UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2010
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 1-4694
R.R. DONNELLEY & SONS COMPANY
(Exact name of registrant as specified in its charter)
Delaware | 36-1004130 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
|
111 South Wacker Drive, Chicago, Illinois |
60606 | |
(Address of principal executive offices) | (Zip code) |
(312)
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large Accelerated filer x Accelerated filer ¨ Non-Accelerated Filer ¨ (Do not check if a smaller reporting company) Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of October 29, 2010, 206.3 million shares of common stock were outstanding.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2010
TABLE OF CONTENTS
2
Item 1. Condensed Consolidated Financial Statements
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (RR DONNELLEY)
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except per share data)
(UNAUDITED)
September 30,
2010 |
December 31,
2009 |
|||||||
ASSETS |
||||||||
Cash and cash equivalents |
$ | 731.6 | $ | 499.2 | ||||
Restricted cash equivalents |
50.4 | | ||||||
Receivables, less allowance for doubtful accounts of $68.2 in 2010 (2009$70.3) |
1,805.0 | 1,675.9 | ||||||
Income taxes receivable |
36.2 | 63.2 | ||||||
Inventories (Note 3) |
565.9 | 561.8 | ||||||
Prepaid expenses and other current assets |
158.7 | 160.8 | ||||||
Total current assets |
3,347.8 | 2,960.9 | ||||||
Property, plant and equipmentnet (Note 4) |
2,071.9 | 2,271.4 | ||||||
Goodwill (Note 5) |
2,329.7 | 2,333.3 | ||||||
Other intangible assetsnet (Note 5) |
641.6 | 747.4 | ||||||
Other noncurrent assets |
433.8 | 434.6 | ||||||
Total assets |
$ | 8,824.8 | $ | 8,747.6 | ||||
LIABILITIES |
||||||||
Accounts payable |
$ | 894.7 | $ | 886.4 | ||||
Accrued liabilities |
828.7 | 813.4 | ||||||
Short-term and current portion of long-term debt (Note 14) |
8.0 | 339.9 | ||||||
Total current liabilities |
1,731.4 | 2,039.7 | ||||||
Long-term debt (Note 14) |
3,407.4 | 2,982.5 | ||||||
Pension liability |
494.5 | 509.8 | ||||||
Postretirement benefits |
335.7 | 324.5 | ||||||
Deferred income taxes |
165.2 | 205.5 | ||||||
Other noncurrent liabilities |
466.9 | 524.6 | ||||||
Total liabilities |
6,601.1 | 6,586.6 | ||||||
Commitments and Contingencies (Note 13) |
||||||||
EQUITY (Note 11) |
||||||||
RR Donnelley shareholders equity |
||||||||
Preferred stock, $1.00 par value |
||||||||
Authorized: 2.0 shares; Issued: None |
| | ||||||
Common stock, $1.25 par value |
||||||||
Authorized: 500.0 shares; |
||||||||
Issued: 243.0 shares in 2010 and 2009 |
303.7 | 303.7 | ||||||
Additional paid-in capital |
2,901.2 | 2,906.2 | ||||||
Retained earnings |
696.9 | 662.9 | ||||||
Accumulated other comprehensive loss |
(532.0 | ) | (545.0 | ) | ||||
Treasury stock, at cost, 36.4 shares in 2010 (200937.3 shares) |
(1,168.0 | ) | (1,193.8 | ) | ||||
Total RR Donnelley shareholders equity |
2,201.8 | 2,134.0 | ||||||
Noncontrolling interests |
21.9 | 27.0 | ||||||
Total equity |
2,223.7 | 2,161.0 | ||||||
Total liabilities and equity |
$ | 8,824.8 | $ | 8,747.6 | ||||
(See Notes to Condensed Consolidated Financial Statements)
3
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (RR DONNELLEY)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)
(UNAUDITED)
Three Months Ended
September 30, |
Nine Months Ended
September 30, |
|||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net sales |
$ | 2,488.1 | $ | 2,463.1 | $ | 7,311.8 | $ | 7,274.3 | ||||||||
Cost of sales (exclusive of depreciation and amortization shown below) |
1,898.7 | 1,841.4 | 5,560.0 | 5,480.5 | ||||||||||||
Selling, general and administrative expenses (exclusive of depreciation and amortization shown below) |
261.7 | 251.6 | 803.4 | 807.2 | ||||||||||||
Restructuring and impairment chargesnet (Note 6) |
48.7 | 131.7 | 74.9 | 234.1 | ||||||||||||
Depreciation and amortization |
130.3 | 145.0 | 403.7 | 436.7 | ||||||||||||
Total operating expenses |
2,339.4 | 2,369.7 | 6,842.0 | 6,958.5 | ||||||||||||
Income from operations |
148.7 | 93.4 | 469.8 | 315.8 | ||||||||||||
Interest expensenet |
57.6 | 59.6 | 166.1 | 178.7 | ||||||||||||
Investment and other income (expense)net |
0.7 | (13.6 | ) | (9.1 | ) | (14.9 | ) | |||||||||
Earnings before income taxes |
91.8 | 20.2 | 294.6 | 122.2 | ||||||||||||
Income tax expense |
39.0 | 5.6 | 103.6 | 65.0 | ||||||||||||
Net earnings |
52.8 | 14.6 | 191.0 | 57.2 | ||||||||||||
Less: Income (loss) attributable to noncontrolling interests |
(0.5 | ) | 1.5 | (3.7 | ) | 5.0 | ||||||||||
Net earnings attributable to RR Donnelley common shareholders |
$ | 53.3 | $ | 13.1 | $ | 194.7 | $ | 52.2 | ||||||||
Earnings per share attributable to RR Donnelley common shareholders (Note 9): |
||||||||||||||||
Basic net earnings per share |
$ | 0.26 | $ | 0.06 | $ | 0.94 | $ | 0.25 | ||||||||
Diluted net earnings per share |
$ | 0.25 | $ | 0.06 | $ | 0.93 | $ | 0.25 | ||||||||
Dividends declared per common share |
$ | 0.26 | $ | 0.26 | $ | 0.78 | $ | 0.78 | ||||||||
Weighted average number of common shares outstanding (Note 9): |
||||||||||||||||
Basic |
206.3 | 205.3 | 206.1 | 205.2 | ||||||||||||
Diluted |
209.9 | 208.5 | 209.6 | 207.7 |
(See Notes to Condensed Consolidated Financial Statements)
4
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (RR DONNELLEY)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(UNAUDITED)
Nine Months Ended
September 30, |
||||||||
2010 | 2009 | |||||||
OPERATING ACTIVITIES |
||||||||
Net earnings |
$ | 191.0 | $ | 57.2 | ||||
Adjustments to reconcile net earnings to cash provided by operating activities: |
||||||||
Impairment charges |
31.0 | 22.9 | ||||||
Depreciation and amortization |
403.7 | 436.7 | ||||||
Provision for doubtful accounts receivable |
8.2 | 12.4 | ||||||
Share-based compensation |
22.4 | 19.3 | ||||||
Deferred taxes |
(45.3 | ) | (19.7 | ) | ||||
Reversal of tax reserves |
| (2.6 | ) | |||||
(Gain) loss on sale of property, plant and equipment |
(2.3 | ) | 1.8 | |||||
Loss related to Venezuela currency devaluation |
8.9 | | ||||||
Loss on debt extinguishment |
| 10.3 | ||||||
Other |
35.6 | 31.7 | ||||||
Changes in operating assets and liabilitiesnet of acquisitions: |
||||||||
Accounts receivablenet |
(149.6 | ) | 148.3 | |||||
Inventories |
(7.8 | ) | 141.7 | |||||
Prepaid expenses and other current assets |
(9.6 | ) | 19.1 | |||||
Accounts payable |
16.9 | 74.8 | ||||||
Income taxes payable and receivable |
27.2 | 129.8 | ||||||
Accrued liabilities and other |
(49.2 | ) | 14.8 | |||||
Net cash provided by operating activities |
481.1 | 1,098.5 | ||||||
INVESTING ACTIVITIES |
||||||||
Capital expenditures |
(144.9 | ) | (132.9 | ) | ||||
Acquisition of businesses, net of cash acquired |
2.2 | (26.6 | ) | |||||
Proceeds from return of capital and sale of investments and other assets |
21.9 | 0.4 | ||||||
Purchases of investments |
(31.7 | ) | (4.0 | ) | ||||
Transfers from restricted cash |
0.2 | 6.1 | ||||||
Net cash used in investing activities |
(152.3 | ) | (157.0 | ) | ||||
FINANCING ACTIVITIES |
||||||||
Proceeds from issuance of long-term debt |
400.0 | 750.0 | ||||||
Net change in short-term debt |
(5.3 | ) | (304.3 | ) | ||||
Payments of current maturities and long-term debt |
(326.7 | ) | (1,051.9 | ) | ||||
Payments on credit facility borrowings |
| (700.0 | ) | |||||
Proceeds from credit facility borrowings |
| 590.0 | ||||||
Debt issuance costs |
(3.2 | ) | (5.9 | ) | ||||
Issuance of common stock |
7.8 | | ||||||
Dividends paid |
(160.7 | ) | (160.1 | ) | ||||
Distributions to noncontrolling interests |
(1.6 | ) | (2.2 | ) | ||||
Net cash used in financing activities |
(89.7 | ) | (884.4 | ) | ||||
Effect of exchange rate on cash and cash equivalents |
(6.7 | ) | 33.8 | |||||
Net increase in cash and cash equivalents |
232.4 | 90.9 | ||||||
Cash and cash equivalents at beginning of period |
499.2 | 324.0 | ||||||
Cash and cash equivalents at end of period |
$ | 731.6 | $ | 414.9 | ||||
(See Notes to Condensed Consolidated Financial Statements)
5
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (RR DONNELLEY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Tabular amounts in millions, except per share data unless otherwise indicated)
1. Basis of Presentation
The accompanying unaudited condensed consolidated interim financial statements include the accounts of R.R. Donnelley & Sons Company and its subsidiaries (the Company or RR Donnelley) and have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and in accordance with the rules and regulations of the United States Securities and Exchange Commission (the SEC). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. These unaudited condensed consolidated interim financial statements reflect all normal and recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods. These unaudited condensed consolidated interim financial statements should be read in conjunction with the consolidated financial statements and the related notes thereto included in the Companys latest Annual Report on Form 10-K for the year ended December 31, 2009 filed with the SEC on February 24, 2010. Operating results for the three and nine months ended September 30, 2010 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2010. All significant intercompany transactions have been eliminated in consolidation. These unaudited condensed consolidated interim financial statements include estimates and assumptions of management that affect the amounts reported in the condensed consolidated financial statements. Actual results could differ from these estimates.
2. Acquisitions
2009 Acquisitions
On June 18, 2009, the Company acquired Prospectus Central, LLC (Prospectus), an e-delivery company located in Fitzgerald, Georgia. The purchase price for Prospectus was $3.0 million. Prospectuss operations are included in the U.S. Print and Related Services segment.
On January 2, 2009, the Company acquired the assets of PROSA, a web printing company located in Santiago, Chile. The purchase price for PROSA was approximately $23.6 million. PROSAs operations are included in the International segment.
The operations of these acquired businesses are complementary to the Companys existing products and services. As a result, the addition of these businesses is expected to improve the Companys ability to serve customers, increase capacity utilization, and reduce management, procurement and manufacturing costs.
The PROSA and Prospectus acquisitions were recorded by allocating the cost of the acquisitions to the assets acquired, including intangible assets, based on their estimated fair values at the acquisition date. The excess of the cost of the acquisitions over the net amounts assigned to the fair value of the assets acquired was recorded as goodwill, none of which is tax deductible. Based on the valuations, the final purchase price allocations for these 2009 acquisitions were as follows:
Accounts receivable |
$ | 2.4 | ||
Property, plant and equipment |
9.2 | |||
Amortizable intangible assets |
11.6 | |||
Goodwill |
6.5 | |||
Accounts payable and accrued liabilities |
(2.5 | ) | ||
Deferred taxesnet |
(0.6 | ) | ||
Net cash paid |
$ | 26.6 | ||
6
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (RR DONNELLEY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)
(Tabular amounts in millions, except per share data unless otherwise indicated)
Pro forma results
For the three and nine months ended September 30, 2010 and 2009, there was no material impact from pro forma adjustments related to the 2009 acquisitions on net sales or net earnings attributable to RR Donnelley common shareholders.
3. Inventories
September 30,
2010 |
December 31,
2009 |
|||||||
Raw materials and manufacturing supplies |
$ | 249.5 | $ | 229.9 | ||||
Work in process |
191.9 | 190.1 | ||||||
Finished goods |
211.3 | 219.6 | ||||||
LIFO reserve |
(86.8 | ) | (77.8 | ) | ||||
Total |
$ | 565.9 | $ | 561.8 | ||||
4. Property, Plant and Equipment
September 30,
2010 |
December 31,
2009 |
|||||||
Land |
$ | 93.0 | $ | 89.6 | ||||
Buildings |
1,140.4 | 1,140.0 | ||||||
Machinery and equipment |
6,045.2 | 6,001.7 | ||||||
7,278.6 | 7,231.3 | |||||||
Less: Accumulated depreciation |
(5,206.7 | ) | (4,959.9 | ) | ||||
Total |
$ | 2,071.9 | $ | 2,271.4 | ||||
During the three and nine months ended September 30, 2010, depreciation expense was $102.1 million and $318.6 million, respectively. During the three and nine months ended September 30, 2009, depreciation expense was $115.1 million and $348.1 million, respectively.
Assets Held for Sale
Primarily as a result of recent restructuring actions, certain facilities and equipment are considered held for sale. The net book value of assets held for sale was $7.0 million at September 30, 2010 and $8.7 million at December 31, 2009. These assets were included in other current assets in the Condensed Consolidated Balance Sheets at September 30, 2010 and December 31, 2009 at the lower of their historical net book value or their estimated fair value, less estimated costs to sell.
7
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (RR DONNELLEY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)
(Tabular amounts in millions, except per share data unless otherwise indicated)
5. Goodwill and Other Intangible Assets
Goodwill at September 30, 2010 and December 31, 2009 was as follows:
Goodwill |
U.S. Print and
Related Services |
International | Total | |||||||||
Net book value at December 31, 2009 |
||||||||||||
Goodwill(1) |
$ | 2,977.6 | $ | 1,216.2 | $ | 4,193.8 | ||||||
Accumulated impairment losses(1) |
(878.2 | ) | (982.3 | ) | (1,860.5 | ) | ||||||
Total |
2,099.4 | 233.9 | 2,333.3 | |||||||||
Acquisitions |
| | | |||||||||
Foreign exchange and other adjustments |
(1.8 | ) | (1.8 | ) | (3.6 | ) | ||||||
Net book value at September 30, 2010 |
||||||||||||
Goodwill(1) |
2,975.8 | 1,209.6 | 4,185.4 | |||||||||
Accumulated impairment losses(1) |
(878.2 | ) | (977.5 | ) | (1,855.7 | ) | ||||||
Total |
$ | 2,097.6 | $ | 232.1 | $ | 2,329.7 | ||||||
(1) | Includes foreign exchange. Certain prior year amounts have been reclassified to reflect the Companys current presentation of goodwill. |
The components of other intangible assets at September 30, 2010 and December 31, 2009 were as follows:
Other Intangible Assets |
September 30, 2010 | December 31, 2009 | ||||||||||||||||||||||
Gross
Carrying Amount |
Accumulated
Amortization |
Net Book
Value |
Gross
Carrying Amount |
Accumulated
Amortization |
Net Book
Value |
|||||||||||||||||||
Trademarks, licenses and agreements |
$ | 25.6 | $ | (22.8 | ) | $ | 2.8 | $ | 25.6 | $ | (22.3 | ) | $ | 3.3 | ||||||||||
Patents |
98.3 | (80.5 | ) | 17.8 | 98.3 | (71.4 | ) | 26.9 | ||||||||||||||||
Customer relationship intangibles |
1,089.6 | (500.5 | ) | 589.1 | 1,125.0 | (440.1 | ) | 684.9 | ||||||||||||||||
Trade names |
21.3 | (7.5 | ) | 13.8 | 21.4 | (7.2 | ) | 14.2 | ||||||||||||||||
Total amortizable purchased intangible assets |
1,234.8 | (611.3 | ) | 623.5 | 1,270.3 | (541.0 | ) | 729.3 | ||||||||||||||||
Indefinite-lived trade names |
18.1 | | 18.1 | 18.1 | | 18.1 | ||||||||||||||||||
Total purchased intangible assets |
$ | 1,252.9 | $ | (611.3 | ) | $ | 641.6 | $ | 1,288.4 | $ | (541.0 | ) | $ | 747.4 | ||||||||||
In the third quarter of 2010, the Company recorded a non-cash charge of $26.9 million to reflect impairment of acquired customer relationship intangible assets in the Global Turnkey Solutions reporting unit. See Note 6 for further discussion regarding this impairment charge.
8
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (RR DONNELLEY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)
(Tabular amounts in millions, except per share data unless otherwise indicated)
For the nine months ended September 30, 2010, there were no additions to other intangible assets. Amortization expense for other intangible assets was $24.5 million and $25.7 million for the three months ended September 30, 2010 and 2009, respectively, and $73.5 million and $74.4 million for the nine months ended September 30, 2010 and 2009, respectively. The estimated annual amortization expense related to intangible assets as of September 30, 2010 is as follows.
Amount | ||||
For the year ending December 31, |
||||
2010 |
$ | 97.7 | ||
2011 |
95.8 | |||
2012 |
83.2 | |||
2013 |
80.9 | |||
2014 |
78.5 | |||
2015 and thereafter |
260.9 | |||
Total |
$ | 697.0 | ||
6. Restructuring and Impairment Charges
Restructuring and Impairment Costs Charged to Results of Operations
For the three months ended September 30, 2010 and 2009, the Company recorded the following net restructuring and impairment charges:
Three Months Ended September 30, 2010 | Three Months Ended September 30, 2009 | |||||||||||||||||||||||||||||||
Employee
Terminations |
Other
Charges |
Impairment | Total |
Employee
Terminations |
Other
Charges |
Impairment | Total | |||||||||||||||||||||||||
U.S. Print and Related Services |
$ | 0.7 | $ | 16.9 | $ | 0.9 | $ | 18.5 | $ | 2.0 | $ | 2.3 | $ | (0.7 | ) | $ | 3.6 | |||||||||||||||
International |
2.6 | (0.6 | ) | 27.6 | 29.6 | 5.6 | 119.0 | 2.7 | 127.3 | |||||||||||||||||||||||
Corporate |
(0.1 | ) | 0.7 | | 0.6 | | 0.8 | | 0.8 | |||||||||||||||||||||||
Total |
$ | 3.2 | $ | 17.0 | $ | 28.5 | $ | 48.7 | $ | 7.6 | $ | 122.1 | $ | 2.0 | $ | 131.7 | ||||||||||||||||
For the nine months ended September 30, 2010 and 2009, the Company recorded the following net restructuring and impairment charges:
Nine Months Ended September 30, 2010 | Nine Months Ended September 30, 2009 | |||||||||||||||||||||||||||||||
Employee
Terminations |
Other
Charges |
Impairment | Total |
Employee
Terminations |
Other
Charges |
Impairment | Total | |||||||||||||||||||||||||
U.S. Print and Related Services |
$ | 4.8 | $ | 20.2 | $ | 2.9 | $ | 27.9 | $ | 33.4 | $ | 16.3 | $ | 12.6 | $ | 62.3 | ||||||||||||||||
International |
13.9 | 3.8 | 27.9 | 45.6 | 35.2 | 121.0 | 10.3 | 166.5 | ||||||||||||||||||||||||
Corporate |
(0.2 | ) | 1.4 | 0.2 | 1.4 | 2.8 | 2.5 | | 5.3 | |||||||||||||||||||||||
Total |
$ | 18.5 | $ | 25.4 | $ | 31.0 | $ | 74.9 | $ | 71.4 | $ | 139.8 | $ | 22.9 | $ | 234.1 | ||||||||||||||||
For the three and nine months ended September 30, 2010, the Company recorded a non-cash charge of $26.9 million for the impairment of acquired customer relationship intangible assets in the Global Turnkey Solutions
9
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (RR DONNELLEY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)
(Tabular amounts in millions, except per share data unless otherwise indicated)
reporting unit within the International segment. The impairment of these intangible assets primarily resulted from the termination of a customer contract. After recording the impairment charge, remaining customer relationship intangible assets in the Global Turnkey Solutions reporting unit were $46.6 million as of September 30, 2010. In addition, for the three and nine months ended September 30, 2010, the Company recorded net restructuring charges of $3.2 million and $18.5 million, respectively, for employee termination costs for 1,137 employees, of whom 1,109 were terminated as of September 30, 2010. These terminations were associated with actions resulting from the reorganization of certain operations, including those within the business process outsourcing and Latin America reporting units. In addition, continuing charges resulting from the closing of two Global Turnkey Solutions manufacturing facilities in 2009 within the International segment were recorded in 2010. These actions also included the reorganization of certain operations within the magazine, catalog and retail insert and variable print reporting units and the closing of one Forms and Labels manufacturing facility within the U.S. Print and Related Services segment. Additionally, the Company incurred other restructuring charges of $17.0 million and $25.4 million, respectively, for the three and nine months ended September 30, 2010. Of this amount, $13.6 million related to multi-employer pension plan partial withdrawal charges primarily attributable to two closed manufacturing facilities within the U.S. Print and Related Services segment. The remaining charges included lease termination and other facility closure costs partially offset by the gain on the sale of a previously closed facility in the International segment. For the three and nine months ended September 30, 2010, the Company also recorded $1.6 million and $4.1 million, respectively, of impairment charges primarily for machinery and equipment and leasehold improvements associated with the facility closings. The fair values of the machinery and equipment and leasehold improvements were determined to be Level 3 under the fair value hierarchy and were estimated based on discussions with machinery and equipment brokers, dealer quotes, and internal expertise related to the equipment and current marketplace conditions. In addition, the impairment of the acquired customer relationship intangible assets was determined using Level 3 inputs and was estimated based on cash flow analysis and managements assumptions related to the future revenues and profitability of certain customers.
For the three and nine months ended September 30, 2009, the Company recorded net restructuring and impairment charges, discounted for future cash payments, of $117.3 million for the termination of a significant long-term customer contract in the business process outsourcing reporting unit within the International segment, of which $116.4 million, $0.8 million and $0.1 million are reflected in other charges, impairment and employee terminations, respectively. In addition, for the three and nine months ended September 30, 2009, the Company recorded net restructuring charges of $7.5 million and $71.3 million, respectively, for employee termination costs for 3,635 employees, all of whom were terminated as of September 30, 2010, associated with actions resulting from the reorganization of certain operations. These actions included the closings of two magazine, catalog and retail insert manufacturing facilities, two book manufacturing facilities and one digital solutions facility within the U.S. Print and Related Services segment, as well as the closing of one Global Turnkey Solutions manufacturing facility, one business process outsourcing facility, one Latin America manufacturing facility and one European manufacturing facility within the International segment. Additionally, the Company incurred other restructuring charges of $5.7 million and $23.4 million for the three and nine months ended September 30, 2009, respectively, including lease termination and other facility closure costs. For the three and nine months ended September 30, 2009, the Company also recorded $1.2 million and $22.1 million, respectively, of impairment charges primarily for machinery and equipment associated with the facility closings.
