UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended March 31, 2017

OR

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

 

LSC Communications, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

36-4829580

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

191 N. Wacker Drive, Suite 1400

Chicago, IL 60606

(Address of principal executive offices, including zip code)

(773) 272-9200

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and has been subject to such filing requirements for the past 90 days. Yes   No  .

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

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

(Do not check if a smaller reporting company)

Smaller reporting company

Emerging growth company

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes   No  ☒      

As of April 28, 2017, 33,941,977 shares of common stock were outstanding.      

 

 

 

 


 

LSC COMMUNICATIONS, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2017

 

TABLE OF CONTENTS

 

PART I

 

 

 

Page

FINANCIAL INFORMATION

 

 

Item 1: Condensed Consolidated and Combined Financial Statements (unaudited)

 

3

Condensed Consolidated and Combined Balance Sheets as of March 31, 2017 and December 31, 2016

 

3

Condensed Consolidated and Combined Statements of Operations for the three months ended March 31, 2107 and 2016

 

4

Condensed Consolidated and Combined Statements of Comprehensive Income for the three months ended March 31, 2017 and 2016

 

5

Condensed Consolidated and Combined Statements of Cash Flows for the three months ended March 31, 2017 and 2016

 

6

Notes to Condensed Consolidated and Combined Financial Statements

 

7

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

 

26

Item 3: Quantitative and Qualitative Disclosures About Market Risk

 

40

Item 4: Controls and Procedures

 

40

Part II. Other Information

 

41

Item 1: Legal Proceedings

 

41

Item 1A: Risk Factors

 

41

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

 

41

Item 4: Mine Safety Disclosures

 

41

Item 6: Exhibits

 

41

Signatures

 

46

 

 

 

2


 

Item 1. CONDENSED CONSOLIDATED AND COM BINED FINANCIAL STATEMENTS (UNAUDITED)

 

LSC COMMUNICATIONS, INC.

CONDENSED CONSOLIDATED AND COMBINED BALANCE SHEETS

(in millions, except share and per share data)

(UNAUDITED)

 

 

 

March 31,

 

 

December 31,

 

 

 

2017

 

 

2016

 

ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

89

 

 

$

95

 

Receivables, less allowances for doubtful accounts of $10 in 2017 (2016: $10)

 

 

627

 

 

 

667

 

Inventories (Note 3)

 

 

199

 

 

 

193

 

Prepaid expenses and other current assets

 

 

21

 

 

 

21

 

Total current assets

 

 

936

 

 

 

976

 

Property, plant and equipment-net (Note 4)

 

 

595

 

 

 

608

 

Goodwill (Note 5)

 

 

87

 

 

 

84

 

Other intangible assets-net (Note 5)

 

 

127

 

 

 

131

 

Deferred income taxes

 

 

53

 

 

 

57

 

Other noncurrent assets

 

 

94

 

 

 

96

 

Total assets

 

$

1,892

 

 

$

1,952

 

LIABILITIES

 

 

 

 

 

 

 

 

Accounts payable

 

$

283

 

 

$

294

 

Accrued liabilities

 

 

235

 

 

 

237

 

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

 

 

15

 

 

 

52

 

Total current liabilities

 

 

533

 

 

 

583

 

Long-term debt (Note 14)

 

 

729

 

 

 

742

 

Pension liabilities

 

 

263

 

 

 

279

 

Deferred income taxes

 

 

2

 

 

 

2

 

Other noncurrent liabilities

 

 

102

 

 

 

106

 

Total liabilities

 

 

1,629

 

 

 

1,712

 

Commitments and Contingencies (Note 13)

 

 

 

 

 

 

 

 

EQUITY (Note 9)

 

 

 

 

 

 

 

 

Common stock, $0.01 par value

 

 

 

 

 

 

 

 

Authorized: 65,000,000 shares;

 

 

 

 

 

 

 

 

Issued: 33,472,273 shares in 2017 (2016: 32,449,669)

 

 

 

 

 

 

Additional paid-in-capital

 

 

791

 

 

 

770

 

(Accumulated deficit) retained earnings

 

 

(8

)

 

 

1

 

Accumulated other comprehensive loss

 

 

(519

)

 

 

(531

)

Treasury stock, at cost: 34,727 shares in 2017

 

 

(1

)

 

 

 

Total equity

 

 

263

 

 

 

240

 

Total liabilities and equity

 

$

1,892

 

 

$

1,952

 

 

      

  

 

 

 

 

 

 

 

 

 

 

 

 

See Notes to the Condensed Consolidated and Combined Financial Statements

3


 

LSC COMMUNICATIONS, INC.

CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS

(in millions, except per share data)

(UNAUDITED)

 

 

 

Three Months Ended

March 31,

 

 

 

2017

 

 

2016

 

Net sales

 

$

821

 

 

$

880

 

Cost of sales

 

 

692

 

 

 

722

 

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

 

 

65

 

 

 

62

 

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

 

 

6

 

 

 

3

 

Depreciation and amortization

 

 

40

 

 

 

46

 

Income from operations

 

 

18

 

 

 

47

 

Interest expense

 

 

17

 

 

 

 

Income before income taxes

 

 

1

 

 

 

47

 

Income tax expense

 

 

2

 

 

 

16

 

Net (loss) income

 

$

(1

)

 

$

31

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) earnings per common share (Note 10):

 

 

 

 

 

 

 

 

     Basic net (loss) earnings per share

 

$

(0.02

)

 

$

0.95

 

     Diluted net (loss) earnings per share

 

$

(0.02

)

 

$

0.95

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.25

 

 

$

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

     Basic

 

32.6

 

 

32.4

 

     Diluted

 

32.6

 

 

32.4

 

  

  

    

  

      

      

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See Notes to the Condensed Consolidated and Combined Financial Statements

4


 

LSC COMMUNICATIONS, INC.

CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF COMPREHENSIVE INCOME

(in millions)

(UNAUDITED)

 

 

 

Three Months Ended

March 31,

 

 

 

2017

 

 

2016

 

Net (loss) income

 

$

(1

)

 

$

31

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

Translation adjustments

 

 

9

 

 

 

10

 

Adjustments for net periodic pension plan cost

 

 

3

 

 

 

(4

)

Other comprehensive income

 

 

12

 

 

 

6

 

Comprehensive income

 

$

11

 

 

$

37

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See Notes to the Condensed Consolidated and Combined Financial Statements

 

5


 

LSC COMMUNICATIONS, INC.

CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS

(in millions)

(UNAUDITED)

 

  

 

Three Months Ended

March 31,

 

 

 

2017

 

 

2016

 

Cash Flows from Operating Activities

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(1

)

 

$

31

 

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

40

 

 

 

46

 

Provision for doubtful accounts receivable

 

 

1

 

 

 

1

 

Share-based compensation

 

 

3

 

 

 

1

 

Deferred income taxes

 

 

1

 

 

 

(8

)

Other

 

 

1

 

 

 

(1

)

Changes in operating assets and liabilities - net of acquisitions:

 

 

 

 

 

 

 

 

Accounts receivable - net

 

 

40

 

 

 

45

 

Inventories

 

 

(4

)

 

 

(20

)

Prepaid expenses and other current assets

 

 

(1

)

 

 

(3

)

Accounts payable

 

 

3

 

 

 

(58

)

Income taxes payable and receivable

 

 

(1

)

 

 

3

 

Accrued liabilities and other

 

 

(18

)

 

 

(23

)

Net cash provided by operating activities

 

 

64

 

 

 

14

 

Cash Flows from Investing Activities

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(21

)

 

 

(12

)

Acquisitions of businesses, net of cash acquired

 

 

(4

)

 

 

 

Proceeds from sales of other assets

 

 

 

 

 

1

 

Net cash used in investing activities

 

 

(25

)

 

 

(11

)

Cash Flows from Financing Activities

 

 

 

 

 

 

 

 

Payments of current maturities and long-term debt

 

 

(51

)

 

 

(1

)

Proceeds from issuance of common stock

 

 

18

 

 

 

 

Dividends paid

 

 

(8

)

 

 

 

Payments to RRD - net

 

 

(7

)

 

 

 

Net transfers to Parent and affiliates

 

 

 

 

 

(21

)

Net cash used in financing activities

 

 

(48

)

 

 

(22

)

Effect of exchange rate on cash and cash equivalents

 

 

3

 

 

 

1

 

Net decrease in cash and cash equivalents

 

 

(6

)

 

 

(18

)

Cash and cash equivalents at beginning of year

 

 

95

 

 

 

95

 

Cash and cash equivalents at end of period

 

$

89

 

 

$

77

 

 

 

 

 

 

 

 

 

 

Supplemental non-cash disclosure:

 

 

 

 

 

 

 

 

Assumption of warehousing equipment related to customer contract

 

$

 

 

$

9

 

 

  

  

 

 

 

 

 

 

 

 

 

 

 

 

See Notes to the Condensed Consolidated and Combined Financial Statements    

 

6


LSC Communications, Inc.

Notes to Condensed Consolidated and Combined Financial Statements (Unaudited)

For the Three Months Ended March 31, 2017 and 2016

(tabular amounts in millions, except per share data)

 

Note 1.   Overview and B asis 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.  

        

In March 2017, RRD completed the sale of 6.2 million shares of LSC Communications common stock, representing its entire 19.25% retained ownership .   In connection with the over-allotment option granted to the underwriters as part of the secondary sale by RRD, LSC Communications also sold 0.9 million shares of common stock, receiving proceeds of $18 million, which were used for general corporate purposes.  

 

In connection with the separation, LSC Communications, RRD and Donnelley Financial entered into commercial arrangements, transition services agreements and various other agreements related to the separation that remain in effect.   Final copies of such agreements are filed as exhibits to this quarterly report on Form 10-Q.

