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, 2018  

OR  

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

Commission file number

001-37729      

LSC Communications, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

36-4829580

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

191 N. Wacker Drive, Suite 1400

Chicago, IL 60606

(Address of principal executive offices, including zip code)

(773) 272-9200  

(Registrant’s telephone number, including area code)

 

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

Indicate by check mark whether the registrant 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 27, 2018, 34,962,612 shares of common stock were outstanding.        

 

    

 

 


 

LSC COMMUNICATIONS, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2018

 

TABLE OF CONTENTS

  

PART I

 

 

 

Page

FINANCIAL INFORMATION

 

 

Item 1: Condensed Consolidated Financial Statements (unaudited)

 

3

Condensed Consolidated Balance Sheets as of March 31, 2018 and December 31, 2017

 

3

Condensed Consolidated Statements of Operations for the three months ended March 31, 2018 and 2017  

 

4

Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2018 and 2017

 

5

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2018 and 2017

 

6

Notes to Condensed Consolidated Financial Statements

 

7

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

 

29

Item 3: Quantitative and Qualitative Disclosures About Market Risk

 

42

Item 4: Controls and Procedures

 

43

Part II. Other Information

 

44

Item 1: Legal Proceedings

 

44

Item 1A: Risk Factors

 

44

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

 

44

Item 4: Mine Safety Disclosures

 

44

Item 6: Exhibits

 

45

Signatures

 

49

 

 

  

2


 

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

LSC COMMUNICATIONS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions, except share and per share data)

(UNAUDITED)  

 

 

 

March 31,

 

 

December 31,

 

 

 

2018

 

 

2017

 

ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

23

 

 

$

34

 

Receivables, less allowances for doubtful accounts of $13 in 2018 (2017: $11)

 

 

694

 

 

 

727

 

Inventories (Note 4)

 

 

242

 

 

 

238

 

Prepaid expenses and other current assets

 

 

53

 

 

 

47

 

Total current assets

 

 

1,012

 

 

 

1,046

 

Property, plant and equipment-net (Note 5)

 

 

565

 

 

 

576

 

Goodwill (Note 6)

 

 

82

 

 

 

82

 

Other intangible assets-net (Note 6)

 

 

155

 

 

 

160

 

Deferred income taxes

 

 

45

 

 

 

51

 

Other noncurrent assets

 

 

98

 

 

 

99

 

Total assets

 

$

1,957

 

 

$

2,014

 

LIABILITIES

 

 

 

 

 

 

 

 

Accounts payable

 

$

329

 

 

$

406

 

Accrued liabilities

 

 

238

 

 

 

239

 

Short-term and current portion of long-term debt (Note 9)

 

 

176

 

 

 

123

 

Total current liabilities

 

 

743

 

 

 

768

 

Long-term debt (Note 9)

 

 

689

 

 

 

699

 

Pension liabilities

 

 

164

 

 

 

182

 

Restructuring and multi-employer pension liabilities (Note 7)

 

 

48

 

 

 

49

 

Other noncurrent liabilities

 

 

66

 

 

 

68

 

Total liabilities

 

 

1,710

 

 

 

1,766

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EQUITY (Note 10)

 

 

 

 

 

 

 

 

Common stock, $0.01 par value

 

 

 

 

 

 

 

 

Authorized: 65,000,000 shares;

 

 

 

 

 

 

 

 

Issued: 34,830,180 shares in 2018 (2017: 34,610,931)

 

 

 

 

 

 

Additional paid-in-capital

 

 

819

 

 

 

816

 

Accumulated deficit

 

 

(4

)

 

 

(90

)

Accumulated other comprehensive loss (Note 13)

 

 

(564

)

 

 

(476

)

Treasury stock, at cost: 201,971 shares in 2018 (2017: 100,256)

 

 

(4

)

 

 

(2

)

Total equity

 

 

247

 

 

 

248

 

Total liabilities and equity

 

$

1,957

 

 

$

2,014

 

 

                              

                    

        

  

 

  

 

  

 

 

See Notes to the Condensed Consolidated Financial Statements

3


 

LSC COMMUNICATIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions, except per share data)  

(UNAUDITED)  

 

 

 

Three Months Ended

March 31,

 

 

 

2018

 

 

2017

 

Net sales

 

$

929

 

 

$

821

 

Cost of sales

 

 

808

 

 

 

692

 

Selling, general and administrative expenses (exclusive of depreciation and

     amortization)

 

 

83

 

 

 

76

 

Restructuring, impairment and other charges-net (Note 7)

 

 

6

 

 

 

6

 

Depreciation and amortization

 

 

38

 

 

 

40

 

(Loss) income from operations

 

 

(6

)

 

 

7

 

Interest expense-net

 

 

20

 

 

 

17

 

Investment and other (income)-net

 

 

(11

)

 

 

(11

)

(Loss) income before income taxes

 

 

(15

)

 

 

1

 

Income tax (benefit) expense

 

 

(4

)

 

 

2

 

Net loss

 

$

(11

)

 

$

(1

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per common share (Note 11):

 

 

 

 

 

 

 

 

     Basic net loss per share

 

$

(0.32

)

 

$

(0.02

)

     Diluted net loss per share

 

$

(0.32

)

 

$

(0.02

)

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.26

 

 

$

0.25

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

     Basic

 

34.7

 

 

32.6

 

     Diluted

 

34.7

 

 

32.6

 

  

      

                

                  

            

      

    

  

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See Notes to the Condensed Consolidated Financial Statements

4


 

LSC COMMUNICATIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in millions)

(UNAUDITED)

 

 

 

Three Months Ended

March 31,

 

 

 

2018

 

 

2017

 

Net loss

 

$

(11

)

 

$

(1

)

 

 

 

 

 

 

 

 

 

Other comprehensive income, net of tax (Note 13)

 

 

 

 

 

 

 

 

Translation adjustments

 

 

5

 

 

 

9

 

Adjustments for net periodic pension plan cost

 

 

4

 

 

 

3

 

Other comprehensive income

 

 

9

 

 

 

12

 

Comprehensive (loss) income

 

$

(2

)

 

$

11

 

 

The adjustments for net pension plan cost were net of income tax expense of $1 million for each of the three months ended March 31, 2018 and 2017.    

 

      

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See Notes to the Condensed Consolidated Financial Statements

 

5


 

LSC COMMUNICATIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

(UNAUDITED)

 

 

 

Three Months Ended

March 31,

 

 

 

2018

 

 

2017

 

Cash Flows from Operating Activities

 

 

 

 

 

 

 

 

Net loss

 

$

(11

)

 

$

(1

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

38

 

 

 

40

 

Provision for doubtful accounts receivable

 

 

2

 

 

 

1

 

Share-based compensation

 

 

3

 

 

 

3

 

Deferred income taxes

 

 

3

 

 

 

1

 

Other

 

 

2

 

 

 

1

 

Changes in operating assets and liabilities - net of acquisitions:

 

 

 

 

 

 

 

 

Accounts receivable – net

 

 

56

 

 

 

40

 

Inventories

 

 

(33

)

 

 

(4

)

Prepaid expenses and other current assets

 

 

1

 

 

 

(1

)

Accounts payable

 

 

(75

)

 

 

3

 

Income taxes payable and receivable

 

 

(8

)

 

 

(1

)

Accrued liabilities and other

 

 

(2

)

 

 

(18

)

Net cash (used in) provided by operating activities

 

 

(24

)

 

 

64

 

 

 

 

 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(20

)

 

 

(21

)

Acquisitions of businesses, net of cash acquired

 

 

1

 

 

 

(4

)

Net cash used in investing activities

 

 

(19

)

 

 

(25

)

 

 

 

 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

 

 

 

Payments of current maturities and long-term debt

 

 

(13

)

 

 

(51

)

Net proceeds from credit facility borrowings

 

 

55

 

 

 

 

Proceeds from issuance of common stock

 

 

 

 

 

18

 

Dividends paid

 

 

(9

)

 

 

(8

)

Payments to RRD – net

 

 

 

 

 

(7

)

Other financing activities

 

 

(2

)

 

 

 

Net cash provided by (used in) financing activities

 

 

31

 

 

 

(48

)

 

 

 

 

 

 

 

 

 

Effect of exchange rate on cash and cash equivalents

 

 

1

 

 

 

3

 

Net decrease in cash, cash equivalents and restricted cash

 

 

(11

)

 

 

(6

)

Cash, cash equivalents and restricted cash at beginning of year

 

 

35

 

 

 

97

 

Cash, cash equivalents and restricted cash at end of period

 

$

24

 

 

$

91

 

 

 

              

Reconciliation to the Condensed Consolidated Balance Sheets

 

 

 

 

 

 

 

 

 

 

As of

March 31, 2018

 

 

As of

December 31, 2017

 

Cash and cash equivalents

 

$

23

 

 

$

34

 

Restricted cash included in Prepaid expenses and other current assets

 

 

1

 

 

 

1

 

Total cash, cash equivalents and restricted cash shown in the statement of cash flows

 

$

24

 

 

$

35

 

 

 

See Notes to the Condensed Consolidated Financial Statements    

 

6


LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three Months Ended March 31, 2018 and 2017

(tabular amounts in millions, except per share data)

 

Note 1.  Overview and B asis of Presentation  

 

Description of Business

 

The principal business of LSC Communications, Inc., a Delaware corporation, and its direct or indirect wholly-owned subsidiaries (“LSC Communications,” “the Company,” “we,” “our” and “us”) is to offer a broad scope of traditional and digital print, print-related services and office products.  The Company serves the needs of publishers, merchandisers and retailers worldwide with a service offering that includes  e-services, logistics, warehousing and fulfillment and supply chain management.  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, envelopes, note-taking products, binder products, and forms. 

 

 

Description of Separation

 

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 stockholders on October 1, 2016.  RRD retained a  19.25 % ownership stake in both LSC Communications and Donnelley Financial.  On October 1, 2016, RRD stockholders of record as of the close of business on September 23, 2016 (“the record date”) 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.  On March 28, 2017, RRD completed the sale of approximately 6.2 million shares of LSC Communications common stock, representing its entire 19.25% retained ownership .      

 

      

Basis of Presentation

 

The condensed consolidated financial statements include the balance sheets, statements of operations and cash flows in conformity with accounting principles generally accepted in the United States (“GAAP”).  All intercompany transactions have been eliminated in consolidation.  These unaudited condensed consolidated interim financial statements include estimates and assumptions of management that affect the amounts reported in the condensed consolidated financial statements. Actual results could differ from these estimates.  

 

Certain prior year amounts were restated to conform to the Company’s current statement of operations and cash flows classifications.  

 

The Company adopted 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”) in the first quarter of 2018.  As a result of the adoption of ASU 2017-07, the Company will reclassify $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 impact to net income.  In the first quarter of 2018, $11 million of net pension income was reclassified from selling, general and administrative expenses to investment and other income-net in the condensed consolidated statement of operations for the three months ended March 31, 2017.    

 

The Company adopted Accounting Standards Update No. 2016-18 “Statements of Cash Flows (Topic 230): Restricted Cash” (“ASU 2016-18”) in the first quarter of 2018.  The standard requires amounts generally described as restricted cash and restricted cash equivalents to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows.  The standard does not provide a definition of restricted cash or restricted cash equivalents.  The standard requires a retrospective transition method to be applied to each period presented.  The Company included a reconciliation of beginning-of-period and end-of-period amounts in condensed consolidated statements of cash flows to the condensed consolidated balance sheets.      

 

  

7


LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three Months Ended March 31, 2018 and 2017

(tabular amounts in millions, except per share data)

 

U.S. Tax Cuts and Jobs Act (“Tax Act”)

 

The Company’s accounting for the Tax Act remains provisional for amounts recorded as of December 31, 2017.  As disclosed in the Company’s annual report on Form 10-K (Note 14, Income Taxes ) for the year ended December 31, 2017, the Company was able to reasonably estimate certain effects, and therefore, recorded provisional adjustments associated with the one-time transition tax on the deemed repatriation of post-1986 undistributed earnings of foreign subsidiaries and the remeasurement of deferred taxes.  The Company has not recorded any potential deferred tax effects related to global intangible low-taxed income (“GILTI”) and has not made a policy decision regarding whether to record deferred taxes on GILTI or in the period in which the tax is incurred.    

 

The Company has not made any additional measurement-period adjustments related to these items during the three months ended March 31, 2018.  The Company is continuing to gather additional information to complete the accounting for these items and expects to complete the accounting within the prescribed measurement period.    

 

 

Note 2.  Business Combinations

 

2017 Acquisitions

 

On November 29, 2017, the Company acquired The Clark Group, (“Clark Group”), a third-party logistics provider of distribution, consolidation, transportation management and international freight forwarding services.  The acquisition enhanced the Company’s logistics service offering. The total purchase price was $25 million in cash, of which $16 million was recorded in goodwill.  

 

On November 9, 2017, the Company acquired Quality Park, a producer of envelopes, mailing supplies and assorted packaging items.  The acquisition enhanced the Company’s office products offerings.   The total purchase price was $41 million in cash, resulting in a bargain purchase gain of $2 million.  We reassessed the recognition and measurement of identifiable assets and liabilities acquired and concluded that all acquired assets and liabilities were recognized and that the valuation procedures and resulting estimates were appropriate.  

 

On September 7, 2017, the Company acquired Publishers Press, a printing provider with capabilities such as web-offset printing, prepress and distribution services for magazines and retail brands.  The acquisition enhanced the Company’s printing capabilities.  The total purchase price was $68 million in cash, of which $1 million was recorded in goodwill.  

 

On August 21, 2017, the Company acquired the assets of NECI, LLC (“NECI”),  a supplier of commodity and specialty filing supplies .  The acquisition enhanced the Company’s office products offerings.  The purchase price, which included the Company’s estimate of contingent consideration, was $6 million in cash, of which $1 million was recorded in goodwill.  

 

On   August 17, 2017, the Company acquired CREEL Printing (“CREEL”), an offset and digital printing company.  The acquisition enhanced the capabilities of the Company’s offset and digital production platform and brought enhanced technologies to support our clients’ evolving needs, specifically in the magazine media and retail marketing industries.  CREEL’s capabilities include full-color web and sheetfed printing, regionally distributed variable digital production, large-format printing, and integrated digital solutions.  The purchase price, which included the Company’s estimate of contingent consideration, was $79 million in cash, of which $26 million was recorded in goodwill.    

 

On July 28, 2017, the Company acquired Fairrington Transportation Corp., F.T.C. Transport, Inc. and F.T.C. Services, Inc. (“Fairrington”), a  full-service, printer-independent mailing logistics provider in the United States.  The acquisition enhanced the Company’s logistics service offering. The purchase price was $19 million in cash and approximately 1.0 million shares of LSC Communications common stock, for a total transaction value of $39 million.  Of the total purchase price, $22 million was recorded in goodwill.  

 

On March 1, 2017, the Company acquired HudsonYards Studios (“HudsonYards”), a 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 enhanced the Company’s digital and premedia capabilities.  The purchase price for HudsonYards was $3 million in cash, of which $2 million was recorded in goodwill.  

 

8


LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three Months Ended March 31, 2018 and 2017

(tabular amounts in millions, except per share data)

 

The operations of Clark Group, Publishers Press, CREEL, Fairrington, and HudsonYards are included in the Pr int segment; specifically the magazines, catalogs and retail inserts reporting unit.  The operations of Quality Park and NECI are included in the Office Products segment.  

 

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

 

The preliminary tax deductible goodwill related to the Clark Group, Quality Park, Publishers Press, NECI, CREEL, Fairrington, and HudsonYards acquisitions was $38 million.

 

The purchase price allocations for the Clark Group and Quality Park are preliminary as of March 31, 2018 because the valuations necessary to assess the fair values of the net assets and liabilities acquired are still in process.  The primary areas that are not yet finalized relate to the valuation of certain assets and liabilities.  The final purchase price allocations may differ from what is currently reflected in the condensed consolidated financial statements and could affect goodwill impairment in the future.  The purchase price allocations for Publishers Press, NECI, CREEL, Fairrington, and HudsonYards are final as of March 31, 2018.  There were no significant changes to the purchase price allocations for all acquisitions as of March 31, 2018 compared to the disclosed purchase price allocations in the Company’s annual report on Form 10-K for the year ended December 31, 2017.

