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 SeptemberJune 30, 20172020

OR

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

Commission File Number 1-4694

 

R.R. DONNELLEY & SONS COMPANY

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

36-1004130

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

35 West Wacker Drive,

Chicago, Illinois

 

60601

(Address of principal executive offices)

 

(Zip code)

(312) 326-8000

(Registrant’s telephone number, including area code)

 

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.01 per share

RRD

New York Stock Exchange

Preferred Stock Purchase Rights

New York Stock Exchange

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

Yes       No  

Indicate by check mark whether the registrant has submitted electronically 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, ora smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company” and “smaller reporting“emerging growth 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

 

 

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 OctoberJuly 27, 2017, 70.12020, 71.4 million shares of common stock were outstanding.  

 

 


R.R. DONNELLEY & SONS COMPANY

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBERJUNE 30, 20172020

TABLE OF CONTENTS

 

 

 

 

Page

 

 

PART I

 

FINANCIAL INFORMATION

 

 

 

 

Item 1:1.

 

Condensed Consolidated Financial Statements (unaudited)Balance Sheets as of June 30, 2020 and December 31, 2019

3

 

 

Condensed Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016

3

Condensed Consolidated Statements of Operations for the three and ninesix months ended SeptemberJune 30, 20172020 and 20162019

4

 

 

Condensed Consolidated Statements of Comprehensive IncomeLoss for the three and ninesix months ended SeptemberJune 30, 20172020 and 20162019

5

 

 

Condensed Consolidated Statements of Cash Flows for the ninesix months ended SeptemberJune 30, 20172020 and 20162019

6

 

 

Notes to Condensed Consolidated Financial Statements

7

Item 2:2.

 

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

28

26

Item 3:3.

 

Quantitative and Qualitative Disclosures About Market Risk

52

39

Item 4:4.

 

Controls and Procedures

5239

 

 

 

 

 

 

PART II

 

 

 

 

 

OTHER INFORMATION

Item 1:1.

 

Legal Proceedings

53

40

Item 2:1A.

 

Risk Factors

40

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

53

41

Item 4:4.

 

Mine Safety Disclosures

53

41

Item 6:6.

 

Exhibits

5442

 

 

 

 

Signatures

5543

 

 

 

 

2


PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

 

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

CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions, except per share data)

(UNAUDITED)

 

 

September 30,

 

 

December 31,

 

 

June 30,

 

 

December 31,

 

 

2017

 

 

2016

 

 

2020

 

 

2019

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

225.8

 

 

$

317.5

 

 

$

341.9

 

 

$

190.8

 

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

 

Receivables, less allowances for credit losses of $25.5 in 2020 (2019 - $20.5)

 

 

950.4

 

 

 

1,161.6

 

Inventories (Note 3)

 

 

307.7

 

 

 

301.8

 

Prepaid expenses and other current assets

 

 

152.8

 

 

 

136.7

 

 

 

123.8

 

 

 

98.6

 

Investment in LSC and Donnelley Financial (Note 2)

 

 

 

 

 

 

328.7

 

Total current assets

 

 

2,218.6

 

 

 

2,501.0

 

 

 

1,723.8

 

 

 

1,752.8

 

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

 

Property, plant and equipment-net (Note 4)

 

 

459.2

 

 

 

500.0

 

Goodwill (Note 5)

 

 

433.5

 

 

 

457.8

 

Other intangible assets-net (Note 5)

 

 

88.1

 

 

 

99.7

 

Deferred income taxes

 

 

123.2

 

 

 

108.9

 

 

 

65.0

 

 

 

57.8

 

Operating lease assets

 

 

213.1

 

 

 

205.5

 

Other noncurrent assets

 

 

252.2

 

 

 

234.7

 

 

 

220.8

 

 

 

256.5

 

Total assets

 

$

3,956.7

 

 

$

4,268.8

 

 

$

3,203.5

 

 

$

3,330.1

 

LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

996.5

 

 

$

985.3

 

 

$

648.1

 

 

$

852.2

 

Accrued liabilities

 

 

463.9

 

 

 

541.7

 

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

 

 

17.9

 

 

 

8.2

 

Accrued liabilities and other

 

 

283.9

 

 

 

334.2

 

Short-term operating lease liabilities

 

 

70.6

 

 

 

68.7

 

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

 

 

155.6

 

 

 

71.2

 

Total current liabilities

 

 

1,478.3

 

 

 

1,535.2

 

 

 

1,158.2

 

 

 

1,326.3

 

Long-term debt (Note 15)

 

 

2,232.2

 

 

 

2,379.2

 

Long-term debt (Note 14)

 

 

1,880.3

 

 

 

1,747.2

 

Pension liabilities

 

 

103.2

 

 

 

119.4

 

 

 

103.9

 

 

 

113.6

 

Other postretirement benefits plan liabilities

 

 

130.2

 

 

 

134.1

 

 

 

59.0

 

 

 

61.7

 

Long-term income tax liability

 

 

68.3

 

 

 

75.8

 

Long-term operating lease liabilities

 

 

147.6

 

 

 

141.0

 

Other noncurrent liabilities

 

 

175.8

 

 

 

193.1

 

 

 

252.1

 

 

 

234.8

 

Total liabilities

 

 

4,119.7

 

 

 

4,361.0

 

 

 

3,669.4

 

 

 

3,700.4

 

Commitments and Contingencies (Note 14)

 

 

 

 

 

 

 

 

EQUITY (Note 10)

 

 

 

 

 

 

 

 

Commitments and Contingencies (Note 13)

 

 

 

 

 

 

 

 

EQUITY (Note 9)

 

 

 

 

 

 

 

 

RRD stockholders' equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock, $1.00 par value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Authorized: 2.0 shares; Issued: None

 

 

 

 

 

 

Authorized: 2.0 shares; Issued: NaN

 

 

 

 

 

 

Common stock, $0.01 par value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Authorized: 165.0 shares;

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issued: 89.0 shares in 2017 and 2016

 

 

0.9

 

 

 

0.9

 

Issued: 89.0 shares in 2020 and 2019

 

 

0.9

 

 

 

0.9

 

Additional paid-in-capital

 

 

3,450.7

 

 

 

3,468.5

 

 

 

3,261.2

 

 

 

3,348.0

 

Accumulated deficit

 

 

(2,160.6

)

 

 

(2,155.4

)

 

 

(2,409.4

)

 

 

(2,336.8

)

Accumulated other comprehensive loss

 

 

(126.5

)

 

 

(55.7

)

 

 

(201.0

)

 

 

(176.2

)

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

 

 

(1,341.4

)

 

 

(1,364.0

)

Treasury stock, at cost, 17.6 shares in 2020 (2019 - 18.1 shares)

 

 

(1,130.2

)

 

 

(1,219.6

)

Total RRD stockholders' equity

 

 

(176.9

)

 

 

(105.7

)

 

 

(478.5

)

 

 

(383.7

)

Noncontrolling interests

 

 

13.9

 

 

 

13.5

 

 

 

12.6

 

 

 

13.4

 

Total equity

 

 

(163.0

)

 

 

(92.2

)

 

 

(465.9

)

 

 

(370.3

)

Total liabilities and equity

 

$

3,956.7

 

 

$

4,268.8

 

 

$

3,203.5

 

 

$

3,330.1

 

 

(See Notes to Condensed Consolidated Financial Statements)

Statements

 

 

 

3


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

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions, except per share data)

(UNAUDITED)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products net sales

 

$

1,322.0

 

 

$

1,327.8

 

 

$

3,830.9

 

 

$

3,772.5

 

Services net sales

 

 

412.9

 

 

 

397.8

 

 

 

1,182.9

 

 

 

1,201.6

 

Total net sales

 

 

1,734.9

 

 

 

1,725.6

 

 

 

5,013.8

 

 

 

4,974.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products cost of sales (exclusive of depreciation and amortization)

 

 

1,064.1

 

 

 

1,030.7

 

 

 

3,065.7

 

 

 

2,958.1

 

Services cost of sales (exclusive of depreciation and amortization)

 

 

346.4

 

 

 

330.7

 

 

 

992.8

 

 

 

1,002.9

 

Total cost of sales

 

 

1,410.5

 

 

 

1,361.4

 

 

 

4,058.5

 

 

 

3,961.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products gross profit

 

 

257.9

 

 

 

297.1

 

 

 

765.2

 

 

 

814.4

 

Services gross profit

 

 

66.5

 

 

 

67.1

 

 

 

190.1

 

 

 

198.7

 

Total gross profit

 

 

324.4

 

 

 

364.2

 

 

 

955.3

 

 

 

1,013.1

 

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

 

 

207.7

 

 

 

218.1

 

 

 

643.6

 

 

 

681.0

 

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

 

 

33.8

 

 

 

10.8

 

 

 

46.7

 

 

 

24.3

 

Depreciation and amortization

 

 

47.0

 

 

 

51.0

 

 

 

143.1

 

 

 

153.5

 

Other operating expense (income)

 

 

 

 

 

0.3

 

 

 

 

 

 

(12.0

)

Income from operations

 

 

35.9

 

 

 

84.0

 

 

 

121.9

 

 

 

166.3

 

Interest expense-net

 

 

43.5

 

 

 

48.8

 

 

 

137.3

 

 

 

150.6

 

Investment and other income -net

 

 

(2.8

)

 

 

(1.0

)

 

 

(47.2

)

 

 

(0.4

)

Loss on debt extinguishments

 

 

6.5

 

 

 

 

 

 

20.1

 

 

 

 

(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

 

 

(7.8

)

 

 

(6.8

)

 

 

19.1

 

 

 

19.0

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

70.2

 

 

 

70.0

 

 

 

70.1

 

 

 

70.0

 

Diluted

 

 

70.2

 

 

 

70.5

 

 

 

70.3

 

 

 

70.5

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Products net sales

 

$

947.6

 

 

$

1,214.7

 

 

$

2,093.1

 

 

$

2,445.6

 

Services net sales

 

 

214.6

 

 

 

294.0

 

 

 

478.6

 

 

 

585.0

 

Total net sales

 

 

1,162.2

 

 

 

1,508.7

 

 

 

2,571.7

 

 

 

3,030.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products cost of sales (exclusive of depreciation and amortization)

 

 

773.5

 

 

 

994.1

 

 

 

1,696.3

 

 

 

2,002.9

 

Services cost of sales (exclusive of depreciation and amortization)

 

 

173.9

 

 

 

236.4

 

 

 

386.8

 

 

 

471.2

 

Total cost of sales

 

 

947.4

 

 

 

1,230.5

 

 

 

2,083.1

 

 

 

2,474.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products gross profit

 

 

174.1

 

 

 

220.6

 

 

 

396.8

 

 

 

442.7

 

Services gross profit

 

 

40.7

 

 

 

57.6

 

 

 

91.8

 

 

 

113.8

 

Total gross profit

 

 

214.8

 

 

 

278.2

 

 

 

488.6

 

 

 

556.5

 

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

 

 

156.0

 

 

 

199.0

 

 

 

335.1

 

 

 

398.6

 

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

 

 

28.5

 

 

 

16.0

 

 

 

60.4

 

 

 

33.1

 

Depreciation and amortization

 

 

38.2

 

 

 

40.0

 

 

 

79.0

 

 

 

82.7

 

Other operating expense (income)

 

 

8.0

 

 

 

2.3

 

 

 

21.2

 

 

 

(2.1

)

(Loss) income from operations

 

 

(15.9

)

 

 

20.9

 

 

 

(7.1

)

 

 

44.2

 

Interest expense-net

 

 

34.6

 

 

 

38.1

 

 

 

68.5

 

 

 

78.2

 

Investment and other income-net

 

 

(3.4

)

 

 

(2.2

)

 

 

(7.2

)

 

 

(6.7

)

Loss on debt extinguishment

 

 

0.4

 

 

 

 

 

 

0.2

 

 

 

 

Loss before income taxes

 

 

(47.5

)

 

 

(15.0

)

 

 

(68.6

)

 

 

(27.3

)

Income tax expense (benefit)

 

 

9.7

 

 

 

(7.6

)

 

 

1.5

 

 

 

(11.4

)

Net loss

 

 

(57.2

)

 

 

(7.4

)

 

 

(70.1

)

 

 

(15.9

)

Less: (loss) income attributable to noncontrolling interests

 

 

 

 

 

(0.4

)

 

 

0.1

 

 

 

(0.1

)

Net loss attributable to RRD common stockholders

 

$

(57.2

)

 

$

(7.0

)

 

$

(70.2

)

 

$

(15.8

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net loss per share

 

$

(0.79

)

 

$

(0.10

)

 

$

(0.98

)

 

$

(0.22

)

Diluted net loss per share

 

$

(0.79

)

 

$

(0.10

)

 

$

(0.98

)

 

$

(0.22

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

72.2

 

 

 

71.3

 

 

 

71.9

 

 

 

71.0

 

Diluted

 

 

72.2

 

 

 

71.3

 

 

 

71.9

 

 

 

71.0

 

 

(See Notes to Condensed Consolidated Financial Statements)

Statements

 

4


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

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMELOSS

(in millions)

(UNAUDITED)

 

 

 

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

)

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Net loss

 

$

(57.2

)

 

$

(7.4

)

 

$

(70.1

)

 

$

(15.9

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Translation adjustments

 

 

6.8

 

 

 

(3.2

)

 

 

(13.2

)

 

 

(2.0

)

Adjustments for net periodic pension and postretirement benefits plan cost

 

 

0.7

 

 

 

(0.2

)

 

 

1.5

 

 

 

(0.4

)

Changes in fair value of derivatives

 

 

(1.3

)

 

 

 

 

 

(13.3

)

 

 

 

Other

 

 

 

 

 

0.9

 

 

 

 

 

 

1.5

 

Other comprehensive income (loss)

 

 

6.2

 

 

 

(2.5

)

 

 

(25.0

)

 

 

(0.9

)

Comprehensive loss

 

 

(51.0

)

 

 

(9.9

)

 

 

(95.1

)

 

 

(16.8

)

Less: comprehensive loss attributable to non-controlling interests

 

 

 

 

 

(0.5

)

 

 

(0.1

)

 

 

 

Comprehensive loss attributable to RRD common stockholders

 

$

(51.0

)

 

$

(9.4

)

 

$

(95.0

)

 

$

(16.8

)

 

(See Notes to Condensed Consolidated Financial Statements)

Statements

 

 

 

5


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

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

(UNAUDITED)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2017

 

 

2016

 

OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

Net earnings

 

$

19.1

 

 

$

19.0

 

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

 

 

 

 

 

 

 

 

Impairment charges - net

 

 

21.8

 

 

 

0.8

 

Depreciation and amortization

 

 

143.1

 

 

 

312.5

 

Provision for doubtful accounts receivable

 

 

1.7

 

 

 

20.4

 

Share-based compensation

 

 

6.4

 

 

 

13.4

 

Deferred income taxes

 

 

(10.1

)

 

 

(33.5

)

Changes in uncertain tax positions

 

 

0.7

 

 

 

(0.4

)

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

 

 

(11.0

)

 

 

(55.1

)

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

 

 

 

 

 

78.8

 

Other

 

 

14.7

 

 

 

9.6

 

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

 

 

 

 

 

 

 

 

Accounts receivable - net

 

 

(26.3

)

 

 

(122.4

)

Inventories

 

 

(62.5

)

 

 

(60.0

)

Prepaid expenses and other current assets

 

 

(6.3

)

 

 

(9.2

)

Accounts payable

 

 

(18.9

)

 

 

(160.8

)

Income taxes payable and receivable

 

 

(11.4

)

 

 

(35.6

)

Accrued liabilities and other

 

 

(36.1

)

 

 

(23.4

)

Pension and other postretirement benefits plan contributions

 

 

(12.4

)

 

 

(18.6

)

Net cash (used in) provided by operating activities

 

 

(12.6

)

 

 

7.8

 

INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(77.2

)

 

 

(147.9

)

Acquisitions of businesses, net of cash acquired

 

 

 

 

 

(47.5

)

Disposition of businesses

 

 

 

 

 

13.7

 

Proceeds from sales of investments and other assets

 

 

127.6

 

 

 

3.7

 

Transfers (to) from restricted cash

 

 

(2.4

)

 

 

13.7

 

Other investing activities

 

 

 

 

 

(3.6

)

Net cash provided by (used in) investing activities

 

 

48.0

 

 

 

(167.9

)

FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Net change in short-term debt

 

 

10.2

 

 

 

5.7

 

Payments of current maturities and long-term debt

 

 

(200.9

)

 

 

(786.6

)

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

 

Debt issuance costs

 

 

(4.4

)

 

 

(37.5

)

Dividends paid

 

 

(29.4

)

 

 

(163.2

)

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

 

 

(78.0

)

 

 

 

Other financing activities

 

 

(1.6

)

 

 

2.5

 

Net cash (used in) provided by financing activities

 

 

(139.1

)

 

 

187.4

 

Effect of exchange rate on cash and cash equivalents

 

 

12.0

 

 

 

(5.1

)

Net (decrease) increase in cash and cash equivalents

 

 

(91.7

)

 

 

22.2

 

Cash and cash equivalents at beginning of year

 

 

317.5

 

 

 

389.6

 

Cash and cash equivalents at end of period

 

$

225.8

 

 

$

411.8

 

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL NON-CASH DISCLOSURE:

 

 

 

 

 

 

 

 

Assumption of warehousing equipment related to customer contract

 

$

 

 

$

8.8

 

Debt-for-equity exchange

 

 

132.9

 

 

 

 

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

 

 

 

 

 

300.0

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2020

 

 

2019

 

OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

Net loss

 

$

(70.1

)

 

$

(15.9

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Impairment charges and other-net

 

 

20.8

 

 

 

0.4

 

Depreciation and amortization

 

 

79.0

 

 

 

82.7

 

Provision for credit losses

 

 

5.9

 

 

 

5.8

 

Share-based compensation

 

 

3.2

 

 

 

6.7

 

Deferred income taxes

 

 

(3.1

)

 

 

1.4

 

Net pension and other postretirement benefits plan income

 

 

(6.7

)

 

 

(8.1

)

Loss (gain) on disposition of businesses and other assets

 

 

9.4

 

 

 

(10.6

)

Loss on debt extinguishments

 

 

0.2

 

 

 

 

Other

 

 

1.1

 

 

 

11.6

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable-net

 

 

174.6

 

 

 

123.1

 

Inventories

 

 

(9.1

)

 

 

(11.2

)

Prepaid expenses and other current assets

 

 

(4.0

)

 

 

(10.6

)

Accounts payable

 

 

(188.6

)

 

 

(205.7

)

Current income taxes

 

 

(4.8

)

 

 

(55.6

)

Accrued liabilities and other

 

 

(47.8

)

 

 

(27.3

)

Pension and other postretirement benefits plan contributions

 

 

(4.2

)

 

 

(3.8

)

Net cash used in operating activities

 

 

(44.2

)

 

 

(117.1

)

INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(38.1

)

 

 

(76.4

)

Disposition of businesses

 

 

16.1

 

 

 

10.4

 

Proceeds from sales of investments and other assets

 

 

4.7

 

 

 

1.4

 

Proceeds (payments) related to company-owned life insurance

 

 

3.1

 

 

 

(2.9

)

Net cash used in investing activities

 

 

(14.2

)

 

 

(67.5

)

FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Payments on other short-term debt

 

 

 

 

 

(8.0

)

Payments of current maturities and long-term debt

 

 

(152.7

)

 

 

(175.1

)

Proceeds from credit facility borrowings

 

 

578.0

 

 

 

797.8

 

Payments on credit facility borrowings

 

 

(210.0

)

 

 

(586.8

)

Dividends paid

 

 

(2.1

)

 

 

(4.3

)

Payments of withholding taxes on share-based compensation

 

 

(0.6

)

 

 

(0.9

)

Other financing activities

 

 

(1.5

)

 

 

(1.0

)

Net cash provided by financing activities

 

 

211.1

 

 

 

21.7

 

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

 

 

(4.3

)

 

 

0.2

 

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

 

 

148.4

 

 

 

(162.7

)

Cash, cash equivalents and restricted cash at beginning of year

 

 

223.8

 

 

 

403.6

 

Cash, cash equivalents and restricted cash at end of period

 

$

372.2

 

 

$

240.9

 

(

See Notes to Condensed Consolidated Financial Statements)Statements

 

6


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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

1. Basis of Presentation

The accompanying unaudited condensed consolidated interim financial statements include the accounts of R.R. Donnelley & Sons Company and its subsidiaries (the “Company” or “RRD”(“RRD,” the “Company,” “we,” “us,” and “our”) and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in accordance with the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. These unaudited condensed consolidated interim financial statements reflect all normal and recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods and should be read in conjunction with the consolidated financial statements and the related notes thereto included in the Company’sour latest Annual Report on Form 10-K for the year ended December 31, 20162019 filed with the SEC on February 28, 2017.26, 2020. Operating results for the ninesix months ended SeptemberJune 30, 20172020 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2017.2020. 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,Due to the Company completedrelationship of our various jurisdictional projections of full-year pre-tax earnings and income tax expense, as well as the separationprojected impact of its financial communicationspermanent tax differences and data services business (“Donnelley Financial Solutions, Inc.” or “Donnelley Financial”)other items, our historic approach of using an estimated full-year world-wide effective income tax rate to determine interim period tax expense produced an income tax provision for the current year-to-date period that was not meaningful because tax expense calculated under the historical approach was not reflective of what taxes would be due 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-free distribution of 80.75%payable based on six-month year to date pre-tax earnings. Accordingly, we calculated year-to-date fiscal 2020 tax expense based on domestic year-to-date earnings before tax to determine an estimate of the outstanding common stock of each Donnelley Financial and LSCactual U.S. tax liability while using an estimated full-year international effective income tax rate on our international year-to-date earnings to determine interim period tax expense for our international jurisdictions. The second quarter tax expense is the Company’s stockholders of record on September 23, 2016 who received one share of each Donnelley Financial and LSC for every eight shares of RRD common stock ownedfiscal year-to-date tax expense computed as of June 30, 2020 less tax expense recognized in the record date (the “Distribution”)first quarter.   

Cash, Cash Equivalents and Restricted Cash

The Company retained 19.25%following table provides a reconciliation of the outstanding common stock of each Donnelley Financialcash, cash equivalents and LSC. The historical financial results of Donnelley Financialrestricted cash at June 30, 2020 and LSC prior to the Separation, are presented as discontinued operations onDecember 31, 2019 reported within the Condensed Consolidated StatementsBalance Sheets that sum to the total of Operations and, asthe same such have been excluded from both continuing operations and segment resultsamounts shown in the Condensed Consolidated Statement of Cash Flows.

 

 

June 30, 2020

 

 

December 31, 2019

 

Cash and cash equivalents

 

$

341.9

 

 

$

190.8

 

Restricted cash - current (a)

 

 

30.2

 

 

 

32.9

 

Restricted cash - noncurrent (b)

 

 

0.1

 

 

 

0.1

 

Total cash, cash equivalents and restricted cash

 

$

372.2

 

 

$

223.8

 

(a)

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

(b)

Included within Other noncurrent assets within the Condensed Consolidated Balance Sheets

Cash payments for all periods presented. Sales from RRD to Donnelley Financial and LSC previously eliminated in consolidation have been recast and are now shown as external sales within the financial results of continuing operations. These net salesincome taxes were $72.5$14.0 million and $150.4$49.4 million for the three and ninesix months ended SeptemberJune 30, 2016, respectively. Unless indicated otherwise,2020 and 2019, respectively. Cash refunds for income taxes were $2.6 million and $6.8 million for the information in the Notes to Condensed Consolidated Financial Statements relates to the Company's continuing operations. Prior periods have been recast to reflect the Company'ssix months ended June 30, 2020 and 2019, respectively. Income taxes receivable of $9.2 million and $12.0 million as of June 30, 2020 and December 31, 2019, respectively, are included within Prepaid expenses and other current segment reporting structure. See Note 2, Discontinued Operations, for more information on the Separation.