    

  

Basis of Presentation

 

The accompanying condensed consolidated and combined financial statements reflect the consolidated balance sheets and results of operations of the Company as an independent, publicly traded company for the period after the separation, and the condensed combined balance sheets and results of operations of the Company as a combined reporting entity of RRD for the periods prior to the separation.   The condensed consolidated and combined financial statements include the balance sheets, results of operations and cash flows in conformity with accounting principles generally accepted in the United States (“GAAP”).  These unaudited condensed consolidated and combined interim financial statements include estimates and assumptions of management that affect the amounts reported in the condensed consolidated and combined financial statements. Actual results could differ from these estimates.   Certain prior year amounts were restated to conform to the Company’s current consolidated and combined statement of operations classifications.  

 

On October 1, 2016, the Company recorded certain separation-related adjustments primarily for certain assets and liabilities that were distributed as part of the separation from RRD. 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.  Additional separation-related adjustments may be recorded in future periods.      

 

LSC Communications generates a portion of its net sales from sales to RRD’s 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 15, Related Parties , for more information.      

 

  

7


LSC Communications, Inc.

Notes to Condensed Consolidated and Combined Financial Statements (Unaudited)

For the Three Months Ended March 31, 2017 and 2016

(tabular amounts in millions, except per share data)

 

Prior to the Separation

 

The condensed 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 condensed 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 condensed combined statement of cash flows as a financing activity.  

 

 

Note 2.  Business Combinations

 

2017 Acquisition

 

On March 1, 2017, the Company acquired HudsonYards Studios (“HudsonYards”), a leading digital and print premedia production company that provides high-quality creative retouching, computer-generated imagery, mechanical creation, press-ready file preparation, and interactive production services.  The acquisition enhances the Company’s digital and premedia capabilities.  The purchase price for HudsonYards was $2 million, of which $1 million was recorded in goodwill.

 

For the three months ended March 31, 2017, the Company recorded a de minimis amount of acquisition-related expenses associated with completed and contemplated acquisitions within selling, general and administrative expenses in the condensed consolidated and combined results of operations.  

 

 

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 Company paid $7 million in cash in 2016.   An additional $2 million was paid during the three months ended March 31, 2017 as part of a final working capital adjustment for a total purchase price of $9 million, of which $5 million was recorded in goodwill.

 

There were no acquisition-related expenses during the three months ended March 31, 2016.

 

 

Pro forma results

 

The following unaudited pro forma financial information for the three months ended March 31, 2017 and 2016 presents the condensed consolidated and combined statements results of operations of the Company and the acquisitions described above, as if the acquisitions had occurred as of January 1 of the year prior to the acquisitions.

 

8


LSC Communications, Inc.

Notes to Condensed Consolidated and Combined Financial Statements (Unaudited)

For the Three Months Ended March 31, 2017 and 2016

(tabular amounts in millions, except per share data)

 

The unaudited pro forma financial information is not intended to represent or be indicative of the Company’s condensed consol idated and combined results of operations that would have been reported had these acquisitions been completed as of the beginning of the period presented and should not be taken as indicative of the Company’s future condensed consolidated results of operat ions.  

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

 

2017

 

 

 

2016

 

Net sales

 

$

822

 

 

$

894

 

Net (loss) income

 

 

(1

)

 

 

31

 

 

 

Note 3.  Inventories

 

The components of the Company’s inventories, net of excess and obsolescence reserves for raw materials and finished goods, at March 31, 2017 and December 31, 2016 were as follows:

 

 

 

March 31,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Raw materials and manufacturing supplies

 

$

101

 

 

$

100

 

Work in process

 

 

63

 

 

 

58

 

Finished goods

 

 

93

 

 

 

93

 

LIFO reserve

 

 

(58

)

 

 

(58

)

Total

 

$

199

 

 

$

193

 

 

 

Note 4.  Property, Plant and Equipment

 

The components of the Company’s property, plant and equipment at March 31, 2017 and December 31, 2016 were as follows:

 

 

 

March 31,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Land

 

$

42

 

 

$

42

 

Buildings

 

 

766

 

 

 

762

 

Machinery and equipment

 

 

4,199

 

 

 

4,173

 

 

 

 

5,007

 

 

 

4,977

 

Accumulated depreciation

 

 

(4,412

)

 

 

(4,369

)

Total

 

$

595

 

 

$

608

 

 

During the three months ended March 31, 2017 and 2016, depreciation expense was $35 million and $39 million, respectively.       

 

 

9


LSC Communications, Inc.

Notes to Condensed Consolidated and Combined Financial Statements (Unaudited)

For the Three Months Ended March 31, 2017 and 2016

(tabular amounts in millions, except per share data)

 

Note 5.  Goodwill and Other Intangible Assets

 

The changes in the carrying amount of goodwill for the three months ended March 31, 2017 were as follows:

 

 

 

Print

 

 

Office Products

 

 

Total

 

Net book value as of December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

$

852

 

 

$

109

 

 

$

961

 

Accumulated impairment losses

 

 

(798

)

 

 

(79

)

 

 

(877

)

Total

 

 

54

 

 

 

30

 

 

 

84

 

Acquisitions

 

 

3

 

 

 

 

 

 

3

 

Net book value as of March 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

 

859

 

 

 

109

 

 

 

968

 

Accumulated impairment losses

 

 

(802

)

 

 

(79

)

 

 

(881

)

Total

 

$

57

 

 

$

30

 

 

$

87

 

 

The components of other intangible assets at March 31, 2017 and December 31, 2016 were as follows:

 

 

 

March 31, 2017

 

 

December 31, 2016

 

 

 

Gross  Carrying

 

 

Accumulated

 

 

Net Book

 

 

Gross  Carrying

 

 

Accumulated

 

 

Net Book

 

 

 

Amount

 

 

Amortization

 

 

Value

 

 

Amount

 

 

Amortization

 

 

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

$

205

 

 

$

(112

)

 

$

93

 

 

$

205

 

 

$

(109

)

 

$

96

 

Trade names

 

 

5

 

 

 

(3

)

 

 

2

 

 

 

5

 

 

 

(2

)

 

 

3

 

Total amortizable other intangible assets

 

 

210

 

 

 

(115

)

 

 

95

 

 

 

210

 

 

 

(111

)

 

 

99

 

Indefinite-lived trade names

 

 

32

 

 

 

 

 

 

32

 

 

 

32

 

 

 

 

 

 

32

 

Total other intangible assets

 

$

242

 

 

$

(115

)

 

$

127

 

 

$

242

 

 

$

(111

)

 

$

131

 

 

During the three months ended March 31, 2017 and 2016, amortization expense for other intangible assets was $4 million and $5 million, respectively.  

  

The following table outlines the estimated annual amortization expense related to other intangible assets as of March 31, 2017:

 

For the year ending December 31,

 

Amount

 

2017

 

$

16

 

2018

 

 

11

 

2019

 

 

10

 

2020

 

 

10

 

2021

 

 

9

 

2022 and thereafter

 

 

43

 

Total

 

$

99

 

  

 

10


LSC Communications, Inc.

Notes to Condensed Consolidated and Combined Financial Statements (Unaudited)

For the Three Months Ended March 31, 2017 and 2016

(tabular amounts in millions, except per share data)

 

Note 6.   Restructuring, Impairment and Other Charges

 

For the three months ended March 31, 2017 and 2016, the Company recorded the following net restructuring, impairment and other charges:

 

Three Months Ended

March 31, 2017

 

Employee

Terminations

 

 

Other

Restructuring

Charges

 

 

Total

Restructuring

Charges

 

 

Impairment

 

 

Other

Charges

 

 

Total

 

Print

 

$

3

 

 

$

1

 

 

$

4

 

 

$

 

 

$

1

 

 

$

5

 

Office Products

 

 

1

 

 

 

 

 

 

1

 

 

 

 

 

 

 

 

 

1

 

Total

 

$

4

 

 

$

1

 

 

$

5

 

 

$

 

 

$

1

 

 

$

6

 

 

Three Months Ended

March 31, 2016

 

Employee

Terminations

 

 

Other

Restructuring

Charges

 

 

Total

Restructuring

Charges

 

 

Impairment

 

 

Other

Charges

 

 

Total

 

Print

 

$

 

 

$

2

 

 

$

2

 

 

$

 

 

$

1

 

 

$

3

 

Total

 

$

 

 

$

2

 

 

$

2

 

 

$

 

 

$

1

 

 

$

3

 

 

Restructuring and Impairment Charges

 

For the three months ended March 31, 2017, the Company incurred employee-related restructuring charges of $4 million for an aggregate of 198 employees, of whom 161 were terminated as of or prior to March 31, 2017.   These charges primarily related to the reorganization of certain business units and corporate functions.  Additionally, the Company incurred lease termination and other restructuring charges of $1 million.      

 

For the three months ended March 31, 2016, the Company incurred lease termination and other restructuring charges of $2 million. The Company also recorded de minimis amounts for employee terminations and net impairment charges for the three months ended March 31, 2016.

 

 

Other Charges

 

For the three months ended March 31, 2017, the Company recorded other charges of $1 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 March 31, 2017.  

 

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 and condensed consolidated and combined balance sheets, results of operations or cash flows.

 

For the three months ended March 31, 2016, the Company recorded other charges of $1 million for multi-employer pension plan withdrawal obligations unrelated to facility closures.  

 

 

11


LSC Communications, Inc.