10
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (RR DONNELLEY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)
(Tabular amounts in millions, except per share data unless otherwise indicated)
Restructuring Reserve
Activity impacting the Companys restructuring reserve for the nine months ended September 30, 2010 was as follows:
December 31,
2009 |
Restructuring
Costs Charged to Results of Operations |
Foreign
Exchange and Other |
Cash
Paid |
September 30,
2010 |
||||||||||||||||
Employee terminations |
$ | 20.4 | $ | 18.5 | $ | (0.2 | ) | $ | (27.8 | ) | $ | 10.9 | ||||||||
Other |
120.5 | 25.4 | (2.3 | ) | (70.9 | ) | 72.7 | |||||||||||||
Total |
$ | 140.9 | $ | 43.9 | $ | (2.5 | ) | $ | (98.7 | ) | $ | 83.6 | ||||||||
$64.5 million of the total restructuring reserve was current and included in accrued liabilities at September 30, 2010, while the long-term portion of $19.1 million, primarily related to multi-employer pension plan partial withdrawal charges and lease termination costs, was included in other noncurrent liabilities at September 30, 2010.
The Company anticipates that payments associated with these employee terminations will be substantially completed by September of 2011.
The restructuring liabilities classified as other consist of the estimated remaining payments related to the termination of a significant long-term customer contract in 2009, multi-employer pension plan partial withdrawal charges, lease termination costs and other facility closing costs. The Company paid $57.5 million in January 2010 and expects to pay approximately $39.6 million, subject to changes in foreign exchange rates, in December 2010 or January 2011, related to the termination of the significant long-term customer contract. The Company transferred funds to restricted cash for this payment. Payments on certain of these lease obligations are scheduled to continue until 2017. Market conditions and the Companys ability to sublease these properties could affect the ultimate charge related to these lease obligations. Any potential recoveries or additional charges could affect amounts reported in the Consolidated Financial Statements of future periods.
7. Employee Benefits
The components of the estimated pension and postretirement benefits expense for the three and nine months ended September 30, 2010 and 2009 were as follows:
Three Months Ended
September 30, |
Nine Months Ended
September 30, |
|||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Pension expense |
||||||||||||||||
Service cost |
$ | 20.1 | $ | 17.5 | $ | 60.3 | $ | 52.4 | ||||||||
Interest cost |
46.2 | 44.5 | 138.1 | 132.9 | ||||||||||||
Expected return on assets |
(64.8 | ) | (64.2 | ) | (193.7 | ) | (191.7 | ) | ||||||||
Amortization, net |
6.5 | | 19.2 | 3.6 | ||||||||||||
Net pension expense (benefit) |
$ | 8.0 | $ | (2.2 | ) | $ | 23.9 | $ | (2.8 | ) | ||||||
Postretirement benefits expense |
||||||||||||||||
Service cost |
$ | 3.1 | $ | 2.6 | $ | 9.2 | $ | 7.7 | ||||||||
Interest cost |
7.1 | 7.7 | 21.3 | 23.1 | ||||||||||||
Expected return on assets |
(3.8 | ) | (3.9 | ) | (11.6 | ) | (11.7 | ) | ||||||||
Amortization, net |
(2.5 | ) | (4.3 | ) | (7.2 | ) | (12.9 | ) | ||||||||
Net postretirement benefits expense |
$ | 3.9 | $ | 2.1 | $ | 11.7 | $ | 6.2 | ||||||||
11
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (RR DONNELLEY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)
(Tabular amounts in millions, except per share data unless otherwise indicated)
8. Share-Based Compensation
The Company recognizes compensation expense, based on estimated grant date fair values, for all share-based awards issued to employees and directors, including stock options and restricted stock units. The total compensation expense related to all share-based compensation plans was $6.4 million and $22.4 million for the three and nine months ended September 30, 2010, respectively. The total compensation expense related to all share-based compensation plans was $5.5 million and $19.3 million for the three and nine months ended September 30, 2009, respectively.
Stock Options
The Company granted 540,000 and 1,520,468 stock options during the nine months ended September 30, 2010 and 2009, respectively. The fair value of each stock option award is estimated on the date of grant using the Black-Scholes-Merton option pricing model. The fair value of these stock options was determined using the following assumptions:
2010 | 2009 | |||||||
Expected volatility |
35.61 | % | 29.67 | % | ||||
Risk-free interest rate |
2.75 | % | 2.27 | % | ||||
Expected life (years) |
6.25 | 6.25 | ||||||
Expected dividend yield |
4.19 | % | 3.63 | % |
The grant date fair value of these options was $4.81 and $1.47 per stock option for the nine months ended September 30, 2010 and 2009, respectively.
The following table is a summary of the Companys stock option activity:
Shares
Under Option (thousands) |
Weighted
Average Exercise Price |
Weighted
Average Remaining Contractual Term (years) |
Aggregate
Intrinsic Value (millions) |
|||||||||||||
Outstanding at December 31, 2009 |
4,168 | $ | 20.17 | 6.4 | $ | 26.6 | ||||||||||
Granted |
540 | 19.89 | 9.4 | |||||||||||||
Exercised |
(198 | ) | 10.63 | |||||||||||||
Cancelled/forfeited/expired |
(281 | ) | 21.53 | |||||||||||||
Outstanding at September 30, 2010 |
4,229 | 20.15 | 6.5 | 14.5 | ||||||||||||
Exercisable at September 30, 2010 |
495 | $ | 8.26 | 6.2 | $ | 4.3 |
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Companys closing stock price on September 30, 2010 and December 31, 2009, respectively, and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on September 30, 2010 and December 31, 2009. This amount will change in future periods based on the fair market value of the Companys stock and the number of options outstanding. There were no options exercised for the three months ended September 30, 2010. Total intrinsic value of options exercised for the nine months ended September 30, 2010 was $2.1 million. Total intrinsic value of options exercised for the three and nine months ended September 30, 2009 was less than $0.1 million in each period.
12
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (RR DONNELLEY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)
(Tabular amounts in millions, except per share data unless otherwise indicated)
Compensation
expense recognized related to stock options for the three and nine months ended September 30, 2010 was $0.8 million and $2.3 million, respectively. Compensation expense recognized related to stock options for the three and nine months ended
September 30, 2009 was $0.6 million and $1.8 million, respectively. As of September 30, 2010, $5.5 million of total unrecognized share-based compensation expense related to stock options is expected to be recognized over a weighted average
Restricted Stock Units
Nonvested restricted stock unit awards as of September 30, 2010 and December 31, 2009 and changes during the nine months ended September 30, 2009 were as follows:
Shares
(thousands) |
Weighted Average Grant
Date Fair Value |
|||||||
Nonvested at December 31, 2009 |
5,480 | $ | 11.08 | |||||
Granted |
1,518 | 17.41 | ||||||
Vested |
(1,226 | ) | 9.77 | |||||
Forfeited |
(30 | ) | 13.24 | |||||
Nonvested at September 30, 2010 |
5,742 | $ | 13.06 | |||||
Compensation expense recognized related to restricted stock units for the three and nine months ended September 30, 2010 was $5.6 million and $20.1 million, respectively. Compensation expense recognized related to restricted stock units for the three and nine months ended September 30, 2009 was $4.9 million and $17.5 million, respectively. As of September 30, 2010, there was $32.5 million of unrecognized share-based compensation expense related to nonvested restricted stock unit awards that are expected to vest over a weighted-average period of 2.5 years.
Other Information
Authorized unissued shares or treasury shares may be used for issuance under the Companys share-based compensation plans. The Company intends to use treasury shares of its common stock to meet the stock requirements of its awards in the future. During the nine months ended September 30, 2010, the Company did not purchase any of its common stock in the open market. As of September 30, 2010, the Company is authorized, under the terms of its share repurchase program approved by the Board of Directors, to repurchase up to 10.0 million shares.
13
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (RR DONNELLEY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)
(Tabular amounts in millions, except per share data unless otherwise indicated)
9. Earnings per Share Attributable to RR Donnelley Common Shareholders
Three Months Ended
September 30, |
Nine Months
Ended
September 30, |
|||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Numerator: |
||||||||||||||||
Net earnings attributable to RR Donnelley common shareholders |
$ | 53.3 | $ | 13.1 | $ | 194.7 | $ | 52.2 | ||||||||
Denominator: |
||||||||||||||||
Weighted average number of common shares outstanding |
206.3 | 205.3 | 206.1 | 205.2 | ||||||||||||
Dilutive options and awards(a) |
3.6 | 3.2 | 3.5 | 2.5 | ||||||||||||
Diluted weighted average number of common shares outstanding |
209.9 | 208.5 | 209.6 | 207.7 | ||||||||||||
Net earnings per share attributable to RR Donnelley common shareholders: |
||||||||||||||||
Basic |
$ | 0.26 | $ | 0.06 | $ | 0.94 | $ | 0.25 | ||||||||
Diluted |
$ | 0.25 | $ | 0.06 | $ | 0.93 | $ | 0.25 | ||||||||
Cash dividends paid per common share |
$ | 0.26 | $ | 0.26 | $ | 0.78 | $ | 0.78 |
(a) | Diluted net earnings per share attributable to RR Donnelley common shareholders takes into consideration the dilution of certain unvested restricted stock awards and unexercised stock option awards. For the three and nine months ended September 30, 2010, restricted stock units of 2.7 million and 2.9 million, respectively, were excluded as their effect would be anti-dilutive. For the three and nine months ended September 30, 2010, options to purchase 3.7 million shares and 3.6 million shares, respectively, were anti-dilutive because the option exercise price exceeded the fair value of the stock. |
For the three and nine months ended September 30, 2009, restricted stock units of 2.8 million and 3.4 million, respectively, were excluded as their effect would be anti-dilutive. For the three and nine months ended September 30, 2009, options to purchase 4.2 million shares and 4.5 million shares, respectively, were anti-dilutive because the option exercise price exceeded the fair value of stock.
10. Comprehensive Income
Three Months Ended
September 30, |
Nine Months Ended
September 30, |
|||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net earnings |
$ | 52.8 | $ | 14.6 | $ | 191.0 | $ | 57.2 | ||||||||
Translation adjustments |
77.4 | 39.4 | 5.4 | 84.1 | ||||||||||||
Adjustment for net periodic pension and postretirement benefit cost, net of tax |
2.6 | (0.4 | ) | 7.5 | (12.5 | ) | ||||||||||
Change in fair value of derivatives, net of tax |
0.1 | 1.8 | 0.3 | 2.2 | ||||||||||||
Comprehensive income |
132.9 | 55.4 | 204.2 | 131.0 | ||||||||||||
Less: comprehensive income (loss) attributable to noncontrolling interests |
(0.2 | ) | 1.4 | (3.5 | ) | 5.0 | ||||||||||
Comprehensive income attributable to RR Donnelley common shareholders |
$ | 133.1 | $ | 54.0 | $ | 207.7 | $ | 126.0 | ||||||||
14
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (RR DONNELLEY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)
(Tabular amounts in millions, except per share data unless otherwise indicated)
For the three and nine months ended September 30, 2010, the changes in other comprehensive income were net of tax provisions of less than $0.1 million and $0.2 million, respectively, related to the change in fair value of derivatives and tax benefits of $1.4 million and $4.3 million, respectively, for the adjustment for net periodic pension and postretirement benefit costs. For the three and nine months ended September 30, 2009, the changes in other comprehensive income were net of tax provisions of $1.1 million and $1.4 million, respectively, related to the change in fair value of derivatives and tax benefits of $1.8 million and $4.4 million, respectively, for the adjustment for net periodic pension and postretirement benefit costs.
11. Equity
The following table summarizes the Companys equity activity for the nine months ended September 30, 2010:
RR Donnelley
Shareholders Equity |
Noncontrolling
Interests |
Total
Equity |
||||||||||
Balance at December 31, 2009 |
$ | 2,134.0 | $ | 27.0 | $ | 2,161.0 | ||||||
Net earnings (loss) |
194.7 | (3.7 | ) | 191.0 | ||||||||
Other comprehensive income |
13.0 | 0.2 | 13.2 | |||||||||
Share-based compensation |
22.4 | | 22.4 | |||||||||
Withholdings for share-based awards and other |
(1.6 | ) | | (1.6 | ) | |||||||
Cash dividends paid |
(160.7 | ) | | (160.7 | ) | |||||||
Distributions to noncontrolling interests |
| (1.6 | ) | (1.6 | ) | |||||||
Balance at September 30, 2010 |
$ | 2,201.8 | $ | 21.9 | $ | 2,223.7 | ||||||
The following table summarizes the Companys equity activity for the nine months ended September 30, 2009:
RR Donnelley
Shareholders Equity |
Noncontrolling
Interests |
Total
Equity |
||||||||||
Balance at December 31, 2008 |
$ | 2,318.5 | $ | 23.4 | $ | 2,341.9 | ||||||
Net earnings |
52.2 | 5.0 | 57.2 | |||||||||
Other comprehensive income |
73.8 | | 73.8 | |||||||||
Share-based compensation |
19.3 | | 19.3 | |||||||||
Withholdings for share-based awards and other |
(1.5 | ) | | (1.5 | ) | |||||||
Cash dividends paid |
(160.1 | ) | | (160.1 | ) | |||||||
Distributions to noncontrolling interests |
| (2.2 | ) | (2.2 | ) | |||||||
Balance at September 30, 2009 |
$ | 2,302.2 | $ | 26.2 | $ | 2,328.4 | ||||||
15
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (RR DONNELLEY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)
(Tabular amounts in millions, except per share data unless otherwise indicated)
12. Segment Information
The Company operates primarily in the printing industry, with related service offerings designed to offer customers complete solutions for communicating their messages to target audiences. The Companys reportable segments reflect the management reporting structure of the organization and the manner in which the chief operating decision-maker regularly assesses information for decision-making purposes, including the allocation of resources. The Companys segments and their products and service offerings are summarized below:
U.S. Print and Related Services
The U.S. Print and Related Services segment includes the Companys U.S. printing operations, managed as one integrated platform, along with related logistics, premedia and print-management services. This segments products and related service offerings include magazines, catalogs, retail inserts, books, directories, financial print, direct mail, forms, labels, office products, statement printing, premedia and logistics services.
International
The International segment includes the Companys non-U.S. printing operations in Asia, Europe, Latin America and Canada. Additionally, this segment includes the Companys business process outsourcing and Global Turnkey Solutions operations. Business process outsourcing provides transactional print and outsourcing services, statement printing, direct mail and print management services through its operations in Europe, Asia and North America. Global Turnkey Solutions provides outsourcing capabilities, including product configuration, customized kitting and order fulfillment for technology, medical device and other companies around the world through its operations in Europe, North America and Asia.
Corporate
Corporate consists of unallocated general and administrative activities and associated expenses including, in part, executive, legal, finance, information technology, human resources, certain facility costs and LIFO inventory provisions. In addition, certain costs and earnings of employee benefit plans, primarily components of net pension and postretirement benefits expense other than service cost, are included in Corporate and not allocated to operating segments.
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 Companys chief operating decision-maker and is most consistent with the presentation of profitability reported within the Condensed Consolidated Financial Statements.
16
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (RR DONNELLEY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)
(Tabular amounts in millions, except per share data unless otherwise indicated)
Total Sales |
Intersegment
Sales |
Net
Sales |
Income (Loss)
from Operations |
Depreciation
and Amortization |
Capital
Expenditures |
|||||||||||||||||||
Three months ended September 30, 2010 |
||||||||||||||||||||||||
U.S. Print and Related Services |
$ | 1,868.8 | $ | (7.4 | ) | $ | 1,861.4 | $ | 168.3 | $ | 94.6 | $ | 24.7 | |||||||||||
International |
638.8 | (12.1 | ) | 626.7 | 23.5 | 28.2 | 19.1 | |||||||||||||||||
Total operating segments |
2,507.6 | (19.5 | ) | 2,488.1 | 191.8 | 122.8 | 43.8 | |||||||||||||||||
Corporate |
| | | (43.1 | ) | 7.5 | 6.6 | |||||||||||||||||
Total operations |
$ | 2,507.6 | $ | (19.5 | ) | $ | 2,488.1 | $ | 148.7 | $ | 130.3 | $ | 50.4 | |||||||||||
Three months ended September 30, 2009 |
||||||||||||||||||||||||
U.S. Print and Related Services |
$ | 1,829.8 | $ | (5.0 | ) | $ | 1,824.8 | $ | 164.9 | $ | 106.4 | $ | 27.8 | |||||||||||
International |
651.0 | (12.7 | ) | 638.3 | (72.3 | ) | 30.6 | 8.7 | ||||||||||||||||
Total operating segments |
2,480.8 | (17.7 | ) | 2,463.1 | 92.6 | 137.0 | 36.5 | |||||||||||||||||
Corporate |
| | | 0.8 | 8.0 | 4.3 | ||||||||||||||||||
Total operations |
$ | 2,480.8 | $ | (17.7 | ) | $ | 2,463.1 | $ | 93.4 | $ | 145.0 | $ | 40.8 | |||||||||||
Total Sales |
Intersegment
Sales |
Net
Sales |
Income (Loss)
from Operations |
Assets of
Operations |
Depreciation
and Amortization |
Capital
Expenditures |
||||||||||||||||||||||
Nine months ended September 30, 2010 |
||||||||||||||||||||||||||||
U.S. Print and Related Services |
$ | 5,529.4 | $ | (21.9 | ) | $ | 5,507.5 | $ | 511.6 | $ | 6,149.8 | $ | 294.3 | $ | 69.3 | |||||||||||||
International |
1,840.9 | (36.6 | ) | 1,804.3 | 99.9 | 2,231.2 | 86.0 | 49.2 | ||||||||||||||||||||
Total operating segments |
7,370.3 | (58.5 | ) | 7,311.8 | 611.5 | 8,381.0 | 380.3 | 118.5 | ||||||||||||||||||||
Corporate |
| | | (141.7 | ) | 443.8 | 23.4 | 26.4 | ||||||||||||||||||||
Total operations |
$ | 7,370.3 | $ | (58.5 | ) | $ | 7,311.8 | $ | 469.8 | $ | 8,824.8 | $ | 403.7 | $ | 144.9 | |||||||||||||
Nine months ended September 30, 2009 |
||||||||||||||||||||||||||||
U.S. Print and Related Services |
$ | 5,533.6 | $ | (20.2 | ) | $ | 5,513.4 | $ | 417.8 | $ | 6,573.4 | $ | 318.8 | $ | 82.5 | |||||||||||||
International |
1,804.2 | (43.3 | ) | 1,760.9 | (32.9 | ) | 2,198.5 | 91.6 | 37.7 | |||||||||||||||||||
Total operating segments |
7,337.8 | (63.5 | ) | 7,274.3 | 384.9 | 8,771.9 | 410.4 | 120.2 | ||||||||||||||||||||
Corporate |
| | | (69.1 | ) | 148.9 | 26.3 | 12.7 | ||||||||||||||||||||
Total operations |
$ | 7,337.8 | $ | (63.5 | ) | $ | 7,274.3 | $ | 315.8 | $ | 8,920.8 | $ | 436.7 | $ | 132.9 | |||||||||||||
13. Commitments and Contingencies
The Company is subject to laws and regulations relating to the protection of the environment. The Company provides for expenses associated with environmental remediation obligations when such amounts are probable and can be reasonably estimated. Such accruals are adjusted as new information develops or circumstances change and are not discounted. The Company has been designated as a potentially responsible party in thirteen federal and state Superfund sites. In addition to the Superfund sites, the Company may also have the obligation to
17
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (RR DONNELLEY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)
(Tabular amounts in millions, except per share data unless otherwise indicated)
remediate six other previously owned facilities and three other currently owned facilities. At the Superfund sites, the Comprehensive Environmental Response, Compensation and Liability Act provides that the Companys 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 Companys understanding of the financial strength of other potentially responsible parties at the Superfund sites and of other liable parties at the previously owned facilities has been considered, where appropriate, in the determination of the Companys 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 Superfund sites and the previously and currently owned facilities. While 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, 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 adverse effect on the Companys consolidated annual results of operations, financial position or cash flows.
From time to time, the Companys 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 adverse effect on the Companys consolidated annual results of operations,
14. Debt
The Companys debt consists of the following:
September 30,
2010 |
December 31,
2009 |
|||||||
4.95% senior notes due May 15, 2010 |
$ | | $ | 325.7 | ||||
5.625% senior notes due January 15, 2012 |
158.5 | 158.5 | ||||||
4.95% senior notes due April 1, 2014 |
599.2 | 599.0 | ||||||
5.50% senior notes due May 15, 2015 |
499.6 | 499.6 | ||||||
8.60% senior notes due August 15, 2016 |
345.9 | 345.3 | ||||||
6.125% senior notes due January 15, 2017 |
621.9 | 621.5 | ||||||
11.25% debentures due February 1, 2019 |
400.0 | 400.0 | ||||||
7.625% senior notes due June 15, 2020 |
400.0 | | ||||||
8.875% debentures due April 15, 2021 |
80.9 | 80.9 | ||||||
6.625% debentures due April 15, 2029 |
199.3 | 199.3 | ||||||
8.820% debentures due April 15, 2031 |
68.9 | 68.9 | ||||||
Other, including capital leases |
41.2 | 23.7 | ||||||
Total debt |
3,415.4 | 3,322.4 | ||||||
Less: current portion |
(8.0 | ) | (339.9 | ) | ||||
Long-term debt |
$ | 3,407.4 | $ | 2,982.5 | ||||
The fair values of the senior notes and debentures, which were based upon the 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 Companys debt was greater than its book value by approximately $303.6 million and $177.9 million at September 30, 2010 and December 31, 2009, respectively.
18
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (RR DONNELLEY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)
(Tabular amounts in millions, except per share data unless otherwise indicated)
Interest income was $5.5 million and $7.4 million for the nine months ended September 30, 2010 and 2009, respectively.
On June 21, 2010, the Company issued $400.0 million of 7.625% senior notes due June 15, 2020. Interest on the notes is payable semi-annually on June 15 and December 15 of each year, commencing on December 15, 2010. The net proceeds from the offering were used to repay borrowings under the revolving credit facility and for general corporate purposes.
15. Derivatives
All derivatives are recorded as other current or noncurrent assets or other current or noncurrent liabilities on the Condensed Consolidated Balance Sheets at their respective fair values with unrealized gains and losses recorded in other comprehensive income (loss), net of applicable income taxes, or in the Condensed Consolidated Statements of Operations, depending on the purpose for which the derivative is held. For derivatives designated and that qualify as fair value hedges, the gain or loss on the derivative, as well as the offsetting gain or loss on the hedged item attributable to the hedged risk, are recognized in the Condensed Consolidated Statements of Operations. Changes in the fair value of derivatives that do not meet the criteria for designation as a hedge at inception, or fail to meet the criteria thereafter, are recognized currently in the Condensed Consolidated Statements of Operations. At the inception of a hedge transaction, the Company formally documents the hedge relationship and the risk management objective for undertaking the hedge. In addition, the Company assesses both at inception of the hedge and on an ongoing basis, whether the derivative in the hedging transaction has been highly effective in offsetting changes in fair value or cash flows of the hedged item and whether the derivative is expected to continue to be highly effective. The impact of any ineffectiveness is recognized currently in the Condensed Consolidated Statements of Operations.
The Company is exposed to the impact of foreign currency fluctuations in certain countries in which it operates. The exposure to foreign currency movements is limited in most countries because the operating revenues and expenses of its various subsidiaries and business units are substantially in the local currency of the country in which they operate. To the extent borrowings, sales, purchases, revenues, expenses or other transactions are not in the local currency of the operating unit, the Company is exposed to currency risk. Periodically, the Company uses foreign exchange forward contracts and cross-currency swaps to hedge exposures resulting from foreign exchange fluctuations. Accordingly, the implied gains and losses associated with the fair values of foreign currency exchange contracts and cross-currency interest rate swaps are generally offset by gains and losses on underlying payables, receivables and net investments in foreign subsidiaries. The Company does not use derivative financial instruments for trading or speculative purposes.