 

The purchase price allocations for the material acquisitions noted above were as follows:

 

 

 

Clark Group

 

 

Quality Park

 

 

Publishers Press

 

 

CREEL

 

 

Fairrington

 

Accounts Receivable

 

$

6

 

 

$

19

 

 

$

27

 

 

$

12

 

 

$

6

 

Inventories

 

 

 

 

 

27

 

 

 

13

 

 

 

5

 

 

 

 

Prepaid expenses and other current assets

 

 

 

 

 

1

 

 

 

1

 

 

 

1

 

 

 

 

Property, plant and equipment

 

 

 

 

 

8

 

 

 

36

 

 

 

20

 

 

 

6

 

Other intangible assets

 

 

14

 

 

 

1

 

 

 

 

 

 

23

 

 

 

17

 

Other noncurrent assets

 

 

 

 

 

 

 

 

1

 

 

 

 

 

 

1

 

Goodwill (bargain purchase)

 

 

16

 

 

 

(2

)

 

 

1

 

 

 

26

 

 

 

22

 

Accounts payable and accrued liabilities

 

 

(8

)

 

 

(11

)

 

 

(14

)

 

 

(9

)

 

 

(4

)

Deferred taxes – net

 

 

(3

)

 

 

(2

)

 

 

 

 

 

 

 

 

(9

)

Purchase price, net of cash acquired

 

$

25

 

 

$

41

 

 

$

65

 

 

$

78

 

 

$

39

 

Less: value of common stock issued

 

 

 

 

 

 

 

 

 

 

 

 

 

 

20

 

Less: accrued but unpaid contingent

     consideration

 

 

 

 

 

 

 

 

 

 

 

1

 

 

 

 

Net cash paid:

 

$

25

 

 

$

41

 

 

$

65

 

 

$

77

 

 

$

19

 

 

In accordance with ASC 350,  Intangibles — Goodwill and Other , the Company is required to test its goodwill for impairment annually, or more often if there is an indication that goodwill might be impaired.  Given the historical valuations of the magazines, catalogs and retail inserts reporting unit that have resulted in goodwill impairment in prior years, combined with the change in the composition of the carrying value of the reporting unit due to the acquisitions completed during the year ended December 31, 2017, the Company determined it necessary to perform goodwill impairment reviews on this reporting unit as of September 30, 2017, and again as of December 31, 2017 due to the acquisitions that were completed after September 30, 2017.    

 

As a result of the goodwill impairment tests, and consistent with prior goodwill impairment tests, the magazines, catalogs and retail inserts reporting unit’s fair value continued to be at a value below its carrying value.  This is primarily due to the negative revenue trends experienced in recent years that are only partially offset by the impact of the new acquisitions.   The charges to recognize the impairment of goodwill in the magazines, catalogs and retail inserts reporting unit were $55 million and $18 million during the three months ended September 30, 2017 and December 31, 2017, respectively.  The total charge was $73 million for 2017, resulting in zero goodwill associated with the magazines, catalogs and retail inserts reporting unit as of December 31, 2017.  

 

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

9


LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three Months Ended March 31, 2018 and 2017

(tabular amounts in millions, except per share data)

 

 

The fair values of goodwill, other intangible assets and property, plant and equipment associated with the acquisitions were determined to be Level 3 under the fair value hierarchy, which included discounted cash flow analyses, comparable marketplace fair value data and management’s assumptions for the goodwill impairment charges.   Property, plant and equipment values were estimated using either the cost or market approach, if a secondhand market existed.

 

For the three months ended March 31, 2018 and 2017, the Company recorded $1 million and a de minimis amount of acquisition-related expenses, respectively, associated with the completed and contemplated acquisitions described above within selling, general and administrative expenses in the condensed consolidated statements of operations.

 

 

Pro forma results  

 

The following unaudited pro forma financial information for the three months ended March 31, 2018 and 2017 presents the condensed consolidated statements 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.

  

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

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

 

2018

 

 

 

2017

 

Net sales

 

$

929

 

 

$

943

 

Net loss

 

 

(10

)

 

 

(3

)

Net loss per common share

 

 

 

 

 

 

 

 

     Basic

 

$

(0.29

)

 

$

(0.09

)

     Diluted

 

$

(0.29

)

 

$

(0.09

)

 

The following table outlines unaudited pro forma financial information for the three months ended March 31, 2018 and 2017:

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2018

 

 

2017

 

Amortization of purchased intangibles

 

$

5

 

 

$

5

 

 

Additionally, the nonrecurring pro forma adjustments affecting net loss for the three months ended March 31, 2018 and 2017 were as follows:  

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2018

 

 

2017

 

Acquisition-related expenses, pre-tax

 

$

 

 

$

(1

)

Restructuring, impairment and other charges, pre-tax

 

 

 

 

 

(1

)

Other pro forma adjustments, pre-tax

 

 

 

 

 

1

 

Income taxes

 

 

 

 

 

1

 

      

Note: A negative number in the table above represents a decrease to income in pro forma net income.

  

 

10


LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three Months Ended March 31, 2018 and 2017

(tabular amounts in millions, except per share data)

 

Note 3.  Revenue Recognition

 

Financial Statement Impact of Adopting ASC 606    

 

The Company adopted Accounting Standards Update No. 2014-09 “Revenue from Contracts with Customers (Topic 606)” (“ASC 606”, or the “standard”) on January 1, 2018 using the modified retrospective method for all contracts not completed as of the date of adoption.  The reported results for 2018 reflect the application of ASC 606 guidance while the reported results for 2017 were prepared and continue to be reported under the guidance of ASC 605, Revenue Recognition , which is also referred to herein as "previous guidance."  

 

The Company assessed all aspects of the standard’s potential impact and focused further assessment on customized products, deferred revenue and certain items in inventory, which are areas that were determined could have had a material impact on the Company’s accounting for revenue.  Potential impacts of other aspects of the standard have not had a material impact to the Company’s accounting for revenue.

 

The Company completed the evaluation of whether the accounting for revenue from customized products should be over time or at a point in time under the standard.  Based on analysis of specific terms associated with current customer contracts, the Company concluded that revenue should be recognized at a point in time for substantially all customized products.  This treatment is consistent with revenue recognition under previous guidance, where revenue was recognized when the products were completed and shipped to the customer (dependent upon specific shipping terms).  Any contracts whereby revenue for customized products should be recognized over time, as opposed to a point in time, are immaterial due to the de minimis nature of any particular order under such contracts in production at any given point in time.  As revenue recognition is dependent upon individual contractual terms, the Company will continue its evaluation of any new or amended contracts entered into, including contracts that the Company might assume as a result of acquisition activity.  

 

With respect to deferred revenue and certain items in inventory, the Company determined ASC 606 impacted the following situations:

 

 

Completed production billed to the customer but not yet shipped:  Under previous guidance, for a majority of these situations the Company deferred revenue for completed production items for which the customer had requested to be billed (or for which the Company is entitled to bill under the contract), but for which the production items had not yet shipped to the customer. Under ASC 606, based upon our evaluation of the contractual terms, the Company is typically able to recognize revenue once it completes production depending on the specific facts and circumstances.

 

Completed production held in inventory (including consigned inventory):  With certain customer contracts, the Company is permitted to complete a pre-defined amount of product and hold such inventory until the customer requests shipment (which generally is required to be delivered in the same year as production).  For these items, the Company has the contractual right to receive payment once the production is completed, regardless of the ultimate delivery date.  Under previous guidance, the Company held this as inventory and recognized revenue upon shipment to the customer.  Under ASC 606, based upon our evaluation of the contractual terms, the Company will be able to recognize revenue once it completes production.

 

Safety stock:  In very limited situations, the Company is permitted to produce and hold in inventory a pre-defined amount of safety stock.  Similar to completed production held in inventory, for these items the Company has the contractual right to receive payment for the pre-defined amount once the production is completed, regardless of the ultimate delivery date.  Under previous guidance, the Company held this as inventory and recognized revenue upon shipment to the customer. Under ASC 606, based upon our evaluation of the contractual terms, the Company is able to recognize revenue once it completes production.

 

11


LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three Months Ended March 31, 2018 and 2017

(tabular amounts in millions, except per share data)

 

Upon adoption of ASC 606, the Compa ny eliminated any deferred revenue and inventory associated with the above three categories against its accumulated deficit within total equity.  Based upon the balances that existed as of December 31, 2017, the Company recorded adjustments to the followin g accounts as of January 1, 2018:

 

 

 

As Reported

 

 

Adjustments

 

 

Adjusted

 

 

 

December 31,

 

 

Adoption of

 

 

January 1,

 

 

 

2017

 

 

ASC 606

 

 

2018

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Receivables, net

 

$

727

 

 

$

32

 

 

$

759

 

Inventories

 

 

238

 

 

 

(32

)

 

 

206

 

Deferred income taxes

 

 

51

 

 

 

(3

)

 

 

48

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Accrued liabilities

 

$

239

 

 

$

(12

)

 

$

227

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

(Accumulated deficit) retained earnings

 

$

(90

)

 

$

9

 

 

$

(81

)

 

As a result of the above adjustments, total assets decreased by $3 million, total liabilities decreased by $12 million and total equity increased by $9 million.  The equity adjustment was net of tax of $3 million.

 

The following tables compare impacted accounts from the reported condensed consolidated balance sheet and statement of operations, as of and for the three months ended March 31, 2018, to their pro forma amounts had the previous guidance been in effect:

 

 

 

As of March 31, 2018

 

 

 

As Reported

 

 

Adjustments

Adoption of

ASC 606

 

 

Pro forma as if the

previous standard

was in effect

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Receivables, net

 

$

694

 

 

$

(27

)

 

$

667

 

Inventories

 

 

242

 

 

 

9

 

 

 

251

 

Deferred income taxes

 

 

45

 

 

 

3

 

 

 

48

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Accrued liabilities

 

$

238

 

 

$

8

 

 

$

246

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated deficit

 

$

(4

)

 

$

(7

)

 

$

(11

)

 

12


LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three Months Ended March 31, 2018 and 2017

(tabular amounts in millions, except per share data)

 

The difference between the reported balances and the pro forma balances above is due to the deferred revenue and inventory in the pro forma balances associated with completed production billed to the customer but not yet shipped, completed production held in inventory (including consigned inventory) and safety stock.  

 

 

 

Three Months Ended

March 31, 2018

 

 

 

As Reported

 

 

Adjustments

Adoption of ASC 606

 

 

Pro forma as if the

previous standard

was in effect

 

Net sales

 

$

929

 

 

$

10

 

 

$

939

 

Cost of sales

 

 

808

 

 

 

8

 

 

 

816

 

Income tax benefit

 

 

(4

)

 

 

 

 

 

(4

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings per common share

 

 

 

 

 

 

 

 

 

 

 

 

     Basic net earnings per share

 

$

(0.32

)

 

$

0.06

 

 

$

(0.26)

 

     Diluted net earnings per share

 

 

(0.32

)

 

 

0.06

 

 

 

(0.26)

 

 

The differences between the reported balances and the pro forma balances above are due to the following impacts:

 

 

The completed production items for which control has passed to the customer and the customer had requested to be billed (or for which the Company is entitled to bill under the contract), but for which the production items had not yet shipped.  Under ASC 606, the Company recognizes revenue for items for which control has passed to the customer, which is typically once it completes production, while under previous guidance revenue would have been deferred until the production items were shipped.

 

Variable consideration relating to paper over-consumption penalties and under-consumption credits that are part of certain customer contracts and were previously recorded in cost of sales are now recorded within revenue.

 

The adoption of ASC 606 had no impact on the Company’s cash flows from operating activities.

 

 

Revenue Recognition Policy

 

The Company recognizes revenue at a point in time for substantially all customized products.  The point in time when revenue is recognized is when the performance obligation has been completed and the customer obtains control of the products, which is generally upon shipment to the customer (dependent upon specific shipping terms).

 

Under agreements with certain customers, custom products may be stored by the Company for future delivery.  Based upon contractual terms, the Company is typically able to recognize revenue once the performance obligation is satisfied and the customer obtains control of the completed product, usually when it completes production (depending on the specific facts and circumstances).   In these situations, the Company may also receive a logistics or warehouse management fee for the services it provides, which the Company recognizes over time as the services are provided.

 

With certain customer contracts, the Company is permitted to complete a pre-defined amount of custom products and hold such inventory until the customer requests shipment (which generally is required to be delivered in the same year as production).  For these items, which include consigned inventory, the Company has the contractual right to receive payment once the production is completed, regardless of the ultimate delivery date.  Based upon contractual terms, the Company recognizes revenue once the performance obligation has been satisfied and the customer obtains control of the completed products, usually when production is completed.

 

In very limited situations, the Company is permitted to produce and hold in inventory a pre-defined amount of custom products as safety stock.  Similar to completed production held in inventory, for these items the Company has the contractual right to receive payment for the pre-defined amount once the production is completed, regardless of the ultimate delivery date.  Based upon our evaluation of the contractual terms, the Company is able to recognize revenue once the performance obligation has been satisfied and the customer obtains control of the completed products, usually when production is completed.

 

13


LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three Months Ended March 31, 2018 and 2017

(tabular amounts in millions, except per share data)

 

Revenue from the Company’s print related services (including list processing, mail sortati on services and supply chain management) is recognized as services are completed over time.

 

Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services, which is based on transaction prices set forth in contracts with customers and an estimate of variable consideration, as applicable.  

 

Variable consideration results from volume rebates, fixed rebates, penalties or credits for paper consumption, and sales discounts that are offered within contracts between the Company and its customers and are recognized in the period the related revenue is recognized. Estimates of variable consideration are based on stated contract terms and an analysis of historical experience.  The amount of variable consideration is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period.

 

A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The majority of our contracts have a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts and, therefore, not distinct.  For contracts with multiple performance obligations, such as co-mail and catalog production, the transaction price allocated to each performance obligation is based on the price stated in the customer contract, which represents our best estimate of the standalone selling price of each distinct good or service in the contract.  

 

Billings for shipping and handling costs are recorded gross.  The Company made an accounting policy election under ASC 606 to account for shipping and handling after the customer obtains control of the good as fulfillment activities rather than as a separate service to the customer.  As a result, the Company accrues the costs of the shipping and handling if revenue is recognized for the related good before the fulfillment activities occur.

 

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

 

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

 

Contracts do not contain a significant financing component as payment terms on invoiced amounts are typically between 30 to 120 days, based on the Company’s credit assessment of individual customers, as well as industry expectations.

 

The timing of revenue recognition, billings and cash collections results in accounts receivable and unbilled receivables (contract assets), and customer advances and deposits (contract liabilities) on the condensed consolidated balance sheet.  Revenue recognition generally coincides with the Company’s contractual right to consideration and the issuance of invoices to customers.  Depending on the nature of the performance obligation and arrangements with customers, the timing of the issuance of invoices may result in contract assets or contract liabilities.  Contract assets related to unbilled receivables are recognized for satisfied performance obligations for which the Company cannot yet issue an invoice.  Contract liabilities result from advances or deposits from our customers on performance obligations not yet satisfied.

 

Because the majority of the Company’s products are customized, product returns are not significant; however, the Company accrues for the estimated amount of customer returns at the time of sale.

 

 

14


LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three Months Ended March 31, 2018 and 2017

(tabular amounts in millions, except per share data)

 

Disaggr egated Revenue

 

The following table provides information about disaggregated revenue by major products/service lines and timing of revenue recognition, and includes a reconciliation of the disaggregated revenue with reportable segments.

 

 

 

Three Months Ended

March 31, 2018

 

 

 

Print

 

 

Office Products

 

 

Total

 

Major Products/Service Lines

 

 

 

 

 

 

 

 

 

 

 

 

Book (a)

 

$

249

 

 

$

 

 

$

249

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Magazines, Catalogs and Retail Inserts (b)

 

$

526

 

 

$

 

 

$

526

 

     North America

 

 

468

 

 

 

 

 

 

468

 

     Europe

 

 

58

 

 

 

 

 

 

58

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Directories

 

$

31

 

 

$

 

 

$

31

 

     North America

 

 

27

 

 

 

 

 

 

27

 

     Europe

 

 

4

 

 

 

 

 

 

4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Office Products

 

$

 

 

$

123

 

 

$

123

 

Total

 

$

806

 

 

$

123

 

 

$

929

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Timing of Revenue Recognition

 

 

 

 

 

 

 

 

 

 

 

 

Products and services transferred at a point in time

 

$

702

 

 

$

123

 

 

$

825

 

Products and services transferred over time

 

 

104

 

 

 

 

 

 

104

 

Total

 

$

806

 

 

$

123

 

 

$

929

 

 

(a)

Includes the pre media services, e-book formatting and supply chain management associated with book production.

