LSC Communications 10Q 2019 Q1 Quarterly report

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 March 31, 2019

☐	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)

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 April 26, 2019, 33,510,017 shares of common stock were outstanding.

LSC COMMUNICATIONS, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED March 31, 2019

TABLE OF CONTENTS

PART I

		Page
FINANCIAL INFORMATION
Item 1: Condensed Consolidated Financial Statements (unaudited)		2
Condensed Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018		3
Condensed Consolidated Statements of Operations for the three months ended March 31, 2019 and 2018		4
Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2019 and 2018		5
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018		6
Condensed Consolidated Statements of Stockholders' Equity for the three months ended March 31, 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		26
Item 3: Quantitative and Qualitative Disclosures About Market Risk		42
Item 4: Controls and Procedures		43

Part II. Other Information		44
Item 1: Legal Proceedings		44
Item 1A: Risk Factors		44
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds		44
Item 4: Mine Safety Disclosures		45
Item 6: Exhibits		45
Signatures		48

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

LSC COMMUNICATIONS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions, except share and per share data)

(UNAUDITED)

	March 31,			December 31,
	2019			2018
ASSETS
Cash and cash equivalents	$	13		$	21
Receivables, less allowances for doubtful accounts of $16 in 2019 (2018 - $14)		616			617
Inventories (Note 5)		221			197
Income tax receivable		8			4
Prepaid expenses and other current assets		26			28
Total current assets		884			867
Property, plant and equipment-net (Note 6)		502			508
Goodwill (Note 7)		103			103
Other intangible assets-net (Note 7)		151			156
Right-of-use assets for operating leases		192			—
Deferred income taxes		25			27
Other noncurrent assets		90			93
Total assets	$	1,947		$	1,754

LIABILITIES
Accounts payable	$	330		$	372
Accrued liabilities		235			199
Short-term debt and current portion of long-term debt (Note 10)		175			108
Short-term operating lease liabilities		45			—
Total current liabilities		785			679
Long-term debt (Note 10)		649			659
Pension liabilities		113			132
Restructuring and multi-employer pension liabilities (Note 8)		44			45
Long-term operating lease liabilities		153			—
Other noncurrent liabilities		50			61
Total liabilities	$	1,794		$	1,576

Commitments and contingencies (Note 9)

EQUITY
Common stock, $0.01 par value
Authorized: 65,000,000
Issued: 35,542,151 shares in 2019 (2018: 35,029,565)	$	—		$	—
Additional paid-in capital		831			828
Accumulated deficit		(177	)		(42	)
Accumulated other comprehensive loss (Note 13)		(476	)		(584	)
Treasury stock, at cost: 2,032,134 shares in 2019 (2018: 1,888,205)		(25	)		(24	)
Total equity		153			178
Total liabilities and equity	$	1,947		$	1,754

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
	March 31,
	2019			2018
Net sales	$	845		$	929
Cost of sales		735			808
Selling, general and administrative expenses (exclusive of depreciation and amortization)		85			83
Restructuring, impairment and other charges-net (Note 8)		13			6
Depreciation and amortization		31			38
(Loss) from operations		(19	)		(6	)
Interest expense-net (Note 10)		19			20
Settlement of retirement benefit obligations (Note 12)		135			—
Investment and other (income)-net		(10	)		(11	)
(Loss) before income taxes		(163	)		(15	)
Income tax (benefit)		(37	)		(4	)
Net (loss)	$	(126	)	$	(11	)

Net (loss) per common share (Note 11)
Basic net (loss) per share	$	(3.79	)	$	(0.32	)
Diluted net (loss) per share	$	(3.79	)	$	(0.32	)

Weighted-average number of common shares outstanding:
Basic	33.3			34.7
Diluted	33.3			34.7

See Notes to the Condensed Consolidated Financial Statements

LSC COMMUNICATIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in millions)

(UNAUDITED)

	Three Months Ended
	March 31,
	2019			2018
Net (loss)	$	(126	)	$	(11	)

Other comprehensive income, net of tax (Note 13):
Translation adjustments		1			5
Adjustment for net periodic pension plan cost, net of tax expense of $36 million and $1 million for the three months ended March 31, 2019 and 2018, respectively		107			4
Other comprehensive income		108			9
Comprehensive (loss)	$	(18	)	$	(2	)

See Notes to the Condensed Consolidated Financial Statements

LSC COMMUNICATIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

(UNAUDITED)

	Three Months Ended
	March 31,
	2019			2018
Cash Flows from Operating Activities
Net (loss)	$	(126	)	$	(11	)
Adjustments to reconcile net (loss) to net cash (used in) operating activities:
Impairment charges		2			—
Depreciation and amortization		31			38
Provision for doubtful accounts receivable		3			2
Share-based compensation		3			3
Deferred income taxes		(34	)		3
Settlement of retirement benefit obligations		135			—
Other		1			2
Changes in operating assets and liabilities - net of acquisitions:
Accounts receivable-net		(2	)		56
Inventories		(24	)		(33	)
Prepaid expenses and other current assets		3			1
Accounts payable		(33	)		(75	)
Income taxes receivable		(4	)		(8	)
Accrued liabilities and other		21			(2	)
Net cash (used in) operating activities		(24	)		(24	)

Cash Flows from Investing Activities
Capital expenditures		(28	)		(20	)
Acquisitions of businesses, net of cash acquired		(3	)		1
Net cash (used in) investing activities		(31	)		(19	)

Cash Flows from Financing Activities
Payments of current maturities and long-term debt		(11	)		(13	)
Net proceeds from credit facility borrowings		67			55
Dividends paid		(9	)		(9	)
Other financing activities		(1	)		(2	)
Net cash provided by financing activities		46			31

Effect of exchange rate on cash and cash equivalents		1			1
Net (decrease) in cash, cash equivalents and restricted cash		(8	)		(11	)
Cash, cash equivalents and restricted cash at beginning of year		24			35
Cash, cash equivalents and restricted cash at end of period	$	16		$	24

Reconciliation to the Condensed Consolidated Balance Sheets
	As of			As of
	March 31, 2019			December 31, 2018
Cash and cash equivalents	$	13		$	21
Restricted cash included in prepaid expenses and other current assets		3			3
Total cash, cash equivalents and restricted cash shown in the condensed consolidated statements of cash flows	$	16		$	24

See Notes to the Condensed Consolidated Financial Statements

LSC COMMUNICATIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

												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

												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

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”).

There were dividends declared per common share of $0.26 during each of the three months ended March 31, 2019 and 2018.

LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three Months Ended March 31, 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 Agreement

On October 30, 2018, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Quad/Graphics, Inc. (“Quad/Graphics”), and QLC Merger Sub, Inc., a direct, wholly-owned subsidiary of Quad/Graphics (“Merger Sub”). Pursuant to the Merger Agreement, subject to the terms and conditions therein, Merger Sub will merge with and into the Company (the “Merger”), with the Company continuing as the surviving corporation. Subject to the terms and conditions set forth in the Merger Agreement, at the effective time of the Merger (the “Effective Time”), each share of the Company’s common stock issued and outstanding immediately prior to the Effective Time, will be converted into the right to receive 0.625 shares of class A common stock of Quad/Graphics, without interest and subject to adjustment as provided in the Merger Agreement.

The Company and Quad/Graphics have made customary representations, warranties and covenants in the Merger Agreement. Subject to certain exceptions outlined in the Merger Agreement, the Company has agreed to covenants relating to the Company’s business during the period between the execution of the Merger Agreement and the consummation of the Merger, including restrictions on its ability to issue any shares of its capital stock, repurchase any shares of its capital stock and incur additional indebtedness outside the ordinary course of business. The Merger Agreement allows the Company to continue paying a regular quarterly dividend up to $0.26 per share.

On February 25, 2019, Quad/Graphics announced that its shareholders had voted to approve the issuance of Quad/Graphics’ class A common stock in the Merger on February 22, 2019.

On February 22, 2019, the Company held a Special Meeting of Stockholders in connection with the Merger. At the special meeting, the Company’s stockholders voted to adopt the Merger Agreement.

The Company and Quad/Graphics filed notification and report forms in connection with the transactions contemplated by the Merger Agreement with the U.S. Department of Justice (the “DOJ”) and the U.S. Federal Trade Commission pursuant to the Hart-Scott-Rodino Antitrust Improvement Act of 1976, as amended (the “HSR Act”) on November 13, 2018. On December 13, 2018, the Company and Quad/Graphics each received a request for additional information and documentary material (the “Second Request”) from the DOJ in connection with the DOJ’s review of the transactions contemplated by the Merger Agreement.

The HSR Act provides that the issuance of the Second Request extends the waiting period under the HSR Act until either 30 days after both the Company and Quad/Graphics have substantially complied with the Second Request or such later time as agreed to by the parties with the DOJ, unless the waiting period is terminated earlier by the DOJ. The Company continues to expect the Merger to be consummated in mid-2019.

Consummation of the Merger remains subject to the expiration of the waiting period under the HSR Act and other required regulatory approvals, and the satisfaction or waiver of the other closing conditions specified in the Merger Agreement.

LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three Months Ended March 31, 2019 and 2018

(tabular amounts in millions, except per share data)

Basis of Presentation

The condensed consolidated financial statements include the balance sheets, statements of operations and cash flows in conformity with accounting principles generally accepted in the United States (“GAAP”). All intercompany transactions have been eliminated in consolidation. 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 the third quarter of 2018, management changed the Company’s reportable segments and reporting units. Consequently, prior year amounts were restated to conform to the new segment structure. Refer to Note 15, Segment Information, for more information.

Note 2. Business Combination and Disposition

2018 Acquisition

On July 2, 2018, 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.

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 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 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 March 31, 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:

LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three Months Ended March 31, 2019 and 2018

(tabular amounts in millions, except per share data)

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 market approach, if a secondhand market existed. The following table presents the fair value, valuation techniques and related unobservable inputs for these Level 3 measurements associated with 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 the three months ended March 31, 2019 and 2018, the Company recorded a de minimis amount and $1 million of acquisition-related expenses, respectively, associated with the completed and contemplated acquisitions within selling, general and administrative expenses in the condensed consolidated statements of operations.

Pro forma results

The following unaudited pro forma financial information for the three months ended March 31, 2019 and 2018 presents the condensed consolidated statements of operations of the Company and the acquisition of Print Logistics, as if the acquisition had occurred as of January 1 of the year prior to the acquisition.

The unaudited pro forma financial information is not intended to represent or be indicative of the Company’s 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.

	Three Months Ended
	March 31,
	2019			2018
Net sales	$	845		$	973
Net (loss)		(126	)		(12	)

The following table outlines unaudited pro forma financial information for the three months ended March 31, 2019 and 2018:

	Three Months Ended
	March 31,
	2019		2018
Amortization of purchased intangibles	$	5	$	5

There were no nonrecurring pro forma adjustments affecting net (loss) for the three months ended March 31, 2019 and 2018.

LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three Months Ended March 31, 2019 and 2018

(tabular amounts in millions, except per share data)

Note 3. 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 months ended March 31, 2019 and 2018.

	Three Months Ended
	March 31, 2019
	Magazines,
	Catalogs
	and				Office
	Logistics		Book		Products		Other		Total
Major Products / Service Lines
Book_(a)	$	—	$	260	$	—	$	—	$	260

Magazines and Catalogs _(b)	$	319	$	—	$	—	$	44	$	363
North America		319		—		—		44		363
Europe		—		—		—		—		—

Logistics	$	84	$	—	$	—	$	—	$	84

Directories	$	—	$	—	$	—	$	19	$	19
North America		—		—		—		19		19
Europe		—		—		—		—		—

Office Products	$	—	$	—	$	119	$	—	$	119
Total	$	403	$	260	$	119	$	63	$	845

Timing of Revenue Recognition
Products and services transferred at a point in time	$	288	$	228	$	119	$	43	$	678
Products and services transferred over time		115		32		—		20		167
Total	$	403	$	260	$	119	$	63	$	845

LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three Months Ended March 31, 2019 and 2018

(tabular amounts in millions, except per share data)

	Three Months Ended
	March 31, 2018
	Magazines,
	Catalogs
	and				Office
	Logistics		Book		Products		Other		Total
Major Products / Service Lines
Book_(a)	$	—	$	249	$	—	$	—	$	249

Magazines and Catalogs _(b)	$	400	$	—	$	—	$	99	$	499
North America		400		—		—		41		441
Europe		—		—		—		58		58

Logistics	$	27	$	—	$	—	$	—	$	27

Directories	$	—	$	—	$	—	$	31	$	31
North America		—		—		—		27		27
Europe		—		—		—		4		4

Office Products	$	—	$	—	$	123	$	—	$	123
Total	$	427	$	249	$	123	$	130	$	929

Timing of Revenue Recognition
Products and services transferred at a point in time	$	369	$	221	$	123	$	112	$	825
Products and services transferred over time		58		28		—		18		104
Total	$	427	$	249	$	123	$	130	$	929

(a)

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

(b)

Includes premedia and co-mail

Contract Balances

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

	Short-Term Contract Assets			Long-Term Contract Assets			Contract Liabilities
Beginning Balance, January 1, 2019	$	44		$	30		$	16
Additions to unbilled accounts receivable		31			—			—
Unbilled accounts receivable recognized in trade receivables		(29	)		—			—
Amortization of contract acquisition costs		—			(3	)		—
Revenue recognized that was included in contract liabilities as of January 1, 2019		—			—			(8	)
Increases due to cash received		—			—			6
Ending Balance, March 31, 2019	$	46		$	27		$	14

The trade receivables balance was $487 million and $488 million as of March 31, 2019 and December 31, 2018, respectively.

LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three Months Ended March 31, 2019 and 2018

(tabular amounts in millions, except per share data)

Accounts Receivable

Transactions affecting the allowances for doubtful accounts receivable balance during the three months ended March 31, 2019 were as follows:

	March 31, 2019
Balance, beginning of year	$	14
Provisions charged to expense		3
Write-offs and other		(1	)
Balance, end of year	$	16

Note 4. 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:

	As Reported		Adjustments			Adjusted
	December 31, 2018		Adoption of ASU 2016-02			January 1, 2019
Assets
ROU assets for operating leases	$	—	$	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 relates to straight-line rent accruals that were reclassified to ROU assets for operating leases.

LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three Months Ended March 31, 2019 and 2018

(tabular amounts in millions, except per share data)

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.

The components of total net lease cost were as follows:

	Three Months Ended
	March 31, 2019
Operating lease cost	$	17
Sublease (income)		(2	)
Variable lease cost		3
Total net lease cost	$	18

During the three months ended March 31, 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:

	Three Months Ended
	March 31, 2019
ROU assets acquired in exchange for lease obligations:
ROU assets
Operating leases	$	2

Lease obligations
Operating leases	$	2

During the three months ended March 31, 2019, the Company recorded $16 million of operating cash outflows from operating leases.

During the three months ended March 31, 2019, the Company recorded a de minimis amount of cash flows from financing leases. No finance lease ROU assets or obligations were acquired during the three months ended March 31, 2019.

Supplemental information related to leases is included below:

LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three Months Ended March 31, 2019 and 2018

(tabular amounts in millions, except per share data)

	March 31, 2019
Weighted Average Remaining Lease Term (years)
Operating leases		5.5
Financing leases		2.4

Weighted Average Discount Rate
Operating leases		8.3	%
Financing leases		6.7	%

The annual maturities of lease liabilities as of March 31, 2019 were as follows:

	Operating Leases
2019	$	44
2020		51
2021		43
2022		34
2023		24
2024 & thereafter		47
Total undiscounted lease payments		243
Imputed interest		(47	)
Total lease liabilities	$	196

During the three months ended March 31, 2019, the Company recorded a de minimis amount of maturities for finance lease liabilities. As of March 31, 2019, the Company has additional operating leases that have not commenced for an undiscounted amount of $9 million. These operating leases will commence during 2019 with lease terms of 4 years to 5 years.

The Company also has land and building subleases for certain locations resulting from the acquisition of businesses or disposition of components. Some of these leases have variable payments, either because payments are structured to follow the head lease (where the Company is the lessee) 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 whereby the sublease can be renewed for 6 months to 5 years, or the sublease can be terminated by providing 90 days’ notice. Sublessees have full discretion to exercise renewal or termination options.

Note 5. Inventories

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

	March 31,			December 31,
	2019			2018
Raw materials and manufacturing supplies	$	132		$	119
Work in process		56			50
Finished goods		84			80
Last in, first out reserve		(51	)		(52	)
Total	$	221		$	197

LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three Months Ended March 31, 2019 and 2018

(tabular amounts in millions, except per share data)

Note 6. Property, Plant and Equipment

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

	March 31,			December 31,
	2019			2018
Land	$	43		$	43
Buildings		712			709
Machinery and equipment		3,614			3,759
		4,369			4,511
Less: Accumulated depreciation		(3,867	)		(4,003	)
Total	$	502		$	508

During the three months ended March 31, 2019 and 2018, depreciation expense was $24 million and $31 million, respectively. Refer to Note 8, Restructuring, Impairment and Other Charges, for information on impairment recorded during the three months ended March 31, 2019.

Assets Held for Sale

Primarily as a result of restructuring actions, certain facilities and equipment are considered held for sale. The net book value of assets held for sale was $3 million at March 31, 2019 and December 31, 2018. These assets were 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.

Note 7. Goodwill and Other Intangible Assets

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

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

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

	March 31, 2019							December 31, 2018
	Gross Carrying		Accumulated			Net Book		Gross Carrying		Accumulated			Net Book
	Amount		Amortization			Value		Amount		Amortization			Value
Customer relationships	$	268	$	(141	)	$	127	$	268	$	(137	)	$	131
Trade names		30		(7	)		23		9		(6	)		3
Total amortizable other intangible assets		298		(148	)		150		277		(143	)		134
Indefinite-lived trade names		1		—			1		22		—			22
Total other intangible assets	$	299	$	(148	)	$	151	$	299	$	(143	)	$	156

LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three Months Ended March 31, 2019 and 2018

(tabular amounts in millions, except per share data)

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 each of the three months ended March 31, 2019 and 2018, amortization expense for other intangible assets was $5 million.

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

For the year ending December 31,	Amount
2019	$	19
2020		19
2021		17
2022		16
2023		15
2024 and thereafter		69
Total	$	155

Note 8. Restructuring, Impairment and Other Charges

For the three months ended March 31, 2019 and 2018, the Company recorded the following net restructuring, impairment and other charges:

			Other		Total
Three Months Ended	Employee		Restructuring		Restructuring				Other
March 31, 2019	Terminations		Charges		Charges		Impairment		Charges		Total
Magazines, Catalogs and Logistics	$	5	$	4	$	9	$	2	$	—	$	11
Book		—		1		1		—		—		1
Corporate		—		1		1		—		—		1
Total	$	5	$	6	$	11	$	2	$	—	$	13

			Other		Total
Three Months Ended	Employee		Restructuring		Restructuring					Other
March 31, 2018	Terminations		Charges		Charges		Impairment			Charges		Total
Magazines, Catalogs and Logistics	$	3	$	2	$	5	$	(1	)	$	—	$	4
Book		—		1		1		—			—		1
Office Products		1		—		1		—			—		1
Total	$	4	$	3	$	7	$	(1	)	$	—	$	6

Restructuring and Impairment Charges

For the three months ended March 31, 2019, the Company incurred charges of $5 million for an aggregate of 240 employees, of whom 16 were terminated as of or prior to March 31, 2019, primarily related to the closure of one facility in the Magazines, Catalogs and Logistics segment. The Company incurred net other restructuring charges of $6 million 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 during the quarter. The Company recorded $2 million of net impairment charges related to machinery and equipment associated with facility closings in the Magazines, Catalogs and Logistics segment.

LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three Months Ended March 31, 2019 and 2018

(tabular amounts in millions, except per share data)

For the three months ended March 31, 2018, the Company incurred employee-related restructuring charges of $4 million for an aggregate of 196 employees, substantially all of whom were terminated as of or prior to March 31, 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. The Company incurred other restructuring charges of $3 million for the three months ended March 31, 2018 for facility costs and pension withdrawal obligations related to facility closures. As a result of a $1 million adjustment of previously recorded goodwill associated with the 2017 acquisitions, there was a reduction of $1 million of goodwill impairment charges during the three months ended March 31, 2018.