The Company has entered into foreign exchange forward contracts in order to manage the currency exposure of certain receivables and liabilities. The foreign exchange forward contracts were not designated as hedges, and accordingly, the fair value gains or losses from these foreign currency derivatives are recognized currently in the Condensed Consolidated Statements of Operations, generally offsetting the foreign exchange gains or losses on the exposures being managed. The aggregate notional value of the forward contracts at September 30, 2010 and December 31, 2009 was $74.5 million and $437.0 million, respectively. The fair values of foreign exchange forward contracts were determined to be Level 2 under the fair value hierarchy and are valued using market exchange rates.
On April 9, 2010, the Company entered into interest rate swap agreements to manage interest rate risk exposure. The interest rate swap agreements effectively changed the interest rate on $600 million of its fixed-rate senior notes to floating rate LIBOR plus a basis point spread. These interest rate swaps, with a notional value of
19
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (RR DONNELLEY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)
(Tabular amounts in millions, except per share data unless otherwise indicated)
$600 million, are designated as fair value hedges against changes in the value of the Companys 4.95% senior notes due April 1, 2014, which are attributable to changes in the benchmark interest rate. The Company evaluates the credit value adjustments of the interest rate swap agreements, which take into account the possibility of counterparty and the Companys own default, on at least a quarterly basis. The Companys agreements with each of its counterparties contain a provision where the Company could be declared in default on its derivative obligations if it either defaults or, in certain cases, is capable of being declared in default of any of its indebtedness greater than specified thresholds. These agreements also contain a provision where the Company could be declared in default subsequent to a merger or restructuring type event if the creditworthiness of the resulting entity is materially weaker. The fair values of the interest rate swaps were determined to be Level 2 under the fair value hierarchy and are valued using market interest rates.
At September 30, 2010 and December 31, 2009, the total fair value of the Companys forward contracts and fair value hedges and the accounts in the Condensed Consolidated Balance Sheets in which the fair value amounts are included are shown below:
September 30,
2010 |
December 31,
2009 |
|||||||
Derivatives not designated as hedges |
||||||||
Prepaid expenses and other current assets |
$ | 1.2 | $ | 1.3 | ||||
Accrued liabilities |
0.2 | 6.8 | ||||||
Derivatives designated as fair value hedges |
||||||||
Other noncurrent assets |
$ | 25.5 | $ | |
The pre-tax gains (losses) related to derivatives not designated as hedges recognized in the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2010 and 2009 are shown in the table below:
Classification of Gain (Loss) Recognized
in the Condensed Consolidated Statements of Operations |
Three months ended
September 30, |
Nine months ended
September 30, |
||||||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||||||
Derivatives not designated as hedges |
||||||||||||||||||||
Foreign exchange forward contracts |
|
Selling, general and
|
|
$ | 2.2 | $ | (1.6 | ) | $ | (2.2 | ) | $ | (13.7 | ) | ||||||
Total gain (loss) recognized in the condensed consolidated statements of operations |
$ | 2.2 | $ | (1.6 | ) | $ | (2.2 | ) | $ | (13.7 | ) | |||||||||
20
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (RR DONNELLEY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)
(Tabular amounts in millions, except per share data unless otherwise indicated)
For derivatives designated as fair value hedges, the pre-tax gains (losses) related to the hedged items, attributable to changes in the hedged benchmark interest rate, and the offsetting gain or loss on the related interest rate swaps for the three and nine months ended September 30, 2010 and 2009 are shown in the table below:
Classification of Gain (Loss) Recognized
in the Condensed Consolidated Statements of Operations |
Three months ended
September 30, |
Nine months ended
September 30, |
||||||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||||||
Fair Value Hedges |
||||||||||||||||||||
Interest rate swaps |
|
Investment and other income
(expense) |
|
$ | 11.3 | $ | | $ | 25.5 | $ | | |||||||||
Hedged items |
|
Investment and other income
(expense) |
|
(10.7 | ) | | (23.7 | ) | | |||||||||||
Total gain (loss) recognized as ineffectiveness in the condensed consolidated statements of operations |
|
Investment and other income
(expense) |
|
$ | 0.6 | $ | | $ | 1.8 | $ | | |||||||||
The Company also recognized a net reduction to interest expense of $2.1 million and $4.3 million for the three and nine months ended September 30, 2010, respectively, related to the Companys fair value hedges, which includes interest accruals on the derivatives and amortization of the basis in the hedged items.
The pre-tax gains (losses) related to derivatives designated as cash flow hedges for the three months ended September 30, 2010 and 2009 are shown in the table below:
Gain (Loss)
Recognized in OCI (Effective Portion) |
Classification of Loss
Reclassified from AOCI into Income (Effective Portion) |
Loss Reclassified from
AOCI into Income (Effective Portion) |
Classification of Gain (Loss)
Recognized in Income (Ineffective Portion) |
Gain (Loss)
Recognized in Income (Ineffective Portion) |
||||||||||||||||||||||||||||
2010 | 2009 | 2010 | 2009 | 2010 | 2009 | |||||||||||||||||||||||||||
Cash Flow Hedges |
||||||||||||||||||||||||||||||||
Interest rate lock |
$ | | $ | | Interest expensenet | $ | (0.1 | ) | $ | (0.1 | ) | Interest expensenet | $ | | $ | | ||||||||||||||||
Interest rate lock |
| |
|
Investment and other
expense |
|
| (2.7 | ) |
|
Investment and other
expense |
|
| | |||||||||||||||||||
Total loss |
$ | | $ | | $ | (0.1 | ) | $ | (2.8 | ) | $ | | $ | | ||||||||||||||||||
The pre-tax gains (losses) related to derivatives designated as cash flow hedges for the nine months ended September 30, 2010 and 2009 are shown in the table below:
Gain (Loss)
Recognized in OCI (Effective Portion) |
Classification of Loss
Reclassified from AOCI into Income (Effective Portion) |
Loss Reclassified from
AOCI into Income (Effective Portion) |
Classification of Gain (Loss)
Recognized in Income (Ineffective Portion) |
Gain (Loss)
Recognized in Income (Ineffective Portion) |
||||||||||||||||||||||||||||
2010 | 2009 | 2010 | 2009 | 2010 | 2009 | |||||||||||||||||||||||||||
Cash Flow Hedges |
||||||||||||||||||||||||||||||||
Interest rate lock |
$ | | $ | | Interest expensenet | $ | (0.4 | ) | $ | (0.9 | ) | Interest expensenet | $ | | $ | | ||||||||||||||||
Interest rate lock |
| |
|
Investment and other
expense |
|
| (2.7 | ) |
|
Investment and other
expense |
|
| | |||||||||||||||||||
Total loss |
$ | | $ | | $ | (0.4 | ) | $ | (3.6 | ) | $ | | $ | | ||||||||||||||||||
21
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (RR DONNELLEY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)
(Tabular amounts in millions, except per share data unless otherwise indicated)
Terminated Derivatives
In May 2005, the Company terminated its interest rate lock agreements which were used to hedge against fluctuations in interest rates. This termination resulted in a loss of $12.9 million recorded in accumulated other comprehensive loss, which was being recognized in interest expense over the term of the hedged forecasted interest payments. During the third quarter of 2009, the Company repurchased $174.2 million of the 4.95% senior notes due May 15, 2010 which were hedged as part of the interest rate lock agreements. A pre-tax loss of $2.7 million was reclassified from accumulated other comprehensive loss as a result of the change in expected forecasted interest payments for the senior notes due May 15, 2010. At September 30, 2010, a balance of $2.3 million remains in accumulated other comprehensive loss, of which $0.4 million is expected to be reclassified to earnings over the next twelve months.
16. Fair Value Measurement
Certain assets and liabilities are required to be recorded at fair value on a recurring basis. The Companys only assets and liabilities adjusted to fair value on a recurring basis are pension plan assets and other postretirement plan assets, foreign exchange forward contracts and interest rate swaps. See Note 15 for further discussion on the fair value of the Companys foreign exchange forward contracts and interest rate swaps as of September 30, 2010 and December 31, 2009.
In addition to assets and liabilities that are recorded at fair value on a recurring basis, the Company is required to record certain assets and liabilities at fair value on a nonrecurring basis, generally as a result of acquisitions or impairment charges. See Note 2 for further discussion on the fair value of assets and liabilities associated with acquisitions. For the three and nine months ended September 30, 2010, the Company recorded a non-cash charge of $26.9 million for the impairment of acquired customer relationship intangible assets in the Global Turnkey Solutions reporting unit within the International segment. The determination of the impairment was based on Level 3 inputs, including cash flow analysis and managements assumptions related to the future revenues and profitability of certain customers. See Note 6 for further discussion regarding the impairment charge. There have been no other significant impairment charges since December 31, 2009.
See Note 14 for further discussion on the fair value of the Companys debt.
17. Income Taxes
The Companys unrecognized tax benefits at September 30, 2010 and December 31, 2009 were as follows:
Balance at December 31, 2009 |
$ | 176.4 | ||
Additions for tax positions of the current year |
6.0 | |||
Additions for tax positions of the prior years |
5.8 | |||
Reductions for tax positions of prior years |
(4.5 | ) | ||
Settlements during the year |
(8.7 | ) | ||
Foreign exchange and other |
0.5 | |||
Balance at September 30, 2010 |
$ | 175.5 | ||
As of September 30, 2010, it is reasonably possible that the total amounts of unrecognized tax benefits will decrease within twelve months by as much as $81.3 million due to the resolution of audits or expirations of statutes of limitations related to U.S. federal and state tax positions.
22
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (RR DONNELLEY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)
(Tabular amounts in millions, except per share data unless otherwise indicated)
18. New Accounting Pronouncements
In January 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2010-06 Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements (ASU 2010-06), which requires additional disclosures regarding transfers between Levels 1, 2 and 3 of the fair value hierarchy, as well as a more detailed reconciliation of recurring Level 3 measurements. Certain aspects of ASU 2010-06 were effective and adopted by the Company in the first quarter of 2010. However, this adoption did not have and is not expected to have a material impact on the Companys consolidated financial position, annual results of operations or cash flows.
In February 2010, the FASB issued Accounting Standards Update No. 2010-09 Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements (ASU 2010-09), which amends the Subsequent Events Topic by no longer requiring an SEC filer to disclose the date through which subsequent events have been evaluated. ASU 2010-09 was adopted in the first quarter of 2010 and did not have a material impact on the Companys consolidated financial position, annual results of operations or cash flows.
In July 2010, the FASB issued Accounting Standards Update No. 2010-20 Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses (ASU 2010-20), which amends existing disclosure requirements and requires additional quantitative and qualitative disclosures concerning financing receivables, credit risk exposures and the allowance for credit losses. Certain aspects of ASU 2010-20 will be effective for the Company in the fourth quarter of 2010. The adoption of ASU 2010-20 is not expected to have a material impact on the Companys consolidated financial position, annual results of operations or cash flows.
23
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
COMPANY OVERVIEW
R.R. Donnelley & Sons Company (RR Donnelley, the Company, we, us, and our) is a global provider of integrated communications. Founded more than 146 years ago, the Company works collaboratively with more than 60,000 customers worldwide to develop custom communications solutions that reduce costs, enhance return on investment and ensure compliance. Drawing on a range of proprietary and commercially available digital conventional technologies deployed across four continents, the Company employs a suite of leading Internet-based capabilities and other resources to provide premedia, printing, logistics and business process outsourcing products and services to leading clients in virtually every private and public sector.
BUSINESS ACQUISITIONS
On February 23, 2010, the Company announced that it had signed a definitive agreement to acquire Bowne & Co., Inc. (Bowne) for approximately $481 million in cash. Bowne, a provider of shareholder and marketing communication services, is headquartered in New York, New York, and has operations in North America, Latin America, Europe and Asia. The acquisition is expected to close in the fourth quarter of 2010 and is subject to customary closing conditions, including regulatory approval.
On June 18, 2009, the Company acquired Prospectus Central, LLC (Prospectus), an e-delivery company located in Fitzgerald, Georgia. Prospectuss operations are included in the U.S. Print and Related Services segment.
On January 2, 2009, the Company acquired the assets of PROSA, a web printing company located in Santiago, Chile. PROSAs operations, which produce magazines, catalogs, retail inserts and soft-cover textbooks, are included in the International segment.
SEGMENT DESCRIPTION
The Company operates primarily in the commercial print portion of the printing industry, with related product and service offerings designed to offer customers complete solutions for communicating their messages to target audiences. The Companys segments and their product and service offerings are summarized below:
U.S. Print and Related Services
The U.S. Print and Related Services segment includes the Companys U.S. printing operations, managed as one integrated platform, along with related logistics, premedia and print management services. This segments products and related service offerings include magazines, catalogs, retail inserts, books, directories, financial print, direct mail, forms, labels, office products, statement printing, premedia and logistics services.
International
The International segment includes the Companys non-U.S. printing operations in Asia, Europe, Latin America and Canada. Additionally, this segment includes the Companys business process outsourcing and Global Turnkey Solutions operations. Business process outsourcing provides transactional print and outsourcing services, statement printing, direct mail and print management services through its operations in Europe, Asia and North America. Global Turnkey Solutions provides outsourcing capabilities including product configuration, customized kitting and order fulfillment for technology, medical device and other companies around the world through its operations in Europe, North America and Asia.
Corporate
Corporate consists of unallocated general and administrative activities and associated expenses including, in part, executive, legal, finance, information technology, human resources, certain facility costs and LIFO inventory provisions. In addition, certain costs and earnings of employee benefit plans, primarily components of net pension and postretirement benefits expense other than service cost, are included in Corporate and not allocated to operating segments.
24
Executive Summary
Financial Performance: Three Months Ended September 30, 2010
The changes in the Companys income from operations, operating margin, net earnings attributable to RR Donnelley common shareholders and net earnings attributable to RR Donnelley common shareholders per diluted share for the three months ended September 30, 2010, from the three months ended September 30, 2009, were due primarily to the following (in millions, except per share data):
Income from
Operations |
Operating
Margin |
Net
Earnings Attributable to RR Donnelley Common Shareholders |
Net Earnings
Attributable to RR Donnelley Common Shareholders Per Diluted Share |
|||||||||||||
For the three months ended September 30, 2009 |
$ | 93.4 | 3.8 | % | $ | 13.1 | $ | 0.06 | ||||||||
2010 restructuring and impairment charges |
(48.7 | ) | (2.0 | %) | (36.8 | ) | (0.18 | ) | ||||||||
2009 restructuring and impairment charges |
131.7 | 5.3 | % | 90.8 | 0.44 | |||||||||||
Acquisition-related expenses |
(2.5 | ) | (0.1 | %) | (2.4 | ) | (0.01 | ) | ||||||||
2009 losses related to debt extinguishment |
| | 8.0 | 0.04 | ||||||||||||
Operations |
(25.2 | ) | (1.0 | %) | (19.4 | ) | (0.10 | ) | ||||||||
For the three months ended September 30, 2010 |
$ | 148.7 | 6.0 | % | $ | 53.3 | $ | 0.25 | ||||||||
2010 restructuring and impairment charges: included $26.9 million of non-cash charges for the impairment of intangible assets; charges of $3.2 million for employee termination costs, substantially all of which were associated with restructuring actions resulting from the reorganization of certain operations and the exiting of certain business activities; $17.0 million of other restructuring costs; and $1.6 million for impairment of long-lived assets.
2009 restructuring and impairment charges: included charges, discounted for future cash payments, of $117.3 million for the termination of a significant long-term customer contract in the business process outsourcing reporting unit within the International segment, of which $116.4 million, $0.8 million and $0.1 million are reflected as other restructuring charges, impairment and employee terminations, respectively; $7.5 million for other employee termination costs, substantially all of which were associated with restructuring actions resulting from the reorganization of certain operations and the exiting of certain business activities; $5.7 million of other restructuring costs, primarily lease termination costs; and $1.2 million for impairment of long-lived assets.
Acquisition-related expenses: included pre-tax charges of $2.6 million ($2.4 million after-tax) related to legal, accounting and other expenses for the three months ended September 30, 2010 associated with current year acquisitions contemplated. For the three months ended September 30, 2009, these pre-tax charges were $0.1 million for both acquisitions completed or contemplated.
2009 losses related to debt extinguishment: included a $10.3 million pre-tax loss on the repurchases of $466.4 million of the 5.625% senior notes due January 15, 2012 and $174.2 million of the 4.95% senior notes that matured May 15, 2010, as well as the reclassification of a pre-tax loss of $2.7 million from accumulated other comprehensive income to investment and other expense due to the change in the hedged forecasted interest payments resulting from the repurchase of the 4.95% senior notes.
Operations: reflected continued price pressures, higher expense for LIFO inventory provisions as compared to a benefit in 2009, transition fees of $12.2 million received in 2009 from another business process outsourcing contract termination and higher pension and postretirement expenses, partially offset by higher net sales as a result of volume increases in Asia, logistics, financial print and variable print, higher pricing on by-products recoveries and reduced material costs, depreciation and amortization expense and interest expense. See further details in the review of operating results by segment that follows.
25
Financial Performance: Nine Months Ended September 30, 2010
The changes in the Companys income from operations, operating margin, net earnings attributable to RR Donnelley common shareholders and net earnings attributable to RR Donnelley common shareholders per diluted share for the nine months ended September 30, 2010, from the nine months ended September 30, 2009, were due primarily to the following (in millions, except per share data):
Income from
Operations |
Operating
Margin |
Net
Earnings Attributable to RR Donnelley Common Shareholders |
Net Earnings
Attributable to RR Donnelley Common Shareholders Per Diluted Share |
|||||||||||||
For the nine months ended September 30, 2009 |
$ | 315.8 | 4.3 | % | $ | 52.2 | $ | 0.25 | ||||||||
2010 restructuring and impairment charges |
(74.9 | ) | (1.0 | %) | (55.0 | ) | (0.26 | ) | ||||||||
2009 restructuring and impairment charges |
234.1 | 3.2 | % | 176.3 | 0.85 | |||||||||||
Acquisition-related expenses |
(6.4 | ) | (0.1 | %) | (6.4 | ) | (0.03 | ) | ||||||||
2010 Venezuela devaluation |
| | (4.5 | ) | (0.02 | ) | ||||||||||
2009 losses related to debt extinguishment |
| | 8.0 | 0.04 | ||||||||||||
Operations |
1.2 | 0.0 | % | 24.1 | 0.10 | |||||||||||
For the nine months ended September 30, 2010 |
$ | 469.8 | 6.4 | % | $ | 194.7 | $ | 0.93 | ||||||||
2010 restructuring and impairment charges: included $26.9 million of non-cash charges for the impairment of intangible assets; charges of $18.5 million for employee termination costs, substantially all of which were associated with restructuring actions resulting from the reorganization of certain operations and the exiting of certain business activities; $25.4 million of other restructuring costs; and $4.1 million for impairment of long-lived assets.
2009 restructuring and impairment charges: included charges, discounted for future cash payments, of $117.3 million for the termination of a significant long-term customer contract in the business process outsourcing reporting unit within the International segment, of which $116.4 million, $0.8 million and $0.1 million are reflected as other restructuring charges, impairment and employee terminations, respectively; $71.3 million for other employee termination costs, substantially all of which were associated with restructuring actions resulting from the reorganization of certain operations and the exiting of certain business activities; $23.4 million of other restructuring costs, primarily lease termination costs; and $22.1 million for impairment of long-lived assets.
Acquisition-related expenses: included pre-tax charges of $7.9 million ($7.3 million after-tax) related to legal, accounting and other expenses for the nine months ended September 30, 2010 associated with current year acquisitions contemplated. For the nine months ended September 30, 2009, these pre-tax charges were $1.5 million ($0.9 million after-tax) for both acquisitions completed or contemplated.
2010 Venezuela devaluation: currency devaluation in Venezuela resulted in a pre-tax loss of $8.9 million ($8.1 million after-tax) and an increase in loss attributable to noncontrolling interests of $3.6 million.
2009 losses related to debt extinguishment: included a $10.3 million pre-tax loss on the repurchases of $466.4 million of the 5.625% senior notes due January 15, 2012 and $174.2 million of the 4.95% senior notes that matured May 15, 2010, as well as the reclassification of a pre-tax loss of $2.7 million from accumulated other comprehensive income to investment and other expense due to the change in the hedged forecasted interest payments resulting from the repurchase of the 4.95% senior notes.
Operations: reflected higher net sales in logistics, Asia, variable print and financial print, cost savings from restructuring actions and productivity efforts, higher pricing on by-products recoveries and reduced depreciation and amortization, material costs and interest expense, as well as a lower effective tax rate in part due to the release of a valuation allowance on deferred tax assets. These benefits were partially offset by continued price pressures, higher incentive compensation expense, LIFO inventory provisions and pension and postretirement expense. See further details in the review of operating results by segment that follows.
26
Overview
During the third quarter of 2010, the Companys net sales trend continued to benefit from the economic recovery. On a consolidated basis, net sales increased $25.0 million, or 1.0%, from the third quarter of 2009, the second consecutive quarterly increase in net sales. Continued strength in Asia, increases in U.S. print and other logistics services along with growth in mail center and commingling services, increased volume in financial print due to higher capital market transactions and higher volume in variable print due to higher direct mailings from financial services and retail customers increased net sales for the third quarter. These increases were partly offset by continued price pressure and reductions in pass-through paper sales in books and directories and magazines, catalogs and retail inserts.
The Companys income from operations for the three months ended September 30, 2010 increased 59.2% compared to the same period in 2009 primarily due to lower restructuring and impairment charges, higher volume and cost reductions driven by restructuring programs and productivity efforts. These benefits were partially offset by the impact of price pressures, higher expense for LIFO inventory provisions, transition fees of $12.2 million received in 2009 from a business process outsourcing contract termination and higher pension and postretirement expenses.
On February 23, 2010, the Company announced that it had signed a definitive agreement to acquire Bowne for approximately $481 million in cash. Bowne, a provider of shareholder and marketing communication services, is headquartered in New York, New York, and has operations in North America, Latin America, Europe and Asia. The acquisition is expected to close in the fourth quarter of 2010 and is subject to customary closing conditions, including regulatory approval. The Company expects the combination with Bowne to expand and enhance the range of services that the Company offers to its customers, while creating an opportunity to provide its comprehensive line of products to Bownes clients. In addition, this acquisition is expected to be accretive to earnings within twelve months of closing.
OUTLOOK
Competition and Strategy
The print and related services industry, in general, continues to have excess capacity and remains highly competitive. Despite some consolidation in recent years, the printing industry remains highly fragmented. Across the Companys range of products and services, competition is based primarily on price, in addition to quality and the ability to service the special needs of customers. The excess capacity created by declines in industry volumes during the recession has resulted in intensified price competition in most product lines. Management expects that prices for the Companys products and services will continue to be a focal point for customers in coming years. The Company believes it needs to continue to lower its cost structure and differentiate its products and service offerings.
Technological changes, including the electronic distribution of documents and data, online distribution and hosting of media content, advances in digital printing, print-on-demand and Internet technologies, continue to impact the market for the Companys products and services. The Company seeks to leverage the distinctive capabilities of its products and services to improve its customers communications, whether in paper form or through electronic communications. The Companys goal remains to help its customers succeed by delivering effective and targeted communications in the right format to the right audiences at the right time. Management believes that with the Companys competitive strengths, including its broad range of complementary print-related services, strong logistics capabilities, technology leadership, depth of management experience, customer relationships and economies of scale, the Company has developed and can further develop valuable, differentiated solutions for its customers. The Company seeks to leverage its unified platform and strong customer relationships in order to serve a larger share of its customers print and related services needs. The Company also believes that its strong financial condition is important to customers focused on establishing or growing long-term relationships with a stable provider of print and related services. Especially in an uncertain economic environment, the Companys financial strength is seen as a competitive advantage. The Company has made targeted acquisitions that offer customers greater capacity and flexibility and further secure the Companys position as a leader in the industry.