Notes to Condensed Consolidated and Combined Financial Statements (Unaudited)

For the Three Months Ended March 31, 2017 and 2016

(tabular amounts in millions, except per share data)

 

Restructuring Reserve

 

The restructuring reserve as of December 31, 2016 and March 31, 2017, and changes during the three months ended March 31, 2017, were as follows:

 

 

 

December 31,

2016

 

 

Restructuring

Charges

 

 

Foreign

Exchange and

Other

 

 

Cash

Paid

 

 

March 31,

2017

 

Employee terminations

 

$

8

 

 

$

4

 

 

$

 

 

$

(2

)

 

$

10

 

Multi-employer pension plan withdrawal obligations

 

 

18

 

 

 

 

 

 

 

 

 

(1

)

 

 

17

 

Lease terminations and other

 

 

2

 

 

 

1

 

 

 

 

 

 

(1

)

 

 

2

 

Total

 

$

28

 

 

$

5

 

 

$

 

 

$

(4

)

 

$

29

 

 

The current portion of restructuring reserves of $15 million at March 31, 2017 was included in accrued liabilities, while the long-term portion of $14 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 March 31, 2017.  

 

The Company anticipates that payments associated with the employee terminations reflected in the above table will be substantially completed by March 2018.

 

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.

 

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.

 

 

Note 7.  Retirement Plans

 

The Company is the sole sponsor of certain defined benefit pension plans, which have been reflected in the condensed consolidated balance sheets as of March 31, 2017 and December 31, 2016. 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.  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 assets of $7 million as of October 1, 2016.

 

The components of the estimated net pension benefits plan income for the three months ended March 31, 2017 and 2016 are disclosed in the table below.  Amounts shown for the three months ended March 31, 2017 include pension income for the Qualified and Non-Qualified plans, certain plans in Mexico and from the acquisitions of Esselte Corporation and Courier. Amounts shown for the three months ended March 31, 2016 include pension income for certain plans in the United Kingdom and Mexico and from the acquisitions of Esselte Corporation and Courier.  

 

12


LSC Communications, Inc.

Notes to Condensed Consolidated and Combined Financial Statements (Unaudited)

For the Three Months Ended March 31, 2017 and 2016

(tabular amounts in millions, except per share data)

 

Prior to the separation, certain employees of the Company participated in certain pension and postretirement healthcare plans sponsored by RRD.  For RRD-sponsored defined benefit and post-employment plans, the Company recorded net pension and postretirement income of $10 million for the three months ended March 31, 2016 in addition to the amoun ts disclosed below.  

 

 

 

Three Months Ended

March 31,

 

 

 

2017

 

 

2016

 

 

 

Qualified

 

 

Non-Qualified

& International

 

 

Qualified

 

 

Non-Qualified

& International

 

Interest cost

 

$

22

 

 

$

1

 

 

$

2

 

 

$

2

 

Expected return on plan assets

 

 

(38

)

 

 

 

 

 

(3

)

 

 

(3

)

Amortization, net

 

 

4

 

 

 

 

 

 

 

 

 

 

Net periodic benefit income

 

$

(12

)

 

$

1

 

 

$

(1

)

 

$

(1

)

    

 

Note 8.  Share-Based Compensation

 

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 incentive stock program which included stock options, restricted stock units (“RSUs”) and performance share units (“PSUs”).  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 condensed combined balance sheets.

 

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 awards at a participant’s new employer or into a basket of awards of each of the Company, RRD and Donnelley Financial using a formula designed to preserve the intrinsic value and fair value of the awards immediately prior to the separation.  In periods after the separation, the Company records share-based compensation expense held by its employees, officers and directors relating to LSC Communications, RRD and Donnelley Financial awards.

 

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 $3 million for the three months ended March 31, 2017. The Company was allocated share-based compensation expense from RRD of $1 million related to all share-based compensation plans for the three months ended March 31, 2016.

 

Stock Options

 

There were no options granted during the three months ended March 31, 2017 or 2016.

 

13


LSC Communications, Inc.

Notes to Condensed Consolidated and Combined Financial Statements (Unaudited)

For the Three Months Ended March 31, 2017 and 2016

(tabular amounts in millions, except per share data)

 

A summary of the Company’s stock option activity for LSC Communications, RRD and Donnelley Financial employees, officers and directors as of December 31, 2016 and March 31, 2017, and changes during the three months ended March 31, 2017 is presented below.

 

 

 

Shares Under Option

(thousands)

 

 

Weighted

Average

Exercise

Price

 

 

Weighted

Average

Remaining

Contractual

Term

(years)

 

 

Aggregate

Intrinsic

Value

(millions)

 

Outstanding at December 31, 2016

 

 

299

 

 

$

25.32

 

 

 

3.3

 

 

$

2

 

Outstanding at March 31, 2017

 

 

299

 

 

 

25.32

 

 

 

3.1

 

 

 

1

 

Vested and expected to vest at March 31, 2017

 

 

299

 

 

 

25.32

 

 

 

3.1

 

 

 

1

 

Exercisable at March 31, 2017

 

 

299

 

 

$

25.32

 

 

 

3.1

 

 

$

1

 

 

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 March 31, 2017 and December 31, 2016 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 March 31, 2017 and December 31, 2016. This amount will change in future periods based on the fair market value of LSC Communications stock and the number of options outstanding. Total intrinsic value of options exercised for the three months ended March 31, 2017 was de minimis.  There was a de minimis amount of excess tax benefits for the three months ended March 31, 2017.

   

There was no compensation expense related to stock options for the three months ended March 31, 2017.

 

 

Restricted Stock Units

 

A summary of the Company’s RSU activity for LSC Communications, RRD and Donnelley Financial employees and officers who hold LSC Communications RSUs as of December 31, 2016 and March 31, 2017, and changes during the three months ended March 31, 2017 is presented below.

 

 

 

Shares

(thousands)

 

 

Weighted

Average Grant

Date Fair Value

 

Nonvested at December 31, 2016

 

 

652

 

 

$

28.39

 

Granted

 

 

150

 

 

 

26.72

 

Vested

 

 

(86

)

 

 

27.22

 

Nonvested at March 31, 2017

 

 

716

 

 

$

28.18

 

 

During the three months ended March 31, 2017, 150,290 RSUs were granted to certain executive officers and senior management. The shares are subject to time-based vesting and will cliff vest on March 2, 2020. The total potential payout for the awards is 150,290 shares.  The fair value of these awards was determined based on the Company’s stock price on the grant date reduced by the present value of expected dividends through the vesting period.  These awards are subject to forfeiture upon termination of employment prior to vesting, subject in some cases to early vesting upon specified events, including death, permanent disability or retirement of the grantee or change of control of the Company.

 

Compensation expense related to LSC Communications, RRD and Donnelley Financial RSUs held by Company employees, officers and directors was $2 million for the three months ended March 31, 2017. As of March 31, 2017, there was $12 million of unrecognized share-based compensation expense related to approximately 0.7 million RSUs, with a weighted-average grant date fair value of $28.10, that are expected to vest over a weighted average period of 2.1 years.

  

 

14


LSC Communications, Inc.

Notes to Condensed Consolidated and Combined Financial Statements (Unaudited)

For the Three Months Ended March 31, 2017 and 2016

(tabular amounts in millions, except per share data)

 

Restricted Stock Awards

 

A summary of restricted stock award (“RSA”) activity for the Company’s employees related to awards granted after the separation as of December 31, 2016 and March 31, 2017, and changes during the three months ended March 31, 2017 is presented below.

 

 

 

Shares

(thousands)

 

 

Weighted

Average Grant

Date Fair Value

 

Nonvested at December 31, 2016

 

 

159

 

 

$

26.26

 

Nonvested at March 31, 2017

 

 

159

 

 

$

26.26

 

 

Compensation expense related to RSAs for the three months ended March 31, 2017 was de minimis.  As of March 31, 2017, there was $3 million of unrecognized compensation expense related to RSAs, which is expected to be recognized over a weighted average period of 2.5 years.

 

 

Performance Restricted Stock

 

A summary of performance restricted stock (“PRS”) activity for the Company’s employees related to awards granted after the separation as of December 31, 2016 and March 31, 2017, and changes during the three months ended March 31, 2017 is presented below.

 

 

 

Shares

(thousands)

 

 

Weighted

Average Grant

Date Fair Value

 

Nonvested at December 31, 2016

 

 

266

 

 

$

26.26

 

Granted

 

 

45

 

 

 

28.94

 

Nonvested at March 31, 2017

 

 

311

 

 

$

26.65

 

 

During the three months ended March 31, 2017, 44,760 shares of PRS were granted to certain executive officers, payable upon the achievement of certain established performance targets. The performance period for the shares is January 1, 2017 to December 31, 2017.  In addition to being subject to achievement of the performance target, the shares are also subject to time-based vesting on March 2, 2020.  Both the performance-based vesting and the time-based vesting must be met for the PRS to vest.   

 

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 events, including death, permanent disability or retirement of the grantee or change of control of the Company.

 

Compensation expense for the awards granted during the three months ended March 31, 2017 is being recognized based on an estimated payout of 37,300 shares. Compensation expense for the awards granted during the three months ended December 31, 2016 is being recognized based on an estimated payout of 266,072 shares.  Compensation expense related to PRS for the three months ended March 31, 2017 was $1 million. As of March 31, 2017, there was $7 million of unrecognized compensation expense related to PRS, which is expected to be recognized over a weighted average period of 2.6 years.

    

  

15


LSC Communications, Inc.

Notes to Condensed Consolidated and Combined Financial Statements (Unaudited)

For the Three Months Ended March 31, 2017 and 2016

(tabular amounts in millions, except per share data)

 

Performance Share Units

 

A summary of PSU activity for the Company’s employees related to awards granted after the separation as of December 31, 2016 and March 31, 2017, and changes during the three months ended March 31, 2017 is presented below.

 

 

 

Shares

(thousands)

 

 

Weighted

Average Grant

Date Fair Value

 

Nonvested at December 31, 2016

 

 

 

 

$

 

Granted

 

 

29

 

 

 

26.72

 

Nonvested at March 31, 2017

 

 

29

 

 

$

26.72

 

 

During the three months ended March 31, 2017, 28,520 PSUs were granted to certain members of senior management, payable upon the achievement of certain established performance targets. The performance period for the shares is January 1, 2017 to December 31, 2017.  In addition to being subject to achievement of the performance target, the shares are also subject to time-based vesting on March 2, 2020.  Both the performance-based vesting and the time-based vesting must be met for the PSUs to vest.  