 

(b)

Includes pre-media, co-mail and logistics services associated with the production of catalogs and magazines.  

 

 

Contract Balances

 

The following table provides information about receivables, contract assets and contract liabilities from contracts with customers:

 

 

 

As of

March 31, 2018

 

 

As of

January 1, 2018

 

Trade receivables

 

$

584

 

 

$

647

 

Short-term contract assets

 

 

28

 

 

 

31

 

Long-term contract assets

 

 

34

 

 

 

36

 

Short-term contract liabilities

 

 

18

 

 

 

21

 

 

 

 

 

 

 

 

 

 

 

15


LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three Months Ended March 31, 2018 and 2017

(tabular amounts in millions, except per share data)

 

Significant changes in the contract assets and the contract liabilities balances during the period are as follows:

 

 

 

 

As of March 31, 2018

 

 

 

Contract Assets

 

 

Contract Liabilities

 

Revenue recognized that was included in contract liabilities as of January 1, 2018

 

$

 

 

$

(17

)

Increases due to cash received

 

 

 

 

 

14

 

Payment of contract acquisition costs

 

 

1

 

 

 

 

Additions to unbilled accounts receivable

 

 

15

 

 

 

 

Amortization of contract acquisition costs

 

 

(3

)

 

 

 

Unbilled accounts receivable recognized as receivables

 

 

(18

)

 

 

 

 

Transactions affecting the allowances for doubtful accounts receivable balance during the three months ended March 31, 2018 were as follows:

 

 

 

As of

March 31, 2018

 

Balance, beginning of year

 

$

11

 

Provisions charged to expense

 

 

2

 

Balance, end of period

 

$

13

 

 

 

Contract Acquisition Costs

 

In connection with the adoption of ASC 606, we are required to capitalize certain contract acquisition costs.  As of December 31, 2017 under previous guidance, we had capitalized $36 million in contract acquisition costs related to contracts that were not completed.  The Company did not have any other costs that were required to be capitalized on January 1, 2018 with the adoption of ASC 606.  For contracts that have a duration of less than one year, the Company follows the ASC 606 practical expedient approach and expenses these costs when incurred; for contracts with life exceeding one year, the Company records these costs in proportion to each completed contract performance obligation.  In the three months ended March 31, 2018, the amount of amortization was $3 million and there was no impairment loss in relation to costs capitalized.

 

 

 

Note 4.  Inventories

 

The components of the Company’s inventories, net of excess and obsolescence reserves for raw materials and finished goods, at March 31, 2018 and December 31, 2017 were as follows:    

 

 

 

March 31,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Raw materials and manufacturing supplies

 

$

138

 

 

$

114

 

Work in process

 

 

65

 

 

 

69

 

Finished goods

 

 

96

 

 

 

112

 

Last in, first out reserve ("LIFO")

 

 

(57

)

 

 

(57

)

Total

 

$

242

 

 

$

238

 

 

            

16


LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three Months Ended March 31, 2018 and 2017

(tabular amounts in millions, except per share data)

 

Note 5.  Property, Plant and Equipment

 

The components of the Company’s property, plant and equipment at March 31, 2018 and December 31, 2017 were as follows:

 

 

 

March 31,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Land

 

$

46

 

 

$

45

 

Buildings

 

 

748

 

 

 

739

 

Machinery and equipment

 

 

4,111

 

 

 

4,012

 

 

 

 

4,905

 

 

 

4,796

 

Accumulated depreciation

 

 

(4,340

)

 

 

(4,220

)

Total

 

$

565

 

 

$

576

 

 

During the three months ended March 31, 2018 and 2017, depreciation expense was $31 million and $35 million, respectively.

 

    

Assets Held for Sale

 

Primarily as a result of restructuring actions, certain facilities and equipment are considered held for sale. The net book value of assets held for sale was $7 million each at March 31, 2018 and December 31, 2017.  These assets were included in other current assets in the condensed consolidated balance sheets at the lower of their historical net book value or their estimated fair value, less estimated costs to sell.  

 

    

Note 6.  Goodwill and Other Intangible Assets  

   

The changes in the carrying amount of goodwill for the three months ended March 31, 2018 were as follows:

 

 

 

Print

 

 

Office Products

 

 

Total

 

Net book value as of December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

$

934

 

 

$

110

 

 

$

1,044

 

Accumulated impairment losses

 

 

(883

)

 

 

(79

)

 

 

(962

)

Total

 

 

51

 

 

 

31

 

 

 

82

 

Net book value as of March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

 

936

 

 

 

110

 

 

 

1,046

 

Accumulated impairment losses

 

 

(885

)

 

 

(79

)

 

 

(964

)

Total

 

$

51

 

 

$

31

 

 

$

82

 

 

The components of other intangible assets at March 31, 2018 and December 31, 2017 were as follows:  

 

 

 

March 31, 2018

 

 

December 31, 2017

 

 

 

Gross  Carrying

 

 

Accumulated

 

 

Net Book

 

 

Gross  Carrying

 

 

Accumulated

 

 

Net Book

 

 

 

Amount

 

 

Amortization

 

 

Value

 

 

Amount

 

 

Amortization

 

 

Value

 

Customer relationships

 

$

256

 

 

$

(129

)

 

$

127

 

 

$

256

 

 

$

(125

)

 

$

131

 

Trade names

 

 

9

 

 

 

(5

)

 

 

4

 

 

 

9

 

 

 

(4

)

 

 

5

 

Total amortizable other intangible assets

 

 

265

 

 

 

(134

)

 

 

131

 

 

 

265

 

 

 

(129

)

 

 

136

 

Indefinite-lived trade names

 

 

24

 

 

 

 

 

 

24

 

 

 

24

 

 

 

 

 

 

24

 

Total other intangible assets

 

$

289

 

 

$

(134

)

 

$

155

 

 

$

289

 

 

$

(129

)

 

$

160

 

 

During the three months ended March 31, 2018 and 2017, amortization expense for other intangible assets was $5 million and $4 million, respectively.

17


LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three Months Ended March 31, 2018 and 2017

(tabular amounts in millions, except per share data)

 

  

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

 

For the year ending December 31,

 

Amount

 

2018

 

$

17

 

2019

 

 

16

 

2020

 

 

16

 

2021

 

 

14

 

2022

 

 

13

 

2023 and thereafter

 

 

60

 

Total

 

$

136

 

           

 

Note 7.  Restructuring, Impairment and Other Charges      

 

For the three months ended March 31, 2018 and 2017, the Company recorded the following net restructuring, impairment and other charges:  

 

Three Months Ended                        

March 31, 2018

 

Employee

Terminations

 

 

Other

Restructuring

Charges

 

 

Total

Restructuring

Charges

 

 

Impairment

 

 

Other

Charges

 

 

Total

 

Print

 

$

3

 

 

$

3

 

 

$

6

 

 

$

(1

)

 

$

 

 

$

5

 

Office Products

 

 

1

 

 

 

 

 

 

1

 

 

 

 

 

 

 

 

 

1

 

Total

 

$

4

 

 

$

3

 

 

$

7

 

 

$

(1

)

 

$

 

 

$

6

 

 

 

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

 

    

Restructuring and Impairment Charges        

 

For the three months ended March 31, 2018, the Company incurred employee-related restructuring charges of $4 million for an aggregate of 196 employees, of whom 132 were terminated as of or prior to March 31, 2018.   These charges primarily related to the closure of one facility in the Print segment and the reorganization of certain business units.  The Company incurred other restructuring charges of $3 million for the three months ended March 31, 2018 for facility costs and pension withdrawal obligations related to facility closures.   

 

As a result of a $1 million adjustment of previously recorded goodwill associated with the 2017 acquisitions, there was a reduction of $1 million of goodwill impairment charges during the three months ended March 31, 2018.  Refer to Note 2, Business Combinations , for more information.    

 

For the three months ended March 31, 2017, employee-related restructuring charges of $4 million related to an aggregate of 198 employees, substantially all of whom were terminated as of or prior to March 31, 2018.  These charges primarily related to the reorganization of certain business units and corporate functions.   

 

 

18


LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three Months Ended March 31, 2018 and 2017

(tabular amounts in millions, except per share data)

 

Other Charges  

 

For the three months ended March 31, 2018, the Company recorded a de minimis amount of other charges for multiemployer pension plan withdrawal obligations unrelated to facility closures.  The total liability for the withdrawal obligations associated with the Company’s decision to withdraw from certain multiemployer pension plans included $3 million in accrued liabilities and $19 million in restructuring and multiemployer pension liabilities at March 31, 2018.    

 

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

 

For the three months ended March 31, 2017, the Company recorded other charges of $1 million for multiemployer pension plan withdrawal obligations unrelated to facility closures.

 

 

Restructuring Reserve

 

The restructuring reserve as of March 31, 2018 and December 31, 2017, and changes during the three months ended March 31, 2018 were as follows:

 

 

 

December 31,

2017

 

 

Restructuring

Charges

 

 

Other

 

 

Cash

Paid

 

 

March 31,

2018

 

Employee terminations

 

$

8

 

 

$

4

 

 

$

 

 

$

(3

)

 

$

9

 

Multiemployer pension plan withdrawal

     obligations

 

 

16

 

 

 

1

 

 

 

19

 

 

 

(1

)

 

 

35

 

Other

 

 

2

 

 

 

2

 

 

 

 

 

 

(2

)

 

 

2

 

Total

 

$

26

 

 

$

7

 

 

$

19

 

 

$

(6

)

 

$

46

 

 

The current portion of restructuring reserves of $17 million at March 31, 2018 was included in accrued liabilities, while the long-term portion of $29 million, which primarily related to multiemployer pension plan withdrawal obligations related to facility closures, was included in restructuring and multiemployer pension liabilities at March 31, 2018.    

      

During the three months ended March 31, 2018, the Company reclassified $19 million of multiemployer pension plan withdrawal obligations from non-restructuring liabilities to restructuring liabilities, of which $3 million and $16 million were recorded in the current and long-term portions of the reserves, respectively.  The reclassification was primarily due to a facility closure in the Print segment during the three months ended March 31, 2018.

 

The Company anticipates that payments associated with the employee terminations reflected in the above table will be substantially completed by March 31, 2019.    

 

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

 

The restructuring liabilities classified as “other” consisted of other facility closing costs.  

 

 

19


LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three Months Ended March 31, 2018 and 2017

(tabular amounts in millions, except per share data)

 

Note 8.  Commitments and Contingencies  

 

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

 

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

 

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

 

 

Note 9.  Debt

 

The Company’s debt at March 31, 2018 and December 31, 2017 consisted of the following:  

 

 

 

March 31, 2018

 

 

December 31, 2017

 

Borrowings under the Revolving Credit Facility

 

$

130

 

 

$

75

 

Term Loan Facility due September 30, 2022 (a)

 

 

294

 

 

 

306

 

8.75% Senior Secured Notes due October 15, 2023

 

 

450

 

 

 

450

 

Capital lease obligations

 

 

2

 

 

 

3

 

Unamortized debt issuance costs

 

 

(11

)

 

 

(12

)

Total debt

 

 

865

 

 

 

822

 

Less: current portion

 

 

(176

)

 

 

(123

)

Long-term debt

 

$

689

 

 

$

699

 

  

 

(a)

The borrowings under the Term Loan Facility are subject to a variable interest rate.  As of March 31, 2018 and December 31, 2017, the interest rate was 7.38% and 7.07%, respectively.     

__________________________________

 

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

 

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

 

 

 

20


LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three Months Ended March 31, 2018 and 2017

(tabular amounts in millions, except per share data)

 

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

 

 

Term Loan Facility

 

On November 17, 2017, the Company amended the Credit Agreement to reduce the interest rate for the Term Loan Facility by 50 basis points and the LIBOR “floor” was also reduced by 25 basis points.   Other terms, including the outstanding principal, maturity date and debt covenants were not amended.  Select terms on the Term Loan Facility before and after the amendment include:

 

 

Before Amendment

After Amendment

 

Interest rate (Company's option)

Base rate + 5.00%; or

LIBOR + 6.00%

Base rate + 4.50%; or

LIBOR + 5.50%

 

LIBOR floor

1.00%

0.75%

 

Amortization

$13 million, first eight quarters;

$11 million quarterly thereafter

(as of original effective date)

$13 million, first eight quarters;

$11 million quarterly thereafter

(as of original effective date)

 

Maturity

September 30, 2022

September 30, 2022

 

 

Under the terms of the Term Loan Facility, each of the syndicated lenders is deemed to have loaned a specific amount to the Company and has the right to repayment from the Company directly.  Therefore, we concluded that the Term Loan Facility is a loan syndication under U.S. GAAP.  As such, in order to determine whether the debt was modified or extinguished as a result of the amendment, we examined the amount of principal pre- and post-amendment by individual lender.  As a result, we determined that $65 million of outstanding principal had been extinguished as of November 17, 2017, even though the total outstanding principal amongst all lenders pre- and post-amendment remained unchanged.       

 

Consequently, the amendment resulted in a pre-tax loss on debt extinguishment of $3 million related to the unamortized discount and debt issuance costs attributable to the $65 million of outstanding principal that had been considered extinguished.  There was no net impact as of November 17, 2017 to cash and cash equivalents, total outstanding principal remained unchanged, and no cash was exchanged between the lenders and the Company (other than customary administrative fees).  

 

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.

 

 

Additional Debt Issuances Information

 

The fair values of the Senior Notes and Term Loan Facility that were determined using the market approach based upon interest rates available to the Company for borrowings with similar terms and maturities, were determined to be Level 2 under the fair value hierarchy.  The fair value of the Company’s debt was greater than its book value by approximately $16 million and $20 million at March 31, 2018 and December 31, 2017, respectively.  

 

There were $130 million and $75 million of borrowings under the Revolving Credit Facility as of March 31, 2018 and December 31, 2017, respectively.  The weighted-average interest rate on borrowings under the Company’s Revolving Credit Facility was 4.73% during the three months ended March 31, 2018.  

 

There were $20 million and $17 million of net interest expense during the three months ended March 31, 2018 and 2017, respectively.

        

21


LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three Months Ended March 31, 2018 and 2017

(tabular amounts in millions, except per share data)

 

 

Note 10.  Equity

 

The Company’s equity as of December 31, 2017 and March 31, 2018 and changes during the three months ended March 31, 2018 were as follows:

 

 

 

Total Equity

 

Balance at December 31, 2017

 

$

248

 

Net loss

 

 

(11

)

Other comprehensive income

 

 

9

 

Share-based compensation

 

 

3

 

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

 

 

(2

)

Revenue recognition adjustments

 

 

9

 

Cash dividends paid

 

 

(9

)

Balance at March 31, 2018

 

$

247

 

  

During the three months ended March 31, 2018, the Company recorded $9 million in equity adjustments as a result of the adoption of ASC 606.  Refer to Note 3, Revenue Recognition , for more information.    

 

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

 

              

On March 28, 2017, in connection with the over-allotment option granted to the underwriters as part of the secondary sale by RRD, LSC Communications completed the sale of approximately 0.9 million shares of common stock, receiving proceeds of $18 million.  

    

 

Note 11.  Earnings Per Share

 

During the three months ended March 31, 2018 and 2017, no shares of common stock were purchased by the Company, however, a de minimis amount of shares were withheld from employees for tax liabilities upon vesting of equity awards.     