27
As a substitute for print, the impact of digital technologies has been felt mainly in directories, forms and statement printing, as electronic communication and transaction technology has eliminated or devalued the role of many traditional paper forms. Electronic substitution has continued to accelerate in directory printing in part driven by environmental concerns and cost pressures at key customers. Despite rapid growth in the adoption of e-books, the Company does not believe there has been a significant impact on the volume of print. However, management does expect to see lower long-term growth in print book volume as e-book penetration continues to expand. The future impact of technology on the Companys business is difficult to predict and could result in additional expenditures to restructure impacted operations or develop new technologies.
The Company has implemented a number of strategic initiatives to reduce its overall cost structure and improve efficiency, including the restructuring, reorganization and integration of operations and streamlining of administrative and support activities. Future cost reduction initiatives could include the reorganization of operations and the consolidation of facilities. Implementing such initiatives might result in future restructuring or impairment charges, which may be substantial. Management also reviews the Companys operations and management structure on a regular basis to balance appropriate risks and opportunities to maximize efficiencies and to support the Companys long-term strategic growth goals. In addition, the expected completion of the pending acquisition of Bowne will result in additional restructuring charges.
Seasonality
Advertising and consumer spending trends affect demand in several of the end-markets served by the Company. Historically, demand for printing of magazines, catalogs, retail inserts and books is higher in the second half of the year driven by increased advertising pages within magazines, and holiday catalog, retail insert and book volumes. This typical seasonal pattern can be impacted by overall trends in the U.S. and world economy. However, the Company expects the seasonality impact in 2010 and future years to be in line with historical patterns.
Raw Materials
The primary raw materials the Company uses in its print businesses are paper and ink. The Company negotiates with leading suppliers to maximize its purchasing efficiencies, uses a wide variety of paper grades, formats, ink formulations and colors and does not rely on any one supplier. In addition, a substantial amount of paper used by the Company is supplied directly by customers. Variations in the cost and supply of certain paper grades used in the manufacturing process may affect the Companys consolidated financial results. Recent strengthening of economic conditions, combined with paper industry capacity reductions, has caused prices to increase during the first nine months of 2010, and further increases are expected. Generally, customers directly absorb the impact of changing prices on customer-supplied paper. With respect to paper purchased by the Company, the Company has historically passed substantially all increases and decreases through to its customers. Contractual arrangements and industry practice should support the Companys continued ability to pass on any future paper price increases to a large extent, but there is no assurance that market conditions will continue to enable the Company to successfully do so. In addition, management believes that paper supply is consolidating, and there may be shortfalls in the future in supplies necessary to meet the demands of the entire marketplace. Higher paper prices and tight paper supplies may have an impact on customers demand for printed products.
The Company continues to monitor the impact of changes in the price of crude oil and other energy costs, which impacts the Companys ink suppliers, logistics operations and manufacturing costs. Crude oil prices continue to be volatile. The Company believes its logistics operations will continue to be able to pass a substantial portion of any increases in fuel prices directly to its customers in order to offset the impact of related cost increases. The Company generally cannot pass on to customers the impact of higher energy prices on its manufacturing costs. The Company cannot predict sudden changes in energy prices and the impact that possible future energy price increases or decreases might have upon either future operating costs or customer demand and the related impact either will have on the Companys consolidated annual results of operations, financial position or cash flows.
28
Distribution
The Companys products are distributed to end-users through the U.S. or foreign postal services, through retail channels, electronically or by direct shipment to customer facilities. Through its logistics operations, the Company manages the distribution of most customer products printed by the Company in the U.S. and Canada to maximize efficiency and reduce costs for customers.
Postal costs are a significant component of many customers cost structures and postal rate changes can influence the number of pieces that the Companys customers are willing to print and mail. On September 30, 2010, the Postal Regulatory Commission denied the U.S. Postal Services (USPS) request for a rate increase which would have been effective on January 2, 2011, Even though the rate increase was denied, the USPS is expected to request another increase under the Postal Accountability and Enhancement Act (the law that governs postal rate increases) that could be effective in May 2011. For most classes of mail, this increase is likely to be between three and four percent. As a leading provider of print logistics and the largest mailer of standard mail in the U.S., the Company works closely with the U.S. Postal Service and its customers on programs to minimize costs and ensure the viability of postal distribution. While the Company does not directly absorb the impact of higher postal rates on its customers mailings, demand for products distributed through the U.S. or foreign postal services are expected to be impacted by changes in the postal rates. In addition, the Company offers innovative products and services to minimize customers postal costs and has invested in equipment and technology to meet customer demand for these services.
Risks Related to Market Conditions
The Company performs its annual goodwill impairment tests as of October 31, or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. As part of its interim review for indicators of impairment, management analyzed potential changes in value of individual reporting units based on each reporting units operating results for the nine months ended September 30, 2010 compared to expected results as of October 31, 2009. In addition, management considered how other key assumptions, including discount rates used in last years impairment analysis, could be impacted by recent market and economic events. Based on this interim assessment, management concluded that as of September 30, 2010, no events or changes in circumstances indicated that it was more likely than not that the fair value for any reporting unit had declined below its carrying value. A significant change in global economic conditions could result in changes to expectations of future financial results and key valuation assumptions. These changes could result in changes to managements estimates of the fair value of the Companys reporting units and may result in material impairments when the Companys completes its annual impairment test as of October 31, 2010.
The funded status of the Companys pension plans is dependent upon many factors, including returns on invested assets and the level of certain market interest rates. Declines in the market value of securities held by the plans and decreases in discount rates could reduce their funded status and materially affect the level of pension expense and required contributions in 2011 and future years. In addition, the Companys required funding may be affected by changes in pension regulations. The Company expects to make cash contributions of approximately $31.3 million to its pension plans and approximately $6.9 million to its postretirement plans in 2010. The Company currently expects the amount of required pension plan contributions in 2011 to be at or below the level of contributions in 2010. However, in future years, required contributions to the pension plans are expected to increase significantly.
Financial Review
In the financial review that follows, the Company discusses its consolidated results of operations, financial position and cash flows and certain other information. This discussion should be read in conjunction with the Companys condensed consolidated financial statements and related notes.
29
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2010 AS
COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2009
The following table shows the results of operations for the three months ended September 30, 2010 and 2009:
Three Months Ended September 30, | ||||||||||||||||
2010 | 2009 | $ Change | % Change | |||||||||||||
(in millions) | ||||||||||||||||
Net sales |
$ | 2,488.1 | $ | 2,463.1 | $ | 25.0 | 1.0 | % | ||||||||
Cost of sales (exclusive of depreciation and amortization shown below) |
1,898.7 | 1,841.4 | 57.3 | 3.1 | % | |||||||||||
Selling, general and administrative expenses (exclusive of depreciation and amortization shown below) |
261.7 | 251.6 | 10.1 | 4.0 | % | |||||||||||
Restructuring and impairment charges |
48.7 | 131.7 | (83.0 | ) | (63.0 | %) | ||||||||||
Depreciation and amortization |
130.3 | 145.0 | (14.7 | ) | (10.1 | %) | ||||||||||
Total operating expenses |
2,339.4 | 2,369.7 | (30.3 | ) | (1.3 | %) | ||||||||||
Income from operations |
$ | 148.7 | $ | 93.4 | $ | 55.3 | 59.2 | % |
Consolidated
Net sales for the three months ended September 30, 2010 increased $25.0 million, or 1.0%, to $2,488.1 million versus the same period in the prior year. Changes in foreign exchange rates decreased net sales by $20.0 million, or 0.8%. The increase in net sales was due to increased volume in Asia, higher logistics services volumes, increased volume in financial print due to more capital market transactions and higher volume in variable print due to higher direct mailings from financial services and retail customers. These increases were partially offset by decreases in net sales of books and directories and magazines, catalogs and retail inserts and primarily attributable to continued price pressure and reductions in pass-through paper sales, as well as lower volume in office products.
Cost of sales increased $57.3 million to $1,898.7 million for the three months ended September 30, 2010 versus the same period in the prior year primarily due to higher LIFO inventory provisions and volume increases, partially offset by higher pricing on by-products recoveries and lower material costs. Cost of sales as a percentage of net sales increased from 74.8% to 76.3%, reflecting the impact of price pressures on net sales and higher LIFO inventory provisions, offset in part by the benefits of continued productivity efforts, the impact of lower pass-through paper sales and higher pricing on by-products sales.
Selling, general and administrative expenses increased $10.1 million to $261.7 million for the three months ended September 30, 2010 versus the same period in the prior year due to a higher provision for bad debt expense, higher benefits expense and higher acquisition-related expenses, partially offset by restructuring-driven cost reductions. Selling, general and administrative expenses as a percentage of net sales increased from 10.2% to 10.5%, due to the higher provision for bad debt expense and higher acquisition-related expenses, partially offset by restructuring-driven cost reductions.
For the three months ended September 30, 2010, the Company recorded a net restructuring and impairment provision of $48.7 million compared to $131.7 million in the same period of 2009. In 2010, these charges included a non-cash pre-tax charge of $26.9 million for the impairment of acquired customer relationship intangible assets in the Global Turnkey Solutions reporting unit within the International segment. The impairment of these intangible assets primarily resulted from the termination of a customer contract. Additionally, for the three months ended September 30, 2010, the Company recorded $3.2 million for workforce reductions of 227 employees (of whom 212 were terminated as of September 30, 2010) associated with actions resulting from the reorganization of certain operations. These charges primarily related to the reorganization of
30
certain operations within the business process outsourcing and Latin America reporting units within the International segment and the reorganization of certain operations within the magazine, catalog and retail insert reporting unit within the U.S. Print and Related Services segment. In addition, the Company recorded $1.6 million of impairment charges of other long-lived assets and $17.0 million of other restructuring costs. The other restructuring costs included $13.6 million related to multi-employer pension plan partial withdrawal charges primarily attributable to two closed manufacturing facilities within the U.S. Print and Related Services segment, as well as lease termination and other facility closure costs. These costs were partially offset by the gain on the sale of a previously closed facility in the International segment. In 2009, these charges included $117.3 million, discounted for future cash payments, for the termination of a long-term significant customer contract in the business process outsourcing unit within the International segment, which allowed the Company to withdraw from certain unprofitable operations in this area. In addition, these charges included $7.5 million for workforce reductions of 344 employees (all of whom were terminated as of September 30, 2010) associated with actions resulting from the reorganization of certain operations. These actions also included the closing of one Latin America manufacturing facility within the International segment. Additionally, the Company recorded $1.2 million of impairment charges of other long-lived assets and $5.7 million of other restructuring costs, including lease termination and other facility closure costs. Management believes that certain restructuring activities will continue throughout the remainder of 2010, as the Company continues to streamline its manufacturing, sales and administrative operations.
Depreciation and amortization decreased $14.7 million to $130.3 million for the three months ended September 30, 2010 compared to the same period in 2009, primarily due to a declining trend in capital expenditures over recent years. Depreciation and amortization included $24.5 million and $25.7 million of amortization of purchased intangibles related to customer relationships, patents, trade names, licenses and non-compete agreements for the three months ended September 30, 2010 and 2009, respectively.
Income from operations for the three months ended September 30, 2010 was $148.7 million, an increase of 59.2% compared to the three months ended September 30, 2009. The increase was primarily driven by lower restructuring and impairment costs and higher volumes, partially offset by the impact of price pressures on net sales, higher LIFO inventory provisions and the benefit received in 2009 from the transition fees of $12.2 million received from a business process outsourcing contract termination.
Net interest expense decreased by $2.0 million for the three months ended September 30, 2010 versus the same period in 2009, primarily due to lower average outstanding borrowings and the impact of the interest rate swaps, as discussed in Note 15 to the condensed consolidated financial statements. In addition, 2009 was impacted by the accelerated amortization of debt issuance costs and unamortized discounts related to the repurchase of $640.6 million of senior notes.
Net investment and other income (expense) for the three months ended September 30, 2010 and 2009 was income of $0.7 million and expense of $13.6 million, respectively. The Companys repurchases of $640.6 million of its senior notes in 2009 resulted in a loss on the debt extinguishment of $10.3 million in 2009. In addition, as a result of the repurchase of the senior notes that matured May 15, 2010, the Company reclassified a loss of $2.7 million from accumulated other comprehensive income to investment and other expense due to changes in the hedged forecasted interest payments.
The effective income tax rate for the three months ended September 30, 2010 was 42.5% compared to 27.7% for the same period in 2009 reflecting the impact of higher restructuring charges for the three months ended September 30, 2009.
Net earnings from operations attributable to RR Donnelley common shareholders for the three months ended September 30, 2010 was $53.3 million, or $0.25 per diluted share, compared to $13.1 million, or $0.06 per diluted share, for the three months ended September 30, 2009. In addition to the factors described above, the per share results reflect an increase of 1.4 million in weighted-average diluted shares outstanding due to higher dilution resulting from increases in the stock price and the issuance of shares related to the vesting of restricted stock units and stock options.
31
U.S. Print and Related Services
The following table summarizes net sales, income from operations and certain items impacting comparability within the U.S. Print and Related Services segment:
Three Months Ended
September 30, |
||||||||
2010 | 2009 | |||||||
(in millions) | ||||||||
Net sales |
$ | 1,861.4 | $ | 1,824.8 | ||||
Income from operations |
168.3 | 164.9 | ||||||
Operating margin |
9.0 | % | 9.0 | % | ||||
Restructuring and impairment charges |
18.5 | 3.6 |
Net Sales for the Three Months
Ended September 30, |
$
Change |
%
Change |
||||||||||||||
Reporting unit(1) |
2010 | 2009 | ||||||||||||||
(in millions) | ||||||||||||||||
Magazines, catalogs and retail inserts |
$ | 488.1 | $ | 497.8 | $ | (9.7 | ) | (1.9 | %) | |||||||
Books and directories |
372.7 | 379.6 | (6.9 | ) | (1.8 | %) | ||||||||||
Variable print |
284.5 | 270.9 | 13.6 | 5.0 | % | |||||||||||
Forms and labels |
203.9 | 206.7 | (2.8 | ) | (1.4 | %) | ||||||||||
Commercial |
149.0 | 147.7 | 1.3 | 0.9 | % | |||||||||||
Logistics |
152.1 | 126.1 | 26.0 | 20.6 | % | |||||||||||
Financial print |
113.3 | 96.8 | 16.5 | 17.0 | % | |||||||||||
Office products |
52.8 | 59.5 | (6.7 | ) | (11.3 | %) | ||||||||||
Premedia |
45.0 | 39.7 | 5.3 | 13.4 | % | |||||||||||
Total U.S. Print and Related Services |
$ | 1,861.4 | $ | 1,824.8 | $ | 36.6 | 2.0 | % | ||||||||
(1) | The amounts included in the above table represent net sales by reporting unit and the descriptions above reflect the primary products or services provided by each. Included in these net sales amounts are sales of other products that may be produced within a reporting unit to meet customer needs and improve operating efficiency. Certain prior year amounts were restated to conform to the Companys current reporting unit structure. |
Net sales for the U.S. Print and Related Services segment for the three months ended September 30, 2010 were $1,861.4 million, an increase of $36.6 million, or 2.0%, compared to the same period in 2009. The increase was primarily attributable to higher logistics services volumes, increased volume in financial print due to more capital markets transactions and higher volume in variable print due to increases in direct mailings from financial services and retail customers. These increases were partially offset by price declines and reductions in pass-through paper sales in books and directories and magazines, catalogs and retail inserts. Sales of magazines, catalogs and retail inserts decreased due to price pressure and reductions in pass-through paper sales. Sales of books and directories decreased, as continued price pressure and lower pass-through paper sales more than offset higher volumes. Sales of variable printing increased due to higher sales of direct mailings from financial services and retail customers, partially offset by price pressures. Sales of forms and labels decreased as price pressure on both forms and labels and lower forms volume were partially offset by higher labels volume. Commercial printing sales increased slightly as higher volume was partially offset by continued price pressure. Sales of logistics services increased primarily due to increases in logistics services on higher print volumes, other logistics services and higher fuel surcharges. Sales of financial printing increased due to increased volume in capital market transactions. Sales of office products decreased due to lower volume and unfavorable product mix from existing customers. Finally, sales of premedia increased due to higher volume from existing customers.
U.S. Print and Related Services segment income from operations increased $3.4 million mainly driven by higher pricing on by-products recoveries, lower material costs, the sales increases discussed above and improved
32
productivity driven by restructuring actions and cost reduction efforts, partially offset by continued price pressures and higher restructuring and impairment charges. Operating margins in the
U.S. Print and Related Services segment remained consistent at 9.0% for the three months ended September 30, 2009 and 2010, as higher pricing on by-product recoveries and lower material costs, as well as cost reductions noted above, offset
International
The following table summarizes net sales, income (loss) from operations and certain items impacting comparability within the International segment:
Three Months Ended
September 30, |
||||||||
2010 | 2009 | |||||||
(in millions) | ||||||||
Net sales |
$ | 626.7 | $ | 638.3 | ||||
Income (loss) from continuing operations |
23.5 | (72.3 | ) | |||||
Operating margin |
3.7 | % | (11.3 | %) | ||||
Restructuring and impairment charges |
29.6 | 127.3 |
Net Sales for the Three Months
Ended September 30, |
$
Change |
%
Change |
||||||||||||||
Reporting unit |
2010 | 2009 | ||||||||||||||
(in millions) | ||||||||||||||||
Business process outsourcing |
$ | 138.5 | $ | 165.7 | $ | (27.2 | ) | (16.4 | %) | |||||||
Asia |
155.9 | 124.2 | 31.7 | 25.5 | % | |||||||||||
Latin America |
110.8 | 111.7 | (0.9 | ) | (0.8 | %) | ||||||||||
Europe |
100.8 | 100.8 | | 0.0 | % | |||||||||||
Global Turnkey Solutions |
71.4 | 85.5 | (14.1 | ) | (16.5 | %) | ||||||||||
Canada |
49.3 | 50.4 | (1.1 | ) | (2.2 | %) | ||||||||||
Total International |
$ | 626.7 | $ | 638.3 | $ | (11.6 | ) | (1.8 | %) | |||||||
Net sales for the International segment for the three months ended September 30, 2010 were $626.7 million, a decrease of $11.6 million, or 1.8%, compared to the same period in 2009. Changes in foreign exchange rates decreased net sales $20.2 million, or 3.2%, during the three months ended September 30, 2010. In addition, the lost volume resulting from the termination of a significant customer contract in 2009 in the business process outsourcing reporting unit and decreased volume and unfavorable product mix from existing customers in Global Turnkey Solutions decreased net sales. These decreases were partially offset by increased business in Asia. Business process outsourcing net sales decreased due to lower volume resulting from the termination of the customer contract noted above, transition fees of $12.5 million received from a contract termination in 2009 and changes in foreign exchange rates. Sales in Asia increased due to higher volume from technology manuals and packaging products and increased volume of books exported to the U.S. and Europe, partially offset by increased price pressure. In Latin America, net sales decreased slightly due to the impact of the currency devaluation in Venezuela and continued decreases in demand for business forms, particularly in Brazil, partially offset by higher commercial and labels volume. Net sales in Europe remained consistent due to increased technology manuals and other packaging products volume offset by changes in foreign exchange rates and declining prices. Global Turnkey Solutions net sales decreased due to lower volume and unfavorable product mix from existing customers and changes in foreign exchange rates, partially offset by volume from new customers. The decrease in net sales in Canada was due to lower statement printing volume, partially offset by changes in foreign exchange rates and higher commercial print volume.
Income (loss) from operations increased $95.8 million mainly driven by lower restructuring and impairment charges and increased volume in Asia, partially offset by the decreases in net sales noted above. Operating
33
margins increased from a loss of 11.3% for the three months ended September 30, 2009 to 3.7% for the three months ended September 30, 2010, of which 15.2 percentage points were due to lower restructuring and impairment charges. The remaining decrease was due to lower prices and cost inflation.
Corporate
Corporate operating expenses in the three months ended September 30, 2010 were $43.1 million compared to income of $0.8 million for the same period in 2009. The 2010 expense included higher LIFO inventory provisions, employee benefit costs and bad debt expense. The income in 2009 included a benefit resulting from lower LIFO inventory provisions, a benefit resulting from lower bad debt expense and reduced pension and postretirement expenses.
34
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AS COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2009
The following table shows the results of operations for the nine months ended September 30, 2010 and 2009:
Nine Months Ended September 30, | ||||||||||||||||
2010 | 2009 | $ Change | % Change | |||||||||||||
(in millions) | ||||||||||||||||
Net sales |
$ | 7,311.8 | $ | 7,274.3 | $ | 37.5 | 0.5 | % | ||||||||
Cost of sales (exclusive of depreciation and amortization shown below) |
5,560.0 | 5,480.5 | 79.5 | 1.5 | % | |||||||||||
Selling, general and administrative expenses (exclusive of depreciation and amortization shown below) |
803.4 | 807.2 | (3.8 | ) | (0.5 | %) | ||||||||||
Restructuring and impairment charges |
74.9 | 234.1 | (159.2 | ) | (68.0 | %) | ||||||||||
Depreciation and amortization |
403.7 | 436.7 | (33.0 | ) | (7.6 | %) | ||||||||||
Total operating expenses |
6,842.0 | 6,958.5 | (116.5 | ) | (1.7 | %) | ||||||||||
Income from operations |
$ | 469.8 | $ | 315.8 | $ | 154.0 | 48.8 | % |
Consolidated
Net sales for the nine months ended September 30, 2010 increased $37.5 million, or 0.5%, to $7,311.8 million versus the same period in the prior year. Changes in foreign exchange rates increased net sales by $20.2 million, or 0.3%. In addition, net sales increased due to higher logistics services volumes along with growth in mail center and commingling services in logistics, the increased sales from the production of mailing for the U.S. Census and higher volume in Asia. These increases were mostly offset by decreases primarily attributable to continued price pressure and reductions in pass-through paper sales in magazines, catalogs and retail inserts and books and directories.
Cost of sales increased $79.5 million to $5,560.0 million for the nine months ended September 30, 2010 versus the same period in the prior year primarily due to volume increases, higher LIFO inventory provisions and higher incentive compensation expense, partially offset by higher pricing on by-products recoveries and lower material costs. Cost of sales as a percentage of net sales increased from 75.3% to 76.0%, reflecting the continued price pressures on net sales, higher LIFO inventory provisions and higher incentive compensation expense.
Selling, general and administrative expenses decreased $3.8 million to $803.4 million for the nine months ended September 30, 2010 versus the same period in the prior year due to benefits achieved from restructuring activities and lower bad debt expense, partially offset by higher incentive compensation expense. Selling, general and administrative expenses as a percentage of net sales decreased from 11.1% to 11.0% reflecting benefits achieved from restructuring activities.
