UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended ~~June 30, 2019~~March 31, 2020

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

Commission file number

001-37729

LSC Communications, Inc.

(Exact name of registrant as specified in its charter)

Delaware

36-4829580

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

191 N. Wacker Drive, Suite 1400

Chicago, IL 60606

(Address of principal executive offices, including zip code)

(773) 272-9200

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

~~Title of each class~~		~~Trading Symbol~~		~~Name of each exchange on which registered~~
~~Common Stock (Par Value $0.01)~~		~~LKSD~~		~~NYSE~~

Indicate by check mark whether the registrant 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 and has been subject to such filing requirements for the past 90 days.

Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☒☐	Accelerated filer	☐☒
Non-accelerated filer	☐	Smaller reporting company	☐
Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected 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 ~~August 2, 2019, 33,551,195~~May 1, 2020, 33,586,062 shares of common stock were outstanding.

LSC COMMUNICATIONS, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED ~~June 30, 2019~~MARCH 31, 2020

TABLE OF CONTENTS

PART I

		Page
FINANCIAL INFORMATION
Item 1: Condensed Consolidated Financial Statements (unaudited)		3
Condensed Consolidated Balance Sheets as of ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019		3
Condensed Consolidated Statements of Operations for the three ~~and six~~ months ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~		4
Condensed Consolidated Statements of Comprehensive Income for the three ~~and six~~ months ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~		5
Condensed Consolidated Statements of Cash Flows for the ~~six~~three months ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~		6
Condensed Consolidated Statements of Stockholders' Equity for the three ~~and six~~ months ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~		7
Notes to Condensed Consolidated Financial Statements		8
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations		2932
Item 3: Quantitative and Qualitative Disclosures About Market Risk		5047
Item 4: Controls and Procedures		5047

Part II. Other Information		5149
Item 1: Legal Proceedings		5149
Item 1A: Risk Factors		5149
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds		5153
Item 4: Mine Safety Disclosures		5153
Item 6: Exhibits		5154
Signatures		5558

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

LSC COMMUNICATIONS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions, except share and per share data)

(UNAUDITED)

	June 30,			December 31,			March 31,			December 31,
	2019			2018			2020			2019 (1)
ASSETS
Cash and cash equivalents	$	17		$	21		$	56		$	105
Receivables, less allowances for doubtful accounts of $15 in 2019 (2018 - $14)		582			617
Inventories (Note 5)		213			197
Receivables
Amortized cost								471			484
Less: Allowance for credit losses								(13	)		(12	)
Receivables, net								458			472
Inventories (Note 4)								156			170
Income tax receivable		7			4			5			5
Prepaid expenses and other current assets		36			28			52			36
Total current assets		855			867			727			788
Property, plant and equipment-net (Note 6)		485			508
Goodwill (Note 7)		103			103
Other intangible assets-net (Note 7)		130			156
Property, plant and equipment-net (Note 5)								424			440
Goodwill (Note 6)								52			52
Other intangible assets-net (Note 6)								116			120
Right-of-use assets for operating leases		188			—			155			163
Deferred income taxes		30			27			7			9
Other noncurrent assets		88			93			74			77
Total assets	$	1,879		$	1,754		$	1,555		$	1,649

LIABILITIES
Accounts payable	$	347		$	372		$	151		$	175
Accrued liabilities		188			199			224			211
Short-term debt and current portion of long-term debt (Note 10)		192			108
Short-term debt and current portion of long-term debt (Note 9)								911			465
Short-term operating lease liabilities		46			—			40			42
Total current liabilities		773			679			1,326			893
Long-term debt (Note 10)		639			659
Long-term debt (Note 9)								—			445
Pension liabilities		100			132			141			156
Restructuring and multi-employer pension liabilities (Note 8)		42			45
Restructuring and multi-employer pension liabilities (Note 7)								41			42
Long-term operating lease liabilities		148			—			123			129
Other noncurrent liabilities		51			61			55			56
Total liabilities	$	1,753		$	1,576		$	1,686		$	1,721

Commitments and contingencies (Note 9)
Commitments and contingencies (Note 8)

EQUITY
Common stock, $0.01 par value
Authorized: 65,000,000
Issued: 35,583,329 shares in 2019 (2018: 35,029,565)	$	—		$	—
Issued: 35,719,936 shares in 2020 (2019: 35,559,052)							$	—		$	—
Additional paid-in capital		832			828			836			835
Accumulated deficit		(209	)		(42	)		(417	)		(365	)
Accumulated other comprehensive loss (Note 13)		(472	)		(584	)		(525	)		(517	)
Treasury stock, at cost: 2,032,134 shares in 2019 (2018: 1,888,205)		(25	)		(24	)
Treasury stock, at cost: 2,133,874 shares in 2020 (2019: 2,084,055)								(25	)		(25	)
Total equity		126			178			(131	)		(72	)
Total liabilities and equity	$	1,879		$	1,754		$	1,555		$	1,649

(1) As Adjusted, see Note 1, Overview and Basis of Presentation

See Notes to the Condensed Consolidated Financial Statements

LSC COMMUNICATIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions, except per share data)

(UNAUDITED)

Three Months Ended

Six Months Ended

June 30,

June 30,

2019

2018

2019

2018

Net sales

$
869

$
943

$
1,714

$
1,872

Cost of sales

750

798

1,485

1,606

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

80

82

165

165

Restructuring, impairment and other charges-net (Note 8)

24

11

37

17

Depreciation and amortization

31

34

62

72

(Loss) income from operations

(16
)

18

(35
)

12

Interest expense-net (Note 10)

19

18

38

38

Settlement of retirement benefit obligations (Note 12)

1

—

136

—

Investment and other (income)-net

(9
)

(13
)

(19
)

(24
)
(Loss) income before income taxes

(27
)

13

(190
)

(2
)
Income tax (benefit) expense

(3
)

5

(40
)

1

Net (loss) income

$
(24
)

$
8

$
(150
)

$
(3
)

Net (loss) income per common share (Note 11)

Basic net (loss) income per share

$
(0.69
)

$
0.24

$
(4.48
)

$
(0.09
)
Diluted net (loss) income per share

$
(0.69
)

$
0.23

$
(4.48
)

$
(0.09
)

Weighted-average number of common shares outstanding:

Basic

33.5

34.0

33.4

34.3

Diluted

33.5

34.3

33.4

34.3

	Three Months Ended
	March 31,
	2020			2019 (1)
Net sales	$	701		$	845
Cost of sales		616			735
Selling, general and administrative expenses (exclusive of depreciation and amortization)		75			85
Restructuring, impairment and other charges-net (Note 7)		26			13
Depreciation and amortization		27			31
(Loss) from operations		(43	)		(19	)
Interest expense-net (Note 9)		18			19
Settlement of retirement benefit obligations (Note 11)		—			132
Investment and other (income)-net		(10	)		(8	)
(Loss) before income taxes		(51	)		(162	)
Income tax expense (benefit)		1			(37	)
Net (loss)	$	(52	)	$	(125	)

Net (loss) per common share (Note 10)
Basic net (loss) per share	$	(1.56	)	$	(3.77	)
Diluted net (loss) per share	$	(1.56	)	$	(3.77	)

Weighted-average number of common shares outstanding:
Basic		33.6			33.3
Diluted		33.6			33.3

(1) As Adjusted, see Note 1, Overview and Basis of Presentation

See Notes to the Condensed Consolidated Financial Statements

LSC COMMUNICATIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in millions)

(UNAUDITED)

	Three Months Ended						Six Months Ended						Three Months Ended
	June 30,						June 30,						March 31,
	2019			2018			2019			2018			2020			2019 (1)
Net (loss) income	$	(24	)	$	8		$	(150	)	$	(3	)
Net (loss)													$	(52	)	$	(125	)

Other comprehensive income (loss), net of tax (Note 13):
Other comprehensive (loss) income, net of tax (Note 13):
Translation adjustments		1			(14	)		2			(9	)		(11	)		1
Adjustment for net periodic pension plan cost		3			4			110			8			3			106
Other comprehensive income (loss)		4			(10	)		112			(1	)
Other comprehensive (loss) income														(8	)		107
Comprehensive (loss)	$	(20	)	$	(2	)	$	(38	)	$	(4	)	$	(60	)	$	(18	)

The adjustments for net pension plan cost were net of income tax expense of $1 million and ~~$37~~$36 million for the three ~~and six~~ months ended ~~June 30,~~March 31, 2020 and 2019, respectively. The tax expense for the ~~six~~three months ended ~~June 30,~~March 31, 2019 was primarily due to the settlements of retirement benefit obligations that are discussed in Note 13, Comprehensive Income. ~~The adjustments for net pension plan cost were net~~

(1) As Adjusted, see Note 1, Overview and Basis of ~~income tax expense of $1 million and $2 million for the three and six months ended June 30, 2018, respectively.~~ Presentation

See Notes to the Condensed Consolidated Financial Statements

LSC COMMUNICATIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

(UNAUDITED)

	Six Months Ended						Three Months Ended
	June 30,						March 31,
	2019			2018			2020			2019 (1)
Cash Flows from Operating Activities
Net (loss)	$	(150	)	$	(3	)	$	(52	)	$	(125	)
Adjustments to reconcile net (loss) to net cash provided by (used in) operating activities:
Adjustments to reconcile net (loss) to net cash (used in) operating activities:
Impairment charges		19			—			1			2
Depreciation and amortization		62			72			27			31
Provision for doubtful accounts receivable		4			4			1			3
Share-based compensation		4			8			1			3
Deferred income taxes		(39	)		4			—			(34	)
Settlement of retirement benefit obligations		136			—			—			132
Other		1			4			2			1
Changes in operating assets and liabilities - net of acquisitions:
Accounts receivable-net		32			61			7			(2	)
Inventories		(15	)		(49	)		11			(24	)
Prepaid expenses and other current assets		1			(4	)		(19	)		3
Accounts payable		(13	)		(81	)		(23	)		(33	)
Income taxes receivable		(3	)		2			—			(4	)
Accrued liabilities and other		(36	)		(44	)		5			23
Net cash provided by (used in) operating activities		3			(26	)
Net cash (used in) operating activities								(39	)		(24	)

Cash Flows from Investing Activities
Capital expenditures		(49	)		(37	)		(11	)		(28	)
Acquisitions of businesses, net of cash acquired		(3	)		4			—			(3	)
Net proceeds from sales and purchase of investments and other assets		—			1
Net proceeds from sales and purchases of investments and other assets								2			—
Net cash (used in) investing activities		(52	)		(32	)		(9	)		(31	)

Cash Flows from Financing Activities
Payments of current maturities and long-term debt		(22	)		(26	)		—			(11	)
Net proceeds from credit facility borrowings		84			115			—			67
Payments for repurchase of common stock		—			(20	)
Debt issuance costs								(1	)		—
Dividends paid		(17	)		(18	)		—			(9	)
Other financing activities		(1	)		(1	)		3			(1	)
Net cash provided by financing activities		44			50			2			46

Effect of exchange rate on cash and cash equivalents		1			(2	)		(2	)		1
Net (decrease) in cash, cash equivalents and restricted cash		(4	)		(10	)		(48	)		(8	)
Cash, cash equivalents and restricted cash at beginning of year		24			35			106			24
Cash, cash equivalents and restricted cash at end of period	$	20		$	25		$	58		$	16

Reconciliation to the Condensed Consolidated Balance Sheets
	As of			As of
Reconciliation to the Consolidated Balance Sheets							As of
	June 30, 2019			December 31, 2018			March 31, 2020			December 31, 2019
Cash and cash equivalents	$	17		$	21		$	56		$	105
Restricted cash included in prepaid expenses and other current assets		3			3			2			1
Total cash, cash equivalents and restricted cash shown in the condensed consolidated statements of cash flows	$	20		$	24		$	58		$	106

(1) As Adjusted, see Note 1, Overview and Basis of Presentation

See Notes to the Condensed Consolidated Financial Statements

LSC COMMUNICATIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(in millions)

Retained

Accumulated

Additional

Earnings

Other

Common Stock

Paid-in

Treasury Stock

(Accumulated

Comprehensive

Total

Shares

Amount

Capital

Shares

Amount

Deficit)

(Loss) Income

Equity

Balance at December 31, 2018

35

$
—

$
828

2

$
(24
)

$
(42
)

$
(584
)

$
178

Net (loss)

—

—

—

—

—

(126
)

—

(126
)
Issuance of share-based awards,
net of withholdings and other

1

—

—

—

(1
)

—

—

(1
)
Share-based compensation

—

—

3

—

—

—

—

3

Cash dividends paid

—

—

—

—

—

(9
)

—

(9
)
Other comprehensive income

—

—

—

—

—

—

108

108

Balance at March 31, 2019

36

$
—

$
831

2

$
(25
)

$
(177
)

$
(476
)

$
153

Net (loss)

—

—

—

—

—

(24
)

—

(24
)
Issuance of share-based awards,
net of withholdings and other

—

—

—

—

—

—

—

—

Share-based compensation

—

—

1

—

—

—

—

1

Cash dividends paid

—

—

—

—

—

(8
)

—

(8
)
Other comprehensive income

—

—

—

—

—

—

4

4

Balance at June 30, 2019

36

$
—

$
832

2

$
(25
)

$
(209
)

$
(472
)

$
126

(UNAUDITED)

Retained

Accumulated

Additional

Earnings

Other

Common Stock

Paid-in

Treasury Stock

(Accumulated

Comprehensive

Total

Shares

Amount

Capital

Shares

Amount

Deficit)

(Loss) Income

Equity

Balance at December 31, 2017

35

$
—

$
816

—

$
(2
)

$
(90
)

$
(476
)

$
248

Net (loss)

—

—

—

—

—

(11
)

—

(11
)
Revenue recognition adjustments

—

—

—

—

—

9

—

9

Reclassification of tax rate change
     to accumulated deficit
      (Note 13)

—

—

—

—

—

97

(97
)

—

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

—

—

—

—

(2
)

—

—

(2
)
Share-based compensation

—

—

3

—

—

—

—

3

Cash dividends paid

—

—

—

—

—

(9
)

—

(9
)
Other comprehensive income

—

—

—

—

—

—

9

9

Balance at March 31, 2018

35

$
—

$
819

—

$
(4
)

$
(4
)

$
(564
)

$
247

Net income

—

—

—

—

—

8

—

8

Repurchase of common stock

—

—

—

2

(20
)

—

—

(20
)
Issuance of share-based awards,
     net of withholdings and other

—

—

—

—

—

—

—

—

Share-based compensation

—

—

5

—

—

—

—

5

Cash dividends paid

—

—

—

—

—

(9
)

—

(9
)
Other comprehensive income

—

—

—

—

—

—

(10
)

(10
)
Balance at June 30, 2018

35

$
—

$
824

2

$
(24
)

$
(5
)

$
(574
)

$
221

															Accumulated
					Additional										Other
	Common Stock				Paid-in		Treasury Stock					(Accumulated			Comprehensive			Total
	Shares		Amount		Capital		Shares		Amount			Deficit)			(Loss) Income			Equity
Balance at December 31, 2019		36	$	—	$	835		2	$	(25	)	$	(365	)	$	(517	)	$	(72	)
Net (loss)		—		—		—		—		—			(52	)		—			(52	)
Share-based compensation		—		—		1		—		—			—			—			1
Other comprehensive (loss)		—		—		—		—		—			—			(8	)		(8	)
Balance at March 31, 2020		36	$	—	$	836		2	$	(25	)	$	(417	)	$	(525	)	$	(131	)

~~During the three months ended March 31, 2018, the Company recorded $9 million in equity adjustments as a result of the adoption of~~ ~~Accounting Standards Update No. 2014-09 “Revenue from Contracts with Customers (Topic 606)” (“ASC 606”)~~.

															Accumulated
					Additional										Other
	Common Stock				Paid-in		Treasury Stock					(Accumulated			Comprehensive			Total
	Shares		Amount		Capital		Shares		Amount			Deficit)			(Loss) Income			Equity
Balance at December 31, 2018	35		$	—	$	828		2	$	(24	)	$	(51	)	$	(575	)	$	178
Net (loss)		—		—		—		—		—			(125	)		—			(125	)
Issuance of share-based awards, net of withholdings and other		1		—		—		—		(1	)		—			—			(1	)
Share-based compensation		—		—		3		—		—			—			—			3
Cash dividends paid		—		—		—		—		—			(9	)		—			(9	)
Other comprehensive income		—		—		—		—		—			—			107			107
Balance at March 31, 2019		36	$	—	$	831		2	$	(25	)	$	(185	)	$	(468	)	$	153

Refer to Note 3,1, ~~Revenue Recognition~~Overview and Basis of Presentation, for ~~ASC 606 disclosures.~~ information on the adjustments made to accumulated deficit and accumulated other comprehensive loss in both periods.

There were dividends declared per common share of $0.26 during ~~each of~~ the three months ended ~~June 30,~~March 31, 2019 ~~and 2018, and $0.52~~(none during ~~each of~~ the ~~six~~three months ended ~~June 30, 2019 and 2018.~~March 31, 2020).

See Notes to the Condensed Consolidated Financial Statements

LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three ~~and Six~~ Months Ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~

(tabular amounts in millions, except per share data)

Note 1. Overview and Basis of Presentation

Description of Business

The principal business of LSC Communications, Inc., a Delaware corporation, and its direct or indirect wholly-owned subsidiaries (“LSC Communications,” “the Company,” “we,” “our” and “us”) is to offer a broad scope of traditional and digital print, print-related services and office products. The Company serves the needs of publishers, merchandisers and retailers worldwide with a service offering that includes e-services, logistics, warehousing and fulfillment and supply chain management services. The Company utilizes a broad portfolio of technology capabilities coupled with consultative attention to clients' needs to increase speed to market, reduce costs, provide postal savings to customers and improve efficiencies. The Company prints magazines, catalogs, books and directories, and its office products offerings include filing products, envelopes, note-taking products, binder products, and forms.

~~Merger with Quad/Graphics, Inc.~~Voluntary Reorganization under Chapter 11

On ~~October 30, 2018,~~April 13, 2020 (the “Petition Date”), the Company ~~entered into that~~and certain ~~Agreement and Plan~~ of ~~Merger~~its subsidiaries filed voluntary petitions for relief under Chapter 11 of title 11 of the United States Code, 11 U.S.C. §§ 101-1532 (the ~~“Merger Agreement”~~“Bankruptcy Code”)~~, by and among Quad/Graphics, Inc. (“Quad”~~ in the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”)~~, QLC Merger Sub, Inc. and~~ (collectively, the “Chapter 11 Cases”). The Chapter 11 Cases are being jointly administered under the caption In re LSC Communications, ~~pursuant~~Inc., 20-10950. We and our subsidiaries that are involved in the Chapter 11 Cases will continue to ~~which,~~operate our businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code.

On April 15, 2020, the Bankruptcy Court entered orders granting interim approval of certain forms of relief that we requested, enabling us to conduct our business activities in the ordinary course, subject to the ~~satisfaction or waiver~~terms and conditions of such orders, including authorizing us to pay employee wages and benefits, to pay taxes and certain governmental fees and charges, to continue to operate our cash management system in the ordinary course, and to pay prepetition claims of certain ~~conditions,~~ of our vendors. For goods and services provided following the Petition Date, the Company expects to continue to pay vendors under normal terms.

During the pendency of the Chapter 11 Cases, attempts to prosecute, collect, secure or enforce remedies with respect to prepetition claims against the debtors, including litigation relating to the entities involved in the Chapter 11 Cases, are subject to the automatic stay provisions of section 362(a) of the Bankruptcy Code, as modified or amended by the terms of any order entered in the Chapter 11 Cases.

We have obtained debtor-in-possession financing of up to $100 million which, together with our normal operating cash flows, will provide liquidity for the Company to operate as usual and fulfill ongoing commitments to stakeholders during the pendency of the Chapter 11 Cases. Refer to Note 9, Debt, for information on the debtor-in-possession financing facility.

Going Concern

The accompanying condensed consolidated financial statements were prepared assuming that the Company will continue as a going concern and contemplate the continuity of our operations, realization of assets and satisfaction of liabilities and commitments in the normal course of business. Our ability to continue as a going concern is contingent upon our ability to comply with the covenants of the DIP Credit Agreement described in Note 9, Debt, and our ability to implement, subject to the Bankruptcy Court’s approval, a restructuring plan, among other factors.

While operating as debtors-in-possession under Chapter 11, we may sell or otherwise dispose of or liquidate assets or settle liabilities, subject to the approval of the Bankruptcy Court or as otherwise permitted in the ordinary course of business (and subject to restrictions in our debt agreements), for amounts other than those reflected in the accompanying condensed consolidated financial statements. Further, the restructuring plan could materially change the amounts and classifications of assets and liabilities reported in the condensed consolidated financial statements.

LSC Communications, ~~would~~Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three Months Ended March 31, 2020 and 2019

(tabular amounts in millions, except per share data)

Coronavirus Pandemic (“COVID-19”)

During and subsequent to the first quarter of 2020, the novel coronavirus strain, known as COVID-19, continues to spread across the globe at an increasing rate. Measures taken by governmental authorities and private actors to limit the spread of this virus may interfere with ~~QLC Merger Sub, Inc.,~~the ability of the Company's employees, suppliers, and ~~become~~other business providers to carry out their assigned tasks or supply materials at ordinary levels of performance relative to the conduct of the business which may cause a ~~wholly-owned subsidiary~~material curtailment to certain business operations. Moreover, as a large part of ~~Quad.~~the Company's business involves sales of books and other products used in schools and school facilities, if COVID-19 related measures continue to result in widespread and lengthy school closings, the Company's consolidated results of operations and financial condition will be adversely impacted. Books sold in retail stores have also been adversely impacted as both large chains and independent stores have been forced to close. Additionally, as COVID-19 has significantly impacted retailers' stores, distribution centers and supply chains, the Company expects to experience an adverse impact on our catalogs and office products businesses. Disruption across many other industries has also significantly impacted demand for advertising, which is expected to result in page count and volume reductions in magazines.

We continue to monitor the situation, to assess further possible implications to our business and customers, and to take actions in an effort to mitigate adverse consequences. The Company has expanded its work-from-home policy for its non-manufacturing employees, has focused on obtaining protective equipment and implementing social distancing and other policies for its manufacturing employees and continues to adhere to guidance issued by governmental authorities. The Company is unable to quantify the impact on our business at this time, but it could have a material adverse effect on our consolidated financial statements in the future.

On ~~July 22, 2019, Quad~~March 27, 2020, the Coronavirus Aid, Relief, and ~~LSC Communications entered~~Economic Security Act (“CARES Act”) was signed into ~~a letter agreement (the “Letter Agreement”)~~law. Refer to Note 12, Taxes, pursuant to which the parties agreed to terminate the Merger Agreement. Pursuant to the Letter Agreement, Quad agreed to pay LSC Communications the Regulatory Approval Reverse Termination Fee (as defined in the Merger Agreement) of $45 million in cashfor more information on the business day following the date of the Letter Agreement. Except for certain indemnification obligations of Quad related to LSC Communications assisting Quad with the financing under the Merger Agreement, the parties also agreed to release each other from any and all claims, counterclaims, demands, proceedings, actions, causes of action, orders, obligations, damages, debts, costs, expenses and other liabilities whatsoever and howsoever arising pursuant to or in connection with the Merger Agreement or the transactions provided for in the Merger Agreement.CARES Act.

Basis of Presentation

The condensed consolidated financial statements include the balance sheets and statements of operations, stockholders’ equity and cash flows in conformity with accounting principles generally accepted in the United States (“GAAP”). All 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.

~~During~~As a result of the ~~third~~Company’s segment analysis in the fourth quarter of ~~2018, management changed~~2019, Mexico met the ~~Company’s~~requirements to be classified as a reportable ~~segments and reporting units. Consequently,~~segment (previously included as a non-reportable segment). All prior year amounts ~~were restated~~have been reclassified to conform to the ~~new segment~~Company’s current reporting structure. Refer to Note 14, Segment Information, for ~~more information.~~

~~Note 2. Business Combination and Disposition~~

~~2018 Acquisition~~

~~On July 2, 2018,~~reclassified balances for the Company completed the acquisition of R. R. Donnelley & Sons Company’s (“RRD”) Print Logistics business (“Print Logistics”), an integrated logistics services provider to the print industry with an expansive distribution network. The acquisition enhanced the Company’s logistics service offering and is included in the Magazines, Catalogs and Logistics segment. The original total purchase price was $58 million in cash, which was reduced to $52 million as a result of a $6 million net working capital settlement in the fourth quarter of 2018. Of the final total purchase price, $21 million was recorded in goodwill related to this acquisition.

~~LSC Communications, Inc.~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~

~~For the Three and Six Months Ended June 30, 2019 and 2018~~

~~(tabular amounts in millions, except per share data)~~three months ended March 31, 2019.

~~2018 Disposition~~

On September 28, 2018, the Company completed the sale of its European printing business, which included web offset manufacturing facilities, a logistics and warehousing site and a location dedicated to premedia services, for proceeds of $47 million. The Company ~~recorded a $25 million non-cash provision primarily for~~adopted Accounting Standards Update No. 2016-13 “Financial Instruments-Credit Losses (Topic 326)” (“ASU 2016-13” or “ASC 326”) on January 1, 2020 using the ~~write-off of a deferred tax asset associated with the disposition. The European printing business was included in the Europe segment, which was disclosed as part of the Other segment grouping.~~

~~Acquisition Information~~

The acquisition of Print Logistics was recorded by allocating the cost of the acquisition to the assets acquired, including other intangible assets, based on their estimated fair values at the acquisition date. The excess of the cost of the acquisition over the net amounts assigned to the fair value of the assets acquired was recorded in goodwill. The goodwill is primarily attributable to the synergies expected to arise asmodified retrospective adoption method. As a result of the ~~acquisition. The tax deductible goodwill related to Print Logistics was $25 million.~~

The purchase price allocation for Print Logistics was final as of December 31, 2018. There were no changes to the purchase price allocation for the acquisition as of June 30, 2019 compared to the disclosed purchase price allocation in the Company’s annual report on Form 10-K for the year ended December 31, 2018.