Reverse Stock Split

Immediately following the Distribution on October 1, 2016, the Company affected a one-for-three reverse stock split for RRD common stock (the “Reverse Stock Split”)assets. 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 was 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.

 

7


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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

RevisionAllowance for Credit Losses

We recognize an allowance for credit losses for financial assets carried at amortized cost to present the net amount expected to be collected as of Net Salesthe balance sheet date. Such allowance is based on credit losses expected to arise over the life of the asset’s contractual term, which includes consideration of prepayments. Assets are written off when we determine that such financial assets are deemed uncollectible and Costare recognized as a deduction from the allowance for credit losses. Expected recoveries of Salesamounts previously written off, not to exceed the aggregate of the amount previously written off, are included in determining the necessary reserve at the balance sheet date. We pool financial assets based on similar risk characteristics to estimate expected credit losses. We estimate expected credit losses on financial assets individually when those assets do not share similar risk characteristics. We closely monitor our accounts receivable including timely account reconciliations, detailed reviews of past due accounts, updated credit limits, and monthly analysis of the adequacy of our reserve for credit losses.

DuringWe utilize a loss rate approach to determine lifetime expected credit losses for our financial assets. This method is used for calculating an estimate of losses based primarily on our historical loss experience. In determining loss rates, we evaluate information related to historical losses, adjusted for current conditions and further adjusted for the third quarterperiod of 2017,time that we can reasonably forecast. We have concluded that we can reasonably support a forecast period for the Company identified an errorcontractual life of our financial assets. Qualitative and quantitative adjustments related to current conditions and the reasonable and supportable forecast period consider the following: the customer or vendor’s creditworthiness, changes in our policy and procedures to establish customer credit limits, changes in the accounting for certain contracts with an inventory buy-back option within the Asia reporting unit, which ispayment terms of receivables, existence and effect of any concentration of credit and changes in the International segment. Aslevel of such concentrations, and the effects of other external forces such as the current and forecasted direction of the economic and business environment. We have considered the current and expected economic and market conditions as a result of COVID-19 in determining credit loss expense for 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 net sales and cost of sales:  period ended June 30, 2020.

 

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 following table presents the impactallowance for credit losses as of the related balance sheet revision on the December 31, 2016 Condensed Consolidated Balance Sheet:2019 and June 30, 2020, was as follows:

 

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

 

 

 

Beginning Balance December 31, 2019

 

 

Additional Allowance Recognized Due to Adoption of Topic ASC326

 

 

Credit Loss Expense for the Period

 

 

Write offs During the Period

 

 

Ending Balance June 30, 2020

 

Trade receivables

 

$

20.5

 

 

 

0.2

 

 

 

5.9

 

 

 

(1.1

)

 

$

25.5

 

The SeptemberRecoveries, notes receivables and rebates from vendors in the six months ended June 30, 2016 Consolidated Statement of Cash Flows has also been revised to reflect the impact of the above balance sheet revision.2020 were immaterial.


 

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 OperationsRevenue Recognition

ImmediatelyDisaggregation of Revenue

The following the Distribution, the Company held approximately 6.2 million shares of Donnelley Financial common stocktable presents net sales disaggregated by products and approximately 6.2 million shares of LSC common stock. The Companyservices:

 

Three Months Ended

 

 

Six Months Ended

 

 

June 30,

 

 

June 30,

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Products

 

 

 

 

 

 

 

 

 

Commercial print

$

275.5

 

 

$

413.5

 

 

$

638.9

 

 

$

835.9

 

Packaging

 

150.4

 

 

 

162.6

 

 

 

265.5

 

 

 

302.1

 

Labels

 

113.7

 

 

 

119.6

 

 

 

235.3

 

 

 

240.1

 

Direct marketing

 

108.0

 

 

 

137.0

 

 

 

290.8

 

 

 

285.5

 

Statements

 

101.9

 

 

 

133.6

 

 

 

228.8

 

 

 

283.1

 

Digital print and fulfillment

 

84.6

 

 

 

115.1

 

 

 

198.2

 

 

 

224.7

 

Supply chain management

 

64.9

 

 

 

74.1

 

 

 

134.6

 

 

 

152.6

 

Forms

 

48.6

 

 

 

59.2

 

 

 

101.0

 

 

 

121.6

 

Total products net sales

$

947.6

 

 

$

1,214.7

 

 

$

2,093.1

 

 

$

2,445.6

 

Services

 

 

 

 

 

 

 

 

 

Logistics

$

155.2

 

 

$

208.0

 

 

$

350.4

 

 

$

409.7

 

Business process outsourcing

 

38.0

 

 

 

60.6

 

 

 

79.4

 

 

 

122.4

 

Digital and creative solutions

 

21.4

 

 

 

25.4

 

 

 

48.8

 

 

 

52.9

 

Total services net sales

$

214.6

 

 

$

294.0

 

 

$

478.6

 

 

$

585.0

 

Total net sales

$

1,162.2

 

 

$

1,508.7

 

 

$

2,571.7

 

 

$

3,030.6

 

Variable Consideration

Certain clients may receive volume-based rebates or early payment discounts, which are accounted for as variable consideration. We estimate these investments as available-for-sale equity securities. In March 2017,amounts based on the Company soldexpected amount to be earned by our clients and reduce revenue accordingly. We do not expect significant changes to estimates of variable consideration. Given the 6.2 million sharesnature of LSC common stock it retained upon spinoff for net proceedsour products and the history of $121.4 million, resulting in a realized loss of $51.6 million, which was recorded 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.  returns, product returns are not significant.

Contract Balances

The following details the financial results of discontinued operations:table provides information about contract assets and liabilities from contracts with clients:

 

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.  

Contract Assets

 

 

Contract Liabilities

 

 

Short-Term

 

 

Short-Term

 

 

Long-Term

 

Balance at December 31, 2019

$

2.0

 

 

$

18.9

 

 

$

0.2

 

Balance at June 30, 2020

 

3.5

 

 

 

11.3

 

 

 

0.2

 

 

The significant non-cash items

Contract liabilities primarily relate to client advances received prior to completion of performance obligations. Reductions in contract liabilities are a result of our completion of performance obligations.

Revenue recognized during the six months ended June 30, 2020 from amounts included in contract liabilities at the beginning of the period was approximately $14.4 million. During the six months ended June 30, 2020, we reclassified $2.0 million of contract assets to receivables as a result of the completion of the performance obligation and capital expenditures of discontinued operations were as follows:the right to the consideration becoming unconditional.

 

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 help 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 providing 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 twenty-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 data, unless otherwise indicated)

 

The Company also entered into various commercial agreements which govern sales transactions between the companies. 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 inflow from Donnelley Financial and LSC within operating activities in the Condensed Consolidated Statements of Cash Flows during the nine months ended September 30, 2017.

3. Acquisitions and Dispositions

2016 Acquisition

On 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 $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 $17.0 million and $44.5 million, respectively, in net sales and earnings before income taxes of $2.9 million and $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 and Strategic Services segments.

 2016 Dispositions

On January 11, 2016, the Company sold two entities within the business process outsourcing reporting unit for net proceeds of $13.4 million. This resulted in a net gain of $12.3 million during the nine months ended September 30, 2016, which was recorded in other operating income in the Condensed Consolidated Statements of Operations. Additionally, in the third quarter of 2016, the Company sold three immaterial entities in the International segment, which resulted in a net loss of $0.3 million during the three and nine months ended September 30, 2016.

4. Inventories

The components of the Company’s inventories, net of excess and obsolescence reserves for raw materials and finished goods, at SeptemberJune 30, 20172020 and December 31, 20162019 were as follows:

 

September 30,

 

 

December 31,

 

 

2017

 

 

2016

 

 

June 30, 2020

 

 

December 31, 2019

 

Raw materials and manufacturing supplies

 

$

168.6

 

 

$

141.0

 

 

$

146.9

 

 

$

139.4

 

Work in process

 

 

114.7

 

 

 

84.4

 

 

 

57.3

 

 

 

64.6

 

Finished goods

 

 

190.1

 

 

 

179.4

 

 

 

121.0

 

 

 

116.4

 

LIFO reserve

 

 

(16.3

)

 

 

(18.0

)

 

 

(17.5

)

 

 

(18.6

)

Total

 

$

457.1

 

 

$

386.8

 

Total inventories

 

$

307.7

 

 

$

301.8

 

 

4. Property, Plant and Equipment

The components of property, plant and equipment at June 30, 2020 and December 31, 2019 were as follows:

 

 

 

June 30, 2020

 

 

December 31, 2019

 

Land

 

$

45.0

 

 

$

47.8

 

Buildings

 

 

369.6

 

 

 

379.9

 

Machinery and equipment

 

 

1,684.0

 

 

 

1,704.7

 

 

 

 

2,098.6

 

 

 

2,132.4

 

Less: Accumulated depreciation

 

 

(1,639.4

)

 

 

(1,632.4

)

Total property, plant and equipment-net

 

$

459.2

 

 

$

500.0

 

During the three and six months ended June 30, 2020 depreciation expense was $25.5 million and $53.7 million, respectively. During the three and six months ended June 30, 2019 depreciation expense was $26.9 million and $55.2 million, respectively.

During the fourth quarter of 2017, we entered into an agreement to sell a printing facility in Shenzhen, China and transfer the related land use rights. As of June 30, 2020, we have received deposits in accordance with the terms of the agreement of approximately $98.2 million which is recorded in other noncurrent liabilities on the Consolidated Balance Sheets. As of June 30, 2020, the carrying cost of the building and land use rights is recorded in other noncurrent assets and is not material. Additional deposits will be paid to us in accordance with the agreement. Gross proceeds from the sale are expected to be approximately $250.0 million, subject to changes in the exchange rate,and we expect the transaction to close in 2022 after closing conditions are satisfied and government approvals are obtained. Our contract with the buyer requires them to pay the final installment in 2022 even if the government’s approval is further delayed.  If the buyer fails to comply with terms of the agreement or terminates for any reason, the Company is entitled to retain 30% of the purchase price as liquidated damages.

5. Goodwill and Other Intangible Assets

The carrying amount of goodwill at June 30, 2020 and December 31, 2019 were as follows:  

 

 

Business Services

 

 

Marketing Solutions

 

 

 

 

Total

 

Net book value as of December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

$

2,210.9

 

 

$

519.5

 

 

 

 

$

2,730.4

 

Accumulated impairment losses

 

 

(2,018.5

)

 

 

(254.1

)

 

 

 

 

(2,272.6

)

Total

 

 

192.4

 

 

 

265.4

 

 

 

 

 

457.8

 

Impairment

 

 

(20.6

)

 

 

 

 

 

 

 

(20.6

)

Disposition

 

 

(3.9

)

 

 

 

 

 

 

 

(3.9

)

Foreign exchange

 

 

0.2

 

 

 

 

 

 

 

 

0.2

 

Net book value as of June 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

 

2,192.1

 

 

 

519.5

 

 

 

 

 

2,711.6

 

Accumulated impairment losses

 

 

(2,024.0

)

 

 

(254.1

)

 

 

 

 

(2,278.1

)

Total

 

$

168.1

 

 

$

265.4

 

 

 

 

$

433.5

 

 

10


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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

.

5. 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 thirdfirst quarter of 2017, the Company2020, we recorded a non-cash chargescharge of $21.3$20.6 million to reflectrecognize the impairment of goodwill in the Strategic Services segment. See Note 7, Restructuring, Impairment and Other Charges, for further information.logistics reporting unit.  

The components of other intangible assets at SeptemberJune 30, 20172020 and December 31, 20162019 were as follows:

 

September 30, 2017

 

 

December 31, 2016

 

 

June 30, 2020

 

 

December 31, 2019

 

 

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

 

$

532.9

 

 

$

(404.8

)

 

$

128.1

 

 

$

517.9

 

 

$

(370.7

)

 

$

147.2

 

Client relationships

 

$

431.9

 

 

$

(358.3

)

 

$

73.6

 

 

$

433.9

 

 

$

(350.0

)

 

$

83.9

 

Patents

 

 

2.0

 

 

 

(2.0

)

 

 

 

 

 

2.0

 

 

 

(2.0

)

 

 

 

 

 

2.0

 

 

 

(2.0

)

 

 

 

 

 

2.0

 

 

 

(2.0

)

 

 

 

Trademarks, licenses and agreements

 

 

26.2

 

 

 

(24.9

)

 

 

1.3

 

 

 

26.2

 

 

 

(24.4

)

 

 

1.8

 

 

 

24.4

 

 

 

(24.4

)

 

 

 

 

 

24.6

 

 

 

(24.5

)

 

 

0.1

 

Trade names

 

 

36.8

 

 

 

(15.7

)

 

 

21.1

 

 

 

36.8

 

 

 

(13.9

)

 

 

22.9

 

 

 

31.6

 

 

 

(17.1

)

 

 

14.5

 

 

 

31.8

 

 

 

(16.1

)

 

 

15.7

 

Total other intangible assets

 

$

597.9

 

 

$

(447.4

)

 

$

150.5

 

 

$

582.9

 

 

$

(411.0

)

 

$

171.9

 

 

$

489.9

 

 

$

(401.8

)

 

$

88.1

 

 

$

492.3

 

 

$

(392.6

)

 

$

99.7

 

Amortization expense for other intangible assets was $7.1$5.2 million and $21.6$10.5 million for the three and ninesix months ended SeptemberJune 30, 2017, respectively. Amortization expense for other intangible assets2020, respectively, and was $8.0$5.8 million and $25.7$12.2 million for the three and ninesix months ended SeptemberJune 30, 2016,2019, respectively.

6. Restructuring, Impairment and Other

For the three months ended June 30, 2020 and 2019, we recorded the following net restructuring, impairment and other expenses:

 

 

Three Months Ended

 

 

 

June 30, 2020

 

 

 

Employee

 

 

Other

Restructuring

 

 

Multi-Employer Pension Plan

 

 

Impairment and

 

 

 

 

 

 

 

Terminations

 

 

Charges

 

 

Charges

 

 

Other

 

 

Total

 

Business Services

 

$

6.6

 

 

$

1.7

 

 

$

1.1

 

 

$

0.4

 

 

$

9.8

 

Marketing Solutions

 

 

1.6

 

 

 

0.5

 

 

 

0.1

 

 

 

 

 

 

2.2

 

Corporate

 

 

4.8

 

 

 

11.7

 

 

 

 

 

 

 

 

 

16.5

 

Total

 

$

13.0

 

 

$

13.9

 

 

$

1.2

 

 

$

0.4

 

 

$

28.5

 

 

Three Months Ended

 

 

 

June 30, 2019

 

 

 

Employee

 

 

Other

Restructuring

 

 

Multi-Employer Pension Plan

 

 

 

 

 

 

 

Terminations

 

 

Charges

 

 

Charges

 

 

Total

 

Business Services

 

$

10.2

 

 

$

3.0

 

 

$

0.6

 

 

$

13.8

 

Marketing Solutions

 

 

0.3

 

 

 

0.1

 

 

 

0.1

 

 

 

0.5

 

Corporate

 

 

0.3

 

 

 

1.4

 

 

 

 

 

 

1.7

 

Total

 

$

10.8

 

 

$

4.5

 

 

$

0.7

 

 

$

16.0

 

 

 

11


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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

7. Restructuring, Impairment and Other Charges

Restructuring, Impairment and Other Charges Recognized in Results of Operations

For the threesix months ended SeptemberJune 30, 20172020 and 2016, the Company2019, we recorded the following net restructuring, impairment and other charges:expenses:

 

Three Months Ended

 

Employee

 

 

Other

Restructuring

 

 

Total

Restructuring

 

 

 

 

 

 

Other

 

 

 

 

 

September 30, 2017

 

Terminations

 

 

Charges

 

 

Charges

 

 

Impairment

 

 

Charges

 

 

Total

 

Variable Print

 

$

3.0

 

 

$

0.6

 

 

$

3.6

 

 

$

0.2

 

 

$

0.4

 

 

$

4.2

 

Strategic Services

 

 

0.7

 

 

 

 

 

 

0.7

 

 

 

21.3

 

 

 

0.1

 

 

 

22.1

 

International

 

 

1.9

 

 

 

0.3

 

 

 

2.2

 

 

 

 

 

 

 

 

 

2.2

 

Corporate

 

 

5.1

 

 

 

0.2

 

 

 

5.3

 

 

 

 

 

 

 

 

 

5.3

 

Total

 

$

10.7

 

 

$

1.1

 

 

$

11.8

 

 

$

21.5

 

 

$

0.5

 

 

$

33.8

 

 

Six Months Ended

 

 

 

June 30, 2020

 

 

 

Employee

 

 

Other

Restructuring

 

 

Multi-Employer Pension Plan

 

 

Impairment and

 

 

 

 

 

 

 

Terminations

 

 

Charges

 

 

Charges

 

 

Other

 

 

Total

 

Business Services

 

$

12.4

 

 

$

2.8

 

 

$

1.7

 

 

$

19.3

 

 

$

36.2

 

Marketing Solutions

 

 

2.0

 

 

 

0.5

 

 

 

0.2

 

 

 

 

 

 

2.7

 

Corporate

 

 

6.7

 

 

 

14.8

 

 

 

 

 

 

 

 

 

21.5

 

Total

 

$

21.1

 

 

$

18.1

 

 

$

1.9

 

 

$

19.3

 

 

$

60.4

 

 

Three Months Ended

 

Employee

 

 

Other

Restructuring

 

 

Total

Restructuring

 

 

 

 

 

 

Other

 

 

 

 

 

September 30, 2016

 

Terminations

 

 

Charges

 

 

Charges

 

 

Impairment

 

 

Charges

 

 

Total

 

Variable Print

 

$

1.1

 

 

$

0.3

 

 

$

1.4

 

 

$

 

 

$

0.5

 

 

$

1.9

 

Strategic Services

 

 

1.2

 

 

 

 

 

 

1.2

 

 

 

 

 

 

0.1

 

 

 

1.3

 

International

 

 

0.9

 

 

 

0.2

 

 

 

1.1

 

 

 

 

 

 

 

 

 

1.1

 

Corporate

 

 

6.5

 

 

 

0.1

 

 

 

6.6

 

 

 

(0.1

)

 

 

 

 

 

6.5

 

Total

 

$

9.7

 

 

$

0.6

 

 

$

10.3

 

 

$

(0.1

)

 

$

0.6

 

 

$

10.8

 

 

Six Months Ended

 

 

 

June 30, 2019

 

 

 

Employee

 

 

Other

Restructuring

 

 

Multi-Employer Pension Plan

 

 

Impairment and

 

 

 

 

 

 

 

Terminations

 

 

Charges

 

 

Charges

 

 

Other

 

 

Total

 

Business Services

 

$

18.0

 

 

$

7.7

 

 

$

1.2

 

 

$

0.1

 

 

$

27.0

 

Marketing Solutions

 

 

0.4

 

 

 

0.1

 

 

 

0.2

 

 

 

 

 

 

0.7

 

Corporate

 

 

0.5

 

 

 

4.9

 

 

 

 

 

 

 

 

 

5.4

 

Total

 

$

18.9

 

 

$

12.7

 

 

$

1.4

 

 

$

0.1

 

 

$

33.1

 

Restructuring, Impairment and Other

For the ninethree and six months ended SeptemberJune 30, 2017 and 2016, the Company2020, we recorded the following net restructuring charges of $13.0 million and $21.1 million, respectively, for employee termination costs. These charges primarily relate to the closure of the Chilean operations, other announced facility closures and the reorganization of selling, general and administrative functions across each segment. We also incurred $13.9 million and $18.1 million of other restructuring charges, primarily consulting charges, and $1.2 million and $1.9 million of multi-employer pension plan (“MEPP”) withdrawal obligation charges during the three and six months ended June 30, 2020, respectively.

During the first quarter of 2020, we recorded a non-cash charge of $20.6 million to recognize the impairment of goodwill in the logistics reporting unit within the Business Services segment. The goodwill impairment charge resulted from reductions in the estimated fair value for this reporting unit based on lower expectations for future revenue, profitability and cash flows as compared to the expectations of the 2019 annual goodwill impairment test. Although the logistics reporting unit reported increases in both net sales and income from operations in the first quarter of 2020, the lower future expectations were driven by expected reduced demand in the near term due to the COVID-19 pandemic. The goodwill impairment charge was determined using Level 3 inputs, including discounted cash flow analysis and comparable marketplace fair value data. The discounted cash flow analysis assumes a modest recovery in the logistics reporting unit in the third and fourth quarters of 2020. If the severity and duration of the impacts of the pandemic exceed our current expectations, additional impairment charges could be recorded. In addition, we recorded a net loss of $0.2 million and a net gain of $1.5 million on the sale of restructured facilities for the three and six months ended June 30, 2020.

For the three and six months ended June 30, 2019, we recorded net restructuring charges of $10.8 million and $18.9 million for employee termination costs. These charges primarily related to the planned relocation of a printing facility in Shenzhen, China, other charges:facility closures in the Business Services segment and the reorganization of selling, general and administrative functions across each segment. We also incurred other restructuring charges of $4.5 million and $12.7 million and MEPP withdrawal obligation charges of $0.7 million and $1.4 million for the three and six months ended June 30, 2019.

Nine Months Ended

 

Employee

 

 

Other

Restructuring

 

 

Total

Restructuring

 

 

 

 

 

 

Other

 

 

 

 

 

September 30, 2017

 

Terminations

 

 

Charges

 

 

Charges

 

 

Impairment

 

 

Charges

 

 

Total

 

Variable Print

 

$

4.0

 

 

$

0.9

 

 

$

4.9

 

 

$

(0.1

)

 

$

1.4

 

 

$

6.2

 

Strategic Services

 

 

1.8

 

 

 

0.3

 

 

 

2.1

 

 

 

21.8

 

 

 

0.3

 

 

 

24.2

 

International

 

 

6.4

 

 

 

2.2

 

 

 

8.6

 

 

 

 

 

 

 

 

 

8.6

 

Corporate

 

 

7.3

 

 

 

0.4

 

 

 

7.7

 

 

 

 

 

 

 

 

 

7.7

 

Total

 

$

19.5

 

 

$

3.8

 

 

$

23.3

 

 

$

21.7

 

 

$

1.7

 

 

$

46.7

 

Nine Months Ended

 

Employee

 

 

Other

Restructuring

 

 

Total

Restructuring

 

 

 

 

 

 

Other

 

 

 

 

 

September 30, 2016

 

Terminations

 

 

Charges

 

 

Charges

 

 

Impairment

 

 

Charges

 

 

Total

 

Variable Print

 

$

1.5

 

 

$

1.5

 

 

$

3.0

 

 

$

0.3

 

 

$

1.4

 

 

$

4.7

 

Strategic Services

 

 

1.7

 

 

 

 

 

 

1.7

 

 

 

 

 

 

0.3

 

 

 

2.0

 

International

 

 

7.4

 

 

 

1.3

 

 

 

8.7

 

 

 

(2.5

)

 

 

 

 

 

6.2

 

Corporate

 

 

10.1

 

 

 

0.1

 

 

 

10.2

 

 

 

1.2

 

 

 

 

 

 

11.4

 

Total

 

$

20.7

 

 

$

2.9

 

 

$

23.6

 

 

$

(1.0

)

 

$

1.7

 

 

$

24.3

 

 

12


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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

Restructuring and Impairment ChargesMEPP Reserves

ForRestructuring and MEPP reserves as of December 31, 2019 and June 30, 2020, and changes during the three and ninesix months ended SeptemberJune 30, 2017,2020, were as follows:

 

 

 

 

 

Restructuring

 

 

Foreign

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

and Other

 

 

Exchange and

 

 

Cash

 

 

June 30,

 

 

 

2019

 

 

Charges

 

 

Other

 

 

Paid

 

 

2020

 

Employee terminations

 

$

3.4

 

 

$

21.1

 

 

$

 

 

$

(13.5

)

 

$

11.0

 

MEPP withdrawal obligations

 

 

40.6

 

 

 

1.9

 

 

 

 

 

 

(3.2

)

 

 

39.3

 

Other

 

 

8.6

 

 

 

18.1

 

 

 

(1.1

)

 

 

(17.8

)

 

 

7.8

 

Total

 

$

52.6

 

 

$

41.1

 

 

$

(1.1

)

 

$

(34.5

)

 

$

58.1

 

The current portion of restructuring reserves of $22.6 million at June 30, 2020 was included in Accrued liabilities and other, while the Company recorded net restructuring chargeslong-term portion of $10.7$35.5 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 chargeMEPP withdrawal obligations, employee terminations 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 terminationlitigation and other, restructuring charges of $1.1 million and $3.8 million, respectively, for the three and nine months ended Septemberwas included in Other noncurrent liabilities at June 30, 2017.