 

The fair value of these awards was determined based on the Company’s stock price on the grant date reduced by the present value of expected dividends through the vesting period.  These awards are subject to forfeiture upon termination of employment prior to vesting, subject in some cases to early vesting upon specified events, including death, permanent disability or retirement of the grantee or change of control of the Company.  

 

Compensation expense for the awards granted during the three months ended March 31, 2017 is being recognized based on an estimated payout of 28,520 shares.  Compensation expense related to PSUs for the three months ended March 31, 2017 was de minimis. As of March 31, 2017, there was $1 million of unrecognized compensation expense related to PSUs, which is expected to be recognized over a weighted average period of 2.9 years.  

 

 

Note 9.  Equity

 

The Company’s equity as of December 31, 2016 and March 31, 2017 and changes during the three months ended March 31, 2017 were as follows:

 

 

 

Total Equity

 

Balance at December 31, 2016

 

$

240

 

Net loss

 

 

(1

)

Other comprehensive income

 

 

12

 

Share-based compensation

 

 

3

 

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

 

 

(1

)

Cash dividends paid

 

 

(8

)

Issuance of common stock

 

 

18

 

Balance at March 31, 2017

 

$

263

 

  

During the three months ended March 31, 2017, in connection with the over-allotment option granted to the underwriters as part of the secondary sale by RRD, LSC Communications also sold 0.9 million shares of common stock.  

  

16


LSC Communications, Inc.

Notes to Condensed Consolidated and Combined Financial Statements (Unaudited)

For the Three Months Ended March 31, 2017 and 2016

(tabular amounts in millions, except per share data)

 

The Company’s equity as of December 31, 2015 and March 31, 2016 and changes during the three months ended March 31, 2016 were as follows:

 

 

 

Total Equity

 

Balance at December 31, 2015

 

$

1,277

 

Net income

 

 

31

 

Net transfers to parent company

 

 

(27

)

Other comprehensive income

 

 

6

 

Balance at March 31, 2016

 

$

1,287

 

 

 

Note 10.  Earnings Per Share

 

On October 1, 2016, RRD distributed approximately 26.2 million shares of LSC Communications common stock to RRD shareholders and retained 6.2 million shares.   In March 2017, RRD completed the sale of its 6.2 million shares of LSC Communications common stock.  

 

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, RSUs, and PSUs. 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 separation.  

 

During the three months ended March 31, 2017, in connection with the over-allotment option granted to the underwriters as part of the secondary sale by RRD, LSC Communications also sold 0.9 million shares of common stock.

 

During the three months ended March 31, 2017, no shares of common stock were purchased by the Company; however, shares were withheld for tax liabilities upon vesting of equity awards.  

 

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

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2017

 

 

2016

 

Net (loss) earnings per common share:

 

 

 

 

 

 

 

 

     Basic

 

$

(0.02

)

 

$

0.95

 

     Diluted

 

$

(0.02

)

 

$

0.95

 

Dividends declared per common share

 

$

0.25

 

 

$

 

Numerator:

 

 

 

 

 

 

 

 

     Net (loss) income

 

$

(1

)

 

$

31

 

Denominator:

 

 

 

 

 

 

 

 

     Weighted average number of common shares outstanding

 

 

32.6

 

 

 

32.4

 

     Dilutive options and awards

 

 

 

 

 

 

     Diluted weighted average number of common shares outstanding

 

 

32.6

 

 

 

32.4

 

 

 

17


LSC Communications, Inc.

Notes to Condensed Consolidated and Combined Financial Statements (Unaudited)

For the Three Months Ended March 31, 2017 and 2016

(tabular amounts in millions, except per share data)

 

Note 11.  Comprehensive Income

 

The components of other comprehensive income and income tax expense allocated to each component for the three months ended March 31, 2017 and 2016 were as follows:

  

 

 

Three Months Ended

March 31, 2017

 

 

 

Before Tax

Amount

 

 

Income Tax

Expense

 

 

Net of Tax

Amount

 

Translation adjustments

 

$

9

 

 

$

 

 

$

9

 

Adjustment for net periodic pension plan cost

 

 

4

 

 

 

1

 

 

 

3

 

Other comprehensive income

 

$

13

 

 

$

1

 

 

$

12

 

 

 

 

 

Three Months Ended

March 31, 2016

 

 

 

Before Tax

Amount

 

 

Income Tax

Expense

 

 

Net of Tax

Amount

 

Translation adjustments

 

$

10

 

 

$

 

 

$

10

 

Adjustment for net periodic pension plan cost

 

 

 

 

 

4

 

 

 

(4

)

Other comprehensive income

 

$

10

 

 

$

4

 

 

$

6

 

 

During the three months ended March 31, 2016, translation adjustments and income tax expense on pension plan cost were adjusted to reflect previously recorded deferred taxes at their historical exchange rates.

 

Accumulated other comprehensive loss by component as of December 31, 2016 and March 31, 2017 and changes during the three months ended March 31, 2017 were as follows:

 

 

 

Pension

Plan Cost

 

 

Translation Adjustments

 

 

Total

 

Balance at December 31, 2016

 

$

(462

)

 

$

(69

)

 

$

(531

)

Other comprehensive income before reclassifications

 

 

 

 

 

9

 

 

 

9

 

Amounts reclassified from accumulated other comprehensive loss

 

 

3

 

 

 

 

 

 

3

 

Net change in accumulated other comprehensive loss

 

 

3

 

 

 

9

 

 

 

12

 

Balance at March 31, 2017

 

$

(459

)

 

$

(60

)

 

$

(519

)

 

Accumulated other comprehensive loss by component as of December 31, 2015 and March 31, 2016 and changes during the three months ended March 31, 2016, were as follows:

 

 

 

Pension

Plan Cost

 

 

Translation Adjustments

 

 

Total

 

Balance at December 31, 2015

 

$

(46

)

 

$

(159

)

 

$

(205

)

Other comprehensive income before reclassifications

 

 

 

 

 

10

 

 

 

10

 

Amounts reclassified from accumulated other comprehensive loss

 

 

(4

)

 

 

 

 

 

(4

)

Net change in accumulated other comprehensive loss

 

 

(4

)

 

 

10

 

 

 

6

 

Balance at March 31, 2016

 

$

(50

)

 

$

(149

)

 

$

(199

)

 

18


LSC Communications, Inc.

Notes to Condensed Consolidated and Combined Financial Statements (Unaudited)

For the Three Months Ended March 31, 2017 and 2016

(tabular amounts in millions, except per share data)

 

Reclassification from accumulated other comprehensive loss for the three months ended March 31, 2017 and 2016 were as follows:

 

 

 

Three Months Ended

March 31,

 

 

Classification in the Condensed

Consolidated & Combined

 

 

2017

 

 

2016

 

 

Statements of Operations

Amortization of pension plan cost:

 

 

 

 

 

 

 

 

 

 

Net actuarial loss

 

$

4

 

 

$

 

 

(a)

Reclassifications before tax

 

 

4

 

 

 

 

 

 

Income tax expense

 

 

1

 

 

 

4

 

 

 

Reclassifications, net of tax

 

$

3

 

 

$

(4

)

 

 

 

 

(a)

These accumulated other comprehensive income components are included in the calculation of net periodic pension plan (income) expense recognized substantially all in selling, general and administrative expenses in the condensed consolidated and combined results of operations (see Note 7, Retirement Plans ).

  

 

Note 12.  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.

 

 

Office Products

 

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

   

 

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 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.  

 

 

19


LSC Communications, Inc.

Notes to Condensed Consolidated and Combined Financial Statements (Unaudited)

For the Three Months Ended March 31, 2017 and 2016

(tabular amounts in millions, except per share data)

 

Information by Segment

 

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

 

 

 

Net

Sales

 

 

Income (Loss)

from

Operations

 

 

Assets of

Operations

 

 

Depreciation

and

Amortization

 

 

Capital

Expenditures

 

Three months ended March 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Print

 

$

710

 

 

$

12

 

 

$

1,470

 

 

$

35

 

 

$

20

 

Office Products

 

 

111

 

 

 

9

 

 

 

312

 

 

 

4

 

 

 

 

Total operating segments

 

 

821

 

 

 

21

 

 

 

1,782

 

 

 

39

 

 

 

20

 

Corporate

 

 

 

 

 

(3

)

 

 

110

 

 

 

1

 

 

 

1

 

Total operations

 

$

821

 

 

$

18

 

 

$

1,892

 

 

$

40

 

 

$

21

 

 

    

 

 

Net

Sales

 

 

Income

from

Operations

 

 

Assets of

Operations

 

 

Depreciation

and

Amortization

 

 

Capital

Expenditures

 

Three months ended March 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Print

 

$

752

 

 

$

32

 

 

$

1,583

 

 

$

41

 

 

$

8

 

Office Products

 

 

128

 

 

 

14

 

 

 

334

 

 

 

4

 

 

 

1

 

Total operating segments

 

 

880

 

 

 

46

 

 

 

1,917

 

 

 

45

 

 

 

9

 

Corporate

 

 

 

 

 

1

 

 

 

25

 

 

 

1

 

 

 

3

 

Total operations

 

$

880

 

 

$

47

 

 

$

1,942

 

 

$

46

 

 

$

12

 

 

Restructuring, impairment and other charges by segment for the three months ended March 31, 2017 and 2016 are disclosed in Note 6, Restructuring, Impairment and Other Charges.  

