certain losses and the impact of the net gain on the disposition of investments. The Donnelley Financial retained shares were disposed in a non-taxable debt-for-equity exchange. The sale of the LSC retained shares generated a capital loss which will be carried forward; however, it is more likely than not that the benefit of such deferred tax asset will not be fully realized and a valuation allowance was recorded. The income tax provision for the nine months ended September 30, 2016 reflects the impact of income generated in higher taxing jurisdictions and the inability to recognize a tax benefit on certain losses.

Income attributable to noncontrolling interests was $0.7 million and $0.8 million for the nine months ended September 30, 2017 and 2016, respectively.  

Net earnings from continuing operations, excluding the impact from non-controlling interests, attributable to RRD common stockholders for the nine months ended September 30, 2017 was $18.4 million, or $0.26 per diluted share, compared to $2.4 million, or $0.03 per diluted share, for the nine months ended September 30, 2016.

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 descriptions of the reporting units 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

Variable Print

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2016

 

 

2015

 

 

2017

 

 

2016

 

 

(in millions, except percentages)

 

 

(in millions, except percentages)

 

Net sales

 

$

672.0

 

 

$

684.9

 

 

$

2,279.6

 

 

$

2,311.8

 

Income from operations

 

 

39.0

 

 

 

33.4

 

 

 

114.2

 

 

 

144.0

 

Operating margin

 

 

5.8

%

 

 

4.9

%

 

 

5.0

%

 

 

6.2

%

Restructuring, impairment and other charges-net

 

 

2.0

 

 

 

5.8

 

 

 

6.2

 

 

 

4.7

 

Purchase accounting inventory adjustment

 

 

 

 

 

5.6

 

 

 

 

Net Sales for the Three Months Ended

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

 

 

 

 

 

 

 

Reporting unit

 

2016

 

 

2015

 

 

$ Change

 

 

% Change

 

 

 

(in millions, except percentages)

 

Magazines, catalogs and retail inserts

 

$

319.5

 

 

$

358.0

 

 

$

(38.5

)

 

 

(10.8

%)

Books

 

 

321.4

 

 

 

294.6

 

 

 

26.8

 

 

 

9.1

%

Directories

 

 

31.1

 

 

 

32.3

 

 

 

(1.2

)

 

 

(3.7

%)

Total Publishing and Retail Services

 

$

672.0

 

 

$

684.9

 

 

$

(12.9

)

 

 

(1.9

%)

 

 

Net Sales for the Nine Months Ended

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

 

 

 

 

 

 

 

Reporting unit

 

2017

 

 

2016

 

 

$ Change

 

 

% Change

 

 

 

(in millions, except percentages)

 

Commercial and digital print

 

$

1,178.8

 

 

$

1,201.8

 

 

$

(23.0

)

 

 

(1.9

%)

Direct mail

 

 

392.0

 

 

 

395.8

 

 

 

(3.8

)

 

 

(1.0

%)

Statement printing

 

 

286.1

 

 

 

283.6

 

 

 

2.5

 

 

 

0.9

%

Labels

 

 

293.4

 

 

 

293.8

 

 

 

(0.4

)

 

 

(0.1

%)

Forms

 

 

129.3

 

 

 

136.8

 

 

 

(7.5

)

 

 

(5.5

%)

Total Variable Print

 

$

2,279.6

 

 

$

2,311.8

 

 

$

(32.2

)

 

 

(1.4

%)

Net sales for the Publishing and Retail Services segment for the three months ended September 30, 2016 were $672.0 million, a decrease of $12.9 million, or 1.9%, compared to 2015.  Net sales decreased due to reduced volume in the magazines, catalogs and retail inserts reporting unit, a $4.4 million decrease in pass-through paper sales and price pressures, partially offset by increased volume in the books reporting unit. An analysis of net sales by reporting unit follows:

Magazines, catalogs and retail inserts: Sales decreased due to a decrease in pass-through paper sales, price pressures and lower volume within catalogs, magazines and retail.

Books: Sales increased as a result of increased volume in supply chain management and fulfillment and an increase in pass-through paper sales, partially offset by decreases in educational volume.

Directories: Sales decreased primarily as a result of price pressures and a decrease in pass-through paper sales, partially offset by slightly higher volume.

Publishing and Retail Services segment income from operations increased by $5.6 million for the three months ended September 30, 2016 as a result of a purchase accounting adjustment booked in the prior year period, lower restructuring, impairment and other charges and synergies from the acquisition of Courier, partially offset by price pressures and lower volume.  Operating margins increased from 4.9% for the three months ended September 30, 2015 to 5.8% for the three months ended September 30, 2016, of which 0.8 percentage points were due to a purchase accounting inventory adjustment in the prior year period and 0.5 percentage points were due to lower restructuring, impairment and other charges. Operating margins were unfavorably impacted by price pressures.

Variable Print

 

 

Three Months Ended

 

 

 

September 30,

 

 

 

2016

 

 

2015

 

 

 

(in millions, except percentages)

 

Net sales

 

$

914.3

 

 

$

935.9

 

Income from operations

 

 

64.2

 

 

 

58.0

 

Operating margin

 

 

7.0

%

 

 

6.2

%

Restructuring, impairment and other charges-net

 

 

2.1

 

 

 

2.9

 


 

 

Net Sales for the Three Months Ended

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

 

 

 

 

 

 

 

Reporting unit

 

2016

 

 

2015

 

 

$ Change

 

 

% Change

 

 

 

(in millions, except percentages)

 

Commercial and digital print

 

$

412.9

 

 

$

409.6

 

 

$

3.3

 

 

 

0.8

%

Direct mail

 

 

143.3

 

 

 

135.8

 

 

 

7.5

 

 

 

5.5

%

Office products

 

 

125.1

 

 

 

144.0

 

 

 

(18.9

)

 

 

(13.1

%)

Labels

 

 

101.3

 

 

 

106.3

 

 

 

(5.0

)

 

 

(4.7

%)

Statement printing

 

 

85.5

 

 

 

90.6

 

 

 

(5.1

)

 

 

(5.6

%)

Forms

 

 

46.2

 

 

 

49.6

 

 

 

(3.4

)

 

 

(6.9

%)

Total Variable Print

 

$

914.3

 

 

$

935.9

 

 

$

(21.6

)

 

 

(2.3

%)

Net sales for the Variable Print segment for the threenine months ended September 30, 20162017 were $914.3$2,279.6 million, a decrease of $21.6$32.2 million, or 2.3%1.4%, compared to 2015,2016, including a $0.1$0.2 million decreaseincrease due to changes in foreign exchange rates. Net sales decreased due to lower volume primarily in the office products, labels, statement printing and forms reporting units, price pressures and lower pass-through postage sales, partially offset by increased volume in the direct mail and commercial and digital print, reporting units.direct mail, forms and price pressures, partially offset by the incremental sales from the Precision Dialogue acquisition. An analysis of net sales by reporting unit follows:

Commercial and digital print: Sales increased as a result of higher in-store marketing materials volume, partially offset by lower transactional commercial print volume, price pressures and a decrease in pass-through postage sales.

Direct mail: Sales increased as a result of incremental sales from the acquisition of Precision Dialogue and higher pass-through postage sales, partially offset by price pressures.

Office products: Sales decreased as a result of lower transactional commercial print volume primarily in filing, binders and note-taking products, and price pressures.pressures, partially offset by higher volume with a large customer.  

Labels:Direct mail: Sales decreased as a result of lower volume and price pressures.pressures, partially offset by incremental sales from the 2016 acquisition of Precision Dialogue.  

Statement printing: Sales decreasedincreased as a result of lower pass-through postage sales, lowerincreased volume, andpartially offset by price pressures.

Labels: Sales decreased slightly as a result of price pressures, partially offset by increased pressure sensitive, prime and integrated labels volume.  

Forms: Sales decreased due to lower volume, primarily as a result of electronic substitution.

Variable Print segment income from operations increased $6.2decreased $29.8 million for the threenine months ended September 30, 2017 primarily due to lower volume within commercial and digital print and direct mail, price pressures and higher variable incentive compensation, partially offset by a favorable mix within statement printing, labels and forms. Operating margins decreased from 6.2% for the nine months ended September 30, 2016 primarilyto 5.0% for the nine months ended September 30, 2017 due to lower depreciationvolume and amortization expense, loweran unfavorable mix within commercial and digital print and direct mail and price pressures, partially offset by cost control initiatives and a favorable mix within statement printing, labels and forms. Higher restructuring, impairment and other charges increased volume in the direct mail, favorable revenue mix within the forms and commercial and digital print reporting units, partially offsetunfavorably impacted operating margins by lower volume within the office products, statement printing and labels reporting units and price pressures. Operating margins increased from 6.2% for the three months ended September 30, 2015 to 7.0% for the three months ended September 30, 2016. Operating margins were favorably impacted by lower depreciation and amortization expense, cost controls and a favorable revenue mix within the commercial and digital print reporting unit, partially offset by price pressures.0.1 percentage points.

Strategic Services

 

 

Three Months Ended

 

 

 

September 30,

 

 

 

2016

 

 

2015

 

 

 

(in millions, except percentages)

 

Net sales

 

$

646.6

 

 

$

635.6

 

Income from operations

 

 

39.8

 

 

 

51.5

 

Operating margin

 

 

6.2

%

 

 

8.1

%

Restructuring, impairment and other charges-net

 

 

3.1

 

 

 

3.5

 

Spinoff-related transaction expenses

 

 

0.1

 

 

 

 

Purchase accounting inventory adjustment

 

 

 

 

 

1.1

 

 


Strategic Services

 

 

Net Sales for the Three Months Ended

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

 

 

 

 

 

 

 

Reporting unit

 

2016

 

 

2015

 

 

$ Change

 

 

% Change

 

 

 

(in millions, except percentages)

 

Logistics

 

$

325.0

 

 

$

305.9

 

 

$

19.1

 

 

 

6.2

%

Financial

 

 

214.0

 

 

 

219.7

 

 

 

(5.7

)

 

 

(2.6

%)

Sourcing

 

 

62.4

 

 

 

55.1

 

 

 

7.3

 

 

 

13.2

%

Digital and creative solutions

 

 

45.2

 

 

 

54.9

 

 

 

(9.7

)

 

 

(17.7

%)

Total Strategic Services

 

$

646.6

 

 

$

635.6

 

 

$

11.0

 

 

 

1.7

%

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

 

(in millions, except percentages)

 

Net sales

 

$

1,274.3

 

 

$

1,229.6

 

Income from operations

 

 

(7.0

)

 

 

25.3

 

Operating margin

 

 

(0.5

%)

 

 

2.1

%

Restructuring, impairment and other charges-net

 

 

24.2

 

 

 

2.0

 

 

 

 

Net Sales for the Nine Months Ended

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

 

 

 

 

 

 

 

Reporting unit

 

2017

 

 

2016

 

 

$ Change

 

 

% Change

 

 

 

(in millions, except percentages)

 

Logistics

 

$

899.7

 

 

$

913.5

 

 

$

(13.8

)

 

 

(1.5

%)

Sourcing

 

 

263.6

 

 

 

210.8

 

 

 

52.8

 

 

 

25.0

%

Digital and creative solutions

 

 

111.0

 

 

 

105.3

 

 

 

5.7

 

 

 

5.4

%

Total Strategic Services

 

$

1,274.3

 

 

$

1,229.6

 

 

$

44.7

 

 

 

3.6

%

Net sales for the Strategic Services segment for the threenine months ended September 30, 20162017 were $646.6$1,274.3 million, an increase of $11.0$44.7 million, or 1.7%3.6%, compared to 2015, including a $1.1 million, or 0.2%, decrease due to changes in foreign exchange rates.2016. Net sales increased primarily due to higher volume in sourcing, freight brokerage and courier services and commercial and forms volume within the Sourcing reporting unit,increased fuel surcharges in logistics, partially offset by a reduction in book publishing, capital markets transactions activity and compliance products volume and decreased fuel surchargeslower postage pass-through sales in logistics.  An analysis of net sales by reporting unit follows:

Logistics: Sales increaseddecreased primarily due to a decrease in postage pass-through sales in pre-sort and international mail services, lower volume in print logistics and price pressures, partially offset by higher volume in freight brokerage and courier services partially offset by a decreaseand an increase in fuel surcharges and pass-through postage and decreased volume in international mail services.

Financial: Sales decreased primarily due to a reduction in capital markets transactions and compliance products activity volume, partially offset by increased volume in data room and translation services.surcharge revenues.  

Sourcing: Sales increased primarily due to higher volume resulting from the commercial agreements entered into as part of the Separation and higher commercial and forms volume, partially offset by lower volume in labels.

Digital and creative solutions: Sales decreasedincreased due to incremental revenue from the 2016 acquisition of Precision Dialogue, partially offset by lower book publishing, prepress and photo volume, partially offset by increased volume in creative services.volume.  

Strategic Services segment income from operations decreased $11.7$32.3 million for the threenine months ended September 30, 2017, mainly due to the impairment of goodwill in digital and creative solutions, lower volume in print logistics and digital and creative solutions, price pressures, higher costs of transportation in logistics and higher variable incentive compensation, partially offset by increased fuel surcharges within logistics and productivity and cost control initiatives. Operating margins decreased from 2.1% for the nine months ended September 30, 2016 mainlyto (0.5%) for the nine months ended September 30, 2017 primarily due to a reduction in publishing volume and capital markets transactions and compliance products activity, partially offset by volume increases in freight brokerage services and sourcing, a purchase accounting inventory adjustment in the prior year period and lower restructuring, impairment and other charges. Operating margins decreased from 8.1% to 6.2% due to lower book publishing volume, a reduction in capital market transactions activity and unfavorable revenue mix in the logistics reporting unit. A purchase accounting inventory adjustment in the prior year period and lowerhigher restructuring, impairment and other charges, improvedunfavorable mix within the segment, price pressures and higher variable incentive compensation, partially offset by favorable fuel surcharges in logistics, increased productivity and cost control initiatives. Higher restructuring, impairment and other charges negatively impacted operating margins by 0.21.7 percentage points and 0.1 percentage points, respectively.points.  

