UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to                     

Commission file number 1-37729

 

LSC Communications, Inc.    

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

36-4829580

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

191 N. Wacker Drive, Suite 1400, Chicago, IL

 

60606

(Address of principal executive offices)

 

(ZIP Code)

Registrant’s telephone number, including area code—(773) 272-9200

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

 

Title of each
Class

 

 

 

Name of each exchange on which
registered

 

Common Stock (Par Value $0.01)

 

NYSE

___________________________________________________

 

Indicated by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    

Yes  ☐    No  

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    

Yes  ☐    No  

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes       No  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes       No  ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer 

 

Accelerated filer 

 

Non-accelerated filer 

 

Smaller reporting company 

 

 

 

 

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ☐    No  

As of June 30, 2016, the registrant’s common stock was not publicly traded.

As of February 17, 2017, 32,449,762 shares of common stock were outstanding.    

Documents Incorporated By Reference

Portions of the registrant’s proxy statement related to its annual meeting of stockholders scheduled to be held on May 18, 2017 are incorporated by reference into Part III of this Form 10-K.  


TABLE OF CONTENTS

 

PART I

 

 

 

Form 10-K

Item No.

 

Name of Item

 

Page

Part I

 

 

 

 

 

 

 

 

Item 1.

 

Business

 

3

 

 

Item 1A.

 

Risk Factors

 

11

 

 

Item 1B.

 

Unresolved Staff Comments

 

23

 

 

Item 2.

 

Properties

 

23

 

 

Item 3.

 

Legal Proceedings

 

23

 

 

Item 4.

 

Mine Safety Disclosures

 

23

 

 

 

 

Executive Officers of LSC Communications, Inc.

 

52

 

 

 

 

 

 

 

Part II

 

 

 

 

 

 

 

 

Item 5.

 

Market for LSC Communications’ Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

24

 

 

Item 6.

 

Selected Financial Data

 

26

 

 

Item 7.

 

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

 

27

 

 

Item 7A.

 

Quantitative and Qualitative Disclosures about Market Risk

 

47

 

 

Item 8.

 

Financial Statements and Supplementary Data

 

49

 

 

Item 9.

 

Changes in Disagreements with Accountants on Accounting and Financial Disclosure

 

49

 

 

Item 9A.

 

Controls and Procedures

 

49

 

 

Item 9B.

 

Other Information

 

50

 

 

 

 

 

 

 

Part III

 

 

 

 

 

 

 

 

Item 10.

 

Directors and Executive Officers of LSC Communications and Corporate Governance

 

51

 

 

Item 11.

 

Executive Compensation

 

52

 

 

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

53

 

 

Item 13.

 

Certain Relationships and Related Transactions and Director Independence

 

53

 

 

Item 14.

 

Principal Accounting Fees and Services

 

54

 

 

 

 

 

 

 

Part IV

 

 

 

 

 

 

 

 

Item 15.

 

Exhibits, Financial Statement Schedules

 

55

 

 

 

 

Signatures

 

56

 

 

 

2


 

PAR T I

 

ITEM 1. BUSINESS

 

Company Overview

 

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

      

On October 1, 2016 (the “separation date”), R. R. Donnelley & Sons Company (“RRD” or the “Parent”) completed the previously announced separation (the “separation”) into three separate independent publicly-traded companies: (i) its publishing and retail-centric print services and office products business (“LSC Communications”); (ii) its financial communications services business (“Donnelley Financial Solutions, Inc.” or “Donnelley Financial”) and (iii) a global, customized multichannel communications management company, which is the business of RRD after the separation.  To effect the separation, RRD undertook a series of transactions to separate net assets and legal entities.  RRD completed the distribution (the “distribution”) of 80.75%, of the outstanding common stock of LSC Communications and Donnelley Financial to RRD shareholders on October 1, 2016.  RRD retained a 19.25% ownership stake in both LSC Communications and Donnelley Financial.  On October 1, 2016, RRD shareholders of record as of the close of business on September 23, 2016 received one share of LSC Communications common stock and one share of Donnelley Financial common stock for every eight shares of RRD common stock held as of the record date. As a result of the separation, LSC Communications and Donnelley Financial are now independent publicly-traded companies and began regular way trading under the symbols “LKSD” and “DFIN,” respectively, on the New York Stock Exchange on October 3, 2016.  RRD remains an independent publicly-traded company trading under the symbol “RRD” on the New York Stock Exchange. 

    

In connection with the separation, LSC Communications, RRD and Donnelley Financial entered into commercial arrangements and transition services agreements.  Under the terms of the commercial arrangements, RRD continues to provide, among other things, logistics, premedia, production and sales services to LSC Communications. RRD will also provide LSC Communications certain global outsourcing, technical support and other services. LSC Communications also continues to provide print and bind services for Donnelley Financial. In addition, LSC Communications continues to provide sales support services to RRD’s Asia and Mexico print and graphics management businesses in order to facilitate sales of books and related products to the U.S.

 

Under the terms of the transition services agreements, RRD provides certain services to LSC Communications, including, but not limited to, in such areas as tax, information technology, treasury, internal audit, human resources, accounting, purchasing, communications, security and compensation and benefits.  These agreements facilitated the separation by allowing LSC Communications to operate independently prior to establishing stand-alone back office systems across its organization.  Transition services may be provided for up to twenty-four months following the separation.  LSC Communications provides certain services to RRD and Donnelley Financial including, but not limited to information technology and credit services.

 

The Company and RRD also entered into:  

 

 

A separation and distribution agreement (to which Donnelley Financial is also a party) which accomplished the distribution of LSC Communications’ common stock and the distribution of Donnelley Financial’s common stock to RRD’s common stockholders, and which governs the Company’s relationships with RRD and Donnelley Financial with respect to pre-separation matters and provides for the allocation of employee benefit, litigation and other liabilities and obligations attributable to periods prior to the separation;

 

A Tax Disaffiliation Agreement that allocates responsibility for taxes between LSC Communications and RRD and includes indemnification rights with respect to tax matters and restrictions to preserve the tax-free status of the separation; and  

 

A Patent Assignment and License Agreement, a Trademark Assignment and License Agreement, a Data Assignment and License Agreement and a Software, Copyright and Trade Secret Assignment and License Agreement, in each case, that will provide for ownership, licensing and other arrangements to facilitate RRD’s, Donnelley Financial’s and the Company’s ongoing use of intellectual property, as applicable.  

 

Final copies of such agreements are filed as exhibits to this annual report on Form 10-K.

 

3


 

 

Business Overview

 

The Company serves the needs of publishers, merchandisers, cataloguers and retailers with product and service offerings that include traditional and digital print, e-services, warehousing, fulfillment and supply chain management services.  In addition, we manufacture and sell office products offerings that include filing products, note-taking products, binder products and tax and stock forms and envelopes.

 

 

Print Business

 

The product and service offerings in the Print business include:

 

Magazines, catalogs, and retail inserts: We are one of the largest producers of catalogs, magazines and retail inserts in North America. These products are produced to customers’ specifications using either offset or gravure printing processes in combination with either on-press finishing, saddle-stitch binding or patent binding. Our catalog customers include retailers and other direct-to-buyer sellers who design their own catalogs and use our production capabilities to print and distribute their catalogs to customers through the mail. Our magazine customers are magazine publishers who design their own magazines and use our production capabilities to print and distribute their magazines through the mail directly to their subscribers and through wholesalers to retailers and other “newsstands” for purchase by non-subscribers. Our retail insert customers include retailers who distribute their inserts in newspapers distributed to newspaper subscribers and via in-store distribution. In the U.S., we have a network of production facilities enabling the optimal combination of regional and national distribution. Additionally, we have production facilities in Poland and Mexico that efficiently produce products for international distribution.

 

Books: We are the largest producer of books in the U.S. Our book customers generally are book publishers who seek to print hardcover and softcover books, with either case, soft or spiral binding serving the education, trade, religious and testing sectors. We believe we are well positioned to meet our book customers’ specific needs, whether they be colors, page counts, trim size, binding styles or quantities. Consumer trade books are typically produced using either offset or digital printing processes, and are bound in a variety of formats. Educational books include softcover and traditional casebound textbooks utilized by primary and secondary school and college students, as well as workbooks, teachers’ editions, and other formats.

 

Directories: We produce directories which are mainly phone directories that support local and small business advertising. Our customers for directory printing are generally marketing solution providers that publish online as well as printed directories.

 

Print-related services: In addition to printed products, we provide a number of print-related services. Our supply chain management offering includes procurement, warehousing, distribution, and inventory management for book publishers. We also provide e-book formatting, and distribution services. Our mail services offering includes list processing, and mail sortation services that, combined with our production scale, optimize postal costs for magazine and catalog customers. Our primary mail sortation facility is located in Bolingbrook, Illinois. Because of our scale of production, we are frequently able to provide cross-customer sortation that reduces postal costs for our customers compared to what an individual customer could obtain.

 

 

Office Products Business

 

The Office Product business produces a wide range of branded and private label products, primarily within the following five categories:

 

Filing products: Our filing products include a variety of presentation and storage materials for professionals and students. We sell our filing products under the Pendaflex and other brands, as well as under private label brands for third parties.

 

Note-taking products: Our note-taking products include legal pads, journals, index cards, spiral notebooks, composition books and notebook filler paper. We sell our note-taking products under the TOPS, Ampad, Oxford, and other brands, as well as under private label brands for third parties.

 

Binder products: Our binder products include a variety of binders and binder accessories for professionals and students. We sell our binder products under the Cardinal, Oxford and other brands, as well as under private label brands for third parties.

 

Forms: We produce business forms, tax forms, message and memo pads, financial forms, and recordkeeping materials for businesses within the U.S. Our key brand used for forms is Adams, and we also produce private label forms for third parties.

4


 

 

Envelopes: We produce envelopes for businesses within the U.S. Our key brand used for envelopes is Ampad, and we also produce private label envelopes for third parties.

 

 

Segment Descriptions

 

The Company’s operating and reporting segments are aligned with how the chief operating decision maker of the Company currently manages the business.  The Company’s operating and reportable segments are summarized below:

 

 

Print

 

We are the largest producer of books in the U.S. and one of the largest producers of catalogs, magazines and retail inserts in North America. The Print segment produces magazines, catalogs, retail inserts, books, and directories. The segment also provides supply-chain management and certain other print-related services, including mail-list management and sortation, e-book formatting and distribution.  The segment has operations in the U.S., Europe and Mexico.  The Print segment is divided into the magazines, catalog and retail inserts, book, Europe and directories reporting units. The Print segment accounted for approximately 86% of the Company’s consolidated and combined net sales in 2016.

 

 

Office Products

 

The Office Products segment manufactures and sells branded and private label products in five core categories. The Office Products segment accounted for approximately 14% of the Company’s consolidated and combined net sales in 2016.

 

 

Corporate

 

Corporate consists of unallocated selling, general and administrative activities and associated expenses including, in part, executive, legal, finance, communications, certain facility costs and Last-in, First-out (“LIFO”) inventory provisions.  In addition, certain costs and earnings of employee benefit plans, such as pension benefit plan income and share-based compensation, are included in Corporate and not allocated to the operating segments. Prior to the separation, many of these costs were based on allocations from RRD; however, the Company has incurred such costs directly after the separation.  

 

Financial and other information related to these segments is included in Item 7,  Management’s Discussion and Analysis of Financial Condition and Results of Operations,  and in Note 18,  Segment Information,  to the consolidated and combined financial statements.

 

 

Business Acquisitions

 

On December 2, 2016, the Company acquired Continuum Management Company, LLC (“Continuum”),  a print procurement and management business, for $7 million in cash.

 

On June 8, 2015, RRD acquired Courier Corporation (“Courier”), a leader in digital printing and publishing primarily in the United States that specializes in educational, religious and trade books, for $137 million in cash and 8 million shares of RRD common stock, for a total transaction value of $292 million.

 

On March 25, 2014, the Company acquired substantially all of the North American operations of Esselte Corporation (“Esselte”), a developer and manufacturer of nationally branded and private label office and stationery products, for $82 million in cash and 1 million shares of RRD common stock, or a total transaction value of $101 million.

 

For further information on the above acquisitions, refer to Note 3, Business Combination , to the consolidated and combined financial statements.

 

 

5


 

Competitive Environment

 

According to the November 2016 IBIS World industry report “Printing in the U.S.,” estimated total printing industry revenue was approximately $85 billion in 2016, of which approximately $15 billion relates to our core segments of the print market and an additional approximately $32 billion relates to related segments of the print market in which we are able to offer certain products. Despite consolidation in recent years, including several acquisitions completed by LSC, the industry remains highly fragmented and LSC is one of the largest players in our segment of the print market. The print and related services industry, in general, continues to have excess capacity and LSC remains diligent in proactively identifying plant consolidation opportunities to keep our capacity in line with demand. Across the Company’s range of Print segment products and services, competition is based primarily on the ability to deliver products for the lowest total cost, a factor driven not only by price, but also by materials and distribution costs. We expect that prices for print products and services will continue to be a focal point for customers in coming years.

 

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

 

The future impact of technology on our business is difficult to predict and could result in additional expenditures to restructure impacted operations or develop new technologies. In addition, we have made targeted acquisitions and investments in our existing business to offer customers innovative services and solutions. Such acquisitions and investments include the acquisition of Continuum in 2016, which expanded our print management capabilities; Courier Corporation in 2015, which expanded our book fulfillment and digital printing capabilities; and Esselte in 2014, which expanded our office products offerings. This and other targeted acquisitions and investments further secure our position as a technology leader in the industry.

 

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

 

LSC Communications 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 LSC Communications’ operations and management structure on a regular basis to appropriately balance risks and opportunities to maximize efficiencies and to support the Company’s long-term strategic goals. 

 

 

Seasonality

 

Advertising and consumer spending trends affect demand in several of the end-markets served by LSC Communications. Historically, demand for printing of magazines, catalogs, retail inserts, books and office products is higher in the second half of the year, driven by increased advertising pages within magazines, holiday volume in catalogs and retail inserts, and back-to-school demand in books and office products. These typical seasonal patterns can be impacted by overall trends in the U.S. and world economy.  During the year ended December 31, 2016, the Company experienced higher demand for its educational book products in the second quarter compared to normal historical patterns. Additionally, there was lower than normal demand in the fourth quarter for education books for the college market.

 

 

6


 

Raw Materials

 

The primary raw materials we use in our Print segment are paper and ink. We negotiate with leading paper suppliers to maximize our purchasing efficiencies and use a wide variety of paper grades and formats. In addition, a substantial amount of paper used in our print business is supplied directly by customers. Variations in the cost and supply of certain paper grades used in the manufacturing process may affect our consolidated and combined financial results. Generally, customers directly absorb the impact of changing prices on customer-supplied paper. For paper that we purchase, we have historically passed most changes in price through to our customers. Contractual arrangements and industry practice should support our continued ability to pass on any future paper price increases, but there is no assurance that market conditions will continue to enable us to successfully do so. Higher paper prices and tight paper supplies may have an impact on customers’ demand for printed products. We also resell waste paper and other print-related by-products and may be impacted by changes in prices for these by-products.

 

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

 

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

 

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

 

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

 

Variations in the cost and supply of certain paper grades, polypropylene and steel used in the manufacturing process of our office products may affect our consolidated and combined financial results. Contractual arrangements and industry practice should support our continued ability to pass on any future paper price increases, but there is no assurance that market conditions will continue to enable us to successfully do so. We also resell waste paper and other by-products and may be impacted by changes in prices for these by-products.

 

 

Customers

 

Our Print segment services retailers, including catalogers and merchandisers; and publishers of magazines, books and directories and online retailers. Our customer base includes nine of the top ten direct mail catalogers, nine of the top ten magazine publishers, and all of the top ten book publishers based in North America and Europe, including the two largest book publishers worldwide in 2016.  The products that make up our Print segment are distributed through the United States Postal Service (“USPS”)  or foreign postal services or to our customers by direct shipment, typically in bulk, to customer facilities and warehouses.

 

Our Office Products segment primarily services office superstores, office supply wholesalers, independent contract stationers, mass merchandisers and retailers and e-commerce resellers. The products that make up our Office Products segment are distributed to our customers by direct shipment, typically in bulk, to customer facilities and warehouses.

 

For each of the years ended December 31, 2016, 2015 and 2014, no customer accounted for 10% or more of the Company’s consolidated and combined net sales.

 

 

7


 

Technology, Research and Development

The Company has a broad portfolio of technology capabilities that are utilized in the delivery of products and services to our customers. We believe that proprietary technology is required where it will provide a competitive advantage or where the desired technology is not readily available in the marketplace, and, as such, our proprietary technology portfolio contains an array of applications and technological capabilities that were developed to perform different functions, including storefront, digital asset management and distribution, manufacturing systems, warehousing, logistics and list management services and data analytics solutions. Our technology strategy is focused on the continued investment in key technologies that support services and solutions that allow for creation, management, production, distribution and analytics of publisher content in multi-channels to maximize their distribution and return for each title. We are also focusing our technology capabilities on developments that will allow us to pursue strategic relationships, such as our recent relationship with a leading education, business and consumer publishing company, which has enabled our further expansion into end-to-end supply chain management. To implement our research and development strategy, we expect to primarily invest in the maintenance and enhancement of our technology footprint within our facilities and in development activities which allow us to create new and differentiating technology capabilities.

Cybersecurity

Our cybersecurity program is designed to meet the needs and expectations of our customers who entrust us with certain sensitive business information. Our infrastructure and technology, expansive and highly trained workforce and comprehensive security and compliance program make us qualified to safely process, store and protect this customer information.

Our infrastructure and technology security capabilities are bolstered by our relationship with a leading data center services provider. Furthermore, our networks are monitored by intrusion detection services around the clock, and our systems and applications are routinely tested for vulnerabilities and are operated under a strict patch management program.

We employ a highly skilled IT workforce to implement our cybersecurity programs and to handle specific security responsibilities. As a result of annual mandatory security awareness training, our IT workforce is qualified to address security and compliance-related issues as they arise. Additionally, all of our IT employees are carefully screened, undergo a thorough background check and are bound by a nondisclosure agreement that details such employee’s security and legal responsibilities with regards to information handling. We believe our security and compliance team also diminishes the risk of system compromise and data exposure by rapidly and effectively addressing security incidents as they arise.

Intellectual Property

We consider patents, trademarks and other proprietary rights to be important to our business. We own approximately 190 patents worldwide, the majority of which are concentrated in our Office Products segment, with the remainder falling into the following categories: printing, binding, co-mailing, and new media. Our printing and binding patents relate to manufacturing processes and systems used in the production of books, magazines and catalogs. Our co-mailing patents relate to combining printed publications in an efficient manner to achieve postal savings. Our new media patents relate to methods for creating and formatting digital content for electronic publications. Lastly, our office products patents include utility and design patents covering a range of office products such as binders, envelopes, file folders, index tab systems and storage boxes. In addition, we benefit from a patented ink formulation developed by RRD that we use in manufacturing digitally-printed books. RRD will continue to supply this ink to us.

We also own approximately 400 trademarks worldwide, the majority of which are concentrated within our Office Products segment. Several of our most significant trademarks include registrations for the Adams, Ampad, Cardinal Brands, Oxford, Pendaflex and TOPS office products brands. Additionally, we own the rights to a group of trademarks relating to our e-media publishing services, such as Newsstand, LibreDigital, LibreMarket, LibrePublish, and LibreAccess.

While we consider our patents, trademarks and other proprietary rights to be valuable assets, we do not believe that our profitability and operations are dependent upon any single patent, trademark or other proprietary right.

Environmental Compliance

Our operations are subject to various international, federal, state and local laws and regulations relating to the protection of the environment, including those governing discharges to air and water, the management and disposal of hazardous materials, the cleanup of contaminated sites and health and safety matters. In the United States, these laws and regulations include the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act and Superfund (the environmental program established in the Comprehensive Environmental Response, Compensation, and Liability Act to address abandoned hazardous waste sites), which imposes joint and severable liability on each potentially responsible party. We are committed to complying with these and all other applicable environmental, health, and safety laws, and in order to reduce the risk of non-compliance, we maintain an Environmental, Health and Safety management system that includes an appropriate policy and standards, staff dedicated to environmental, health, and safety issues, and other measures.

8


 

While it is our policy to conduct our global operations in accordance with all applicable laws, regulations and other requirements, from time to time, our properties, products or operations may be affected by environ mental issues. It is not possible to quantify with certainty the potential impact of actions regarding environmental matters, particularly remediation and other compliance efforts that we may undertake in the future. However, in the opinion of management, compliance with the present environmental protection laws, before taking into account estimated recoveries from third parties, will not have a material adverse effect on our consolidated and combined financial statements.

 

 

Employees

 

As of December 31, 2016, the Company had approximately 22,000 total employees in the global workforce, of which approximately 17,000 employees were in the U.S. and approximately 5,000 were in international locations.    Of the U.S. and international employees, approximately 4.0% and 30.0% were covered by collective bargaining agreements, respectively. We have collective bargaining agreements with unionized employees in Canada, Mexico and Poland. We have not experienced a work stoppage during the past five years. Management believes that we have good relationships with our employees and collective bargaining groups.

 

 

Available Information

 

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

 

 

Special Note Regarding Forward-Looking Statements

 

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

 

These statements may include, or be preceded or followed by, the words  “anticipates,” “estimates,” “expects,” “projects,” “forecasts,” “intends,” “plans,” “continues,” “believes,” “may,” “will,” “goals” or variations of such words and similar expressions.  Examples of forward-looking statements include, but are not limited to, statements, beliefs and expectations regarding our business strategies, market potential, future financial performance, dividends, costs to be incurred in connection with the separation, results of pending legal matters, our goodwill and other intangible assets, price volatility and cost environment, our liquidity, our funding sources, expected pension contributions, capital expenditures and funding, our financial covenants, repayments of debt, off-balance sheet arrangements and contractual obligations, our accounting policies, general views about future operating results and other events or developments that we expect or anticipate will occur in the future. These forward-looking statements are subject to a number of important factors, including those factors discussed under “Item 1A. Risk Factors.” Other Information that could cause our actual results to differ materially from those indicated in any such forward-looking statements. These factors include, but are not limited to:

 

 

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

 

 

inability to improve operating efficiency to meet changing market conditions;

 

 

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

 

 

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

 

 

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

 

 

the effect of economic weakness and constrained advertising;

 

9


 

 

uncertainty about future economic conditions;

 

 

increased competition as a result of consolidation among our competitors;

 

 

our ability to successfully integrate future acquisitions;

 

 

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

 

 

vulnerability to adverse events as a result of becoming a stand-alone company after separation from RRD, including the inability to obtain as favorable of terms from third-party vendors;

 

 

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

 

 

the effects of seasonality on our core businesses;

 

 

the effects of increases in capital expenditures;

 

 

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

 

 

performance issues with key suppliers;

 

 

our ability to maintain our brands and reputation;

 

 

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

 

 

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

 

 

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

 

 

changes in environmental laws and regulations affecting our business;

 

 

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

 

 

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

 

 

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

 

 

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

 

 

the effect of catastrophic events;

 

 

lack of market for our common stock;

 

 

the effect of substantial shares of our common stock in the public market, or the perception that such sales might occur, on the price of our common stock;

 

 

potential tax liability of the separation;

 

 

lack of history as an operating company and costs and other issues associated with being an independent company;

 

 

failure to achieve certain intended benefits of the separation;

 

 

failure of RRD or Donnelley Financial to satisfy their respective obligations under transition services agreements or other agreements entered into in connection with the separation; and

 

 

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

10


 

 

 

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

 

 

ITEM 1A. RISK FACTORS

 

The Company’s consolidated and combined statements of income, balance sheets and cash flows can be adversely affected by various risks. These risks include the principal factors listed below and the other matters set forth in this annual report on Form 10-K. You should carefully consider all of these risks.

 

 

Risks Relating to the Business of the Company

 

The highly competitive market for our products and industry fragmentation may continue to create adverse

price pressures.

 

The markets for the majority of our product categories are highly fragmented and we have a large number of competitors. Management believes that excess capacity in our markets, as well as increasing consolidation of our customer base has caused downward price pressure for our products and that this trend is likely to continue. In addition, consolidation in the markets in which we compete may increase competitive price pressures due to competitors lowering prices as a result of synergies achieved.

 

 

We may be unable to improve our operating efficiency rapidly enough to meet market conditions.

 

Because the markets in which we compete are highly competitive, we must continue to improve our operating efficiency in order to maintain or improve our profitability. There is no assurance that we will be able to do so in the future. In addition, the need to reduce ongoing operating costs may result in significant up-front costs to reduce workforce, close or consolidate facilities, or upgrade equipment and technology, which could negatively impact the Company’s consolidated and combined statements of income, balance sheets and cash flows.

 

 

The substitution of electronic delivery for printed materials may continue to adversely affect our businesses.

 

Electronic delivery of documents and data, including the online distribution and hosting of media content, offer alternatives to traditional delivery of print materials. Consumers continue to accept electronic substitution in directory printing and are replacing traditional reading of print materials with online, hosted media content or e-reading devices. The extent to which consumers will continue to accept electronic delivery is uncertain and it is difficult to predict future rates of acceptance of these alternatives. Electronic delivery has negatively impacted some of our products, such as directories and books. Digital technologies have also impacted printed magazines, as some advertising spending has started transitioning from print to electronic media. To the extent that consumers and customers continue to accept these alternatives, our consolidated and combined statements of income, balance sheets and cash flows could be negatively impacted.

 

 

11


 

Global market and economic conditions, as well as the effects of these conditions on our customers’ businesses, could adversely affect us, as the financial condition o f our customers may deteriorate.

Global economic conditions affect our customers’ businesses and the markets they serve. Because a significant part of our business relies on advertising spending, which is driven in part by economic conditions and consumer spending, a prolonged downturn in the global economy and an uncertain economic outlook could further reduce the demand for the printing and related services that we provide. Delays or reductions in customers’ spending would have an adverse effect on demand for our products and services, which could be material, and consequently could negatively impact our results of consolidated and combined statements of income, balance sheets and cash flows . Economic weakness and constrained advertising spending may result in decreased net sales, operating margin, earnings and growth rates and difficulty in managing inventory levels and collecting accounts receivable. Our exposure to industries experiencing financial difficulties and certain financially troubled customers could negatively impact our consolidated and combined statements of income, balance sheets and cash flows . Further, a lack of liquidity in the capital markets or a sustained period of unfavorable economic conditions could increase our exposure to credit risks of our customers and result in increases in bad debt write-offs and allowances for doubtful accounts receivable. We may experience operating margin declines, reflecting the effect of items such as competitive price pressures, inventory write-downs, cost increases for wages and materials, and increases in pension plan funding requirements. Economic downturns may also result in restructuring actions and associated expenses and impairment of long-lived assets, including goodwill and other intangibles. Uncertainty about future economic conditions makes it difficult for us to forecast operating results and to make decisions about future investments.

For instance, in June 2016, a majority of voters in the United Kingdom elected to withdraw from the European Union in a national referendum. The referendum was advisory, and the terms of any withdrawal are subject to a negotiation period that could last up to two years after the government of the United Kingdom formally initiates a withdrawal process. Nevertheless, the referendum has created significant uncertainty about the future relationship between the United Kingdom and the European Union, including with respect to the laws and regulations that will apply as the United Kingdom determines which European Union-derived laws to replace or replicate in the event of a withdrawal. The referendum has also given rise to calls for the governments of other European Union member states to consider withdrawal or renegotiation of the terms of their membership. These developments, or the perception that any of them could occur, have had and may continue to have an adverse effect on global economic conditions and the stability of global financial markets, and may significantly reduce global market liquidity and restrict the ability of key market participants to operate in certain financial markets. Any of these factors could depress economic activity and restrict our access to capital, which could negatively impact our consolidated and combined statements of income, balance sheets and cash flows .

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

We may, from time to time, depend on access to the credit markets. Uncertainty and volatility in global financial markets may cause financial markets institutions to fail or may cause lenders to hoard capital and reduce lending. The failure of a financial institution that supports the Company’s existing credit agreement would reduce the size of its committed facility unless a replacement institution were added.

Our business is subject to risks associated with seasonality, which could negatively impact our consolidated and combined statements of income, balance sheets and cash flows.

Our sales and cash flows are affected by seasonality, as print demand is affected by advertising and consumer spending trends. Historically, demand for printing of magazines, catalogs, retail inserts, books and office products is higher in the second half of the year, driven by increased advertising pages within magazines, holiday volume in catalogs and retail inserts, and back-to-school demand in books and office products. These typical seasonal patterns can be impacted by overall trends in the U.S. and world economy. For these reasons, sequential quarterly comparisons are not a good indication of our performance or how we may perform in the future. If we are unable to obtain access to financing sources to fund our working capital needs or if seasonal fluctuations are greater than anticipated, there could negatively impact our consolidated and combined statements of income, balance sheets and cash flows .

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

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

12


 

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

 

We are dependent on the availability of paper, ink and other raw materials to support our operations. Unforeseen developments in these markets could result in a decrease in the supply of paper, ink or other raw materials and could cause a decline in our net sales.

 

We rely on a key supplier for ink and if such supplier breaches or is unable to perform certain obligations under our arrangement with them, we may be unable to procure comparable supply from another supplier in a timely fashion, or when we are able to procure such supply, such supply may be on worse terms.

 

A significant portion of our ink comes from a single supplier pursuant to a multi-year supply agreement. The ink industry has faced significant challenges in recent years, as the demand for ink has declined while the costs of raw materials used to manufacture ink have fluctuated. We rely on this ink supplier to meet a significant portion of our ink needs, and have negotiated a contract that provides us with favorable terms and certain contingencies from supply disruption. A disruption in the supply of ink from this supplier, either from natural disaster, financial bankruptcy or other supply interruption, may require us to purchase a significant amount of ink from other suppliers or assume the production ourselves, which in either case, may be on worse terms and slow our production, either of which could have a negative impact on our consolidated and combined statements of income, balance sheets and cash flows .

 

 

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

 

Achieving the anticipated benefits of acquisitions will depend in part upon our ability to integrate these businesses in an efficient and effective manner. The integration of companies that have previously operated independently may result in significant challenges, and we may be unable to accomplish the integration smoothly or successfully. In particular, the coordination of geographically dispersed organizations with differences in corporate cultures and management philosophies may increase the difficulties of integration. The integration of acquired businesses may also require the dedication of significant management resources, which may temporarily distract management’s attention from the day-to-day operations of the Company. In addition, the process of integrating operations may cause an interruption of, or loss of momentum in, the activities of one or more of the Company’s businesses and the loss of key personnel from the Company or the acquired businesses. Further, employee uncertainty and lack of focus during the integration process may disrupt the businesses of the Company or the acquired businesses.

 

The Company’s strategy is, in part, predicated on the Company’s ability to realize cost savings and to increase net sales through the acquisition of businesses that add to the breadth and depth of the Company’s products and services. Achieving these cost savings and net sales increases is dependent upon a number of factors, many of which are beyond the Company’s control. In particular, the Company may not be able to realize the benefits of more comprehensive product and service offerings, anticipated integration of sales forces, asset rationalization and systems integration.

 

 

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

 

We currently have a large number of competitors in the markets in which we operate. We believe that selectively pursuing acquisitions is an important strategy for our business. If our competitors are able to successfully combine with one another, and we are not successful with our own efforts to consolidate or adapt effectively to increased competition, the competitive landscape we face could be significantly altered. Such consolidation could create stronger competitors with greater financial resources and broader manufacturing and distribution capabilities than our own, and the resulting increase in competitive pressures could negatively impact our consolidated and combined statements of income, balance sheets and cash flows .

 

 

13


 

Our business is dependent upon brand recognition and reputation, and the failure to maintain or enhance our brands or repu tation would likely have an adverse effect on our business.

 

Our brand recognition, particularly in our Office Products segment, and reputation generally are important aspects of our business. Maintaining and further enhancing our brands and reputation will be important to retaining and attracting customers for our products. We also believe that the importance of our brand recognition and reputation for products will continue to increase as competition in the market for our products continues to increase. Our success in this area will be dependent on a wide range of factors, some of which are out of our control, including our ability to retain existing and obtain new customers and strategic partners, the quality and perceived value of our products, actions of our competitors, and positive or negative publicity. Our reputation also depends on the quality of our customer service, and if our customer service declines, our reputation may also decline. Damage to our reputation and loss of brand equity may reduce demand for our products and could negatively impact our consolidated and combined statements of income, balance sheets and cash flows .

 

 

We may be unable to hire and retain talented employees, including management.

 

Our success depends, in part, on our general ability to attract, develop, motivate and retain skilled employees. The loss of a significant number of our employees or the inability to attract, hire, develop, train and retain skilled personnel could have a serious negative effect on our business. Various locations may encounter competition with other manufacturers for skilled labor. Many of these manufacturers may be able to offer significantly greater compensation and benefits or more attractive lifestyle choices than we offer. In addition, many members of our management have significant industry experience that is valuable to our competitors. Our executive officers have non-solicitation agreements contractually prohibiting them from soliciting our customers and employees for a specified period of time after they leave the Company. If one or more members of our senior management team leave and cannot be replaced with a suitable candidate quickly, we could experience difficulty in managing our business properly, which could negatively impact our consolidated and combined statements of income, balance sheets and cash flows .

 

 

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

 

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

 

 

There are risks associated with operations outside the United States.

 

Net sales from our operations in geographic regions outside the United States accounted for approximately 11% of our consolidated and combined net sales for the year ended December 31, 2016. As a result, we are subject to the risks inherent in conducting business outside the United States, including the impact of economic and political instability of those countries in which we operate. Our operations outside of the United States are primarily in Poland and Mexico. Our business in Poland, which primarily serves the European market, has experienced a decline in profitability due to adverse economic conditions in Europe since the global financial crisis, which has affected the demand for print services in Europe. Security disruptions within the regions in Mexico in which we operate may interfere with operations, which could negatively impact our supply chain.

 

We are also subject to risks that could materially affect our operations and operating results with respect to potential changes in United States government trade policy and legislation, including changes to tax laws, withdrawal from or modification of certain international trade agreements, including the North American Free Trade Agreement (“NAFTA”), the imposition of additional tariffs or other restrictions on trade on goods produced outside the United States for import into the United States and any changes in diplomatic relations with countries in which we operate or do business and compliance with applicable anti-corruption and sanctions laws and regulations.

 

14


 

 

We are exposed to risks related to potential adverse changes in currency exchange rates.

 

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

 

 

The trend of increasing costs to provide health care and other benefits to our employees may continue.

 

We provide health care and other benefits to our employees. For many years, costs for health care have increased more rapidly than general inflation in the U.S. economy. If this trend in health care costs continues, our cost to provide such benefits could increase, adversely impacting our profitability. Changes to health care regulations in the U.S. may also increase our cost of providing such benefits. The full effect that a full or partial repeal of the Affordable Care Act or changes to other healthcare laws and regulations would have on our business remains unclear at this time, and could negatively impact our consolidated and combined statements of income, balance sheets and cash flows.

 

 

Changes in market conditions, changes in discount rates, or lower returns on assets may increase required pension plan contributions in future periods.

 

The funded status of our pension plans is dependent upon many factors, including returns on invested assets and the level of certain interest rates. As experienced in prior years, declines in the market value of the securities held by the plans coupled with historically low interest rates have substantially reduced, and in the future could further reduce, the funded status of the plans. These reductions may increase the level of expected required pension plan contributions in future years. Various conditions may lead to changes in the discount rates used to value the year-end benefit obligations of the plans, which could partially mitigate, or worsen, the effects of lower asset returns. If adverse conditions were to continue for an extended period of time, our costs and required cash contributions associated with pension plans may substantially increase in future periods.

 

 

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

 

We hold goodwill, other long-lived assets and deferred tax assets on our balance sheet. A decline in expected profitability, particularly if there is a decline in the global economy, could call into question the recoverability of our related goodwill, other long-lived tangible and intangible assets or deferred tax assets and require the write-down or write-off of these assets or, in the case of deferred tax assets, recognition of a valuation allowance through a charge to income. Such an occurrence has had and could continue to have a negative impact on our consolidated and combined statements of income, balance sheets and cash flows .

 

 

Changes in postal rates, regulations and delivery systems may adversely impact demand for our products and services.

 

Postal costs are a significant component of many of our customers’ cost structure and postal rate changes can influence the number of pieces and types of mailings that our customers mail. On January 22, 2017, the USPS implemented a rate adjustment affecting all market dominant classes including an average inflation-based rate increase for each class of mail. Going forward, the frequency and percentage of postal rate increases are uncertain. As of the date hereof there are two efforts underway. First, on September 1, 2016, the Postal Regulatory Commission (the “PRC”) notified the public that, pursuant to its statutory mandate under the Postal Accountability and Enhancement Act, it would begin reviewing the system for regulating rates and classes for market dominant products to determine if it is achieving the objectives established by Congress. If the PRC determines that the system is not achieving the objectives, the PRC may, by regulation, make modifications or adopt an alternative system as necessary to achieve the objectives. Second, on January 31, 2017, the Postal Service Reform Act of 2017 was introduced in the United States House of Representatives.  If the bill is passed into law, it would allow the USPS to increase postal rates for market-dominant products by 2.15%, or 1 cent, for a First-Class stamp.  

 

These two efforts leave our customers with an uncertain future relative to budgeting for postal expenses. If either of these efforts result in declines in print volumes mailed, this may have an adverse effect on our business.

15


 

We are subject to environmental regulation and environmental compliance expenditures, which could increase our costs an d subject us to liabilities.

 

The conduct of our businesses is subject to various environmental laws and regulations administered by federal, state and local government agencies in the United States, as well as to foreign laws and regulations administered by government entities and agencies in markets in which we operate. These laws and regulations and interpretations thereof may change, sometimes dramatically, as a result of political, economic or social events. Changes in laws, regulations or governmental policy and the related interpretations may alter the environment in which we do business and, therefore, may impact our results or increase our costs and liabilities.

 

Various laws and regulations addressing climate change are being considered at the federal and state levels. Proposals under consideration include limitations on the amount of greenhouse gas that can be emitted. The impacts of such proposals could negatively impact our consolidated and combined statements of income, balance sheets and cash flows .

 

 

The competitiveness, success and growth of our business may depend on our ability to refurbish or replace our infrastructure, which could result in an increase in our capital expenditures and such capital expenditures could be substantial. We may be required to invest more in capital expenditures than we have done historically.

 

Capital expenditures, such as software upgrades or machinery replacements, may be necessary from time to time to preserve the competitiveness, success and growth of our business. The industry in which we operate is highly competitive and is expected to remain competitive. We may be required to invest amounts in capital expenditures that exceeds our recent spending levels to replace worn out or obsolete machinery or otherwise remain competitive. If cash from operations is insufficient to provide for needed levels of capital expenditures and we are unable to obtain funds for such purposes elsewhere, we may be unable to make necessary upgrades or

repairs to our software and facilities. An increase in capital expenditures could affect our ability to compete effectively and could have a negative impact on our consolidated and combined statements of income, balance sheets and cash flows .

 

 

The failure to adapt to technological changes to address the changing demands of customers or the failure to implement new required processes or procedures in connection with the expansion of our products and services into new areas may adversely impact our business.

 

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

 

Technological developments, changing demands of customers and the expansion of our products and services into new areas may require additional investment in new equipment and technologies, as well as the implementation of additional necessary or required compliance procedures and processes to which we are not currently subject. The development of such solutions may be costly and there is no assurance that these solutions will be accepted by customers. Furthermore, our compliance with new procedures and processes may increase our costs and, in the event we are unable to comply, may reduce our customers’ willingness to work with us. If we are unable to adapt to technological changes on a timely basis or at an acceptable cost, or if we cannot comply with these necessary or required procedures or processes, customers’ demand for our products and services may be adversely affected.

 

 

Our services depend on the reliability of computer systems maintained by us and our vendors and the ability to implement and maintain information technology and security measures to protect against security breaches and data leakage.

 

We depend on our information technology and data processing systems to operate our business, and a significant malfunction or disruption in the operation of our systems, or a security breach or a data leak that compromises the confidential and sensitive information stored in those systems, could disrupt our business and adversely impact our ability to compete. These systems include systems that we own and operate, as well as those systems of our vendors.

 

16


 

Our systems allow us to share information that may be confidential in nature to our customers across our offices worldwide, which allows us to increase global reach for o ur customers. Such systems are susceptible to malfunctions and interruptions due to equipment damage, power outages and a range of other hardware, software and network problems. Those systems are also susceptible to cybercrime, or threats of intentional di sruption, which are increasing in terms of sophistication and frequency. Our systems are also susceptible to breaches due to intentional employee misconduct. For any of these reasons, we may experience systems malfunctions or interruptions or leakage of co nfidential information. A significant or large-scale malfunction or interruption of any one of our computer or data processing systems, or the leakage of confidential information due to a malfunction or breach of our systems or employee misconduct, could a dversely affect our ability to manage and keep our operations running efficiently, and damage our reputation if we are unable to track transactions, deliver products and safeguard our customers’ confidential information. A malfunction that results in a wid er or sustained disruption to our business could negatively impact our consolidated and combined statements of income, balance sheets and cash flows .

 

 

Risks Relating to our Recent Separation from RRD

 

Because there was not a public market for our common stock prior to the separation, the market price and trading volume of our common stock has been and may continue to be volatile and stockholders may not be able to resell their shares at or above the current market price of our stock after the separation.

 

Prior to the separation, we did not have any securities traded on any exchange and, as a result, have a very limited trading history. There has been a limited market in our common stock. We cannot predict the extent to which investors’ interest will lead to a liquid trading market or whether the market price of our common stock will be volatile in the upcoming periods. The market price of our common stock could fluctuate significantly for many reasons, including in response to the risk factors listed in this annual report on Form 10-K or for reasons unrelated to our specific performance, such as reports by industry analysts, investor perceptions or negative developments for our customers, competitors or suppliers, as well as general economic and industry conditions.

 

 

Shares of LSC’s common stock are eligible for future sale, and substantial sales of such shares may cause the price of LSC’s common stock to decline.

 

Any sales of substantial amounts of LSC’s common stock in the public market or the perception that such sales might occur may cause the market price of LSC’s common stock to decline. As of October 1, 2016, LSC had approximately 32 million of its common stock outstanding (of which approximately 26 million were distributed and owned by the public). Such publicly-owned shares are freely tradable without restriction or further registration under the Securities Act of 1933, as amended (the “Securities Act”), unless the shares are owned by one of LSC’s “affiliates,” as that term is defined in Rule 405 under the Securities Act. LSC is unable to predict whether large amounts of its common stock will be sold in the open market and whether a sufficient number of buyers would be in the market at that time.

 

In connection with the separation, RRD retained 19.25% of LSC’s total shares outstanding. RRD will dispose of such shares within the 12-month period following the separation. Such disposition could include one or more subsequent exchanges of LSC common stock for debt of RRD, or otherwise using the common stock to satisfy RRD’s outstanding obligations. RRD and LSC entered into a Stockholder and Registration Rights Agreement wherein LSC agreed, upon the request of RRD, to use reasonable best efforts to effect a registration under applicable federal and state securities laws of any shares of LSC’s common stock retained by RRD. Refer to Stockholder and Registration Rights Agreement, filed as E xhibit 4.1 to  this Form 10-K.

 

Dispositions of significant amounts of LSC’s common stock or the perception in the market that this will occur may result in the lowering of the market price of LSC’s common stock.

 

 

The spinoff from RRD could result in significant liability to LSC.

 

The spin-off is intended to qualify for tax-free treatment to RRD and its stockholders under Sections 355 and 368(a)(1)(D) of the Internal Revenue Code of 1986, as amended (the “Code”). Completion of the spin-off was conditioned upon, among other things, the receipt of a private letter ruling from the IRS regarding certain issues relating to the tax-free treatment of the RRD Transactions. Although the IRS private letter ruling is generally binding on the IRS, the continuing validity of such ruling is subject to the accuracy of factual representations and assumptions made in the ruling. Completion of the spin-off was also conditioned upon RRD’s receipt of a tax opinion from Sullivan & Cromwell LLP regarding certain aspects of the spin-off not covered by the IRS private letter ruling. The opinion was based upon various factual representations and assumptions, as well as certain undertakings made by RRD, LSC and Donnelley Financial. If any of the factual representations or assumptions in the IRS private letter ruling or tax opinion are untrue or

17


 

incom plete in any material respect, an undertaking is not complied with, or the facts upon which the IRS private letter ruling or tax opinion are based are materially different from the actual facts relating to the RRD transactions, the opinion or IRS private l etter ruling may not be valid. Moreover, opinions of a tax advisor are not binding on the IRS. As a result, the conclusions expressed in the opinion of a tax advisor could be successfully challenged by the IRS.

 

If the separation is determined to be taxable, RRD and its stockholders could incur significant tax liabilities, and under the tax matters agreement and the letter agreement, LSC may be required to indemnify RRD for any liabilities incurred by RRD if the liabilities are caused by any action or inaction undertaken by LSC following the spinoff.  For additional detail, refer to Tax Disaffiliation Agreement, filed as E xhibit 2.4 to  this Form 10-K.

 

 

The tax rules applicable to the separation may restrict us from engaging in certain corporate transactions or from raising equity capital beyond certain thresholds for a period of time after the separation.

 

To preserve the tax-free treatment of the separation from RRD under the Tax Disaffiliation Agreement, for the two-year period following the separation, we are subject to restrictions with respect to:

 

 

taking any action that would result in our ceasing to be engaged in the active conduct of our business, with the result that we are not engaged in the active conduct of a trade or business within the meaning of certain provisions of the Code;

 

redeeming or otherwise repurchasing any of our outstanding stock, other than through certain stock purchases of widely held stock on the open market;

 

amending our Certificate of Incorporation (or other organizational documents) that would affect the relative voting rights of separate classes of our capital stock or would convert one class of our capital stock into another class of our capital stock;

 

liquidating or partially liquidating;

 

merging with any other corporation (other than in a transaction that does not affect the relative shareholding of our shareholders), selling or otherwise disposing of (other than in the ordinary course of business) our assets, or taking any other action or actions if such merger, sale, other disposition or other action or actions in the aggregate would have the effect that one or more persons acquire (or have the right to acquire), directly or indirectly, as part of a plan or series of related transactions, assets representing one-half or more our asset value;

 

taking any other action or actions that in the aggregate would have the effect that one or more persons acquire (or have the right to acquire), directly or indirectly, as part of a plan or series of related transactions, capital stock of ours possessing (i) at least 50% of the total combined voting power of all classes of stock or equity interests of ours entitled to vote, or (ii) at least 50% of the total value of shares of all classes of stock or of the total value of all equity interests of ours, other than an acquisition of our shares as part of the separation solely by reason of holding RRD common stock (but not including such an acquisition if such RRD common stock, before such acquisition, was itself acquired as part of a plan (or series of related transactions) pursuant to which one or more persons acquire, directly or indirectly, shares of our stock meeting the voting and value threshold tests listed previously in this bullet); and

 

taking any action that (or failing to take any action the omission of which) would be inconsistent with the separation qualifying as, or that would preclude the separation from qualifying as, a transaction that is generally tax-free to RRD and the holders of RRD common stock for U.S. federal income tax purposes.

 

These restrictions may limit our ability during such period to pursue strategic transactions of a certain magnitude that involve the issuance or acquisition of our stock or engage in new businesses or other transactions that might increase the value of our business. These restrictions may also limit our ability to raise significant amounts of cash through the issuance of stock, especially if our stock price were to suffer substantial declines, or through the sale of certain of our assets. For more information, refer to Tax Disaffiliation Agreement, filed as E xhibit 2.4 to  this Form 10-K.

 

 

LSC's historical financial information is not necessarily representative of the results that it would have achieved as a separate, publicly traded company and may not be a reliable indicator of its future results.

 

The historical information about LSC prior to October 1, 2016 included in this annual report on Form 10-K refers to LSC’s business as operated by and integrated with RRD. LSC’s historical financial information for such periods was derived from the consolidated financial statements and accounting records of RRD. Accordingly, such historical financial information does not necessarily reflect the combined statements of income, balance sheets and cash flows that LSC would have achieved as a separate, publicly traded company during the periods presented or those that LSC will achieve in the future primarily as a result of the following factors:

 

18


 

 

Prior to the separat ion, LSC’s business was operated by RRD as part of its broader corporate organization, rather than as an independent company. RRD or one of its affiliates performed various corporate functions for LSC, such as tax, treasury, finance, audit, risk management , legal, information technology, human resources, stockholder relations, compliance, shared services, insurance, employee benefits and compensation. After the separation, RRD has continued to provide some of these functions to LSC, as described in Transiti on Services Agreement, filed as E xhibit 2.2 to  this Form 10-K. LSC’s historical financial results reflect allocations of corporate expenses from RRD for such functions. These allocations may not be indicative of the actual expenses LSC would have incurred had it operated as an independent, publicly traded company in the periods presented. LSC will make significant investments to replicate or outsource from other providers certain facilities, systems, infrastructure, and personnel to which LSC no longer has access as a result of the separation. These initiatives to develop LSC’s independent ability to operate without access to RRD’s existing operational and administrative infrastructure have been costly and will continue to be costly to implement in the futur e. LSC may not be able to operate its business efficiently or at comparable costs, and its profitability may decline.

 

Prior to the separation, LSC’s business was integrated with the other businesses of RRD. LSC was able to utilize RRD’s size and purchasing power in procuring various goods and services and shared economies of scope and scale in costs, employees, vendor relationships and customer relationships. Although LSC has entered into transition agreements with RRD, these arrangements may not fully capture the benefits LSC enjoyed as a result of being integrated with RRD and may result in LSC paying higher charges than in the past for these services. As a separate, independent company, LSC may be unable to obtain goods and services at the prices and terms obtained prior to the separation, which could decrease LSC’s overall profitability. As a separate, independent company, LSC may also not be as successful in negotiating favorable tax treatments and credits with governmental entities. This could have a material adverse effect on LSC’s consolidated and combined statements of income, balance sheets and cash flows for periods after the separation.

 

Generally, prior to the separation, LSC’s working capital requirements and capital for its general corporate purposes, including acquisitions, R&D and capital expenditures, were satisfied as part of the corporate-wide cash management policies of RRD. As a separate independent company, LSC may need to obtain additional financing from banks, through public offerings or private placements of debt or equity securities, strategic relationships or other arrangements.

 

The cost of capital for LSC’s business is higher than RRD’s cost of capital prior to the separation.

 

 

 

 

 

 

Other significant changes have occurred and may continue to occur in LSC’s cost structure, management, financing and business operations as a result of operating as a company separate from RRD. For additional information about the past financial performance of LSC’s business and the basis of presentation of the historical consolidated and combined financial statements of LSC’s business, refer to the discussion in Item 7, Item 8 and the Notes to Consolidated and Combined Financial Statements in Item 8 of this annual report on Form 10-K.

 

 

We have incurred, and we may continue to incur, material costs and expenses as a result of our separation from RRD.

 

We have incurred, and may continue to incur, costs and expenses greater than those we currently incur as a result of our separation from RRD. These increased costs and expenses may arise from various factors, including financial reporting and costs associated with complying with federal securities laws (including compliance with the Sarbanes-Oxley Act of 2002, as amended (the “Sarbanes-Oxley Act”). In addition, we expect to either maintain similar or have increased corporate and administrative costs and expenses to those we incurred or were allocated while part of RRD, even though, after the separation, LSC is a smaller, stand-alone company. We cannot assure you that these costs will not be material to our business.

 

 

As LSC builds its information technology infrastructure and transitions its data to its own systems, LSC has incurred and will continue to incur substantial additional costs and experience temporary business interruptions.

 

LSC expects to install and implement information technology infrastructure to support its critical business functions, including accounting and reporting, manufacturing process control, customer service, inventory control and distribution. LSC may incur temporary interruptions in business operations if it cannot transition effectively from RRD's existing transactional and operational systems, data centers and the transition services that support these functions as LSC replaces these systems. LSC may not be successful in implementing its new systems and transitioning its data, and it may incur substantially higher costs for implementation than currently anticipated. LSC's failure to avoid operational interruptions as it implements the new systems and replaces RRD's information technology services, or its failure to implement the new systems and replace RRD's services successfully, could disrupt its business, adversely affect its ability to collect receivables from customers, and have a material adverse effect on its profitability. In addition, if LSC is unable to replicate or transition certain systems, its ability to comply with regulatory requirements could be impaired.

 

19


 

 

If we are unable to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act, or, our internal control over financial reporting is not effective, the reliability of our financial statements may be questioned and our stock price may suffer.

 

Section 404 of the Sarbanes-Oxley Act requires any company subject to the reporting requirements of the U.S. securities laws to do a comprehensive evaluation of its and its consolidated subsidiaries’ internal control over financial reporting. To comply with this statute, beginning in Fiscal Year 2017, we will be required to document and test our internal control procedures, our management will be required to assess and issue a report concerning our internal control over financial reporting, and our independent auditors will be required to issue an opinion on our internal controls over financial reporting. The rules governing the standards that must be met for management to assess our internal control over financial reporting are complex and require significant documentation, testing and possible remediation to meet the detailed standards under the rules. During the course of its testing, our management may identify material weaknesses or deficiencies which may not be remedied in time to meet the deadline imposed by the Sarbanes-Oxley Act. If our management cannot favorably assess the effectiveness of our internal control over financial reporting or our auditors identify material weaknesses in our internal controls, investor confidence in our financial results may weaken and our stock price may suffer.

 

 

We may be unable to achieve some or all of the benefits that we expect to achieve from the separation.

 

We believe that our separation from RRD has allowed, and will continue to allow, among other benefits, us to focus on our distinct strategic priorities; afford us direct access to the capital markets and facilitate our ability to capitalize on growth opportunities and effect future acquisitions utilizing our common stock; facilitate incentive compensation arrangements for our employees more directly tied to the performance of our business; and enable us to concentrate our financial resources solely on our own operations. However, we may be unable to achieve some or all of these benefits. For example, in order to prepare ourselves for the separation, we undertook a series of strategic, structural and process realignment and restructuring actions within our operations. These actions may not provide the benefits we currently expect, and could lead to disruption of our operations, loss of, or inability to recruit, key personnel needed to operate and grow our businesses after the separation, weakening of our internal standards, controls or procedures and impairment of our key customer and supplier relationships. If we fail to achieve some or all of the benefits that we expect to achieve as an independent company, or do not achieve them in the time we expect, our business and consolidated and combined statements of income, balance sheets and cash flows could be materially and adversely affected.

 

 

RRD or Donnelley Financial may not satisfy their respective obligations under the Transition Services Agreements and other agreements that were entered into as part of the separation, or we may not have necessary systems and services in place when the transition services terms expire.

 

In connection with the separation, we entered into Transition Services Agreements with both RRD and Donnelley Financial. Refer to exhibits 2.2 and 2.3 to this annual report on Form 10-K, related to the agreements with RRD and Donnelley Financial, respectively. These Transition Services Agreements will provide for the performance of services by each company for the benefit of the other for a period of time after the separation. We will rely on RRD and Donnelley Financial to satisfy their respective performance and payment obligations under these Transition Services Agreements. If RRD or Donnelley Financial is unable to satisfy its respective obligations, including indemnification obligations, under these Transition Services Agreements, we could incur operational difficulties. The other agreements relating to the separation provide for indemnification in certain circumstances and commercial agreements establish ongoing commercial arrangements. There can be no guarantee that RRD or Donnelley Financial, as the case may be, will satisfy any obligations owed to us under such agreements, including any indemnification obligations.

 

Further, if we do not have our own systems and services in place, or if we do not have agreements in place with other providers of these services when the term of a particular transition service terminates, we may not be able to operate our business effectively, which could negatively impact our consolidated and combined statements of income, balance sheets and cash flows . We are in the process of creating our own, or engaging third parties to provide, systems and services to replace many of the systems and services RRD and Donnelley Financial will provide. We may not be successful in effectively or efficiently implementing these systems and services or in transitioning data from RRD’s or Donnelley Financial’s systems to our systems, as the case may be, which could disrupt our business and have a negative impact on our consolidated and combined statements of income, balance sheets and cash flows . These systems and services may also be more expensive or less efficient than the systems and services RRD and Donnelley Financial are providing during the transition period.

 

 

20


 

We have incurred substantial indebtedness in connection with the sep aration and the degree to which we are currently leveraged may materially and adversely affect our business and consolidated and combined statements of income, balance sheets and cash flows .

We incurred approximately $825 million of debt in connection with the separation. Our ability to make payments on and to refinance our indebtedness, including the debt incurred in connection with the separation, as well as any future debt that we may incur, will depend on our ability to generate cash in the future from operations, financings or asset sales. Our ability to generate cash is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. We may not generate sufficient funds to service our debt and meet our business needs, such as funding working capital or the expansion of our operations. If we are not able to repay or refinance our debt as it becomes due, we may be forced to take disadvantageous actions, including facility closure, staff reductions, reducing financing in the future for working capital, capital expenditures and general corporate purposes, selling assets or dedicating an unsustainable level of our cash flow from operations to the payment of principal and interest on our indebtedness, and restricting future capital return to stockholders. In addition, our ability to withstand competitive pressures and to react to changes in the print and related services industry could be impaired. The lenders who hold our debt could also accelerate amounts due in the event that we default, which could potentially trigger a default or acceleration of the maturity of our other debt.

In addition, our leverage could put us at a competitive disadvantage compared to our competitors who may be less leveraged. These competitors could have greater financial flexibility to pursue strategic acquisitions and secure additional financing for their operations. Our leverage could also impede our ability to withstand downturns in our industry or the economy in general.

The agreements and instruments that govern our debt impose restrictions that may limit our operating and financial flexibility.

The Credit Agreement that governs our Senior Secured Credit Facilities and the indenture that governs the Senior Notes contain a number of significant restrictions and covenants that limit our ability to:

 

incur additional debt;

 

pay dividends, make other distributions or repurchase or redeem our capital stock;

 

prepay, redeem or repurchase certain debt;

 

make loans and investments;

 

sell, transfer or otherwise dispose of assets;

 

incur or permit to exist certain liens; enter into certain types of transactions with affiliates;

 

enter into agreements restricting our subsidiaries’ ability to pay dividends; and

 

consolidate, merge or sell all or substantially all of our assets.

These covenants can have the effect of limiting our flexibility in planning for or reacting to changes in our business and the markets in which we compete. In addition, the Credit Agreement that governs our Senior Secured Credit Facilities requires us to comply with certain financial maintenance covenants. Operating results below current levels or other adverse factors, including a significant increase in interest rates, could result in our being unable to comply with the financial covenants contained in our Term Loan Facility and indenture. If we violate covenants under our Senior Secured Credit Facilities and indenture and are unable to obtain a waiver from our lenders, our debt under our Senior Secured Credit Facilities and indenture would be in default and could be accelerated by our lenders. Because of cross-default provisions in the agreements and instruments governing our debt, a default under one agreement or instrument could result in a default under, and the acceleration of, our other debt.

If our debt is accelerated, we may not be able to repay our debt or borrow sufficient funds to refinance it. Even if we are able to obtain new financing, it may not be on commercially reasonable terms, on terms that are acceptable to us, or at all. If our debt is in default for any reason, our business and consolidated and combined statements of income, balance sheets and cash flows could be materially and adversely affected. In addition, complying with these covenants may also cause us to take actions that are not favorable to holders of the notes and may make it more difficult for us to successfully execute our business strategy and compete against companies that are not subject to such restrictions.

Despite our substantial indebtedness, we may be able to incur substantially more debt.

Despite our substantial amount of indebtedness, we may be able to incur substantial additional debt, including secured debt, in the future. Although our the indenture governing our Senior Notes and the Credit Agreement governing the Senior Secured Credit Facilities restrict the incurrence of additional debt, these restrictions are subject to a number of qualifications and exceptions. Also, these restrictions do not prevent us from incurring obligations that do not constitute indebtedness. In addition, as of December 31, 2016, we had $388 million available for additional borrowing under our Revolving Facility. The more indebtedness we incur, the further exposed we become to the risks associated with substantial leverage described above.

21


 

RRD and Donnelley Financial have a significant understanding of our business and may be uniquely positioned to compete against us.

 

Prior to the separation, we operated as part of RRD, and many of its and Donnelley Financial’s current officers, directors and employees have participated in the development and execution of our corporate strategy and the management of our day-to-day operations. RRD and Donnelley Financial have significant knowledge of our products, operations, strengths, weaknesses and strategies. This knowledge includes the cost of production, average market pricing and margin, compensation of critical employees, key or critical accounts knowledge, intellectual property and proprietary processes. Because of RRD’s competitive insight into our operations and Donnelley Financial’s ability to compete in discrete areas of our business, specifically the printing of books, competition from RRD, and to a lesser extent Donnelley Financial, which could occur in the future, may negatively impact our consolidated and combined statements of income, balance sheets and cash flows .

 

 

Risks Relating to Our Common Stock and the Securities Market

 

Substantial sales of our common stock may occur, which could cause our stock price to decline.

 

RRD stockholders who received shares of common stock in LSC after the separation generally may sell those shares in the public market. RRD retained 19.25% of our common stock, and may sell or transfer its shares in certain circumstances. It is possible that some RRD stockholders, including some of our larger stockholders, will sell our common stock if, for reasons such as our business profile, market capitalization as an independent company or the size or rate of return of our dividend, we do not fit their investment objectives, or—in the case of index funds—we are not a participant in the index in which they are investing . The sales of significant amounts of our common stock relating to the above events or the perception in the market that such sales will occur may decrease the market price of our common stock.

 

 

We cannot assure you that we will continue to pay dividends on our common stock, and our indebtedness could limit our ability to pay dividends on our common stock.

 

The timing, declaration, amount and payment of any future dividends to LSC stockholders will fall within the discretion of our Board of Directors. Our Board’s decisions regarding the payment of future dividends will depend on many factors, including our financial condition, future prospects, earnings, capital requirements and debt service obligations, as well as legal requirements, regulatory constraints, industry practice and other factors that our Board deems relevant. In addition, the terms of the agreements governing our debt or debt that we may incur in the future may continue to limit or prohibit the payment of dividends.  While our Board declared a quarterly cash dividend of $0.25 per common share on October 27, 2016 payable on December 1, 2016 and on January 18, 2017 payable on March 2, 2017, there can be no assurance that we will continue to pay a dividend.  

 

 

Delaware law and anti-takeover provisions in our organizational documents may discourage our acquisition by a third party, which could make it more difficult to acquire us and limit your ability to sell your shares at a premium.

 

Certain provisions of our Certificate of Incorporation and By-laws and Delaware law may discourage, delay or prevent a merger or acquisition that is opposed by our board of directors. These provisions include:

 

 

the ability of our board of directors to issue preferred stock in one or more series with such rights, obligations and preferences as the board of directors may determine, without further vote or action by our stockholders;

 

the initial classification of our board of directors, which effectively prevents stockholders from electing a majority of the directors at any one annual meeting of stockholders until the second annual meeting of stockholders after the separation;

 

advanced notice procedures for stockholders to nominate candidates for election to the board of directors and for stockholders to submit proposals for consideration at a meeting of stockholders;

 

inability of stockholders to act by written consent;

 

restrictions on the ability of our stockholders to call a special meeting of stockholders; and

 

the absence of cumulative voting rights for our stockholders.

 

We are also subject to Section 203 of the Delaware General Corporation Law which, subject to certain exceptions, prohibits “business combinations” between a publicly-held Delaware corporation and an “interested stockholder,” which is generally defined as a stockholder who becomes a beneficial owner of 15% or more of a Delaware corporation’s voting stock for a three-year period following the date that such stockholder became an interested stockholder. This statute, as well as the provisions in our organizational documents, could have the effect of delaying, deterring or preventing certain potential acquisitions or a change in control of us.

22


 

 

 

Stockholders’ percentage ownership in LSC may be diluted in the future.

 

Stockholders’ percentage ownership in LSC may be diluted in the future because of equity securities we issue, either as consideration for acquisitions, in connection with capital raises or for equity awards that we expect to grant to our directors, officers and employees. We may issue equity securities as consideration in an acquisition. Further, to the extent that LSC raises additional capital through the sale of equity or convertible debt securities, existing ownership interests will be diluted, and the terms of such financings may include liquidation or other preferences that adversely affect the rights of existing stockholders. Any such transaction will dilute stockholders’ ownership in LSC.

 

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

The Company has no unresolved written comments from the SEC staff regarding its periodic or current reports under the Securities Exchange Act of 1934.

 

 

ITEM 2. PROPERTIES

 

The Company’s principal executive office is currently located in leased office space at 191 N. Wacker Drive, Suite 1400, Chicago, IL 60606.  The Company operates or owns the following:

 

 

94 leased or owned facilities in approximately 28 states in the U.S., which encompass approximately 24 million square feet, of which 43 are production facilities.

 

o

Approximately six million square feet of space is leased, comprised of 57 U.S. facilities.

 

o

Approximately 18 million square feet of space is owned in 37 facilities in the U.S.

 

18 international facilities in four countries which encompass approximately 3 million square feet, of which 8 are manufacturing facilities.

 

o

Approximately one million square feet of space is leased, comprised of ten international facilities.

 

o

Approximately two million square feet of space is owned in eight international facilities.

 

o

12 of our international facilities service our Print segment.

 

o

In Europe, the Company has a production platform consisting of 3 facilities in Poland that cost effectively produce products for distribution throughout the continent.

 

o

In Mexico, the Company has 5 production facilities.

 

The Company’s facilities are reasonably maintained and suitable for the operations conducted in them. While the Company has a facility that provides the majority of our mailing services, which is located in Bolingbrook, Illinois, the Company does not believe that this facility, or any other facility, is individually material to our business. In addition, the Company owns or leases additional land for use as parking lots and other purposes in the U.S.

 

 

ITEM 3. LEGAL PROCEEDINGS

 

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

 

For a discussion of certain litigation involving the Company, refer to Note 11,  Commitments and Contingencies,  to the consolidated and combined financial statements.

 

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

23


 

PART II

 

ITEM 5. MARKET FOR LSC COMMUNICATIONS’ COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Principal Market

 

The principal market for LSC Communications’ common stock is the New York Stock Exchange (NYSE).  LSC Communications began when issued trading on September 21, 2016 and regular way trading under the symbol “LKSD” on October 3, 2016.

 

Below are the high and low share prices of the Company’s stock and the dividend paid per share during the fourth quarter of 2016.

 

 

 

 

 

 

Closing Common Stock Prices

 

 

 

Dividends Paid

 

 

2016

 

 

 

2016

 

 

High

 

 

Low

 

Fourth Quarter

 

$

0.25

 

 

$

30.51

 

 

$

17.55

 

 

 

Stockholders

 

As of February 17, 2017, there were 5,080 stockholders of record of the Company’s common stock.

 

 

Dividends

 

The timing, declaration, amount of any payment of dividends in the future is within the discretion of the Company’s Board of Directors. The Credit Agreement generally allows annual dividend payments of up to $50 million in aggregate, though additional dividends may be allowed subject to certain conditions. For more information on the Credit Agreement, refer to the Credit Agreement referenced as an exhibit to this annual report on Form 10-K.

 

 

Issuer Purchases of Equity Securities

 

There were no repurchases of equity securities during the three months ended December 31, 2016.

 

 

Equity Compensation Plans

 

For information regarding equity compensation plans, refer to Item 12 of Part III of this annual report on Form 10-K.

 

 

Peer Performance Table

The graph below compares the cumulative total shareholder return on the Company’s common stock from October 3, 2016, when regular way trading in the Company’s common stock commenced on the NYSE, through December 31, 2016, with the comparable cumulative return of the S&P SmallCap 600 index and a selected peer group of companies. The comparison assumes all dividends have been reinvested, and an initial investment of $100 on October 3, 2016. The returns of each company in the peer group have been weighted to reflect their market capitalizations. The Company itself has been excluded, and its contributions to the S&P SmallCap 600 index have been subtracted out.  The peer group was determined by the Company's senior management team as a group of companies within the printing, publishing, and office products industries that most closely align with the Company’s business model.  

 

24


 

Comparison of Cumulative Total Return Among LSC Communications, Inc. S&P SmallCap 600 Index and Peer Group*

 

 

 

 

 

Base

 

Indexed Returns

Month Ending

 

 

 

Period

 

 

 

 

 

 

 

 

 

 

 

 

Company Name / Index

 

10/3/16

 

10/31/16

 

 

11/30/16

 

 

12/31/16

 

LSC Communications, Inc.

 

100

 

 

84.73

 

 

 

73.17

 

 

 

105.22

 

S&P SmallCap 600 Index

 

100

 

 

95.86

 

 

 

107.89

 

 

 

111.52

 

Peer Group

 

100

 

 

90.82

 

 

 

99.47

 

 

 

102.27

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Below are the specific companies included in the peer group.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Peer Group

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ACCO Brands Corporation

 

John Wiley & Sons Inc.

 

 

 

 

 

 

 

 

 

 

 

 

Cenveo, Inc.

 

The McClatchy Company

 

 

 

 

 

 

 

 

 

 

 

 

Deluxe Corporation

 

Meredith Corporation

 

 

 

 

 

 

 

 

 

 

 

 

Essendant, Inc.

 

Quad/Graphics, Inc.

 

 

 

 

 

 

 

 

 

 

 

 

Houghton Mifflin Harcourt Company

 

R.R. Donnelley & Sons Company

 

 

 

 

 

 

 

 

 

 

 

 

InnerWorkings, Inc.

 

Scholastic Corporation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

25


 

ITEM 6. SELECTED FINANCIAL DATA

 

SELECTED FINANCIAL DATA

 

(in millions except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2016

 

 

2015

 

 

2014

 

 

2013

 

 

2012

 

Net sales

 

$

3,654

 

 

$

3,743

 

 

$

3,853

 

 

$

3,741

 

 

$

3,879

 

Net income (loss)

 

 

106

 

 

 

74

 

 

 

58

 

 

 

95

 

 

 

(646

)

Net income (loss) per basic share (a)

 

 

3.25

 

 

 

2.27

 

 

 

1.79

 

 

 

2.91

 

 

 

(19.91

)

Net income (loss) per diluted share (a)

 

 

3.23

 

 

 

2.27

 

 

 

1.79

 

 

 

2.91

 

 

 

(19.91

)

Total assets

 

 

1,952

 

 

 

2,011

 

 

 

1,869

 

 

 

2,035

 

 

 

2,198

 

Long-term debt

 

 

742

 

 

 

3

 

 

 

 

 

 

 

 

 

 

Cash dividends per common share

 

 

0.25

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reflects results of acquired businesses from the relevant acquisition dates. Refer to Note 3, Business Combinations , to the consolidated and combined financial statements for information on acquisitions.

(a) On October 1, 2016, RRD distributed approximately 26.2 million shares of LSC Communications common stock to RRD shareholders.  RRD retained an additional 6.2 million shares. The computation of net income (loss) per basic and diluted shares for periods prior to the separation was calculated using the shares distributed and retained by RRD on October 1, 2016, 32.4 million.   Refer to Note 1, Overview and Basis of Presentation , to the consolidated and combined financial statements for information on the separation.