~~The final purchase price allocation for Print Logistics was as follows:~~

Accounts Receivable

$
40

Prepaid expenses and other current assets

1

Property, plant and equipment

8

Other intangible assets

17

Goodwill

21

Accounts payable and accrued liabilities

(35
)
Purchase price and net cash paid

$
52

The fair values of goodwill, other intangible assets and property, plant and equipment associated with Print Logistics were determined to be Level 3 under the fair value hierarchy, which included discounted cash flow analyses and comparable marketplace fair value data. Property, plant and equipment values were estimated using either the cost or, if a secondhand market existed, the market approach. The following table presents the fair value, valuation techniques and related unobservable inputs for these Level 3 measurements associated with Print Logistics:

Fair Value

Valuation Technique

Unobservable Input

Value

Customer relationships

$
17

Multi-period excess earnings method

Existing customer growth rate

(3.5%)

Attrition rate

7.5%

Discount rate

18.0%

~~For each of the three and six months ended June 30, 2019,~~adoption, the Company ~~recorded a de minimis~~separately disclosed the amortized cost amount of ~~acquisition-related expenses associated with contemplated acquisitions within selling, general and administrative expenses~~total receivables separately from the allowance for credit losses in the condensed consolidated ~~statements~~balance sheet. Refer to Note 2, Revenue Recognition, for more information.

Impact of ~~operations. For~~Change in Accounting Principle

Beginning in the ~~three and six months ended June 30, 2018,~~first quarter of 2020, the Company ~~recorded $1 million and $2 million~~changed the method of ~~acquisition-related expenses, respectively, associated with completed and contemplated acquisitions.~~

~~Pro forma results~~

~~The following unaudited pro forma financial information~~accounting for the ~~three~~market-related value of assets for a class of assets within the U.S. Qualified Plan and ~~six months ended June 30, 2019 and 2018 presents the condensed consolidated statements~~Non-Qualified plans. This class of ~~operations~~assets is currently comprised of liability-hedging investments, which represents approximately 60% of the ~~Company and~~plans’ assets. Liability-hedging investments provide a natural hedge against the ~~acquisition~~changes in the recorded amount of ~~Print Logistics as if~~net periodic pension cost. Refer to Note 11, Retirement Plans, in the ~~acquisition had occurred as of January 1 of the year prior to the acquisition.~~ Company’s Form

LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three ~~and Six~~ Months Ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~

(tabular amounts in millions, except per share data)

10-K for the fiscal year ended December 31, 2019 for disclosure by asset classifications. The previous method of accounting was to use the market-related value of assets for all the plans’ assets when recognizing changes in fair value of plan assets ratably over a five-year period. As a result of the change in method of accounting the Company will no longer use the market-related value of liability-hedging investments. Instead, the fair value of liability-hedging investments will be immediately included in the calculation of net periodic pension cost. This change in accounting method is preferable because it accelerates the recognition of the fair value for this class of assets into net income or loss. No change is being made to the accounting principle for the other classes of pension assets, which represent the remaining 40% of the pension asset portfolio for the plan.

The ~~unaudited pro forma~~change in accounting principle requires retrospective application and prospective disclosure. Refer below for the restatements on previously issued financial ~~information is~~statements. Retrospective application was applied to periods beginning in 2017 as it was determined not ~~intended~~ to ~~represent or~~ be ~~indicative~~possible to go further than that date due to the Company’s separation in 2016 from its prior parent company. Prior to the separation in 2016, the U.S. Qualified and Non-Qualified pension plans were legally owned by the Company’s prior parent company.

The cumulative effect of the ~~Company’s~~change on accumulated deficit was an increase in deficit of $9 million as of January 1, 2019 and a $9 million decrease in accumulated other comprehensive loss, as shown in the condensed statement of stockholders’ equity.

The historical statements of cash flows are also being retrospectively restated as changes in net (loss) income, expense related to settlement of retirement obligations and pension income flow through the operating activities section with an offsetting impact to the change in accrued liabilities and other. There is no net impact to cash flows provided by (used in) operating activities.

The tables below represent the impact of the change in accounting principle on the condensed consolidated balance sheets and statement of stockholders’ equity for all periods since 2017:

	Previously Disclosed in Form 10-K						As Reported with Change
	As of December 31, 2017			Impact of Change			As of December 31, 2017
Equity
(Accumulated deficit)	$	(90	)	$	(7	)	$	(97	)
Accumulated other comprehensive loss		(476	)		7			(469	)

	Previously Disclosed in Form 10-K						As Reported with Change
	As of December 31, 2018			Impact of Change			As of December 31, 2018
Equity
(Accumulated deficit)	$	(42	)	$	(9	)	$	(51	)
Accumulated other comprehensive loss		(584	)		9			(575	)

	Previously Disclosed in Form 10-K						As Reported with Change
	As of December 31, 2019			Impact of Change			As of December 31, 2019
Equity
(Accumulated deficit)	$	(354	)	$	(11	)	$	(365	)
Accumulated other comprehensive loss		(528	)		11			(517	)

	Previously Disclosed in Form 10-Q						As Reported with Change
	As of March 31, 2019			Impact of Change			As of March 31, 2019
Equity
(Accumulated deficit)	$	(177	)	$	(8	)	$	(185	)
Accumulated other comprehensive loss		(476	)		8			(468	)

LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three Months Ended March 31, 2020 and 2019

(tabular amounts in millions, except per share data)

	Previously Disclosed in Form 10-Q						As Reported with Change
	As of June 30, 2019			Impact of Change			As of June 30, 2019
Equity
(Accumulated deficit)	$	(209	)	$	(9	)	$	(218	)
Accumulated other comprehensive loss		(472	)		9			(463	)

	Previously Disclosed in Form 10-Q						As Reported with Change
	As of September 30, 2019			Impact of Change			As of September 30, 2019
Equity
(Accumulated deficit)	$	(185	)	$	(10	)	$	(195	)
Accumulated other comprehensive loss		(472	)		10			(462	)

The tables below represent the impact of the change in accounting principle on the condensed consolidated statements of operations ~~that would have been reported had these acquisitions been completed as of the beginning of the period presented~~ and ~~should not be taken as indicative of the Company’s future condensed consolidated statements of operations. Pro forma adjustments are tax-effected at the applicable statutory tax rates.~~ comprehensive income for all periods since 2017:

Three Months Ended

Six Months Ended

June 30,

June 30,

2019

2018

2019

2018

Net sales

$
869

$
984

$
1,714

$
1,957

Net (loss) income

(24
)

6

(150
)

(6
)

	Previously Disclosed in Form 10-K						As Reported with Change
	Year Ended December 31, 2017			Impact of Change			Year Ended December 31, 2017
Investment and other (income) expense	$	(47	)	$	10		$	(37	)
(Loss) before income taxes		(44	)		(10	)		(54	)
Income tax expense (benefit)		13			(3	)		10
Net (loss)		(57	)		(7	)		(64	)
Basic net (loss) per share		(1.69	)		(0.22	)		(1.91	)
Diluted net (loss) per share		(1.69	)		(0.22	)		(1.91	)
Adjustment for net periodic pension plan cost		34			7			41
Other comprehensive income		55			7			62
Comprehensive (loss)		(2	)		—			(2	)

	Previously Disclosed in Form 10-K						As Reported with Change
	Year Ended December 31, 2018			Impact of Change			Year Ended December 31, 2018
Investment and other (income) expense	$	(48	)	$	2		$	(46	)
Income (loss) before income taxes		10			(2	)		8
Income tax expense		33			—			33
Net (loss)		(23	)		(2	)		(25	)
Basic net (loss) per share		(0.67	)		(0.04	)		(0.71	)
Diluted net (loss) per share		(0.67	)		(0.04	)		(0.71	)
Adjustment for net periodic pension plan cost		(4	)		2			(2	)
Other comprehensive (loss) income		(11	)		2			(9	)
Comprehensive (loss)		(34	)		—			(34	)

LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three Months Ended March 31, 2020 and 2019

(tabular amounts in millions, except per share data)

	Previously Disclosed in Form 10-K						As Reported with Change
	Year Ended December 31, 2019			Impact of Change			Year Ended December 31, 2019
Settlement of retirement benefit obligations	$	137		$	(3	)	$	134
Investment and other (income) expense		(37	)		6			(31	)
(Loss) before income taxes		(288	)		(3	)		(291	)
Income tax expense (benefit)		7			(1	)		6
Net (loss)		(295	)		(2	)		(297	)
Basic net (loss) per share		(8.82	)		(0.07	)		(8.89	)
Diluted net (loss) per share		(8.82	)		(0.07	)		(8.89	)
Adjustment for net periodic pension plan cost		54			2			56
Other comprehensive income		56			2			58
Comprehensive (loss)		(239	)		—			(239	)

	Previously Disclosed in Form 10-Q						As Reported with Change
	Three Months Ended March 31, 2019			Impact of Change			Three Months Ended March 31, 2019
Settlement of retirement benefit obligations	$	135		$	(3	)	$	132
Investment and other (income) expense		(10	)		2			(8	)
(Loss) income before income taxes		(163	)		1			(162	)
Income tax (benefit)		(37	)		—			(37	)
Net (loss) income		(126	)		1			(125	)
Basic net (loss) income per share		(3.79	)		0.02			(3.77	)
Diluted net (loss) income per share		(3.79	)		0.02			(3.77	)
Adjustment for net periodic pension plan cost		107			(1	)		106
Other comprehensive income (loss)		108			(1	)		107
Comprehensive (loss)		(18	)		—			(18	)

	Previously Disclosed in Form 10-Q						As Reported with Change
	Three Months Ended June 30, 2019			Impact of Change			Three Months Ended June 30, 2019
Settlement of retirement benefit obligations	$	1		$	—		$	1
Investment and other (income) expense		(9	)		1			(8	)
(Loss) before income taxes		(27	)		(1	)		(28	)
Income tax (benefit)		(3	)		—			(3	)
Net (loss)		(24	)		(1	)		(25	)
Basic net (loss) per share		(0.69	)		(0.03	)		(0.72	)
Diluted net (loss) per share		(0.69	)		(0.03	)		(0.72	)
Adjustment for net periodic pension plan cost		3			1			4
Other comprehensive income		4			1			5
Comprehensive (loss)		(20	)		—			(20	)

LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three Months Ended March 31, 2020 and 2019

(tabular amounts in millions, except per share data)

	Previously Disclosed in Form 10-Q						As Reported with Change
	Three Months Ended September 30, 2019			Impact of Change			Three Months Ended September 30, 2019
Settlement of retirement benefit obligations	$	1			—		$	1
Investment and other (income) expense		(9	)		1			(8	)
Income (loss) before income taxes		24			(1	)		23
Income tax expense		—			—			—
Net income (loss)		24			(1	)		23
Basic net income (loss) per share		0.69			(0.03	)		0.66
Diluted net income (loss) per share		0.69			(0.03	)		0.66
Adjustment for net periodic pension plan cost		2			1			3
Other comprehensive income		—			1			1
Comprehensive income		24			—			24

	Previously Disclosed in Form 10-Q						As Reported with Change
	Three Months Ended December 31, 2019			Impact of Change			Three Months Ended December 31, 2019
Settlement of retirement benefit obligations	$	—		$	—		$	—
Investment and other (income) expense		(9	)		2			(7	)
(Loss) before income taxes		(122	)		(2	)		(124	)
Income tax expense (benefit)		47			(1	)		46
Net (loss)		(169	)		(1	)		(170	)
Basic net (loss) per share		(5.02	)		(0.03	)		(5.05	)
Diluted net (loss) per share		(5.02	)		(0.03	)		(5.05	)

The ~~following table outlines unaudited pro forma financial information for~~tables below represent the ~~three~~impact of the change in accounting principle on the condensed consolidated balance sheet as of March 31, 2020 and ~~six months ended June 30, 2019~~the statements of operations and ~~2018:~~

Three Months Ended

Six Months Ended

June 30,

June 30,

2019

2018

2019

2018

Amortization of purchased intangibles

$
4

$
5

$
9

$
10

~~There were no nonrecurring pro forma adjustments affecting net (loss)~~comprehensive income for the three ~~and six~~ months ended ~~June 30,~~March 31, 2020:

	Previous Accounting Method						As Reported
	March 31, 2020			Impact of Change			March 31, 2020
Equity
(Accumulated deficit)	$	(408	)	$	(9	)	$	(417	)
Accumulated other comprehensive loss (income)		(535	)		10			(525	)
Pension liabilities	142				(1	)		141

	Previous Accounting Method						As Reported
	March 31, 2020			Impact of Change			March 31, 2020
Investment and other (income)	$	(8	)	$	(2	)	$	(10	)
(Loss) income before income taxes		(53	)		2			(51	)
Income tax expense		1			—			1
Net (loss) income		(54	)		2			(52	)
Basic net (loss) income per share		(1.61	)		0.05			(1.56	)
Diluted net (loss) income per share		(1.61	)		0.05			(1.56	)
Adjustment for net periodic pension plan cost		4			(1	)		3
Other comprehensive (loss)		(7	)		(1	)		(8	)
Comprehensive (loss) income		(61	)		1			(60	)

LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three Months Ended March 31, 2020 and 2019 ~~and 2018.~~

(tabular amounts in millions, except per share data)

Note 3.2. Revenue Recognition

Disaggregated Revenue

The following tables provide information about disaggregated revenue by major products/service lines and timing of revenue recognition, and include a reconciliation of the disaggregated revenue with reportable segments for the three ~~and six~~ months ended ~~June 30, 2019~~March 31, 2020 and ~~2018.~~ 2019.

	Three Months Ended
	March 31, 2020
	Magazines,
	Catalogs
	and				Office
	Logistics		Book		Products		Mexico		Other		Total
Major Products / Service Lines
Book_(a)	$	—	$	204	$	—	$	—	$	—	$	204

Magazines and Catalogs _(b)	$	250	$	—	$	—	$	23	$	21	$	294

Logistics	$	77	$	—	$	—	$	—	$	—	$	77

Directories	$	—	$	—	$	—	$	—	$	14	$	14

Office Products	$	—	$	—	$	112	$	—	$	—	$	112
Total	$	327	$	204	$	112	$	23	$	35	$	701

Timing of Revenue Recognition
Products and services transferred at a point in time	$	225	$	172	$	112	$	23	$	14	$	546
Products and services transferred over time		102		32		—		—		21		155
Total	$	327	$	204	$	112	$	23	$	35	$	701

LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three ~~and Six~~ Months Ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~

(tabular amounts in millions, except per share data)

Three Months Ended

Three Months Ended

June 30, 2019

June 30, 2018

Magazines,

Magazines,

Catalogs

Catalogs

and

Office

and

Office

Logistics

Book

Products

Other

Total

Logistics

Book

Products

Other

Total

Major Products / Service Lines

Book_(a)

$
—

$
289

$
—

$
—

$
289

$
—

$
266

$
—

$
—

$
266

Magazines and Catalogs _(b)

$
297

$
—

$
—

$
44

$
341

$
372

$
—

$
—

$
92

$
464

     North America

297

—

—

44

341

372

—

—

41

413

     Europe

—

—

—

—

—

—

—

—

51

51

Logistics

$
83

$
—

$
—

$
—

$
83

$
29

$
—

$
—

$
—

$
29

Directories

$
—

$
—

$
—

$
17

$
17

$
—

$
—

$
—

30

$
30

     North America

—

—

—

17

17

—

—

—

25

25

     Europe

—

—

—

—

—

—

—

—

5

5

Office Products

$
—

$
—

$
139

$
—

$
139

$
—

$
—

$
154

$
—

$
154

Total

$
380

$
289

$
139

$
61

$
869

$
401

$
266

$
154

$
122

$
943

Timing of Revenue Recognition

Products and services
     transferred at a point in
     time

$
268

$
253

$
139

$
42

$
702

$
342

$
236

$
154

$
105

$
837

Products and services
     transferred over time

112

36

—

19

167

59

30

—

17

106

Total

$
380

$
289

$
139

$
61

$
869

$
401

$
266

$
154

$
122

$
943

~~LSC Communications, Inc.~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~

~~For the Three and Six Months Ended June 30, 2019 and 2018~~

~~(tabular amounts in millions, except per share data)~~

	Six Months Ended										Six Months Ended										Three Months Ended
	June 30, 2019										June 30, 2018										March 31, 2019
	Magazines,										Magazines,										Magazines,
	Catalogs										Catalogs										Catalogs
	and				Office						and				Office						and				Office
	Logistics		Book		Products		Other		Total		Logistics		Book		Products		Other		Total		Logistics		Book		Products		Mexico		Other		Total
Major Products / Service Lines
Book_(a)	$	—	$	549	$	—	$	—	$	549	$	—	$	515	$	—	$	—	$	515	$	—	$	260	$	—	$	—	$	—	$	260

Magazines and Catalogs _(b)	$	616	$	—	$	—	$	88	$	704	$	772	$	—	$	—	$	191	$	963	$	319	$	—	$	—	$	24	$	20	$	363
North America		616		—		—		88		704		772		—		—		82		854
Europe		—		—		—		—		—		—		—		—		109		109

Logistics	$	167	$	—	$	—	$	—	$	167	$	56	$	—	$	—	$	—	$	56	$	84	$	—	$	—	$	—	$	—	$	84

Directories	$	—	$	—	$	—	$	36	$	36	$	—	$	—	$	—	$	61	$	61	$	—	$	—	$	—	$	—	$	19	$	19
North America		—		—		—		36		36		—		—		—		52		52
Europe		—		—		—		—		—		—		—		—		9		9

Office Products	$	—	$	—	$	258	$	—	$	258	$	—	$	—	$	277	$	—	$	277	$	—	$	—	$	119	$	—	$	—	$	119
Total	$	783	$	549	$	258	$	124	$	1,714	$	828	$	515	$	277	$	252	$	1,872	$	403	$	260	$	119	$	24	$	39	$	845

Timing of Revenue Recognition
Products and services transferred at a point in time	$	556	$	481	$	258	$	85	$	1,380	$	711	$	457	$	277	$	217	$	1,662	$	288	$	228	$	119	$	24	$	19	$	678
Products and services transferred over time		227		68		—		39		334		117		58		—		35		210		115		32		—		—		20		167
Total	$	783	$	549	$	258	$	124	$	1,714	$	828	$	515	$	277	$	252	$	1,872	$	403	$	260	$	119	$	24	$	39	$	845

(a)

Includes e-book formatting and supply chain management associated with book production

(b)

Includes premedia and co-mail

12Accounts Receivable

As disclosed in Note 1, Overview and Basis of Presentation, the Company adopted ASU 2016-13 on January 1, 2020 using the modified retrospective adoption method. As a result of the adoption, the Company now records an allowance for credit losses on unbilled receivables which resulted in a de minimis amount of expense for the three months ended March 31, 2020. There were no changes to the Company’s policy relating to its receivables. To recognize the initial adoption, the Company recorded a de minimis increase to its January 1, 2020 balance for allowance for credit losses and an offsetting impact to accumulated deficit in the condensed consolidated balance sheet.

Transactions affecting the allowances for doubtful accounts receivable balance during the three months ended March 31, 2020 were as follows:

	Three Months Ended
	March 31, 2020
Balance, beginning of year	$	12
Provisions charged to expense		1
Balance, end of period	$	13

There was a de minimis amount of write-offs and recoveries during the three months ended March 31, 2020.

LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three ~~and Six~~ Months Ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~

(tabular amounts in millions, except per share data)

Contract Balances

The following table provides changes in contract assets and liabilities during the ~~six~~three months ended ~~June 30, 2019:~~March 31, 2020:

	Short-Term Contract Assets			Long-Term Contract Assets			Contract Liabilities			Short-Term Contract Assets			Long-Term Contract Assets			Contract Liabilities
Beginning Balance, January 1, 2019	$	44		$	30		$	16
Beginning Balance, January 1, 2020										$	40		$	14		$	17
Additions to unbilled accounts receivable		35			—			—			17			—			—
Unbilled accounts receivable recognized in trade receivables		(33	)		—			—			(28	)		—			—
Payment of contract acquisition costs					2						—			—			—
Amortization of contract acquisition costs		—			(6	)		—			—			(3	)		—
Revenue recognized that was included in contract liabilities as of January 1, 2019		—			—			(9	)
Write-off due to termination of contract acquisition costs											—			—			—
Revenue recognized that was included in contract liabilities as of January 1, 2020											—			—			(12	)
Increases due to cash received		—			—			4			—			—			11
Ending Balance, June 30, 2019	$	46		$	26		$	11
Ending Balance, March 31, 2020										$	29		$	11		$	16

The trade receivables balance was ~~$461~~$371 million and ~~$488~~$366 million as of ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively. There was a de minimis amount of credit losses recognized on short-term contract assets recorded during the three months ended March 31, 2020.

~~Accounts Receivable~~

~~Transactions affecting the allowances for doubtful accounts receivable balance during the six months ended June 30, 2019 were as follows:~~

June 30, 2019

Balance, beginning of year

$
14

Provisions charged to expense

4

Write-offs and other

(3
)
Balance, end of period

$
15

Note 4.3. Leases

~~Financial Statement Impact of Adopting Accounting Standards Update No. 2016-02 “Leases (Topic 842)” (“ASU 2016-02” or “ASC 842”)~~

The Company adopted ASU 2016-02 on January 1, 2019 using the modified retrospective adoption method. The reported results for 2019 reflect the adoption of ASC 842 guidance while the reported results for 2018 were prepared and continue to be reported under the guidance of ASC 840, Leases, referred to herein as “previous guidance.”

In adopting ASC 842, the Company applied certain available practical expedients, including electing to combine lease and non-lease components of a contract and electing to apply the practical expedient “package” permitted under ASU 2016-02. This election allowed the Company to use the lease classification (operating or finance) previously determined at the start of a lease contract for any expired or existing leases as of the date of adoption.

The Company performed an analysis of all lease contracts existing as of January 1, 2019. Upon adoption of ASC 842, the Company added $206 million of right-of-use (“ROU”) assets and lease liabilities to its balance sheet related to operating leases. There were no changes to assets or liabilities relating to finance leases.

~~Based upon the balances that existed as of December 31, 2018, the Company recorded adjustments to the following accounts as of January 1, 2019:~~

~~LSC Communications, Inc.~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~

~~For the Three and Six Months Ended June 30, 2019 and 2018~~

~~(tabular amounts in millions, except per share data)~~

As Reported

Adjustments

Adjusted

December 31,
2018

Adoption of ASU 2016-02

January 1,
2019

Assets

ROU assets for operating leases _(a)

$
—

$
201

$
201

Liabilities

Accrued liabilities_(a)

$
199

$
(1
)

$
198

Short-term operating lease liabilities

—

52

52

Long-term operating lease liabilities

—

154

154

Other noncurrent liabilities_(a)

61

(4
)

57

~~(a)~~

~~The total $5 adjustment shown in accrued liabilities and other noncurrent liabilities relates to straight-line rent accruals that were reclassified to ROU assets for operating leases.~~

~~Accounting Policy~~

Under ASC 842, the Company determines if a contract contains a lease at the inception of the contract. A contract contains a lease if it conveys to the Company the right to control the use of specified assets. Operating leases are included in ROU assets and in other current liabilities and other non-current liabilities. Finance lease assets are included in property, plant, and equipment, and liabilities are included in short-term and long-term debt. ROU assets and lease liabilities are recognized at the present value of future lease payments. The discount rate used to measure the amount recognized is the Company’s incremental borrowing rate if an implicit rate is not determinable from the lease contract. Operating lease cost is recognized on a straight-line basis over the term of the lease.

The Company leases land, production facilities, office space, and equipment. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. Further, the Company has elected not to separate lease and non-lease components of contracts for any asset classes, but rather to account for non-lease components together with their related lease components.

For leases that include renewal options that the Company is reasonably certain to exercise, the Company includes the renewal period in its initial classification of the lease. Renewal options range from 1 year to 5 years.

~~The Company’s variable lease payments do not depend on a published index or rate, and therefore, are expensed as incurred.~~Lease Expense

The components of total net lease expense were as follows:

	Three Months Ended			Six Months Ended			Three Months Ended			Three Months Ended
	June 30, 2019			June 30, 2019			March 31, 2020			March 31, 2019
Operating lease expense	$	18		$	35		$	17		$	17
Sublease (income)		(2	)		(4	)		(2	)		(2	)
Variable lease expense		2			5			2			3
Total net lease expense	$	18		$	36		$	17		$	18

During each of the three ~~and six~~ months ended ~~June 30,~~March 31, 2020 and 2019, the Company incurred a de minimis amount of finance lease cost, consisting of finance lease ROU asset amortization and interest on finance lease liabilities, and a de minimis amount of cost associated with short-term leases.

~~Supplemental non-cash information related to leases is included below:~~

1416

LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three ~~and Six~~ Months Ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~

(tabular amounts in millions, except per share data)

Cash Flow Information

Supplemental non-cash information related to leases is included below:

	Six Months Ended		Three Months Ended		Three Months Ended
	June 30, 2019		March 31, 2020		March 31, 2019
ROU assets acquired in exchange for lease obligations:
ROU assets
Operating leases	$	9	$	4	$	2

Lease obligations
Operating leases	$	9	$	4	$	2

During the ~~six~~three months ended ~~June 30,~~March 31, 2020 and 2019, the Company recorded ~~$31~~$14 million and $16 million of operating cash outflows from operating ~~leases.~~leases, respectively.

During each of the ~~six~~three months ended ~~June 30,~~March 31, 2020 and 2019, the Company recorded a de minimis amount of cash ~~flows~~outflows from financing leases. NoNaN finance lease ROU assets or obligations were acquired during the ~~six~~three months ended ~~June 30,~~March 31, 2020 and 2019.