Other Charges

For each of the three months ended March 31, 2019 and 2018, the Company recorded a 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 $19 million in restructuring and multiemployer pension plan liabilities at March 31, 2019.

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

Restructuring Reserve

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

	December 31,		Restructuring				Cash			March 31,
	2018		Charges		Other		Paid			2019
Employee terminations	$	8	$	5	$	—	$	—		$	13
Multiemployer pension plan withdrawal obligations		32		1		—		(2	)		31
Other		1		5		—		(2	)		4
Total	$	41	$	11	$	—	$	(4	)	$	48

The current portion of restructuring reserves of $23 million at March 31, 2019 was included in accrued liabilities, while the long-term portion of $25 million, which primarily related to multiemployer pension plan withdrawal obligations related to facility closures, was included in restructuring and multiemployer pension liabilities at March 31, 2019.

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

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.

LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three Months Ended March 31, 2019 and 2018

(tabular amounts in millions, except per share data)

Note 9. 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 active federal and state Superfund and other multiparty remediation sites. In addition to these sites, the Company may also have the obligation to remediate three other previously and currently owned facilities. At the Superfund sites, the Comprehensive Environmental Response, Compensation and Liability Act provides that the Company’s liability could be joint and several, meaning that the Company could be required to pay an amount in excess of its proportionate share of the remediation costs.

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

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

	March 31, 2019			December 31, 2018
Borrowings under the Revolving Credit Facility	$	133		$	64
Term Loan Facility due September 30, 2022 _(a₎		249			260
8.75% Senior Secured Notes due October 15, 2023		450			450
Capital lease and other obligations		2			4
Unamortized debt issuance costs		(10	)		(11	)
Total debt		824			767
Less: current portion		(175	)		(108	)
Long-term debt	$	649		$	659

(a)

The borrowings under the Term Loan Facility are subject to a variable interest rate. As of March 31, 2019 and December 31, 2018, the interest rate was 8.00% and 8.02%, respectively.

__________________________________

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

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

LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three Months Ended March 31, 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. The Credit Agreement generally allows annual dividend payments of up to $50 million in the aggregate, though additional dividends may be allowed subject to certain conditions. Each of these covenants is subject to important exceptions and qualifications.

Credit Agreement

On December 20, 2018, the Company amended the Credit Agreement to, among other things, defer certain changes to the minimum Interest Coverage Ratio and the maximum Consolidated Leverage Ratio. As a result, the maximum Consolidated Leverage Ratio will be reduced to 3.00 to 1.00 with respect to any fiscal quarter ending on or after March 31, 2020, as opposed to March 31, 2019, as originally contemplated in the Credit Agreement. The minimum Interest Coverage Ratio will be increased to 3.50 to 1.00 with respect to any test period ending on or after March 31, 2020, as opposed to March 31, 2019, as originally contemplated in the Credit Agreement. Other terms, including the outstanding principal, maturity date and other debt covenants remain the same.

Additional Debt Issuances Information

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

There were $133 million and $64 million of borrowings under the Revolving Credit Facility as of March 31, 2019 and December 31, 2018, respectively. The weighted-average interest rate on borrowings under the Company’s Revolving Credit Facility was 5.76% during the three months ended March 31, 2019.

There were $19 million and $20 million of net interest expense during the three months ended March 31, 2019 and 2018, respectively.

Note 11. Earnings Per Share

During the three months ended March 31, 2019 and 2018, no shares of common stock were purchased by the Company, however, a de minimis amount of shares were withheld from employees for tax liabilities upon vesting of equity awards.

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

LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three Months Ended March 31, 2019 and 2018

(tabular amounts in millions, except per share data)

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
	March 31,
	2019			2018
Net (loss) per common share:
Basic	$	(3.79	)	$	(0.32	)
Diluted	$	(3.79	)	$	(0.32	)
Numerator:
Net (loss)	$	(126	)	$	(11	)
Denominator:
Weighted average number of common shares outstanding		33.3			34.7
Dilutive options and awards		—			—
Diluted weighted average number of common shares outstanding		33.3			34.7

Note 12. 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 March 31, 2019 and December 31, 2018. 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. Qualified Plan”) and related non-qualified benefits (the “Non-Qualified Plan”).

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

	Three Months Ended
	March 31, 2019
	Qualified			Non-Qualified & International		Total
Interest cost	$	20		$	1	$	21
Expected return on plan assets		(33	)		—		(33	)
Amortization of actuarial loss		3			—		3
Settlement of retirement obligations		135			—		135
Net periodic benefit loss	$	125		$	1	$	126

	Three Months Ended
	March 31, 2018
	Qualified			Non-Qualified & International		Total
Interest cost	$	21		$	1	$	22
Expected return on plan assets		(39	)		—		(39	)
Amortization of actuarial loss		5			—		5
Net periodic benefit (income) loss	$	(13	)	$	1	$	(12	)

LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three Months Ended March 31, 2019 and 2018

(tabular amounts in millions, except per share data)

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 million in settlement of retirement benefit obligations in the condensed consolidated statement of operations in the first quarter of 2019. This charge results from the recognition in earnings of a portion of the actuarial losses recorded in accumulated other comprehensive loss based on the proportion of the obligation settled. The 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.

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

Note 13. Comprehensive Income

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

	Pension			Translation
	Plan Cost			Adjustments			Total
Balance at December 31, 2018	$	(529	)	$	(55	)	$	(584	)
Other comprehensive income before reclassifications		105			1			106
Amounts reclassified from accumulated other comprehensive loss		2			—			2
Net change in accumulated other comprehensive loss		107			1			108
Balance at March 31, 2019	$	(422	)	$	(54	)	$	(476	)

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. Refer to Note 12, Retirement Plans, for more information.

The following table summarizes accumulated other comprehensive loss by component as of December 31, 2017 and March 31, 2018 and changes during the three months ended March 31, 2018.

	Pension			Translation
	Plan Cost			Adjustments			Total
Balance at December 31, 2017	$	(428	)	$	(48	)	$	(476	)
Other comprehensive income before reclassifications		—			5			5
Amounts reclassified from accumulated other comprehensive loss		4			—			4
Reclassification to accumulated deficit		(97	)		—			(97	)
Net change in accumulated other comprehensive loss		(93	)		5			(88	)
Balance at March 31, 2018	$	(521	)	$	(43	)	$	(564	)

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 ended March 31, 2018. ASU 2018-02 eliminated the stranded tax effects resulting from the U.S Tax Cuts and Jobs Act and improved the usefulness of information reported to financial statement users.