For the three and nine months ended September 30, 2016, the Company recorded net restructuring charges of $9.7 million and $20.7 million, respectively, for employee termination costs. These charges primarily related to two facility closures in the International segment and the reorganization of certain administrative functions and operations. Additionally, the Company incurred lease termination and other restructuring charges of $0.6 million and $2.9 million for the three and nine months ended September 30, 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 $0.5 million and $1.7 million and $0.6 million and $1.7 million, respectively, for multi-employer pension plan withdrawal obligations unrelated to facility closures.2020. The total liabilities for the withdrawal obligations associated with the Company’sour previous decision to withdraw from multi-employer pension plansall MEPPs included in accruedAccrued liabilities and other and Other noncurrent liabilities are $5.1$7.1 million and $32.4$32.2 million, respectively, as of SeptemberJune 30, 20172020.

The Company’s multi-employer pension plan withdrawal liabilities could be affected byWe anticipate that payments associated with the financial stability of other employers participatingemployee terminations reflected in the plans and any decisionsabove table will be fully completed by those employersJune 2021, excluding employee terminations in litigation within the Business Services segment.

Payments on all of our MEPP withdrawal obligations are scheduled to withdraw from the plansbe substantially completed by 2034. Changes based on uncertainties 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 previouslythese estimated withdrawal liabilities, consolidated results of operations, financial position or cash flows.

Restructuring Reserveobligations could affect the ultimate charges related to MEPP withdrawals.

The restructuring reserveliabilities classified as “other” primarily consisted of December 31, 2016reserves for employee termination litigation and September 30, 2017,environmental matters. Any potential recoveries or additional charges could affect amounts reported in our consolidated financial statements.

7. Retirement Plans

Components of net pension and changes duringother postretirement benefits plan (“OPEB”) income for the ninethree and six months ended SeptemberJune 30, 2017,2020 and 2019 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

 

Three Months Ended

 

 

Six Months Ended

 

 

June 30,

 

 

June 30,

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Pension income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

$

0.2

 

 

$

0.3

 

 

$

0.5

 

 

$

0.5

 

Interest cost

 

6.8

 

 

 

8.3

 

 

 

13.7

 

 

 

16.7

 

Expected return on plan assets

 

(10.0

)

 

 

(11.6

)

 

 

(20.2

)

 

 

(23.2

)

Amortization, net

 

2.5

 

 

 

1.5

 

 

 

5.0

 

 

 

3.0

 

Net pension income

$

(0.5

)

 

$

(1.5

)

 

$

(1.0

)

 

$

(3.0

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OPEB income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest cost

 

1.8

 

 

 

2.4

 

 

 

3.6

 

 

 

5.0

 

Expected return on plan assets

 

(3.1

)

 

 

(3.3

)

 

 

(6.3

)

 

 

(6.6

)

Amortization, net

 

(1.5

)

 

 

(1.7

)

 

 

(3.0

)

 

 

(3.5

)

Net OPEB income

$

(2.8

)

 

$

(2.6

)

 

$

(5.7

)

 

$

(5.1

)

 

The current portion of restructuring reserves of $14.4During the six months ended June 30, 2020 and 2019, we contributed $4.2 million at September 30, 2017 was included in accrued liabilities, while the long-term portion of $13.6and $3.8 million, primarily relatedrespectively, to multi-employer pension plan withdrawal obligations related to facility closures, was included in other noncurrent liabilities at September 30, 2017.our retirement plans.

 

13


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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

The Company anticipates that payments associated with the employee terminations reflected in the above table will be substantially completed by September 2018.8. Share-Based Compensation

Payments on all of the Company’s multi-employer pension plan withdrawal obligations are scheduled to be completed by 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 terminationsShare-based compensation expense was $1.8 million and other” consisted of lease terminations, other facility closing costs and contract termination costs. Payments on certain of the lease obligations are scheduled to continue until 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.

8. Employee Benefits

The components of the estimated net pension and other postretirement benefits plan income$3.2 million for the three and ninesix months ended SeptemberJune 30, 20172020, respectively, and 2016 were as follows:

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Pension (income) expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

$

0.1

 

 

$

0.3

 

 

$

0.5

 

 

$

0.8

 

Interest cost

 

8.0

 

 

 

37.9

 

 

 

23.7

 

 

 

105.3

 

Expected return on plan assets

 

(12.7

)

 

 

(58.2

)

 

 

(37.6

)

 

 

(171.2

)

Amortization, net

 

1.9

 

 

 

7.6

 

 

 

5.4

 

 

 

23.4

 

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

$

0.4

 

 

$

1.0

 

 

$

1.0

 

 

$

3.0

 

Interest cost

 

2.7

 

 

 

3.1

 

 

 

8.3

 

 

 

9.2

 

Expected return on plan assets

 

(3.4

)

 

 

(3.4

)

 

 

(10.1

)

 

 

(10.2

)

Amortization, net

 

(0.7

)

 

 

(4.0

)

 

 

(2.2

)

 

 

(12.0

)

Curtailments

 

 

 

 

(19.7

)

 

 

 

 

 

(19.7

)

Net other postretirement benefit income - continuing operations

$

(1.0

)

 

$

(23.0

)

 

$

(3.0

)

 

$

(29.7

)

The Company expects to make cash contributions of approximately $17.0was $3.3 million to its pension and other postretirement benefit plans in 2017. During$6.7 million for the ninethree and six months ended SeptemberJune 30, 2017,2019, respectively.

In March 2020, we awarded our annual share-based compensation grants, which consisted of 0.8 million restricted stock units with a grant date fair value of $1.61 per unit and 0.8 million performance share units also with a grant date fair value of $1.61 per unit. The restricted stock units are subject to a three year graded vesting period and the performance share units are subject to a 34 month cliff vesting period. Dividends are 0t paid on restricted stock units.

In addition, in March 2020 we granted 1.5 million cash-settled restricted stock units (“phantom restricted stock units”) and 1.5 million cash-settled performance stock units (“phantom performance stock units”). Our share price on the date of grant was $1.88. The phantom restricted stock units vest and are payable in three equal installments over a period of three years after the grant date. The phantom performance stock units are subject to a 34 month cliff vesting period. Phantom stock units are not shares of our common stock and therefore the recipients of these awards do not receive ownership interest in the Company contributed $12.4 millionor stockholder voting rights. Phantom stock unit awards are subject to its benefit plans.

In the fourth quarterforfeiture upon termination of 2015, the Company communicatedemployment prior to certain former employees the optionvesting, subject in some cases to receive a lump-sum pension paymentearly vesting upon specified events, including death 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 liabilities were remeasured aspermanent disability of the payout date. The discount ratesgrantee, termination of the grantee’s employment under certain circumstances or a change in control of the Company. All phantom stock unit awards are classified as liability awards due to their expected settlement in cash and actuarial assumptions used to calculate the payouts were determinedare included in accordance with federal regulations. The company recorded total non-cash settlement charges of $1.6 millionAccrued liabilities and $98.0 million, of which $0.3 million and $20.7 million is included within selling, general and administrative expenses and $1.3 million and $77.3 million is included within income from discontinued operations, net of taxother in the Condensed Consolidated Statements of OperationsBalance Sheets. Compensation expense for these awards is measured based upon the three and nine months ended September 30, 2016, respectively. These charges resulted from the recognition in earnings of a portionfair value of the actuarial losses recorded in accumulated other comprehensive loss basedawards at the end of each reporting period. Dividends are 0t paid on the proportion of the obligation settled.  phantom stock units.

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 remeasured9. Equity

Our equity as of SeptemberDecember 31, 2019 and June 30, 2016.  This remeasurement resulted in a curtailment gain of $16.4 million within cost of sales2020, and $3.3 million in selling, general and administrative expenseschanges during the three and ninesix months ended SeptemberJune 30, 2016.  2020, were as follows:

Common

 

 

Additional

Paid-in-

 

 

Treasury

 

 

Accumulated

 

 

Accumulated

Other

Comprehensive

 

 

Total RRD's

Stockholders'

 

 

Noncontrolling

 

 

Total

 

 

Stock

 

 

Capital

 

 

Stock

 

 

Deficit

 

 

Loss

 

 

Equity

 

 

Interests

 

 

Equity

 

Balance at December 31, 2019

$

0.9

 

 

$

3,348.0

 

 

$

(1,219.6

)

 

$

(2,336.8

)

 

$

(176.2

)

 

$

(383.7

)

 

$

13.4

 

 

$

(370.3

)

Net (loss) income

 

 

 

 

 

 

 

 

 

 

 

 

 

(13.0

)

 

 

 

 

 

 

(13.0

)

 

 

0.1

 

 

 

(12.9

)

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(31.0

)

 

 

(31.0

)

 

 

(0.2

)

 

 

(31.2

)

Share-based compensation

 

 

 

 

 

1.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1.4

 

 

 

 

 

 

 

1.4

 

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

 

 

 

 

 

(82.3

)

 

 

81.8

 

 

 

 

 

 

 

 

 

 

 

(0.5

)

 

 

 

 

 

 

(0.5

)

Cash dividends paid

 

 

 

 

 

 

 

 

 

 

 

 

 

(2.1

)

 

 

 

 

 

 

(2.1

)

 

 

 

 

 

 

(2.1

)

Cumulative impact of adopting ASU 2016-03

 

 

 

 

 

 

 

 

 

 

 

 

 

(0.3

)

 

 

 

 

 

 

(0.3

)

 

 

 

 

 

 

(0.3

)

Distributions to noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(0.7

)

 

 

(0.7

)

Balance at March 31, 2020

$

0.9

 

 

$

3,267.1

 

 

$

(1,137.8

)

 

$

(2,352.2

)

 

$

(207.2

)

 

$

(429.2

)

 

$

12.6

 

 

$

(416.6

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

(57.2

)

 

 

 

 

 

 

(57.2

)

 

 

 

 

 

 

(57.2

)

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6.2

 

 

 

6.2

 

 

 

 

 

 

 

6.2

 

Share-based compensation

 

 

 

 

 

1.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1.8

 

 

 

 

 

 

 

1.8

 

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

 

 

 

 

 

(7.7

)

 

 

7.6

 

 

 

 

 

 

 

 

 

 

 

(0.1

)

 

 

 

 

 

 

(0.1

)

Balance at June 30, 2020

$

0.9

 

 

$

3,261.2

 

 

$

(1,130.2

)

 

$

(2,409.4

)

 

$

(201.0

)

 

$

(478.5

)

 

$

12.6

 

 

$

(465.9

)

 

14


R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (“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’sOur equity as of December 31, 20162018 and SeptemberJune 30, 2017,2019, and changes during the ninethree and six months ended SeptemberJune 30, 2017,2019, were as follows:

 

 

RRD

 

 

 

 

 

 

 

 

 

Common

 

 

Additional

Paid-in-

 

 

Treasury

 

 

Accumulated

 

 

Accumulated

Other

Comprehensive

 

 

Total RRD's

Stockholders'

 

 

Noncontrolling

 

 

Total

 

 

Stockholders'

 

 

Noncontrolling

 

 

 

 

 

Stock

 

 

Capital

 

 

Stock

 

 

Deficit

 

 

Loss

 

 

Equity

 

 

Interests

 

 

Equity

 

 

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

)

Balance at December 31, 2018

$

0.9

 

 

$

3,404.0

 

 

$

(1,285.5

)

 

$

(2,225.7

)

 

$

(153.8

)

 

$

(260.1

)

 

$

14.7

 

 

$

(245.4

)

Net (loss) income

 

 

 

 

 

 

 

 

 

 

 

 

 

(8.8

)

 

 

 

 

 

 

(8.8

)

 

 

0.3

 

 

 

(8.5

)

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1.4

 

 

 

1.4

 

 

 

0.2

 

 

 

1.6

 

Share-based compensation

 

 

6.4

 

 

 

 

 

 

6.4

 

 

 

 

 

 

3.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3.4

 

 

 

 

 

 

 

3.4

 

Spinoff adjustments

 

 

5.9

 

 

 

 

 

 

5.9

 

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

 

 

(1.7

)

 

 

 

 

 

(1.7

)

 

 

 

 

 

(54.7

)

 

 

53.8

 

 

 

 

 

 

 

 

 

 

 

(0.9

)

 

 

 

 

 

 

(0.9

)

Cash dividends paid

 

 

(29.4

)

 

 

 

 

 

(29.4

)

 

 

 

 

 

 

 

 

 

 

 

 

 

(2.1

)

 

 

 

 

 

 

(2.1

)

 

 

 

 

 

 

(2.1

)

Cumulative impact of adopting ASU 2016-02, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

2.6

 

 

 

 

 

 

 

2.6

 

 

 

 

 

 

 

2.6

 

Distributions to noncontrolling interests

 

 

 

 

 

(0.7

)

 

 

(0.7

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(0.7

)

 

 

(0.7

)

Balance at September 30, 2017

 

$

(176.9

)

 

$

13.9

 

 

$

(163.0

)

Balance at March 31, 2019

$

0.9

 

 

$

3,352.7

 

 

$

(1,231.7

)

 

$

(2,234.0

)

 

$

(152.4

)

 

$

(264.5

)

 

$

14.5

 

 

$

(250.0

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

(7.0

)

 

 

 

 

 

 

(7.0

)

 

 

(0.4

)

 

 

(7.4

)

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2.4

)

 

 

(2.4

)

 

 

(0.1

)

 

 

(2.5

)

Share-based compensation

 

 

 

 

 

3.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3.3

 

 

 

 

 

 

 

3.3

 

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

 

 

 

 

 

(0.5

)

 

 

0.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends paid

 

 

 

 

 

 

 

 

 

 

 

 

 

(2.2

)

 

 

 

 

 

 

(2.2

)

 

 

 

 

 

 

(2.2

)

Spinoff adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

(12.0

)

 

 

 

 

 

 

(12.0

)

 

 

 

 

 

 

(12.0

)

Balance at June 30, 2019

$

0.9

 

 

$

3,355.5

 

 

$

(1,231.2

)

 

$

(2,255.2

)

 

$

(154.8

)

 

$

(284.8

)

 

$

14.0

 

 

$

(270.8

)

During the nine months ended September 30, 2017, the Company recorded certain spinoff related adjustments within equity primarily resulting from the final pension asset valuation as required by the Separation and Distribution Agreement.

 

11.10. Earnings per Share

Basic earnings per share is calculated by dividing net earnings attributable to RRD 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 market value of the Company’sour stock price during the applicable period. In periods when the Company iswe are 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 ninesix months ended SeptemberJune 30, 20172020 and 2016, no2019, 0 shares of common stock were purchased by the Company;us; however, shares were withheld for tax liabilities upon the vesting of equity awards.

 

15


R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (“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 ninesix months ended SeptemberJune 30, 20172020 and 2016 was2019 were as follows:

 

 

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

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2020

 

 

2019

 

 

 

2020

 

 

 

2019

 

Net loss per share attributable to RRD common stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.79

)

 

$

(0.10

)

 

$

(0.98

)

 

$

(0.22

)

Diluted

 

$

(0.79

)

 

$

(0.10

)

 

$

(0.98

)

 

$

(0.22

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to RRD common stockholders

 

$

(57.2

)

 

$

(7.0

)

 

$

(70.2

)

 

$

(15.8

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding - Basic and Diluted

 

 

72.2

 

 

 

71.3

 

 

 

71.9

 

 

 

71.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options

 

 

0.3

 

 

 

0.4

 

 

 

0.3

 

 

 

0.5

 

Restricted stock units

 

 

1.5

 

 

 

1.4

 

 

 

1.1

 

 

 

1.0

 

Total

 

 

1.8

 

 

 

1.8

 

 

 

1.4

 

 

 

1.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

 

 

$

0.03

 

 

$

0.03

 

 

$

0.06

 

 

12.11. Other Comprehensive Income (Loss) Income

The components of other comprehensive income (loss) and income tax (benefit) expense allocated to each component for the three and ninesix months ended SeptemberJune 30, 20172020 and 20162019 were as follows:

 

Three Months Ended

 

 

Six Months Ended

 

 

June 30, 2020

 

 

June 30, 2020

 

 

Before

 

 

 

 

 

 

Net of

 

 

Before

 

 

 

 

 

 

Net of

 

 

Tax

 

 

Income

 

 

Tax

 

 

Tax

 

 

Income

 

 

Tax

 

 

Amount

 

 

Tax

 

 

Amount

 

 

Amount

 

 

Tax

 

 

Amount

 

Translation adjustments

$

6.8

 

 

$

 

 

$

6.8

 

 

$

(13.2

)

 

$

 

 

$

(13.2

)

Adjustments for net periodic pension and OPEB cost

 

1.0

 

 

 

0.3

 

 

 

0.7

 

 

 

2.0

 

 

 

0.5

 

 

 

1.5

 

Change in fair value of derivatives

 

(1.8

)

 

 

(0.5

)

 

 

(1.3

)

 

 

(17.5

)

 

 

(4.2

)

 

 

(13.3

)

Other comprehensive income (loss)

$

6.0

 

 

$

(0.2

)

 

$

6.2

 

 

$

(28.7

)

 

$

(3.7

)

 

$

(25.0

)

 

 

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

)

 

Three Months Ended

 

 

Six Months Ended

 

 

June 30, 2019

 

 

June 30, 2019

 

 

Before

 

 

 

 

 

 

Net of

 

 

Before

 

 

 

 

 

 

Net of

 

 

Tax

 

 

Income

 

 

Tax

 

 

Tax

 

 

Income

 

 

Tax

 

 

Amount

 

 

Tax

 

 

Amount

 

 

Amount

 

 

Tax

 

 

Amount

 

Translation adjustments

$

(3.2

)

 

$

 

 

$

(3.2

)

 

$

(2.0

)

 

$

 

 

$

(2.0

)

Adjustments for net periodic pension and OPEB cost

 

(0.2

)

 

 

 

 

 

(0.2

)

 

 

(0.5

)

 

 

(0.1

)

 

 

(0.4

)

Other

 

 

 

 

(0.9

)

 

 

0.9

 

 

 

 

 

 

(1.5

)

 

 

1.5

 

Other comprehensive loss

$

(3.4

)

 

$

(0.9

)

 

$

(2.5

)

 

$

(2.5

)

 

$

(1.6

)

 

$

(0.9

)

 

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, 20162019 and SeptemberJune 30, 2017,2020, and changes during the ninesix months ended SeptemberJune 30, 2017,2020, were as follows:

 

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

)

Changes in the Fair Value of Derivatives

 

 

Pension and OPEB Cost

 

 

Translation Adjustments

 

 

Total

 

 

Balance at December 31, 2019

$

1.0

 

 

$

(185.7

)

 

$

8.5

 

 

$

(176.2

)

 

Other comprehensive loss before reclassifications

 

(14.1

)

 

 

 

 

 

(13.0

)

 

 

(27.1

)

 

Amounts reclassified from accumulated other comprehensive loss

 

0.8

 

 

 

1.5

 

 

 

 

 

 

2.3

 

 

Net change in accumulated other comprehensive loss

 

(13.3

)

 

 

1.5

 

 

 

(13.0

)

 

 

(24.8

)

 

Balance at June 30, 2020

$

(12.3

)

 

$

(184.2

)

 

$

(4.5

)

 

$

(201.0

)

 

Accumulated other comprehensive loss by component as of December 31, 20152018 and SeptemberJune 30, 2016,2019, and changes during the ninesix months ended SeptemberJune 30, 2016,2019, were as follows:

 

Pension and Other Postretirement

Benefits Plan Cost

 

 

Translation Adjustments

 

 

Total

 

Balance at December 31, 2015

$

(727.5

)

 

$

(65.7

)

 

$

(793.2

)

Other comprehensive loss before reclassifications

 

(69.7

)

 

 

(8.5

)

 

 

(78.2

)

Amounts reclassified from accumulated other comprehensive loss

 

55.2

 

 

 

 

 

 

55.2

 

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

)

Balance at September 30, 2016

$

(740.8

)

 

$

(74.9

)

 

$

(815.7

)

 

Pension and OPEB Cost

 

 

Translation Adjustments

 

 

Other

 

 

Total

 

Balance at December 31, 2018

$

(155.2

)

 

$

1.4

 

 

$

 

 

$

(153.8

)

Other comprehensive income before reclassifications

 

 

 

 

2.4

 

 

 

1.5

 

 

 

3.9

 

Amounts reclassified from accumulated other comprehensive loss

 

(0.4

)

 

 

(4.5

)

 

 

 

 

 

(4.9

)

Net change in accumulated other comprehensive loss

 

(0.4

)

 

 

(2.1

)

 

 

1.5

 

 

 

(1.0

)

Balance at June 30, 2019

$

(155.6

)

 

$

(0.7

)

 

$

1.5

 

 

$

(154.8

)

Reclassifications from accumulated other comprehensive loss for the three and six months ended June 30, 2020 and 2019 were as follows:

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

Classification in the Condensed

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

Consolidated Statements of Operations

Translation Adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net realized gain, before tax

$

 

 

$

 

 

$

 

 

$

(4.5

)

 

Other operating expense (income)

Reclassification, net of tax

$

 

 

$

 

 

$

 

 

$

(4.5

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of pension and OPEB cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net actuarial loss

$

1.4

 

 

$

0.7

 

 

$

3.0

 

 

$

2.2

 

 

Investment and other income-net

Net prior service credit

 

(0.4

)

 

 

(0.9

)

 

 

(1.0

)

 

 

(2.7

)

 

Investment and other income-net

Reclassifications before tax

 

1.0

 

 

 

(0.2

)

 

 

2.0

 

 

 

(0.5

)

 

 

Income tax expense (benefit)

 

0.3

 

 

 

 

 

 

0.5

 

 

 

(0.1

)

 

 

Reclassification, net of tax

 

0.7

 

 

 

(0.2

)

 

$

1.5

 

 

$

(0.4

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net realized loss

$

1.0

 

 

$

 

 

$

0.8

 

 

$

 

 

Interest expense-net

Reclassification, net of tax

 

1.0

 

 

 

 

 

 

0.8

 

 

 

 

 

 

Total reclassifications, net of tax

$

1.7

 

 

$

(0.2

)

 

$

2.3

 

 

$

(4.9

)

 

 

 

17


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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

Reclassifications from accumulated other comprehensive loss for the three and nine months ended September 30, 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

 

 

 

13.12. Segment Information

The Company’sOur segments and their product and service offerings are summarized below:

Variable Print

This segment includes the Company’s U.S. short-run and transactional printing operations. This segment’s primary product offerings include commercial and digital print, direct mail, labels, statement printing, forms and packaging.