  

 

Note 13.  Commitments and Contingencies

 

The Company is subject to laws and regulations relating to the protection of the environment. The Company accrues for expenses associated with environmental remediation obligations when such amounts are probable and can be reasonably estimated. Such accruals are adjusted as new information develops or circumstances change and are generally not discounted. The Company has been designated as a potentially responsible party or has received claims in 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 condensed consolidated and combined balance sheets, results of operations and cash flows.

 

20


LSC Communications, Inc.

Notes to Condensed Consolidated and Combined Financial Statements (Unaudited)

For the Three Months Ended March 31, 2017 and 2016

(tabular amounts in millions, except per share data)

 

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 it ems and subject to return. In addition, the Company may be party to certain litigation arising in the ordinary course of business. Management believes that the final resolution of these preference items and litigation will not have a material effect on the Company’s condensed consolidated and combined balance sheets, results of operations and cash flows.    

 

 

Note 14.  Debt

 

The Company’s debt at March 31, 2017 and December 31, 2016 consisted of the following:

 

 

March 31, 2017

 

 

December 31, 2016

 

Term Loan Facility due September 30, 2022 (a)

$

303

 

 

$

353

 

8.75% Senior Secured Notes due October 15, 2023

 

450

 

 

 

450

 

Capital lease obligations

 

5

 

 

 

6

 

Unamortized debt issuance costs

 

(14

)

 

 

(15

)

Total debt

 

744

 

 

 

794

 

Less: current portion

 

(15

)

 

 

(52

)

Long-term debt

$

729

 

 

$

742

 

  

 

(a)

The borrowings under the Term Loan Facility are subject to a variable interest rate. As of March 31, 2017 and 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 $23 million and $22 million at March 31, 2017 and December 31, 2016, respectively.  

 

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 the collateral, 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.    

 

21


LSC Communications, Inc.

Notes to Condensed Consolidated and Combined Financial Statements (Unaudited)

For the Three Months Ended March 31, 2017 and 2016

(tabular amounts in millions, except per share data)

 

On September 30, 2016 the Company entered i nto 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 aggre gate 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 u pon the Consolidated Leverage Ratio of the Company and its restricted subsidiaries. Interest on the Credit Agreement is due at least quarterly and commenced on December 31, 2016.  The Term Loan Facility will amortize in quarterly installments of $13 millio n 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 Sept ember 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 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 in 2016.  The Company intends to use any additional borrowings under the Credit Facilities for general corporate purposes, including the financing of permitted investments.

 

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.

 

There were de minimis amounts of interest income during the three months ended March 31, 2017 and 2016.

 

There were no borrowings under the Revolving Credit Facility as of March 31, 2017 and December 31, 2016.

 

 

Note 15:  Related Parties

 

In March 2017, RRD completed the sale of 6.2 million shares of LSC Communications common stock, representing its entire 19.25% retained ownership.

 

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 RRD.  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.    

  

    

22


LSC Communications, Inc.

Notes to Condensed Consolidated and Combined Financial Statements (Unaudited)

For the Three Months Ended March 31, 2017 and 2016

(tabular amounts in millions, except per share data)

 

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 condensed combined financial statements for the three months ended March 31, 2016:

 

 

 

Three Months Ended

March 31, 2016

 

Costs of goods sold

 

$

22

 

Selling, general and administrative

 

 

32

 

Depreciation and amortization

 

 

2

 

     Total allocations from RRD

 

$

56

 

 

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 receives or records allocations from RRD. The Company records transactions with RRD as external arms-length transactions in the Company’s condensed consolidated financial statements.

 

 

Transactions with RR Donnelley

 

Receivables and Payables  

 

As of March 31, 2017, the Company had $55 million and $45 million of trade receivables and payables, respectively, with RRD.   In addition, receivables as of March 31, 2017 and December 31, 2016 included a $10 million non-trade receivable owed by RRD that was paid in April 2017.

 

As of December 31, 2016, the Company had $62 million and $56 million of trade receivables and payables, respectively, with RRD.  

    

Revenues and Purchases

 

LSC Communications generates a portion of net revenue from sales to RRD’s subsidiaries.  Net revenues from related party sales were $32 million and $10 million for the three months ended March 31, 2017 and 2016, respectively.  These amounts are included in the condensed consolidated and combined results of operations.

 

LSC Communications utilizes RRD for freight, logistics and premedia services.  Included in the condensed consolidated and combined financial statements were costs of sales related to freight, logistics and premedia services purchased from RRD of $51 million and $47 million for the three months ended March 31, 2017 and 2016, respectively.

 

 

23


LSC Communications, Inc.

Notes to Condensed Consolidated and Combined Financial Statements (Unaudited)

For the Three Months Ended March 31, 2017 and 2016

(tabular amounts in millions, except per share data)

 

Note 16.  New Accounting Pronouncements    

    

In March 2017, the Financial Standards Accounting Board (“FASB”) issued Accounting Standards Update No. 2017-07 “Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost” (“ASU 2017-07”). This ASU requires entities to disaggregate the service cost component from other components of net benefit cost and present it with other employee compensation costs.  All other components of net benefit cost will need to be presented elsewhere on the income statement outside of income from operations. Only the service cost component would be eligible for capitalization into inventory. The standard is effective in the first quarter 2018.  As a result of the adoption of ASU 2017-07, the Company expects to reclassify approximately $46 million and $45 million related to the years ended December 31, 2017 and 2016, respectively, of net pension income out of income from operations to a line item outside of income from operations, resulting in no net impact to net income.  

 

In January 2017, the FASB issued Accounting Standards Update No. 2017-04 “Intangibles – Goodwill and Other (Topic 350) Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”).  The standard eliminates Step 2 of the goodwill impairment test, and instead, recognizes an impairment charge for the amount by which the carrying value exceeds the reporting unit’s fair value not to exceed the total amount of goodwill allocated.  The standard is effective in the first quarter 2020, with early adoption permitted on testing dates after January 1, 2017.  The Company is evaluating the impact of ASU 2017-04.

 

In January 2017, the FASB issued Accounting Standards Update No. 2017-01 "Business Combinations (Topic 805): Clarifying the Definition of a Business" (“ASU 2017-01”) in order to clarify the definition of a business as it relates to whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The standard becomes effective in the first quarter of 2018. The Company plans to adopt the standard in the first quarter of 2018.  The impact is not expected to be material.  

 

In August 2016, the 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 condensed consolidated and 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 became 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 did not have a material 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.    

 

24


LSC Communications, Inc.

Notes to Condensed Consolidated and Combined Financial Statements (Unaudited)

For the Three Months Ended March 31, 2017 and 2016

(tabular amounts in millions, except per share data)

 

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 ap plied to all periods presented, or a modified retrospective adoption approach, meaning the standard is applied only to the most current period. The Company currently anticipates adopting the standard using the modified retrospective adoption 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.

 

 

 

25


 

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

 

The following is management’s discussion and analysis of the financial condition of LSC Communications, Inc. as of March 31, 2017 and December 31, 2016 and the results of operations for the three months ended March 31, 2017 and 2016. This commentary should be read in conjunction with the condensed consolidated and combined financial statements and accompanying notes included in Item 1 Condensed Consolidated and Combined Financial Statements.  Refer to the company’s annual report on Form 10-K, as filed with the Securities and Exchange Commission on February 23, 2017, for management’s discussion and analysis of the financial condition of the company as of December 31, 2016 and December 31, 2015, and the results of operations for the years ended December 31, 2016, 2015 and 2014.

    

  

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.

 

In March 2017, RRD completed the sale of 6.2 million shares of LSC Communications common stock, representing its entire 19.25% retained ownership.   In connection with the over-allotment option granted to the underwriters as part of the secondary sale by RRD, LSC Communications also sold 0.9 million shares of common stock, receiving proceeds of $18 million, which were used for general corporate purposes.

 

In connection with the separation, LSC Communications, RRD and Donnelley Financial entered into commercial arrangements, transition services agreements and various other agreements related to the separation that remain in effect.   Final copies of such agreements are filed as exhibits to this quarterly report on Form 10-Q.

 

  

Segment Descriptions

 

The Company’s segments and their product offerings 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.

 

 

26


 

Office Products 

 

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

 

 

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.  

 

 

Business Combinations

 

On March 1, 2017, the Company acquired HudsonYards Studios (“HudsonYards”), a leading digital and print premedia production company that provides high-quality creative retouching, computer-generated imagery, mechanical creation, press-ready file preparation, and interactive production services, for $2 million in cash.

 

On December 2, 2016, the Company acquired Continuum Management Company, LLC (“Continuum”),  a print procurement and management business, for $7 million in cash.   An additional $2 million was paid during the three months ended March 31, 2017 as part of a final working capital adjustment for a total purchase price of $9 million.     

 

For further information on the above acquisitions, refer to Note 2,  Business Combinations , to the condensed consolidated and combined financial statements.

 

 

OUTLOOK

 

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.

 

27


 

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 technolo gies. 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 HudsonYards in 2017, which expanded our digita l and premedia capabilities and Continuum in 2016, which expanded our print management capabilities. These 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.   The Company expects the seasonal impact in 2017 to be in line with historical patterns.

 

 

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.

 

28


 

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

 

Changes in the price of raw materials, crude oil and other energy costs impact our 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 condensed consolidated balance sheets, results of operations 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.

 

 

Pension Benefit Plans

 

The funded status of the Company’s pension benefits plans is dependent upon many factors, including returns on invested assets and the level of certain market interest rates. Market conditions may lead to changes in the discount rates (used to value the year-end benefit obligations of the plans) and the market value of the securities held by the plans, which could significantly increase or decrease the funded status of the plans. The Company reviews its actuarial assumptions on an annual basis as of December 31. Based on current estimates, the Company expects to make cash contributions of approximately $5 million to $7 million to its pension benefit plans for the full year 2017, of which $1 million has been contributed during the three months ended March 31, 2017.  

 

Refer to Note 7, Retirement Plans , for more information on the Company’s pension benefit plans and the activity recorded at the separation date.