 

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

 

22


LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three Months Ended March 31, 2018 and 2017

(tabular amounts in millions, except per share data)

 

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

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2018

 

 

2017

 

Net loss per common share:

 

 

 

 

 

 

 

 

     Basic

 

$

(0.32

)

 

$

(0.02

)

     Diluted

 

$

(0.32

)

 

$

(0.02

)

Dividends declared per common share

 

$

0.26

 

 

$

0.25

 

Numerator:

 

 

 

 

 

 

 

 

     Net loss

 

$

(11

)

 

$

(1

)

Denominator:

 

 

 

 

 

 

 

 

     Weighted average number of common shares outstanding

 

 

34.7

 

 

 

32.6

 

     Dilutive options and awards

 

 

 

 

 

 

     Diluted weighted average number of common shares outstanding

 

 

34.7

 

 

 

32.6

 

                  

 

Note 12.  Retirement Plans

 

The Company is the sole sponsor of certain defined benefit pension plans that are included in the condensed consolidated balance sheets as of March 31, 2018 and December 31, 2017.   The components of the estimated net pension (income) loss for the three months ended March 31, 2018 and 2017 were as follows:

 

 

 

Three Months Ended

March 31,

 

 

 

2018

 

 

 

 

 

 

2017

 

 

 

 

 

 

 

Qualified

 

 

Non-Qualified

& International

 

 

Total

 

 

Qualified

 

 

Non-Qualified

& International

 

 

Total

 

Interest cost

 

$

21

 

 

$

1

 

 

$

22

 

 

$

22

 

 

$

1

 

 

$

23

 

Expected return on plan assets

 

 

(39

)

 

 

 

 

 

(39

)

 

 

(38

)

 

 

 

 

 

(38

)

Amortization of actuarial loss

 

 

5

 

 

 

 

 

 

5

 

 

 

4

 

 

 

 

 

 

4

 

Net periodic benefit (income) loss

 

$

(13

)

 

$

1

 

 

$

(12

)

 

$

(12

)

 

$

1

 

 

$

(11

)

 

The net pension income of $12 million and $11 million for the three months ended March 31, 2018 and 2017, respectively, is included in the investment and other income-net line item in the condensed consolidated statements of operations.    

    

 

Note 13.  Comprehensive Income

 

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

 

 

 

Pension

Plan Cost

 

 

Translation

Adjustments

 

 

Total

 

Balance at December 31, 2017

 

$

(428

)

 

$

(48

)

 

$

(476

)

Other comprehensive income before reclassifications

 

 

 

 

 

5

 

 

 

5

 

Amounts reclassified from accumulated other comprehensive loss

 

 

4

 

 

 

 

 

 

4

 

Reclassification to accumulated deficit

 

 

(97

)

 

 

 

 

 

(97

)

Net change in accumulated other comprehensive loss

 

 

(93

)

 

 

5

 

 

 

(88

)

Balance at March 31, 2018

 

$

(521

)

 

$

(43

)

 

$

(564

)

23


LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three Months Ended March 31, 2018 and 2017

(tabular amounts in millions, except per share data)

 

 

The Company adopted ASU 2018-02 “Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“ASU 2018-02”) in the first quarter of 2018.   As a result of applying this standard in the period of adoption, the Company reclassified $97 million relating to the change in tax rate from accumulated other comprehensive loss to accumulated deficit in the Company’s condensed consolidated balance sheet as of March 31, 2018.   ASU 2018-02 eliminates the stranded tax effects resulting from the Tax Act and will improve the usefulness of information reported to financial statement users.

 

The following table summarizes 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.

 

 

 

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

)

 

Refer to the condensed consolidated statements of comprehensive income for the components of comprehensive income for the three months ended March 31, 2018 and 2017.

 

Reclassifications from accumulated other comprehensive loss for the three months ended March 31, 2018 and 2017 were as follows:    

 

 

 

Three Months Ended

March 31,

 

 

 

2018

 

 

2017

 

Amortization of pension plan cost:

 

 

 

 

 

 

 

 

Net actuarial loss (a)

 

$

5

 

 

$

4

 

Reclassifications before tax

 

 

5

 

 

 

4

 

Income tax expense

 

 

1

 

 

 

1

 

Reclassifications, net of tax

 

$

4

 

 

$

3

 

  

 

(a)

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

      

 

Note 14.  Shared-Based Compensation

 

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

 

Total compensation expense related to all share based compensation plans for the Company’s employees, officers and directors was $3 million for each of the three months ended March 31, 2018 and 2017.  There were net tax benefits of a de minimis amount and $1 million for the three months ended March 31, 2018 and 2017, respectively.

 

There was no significant activity related to stock options, RSAs and performance restricted stock during the three months ended March 31, 2018.

  

 

24


LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three Months Ended March 31, 2018 and 2017

(tabular amounts in millions, except per share data)

 

Restricted Stock Units

 

A summary of the Company’s RSU activity for LSC Communications, RRD and Donnelley Financial employees, officers and directors as of December 31, 2017 and March 31, 2018, and changes during the three months ended March 31, 2018 is presented below.

 

 

 

Shares

(thousands)

 

 

Weighted

Average Grant

Date Fair Value

 

Nonvested at December 31, 2017

 

 

704

 

 

$

28.64

 

Granted

 

 

460

 

 

 

12.34

 

Vested

 

 

(219

)

 

 

33.25

 

Forfeited

 

 

(2

)

 

 

26.72

 

Nonvested at March 31, 2018

 

 

943

 

 

$

19.29

 

 

During the three months ended March 31, 2018, 459,855 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, 2021.  As of March 31, 2018, the total potential payout for the awards granted during the three months ended March 31, 2018 is 459,855 RSUs.  The fair value of these awards was determined based on the Company’s stock price on the grant date reduced by the present value of expected dividends through the vesting period.   These awards are subject to forfeiture upon termination of employment prior to vesting, subject in some cases to early vesting upon specified events, including death, permanent disability or retirement of the grantee or change of control of the Company .

 

Compensation expense related to LSC Communications, RRD and Donnelley Financial RSUs held by Company employees, officers and directors was $2 million for each of the three months ended March 31, 2018 and 2017.  As of March 31, 2018, there was $11 million of unrecognized share-based compensation expense related to the approximately 0.9 million RSUs outstanding, with a weighted-average grant date fair value of $19.29, that are expected to vest over a weighted average period of 2.0   years.  

 

 

Performance Share Units  

 

A summary of performance share units (“PSUs”) activity for the Company’s employees as of December 31, 2017 and March 31, 2018, and changes during the three months ended March 31, 2018 is presented below .

 

 

 

Shares

(thousands)

 

 

Weighted

Average Grant

Date Fair Value

 

Nonvested at December 31, 2017

 

 

29

 

 

$

26.72

 

Granted

 

 

249

 

 

 

12.67

 

Forfeited

 

 

(1

)

 

 

26.72

 

Nonvested at March 31, 2018

 

 

277

 

 

$

14.09

 

 

The 2018 and 2017 grants consisted of 242,965 and 28,520 PSUs, respectively, granted during the three months ended March 31, 2018 and 2017 to certain members of senior management, respectively, payable upon the achievement of certain established performance targets.  The performance period for the units awarded in 2018 and 2017 is January 1, 2018 to December 31, 2020 and January 1, 2017 to December 31, 2017, respectively.  The performance target for the PSUs granted in 2017 was exceeded, and compensation expense is now being recognized based on an estimated payout of 33,708 shares.  In addition to being subject to achievement of the performance target, the PSUs granted in 2018 and 2017 are also subject to time-based vesting on March 2, 2021 and March 2, 2020, respectively.  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.  

25


LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three Months Ended March 31, 2018 and 2017

(tabular amounts in millions, except per share data)

 

 

Compensation expense for the 2018 PSUs granted during the three months ended March 31, 2018 is being recognized based on an estimated payout of 242,965 shares.  There was a de minimis amount of compensation expense related to PSUs for each of the three months ended March 31, 2018 and 2017.  As of March 31, 2018, there was $3 million of unrecognized compensation expense related to PSUs, which is expected to be recognized over a weighted average period of 2.8   years.        

      

 

Note 15.  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, logistics 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, catalogs 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, envelopes, note-taking products, binder products, and forms. 

 

 

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.

 

 

Information by Segment

 

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

 

 

 

Net

Sales

 

 

Income (loss)

from

Operations

 

 

Assets of

Operations

 

 

Depreciation

and

Amortization

 

 

Capital

Expenditures

 

Three months ended

March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Print

 

$

806

 

 

$

2

 

 

$

1,501

 

 

$

34

 

 

$

19

 

Office Products

 

 

123

 

 

 

2

 

 

 

372

 

 

 

4

 

 

 

 

Total operating segments

 

 

929

 

 

 

4

 

 

 

1,873

 

 

 

38

 

 

 

19

 

Corporate

 

 

 

 

 

(10

)

 

 

84

 

 

 

 

 

 

1

 

Total operations

 

$

929

 

 

$

(6

)

 

$

1,957

 

 

$

38

 

 

$

20

 

 

          

26


LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three Months Ended March 31, 2018 and 2017

(tabular amounts in millions, except per share data)

 

 

 

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

 

 

 

 

 

(14

)

 

 

110

 

 

 

1

 

 

 

1

 

Total operations

 

$

821

 

 

$

7

 

 

$

1,892

 

 

$

40

 

 

$

21

 

 

Restructuring, impairment and other charges by segment for the three months ended March 31, 2018 and 2017 are disclosed in Note 7, Restructuring, Impairment and Other Charges.        

            

 

Note 16.  Related Parties  

 

On March 28, 2017, RRD completed the sale of approximately 6.2 million shares of LSC Communications common stock, representing its entire 19.25% retained ownership.    

  

 

Transactions with RRD  

      

Revenues and Purchases    

 

Given that RRD sold its remaining stake in LSC Communications on March 28, 2017, the following information is presented for the three months ended March 31, 2017 only. 

 

LSC Communications generates net revenue from sales to RRD’s subsidiaries.  Net revenues from related party sales were $32 million for the three months ended March 31, 2017.

 

LSC Communications utilizes RRD for freight, logistics and premedia services.  There were cost of sales of $51 million related to freight, logistics and premedia services purchased from RRD for the three months ended March 31, 2017.  These amounts are included in the condensed consolidated statements of operations.    

  

 

Note 17.  New Accounting Pronouncements      

    

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.   In January 2018, the FASB issued Accounting Standards Update No. 2018-01 “Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842” (“ASU 2018-01”).  The amendments in ASU 2018-01 permit an entity to elect an optional transition practical expedient to not evaluate under Topic 842 land easements that exist or expired before the entity’s adoption of Topic 842 and that were not previously accounted for as leases under Topic 840.  An entity that does not elect this practical expedient should evaluate all existing or expired land easements in connection with the adoption of the new lease requirements in Topic 842 to assess whether they meet the definition of a lease.   The Company plans to elect the optional transition practical expedient.   The standard 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 currently evaluating the impact of the provisions of ASU 2016-02  and anticipates it will be able to complete its analysis of all potential impacts of the standard, 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 2019.      

 

  

Note 18.  Subsequent Events

 

27


LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three Months Ended March 31, 2018 and 2017

(tabular amounts in millions, except per share data)

 

On May 2, 2018, the Company announced that it has entered into a definitive agreement to acquire RRD’s Print Logistics business, a leading integrated logistics services provider to the print industry with an expansive distribution network.  

 

On May 2, 2018, the Company announced that it has entered into a definitive agreement to sell its retail offset printing facilities, which are included in the Company’s magazines, catalogs and retail inserts reporting unit, to Trend Offset Printing.  

 

The acquisition and sale have not been completed as of May 3, 2018, the date of the filing of the Form 10-Q for the quarter ended March 31, 2018.  

 

 

 

28


 

ITEM 2. MANAGEMENT’S DISCUSS ION 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, 2018 and December 31, 2017 and the results of operations for the three months ended March 31, 2018 and 2017.  This commentary should be read in conjunction with the condensed consolidated financial statements and accompanying notes included in Item 1 Condensed Consolidated Financial Statements.  Refer to the Company’s annual report on Form 10-K, as filed with the Securities and Exchange Commission on February 22, 2018, for management’s discussion and analysis of the financial condition of the company as of December 31, 2017 and December 31, 2016, and the results of operations for the years ended December 31, 2017, 2016 and 2015.                          

                  

                 

Company Overview

 

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.

      

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 stockholders on October 1, 2016.  RRD retained a 19.25% ownership stake in both LSC Communications and Donnelley Financial.  On October 1, 2016, RRD stockholders of record as of the close of business on September 23, 2016 (“the record date”) 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.   On March 28, 2017, RRD completed the sale of approximately 6.2 million shares of LSC Communications common stock, representing its entire 19.25% retained ownership.  

 

    

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, logistics 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, catalogs 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, envelopes, note-taking products, binder products, and forms.

 

 

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.

 

 

29


 

Business Combinations

 

The following table lists the Company’s acquisitions sinc e the beginning of 2017:

 

Date

Company

Description

Purchase Price

November 29, 2017

The Clark Group, (“Clark Group”)

Third-party logistics provider of distribution, consolidation, transportation management and international freight forwarding services

$25 million in cash

November 9, 2017

Quality Park

Producer of envelopes, mailing supplies and assorted packaging items

$41 million in cash

September 7, 2017

Publishers Press

Printing provider with capabilities such as web-offset printing, prepress and distribution services for magazines and retail brands

$68 million in cash

August 21, 2017

NECI, LLC ("NECI")

Supplier of commodity and specialty filing supplies

$6 million in cash

August 17, 2017

CREEL Printing ("CREEL")

Offset and digital printing company

$79 million in cash

July 28, 2017

Fairrington Transportation Corp., F.T.C. Transport, Inc. and F.T.C. Services, Inc. (“Fairrington”)

Full-service, printer-independent mailing logistics provider in the United States

$19 million in cash and ~1.0 million shares of LSC common stock (total value $39 million)

March 1, 2017

HudsonYards Studios ("HudsonYards")

Digital and print premedia production company that provides high-quality creative retouching, computer-generated imagery, mechanical creation, press-ready file preparation, and interactive production services

$3 million in cash

 

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

  

 

Outlook

 

Competitive Environment

 

According to the January 2018 IBIS World industry report  “Printing in the U.S.,”  estimated total annual printing industry revenue is approximately $75 billion, of which approximately $12 billion relates to our core segments of the print market and an additional approximately $31 billion pertains to related segments of the print market in which we are able to offer certain products. Despite consolidation in recent years, including several acquisitions completed by LSC Communications, the industry remains highly fragmented and LSC Communications is one of the largest players in our segment of the print market.  The print and related services industry, in general, continues to have excess capacity and LSC Communications remains diligent in proactively identifying plant consolidation opportunities to keep our capacity in line with demand.  Across the Company’s range of Print 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 Communications’ co-mail, logistics and supply chain management offerings, enable customers to lower their total costs. Technological changes, including the electronic distribution of documents and data, online distribution and hosting of media content, and advances in digital printing, print-on-demand and internet technologies, continue to impact the market for our products and services.  The impact of digital technologies has been felt in many print products.  Digital technologies have impacted printed magazines as some advertising spending has moved from print to electronic media.   Catalogs have experienced volume reductions as our customers allocate more of their spending to online resources and also face stiff competition from online retailers resulting in retailer compression.   Educational books within the college market continue to be impacted by electronic substitution and other trends.  The K-12 educational sector continues to be focused on increasing digital distribution but there has been inconsistent adoption across school systems.   E-book substitution has impacted overall consumer print trade book volume, although e-book adoption  rates have stabilized and industry-wide print book volume has been growing in recent years.   In addition, retail inserts have experienced volume reductions primarily as a result of store closures and reduced newspaper circulation.   Electronic  communication and transaction technology has also continued to drive electronic substitution in directory printing, in part driven by cost pressures at key customers.

30


 

 

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

 

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

 

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

 

 

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 2018 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 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 financial results.  We have undertaken various strategic initiatives to try to mitigate any foreseeable supply disruptions with respect to our ink requirements, including entering into a long term supply arrangement with a single supplier for a substantial portion of our ink supply.  Certain contractual protections exist in our relationship with such supplier, such as price and quality protections and an ability to seek alternative sources of ink if the supplier breaches or is unable to perform certain of its obligations, which are intended to mitigate the risk of ink-related supply disruptions.

 

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

 

31


 

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 consolidated balance sheets, statements of operations and cash flows.

 

 

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 $6 million to its pension benefit plans for the full year in 2018, of which $1 million has been contributed during three months ended March 31, 2018.  

 

Based on the fair value of assets and the estimated discount rate used to value benefit obligations as of March 31, 2018, the Company estimates the unfunded status of the pension benefit plans would approximate $140 million compared to $187 million at December 31, 2017.

 

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

 

 

Significant Accounting Policies

 

There have been no changes to the Company’s significant accounting policies disclosed in the annual report on Form 10-K for the year-ended December 31, 2017, with the exception of revenue recognition.  During the first quarter of 2018, the Company adopted ASU 2014-09 “Revenue from Contracts with Customers (Topic 606) (“ASC 606”, or the “standard”) , as discussed in the Company’s annual report on Form 10-K.  The adoption of ASC 606 did not have a material impact on the Company’s financial position or results of operations.  See Note 3, Revenue Recognition , for more information. 