 

Includes the following significant items:

 

For 2016: Pre-tax restructuring, impairment and other charges of $18 million ($12 million after-tax); pre-tax charge of $5 million ($3 million after-tax) for spinoff-related transaction expenses and pre-tax charge of $1 million ($0 million after-tax) for lump-sum pension settlement payments;

 

• For 2015: Pre-tax restructuring, impairment and other charges of $57 million ($39 million after-tax), pre-tax charges of $14 million for acquisition-related expenses ($13 million after-tax), pre-tax charges of $11 million ($7 million after-tax) for inventory purchase accounting adjustments for Courier, and tax expense of $6 million was recorded due to the receipt of an unfavorable court decision related to payment of prior year taxes in an international jurisdiction;

 

For 2014: Pre-tax restructuring, impairment and other charges of $132 million ($100 million after-tax), pre-tax gain of $9 million ($9 million after-tax) related to the acquisition of Esselte, pre-tax charges of $2 million ($1 million after-tax) for inventory purchase accounting adjustments for Esselte, pre-tax charges of $2 million ($1 million after-tax) for acquisition-related expenses;

 

• For 2013: Pre-tax restructuring, impairment and other charges of $79 million ($51 million after-tax), $3 million pre-tax impairment loss ($2 million after-tax) on an equity investment, and pre-tax charges of $1 million ($1 million after-tax) for acquisition-related expenses; and

 

For 2012: Pre-tax restructuring, impairment and other charges of $884 million ($820 million after-tax).

26


 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion of LSC Communications’ financial condition and results of operation should be read together with the consolidated and combined financial statements and Notes to those statements included in Item 15, Exhibits, Financial Statement Schedules , of Part IV of this annual report on Form 10-K.

 

 

Business

 

For a description of the Company’s business, segments and product offerings, refer to Item 1, Business , of Part I of this annual report on Form 10-K.

 

 

OUTLOOK

 

Vision and Strategy

 

The Company works with its customers to offer a broad scope of print and print-related capabilities and manage their full range of communication needs. The Company is focused on enhancing its strong customer relationships by expanding to a broader range of offerings. The Company will focus on further expanding its supply chain offerings and driving growth in core and related businesses. The Company will continue to seek opportunities to grow by utilizing core capabilities to expand print and print-related products and services, grow core businesses, strategically increase our geographic coverage, and focus on the expansion of the office products brands. For instance, our end-to-end supply chain services offerings combine print, warehousing, fulfillment and supply chain management into a single workflow designed to increase speed to the market and improve efficiencies across the distribution process.  Ongoing investments via organic growth and strategic acquisition in our digital print technology will be an integral part of supporting growth across the entire Print segment.  Further, other innovative offerings such as co-mailing services help our catalogers and magazine publisher customers reduce their overall cost of producing and distributing their product as postage expense often accounts for approximately half of these publishers’ costs to produce and deliver a catalog or magazine. We have been developing technologies to help book clients reduce the incidence of book piracy. We have begun offering end-to-end fulfillment of subscription boxes to address client demand, which we believe will provide additional opportunity for us.

 

Management believes productivity improvement and cost reduction are critical to the Company’s continued competitiveness, and the flexibility of its platform enhances the value the Company delivers to its customers. Since 2012, our plant rationalization process has resulted in the closure of 12 facilities, which we believe has allowed us to realize meaningful cost savings.  These cost savings primarily arise from facility related costs, such as overhead, employee costs and selling, general and administrative expenses. The Company continues to implement strategic initiatives across all platforms to reduce its overall cost structure, focus on safety initiatives and enhance productivity, including restructuring, consolidation, reorganization and integration of operations and streamlining of administrative and support activities.

 

The Company seeks to deploy its capital using a balanced and disciplined approach in order to ensure financial flexibility and provide returns to shareholders. Priorities for capital deployment, over time, include principal and interest payments on debt obligations, distributions to shareholders, targeted acquisitions and capital expenditures. The Company believes that a strong financial condition is important to customers focused on establishing or growing long-term relationships. The Company also expects to make targeted acquisitions that extend its capabilities, drive cost savings and reduce future capital spending needs.  We believe these acquisitions may also allow us to achieve synergies, as we did with our acquisitions of Courier and Esselte, which resulted in first-year synergies savings of approximately $30 million and $20 million, respectively.

 

Management uses several key indicators to gauge progress toward achieving these objectives. These indicators include organic sales growth, operating margins, cash flow from operations, capital expenditures, and Non-GAAP adjusted EBITDA. The Company targets long-term net sales growth at or above industry levels, while managing operating margins by achieving productivity improvements that offset the impact of price declines and cost inflation.  Cash flows from operations are targeted to be stable over time, however, cash flows from operations in any given year can be significantly impacted by the timing of non-recurring or infrequent receipts and expenditures, the level of required pension plan contributions, volatility in the cost of raw materials, and the impact of working capital management efforts.

 

The Company faces many challenges and risks as a result of competing in highly competitive global markets. Refer to Item 1A,  Risk Factors,  of Part I of this annual report on Form 10-K for further discussion.

 

27


 

 

Long-Term Outlook

 

The following discussion describes management’s expectations for the trends in net sales and earnings over the next five years.

 

The Company expects the Print segment to experience annual net sales declines between 1% and 4%. In magazines, catalogs, and retail inserts, annual net sales declines are expected to range from 2% to 7% driven by the ongoing shift in advertiser spend from print to electronic media. Catalog demand is expected to decline less rapidly than magazine volumes, although the Company is unable to predict the exact amount of the decline. For the book reporting unit, the Company expects modest declines from ongoing electronic substitution offset by growth in our supply chain management offerings. As a result, annual net sales changes for this unit are expected to be in a range from declines of 2% to growth of 3%. Our net sales in Europe are expected to range from 4% annual declines to 1% annual growth based on the mix of catalog, magazine, retail, and directory products along with premedia services. Directory revenue is expected to continue to decline from 10% to 15% annually as rapid electronic substitution for these products is expected to continue.

 

Net sales for the Office Products segment are expected to range from 2% annual declines to 3% annual growth. In this segment, modest declines in demand for many of our products are expected to be offset by growth in private label volume.

 

The expectations described above are anticipated to result in an overall annual net sales decline for the Company in a range between 0% and 3% over the next five years. The Company will continue to manage its cost structure and implement cost control initiatives in order to reduce its costs as net sales decline. However, there can be no guarantee that such cost control initiatives will be effective.

 

 

2017 Outlook

 

In 2017 the Company expects revenue changes for each of the reporting units within the Print segment to be within the range of our long-term outlook described above.  Office Products net sales are expected to decline in 2017 as the continuing shift in volume from the traditional office products retailers to the online channel will result in further store consolidations and reductions in retail channel inventories. Although the Office Products net sales decline in 2017 may be outside the range of our long-term outlook, the Company expects the longer term net sales trends to be within this range.

 

Declining price levels along with cost inflation driven by tighter labor market conditions will continue to pressure operating margins during 2017.  In order to partially offset this margin pressure, the Company initiated several restructuring actions in 2016 and 2015 to further reduce the Company’s overall cost structure. These restructuring actions included the closure of one manufacturing facility during 2016 in the Print segment, the expected closure of another facility in the first quarter of 2017 in the Print segment and the reorganization of certain operations. These and future cost reduction actions are expected to have a positive impact on operating earnings in 2017 and in future years. In addition, the Company expects to identify other cost reduction opportunities and possibly take further actions in 2017, which may result in significant additional restructuring charges. These restructuring actions will be funded by cash generated from operations and cash on hand or, if necessary, by utilizing the Company’s credit facilities.

Cash flows from operations in 2017 are expected to decline due to higher interest payments resulting from the issuance of debt in connection with the separation, and because pension income allocated from RRD was considered an operating cash inflow for LSC prior to the separation.  The Company expects capital expenditures to be in the range of $60 million to $65 million in 2017, bringing it in line with historical averages. Approximately $5 million of anticipated capital expenditures in 2017 are expected to be for investments in information technology systems and infrastructure necessary to operate as an independent company.

The Company’s pension plans were underfunded by $280 million as of December 31, 2016, as reported on the Company’s consolidated and combined balance sheets and further described in Note 14,  Retirement Plans,  to the consolidated and combined financial statements. Governmental regulations for measuring pension plan funded status differ from those required under accounting principles generally accepted in the United States of America (“GAAP”) for financial statement preparation. Based on the plans’ regulatory funded status, there are no required contributions for the Company’s two primary Qualified Plans in 2017.  The required contributions in 2017, primarily for the Non-Qualified Plan, are expected to be approximately $5 million to $7 million.

 

28


 

 

SIGNIFICANT ACCOUNTING POLICIES AND CRITICAL ESTIMATES

 

Basis of Presentation

 

Prior to the separation, the combined financial statements were prepared on a stand-alone basis and were derived from RRD’s consolidated financial statements and accounting records. They included certain expenses of RRD which were allocated to LSC Communications for certain corporate functions, including healthcare and pension benefits, information technology, finance, legal, human resources, internal audit, treasury, tax, investor relations and executive oversight.  These expenses were allocated to the Company on the basis of direct usage, when available, with the remainder allocated on a pro rata basis by revenue, employee headcount, or other measures. After the separation, the Company no longer records allocated amounts.

 

The preparation of consolidated and combined financial statements, in conformity with GAAP, requires the extensive use of management’s estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from these estimates. Estimates are used when accounting for items and matters including, but not limited to, allowance for uncollectible accounts receivable, inventory obsolescence, asset valuations and useful lives, taxes, restructuring and other provisions and contingencies.

 

The Company’s most critical accounting policies are those that are most important to the portrayal of its financial condition and results of operations, and which require the Company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. The Company has identified the following as its most critical accounting policies and judgments. Although management believes that its estimates and assumptions are reasonable, they are based upon information available when they are made, and therefore, actual results may differ from these estimates under different assumptions or conditions.

 

 

Revenue Recognition

 

The Company recognizes revenue for the majority of its products upon the transfer of title and risk of ownership, which is generally upon shipment to the customer. Because the majority of the Company’s products are customized, product returns are not significant; however, the Company accrues for the estimated amount of customer credits at the time of sale. Revenue from the Company’s co-mail and list services operations is recognized when services are completed. Refer to Note 2, Significant Accounting Policies , to the consolidated and combined financial statements for further discussion.

 

Billings for shipping and handling costs are recorded gross. Many of the Company’s operations process materials, primarily paper, that may be supplied directly by customers or may be purchased by the Company and sold to customers. No revenue is recognized for customer-supplied paper, but revenues for Company-supplied paper are recognized on a gross basis. As a result, the Company’s reported sales and margins may be impacted by the mix of customer-supplied paper and Company-supplied paper.

 

 

Goodwill and Other Long-Lived Assets

 

The Company’s methodology for allocating the purchase price of acquisitions is based on established valuation techniques that reflect the consideration of a number of factors, including valuations performed by third-party appraisers when appropriate. Goodwill is measured as the excess of the cost of an acquired entity over the fair value assigned to identifiable assets acquired and liabilities assumed. Based on its current organization structure, the Company has identified five reporting units for which cash flows are determinable and to which goodwill may be allocated. Goodwill is either assigned to a specific reporting unit or allocated between reporting units based on the relative fair value of each reporting unit.

 

The Company performs its goodwill impairment tests annually as of October 31, or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. The Company also performs an interim review for indicators of impairment each quarter to assess whether an interim impairment review is required for any reporting unit. As part of its interim reviews, management analyzes potential changes in the value of individual reporting units based on each reporting unit’s operating results for the period compared to expected results as of the prior year’s annual impairment test. In addition, management considers how other key assumptions, including discount rates and expected long-term growth rates, used in the last annual impairment test could be impacted by changes in market conditions and economic events.

 

29


 

As of October 31, 2016, two reporting units had goodwill: book and Office Products. The magazines, catalogs and retail inserts, directories, and Europe reporting units had no goodwi ll as of October 31, 2016. Management assessed goodwill impairment risk by first performing a qualitative review of entity specific, industry, market and general economic factors for each reporting unit. In cases where the Company is not able to conclude t hat it is more likely than not that the fair values of our reporting units are greater than their carrying values, a two-step method for determining goodwill impairment is applied.

 

 

Qualitative Assessment for Impairment

The Company performed a qualitative assessment for the book and Office Product reporting units to determine whether it was more likely than not that the fair value of the reporting units were less than their carrying value. In performing this analysis, the Company considered various factors, including the effect of market or industry changes and the actual results of the reporting unit as compared to projected results. In addition, management considered how other key assumptions used in the October 31, 2015 annual goodwill impairment test could be impacted by changes in market conditions and economic events.

As part of the qualitative review of impairment, management analyzed the potential changes in fair value of the book and Office Products reporting units based on their operating results for the ten months ended October 31, 2016, compared to expected results. As of October 31, 2015, the estimated fair values of the book and Office Products reporting units exceeded their carrying values by over 100.0%, according to a valuation performed by a third-party appraisal firm. Based on current factors and circumstances, as well as expectation of future performance, management concluded that the October 31, 2015 estimated fair values continued to be appropriate as of October 31, 2016.

Based on its qualitative assessment, management concluded that as of October 31, 2016, it was more likely than not that the fair values of the book and Office Products reporting units were greater than their carrying values. The goodwill balances of the book and Office Products reporting units were $51 million and $30 million, respectively, as of October 31, 2016.

 

 

Other Long-Lived Assets

 

The Company evaluates the recoverability of other long-lived assets, including property, plant and equipment and certain identifiable intangible assets, whenever events or changes in circumstances indicate that the carrying value of an asset or asset group may not be recoverable. The Company performs impairment tests of indefinite-lived intangible assets on an annual basis or more frequently in certain circumstances.

 

Factors that could trigger an impairment review include significant underperformance relative to historical or projected future operating results, significant changes in the manner of use of the assets or the strategy for the overall business, a significant decrease in the market value of the assets or significant negative industry or economic trends. When the Company determines that the carrying value of long-lived assets may not be recoverable based upon the existence of one or more of the indicators, the assets are assessed for impairment based on the estimated future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. If the carrying value of an asset exceeds its estimated future undiscounted cash flows, an impairment loss is recorded for the excess of the asset’s carrying value over its fair value.

 

The Company recognized non-cash impairment charges of $1 million during the year ended December 31, 2016, related to buildings and machinery and equipment, primarily as a result of restructuring actions.

 

 

Pension

 

Benefit Plans Sponsored by RRD

 

Prior to the separation, certain employees of the Company participated in certain pension and postretirement health care plans sponsored by RRD. In the company’s combined financial statements, these plans were accounted for as multiemployer benefit plans and no net liabilities were reflected in the Company’s combined balance sheets as there were no unfunded contributions due at the end of any reporting period. The Company’s statements of income included expense allocations for these benefits. These expenses were funded through intercompany transactions with RRD and were reflected within net parent company investment in LSC Communications.

 

30


 

LSC Communications’ Sponsored Benefit Plans

 

The Company is the sole sponsor of certain defined benefit plans, which have been reflected in the consolidated balance sheet at December 31, 2016 and combined balance sheet at December 31, 2015. At the separation date, the Company assumed and recorded certain pension obligations and plan assets in single employer plans for the Company’s employees and certain former employees and retirees of RRD. Additionally, the U.K pension plan was transferred from the Company to RRD.  

 

After the separation, the Company records annual income and expense amounts relating to its pension plans based on calculations which include various actuarial assumptions, including discount rates, mortality, assumed rates of return, compensation increases, and turnover rates. The Company reviews its actuarial assumptions on an annual basis and makes modifications to the assumptions based on current rates and trends when it is deemed appropriate to do so. The effects of modifications on the value of plan obligations and assets is recognized immediately within other comprehensive income (loss) and amortized into operating earnings over future periods. The Company believes that the assumptions utilized in recording its obligations under its plans are reasonable based on its experience, market conditions and input from its actuaries and investment advisors. The discount rates used to calculate pension benefits at December 31, 2016 and 2015 were 4.3% and 4.2%, respectively.

 

As of December 31, 2015, the Company changed the method used to estimate the interest cost components of net pension plan expense for its defined benefit pension plans. Historically, the interest cost components were estimated using a single weighted-average discount rate derived from the yield curve used to measure the projected benefit obligation at the beginning of the period. The Company has elected to use a full yield curve approach in the estimation of these interest components of net pension plan expense by applying the specific spot rates along the yield curve used in the determination of the projected benefit obligation to the relevant projected cash flows. The Company made this change to improve the correlation between projected benefit cash flows and the corresponding yield curve spot rates and to provide a more precise measurement of interest costs. This change does not affect the measurement and calculation of the Company’s total benefit obligations. The Company accounted for this change as a change in estimate and accordingly has accounted for it prospectively starting in the first quarter of 2016.

 

A one-percentage point change in the discount rates at December 31, 2016 would have the following effects on the accumulated benefit obligation and projected benefit obligation:

 

 

1% Increase

 

 

1% Decrease

 

 

 

(in millions)

 

 

 

Qualified

 

 

Non-Qualified & International

 

 

Qualified

 

 

Non-Qualified & International

 

Accumulated benefit obligation

 

$

(272

)

 

$

(9

)

 

$

333

 

 

$

11

 

Projected benefit obligation

 

 

(272

)

 

 

(9

)

 

 

333

 

 

 

11

 

 

The Company’s U.S. pension plans are frozen and the Company has previously transitioned to a risk management approach for its U.S. pension plan assets. The overall investment objective of this approach is to further reduce the risk of significant decreases in the plan’s funded status by allocating a larger portion of the plan’s assets to investments expected to hedge the impact of interest rate risks on the plan’s obligation. Over time, the target asset allocation percentage for the pension plan is expected to decrease for equity and other “return seeking” investments and increase for fixed income and other “hedging” investments. The assumed long-term rate of return for plan assets, which is determined annually, is likely to decrease as the asset allocation shifts over time.

The expected long-term rate of return for plan assets is based upon many factors including expected asset allocations, historical asset returns, current and expected future market conditions and risk. In addition, the Company considered the impact of the current interest rate environment on the expected long-term rate of return for certain asset classes, particularly fixed income. The target asset allocation percentage for the primary U.S. Qualified Plan was approximately 60.0% for return seeking investments and approximately 40.0% for hedging investments. The expected long-term rate of return on plan assets assumption used to calculate net pension plan expense in 2016 was 7.25% for the Company’s primary U.S. pension plan. The expected long-term rate of return on plan assets assumption that will be used to calculate net pension plan expense in 2017 is 7.0% for the Company’s primary U.S. Qualified Plan.

A 0.25% change in the expected long-term rate of return on plan assets at December 31, 2016 would have the following effects on 2016 and 2017 pension plan (income)/expense in the Company’s primary U.S. pension plan:

 

 

 

0.25% Increase

 

 

0.25% Decrease

 

 

 

(in millions)

 

2016

 

$

(1

)

 

$

1

 

2017

 

$

(5

)

 

$

5

 

 

31


 

Accounting for Income Taxes

 

Prior to the separation in the Company’s combined financial statements, income tax expense and deferred tax balances were calculated on a separate return basis, although with respect to certain entities, the Company’s operations have historically been included in the tax returns filed by the respective RRD entities of which the Company’s business was previously a part. For periods after the separation, the Company will file tax returns on its own behalf. The provision for income tax and income tax balances after the separation represent the Company's tax liabilities as an independent company.

 

The Company has recorded deferred tax assets related to future deductible items, including domestic and foreign tax loss and credit carryforwards. The Company evaluates these deferred tax assets by tax jurisdiction. The utilization of these tax assets is limited by the amount of taxable income expected to be generated within the allowable carryforward period and other factors. Accordingly, management has provided a valuation allowance to reduce certain of these deferred tax assets when management has concluded that, based on the weight of available evidence, it is more likely than not that the deferred tax assets will not be fully realized. If actual results differ from these estimates, or the estimates are adjusted in future periods, adjustments to the valuation allowance might need to be recorded. As of December 31, 2016 and 2015, valuation allowances of $87 million and $106 million, respectively, were recorded in the Company’s consolidated and combined balance sheets.

 

Deferred U.S. income taxes and foreign taxes are not provided on the excess of the investment value for financial reporting over the tax basis of investments in foreign subsidiaries because such excess is considered to be permanently reinvested in those operations. Management regularly evaluates whether foreign earnings are expected to be permanently reinvested. This evaluation requires judgment about the future operating and liquidity needs of the Company’s foreign subsidiaries. Changes in economic and business conditions, foreign or U.S. tax laws, or the Company’s financial situation could result in changes to these judgments and the need to record additional tax liabilities.  

 

Significant judgment is required in determining the provision for income taxes and related accruals, deferred tax assets and liabilities and any valuation allowance recorded against deferred tax assets. In the ordinary course of business, there are transactions and calculations where the ultimate tax outcome is uncertain. Additionally, the Company’s tax returns are subject to audit by various U.S. and foreign tax authorities. The Company recognizes a tax position in its financial statements when it is more likely than not (a likelihood of more than fifty percent) that the position would be sustained upon examination by tax authorities. This recognized tax position is then measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Although management believes that its estimates are reasonable, the final outcome of uncertain tax positions may be materially different from that which is reflected in the Company’s financial statements. The Company classifies interest expense and any related penalties related to income tax uncertainties as a component of income tax expense.

 

 

Commitments and Contingencies

 

The Company is subject to lawsuits, investigations and other claims related to environmental, employment, commercial and other matters, as well as preference claims related to amounts received from customers and others prior to their seeking bankruptcy protection. Periodically, the Company reviews the status of each significant matter and assesses the potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and the related liability is estimable, the Company accrues a liability for the estimated loss. Because of uncertainties related to these matters, accruals are based on the best information available at the time. As additional information becomes available, the Company reassesses the related potential liability and may revise its estimates.

 

With respect to claims made under the Company’s third-party insurance for workers’ compensation, automobile and general liability, the Company is responsible for the payment of claims below and above insured limits, and consulting actuaries are utilized to assist the Company in estimating the obligation associated with any such incurred losses, which are recorded in accrued and other non-current liabilities. Historical loss development factors for both the Company and the industry are utilized to project the future development of such incurred losses, and these amounts are adjusted based upon actual claims experience and settlements. If actual experience of claims development is significantly different from these estimates, an adjustment in future periods may be required. Expected recoveries of such losses are recorded in other current and other non-current assets.

 

 

Restructuring

 

The Company records restructuring charges when liabilities are incurred as part of a plan approved by management with the appropriate level of authority for the elimination of duplicative functions, the closure of facilities, or the exit of a line of business,

32


 

generally in order to reduce the Company’s overall cost structure. Total restructuring charges were $15 million for the year ended Decembe r 31, 2016.

 

The restructuring liabilities may change in future periods based on several factors that could differ from original estimates and assumptions. These include, but are not limited to: contract settlements on terms different than originally expected; ability to sublease properties based on market conditions at rates or on timelines different than originally estimated; or changes to original plans as a result of acquisitions or other factors. Such changes may result in reversals of or additions to restructuring charges that could affect amounts reported in the consolidated and combined statements of income of future periods.

 

 

Accounts Receivable

 

The Company maintains an allowance for doubtful accounts receivable, which is reviewed for estimated losses resulting from the inability of its customers to make required payments for products and services. Specific customer provisions are made when a review of significant outstanding amounts, utilizing information about customer creditworthiness and current economic trends, indicates that collection is doubtful. In addition, provisions are made at differing rates, based upon the age of the receivable and the Company’s past collection experience. The allowance for doubtful accounts receivable was $10 million at December 31, 2016. The Company’s estimates of the recoverability of accounts receivable could change, and additional changes to the allowance could be necessary in the future if any major customer’s creditworthiness deteriorates or actual defaults are higher than the Company’s historical experience.

 

 

Share-Based Compensation

 

Prior to the separation, RRD maintained an incentive share-based compensation program for the benefit of its officers, directors, and certain employees, including certain LSC Communications employees. Share-based compensation expense was allocated to the Company based on the awards and terms previously granted to the Company’s employees, as well as an allocation of expense related to RRD’s corporate and shared-function employees.

 

After the separation, the Company recognizes share-based compensation expense based on estimated fair values for all share-based awards made to employees and directors. The amount of expense recognized for share-based awards is determined by the Company’s estimates of several factors, including expected performance compared to target for performance share units and expected volatility of the Company’s stock.

 

The Company recognizes compensation expense for share-based awards expected to vest on a straight-line basis over the requisite service period of the award based on their grant date fair value. The total compensation expense related to all share-based compensation plans was $8 million for the year ended December 31, 2016. Refer to Note 17, Stock and Incentive Programs for Employees, for further discussion.  

 

 

Off-Balance Sheet Arrangements

 

Other than non-cancelable operating lease commitments, the Company does not have off-balance sheet arrangements, financings or special purpose entities.

 

 

FINANCIAL REVIEW

 

In the financial review that follows, the Company discusses its consolidated and combined statements of income, balance sheets, cash flows and certain other information. This discussion should be read in conjunction with the Company’s consolidated and combined financial statements and the related notes that begin on page F-1.  

 

 

Results of Operations for the Year Ended December 31, 2016 as Compared to the Year Ended December 31, 2015

 

The following table shows the results of operations for the year ended December 31, 2016 and 2015, which reflects the results of acquired businesses from the relevant acquisition dates:

 

33


 

 

 

2016

 

 

2015

 

 

$ Change

 

 

% Change

 

 

 

(in millions, except percentages)

 

Net sales

 

$

3,654

 

 

$

3,743

 

 

$

(89

)

 

 

(2.4

%)

     Cost of sales (exclusive of depreciation and amortization)

 

 

2,823

 

 

 

2,874

 

 

 

(51

)

 

 

(1.8

%)

     Cost of sales with RRD and affiliates (exclusive of depreciation and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

          amortization)

 

 

208

 

 

 

216

 

 

 

(8

)

 

 

(3.7

%)

Total cost of sales

 

 

3,031

 

 

 

3,090

 

 

 

(59

)

 

 

(1.9

%)

    

 

 

83.0

%

 

 

82.6

%

 

 

 

 

 

 

 

 

Selling, general and administrative expenses (exclusive of depreciation and

     amortization)

 

 

259

 

 

 

280

 

 

 

(21

)

 

 

(7.5

%)

    

 

 

7.1

%

 

 

7.5

%

 

 

 

 

 

 

 

 

Restructuring, impairment and other charges-net

 

 

18

 

 

 

57

 

 

 

(39

)

 

 

(68.4

%)

Depreciation and amortization

 

 

171

 

 

 

181

 

 

 

(10

)

 

 

(5.5

%)

Income from operations

 

$

175

 

 

$

135

 

 

$

40

 

 

 

29.6

%

Consolidated and Combined Results

 

Net sales for the year ended December 31, 2016 were $3,654 million, a decrease of $89 million or 2.4% compared to the year ended December 31, 2015.  Net sales were impacted by:

 

 

Decreases resulting from price pressures, a $41 million decrease in pass-through paper sales, a $34 million, or 0.9%, decrease due to changes in foreign exchange rates, and lower volume in the Office Products and Print segments; and

 

Increases due to the acquisition of Courier in June 2015 and higher supply chain management and fulfillment volume in the Print segment, which partially offset some of the decreases.

 

Additionally, on a pro forma basis, the Company’s net sales decreased by approximately $213 million or 5.4% (refer to Note 3, Business Combinations , to the consolidated and combined financial statements).  

 

Total cost of sales decreased $59 million, or 1.9%, for the year ended December 31, 2016 compared to the year ended December 31, 2015, including a $28 million, or 0.9%, decrease due to changes in foreign exchange rates.  Additionally, cost of sales decreased due to the following:

 

 

A decline in paper pass-through sales, lower volume in the Print and Office Products segments, lower purchase accounting inventory adjustments and synergies from the integration of Courier;

 

The decreases above were partially offset by increases from the acquisition of Courier and higher supply chain management and fulfillment volume in the book reporting unit. As a percentage of net sales, cost of sales increased 0.4% year-over-year.

 

Selling, general and administrative expenses decreased $21 million, or 7.5%, to $259 million for the year ended December 31, 2016, primarily driven by:

 

 

Lower selling expense, higher pension income, a decrease in acquisition-related expenses of $14 million , and a $3 million, or 1.1%, decrease due to changes in foreign exchange rates;

 

Increases in costs to operate as an independent public company due to the separation and higher expenses as a result of the acquisition of Courier, all of which partially offset the results from the favorable expense drivers. 

 

As a percentage of net sales, selling, general and administrative expenses decreased from 7.5% for the year ended December 31, 2015 to 7.1% for the year ended December 31, 2016.

 

For the year ended December 31, 2016, the Company recorded restructuring, impairment and other charges of $18 million compared to $57 million for the same period in 2015. The Company recorded $8 million for employee termination costs for an aggregate of 222 employees, of whom 64 were terminated as of or prior to December 31, 2016.  These charges primarily related to one facility closure in the Print segment, the expected closure of another facility in the first quarter of 2017 in the Print segment and the reorganization of certain operations.  Additionally, the Company recorded lease termination and other restructuring charges of $7 million. The Company recorded other charges of $3 million for multi-employer pension plan withdrawal obligations unrelated to facility closures.

34


 

 

For the year ended December 31, 2015, the Company recorded restructuring, impairment and other charges of $57 million. The Company incurred $20 million of employee termination costs for 766 employees, substantially all of whom were terminated as of December 31, 2016.  These charges primarily related to two facility closures in the Print segment, the integration of Courier and the reorganization of certain operations.  The Company also recorded $19 million for payments to certain Courier employees upon the termination of Courier’s executive severance plan immediately prior to acquisition; $8 million of impairment charges primarily related to building, machinery and equipment associated with facility closings; lease termination and other restructuring charges of $7 million including charges related to multi-employer pension plan withdrawal obligations as a result of facility closures; and $3 million of charges for multi-employer pension plan withdrawal obligations unrelated to facility closures for the year ended December 31, 2015.

 

Depreciation and amortization decreased $10 million to $171 million for the year ended December 31, 2016 compared to the year ended December 31, 2015 due to decreased capital spending in recent years compared to historical levels, partially offset by the acquisitions of Courier and Esselte.  Depreciation and amortization included $16 million and $17 million of amortization of other intangible assets related to customer relationships and trade names for the years ended December 31, 2016 and 2015, respectively.

 

Income from operations for the year ended December 31, 2016 increased by $40 million, or 29.6%, to $175 million as compared to the year ended December 31, 2015.  The increase was due to higher volume as a result of the acquisition of Courier, lower restructuring, impairment and other charges, synergies from the integration of Courier, and a decline in acquisition-related expenses, partially offset by price pressures and lower volume in the Office Products and Print segments.

 

 

 

2016

 

 

2015

 

 

$ Change

 

 

% Change

 

 

 

(in millions, except percentages)

 

Interest expense (income)-net

 

$

18

 

 

$

(3

)

 

$

21

 

 

 

700.0

%

Investment and other expense-net

 

 

 

 

 

 

 

 

 

 

 

 

The Company recorded net interest expense of $18 million and net interest income of $3 million for the years ended December 31, 2016 and 2015, respectively. The change was primarily due to debt incurred in relation to the separation. Refer to Note 12, Debt , to the consolidated and combined financial statements.

 

 

2016

 

 

2015

 

 

$ Change

 

 

% Change

 

 

 

(in millions, except percentages)

 

Income before income taxes

 

$

157

 

 

$

138

 

 

$

19

 

 

 

13.8

%

Income tax expense

 

 

51

 

 

 

64

 

 

 

(13

)

 

 

(20.3

%)

Effective income tax rate

 

 

32.5

%

 

 

46.5

%

 

 

 

 

 

 

 

 

 

The effective income tax rate for the year ended December 31, 2016 was 32.5% compared to 46.5% for the year ended December 31, 2015.    The 2015 effective income tax rate reflected a tax expense of $6 million that was recorded due to an unfavorable court decision related to payment of prior year taxes in Mexico, the establishment of a valuation allowance on certain international net operating loss deferred tax assets and acquisition-related expenses of $14 million, most of which were not tax deductible.  

 

 

Information by Segment

 

The following tables summarize net sales, income (loss) from operations and certain items impacting comparability within each of the reportable segments and Corporate.  The descriptions of the reporting units generally reflect the primary products provided by each reporting unit.  Included in these net sales amounts are sales of other products or services that may be produced within a reporting unit to meet customer needs and improve operating efficiency.  

 

 

Print

 

 

Year Ended December 31,

 

 

 

2016

 

 

2015

 

 

 

(in millions, except percentages)

 

Net sales

 

$

3,127

 

 

$

3,181

 

Income from operations

 

 

141

 

 

 

96

 

Operating margin

 

 

4.5

%

 

 

3.0

%

Restructuring, impairment and other charges-net

 

 

15

 

 

 

53

 

Purchase accounting inventory adjustment

 

 

 

 

 

11

 

 

35


 

 

 

 

Net Sales for the Year

 

 

 

 

 

 

 

 

 

 

 

Ended December 31,

 

 

 

 

 

 

 

 

 

Reporting unit

 

2016

 

 

2015

 

 

$ Change

 

 

% Change

 

 

 

(in millions, except percentages)

 

 

 

 

 

Magazines, catalogs and retail inserts

 

$

1,632

 

 

$

1,807

 

 

$

(175

)

 

 

(9.7

%)

Book

 

 

1,097

 

 

 

925

 

 

 

172

 

 

 

18.6

%

Europe

 

 

272

 

 

 

305

 

 

 

(33

)

 

 

(10.8

%)

Directories

 

 

126

 

 

 

144

 

 

 

(18

)

 

 

(12.5

%)

Total Print

 

$

3,127

 

 

$

3,181

 

 

$

(54

)

 

 

(1.7

%)

 

Net sales for the Print segment for the year ended December 31, 2016 were $3,127 million, a decrease of $54 million or 1.7%, compared to 2015.  Additionally, net sales decreased due to price pressures, a $41 million decrease in pass-through paper sales, lower volume in the Europe and magazines, catalogs and retail inserts reporting units, and a $31 million, or 1.0%, decrease due to changes in foreign exchange rates, partially offset by the acquisition of Courier and increased supply chain management and fulfillment volume in the book reporting unit.

 

An analysis of net sales by reporting unit follows:

 

Magazines, catalogs and retail inserts: Sales declined due to a decrease in pass-through paper sales, price declines, lower volume, and changes in foreign exchange rates.

 

Book: Sales increased as a result of the acquisition of Courier, increased volume in supply chain management and fulfillment, and increases in pass-through paper sales, partially offset by lower volume in educational books and price declines.

 

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

 

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

 

Print segment income from operations increased by $45 million for the year ended December 31, 2016 due to higher volume as a result of the acquisition of Courier, lower restructuring, impairment and other charges, the impact of an $11 million purchase accounting inventory adjustment in 2015, and synergies from the integration of Courier, partially offset by price pressures, primarily in the magazines, catalogs and retail inserts reporting unit.  Operating margins increased from 3.0% for the year ended December 31, 2015 to 4.5% for the year ended December 31, 2016, of which 1.2 percentage points were due to lower restructuring, impairment and other charges and 0.3 percentage points were due to the impact of the prior year purchase accounting inventory adjustment.    

 

 

Office Products

 

 

Year Ended December 31,

 

 

 

2016

 

 

2015

 

 

 

(in millions, except percentages)

 

Net sales

 

$

527

 

 

$

562

 

Income from operations

 

 

54

 

 

 

47

 

Operating margin

 

 

10.2

%

 

 

8.4

%

Restructuring, impairment and other charges-net

 

 

 

 

 

4

 

 

Net sales for the Office Products segment for the year ended December 31, 2016 were $527 million, a decrease of $35 million, or 6.2% compared to 2015, including a $3 million, or 0.5%, decrease due to changes in foreign exchange rates.  Net sales also decreased as a result of lower volume, primarily in filing products, envelopes and binders products, and price pressures.

 

Office Products segment income from operations increased $7 million for the year ended December 31, 2016, mainly due to cost control initiatives and lower restructuring, impairment and other charges, partially offset by lower volume.  Operating margins increased from 8.4% for the year ended December 31, 2015 to 10.2% for the year ended December 31, 2016 due to cost control initiatives and 0.7 percentage points attributable to lower restructuring, impairment and other charges.  

 

36


 

 

Corporate

 

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

 

 

Year Ended December 31,

 

 

 

2016

 

 

2015

 

 

 

(in millions)

 

Operating expense

 

$

20

 

 

$

8

 

Spinoff-related transaction expenses

 

 

5

 

 

 

 

Pension settlement charge

 

 

1

 

 

 

 

Acquisition-related expenses

 

 

 

 

 

14

 

Restructuring, impairment and other charges-net

 

 

3

 

 

 

 

 

Corporate operating expense for the year ended December 31, 2016 was $20 million, compared to $8 million during the same period in 2015. The increase was mostly driven by one-time transaction costs associated with becoming a standalone company, a $7 million LIFO inventory benefit in 2015, the unfavorable impact of a prior year workers’ compensation adjustment, increased bad debt expense, and higher restructuring costs, partially offset by lower acquisition-related expenses and an increase in pension income.  

 

 

Results of Operations for the Year Ended December 31, 2015 as Compared to the Year Ended December 31, 2014

 

The following table shows the results of operations for the year ended December 31, 2015 and 2014, which reflects the results of acquired businesses from the relevant acquisition dates:

 

 

2015

 

 

2014

 

 

$ Change

 

 

% Change

 

 

 

(in millions, except percentages)

 

Net sales

 

$

3,743

 

 

$

3,853

 

 

$

(110

)

 

 

(2.9

%)

     Cost of sales (exclusive of depreciation and amortization)

 

 

2,874

 

 

 

2,953

 

 

 

(79

)

 

 

(2.7

%)

     Cost of sales with RRD and affiliates (exclusive of depreciation and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

          amortization)

 

 

216

 

 

 

244

 

 

 

(28

)

 

 

(11.5

%)

Total cost of sales

 

 

3,090

 

 

 

3,197

 

 

 

(107

)

 

 

(3.3

%)

    

 

 

82.6

%

 

 

83.0

%

 

 

 

 

 

 

 

 

Selling, general and administrative expenses (exclusive of depreciation and

     amortization)

 

 

280

 

 

 

268

 

 

 

12

 

 

 

4.5

%

    

 

 

7.5

%

 

 

7.0

%

 

 

 

 

 

 

 

 

Restructuring, impairment and other charges-net

 

 

57

 

 

 

132

 

 

 

(75

)

 

 

(56.8

%)

Depreciation and amortization

 

 

181

 

 

 

181

 

 

 

 

 

 

 

Income from operations

 

$

135

 

 

$

75

 

 

$

60

 

 

 

80.0

%

 

Combined Results

 

Net sales for the year ended December 31, 2015 were $3,743 million, a decrease of $110 million or 2.9% compared to December 31, 2014 including an $84 million, or 2.2%, decrease due to changes in foreign exchange rates. The decrease in net sales was primarily driven by volume declines in the Print segment, an $84 million decline in pass-through paper sales and price pressures in the Print segment, partially offset by the acquisitions of Courier and Esselte and volume growth in the Office Products segment.

 

Total cost of sales decreased $107 million, or 3.3%, for the year ended December 31, 2015 compared to the year ended December 31, 2014 including a $73 million, or 2.3% decrease due to change in foreign exchange rates. Additionally, cost of sales decreased primarily due to lower volume in the Print segment, lower pass-through paper sales, cost control initiatives and lower incentive compensation expense partially offset by the acquisitions of Courier and Esselte. As a percentage of net sales, cost of sales decreased 0.4% year-over-year.

 

Selling, general and administrative expenses increased $12 million to $280 million for the year ended December 31, 2015 due to the acquisition of Courier and a $12 million increase in acquisition-related expenses, partially offset by a $6 million, or 2.2% decrease in foreign exchange rates, incentive compensation and information technology expenses. As a percentage of net sales, selling, general and administrative expenses increased from 7.0% for the year ended December 31, 2014 to 7.5% for the year ended

37


 

December 31, 2015 due to the impact of lower volume, lower pass-through paper sales and price pressures, partially offset by the decrease in incentive compensation expense and cost control initiatives.  

 

For the year ended December 31, 2015, the Company recorded net restructuring and impairment charges of $57 million compared to $132 million in the same period in 2014. The Company incurred $20 million of employee termination costs for 766 employees, substantially all of whom were terminated as of December 31, 2016. These charges were the result of two facility closures in the Print segment, the integration of Courier and the reorganization of certain operations. The Company also recorded $19 million for payments to certain Courier employees upon the termination of Courier’s executive severance plan immediately prior to acquisition; $8 million of impairment charges primarily related to building, machinery and equipment associated with facility closings; lease termination and other restructuring charges of $7 million including charges related to multi-employer pension plan withdrawal obligations as a result of facility closures; and $3 million of charges for multi-employer pension plan withdrawal obligations unrelated to facility closures for the year ended December 31, 2015.

 

For the year ended December 31, 2014, the Company recorded net restructuring, impairment and other charges of $132 million.

 

 

The Company recorded $100 million of non-cash charges for the impairment of goodwill in the magazines, catalogs and retail inserts reporting unit. The goodwill impairment charge resulted from reductions in the estimated fair value of the reporting unit based on lower expectations for future revenue, profitability and cash flows as compared to expectations as of the prior annual goodwill impairment test. The lower expectations were due to an expected increase in volume declines and increasing price pressures resulting from declining demand, primarily in catalogs and magazines. Revenue and income from operations in the magazines, catalogs and retail inserts reporting unit for the year ended December 31, 2014 were lower than previous expectations due to volume declines and price pressures.

 

The Company recorded $17 million of charges related to the decision to withdraw from certain multi-employer pension plans serving facilities that are operating.

 

The Company recorded lease termination and other restructuring charges of $8 million for the year ended December 31, 2014, including charges related to multi-employer pension plans withdrawal obligations as a result of facility closures.

 

The Company incurred $5 million of employee termination costs for 96 employees, substantially all of whom were terminated as of December 31, 2016. These charges were primarily related to the integration of Esselte and the result of one facility closure in the Print segment as well as the reorganization of certain operations.

 

The Company also recorded non-cash charges of $2 million, for the impairment of buildings, machinery and equipment associated with a facility closure, net of gains on sales of previously impaired buildings and equipment.

 

Depreciation and amortization was $181 million for the years ended December 31, 2015 and 2014, due to lower capital spending in recent years compared to historical levels mostly offset by the impact of the acquisitions of Courier and Esselte. Depreciation and amortization included $17 million and $11 million of amortization of other intangible assets related to customer relationships and trade names for the year ended December 31, 2015 and 2014, respectively.

 

Income from operations for the year ended December 31, 2015 increased by $60 million or 80.0% to $135 million as compared to the year ended December 31, 2014 as a result of lower restructuring, impairment and other charges, the acquisitions of Courier and Esselte and cost control initiatives, partially offset by lower volume and continued price pressures in the Print segment, higher acquisition-related expenses of $12 million and an increase of $9 million related to a purchase accounting inventory adjustment.

 

 

 

2015

 

 

2014

 

 

$ Change

 

 

% Change

 

 

 

(in millions, except percentages)

 

Interest income-net

 

$

(3

)

 

$

(4

)

 

 

1

 

 

 

25.0

%

Investment and other income-net

 

 

 

 

 

(9

)

 

 

9

 

 

 

100.0

%

 

Net interest income decreased by $1 million for the year ended December 31, 2015 versus the same period in 2014, primarily due to a decrease in the average outstanding notes receivable from an RRD affiliate.

 

Net investment and other income was de minimis and $9 million for the years ended December 31, 2015 and 2014, respectively. For the year ended December 2014, the Company recorded a $10 million bargain purchase gain related to the Esselte acquisition.

 

38


 

 

 

2015

 

 

2014

 

 

$ Change

 

 

% Change

 

 

 

(in millions, except percentages)

 

Income before income taxes

 

$

138

 

 

$

88

 

 

$

50

 

 

 

56.8

%

Income tax expense

 

 

64

 

 

 

30

 

 

 

34

 

 

 

113.3

%

Effective income tax rate

 

 

46.5

%

 

 

34.2

%

 

 

 

 

 

 

 

 

 

The effective income tax rate for the year ended December 31, 2015 was 46.5% compared to 34.2% in the same period in 2014. The 2015 effective income tax rate reflected a tax expense of $6 million that was recorded due to an unfavorable court decision related to payment of prior year taxes in an international jurisdiction, the establishment of a valuation allowance on certain international net operating loss deferred tax assets and certain acquisition costs that are not deductible for tax purposes.

 

 

Information by Segment

 

The following tables summarize net sales, income (loss) from operations and certain items impacting comparability within each of the reportable segments and Corporate. The descriptions of the reporting unit generally reflect the primary products provided by each reporting unit. Included in these net sales amounts are sales of other products or services that may be produced within a reporting unit to meet customer needs and improve operating efficiency.

 

 

Print

 

 

Year Ended December 31,

 

 

 

2015

 

 

2014

 

 

 

(in millions, except percentages)

 

Net sales

 

$

3,181

 

 

$

3,353

 

Income from operations

 

 

96

 

 

 

47

 

Operating margin

 

 

3.0

%

 

 

1.4

%

Restructuring, impairment and other charges-net

 

 

53

 

 

 

127

 

Purchase accounting inventory adjustment

 

 

11

 

 

 

 

 

 

 

 

Net Sales for the Year

 

 

 

 

 

 

 

 

 

 

 

Ended December 31,

 

 

 

 

 

 

 

 

 

Reporting unit

 

2015

 

 

2014

 

 

$ Change

 

 

% Change

 

 

 

(in millions, except percentages)

 

 

 

 

 

 

 

 

 

Magazines, catalogs and retail inserts

 

$

1,807

 

 

$

2,036

 

 

$

(229

)

 

 

(11.3

%)

Book

 

 

925

 

 

 

787

 

 

 

138

 

 

 

17.5

%

Europe

 

 

305

 

 

 

381

 

 

 

(76

)

 

 

(19.9

%)

Directories

 

 

144

 

 

 

149

 

 

 

(5

)

 

 

(3.4

%)

Total Print

 

$

3,181

 

 

$

3,353

 

 

$

(172

)

 

 

(5.1

%)

 

Net sales for the Print segment for the year ended December 31, 2015 were $3,181 million, a decrease of $172 million, or 5.1%, compared to 2014, including a $76 million, or 2.3%, decrease due to changes in foreign exchange rates. Net sales decreased due to lower volume in magazines, catalogs and retail inserts, an $84 million or 2.5%, decrease in pass-through paper sales, price pressures, and lower volume in consumer and educational books, partially offset by the acquisition of Courier.

 

An analysis of net sales by reporting unit follows:

 

 

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

 

Books: Sales increased as a result of the acquisition of Courier, partially offset by reduced volume in consumer and educational books.

 

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

 

Directories: Sales decreased primarily as a result of a decline in pass-through paper sales and lower volume resulting from electronic substitution.

 

39


 

Print segment income from operations increased $49 million for the year ended December 31, 2015 due to lower restruc turing, impairment and other charges, cost control initiatives and lower incentive compensation expense, partially offset by volume declines in magazines, catalogs and retail inserts, price pressures, a $11 million charge from an inventory purchase account ing adjustment from the acquisition of Courier. Operating margins increased from 1.4% for the year ended December 31, 2014 to 3.0% for the year ended December 31, 2015. The lower restructuring, impairment and other charges impacted margins favorably by 2.1 percentage points. Operating margins also increased due to cost control initiatives, lower pass-through paper sales, and lower incentive compensation expense, which were more than offset by a 0.3 percentage point impact of the purchase accounting inventor y adjustment, price pressures and unfavorable product mix.

 

 

Office Products

 

 

Year Ended December 31,

 

 

 

2015

 

 

2014

 

 

 

(in millions, except percentages)

 

Net sales

 

$

562

 

 

$

500

 

Income from operations

 

 

47

 

 

 

40

 

Operating margin

 

 

8.4

%

 

 

8.0

%

Restructuring, impairment and other charges-net

 

 

4

 

 

 

5

 

Purchase accounting inventory adjustment

 

 

 

 

 

2

 

 

 

Net sales for the Office Products segment for the year ended December 31, 2015 were $562 million, an increase of $62 million, or 12.4%, compared to 2014, including an $8 million, or 1.6% decrease due to changes in foreign exchange rates. Net sales increased due to the acquisition of Esselte and higher volume in filing and binder products primarily related to new customers.

 

Office Products segment income from operations increased $7 million for the year ended December 31, 2015 mainly due to the acquisition of Esselte, cost control initiatives and the impact of a prior year purchase accounting inventory adjustment. Operating margins increased from 8.0% for the year ended December 31, 2014 to 8.4% for the year ended December 31, 2015 of which 0.4 percentage points are due to the impact of a prior year purchase accounting inventory adjustment and 0.3 percentage points are due to lower restructuring, impairment and other charges. These decreases were partially offset by unfavorable product mix and price pressures.

 

 

Corporate

 

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

 

 

 

 

 

 

Year Ended December 31,

 

 

 

2015

 

 

2014

 

 

 

(in millions)

 

Operating expenses

 

$

8

 

 

$

12

 

Acquisition-related expenses

 

 

14

 

 

 

2

 

 

Corporate operating expenses in the year ended December 31, 2015 were $8 million, a decrease of $4 million compared to the year ended December 31, 2014. The decrease was driven by a $7 million LIFO inventory benefit in 2015 and lower incentive compensation expense, partially offset by higher acquisition-related expenses.

 

 

40


 

Non-GAAP Measures

 

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

 

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

 

Non-GAAP adjusted EBITDA excludes restructuring, impairment and other charges-net, spinoff-related transaction expenses, a pension settlement charge related to the Esselte defined benefit plan, acquisition-related expenses, purchase accounting inventory adjustments, and a gain on bargain purchase related to the Esselte acquisition. A reconciliation of GAAP net income to non-GAAP adjusted EBITDA for the years ended December 31, 2016, 2015 and 2014 is presented in the following table:

 

 

 

For the Year Ended December 31,

 

 

 

2016

 

 

2015

 

 

2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

106

 

 

$

74

 

 

$

58

 

Restructuring, impairment and other charges – net

 

 

18

 

 

57

 

 

 

132

 

Spinoff-related transaction expenses

 

 

5

 

 

 

 

 

 

 

Pension settlement charge

 

 

1

 

 

 

 

 

 

 

Acquisition-related expenses

 

 

 

 

14

 

 

 

2

 

Purchase accounting inventory adjustments

 

 

 

 

11

 

 

 

2

 

Gain on bargain purchase

 

 

 

 

 

 

 

 

(9

)

Depreciation and amortization

 

 

171

 

 

 

181

 

 

 

181

 

Interest expense (income) – net

 

 

18

 

 

 

(3

)

 

 

(4

)

Income tax expense

 

 

51

 

 

64

 

 

 

30

 

Non-GAAP adjusted EBITDA

 

$

370

 

 

$

398

 

 

$

392

 

 

Years Ended December 31, 2016, 2015 and 2014

 

2016 Restructuring, impairment and other charges—net. T he year ended December 31, 2016 included net restructuring charges of $18 million. The Company recorded $8 million for employee termination costs related to one facility closure in the Print segment, the expected closure of another facility in the first quarter of 2017 in the Print segment and the reorganization of certain operations.  Additionally, the Company recorded lease termination and other restructuring charges of $7 million. The Company recorded other charges of $3 million for multi-employer pension plan withdrawal obligations unrelated to facility closures.

 

 

2015 Restructuring, impairment and other charges—net. The year ended December 31, 2015 included $20 million for employee termination costs related to the closure of two facilities in the Print segment and the reorganization of certain operations; $19 million for payments to certain Courier employees upon the termination of Courier’s executive severance plan immediately prior to acquisition; $8 million of impairment charges primarily related to buildings, machinery and equipment associated with facility closings; $7 million of lease termination and other restructuring costs, including charges related to multi-employer pension plan withdrawal obligations as a result of facility closures; and $3 million of charges for multi-employer pension plan withdrawal obligations unrelated to facility closures.

 

 

41


 

2014 Restructuring, impairment and other charges—net. The year ended December 31, 2014 included $100 million for the impairment of goodwill in the magazines, catalogs and retail inserts reporting unit; $17 million for charges related to the decision to withdraw from multi-employer pension plans serving facili ties that continued to operate; $8 million of lease termination and other restructuring costs, including charges related to multi-employer pension plan withdrawal obligations as a result of facility closures; $5 million for employee termination costs prima rily related to the integration of Esselte, the closure of one facility in the Print segment and the reorganization of certain operations; and $2 million for impairment of other long-lived assets, primarily for buildings and machinery and equipment associa ted with facility closures.

 

 

Spinoff-related transaction expenses: The year ended December 31, 2016 included charges of $5 million for one-time transaction costs associated with becoming a standalone company .

 

 

Pension settlement charge. The year ended December 31, 2016 included a pension settlement charge of $1 million related to lump-sum pension settlement payments for the Esselte plan.

 

 

Acquisition-related expenses. Included charges of $14 million and $2 million related to legal, accounting and other expenses for the year ended December 31, 2015 and 2014, respectively, associated with completed acquisitions.

 

 

Purchase accounting inventory adjustments. Included a charge of $11 million for the year ended December 31, 2015 as a result of an inventory purchase accounting adjustment for Courier and a charge of $2 million for the year ended December 31, 2014 as result of an inventory purchase accounting adjustment for Esselte.

 

 

Gain on bargain purchase. The acquisition of Esselte resulted in a gain of $9 million for the year ended December 31, 2014.

 

LIQUIDITY AND CAPITAL RESOURCES

 

The Company believes it has sufficient liquidity to support its ongoing operations and to invest in future growth to create value for its shareholders. Operating cash flows and the Company’s $400 million senior secured revolving credit facility (the “Revolving Credit Facility”) are the Company’s primary sources of liquidity and are expected to be used for, among other things, payment of interest and principal on the Company’s debt obligations, distributions to shareholders that may be approved by the Board of Directors, acquisitions, capital expenditures necessary to support productivity improvement and growth and completion of restructuring programs.

 

The following sections describe the Company’s cash flows for the years ended December 31, 2016, 2015 and 2014.

 

 

 

Year Ended December 31,

 

 

 

 

2016

 

 

2015

 

 

2014

 

Net cash provided by operating activities

 

$

231

 

 

$

275

 

 

$

307

 

Net cash used in investing activities

 

 

41

 

 

 

121

 

 

 

135

 

Net cash used in financing activities

 

 

187

 

 

 

172

 

 

 

178

 

 

 

Cash flows from Operating Activities

 

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

  

 

2016 compared to 2015

 

Net cash provided by operating activities was $231 million for the year ended December 31, 2016 compared to $275 million for the same period in 2015.  The decrease in net cash provided by operating activities reflected the timing of supplier payments and cash collections, increased costs related to the separation and interest payments in 2016.

42


 

 

Beginning October 1, 2016, transactions with RRD and Donnelley Financial are considered third-party and will be settled in cash, whereas prior to that date transactions were net settled among the three companies.  Operating cash flows for the three months ended December 31, 2016 were negatively impacted by an increase in trade receivables with RRD of $62 million and Donnelley Financial of $3 million, which was partially offset by an increase in trade payables with RRD of $56 million and Donnelley Financial of $1 million.  Refer to Note 20, Related Parties , for more information.

 

 

2015 compared to 2014

 

Net cash provided by operating activities was $275 million for the year ended December 31, 2015 compared to $307 million for the year ended December 31, 2014. The decrease in net cash provided by operating activities reflected the timing of customer payments and payments for employee-related liabilities, higher payments for incentive compensation costs and higher acquisition-related expenses. Operating cash flows related to allocated expenses that were recorded prior to the separation and resulted in a decrease in cash provided by operating activities in 2015, driven primarily by higher current income tax deemed settlements, partially offset by pension and postretirement benefit income allocations.

 

 

Cash flows from Investing Activities

 

2016 compared to 2015

 

Net cash used in investing activities for the year ended December 31, 2016 was $41 million compared to $121 million for the same period in 2015. Significant changes are as follows:

 

 

Capital expenditures were $48 million during the year ended December 31, 2016, an increase of $6 million as compared to the same period in 2015 primarily due to an increase in software capital expenditures related to, and in anticipation of the separation.  

 

During the year ended December 31, 2015, net cash used for the acquisition of Courier was $111 million.  

 

For the year ended December 31, 2016, proceeds from the sale of other assets were $6 million compared to $8 million for the same period in 2015.

 

During the year ended December 31, 2016, transfers from restricted cash were $9 million. There were no transfers from restricted cash in 2015.

 

There was also $24 million of cash provided from other investing activities during the year ended December 31, 2015 related to a notes receivable repayment from RRD and its affiliates.

 

 

2015 compared to 2014

 

Net cash used in investing activities for the year ended December 31, 2015 was $121 million compared to $135 million for the year ended December 31, 2014. Capital expenditures were $42 million during the year ended December 31, 2015, a decrease of $18 million as compared to the same period of 2014. During the year ended December 31, 2015, net cash used for the acquisition of Courier was $111 million. There were no transfers to restricted cash in 2015 as compared to $12 million for the same period of 2014.

 

 

Cash flows from Financing Activities

 

2016 compared to 2015

 

Net cash used in financing activities for the year ended December 31, 2016 was $187 million compared to $172 million for the same period in 2015.  Significant changes are as follows:

 

 

On September 30, 2016, the Company issued new debt presented as proceeds from the issuance of long-term debt of $816 million and debt issuance costs of $20 million.

 

Net transfers to parent and affiliates were $945 million and $100 million for the year ended December 31, 2016 and 2015, respectively.  The increase is primarily due to a cash dividend paid to RRD from the proceeds of the Company’s debt issuance.

 

During the year ended December 31, 2016, the Company made $13 million in net cash payments to RRD related to the separation from RRD on October 1, 2016.

43


 

 

During the year ended December 31, 2015, the Company repaid $72 million of debt assumed in the acquisition of Courier.

 

The Company paid an $8 million dividend to shareholders on December 1, 2016.

 

 

2015 compared to 2014

 

Net cash used in financing activities for the year ended December 31, 2015 was $172 million compared to $178 million used for the year ended December 31, 2014. Net transfers to parent and affiliates were $100 million for the year ended December 31, 2015, a decrease of $78 million as compared to the same period of 2014. During the year ended December 31, 2015, the Company repaid $72 million of debt assumed in the Courier acquisition.

 

 

Dividends

 

Cash dividends declared and paid to shareholders in 2016 totaled $8 million. On January 18, 2017, the Board of Directors declared a quarterly cash dividend of $0.25 per common share, payable on March 2, 2017 to shareholders of record on February 15, 2017.

 

The Credit Agreement generally allows annual dividend payments of up to $50 million in aggregate, though additional dividends may be allowed subject to certain conditions. The Company’s Board of Directors must review and approve future dividend payments and will determine whether to declare additional dividends based on the Company’s operating performance, expected future cash flows, debt levels, liquidity needs and investment opportunities.

 

The timing, declaration, amount and payment of any future dividends to the Company’s stockholders falls within the discretion of the Company’s Board of Directors. The decisions of the Company’s Board of Directors regarding the payment of future dividends depends on many factors, including but not limited to the Company’s financial condition, future prospects, earnings, capital requirements and debt service obligations, as well as legal requirements, regulatory constraints, industry practice and other factors that the Board of Directors may deem relevant. In addition, the terms of the agreements governing the Company’s existing debt or debt that the Company may incur in the future may limit or prohibit the payment of dividends. There can be no assurance that the Company will continue to pay a dividend.  

 

 

Contractual Cash Obligations and Other Commitments and Contingencies

 

The following table quantifies the Company’s future contractual obligations as of December 31, 2016:

 

 

 

Payments Due In

 

 

 

Total

 

 

2017

 

 

2018

 

 

2019

 

 

2020

 

 

2021

 

 

Thereafter

 

 

 

(in millions)

 

Debt (a)

 

$

818

 

 

$

54

 

 

$

49

 

 

$

43

 

 

$

43

 

 

$

43

 

 

$

586

 

Interest due on debt (b)

 

 

371

 

 

 

64

 

 

 

60

 

 

 

57

 

 

 

54

 

 

 

51

 

 

 

85

 

Multi-employer pension withdrawals obligations

 

 

127

 

 

 

9

 

 

 

9

 

 

 

8

 

 

 

8

 

 

 

8

 

 

 

85

 

Operating leases (c)

 

 

197

 

 

 

49

 

 

 

39

 

 

 

35

 

 

 

25

 

 

 

21

 

 

 

28

 

Deferred compensation

 

 

8

 

 

 

1

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

6

 

Pension plan contributions (d)

 

 

14

 

 

 

7

 

 

 

7

 

 

 

 

 

 

 

 

 

 

 

 

 

Incentive compensation

 

 

8

 

 

 

8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outsourced services

 

 

35

 

 

 

33

 

 

 

1

 

 

 

1

 

 

 

 

 

 

 

 

 

 

Other (e)

 

 

27

 

 

 

27

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Total as of December 31, 2016

 

$

1,605

 

 

$

252

 

 

$

166

 

 

$

144

 

 

$

130

 

 

$

123

 

 

$

790

 

 

 

(a)

Excludes unamortized debt issuance costs of $6 million and $9 million related to the Company’s Term Loan Facility and 8.75% Senior Notes due October 15, 2023, respectively, and a discount of $9 million related to the Company’s Term Loan Facility. These amounts do not represent contractual obligations with a fixed amount or maturity date.

 

(b)

Includes scheduled interest payments for all debt, including estimates for the Company’s floating-rate debt.

 

(c)

Includes obligations to landlords.

 

(d)

Includes the high end of the estimated range for 2017 and 2018 pension plan contributions and does not include the obligations for subsequent periods, as the Company is unable to reasonably estimate the ultimate amounts.

 

(e)

Other primarily includes employee restructuring-related severance payments ($8 million), purchases of property, plant and equipment ($15 million) and purchases of natural gas ($3 million).

44


 

 

 

Liquidity

 

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

 

Cash and cash equivalents were $95 million as of December 31, 2016 and December 31, 2015.

 

The Company’s cash balances are held in several locations throughout the world, including amounts held outside of the United States.  Cash and cash equivalents as of December 31, 2016 included $44 million in the U.S. and $51 million at international locations. The Company has not recognized deferred tax liabilities as of December 31, 2016 related to local taxes on certain foreign earnings as all are considered to be permanently reinvested. Certain other cash balances of foreign subsidiaries may be subject to U.S. or local country taxes if repatriated to the U.S. In addition, repatriation of some foreign cash balances is further restricted by local laws. Management regularly evaluates whether foreign earnings are expected to be permanently reinvested. This evaluation requires judgment about the future operating and liquidity needs of the Company and its foreign subsidiaries. Changes in economic and business conditions, foreign or U.S. tax laws, or the Company’s financial situation could result in changes to these judgments and the need to record additional tax liabilities.

 

 

Debt Issuances

 

On September 30, 2016, the Company issued $450 million of 8.75% Senior Secured Notes (the “Senior Notes”) due October 15, 2023.  Interest on the Senior Notes is due semi-annually on April 15 and October 15, commencing on April 15, 2017.  Net proceeds from the offering of the Senior Notes (“the Notes Offering”) were distributed to RRD in the form of a dividend.  The Company did not retain any proceeds from the Notes Offering.

 

The Senior Notes were issued pursuant to an indenture where certain wholly-owned domestic subsidiaries of the Company guarantee the Senior Notes (the “Guarantors”).  The Senior Notes are fully and unconditionally guaranteed, on a senior secured basis, jointly and severally, by the Guarantors, which are comprised of each of the Company’s existing and future direct and indirect wholly-owned U.S. subsidiaries that guarantee the Company’s obligations. The Senior Notes are not guaranteed by the Company’s foreign subsidiaries or unrestricted subsidiaries.  The Senior Notes and the related guarantees are secured on a first-priority lien basis by substantially all assets of the Company and the Guarantors, subject to certain exceptions and permitted liens. The Indenture governing the Senior Notes contains certain covenants applicable to the Company and its restricted subsidiaries, including limitations on: (1) liens; (2) indebtedness; (3) mergers, consolidations and acquisitions; (4) sales, transfers and other dispositions of assets; (5) loans and other investments; (6) dividends and other distributions, stock repurchases and redemptions and other restricted payments; (7) restrictions affecting subsidiaries; (8) transactions with affiliates; and (9) designations of unrestricted subsidiaries. Each of these covenants is subject to important exceptions and qualifications.

 

On September 30, 2016 the Company entered into a credit agreement (the “Credit Agreement”) which provides for (i) a new senior secured term loan B facility in an aggregate principal amount of $375 million (the “Term Loan Facility”) and (ii) a new senior secured revolving credit facility in an aggregate principal amount of $400 million (the “Revolving Credit Facility,”). The interest rate per annum applicable to the Term Loan Facility is equal to, at the Company’s option, either a base rate plus a margin of 5.00% or LIBOR plus a margin of 6.00%. The LIBOR rate is subject to a “floor” of 1%.  The interest rate per annum applicable to the Revolving Credit Facility is equal to a base rate plus a margin ranging from 1.75% to 2.25%, or LIBOR plus a margin ranging from 2.75% to 3.25%, in either case based upon the Consolidated Leverage Ratio of the Company and its restricted subsidiaries. Interest on the Credit Agreement is due at least quarterly commencing on December 31, 2016.  The Term Loan Facility will amortize in quarterly installments of $13 million for the first eight quarters and $11 million for subsequent quarters.  The debt issuance costs and original issue discount are being amortized over the life of the facilities using the effective interest method. The Term Loan Facility will mature on September 30, 2022 and the Revolving Credit Facility will mature on September 30, 2021.

 

On February 2, 2017, the Company paid in advance the full amount of required amortization payments, $50 million, for the year ended December 31, 2017 for the Term Loan Facility.

 

The proceeds of any collection or other realization of collateral received in connection with the exercise of remedies and any distribution in respect of collateral in any bankruptcy proceeding will be applied first to repay amounts due under the Revolving Credit Facility before the lenders under the Term Loan Facility or the holders of the Senior Notes receive such proceeds.

 

45


 

The Credit Agreement is subject to a number of covenants, including, but not limited t o, a minimum Interest Coverage Ratio and the Consolidated Leverage Ratio, as defined in and calculated pursuant to the Credit Agreement, that, in part, restrict the Company’s ability to incur additional indebtedness, create liens, engage in mergers and con solidations, make restricted payments and dispose of certain assets. The Credit Agreement generally allows annual dividend payments of up to $50 million in aggregate, though additional dividends may be allowed subject to certain conditions. Each of these c ovenants is subject to important exceptions and qualifications.

 

The Company used the net proceeds from the Term Loan Facility to fund a cash dividend to RRD in connection with the separation and to pay fees and expenses related to the separation from RRD.  The Company intends to use any additional borrowings under the Credit Facilities for general corporate purposes, including the financing of permitted investments.

 

There were no borrowings under the Revolving Credit Facility as of December 31, 2016. Based on the Company’s consolidated and combined statements of income for the year ended December 31, 2016 and existing debt, the Company would have had the ability to utilize the entire $400 million Credit Agreement and not have been in violation of the terms of the agreement.   Availability under the Revolving Credit Facility was reduced by $12 million of outstanding letters of credit.  The Company expects to obtain additional letters of credit related to workers’ compensation program, which will further reduce the availability by approximately $35 - $45 million.  

 

The current availability under the Revolving Credit Facility and net availability as of December 31, 2016 is shown in the table below:

 

 

December 31, 2016

 

Total Liquidity

 

(in millions)

 

Cash

 

$

95

 

 

 

 

 

 

Stated amount of the Revolving Credit Facility

 

$

400

 

Less: availability reduction from covenants

 

 

 

Amount available under the Revolving Credit Facility

 

$

400

 

 

 

 

 

 

Usage

 

 

 

 

Borrowings under the credit agreement

 

$

 

Impact on availability related to outstanding letters of credit

 

 

12

 

Net Available Liquidity

 

$

483

 

 

The Company was in compliance with its debt covenants as of December 31, 2016, and expects to remain in compliance based on management’s estimates of operating and financial results for 2017 and the foreseeable future. However, declines in market and economic conditions or demand for certain of the Company’s products could impact the Company’s ability to remain in compliance with its debt covenants in future periods. As of December 31, 2016, the Company met all the conditions required to borrow under the Credit Agreement and management expects the Company to continue to meet the applicable borrowing conditions.

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

 

As of December 31, 2016, the Company had $12 million in outstanding letters of credit issued under the Credit Agreement. As of December 31, 2016, the Company also had $16 million in other uncommitted credit facilities, primarily outside the U.S., (the “Other Facilities”). As of December 31, 2016, letters of credit and guarantees of a de minimis amount were issued and reduced availability under the Company’s Other Facilities. As of December 31, 2016, there were no borrowings under the Credit Agreement and the Other Facilities.

 

 

Acquisitions

 

During the year ended December 31, 2016, the Company paid $7 million, net of cash acquired, related to the acquisition of Continuum.  The Company paid the cash portion of the Continuum acquisition with cash on hand.

 

During the year ended December 31, 2015, the Company paid $111 million, net of cash acquired, related to the acquisition of Courier.  The Company financed the cash portion of the Courier acquisition with a combination of cash on hand and borrowings.

 

46


 

During the year ended December 31, 2014, the Company paid $76 million, net of cash acquired, related to the acquisition of Esselte.  The Company financed the cash portion of the Esselte acquisition with a combination of cash on hand and borrowings.

 

Refer to Note 3, Business Combinations , for more information.

 

 

Risk Management

 

The Company is exposed to interest rate risk on its variable debt and price risk on its fixed-rate debt. At December 31, 2016, the Company’s variable-interest borrowings were $362 million , or approximately 44.3%, of the Company’s total debt.

 

The Company assesses market risk based on changes in interest rates utilizing a sensitivity analysis that measures the potential loss in earnings, fair values and cash flows based on a hypothetical 10% change in interest rates. Using this sensitivity analysis, such changes would not have a material effect on interest income or expense and cash flows and would change the fair values of fixed-rate debt at December 31, 2016 by approximately $19 million.

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

 

 

OTHER INFORMATION

 

Environmental, Health and Safety

 

For a discussion of certain environmental, health and safety issues involving the Company, refer to Note 11, Commitments and Contingencies, to the consolidated and combined financial statements.

 

 

Litigation and Contingent Liabilities

 

For a discussion of certain litigation involving the Company, refer to Note 11, Commitments and Contingencies, to the consolidated and combined financial statements.

 

 

New Accounting Pronouncements and Pending Accounting Standards

 

Recently issued accounting standards and their estimated effect on the Company’s consolidated and combined financial statements are also described in Note 21, New Accounting Pronouncements , to the consolidated and combined financial statements.

 

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The Company is exposed to a variety of market risks which may adversely impact the Company's results of operations and financial condition, including changes in interest and foreign currency exchange rates, changes in the economic environment that would impact credit positions and changes in the prices of certain commodities. The Company's management takes an active role in the risk management process and has developed policies and procedures that require specific administrative and business functions to assist in the identification, assessment and control of various risks. These risk management strategies may not fully insulate the Company from adverse impacts due to market risks.

 

 

Interest Rate Risk

 

The Company is exposed to interest rate risk on variable rate debt obligations and price risk on fixed rate debt. As of December 31, 2016, the Company had variable rate debt outstanding of $353 million at a current weighted average interest rate of

47


 

7.00% and fixed rate debt outstanding of   $450 million   at a current weighted average interest rate of   8.75%. The variable rate debt outstanding at   December 31, 2016, is comprised of the   $362 million  Term Loan Faci lity entered into on   September 30, 2016. The interest rate per annum applicable to the Term Loan Facility is equal to, at the Company s option, either a base rate plus a margin of 5.00% or LIBOR plus a margin of 6.00%. However, the LIBOR rate is subject to a floor of 1%.  As of   December 31, 201 6, the interest rate on the Term Loan Facility was 7.00%. A hypothetical 10% change in interest rates in the near term would not have a material effect on interest expense or cash flows. A hypothetical 10% adverse change in interest rates in the near term would change the fair value of fixed rate debt at   December 31, 2016, by approximately   $19 million.

 

 

Foreign Currency Risk and Translation Exposure

 

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.