 


International

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2016

 

 

2015

 

 

2017

 

 

2016

 

 

(in millions, except percentages)

 

 

(in millions, except percentages)

 

Net sales

 

$

539.5

 

 

$

571.6

 

 

$

1,459.9

 

 

$

1,432.7

 

Income (loss) from operations

 

 

34.4

 

 

 

(8.4

)

Income from operations

 

 

53.8

 

 

 

101.8

 

Operating margin

 

 

6.4

%

 

 

(1.5

%)

 

 

3.7

%

 

 

7.1

%

Spinoff-related transaction expenses

 

 

0.9

 

 

 

 

Restructuring, impairment and other charges-net

 

 

8.6

 

 

 

6.2

 

OPEB curtailment gain

 

 

 

 

 

(0.1

)

Gain on sale of businesses

 

 

(0.3

)

 

 

 

 

 

 

 

 

(12.6

)

OPEB curtailment gain

 

 

(0.1

)

 

 

 

Restructuring, impairment and other charges-net

 

 

1.2

 

 

 

39.3

 

 

 

Net Sales for the Three Months Ended

 

 

 

 

 

 

 

 

 

 

Net Sales for the Nine Months Ended

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

 

 

 

 

 

 

 

Reporting unit

 

2016

 

 

2015

 

 

$ Change

 

 

% Change

 

 

2017

 

 

2016

 

 

$ Change

 

 

% Change

 

 

(in millions, except percentages)

 

 

(in millions, except percentages)

 

Asia

 

$

198.3

 

 

$

196.4

 

 

$

1.9

 

 

 

1.0

%

 

$

586.7

 

 

$

479.3

 

 

$

107.4

 

 

 

22.4

%

Global Turnkey Solutions

 

 

340.7

 

 

 

377.3

 

 

 

(36.6

)

 

 

(9.7

%)

Business process outsourcing

 

 

88.6

 

 

 

107.8

 

 

 

(19.2

)

 

 

(17.8

%)

 

 

284.9

 

 

 

323.5

 

 

 

(38.6

)

 

 

(11.9

%)

Global Turnkey Solutions

 

 

81.5

 

 

 

87.2

 

 

 

(5.7

)

 

 

(6.5

%)

Europe

 

 

70.8

 

 

 

77.7

 

 

 

(6.9

)

 

 

(8.9

%)

Canada

 

 

46.2

 

 

 

43.3

 

 

 

2.9

 

 

 

6.7

%

 

 

148.3

 

 

 

160.4

 

 

 

(12.1

)

 

 

(7.5

%)

Latin America

 

 

54.1

 

 

 

59.2

 

 

 

(5.1

)

 

 

(8.6

%)

 

 

99.3

 

 

 

92.2

 

 

 

7.1

 

 

 

7.7

%

Total International

 

$

539.5

 

 

$

571.6

 

 

$

(32.1

)

 

 

(5.6

%)

 

$

1,459.9

 

 

$

1,432.7

 

 

$

27.2

 

 

 

1.9

%

Net sales in the International segment for the threenine months ended September 30, 20162017 were $539.5$1,459.9 million, a decreasean increase of $32.1$27.2 million, or 5.6%1.9%, compared to the same period in 2015, including2016, inclusive of a $21.0$16.3 million, or 3.7%1.1%, decrease due to changes in foreign exchange rates. The netNet sales decrease was alsoincreased due to higher volume in Asia, partially offset by lower volume in theGlobal Turnkey Solutions, business process outsourcing Global Turnkey Solutions, Europe and Latin America reporting units,Canada, as well as price pressures. An analysis of net sales by reporting unit follows:

Asia: Sales increased due to higher volume primarily in packaging and books products, partially offset by lower volume in labels along with price pressures.

Business process outsourcing: Sales decreased due to changesan unfavorable change in foreign exchangesexchange rates lower volume as a result of the sale of two entities in the first quarter of 2016 and price pressures.

Global Turnkey Solutions: Sales decreased primarily due to lower volume.

Europe: Sales decreased primarily due to lower volume and changes in foreign exchange rates.

Canada: Sales increased due to higher volume in statement printing, formsbooks and labels.

Latin America: Sales decreased primarily due to changes in foreign exchange rates across the region and lower volume.

International segment income from operations increased $42.8 million primarily due to lower restructuring, impairment and other charges and increased volume in Asia and Canada,packaging, partially offset by favorable price pressures. Operating margins increased from negative 1.5% to 6.4%, driven by lower restructuring, impairment and other charges, increased packaging volume in Asia and favorable revenue mix in Canada, partially offset by price pressures. Lower restructuring, impairment and other charges improved operating margins by 6.7 percentage points.


Corporate

 

 

Three Months Ended

 

 

 

September 30,

 

 

 

2016

 

 

2015

 

 

 

(in millions)

 

Operating expenses

 

$

19.9

 

 

$

11.2

 

Pension settlement

 

 

1.6

 

 

 

 

Spinoff-related transaction expenses

 

 

26.0

 

 

 

6.7

 

Restructuring, impairment and other charges-net

 

 

6.6

 

 

 

1.4

 

OPEB curtailment gain

 

 

(19.6

)

 

 

 

Loss on disposition of business

 

 

0.6

 

 

 

 

Acquisition-related expenses

 

 

0.7

 

 

 

0.3

 

Corporate operating expenses in the three months ended September 30, 2016 were $19.9 million, an increase of $8.7 million compared to the same period in 2015. The increase was primarily driven by increased spinoff-related transaction expenses and higher restructuring, impairment and other charges, partially offset by the curtailment gain and an increase in pension income.

RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016 AS COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2015

The following table shows the results of operations for the nine months ended September 30, 2016 and 2015, which reflects the results of acquired businesses from the relevant acquisition dates:

 

Nine Months Ended September 30,

 

 

2016

 

 

2015

 

 

$ Change

 

 

% Change

 

 

(in millions, except percentages)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products net sales

$

6,706.3

 

 

$

6,883.8

 

 

$

(177.5

)

 

 

(2.6

%)

Services net sales

 

1,447.2

 

 

 

1,438.4

 

 

 

8.8

 

 

 

0.6

%

Total net sales

 

8,153.5

 

 

 

8,322.2

 

 

 

(168.7

)

 

 

(2.0

%)

Products cost of sales (exclusive of depreciation and

   amortization)

 

5,237.2

 

 

 

5,386.5

 

 

 

(149.3

)

 

 

(2.8

%)

Services cost of sales (exclusive of depreciation and

   amortization)

 

1,134.4

 

 

 

1,120.3

 

 

 

14.1

 

 

 

1.3

%

Total cost of sales

 

6,371.6

 

 

 

6,506.8

 

 

 

(135.2

)

 

 

(2.1

%)

Products gross profit

 

1,469.1

 

 

 

1,497.3

 

 

 

(28.2

)

 

 

(1.9

%)

Services gross profit

 

312.8

 

 

 

318.1

 

 

 

(5.3

)

 

 

(1.7

%)

Total gross profit

 

1,781.9

 

 

 

1,815.4

 

 

 

(33.5

)

 

 

(1.8

%)

Selling, general and administrative expenses

   (exclusive of depreciation and amortization)

 

1,099.9

 

 

 

972.4

 

 

 

127.5

 

 

 

13.1

%

Restructuring, impairment and other charges-net

 

38.4

 

 

 

104.9

 

 

 

(66.5

)

 

 

(63.4

%)

Depreciation and amortization

 

312.5

 

 

 

341.5

 

 

 

(29.0

)

 

 

(8.5

%)

Other operating income

 

(12.0

)

 

 

 

 

 

(12.0

)

 

 

100.0

%

Income from operations

$

343.1

 

 

$

396.6

 

 

$

(53.5

)

 

 

(13.5

%)

Consolidated

Net sales of products for the nine months ended September 30, 2016 decreased $177.5 million, or 2.6%, to $6,706.3 million versus the same period in 2015, including a $71.0 million, or 1.0%, decrease due to changes in foreign exchange rates. Net sales of products decreased due to price pressures, lower volume in the Variable Print segment, a decline in compliance products and capital markets transactions in the Strategic Services segment and a $22.7 million decrease in pass-through paper sales, partially offset by higher volume primarily in the Publishing and Retail Services segment as a result of the acquisition of Courier.

Net sales from services for the nine months ended September 30, 2016 increased $8.8 million to $1,447.2 million versus the same period in 2015, including an $11.2 million, or 0.8%, decrease 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, partially offset by lower volume in the International segment.

Products cost of sales decreased $149.3 million, or 2.8%, for the nine months ended September 30, 2016 versus the same period in the prior year. Products cost of sales decreased primarily due to lower volume in the Variable Print segment, a decline in capital markets transactions and compliance products volume in the Strategic Services segment and cost controls, partially offset by higher volume primarily in the Publishing and Retail Services segment as a result of the acquisition of Courier and wage and other inflation in the International segment.  As a percentage of net sales, products cost of sales decreased 0.1% for the nine months ended September 30, 2016 versus the same period in the prior year, primarily due to cost savings initiatives, partially offset by wage and other cost inflation.

Services cost of sales increased $14.1 million, or 1.3%, for the nine months ended September 30, 2016 versus the same period in the prior year. Services cost of sales increased primarily due to higher volume logistics reporting unit partially offset by lower in the digital and creative solutions and business processing outsourcing reporting units. As a percentage of net sales, services cost of sales increased 0.5% for the nine months ended September 30, 2016 versus the same period in the prior year driven by unfavorable revenue mix in the Strategic Services segment.

Products gross profit decreased $28.2 million to $1,469.1 million for the nine months ended September 30, 2016 versus the same period in 2015 primarily due to lower volume in the Strategic Services and Variable Print segments and price pressures, partially offset by higher volume in the Publishing and Retail Services segment due to the acquisition of Courier and cost control initiatives, including synergies from the integration of Courier. Products gross margin increased slightly from 21.8% to 21.9%, reflecting the impact of synergies from the integration of Courier, partially offset by the impact of price pressures.

Services gross profit decreased $5.3 million to $312.8 million for the nine months ended September 30, 2016 versus the same period in 2015 due to lower volume in the International segment and unfavorable mix in the Strategic Services segment. Services gross margin decreased from 22.1% to 21.6%, reflecting unfavorable mix in the Strategic Services segment.

Selling, general and administrative expenses increased $127.5 million to $1,099.9 million for the nine months ended September 30, 2016 versus the same period in 2015, reflecting the non-cash pension settlement charge of $98.5 million, $50.6 million of additional spinoff-related transaction expenses, and an increase in bad debt and legal expenses. As a percentage of net sales, selling, general and administrative expenses increased due to the impact of the aforementioned charge and expenses.

For the nine months ended September 30, 2016, the Company recorded net restructuring, impairment and other charges of $38.4 million. These charges included $24.9 million of employee termination costs for 870 employees, of whom 843 were terminated as of September 30, 2016. These charges were primarily the result of the reorganization of certain administrative functions and operations, two facility closures in the International segment and one facility closure in the Publishing and Retail Services segment. The Company also incurred lease termination and other restructuring charges of $8.7 million for the nine months ended September 30, 2016. Additionally, the Company recorded $4.3 million for multi-employer pension plan withdrawal obligations and $0.5 million of net impairment charges of long-lived assets.

For the nine months ended September 30, 2015, the Company recorded net restructuring, impairment and other charges of $104.9 million. These charges included $39.8 million of employee termination costs for 1,829 employees, all of whom were terminated as of September 30, 2016. These charges were primarily the result of two facility closures in the International segment, one facility closure in the Variable Print segment and the reorganization of certain operations. The Company also recorded $23.1 million of other charges, including integration charges for payments made to certain Courier employees upon the termination of Courier’s executive severance plan immediately prior to the acquisition during the second quarter of 2015. The Company also incurred lease termination and other restructuring charges of $13.0 million for the nine months ended September 30, 2015. Additionally, the Company recorded $29.0 million of net impairment charges, including $18.0 million for the impairment of goodwill in the Europe and Latin America reporting units within the International segment, $8.7 million of impairment charges for other long-lived assets, primarily related to buildings and machinery and equipment associated with facility closures and $2.3 million for the impairment of intangibles in the Latin America reporting unit within the International segment for the nine months ended September 30, 2015.

Depreciation and amortization decreased $29.0 million to $312.5 million for the nine months ended September 30, 2016 compared to the same period in 2015 primarily due to lower capital spending in recent years compared to historical levels, partially offset by additional depreciation and amortization due to the acquisition of Courier. Depreciation and amortization included $49.6 million and $58.6 million of amortization of other intangible assets related to customer relationships, trade names, trademarks, licenses and agreements for the nine months ended September 30, 2016 and 2015, respectively.


For the nine months ended September 30, 2016, other operating income was $12.0 million, which related to the net gain on the sale of entities in the International segment.