 

 

FINANCIAL REVIEW

 

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

 

 

32


 

Results of Operations for the Three Months Ended March 31, 2018 as Compared to the Three Months Ended March 31, 2017

 

The following table shows the results of operations for the three months ended March 31, 2018 and 2017, which reflects the results of the acquired businesses from the relevant acquisition dates:

 

 

 

Three Months Ended

March 31,

 

 

 

 

 

 

 

 

 

 

 

2018

 

 

2017

 

 

$ Change

 

 

% Change

 

 

 

(in millions, except percentages)

 

Net sales

 

$

929

 

 

$

821

 

 

$

108

 

 

 

13.2

%

Cost of sales

 

 

808

 

 

 

692

 

 

 

116

 

 

 

16.8

%

Cost of sales as a % of net sales

 

 

87.0

%

 

 

84.3

%

 

 

 

 

 

 

 

 

Selling, general and administrative expenses (exclusive of depreciation and

     amortization)

 

 

83

 

 

 

76

 

 

 

7

 

 

 

9.2

%

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

 

 

8.9

%

 

 

9.3

%

 

 

 

 

 

 

 

 

Restructuring, impairment and other charges-net

 

 

6

 

 

 

6

 

 

 

 

 

 

0.0

%

Depreciation and amortization

 

 

38

 

 

 

40

 

 

 

(2

)

 

 

(5.0

%)

(Loss) income from operations

 

$

(6

)

 

$

7

 

 

$

(13

)

 

 

(185.7

%)

 

Condensed Consolidated Results            

 

Net sales for the three months ended March 31, 2018 were $929 million, an increase of $108 million, or 13.2%, compared to the three months ended March 31, 2017.  Net sales were impacted by:

 

 

Increases due to the acquisitions of Clark Group, CREEL, Publishers Press, Fairrington, and HudsonYards in 2017 (the “MCR 2017 acquisitions”), and the acquisitions of Quality Park and NECI in 2017 (the “Office Products 2017 acquisitions”) (together with the MCR 2017 acquisitions, the “2017 acquired companies”), partially offset by price declines; and

 

A $12 million, or 1.5%, increase due to changes in foreign exchange rates, primarily in Polish Zloty.

 

Additionally, on a pro forma basis, the Company’s net sales decreased by approximately $14 million or 1.5% (see Note 2, Business Combinations , to the condensed consolidated financial statements).    

 

Total cost of sales increased $116 million, or 16.8%, for the three months ended March 31, 2018 compared to the three months ended March 31, 2017, primarily due to the cost of sales incurred by the 2017 acquired companies, an $11 million increase due to changes in foreign exchange rates, primarily in Polish Zloty, increased costs of raw materials, and the mix of volume.

 

As a percentage of net sales, cost of sales increased from 84.3% for the three months ended March 31, 2017 to 87.0% for the three months ended March 31, 2018 primarily due to price pressures and increased costs of raw materials.

 

Selling, general and administrative expenses increased $7 million to $83 million for the three months ended March 31, 2018 compared to the three months ended March 31, 2017, primarily driven by expenses incurred by the 2017 acquired companies, partially offset by lower separation-related expenses.            

 

As a percentage of net sales, selling, general and administrative expenses decreased from 9.3% for the three months ended March 31, 2017 to 8.9% for the three months ended March 31, 2018 primarily due to cost control initiatives.

 

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

 

 

Employee termination costs of $4 million related to an aggregate of 196 employees, of whom 132 were terminated as of or prior to March 31, 2018.  These charges primarily related to one facility closure in the Print segment and the reorganization of certain business units;

 

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

 

As a result of a $1 million adjustment of previously recorded goodwill associated with the 2017 acquisitions, there was a reduction of $1 million of goodwill impairment charges during the three months ended March 31, 2018.  Refer to Note 2, Business Combinations , for more information.  

33


 

 

For the three months ended March 31, 2017, the Company recorded restructuring, impairment and other charges of $6 million. The charges included:

 

 

Net restructuring charges of $4 million for employee termination costs for an aggregate of 198 employees, substantially all of whom were terminated as of or prior to March 31, 2018, primarily related to the reorganization of certain business units and corporate functions;  

 

Other restructuring charges of $1 million; and

 

Other charges of $1 million primarily related to multiemployer pension withdrawal obligations unrelated to facility closures.

 

Depreciation and amortization decreased $2 million to $38 million for the three months ended March 31, 2018 compared to the three months ended March 31, 2017 due to decreased capital spending in recent years compared to historical levels, partially offset by depreciation and amortization incurred by the 2017 acquired companies.

 

 

 

Three Months Ended

March 31,

 

 

 

 

 

 

 

 

 

 

 

2018

 

 

2017

 

 

$ Change

 

 

% Change

 

 

 

(in millions, except percentages)

 

Interest expense-net

 

$

20

 

 

$

17

 

 

$

3

 

 

 

17.6

%

Investment and other (income)-net

 

 

(11

)

 

 

(11

)

 

 

 

 

 

0.0

%

 

Net interest expense increased by $3 million for the three months ended March 31, 2018 compared to the three months ended March 31, 2017 due to increased borrowings on the Company’s $400 million senior secured revolving credit facility (the “Revolving Credit Facility”).  The investment and other (income)-net balance in both years primarily relates to the Company’s pension benefit plans.      

 

 

 

Three Months Ended

March 31,

 

 

 

 

 

 

 

2018

 

 

2017

 

 

$ Change

 

 

 

(in millions, except percentages)

 

Net (loss) income before income taxes

 

$

(15

)

 

$

1

 

 

$

(16

)

Income tax (benefit) expense

 

 

(4

)

 

 

2

 

 

 

(6

)

Effective income tax rate

 

 

24.0

%

 

 

148.1

%

 

 

 

 

  

The effective income tax rate for the three months ended March 31, 2018 was 24.0% compared to 148.1% for the three months ended March 31, 2017.   The effective income tax rate for the three months ended March 31, 2018 reflects the impact of the U.S. Tax Cuts and Jobs Act (“Tax Act”) including the reduction of the U.S. federal corporate tax rate from 35.0% to 21.0%.    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.  

 

 

Print

 

 

 

Three Months Ended

March 31,

 

 

 

 

 

 

 

2018

 

 

2017

 

 

Change

 

 

 

(in millions, except percentages)

 

Net sales

 

$

806

 

 

$

710

 

 

$

96

 

Income from operations

 

 

2

 

 

 

12

 

 

 

(10

)

Operating margin

 

 

0.2

%

 

 

1.7

%

 

(150 bps)

 

Restructuring, impairment and other charges-net

 

 

5

 

 

 

5

 

 

 

 

34


 

 

 

 

 

Net Sales for the

Three Months Ended

March 31,

 

 

 

 

 

 

 

 

 

Reporting unit

 

2018

 

 

2017

 

 

$ Change

 

 

% Change

 

 

 

(in millions, except percentages)

 

 

 

 

 

Magazines, catalogs and retail inserts

 

$

468

 

 

$

383

 

 

$

85

 

 

 

22.2

%

Book

 

 

249

 

 

 

239

 

 

 

10

 

 

 

4.2

%

Europe

 

 

62

 

 

 

56

 

 

 

6

 

 

 

10.7

%

Directories

 

 

27

 

 

 

32

 

 

 

(5

)

 

 

(15.6

%)

Total Print

 

$

806

 

 

$

710

 

 

$

96

 

 

 

13.5

%

  

Net sales for the Print segment for the three months ended March 31, 2018 were $806 million, an increase of $96 million, or 13.5%, compared to the three months ended March 31, 2017.  Print segment net sales were impacted as follows by changes in the net sales of its reporting units:    

 

 

Magazines, catalogs and retail inserts: Sales increased due to the MCR 2017 acquisitions, a $2 million increase due to changes in foreign exchange rates in the Mexican peso, partially offset by lower volume and price pressures.

 

Book: Sales increased due to higher volume in trade and education books and digital services, as well as a $2 million increase in paper sales, partially offset by lower volume from religious books.

 

Europe: Sales increased primarily as a result of a $10 million increase due to changes in foreign exchange rates for Polish Zloty, that was partially offset by lower volume and a $1 million decrease in pass-through paper sales.

 

Directories: Sales decreased due to lower volume and a $2 million decrease in pass-through paper sales.

  

The decrease in Print segment income from operations and operating margins was primarily due to mix of volume and price pressures.

  

 

Office Products

 

 

 

Three Months Ended

March 31,

 

 

 

 

 

 

 

2018

 

 

2017

 

 

Change

 

 

 

(in millions, except percentages)

 

Net sales

 

$

123

 

 

$

111

 

 

$

12

 

Income from operations

 

 

2

 

 

 

9

 

 

 

(7

)

Operating margin

 

 

1.6

%

 

 

8.1

%

 

(650 bps)

 

Restructuring, impairment and other charges-net

 

 

1

 

 

 

1

 

 

 

 

Purchase accounting inventory adjustments

 

 

1

 

 

 

 

 

 

1

 

  

Net sales for the Office Products segment for the three months ended March 31, 2018 were $123 million, an increase of $12 million, or 10.8%, compared to the three months ended March 31, 2017, largely as a result of the acquisitions in 2017, partially offset by lower volume in filing and form products.

 

The decrease in Office Products segment income from operations and operating margins was due to increased costs of raw materials and lower mix of branded products compared to private label products.

 

 

Corporate

 

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

 

35


 

 

 

Three Months Ended

March 31,

 

 

 

2018

 

 

2017

 

 

 

(in millions)

 

Total operating expenses

 

$

10

 

 

$

14

 

Significant components of total operating expenses:

 

 

 

 

 

 

 

 

     Share-based compensation expenses

 

 

3

 

 

 

3

 

     Acquisition-related expenses

 

 

1

 

 

 

 

     Separation-related expenses

 

 

 

 

 

1

 

 

Corporate operating expenses for the three months ended March 31, 2018 were $10 million, as compared to $14 million for the three months ended March 31, 2017.  

  

 

Non-GAAP Measures

 

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

 

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

 

Non-GAAP adjusted EBITDA excludes restructuring, impairment and other charges-net, purchase accounting adjustments, acquisition-related expenses, and separation-related expenses.  A reconciliation of GAAP net income to non-GAAP adjusted EBITDA for the three months ended March 31, 2018 and 2017 is presented in the following table:

 

 

 

Three Months Ended

March 31,

 

 

 

2018

 

 

2017

 

Net loss

 

$

(11

)

 

$

(1

)

Restructuring, impairment and other charges – net

 

 

6

 

 

 

6

 

Purchase accounting adjustments

 

 

3

 

 

 

 

Acquisition-related expenses

 

 

1

 

 

 

 

Separation-related expenses

 

 

 

 

 

1

 

Depreciation and amortization

 

 

38

 

 

 

40

 

Interest expense-net

 

 

20

 

 

 

17

 

Income tax (benefit) expense

 

 

(4

)

 

 

2

 

Non-GAAP adjusted EBITDA

 

$

53

 

 

$

65

 

 

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

 

 

Restructuring, impairment and other charges-net: Refer to Results of Operations for the Three Months Ended March 31, 2018 as Compared to the Three Months Ended March 31, 2017 for information on charges for the three months ended March 31, 2018 and 2017.

 

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

 

Acquisition-related expenses: The three months ended March 31, 2018 included charges of $1 million related to legal, accounting and other expenses associated with completed and contemplated acquisitions.

36


 

 

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

 

 

LIQUIDITY AND CAPITAL RESOURCES

 

The Company believes it has sufficient liquidity to support its ongoing operations and to invest in future growth to create value for its stockholders. Operating cash flows and the Company’s Revolving Credit Facility are the Company’s primary sources of liquidity and are expected to be used for, among other things, payments of interest and principal on the Company’s debt obligations, distributions to stockholders that may be approved by the Board of Directors, 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, 2018 and 2017.

 

 

 

Three Months Ended

March 31,

 

 

 

2018

 

 

2017

 

Net cash (used in) provided by operating activities

 

$

(24

)

 

$

64

 

Net cash (used in) investing activities

 

 

(19

)

 

 

(25

)

Net cash provided by (used in) financing activities

 

 

31

 

 

 

(48

)

 

                

Cash Flows from Operating Activities

 

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

 

Net cash used in operating activities was $24 million for the three months ended March 31, 2018 compared to $64 million provided by operating activities for the same period in 2017.  The decrease in net cash provided by operating activities was driven by the timing of supplier payments and increase in inventories.    

 

 

Cash Flows from Investing Activities  

 

Net cash used in investing activities for the three months ended March 31, 2018 was $19 million compared to $25 million for the same period in 2017.  Significant changes are as follows:

 

 

Capital expenditures were $ 20 million during the three months ended March 31, 2018, a decrease of $ 1 million compared to the same period in 2017; and

 

Cash paid for acquisitions of businesses, net of cash acquired was impacted by purchase price adjustments resulting from finalization of working capital calculations in each period.

 

    

Cash Flows from Financing Activities

 

Net cash provided by financing activities for the three months ended March 31, 2018 was $31 million compared to $48 million used in financing activities for the same period in 2017.  Significant changes are as follows:

 

 

The Company paid down $13 million of long-term debt and current maturities during the three months ended March 31, 2018 compared with $51 million for the prior period;

 

The Company received net proceeds from credit facility borrowings of $55 million for the three months ended March 31, 2018 and none in the prior period;  

 

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; and

 

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.

 

 

37


 

Dividends

 

Cash dividends declared and paid to stockholders during the three months ended March 31, 2018 totaled $9 million.  On April 4, 2018, the Board of Directors declared a quarterly cash dividend of $0.26 per common share, payable on June 4, 2018 to stockholders of record on May 15, 2018.      

 

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 $23 million and $34 million as of March 31, 2018 and December 31, 2017, respectively.

 

The Company’s cash balances are held in several locations throughout the world, including amounts held outside of the United States.  Cash and cash equivalents as of March 31, 2018 included $6 million in the U.S. and $17 million at international locations.

 

The Company maintains cash pooling structures that enable participating international locations to draw on the pools’ cash resources to meet local liquidity needs.  Foreign cash balances may be loaned from certain cash pools to U.S. operating entities on a temporary basis in order to reduce the Company’s short-term borrowing costs or for other purposes.  As of March 31, 2018, $62 million of international cash was loaned to U.S. operating entities.    

 

 

Debt Issuances

 

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

 

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

 

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

 

 

Term Loan Facility

 

On November 17, 2017, the Company amended the Credit Agreement to reduce the interest rate for the Term Loan Facility by 50 basis points and the LIBOR “floor” was also reduced by 25 basis points.  Other terms, including the outstanding principal, maturity date and debt covenants were not amended.  Select terms on the Term Loan Facility before and after amendment include:

 

 

Before Amendment

After Amendment

 

Interest rate (Company's     option)

Base rate + 5.00%; or

LIBOR + 6.00%

Base rate + 4.50%; or

LIBOR + 5.50%

 

LIBOR floor

1.00%

0.75%

 

Amortization

$13 million, first eight quarters;

$11 million quarterly thereafter

(as of original effective date)

$13 million, first eight quarters;

$11 million quarterly thereafter

(as of original effective date)

 

Maturity

September 30, 2022

September 30, 2022

 

38


 

 

Under the terms of the Term Loan Facility, each of the syndicated lenders is deemed to have loaned a specific amount to the Company and has the right to repayment from the Company directly.  Therefore, we concluded that the Term Loan Facility is a loan syndication under GAAP.  As such, in order to determine whether the debt was modified or extinguished as a result of the amendment, we examined the amount of principal pre- and post-amendment by individual lender.  As a result, we determined that $65 million of outstanding principal had been extinguished as of November 17, 2017, even though the total outstanding principal amongst all lenders pre- and post-amendment remained unchanged.    

 

Consequently, the amendment resulted in a pre-tax loss on debt extinguishment of $3 million related to the unamortized discount and debt issuance costs attributable to the $65 million of outstanding principal that had been considered extinguished.  There was no net impact as of November 17, 2017 to cash and cash equivalents, total outstanding principal remained unchanged, and no cash was exchanged between the lenders and the Company (other than customary administrative fees).  

 

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.

 

 

Additional Debt Issuances Information

 

There were $130 million of borrowings under the Revolving Credit Facility as of March 31, 2018.  Based on the Company’s condensed consolidated statements of operations for the three months ended March 31, 2018 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 $130 million in borrowings and $53 million related to outstanding letters of credit. 