 

Although operating in local currencies may limit the impact of currency rate fluctuations on the results of operations of the Company's non-United States subsidiaries and business units, rate fluctuations may impact the consolidated financial position as the assets and liabilities of its foreign operations are translated into U.S. dollars in preparing the Company's consolidated and combined balance sheets. As of December 31, 2016, the Company's foreign subsidiaries had net current assets (defined as current assets less current liabilities) subject to foreign currency translation risk of $62 million. The potential decrease in net current assets as of December 31, 2016, from a hypothetical 10% adverse change in quoted foreign currency exchange rates in the near term would be approximately $5 million. This sensitivity analysis assumes a parallel shift in all major foreign currency exchange rates verses the U.S. dollar. Exchange rates rarely move in the same direction relative to the U.S. dollar due to positive and negative correlations of the various global currencies. This assumption may overstate the impact of changing exchange rates on individual assets and liabilities denominated in a foreign currency.

 

These international operations are subject to risks typical of international operations, including, but not limited to, differing economic conditions, changes in political climate, potential restrictions on the movement of funds, differing tax structures, and other regulations and restrictions. Accordingly, future results could be adversely impacted by changes in these or other factors.

 

 

Credit Risk

 

 

Credit risk is the possibility of loss from a customer's failure to make payments according to contract terms. Prior to granting credit, each customer is evaluated, taking into consideration the prospective customer's financial condition, past payment experience, credit bureau information and other financial and qualitative factors that may affect the customer's ability to pay. Specific credit reviews and standard industry credit scoring models are used in performing this evaluation. Customers' financial condition is continuously monitored as part of the normal course of business. Some of the Company's customers are highly leveraged or otherwise subject to their own operating and regulatory risks. Based on those customer account reviews and due to the continued uncertainty of the global economy, the Company has established an allowance for doubtful accounts of $10 million as of December 31, 2016.

 

The Company has a large, diverse customer base and does not have a high degree of concentration with any single customer account. During the year ended December 31, 2015, the Company's largest customer accounted for less than 10% of the Company's net sales. Even if the Company's credit review and analysis mechanisms work properly, the Company may experience financial losses in its dealings with customers and other parties. Any increase in nonpayment or nonperformance by customers could adversely impact the Company's results of operations and financial condition. Economic disruptions in the near term could result in significant future charges.

 

 

Commodity Risk

 

The primary raw materials used by the Company are paper and ink. At this time, the Company's supply of raw materials is readily available from numerous vendors; however, based on market conditions, that could change in the future. The Company generally buys these raw materials based upon market prices that are established with the vendor as part of the procurement process.

 

48


 

To reduce price risk caused by market fluctuations, the Company has incorporated price adjustment clauses in certain sales contracts. A lthough the Company is able to pass commodity cost increases through to its customers, management believes a hypothetical 10% adverse change in the price of paper and other raw materials in the near term would have a significant effect on demand for the Co mpany s products due to the increase in total costs to our customers. Management is not able to quantify the likely impact of such a change in raw material prices on the Company s consolidated and combined annual results of operations or cash flows.

 

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

The financial information required by Item 8 is contained in Item 15 of Part IV of this annual report on Form 10-K.

 

 

ITEM 9. CHANGES IN DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

 

 

ITEM 9A. CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

As required by Rule 13a-15(b) and Rule 15d-15(e) of the Securities Exchange Act of 1934, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining effective disclosure controls and procedures, as defined under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. As of December 31, 2016, an evaluation was performed under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that disclosure controls and procedures as of December 31, 2016 were effective in ensuring information required to be disclosed in the Company’s SEC reports was recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information was accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

 

 

Internal Control Over Financial Reporting

 

Under the rules and regulations of the SEC, LSC Communications is not required to comply with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 until its annual report on Form 10-K for the year ending December 31, 2017. In its annual report on Form 10-K for the year ending December 31, 2017, management and the company’s independent registered public accounting firm will be required to provide an assessment as to the effectiveness of the company’s internal control over financial reporting.

 

 

Changes in Internal Control Over Financial Reporting

 

During the fourth quarter of 2016, under the supervision of and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, we completed a series of changes to our financial reporting controls to support the separate financial reporting requirements of LSC Communications.  There were no other changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended December 31, 2016 that have materially affected, or are reasonably likely to materially affect, the company’s internal control over financial reporting.

49


 

ITEM 9B. OTHER INFORMATION

 

None.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

50


 

PART III

 

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF LSC COMMUNICATIONS AND CORPORATE GOVERNANCE

 

Information regarding directors and executive officers of the Company is incorporated herein by reference to the descriptions under “Proposal 1: Election of Directors,” “About the Continuing Directors,” “The Board’s Committees and their Functions” and “Section 16(a) Beneficial Ownership Reporting Compliance” of the Company’s Proxy Statement for the Annual Meeting of Shareholders scheduled to be held May 18, 2017 (the “2017 Proxy Statement”).

 

The Company has adopted a policy statement entitled  Code of Ethics  that applies to its chief executive officer and senior financial officers. In the event that an amendment to, or a waiver from, a provision of the  Code of Ethics  is made or granted, the Company intends to post such information on its web site,  www.lsccom.com . A copy of the Company’s  Code of Ethics  has been filed as Exhibit 14.1 to this Form 10-K.

51


 

 

 

EXECUTIVE OFFICERS OF LSC COMMUNICATIONS, INC.

 

Name, Age and

 

 

Positions with the Company

 

Business Experience

 

 

 

Thomas J. Quinlan, III

54, President, Chief Executive Officer and Chairman of the Board of Directors

 

Served as Chairman of the Board and Chief Executive Officer since October 2016. Prior to this, served as RRD’s President and Chief Executive Officer since April 2007 and from 2004 in various other positions, including Group President, Chief Financial Officer since April 2006 and Executive Vice President, Operations since February 2004.

 

 

 

Suzanne S. Bettman

52, Chief Administrative Officer and General Counsel

 

Served as Chief Administrative Officer and General Counsel since October 2016. Prior to this, served as RRD’s Executive Vice President, General Counsel, Corporate Secretary and Chief Compliance Officer since January 2007 and as its Senior Vice President, General Counsel since March 2004.

 

 

 

Andrew B. Coxhead

48, Chief Financial Officer

 

Served as Chief Financial Officer since October 2016. Prior to this, served as RRD’s Senior Vice President and Chief Accounting Officer since October 2007, and Corporate Controller from October 2007 to January 2013 and from 1995 in various other positions including in financial planning, accounting, manufacturing management, operational finance and mergers and acquisitions, including as Vice President, Assistant Controller.

 

 

 

Kent A. Hansen

45, Chief Accounting Officer and Controller

 

Served as Chief Accounting Officer and Controller since October 2016. Prior to this, served as Vice President, Assistant Controller, of Baxalta, Incorporated, a biopharmaceutical company from 2015 to 2016. Prior to this, served in various finance and accounting roles from 2006 to 2015 with Scientific Games Corporation (formerly WMS Industries, Inc.), including Director of Accounting and SEC Reporting, Assistant Controller, and Group Chief Financial Officer.  Prior to this, previous experience included roles in accounting and financial reporting at Accenture and as an auditor at Ernst and Young LLP.

 

 

 

Richard T. Lane

60, Chief Strategy and Supply Chain Officer

 

Served as Chief Strategy and Supply Chain Officer since October 2016. Prior to this, served as RRD’s Executive Vice President of Global Business Solutions and was responsible for Product and Materials sourcing, Customer Service and Global Print Management Sales and Operations and from 1989 to 1997 and since 2005 in various capacities within RRD in sales, strategy and operations from 1989 to 1997, and from 1997 to 2005, with other companies in strategic sales and operations roles.

 

 

ITEM 11. EXECUTIVE COMPENSATION

 

Information regarding executive and director compensation is incorporated by reference to the material under the captions “Compensation Discussion and Analysis,” “Human Resources Committee Report,” “Executive Compensation,” “Potential Payments Upon Termination or Change in Control,” and “Director Compensation” of the 2017 Proxy Statement.

 

 

52


 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OW NERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

Information regarding security ownership of certain beneficial owners and management is incorporated herein by reference to the material under the heading “Stock Ownership” of the 2017 Proxy Statement.

  

Information as of December 31, 2016 concerning compensation plans under which LSC Communications’ equity securities are authorized for issuance are as follows:

 

 

 

 

 

 

 

 

 

 

 

Number of Securities

 

 

Number of Securities

 

 

 

 

 

 

Remaining Available for

 

 

to Be Issued upon

 

 

 

 

 

 

Future Issuance under

 

 

Exercise of

 

 

Weighted-Average

 

 

Equity Compensation Plans

 

 

Outstanding Options,

 

 

Exercise Price of

 

 

(Excluding Securities

 

 

Warrants and Rights

 

 

Outstanding Options,

 

 

Reflected in Column (1))

 

 

(in thousands)

 

 

Warrants and Rights (b)

 

 

(in thousands)

 

 

(1)

 

 

(2)

 

 

(3)

Plan Category

 

 

 

 

 

 

 

 

 

 

Equity compensation plan approved by security holders (a)

 

 

1,458

 

 

$

25.32

 

 

2,022 (c)

 

 

(a)

Includes 1,158,944 shares issuable upon the vesting of restricted stock units.

 

(b)

Restricted stock units were excluded when determining the weighted-average exercise price of outstanding options, warrants and rights.

 

(c)

The 2016 Performance Incentive Plan allows grants in the form of cash or bonus awards, stock options, stock appreciation rights, restricted stock, stock units or combinations thereof. The maximum number of shares of common stock that may be granted with respect to bonus awards, including performance awards or fixed awards in the form of restricted stock or other form, is 3,500,000 in the aggregate, of which 2,022,196 remain available for issuance.

 

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

 

Information regarding certain relationships and related transactions and director independence is incorporated herein by reference to the material under the heading “Certain Transactions,” “The Board’s Committees and Their Functions” and “Corporate Governance—Independence of Directors” of the 2017 Proxy Statement.

 

53


 

ITEM 14 . PRINCIPAL ACCOU NTING FEES AND SERVICES

 

Information regarding principal accounting fees and services is incorporated herein by reference to the material under the heading “The Company’s Independent Registered Public Accounting Firm” of the 2017 Proxy Statement.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

54


 

PART IV

 

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

 

(a)

1. Financial Statements

The financial statements listed in the accompanying index (page F-1) to the financial statements are filed as part of this annual report on Form 10-K.

 

(b)

Exhibits

The exhibits listed on the accompanying index (pages E-1 through E-3) are filed as part of this annual report on Form 10-K.

 

(c)

Financial Statement Schedules omitted

Certain schedules have been omitted because the required information is included in the consolidated and combined financial statements and notes thereto or because they are not applicable or not required.

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

55


 

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 23rd day of February 2017.

 

LSC COMMUNICATIONS, INC.

 

 

By:

 

/ S /     Andrew B.  Coxhead      

 

 

Andrew B. Coxhead

Chief Financial Officer

(Principal Financial Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated, on the 23rd day of February 2017.

 

 

 

 

 

Signature   and Title

 

  

 

Signature   and Title

 

 

 

/ S /    T HOMAS J. Q UINLAN III        

  

/ S /    F RANCIS J. J ULES *        

Thomas J. Quinlan III

President and Chief Executive Officer

Chairman of the Board, Director

(Principal Executive Officer)

  

Francis J. Jules

Director

 

 

/ S /    A NDREW B. C OXHEAD               

  

/ S /    T HOMAS F. O’T OOLE *        

Andrew B. Coxhead

Chief Financial Officer

(Principal Financial Officer)

  

Thomas F. O’Toole

Director

 

 

/ S /    K ENT A. H ANSEN        

  

/ S /    R ICHARD K. P ALMER *        

Kent A. Hansen

Chief Accounting Officer and Controller

(Principal Accounting Officer)

  

Richard K. Palmer

Director

 

 

/ S /    M. S HÂN A TKINS *        

  

/ S /    D OUGLAS W. S TOTLAR *        

M. Shân Atkins

Director

  

Douglas W. Stotlar

Director

 

 

/ S /    M ARGARET A. B REYA *        

  

/ S /    S HIVAN S. S UBRAMANIAM *        

Margaret A. Breya

Director

  

Shivan S. Subramaniam

Director

 

 

 

/ S /    J UDITH H. H AMILTON *        

Judith H. Hamilton

Director

 

 

 

 

By:

 

/ S /      Suzanne S. Bettman

 

 

Suzanne S. Bettman

As Attorney-in-Fact

 

*

By Suzanne S. Bettman as Attorney-in-Fact pursuant to Powers of Attorney executed by the directors listed above, which Powers of Attorney have been filed with the Securities and Exchange Commission

 

 

 

 

56


 

ITEM 15(a). INDEX TO FINANCIAL STATEMENTS

 

 

 

Page

Report of Independent Registered Public Accounting Firm

 

F-2

Consolidated and Combined Statements of Income for each of the three years in the period ended December 31, 2016

 

F-3

Consolidated and Combined Statements of Comprehensive Income for each of the three years in the period ended December 31, 2016

 

F-4

Consolidated and Combined Balance Sheets as of December 31, 2016 and 2015

 

F-5

Consolidated and Combined Statements of Cash Flows for each of the three years in the period ended December 31, 2016

 

F-6

Consolidated and Combined Statements of Shareholders’ Equity for each of the three years in the period ended December 31, 2016

 

F-7

Notes to Consolidated and Combined Financial Statements

 

F-8

Unaudited Interim Financial Information

 

F-42

F-1


 

 

To the Board of Directors and Stockholders of
LSC Communications, Inc.

Chicago, Illinois

 

We have audited the accompanying consolidated and combined balance sheets of LSC Communications, Inc. and subsidiaries (the “Company”) as of December 31, 2016 and 2015, and the related consolidated and combined statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2016.  These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, such consolidated and combined financial statements present fairly, in all material respects, the financial position of LSC Communications, Inc. and subsidiaries as of December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America.

 

As described in Note 1, prior to October 1, 2016, the accompanying consolidated and combined financial statements have been derived from the consolidated financial statements and accounting records of R. R. Donnelley & Sons Company. The consolidated and combined financial statements include the allocation of certain assets, liabilities, expenses and income that have historically been held at the RR Donnelley & Sons Company corporate level but which are specifically identifiable or attributable to the Company. The consolidated and combined financial statements also include expense allocations for certain corporate functions historically provided by R. R. Donnelley & Sons Company. These costs and allocations may not be reflective of the actual expense which would have been incurred had the Company operated as a separate unaffiliated entity apart from R. R. Donnelley & Sons Company.

 

/s/ DELOITTE & TOUCHE LLP

Chicago, Illinois

February 23, 2017

 

  

 

F-2


 

LSC COMMUNICATIONS, INC.

CONSOLIDATED AND C OMBIN ED STATEMENTS OF INCOME

(in millions, except per share data)

 

 

 

Year Ended December 31,

 

  

 

2016

 

 

2015

 

 

2014

 

Net sales

 

$

3,654

 

 

$

3,743

 

 

$

3,853

 

     Cost of sales (exclusive of depreciation and amortization)

 

 

2,823

 

 

 

2,874

 

 

 

2,953

 

     Cost of sales with RRD and affiliates (exclusive of depreciation and amortization)

 

 

208

 

 

 

216

 

 

 

244

 

Total cost of sales

 

 

3,031

 

 

 

3,090

 

 

 

3,197

 

Selling, general and administrative expenses (exclusive of depreciation and

     amortization)

 

 

259

 

 

 

280

 

 

 

268

 

Restructuring, impairment and other charges-net (Note 4)

 

 

18

 

 

 

57

 

 

 

132

 

Depreciation and amortization

 

 

171

 

 

 

181

 

 

 

181

 

Income from operations

 

 

175

 

 

 

135

 

 

 

75

 

Interest expense (income)-net (Note 12)

 

 

18

 

 

 

(3

)

 

 

(4

)

Investment and other income-net

 

 

 

 

 

 

 

 

(9

)

Income before income taxes

 

 

157

 

 

 

138

 

 

 

88

 

Income tax expense (Note 15)

 

 

51

 

 

 

64

 

 

 

30

 

Net income

 

$

106

 

 

$

74

 

 

$

58

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per common share (Note 13)

 

 

 

 

 

 

 

 

 

 

 

 

     Basic net earnings per share

 

$

3.25

 

 

$

2.27

 

 

$

1.79

 

     Diluted net earnings per share

 

$

3.23

 

 

 

2.27

 

 

$

1.79

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

     Basic

 

 

32.5

 

 

 

32.4

 

 

 

32.4

 

     Diluted

 

 

32.8

 

 

 

32.4

 

 

 

32.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See Notes to the Consolidated and Combined Financial Statements

F-3


 

LSC COMMUNICATIONS, INC.

CONSOLIDATED AND COMBINED STAT EMENTS OF COMPREHENSIVE INCOME

(in millions)

 

 

 

Year Ended December 31,

 

 

 

2016

 

 

2015

 

 

2014

 

Net income

 

$

106

 

 

$

74

 

 

$

58

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax (Note 16)

 

 

 

 

 

 

 

 

 

 

 

 

Translation adjustments

 

 

5

 

 

 

(28

)

 

 

(33

)

Adjustments for net pension and other post-retirement benefits plan cost

 

 

35

 

 

 

(9

)

 

 

1

 

Other comprehensive income (loss)

 

 

40

 

 

 

(37

)

 

 

(32

)

Comprehensive income

 

$

146

 

 

$

37

 

 

$

26

 

 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See Notes to the Consolidated and Combined Financial Statements

F-4


 

 

LSC COMMUNICATIONS, INC.

CONSOLIDATED AND COM BINED BALANCE SHEETS

(in millions, except share and per share data)

 

 

 

December 31,

 

 

 

2016

 

 

2015

 

ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

95

 

 

$

95

 

Receivables, less allowances for doubtful accounts of $10 in 2016 (2015: $11)

 

 

667

 

 

 

617

 

Inventories (Note 7)

 

 

193

 

 

 

218

 

Prepaid expenses and other current assets

 

 

21

 

 

 

30

 

Total current assets

 

 

976

 

 

 

960

 

Property, plant and equipment-net (Note 8)

 

 

608

 

 

 

718

 

Goodwill (Note 5)

 

 

84

 

 

 

81

 

Other intangible assets-net (Note 5)

 

 

131

 

 

 

148

 

Deferred income taxes

 

 

57

 

 

 

36

 

Other noncurrent assets

 

 

96

 

 

 

68

 

Total assets

 

$

1,952

 

 

$

2,011

 

LIABILITIES

 

 

 

 

 

 

 

 

Accounts payable

 

$

294

 

 

$

289

 

Accrued liabilities (Note 10)

 

 

237

 

 

 

203

 

Short-term and current portion of long-term debt (Note 12)

 

 

52

 

 

 

2

 

Total current liabilities

 

 

583

 

 

 

494

 

Long-term debt (Note 12)

 

 

742

 

 

 

3

 

Pension liabilities

 

 

279

 

 

 

1

 

Deferred income taxes

 

 

2

 

 

 

152

 

Other noncurrent liabilities

 

 

106

 

 

 

84

 

Total liabilities

 

 

1,712

 

 

 

734

 

Commitments and Contingencies (Note 11)

 

 

 

 

 

 

 

 

EQUITY

 

 

 

 

 

 

 

 

LSC Communications' shareholders' equity

 

 

 

 

 

 

 

 

Common stock, $0.01 par value

 

 

 

 

 

 

 

 

Authorized: 65,000,000 shares;

 

 

 

 

 

 

 

 

Issued: 32,449,669 shares in 2016

 

 

 

 

 

 

Additional paid-in-capital

 

 

770

 

 

 

 

Retained earnings

 

 

1

 

 

 

 

Accumulated other comprehensive loss

 

 

(531

)

 

 

(205

)

          Net parent company investment

 

 

 

 

 

1,482

 

Total equity

 

 

240

 

 

 

1,277

 

Total liabilities and equity

 

$

1,952

 

 

$

2,011

 

 

  

 

 

 

 

 

 

 

 

 

 

 

See Notes to the Consolidated and Combined Financial Statements

F-5


 

LSC COMMUNICATIONS, INC.

CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS

(in millions)

 

 

 

Year Ended December 31,

 

 

 

2016

 

 

2015

 

 

2014

 

Cash Flows from Operating Activities

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

106

 

 

$

74

 

 

$

58

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Impairment charges

 

 

 

 

 

8

 

 

 

103

 

Depreciation and amortization

 

 

171

 

 

 

181

 

 

 

181

 

Provision for doubtful accounts receivable

 

 

6

 

 

 

3

 

 

 

5

 

Share-based compensation

 

 

8

 

 

 

6

 

 

 

6

 

Deferred income taxes

 

 

(18

)

 

 

(38

)

 

 

(59

)

Changes in uncertain tax positions

 

 

 

 

 

7

 

 

 

 

Gain on bargain purchase

 

 

 

 

 

 

 

 

(10

)

Other

 

 

(2

)

 

 

(1

)

 

 

 

Changes in operating assets and liabilities - net of acquisitions:

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable- net

 

 

(52

)

 

 

(2

)

 

 

37

 

Inventories

 

 

29

 

 

 

24

 

 

 

(7

)

Prepaid expenses and other current assets

 

 

(7

)

 

 

21

 

 

 

1

 

Accounts payable

 

 

13

 

 

 

2

 

 

 

(11

)

Income taxes payable and receivable

 

 

1

 

 

 

11

 

 

 

(1

)

Accrued liabilities and other

 

 

(24

)

 

 

(21

)

 

 

4

 

Net cash provided by operating activities

 

 

231

 

 

 

275

 

 

 

307

 

Cash Flows from Investing Activities

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(48

)

 

 

(42

)

 

 

(60

)

Acquisition of businesses, net of cash acquired

 

 

(8

)

 

 

(111

)

 

 

(76

)

Proceeds from sales of other assets

 

 

6

 

 

 

8

 

 

 

13

 

Transfers from (to) restricted cash

 

 

9

 

 

 

 

 

 

(12

)

Other investing activities

 

 

 

 

 

24

 

 

 

 

Net cash used in investing activities

 

 

(41

)

 

 

(121

)

 

 

(135

)

Cash Flows from Financing Activities

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from issuance of long-term debt

 

 

816

 

 

 

 

 

 

 

Payments of current maturities and long-term debt

 

 

(17

)

 

 

(72

)

 

 

 

Debt issuance costs

 

 

(20

)

 

 

 

 

 

 

Dividends paid

 

 

(8

)

 

 

 

 

 

 

Payments to RRD

 

 

(13

)

 

 

 

 

 

 

Net transfers to Parent and affiliates

 

 

(945

)

 

 

(100

)

 

 

(178

)

Net cash used in financing activities

 

 

(187

)

 

 

(172

)

 

 

(178

)

Effect of exchange rate on cash and cash equivalents

 

 

(3

)

 

 

(12

)

 

 

(14

)

Net decrease in cash and cash equivalents

 

 

 

 

 

(30

)

 

 

(20

)

Cash and cash equivalents at beginning of year

 

 

95

 

 

 

125

 

 

 

145

 

Cash and cash equivalents at end of period

 

$

95

 

 

$

95

 

 

$

125

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental non-cash disclosure:

 

 

 

 

 

 

 

 

 

 

 

 

Assumption of warehousing equipment related to customer contract

 

$

9

 

 

$

 

 

$

 

Issuance of 8 million shares of R. R. Donnelley & Sons stock for acquisition of a business

 

$

 

 

$

154

 

 

$

 

Issuance of 1 million shares of R. R. Donnelley & Sons stock for acquisition of a business

 

$

 

 

$

 

 

$

18

 

 

 

See Notes to the Consolidated and Combined Financial Statements

F-6


 

LSC COMMUNICATIONS, INC.

CONSOLIDATED AND COMBINED STATEMENTS OF SHAREHOLDERS’ EQUITY

(in millions)

 

 

 

Common Stock

 

 

Additional

Paid-in-

 

 

Net Parent

Company

 

 

Retained

Earnings

(Accumulated

 

 

Accumulated

Other

Comprehensive

 

 

Total

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Investment

 

 

Deficit)

 

 

Loss

 

 

Equity

 

Balance at January 1, 2014

 

 

 

 

$

 

 

$

 

 

$

1,451

 

 

$

 

 

$

(136

)

 

$

1,315

 

Net income

 

 

 

 

 

 

 

 

 

 

 

58

 

 

 

 

 

 

 

 

 

58

 

Net transfers to parent company

 

 

 

 

 

 

 

 

 

 

 

(166

)

 

 

 

 

 

 

 

 

(166

)

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(32

)

 

 

(32

)

Balance at December 31, 2014

 

 

 

 

$

 

 

$

 

 

$

1,343

 

 

$

 

 

$

(168

)

 

$

1,175

 

Net income

 

 

 

 

 

 

 

 

 

 

 

74

 

 

 

 

 

 

 

 

 

74

 

Net transfers from parent company

 

 

 

 

 

 

 

 

 

 

 

65

 

 

 

 

 

 

 

 

 

65

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(37

)

 

 

(37

)

Balance at December 31, 2015

 

 

 

 

$

 

 

$

 

 

$

1,482

 

 

$

 

 

$

(205

)

 

$

1,277

 

Net income

 

 

 

 

 

 

 

 

 

 

 

97

 

 

 

9

 

 

 

 

 

 

106

 

Net transfers to parent company

 

 

 

 

 

 

 

 

 

 

 

(934

)

 

 

 

 

 

 

 

 

(934

)

Separation-related adjustments

 

 

 

 

 

 

 

 

 

 

 

122

 

 

 

 

 

 

(366

)

 

 

(244

)

Reclassification of net parent investment to additional paid-in capital

 

 

 

 

 

 

 

 

767

 

 

 

(767

)

 

 

 

 

 

 

 

 

 

Issuance of common stock upon separation

 

 

32

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation

 

 

 

 

 

 

 

 

3

 

 

 

 

 

 

 

 

 

 

 

 

3

 

Cash dividends paid

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8

)

 

 

 

 

 

(8

)

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

40

 

 

 

40

 

Balance at December 31, 2016

 

 

32

 

 

$

 

 

$

770

 

 

$

 

 

$

1

 

 

$

(531

)

 

$

240

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

See Notes to the Consolidated and Combined Financial Statements

 

 

 

 

 

 

 

 

F-7


 

LSC Communications, Inc.

Notes to Consolidated and Combined Financial Statements

(tabular amounts in millions, except per share data)

 

Note 1.  Overview and Basis of Presentation  

Description of Business and Separation

 

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

  

  On October 1, 2016 (the “separation date”), R. R. Donnelley & Sons Company (“RRD” or the “Parent”) completed the previously announced separation (the “separation”) into three separate independent publicly-traded companies: (i) its publishing and retail-centric print services and office products business (“LSC Communications”); (ii) its financial communications services business (“Donnelley Financial Solutions, Inc.” or “Donnelley Financial”) and (iii) a global, customized multichannel communications management company, which is the business of RRD after the separation.  To effect the separation, RRD undertook a series of transactions to separate net assets and legal entities.  RRD completed the distribution (the “distribution”) of 80.75%, of the outstanding common stock of LSC Communications and Donnelley Financial to RRD shareholders on October 1, 2016.  RRD retained a 19.25% ownership stake in both LSC Communications and Donnelley Financial.  On October 1, 2016, RRD shareholders of record as of the close of business on September 23, 2016 received one share of LSC Communications common stock and one share of Donnelley Financial common stock for every eight shares of RRD common stock held as of the record date. As a result of the separation, LSC Communications and Donnelley Financial are now independent publicly-traded companies and began regular way trading under the symbols “LKSD” and “DFIN,” respectively, on the New York Stock Exchange on October 3, 2016.  RRD remains an independent publicly-traded company trading under the symbol “RRD” on the New York Stock Exchange.         

      

In connection with the separation, LSC Communications, RRD and Donnelley Financial entered into commercial arrangements and transition services agreements.  Under the terms of the commercial arrangements, RRD continues to provide, among other things, logistics, premedia, production and sales services to LSC Communications.  RRD will also provide LSC Communications certain global outsourcing, technical support and other services.  LSC Communications also continues to provide print and bind services for Donnelley Financial. In addition, LSC Communications continues to provide sales support services to RRD’s Asia and Mexico print and graphics management businesses in order to facilitate sales of books and related products to the U.S.

 

Under the terms of the transition services agreements, RRD provides certain services to LSC Communications, including, but not limited to, in such areas as tax, information technology, treasury, internal audit, human resources, accounting, purchasing, communications, security and compensation and benefits.  These agreements facilitated the separation by allowing LSC Communications to operate independently prior to establishing stand-alone back office systems across its organization.  Transition services may be provided for up to twenty-four months following the separation.  LSC Communications provides certain services to RRD and Donnelley Financial including, but not limited to, information technology and credit services.

 

The Company and RRD also entered into:  

 

 

A separation and distribution agreement (of which Donnelley Financial is also a party) which accomplished the distribution of LSC Communications’ common stock and the distribution of Donnelley Financial’s common stock to RRD’s common stockholders, and which governs the Company’s relationships with RRD and Donnelley Financial with respect to pre-separation matters and provides for the allocation of employee benefit, litigation and other liabilities and obligations attributable to periods prior to the separation;

 

A Tax Disaffiliation Agreement that allocates responsibility for taxes between LSC Communications and RRD and includes indemnification rights with respect to tax matters and restrictions to preserve the tax-free status of the separation; and  

 

A Patent Assignment and License Agreement, a Trademark Assignment and License Agreement, a Data Assignment and License Agreement and a Software, Copyright and Trade Secret Assignment and License Agreement, in each case, that will provide for ownership, licensing and other arrangements to facilitate RRD’s, Donnelley Financial’s and the Company’s ongoing use of intellectual property, as applicable.  

 


Final copies of such agreements are filed as exhibits to this annual report on Form 10-K.

Basis of Presentation

   The accompanying consolidated and combined financial statements reflect the consolidated statements of income and balance sheets of the Company as an independent, publicly traded company for the periods after the separation, and the combined statements of income and balance sheets of the Company as a combined reporting entity of RRD for the periods prior to the separation.

The consolidated and combined financial statements include the statements of income, balance sheets, and cash flows in conformity with accounting principles generally accepted in the United States (“GAAP”).  

Certain prior year amounts were restated to conform to the Company’s current consolidated and combined balance sheet classifications.

Prior to the Separation

The combined financial statements were prepared on a stand-alone basis and were derived from RRD’s consolidated financial statements and accounting records. They include certain expenses of RRD which were allocated to LSC Communications for certain corporate functions, including healthcare and pension benefits, information technology, finance, legal, human resources, internal audit, treasury, tax, investor relations and executive oversight.  These expenses were allocated to the Company on the basis of direct usage, when available, with the remainder allocated on a pro rata basis by revenue, employee headcount, or other measures. The Company considered the allocation methodologies and results to be reasonable for all periods presented; however, these allocations may not be indicative of the actual expenses that LSC Communications would have incurred as an independent public company or the costs it may incur in the future.  The income tax amounts in these combined financial statements were calculated based on a separate income tax return methodology and presented as if the Company’s operations were separate taxpayers in the respective jurisdictions.  

All intercompany transactions and accounts have been eliminated.  All intracompany transactions between LSC Communications, RRD and Donnelley Financial are considered to be effectively settled in the consolidated and combined financial statements at the time the transaction is recorded.  The total net effect of the settlement of these intracompany transactions is reflected in the consolidated and combined statements of cash flows as a financing activity and in the consolidated and combined balance sheets as net parent company investment.  Net parent company investment is primarily impacted by contributions from RRD which are the result of treasury activities and net funding provided by or distributed to RRD.  In connection with the separation, the net parent investment balance was transferred to additional paid-in-capital in the consolidated and combined balance sheets.  

After the Separation

On October 1, 2016, the Company recorded certain separation-related adjustments primarily related to certain assets and liabilities which were distributed as part of the separation from RRD, resulting in a net $244 million decrease to equity.  The adjustments primarily related to the assumption of certain pension obligations and plan assets in single employer plans for the Company’s employees and certain former employees and retirees of RRD.  The Company recorded a net benefit obligation of $358 million as of October 1, 2016 for these plans.  In addition, the Company recorded separation-related adjustments for certain workers’ compensation liabilities of $39 million, of which $11 million was short-term and $28 million was long-term, and a workers’ compensation recovery asset of $5 million. Refer to the separation-related adjustments disclosed in consolidated and combined statement of equity. Additional separation-related adjustments may be recorded in future periods.      

LSC Communications generates a portion of its net sales from sales to RRD and its subsidiaries.  Additionally, LSC Communications utilizes RRD for freight and logistics when shipping finished goods to its customers, premedia services and printing products.  Refer to Note 20, Related Parties , for more information.    

 

Note 2. Significant Accounting Policies

 

Use of Estimates —The preparation of the consolidated and combined financial statements, in conformity with GAAP, requires the extensive use of management’s estimates and assumptions that affect the reported amounts of assets and liabilities disclosure of contingent assets and liabilities at the date of the financial statements, and reported amounts of revenue and expenses during the reporting periods.

F-9


Actual results could differ from these estimates. Estimates are used when accounting for items and matters including, but not limited to, allowance for uncollectible accounts receivable, inventory obsolescence, asset valuations and useful lives, employee benefits, self-insurance reserves , taxes, restructuring and other provisions and contingencies.

 

Foreign Operations —Assets and liabilities denominated in foreign currencies are translated into U.S. dollars at the exchange rates existing at the respective balance sheet dates. Income and expense items are translated at the average rates during the respective periods. Translation adjustments resulting from fluctuations in exchange rates are recorded as a separate component of other comprehensive income (loss) while transaction gains and losses are recorded in net earnings. Deferred taxes are not provided on cumulative foreign currency translation adjustments when the Company expects foreign earnings to be permanently reinvested.

 

Fair Value Measurements— Certain assets and liabilities are required to be recorded at fair value on a recurring basis. Fair value is determined based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. The Company records the fair value of its pension plan assets on a recurring basis. Assets measured at fair value on a nonrecurring basis include long-lived assets held and used, long-lived assets held for sale, goodwill and other intangible assets. The fair value of cash and cash equivalents, accounts receivable, short-term debt and accounts payable approximate their carrying values. The three-tier value hierarchy, which prioritizes valuation methodologies based on the reliability of the inputs, is:

 

Level 1 Valuations based on quoted prices for identical assets and liabilities in active markets.

 

Level 2 —Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

 

Level 3 —Valuations based on unobservable inputs reflecting the Company’s own assumptions, consistent with reasonably available assumptions made by other market participants.

 

Revenue Recognition —The Company recognizes revenue for the majority of its products upon transfer of title and the passage of the risk of ownership, which is generally upon shipment to the customer. Contracts generally specify F.O.B. shipping point terms. Under agreements with certain customers, custom products may be stored by the Company for future delivery. In these situations, the Company may also receive a logistics or warehouse management fee for the services it provides. In certain of these cases, delivery and billing schedules are outlined in the customer agreement and product revenue is recognized when manufacturing is complete, title and risk of ownership transfer to the customer, and there is a reasonable assurance as to collectability. Because the majority of products are customized, product returns are not significant; however, the Company accrues for the estimated amount of customer credits at the time of sale.

 

Revenue from the Company’s co-mail and list services operations is recognized when services are completed.

 

The Company records deferred revenue in situations where amounts are invoiced but the revenue recognition criteria outlined above are not met. Such revenue is recognized when all criteria are subsequently met.

 

Billings for shipping and handling costs are recorded gross. Many of the Company’s operations process materials, primarily paper, that may be supplied directly by customers or may be purchased by the Company and sold to customers. No revenue is recognized for customer-supplied paper, but revenues for Company-supplied paper are recognized on a gross basis.

 

The Company records taxes collected from customers and remitted to governmental authorities on a net basis.

 

By-product recoveries —The Company records the sale of by-products as a reduction of cost of sales.

 

Cash and cash equivalents —The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Short-term securities consist of investment grade instruments of governments, financial institutions and corporations.

 

Receivables— Receivables are stated net of allowances for doubtful accounts and primarily include trade receivables, notes receivable and miscellaneous receivables from suppliers. No single customer comprised more than 10% of our net sales in 2016, 2015 or 2014. Specific customer provisions are made when a review of significant outstanding amounts, utilizing information about customer creditworthiness and current economic trends, indicates that collection is doubtful. In addition, provisions are made at differing rates, based upon the age of the receivable and the Company’s historical collection experience. Refer to Note 6, Accounts Receivable, for details of activity affecting the allowance for doubtful accounts receivable.

F-10


Inventories —Inventories inc lude material, labor and factory overhead and are stated at the lower of cost or market and net of excess and obsolescence reserves for raw materials and finished goods. Provisions for excess and obsolete inventories are made at differing rates, utilizing historical data and current economic trends, based upon the age and type of the inventory. Specific excess and obsolescence provisions are also made when a review of specific balances indicates that the inventories will not be utilized in production or sol d.  

The cost of 85.5% and 78.9% of the inventories at December 31, 2016 and 2015, respectively, has been determined using the Last-In, First-Out (“LIFO”) method. This method is intended to reflect the effect of inventory replacement costs within the consolidated and combined statements of income; accordingly, charges to cost of sales generally reflect recent costs of material, labor and factory overhead. The Company uses an external-index method of valuing LIFO inventories. The remaining inventories, primarily related to certain acquired and international operations, are valued using the First-In, First-Out (“FIFO”) or specific identification methods.

Long-Lived Assets —The Company assesses potential impairments to its long-lived assets if events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Indefinite-lived intangible assets are reviewed annually for impairment or more frequently if events or changes in circumstances indicate that the carrying value may not be recoverable. An impaired asset is written down to its estimated fair value based upon the most recent information available. Estimated fair market value is generally measured by discounting estimated future cash flows. Long-lived assets, other than goodwill and other intangible assets, that are held for sale, are recorded at the lower of the carrying value or the fair market value less the estimated cost to sell.

Property, plant and equipment —Property, plant and equipment are recorded at cost and depreciated on a straight-line basis over their estimated useful lives. Useful lives range from 15 to 40 years for buildings, the lesser of 7 years or the lease term for leasehold improvements and from 3 to 15 years for machinery and equipment. Maintenance and repair costs are charged to expense as incurred. Major overhauls that extend the useful lives of existing assets are capitalized. When properties are retired or disposed, the costs and accumulated depreciation are eliminated and the resulting profit or loss is recognized in the results of operations.

Goodwill —Goodwill is either assigned to a specific reporting unit or allocated between reporting units based on the relative fair value of each reporting unit. Prior to the separation, the Company’s goodwill balances for certain reporting units were reallocated based on the relative fair values of the businesses.

Goodwill is reviewed for impairment annually as of October 31 or more frequently if events or changes in circumstances indicate that it is more likely than not that the fair value of a reporting unit is below its carrying value.

For certain reporting units, the Company may perform a qualitative, rather than quantitative, assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. In performing this qualitative analysis, the Company considers various factors, including the excess of prior year estimates of fair value compared to carrying value, the effect of market or industry changes and the reporting unit’s actual results compared to projected results. Based on this qualitative analysis, if management determines that it is more likely than not that the fair value of the reporting unit is greater than its carrying value, no further impairment testing is performed.

For the remaining reporting units, the Company compares each reporting unit’s fair value, estimated based on comparable company market valuations and expected future discounted cash flows to be generated by the reporting unit, to its carrying value. If the carrying value exceeds the reporting unit’s fair value, the Company performs an additional fair value measurement calculation to determine the impairment loss, which is charged to operations in the period identified. Refer to Note 4, Restructuring, Impairment and Other Charges, for further discussion.

The Company also performs an interim review for indicators of impairment at each quarter-end to assess whether an interim impairment review is required for any reporting unit. In the Company’s impairment review at October 31, 2016, and its interim review for indicators of impairment as of December 31, 2016, management concluded that there were no indicators that the fair value of any of the reporting units with goodwill was more likely than not below its carrying value.  

Amortization —Certain costs to acquire and develop internal-use computer software are capitalized and amortized over their estimated useful life using the straight-line method, up to a maximum of five years. Amortization expense, primarily related to internally-developed software and excluding amortization expense related to other intangible assets, was $5 million, $5 million and $3 million for the years ended December 31, 2016, 2015 and 2014, respectively. Deferred debt issuance costs are amortized over the term of the related debt.

Other intangible assets, except for those intangible assets with indefinite lives, are recognized separately from goodwill and are amortized over their estimated useful lives. Other intangible assets with indefinite lives are not amortized. Refer to Note 5 , Goodwill and Other Intangible Assets, for further discussion of other intangible assets and the related amortization expense.

F-11


Share-Based Compensation —Prior to the separation, RR D maintained an incentive share-based compensation program for the benefit of its officers, directors, and certain employees, including certain LSC Communications employees. The share-based compensation expense was allocated to the Company based on the awa rds and terms previously granted to the Company’s employees, as well as an allocation of expense related to RRD’s corporate and shared functional employees.  After the separation, the Company recognizes share-based compensation expense based on estimated f air values for all share-based awards made to employees and directors. The Company recognizes compensation expense for share-based awards expected to vest on a straight-line basis over the requisite service period of the award based on their grant date fai r value. Refer to Note 17, Stock and Incentive Programs for Employees, for further discussion.  

Pension and Other Postretirement Benefits Plans —Prior to the separation, certain employees of the Company participated in various pension and postretirement health care plans sponsored by RRD. In the company’s combined financial statements, these plans were accounted for as multiemployer benefit plans and no net liabilities were reflected in the Company’s combined balance sheets as there were no unfunded contributions due at the end of any reporting period. The Company’s statements of income included expense allocations for these benefits. These expenses were funded through intercompany transactions with RRD and were reflected within net parent company investment in LSC Communications. Certain plans in LSC Communications’ Mexico and U.S. operations were direct obligations of LSC Communications and were recorded in the consolidated and combined financial statements.  

At the separation date, the Company recorded net benefit obligations transferred from RRD.  T he Company records annual income and expense amounts relating to its pension plans based on calculations which include various actuarial assumptions, including discount rates, mortality, assumed rates of return, compensation increases, and turnover rates. The Company reviews its actuarial assumptions on an annual basis and makes modifications to the assumptions based on current rates and trends when it is deemed appropriate to do so. The effect of modifications on the value of plan obligations and assets is recognized immediately within other comprehensive income (loss) and amortized into operating earnings over future periods. The Company believes that the assumptions utilized in recording its obligations under its plans are reasonable based on its experience, market conditions and input from its actuaries and investment advisors. Refer to Note 14, Retirement Plans , for further discussion.   

Taxes on Income —Prior to the separation, in the Company’s combined financial statements, income tax expense and deferred tax balances were calculated on a separate return basis, although with respect to certain entities, the Company’s operations were historically included in the tax returns filed by the respective RRD entities of which the Company’s business was formerly a part. For periods after the separation, the Company will file tax returns on its own behalf. The provision for income tax and income tax balances after the separation represent the Company's tax liabilities as an independent company.    

The Company has recorded deferred tax assets related to future deductible items, including domestic and foreign tax loss and credit carryforwards. The Company evaluates these deferred tax assets by tax jurisdiction. The utilization of these tax assets is limited by the amount of taxable income expected to be generated within the allowable carryforward period and other factors. Accordingly, management has provided a valuation allowance to reduce certain of these deferred tax assets when management has concluded that, based on the weight of available evidence, it is more likely than not that the deferred tax assets will not be fully realized. If actual results differ from these estimates, or the estimates are adjusted in future periods, adjustments to the valuation allowance might need to be recorded.  

Deferred U.S. income taxes and foreign taxes are not provided on the excess of the investment value for financial reporting over the tax basis of investments in foreign subsidiaries because such excess is considered to be permanently reinvested in those operations. Management regularly evaluates whether foreign earnings are expected to be permanently reinvested. This evaluation requires judgment about the future operating and liquidity needs of the Company’s foreign subsidiaries. Changes in economic and business conditions, foreign or U.S. tax laws, or the Company’s financial situation could result in changes to these judgments and the need to record additional tax liabilities.

Significant judgment is required in determining the provision for income taxes and related accruals, deferred tax assets and liabilities and any valuation allowance recorded against deferred tax assets. In the ordinary course of business, there are transactions and calculations where the ultimate tax outcome is uncertain. Additionally, the Company’s tax returns are subject to audit by various U.S. and foreign tax authorities. The Company recognizes a tax position in its financial statements when it is more likely than not (a likelihood of more than fifty percent) that the position would be sustained upon examination by tax authorities. This recognized tax position is then measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Although management believes that its estimates are reasonable, the final outcome of uncertain tax positions may be materially different from that which is reflected in the Company’s consolidated and combined financial statements. The Company classifies interest expense and any related penalties related to income tax uncertainties as a component of income tax expense. Refer to Note 15 , Income Taxes, for further discussion.

Comprehensive Income (Loss) —Comprehensive income (loss) for the Company consists of net earnings, unrecognized actuarial gains and losses and foreign currency translation adjustments. Refer to Note 16 , Comprehensive Income, for further discussion.

F-12


 

 

Note 3.  Business Combinations

 

2016 Acquisition

 

On December 2, 2016, the Company acquired Continuum Management Company, LLC (“Continuum”), a print procurement and management business.  The acquisition enhanced the Company’s print management’s capabilities.  The purchase price for Continuum was $7 million in cash, of which $3 million was recorded in goodwill, based on preliminary acquisition accounting. The allocation of purchase price will be completed as soon as it is practicable, but no later than one year from the acquisition date.

 

 

2015 Acquisition

 

On June 8, 2015, RRD acquired Courier Corporation (“Courier”), a leader in digital printing and publishing primarily in the United States, specializing in educational, religious and trade books. The acquisition expanded the Company’s digital printing capabilities. Courier’s book manufacturing operations and publishing operations are included in LSC Communications’ consolidated and combined financial statements.  Courier‘s Brazilian operations are not part of LSC Communications; therefore, the Company’s consolidated and combined financial statements do not include Courier’s Brazilian operations. The purchase price for Courier was $137 million in cash and 8 million shares of RRD common stock, or a total transaction value of $292 million (including $6 million related to Brazil) based on RRD’s closing share price on June 5, 2015, plus the assumption of Courier’s debt of $78 million (including $2 million related to Brazil).  Courier had $21 million (including $0.4 million related to Brazil) of cash as of the date of acquisition.  Immediately following the acquisition, substantially all of the debt assumed was repaid.

 

For the year ended December 31, 2015, the Company’s combined financial statements included net sales of $184 million and a loss before income taxes of $3 million related to the Courier acquisition, including restructuring, impairment and other charges of $25 million and a charge of $11 million resulting from an inventory purchase accounting adjustment.

 

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

     The tax deductible goodwill related to Courier was $8 million.

 

     Based on the valuation, the final purchase price allocation for the Courier acquisition was as follows:

 

Accounts receivable

 

$

33

 

Inventories

 

 

59

 

Prepaid expenses and other current assets

 

 

38

 

Property, plant and equipment

 

 

158

 

Other intangible assets

 

 

104

 

Other noncurrent assets

 

 

8

 

Goodwill

 

 

51

 

Accounts payable and accrued liabilities

 

 

(19

)

Other noncurrent liabilities

 

 

(6

)

Deferred taxes-net

 

 

(84

)

Total purchase price-net of cash acquired

 

 

342

 

Less: debt assumed

 

 

77

 

Less: value of common stock issued by RRD

 

 

154

 

Net cash paid

 

$

111

 

 

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

F-13


 

 

Fair Value

 

 

Valuation Technique

 

Unobservable Input

 

Range

 

Customer relationships

 

$

94

 

 

Excess earnings

 

Discount rate

Attrition rate

 

14.0% - 17.0%

0.0% - 5.0%

 

Trade names

 

 

10

 

 

Relief-from-royalty method

 

Discount rate

Royalty rate (pre-tax)

 

12.0%

0.3% - 1.0%

 

Technology

 

 

2

 

 

Relief-from-royalty method

 

Discount rate

 

 

11.0%

 

 

 

 

 

 

 

 

 

Royalty rate (pre-tax)

 

 

15.0%

 

 

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

 

 

2014 Acquisition

 

On March 25, 2014, the Company acquired substantially all of the North American operations of Esselte Corporation (“Esselte”), a developer and manufacturer of nationally branded and private label office and stationery products. The acquisition, combined with the Company’s existing products, created a more competitive and efficient office products supplier capable of supplying enhanced offerings across the combined customer base. The purchase price for Esselte included $82 million in cash and 1 million shares of RRD common stock, or a total transaction value of $101 million based on RRD’s closing share price on March 24, 2014. Esselte had $6 million of cash as of the date of acquisition.  

 

The fair value of the identifiable net assets acquired of approximately $110 million exceeded the purchase price of $101 million, resulting in a bargain purchase gain of $10 million for the year ended December 31, 2014, which was recorded in net investment and other (income) expense. The gain on the bargain purchase was primarily attributable to RRD’s ability to use certain tax operating losses.

 

The tax deductible goodwill related to the Esselte acquisition was $7 million.

 

Based on the valuation, the final purchase price allocation for the Esselte acquisition was as follows:

 

Accounts receivable

 

$

54

 

Inventories

 

 

24

 

Prepaid expenses and other current assets

 

 

2

 

Property, plant and equipment

 

 

40

 

Other intangible assets

 

 

25

 

Accounts payable and accrued liabilities

 

 

(45

)

Other noncurrent liabilities

 

 

(16

)

Deferred taxes-net

 

 

20

 

Total purchase price-net of cash acquired

 

 

104

 

Less: value of common stock issued by RRD

 

 

18

 

Less: Gain on bargain purchase

 

 

10

 

Net cash paid

 

$

76

 

 

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

 

 

 

Fair Value

 

 

Valuation Technique

 

Unobservable Input

 

Range

Customer relationships

 

$

16

 

 

Excess earnings

 

Discount rate

Attrition rate

 

21.0%

5.0%

 

 

 

 

 

 

 

 

 

 

 

Trade names

 

 

9

 

 

Relief-from-royalty method

 

Discount rate

Royalty rate (pre-tax)

 

19.0%

1.5%

 

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

 

F-14


For the year ended December 31, 2016, there were de minimis acquisition-related expenses associated with the completed acquisition.  For the years ended December 31, 2015 and 2014, the Company re corded $14 million and $1 million, respectively, of acquisition-related expenses, associated with completed acquisitions, within selling, general and administrative expenses in the consolidated and combined statements of income.

 

 

Pro forma results

 

The following unaudited pro forma financial information for the year ended December 31, 2016 presents the consolidated and combined statements of income of the Company and the acquisitions of Continuum and Courier described above, as if the acquisitions had occurred as of January 1 of the year prior to acquisition.

 

The unaudited pro forma financial information is not intended to represent or be indicative of the Company’s consolidated future statements of income and balance sheets that would have been reported had these acquisitions been completed as of the beginning of the period presented and should not be taken as indicative of the Company’s consolidated future statements of income or balance sheets.   Pro forma adjustments are tax-effected at the applicable statutory tax rates.  

 

 

 

Year ended

December 31,

 

 

 

 

2016

 

 

 

2015

 

Net sales

 

$

3,698

 

 

$

3,911

 

Net income

 

 

106

 

 

 

107

 

 

The following table outlines unaudited pro forma financial information for the year ended December 31, 2015:

 

 

 

Year ended

December 31, 2015

 

Amortization of purchased intangibles

 

$

21

 

Restructuring, impairment and other charges

 

 

31

 

 

Additionally, the pro forma adjustments affecting net income for the year ended December 31, 2015 were as follows:

 

 

 

Year ended

December 31, 2015

 

Depreciation and amortization of purchased assets, pre-tax

 

$

(3

)

Acquisition-related expenses, pre-tax

 

 

19

 

Restructuring, impairment and other charges, pre-tax

 

 

26

 

Inventory fair value adjustments, pre-tax

 

 

11

 

Other pro forma adjustments, pre-tax

 

 

1

 

Income taxes

 

 

(13

)

 

 

Note 4.  Restructuring, Impairment and Other Charges

 

2016 Restructuring, Impairment and Other Charges

 

2016

 

 

 

Employee

Terminations

 

 

Other

Restructuring

Charges

 

 

Total

Restructuring

Charges

 

 

Impairment

 

 

Other

Charges

 

 

Total

 

Print

 

 

$

6

 

 

$

6

 

 

$

12

 

 

$

 

 

$

3

 

 

$

15

 

Corporate

 

 

 

2

 

 

 

1

 

 

 

3

 

 

 

 

 

 

 

 

 

3

 

Total

 

 

$

8

 

 

$

7

 

 

$

15

 

 

$

 

 

$

3

 

 

$

18

 

 

F-15


Rest ructuring and Impairment Charges

 

For the year ended December 31, 2016, the Company recorded net restructuring charges of $8 million for employee termination costs for an aggregate of 222 employees, of whom 64 were terminated as of or prior to December 31, 2016.  These charges primarily related to one facility closure in the Print segment, the expected closure of another facility in the first quarter of 2017 in the Print segment and the reorganization of certain operations.  Additionally, the Company recorded lease termination and other restructuring charges of $7 million. The fair values of the buildings and machinery and equipment were determined to be Level 3 under the fair value hierarchy and were estimated based on discussions with real estate brokers, review of comparable properties, if available, discussions with machinery and equipment brokers, dealer quotes and internal expertise related to the current marketplace conditions.

 

 

Other Charges

 

For the year ended December 31, 2016, the Company recorded other charges of $3 million for multi-employer pension plan withdrawal obligations unrelated to facility closures. The total liability for the withdrawal obligations associated with the Company’s decision to withdraw from certain multi-employer pension plans included in accrued liabilities and other noncurrent liabilities are $6 million and $39 million, respectively, at December 31, 2016.   Refer to Note 14, Retirement Plans , for further discussion of multi-employer pension plans.

 

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

 

 

2015 Restructuring, Impairment and Other Charges

 

 

2015

 

 

 

Employee

Terminations

 

 

Other

Restructuring

Charges

 

 

Total

Restructuring

Charges

 

 

Impairment

 

 

Other

Charges

 

 

Total

 

Print

 

 

$

19

 

 

$

5

 

 

$

24

 

 

$

7

 

 

$

22

 

 

$

53

 

Office Products

 

 

 

1

 

 

 

2

 

 

 

3

 

 

 

1

 

 

 

 

 

 

4

 

Total

 

 

$

20

 

 

$

7

 

 

$

27

 

 

$

8

 

 

$

22

 

 

$

57

 

 

 

Restructuring and Impairment Charges

 

For the year ended December 31, 2015, the Company recorded net restructuring charges of $20 million for employee termination costs for 766 employees, of whom 536 were terminated as of December 31, 2015. These charges primarily related to the closure of two facilities in the Print segment, the integration of Courier and the reorganization of certain operations. Additionally, the Company incurred lease termination and other restructuring charges of $7 million for the year ended December 31, 2015, including charges related to multiemployer pension plan withdrawal obligations as a result of facility closures. For the year ended December 31, 2015, the Company also recorded $8 million of impairment charges primarily related to buildings and machinery and equipment associated with facility closings. The fair values of the buildings and machinery and equipment were determined to be Level 3 under the fair value hierarchy and were estimated based on discussions with real estate brokers, review of comparable properties, if available, discussions with machinery and equipment brokers, dealer quotes and internal expertise related to the current marketplace conditions.

 

 

F-16


Other Cha rges

 

For the year ended December 31, 2015, the Company recorded charges of $22 million, including integration charges of $19 million for payments made to certain Courier employees upon the termination of Courier’s executive severance plan immediately prior to the acquisition and $3 million of charges for multiemployer pension plan withdrawal obligations unrelated to facility closures. The total liability for the withdrawal obligations associated with the Company’s decision to withdraw from all multi-employer pension plans included in accrued liabilities and other noncurrent liabilities are $6 million and $42 million, respectively. Refer to Note 14, Retirement Plans, for further discussion of multi-employer pension plans.

 

 

2014 Restructuring, Impairment and Other Charges

 

2014

 

 

 

Employee

Terminations

 

 

Other

Restructuring

Charges

 

 

Total

Restructuring

Charges

 

 

Impairment

 

 

Other

Charges

 

 

Total

 

Print

 

 

$

1

 

 

$

6

 

 

$

7

 

 

$

103

 

 

$

17

 

 

$

127

 

Office Products

 

 

 

4

 

 

 

2

 

 

 

6

 

 

 

(1

)

 

 

 

 

 

5

 

Total

 

 

$

5

 

 

$

8

 

 

$

13

 

 

$

102

 

 

$

17

 

 

$

132

 

 

 

Restructuring and Impairment Charges

 

For the year ended December 31, 2014, the Company recorded net restructuring charges of $5 million for employee termination costs for 96 employees, substantially all of whom were terminated as of December 31, 2016. These charges primarily related to the integration of Esselte as well as one facility closure within the Print segment, continuing charges related to a facility closure in the prior year and the reorganization of certain operations. Additionally, the Company incurred lease termination and other restructuring charges of $8 million for the year ended December 31, 2014, including charges related to multi-employer pension plan withdrawal obligations as a result of facility closures. For the year ended December 31, 2014, the Company also recorded $2 million of impairment charges primarily related to buildings and machinery and equipment associated with facility closings. The impairment charges are net of gains related to the sale of previously impaired other long lived assets. The fair values of the buildings and machinery and equipment were determined to be Level 3 under the fair value hierarchy and were estimated based on discussions with real estate brokers, review of comparable properties, if available, discussions with machinery and equipment brokers, dealer quotes and internal expertise related to the current marketplace conditions.

 

As a result of the Company’s annual goodwill impairment test, the Company recorded non-cash charges of $100 million to recognize the impairment of goodwill in the magazines, catalogs and retail inserts reporting unit within the Print segment. The goodwill impairment charges resulted from a reduction in the estimated fair value of the reporting unit based on lower expectations of future revenue, profitability and cash flows as compared to expectations as of the last annual goodwill impairment test. The lower expectations for the magazines, catalogs and retail inserts reporting unit were due to accelerating volume declines and increasing price pressures resulting from declining demand, primarily in catalogs and magazines. Revenue and income from operations in the magazines, catalogs and retail inserts reporting unit for the year ended December 31, 2014 were lower than previous expectations due to volume declines and price pressures. The negative trends experienced in 2014 were expected to continue in future years. The goodwill impairment charges were determined using Level 3 inputs, including discounted cash flow analyses, comparable marketplace fair value data and management’s assumptions in valuing the significant tangible and intangible assets.

 

 

Other Charges

 

For the year ended December 31, 2014, the Company recorded charges of $17 million as a result of its decision to withdraw from all multi-employer pension plans serving facilities that are currently operating. These charges for multi-employer pension plan withdrawal obligations, unrelated to facility closures, represent the Company’s best estimate of the expected settlement of these withdrawal liabilities. Refer to Note 14 , Retirement Plans, for further discussion of multi-employer pension plans.

 

 

F-17


Restructuring Reserve

 

The restructuring reserve as of December 31, 2016 and 2015, and changes during the year ended December 31, 2016, were as follows:

 

 

 

December 31,

2015

 

 

Restructuring

Charges

 

 

Foreign

Exchange and

Other

 

 

Cash

Paid

 

 

December 31,

2016

 

Employee terminations

 

$

13

 

 

$

8

 

 

$

2

 

 

$

(15

)

 

$

8

 

Multi-employer pension plan withdrawal obligations

 

 

20

 

 

 

2

 

 

 

 

 

 

(4

)

 

 

18

 

Lease terminations and other

 

 

4

 

 

 

5

 

 

 

 

 

 

(7

)

 

 

2

 

Total

 

$

37

 

 

$

15

 

 

$

2

 

 

$

(26

)

 

$

28

 

 

The current portion of restructuring reserves of $13 million at December 31, 2016 was included in accrued liabilities, while the long-term portion of $15 million, which primarily related to multi-employer pension plan withdrawal obligations related to facility closures and lease termination costs, was included in other noncurrent liabilities at December 31, 2016.

 

Payments on all of the Company’s multi-employer pension plan withdrawal obligations are scheduled to be completed by 2034. Changes based on uncertainties in these estimated withdrawal obligations could affect the ultimate charges related to multi-employer pension plan withdrawals. Refer to Note 14 , Retirement Plans, for further discussion of multi-employer pension plans.

 

The restructuring liabilities classified as “lease terminations and other” consisted of lease terminations and other facility closing costs. Payments on certain of the lease obligations are scheduled to continue until 2018. Market conditions and the Company’s ability to sublease these properties could affect the ultimate charges related to the lease obligations.  Any potential recoveries or additional charges could affect amounts reported in the Company’s financial statements.

 

The restructuring reserve as of December 31, 2015 and 2014, and changes during the year ended December 31, 2015, were as follows:

 

 

 

December 31,

2014

 

 

Restructuring

Charges

 

 

Foreign

Exchange and

Other

 

 

Cash

Paid

 

 

December 31,

2015

 

Employee terminations

 

$

4

 

 

$

20

 

 

$

1

 

 

$

(12

)

 

$

13

 

Multi-employer pension plan withdrawal obligations

 

 

21

 

 

 

1

 

 

 

2

 

 

 

(4

)

 

 

20

 

Lease terminations and other

 

 

5

 

 

 

6

 

 

 

 

 

 

(7

)

 

 

4

 

Total

 

$

30

 

 

$

27

 

 

$

3

 

 

$

(23

)

 

$

37

 

 

The current portion of restructuring reserves of $19 million at December 31, 2015 was included in accrued liabilities, while the long-term portion of $18 million, primarily related to multi-employer pension plan withdrawal obligations related to facility closures and lease termination costs, was included in other noncurrent liabilities at December 31, 2015.

 

 

F-18


Note 5.  Goodwill and Other Intangible Assets

 

The changes in the carrying amount of goodwill for the years ended December 31, 2016 and 2015 were as follows:

 

 

 

Print

 

 

Office Products

 

 

Total

 

Net book value as of January 1, 2015

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

$

800

 

 

$

109

 

 

$

909

 

Accumulated impairment losses

 

 

(800

)

 

 

(79

)

 

 

(879

)

Total

 

 

 

 

 

30

 

 

 

30

 

Acquisition

 

 

51

 

 

 

 

 

 

51

 

Net book value as of December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

$

845

 

 

$

109

 

 

$

954

 

Accumulated impairment losses

 

 

(794

)

 

 

(79

)

 

 

(873

)

Total

 

 

51

 

 

 

30

 

 

 

81

 

Acquisition

 

 

3

 

 

 

 

 

 

3

 

Net book value as of December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

 

852

 

 

 

109

 

 

 

961

 

Accumulated impairment losses

 

 

(798

)

 

 

(79

)

 

 

(877

)

Total

 

$

54

 

 

$

30

 

 

$

84

 

 

There was no impairment of goodwill during the years ended December 31, 2016 and 2015.  The goodwill and accumulated impairment balances are impacted by changes in foreign exchanges.

The components of other intangible assets at December 31, 2016 and 2015 were as follows:

 

 

December 31, 2016

 

 

December 31, 2015

 

 

 

Gross  Carrying

 

 

Accumulated

 

 

Net Book

 

 

Gross  Carrying

 

 

Accumulated

 

 

Net Book

 

 

 

Amount

 

 

Amortization

 

 

Value

 

 

Amount

 

 

Amortization

 

 

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

$

205

 

 

$

(109

)

 

$

96

 

 

$

206

 

 

$

(94

)

 

$

112

 

Trade names

 

 

5

 

 

 

(2

)

 

 

3

 

 

 

5

 

 

 

(1

)

 

 

4

 

Total amortizable other intangible assets

 

 

210

 

 

 

(111

)

 

 

99

 

 

 

211

 

 

 

(95

)

 

 

116

 

Indefinite-lived trade names

 

 

32

 

 

 

 

 

 

32

 

 

 

32

 

 

 

 

 

 

32

 

Total other intangible assets

 

$

242

 

 

$

(111

)

 

$

131

 

 

$

243

 

 

$

(95

)

 

$

148

 

 

During the year ended December 31, 2015, the Company recorded additions to other intangible assets of $104 million for the acquisition of Courier, the components of which were as follows:

 

 

 

December 31, 2015

 

 

Amount

 

 

Weighted

Average

Amortization

Period

(in years)

Customer relationships

 

$

94

 

 

12.0

Trade names (amortizable)

 

 

5

 

 

3.0

Trade names (indefinite-lived)

 

 

5

 

 

N/A

Total additions

 

$

104

 

 

 

 

Amortization expense for other intangible assets was $16 million, $17 million and $11 million for the years ended December 31, 2016, 2015 and 2014, respectively.

F-19


 

The following table outlines the estimated annual amortization expense related to other intangible assets as of December 31, 2016:

 

For the year ending December 31,

 

Amount

 

2017

 

$

16

 

2018

 

 

11

 

2019

 

 

10

 

2020

 

 

10

 

2021

 

 

9

 

2022 and thereafter

 

 

43

 

Total

 

$

99

 

 

 

Note 6. Accounts Receivable

 

Transactions affecting the allowances for doubtful accounts receivable balance during the years ended December 31, 2016, 2015 and 2014 were as follows:

 

 

 

2016

 

 

2015

 

 

2014

 

Balance, beginning of year

 

$

11

 

 

$

13

 

 

$

12

 

Provisions charged to expense

 

 

6

 

 

 

3

 

 

 

5

 

Write-offs and other

 

 

(7

)

 

 

(5

)

 

 

(4

)

Balance, end of year

 

$

10

 

 

$

11

 

 

$

13

 

  

  

Note 7.  Inventories

 

The components of the Company’s inventories, net of excess and obsolescence reserves for raw materials and finished goods, at December 31, 2016 and 2015 were as follows:

 

 

 

2016

 

 

2015

 

Raw materials and manufacturing supplies

 

$

100

 

 

$

102

 

Work in process

 

 

58

 

 

 

62

 

Finished goods

 

 

93

 

 

 

121

 

LIFO reserve

 

 

(58

)

 

 

(67

)

Total

 

$

193

 

 

$

218

 

 

During the years ended December 31, 2016 and 2015, the Company recognized a LIFO benefit of $1 million and $7 million, respectively.  The Company recognized a de minimis amount of expense in the year ended December 31, 2014.

    

 

Note 8.  Property, Plant and Equipment  

 

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

 

 

 

2016

 

 

2015

 

Land

 

$

42

 

 

$

49

 

Buildings

 

 

762

 

 

 

774

 

Machinery and equipment

 

 

4,173

 

 

 

4,283

 

 

 

 

4,977

 

 

 

5,106

 

Accumulated depreciation

 

 

(4,369

)

 

 

(4,388

)

Total

 

$

608

 

 

$

718

 

 

During the years ended December 31, 2016, 2015 and 2014, depreciation expense was $149 million, $160 million and $167 million, respectively.  

F-20


 

 

Note 9. Fair Value Measurement

 

Certain assets and liabilities are required to be recorded at fair value on a recurring basis. The Company’s assets and liabilities required to be adjusted to fair value on a recurring basis are pension plan assets.  Refer to Note 14 , Retirement Plans, for the fair value of the Company’s pension plan assets as of December 31, 2016 and 2015.   Refer to Note 12 , Debt, for the fair value of the Company’s debt as of December 31, 2016, which is recognized at book value.

 

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 the remeasurement of assets resulting in impairment charges.  Refer to Note 3 , Business Combinations, for further discussion on the fair value of assets and liabilities associated with acquisitions.

 

There was a de minimis amount of impairment charges during the year ended December 31, 2016.

 

The fair value as of the measurement date, net book value as of the end of the year and related impairment charge for assets measured at fair value on a nonrecurring basis subsequent to initial recognition during the years ended December 31, 2015 and 2014 were as follows:

 

 

 

Year Ended

December 31, 2015

 

 

As of

December 31, 2015

 

 

 

Impairment

Charge

 

 

Fair Value

Measurement

(Level 3)

 

 

Net Book

Value

 

Long-lived assets held for sale or disposal

 

$

9

 

 

$

15

 

 

$

14

 

Total

 

$

9

 

 

$

15

 

 

$

14

 

 

 

 

Year Ended

December 31, 2014

 

 

As of

December 31, 2014

 

 

 

Impairment

Charge

 

 

Fair Value

Measurement

(Level 3)

 

 

Net Book

Value

 

Long-lived assets held and used

 

$

1

 

 

$

1

 

 

$

1

 

Long-lived assets held for sale or disposal

 

 

3

 

 

 

11

 

 

 

1

 

Goodwill

 

 

100

 

 

 

 

 

 

 

Total

 

$

104

 

 

$

12

 

 

$

2

 

 

The fair values of assets held for sale that were remeasured during the years ended December 31, 2016, 2015 and 2014 were reduced by estimated costs to sell of $0 million, $0 million and $1 million, respectively.  

 

During the year ended December 31, 2014, goodwill for the magazines, catalogs and retail inserts reporting unit was written down to an implied fair value of zero. Refer to Note 4 , Restructuring, Impairment and Other Charges, for further discussion regarding this impairment charge.

 

The Company’s accounting and finance management determines the valuation policies and procedures for Level 3 fair value measurements and is responsible for the development and determination of unobservable inputs.

 

The fair values of the long-lived assets held and used and long-lived assets held for sale or disposal were determined using Level 3 inputs and were estimated based on discussions with real estate brokers, review of comparable properties, if available, discussions with machinery and equipment brokers, dealer quotes and internal expertise related to the current marketplace conditions. Unobservable inputs obtained from third parties are adjusted as necessary for the condition and attributes of the specific asset.

 

 

Note 10. Accrued Liabilities

 

The components of the Company’s accrued liabilities at December 31, 2016 and 2015 were as follows:

 

F-21


 

 

2016

 

 

2015

 

Employee-related liabilities

 

$

87

 

 

$

55

 

Customer-related liabilities

 

 

37

 

 

 

36

 

Deferred revenue

 

 

33

 

 

 

34

 

Restructuring liabilities

 

 

13

 

 

 

19

 

Other

 

 

67

 

 

 

59

 

Total accrued liabilities

 

$

237

 

 

$

203

 

 

Employee-related liabilities consist primarily of payroll, workers’ compensation, employee benefits, deferred compensation, and incentive compensation.  Refer to Note 1, Overview and Basis of Presentation , for information on the workers’ compensation balances transferred on October 1, 2016 from RRD to the Company. As of December 31, 2016 and 2015, incentive compensation accruals include amounts earned pursuant to the Company’s and RRD’s primary employee incentive compensation plans, respectively. Customer-related liabilities include accruals for volume discounts, rebates and other customer discounts. Other accrued liabilities include miscellaneous operating accruals and other tax liabilities.    

 

 

Note 11.  Commitments and Contingencies

 

As of December 31, 2016, the Company had commitments of $8 million for severance payments related to employee restructuring activities. In addition, as of December 31, 2016, the Company had commitments of approximately $15 million for the purchase of property, plant and equipment related to incomplete projects.  The Company also has contractual commitments of approximately $35 million for outsourced services, including professional, maintenance and other services.  The Company has natural gas commitments that are at fixed prices of $3 million.  

 

Future minimum rental commitments under operating leases are as follows:

 

Year Ended December 31

 

Amount

 

2017

 

$

40

 

2018

 

 

35

 

2019

 

 

31

 

2020

 

 

21

 

2021

 

 

17

 

2022 and thereafter

 

 

23

 

 

 

$

167

 

 

The Company has operating lease commitments, including those for vacated facilities, totaling $167 million extending through various periods to 2028. Future rental commitments for leases have not been reduced by minimum non-cancelable sublease rentals aggregating approximately $12 million. The Company remains secondarily liable under these leases in the event that the sub-lessee defaults under the sublease terms. The Company does not believe that material payments will be required as a result of the secondary liability provisions of the primary lease agreements.

 

Rent expense for facilities in use and equipment was $39 million, $29 million and $27 million for the years ended December 31, 2016, 2015 and 2014 respectively. Rent expense for vacated facilities was recognized as restructuring, impairment and other charges.  Refer to Note 4 , Restructuring, Impairment and Other Charges , for further details.