Income from operations for the nine months ended September 30, 2016 was $343.1 million, a decrease of $53.5 million, or 13.5%, compared to the nine months ended September 30, 2015. The decrease was due to the impact of the non-cash pension settlement charge, higher spinoff-related transaction expenses, price pressures, unfavorable revenue mix in the Strategic Services segment, lower volume in the Variable Print segment and increased bad debt and legal expenses, partially offset by the acquisition of Courier, including synergies from the integration, lower restructuring, impairment and other charges, lower depreciation and amortization expense and the curtailment gain.  

 

Nine Months Ended September 30,

 

 

 

 

 

 

 

 

 

 

2016

 

 

2015

 

 

$ Change

 

 

% Change

 

 

(in millions, except percentages)

 

Interest expense-net

$

204.1

 

 

$

207.2

 

 

$

(3.1

)

 

 

(1.5

%)

Investment and other expense-net

 

0.4

 

 

 

43.2

 

 

 

(42.8

)

 

 

(99.1

%)

Loss on debt extinguishments

 

85.3

 

 

 

 

 

 

85.3

 

 

 

100.0

%

Net interest expense decreased $3.1 million to $204.1 million for the nine months ended September 30, 2016 versus the same period in 2015, primarily due to a decrease in average senior notes outstanding, partially offset by higher average borrowings under the Credit Agreement.

Net investment and other expense for the nine months ended September 30, 2016 and 2015 was $0.4 million and $43.2 million, respectively. For the nine months ended September 30, 2015, the Company recorded a loss of $30.3 million related to the currency remeasurement in Venezuela and the related impact of the devaluation, a $14.7 million net loss on the sale of its Venezuelan operating entity and a loss of $2.8 million for the impairment of the Company’s investment in the Brazilian operations of Courier.

Loss on debt extinguishments, related to premiums paid, unamortized debt issuance costs and other expenses for the nine months ended September 30, 2016 was $85.3 million due to the tender of senior notes and amendments to the Credit Agreement.

 

Nine Months Ended September 30,

 

 

 

 

 

 

 

 

 

 

2016

 

 

2015

 

 

$ Change

 

 

% Change

 

 

(in millions, except percentages)

 

Earnings before income taxes

$

53.3

 

 

$

146.2

 

 

$

(92.9

)

 

 

(63.5

%)

Income tax expense

 

34.3

 

 

 

79.1

 

 

 

(44.8

)

 

 

(56.6

%)

Effective income tax rate

 

64.4

%

 

 

54.1

%

 

 

 

 

 

 

 

 

The effective income tax rate for the nine months ended September 30, 2016 was 64.4% compared to 54.1% in the same period in 2015. The income tax provision for the period ended September 30, 2016 reflects the impact of certain non-deductible spinoff-related transaction expenses, income taxes for certain internal reorganization transactions in preparation for the spinoff transactions within the International segment and the adjustment of valuation allowances in the International segment. The income tax provision for the period ended September 30, 2015 reflects charges for unrecognized tax positions of $9.0 million due to the receipt of an unfavorable court decision relating to payment of prior year taxes in the International segment, a lower tax benefit than the statutory rate of the Venezuelan currency devaluation, the impact of the non-deductible goodwill impairment charges and the loss on the sale of the Company's Venezuelan operating entity.

Income attributable to noncontrolling interests was $0.8 million and a loss of $13.0 million for the nine months ended September 30, 2016 and 2015, respectively.  For the nine months ended September 30, 2015, the remeasurement of the Venezuelan currency, net of foreign exchange gains, resulted in losses attributable to noncontrolling interests of $10.5 million.

Net earnings attributable to RR Donnelley common stockholders for the nine months ended September 30, 2016 was $18.2 million, or $0.26 per diluted share, compared to $80.1 million, or $1.17 per diluted share, for the nine months ended September 30, 2015. In addition to the factors described above, the per share results reflect an increase in weighted average diluted shares outstanding of 2.0 million, primarily as a result of the acquisition of Courier.


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 descriptions of the reporting units 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,

 

 

 

2016

 

 

2015

 

 

 

(in millions, except percentages)

 

Net sales

 

$

1,889.3

 

 

$

1,840.4

 

Income from operations

 

 

85.9

 

 

 

47.8

 

Operating margin

 

 

4.5

%

 

 

2.6

%

Restructuring, impairment and other charges-net

 

 

8.4

 

 

 

27.8

 

Purchase accounting inventory adjustment

 

 

 

 

 

8.5

 

 

 

Net Sales for the Nine Months Ended

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

 

 

 

 

 

 

 

Reporting unit

 

2016

 

 

2015

 

 

$ Change

 

 

% Change

 

 

 

(in millions, except percentages)

 

Magazines, catalogs and retail inserts

 

$

936.8

 

 

$

1,040.9

 

 

$

(104.1

)

 

 

(10.0

%)

Books

 

 

859.5

 

 

 

698.9

 

 

 

160.6

 

 

 

23.0

%

Directories

 

 

93.0

 

 

 

100.6

 

 

 

(7.6

)

 

 

(7.6

%)

Total Publishing and Retail Services

 

$

1,889.3

 

 

$

1,840.4

 

 

$

48.9

 

 

 

2.7

%

Net sales for the Publishing and Retail Services segment for the nine months ended September 30, 2016 were $1,889.3 million, an increase of $48.9 million, or 2.7%, compared to 2015. Net sales increased due to the acquisition of Courier and increased supply chain management and fulfillment volume, partially offset by price pressures, a $22.7 million decrease in pass-through paper sales and lower volume in the magazines, catalogs and retail inserts reporting unit.  An analysis of net sales by reporting unit follows:

Magazines, catalogs and retail inserts: Sales declined due to a decrease in pass-through paper sales, price pressures and reduced volume in catalogs and magazines, partially offset by increased volume in retail inserts.

Books: Sales increased as a result of the acquisition of Courier, increased volume in supply chain management and fulfillment and increased pass-through paper sales, partially offset by price pressures.

Directories: Sales decreased primarily as a result of price pressures and a decline in pass-through paper sales.

Publishing and Retail Services segment income from operations increased by $38.1 million for the nine months ended September 30, 2016 compared to the same period in 2015 due to higher volume as a result of the acquisition of Courier and cost control initiatives, including synergies from the integration of Courier, lower restructuring, impairment and other charges and a purchase accounting inventory adjustment recorded in the prior year period, partially offset by price pressures. Operating margins increased from 2.6% for the nine months ended September 30, 2015 to 4.5% for the nine months ended September 30, 2016, of which 1.1 percentage points were due to lower restructuring, impairment and other charges and 0.5 percentage points were due to a purchase accounting inventory adjustment in the prior year period. Operating margins also increased due to synergies from the integration of Courier and cost control initiatives, partially offset by price pressures.


Variable Print

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2016

 

 

2015

 

 

 

(in millions, except percentages)

 

Net sales

 

$

2,699.5

 

 

$

2,796.0

 

Income from operations

 

 

189.4

 

 

 

183.6

 

Operating margin

 

 

7.0

%

 

 

6.6

%

Restructuring, impairment and other charges-net

 

 

4.9

 

 

 

11.9

 

 

 

Net Sales for the Nine Months Ended

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

 

 

 

 

 

 

 

Reporting unit

 

2016

 

 

2015

 

 

$ Change

 

 

% Change

 

 

 

(in millions, except percentages)

 

Commercial and digital print

 

$

1,194.3

 

 

$

1,227.5

 

 

$

(33.2

)

 

 

(2.7

%)

Office products

 

 

394.2

 

 

 

429.6

 

 

 

(35.4

)

 

 

(8.2

%)

Direct mail

 

 

390.2

 

 

 

374.0

 

 

 

16.2

 

 

 

4.3

%

Labels

 

 

302.0

 

 

 

320.7

 

 

 

(18.7

)

 

 

(5.8

%)

Statement printing

 

 

282.2

 

 

 

294.0

 

 

 

(11.8

)

 

 

(4.0

%)

Forms

 

 

136.6

 

 

 

150.2

 

 

 

(13.6

)

 

 

(9.1

%)

Total Variable Print

 

$

2,699.5

 

 

$

2,796.0

 

 

$

(96.5

)

 

 

(3.5

%)

Net sales for the Variable Print segment for the nine months ended September 30, 2016 were $2,699.5 million, a decrease of $96.5 million, or 3.5%, compared to 2015, including a $3.8 million, or 0.1%, decrease due to changes in foreign exchange rates.  Net sales decreased due to lower volume primarily in the commercial and digital print, office products, labels, forms and statement printing reporting units, price pressures and lower pass-through postage sales, partially offset by increased volume in direct mail. An analysis of net sales by reporting unit follows:

Commercial and digital print: Sales decreased as a result of lower volume, primarily in transactional activity, a decrease in pass-through postage sales and price pressures, partially offset by higher in-store marketing materials volume.

Office products: Sales decreased as a result of lower volume, primarily in filing, envelope, binders and note-taking products and price pressures.

Direct mail: Sales increased as a result of higher volume, including the impact from the acquisition of Precision Dialogue in the third quarter of 2016, partially offset by price pressures.

Labels: Sales decreased primarily as a result of lower volume and price pressures.

Statement printing: Sales decreased primarily as a result of lower volume and lower pass-through postage sales.

Forms: Sales decreased due to lower volume, primarily as a result of electronic substitution.

Variable Print segment income from operations increased $5.8 million for the nine months ended September 30, 2016 mainly due to lower depreciation and amortization, lower restructuring, impairment and other charges and favorable revenue mix within forms and labels, partially offset by price pressures and lower volume primarily in commercial and digital print and office products. Operating margins increased from 6.6% for the nine months ended September 30, 2015 to 7.0% for the nine months ended September 30, 2016. Operating margins were impacted favorably by 0.2 percentage points due to lower restructuring, impairment and other charges. Additionally, changes in operating margins were impacted by favorable revenue mix within forms, direct mail and labels, partially offset by price pressures.


Strategic Services

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2016

 

 

2015

 

 

 

(in millions, except percentages)

 

Net sales

 

$

1,987.1

 

 

$

2,000.5

 

Income from operations

 

 

161.0

 

 

 

189.3

 

Operating margin

 

 

8.1

%

 

 

9.5

%

Restructuring, impairment and other charges-net

 

 

6.2

 

 

 

11.5

 

Spinoff-related transaction expenses

 

 

0.1

 

 

 

 

Purchase accounting inventory adjustment

 

 

 

 

 

1.4

 

 

 

Net Sales for the Nine Months Ended

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

 

 

 

 

 

 

 

Reporting unit

 

2016

 

 

2015

 

 

$ Change

 

 

% Change

 

 

 

(in millions, except percentages)

 

Logistics

 

$

959.1

 

 

$

937.4

 

 

$

21.7

 

 

 

2.3

%

Financial

 

 

722.9

 

 

 

761.2

 

 

 

(38.3

)

 

 

(5.0

%)

Sourcing

 

 

167.2

 

 

 

169.0

 

 

 

(1.8

)

 

 

(1.1

%)

Digital and creative solutions

 

 

137.9

 

 

 

132.9

 

 

 

5.0

 

 

 

3.8

%

Total Strategic Services

 

$

1,987.1

 

 

$

2,000.5

 

 

$

(13.4

)

 

 

(0.7

%)

Net sales for the Strategic Services segment for the nine months ended September 30, 2016 were $1,987.1 million, a decrease of $13.4 million, or 0.7%, compared to 2015, including a $3.3 million, or 0.2%, decrease due to changes in foreign exchange rates. Net sales decreased primarily due to a reduction in compliance products and capital markets transactions activity in financial and decreased fuel surcharges and pass-through postage sales in logistics, partially offset by higher volume in freight brokerage services and book publishing volume as a result of the acquisition of Courier. An analysis of net sales by reporting unit follows:

Logistics: Sales increased primarily due to higher volume in freight brokerage services, partially offset by a decrease in fuel surcharges and pass through postage sales.

Financial: Sales decreased primarily due to a reduction in compliance products volume and capital markets transactions activity, partially offset by increased data room and translation services.

Sourcing: Sales decreased slightly primarily due to lower commercial volume, partially offset by higher volume in forms and labels.

Digital and creative solutions: Sales increased due to book publishing volume as a result of the Courier acquisition, partially offset by lower volume in prepress and photo services.

Strategic Services segment income from operations decreased $28.3 million for the nine months ended September 30, 2016, mainly due to a reduction in compliance products and capital markets transactions activity volume, an unfavorable revenue mix in logistics and price pressures, partially offset by increased book publishing volume as a result of the acquisition of Courier. Operating margins decreased from 9.5% for the nine months ended September 30, 2015 to 8.1% for the nine months ended September 30, 2016. Operating margins were impacted by unfavorable revenue mix in financial and logistics, partially offset by lower restructuring, impairment and other charges which improved operating margins by 0.3 percentage points.