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

LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three Months Ended March 31, 2019 and 2018

(tabular amounts in millions, except per share data)

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

	Three Months Ended
	March 31,
	2019		2018
Amortization of pension plan cost:
Net actuarial loss _(a)	$	3	$	5
Reclassifications before tax		3		5
Income tax expense		1		1
Reclassifications, net of tax	$	2	$	4

(a)

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

Note 14. Stock and Incentive Programs

The Company’s employees participate in the Company’s 2016 Performance Incentive Plan (the “2016 PIP”). Under the 2016 PIP, the Company may grant cash or bonus awards, stock options, stock appreciation rights, restricted stock awards (“RSAs”), RSUs, performance awards or combinations thereof to certain officers, directors and key employees.

Total compensation expense related to all share based compensation plans for the Company’s employees, officers and directors was $3 million for each of the three months ended March 31, 2019 and 2018. There was a de minimis amount of excess tax benefits for each of the three months ended March 31, 2019 and 2018.

There was no significant activity related to stock options, RSAs, performance restricted stock, and PSUs during the three months ended March 31, 2019.

Restricted Stock Units

A summary of the Company’s RSU activity for LSC Communications employees, officers and directors as of December 31, 2018 and March 31, 2019, and changes during the three months ended March 31, 2019 is presented below.

				Weighted
	Shares			Average Grant
	(thousands)			Date Fair Value
Nonvested at December 31, 2018		897		$	19.65
Granted		927			6.28
Vested		(338	)		25.59
Forfeited		(2	)		17.62
Nonvested at March 31, 2019		1,484		$	9.94

During the three months ended March 31, 2019, 926,870 RSUs were granted to certain senior management of the Company. The shares are subject to time-based vesting and will cliff vest on February 25, 2022. As of March 31, 2019, the total potential payout for the awards granted during the three months ended March 31, 2019 is 926,870 RSUs. The fair value of these awards was determined based on the Company’s stock price on the grant date reduced by the present value of expected dividends through the vesting period. These awards are subject to forfeiture upon termination of employment prior to vesting, subject in some cases to early vesting upon specified events, including death, permanent disability or retirement of the grantee or change of control of the Company.

Compensation expense related to LSC Communications, RRD and Donnelley Financial RSUs held by Company employees, officers and directors was $1 million and $2 million for the three months ended March 31, 2019 and 2018, respectively.

LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three Months Ended March 31, 2019 and 2018

(tabular amounts in millions, except per share data)

As of March 31, 2019 there was $10 million of unrecognized share-based compensation expense related to approximately 1.5 million RSUs outstanding, with a weighted-average grant date fair value of $9.94, that are expected to vest over a weighted-average period of 2.5 years.

Note 15. Segment Information

During the third quarter of 2018, the Company realigned the reportable segments and reporting units to reflect its evolution since its separation from RRD in 2016, as well as changes from recent acquisition and disposal activity. All prior year amounts have been reclassified to conform to the Company’s current reporting structure.

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

Magazines, Catalogs and Logistics

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

Book

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

Office Products

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

Other

The Other grouping consists of the following non-reportable segments: Europe, Directories, Mexico, and Print Management. 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 Months Ended March 31, 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			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		—
Total reportable segments		782		(10	)		1,771		30		27
Other		63		4			90		1		1
Corporate		—		(13	)		86		—		—
Total operations	$	845	$	(19	)	$	1,947	$	31	$	28

			Income (Loss)					Depreciation
Three Months Ended	Net		from			Assets of		and		Capital
March 31, 2018	Sales		Operations			Operations		Amortization		Expenditures
Magazines, Catalogs and Logistics	$	427	$	(14	)	$	742	$	16	$	9
Book		249		9			565		14		9
Office Products		123		2			372		4		—
Total reportable segments		799		(3	)		1,679		34		18
Other		130		7			194		4		1
Corporate		—		(10	)		84		—		1
Total operations	$	929	$	(6	)	$	1,957	$	38	$	20

Restructuring, impairment and other charges by segment for the three months ended March 31, 2019 and 2018 are disclosed in Note 8, Restructuring, Impairment and Other Charges.

Note 16. New Accounting Pronouncements

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 in the first quarter of 2019.

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 March 31, 2019 and December 31, 2018 and the results of operations for the three months ended March 31, 2019 and 2018. 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, for management’s discussion and analysis of the financial condition of the company as of December 31, 2018 and December 31, 2017, and the results of operations for the years ended December 31, 2018, 2017 and 2016.

Company Overview

Merger Agreement

The Company and Quad/Graphics have made customary representations, warranties and covenants in the Merger Agreement. Subject to certain exceptions outlined in the Merger Agreement, the Company has agreed to covenants relating to the Company’s business during the period between the execution of the Merger Agreement and the consummation of the Merger, including restrictions on its ability to issue any shares of its capital stock, repurchase any shares of its capital stock and incurring additional indebtedness outside the ordinary course of business. The Merger Agreement allows the Company to continue paying a regular quarterly dividend up to $0.26 per share.

On February 25, 2019, Quad/Graphics announced that its shareholders had voted to approve the issuance of Quad/Graphics’ class A common stock in the Merger on February 22, 2019.

On February 22, 2019, the Company held a Special Meeting of Stockholders in connection with the Merger. At the special meeting, the Company’s stockholders voted to adopt the Merger Agreement.

Segment Descriptions

During the third quarter of 2018, the Company realigned the reportable segments and reporting units to reflect its evolution since its separation from R. R. Donnelley & Sons Company’s (“RRD”) in 2016, as well as changes from recent acquisition and disposal activity. All prior year amounts have been reclassified to conform to the Company’s current reporting structure.

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

Magazines, Catalogs and Logistics

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

Corporate

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 February 2019 IBIS World industry report “Printing in the U.S.,” estimated total annual printing industry revenue is approximately $77 billion, of which approximately $12 billion relates to our core segments of the print market and an additional approximately $31 billion pertains to related segments of the print market in which we are able to offer certain products. Despite consolidation in recent years, including several acquisitions completed by LSC Communications, the industry remains highly fragmented and LSC Communications is one of the largest players in our segment of the print market. The print and related services industry, in general, continues to have excess capacity and LSC Communications remains diligent in proactively identifying plant consolidation opportunities to keep our capacity in line with demand. Across the Company’s range of print products and services, competition is based primarily on the ability to deliver products for the lowest total cost, a factor driven not only by price, but also by materials and distribution costs. We expect that prices for print products and services will continue to be a focal point for customers in coming years.

Value-added services, such as LSC Communications’ co-mail, logistics and supply chain management offerings, enable customers to lower their total costs. Technological changes, including the electronic distribution of documents and data, online distribution and hosting of media content, and advances in digital printing, print-on-demand and internet technologies, continue to impact the market for our products and services. The impact of digital technologies has been felt in many print products. Digital technologies have impacted printed magazines as some advertising spending has moved from print to electronic media. Catalogs have experienced volume reductions as our customers allocate more of their spending to online resources and also face stiff competition from online retailers resulting in retailer compression. Educational books within the college market continue to be impacted by electronic substitution and other trends. The K-12 educational sector continues to be focused on increasing digital distribution but there has been inconsistent adoption across school systems. E-book substitution has impacted overall consumer print trade book volume, although e-book adoption rates have stabilized and industry-wide print book volume has been growing in recent years. In addition, retail inserts have experienced volume reductions primarily as a result of store closures and reduced newspaper circulation. Electronic communication and transaction technology has also continued to drive electronic substitution in directory printing, in part driven by cost pressures at key customers.