F-22


 

 

Litigation

 

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

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

 

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

  

 

Note 12.  Debt

 

The Company’s debt at December 31, 2016 consisted of the following:

 

 

2016

 

Term Loan Facility due September 30, 2022 (a)

 

$

353

 

8.75% Senior Secured Notes due October 15, 2023

 

 

450

 

Capital lease obligations

 

 

6

 

Unamortized debt issuance costs

 

 

(15

)

Total debt

 

 

794

 

Less: current portion

 

 

(52

)

Long-term debt

 

$

742

 

 

 

(a)

The borrowings under the term loan facility are subject to a variable interest rate. As of December 31, 2016 the interest rate was 7.00 %.

__________________________________

 

The fair values of the senior notes and term loan facility, which were determined using the market approach based upon interest rates available to the Company for borrowings with similar terms and maturities, were determined to be Level 2 under the fair value hierarchy. The fair value of the Company’s debt was greater than its book value by approximately $22 million at December 31, 2016.

 

On September 30, 2016, the Company issued $450 million of 8.75% Senior Secured Notes (the “Senior Notes”) due October 15, 2023.  Interest on the Senior Notes is due semi-annually on April 15 and October 15, commencing on April 15, 2017.  Net proceeds from the offering of the Senior Notes (“the Notes Offering”) were distributed to RRD in the form of a dividend.  The Company did not retain any proceeds from the Notes Offering.    

 

F-23


The Senior Notes were is sued pursuant to an indenture where certain wholly-owned domestic subsidiaries of the Company guarantee the Senior Notes (the “Guarantors”).  The Senior Notes are fully and unconditionally guaranteed, on a senior secured basis, jointly and severally, by th e Guarantors, which are comprised of each of the Company’s existing and future direct and indirect wholly-owned U.S. subsidiaries that guarantee the Company’s obligations. The Senior Notes are not guaranteed by the Company’s foreign subsidiaries or unrestr icted subsidiaries.  The Senior Notes and the related guarantees are secured on a first-priority lien basis by substantially all assets of the Company and the Guarantors, subject to certain exceptions and permitted liens. The Indenture governing the Senior Notes contains certain covenants applicable to the Company and its restricted subsidiaries, including limitations on: (1) liens; (2) indebtedness; (3) mergers, consolidations and acquisitions; (4) sales, transfers and other dispositions of assets; (5) loa ns and other investments; (6) dividends and other distributions, stock repurchases and redemptions and other restricted payments; (7) restrictions affecting subsidiaries; (8) transactions with affiliates; and (9) designations of unrestricted subsidiaries. Each of these covenants is subject to important exceptions and qualifications.  

 

On September 30, 2016 the Company entered into a credit agreement (the “Credit Agreement”) which provides for (i) a new senior secured term loan B facility in an aggregate principal amount of $375 million (the “Term Loan Facility”) and (ii) a new senior secured revolving credit facility in an aggregate principal amount of $400 million (the “Revolving Credit Facility,”). The interest rate per annum applicable to the Term Loan Facility is equal to, at the Company’s option, either a base rate plus a margin of 5.00% or LIBOR plus a margin of 6.00%. The LIBOR rate is subject to a “floor” of 1%.  The interest rate per annum applicable to the Revolving Credit Facility is equal to a base rate plus a margin ranging from 1.75% to 2.25%, or LIBOR plus a margin ranging from 2.75% to 3.25%, in either case based upon the Consolidated Leverage Ratio of the Company and its restricted subsidiaries. Interest on the Credit Agreement is due at least quarterly commencing on December 31, 2016.  The Term Loan Facility will amortize in quarterly installments of $13 million for the first eight quarters and $11 million for subsequent quarters.  The debt issuance costs and original issue discount are being amortized over the life of the facilities using the effective interest method. The Term Loan Facility will mature on September 30, 2022 and the Revolving Credit Facility will mature on September 30, 2021.

 

The proceeds of any collection or other realization of collateral received in connection with the exercise of remedies and any distribution in respect of collateral in any bankruptcy proceeding will be applied first to repay amounts due under the Revolving Credit Facility before the lenders under the Term Loan Facility or the holders of the Senior Notes receive such proceeds.

 

The Credit Agreement is subject to a number of covenants, including, but not limited to, a minimum Interest Coverage Ratio and the Consolidated Leverage Ratio, as defined in and calculated pursuant to the Credit Agreement, that, in part, restrict the Company’s ability to incur additional indebtedness, create liens, engage in mergers and consolidations, make restricted payments and dispose of certain assets. The Credit Agreement generally allows annual dividend payments of up to $50 million in aggregate, though additional dividends may be allowed subject to certain conditions. Each of these covenants is subject to important exceptions and qualifications.

 

The Company has used the net proceeds from the Term Loan Facility to fund a cash dividend to RRD in connection with the spin off and to pay fees and expenses related to the spin off from RRD.  The Company intends to use any additional borrowings under the Credit Facilities for general corporate purposes, including the financing of permitted investments.

 

The weighted-average interest rate on borrowings under the Company’s $400 million Revolving Credit Facility was 3.5% during the three months ended December 31, 2016.

 

As of December 31, 2016, the Company had $12 million in outstanding letters of credit issued under the Credit Agreement. As of December 31, 2016, the Company also had $16 million in other uncommitted credit facilities, primarily outside the U.S., (the “Other Facilities”). As of December 31, 2016, letters of credit and guarantees of a de minimis amount were issued and reduced availability under the Company’s Other Facilities. As of December 31, 2016, there were no borrowings under the Revolving Credit Facility and the Other Facilities (the “Combined Facilities”).

 

At December 31, 2016, the future maturities of debt, including capitalized leases, were as follows:

 

 

 

Amount

 

2017

 

$

54

 

2018

 

49

 

2019

 

43

 

2020

 

43

 

2021

 

43

 

2022 and thereafter

 

586

 

Total (a)

 

$

818

 

 

F-24


 

(a)

Excludes unamortized debt issuance costs of $6 million and $9 million related to the Company’s Term Loan Facility and 8.75% Senior Notes due October 15, 2023, respectively, and a discount of $9 million related to the Company’s Term Loan Facility. These amounts do not represent contractual obligations with a fixed amount or maturity date.

 

The following table summarizes interest expense included in the Consolidated and Combined Statements of Income:

 

 

 

 

2016

 

 

 

2015

 

 

 

2014

 

Interest incurred

 

$

19

 

 

$

 

 

$

 

Less: interest income

 

 

(1

)

 

 

(3

)

 

 

(4

)

Interest expense (income), net

 

$

18

 

 

$

(3

)

 

$

(4

)

 

Interest paid, net of interest received, was $7 million for the year ended December 31, 2016. Interest received, net of interest paid, was $1 million and $2 million for the years ended December 31, 2015 and 2014, respectively, as interest received was greater than interest payments for these years.

 

 

Note 13.  Earnings Per Share

On October 1, 2016, RRD distributed approximately 26.2 million shares of LSC Communications common stock to RRD shareholders.  RRD retained an additional 6.2 million shares.  In connection with the total distribution of 26.2 million shares, each RRD shareholder received one share of LSC Communications common stock for every eight shares of RRD common stock held at the close of business on September 23, 2016, the record date.  

For the period after the separation, basic earnings per share (“EPS”) is calculated by dividing net earnings attributable to the Company’s shareholders by the weighted average number of common shares outstanding for the period. In computing diluted EPS, basic EPS is adjusted for the assumed issuance of all potentially dilutive share-based awards, including stock options, restricted stock units and performance share units. The computations of basic and diluted EPS for periods prior to the separation were calculated using the shares distributed and retained by RRD on October 1, 2016.  The same number of shares was used to calculate basic and diluted earnings per share since there were no LSC Communications equity awards outstanding prior to the spinoff.

Stock options are considered anti-dilutive when the exercise price exceeds the average market value of the Company’s stock price during the applicable period.

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

 

 

 

 

2016

 

 

 

2015

 

 

 

2014

 

Net income per common share:

 

 

 

 

 

 

 

 

 

 

 

 

     Basic

 

$

3.25

 

 

$

2.27

 

 

$

1.79

 

     Diluted

 

$

3.23

 

 

$

2.27

 

 

$

1.79

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

     Net income

 

$

106

 

 

$

74

 

 

$

58

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

     Weighted-average number of common shares outstanding

 

 

32.5

 

 

 

32.4

 

 

 

32.4

 

     Dilutive options and awards

 

 

0.3

 

 

 

 

 

 

 

     Dilutive weighted-average number of common shares outstanding

 

 

32.8

 

 

 

32.4

 

 

 

32.4

 

 

After the separation through the year ended December 31, 2016, no shares of common stock were purchased by the Company; however, shares were withheld for tax liabilities upon the vesting of equity awards.  In the fourth quarter of 2016, a dividend of $0.25 per common share was declared.

 

 

Note 14.  Retirement Plans

 

Benefit Plans Sponsored by RRD

 

Prior to the separation, certain employees of the Company participated in certain pension and postretirement healthcare plans sponsored by RRD. In the Company’s combined financial statements prior to the separation, these plans were accounted for as multiemployer benefit plans, and as a result, the related net benefit obligations are not reflected in LSC Communications’ combined balance sheets as there were no unfunded contributions due at the end of the reporting period. Effective October 1, 2016 in connection

F-25


with the separation, these plans were separated and the Company assumed certain net benefit plan obligations and plan assets th at were previously recorded by RRD.  For RRD sponsored defined benefit and post-employment plans, the Company recorded net pension and postretirement income of $28 million for the nine months ended September 30, 2016, and $22 million and $24 million for th e years ended December 31, 2015 and 2014, respectively. These amounts are reflected in cost of sales and selling, general and administrative expenses in the consolidated and combined statements of income.

 

 

LSC Communications’ Sponsored Benefit Plans

 

The Company is the sole sponsor of certain defined benefit pension plans, which have been reflected in the consolidated balance sheet as of December 31, 2016 and the combined balance sheet as of December 31, 2015. At the separation date, the Company assumed and recorded certain pension obligations and plan assets in single employer plans for the Company’s employees and certain former employees and retirees of RRD.  The Company recorded a net benefit plan obligation of $358 million as of October 1, 2016 related to these plans.  Additionally, the Company’s United Kingdom pension plan was transferred to RRD at the separation date, and as a result, the Company recorded a reduction in its net benefit plan asset of $7 million as of October 1, 2016.

 

The Company’s primary single employer defined benefit pension plans are frozen. No new employees will be permitted to enter those plans and participants will earn no additional benefits. The assets and certain obligations of the defined benefit pension plans transferred to the Company include a plan qualified under Section 401(a) of the Internal Revenue Code of 1986, as amended (the “Qualified Plans”) and related non-qualified benefits (the “Non-Qualified Plan”). The Qualified Plans will be funded in conformity with the applicable government regulations, such that the Company from time to time contributes at least the minimum amount required using actuarial cost methods and assumptions acceptable under government regulations. The Non-Qualified Plan is unfunded, and the Company pays retiree benefits as they become due.   

 

The Company engages outside actuaries to assist in the determination of the obligations and costs under these plans. The Company records annual income and expense amounts relating to its pension plans based on calculations which include various actuarial assumptions such as discount rates, mortality, assumed rate of return, compensation increases, and turnover rates. The Company reviews its actuarial assumptions on an annual basis and makes modifications to the assumptions based on current rates and trends when it is deemed appropriate to do so. The effect of modifications on the value of plan obligations and assets is recognized immediately within other comprehensive income (loss) and amortized into operating earnings over future periods. The Company believes that the assumptions utilized in recording its obligations under its plans are reasonable based on its experience, market conditions and input from its actuaries and investment advisors.

 

As of December 31, 2015, the Company changed the method used to estimate the interest cost components of net pension plan expense for its defined benefit pension plans. Historically, the interest cost components were estimated using a single weighted-average discount rate derived from the yield curve used to measure the projected benefit obligation at the beginning of the period. The Company has elected to use a full yield curve approach in the estimation of these interest components of net pension plan expense by applying the specific spot rates along the yield curve used in the determination of the projected benefit obligation to the relevant projected cash flows. The Company made this change to improve the correlation between projected benefit cash flows and the corresponding yield curve spot rates and to provide a more precise measurement of interest costs. This change does not affect the measurement and calculation of the Company’s total benefit obligations. The Company accounted for this change as a change in estimate and accordingly accounted for it prospectively starting in the first quarter of 2016.

 

In the fourth quarter of 2015, the Company communicated to certain former Esselte employees the option to receive a lump-sum pension payment or commence annuity payments computed in accordance with statutory requirements, beginning in the second quarter of 2016. Payments to eligible participants who elected to receive a lump-sum pension payment or annuity were funded from existing pension plan assets and constituted a complete settlement of the Company’s pension liabilities with respect to these participants. The Company’s pension assets and liabilities were remeasured as of the payout date. The discount rates and actuarial assumptions used to calculate the payouts were determined in accordance with federal regulations. As of the remeasurement date, the reduction in the reported pension obligation for these participants was $35 million, compared to payout amounts of approximately $30 million . The Company recorded non-cash settlement charges of $1 million in selling, general and administrative expenses in the year ended December 31, 2016 in connection with the settlement payments. These charges resulted from the recognition in earnings of a portion of the actuarial losses recorded in accumulated other comprehensive loss based on the proportion of the obligation settled.  

 

The Company made contributions of $5 million to its pension plans during the year ended December 31, 2016.  Based on the plans’ regulatory funded status, there are no required contributions for the Company’s two primary Qualified Plans in 2017.  The required contributions in 2017, primarily for the Non-Qualified Plan, are expected to be approximately $5 million to $7 million to its pension plans in 2017.

F-26


The benefit plan obligations are calculated using generally accepted actuarial methods and are measured as of December 31. Prior to the plan freezes, actuarial gains and losses were amortized using the corridor method over the average remaining service life of active plan participants. Actuarial gains and losses for frozen plans are amortized using the corridor method over the average remaining expected life of active plan participants.

The components of the net periodic benefit (income) expense were as follows:

 

 

 

Pension Benefits

 

 

 

2016

 

 

2015

 

 

2014

 

 

 

 

Qualified

 

 

Non-Qualified & International

 

 

 

Qualified

 

 

Non-Qualified & International

 

 

 

Qualified

 

 

Non-Qualified & International

 

Service cost

 

 

$

 

 

$

 

 

 

$

 

 

$

 

 

 

$

 

 

$

 

Interest cost

 

 

 

24

 

 

 

6

 

 

 

 

7

 

 

 

9

 

 

 

 

6

 

 

 

11

 

Expected return on plan assets

 

 

 

(48

)

 

 

(7

)

 

 

 

(11

)

 

 

(13

)

 

 

 

(8

)

 

 

(15

)

Amortization of actuarial loss

 

 

 

6

 

 

 

1

 

 

 

 

 

 

 

1

 

 

 

 

 

 

 

1

 

Settlement

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net periodic benefit income

 

 

$

(17

)

 

$

 

 

 

$

(4

)

 

$

(3

)

 

 

$

(2

)

 

$

(3

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average assumption used to calculate net

     periodic benefit expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Discount rate

 

 

 

3.8

%

 

 

3.8

%

 

 

 

4.2

%

 

 

3.8

%

 

 

 

4.7

%

 

 

4.6

%

Expected return on plan assets

 

 

 

7.2

%

 

 

7.2

%

 

 

 

6.5

%

 

 

6.3

%

 

 

 

6.5

%

 

 

7.0

%

 

 

The accumulated benefit obligation for the LSC Communications sponsored defined qualified benefit pension plans was $2,439 million and $168 million at December 31, 2016 and December 31, 2015, respectively.  The accumulated benefit obligation for the LSC Communications sponsored defined non-qualified and international benefit pension plans was $90 million and $218 million at December 31, 2016 and 2015, respectively.

 

F-27


 

 

Pension Benefits

 

 

 

2016

 

 

2015

 

 

 

 

Qualified

 

 

Non-Qualified & International

 

 

 

Qualified

 

 

Non-Qualified & International

 

Benefit obligation at beginning of year

 

 

$

168

 

 

$

220

 

 

 

 

181

 

 

 

241

 

Service cost

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest cost

 

 

 

24

 

 

 

6

 

 

 

 

7

 

 

 

9

 

Actuarial gain

 

 

 

(186

)

 

 

(7

)

 

 

 

(14

)

 

 

(3

)

Settlement

 

 

 

(30

)

 

 

 

 

 

 

 

 

 

 

Foreign currency translation

 

 

 

 

 

 

(27

)

 

 

 

 

 

 

(11

)

Benefits paid

 

 

 

(39

)

 

 

(10

)

 

 

 

(9

)

 

 

(10

)

Plan transfers prior to separation

 

 

 

 

 

 

 

 

 

 

 

 

 

(6

)

Plan transfers from parent company

 

 

 

2,502

 

 

 

97

 

 

 

 

 

 

 

 

Plan transfers to parent company

 

 

 

 

 

 

(187

)

 

 

 

 

 

 

 

Acquisitions

 

 

 

 

 

 

 

 

 

 

3

 

 

 

 

Benefit obligation at end of year

 

 

$

2,439

 

 

$

92

 

 

 

$

168

 

 

$

220

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value of plan assets at beginning of year

 

 

$

169

 

 

$

220

 

 

 

$

182

 

 

$

235

 

Actual return on assets

 

 

 

(93

)

 

 

9

 

 

 

 

(6

)

 

 

1

 

Settlement

 

 

 

(30

)

 

 

 

 

 

 

 

 

 

 

Employer contributions

 

 

 

1

 

 

 

4

 

 

 

 

 

 

 

6

 

Acquisitions

 

 

 

 

 

 

 

 

 

 

2

 

 

 

 

Foreign currency translation

 

 

 

 

 

 

(27

)

 

 

 

 

 

 

(12

)

Plan transfers from parent company

 

 

 

2,241

 

 

 

 

 

 

 

 

 

 

 

Plan transfers to parent company

 

 

 

 

 

 

(194

)

 

 

 

 

 

 

 

Benefits paid

 

 

 

(39

)

 

 

(10

)

 

 

 

(9

)

 

 

(10

)

Fair value of plan assets at end of year

 

 

$

2,249

 

 

 

2

 

 

 

$

169

 

 

$

220

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Unfunded) funded status at end of year

 

 

$

(190

)

 

$

(90

)

 

 

$

1

 

 

$

 

 

 

 

 

Pension Benefits

 

 

 

2016

 

 

2015

 

 

 

 

Qualified

 

 

Non-Qualified & International

 

 

 

Qualified

 

 

Non-Qualified & International

 

Prepaid pension cost (included in other noncurrent assets)

 

 

$

4

 

 

$

 

 

 

$

2

 

 

$

 

Accrued benefit cost (included in accrued liabilities)

 

 

 

 

 

 

(5

)

 

 

 

 

 

 

 

Pension liabilities

 

 

 

(194

)

 

 

(85

)

 

 

 

(1)

 

 

 

 

Net (liabilities) assets recognized in the consolidated and

   combined balance sheets

 

 

$

(190

)

 

$

(90

)

 

 

$

1

 

 

$

 

 

 

The amounts included in accumulated other comprehensive loss in the consolidated and combined balance sheets, excluding tax effects, that have not been recognized as components of net periodic cost at December 31, 2016 and 2015 were as follows:

 

 

Pension Benefits

 

 

 

2016

 

 

2015

 

 

 

 

Qualified

 

 

Non-Qualified & International

 

 

 

Qualified

 

 

Non-Qualified & International

 

Accumulated other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net actuarial loss

 

 

$

(727

)

 

$

(25

)

 

 

$

(3

)

 

$

(60

)

Total

 

 

$

(727

)

 

$

(25

)

 

 

$

(3

)

 

$

(60

)

 

 

F-28


The pre-tax amounts recognized in other comprehensive loss in 2016 as components of net periodic costs were as follows:

 

 

 

Pension Benefits

 

 

 

 

Qualified

 

 

Non-Qualified & International

 

Amortization of:

 

 

 

 

 

 

 

 

 

Net actuarial loss

 

 

$

6

 

 

$

1

 

Amounts arising during the period:

 

 

 

 

 

 

 

 

 

Net actuarial gain

 

 

 

46

 

 

 

9

 

Settlement

 

 

 

1

 

 

 

 

Total

 

 

$

53

 

 

$

10

 

 

 

Actuarial gains and losses in excess of 10.0% of the greater of the projected benefit obligation or the market-related value of plan assets were recognized as a component of net periodic benefit costs over the average remaining service period of a plan’s active employees. Unrecognized prior service costs or credits are also recognized as a component of net periodic benefit cost over the average remaining service period of a plan’s active employees. The amounts in accumulated other comprehensive loss that are expected to be recognized as components of net periodic benefit costs in 2017 are shown below:

 

 

 

Pension Benefits

 

 

 

Qualified

 

 

Non-Qualified & International

 

Amortization of:

 

 

 

 

 

 

 

 

Net actuarial loss

 

$

17

 

 

$

1

 

 

The weighted-average assumptions used to determine the net benefit obligation at the measurement date were as follows:

 

 

 

Pension Benefits

 

 

 

2016

 

 

2015

 

 

 

Qualified

 

 

Non-Qualified & International

 

 

 

Qualified

 

 

Non-Qualified & International

 

Discount rate

 

 

4.3

%

 

 

4.3

%

 

 

 

4.6

%

 

 

3.8

%

 

The following table provides a summary of pension plans with projected benefit obligations in excess of plan assets as of December 31, 2016 and 2015:

 

 

Pension Benefits

 

 

 

2016

 

 

2015

 

 

 

Qualified

 

 

Non-Qualified & International

 

 

 

Qualified

 

 

Non-Qualified & International

 

Projected benefit obligation

 

$

2,306

 

 

$

92

 

 

 

$

3

 

 

$

3

 

Fair value of plan assets

 

 

2,112

 

 

 

2

 

 

 

 

2

 

 

2

 

 

 

The following table provides a summary of pension plans with accumulated benefit obligations in excess of plan assets as of December 31, 2016 and 2015:

 

 

Pension Benefits

 

 

 

2016

 

 

2015

 

 

 

Qualified

 

 

Non-Qualified & International

 

 

 

Qualified

 

 

Non-Qualified & International

 

Accumulated benefit obligation

 

$

2,306

 

 

$

90

 

 

 

$

3

 

 

$

 

Fair value of plan assets

 

 

2,112

 

 

 

1

 

 

 

 

2

 

 

 

 

 

The Company determines its assumption for the discount rate to be used for purposes of computing annual service and interest costs based on an index of high-quality corporate bond yields and matched-funding yield curve analysis as of the measurement date.

F-29


Benefit payments are expected to be paid as follows:

 

 

Pension Benefits

 

 

 

Qualified

 

 

Non-Qualified & International

2017

 

 

$

123

 

 

5

2018

 

 

 

127

 

 

5

2019

 

 

 

132

 

 

5

2020

 

 

 

135

 

 

6

2021

 

 

 

139

 

 

6

2022-2026

 

 

 

740

 

 

30

 

 

Plan Assets

 

The Company’s overall investment approach for its primary Qualified Plan, is to reduce the risk of significant decreases in the plan’s funded status by allocating a larger portion of the plan’s assets to investments expected to hedge the impact of interest rate risks on the plan’s obligation. Over time, the target asset allocation percentage for the pension plan is expected to decrease for equity and other “return seeking” investments and increase for fixed income and other “hedging” investments. The assumed long-term rate of return for plan assets, which is determined annually, is likely to decrease as the asset allocation shifts over time. The expected long-term rate of return for plan assets is based upon many factors including asset allocation, historical asset returns, current and expected future market conditions, risk and active management premiums. The target asset allocation percentage as of December 31, 2016 for the primary Qualified Plan was approximately 60.0% for return seeking investments and approximately 40.0% for hedging investments.  

 

During the year ended December 31, 2016, the Company adopted ASU 2015-07 “Fair Value Measurement: Disclosures for Investments in Certain Entities that Calculate Net Asset Value per Share (or Its Equivalent)”.  The new guidance requires for investments valued using net asset value (“NAV”) to be classified as a reconciling item between the fair value hierarchy table shown below and the amount of investments in the balance sheet. The new pronouncement was adopted retroactively to the disclosure of 2015 assets.

 

The Company segregated its plan assets by the following major categories and levels for determining their fair value as of December 31, 2016 and 2015:

 

Cash and cash equivalents —Carrying value approximates fair value. As such, these assets were classified as Level 1.  The Company also invests in certain short-term investments which are valued using the amortized cost method.  As such, these assets were classified as Level 2.

 

Equity— The value of individual equity securities were based on quoted prices in active markets.  As such, these assets are classified as Level 1. Additionally, this category includes underlying securities in trust-owned life insurance policies which are invested in certain equity securities. These investments are not quoted on active markets; therefore, they are classified as Level 2.

 

Fixed income— Fixed income securities are typically priced based on a valuation model rather than a last trade basis and are not exchange-traded. These valuation models involve utilizing dealer quotes, analyzing market information, estimating prepayment speeds and evaluating underlying collateral. Accordingly, the Company classified these fixed income securities as Level 2. Fixed income securities also include investments in various asset-backed securities that are part of a government sponsored program. The prices of these asset-backed securities were obtained by independent third parties using multi-dimensional, collateral specific prepayments tables. Inputs include monthly payment information and collateral performance. As the values of these assets was determined based on models incorporating observable inputs, these assets were classified as Level 2. Additionally, this category includes underlying securities in trust owned life insurance policies which are invested in certain fixed income securities. These investments are not quoted on active markets; therefore, they are classified as Level 2.

 

Derivatives and other— This category includes investments in commodity and structured credit funds that are not quoted on active markets; therefore, they are classified as Level 2.

 

Real estate —The fair market value of real estate investment trusts is based on observable inputs for similar assets in active markets, for instance, appraisals and market comparables. Accordingly, the real estate investments were categorized as Level 2.

 

F-30


Investments measured at NAV as a practical expedient The Company invests in certain equity, real estate and private equity funds that are valued at calculated NAV per share. In accordance with FASB guidance investments that are measured at fair value using the NAV per share as a practical expedient have not been classified in the fair value hierarchy.

 

For Level 2 plan assets, management reviews significant investments on a quarterly basis including investigation of unusual fluctuations in price or returns and obtaining an understanding of the pricing methodology to assess the reliability of third-party pricing estimates.

 

The valuation methodologies described above may generate a fair value calculation that may not be indicative of net realizable value or future fair values. While the Company believes the valuation methodologies used are appropriate, the use of different methodologies or assumptions in calculating fair value could result in different amounts. The Company invests in various assets in which valuation is determined by NAV. The Company believes that the NAV is representative of fair value at the reporting date, as there are no significant restrictions on redemption of these investments or other reasons to indicate that the investment would be redeemed at an amount different than the NAV.

 

The fair values of the Company’s pension plan assets at December 31, 2016 and 2015, by asset category were as follows:

 

 

 

December 31, 2016

 

 

December 31, 2015

 

Asset Category

 

Total

 

 

Level 1

 

 

Level 2

 

 

Total

 

 

Level 1

 

 

Level 2

 

Cash and cash equivalents

 

$

80

 

 

$

50

 

 

$

30

 

 

$

12

 

 

$

12

 

 

$

 

Equity

 

 

595

 

 

 

595

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed income

 

 

802

 

 

 

 

 

 

802

 

 

 

44

 

 

 

 

 

44

 

Derivatives and other

 

 

 

 

 

 

 

 

 

 

 

18

 

 

2

 

 

16

 

Investments measurement at NAV

     as a practical expedient

 

 

774

 

 

 

 

 

 

 

 

 

315

 

 

 

 

 

 

 

Total

 

$

2,251

 

 

$

645

 

 

$

832

 

 

$

389

 

 

$

14

 

 

$

60

 

 

Employer 401(k) Savings Plan— Prior to the separation, RRD maintained a defined contribution retirement savings plan (401(k)) that is intended to be qualified under Section 401(a) of the Internal Revenue Code in which eligible employees of the Company were allowed to participate for the period beginning July 1, 2016 through September 1, 2016.  Under this plan, employees had the option to contribute a percentage of eligible compensation on both a before-tax and after-tax basis. RRD could have provided a 401(k) discretionary match to participants, but did not in 2016, 2015 or 2014. Effective September 2, 2017, LSC Communications initiated its own 401(k) plan. Under the LSC Savings Plan (the “Plan”), eligible employees have the option to contribute a percentage of eligible compensation on both a before-tax and after-tax basis.  Effective January 1, 2017, LSC Communications amended the Plan to provide a company match equal to $0.50 of every pre-tax and Roth 401(k) dollar a participating employee contributes to the Plan on up to the first 3.0% of such participant’s pay.

 

Multi-Employer Pension Plans —Multi-employer plans receive contributions from two or more unrelated employers pursuant to one or more collective bargaining agreements and the assets contributed by one employer may be used to fund the benefits of all employees covered within the plan. The risk and level of uncertainty related to participating in these multi-employer pension plans differs significantly from the risk associated with the Company-sponsored defined benefit plans. For example, investment decisions are made by parties unrelated to the Company and the financial stability of other employers participating in a plan may affect the Company’s obligations under the plan.

 

During the year ended December 31, 2016, the Company recorded restructuring, impairment and other charges of $5 million for multi-employer pension plan withdrawal obligations. Of these charges, $3 million were unrelated to facility closures and $2 million were primarily related to facility closures. During the year ended December 31, 2015, the Company recorded restructuring, impairment and other charges of $4 million for multi-employer pension plan withdrawal obligations. Of these charges, $3 million were unrelated to facility closures and $1 million were primarily related to facility closures. For the year ended December 31, 2014, the Company recorded restructuring, impairment and other charges of $18 million associated with its estimated liability for withdrawing from two defined benefit multi-employer pension plans. Of these charges, $17 million were due to the Company’s decision to withdraw from the two defined benefit multiemployer pension plans and $1 million were primarily related to facility closures. Refer to Note 4 , Restructuring, Impairment and Other Charges, for further details of charges related to complete or partial multi-employer pension plan withdrawal liabilities recognized in the combined statements of income.

 

F-31


The Company’s withdrawal liabilities could be affected by the financial stabil ity of other employers participating in the plans and any decisions by those employers to withdraw from the plans in the future. While it is not possible to quantify the potential impact of future events or circumstances, reductions in other employers’ par ticipation in multi-employer pension plans, including certain plans from which the Company has previously withdrawn, could have a material impact on the Company’s previously estimated withdrawal liabilities, may affect consolidated and combined statements of income, balance sheets or cash flows. As a result of the acquisition of Courier, the Company participates in two multi-employer pension plans, one of which the Company’s contributions are approximately 85% of the total plan contributions. Both plans are estimated to be underfunded and have a red zone status, designated as a result of low contribution funding levels, under the Pension Protection Act.

 

During the years ended December 31, 2016, December 31, 2015 and December 31, 2014, the Company made de minimis contributions to these multi-employer pension plans and other plans from which the Company has completely withdrawn as of December 31, 2016.  

 

 

Note 15. Income Taxes

 

Prior to the separation, in the Company’s combined financial statements, income tax expense and deferred tax balances were calculated on a separate return basis, although with respect to certain entities, the Company’s operations have historically been included in the tax returns filed by the respective RRD entities of which the Company’s business was a part. After the separation, the Company will file tax returns on its own behalf.  The provision for income tax and income tax balances represent the Company's tax liabilities as an independent company.

 

Income taxes have been based on the following components of earnings from operations before income taxes for the years ended December 31, 2016, 2015 and 2014:

 

 

 

2016

 

 

 

2015

 

 

 

2014

 

U.S.

 

$

129

 

 

$

136

 

 

$

61

 

Foreign

 

 

28

 

 

 

2

 

 

 

27

 

Total

 

$

157

 

 

$

138

 

 

$

88

 

 

The components of income tax expense (benefit) from operations for the years ended December 31, 2016, 2015 and 2014 were as follows:

 

 

 

2016

 

 

 

2015

 

 

 

2014

 

Current

 

 

 

 

 

 

 

 

 

 

 

 

U.S. federal

 

$

54

 

 

$

76

 

 

$

71

 

U.S. state and local

 

 

10

 

 

 

13

 

 

 

13

 

Foreign

 

 

5

 

 

 

13

 

 

 

5

 

Current income tax expense

 

 

69

 

 

 

102

 

 

 

89

 

Deferred

 

 

 

 

 

 

 

 

 

 

 

 

U.S. federal

 

 

(17

)

 

 

(31

)

 

 

(43

)

U.S. state and local

 

 

(3

)

 

 

(5

)

 

 

(7

)

Foreign

 

 

2

 

 

 

(2

)

 

 

(9

)

Deferred income tax benefit

 

 

(18

)

 

 

(38

)

 

 

(59

)

Income tax expense

 

$

51

 

 

$

64

 

 

$

30

 

  

Refer to Note 16, Comprehensive Income , for details of the income tax expense or benefit allocated to each component of other comprehensive loss.

 

F-32


The following table outlines the reconciliation of differences between the Federal statutory tax rate and the Company’s effective income tax rate:

 

 

 

2016

 

 

 

2015

 

 

 

2014

 

Federal statutory tax rate

 

 

35.0

%

 

 

35.0

%

 

 

35.0

%

State and local income taxes, net of U.S. federal income tax benefit

 

 

3.1

 

 

 

3.8

 

 

 

4.3

 

Change in valuation allowances

 

 

0.9

 

 

 

2.5

 

 

 

(5.6

)

Foreign tax rate differential

 

 

(1.4

)

 

 

0.8

 

 

 

(3.1

)

International investment tax credit

 

 

(1.6

)

 

 

(1.8

)

 

 

(7.4

)

Domestic manufacturing deduction

 

 

(3.1

)

 

 

(4.4

)

 

 

(6.7

)

Adjustment of uncertain tax positions and interest

 

 

 

 

 

4.4

 

 

 

 

Acquisition-related expenses

 

 

 

 

 

3.0

 

 

 

0.5

 

Impairment charges

 

 

 

 

 

 

 

 

17.9

 

Other

 

 

(0.4

)

 

 

3.2

 

 

 

(0.7

)

Effective income tax rate

 

 

32.5

%

 

 

46.5

%

 

 

34.2

%

 

Included in 2015 is a tax expense of $6 million that was recorded due to the receipt of an unfavorable court decision related to payment of prior year taxes in an international jurisdiction.

 

 

Deferred income taxes

 

The significant deferred tax assets and liabilities at December 31, 2016 and 2015 were as follows:

 

 

 

 

2016

 

 

 

2015

 

Deferred tax assets:

 

 

 

 

 

 

 

 

Pension benefits plan liabilities

 

$

126

 

 

$

19

 

Net operating losses and other tax carryforwards

 

 

106

 

 

 

126

 

Accrued liabilities

 

 

57

 

 

 

31

 

Foreign depreciation

 

 

10

 

 

 

12

 

Other

 

 

6

 

 

 

8

 

Total deferred tax assets

 

 

305

 

 

 

196

 

Valuation allowances

 

 

(87

)

 

 

(106

)

Net deferred tax assets

 

$

218

 

 

$

90

 

 

 

 

 

 

 

 

 

 

Deferred tax liabilities:

 

 

 

 

 

 

 

 

Accelerated depreciation

 

$

(91

)

 

$

(126

)

Other intangible assets

 

 

(56

)

 

 

(62

)

Inventories

 

 

(11

)

 

 

(14

)

Other

 

 

(5

)

 

 

(4

)

Total deferred tax liabilities

 

 

(163

)

 

 

(206

)

 

 

 

 

 

 

 

 

 

Net deferred tax assets (liabilities)

 

$

55

 

 

$

(116

)

 

In the fourth quarter of 2015, the Company adopted Accounting Standards Update No. 2015-17 “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes” (“ASU 2015-17”), which requires all deferred tax liabilities and assets to be classified as noncurrent on the balance sheet. The Company adopted the standard prospectively. Therefore, deferred tax balances above are classified as noncurrent in the consolidated and combined balance sheets as of December 31, 2016 and 2015.

 

Included in 2016 is a deferred tax asset balance related to the Company’s assumption of certain pension obligations and plan assets in single employer plans for the Company’s employees and certain employees and former employees and retirees of RRD.  The Company recorded a deferred tax asset of $139 million on October 1, 2016 for these plans.

 

F-33


Transactions affecting the valuation allowances on deferred tax assets during the y ears ended December 31, 2016, 2015 and 2014 were as follows:

 

 

 

 

2016

 

 

 

2015

 

 

 

2014

 

Balance, beginning of year

 

$

106

 

 

$

111

 

 

$

135

 

Current year expense-net

 

 

1

 

 

 

3

 

 

 

(5

)

Write-offs

 

 

 

 

 

 

 

 

 

Transfer of U.K. entity to parent company

 

 

(7

)

 

 

 

 

 

 

Foreign exchange and other

 

 

(13

)

 

 

(8

)

 

 

(19

)

Balance, end of year

 

$

87

 

 

$

106

 

 

$

111

 

 

As of December 31, 2016, the Company had domestic and foreign net operating loss deferred tax assets and other tax carryforwards of approximately $5 million and $101 million ($6 million and $120 million, respectively, at December 31, 2015), of which $105 million expires between 2017 and 2026. Limitations on the utilization of these tax assets may apply. The Company has provided valuation allowances to reduce the carrying value of certain deferred tax assets, as management has concluded that, based on the weight of available evidence, it is more likely than not that the deferred tax assets will not be fully realized.

 

Deferred income taxes are not provided on the excess of the investment value for financial reporting over the tax basis of investments in those foreign subsidiaries for which such excess is considered to be permanently reinvested in those operations. Undistributed earnings of foreign subsidiaries that are considered indefinitely reinvested outside of the U.S. were approximately $92 million as of December 31, 2016. Upon repatriation of these earnings to the U.S. in the form of dividends or otherwise, the Company may be subject to U.S. income taxes and foreign taxes. The tax cost would depend on income tax laws and circumstances at the time of distribution.

 

Cash payments for income taxes were $14 million, $3 million and $4 million during the years ended December 31, 2016, 2015 and 2014, respectively. Total amounts settled with RRD were $57 million, $88 million, and $86 million for 2016, 2015, and 2014, respectively. Cash refunds for income taxes were $3 million and $5 million during the years ended December 31, 2016 and 2015, respectively.  Cash refunds were de minimis in 2014.

 

 

Uncertain tax positions

 

Changes in the Company’s unrecognized tax benefits at December 31, 2016 and 2015 were as follows:

 

 

2016

 

 

2015

 

Balance, beginning of year

 

$

5

 

 

$

 

Additions for tax positions of prior years

 

 

 

 

 

5

 

Settlements during the year

 

 

(5

)

 

 

 

Foreign exchange and other

 

 

 

 

 

 

Balance, end of year

 

$

 

 

$

5

 

 

There were no uncertain tax positions during the year ended December 31, 2014.

 

The Company classifies interest expense and any related penalties related to income tax uncertainties as a component of income tax expense. The total interest expense, net of tax benefits, related to tax uncertainties recognized in the consolidated and combined statements of income was expense of $0 million, $1 million and $0 million for the years ended December 31, 2016, 2015 and 2014.  No benefits were recognized for the years ended December 31, 2016, 2015, and 2014, from the reversal of accrued penalties. Accrued interest of $2 million related to income tax uncertainties was reported as a component of other noncurrent liabilities in the consolidated and combined balance sheets at December 31, 2015. There was no interest accrued at December 31, 2016. There were no accrued penalties related to income tax uncertainties for years ended December 31, 2016 and 2015.

 

The Company has tax years from 2012 that remain open and subject to examination by the IRS, certain state taxing authorities or certain foreign tax jurisdictions.

 

 

F-34


Note 16.  Comprehensive Income

 

The components of other comprehensive income (loss) and income tax expense allocated to each component for the years ended December 31, 2016, 2015 and 2014 were as follows:

 

 

 

2016

 

 

2015

 

 

2014

 

 

 

Before Tax

Amount

 

 

Income Tax

Expense

 

 

Net of Tax

Amount

 

 

Before Tax

Amount

 

 

Income Tax

Expense

 

 

Net of Tax

Amount

 

 

Before Tax

Amount

 

 

Income Tax

Expense

 

 

Net of Tax

Amount

 

Translation adjustments

 

$

5

 

 

$

 

 

$

5

 

 

$

(28

)

 

$

 

 

$

(28

)

 

$

(33

)

 

$

 

 

$

(33

)

Adjustment for net periodic pension plan cost

 

 

63

 

 

 

28

 

 

 

35

 

 

 

(10

)

 

 

(1

)

 

 

(9

)

 

 

1

 

 

 

 

 

 

1

 

Other comprehensive income (loss)

 

$

68

 

 

$

28

 

 

$

40

 

 

$

(38

)

 

$

(1

)

 

$

(37

)

 

$

(32

)

 

$

 

 

$

(32

)

 

The following table summarizes the change in the component in accumulated other comprehensive loss by component for the years ended December 31, 2016, 2015 and 2014.    

 

 

 

Pension and Other Postretirement Benefits Plan Cost

 

 

Translation Adjustments

 

 

Total

 

Balance at December 31, 2013

 

$

(38

)

 

$

(98

)

 

$

(136

)

Other comprehensive loss before reclassifications

 

 

 

 

 

(33

)

 

 

(33

)

Amounts reclassified from accumulated other comprehensive loss

 

 

1

 

 

 

 

 

 

1

 

Net change in accumulated other comprehensive loss

 

 

1

 

 

 

(33

)

 

 

(32

)

Balance at December 31, 2014

 

$

(37

)

 

$

                (131

)

 

$

                (168

)

Other comprehensive loss before reclassifications

 

 

(10

)

 

 

(28

)

 

 

(38

)

Amounts reclassified from accumulated other comprehensive loss

 

 

1

 

 

 

 

 

 

1

 

Net change in accumulated other comprehensive loss

 

 

(9

)

 

 

(28

)

 

 

(37

)

Balance at December 31, 2015

 

$

(46

)

 

$

(159

)

 

$

(205

)

Other comprehensive income before reclassifications

 

 

29

 

 

 

5

 

 

 

34

 

Amounts reclassified from accumulated other comprehensive loss

 

 

6

 

 

 

 

 

 

6

 

Transfer of pension plan from parent company, net

 

 

(495

)

 

 

 

 

 

(495

)

Transfer of U.K. entity to parent company, net

 

 

44

 

 

 

85

 

 

 

129

 

Net change in accumulated other comprehensive loss

 

 

(416

)

 

 

90

 

 

 

(326

)

Balance at December 31, 2016

 

$

(462

)

 

$

(69

)

 

$

(531

)

 

On October 1, 2016, the other comprehensive loss balances related to the primary qualified and non-qualified pension plans were transferred from RRD to the Company.  Additionally, the other comprehensive loss balance related to the United Kingdom pension plan was transferred from the Company to RRD. Refer to Note 14, Retirement Plans , for further information on the pension plans’ transfers.

 

Reclassifications from accumulated other comprehensive loss for the year ended December 31, 2016, 2015 and 2014 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Classification in the Consolidated and Combined

 

 

2016

 

 

2015

 

 

2014

 

 

Statements of Income

Amortization of pension and other postretirement benefits

     plan cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net actuarial loss

 

$

7

 

 

$

1

 

 

$

1

 

 

(a)

Settlement

 

 

1

 

 

 

 

 

 

 

 

 

Reclassifications before tax

 

$

8

 

 

$

1

 

 

 

1

 

 

 

Income tax expense

 

 

2

 

 

 

 

 

 

 

 

 

Reclassifications, net of tax

 

$

6

 

 

$

1

 

 

$

1

 

 

 

 

 

(a)

These accumulated other comprehensive income components are included in the calculation of net periodic pension benefits plan (income) expense recognized in cost of sales and selling, general and administrative expenses in the consolidated and combined statements of income (see Note 14, Retirement Plans ).

 

 

F-35


Note 17. Stock and Incentive Programs  

 

Prior to the separation, RRD maintained an incentive stock program for the benefit of its officers, directors, and certain employees, including the Company’s employees. A portion of the Company’s employees have participated in RRD’s non-qualified stock options, restricted stock units (“RSUs”) and performance share units (“PSUs”) programs.  Share based compensation expense included expense attributable to the Company based on the award terms previously granted to the Company’s employees and an allocation of compensation expense associated with RRD’s corporate and shared functional employees.  As the share-based compensation plans were RRD’s plans, the amounts were recognized through net parent company investment on the combined balance sheets. In periods after the separation, the Company records share-based compensation expense relating to LSC Communications, RRD and Donnelley Financial awards held by its employees, officers and directors.

 

In connection with the separation, outstanding RRD stock options, RSUs and PSUs previously issued under RRD’s incentive stock program were adjusted and converted into new LSC Communications, RRD, or Donnelley Financial stock-based awards using a formula designed to preserve the intrinsic value and fair value of the awards immediately prior to the separation.

 

As the separation date, the outstanding RRD options related to the 2009, 2010, 2011, and 2012 grants were modified and converted into stock options in all three companies at a conversion rate outlined in the separation and distribution agreement. The outstanding shares related to the 2013 and 2014 RRD RSUs were modified and converted into RSUs in all three companies as outlined in the separation and distribution agreement.  The outstanding shares related to the 2015 and 2016 RRD RSUs were converted into RSUs in the company that the grantees were employed by at the separation date.

 

Modifications were made to the RRD PSUs so that as of the separation date, the performance period for the 2014 and 2015 PSU grants ended.  The applicable performance was measured as of the separation date against revised cumulative free cash flow targets approved by the RRD Board of Directors. The 2014 PSUs converted into RSUs in all three companies in accordance with the separation and distribution agreement. The 2015 PSUs converted into RSUs in the company that the grantees were employed by at the separation date.

 

Total compensation expense related to all share based compensation plans for the Company’s employees, officers and directors was $8 million for the year ended December 31, 2016, which includes $5 million of expense allocated from RRD prior to the separation.  The Company was allocated share-based compensation expense from RRD related to all share-based compensation plans of $6 million each for the years ended December 31, 2015 and 2014.

 

 

General Terms of the Awards

 

The Company’s employees participate in the Company’s 2016 Performance Incentive Plan (the “2016 PIP”). Under the 2016 PIP, the Company may grant cash or bonus awards, stock options, stock appreciation rights, restricted stock awards, RSUs, performance awards or combinations thereof to certain officers, directors and key employees. The Human Resources Committee of the Company’s Board of Directors has discretion to establish the terms and conditions for grants, including the number of shares, vesting and required service or other performance criteria. The maximum term of any award under the 2016 PIP is ten years.

 

Options generally vest over four years or less from the date of grant, upon retirement or upon a change in control. Options generally expire ten years from the date of grant or five years after the date of retirement, whichever is earlier.

 

The rights granted to the recipient of RSUs generally accrue ratably over the restriction or vesting period, which is generally four years. RSUs are subject to forfeiture upon termination of employment prior to vesting, subject in some cases to early vesting upon specified events, including death or permanent disability of the grantee, termination of the grantee’s employment under certain circumstances or a change in control of the Company. Compensation expense is based on the fair market value of the awards on the date of grant expensed ratably over the periods during which restrictions lapse.

 

 

Stock Options

 

There were no options granted during the years ended December 2016, 2015 and 2014.

 

A summary of the Company’s stock option activity for LSC Communications, RRD and Donnelley Financial employees, officers and directors for the period after the separation is presented below.

 

F-36


 

 

Shares Under Option

(thousands)

 

 

Weighted

Average

Exercise

Price

 

 

Weighted

Average

Remaining

Contractual

Term

(years)

 

 

Aggregate

Intrinsic

Value

(millions)

 

Awards converted on October 1, 2016

 

 

299

 

 

$

25.32

 

 

 

 

 

 

 

 

 

Outstanding at December 31, 2016

 

 

299

 

 

 

25.32

 

 

 

3.32

 

 

$

2

 

Vested and expected to vest at December 31,

     2016

 

 

299

 

 

 

25.32

 

 

 

3.32

 

 

 

2

 

Exercisable at December 31, 2016

 

 

299

 

 

$

25.32

 

 

 

3.32

 

 

$

2

 

 

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on December 31, 2016 and October 1, 2016, 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 in-the-money options on December 31, 2016 and October 1, 2016. This amount will change in future periods based on the fair market value of LSC’s stock and the number of options outstanding. Total intrinsic value of options exercised for the year ended December 31, 2016 was de minimis.

 

Compensation expense related to stock options for the years ended December 31, 2016, 2015 and 2014 was de minimis.

 

 

Restricted Stock Units

 

A summary of the Company’s RSU activity for LSC Communications, RRD and Donnelley Financial employees, officers and directors for the period after the separation is presented below.

 

 

 

Shares

(thousands)

 

 

Weighted

Average Grant

Date Fair Value

 

Awards converted on October 1, 2016

 

 

652

 

 

$

28.39

 

Granted

 

 

19

 

 

 

26.26

 

Vested

 

 

(19

)

 

 

26.26

 

Nonvested at December 31, 2016

 

 

652

 

 

 

28.39

 

 

Compensation expense related to LSC Communications, RRD and Donnelley Financial RSUs held by Company employees, officers and directors was $7 million, $4 million and $4 million for the years ended December 31, 2016, 2015 and 2014, respectively. As of December 31, 2016, there was $10 million of unrecognized share-based compensation expense related to approximately 800 thousand RSUs, with a weighted-average grant date fair value of $27.14, that is expected to vest over a weighted average period of 1.7 years. The fair value of these awards was determined based on the Company’s stock price on the grant date reduced by the present value of expected dividends through the vesting period.

 

 

Performance Restricted Stock

 

A summary of performance restricted stock (“PRS”) activity for the period after the separation is presented below.

 

 

Shares

(thousands)

 

 

Weighted

Average Grant

Date Fair Value

 

Awards converted on October 1, 2016

 

 

 

 

$

 

Granted

 

 

434

 

 

 

26.26

 

Nonvested at December 31, 2016

 

 

434

 

 

$

26.26

 

 

As of October 1, 2016, 434,463 shares of PRS were granted to certain executive officers and senior management, payable upon the achievement of certain established performance targets. The performance periods for the shares are October 1, 2016 through September 30, 2017, October 1, 2017 through September 30, 2018 and October 1, 2018 through September 30, 2019.  In addition to being subject to achievement of the performance target, the shares are also subject to time-based vesting and will vest one-third on each anniversary of the grant date.  Both the performance-based vesting and the time-based vesting must be met for the restricted stock to vest.  

 

F-37


The total potential payout for the awards is 434,463 shares. The fair value of these awards was determined on the date of grant based on the Company’s stock price.  These awards are subject to forfeiture upon termination of employment prior to vesting, subject in some cases to early vesting upon specified e vents, including death, permanent disability or retirement of the grantee or change of control of the Company.

Compensation expense for the awards is being recognized based on 100% estimated payout of 434,463 shares. Compensation expense related to PRS for the year ended December 31, 2016 was $1 million. As of December 31, 2016, there was $10 million of unrecognized compensation expense related to PRS, which is expected to be recognized over a weighted average period of 2.8 years.

 

 

Note 18.  Segment Information

 

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

 

 

Print

 

The Print segment produces magazines, catalogs, retail inserts, books, and directories. The segment also provides supply-chain management and certain other print-related services, including mail-list management and sortation, e-book formatting and distribution.  The segment has operations in the U.S., Europe and Mexico.  The Print segment is divided into the magazines, catalog and retail inserts, book, Europe and directories reporting units. The Print segment accounted for approximately 86% of the Company’s consolidated and combined net sales in 2016.

 

 

Office Products

 

The Office Products segment manufactures and sell branded and private label products in five core categories:  filing products, note-taking products, binder products, forms and envelopes.  The Office Products segment accounted for approximately 14% of the Company’s consolidated and combined net sales in 2016.

 

 

Corporate

 

Corporate consists of unallocated selling, general and administrative activities and associated expenses including, in part, executive, legal, finance, communications, certain facility costs and LIFO inventory provisions.  In addition, certain costs and earnings of employee benefit plans, such as pension and other postretirement benefit plan income and share-based compensation, are included in Corporate and not allocated to the operating segments. Prior to the separation, many of these costs were based on allocations from RRD; however, the Company has incurred such costs directly after the separation.  

 

 

Information by Segment

 

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

 

 

 

Net

Sales

 

 

Income (Loss)

from

Operations

 

 

Assets of

Operations

 

 

Depreciation

and

Amortization

 

 

Capital

Expenditures

 

Year ended December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Print

 

$

3,127

 

 

$

141

 

 

$

1,501

 

 

$

154

 

 

 

39

 

Office Products

 

 

527

 

 

 

54

 

 

 

323

 

 

 

15

 

 

 

3

 

Total operating segments

 

 

3,654

 

 

 

195

 

 

 

1,824

 

 

 

169

 

 

 

42

 

Corporate

 

 

 

 

 

(20

)

 

 

128

 

 

 

2

 

 

 

6

 

Total operations

 

$

3,654

 

 

$

175

 

 

$

1,952

 

 

$

171

 

 

$

48

 

 

F-38


 

 

Net

Sales

 

 

Income (Loss)

from

Operations

 

 

Assets of

Operations

 

 

Depreciation

and

Amortization

 

 

Capital

Expenditures

 

Year ended December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Print

 

$

3,181

 

 

$

96

 

 

$

1,647

 

 

$

164

 

 

$

38

 

Office Products

 

 

562

 

 

 

47

 

 

 

324

 

 

 

16

 

 

 

4

 

Total operating segments

 

 

3,743

 

 

 

143

 

 

 

1,971

 

 

 

180

 

 

 

42

 

Corporate

 

 

 

 

 

(8

)

 

 

40

 

 

 

1

 

 

 

 

Total operations

 

$

3,743

 

 

$

135

 

 

$

2,011

 

 

$

181

 

 

$

42

 

 

 

 

Net

Sales

 

 

Income (Loss)

from

Operations

 

 

Assets of

Operations

 

 

Depreciation

and

Amortization

 

 

Capital

Expenditures

 

Year ended December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Print

 

$

3,353

 

 

$

47

 

 

$

1,579

 

 

$

164

 

 

$

55

 

Office Products

 

 

500

 

 

 

40

 

 

331

 

 

 

15

 

 

 

5

 

Total operating segments

 

 

3,853

 

 

 

87

 

 

$

1,910

 

 

 

179

 

 

 

60

 

Corporate

 

 

 

 

 

(12

)

 

 

(41

)

 

 

2

 

 

 

 

Total operations

 

$

3,853

 

 

$

75

 

 

$

1,869

 

 

$

181

 

 

$

60

 

 

 

Corporate assets primarily consisted of the following items at December 31, 2016, 2015 and 2014:

 

 

 

 

2016

 

 

 

2015

 

 

 

2014

 

Receivables, less allowances for doubtful accounts

 

$

54

 

 

$

(8

)

 

$

(5

)

Cash and cash equivalents

 

 

45

 

 

 

 

 

 

1

 

Long-term investments

 

 

19

 

 

 

10

 

 

 

11

 

Property, plant and equipment, net

 

 

15

 

 

 

13

 

 

 

13

 

LIFO reserves

 

 

(58

)

 

 

(67

)

 

 

(74

)

Current and deferred income tax assets, net of valuation

     allowances

 

 

24

 

 

 

83

 

 

 

(1

)

 

Restructuring, impairment and other charges by segment for the year ended December 31, 2016, 2015 and 2014 are described in Note 4, Restructuring, Impairment and Other Charges.      

 

 

Note 19. Geographic Areas

 

The table below presents net sales and long-lived assets by geographic region.

 

 

 

North America (b)

 

 

Europe

 

 

Mexico

 

 

Consolidated

& Combined

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

$

3,286

 

 

$

272

 

 

$

96

 

 

$

3,654

 

Long-lived assets (a)

 

 

651

 

 

 

30

 

 

 

23

 

 

 

704

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

$

3,319

 

 

$

305

 

 

$

119

 

 

$

3,743

 

Long-lived assets (a)

 

 

722

 

 

 

43

 

 

 

21

 

 

 

786

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

$

3,350

 

 

$

381

 

 

$

122

 

 

$

3,853

 

Long-lived assets (a)

 

 

692

 

 

 

61

 

 

 

23

 

 

 

776

 

 

(a)

Includes net property, plant and equipment and other noncurrent assets.

(b)

North America includes the United States and Canada.

  

F-39


 

Note 20.  Related Parties

Prior to the separation, the Company had not historically operated as a stand-alone business.  After the separation, the Company has entered into commercial arrangements with both RRD and Donnelley Financial. Under the terms of the commercial arrangements, RRD continues to provide, among other things, logistics, premedia, production and sales services to LSC Communications.  In addition, LSC Communications continues to provide sales support services to RRD’s Asia and Mexico print and graphics management businesses in order to facilitate the importing of books and related products to the U.S. RRD also provides LSC Communications certain global outsourcing, technical support and other services.  LSC Communications also continues to provide print and bind services for Donnelley Financial.    

Allocations from RRD

Prior to the separation, RRD provided LSC Communications certain services, which included, but were not limited to, information technology, finance, legal, human resources, internal audit, treasury, tax, investor relations and executive oversight. RRD charged the Company for these services based on direct usage, when available, with the remainder allocated on a pro rata basis by revenue, headcount, or other measures.  These allocations were reflected as follows in the consolidated and combined financial statements:

 

 

 

Nine months ended

September 30,

 

 

Year ended

December 31,

 

 

 

2016

 

 

 

2015

 

 

 

2014

 

Costs of goods sold

 

$

67

 

 

$

78

 

 

$

84

 

Selling, general and administrative

 

 

114

 

 

 

158

 

 

 

178

 

Depreciation and amortization

 

 

5

 

 

 

7

 

 

 

8

 

     Total allocations from RRD

 

$

186

 

 

$

243

 

 

$

270

 

The Company considered the expense methodologies and financial results to be reasonable for all periods presented.  However, these allocations may not be indicative of the actual expenses that may have been incurred as an independent public company or the costs LSC Communications may incur in the future.

After the separation, the Company no longer records allocations from RRD. The Company records transactions with RRD as external arms-length transactions in the Company’s consolidated and combined financial statements.

Related Party Receivables and Payables

As of December 31, 2016, the Company had $62 million and $56 million of trade receivables and payables, respectively, with RRD.  The Company also had $3 million and $1 million of trade receivables and payables, respectively, with Donnelley Financial.  As of December 31, 2015, the Company had no trade receivables or payables due from or to RRD or Donnelley Financial.  

In addition, receivables as of December 31, 2016 included a $10 million non-trade receivable owed by RRD that is expected to be paid in 2017.

Related Party Revenues

 

LSC Communications generates a portion of net revenue from sales to RRD’s subsidiaries and Donnelley Financial.  Net revenues from related party sales were $103 million, $64 million, and $63 million for the years ended December 31, 2016, 2015 and 2014, respectively.  These amounts are included in the consolidated and combined statements of income.

 

 

Related Party Purchases

 

LSC Communications utilizes RRD for freight, logistics and premedia services.  Included in the consolidated and combined financial statements were costs of sales related to freight, logistics and premedia services purchased from RRD of $208 million, $216 million and $244 million for the years ended December 31, 2016, 2015 and 2014, respectively. Prior to the separation, related party receivables and payables with RRD were reflected within net parent company investment.

 

F-40


 

Note 21:  New Accounting Pronouncements  

 

In August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2016-15 “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments” (“ASU2016-15”), which provided guidance on eight specific cash flow classification issues to reduce existing diversity in practice. The standard becomes effective in the first quarter of 2018.  Early adoption of ASU 2016-15 is permitted; however the Company plans to adopt the standard in the first quarter of 2018. The Company does not expect a significant impact to presentation on its Consolidated Combined Statements of Cash Flows.  

 

In March 2016, the FASB issued Accounting Standards Update No. 2016-09 “Stock Compensation (Topic 718) – Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”) which simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures and statutory withholding requirements, as well as the classification of share-based payment transactions on the statement of cash flows. The standard becomes effective in the first quarter of 2017.  As early adoption of ASU 2016-09 is permitted, the Company adopted the standard in the fourth quarter of 2016. The election to early adopt ASU 2016-09 requires any adjustments as of January 1, 2016, the beginning of the annual period that includes the interim period of adoption, to be reflected. The requirements of ASU 2016-09 had no impact to any of the periods presented.    

 

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

 

In May 2014, the FASB issued Accounting Standards Update No. 2014-09 “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”), which outlines a single comprehensive model for entities to use in accounting for revenue using a five-step process that supersedes virtually all existing revenue guidance. ASU 2014-09 also requires additional quantitative and qualitative disclosures. In August 2015, the FASB issued Accounting Standards Update No. 2015-14 “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date” (“ASU 2015-14”), which defers the effective date of ASU 2014-09 to January 1, 2018. Early adoption of ASU 2014-09 is permitted in the first quarter of 2017.    

 

The Company plans to adopt the standard in the first quarter of 2018. The standard allows the option of either a full retrospective adoption, meaning the standard is applied to all periods presented, or a modified retrospective adoption, meaning the standard is applied only to the most current period. The Company currently anticipates adopting the standard using the modified retrospective approach.

 

While the Company is continuing to assess all potential impacts of the standard, the Company currently believes the most significant impacts relate to:

 

 

Whether the accounting for the revenue of customized products is over time or at a point in time.  Currently, the Company’s Print operating segment produces a substantial amount of customized product.  Under current revenue recognition guidance, revenue is recognized when the products are completed and shipped to the customer (dependent upon specific shipping terms).  

 

The Company is currently evaluating whether, under the new guidance, revenue would be recognized over the time the goods are produced and not necessarily dependent upon shipment to the customer.  Should the Company conclude that revenue should be recognized over time, rather than at a point in time under current guidance, this could have a material impact on the timing of revenue recognition and might require significant changes in internal processes and controls. However, the Company anticipates that this would not impact the timing of cash flows, given that invoicing and payment thereof is usually associated with the delivery of product.  

 

 

The accounting for inventory billed but not yet shipped.  Under current guidance, the Company defers revenue for inventory billed but not yet shipped.  Under the new standard, in certain situations the Company may be able to recognize revenue for inventory billed but not yet shipped, which could accelerate the timing, but not the total amount, of revenue recognized and would not impact the timing of cash flows, given that invoicing and payment thereof is usually associated with the delivery of product.

 

Due to the complexity of certain of the Company’s contracts, the actual revenue recognition treatment required under the new standard will be dependent on contract specific terms. The Company anticipates it will be able to complete its analysis of the above items, implement any system and process changes that might be necessary and educate the appropriate employees with respect to the new standard in order to effectively adopt the standard beginning in the first quarter of 2018.

  

 

F-41


 

UNAUDITED INTERIM FINANCIAL INFORMATION

(tabular amounts in millions, except per share data)

 

 

 

 

 

First

Quarter

 

 

Second

Quarter

 

 

Third

Quarter

 

 

Fourth

Quarter

 

 

Full Year

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

880

 

 

$

906

 

 

$

949

 

 

$

919

 

 

$

3,654

 

Cost of sales

 

722

 

 

745

 

 

783

 

 

 

781

 

 

 

3,031

 

Income from operations

 

47

 

 

44

 

 

57

 

 

 

27

 

 

 

175

 

Net income

 

31

 

 

28

 

 

38

 

 

 

9

 

 

 

106

 

Net income per basic share (a)

 

 

0.95

 

 

 

0.87

 

 

 

1.17

 

 

 

0.26

 

 

 

3.25

 

Net income per diluted share (a)

 

 

0.95

 

 

 

0.87

 

 

 

1.17

 

 

 

0.26

 

 

 

3.23

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

861

 

 

$

879

 

 

$

999

 

 

$

1,004

 

 

$

3,743

 

Cost of sales

 

723

 

 

733

 

 

809

 

 

 

825

 

 

 

3,090

 

Income from operations

 

15

 

 

18

 

 

44

 

 

 

58

 

 

 

135

 

Net income

 

9

 

 

12

 

 

15

 

 

 

38

 

 

 

74

 

Net income per basic share (a)

 

 

0.28

 

 

 

0.36

 

 

 

0.46

 

 

 

1.17

 

 

 

2.27

 

Net income per diluted share (a)

 

 

0.28

 

 

 

0.36

 

 

 

0.46

 

 

 

1.17

 

 

 

2.27

 

 

 

(a)

On October 1, 2016, RRD distributed approximately 26.2 million shares of LSC Communications common stock to RRD shareholders.  RRD retained an additional 6.2 million shares.   Refer to Note 1, Overview and Basis of Presentation , to the consolidated and combined financial statements for more information. For periods shown above prior to the separation, basic and diluted earnings per share and the average number of shares outstanding were retrospectively restated for the number of LSC Communications shares outstanding immediately following the separation, 32.4 million shares. As basic and diluted EPS were computed independently for each of the periods presented, the sum of the quarterly EPS amounts do not equal the total for 2016.

 

Reflects results of acquired businesses from the relevant acquisition dates.  

 

 

Includes the following significant items:

 

 

Pre-tax

 

 

After-tax

 

Year ended December 31, 2016

 

First Quarter

 

 

Second Quarter

 

 

Third Quarter

 

 

Fourth Quarter

 

 

Full Year

 

 

First Quarter

 

 

Second Quarter

 

 

Third Quarter

 

 

Fourth Quarter

 

 

Full Year

 

Spinoff-related transaction

     expenses

 

$

 

 

$

 

 

$

1

 

 

$

4

 

 

$

5

 

 

$

 

 

$

 

 

$

1

 

 

$

2

 

 

$

3

 

Pension settlement charge

 

 

 

 

 

1

 

 

 

 

 

 

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restructuring, impairment and

     other charges-net

 

 

3

 

 

 

5

 

 

 

3

 

 

 

7

 

 

 

18

 

 

 

2

 

 

 

3

 

 

 

3

 

 

 

4

 

 

 

12

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pre-tax

 

 

After-tax

 

Year ended December 31, 2015

 

First Quarter

 

 

Second Quarter

 

 

Third Quarter

 

 

Fourth Quarter

 

 

Full Year

 

 

First Quarter

 

 

Second Quarter

 

 

Third Quarter

 

 

Fourth Quarter

 

 

Full Year

 

Acquisition-related expenses

 

$

11

 

 

$

3

 

 

$

 

 

$

 

 

$

14

 

 

$

10

 

 

 

3

 

 

$

 

 

$

 

 

$

13

 

Purchase accounting inventory

     adjustments

 

 

 

 

 

3

 

 

 

7

 

 

 

1

 

 

 

11

 

 

 

 

 

 

2

 

 

 

4

 

 

 

1

 

 

 

7

 

Restructuring, impairment and

     other charges-net

 

6

 

 

21

 

 

25

 

 

5

 

 

57

 

 

1

 

 

14

 

 

20

 

 

4

 

 

 

39

 

 

 

 

F-42


 

 

INDEX TO EXHIBITS

 

2.1

Separation and Distribution Agreement, dated as of September 14, 2016, by and among R. R. Donnelley & Sons Company, LSC Communications, Inc. and Donnelley Financial Solutions, Inc. (the “Separation Agreement”)  (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on October 3, 2016)

 

2.2

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

 

2.3

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

 

2.4

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

 

2.5

Patent Assignment and License Agreement, dated as of September 27, 2016, between LSC Communications US, LLC and R. R. Donnelley & Sons Company (incorporated by reference to Exhibit 2.5 to the Company’s Current Report on Form 8-K filed on October 3, 2016)

 

2.6

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

 

2.7

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

 

2.8

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

 

3.1

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

 

3.2

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

 

4.1

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

 

4.2

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

 

10.1    

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

 

10.2

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

 

E-1


 

10.3

LSC Communications, Inc. Nonqualified Deferred Compensation Plan, dated as of September 22, 2016 (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on October 3, 2016)*

 

10.4

LSC Unfunded Supplemental Pension Plan effective October 1, 2016 (filed herewith)*

 

10.5

Supplemental Executive Retirement Plan-B for Designated Executives effective January 1, 2001 as amended effective December 31, 2004, January 1, 2005 and September 30, 2016 (the “SERP-B”) (filed herewith)*

 

10.6

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

 

10.7

Assignment of Employment Agreement and Acceptance of Assignment, dated as of September 29, 2016,  between LSC Communications, Inc., R. R. Donnelley & Sons Company and Andrew B. Coxhead (incorporated by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K filed on October 3, 2016)*

 

10.8

Assignment of Employment Agreement and Acceptance of Assignment, dated as of September 29, 2016,  between

LSC Communications, Inc., R. R. Donnelley & Sons Company and Suzanne S. Bettman (incorporated by reference to Exhibit 10.7 to the Company’s Current Report on Form 8-K filed on October 3, 2016)*

 

10.9

Assignment of Employment Agreement and Acceptance of Assignment, dated as of September 30, 2016, between LSC Communications, Inc., R. R. Donnelley & Sons Company and Richard T. Lane (incorporated by reference to Exhibit 10.8 to the Company’s Current Report on Form 8-K filed on October 3, 2016)*

 

10.10

Employment Agreement, dated as of July 26, 2016, between Kent A. Hansen and LSC Communications US, LLC (filed herewith)*

 

10.11

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

 

10.12

Form of Director Restricted Stock Unit Award as amended (for 2004-2007) converted from R. R. Donnelley & Sons Company to the Company pursuant to the Separation Agreement (filed herewith)*

 

10.13

Form of Director Restricted Stock Unit Award (for 2014-2016) converted from R. R. Donnelley & Sons Company to the Company pursuant to the Separation Agreement (filed herewith)*

 

10.14

Non-Employee Director Compensation Plan (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on October 3, 2016)*  

 

10.15

Form of Director Restricted Stock Unit Award Agreement (filed herewith)*

 

10.16

Policy on Retirement Benefits, Phantom Stock Grants and Stock Options for Directors as amended to March 2000 (filed herewith)*

 

10.17

Form of Option Agreement (for 2009 to 2012) converted from R. R. Donnelley & Sons Company to the Company pursuant to the Separation Agreement (filed herewith)*

 

10.18

Form of Cash Retention Award Agreement (for 2013) converted from R. R. Donnelley & Sons Company to the Company pursuant to the Separation Agreement (filed herewith)*

 

10.19

Form of Cash Retention Award Agreement (for 2014) converted from R. R. Donnelley & Sons Company to the Company pursuant to the Separation Agreement (filed herewith)*

 

10.20

Form of Stock Unit Award Agreement (for 2013 and 2014) converted from R. R. Donnelley & Sons Company to the Company pursuant to the Separation Agreement (filed herewith)*

 

10.21

Form of Stock Unit Award Agreement (for 2015) converted from R. R. Donnelley & Sons Company to the Company pursuant to the Separation Agreement (filed herewith)*

E-2


 

 

10.22

Form of Stock Unit Award Agreement (for 2016) converted from R. R. Donnelley & Sons Company to the Company pursuant to the Separation Agreement (filed herewith)*

 

10.23

Form of Performance Unit Award Agreement (for 2014) converted from R. R. Donnelley & Sons Company to the Company pursuant to the Separation Agreement (filed herewith)*

 

10.24

Form of Performance Unit Award Agreement (for 2015) converted from R. R. Donnelley & Sons Company to the Company pursuant to the Separation Agreement (filed herewith)*

 

10.25

Form of Founder’s Award (Restricted Stock) Agreement (filed herewith)*

 

10.26

Written Description of 2016 Annual Incentive Plan of the Company with respect to the period from October 1, 2016 to December 31, 2016 (filed herewith)*

 

10.27

LSC Communications Annual Incentive Plan as amended and restated (filed herewith)*

 

10.28

Form of Amendment to Cash Retention Awards (filed herewith)*

 

12.1

Statements of Computation of Ratio of Earnings to Fixed Charges (filed herewith)  

 

14.1

Code of Ethics for the Chief Executive Officer and Senior Financial Officers (filed herewith)

 

21.1

Subsidiaries of the Company (filed herewith)

 

23.1

Consent of Deloitte & Touche LLP (filed herewith)

 

24.1

Powers of Attorney (filed herewith)

 

31.1

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

 

31.2

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

 

32.1

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

 

32.2

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

 

101.INS

XBRL Instance Document

 

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

 

E-3

 

Exhibit 10.4

LSC COMMUNICATIONS US, LLC

ADOPTION OF THE

 

LSC UNFUNDED SUPPLEMENTAL PENSION PLAN

BY THE

SOLE MEMBER OF

LSC COMMUNICATIONS US, LLC

WHEREAS , pursuant to the applicable laws of Delaware and the limited liability company operating agreement of LSC Communications US, LLC, a Delaware limited liability company (the “ Company ”), the undersigned, being the sole member (the “ Member ”) of the Company, has the authority and discretion to take action on behalf the Company; and

WHEREAS , the Member, acting as the Company, desires to adopt the LSC Unfunded Supplemental Pension Plan (the “ Plan ”), in the form of the document attached hereto, such Plan document to be generally effective 12:00 a.m., Eastern Time, October 1, 2016.