For the nine months ended September 30, 2010, the Company recorded a net restructuring and impairment provision of $74.9 million compared to $234.1 million in the same period of 2009. In 2010, these charges included a non-cash pre-tax charge of $26.9 million for the impairment of acquired customer relationship intangible assets in the Global Turnkey Solutions reporting unit within the International segment. The impairment of these intangible assets primarily resulted from the termination of a customer contract. Additionally, for the nine months ended September 30, 2010, the Company recorded $18.5 million for workforce reductions of 1,137 employees (of whom 1,109 were terminated as of September 30, 2010) associated with actions resulting from the reorganization of certain operations. These actions included the reorganization of certain operations within the business process outsourcing and Latin America reporting units and the continuing charges resulting from the closing of two Global Turnkey Solutions manufacturing facilities in 2009 within the International segment. These actions also included the reorganization of certain operations within the magazine,
35
catalog and retail insert and variable print reporting units and the closing of one Forms and Labels manufacturing facility within the U.S. Print and Related Services segment. In addition, the Company recorded $4.1 million of impairment charges of other long-lived assets and $25.4 million of other restructuring costs. The other restructuring costs included $13.6 million related to multi-employer pension plan partial withdrawal charges primarily attributable to two closed manufacturing facilities within the U.S. Print and Related Services segment, as well as lease termination and other facility closure costs. In 2009, these charges included $117.3 million, discounted for future cash payments, for the termination of a significant long-term customer contract in the business outsourcing reporting unit within the International segment, which allowed the Company to withdraw from certain unprofitable operations in this area. In addition, these charges included $71.3 million for workforce reductions of 3,635 employees (all of whom were terminated as of September 30, 2010) associated with actions resulting from the reorganization of certain operations. These actions included the closings of two catalog, magazine and retail insert manufacturing facilities, two book manufacturing facilities and one digital solutions facility within the U.S. Print and Related Services segment, as well as the closing of one Global Turnkey Solutions manufacturing facility, one business process outsourcing facility, one Latin America manufacturing facility and one European manufacturing facility within the International segment. Additionally, the Company recorded $22.1 million of impairment charges of other long-lived assets and $23.4 million of other restructuring costs, including lease termination and other facility closure costs. Management believes that certain restructuring activities will continue throughout the remainder of 2010, as the Company continues to streamline its manufacturing, sales and administrative operations.
Depreciation and amortization decreased $33.0 million to $403.7 million for the nine months ended September 30, 2010 compared to the same period in 2009, primarily due to a declining trend in capital expenditures over recent years. Depreciation and amortization included $73.5 million and $74.4 million of amortization of purchased intangibles related to customer relationships, patents, trade names, licenses and non-compete agreements for the nine months ended September 30, 2010 and 2009, respectively.
Income from operations for the nine months ended September 30, 2010 was $469.8 million, an increase of 48.8% compared to the nine months ended September 30, 2009. The increase was primarily driven by the lower restructuring and impairment costs in 2010, procurement savings and benefits achieved from restructuring activities, partially offset by the declines in volumes, cost inflation, price pressures, higher LIFO inventory provisions and higher incentive compensation expense.
Net interest expense decreased by $12.6 million for the nine months ended September 30, 2010 versus the same period in 2009, primarily due to lower average outstanding borrowings and the effect of the interest rate swaps. In addition, 2009 was impacted by the accelerated amortization of debt issuance costs and unamortized discounts related to the repurchase of $640.6 million of senior notes.
Net investment and other expense for the nine months ended September 30, 2010 and 2009 was $9.1 million and $14.9 million, respectively. For the nine months ended September 30, 2010, the Company recorded an $8.9 million loss related to the devaluation of the Venezuelan currency, of which $3.6 million increased the loss attributable to noncontrolling interests. In addition, the Companys repurchases of $640.6 million of its senior notes in 2009 resulted in a loss on the debt extinguishment of $10.3 million in 2009. Additionally in 2009, as a result of the repurchase of the senior notes that matured May 15, 2010, the Company reclassified a loss of $2.7 million from accumulated other comprehensive income to investment and other expense due to changes in the hedged forecasted interest payments.
The effective income tax rate for the nine months ended September 30, 2010 was 35.2% compared to 53.2% in the same period of 2009. The lower effective tax rate in 2010 reflects the release of a valuation allowance on deferred tax assets due to the forecasted increase in net earnings for certain operations within the Latin America reporting unit. The higher rate in 2009 reflected the impact of 2009 foreign restructuring and impairment charges on which the Company did not realize tax benefits in line with the U.S. statutory rate.
36
Net earnings
attributable to RR Donnelley common shareholders for the nine months ended September 30, 2010 was $194.7 million, or $0.93 per diluted share, compared to $52.2 million, or $0.25 per diluted share, for the nine months ended September 30,
2009. In addition to the factors described above, the per share results reflect an increase of 1.9 million in weighted-average diluted shares outstanding due to higher dilution resulting from increases in the stock price and the issuance of
U.S. Print and Related Services
The following table summarizes net sales, income from operations and certain items impacting comparability within the U.S. Print and Related Services segment:
Nine Months Ended
September 30, |
||||||||
2010 | 2009 | |||||||
(in millions) | ||||||||
Net sales |
$ | 5,507.5 | $ | 5,513.4 | ||||
Income from continuing operations |
511.6 | 417.8 | ||||||
Operating margin |
9.3 | % | 7.6 | % | ||||
Restructuring and impairment charges |
27.9 | 62.3 |
Net Sales for the Nine Months
Ended September 30, |
$
Change |
%
Change |
||||||||||||||
Reporting unit(1) |
2010 | 2009 | ||||||||||||||
(in millions) | ||||||||||||||||
Magazines, catalogs and retail inserts |
$ | 1,385.9 | $ | 1,501.0 | $ | (115.1 | ) | (7.7 | %) | |||||||
Books and directories |
1,071.3 | 1,102.7 | (31.4 | ) | (2.8 | %) | ||||||||||
Variable print |
895.4 | 837.4 | 58.0 | 6.9 | % | |||||||||||
Forms and labels |
609.7 | 617.5 | (7.8 | ) | (1.3 | %) | ||||||||||
Commercial |
440.1 | 447.3 | (7.2 | ) | (1.6 | %) | ||||||||||
Logistics |
429.7 | 354.5 | 75.2 | 21.2 | % | |||||||||||
Financial Print |
392.1 | 364.3 | 27.8 | 7.6 | % | |||||||||||
Office products |
164.3 | 177.1 | (12.8 | ) | (7.2 | %) | ||||||||||
Premedia |
119.0 | 111.6 | 7.4 | 6.6 | % | |||||||||||
Total U.S. Print and Related Services |
$ | 5,507.5 | $ | 5,513.4 | $ | (5.9 | ) | (0.1 | %) | |||||||
(1) | The amounts included in the above table represent net sales by reporting unit and the descriptions above reflect the primary products or services provided by each. Included in these net sales amounts are sales of other products that may be produced within a reporting unit to meet customer needs and improve operating efficiency. Certain prior year amounts were restated to conform to the Companys current reporting unit structure. |
Net sales for the U.S. Print and Related Services segment for the nine months ended September 30, 2010 were $5,507.5 million, a decrease of $5.9 million, or 0.1%, compared to the same period in 2009. The decrease was primarily attributable to reductions in pass-through paper sales across the magazines, catalogs and retail inserts and books and directories reporting units and price declines across most reporting units. Sales of magazine, catalogs and retail inserts decreased due to reductions in pass-through paper sales, lower volume and lower prices on contract renewals. Sales of books and directories decreased primarily as a result of lower prices, reductions in pass-through paper sales, and lower sales in directories, partially offset by higher volume in educational books and related materials, as well as consumer books. Sales of variable printing increased due to the production of mailings for the U.S. Census and higher direct mailings from financial services and retail customers, partially offset by reduced fulfillment and distribution volume from healthcare customers. Sales of forms and labels decreased due to continued price pressure and lower forms volume, partially offset by increased
37
sales of labels. Commercial printing sales decreased due to increased price pressure, partially offset by increased volume from financial services and retail customers. Sales of logistics services increased primarily due to increases in print and other logistics services volumes along with growth in mail center and commingling services, as well as higher fuel surcharges. Sales of financial printing increased due to increased capital market transactions, partially offset by lower investment management and compliance volume. Sales of office products decreased due to lower volume from existing customers. Finally, sales of premedia services increased due to volume from new and existing customers.
U.S. Print and Related Services segment income from operations increased $93.8 million mainly driven by cost reductions resulting from restructuring actions and productivity initiatives, higher pricing on by-products recoveries and lower restructuring and impairment charges, partially offset by the price declines discussed above. Operating margins in the U.S. Print and Related Services segment increased from 7.6% for the nine months ended September 30, 2009 to 9.3% for the nine months ended September 30, 2010 due to the cost reductions discussed above, higher pricing on by-products sales and lower restructuring and impairment charges, which more than offset the impact of lower prices and higher incentive compensation expense.
International
The following table summarizes net sales, income (loss) from operations and certain items impacting comparability within the International segment:
Nine Months Ended
September 30, |
||||||||
2010 | 2009 | |||||||
(in millions) | ||||||||
Net sales |
$ | 1,804.3 | $ | 1,760.9 | ||||
Income (loss) from continuing operations |
99.9 | (32.9 | ) | |||||
Operating margin |
5.5 | % | (1.9 | %) | ||||
Restructuring and impairment charges |
45.6 | 166.5 |
Net Sales for the Nine Months
Ended September 30, |
$
Change |
%
Change |
||||||||||||||
Reporting unit |
2010 | 2009 | ||||||||||||||
(in millions) | ||||||||||||||||
Business process outsourcing |
$ | 418.0 | $ | 449.8 | $ | (31.8 | ) | (7.1 | %) | |||||||
Asia |
393.2 | 326.5 | 66.7 | 20.4 | % | |||||||||||
Latin America |
313.5 | 330.4 | (16.9 | ) | (5.1 | %) | ||||||||||
Europe |
287.6 | 281.0 | 6.6 | 2.3 | % | |||||||||||
Global Turnkey Solutions |
230.8 | 220.4 | 10.4 | 4.7 | % | |||||||||||
Canada |
161.2 | 152.8 | 8.4 | 5.5 | % | |||||||||||
Total International |
$ | 1,804.3 | $ | 1,760.9 | $ | 43.4 | 2.5 | % | ||||||||
Net sales for the International segment for the nine months ended September 30, 2010 were $1,804.3 million, an increase of $43.4 million, or 2.5%, compared to the same period in 2009. This increase was primarily due to changes in foreign exchange rates which increased net sales $19.1 million, or 1.1%, and increases in Asia, partially offset by declines in business process outsourcing. Business process outsourcing net sales decreased due to the lower volume resulting from the termination of a significant customer contract in 2009, partially offset by higher volume from a new customer contract. Sales in Asia increased due to higher volume of books exported to the U.S. and Europe, higher local sales of catalogs and retail inserts and increased volume from technology manuals and packaging products, partially offset by lower prices on print packaging products. In Latin America, net sales decreased due to the impact of the currency devaluation in Venezuela, disruptions caused by the Chilean earthquake and continued decreases in demand for business forms, particularly in Brazil, partially offset by changes in foreign exchange rates. Net sales in Europe increased due to increased volume in technology manuals
38
and other packaging products and changes in foreign exchange rates, partially offset by declining prices. Global Turnkey Solutions net sales increased due to higher volume from existing and new customers and changes in foreign exchange rates. The increase in net sales in Canada was due to changes in foreign exchange rates, partially offset by lower statement printing volume.
Income (loss) from operations increased $132.8 million primarily due to lower restructuring and impairment charges and increased business in Asia and Global Turnkey Solutions. Operating margins increased from a loss of 1.9% for the nine months ended September 30, 2009 to 5.5% for the nine months ended September 30, 2010, of which 7.0 percentage points were due to lower restructuring and impairment charges. The remaining increase resulted from cost reductions driven by restructuring actions and productivity improvements and the termination of the significant customer contract in 2009, which more than offset lower prices, cost inflation and higher incentive compensation expense.
Corporate
Corporate operating expenses in the nine months ended September 30, 2010 were $141.7 million, an increase of $72.6 million compared to the same period in 2009. The increase was driven by higher employee benefit costs, LIFO inventory provisions, incentive compensation expense and acquisition-related costs, partially offset by lower bad debt expense, lower restructuring and impairment charges of $3.9 million and cost reductions from productivity and restructuring actions.
LIQUIDITY AND CAPITAL RESOURCES
The following describes the Companys cash flows for the nine months ended September 30, 2010 and 2009.
Cash Flows From Operating Activities
Net cash provided by operating activities was $481.1 million for the nine months ended September 30, 2010, compared to $1,098.5 million for the same period last year. Operating cash inflows are largely attributable to sales of the Companys products and services. Operating cash outflows are largely attributable to recurring expenditures for raw materials, labor, rent, interest, taxes and other operating activities. The decrease in operating cash flow reflected the $383.9 million benefit from reductions in net working capital (accounts receivable, inventory, prepaid expenses and other current assets and accounts payable) driven by volume declines and efficiency improvement in 2009, the non-recurring tax refund of $161.4 million in 2009, the continued price pressures on net sales in 2010, the $57.5 million payment in January 2010 related to the termination of the long-term customer contract in 2009 and incentive compensation payments in the first quarter of 2010 compared to no such payments in 2009. These decreases were partially offset by higher operating earnings in 2010 driven by cost reductions from productivity and restructuring actions and the $22.2 million payment in the third quarter of 2009 related to the termination of the long-term customer contract in 2009.
Cash Flows From Investing Activities
Net cash used in investing activities for the nine months ended September 30, 2010 was $152.3 million compared to $157.0 million for the nine months ended September 30, 2009. Net cash used for the acquisitions of PROSA and Prospectus in the nine months ended September 30, 2009 was $26.6 million. The Company used $17.0 million to purchase long-term investments and $14.7 million to purchase short-term deposits during the nine months ended September 30, 2010. A portion of the short-term term deposits were subsequently liquidated for $11.9 million during the nine months ended September 30, 2010. Capital expenditures were $144.9 million, an increase of $12.0 million compared to the first nine months of 2009. The Company continues to fund capital expenditures primarily through cash provided by operations. The Company expects that capital expenditures for 2010 will be approximately $225 million.
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Cash Flows From Financing Activities
Net cash used in financing activities for the nine months ended September 30, 2010 was $89.7 million compared to $884.4 million in the same period of 2009. During the nine months ended September 30, 2010, the Company received proceeds of $400.0 million from the issuance of long-term senior notes which were partly used to repay borrowings on the Companys revolving credit facility (the Facility). Proceeds from Facility borrowings were used, along with cash on hand, to pay the May 2010 maturity of senior notes of $325.7 million. In the nine months ended September 30, 2009, the Company received proceeds of $750.0 million from the issuance of long-term senior notes and repaid $400.0 million in senior notes that matured April 1, 2009. In addition, the Company repurchased $466.4 million and $174.2 million of senior notes with maturity dates of January 15, 2012 and May 15, 2010, respectively. Net repayments under the Facility were $110.0 million for the nine months ended September 30, 2009. The net change in other short-term debt was a cash outflow of $304.3 million in the nine months ended September 30, 2009 primarily due to the pay down of commercial paper.
Dividends
During the nine months ended September 30, 2010, the Company paid cash dividends of $160.7 million. On October 27, 2010, the Board of Directors of the Company declared a quarterly cash dividend of $0.26 per common share payable on December 1, 2010 to RR Donnelley shareholders of record on November 11, 2010.
LIQUIDITY
The Company believes it has sufficient liquidity to support its ongoing operations and to invest in future growth to create value for its shareholders. Operating cash flows are the Companys primary source of liquidity and are expected to be used for, among other things, interest and principal on the Companys debt obligations, capital expenditures as necessary to support productivity improvement and growth, completion of restructuring programs, dividend payments that may be approved by the Board of Directors, additional acquisitions and future common stock or debt repurchases based upon market conditions.
Cash and cash equivalents of $731.6 million as of September 30, 2010 included $372.1 million that were readily available in the U.S. and $359.5 million that were available at international locations, most of which could be subject to U.S. federal income taxes and some of which could be subject to local country taxes if repatriated to the U.S. In addition, repatriation of some foreign cash is further restricted by local laws. The Company maintains a cash pooling structure that enables several participating international locations to draw on the Companys overseas cash resources to meet local liquidity needs. In addition, foreign cash balances may be loaned to U.S. operating entities on a temporary basis in order to reduce the Companys short-term borrowing costs or for other purposes.
The Company has a $2.0 billion committed revolving credit facility (the Facility) that can be used for general corporate purposes, including letters of credit and as a backstop for the Companys commercial paper program. The Facility is subject to a number of restrictive covenants that, in part, limit the ability of the Company to create liens on assets, engage in mergers and consolidations, or dispose of assets. The financial covenants require a minimum interest coverage ratio and a maximum leverage ratio. Based on the Companys results of operations for the twelve months ended September 30, 2010 and existing term debt structure, as shown in the table below, the Company could utilize approximately $1.3 billion of the $2.0 billion Facility and not be in violation of those financial covenants. A further reduction in earnings year over year would likely further decrease the amount available under the Facility. However, the Company does not expect the reduction in availability on the Facility to impact its ability to meet its liquidity requirements. In addition, borrowings under the Facility are subject to certain conditions, all of which were met at September 30, 2010. The Company pays an annual commitment fee of 0.10%, and LIBOR plus a spread on borrowings under the Facility. The Facility has a maturity date of January 6, 2012. As of September 30, 2010, there were no borrowings outstanding under the Facility. The Company also has $100.3 million in credit facilities outside of the U.S., most of which are uncommitted. As of September 30, 2010, the Company had $52.3 million in outstanding letters of credit, of
40
which $37.5 million reduced availability under the Facility and $0.4 million reduced availability under uncommitted facilities outside of the U.S. As of September 30, 2010, there were no borrowings outstanding under the Companys commercial paper program. Of the remaining $14.4 million, $10.8 million is a letter of credit supported by cash collateral classified as restricted cash on the condensed consolidated balance sheet. The failure of a financial institution supporting the Facility would reduce the size of our committed facility unless a replacement institution were added. Currently, the Facility is supported by 20 U.S. and international financial institutions. The current availability on the Facility is shown in the following table:
September 30, 2010 | ||||
(in millions) | ||||
Availability |
||||
Committed credit facility |
$ | 2,000.0 | ||
Availability reduction from covenants |
712.3 | |||
1,287.7 | ||||
Usage |
||||
Borrowings |
| |||
Current availability at September 30, 2010 |
$ | 1,287.7 | ||
The Company was in compliance with its debt covenants as of September 30, 2010, and is expected to remain in compliance based on managements estimates of operating and financial results for 2010 and the foreseeable future; however, as of September 30, 2010, as shown in the table above, the Company may borrow $1.3 billion of the $2.0 billion currently not utilized under the Facility. Borrowings above $1.3 billion would cause the Company to violate certain debt covenants in the Facility. In addition, the Company met all the conditions required to borrow under the Facility as of September 30, 2010 and management expects the Company to continue to meet the applicable borrowing conditions.
On March 31, 2010, Moodys Investors Service reaffirmed the Companys senior unsecured debt ratings and short-term credit rating at Baa3 and P-3, respectively. On April 1, 2010, Standard & Poors Ratings Services reaffirmed the Companys long-term corporate credit and senior unsecured debt ratings at BBB and maintained the Companys short-term credit rating at A-3.
On June 21, 2010, the Company issued $400 million of 7.625% senior notes due June 15, 2020. The Company used the net proceeds to repay borrowings under the Facility that were drawn on May 13, 2010 to, together with cash on hand, repay $325.7 million of senior notes due May 15, 2010. The remaining net proceeds will be used for general corporate purposes.
In the third quarter of 2009, the Company terminated a significant long-term customer contract in the business process outsourcing reporting unit within the International segment. The Company expects to pay approximately $119.3 million in related restructuring costs, of which $22.2 million was paid in the third quarter of 2009, $57.5 million was paid in January 2010 and $39.6 million, subject to changes in foreign exchange rates, is expected to be paid in December 2010 or January 2011. The $39.6 million is reflected as restricted cash equivalents in the condensed consolidated balance sheets at September 30, 2010.
The Company expects to pay approximately $481 million to acquire Bowne. In addition, the expected completion of the pending acquisition of Bowne will result in additional restructuring payments, associated closing costs and acquisition fees. The Company anticipates funding these obligations through a combination of cash on hand and borrowings under the Facility.
41
RISK MANAGEMENT
The Company is exposed to interest rate risk on its variable debt and price risk on its fixed-rate debt. As of September 30, 2010, approximately 82.1% of the Companys outstanding term debt was comprised of fixed-rate debt. At September 30, 2010, the Companys exposure to rate fluctuations on variable-interest borrowings was $610.0 million, including $600.0 million notional value of interest rate swap agreements (See Note 15 to the condensed consolidated financial statements) and $10.0 million in borrowings under both international credit facilities and other long-term debt.
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 most 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 operating unit, the Company is exposed to currency risk and may enter into foreign exchange forward contracts to hedge the currency risk. As of September 30, 2010, the aggregate notional amount of outstanding forward contracts was approximately $74.5 million (See Note 15 to the condensed consolidated financial statements). Net unrealized gains from these foreign exchange contracts were $1.0 million at September 30, 2010. The Company does not use derivative financial instruments for trading or speculative purposes.
The Company assesses market risk based on changes in interest rates utilizing a sensitivity analysis that measures the potential loss in earnings, fair values and cash flows based on a hypothetical 10% change in interest rates. Using this sensitivity analysis, such changes would not have a material effect on interest income or expense and cash flows; and would change the fair values of fixed rate debt at September 30, 2010 and December 31, 2009 by approximately $101.5 million and $101.0 million, respectively.
CAUTIONARY STATEMENT
We have made forward-looking statements in this Quarterly Report on Form 10-Q that are subject to risks and uncertainties. These statements are based on the beliefs and assumptions of the Company. Generally, forward-looking statements include information concerning possible or assumed future actions, events, or results of operations of the Company.
These statements may include, or be preceded or followed by, the words may, will, should, might, could, would, potential, possible, believe, expect, anticipate, intend, plan, estimate, hope or similar expressions. The Company claims the protection of the Safe Harbor for Forward-Looking Statements contained in the Private Securities Litigation Reform Act of 1995 for all forward-looking statements.