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

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

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

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 the benefits beginning in 2019 and at various points over the next three years, the Company incurred $1.5 million of expense during the three months ended March 31, 2019 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 months ended March 31, 2019.

Raw Materials

We negotiate with suppliers to maximize our purchasing efficiencies. The primary raw materials we use in our printed products are paper and ink. We negotiate with paper suppliers to maximize our purchasing efficiencies and use a wide variety of paper grades and formats. In addition, a substantial amount of paper used in our printed products is supplied directly by customers. Variations in the cost and supply of certain paper grades used in the manufacturing process may affect our consolidated financial results. Generally, customers directly absorb the impact of changing prices on customer-supplied paper. For paper that we purchase, we have historically passed most changes in price through to our customers.

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

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

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

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

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

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 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, of which $1 million has been contributed during the three months ended March 31, 2019.

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 operations in the first quarter of 2019.

Based on the fair value of assets and the estimated discount rate used to value benefit obligations as of March 31, 2019, the Company estimates the unfunded status of the pension benefit plans to be approximately $105 million compared to $137 million at December 31, 2018.

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

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.

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 March 31, 2019 as Compared to the Three Months Ended March 31, 2018

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

	Three Months Ended
	March 31,
	2019			2018			$ Change			% Change
	(in millions, except percentages)
Net sales	$	845		$	929		$	(84	)		(9.1	%)
Cost of sales		735			808			(73	)		(9.0	%)
Cost of sales as a % of net sales		87.0	%		87.0	%
Selling, general and administrative expenses (exclusive of depreciation and amortization)		85			83			2			2.4	%
Selling, general and administrative expenses as a % of net sales		10.1	%		8.9	%
Restructuring, impairment and other charges-net		13			6			7			116.7	%
Depreciation and amortization		31			38			(7	)		(18.4	%)
(Loss) from operations	$	(19	)	$	(6	)	$	(13	)		216.7	%

Condensed Consolidated Results

Net sales for the three months ended March 31, 2019 were $845 million, a decrease of $84 million, or 9.1%, compared to the three months ended March 31, 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;

•

Partially offset by the acquisition of Print Logistics in 2018 and higher volume in books.

Additionally, on a pro forma basis, the Company’s net sales decreased by approximately $128 million or 13.2% (see Note 2, Business Combination and Disposition, to the condensed consolidated financial statements).

Total cost of sales decreased $73 million, or 9.0%, for the three months ended March 31, 2019 compared to the three months ended March 31, 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 remained consistent at 87.0% for the three months ended March 31, 2019 and 2018.

Selling, general and administrative expenses increased $2 million to $85 million for the three months ended March 31, 2019 compared to the three months ended March 31, 2018, primarily due to costs associated with the Merger 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 8.9% for the three months ended March 31, 2018 to 10.1% for the three months ended March 31, 2019 primarily due to costs associated with the Merger.

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 closure of one facility 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 three months ended March 31, 2018, the Company recorded restructuring, impairment and other charges of $6 million. The charges included:

•

Employee termination costs of $4 million related to an aggregate of 196 employees, substantially all of whom were terminated as of or prior to March 31, 2019 primarily related to one facility closure in the Magazines, Catalogs and Logistics segment and the reorganization of certain business units;

•

Other restructuring charges of $3 million for facility costs and multiemployer withdrawal obligations related to facility closures; and

•

As a result of a $1 million adjustment of previously recorded goodwill associated with the 2017 acquisitions, there was a reduction of $1 million of goodwill impairment charges during the three months ended March 31, 2018.

Depreciation and amortization decreased $7 million to $31 million for the three months ended March 31, 2019 compared to the three months ended March 31, 2018 due to decreased capital spending in recent years compared to historical levels and the dispositions of the Company’s European printing business and retail offset printing facilities.

	Three Months Ended
	March 31,
	2019			2018			$ Change			% Change
	(in millions, except percentages)
Interest expense-net	$	19		$	20		$	(1	)		(5.0	%)
Settlement of retirement benefit obligations		135			—			135			100.0	%
Investment and other (income)-net		(10	)		(11	)		1			(9.1	%)

Net interest expense decreased by $1 million for the three months ended March 31, 2019 compared to the three months ended March 31, 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.

	Three Months Ended
	March 31,
	2019			2018			$ Change
	(in millions, except percentages)
Net (loss) before income taxes	$	(163	)	$	(15	)	$	(148	)
Income tax (benefit)		(37	)		(4)			(33	)
Effective income tax rate		22.7	%		24.0	%

The effective income tax rate for the three months ended March 31, 2019 was 22.7% compared to 24.0% for the three months ended March 31, 2018. The effective income tax rate for the three months ended March 31, 2019 reflects the impact of nondeductible costs associated with the Merger and share-based compensation awards that either lapsed or vested. The effective income tax rate for the three months ended March 31, 2018 reflects the impact of the U.S. Tax Cuts and Jobs Act (“Tax Act”) including the reduction of the U.S. federal corporate tax rate from 35.0% to 21.0%.

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
	March 31,
	2019			2018			Change
	(in millions, except percentages)
Net sales	$	403		$	427		$	(24	)
(Loss) from operations		(31	)		(14	)		(17	)
Operating margin		(7.7	%)		(3.3	%)	(440) bps
Restructuring, impairment and other charges-net		11			4			7

Net sales for the Magazines, Catalogs and Logistics segment for the three months ended March 31, 2019 were $403 million, a decrease of $24 million, or 5.4%, compared to the three months ended March 31, 2018. The Magazines, Catalogs and Logistics segment’s net sales decreased primarily due to lower volume and the disposition of the Company’s retail offset printing facilities, partially offset by the acquisition of Print Logistics and a $1 million increase in pass-through paper sales.

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

Book

	Three Months Ended
	March 31,
	2019			2018			Change
	(in millions, except percentages)
Net sales	$	260		$	249		$	11
Income from operations		13			9			4
Operating margin		5.0	%		3.6	%	140 bps
Restructuring, impairment and other charges-net		1			1			—

Net sales for the Book segment for the three months ended March 31, 2019 were $260 million, an increase of $11 million, or 4.3%, compared to the three months ended March 31, 2018, primarily due to higher volume in digitally-printed and educational books, increased fulfillment services, and a $4 million increase in pass-through paper sales.

The increase in the Book segment income from operations and operating margins was primarily due to mix of volume.