NOW, THEREFORE , the Member, acting as the Company, hereby adopts the LSC Unfunded Supplemental Pension Plan, in the form of the document attached hereto, such Plan document to be effective as of the date specified in the preceding recital.

Executed this 30 th day of September, 2016, by the undersigned.

 

 

R. R. DONNELLEY & SONS COMPANY

By: /s/ Anne N. Pease

 

Name:       Anne N. Pease

Title:         Vice President, Benefits

 

 

Being the sole member of LSC Communications US, LLC

 

 

 


 

LSC

UNFUNDED SUPPLEMENTAL

PENSION PLAN

(effective October 1, 2016)

 

 

 

G:\Legal - Benefits\LSC\Benefit Plans\SERP\LSC UnfSupPenPln\16-10-1\Plan\Plan Doc\16-10-1.LSC UnfSupPenPln.docx


Table of Contents

 

Page

 

Section 1 DEFINITIONS

1

 

Section 2 SUPPLEMENTAL BENEFIT

6

 

Section 3 TIME OF PAYMENT

6

 

 

(a)

In General6

 

 

(b)

Designated Age Elections6

 

 

(c)

Post-2009 Restatement Merged Plan Benefits7

 

Section 4 FORM OF PAYMENT

7

 

 

(a)

In General7

 

 

(b)

Optional Forms of Payment7

 

 

(c)

Post-2009 Restatement Merged Plan Benefits8

 

Section 5 ADDITIONAL PAYMENT PROVISIONS

8

 

 

(a)

Commenced Benefits and Existing Elections8

 

 

(b)

Small Amount Cash-outs8

 

 

(c)

Change In Control8

 

 

(d)

Tax Matters8

 

 

(e)

6-Month Delay Following Separation From Service9

 

 

(f)

Age 65 Distributions for Certain Members9

 

 

(g)

Additional Supplemental Benefits9

 

 

(h)

Post-2009 Restatement Merged Plans10

 

Section 6 PRE-RETIREMENT SURVIVOR BENEFITS

11

 

 

(a)

In General11

 

 

(b)

Predecessor Plans11

 

 

(c)

Additional Benefits11

 

 

(d)

Small Amount Cash-out11

 

 

(e)

Reductions for Prior Distributions12

 

 

(f)

Post-2009 Restatement Merged Plans12

 

Section 7 AMENDMENT AND TERMINATION

12

 

Section 8 APPLICATION OF ERISA

12

 

Section 9 ADMINISTRATION

12

 

Section 10 COMPANY ACTION

12

 

-i-


 

Section 11 NONASSIGNMENT OF BENEFITS

13

 

Section 12 NON-DUPLICATION OF BENEFITS

13

 

Section 13 NO GUARANTY OF EMPLOYMENT

13

 

Section 14 TRUST

13

 

 

(a)

Funding13

 

 

(b)

Taxation and Gross-ups14

 

Section 15 MISCELLANEOUS

14

 

 

(a)

Applicable Law14

 

 

(b)

Expenses14

 

 

(c)

Successors and Assigns14

 

Section 16 CLAIMS AND APPEALS PROCEDURES

14

 

 

(a)

Authority to Submit Claims14

 

 

(b)

Procedure for Filing a Claim14

 

 

(c)

Initial Claim Review15

 

 

(d)

Benefit Determination on Claim15

 

 

(e)

Manner and Content of Notification of Adverse Benefit Determination on a Claim15

 

 

(f)

Authority to Submit an Appeal15

 

 

(g)

Procedure for Filing for a Request for Review of an Adverse Benefit Determination15

 

 

(h)

Review Procedures for Appeals16

 

 

(i)

Timing and Notification of Benefit Determination on Review16

 

 

(j)

Manner and Content of Notification of Adverse Benefit Determination on Appeal17

 

 

(k)

Collectively Bargained Benefits17

 

 

(l)

Limitation on Actions17

 

 

(m)

Failure to Exhaust Administrative Remedies17

 

Section 17 DELIVERY AND RECEIPT

18

 

EXHIBIT A QUALIFIED PLANS

EXHIBIT B ADDITIONAL BENEFITS

EXHIBIT C PREDECESSOR PLANS

EXHIBIT D POST-2009 RESTATEMENT MERGED PLANS

EXHIBIT E MEMBERS OF THE PLAN

 

-ii-


 

LSC

UNFUNDED SUPPLEMENTAL

PENSION PLAN

(effective October 1, 2016)

 

INTRODUCTION

This retirement plan is established on October 1, 2016 as a spin-off from the RR Donnelley Unfunded Supplemental Pension Plan (formerly known as the R.R. Donnelley & Sons Company Unfunded Supplemental Benefit Plan), which included a merger of the Predecessor Plans (each of which was sponsored by an Affiliate) with and into the RR Donnelley Unfunded Supplemental Pension Plan effective January 1, 2009.  The spin-off of benefit obligations is occurring in connection with the distribution by R. R. Donnelley & Sons Company to its shareholders of the shares of common stock of Donnelley Financial Solutions, Inc. and LSC Communications, Inc., both of which are prior to such distribution wholly-owned subsidiaries of R. R. Donnelley & Sons Company.  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.  Prior to January 1, 2009, 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, had not commenced, and the rights of such Member’s Spouse or Beneficiary were determined pursuant to the terms of the January 1, 2009 restatement.  From and after the Effective Date, the terms of this October 1, 2016 restatement shall govern the rights of Members and their Spouses and Beneficiaries.

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 LCS Pension Plan, 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 individual’s benefit, if any, described on Exhibit B hereto.  

-1-


 

(3) Additional Supplemental Benefit .  The Supplemental Benefit to which a Reemployed Member is entitled that is attributable to service s rendered after he or she becomes a Reemployed Member.

(4) 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 individual’s eligibility to participate in this Plan.

(5) 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 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.  With respect to periods of time prior to the Effective Date, the term “Affiliate” refers to entities that were Affiliates at the relevant time.

(6) Appeal has the meaning assigned to such term in Section 16(f).

(7) 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 Member’s Spouse and (ii) not more than 30 years younger than such Member.

(8) Benefit .  A benefit provided by the Plan.

(9) Benefit Commencement Date .  The first day of the month that begins coincident with, or immediately following, a Member’s Payment Event.

(10) Benefit Determination .  The Benefits Committee’s decision with respect to a Claim or an Appeal.

(11) Benefits Committee .  The committee created and organized pursuant to the provisions of Section 9.

(12) 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 Company’s assets change ownership in connection therewith.

(13) 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 Plan’s 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.

(14) Claimant has the meaning assigned to such term in Section 16(a).

-2-


 

(15) Code .  T he 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.

(16) Code Limitations .  The limitations set forth in sections 401(a)(17) and 415 of the Code.

(17) Company .  LSC Communications US, LLC, a Delaware limited liability company, and any company which is substituted for such company as described in Section 14.

(18) Delivered has the meaning set forth in Section 17 and Delivery means Delivery pursuant to, and subject to, Section 17.

(19) Designated Age .  Age 55, or such other age as may be elected by a Member pursuant to Section 3(b).

(20) Effective Date .  12:00 a.m., Eastern Time, October 1, 2016, the time and date as of which the Plan is established by the Company pursuant to the spinoff from the RR Donnelley Unfunded Supplemental Pension Plan of the benefit obligations thereunder with regard to certain members and their beneficiaries of the RR Donnelley Unfunded Supplemental Pension Plan.  With respect to an entity that becomes an Employer after the Effective Date, the Plan will not be effective as to such entity until the date as of which such entity so becomes an Employer.

(21) 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.  

(22) 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.

(23) Initial Payment Date .  The later to occur of (i) a Member’s 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.  

(24) Member .  An individual who is entitled to a Supplemental Benefit or a Post-2009 Restatement Merged Plan Benefit.  As of the Effective Date, an individual shall be a Member only if such individual is identified as a Member on Exhibit E.

(25) 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

-3-


 

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 .

(26) Notice , Notification or Notify means the Delivery or furnishing of information in a manner that satisfies applicable provisions of Section 17.

(27) Original Supplemental Benefit .  With respect to a Reemployed Member, the Supplemental Benefit attributable to services rendered prior to becoming a Reemployed Member.

(28) 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 January 1, 2009 and whose benefits under a Qualified Plan did not commence prior to January 1, 2009, January 1, 2009.

(29) Plan .  The LSC Unfunded Supplemental Pension Plan as herein set forth, as amended from time to time.

(30) Plan Year .  The calendar year.

(31) Post-2009 Restatement Merged Plan .  A plan or arrangement that is merged into the Plan after January 1, 2009.  Exhibit D shall be updated from time to time by the Company to reflect any plan or arrangement that is merged into the Plan after January 1, 2009, but failure to so update Exhibit D shall not affect the effectiveness of any such merger.  Certain of the plan documents in effect immediately prior to such a merger for the plans or arrangements that are Post-2009 Restatement Merged Plans are attached to Exhibit D as supplements thereto.

(32) Post-2009 Restatement Merged Plan Benefit .  An individual’s benefit, if any, under a Post-2009 Restatement Merged Plan.

(33) Predecessor Benefit .  An individual’s benefit, if any, under a Predecessor Plan.

(34) Predecessor Plan .  A plan or arrangement listed on Exhibit C.  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.

(35) Qualified Plan .  A plan listed on Exhibit A hereto, effective as of the date indicated on Exhibit A.  

(36) Received has the meaning set forth in Section 17 and Receipt means Receipt pursuant to, and subject to, Section 17.

(37) 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.

(38) Restored Benefit .  With respect to an individual whose retirement benefit payable under a Qualified Plan (including benefits payable pursuant to a supplement thereto) is

-4-


 

less than the retirement benefit that would be payable under such Qualified Plan without giving ef fect 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.

(39) 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.

(40) Separation From Service .  An employee’s Separation From Service with the Employers, as described in Treasury Regulation § 1.409A-1(h).

(41) Spouse .  With respect to a Member, a person who is legally married to the Member under the laws of any domestic or foreign jurisdiction that has the legal authority to sanction marriages, and “marriage” and similar terms shall mean the legal union between the Member and a person who thereby became the Spouse of the Member.

(42) Supplemental Benefit .  The sum of an individual’s 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.  For the avoidance of doubt, a Member’s Supplemental Benefit shall not include his or her Post-2009 Restatement Merged Plan Benefit.

(43)

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 Effective Date, allocated to the Treasurer.  In the event of the temporary absence of the Company’s 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.

(44)

Vice President .  The most recently elected Senior Vice President, Compensation and Benefits, 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 Effective Date, allocated to the Vice President, Benefits.  In the event of the temporary absence of the Company’s 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.

-5-


 

Section 2
SUPPLEMENTAL BENEFIT

A Member’s Supplemental Benefit shall be determined as of the Member’s 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 Member’s Supplemental Benefit shall begin on the Member’s 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.  

(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.

-6-


 

(c) Post-2009 Restatement Merged Plan Benefits

.  The payment of a Member’s Post-2009 Restatement Merged Plan Benefit shall begin at the time provided in the applicable Post-2009 Restatement Merged Plan.

Section 4
FORM OF PAYMENT

(a) In General

.  Subject to Sections 4(b) and 5, a Member’s Supplemental Benefit shall be paid in the form of:

(i)   with respect to a Member who does not have a Spouse on the Member’s Benefit Commencement Date, a single life annuity; and

(ii)   with respect to a Member who has a Spouse on the Member’s Benefit Commencement Date, a joint and 50% survivor annuity (with any survivor’s benefit payable to the Member’s Spouse).

(b) Optional Forms of Payment

.  

(i)   Single Members .  A Member who does not have a Spouse on the Member’s 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 survivor’s benefit payable to the Member’s Beneficiary), or (B) a joint and 100% survivor annuity (with any survivor’s benefit payable to the Member’s 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 Member’s 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 survivor’s benefit payable to the Member’s Spouse), (B) a joint and 100% survivor annuity (with any survivor’s benefit payable to the Member’s Beneficiary), (C) a joint and 50% survivor annuity (with any survivor’s benefit payable to the Member’s 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.  

 

(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 Member’s Spouse has consented to such election, to the satisfaction of the Company, or (2) it is established to the satisfaction of the

-7-


 

 

Company that such consent cannot be obtained because the Member’s Spouse cannot be located.

(c) Post-2009 Restatement Merged Plan Benefits

.  A Member’s Post-2009 Restatement Merged Plan Benefit shall be paid in the form provided in the applicable Post-2009 Restatement Merged Plan.  

Section 5
ADDITIONAL PAYMENT PROVISIONS

(a) Commenced Benefits and Existing Elections

.  If a Member’s 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.  If a Member’s benefit under a Post-2009 Restatement Merged Plan commenced prior to the date on which such plan was merged with the Plan, then the payments of such benefit shall continue pursuant to the terms under which the payments of such benefit commenced.

(b) Small Amount Cash-outs

.  Notwithstanding anything herein to the contrary, if at any time following a Member’s Separation From Service the Company determines that the aggregate single sum amount that is the Actuarial Equivalent of the Member’s 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 Member’s Separation From Service, and (ii) the first day of the calendar month following the date the Member’s 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 Member’s 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 Member’s participation in the Plan results in the imposition of any employment taxes, then the Company or the Member’s Employer may remit any required employment taxes, and related income tax withholding, to the taxing authority and the Member’s Supplemental Benefit may be actuarially reduced to reflect such remittance.   

(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

-8-


 

included in income, and the Member’s Supplemental Benefit may be actuarially reduce d 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 Member’s Benefit be made before the six-month anniversary of the Member’s Separation From Service.  

(ii)   If a Member’s 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 Member’s 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.

(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.  

-9-


 

(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 Member’s 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 Member’s 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 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 Member’s 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.  

(h) Post-2009 Restatement Merged Plans

.  The amount, time and manner of payment of the benefit provided under the Plan with respect to any Post-2009 Restatement Merged Plan Benefit shall be determined in accordance with the provisions of the applicable Post-2009 Restatement Merged Plan.  Administrative, plan governance or other provisions of the Post-2009 Restatement Merged Plan that do not affect the amount, time or form of benefits will not have any force or effect.  Exhibit D may set forth any additional terms applicable to a Post-2009 Restatement Merged Plan Benefit.  

Section 6
PRE-RETIREMENT SURVIVOR BENEFITS

(a) In General

.  If a Member dies prior to his or her Benefit Commencement Date and such Member’s 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 Member’s 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

-10-


 

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.

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 Member’s 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 Member’s 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 Member’s 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 Member’s 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 Member’s death, and (ii) the first day of the calendar month following the date the such individual’s 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 individual’s 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.

(f) Post-2009 Restatement Merged Plans

.  Notwithstanding anything herein to the contrary, with respect to a Post-2009 Restatement Merged Plan Benefit, the terms of any survivor benefit and any other terms applicable in the event of a Member’s death shall be determined in accordance with the terms of the applicable Post-2009 Restatement Merged Plan.

Section 7
AMENDMENT AND TERMINATION

This Plan shall be subject to the same reserved powers of amendment and termination as the LSC Pension Plan (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.

-11-


 

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 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 LSC Pension Plan.

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 Company’s 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 assi gned, 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).

-12-


 

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 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.

-13-


 

(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.

Section 16
CLAIMS AND APPEALS PROCEDURES

(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 Plan’s Claims and Appeals procedures within the past 24 months.

(d) Benefit Determination on Claim

.

(i)   The Benefits Committee will make a Benefit Determinati on 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 Ben efits 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.

-14-


 

(e) Manner and Content of Notification of Adverse Benefit Determination on a Claim

.

(i)   The Benefits Committe e 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:

 

(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 Plan’s review procedures and the time limits applicable to such procedures, including a statement describing the Claimant’s 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 Benefit s 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 Commit tee 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

-15-


 

submitted by the Claimant without r egard 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 Plan’s Claims and Appeals procedures within the past 24 months.

(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 exten sion 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 Committee’s 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 pro vide 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;

-16-


 

 

(III)

A statement that the Claimant is entitled to receive, upon request and free of charge, reasonable access to and copies of all Relevant D ocuments; and

 

(IV)

A statement describing the Claimant’s 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

(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 LSC Pension Plan 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.

 

-17-


 

EXHIBIT A

QUALIFIED PLANS

 

Name of Plan

Effective Date of becoming a Qualified Plan

LSC Pension Plan

Inception of Plan

 

 

-A1-


 

EXHIBIT B

ADDITIONAL BENEFITS

 

PART I—BENEFITS 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 1 (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 Member’s 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 individual’s 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 individual’s compensation used to determine the amount of

 

1  

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 was merged into, and became a component plan of, the R.R. Donnelley & Sons Company Nonqualified Deferred Compensation Plan (the "NQDC") on January 1, 2009.  On October 1, 2016 this component plan of the NQDC was transferred to and made a part of the Donnelley Financial Deferred Compensation Plan which was sponsored by Donnelley Financial, LLC and which was transferred out of the R. R. Donnelley & Sons Company controlled group when Donnelley Financial Solutions, Inc., the parent company of Donnelley Financial, LLC, was spun off to the shareholders of R. R. Donnelley & Sons Company on October 1, 2016.  

-B-


 

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 individual’s Restored Benefit.

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

-B-


 

engaged in by the Company directly through its Global Softwa re 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 when such person is not so employed, but excluding any period of employment with any company prior to the Company’s acquisition thereof or assets relating thereto.

PART II—BENEFITS NOT INCLUDED IN §6(A) PRE-RETIREMENT SURVIVOR BENEFITS

 

-B-


 

 

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.

 

 

-C1-


 

EXHIBIT D

POST-2009 RESTATEMENT MERGED PLANS

 

1. Esselte Programs .  The following formerly existing Esselte Corporation nonqualified deferred compensation plans and agreements providing for benefits in the form of an annuity which, upon their merger, became programs under the Plan and which are set forth in their entirety as Appendices 1, 2, 3, and 4 to Exhibit D :

a. Esselte Corporation Statutory Excess Plan;

b. Esselte Corporation Supplemental Executive Retirement Plan;

c. Esselte Corporation Pension Agreement for Robert K. Scribner; and

d. Agreement Providing Supplemental Pension Benefits for Richard B. Stein.

 

 

-D1-


APPENDIX 1 TO EXHIBIT D


TO THE
LSC UNFUNDED SUPPLEMENTAL PENSION PLAN

 

 

[Esselte Corporation Statutory Excess Plan]


 


APPENDIX 2 TO EXHIBIT D



TO THE
LSC UNFUNDED SUPPLEMENTAL PENSION PLAN

 

 

[Esselte Corporation Supplemental Executive Retirement Plan]


 


APPENDIX 3 TO EXHIBIT D


TO THE
LSC UNFUNDED SUPPLEMENTAL PENSION PLAN

 

 

[Esselte Corporation Pension Agreement for Robert K. Scribner]

 


APPENDIX 4 TO EXHIBIT D


TO THE
LSC UNFUNDED SUPPLEMENTAL PENSION PLAN

 

 

[Agreement Providing Supplemental Pension Benefits for Richard B. Stein]

 


 


EXHIBIT E

MEMBERS OF THE PLAN

An individual shall be a Member in the Plan on or after the Effective Date if and only if such individual is identified on this Exhibit E (1) as an individual who was a “Member” in the RR Donnelley Unfunded Supplemental Pension Plan immediately prior to the Effective Date (a “Legacy RR Donnelley Member”), and (2) as an individual with regard to whom benefit obligations of RR Donnelley Unfunded Supplemental Pension Plan are as of the Effective Date spun off from the RR Donnelley Unfunded Supplemental Pension Plan to the Plan (such a Legacy RR Donnelley Member being an “LSC Unfunded Supplemental Pension Plan Member”).

 

The schedule accompanying this Exhibit E identifies all individuals who are LSC Unfunded Supplemental Pension Plan Members.

Any individual who is not identified on the accompanying schedule but who is determined by the Benefits Committee to be identified on the official records of the RR Donnelley Unfunded Supplemental Pension Plan as a “Member” in the RR Donnelley Unfunded Supplemental Pension Plan immediately prior to the Effective Date, and who is in a group of “Participants” identified in the following table with regard to whom qualified retirement benefit obligations of a component plan of the Bowne Pension Plan are as of the Effective Date spun off from the Bowne Pension Plan to the LSC Pension Plan is hereby identified on this Exhibit E as an LSC Unfunded Supplemental Pension Plan Member.

 

Note:  Certain capitalized terms used in the following table are defined immediately after the table.

 

Each Individual who is in the group of such “Participants” identified below:

… as of the Effective Date has all of his or her benefit obligations of the Component Plans of the Bowne Plan spun off to the LSC Plan or to the DFS Plan, or retained by the Bowne Plan, as indicated below:

A

a “Participant” in the R.R. Donnelley Printing Companies Component Plan

spun off to the LSC Plan

B1

other than individuals described in A above, an Employee of RR Donnelley

retained by the Bowne Plan

B2

other than individuals described in A above, an Employee of LSC

spun off to the LSC Plan

B3

other than individuals described in A above, an Employee of DFS

spun off to the DFS Plan

C1

Other than individuals described in A or any B above, and other than  an individual described in E1 below, a “Participant” in the Moore Wallace Component Plan whose benefit under that Component Plan is in pay status on August 1, 2016 with an Benefit Commencement Date before that date

retained by the Bowne Plan

 


C2

Other than individuals described in A or any B above, a “Participant” in the Bowne Component Plan whose benefit under that Component Plan is in pay status on August 1, 2016 with an

Benefit Commenc ement Date before that date

retained by the Bowne Plan

D1

Other than individuals described in A or any B or C above, and other than  an individual described in E1 below, a “Participant” in the RR Donnelley Component Plan

spun off to the LSC Plan

D2

Other than individuals described in A or any B or C above, and other than  an individual described in E1 below, a “Participant” in the Moore Wallace  Component Plan

spun off to the LSC Plan

D3

Other than individuals described in A or any B or C above, a “Participant” in the Bowne Component Plan

spun off to the LSC Plan

D4

Other than individuals described in A or any B or C above, and other than  an individual described in E3 below, a “Participant” in the Banta Employees Component Plan

spun off to the LSC Plan

E1

Other than individuals described in A, any B, C2, D3 or D4 above, a “Participant” in the Haddon Component Plan

spun off to the DFS Plan

E2

Other than individuals described in A or any B, C or D above, and other than  an individual described in E3 below, a “Participant” in the Banta Book Group Component Plan , Banta Danbury Component Plan or Banta Specially Converting Component Plan

spun off to the DFS Plan

E3

Other than individuals described in A or any B, C or D above, a “Participant” in the Banta Employees Component Plan whose benefit under that Component Plan is in pay status on August 1, 2016 with an Benefit Commencement Date before that date

spun off to the DFS Plan

 

Note:  For purposes of the preceding table, the following capitalized terms have the following meanings:

“RR Donnelley” means R. R. Donnelley & Sons Company and entities that are expected to be its subsidiaries immediately after as of the Distribution Effective Time (excluding LSC and DFS).

“LSC” means LSC Communications US, LLC and entities that are expected to be its subsidiaries immediately after the Distribution Effective Time.

“DFS” means Donnelley Financial, LLC and entities that are expected to be its subsidiaries immediately after the Distribution Effective Time.

An individual is an “Employee of RR Donnelley” if such individual was an Employee of the Controlled Group of R. R. Donnelley & Sons Company on August 1, 2016 and his last employment preceding the Distribution Effective Time is by RR Donnelley.

An individual is an “Employee of LSC” if such individual was an Employee of the Controlled Group of  R. R. Donnelley & Sons Company on August 1, 2016 and his last employment preceding the Distribution Effective Time is by LSC.

An individual is an “Employee of DFS” if such individual was an Employee of the Controlled Group of  R. R. Donnelley & Sons Company on August 1, 2016 and his last employment preceding the Distribution Effective Time is by DFS.

“Bowne Plan” means the Bowne Pension Plan.  Effective on the Effective Date, the Bowne Pension Plan is renamed the “RR Donnelley Pension Plan.”

“LSC Plan” means the LSC Pension Plan.

“DFS Plan” means the Donnelley Financial Pension Plan.

The “Controlled Group” of an entity (the “first entity”) consists of that first entity and every other entity that is (1) 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 first entity, (2) a trade or business (whether or not incorporated) under common control (within the meaning of section 414(c) of the Code) with the first entit y, (3) 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 first entity, a corporation described in clause (1) of this sentence or a trade or business described in clause (2) of this sentence, or (4) any other entity which is required to be aggregated with the first entity pursuant to Regulations promulgated under section 414(o) of the Code.

“Distribution Effective Time” is the effective time of the distribution by R. R. Donnelley & Sons Company to its shareholders of the shares of common stock of Donnelley Financial Solutions, Inc. and LSC Communications, Inc., both of which are prior to such distribution wholly-owned subsidiaries of R. R. Donnelley & Sons Company.

 

 

For privacy reasons, the schedule accompanying this Exhibit E accompanies only non-public copies of this Exhibit E, the master of which is maintained in the LSC Communications US, LLC corporate files under the following file name and path:

 

G:\Legal - Benefits\LSC\Benefit Plans\SERP\LSC UnfSupPenPln\16-10-1\Plan\Plan Doc\16-10-1.LSC UnfSupPenPln.ExE.xlsx

 

 


 


 

Formerly Sidley # 217431325

 

 

Exhibit 10.5

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN - B

 

FOR

 

DESIGNATED EXECUTIVES

 

OF

 

MOORE CORPORATION LIMITED

 

AND SUBSIDIARY COMPANIES

 

 

 

 

 

 

 

Effective January 1, 2001

 


TABLE OF CONTENTS

 

 

Article 1 DEFINITIONS

Article 2 ELIGIBILITY FOR BENEFITS AND VESTING

Article 3 BENEFIT FORMULA

Article 4 PAYMENT UPON CESSATION OF EMPLOYMENT

Article 5 DEATH BENEFITS

Article 6 DISABILITY

Article 7 CHANGE IN CONTROL

Article 8 FORFEITURE OF BENEFITS

Article 9 SOURCE OF BENEFITS

Article 10 AMENDMENT, SUSPENSION AND TERMINATION  

Article 11 MISCELLANEOUS PROVISIONS


 


Article 1 - Definitions

 

The following terms where used in this Plan shall have the meanings set forth below.

 

1.01

"Beneficiary" means the person last designated on the appropriate form filed with Moore Corporation by the Executive to receive benefits in accordance with Article 7 of this Plan in the event of the death of the Executive.

 

1.02

"Board" means the Board of Directors of Moore Corporation Limited.

 

1.03

"Cause".  For purposes of this Agreement, Cause shall mean (a) the refusal or willful failure by the Executive to Substantially perform his duties and responsibilities within a reasonable time after demand for proper performance is delivered by the Company or an Affiliate that specifically identifies the manner in which the Company or Affiliate believes the Executive has not substantially performed his or her duties, (b) the Executive's dishonesty, misappropriation, or fraud with regard to the Company or its Affiliates or any of their property or businesses, (c) the Executive's breach of fiduciary duty owed to the Company or any of its Affiliates, (d) willful misconduct or gross negligence with regard to the Company or its Affiliates or any of their property, businesses or employees, including but not limited to carrying out his duties, (e) the refusal of the Executive to follow the written direction of the Board, the board of an Affiliate for which he is working or a more senior officer.

 

1.04

"Cessation of Employment" means the termination of the Executive's employment with the Company, whether by voluntary or involuntary separation, retirement or death, and shall only be deemed to occur after the end of any Disability period under Article 6 and after any severance payment period during which the Executive receives severance based on an amount determined with regard to his prior salary.  For greater certainty a severance period shall not include any period for which payment was made in a lump sum even if such period was the measuring factor.

 

1.05

"Change in Control" shall have the meaning described in Article 7.

 

1.06

"Committee" means the Compensation Committee of Moore Corporation, as the same shall be constituted from time to time.

 

1.07

"Company" means Moore Corporation and any wholly owned subsidiary and any other subsidiary designated by the Committee as long as such subsidiary remains a subsidiary of Moore Corporation.

 

1.08

"Disability" means disability as defined under the Moore Long Term Disability Plan in which the Executive is then participating.  Where the Executive is not a member of the Moore Long Term Disability Plan, Disability shall be as defined under the Moore Long Term Disability Plan.

 


 

1.09

"Executive" means an executive of the Company designated by the Board as a member of the Plan.

 

1.10 "Moore Corporation" means Moore Corporation Limited.

 

1.11

"Pensionable Earnings" means the amount of base earnings received by the Executive plus bonuses earned under the Company's short term incentive program (MBO).  For purposes of this Plan annual bonuses shall be included in Pensionable Earnings in the months in which they are paid.

 

1.12

"Plan" means the "Supplemental Executive Retirement Plan - B for Designated Executives of Moore Corporation Limited and Subsidiary Companies" organized and administered in accordance with the terms of this document as amended from time to time.

 

1.13    “Service” means the period of employment after January 1, 2001 during which the Executive was a designated member of the Plan.

 

1.14

"Spouse" means the person who, at the Executive's Retirement Date, is the person eligible (other than as a result of a waiver of Spousal benefits) to receive any benefits payable under the Moore Life Insurance Plan then or last participated in to a spouse upon the death of the Executive, provided that in the event of any dispute as to the status of any person as a spouse, the determination of the Committee as to such status shall be final and binding upon all persons claiming a payment under this Plan.

 

Article 2 - Eligibility for Benefits and Vesting

 

2.01

Subject to Article 8, benefits under this Plan shall be payable only if the Executive has enrolled in the Moore Savings Plan and contributed the maximum amount allowed by law or other Plan restrictions, and has fulfilled all other conditions of this Plan.  The Executive will vest at 25% per year of Service and be fully vested if he has completed four (4) years of Service at his date of Cessation of Employment.  For further clarity, no benefit shall be provided under this Plan to the Executive whose employment with the Company is terminated prior to becoming vested.  Notwithstanding the above, the Executive shall be eligible for benefits on a Change in Control irrespective of actual Service.

 

 

Article 3 - Benefit Formula

 

3.01      The benefit payable upon Cessation of Employment shall be equal to:

 

(a)

For Service after January 1, 2001, the accumulated sum of 6% of the executive’s annual Pensionable Earnings that are in excess of the maximum annual savings plan earnings allowed by law under US Code

 


 

Section 401(a)(17).

 

(b)

Interest will be credited to each executive’s account on December 31 of each year, such rate being the prime interest rate at July 1 of each year.

 

 

Article 4 - Payment Upon Cessation of Employment

 

4.01

Lump Sum Payment  

The vested benefit amount determined under Article 3 shall be payable in a lump sum as soon as practical following Cessation of Employment.

 

 

Article 5 - Death Benefits

 

5.01

Death Benefits Prior to Retirement Date

On the death of the Executive while in active employment with the Company prior to his Cessation of Employment there shall be paid to his Beneficiary, or if none, to his estate, a lump sum as described in Article 4.01.  For greater certainty, no death benefit shall be payable if the Executive is not vested as defined in Article 2.01.

 

Article 6 – Disability

 

6.01

In the event of the Disability of the Executive, for purposes of this Plan:

 

(a)

The Benefit described in Article 3.01 shall continue to accrue during the period of the Disability but not beyond attainment of age 65; and

 

(b)

Pensionable Earnings shall be deemed to continue at the annualized base salary rate in effect immediately prior to his period of Disability.

 

Article 7 - Change in Control

 

7.01

A "Change in Control" shall mean any of the following:

 

(a)

the acquisition of direct or indirect beneficial ownership (as determined under Rule 13d-3 promulgated under the United States Securities Exchange Act of 1934), in the aggregate, of securities of Moore Corporation representing thirty percent (30%) or more of the total combined voting power of Moore Corporation's then issued and outstanding voting securities by any person or entity or group of associated persons or entities (within the meaning of Section 13(d)(3) or 14(d)(2) of the United States Securities Exchange Act of 1934) acting in concert as of the date of this Plan (other than Moore Corporation's subsidiaries or any employee benefit plan of either) (a "Person"); or

 

 

(b)

the merger or consolidation of Moore Corporation with any Person other than

 

 


 

(i) a merger or consolidation which would result in the voting securities of Moore Corporation outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) fifty percent (50%) or more of the co mbined voting power of the voting securities of Moore Corporation or such surviving entity outstanding immediately after such merger or consolidation; or

 

 

(ii)a merger or consolidation effected to implement a recapitalization of Moore Corporation (or similar transaction) in which no Person is or becomes the beneficial owner, directly or indirectly (as determined under Rule 13d-3 promulgated under the United States Securities Exchange Act of 1934), of securities representing more than the amounts set forth in paragraph (a) above; or

 

(c)the approval by the shareholders of Moore Corporation of any plan or proposal for the complete liquidation or dissolution of Moore Corporation or for the sale of all or substantially all of the assets of Moore Corporation (other than the sale of all or substantially all of the assets of Moore Corporation to a person or persons who beneficially own, directly or indirectly, at least fifty percent (50%) or more of the combined voting power of the voting securities of Moore Corporation at the time of the sale); or

 

 

(d)

during any period of not more than twenty-four (24) consecutive months, individuals who at the beginning of such period constitute the Board of Directors of Moore Corporation and any new director (other than a director designated by a person who has entered into Plan with Moore Corporation to effect a transaction described in paragraphs (a), (b), or (c) of this Section 9.01) whose election by the Board of Directors of Moore Corporation or nomination for election by Moore Corporation's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof.

 

7.02

If a Change in Control occurs, then, any accrued benefit will be payable to the executive whether or not he has satisfied the vesting requirement in Article 2.

 

Article 8 - Forfeiture of Benefits

 

8.01

Forfeiture of Benefits

Notwithstanding any other provision of this Plan, future payment of any benefit hereunder to the Executive will be discontinued and forfeited, and Moore Corporation will have no further obligation hereunder to the Executive if any of

 


the following circumst ances occur:

 

(a)The Executive is discharged from employment with the Company for cause.  Where the Executive has a written employment contract, cause shall be as defined in the employment contract.  Where the Executive does not have a written employment contract, Cause shall be as defined herein; or

 

(b)

the Executive performs acts which would be Cause (as defined herein) prior to Cessation of Employment, and such acts are discovered by the Company at any time prior to the date of death of the Executive; or

 

(c)

the Executive enters into Competition with the Company following Cessation of Employment.  For the purposes of this paragraph Competition is defined in Section 10.02.

 

If the circumstance is (b) or (c) above, then in addition the Executive or his Beneficiary, respectively, shall promptly re-imburse the company for any amounts previously received by the executive or his beneficiary, as the case may be.

 

The Committee shall have sole and unrestricted discretion with respect to the application of the provisions of this Section 8.01 and such exercise of discretion shall be conclusive and binding upon the Executive and all other persons.

 

8.02

Competition

 

 

(a)

"Competition" shall mean:

 

(i)participating, directly or indirectly, as an individual proprietor, partner, stockholder, officer, employee, director, joint venturer, investor, lender, consultant or in any capacity whatsoever within the United States of America, Canada, or in any country where the Company does business in a business in competition with any business conducted by the Company provided, however, that such participation shall not include any activity engaged in with the prior written approval of the chief executive officer of Moore Corporation; or

 

(ii)recruiting, soliciting or inducing, directly or indirectly, any non-clerical employee or employees of the Company to terminate their employment or otherwise cease their relationship with, the Company or hiring, retaining,  or assisting another person or entity to hire or retain any non-clerical employee of the Company or any person who within six months before had been a non-clerical employee of the Company. Notwithstanding the foregoing, if requested by an entity with which the Executive is not affiliated, the Executive may serve as a reference for any person who at the time of the request is not an employee of the Company.

 

 


 

(b)

If any restriction set forth with regard to Competition is found by any court of competent jurisdict ion, or an arbitrator, to be unenforceable because it extends for too long a period of time or over too great a range of activities or over too broad a geographic area, it shall be interpreted to extend over the maximum period of time, range of activities or geographic area as to which it may be enforceable.

 

Article 9 - Source of Benefits

 

9.01

Funding

 

 

(a)

Benefits under this Plan shall not be funded or otherwise secured nor shall assets or monies be segregated or set aside to pay benefits hereunder, but the same shall be payable by Moore Corporation out of its general assets as and when they become due as provided herein.  The Executive's interest in his benefits under this Plan, and the interest of his surviving Spouse, Beneficiary or estate, shall not be greater than that of a general  unsecured creditor of Moore Corporation.  Nothing contained in this Plan or relating thereto shall constitute a guarantee by Moore Corporation or any other person that the assets of Moore Corporation will be sufficient to pay any benefit hereunder

 

 

(b)

Any dispute or controversy arising under or in connection with Moore Corporation's obligation to this Plan (other than as a result of a dispute under Section 8 hereof) shall be settled exclusively by arbitration, conducted before a single arbitrator in Stamford Connecticut, or such other jurisdiction as may be mutually agreed on by the Executive and Moore Corporation, in accordance with the rules of the American Arbitration Association then in effect, and judgment may be entered on the arbitrator's award in any court having jurisdiction.  The determination of the arbitrator shall be final and binding.  In the event of such an arbitration, Moore Corporation shall bear the costs of the American Arbitration Association and the arbitrator and, if the Executive's assertion is not frivolous or brought in bad faith as determined by the arbitrator, the Executive's reasonable legal fees and disbursements incurred in connection with such arbitration.  This provision shall not apply with regard to any other dispute, including a dispute as to whether or not Moore Corporation was entitled to forfeit a Executive's benefit under Section 8 hereof.

 

Article 10 - Amendment, Suspension and Termination

 

10.01

Amendment and Suspension

 

The Board may at any time or from time to time amend this Plan in any respect or suspend this Plan without restriction and without consent of the Executive or

 


surviving Spouse or  Beneficiary; provided that:

 

 

(a)

subject to Article 2 and Article 8, no such amendment or suspension shall reduce the accrued benefits hereunder of the Executive;

 

(b)

upon the Cessation of Employment after the effective date of this Plan's suspension, if the Executive is vested based on Service up to his Cessation of Employment, then the Executive shall be entitled to receive benefits hereunder, where such benefits are based on his Service and Earnings, as of the date of the suspension of the Plan;

 

(c)

upon the Cessation of Employment after the effective date of this Plan's suspension, if the Executive is not vested based on Service up to his Cessation of Employment, then the Executive shall not be entitled to receive benefits hereunder.

 

10.02

Termination

 

The Board may at any time terminate this Plan without restriction and without consent of the Executive or Surviving Spouse or Beneficiary.  Upon the termination of the Plan the Executive shall be vested irrespective of his Service and subject to Article 8 shall be entitled to receive benefits hereunder, where such benefits shall be based on his Service and as of the date of termination of the Plan.  Upon the termination of the Plan each member is to receive a lump sum value of his benefit.

 

Article 11 - Miscellaneous Provisions

 

11.01

Administration

 

The general administration of this Plan shall be the responsibility of the Committee which is hereby authorized, in its sole discretion, to delegate said responsibilities to any person or administrative committee.  The Committee may also grant additional benefits under this Plan as it may deem appropriate in its sole discretion.  All determinations of the Committee including, but not limited to

 

 

(i)

the determination of the Executive's Service, and Earnings and

 

(ii)

computations of benefit amounts

 

made by the Committee in its sole discretion, based on the Plan document shall be final, conclusive and binding upon the Executive, surviving Spouse, Beneficiary  and other persons, except to the extent that a determination of the Committee is found by a court of competent jurisdiction to be arbitrary and capricious.

 

11.02

No Guarantee of Employment

 

It is understood and agreed by the parties hereto that this Plan does not itself constitute a contract of employment and shall not be deemed to restrict in any way

 


the rights of the Company or the Executive with respect to termination of employment.  Nothing in this Plan shall prevent the Company from dismissing the Executive from its employ, with or without cause, subject to such rights, if any, as may thereupon a ccrue to the Executive hereunder.  Nothing in this Plan shall be deemed to limit or expand any right or obligation which the Executive, surviving Spouse, Beneficiary or estate  may have under the terms and conditions of the Basic Plan.

 

11.03

Non-Alienation of Benefits

 

No benefit payable hereunder may be assigned, pledged, mortgaged or hypothecated and, except to the extent required by applicable law, no such benefit shall be subject to legal process or attachment for the payment of any claims of a creditor of the Executive or surviving Spouse.

 

11.04

Payment to Representatives

 

If an individual entitled to receive any benefits hereunder is determined by the Committee or is adjudged to be legally incapable of giving valid receipt and discharge for such benefits, they shall be paid to the duly appointed and acting guardian, if any, and if no such guardian is appointed and acting, to such persons as the Committee may designate.  Such payment shall, to the extent made, be deemed a complete discharge of the obligation to make such payments under this Plan.

 

11.05

Timing of Payments

 

If the Committee is unable to make the determination required under this Plan in sufficient time for payments to be made when due, the Committee shall arrange to have the payments made upon the completion of such determinations, with interest at a reasonable rate from the due date and may, at its option, make provisional payments, subject to adjustment, pending such determinations.

 

11.06

Claims Procedure

 

Any claim by an Executive or other payee with respect to eligibility, participation, benefit or other aspects of the operation of the Plan shall be made in writing to the Committee.  If the Committee believes that the claim should be denied, it shall notify the claimant in writing of the denial of the claim within 90 days after its receipt thereof (this period may be extended an additional 90 days in special circumstances).  Such notice shall

 

 

(a)

set forth the specific reason or reasons for the denial, making reference to the pertinent provisions of the Plan or of Plan documents on which the denial is based,

 

(c)

describe any additional material or information necessary to perfect the

 


 

claim, and explain why such material or information, if any, is necessary, and

 

(d)

inform the Executive or other payee making the claim of his right pursuant to this Section 11.07 to request review of the decision of the Committee.

 

Any such person may appeal the denial of a claim to the Committee by submitting a written request for review to the Committee within 60 days after the day on which such denial is received.  Such period may be extended by the Committee for good cause shown.  The person making the request for review or his duly authorized representative may discuss any issues relevant to the claim, may review pertinent documents and may submit issues and comments in writing.  If the Committee deems it appropriate, it may hold a hearing as to a claim.  If a hearing is held, the claimant shall be entitled to be represented by counsel.  The Committee shall decide whether or not to grant the claim within 60 days after receipt of the request for review, but this period may be extended by the Committee for up to an additional 60 days in special circumstances (the claimant shall be notified of the delay).  The decision of the Committee shall be in writing, shall include specific reasons for the decision and shall refer to pertinent provisions of the Plan or of Plan documents on which the decision is based.  Any claim not decided upon in the required time period shall be deemed denied.  All interpretations, determinations and decisions of the Committee with respect to any claim shall be made in its sole discretion based on the Plan documents and shall be final and conclusive.

 

11.07

Governing Law

 

This Plan shall be governed by and interpreted in accordance with the laws of the State of Connecticut and the laws of the United States.

 

11.08

Gender and Number

 

The masculine pronoun wherever used herein shall include the feminine, and vice versa.  Wherever any words are used herein in the singular, they shall be construed as though they were also used in the plural wherever the context so requires.

 

11.09     Titles and Headings

 

The titles to Articles and headings of Sections of the Plan are for convenience of reference and in case of any conflict the text of the Plan, rather than such titles and headings, shall control.


 


MOORE WALLACE INCORPORATED

 

AMENDMENT NUMBER ONE

to the

January 1, 2001 Restatement

of the

SUPPLEMENTAL EXECUTIVE RETIREMENT

PLAN - B FOR DESIGNATED EXECUTIVES

OF MOORE CORPORATION LIMITED

AND SUBSIDIARY COMPANIES

(Effective December 31, 2004)

 

Cessation of Benefit Accrual

 

WHEREAS, Moore Wallace Incorporated (the "Company"), formerly known as Moore Corporation Limited, maintains for the benefit of certain of its employees and for the benefit of certain employees of certain of its subsidiaries and affiliates the Supplemental Executive Retirement Plan - B for Designated Executives of Moore Corporation Limited and Subsidiary Companies (the "Plan");

 

WHEREAS, pursuant to Article 10 of the Plan, the Company has the authority to amend or suspend the Plan;

 

WHEREAS, all capitalized terms used in this amendment (this “Amendment”), unless otherwise defined herein, will have the meanings assigned thereto in the Plan;

 

WHEREAS, the Company desires to amend the Plan to cease future benefit accruals with respect to Pensionable Earnings, but not of interest credits;

 

NOW THEREFORE, the Company hereby amends the Plan, effective December 31, 2004, as follows:

 

Section 3.01(a) of the Plan is amended in its entirety as follows:

 

 

(a)

“For Service after January 1, 2001 and before January 1, 2005, the accumulated sum of 6% of the executive’s annual Pensionable Earnings that are in excess of the maximum annual savings plan earnings allowed by law under US Code Section 401(a)(17).”

 

In all other respects the Plan shall remain in full force and effect.


 


MOORE WALLACE INCORPORATED

 

AMENDMENT NUMBER TWO

to the

January 1, 2001 Restatement

of the

SUPPLEMENTAL EXECUTIVE RETIREMENT

PLAN - B FOR DESIGNATED EXECUTIVES

OF MOORE CORPORATION LIMITED

AND SUBSIDIARY COMPANIES

(Effective January 1. 2005)

 

Transfer of Plan Sponsorship; Renaming Plan

 

WHEREAS, Moore Wallace Incorporated (the "Company"), formerly known as Moore Corporation Limited, maintains for the benefit of certain of its employees and for the benefit of certain employees of certain of its subsidiaries and affiliates the Supplemental Executive Retirement Plan - B for Designated Executives of Moore Corporation Limited and Subsidiary Companies (the "Plan");

 

WHEREAS, pursuant to Article 10 of the Plan, the Company has the authority to amend or suspend the Plan;

 

WHEREAS, all capitalized terms used in this amendment (this “Amendment”), unless otherwise defined herein, will have the meanings assigned thereto in the Plan;

 

WHEREAS, the Company desires to transfer sponsorship of the Plan, together with all assets and liabilities thereof, to Moore Wallace North America, Inc.;

 

NOW THEREFORE, the Company hereby amends the Plan as follows, effective January 1, 2005:

 

Section 1.10 of the Plan (definition of “Moore Corporation”) is amended in its entirety as follows:

 

 

“1.10

‘MWNA’ means Moore Wallace North America, Inc., a Delaware Corporation.”

 

 

Section 1.12 of the Plan (definition of “Plan”) is amended in its entirety as follows:

 

 


 

 

“1.12 ‘Plan’ means the ‘Supplemental Executive Retirement Plan – B for Designated Executives of Moore Wallace North America, Inc. and Subsidiary Companies’ organized and administered in accordance with the terms of this document as amended from time to time.”

 

All references in the Plan to “Moore Corporation” are hereby changed to “MWNA”

 

In all other respects the Plan shall remain in full force and effect.


--

 


 

R. R. DONNELLEY & SONS COMPANY

AMENDMENT

to the

January 1, 2001 Restatement

of the

SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN – B FOR DESIGNATED EXECUTIVES OF MOORE WALLACE NORTH AMERICA, INC. AND SUBSIDIARY COMPANIES

Modifying plan governance provisions and effecting transfer of sponsorship of SERP-B to LSC Communications US, LLC

WHEREAS , prior to October 1, 2016, R. R. Donnelley & Sons Company, a Delaware corporation (“ RR Donnelley ”), acting through its direct and indirect subsidiaries, conducted a number of businesses, including (i) a publishing and retail-centric print services and office products business, (ii) a financial communications and data services businesses and (iii) a customized multichannel communications management businesses;

WHEREAS , the Board of Directors of RR Donnelley (the “ Board ”) determined that it was appropriate, desirable and in the best interests of RR Donnelley and its stockholders to separate RR Donnelley into three independent, publicly traded companies: (i) RR Donnelley, (ii) LSC Communications, Inc., a Delaware corporation; and (iii) Donnelley Financial Solutions, Inc., a Delaware corporation (such separation, the “ Distribution ”);

WHEREAS , LSC Communications US, LLC is a wholly-owned subsidiary of LSC Communications, Inc.;

WHEREAS , due to the merger of Moore Wallace North America, Inc. into RR Donnelley on December 31, 2012, RR Donnelley maintains the Supplemental Executive Retirement Plan – B for Designated Executives of Moore Wallace North America, Inc. and Subsidiary Companies (“ SERP-B ”), the terms of which are currently set forth in the January 1, 2001 Amendment and Restatement of SERP-B, as amended prior to the date hereof (the “ Plan Document ”);

WHEREAS , Section 10.01 of the Plan Document permits amendment of SERP-B by the Board;

WHEREAS , pursuant to resolutions adopted by the Board on September 14, 2016, the Board delegated to the Vice President, Benefits, of RR Donnelley (the “ Vice President ”) the authority to adopt material amendments to its benefit plans, which include SERP-B, on behalf of RR Donnelley to the extent the Vice President deems such amendment appropriate or desirable in connection with the Distribution;


--

 


 

WHEREAS , RR Donnelley wishes to adopt the terms of that certain “A mendment to Each ERISA Plan (And Any Trust Related Thereto) Which Have Not Been Specifically Updated to Establish and/or Implement the Benefits Committee for Each Such Plan and Trust as of July 1, 2004” (the “ Omnibus Amendment ”), which is attached hereto a s Exhibit A, so that the applicable terms of such Omnibus Amendment shall apply to SERP-B, effective 11:59 p.m., Eastern Time, September 30, 2016;

WHEREAS , effective 12:00 a.m., Eastern Time, October 1, 2016 (the “ Sponsorship Transfer Time ”), RR Donnelley wishes to transfer sponsorship of SERP-B to LSC Communications US, LLC; and

WHEREAS , LSC Communications US, LLC has taken or will take action to accept sponsorship of SERP-B, effective at the Sponsorship Transfer Time.

NOW, THEREFORE , pursuant to the power of amendment contained in Section 10.01 of the Plan Document, the Vice President, acting as RR Donnelley, hereby amends:

 

1.

SERP B, so that the applicable terms of the Omnibus Amendment shall apply to the Plan Document, effective 11:59 p.m., Eastern Time, September 30, 2016; and

 

2.

SERP B, to transfer sponsorship of SERP-B to LSC Communications US, LLC, effective at the Sponsorship Transfer Time;

 

3.

Section 1.10 of the Plan Document (definition of “MWNA”), effective at the Sponsorship Transfer Time, is amended in its entirety as follows:

“1.10 ‘LSC’ means LSC Communications US, LLC, a Delaware limited liability company.”

 

4.

the Plan Document, effective at the Sponsorship Transfer Time, to replace all references in the Plan Document to “MWNA” with “LSC.”

FURTHER , the officers of RR Donnelley, acting alone or in conjunction with each other, be, and they hereby are, authorized and directed to take such further action on behalf of RR Donnelley as such officers in their sole discretion deem necessary or advisable to carry out the intent and purpose of the foregoing.

*     *     *     *     *

 

 

 

 

 

 

 

--

 


 

 

 

EXHIBIT A

 

MOORE WALLACE NORTH AMERICA, INC.

 

 

AMENDMENT

to

 

EACH ERISA PLAN (AND ANY TRUST RELATED THERETO) WHICH HAVE NOT BEEN SPECIFICALLY UPDATED TO ESTABLISH AND/OR IMPLEMENT THE BENEFITS COMMITTEE FOR EACH SUCH PLAN AND TRUST AS OF JULY 1, 2004

 

 

 

Establishment of Benefits Committee; Updating ERISA Claims and Appeals Procedure

 

WHEREAS, Moore Wallace North America, Inc. (the “Company”) maintains for the benefit of certain of its employees or former employees and for the benefit of certain employees or former employees of certain of its affiliates one or more plans which are (i) subject to the provisions of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or (ii) an “excess benefit plan” as defined in ERISA but which is exempt from ERISA (plans described in (i) or (ii) above (other than any such plans which are separately amended with respect to governance matters with an effective date of July 1, 2004) are each referred to individually as the "Plan" or a “Plan”, and collectively as the “Plans”);

 

WHEREAS, as sponsor of each such Plan, the Company has the authority to amend each Plan;

 

WHEREAS, the Company desires to amend each Plan (and any trust related thereto (the “Trust”)), to establish the Benefits Committee to have the power and authority to act on behalf of the Company, the Plan and the Trust;

 

WHEREAS, the Company has developed certain standardized plan governance language to be used in amending Plans and Trusts which are not “unfunded top hat plans” (as defined below) and their related Trusts;

 

WHEREAS, the Company (i) understands that ERISA Section 401(a)(1) exempts certain employee benefit plans described therein (and referred to as an "unfunded top hat plan") from "Part 4 - Fiduciary Responsibility" of Title I of ERISA, (ii) consequently wishes to

--

 


 

utilize different governance language with respect to such plans, and (iii) does not intend to impose any fiduciary responsibility under such Part of ERISA with respect to a Plan which is an unfunded top hat plan, or on the Benefits Committee, or any other person acting on behalf of such Plan, except to the extent required by ERISA;

 

WHEREAS, the Company (i) understands that if any assets related to a Plan are held in a "rabbi trust", ERISA "Part 4 - Fiduciary Responsibility" will not apply to such assets, (ii) consequently wishes to utilize different governance language with respect to such trusts, and (iii) does not intend to impose any fiduciary responsibility under such Part of ERISA with respect to any assets related to a Plan which is an unfunded top hat plan, or on the Benefits Committee, or any other person with respect to those assets, except to the extent required by ERISA; and

 

WHEREAS, the Company desires to update the claims and appeals language of each Plan which is not an excess benefit plan to reflect revised Department of Labor regulations and to enable the Benefits Committee to administer such Plan’s claims and appeals procedure.

 

NOW THEREFORE, the Company hereby amends each Plan and Trust, effective July 1, 2004 (unless noted otherwise) as follows; provided, however, that nothing in this Amendment will override, invalidate or otherwise make ineffective any decision, exercise of Authority or Discretion (as defined in the Plan), policy, allocation, delegation, contract execution, representation, or any other act taken by a person whose Authority or Discretion has been transferred to the Benefits Committee by this Amendment until such time as the Benefits Committee specifically acts and overrides such decision, exercise of Authority or Discretion, policy, allocation, delegation, contract execution, representation, or other act:

 

A. Each Plan which is not an unfunded top hat plan or an excess benefit plan is

amended by replacing or adding the terms related to the administration thereof,

and also related to Company actions related thereto, with the following:

 

Plan Administration and Company Actions .

 

I - Definitions

 

For purposes of this Plan Administration and Company Actions section:

 

(a) Administrative Named Fiduciary means a Named Fiduciary with respect

to:

 

 

(1)

the authority to control and manage the operation and

 

administration of the Plan or the Trust, within the meaning

of Section 402(a)(1) of ERISA;

 

 

 

(2)

the discretionary authority or discretionary responsibility in

 

the administration of the Plan or the Trust, within the

meaning of Section 3(21)(A)(iii) of ERISA; or

 

--

 


 

 

(3)

the exercise of discretionary authority or discretionary

 

control respecting management of the Plan or the Trust or

the exercise of any authority or control respecting

management or disposition of any assets of the Plan or

Trust, within the meaning of Section 3(21)(A)(i) of ERISA,

and with respect to any of the above, which is not within

the Authority or Discretion of an Investment Named

Fiduciary.

 

(b) Administrator means the Benefits Committee acting as an

Applicable Administrative Named Fiduciary.

 

(c) Adverse Benefit Determination means 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 Employee’s or former Employee’s

eligibility to participate in this Plan.

 

(d) Appeal has the meaning assigned to such term in Section IV.6.

 

(e) Applicable Administrative Named Fiduciary means, with respect to any

Authority or Discretion with respect to the Plan or Trust which is not

within the Authority or Discretion of an Investment Named Fiduciary, the

Administrative Named Fiduciary to whom the Benefits Committee has

allocated such Authority or Discretion for such matters, and if not

allocated, the Benefits Committee acting as the Applicable Administrative

Named Fiduciary.  If the Benefits Committee has allocated or delegated

Authority or Discretion, references in the Plan or Trust to the Benefits

Committee acting as an Applicable Administrative Named Fiduciary are

deemed to refer to another Named Fiduciary to whom the relevant

Authority or Discretion has been identified or allocated pursuant to the

procedures of the Plan or, if applicable, to refer to a Fiduciary to whom the

relevant Authority or Discretion has been delegated pursuant to the

procedures in the Plan.

 

(f) Applicable Investment Named Fiduciary means, with respect to any

Authority or Discretion with respect to the Trust, the Investment Named

Fiduciary to whom the Benefits Committee has allocated such Authority

or Discretion for such matters, and if not allocated, the Benefits

Committee acting as the Applicable Investment Named Fiduciary.  If the

Benefits Committee has allocated or delegated Authority or Discretion,

references in the Plan or Trust to the Benefits Committee acting as an

Applicable Investment Named Fiduciary are deemed to refer to another

Named Fiduciary to whom the relevant Authority or Discretion has been

identified or allocated pursuant to the procedures of the Plan or, if

applicable, to refer to a Fiduciary to whom the relevant Authority or

Discretion has been delegated pursuant to the procedures in the Plan.

 

--

 


 

(g) Authority or Discretion means (a) the authority, control or discretion with

respect to the Plan or Trust which is identified or allocated to a Named

Fiduciary under the terms of the Plan or Trust or a procedure in the Plan,

or (b) the exercise of such authority, control or discretion by a Named

Fiduciary.

 

(h) Benefit means a benefit provided by the Plan.

 

(i) Benefit Agreement means an administrative services agreement, third

party administrator agreement, or other type of agreement to render

services to, or on behalf of, the Plan, including agreements with the Plan

or Trust, an Employer or a Named Fiduciary.

 

(j) Benefit Determination means the Claims Administrator’s decision with

respect to a Claim or an Appeal.

 

(k) Benefits Committee means the committee created and organized herein.

 

(l) Claim means a request for a Benefit or eligibility for a Benefit Received

on or after January 1, 2002 and prior to the time the Claims Administrator

has Received an Appeal with respect to the same matter, made by a

Claimant in accordance with this Plan’s procedures for filing Claims, as

described in Section IV.2.  If the procedures described in Section IV.2 are

not followed with respect to any submission by an Employee, such

submission will be deemed not to constitute a Claim.

 

(m) Claimant has the meaning assigned to such term in Section IV.1.

 

(n) Claims Administrator means the Benefits Committee, acting as the

Applicable Administrative Named Fiduciary.

 

(o) Delivered has the meaning set forth in Section V and Delivery means

Delivery pursuant to, and subject to, Section V.

 

(p) Fiduciary means (a) any individual or entity who performs a fiduciary

function under the Plan as defined in accordance with Section 3(21) of

ERISA; (b) such individual or entity which the Vice President, acting on

behalf of the Company, designates to be a Named Fiduciary with respect

to such person's authority to control and manage the operation and

administration of the Plan or Trust; or (c) such individual or entity which a

Named Fiduciary, acting on behalf of the Plan, designates to be a

Fiduciary with respect to such person's authority to control and manage

the operation and administration of the Plan or Trust.

 

(q) Investment Named Fiduciary means a Named Fiduciary with respect to:

 

(1) the authority to control and manage the operation and

administration of the Trust;

 

--

 


 

(2) trustee responsibilities within the meaning of Section 405(c)(3) of

ERISA that have been specifically made subject to the direction or

Authority or Discretion of an Applicable Investment Named

Fiduciary;

 

 

(3)

the exercise of discretionary authority or discretionary control respecting management of the Plan or the Trust or the exercise of any authority or control respecting management or disposition of any assets of the Trust, within the meaning of Section 3(21)(A)(i) of ERISA, (d) the discretion to designate an Investment Manager, as described in Section 402(c)(3); or

 

 

 

(4)

the discretion to name or appoint a trustee under the Trust.

 

 

(r) Named Fiduciary means a named fiduciary within the meaning of ERISA,

including without limitation, Sections 402, 403 or 405 of ERISA.

 

(s) Notice , Notification or Notify means the delivery or furnishing of

information in a manner that satisfies applicable provisions of Section

A.II(o), A.V., or B.II.(o), as applicable.

 

(t) Received has the meaning set forth in Section V and Receipt means

receipt pursuant to, and subject to, Section V.

 

(u) Treasurer means the most recently elected Treasurer of R.R. Donnelley &

Sons Company ("Donnelley") or such other officer of Donnelley which

from time to time assumes the responsibilities with respect to the Plan which are, on the day immediately prior to the date this Amendment is effective, allocated to the Treasurer.  In the event of the temporary absence of Donnelley’s officer who would otherwise be the “Treasurer” under this Section, 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 or Trust (whether assigned a different title by Donnelley or not), or, in the absence of such a substitute or successor, the person to whom such Treasurer would report, will be the Treasurer.

 

 

(v)

Vice President means the most recently elected Vice President, Benefits, of Donnelley or such other officer of Donnelley which from time to time assumes the responsibilities with respect to the Plan or Trust which are, on the day immediately prior to the date this Amendment is effective, allocated to the Vice President.  In the event of the temporary absence of Donnelley’s officer who would otherwise be the 'Vice President' under this Section, 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 or Trust (whether assigned a different title by Donnelley 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."

 

--

 


 

 

II - General

 

 

(a)

Authority .  The Company, through the authority vested in its Board, hereby establishes the Benefits Committee and enables the Benefits Committee to have:

 

 

 

(1)

the Authority or Discretion to act, to the extent provided in the Plan or Trust, on behalf of the Plan or Trust, but not on behalf of the Company; and

 

 

 

(2)

the power and authority to act, to the extent provided in the Plan or Trust, on behalf of the Company, but not on behalf of the Plan or Trust.

 

 

(b) Benefits Committee acting as the Company .  The Benefits Committee

acting as the Company has all powers necessary, incidental or desirable to

act as an Employer and all powers necessary, incidental or desirable to

carrying out the duties and rights assigned by the Plan or Trust to the

Benefits Committee acting as the Company.  This grant of power is

nonexclusive and, by way of illustration and not limitation, these powers

will include the power to:

 

 

(1)

amend the Plan in any manner which, in the reasonable opinion of the Benefits Committee acting as the Company, does not have a material effect on cost to the Company of, or benefits in the aggregate under, the Plan;

 

 

 

(2)

identify any person or entity as a Named Fiduciary, and allocate to them their duties and responsibilities, in the manner provided herein;

 

 

 

(3)

determine what expenses, if any, related to the operation and administration of the Plan or Trust and the investment of Plan or Trust assets, will be paid from Employer assets, subject to applicable law;

 

 

 

(4)

establish such policies and make such delegations or designations as may be necessary or incidental to the Benefits Committee’s authority and control over the Plan or Trust acting as the Company;

 

 

 

(5)

retain, monitor and terminate such service providers and advisors as it considers appropriate to perform Employer activities with respect to the Plan or Trust and to delegate any of its duties, as appropriate, to such service providers and advisors; to determine appropriate fees for such service providers and advisors; and to ensure that appropriate contracts (under terms acceptable to the Benefits Committee acting as the Company) are signed and in

 

--

 


 

 

place with such service providers and advisors ;

 

 

 

(6)

consult with legal counsel, independent consulting or evaluation firms, accountants, actuaries, or other advisors, as necessary, to perform its functions;

 

 

 

(7)

adopt, amend or terminate, in part or completely, a Trust document;

 

 

 

(8)

determine the funding policy for the Plan, including the level of contributions to be paid by Participants and whether benefits are self-funded or insured;

 

 

 

(9)

add a corporation or business entity as an Employer and remove a corporation or entity as an Employer, on such terms and in such manner as the Benefits Committee acting as the Company in its discretion will determine; and

 

 

 

(10)

take any other actions it deems necessary, incidental or desirable to the performance of the duties of the Benefits Committee acting as the Company, including the power to delegate that power to any persons.

 

 

(c) Benefits Committee Acting as an Applicable Administrative Named

Fiduciary .

 

 

(1)

The Benefits Committee acting as an Applicable Administrative Named Fiduciary, subject to subparagraph (2) hereof, has all the Authority or Discretion of an Administrative Named Fiduciary.  This grant of Authority or Discretion is exclusive, subject to the power of the Benefits Committee to allocate or delegate such Authority or Discretion pursuant to the procedures in the Plan, and includes, but is not limited to, Authority or Discretion to:

 

 

 

(i)

the extent provided in a Benefit Agreement, but only if it has been specifically designated in such agreement as being the responsibility of the Benefits Committee;

 

 

 

(ii)

construe and apply the provisions of the Plan or Trust, including a determination of who is eligible to be a Participant or is otherwise eligible for coverage under the Plan, subject only to the terms and conditions of the Plan;

 

 

 

(iii)

appoint and compensate such specialists (including attorneys, actuaries, consultants and accountants) to aid it in the administration of the Plan or Trust, and arrange for such other services, as the Benefits Committee acting as an Applicable Administrative Named Fiduciary considers necessary, appropriate or desirable in carrying out the

 

--

 


 

 

provisions of the Plan or Trust;

 

 

 

(iv)

appoint and compensate an independent outside accountant to conduct such audits of the financial statements of the Plan or Trust as the Benefits Committee acting as an Applicable Administrative Named Fiduciary considers necessary, appropriate or desirable;

 

 

 

(v)

execute on behalf of the Plan or Trust, or to cause the Trustee to execute on behalf of the Plan or Trust, Benefit Agreements or other contracts which are legally enforceable and binding on the Plan or Trust, subject to ERISA and other applicable law;

 

 

 

(vi)

formulate, adopt, issue and apply procedures and rules and change, alter or amend such procedures and rules in accordance with law and as may be consistent with the terms of the Plan or Trust;

 

 

 

(vii)

be a final appeals Fiduciary under ERISA Section 503, to make a final determination with respect to any Claim;

 

 

 

(viii)

settle or compromise any litigation against the Plan or Trust or against a Fiduciary with respect to which the Plan or Trust has an indemnity obligation; and

 

 

 

(ix)

take any other actions necessary, incidental or desirable to the performance of the Authority or Discretion of the Benefits Committee.

 

 

 

(2)

The Benefits Committee will not be an Applicable Administrative Named Fiduciary whenever it acts as the Company and, notwithstanding any other term or provision of the Plan, Trust or any Benefit Agreement, the Benefits Committee will cease to be an Applicable Administrative Named Fiduciary with respect to any specified portion of Authority or Discretion, to the extent such Authority or Discretion has been identified or allocated to another Applicable Administrative Named Fiduciary pursuant to the procedure in the Plan or Trust.

 

 

(d) Benefits Committee Acting as an Applicable Investment Named

Fiduciary .

 

 

(1)

The Benefits Committee acting as an Applicable Investment Named Fiduciary, subject to subparagraph (2) hereof, has all the Authority or Discretion of an Applicable Investment Named Fiduciary as set forth in the Trust, or if no Trust, the Authority or Discretion described in the Trust amendment set forth below.

 

 

--

 


 

 

(2)

The Benefits Committee will not be an Applicable Investment Named Fiduciary whenever it acts as the Company and, notwithstanding any other term or provision of the Plan, Trust or any Benefit Agreement, the Benefits Committee will cease to be an Applicable Investment Named Fiduciary with respect to any specified portion of Authority or Discretion, to the extent such Authority or Discretion has bee n identified or allocated to another Applicable Investment Named Fiduciary pursuant to the procedure in the Plan or Trust.

 

 

(e) Procedures for Identification of a Named Fiduciary .

 

 

(1)

Procedure for Identification .  Subject to Section (e)(2), the Benefits Committee acting as the Company may from time to time identify a person to be a Named Fiduciary by (i) amending the Plan or Trust to specify in the Plan or Trust document (A) the name or position of the person identified, and (B) the Authority or Discretion with respect to which the person will be a Named Fiduciary; or (ii) referencing a Benefit Agreement as a means for specifying the Authority or Discretion with respect to which such person will be a Named Fiduciary, in which case the Benefits Committee acting as the Company may make such identification under this clause (ii) by use of an Exhibit to the Plan or such other method of taking action as the Benefits Committee acting as the Company may select.

 

 

No person who is identified as a Named Fiduciary hereunder must consent to such designation or identification nor will it be necessary for the Benefits Committee acting as the Company to seek such person’s or entity’s acquiescence.  The Authority or Discretion which a Named Fiduciary identified hereunder may have, will be several and not joint with the Benefits Committee or any other Named Fiduciary and the identification of such Named Fiduciary will result in the Benefits Committee or other Named Fiduciary no longer being a Named Fiduciary with respect to, nor having any longer, such Authority or Discretion.  On and after the identification of a person as a Named Fiduciary, neither the Benefits Committee nor any Named Fiduciary with respect to the Plan or Trust, will have any liability for the acts (or failure to act) of any such identified Named Fiduciary except to the extent of its co-Fiduciary duty under ERISA.

 

 

(2)

No Identification of Employer .  Notwithstanding the procedure set forth in (1) above, the Benefits Committee may not identify an Employer or its board of directors as a Named Fiduciary.  Nor may the Benefits Committee identify any officer of an Employer or an Employee as a Named Fiduciary, except by making them a member of the Benefits Committee.

 

 

--

 


 

(f) Compensation .  The members of the Benefits Committ ee, acting as a

Named Fiduciary, will serve without compensation for their services as

such.

 

(g) Allocations and Delegations of Authority or Discretion .

 

 

(1)

Delegations .  Subject to Section (g)(4), each Named Fiduciary may (i) delegate Authority or Discretion, other than trustee responsibilities as described in Section 405(c)(3) of ERISA unless the delegation is to an investment manager as defined in ERISA Section 3(38), to persons it designates, and (ii) make a change of delegated responsibilities. Each such delegation will either (i) if it relates to an individual employed by an Employer, specify the delegated person by name or by office and describe the Authority or Discretion delegated to such individual, or (ii) use a Benefit Agreement with such person as a means for specifying the Authority or Discretion delegated to such person.  The Benefits Committee acting as a Named Fiduciary may make such delegations by use of an Exhibit to the Plan or such other method of taking such action which the Benefits Committee acting as a Named Fiduciary may select.  Any Named Fiduciary, other than the Benefits Committee acting as a Named Fiduciary, may make such delegations only (i) in writing and (ii) after giving prior written Notice of such delegation to the Benefits Committee acting as a Named Fiduciary.  No person, other than an investment manager (as defined in Section 3(38) of ERISA), to whom Authority or Discretion has been properly delegated must consent to being a Fiduciary nor will it be necessary for the delegating Named Fiduciary to seek such person’s acquiescence; however, where such person has not signed a contract, the person must be given Notification of the services to be performed and agree to perform, or perform, such services.  A permissible delegation of Authority or Discretion which is not implemented in the manner set forth herein will not be void; however, whether the delegating Named Fiduciary will have joint liability for acts of such person will be determined by applicable law.