StrategicBusiness Services

This segment includes the Company’s logistics services, print management offeringsBusiness Services provides customized solutions at scale to help clients inform, service and digital and creative solutions.

International

This segment includes the Company’s non-U.S. printing operations in Asia, Latin America, Canada and Europe. Thistransact with their customers. The segment’s primary product and service offerings include commercial print, logistics, packaging, books, catalogs, magazines, retail inserts,labels, statement printing, commercialsupply chain management, forms and business process outsourcing. This segment also includes all of our operations in Asia, Europe, Canada and Latin America.

Marketing Solutions

Marketing Solutions leverages an integrated portfolio of data analytics, creative services and multichannel execution to deliver comprehensive, end-to-end solutions. The segment’s primary product and service offerings include direct marketing, in-store marketing, digital print, forms, labels, logistics services, directories,kitting, fulfillment, digital and creative solutions and direct mail. Additionally, thislist services.

Corporate

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

Information by Segment

We have disclosed income (loss) from operations as the primary measure of segment includesearnings (loss). This is the Company’s business process outsourcingmeasure of profitability used by our chief operating decision-maker 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 aroundis most consistent with the world through its operations in Europe, North America and Asia.presentation of profitability reported within the Condensed Consolidated Financial Statements.

 

Three Months Ended

 

 

 

 

 

 

 

June 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (Loss)

 

 

Depreciation

 

 

 

 

 

 

 

 

Operations

 

 

 

Total

 

 

Intersegment

 

 

Net

 

 

from

 

 

and

 

 

 

 

Capital

 

 

As of

 

 

 

Sales

 

 

Sales

 

 

Sales

 

 

Operations

 

 

Amortization

 

 

 

 

Expenditures

 

 

June 30, 2020

 

Business Services

 

$

963.0

 

 

$

(14.8

)

 

$

948.2

 

 

$

19.5

 

 

$

25.1

 

 

 

 

$

9.1

 

 

$

2,123.4

 

Marketing Solutions

 

 

219.3

 

 

 

(5.3

)

 

 

214.0

 

 

 

(1.8

)

 

 

12.0

 

 

 

 

 

4.8

 

 

 

622.9

 

Total operating segments

 

 

1,182.3

 

 

 

(20.1

)

 

 

1,162.2

 

 

 

17.7

 

 

 

37.1

 

 

 

 

 

13.9

 

 

 

2,746.3

 

Corporate

 

 

 

 

 

 

 

 

 

 

 

(33.6

)

 

 

1.1

 

 

 

 

 

6.5

 

 

 

457.2

 

Total operations

 

$

1,182.3

 

 

$

(20.1

)

 

$

1,162.2

 

 

$

(15.9

)

 

$

38.2

 

 

 

 

$

20.4

 

 

$

3,203.5

 

 

 

Three Months Ended

 

 

 

 

 

 

 

June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (Loss)

 

 

Depreciation

 

 

 

 

 

 

Operations

 

 

 

Total

 

 

Intersegment

 

 

Net

 

 

from

 

 

and

 

 

Capital

 

 

As of

 

 

 

Sales

 

 

Sales

 

 

Sales

 

 

Operations

 

 

Amortization

 

 

Expenditures

 

 

December 31, 2019

 

Business Services

 

$

1,253.8

 

 

$

(22.6

)

 

$

1,231.2

 

 

$

41.6

 

 

$

26.6

 

 

$

19.3

 

 

$

2,329.7

 

Marketing Solutions

 

 

287.0

 

 

 

(9.5

)

 

 

277.5

 

 

 

6.0

 

 

 

11.4

 

 

 

14.4

 

 

 

748.1

 

Total operating segments

 

 

1,540.8

 

 

 

(32.1

)

 

 

1,508.7

 

 

 

47.6

 

 

 

38.0

 

 

 

33.7

 

 

 

3,077.8

 

Corporate

 

 

 

 

 

 

 

 

 

 

 

(26.7

)

 

 

2.0

 

 

 

5.3

 

 

 

252.3

 

Total operations

 

$

1,540.8

 

 

$

(32.1

)

 

$

1,508.7

 

 

$

20.9

 

 

$

40.0

 

 

$

39.0

 

 

$

3,330.1

 

 

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.

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

 

 

 

 

 

 

 

Total

 

 

Intersegment

 

 

Net

 

 

from

 

 

and

 

 

Capital

 

 

 

Sales

 

 

Sales

 

 

Sales

 

 

Operations

 

 

Amortization

 

 

Expenditures

 

Three Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Variable Print

 

$

771.7

 

 

$

(4.2

)

 

$

767.5

 

 

$

39.3

 

 

$

28.5

 

 

$

6.3

 

Strategic Services

 

 

483.5

 

 

 

(39.8

)

 

 

443.7

 

 

 

(14.8

)

 

 

3.8

 

 

 

(0.2

)

International

 

 

532.6

 

 

 

(8.9

)

 

 

523.7

 

 

 

20.6

 

 

 

13.7

 

 

 

11.9

 

Total operating segments

 

 

1,787.8

 

 

 

(52.9

)

 

 

1,734.9

 

 

 

45.1

 

 

 

46.0

 

 

 

18.0

 

Corporate

 

 

 

 

 

 

 

 

 

 

 

(9.2

)

 

 

1.0

 

 

 

5.0

 

Total operations

 

$

1,787.8

 

 

$

(52.9

)

 

$

1,734.9

 

 

$

35.9

 

 

$

47.0

 

 

$

23.0

 

 

 

Six Months Ended

 

 

 

June 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (Loss)

 

 

 

 

Depreciation

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

Intersegment

 

 

 

 

Net

 

 

 

 

from

 

 

 

 

and

 

 

 

 

Capital

 

 

 

Sales

 

 

 

 

Sales

 

 

 

 

Sales

 

 

 

 

Operations

 

 

 

 

Amortization

 

 

 

 

Expenditures

 

Business Services

 

$

2,065.2

 

 

 

 

$

(31.3

)

 

 

 

$

2,033.9

 

 

 

 

$

39.1

 

 

 

 

$

51.1

 

 

 

 

$

19.8

 

Marketing Solutions

 

 

549.7

 

 

 

 

 

(11.9

)

 

 

 

 

537.8

 

 

 

 

 

23.1

 

 

 

 

 

26.2

 

 

 

 

 

6.4

 

Total operating segments

 

 

2,614.9

 

 

 

 

 

(43.2

)

 

 

 

 

2,571.7

 

 

 

 

 

62.2

 

 

 

 

 

77.3

 

 

 

 

 

26.2

 

Corporate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(69.3

)

 

 

 

 

1.7

 

 

 

 

 

11.9

 

Total operations

 

$

2,614.9

 

 

 

 

$

(43.2

)

 

 

 

$

2,571.7

 

 

 

 

$

(7.1

)

 

 

 

$

79.0

 

 

 

 

$

38.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (Loss)

 

 

Depreciation

 

 

 

 

 

 

 

Total

 

 

Intersegment

 

 

Net

 

 

from

 

 

and

 

 

Capital

 

 

 

Sales

 

 

Sales

 

 

Sales

 

 

Operations

 

 

Amortization

 

 

Expenditures

 

Three Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Variable Print

 

$

796.8

 

 

$

(6.5

)

 

$

790.3

 

 

$

50.1

 

 

$

30.5

 

 

$

15.0

 

Strategic Services

 

 

486.9

 

 

 

(41.9

)

 

 

445.0

 

 

 

13.3

 

 

 

4.3

 

 

 

-

 

International

 

 

501.5

 

 

 

(11.2

)

 

 

490.3

 

 

 

36.0

 

 

 

14.8

 

 

 

6.3

 

Total operating segments

 

 

1,785.2

 

 

 

(59.6

)

 

 

1,725.6

 

 

 

99.4

 

 

 

49.6

 

 

 

21.3

 

Corporate

 

 

 

 

 

 

 

 

 

 

 

(15.4

)

 

 

1.4

 

 

 

7.4

 

Total operations

 

$

1,785.2

 

 

$

(59.6

)

 

$

1,725.6

 

 

$

84.0

 

 

$

51.0

 

 

$

28.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

Six Months Ended

 

 

 

June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (Loss)

 

 

 

 

Depreciation

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

Intersegment

 

 

 

 

Net

 

 

 

 

from

 

 

 

 

and

 

 

 

 

Capital

 

 

 

Sales

 

 

 

 

Sales

 

 

 

 

Sales

 

 

 

 

Operations

 

 

 

 

Amortization

 

 

 

 

Expenditures

 

Business Services

 

$

2,509.7

 

 

 

 

$

(42.2

)

 

 

 

$

2,467.5

 

 

 

 

$

70.2

 

 

 

 

$

55.9

 

 

 

 

$

42.8

 

Marketing Solutions

 

 

578.9

 

 

 

 

 

(15.8

)

 

 

 

 

563.1

 

 

 

 

 

14.5

 

 

 

 

 

23.5

 

 

 

 

 

23.6

 

Total operating segments

 

 

3,088.6

 

 

 

 

 

(58.0

)

 

 

 

 

3,030.6

 

 

 

 

 

84.7

 

 

 

 

 

79.4

 

 

 

 

 

66.4

 

Corporate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(40.5

)

 

 

 

 

3.3

 

 

 

 

 

10.0

 

Total operations

 

$

3,088.6

 

 

 

 

$

(58.0

)

 

 

 

$

3,030.6

 

 

 

 

$

44.2

 

 

 

 

$

82.7

 

 

 

 

$

76.4

 

 

19


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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (Loss)

 

 

Depreciation

 

 

 

 

 

 

 

Total

 

 

Intersegment

 

 

Net

 

 

from

 

 

and

 

 

Capital

 

 

 

Sales

 

 

Sales

 

 

Sales

 

 

Operations

 

 

Amortization

 

 

Expenditures

 

Nine Months Ended September 30, 2016

 

Variable Print

 

$

2,326.3

 

 

$

(14.5

)

 

$

2,311.8

 

 

$

144.0

 

 

$

90.5

 

 

$

45.5

 

Strategic Services

 

 

1,343.9

 

 

 

(114.3

)

 

 

1,229.6

 

 

 

25.3

 

 

 

14.0

 

 

 

13.1

 

International

 

 

1,465.7

 

 

 

(33.0

)

 

 

1,432.7

 

 

 

101.8

 

 

 

46.7

 

 

 

23.8

 

Total operating segments

 

 

5,135.9

 

 

 

(161.8

)

 

 

4,974.1

 

 

 

271.1

 

 

 

151.2

 

 

 

82.4

 

Corporate

 

 

 

 

 

 

 

 

 

 

 

(104.8

)

 

 

2.3

 

 

 

16.5

 

Total operations

 

$

5,135.9

 

 

$

(161.8

)

 

$

4,974.1

 

 

$

166.3

 

 

$

153.5

 

 

$

98.9

 

Restructuring,

Net restructuring, impairment and other chargesexpenses by segment are described in Note 7, 6, Restructuring, Impairment and Other Charges.

14.13. Commitments and Contingencies

The Company isWe are subject to laws and regulations relating to the protection of the environment. The Company providesWe provide 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 hasWe have been designated as a potentially responsible party or hashave received claims in three active federal and state Superfund and other multiparty remediation sites. In addition to these sites, the Companywe may also have the obligation to remediate sevensix other previously and currently owned facilities. At the Superfund sites, the Comprehensive Environmental Response, Compensation and Liability Act provides that the Company’sour liability could be joint and several, meaning that the Companywe could be required to pay an amount in excess of itsour proportionate share of the remediation costs.

The Company’sOur 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’sour estimated liability. The Company established reserves,We believe that our recorded accruals, recorded in accruedAccrued liabilities and other and Other noncurrent liabilities, that it believes are adequate to cover itsour 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 Companywe may undertake in the future. However, in theour 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’sour consolidated results of operations, financial position or cash flows.

In April 2019, we received a subpoena from the SEC related to previous business dealings with the Brazilian Ministry of Education. The SEC and Department of Justice (“DOJ”) are investigating the matter, and we are cooperating as they conduct their investigations. In addition, the Brazil authorities are also investigating the matter.

From time to time, the Company’s customersour clients and others file voluntary petitions for reorganization under United States bankruptcy laws. In such cases, certain pre-petition payments received by the Companyus from these parties could be considered preference items and subject to return. In addition, the Companywe may be party to certain litigation arising in the ordinary course of business. Management believesWe believe that the final resolution of these preference items and litigation will not have a material effect on the Company’sour consolidated results of operations, financial position or cash flows.

19


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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

Leases

We determine if an arrangement is a lease at inception. Operating leases are recorded in Operating lease assets, Short-term operating lease liabilities and Long-term operating lease liabilities on the Condensed Consolidated Balance Sheets. Operating lease assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. In determining the present value of lease payments, we use our incremental borrowing rate based on the information available at the lease commencement date. Operating lease assets reflects lease payments and are reduced by any lease incentives received. Our lease terms may include options to extend or not terminate the lease when we are reasonably certain that we will exercise any such options. Leases with an expected term of 12 months or less are not recorded on the balance sheet. Lease expense is recognized on a straight-line basis over the expected lease term.

Our most significant leases are real estate leases for plants, warehouses, storage facilities, offices and other facilities. For real estate leases, we elected the practical expedient permitted under Topic 842 to combine lease and non-lease components. As a result, non-lease components, such as common area maintenance charges, are accounted for as a single lease element. Our remaining operating leases are primarily comprised of leases of machinery and technology equipment. Finance leases are not material.

Certain of our operating lease agreements include variable payments that are passed-through by the landlord, such as insurance, taxes and common area maintenance, payments based on the usage of the asset and rental payments adjusted periodically for inflation. Pass-through charges, payments due to change in usage of the asset and payments due to changes in inflation are included within variable rent expense.

Our lease agreements do not contain material residual value guarantees, restrictions or covenants. 

Contingencies related to LSC Communication, Inc. and Subsidiaries (“LSC”) and Donnelley Financial Solutions, Inc. (“Donnelley Financial”)

Subsequent to the spinoff of LSC Communications, Inc. and Subsidiaries (“LSC”) and Donnelley Financial Solutions, Inc. (“Donnelley Financial”) on October 1, 2016, we may be contingently liable for obligations under various operating leases for office, warehouse and manufacturing locations of LSC and Donnelley Financial. In the event that LSC or Donnelley Financial, or any successor lessee, fail to make lease payments or fail to pay other obligations under these lease agreements, we may be required to satisfy those obligations to the lessor. Under various agreements executed at the time of the spinoff, LSC and Donnelley Financial agreed to fully indemnify us in the event that we would be required to make a payment on their behalf; however, there can be no assurance that the indemnities from LSC and Donnelley Financial will be sufficient to satisfy the full amount of any such contingent obligations. Our exposure to these potential contingent liabilities will decrease over time as LSC and Donnelley Financial pay monthly lease obligations and as the leases expire. As of June 30, 2020 and December 31, 2019, these potential contingent obligations were approximately $65.2 million and $78.8 million, respectively, forLSC, and $4.3 million and $5.5 million, respectively for Donnelley Financial. On April 13, 2020, LSC announced that it, along with most of its U.S. subsidiaries, voluntarily filed for business reorganization under Chapter 11 of the U.S. Bankruptcy Code.  At the time of this filing, no plan of reorganization has been filed and we cannot assess the potential impact of any such plan on our contingent liabilities related to the spin-off of LSC.

In May and June 2020 we became aware that LSC failed to make required monthly contributions to certain of their multiemployer pension plans (“MEPP”). In accordance with laws and regulations governing multiemployer pension plans, we believe that we and Donnelley Financial, as former members of the control group, are contingently liable on a joint and several liability basis for LSC’s MEPP obligations. We believe that the total undiscounted MEPP obligations for which LSC is responsible is approximately $100.0 million and is payable over an average 13 year period. The amount of our ultimate liability related to LSC's MEPP obligations is contingent upon whether LSC or a successor company will be required to make full or partial required contributions to their MEPPs as determined by the bankruptcy court, as well as the outcome of our negotiations with Donnelley Financial concerning how the obligations would be apportioned between us and Donnelley Financial. At June 30, 2020, we recorded an immaterial accrual representing our estimated share of payments that were due but not made by LSC during the second quarter of 2020. At this time, however, we cannot make a reasonable estimate of our ultimate exposure, and therefore, have not recorded an additional contingent liability related to LSC’s MEPP obligations as of June 30, 2020.

 

 

 

 

20


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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

15.

14. Debt

The Company’s debtDebt at SeptemberJune 30, 20172020 and December 31, 20162019 consisted of the following:  

 

 

September 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Borrowings under the Credit Agreement

 

$

350.0

 

 

$

185.0

 

11.25% senior notes due February 1, 2019 (a)

 

 

172.2

 

 

 

172.2

 

7.625% senior notes due June 15, 2020

 

 

238.4

 

 

 

350.0

 

7.875% senior notes due March 15, 2021

 

 

447.1

 

 

 

448.8

 

8.875% debentures due April 15, 2021

 

 

80.9

 

 

 

80.9

 

7.00% senior notes due February 15, 2022

 

 

140.0

 

 

 

140.0

 

6.50% senior notes due November 15, 2023

 

 

290.6

 

 

 

350.0

 

6.00% senior notes due April 1, 2024

 

 

298.3

 

 

 

400.0

 

6.625% debentures due April 15, 2029

 

 

157.9

 

 

 

199.5

 

8.820% debentures due April 15, 2031

 

 

69.0

 

 

 

69.0

 

Other (b)

 

 

17.9

 

 

 

8.5

 

Unamortized debt issuance costs

 

 

(12.2

)

 

 

(16.5

)

Total debt

 

 

2,250.1

 

 

 

2,387.4

 

Less: current portion

 

 

(17.9

)

 

 

(8.2

)

Long-term debt

 

$

2,232.2

 

 

$

2,379.2

 

 

June 30, 2020

 

 

December 31, 2019

 

Borrowings under the ABL Credit Facility

$

410.0

 

 

$

42.0

 

7.625% notes due June 15, 2020

 

 

 

 

65.8

 

7.875% notes due March 15, 2021

 

94.4

 

 

 

167.1

 

8.875% debentures due April 15, 2021

 

55.6

 

 

 

60.2

 

7.000% notes due February 15, 2022

 

107.6

 

 

 

140.0

 

6.500% notes due November 15, 2023

 

75.0

 

 

 

290.6

 

Term Loan due January 15, 2024 (a)

 

538.0

 

 

 

540.3

 

6.000% notes due April 1, 2024

 

61.7

 

 

 

298.3

 

8.250% notes due July 1, 2027

 

245.9

 

 

 

 

6.625% debentures due April 15, 2029

 

103.4

 

 

 

157.9

 

8.500% notes due April 15, 2029

 

300.6

 

 

 

 

8.820% debentures due April 15, 2031

 

54.5

 

 

 

69.0

 

Unamortized debt issuance costs

 

(10.8

)

 

 

(12.8

)

Total debt

 

2,035.9

 

 

 

1,818.4

 

Less: current portion

 

155.6

 

 

 

71.2

 

Long-term debt

$

1,880.3

 

 

$

1,747.2

 

(a)

As of SeptemberJune 30, 20172020 and December 31, 2016,2019, the interest rate on the 11.25% senior notesTerm Loan due February 1, 2019January 15, 2024 was 13.25%5.17% and 6.80%, the maximum rate on these notes, as a result of ratings downgrades.

(b)

Includes miscellaneous debt obligations and capital leases.respectively. 

 

The fair values of the senior notes and debentures, which were determined using the market approach based upon quoted prices or interest rates available to the Companyus for borrowingsdebt obligations with similar terms and maturities, were determined to be Level 2 under the fair value hierarchy. The fair value of the Company’sour total debt was less than its book value by approximately $33.1 million at June 30, 2020 and greater than its book value by approximately $38.9 million and $4.3$29.3 million at September 30, 2017 and December 31, 2016, respectively.2019.

During the first and second quarters of 2020, we executed various transactions that reduced our near-term maturities and extended our debt maturity profile. On September 29, 2017, the CompanyJune 18, 2020, we completed a public exchange transaction in which we exchanged $246.2 million aggregate principal amount of the Company’s debt held by various investors maturing between 2021 and 2024 (the “Old Debt”) for $244.9 million aggregate principal amount of newly issued unsecured 8.25% notes due 2027 (the “New 2027 Notes”). The Old Debt that was exchanged consisted of $16.4 million of the 7.875% notes due 2021 (the “2021 Notes”); $3.3 million of the 8.875% debentures due 2021 (the “2021 Debentures”); $25.8 million of the 7.000% notes due 2022 (the “2022 Notes”); $161.6 million of the 6.500% notes due 2023 (the “2023 Notes”); and $39.1 million of the 6.000% of notes due 2024 (the “2024 Notes”). Other than the interest rate, the terms of the New 2027 Notes are substantially similar to the terms of the Old Debt. We treated the transaction as a debt modification, which resulted in a premium on the New 2027 Notes of approximately $1.0 million.

In March 2020, we entered into an asset-based revolving credit facility pursuantprivately negotiated agreements with the largest holder of our outstanding notes (the “Seller”) 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 forextend 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 the amendment, 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. Additionally, the Company had approximately $0.6  million of accrued financing fees as of September 30, 2017 related to 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 unusedsignificant portion of the Company’s 2023 and 2024 maturities. The agreements included the exchange of $277.0 million aggregate principal amount available to be borrowed underof notes owned by the Credit Agreement. The unused line fee accrues at a rateSeller, consisting of either 0.250% or 0.375% depending upon the average usage$54.0 million 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 assets2023 Notes, $177.4 million of the Company2024 Notes, and its domestic subsidiaries, including accounts receivable, inventory, deposit accounts, securities$45.6 million of the 6.625% debentures due 2029 (the “2029 Debentures”) for $297.0 million aggregate principal amount of newly issued unsecured 8.50% notes due 2029 (the “New 2029 Notes”). Other than the interest rate, the terms of the New 2029 Notes are substantially similar to the terms of the 2029 Debentures. We treated the transaction as a debt modification, which resulted in a discount on the New 2029 Notes of approximately $20 million, inclusive of approximately $0.3 million of fees paid to the Seller. The exchange was executed in a series of transactions that were completed on April 8, 2020. The agreements also included the repurchase of $6.6 million of the 2022 Notes and $20.0 million of the 2024 Notes. These repurchases were completed in March and were funded with a draw from our ABL Credit Facility. We recorded a gain of $0.2 million on these repurchases.

 

21


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 May 2020, we entered into an additional agreement with the Seller in which the Seller agreed to exchange approximately $9.0 million aggregate principal amount of the 2029 Debentures and $14.5 million aggregate principal amount of 8.820% Debentures due 2031 (collectively, the “Old Debentures”) for approximately $21.2 million aggregate principal amount of New 2029 Notes. This transaction was completed on June 19, 2020. We treated the transaction as a debt modification, which resulted in a premium on the New 2029 Notes of approximately $2.1 million, inclusive of $0.2 million of fees paid to the Seller.

During the first half of the year, we also repurchased on the open market $59.0 million aggregate principal of debt maturing in 2020 and 2021. During the second quarter, we repurchased $27.3 million aggregate principal of the 2021 Notes and $0.6 million aggregate principal of the 2021 Debentures using available cash. We recorded a loss on debt extinguishment of $0.4 million, including unamortized debt issuance costs. During the first quarter, we repurchased $1.3 million of 7.625% notes due 2020 (the “2020 Notes”), $29.1 million of the 2021 Notes, and $0.8 million of the 2021 Debentures using availability under our ABL Credit Facility. We recorded a gain on debt extinguishment of $0.3 million, offset by approximately $0.3 million in unamortized debt issuance costs on the repurchase of these notes. 