 

 

Financial Review

 

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

 

 

Results of Operations for the Three Months Ended March 31, 2017 as Compared to the Three Months Ended March 31, 2016

 

The following table shows the results of operations for the three months ended March 31, 2017 and 2016, which reflects the results of the acquired businesses from the relevant acquisition dates:

 

 

 

Three Months Ended

March 31,

 

 

 

 

 

 

 

 

 

 

 

2017

 

 

2016

 

 

$ Change

 

 

% Change

 

 

 

(in millions, except percentages)

 

Net sales

 

$

821

 

 

$

880

 

 

$

(59

)

 

 

(6.7

%)

Cost of sales

 

 

692

 

 

 

722

 

 

 

(30

)

 

 

(4.2

%)

 

 

 

84.3

%

 

 

82.0

%

 

 

 

 

 

 

 

 

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

 

 

65

 

 

 

62

 

 

 

3

 

 

 

4.8

%

 

 

 

7.9

%

 

 

7.0

%

 

 

 

 

 

 

 

 

Restructuring, impairment and other charges-net

 

 

6

 

 

 

3

 

 

 

3

 

 

 

100.0

%

Depreciation and amortization

 

 

40

 

 

 

46

 

 

 

(6

)

 

 

(13.0

%)

Income from operations

 

$

18

 

 

$

47

 

 

$

(29

)

 

 

(61.7

%)

 

29


 

Consolidated and Combined Results        

 

Net sales for the three months ended March 31, 2017 were $821 million, a decrease of $59 million, or 6.7% compared to the three months ended March 31, 2016.  Net sales were impacted by:

 

 

Decreases resulting from lower volume in the Print and Office Products segments, price declines, a $5 million, or 0.6% decrease in pass-through paper sales, a $4 million, or 0.5%, decrease due to changes in foreign exchange rates; and

 

Increases due to the acquisition of Continuum in December 2016 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 $72 million or 8.1% (see Note 2, Business Combinations , to the condensed consolidated and combined financial statements).    

 

Total cost of sales decreased $30 million, or 4.2%, for the three months ended March 31, 2017 compared to the three months ended March 31, 2016, including a $3 million, or 0.5%, decrease due to changes in foreign exchange rates. Additionally, cost of sales decreased due to lower volume in the Print and Office products segments, lower pass-through paper sales, productivity, and cost control initiatives.

  

Selling, general and administrative expenses increased $3 million to $65 million for the three months ended March 31, 2017 primarily driven by increases in costs to operate as an independent public company due to the separation, partially offset by lower selling expense.

 

As a percentage of net sales, selling, general and administrative expenses increased from 7.0% for the three months ended March 31, 2016 to 7.9% for the three months ended March 31, 2017 primarily due to lower sales.  

 

For the three months ended March 31, 2017, the Company recorded restructuring, impairment and other charges of $6 million.  The Company incurred net restructuring charges of $4 million for employee terminations for an aggregate of 198 employees, of whom 161 were terminated as of or prior to March 31, 2017.  These charges primarily related to the reorganization of certain business units and corporate functions.  The Company recorded lease termination and other restructuring charges of $1 million. Additionally, the Company recorded other charges of $1 million for multi-employer pension plan withdrawal obligations unrelated to facility closures.      

 

For the three months ended March 31, 2016, the Company recorded restructuring, impairment and other charges of $3 million. The Company incurred lease termination and other restructuring charges of $2 million. The Company also recorded de minimis amounts for employee terminations and net impairment charges for the three months ended March 31, 2016.  Additionally, the Company recorded other charges of $1 million for multi-employer pension plan withdrawal obligations unrelated to facility closures.

 

Depreciation and amortization decreased $6 million to $40 million for the three months ended March 31, 2017 compared to the three months ended March 31, 2016 due to decreased capital spending in recent years compared to historical levels. Depreciation and amortization included $4 million and $5 million of amortization of other intangible assets related to customer relationships and trade names for the three months ended March 31, 2017 and 2016, respectively.

 

Income from operations for the three months ended March 31, 2017 was $18 million compared to $47 million for the three months ended March 31, 2016.  The decrease was due to lower volume in the Print and Office Products segments, price pressures and higher restructuring, impairment and other charges.

 

 

 

Three Months Ended

March 31,

 

 

 

 

 

 

 

 

 

 

 

2017

 

 

2016

 

 

$ Change

 

 

% Change

 

 

 

(in millions, except percentages)

 

Interest expense

 

$

17

 

 

$

 

 

$

17

 

 

 

100.0

%

 

30


 

N et interest expense increased by $17 million for the three months ended March 31, 2017 compared to the three months ended March 31, 2016 due to the debt incurred in relation to the separation.  

 

 

 

Three Months Ended

March 31,

 

 

 

 

 

 

 

 

 

 

 

2017

 

 

2016

 

 

$ Change

 

 

% Change

 

 

 

(in millions, except percentages)

 

Income before income taxes

 

$

1

 

 

$

47

 

 

$

(46

)

 

 

(97.9

%)

Income tax expense

 

 

2

 

 

 

16

 

 

 

(14

)

 

 

(87.5

%)

Effective income tax rate

 

 

148.1

%

 

 

33.9

%

 

 

 

 

 

 

 

 

 

The effective income tax rate for the three months ended March 31, 2017 was 148.1% compared to 33.9% for the three months ended March 31, 2016.    The effective income tax rate for the three months ended March 31, 2017 reflects the unfavorable impact associated with share-based compensation awards that lapsed in 2017.

 

 

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

 

 

 

Three Months Ended

March 31,

 

 

 

2017

 

 

2016

 

 

 

(in millions, except percentages)

 

Net sales

 

$

710

 

 

$

752

 

Income from operations

 

 

12

 

 

 

32

 

Operating margin

 

 

1.7

%

 

 

4.3

%

Restructuring, impairment and other charges-net

 

 

5

 

 

 

3

 

 

 

 

Net Sales for the

Three Months Ended

March 31,

 

 

 

 

 

 

 

 

 

Reporting unit

 

2017

 

 

2016

 

 

$ Change

 

 

% Change

 

 

 

(in millions, except percentages)

 

 

 

 

 

Magazines, catalogs and retail inserts

 

$

383

 

 

$

407

 

 

$

(24

)

 

 

(5.9

%)

Book

 

 

239

 

 

 

243

 

 

 

(4

)

 

 

(1.6

%)

Europe

 

 

56

 

 

 

70

 

 

 

(14

)

 

 

(20.0

%)

Directories

 

 

32

 

 

 

32

 

 

 

 

 

 

0.0

%

Total Print

 

$

710

 

 

$

752

 

 

$

(42

)

 

 

(5.6

%)

 

31


 

Net sales for the Print segment for the three months ended March 31, 2017 were $710 million, a decrease of $42 million, or 5.6% , compared to the three months ended March 31, 2016.  Net sales decreased due to lower educational and publishing volume in the book reporting unit, lower volume in the Europe and magazines, catalogs and retail inserts reporting units, price declines, a $5 million decrease is pass-through paper sales, and a $4 million, or 0.5%, decrease due to changes in foreign exchange rates.  The decreases were partially offset by the acquisition of Continuum in December 2016 and higher supply chain management and fulfil lment 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, lower volume, changes in foreign exchange rates, and price declines, partially offset by the acquisition of Continuum in December 2016.

 

Book: Sales decreased due to lower volume in educational and coloring books and price pressures, partially offset by increased volume in supply chain management and fulfillment, as well as higher pass-through paper sales.

 

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

 

Directories: Sales remained consistent.

 

Print segment income from operations decreased $20 million for the three months ended March 31, 2017 primarily due to lower volume, price declines, an increase in labor costs, and higher restructuring, impairment and other charges. Operating margins decreased from 4.3% for the three months ended March 31, 2016 to 1.7% for the three months ended March 31, 2017, of which 30 basis points were due to higher restructuring, impairment and other charges.  Operating margins also decreased due to price declines, an unfavorable mix and lower volume, primarily in educational and publishing products.      

 

 

Office Products

 

 

 

Three Months Ended

March 31,

 

 

 

2017

 

 

2016

 

 

 

(in millions, except percentages)

 

Net sales

 

$

111

 

 

$

128

 

Income from operations

 

 

9

 

 

 

14

 

Operating margin

 

 

8.1

%

 

 

10.9

%

Restructuring, impairment and other charges-net

 

 

1

 

 

 

 

 

Net sales for the Office Products segment for the three months ended March 31, 2017 were $111 million, a decrease of $17 million, or 13.3% compared to the three months ended March 31, 2016 largely as a result of lower volume, primarily in filing, note taking and binder products, and price declines.  

 

Office Products segment income from operations decreased $5 million for the three months ended March 31, 2017 compared to the three months ended March 31, 2016 mainly due to lower volume and higher restructuring, impairment and other charges, partially offset by cost control initiatives.  Operating margins decreased from 10.9% for the three months ended March 31, 2016 to 8.1% for the three months ended March 31, 2017 of which 90 basis points were due to higher restructuring, impairment and other charges.  Operating margins also decreased due to price declines, partially offset by cost control initiatives.

 

 

Corporate

 

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

 

 

 

Three Months Ended

March 31,

 

 

 

2017

 

 

2016

 

 

 

(in millions)

 

Operating expense (income)

 

$

3

 

 

$

(1

)

Spinoff-related transaction expenses

 

1

 

 

 

 

 

32


 

Corporate operating expense for the three months ended March 31, 2017 was $3 million, as compared to income of $1 million for the three months ended March 31, 2016. The change was mostly driven by higher costs incurred during the three months ended March 31, 2017 as a result of costs to operate as an independent public company and higher share-based compensation expense, partially offset by higher pension income.  