Lease Terms and Discount Rates

Supplemental information ~~related to leases~~regarding the weighted average lease term and discount rate for the lease liabilities as of March 31, 2020 is included below:

	~~June 30, 2019~~March 31, 2020
Weighted Average Remaining Lease Term (years)
Operating leases		~~5.2~~4.9
Financing leases		~~2.4~~2.0

Weighted Average Discount Rate
Operating leases		~~8.4~~8.7	%
Financing leases		~~6.7~~6.9	%

LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three Months Ended March 31, 2020 and 2019

(tabular amounts in millions, except per share data)

Lease Maturities

The annual maturities of lease liabilities as of ~~June 30, 2019~~March 31, 2020 were as follows:

	Operating Leases			Operating Leases
2019	$	29
2020		53		$	39
2021		45			45
2022		36			34
2023		25			24
2024 & thereafter		47
2024					19
2025 & thereafter					28
Total undiscounted lease payments		235			189
Imputed interest		(41	)		(26	)
Total lease liabilities	$	194		$	163

During the ~~six~~three months ended ~~June 30, 2019,~~March 31, 2020, the Company recorded a de minimis amount of maturities for finance lease liabilities. As of ~~June 30, 2019,~~March 31, 2020, the Company has additional operating leases that have not commenced for an undiscounted amount of $5$1 million. ~~These operating leases will commence during 2019 with lease terms of 3 years to 6 years.~~

The Company also is a sublessor to land and building subleases for certain locations resulting from the acquisition of businesses or disposition of the Company’s business components. Some of these subleases have variable payments, either because payments are structured to follow the head lease or because the sublease includes reimbursement for utilities and other expenses. We recognize the rent-related portion of lease payments, including changes based on a published index or rate, on a straight-line basis and the variable portion related to utilities and other expenses in the period incurred. Our subleases have various renewal and termination options which generally allow for renewal for 1 year to 5 years, or termination on 90 days’ notice.

~~LSC Communications, Inc.~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~

~~For the Three and Six Months Ended June 30, 2019 and 2018~~

~~(tabular amounts in millions, except per share data)~~

Note 5.4. Inventories

The components of the Company’s inventories, net of excess and obsolescence reserves for raw materials and finished goods, at ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019 were as follows:

	June 30,			December 31,			March 31,			December 31,
	2019			2018			2020			2019
Raw materials and manufacturing supplies	$	123		$	119		$	70		$	91
Work in process		50			50			38			38
Finished goods		89			80			89			87
Last in, first out reserve		(49	)		(52	)		(41	)		(46	)
Total	$	213		$	197		$	156		$	170

Note 6.5. Property, Plant and Equipment

The components of the Company’s property, plant and equipment at ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019 were as follows:

	June 30,			December 31,			March 31,			December 31,
	2019			2018			2020			2019
Land	$	35		$	43		$	34		$	35
Buildings		698			709			662			663
Machinery and equipment		3,592			3,759			2,989			3,006
		4,325			4,511			3,685			3,704
Less: Accumulated depreciation		(3,840	)		(4,003	)		(3,261	)		(3,264	)
Total	$	485		$	508		$	424		$	440

During the three ~~and six~~ months ended ~~June 30,~~March 31, 2020 and 2019, depreciation expense was~~$24~~ $21 million and ~~$48 million, respectively. During the three and six months ended June 30, 2018, depreciation expense was $28 million and $59~~$24 million, respectively. Refer to Note 8, Restructuring, Impairment and Other Charges, for a discussion on impairment reviews performed as of ~~June 30, 2019~~March 31, 2020 and information on impairment recorded during the ~~six~~three months ended ~~June 30,~~March 31, 2020 and 2019.

LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three Months Ended March 31, 2020 and 2019

(tabular amounts in millions, except per share data)

Assets Held for Sale

Primarily as a result of restructuring actions, certain facilities and equipment are considered held for sale. The net book value of assets held for sale was ~~$11~~$6 million and $3$9 million at ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively. These assets ~~were~~are included in prepaid expenses and other current assets in the condensed consolidated balance sheets at the lower of their historical net book value or their estimated fair value, less estimated costs to sell.

~~LSC Communications, Inc.~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~

~~For the Three and Six Months Ended June 30, 2019 and 2018~~

~~(tabular amounts in millions, except per share data)~~

Note 7.6. Goodwill and Other Intangible Assets

The changes in the carrying amount of goodwill for the ~~six~~three months ended ~~June 30, 2019~~March 31, 2020 were as follows:

	Magazines,															Magazines,
	Catalogs															Catalogs						Office
	and Logistics			Book			Office Products			Other			Total			and Logistics			Book			Products			Mexico		Other			Total
Net book value as of December 31, 2018
Net book value as of December 31, 2019
Goodwill	$	523		$	354		$	110		$	5		$	992		$	523		$	354		$	110		$	—	$	5		$	992
Accumulated impairment losses		(502	)		(303	)		(79	)		(5	)		(889	)		(502	)		(354	)		(79	)		—		(5	)		(940	)
Total		21			51			31			—			103			21			—			31			—		—			52
Net book value as of June 30, 2019
Net book value as of March 31, 2020
Goodwill		523			354			110			5			992			523			354			110			—		5			992
Accumulated impairment losses		(502	)		(303	)		(79	)		(5	)		(889	)		(502	)		(354	)		(79	)		—		(5	)		(940	)
Total	$	21		$	51		$	31		$	—		$	103		$	21		$	—		$	31		$	—	$	—		$	52

The components of other intangible assets at ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019 were as follows:

	June 30, 2019							December 31, 2018							March 31, 2020							December 31, 2019
	Gross Carrying		Accumulated			Net Book		Gross Carrying		Accumulated			Net Book		Gross Carrying		Accumulated			Net Book		Gross Carrying		Accumulated			Net Book
	Amount		Amortization			Value		Amount		Amortization			Value		Amount		Amortization			Value		Amount		Amortization			Value
Customer relationships	$	248	$	(142	)	$	106	$	268	$	(137	)	$	131	$	248	$	(153	)	$	95	$	248	$	(149	)	$	99
Trade names		30		(7	)		23		9		(6	)		3		29		(8	)		21		29		(8	)		21
Total amortizable other intangible assets		278		(149	)		129		277		(143	)		134
Indefinite-lived trade names		1		—			1		22		—			22
Total other intangible assets	$	279	$	(149	)	$	130	$	299	$	(143	)	$	156	$	277	$	(161	)	$	116	$	277	$	(157	)	$	120

~~In the second quarter of 2019, the Company impaired certain definite-lived customer relationships with a net book value of $17 million. Refer to Note 8,~~ ~~Restructuring, Impairment and Other Charges, for a discussion on impairment reviews performed as of June 30, 2019 and information on impairment recorded during the six months ended June 30, 2019.~~

On January 1, 2019, all of Office Products’ tradenames (net book value of $21 million) were changed from indefinite-lived tradenames to definite-lived tradenames with a useful life of 15 years, as management determined that it was not possible to conclude the tradenames will generate cash flows for an indefinite period of time due to secular industry decline and changes in the usage of branded products.

During the three ~~and six~~ months ended ~~June 30,~~March 31, 2020 and 2019, amortization expense for other intangible assets was $4 million and $9$5 million, respectively. ~~During the three and six months ended June 30, 2018, amortization expense for other intangible assets was $4 and $9 million, respectively.~~

The following table outlines the estimated annual amortization expense related to all amortizable intangible assets:

For the year ending December 31,	Amount		Amount
2019	$	18
2020		17	$	17
2021		15		15
2022		14		14
2023		13		13
2024 and thereafter		61
2024				13
2025 and thereafter				48
Total	$	138	$	120

Refer to Note 7, Restructuring, Impairment and Other Charges, for information on the goodwill and intangible asset impairment reviews performed as of March 31, 2020.

1719

LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three ~~and Six~~ Months Ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~

(tabular amounts in millions, except per share data)

Note 8.7. Restructuring, Impairment and Other Charges

For the three ~~and six~~ months ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018,~~ the Company recorded the following net restructuring, impairment and other charges disclosed in the condensed consolidated statements of operations:

Other

Total

Three Months Ended

Employee

Restructuring

Restructuring

Other

June 30, 2019

Terminations

Charges

Charges

Impairment

Charges

Total

Magazines, Catalogs and Logistics

$
—

$
3

$
3

$
17

$
—

$
20

Book

—

—

—

—

1

1

Office Products

—

1

1

—

—

1

Other

—

—

—

—

—

—

Corporate

—

2

2

—

—

��

2

Total

$
—

$
6

$
6

$
17

$
1

$
24

			Other		Total										Other		Total
Six Months Ended	Employee		Restructuring		Restructuring				Other
June 30, 2019	Terminations		Charges		Charges		Impairment		Charges		Total
Three Months Ended													Employee		Restructuring		Restructuring				Other
March 31, 2020													Terminations		Charges		Charges		Impairment		Charges		Total
Magazines, Catalogs and Logistics	$	5	$	7	$	12	$	19	$	—	$	31	$	—	$	10	$	10	$	1	$	—	$	11
Book		—		1		1		—		1		2		1		2		3		—		—		3
Office Products		—		1		1		—		—		1		2		—		2		—		—		2
Mexico														—		—		—		—		—		—
Other		—		—		—		—		—		—		—		—		—		—		—		—
Corporate		—		3		3		—		—		3		—		10		10		—		—		10
Total	$	5	$	12	$	17	$	19	$	1	$	37	$	3	$	22	$	25	$	1	$	—	$	26

Other

Total

Three Months Ended

Employee

Restructuring

Restructuring

Other

June 30, 2018

Terminations

Charges

Charges

Impairment

Charges

Total

Magazines, Catalogs and Logistics

$
1

$
5

$
6

$
—

$
—

$
6

Book

1

1

2

—

1

3

Office Products

—

1

1

—

—

1

Other

—

—

—

—

—

—

Corporate

1

—

1

—

—

1

Total

$
3

$
7

$
10

$
—

$
1

$
11

			Other		Total											Other		Total
Six Months Ended	Employee		Restructuring		Restructuring					Other
June 30, 2018	Terminations		Charges		Charges		Impairment			Charges		Total
Three Months Ended														Employee		Restructuring		Restructuring				Other
March 31, 2019														Terminations		Charges		Charges		Impairment		Charges		Total
Magazines, Catalogs and Logistics	$	4	$	7	$	11	$	(1	)	$	—	$	10	$	5	$	4	$	9	$	2	$	—	$	11
Book		1		2		3		—			1		4		—		1		1		—		—		1
Office Products		1		1		2		—			—		2		—		—		—		—		—		—
Mexico															—		—		—		—		—		—
Other		—		—		—		—			—		—		—		—		—		—		—		—
Corporate		1		—		1		—			—		1		—		1		1		—		—		1
Total	$	7	$	10	$	17	$	(1	)	$	1	$	17	$	5	$	6	$	11	$	2	$	—	$	13

~~LSC Communications, Inc.~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~

~~For the Three and Six Months Ended June 30, 2019 and 2018~~

~~(tabular amounts in millions, except per share data)~~

Restructuring Charges

For the three ~~and six~~ months ended ~~June 30,~~March 31, 2020, the Company incurred net other restructuring charges of $22 million, primarily due to facility costs and costs to move equipment, expenses associated with new revenue opportunities, and cost savings initiatives implemented in 2019. For the three months ended March 31, 2020, the Company incurred charges of $3 million for an aggregate of 397 employees, of whom 197 were terminated as of or prior to March 31, 2020, primarily related to the closure of 1 facility in the Office Products segment.

For the three months ended March 31, 2019, the Company incurred charges of $5 million for an aggregate of 240 employees, primarily related to the closure of 1 facility in the Magazines, Catalogs and Logistics segment. The Company incurred net other restructuring charges of $6 million ~~and $12 million, respectively,~~for the three months ended March 31, 2019 primarily due to charges related to facility costs,as well as costs associated with new revenue opportunities and cost savings initiatives implemented ~~in 2019, and pension withdrawal obligations related to facility closures. For~~during the ~~six months ended June 30, 2019, the Company incurred charges of $5 million for an aggregate of 234 employees, of whom 31 were terminated as of or prior to June 30, 2019,~~ ~~primarily related to the closure of one facility in the Magazines, Catalogs and Logistics segment.~~ quarter. The Company recorded $2 million of net impairment charges ~~for the six months ended June 30, 2019~~ related to machinery and equipment associated with facility closings in the Magazines, Catalogs and Logistics segment.

For the three and six months ended June 30, 2018, the Company incurred employee-related restructuring charges of $3 million and $7 million, respectively, for an aggregate of 304 employees, substantially all of whom were terminated as of or prior to June 30, 2019. These charges primarily related to the closure of one facility in the ~~Magazines, Catalogs and Logistics segment~~ and the reorganization of certain business units and corporate functions. The Company incurred other restructuring charges of $7 million and $10 million for the three and six months ended June 30, 2018, respectively, for facility costs, a loss related to the Company's disposition of its retail offset printing facilities and pension withdrawal obligations related to facility closures.

Impairment Reviews ~~and Charges~~

The Company performs interim reviews of goodwill for indicators of impairment each quarter to assess whether an interim impairment review is required for any reporting unit. Additionally, the Company evaluates the recoverability of other long-lived assets, including property, plant and equipment and certain identifiable intangible assets, whenever events or changes in circumstances indicate that the carrying value of an asset or asset group may not be recoverable. As part of its interim reviews, management analyzes operating results for the period compared to expected results as of the prior year’s review, key assumptions such as discount rates and

LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three Months Ended March 31, 2020 and 2019

(tabular amounts in millions, except per share data)

expected long-term growth rates, changes in the overall market value of the Company’s equity and debt securities, significant negative industry and economic trends, as well as other factors.

~~For~~

Goodwill

Due the three months ended June 30, 2019, the Book and Office Products segments performed in line with expectations. However, the Company has seen an unprecedented drop in demand in its magazines and catalogs reporting unit, with the faster pace of decline in demand primarily due to the acceleratedpotential impact of ~~digital disruption of demand for printed materials. In addition,~~COVID-19 on the ~~Company’s stock price has experienced a significant, sustained decline since the Company performed its annual goodwill impairment test (October 31, 2018).~~

~~Given the stock price decline,~~company’s future performance, management determined that a further review of the reporting units’ goodwill for indicators of impairment was appropriate. ~~The Company concluded that Book,~~As discussed in Note 1, Overview and Basis of Presentation, COVID-19 has the potential to have a negative impact across several of the Company’s segments. As of March 31, 2020, only two reporting units had goodwill: Office Products ($31 million) and logistics ($21 million).

For the Office Products and ~~Logistics~~logistics reporting units, management assessed goodwill impairment risk by first performing a qualitative review of entity specific, industry, market and general economic factors for each reporting unit. For both reporting units, the Company was not able to conclude that it is more likely than not that the fair values of our reporting units are greater than their carrying values, and therefore, a one-step method for determining goodwill impairment was applied as of March 31, 2020.

The Company performed a Step 1 impairment test of goodwill in accordance with Accounting Standards Codification (“ASC”) 350, Intangibles-Goodwill and Other, which includes comparing the estimated fair value of each reporting unit to its carrying amount, including goodwill. If the carrying amount of a reporting unit is greater than zero and its fair value exceeds its carrying amount, goodwill of the reporting unit is considered not impaired. However, if the carrying amount of a reporting unit exceeds its fair value, the goodwill is considered impaired and a full or partial write-off of goodwill would be required.

The Company determines the fair value of its reporting units using both the income approach and the market approach. The determination of the fair value using the income approach requires management to make significant estimates and assumptions related to projected operating results (including forecasted revenue and operating income), anticipated future cash flows, and discount rates. The determination of the fair value using the market approach requires management to make significant assumptions related to the multiples of earnings before interest, income taxes, depreciation and amortization (“EBITDA”) used in the calculation. Additionally, the market approach estimates fair value using comparable marketplace fair value data from within a comparable industry grouping. The Company weighs both the income and market approach equally to estimate the concluded fair value of each reporting unit.

The determination of fair value and the allocation of that value to individual assets and liabilities requires the Company to make significant estimates and assumptions. These estimates and assumptions primarily include, but are not limited to: the selection of appropriate peer group companies; control premiums appropriate for acquisitions in the industries in which the Company competes; the discount rate; terminal growth rates; and forecasts of revenue, operating income, depreciation and amortization, restructuring charges and capital expenditures. As part of its impairment test for its reporting units, the Company engages a third-party valuation firm to assist in the Company’s determination of certain assumptions used to estimate fair values.

As a result of the interim impairment tests Office Products and logistics, the Company did ~~not have indicators of~~0t recognize any goodwill impairment charges as the ~~underlying assumptions from~~estimated fair values of the ~~2018 review continue to be reasonable compared to performance thus far in 2019~~reporting units exceeded their respective carrying values by 10% and ~~management’s current outlook. No other reporting unit, including magazines and catalogs, had a goodwill balance as of June 30, 2019.~~ 32%, respectively.

~~Due to~~

Other Intangible Assets and Property, Plant and Equipment

Given the ~~unprecedented drop~~continued decline in demand in the magazines and catalogs reporting unit and the potential impact of COVID-19, management determined that a further review of the reporting unit’s ~~intangible assets and~~ property, plant and equipment and right-of-use assets for operating leases for recoverability was ~~appropriate:~~appropriate during the first quarter of 2020. The Company performed a Step 1 recoverability test in accordance with Accounting Standards Codification (“ASC”) 360, Property, Plant and Equipment. The recoverability test compares the estimated future undiscounted cash flows expected to result from the use of the asset group and its eventual disposition to the carrying value of the asset group; if the carrying value of the asset group exceeds its estimated future undiscounted cash flows, an impairment loss is recorded for the excess of the asset group’s carrying value over its fair value. Based upon management’s updated projection of cash flows for this asset group, management determined that the estimated future undiscounted cash flows were in excess of the asset group’s carrying value, resulting in 0 impairment loss as a result of these tests in the first quarter of 2020.

•

As a result of the faster pace of decline in demand, negative revenue trends and lower expectations of future revenue to be derived from certain customer relationships, management determined that a certain definite-lived customer relationship intangible asset was not recoverable. This resulted in the Company recording a $17 million impairment charge for the three months ended June 30, 2019, which fully impaired the asset. The impairment was determined using Level 3 inputs and estimated based on cash flow analyses, which included management’s assumptions related to future revenues and profitability.

1921

LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three ~~and Six~~ Months Ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~

(tabular amounts in millions, except per share data)

•

In addition to the interim tests noted above, the Company reviewed the Office Products’ intangible assets and Books’ intangible assets and property, plant and equipment for recoverability. There were 0 impairment charges recorded as a result of the recoverability tests.

With respect to property, plant and equipment and right-of-use assets for operating leases within the magazines and catalogs reporting unit, management performed a Step 1 recoverability test in accordance with Accounting Standards Codification (“ASC”) ASC 360, ~~Property, Plant and Equipment~~. The recoverability test compares the estimated future undiscounted cash flows expected to result from the use of the asset group and its eventual disposition to the carrying value of the asset group; if the carrying value of the asset group exceeds its estimated future undiscounted cash flows, an impairment loss is recorded for the excess of the asset group’s carrying value over its fair value. Based upon management’s updated projection of cash flows for this asset group – which includes a hypothetical sale of assets – management determined that the estimated future undiscounted cash flows were in excess of the asset group’s carrying value, resulting in no impairment loss.

Future Interim Reviews

The Company will continue to perform interim reviews of goodwill for indicators of impairment each quarter to assess whether an interim impairment test is required for its goodwill balances or if recoverability tests are required for long-lived assets, including property, plant and equipment, ~~deferred tax assets~~ and certain identifiable intangible assets, whenever events or changes in circumstances indicate that the carrying value of an asset or asset group may not be recoverable. Such reviews could result in future impairment charges, depending on the facts and circumstances in effect at the time of those reviews.

Other Charges

For each of the three ~~and six~~ months ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018,~~ the Company recorded ~~$1 million~~de minimis amount of other charges for multiemployer pension plan withdrawal obligations unrelated to facility closures. The total liability for the withdrawal obligations associated with the Company’s decision to withdraw from certain multiemployer pension plans included $3 million in accrued liabilities and ~~$18~~$17 million in restructuring and multiemployer pension plan liabilities at ~~June 30, 2019.~~March 31, 2020.

The Company’s withdrawal liabilities could be affected by the financial stability of other employers participating in such plans and any decisions by those employers or the Company to withdraw from such plans in the future. While it is not possible to quantify the potential impact of future events or circumstances, reductions in other employers’ participation in multiemployer pension plans, including certain plans from which the Company has previously withdrawn, could have a material effect on the Company’s previously estimated withdrawal liabilities and condensed consolidated balance sheets, statements of operations and cash flows.

Restructuring Reserve

The restructuring reserve as of December 31, ~~2018~~2019 and ~~June 30, 2019,~~March 31, 2020, and changes during the ~~six~~three months ended ~~June 30, 2019~~March 31, 2020 were as follows:

	December 31,		Restructuring				Cash			June 30,		December 31,		Restructuring		Cash			March 31,
	2018		Charges		Other		Paid			2019		2019		Charges		Paid			2020
Employee terminations	$	8	$	5	$	—	$	(3	)	$	10	$	29	$	3	$	(5	)	$	27
Multiemployer pension plan withdrawal obligations		32		1		—		(3	)		30		31		1		(2	)		30
Other		1		11		—		(9	)		3
Other and lease termination													2		19		(13	)		8
Total	$	41	$	17	$	—	$	(15	)	$	43	$	62	$	23	$	(20	)	$	65

The current portion of restructuring reserves of ~~$19~~$41 million at ~~June 30, 2019~~March 31, 2020 was included in accrued liabilities, while the long-term portion of $24 million, which primarily related to multiemployer pension plan withdrawal obligations related to facility closures, was included in restructuring and multiemployer pension liabilities at ~~June 30, 2019.~~March 31, 2020.

The Company anticipates that payments associated with the employee terminations reflected in the above table will be substantially completed by ~~June 30, 2020.~~March 31, 2021.

Payments on all of the Company’s multiemployer pension plan withdrawal obligations are scheduled to be completed by 2034. Changes based on uncertainties in these estimated withdrawal obligations could affect the ultimate charges related to multiemployer pension plan withdrawal obligations.

The restructuring liabilities classified as “other” consisted of other facility closing ~~costs.~~ costs and costs associated with new revenue opportunities and cost savings initiatives implemented in 2019.

2022

LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three ~~and Six~~ Months Ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~

(tabular amounts in millions, except per share data)

Note 9.8. Commitments and Contingencies

The Company is subject to laws and regulations relating to the protection of the environment. The Company accrues for expenses associated with environmental remediation obligations when such amounts are probable and can be reasonably estimated. Such accruals are adjusted as new information develops or circumstances change and are generally not discounted. The Company has been designated as a potentially responsible party or has received claims in ~~ten~~9 active federal and state Superfund and other multiparty remediation sites. In addition to these sites, the Company may also have the obligation to remediate ~~two~~3 other previously and currently owned facilities. At the Superfund sites, the Comprehensive Environmental Response, Compensation and Liability Act provides that the Company’s liability could be joint and several, meaning that the Company could be required to pay an amount in excess of its proportionate share of the remediation costs.

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

From time to time, the Company’s customers and others file voluntary petitions for reorganization under United States bankruptcy laws. In such cases, certain pre-petition payments received by the Company from these parties could be considered preference items and subject to return. In addition, the Company may be party to certain litigation arising in the ordinary course of business. Management believes that the final resolution of these preference items and litigation will not have a material effect on the Company’s ~~condensed~~ consolidated balance sheets, statements of operations and cash flows.

Note ~~10.~~9. Debt

The Company’s debt at ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019 consisted of the following:

							March 31,			December 31,
	June 30, 2019			December 31, 2018			2020			2019
Borrowings under the Revolving Credit Facility	$	150		$	64		$	249		$	249
Term Loan Facility due September 30, 2022 _(a)		239			260			219			218
8.75% Senior Secured Notes due October 15, 2023		450			450			450			450
Finance lease and other obligations		2			4			1			2
Unamortized debt issuance costs		(10	)		(11	)		(8	)		(9	)
Total debt		831			767			911			910
Less: current portion		(192	)		(108	)		(911	)		(465	)
Long-term debt	$	639		$	659		$	—		$	445

(a)

The borrowings under the Term Loan Facility are subject to a variable interest rate. As of ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, the interest rate was ~~7.87%~~7.02% and ~~8.02%~~7.12%, respectively.

On September 30, 2016, the Company issued $450 million of Senior Secured Notes (the “Senior Notes”).

On September 30, 2016 the Company entered into a credit agreement (the “Credit Agreement”) that provides for (i) a senior secured term loan B facility in an aggregate principal amount of $375 million (the “Term Loan Facility”) and (ii) a senior secured revolving credit facility in an aggregate principal amount of $400 million (the “Revolving Credit Facility”), which was reduced to $300 million per the amendment effective on August 5, 2019. The debt issuance costs and original issue discount are being amortized over the life of the facilities using the effective interest method.

2123

LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three ~~and Six~~ Months Ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~

(tabular amounts in millions, except per share data)

The Credit Agreement is subject to a number of covenants, including, but not limited to, a minimum Interest Coverage Ratio and a Consolidated Leverage Ratio, as defined in and calculated pursuant to the Credit Agreement, that, in part, restrict the Company’s ability to incur additional indebtedness, create liens, engage in mergers and consolidations, make restricted payments and dispose of certain assets. Each of these covenants is subject to important exceptions and qualifications.

Credit Agreement Amendments

On December 20, 2018, the Company amended the Credit Agreement to, among other things, defer certain changes to the minimum Interest Coverage Ratio and the maximum Consolidated Leverage Ratio. Effective August 5, 2019, the Company further amended the Credit Agreement to, among other things, defer certain changes to the minimum Interest Coverage Ratio and the maximum Consolidated Leverage Ratio. The following summarizes the changes to the minimum Interest Coverage Ratio and the maximum Consolidated Leverage Ratio:

	Original	December 20, 2018	August 5, 2019
Maximum Consolidated Leverage Ratio
Current ratio	3.25 to 1.00	3.25 to 1.00	3.75 to 1.00
Step-down ratio	3.00 to 1.00	3.00 to 1.00	3.50 to 1.00 and 3.25 to 1.00
Step-down as of date (quarter ending on or after)	March 31, 2019	March 31, 2020	June 30, 2020 and March 31, 2021

Minimum Interest Coverage Ratio
Current ratio	3.25 to 1.00	3.25 to 1.00	2.50 to 1.00
Step-up ratio	3.50 to 1.00	3.50 to 1.00	2.75 to 1.00 and 3.00 to 1.00
Step-up as of date (quarter ending on or after)	March 31, 2019	March 31, 2020	September 30, 2020 and June 30, 2021

Other terms, including the outstanding principal, maturity date and other debt covenants remained the same under the December 20, 2018 amendment.