International

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2016

 

 

2015

 

 

 

(in millions, except percentages)

 

Net sales

 

$

1,577.6

 

 

$

1,685.3

 

Income from operations

 

 

97.7

 

 

 

25.9

 

Operating margin

 

 

6.2

%

 

 

1.5

%

Spinoff-related transaction expenses

 

 

1.4

 

 

 

 

Restructuring, impairment and other charges-net

 

 

7.4

 

 

 

49.8

 

OPEB curtailment gain

 

 

(0.1

)

 

 

 

Gain on sales of businesses

 

 

(12.6

)

 

 

 

 

 

Net Sales for the Nine Months Ended

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

 

 

 

 

 

 

 

Reporting unit

 

2016

 

 

2015

 

 

$ Change

 

 

% Change

 

 

 

(in millions, except percentages)

 

Asia

 

$

523.1

 

 

$

543.6

 

 

$

(20.5

)

 

 

(3.8

%)

Business process outsourcing

 

 

287.0

 

 

 

325.7

 

 

 

(38.7

)

 

 

(11.9

%)

Global Turnkey Solutions

 

 

242.6

 

 

 

254.3

 

 

 

(11.7

)

 

 

(4.6

%)

Europe

 

 

207.5

 

 

 

221.9

 

 

 

(14.4

)

 

 

(6.5

%)

Canada

 

 

160.4

 

 

 

149.4

 

 

 

11.0

 

 

 

7.4

%

Latin America

 

 

157.0

 

 

 

190.4

 

 

 

(33.4

)

 

 

(17.5

%)

Total International

 

$

1,577.6

 

 

$

1,685.3

 

 

$

(107.7

)

 

 

(6.4

%)

Net sales in the International segment for the nine months ended September 30, 2016 were $1,577.6 million, a decrease of $107.7 million, or 6.4%, compared to the same period in 2015, including a $75.1 million, or 4.5%, decrease due to changes in foreign exchange rates. The net sales decrease was also due to lower volume in business process outsourcing, Global Turnkey Solutions, Asia and Europe, as well as price pressures in Asia, business process outsourcing and Europe. An analysis of net sales by reporting unit follows:

Asia: Sales decreased due to lower volume, primarily in packaging and labels, price pressures and changes in foreign exchange rates, partially offset by higher volume in book exports.changes.

Business process outsourcing: Sales decreased due to the sale of two entities in the first quarter of 2016, changes in foreign exchanges rates and price pressures, partially offset by higher volume.

Global Turnkey Solutions: Sales decreased primarily due to lower volume.

Europe: Sales decreased primarily due tovolume, changes in foreign exchange rates lower volume and price pressures.

Canada: Sales increaseddecreased due to higherlower volume in forms, labels andcommercial print, statement printing, forms and labels, partially offset by changes in foreign exchange rates.

Latin America: Sales decreased primarily due tofavorable changes in foreign exchange rates across the region and lower forms volume as a result ofregion.

Latin America: Sales increased primarily due to favorable changes in foreign exchange rates across the sale of the Venezuelan operating entity in the second quarter of 2015, partially offset by higher commercial print volume.region.

International segment income from operations increased $71.8decreased $48.0 million primarily due to lower volume in Global Turnkey Solutions, Canada and business process outsourcing, the prior year $12.6 million gain recognized on the sale of businesses, higher costs of transactional foreign exchange expense, as well as price pressures, higher restructuring, impairment and other charges a net gain on the sale of entities in the business process outsourcing,and higher volume in the Canada and favorable revenue mix in Asia, Latin America and Canada,variable incentive compensation, partially offset by price pressures and wage and other inflationincreased volume in Asia and business process outsourcing.lower bad debt expense. Operating margins increaseddecreased from 1.5% for the nine months ended September 30, 2015 to 6.2%7.1% for the nine months ended September 30, 2016 to 3.7% for the nine months ended September 30, 2017, driven by the prior year $12.6 million gain recognized on the sale of which 2.5 percentage points were due tobusinesses, lower volume in Global Turnkey Solutions, Canada and business process outsourcing, higher transactional foreign exchange expense, price pressures, higher restructuring, impairment and other charges and 0.8 percentage points due to the nethigher variable incentive compensation, partially offset by increased packaging volume in Asia and lower bad debt expense. The prior year gain on the sale of entities in the business process outsourcing.  The remaining increase inbusinesses and higher restructuring, impairment and other charges negatively impacted operating margins reflected favorable revenue mix in Asia, Latin Americaby 0.9 and Canada, partially offset by price pressures and wage and other inflation in Asia and business process outsourcing.0.2 percentage points, respectively.

 


Corporate

 

Nine Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2016

 

 

2015

 

 

2017

 

 

2016

 

 

(in millions)

 

 

(in millions)

 

Operating expenses

 

$

190.9

 

 

$

50.0

 

 

$

(39.1

)

 

$

(104.8

)

Pension settlement

 

 

98.5

 

 

 

 

 

 

 

 

 

20.7

 

Spinoff-related transaction expenses

 

 

55.8

 

 

 

6.7

 

 

 

3.3

 

 

 

 

Restructuring, impairment and other charges-net

 

 

11.5

 

 

 

3.9

 

 

 

7.7

 

 

 

11.4

 

OPEB curtailment gain

 

 

(19.6

)

 

 

 

 

 

 

 

 

(19.6

)

Loss on disposition of business

 

 

0.6

 

 

 

 

Loss on the sale of businesses

 

 

 

 

 

0.6

 

Acquisition-related expenses

 

 

2.7

 

 

 

14.1

 

 

 

 

 

 

2.7

 

Corporate operating expenses in the nine months ended September 30, 20162017 were $190.9$39.1 million, an increasea decrease of $140.9$65.7 million compared to the same period in 2015.2016. The increasedecrease was primarily driven by the non-cashprior year pension settlement charge, higher spinoff-related expenseslower corporate and an increase inother overhead costs related to the pre-Separation combined entity, lower legal and bad debt expenses, cost control initiatives and legal expenses,lower restructuring, impairment and other charges-net, partially offset by the prior year OPEB curtailment gain, lower pension and a decrease in acquisition-relatedpostretirement plan income, higher variable incentive compensation and spinoff-related transaction expenses.

LIQUIDITY AND CAPITAL RESOURCES

The Company believes it has sufficient liquidity to support its ongoing operations and to invest in future growth to create value for its stockholders. Operating cash flows and available capacity under the Company’s $800.0 million asset-based 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 stockholders that may be approved by the Board of Directors, acquisitions, capital expenditures necessary to support productivity improvement and growth and completion of restructuring programs. All references to the Credit Agreement and other credit facilities are related to RR Donnelley, unless otherwise specified as being borrowing by Donnelley Financial or LSC.

The following describes the Company’s cash flows for the nine months ended September 30, 2017 and 2016. The Company’s cash flows for all periods prior to the October 1, 2016 Distribution include the impact of LSC and 2015.Donnelley Financial. Refer to Note 2, Discontinued Operations, to the Condensed Consolidated Financial Statements for information on the significant non-cash items, capital expenditures and depreciation and amortization related to LSC and Donnelley Financial.

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 $7.8$12.6 million for the nine months ended September 30, 2016,2017, compared to $204.2net cash provided by operating activities of $7.8 million during the same period in 2015.2016. The decrease in net cash provided by operating activities reflected was driven by lower cash earnings, partially offset by the timing of supplier and customer payments higherand lower interest, spinoff-related transaction expenses and highertax payments for taxes, partially offset by lower payments for incentive compensation.

Cash Flows From Investing Activities

Net cash used inprovided by investing activities for the nine months ended September 30, 20162017 was $167.9$48.0 million compared to $261.0net cash used in investing activities of $167.9 million for the nine months ended September 30, 2015.2016. Capital expenditures were $77.2 million during the first nine months of 2017, a decrease of $70.7 million as compared to the same period of 2016 primarily driven by LSC and Donnelley Financial capital expenditures in the prior year period of $49.0 million. For the nine months ended September 30, 2017, cash provided by investing activities included net proceeds of $121.4 million from the sale of the Company’s retained interest in LSC. For the nine months ended September 30, 2016, the Company paid $47.5 million to acquire Precision Dialogue. During the nine months ended September 30, 2015, net cash usedAdditionally, for acquisitions, primarily Courier, was $118.3 million. Capital expenditures were $147.9 million during the first nine months of 2016, a decrease of $4.9 million as compared to the same period of 2015. For the nine months ended September 30, 2016, cash provided byused in investing activities included $13.7 million of proceeds primarily from business dispositions in the International segment.

Cash Flows From Financing Activities

Net cash provided byused in financing activities for the nine months ended September 30, 20162017 was $187.4$139.1 million compared to net cash used inprovided by financing activities of $188.8$187.4 million in the same period in 2015.2016. During the nine months ended September 30, 2017, the


Company had $1,000.0 million and $1,165.0 million of payments and borrowings, respectively, under the Company’s credit facilities, compared to none in the prior year period. During the nine months ended September 30, 2017, the Company paid approximately $200.4 million to repurchase certain senior notes and debentures outstanding through borrowings under the Company’s credit facilities. During the nine months ended September 30, 2016, the Company had norepurchased $503.6 million of aggregate principal of senior notes using the proceeds from borrowings under the credit facilities, compared to $225.0 million during the nine months ended September 30, 2015. During the nine months ended September 30, 2016, the Company received proceeds of $1,164.0 million from (i) the issuance by LSC of its 8.750% senior secured notes due 2023 and (ii) borrowings of (a) $450.0 million by LSC under its senior secured term loan B credit facilityfacilities of $450.0 million and (b) $350.0$725.0 million, respectively, issued by its formerly, wholly-owned subsidiaries LSC and Donnelley Financial, under its senior secured term loan B credit facility.


Thesewhich proceeds were usedreceived as distributions by the Company immediately prior to purchase approximately $503.6 million in aggregate principal amount of the Company’s senior notes due January 15, 2017 (the “2017 Notes”), May 15, 2018 (the “2018 Notes”), March 15, 2019 (the “2019 Notes”) and February 15, 2022 (the “2022 Notes”) and to pay the outstanding balance on the Credit Agreement.Separation. Additionally, during the nine months ended September 30, 2016, cash on hand and the borrowings under the Credit Agreementprior credit agreement were used to pay $219.8 million of the 8.60% senior notes that matured on August 15, 2016.  

Additionally, dividends paid decreased $133.8 million from $163.2 million during the nine months ended September 30, 2016 to $29.4 million during the nine months ended September 30, 2017. During the nine months ended September 30, 2015, cash on hand and the borrowings under the Credit Agreement were used to pay $200.0 million of the 5.50% senior notes that matured on May 15, 2015. Additionally,2017, the Company repaid $70.0paid the final spinoff cash settlement of $78.0 million of debt assumed fromto LSC and Donnelley Financial as required by the Courier acquisition during the nine months ended September 30, 2015.Separation and Distribution agreement.

LIQUIDITY

Cash and cash equivalents of $411.8$225.8 million as of September 30, 20162017 included $94.3$41.2 million in the U.S. and $317.5$184.6 million at international locations. The Company’s foreign subsidiaries are expected to make payments of approximately $175.0$17.9 million in payments in 2016 and future yearsduring the remainder of 2017 in satisfaction of intercompany obligations. The Company has recognized deferred tax liabilities of $5.5$5.7 million as of September 30, 20162017 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 $411.8 million at September 30, 20162017 were $27.7$23.8 million of short-term investments, which primarily consisted of short-term deposits and money market funds. These investments are held at institutions with sound credit ratings and are expected to be highly liquid.

In connection withMarch 2017, the spin-off transactions,Company sold the following debt transactions6,242,802 common shares it retained upon the spinoff of LSC for net proceeds of $121.4 million. The proceeds of this sale were executed duringused to repay a portion of the three months ended September 30, 2016 (see Note 13, Debt, to the Condensed Consolidated Financial Statements for additional information):

RR Donnelley: Entered into an amended and restated Credit Agreement (the “Credit Agreement”) providing for $800.0 million in credit facilities (the “Revolving Facility”). The Credit Agreement also includes an option for RR Donnelley to increase commitmentsoutstanding borrowings under the Revolving Facility or add term loans in an aggregate amountCompany’s credit facility. In June 2017, the Company exchanged 6,143,208 of up to $100.0 million, at any time prior to the date that is six months prior to6,242,802 shares of Donnelley Financial retained upon the maturity date, subject to the satisfaction of certain conditions set forth in the Credit Agreement.

RR Donnelley: Repurchased $503.6spinoff for $111.6 million of aggregate principal of certain outstanding senior notes. In August 2017, the 2017 Notes, 2018 Notes, 2019 Notes and 2022 Notes (the “Company Purchase Notes”). The Company alsodisposed of its remaining retained shares in Donnelley Financial via a second debt-for-equity exchange, pursuant to which the Company exchanged $300.0 million in aggregate principal amount99,594 shares of Donnelley Financial’s 8.250% senior notes due 2024, which are discussed below,common stock for $274.4$1.9 million in aggregate principal amount of the 2017 Notes and 2018 Notes purchased by certain third party financial institutions (the “Third Party Purchase Notes”). The Company cancelled the Third Party Purchase Notes and Company Purchase Notes.

Donnelley Financial: Issued 8.250% senior notes due 2024 with an aggregate principal of $300.0 millioncertain outstanding senior notes. Such debt obligations were cancelled and incurred a senior secured term loan B facility under its new credit agreement with an aggregate principal of $350.0 million. Donnelley Financial’s credit agreement also includes a $300.0 million senior secured revolving credit facility which was undrawn asdischarged upon delivery to the Company. As of September 30, 2016.

LSC: Issued 8.750% senior secured notes due 2023 with an aggregate principal2017, the Company no longer held any shares of $450.0 million and incurred a senior secured term loan B facility under its new credit agreement with an aggregate principal of $375.0 million. LSC’s credit agreement also includes a $400.0 million senior secured revolving credit facility which was undrawn as of September 30, 2016.

The proceeds from theLSC or Donnelley Financial and LSC term loan B facilities and LSC senior notes were distributed to RR Donnelley in connection with the contribution of certain assets to Donnelley Financial and LSC, respectively, slightly before the completion of the Separation and used to extinguish the aforementioned senior notes as well as borrowings under the Credit Agreement. RR Donnelley has no obligations under Donnelley Financial’s or LSC’s senior secured notes or credit agreements.