On October 15, 2018, we entered into a $550.0 million senior secured term loan B (the “Term Loan”) pursuant to a credit agreement (the “Term Loan Credit Agreement”). The Term Loan is scheduled to mature on January 15, 2024, at which time the remaining outstanding balance under the Term Loan will be due and payable. Principal payments of $1.4 million are due quarterly. The Term Loan bears interest based on the London Interbank Offered Rate (LIBOR) plus a margin of 5% or a base rate plus a margin of 4%.

We entered into an $800.0 million senior secured asset-based revolving credit facility (the “ABL Credit Facility”) on September 29, 2017, pursuant to a credit agreement (the “ABL Credit Agreement”), which replaced our prior $800.0 million senior secured revolving credit facility dated September 30, 2016. The ABL Credit Facility is scheduled to mature on September 29, 2022, at which time all outstanding amounts under the ABL Credit Facility will be due and payable.

The amount available to be borrowed under the ABL Credit Facility is equal to the lesser of (a) $800.0 million and (b) a borrowing base formula based on the amount of accounts investment property,receivable, inventory, machinery, equipment and, if we were to so elect in the future subject to the satisfaction of certain conditions, fee-owned real estate of ours and our material domestic subsidiaries, subject to certain eligibility criteria and advance rates (collectively, the “Borrowing Base”). The aggregate amount of real estate, machinery and equipment that can be included in the Borrowing Base formula cannot exceed $200.0 million.

Borrowings under the ABL Credit Facility bear interest at a rate dependent on the average quarterly availability and is calculated according to a base rate (except in certain circumstances, based on the prime rate) or a Eurocurrency rate (except in certain circumstances, based on LIBOR) 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, a fee is payable quarterly on the unused portion of the total commitments. This fee accrues at a rate of either 0.25% or 0.375% depending upon the average usage of the facility. Borrowings under the ABL Credit Facility may be used for working capital and general corporate purposes.

During the first quarter of 2020, we increased our borrowings under the ABL Credit Facility to $450 million as a proactive measure in response to the extent related to the foregoing, general intangibles, documents, instruments and chattel paper, as well as 65%COVID-19 pandemic. The amount of the equity interestsborrowings under the ABL Credit Facility was subsequently reduced to $410 million at the end of their first-tier foreign subsidiaries.the second quarter. Based on our Borrowing Base as of June 30, 2020 and outstanding borrowings, we had approximately $117.8 million borrowing capacity available under the ABL Credit Facility. The weighted average interest rate on borrowings under our ABL Credit Facility was 1.9% and 3.7% during the six months ended June 30, 2020 and 2019, respectively.

The ABL Credit Agreement and Term Loan Credit Agreement contain customary affirmative and negative covenants including negative covenants restricting, among other things, our ability to incur debt, make investments, make certain restricted payments (including payments on certain other debt and external dividends), incur liens securing other debt, consummate certain fundamental transactions, enter into transactions with affiliates and consummate asset sales. The ABL Credit Agreement contains customary restrictive covenants, including a covenant which requires the Companyus to maintain a minimum fixed charge coverage ratio of 1.0 to 1.0 if availability under the ABL Credit Facility declines below certain circumstances. In addition,levels. The Term Loan Credit Agreement requires that the Company’s abilitynet cash proceeds of significant asset sales be used to undertakeprepay the Term Loan to the extent that the net cash proceeds are not used for reinvestment in assets useful to our business, certain actions, including, among other things, prepay certain junior debt, incur additional unsecured indebtednessacquisitions and make certain restricted payments depends on satisfactioninvestments, repayment of certain conditions, including, among other things, meeting minimum availability thresholds under the Credit Agreement.

The weighted average interest rate on borrowings under our ABL Credit Facility or the credit facilities was 3.7% and 2.2% duringfunding of debt repayments, redemptions or tenders of certain existing notes maturing prior to the nine months ended September 30, 2017 and 2016, respectively.

On June 7, 2017, the Company repurchased $41.7 millionmaturity of the 6.625% debentures due April 15, 2029, $59.4 million of the 6.50% senior notes due November 15, 2023Term Loan, in each case, subject to certain restrictions 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 limitations set forth 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 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 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 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.

Interest income was $0.8 million and $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, respectively.  

16. Income Taxes

The 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.Term Loan Credit Agreement.

 

22


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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

17.Interest paid was $44.3 million and $67.8 million for the three and six months ended June 30, 2020, respectively, and $47.4 million and $85.5 million for the three and six months ended June 30, 2019, respectively.

Interest income was $0.4 million and $0.9 million for the three and six months ended June 30, 2020, respectively, and $0.9 million and $1.7 million for the three and six months ended June 30, 2019, respectively.   

15. Derivatives

All derivatives are recorded as other current or noncurrent assets or other current or noncurrent liabilities in the Condensed Consolidated Balance Sheets at their respective fair values. Unrealized gains and losses related to derivatives are recorded in the Condensed Consolidated Statements of Operations, or 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 Companywe formally documentsdocument the hedge relationship and the risk management objective for undertaking the hedge. In addition, the Company assesseswe assess 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 isWe are exposed to the impact of foreign currency fluctuations in certain countries in which it operates. The exposure to foreignbased on our global operations. Foreign currency movements is limited in many countries becausefluctuations affect the operatingU.S. dollar value of revenues earned and expenses of its various subsidiaries and business unitsincurred in foreign currencies. We are substantially in the localalso exposed to currency of the country in which they operate. Torisk to the extent borrowings, sales, purchases, revenues, expenseswe own assets or incur liabilities, or enter into other transactions that are not in the localfunctional currency of the subsidiary or operating unit,in which we operate. We employ different practices to manage these risks, including where appropriate the Company is exposed touse of derivative instruments, such as foreign currency risk. Periodically,forwards. To the Company uses foreign exchange spot, forward and swap contracts to hedge exposures resulting from foreign exchange fluctuations. Accordingly,extent the gains and losses associated with the fair values of foreign currency exchange contractsderivatives are recognized currently in the Condensed Consolidated Statements of Operations, andthey are generally offset by gains and losses on underlying payables receivables, borrowings and net investments in foreign subsidiaries. The Company doesreceivables. We do not use derivative financial instruments for trading or speculative purposes. The aggregate notional value of the foreign currencyforward contracts at SeptemberJune 30, 20172020 and December 31, 20162019 was $136.7$111.4 million and $172.2$179.9 million, respectively. The fair values of foreign currency contracts were determined to be Level 2 under the fair value hierarchy and are valued using market exchange rates.

On March 13, 2012, the CompanyIn 2019 and 2020, we 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 aour floating-rate Term Loan based on LIBOR plusto a basis point spread.fixed-rate. The interest rate swaps, with a notional value of $400.0 million, at inception, were designated as fair valuecash flow hedges against changes in the valuevariability of the Company’s $450.0 million 8.25% senior notes due Marchcash flows associated with our Term Loan scheduled to mature on January 15, 2019,2024, which wereare 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 fixedvariable cash payments and the discounted expected variablefixed cash receipts. The variable cash receipts are based on the expectation of future interest rates derived from observed market interest rate curves. In addition, creditCredit 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 evaluatesWe evaluate the credit value adjustments of the interest rate swap agreements, which take into account the possibility of counterparty and the Company’sour own default.default, on at least a quarterly basis.

The Company’s

Our foreign currency contracts and interest rate swaps are subject to enforceable master netting agreements that allow the Companyus to settle positive and negative positions with the respective counterparties. Under these master netting agreements, net settlement generally permits us or the counterparty to determine the net amount payable for contracts due on the same date and in the same currency for similar types of derivative transactions. The Company settles foreign currencymaster netting agreements generally also provide for net settlement of all outstanding contracts with a counterparty in the case of an event of default or a termination event.

We manage credit risk for our derivative positions on a counterparty-by-counterparty basis, considering the net basis when possible. Foreign currency contracts that canportfolio exposure with each counterparty, consistent with our risk management strategy for such transactions. Our agreements with each of our counterparties contain a provision where we could be settleddeclared in default on our derivative obligations if we either default or, in certain cases, are capable of being declared in default of any of our indebtedness greater than specified thresholds. These agreements also contain a net basis are presented netprovision where we could be declared in default subsequent to a merger or restructuring type event if the Condensed Consolidated Balance Sheets. Interest rate swaps were settled on a gross basis and presented gross increditworthiness of the Condensed Consolidated Balance Sheets.resulting entity is materially weakened.

 

23


R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (“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 eachAs 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 whereby the Company could be declared in default subsequent to a merger or restructuring type event if the creditworthiness of the resulting entity is materially weakened.

At SeptemberJune 30, 20172020 and December 31, 2016,2019, the total fair valuevalues of the Company’s foreign currency contracts, which were the only derivatives not designated as hedges along with the accounts inour derivative financial instruments and their classifications on the Condensed Consolidated Balance Sheets in which the fair value amounts were included, was as follows:

 

 

September 30, 2017

 

 

December 31, 2016

 

Derivatives not designated as hedges

 

 

 

 

 

 

 

 

Prepaid expenses and other current assets

 

$

1.5

 

 

$

1.7

 

Accrued liabilities

 

 

1.0

 

 

 

1.5

 

 

Classification on Consolidated Balance Sheets

 

June 30, 2020

 

 

December 31, 2019

 

Derivative assets

 

 

 

 

 

 

 

 

 

Foreign currency contracts:

 

 

 

 

 

 

 

 

 

Not designated as hedging instruments

Prepaid expenses and other current assets

 

$

0.3

 

 

$

0.9

 

Interest rate swap agreements:

 

 

 

 

 

 

 

 

 

Designated as cash flow hedges

Other noncurrent assets

 

 

 

 

 

1.0

 

 

 

 

 

 

 

 

 

 

 

Derivative liabilities

 

 

 

 

 

 

 

 

 

Foreign currency contracts:

 

 

 

 

 

 

 

 

 

Not designated as hedging instruments

Accrued liabilities and other

 

$

0.2

 

 

$

0.1

 

Interest rate swap agreements:

 

 

 

 

 

 

 

 

 

Designated as cash flow hedges

Accrued liabilities and other

 

 

4.7

 

 

 

 

Designated as cash flow hedges

Other noncurrent liabilities

 

 

11.8

 

 

 

 

The pre-tax losses related to derivatives not designated as hedges(gains) recognized on derivative financial instruments in the Condensed Consolidated Statements of Operations for the three and ninesix months ended SeptemberJune 30, 20172020 and 20162019 were as follows: 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

Classification of Loss (Gain) Recognized in the Consolidated Statements of Operations

 

June 30, 2020

 

 

June 30, 2019

 

 

June 30, 2020

 

 

June 30, 2019

 

Derivatives not designated as hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency contracts

Selling, general and administrative expenses

 

$

(0.1

)

 

$

2.2

 

 

$

1.1

 

 

$

(1.5

)

Derivatives designated as cash flow hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap agreements

Interest expense, net

 

 

1.0

 

 

 

 

 

 

0.8

 

 

 

 

The pre-tax losses recognized on derivative financial instruments in the Condensed Consolidated Statements of Comprehensive Loss for the three and six months ended June 30, 2020 and 2019 were as follows:

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

Classification of (Gain) Loss Recognized in the

 

September 30,

 

 

September 30,

 

 

Condensed Consolidated Statements of Operations

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Derivatives not designated as hedges

 

Foreign currency contracts

Selling, general and administrative expenses

 

$

0.5

 

 

$

0.8

 

 

$

1.1

 

 

$

3.4

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30, 2020

 

 

June 30, 2019

 

 

June 30, 2020

 

 

June 30, 2019

 

Derivatives designated as cash flow hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap agreements

 

$

2.7

 

 

$

 

 

$

18.2

 

 

$

 

For derivatives designated as fair value hedges,

16. Dispositions and Acquisition

2020 Disposition

On March 2, 2020, we sold our Logistics Courier business within the pre-tax (gains) losses relatedBusiness Services segment for net proceeds of $9.7 million, subject to a working capital adjustment. The disposition of this business resulted in a loss of $9.1 million during the hedged items attributable to changessix months ended June 30, 2020, which was recorded in Other operating expense (income) in the hedged benchmark interest rate andCondensed Consolidated Statements of Operations.

2019 Dispositions

On October 25, 2019, we completed the offsetting (gain) loss on the related interest rate swaps for the three and nine months ended September 30, 2017 and 2016 were as follows:

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

Classification of (Gain) Loss Recognized in the

 

September 30,

 

 

September 30,

 

 

Condensed Consolidated Statements of Operations

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Fair Value Hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

Investment and other income-net

 

$

 

 

$

3.6

 

 

$

 

 

$

0.4

 

Hedged items

Investment and other income-net

 

 

 

 

 

(4.3

)

 

 

 

 

 

(0.8

)

Total ineffectiveness recognized

Investment and other income-net

 

$

 

 

$

(0.7

)

 

$

 

 

$

(0.4

)

The Company also recognized a net reduction to interest expensesale of $0.2 million and $1.0 million for the three and nine months ended September 30, 2016, respectively, related to the Company’s fair value hedges, which included interest accruals on the derivatives and amortizationsubstantially all of the basisGlobal Document Solutions (“GDS”) business for approximately $53.7 million. GDS primarily provides statements and print management services in Europe. The disposition resulted in a loss of $3.8 million, which was recorded in Other operating expense (income) in the hedged items.

Consolidated Statements of Operations.

 

24


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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

18. Fair Value MeasurementsOn May 8, 2019, we sold the R&D business within the Business Services segment for net proceeds of $11.6 million. The disposition resulted in a gain of $6.1 million during 2019, which was recorded in Other operating expense (income) in the Consolidated Statements of Operations.

CertainOn March 31, 2019, our subsidiary, RR Donnelley Editora e Grafica Ltda. (“RRD Brazil”), filed for bankruptcy liquidation in bankruptcy court in Brazil. The bankruptcy petition was approved by the court shortly thereafter and a bankruptcy trustee was appointed. As a result of the bankruptcy liquidation, we recorded a gain of $4.0 million in Other operating expense (income) during 2019, primarily reflecting the reclassification of cumulative currency translation adjustments into earnings and ongoing expenses associated with the bankruptcy proceedings. Subsequent to March 31, 2019, the operating results of RRD Brazil are no longer included in our consolidated results of operations except for legal fees associated with the bankruptcy proceedings. The operations of RRD Brazil had been included in the Business Services segment.

2019 Acquisition

On August 1, 2019, we completed an acquisition within the Business Services segment for a purchase price of $14.6 million consisting of $3.0 million in cash paid at closing, a $3.0 million note paid in January 2020 and $8.6 million in contingent consideration based on the future performance of the acquired business. The cost of the acquisition is primarily allocated to intangible assets and liabilities are requiredrelated to be recorded atclient relationships based on the fair value on a recurring basis. The following tables summarizeat 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

 

acquisition date.

As of September 30, 2017, the Company no longer held investments in LSC or Donnelley Financial common stock.  As of December 31, 2016, the Company’s investment in LSC and Donnelley Financial common stock were categorized as Level 2 securities as these shares were not registered and were valued based upon the closing stock price on the balance sheet date as they represented an identical equity instrument registered under the Securities Act of 1933, as amended.17. New Accounting Pronouncements

19. NewRecently Adopted Accounting Pronouncements

In 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 NovemberJune 2016, the FASB issued ASU No. 2016-18 “Statement2016-13 “Financial Instruments—Credit Losses (Topic 326): Measurement of Cash Flows (Topic 230): Restricted Cash.” This update requires that restricted cashCredit Losses on Financial Instruments” (“ASU 2016-13”), which changes the impairment model for most financial assets and cash equivalents be included as components of total cash and cash equivalents as presented oncertain other instruments. Under 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 impactentities are required to measure expected credit losses for financial results, but will result in a change in the presentation of restricted cashinstruments, including trade receivables, based on historical experience, current conditions and restricted cash equivalents within the Condensed Consolidated Statements of Cash Flows.

In August 2016, the FASB issuedreasonable forecasts. 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 are2016-13 is effective for public entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 20172019. We established a cross-functional implementation team to analyze the effect of Topic 326. The analysis included identifying pools of receivables, developing and are requiredassessing estimation methodologies, policy elections, and evaluating our business processes and internal controls to meet the accounting, reporting and disclosure requirements. On January 1, 2020, we adopted and applied Topic 326 using the modified retrospective method. The cumulative adjustment to retained earnings was $0.3 million.  

Accounting Pronouncements Issued and Not Yet Adopted

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform, which provides companies with optional guidance, including expedients and exceptions for applying generally accepted accounting principles to contracts and other transactions affected by reference rate reform, such as the London Interbank Offered Rate (LIBOR). This new standard was effective upon issuance and generally can be retroactively adopted. Early adoption is permitted, including adoption in an interim period. The Company isapplied to applicable contract modifications through December 31, 2022. We are currently evaluating the impact of ASU No. 2016-152020-04 on its Condensed Consolidated Statements of Cash Flows.the consolidated financial statements.

In March 2016,December 2019, 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 “Leases2019-12 “Simplifying the Accounting for Income Taxes (Topic 842)740)(“ASU 2019-12”), 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 andsimplifies the accounting for sales-typeincome taxes by eliminating certain exceptions to the guidance in Accounting Standards Codification (“ASC”) 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and direct financing leases.the recognition of deferred tax liabilities for outside basis differences. The standard requires a modified retrospective approach for leases that exist or are entered into after the beginningalso simplifies aspects of the earliest comparative periodaccounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the financial statementstax basis of goodwill. ASU 2019-12 will be effective for public entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, however early adoption 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 ispermitted. We are currently evaluating the impact of ASU 2016-02.2019-12 on the consolidated financial statements.

In May 2014,August 2018, the FASB issued ASU No. 2014-09 “Revenue from Contracts with Customers (Topic 606)2018-14 “Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans” (“ASU 2018-14”), which outlines a single comprehensive model for entitiesremoves certain disclosures that are no longer cost beneficial and also includes additional disclosures 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. During 2016,improve the FASB issued 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): Deferraloverall usefulness of the Effective Date,”disclosure requirements to financial statement users. ASU 2018-14 will be effective for the Company on January 1, 2018. The standard allows the option of either a full retrospectivepublic entities for fiscal years beginning after December 15, 2020, however early 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.

26


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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

Based upon preliminary results of management’s evaluation, the most impactful aspects of the guidance relate to the timing of recognition 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 International segments whichpermitted. We are currently recognized whenevaluating the products are completed and shipped toimpact of ASU 2018-14 on the customer. 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 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 Company will adopt the standard in the first quarter of 2018 and currently anticipates applying the modified retrospective approach.consolidated financial statements.

 

 

25



Item

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

Company Overview

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

Spinoff Transactions

On October 1, 2016, we completed the previously announced separation of our financial communications and data services business (“Donnelley Financial Solutions, Inc.” or “Donnelley Financial”) and our publishing and retail-centric print services and office products business (“LSC Communications, Inc.” or “LSC”) into two separate publicly-traded companies (the "Separation"). We 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 RRD stockholders (the “Distribution”). The Distribution was made to RRD 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 RRD 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, we held 6.2 million shares of Donnelley Financial 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 financial results of Donnelley Financial and LSC for periods prior to the Distribution have been reflected within the disclosures of this Management’s Discussion and Analysis of Financial Condition and Results of Operations as discontinued operations. Additionally, sales from RRD to Donnelley Financial and LSC previously eliminated in consolidation have been recast and are now shown as external sales of RRD within the financial results of continuing operations. The Company’s cash flows for all periods prior to the 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, we affected a one-for-three reverse stock split for RRD common stock (the “Reverse Stock Split”). The Reverse Stock Split was approved by our Board of Directors on September 14, 2016 and previously approved by our 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 our common stock was 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.

Revision of Net Sales and Cost of Sales

During the third quarter of 2017, the Company identified an error in the 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 Condensed Consolidated Financial Statements for additional information regarding the revision.

Segment Descriptions

Our segments and their respective product and service offerings are summarized below:

Variable Print

This segment includes our U.S. short-run and transactional printing operations. This segment’s primary product offerings include commercial and digital print, direct mail, labels, statement printing, forms and packaging.


StrategicBusiness Services

This segment includes our logistics services, print management offeringsBusiness Services provides customized solutions at scale to help clients inform, service and digital and creative solutions.

International

This segment includes our non-U.S. printing operations in Asia, Latin America, Canada and Europe. Thistransact with their customers. The segment’s primary product and service offerings include commercial print, logistics, packaging, books, catalogs, magazines, retail inserts,labels, statement printing, commercialsupply chain management, forms and business process outsourcing. This segment also includes all of our operations in Asia, Europe, Canada and Latin America.

Marketing Solutions

Marketing Solutions leverages an integrated portfolio of data analytics, creative services and multichannel execution to deliver comprehensive, end-to-end solutions. The segment’s primary product and service offerings include direct marketing, in-store marketing, digital print, forms, labels, logistics services, directories,kitting, fulfillment, digital and creative solutions and direct mail. Additionally, this segment includes our 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.list services.

Corporate

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

Products and Services

We separately report our net sales, related costs of sales and gross profit for our product and service offerings. Our product offerings primarily consist of commercial andprint, packaging, labels, statements, direct marketing, digital print statement printing, direct mail, packaging, labels, forms, magazines, catalogs, retail inserts, books, directories, manuals and other related products procured through our printfulfillment, supply chain management offering.and forms. Our service offerings primarily consist of logistics, certain business process outsourcing services and digital and creative solutions.

Business AcquisitionsExecutive Overview

Response to COVID-19

The COVID-19 pandemic has continued to create significant business challenges for companies around the world, including many of our clients across the broad number of industries we serve. In response to the pandemic, we have established a formal operating plan that we are utilizing to manage our business through this new and Dispositionschallenging global business environment.  Our operating plan consists of three very clear priorities: to sustain operational and supply chain continuity, to protect the health and safety of our employees, and to effectively manage our business performance and liquidity throughout this very volatile period.

On August 4, 2016,

SUPPLY CHAIN CONTINUITY

We have activated our business continuity plans and are leveraging our strong supply chain partnerships to continue to meet the ongoing needs of our 50,000 global clients.We remain fully operational across the 29 countries and more than 250 facilities.The majority of our printing and distribution operations have been classified as essential, and therefore, remain open.  

26


EMPLOYEES HEALTHAND SAFETY

We are continually evolving our policies and procedures to adhere to the latest best practices being provided by the Centers for Disease Control (“CDC”) and World Health Organization (“WHO”). Our cross-functional COVID Task Force created at the onset of the pandemic has developed safety measures, policies, and procedures for our workplace. We have implemented flexible working policies, including telecommuting and staggered shifts, while allowing for voluntary leaves of absence. Currently, approximately 10,000 employees, including those providing essential services are working from home. For our offices, we have developed a phased approach for slowly and cautiously ending remote work arrangements when deemed practical. We are also enforcing social distancing policies within our manufacturing facilities, and we are providing training for adherence to personal hygiene best practices in line with CDC and WHO guidelines. In response to the CDC recommendation that all individuals in the U.S. wear face masks, we are supplying our essential employees with a combination of disposable and cloth masks, as well as face shields, to ensure their safety and protection.  With personal protective equipment in short supply around the world, our teams have exercised ingenuity and leadership to develop protective equipment within our own operations using our own equipment.

BUSINESS IMPACT

Although the COVID-19 pandemic significantly impacted the Company’s financial results during the second quarter, we believe that there are three primary factors that are helping mitigate the top line impact from the pandemic. These include our diverse portfolio of products and services, the lack of client concentration across industries and the products and services we have introduced to meet the evolving needs of our clients.