The August 5, 2019 amendment resulted in a reduction in the Revolving Credit Facility aggregate principal amount from $400 million to $300 million and removed the general allowance to declare and pay annual dividends of up to $50 million. The August 5, 2019 amendment included other changes that generally further restrict the Company’s ability to incur additional indebtedness, create liens, engage in mergers and consolidations, make restricted payments and dispose of certain assets. The outstanding principal and maturity date of the Term Loan Facility remains the same, while the maturity date of the Revolving Credit Facility remains the same.

Waiver, Forbearance Agreement and Fourth Amendment to Credit Agreement

Based on final results of operations for the year ended December 31, 2019, the Company concluded it was not in compliance with the Consolidated Leverage Ratio and Minimum Interest Ratio contained in the Credit Agreement as of December 31, 2019. The noncompliance occurred on the last day of the fourth quarter due to the following: the Company’s Consolidated Leverage Ratio exceeded the maximum level permitted and the Company’s Minimum Interest Ratio was below the minimum level permitted. On March 2, 2020, the Company entered into a Waiver, Forbearance Agreement and Fourth Amendment to Credit Agreement with lenders constituting a majority under the Credit Agreement that governs the Company’s Revolving Credit Facility and Term Loan Facility. The Waiver, Forbearance Agreement and Fourth Amendment to Credit Agreement waived the defaults or events of default that occurred as a result of the financial covenant noncompliance on December 31, 2019 and prevented the lenders from directing the Administrative Agent to accelerate the debt or exercise other remedies as a result of certain other potential defaults or events of default which may occur under the Credit Agreement (the “Potential Defaults”), through the period ended May 14, 2020 (such period, the “Forbearance Period”). As a result of the noncompliance as of December, 31, 2019, the Company annual report on Form 10-K disclosed there was substantial doubt about the Company’s ability to continue as a going concern as of December 31, 2019.

LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three Months Ended March 31, 2020 and 2019

(tabular amounts in millions, except per share data)

Voluntary Reorganization under Chapter 11

The commencement of the Chapter 11 Cases constituted an event of default with respect to the Senior Notes, the Term Loan Facility and the Revolving Credit Facility (the “Debt Instruments”). The Debt Instruments provide that as a result of the commencement of the Chapter 11 Cases, the principal and interest due thereunder shall be immediately due and payable. Any efforts to enforce payment obligations under the Debt Instruments will be automatically stayed as a result of the commencement of the Chapter 11 Cases, and the creditors’ right of enforcement in respect of the Debt Instruments are subject to the applicable provisions of the Bankruptcy Code.

Debtor-in-Possession Financing

As previously disclosed, on April 15, 2020 (the “Closing Date”), the Company entered into a Superpriority Secured Debtor-in-Possession Credit Agreement (the “DIP Credit Agreement”), upon the entry of an interim order of the Bankruptcy Court granting interim approval of the DIP Credit Agreement, among the Company, as borrower, the lenders from time to time party thereto (the “DIP Lenders”) and Bank of America, N.A. as administrative agent (in such capacity, the “DIP Agent”), pursuant to which the DIP Lenders committed to provide a senior secured superpriority debtor-in-possession credit facility in an aggregate principal amount not to exceed $100 million (the “DIP Facility”).

The DIP Facility consists of (i) revolving loans not to exceed an aggregate amount of $55 million (the “Revolving Loans”), subject to the limitation in the next succeeding sentence, and (ii) letters of credit not to exceed an aggregate amount of $45 million, with $5 million of that amount being available for the issuance of new letters of credit (together with the Revolving Loans, the “DIP Loan Commitments”). During the interim period prior to the entry of a final order of the Bankruptcy Court authorizing the DIP Facility (the “Final Order”), the Company’s capacity to incur Revolving Loans is limited to an aggregate amount of up to $27.5 million.

Proceeds of the loans made under the DIP Facility may be used only for the following purposes: (i) working capital and other general corporate purposes, including the payment of professional fees and expenses, (ii) to pay the reasonable fees and expenses of the DIP Agent and the DIP Lenders (including the reasonable fees and expenses of counsel and financial advisors), (iii) to pay claims in respect of certain prepetition creditors, (iv) to repay indebtedness owed to holders of the Prepetition Priority Payment Obligations (as defined in the DIP Credit Agreement) (the “Prepetition Revolving Lenders”), and (v) making adequate protection payments to the Prepetition Revolving Lenders, the Prepetition Term Lenders and the Prepetition Secured Noteholders (each as defined in the DIP Credit Agreement).

In connection with the DIP Credit Agreement, certain subsidiaries of the Company became parties to a guarantee agreement as guarantors (collectively, the “Guarantors,” and together with the Company, the “DIP Credit Parties”). Each of the Guarantors is a debtor and debtor-in-possession in the Chapter 11 Cases. The Guarantors have guaranteed, on a joint and several basis, all of the obligations under the DIP Facility. To secure the obligations under the DIP Facility, the Company and the Guarantors have granted liens on substantially all of their assets, whether now owned or hereafter acquired.

The DIP Facility will mature on the earliest of the following dates: (i) unless the Final Order is entered, May 15, 2020, (ii) the date upon which any Plan of Reorganization (as defined in the DIP Credit Agreement) becomes effective, or (iii) the six-month anniversary following the Petition Date, provided that such maturity may be extended with the consent of the Required Lenders (as defined in the DIP Credit Agreement) to a date no later than nine months after the Petition Date.

LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three Months Ended March 31, 2020 and 2019

(tabular amounts in millions, except per share data)

The DIP Credit Agreement contains representations, warranties and covenants that are customary for debtor-in-possession facilities of this type, including, but not limited to, certain case milestones, specified restrictions on indebtedness, liens, guarantee obligations, liquidations and dissolutions, sales of assets, leases, payment of dividends and other restricted payments, voluntary payments of other indebtedness, investments, loans and advances, transactions with affiliates, sale and leaseback transactions and compliance with case milestones. The DIP Credit Agreement also contains customary events of default for facilities of this type, including failure to achieve the milestones and the occurrence of certain events in the Chapter 11 Cases.

The DIP Facility is subject to final approval by the Bankruptcy Court.

Additional Debt Issuances Information

The fair values of the Senior Notes and Term Loan Facility that were determined using the market approach based upon interest rates available to the Company for borrowings with similar terms and maturities, were determined to be Level 2 under the fair value hierarchy. The fair value of the Company’s debt was lower than its book value by approximately ~~$21~~$546 million and $277 million at ~~June 30, 2019~~March 31, 2020 and ~~greater than its book value by approximately $22 million at~~ December 31, ~~2018.~~2019, respectively.

There were ~~$150 million and $64~~$249 million of borrowings under the Revolving Credit Facility as of ~~June 30, 2019~~both March 31, 2020 and December 31, ~~2018, respectively.~~2019. The weighted-average interest rate on borrowings under the Company’s Revolving Credit Facility was ~~5.76%~~4.65% during the ~~six~~three months ended ~~June 30, 2019.~~March 31, 2020.

~~LSC Communications, Inc.~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~

~~For the Three and Six Months Ended June 30, 2019 and 2018~~

~~(tabular amounts in millions, except per share data)~~

There was ~~$19~~$18 million and ~~$38~~$19 million of net interest expense during the three ~~and six~~ months ended ~~June 30,~~March 31, 2020 and 2019, respectively. ~~There was $18 million and $38 million of net interest expense during the three and six months ended June 30, 2018, respectively.~~

Note ~~11.~~10. Earnings Per Share

During the ~~six~~three months ended ~~June 30,~~March 31, 2020 and 2019, no0 shares of common stock were purchased by the ~~Company.~~ ~~On May 31, 2018, the Company completed the repurchase approved by the Board of Directors of 1.6 million shares of common stock for a total cost of $20 million.~~ ~~During the six months ended June 30, 2019 and 2018,~~ Company; however, a de minimis amount of shares were withheld from employees for tax liabilities upon vesting of equity awards.

Basic ~~earnings~~ (loss) per share (“EPS”) is calculated by dividing net earnings attributable to the Company’s stockholders by the weighted average number of common shares outstanding for the period. In computing diluted EPS, basic EPS is adjusted for the assumed issuance of all potentially dilutive share-based awards, including stock options, restricted stock, restricted stock units, ~~(“RSUs”),~~ and performance share ~~units (“PSUs”).~~units.

The following table shows the calculation of basic and diluted EPS, as well as a reconciliation of basic shares to diluted shares:

	Three Months Ended					Six Months Ended						Three Months Ended
	June 30,					June 30,						March 31,
	2019			2018		2019			2018			2020			2019 (1)
Net (loss) income per common share:
Net (loss) per common share:
Basic	$	(0.69	)	$	0.24	$	(4.48	)	$	(0.09	)	$	(1.56	)	$	(3.77	)
Diluted	$	(0.69	)	$	0.23	$	(4.48	)	$	(0.09	)	$	(1.56	)	$	(3.77	)
Numerator:
Net (loss) income	$	(24	)	$	8	$	(150	)	$	(3	)
Net (loss)												$	(52	)	$	(125	)
Denominator:
Weighted average number of common shares outstanding		33.5			34.0		33.4			34.3			33.6			33.3
Dilutive options and awards		—			0.3		—			—			—			—
Diluted weighted average number of common shares outstanding		33.5			34.3		33.4			34.3			33.6			33.3
Weighted-average number of anti-dilutive share-based awards:
Restricted stock units		—			0.5		—			—
Options		—			0.2		—			—

LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three Months Ended March 31, 2020 and 2019

(tabular amounts in millions, except per share data)

Refer to Note 1, Overview and Basis of Presentation, for information on the restated balances for the three months ended March 31, 2019.

Note ~~12.~~11. Retirement Plans

The Company is the sole sponsor of certain defined benefit pension plans that are included in the condensed consolidated balance sheets as of ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018.~~2019. The assets and certain obligations of the defined benefit pension plans includes plans qualified under Section 401(a) of the Internal Revenue Code of 1986, ~~as amended (the “U.S.~~the U.S. Qualified ~~Plan”)~~Plan and related non-qualified benefits (the “Non-Qualified Plan”).

The components of the estimated net pension loss (income) for the three ~~and six~~ months ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~ were as follows:

~~LSC Communications, Inc.~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~

~~For the Three and Six Months Ended June 30, 2019 and 2018~~

~~(tabular amounts in millions, except per share data)~~

	Three Months Ended								Six Months Ended								Three Months Ended
	June 30, 2019								June 30, 2019								March 31, 2020
	Qualified			Non-Qualified & International		Total			Qualified			Non-Qualified & International		Total			Qualified			Non-Qualified & International		Total
Interest cost	$	18		$	1	$	19		$	38		$	2	$	40		$	15		$	1	$	16
Expected return on plan assets		(30	)		—		(30	)		(63	)		—		(63	)		(30	)		—		(30	)
Amortization of actuarial loss		2			—		2			5			—		5			4			—		4
Settlement of retirement obligations		1			—		1			136			—		136
Net periodic benefit (income) loss	$	(9	)	$	1	$	(8	)	$	116		$	2	$	118		$	(11	)	$	1	$	(10	)

	Three Months Ended								Six Months Ended								Three Months Ended
	June 30, 2018								June 30, 2018								March 31, 2019
	Qualified			Non-Qualified & International		Total			Qualified			Non-Qualified & International		Total			Qualified			Non-Qualified & International		Total
Interest cost	$	21		$	1	$	22		$	42		$	2	$	44		$	20		$	1	$	21
Expected return on plan assets		(39	)		—		(39	)		(78	)		—		(78	)		(31	)		—		(31	)
Amortization of actuarial loss		5			—		5			10			—		10			3			—		3
Net periodic benefit (income) loss	$	(13	)	$	1	$	(12	)	$	(26	)	$	2	$	(24	)
Settlement of retirement obligations																		132			—		132
Net periodic benefit loss																	$	124		$	1	$	125

In the first quarter of 2020, the Company adopted a change in method of accounting for the market-related value of assets for a class of assets within the U.S. Qualified Plan and Non-Qualified plans. The change in accounting method was retrospectively applied to periods in 2017, 2018 and 2019, and as a result, pension income shown above for the three months ended March 31, 2019 has been restated. Refer to Note 1, Overview and Basis of Presentation, for more information.

In the first quarter of 2019, the Company completed a partial settlement of its retirement benefit obligations related to the U.S. Qualified Plan by purchasing a group annuity contract for certain retirees and beneficiaries from a third-party insurance company. As a result, the Company’s pension assets and liabilities were remeasured as of the settlement date. As of the remeasurement date, the reduction in the reported pension obligation for the participants under the annuity contract was $477 million, and the reduction in plan assets was $466 million. The Company recorded a non-cash settlement charge of ~~$135~~$132 million in settlement of retirement benefit obligations in the condensed consolidated statement of operations in the first quarter of 2019. This charge ~~results~~resulted from the recognition in earnings of a portion of the actuarial losses recorded in accumulated other comprehensive loss based on the proportion of the obligation settled. The long-term rate of return remained at 6.50% for the U.S. Qualified pension plan and did not change as a result of the settlement. The discount rate used to determine the net obligation for the U.S. Qualified pension plan at the settlement date was 4.3%, 10 basis points lower than the discount rate as of December 31, 2018.

There were additional immaterial lump-sum settlements related to the U.S. Qualified Plan (unrelated to the transaction noted above) during the three months ended June 30, 2019 that resulted in a non-cash settlement charge of $1 million.

Settlement of retirement obligations is disclosed separately in the condensed consolidated statements of operations, while the remaining net periodic (loss) income for the three ~~and six~~ months ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~ is included in the investment and other (income)-net.

Note 12. Taxes

LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three Months Ended March 31, 2020 and 2019

(tabular amounts in millions, except per share data)

The CARES Act is intended to provide emergency relief to both businesses and individuals impacted by the COVID-19 pandemic.

Income Taxes

The CARES Act enacted several provisions that may impact corporations including the carryback of certain net operating losses and the expensing of additional interest under certain circumstances. The Company has estimated that these provisions will 0t result in a benefit for the three months ended March 31, 2020. As the Company assesses additional guidance issued by the U.S. Treasury Department, the IRS and other standard-setting bodies related to the CARES Act, it may record an impact to the income tax provision.

Payroll Taxes

The CARES Act allows companies to defer payments of the employer share (6.2% of wages) of Social Security payroll taxes from the date of enactment through December 31, 2020. NaN percent of the taxes deferred are required to be paid by December 31, 2021 with the remaining 50 percent by December 31, 2022. As of March 31, 2020, the Company accrued $2 million of payroll taxes that will benefit from this adoption. The Company expects to continue to defer payroll taxes through the end of 2020.

Note 13. Comprehensive Income

The following table summarizes accumulated other comprehensive loss by component as of December 31, 2019 and March 31, 2020 and changes during the three months ended March 31, 2020.

	Pension			Translation
	Plan Cost			Adjustments			Total
Balance at December 31, 2019	$	(464	)	$	(53	)	$	(517	)
Other comprehensive (loss) before reclassifications		—			(11	)		(11	)
Amounts reclassified from accumulated other comprehensive loss		3			—			3
Net change in accumulated other comprehensive income (loss)		3			(11	)		(8	)
Balance at March 31, 2020	$	(461	)	$	(64	)	$	(525	)

The following table summarizes accumulated other comprehensive loss by component as of December 31, 2018 and ~~June 30,~~March 31, 2019 and changes during the ~~six~~three months ended ~~June 30,~~March 31, 2019.

	Pension			Translation						Pension			Translation
	Plan Cost			Adjustments			Total			Plan Cost			Adjustments			Total
Balance at December 31, 2018	$	(529	)	$	(55	)	$	(584	)	$	(520	)	$	(55	)	$	(575	)
Other comprehensive income before reclassifications		106			2			108			104			1			105
Amounts reclassified from accumulated other comprehensive loss		4			—			4			2			—			2
Net change in accumulated other comprehensive loss		110			2			112			106			1			107
Balance at June 30, 2019	$	(419	)	$	(53	)	$	(472	)
Balance at March 31, 2019										$	(414	)	$	(54	)	$	(468	)

~~LSC Communications, Inc.~~

~~Notes~~In the first quarter of 2020, the Company adopted a change in method of accounting for the market-related value of assets for a class of assets within the U.S. Qualified Plan and Non-Qualified plans. The change in accounting method was retrospectively applied to ~~Condensed Consolidated Financial Statements (Unaudited)~~

~~For the Three~~periods in 2017, 2018 and ~~Six Months Ended June 30,~~ 2019, and ~~2018~~

~~(tabular amounts in millions, except per share data)~~as a result, the pension rollforward for accumulated other comprehensive loss above and reclassification table below have been restated for the three months ended March 31, 2019. Refer to Notes 1, Overview and Basis of Presentation, and 11, Retirement Plans, for more information.

In the first quarter of 2019, the Company completed a partial settlement of its retirement benefit obligations and, as a result, the Company’s pension assets and liabilities were remeasured as of the settlement date. The impact, net of tax, to the Company’s accumulated other comprehensive loss was a decrease of ~~$105 million. Additional immaterial lump-sum settlements~~$104 million during the three months ended ~~June 30,~~March 31, 2019 ~~increased~~(including the ~~balance by $1 million to a total net of tax impact of $106 million.~~restatement noted above). Refer to Note ~~12,~~11, Retirement Plans, for more information.

LSC Communications, Inc.

~~The following table summarizes accumulated other comprehensive loss by component as of December 31, 2017 and June 30, 2018 and changes during~~Notes to Condensed Consolidated Financial Statements (Unaudited)

For the ~~six months ended June 30, 2018.~~

Pension

Translation

Plan Cost

Adjustments

Total

Balance at December 31, 2017

$
(428
)

$
(48
)

$
(476
)
Other comprehensive loss before reclassifications

—

(9
)

(9
)
Amounts reclassified from accumulated other comprehensive loss

8

—

8

Reclassification to accumulated deficit

(97
)

—

(97
)
Net change in accumulated other comprehensive loss

(89
)

(9
)

(98
)
Balance at June 30, 2018

$
(517
)

$
(57
)

$
(574
)

~~The Company adopted~~ ASU 2018-02 “Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” (“ASU 2018-02”) in the first quarter of 2018. As a result of applying this standard in the period of adoption, the Company reclassified $97 million relating to the change in tax rate from accumulated other comprehensive loss to accumulated deficit in the Company’s condensed consolidated balance sheet during the three months endedThree Months Ended March 31, ~~2018.~~ ~~ASU 2018-02 eliminated the stranded tax effects resulting from the U.S Tax Cuts~~2020 and ~~Jobs Act and improved the usefulness of information reported to financial statement users.~~2019

(tabular amounts in millions, except per share data)

Refer to the condensed consolidated statements of comprehensive income for the components of comprehensive (loss) income for the three ~~and six~~ months ended ~~June 30, 2019~~March 31, 2020 and ~~2018.~~2019.

Reclassifications from accumulated other comprehensive loss for the three ~~and six~~ months ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~ were as follows:

Three Months Ended

Six Months Ended

June 30,

June 30,

2019

2018

2019

2018

Amortization of pension plan cost:

Net actuarial loss _(a)

$
2

$
5

$
5

$
10

Reclassifications before tax

2

5

5

10

Income tax expense

—

1

1

2

Reclassifications, net of tax

$
2

$
4

$
4

$
8

~~(a)~~

Amortization of pension plan cost is included in the calculation of net periodic pension plan (income) expense that is recognized in investment and other income-net in the condensed consolidated statements of operations (see Note 12, ~~Retirement Plans~~).

	Three Months Ended
	March 31,
	2020		2019 (1)
Amortization of pension plan cost:
Net actuarial loss _(a)	$	4	$	3
Reclassifications before tax		4		3
Income tax expense		1		1
Reclassifications, net of tax	$	3	$	2

(a)Amortization of pension plan cost is included in the calculation of net periodic pension plan (income) expense that is recognized in investment and other income-net in the condensed consolidated statements of operations (see Note 11, Retirement Plans).

~~LSC Communications, Inc.~~

~~Notes~~(1)As Adjusted – Refer to ~~Condensed Consolidated Financial Statements (Unaudited)~~

~~For~~ the ~~Three and Six Months Ended June 30, 2019 and 2018~~

~~(tabular amounts~~narrative above on the change in ~~millions, except per share data)~~accounting method.

Note 14. Segment Information

~~During~~As a result of the ~~third~~Company’s segment analysis in the fourth quarter of ~~2018,~~2019, Mexico met the ~~Company realigned the~~ requirements to be classified as a reportable ~~segments and reporting units to reflect its evolution since its separation from RRD in 2016,~~segment (previously included as ~~well as changes from recent acquisition and disposal activity.~~a non-reportable segment). All prior year amounts have been reclassified to conform to the Company’s current reporting structure.

The Company’s segment and product and service offerings are summarized ~~below:~~below

Magazines, Catalogs and Logistics

The Magazines, Catalogs and Logistics segment primarily produces magazines and catalogs ~~as well as~~and provides logistics ~~services~~solutions to the Company and other ~~third-parties.~~third parties. The segment also provides certain other print-related services, including ~~mail-list management and sortation.~~mail services. The segment has operations primarily in the U.S. The Magazines, Catalogs and Logistics segment is divided into ~~two~~2 reporting units: magazines and catalogs; and logistics.

Book

The Book segment produces books for publishers primarily in the U.S. The segment also provides supply-chain management services and warehousing and fulfillment services, as well as e-book formatting for book publishers.

Office Products

The Office Products segment manufactures and sells branded and private label products in ~~five~~5 core categories: filing products, envelopes, note-taking products, binder products, and forms.

Mexico

Mexico produces magazines, catalogs, statements, forms, and labels.

LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three Months Ended March 31, 2020 and 2019

(tabular amounts in millions, except per share data)

Other

The Other grouping consists of the following non-reportable segments: ~~Europe,~~ Directories ~~Mexico,~~ and Print Management. Europe produced magazines, catalogs and directories, as well as provided packaging and pre-media services. The Company disposed of its European printing business in the third quarter of 2018 (refer to Note 2, ~~Business Combination and Disposition, for more information). Mexico produces~~ ~~magazines, catalogs, statements, forms, and labels.~~ Print Management provides outsourced print procurement and management 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 LIFO inventory provisions. In addition, share-based compensation expense is included in Corporate and not allocated to the operating segments.

~~LSC Communications, Inc.~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~

~~For the Three and Six Months Ended June 30, 2019 and 2018~~

~~(tabular amounts in millions, except per share data)~~

Information by Segment

The Company has disclosed income (loss) from operations as the primary measure of segment earnings (loss). This is the measure of profitability used by the Company’s chief operating decision-maker and is most consistent with the presentation of profitability reported with the condensed consolidated financial statements.

Income (Loss)

Depreciation

Three Months Ended

Net

from

and

Capital

June 30, 2019

Sales

Operations

Amortization

Expenditures

Magazines, Catalogs and Logistics

$
380

$
(42
)

$
13

$
12

Book

289

18

13

7

Office Products

139

13

3

1

Total reportable segments

808

(11
)

29

20

Other

61

8

1

—

Corporate

—

(13
)

1

1

Total operations

$
869

$
(16
)

$
31

$
21

Income (Loss)

Depreciation

Six Months Ended

Net

from

Assets of

and

Capital

June 30, 2019

Sales

Operations

Operations

Amortization

Expenditures

Magazines, Catalogs and Logistics

$
783

$
(73
)

$
734

$
28

$
22

Book

549

31

637

25

24

Office Products

258

21

339

6

1

Total reportable segments

1,590

(21
)

1,710

59

47

Other

124

12

77

2

1

Corporate

—

(26
)

92

1

1

Total operations

$
1,714

$
(35
)

$
1,879

$
62

$
49

Income (Loss)

Depreciation

Three Months Ended

Net

from

and

Capital

June 30, 2018

Sales

Operations

Amortization

Expenditures

Magazines, Catalogs and Logistics

$
401

$
(6
)

$
15

$
5

Book

266

19

13

9

Office Products

154

13

3

1

Total reportable segments

821

26

31

15

Other

122

7

2

1

Corporate

—

(15
)

1

1

Total operations

$
943

$
18

$
34

$
17

			Income (Loss)					Depreciation						Income (Loss)					Depreciation
Six Months Ended	Net		from			Assets of		and		Capital
June 30, 2018	Sales		Operations			Operations		Amortization		Expenditures
Three Months Ended												Net		from			Assets of		and		Capital
March 31, 2020												Sales		Operations			Operations		Amortization		Expenditures
Magazines, Catalogs and Logistics	$	828	$	(20	)	$	690	$	31	$	14	$	327	$	(35	)	$	597	$	11	$	7
Book		515		28			598		27		18		204		(9	)		468		12		4
Office Products		277		15			367		7		1		112		7			282		3		—
Mexico													23		3			51		1		—
Total reportable segments		1,620		23			1,655		65		33		666		(34	)		1,398		27		11
Other		252		14			195		6		2		35		3			29		—		—
Corporate		—		(25	)		71		1		2		—		(12	)		128		—		—
Total operations	$	1,872	$	12		$	1,921	$	72	$	37	$	701	$	(43	)	$	1,555	$	27	$	11

			Income (Loss)					Depreciation
Three Months Ended	Net		from			Assets of		and		Capital
March 31, 2019	Sales		Operations			Operations		Amortization		Expenditures
Magazines, Catalogs and Logistics	$	403	$	(31	)	$	795	$	15	$	10
Book		260		13			647		12		17
Office Products		119		8			329		3		—
Mexico		24		3			68		1		1
Total reportable segments		806		(7	)		1,839		31		28
Other		39		1			22		—		—
Corporate		—		(13	)		86		—		—
Total operations	$	845	$	(19	)	$	1,947	$	31	$	28

Restructuring, impairment and other charges by segment for the three months ended March 31, 2020 and 2019 are disclosed in Note 7, Restructuring, Impairment and Other Charges.

LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three ~~and Six~~ Months Ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~

(tabular amounts in millions, except per share data)

~~Restructuring, impairment and other charges by segment for the three and six months ended June 30, 2019 and 2018 are disclosed in Note 8,~~ ~~Restructuring, Impairment and Other Charges.~~

Note 15. New Accounting Pronouncements

In ~~June 2016,~~August 2018, the ~~Financial Accounting Standards Board (“FASB”)~~FASB issued Accounting Standards Update No. ~~2016-13 “Financial Instruments-Credit Losses (Topic 326)”~~2018-14 “Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans” (“ASU ~~2016-13”~~2018-14”). ASU ~~2016-13 changes~~2018-14 modifies the annual disclosure requirements for employers that sponsor defined benefit pension plans. ASU 2018-14 is effective for 2020 year-end disclosures. Early adoption of ASU 2018-14 is permitted; however, the Company plans to adopt the standard for the 2020 year-end disclosures. The Company does not anticipate a significant impact.