Office Products

	Three Months Ended
	March 31,
	2019			2018			Change
	(in millions, except percentages)
Net sales	$	119		$	123		$	(4	)
Income from operations		8			2			6
Operating margin		6.7	%		1.6	%	510 bps
Restructuring, impairment and other charges-net		—			1			(1	)
Purchase accounting adjustments		—			1			(1	)

Net sales for the Office Products segment for the three months ended March 31, 2019 were $119 million, a decrease of $4 million, or 3.3%, compared to the three months ended March 31, 2018, largely as a result of lower volume in notetaking and filing products.

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

Other

	Three Months Ended
	March 31,
	2019			2018			Change
	(in millions, except percentages)
Net sales	$	63		$	130		$	(67	)
Income from operations		4			7			(3	)
Operating margin		6.3	%		5.4	%	90 bps

Net sales for the Other grouping for the three months ended March 31, 2019 were $63 million, a decrease of $67 million, or 52.0%, compared to the three months ended March 31, 2018, 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.

The decrease in income from operations was primarily due to lower volume and mix of volume, partially offset by cost control initiatives which helped to improve the operating margin compared to the prior year.

Corporate

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

	Three Months Ended
	March 31,
	2019		2018		Change
	(in millions, except percentages)
Total operating expenses	$	13	$	10	$	3
Significant components of total operating expenses:
Restructuring, impairment and other charges-net		1		—		1
Share-based compensation expenses		3		3		—
Expenses related to acquisitions and the Merger		7		1		6

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, settlement of retirement benefit obligations, purchase accounting adjustments, and expenses related to acquisitions and the Merger. A reconciliation of GAAP net income to non-GAAP adjusted EBITDA for the three months ended March 31, 2019 and 2018 is presented in the following table:

	Three Months Ended
	March 31,
	2019			2018
Net (loss)	$	(126	)	$	(11	)
Restructuring, impairment and other charges-net		13			6
Settlement of retirement benefit obligations		135			—
Expenses related to acquisitions and the Merger		7			1
Purchase accounting adjustments		—			3
Depreciation and amortization		31			38
Interest expense-net		19			20
Income tax (benefit)		(37	)		(4	)
Non-GAAP adjusted EBITDA	$	42		$	53

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 March 31, 2019 as Compared to the Three Months Ended March 31, 2018 for information on charges.

•

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

•

Expenses related to acquisitions and the Merger: The three months ended March 31, 2019 included charges of $7 million primarily related to costs associated with the Merger. The three months ended March 31, 2018 included charges of $1 million related to legal, accounting and other expenses associated with completed and contemplated acquisitions.

•

Purchase accounting adjustments: three months ended March 31, 2018 included charges of $3 million as a result of purchase accounting inventory step-up adjustments and changes to purchase price allocations related to prior acquisitions.

LIQUIDITY AND CAPITAL RESOURCES

The Company believes it has sufficient liquidity to support its ongoing operations and to invest in future growth to create value for its stockholders. Operating cash flows and the Revolving Credit Facility are the Company’s primary sources of liquidity and are expected to be used for, among other things, payments of interest and principal on the Company’s debt obligations, distributions to stockholders that may be approved by the Board of Directors and in accordance with the Merger Agreement, capital expenditures necessary to support productivity improvement and growth, and completion of restructuring programs.

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

	Three Months Ended
	March 31,
	2019			2018
Net cash (used in) operating activities	$	(24	)	$	(24	)
Net cash (used in) investing activities		(31	)		(19	)
Net cash provided by financing activities		46			31

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 used in operating activities was $24 million for each of the three months ended March 31, 2019 and 2018. The operating cash flows in both periods were impacted by the timing of customer payments, which were offset by the timing of supplier payments and inventory expenditures.

Cash Flows from Investing Activities

Net cash used in investing activities for the three months ended March 31, 2019 was $31 million compared to $19 million for the same period in 2018. Capital expenditures increased by $8 million compared to the same period in 2018, primarily due to increased spend on machinery and equipment to increase automation and productivity in the Book and Magazines, Catalogs and Logistics segments.

Cash Flows from Financing Activities

Net cash provided by financing activities for the three months ended March 31, 2019 was $46 million compared to $31 million provided by financing activities for the same period in 2018, driven by net proceeds of $67 million from credit facility borrowings during the three months ended March 31, 2019, compared to $55 million during the same period in 2018.

Dividends

Cash dividends declared and paid to stockholders during the three months ended March 31, 2019 totaled $9 million. On April 10, 2019, the Board of Directors declared a quarterly cash dividend of $0.26 per common share, payable on June 4, 2019 to stockholders of record on May 15, 2019.

The Credit Agreement generally allows annual dividend payments of up to $50 million in the aggregate, though additional dividends may be allowed subject to certain conditions. The timing, declaration, amount and payment of any future dividends to the Company’s stockholders falls within the discretion of the Company’s Board of Directors. The decisions of the Company’s Board of Directors regarding the payment of future dividends depends on many factors, including but not limited to the Company’s financial condition, future prospects, earnings, capital requirements and debt service obligations, as well as legal requirements, regulatory constraints, industry practice and other factors that the Board of Directors may deem relevant. In addition, the terms of the agreements governing the Company’s existing debt or debt that the Company may incur in the future may limit or prohibit the payment of dividends. There can be no assurance that the Company will continue to pay a dividend. The Merger Agreement permits the Company to continue paying a quarterly dividend up to $0.26 per share and restricts the Company from incurring additional indebtedness outside of the ordinary course of business.

LIQUIDITY

Cash and cash equivalents were $13 million and $21 million as of March 31, 2019 and December 31, 2018, 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 March 31, 2019 included $6 million in the U.S. and $7 million at international locations.

The Company maintains cash pooling structures that enable participating international locations to draw on the pools’ cash resources to meet local liquidity needs. Foreign cash balances may be loaned from certain cash pools to U.S. operating entities on a temporary basis in order to reduce the Company’s short-term borrowing costs or for other purposes. As of March 31, 2019, $8 million of international cash was loaned to U.S. operating entities.

Debt Issuances

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

Credit Agreement

Additional Debt Issuances Information

There were $133 million of borrowings under the Revolving Credit Facility as of March 31, 2019. Based on the Company’s condensed consolidated statements of operations for the three months ended March 31, 2019 and existing debt, the Company would have had the ability to utilize $257 million of the $400 million Revolving Credit Facility and not have been in violation of the terms of the agreement. Availability under the Revolving Credit Facility was reduced by $133 million in borrowings.