 

 

 

(2)

Allocations .  Subject to Section (g)(4), the Benefits Committee acting as the Company may allocate Authority or Discretion, other than trustee responsibilities described in Section 405(c)(3) of ERISA, to a Named Fiduciary when it identifies such Named Fiduciary in the manner described in Section (e).  The Benefits Committee acting as a Named Fiduciary may allocate or reallocate Authority or Discretion, other than trustee responsibilities described in Section 405(c)(3) of ERISA, among Named Fiduciaries.  Each such allocation will either (i) if it relates to an individual employed by an Employer, specify the allocated person by name or by office and describe the Authority or Discretion allocated to such individual, or (ii) use a Benefit Agreement with

 

--

 


 

 

such per son as a means for specifying the Authority or Discretion allocated to such person.  The Benefits Committee acting as a Named Fiduciary may make such allocations by use of an Exhibit to the Plan or such other method of taking such action which the Benefits Committee acting as a Named Fiduciary may select.  No person to whom Authority or Discretion has been properly allocated must consent to being a Fiduciary nor will it be necessary for the allocating Named Fiduciary to seek such person’s acquiescence; howe ver, where such person has not signed a contract, the person must be given Notification of the services to be performed and agree to perform, or perform, such services.  A permissible allocation of Authority or Discretion which is not implemented in the ma nner set forth herein will not be void; however, whether the allocating Named Fiduciary will have joint liability for acts of such person will be determined by applicable law.

 

 

 

(3)

Limit on Liability .  The allocation and delegation of Authority or Discretion pursuant to the terms of this Plan are intended to limit the liability of the (i) Benefits Committee acting as a Named Fiduciary, and (ii) each other Named Fiduciary, as appropriate, in accordance with the provisions of Section 405(c) of ERISA.

 

 

 

(4)

No Delegation or Allocation to Employer .  Notwithstanding the procedures set forth in (1) or (2) above, a Named Fiduciary may not delegate or allocate Authority or Discretion to the Company, an Employer, or their respective boards of directors, officers or employees; provided, however, that the Benefits Committee may allocate Authority or Discretion among the members of the Benefits Committee, and the Benefits Committee may delegate Authority or Discretion to officers of Employers or to Employees.

 

 

(h) Benefits Committee Bonding .  The Benefits Committee acting as a Named

Fiduciary will serve without bond (except as otherwise required by federal

law).

 

 

(i)

Information to be Supplied by Employer .  Each Employer will supply to the Benefits Committee acting as a Named Fiduciary, within a reasonable time of its request, the names of all Employees, their ages, their dates of hire, the names of all Employees who incur a termination of employment during any Plan Year and the dates of such terminations, and such other information in the Employer's possession as the Benefits Committee acting as a Named Fiduciary will from time to time request.  The Benefits Committee acting as a Named Fiduciary may rely conclusively on the information supplied to it by an Employer.

 

 

(j) Misrepresentations .  The Benefits Committee acting as a Named Fiduciary

may, but will not be required to, rely upon any certificate, statement or

other representation made to it by another Named Fiduciary or by an

--

 


 

Employee, a Participant, or another individua l, or personal representative

of any thereof with respect to any fact.  Any such certificate, statement or

other representation will be conclusively binding upon such other Named

Fiduciary, Employee, Participant, or other individual or personal

representative, and on any heir or assignee of any thereof (but not upon the

Benefits Committee), and any such person will thereafter be stopped

from disputing the truth of any such certificate, statement or other

representation.

 

(k) Records .  The regularly kept records of any Named Fiduciary, Trustee or

Employer may be relied upon conclusively by the Benefits Committee

acting as a Named Fiduciary.

 

(l) Plan Expenses .  All expenses of the Plan or Trust which have been

approved by the Benefits Committee acting as an Applicable

Administrative Named Fiduciary will be paid by the Trust except to the

extent paid by the Employer; and if paid by the Employer, such Employer

may, if authorized by the Benefits Committee acting as the Company, seek

reimbursement of such expenses from the Trust and the Trust will

reimburse the Employer.  If borne by the Employer(s), expenses of administering the Plan or Trust will be borne by the Employer(s) in such proportion as the Benefits Committee, acting as the Company, will determine.

 

(m) Fiduciary Capacity .  Any person or group of persons may serve in more

than one Fiduciary capacity with respect to the Plan or Trust.  In addition,

any person or group of persons may serve both as a Fiduciary and as the

Company, however, they must act as either a Fiduciary or the Company,

but not both, with respect to any matter.

 

(n) Employer's Agent .  The Benefits Committee acting as the Company will

act as agent for each Employer.

 

(o) Notices to Participants, Etc.   Any Notice, report or statement given, made,

delivered or transmitted to a Participant or any other person entitled to or

claiming benefits under the Plan will be deemed to have been duly given,

made or transmitted when sent via messenger, delivery service, facsimile

or mailed by first class mail with postage prepaid and addressed to the

Participant or such person at the address last appearing on the records of

the Applicable Administrative Named Fiduciary.  A Participant or such

other person may record any change of his address from time to time by

written Notice filed with the Applicable Administrative Named Fiduciary.

 

(p) Plan Administrator .  The term "Plan Administrator" will have the meaning

assigned to that term by ERISA Section 3(16)(A).  The Plan Administrator

is the Benefits Committee, acting as an Applicable Administrative Named

Fiduciary.

 

(q) Named Fiduciary Decisions Final .  The decision of a Named Fiduciary in

--

 


 

matters within its jurisdictio n will be final, binding, and conclusive upon

each Employer and the Trustee and upon each Employee, Participant, and

every other person or party interested or concerned.

 

(r) Agency .  Each Fiduciary will perform (or fail to perform) its Authority or

 

Discretion with respect to the Plan or Trust as an independent contractor and not as an agent of the Plan, any Employer, the Trust or the Benefits Committee.  No agency is intended to be created nor is the Benefits Committee empowered to create an agency relationship with a Fiduciary acting as a Fiduciary.  Except as provided in this Section (r), the Plan, the Trust, the Benefits Committee or another Fiduciary may act through agents.

 

 

(s) Composition of Benefits Committee .  The Benefits Committee will

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.

 

(t) By-Laws .  The Benefits Committee may always act by unanimous

consent, will adopt by-laws to govern its activities and may amend such

by-laws from time to time."

 

III - Actions by the Company

 

'Company,' when referred to in this Plan, will be deemed to mean a reference to:

 

(a) with respect to actions taken by the Company as sponsor of the Plan, the

Company’s board of directors, the Company’s authorized officers, or the

Benefits Committee acting as the Company;

 

(b) with respect to actions taken by the Company as a Named Fiduciary with

respect to administration of the Plan, the Benefits Committee acting as the

Applicable Administrative Named Fiduciary; and

 

(c) with respect to actions taken by the Company as a Named Fiduciary with

respect to management and control of the assets of the Plan, the Benefits

Committee acting as an Applicable Investment Named Fiduciary.

 

IV - Claims and Appeals Procedures

 

Section IV.1    Authority to Submit Claims .  Any participant or beneficiary who believes that he is entitled to receive a Benefit under this Plan, including one greater than that initially determined by the Benefits Committee, may (or his duly authorized representative may) file a Claim in writing with the Claims Administrator. The Administrator will determine whether an individual is duly authorized to act on behalf of a participant or beneficiary, and may establish reasonable procedures for making this determination.  Any such participant, beneficiary or duly authorized representative is referred to in this Plan as a Claimant.

 

--

 


 

Section IV.2    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 IV.2, 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.

 

(a) Any Claim must be Delivered to the Claims Administrator by a Claimant,

in writing, and on the appropriate Claim form, or in such other form as

may be acceptable to the Claims Administrator; and

 

 

(b) Any Claim must be identified in writing as a formal Claim for a Benefit

under the Claims and Appeals Procedures.

 

 

Section IV.3    Initial Claim Review .  The initial Claim review will be conducted by the Claims Administrator, with or without the presence of the Claimant, as determined by the Claims Administrator in its discretion.  The Claims Administrator 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 Claims Administrator 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 Plan’s Claims and Appeals procedures within the past 24 months.

 

Section IV.4    Benefit Determination on Claim .

 

 

(a)

The Claims Administrator 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 IV.4(b) below) within 90 days after Receipt of the Claim by the Claims Administrator.

 

 

 

(b)

The Claims Administrator 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 Claims Administrator expects to render a Benefit Determination.

 

 

 

Section IV.5    Manner and Content of Notification of Adverse Benefit Determination on a Claim .

 

(a) The Claims Administrator will provide a Claimant with written or

electronic Notice of any Adverse Benefit Determination on the Claim.

 

(b) The Notification will set forth in a manner calculated to be understood by

the Claimant:

 

--

 


 

 

(1)

the specific reason or reasons for the Adverse Benefit Determination;

 

 

 

(2)

reference to the specific provision(s) of this Plan on which the Adverse Benefit Determination is based;

 

 

 

(3)

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

 

 

(4)

a description of this Plan’s review procedures and the time limits applicable to such procedures, including a statement describing the Claimant’s right to bring a civil action under section 502(a) of ERISA following an Adverse Benefit Determination on review.

 

 

 

Section IV.6    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”).

 

 

Section IV.7    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 IV.7, 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.

 

(a) 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 Claims

Administrator.

 

(b) Any Appeal must be Delivered, as p rovided in Section V, to the Claims

Administrator within 60 days of Receipt by the Claimant of the Notice of

the Adverse Benefit Determination on the Claim .

 

If the Claims Administrator 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 will be deemed to have failed to exhaust all administrative remedies under this Plan.

 

Section IV.8    Review Procedures for Appeals .

 

 

(a)

The Appeal review will be conducted by the Claims Administrator, with or without the presence of the Claimant, as determined by the Claims Administrator in its discretion.  The Claims Administrator 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 Claims Administrator, where appropriate, will also consider and be consistent with prior determinations of Appeals from other Claimants who wer e similarly situated and which have been processed through this Plan’s Claims and Appeals procedures within the past 24 months.

 

 

 

(b)

The Claimant will be provided, upon request and free of charge, reasonable access to and copies of all Relevant Documents.

 

 

 

(c)         The review procedure will involve only one level of review.

 

 

 

(d)         

The Claimant will be allowed to submit any supporting comments, documents, records and other information.

 

 

 

Section IV.9    Timing and Notification of Benefit Determination on Review .  

 

(a) The Claims Administrator 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 IV.9(b) below) within 60 days after Receipt of the Appeal by the

Claims Administrator.

 

 

(b)

The Claims Administrator 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 Claims Administrator 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 Claims Administrator is required to make a decision shall be tolled by the Claims Administrator from the date on which the Notification is sent to the Claimant until the Claims Administrator has Received from the Claimant a response to the request for additional information.  If the Claimant fails to respond to the Claims Administrator’s request for additional information within a reasonable time, the Claims Administrator may, in its discretion, render a Benefit Determination on the Appeal based on the record before the Claims Administrator.

 

 

Section IV.10    Manner and Content of Notification of Adverse Benefit Determination on Appeal .

 

 

(a)

The Claims Administrator will provide a Claimant with written or electronic Notice of any Adverse Benefit Determination on the Appeal.

 

 

(b) The Notification will set forth in a manner calculated to be understood by

--

 


 

the Claimant:

 

 

(1)

The specific reason or reasons for the Adverse Benefit Determination;

 

 

 

(2)

Reference to the specific provision(s) of this Plan on which the Adverse Benefit Determination is based;  

 

 

 

(3)       

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

 

 

 

(4)

A statement describing the Claimant’s right to bring a civil action under section 502(a) of ERISA following an Adverse Benefit Determination on review.

 

 

Section IV.11    Collectively Bargained Benefits .  Where benefits are provided pursuant to a collective bargaining agreement and

 

such collective bargaining agreement maintains or incorporates by specific reference (1) provisions concerning the filing and disposition of Claims; and (2) a grievance and arbitration procedure to which Appeals are subject, then Sections IV.2 through

 

and including Section IV.10 will not apply to Claims covered by such collective bargaining agreement; or

 

 

(b)

such collective bargaining agreement maintains or incorporates by specific reference a grievance and arbitration procedure to which Appeals are subject, then Section IV.7 through and including Section IV.10 will not apply to such Appeal.

 

 

Section IV.12    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 Claims Administrator, or (b) if the Claimant has Received a denial of his related Appeal during such time, two years after such Receipt.

 

Section IV.13    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.

 

V - Delivery and Receipt

 

For purposes of Section IV of each Plan, 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 Claims Administrator 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 Claims Administrator must be sent to the address specified in the Summary Plan Description for this Plan.  Any such item sent to an Em ployee or Claimant must be sent to the last known address of such Employee or Claimant, as determined by reference to the records of this Plan or such Employee’s or Claimant’s employer.  Any such item which meets the above-requirements will be deemed “Deli vered” 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 confirm ation 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."

 

*     *     *

 

B.

Each Trust, if any, related to a Plan which is not an unfunded top hat plan or an excess benefit plan is amended by replacing or adding the terms related to the administration and asset management terms and provisions thereof, and also related to the Company actions related thereto, with the following:

 

 

" Trust Administration, Asset Management and Company Actions .

 

I - Definitions

 

For purposes of this Section on Trust administration, asset management and Company actions, the following definitions shall apply:

 

(a) Administrative Named Fiduciary means a Named Fiduciary with respect

to:

 

 

(1)

the authority to control and manage the operation and administration of the Plan or the Trust, within the meaning of Section 402(a)(1) of ERISA;

 

 

 

(2)

the discretionary authority or discretionary responsibility in the administration of the Plan or the Trust, within the meaning of Section 3(21)(A)(iii) of ERISA; or

 

 

 

(3)

the exercise of discretionary authority or discretionary control respecting management of the Plan or the Trust or the exercise of any authority or control respecting management or disposition of any assets of the Plan or Trust, within the meaning of Section 3(21)(A)(i) of ERISA, and with respect to any of the above, which is not within the Authority or Discretion of an Investment Named Fiduciary.

 

 

(b) Administrator means the Benefits Committee acting as an Applicable

Administrative Named Fiduciary.

 

(c) Applicable Administrative Named Fiduciary means, with respect to any

--

 


 

Authority or Discretion with respect to the Plan or Trust which is not

within the Authority or Discretion of an Investment Named Fiduciary, the

Administrative Named Fiduciary to whom the Benefits Committee has

allocated such Authority or Discretion for such matters, and if not

allocated, the Benefits Committee acting as the Applicable Administrative

Named Fiduciary.  If the Benefits Committee has allocated or delegated

Authority or Discretion, references in the Plan or Trust to the Benefits

Committee acting as an Applicable Administrative Named Fiduciary are

deemed to refer to another Named Fiduciary to whom the relevant

Authority or Discretion has been identified or allocated pursuant to the

procedures of the Plan or, if applicable, to refer to a Fiduciary to whom the

relevant Authority or Discretion has been delegated pursuant to the

procedures in the Plan.

 

 

(d)

Applicable Investment Named Fiduciary means, with respect to any Authority or Discretion with respect to the Trust, the Investment Named Fiduciary to whom the Benefits Committee has allocated such Authority or Discretion for such matters, and if not allocated, the Benefits Committee acting as the Applicable Investment Named Fiduciary.  If the Benefits Committee has allocated or delegated Authority or Discretion, references in the Plan or Trust to the Benefits Committee acting as an Applicable Investment Named Fiduciary are deemed to refer to another Named Fiduciary to whom the relevant Authority or Discretion has been identified or allocated pursuant to the procedures of the Plan or, if applicable, to refer to a Fiduciary to whom the relevant Authority or Discretion has been delegated pursuant to the procedures in the Plan.

 

 

 

(e)

Authority or Discretion means (a) the authority, control or discretion with respect to the Plan or Trust which is identified or allocated to a Named Fiduciary under the terms of the Plan or Trust or a procedure in the Plan, or (b) the exercise of such authority, control or discretion by a Named Fiduciary.

 

 

 

(f)

Benefit Agreement means an administrative services agreement, third party administrator agreement, or other type of agreement to render services to, or on behalf of, the Plan, including agreements with the Plan or Trust, an Employer or a Named Fiduciary.

 

 

(g) Benefits Committee means the committee created and organized herein.

 

 

(h)

Fiduciary means (a) any individual or entity who performs a fiduciary function under the Plan as defined in accordance with Section 3(21) of ERISA; (b) such individual or entity which the Vice President, acting on behalf of the Company, designates to be a Named Fiduciary with respect to such person's authority to control and manage the operation and administration of the Plan or Trust; or (c) such individual or entity which a Named Fiduciary, acting on behalf of the Plan, designates to be a Fiduciary with respect to such person's authority to control and manage the operation and administration of the Plan or Trust.

 

--

 


 

 

(i) Investment Named Fiduciary means a Named Fiduciary with respect to:

 

 

(1)

the authority to control and manage the operation and administration of the Trust;

 

 

 

(2)

trustee responsibilities within the meaning of Section 405(c)(3) of ERISA that have been specifically made subject to the direction or Authority or Discretion of an Applicable Investment Named Fiduciary;

 

 

 

(3)

the exercise of discretionary authority or discretionary control respecting management of the Plan or the Trust or the exercise of any authority or control respecting management or disposition of any assets of the Trust, within the meaning of Section 3(21)(A)(i) of ERISA;

 

 

 

(4)

the discretion to designate an Investment Manager, as described in Section 402(c)(3); or

 

 

 

(5)

the discretion to name or appoint a trustee under the Trust.

 

 

(j) Named Fiduciary means a named fiduciary within the meaning of ERISA,

including without limitation, Sections 402, 403 or 405 of ERISA.

 

 

(k)

Treasurer means the most recently elected Treasurer of R.R. Donnelley & Sons Company ("Donnelley") or such other officer of Donnelley which from time to time assumes the responsibilities with respect to the Plan which are, on the day immediately prior to the date this Amendment is effective, allocated to the Treasurer.  In the event of the temporary absence of Donnelley’s officer who would otherwise be the “Treasurer” under this Section, 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 or Trust (whether assigned a different title by Donnelley or not), or, in the absence of such a substitute or successor, the person to whom such Treasurer would report, will be the Treasurer.

 

 

 

(l)

Vice President means the most recently elected Vice President, Benefits, of Donnelley or such other officer of Donnelley which from time to time assumes the responsibilities with respect to the Plan or Trust which are, on the day immediately prior to the date this Amendment is effective, allocated to the Vice President.  In the event of the temporary absence of Donnelley’s officer who would otherwise be the 'Vice President' under this Section, 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 or Trust (whether assigned a different title by Donnelley or not), or, in the absence of such a substitute or successor, the

 

--

 


 

 

person to whom such Vice President would report, will be the VicePresident."

 

 

II - General

 

(a) Authority .  The Company, through the authority vested in its Board,

hereby establishes the Benefits Committee and enables the Benefits

Committee to have:

 

 

(1)

the Authority or Discretion to act, to the extent provided in the Plan or Trust, on behalf of the Plan or Trust, but not on behalf of the Company; and

 

 

 

(2)

the power and authority to act, to the extent provided in the Plan or Trust, on behalf of the Company, but not on behalf of the Plan or Trust.

 

 

 

(b)

Benefits Committee acting as the Company .  The Benefits Committee acting as the Company has all powers necessary, incidental or desirable to act as an Employer and all powers necessary, incidental or desirable to carrying out the duties and rights assigned by the Plan or Trust to the Benefits Committee acting as the Company.  This grant of power is nonexclusive and, by way of illustration and not limitation, these powers will include the power to:

 

 

 

(1)

amend the Plan in any manner which, in the reasonable opinion of the Benefits Committee acting as the Company, does not have a material effect on cost to the Company of, or benefits in the aggregate under, the Plan;

 

 

 

(2)

identify any person or entity as a Named Fiduciary, and allocate to them their duties and responsibilities, in the manner provided herein;

 

 

 

(3)

determine what expenses, if any, related to the operation and administration of the Plan or Trust and the investment of Plan or Trust assets, will be paid from Employer assets, subject to applicable law;

 

 

 

(4)

establish such policies and make such delegations or designations as may be necessary or incidental to the Benefits Committee’s authority and control over the Plan or Trust acting as the Company;

 

 

 

(5)

retain, monitor and terminate such service providers and advisors as it considers appropriate to perform Employer activities with respect to the Plan or Trust and to delegate any of its duties, as appropriate, to such service providers and advisors; to determine appropriate fees for such service providers and advisors; and to

 

--

 


 

 

ensure that appropriate contracts (under terms acceptable to the Benefits Committee acting as the Company) are signed and in place with such service providers and advisors ;

 

 

 

(6)

consult with legal counsel, independent consulting or evaluation firms, accountants, actuaries, or other advisors, as necessary, to perform its functions;

 

 

 

(7)

adopt, amend or terminate, in part or completely, a Trust document;

 

 

 

(8)

determine the funding policy for the Plan, including the level of contributions to be paid by Participants and whether benefits are self-funded or insured;

 

 

 

(9)

add a corporation or business entity as an Employer and remove a corporation or entity as an Employer, on such terms and in such manner as the Benefits Committee acting as the Company in its discretion will determine; and

 

 

 

(10)

take any other actions it deems necessary, incidental or desirable to the performance of the duties of the Benefits Committee acting as the Company, including the power to delegate that power to any persons.

 

 

(c) Benefits Committee Acting as an Applicable Administrative Named Fiduciary .

 

 

(1)

The Benefits Committee acting as an Applicable Administrative Named Fiduciary, subject to subparagraph (2) hereof, has all the Authority or Discretion of an Administrative Named Fiduciary.  This grant of Authority or Discretion is exclusive, subject to the power of the Benefits Committee to allocate or delegate such Authority or Discretion pursuant to the procedures in the Plan, and includes, but is not limited to, Authority or Discretion to:

 

 

 

(i)

the extent provided in a Benefit Agreement, but only if it has been specifically designated in such agreement as being the responsibility of the Benefits Committee;

 

 

 

(ii)

construe and apply the provisions of the Plan or Trust, including a determination of who is eligible to be a Participant or is otherwise eligible for coverage under the Plan, subject only to the terms and conditions of the Plan;

 

 

 

(iii)

appoint and compensate such specialists (including attorneys, actuaries, consultants and accountants) to aid it in the administration of the Plan or Trust, and arrange for such other services, as the Benefits Committee acting as an Applicable Administrative Named Fiduciary considers

 

--

 


 

 

neces sary, appropriate or desirable in carrying out the provisions of the Plan or Trust;

 

 

 

(iv)

appoint and compensate an independent outside accountant to conduct such audits of the financial statements of the Plan or Trust as the Benefits Committee acting as an Applicable Administrative Named Fiduciary considers necessary, appropriate or desirable;

 

 

 

(v)

execute on behalf of the Plan or Trust, or to cause the Trustee to execute on behalf of the Plan or Trust, Benefit Agreements or other contracts which are legally enforceable and binding on the Plan or Trust, subject to ERISA and other applicable law;

 

 

 

(vi)

formulate, adopt, issue and apply procedures and rules and change, alter or amend such procedures and rules in accordance with law and as may be consistent with the terms of the Plan or Trust;

 

 

 

(vii)

be a final appeals Fiduciary under ERISA Section 503, to make a final determination with respect to any Claim;

 

 

 

(viii)

settle or compromise any litigation against the Plan or Trust or against a Fiduciary with respect to which the Plan or Trust has an indemnity obligation; and

 

 

 

(ix)

take any other actions necessary, incidental or desirable to the performance of the Authority or Discretion of the Benefits Committee.

 

 

 

(2)

The Benefits Committee will not be an Applicable Administrative Named Fiduciary whenever it acts as the Company and, notwithstanding any other term or provision of the Plan, Trust or any Benefit Agreement, the Benefits Committee will cease to be an Applicable Administrative Named Fiduciary with respect to any specified portion of Authority or Discretion, to the extent such Authority or Discretion has been identified or allocated to another Applicable Administrative Named Fiduciary pursuant to the procedure in the Plan or Trust.

 

 

(d) Benefits Committee Acting as Applicable Investment Named Fiduciary .  

 

 

(1)

The Benefits Committee, acting as an Applicable Investment Named Fiduciary, subject to subparagraph (2) hereof, has all the Authority or Discretion of an Investment Named Fiduciary.  This grant of Authority or Discretion is exclusive, subject to the power of the Benefits Committee to allocate or delegate such Authority or Discretion pursuant to the procedures in the Plan and includes, but

 

--

 


 

 

is not limited to, Authority or Discretion to:

 

 

 

(i)

appoint and remove the Trustee;

 

 

 

(ii)

direct the Trustee as to the investment and reinvestment of the assets of the Trust;

 

 

 

(iii)

appoint an Investment Manager, in accordance with the procedures in the Plan or Trust and by written Notice in writing to the Trustee, to manage, acquire or dispose of that portion of the Trust over which the Benefits Committee acting as an Applicable Investment Named Fiduciary has Authority or Discretion;

 

 

 

(iv)

require that the Trustee is subject to the direction of the Benefits Committee with respect to the Authority or Discretion for which the Benefits Committee acting as an Applicable Investment Named Fiduciary has Authority or Discretion;

 

 

 

(v)

establish written investment policies as to the Trust and ensure compliance with such policies and applicable law;

 

 

 

(vi)

delegate management and control over assets of the Trust to an Investment Manager; and

 

 

 

(vii)

take all other actions already described in the Trust or which are necessary, incidental or desirable for the Benefits Committee to fulfill its duties and obligations under the Trust.

 

 

 

(2)

The Benefits Committee will not be an Applicable Investment Named Fiduciary whenever it acts as the Company and, notwithstanding any other term or provision of the Plan, Trust or any Benefit Agreement, the Benefits Committee will cease to be an Applicable Investment Named Fiduciary with respect to some specified portion of the Authority or Discretion, to the extent such Authority or Discretion has been identified or allocated to another Applicable Investment Named Fiduciary pursuant to the procedure in the Plan or Trust.

 

 

(e) Procedures for Identification of a Named Fiduciary .

 

--

 


 

 

(1)

Procedure for Identification .  Subject to Section (e)(2), the Benefits Committee acting as the Company may from time to time identify a person to be a Named Fiduciary by (i) amending the Plan or Trust t o specify in the Plan or Trust document (A) the name or position of the person identified, and (B) the Authority or Discretion with respect to which the person will be a Named Fiduciary; or (ii) referencing a Benefit Agreement as a means for specifying the Authority or Discretion with respect to which such person will be a Named Fiduciary, in which case the Benefits Committee acting as the Company may make such identification under this clause (ii) by use of an Exhibit to the Plan or such other method of ta king action as the Benefits Committee acting as the Company may select.

 

 

No person who is identified as a Named Fiduciary hereunder must consent to such designation or identification nor will it be necessary for the Benefits Committee acting as the Company to seek such person’s or entity’s acquiescence.  The Authority or Discretion which a Named Fiduciary identified hereunder may have, will be several and not joint with the Benefits Committee or any other Named Fiduciary and the identification of such Named Fiduciary will result in the Benefits Committee or other Named Fiduciary no longer being a Named Fiduciary with respect to, nor having any longer, such Authority or Discretion.  On and after the identification of a person as a Named Fiduciary, neither the Benefits Committee nor any Named Fiduciary with respect to the Plan or Trust, will have any liability for the acts (or failure to act) of any such identified Named Fiduciary except to the extent of its co-Fiduciary duty under ERISA.

 

 

(2)

No Identification of Employer .  Notwithstanding the procedure set forth in (1) above, the Benefits Committee may not identify an Employer or its board of directors as a Named Fiduciary.  Nor may the Benefits Committee identify any officer of an Employer or an Employee as a Named Fiduciary, except by making them a member of the Benefits Committee.

 

 

(f) Compensation .  The members of the Benefits Committee, acting as a Named

Fiduciary, will serve without compensation for their services as such.

 

(g) Allocations and Delegations of Authority or Discretion .

 

--

 


 

 

(1)

Delegations .  Subject to Section (g)(4), each Named Fiduciary may (i) delegate Authority or Discretion, other than trustee responsibilities as described in Section 405(c)(3) of ERISA unless the delegation is to an investment mana ger as defined in ERISA Section 3(38), to persons it designates, and (ii) make a change of delegated responsibilities.  Each such delegation will either (i) if it relates to an individual employed by an Employer, specify the delegated person by name or by office and describe the Authority or Discretion delegated to such individual, or (ii) use a Benefit Agreement with such person as a means for specifying the Authority or Discretion delegated to such person.  The Benefits Committee acting as a Named Fiducia ry may make such delegations by use of an Exhibit to the Plan or such other method of taking such action which the Benefits Committee acting as a Named Fiduciary may select.  Any Named Fiduciary, other than the Benefits Committee acting as a Named Fiduciar y, may make such delegations only (i) in writing and (ii) after giving prior written Notice of such delegation to the Benefits Committee acting as a Named Fiduciary.  No person, other than an investment manager (as defined in Section 3(38) of ERISA), to wh om Authority or Discretion has been properly delegated must consent to being a Fiduciary nor will it be necessary for the delegating Named Fiduciary to seek such person’s acquiescence; however, where such person has not signed a contract, the person must b e given Notification of the services to be performed and agree to perform, or perform, such services.  A permissible delegation of Authority or Discretion which is not implemented in the manner set forth herein will not be void; however, whether the delega ting Named Fiduciary will have joint liability for acts of such person will be determined by applicable law.

 

 

 

(2)

Allocations .  Subject to Section (g)(4), the Benefits Committee acting as the Company may allocate Authority or Discretion, other than trustee responsibilities described in Section 405(c)(3) of ERISA, to a Named Fiduciary when it identifies such Named Fiduciary in the manner described in Section (e).  The Benefits Committee acting as a Named Fiduciary may allocate or reallocate Authority or Discretion, other than trustee responsibilities described in Section 405(c)(3) of ERISA, among Named Fiduciaries.  Each such allocation will either (i) if it relates to an individual employed by an Employer, specify the allocated person by name or by office and describe the Authority or Discretion allocated to such individual, or (ii) use a Benefit Agreement with such person as a means for specifying the Authority or Discretion allocated to such person.  The Benefits Committee acting as a Named Fiduciary may make such allocations by use of an Exhibit to the Plan or such other method of taking such action which the Benefits Committee acting as a Named Fiduciary may select.  No person to whom Authority or Discretion has been properly allocated must consent to being a Fiduciary nor will it be necessary for the allocating Named Fiduciary to seek such person’s acquiescence; however, where such person has not signed a contract, the person must be given Notification of the services to be performed and agree to perform, or perform, such services.  A permissible allocation of Authority or

 

--

 


 

 

Discretion which is not implemented in the manner set forth herein will not be void; however, whether the allocating Named Fiduciary will have joint liability for acts of such person will be determined by applicable law.

 

 

 

(3)

Limit on Liability .  The allocation and delegation of Authority or Discretion pursuant to the terms of this Plan are intended to limit the liability of the (i) Benefits Committee acting as a Named Fiduciary, and (ii) each other Named Fiduciary, as appropriate, in accordance with the provisions of Section 405(c) of ERISA.

 

 

 

(4)

No Delegation or Allocation to Employer .  Notwithstanding the procedures set forth in (1) or (2) above, a Named Fiduciary may not delegate or allocate Authority or Discretion to the Company, an Employer, or their respective boards of directors, officers or employees; provided, however, that the Benefits Committee may allocate Authority or Discretion among the members of the Benefits Committee, and the Benefits Committee may delegate Authority or Discretion to officers of Employers or to Employees.

 

 

(h)

Benefits Committee Bonding .  The Benefits Committee acting as a Named Fiduciary will serve without bond (except as otherwise required by federal law).

 

 

(i)

Information to be Supplied by Employer .  Each Employer will supply to the Benefits Committee acting as a Named Fiduciary, within a reasonable time of its request, the names of all Employees, their ages, their dates of hire, the names of all Employees who incur a termination of employment during any Plan Year and the dates of such terminations, and such other information in the Employer's possession as the Benefits Committee acting as a Named Fiduciary will from time to time request.  The Benefits Committee acting as a Named Fiduciary may rely conclusively on the information supplied to it by an Employer.

 

 

(j)

Misrepresentations .  The Benefits Committee acting as a Named Fiduciary may, but will not be required to, rely upon any certificate, statement or other representation made to it by another Named Fiduciary or by an Employee, a Participant, or another individual, or personal representative of any thereof with respect to any fact.  Any such certificate, statement or other representation will be conclusively binding upon such other Named Fiduciary, Employee, Participant, or other individual or personal representative, and on any heir or assignee of any thereof (but not upon the Benefits Committee), and any such person will thereafter be estopped from disputing the truth of any such certificate, statement or other representation.

 

 

(k)

Records .  The regularly kept records of any Named Fiduciary, Trustee or Employer may be relied upon conclusively by the Benefits Committee acting as a Named Fiduciary.

 

 

(l)

Plan Expenses . All expenses of the Plan or Trust which have been approved by the Benefits Committee acting as an Applicable Administrative Named Fiduciary will be paid by the Trust except to the extent paid by the Employer; and if paid by

 

--

 


 

the Employer, such Employer may , if authorized by the Benefits Committee acting as the Company, seek reimbursement of such expenses from the Trust and the Trust will reimburse the Employer.  If borne by the Employer(s), expenses of administering the Plan or Trust will be borne by the Em ployer(s) in such proportion as the Benefits Committee, acting as the Company, will determine.

 

 

(m)

Fiduciary Capacity .  Any person or group of persons may serve in more than one Fiduciary capacity with respect to the Plan or Trust.  In addition, any person or group of persons may serve both as a Fiduciary and as the Company, however, they must act as either a Fiduciary or the Company, but not both, with respect to any matter.

 

 

(n)

Employer's Agent .  The Benefits Committee acting as the Company will act as agent for each Employer.

 

 

(o)

Notices to Participants, Etc.   Any Notice, report or statement given, made, delivered or transmitted to a Participant or any other person entitled to or claiming benefits under the Plan will be deemed to have been duly given, made or transmitted when sent via messenger, delivery service, facsimile or mailed by first class mail with postage prepaid and addressed to the Participant or such person at the address last appearing on the records of the Applicable Administrative Named Fiduciary.  A Participant or such other person may record any change of his address from time to time by written Notice filed with the Applicable Administrative Named Fiduciary.

 

 

(p)

Plan Administrator .  The term "Plan Administrator" will have the meaning assigned to that term by ERISA Section 3(16)(A).  The Plan Administrator is the Benefits Committee, acting as an Applicable Administrative Named Fiduciary.

 

 

(q)

Named Fiduciary Decisions Final .  The decision of a Named Fiduciary in matters within its jurisdiction will be final, binding, and conclusive upon each Employer and the Trustee and upon each Employee, Participant, and every other person or party interested or concerned.

 

 

(r)

Agency .  Each Fiduciary will perform (or fail to perform) its Authority or Discretion with respect to the Plan or Trust as an independent contractor and not as an agent of the Plan, any Employer, the Trust or the Benefits Committee.  No agency is intended to be created nor is the Benefits Committee empowered to create an agency relationship with a Fiduciary acting as a Fiduciary.  Except as provided in this Section (r), the Plan, the Trust, the Benefits Committee or another Fiduciary may act through agents.

 


--

 


 

(s)

Composition of Benefits Committee .  The Benefits Committee will 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.

 

 

(t)

By-Laws .  The Benefits Committee may always act by unanimous consent, will adopt by-laws to govern its activities and may amend such by-laws from time to time."

 

 

(u)

Fiduciary to Direct Trustee    Each Named Fiduciary and the Benefits Committee, on its own behalf and on behalf of the Plan or Trust with respect to which the person is a fiduciary, as defined in ERISA, shall furnish the Trustee the name of each person upon whose statement of the decision or direction of such fiduciary the Trustee is authorized to rely; provided that, notwithstanding the preceding, any such person who, prior to the date of this Amendment, has been identified to the Trustee to communicate a decision or direction of the Asset Manager or the Administrator to the Trustee will continue to be authorized to communicate a decision or direction of the Benefits Committee to the Trustee until the Benefits Committee acts to terminate such authorization and so notifies the Trustee in writing.  Until notified of a change in the identity of such person or persons, the Trustee shall act upon the assumption that there has been no change.

 

 

(v)

Benefits Committee to Direct Trustee   The Benefits Committee acting as the Company and as agent for each Participating Employer, shall furnish the Trustee the name of each person upon whose statement of the decision, or direction, of the Benefits Committee acting as the Company, or the participating Employers, the Trustee is authorized to rely; provided that, notwithstanding the preceding, any such person who, prior to the date of this Amendment, has been identified to the Trustee to communicate a decision or direction of the Asset Manager or the Administrator to the Trustee will continue to be authorized to communicate a decision or direction of the Benefits Committee to the Trustee until the Benefits Committee acts to terminate such authorization and so notifies the Trustee in writing.  Until notified of a change in the identity of such person or persons, the Trustee shall act upon the assumption that there has been no change.  With respect to the Plan, the Benefits Committee will notify the Trustee in writing as to the identity of such Plan’s Contract Administrator (if any), and any other Named Fiduciary with respect to such Plan or Trust and the scope of Authority or Discretion of each whenever the term Applicable Administrative Named Fiduciary or Applicable Investment Named Fiduciary is used in this Trust, and the Trustee may conclusively rely on such Notification.

 

 

III - Actions by the Company

 

'Company,' when referred to in the Trust, will be deemed to mean a reference to:

 

 

(a)

with respect to actions taken by the Company as sponsor of the Trust, the Company’s board of directors, the Company’s authorized officers, or the Benefits Committee acting as the Company;

 

 

 

(b)

with respect to actions taken by the Company as a Named Fiduciary with

 

--

 


 

 

respect to administration of the Plan, the Benefits Committee acting as the Applicable Administrative Named Fiduciary; and

 

 

 

(c)

with respect to actions taken by the Company as a Named Fiduciary with respect to the management and control of assets of the Plan, the Benefits Committee acting as an Applicable Investment Named Fiduciary."

 

 

*     *     *

 

C.

Each Plan which is an unfunded top hat plan is amended by replacing or adding the terms related to the Plan's claims and appeals procedure to be the same as (i) part A.IV of the Plan amendment above, renumbered as appropriate for the Plan, (ii) part A.V of the Plan amendment above, renumbered as appropriate for the Plan, and (iii) those definitions in part A.I of the Plan amendment above, as are used in the aforementioned parts A.IV and A.V.

 

 

Each Plan which is an unfunded top hat plan or an excess benefit plan is amended (1) by changing the definition of the term, and all instances of the term, "Committee," or such other term as may be used in the Plan to define the person who has the power to administer the Plan, to the term "Benefits Committee", and (2)   by replacing or adding the terms related to the creation or appointment of a committee, administrator or other person with administrative power, to read as follows:

 

" Benefits Committee

 

 

(a)

Composition of Benefits Committee .  The Benefits Committee is hereby created and will 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.

 

 

 

(b)

By-Laws .  The Benefits Committee may always act by unanimous consent, will adopt by-laws to govern its activities and may amend such by-laws from time to time.

 

 

 

(c)

Authority to Act on Behalf of the Company .  In addition to the authority of the Company to act through its board of directors, authorized officers, or other authorized persons, the Benefits Committee will have the non-exclusive authority to act on behalf of the Company with respect to the Plan.

 

 

For purposes of this section:

 

' Treasurer ' means the most recently elected Treasurer of R.R. Donnelley & Sons Company ('Donnelley') or such other officer of Donnelley which from time to time assumes the responsibilities with respect to the Plan which are, on the day immediately prior to the date this Amendment is effective, allocated to the Treasurer.  In the event of the temporary absence of Donnelley’s officer who would otherwise be the 'Treasurer' under this Section, whether due to illness,

--

 


 

disability or otherwise, or upon the resignation or re moval of such officer, the substitute or successor officer to the Treasurer who performs substantially similar duties with respect to the Plan or Trust (whether assigned a different title by Donnelley or not), or, in the absence of such a substitute or suc cessor, the person to whom such Treasurer would report, will be the Treasurer.

 

' Vice President ' means the most recently elected Vice President, Benefits, of Donnelley or such other officer of Donnelley which from time to time assumes the responsibilities with respect to the Plan or Trust which are, on the day immediately prior to the date this Amendment is effective, allocated to the Vice President.  In the event of the temporary absence of Donnelley’s officer who would otherwise be the 'Vice President' under this Section, 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 or Trust (whether assigned a different title by Donnelley 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."

 

*     *     *

 

D.

Each Trust, if any related to a Plan which is an unfunded top hat plan or an excess benefit plan, is amended (1) by changing the definition of the term, and all instances of the term, "Committee," or such other term as may be used in the Trust to define the person who has the power to administer the Trust, to the term "Benefits Committee", and (2)   by replacing or adding the terms related to the creation or appointment of a committee, administrator or other person with administrative power, to read as follows:

 

 

" Benefits Committee

 

 

(a)

Composition of Benefits Committee .  The Benefits Committee, which is created by the plan related to this Trust, will 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.

 

 

 

(b)

By-Laws .  The Benefits Committee may always act by unanimous consent, will adopt by-laws to govern its activities and may amend such by-laws from time to time.

 

 

 

(c)

Authority to Act on Behalf of the Company .  In addition to the authority of the Company to act through its board of directors, authorized officers, or other authorized persons, the Benefits Committee will have the non-exclusive authority to act on behalf of the Company with respect to the Trust.

 

 

For purposes of this section:

 

' Treasurer ' means the most recently elected Treasurer of R.R. Donnelley & Sons Company ('Donnelley') or such other officer of Donnelley which from time to

--

 


 

time assumes the responsibilities with respect to the Plan which are, on the day immediately prior to the date this Amendment is effective, allocated to the Treasurer.  In the event of the temporary absence of Donnelley’s officer who would otherwise be the 'Treasurer' under this Section, whether due to illness, disability or otherwise, or upon the resignat ion or removal of such officer, the substitute or successor officer to the Treasurer who performs substantially similar duties with respect to the Plan or Trust (whether assigned a different title by Donnelley or not), or, in the absence of such a substitu te or successor, the person to whom such Treasurer would report, will be the Treasurer.

 

' Vice President ' means the most recently elected Vice President, Benefits, of Donnelley or such other officer of Donnelley which from time to time assumes the responsibilities with respect to the Plan or Trust which are, on the day immediately prior to the date this Amendment is effective, allocated to the Vice President.  In the event of the temporary absence of Donnelley’s officer who would otherwise be the 'Vice President' under this Section, 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 or Trust (whether assigned a different title by Donnelley 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."

 

--

 

 

Exhibit 10.10

RR Donnelley      Global Headquarters

35 West Wacker Drive

Chicago, Illinois 60601

Telephone (312) 326 8000

    

 

 

 

          

July 26, 2016

Kent Hansen

[email]

 

Dear  Kent:

 

The purpose of this letter is outline the employment agreement between you and LSC Communications US, LLC (“LSC Communications” or “Company”).  All capitalized terms used but not defined in the text of this letter (“Agreement”) shall have the meanings assigned to such terms in Annex A.

 

The terms of this Agreement are set forth below.

 

 

1.

Title and Responsibilities .  Effective September 6, 2016, you will serve as Senior Vice President, Controller & Chief Accounting Officer for LSC Communications US, LLC, reporting to Drew Coxhead, Chief Financial Officer, in accordance with the terms and provisions of this Agreement as well as any employment and other policies generally applicable to employees of the Company from time to time during the term of your employment. You will have the duties, responsibilities and authorities of such position as are assigned to you by the Company.   You will also receive such office, staffing and other assistance as is commensurate with that received by other executives at your level in the Company.  

 

 

 

2.

Employment at Will . You and we hearby acknowledge that your employment with the Company constitutes “at-will” employment and either party may terminate the employment relationship at any time upon written notice of termination within a reasonable period of time before the effective date of you Separation from Service.

 

 

 

3.

Compensation . You will receive the following compensation and benefits, from which the Company may withhold any amounts required by applicable law.

 

 

 

a.

Base Salary .  The Company will pay you a base salary (“Base Salary”) at the rate of $285,000 per year. This Base Salary will be paid in accordance with the normal payroll practices of the Company.

 

 

 

b.

Annual Bonus.   For each calendar year of the Company, you will be eligible to receive an annual  bonus (the “Annual Bonus”) in accordance with the Company’s annual incentive compensation plan (“Plan”).  Your

 

Page 1 of 10

 


 

 

target bonus opportunity during the first calendar year of the agreement  will be 75% of Base Salary, pro-rated for any partial year of service. The performance objectives for your A nnual Bonus with respect to each calendar year will be determined as provided for in the Plan.   Any Annual Bonus which you become entitled to receive shall be paid to you at the time set forth in the Plan.

 

 

 

c.

Signing Bonus .  The Company agrees to pay you a lump sum bonus of $100,000, less applicable deductions. The Company will pay the bonus to you in a lump sum, minus applicable deductions, by automatic direct deposit into the account previously designated by you on the first regular payday in which you are on the Company payroll.   Note : If you leave the Company voluntarily at any time within the first two years after your start date, you will be responsible for reimbursing the company for the unearned portion of the signing bonus as follows:

 

 

 

100% if you leave within the first 180 days;

 

 75% if you leave between 181and 365 days;

 

 50% if you leave between 366 and 545 days;

 

 25% if you leave between 546 and 730 days.

 

You authorize the Company to deduct from your wages, commissions, vacation, termination, separation pay, or any other pay due you, such unearned portion of the signing bonus.  To the extent there is a balance due, you agree to pay it within 30 days  of your departure.

 

 

d.

Equity .  You will be eligible to receive equity grants on an annual basis, and will receive grant amounts that are similar to other employees at your level in the organization.

 

 

 

e.

Vacation . You will be eligible for three weeks of vacation annually.

 

 

 

f.

Benefits . You will be eligible to participate in the employee benefit plans and programs generally applicable to the Company’s employees.

 

 

 

4.

Severance .  If your Separation from Service with the Company (and the members of the Company’s controlled group within the meaning of section 414(b) and (c) of the Internal Revenue Code of 1986, as amended (the “Code”))  is initiated by the Company without Cause, the following provisions will apply .

 

 

 

a.

Severance Pay .  The Company will pay you an amount equal to one times your Annualized Total Compensation (“Severance Pay”), subject to your prompt  execution of the Company’s customary release, which amount shall be payable in equal installments on the 15th and last days of each of the 12 months following the 30 th day after the date of your Separation from Service (if the 15th or last day of a month is not a business day, on the closest business day to such date).  This amount constitutes "Separation Pay" under the terms of the LSC Separation Pay Plan ("SPP")

 

Page 2 of 10

 


 

 

and all provisions of the SPP shall apply thereto and no other amount shall be payable under the SPP.

 

 

All payments made pursuant to this Agreement shall be reduced by applicable tax withholdings.  

Any disputes regarding Severance Pay will be governed by the claims and appeals procedures of the SPP.

 

 

b.

Resignations .   Upon your Separation from Service, you shall resign from such offices and directorships, if any, of the Company that you may hold on the date of your Separation from Service .  

 

 

 

c.

Indemnification .  Your rights of indemnification under the Company’s organizational documents, any plan or agreement at law or otherwise and your rights thereunder to director’s and officer’s liability insurance coverage for, in both cases, actions as an officer of the Company shall survive your Separation from Service.

 

 

 

d.

Section 409A. If you are a “specified employee” within the meaning set forth in the document entitled “409A:  Policy of LSC Communications and its Affiliates Regarding Specified Employees” on the date of your Separation from Service, then any amounts payable pursuant to this Agreement or otherwise that (i) become payable as a result of your Separation from Service and (ii) are subject to Code Section 409A as a result of your Separation from Service shall not be paid until the earlier of (x) the first business day of the sixth month occurring after the month in which the date of your Separation from Service occurs and (y) the date of your death.  Notwithstanding the immediately preceding sentence, amounts payable to you as a result of your involuntary Separation from Service that do not exceed two times the lesser of (i) your annualized compensation based upon your annual rate of Base Salary for the year prior to the year in which the date of your Separation from Service occurs and (ii) the maximum amount that may be taken into account under Code Section 401(a)(17) in the year in which the date of your Separation from Service occurs may be paid as otherwise scheduled .  If any compensation or benefits provided by this letter may result in the application of Code Section 409A, then the Company shall, in consultation with you, modify this Agreement to the extent permissible under Code Section 409A in the least restrictive manner necessary in order to exclude such compensation and benefits from the definition of “deferred compensation” within the meaning of such Code Section 409A or in order to comply with the provisions of Code Section 409A .  By signing this Agreement you acknowledge that if any amount paid or payable to you becomes subject to Code Section 409A, you are solely responsible for the payment of any taxes and interest due as a result .

 

 

 

5.

Restrictive Covenants .  You and the Company recognize that, due to the nature of your employment and relationship with LSC Communications, you will have

 

Page 3 of 10

 


 

 

access to and develop confidential business information, proprietary information, and trade secrets relating to the business and operations of the Company and its aff iliates. You acknowledge that such information is valuable to the business of LSC Communications and its affiliates, and that disclosure to, or use for the benefit of, any person or entity other than LSC Communications, would cause substantial damage to th e Company. You further acknowledge that your duties for LSC Communications include the opportunity to develop and maintain relationships with LSC Communications customers, employees, representatives and agents on behalf of LSC Communications and that acces s to and development of those close relationships with LSC Communications customers render your services special, unique and extraordinary. In recognition that the goodwill and relationships described herein are assets and extremely valuable to LSC Communi cations, and that loss of or damage to those relationships would destroy or diminish the value of LSC Communications, you agree as follows:

 

 

 

a.

Noncompetition .  In consideration of the covenants and agreements of the Company herein contained, the payments to be made by the Company pursuant to this Agreement, the positions of trust and confidence you occupy and have occupied with the Company and the information of a highly sensitive and confidential nature obtained as a result of such positions, you agree that, from the date of your  Separation from Service for any reason, including a Separation from Service initiated by LSC Communications, with or without Cause, and for 12 months thereafter (the “Severance Period”), you will not, directly or indirectly, engage in any business which is competitive with any business of the Company in which you worked or were engaged in the last two years of your employment with the Company , in the geographic areas where such business was conducted on behalf of the Company.  The phrase ‘directly or indirectly’ shall include, but not be limited to, engaging in such business either as an employee, employer, consultant, agent, principal, partner, stockholder, corporate officer, director or in any other individual or representative capacity. The Company agrees that you may, however, own stock or the rights to own stock in a company, whether or not a competitor, that is publicly owned and regularly traded on any national exchange or in the over-the-counter market, so long as your holdings of stock and rights to own stock of any such company do not exceed 1% of the capital stock entitled to vote in the election of directors and (ii) the combined value of the stock and rights to acquire stock does not exceed your gross annual earnings from the Company in the full tax year preceding the Separation Date.

 

 

 

b.

Importance of Customer Relationships . You recognize that LSC Communications’ relationship with the customer or customers you serve, and with other employees, is special and unique, based upon the development and maintenance of goodwill resulting from the customers’ and other employees’ contacts with the Company and its employees, including you. As a result of your position and customer contacts, you recognize that you will gain valuable information about (i) the Company’s relationship with its customers, their buying habits, special

 

Page 4 of 10

 


 

 

needs, purchasing policies, (ii) the skills, capabilities and other employment-related information about Company employees, and (iii) other matters which you would not otherwise know and which is not otherwise readily available. Such knowledge is essential to the business of the Company and you recognize that if your employment terminates, the Company will be required to rebuild that customer relationship to retain the customer’s business. You recognize that during a period following the date of your Separation from Service, the Company is entitled to protection from your using the information and customer and employee relationships with which you have been entrusted by the Company during your employment.

 

 

 

c.

Nonsolicitation of Customers .  You acknowledge and agree that any injury to the Company’s customer relationships, or the loss of those relationships, would cause irreparable harm to the Company.   While employed by LSC Communications and for a period of 12 months from the date of your Separation from Service with the Company for any reason, including your Separation from Service initiated by LSC Communications, with or without Cause , you shall not , directly or indirectly, either on your own behalf or on behalf of any other person, firm or entity, solicit or provide services which are the same as or similar to the services the Company provided or offered while you were employed by the Company to any customer or prospective customer of  the Company (i) with whom you had direct contact in the course of your employment with the Company or about whom you learned confidential information as a result of your employment with the Company or (ii) with whom any person over whom you had supervisory authority at any time had direct contact during the course of his or her employment with the Company or about whom such person learned confidential information as a result of his or her employment with the Company.

 

 

 

d.

Nonsolicitation of Employees . While employed by LSC Communications and for a period of two years from the date of your Separation from Service with the Company for any reason, including your Separation from Service initiated by LSC Communications, with or without Cause, you shall not either directly or indirectly solicit, induce or encourage any Company employee(s) to terminate their employment with the Company or to accept employment with any entity, including but not limited to a competitor, supplier or customer of the Company, nor shall you cooperate with any others in doing or attempting to do so. As used herein, the term “solicit, induce or encourage” includes , but is not limited to, (a) initiating communications with a Company employee relating to possible employment, (b) offering bonuses or additional compensation to encourage Compnay employees to terminate their employment with the Company, or (c) recommending or referring Company employees to search firms, headhunters or agents employed by others.

 

 

 

e.

Confidential Informa tion .  You are prohibited from, at any time during your employment with the Company or thereafter, disclosing or using any

 

Page 5 of 10

 


 

 

Confidential Information for your benefit or any other person or entity, unless directed or authorized in writing by the Company to d o so, until such time as the information becomes generally known to the public without your fault.  For purposes of this Agreement, “ Confidential Information ” means all information that meets one or more of the following three conditions: (i) it has not be en made available generally to the public either by  the Company or by a third party with  the Company’s consent, (ii) it is useful or of value to  the Company’s current or anticipated business or research and development activities or those of a customer or supplier of the Company, or (c) it either has been identified as confidential to Employee by the Company  (orally or in writing) or it has been maintained as confidential from outside parties and is recognized as intended for internal disclosure only. C onfidential Information includes, but is not limited to, “ Trade Secrets ” to the full extent of the definition of that term under Delaware law. It does not include “general skills, knowledge and experience” as those terms are defined under Delaware law.  Th ese restrictions are in addition to any confidentiality restrictions in any other agreement you may have signed with the Company.

 

 

 

f.

Obligation upon Subsequent Employment . If you accept employment with any future employer during the time period that equals t he greater of one year following the date of your Separation from Service and the Severance Period (regardless of whether you actually receive severance benefits during that period), you will deliver a copy of this Agreement to such employer and advise such employer concerning the existence of your obligations under this Agreement.

 

 

 

g.

Geographic Scope . You understand that the Company has sales and manufacturing facilities throughout the United States and in a number of foreign countries, that it purchases equipment and materials from suppliers located throughout the world, and that it expects to expand the scope of its international activities in the future. You therefore agree that your obligations under Paragraph 5 shall extend worldwide.

 

 

 

h.

Other Agreements .  In the event a covenant in this Agreement covers the same subject matter of a provision contained in one or more other agreements between you and the Company, you agree that the provision containing the greatest enforceable time, territorial, and/or prohibited activity restriction(s) shall control.  

 

 

 

i.

Company’s Right to Injunctive Relief .  By execution of this Agreement, you acknowledge and agree that the Company would be damaged irreparably if an y provision under this Paragraph 5 were breached by you and money damages would be an inadequate remedy for any such nonperformance or breach.  Accordingly, in order to protect its interests , the Company shall be entitled to pursue, in addition to other rights and remedies existing in its favor, an injunction or injunctions to prevent any breach or threatened breach of any of such provisions and to enforce such

 

Page 6 of 10

 


 

 

provisions specifically (without posting a bond or other security).  With respect to such enforce ment, the prevailing party in such litigation shall be entitled to recover from the other party any and all attorneys’ fees, costs and expenses incurred by or on behalf of that party in enforcing or attempting to enforce any provision under this Section 5 or any other rights under this Agreement.

 

 

 

6.

General

 

 

 

a.

Acknowledgement of Reasonableness and Severability . You acknowledge and agree that the provisions of this Agreement, including Section 5, are reasonable and valid in geographic, temporal and subject matter scope and in all other respects, and do not impose limitations greater than are necessary to protect the goodwill, Confidential Information and other business interests of the Company.  If any court subsequently determines that any part of this Agreement, including Section 5, is invalid or unenforceable, the remainder of the Agreement shall not be affected and shall be given full effect without regard to the invalid portions.  Further, any court invalidating any provision of this Agreement shall have the power to revise the invalidated provisions such that the provision is enforceable to the maximum extent permitted by applicable law.

 

 

 

b.

Non-duplication of Severance Pay . By signing this Agreement, you hereby waive any right to any “Benefits” under the SPP, other than those specified in this Agreement.   

 

 

 

c.

Employee Breach .    If you breach this Agreement or any other agreement you have signed with the Company, the Company may, in its complete discretion, stop making any of the payments provided for in this Ag reement, in addition to any other rights or remedies the Company may have under this Agreement, at law or in equity.

 

 

 

d.

Arbitration .  Any dispute, claim or controversy arising out of or relating to this Agreement or the breach, termination, enforcement, interpretation or validity thereof, that cannot be resolved by you and the Company, including any dispute as to the calculation of any payments hereunder, the determination of the scope or applicability of this Agreement to arbitrate and the terms of this Agreement, shall be determined by a single arbitrator in Chicago, Illinois. The arbitration shall be administered by JAMS pursuant to its Streamlined Arbitration Rules and Procedures; provided, however, that either party may seek preliminary injunctive relief to maintain or restore the status quo pending a decision of the arbitrator, and the parties consent to the exclusive jurisdiction of the courts of the State of Delaware or the Federal courts of the United States of America located in the District of Delaware in connection therewith. The decision of the arbitrator shall be final and binding and may be entered in any court of competent jurisdiction. The arbitrator may, in the

 

Page 7 of 10

 


 

 

award, allocate all or part of the costs of the arbitration, including the fees of t he arbitrator and the reasonable attorneys’ fees of the prevailing party.

 

 

 

e.

Governing Law .  You acknowledge and agree that the Company has an interest in administering its employee agreements, plans, and programs under uniform law, and that it is fair to have all LSC Communications employees be subject to uniform laws in connection with agreements like this one. Therefore you agree that this Agreement shall be governed by the laws of the State of Delaware (where LSC Communications US, LLC is organized) and a pplicable federal laws, and construed in accordance therewith without giving effect to principles of conflicts of laws  

 

 

 

f.

Notice and Execution .  This Agreement may be executed in counterparts.  Any notice or request required or permitted under this Agreement must be in writing, addressed; (i) if to the Company, to the attention of the chief human resources officer, at its Corporate Headquarters and (ii) if to Employee, at Employee’s last known address (or to any other addresses as either party may designate in a notice duly delivered as described in this paragraph).  Any notice or communication shall be delivered by fax (with proof of transmission), by hand or by courier (with proof of delivery), or by certified or registered United States mail, return receipt requested, postage prepaid.  For notices and communications delivered by fax, by hand or by courier, the time of delivery shall constitute the time at which notice is given.  For notices and communications sent by United States mail, the fifth business day after the actual date of mailing shall constitute the time at which notice is given.  

 

 

 

g.

Entire Agreement .  This Agreement contains the entire understanding and agreement between the parties concerning the subject matter hereof and fully supersedes all prior agreements, understandings, discussions, negotiations and undertakings, whether written or oral, between the parties with respect thereto, except that any restrictive covenant, confidentiality or intellectual property obligations that Employee has to the Company shall survive and not be superseded, including without limitation, those set forth in the Company’s policies. This Agreement may not be modified except by a written, signed agreement executed by Employee and the Company.

 

 

 

h.

Waiver .  The failure of either party hereto to enforce at any time any provision of this Agreement shall not be construed as a waiver of such provision nor in any way to affect the validity of this Agreement or any part hereof or the right of such party thereafter to enforce each and every such provision.  No waiver of any breach of this Agreement shall be held to constitute a waiver of any other or subsequent breach.

 

 

 

i.

Severability .  If any provision contained in this Separation Agreement is finally held to be invalid, illegal or unenforceable (whether in whole or in part), such provision shall be deemed modified, but only to the extent necessary, to make such provision valid, legal and enforceable.  In any

 

Page 8 of 10

 


 

 

event, the remainder of this Agreement shall continue to be valid and e nforceable to the fullest extent permitted by law.  

 

 

 

j.

Assignments and Successors.   You understand and agree that the Company’s rights and obligations under this Agreement shall inure to the benefit of, and shall be binding on, any successor in interest to the Company and that the Company may, at any time and without consent of or further action by you, assign this Agreement to any affiliate of the Company or to a purchaser or transferee of all or a substantial portion of the Company’s assets.  You understand and agree that you may not assign any rights or transfer any obligations you have under this Agreement.

 

 

If the foregoing terms and conditions are acceptable and agreed to by you, please sign on the line provided below to signify such acceptance and agreement and return the executed copy to Scott Bigelow, Vice President, Human Resources.

 

Very truly yours,

 

 

LSC Communications US, LLC

 

By: _/s/ Suzanne S. Bettman________________

Suzanne S. Bettman

Chief Administrative Officer

 

_

 

 

 

ACCEPTED AND AGREED to this 28th day of July, 2016

 

 

_/s/ Kent Hansen____________________________

Kent Hansen

 

 


Page 9 of 10

 


 

 

Annex A

 

Definitions

 

 

1.

“Annualized Total Compensation” means Base Salary plus Annual Bonus (at the target level) for one year at the rate in effect immediately before the Separation Date, but, for these calculations only, your Base Salary and target bonus percentage shall not be less than the amount set forth in Section 3, above

 

 

 

2.

“Cause” means (i) your willful and continued failure to perform substantially your duties with the Company (other than any such failure resulting from your incapacity due to physical or mental illness or any such failure subsequent to your being delivered a notice of termination without Cause) after a written demand for substantial performance is delivered to you by the Group President, the Chief Executive Officer, or the Board that identifies the manner in which you have not performed your duties, (ii)  your willful engaging in conduct which is demonstrably and materially injurious (monetarily or otherwise) to the business, reputation, character or community standing of the Company, (iii) conviction of or the pleading of nolo contendere with regard to a felony or any crime involving fraud, dishonesty or moral turpitude, or (iv) a refusal or failure to attempt in good faith to follow the written direction of the Group President, the Chief Executive Officer, or the Board (provided that such written direction is consistent with your duty and station) promptly upon receipt of such written direction.  For the purposes of this definition, no act or failure to act by you shall be considered “willful” unless done or omitted to be done by you in bad faith and without reasonable belief that your action or omission was in the best interests of the Company.  Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or based upon the advice of the Company’s principal outside counsel shall be conclusively presumed to be done, or omitted to be done, by you in good faith and in the best interests of the Company.  Notwithstanding the foregoing, the Company shall provide you with a reasonable amount of time, after a notice and demand for substantial performance is delivered to you, to cure any such failure to perform, and if such failure is so cured within a reasonable time thereafter, such failure shall not be deemed to have occurred.

 

 

 

3.

“Committee” means a committee designated by the Chief Human Resources Officer of the Company.

 

 

 

4.

“Separation from Service” means a termination of employment with the Company within the meaning of Treasury Regulation §1.409A-1(h).

 

 

Page 10 of 10

 

Exhibit 10.12

R.R. DONNELLEY & SONS COMPANY  
DIRECTOR RESTRICTED STOCK UNIT AWARD

This Restricted Stock Unit Award (“Award”) is granted as of this ___th day of ______ (the “Grant Date”) by R.R. Donnelley & Sons Company, a Delaware corporation (the “Company”), to XXXXXX XXXXX (“Grantee”).   This Award is made to Grantee pursuant to the provisions of the Company’s 2004 Performance Incentive Plan (the “2004 PIP”).  Capitalized terms not defined herein shall have the meanings specified in the 2004 PIP .

 

1. Grant of Award .  The Company hereby credits to Grantee XXXXX restricted stock units (the “RSUs”), subject to the restrictions and on the terms and conditions set forth herein.  Grantee shall indicate acceptance of this Award by signing and returning a copy hereof.

2. Issuance of Common Stock in Satisfaction of Restricted Stock Units .  

(a) On the earlier of (i) the third anniversary of the Grant Date and (ii) the date the Grantee ceases to be a member of the Board of Directors of the Company (the “Board”), the number of shares of Common Stock (or, in the Company’s discretion, cash based on the fair market value of the Common Stock on the date of distribution) equal to one‑third of the RSUs (the “First Tranche RSUs”) shall be delivered to the Grantee; provided , however , that the Grantee may elect to defer the delivery of the shares of Common Stock (or cash) underlying the First Tranche RSUs until the date such Grantee ceases to be a member of the Board by delivering the Deferral Election attached hereto as Exhibit A within one year of the Grant Date.  THE RIGHT TO DEFER DELIVERY OF THE SHARES UNDERLYING THE FIRST TRANCHE RSUs SHALL LAPSE IF NOT EXERCISED BY THE ONE YEAR ANNIVERSARY OF THE GRANT DATE.

(b) On the date the Grantee ceases to be a member of the Board, shares of Common Stock (or, in the Company’s discretion, cash based on the fair market value of the Common Stock on the date of distribution) with respect to the remaining two‑thirds of the RSUs (the “Second Tranche RSUs”) or 100% of the RSUs if the Grantee so elects by delivery of Exhibit A, shall be delivered to the Grantee.  

(c) Each RSU shall be cancelled upon the issuance of a share of Common Stock (or cash) with respect thereto.

3. Fractional Shares .  Any fractional shares of Common Stock that would otherwise be deliverable on the date Grantee ceases to be a member of the Board or the third anniversary of the Grant Date, as applicable, shall be paid in cash based upon the fair market value of a share of Common Stock on the date of distribution.


4. Dividends .  Dividends or other distributions that are payable (other than dividends or distributions for which the record date is prior to the date hereof) during the period commencing on the date hereof and ending on the date on whi ch no RSUs shall remain outstanding (due to issuance of shares of Common Stock (or cash) in satisfaction of RSUs pursuant to paragraph 3) on a like number of shares of Common Stock as are equal to the number of RSUs then outstanding shall be credited to a book keeping account for the Grantee.  Such accounts shall be credited quarterly (beginning on the last day of the calendar quarter in which the first credit to the account was made) with an amount of interest on the balance (including interest previously credited) at an annual rate equal to the then current yield obtainable on United States government bonds having a maturity date of approximately five years.  The entire amount in such account shall be paid out on the date the Grantee ceases to be a member of the Board (the “Dividend Equivalents”).    

5. Rights as a Shareholder .  Prior to issuance, Grantee shall not have the right to vote, nor have any other rights of ownership in, the shares of Common Stock to be issued in satisfaction of the RSUs.  

6. Withholding Taxes .  

(a) As a condition precedent to the issuance to Grantee of any shares of Common Stock pursuant to this Award, the Grantee shall, upon request by the Company, pay to the Company such amount of cash as the Company may be required, under all applicable federal, state, local or other laws or regulations, to withhold and pay over as income or other withholding taxes (the “Required Tax Payments”) with respect to the Award and any Dividend Equivalents.  If Grantee shall fail to advance the Required Tax Payments after request by the Company, the Company may, in its discretion, deduct any Required Tax Payments from any amount then or thereafter payable by the Company to Grantee.

(b)

-2-

 

Grantee may elect to satisfy his or her obligation to advance the Required Tax Payments by any of the following means:  (1) a cash payment to the Company, (2) delivery to the Company of previously owned whole shares of Common Stock for which Grantee has good title, free and clear of all liens and encumbrances, having a fair market value, determined as of the date the obligation to withhold or pay taxes first arises in connection with the Award and any Dividend Equivalents (the “Tax Date”), equal to the Required Tax Payments, or (3) directing the Company to withhold a number of shares of Common Stock (or cash) otherwise issuable to Grantee pursuant to this Award and any Dividend Equivalents having a fair market value, determined as of the Tax Date, equal to the Required Tax Payments or any combination of (1)-(3).  Any fraction of a share of Common Stock which would be required to satisfy such an obligation shall be disregarded and the remaining amount due shall be paid in cash by Grantee.  No certificate representing a share of Common Stock shall be delivered until the Required Tax Payments have been satisfied in full.  For purposes of this Award and any Dividend Equivalents, the fair market value of a share of Common Stock on a specified date shall be determined by reference to

the average of the high and low transaction prices in trading of the Common Stock on such date as reported in the New York Stock Exchange-Composite Transactions, or, if no such trading in the Common Stock occurred on such date, then on the next preceding date when such trading occurred.

 

7. Miscellaneous  

(a) The Company shall pay all original issue or transfer taxes with respect to the issuance or delivery of shares of Common Stock pursuant hereto and all other fees and expenses necessarily incurred by the Company in connection therewith, and will use reasonable efforts to comply with all laws and regulations which, in the opinion of counsel for the Company, shall be applicable thereto.

(b) This Award shall be governed in accordance with the laws of the State of Illinois.

(c) This Award shall be binding upon and inure to the benefit of any successor or successors to the Company.

(d) Neither this Award nor the RSUs nor any rights hereunder or thereunder may be transferred or assigned by Grantee other than:

 

(1)by will or the laws of descent and distribution;

 

 

(2)in whole or in part to one or more transferees; provided that (i) any such transfer must be without consideration, (ii) each transferee must be a “family member” of Grantee, a trust established for the exclusive benefit of Grantee and/or one or more family member of Grantee or a partnership whose sole equity owners are Grantee and/or family members of Grantee, and (iii) such transfer is specifically approved by the Company’s Chief Administrative Officer or the Committee following the receipt of a completed Assignment of Restricted Stock Unit Award attached hereto as Exhibit B; or

 

(3) as otherwise set forth in an amendment to this Agreement.  

 

-3-

 

In the event the RSUs are transferred as contemplated in this Section 7(d), such transfer shall become effective when approved by the Company’s Chief Administrative Officer or the Committee (as evidenced by counter execution of the Assignment of Restricted Stock Unit Award on behalf of the Company), and such RSUs may not be subsequently transferred by the transferee other than by will or the laws of descent and distribution.  Any transferred RSU shall continue to be governed by and subject to the terms and conditions of the 2004 PIP and this Agreement and the transferee shall be entitled to the same rights as Grantee as if no transfer had taken place.  Except as permitted by the foregoing, the RSUs and

this Award may not be sold, transferred, assigned, pledg ed, hypothecated, encumbered or otherwise disposed of (whether by operation of law or otherwise) or be subject to execution, attachment or similar process.  Upon any attempt to so sell, transfer, assign, pledge, hypothecate, encumber or otherwise dispose o f the RSUs, the RSUs and all rights hereunder shall immediately become null and void.  As used in this Section, "family member" with respect to any person, includes any child, step-child, grandchild, parent, step-parent, grandparent, spouse, former spouse, sibling, niece, nephew, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law and sister-in-law, including adoptive relationships, and any person sharing the transferor's household (other than a tenant or employee) .

 

(e) The Committee, as from time to time constituted, shall have the right to determine any questions which arise in connection with this Agreement, the RSUs or the Dividend Equivalents.  This Agreement and the RSUs are subject to the provisions of the 2004 PIP and shall be interpreted in accordance therewith.

 

IN WITNESS WHEREOF, the Company has caused this Award to be duly executed by its duly authorized officer.

R.R. Donnelley & Sons Company

By: __________________________

Name: Suzanne Bettman

Title: SVP and General Counsel

Accepted: ________________________

 



   R.R. DONNELLEY & SONS COMPANY

AMENDMENT TO

DIRECTOR RESTRICTED STOCK UNIT AWARD

THIS AMENDMENT TO DIRECTOR RESTRICTED STOCK UNIT AWARD (this “Amendment”) is made as of May 21, 2009 by and between R.R. Donnelley & Sons Company, a Delaware corporation (the “Company”), and  XXXXXXXX  (the “Grantee”).