In December 2019, the FASB issued Accounting Standards Update No. 2019-12 Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes ("ASU 2019-12"). ASU 2019-12 removes certain exceptions for intraperiod tax allocations and interim calculations, and adds guidance to reduce complexity in accounting for ~~credit losses on financial instruments,~~income taxes, including ~~accounts receivable. The standard will require~~a modification in the ~~Company to measure expected credit losses on trade receivables~~guidance for franchise taxes that are partially based on ~~historical experience, current conditions,~~income and ~~reasonable forecasts.~~recognizing deferred taxes for a subsequent step-up in the tax basis of goodwill. ASU ~~2016-13~~2019-12 is effective in the first quarter of ~~2020.~~2021. Early adoption of ASU 2019-12 is permitted; however, the Company plans to adopt the standard in the first quarter of 2021. The Company is in the process of assessing the impact of the new ~~standard but does not anticipate a significant impact.~~

~~In August 2018, the FASB issued Accounting Standards Update No. 2018-15 “~~Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract” (“ASU 2018-15”). ASU 2018-15 aligns the accounting for implementation costs for cloud computing arrangements with the accounting for costs involved in implementing an internal-use software license. ASU 2018-15 is effective in the first quarter of 2020; however, as early adoption is permitted, the Company adopted ASU 2018-15 in the first quarter of 2019. The adoption did not have a material impact during the six months ended June 30, 2019.standard.

~~Note 16. Subsequent Events~~

On August 7, 2019, the Company entered into an agreement to sell the land and building associated with its production facility in Torrance, California and expects to receive net proceeds of approximately $35 million, subject to customary contractual terms and conditions.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is management’s discussion and analysis of the financial condition of LSC Communications, Inc. as of ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019 and the results of operations for the three ~~and six~~ months ended ~~June 30, 2019~~March 31, 2020 and ~~2018.~~2019. This commentary should be read in conjunction with the condensed consolidated financial statements and accompanying notes included in Item 1, Condensed Consolidated Financial Statements. Refer to the Company’s annual report on Form 10-K, as filed with the Securities and Exchange Commission (“SEC”) on ~~February 19, 2019,~~March 2, 2020, for management’s discussion and analysis of the financial condition of the company as of December 31, ~~2018~~2019 and December 31, ~~2017,~~2018, and the results of operations for the years ended December 31, 2019, 2018 ~~2017~~ and ~~2016.~~2017.

Company Overview

~~Merger with Quad/Graphics, Inc.~~

On October 30, 2018, the Company entered into that certain Agreement and Plan of Merger (the “Merger Agreement”), by and among Quad/Graphics, Inc. (“Quad”), QLC Merger Sub, Inc. and LSC Communications, pursuant to which, subject to the satisfaction or waiver of certain conditions, LSC Communications would be merged with QLC Merger Sub, Inc., and become a wholly-owned subsidiary of Quad.

On July 22, 2019, Quad and LSC Communications entered into a letter agreement (the “Letter Agreement”), pursuant to which the parties agreed to terminate the Merger Agreement. Pursuant to the Letter Agreement, Quad agreed to pay LSC Communications the Regulatory Approval Reverse Termination Fee (as defined in the Merger Agreement) of $45 million in cash on the business day following the date of the Letter Agreement. Except for certain indemnification obligations of Quad related to LSC Communications assisting Quad with the financing under the Merger Agreement, the parties also agreed to release each other from any and all claims, counterclaims, demands, proceedings, actions, causes of action, orders, obligations, damages, debts, costs, expenses and other liabilities whatsoever and howsoever arising pursuant to or in connection with the Merger Agreement or the transactions provided for in the Merger Agreement.

~~Retention Award Agreements~~Voluntary Reorganization under Chapter 11

~~On August 5, 2019,~~As a result of the ~~Human Resources Committee~~commencement of the Chapter 11 Cases, the Company’s operations and ability to develop and execute its business plan are subject to the risks and uncertainties associated with the reorganization process under the Bankruptcy Code. Following the outcome of the Chapter 11 Cases, the amount and composition of the Company’s ~~Board~~assets, liabilities, officers and/or directors, and the description of ~~Directors (the “HR Committee”) approved (i) grants of cash retention awards (the “Retention Awards”) to~~ the Company’s ~~named executive officers~~operations, properties, liquidity and ~~certain other employees and (ii)~~capital resources included in this quarterly report may be significantly different.

DIP Financing

See Note 9, Debt, for information on the DIP Facility, which provides up to $100 million of financing in the form of ~~award agreement (the “Retention Award Agreement”)~~revolving loans and letters of credit.

Going Concern

The accompanying condensed consolidated financial statements were prepared assuming that the Company will continue as a going concern and contemplate the continuity of our operations, realization of assets and satisfaction of liabilities and commitments in the normal course of business. Our ability to continue as a going concern is contingent upon our ability to comply with the covenants of the DIP Credit Agreement described in Note 9, Debt, ~~pursuant~~and our ability to ~~which such grants of retention awards will be made. One-third of each Retention Award will vest on August 5, 2020,~~implement, subject to the ~~grantee’s continued employment with the Company through such date. The remaining two-thirds~~Bankruptcy Court’s approval, a restructuring plan, among other factors.

While operating as debtors-in-possession under Chapter 11, we may sell or otherwise dispose of ~~each Retention Award will vest ratably following each of the Company’s 2021 and 2022 fiscal years, in each case~~or liquidate assets or settle liabilities, subject to the ~~Company’s achievement~~approval of the ~~applicable performance metric~~Bankruptcy Court or as otherwise permitted in the ordinary course of business (and subject to restrictions in our debt agreements), for amounts other than those reflected in the accompanying condensed consolidated financial statements. Further, the restructuring plan could materially change the amounts and classifications of assets and liabilities reported in the ~~grantee’s continued employment with~~condensed consolidated financial statements.

As a result of the factors noted above, we believe there is substantial doubt about the Company’s ability to continue as a going concern. The condensed consolidated financial statements included in this quarterly report on Form 10-Q do not include any adjustments related to the recoverability and classification of liabilities that might be necessary should the Company ~~through the date the HR Committee certifies the achievement of such performance. If the grantee’s employment is terminated prior~~be unable to ~~payment in full of the Retention Award due to death, his or her estate will receive~~continue as a pro-rated portion of the unvested portion of Retention Award, based on the number of days worked in the full vesting period. The unvested portion of each Retention Award will be forfeited upon any other termination of employment. The amounts of the Retention Awards for each of the named executive officers are as follows: (i) Thomas J. Quinlan III, $2,400,000; (ii) Suzanne S. Bettman, $810,000; (iii) Andrew B. Coxhead, $810,000; (iv) Kent A. Hansen, $325,0000; and (v) Richard T. Lane, $675,000.

The foregoing description of the terms of the Retention Award Agreement does not purport to be complete and is qualified in its entirety by the provisions of the form of Retention Award Agreement, which filed as Exhibit 10.31 to this Form 10-Q and incorporated by reference herein.going concern.

~~Segment Descriptions~~Coronavirus Pandemic (“COVID-19”)

During and subsequent to the ~~third~~first quarter of ~~2018,~~2020, the novel coronavirus strain, known as COVID-19, continues to spread across the globe at an increasing rate. Measures taken by governmental authorities and private actors to limit the spread of this virus may interfere with the ability of the Company's employees, suppliers, and other business providers to carry out their assigned tasks or supply materials at ordinary levels of performance relative to the conduct of the business which may cause a material curtailment to certain business operations. Moreover, as a large part of the Company's business involves sales of books and other products used in schools and school facilities, if COVID-19 related measures continue to result in widespread and lengthy school closings, the Company's condensed consolidated results of operations and financial condition will be adversely impacted. Books sold in retail stores have also been adversely impacted as both large chains and independent stores have been forced to close. Additionally, as COVID-19 has significantly impacted retailers' stores, distribution centers and supply chains, the Company ~~realigned~~expects to experience an adverse impact on our catalogs and office products businesses. Disruption across many other industries has also significantly impact demand for advertising, which is expected to result in page count and volume reductions in magazines.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law. Refer to Note 12, Taxes, for more information on the CARES Act.

Segment Descriptions

As a result of the Company’s segment analysis in the fourth quarter of 2019, Mexico met the requirements to be classified as a reportable ~~segments and reporting units to reflect its evolution since its separation from~~ ~~R. R. Donnelley & Sons Company’s (“RRD”)~~ ~~in 2016,~~segment (previously included as ~~well as changes from recent acquisition and disposal activity.~~a non-reportable segment). All prior year amounts have been reclassified to conform to the Company’s current reporting structure.

The Company’s ~~segments~~segment and ~~their~~ product and service offerings are summarized ~~below:~~below

Magazines, Catalogs and Logistics

The Magazines, Catalogs and Logistics segment primarily produces magazines and catalogs ~~as well as~~and provides logistics ~~services~~solutions to the Company and other ~~third-parties.~~third parties. The segment also provides certain other print-related services, including ~~mail-list management and sortation.~~mail services. The segment has operations primarily in the U.S. The Magazines, Catalogs and Logistics segment is divided into two reporting units: magazines and catalogs; and logistics.

Book

Office Products

The Office Products segment manufactures and sells branded and private label products in five core categories: filing products, envelopes, note-taking products, binder products, and forms.

~~Other~~Mexico

Mexico produces magazines, catalogs, statements, forms, and labels.

Other

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~~last in, first out (“LIFO”) inventory provisions. In addition, share-based compensation expense is included in Corporate and not allocated to the operating segments.

~~Business Combination and Dispositions~~

~~The following table lists the Company’s acquisitions since 2016:~~

~~Date~~	~~Company~~	~~Description~~	~~Purchase Price~~
~~July 2, 2018~~	~~RRD's Print Logistics business ("Print Logistics")~~	~~Integrated logistics services provider with distribution network~~	~~$52 million in cash~~
~~November 29, 2017~~	~~The Clark Group, Inc. ("Clark Group")~~	~~Third-party logistics provider of distribution, consolidation, transportation management and international freight forwarding services~~	~~$25 million in cash~~
~~November 9, 2017~~	~~Quality Park~~	~~Producer of envelopes, mailing supplies and assorted packaging items~~	~~$41 million in cash~~
~~September 7, 2017~~	~~Publishers Press, LLC ("Publishers Press")~~	~~Printing provider with capabilities such as web-offset printing, prepress and distribution services for magazines and retail brands~~	~~$68 million in cash~~
~~August 21, 2017~~	~~NECI, LLC ("NECI")~~	~~Supplier of commodity and specialty filing supplies~~	~~$6 million in cash~~
~~August 17, 2017~~	~~CREEL Printing, LLC ("Creel")~~	~~Offset and digital printing company~~	~~$79 million in cash~~
~~July 28, 2017~~	~~Fairrington Transportation Corp., F.T.C. Transport, Inc. and F.T.C. Services, Inc. (“Fairrington”)~~	~~Full-service, printer-independent mailing logistics provider in the United States~~	~~$19 million in cash and ~1.0 million shares of LSC Communications common stock (total value $39 million)~~
~~March 1, 2017~~	~~HudsonYards Studios, LLC ("HudsonYards")~~	Digital and print premedia production company that provides high-quality creative retouching, computer-generated imagery, mechanical creation, press-ready file preparation, and interactive production services	~~$3 million in cash~~
~~December 2, 2016~~	~~Continuum Management Company, LLC (“Continuum”)~~	~~Print procurement and management business~~	~~$9 million in cash~~

~~The Company sold its European printing business on September 28, 2018 for $47 million in cash. The~~ ~~Company sold its retail offset printing facilities on June 5, 2018.~~

~~For further information on the Print Logistics acquisition and the European disposition, see Note 2,~~ ~~Business Combination and Disposition, to the condensed consolidated financial statements.~~

Outlook

Competitive Environment

According to the ~~August~~December 2019 IBIS World industry report “Printing in the U.S.,” estimated total annual printing industry revenue is approximately ~~$77~~$80 billion, of which approximately $13 billion relates to our core segments of the print market and an additional approximately ~~$31~~$33 billion pertains to related segments of the print market in which we are able to offer certain products. Despite consolidation in recent years, including several acquisitions completed by LSC Communications, the industry remains highly fragmented and LSC Communications is one of the largest players in our segment of the print market. The print and related services industry, in general, continues to have excess capacity and LSC Communications remains diligent in proactively identifying plant consolidation opportunities to keep our capacity in line with demand. Across the Company’s range of print products and services, competition is based primarily on the ability to deliver products for the lowest total cost, a factor driven not only by price, but also by materials and distribution costs. We expect that prices for print products and services will continue to be a focal point for customers in coming years.

Value-added services, such as LSC Communications’ co-mail, logistics and supply chain management offerings, enable customers to lower their total costs. Technological changes, including the electronic distribution of documents and data, online distribution and hosting of media content, and advances in digital printing, print-on-demand and internet technologies, continue to impact the market for our products and services.

The ~~impact of digital technologies has~~Company’s product and service offerings have been ~~felt in many print products. Digital technologies have impacted printed magazines as some advertising spending has moved from print to electronic media.~~ Catalogs have experienced volume reductions as our customers allocate more of their spending to online resources and also face stiff competition from online retailers resulting in retailer compression. The Company has seen an unprecedented drop in demand for magazines and catalogs in 2019, with the faster pace of decline in demand primarily due to the accelerated impact of digital disruption of demand for printed materials. ~~Educational books within the college market continue to be~~ impacted by ~~electronic substitution and other trends. The K-12 educational sector continues to be focused on increasing digital distribution but there has been inconsistent adoption across school systems.~~ ~~E-book substitution has impacted overall consumer print trade book volume, although e-book adoption~~ ~~rates have stabilized and industry-wide print book volume has been growing in recent years.~~ ~~In addition, retail inserts have experienced volume reductions primarily as a result of store closures and reduced newspaper circulation.~~ ~~Electronic~~ ~~communication and transaction technology has also continued to drive electronic substitution in directory printing, in part driven by cost pressures at key customers.~~ the following:

•

The impact of digital technologies has been felt in many print products. Digital technologies have impacted printed magazines as advertising spending continues to move from print to electronic media.

•

Catalogs have experienced volume reductions as our customers allocate more of their spending to online resources and also face competition from online retailers resulting in retailer compression.

•

The effect of COVID-19 in 2020 on the industries the Company services.

•

The Company has seen an unprecedented drop in demand for magazines and catalogs, with the faster pace of decline in demand primarily due to the accelerated impact of digital disruption of demand for printed materials.

•

Educational books within the college market continue to be impacted by electronic substitution and other trends. The K-12 educational sector continues to be focused on increasing digital distribution but there has been inconsistent adoption across school systems.

•

E-book substitution has impacted overall consumer print trade book volume, although e-book adoption rates have stabilized and industry-wide print book volume has been growing in recent years.

•

Electronic communication and transaction technology has also continued to drive electronic substitution in directory printing, in part driven by cost pressures at key customers.

The future impact of technology on our business is difficult to ~~predict and could~~predict; however, it is likely to result in additional expenditures to restructure impacted operations or develop new technologies. In addition, we have made targeted acquisitions and investments in our existing business to offer customers innovative services and solutions. Such acquisitions and investments include the acquisitions of Print Logistics in 2018 and Clark Group, Quality Park, Publishers Press, ~~NECI,~~ CREEL, Fairrington, and HudsonYards in 2017, which expanded our logistics, printing, digital, office products, and premedia capabilities, and Continuum ~~Management Company, LLC (“Continuum”)~~ in 2016, which expanded our print management capabilities. These acquisitions and investments further secure our position as a technology leader in the industry.

Technological advancement and innovation ~~has affected~~continues to affect the overall demand for most of the products in our Office Products segment. ~~While these changes continue to impact demand,~~However, the overall market for our products remains large and we believe share growth is attainable. We compete against a range of both domestic and international competitors in each of our product categories within the segment. Due to the increasing percentage of private label products in the market, resellers have created a highly competitive environment where purchasing decisions are based largely on price, quality and the supplier’s ability to service the customer. As consumer preferences shift towards private label, resellers have increased the pressure on suppliers to better differentiate their product offering, oftentimes through product exclusivity, product innovation and development of private label products. We have experienced robust growth within our e-commerce channel, where a significant majority of our sales are branded products.

We have implemented a number of strategic initiatives to reduce our overall cost structure and improve efficiency, including the restructuring, reorganization and integration of operations and streamlining of administrative and support activities. Future cost reduction initiatives ~~could~~are likely to include the reorganization of operations and the consolidation of facilities. Implementing such initiatives might result in future restructuring or impairment charges, which may be substantial. We also review our operations and management structure on a regular basis to appropriately balance risks and opportunities to maximize efficiencies and to support our long-term strategic goals.

During late 2018 and early 2019, the Company performed a comprehensive review of the Company’s entire operations to identify new revenue opportunities and cost savings. This review covered substantially all aspects of the Company – both operational and support functions – and involved key personnel from throughout the organization. The resulting revenue opportunities and cost savings initiatives were approved by senior management in the first quarter of 2019 and are expected to be implemented over the next three years. While the Company ~~expects to realize~~realized the benefits beginning in 2019 and expects to realize benefits at various points over the next three years, the Company has incurred ~~$1.1 million and $2.6~~$15 million of expense, of which $5 million was incurred during the three ~~and six~~ months ended ~~June 30, 2019, respectively,~~March 31, 2020, relating to the implementation of certain identified initiatives. As the Company continues to implement the identified initiatives, the Company expects to incur additional expense; however, the Company expects the resulting benefits (additional revenue and/or cost savings) to significantly exceed the additional expense. ~~Refer to Note 8,~~ ~~Restructuring, Impairment and Other Charges, for information on the charges recorded during the three and six months ended June 30, 2019.~~

~~Impairment Reviews and Charges~~

For the three months ended June 30, 2019, the Book and Office Products segments performed in line with expectations. However, the Company has seen an unprecedented drop in demand in its magazines and catalogs reporting unit, with the faster pace of decline in demand primarily due to the accelerated impact of digital disruption of demand for printed materials. In addition, the Company’s stock price has experienced a significant, sustained decline since the Company performed its annual goodwill impairment test (October 31, 2018).

Given the stock price decline, management determined that a further review of the reporting units’ goodwill for indicators of impairment was appropriate. The Company concluded that Book, Office Products and Logistics goodwill did not have indicators of impairment as the underlying assumptions from the 2018 review continue to be reasonable compared to performance thus far in 2019 and management’s current outlook. No other reporting unit, including magazines and catalogs, had a goodwill balance as of June 30, 2019.

Due to the unprecedented drop in demand in the magazines and catalogs reporting unit, management determined that a further review of the reporting unit’s intangible assets and property, plant and equipment for recoverability was appropriate:

•

With respect to property, plant and equipment and right-of-use assets for operating leases within the magazines and catalogs reporting unit, management performed a Step 1 recoverability test in accordance with Accounting Standards Codification (“ASC”) ASC 360, Property, Plant and Equipment. The recoverability test compares the estimated future undiscounted cash flows expected to result from the use of the asset group and its eventual disposition to the carrying value of the asset group; if the carrying value of the asset group exceeds its estimated future undiscounted cash flows, an impairment loss is recorded for the excess of the asset group’s carrying value over its fair value. Based upon management’s updated projection of cash flows for this asset group – which includes a hypothetical sale of assets – management determined that the estimated future undiscounted cash flows were in excess of the asset group’s carrying value, resulting in no impairment loss.

The Company will continue to perform interim reviews of goodwill for indicators of impairment each quarter to assess whether an interim impairment test is required for its goodwill balances or if recoverability tests are required for long-lived assets, including property, plant and equipment, deferred tax assets and certain identifiable intangible assets, whenever events or changes in circumstances indicate that the carrying value of an asset or asset group may not be recoverable. Such reviews could result in future impairment charges, depending on the facts and circumstances in effect at the time of those reviews.

Raw Materials

We negotiate with suppliers to maximize our purchasing efficiencies. The primary raw materials we use in our printed products are paper and ink. We negotiate with paper suppliers to maximize our purchasing efficiencies and use a wide variety of paper grades and formats. In addition, a substantial amount of paper used in our printed products is supplied directly by customers. Variations in the cost and supply of certain paper grades used in the manufacturing process may affect our consolidated financial results. Generally, customers directly absorb the impact of changing prices on customer-supplied paper. For paper that we purchase, we have historically passed most changes in price through to our customers. We entered into a paper consignment agreement at the end of 2019 that will encompass substantially all of LSC Communications’ purchased paper by mid-2020 to reduce our working capital.

Contractual arrangements and industry practice should support our continued ability to pass on any future paper price increases, but there is no assurance that market conditions will continue to enable us to successfully do so. Higher paper prices and tight paper supplies may have an impact on customers’ demand for printed products. We also resell waste paper and other print-related by-products and may be impacted by changes in prices for these ~~by-products~~.by-products.

We use a wide variety of ink formulations and colors in our manufacturing processes. Variations in the cost and supply of certain ink formulations may affect our consolidated financial results. We have undertaken various strategic initiatives to try to mitigate any foreseeable supply disruptions with respect to our ink requirements, including entering into a long term supply arrangement with a single supplier for a substantial portion of our ink supply. Certain contractual protections exist in our relationship with such supplier, such as price and quality protections and an ability to seek alternative sources of ink if the supplier breaches or is unable to perform certain of its obligations, which are intended to mitigate the risk of ink-related supply disruptions.

The primary materials used in the Office Products segment are paper, steel and polypropylene substrates. We negotiate with leading paper, plastic and steel suppliers to maximize our purchasing efficiencies. All of these materials are available from a number of domestic and international suppliers and we are not dependent upon any single supplier for any of these materials. We believe that adequate supply is available for each of these materials for the foreseeable future, although higher paper prices may have an impact on demand for our products.

Changes in material prices, including paper, ~~and freight,~~ may impact the Company’s operating margins as there may be a lag between when the Company experiences the changes and when they are absorbed by our customers.

Except for our long-term supply arrangement regarding ink and paper consignment agreement, we do not consider ourselves to be dependent upon any single vendor as a source of supply for our businesses, and we believe that sufficient alternative sources for the same, similar or alternative products are available.

Changes in the price of raw materials, crude oil and other energy costs impact our manufacturing costs. Crude oil and energy prices continue to be volatile. Should prices increase, we generally cannot pass on to customers the impact of higher energy prices on our manufacturing costs. We do enter into fixed price contracts for a portion of our natural gas purchases to mitigate the impact of changes in energy prices. We cannot predict sudden changes in energy prices and the impact that possible future changes in energy prices might have upon either future operating costs or customer demand and the related impact either will have on the Company’s condensed consolidated statements of operations, balance sheets and cash flows.

Pension Benefit Plans

The funded status of the Company’s pension benefit plans is dependent upon many factors, including returns on invested assets and the level of certain market interest rates. Market conditions may lead to changes in the discount rates (used to value the year-end benefit obligations of the plans) and the market value of the securities held by the plans, which could significantly increase or decrease the funded status of the plans. The Company reviews its actuarial assumptions on an annual basis as of December 31. Based on current estimates, the Company expects to make cash contributions of approximately $6 million to its pension benefit plans for the full year in ~~2019,~~2020, of which $3$1 million has been contributed during the ~~six~~three months ended ~~June 30, 2019.~~March 31, 2020.

In the first quarter of 2019, the Company completed a partial settlement of its retirement benefit obligations by purchasing a group annuity contract for certain retirees and beneficiaries from a third-party insurance company. As a result, the Company’s pension assets and liabilities were remeasured as of the settlement date. The Company recorded a non-cash settlement charge of $135 million in settlement of retirement benefit obligations in the condensed consolidated statement of operationsBeginning in the first quarter of 2020, the Company changed the method of accounting for the market-related value of assets for a class of assets within the U.S. Qualified Plan and Non-Qualified plans. The change in accounting method was retrospectively applied to periods in 2017, 2018 and 2019. ~~There were additional immaterial lump-sum settlements (unrelated~~Refer to ~~the transaction noted above) during the three months ended June 30, 2019 that resulted in a non-cash settlement charge~~Note 1, Overview and Basis of ~~$1 million.~~Presentation, for more information.

Based on the fair value of assets and the estimated discount rate used to value benefit obligations as of ~~June 30, 2019,~~March 31, 2020, the Company estimates the unfunded status of the pension benefit plans to be approximately ~~$100~~$113 million compared to ~~$137~~$162 million at December 31, ~~2018.~~2019.

See Note ~~12,~~11, Retirement Plans, for more information on the Company’s pension benefit plans.

~~Dividend Policy~~

~~On July 23, 2019, LSC Communications announced that its Board of Directors has determined to suspend the Company’s quarterly cash dividend.~~

Significant Accounting Policies

There have been no changes to the Company’s significant accounting policies disclosed in the annual report on Form 10-K for the year-ended December 31, ~~2018, with the exception of leases. On January 1, 2019, the Company adopted~~ ~~Accounting Standards Update No. 2016-02 “Leases (Topic 842)” (“ASU 2016-02”), as discussed in the Company’s annual report on Form 10-K.~~ Upon adoption of ASC 842, the Company added $206 million of right-of-use (“ROU”) assets and lease liabilities to its condensed consolidated balance sheet related to operating leases. There was no impact to the Company’s condensed consolidated statements of operations. See Note 4, ~~Leases, for more information.~~2019.

FINANCIAL REVIEW

In the financial review that follows, the Company discusses its condensed consolidated balance sheets, statements of operations, cash flows and certain other information. This discussion should be read in conjunction with the Company’s condensed consolidated financial statements and the related notes.