Forward-looking statements are not guarantees of performance. The following important factors, in addition to those discussed elsewhere in this Form 10-Q, could affect the future results of the Company and could cause those results or other outcomes to differ materially from those expressed or implied in our forward-looking statements:
|
the volatility and disruption of the capital and credit markets, and adverse changes in the global economy; |
|
successful execution and integration of acquisitions, including the pending acquisition of Bowne; |
|
successful negotiation of future acquisitions; and the ability of the Company to integrate operations successfully and achieve enhanced earnings or effect cost savings; |
|
the ability to implement comprehensive plans for the integration of sales forces, cost containment, asset rationalization, system integration and other key strategies; |
|
the ability to divest non-core businesses; |
42
|
future growth rates in the Companys core businesses; |
|
competitive pressures in all markets in which the Company operates; |
|
the Companys ability to access unsecured debt in the capital markets and the participants ability to perform to our contractual lending and insurance agreements; |
|
changes in technology, including the electronic substitution and migration of paper based documents to digital data formats; |
|
factors that affect customer demand, including changes in postal rates and postal regulations, changes in the capital markets, changes in advertising markets, customers budgetary constraints and changes in customers short-range and long-range plans; |
|
the ability to gain customer acceptance of the Companys new products and technologies; |
|
the ability to secure and defend intellectual property rights and, when appropriate, license required technology; |
|
customer expectations and financial strength; |
|
performance issues with key suppliers; |
|
changes in the availability or costs of key materials (such as ink, paper and fuel) or in the prices received for the sale of by-products; |
|
changes in ratings of the Companys debt securities, as a result of financial community and rating agency perceptions of the Companys business, operations and financial condition and the industry in which the Company operates; |
|
the ability to generate cash flow or obtain financing to fund growth; |
|
the effect of inflation, changes in currency exchange rates and changes in interest rates; |
|
the effect of changes in laws and regulations, including changes in accounting standards, trade, tax, environmental compliance (including the emission of greenhouse gases and other air pollution controls), health and welfare benefits (including the recently enacted Patient Protection and Affordable Care Act, as modified by the Health Care and Education Reconciliation Act, and further healthcare reform initiatives), price controls and other regulatory matters and the cost, which could be substantial, of complying with these laws and regulations; |
|
contingencies related to actual or alleged environmental contamination; |
|
the retention of existing, and continued attraction of additional, customers and key employees; |
|
the effect of a material breach of security of any of the Companys systems; |
|
the effect of labor disruptions or labor shortages; |
|
the effect of economic and political conditions on a regional, national or international basis; |
|
the effect of economic weakness and constrained advertising; |
|
uncertainty about future economic conditions; |
|
the possibility of future terrorist activities or the possibility of a future escalation of hostilities in the Middle East or elsewhere; |
|
the possibility of a regional or global health pandemic outbreak; |
|
adverse outcomes of pending and threatened litigation; and |
|
other risks and uncertainties detailed from time to time in the Companys filings with the SEC, including under Risk Factors in the Companys Annual Report on Form 10-K. |
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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 should consider these forward-looking statements only as our current plans, estimates and beliefs. We do not undertake and specifically decline 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. We undertake no obligation to update or revise any forward-looking statements in this Quarterly Report to reflect any new events or any change in conditions or circumstances.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
See Item 2 of Part I under Liquidity and Capital Resources.
Item 4. Controls and Procedures
(a) Disclosure controls and procedures.
As required by Rule 13a-15(b) and Rule 15d-15(e) of the Securities Exchange Act of 1934, the Companys management, including the Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining effective disclosure controls and procedures, as defined under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. As of September 30, 2010, 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 Companys disclosure controls and procedures. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that disclosure controls and procedures as of September 30, 2010 were effective in ensuring information required to be disclosed in this Quarterly Report was recorded, processed, summarized, and reported within the time periods specified in the SECs rules and forms, and that such information was accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
(b) Changes in internal control over financial reporting.
There have not been any changes in the Companys internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) that occurred during the quarter ended September 30, 2010 that had materially affected, or were reasonably likely to materially affect, the Companys internal control over financial reporting.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
ISSUER PURCHASES OF EQUITY SECURITIES
Period |
(a) Total
Number of Shares Purchased |
(b) Average
Price Paid per Share |
(c) Total Number of
Shares Purchased as Part of Publicly Announced Plans or Programs |
(d) Maximum Number
of Shares that May Yet be Purchased Under the Plans or Programs(1) |
||||||||||||
July 1, 2010July 31, 2010 |
| $ | | | 10,000,000 | |||||||||||
August 1, 2010August 31, 2010 |
| | | 10,000,000 | ||||||||||||
September 1, 2010September 30, 2010 |
| | | 10,000,000 | ||||||||||||
Total |
| $ | | | 10,000,000 | |||||||||||
3.1 | Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2007, filed on August 2, 2007) | |
3.2 | By-Laws (incorporated by reference to Exhibit 3.2 to the Companys Current Report on Form 8-K dated January 8, 2009, filed on January 13, 2009) | |
4.1 | Instruments, other than those defining the rights of holders of long-term debt not registered under the Securities Exchange Act of 1934 of the registrant and of all subsidiaries for which consolidated or unconsolidated financial statements are required to be filed are being omitted pursuant to paragraph (4)(iii)(A) of Item 601 of Regulation S-K. Registrant agrees to furnish a copy of any such instrument to the Commission upon request. | |
4.2 | Indenture dated as of November 1, 1990 between the Company and Citibank, N.A., as Trustee (incorporated by reference to Exhibit 4 filed with the Companys Form SE filed on March 26, 1992) | |
4.3 | Indenture dated as of March 10, 2004 between the Company and LaSalle National Bank Association, as Trustee (incorporated by reference to Exhibit 4.4 to the Companys Quarterly Report on Form 10-Q for the quarter ended March 31, 2004, filed on May 10, 2004) | |
4.4 | Indenture dated as of May 23, 2005 between the Company and LaSalle Bank National Association, as Trustee (incorporated by reference to Exhibit 4.1 to the Companys Current Report on Form 8-K dated May 23, 2005, filed on May 25, 2005) | |
4.5 | Indenture dated as of January 3, 2007 between the Company and LaSalle Bank National Association, as Trustee (incorporated by reference to Exhibit 4.1 to the Companys Registration Statement on Form S-3 filed on January 3, 2007) | |
4.6 | Credit Agreement dated January 8, 2007 among the Company, the Banks named therein and Bank of America, N.A., as Administrative Agent (incorporated by reference to Exhibit 99.1 to the Companys Current Report on Form 8-K dated January 22, 2007, filed on January 23, 2007) | |
4.7 | Amendment No. 1 dated July 14, 2009 to Credit Agreement dated January 8, 2007 among the Company, the Banks named therein and Bank of America, N.A., as Administrative Agent (incorporated by reference to Exhibit 4.7 to the Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2009, filed August 5, 2009) |
45
10.1 | Policy on Retirement Benefits, Phantom Stock Grants and Stock Options for Directors (incorporated by reference to Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2008, filed on August 6, 2008)* | |
10.2 | Non-Employee Director Compensation Plan (incorporated by reference to Exhibit 10.2 to the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2004, filed on March 14, 2005)* | |
10.3 | Amended Non-Employee Director Compensation Plan (incorporated by reference to Exhibit 10.3 to the Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2007, filed on August 2, 2007)* | |
10.4 | Amended Non-Employee Director Compensation Plan (incorporated by reference to Exhibit 10.4 to the Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2010, filed on August 4, 2010)* | |
10.5 | Amended Non-Employee Director Compensation Plan dated May 21, 2009 (incorporated by reference to Exhibit 10.4 to the Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2009, filed on August 5, 2009)* | |
10.6 | Directors Deferred Compensation Agreement, as amended (incorporated by reference to Exhibit 10(b) to the Companys Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, filed on November 12, 1998)* | |
10.7 | Amended and Restated Non-Qualified Deferred Compensation Plan (incorporated by reference to Exhibit 10.5 to the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2007, filed on February 27, 2008)* | |
10.8 | 2000 Stock Incentive Plan, as amended (incorporated by reference to Exhibit 10(a) to the Companys Quarterly Report on Form 10-Q for the quarter ended September 30, 2003, filed on November 12, 2003)* | |
10.9 | 2000 Broad-based Stock Incentive Plan, as amended (incorporated by reference to Exhibit 10(a) to the Companys Quarterly Report on Form 10-Q for the quarter ended September 30, 2003, filed on November 12, 2003)* | |
10.10 | 2004 Performance Incentive Plan (incorporated by reference to Exhibit 10.9 to the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2008, filed on February 25, 2009)* | |
10.11 | Amended and Restated R.R. Donnelley & Sons Company Unfunded Supplemental Benefit Plan (filed herewith)* | |
10.12 | Amendment to Amended and Restated R.R. Donnelley & Sons Company Unfunded Supplemental Benefit Plan (filed herewith)* | |
10.13 | Supplemental Executive Retirement Plan for Designated ExecutivesB (incorporated by reference to Exhibit 10.1 to Moore Wallace Incorporateds (Commission file number 1-8014) Quarterly Report on Form 10-Q for the quarter ended September 30, 2001, filed on November 14, 2001)* | |
10.14 | 2003 Long Term Incentive Plan (incorporated by reference to Exhibit 10.12 to the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2008, filed on February 25, 2009)* | |
10.15 | 2000 Inducement Option Grant Agreement (incorporated by reference to Exhibit 99.1 to Moore Wallace Incorporateds (formerly Moore Corporation Limited, Commission file number 1-8014) Registration Statement on Form S-8 filed on February 13, 2003)* | |
10.16 | 2003 Inducement Option Grant Agreement (incorporated by reference to Exhibit 4.4 to Moore Wallace Incorporateds (Commission file number 1-8014) Registration Statement on Form S-8 filed September 29, 2003)* | |
10.17 | Form of Option Agreement for certain executive officers (incorporated by reference to Exhibit 10.17 to the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2004, filed on March 14, 2005)* |
46
10.18 | Form of Cash Bonus Agreement for certain executive officers (incorporated by reference to Exhibit 10.16 to the Companys Quarterly Report on Form 10-Q for the quarter ended March 31, 2010, filed on May 5, 2010)* | |
10.19 | Form of Restricted Stock Unit Award Agreement for certain executive officers, as amended (incorporated by reference to Exhibit 10.17 to the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2008, filed on February 25, 2009)* | |
10.20 | Form of Restricted Stock Unit Award Agreement for certain executive officers, as amended (incorporated by reference to Exhibit 10.18 to the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2008, filed on February 25, 2009)* | |
10.21 | Form of Restricted Stock Unit Award Agreement for certain executive officers, as amended (incorporated by reference to Exhibit 10.19 to the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2008, filed on February 25, 2009)* | |
10.22 | Form of Restricted Stock Unit Award Agreement for directors (incorporated by reference to Exhibit 10.21 to the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2004, filed on March 14, 2005)* | |
10.23 | Form of Restricted Stock Unit Award Agreement for directors (incorporated by reference to Exhibit 10.25 to the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2007, filed on February 27, 2008)* | |
10.24 | Form of Amendment to Director Restricted Stock Unit Awards dated May 21, 2009 (incorporated by reference to Exhibit 10.23 to the Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2009, filed on August 5, 2009)* | |
10.25 | Form of Amendment to Director Restricted Stock Unit Awards (incorporated by reference to Exhibit 10.22 to the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2008, filed on February 25, 2009)* | |
10.26 | Form of Restricted Stock Unit Award Agreement for directors (incorporated by reference to Exhibit 10.23 to the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2008, filed on February 25, 2009)* | |
10.27 | Form of Director Restricted Stock Unit Awards (incorporated by reference to Exhibit 10.23 to the Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2009, filed on August 5, 2009)* | |
10.28 | Amended and Restated Employment Agreement dated as of November 30, 2008 between the Company and Thomas J. Quinlan, III (incorporated by reference to Exhibit 10.24 to the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2008, filed on February 25, 2009)* | |
10.29 | Amended and Restated Employment Agreement dated as of November 30, 2008 between the Company and John R. Paloian (incorporated by reference to Exhibit 10.25 to the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2008, filed on February 25, 2009)* | |
10.30 | Amended and Restated Employment Agreement dated as of November 38, 2008 between the Company and Daniel L. Knotts (incorporated by reference to Exhibit 10.26 to the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2008, filed on February 25, 2009)* | |
10.31 | Amended and Restated Employment Agreement dated as of December 18, 2008 between the Company and Suzanne S. Bettman (incorporated by reference to Exhibit 10.27 to the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2008, filed on February 25, 2009)* | |
10.32 | Amended and Restated Employment Agreement dated as of December 18, 2008 between the Company and Miles W. McHugh (incorporated by reference to Exhibit 10.28 to the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2008, filed on February 25, 2009)* |
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10.33 | Form of Indemnification Agreement for directors (incorporated by reference to Exhibit 10.32 to the Companys Quarterly Report on Form 10-Q for the quarter ended September 30, 2005, filed on November 8, 2005)* | |
10.34 | Amended Management by Objective Plan (filed herewith)* | |
10.35 | Amended 2009 Management By Objective Plan (incorporated by reference to Exhibit 10.33 to the Companys Annual Report on Form10-K for the fiscal year ended December 31, 2009, filed on February 24, 2010)* | |
14 | Code of Ethics (incorporated by reference to Exhibit 14 to the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2003, filed on March 1, 2004) | |
21 | Subsidiaries of the Company (incorporated by reference to Exhibit 21 to the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2009, filed on February 24, 2010) | |
31.1 | Certification by Thomas J. Quinlan, III, President and Chief Executive Officer, required by Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934 (filed herewith) | |
31.2 | Certification by Miles W. McHugh, Executive Vice President and Chief Financial Officer, required by Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934 (filed herewith) | |
32.1 | Certification by Thomas J. Quinlan, III, President and Chief Executive Officer, required by Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and Section 1350 of Chapter 63 of Title 18 of the United States Code (filed herewith) | |
32.2 | Certification by Miles W. McHugh, Executive Vice President and Chief Financial Officer, required by Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and Section 1350 of Chapter 63 of Title 18 of the United States Code (filed herewith) | |
101.INS | XBRL Instance Document | |
101.SCH | XBRL Taxonomy Extension Schema Document | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
* | Management contract or compensatory plan or arrangement. |
48
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
R.R. DONNELLEY & SONS COMPANY |
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By: |
/s/ M ILES W. M CHUGH |
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Miles W. McHugh Executive Vice President and Chief Financial Officer |
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By: |
/s/ A NDREW B. C OXHEAD |
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Andrew B. Coxhead Senior Vice President and Controller (Chief Accounting Officer) |
Date: November 3, 2010
49
Exhibit 10.11
RR DONNELLEY
UNFUNDED SUPPLEMENTAL
PENSION PLAN
(amended and restated effective January 1, 2009)
Table of Contents
Page | ||||
Section 1 DEFINITIONS |
1 | |||
Section 2 SUPPLEMENTAL BENEFIT |
5 | |||
Section 3 TIME OF PAYMENT |
5 | |||
(a) In General |
5 | |||
(b) Designated Age Elections |
5 | |||
Section 4 FORM OF PAYMENT |
6 | |||
(a) In General |
6 | |||
(b) Optional Forms of Payment |
6 | |||
Section 5 ADDITIONAL PAYMENT PROVISIONS |
7 | |||
(a) Commenced Benefits and Existing Elections |
7 | |||
(b) Small Amount Cash-outs |
7 | |||
(c) Change in Control |
7 | |||
(d) Tax Matters |
7 | |||
(e) 6-Month Delay Following Separation From Service |
8 | |||
(f) Age 65 Distributions for Certain Members |
8 | |||
Section 6 PRE-RETIREMENT SURVIVOR BENEFITS |
8 | |||
(a) In General |
8 | |||
(b) Predecessor Plans |
9 | |||
(c) Additional Benefits |
9 | |||
(d) Small Amount Cash-out |
9 | |||
(e) Reductions for Prior Distributions |
9 | |||
Section 7 AMENDMENT AND TERMINATION |
9 | |||
Section 8 APPLICATION OF ERISA |
9 | |||
Section 9 ADMINISTRATION |
10 | |||
Section 10 COMPANY ACTION |
10 | |||
Section 11 NONASSIGNMENT OF BENEFITS |
10 | |||
Section 12 NON-DUPLICATION OF BENEFITS |
10 |
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Section 13 NO GUARANTY OF EMPLOYMENT |
11 | |||
Section 14 TRUST |
11 | |||
(a) Funding |
11 | |||
(b) Taxation and Gross-ups |
11 | |||
Section 15 MISCELLANEOUS |
11 | |||
(a) Applicable Law |
11 | |||
(b) Expenses |
11 | |||
(c) Successors and Assigns |
11 | |||
Section 16 CLAIMS AND APPEALS PROCEDURES |
12 | |||
(a) Authority to Submit Claims |
13 | |||
(b) Procedure for Filing a Claim |
13 | |||
(c) Initial Claim Review |
13 | |||
(d) Benefit Determination on Claim |
13 | |||
(e) Manner and Content of Notification of Adverse Benefit Determination on a Claim |
13 | |||
(f) Authority to Submit an Appeal |
14 | |||
(g) Procedure for Filing for a Request for Review of an Adverse Benefit Determination |
14 | |||
(h) Review Procedures for Appeals |
14 | |||
(i) Timing and Notification of Benefit Determination on Review |
15 | |||
(j) Manner and Content of Notification of Adverse Benefit Determination on Appeal |
15 | |||
(k) Collectively Bargained Benefits |
15 | |||
(l) Limitation on Actions |
16 | |||
(m) Failure to Exhaust Administrative Remedies |
16 | |||
Section 17 DELIVERY AND RECEIPT |
16 | |||
EXHIBIT A QUALIFIED PLANS |
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EXHIBIT B ADDITIONAL BENEFITS |
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EXHIBIT C PREDECESSOR PLANS |
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INTRODUCTION
This retirement plan constitutes (a) an amendment and restatement of the RR Donnelley Unfunded Supplemental Pension Plan (formerly known as the R.R. Donnelley & Sons Company Unfunded Supplemental Benefit Plan) (the Plan), and (b) a merger of the Predecessor Plans (each of which was sponsored by an Affiliate), with and into the Plan, both effective January 1, 2009. The Plan primarily provides (i) benefits which, but for the Code Limitations, would have been payable under the Qualified Plans, and (ii) benefits pursuant to (A) the Predecessor Plans, and (B) additional arrangements that provide for the payment of nonqualified deferred compensation generally in the form of an annuity, in each case for the benefit of a select group of management or highly compensated employees or former employees within the meaning of ERISA. The Plan is intended to comply with the requirements of section 409A of the Code and the Treasury Regulations and other guidance thereunder. Between December 31, 2004 and the Effective Date, the Plan and the Predecessor Plans were operated in accordance with a good faith, reasonable interpretation of section 409A of the Code and the Treasury Regulations and other guidance thereunder. Prior to the Effective Date, payments under the Plan and the Predecessor Plans were generally linked to payments under Qualified Plans. The rights of Members whose benefits, immediately prior to January 1, 2009, have not commenced, and the rights of such Members Spouse or Beneficiary shall be determined solely by reference to the terms hereof.
Section 1
DEFINITIONS
As used herein the following words and phrases shall, when capitalized herein, have the following respective meanings:
(1) Actuarial Equivalent has the meaning assigned to such term in the Retirement Benefit Plan of R.R. Donnelley & Sons Company, as such definition is appropriately modified to make it applicable to the Plan ( e.g. , by modifying cross-references and by ignoring provisions addressing terms not applicable to the Plan), as determined in the sole discretion of the Benefits Committee.
(2) Additional Benefit . An individuals benefit, if any, described on Exhibit B hereto.
(3) Adverse Benefit Determination . A Benefit Determination that is a denial, reduction, or termination of, or a failure to provide or make payment (in whole or in part) with respect to a Claim, including any such denial, reduction, termination, or failure to provide or make payment that is based on a determination of an individuals eligibility to participate in this Plan.
(4) Affiliate . An entity (other than the Company) that is (i) a corporation which is a member of the same controlled group of corporations (within the meaning of section 414(b) of the Code) as the Company, (ii) a trade or business (whether or not incorporated) under common control (within the meaning of section 414(c) of the Code) with the Company, (iii) any organization (whether or not incorporated) which is a member of an affiliated service group (within the meaning of section 414(m) of the Code) which includes the Company, a corporation
§1(4)
described in clause (i) of this paragraph or a trade or business described in clause (ii) of this paragraph, or (iv) any other entity which is required to be aggregated with the Company pursuant to Regulations promulgated under section 414(o) of the Code.
(5) Appeal has the meaning assigned to such term in Section 16(f).
(6) Beneficiary . An individual that is designated by a Member to receive a survivor benefit, if any, under Section 4(b), and that is (i) not such Members Spouse and (ii) not more than 30 years younger than such Member.
(7) Benefit . A benefit provided by the Plan.
(8) Benefit Commencement Date . The first day of the month that begins coincident with, or immediately following, a Members Payment Event.
(9) Benefit Determination . The Benefits Committees decision with respect to a Claim or an Appeal.
(10) Benefits Committee . The committee created and organized pursuant to the provisions of Section 9.
(11) Change In Control . A change in ownership of the Company, a change in effective control of the Company, or a change in ownership of a substantial portion of the assets of the Company as such terms are defined in Treasury Regulation §1.409A-3(i)(5)(v), (vi), and (vii), respectively; provided , however , that such a change in ownership of a substantial portion of the assets of the Company shall constitute a Change In Control only if all or substantially all of the Companys assets change ownership in connection therewith.
(12) Claim . A request for a Benefit or eligibility for a Benefit Received prior to the time the Benefits Committee has Received an Appeal with respect to the same matter, made by a Claimant in accordance with this Plans procedures for filing Claims, as described in Section 16(b). If the procedures described in Section 16(b) are not followed with respect to any submission by an individual, such submission will be deemed not to constitute a Claim.
(13) Claimant has the meaning assigned to such term in Section 16(a).
(14) Code . The Internal Revenue Code of 1986, as amended. If the Code is succeeded or renumbered, then references to particular sections of the Code included herein shall be deemed to be references to the appropriate renumbered sections of the Code or its successor.
(15) Code Limitations . The limitations set forth in sections 401(a)(17) and 415 of the Code.
(16) Company . R. R. Donnelley & Sons Company, a Delaware corporation, and any corporation which is substituted for such corporation as described in Section 14.
(17) Delivered has the meaning set forth in Section 17 and Delivery means Delivery pursuant to, and subject to, Section 17.
(18) Designated Age . Age 55, or such other age as may be elected by a Member pursuant to Section 3(b).
(19) Effective Date . January 1, 2009.
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§1(20)
(20) Employer . Any Affiliate which is or becomes a participating employer under a Qualified Plan or which is otherwise designated by the Company as an Employer under the Plan.
(21) ERISA . The Employee Retirement Income Security Act of 1974, as amended. If ERISA is succeeded or renumbered, then references to particular sections of ERISA included herein shall be deemed to be references to the appropriate renumbered sections of ERISA or its successor.
(22) Initial Payment Date . The later to occur of (i) a Members Benefit Commencement Date, and (ii) the first day of the month that begins coincident with, or immediately following, the six-month anniversary of the date the Member incurs a Separation From Service.
(23) Member . An individual who is entitled to a Supplemental Benefit.
(24) Non-Early Retirement Eligible Member . A Member (a) whose employment terminated prior to the date he or she attained age 65, (b) who for at least two of the three calendar years immediately preceding his or her termination of employment was eligible to participate in the R.R. Donnelley & Sons Company Stock Purchase Plan for Selected Managers and Key Staff Employees, or would have been eligible to participate in such plan except for a disqualifying sale of stock, and (c) who, at any time within the 36-month period which began on the date of his or her termination of employment, engaged directly or indirectly in any phase of business in competition with the business of an Employer (as such term was defined in the January 1, 2002 Amendment and Restatement of the Retirement Benefit Plan of R.R. Donnelley & Sons Company, or the applicable predecessor version of such plan) or directly provided services to any business which supplied materials, equipment or other products or chemicals to such an employer or to any business engaged in the graphics arts industry in any part of the United States as a sole proprietor, partner, director, officer, employee, agent, consultant or advisor in any capacity whatsoever without the written consent of the Company.
(25) Notice , Notification or Notify means the Delivery or furnishing of information in a manner that satisfies applicable provisions of Section 17.
(26) Qualified Plan . A plan listed on Exhibit A hereto, effective as of the date indicated on Exhibit A.
(27) Payment Event . The later to occur of (a) a Member incurring a Separation From Service, (b) the Member attaining his or her Designated Age, and (c) with respect to a Member who incurred a Separation From Service prior to the Effective Date and whose benefits under a Qualified Plan did not commence prior to the Effective Date, the Effective Date.
(28) Plan . The RR Donnelley Unfunded Supplemental Pension Plan as herein set forth, as amended from time to time.
(29) Plan Year . The calendar year.
(30) Predecessor Benefit . An individuals benefit, if any, under a Predecessor Plan.