The extent the outbreak will ultimately impact our business, results of operations, financial position and cash flows will depend on future developments which are highly uncertain and cannot be fully predicted or estimated at this time. However, amidst the global uncertainty posed by COVID-19, we are positioning the company to weather an economic downturn and protect the short and long-term interests of our stakeholders.  These decisions are difficult but critical to preserving the short-term financial flexibility of the Company acquired Precision Dialogue,as COVID-19 presents increasing challenges across the industries we serve.  We are freeing up capital to ensure we are prepared for the range of scenarios we may experience as a providerresult of email marketing, direct mail marketingthe virus. As a result, we implemented several business actions, including the implementation of an employee furlough program with RRD paid medical benefits. We have temporarily closed those production facilities most heavily impacted by client volume decreases, shifting that production to other facilities to lower costs while continuing to meet client requirements. We suspended all 2020 employee merit increases. We accelerated cost reduction initiatives, and will continue to assess opportunities for further reduction, and have delayed capital projects and reduced consulting and other services with operations in the United States.discretionary spend. We suspended our quarterly dividend effective April 6, 2020.

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

For further informationTo protect liquidity, we continue to hold more cash than has been typical and borrowings under our credit facility remain temporarily elevated. As of June 30, 2020 borrowings under our ABL Credit Facility are $410 million and cash and cash equivalents on the above acquisitions and dispositions, see Note 3, Acquisitions and Dispositions, to theour Condensed Consolidated Financial Statements.Balance Sheet is $341.9 million.

Executive Overview

ThirdSecond Quarter Overview

Net sales increaseddecreased by $9.3$346.5 million, or 0.5%23.0%, for the third quarter of 2017three months ended June 30, 2020 compared to the same period in the prior year. There was a $5.32019. Net sales decreased $94.2 million or 0.3%, increase due to business dispositions, primarily the Global Document Solutions (“GDS”) business and our Logistics Courier business, and $9.8 million due to unfavorable changes in foreign exchange rates. After including the impact of changes in foreign exchange rates, the increase in netNet sales wasalso decreased due to increased volumelower volumes resulting from the COVID-19 pandemic, lower pricing, and lower fuel surcharges in the International segment driven by the Asia reporting unit, partially offset by lower volume in the Variable Print segment, lower postage pass-through sales in the Strategic Services segment and price pressures across the segments.logistics business.

The Company continuesWe continue to strategically assess opportunities to reduce itsour cost structure and enhance productivity throughout the business. During the ninethree months ended SeptemberJune 30, 2017, the Company2020, we realized cost savings from previous restructuring activities including the reorganization of administrative and support functions across all segments, as well as several facility consolidations.  

Net cash used in operating activities for the ninesix months ended SeptemberJune 30, 20172020 was $12.6$44.2 million as compared to cash provided by operating activities of $7.8$117.1 million for the ninesix months ended SeptemberJune 30, 2016.2019. The decrease in net cash flow from operating activities wassignificant improvement is primarily driven by working capital improvements and lower cash earnings, partially offsettax and interest payments versus the prior year.

While we have a diversified client base with limited concentration, we do have clients that operate in industries hard-hit by the timingeffects of supplierCOVID-19, including airlines, hotel chains, cruise lines, and customer payments and lower interest, spinoff-related transaction and tax payments.


Financial Performance: Three Months Ended September 30, 2017

The changes inrestaurants.  During the Company’s incomesecond quarter, we saw the cancellation of some programmatic projects from operations, operating margin, net earnings (loss) attributablethese clients as they worked to RRD common stockholders and net earnings (loss) attributable to RRD common stockholders per diluted share formitigate the three months ended September 30, 2017, fromimpact of the three 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 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.virus on their business.

 

2016 restructuring, impairment

27


Outlook

The Company continues to aggressively accelerate both permanent and other charges - net: included pre-tax charges of $9.7 million for employee termination costs; $0.1 million for a net gain ontemporary cost reduction actions to lessen the sale of previously impaired other long-lived assets; $0.6 million of lease termination and other restructuring costs; and $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.

Other postretirement benefit plan obligation (OPEB) curtailment gains:  included a pretax gain of $19.7 million ($12.2 million after-tax)impact from lower sales volume 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 $0.7 million ($0.4 million after-tax) related to legal, accounting and other expenses for the three months ended September 30, 2016 associated with contemplated or completed acquisitions.

Loss on dispositions of businesses: included a pre-tax loss on the 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 $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 ($2.1 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 debt-for-equity exchange of senior notes, the repurchase of debentures and senior notes and the amendment and restatement of the credit agreement during the nine 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 $94.0 million ($96.1 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 a pre-tax gain of $1.3 million ($0.7 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, 2017. The nine months ended September 30, 2016 included pre-tax gain of $0.1 million ($0.1 million after-tax) resulting from the sale of certain of the Company’s affordable housing investments.

Operations: reflected lower volume in certain reporting units within the International and Variable Print segments, price pressures 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, reduced bad debt, legal and depreciation and amortization expenses and cost control initiatives.  

OUTLOOK

Competitive Environment

Our 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.COVID-19 pandemic. In addition, technological changes,the Company is also receiving pandemic-related orders in many parts of its business, including the electronic distribution of documents and data, online distribution and hosting of media content, and advances inspecial notification letters, government mailings, product packaging, labels, signage, mail-in ballots, test kit assembly, emergency kits, protective face shields, digital printing, print-on-demand and internet technologies, continue to impact the market for some of our products and 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 our competitive strengths is that we offer a wide array of communications products and services, including print and content management, which provide differentiated solutions for our customers. We 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 store printed materials and to 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 our creative and design, content management, digitalCOVID-19 specific consumer research and print production, supply chain management and distribution services to address our 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 and fragmented.

We believe that, across our range of products and services, competition is based primarily on quality and the ability to service the special needs of customers at a competitive price. Therefore, we believe we need to continue to differentiate our product and service offerings and aggressively manage our cost structure to remain competitive.

We also operate in a highly competitive and fragmented 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 well as regional or niche freight brokerages, asset-based carriers offering brokerage and/or logistics services, wholesale intermodal transportation service providers and rail carriers. In addition, we may from time to time compete against carriers’ internal sales forces or shippers’ internal transportation departments.

Seasonality

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


Raw Materials

The primary raw materials we use in our print businesses are paper and ink. We negotiate with leading suppliers to maximize our purchasing efficiencies. Some of the paper we use is supplied directly by 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 2017 and volatility in the future is expected. Generally, customers directly absorbanalytics. These orders further mitigate the impact of changing prices on customer-supplied paper. With respect to paper we purchase, we have historically passed most changes in price through to our customers. We believe contractual arrangements and industry practicefrom COVID-19. The extent the outbreak will support our continued ability to pass on any future paper price increases, but there is no assurance that market conditions will continue to enable us to successfully do so. We believe that the paper supply is consolidating, and there may be shortfalls in the future in supplies necessary to meet the demands of the entire marketplace. Higher paper prices and tight paper supplies may have an impact on customers’ demand for printed products. We 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 our ink requirements. We may be impacted by changes in prices for these by-products in the future.

We continue to monitor the impact of changes in the price of crude oil and other energy costs, whichultimately impact our ink suppliers, logistics operations and manufacturing costs. Crude oil, energy prices and market cost of transportation continue to be volatile. We believe our logistics operations will continue to be able to pass a substantial portion of any increases in fuel prices directly to our customers in order to offset the impact of related cost increases. Decreases in fuel prices are also passed on to customers which negatively impact 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 our manufacturing costs. We cannot predict sudden changes in energy prices and the impact that possible future changes in energy prices might have upon either future operating costs or customer demand or the related impact either will have on our consolidated annualbusiness, results of operations, financial position or cash flows.

Distribution

Our products are distributed to end-users through U.S. and foreign postal services, through retail channels, electronically or by direct shipment to customer facilities. Through our logistics operations, we manage the distribution of most customer products we 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 Mail in the U.S., we work closely with our customers and the USPS to offer innovative products and mail preparation services to minimize postage costs. While we do not directly absorb the impact of higher postal rates on our 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 market dominant mail categories would increase annually by an amount equal to or slightly less than the Consumer Price Index (the “CPI”). 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 implemented 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-dominant mail products. Absent such legislative changes, the USPS filed with the Postal Regulatory Commission on October 6, 2017 for a price increase of 1.905% 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 achieving the original objectives of the law. The study still in process and their recommendations are due by the end of 2017. The impact of these actions cannot currently be estimated.

Mail transportation services to the USPS facilities across the country accounted for approximately 31% of the Company’s logistics revenues during the nine months ended September 30, 2017.


Goodwill Impairment Assessment

We 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, 2017 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 comparedwill depend on future developments which are highly uncertain and cannot be fully predicted or estimated at this time.  In the nearer term, the Company expects third quarter sales 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 the September 30, 2017 interim assessment, management concluded that otherbe lower than the goodwill impairment recognizedprior year reflecting the continued impact from the COVID-19 pandemic, census work in the digitalprior year period that will not repeat, 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 changesa decline due to expectations of future financial results and key valuation assumptions. Such changes could result in revisions of management’s estimates of the fair value of the Company’s reporting units and could result in a material impairment of goodwill as of October 31, 2017, the Company’s next annual measurement date.

Pension and Other Postretirement Benefit Plans

The funded status of our 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. We review the actuarial assumptions on an annual basis as of December 31. Based on current estimates, we expect to make cash contributions of approximately $17.0 million to our pension and other postretirement benefits plans for the full year 2017, of which $12.4 million has been contributed during the nine months ended September 30, 2017.  

Income taxes

As of December 31, 2016 the Company had 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 next twelve months we may be required to establish a valuation allowance to reduce the carrying value of certain U.S. deferred tax assets.


Financial Review

In the financial review that follows, we discuss our consolidated results of operations, financial position, cash flows and certain other information. This discussion should be read in conjunction with our Condensed Consolidated Financial Statements and related notes.recent business dispositions.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBERJUNE 30, 20172020 AS COMPARED TO THE THREE MONTHS ENDED SEPTEMBERJUNE 30, 20162019

The following table shows the results of continuing operations for the three months ended SeptemberJune 30, 20172020 and 2016, which reflects the results of acquired businesses from the relevant acquisition dates:2019:

Three Months Ended September 30,

 

Three Months Ended

 

 

 

 

 

 

 

 

 

2017

 

 

2016

 

 

$ Change

 

 

% Change

 

June 30,

 

 

 

 

 

 

 

 

 

(in millions, except percentages)

 

2020

 

 

2019

 

 

$ Change

 

 

% Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in millions, except percentages)

 

Products net sales

$

1,322.0

 

 

$

1,327.8

 

 

$

(5.8

)

 

 

(0.4

%)

$

947.6

 

 

$

1,214.7

 

 

$

(267.1

)

 

 

(22.0

%)

Services net sales

 

412.9

 

 

 

397.8

 

 

 

15.1

 

 

 

3.8

%

 

214.6

 

 

 

294.0

 

 

 

(79.4

)

 

 

(27.0

%)

Total net sales

 

1,734.9

 

 

 

1,725.6

 

 

 

9.3

 

 

 

0.5

%

 

1,162.2

 

 

 

1,508.7

 

 

 

(346.5

)

 

 

(23.0

%)

Products cost of sales (exclusive of depreciation and amortization)

 

1,064.1

 

 

 

1,030.7

 

 

 

33.4

 

 

 

3.2

%

 

773.5

 

 

 

994.1

 

 

 

(220.6

)

 

 

(22.2

%)

Services cost of sales (exclusive of depreciation and amortization)

 

346.4

 

 

 

330.7

 

 

 

15.7

 

 

 

4.7

%

 

173.9

 

 

 

236.4

 

 

 

(62.5

)

 

 

(26.4

%)

Total cost of sales

 

1,410.5

 

 

 

1,361.4

 

 

 

49.1

 

 

 

3.6

%

 

947.4

 

 

 

1,230.5

 

 

 

(283.1

)

 

 

(23.0

%)

Products gross profit

 

257.9

 

 

 

297.1

 

 

 

(39.2

)

 

 

(13.2

%)

 

174.1

 

 

 

220.6

 

 

 

(46.5

)

 

 

(21.1

%)

Services gross profit

 

66.5

 

 

 

67.1

 

 

 

(0.6

)

 

 

(0.9

%)

 

40.7

 

 

 

57.6

 

 

 

(16.9

)

 

 

(29.3

%)

Total gross profit

 

324.4

 

 

 

364.2

 

 

 

(39.8

)

 

 

(10.9

%)

 

214.8

 

 

 

278.2

 

 

 

(63.4

)

 

 

(22.8

%)

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

 

207.7

 

 

 

218.1

 

 

 

(10.4

)

 

 

(4.8

%)

 

156.0

 

 

 

199.0

 

 

 

(43.0

)

 

 

(21.6

%)

Restructuring, impairment and other charges-net

 

33.8

 

 

 

10.8

 

 

 

23.0

 

 

nm

 

Restructuring, impairment and other expense-net

 

28.5

 

 

 

16.0

 

 

 

12.5

 

 

 

78.1

%

Depreciation and amortization

 

47.0

 

 

 

51.0

 

 

 

(4.0

)

 

 

(7.8

%)

 

38.2

 

 

 

40.0

 

 

 

(1.8

)

 

 

(4.5

%)

Other operating expense

 

 

 

 

0.3

 

 

 

(0.3

)

 

nm

 

 

8.0

 

 

 

2.3

 

 

 

5.7

 

 

nm

 

Income from operations

$

35.9

 

 

$

84.0

 

 

$

(48.1

)

 

 

(57.3

%)

(Loss) income from operations

$

(15.9

)

 

$

20.9

 

 

$

(36.8

)

 

nm

 

Consolidated

Net sales of products for the three months ended SeptemberJune 30, 20172020 decreased $5.8$267.1 million, or 0.4%22.0%, to $1,322.0$947.6 million versus the same period in 2016, including2019. The second quarter of 2020 included a $5.1$43.0 million or 0.4%, increasedecrease in product sales due to business dispositions and a $9.4 million decrease due to unfavorable changes in foreign exchange rates. Net sales of products also decreased due to higher volume within the Asia reporting unit, partially offset by lower volume as a result of the COVID-19 pandemic, including reduced orders from customers in the Variable Printindustries especially hard-hit such as airlines, lodging, restaurants, non-essential retailers, and Strategic Services segmentseducation, and certain other reporting units within the International segment, as well as price pressures.lower pricing.

Net sales from services for the three months ended SeptemberJune 30, 2017 increased $15.12020 decreased $79.4 million, or 3.8%27.0%, to $412.9$214.6 million versus the same period in 2016, including2019. The second quarter of 2020 included a $0.2$51.2 million or 0.1%, increasedecrease due to changes in foreign exchange rates. Net sales increased primarily duebusiness dispositions and $10.5 million decrease attributable to higher volume as well as increasedlower fuel surcharges in the logistics partially offset by lower postage pass-through sales within logistics, lower volume in business process outsourcing and price pressures.business.

Products cost of sales increased $33.4 million, or 3.2%, for the three months ended SeptemberJune 30, 20172020 decreased $220.6 million, or 22.2%, to $773.5 million versus the same period in the prior year,2019. Products cost of sales decreased 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 certain reporting units within the International segment, along withbusiness dispositions, cost control initiatives, and lower volumes across the organization.all products. As a percentage of net sales, products cost of sales increased 2.9decreased 0.2 percentage points for the three months ended SeptemberJune 30, 20172020 versus the same period in 2016, primarily due to an unfavorable mix across the segments.2019.

Services cost of sales increased $15.7decreased $62.5 million, or 4.7%26.4%, for the three months ended SeptemberJune 30, 20172020 versus the same period in the prior year. Services cost of sales increased2019, primarily due to higher volume in freight brokeragebusiness dispositions and higher costs of transportation in the logistics reporting unit, partially offset by lower postage pass-through sales within logistics and reduced business process outsourcing volume.cost control initiatives. As a percentage of net sales, services cost of sales increased 0.8 percentage pointsremained essentially unchanged for the three months ended SeptemberJune 30, 2017 versus the same period in 2016, primarily due to unfavorable revenue mix in business process outsourcing.2020.

28


Products gross profit decreased $39.2$46.5 million to $257.9$174.1 million for the three months ended SeptemberJune 30, 20172020 versus the same period in 20162019, primarily due to price pressures and an unfavorable mix in the Variable Print and International segments, partially offset by cost control initiatives.lower volume. Products gross margin decreasedincreased from 22.4%18.2% in 2019 to 19.5%, driven by price pressures and an unfavorable revenue mix within the International and Variable Print segment, partially offset by cost control initiatives.18.4% in 2020.

Services gross profit decreased $0.6$16.9 million to $66.5$40.7 million for the three months ended SeptemberJune 30, 20172020 versus the same period in 20162019, primarily due to decreased 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.lower volume. Services gross margin decreased from 16.9%19.6% in 2019 to 16.1%, reflecting an unfavorable revenue mix and price pressures.19.0% in 2020.

Selling, general and administrative expenses decreased $10.4$43.0 million to $207.7$156.0 million for the three months ended SeptemberJune 30, 20172020 versus the same period in 20162019 reflecting lower corporatecost control initiatives, and business dispositions. As a percentage of net sales, selling, general and administrative expenses increased from 13.2% to 13.4% for the three months ended June 30, 2020 versus the same period in 2019.

For the three months ended June 30, 2020, net restructuring, impairment and other overhead costscharges of $28.5 million included $13.9 million for other restructuring charges, primarily consulting charges, and $13.0 million for employee termination costs. See Note 6, Restructuring, Impairment and Other, within the Notes to the Condensed Consolidated Financial Statements for further discussion.

Depreciation and amortization decreased $1.8 million to $38.2 million for the three months ended June 30, 2020 compared to the same period in 2019. Depreciation and amortization included $5.2 million and $5.8 million of amortization of other intangible assets related to our operations priorclient relationships, trade names, trademarks, licenses and agreements for the three months ended June 30, 2020 and 2019, respectively.

Other operating expense for the three months ended June 30, 2020 was $8.0 million compared to $2.3 million in the same period in 2019. Other operating expenses in the current period primarily included $4.3 million related to the Separation,ongoing SEC and DOJ investigations and $3.7 million related to additional loss on previous business dispositions recorded in the current quarter. The prior year expense primarily included an increase in reserves for an unfavorable state sales tax matter and expenses related to the ongoing SEC and DOJ investigations, partially offset by the net gain on the sale of our R&D business within the Business Services segment.

Loss from operations for the three months ended June 30, 2020 was $15.9 million, a decrease of $36.8 million compared to the three months ended June 30, 2019.

 

Three Months Ended

 

 

 

 

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

 

 

 

 

2020

 

 

2019

 

 

$ Change

 

 

% Change

 

 

(in millions, except percentages)

 

Interest expense-net

$

34.6

 

 

$

38.1

 

 

$

(3.5

)

 

 

(9.2

%)

Investment and other income-net

 

(3.4

)

 

 

(2.2

)

 

 

(1.2

)

 

 

54.5

%

Loss on debt extinguishment

 

0.4

 

 

 

 

 

 

0.4

 

 

nm

 

Net interest expense decreased by $3.5 million for the three months ended June 30, 2020 versus the same period in 2019, primarily due to repurchases of higher interest rate debt combined with lower healthcare costsaverage interest rates on the ABL Credit Facility and Term Loan, partially offset by the impact of the debt exchange transactions.

Investment and other income, net for the three months ended June 30, 2020 and 2019 was $3.4 million and $2.2 million, respectively, and principally comprised of net OPEB and pension income.

Loss on debt extinguishment for the three months ended June 30, 2020 was $0.4 million. See Note 14, Debt, within the Notes to the Condensed Consolidated Financial Statements for further discussion.

 

Three Months Ended

 

 

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

 

 

2020

 

 

2019

 

 

$ Change

 

 

% Change

 

(in millions, except percentages)

Loss before income taxes

$

(47.5

)

 

$

(15.0

)

 

$

(32.5

)

 

nm

Income tax expense (benefit)

 

9.7

 

 

 

(7.6

)

 

 

17.3

 

 

nm

Effective income tax rate

 

20.4

%

 

 

50.7

%

 

 

 

 

 

 

The effective income tax rate three months ended June 30, 2020 was an expense of 20.4% primarily driven by the mix of earnings and the tax impact of our interest expense. The effective income tax rate for the three months ended June 30, 2019 was a benefit of 50.7%.

Net loss attributable to RRD common stockholders was $57.2 million for the three months ended June 30, 2020 compared to $7.0 million for the three months ended June 30, 2019.

29


Information by Segment

Business Services

 

Three Months Ended

 

 

 

June 30,

 

 

 

2020

 

 

2019

 

 

 

(in millions, except percentages)

 

Net sales

 

$

948.2

 

 

$

1,231.2

 

Income from operations

 

 

19.5

 

 

 

41.6

 

Operating margin

 

 

2.1

%

 

 

3.4

%

Restructuring, impairment and other expense-net

 

 

9.8

 

 

 

13.8

 

Other operating expense (income)

 

 

0.5

 

 

 

(0.1

)

Net sales for the Business Services segment for the three months ended June 30, 2020 were $948.2 million, a decrease of $283.0 million, or 23.0%, compared to 2019. Net sales decreased $94.2 million due to business dispositions, primarily the GDS and Logistics Courier businesses and $9.8 million due to unfavorable changes in foreign exchange rates. Net sales also decreased due to lower volume as a result of the COVID-19 pandemic, including reduced orders from those customers in industries especially hard-hit, lower pricing, and lower fuel surcharges in the logistics business segment. The following table summarizes net sales by products and services in the Business Services segment:

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

 

 

 

Products and Services

 

2020

 

 

2019

 

 

$ Change

 

 

% Change

 

 

 

(in millions, except percentages)

 

Commercial print

 

$

275.5

 

 

$

413.5

 

 

$

(138.0

)

 

 

(33.4

%)

Logistics

 

 

155.2

 

 

 

208.0

 

 

 

(52.8

)

 

 

(25.4

%)

Packaging

 

 

150.4

 

 

 

162.6

 

 

 

(12.2

)

 

 

(7.5

%)

Labels

 

 

113.7

 

 

 

119.6

 

 

 

(5.9

)

 

 

(4.9

%)

Statements

 

 

101.9

 

 

 

133.6

 

 

 

(31.7

)

 

 

(23.7

%)

Supply chain management

 

 

64.9

 

 

 

74.1

 

 

 

(9.2

)

 

 

(12.4

%)

Forms

 

 

48.6

 

 

 

59.2

 

 

 

(10.6

)

 

 

(17.9

%)

Business process outsourcing

 

 

38.0

 

 

 

60.6

 

 

 

(22.6

)

 

 

(37.3

%)

Total Business Services

 

$

948.2

 

 

$

1,231.2

 

 

$

(283.0

)

 

 

(23.0

%)

Business Services segment income from operations decreased $22.1 million to $19.5 million for the three months ended June 30, 2020, primarily due to lower volume partially offset by $5.5 million attributable to favorable changes in foreign exchange rates, lower variable compensation expense, and other cost control initiatives,initiatives.