    

The current availability under the Revolving Credit Facility and net availability as of March 31, 2018 is shown in the table below:    

  

 

 

March 31, 2018

 

 

 

(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

 

$

130

 

Impact on availability related to outstanding letters of credit

 

 

53

 

 

 

$

183

 

 

 

 

 

 

Current availability at March 31, 2018

 

$

217

 

Cash

 

 

23

 

Net Available Liquidity

 

$

240

 

  

The Company was in compliance with its debt covenants as of March 31, 2018, and expects to remain in compliance based on management’s estimates of operating and financial results for 2018 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 March 31, 2018, the Company met all the conditions required to borrow under the Credit Agreement and management expects the Company to continue to meet the applicable borrowing conditions.

 

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

 

As of March 31, 2018, the Company had $53 million in outstanding letters of credit issued under the Revolving Credit Facility, all of which reduced the availability thereunder.  As of March 31, 2018, 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, 2018, letters of credit and guarantees of a de minimis amount were issued and reduced availability under the Other Facilities.

 

39


 

The Company’s debt maturities as of March 31, 2018 are shown in the following table:

 

 

 

Debt Maturity Schedule

 

 

 

Total

 

 

2018

 

 

2019

 

 

2020

 

 

2021

 

 

2022

 

 

Thereafter

 

Borrowings under the Credit Agreement

 

$

430

 

 

$

166

 

 

$

43

 

 

$

43

 

 

$

43

 

 

$

135

 

 

$

 

Senior secured notes

 

 

450

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

450

 

Capital lease obligations

 

 

2

 

 

 

1

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

Total (a)

 

$

882

 

 

$

167

 

 

$

44

 

 

$

43

 

 

$

43

 

 

$

135

 

 

$

450

 

 

 

(a)

Excludes unamortized debt issuance costs of $4 million and $7 million related to the Company’s Term Loan Facility and 8.75% Senior Notes due October 15, 2023, respectively, and a discount of $6 million related to the Company’s Term Loan Facility.  These amounts do not represent contractual obligations with a fixed amount or maturity date.

 

The Company expects to complete the acquisition of RRD’s Print Logistics business in Q3 2018.   The total purchase price is expected to be funded with a combination of cash on hand and drawings under the Revolving Credit Facility.  

 

Additionally, the Company expects to complete the sale of its retail offset printing facilities, which are included in the Company’s magazines, catalogs and retail inserts reporting unit, to Trend Offset Printing in Q2 2018.    

 

  

Other

 

On February 15, 2018, the Company’s Board of Directors approved an init ial share repurchase authorization of up to $20 million of common stock under which the Company may buy back LSC Communications’ shares at its discretion from February 15, 2018 through August 15, 2019.  The Company expects to fund the repurchases, if any, from a combination of cash on hand, future cash flows and borrowings under its  Revolving Credit Facility.  As of March 31, 2018, no shares had been repurchased under this authorization.

 

 

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, 2018, the Company’s variable-interest borrowings were $430 million, or approximately 48.8%, 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, 2018 by approximately $16 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, Mexican peso and Polish Zloty. The Company does not use derivative financial instruments for trading or speculative purposes.  

 

 

OTHER INFORMATION

 

Litigation and Contingent Liabilities

 

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

 

 

40


 

New Accounting Pronouncements and Pending Accounting Standards

 

Recently issued accounting standards and their estimated effect on the Company’s condensed consolidated financial statements are also described in Note 17,  New Accounting Pronouncements , and throughout the notes to the condensed consolidated 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, 2017, as filed with the SEC on February 22, 2018, that could cause our actual results to differ materially from those indicated in any such forward-looking statements. These factors include, but are not limited to:

 

 

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

 

 

inability to improve operating efficiency to meet changing market conditions;

 

 

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

 

 

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

 

 

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

 

 

the effect of economic weakness and constrained advertising;

 

 

uncertainty about future economic conditions;

 

 

increased competition as a result of consolidation among our competitors;

 

 

our ability to successfully integrate recent and future acquisitions;

 

 

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

 

 

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

 

 

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

 

 

the effects of seasonality on our core businesses;

 

 

the effects of increases in capital expenditures;

 

 

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

41


 

 

 

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;

 

 

potential tax liability of the separation;

 

 

the impact of the U.S. Tax Cuts and Jobs Act (“Tax Act”);

 

 

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 agreements entered into in connection with the separation; and

 

 

increases in requirements to fund or pay withdrawal costs or required contributions 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.

 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

See Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations of Part I under “Management of Market Risk.”  There have been no significant changes to the Company’s market risk since December 31, 2017.  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, 2017, as filed with the SEC on February 22, 2018.        

    

 

42


 

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, 2018 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, 2018 were effective in ensuring information required to be disclosed in the Company’s SEC reports was recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information was accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.  

 

 

Changes in Internal Control over Financial Reporting

 

During the quarter ended March 31, 2018, the Company implemented a new payroll system, which was considered a change 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).  There were no other changes in internal control over financial reporting during the three months ended March 31, 2018.        

43


 

PART II – OTHE R INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

For a discussion of certain litigation involving the Company, see Note 8,  Commitments and Contingencies,  to the condensed consolidated 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, 2017, as filed with the SEC on February 22, 2018.        

 

 

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 Purchased as Part

of Publicly Announced

Plans or Programs

 

 

Dollar Value of Shares

that May Yet be

Purchased Under the

Plans or Programs

 

January 1, 2018 - January 31, 2018

 

 

 

 

$

 

 

 

 

 

$

 

February 1, 2018 - February 28, 2018

 

 

 

 

 

 

 

 

 

 

$

 

March 1, 2018 - March 31, 2018

 

 

101,715

 

 

 

15.03

 

 

 

 

 

$

 

Total

 

 

101,715

 

 

$

15.03

 

 

 

 

 

 

 

 

 

 

(a)

Shares withheld for tax liabilities upon vesting of equity awards  

 

On February 15, 2018, the Company’s Board of Directors approved an initial share repurchase authorization of up to $20 million of common stock under which the Company may buy back LSC Communications’ shares at its discretion from February 15, 2018 through August 15, 2019.  The Company expects to fund the repurchases, if any, from a combination of cash on hand, cash flow and borrowings under its  $400 million Revolving Credit Facility.  As of March 31, 2018, no shares had been repurchased under this authorization.  

 

 

  

Dividends

 

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    

    

 

44


 

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)

 

2.4

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

 

2.5

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

 

2.6

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

 

2.7

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

 

2.8

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

 

3.1

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

 

3.2

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

 

4.1

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

 

4.2

Registration Rights Agreement, dated as of July 28, 2017, by and among LSC Communications, Inc. Victor G. Warren Revocable Trust Dated July 14, 1993, James Reifenberg, Mark Nickel, Phillip Warren and James M. Slattery (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-3 filed on October 2, 2017)

 

10.1    

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

 

10.2

Amendment No. 1 to Credit Agreement dated as of November 17, 2017, by and among LSC Communications, Inc., the other Loan Parties, the 2017 Refinancing Term Lenders party thereto and Bank of America, N.A., as administrative agent and collateral agent (filed herewith)

 

45


 

10.3

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)*

 

10.4

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

 

10.5

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)*

 

10.6

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)*

 

10.7

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)*

 

10.8

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)*

 

10.9

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

 

10.10

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

 

10.11

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

 

10.12

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

 

10.13

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

 

10.14

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

 

10.15

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

 

10.16

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

 

10.17

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

 

10.18

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)*

 

10.19

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)*

46


 

 

10.20

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

 

10.21

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

 

10.22

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)*

 

10.23

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)*

 

10.24

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 on Form 10-K for the fiscal year ended December 31, 2016, filed on February 23, 2017)*

 

10.25

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

 

10.26

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

 

10.27

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)*

 

10.28

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)*

 

10.29

Non-Employee Director Compensation Plan amended as of October 26, 2017 (incorporated by reference to Exhibit 10.19 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017, filed on November 2, 2017)*

 

10.30

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)*

 

10.31

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)*

 

10.32

Form of Director Restricted Stock Unit Award Agreement (for 2017) (incorporated by reference to Exhibit 10.17 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2017, filed on August 3, 2017)*

 

10.33

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

 

14.1

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

 

31.1

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

 

47


 

31.2

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

 

32.1

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

 

32.2

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

 

101.INS

XBRL Instance Document

 

101.SCH

XBRL Taxonomy Extension Schema Document

 

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

 

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

 

101.L AB

XBRL Taxonomy Extension Label Linkbase Document

 

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

  

___________________________

 

* Management contract or compensatory plan or arrangement

 

 

48


 

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 3, 2018             

  

 

49

Exhibit 10.2

 

EXECUTION VERSION

 

 

AMENDMENT NO. 1 TO CREDIT AGREEMENT

AMENDMENT NO. 1 TO CREDIT AGREEMENT (this “ Amendment No. 1 ”), dated as of November 17, 2017, by and among LSC Communications, Inc. (the “ Borrower ”), the other Loan Parties, the 2017 Refinancing Term Lenders (as defined below) party hereto and Bank of America, N.A. (“ BofA ”), as administrative agent and collateral agent (in such capacities, including any permitted successor thereto, the “ Administrative Agent ”).  

PRELIMINARY STATEMENTS

WHEREAS, the Borrower has entered into that certain Credit Agreement, dated as of September 30, 2016, among the Borrower, the other parties thereto, the Lenders party thereto from time to time , BofA, as Administrative Agent, Swing Line Lender and as an Issuing Bank and the other Issuing Banks party thereto from time to time (as amended, restated, amended and restated, supplemented or otherwise modified from time to time prior to, but not including, the date hereof, the “ Credit Agreement ”) and, in connection with this Amendment No. 1, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Capital One, N.A., Citigroup Global Markets Inc., Fifth Third Securities, Inc., ING Bank, N.V., JPMorgan Chase Bank, N.A., PNC Capital Markets LLC, SunTrust Robinson Humphrey, Inc., The Bank of Tokyo-Mitsubishi UFJ, Ltd., U.S. Bank National Association and Wells Fargo Securities, LLC are acting as joint lead arrangers and joint bookrunners (in such capacities, the “ Arrangers ”) in connection with the provision of the 2017 Refinancing Term Loans (as defined below);

WHEREAS, the Borrower has requested that the Credit Agreement be amended as set forth herein (the Credit Agreement, as amended by this Amendment No. 1, the “ Amended Credit Agreement ”) so as to, among other things, provide for a new Class of Refinancing Term Loans pursuant to Section 2.20 of the Credit Agreement, which Refinancing Term Loans would refinance all of the Term Loans made on the Closing Date that are outstanding under the Credit Agreement immediately prior to the effectiveness of this Amendment No. 1 (the “ Existing Term Loans ” and each Lender with an Existing Term Loan, an “ Existing Term Lender ”) and shall have the terms set forth in the Amended Credit Agreement;

WHEREAS, pursuant to the Engagement Letter, dated November 7, 2017, by and among the Arrangers and the Borrower (the “ Engagement Letter ”), the Arrangers have agreed to act as joint lead arrangers and joint bookrunners in connection with the provision of the 2017 Refinancing Term Loans;

WHEREAS, each Existing Term Lender that executes and delivers a consent and executed signature page to this Amendment No. 1 in the form of Exhibit A hereto (a “ Lender Consent ”) (such consenting Lender, an “ Exchanging Term Lender ”) will be deemed (i) to have agreed to the terms of this Amendment No. 1 and the Amended Credit Agreement, (ii) to have agreed to exchange (as further described in the Lender Consent) its Existing Term Loans for 2017 Refinancing Term Loans in an equal principal amount (or such lesser amount as determined by the 2017 Refinancing Arranger), and (iii) upon the Amendment No. 1 Effective Date to have exchanged its Existing Term Loans for 2017 Refinancing Term Loans in an equal principal amount (or such lesser amount as determined by the 2017 Refinancing Arranger) through either a cashless rollover or a post-closing cash settlement (as selected by such Exchanging Term Lender on its Lender Consent);

WHEREAS, each Person that executes and delivers a signature page to this Amendment No. 1 in the capacity of an “Additional Refinancing Term Lender” (each, an “ Additional Refinancing Term Lender ” and together with the Exchanging Term Lenders, the “ 2017 Refinancing Term Lenders ”)

 


 

will be deemed (i) to have agreed to the terms of this Amendment No. 1 and the Amended Credit Agreement and (ii) to have committed to make 2017 Refinancing Term Loans to the Borrower on the Amendment No. 1 Effective Date, in the amount specified opposite such Additional Refinancing Term Lender’s name on Schedule 1 hereto (such loans, the “ Additional Refinancing Term Loans ”);

WHEREAS, the aggregate proceeds of the Additional Refinancing Term Loans will be used by the Borrower to repay in full the outstanding principal amount of the Existing Term Loans (other than the Exchanged Term Loans);

WHEREAS, each Additional Refinancing Term Lender party hereto is prepared to provide 2017 Refinancing Term Loans in an amount equal to its commitment to provide such Loans as set forth opposite such Additional Refinancing Term Lender’s name on Schedule 1 hereto, subject to the terms and conditions set forth herein; and

WHEREAS, each Loan Party expects to realize substantial direct and indirect benefits as a result of this Amendment No. 1 becoming effective and the consummation of the transactions contemplated hereby and agrees to reaffirm its obligations under the Credit Agreement, the Collateral Documents, and the other Loan Documents to which it is a party.

NOW, THEREFORE, for good and valuable consideration, the receipt and adequacy of which is acknowledged by each party hereto, it is agreed:

cERTAIN definitions

.

Capitalized terms used (including in the preamble and recitals hereto) but not defined herein shall have the meanings assigned to such terms in the Amended Credit Agreement. As used in this Amendment No. 1:

2017 Refinancing Term Lenders ” is defined in the fifth recital hereto.

Additional Refinancing Term Lenders ” is defined in the fifth recital hereto.

Additional Refinancing Term Loans ” is defined in the fifth recital hereto.

Administrative Agent ” is defined in the preamble hereto.

Amended Credit Agreement ” is defined in the second recital hereto.

Amendment No. 1 ” is defined in the preamble hereto.

Amendment No. 1 Effective Date ” is defined in Section 6 hereof.

Arrangers ” is defined in the first recital hereto.

Borrower ” is defined in the preamble hereto.

Credit Agreement ” is defined in the first recital hereto.

Exchanged Term Loan ” is defined in Section 2(a)(i) hereof.

Exchanging Term Lenders ” is defined in the fourth recital hereto.

Existing Term Lender ” is defined in the second recital hereto.

2


 

Existing Term Loans ” is defined in the second recital hereto.

Lender Consent ” is defined in the fourth recital hereto.

Non-Exchanged Term Loan ” is defined in Section 2(a)(ii) hereof.

Non-Exchanging Term Lender ” shall mean each Lender holding Non-Exchanged Term Loans.

EXCHANGE OF EXISTING TERM LOANS; AGREEMENT TO MAKE 2017 REFINANCING Term Loans .  

 

 

(a)

Exchange and Repayment of Existing Term Loans .

 

(i)

As of the Amendment No. 1 Effective Date, subject to the terms hereof, each Exchanging Term Lender agrees that the aggregate principal amount of its Existing Term Loans (or such lesser amount as determined by the 2017 Refinancing Arranger) (the “ Exchanged Term Loans ”) will be exchanged for 2017 Refinancing Term Loans in an equal principal amount through either a cashless rollover or a post-closing cash settlement (as selected by such Exchanging Term Lender on its Lender Consent).  

 

(ii)

As of the Amendment No. 1 Effective Date, subject to the terms hereof, (1) the Borrower agrees that pursuant to Section 2.20 of the Credit Agreement the aggregate principal amount of its Existing Term Loans not being exchanged into 2017 Refinancing Term Loans (such Existing Term Loans, “ Non-Exchanged Term Loans ”) plus all unpaid and accrued interest on the Non-Exchanged Term Loans up to but not including the Amendment No. 1 Effective Date will be repaid in full on the Amendment No. 1 Effective Date and (2) the Borrower agrees that pursuant to Section 2.20 of the Credit Agreement all unpaid and accrued interest on the Exchanged Term Loans up to but not including the Amendment No. 1 Effective Date will be repaid in full on the Amendment No. 1 Effective Date.