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§1(31)
(31) Predecessor Plan . A plan or arrangement listed on Exhibit C and any other plan or arrangement that is merged into the Plan. Exhibit C shall be updated from time to time by the Company to reflect any plan or arrangement that is merged into the Plan, but failure to so update Exhibit C shall not affect the effectiveness of any such merger. Certain of the plan documents in effect immediately prior to the Effective Date for the plans or arrangements that are Predecessor Plans as of the Effective Date are attached to Exhibit C as supplements thereto.
(32) Received has the meaning set forth in Section 17 and Receipt means Receipt pursuant to, and subject to, Section 17.
(33) Restored Benefit . With respect to an individual whose retirement benefit payable under a Qualified Plan (including benefits payable pursuant to a supplement thereto) is less than the retirement benefit that would be payable under such Qualified Plan without giving effect to the Code Limitations, an amount equal to (A) minus (B) where:
(A) equals the retirement benefit that would be payable to the individual under the Qualified Plan without giving effect to the Code Limitations; and
(B) equals the retirement benefit actually payable to the individual under the Qualified Plan.
(34) Retirement Benefit Records . Records, files or other documents maintained by an Employer or the Plan that designate, relate to the determination of, or otherwise indicate the benefit to which an individual is entitled under the Plan (including any Predecessor Plan) and any adjustments or enhancements thereto.
(35) Separation From Service . An employees Separation From Service with the Employers, as described in Treasury Regulation § 1.409A-1(h).
(36) Spouse . With respect to a Member, a person of the opposite sex who is the Members husband or wife pursuant to a marriage that is recognized by Illinois law.
(37) Supplemental Benefit . The sum of an individuals Restored Benefit, Predecessor Benefit and Additional Benefit, as actuarially adjusted to reflect any advance of benefits paid pursuant to Section 5(d) and any amounts previously distributed to or on behalf of the Member under the Plan or a Predecessor Plan.
(38) Treasurer . The most recently elected Treasurer of the Company or such other officer of the Company which from time to time assumes the responsibilities with respect to the Plan which are, on the day immediately prior to the Effective Date, allocated to the Treasurer. In the event of the temporary absence of the Companys officer who would otherwise be the Treasurer under this paragraph, whether due to illness, disability, or otherwise, or upon the resignation or removal of such officer, the substitute or successor officer to the Treasurer who performs substantially similar duties with respect to the Plan (whether assigned a different title by the Company or not), or, in the absence of such a substitute or successor, the person to whom such Treasurer would report, will be the Treasurer.
(39) Vice President . The most recently elected Senior Vice President, Compensation and Benefits, of the Company or such other officer of the Company which from
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§1(39)
time to time assumes the responsibilities with respect to the Plan which are, on the day immediately prior to the Effective Date, allocated to the Vice President, Benefits. In the event of the temporary absence of the Companys officer who would otherwise be the Vice President under this paragraph, whether due to illness, disability, or otherwise, or upon the resignation or removal of such officer, the substitute or successor officer to the Vice President who performs substantially similar duties with respect to the Plan (whether assigned a different title by the Company or not), or, in the absence of such a substitute or successor, the person to whom such Vice President would report, will be the Vice President.
Section 2
SUPPLEMENTAL BENEFIT
A Members Supplemental Benefit shall be determined as of the Members Benefit Commencement Date and paid to or on behalf of such Member at the time designated in Section 3 and in the manner designated in Section 4, both subject to Section 5.
Section 3
TIME OF PAYMENT
(a) In General . Subject to Section 5, the payment of a Members Supplemental Benefit shall begin on the Members Initial Payment Date.
(b) Designated Age Elections .
(i) Initial Elections .
(I) | Initial Eligibility Elections . An individual who first accrues (or who would, but for the application of an age, service or similar requirement, first accrue) a benefit under the Plan, a Predecessor Plan or any other plan that is aggregated with the Plan for purposes of section 409A of the Code during 2008 or any Plan Year thereafter may, if permitted by, and subject to rules established by, the Company, elect to have his or her Designated Age be any age between 56 and 65, inclusive; provided , however , that any such election shall not be given effect if made after the thirtieth day of the Plan Year immediately following the Plan Year in which such Member first so accrued a benefit. |
(II) | Transition Elections . During 2008 only, if permitted by, and subject to rules established by, the Company, a Member (or an individual who would, but for the application of an age, service or similar requirement, be a Member) whose benefits had not previously commenced, may elect to have his or her Designated Age be any age between 56 and 65, inclusive; provided , however , that such election shall not be given effect if (A) payments would have otherwise commenced during 2008, or (B) such election would have resulted in payments commencing during 2008. |
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§3(b)(ii)
(ii) Subsequent Deferral Elections . If permitted by, and subject to rules established by, the Company, a Member may elect to have his or her Designated Age be any age that is both (i) at least five years after his or her then Designated Age (taking into account any election made pursuant to Section 3(b)(i) and any other election made pursuant to this Section 3(b)(ii)), and (ii) between ages 60 and 65, inclusive ; provided , however , that any election made less than twelve months before the date the Member would attain his or her then Designated Age (taking into account any prior election) shall not be given effect and payment shall commence as though no such election had been made.
Section 4
FORM OF PAYMENT
(a) In General . Subject to Sections 4(b) and 5, a Members Supplemental Benefit shall be paid in the form of:
(i) with respect to a Member who does not have a Spouse on the Members Benefit Commencement Date, a single life annuity; and
(ii) with respect to a Member who has a Spouse on the Members Benefit Commencement Date, a joint and 50% survivor annuity (with any survivors benefit payable to the Members Spouse).
(b) Optional Forms of Payment .
(i) Single Members . A Member who does not have a Spouse on the Members Benefit Commencement Date may, if permitted by, and subject to rules established by, the Company, elect to receive his or her Supplemental Benefit in the form of (A) a joint and 50% survivor annuity (with any survivors benefit payable to the Members Beneficiary), or (B) a joint and 100% survivor annuity (with any survivors benefit payable to the Members Beneficiary); provided that such options shall be the Actuarial Equivalent of the form of benefit the Member would have received pursuant to Section 4(a)(i) had no election been made.
(ii) Married Members .
(I) | In General . Subject to Section 4(b)(ii)(II), a Member who has a Spouse on the Members Benefit Commencement Date may, if permitted by, and subject to rules established by, the Company, elect to receive his or her Supplemental Benefit in the form of (A) a joint and 100% survivor annuity (with any survivors benefit payable to the Members Spouse), (B) a joint and 100% survivor annuity (with any survivors benefit payable to the Members Beneficiary), (C) a joint and 50% survivor annuity (with any survivors benefit payable to the Members Beneficiary), or (D) a single life annuity; provided that such options shall be the Actuarial Equivalent of the form of benefit the Member would have received pursuant to Section 4(a)(ii) had no election been made. |
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§4(b)(ii)(I)
(II) | Election Procedures . In the case of a Member who has a Spouse on his or her Benefit Commencement Date, no election under Section 4(b)(ii)(I) shall be effective unless (1) the Members Spouse has consented to such election, to the satisfaction of the Company, or (2) it is established to the satisfaction of the Company that such consent cannot be obtained because the Members Spouse cannot be located. |
Section 5
ADDITIONAL PAYMENT PROVISIONS
(a) Commenced Benefits and Existing Elections . If a Members benefits under the Plan or a Predecessor Plan commenced prior to the Effective Date, then the payment of such benefits shall continue pursuant to the terms under which the payment of such benefits commenced.
(b) Small Amount Cash-outs . Notwithstanding anything herein to the contrary, if at any time following a Members Separation From Service the Company determines that the aggregate single sum amount that is the Actuarial Equivalent of the Members Supplemental Retirement Benefit would be equal to or less than the then applicable amount prescribed by section 402(g) of the Code, such benefit will be paid to the Member in a lump sum on the later of (i) the first day of the calendar month following the six-month anniversary of the Members Separation From Service, and (ii) the first day of the calendar month following the date the Members benefit is determined to be equal to or less than such applicable amount.
(c) Change In Control . Notwithstanding anything herein to the contrary, if a Member incurs a Separation From Service within twenty-four (24) months following a Change In Control, then his or her Supplemental Benefit will be paid to such Member in a lump sum on the first day of the calendar month following the six-month anniversary of such Members Separation From Service. If such Member is not alive on the date such benefit would have been paid to him or her, then such benefit shall be paid to his or her estate.
(d) Tax Matters .
(i) The Company or an Employer may, at the discretion of the Company, withhold from any payment of benefits hereunder any taxes that may be due in respect of such payment in such amount as the Company or such Employer may reasonably estimate to be necessary to cover any taxes which the Company or such Employer may be liable to withhold.
(ii) If a Members participation in the Plan results in the imposition of any employment taxes, then the Company or the Members Employer may remit any required employment taxes, and related income tax withholding, to the taxing authority and the Members Supplemental Benefit may be actuarially reduced to reflect such remittance.
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§5(d)(iii)
(iii) If at any time the Plan, with respect to a particular Member, is found to fail to meet the requirements of section 409A of the Code and the Treasury Regulations thereunder, the Company or an Employer may, at the discretion of the Company, distribute an amount equal to all taxes required to be paid on the amount included in income, and the Members Supplemental Benefit may be actuarially reduced to reflect such distribution.
(iv) A Member shall have no discretion, and shall have no direct or indirect election, as to whether a payment will be accelerated pursuant to this Section 5(d).
(e) 6-Month Delay Following Separation From Service .
(i) Notwithstanding anything to the contrary in the other Sections of the Plan, in no event shall payment of a Members Benefit be made before the six-month anniversary of the Members Separation From Service.
(ii) If a Members Initial Payment Date is later than his or her Benefit Commencement Date, then the first payment made to or on behalf of the Member shall include an amount equal to the amount (without any adjustment for interest) that would have previously been paid to or on behalf of the Member had his or her Initial Payment Date been the same date as his or her Benefit Commencement Date.
(f) Age 65 Distributions for Certain Members . Notwithstanding anything herein to the contrary, in the case of a Non-Early Retirement Eligible Member, the payment of such Members Supplemental Benefit shall begin on the first day of the month that begins coincident with, or immediately following, the date such Member attains age 65.
Section 6
PRE-RETIREMENT SURVIVOR BENEFITS
(a) In General . If a Member dies prior to his or her Benefit Commencement Date and such Members surviving Spouse, if any, is entitled to payment of a pre-retirement survivor benefit under a Qualified Plan that is less than the survivor benefit that would be payable under the Qualified Plan (i) but for the Code Limitations and (ii) treating the Additional Benefits described in Part I of Exhibit B hereto as payable with respect to such Member as having accrued under a Qualified Plan, then such surviving Spouse shall be entitled to receive a supplemental survivor benefit from the Company or the deceased Members former Employer under this Plan in an amount equal to (A) minus (B) where:
(A) equals the survivor benefit that would be payable under the Qualified Plan if such benefit were determined (I) without giving effect to the Code Limitations and (II) by treating the Additional Benefits described in Part I of Exhibit B hereto as having accrued under the Qualified Plan; and
(B) equals the survivor benefit actually payable to such surviving Spouse under the Qualified Plan.
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§6(a)
Any supplemental survivor benefit described in this Section 6(a) shall be paid in a lump sum on the first day of the month following the later of (i) the six-month anniversary of the Members death, and (ii) the date the Member would have attained age 55.
(b) Predecessor Plans . If a Predecessor Plan provides that a survivor benefit shall be paid if a participant therein dies prior to his or her Benefit Commencement Date, then any such survivor benefits shall be paid in a lump sum on the first day of the month following the later of (i) the six-month anniversary of the Members death, and (ii) the date the Member would have attained age 55.
(c) Additional Benefits . If an Additional Benefit described in Part II of Exhibit B provides that a survivor benefit shall be paid if the Member entitled to such Additional Benefit dies prior to his or her Benefit Commencement Date, then, unless specified otherwise therein, any such survivor benefits shall be paid in a lump sum on the first day of the month following the later of (i) the six-month anniversary of the Members death, and (ii) the date the Member would have attained age 55.
(d) Small Amount Cash-out . Notwithstanding anything herein to the contrary, if at any time following a Members death the Company determines that the single sum amount that is the Actuarial Equivalent of the aggregate supplemental survivor benefit described in Section 6(a), (b) and (c) to which any individual is entitled is equal to or less than the then applicable amount prescribed by section 402(g) of the Code, such benefits will be paid to such individual in a lump sum on the later of (i) the first day of the calendar month following the six-month anniversary of the Members death, and (ii) the first day of the calendar month following the date the such individuals supplemental survivor benefit is determined to be equal to or less than such applicable amount.
(e) Reductions for Prior Distributions . Notwithstanding anything herein to the contrary, an individuals benefit, if any, under this Section 6 shall be actuarially adjusted to reflect any amounts previously distributed under the Plan or a Predecessor Plan to or on behalf of such individual or the Member.
Section 7
AMENDMENT AND TERMINATION
This Plan shall be subject to the same reserved powers of amendment and termination as the Retirement Benefit Plan of R.R. Donnelley & Sons Company (without regard to any limitations imposed on such powers by the Code or ERISA), except that no such amendment or termination shall reduce or otherwise adversely affect the rights of Members or beneficiaries in respect of amounts accrued hereunder as of the date of such amendment or termination without their written consent.
Section 8
APPLICATION OF ERISA
This Plan is intended to be an unfunded plan maintained primarily for the purpose of providing deferred compensation to a select group of management or highly compensated employees within the meaning of sections 201(2), 301(a)(3) and 401(a)(1) of ERISA and Department of Labor Regulation § 2520.104-23. Neither the Company nor any of the Employers
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§8
shall be under any obligation to set aside any funds for the purpose of making payments under this Plan. Any payments hereunder shall be made out of the general assets of the Company or the Employers, as applicable.
Section 9
ADMINISTRATION
The Benefits Committee is hereby established and shall consist, at a minimum, of the Treasurer and the Vice President. The Benefits Committee may add additional members pursuant to procedures established in its by-laws. The Benefits Committee may always act by unanimous consent, has adopted by-laws to govern its activities and may amend such by-laws from time to time. Except as the context otherwise requires, the Benefits Committee shall be charged with the administration of this Plan and shall have the same powers and duties, and shall be subject to the same limitations, as are applicable to the Benefits Committee under the Retirement Benefit Plan of R.R. Donnelley & Sons Company.
Section 10
COMPANY ACTION
Company when referred to in the Plan, with respect to actions taken by the Company as sponsor of the Plan will be a reference to the Benefits Committee, the board of directors of the Company, or any delegee of any of the foregoing, in each case acting as the Company; provided , however , that any action by the Company pursuant to Section 7 to amend the Plan, if taken by any of the foregoing except the board of directors of the Company, may only be taken if, in the reasonable opinion of the person taking such action, the amendment does not have a material effect on the cost to the Employers of, or benefits in the aggregate under, the Plan; and provided further , that the Plan may be terminated with respect to all Employers only by resolution duly adopted by the Companys board of directors. Whenever in the Plan any determination or other action is to be made or taken by the Company or any other Employer, such determination or other action will be made or taken in the sole discretion of the Company or other Employer, as appropriate.
Section 11
NONASSIGNMENT OF BENEFITS
Notwithstanding anything contained in the Plan, any Predecessor Plan or any Qualified Plan to the contrary, it shall be a condition of the right to payment of Benefits that neither such Benefits nor any portion thereof shall be assigned, alienated or transferred to any person voluntarily or by operation of any law, including any assignment, division or awarding of property under state domestic relations law (including community property law).
Section 12
NON-DUPLICATION OF BENEFITS
Notwithstanding anything herein to the contrary, nothing herein shall operate to result in the duplication of any benefits under this Plan, between the Plan and any other plan or
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§12
arrangement, or otherwise with respect to any Member or other individual (including, without limitation, multiple accruals based on the same compensation), as determined in the sole discretion of the Company.
Section 13
NO GUARANTY OF EMPLOYMENT
Nothing contained in this Plan shall be construed as a contract of employment between any Employer and any employee or as conferring a right on any employee to be continued in the employment of any Employer.
Section 14
TRUST
(a) Funding . The Company may in its sole discretion establish a trust for the purpose of administering assets of the Company and the Employers to be used for the purpose of satisfying their obligations under the Plan. Any such trust shall be established in such manner so as to be a grantor trust of which the Company is the grantor, within the meaning of section 671 et . seq . of the Code. The existence of any such trust shall not relieve the Company or the Employers of their liabilities under the Plan, but the obligations of the Company and the Employers under the Plan shall be deemed satisfied to the extent paid from the trust.
(b) Taxation and Gross-ups . If any Member incurs a tax due to the application of section 409A(b)(3) of the Code in connection with the transfer of assets to any trust, the Company shall pay to such Member an amount such that after payment by the Member of all related taxes (including additional taxes imposed upon such payment to the Member) the Member retains an amount equal to the taxes imposed as a result of the application of section 409A(b)(3) of the Code. Any such payment shall be made no later than the fifteenth day of the third month following the calendar year in which such Member incurs such taxes.
Section 15
MISCELLANEOUS
(a) Applicable Law . This Plan and all rights hereunder and all determinations made and actions taken pursuant hereto, to the extent not otherwise governed by the Code or the laws of the United States, shall be governed by the laws of the State of Illinois and construed in accordance therewith without giving effect to its principles of conflict of laws.
(b) Expenses . All costs and expenses incurred in administering this Plan, including the expenses of the Benefits Committee, the fees of counsel and any agents of the Benefits Committee and other administrative expenses shall be paid by the Company and the Employers. The Company, in its sole discretion, having regard to the nature of a particular expense, shall determine the portion of such expense which is to be borne by the Company or a particular Employer.
(c) Successors and Assigns . The provisions of this Plan shall bind and inure to the benefit of the Company and each Employer and their successors and assigns, as well as each Member and his or her Spouse or other beneficiary and successors.
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§16
Section 16
CLAIMS AND APPEALS PROCEDURES
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§16(e)
(a) Authority to Submit Claims . Any individual who believes that he or she is entitled to receive a Benefit under this Plan, including one greater than that initially determined by the Benefits Committee, may (or his or her duly authorized representative may) file a Claim in writing with the Benefits Committee. The Benefits Committee will determine whether an individual is duly authorized to act on behalf of another individual, and may establish reasonable procedures for making this determination. Any such individual is referred to in this Plan as a Claimant.
(b) Procedure for Filing a Claim . In order for a communication from a Claimant to constitute a valid Claim, it must satisfy all the requirements of this Section 16(b), and if it does, it will constitute a valid Claim whether or not all the information necessary to make a Benefit Determination accompanies the communication.
(i) Any Claim must be Delivered to the Benefits Committee by a Claimant, in writing, and on the appropriate Claim form, or in such other form as may be acceptable to the Benefits Committee; and
(ii) Any Claim must be identified in writing as a formal Claim for a Benefit under the Claims and Appeals Procedures.
(c) Initial Claim Review . The initial Claim review will be conducted by the Benefits Committee, with or without the presence of the Claimant, as determined by the Benefits Committee in its discretion. The Benefits Committee will consider the applicable terms and provisions of this Plan and amendments to this Plan, information and evidence that is presented by the Claimant and any other information it deems relevant. In reviewing the Claim, the Benefits Committee will also consider and be consistent with prior determinations of Claims from other Claimants who were similarly situated and which have been processed through this Plans Claims and Appeals procedures within the past 24 months.
(d) Benefit Determination on Claim .
(i) The Benefits Committee will make a Benefit Determination regarding the Claim and Notify the Claimant of such Benefit Determination within a reasonable period of time, but in any event (except as described in Section 16(d)(ii) below) within 90 days after Receipt of the Claim by the Benefits Committee.
(ii) The Benefits Committee may extend the period for making the Benefit Determination on the Claim by up to 90 days if it determines that special circumstances require an extension of time, and if it Notifies the Claimant, prior to the end of the initial 90-day period, of the special circumstances requiring the extension of time and the date by which the Benefits Committee expects to render a Benefit Determination.
(e) Manner and Content of Notification of Adverse Benefit Determination on a Claim .
(i) The Benefits Committee will provide a Claimant with written or electronic Notice of any Adverse Benefit Determination on the Claim.
(ii) The Notification will set forth in a manner calculated to be understood by the Claimant:
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(I) | the specific reason or reasons for the Adverse Benefit Determination; |
(II) | reference to the specific provision(s) of this Plan on which the Adverse Benefit Determination is based; |
(III) | description of any additional material or information necessary for the Claimant to perfect the Claim and an explanation of why such material or information is necessary; and |
(IV) | a description of this Plans review procedures and the time limits applicable to such procedures, including a statement describing the Claimants right to bring a civil action under section 502(a) of ERISA following an Adverse Benefit Determination on review. |
(f) Authority to Submit an Appeal . Any Claimant who receives an Adverse Benefit Determination with respect to a Claim may file a request for review of such Adverse Benefit Determination (an Appeal).
(g) Procedure for Filing for a Request for Review of an Adverse Benefit Determination . In order for a communication from a Claimant to constitute a valid Appeal, it must satisfy all the requirements of this Section 16(g), and if it does, it will constitutes a valid Appeal whether or not all the information necessary to make a Benefit Determination on Appeal accompanies the request.
(i) Any Appeal must be submitted by a Claimant, in writing, and on the appropriate form, or in such other form as may be acceptable to the Benefits Committee.
(ii) Any Appeal must be Delivered to the Benefits Committee within 60 days of Receipt by the Claimant of the Notice of the Adverse Benefit Determination on the Claim.
If the Benefits Committee does not Receive a valid Appeal within 60 days of Delivery to the Claimant of the Notice of Adverse Benefit Determination for the related Claim, the Claimant will be barred from filing any Appeal thereafter and he or she will be deemed to have failed to exhaust all administrative remedies under this Plan.
(h) Review Procedures for Appeals .
(i) The Appeal review will be conducted by the Benefits Committee, with or without the presence of the Claimant, as determined by the Benefits Committee in its discretion. The Benefits Committee will consider the applicable terms and provisions of this Plan and amendments to this Plan, information and evidence that is presented by the Claimant (including all comments, documents, records and other information submitted by the Claimant without regard to whether such information was submitted or considered in the initial Benefit Determination) and any other information it deems relevant. In reviewing the Appeal, the Benefits Committee, where appropriate, will also consider and be consistent with prior determinations of Appeals from other Claimants who were similarly situated and which have been processed through this Plans Claims and Appeals procedures within the past 24 months.
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§16(j)(ii)(III)
(ii) The Claimant will be provided, upon request and free of charge, reasonable access to and copies of all Relevant Documents.
(iii) The review procedure will involve only one level of review.
(iv) The Claimant will be allowed to submit any supporting comments, documents, records and other information.
(i) Timing and Notification of Benefit Determination on Review .
(i) The Benefits Committee will make a Benefit Determination regarding the Appeal and Notify the Claimant of such Benefit Determination within a reasonable period of time, but in any event (except as described in Section 16(i)(ii) below) within 60 days after Receipt of the Appeal by the Benefits Committee.
(ii) The Benefits Committee may extend the period for making the Benefit Determination on the Appeal by up to 60 days if it determines that special circumstances require an extension of time, and if it Notifies the Claimant, prior to the end of the initial 60-day period, of the special circumstances requiring the extension of time and the date by which the Benefits Committee expects to render a decision. If such an extension is necessary due to a failure of the Claimant to submit information necessary to decide the Appeal, the period in which the Benefits Committee is required to make a decision shall be tolled by the Benefits Committee from the date on which the Notification is sent to the Claimant until the Benefits Committee has Received from the Claimant a response to the request for additional information. If the Claimant fails to respond to the Benefits Committees request for additional information within a reasonable time, the Benefits Committee may, in its discretion, render a Benefit Determination on the Appeal based on the record before the Benefits Committee.