Results of Operations for the ~~Three Months Ended June 30, 2019~~three months ended March 31, 2020 as Compared to the ~~Three Months~~three months ended ~~June 30, 2018~~March 31, 2019

The following table shows the results of operations for the three months ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018,~~ which reflects the results of the acquired businesses from the relevant acquisition dates:

	Three Months Ended												Three Months Ended
	June 30,												March 31,
	2019			2018			$ Change			% Change			2020			2019			$ Change			% Change
	(in millions, except percentages)												(in millions, except percentages)
Net sales	$	869		$	943		$	(74	)		(7.7	%)	$	701		$	845		$	(144	)		(17.0	%)
Cost of sales		750			798			(48	)		(6.0	%)		616			735			(119	)		(16.2	%)
Cost of sales as a % of net sales		86.3	%		84.6	%								87.9	%		87.0	%
Selling, general and administrative expenses (exclusive of depreciation and amortization)		80			82			(2	)		(2.4	%)		75			85			(10	)		(11.8	%)
Selling, general and administrative expenses as a % of net sales		9.2	%		8.7	%								10.7	%		10.1	%
Restructuring, impairment and other charges-net		24			11			13			118.2	%		26			13			13			100.0	%
Depreciation and amortization		31			34			(3	)		(8.8	%)		27			31			(4	)		(12.9	%)
(Loss) income from operations	$	(16	)	$	18		$	(34	)		(188.9	%)
(Loss) from operations													$	(43	)	$	(19	)	$	(24	)		126.3	%

Condensed Consolidated Results

Net sales for the three months ended ~~June 30, 2019~~March 31, 2020 were ~~$869~~$701 million, a decrease of ~~$74~~$144 million, or ~~7.7%~~17.0%, compared to the three months ended ~~June 30, 2018.~~March 31, 2019. Net sales were impacted ~~by:~~

•

~~The dispositions of the Company’s European printing business and retail offset printing facilities in 2018, and lower volume in magazines and catalogs and Office Products;~~

•

~~Partially offset by the acquisition of Print Logistics in 2018, higher volume in books and a $2 million increase~~by lower volume in magazines, catalogs and book products and a $41 million decrease in pass-through paper sales.

~~Additionally, on a pro forma basis, the Company’s net sales decreased by approximately $115 million or 11.6% (see Note 2,~~ ~~Business Combination and Disposition, to the condensed consolidated financial statements). The decrease was primarily due to the Company’s disposition of its European printing business and retail offset printing facilities in 2018.~~

Total cost of sales decreased ~~$48~~$119 million, or ~~6.0%~~16.2%, for the three months ended ~~June 30, 2019~~March 31, 2020 compared to the three months ended ~~June 30, 2018,~~March 31, 2019, primarily driven by ~~the dispositions of the Company’s European printing business and retail offset printing facilities and~~ lower volume ~~partially offset by costs incurred by the acquisition of Print Logistics.~~and cost control initiatives.

As a percentage of net sales, cost of sales increased from ~~84.6%~~87.0% for the three months ended ~~June 30, 2018~~March 31, 2019 to ~~86.3%~~87.9% for ~~the~~ three months ended ~~June 30, 2019~~March 31, 2020 primarily due to ~~higher labor costs and product mix.~~lower volume.

Selling, general and administrative expenses decreased $2$10 million, ~~to $80 million~~or 11.8%, for the three months ended ~~June 30, 2019~~March 31, 2020 compared to the three months ended ~~June 30, 2018 primarily due to~~ ~~the disposition of the Company’s European printing business, partially offset by costs associated with the Merger Agreement and costs incurred by the acquisition of Print Logistics.~~

~~As a percentage of net sales, selling, general and administrative expenses increased from 8.7% for the three months ended June 30, 2018 to 9.2% for the three months ended June 30,~~March 31, 2019, primarily due to ~~costs associated with~~higher expenses in 2019 related to the ~~Merger Agreement.~~previously terminated merger agreement, lower volume and cost control initiatives.

For the three months ended ~~June 30, 2019,~~March 31, 2020, the Company recorded restructuring, impairment and other charges of ~~$24~~$26 million. The charges primarily included:

•

Net other restructuring charges of $6$22 million primarily due to facility costs, expenses to move equipment, costs associated with new revenue opportunities and cost savings initiatives implemented ~~during the quarter, andmultiemployer withdrawal obligations related to facility closures; and~~

•

~~$17 million for the impairment of certain definite-lived customer relationships intangible assets~~ in ~~the Magazines, Catalogs and Logistics segment.~~

~~For the three months ended June 30, 2018, the Company recorded restructuring, impairment and other charges of $11 million. The charges primarily included:~~

•

Other restructuring charges of $7 million for facility costs, a loss related to the Company’s disposition of its retail offset printing facilities, and multiemployer withdrawal obligations related to facility closures;2019; and

•

Employee termination costs of $3 million related to an aggregate of ~~108~~397 employees, ~~substantially all~~ of whom 197 were terminated as of or prior to ~~June 30,~~March 31, 2020 primarily related to the closure of one facility closure in the Office Products segment.

For the three months ended March 31, 2019, the Company recorded restructuring, impairment and other charges of $13 million. The charges primarily included:

•

Net other restructuring charges of $6 million primarily due to charges related to facility costs and costs associated with new revenue opportunities and cost savings initiatives implemented during the quarter;

•

Employee termination costs of $5 million related to an aggregate of 240 employees, of whom 16 were terminated as of or prior to March 31, 2019 primarily related to the ~~reorganization~~closure of ~~certain business units~~one facility in the Magazines, Catalogs and ~~corporate functions.~~Logistics segment; and

•

$2 million of net impairment charges related to machinery and equipment associated with facility closings in the Magazines, Catalogs and Logistics segment.

Depreciation and amortization decreased $3$4 million to ~~$31~~$27 million for the three months ended ~~June 30, 2019~~March 31, 2020 compared to the three months ended ~~June 30, 2018~~March 31, 2019, due to decreased capital spending in recent years compared to historical ~~levels and the disposition of the Company’s European printing business, partially offset by the acquisition of Print Logistics.~~

levels.

	Three Months Ended											Three Months Ended
	June 30,											March 31,
	2019			2018			$ Change		% Change			2020			2019 (1)			$ Change			% Change
	(in millions, except percentages)											(in millions, except percentages)
Interest expense-net	$	19		$	18		$	1		5.6	%	$	18		$	19		$	(1	)		(5.3	%)
Settlement of retirement benefit obligations		1			—			1		100.0	%		—			132			(132	)		(100.0	%)
Investment and other (income)-net		(9	)		(13	)		4		(30.8	%)		(10	)		(8	)		(2	)		25.0	%

~~Net interest expense increased by $1 million for the three months ended June 30, 2019 compared to the three months ended June 30, 2018.~~ Refer to Note ~~12,~~11, Retirement Plans, for information on the non-cash settlement charge related to retirement benefit obligations. Investment and other (income)-net primarily relates to the Company’s pension benefit plans in both years.

Three Months Ended

June 30,

2019

2018

$ Change

(in millions, except percentages)

(Loss) income before income taxes

$
(27
)

$
13

$
(40
)
Income tax (benefit) expense

(3
)

5

(8
)
Effective income tax rate

13.3
%

35.3
%

	Three Months Ended
	March 31,
	2020			2019 (1)			$ Change
	(in millions, except percentages)
Net (loss) before income taxes	$	(51	)	$	(162	)	$	111
Income tax expense (benefit)		1			(37	)		38
Effective income tax rate		(2.7	%)		22.7	%

The effective income tax rate for the three months ended ~~June 30, 2019~~March 31, 2020 was ~~13.3%~~(2.7)% compared to ~~35.3%~~22.7% for the three months ended ~~June 30, 2018.~~ ~~The effective rate for three months ended June 30, 2019 reflects the impact of nondeductible costs associated with the Merger Agreement.~~March 31, 2019.

The effective income tax rate for the three months ended ~~June 30, 2018~~March 31, 2020 reflects the company’s limited ability to benefit U.S. results as the Company has a valuation allowance recorded on its U.S. deferred tax assets.

The effective income tax rate for the three months ended March 31, 2019 reflects the impact of ~~the U.S. Tax Cuts~~nondeductible merger costs and ~~Jobs Act (“Tax Act”) including the reduction~~share-based compensation awards that either lapsed or vested.

(1) As Adjusted - Refer to Note 1, Overview and Basis of ~~the U.S. federal corporate tax rate from 35.0% to 21.0%~~Presentation, partially offset by the tax resulting from the inclusion of certain foreign-sourced earnings, referred to as the global intangible low-taxed income ("GILTI") tax, as well as changes in deductions and permanent book-to-tax differences.for information on restated balances.

Information by Segment

The following tables summarize net sales, income (loss) from operations and certain items impacting comparability within each of the reportable segments and Corporate. The descriptions of the reporting units generally reflect the primary products provided by each reporting unit.

Magazines, Catalogs and Logistics

	Three Months Ended									Three Months Ended
	June 30,									March 31,
	2019			2018			Change			2020			2019			Change
	(in millions, except percentages)									(in millions, except percentages)
Net sales	$	380		$	401		$	(21	)	$	327		$	403		$	(76	)
(Loss) from operations		(42	)		(6	)		(36	)		(35	)		(31	)		(4	)
Operating margin		(11.1	%)		(1.5	%)	(960 bps)				(10.7	%)		(7.7	%)	(300) bps
Restructuring, impairment and other charges-net		20			6			14			11			11			—

Net sales for the Magazines, Catalogs and Logistics segment for the three months ended ~~June 30, 2019~~March 31, 2020 were ~~$380~~$327 million, a decrease of ~~$21~~$76 million, or ~~5.3%~~18.9%, compared to the three months ended ~~June 30, 2018.~~March 31, 2019. The Magazines, Catalogs and Logistics segment’s net sales decreased primarily due to ~~an unprecedented drop~~lower volume in ~~long-run magazine~~magazines, catalogs and catalog volumes, with the faster pace of decline in demand primarily due to the accelerated impact of digital disruption of demand for printed materials. In addition, the disposition of the Company’s retail offset printing facilitieslogistics and a $5$28 million decrease in pass-through paper ~~sales contributed to the decrease, all of which was partially offset by the acquisition of Print Logistics.~~sales.

The ~~increase~~change in Magazines, Catalogs and Logistics segment loss from operations and ~~change in~~ operating margins was primarily due to ~~higher restructuring, impairment and other charges and the~~ lower ~~volumes noted above.~~volume, partially offset by cost control initiatives.

Book

	Three Months Ended									Three Months Ended
	June 30,									March 31,
	2019			2018			Change			2020			2019			Change
	(in millions, except percentages)									(in millions, except percentages)
Net sales	$	289		$	266		$	23		$	204		$	260		$	(56	)
Income from operations		18			19			(1	)
(Loss) income from operations											(9	)		13			(22	)
Operating margin		6.2	%		7.1	%	(90 bps)				(4.4	%)		5.0	%	(940 bps)
Restructuring, impairment and other charges-net		1			3			(2	)		3			1			2

Net sales for the Book segment for the three months ended ~~June 30, 2019~~March 31, 2020 were ~~$289~~$204 million, ~~an increase~~a decrease of ~~$23~~$56 million, or ~~9.2%~~21.4%, compared to the three months ended ~~June 30, 2018,~~March 31, 2019, primarily due to ~~higher~~lower volume in educational and digitally-printed books and ~~educational books, increased fulfillment and procurement services and an $11~~a $9 million ~~increase~~decrease in pass-through paper sales.

The decrease in the ~~Book segment~~operating income ~~from operations~~ and ~~operating~~ margins was ~~primarily due to increased labor costs.~~driven by lower volume and higher restructuring, impairment and other charges.

Office Products

	Three Months Ended									Three Months Ended
	June 30,									March 31,
	2019			2018			Change			2020			2019			Change
	(in millions, except percentages)									(in millions, except percentages)
Net sales	$	139		$	154		$	(15	)	$	112		$	119		$	(7	)
Income from operations		13			13			—			7			8			(1	)
Operating margin		9.4	%		8.4	%	100 bps				6.3	%		6.7	%	(40) bps
Restructuring, impairment and other charges-net		1			1			—			2			—			2

Net sales for the Office Products segment for the three months ended ~~June 30, 2019~~March 31, 2020 were ~~$139~~$112 million, a decrease of ~~$15~~$7 million, or ~~9.7%~~5.6%, compared to the three months ended ~~June 30, 2018,~~March 31, 2019, largely as a result of lower volume in ~~filing~~envelopes and ~~binder~~notetaking products, partially offset by higher volume in filing products.

The decrease in Office Products segment income from operations ~~remained consistent at $13~~and operating margin was primarily due to higher restructuring, impairment and other charges and lower volume, partially offset by cost control initiatives.

Mexico

	Three Months Ended
	March 31,
	2020			2019			Change
	(in millions, except percentages)
Net sales	$	23		$	24		$	(1	)
Income from operations		3			3			—
Operating margin		13.0	%		12.5	%	50 bps

Net sales for the Mexico segment were $23 million for the three months ended March 31, 2020, a decrease of $1 million or 3.6%, compared to the three months ended March 31, 2019. There were no significant changes to net sales or income from operations for the three months ended ~~June 30, 2019 and 2018. The increase~~March 31, 2020 compared to the same period in ~~operating margins was due to cost reductions and synergies realized from the integration of Quality Park.~~2019.

Other

	Three Months Ended									Three Months Ended
	June 30,									March 31,
	2019			2018			Change			2020			2019			Change
	(in millions, except percentages)									(in millions, except percentages)
Net sales	$	61		$	122		$	(61	)	$	35		$	39		$	(4	)
Income from operations		8			7			1			3			1			2
Operating margin		13.1	%		5.7	%	740 bps				8.6	%		2.5	%	610 bps

Net sales for the Other grouping for the three months ended ~~June 30, 2019~~March 31, 2020 were ~~$61~~$35 million, a decrease of ~~$61~~$4 million, or ~~50.1%~~10.6%, compared to the three months ended ~~June 30, 2018,~~March 31, 2019, primarily due to ~~the disposition of the Company’s European printing business,~~ a $4 million decrease in pass-through paper sales and lower directories ~~volume, partially offset by higher sales in outsourced print procurement and management services.~~volume.

The increase in income ~~from operations and operating margin was primarily due to mix of volume.~~

~~Corporate~~

~~The following table summarizes unallocated operating expenses and certain items impacting comparability within the activities presented as Corporate:~~

Three Months Ended

June 30,

2019

2018

Change

(in millions, except percentages)

Total operating expenses

$
13

$
15

$
(2
)
Significant components of total operating
expenses:

Restructuring, impairment and other charges-net

2

1

1

Share-based compensation expenses

1

5

(4
)
Expenses related to acquisitions, the Merger
Agreement and dispositions

5

1

4

~~Results of Operations for the Six Months Ended June 30, 2019 as Compared to the Six Months Ended June 30, 2018~~

~~The following table shows the results of operations for the six months ended June 30, 2019 and 2018, which reflects the results of the acquired businesses from the relevant acquisition dates:~~

Six Months Ended

June 30,

2019

2018

$ Change

% Change

(in millions, except percentages)

Net sales

$
1,714

$
1,872

$
(158
)

(8.4
%)
Cost of sales

1,485

1,606

(121
)

(7.5
%)
Cost of sales as a % of net sales

86.6
%

85.8
%

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

165

165

—

---
%
Selling, general and administrative expenses as a % of net sales

9.6
%

8.8
%

Restructuring, impairment and other charges-net

37

17

20

117.6
%
Depreciation and amortization

62

72

(10
)

(13.9
%)
(Loss) income from operations

$
(35
)

$
12

$
(47
)

(391.7
%)

~~Condensed Consolidated Results~~

~~Net sales for the six months ended June 30, 2019 were $1,714 million, a decrease of $158 million, or 8.4%, compared to the six months ended June 30, 2018. Net sales were impacted by:~~

•

~~The dispositions of the Company’s European printing business and retail offset printing facilities in 2018, and lower volume in magazines and catalogs, Directories and Office Products;~~

•

~~Partially offset by the acquisition of Print Logistics in 2018, higher volume in books and a $3 million increase in pass-through paper sales.~~

~~Additionally, on a pro forma basis, the Company’s net sales decreased by approximately $243 million or 12.4% (see Note 2,~~ ~~Business Combination and Disposition, to the condensed consolidated financial statements). The decrease was primarily due to the Company’s disposition of its European printing business and retail offset printing facilities in 2018.~~

Total cost of sales decreased $121 million, or 7.5%, for the six months ended June 30, 2019 compared to the six months ended June 30, 2018, primarily driven by the dispositions of the Company’s European printing business and retail offset printing facilities and lower volume, partially offset by costs incurred by the acquisition of Print Logistics.

As a percentage of net sales, cost of sales increased from 85.8% for the three months ended June 30, 2018 to 86.6% for three months ended June 30, 2019 primarily due to higher labor costs and product mix.

Selling, general and administrative expenses remained consistent at $165 million for the six months ended June 30, 2019 compared to the six months ended June 30, 2018, primarily due to costs associated with the Merger Agreement and costs incurred by the acquisition of Print Logistics, partially offset by the disposition of the Company’s European printing business.

As a percentage of net sales, selling, general and administrative expenses increased from 8.8% for the six months ended June 30, 2018 to 9.6% for the six months ended June 30, 2019 primarily due to costs associated with the Merger Agreement.

~~For the six months ended June 30, 2019, the Company recorded restructuring, impairment and other charges of $37 million. The charges primarily included:~~

•

Net other restructuring charges of $12 million primarily due to facility costs, costs associated with new revenue opportunities and cost savings initiatives implemented in 2019, and multiemployer withdrawal obligations related to facility closures;

•

Employee termination costs of $5 million related to an aggregate of 234 employees, of whom 31 were terminated as of or prior to June 30, 2019 primarily related to the closure of one facility in the Magazines, Catalogs and Logistics segment;

•

~~$17 million for the impairment of certain definite-lived customer relationships intangible assets in the Magazines, Catalogs and Logistics segment; and~~

•

~~$2 million of net impairment charges related to machinery and equipment associated with facility closings~~ ~~in the Magazines, Catalogs and Logistics segment.~~

~~For the six months ended June 30, 2018, the Company recorded restructuring, impairment and other charges of $17 million. The charges primarily included:~~

•

Other restructuring charges of $10 million for facility costs, a loss related to the Company’s disposition of its retail offset printing facilities, and multiemployer withdrawal obligations related to facility closures; and

•

Employee termination costs of $7 million related to an aggregate of 304 employees, substantially all of whom were terminated as of or prior to June 30, 2019. These charges primarily related to one facility closure in the Print segment and the reorganization of certain business units and corporate functions.

Depreciation and amortization decreased $10 million to $62 million for the six months ended June 30, 2019 compared to the six months ended June 30, 2018 due to decreased capital spending in recent years compared to historical levels and the disposition of the Company’s European printing business, partially offset by the acquisition of Print Logistics.

Six Months Ended

June 30,

2019

2018

$ Change

% Change

(in millions, except percentages)

Interest expense-net

$
38

$
38

$
—

---
%
Settlement of retirement benefit obligations

136

—

136

100.0
%
Investment and other (income)-net

(19
)

(24
)

5

(20.8
%)

Net interest expense was $38 million for each of the six months ended June 30, 2019 and 2018. Investment and other (income)-net primarily relates to the Company’s pension benefit plans in both years. Refer to Note 12, ~~Retirement Plans, for information on the non-cash settlement charge related to retirement benefit obligations.~~

Six Months Ended

June 30,

2019

2018

$ Change

(in millions, except percentages)

Net (loss) before income taxes

$
(190
)

$
(2
)

$
(188
)
Income tax (benefit) expense

(40
)

1

(41
)
Effective income tax rate

21.3
%

(35.7
%)

~~The effective income tax rate for the six months ended June 30, 2019 was 21.3% compared to (35.7%) for the six months ended June 30, 2018.~~ ~~The effective income tax rate for the six months ended June 30, 2019 reflects the impact of nondeductible costs associated with the Merger Agreement.~~

The effective income tax rate for the six months ended June 30, 2018 reflects the impact of the Tax Act including the reduction of the U.S. federal corporate tax rate from 35.0% to 21.0%, partially offset by the tax resulting from the inclusion of certain foreign-sourced earnings, referred to as the GILTI tax, as well as changes in deductions and permanent book-to-tax differences.

~~Information by Segment~~

~~Magazines, Catalogs and Logistics~~

Six Months Ended

June 30,

2019

2018

Change

(in millions, except percentages)

Net sales

$
783

$
828

$
(45
)
(Loss) from operations

(73
)

(20
)

(53
)
Operating margin

(9.3
%)

(2.4
%)

(690) bps

Restructuring, impairment and other charges-net

31

10

21

Net sales for the Magazines, Catalogs and Logistics segment for the six months ended June 30, 2019 were $783 million, a decrease of $45 million, or 5.3%, compared to the six months ended June 30, 2018. The Magazines, Catalogs and Logistics segment’s net sales decreased primarily due to an unprecedented drop in long-run magazine and catalog volumes, with the faster pace of decline in demand primarily due to the accelerated impact of digital disruption of demand for printed materials. In addition, the disposition of the Company’s retail offset printing facilities and a $4 million decrease in pass-through paper sales contributed to the decrease, all of which was partially offset by the acquisition of Print Logistics.

~~The increase in Magazines, Catalogs and Logistics segment loss~~ from operations and change in operating margins was primarily due to ~~higher restructuring, impairment~~cost control initiatives and ~~other charges~~ ~~and~~ ~~lower volume.~~

~~Book~~

Six Months Ended

June 30,

2019

2018

Change

(in millions, except percentages)

Net sales

$
549

$
515

$
34

Income from operations

31

28

3

Operating margin

5.6
%

5.4
%

20 bps

Restructuring, impairment and other charges-net

2

4

(2
)

Net sales for the Book segment for the six months ended June 30, 2019 were $549 million, an increase of $34 million, or 6.8%, compared to the six months ended June 30, 2018, primarily due to higher volume in digitally-printed and educational books, increased fulfillment and procurement services and a $15 million increase in pass-through paper sales.

The increase in the operating income and margins was driven by higher volume and lower restructuring, impairment, and other charges-net, partially offset by higher labor costs in manufacturing and fulfillment operations.

~~Office Products~~

Six Months Ended

June 30,

2019

2018

Change

(in millions, except percentages)

Net sales

$
258

$
277

$
(19
)
Income from operations

21

15

6

Operating margin

8.1
%

5.4
%

270 bps

Restructuring, impairment and other charges-net

1

2

(1
)
Purchase accounting adjustments

—

1

(1
)

Net sales for the Office Products segment for the six months ended June 30, 2019 were $258 million, a decrease of $19 million, or 6.8%, compared to the six months ended June 30, 2018, largely as a result of lower volume in filing and notetaking products.

The increase in Office Products segment income from operations and operating margins was due to cost reductions, synergies realized from the integration of Quality Park, and lower restructuring, impairment and other charges and purchase accounting adjustments.

~~Other~~

Six Months Ended

June 30,

2019

2018

Change

(in millions, except percentages)

Net sales

$
124

$
252

$
(128
)
Income from operations

12

14

(2
)
Operating margin

9.7
%

5.6
%

410 bps

Net sales for the Other grouping for the six months ended June 30, 2019 were $124 million, a decrease of $128 million, or 51.1%, compared to the three months ended June 30, 2018, primarily due to the disposition of the Company’s European printing ~~business, a $8 million decrease in pass-through paper sales and lower directories volume, partially offset by higher sales in outsourced print procurement and management services.~~

~~The decrease in income from operations was primarily due to lower volume. The~~ mix of ~~volume helped to improve the operating margin compared to the prior year.~~work.

Corporate

The following table summarizes unallocated operating expenses and certain items impacting comparability within the activities presented as Corporate:

	Six Months Ended							Three Months Ended
	June 30,							March 31,
	2019		2018		Change			2020		2019		Change
	(in millions, except percentages)							(in millions)
Total operating expenses	$	26	$	25	$	1		$	12	$	13	$	(1	)
Significant components of total operating expenses:
Restructuring, impairment and other charges-net		3		1		2			10		1		9
Share-based compensation expenses		4		8		(4	)		1		3		(2	)
Expenses related to acquisitions, the Merger Agreement and dispositions		12		2		10
Expenses related to acquisitions, merger agreement and dispositions									—		7		(7	)

Non-GAAP Measures

The Company believes that certain non-GAAP measures, such as Non-GAAP adjusted EBITDA, provide useful information about the Company’s operating results and enhance the overall ability to assess the Company’s financial performance. The Company uses these measures, together with other measures of performance under GAAP, to compare the relative performance of operations in planning, budgeting and reviewing the performance of its business. Non-GAAP adjusted EBITDA allows investors to make a more meaningful comparison between the Company’s core business operating results over different periods of time. The Company believes that Non-GAAP adjusted EBITDA, when viewed with the Company’s results under GAAP and the accompanying reconciliations, provides useful information about the Company’s business without regard to potential distortions. By eliminating potential differences in results of operations between periods caused by factors such as depreciation and amortization methods and restructuring, impairment and other charges, the Company believes that Non-GAAP adjusted EBITDA can provide a useful additional basis for comparing the current performance of the underlying operations being evaluated.

Non-GAAP adjusted EBITDA is not presented in accordance with GAAP and has important limitations as an analytical tool. Readers should not consider these measures in isolation or as a substitute for analysis of our results as reported under GAAP. In addition, these measures are defined differently by different companies in our industry and, accordingly, such measures may not be comparable to similarly-titled measures of other companies.

Non-GAAP adjusted EBITDA excludes restructuring, impairment and other charges-net, share-based compensation expense, settlement of retirement benefit obligations, and expenses related to acquisitions, merger agreement and dispositions. In the ~~Merger Agreement~~first quarter of 2020, the Company began including share-based compensation expense as a non-GAAP measure. As the share-based compensation expense recorded in the current period represents expense for previously issued grants that will vest at a lower share price than originally expensed, management determined that share-based compensation expense represents a non-GAAP measure. Share-based compensation expense was $1 million and ~~dispositions,~~$3 million during the three months ended March 31, 2020 and ~~purchase accounting adjustments.~~ 2019, respectively. The reconciliation for the three months ended March 31, 2019 below has been restated to reflect this change.