 

(b)

Commitment to Make Additional Refinancing Term Loans .  As of the Amendment No. 1 Effective Date, subject to the terms hereof, each Additional Refinancing Term Lender agrees to make Additional Refinancing Term Loans equal to the amount set forth opposite such Additional Refinancing Term Lender’s name on Schedule 1 hereto.

 

(c)

Other Provisions Regarding 2017 Refinancing Term Loans .  

 

(i)

On the Amendment No. 1 Effective Date, the Borrower shall apply the aggregate proceeds of the Additional Refinancing Term Loans to prepay in full the principal amount of all Non-Exchanged Term Loans. The commitments of the Exchanging Term Lenders and the Additional Refinancing Term Lenders are several and not joint and no 2017 Refinancing Term Lender will be responsible for any other 2017 Refinancing Term Lender’s failure to make or acquire the 2017 Refinancing Term Loans.

 

(ii)

Each 2017 Refinancing Term Lender shall be a “Term Lender,” “Term B Lender” and “Lender” under the Credit Agreement as of the Amendment No. 1 Effective Date. Amounts paid or prepaid in respect of 2017 Refinancing Term Loans may not be reborrowed.

3


 

 

(iii)

The Administrative Agent and the 2017 Refinancing Term Lenders hereby waive any requirement s to deliver (x) a Committed Loan Notice pursuant to Section 2.03 of the Credit Agreement in connection with the funding of the 2017 Refinancing Term Loans and (y) a notice of mandatory prepayment pursuant to Section 2.08(f) in connection with the refinancing of the Existing Term Loans .

 

(iv)

The Interest Period then in effect (and the Eurodollar Rate thereunder) for the Existing Term Loans shall remain in effect for the 2017 Refinancing Term Loans. For the avoidance of doubt, such Interest Period shall end on November 21, 2017.

Amendments to lOAN dOCUMENTS

.  

 

(a)

Section 1.01 of the Credit Agreement is hereby amended to add the following definitions in their proper alphabetical order:

2017 Refinancing Arranger ” means Merrill Lynch, Pierce, Fenner & Smith Incorporated.

2017 Refinancing Term Loans ” means the Refinancing Term Loans that are made or deemed made pursuant to Sections 2(a)(i) and 2(b) of Amendment No. 1.

2017 Refinancing Term Commitments ” means, as to any Lender, the agreement of such Lender to (i) exchange the entire principal amount of its Term B Loans made on the Closing Date that are outstanding immediately prior to the effectiveness of Amendment No. 1 (or such lesser amount allocated to it by the 2017 Refinancing Arranger) for an equal principal amount of 2017 Refinancing Term Loans on the Amendment No. 1 Effective Date or (ii) make 2017 Refinancing Term Loans in an aggregate principal amount not to exceed the amount set forth opposite such Lender’s name on Schedule 1 to Amendment No. 1. The aggregate amount of all 2017 Refinancing Term Commitments as of the Amendment No. 1 Effective Date is $312,500,000.

Amendment No. 1 ” shall mean the Amendment No. 1 to Credit Agreement, dated as of November 17, 2017, among the Borrower, the other Loan Parties, the Administrative Agent and the Lenders party thereto.

Amendment No. 1 Effective Date ” shall have the meaning assigned to such term in Amendment No. 1.

Benefit Plan ” means any of (a) an “employee benefit plan” (as defined in ERISA) that is subject to Title I of ERISA, (b) a “plan” as defined in Section 4975 of the Code or (c) any Person whose assets include (for purposes of ERISA Section 3(42) or otherwise for purposes of Title I of ERISA or Section 4975 of the Code) the assets of any such “employee benefit plan” or “plan”.

PTE ” means a prohibited transaction class exemption issued by the U.S. Department of Labor, as any such exemption may be amended from time to time.

 

(b)

Section 1.01 of the Credit Agreement is hereby amended by amending and restating clause (b) of the definition of “Applicable Rate” contained therein to read as follows:

“(b) for each Term B Loan, 5.50% for Eurodollar Loans and 4.50% for ABR Loans and”;

4


 

 

(c)

The definition of “ERISA” in Section 1.01 of the Credit Agreement is hereby amended by inserting “, and the rules and regulations promulgated thereunder” immediately prior to the period there in.

 

(d)

Section 1.01 of the Credit Agreement is hereby amended by replacing all references in the definition of “Eurodollar Rate” to “1.00%” with “0.75%”;

 

(e)

The definition of “Lenders” in Section 1.01 of the Credit Agreement is hereby amended by inserting “Amendment No. 1,” immediately before “an Assignment and Assumption”.

 

(f)

The definition of “Term B Commitment” in Section 1.01 of the Credit Agreement is hereby amended and restated in its entirety as follows:

Term B Commitment ” means, as to any Term B Lender, (i) if such Term B Lender is a Term B Lender on the Closing Date, the obligation of such Term B Lender to make Term B Loans in an aggregate principal amount not to exceed the amount set forth opposite such Lender’s name on Schedule 1.01A, (ii) if such Term B Lender is a Term B Lender on the Amendment No. 1 Effective Date from and after the effectiveness of Amendment No. 1, the 2017 Refinancing Term Commitments or (iii) the obligation of such Term B Lender to make Term B Loans in an aggregate principal amount not to exceed the amount set forth in the Assignment and Assumption or Incremental Assumption Agreement pursuant to which such Term B Lender became a party hereto, in each case, as the same may be changed from time to time pursuant to the terms of this Agreement (including as increased, extended or replaced as provided in Section 2.02, 2.19 and 2.20).

 

(g)

The definition of “Term B Loans” in Section 1.01 of the Credit Agreement is hereby amended by inserting “(including the 2017 Refinancing Term Loans)” immediately prior to the period therein.

 

(h)

Section 2.07 of the Credit Agreement is hereby amended by amending and restating clause (c) thereof to read as follows:

“The Borrower shall repay principal of outstanding Term B Loans on the last Business Day of each March, June, September and December of each year (commencing on March 30, 2018) and on the Term B Maturity Date, in an aggregate principal amount of such Term B Loans equal to (A) in the case of the first three payments, an amount equal to $12,500,000, (B) thereafter, in the case of quarterly payments due prior to the Term B Maturity Date, an amount equal to $10,625,000 and (C) in the case of such payment due on the Term B Maturity Date, an amount equal to the then unpaid principal amount of such Term B Loans outstanding.”.

 

(i)

Section 2.08(a)(i) of the Credit Agreement is hereby amended by amending and restating the last two sentences thereof to read as follows:

“If any Repricing Event occurs prior to the date occurring twelve months after the Amendment No. 1 Effective Date, the Borrower agrees to pay to the Administrative Agent, for the ratable account of each Lender with Term B Loans that are subject to such Repricing Event (including any Lender which is replaced pursuant to Section 2.16(c) as a result of its refusal to consent to an amendment giving rise to such Repricing Event), a fee in an amount equal to 1.00% of the aggregate principal amount of the Term B Loans subject to such Repricing Event. Such fees shall be earned, due and payable upon the date of the occurrence of such Repricing Event.”.

5


 

 

(j)

Section 3.10 of the Credit Agreement is hereby amended by adding the following as a new sentence at the end thereof:

“The Borrower is not and will not be using “plan assets” (within the meaning of 29 CFR § 2510.3-101, as modified by Section 3(42) of ERISA) of one or more Benefit Plans in connection with the Loans, the Letters of Credit or the Commitments.”

 

(k)

Article VIII of the Credit Agreement is hereby amended by adding the following as a new Section 8.12 at the end thereof:

Section 8.12

Certain ERISA Matters .

(a)

Each Lender (x) represents and warrants, as of the date such Person became a Lender party hereto, to, and (y) covenants, from the date such Person became a Lender party hereto to the date such Person ceases being a Lender party hereto, for the benefit of, the Administrative Agent and each Lead Arranger and their respective Affiliates, and not, for the avoidance of doubt, to or for the benefit of the Borrower or any other Loan Party, that at least one of the following is and will be true:

(i)

such Lender is not using “plan assets” (within the meaning of 29 CFR § 2510.3-101, as modified by Section 3(42) of ERISA) of one or more Benefit Plans in connection with the Loans, the Letters of Credit or the Commitments,

(ii)

the transaction exemption set forth in one or more PTEs, such as PTE 84-14 (a class exemption for certain transactions determined by independent qualified professional asset managers), PTE 95-60 (a class exemption for certain transactions involving insurance company general accounts), PTE 90-1 (a class exemption for certain transactions involving insurance company pooled separate accounts), PTE 91-38 (a class exemption for certain transactions involving bank collective investment funds) or PTE 96-23 (a class exemption for certain transactions determined by in-house asset managers), is applicable with respect to such Lender’s entrance into, participation in, administration of and performance of the Loans, the Letters of Credit, the Commitments and this Agreement,

(iii)

(A) such Lender is an investment fund managed by a “Qualified Professional Asset Manager” (within the meaning of Part VI of PTE 84-14), (B) such Qualified Professional Asset Manager made the investment decision on behalf of such Lender to enter into, participate in, administer and perform the Loans, the Letters of Credit, the Commitments and this Agreement, (C) the entrance into, participation in, administration of and performance of the Loans, the Letters of Credit, the Commitments and this Agreement satisfies the requirements of sub-sections (b) through (g) of Part I of PTE 84-14 and (D) to the best knowledge of such Lender, the requirements of subsection (a) of Part I of PTE 84-14 are satisfied with respect to such Lender’s entrance into, participation in, administration of and performance of the Loans, the Letters of Credit, the Commitments and this Agreement, or

(iv)

such other representation, warranty and covenant as may be agreed in writing between the Administrative Agent, in its sole discretion, and such Lender.

(b)

In addition, (I) unless sub-clause (i) in the immediately preceding clause (a) is true with respect to a Lender or (II) if such sub-clause (i) is not true with respect to a Lender and such Lender has not provided another representation, warranty and covenant as provided in sub-clause (iv) in the immediately preceding clause (a), such Lender further (x) represents and warrants, as of the date such Person became a Lender party hereto, to, and (y) covenants, from the date such Person became a Lender

6


 

party hereto to the date such Person ceases being a Lender party hereto, for the benefit of, the Administrative Agent and each Lead Arranger and their respective Affiliates, and not, for the avoidance of doubt, to or for the benefit of the Borrower or any other Loan Party, that:

(i)

none of the Administrative Agent or any other Lead Arranger or any of their respective Affiliates is a fiduciary with respect to the assets of such Lender (including in connection with the reservation or exercise of any rights by the Administrative Agent under this Agreement, any Loan Document or any documents related hereto or thereto),

(ii)

the Person making the investment decision on behalf of such Lender with respect to the entrance into, participation in, administration of and performance of the Loans, the Letters of Credit, the Commitments and this Agreement is independent (within the meaning of 29 CFR § 2510.3-21) and is a bank, an insurance carrier, an investment adviser, a broker-dealer or other person that holds, or has under management or control, total assets of at least $50 million, in each case as described in 29 CFR § 2510.3-21(c)(1)(i)(A)-(E),

(iii)

the Person making the investment decision on behalf of such Lender with respect to the entrance into, participation in, administration of and performance of the Loans, the Letters of Credit, the Commitments and this Agreement is capable of evaluating investment risks independently, both in general and with regard to particular transactions and investment strategies (including in respect of the Obligations),

(iv)

the Person making the investment decision on behalf of such Lender with respect to the entrance into, participation in, administration of and performance of the Loans, the Letters of Credit, the Commitments and this Agreement is a fiduciary under ERISA or the Code, or both, with respect to the Loans, the Letters of Credit, the Commitments and this Agreement and is responsible for exercising independent judgment in evaluating the transactions hereunder, and

(v)

no fee or other compensation is being paid directly to the Administrative Agent or any Lead Arranger or any of their respective Affiliates for investment advice (as opposed to other services) in connection with the Loans, the Letters of Credit, the Commitments or this Agreement.

(c)

The Administrative Agent and each Lead Arranger hereby informs the Lenders that each such Person is not undertaking to provide impartial investment advice, or to give advice in a fiduciary capacity, in connection with the transactions contemplated hereby, and that such Person has a financial interest in the transactions contemplated hereby in that such Person or an Affiliate thereof (i) may receive interest or other payments with respect to the Loans, the Letters of Credit, the Commitments and this Agreement, (ii) may recognize a gain if it extended the Loans, the Letters of Credit or the Commitments for an amount less than the amount being paid for an interest in the Loans, the Letters of Credit or the Commitments by such Lender or (iii) may receive fees or other payments in connection with the transactions contemplated hereby, the Loan Documents or otherwise, including structuring fees, commitment fees, arrangement fees, facility fees, upfront fees, underwriting fees, ticking fees, agency fees, administrative agent or collateral agent fees, utilization fees, minimum usage fees, letter of credit fees, fronting fees, deal-away or alternate transaction fees, amendment fees, processing fees, term out premiums, banker’s acceptance fees, breakage or other early termination fees or fees similar to the foregoing.”

Reference to and Effect on the Credit Agreement

.  On and after the Amendment No. 1 Effective Date, (i) each reference in the Credit Agreement to “this Agreement,” “hereunder,” “hereof” or text of like import referring to the Credit Agreement shall mean and be a reference to the Credit Agreement as amended by this Amendment No. 1, (ii) the 2017 Refinancing

7


 

Term Commitments shall constitute “Term Loan Commitments”, “Term B Commitments” and “Commitments”, in each case, under and as defined in the Credit Agreement, (iii) the 2017 Refinancing Term Loans shall constitute “Term Loans”, “Term B Loans” , “Refinancing Term Loans” and “Loans”, in each case, under and as defined in the Credit Agreement and (iv) the 2017 Refinancing Term Lenders shall each constitute a “Term Lender”, “Term B Lender” and a “Lender”, in each case, under and as defined in the Credit Agreement.  This Amendment No. 1 shall for all purposes constitute a “Loan Document” and a “Refinancing Amendment” under and as defined in the Credit Agreement and the other Loan Documents.

Representations & Warranties

.

In order to induce the 2017 Refinancing Term Lenders and the Administrative Agent to enter into this Amendment No. 1 and to induce the 2017 Refinancing Term Lenders to make the 2017 Refinancing Term Loans hereunder, each Loan Party hereby represents and warrants to the 2017 Refinancing Term Lenders and the Administrative Agent on and as of the Amendment No. 1 Effective Date that each of the representations and warranties made by any Loan Party set forth in Article III of the Credit Agreement or in any other Loan Document shall be true and correct in all material respects ( provided that, any representation and warranty that is qualified by “materiality,” “material adverse effect” or similar language shall be true and correct in all respects (after giving effect to any such qualification therein)) on and as of the Amendment No. 1 Effective Date with the same effect as though made on and as of such date, except to the extent such representations and warranties expressly relate to an earlier date (in which case such representations and warranties shall be true and correct in all material respects ( or if any such representation and warranty is qualified by “materiality,” “material adverse effect” or similar language, shall be true and correct in all respects (after giving effect to any such qualification therein)) on and as of such earlier date); provided that all references in the representations set forth in Sections 3.02 , and 3.03 of the Credit Agreement to “Loan Documents” shall be deemed to be references to this Amendment No. 1 and the other Loan Documents (including the Credit Agreement) as amended by this Amendment No. 1.

Conditions Precedent .

  This Amendment No. 1 shall become effective as of the first date (the “ Amendment No. 1 Effective Date ”) when each of the conditions set forth in this Section 6 shall have been satisfied or waived:

 

(a)

The Administrative Agent shall have received a duly authorized, executed and delivered counterpart of the signature page to this Amendment No. 1 from each Loan Party, the Administrative Agent and the 2017 Refinancing Term Lenders.

 

(b)

All costs, fees and expenses (including, without limitation, legal fees and expenses) contemplated and to the extent required by the Credit Agreement, the Engagement Letter and any other letter agreement between the Borrower and any Arranger relating to the transactions contemplated hereby, and which are payable to the 2017 Refinancing Arranger or any other Arranger (or any other 2017 Refinancing Term Lender) or the Administrative Agent shall have been paid to the extent due. All accrued interest on, and any amounts owing under the Credit Agreement with respect to, the Existing Term Loans, whether or not due and payable, shall have been, or shall substantially concurrently with the effectiveness of this Amendment No. 1 be, paid in full.

 

(c)

No Default or Event of Default shall have occurred or be continuing or would occur immediately after giving effect to the incurrence of the 2017 Refinancing Term Loans.