On October 6, 2016, the Company completed the redemption of the outstanding $45.8 million principal amount of the 2018 Notes and the outstanding $21.3 million principal amount of the 2019 Notes plus accrued and unpaid interest. On November 2, 2016,


the Company redeemed the outstanding $155.2 million aggregate principal of the 2017 Notes plus accrued and unpaid interest. As a result, the Company expects to recognize an estimated $9.0 million loss on debt extinguishments in the fourth quarter of 2016.common stock.

The Company’s debt maturities as of September 30, 20162017 are shown in the following table:

Debt Maturity Schedule

 

Debt Maturity Schedule

 

Total

 

 

2016

 

 

2017

 

 

2018

 

 

2019

 

 

2020

 

 

Thereafter

 

Total

 

 

2017

 

 

2018

 

 

2019

 

 

2020

 

 

2021

 

 

Thereafter

 

(in millions)

 

(in millions)

 

Senior notes and debentures and borrowings

under the Credit Agreement (a)

$

2,434.5

 

 

$

 

 

$

155.2

 

 

$

45.8

 

 

$

193.5

 

 

$

350.0

 

 

$

1,690.0

 

$

2,245.8

 

 

$

 

 

$

 

 

$

172.2

 

 

$

238.4

 

 

$

529.1

 

 

$

1,306.1

 

Capital lease obligations

 

0.9

 

 

 

0.8

 

 

 

0.1

 

 

 

 

 

 

 

 

 

 

 

 

 

Miscellaneous debt obligations

 

30.5

 

 

 

30.1

 

 

 

0.2

 

 

 

0.2

 

 

 

 

 

 

 

 

 

 

 

17.9

 

 

 

17.9

 

 

 

 

 

 

 

 

 

 

 

Donnelley Financial and LSC senior notes, term loan facilities and capital lease obligations (b)

 

1,481.8

 

 

 

17.9

 

 

 

71.0

 

 

 

66.8

 

 

 

60.5

 

 

 

60.3

 

 

 

1,205.3

 

Total

$

3,947.7

 

 

$

48.8

 

 

$

226.5

 

 

$

112.8

 

 

$

254.0

 

 

$

410.3

 

 

$

2,895.3

 

$

2,263.7

 

 

$

17.9

 

 

$

 

 

$

172.2

 

 

$

238.4

 

 

$

529.1

 

 

$

1,306.1

 

 

(a)

Excludes unamortized debt issuance costs of $17.5$12.2 million and a discount of $1.9 million which do not represent contractual commitments with a fixed amount or maturity date.

(b)

Excludes unamortized debt issuance costs of $26.3 million and a discount of $11.1$1.4 million which do not represent contractual commitments with a fixed amount or maturity date.

 

On June 7, 2017, the Company repurchased $41.7 million of the 6.625% debentures due April 15, 2029, $59.4 million of the 6.50% senior notes due November 15, 2023 and $101.7 million of the 6.00% senior notes due April 1, 2024 using borrowings under the prior credit agreement. The repurchases resulted in a net gain of $0.8 million which was recognized within loss on debt extinguishments in the Condensed Consolidated Statements of Operations during the nine months ended September 30, 2017 related to the difference between the fair value of the debt repurchased and the principal outstanding, partially offset by premiums paid, unamortized debt issuance costs and other expenses.


On May 22, 2017, certain third party financial institutions (such financial institutions collectively, the “Third Party Purchasers”), launched cash tender offers for certain of the Company’s outstanding debt securities, including the Company’s 7.625% senior notes due June 15, 2020 and 7.875% senior notes due March 15, 2021. On June 7, 2017, the Third Party Purchasers purchased $111.6 million in aggregate principal amount of the 7.625% senior notes due June 15, 2020 (the “Third Party Purchase Notes”). On June 21, 2017, the Company exchanged 6,143,208 of its retained shares of Donnelley Financial for the Third Party Purchase Notes. The Company cancelled the Third Party Purchase Notes on June 21, 2017. As a result, the Company recognized a $14.4 million loss on debt extinguishment in the Condensed Consolidated Statements of Operations during the nine months ended September 30, 2017 related to premiums paid, unamortized debt issuance costs and other expenses. In addition, the Company recognized a net realized gain of $92.4 million resulting from the disposition of the retained shares of Donnelley Financial common stock within investment and other income-net in the Condensed Consolidated Statements of Operations during the nine months ended September 30, 2017.

As described above, on August 4, 2017, the Company disposed of its remaining 99,594 shares of Donnelley Financial common stock in exchange for the extinguishment of $1.9 million in aggregate principal of the Company’s 7.875% senior notes due March 15, 2021. As a result, the Company recognized a $0.3 million loss on debt extinguishments in the Condensed Consolidated Statements of Operations during the three and nine months ended September 30, 2017, related to premiums paid, unamortized debt issuance costs and other expenses. In addition, the Company recognized a net realized gain of $1.6 million resulting from the disposition of these retained shares of Donnelley Financial common stock within investment and other income-net in the Condensed Consolidated Statements of Operations during the three and nine months ended September 30, 2017.

On September 29, 2017, the Company entered into an asset-based revolving credit facility pursuant to the second amended and restated credit agreement (the “Credit Agreement”) which amended and restated the Company’s $800.0 million senior secured revolving credit facility dated September 30, 2016. The Credit Agreement provides for a senior secured asset-based revolving credit facility of up to $800.0 million subject to a borrowing base. The amount available to be borrowed under the Credit Agreement is equal to the lesser of (a) $800.0 million and (b) the aggregate amount of accounts receivable, inventory, machinery and equipment and fee-owned real estate of the Company and certain of its domestic subsidiaries (the “Guarantors”) (collectively, the “Borrowing Base”), subject to certain eligibility criteria and advance rates. The aggregate amount of real estate, machinery and equipment that can be included in the Borrowing Base cannot exceed $200.0 million. As a result of entering into the Credit Agreement, the Company recognized a $6.2 million loss related to unamortized debt issuance costs and other expenses within loss on debt extinguishments in the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2017.

Borrowings under the Credit Agreement bear interest at a rate dependent on the average quarterly availability under the Credit Agreement and will be calculated according to a base rate or a Eurocurrency rate plus an applicable margin. The applicable margin determined atfor base rate loans ranges from 0.25% to 0.50% and the timeapplicable margin for Eurocurrency loans ranges from 1.25% to 1.50%. In addition, an unused line fee is payable quarterly on the unused portion of the borrowing. In addition, the Company pays facility commitment fees which fluctuate dependent onamount available to be borrowed under the Credit Agreement’s leverage ratio.Agreement. The unused line fee accrues at a rate of either 0.250% or 0.375% depending upon the average usage of the facility.

Proceeds of the loans under the Credit Agreement ismay be used for working capital and general corporate purposes, including acquisitions and letters of credit.purposes. The Company’s obligations under the Credit Agreement are guaranteed by its material and certain other domestic subsidiaries and are secured by a pledgesecurity interest in certain assets of the Company and its domestic subsidiaries, including accounts receivable, inventory, deposit accounts, securities accounts, investment property, machinery and equipment and, to the extent related to the foregoing, general intangibles, documents and instruments, as well as 65% of the equity interests of certainits first-tier foreign subsidiaries including most of its domestic subsidiaries, and a security interest in substantially all of the domestic current assets and mortgages of certain domestic real property of the Company..

The Credit Agreement contains certainis subject to customary restrictive covenants, on RR Donnelleyincluding a covenant which requires the Company to maintain a minimum fixed charge coverage ratio under certain circumstances. In addition, the Company’s ability to undertake certain actions, including, among other things, prepay certain junior debt, incur additional unsecured indebtedness and its subsidiaries, including but not limited to: limitations on debt, investments,make certain restricted payments burdensome agreements, liens, merger or saledepends on satisfaction of assets, conduct of business, transactions with affiliates and dispositions. The Credit Agreement requires that RR Donnelley maintain a maximum secured leverage ratio of 1.50 to 1.00, and a maximum leverage ratio, as of the last day of each fiscal quarter commencing with the first fiscal quarter ending December 31, 2016, of (i) with respect to any fiscal quarter ending on or after December 31, 2016 prior to September 2017, 5.00 to 1.00, (ii) with respect to any fiscal quarter ending on or after September 30, 2017 and prior to March 31, 2018, 4.75 to 1.00, (iii) with respect to any fiscal quarter ending on or after March 31, 2018 and prior to March 31, 2019, 4.50 to 1.00, (iv) with respect to any fiscal quarter ending on or after March 31, 2019 and prior to March 31, 2020, 4.25 to 1.00 and (v) with respect to any fiscal quarter ending on or after March 31, 2020, 4.00 to 1.00.

Cash on hand and borrowingscertain conditions, including, among other things, meeting minimum availability thresholds under the Credit Agreement were used to pay the $219.8 million of 8.6% senior notes that matured on August 15, 2016.Agreement.

There were no$350.0 million of borrowings under the Credit Agreement as of September 30, 2016.2017. Based on the Company’s resultsborrowing base as of operations for the twelve months ended September 30, 20162017 and existing borrowings, the Company would have had the ability to utilize approximately $742.9$384.9 million of the $800.0 million Credit Agreement and not have been in violation of the terms of the agreement.Agreement.

 


The current availability under the Credit Agreement as of September 30, 20162017 is shown in the table below:

 

September 30, 2016

 

 

September 30, 2017

 

Availability

 

(in millions)

 

 

(in millions)

 

Committed Credit Agreement

 

$

800.0

 

 

$

800.0

 

Availability reduction from covenants

 

 

 

Availability reduction due to available borrowing base

 

 

35.4

 

 

$

800.0

 

 

$

764.6

 

Usage

 

 

 

 

 

 

 

 

Borrowings under the Credit Agreement

 

 

 

 

 

350.0

 

Impact on availability related to outstanding letters of credit

 

 

57.1

 

Outstanding letters of credit

 

 

29.7

 

 

 

57.1

 

 

 

379.7

 

 

 

 

 

Current availability at September 30, 2016

 

$

742.9

 

Current availability at September 30, 2017

 

$

384.9

 

TheAs of September 30, 2017, the Company was in compliance with itsthe debt covenants as of September 30, 2016, under the Credit Agreement and expects to remain in compliance based on management’s estimates of operating and financial results for 20162017 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, 2016,2017, 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 was added. Currently, the Credit Agreement is supported by sixteeneight U.S. and international financial institutions.

As of September 30, 2016,2017, the Company had $83.0 million in outstanding letters of credit and bank guarantees, of which $57.1 million were issued under the Credit Agreement.  The letters of credit used under the Credit Agreement reduced availability under the Credit Agreement as of September 30, 2016.  As of September 30, 2016, the Company also had $159.4$176.7 million in other uncommitted credit facilities, primarily outside the U.S. (the “Other Facilities”). AsThere were $103.3 million in outstanding letters of September 30, 2016,credit, bank guarantees and bank acceptance drafts letterswhich reduced availability, of credit and guarantees of $59.6which $29.7 million were issued and reduced availability, under the Company’s Other Facilities.Credit Agreement. Total borrowings under the Credit Agreement and the Other Facilities (the “Combined Facilities”) were $8.0$367.6 million as of September 30, 2016.2017.

The Company’s liquidity may be affected by its credit ratings. On September 14, 2016, Moody’s Investor Services (“Moody’s”) downgraded the Company’s long-term corporate credit rating from Ba3 to B1 and changed the credit ratings outlook from developing to stable.  Moody’s also downgraded its rating on the Company’s senior unsecured debt and Credit Agreement from B1 to B2 and Baa3 to Ba1, respectively. The Company’s Standard & Poor Rating Services (“S&P”) and Moody’s credit ratings as of September 30, 20162017 are shown in the table below:

 

S&P

 

Moody's

Long-term corporate credit rating

BB-B+, Credit Watch negativeStable

 

B1, Stable

Senior unsecured debt

BB-B+

 

B2

Credit Agreement

BB+BB

 

Ba1

On October 6, 2016, S&P downgraded the Company’s corporate credit rating from BB- to B+ and changed the credit ratings outlook from CreditWatch to Stable. S&P also downgraded its ratings on the Company’s senior unsecured debt and Credit Agreement from BB- to B+ and BB+ to BB, respectively.

Dividends

During the nine months ended September 30, 2016,2017, the Company paid cash dividends of $163.2$29.4 million. On October 27, 2016,25, 2017, the Board of Directors of the Company declared a quarterly cash dividend of $0.14 per common share payable on December 1, 20162017 to RR DonnelleyRRD stockholders of record on November 15, 2016.2017.

Acquisitions and Dispositions

During the nine months ended September 30, 2016, the Company paid $47.5 million, net of cash acquired, to acquire Precision Dialogue. Additionally, during the nine months ended September 30, 2016, the Company sold immaterial entities within the International segment for net proceeds of $13.7 million, all of which was received as of September 30, 2016.


During the nine months ended September 30, 2015, the Company paid $118.3 million, net of cash acquired, substantially all of which related to the acquisition of Courier.  The Company financed the cash portion of the Courier acquisition with a combination of cash on hand and borrowings under the Credit Agreement.million.