A reconciliation of GAAP net income to non-GAAP adjusted EBITDA for the three ~~and six~~ months ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~ is presented in the following table:

Three Months Ended

Six Months Ended

June 30,

June 30,

2019

2018

2019

2018

Net (loss) income

$
(24
)

$
8

$
(150
)

$
(3
)
Restructuring, impairment and other charges-net

24

11

37

17

Settlement of retirement benefit obligations

1

—

136

—

Expenses related to acquisitions, the
Merger Agreement and dispositions

5

1

12

2

Purchase accounting adjustments

—

—

—

3

Depreciation and amortization

31

34

62

72

Interest expense-net

19

18

38

38

Income tax (benefit) expense

(3
)

5

(40
)

1

Non-GAAP adjusted EBITDA

$
53

$
77

$
95

$
130

	Three Months Ended
	March 31,
	2020			2019 (1)
	(in millions)
Net (loss)	$	(52	)	$	(125	)
Restructuring, impairment and other charges- net		26			13
Share-based compensation expense		1			3
Settlement of retirement benefit obligations		—			132
Expenses related to acquisitions, merger agreement and dispositions		—			7
Depreciation and amortization		27			31
Interest expense-net		18			19
Income tax expense (benefit)		1			(37	)
Non-GAAP adjusted EBITDA	$	21		$	43

The adjustments to arrive at non-GAAP adjusted EBITDA are summarized below:

•

Restructuring, impairment and other charges-net: Refer to Results of Operations for the Three Months Ended ~~June 30, 2019~~March 31, 2020 as Compared to the Three Months Ended ~~June 30, 2018~~ ~~and~~ ~~Results of Operations for the Six Months Ended June 30,~~March 31, 2019 ~~as Compared to the Three Months Ended June 30, 2018~~ for information on the charges.

•

Share-based compensation expense: The Company incurred $1 million and $3 million of expenses during the three months ended March 31, 2020 and 2019, respectively, in relation to its share-based compensation plans. There were no new plans granted in 2020.

•

Settlement of retirement obligations: Refer to Note ~~12,~~11, Retirement Plans, for more information on the settlement charges.

•

Expenses related to acquisitions, ~~the Merger Agreement~~merger agreement and dispositions: The three ~~and six~~ months ended ~~June 30,~~March 31, 2019 included charges of $5$7 million ~~and $12 million, respectively,~~ primarily related to ~~costs associated with~~ the ~~Merger Agreement. The three and six months ended June 30, 2018 included charges of $1 million and~~ ~~$2 million, respectively, related to legal, accounting and other expenses associated with completed and contemplated acquisitions and dispositions.~~

•

Purchase accounting adjustments: The six months ended June 30, 2018 included charges of $3 million as a result of purchase accounting inventory step-up adjustments and changes to purchase price allocations related to prior acquisitions.previously terminated merger agreement.

(1) As Adjusted - Refer to Note 1, Overview and Basis of Presentation, for information on restated balances.

LIQUIDITY AND CAPITAL RESOURCES

The Company believes it has sufficient liquidity to support its ongoing operations and to strategically invest in opportunities to create value for its stockholders. Operating cash flows and the Revolving Credit Facility are the Company’s primary sources of liquidity and are expected to be used for, among other things, payments of interest and principal on the Company’s debt obligations, capital expenditures necessary to support productivity improvement and strategic investment, and completion of restructuring programs.

The following sections describe the Company’s cash flows for the ~~six~~three months ended ~~June 30, 2019~~March 31, 2020 and ~~2018.~~2019.

	Six Months Ended						Three Months Ended
	June 30,						March 31,
	2019			2018			2020			2019
Net cash provided by (used in) operating activities	$	3		$	(26	)
							(in millions)
Net cash (used in) operating activities							$	(39	)	$	(24	)
Net cash (used in) investing activities		(52	)		(32	)		(9	)		(31	)
Net cash provided by financing activities		44			50			2			46

Cash Flows from Operating Activities

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

Net cash ~~provided by operating activities was $3 million for the six months ended June 30, 2019 compared to $26 million~~ used in operating activities was $39 million for the ~~six~~three months ended ~~June 30, 2018.~~March 31, 2020 compared to $24 million for the three months ended March 31, 2019. The change was primarily due to a decrease in sales volume, an increase in restructuring payments and an increase in prepaid expenses, partially offset by improvements in timing of ~~net working capital impacts.~~customer payments received and vendor payments made and by a decrease in inventory.

Cash Flows from Investing Activities

Net cash used in investing activities for the ~~six~~three months ended ~~June 30, 2019~~March 31, 2020 was ~~$52~~$9 million compared to ~~$32~~$31 million for the same period in ~~2018. Significant changes are as follows:~~2019. The decrease was primarily due to $17 million of lower capital expenditures during the three months ended March 31, 2020 compared to the same period in 2019.

•

~~Capital expenditures increased by~~ ~~$12~~ million compared to the same period in 2018, primarily due to increased spend on machinery and equipment in order to increase automation and productivity in the Book and Magazines, Catalogs and Logistics segments; and

•

~~Cash flows from investing activities were also impacted by finalization of working capital calculations in each year.~~

Cash Flows from Financing Activities

Net cash provided by financing activities for the three months ended ~~June 30, 2019~~March 31, 2020 was ~~$44~~$2 million compared to ~~$50~~$46 million for the same period in ~~2018. Significant changes are as follows:~~2019. There was minimal financing activity during the three months ended March 31, 2020 compared to the following significant activity during the three months ended March 31, 2019:

•

~~The Company paid $22~~$67 million of ~~long-term debt and current maturities during the six months ended June 30, 2019, compared to $26 million during the six months ended June 30, 2018;~~net proceeds from credit facility borrowings;

•

~~The Company received net proceeds from credit facility borrowings of $84 million for the six months ended June 30, 2019, compared to $115~~$11 million in ~~the prior period; the net proceeds were higher in 2018 due to the pending acquisition~~payments of ~~Print Logistics on June 30, 2018;~~current maturities and long-term debt; and

•

~~The Company paid $20~~$9 million ~~to repurchase common stock during the six months ended June 30, 2018, with no such activity during 2019.~~of dividends paid.

Dividends

~~Cash dividends declared and paid to stockholders during~~As a result of the ~~six months ended June 30, 2019 totaled $17 million.~~

In light of lower expectations for earnings and cash flows, on July 18, 2019 the Board of Directors suspended dividend payments in order to allocate greater capital to the Company’s debt reduction and ongoing operational restructuring programs. The dividend paid in June 2019 is the last dividend that will be paid for the foreseeable future. Suspending the dividend will allowDIP Credit Agreement, the Company ~~to redeploy approximately $35 million in cash annually.~~

~~Prior to the amendment to the Credit Agreement that was effective on August 5, 2019 that~~ is ~~described below, the Company was generally allowed to declare and pay annual~~restricted from issuing dividend ~~payments of up to $50 million in the aggregate. However, the August 5, 2019 amendment removed the general allowance to declare and pay annual dividends of up to $50 million.~~

~~See further discussion below for information regarding the August 5, 2019 amendment to the Credit Agreement.~~payments.

LIQUIDITY

Cash and cash equivalents were ~~$17~~$56 million and ~~$21~~$105 million as of ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively.

The Company’s cash balances are held in several locations throughout the world, including amounts held outside of the United States. Cash and cash equivalents as of ~~June 30, 2019~~March 31, 2020 included ~~$10~~$40 million in the U.S. and $7$16 million at international locations.

~~The~~Until September 30, 2019, the Company ~~maintains~~maintained cash pooling structures that ~~enable~~enabled participating international locations to draw on the pools’ cash resources to meet local liquidity needs. Foreign cash balances ~~may~~were permitted to be loaned from certain cash pools to U.S. operating entities on a temporary basis in order to reduce the Company’s short-term borrowing costs or for other purposes. The pooling structure was discontinued in October 2019. As of ~~June 30, 2019, $18~~March 31, 2020, the Company had $249 million of ~~international cash was loaned~~borrowings under the Revolving Credit Facility and had no availability to ~~U.S. operating entities.~~ further draw. Additionally, the Company had $51 million in outstanding letters of credit issued under the Revolving Credit Facility as of March 31, 2020.

Debt Issuances

On September 30, 2016, the Company issued $450 million of Senior Secured Notes (the “Senior Notes”).

Credit Agreement Amendments

	Original	December 20, 2018	August 5, 2019
Maximum Consolidated Leverage Ratio
Current ratio	3.25 to 1.00	3.25 to 1.00	3.75 to 1.00
Step-down ratio	3.00 to 1.00	3.00 to 1.00	3.50 to 1.00 and 3.25 to 1.00
Step-down as of date (quarter ending on or after)	March 31, 2019	March 31, 2020	June 30, 2020 and March 31, 2021

Minimum Interest Coverage Ratio
Current ratio	3.25 to 1.00	3.25 to 1.00	2.50 to 1.00
Step-up ratio	3.50 to 1.00	3.50 to 1.00	2.75 to 1.00 and 3.00 to 1.00
Step-up as of date (quarter ending on or after)	March 31, 2019	March 31, 2020	September 30, 2020 and June 30, 2021

Other terms, including the outstanding principal, maturity date and other debt covenants remained the same under the December 20, 2018 amendment.

The August 5, 2019 amendment resulted in a reduction in the Revolving Credit Facility aggregate principal amount from $400 million to $300 million and removed the general allowance to pay annual dividends of up to $50 million. The August 5, 2019 amendment included other changes that generally further restrict the Company’s ability to incur additional indebtedness, create liens, engage in mergers and consolidations, make restricted payments and dispose of certain assets. The outstanding principal and maturity date of the Term Loan Facility remains the same, while the maturity date of the Revolving Credit Facility remains the same.

Waiver, Forbearance Agreement and Fourth Amendment to Credit Agreement

~~Additional Debt Issuances Information~~ Voluntary Reorganization under Chapter 11

~~There were $150 million~~The commencement of ~~borrowings under~~the Chapter 11 Cases constituted an event of default with respect to the Senior Notes, the Term Loan Facility and the Revolving Credit Facility (the “Debt Instruments”). The Debt Instruments provide that as a result of ~~June 30, 2019. Based~~the commencement of the Chapter 11 Cases, the principal and interest due thereunder shall be immediately due and payable. Any efforts to enforce payment obligations under the Debt Instruments will be automatically stayed as a result of the commencement of the Chapter 11 Cases, and the creditors’ right of enforcement in respect of the Debt Instruments are subject to the applicable provisions of the Bankruptcy Code.

Debtor-in-Possession Financing

Borrowings under the DIP Facility bear interest at a rate per annum equal to, at the Company’s option, either (i) the Alternate Base Rate (as defined in the DIP Credit Agreement) plus 5.75%, or (ii) LIBOR plus 6.75%. Upon an event of default under the DIP Credit Agreement (an “Event of Default”), an additional 2.00% may be added to the Interest Rate. In addition, the Company is required to pay (i) an unused line fee of 0.50% per annum (payable quarterly in arrears) on the ~~Company’s condensed consolidated statements~~average daily unused portion of ~~operations~~the DIP Loan Commitments, (ii) a commitment fee of (x) 1.00% per annum on the DIP Loan Commitments, regardless of usage, plus (y) $100,000 per week for the ~~six months ended June 30, 2019 and existing debt,~~first 20 weeks after the ~~Company would have had~~Closing Date, in each case, payable quarterly in arrears, (iii) a participation fee equal to 6.75% multiplied by the ~~ability~~amounts available to ~~utilize $193 million of the $400 million Revolving Credit Facility and not have been in violation of the terms of the agreement. Availability~~be drawn under the Revolving Credit Facility was reduced by $150 million in borrowings. If the August 5, 2019 Credit Agreement amendment had been effective as of June 30, 2019, the Company would have had the ability to utilize the entire $300 million Revolving Credit Facility and not have been in violation. This availability would have been reduced by $150 million in borrowings and $41 million of outstanding letters of credit, ~~for~~payable quarterly, and (iv) a ~~net availability~~fronting fee equal to 0.125% per annum on amounts available to be drawn under outstanding letters of ~~$126 million, including cash.~~ credit, payable quarterly.

~~The current availability~~Proceeds of the loans made under the ~~Revolving Credit~~DIP Facility may be used only for the following purposes: (i) working capital and ~~net availability as~~other general corporate purposes, including the payment of ~~June 30, 2019 is shown~~professional fees and expenses, (ii) to pay the reasonable fees and expenses of the DIP Agent and the DIP Lenders (including the reasonable fees and expenses of counsel and financial advisors), (iii) to pay claims in respect of certain prepetition creditors, (iv) to repay indebtedness owed to holders of the Prepetition Priority Payment Obligations (as defined in the ~~table below:~~

June 30, 2019

(in millions)

Availability

Stated amount of the Revolving Credit Facility

$
400

Less: availability reduction from covenants

207

Amount available under the Revolving Credit Facility

$
193

Usage

Borrowings under the Revolving Credit Facility

$
150

Impact on availability related to outstanding letters of credit

—

Total usage

$
150

Current availability at June 30, 2019

$
43

Cash

17

Net Available Liquidity

$
60

~~The Company was in compliance with its debt covenants as they were in effect as of June 30, 2019,~~DIP Credit Agreement) (the “Prepetition Revolving Lenders”), and ~~expects~~(v) making adequate protection payments to ~~remain in compliance with~~ the ~~August 5, 2019 amended covenants based on management’s estimates of operating and financial results for 2019~~Prepetition Revolving Lenders, the Prepetition Term Lenders and the foreseeable future. However, continued declines in market and economic conditions or demand for certain of the Company’s products beyond those included in management’s projections could impact the Company’s ability to remain in compliance with its debt covenants in future periods~~. As of June 30, 2019, the Company’s leverage~~Prepetition Secured Noteholders (each as defined in the DIP Credit Agreement).

In connection with the DIP Credit Agreement, ~~was 3.09, compared~~certain subsidiaries of the Company became parties to a ~~maximum permitted ratio~~guarantee agreement as guarantors (collectively, the “Guarantors,” and together with the Company, the “DIP Credit Parties”). Each of the Guarantors is a debtor and debtor-in-possession in the Chapter 11 Cases. The Guarantors have guaranteed, on a joint and several basis, all of the obligations under the ~~Credit Agreement of 3.25 (which was increased to 3.75 with~~DIP Facility. To secure the ~~August 5, 2019 amendment). The full definition of~~obligations under the ~~Consolidated Leverage Ratio is included in the Credit Agreement filed as an exhibit to this quarterly report on Form 10-Q.~~ ~~As of June 30, 2019,~~DIP Facility, the Company ~~met~~and the Guarantors have granted liens on substantially all ~~the conditions required to borrow under the Credit Agreement and management expects the Company to continue to meet the applicable borrowing conditions under the Credit Agreement.~~ of their assets, whether now owned or hereafter acquired.

The ~~failure of a financial institution supporting~~DIP Facility will mature on the ~~Revolving Credit Facility would reduce the size~~earliest of the ~~Company’s committed facility~~following dates: (i) unless the Final Order is entered, May 15, 2020, (ii) the date upon which any Plan of Reorganization (as defined in the DIP Credit Agreement) becomes effective, or (iii) the six-month anniversary following the Petition Date, provided that such maturity may be extended with the consent of the Required Lenders (as defined in the DIP Credit Agreement) to a ~~replacement institution were added. Currently,~~date no later than nine months after the ~~Revolving~~Petition Date.

The DIP Facility is ~~supported~~subject to final approval by ~~fifteen U.S. and international financial institutions.~~ the Bankruptcy Court.

~~As of June 30, 2019, the Company had $41 million in outstanding letters of credit issued under the Revolving Credit Facility.~~

Other Information

The Company’s debt maturities as of ~~June 30, 2019~~March 31, 2020 are shown in the following table:

															Debt Maturity Schedule
	Debt Maturity Schedule														Total		2020		2021		2022		2023		2024		Thereafter
	Total		2019		2020		2021		2022		2023		Thereafter		(in millions)
Borrowings under the Credit Agreement	$	393	$	171	$	43	$	43	$	136	$	—	$	—	$	471	$	471	$	—	$	—	$	—	$	—	$	—
Senior secured notes		450		—		—		—		—		450		—		450		450		—		—		—		—		—
Finance lease obligations and other borrowings		2		1		1		—		—		—		—		1		1		—		—		—		—		—
Total_(a)	$	845	$	172	$	44	$	43	$	136	$	450	$	—	$	922	$	922	$	—	$	—	$	—	$	—	$	—

(a)

Excludes unamortized debt issuance costs of $4$3 million and $6$5 million related to the Company’s Term Loan Facility and 8.75% Senior Notes due October 15, 2023, respectively, and a discount of $4$3 million related to the Company’s Term Loan Facility. These amounts do not represent contractual obligations with a fixed amount or maturity date.

On March 4, 2020, Moody's Investors Service (“Moody’s) downgraded the Company’s credit ratings as noted below. There was no change to the outlook which remained at negative. Refer below for S&P Global Rating (“S&P) under which the Company has an issuer credit rating of CCC+.

	Moody's		S&P
	Prior Rating	New Rating	Current Rating
Corporate family	B3	Ca	not applicable
Revolving Credit Facility	Ba3	B3	B
Term Loan Facility	B3	Ca	CCC+
Senior Notes	B3	Ca	CCC+

MANAGEMENT OF MARKET RISK

The Company is exposed to interest rate risk on its variable debt and price risk on its fixed-rate debt. At ~~June 30, 2019,~~March 31, 2020, the Company’s variable-interest borrowings were ~~$393~~$471 million, or approximately ~~46.5%~~51.1%, of the Company’s total debt.

The Company assesses market risk based on changes in interest rates utilizing a sensitivity analysis that measures the potential loss in earnings, fair values and cash flows based on a hypothetical 10% change in interest rates. Using this sensitivity analysis, such changes would not have a material effect on interest income or expense and cash flows and would change the fair values of fixed-rate debt at ~~June 30, 2019~~March 31, 2020 by approximately ~~$15~~$10 million.

The Company is exposed to the impact of foreign currency fluctuations in certain countries in which it operates. The exposure to foreigncurrency movements is limited in many countries because the operating revenues and expenses of its various subsidiaries and business units are substantially in the local currency of the country in which they operate. To the extent that borrowings, sales, purchases, revenues, expenses or other transactions are not in the local currency of the subsidiary, the Company is exposed to currency risk and may enter into foreign exchange forward contracts to hedge the currency risk. The Company is primarily exposed to the currencies of the Canadian dollar and Mexican ~~peso, and was exposed to the currency of the Polish Zloty until the sale of the Company’s European printing business in the third quarter of 2018.~~peso. The Company does not use derivative financial instruments for trading or speculative purposes.

OTHER INFORMATION

Litigation and Contingent Liabilities

For a discussion of certain litigation involving the Company, see Note 9,8, Commitments and Contingencies, to the condensed consolidated financial statements.

New Accounting Pronouncements and Pending Accounting Standards

Recently issued accounting standards and their estimated effect on the Company’s condensed consolidated financial statements are described in Note 15, New Accounting Pronouncements, and throughout the notes to the condensed consolidated financial statements.

Available Information

The Company maintains an Internet website at www.lsccom.com where the Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on form 8-K and all amendments to those reports are available without charge, as soon as reasonably practicable following the time they are filed with, or furnished to, the SEC. The Principles of Corporate Governance of the Company’s Board of Directors, the charters of the Audit, Human Resources and Corporate Responsibility and Governance Committees of the Board of Directors and the Company’s Principles of Ethical Business Conduct are also available on the Investor Relations portion of www.lsccom.com, and will be provided, free of charge, to any stockholder who requests a copy. References to the Company’s website address do not constitute incorporation by reference of the information contained on the website, and the information contained on the website is not part of this document.

CAUTIONARY STATEMENT

The Company has made forward-looking statements in this quarterly report on Form 10-Q that are subject to risks and uncertainties. These statements are based on the beliefs and assumptions of the Company. Generally, forward-looking statements include information concerning possible or assumed future actions, events, or results of operations of the Company.

These statements may include, or be preceded or followed by, the words “anticipates,” “estimates,” “expects,” “projects,” “forecasts,” “intends,” “plans,” “continues,” “believes,” “may,” “will,” “goals” or variations of such words and similar expressions. Examples of forward-looking statements include, but are not limited to, statements, beliefs and expectations regarding our business strategies, market potential, future financial performance, dividends, results of pending legal matters, our goodwill and other intangible assets, price volatility and cost environment, our liquidity, our funding sources, expected pension contributions, capital expenditures and funding, our financial covenants, repayments of debt, off-balance sheet arrangements and contractual obligations, our accounting policies, general views about future operating results and other events or developments that we expect or anticipate will occur in the future. These forward-looking statements are subject to a number of important factors, including those factors disclosed in Item 1A, Risk Factors, in section Part II of this quarterly report on Form 10-Q, and Item 1A, Risk Factors, in section Part I in the Company’s annual report on Form 10-K for the year ended December 31, ~~2018,~~2019, as filed with the SEC on ~~February 19, 2019,~~March 2, 2020, that could cause our actual results to differ materially from those indicated in any such forward-looking statements. These factors include, but are not limited to:

•

our ability to generate sufficient liquidity to satisfy our obligations as they become due;

•

the competitive market for our products and industry fragmentation affecting our prices;

•

inability to improve operating efficiency to meet changing market conditions;

•

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

•

the volatility and disruption of the capital and credit markets, and adverse changes in the global economy;

•

the effects of global market and economic conditions on our customers;

•

the effect of economic weakness and constrained advertising;

•

uncertainty about future economic conditions;

•

increased competition as a result of consolidation among our competitors;

•

our ability to successfully integrate ~~recent and~~ future acquisitions;

•

factors that affect customer demand, including changes in postal rates, postal regulations, delivery systems and service levels, changes in advertising markets and customers’ budgetary constraints;

•

~~our ability to access debt and the capital markets due to adverse credit market conditions;~~

•

the effects of seasonality on our core businesses;

•

the effects of increases in capital expenditures;

•

changes in the availability or costs of key print production materials (such as paper, ink, energy, and other raw materials), the tight labor market, the availability of labor at our vendors or in prices received for the sale of by-products;

•

performance issues with key suppliers;

•

our ability to maintain our brands and reputation;

•

the retention of existing, and continued attraction of additional customers and key employees, including management;

•

the effect of economic and political conditions on a regional, national or international basis;

•

the effects of operating in international markets, including fluctuations in currency exchange rates;

•

changes in environmental laws and regulations affecting our business;

•

the ability to gain customer acceptance of our new products and technologies;

•

the effect of a material breach of or disruption to the security of any of our or our vendors’ systems;

•

the failure to properly use and protect customer and employee information and data;

•

the effect of increased costs of providing health care and other benefits to our employees;

•

the effect of catastrophic events;

•

the ability to maintain adequate payment terms with key vendors in light of recent credit downgrades;

•

the impact of tax legislation, including the ~~Tax~~CARES Act; ~~and~~

•

increases in requirements to fund or pay withdrawal costs or required contributions related to the Company’s pension ~~plans.~~plans; and

•

the effect of COVID-19 on our business.

Because forward-looking statements are subject to assumptions and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. Undue reliance should not be placed on such statements, which speak only as of the date of this document or the date of any document that may be incorporated by reference into this document.

Consequently, readers of this quarterly report on Form 10-Q should consider these forward-looking statements only as the Company’s current plans, estimates and beliefs. The Company does not undertake and specifically declines any obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect future events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. The Company undertakes no obligation to update or revise any forward-looking statements in this quarterly report on Form 10-Q to reflect any new events or any change in conditions or circumstances.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See Management of Market Risk in Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations. There have been no significant changes to the Company’s market risk sinceDecember 31, ~~2018.~~2019. For a discussion of exposure to market risk, refer to Part II, Item 7A, Quantitative and Qualitative Disclosures about Market Risk, disclosed in the Company’s annual report on Form 10-K for the year ended December 31, ~~2018,~~2019, as filed with the SEC on ~~February 19, 2019.~~March 2, 2020.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of 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 ~~June 30, 2019~~March 31, 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 ~~June 30, 2019~~March 31, 2020 were effective in ensuring information required to be disclosed in the Company’s SEC reports was recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information was accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended ~~June 30, 2019~~March 31, 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

For a discussion of certain litigation involving the Company, see Note 9,8, Commitments and Contingencies, to the condensed consolidated financial statements.

Voluntary Reorganization under Chapter 11

As discussed more fully in Note 1, Overview and Basis of Presentation, to the condensed consolidated financial statements, on April 13, 2020 (the “Petition Date”), the Company and certain of its subsidiaries filed voluntary petitions for relief under Chapter 11 of title 11 of the United States Code, 11 U.S.C. §§ 101-1532 (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”) (collectively, the “Chapter 11 Cases”). The Chapter 11 Cases are being jointly administered under the caption In re LSC Communications, Inc., 20-10950. We and our subsidiaries that are involved in the Chapter 11 Cases will continue to operate our businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code.

On April 15, 2020, the Bankruptcy Court entered orders granting interim approval of certain forms of relief that we requested, enabling the Company to conduct our business activities in the ordinary course, subject to the terms and conditions of such orders, including authorizing us to pay employee wages and benefits, to pay taxes and certain governmental fees and charges, to continue to operate our cash management system in the ordinary course, and to pay prepetition claims of certain of our vendors. For goods and services provided following the Petition Date, the Company expects to continue to pay vendors under normal terms.

ITEM 1A. RISK FACTORS

~~There~~Other than the risk factors noted below, there have been no significant changes to the risk factors disclosed in the Company’s annual report on Form 10-K for the year ended December 31, ~~2018,~~2019, as filed with the SEC on ~~February 19, 2019, except~~March 2, 2020:

We are subject to the risks and uncertainties associated with Chapter 11 proceedings.

For the duration of the Chapter 11 Cases, our operations and our ability to develop and execute our business plan, as well as our continuation as a going concern, are subject to the risks and uncertainties associated with bankruptcy, including:

•

our ability to develop, confirm and consummate a Chapter 11 plan of reorganization or alternative restructuring transaction;

•

our ability to obtain Bankruptcy Court approval with respect to motions filed in the Chapter 11 Cases from time to time;

•

our ability to maintain our relationships with our suppliers, service providers, customers, employees and other third parties;

•

our ability to maintain contracts that are critical to our operations;

•

our ability to develop and execute our business plan;

•

our ability to obtain acceptable and appropriate financing;

•

the ability of third parties to seek and obtain Bankruptcy Court approval to terminate contracts and other agreements with us;

•

the ability of third parties to seek and obtain Bankruptcy Court approval to terminate or shorten the exclusivity period for us to propose and confirm a Chapter 11 plan, to appoint a Chapter 11 trustee, or to convert the Chapter 11 Cases to a Chapter 7 proceeding; and

•

the actions and decisions of our creditors and other third parties who have interests in our Chapter 11 Cases that may be inconsistent with our plans.