Marketing Solutions

 

 

Three Months Ended

 

 

 

June 30,

 

 

 

2020

 

 

2019

 

 

 

(in millions, except percentages)

 

Net sales

 

$

214.0

 

 

$

277.5

 

(Loss) income from operations

 

 

(1.8

)

 

 

6.0

 

Operating margin

 

 

(0.8

%)

 

 

2.2

%

Restructuring and other expense-net

 

 

2.2

 

 

 

0.5

 

Net sales for the Marketing Solutions segment for the three months ended June 30, 2020 were $214.0 million, a decrease of $63.5 million, or 22.9%, compared to 2019. Net sales decreased primarily due to lower volume as a result of the COVID-19 pandemic and lower pricing, partially offset by higher transactional foreign currencyvolume in direct marketing attributable to the 2020 Census contract. The following table summarizes net sales by products and services in the marketing solutions segment:

30


 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

 

 

 

Products and Services

 

2020

 

 

2019

 

 

$ Change

 

 

% Change

 

 

 

(in millions, except percentages)

 

Direct marketing

 

$

108.0

 

 

$

137.0

 

 

$

(29.0

)

 

 

(21.2

%)

Digital print and fulfillment

 

 

84.6

 

 

 

115.1

 

 

 

(30.5

)

 

 

(26.5

%)

Digital and creative solutions

 

 

21.4

 

 

 

25.4

 

 

 

(4.0

)

 

 

(15.7

%)

Total Marketing Solutions

 

$

214.0

 

 

$

277.5

 

 

$

(63.5

)

 

 

(22.9

%)

Marketing Solutions segment loss from operations three months ended June 30, 2020 was $1.8 million, a decrease of $7.8 million compared to the same period in 2019, primarily due to lower volume and higher restructuring expenses, partially offset by lower variable compensation expense.

Corporate

Corporate operating expenses during the three months ended June 30, 2020 were $33.6 million, an increase of $6.9 million compared to the same period in 2019. The increase was primarily driven by higher restructuring and other expense and higher other operating expenses which are related to the ongoing SEC and DOJ investigations, and $4.2 million in fees related to recent debt transactions, partially offset by a $4.8 million decrease in healthcare costs, lower variable incentive compensation.compensation expense, and other cost control initiatives. The following table summarizes unallocated operating expenses and certain items impacting comparability within the activities presented as Corporate:

 

 

Three Months Ended

 

 

 

June 30,

 

 

 

2020

 

 

2019

 

 

 

(in millions)

 

Operating expenses

 

$

33.6

 

 

$

26.7

 

Restructuring and other expense-net

 

 

16.5

 

 

 

1.7

 

Other operating expense

 

 

7.5

 

 

 

2.4

 

RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2020 AS COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2019

The following table shows the results of operations for the six months ended June 30, 2020 and 2019:

Six Months Ended

 

 

 

 

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

 

 

 

 

2020

 

 

2019

 

 

$ Change

 

 

% Change

 

 

(in millions, except percentages)

 

Products net sales

$

2,093.1

 

 

$

2,445.6

 

 

$

(352.5

)

 

 

(14.4

%)

Services net sales

 

478.6

 

 

 

585.0

 

 

 

(106.4

)

 

 

(18.2

%)

Total net sales

 

2,571.7

 

 

 

3,030.6

 

 

 

(458.9

)

 

 

(15.1

%)

Products cost of sales (exclusive of depreciation and amortization)

 

1,696.3

 

 

 

2,002.9

 

 

 

(306.6

)

 

 

(15.3

%)

Services cost of sales (exclusive of depreciation and amortization)

 

386.8

 

 

 

471.2

 

 

 

(84.4

)

 

 

(17.9

%)

Total cost of sales

 

2,083.1

 

 

 

2,474.1

 

 

 

(391.0

)

 

 

(15.8

%)

Products gross profit

 

396.8

 

 

 

442.7

 

 

 

(45.9

)

 

 

(10.4

%)

Services gross profit

 

91.8

 

 

 

113.8

 

 

 

(22.0

)

 

 

(19.3

%)

Total gross profit

 

488.6

 

 

 

556.5

 

 

 

(67.9

)

 

 

(12.2

%)

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

 

335.1

 

 

 

398.6

 

 

 

(63.5

)

 

 

(15.9

%)

Restructuring, impairment and other-net

 

60.4

 

 

 

33.1

 

 

 

27.3

 

 

 

82.5

%

Depreciation and amortization

 

79.0

 

 

 

82.7

 

 

 

(3.7

)

 

 

(4.5

%)

Other operating expense (income)

 

21.2

 

 

 

(2.1

)

 

 

23.3

 

 

nm

 

(Loss) income from operations

$

(7.1

)

 

$

44.2

 

 

$

(51.3

)

 

nm

 

31


Consolidated

Net sales of products for the six months ended June 30, 2020 decreased $352.5 million, or 14.4%, to $2,093.1 million versus the same period in 2019. The six months ended June 30, 2020 included a $98.3million decrease due to business dispositions and a $15.9 million decrease due to unfavorable changes in foreign exchange rates. Net sales of products also decreased due to lower volume as a result of the COVID-19 pandemic, including reduced orders from customers in industries especially hard-hit such as airlines, lodging, restaurants, non-essential retailers and education, and lower pricing.

Net sales from services for the six months ended June 30, 2020 decreased $106.4 million, or 18.2%, to $478.6 million versus the same period in 2019. Net sales from services decreased $83.6 million due to business dispositions and $11.8 million attributable to lower fuel surcharges in the logistics business. The remaining decrease is related to lower volume as a result of the COVID-19 pandemic.  

Products cost of sales for the six months ended June 30, 2020 decreased $306.6 million, or 15.3%, to $1,696.3 million versus the same period in 2019 primarily due to lower volume, business dispositions and cost control initiatives.

Services cost of sales decreased $84.4 million, or 17.9%, for the six months ended June 30, 2020 versus the same period in 2019, primarily due to lower volume, business dispositions and cost control initiatives. As a percentage of net sales, services cost of sales remained essentially unchanged for the six months ended June 30, 2020 versus the same period in 2019.

Products gross profit decreased $45.9 million to $396.8 million for the six months ended June 30, 2020 versus the same period in 2019, primarily due to lower volume, partially offset by favorable product mix, changes in foreign exchange rates, and cost control initiatives. Products gross margin increased from 18.1% to 19.0% for the six months ended June 30, 2020 versus the same period in 2019.

Services gross profit decreased $22.0 million to $91.8 million for the six months ended June 30, 2020 versus the same period in 2019, primarily due to lower volume. Services gross margin decreased slightly from 19.5% to 19.2% for the six months ended June 30, 2020 versus the same period in 2019.

Selling, general and administrative expenses decreased $63.5 million to $335.1 million for the six months ended June 30, 2020 versus the same period in 2019 reflecting business dispositions and cost control initiatives. As a percentage of net sales, selling, general and administrative expenses decreased from 12.6%13.2% to 12.0%13.0% for the threesix months ended SeptemberJune 30, 20172020 versus the same period in 2016, due to the impact of the aforementioned expenses.2019.

For the threesix months ended SeptemberJune 30, 2017, the Company recorded2020, net restructuring, impairment and other charges of $33.8 million.expense increased by $27.3 million to $60.4 million versus the same period in 2019. These chargesexpenses included a non-cash charge of $21.3$20.6 million forto recognize the impairment of goodwill in the digital and creative solutionslogistics reporting unit within the StrategicBusiness Services segment. The charges also included $10.7segment, $21.1 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$18.1 million for 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 tocharges. See Note 7, 6, Restructuring, Impairment, and Other Charges, within the Notes to the Condensed Consolidated Financial Statements for additional information.further discussion.

ForDepreciation and amortization decreased $3.7 million to $79.0 million for the threesix months ended SeptemberJune 30, 2016,2020 compared to the Company recorded net restructuring, impairmentsame period in 2019. Depreciation and other charges of $10.8 million. The Company recorded $9.7amortization included $10.5 million and $12.2 million of employee termination costs,amortization of other intangible assets related to client relationships, trade names, trademarks, licenses and agreements for the six months ended June 30, 2020 and 2019, respectively.

Other operating expense for the six months ended June 30, 2020 was $21.2 million compared to income of $2.1 million for the same period in 2019. During the six months ended June 30, 2020 we recorded a $9.1 million loss on the sale of our Logistics Courier business. The remainder of the change was primarily driven by legal expenses related to the reorganizationongoing SEC and DOJ investigations. The prior year amount primarily included a net gain on the sale of certain administrative functionsour R&D business and operations. The Company also recorded lease terminationthe bankruptcy liquidation of RRD Brazil, partially offset by an increase in reserves for an unfavorable state sales tax matter and expenses related to an ongoing SEC and DOJ investigations.

32


Loss from operations for the six months ended June 30, 2020 was $7.1 million, a decrease of $51.3 million, or 116.1%, compared to the six months ended June 30, 2019.

 

Six Months Ended

 

 

 

 

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

 

 

 

 

2020

 

 

2019

 

 

$ Change

 

 

% Change

 

 

(in millions, except percentages)

 

Interest expense-net

$

68.5

 

 

$

78.2

 

 

$

(9.7

)

 

 

(12.4

%)

Investment and other income-net

 

(7.2

)

 

 

(6.7

)

 

 

0.5

 

 

 

7.5

%

Loss on debt extinguishment

 

0.2

 

 

 

 

 

 

0.2

 

 

nm

 

Net interest expense decreased by $9.7 million for the six months ended June 30, 2020 versus the same period in 2019, primarily due to repurchases and repayment of higher interest rate debt combined with lower average interest rates on the ABL Credit Facility and Term Loan, partially offset by the debt exchange transactions.

Investment and other restructuring charges of $0.6income, net for the six months ended June 30, 2020 and 2019 was $7.2 million and $0.6$6.7 million, respectively, and principally comprised of other charges related to multi-employernet pension plan withdrawal obligations unrelated to facility closuresand OPEB income.

Loss on debt extinguishment for the threesix months ended SeptemberJune 30, 2016. Additionally, the Company recorded $0.1 million of net gains related to buildings and machinery and equipment associated with facility closures. Refer to2020 was $0.2 million. See Note 7, Restructuring, Impairment and Other Charges14, Debt, within the Notes to the Condensed Consolidated Financial Statements for additional information.

Depreciation and amortization decreased $4.0 million to $47.0 million for the three 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. Depreciation and amortization included $7.1 million and $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, 2017 and 2016, respectively.

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

Income from operations for the three months ended September 30, 2017 was $35.9 million, a decrease of $48.1 million, or 57.3%, compared to the three months ended September 30, 2016. The decrease was due to higher restructuring, impairment and other charges, the prior year OPEB curtailment 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 control initiatives.   

 

Three Months Ended September 30,

 

 

 

 

 

 

 

 

 

 

2017

 

 

2016

 

 

$ Change

 

 

% Change

 

 

(in millions, except percentages)

 

Interest expense-net

$

43.5

 

 

$

48.8

 

 

$

(5.3

)

 

 

(10.9

%)

Investment and other income-net

 

(2.8

)

 

 

(1.0

)

 

 

1.8

 

 

nm

 

Loss on debt extinguishments

 

6.5

 

 

 

 

 

 

6.5

 

 

nm

 

Net interest expense decreased by $5.3 million for the three months ended September 30, 2017 versus the same period in 2016, primarily due to a decrease in average senior notes outstanding.further discussion.

 


Investment and other income-net for the three months ended September 30, 2017 and 2016 was $2.8 million and $1.0 million, respectively. During the three months ended September 30, 2017, the Company recognized a non-cash net realized gain of $1.6 million on the retained shares of Donnelley Financial exchanged for certain of the Company’s senior notes outstanding. See Note 15, Debt, to the Condensed Consolidated Financial Statements for additional details of the debt-for-equity exchange.

Loss on debt extinguishments for the three months ended September 30, 2017 was $6.5 million which related to unamortized debt issuance costs, premiums paid and other expenses associated with the amendment and restatement of the credit agreement as well as the debt-for-equity exchange of senior notes during the three months ended September 30, 2017. Refer to Note 15, Debt, to the Condensed Consolidated Financial Statements for additional details.

 

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

%

 

 

 

 

 

 

 

Six Months Ended

 

 

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

 

 

2020

 

 

2019

 

 

$ Change

 

 

% Change

 

(in millions, except percentages)

Loss before income taxes

$

(68.6

)

 

$

(27.3

)

 

$

(41.3

)

 

nm

Income tax expense (benefit)

 

1.5

 

 

 

(11.4

)

 

 

(12.9

)

 

nm

Effective income tax rate

 

2.2

%

 

 

41.8

%

 

 

 

 

 

 

The effective income tax rate for the threesix months ended SeptemberJune 30, 20172020 was 31.0% compared to 38.4% in the same period in 2016. The effective income tax rate for the period ended September 30, 2017 reflects the impactan expense 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 income generated in higher taxing jurisdictions and the inability to recognize a tax benefit on certain losses.

Income attributable to noncontrolling interests was $0.2 million and $0.3 million for the three months ended September 30, 2017 and 2016, respectively.

The net loss from continuing operations, excluding the impact from non-controlling interests, attributable to RRD common stockholders for the three months ended September 30, 2017 was $8.0 million, or $0.11 per diluted share, compared to net earnings of $22.0 million, or $0.31 per diluted share, for the three 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.

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 2.2% 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 resultsmix 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,earnings, the inability to recognize a tax benefit on certain losses and the tax impact of our interest expense. The effective income tax rate for the net gain on the disposition of investments. The Donnelley Financial retained shares were disposed insix months ended June 30, 2019 was 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.41.8%.

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,Loss attributable to RRD common stockholders was a loss of $70.2 million and $15.8 million for the ninesix months ended SeptemberJune 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, 2016.2020 and 2019, respectively.

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.Business Services

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2020

 

 

2019

 

 

 

(in millions, except percentages)

 

Net sales

 

$

2,033.9

 

 

$

2,467.5

 

Income from operations

 

 

39.1

 

 

 

70.2

 

Operating margin

 

 

1.9

%

 

 

2.8

%

Restructuring, impairment and other-net

 

 

36.2

 

 

 

27.0

 

Other operating expense (income)

 

 

1.4

 

 

 

(0.2

)

 


Variable Print

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

 

(in millions, except percentages)

 

Net sales

 

$

2,279.6

 

 

$

2,311.8

 

Income from operations

 

 

114.2

 

 

 

144.0

 

Operating margin

 

 

5.0

%

 

 

6.2

%

Restructuring, impairment and other charges-net

 

 

6.2

 

 

 

4.7

 

 

 

 

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

%)

33


Net sales for the Variable PrintBusiness Services segment for the ninesix months ended SeptemberJune 30, 20172020 were $2,279.6$2,033.9 million, a decrease of $32.2$433.6 million, or 1.4%17.6%, compared to 2016, including a $0.2the six months ended June 30, 2019. Net sales decreased $181.9 million increase due to business dispositions, primarily the GDS and Logistics Courier businesses, and $16.4 million due to unfavorable changes in foreign exchange rates. Net sales also decreased due to lower volume primarilyas result of the COVID-19 pandemic, including those customers in commercialindustries especially hard-hit, and digital print, direct mail, forms and price pressures, partially offset by the incremental sales from the Precision Dialogue acquisition. An analysis oflower pricing. The following table summarizes net sales by reporting unit follows:products and services in the Business Services segment:

Commercial and digital print: Sales decreased as a result of lower transactional commercial print volume and price pressures, partially offset by higher volume with a large customer.  

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 increased volume, partially 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.

 

 

Six Months Ended

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

 

 

 

Products and Services

 

2020

 

 

2019

 

 

$ Change

 

 

% Change

 

 

 

(in millions, except percentages)

 

Commercial print

 

$

638.9

 

 

$

835.9

 

 

$

(197.0

)

 

 

(23.6

%)

Logistics

 

 

350.4

 

 

 

409.7

 

 

 

(59.3

)

 

 

(14.5

%)

Packaging

 

 

265.5

 

 

 

302.1

 

 

 

(36.6

)

 

 

(12.1

%)

Labels

 

 

235.3

 

 

 

240.1

 

 

 

(4.8

)

 

 

(2.0

%)

Statements

 

 

228.8

 

 

 

283.1

 

 

 

(54.3

)

 

 

(19.2

%)

Supply chain management

 

 

134.6

 

 

 

152.6

 

 

 

(18.0

)

 

 

(11.8

%)

Forms

 

 

101.0

 

 

 

121.6

 

 

 

(20.6

)

 

 

(16.9

%)

Business process outsourcing

 

 

79.4

 

 

 

122.4

 

 

 

(43.0

)

 

 

(35.1

%)

Total Business Services

 

$

2,033.9

 

 

$

2,467.5

 

 

$

(433.6

)

 

 

(17.6

%)

Variable PrintBusiness Services segment income from operations decreased $29.8$31.1 million for the ninesix months ended SeptemberJune 30, 2017 2020, 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 to 5.0% for the nine months ended September 30, 2017 due to lower volume and an 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 unfavorably impacted operating marginsexpense, partially offset by 0.1 percentage points.lower compensation expense, lower depreciation expense and cost control initiatives.

Marketing Solutions


Strategic Services

 

 

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

%

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2020

 

 

2019

 

 

 

(in millions, except percentages)

 

Net sales

 

$

537.8

 

 

$

563.1

 

Income from operations

 

 

23.1

 

 

 

14.5

 

Operating margin

 

 

4.3

%

 

 

2.6

%

Restructuring and other-net

 

 

2.7

 

 

 

0.7

 

Net sales for the Strategic ServicesMarketing Solutions segment for the ninesix months ended SeptemberJune 30, 20172020 were $1,274.3$537.8 million, an increasea decrease of $44.7$25.3 million or 3.6%, compared to 2016.the six months ended June 30, 2019. Net sales increased primarily due to higher volume in sourcing, freight brokerage and courier services and increased fuel surcharges in logistics, partially offset by lower postage pass-through sales in logistics.  An analysis of net sales by reporting unit follows:

Logistics: Sales decreased primarily due to a decrease in postage pass-through sales in pre-sort and international mail services, lower volume in print logisticsas a result of the COVID-19 pandemic and price pressures,lower pricing, partially offset by higher volume in freight brokeragedirect marketing attributable to the 2020 Census contract. The following table summarizes net sales by products and courier services and an increase in fuel 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.  Marketing Solutions segment:

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

 

 

Six Months Ended

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

 

 

 

Products and Services

 

2020

 

 

2019

 

 

$ Change

 

 

% Change

 

 

 

(in millions, except percentages)

 

Direct marketing

 

$

290.8

 

 

$

285.5

 

 

$

5.3

 

 

 

1.9

%

Digital print and fulfillment

 

 

198.2

 

 

 

224.7

 

 

 

(26.5

)

 

 

(11.8

%)

Digital and creative solutions

 

 

48.8

 

 

 

52.9

 

 

 

(4.1

)

 

 

(7.8

%)

Total Marketing Solutions

 

$

537.8

 

 

$

563.1

 

 

$

(25.3

)

 

 

(4.5

%)

Strategic ServicesMarketing Solutions segment income from operations decreased $32.3increased $8.6 million to $23.1 million for the ninesix months ended SeptemberJune 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 to (0.5%) for the nine months ended September 30, 20172020, primarily due to lower manufacturing expenses and higher restructuring, impairment and other charges, unfavorable mix withinvolume in direct marketing attributable to 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 1.7 percentage points.  2020 Census contract.

 


International

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

 

(in millions, except percentages)

 

Net sales

 

$

1,459.9

 

 

$

1,432.7

 

Income from operations

 

 

53.8

 

 

 

101.8

 

Operating margin

 

 

3.7

%

 

 

7.1

%

Restructuring, impairment and other charges-net

 

 

8.6

 

 

 

6.2

 

OPEB curtailment gain

 

 

 

 

 

(0.1

)

Gain on sale of businesses

 

 

 

 

 

(12.6

)

 

 

 

Net Sales for the Nine Months Ended

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

 

 

 

 

 

 

 

Reporting unit

 

2017

 

 

2016

 

 

$ Change

 

 

% Change

 

 

 

(in millions, except percentages)

 

Asia

 

$

586.7

 

 

$

479.3

 

 

$

107.4

 

 

 

22.4

%

Global Turnkey Solutions

 

 

340.7

 

 

 

377.3

 

 

 

(36.6

)

 

 

(9.7

%)

Business process outsourcing

 

 

284.9

 

 

 

323.5

 

 

 

(38.6

)

 

 

(11.9

%)

Canada

 

 

148.3

 

 

 

160.4

 

 

 

(12.1

)

 

 

(7.5

%)

Latin America

 

 

99.3

 

 

 

92.2

 

 

 

7.1

 

 

 

7.7

%

Total International

 

$

1,459.9

 

 

$

1,432.7

 

 

$

27.2

 

 

 

1.9

%

Net sales in

34


Corporate

Corporate operating expenses during the International segment for the ninesix months ended SeptemberJune 30, 20172020 were $1,459.9$69.3 million, an increase of $27.2 million, or 1.9%, compared to the same period in 2016, inclusive of a $16.3 million, or 1.1%, decrease 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 books products, partially offset by an unfavorable change in foreign exchange rates and price pressures.  

Global Turnkey Solutions: Sales decreased primarily due to lower volume in books and packaging, partially offset by favorable price changes.

Business process outsourcing: Sales decreased due to lower volume, changes in foreign exchange rates and price pressures.

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

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

International segment income from operations decreased $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 and higher variable incentive compensation, partially offset by increased volume in Asia and lower bad debt expense. Operating margins decreased from 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 businesses, 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 higher variable incentive compensation, partially offset by increased packaging volume in Asia and lower bad debt expense. The prior year gain on the sale of businesses and higher restructuring, impairment and other charges negatively impacted operating margins by 0.9 and 0.2 percentage points, respectively.


Corporate

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

 

(in millions)

 

Operating expenses

 

$

(39.1

)

 

$

(104.8

)

Pension settlement

 

 

 

 

 

20.7

 

Spinoff-related transaction expenses

 

 

3.3

 

 

 

 

Restructuring, impairment and other charges-net

 

 

7.7

 

 

 

11.4

 

OPEB curtailment gain

 

 

 

 

 

(19.6

)

Loss on the sale of businesses

 

 

 

 

 

0.6

 

Acquisition-related expenses

 

 

 

 

 

2.7

 

Corporate operating expenses in the nine months ended September 30, 2017 were $39.1 million, a decrease of $65.7$28.8 million compared to the same period in 2016. 2019. The decreaseincrease was primarily driven by the prior year pension settlement charge, lower corporatehigher restructuring and other overhead costsexpenses and higher other operating expenses which are related to the pre-Separation combined entity,ongoing SEC and DOJ investigations, partially offset by lower legalcompensation expense and bad debt expenses, cost control initiatives. The following table summarizes unallocated operating expenses and lower restructuring, impairment and other charges-net, partially offset bycertain items impacting comparability within the prior year OPEB curtailment gain, lower pension and postretirement plan income, higher variable incentive compensation and spinoff-related transaction expenses.activities presented as Corporate:

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2020

 

 

2019

 

 

 

(in millions)

 

Operating expenses

 

$

69.3

 

 

$

40.5

 

Restructuring and other expense-net

 

 

21.5

 

 

 

5.4

 

Other operating expense (income)

 

 

19.8

 

 

 

(1.9

)

Acquisition-related expenses

 

 

0.2

 

 

 

0.2

 

LIQUIDITY AND CAPITAL RESOURCES

The Company believes it hasWe believe that we have sufficient liquidity to support itsour ongoing operations and to invest in future growth to create value for itsour stockholders. OperatingOur operating cash flows, existing cash balances and available capacity under the Company’s $800.0 millionour asset-based senior secured revolving credit facility (the “Credit Agreement”“ABL Credit Facility”) are the Company’sour primary sources of liquidity and are expected to be used for, among other things, capital expenditures necessary to support productivity, completion of restructuring programs and payment of interest and principal on the Company’sour 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.obligations.

The following describes the Company’sour cash flows for the ninesix months ended SeptemberJune 30, 20172020 and 2016. The Company’s cash flows for all periods prior to the October 1, 2016 Distribution include the impact of LSC and 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.2019.