Debt Issuances

During the nine months endedOn September 30, 2016, in connection with the spin-off transactions,Company’s then wholly-owned subsidiary Donnelley Financial issued 8.250% senior notes due 2024 with an aggregate principal of $300.0 million and issuedincurred a senior secured term loan B facility under its new credit agreement with antotal aggregate principalprincipals of $300.0 million and $350.0 million.million, respectively.  Additionally on September 30, 2016, the Company’s then wholly-owned subsidiary LSC issued 8.750% senior notes due 2023 with an aggregate principal of $450.0 million and issuedincurred a senior secured term loan B facility under its new credit agreement with antotal aggregate principal of $450.0 million and $375.0 million. Themillion, respectively.  All of the related net proceeds fromwere distributed to the sale ofCompany or exchanged for debt in connection with the LSCSeparation. After the Separation, RR Donnelley has no obligations as it relates to these senior secured notes, and borrowings under the Donnelley Financial and LSC senior secured term loan B facilities were distributed to their parent company, RR Donnelley. RR Donnelley used these proceeds to reduce its existing debt. Theor any other LSC or Donnelley Financial senior notes were exchanged to reduce RR Donnelley debt. RR Donnelley has no obligations under Donnelley Financial’s or LSC’s senior secured notes or credit agreements.indebtedness.

There were no debt issuances during the nine months ended September 30, 2015. 


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, 2016,2017, the Company’s variable-interest borrowings were $30.0 million, or approximately 0.8%,$367.6 million. Approximately 83.8% of the Company’s total debt under borrowings under the Combined Facilities. Approximately 99% of the Company’s outstanding term debt was comprised of fixed-rate debt as of September 30, 2016.2017.

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, 20162017 and 2015December 31, 2016 by approximately $102.0$50.2 million and $101.8$69.6 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 forwardcurrency contracts to hedge the currency risk. As of September 30, 20162017 and December 31, 2015,2016, the aggregate notional amount of outstanding foreign exchange forwardcurrency contracts was approximately $260.4$136.7 million and $268.4$172.2 million, respectively (see Note 14,17, Derivatives, to the Condensed Consolidated Financial Statements). Net unrealized lossesgains from these foreign exchange forwardcurrency contracts were $1.8$0.5 million at September 30, 20162017 and net unrealized gains from these foreign exchange forward contracts were $0.3$0.2 million at December 31, 2015.2016. 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 12,14, Commitments and Contingencies, to the Condensed Consolidated Financial Statements.

New Accounting Pronouncements and Pending Accounting Standards

Recently issued accounting standards and their estimated effect on the Company’s consolidated financial statements are described in Note 16,19, 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 spinoffs not achieving the intended results;

the volatility of the price of the Company’s common stock following completion of the spinoff;

not realizing the full benefits from the retained ownership interests in LSC Communications and Donnelley Financial Solutions;

increased costs resulting from a decrease in purchase power as a result of the spinoffs;

inability to hire and retain employees;

the spinoffs resulting in significant tax liability;

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

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

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

changes in consumer preferences or a failure to otherwise manage relationships with our significant customers;

adverse credit market conditions and other issues that may affect the Company’s ability to obtain future financing on favorable terms;

the Company’s ability to make payments on, reduce or extinguish any of its material indebtedness;


changes in the availability or costs of key materials (such as ink, paper and fuel), increases in shipping costs or changes in prices received for the sale of by-products;

the ability of the Company to improve operating efficiency rapidly enough to meet market conditions;

successful negotiation, execution and integration of acquisitions;

increased pricing pressure as a result of the competitive pressures in all marketsenvironment in which the Company operates;

increasing health care and benefits costs for employees and retirees;

changes in the Company’s pension and other post-retirementpostretirement obligations;

catastrophic events which may damage the Company’s facilities or otherwise disrupt the business;

pricing pressure as a resultadverse trends or events in our operations outside of the competitive environment in which the Company operates;United States;

the effect of inflation, changes in technology, including electronic substitutioncurrency exchange rates and migration of paper based documents to digital data formats, and the ability of the Company to adapt to these changes;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;

changes in the regulations applicable to the Company’s customers, which may adversely impact demand for the Company’s products and services;

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;

failures or errors in the Company’s products and services;

the ability by the Company and/or its vendors to implement and maintain information technology and security measures sufficient to protect against breaches and data leakage;


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

leakage or the failure to properly use and protect customer, Company’Company and employee information and data;

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

the spinoff transactions achieving the intended results;

the volatility of the price of the Company’s common stock following completion of the spinoff;

not realizing the benefits from the retained ownership interests in LSC and Donnelley Financial;

increased costs resulting from a decrease in purchase power as a result of the spinoffs;

inability to hire and retain employees;

the spinoffs resulting in significant tax liability; 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.


ItemItem 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, 2015.2016.  For a discussion of exposure to market risk, refer to Part II, Item 7A – Quantitative and Qualitative Disclosures about Market Risk, set forforth in the Company’s 20152016 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, 2016,2017, 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, 20162017 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.

During the third quarter of 2016, under the supervision of and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we completed our preparations and implementations for a series of changes to our information technology environment, which include our financial reporting systems, to support the separate financial reporting requirements for RR Donnelley, Donnelley Financial, and LSC. There were no other 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, 20162017 that had materially affected, or were reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 


PART II— OTHER INFORMATION

 

Item 1. Legal Proceedings

For a discussion of certain litigation involving the Company, see Note 12,14, Commitments and Contingencies, to the Condensed Consolidated Financial Statements.

Item 1A. Risk Factors

The following risk factors amend and supplement the Risk Factors identified under Item 1A. Risk Factors in the Company’s Annual Report on Form 10-K and should be read in conjunction with such risk factors in the Form 10-K.  Unless the context otherwise


requires, the risk factors identified below relating to the Company relate to the Company after giving effect to the completion of the spinoff transactions. 

The spinoffs may not achieve the intended results.

The Company’s operational and financial profile changed upon the separation of LSC Communications and Donnelley Financial Solutions from the Company’s other businesses. As a result, the Company’s diversification of revenue sources diminished, and the Company’s results of operations, cash flows, working capital and financing requirements may be subject to increased volatility and greater risk as a result of the concentration of our business in the multichannel communications management industry. Further, shares of the Company’s common stock represent an investment in a smaller company. These changes may not meet some stockholders’ investment strategies, which could cause investors to sell their shares of the Company’s common stock. Excessive selling could cause the relative market price of the Company’s common stock to decrease.  

Further, the anticipated benefits to the Company of the spinoff transactions were based on a number of assumptions, some of which may prove incorrect. Any such incorrect assumptions could adversely affect the Company’s business, results of operations or financial condition.

In addition, we believe that the spinoff transactions will result in a number of benefits to the Company, including, among others, enabling management to better focus on our multichannel integrated communications business.  However, if we fail to achieve some or all of the expected benefits of the transaction, or if those benefits are delayed, our business, results of operations and financial condition could be adversely affected and the value of our stock could be adversely impacted

The price of the Company’s common stock may fluctuate significantly with the completion of the spinoffs.

We cannot predict the prices at which the Company’s common stock may trade now that the spinoffs are complete , the effect of the spinoffs on the trading prices of the Company’s common stock or whether the market value of the Company’s common stock and the common stock of each of the new public companies held by a stockholder after the spinoffs will be, in the aggregate, less than, equal to or greater than the market value of the Company’s common stock held by such stockholder prior to the spinoffs.

The Company may not realize the full benefits from its retained ownership interests in LSC Communications and Donnelley Financial Solutions.

As part of the spinoff transactions, the Company distributed approximately 80.75% of the outstanding shares of common stock of LSC Communications and Donnelley Financial Solutions to the Company’s stockholders.  After giving effect to these distributions, the Company retained approximately 19.75% of the outstanding shares of common stock of each of LSC Communications and Donnelley Financial Solutions.  In connection with the spinoff transactions, the Company entered into a stockholder and registration rights agreement with each of LSC Communications and Donnelley Financial Solutions governing the Company’s ownership and potential disposition of the shares of common stock retained in each company. The Company will dispose of any shares of common stock of LSC Communications and Donnelley Financial Solutions that it retains within the 12-month period following the initial distribution of shares of common stock of LSC Communications and Donnelley Financial Solutions to the Company’s stockholders.

As with any investment in a publicly traded company, the Company’s retained ownership in each company is subject to risks and uncertainties relating to the businesses of LSC Communications and Donnelley Financial Solutions and risks and uncertainties relating to fluctuations in public equity markets generally. In addition, under the stockholders’ and registration rights agreement, the Company gave a proxy to each company to vote all of its retained shares of common stock in proportion to the votes cast by LSC Communications’ and Donnelley Financial Solutions’ other stockholders. Consequently, the Company does not retain any influence over the management and affairs of each of LSC Communications and Donnelley Financial Solutions.

Pursuant to the stockholders’ and registration rights agreement with each company, we may dispose of shares of common stock of either company to investment banks in exchange for our outstanding public debt. We will dispose of all of the shares of common stock we retain in LSC Communications and Donnelley Financial Solutions within a year of the spinoff distribution date. Any disposition of shares of common stock of LSC Communications or Donnelley Financial Solutions held by the Company in the public market, or the perception that such dispositions could occur, could adversely affect prevailing market prices for LSC Communications common stock and Donnelley Financial Solutions common stock and thereby adversely affect the value of our retained ownership interests or adversely affect the terms and conditions of such disposition.


Post-spin, we are a smaller company and may experience increased costs resulting from a decrease in purchasing power.

Prior to the completion of the spinoff transactions, we had been able to take advantage of our size and purchasing power in sourcing products and services from third-party vendors. Since the spinoff transactions are complete, we are a smaller company and may not have the same purchasing power that we had before the completion of the spinoff transactions. Although we are seeking to expand our direct purchasing relationships with many of our most important third-party vendors, we may be unable to obtain products and services at prices and on terms as favorable as those available to us prior to completion of the spinoff transactions, which could negatively impact our results of operations, financial positions and cash flow.

The Company may be unable to hire and retain talented employees, including management, which may be exacerbated by the spinoff transactions.

The Company’s success depends, in part, on its general ability to attract, develop, motivate and retain highly skilled employees. The loss of a significant number of the Company’s employees or the inability to attract, hire, develop, train and retain skilled personnel could have a serious negative effect on the Company. Various locations may encounter competition with other manufacturers for skilled labor. Many of these competitors may be able to offer significantly greater compensation and benefits or more attractive lifestyle choices than the Company offers. In addition, many members of the Company’s management have significant industry experience that is valuable to the Company’s competitors. The Company enters into non-solicitation and, as appropriate, non-competition agreements with its executive officers, prohibiting them contractually from soliciting the Company’s customers and employees and from leaving and joining a competitor within a specified period.

Furthermore, as a result of the spinoff transactions, certain members of our senior management team prior to the spinoff, resigned from their roles with the Company to assume positions with either LSC Communications or Donnelley Financial Solutions. The loss of members of our senior management team and other key employees due to the spinoff transactions may result in transitional challenges or temporary difficulty in managing our business properly, which could harm business prospects and the Company’s consolidated results of operations, financial position and cash flows.  

The spinoff transactions could result in significant tax liability.

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

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

Global market and economic conditions, as well as the effects of these conditions on customers’ businesses, could adversely affect the Company.

Global economic conditions affect customers’ businesses and the markets they serve. In general, demand for the Company’s products and services are highly correlated with general economic conditions. Because a significant part of the Company’s business relies on its customers’ advertising spending, which is driven in part by economic conditions and consumer spending, a prolonged downturn in the global economy and an uncertain economic outlook could further reduce the demand for printing and related services that the Company provides to these customers. Delays or reductions in customers’ spending would have an adverse effect on demand for our products and services, which could be material, and consequently could negatively impact our results of operations, financial position and cash flow. Economic weakness and constrained advertising spending may result in decreased revenue, operating margin, earnings and growth rates and difficulty in managing inventory levels and collecting accounts receivable. In addition, customer difficulties could result in increases in bad debt write-offs and allowances for doubtful accounts receivable. The Company may experience operating margin declines as a result.  Economic downturns may also result in restructuring actions and associated expenses and impairment of long-lived assets, including goodwill and other intangibles. Uncertainty about future economic conditions makes it difficult for the Company to forecast operating results and to make decisions about future investments.


Such declines in demand are difficult to predict and may result in the Company or the industry having increased excess capacity as a result. An increase in excess capacity may result in declines in prices for the Company’s products and services. The overall business climate may also be impacted by wars or acts of terrorism. Such acts may have sudden and unpredictable adverse impacts on demand for the Company’s products and services.

Further, in June 2016, a majority of voters in the United Kingdom elected to withdraw from the European Union in a national referendum. The referendum has created significant uncertainty about the future relationship between the United Kingdom and the European Union. The referendum has also given rise to calls for the governments of other European Union member states to consider withdrawal. These developments, or the perception that any of them could occur, have had and may continue to have an adverse effect on global economic conditions and the stability of global financial markets, and may significantly reduce global market liquidity and restrict the ability of key market participants to operate in certain financial markets. Any of these factors could depress economic activity and restrict our access to capital, which could negatively impact our results of operations, financial position and cash flow.

Our business is dependent upon brand reputation and the quality of our customer support and services offerings and if we fail to offer effective customer support and services, our brand reputation would be harmed and customers may not use our solutions, resulting in a decline of our net sales.

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

Adverse credit market conditions may limit the Company’s ability to obtain future financing.

Uncertainty and volatility in global financial markets may cause financial institutions to fail, may cause lenders to reduce lending or may cause investors to reinvest in assets that are considered less risky. The failure of a financial institution that supports the Company’s existing credit agreement would reduce the size of its committed facility unless a replacement institution was added.   Furthermore, the Company revised its existing financing structure to consummate the spinoff transactions,  through refinancing and debt tender and exchange transactions.  Any future capital markets transaction will be dependent on market conditions, which may result in the Company receiving financing on terms less favorable to the Company than its existing financings.  