The current availability under the Revolving Credit Facility and net availability as of March 31, 2019 is shown in the table below:

	March 31, 2019
	(in millions)
Availability
Stated amount of the Revolving Credit Facility	$	400
Less: availability reduction from covenants		143
Amount available under the Revolving Credit Facility	$	257

Usage
Borrowings under the Revolving Credit Facility	$	133
Impact on availability related to outstanding letters of credit		—
Total usage	$	133

Current availability at March 31, 2019	$	124
Cash		13
Net Available Liquidity	$	137

The Company was in compliance with its debt covenants as of March 31, 2019, and expects to remain in compliance based on management’s estimates of operating and financial results for 2019 and the foreseeable future. However, declines in market and economic conditions or demand for certain of the Company’s products could impact the Company’s ability to remain in compliance with its debt covenants in future periods. As a result of the Company’s amendment of its Credit Agreement during the fourth quarter of 2018, the maximum Consolidated Leverage Ratio steps down to 3.00 on March 31, 2020, one year later from the previous date of March 31, 2019 and the minimum Interest Coverage Ratio will be increased to 3.50 to 1.00 with respect to any test period ending on or after March 31, 2020, as opposed to March 31, 2019. As of March 31, 2019, the Company’s leverage as defined in the Credit Agreement was 2.82, compared to a maximum permitted ratio under the Credit Agreement of 3.25. The full definition of the Consolidated Leverage Ratio is included in the Credit Agreement filed as an exhibit to this quarterly report on Form 10-Q. As of March 31, 2019, the Company met all the conditions required to borrow under the Credit Agreement and management expects the Company to continue to meet the applicable borrowing conditions.

The failure of a financial institution supporting the Revolving Credit Facility would reduce the size of the Company’s committed facility unless a replacement institution were added. Currently, the Revolving Credit Facility is supported by fifteen U.S. and international financial institutions.

As of March 31, 2019, the Company had $46 million in outstanding letters of credit issued under the Revolving Credit Facility, none of which reduced the availability thereunder.

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

	Debt Maturity Schedule
	Total		2019		2020		2021		2022		2023		Thereafter
Borrowings under the Credit Agreement	$	386	$	164	$	43	$	43	$	136	$	—	$	—
Senior secured notes		450		—		—		—		—		450		—
Capital lease obligations and other borrowings		2		1		1		—		—		—		—
Total_(a)	$	838	$	165	$	44	$	43	$	136	$	450	$	—

(a)

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

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 March 31, 2019, the Company’s variable-interest borrowings were $386 million, or approximately 46.1%, 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 March 31, 2019 by approximately $13 million.

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

OTHER INFORMATION

Litigation and Contingent Liabilities

For a discussion of certain litigation involving the Company, see Note 9, 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 also described in Note 16, 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, as filed with the SEC on February 19, 2019, 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:

•

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 impact of the Tax Act;

•

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

•

our inability to consummate the Merger;

•

limitations in the Merger Agreement that restrict LSC Communication's ability to pursue alternatives to the Merger that might result in greater value to LSC Communications stockholders than the Merger;

•

failure to consummate the Merger that could negatively impact the stock price and the future business and financial results of LSC Communications;

•

significant transaction and merger-related costs that LSC Communications may incur in connection with the Merger, which may be in excess of those anticipated; and

•

LSC Communications may be a target of further securities class action and derivative lawsuits which could result in substantial costs and may delay or prevent the Merger from being consummated.

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

Consequently, readers of this 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 since December 31, 2018. 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, as filed with the SEC on February 19, 2019.

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 March 31, 2019 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 March 31, 2019 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 March 31, 2019 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, Commitments and Contingencies, to the condensed consolidated financial statements.

Merger Litigation

Three substantially similar actions have been filed by an alleged LSC Communications stockholder against some or all of LSC Communications, the directors of LSC Communications, Quad/Graphics and merger sub.

•

On December 21, 2018, an action captioned Joe Waters v. LSC, et al., No. 1:18-cv-08419, was filed in the U.S. District Court for the Northern District of Illinois against LSC Communications, the directors of LSC Communications, Quad/Graphics and merger sub on behalf of a putative class of LSC Communications stockholders.

•

On January 2, 2019, an action captioned David Wefer v. LSC, et al., No. 1:19-cv-00007, was filed in the U.S. District Court for the Southern District of New York against LSC Communications and the directors of LSC Communications. On February 27, 2019, Mr. Wefer filed a notice of voluntary dismissal without prejudice, which the court entered on the same date.

•

On January 7, 2019, an action captioned Patrick Plumley v. LSC, et al., No. 1:19-cv-00030-UNA, was filed in the U.S. District Court for the District of Delaware against LSC Communications, the directors of LSC Communications, Quad/Graphics and merger sub on behalf of a putative class of LSC Communications stockholders.

The lawsuits include similar allegations challenging the adequacy or completeness of the disclosures to LSC Communications stockholders made in the initial version of the joint proxy statement/prospectus filed on December 11, 2018 regarding the merger, and the complaints assert claims under Section 14(a) and 20(a) of the Exchange Act against some or all of LSC Communications, the members of the LSC Communications board and Quad/Graphics. The complaints allege, among other things, that the initial version of this joint proxy statement/prospectus filed on December 11, 2018 misstated or omitted material information regarding the financial projections prepared by LSC management, the value of shares of LSC Communications common stock and the financial analyses performed by LSC Communications’ financial advisor and the sales process leading up to the merger. The complaints seek injunctive relief, including to enjoin the merger, damages in the event the merger is consummated and an award of attorneys’ fees, in addition to other relief.

ITEM 1A. RISK FACTORS

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, as filed with the SEC on February 19, 2019.

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

Issuer Purchases of Equity Securities

					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, 2019 - January 31, 2019		—	$	—		—	$	—
February 1, 2019 - February 28, 2019		—		—		—	$	—
March 1, 2019 - March 31, 2019		143,929		8.42		—	$	—
Total		143,929	$	8.42		—

(a)

Shares withheld for tax liabilities upon vesting of equity awards

Dividends

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)

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		2016 LSC Communications, Inc. Performance Incentive Plan (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on October 3, 2016)*

10.5		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)*

10.6		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)*

10.7		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)*

10.8		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 (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)*

10.9		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)*

10.10		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)*

10.11		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)*

10.12		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)*

10.13		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)*

10.14		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)*

10.15		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)*

10.16		Participation Agreement between Kent A. Hansen and the Company, dated as of January 24, 2018 (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on January 26, 2018)*

10.17		Participation Agreement between Richard T. Lane and the Company, dated as of January 24, 2018 (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on January 26, 2018)*

10.18		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)*

10.19		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)*

10.20		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)*

10.21		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)*

10.22		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)*

10.23		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)*

10.24		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)*

10.25		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)*


10.26		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)*

10.27		Form of Director Restricted Stock Unit Award as amended (for 2004-2007) converted from R. R. Donnelley & Sons Company to the Company pursuant to the Separation Agreement (incorporated by reference to Exhibit 10.12 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, filed on February 23, 2017)*

10.28		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)*

10.29		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)*

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)

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

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

* Management contract or compensatory plan or arrangement

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
		Kent A. Hansen
		Chief Accounting Officer and Controller

Date: April 30, 2019

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LSC Communications (LKSDQ) 10-Q2019 Q1 Quarterly report

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