 

  

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 and spinoff-related transaction expenses.  A reconciliation of GAAP net (loss) income to non-GAAP adjusted EBITDA for the three months ended March 31, 2017 and 2016 is presented in the following table:

 

 

 

Three Months Ended

March 31,

 

 

 

2017

 

 

2016

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(1

)

 

$

31

 

Restructuring, impairment and other charges – net

 

 

6

 

 

 

3

 

Spinoff-related transaction expenses

 

 

1

 

 

 

 

Depreciation and amortization

 

 

40

 

 

 

46

 

Interest expense

 

 

17

 

 

 

 

Income tax expense

 

 

2

 

 

 

16

 

Non-GAAP adjusted EBITDA

 

$

65

 

 

$

96

 

 

 

Three Months Ended March 31, 2017 and 2016

 

2017 Restructuring, impairment and other charges—net . The three months ended March 31, 2017 included restructuring, impairment and other charges of $6 million.  The Company incurred net restructuring charges of $4 million for employee terminations and lease termination and other restructuring charges of $1 million. Additionally, the Company recorded other charges of $1 million for multi-employer pension plan withdrawal obligations unrelated to facility closures.  

 

2016 Restructuring, impairment and other charges—net. The three months ended March 31, 2016 included restructuring, impairment and other charges of $3 million. The Company incurred lease termination and other restructuring charges of $2 million. The Company also recorded de minimis amounts of employee terminations and net impairment charges for the three months ended March 31, 2016.  Additionally, the Company recorded other charges of $1 million for multi-employer pension plan withdrawal obligations unrelated to facility closures.  

 

Spinoff-related transaction expenses:   The three months ended March 31, 2017 included charges of $1 million for one-time transaction costs associated with   becoming a standalone company .

 

 

33


 

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 three months ended March 31, 2017 and 2016.

 

 

 

Three Months Ended

March 31,

 

 

 

2017

 

 

2016

 

Net cash provided by operating activities

 

$

64

 

 

$

14

 

Net cash used in investing activities

 

 

25

 

 

 

11

 

Net cash used in financing activities

 

 

48

 

 

 

22

 

 

            

Cash flows from Operating Activities

 

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

  

Net cash provided by operating activities was $64 million for the three months ended March 31, 2017 compared to $14 million for the same period in 2016.  The increase in net cash provided by operating activities reflected the timing of supplier payments, partially offset by interest payments in 2017.

 

Beginning on October 1, 2016, transactions with RRD and Donnelley Financial are considered third-party and are settled in cash, whereas prior to that date transactions were net settled among the three companies.   

 

 

Cash flows from Investing Activities

 

Net cash used in investing activities for the three months ended March 31, 2017 was $25 million compared to $11 million for the same period in 2016.  Significant changes are as follows:

 

 

Capital expenditures were $21 million during the three months ended March 31, 2017, an increase of $9 million compared to the same period in 2016 primarily due to increased spend on machinery and equipment in the Print segment; and

 

Cash paid for acquisitions of businesses, net of cash acquired was $4 million during the three months ended March 31, 2017, of which $2 million was for the 2017 acquisition of HudsonYards and $2 million was paid as part of a final working capital adjustment for the 2016 acquisition of Continuum.  

 

 

Cash flows from Financing Activities

 

Net cash used in financing activities for the three months ended March 31, 2017 was $48 million compared to $22 million for the same period in 2016.  Significant changes are as follows:

 

 

The Company paid $51 million of long-term debt and current maturities, primarily due to $50 million paid in advance for the full amount of required amortization payments for the year ended December 31, 2017 for the Term Loan Facility on February 2, 2017;  

 

The Company received proceeds of $18 million for the issuance of common stock on March 28, 2017 in connection with the secondary offering of shares retained by RRD at the separation;

 

The Company paid an $8 million dividend to shareholders on March 2, 2017;

 

The Company made $7 million in net cash payments to RRD related to the separation from RRD on October 1, 2016 during the three months ended March 31, 2017; and

 

Net transfers to parent and affiliates were $21 million for the three months ended March 31, 2016.

  

34


 

Dividends

 

Cash dividends declared and paid to shareholders during the three months ended March 31, 2017 totaled $8 million. On April 6, 2017, the Board of Directors declared a quarterly cash dividend of $0.25 per common share, payable on June 2, 2017 to shareholders of record on May 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 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.  

 

 

LIQUIDITY

 

Cash and cash equivalents were $89 million and $95 million as of March 31, 2017 and December 31, 2016.

 

The Company’s cash balances are held in several locations throughout the world, including amounts held outside of the United States.  Cash and cash equivalents as of March 31, 2017 included $46 million in the U.S. and $43 million at international locations. The Company has not recognized deferred tax liabilities as of March 31, 2017 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.

 

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.

 

 

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.

 

35


 

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 le ast quarterly, which commenced 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 a re 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.

 

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 used the net proceeds from the Term Loan Facility in 2016 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 March 31, 2017. Based on the Company’s condensed consolidated results of operations for the three months ended March 31, 2017 and existing debt, the Company would have had the ability to utilize the entire $400 million Revolving Credit Facility and not have been in violation of the terms of the agreement.  Availability under the Revolving Credit Facility was reduced by $13 million related to outstanding letters of credit.   On April 18, 2017, the Company issued a letter of credit related to its workers’ compensation program which will further reduce the availability by $38 million.          

  

The current availability under the Revolving Credit Facility and net availability as of March 31, 2017 is shown in the table below:  

  

 

 

March 31, 2017

 

 

 

(in millions)

 

Availability

 

 

 

 

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 Revolving Credit Facility

 

$

 

Impact on availability related to outstanding letters of credit

 

 

13

 

 

 

$

13

 

 

 

 

 

 

Current availability at March 31, 2017

 

$

387

 

Cash

 

 

89

 

Net Available Liquidity

 

$

476

 

  

36


 

The Company was in compliance with its debt covenants as of March 31, 2017, 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 Mar ch 31, 2017, 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 was added. Currently, the Credit Agreement is supported by fifteen U.S. and international financial institutions.

 

As of March 31, 2017, the Company had $13 million in outstanding letters of credit issued under the Revolving Credit Facility, all of which reduced the availability. As of March 31, 2017, the Company also had $16 million in other uncommitted credit facilities, all of which were outside the U.S. (the “Other Facilities”). As of March 31, 2017, letters of credit and guarantees of a de minimis amount were issued and reduced availability under the Other Facilities. As of March 31, 2017, there were no borrowings under the Revolving Credit Facility and the Other Facilities.

 

The Company’s debt maturities as of March 31, 2017 are shown in the following table:

 

 

 

Debt Maturity Schedule

 

 

 

Total

 

 

2017

 

 

2018

 

 

2019

 

 

2020

 

 

2021

 

 

Thereafter

 

Borrowings under the Credit Agreement

 

$

312

 

 

$

 

 

$

48

 

 

$

43

 

 

$

43

 

 

$

43

 

 

$

135

 

Senior secured notes

 

 

450

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

450

 

Capital lease obligations

 

 

5

 

 

 

3

 

 

 

1

 

 

 

1

 

 

 

 

 

 

 

 

 

 

Total (a)

 

$

767

 

 

$

3

 

 

$

49

 

 

$

44

 

 

$

43

 

 

$

43

 

 

$

585

 


(a) Excludes unamortized debt issuance costs of $6 million and $8 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.

 

  

Business Combinations

 

During the three months ended March 31, 2017, the Company paid $2 million, net of cash acquired, related to the acquisition of HudsonYards. The Company paid the cash portion of the HudsonYards acquisition with cash on hand.

 

During the year ended December 31, 2016, the Company paid $7 million, net of cash acquired, related to the acquisition of Continuum.   An additional $2 million was paid during the three months ended March 31, 2017 as part of a final working capital adjustment for a total purchase price of $9 million. The Company paid the cash portion of the Continuum acquisition with cash on hand.

    

 

MANAGEMENT OF MARKET RISK

 

The Company is exposed to interest rate risk on its variable debt and price risk on its fixed-rate debt. At March 31, 2017, the Company’s variable-interest borrowings were $312 million, or approximately 40.7%, of the Company’s total debt.

 

The Company assesses market risk based on changes in interest rates utilizing a sensitivity analysis that measures the potential loss in earnings, fair values and cash flows based on a hypothetical 10% change in interest rates. Using this sensitivity analysis, such changes would not have a material effect on interest income or expense and cash flows and would change the fair values of fixed-rate debt at March 31, 2017 by approximately $18 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.

 

37


 

OTHER INFORMATION

 

Litigation and Contingent Liabilities

 

For a discussion of certain litigation involving the Company, see Note 13, Commitments and Contingencies, to the condensed 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 16,  New Accounting Pronouncements , to the condensed consolidated and combined financial statements.

 

 

CAUTIONARY STATEMENT

 

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

 

These statements may include, or be preceded or followed by, the words  “anticipates,” “estimates,” “expects,” “projects,” “forecasts,” “intends,” “plans,” “continues,” “believes,” “may,” “will,” “goals” or variations of such words and similar expressions.  Examples of forward-looking statements include, but are not limited to, statements, beliefs and expectations regarding our business strategies, market potential, future financial performance, dividends, 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 disclosed in “Item 1A. Risk Factors” in section Part I in the Company’s annual report on Form 10-K for the year ended December 31, 2016, as filed with the SEC on February 23, 2017, that could cause our actual results to differ materially from those indicated in any such forward-looking statements. These factors include, but are not limited to:

 

 

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

 

 

inability to improve operating efficiency to meet changing market conditions;

 

 

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

 

 

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

 

 

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

 

 

the effect of economic weakness and constrained advertising;

 

 

uncertainty about future economic conditions;

 

 

increased competition as a result of consolidation among our competitors;

 

 

our ability to successfully integrate 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;

 

38


 

 

our ability to access debt and the capital markets due to adverse credit ma rket 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.