The Company’s operating performance and creditworthiness may limit its ability to obtain future financing and the cost of any such capital may be higher than in past periods.

The Company’s access to future financing will depend on a variety of factors such as the general availability of credit, its credit ratings and credit capacity at the time it pursues such financing. The Company’s current corporate credit ratings are below investment grade and, as a result, the Company’s borrowing costs may further increase or ability to borrow may be limited. The Company’s obligations under its current $800 million senior secured revolving credit facility (the “Credit Agreement”) which expires September 30, 2021, are guaranteed by 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 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 Ratio and a maximum Leverage Ratio, that, in part, restrict the Company’s ability to incur additional indebtedness, create liens, engage in mergers and consolidations, make restricted payments, dispose of certain assets and may also limit the use of proceeds. The Credit Agreement generally allows annual dividend payments of up to $60.0 million in aggregate, though additional dividends may be allowed subject to certain conditions. If adequate capital is not available to the Company and its internal sources of liquidity prove to be insufficient, or if future financings require more restrictive covenants, such combination of events could adversely affect the Company’s ability to (i) acquire new businesses or enter new markets, (ii) service or refinance its existing debt, (iii) pay dividends on common stock, (iv) make necessary capital investments, and (v) make other expenditures necessary for the ongoing conduct of its business.


The Company may not be able to reduce or extinguish any of its material indebtedness, and as a result the Company would have increased financial leverage, which could adversely affect its business.

The Company will not be able to assign, and may not be able to reduce or extinguish, any of its material indebtedness.  The Company  has substantial indebtedness and if it is unable to reduce this indebtedness, the Company will have increased financial leverage since  the spinoff transactions are complete.  As a result of the transfer of certain businesses to LSC Communications and Donnelley Financial Solutions, the Company’s interest and principal payments on its outstanding indebtedness are expected to increase substantially in relation to its revenues and cash flows.  In addition, the Company’s ability to make payments on, or repay or refinance, such debt, will depend largely upon its future operating performance. The Company’s future operating performance may be adversely impacted by loss of earnings from businesses transferred to LSC Communications and Donnelley Financial Solutions.

The indentures governing the notes and debentures the Company issues do not contain restrictive covenants and the Company may incur substantially more debt or take other actions, including engaging in mergers and acquisitions, paying dividends and making other distributions to holders of equity securities, and disposing of certain assets, which may adversely affect the Company’s ability to satisfy its obligations under the notes and debentures issued under its indentures.

Although the Credit Agreement is subject to a number of negative and financial covenants, including a minimum interest coverage ratio and a maximum leverage ratio, and covenants that restrict the Company’s ability to incur additional indebtedness, engage in mergers and acquisitions, pay dividends and make other distributions to the holders of the Company’s equity securities, and dispose of certain assets, the indentures governing the Company’s outstanding notes and debentures do not contain financial or operating covenants or restrictions on the incurrence of indebtedness, the payment of dividends or making other distributions, or the disposition of certain assets. In addition, the limited covenants applicable to the notes and debentures do not require the Company to achieve or maintain any minimum financial results relating to its financial position or results of operations.

In carrying out the Company’s strategy focused on maximizing long-term stockholder value, the Company may enter into transactions which may increase its financial leverage. The Company’s ability to recapitalize, incur additional debt and take a number of other actions that are not limited by the terms of the indentures governing its notes and debentures could have the effect of diminishing the Company’s ability to make payments on those notes and debentures when due, and require the Company to dedicate a substantial portion of its cash flow from operations to payments on its indebtedness, which would reduce the availability of cash flow to fund the Company’s operations, working capital and capital expenditures.

Fluctuations in the costs of paper, ink, energy and other raw materials may adversely impact the Company.

Purchases of paper, ink, energy and other raw materials represent a large portion of the Company’s costs. Increases in the costs of these inputs may increase the Company’s costs and the Company may not be able to pass these costs on to customers through higher prices. In addition, the Company may not be able to resell waste paper and other print-related by-products or may be adversely impacted by decreases in the prices for these by-products. Increases in the cost of materials may adversely impact customers’ demand for the Company’s printing and related services.

The Company may be adversely affected by a decline in the availability of raw materials.

The Company is dependent on the availability of paper, ink and other raw materials to support its operations. Unforeseen developments in these markets could result in a decrease in the supply of paper, ink or other raw materials and could cause a decline in the Company’s revenues.  

The Company may be unable to improve its operating efficiency rapidly enough to meet market conditions.

Because the markets in which the Company competes are highly competitive, the Company must continue to improve its operating efficiency in order to maintain or improve its profitability.  There is no assurance that the Company will be able to do so in the future.  In addition, the need to reduce ongoing operating costs may result in significant up-front costs to reduce workforce, close or consolidate facilities, or upgrade equipment and technology.


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

Achieving the anticipated benefits of acquisitions will depend in part upon our ability to integrate these businesses in an efficient and effective manner. The integration of companies that have previously operated independently may result in significant challenges, and we may be unable to accomplish the integration smoothly or successfully. In particular, the coordination of geographically dispersed organizations with differences in corporate cultures and management philosophies may increase the difficulties of integration. The integration of acquired businesses may also require the dedication of significant management resources, which may temporarily distract management’s attention from the day-to-day operations of the Company. In addition, the process of integrating operations may cause an interruption of, or loss of momentum in, the activities of one or more of the Company’s businesses and the loss of key personnel from the Company or the acquired businesses. Further, employee uncertainty and lack of focus during the integration process may disrupt the businesses of the Company or the acquired businesses. The Company’s strategy is, in part, predicated on the Company’s ability to realize cost savings and to increase net sales through the acquisition of businesses that add to the breadth and depth of the Company’s products and services. Achieving these cost savings and net sales increases is dependent upon a number of factors, many of which are beyond the Company’s control. In particular, the Company may not be able to realize the benefits of more comprehensive product and service offerings, anticipated integration of sales forces, asset rationalization and systems integration.

The highly competitive market for the Company’s products and industry consolidation may continue to create adverse price pressures.

The markets for the majority of the Company’s product categories are highly fragmented and the Company has a large number of competitors. Management believes that excess capacity in the Company’s markets has caused downward price pressure and that this trend is likely to continue. In addition, consolidation in the markets in which the Company competes may increase competitive price pressures due to competitors lowering prices.

The Company may be subject to more intensive competition if our competitors pursue consolidations.

The Company currently has a large number of competitors in the markets in which we operate. The Company believes that selectively pursuing acquisitions is an important strategy for our business following the proposed spinoff transactions. If our competitors are able to successfully combine with one another or otherwise consolidate, the competitive landscape we face could be significantly altered. Such consolidation could create stronger competitors with greater financial resources and broader manufacturing and distribution capabilities than our own, and, if we are not successful with our own efforts to consolidate or adapt effectively to increased competition, the resulting increase in competitive pressures could negatively impact our results of operations, financial position and cash flow.

The trend of increasing costs to provide health care and other benefits to the Company’s employees and retirees may continue.

The Company provides health care and other benefits to both employees and retirees. For many years, costs for health care have increased more rapidly than general inflation in the U.S. economy. If this trend in health care costs continues, the Company’s cost to provide such benefits could increase, adversely impacting the Company’s profitability. Changes to health care regulations in the U.S. may also increase the Company’s cost of providing such benefits.

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

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. As experienced in prior years, declines in the market value of the securities held by the plans coupled with low interest rates have substantially reduced, and in the future could further reduce, the funded status of the plans. These reductions have increased the level of expected required pension and other postretirement benefits plan contributions in future years. Market conditions may lead to changes in the discount rates used to value the year-end benefit obligations of the plans, which could partially mitigate or worsen the effects of lower asset returns. If adverse market conditions were to continue for an extended period of time, the Company’s costs and required cash contributions associated with pension and other postretirement benefits plans may substantially increase in future periods.


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

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

After the spinoff transactions, we may be more vulnerable to adverse events and trends associated with operations outside the United States.

Post the spinoff transactions, our business will be less diversified and focus only on variable print and strategic services and will have significant operations outside the United States. As a result, the Company may be more exposed to the risks inherent in conducting such businesses and in conducting business outside the United States. Conducting business outside the United States subjects us to a number of additional risks and challenges, including:

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

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

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

certification requirements;

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

inadequate protection of intellectual property rights in some countries;

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

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

fluctuations in freight rates and transportation disruptions.

These factors, individually or in combination, could impair our ability to effectively deliver our products, result in unexpected and material expenses, or cause an unexpected decline in the demand for our products in certain countries or regions. Specifically with respect to our operations in China, our financial performance may be subject to the following risks, among others: regulation of foreign investment and business activities by the Chinese government, including recent scrutiny of foreign companies, may limit our ability to expand our business in China; uncertainties with respect to the legal system in China may limit the legal protections available to us in China; government restrictions on the remittance of currency out of China and the ability of any subsidiary we may establish in China to pay dividends and make other distributions to us; and potential unfavorable tax consequences as a result of our operations in China.  Our failure to manage the risks and challenges associated with our international business and operations could have a material adverse effect on the Company’s consolidated results of operations, financial position and cash flows.

The Company is exposed to significant risks related to potential adverse changes in currency exchange rates.

The Company is exposed to market risks resulting from changes in the currency exchange rates of the currencies in the countries in which it does business. Although operating in local currencies may limit the impact of currency rate fluctuations on the operating results of the Company’s non-U.S. subsidiaries, fluctuations in such rates may affect the translation of these results into the Company’s consolidated financial statements. To the extent borrowings, sales, purchases, revenues and expenses or other transactions are not in the applicable local currency, the Company may enter into foreign currency spot and forward contracts to hedge the currency risk. Management cannot be sure, however, that the Company’s efforts at hedging will be successful, and such efforts could, in certain circumstances, lead to losses that are material to the Company’s consolidated results of operations, financial position and cash flows.


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

The Company holds material amounts of goodwill, other long-lived assets and deferred tax assets on its balance sheet. A decline in expected profitability, particularly if there is a decline in the global economy, could call into question the recoverability of the Company’s related goodwill, other long-lived tangible and intangible assets or deferred tax assets and require the write down or write off these assets or, in the case of deferred tax assets, recognition of a valuation allowance through a charge to income. Such an occurrence has had and could continue to have a material adverse effect on the Company’s consolidated results of operations, financial position and cash flows.

The substitution of electronic delivery for printed materials may continue to adversely affect the Company’s businesses.

Electronic delivery of documents and data, including the online distribution and hosting of media content, offer alternatives to traditional delivery of printed documents. Consumers continue to accept electronic substitution in statement printing and forms while online and digital advertising is impacting customers’ printed advertising spends. The extent to which consumers will continue to accept electronic delivery is uncertain and it is difficult to predict future rates of acceptance of these alternatives. Electronic delivery has negatively impacted the Company’s products, such as forms and statement printing. To the extent that consumers, customers and regulators continue to accept these alternatives, the Company’s products will be adversely affected.

Changes in the rules and regulations to which the Company is subject may increase the Company’s costs.

The Company is subject to numerous rules and regulations, including, but not limited to, product safety, environmental and health and welfare benefit regulations. These rules and regulations may be changed by local, state or federal governments in countries in which the Company operates. Changes in these regulations may result in a significant increase in the Company’s costs to comply. Compliance with changes in rules and regulations could require increases to the Company’s workforce, increased cost for compensation and benefits, or investments in new or upgraded equipment. In addition, growing concerns about climate change, including the impact of global warming, may result in new regulations with respect to greenhouse gas emissions (including carbon dioxide) and/or “cap and trade” legislation. Compliance with new rules and regulations or changes in existing rules and regulations could result in additional costs to the Company.

Changes in the rules and regulations to which customers are subject may impact demand for the Company’s products and services.

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

Changes in postal rates, regulations and delivery structure may adversely impact demand for the Company’s products and services.

Postal costs are a significant component of many of the Company’s customers’ cost structure and postal rate changes can influence the number of pieces and types of mailings that the Company’s customers mail. On December 24, 2013, the Postal Regulatory Commission (the “PRC”) approved the USPS Board of Governors’ request for an exigent price increase of 4.3%. This 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 mail categories, effective January 26, 2014. On January 15, 2015, the USPS filed for a CPI rate increase of approximately 2.0%, which was approved by the PRC on May 7, 2015, and became effective May 31, 2015. The USPS eliminated the 4.3% exigency rate increase in April 2016. In addition, the USPS has incurred significant financial losses in recent years and may, as a result, implement significant changes to the breadth or frequency of its mail delivery. The USPS is continuing to pursue its previously announced plans to restructure its mail delivery network, including the closure of many post office facilities and a possible suspension of Saturday service. The impact to the Company of the USPS’s restructuring plans, many of which require legislative action, cannot currently be estimated. If implemented, such changes could impact customers’ ability or willingness to communicate by mail. Declines in print volumes mailed would have an adverse effect on the Company’s business.

We rely on independent shipping companies to deliver the products we create for our customers, and as part of our logistics business for our customers, changes in our relationships with these companies or an increase in shipping costs could have an adverse impact on our business and results of operations.

We rely upon third party carriers, including FedEx and UPS, for timely delivery of our product shipments. As a result, we are subject to carrier disruptions and increased costs due to factors that are beyond our control, including employee strikes, inclement


weather and increased fuel costs. Any failure to deliver products to our customers in a timely and accurate manner may damage our reputation and brand and could cause us to lose customers. If our relationship with any of these third party carriers is terminated or impaired, or if any of these third parties are unable to ship products for us, we would be required to use alternative, and possibly more expensive, carriers for the shipment of products to our customers. We may be unable to engage alternative carriers on a timely basis or on terms favorable to us, if at all, which could have a material adverse effect on our business, financial condition and results of operations.