WHEREAS, the Company and Grantee are parties to a Director Restricted Stock Unit Award dated May 28, 2008 (the “Award Agreement”).

WHEREAS, the Company and Grantee have determined that it would be in the best interests of the Company and Grantee if the Award Agreement was amended to allow for deferral of payment of all or any portion of the award in accordance with the provisions of Section 409A of the Internal Revenue Code of 1986, as amended.

NOW THEREFORE, for good and valuable consideration the receipt and sufficiency of which hereby are acknowledged, the parties hereto hereby agree as follows:

1. Section 2 of the Award Agreement shall be deleted and replaced in its entirety by the following language:

Issuance of Common Stock in Satisfaction of Restricted Stock Units .

(a) Except to the extent otherwise provided in paragraphs 2(b) or (c) below, on each of the first, second and third anniversary of the Grant Date (the “Vesting Dates”) the number of shares of Common Stock equal to one-third of the RSUs (the “Vesting RSUs”) and cash in the amount of Dividend Equivalents (as defined below) earned with respect to such Vesting RSUs pursuant to paragraph 4 below shall be delivered to the Grantee;  provided however , that the Grantee may elect to defer the delivery of the shares of Common Stock underlying any of the Vesting RSUs until the date such Grantee ceases to be a member of the Board of Directors of the Company (the “Board”) or such other date as required by Section 409A of the Internal Revenue Code of 1986, as amended (“Section 409A”), by delivering a Deferral Election to the Company in accordance with Section 409A.

(b) On the date the Grantee ceases to be a member of the Board, shares of Common Stock with respect to any remaining RSUs (including any Vesting RSUs deferred by the Grantee) and cash in the amount of Dividend Equivalents earned with respect to such RSUs pursuant to paragraph 4 below shall be delivered to the Grantee.

(c) Upon the Acceleration Date associated with a Change in Control, shares of Common Stock with respect to any remaining RSUs (including any Vesting RSUs deferred by the Grantee) and cash in the amount of Dividend Equivalents earned with respect to such RSUs pursuant to paragraph 4 below shall be delivered to the Grantee in accordance with the terms of the 2004 PIP.


(d) Each RSU shall be cancelled upon the issuance of a share of Common Stock (or cash with respect to fractional shares) with respect thereto.

 

2. This Amendment shall be binding upon and inure to the benefit of the parties hereto and their respective successors, assigns, personal representatives and heirs.

3. All other terms and conditions of the Award Agreement shall remain in full force effect

4. This Amendment and the rights and obligations of the parties hereunder shall be governed by and interpreted, construed and enforced in accordance with, the laws of the State of Illinois.

IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date set forth above.

 

R.R. Donnelley & Sons Company:

 

Grantee:

 

 

 

 

 

 

By :

 

Thomas Carroll

 

Accepted:

 

 

Title:

 

EVP, Human Resources

 

 

 

[Grantee Signature]

 

Exhibit 10.13

R.R. DONNELLEY & SONS COMPANY
DIRECTOR RESTRICTED STOCK UNIT AWARD

This Restricted Stock Unit Award (“Award”) is granted as of this __ day of _________ (the “Grant Date”) by R.R. Donnelley & Sons Company, a Delaware corporation (the “Company”), to _____________ (“Grantee”).   This Award is made to Grantee pursuant to the provisions of the Company’s 2012 Performance Incentive Plan (the “2012 PIP”).  Capitalized terms not defined herein shall have the meanings specified in the 2012 PIP .

 

1. Grant of Award .  The Company hereby credits to Grantee XXXXX restricted stock units (the “RSUs”), subject to the restrictions and on the terms and conditions set forth herein.  Grantee shall indicate acceptance of this Award by signing and returning a copy hereof.

2. Issuance of Common Stock in Satisfaction of Restricted Stock Units .  

(a) Except to the extent otherwise provided in paragraph 2(b) or (c) below, on each of the first, second and third anniversary of __________ (the “Payment Dates”) the number of shares of Common Stock equal to one‑third of the RSUs (the “Payable RSUs”) and cash in the amount of Dividend Equivalents (as defined below) earned with respect to such Payable RSUs pursuant to paragraph 4 below shall be delivered to the Grantee; provided , however , that the Grantee may irrevocably elect, no later than the December 31 st preceding the year in which the Grant Date is to occur, to defer the delivery of the shares of Common Stock underlying the Payable RSUs until the date such Grantee ceases to be a member of the Board of Directors of the Company (the “Board”) or otherwise has a separation from service within the meaning of section 409A(a)(2)(A)(i) of the Internal Revenue Code of 1986, as amended (the “Code”).

(b) On the date Grantee ceases to be a member of the Board or such other date as required by section 409A of the Code, shares of Common Stock with respect to any remaining RSUs (including any Payable RSUs deferred by the Grantee) and cash in the amount of Dividend Equivalents earned with respect to such RSUs pursuant to paragraph 4 below shall be delivered to the Grantee.

(c) Upon the Acceleration Date associated with a Change in Control, shares of Common Stock with respect to any remaining RSUs (including any Payable RSUs deferred by the Grantee) and cash in the amount of Dividend Equivalents earned with respect to such RSUs pursuant to paragraph 4 below shall be delivered to the Grantee in accordance with the terms of the 2012 PIP.

(d) Each RSU shall be cancelled upon the issuance of a share of Common Stock (or cash with respect to fractional shares) with respect thereto.


 

3. Fractional Shares .  Any fractional shares of Common Stock that would otherwise be deliverable as set forth above shall be paid in cash based upo n the fair market value of a share of Common Stock on the date of distribution.

4. Dividends .  Dividends or other distributions that are payable (other than dividends or distributions for which the record date is prior to the date hereof) during the period commencing on the date hereof and ending on the date on which no RSUs shall remain outstanding (due to issuance of shares of Common Stock (or cash) in satisfaction of RSUs pursuant to paragraphs 2 and 3) on a like number of shares of Common Stock as are equal to the number of RSUs then outstanding shall be credited to a book keeping account for the Grantee (the “Dividend Equivalents”).  Such accounts shall be credited quarterly (beginning on the last day of the calendar quarter in which the first credit to the account was made) with an amount of interest on the balance (including interest previously credited) at an annual rate equal to the then current yield obtainable on United States government bonds having a maturity date of approximately five years.      

5. Rights as a Shareholder .  Prior to issuance, Grantee shall not have the right to vote, nor have any other rights of ownership in, the shares of Common Stock to be issued in satisfaction of the RSUs.  

6. Withholding Taxes .  

(a) As a condition precedent to the issuance to Grantee of any shares of Common Stock pursuant to this Award, Grantee shall, upon request by the Company, pay to the Company such amount of cash as the Company may be required, under all applicable and allowable laws or regulations, to withhold and pay over as income or other withholding taxes (the “Required Tax Payments”) with respect to the Award and any Dividend Equivalents.  If Grantee shall fail to advance the Required Tax Payments after request by the Company, the Company may, in its discretion, deduct any Required Tax Payments from any amount then or thereafter payable by the Company to Grantee.

(b) Grantee may elect to satisfy his or her obligation to advance the Required Tax Payments by any of the following means:  (1) a cash payment to the Company, (2) delivery to the Company of previously owned whole shares of Common Stock for which Grantee has good title, free and clear of all liens and encumbrances, having a fair market value, determined as of the date the obligation to withhold or pay taxes first arises in connection with the Award and any Dividend Equivalents (the “Tax Date”), equal to the Required Tax Payments, or (3) directing the Company to withhold a number of shares of Common Stock (or cash) otherwise issuable to Grantee pursuant to this Award and any Dividend Equivalents having a fair market value, determined as of the Tax Date, equal to the Required Tax Payments or any combination of (1)-(3). No certificate representing a share of Common Stock shall be delivered until the Required Tax Payments have been satisfied in full.  For purposes of this Award and any Dividend Equivalents, the fair market value of a share of Common Stock on a specified date shall be determined by reference to the closing stock price  in trading of the Common Stock or, if no such trading in the Common Stock

2

 


 

occurred on such date, then on the next preceding date when such trading occurred.

 

7. Miscellaneous  

(a) The Company shall pay all original issue or transfer taxes with respect to the issuance or delivery of shares of Common Stock pursuant hereto and all other fees and expenses necessarily incurred by the Company in connection therewith, and will use reasonable efforts to comply with all laws and regulations which, in the opinion of counsel for the Company, shall be applicable thereto.

(b) This Award shall be governed in accordance with the laws of the State of Illinois.

(c) This Award shall be binding upon and inure to the benefit of any successor or successors to the Company.

(d) Neither this Award nor the RSUs nor any rights hereunder or thereunder may be transferred or assigned by Grantee other than:

 

(1)by will or the laws of descent and distribution;

 

 

(2)in whole or in part to one or more transferees; provided that (i) any such transfer must be without consideration, (ii) each transferee must be a “family member” of Grantee, a trust established for the exclusive benefit of Grantee and/or one or more family member of Grantee or a partnership whose sole equity owners are Grantee and/or family members of Grantee, and (iii) such transfer is specifically approved by the Company’s EVP and General Counsel or the Committee following the receipt of a completed Assignment of Restricted Stock Unit Award attached hereto as Exhibit A; or

 

(3) as otherwise set forth in an amendment to this Award.  

 

In the event the RSUs are transferred as contemplated in this Section 7(d), such transfer shall become effective when approved by the Company’s General Counsel or the Committee (as evidenced by counter execution of the Assignment of Restricted Stock Unit Award on behalf of the Company), and such RSUs may not be subsequently transferred by the transferee other than by will or the laws of descent and distribution.  Any transferred RSU shall continue to be governed by and subject to the terms and conditions of the 2012 PIP and this Agreement and the transferee shall be entitled to the same rights as Grantee as if no transfer had taken place.  Except as permitted by the foregoing, the RSUs and this Award may not be sold, transferred, assigned, pledged, hypothecated, encumbered or otherwise disposed of (whether by operation of law or otherwise) or be subject to execution, attachment or similar process.  Upon any attempt to so sell, transfer,

3

 


 

assign, pledge, hypothecate, encumber or otherwise dispose of the RSUs, the RSUs and all rights hereunder shall immediately become null and void.  As used in this Section, "family member" with respect to any person, includes any child, step-child, grandchild, parent, step -parent, grandparent, spouse, former spouse, sibling, niece, nephew, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law and sister-in-law, including adoptive relationships, and any person sharing the transferor's household (other tha n a tenant or employee) .

 

(e) The Committee, as from time to time constituted, shall have the right to determine any questions which arise in connection with this Award, the RSUs or the Dividend Equivalents.  This Award and the RSUs are subject to the provisions of the 2012 PIP and shall be interpreted in accordance therewith.

 

IN WITNESS WHEREOF, the Company has caused this Award to be duly executed by its duly authorized officer.

R.R. Donnelley & Sons Company

 

By:

Name: Suzanne Bettman

Title: General Counsel

 

 

 

Accepted: ________________________

                 

 

4

 

Exhibit 10.15

LSC COMMUNICATIONS, INC.
DIRECTOR RESTRICTED STOCK UNIT AWARD

This Restricted Stock Unit Award (“Award”) is granted as of this __ day of _________ (the “Grant Date”) by LSC Communications, Inc., a Delaware corporation (the “Company”), to XXXXXXX (“Grantee”).   This Award is made to Grantee pursuant to the provisions of the Company’s 2016 Performance Incentive Plan (the “2016 PIP”).  Capitalized terms not defined herein shall have the meanings specified in the 2016 PIP .

 

1. Grant of Award .  The Company hereby credits to Grantee XXXXX restricted stock units (the “RSUs”), subject to the restrictions and on the terms and conditions set forth herein.  Grantee shall indicate acceptance of this Award by signing and returning a copy hereof.

2. Issuance of Common Stock in Satisfaction of Restricted Stock Units .  

(a) Except to the extent otherwise provided in paragraph 2(c) below, the Company shall deliver to Grantee on the earlier of  (1) the first anniversary of the Grant Date or (2) the date Grantee ceases to be a member of the Board or such other date as required by section 409A(a)(2)(A)(i) of the Internal Revenue Code of 1986, as amended (the “Code”), the number of shares of Common Stock equal to all of the RSUs and cash in the amount of Dividend Equivalents (as defined below) earned with respect to such RSUs pursuant to paragraph 3 below.

(b) Upon the Acceleration Date associated with a Change in Control, shares of Common Stock with respect to any remaining RSUs and cash in the amount of Dividend Equivalents earned with respect to such RSUs pursuant to paragraph 3 below shall be delivered to Grantee in accordance with the terms of the 2016 PIP.

(c) Each RSU shall be cancelled upon the issuance of a share of Common Stock with respect thereto.

3. Dividend Equivalents . An amount in cash equal to the amount of dividends and  other distributions that are payable (other than dividends or distributions for which the record date is prior to the date hereof) during the period commencing on the date hereof and ending on the date on which no RSUs shall remain outstanding (due to issuance of shares of Common Stock (or cash) in satisfaction of RSUs pursuant to paragraph 2) on a like number of shares of Common Stock as are equal to the number of RSUs then outstanding shall be credited to a bookkeeping account for Grantee (the “Dividend Equivalents”).  Such bookkeeping account shall be credited quarterly (beginning on the last day of the calendar quarter in which the first credit to the account was made) with an amount of interest on the balance (including interest previously credited) at an annual rate equal to the then current yield obtainable on United States government bonds having a maturity date of approximately five years.      


 

4. Rights as a Shareholder .  Prior to issuance, Gran tee shall not have the right to vote, nor have any other rights of ownership in, the shares of Common Stock to be issued in satisfaction of the RSUs.  

5. Withholding Taxes

(a) As a condition precedent to the issuance to Grantee of any shares of Common Stock pursuant to this Award, Grantee shall, upon request by the Company, pay to the Company such amount of cash as the Company may be required, under all applicable and allowable laws or regulations, to withhold and pay over as income or other withholding taxes (the “Required Tax Payments”) with respect to the Award and any Dividend Equivalents.  If Grantee shall fail to advance the Required Tax Payments after request by the Company, the Company may, in its discretion, deduct any Required Tax Payments from any amount then or thereafter payable by the Company to Grantee.

(b) Grantee may elect to satisfy his or her obligation to advance the Required Tax Payments by any of the following means:  (1) a cash payment to the Company, (2) delivery to the Company of previously owned whole shares of Common Stock for which Grantee has good title, free and clear of all liens and encumbrances, having a fair market value, determined as of the date the obligation to withhold or pay taxes first arises in connection with the Award and any Dividend Equivalents (the “Tax Date”), equal to the Required Tax Payments, or (3) directing the Company to withhold a number of shares of Common Stock (or cash) otherwise issuable to Grantee pursuant to this Award and any Dividend Equivalents having a fair market value, determined as of the Tax Date, equal to the Required Tax Payments or any combination of (1)-(3). No certificate representing a share of Common Stock shall be delivered until the Required Tax Payments have been satisfied in full.  For purposes of this Award and any Dividend Equivalents, the fair market value of a share of Common Stock on a specified date shall be determined by reference to the closing stock price  in trading of the Common Stock or, if no such trading in the Common Stock occurred on such date, then on the next preceding date when such trading occurred.

6. Miscellaneous  

(a) The Company shall pay all original issue or transfer taxes with respect to the issuance or delivery of shares of Common Stock pursuant hereto and all other fees and expenses necessarily incurred by the Company in connection therewith, and will use reasonable efforts to comply with all laws and regulations which, in the opinion of counsel for the Company, shall be applicable thereto.

(b) This Award shall be governed in accordance with the laws of the State of Illinois.

2

 


 

(c) This Award shall be binding upon and inure to the benefit of any successor or successors to the Company.

(d) Neither this Award nor the RSUs nor any rights hereunder or thereunder may be transferred or assigned by Grantee other than:

 

(1)by will or the laws of descent and distribution;

 

 

(2)in whole or in part to one or more transferees; provided that (i) any such transfer must be without consideration, (ii) each transferee must be a “family member” of Grantee, a trust established for the exclusive benefit of Grantee and/or one or more family member of Grantee or a partnership whose sole equity owners are Grantee and/or family members of Grantee, and (iii) such transfer is specifically approved by the Company’s General Counsel or the  Committee following the receipt of a completed Assignment of Restricted Stock Unit Award; or

 

(3) as otherwise set forth in an amendment to this Award.  

 

In the event the RSUs are transferred as contemplated in this Section 6(d), such transfer shall become effective when approved by the Company’s General Counsel or the Committee (as evidenced by counter execution of the Assignment of Restricted Stock Unit Award on behalf of the Company), and such RSUs may not be subsequently transferred by the transferee other than by will or the laws of descent and distribution.  Any transferred RSU shall continue to be governed by and subject to the terms and conditions of the 2016 PIP and this Agreement and the transferee shall be entitled to the same rights as Grantee as if no transfer had taken place.  Except as permitted by the foregoing, the RSUs and this Award may not be sold, transferred, assigned, pledged, hypothecated, encumbered or otherwise disposed of (whether by operation of law or otherwise) or be subject to execution, attachment or similar process.  Upon any attempt to so sell, transfer, assign, pledge, hypothecate, encumber or otherwise dispose of the RSUs, the RSUs and all rights hereunder shall immediately become null and void.  As used in this Section, "family member" with respect to any person, includes any child, step-child, grandchild, parent, step-parent, grandparent, spouse, former spouse, sibling, niece, nephew, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law and sister-in-law, including adoptive relationships, and any person sharing the transferor's household (other than a tenant or employee) .

 

(e) The Committee, as from time to time constituted, shall have the right to determine any questions which arise in connection with this Award, the RSUs or the Dividend Equivalents.  This Award and the RSUs are subject to the provisions of the 2016 PIP and shall be interpreted in accordance therewith.

 

3

 


 

IN WITNESS WHEREOF, the Company has caused this Awar d to be duly executed by its duly authorized officer.

LSC Communications, Inc.

 

By:

Name: Suzanne S. Bettman

Title: Chief Administrative Officer

 

 

 

Accepted: ________________________

                [Name]

 

4

 

Exhibit 10.16

 

RETIREMENT BENEFITS, PHANTOM STOCK GRANTS AND STOCK OPTIONS FOR DIRECTORS

( Effective January 1, 1997, as revised September 24, 1998;

November 18, 1999; March 23, 2000)

 

 

No retirement benefit will be paid to any director whose service begins on or after November 18, 1999.  Retirement benefits for directors whose service began prior to November 18, 1999, will be determined as follows:  

 

A director who is retired as of January 1, 1997 will receive an annual retirement benefit equal to 10% of the annual retainer fee payable to active directors at the time such benefit is actually paid for each year or fraction thereof of service as a director (with a maximum of ten years).  

 

Each director who was active as of January 1, 1997 shall have elected, prior to February 15, 1997, to:

 

(1) receive an annual retirement benefit equal to 10% of the annual retainer fee payable to active directors at the time such benefit is actually paid for each year or fraction thereof of service as a director (with a maximum of ten years); or

 

(2) have an amount equal to the present value of that director's earned annual retirement benefit at December 31, 1996 credited as of January 1, 1997 to a book-entry account of that director pursuant to a Deferred Compensation Agreement; or

 

(3) convert the present value of that director's earned annual retirement benefit at December 31, 1996 to the number of shares of phantom stock (carried to four decimal places) determined by dividing such present value by the fair market value of a share of common stock on the most recent trading day of the common stock on the NYSE, which shares will be credited as of January 1, 1997 to a book-entry phantom stock account.  

 

 

A non-employee director who (i) was active as of January 1, 1997 with less than ten years of service as a director and who chose alternative (2) or (3) in the preceding paragraph or (ii) is first elected to the Board on or after January 1, 1997, but prior to November 18, 1999, will be credited as of January 1 of each year beginning January 1, 1997 with the number of shares of phantom stock (carried to four decimal places) determined by dividing an amount equal to 35% of the annual retainer fee payable to active directors for such year by the fair market value of a share of common stock on the most recent trading day of the common stock; provided that a non-employee director shall be credited with phantom shares only until the commencement of the tenth year of service as a non-employee director; provided, further, that a non-employee director may elect, as set forth in and pursuant to the applicable Stock Incentive Plan of the Company, to receive in lieu of crediting all or some of such shares of phantom stock, an option to purchase shares of common stock.

PAYMENT OF ANNUAL RETIREMENT BENEFITS, DEFERRED COMPENSATION AND PHANTOM STOCK AND TREATMENT OF STOCK OPTIONS


 

Annual Retirement Benefits

 

Annual retirement benefits will be paid quarterly in advance as follows:

 

The annual retirement benefit of a director whose service on the Board terminates at or after age 65 for any reason will begin with the first calendar quarter following the effective date of retirement.

 

The annual retirement benefit of a director whose service on the Board terminates prior to age 65 for any reason except disability that ends the director's active business career or employment will begin with the first calendar quarter following the attainment of age 65.

 

The annual retirement benefit of a director whose service on the Board terminates prior to age 65 by reason of disability that ends the director's active business career or employment will begin with the first calendar quarter following the effective date of retirement.

 

In all cases, no payment of an annual retirement benefit will occur following the date of death.

 

A former director who is receiving an annual retirement benefit will receive any future increases in annual retirement benefits from and after the time such increases are put into effect.

 

Deferred Compensation

 

A director who was active as of January 1, 1997 who elected to have an amount equal to the present value of that director's earned annual retirement benefit at December 31, 1996 credited as of January 1, 1997 to a book-entry account pursuant to a Deferred Compensation Agreement will be paid in accordance with the terms and conditions of that Agreement.

 

Phantom Stock

 

 

On each dividend payment date in respect of the common stock, a director's phantom stock account shall be credited with the number of shares of phantom stock (carried to four decimal places) determined by dividing (i) the product of the number of shares of phantom stock credited to that director's phantom stock account as of the record date for such dividend multiplied by the per share amount of the dividend by (ii) the fair market value of a share of common stock on the dividend payment date (or if the dividend payment date is not a trading day on the NYSE, the most recent trading day of the common stock on the NYSE).

 

In the event of any stock split, stock dividend, recapitalization, reorganization, merger, consolidation, combination, exchange of shares, liquidation, spin-off or other similar change in capitalization or event, or any distribution to holders of common stock other

 

Page 2

 


than a regular cash dividend, the number and class of phantom securities credited to a director's account shall be appr opriately adjusted by a committee designated by the Board.

 

In connection with termination of service on the Board for any reason other than death, the director may elect as of the effective date of such cessation of service (and if the director's cessation of service is by reason of death, the director shall be deemed to elect as of the date of death), to convert the value of that director's phantom stock account (determined by multiplying the number of shares of phantom stock by the fair market value of the common stock on the effective date of such cessation of service) to a cash amount to be credited to a book-entry cash account.  Such cash account shall be credited quarterly (beginning on the last day of the calendar quarter in which the termination of service occurred) with an amount of interest on the balance (including interest previously credited) at an annual rate equal to the then current yield obtainable on United States government bonds having a maturity date of approximately five years.   Failure to make an election under this clause shall result in the continuation of the director's phantom stock account.

 

If, as a result of any merger, consolidation, exchange, reclassification, sale of assets or similar transaction or event, the common stock ceases, or as a result of a transaction or event is intended to cease, to be listed for trading on the NYSE (and is not otherwise publicly traded), the director or any former director may elect at any time after the Company has entered into an agreement providing for such transaction or event, as of a date designated by the director or former director (and in the absence of such an election and designation the director or former director shall be deemed to elect as of the effective date of such transaction or event), to convert the value of that director's phantom stock account (determined by multiplying the number of shares of phantom stock by the fair market value of the common stock on the effective date of such cessation of service) to a cash amount to be credited to a book-entry cash account.  Such cash account shall be credited quarterly (beginning on the last day of the calendar quarter in which the termination of service occurred) with an amount of interest on the balance (including interest previously credited) at an annual rate equal to the then current yield obtainable on United States government bonds having a maturity date of approximately five years.  

 

A director's cash account or phantom stock account will be paid as follows:

 

 

A director whose service on the Board terminates at or after age 65 for any reason except death shall elect to receive, as of the first day of the first calendar quarter following the effective date of such cessation of service, either (1) an annual amount in cash for a number of years not exceeding ten determined by dividing the value of the director's phantom stock account (the value of the phantom stock is to be determined by reference to the fair market value of the common stock on the date of such cessation of service), but not the director’s cash account, as of the effective date of such cessation of service by the number of annual payments to be made; provided that the last payment made shall be for 100% of the value of the director's account as of the date of the last payment, (2) an annual amount in cash for a number of years not exceeding ten determined by dividing the value of the director's cash account or phantom stock account (the value of the

 

Page 3

 


phantom stock is to be determined by reference to the fair ma rket value of the common stock on the effective date of the distribution and after giving effect to the crediting of shares of phantom stock on each dividend payment date on or prior to the date of the distribution) as of the effective date of the distribu tion by the number of annual payments remaining to be made; provided that the last payment made shall be for 100% of the value of the director's cash account or phantom stock account, as the case may be, as of the date of the last payment,  or (3) a lump s um amount in cash equal to the value of the director’s cash account or phantom stock account (the value of the phantom stock is to be determined by reference to the fair market value of the common stock on the effective date of such cessation of service). In the absence of a timely election, a director shall be deemed to have elected option (1) with ten annual payments with respect to his phantom stock account, and option (2) with ten annual payments with respect to his cash account.

 

 

A director whose service on the Board terminates prior to age 65 for any reason except death shall elect to receive (1) as of the first day of the first calendar quarter following the attainment of age 65, an annual amount in cash a number of years not exceeding ten determined by dividing the value of the director's cash account or phantom stock account (the value of the phantom stock is to be determined by reference to the fair market value of the common stock on the effective date of the distribution and after giving effect to the crediting of shares of phantom stock on each dividend payment date on or prior to the date of the distribution) as of the effective date of the distribution by the number of annual payments remaining to be made; provided that the last payment made shall be for 100% of the value of the director's account as of the date of the last payment,  or (2) shall elect to receive, as of the first day of the first calendar quarter following the effective date of such cessation of service, either (i) an annual amount in cash for a number of years not exceeding ten determined by dividing the value of the director's phantom stock account (the value of the phantom stock is to be determined by reference to the fair market value of the common stock on the date of such cessation of service), but not the director’s cash account,  as of the effective date of such cessation of service by the number of annual payments to be made; provided that the last payment made shall be for 100% of the value of the director's account as of the date of the last payment, (ii) an annual amount in cash for a number of years not exceeding ten determined by dividing the value of the director's cash account or phantom stock account (the value of the phantom stock is to be determined by reference to the fair market value of the common stock on the effective date of the distribution and after giving effect to the crediting of shares of phantom stock on each dividend payment date on or prior to the date of the distribution) as of the effective date of the distribution by the number of annual payments remaining to be made; provided that the last payment made shall be for 100% of the value of the director's cash account or phantom stock account, as the case may be, as of the date of the last payment,  or (iii) a lump sum amount in cash equal to the value of the director’s cash account or phantom stock account (the value of the phantom stock is to be determined by reference to the fair market value of the common stock on the effective date of such cessation of service).  In the absence of a timely election, a director shall be deemed to have elected option (2)(i) with ten annual payments with respect to his phantom stock account, and (2)(ii) with ten annual payments with respect to his cash account.

 

 

Page 4

 


In all cases, if a director's cessation of service as a director is by reason of death or if a director dies while retired and amounts remain to be paid under the director's cash account or phantom stock account, 100% of the value of the director's cas h account or phantom stock account (the value of the phantom stock is to be determined by reference to the fair market value of the common stock on the date of death) as of the date of death shall be paid as soon as practicable after the date of death to t he director's estate or any beneficiaries designated by the director.  

 

If, as a result of any recapitalization, reorganization, merger, consolidation, combination, exchange of shares or similar transaction or event, the common stock will cease, or as a result of a transaction or event is intended to cease, to be listed for trading on the NYSE (and is not otherwise publicly traded), any former director who has amounts remaining to be paid under the former director’s cash account or phantom stock account, may elect at any time after the Company has entered into an agreement providing for such transaction or event, as of a date designated by the former director to receive a lump sum amount in cash equal to the value of the director’s cash account or phantom stock account (the value of the phantom stock is to be determined by reference to the fair market value of the common stock on the date designated by the former director).

 

Stock Options

 

Each option to purchase shares of common stock held by a non-employee director shall be governed by the terms and conditions of the applicable stock option agreement and stock incentive plan.

 

MISCELLANEOUS

 

To be entitled to receive any benefits under this policy, a former director must agree to consult with and render advice to the Company as requested at times that do not unreasonably interfere with his personal or other business activities.  Conduct detrimental to the Company, as determined by the Board of Directors, will result in forfeiture of all benefits under this policy.

 

These provisions on benefits will apply to all living, former directors effective January 1, 1997, regardless of when they were first elected or ceased to serve, to all active, non-employee directors as of January 1, 1997 whose service on the Board terminates after January 1, 1997 and to all non-employee directors who are first elected to the Board on or after January 1, 1997.

 

A director’s rights to receive benefits shall be no greater than the rights of any unsecured general creditor of the Company.

 

 

A director shall not have any rights as a stockholder of the Company with respect to any shares of phantom stock.

 

This policy and all determinations made and actions taken pursuant hereto, to the extent not governed by the Internal Revenue Code or the laws of the United States, shall be governed by the laws of the State of Delaware and construed in accordance therewith without giving effect to principles of conflict of laws.

 

Page 5

 


 

Benefits described herein may not be sold, transferred, assigned, pledged, hypothecated, encumbered or otherwise disposed of (whether by operation of law or otherwise) or be subject to execution, attachment or similar process.

 

For the purposes of these provisions on retirement benefits and phantom stock grants:

 

A non-employee director is a director who is not currently an employee of the Company and/or its subsidiaries and who never has been an employee of the Company and/or its subsidiaries.

 

The fair market value of the common stock shall be determined by reference to the average of the high and low trading prices as reported in the New York Stock Exchange Composite Transactions in The Wall Street Journal for the relevant trading day.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

G:\Legal ‑ All\SDR\Board Manual\retirement.300.wpd,February 23, 2017 (9:38PM)

 

Page 6

 

Exhibit 10.17

 

R. R. DONNELLEY & SONS COMPANY

STOCK OPTION AGREEMENT

(2004 PIP)

 

 

R. R. DONNELLEY & SONS COMPANY, a Delaware corporation (herein called the "Company"), acting pursuant to the provisions of its 2004 Performance Incentive Plan (herein called the "Plan"), hereby grants to XXXXXX (herein called "Optionee"), as of March 2, 2009 (herein called the "Option Date"), an option (herein called the "Option") to purchase from the Company XXXXX shares of common stock of the Company, par value $1.25 per share (herein called "Common Stock"), at a price of   $7.09 per share to be exercisable during the term set forth herein, but only upon the following terms and conditions:

 

1.

The Option may be exercised by Optionee, in whole or in part, from time to time, during the Option Term (as defined below) only in accordance with the following conditions and limitations:

 

 

(a)

Except as provided in Sections 5 and 7 hereof, Optionee must, at any time the Option becomes exercisable and at any time the Option is exercised, have been continuously in the employment of the Company since the date hereof, unless otherwise determined by the Committee administering the Plan (the “Committee”).  Leave of absence for periods and purposes conforming to the personnel policies of the Company and approved by the Committee shall not be deemed terminations of employment or interruptions of continuous service.

 

 

(b)

(i)  Subject to Sections 5 and 7 hereof and subsection (ii) below, at any time on and after the dates indicated in column (1), Optionee may purchase such whole number of shares of Common Stock which, when added to all shares theretofore purchased under the Option, does not exceed the total number of shares subject to the Option multiplied by the percentage indicated in column (2) opposite such respective date, as follows:

 

(1)          (2)

     Date Percentage o f Total

 

    March 2, 2010 25%

    March 2, 2011 25%

    March 2, 2012 25%

    March 2, 2013 25%

 

 

(ii)  Notwithstanding the foregoing subsection (i), if while any portion of the Option is outstanding and unexercisable, a Change in Control (as defined in the Plan) occurs, then from and after the Acceleration Date (as defined in the Plan), the Option shall be exercisable with respect to all of the shares of Common Stock subject to the Option.  

 

 

 

 

1


(iii)  The Option awarded hereby shall expire on the first business day preceding the tenth anniversary of the Option Date (the period beginning on the date he reof and ending on such date being the “Option Term”).

 

(c) No fractional shares may be purchased at any time.  

 

2.

Subject to the limitations herein set forth, the Option may be exercised by delivery of notice to the Company, in such form as the Company determines, specifying the number of shares of Common Stock to be purchased and accompanied by payment in full of the option price (or arrangement made for such payment to the Company's satisfaction) for the number of shares so purchased.  No shares of Common Stock may be purchased under the Option unless Optionee (or in the event of Optionee's death, Optionee's executor, administrator or personal representative or Optionee's beneficiary designated pursuant to the Beneficiary Designation Form on file with the Company (herein called a "Beneficiary")) shall pay to the Company such amount as the Company is advised it is required under applicable federal, state, local or other tax laws to withhold and pay over to governmental taxing authorities by reason of the purchase of shares of Common Stock pursuant to the Option.  

 

The option price and any federal, state, local and other taxes required to be withheld in connection with such exercise may be paid (i) in cash, (ii) by delivering previously owned whole shares of Common Stock (which Optionee has held for at least six months prior to the delivery of such shares or which Optionee purchased on the open market and for which Optionee has good title, free and clear of all liens and encumbrances) having a fair market value, determined on the date of exercise, equal to the option price and such amount of tax, (iii) with respect to taxes only, by authorizing the Company to withhold whole shares of Common Stock which would otherwise be delivered having a fair market value equal to such amount of tax, (iv) in a combination of (i) - (iii), (v) in cash by a broker-dealer acceptable to the Company to whom Optionee has submitted an irrevocable notice of exercise or (vi) to the extent previously expressly authorized by the Committee, via a cashless exercise arrangement with the Company; provided that the Committee shall have the sole discretion to disapprove of an election pursuant to clause (vi).   Payment of the option price and such tax, or any part thereof, in previously owned shares of Common Stock shall not be effective unless Optionee delivers one or more stock certificates (or otherwise delivers shares of Common Stock or evidence of ownership to the satisfaction of the Company) representing shares having a fair market value on the date of exercise equal to or in excess of the option price and such tax, or applicable portion thereof, accompanied by such endorsements, signature guarantees or other documents or assurances as may reasonably be required by the Company. For purposes of this Agreement, the fair market value of the Common Stock on a specified date shall be determined by reference to the average of the high and low transaction prices in trading of the Common Stock on such date as reported in the New York Stock Exchange-Composite Transactions, or, if no such trading in the Common Stock occurred on such date, then on the next preceding date when such trading occurred.

 

3.

Upon exercise of the Option in whole or in part pursuant to Section 2 hereof, the Company shall deliver or cause to be delivered a certificate (or other evidence of ownership) representing the number of shares specified against payment therefor and shall pay all original issue or transfer taxes and all other fees and expenses incident to such delivery.

 

 

 

 

2


4.

Optionee shall be entitled to the privileges of ownership with respect to shares subject to the Option only with respect to shares purchased upon exercise of all or part of the Option and as to which Optionee becomes a stockholder of record.

 

5.         

(a) If Optionee ceases to be employed by the Company by reason of death or disability as defined in the Company’s long-term disability policy as in effect at the time of the Optionee’s disability (“Disability”), then from and after the date of death or such Disability the Option shall be exercisable by Optionee, the executor, administrator, personal representative or Beneficiary of Optionee during the 1-year period commencing on the date of Optionee's death or Disability, but only during the Option Term, with respect to all of the shares of Common Stock subject to the Option.

 

 

(b)

If Optionee ceases to be employed by the Company by reason of retirement on or after age 65 or by reason of a Qualifying Retirement, then, subject to the provisions of Section 7, from and after the effective date of such cessation of employment the portion of the Option that is not exercisable shall continue to vest in accordance with the provisions of Section 1(b) and the Option shall be exercisable by Optionee during the five-year period commencing on the effective date of such cessation of employment, but only during the Option Term, with respect to all of the shares of Common Stock subject to the Option. For purposes of this Agreement, the term “Qualifying Retirement” shall be defined as follows:

 

 

(i)

Optionee is an active participant in a Company sponsored retirement benefit plan and is eligible to commence benefits thereunder at the time of cessation of employment and the Company has not terminated Optionee’s employment for cause.  An Optionee that is a participant in the Retirement Benefit Plan of R.R. Donnelley & Sons Company (the “ RR Donnelley Pension Plan”) is eligible to commence benefits under the plan if Optionee is eligible to commence benefits under the traditional formula of the RR Donnelley Pension Plan, or would have been eligible to commence benefits under the traditional formula of the RR Donnelley Pension Plan had Optionee been a participant in the traditional formula of the RR Donnelley Pension Plan during his/her service with R.R. Donnelley & Sons Company and/or any of the entities described in Section 10 hereof at the time of cessation of employment; or

 

 

(ii)

Optionee is not an active participant in a Company sponsored retirement benefit plan but Optionee would have been eligible to commence benefits under the traditional formula of the RR Donnelley Pension Plan had Optionee been a participant in the traditional formula of the RR Donnelley Pension Plan during his/her service with R.R. Donnelley & Sons Company and/or any of the entities described in Section 10 hereof at the time of cessation of employment; or

 

 

(iii)

t he Committee has otherwise determined the cessation of employment to constitute a Qualifying Retirement.

 

(d)

If Optionee ceases to be employed by the Company for any reason other than death, retirement on or after age 65, a Qualifying Retirement or Disability, then from and after the effective date of such cessation of employment the Option shall be exercisable by Optionee during the 90-day period commencing on the effective date of such cessation of employment, but only during the Option Term, to the extent it is exercisable on the

3


 

effective date of such cessation of employment.  The portion of the Option that is not exercisable pursuant to the preceding sentence shall be cancelled as of the effective date of Optionee’s cessation of employment.

 

6.

The Option may not be transferred by Optionee other than by will, the laws of descent and distribution or pursuant to the beneficiary designation procedures approved by the Company or as otherwise set forth in an amendment to this Agreement.  The Option is exercisable only by Optionee or Optionee's guardian, personal representative or similar person or by a permitted transferee.  Except as permitted by the foregoing, the Option may not be sold, transferred, assigned, pledged, hypothecated, encumbered or otherwise disposed of (whether by operation of law or otherwise) or be subject to execution, attachment or similar process.  Upon any attempt to so sell, transfer, assign, pledge, hypothecate, encumber or otherwise dispose of the Option, the Option and all rights hereunder shall immediately become null and void.  

 

7.

In the event of the death of Optionee during the five-year period commencing on the effective date of Optionee's cessation of employment by reason of retirement under Section 5(b) or (c), the Option may be exercised by the executor, administrator, personal representative or Beneficiary of Optionee during the one-year period commencing on the date of Optionee's death, but only during the Option Term remaining, and only to the extent Optionee was entitled to exercise the Option on the date of Optionee's death.   In the event of the death of Optionee (a) during the one-year period commencing on the effective date of Optionee's cessation of employment by reason of Disability, or (b) during the 90-day period commencing on the effective date of Optionee's cessation of employment for reason other than retirement under Section 5(b) or (c), or Disability, the Option may be exercised by the executor, administrator, personal representative or Beneficiary of Optionee during the Option Term remaining, and only to the extent Optionee was entitled to exercise the Option on the date of Optionee's death.

 

8.

[Reserved]

 

9.

In the event of any stock split, stock dividend, recapitalization, reorganization, merger, consolidation, combination, exchange of shares, liquidation, spin-off or other similar change in capitalization or event, or any distribution to holders of Common Stock other than a regular cash dividend, the number and class of securities subject to the Option and the purchase price per security shall be appropriately adjusted by the Committee without an increase in the aggregate purchase price, other than an increase resulting from rounding.  If any adjustment would result in a fractional security being subject to the Option, the Company shall pay Optionee, in connection with the first exercise of the Option, in whole or in part, occurring after such adjustment, an amount in cash determined by multiplying (i) the fraction of such security (rounded to the nearest hundredth) by (ii) the excess, if any, of (A) the fair market value of the Common Stock on the exercise date over (B) the exercise price of the Option; provided, however, that if the fair market value of such fractional security immediately after such adjustment is less than the fair market value of one share of Common Stock immediately prior to such adjustment, such fractional security shall be disregarded and no payment shall be made.  The decision of the Committee regarding the amount and timing of any adjustment pursuant to this Section 9 shall be final, binding and conclusive.

 

10.

For purposes of this Agreement, employment by the Company shall be deemed to include employment by a corporation which is a direct or indirect majority-owned subsidiary of the Company, employment by any other entity designated by the Board of Directors of the

4


Company or the Committee in which the Company has a direct or indirect equity interest and employment by any corporation which succeeds to the obligations of the Company hereunder .

 

11.

(a)Optionee shall not, while employed by the Company and for a period of one year from the date of termination of Optionee’s employment with the Company for any reason, including termination by the Company with or without cause, directly or indirectly, either on Optionee’s own behalf or on behalf of any other person, firm or entity, solicit or provide services that are the same as or similar to the services the Company provided or offered while Optionee was employed by the Company to any customer or prospective customer of the Company (i) with whom Optionee had direct contact during the last two years of Optionee’s employment with the Company or about whom Optionee learned confidential information as a result of his or her employment with the Company and (ii) with whom any person over whom Grantee had supervisory authority at any time had direct contact during the last two years of Grantee’s employment with the Company or about whom such person learned confidential information as a result of his or her employment with the Company .

 

(b)Optionee shall not while employed by the Company and for a period of two years from the date of termination of Optionee’s employment with the Company for any reason, including termination by the Company with or without cause, either directly or indirectly solicit, induce or encourage any individual who was a Company employee at the time of, or within six months prior to, Grantee’s termination to terminate their employment with the Company or to accept employment with any entity, including but not limited to a competitor, supplier or customer of the Company, nor shall Optionee cooperate with any others in doing or attempting to do so. As used herein, the term "solicit, induce or encourage" includes, but is not limited to, (i) initiating communications with a Company employee relating to possible employment, (ii) offering bonuses or other compensation to encourage a Company employee to terminate his or her employment with the Company and accept employment with any entity, including but not limited to a competitor, supplier or customer of the Company, or (iii) referring Company employees to personnel or agents employed by any entity, including but not limited to competitors, suppliers or customers of the Company.

 

12.

The Option is subject to the condition that if the listing, registration or qualification of the shares subject to the Option on any securities exchange or under any state or federal law, or if the assent or approval of any regulatory body shall be necessary as a condition of, or in connection with, the granting of the Option or the delivery or purchase of shares thereunder, the Option may not be exercised in whole or in part unless and until such listing, registration, qualification, consent or approval shall have been effected or obtained.  The Company agrees to use its best efforts to obtain any such requisite listing, registration, qualification, consent or approval.  

 

13.

The Committee, as from time to time constituted, shall have the right to determine any questions that arise in connection with this Agreement or the Option.  This Agreement and the Option are subject to the provisions of the Plan and shall be interpreted in accordance therewith.  

 

14.

This Agreement shall not be construed as an employment contract and does not give Optionee any right to continued employment by the Company or any affiliate of the Company, and the fact that the termination of Optionee's employment occurs during the Option Term shall in no way be construed as giving Optionee the right to continue in the Company's or any such affiliate's employ.

5


 

15.

The Option shall not be treated as an incentive stock option within the meaning of Section 422 of the Internal Revenue Code.

 

16.

This Agreement shall be binding upon and shall inure to the benefit of any successor or successors of the Company and any person or persons who shall, upon the death of  Optionee, acquire any rights in the Option.

 

17.

Any notice, including a notice of exercise of the Option, required to be given hereunder to the Company shall be addressed to the Company at its headquarters in Chicago, Illinois, attention of the Corporate Secretary, and any notice required to be given hereunder to Optionee shall be addressed to Optionee at Optionee's residence address as shown in the Company's records, subject to the right of either party hereafter to designate in writing to the other some other address.  Any such notice shall be (i) delivered by personal delivery, facsimile, United States mail or by express courier service and (ii) deemed to be received upon personal delivery, upon confirmation of receipt of facsimile transmission or upon receipt if by United States mail or express courier service; provided, however, that if any notice is not received during regular business hours, it shall be deemed to be received on the next succeeding business day of the Company.  

 

18.

The Option, this Agreement, and all determinations made and actions taken pursuant hereto and thereto, to the extent not governed by the laws of the United States, shall be governed by the laws of the State of Delaware and construed in accordance therewith without giving effect to principles of conflicts of laws.

 

 

IN WITNESS WHEREOF, R. R. DONNELLEY & SONS COMPANY has caused this instrument to be executed as of the day and year first above written.

 

 

R. R. DONNELLEY & SONS COMPANY

 

 

 

 

 

 

 

 

 

By:

 

 

 

 

 

 

 

 

 

Name: Thomas Carroll

 

Title: EVP, Chief Human Resources Officer

 

 

 

All of the terms of this Agreement are accepted as of this ___ day of _____, 2009.

 

 

___________________________

Optionee:  

 

6

Exhibit 10.18

R.R. DONNELLEY & SONS COMPANY
CASH RETENTION AWARD

(2012 PIP)

This Cash Retention Award (“Award”) is granted as of March 1, 2013 by R.R. Donnelley & Sons Company, a Delaware corporation (the “Company”), to XXXXXXXXXX (“Grantee”).  

 

1. Grant of Award .  This Award is in recognition of your hard work and dedication over the last several years and is granted as an incentive for the Grantee to remain an employee of the Company and share in the future success of the Company.  The Company hereby credits to Grantee $________ (the “Retention Award”), subject to the restrictions and on the terms and conditions set forth herein.   This Award is made pursuant to the provisions of the Company’s 2012 Performance Incentive Plan (the “2012 PIP”).  Capitalized terms not defined herein shall have the meanings specified in the 2012 PIP.   Grantee shall indicate acceptance of this Award by signing and returning a copy hereof.

2. Vesting .  

(a) Except to the extent otherwise provided in paragraph 2(b) or 3 below, the Retention Award shall vest and be payable 100% on March 2, 2017.

(b) Upon the Acceleration Date associated with a Change in Control, the Retention Award, shall, in accordance with the terms of the 2012 PIP, become fully vested.

3. Treatment Upon Separation from Service .

(a) If Grantee has a separation from service (within the meaning of Treasury Regulation § 1.409A-1(h), hereinafter a “Separation from Service”) (i) by reason of death (ii) by reason of Disability (as defined as in the Company’s long-term disability p olicy as in effect at the time of Grantee’s disability) or (iii) initiated by the Company without cause a pro-rated portion of the Retention Award shall become fully vested and payable.  The pro-rated portion of the Retention Award shall be determined by multiplying the amount of the Retention Award by a fraction, the numerator of which is the total number of days between the grant date and the date of Grantee’s termination as set forth in the paragraph 3(a) and the denominator of which is 1461.  

(b) If Grante e has a Separation from Service either (i) prior to age 65 by reason of a Qualifying Retirement or (ii) on account of retirement on or after age 65, the  Retention Award shall vest in accordance with the terms of paragraph 3(a) above.  A “Qualifying Retirement” is defined as

(A) Grantee is an active participant in a Company sponsored retirement benefit plan and is eligible to commence benefits thereunder at the time of Separation from Service and Grantee’s Separation from Service was not initiated by the C ompany for Cause (a Grantee that is a participant in the Retirement Benefit Plan of R.R. Donnelley & Sons Company (the “RR Donnelley Pension Plan”) is eligible to commence benefits under the plan if Grantee is eligible to commence benefits under the traditional formula of the RR Donnelley Pension Plan, or


would have been eligible to commence benefits under the traditional formula of the RR Donnelley Pension Plan had Grantee been a participant in the traditional formula of the RR Donnelley Pension Plan durin g his or her service with R.R. Donnelley & Sons Company and/or any subsidiary at the time of Separation from Service ); or

(B) Grantee is not an active participant in a Company sponsored retirement benefit plan but Grantee would have been eligible to comme nce benefits under the traditional formula of the RR Donnelley Pension Plan had Grantee been a participant in the traditional formula of the RR Donnelley Pension Plan during his or her service with the Company and/or any subsidiary at the time of Separatio n from Service ; or

(C) a Separation from Service that the Committee determines is a Qualifying Retirement.

(c) If Grantee has a Separation from Service other than as set forth in paragraph 3(a) or (b) above, the  Retention Award shall be forfeited.

4. Payment of Award .  As soon as practicable following the vesting date , the Company shall pay Grantee the  Retention Award, subject to deduction of the Required Tax Payments in accordance with paragraph 5 below; provided, however, that if Grantee has a Separation from Service described in Section 3(b) and Grantee is a “specified employee” within the meaning set forth in the document entitled “409A:  Policy of R.R. Donnelly & Sons Company and to Affiliates Regarding Specified Employees” on the date of Grantee’ Separatio n from Service, then the date of payment shall be postponed to the first business day of the sixth month occurring after the month in which the date of Grantee’s Separation from Service occurs (or, if earlier, thirty days after the date of Grantee’s death) .   

5. Withholding Taxes .  As a condition precedent to the payment of the Retention Award  pursuant to this Award, the Company may, in its discretion, deduct from any amount then or thereafter payable by the Company to Grantee such amount of cash as the Company may be required, under all applicable federal, state, local or other laws or regulations, to withhold and pay over as income or other withholding taxes (the “Required Tax Payments”) with respect to the Award.  

6. Non-Solicitation .

(a) Grantee hereby acknowledges that the Company’s relationship with the customer or customers Grantee serves, and with other employees, is special and unique, based upon the development and maintenance of good will resulting from the customers' and other employees’ contacts with the Company and its employees, including Grantee.  As a result of Grantee’s position and customer contacts, Grantee recognizes that Grantee will gain valuable information about (i) the Company’s relationship with its customers, their buying habits, special needs, and purchasing policies, (ii) the Company’s pricing policies, purchasing policies, profit structures, and margin needs, (iii) the skills, capabilities and other employment-related information relating to Company employees, and (iv) and other matters of which Grantee would not otherwise know and that is not otherwise readily available.  Such knowledge is essential to the business of the Company and Grantee recognizes that, if Grantee has a Separation

2

 


from Service , the Company will be required to rebuil d that customer relationship to retain the customer's business.  Grantee recognizes that during a period following Se paration from Service , the Company is entitled to protection from Grantee’s use of the information and customer and employee relationships with which Grantee has been entrusted by the Company during Grantee’s employment.

(b) Grantee acknowledges and agrees that any injury to the Company’s customer relationships, or the loss of those relationships, would cause irreparable harm to the Company.  Accordingly, Grantee shall not , while employed by the Company and for a period of one year from the date of Grantee’s Separation from Service for any reason, including Separation from Service initiated by the Company with or without cause, directly or indirectly, either on Grantee’s own behalf or on behalf of any other person, firm or entity, solicit or provide services that are the same as or similar to the services the Company provided or offered while Grantee was employed by the Company to any customer or prospective customer of the Company (i) with whom Grantee had direct contact during the last two years of Grantee’s employment with the Company or about whom Grantee learned confidential information as a result of his or her employment with the Company or (ii) with whom any person over whom Grantee had supervisory authority at any time had direct contact during the last two years of Grantee’s employment with the Company or about whom such person learned confidential information as a result of his or her employment with the Company.

(c) Grantee shall not, while employed by the Company and for a period of two years following Separation from Service Grantee’s Separation from Service for any reason, including Separation from Service initiated by the Company with or without cause, either directly or indirectly solicit, induce or encourage any individual who was a Company employee at the time of, or within six months prior to, Grantee’s Separation from Service , to terminate their employment with the Company or accept employment with any entity, including but not limited to a competitor, supplier or customer of the Company, nor shall Grantee cooperate with any others in doing or attempting to do so.  As used herein, the term "solicit, induce or encourage" includes, but is not limited to, (i) initiating communications with a Company employee relating to possible employment, (ii) offering bonuses or other compensation to encourage a Company employee to terminate his or her employment with the Company and accept employment with any entity, including but not limited to a competitor, supplier or customer of the Company, or (iii) referring Company employees to personnel or agents employed by any entity, including but not limited to competitors, suppliers or customers of the Company.

7. Miscellaneous .

(a) Nothing in this Award shall confer upon Grantee any right to continue in the employ of the Company or any other company that is controlled, directly or indirectly, by the Company or to interfere in any way with the right of the Company to terminate Grantee’s employment at any time.  

(b) This Award shall be governed in accordance with the laws of the state of Delaware.

(c) This Award shall be binding upon and inure to the benefit of any successor or successors to the Company.  

3

 


(d) Neither this Award nor any rights hereunder may be transferred or assigned by Grantee other than by will or the laws of descent and distribution or pursuant to beneficiary designation procedures approved by the Company or other procedures approved by the Company.  Any other transfer or attempted assignment, pledge or hypothecation, whether or not by operation of law, shall be void.

(e) The Committee, as from time to time constituted, shall have the right to determine any questions which arise in connection with this Agreement.  This Agreement and the Award are subject to the provisions of the 2012 PIP and shall be interpreted in accordance therewith.

(f) If there is any inconsistency between the terms and conditions of this Award and the terms and conditions of Grantee’s employm ent agreement, employment letter or other similar agreement, the terms and conditions of such agreement shall control.

(g) This Award is intended to comply with section 409A of the Internal Revenue Code of 1986, as amended (the “Code”), and the regulations promulgated thereunder.  This Award shall be administered and interpreted to the extent possible in a manner consistent with the intent expressed in this paragraph.  If any compensation or benefits provided by this Award may result in the application of section 409A of the Code, the Company shall, in consultation with you, modify this Award as necessary in order to exclude such compensation from the definition of “deferred compensation” within the meaning of such section 409A of the Code or in order to comply with the provisions of section 409A of the Code.  By signing this Agreement you acknowledge that if any amount paid or payable to you becomes subject to section 409A of the Code, you are solely responsible for the payment of any taxes and interest due as a result.

IN WITNESS WHEREOF, the Company has caused this Award to be duly executed by its duly authorized officer.

 

R.R. Donnelley & Sons Company

 

 

 

 

 

 

 

 

 

By:

 

 

 

 

 

 

 

 

 

Name: Thomas Carroll

 

Title: EVP, Chief Human Resources Officer

 

 

All of the terms of this Award are accepted as of this _____ day of _________, 2013.

 

 

______________________________

Grantee:  

4

 

Exhibit 10.19

R.R. DONNELLEY & SONS COMPANY
CASH RETENTION AWARD

(2012 PIP)

   

 

1. Grant of Award .  This Award is in recognition of your hard work and dedication over the last several years and is granted as an incentive for the Grantee to remain an employee of the Company and share in the future success of the Company.    The Company hereby credits to Grantee $________ (the “Retention Award”), subject to the restrictions and on the terms and conditions set forth herein.   This Award is made pursuant to the provisions of the Company’s 2012 Performance Incentive Plan (the “2012 PIP”).  Capitalized terms not defined herein shall have the meanings specified in the 2012 PIP.   Grantee shall indicate acceptance of this Award by signing and returning a copy hereof.

2. Vesting .  

(a) Except to the extent otherwise provided in paragraph 2(b) or 3 below, the Retention Award shall vest and be payable in three equal installments on each of:

 

January 1, 2015

 

January 1, 2016

 

January 1, 2017

 

(b) Upon the Acceleration Date associated with a Change in Control, the Retention Award, shall, in accordance with the terms of the 2012 PIP, become fully vested and payable.

3. Treatment Upon Separation from Service .

(a) If Grantee has a separation from service (within the meaning of Treasury Regulation § 1.409A-1(h), hereinafter a “Separation from Service”) (i) by reason of death or (ii) by reason of Disability (as defined as in the Company’s long-term disability policy as in effect at the time of Grantee’s disability) any portion of the Rete ntion Award that is unvested as of the date of such Separation from Service shall become fully vested and payable.    

(b) (1) If at any time prior to the first vest date set forth in paragraph 2(a) above Grantee has a Separation from Service  (A) prior to age 65 by reason of a Qualifying Retirement, or (B) on account of retirement on or after age 65 , any portion of the Retention Award that is unvested as of the date of such Separation from Service shall be forfeited.  

(2) If at any time after the first vest date set forth in paragraph 2(a) above Grantee has a Separation from Service either (A) prior to age 65 by reason of a Qualifying Retirement or (B) on account of retirement on or after age 65, any portion of the  Retention Award that is unvested as of the date of such Separation from Service shall vest and be payable in accordance with the terms of paragraph 2(a) above.  A “Qualifying Retirement” is defined as


(A) Grantee is an active participant in a Company sponsored retirement benefit plan and is eligibl e to commence benefits thereunder at the time of Separation from Service and Grantee’s Separation from Service was not initiated by the Company for Cause (a Grantee that is a participant in the Retirement Benefit Plan of R.R. Donnelley & Sons Company (the “RR Donnelley Pension Plan”) is eligible to commence benefits under the plan if Grantee is eligible to commence benefits under the traditional formula of the RR Donnelley Pension Plan, or would have been eligible to commence benefits under the traditional formula of the RR Donnelley Pension Plan had Grantee been a participant in the traditional formula of the RR Donnelley Pension Plan during his or her service with R.R. Donnelley & Sons Company and/or any subsidiary at the time of Separation from Service ); or

(B) Grantee is not an active participant in a Company sponsored retirement benefit plan but Grantee would have been eligible to commence benefits under the traditional formula of the RR Donnelley Pension Plan had Grantee been a participant in the tradi tional formula of the RR Donnelley Pension Plan during his or her service with the Company and/or any subsidiary at the time of Separation from Service ; or

(C) a Separation from Service that the Committee determines is a Qualifying Retirement.

(c) If at any ti me Grantee has a Separation from Service other than as set forth in paragraph 3(a),or (b)  above, any portion of the  Retention Award that is unvested as of the date of such Separation from Service shall be forfeited.

4. Payment of Award .  As soon as practicable following any vesting date , the Company shall pay Grantee the vested portion of the Retention Award, subject to deduction of the Required Tax Payments in accordance with paragraph 5 below; provided, however, that if Grantee has a Separation from Service described in Section 3(b) and Grantee is a “specified employee” within the meaning set forth in the document entitled “409A:  Policy of R.R. Donnelly & Sons Company and to Affiliates Regarding Specified Employees” on the date of Grantee’ Separation from Service, then the date of payment shall be postponed to the first business day of the sixth month occurring after the month in which the date of Grantee’s Separation from Service occurs (or, if earlier, thirty days after the date of Grantee’s death) .   

5. Withholding Taxes .  As a condition precedent to the payment of the Retention Award  pursuant to this Award, the Company may, in its discretion, deduct from any amount then or thereafter payable by the Company to Grantee such amount of cash as the Company may be required, under all applicable federal, state, local or other laws or regulations, to withhold and pay over as income or other withholding taxes (the “Required Tax Payments”) with respect to the Award.  

6. Non-Solicitation .

(a) Grantee hereby acknowledges that the Company’s relationship with the customer or customers Grantee serves, and with other employees, is special and unique, based upon the development and maintenance of good will resulting from the customers' and other employees’ contacts with the Company and its employees,

2

 


including Grantee.  As a result of Grantee’s position and customer contacts, Grantee recognizes that Grantee will gain valuable information about (i) the Company’s relationship with its customers, their buying habits, special needs, and purchasing poli cies, (ii) the Company’s pricing policies, purchasing policies, profit structures, and margin needs, (iii) the skills, capabilities and other employment-related information relating to Company employees, and (iv) and other matters of which Grantee would no t otherwise know and that is not otherwise readily available.  Such knowledge is essential to the business of the Company and Grantee recognizes that, if Grante e has a Separation from Service , the Company will be required to rebuild that customer relations hip to retain the customer's business.  Grantee recognizes that during a period following Se paration from Service , the Company is entitled to protection from Grantee’s use of the information and customer and employee relationships with which Grantee has be en entrusted by the Company during Grantee’s employment.

(b) Grantee acknowledges and agrees that any injury to the Company’s customer relationships, or the loss of those relationships, would cause irreparable harm to the Company.  Accordingly, Grantee shall not , while employed by the Company and for a period of one year from the date of Grantee’s Separation from Service for any reason, including Separation from Service initiated by the Company with or without cause, directly or indirectly, either on Grantee’s own behalf or on behalf of any other person, firm or entity, solicit or provide services that are the same as or similar to the services the Company provided or offered while Grantee was employed by the Company to any customer or prospective customer of the Company (i) with whom Grantee had direct contact during the last two years of Grantee’s employment with the Company or about whom Grantee learned confidential information as a result of his or her employment with the Company or (ii) with whom any person over whom Grantee had supervisory authority at any time had direct contact during the last two years of Grantee’s employment with the Company or about whom such person learned confidential information as a result of his or her employment with the Company.

(c) Grantee shall not, while employed by the Company and for a period of two years following Separation from Service Grantee’s Separation from Service for any reason, including Separation from Service initiated by the Company with or without cause, either dir ectly or indirectly solicit, induce or encourage any individual who was a Company employee at the time of, or within six months prior to, Grantee’s Separation from Service , to terminate their employment with the Company or accept employment with any entity, including but not limited to a competitor, supplier or customer of the Company, nor shall Grantee cooperate with any others in doing or attempting to do so.  As used herein, the term "solicit, induce or encourage" includes, but is not limited to, (i) initiating communications with a Company employee relating to possible employment, (ii) offering bonuses or other compensation to encourage a Company employee to terminate his or her employment with the Company and accept employment with any entity, including but not limited to a competitor, supplier or customer of the Company, or (iii) referring Company employees to personnel or agents employed by any entity, including but not limited to competitors, suppliers or customers of the Company.

7. Miscellaneous .

(a) Nothing in this Award shall confer upon Grantee any right to continue in the

3

 


employ of the Company or any other company that is controlled, directly or indirectly, by the Company or to interfere in any way with the right of the Company to terminate Grantee’s e mployment at any time.  

(b) This Award shall be governed in accordance with the laws of the state of Delaware.

(c) This Award shall be binding upon and inure to the benefit of any successor or successors to the Company.  

(d) Neither this Award nor any rights hereunder may be transferred or assigned by Grantee other than by will or the laws of descent and distribution or pursuant to beneficiary designation procedures approved by the Company or other procedures approved by the Company.  Any other transfer or attempted assignment, pledge or hypothecation, whether or not by operation of law, shall be void.

(e) The Committee, as from time to time constituted, shall have the right to determine any questions which arise in connection with this Agreement.  This Agreement and the Award are subject to the provisions of the 2012 PIP and shall be interpreted in accordance therewith.

(f) If there is any inconsistency between the terms and conditions of this Award and the terms and conditions of Grantee’s employment agreement, employment le tter or other similar agreement, the terms and conditions of such agreement shall control.

(g) This Award is intended to comply with section 409A of the Internal Revenue Code of 1986, as amended (the “Code”), and the regulations promulgated thereunder.  This Award shall be administered and interpreted to the extent possible in a manner consistent with the intent expressed in this paragraph.  If any compensation or benefits provided by this Award may result in the application of section 409A of the Code, the Company shall, in consultation with you, modify this Award as necessary in order to exclude such compensation from the definition of “deferred compensation” within the meaning of such section 409A of the Code or in order to comply with the provisions of section 409A of the Code.  By signing this Agreement you acknowledge that if any amount paid or payable to you becomes subject to section 409A of the Code, you are solely responsible for the payment of any taxes and interest due as a result.

4

 


IN WITNESS WHEREOF, the Company has caused this Award to be duly executed by its duly authorized officer.

 

R.R. Donnelley & Sons Company

 

 

 

 

 

 

 

 

 

By:

 

 

 

 

 

 

 

 

 

Name: Thomas Carroll

 

Title: EVP, Chief Human Resources Officer

 

 

All of the terms of this Award are accepted as of this _____ day of _________, 2014.

 

 

______________________________

Grantee:  

5

 

Exhibit 10.20

R.R. DONNELLEY & SONS COMPANY
STOCK UNIT AWARD

(2012 PIP)

This Stock Unit Award (“Award”) is granted as of __________ by R.R. Donnelley & Sons Company, a Delaware corporation (the “Company”), to XXXXXX (“Grantee”) .

 

1. Grant of Award .  This Award is in recognition of your hard work and dedication over the last several years and is granted as an incentive for the Grantee to remain an employee of the Company and share in the future success of the Company.  The Company hereby credits to Grantee XXXXX stock units (the “Stock Units”), subject to the restrictions and on the terms and conditions set forth herein.  This Award is made pursuant to the provisions of the Company’s 2012 Performance Incentive Plan (the “2012 PIP”).  Capitalized terms not defined herein shall have the meanings specified in the 2012 PIP.  Grantee shall indicate acceptance of this Award by signing and returning a copy hereof.

2. Vesting .  

(a) Except to the extent otherwise provided in paragraph 2(b) or 3 below, the Stock Units shall vest in four equal 25% increments on each of:  

 

________

 

(b) Upon the Acceleration Date associated with a Change in Control, any portion of the Stock Units that is not fully vested, shall, in accordance with the terms of the 2012 PIP, become fully vested.

3. Treatment Upon Separation from Service .

(a) If Grantee has a separation from service (within the meaning of Treasury Regulation § 1.409A-1(h), hereinafter a “Separation from Service”) by reason of death or Disability (as defined as in the Company’s long-term disability policy as in effect at the time of Grantee’s disability) , any portion of the Stock Units that is unvested as of the date of such Separation from Service shall become fully vested.  

(b) If Grante e has a Separation from Service either (i) prior to age 65 by reason of a Qualifying Retirement or (ii) on account of retirement on or after age 65, at any time prior to the first vest date set forth in paragraph 2(a) above, any portion of the Stock Units that is unvested as of the date of such Separation from Service shall be forfeited.  If Grantee has a Separation from Service either (i) prior to age 65 by reason of a Qualifying Retirement or (ii) on account of retirement on or after age 65, at any time after the first vest date set forth in paragraph 2(a) above, any portion of the Stock Units that is unvested as of the date of such Separation from Service shall vest in accordance with the terms of paragraph 2 above.  A “Qualifying Retirement” is defined as

 

(A) Grantee is an active participant in a Company sponsored retirement benefit


plan and is eligible to commence benefits thereunder at the time of Separation from Service and Grantee’s Separation from Service was not initiated by the Company for cause (a Grantee that is a participant in the Retirement Benefit Plan of R.R. Donnelley & Sons Company (the “RR Donnelley Pension Plan”) is eligible to commence benefits under the plan if Grantee is eligible to commence benefits under the traditional formula of the RR Donnelley Pension Plan, or would have been eligible to commence benefits under the traditional formula of the RR Donnelley Pension Plan had Grantee been a participant in the traditional formula of the RR Donnelley Pension Plan during his or her serv ice with R.R. Donnelley & Sons Company and/or any subsidiary at the time of Separation from Service ); or

(B) Grantee is not an active participant in a Company sponsored retirement benefit plan but Grantee would have been eligible to commence benefits unde r the traditional formula of the RR Donnelley Pension Plan had Grantee been a participant in the traditional formula of the RR Donnelley Pension Plan during his or her service with the Company and/or any subsidiary at the time of Separation from Service ; or

(C) a Separation from Service that the Committee determines is a Qualifying Retirement.

(c) If Grantee has a Separation from Service other than for death, Disability or Retirement, any portion of the Stock Units that is unvested as of the date of such S epar ation from Service shall be forfeited.

4. Issuance of Common Stock in Satisfaction of Stock Units .  As soon as practicable following each vesting date but no later than 60 days thereafter , the Company shall issue one share of common stock of the Company (“Common Stock”) to Grantee for each Stock Unit that has vested on such date , provided, however, that if Grantee has a Separation from Service described in Section 3(b) and Grantee is a “specified employee” within the meaning set forth in the document entitled “409A:  Policy of R.R. Donnelly & Sons Company and to Affiliates Regarding Specified Employees” on the date of Grantee’ Separation from Service, then the date of issuance shall be postponed to the first business day of the sixth month occurring after the month in which the date of Grantee’s Separation from Service occurs (or, if earlier, thirty days after the date of Grantee’s death) .  Each Stock Unit shall be cancelled upon the issuance of a share of Common Stock with respect thereto.  

5. Dividends .  No dividends or dividend equivalents will accrue with respect to the Stock Units.  

6. Rights as a Shareholder .  Prior to issuance, Grantee shall not have the right to vote, nor have any other rights of ownership in, the shares of Common Stock to be issued in s atisfaction of Stock Units upon their vesting .   

 

 

7. Withholding Taxes .  

2

 


(a) As a condition precedent to the issuance to Grantee of any shares of Common Stock pursuant to this Award, the Grantee shall, upon request by the Company, pay to the Company such amount of cash as the Company may be required, under all applicable federal, state, local or other laws or regulations, to withhold and pay over as income or other withholding taxes (the “Required Tax Payments”) with respect to the Award.  If Grantee shall fail to advance the Required Tax Payments after request by the Company, the Company may, in its discretion, deduct any Required Tax Payments from any amount then or thereafter payable by the Company to Grantee.

(b) Grantee may elect to satisfy his obligation to advance the Required Tax Payments by any of the following means:  (1) a cash payment to the Company, (2) delivery to the Company of previously owned whole shares of Common Stock for which Grantee has good title, free and clear of all liens and encumbrances, having a fair market value, determined as of the date the obligation to withhold or pay taxes first arises in connection with the Award (the “Tax Date”), equal to the Required Tax Payments, or (3) directing the Company to withhold a number of shares of Common Stock otherwise issuable to Grantee pursuant to this Award having a fair market value, determined as of the Tax Date, equal to the Required Tax Payments or any combination of (1)-(3).  Any fraction of a share of Common Stock which would be required to satisfy such an obligation shall be disregarded and the remaining amount due shall be paid in cash by Grantee.  No certificate representing a share of Common Stock shall be delivered until the Required Tax Payments have been satisfied in full.  For purposes of this Award, the fair market value of a share of Common Stock on a specified date shall be determined by reference to the closing stock price in trading of the Common Stock on such date  or, if no such trading in the Common Stock occurred on such date, then on the next preceding date when such trading occurred.

8. Non-Solicitation .

(a) Grantee hereby acknowledges that the Company’s relationship with the customer or customers Grantee serves, and with other employees, is special and unique, based upon the development and maintenance of good will resulting from the customers' and other employees’ contacts with the Company and its employees, including Grantee.  As a result of Grantee’s position and customer contacts, Grantee recognizes that Grantee will gain valuable information about (i) the Company’s relationship with its customers, their buying habits, special needs, and purchasing policies, (ii) the Company’s pricing policies, purchasing policies, profit structures, and margin needs, (iii) the skills, capabilities and other employment-related information relating to Company employees, and (iv) and other matters of which Grantee would not otherwise know and that is not otherwise readily available.  Such knowledge is essential to the business of the Company and Gran tee recognizes that, if Grantee has a Separation from Service , the Company will be required to rebuild that customer relationship to retain the customer's business.  Grantee recognizes that during a period following Se paration from Service , the Company is entitled to protection from Grantee’s use of the information and customer and employee relationships with which Grantee has been entrusted by the Company during Grantee’s employment.

(b) Grantee acknowledges and agrees that any injury to the Company’s customer

3

 


relationships, or the loss of those relationships, would cause irreparable harm to the Company.  Accordingly, Grantee shall not , while employed by the Company and for a period of one year from the date of Grantee’s Separation from Service for any reason, including Separation from Service initiated by the Company with or without cause, directly or indirectly, either on Grantee’s own behalf or on behalf of any other person, firm or entity, solicit or provide services that are the same as or similar to the s ervices the Company provided or offered while Grantee was employed by the Company to any customer or prospective customer of the Company (i) with whom Grantee had direct contact during the last two years of Grantee’s employment with the Company or about wh om Grantee learned confidential information as a result of his or her employment with the Company or (ii) with whom any person over whom Grantee had supervisory authority at any time had direct contact during the last two years of Grantee’s employment with the Company or about whom such person learned confidential information as a result of his or her employment with the Company.