 

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

 

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

 

39


 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

See Item 2 of Part I under “Management of Market Risk.” There have been no significant changes to the Company’s market risk since December 31, 2016.  For a discussion of exposure to market risk, refer to Part II, Item 7A – Quantitative and Qualitative Disclosures about Market Risk disclosed in the Company’s annual report on Form 10-K for the year ended December 31, 2016, as filed with the SEC on February 23, 2017.    

 

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

As required by Rule 13a-15(b) and Rule 15d-15(e) of the Securities Exchange Act of 1934, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining effective disclosure controls and procedures, as defined under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. As of March 31, 2017, an evaluation was performed under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that disclosure controls and procedures as of March 31, 2017 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 Securities and Exchange Commission, 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

 

There have been no changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended March 31, 2017 that have materially affected, or are reasonably likely to materially affect, the company’s internal control over financial reporting.

 

 

40


 

PART II – OTHE R INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

For a discussion of certain litigation involving the Company, see Note 13,  Commitments and Contingencies,  to the condensed consolidated and combined financial statements.

 

 

ITEM 1A. RISK FACTORS  

 

There have been no material changes to the risk factors disclosed in the Company’s annual report on Form 10-K for the year ended December 31, 2016, as filed with the SEC on February 23, 2017.

 

 

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

 

 

ISSUER PURCHASES OF EQUITY SECURITIES

 

 

 

Total Number

of Shares

Purchased (a)

 

 

Average Price

Paid per Share

 

 

Total Number of

Shares Purchases as Part

of Publicly Announced

Plans or Programs

 

 

Dollar Value of Shares

that May Yet be

Purchased Under the

Plans or Programs

 

January 1, 2017 - January 31, 2017

 

 

 

 

$

 

 

 

 

 

$

 

February 1, 2017 - February 28, 2017

 

 

 

 

 

 

 

 

 

 

$

 

March 1, 2017 - March 31, 2017

 

 

34,727

 

 

 

27.16

 

 

 

 

 

$

 

Total

 

 

34,727

 

 

$

27.16

 

 

 

 

 

 

 

 

 

(a)

Shares withheld for tax liabilities upon vesting of equity awards      

_____________________________  

 

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 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.  

  

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable

  

 

ITEM 6. 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)

 

41


 

2.4

Tax Disaf filiation 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)*

 

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 ( incorporated by reference to Exhibit 10.4 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, filed on February 23, 2017)*

 

10.5

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”) ( incorporated by reference to Exhibit 10.5 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, filed on February 23, 2017)*

 

10.6

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)*

  

42


 

10.7

Assignment of Employment Agreem ent 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 Octobe r 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 ( incorporated by reference to Exhibit 10.10 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, filed on February 23, 2017)*

 

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 ( incorporated by reference to Exhibit 10.12 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, filed on February 23, 2017)*

 

10.13

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 ( incorporated by reference to Exhibit 10.13 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, filed on February 23, 2017)*

 

10.14

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 (for 2016) ( incorporated by reference to Exhibit 10.15 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, filed on February 23, 2017)*

 

10.16

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

 

10.17

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

 

10.18

Form of Cash Retention Award Agreement (for 2013) converted from R. R. Donnelley & Sons Company to the Company pursuant to the Separation Agreement ( incorporated by reference to Exhibit 10.18 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, filed on February 23, 2017)*

 

10.19

Form of Cash Retention Award Agreement (for 2014) converted from R. R. Donnelley & Sons Company to the Company pursuant to the Separation Agreement ( incorporated by reference to Exhibit 10.19 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, filed on February 23, 2017)*

 

10.20

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 ( incorporated by reference to Exhibit 10.20 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, filed on February 23, 2017)*

 

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 ( incorporated by reference to Exhibit 10.21 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, filed on February 23, 2017)*

 

43


 

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 ( incorporated by reference to Exhibit 10.22 to the Company’s Annual Report o n Form 10-K for the fiscal year ended December 31, 2016, filed on February 23, 2017)*

 

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 ( incorporated by reference to Exhibit 10.23 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, filed on February 23, 2017)*

 

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 ( incorporated by reference to Exhibit 10.24 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, filed on February 23, 2017)*

 

10.25

Form of Founder’s Award (Restricted Stock) Agreement ( incorporated by reference to Exhibit 10.25 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, filed on February 23, 2017)*

 

10.26

Written Description of 2016 Annual Incentive Plan of the Company with respect to the period from October 1, 2016 to December 31, 2016 ( incorporated by reference to Exhibit 10.26 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, filed on February 23, 2017)*

 

10.27

LSC Communications Annual Incentive Plan as amended and restated ( incorporated by reference to Exhibit 10.27 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, filed on February 23, 2017)*

 

10.28

Form of Amendment to Cash Retention Awards ( incorporated by reference to Exhibit 10.28 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, filed on February 23, 2017)*

 

10.29

Form of Performance Restricted Stock Award (for 2017) (filed herewith)*

 

10.30

Form of Stock Unit Award Agreement (for 2017) (filed herewith)*

 

14.1

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

 

21.1

Subsidiaries of the Company ( incorporated by reference to Exhibit 21.1 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, filed on February 23, 2017)

 

31.1

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

 

31.2

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

 

32.1

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

 

32.2

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

 

101.INS

XBRL Instance Document

 

101.SCH

XBRL Taxonomy Extension Schema Document

 

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

 

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

 

44


 

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

 

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

 

___________________________

 

* Management contract or compensatory plan or arrangement

 

 

45


 

S IGNA TURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

LSC COMMUNICATIONS, INC.

 

 

By:

 

/s/ ANDREW B. COXHEAD

 

 

Andrew B. Coxhead

 

 

Chief Financial Officer

 

 

By:

 

/s/ KENT A. HANSEN

 

 

Kent A. Hansen

 

 

Chief Accounting Officer and Controller

Date: May 4, 2017        

  

 

46

 

EXHIBIT 10.29

 

LSC COMMUNICATIONS, INC.
PERFORMANCE RESTRICTED STOCK AWARD

(2016 PIP)

This Restricted Stock Award (“Award”) is granted as of XXXX (the “Grant Date”) by LSC Communications, Inc., a Delaware corporation (the “Company”), to XXXXX (“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”) (with YYYY number of such shares considered to represent target achievement), 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”) and reflects the right to receive up to XXXX Shares of the Company subject to the fulfillment of the vesting conditions set forth in this Award.  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, the Company’s transfer agent, until the Performance Vesting Date (as defined below).

2. Vesting .  

(a) The number of Shares subject to the Award that are earned and eligible for vesting shall be determined as set forth below in Section 4(a), according 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 performance period (the “Performance Period”) as established by the Committee and set forth on Exhibit A.  The Committee shall determine and certify the attainment of each Performance Condition after the applicable Performance Period.  The Shares shall also be subject to the time-based vesting conditions set forth below.

(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 Grantee is a “covered person” within the meaning of Section 162(m).

(c) Upon the date of 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 .  The number of Shares under the Award that vest shall be based upon the achievement of the Performance Condition for the applicable Performance Period set forth on Exhibit A (such Shares shall be referred to as the “Earned Shares”). 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 Earned Shares shall lapse upon certification by the Committee 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 Earned 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 no Shares shall be Earned Shares, and all Shares shall be forfeited. Any Shares subject to the Award that do not become Earned Shares pursuant to this Section 4(a) shall be cancelled and surrendered to the Company without payment of any consideration to Grantee immediately upon the determination of the number of Earned Shares pursuant to Exhibit A (the “Cancelled Shares”).

(b) Time-Based Vesting . In addition to satisfying the Performance Condition as described above, the Earned Shares shall also be subject to the following time-based vesting condition:  the Earned Shares shall vest on March 2, 2020.  Upon achievement of the Performance Condition and the time-based vesting condition, the restrictions applicable to the Earned Shares shall lapse.

-2-

 


 

5. Rights as a Shareholder .   Grantee 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.  Grantee shall not have the rights of a shareholder with respect to any Cancelled Shares, and shall not be entitled to receive any dividends or distributions paid with respect to such Cancelled Shares.

6. Withholding Taxes .  

(a) All payments or distributions of Earned 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 Earned Shares or with respect thereto. In lieu thereof, the Company shall have the right to withhold the number of Earned 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 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 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.

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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.

-4-

 


 

(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.

(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.

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(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.

(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.


-6-

 


 

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 ______, 2017.

 

 

______________________________

Grantee:  

 

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EXHIBIT 10.30

 

LSC COMMUNICATIONS, INC.
STOCK UNIT AWARD

(2016 PIP)

This Stock Unit Award (“Award”) is granted as of XXXXX by LSC Communications, Inc., a Delaware corporation (the “Company”), to XXXXXX (“Grantee”) .

 

1. Grant of Award .  This Award is in recognition of your hard work and dedication to the Company 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 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.

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, 2020.  

(b) Upon the date of a Change in Control, the Stock Units 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 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, 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 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 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 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.  

(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 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 2016 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.

4

 


(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 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.

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 ______, 2017.

 

 

______________________________

Grantee:  

 

 

5

 

 

Exhibit 31.1

Certification Pursuant to Rule 13a-14(a) and Rule 15d-14(a)

of the Securities Exchange Act of 1934

I, Thomas J. Quinlan, III, certify that:

1.

I have reviewed this Quarterly Report on Form 10-Q of 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: May 4, 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 Quarterly Report on Form 10-Q 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: May 4, 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 Quarterly Report of LSC Communications, Inc. (the “Company”) on Form 10-Q for the period ended March 31, 2017 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Thomas J. Quinlan, III, Chairman 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.

May 4, 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 Quarterly Report of LSC Communications (the “Company”) on Form 10-Q for the period ended March 31, 2017 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Andrew B. Coxhead, 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.

May 4, 2017    

   

/s/  A NDREW B. COXHEAD

Andrew B. Coxhead

Chief Financial Officer