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

A failure to adapt to technological changes to address the changing demands of customers may adversely impact the Company’s business.

Many of the end markets in which customers of the Company compete are experiencing changes due to technological progress and changes in consumer preferences.  In order to grow and remain competitive, the Company will need to continue to adapt to future changes in technology, enhance the Company's existing offerings and introduce new offerings to address the changing demands of customers.  If the Company is unable to continue to exploit new and existing technologies to distinguish its products and services from those of its competitors or adapt to new distribution methods, the Company’s business may be adversely affected.

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

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

Our products and services may contain undetected errors or scalability limitations at any point in their lives, but particularly when first introduced or as new versions are released. We frequently release new versions of our products and different aspects of our platform are in various stages of development. Despite testing by us and by current and potential customers, errors may not be found in new products and services until after commencement of commercial availability or use, resulting in a loss of or a delay in market acceptance, damage to our reputation, customer dissatisfaction and reductions in net sales and margins, any of which could negatively impact our business.

Our services depend on the reliability of computer systems maintained by us and our vendors and the ability to implement and maintain information technology and security measures to protect against security breaches and data leakage. Our failure to maintain the integrity of these systems could compromise the confidentiality of certain information provided to us by our customers and affect our ability to retain customers and attract new business.

We depend on our information technology and data processing systems to operate our business, and a significant malfunction or disruption in the operation of our systems, or a security breach or a data leak that compromises the confidential and sensitive information stored in those systems, could disrupt our business and adversely impact our ability to compete. These systems include systems that we own and operate, as well as those systems of our vendors. Such systems are susceptible to malfunctions and interruptions due to equipment damage and power outages and are also susceptible to cybercrime, or threats of intentional disruption, which are increasing in terms of sophistication and frequency.


Maintaining the confidentiality, integrity and availability of our systems, software and solutions is an issue of critical importance for us and for our customers and users who rely on us to protect the confidentiality of certain information they provide us.  Many of our customers’ industries are highly regulated and have established standards and requirements for safeguarding the confidentiality, integrity and availability of information relating to their businesses and customers. Disclosure of the information maintained on our systems due to human error, breach of our systems through hacking or cybercrime, a leak of confidential information due to employee misconduct or otherwise could materially damage our reputation, subject us to regulatory risks and cause significant reputational harm for our customers, all of which could have a material adverse effect on our business, financial condition and results of operations.

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

ISSUER PURCHASES OF EQUITY SECURITIES

Period

Total Number

of Shares

Purchased (a)

Average Price

Paid per Share

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

July 1, 2016 - July 31, 2016

$

$

August 1, 2016 - August 31, 2016

$

September 1, 2016 - September 30, 2016

$

Total

$

ISSUER PURCHASES OF EQUITY SECURITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Period

 

Total Number

of Shares

Purchased (a)

 

 

Average Price

Paid per Share

 

 

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

 

July 1, 2017 - July 30, 2017

 

 

102

 

 

$

11.97

 

 

 

$

 

August 1, 2017 - August 31, 2017

 

 

 

 

 

 

$

 

September 1, 2017 - September 30, 2017

 

 

 

 

 

 

 

$

 

Total

 

 

102

 

 

$

11.97

 

 

 

 

 

 

(a)

Shares withheld for tax liabilities upon vesting of equity awards

The Credit Agreement generally allows annual dividend payments of up to $60.0 million in aggregate, though additional dividends may be allowed subject to certain conditions. For more detail refer to the Credit Agreement and its amendments filed as exhibits to this Quarterly Report on Form 10-Q.

 

 

Item 4: Mine Safety Disclosures

Not applicable  

 

 

 


Item 6. Exhibits

 

2.1

10.1

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, filed on February 11, 2015)

 

 

 

2.2

SeparationSecond Amended and DistributionRestated Credit Agreement, dated as of September 14, 2016, by and29, 2017, among R.R. Donnelley &and Sons Company, LSC Communications, Inc.the guarantors party thereto, the lenders party thereto and Donnelley Financial Solutions, Inc. (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on 8-K filed October 3, 2016).

2.3

Transition Services Agreement, dated asBank of September 14, 2016, between LSC Communications, Inc. and R.R. Donnelley & Sons Company (incorporated by reference to Exhibit 2.2 to the Company’s Current Report on 8-K filed October 3, 2016).

2.4

Transition Services Agreement, dated as of September 14, 2016, between Donnelley Financial Solutions, Inc. and R.R. Donnelley & Sons Company (incorporated by reference to Exhibit 2.3 to the Company’s Current Report on 8-K filed October 3, 2016).

2.5

Tax Disaffiliation Agreement, dated as of September 14, 2016, between LSC Communications, Inc. and R.R. Donnelley & Sons Company (incorporated by reference to Exhibit 2.4 to the Company’s Current Report on 8-K filed October 3, 2016).

2.6

Tax Disaffiliation Agreement, dated as of September 14, 2016, between Donnelley Financial Solutions, Inc. and R.R. Donnelley & Sons Company (incorporated by reference to Exhibit 2.5 to the Company’s Current Report on 8-K filed October 3, 2016).

2.7

Patent Assignment and License Agreement, dated as of September 27, 2016, between LSC Communications US, LLC. and R.R. Donnelley & Sons Company (incorporated by reference to Exhibit 2.6 to the Company’s Current Report on 8-K filed October 3, 2016).

2.8

Patent Assignment and License Agreement, dated as of September 27, 2016, between Donnelley Financial Solutions, LLC and R.R. Donnelley & Sons Company (incorporated by reference to Exhibit 2.7 to the Company’s Current Report on 8-K filed October 3, 2016).

2.9

Trademark Assignment and License Agreement, dated as of September 27, 2016, between LSC Communications US, LLC. and R.R. Donnelley & Sons Company (incorporated by reference to Exhibit 2.8 to the Company’s Current Report on 8-K filed October 3, 2016).

2.10

Trademark Assignment and License Agreement, dated as of September 27, 2016, between Donnelley Financial, LLC and R.R. Donnelley & Sons Company (incorporated by reference to Exhibit 2.9 to the Company’s Current Report on 8-K filed October 3, 2016).

2.11

Data Assignment and License Agreement, dated as of September 27, 2016, between LSC Communications US, LLC and R.R. Donnelley & Sons Company (incorporated by reference to Exhibit 2.10 to the Company’s Current Report on 8-K filed October 3, 2016).

2.12

Data Assignment and License Agreement, dated as of September 27, 2016, between Donnelley Financial, LLC and R.R. Donnelley & Sons Company (incorporated by reference to Exhibit 2.11 to the Company’s Current Report on 8-K filed October 3, 2016).

2.13

Software, Copyright and Trade Secret Assignment and License Agreement, dated as of September 27, 2016, between LSC Communications US, LLC and R.R. Donnelley & Sons Company (incorporated by reference to Exhibit 2.12 to the Company’s Current Report on 8-K filed October 3, 2016).

2.14

Software, Copyright and Trade Secret Assignment and License Agreement, dated as of September 27, 2016, between Donnelley Financial, LLC and R.R. Donnelley & Sons Company (incorporated by reference to Exhibit 2.13 to the Company’s Current Report on 8-K filed October 3, 2016).


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)

3.2

Certificate of Amendment of Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K dated May 31, 2016, filed on May 31, 2016)

3.3

Certificate of Amendment of Restated Certificate of Incorporation of R.R. Donnelley & Sons Company Regarding Board Size (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on 8-K filed October 3, 2016).

3.4

Certificate of Amendment of Restated Certificate of Incorporation of R.R. Donnelley & Sons Company Regarding Reverse Stock Split (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on 8-K filed October 3, 2016).

3.5

Restatement of Certificate of Incorporation of R.R. Donnelley & Sons Company (incorporated by reference to Exhibit 3.3 to the Company’s Current Report on 8-K filed October 3, 2016).

3.6

Amended and Restated By-Laws of R.R. Donnelley & Sons Company (incorporated by reference to Exhibit 3.4 to the Company’s Current Report on 8-K filed October 3, 2016).

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.

4.2

Indenture dated as of November 1, 1990 between the Company and Citibank,America, N.A., as Trustee (incorporated by reference to Exhibit 4 filed with the Company’s Form SE filed on March 26, 1992)

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)

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)

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)

4.6

Stockholder Registration Rights Agreement, dated as of September 14, 2016, between LSC Communications, Inc. and R.R. Donnelley & Sons Company (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on 8-K filed October 3, 2016).

4.7

Stockholder Registration Rights Agreement, dated as of September 14, 2016, between Donnelley Financial, Inc. and R.R. Donnelley & Sons Company (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on 8-K filed October 3, 2016).

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)*

10.2

Non-Employee Director Compensation Plan (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2015, filed on May 7, 2015)*

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)*

10.4

Amended and Restated Non-Qualified Deferred Compensation Plan (incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2015, filed on May 7, 2015)*


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)*

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)*

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)*

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)*

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)*

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)*

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)*

10.12

Form of Restricted Stock Unit Award Agreement for certain executive officers (incorporated by reference to Exhibit 10.12 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2015, filed on May 7, 2015)*

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)*

10.14

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)*

10.15

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)*

10.16

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)*

10.17

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)*

10.18

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)*

10.19

Form of Performance Share Unit Award Agreement (incorporated by reference to Exhibit 10.19 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2015, filed on May 7, 2015)*

10.20

Form of Performance Share Unit Award Agreement (incorporated by reference to Exhibit 10.23 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014, filed on May 1, 2014)*

10.21

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)*

10.22

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)*


10.23

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)*

10.24

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)*

10.25

Form of Amendment to Cash Retention Awardsadministrative agent (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated March 2, 2016, filed on March 2, 2016)*October 3, 2017)

 

10.2610.2

 

 

Form of AmendedEmployment Offer Letter dated October 25, 2017 between R.R. Donnelley & Sons Company and Restated Indemnification Agreement for directorsMichael J. Sharp (incorporated by reference to Exhibit 10.31Exhibit10.1 to the Company’s AnnualCurrent Report on Form 10-K for the fiscal year ended December 31, 2013,8-K filed on February 26, 2014)*October 30, 2017)

 

10.2731.1*

  

 

Amended and Restated Annual Incentive Plan (incorporated by reference to Exhibit 10.32 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2015, filed on May 7, 2015)*

10.28

Amended and Restated Credit Agreement, dated as of September 30, 2016, among R.R. Donnelley & Sons Company, the guarantors party thereto, Bank of America, N.A., as Administrative Agent, Swing Line Lender and an L/C Issuer, Citigroup Global Markets Inc. and JPMorgan Chase Bank, N.A., as Co-Syndication Agents (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on 8-K filed October 3, 2016).

10.29

R.R. Donnelley & Sons Company Non-Employee Director Compensation Plan (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on 8-K filed October 3, 2016).*

10.30

Employment Agreement, dated as of October 1, 2016, between Daniel L. Knotts and R.R. Donnelley & Sons Company (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on 8-K filed October 3, 2016).*

10.31

Employment Agreement, dated as of October 1, 2016, between Thomas M. Carroll III and R.R. Donnelley & Sons Company (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on 8-K filed October 3, 2016).*

10.32

Employment Agreement, dated as of October 1, 2016, between Jeffrey G. Gorski and R.R. Donnelley & Sons Company (incorporated by reference to Exhibit 10.5 to the Company’s Current Report on 8-K filed October 3, 2016).*

10.33

Employment Agreement, dated as of October 1, 2016, between John Pecaric and R.R. Donnelley & Sons Company (incorporated by reference to Exhibit 10.6 to the Company’s Current Report on 8-K filed October 3, 2016).*

10.34

Employment Agreement, dated as of October 1, 2016, between Terry D. Peterson and R.R. Donnelley & Sons Company (incorporated by reference to Exhibit 10.7 to the Company’s Current Report on 8-K filed October 3, 2016).*

10.35

Employment Agreement, dated as of October 1, 2016, between Deborah L. Steiner and R.R. Donnelley & Sons Company (incorporated by reference to Exhibit 10.8 to the Company’s Current Report on 8-K filed October 3, 2016).*

10.36

Form of Indemnification Agreement for directors (filed herewith) *

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)

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, 2015, filed on February 25, 2016)

31.1

Certification by Daniel L. Knotts, 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)

 

31.231.2*

  

 

Certification by Terry D. Peterson, 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)


 

32.132.1**

  

 

Certification by Daniel L. Knotts, 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)

 

32.232.2**

  

 

Certification by Terry D. Peterson, 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)

 

101.INS

  

 

XBRL Instance Document

 

101.SCH

  

 

XBRL Taxonomy Extension Schema Document

 

101.CAL

  

 

XBRL Taxonomy Extension Calculation Linkbase Document

 

101.DEF

  

 

XBRL Taxonomy Extension Definition Linkbase Document

 

101.LAB

  

 

XBRL Taxonomy Extension Label Linkbase Document

 

101.PRE

  

 

XBRL Taxonomy Extension Presentation Linkbase Document

 

 

*

Management contract or compensatory plan or arrangement.Filed herewith

**

Furnished herewith

 

 

 

 


SIGNATURES

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

 

 

By:

 

/s/ TERRY D. PETERSON

 

 

Terry D. Peterson

 

 

Executive Vice President and Chief Financial Officer

By:

/s/ JEFFREY G. GORSKI

Jeffrey G. Gorski

Senior Vice President and Chief Accounting Officer

Date: November 2, 2016October 31, 2017

 

 

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