 

(d)

Each of the representations and warranties made by any Loan Party set forth in Section 5 hereof shall be true and correct in all material respects ( provided that, any representation and warranty that is qualified by “materiality,” “material adverse effect” or similar language shall be true and correct in all respects (after giving effect to any such qualification therein)) on and as of the

8


 

 

Amendment No. 1 Effective Date with the same effect as though made on and as of such date, except to the extent such representations and warranties expressly relate to an earlier date (in which case such representations and warranties shall be true and correct in all material respects ( or if any such representation and warranty is qualified by “materiality,” “material adverse effect” or similar language, shall be true and correct in all respects (after giving effect to any such qualification therein)) on and as of such earlier date) .

 

(e)

[Reserved].

 

(f)

The Administrative Agent shall have received a certificate of the Borrower, dated the Amendment No. 1 Effective Date, executed by a Responsible Officer of the Borrower certifying compliance with the requirements set forth in clauses (c) and (d) of this Section 6.

 

(g)

On the Amendment No. 1 Effective Date, the Administrative Agent shall have received a favorable written opinion (addressed to the Administrative Agent and the 2017 Refinancing Term Lenders and dated the Amendment No. 1 Effective Date) of (i) Sullivan & Cromwell LLP, counsel to the Loan Parties and (ii) local counsel in each jurisdiction in which a Loan Party is organized and the laws of which are not covered by the opinion referred to in (i) above, in each case in form and substance reasonably satisfactory to the Administrative Agent.

 

(h)

The Administrative Agent shall have received a customary certificate from each Loan Party, dated the Amendment No. 1 Effective Date, signed by a Responsible Officer of such Loan Party, and attested to by the secretary or any assistant secretary of such Loan Party, with appropriate insertions, together with (a) certified copies of the certificate or articles of incorporation and by-laws (or other equivalent organizational documents), as applicable, of such Loan Party, (b) customary resolutions of such Loan Party referred to in such certificate, (c) incumbency or specimen signatures which identify by name and title of such Responsible Officer or authorized signatory of such Loan Party authorized to sign this Amendment No. 1, and (d) a good standing certificate from the applicable Governmental Authority of such Loan Party’s jurisdiction of incorporation, organization or formation, each dated a recent date prior to the Amendment No. 1 Effective Date and certifying as to the good standing of such Loan Party; provided that in the case of preceding clause (a), such documents shall not be required to be delivered with respect to any Person that was a Loan Party immediately prior to the Amendment No. 1 Effective Date if such certificate includes a certification by such Responsible Officer that the applicable organizational documents delivered to the Administrative Agent in connection with the initial funding of Term Loans on the Closing Date remain in full force and effect and have not been amended, modified, revoked or rescinded since the Closing Date and that no action has been taken by the governing body of such Loan Party for the purpose of effecting any further amendment to or modification of such documents.

 

(i)

The 2017 Refinancing Arranger and the Administrative Agent shall have received at least three (3) Business Days prior to the Amendment No. 1 Effective Date all documentation and other information requested by the 2017 Refinancing Term Lenders that is required by regulatory authorities under applicable “know your customer” and anti-money-laundering rules and regulations, including without limitation, the Act, in each case as requested at least five (5) Business Days prior to the Amendment No. 1 Effective Date.

 

(j)

with respect to each Mortgaged Property located in the United States of America owned by a Loan Party as of the Amendment No. 1 Effective Date, the Administrative Agent shall have received (i) a completed “life-of-loan” Federal Emergency Management Agency standard flood hazard determination (to the extent a Mortgaged Property is located in a Special Flood Hazard

9


 

 

Area , together with a notice about Special Flood Hazard Area status and flood disaster assistance duly executed by the applicable Loan Party relating thereto) and (ii ) a copy of, or a certificate as to coverage under, and a declaration page relating to, the insurance policies required by Section 5 .0 5 of the Credit Agreement.

ArrangerS .

The Borrower and the 2017 Refinancing Term Lenders agree that the Arrangers shall be entitled to the privileges, indemnification, immunities and other benefits afforded to the Lead Arrangers pursuant to Sections 8.08 and 9.04 of the Amended Credit Agreement and except as otherwise agreed to in writing by the Borrower and the Arrangers, shall have no duties, responsibilities or liabilities with respect to this Amendment No. 1, the Amended Credit Agreement or any other Loan Document.

Reaffirmation .

 

 

(a)

To induce the 2017 Refinancing Term Lenders and the Administrative Agent to enter into this Amendment No. 1, each of the Loan Parties hereby acknowledges and reaffirms its obligations under each Loan Document to which it is a party, including, without limitation, any prior grant, prior pledge or prior collateral assignment of a lien or security interest, as applicable, contained therein, in each case as amended, restated, amended and restated, supplemented or otherwise modified prior to or as of the date hereof (including as amended pursuant to this Amendment No. 1 and the incurrence of the 2017 Refinancing Term Loans hereunder).  Each Loan Party acknowledges and agrees that each of the Loan Documents to which it is a party or otherwise bound shall continue in full force and effect and that all of its obligations thereunder shall not be impaired or limited by the execution or effectiveness of this Amendment No. 1.

 

(b)

In furtherance of the foregoing Section 8(a), each Subsidiary Guarantor, in its capacity as a Guarantor under the Guarantee Agreement (in such capacity, each a “ Reaffirming Loan Guarantor ”), reaffirms its guarantee of the Obligations under the terms and conditions of the Guarantee Agreement and agrees that the Guarantee Agreement remains in full force and effect to the extent set forth in the Guarantee Agreement and after giving effect to this Amendment No. 1 and the incurrence of the 2017 Refinancing Term Loans, and is hereby ratified, reaffirmed and confirmed.  Each Reaffirming Loan Guarantor hereby confirms that it consents to the terms of this Amendment No. 1 and the Amended Credit Agreement and that the principal of, the interest and premium (if any) on, and fees and other amounts related to, the 2017 Refinancing Term Loans constitute “Obligations” for all purposes of the Loan Documents.  Each Reaffirming Loan Guarantor hereby (i) acknowledges and agrees that its guarantee of the Obligations and each of the Loan Documents to which it is a party or otherwise bound shall continue in full force and effect and that all of its obligations thereunder shall not be impaired or limited by the execution or effectiveness of this Amendment No. 1, (ii) acknowledges and agrees that it will continue to guarantee to the fullest extent possible in accordance with the Loan Documents the payment and performance of all Obligations (including all such Obligations as amended, reaffirmed and/or increased pursuant to this Amendment No. 1 and the incurrence of the 2017 Refinancing Term Loans) and (iii) acknowledges, agrees and warrants for the benefit of the Administrative Agent and each other Secured Party that there are no rights of set-off or counterclaim, nor any defenses of any kind, whether legal, equitable or otherwise, that would enable such Reaffirming Loan Guarantor to avoid or delay timely performance of its obligations under the Loan Documents.

 

(c)

In furtherance of the foregoing Section 8(a), each of the Loan Parties that is party to any Collateral Document, in its capacity as a “grantor”, “pledgor” or other similar capacity under such Collateral Document (in such capacity, each a “ Reaffirming Grantor ”), hereby

10


 

 

acknowledges that it has reviewed and consents to the terms and conditions of this Amendment No. 1 and the transactions contemplated hereby, including the extension of credit in the form of the 2017 Refinancing Term Loans.  In addition, each Reaffirming Grantor reaffirms the security interests previously granted by such Reaffirming Grantor under the terms and conditions of the Collateral Documents (in each case, to the extent a party thereto) to secure the Obligations (including all such Obligations as amended, reaffirmed and/or increased pursuant to this Amendment No. 1 and the incurrence of the 2017 Refinancing Term Loans) and agrees that such security interests remain in full force and effect after giving effect to this Amendment No. 1 and are hereby ratified, reaffirmed and confirmed.  Each Loan Party hereby confirms that the security interests previously granted by such Reaffirming Grantor under the terms and conditions of the Loan Documents secure the 2017 Refinancing Term Loans as part of the Obligations.  Each Reaffirming Grantor hereby (i) confirms that each Collateral Document to which it is a party or is otherwise bound and all Collateral encumbered thereby will continue to secure, to the fullest extent possible in accordance with the Collateral Documents, the payment and performance of the Obligations (including all such Obligations as amended, reaffirmed and/or increased pursuant to this Amendment No. 1 and the incurrence of the 2017 Refinancing Term Loans), as the case may be, including without limitation the payment and performance of all such applicable Obligations that are joint and several obligations of each Guarantor and each Reaffirming Grantor now or hereafter existing, (ii) confirms its respective prior grant to the Administrative Agent of the security interest in and continuing Lien on all of such Reaffirming Grantor’s right, title and interest in, to and under all Collateral, in each case whether now owned or existing or hereafter acquired or arising and wherever located, as collateral security for the prompt and complete payment and performance in full when due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise, of all applicable Obligations (including all such Obligations as amended, reaffirmed and/or increased pursuant to this Amendment No. 1 and the incurrence of the 2017 Refinancing Term Loans), subject to the terms contained in the applicable Loan Documents, and (iii) confirms its respective prior pledges, prior grants of security interests and other obligations, as applicable, under and subject to the terms of each of the Collateral Documents to which it is a party.

 

(d)

Each Guarantor (other than the Borrower) acknowledges and agrees that (i) such Guarantor is not required by the terms of the Credit Agreement or any other Loan Document to consent to this Amendment No. 1 and (ii) nothing in the Credit Agreement, this Amendment No. 1 or any other Loan Document shall be deemed to require the consent of such Guarantor to any future amendment, consent or waiver of the terms of the Credit Agreement.

Miscellaneous Provisions .

 

 

(a)

Ratification .  This Amendment No. 1 is limited to the matters specified herein and shall not constitute acceptance or waiver, or, to the extent not expressly set forth herein, an amendment or modification, of any other provision of the Credit Agreement or any other Loan Document.  Nothing herein contained shall be construed as a substitution or novation of the obligations outstanding under the Credit Agreement or any other Loan Document or instruments securing the same, which shall remain in full force and effect as modified hereby or by instruments executed concurrently herewith, and each of the parties hereto acknowledges and agrees that the terms of this Amendment No. 1 constitute an amendment of the terms of pre-existing Indebtedness and the related agreement, as evidenced by the Amended Credit Agreement.  This Amendment No. 1 shall not constitute a novation of the Credit Agreement or any other Loan Document.

11


 

 

(b)

Governing Law; Submission to Jurisdiction, Consent to Service of Process, Waiver of Jury Trial, Etc. Sections 9.10 and 9.11 of the Credit Agreement are incorporated by reference herein as if such Sections appeared herein, mutatis mutandis .

 

(c)

Severability .   Section 9.08 of the Credit Agreement is incorporated by reference herein as if such Section appeared herein, mutatis mutandis .

 

(d)

Counterparts; Headings .  This Amendment No. 1 may be executed in counterparts (and by different parties hereto on different counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single contract. Delivery of an executed counterpart of a signature page of this Amendment No. 1 by telecopy or other electronic transmission (including in .pdf format) shall be effective as delivery of a manually executed counterpart of this Amendment No. 1. Article and Section headings used herein are for convenience of reference only, and are not part of this Amendment No. 1 and shall not affect the construction of, or be taken into consideration in interpreting, this Amendment No. 1.

 

(e)

Notice . For purposes of the Credit Agreement, the notice address of each Additional Refinancing Term Lender shall be as set forth opposite such Additional Refinancing Term Lender’s name on Schedule 1 hereto.

 

(f)

Recordation of 2017 Refinancing Term Loans . Upon execution and delivery hereof, and the funding of the 2017 Refinancing Term Loans, the Administrative Agent will record in the Register the 2017 Refinancing Term Loans made by the 2017 Refinancing Term Lenders as “Term Loans”.

 

(g)

Amendment, Modification and Waiver . This Amendment No. 1 may not be amended nor may any provision hereof be waived except pursuant to a writing signed by each of the parties hereto.

POST-CLOSING OBLIGATIONS .

  Within 90 days after the Amendment No. 1 Effective Date (which period may be extended in the reasonable discretion of the Administrative Agent), each relevant Loan Party shall deliver to the Administrative Agent either:

 

(a)

written confirmation (which confirmation may be provided in the form of an electronic mail acknowledgment in form and substance reasonably satisfactory to the Administrative Agent) from local counsel in the jurisdiction in which each Mortgaged Property is located substantially to the effect that: (x) the recording of the existing Mortgage encumbering such Mortgaged Property is the only filing or recording necessary to give constructive notice to third parties of the lien created by such Mortgage as security for the Obligations, including the Obligations evidenced by the Credit Agreement, as amended pursuant to this Amendment No.1; and (y) no other documents, instruments, filings, recordings, re-recordings, re-filings or other actions, including, without limitation, the payment of any mortgage recording taxes or similar taxes, are necessary under applicable law in order to maintain the continued enforceability, validity or priority of the lien created by such Mortgage as security for the Obligations, including the Obligations evidenced by the Credit Agreement, as amended pursuant to this Amendment No. 1; or

 

(b)

the following documents:

 

(i)

with respect to each Mortgage encumbering a Mortgaged Property, an amendment thereof (a “ Mortgage Amendment ”) duly executed and acknowledged by the relevant

12


 

 

Loan Party, and in form for recording in the recording office where the Mortgage was recorded, in each case in form and substance reasonably satisfactory to the Administrative Agent;

 

(ii)

with respect to each Mortgage Amendment, a date down endorsement to the existing Mortgage Policy relating to the Mortgage encumbering the applicable Mortgaged Property (a “ Title Policy Endorsement ”) insuring that such Mortgage, as amended by such Mortgage Amendment is a valid lien on such Mortgaged Property in favor of the Administrative Agent for the benefit of the Secured Parties free and clear of any other Liens except for Permitted Liens and each such Title Policy Endorsement shall otherwise be in form and substance reasonably satisfactory to the Administrative Agent; and

 

(iii)

with respect to each Mortgage Amendment, opinions of local counsel regarding the due authorization, execution, delivery and enforceability of such Mortgage Amendment and such other matters customarily covered in real estate mortgage amendment opinions as the Administrative Agent may reasonably request.

[ Remainder of page intentionally blank; signatures begin next page ]

 

13


 

IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 1 to be duly executed by their respective authorized officers as of the date first above written.

LSC COMMUNICATIONS, INC. , as Borrower

 

 

By: /s/ Suzanne S. Bettman

Name:  Suzanne S. Bettman

Title:  Secretary; Chief Administrative Officer; General Counsel

 

 

with respect to Section 8:
COURIER COMMUNICATIONS LLC
,

courier kendallville, inc.,

courier new media, inc.,

CREEL PRINTING, LLC

dover publications, inc.,

FAIRRINGTON, LLC,

LSC COMMUNICATIONS MM LLC,

LSC COMMUNICATIONS US, LLC,

LSC INTERNATIONAL HOLDINGS, INC.,

NATIONAL PUBLISHING COMPANY and

PUBLISHERS PRESS, LLC,

each as a Loan Party, Reaffirming Loan Guarantor and Reaffirming Grantor

 

 

By:  /s/ Janet M. Halpin

Name: Janet M. Halpin

Title: Treasurer

 

 

 

 

 

 


 


 

BANK OF AMERICA , N.A., as an Additional Refinancing Term Lender
  


By /s/ Jonathan Tristan
Name: Jonathan Tristan
Title: Vice President

 

 

 

 


 


 

 

 

BANK OF AMERICA, N.A., as Administrative Agent
  


By /s/ Angela Larkin
Name: Angela Larkin
Title: Assistant Vice President

 

 

 

 

 

 

LENDER SIGNATURE PAGES ON FILE WITH ADMINISTRATIVE AGENT

 

 


 

 

SCHEDULE 1

 

 

Additional Refinancing Term Lender

2017 Refinancing Term Commitment

Notice address

Bank of America, N.A.

$120,288,016.50

Bank of America

Attn: Angela Larkin

Mail Code: IL4-135-09-61

135 S. LaSalle St.

Chicago, IL 60603

TOTAL

$120,288,016.50

 

 

 

 

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)

designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

( c )

evaluated the effectiveness of the 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

 

( d )

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 3, 2018       

     

/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)

designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c)

evaluated the effectiveness of the 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

 

(d)

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 3, 2018      

 

/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, 2018 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 3, 2018

     

/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, 2018 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 3, 2018

   

/s/  A NDREW B. COXHEAD

Andrew B. Coxhead

Chief Financial Officer