Because of the risks and uncertainties associated with the Chapter 11 Cases, we cannot accurately predict or quantify the ultimate impact of events that will occur during the Chapter 11 Cases that may be inconsistent with our plans.

Operating under Bankruptcy Court protection for a long period of time may harm our business.

A long period of operations under Bankruptcy Court protection could have a material adverse effect on our business, financial condition, results of operations and liquidity. During the pendency of the Chapter 11 Cases, our senior management will be required to spend a significant amount of time and effort dealing with the reorganization instead of focusing exclusively on our business operations. A prolonged period of operating under Bankruptcy Court protection also may make it more difficult to retain management and other key personnel necessary to the success and growth of our business. In addition, the longer the Chapter 11 Cases continue, the more likely it is that our customers and suppliers will lose confidence in our ability to reorganize our business successfully and will seek to establish alternative commercial relationships. Furthermore, so long as the Chapter 11 Cases continue, we will be required to incur substantial costs for professional fees and other expenses associated with the administration of the Chapter 11 Cases.

We may not be able to obtain confirmation of a Chapter 11 plan of reorganization or complete any Bankruptcy Court-approved sales of our Company or assets, or we may not be able to realize adequate consideration for such sales.

In connection with the Chapter 11 Cases, we may attempt to sell all or certain of our assets pursuant to a sale under section 363 of the Bankruptcy Code or otherwise reorganize the Company pursuant to a Chapter 11 plan of reorganization (each, a “Transaction”). There can be no assurance that we will be successful in completing any Transactions because there may not be buyers willing to enter into any Transactions, we may not receive sufficient consideration for such assets, or there may be objections from our stakeholders. If we are unable to complete these Transactions, it may be necessary to seek additional funding sources or possibly convert to a Chapter 7 liquidation process. If these Transactions are completed, they may not generate the anticipated or desired outcomes.

Additionally, to successfully obtain confirmation of a plan of reorganization, we must meet certain statutory requirements with respect to adequacy of disclosure with respect to the Chapter 11 plan of reorganization, solicit and obtain the requisite acceptances of such a plan and fulfill other statutory conditions for confirmation of such plan, which have not occurred to date.

Even if a Chapter 11 plan of reorganization is consummated, we may not be able to achieve our stated goals and there is substantial doubt regarding our ability to continue as a going concern.

Even if a Chapter 11 plan of reorganization is consummated, we may continue to face a number of risks, such as further deterioration in economic conditions, changes in our industry, changes in demand for our products and increasing expenses. Some of these risks become more acute when a case under the Bankruptcy Code continues for a protracted period without indication of how or when the case may be completed. As a result of these risks and others, we cannot guarantee that any ~~risk factor~~Chapter 11 plan of reorganization will achieve our stated goals.

As a result of the Chapter 11 Cases, our financial results may be volatile and may not reflect historical trends.

During the Chapter 11 Cases, we expect our financial results to continue to be volatile as restructuring activities and expenses, contract terminations and rejections, and claims assessments significantly impact our consolidated financial statements. As a result, our historical financial performance is likely not indicative of our financial performance after the date of the bankruptcy filing. In addition, if we emerge from the Chapter 11 Cases, the amounts reported in subsequent consolidated financial statements may materially change relative to historical consolidated financial statements, including as a result of revisions to our operating plans pursuant to a plan of reorganization. We also may be required to adopt fresh-start accounting, in which case our assets and liabilities will be recorded at fair value as of the fresh start reporting date, which may differ materially from the recorded values of assets and liabilities on our consolidated balance sheets. Our financial results after the application of fresh-start accounting also may be different from historical trends.

We may be subject to claims that will not be discharged in the Chapter 11 proceedings, which could have a material adverse effect on our financial condition and results of operations.

The Bankruptcy Code provides that the confirmation of a plan of reorganization discharges a debtor from substantially all debts arising prior to confirmation. With few exceptions, all claims that arose prior to confirmation of a plan of reorganization (i) would be subject to compromise and/or treatment under the plan of reorganization and/or (ii) would be discharged in accordance with the terms of such plan of reorganization. Any claims not ultimately discharged through the plan of reorganization could be asserted against the reorganized entities and may have an adverse effect on our financial condition and results of operations on a post-reorganization basis.

We may experience increased levels of employee attrition as a result of the Chapter 11 Cases.

As a result of the Chapter 11 Cases, we may experience increased levels of employee attrition, and our employees likely will face considerable distraction and uncertainty. A loss of key personnel or material erosion of employee morale could adversely affect our business and results of operations. Our ability to engage, motivate and retain key employees or take other measures intended to motivate and incent key employees to remain with us through the pendency of the Chapter 11 Cases is limited by restrictions on implementation of incentive programs under the Bankruptcy Code. The loss of services of members of our senior management team could impair our ability to execute our strategy and implement operational initiatives, which would be likely to have a material adverse effect on our business, financial condition and results of operations.

In certain instances, a Chapter 11 proceeding may be converted to a proceeding under Chapter 7.

There can be no assurance as to whether we will successfully reorganize and emerge from the Chapter 11 Cases or, if we do successfully reorganize, as to when we would emerge from the Chapter 11 Cases. If the Bankruptcy Court finds that it would be in the best interest of creditors and/or the Debtors, the Bankruptcy Court may convert our Chapter 11 Cases to proceedings under Chapter 7. In such event, a Chapter 7 trustee would be appointed or elected to liquidate the Debtors’ assets for distribution in accordance with the priorities established by the Bankruptcy Code. The Debtors believe that liquidation under Chapter 7 would result in significantly smaller distributions being made to the Debtors’ creditors than those provided for in a Chapter 11 plan of reorganization because of (i) the likelihood that the assets would have to be sold or otherwise disposed of in a disorderly fashion over a short period of time rather than reorganizing or selling in a controlled manner the Debtors’ businesses as a going concern, (ii) additional administrative expenses

involved in the appointment of a Chapter 7 trustee, and (iii) additional expenses and claims, some of which would be entitled to priority, that would be generated during the liquidation and from the rejection of leases and other executory contracts in connection with a cessation of operations.

We are subject to risks and uncertainties with respect to the actions and decisions of our creditors and other third parties who have interests in our Chapter 11 Cases that may be inconsistent with our plans.

These risks and uncertainties could significantly affect our business and operations in various ways. For example, negative publicity or events associated with the Chapter 11 Cases have adversely affected, and could continue to adversely affect, our relationships with our vendors and employees, as well as with customers, which in turn could adversely affect our operations and financial condition. In addition, pursuant to the Bankruptcy Code, we need Bankruptcy Court approval for transactions outside the ordinary course of business, which may limit our ability to respond to certain events in a timely manner or take advantage of certain opportunities. Because of the risks and uncertainties associated with the Chapter 11 Cases, we cannot predict or quantify the ultimate impact that events occurring during the pendency of the Chapter 11 Cases will have on our business, financial condition, results of operations, or the certainty as to our ability to continue as a going concern. As a result of the Chapter 11 Cases, realization of assets and liquidation of liabilities are subject to uncertainty. While operating under the protection of the Bankruptcy Code, and subject to Bankruptcy Court approval or otherwise as permitted in the normal course of business, we may sell or otherwise dispose of a portion

or all of our assets and liquidate or settle liabilities for amounts other than those reflected in our consolidated financial statements. Further, a plan of reorganization could materially change the amounts and classifications reported in our consolidated historical financial statements, which do not give effect to any adjustments to the carrying value of assets or amounts of liabilities that might be necessary as a consequence of confirmation of a plan of reorganization.

Trading in our securities during the pendency of the Chapter 11 Cases poses substantial risks.

The Company’s stockholders are cautioned that it is possible that the Company’s stockholders will receive nothing in exchange for their common stock upon the Company’s emergence from bankruptcy and that the common stock will have no value and that trading in securities of the Company during the pendency of the Chapter 11 Cases will be highly speculative and will pose substantial risks. It is possible the Company’s outstanding common stock and other securities may be cancelled and extinguished upon confirmation of a restructuring plan by the Bankruptcy Court. In such an event, the Company’s stockholders and other security holders would not be entitled to receive or retain any cash, securities or other property on account of their cancelled securities. Trading prices for the Company’s common stock and other securities may bear little or no relation to actual recovery, if any, by holders thereof in the Company’s Chapter 11 Cases. Accordingly, the Company urges extreme caution with respect to existing and future investments in its securities.

The Debtors may be unable to comply with restrictions or with budget, liquidity or other covenants imposed by the agreements governing the DIP Facility. Such non-compliance could result in an event of default under the DIP Credit Agreement that, if not cured or waived, would have a material adverse effect on our business, financial condition and results of operations.

The agreements governing the DIP Facility impose a number of restrictions on the Debtors. Specifically, the terms of the credit agreements governing the DIP financing impose certain obligations including, among other things, affirmative covenants requiring the Company to provide financial information, budgets and other information to the agents under the DIP financing, and negative covenants restricting the Debtors’ ability to incur additional indebtedness, grant liens, dispose of assets, pay dividends or take certain other actions, in each case except as permitted by the terms and conditions of the DIP Credit Agreement. Covenants under the DIP Credit Agreement include general affirmative covenants such as compliance with all applicable laws, preservation and maintenance of collateral and property (including maintenance of adequate insurance policies regarding collateral), preservation of the Debtors’ corporate existence, compliance with certain case milestones and use of the loans under the DIP Facility in accordance with the approved budget, as well as negative covenants such as prohibiting the Debtors from incurring or permitting any other debt, investments, liens or dispositions unless specifically permitted.

The DIP Credit Agreement includes a series of milestones related to the ~~now-abandoned merger~~Chapter 11 Cases. The milestones require the Company to achieve a series of intermediate milestones and failure to comply with ~~Quad/Graphics is no longer applicable~~these covenants or milestones would result in an event of default under the DIP Credit Agreement and permit the DIP Lenders to accelerate the loans and otherwise exercise remedies under the loan documentation for the DIP Facility. Our ability to comply with these provisions may be affected by events beyond our control and our failure to comply, or obtain a waiver in the event we cannot comply with a covenant or achieve a milestone, could result in an event of default under the agreements governing the DIP Facility.

We may not have sufficient cash to maintain our operations during the Chapter 11 Cases or fund our emergence from the bankruptcy.

Because of our financial condition, we will have heightened exposure to, and less ability to withstand, the operating risks that are customary in our industry, such as fluctuations in input prices and currency exchange rates. Any of these factors could result in the need for substantial additional funding. A number of other factors, including the Chapter 11 Cases, our financial results in recent years, our substantial indebtedness and the competitive environment we face, adversely affect the availability and terms of funding that might be available to us during, and upon emergence from, Chapter 11. As such, we may not be able to source capital at rates acceptable to us, or at all, to fund our current operations or our exit from bankruptcy. The inability to obtain necessary additional funding on acceptable terms would have a material adverse impact on us and on our ability to sustain our operations.

Our business, results of operations and financial condition may be adversely affected by pandemic infectious diseases, particularly the novel coronavirus strain known as COVID-19.

Pandemic infectious diseases, such as the current COVID-19 strain, may adversely impact our business, condensed consolidated results of operations and financial condition. COVID-19, as well as measures taken by governmental authorities and private actors to limit the spread of this virus, may interfere with the ability of our employees, suppliers, and other business providers to carry out their assigned tasks or supply materials at ordinary levels of performance relative to the ~~Company.~~conduct of our business which may cause us to materially curtail certain of our business operations. Moreover, as a large part of the Company's business involves sales of books and other products used in schools and school facilities, if COVID-19 related measures continue to result in widespread and lengthy school closings, the Company's condensed consolidated results of operations and financial condition will be adversely impacted. Additionally, as COVID-19 has significantly impacted retailers' stores, distribution centers and supply chains, the Company expects to experience an adverse impact on our catalogs and office products businesses. Disruption across many other industries has also significantly impact demand for advertising, which is expected to result in page count and volume reductions in magazines.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Purchases of Equity Securities

~~There were no repurchases during the three months ended June 30, 2019.~~

					Total Number
					of Shares Purchased		Dollar Value of Shares
	Total Number				as Part of		that May Yet be
	of Shares		Average Price		Publicly Announced		Purchased Under the
	Purchased _(a)		Paid per Share		Plans or Programs		Plans or Programs
January 1, 2020 - January 31, 2020		—	$	—		—	$	—
February 1, 2020 - February 29, 2020		—		—		—	$	—
March 1, 2020 - March 31, 2020		49,819		0.13		—	$	—
Total		49,819	$	0.13		—

(a) Shares withheld for tax liabilities upon vesting of equity awards

Dividends

~~In light~~As a result of ~~lower expectations for earnings and cash flows, on July 18, 2019~~ the Board of Directors suspended dividend payments in order to allocate greater capital to the Company’s debt reduction and ongoing operational restructuring programs. The dividend paid in June 2019 is the last dividend that will be paid for the foreseeable future. Suspending the dividend will allowDIP Credit Agreement, the Company ~~to redeploy approximately $35 million in cash annually.~~

~~Prior to the amendment to the Credit Agreement that was effective on August 5, 2019, the Company was generally allowed to declare and pay annual~~is restricted from issuing dividend ~~payments of up to $50 million in the aggregate. However, the August 5, 2019 amendment removed the general allowance to declare and pay annual dividends of up to $50 million.~~ payments.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable

ITEM 6. EXHIBITS

3.1

Amended and Restated Certificate of Incorporation of LSC Communications, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on October 3, 2016)


3.2		Amended and Restated By-laws of LSC Communications, Inc. (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed on October 3, 2016)


4.1		Indenture, dated as of September 30, 2016, among LSC Communications, Inc., the subsidiary guarantors party thereto and Wells Fargo Bank, National Association, as Trustee and as Collateral Agent (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on October 3, 2016)

4.2	Description of the LSC Communications, Inc. Securities Registered under Section 12 of the Exchange Act (incorporated by reference to Exhibit 4.2 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019, filed on March 2, 2020)

4.3

Rights Agreement, which includes as Exhibit A the forms of Rights Certificate and Election to Exercise and as Exhibit B the form of Certificate of Designation and Terms of the Participating Preferred Stock. (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on March 2, 2020)


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

10.2

Amendment No. 1 to Credit Agreement dated as of November 17, 2017, by and among LSC Communications, Inc., the other Loan Parties, the 2017 Refinancing Term Lenders party thereto and Bank of America, N.A., as administrative agent and collateral agent (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2018, filed on May 3, 2018)


10.3		Amendment No. 2 to Credit Agreement dated as of December 20, 2018, by and among LSC Communications, Inc. the other Loan Parties, the Lenders party thereto and Bank of America, N. A., as administrative agent and collateral agent (incorporated by reference to Exhibit 10.3 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018, filed on February 19, 2019))


10.4		Amendment No. 3 to Credit Agreement dated as of August 2, 2019, by and among LSC Communications, Inc., the other Loan Parties, the Lenders party thereto and Bank of America, N. A., as administrative agent and collateral agent (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on August 5, 2019)


10.5		~~2016~~Waiver, Forbearance Agreement and Fourth Amendment to Credit Agreement dated as of March 2, 2020, by and among LSC Communications, Inc. ~~Performance Incentive Plan~~, the other Loan Parties, the Lenders party thereto and Bank of America, N.A., as Administrative Agent (incorporated by reference to Exhibit ~~10.2~~10.5 to the Company’s ~~Current~~Annual Report on Form ~~8-K~~10-K for the fiscal year ended December 31, 2019, filed on October 3, 2016)*March 2, 2020)

10.6

Amended and Restated LSC Communications, Inc. 2016 Performance Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on May 23, 2017)*


10.7		Amendment to Amended and Restated LSC Communications, Inc. 2016 Performance Incentive Plan dated October 17, 2019 (incorporated by reference to Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q filed on November 7, 2019)*

10.8	LSC Communications, Inc. Nonqualified Deferred Compensation Plan, amended and restated effective as of August 1, 2018 (incorporated by reference to Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q filed on August 2, 2018)*


~~10.8~~	10.9	LSC Unfunded Supplemental Pension Plan effective October 1, 2016 (incorporated by reference to Exhibit 10.4 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, filed on February 23, 2017)*


~~10.9~~	10.10	Supplemental Executive Retirement Plan-B for Designated Executives effective January 1, 2001 as amended effective December 31, 2004, January 1, 2005 and September 30, 2016 (the “SERP-B”) (incorporated by reference to Exhibit 10.5 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, filed on February 23, 2017)*


~~10.10~~	10.11	LSC Communications Annual Incentive Plan as amended and restated effective January 17, 2019 (incorporated by reference to Exhibit 10.9 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018, filed on February 19, 2019)*


~~10.11~~	10.12	Assignment of Employment Agreement and Acceptance of Assignment, dated as of September 29, 2016, between LSC Communications, Inc., R. R. Donnelley & Sons Company and Thomas J. Quinlan III (incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed on October 3, 2016)*


~~10.12~~	10.13	Amendment to Employment Agreement, dated as of October 25, 2017, between LSC Communications, Inc. and Thomas J. Quinlan III (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 31, 2017)*

10.14

Employment Agreement Waiver, dated as of April 1, 2020, between LSC Communications, Inc. and Thomas J. Quinlan III (filed herewith)*


~~10.13~~	10.15	Key Employee Severance Plan effective October 25, 2017 (incorporated by reference to Exhibit 10.15 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017, filed on November 2, 2017)*


~~10.14~~	10.16	Form of Participation Agreement for the Key Employee Severance Plan (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on January 19, 2018)*


~~10.15~~	10.17	Participation Agreement between Suzanne S. Bettman and the Company, dated as of January 24, 2018 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on January 26, 2018)*


~~10.16~~	10.18	Participation Agreement between Andrew B. Coxhead and the Company, dated as of January 24, 2018 (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on January 26, 2018)*


~~10.17~~	10.19	Participation Agreement between ~~Kent A. Hansen~~David B. McCree and the Company, dated as of February 26, 2018 (filed herewith)*

10.20

Participation Agreement between Matthew K. Roberts and the Company, dated as of January ~~24, 2018 (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on January 26, 2018)~~21, 2019 (filed herewith)*


~~10.18~~	10.21	Participation Agreement between ~~Richard T. Lane~~George B. Zengo and the Company, dated as of March 1, 2018 (filed herewith)*

10.22	Participation Agreement between Sarah L. Hoxie and the Company, dated as of January ~~24, 2018~~23, 2020 (incorporated by reference to Exhibit ~~10.4~~10.20 to the Company’s ~~Current~~Annual Report on Form ~~8-K~~10-K for the fiscal year ended December 31, 2019, filed on ~~January 26, 2018)~~March 2, 2020)*

~~10.19~~10.23

Form of Stock Option Award Agreement (for 2009 to 2012) converted from R. R. Donnelley & Sons Company to the Company pursuant to the Separation Agreement (incorporated by reference to Exhibit 10.17 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, filed on February 23, 2017)*


~~10.20~~	10.24	Form of Performance Restricted Stock Award (for 2017) (incorporated by reference to Exhibit 10.29 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2017, filed on May 4, 2017)*

10.25
~~10.21~~		Form of Performance Unit Award Agreement (for 2018) (incorporated by reference to Exhibit 10.20 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017, filed on February 22, 2018)*


~~10.22~~	10.26	Form of Stock Unit Award Agreement (for 2017) (incorporated by reference to Exhibit 10.30 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2017, filed on May 4, 2017)*


~~10.23~~	10.27	Form of Restricted Stock Unit Award Agreement (for 2018) (incorporated by reference to Exhibit 10.25 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017, filed on February 22, 2018)*


~~10.24~~	10.28	Form of Restricted Stock Unit Award Agreement (for 2019) (incorporated by reference to Exhibit 10.25 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018, filed on February 19, 2019)*


~~10.25~~	10.29	Form of LTIP Performance-Vested Award Agreement (for 2020) (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on February 18, 2020)*

10.30

Form of LTIP Cash-Vested Award Agreement (for 2020) (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on February 18, 2020)*

10.31

Form of Director Indemnification Agreement (incorporated by reference to Exhibit 10.9 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2016, filed on November 10, 2016)*


~~10.26~~	10.32	Policy on Retirement Benefits, Phantom Stock Grants and Stock Options for Directors as amended to March 2000 (incorporated by reference to Exhibit 10.16 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, filed on February 23, 2017)*


~~10.27~~	10.33	Non-Employee Director Compensation Plan effective as of October 30, 2018 (incorporated by reference to Exhibit 10.28 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018, filed on February 19, 2019)*


~~10.28~~	10.34	~~Form~~Non-Employee Director Compensation Plan effective as of ~~Director Restricted Stock Unit Award as amended (for 2004-2007) converted from R. R. Donnelley & Sons Company to the Company pursuant to the Separation Agreement~~February 12, 2020 (incorporated by reference to Exhibit ~~10.12~~10.32 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, ~~2016,~~2019, filed on ~~February 23, 2017)~~March 2, 2020)*


~~10.29~~	10.35	Form of Director Restricted Stock Unit Award (for 2014-2016) converted from R. R. Donnelley & Sons Company to the Company pursuant to the Separation Agreement (incorporated by reference to Exhibit 10.13 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, filed on February 23, 2017)*


~~10.30~~	10.36	Form of Director Restricted Stock Unit Award Agreement (for 2018) (incorporated by reference to Exhibit 10.21 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017, filed on November 2, 2017)*


~~10.31~~	10.37	Form of Retention Bonus Letter (filed herewith)*

~~10.32~~		~~Agreement and Plan of Merger by and among Quad/Graphics, Inc. QLC Merger Sub, Inc. and the Company dated as of October 30, 2018~~ (incorporated by reference to Exhibit ~~2.1~~10.31 to the Company’s ~~Current~~Quarterly Report on Form ~~8-K,~~10-Q for the quarter ended June 30, 2019, filed ~~October 31, 2018)~~on August 8, 2019)*


~~10.33~~	14.1	Letter Agreement dated July 22, 2019 by and between Quad/Graphics, Inc. and the Company (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed July 23, 2019)

~~14.1~~		Code of Ethics for the Chief Executive Officer and Senior Financial Officers (incorporated by reference to Exhibit 14.1 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, filed on February 23, 2017)

18	Preferability Letter of Independent Registered Public Accounting Firm dated May 6, 2020 (filed herewith)


31.1		Certification by Thomas J. Quinlan, III, Chief Executive Officer, required by Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934 (filed herewith)


31.2		Certification by Andrew B. Coxhead, Chief Financial Officer, required by Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934 (filed herewith)


32.1		Certification by Thomas J. Quinlan, III, Chief Executive Officer, required by Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and Section 1350 of Chapter 63 of Title 18 of the United States Code (filed herewith)


32.2		Certification by Andrew B. Coxhead, Chief Financial Officer, required by Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and Section 1350 of Chapter 63 of Title 18 of the United States Code (filed herewith)


101.INS		XBRL Instance Document – The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH
~~101.SCH~~		Inline XBRL Taxonomy Extension Schema Document

101.CAL
~~101.CAL~~		Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF
~~101.DEF~~		Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB
~~101.LAB~~		Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE
~~101.PRE~~		Inline XBRL Taxonomy Extension Presentation Linkbase Document

104	The cover page from the Company’s Quarterly Report on Form 10-Q for the three months ended March 31, 2020, has been formatted in Inline XBRL.

* Management contract or compensatory plan or arrangement

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.

LSC COMMUNICATIONS, INC.

By:		/s/ ANDREW B. COXHEAD
		Andrew B. Coxhead
		Chief Financial Officer

By:		/s/ ~~KENT A. HANSEN~~SARAH L. HOXIE
		~~Kent A. Hansen~~Sarah L. Hoxie
		~~Chief~~Corporate Controller and Principal Accounting Officer ~~and Controller~~

Date: ~~August 8, 2019~~ May 6, 2020

5558

												Retained			Accumulated
					Additional							Earnings			Other
	Common Stock				Paid-in		Treasury Stock					(Accumulated			Comprehensive			Total
	Shares		Amount		Capital		Shares		Amount			Deficit)			(Loss) Income			Equity
Balance at December 31, 2018		35	$	—	$	828		2	$	(24	)	$	(42	)	$	(584	)	$	178
Net (loss)		—		—		—		—		—			(126	)		—			(126	)
Issuance of share-based awards, net of withholdings and other		1		—		—		—		(1	)		—			—			(1	)
Share-based compensation		—		—		3		—		—			—			—			3
Cash dividends paid		—		—		—		—		—			(9	)		—			(9	)
Other comprehensive income		—		—		—		—		—			—			108			108
Balance at March 31, 2019		36	$	—	$	831		2	$	(25	)	$	(177	)	$	(476	)	$	153
Net (loss)		—		—		—		—		—			(24	)		—			(24	)
Issuance of share-based awards, net of withholdings and other		—		—		—		—		—			—			—			—
Share-based compensation		—		—		1		—		—			—			—			1
Cash dividends paid		—		—		—		—		—			(8	)		—			(8	)
Other comprehensive income		—		—		—		—		—			—			4			4
Balance at June 30, 2019		36	$	—	$	832		2	$	(25	)	$	(209	)	$	(472	)	$	126

Accounts Receivable	$	40
Prepaid expenses and other current assets		1
Property, plant and equipment		8
Other intangible assets		17
Goodwill		21
Accounts payable and accrued liabilities		(35	)
Purchase price and net cash paid	$	52

	Fair Value		Valuation Technique	Unobservable Input	Value
Customer relationships	$	17	Multi-period excess earnings method	Existing customer growth rate	(3.5%)
				Attrition rate	7.5%
				Discount rate	18.0%

	As Reported		Adjustments			Adjusted
	December 31, 2018		Adoption of ASU 2016-02			January 1, 2019
Assets
ROU assets for operating leases _(a)	$	—	$	201		$	201

Liabilities
Accrued liabilities_(a)	$	199	$	(1	)	$	198
Short-term operating lease liabilities		—		52			52
Long-term operating lease liabilities		—		154			154
Other noncurrent liabilities_(a)		61		(4	)		57

	June 30, 2019
	(in millions)
Availability
Stated amount of the Revolving Credit Facility	$	400
Less: availability reduction from covenants		207
Amount available under the Revolving Credit Facility	$	193

Usage
Borrowings under the Revolving Credit Facility	$	150
Impact on availability related to outstanding letters of credit		—
Total usage	$	150

Current availability at June 30, 2019	$	43
Cash		17
Net Available Liquidity	$	60