(j) Manner and Content of Notification of Adverse Benefit Determination on Appeal .
(i) The Benefits Committee will provide a Claimant with written or electronic Notice of any Adverse Benefit Determination on the Appeal.
(ii) The Notification will set forth in a manner calculated to be understood by the Claimant:
(I) | The specific reason or reasons for the Adverse Benefit Determination; |
(II) | Reference to the specific provision(s) of this Plan on which the Adverse Benefit Determination is based; |
(III) | A statement that the Claimant is entitled to receive, upon request and free of charge, reasonable access to and copies of all Relevant Documents; and |
(IV) | A statement describing the Claimants right to bring a civil action under section 502(a) of ERISA following an Adverse Benefit Determination on review. |
(k) Collectively Bargained Benefits . Where benefits are provided pursuant to a collective bargaining agreement and
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(i) such collective bargaining agreement maintains or incorporates by specific reference (i) provisions concerning the filing and disposition of Claims; and (ii) a grievance and arbitration procedure to which Appeals are subject, then Section 16(b) through and including Section 16(j) will not apply to Claims covered by such collective bargaining agreement; or
(ii) such collective bargaining agreement maintains or incorporates by specific reference a grievance and arbitration procedure to which Appeals are subject, then Section 16(g) through and including Section 16(j) will not apply to such Appeal.
(l) Limitation on Actions . No legal action, including without limitation any lawsuit, may be brought for a Benefit by a Claimant more than (a) two years after the date the related Claim is Received by the Benefits Committee, or (b) if the Claimant has Received a denial of his or her related Appeal during such time, two years after such Receipt.
(m) Failure to Exhaust Administrative Remedies . No legal action for a Benefit, including without limitation any lawsuit, may be brought by a Claimant who has not timely filed a Claim and an Appeal for such Benefit and otherwise exhausted all administrative remedies under this Plan.
Section 17
DELIVERY AND RECEIPT
For purposes of Section 17, any Notice, Notification, Claim, or other thing(s) or document(s) may be delivered in person, via messenger or courier service, or via United States Mail; provided , however , that any Notice sent by the Benefits Committee related to a Claim may be sent via fax if (a) Receipt of the fax is confirmed by a print out from the sending fax machine indicating that the transmission was Received, and (b) the fax transmission is followed by a hard copy sent via next business day courier service sent no later than the business day after the fax is transmitted. Any such item sent to the Benefits Committee must be sent to the address specified for the benefits committee of the Retirement Benefit Plan of R.R. Donnelley & Sons Company in the summary plan description of such plan. Any such item sent by the Benefits Committee, the Company or an Employer may be sent to the last known address of the intended recipient, as determined by reference to the records of this Plan, the Company or an Employer. Any such item which meets the above-requirements will be deemed Delivered and Received on the earlier of (a) the date of actual Receipt, if Receipt is evidenced by a written Receipt, (b) 10 days after deposit in the United States Mail, first class postage prepaid and return Receipt requested, and (c) the date of confirmation of successful transmission via fax. If the above-specified procedures are not followed, the item will be deemed not Delivered or Received and it will not be effective.
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EXHIBIT A
QUALIFIED PLANS
Name of Plan |
Effective Date of becoming a
|
|
Retirement Benefit Plan of R.R. Donnelley & Sons Company |
Inception of Plan | |
Retirement Income Plan of Moore Wallace North America, Inc. |
January 1, 2005 | |
Banta Corporation Employees Pension Plan |
April 1, 2007 |
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EXHIBIT B
ADDITIONAL BENEFITS
PART IBENEFITS INCLUDED IN SECTION 6(A) PRE-RETIREMENT SURVIVOR BENEFITS
1. Compensation-Based Benefits Derived from Nonqualified Deferred Compensation Plans .
(a) Sales Representative Plan . With respect to an individual who is a participant in the R. R. Donnelley & Sons Company Global Capital Markets and Global Investment Markets Business Units of the Financial Business Unit Sales Representative Deferred Compensation Plan (the Sales Representatives Plan), if the retirement benefit payable to such individual under a Qualified Plan is less than the retirement benefit that would be payable under the Qualified Plan if compensation deferred by the individual under the Sales Representatives Plan that would have otherwise been received as salary or bonus were included in the Members compensation used to determine the amount of his or her accrued benefit under the Qualified Plan, without giving effect to the Code Limitations, then such individual shall be entitled to an Additional Benefit in an amount equal to (A) minus (B) where:
(A) equals the retirement benefit that would be payable under the Qualified Plan if such benefit were determined by including compensation deferred by the individual under the Sales Representatives Plan and without giving effect to the Code Limitations; and
(B) equals the sum of the retirement benefit actually payable to the individual under the Qualified Plan and the individuals Restored Benefit.
(b) RRD Deferred Compensation Plan . With respect to an individual who is a participant in the R.R. Donnelley & Sons Company Nonqualified Deferred Compensation Plan (the RRD Deferred Compensation Plan), if the retirement benefit payable to such individual under a Qualified Plan is less than the retirement benefit that would be payable under the Qualified Plan if compensation deferred by the individual under the RRD Deferred Compensation Plan that would have otherwise been received as salary or bonus during 2005 or any later year were included in the individuals compensation used to determine the amount of his or her accrued benefit under the Qualified Plan, without giving effect to the Code Limitations, then such individual shall be entitled to an Additional Benefit in an amount equal to (A) minus (B) where:
(A) equals the retirement benefit that would be payable under the Qualified Plan if such benefit were determined by including compensation deferred by the individual under the RRD Deferred Compensation Plan and without giving effect to the Code Limitations; and
(B) equals the sum of the retirement benefit actually payable to the individual under the Qualified Plan and the individuals Restored Benefit.
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2. Past Service Improvements . Each Member designated in the Retirement Benefit Records as entitled to receive a Past Service Improvement, Cost of Living Adjustment or similar adjustment under the Plan or a Predecessor Plan for reasons other than on account of the Code Limitations shall be entitled to an Additional Benefit determined in the manner and in the amount designated in the Retirement Benefit Records with respect to such Member.
3. Early Retirement Window Benefits . Each Member designated in the Retirement Benefit Records as eligible for, and who elected to participate in, an early retirement window program offered to such Member and providing enhanced retirement benefits that are designated by the Company as payable under this Plan for reasons other than on account of the Code Limitations shall be entitled to an Additional Benefit determined in the manner and in the amount designated in the Retirement Benefit Records with respect to such Member.
4. Additional Benefits for Eligible Stream Employees . (a) Amount of Additional Benefit . An Eligible Stream Employee, as hereinafter defined, who as of April 21, 1995 (i) had at least five years of RRD Continuous Service, as hereinafter defined, and (ii) had attained age 40 shall be entitled to an Additional Benefit in an amount equal to the amount designated in the Retirement Benefit Records as payable to such Eligible Stream Employee in connection with a transfer of employment from an Employer to Stream International, Inc.
(b) Definitions .
(i) The term Eligible Stream Employee shall mean any individual designated in the Retirement Benefit Records as eligible to receive a benefit under this Plan and who immediately prior to April 21, 1995 was employed in the United States (including expatriates deemed to be employed in the United States) at a facility included in the RRD GSS Assets or RRD Norwest GSS Assets, as hereinafter defined, or was otherwise assigned thereto prior to such date and who transfers or transferred to Stream International Inc. on or after such date.
(ii) The term GSS Business means, as of April 21, 1995, the business of providing computer and computer software related documentation services, including printing and binding, media replication, kitting assembly, packaging, translation and localization, electronic exchange, licensing and fulfillment, as engaged in by the Company directly through its Global Software Services division and indirectly through a division of R. R. Donnelley Norwest Inc.
(iii) The term RRD GSS Assets means all of the assets and properties of the Company of every kind and description, wherever located, real, personal or mixed, tangible or intangible, used primarily in connection with the GSS Business as the same existed on April 21, 1995.
(iv) The term RRD Norwest GSS Assets means all of the assets and properties of R. R. Donnelley Norwest Inc. of every kind and description, wherever located, real, personal or mixed, tangible or intangible, used primarily in connection with the GSS Business as the same existed on April 21, 1995.
(v) The term RRD Continuous Service shall mean the continuous employment of such person with the Company, plus periods of up to 30 days
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when such person is not so employed, but excluding any period of employment with any company prior to the Companys acquisition thereof or assets relating thereto.
PART IIBENEFITS NOT INCLUDED IN §6(A) PRE-RETIREMENT SURVIVOR BENEFITS
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EXHIBIT C
PREDECESSOR PLANS
1. Werthan Industries, Inc. Supplemental Retirement Plan (a/k/a Check Printers Supplemental Retirement Plan)
2. Moore Wallace North America, Inc. Non-Qualified Retirement Income Plan
3. Supplemental Unfunded Retirement Income Plan for Employees of Meredith/Burda Corporation
4. Supplemental Unfunded Retirement Income Plan for Employees of Meredith/Burda Company, Limited Partnership
5. Each other nonqualified deferred compensation plan maintained by an Affiliate that provides benefits in the form of an annuity, other than the Banta Corporation Supplemental Retirement Plan for Key Employees.
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Exhibit 10.12
R.R. DONNELLEY & SONS COMPANY
AMENDMENT NUMBER ONE
to the
January 1, 2009 Restatement
of the
RR DONNELLEY UNFUNDED SUPPLEMENTAL
PENSION PLAN
Terms applicable to reemployed Members
WHEREAS, R.R. Donnelley & Sons Company (the Company) maintains the RR Donnelley Unfunded Supplemental Pension Plan (the Plan) for the benefit of a select group of management or highly compensated employees or former employees of the Company and its participating affiliates;
WHEREAS, Sections 7 and 10 of the Plan permit amendment of the Plan by the Benefits Committee acting as the Company;
WHEREAS, pursuant to the By-Laws of the Benefits Committee, the Benefits Committee acting as the Company has delegated to the Companys Vice President, Benefits (the Vice President), authority to amend the Plan; and
WHEREAS, the Company desires to amend the Plan to provide rules applicable to reemployed Members.
NOW, THEREFORE, pursuant to the power of amendment in Section 7 of the Plan, the Vice President acting as the Company hereby amends the Plan effective January 1, 2009, in the following respects:
1. Section 2 of the Plan is hereby amended to add the following definitions in alphabetical order and to renumber subsections and subsection references accordingly, and the Plan is further amended to renumber subsection references to renumbered subsections of Section 2 accordingly :
Additional Supplemental Benefit . The Supplemental Benefit to which a Reemployed Member is entitled that is attributable to services rendered after he or she becomes a Reemployed Member.
Original Supplemental Benefit . With respect to a Reemployed Member, the Supplemental Benefit attributable to services rendered prior to becoming a Reemployed Member.
Reemployed Member . A Member who (a) has incurred a Separation From Service, (b) is entitled to a Supplemental Benefit (whether or not in pay status) attributable to services rendered prior to such Separation From Service, and (c) is employed by an Employer following such Separation From Service.
2. Section 5 of the Plan is hereby amended to add the following new subsection (g) at the end thereof:
(g) | Additional Supplemental Benefits . |
(i) Form of Payment . Notwithstanding anything herein to the contrary, if a Reemployed Member incurs a Separation From Service while his or her Original Supplemental Benefit is in pay status, then his or her Additional Supplemental Benefit, if any, shall be paid in a form determined pursuant to the following:
(I) | Original Supplemental Benefit Form Remains Available . If the form of benefit in which his or her Original Supplemental Benefit is being paid is still offered under the Plan, then his or her Additional Supplemental Benefit shall be paid in the same form (and with the same contingent annuitant, if any) as the Original Supplemental Benefit. |
(II) | Original Supplemental Benefit Form No Longer Available . If the form of benefit in which his or her Original Supplemental Benefit is being paid is no longer offered under the Plan, then his or her Additional Supplemental Benefit shall be paid in the default form described in Section 4(a)(i) or (ii), as applicable. |
If a Reemployed Member incurs a Separation From Service when his or her Original Supplemental Benefit is not in pay status, then his or her Additional Supplemental Benefit shall be paid in the same form in which his or her Original Supplemental Benefit is paid pursuant to Section 4 of the Plan.
(ii) Time of Payment . If a Reemployed Member is entitled to an Additional Supplemental Benefit, then his or her Additional Supplemental Benefit shall, subject to Section 5(e), commence at a time determined pursuant to the following:
(I) | Original Supplemental Benefit Not in Pay Status . If the Members Original Supplemental Benefit is not in pay status when the Reemployed Member incurs another Separation From Service, then his or her Additional Supplemental Benefit shall commence at the same time his or her Original Supplemental Benefit commences. |
(II) |
Original Supplemental Benefit In Pay Status . If the Members Original Supplemental Benefit is already in pay status, then his or her Additional Supplemental Benefit shall commence (or shall result in an increase to the ongoing payments attributable to his or |
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her Original Supplemental Benefit, as applicable) on the first day of the month that begins coincident with or immediately following the six-month anniversary of the Reemployed Members Separation From Service. |
(iii) Pre-Retirement Survivor Benefits . If a Reemployed Member dies while his Original Supplemental Benefit is in pay status but prior to again incurring a Separation From Service, then any Additional Supplemental Benefit shall not be subject to terms of Section 6 and shall be treated as though the Member had incurred a Separation From Service immediately prior to his or her death
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Exhibit 10.34
R.R Donnelley
Management By Objective Plan
(As amended and restated effective January 1, 2010)
OVERVIEW
The RR Donnelley Management By Objective Plan (the Management By Objective Plan or the Plan) is designed to promote the growth and profitability of RR Donnelley and its subsidiaries with incentives to reward and enhance the retention of eligible employees. Awards are made depending on the Companys financial performance and on how well an eligible employee performs against individual objectives that link to and support RR Donnelleys strategic and financial priorities.
The Plan is a sub-plan of the R. R. Donnelley & Sons Company 2004 Performance Incentive Plan (the 2004 PIP) and is subject to all of the performance conditions established pursuant to the 2004 PIP and the limitations set forth therein. With respect to participants who are subject to Section 162(m) of the Internal Revenue Code, as amended (the Code), to the extent that any term of the Plan conflicts with the terms of the 2004 PIP, the terms of the 2004 PIP will apply.
The Human Resources Committee of the Board of Directors (the Committee) administers the Plan. The Committee has authority to establish rules and regulations for the Plans implementation and administration, including the authority to impose limitations and conditions, with respect to competitive employment or otherwise, that are not inconsistent with the Plans purposes.
PARTICIPATION
Eligibility is limited to officers selected by the Committee and other key employees designated in writing annually by the Chief Human Resources Officer.
TARGET AWARD PERCENTAGE AND PLAN FUNDING
Each eligible participants target incentive opportunity under the Management By Objective Plan is a percentage of such participants base salary as of December 31 of the Plan Year, or such other amount as determined by the Committee. This is referred to as the Target Award Percentage and will be communicated to eligible participants annually. Eligible wages do not include disability benefit payments. The Plan Year for any year is the calendar year. The portion of any Target Award Percentage that is dependent upon achievement of personal objectives may vary based on the participants level in the Company (the Personal Objective Percentage) and will be communicated to eligible participants annually.
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Subject to the performance conditions established under the 2004 PIP and the limitations set forth therein, the Company must fund the Plan for a Plan Year for participants to receive an award for that Plan Year. The decision whether or not to fund the Plan for a particular Plan Year, as well as the Plans funding level, is made by the Committee in its sole discretion based on financial performance targets set by the Committee, which may not be amended after the end of the Plan Year. Plan funding is based upon the Companys actual financial performance for the Plan Year against the previously set targets and if the Committee determines that the financial targets have been met the Plan will be funded.
If the Company funds the Plan, then awards will be made based upon the Plans funding level and the participants achievement of his or her personal objectives, up to 125% of the participants Target Award Percentage (or such other percentage as determined by the Committee). The Committee will determine the percentage of the participants Target Award Percentage to be paid out based upon the participants Personal Objective Percentage, achievement of personal objectives and the Plans funding level, and such percentages will be communicated to the participant.
Any actual award made under the Management By Objective Plan can range from 0% to 125% of the Target Award Percentage (or such other percentage as determined by the Committee), depending upon the Plans funding level, the participants Personal Objective Percentage and achievement of the participants personal objectives.
Example 1 . Assume the following:
|
Susans base salary is $200,000 |
|
Her Target Award Percentage is 50% |
|
Her Personal Objective Percentage is 50% |
|
She achieves all of her personal objectives |
|
The Plan funding level for the year is 100% |
|
The Committee determines that Susans award should not be subject to any adjustments |
Susans award for the Plan Year would be $100,000, calculated as follows:
|
$200,000 base salary x 50% Target Award Percentage x 100% Plan funding = $100,000 max potential award |
|
50% Personal Objective Percentage x $100,000 max potential award = $50,000 |
|
+ $50,000 (50% not dependent personal objective achievement) |
|
= $100,000 actual award |
Example 2 . Same facts as 1 except that, due to the Companys financial performance, the Plan funding level is 50% rather than 100%.
Susans award would be $50,000, calculated as follows:
|
$200,000 base salary x 50% Target Award Percentage x 50% Plan funding = $50,000 max potential award |
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|
50% Personal Objective Percentage x $50,000 max potential award = $25,000 |
|
+ $25,000 ( 50% not dependent on personal objective achievement) |
|
= $50,000 actual award |
Example 3 . Same facts as 1 except that Susan only achieves 25% of her personal objectives.
Susans award would be $62,500, calculated as follows:
|
$200,000 base salary x 50% Target Award Percentage x 100% Plan funding = $100,000 max potential award |
|
50% Personal Objective Percentage x $100,000 max potential award = $50,000 |
|
x 25% personal objective achievement = $12,500 |
|
+ $50,000 (50% not dependent on personal objective achievement) |
|
= $62,500 actual award |
PERSONAL OBJECTIVES
Personal objectives are established for each participant each Plan Year to link and support RR Donnelleys strategic and financial priorities. A participants personal objectives are determined each year in consultation with the participant and his or her manager and are communicated to the participant in writing as part of the objective goal-setting process. The portion of any Target Award Percentage that is dependent upon achievement of personal objectives may vary based on the participants level in the Company and will be communicated to eligible participants annually. The Committees determination of whether a participant has attained, in whole or in part, the participants personal objectives for a Plan Year, shall be final and binding.
AWARD AMOUNT AND PAYMENT
Awards are paid following the Plan Year after the Committee has certified the achievement of performance goals under the 2004 PIP and the Plan funding decisions and personal performance measurements have been made. Except as otherwise provided herein or by the Committee at the time the target awards for a Plan Year are determined, any award to be paid under the Plan shall be paid to recipients within 2 1 /2 months after the end of the Plan Year (i.e., by March 15). A participant must be on the payroll of the Company as of the end of the Plan Year (i.e. as of December 31) to receive an award. Special provisions apply to retirees and in the case of a participants death or Disability. (Please refer to the Changes in Employment Status section of this document for details.)
The Committee has discretionary authority to increase or decrease the amount of the award otherwise payable if it determines prior to the end of the Plan Year that an adjustment is appropriate to better reflect the actual performance of the Company and/or the participant; provided, however, that the Committee may not increase the amount of the award payable to a
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person who is a covered employee, as defined in Section 162(m) of the Code, to an amount in excess of the amount earned under the 2004 PIP. The Committee also has discretionary authority to reduce the amount of the award otherwise payable if it determines that the participant engaged in misconduct.
BENEFITS AND TAX TREATMENT
Award payments are subject to applicable deductions, including social security taxes and federal and applicable state and local income tax withholding.
The treatment of award payments as compensation for purposes of other RR Donnelley employee benefits plans is determined by the terms of the applicable plans.
CHANGES IN EMPLOYMENT STATUS
A. PROMOTIONS, DEMOTIONS, TRANSFERS, CHANGES IN ASSIGNMENT
If a participant is promoted, demoted, transferred to or between business units or from corporate during the year, any award payout normally will be calculated by prorating the payouts for each eligible position based on the time assigned to that position.
B. NEW HIRE
Employees hired prior to October 1 st of the Plan Year shall be eligible to participate in the Management By Objective Plan in the year of hire if designated. Eligible employees hired after September 30 th of the Plan Year shall not be eligible to begin participation in the Plan until the following year, except for those who receive approval for participation from the Companys Chief Human Resources Officer.
C. RETIREMENT, DEATH or DISABILITY
A participants retirement*, death, or Disability** during a Plan Year or prior to the payment date will not disqualify a participant from eligibility to receive any award that otherwise would be due under the Plan.
* | For purposes of the Plan, retirement generally means (i) retirement at age 65, or (ii) retirement at or after age 55 with 5 or more years of continuous service. |
** | For purposes of the Plan, Disability means disability as defined as in the Companys long-term disability policy as in effect at the time of the participants disability. |
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D. OTHER TERMINATION
If participants employment terminates for reasons other than retirement (as defined above), death, or Disability (as defined above) prior to the end of the Plan Year, no award shall be payable.
ADMINISTRATION
The Committee has full discretionary authority to administer the Plan, including the authority to determine the performance achievement attained under the Plan. The Committee may delegate to members of RR Donnelleys management the authority to administer the Plan and determine performance under the Plan.
RR Donnelley retains the right to amend or terminate the Plan at any time; provided however that awards for any plan year may not be amended or terminated after the completion of such Plan Year except in cases of misconduct of the participant.
Questions regarding the Plan should be directed to the Corporate Compensation Department.
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EXHIBIT 31.1
Certification Pursuant to Rule 13a-14(a) and Rule 15d-14(a)
of the Securities Exchange Act of 1934
I, Thomas J. Quinlan, III, certify that:
1. | I have reviewed this quarterly report on Form 10-Q of R.R. Donnelley & Sons Company; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) | designed such disclosure controls and procedures, or caused such disclosures controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over the financial reporting; and |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent function): |
(a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
(b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: November 3, 2010
/ S / T HOMAS J. Q UINLAN , III |
Thomas J. Quinlan, III |
President and Chief Executive Officer |
EXHIBIT 31.2
Certification Pursuant to Rule 13a-14(a) and Rule 15d-14(a)
of the Securities Exchange Act of 1934
I, Miles W. McHugh, certify that:
1. | I have reviewed this quarterly report on Form 10-Q of R.R. Donnelley & Sons Company; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; |
(b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over the financial reporting; and |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent function): |
(a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
(b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: November 3, 2010
/ S / M ILES W. M C H UGH |
Miles W. McHugh Executive Vice President and Chief Financial Officer |
EXHIBIT 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
CERTIFICATION PURSUANT TO RULE 13a-14(a) AND RULE 15d-14(a)
SECTION 1350, CHAPTER 63 OF TITLE 18
OF THE UNITED STATES CODE,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of R. R. Donnelley & Sons Company (the Company) on Form 10-Q for the period ending September 30, 2010 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Thomas J. Quinlan, III, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) | The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
(2) | The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. |
/s/ T HOMAS J. Q UINLAN , III |
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November 3, 2010 |
Thomas J. Quinlan, III President and Chief Executive Officer |
EXHIBIT 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
CERTIFICATION PURSUANT TO RULE 13a-14(a) AND RULE 15d-14(a)
SECTION 1350, CHAPTER 63 OF TITLE 18
OF THE UNITED STATES CODE,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of R. R. Donnelley & Sons Company (the Company) on Form 10-Q for the period ending September 30, 2010 as filed with the Securities and Exchange Commission on the date hereof (the Report), Miles W. McHugh, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) | The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
(2) | The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. |
/s/ M ILES W. M C H UGH |
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November 3, 2010 |
Miles W. McHugh Executive Vice President and Chief Financial Officer |