Cash Flows From Operating Activities

Six Months Ended

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

2020

 

 

2019

 

 

$ Change

 

 

(in millions)

 

Net cash used in operating activities

$

(44.2

)

 

$

(117.1

)

 

$

72.9

 

Net cash used in investing activities

 

(14.2

)

 

 

(67.5

)

 

 

53.3

 

Net cash provided by financing activities

 

211.1

 

 

 

21.7

 

 

 

189.4

 

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

 

(4.3

)

 

 

0.2

 

 

 

(4.5

)

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

$

148.4

 

 

$

(162.7

)

 

$

311.1

 

Operating cash inflows are largely attributable to sales of the Company’sour 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 used in operating activities was $12.6 million for the ninesix months ended SeptemberJune 30, 2017, compared to net cash provided by operating activities of $7.82020 was $72.9 million duringlower than in the same period in 2016. The decrease2019, primarily due to working capital improvements in net cash provided by operating activities was driven byaddition to lower cash earnings, partially offset by the timing of suppliertax and customerinterest payments and lower interest, spinoff-related transaction and tax payments.cash deferrals from the CARES Act in the current period.

Cash Flows From Investing Activities

Net cash provided by investing activities for the nine months ended September 30, 2017 was $48.0 million compared toIncluded in net cash used in operating activities were the following operating cash outflows:

 

Six Months Ended

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

2020

 

 

2019

 

 

$ Change

 

 

(in millions)

 

Income tax payments, net of tax refunds

$

11.4

 

 

$

42.6

 

 

$

(31.2

)

Interest payments

 

67.8

 

 

 

83.8

 

 

 

(16.0

)

Performance-based compensation payments

 

41.4

 

 

 

42.4

 

 

 

(1.0

)

Restructuring and MEPP payments

 

34.5

 

 

 

26.0

 

 

 

8.5

 

Pension and other postretirement benefits plan contributions

 

4.2

 

 

 

3.8

 

 

 

0.4

 

35


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

Six Months Ended

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

2020

 

 

2019

 

 

$ Change

 

 

(in millions)

 

Capital expenditures

$

(38.1

)

 

$

(76.4

)

 

$

38.3

 

Proceeds from sale of investments and other assets

 

4.7

 

 

 

1.4

 

 

 

3.3

 

Disposition of businesses

 

16.1

 

 

 

10.4

 

 

 

5.7

 

Payments of current maturities and long-term debt

 

(152.7

)

 

 

(175.1

)

 

 

22.4

 

Net borrowings under credit facilities

 

368.0

 

 

 

211.0

 

 

 

157.0

 

Dividends paid

 

(2.1

)

 

 

(4.3

)

 

 

2.2

 

Proceeds from disposition of $167.9 million forbusinesses in 2020 reflect the nine months ended September 30, 2016. Capital expenditures were $77.2 million duringsale of the Logistics Courier business and a working capital adjustment received in 2020 from the sale of GDS which occurred in the fourth quarter of 2019.

Payments of current maturities and long-term debt in the first nine monthshalf of 2017, a decrease2020 primarily reflect the repayment of $70.7the remaining $64.5 million balance on the 2020 Notes that matured on June 15, 2020 along with repurchases of outstanding debt with maturities from 2020 to 2024. During the first half of 2019, we repaid $172.2 million of outstanding notes at maturity using availability under our ABL Credit Facility. Net borrowing under our ABL Credit Facility increased as compared to the same period in 2019. The additional borrowings are part of 2016 primarily driven by LSC and Donnelley Financial capital expendituresan effort to retain financial flexibility 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 salelight of the Company’s retained interest in LSC. ForCOVID-19 outbreak. See Item 2Management’s Discussion and Analysis of Financial Condition and Results of Operations, Executive Overview, Response to COVID-19section and Note 14 - Debt to the nine months ended September 30, 2016, the Company paid $47.5 million to acquire Precision Dialogue. Additionally,Condensed Consolidated Financial Statements for the nine months ended September 30, 2016, cash used in investing activities included $13.7 million of proceeds primarily from business dispositions in the International segment.further discussion.

Cash Flows From Financing ActivitiesLIQUIDITY

Net cash used in financing activities for the nine months ended September 30, 2017 was $139.1 million compared to net cash provided by financing activities of $187.4 million in the same period in 2016. During the nine months ended September 30, 2017, the


Company had $1,000.0 millionfirst half of 2020, we executed various debt transactions that reduced our near-term maturities and $1,165.0 million of payments and borrowings, respectively, under the Company’s credit facilities, comparedextended our debt maturity profile. Refer 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 repurchased $503.6 million of aggregate principal of senior notes using the proceeds from the issuance of senior notes and senior secured term loan B facilities of $450.0 million and $725.0 million, respectively, issued by its formerly, wholly-owned subsidiaries LSC and Donnelley Financial, which proceeds were received as distributions by the Company immediately priorNote 14 – Debt to the Separation. Additionally, during the nine months ended September 30, 2016, cash on hand and the borrowings under the prior 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, 2017, the Company paid the final spinoff cash settlement of $78.0 million to LSC and DonnelleyCondensed Consolidated Financial as required by the Separation and Distribution agreement.

LIQUIDITYStatements for further discussion.  

Cash and cash equivalents of $225.8$341.9 million as of SeptemberJune 30, 20172020 included $41.2$161.6 million in the U.S. and $184.6$180.3 million at international locations. As a result of the Tax Act, we have opportunities to repatriate foreign cash, primarily generated from current year earnings, in a tax efficient manner. The Company’spreviously taxed earnings from the transition tax and annual GILTI inclusion, as well as certain foreign subsidiariesearnings that receive a one hundred percent dividends received deduction may be repatriated with minimal additional tax consequences. As such, we are expectedno longer permanently reinvested on certain foreign earnings yet remain permanently reinvested on all other foreign earnings and other outside basis differences. We record foreign withholding tax liabilitiesrelated to make payments of approximately $17.9 million during the remainder of 2017 in satisfaction of intercompany obligations. The Company hascertain foreign earnings for repatriation. We have recognized deferred tax liabilities of $5.7$6.0 million as of SeptemberJune 30, 20172020 related to local taxes on certain foreign earnings thatwhich 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 cashCash and cash equivalents at SeptemberJune 30, 20172020 were $23.8$22.0 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 March 2017, the Company sold the 6,242,802 common shares it retained upon the spinoff of LSC for net proceeds of $121.4 million. The proceeds of this sale were used to repay a portion of the outstanding borrowings under the Company’s credit facility. In June 2017, the Company exchanged 6,143,208 of the 6,242,802 shares of Donnelley Financial retained upon the spinoff for $111.6 million of aggregate principal of certain outstanding senior notes. In August 2017, the Company disposed of its remaining retained shares in Donnelley Financial via a second debt-for-equity exchange, pursuant to which the Company exchanged 99,594 shares of Donnelley Financial’s common stock for $1.9 million of aggregate principal of certain outstanding senior notes. Such debt obligations were cancelled and discharged upon delivery to the Company. As of September 30, 2017, the Company no longer held any shares of LSC or Donnelley Financial common stock.

The Company’s debt maturities as of September 30, 2017 are shown in the following table:

 

Debt Maturity Schedule

 

 

Total

 

 

2017

 

 

2018

 

 

2019

 

 

2020

 

 

2021

 

 

Thereafter

 

 

(in millions)

 

Senior notes and debentures and borrowings

   under the Credit Agreement (a)

$

2,245.8

 

 

$

 

 

$

 

 

$

172.2

 

 

$

238.4

 

 

$

529.1

 

 

$

1,306.1

 

Miscellaneous debt obligations

 

17.9

 

 

 

17.9

 

 

 

 

 

 

 

 

 

 

 

Total

$

2,263.7

 

 

$

17.9

 

 

$

 

 

$

172.2

 

 

$

238.4

 

 

$

529.1

 

 

$

1,306.1

 

(a)

Excludes unamortized debt issuance costs of $12.2 million and a discount of $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 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.

Proceeds of the loans under the Credit Agreement may be used for working capital and general corporate purposes. The Company’s obligations under the Credit Agreement are guaranteed by its material and certain domestic subsidiaries and are secured by a security 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 its first-tier foreign subsidiaries.

The Credit Agreement is subject to 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.

There were $350.0 million of borrowings under the Credit Agreement as of September 30, 2017. Based on the Company’s borrowing base as of September 30, 2017 and existing borrowings, the Company had the ability to utilize approximately $384.9 million of the $800.0 million Credit Agreement.


The current availability under the ABL Credit AgreementFacility as of SeptemberJune 30, 20172020 is shown in the table below:

 

September 30, 2017

 

 

June 30, 2020

 

Availability

 

(in millions)

 

 

(in millions)

 

Committed Credit Agreement

 

$

800.0

 

ABL Credit Facility

 

$

800.0

 

Availability reduction due to available borrowing base

 

 

35.4

 

 

 

219.1

 

 

$

764.6

 

 

$

580.9

 

Usage

 

 

 

 

 

 

 

 

Borrowings under the Credit Agreement

 

 

350.0

 

Borrowings under the ABL Credit Facility

 

$

410.0

 

Outstanding letters of credit

 

 

29.7

 

 

 

53.1

 

 

 

379.7

 

 

$

463.1

 

Current availability at September 30, 2017

 

$

384.9

 

 

 

 

 

Current availability at June 30, 2020

 

$

117.8

 

Cash and cash equivalents

 

 

341.9

 

Total available liquidity (a)

 

$

459.7

 

(a)

Total available liquidity does not include credit facilities of non-U.S. subsidiaries, which are uncommitted facilities.

As of September 30, 2017, the Company was in compliance with the debt covenants under the Credit Agreement and expects to remain in compliance based on management’s estimates of operating and financial results for 2017 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, 2017, the Company met all the conditions required to borrow under the Credit Agreement and management expects the Company to continue to meet the borrowing conditions.

36


The failure of a financial institution supporting the ABL Credit AgreementFacility would reduce the size of the Company’sour committed facility unless a replacement institution was added. Currently, the ABL Credit AgreementFacility is supported by eight U.S. financial institutions.

Dispositions

During the fourth quarter of 2017, we entered into an agreement to sell a printing facility in Shenzhen, China and transfer the related land use rights. As of SeptemberJune 30, 2017,2020, we have received deposits in accordance with the Company had $176.7terms of the agreement of approximately $98.2 million. These deposits are recorded in Other noncurrent liabilities on the Condensed Consolidated Balance Sheets. We continue to expect that we will collect one additional deposit of $23 million in other uncommitted credit facilities, primarily outside the U.S. (the “Other Facilities”). There were $103.3third quarter of 2020.  The buyer continues to work to obtain the necessary approvals from the government regarding their plans to redevelop the site. Gross proceeds from the sale are expected to be approximately $250.0 million, in outstanding letters of credit, bank guarantees and bank acceptance drafts which reduced availability, of which $29.7 million were issued under the Credit Agreement. Total borrowings under the Credit Agreement and the Other Facilities (the “Combined Facilities”) were $367.6 million as of September 30, 2017.

The Company’s liquidity may be affected by its credit ratings. The Company’s Standard & Poor Rating Services (“S&P”) and Moody’s credit ratings as of September 30, 2017 are shownsubject to changes in the table below:exchange rate,and we expect the transaction to close in 2022 after closing conditions are satisfied and government approvals are obtained. Our contract with the buyer requires them to pay the final installment in 2022 even if the government’s approval is further delayed.  If the buyer fails to comply with terms of the agreement or terminates for any reason, we are entitled to retain 30% of the purchase price as liquidated damages. As of June 30, 2020, the carrying cost of the building and land use rights is recorded in Other noncurrent assets and is not material.

S&P

Moody's

Long-term corporate credit rating

B+, Stable

B1, Stable

Senior unsecured debt

B+

B2

Credit Agreement

BB

Ba1

Dividends

During the ninesix months ended SeptemberJune 30, 2017, the Company2020, we paid cash dividends of $29.4$2.1 million. On October 25, 2017,April 6, 2020, the Board of Directors of the Company declaredmade a quarterly cash dividenddecision to suspend all dividends payments as part of $0.14 per common share payable on December 1, 2017 to RRD stockholders of record on November 15, 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.

Debt Issuances

On September 30, 2016, the Company’s then wholly-owned subsidiary Donnelley Financial issued senior notes and incurred a senior secured term loan B facility with total aggregate principals of $300.0 million and $350.0 million, respectively.  Additionally on September 30, 2016, the Company’s then wholly-owned subsidiary LSC issued senior notes and incurred a senior secured term loan B facility with total aggregate principal of $450.0 million and $375.0 million, respectively.  All of the related net proceeds were distributedresponse to the Company or exchangedCOVID-19 outbreak. See Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Executive Overview, Response to COVID-19 Section for debt in connection with the Separation. After the Separation, RR Donnelley has no obligations as it relates to these senior notes, senior secured term loan B facilities or any other LSC or Donnelley Financial indebtedness.further discussion.


MANAGEMENT OF MARKET RISK

The Company isWe are exposed to interest rate risk on itsour variable debt and price risk on itsour fixed-rate debt. At September 30, 2017,Including the Company’s variable-interest borrowings were $367.6 million. Approximately 83.8%effect of the Company’sfloating-to-fixed interest rate swaps (see Note 15, Derivatives, to the Consolidated Financial Statements),approximately 73.3% of our outstanding debt was comprised of fixed-rate debt as of SeptemberJune 30, 2017.2020.

The Company assessesWe assess 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 SeptemberJune 30, 20172020 and December 31, 20162019 by approximately $50.2$64.4 million and $69.6$25.8 million, respectively.

The Company isWe are exposed to the impact of foreign currency fluctuations in certain countries in which it operates. The exposure to foreignbased on our global operations. Foreign currency movements is limited in many countries becausefluctuations affect the operatingU.S. dollar value of revenues earned and expenses of its various subsidiaries and business unitsincurred in foreign currencies. We are substantially in the localalso exposed to currency of the country in which they operate. Torisk to the extent that borrowings, sales, purchases, revenues, expenseswe own assets or incur liabilities, or enter into other transactions that are not in the localfunctional currency of the subsidiary in which we operate. We employ different practices to manage these risks, including where appropriate the Company is exposed to currency risk and may enter intouse of derivative instruments, such as foreign currency contracts to hedge the currency risk.forwards. As of SeptemberJune 30, 20172020 and December 31, 2016,2019, the aggregate notional amount of outstanding foreign currency contracts was approximately $136.7$111.4 million and $172.2$179.9 million, respectively (see Note 17, 15, Derivatives, to the Condensed Consolidated Financial Statements). Net unrealized gains from these foreign currency contracts were $0.5$0.1 million at SeptemberJune 30, 20172020 and $0.2$0.8 million at December 31, 2016. The Company does2019. We do 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 14,13, 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’sour consolidated financial statements are described in Note 19, 17, New Accounting Pronouncements, to the Condensed Consolidated Financial Statements.

37


CAUTIONARY STATEMENT

The Company has made forward-looking statements in thisThis Quarterly Report on Form 10-Q thatand any documents incorporated by reference contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties. These statementsuncertainties and are based on theour beliefs and assumptions of the Company.assumptions. Generally, forward-looking statements include information concerning possible or assumed future actions, events, or results of operations of the Company.

ours. These statements may include, or be preceded or followed by, the words “may,” “will,” “should,” “might,” “could,” “would,” “potential,” “possible,” “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “hope” or similar expressions. The Company claimsWe claim the protection of the Safe Harborsafe harbor for Forward-Looking Statementsforward-looking statements contained in the Private Securities Litigation Reform Act of 1995 for all forward-looking statements.

Forward-looking statements are not guarantees of performance. The factors identified below are believed to be significant factors, but not necessarily all of the significant factors, that could cause actual results to differ materially from those expressed in any forward-looking statement. Unpredictable or unknown factors could also have material effects on us.

The following important factors, in addition to those discussed elsewhere in this Quarterly Report on Form 10-Q and under the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, could affect theour 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:

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

The severity and length of the economic downturn due to COVID-19

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

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

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

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

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

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

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

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

taxation related risks in multiple jurisdictions;

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

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

limitations on our borrowing capacity in our credit facilities;

increases in interest rates;

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

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

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

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

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

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

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

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

successful negotiation, execution and integration of acquisitions;

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

increasing health care and benefits costs for employees and retirees;

changes in our pension and OPEB obligations;

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

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

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

 

38



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

changes in the 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;

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

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

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

successful negotiation, execution and integration of acquisitions;

failures or errors in our products and services;

increased pricing pressure as a result of the competitive environment in which the Company operates;

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

increasing health care and benefits costs for employees and retirees;

inability to hire and retain employees;

changes in the Company’s pension and other postretirement obligations;

potential contingent obligations related to leases and multiemployer pension plan liabilities;

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

the spinoffs resulting in significant tax liability; and

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

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

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 or the failure to properly use and protect customer, 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.

other risks and uncertainties detailed from time to time in our 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’sour current plans, estimates and beliefs. The Company doesWe do not undertake and specifically declinesdisclaims 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 undertakesWe undertake 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.” ThereOther than COVID-19 discussed in Part 2 – Risk Factors, Section 1A, there have been no significant changes to the Company’sour market risk since December 31, 2016.2019. For a discussion of exposure to market risk, refer to Part II, Item 7A – Quantitative and Qualitative Disclosures about Market Risk, set forth in the Company’s 2016our 2019 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 SeptemberJune 30, 2017,2020, 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 SeptemberJune 30, 20172020 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.

There were no changes in the Company’sour 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 SeptemberJune 30, 20172020 that had materially affected, or were reasonably likely to materially affect, the Company’sour internal control over financial reporting. We have not experienced any material impact to our internal controls over financial reporting despite the fact that most of our employees are working remotely due to the COVID-19 pandemic. We are continually monitoring and assessing the impact of the COVID-19 pandemic on our internal controls to ensure they remain effective.

 

 

39



PART II— OTHER INFORMATION

 

For a discussion of certain litigation, involving the Company, see Note 14,13, Commitments and Contingencies, to the Condensed Consolidated Financial Statements.

Item 1A. Risk Factors

There is no material change in the information reported under "Part 1 -Items 1A Risk Factors" contained in our annual Report on Form 10-K for the fiscal year ended December 31, 2019 with the exception of the following:

COVID-19

In December 2019, a novel strain of coronavirus (COVID-19) emerged in Wuhan, Hubei Province, China. While initially the outbreak was largely concentrated in China and caused significant disruptions to its economy, during and subsequent to the first quarter of 2020, COVID-19 continued to spread across the globe at an increasing rate including a significant outbreak in the U.S. The outbreak in the U.S and most other countries forced governments to close non-essential businesses and substantially restrict the lives of most people. Measures taken by various governmental authorities, including the U.S government, to limit the spread of this virus has created tremendous business challenges for us and for other companies around the world, including many of our clients and suppliers. We have taken a number of proactive measures to manage through the impact of the growing pandemic.  The extent to which the coronavirus impacts our operations and the operations of our suppliers and our customers will depend on future developments, which are highly uncertain at this time, including the duration of the outbreak, the degree and ultimate success of government intervention in stabilizing economies around the world, and other actions to contain the coronavirus or treat its impact, among others. The continued spread of COVID-19 and ongoing governmental efforts to contain the pandemic has significantly impacted the global economy, resulting in decreased demand for some of our products and services. While the Company continues to implement measures to mitigate the effects of COVID-19, this decreased demand has adversely affected our business, operating results, financial condition and cash flows and we expect such adverse impacts to continue for the foreseeable future. Depending on the severity and duration of the global economic decline, revenue declines from decreased client demand could materially adversely affect our business, operating results, financial condition and cash flows. Additionally, declining operating results and cash flows may also cause impairments of tangible and intangible assets and an increase in allowance for doubtful accounts as a result of our inability to collect customer accounts receivable balances.

Contingent Liabilities

Subsequent to the spinoff of LSC Communications, Inc. and Subsidiaries (“LSC”) and Donnelley Financial Solutions, Inc. (“Donnelley Financial”), we may be contingently liable for obligations under various operating leases for office, warehouse and manufacturing locations of LSC and Donnelley Financial. In the event that LSC or Donnelley Financial, or any successor lessee, fail to make lease payments or fail to pay other obligations under these lease agreements, we may be required to satisfy those obligations to the lessor. Under various agreements executed at the time of the spinoff, LSC and Donnelley Financial agreed to fully indemnify us in the event that we would be required to make a payment on their behalf; however, there can be no assurance that the indemnities from LSC and Donnelley Financial will be sufficient to satisfy the full amount of any such contingent obligations. Our exposure to these potential contingent liabilities will decrease over time as LSC and Donnelley Financial pay monthly lease obligations and as the leases expire. As of June 30, 2020, these potential contingent obligations were approximately $65.2 million and $4.3 million for LSC and Donnelley Financial, respectively. On April 13, 2020, LSC announced that it, along with most of its U.S. subsidiaries, voluntarily filed for business reorganization under Chapter 11 of the U.S. Bankruptcy Code. As a result, we may be liable for portions of liabilities where we share joint and several liability with LSC and other members of the control group including LSC’s frozen multiemployer pension plan (“MEPP”) liabilities and certain environmental liabilities.

We believe that the total MEPP liability for which LSC is responsible for is approximately $100.0 million and is payable over an average 13 year period. In accordance with laws and regulations governing multiemployer pension plans, we and Donnelley Financial are contingently liable on a joint and several liability basis for LSC’s MEPP obligations. Our ultimate liability, if any, related to LSC's MEPP obligations is contingent upon whether LSC or a successor company will be required to make full or partial required contributions to the MEPPs as determined by the bankruptcy court, as well as the outcome of our negotiations with Donnelley Financial concerning how the obligations would be apportioned. At the time of this filing we cannot make a reasonable estimate of our ultimate exposure. However, if we are required to make payments in connection with these contingent liabilities, it may adversely affect our results of operations, financial condition or cash flows.

40


 

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

There were no issuer purchases of equity securities during the three months ended June 30, 2020.

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

 

 

 

 

 

 

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 theABL Credit Agreement and its amendments filed as exhibitsTerm Loan Credit Agreement contain customary affirmative and negative covenants including negative covenants restricting, among other things, our ability to this Quarterly Reportincur debt, make investments, make certain restricted payments (including payments on Form 10-Q.certain other debt and external dividends), incur liens securing other debt, consummate certain fundamental transactions, enter into transactions with affiliates and consummate asset sales.

Item 4:4. Mine Safety Disclosures

Not applicable  

 

 

 


41


Item

Item 6. Exhibits

10.1

 

 

 

Second Amended and Restated Credit Agreement, dated as of September 29, 2017, among R.R. Donnelley and Sons Company, the guarantors party thereto, the lenders party thereto and Bank of America, N.A., as administrative agent (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed October 3, 2017)

 

10.2

 

 

Employment Offer Letter dated October 25, 2017 between R.R. Donnelley & Sons Company and Michael J. Sharp (incorporated by reference to Exhibit10.1 to the Company’s Current Report on Form 8-K filed October 30, 2017)

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

 

31.2*

 

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

 

32.1**

 

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

 

32.2**

 

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

 

101.INS

  

Inline XBRL Instance Document

 

101.SCH

  

Inline XBRL Taxonomy Extension Schema Document

 

101.CAL

  

Inline XBRL Taxonomy Extension Calculation Linkbase Document

 

101.DEF

  

Inline XBRL Taxonomy Extension Definition Linkbase Document

 

101.LAB

  

Inline XBRL Taxonomy Extension Label Linkbase Document

 

101.PRE

  

Inline XBRL Taxonomy Extension Presentation Linkbase Document

104

Cover Page Interactive Data File (embedded within the Inline XBRL document)

 

 

*

Filed herewith

**

Furnished herewith

 

 

 

 

 


SIGNATURES42


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

Date: October 31, 2017July 29, 2020

 

 

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