(c) Grantee shall not, while employed by the Company and for a period of two years following Separation from Service Grantee’s Separa tion from Service for any reason, including Separation from Service initiated by the Company with or without cause, either directly or indirectly solicit, induce or encourage any individual who was a Company employee at the time of, or within six months pr ior to, Grantee’s Separation from Service , to terminate their employment with the Company or accept employment with any entity, including but not limited to a competitor, supplier or customer of the Company, nor shall Grantee cooperate with any others in doing or attempting to do so.  As used herein, the term "solicit, induce or encourage" includes, but is not limited to, (i) initiating communications with a Company employee relating to possible employment, (ii) offering bonuses or other compensation to encourage a Company employee to terminate his or her employment with the Company and accept employment with any entity, including but not limited to a competitor, supplier or customer of the Company, or (iii) referring Company employees to personnel or agents employed by any entity, including but not limited to competitors, suppliers or customers of the Company.

 

9. Miscellaneous .

(a) The Company shall pay all original issue or transfer taxes with respect to the issuance or delivery of shares of Common Stock pursuant hereto and all other fees and expenses necessarily incurred by the Company in connection therewith, and will use reasonable efforts to comply with all laws and regulations which, in the opinion of counsel for the Company, shall be applicable thereto.

(b) Nothing in this Award shall confer upon Grantee any right to continue in the employ of the Company or any other company that is controlled, directly or indirectly, by the Company or to interfere in any way with the right of the Company to terminate Grantee’s employment at any time.  

(c) This Award shall be governed in accordance with the laws of the state of Delaware.

4

 


(d) This Award shall be binding upon and inure to the benefit of any successor or successors to the Company.  

(e) Neither this Award nor the Stock Units nor any rights hereunder or thereunder may be transferred or assigned by Grantee other than by will or the laws of descent and distribution or pursuant to beneficiary designation procedures approved by the Company or other procedures approved by the Company.  Any other transfer or attempted assignment, pledge or hypothecation, whether or not by operation of law, shall be void.

(f) The Committee, as from time to time constituted, shall have the right to determine any questions which arise in connection with this Agreement or the Stock Units.  This Agreement and the Stock Units are subject to the provisions of the 2012 PIP and shall be interpreted in accordance therewith.

(g) If Grantee is a resident of Canada, Grantee further agrees and represents that any acquisitions of Common Stock hereunder are for his own account for investment, and without the present intention of distributing or selling such Common Stock or any of them. Further, the Company and its subsidiaries expressly reserve the right at any time to dismiss Grantee free from any liability, or any claim under this Award, except as provided herein or in any agreement entered into hereunder.  Any obligation of the Company under this Award to make any payment at any future date or issue Common Stock merely constitutes the unfunded and unsecured promise of the Company to make such payment or issue such Common Stock; any payment shall be from the Company’s general assets in accordance with this Award and the issuance of any Common Stock shall be subject to the Company’s compliance with all applicable laws including securities law and the laws its jurisdiction of incorporation or continuance, as applicable, and no Grantee shall have any interest in, or lien or prior claim upon, any property of the Company or any subsidiary by reason of that obligation.  If Grantee is a resident of Canada, Grantee hereby indemnifies the Company against and agrees to hold it free and harmless from any loss, damage, expense or liability resulting to the Company if any sale or distribution of the Common Stock by Grantee is contrary to the representations and agreements referred to above.

(h) If there is any inconsistency between the terms and conditions of this Award and the terms and conditions of Grantee’s employment agreement, employment le tter or other similar agreement, the terms and conditions of such agreement shall control.

(i) This Award is intended to comply with section 409A of the Internal Revenue Code of 1986, as amended (the “Code”), and the regulations promulgated thereunder.  This Award shall be administered and interpreted to the extent possible in a manner consistent with the intent expressed in this paragraph.  If any compensation or benefits provided by this Award may result in the application of section 409A of the Code, the Company shall, in consultation with you, modify this Award as necessary in order to exclude such compensation from the definition of “deferred compensation” within the meaning of such section 409A of the Code or in order to comply with the provisions of section 409A of the Code.  By signing this Agreement you acknowledge that if any amount paid or payable to you becomes subject to section 409A of the Code, you are

5

 


solely responsible for the payment of any taxes and interest due as a result.

 

IN WITNESS WHEREOF, the Company has caused this Award to be duly executed by its duly authorized officer.

 

R.R. Donnelley & Sons Company

 

 

 

 

 

 

 

 

 

By:

 

 

 

 

 

 

 

 

 

Name: Thomas Carroll

 

Title: EVP, Chief Human Resources Officer

 

 

All of the terms of this Award are accepted as of this ___ day of ______, 2013.

 

 

______________________________

Grantee:  

6

 

Exhibit 10.21

R.R. DONNELLEY & SONS COMPANY
STOCK UNIT AWARD

(2012 PIP)

This Stock Unit Award (“Award”) is granted as of March 2, 2015 by R.R. Donnelley & Sons Company, a Delaware corporation (the “Company”), to XXXXXX (“Grantee”) .

 

1. Grant of Award .  This Award is in recognition of your hard work and dedication over the last several years and is granted as an incentive for the Grantee to remain an employee of the Company and share in the future success of the Company.  The Company hereby credits to Grantee XXXXX stock units (the “Stock Units”), subject to the restrictions and on the terms and conditions set forth herein.  This Award is made pursuant to the provisions of the Company’s 2012 Performance Incentive Plan (the “2012 PIP”).  Capitalized terms not defined herein shall have the meanings specified in the 2012 PIP.  Grantee shall indicate acceptance of this Award by signing and returning a copy hereof.

2. Vesting .  

(a) Except to the extent otherwise provided in paragraph 2(b) or 3 below, the Stock Units shall vest 100% on March 2, 2018.  

(b) Upon the Acceleration Date associated with a Change in Control, the Stock Units shall, in accordance with the terms of the 2012 PIP, become fully vested.

3. Treatment Upon Separation from Service .

(a) If Grantee has a separation from service (within the meaning of Treasury Regulation § 1.409A-1(h), hereinafter a “Separation from Service”) by reason of death or Disability (as defined in the applicable Company long-term disability policy as in effect at the time of Grantee’s disabi lity) , the Stock Units shall become fully vested of the date of such Separation from Service .  

(b) If Grantee has a Separation from Service other than for deathor Disability, the Stock Units, if unvested, shall be forfeited.

4. Issuance of Common Stock in Satisfaction of Stock Units .  As soon as practicable, but not more than 2½ months following the vesting date , the Company shall issue one share of common stock of the Company (“Common Stock”) to Grantee for each Stock Unit that has vested on such dateEach Stock Unit shall be cancelled upon the issuance of a share of Common Stock with respect thereto.  

5. Dividends .  No dividends or dividend equivalents will accrue with respect to the Stock Units.  

6. Rights as a Shareholder .  Prior to issuance, Grantee shall not have the right to vote, nor have any other rights of ownership in, the shares of Common Stock to be issued in satisfaction of Stock Units upon their vesting .   


7. Withholding Taxes .  

(a) As a condition precedent to the issuance to Grantee of any shares of Common Stock pursuant to this Award, the Grantee shall, upon request by the Company, pay to the Company such amount of cash as the Company may be required, under all applicable federal, state, local or other laws or regulations, to withhold and pay over as income or other withholding taxes (the “Required Tax Payments”) with respect to the Award.  If Grantee shall fail to advance the Required Tax Payments after request by the Company, the Company may, in its discretion, deduct any Required Tax Payments from any amount then or thereafter payable by the Company to Grantee.

(b) Grantee may elect to satisfy his obligation to advance the Required Tax Payments by any of the following means:  (1) a cash payment to the Company, (2) delivery to the Company of previously owned whole shares of Common Stock for which Grantee has good title, free and clear of all liens and encumbrances, having a fair market value, determined as of the date the obligation to withhold or pay taxes first arises in connection with the Award (the “Tax Date”), equal to the Required Tax Payments, or (3) directing the Company to withhold a number of shares of Common Stock otherwise issuable to Grantee pursuant to this Award having a fair market value, determined as of the Tax Date, equal to the Required Tax Payments or any combination of (1)-(3).  Any fraction of a share of Common Stock which would be required to satisfy such an obligation shall be disregarded and the remaining amount due shall be paid in cash by Grantee.  No certificate representing a share of Common Stock shall be delivered until the Required Tax Payments have been satisfied in full.  For purposes of this Award, the fair market value of a share of Common Stock on a specified date shall be determined by reference to the closing stock price in trading of the Common Stock on such date  or, if no such trading in the Common Stock occurred on such date, then on the next preceding date when such trading occurred.

8. Non-Solicitation .

(a) Grantee hereby acknowledges that the Company’s relationship with the customer or customers Grantee serves, and with other employees, is special and unique, based upon the development and maintenance of good will resulting from the customers' and other employees’ contacts with the Company and its employees, including Grantee.  As a result of Grantee’s position and customer contacts, Grantee recognizes that Grantee will gain valuable information about (i) the Company’s relationship with its customers, their buying habits, special needs, and purchasing policies, (ii) the Company’s pricing policies, purchasing policies, profit structures, and margin needs, (iii) the skills, capabilities and other employment-related information relating to Company employees, and (iv) and other matters of which Grantee would not otherwise know and that is not otherwise readily available.  Such knowledge is essential to the business of the Company and Grantee recognizes that, if Grantee has a Separation from Service , the Company will be required to rebuild that customer relationship to retain the custome r's business.  Grantee recognizes that during a period following Se paration from Service , the Company is entitled to protection from Grantee’s use of the information and customer and employee relationships with which Grantee has been entrusted by the Company during Grantee’s employment.

2

 


(b) Grantee acknowledges and agrees that any injury to the Company’s customer relationships, or the loss of those relationships, would cause irreparable harm to the Company.  Accordingly, Grantee shall not , while employed by the Company and for a period of one year from the date of Grantee’s Separation from Service for any reason, including Separation from Service initiated by the Company with or without cause, directly or indirectly, either on Grantee’s ow n behalf or on behalf of any other person, firm or entity, solicit or provide services that are the same as or similar to the services the Company provided or offered while Grantee was employed by the Company to any customer or prospective customer of the Company (i) with whom Grantee had direct contact during the last two years of Grantee’s employment with the Company or about whom Grantee learned confidential information as a result of his or her employment with the Company or (ii) with whom any person ov er whom Grantee had supervisory authority at any time had direct contact during the last two years of Grantee’s employment with the Company or about whom such person learned confidential information as a result of his or her employment with the Company.

(c) Grantee shall not, while employed by the Company and for a period of two years following Separation from Service Grantee’s Separation from Service for any reason, including Separation from Service initiated by the Company with or without cause, either direct ly or indirectly solicit, induce or encourage any individual who was a Company employee at the time of, or within six months prior to, Grantee’s Separation from Service , to terminate their employment with the Company or accept employment with any entity, including but not limited to a competitor, supplier or customer of the Company, nor shall Grantee cooperate with any others in doing or attempting to do so.  As used herein, the term "solicit, induce or encourage" includes, but is not limited to, (i) initiating communications with a Company employee relating to possible employment, (ii) offering bonuses or other compensation to encourage a Company employee to terminate his or her employment with the Company and accept employment with any entity, including but not limited to a competitor, supplier or customer of the Company, or (iii) referring Company employees to personnel or agents employed by any entity, including but not limited to competitors, suppliers or customers of the Company.

9. Miscellaneous .

(a) The Company shall pay all original issue or transfer taxes with respect to the issuance or delivery of shares of Common Stock pursuant hereto and all other fees and expenses necessarily incurred by the Company in connection therewith, and will use reasonable efforts to comply with all laws and regulations which, in the opinion of counsel for the Company, shall be applicable thereto.

(b) Nothing in this Award shall confer upon Grantee any right to continue in the employ of the Company or any other company that is controlled, directly or indirectly, by the Company or to interfere in any way with the right of the Company to terminate Grantee’s employment at any time.  

(c) This Award shall be governed in accordance with the laws of the state of Delaware.

3

 


(d) This Award shall be binding upon and inure to the benefit of any successor or successors to the Company.  

(e) Neither this Award nor the Stock Units nor any rights hereunder or thereunder may be transferred or assigned by Grantee other than by will or the laws of descent and distribution or pursuant to beneficiary designation procedures approved by the Company or other procedures approved by the Company.  Any other transfer or attempted assignment, pledge or hypothecation, whether or not by operation of law, shall be void.

(f) The Committee, as from time to time constituted, shall have the right to determine any questions which arise in connection with this Agreement or the Stock Units.  This Agreement and the Stock Units are subject to the provisions of the 2012 PIP and shall be interpreted in accordance therewith.

(g) If Grantee is a resident of Canada, Grantee further agrees and represents that any acquisitions of Common Stock hereunder are for his own account for investment, and without the present intention of distributing or selling such Common Stock or any of them. Further, the Company and its subsidiaries expressly reserve the right at any time to dismiss Grantee free from any liability, or any claim under this Award, except as provided herein or in any agreement entered into hereunder.  Any obligation of the Company under this Award to make any payment at any future date or issue Common Stock merely constitutes the unfunded and unsecured promise of the Company to make such payment or issue such Common Stock; any payment shall be from the Company’s general assets in accordance with this Award and the issuance of any Common Stock shall be subject to the Company’s compliance with all applicable laws including securities law and the laws its jurisdiction of incorporation or continuance, as applicable, and no Grantee shall have any interest in, or lien or prior claim upon, any property of the Company or any subsidiary by reason of that obligation.  If Grantee is a resident of Canada, Grantee hereby indemnifies the Company against and agrees to hold it free and harmless from any loss, damage, expense or liability resulting to the Company if any sale or distribution of the Common Stock by Grantee is contrary to the representations and agreements referred to above.

(h) If there is any inconsistency between the terms and conditions of this Award and the terms and conditions of Grantee’s employment agreement, employment letter or other similar agreement, the terms and conditions of such agreement shall control.

(i) This Award is intended to be exempt from section 409A of the Internal Revenue Code of 1986, as amended (the “Code”), and the regulations promulgated thereunder, as a “short-term deferral.”  This Award shall be administered and interpreted to the extent possible in a manner consistent with the intent expressed in this paragraph.  If any compensation or benefits provided by this Award may result in the application of section 409A of the Code, the Company shall, in consultation with you, modify this Award as necessary in order to exclude such compensation from the definition of “deferred compensation” within the meaning of such section 409A of the Code or in order to comply with the provisions of section 409A of the Code.  By signing this Agreement you acknowledge that if any amount paid or payable to you becomes subject

4

 


to section 409A of the Code, you are solely responsible for the payment of any taxes and interest due as a result.

 

IN WITNESS WHEREOF, the Company has caused this Award to be duly executed by its duly authorized officer.

 

R.R. Donnelley & Sons Company

 

 

 

 

 

 

 

 

 

By:

 

 

 

 

 

 

 

 

 

Name: Thomas Carroll

 

Title: EVP, Chief Human Resources Officer

 

 

All of the terms of this Award are accepted as of this ___ day of ______, 2015.

 

 

______________________________

Grantee:  

5

 

Exhibit 10.22

R.R. DONNELLEY & SONS COMPANY
STOCK UNIT AWARD

(2012 PIP)

This Stock Unit Award (“Award”) is granted as of February 29, 2016 by R.R. Donnelley & Sons Company, a Delaware corporation (the “Company”), to XXXXXX (“Grantee”) .

 

1. Grant of Award .  This Award is in recognition of your hard work and dedication over the last several years and is granted as an incentive for the Grantee to remain an employee of the Company and share in the future success of the Company.  The Company hereby credits to Grantee XXXXX stock units (the “Stock Units”), subject to the restrictions and on the terms and conditions set forth herein.  This Award is made pursuant to the provisions of the Company’s 2012 Performance Incentive Plan (the “2012 PIP”).  Capitalized terms not defined herein shall have the meanings specified in the 2012 PIP.  Grantee shall indicate acceptance of this Award by signing and returning a copy hereof.

2. Vesting .  

(a) Except to the extent otherwise provided in paragraph 2(b) or 3 below, the Stock Units shall vest 100% on March 2, 2019.  

(b) Upon the Acceleration Date associated with a Change in Control, the Stock Units shall, in accordance with the terms of the 2012 PIP, become fully vested.

3. Treatment Upon Separation from Service .

(a) If Grantee has a separation from service (within the meaning of Treasury Regulation § 1.409A-1(h), hereinafter a “Separation from Service”) by reason of death or Disability (as defined in the applicable Company long-term disability policy as in effect at the time of Grante e’s disability) , the Stock Units shall become fully vested of the date of such Separation from Service .  

(b) If Grantee has a Separation from Service other than for death or Disability, the Stock Units, if unvested, shall be forfeited.

4. Issuance of Common Stock in Satisfaction of Stock Units .  As soon as practicable, but not more than 2½ months following the vesting date , the Company shall issue one share of common stock of the Company (“Common Stock”) to Grantee for each Stock Unit that has vested on such date.  Each Stock Unit shall be cancelled upon the issuance of a share of Common Stock with respect thereto.  

5. Dividends .  No dividends or dividend equivalents will accrue with respect to the Stock Units.  

6. Rights as a Shareholder .  Prior to issuance, Grantee shall not have the right to vote, nor have any other rights of ownership in, the shares of Common Stock to be issued in


satisfaction of Stock Units upon their vesting .   

7. Withholding Taxes .  

(a) As a condition precedent to the issuance to Grantee of any shares of Common Stock pursuant to this Award, the Grantee shall, upon request by the Company, pay to the Company such amount of cash as the Company may be required, under all applicable federal, state, local or other laws or regulations, to withhold and pay over as income or other withholding taxes (the “Required Tax Payments”) with respect to the Award.  If Grantee shall fail to advance the Required Tax Payments after request by the Company, the Company may, in its discretion, deduct any Required Tax Payments from any amount then or thereafter payable by the Company to Grantee.

(b) Grantee may elect to satisfy his obligation to advance the Required Tax Payments by any of the following means:  (1) a cash payment to the Company, (2) delivery to the Company of previously owned whole shares of Common Stock for which Grantee has good title, free and clear of all liens and encumbrances, having a fair market value, determined as of the date the obligation to withhold or pay taxes first arises in connection with the Award (the “Tax Date”), equal to the Required Tax Payments, (3) directing the Company to withhold a number of shares of Common Stock otherwise issuable to Grantee pursuant to this Award having a fair market value, determined as of the Tax Date, equal to the Required Tax Payments or (4) any combination of (1)-(3).  Any fraction of a share of Common Stock which would be required to satisfy such an obligation shall be disregarded and the remaining amount due shall be paid in cash by Grantee.  No certificate representing a share of Common Stock shall be delivered until the Required Tax Payments have been satisfied in full.  For purposes of this Award, the fair market value of a share of Common Stock on a specified date shall be determined by reference to the closing stock price in trading of the Common Stock on such date  or, if no such trading in the Common Stock occurred on such date, then on the next preceding date when such trading occurred.

8. Non-Solicitation .

(a) Grantee hereby acknowledges that the Company’s relationship with the customer or customers Grantee serves, and with other employees, is special and unique, based upon the development and maintenance of good will resulting from the customers' and other employees’ contacts with the Company and its employees, including Grantee.  As a result of Grantee’s position and customer contacts, Grantee recognizes that Grantee will gain valuable information about (i) the Company’s relationship with its customers, their buying habits, special needs, and purchasing policies, (ii) the Company’s pricing policies, purchasing policies, profit structures, and margin needs, (iii) the skills, capabilities and other employment-related information relating to Company employees, and (iv) and other matters of which Grantee would not otherwis e know and that is not otherwise readily available.  Such knowledge is essential to the business of the Company and Grantee recognizes that, if Grantee has a Separation from Service , the Company will be required to rebuild that customer relationship to ret ain the customer's business.  Grantee recognizes that during a period following Se paration from Service , the Company is entitled to protection from Grantee’s use of

2

 


the information and customer and employee relationships with which Grantee has been entrust ed by the Company during Grantee’s employment.

(b) Grantee acknowledges and agrees that any injury to the Company’s customer relationships, or the loss of those relationships, would cause irreparable harm to the Company.  Accordingly, Grantee shall not , while employed by the Company and for a period of one year from the date of Grantee’s Separation from Service for any reason, including Separation from Service initiated by the Company with or without cause, directly or indirectly, either on Grantee’s own behalf or on behalf of any other person, firm or entity, solicit or provide services that are the same as or similar to the services the Company provided or offered while Grantee was employed by the Company to any customer or prospective customer of the Company (i) with whom Grantee had direct contact during the last two years of Grantee’s employment with the Company or about whom Grantee learned confidential information as a result of his or her employment with the Company or (ii) with whom any person over whom Grantee had supervisory authority at any time had direct contact during the last two years of Grantee’s employment with the Company or about whom such person learned confidential information as a result of his or her employment with the Company.

(c) Grantee shall not, while employed by the Company and for a period of two years following Grantee’s Separation from Service for any reason, including Separation from Service initiated by the Company with or without cause, either directly or indirectly solicit , induce or encourage any individual who was a Company employee at the time of, or within six months prior to, Grantee’s Separation from Service , to terminate their employment with the Company or accept employment with any entity, including but not limited to a competitor, supplier or customer of the Company, nor shall Grantee cooperate with any others in doing or attempting to do so.  As used herein, the term "solicit, induce or encourage" includes, but is not limited to, (i) initiating communications with a Company employee relating to possible employment, (ii) offering bonuses or other compensation to encourage a Company employee to terminate his or her employment with the Company and accept employment with any entity, including but not limited to a competitor, supplier or customer of the Company, or (iii) referring Company employees to personnel or agents employed by any entity, including but not limited to competitors, suppliers or customers of the Company.

9. Miscellaneous .

(a) The Company shall pay all original issue or transfer taxes with respect to the issuance or delivery of shares of Common Stock pursuant hereto and all other fees and expenses necessarily incurred by the Company in connection therewith, and will use reasonable efforts to comply with all laws and regulations which, in the opinion of counsel for the Company, shall be applicable thereto.

(b) Nothing in this Award shall confer upon Grantee any right to continue in the employ of the Company or any other company that is controlled, directly or indirectly, by the Company or to interfere in any way with the right of the Company to terminate Grantee’s employment at any time.  

3

 


(c) This Award shall be governed in accordance with the laws of the state of Delaware.

(d) This Award shall be binding upon and inure to the benefit of any successor or successors to the Company.  

(e) Neither this Award nor the Stock Units nor any rights hereunder or thereunder may be transferred or assigned by Grantee other than by will or the laws of descent and distribution or pursuant to beneficiary designation procedures approved by the Company or other procedures approved by the Company.  Any other transfer or attempted assignment, pledge or hypothecation, whether or not by operation of law, shall be void.

(f) The Human Resources Committee of the Board of Directors of the Company (the “Committee”), as from time to time constituted, shall have the right to determine any questions which arise in connection with this Agreement or the Stock Units.  This Agreement and the Stock Units are subject to the provisions of the 2012 PIP and shall be interpreted in accordance therewith.

(g) If Grantee is a resident of Canada, Grantee further agrees and represents that any acquisitions of Common Stock hereunder are for his own account for investment, and without the present intention of distributing or selling such Common Stock or any of them. Further, the Company and its subsidiaries expressly reserve the right at any time to dismiss Grantee free from any liability, or any claim under this Award, except as provided herein or in any agreement entered into hereunder.  Any obligation of the Company under this Award to make any payment at any future date or issue Common Stock merely constitutes the unfunded and unsecured promise of the Company to make such payment or issue such Common Stock; any payment shall be from the Company’s general assets in accordance with this Award and the issuance of any Common Stock shall be subject to the Company’s compliance with all applicable laws including securities law and the laws its jurisdiction of incorporation or continuance, as applicable, and no Grantee shall have any interest in, or lien or prior claim upon, any property of the Company or any subsidiary by reason of that obligation.  If Grantee is a resident of Canada, Grantee hereby indemnifies the Company against and agrees to hold it free and harmless from any loss, damage, expense or liability resulting to the Company if any sale or distribution of the Common Stock by Grantee is contrary to the representations and agreements referred to above.

(h) If there is any inconsistency between the terms and conditions of this Award and the terms and conditions of Grantee’s employment agreement, employment letter or other similar agreement, th e terms and conditions of such agreement shall control.

(i) This Award is intended to be exempt from section 409A of the Internal Revenue Code of 1986, as amended (the “Code”), and the regulations promulgated thereunder, as a “short-term deferral.”  This Award shall be administered and interpreted to the extent possible in a manner consistent with the intent expressed in this paragraph.  If any compensation or benefits provided by this Award may result in the application of section 409A of the Code, the Company shall, in consultation with you, modify this

4

 


Award as necessary in order to exclude such compensation from the definition of “deferred compensation” within the meaning of such section 409A of the Code or in order to comply with the provisions of section 4 09A of the Code.  By signing this Agreement you acknowledge that if any amount paid or payable to you becomes subject to section 409A of the Code, you are solely responsible for the payment of any taxes and interest due as a result.

 

(j) Impact of Spin-off on 2014 and 2015 PSUs:   In the event that the Company completes its planned spin-offs, the Committee has determined that with respect to outstanding Performance Share Units granted in 2014 and 2015, that the performance period will end and the applicable performance will be measured as of the completion date of the spin-offs.  The payment date and time-vesting service conditions will remain the same.

 

IN WITNESS WHEREOF, the Company has caused this Award to be duly executed by its duly authorized officer.

 

R.R. Donnelley & Sons Company

 

 

 

 

 

 

 

 

 

By:

 

 

 

 

 

 

 

 

 

Name: Thomas Carroll

 

Title: EVP, Chief Human Resources Officer

 

 

All of the terms of this Award are accepted as of this ___ day of ______, 2016.

 

 

______________________________

Grantee:  

 

 

5

 

 

 

 

 

Exhibit 10.23

R.R. DONNELLEY & SONS COMPANY
PERFORMANCE UNIT AWARD (2012 PIP)

This Performance Unit Award (“Award”) is granted as of March 3, 2014 (the “Grant Date”), by R. R. Donnelley & Sons Company (the “Company”) to XXXXXXXXX (“Grantee”).  

1. Grant of Award .   This Award is in recognition of your hard work and dedication over the last several years and is granted as an incentive for the Grantee to remain an employee of the Company and share in the future success of the Company.    The Company hereby credits to Grantee XXXXX stock units (the “Performance Units”), subject to the restrictions and on the terms and conditions set forth herein.  This Award is made pursuant to the provisions of the R. R. Donnelley & Sons Company 2012 Performance Incentive Plan (“2012 PIP”).  Capitalized terms not defined herein shall have the meanings specified in the 2012 PIP.  Grantee shall indicate acceptance of this Award by signing and returning a copy hereof.  

2. Determination of Achievement; Distribution of Award .  

(a) The number of shares of common stock, par value $1.25 per share, of the Company (the “Common Stock”) payable in respect of the Performance Units will be determined based on the attainment of Cumulative Free Cash Flow against the “Cumulative Free Cash Flow Matrix” as shown on Attachment A hereto.  Promptly following the filing of the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 (or promptly following such earlier date as of which, pursuant to Section 4 hereof, to be made), the Committee (as defined in the 2012 PIP) shall determine the attainment against the Cumulative Free Cash Flow Matrix of the Company’s Cumulative Free Cash Flow.  

(b) Distribution with respect to this Award shall be made to Grantee as soon as practicable following the deter mination described in (a) above but no later than 60 days thereafter .  Distribution of this Award may be made in Common Stock, cash (based upon the fair market value of the Common Stock on the date of distribution) or any combination thereof as determined by the Committee.  

3. Dividends; Voting .  

(a) No dividends or dividend equivalents will accrue with respect to the Performance Units.  

(b) Grantee shall have no rights to vote shares of common stock represented by the Performance Units unless and until distribution with respect to this Award is made in Common Stock pursuant to paragraph 2(b) above.

4. Treatment upon Separation or Termination .

(a) Notwithstanding any other agreement with Grantee to the contrary, if Grantee terminates his employment for Good Reason (as defined in the Grantee’s employment agreement) or the Company terminates the Grantee’s employment without Cause (as defined in the Grantee’s employment agreement) the Performance Units shall vest and be payable, if at

1

 


 

all, on the same terms and conditions tha t would have applied had Grantee’s employment not terminated (i.e., performance measured on December 31, 2016).

(b) Notwithstanding any other agreement with Grantee to the contrary, if Grantee’s employment terminates by reason of death or Disability (as defined as “total and permanent” disability under the Company’s long-term disability plan for senior executives), fifty percent of any unvested Performance Units shall vest and become payable, assuming the attainment of target performance (100% achievement) or, if greater, based on actual performance through the date of death or determination of Disability.

(c) If Grantee’s employment terminates by reason of retirement on or after age 65 or by reason of a Qualifying Retirement (together, “Retirement”), a pro-rated portion of the Performance Units shall vest and be payable, if at all, on the same terms and conditions that would have applied had Grantee’s employment not terminated (i.e., performance measured on December 31, 2016).  The pro-rated portion of the Performance Units shall be determined by multiplying the total number of Performance Units by a fraction, the numerator of which is the total number of days between March 3, 2014 and the date of Grantee’s termination by reason of Retirement and the denominator of which is 1033.  A “Qualifying Retirement” is defined as

(i) Grantee is an active participant in a Company sponsored retirement benefit plan and is eligible to commence benefits thereunder at the time of cessation of employment and the Company has not terminated Grantee’s employment for cause (a Grantee that is a participant in the Retirement Benefit Plan of R.R. Donnelley & Sons Company (the “RR Donnelley Pension Plan”) is eligible to commence benefits under the plan if Grantee is eligible to commence benefits under the traditional formula of the RR Donnelley Pension Plan, or would have been eligible to commence benefits under the traditional formula of the RR Donnelley Pension Plan had Grantee been a participant in the traditional formula of the RR Donnelley Pension Plan during his or her service with R.R. Donnelley & Sons Company and/or any subsidiary at the time of cessation of employment);

(ii) Grantee is not an active participant in a Company sponsored retirement benefit plan but Grantee would have been eligible to commence benefits under the traditional formula of the RR Donnelley Pension Plan had Grantee been a participant in the traditional formula of the RR Donnelley Pension Plan during his or her service with the Company and/or any subsidiary at the time of cessation of employment; or

(iii) a cessation of employment that the Committee determines is a Qualifying Retirement.

 

(d) Notwithstanding any other agreement with Grantee to the contrary, if Grantee’s employment is terminated by the Company for Cause or is terminated by Grantee other than for Good Reason or by reason of Retirement, any unvested Performance Units shall be forfeited.    

5. Treatment upon Change in Control .  Notwithstanding anything provided in the 2012 PIP or any other agreement with Grantee to the contrary, upon the Acceleration Date associated with a Change in Control, all of the Performance Units shall vest and become payable at the fifty percent payout level with respect to that number of shares of Common Stock that would be payable or, if greater, based on actual performance through the Change in Control Date.

2

 


 

 

 

6. Withholding Taxes  

(a) As a condition precedent to the issuance to Grantee of any shares of Common Stock pursuant to this Award, the Grantee shall, upon request by the Company, pay to the Company such amount of cash as the Company may be required, under all applicable federal, state, local or other laws or regulations, to withhold and pay over as income or other withholding taxes (the “Required Tax Payments”) with respect to the Award.  If Grantee shall fail to advance the Required Tax Payments after request by the Company, the Company may, in its discretion, deduct any Required Tax Payments from any amount then or thereafter payable by the Company to Grantee.

(b) Grantee may elect to satisfy his obligation to advance the Required Tax Payments by any of the following means:  (1) a cash payment to the Company, (2) delivery to the Company of previously owned whole shares of Stock for which Grantee has good title, free and clear of all liens and encumbrances, having a fair market value, determined as of the date the obligation to withhold or pay taxes first arises in connection with the Award (the “Tax Date”), equal to the Required Tax Payments, or (3) directing the Company to withhold a number of shares of Common Stock otherwise issuable to Grantee pursuant to this Award having a fair market value, determined as of the Tax Date, equal to the Required Tax Payments or any combination of (1)-(3).  Any fraction of a share of Common Stock that would be required to satisfy such an obligation shall be disregarded and the remaining amount due shall be paid in cash by Grantee.  No certificate representing a share of Common Stock shall be delivered until the Required Tax Payments have been satisfied in full.  For purposes of this Award, the fair market value of a share of Common Stock on a specified date shall be determined by reference to the closing stock price in trading of the Common Stock on such date, or, if no such trading in the Common Stock occurred on such date, then on the next preceding date when such trading occurred.

7. Miscellaneous  

(a) The Company shall pay all original issue or transfer taxes with respect to the issuance or delivery of shares of Common Stock pursuant hereto and all other fees and expenses necessarily incurred by the Company in connection therewith, and will use reasonable efforts to comply with all laws and regulations which, in the opinion of counsel for the Company, shall be applicable thereto.

(b) Nothing in this Award shall confer upon Grantee any right to continue in the employ of the Company or any other company that is controlled, directly or indirectly, by the Company or to interfere in any way with the right of the Company to terminate Grantee’s employment at any time.

(c) No interest shall accrue at any time on this Award or the Performance Units.

(d) This Award shall be governed in accordance with the laws of the state of Illinois.  

(e) This Award shall be binding upon and inure to the benefit of any successor or successors to the Company.

3

 


 

(f) Neither this Award nor the Performance Units nor any rights hereunder or thereunder may be transferred or assigned by Grantee other than by will or the laws of descent and distribution or pursuant to beneficiary designation procedures approved by the Company or other procedures approved by the Company.  Any other transfer or attempted assignment, pledge or hypothecation, whether or not by operation of law, shall be void.

(g) The Committee, as from time to time constituted, shall have the right to determine any questions that arise in connection with this Agreement or the Performance Units.  This Agreement and the Performance Units are subject to the provisions of the Plan and shall be interpreted in accordance therewith.

(h) If there is any inconsistency between the terms and conditions of this Award and the terms and conditions of the Employment Agreement, the terms and conditions of the Employment Agreement shall control.

IN WITNESS WHEREOF, the Company has caused this Award to be duly executed by its duly authorized officer.

R. R. DONNELLEY & SONS COMPANY

By:

 

 

 

Name:    Thomas Carroll

Title:     EVP, Chief Human Resources Officer

 

 

 

All of the terms of this Agreement are accepted as of this ____ day of _________, 2014.

 

 

 

 

___________________________

Grantee:  

 

 

4

 


 

Attachment A

 

DEFINITIONS:

“Free Cash Flow” for a fiscal year shall be equal to net cash provided by (used in) operating activities of continuing operations for such year less capital expenditures (as reported in the Financial Statements) for such year.  Free Cash Flow shall be adjusted by the Committee, as it shall deem reasonably necessary and appropriate, to avoid any increase or diminution in the opportunity conveyed by the Performance Units that could result from (i) (whether at the time of or subsequent to) any acquisition or disposition of any business or division (whether by merger, stock purchase or sale, sale or purchase of assets, or otherwise) made by the Company or (ii) other significant events that in the Committee’s judgment  have caused an increase or diminution in the opportunity conveyed by the Performance units (including, but not limited to, significant changes in financial or capital structure, significant regulatory changes, or significant changes in tax laws).

“Cumulative Free Cash Flow” shall equal the sum of the Free Cash Flow amounts for the years ended December 31, 2014, 2015 and 2016.

“Financial Statements” shall mean the Company’s consolidated financial statements included in the Company’s Annual Report on Form 10-K filed for the applicable year.

 

CUMULATIVE FREE CASH FLOW MATRIX:

The attainment of Cumulative Free Cash Flow shall be compared to the matrix below to determine the payout under the Performance Units, if any.  

5

 


 

 

 

6

 

 

 

 

 

Exhibit 10.24

R.R. DONNELLEY & SONS COMPANY
PERFORMANCE UNIT AWARD (2012 PIP)

This Performance Unit Award (“Award”) is granted as of March 2, 2015 (the “Grant Date”), by R. R. Donnelley & Sons Company (the “Company”) to XXXXXXXXX (“Grantee”).  

1. Grant of Award .   This Award is in recognition of your hard work and dedication over the last several years and is granted as an incentive for the Grantee to remain an employee of the Company and share in the future success of the Company.    The Company hereby credits to Grantee XXXXX stock units (the “Performance Units”), subject to the restrictions and on the terms and conditions set forth herein.  This Award is made pursuant to the provisions of the R. R. Donnelley & Sons Company 2012 Performance Incentive Plan (“2012 PIP”).  Capitalized terms not defined herein shall have the meanings specified in the 2012 PIP.  Grantee shall indicate acceptance of this Award by signing and returning a copy hereof.  

2. Determination of Achievement; Distribution of Award .  

(a) The number of shares of common stock, par value $1.25 per share, of the Company (the “Common Stock”) payable in respect of the Performance Units will be determined based on the attainment of Cumulative Free Cash Flow against the “Cumulative Free Cash Flow Matrix” and as modified by the “PSU Payout Modifier,” each as shown on Attachment A hereto.  Promptly following the filing of the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 (or promptly following such earlier date as of which, pursuant to Section 4 hereof, to be made), the Committee (as defined in the 2012 PIP) shall determine the attainment against the “Cumulative Free Cash Flow Matrix” of the Company’s Cumulative Free Cash Flow and any adjustment to such attainment as required pursuant to the “PSU Payout Modifier.”  

(b) Distribution with respect to this Award shall be made to Grantee as soon as practicable following the determination described in (a) above but no later than 60 days thereafter .  Distribution of this Award may be made in Co mmon Stock, cash (based upon the fair market value of the Common Stock on the date of distribution) or any combination thereof as determined by the Committee.  

3. Dividends; Voting .  

(a) No dividends or dividend equivalents will accrue with respect to the Performance Units.  

(b) Grantee shall have no rights to vote shares of common stock represented by the Performance Units unless and until distribution with respect to this Award is made in Common Stock pursuant to paragraph 2(b) above.

4. Treatment upon Separation or Termination .

(a) Notwithstanding any other agreement with Grantee to the contrary, if Grantee terminates his employment for Good Reason (as defined in the Grantee’s employment agreement) or the Company terminates the Grantee’s employment without Cause (as defined in

1

 


 

the Grantee’s employment agreement) the Performance Units shall vest and be payable, if at all, on the same terms and conditions that would have applied had Grantee’s employment not terminated (i.e., performance measured on December 31, 2017).

(b) Notwithstanding any other agreement with Grantee to the contrary, if Grantee’s employment terminates by reason of death or Disability (as defined in the applicable Company long-term disability policy as in effect at the time of Grantee’s disability), fifty percent of any unvested Performance Units shall vest and become payable, assuming the attainment of target performance (100% achievement) or, if greater, based on actual performance through the date of death or determination of Disability.

(c) Except as set forth in Grantee’s employment agreement, if any, with the Company, if Grantee’s employment terminates for any reason other than by death or Disability, any unvested Performance Units shall be forfeited.    

5. Treatment upon Change in Control .  Notwithstanding anything provided in the 2012 PIP or any other agreement with Grantee to the contrary, upon the Acceleration Date associated with a Change in Control, all of the Performance Units shall vest and become payable at the fifty percent payout level with respect to that number of shares of Common Stock that would be payable or, if greater, based on actual performance through the Change in Control Date.

6. Withholding Taxes  

(a) As a condition precedent to the issuance to Grantee of any shares of Common Stock pursuant to this Award, the Grantee shall, upon request by the Company, pay to the Company such amount of cash as the Company may be required, under all applicable federal, state, local or other laws or regulations, to withhold and pay over as income or other withholding taxes (the “Required Tax Payments”) with respect to the Award.  If Grantee shall fail to advance the Required Tax Payments after request by the Company, the Company may, in its discretion, deduct any Required Tax Payments from any amount then or thereafter payable by the Company to Grantee.

(b) Grantee may elect to satisfy his obligation to advance the Required Tax Payments by any of the following means:  (1) a cash payment to the Company, (2) delivery to the Company of previously owned whole shares of Stock for which Grantee has good title, free and clear of all liens and encumbrances, having a fair market value, determined as of the date the obligation to withhold or pay taxes first arises in connection with the Award (the “Tax Date”), equal to the Required Tax Payments, or (3) directing the Company to withhold a number of shares of Common Stock otherwise issuable to Grantee pursuant to this Award having a fair market value, determined as of the Tax Date, equal to the Required Tax Payments or any combination of (1)-(3).  Any fraction of a share of Common Stock that would be required to satisfy such an obligation shall be disregarded and the remaining amount due shall be paid in cash by Grantee.  No certificate representing a share of Common Stock shall be delivered until the Required Tax Payments have been satisfied in full.  For purposes of this Award, the fair market value of a share of Common Stock on a specified date shall be determined by reference to the closing stock price in trading of the Common Stock on such date, or, if no such trading in the Common Stock occurred on such date, then on the next preceding date when such trading occurred.

 

2

 


 

7. Miscellaneous  

(a) The Company shall pay all original issue or transfer taxes with respect to the issuance or delivery of shares of Common Stock pursuant hereto and all other fees and expenses necessarily incurred by the Company in connection therewith, and will use reasonable efforts to comply with all laws and regulations which, in the opinion of counsel for the Company, shall be applicable thereto.

(b) Nothing in this Award shall confer upon Grantee any right to continue in the employ of the Company or any other company that is controlled, directly or indirectly, by the Company or to interfere in any way with the right of the Company to terminate Grantee’s employment at any time.

(c) No interest shall accrue at any time on this Award or the Performance Units.

(d) This Award shall be governed in accordance with the laws of the state of Illinois.  

(e) This Award shall be binding upon and inure to the benefit of any successor or successors to the Company.

(f) Neither this Award nor the Performance Units nor any rights hereunder or thereunder may be transferred or assigned by Grantee other than by will or the laws of descent and distribution or pursuant to beneficiary designation procedures approved by the Company or other procedures approved by the Company.  Any other transfer or attempted assignment, pledge or hypothecation, whether or not by operation of law, shall be void.

(g) The Committee, as from time to time constituted, shall have the right to determine any questions that arise in connection with this Agreement or the Performance Units.  This Agreement and the Performance Units are subject to the provisions of the Plan and shall be interpreted in accordance therewith.

(h) If there is any inconsistency between the terms and conditions of this Award and the terms and conditions of the Employment Agreement, the terms and conditions of the Employment Agreement shall control.

IN WITNESS WHEREOF, the Company has caused this Award to be duly executed by its duly authorized officer.

R. R. DONNELLEY & SONS COMPANY

By:

 

 

 

Name:    Thomas Carroll

Title:     EVP, Chief Human Resources Officer

 

 

 

3

 


 

All of the terms of this Agreement are accepted as of this ____ day of _________, 2015.

 

 

 

 

___________________________

Grantee:  

 

 

4

 


 

Attachment A

 

DEFINITIONS:

“Free Cash Flow” for a fiscal year shall be equal to net cash provided by (used in) operating activities of continuing operations for such year less capital expenditures (as reported in the Financial Statements) for such year.  Free Cash Flow shall be adjusted by the Committee, as it shall deem reasonably necessary and appropriate, to avoid any increase or diminution in the opportunity conveyed by the Performance Units that could result from (i) (whether at the time of or subsequent to) any acquisition or disposition of any business or division (whether by merger, stock purchase or sale, sale or purchase of assets, or otherwise) made by the Company or (ii) other significant events that in the Committee’s judgment  have caused an increase or diminution in the opportunity conveyed by the Performance units (including, but not limited to, significant changes in financial or capital structure, significant regulatory changes, or significant changes in tax laws).

“Cumulative Free Cash Flow” shall equal the sum of the Free Cash Flow amounts for the years ended December 31, 2015, 2016 and 2017.

“Financial Statements” shall mean the Company’s consolidated financial statements included in the Company’s Annual Report on Form 10-K filed for the applicable year.

“PSU Payout Modifier” shall mean the amount by which any PSU payout shall be adjusted as set forth.

 

CUMULATIVE FREE CASH FLOW MATRIX:

The attainment of Cumulative Free Cash Flow shall be compared to the matrix below to determine the payout under the Performance Units, if any.  


5

 


 

PSU PAYOUT MODIFIER:

 

6

 

Exhibit 10.25

LSC COMMUNICATIONS, INC.
FOUNDER’S AWARD (RESTRICTED STOCK)

(2016 PIP)  

This Restricted Stock Founder’s Award (“Award”) is granted as of October 1, 2016 (the “Grant Date”) by LSC Communications, Inc., a Delaware corporation (the “Company”), to XXXXXX (“Grantee”).

 

1. Grant of Award .  This Award is granted as an incentive for Grantee to remain an employee of the Company and share in the future success of the Company.  The Company hereby credits to Grantee XXXXX restricted shares (the “Shares”), subject to the restrictions and on the terms and conditions set forth herein.  This Award is made pursuant to the provisions of the Company’s 2016 Performance Incentive Plan (the “2016 PIP”).  Capitalized terms not defined herein shall have the meanings specified in the 2016 PIP.  Grantee shall indicate acceptance of this Award by signing and returning a copy hereof.  The Shares will be held for you by Computershare until the Performance Vesting Date (as defined below).

2. Vesting .  

(a) The Shares will be earned subject to the attainment of the performance condition or conditions as established by the Committee and set forth on Exhibit A hereto (each, a “Performance Condition”) for the applicable performance period (the “Performance Period”) as established by the Committee and set forth on Exhibit A and subject to the time-based vesting conditions set forth below. The Committee shall determine the attainment of each Performance Condition after the applicable Performance Period.  

(b) This Award is intended to constitute “performance-based compensation” within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”) and is intended to comply the requirements thereof to the extent the Grantee is a “covered person” within the meaning of Section 162(m).

(c) Upon the Acceleration Date associated with a Change in Control, the Shares shall, in accordance with the terms of the 2016 PIP, become fully vested.

3. Treatment Upon Separation from Service.

(a) If Grantee has a separation from service (within the meaning of Treasury Regulation § 1.409A-1(h), hereinafter a “Separation from Service”) by reason of death or Disability (as defined in the applicable Company long-term disability policy as in effect at the time of Grantee’s disability), the Shares shall become fully vested of the date of such Separation from Service.  

(b) If Grantee has a Separation from Service other than for death or Disability, the Shares, if unvested, shall be forfeited.

4. Period of Restriction .


(a) Performance-Based Vesting .  Subject to Grantee’s continued employment with the Company through the end of the applicable Performance Period, the performance-based vesting restrictions set forth in this Award with respect to the Shares shall lapse upon certification by the Committe e that the Performance Condition for the applicable Performance Period set forth on Exhibit A has been satisfied (the “Performance Vesting Date”). Upon the Performance Vesting Date, all performance restrictions applicable to the Shares shall lapse. Unless the vesting of the Shares is accelerated under the circumstances set forth above, if the Performance Condition is not satisfied, then the Shares shall be forfeited.

(b) Time-Based Vesting . In addition to satisfying the Performance Condition as described above, the Shares shall also be subject to the following time-based vesting conditions:  the Shares shall vest one-third on each of the first three anniversaries of the Grant Date.  Upon achievement of the Performance Condition and the time-based vesting conditions, the restrictions applicable to the Shares shall lapse.

5. Rights as a Shareholder .   Participant shall have all rights of a shareholder (including, without limitation, dividends  and voting rights) with respect to the Shares, for record dates occurring on or after the Grant Date and prior to the date any such Shares are forfeited in accordance with this Award, except that any dividends or distributions shall, until such time as the applicable restrictions have lapsed, be deposited with the Company or any holder appointed, (together with a stock power endorsed in blank or other appropriate instrument of transfer for dividends or distributions paid in Shares or other securities with respect to the Shares), or credited to Grantee’s book-entry account, as applicable, and shall be subject to the same restrictions (including, without limitation, the need to satisfy the Performance Condition) as such Shares and otherwise considered to be such Shares for all purposes hereunder.  

6. Withholding Taxes .  

(a) All payments or distributions of Shares or with respect thereto shall be net of any amounts required to be withheld pursuant to applicable federal, national, state and local tax withholding requirements (the “Required Tax Payments”). The Company may require Grantee to remit to it an amount sufficient to satisfy such Required Tax Payments prior to delivery of any certificates for such Shares or with respect thereto. In lieu thereof, the Company shall have the right to withhold the number of Shares equal to the amount of such taxes or may withhold such amount from any other amounts (provided such amounts do not constitute deferred compensation within the meaning of Section 409A of the Code) that are due or to become due from such corporation to the Grantee as the Company shall determine.

(b) Grantee may elect to satisfy his obligation to advance the Required Tax Payments by any of the following means:  (1) a cash payment to the Company, (2) delivery to the Company of previously owned whole shares of Common Stock for which Grantee has good title, free and clear of all liens and encumbrances, having a fair market value, determined as of the date the obligation to withhold or pay taxes first arises in connection with the Award (the “Tax Date”), equal to the Required Tax Payments, (3) directing the Company to withhold a number of Shares subject to this Award having a fair market

-2-

 


value, determined as of the Tax Date, equal to the Required Tax Payments or (4) any combination of (1)-(3).  Any fraction of a share of Common Stock which would be required to satisfy such an obligation shall be disregarded and the remaining am ount due shall be paid in cash by Grantee.  No certificate representing a share of Common Stock shall be delivered until the Required Tax Payments have been satisfied in full.  For purposes of this Award, the fair market value of a share of Common Stock on a specified date shall be determined by reference to the closing stock price in trading of the Common Stock on such date or, if no such trading in the Common Stock occurred on such date, then on the next preceding date when such trading occurred.

7. Non-Solicitation .

(a) Grantee hereby acknowledges that the Company’s relationship with the customer or customers Grantee serves, and with other employees, is special and unique, based upon the development and maintenance of good will resulting from the customers' and other employees’ contacts with the Company and its employees, including Grantee.  As a result of Grantee’s position and customer contacts, Grantee recognizes that Grantee will gain valuable information about (i) the Company’s relationship with its customers, their buying habits, special needs, and purchasing policies, (ii) the Company’s pricing policies, purchasing policies, profit structures, and margin needs, (iii) the skills, capabilities and other employment-related information relating to Company employees, and (iv) and other matters of which Grantee would not otherwise know and that is not otherwise readily available.  Such knowledge is essential to the business of the Company and Grantee recognizes that, if Grantee has a Separation from Service, the Company will be required to rebuild that customer relationship to retain the customer's business.  Grantee recognizes that during a period following Separation from Service, the Company is entitled to protection from Grantee’s use of the information and customer and employee relationships with which Grantee has been entrusted by the Company during Grantee’s employment.

(b) Grantee acknowledges and agrees that any injury to the Company’s customer relationships, or the loss of those relationships, would cause irreparable harm to the Company.  Accordingly, Grantee shall not , while employed by the Company and for a period of one year from the date of Grantee’s Separation from Service for any reason, including Separation from Service initiated by the Company with or without cause, directly or indirectly, either on Grantee’s own behalf or on behalf of any other person, firm or entity, solicit or provide services that are the same as or similar to the services the Company provided or offered while Grantee was employed by the Company to any customer or prospective customer of the Company (i) with whom Grantee had direct contact during the last two years of Grantee’s employment with the Company or about whom Grantee learned confidential information as a result of his or her employment with the Company or (ii) with whom any person over whom Grantee had supervisory authority at any time had direct contact during the last two years of Grantee’s employment with the Company or about whom such person learned confidential information as a result of his or her employment with the Company.

(c) Grantee shall not, while employed by the Company and for a period of two years

-3-

 


following Grantee’s Separation from Service for any reason, including Separation from Service initiated by the Company with or without cause, either directly or indirectly solicit, induce or encourage any individual who was a Company employee at the time of, or within six months prior to, Grantee’s Separation from Service, to terminate their employment with the Company or accept employment with any entity, including but not limited to a competitor, supplier or customer of the Company, nor shall Grantee cooperate with any others in doing or attempting to do so.  As used herein, the term "solicit, induce or encourage" includ es, but is not limited to, (i) initiating communications with a Company employee relating to possible employment, (ii) offering bonuses or other compensation to encourage a Company employee to terminate his or her employment with the Company and accept emp loyment with any entity, including but not limited to a competitor, supplier or customer of the Company, or (iii) referring Company employees to personnel or agents employed by any entity, including but not limited to competitors, suppliers or customers of the Company.

(d) Grantee acknowledges that the non-solicitation restrictions set forth in this Section 7 apply whether or not the Shares subject to this Award actually vest.

8. Miscellaneous .

(a) The Company shall pay all original issue or transfer taxes with respect to the issuance or delivery of the Shares pursuant hereto and all other fees and expenses necessarily incurred by the Company in connection therewith, and will use reasonable efforts to comply with all laws and regulations which, in the opinion of counsel for the Company, shall be applicable thereto.

(b) Nothing in this Award shall confer upon Grantee any right to continue in the employ of the Company or any other company that is controlled, directly or indirectly, by the Company or to interfere in any way with the right of the Company to terminate Grantee’s employment at any time.  

(c) This Award shall be governed in accordance with the laws of the state of Delaware.

(d) This Award shall be binding upon and inure to the benefit of any successor or successors to the Company.  

(e) Neither this Award nor the Shares nor any rights hereunder or thereunder may be transferred or assigned by Grantee prior to vesting other than by will or the laws of descent and distribution or pursuant to beneficiary designation procedures approved by the Company or other procedures approved by the Company.  Any other transfer or attempted assignment, pledge or hypothecation, whether or not by operation of law, shall be void.

(f) The Committee, as from time to time constituted, shall have the right to determine any questions which arise in connection with this Award or the Shares.  This Award and the Shares are subject to the provisions of the 2016 PIP and shall be interpreted in accordance therewith.

-4-

 


(g) If Grantee is a resident of Canada, Grantee furt her agrees and represents that any acquisitions of Common Stock hereunder are for his own account for investment, and without the present intention of distributing or selling such Common Stock or any of them. Further, the Company and its subsidiaries expre ssly reserve the right at any time to dismiss Grantee free from any liability, or any claim under this Award, except as provided herein or in any agreement entered into hereunder.  Any obligation of the Company under this Award to make any payment at any f uture date or issue Common Stock merely constitutes the unfunded and unsecured promise of the Company to make such payment or issue such Common Stock; any payment shall be from the Company’s general assets in accordance with this Award and the issuance of any Common Stock shall be subject to the Company’s compliance with all applicable laws including securities law and the laws its jurisdiction of incorporation or continuance, as applicable, and no Grantee shall have any interest in, or lien or prior claim upon, any property of the Company or any subsidiary by reason of that obligation.  If Grantee is a resident of Canada, Grantee hereby indemnifies the Company against and agrees to hold it free and harmless from any loss, damage, expense or liability result ing to the Company if any sale or distribution of the Common Stock by Grantee is contrary to the representations and agreements referred to above.

(h) If there is any inconsistency between the terms and conditions of this Award and the terms and conditions of Grantee’s employment agreement, employment letter or other similar agreement, the terms and conditions of such agreement shall control.


-5-

 


IN WITNESS WHEREOF, the Company has caused this Award to be duly executed by its duly authorized officer.

LSC Communications, Inc.

By:

Name:  Suzanne S. Bettman

Title:  Chief Administrative Officer

 

 

All of the terms of this Award are accepted as of this ___ day of ______, 2016.

 

 

______________________________

Grantee:  

 

 

 

-6-

 

Exhibit 10.26

 

WRITTEN DESCRIPTION OF ANNUAL INCENTIVE PLAN OF

LSC COMMUNICATIONS, INC.

WITH RESPECT TO THE PERIOD FROM

OCTOBER 1, 2016 TO DECEMBER 31, 2016

 

 

Pursuant to the LSC Communications, Inc. 2016 Performance Incentive Plan (the “LSC PIP”) the Human Resources Committee approved a stub incentive plan (the “Stub Plan”), a subplan under the LSC PIP, covering the period from October 1, 2016 to December 31, 2016 (the “Stub Plan Period”).  The threshold performance measure for the Stub Plan is a corporate financial target for the Stub Plan Period based on the Company’s reported EBITDA of $96,000,000 (the “Stub Plan Target”).  The Stub Plan will begin to fund when 90% of the Stub Plan Target is exceeded, as set forth on the scale approved by the Human Resources Committee.  

 

 

 

 

Exhibit 10.27

LSC Communications

Annual Incentive Plan

(As amended and restated effective January 17, 2017)

 

OVERVIEW

 

The LSC Communications Annual Incentive Plan (the “Annual Incentive Plan” or the “Plan”) is designed to promote the growth and profitability of LSC Communications and its subsidiaries with incentives to reward and enhance the retention of eligible employees. Awards are made depending on the Company’s financial performance and on how well an eligible employee performs against individual goals that link to and support LSC Communications’ strategic and financial priorities.

 

The Plan is a sub-plan of the LSC Communications 2016 Performance Incentive Plan (the “2016 PIP”) and is subject to all of the performance conditions established pursuant to the 2016 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 2016 PIP, the terms of the 2016 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 Plan’s implementation and administration, including the authority to impose limitations and conditions, with respect to competitive employment or otherwise, that are not inconsistent with the Plan’s purposes.

 

PARTICIPATION

 

Eligibility is limited to executive officers selected by the Committee and other employees designated as eligible by position in the organization.

 

TARGET AWARD PERCENTAGE AND PLAN FUNDING

 

Each eligible participant’s target incentive opportunity under the Annual Incentive Plan is a percentage of such participant’s 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 goals may vary based on the participant’s level in the Company (the “Personal Goal Percentage”) and will be communicated to eligible participants annually.

 

 

 

 

 


 

Subject to the performance conditions established under the 2016 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 Plan’s 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 Company’s 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 Plan is funded, Plan awards will be made based upon the Plan’s funding level and the participant’s achievement level of his or her personal goals, up to 150% of the participant’s Target Award Percentage (or such other percentage as determined by the Committee).

 

PERSONAL GOALS

 

Personal goals are established for each participant each Plan Year to link and support LSC Communications’ strategic and financial priorities. A participant’s personal goals 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 goal-setting process. The portion of any Target Award Percentage that is dependent upon achievement of personal goals may vary based on the participant’s level in the Company and will be communicated to eligible participants annually. The Committee’s determination of whether a participant has attained, in whole or in part, the participant’s personal goals 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 2016 PIP and the Plan funding decisions and personal performance goals have been made. Except as otherwise provided herein, or by the Committee, at any time prior to the end of such Plan Year, 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 participant’s death or Disability. (Please refer to the Changes in Employment Status section of this document for details.)

 

The Committee has the discretionary authority prior to the end of the Plan Year to determine to pay any award in installment payments over a specified period of time.  The Committee also 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 person who is a “covered employee,” as defined in Section 162(m) of the Internal Revenue Code, to an amount in excess of the amount earned under the 2016 PIP; provided further, however, the Committee has discretionary authority to decrease the amount of the award otherwise payable at any time for any person designated as an executive officer of the Company for purposes of Section 16 of the Securities Exchange Act of 1934, including after the end of the Plan Year.  Additionally, the

2

 


Committee has discretionary authority to reduce the amount of the award otherwise payable if it determine s that any 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 LSC Communications 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.  Promotions on to the AIP Plan on or after October 1 of the Plan Year will not be eligible to participate in the Annual Incentive Plan until the following such Plan Year.

 

B.

NEW HIRE

 

Employees hired prior to October 1 st of the Plan Year shall be eligible to participate in the Annual Incentive Plan in the year of hire if designated. Eligible employees hired on or after October 1 of the Plan Year will not be able to participate in the Annual Incentive Plan until the following such Plan Year.  

 

 

C.

RETIREMENT, DEATH or DISABILITY

 

A participant’s 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” means separation from service with the Company (i) at age 65, or (ii)  at or after age 55 with 5 or more years of continuous service, except in each case as determined by the Committee.

 

 

**

For purposes of the Plan, “Disability” means disability as defined as in the Company’s long-term disability policy as in effect at the time of the participant’s disability.

 

D.

OTHER TERMINATION

 

If participant’s 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.

3

 


 

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 LSC Communications’ management the authority to administer the Plan and determine performance under the Plan.

 

LSC Communications 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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4

 

Exhibit 10.28

February 29, 2016

We are pleased to inform you that the HR Committee of the RR Donnelley Board of Directors has decided to provide full and immediate payment of the unvested portion of your 2013 and 2014 retention awards in the event your employment is terminated by your employer without cause prior to vest date. For the avoidance of doubt, this would not apply to the transfer of your employment to Donnelley Financial Solutions or LSC Communications (in connection with their spin-offs) or the transfer of your employment within the RRD control group (prior to these spin-offs).

This change is effective immediately.

 

/s/ Thomas Carroll

Thomas Carroll

EVP, CHRO

RR Donnelley

 

Exhibit 12.1

LSC COMMUNICATIONS, INC.

COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES

(in millions, except ratios)

 

 

 

Years ended December 31,

 

 

2016

 

 

2015

 

 

2014

 

 

2013

 

 

2012

 

Earnings (loss) available for fixed charges:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) from continuing operations before income taxes

$

157

 

 

$

138

 

 

$

88

 

 

$

137

 

 

$

(629

)

Add: Fixed charges before capitalized interest

 

31

 

 

 

9

 

 

 

8

 

 

 

7

 

 

 

7

 

Add: Amortization of capitalized interest

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

Total earnings (loss) available for fixed charges

$

189

 

 

$

147

 

 

$

96

 

 

$

144

 

 

$

(622

)

Fixed charges:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense (income)

$

18

 

 

$

 

 

$

 

 

$

 

 

$

 

Interest portion of rental expense

 

13

 

 

 

10

 

 

 

9

 

 

 

8

 

 

 

8

 

Total fixed charges before capitalized interest

 

31

 

 

 

10

 

 

 

9

 

 

 

8

 

 

 

8

 

Capitalized interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total fixed charges

$

31

 

 

$

10

 

 

$

9

 

 

$

8

 

 

$

8

 

Ratio of earnings (loss) to fixed charges

 

6.10

 

 

 

14.70

 

 

 

10.67

 

 

 

18.00

 

 

 

(77.75

)

 

 

(a)

In 2012, earnings (loss) were inadequate to cover fixed charges by $630 million, due to certain charges in the year.    

      

  

    

 

 

Exhibit 14.1

LSC COMMUNICATIONS, INC.

 

CODE OF ETHICS for the CHIEF EXECUTIVE OFFICER and

SENIOR FINANCIAL OFFICERS

 

(Adopted October 1, 2016)

 

LSC Communications, Inc. (the “Company”) maintains its “Principles of Ethical Business Conduct” and the policies referred to therein applicable to all directors and employees of the Company. The Chief Executive Officer (“CEO”) and all Senior Financial Officers (including particularly the Chief Financial Officer and the Controller) are bound by the provisions set forth in the Principles relating to ethical conduct and fair dealing, conflicts of interest, confidentiality of Company information and compliance with law, but in addition are subject to the following specific policies:

 

 

1.

The CEO and all Senior Financial Officers are responsible for full, fair, accurate, timely and understandable disclosure in the periodic reports required to be filed by the Company with the Securities and Exchange Commission. Accordingly, it is the responsibility of the CEO and each Senior Financial Officer promptly to bring to the attention of the Company’s Disclosure Committee any material information of which he or she may become aware that affects the disclosures made by the Company in its public filings or otherwise assist the Company’s Disclosure Committee in fulfilling its responsibilities as specified in the Company’s Disclosure Policy

 

2.

The CEO and each Senior Financial Officer shall promptly bring to the attention of the Company’s Disclosure Committee and the Audit Committee any information he or she may have concerning (a) significant deficiencies in the design or operation of internal controls which could adversely affect the Company’s ability to record, process, summarize and report financial data or (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s financial reporting, disclosures or internal controls.

 

3.

The CEO and each Senior Financial Officer shall promptly bring to the attention of the General Counsel or the CEO and to the Audit Committee any information he or she may have concerning any violation of the Company’s Principles of Ethical Business Conduct, including any actual or apparent conflicts of interest between personal and professional relationships, involving any management or other employees who have a significant role in the Company’s financial reporting, disclosures or internal controls. All investigations into any matter reported hereunder shall be handled as described in the Company’s whistleblower procedures.

 

4.

The CEO and each Senior Financial Officer shall promptly bring to the attention of the General Counsel or the CEO and to the Audit Committee any information he or she may


 

have concerning evidence of a material violation of the securities or other laws, rules or regulations applicable to the Company and the operation of its business, by the Company or any agent thereof, or of these additional procedures.

 

5.

The Board of Directors shall determine, or designate the appropriate committee of the Board to determine, appropriate actions to be taken in the event of violations of the Principles of Ethical Business Conduct or of these additional procedures by the CEO and the Company’s Senior Financial Officers. Such actions shall be reasonably designed to deter wrongdoing and to promote accountability for adherence to the Principles of Ethical Business Conduct and to these additional procedures, and shall include actions up to and including termination of the individual’s employment. In determining what action is appropriate in a particular case, the Board of Directors or such committee shall take into account all relevant information, including the nature and severity of the violation, whether the violation was a single occurrence or repeated occurrences, whether the violation appears to have been intentional or inadvertent, whether the individual in question had been advised prior to the violation as to the proper course of action and whether or not the individual in question had committed other violations in the past.

 

6.

The waiver of the application of the Principles of Ethical Business Conduct or these additional procedures granted to the CEO or any Senior Financial Officer of the Company shall be solely within the authority of the Board of Directors or the committee designated in paragraph 5 above, and shall be reported as required by law or regulation.

2

 

Exhibit 21.1

 

LSC Communications, Inc.

Subsidiaries as of 2/23/2017

 

Entity Name

Domestic Jurisdiction

American Pad and Paper de Mexico S. de R.L. de C.V.

Mexico

Cardinal Brands Fabricacion S. de R.L. de C.V.

Mexico

Continuum Management Company, LLC

Delaware

Courier Communications LLC

Massachusetts

Courier Companies, Inc.

Massachusetts

Courier Kendallville, Inc.

Indiana

Courier New Media, Inc.

Massachusetts

Courier Properties, Inc.

Massachusetts

Courier Publishing, Inc.

Massachusetts

Dover Publications, Inc.

New York

LibreDigital, Inc.

Delaware

LSC Communications Canada Corporation

Nova Scotia

LSC Communications Canada Holdings ULC

Nova Scotia

LSC Communications Deutschland GmbH

Frankfurt/Main

LSC Communications Europe Sp z.o.o.

Poland

LSC Communications Holdings B.V.

Netherlands

LSC Communications LLC

Moscow

LSC Communications MM LLC

Delaware

LSC Communications Netherlands B.V.

Netherlands

LSC Communications Pendaflex Mexico, S. de R.L. de C.V.

Mexico

LSC Communications Poland Sp zoo

Poland

LSC Communications Printing Company

Delaware

LSC Communications sp. z o.o.

Poland

LSC Communications UK Limited

England and Wales

LSC Communications US, LLC

Delaware

LSC International Holdings, Inc.

Delaware

LSC Pendaflex de Reynosa, S. de R.L. de C.V.

Mexico

Moore-Langen Printing Company, Inc.

Indiana

National Publishing Company

Pennsylvania

Print LSC Communications, S. de R.L. de C.V.

Mexico

Print LSC Mexico S. de R.L. de C.V.

Mexico

Print LSC Operaciones, S. de R.L. de C.V.

Mexico

Research & Education Association, Inc.

Delaware

TOPS SLT Holdings S. de R.L. de C.V.

Mexico

work-bench co-op LLC

Delaware

work-bench ventures I, LLC

Delaware

 

Exhibit 23.1

 

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

We consent to the incorporation by reference in Registration Statement No. 333-213913 on Form S-8 of our report dated February 23, 2017, relating to the consolidated and combined financial statements of LSC Communications, Inc. and subsidiaries, appearing in this Annual Report on Form 10-K of LSC Communications, Inc. for the year ended December 31, 2016.

 

 

/s/ DELOITTE & TOUCHE LLP

Chicago, Illinois
February 23, 2017

    

Exhibit 24.1

POWER OF ATTORNEY

KNOW ALL BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Suzanne S. Bettman, Andrew B. Coxhead and Kent A. Hansen, or any of them, his or her true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, in any and all capacities, to sign the Annual Report on Form 10-K of LSC Communications, Inc. for its fiscal year ended December 31, 2016 and any and all amendments thereto, and to file the same with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or her substitute, may lawfully do or cause to be done by virtue hereof. This Power of Attorney shall be effective from the date on which it is signed until June 30, 2017.

Dated:  February 16, 2017

 

 

 

 

 

 

 

/s/ M. Shan Atkins

 

 

 

/s/ Thomas F. O’Toole

 

 

 

 

 

M. Shan Atkins

 

 

 

Thomas F. O’Toole

 

 

 

 

 

/s/ Margaret A. Breya

 

 

 

/s/ Richard K. Palmer

 

 

 

 

 

Margaret A. Breya

 

 

 

Richard K. Palmer

 

 

 

 

 

/s/ Judith H. Hamilton

 

 

 

/s/ Douglas W. Stotlar

 

 

 

 

 

Judith H. Hamilton

 

 

 

Douglas W. Stotlar

 

 

 

 

 

/s/ Francis J. Jules

 

 

 

/s/ Shivan S. Subramaniam

 

 

 

 

 

Francis J. Jules

 

 

 

Shivan S. Subramaniam

 

 

 

 

 

 

 

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 Annual Report on Form 10-K of LSC Communications, Inc.;

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 registrant’s 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 report is being prepared;

 

(b)

evaluated the effectiveness of the registrant’s 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

 

(c)

disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and  

5.

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(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 registrant’s 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 registrant’s internal control over financial reporting.

Date: February 23, 2017

   

/s/    T HOMAS J. Q UINLAN , III

Thomas J. Quinlan, III

Chairman 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, Andrew B. Coxhead, certify that:

1.

I have reviewed this Annual Report on Form 10-K of LSC Communications, Inc.;

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 registrant’s 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 report is being prepared;

 

(b)

evaluated the effectiveness of the registrant’s 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

 

(c)

disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and  

5.

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(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 registrant’s 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 registrant’s internal control over financial reporting.

Date: February 23, 2017

 

/s/    A NDREW B. C OXHEAD

Andrew B. Coxhead

Chief Financial Officer

 

 

 

 

Exhibit 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

CERTIFICATION PURSUANT TO RULE 13a-14(b) OR RULE 15d-14(b)

AND SECTION 1350 OF CHAPTER 63 OF TITLE 18

OF THE UNITED STATES CODE (18 U.S.C. 1350),

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of LSC Communications, Inc. (the “Company”) on Form 10-K for the period ending December 31, 2016 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Thomas J. Quinlan, III, President and 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 to the best of my knowledge:

 

(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 results of operations of the Company.

February 23, 2017

   

/s/  T HOMAS J. Q UINLAN , III

Thomas J. Quinlan, III

Chairman and Chief Executive Officer

 

  

 

 

Exhibit 32.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

CERTIFICATION PURSUANT TO RULE 13a-14(b) OR RULE 15d-14(b)

AND SECTION 1350 OF CHAPTER 63 OF TITLE 18

OF THE UNITED STATES CODE (18 U.S.C. 1350),

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of LSC Communications (the “Company”) on Form 10-K for the period ended December 31, 2016 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Andrew B. Coxhead, Executive Vice President and 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 to the best of my knowledge:

 

(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 results of operations of the Company.

February 23, 2017

 

/s/  A NDREW B. COXHEAD

Andrew B. Coxhead

Chief Financial Officer