UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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Commission File Number 1-37729
LSC Communications, Inc.
(Exact name of registrant as specified in its Charter)
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Delaware |
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36-4829580 |
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(State or other jurisdiction of
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(I.R.S. Employer
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191 N. Wacker Drive, Suite 1400, Chicago, IL |
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60606 |
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(Address of principal executive offices) |
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(ZIP Code) |
Registrant’s telephone number, including area code—(773) 272-9200
Securities registered pursuant to Section 12(g) of the Act:
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Title of each class |
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Trading Symbol (s) |
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Name of each exchange on which registered |
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Common stock, par value $0.01 per share) |
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LKSD |
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OTCQX |
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☐ No ☑
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ☐ No ☑
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer |
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Accelerated filer ☑ |
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Non-accelerated filer |
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Smaller reporting company ☐ |
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Emerging growth company |
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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 Act). Yes ☐ No ☑
The aggregate market value of the shares of common stock (based on the closing price of these shares on the New York Stock Exchange—Composite Transactions) on June 30, 2019, the last business day of the registrant’s most recently completed second fiscal quarter, held by nonaffiliates was $120,031,446.
The number of shares of Registrant’s Common Stock outstanding as of February 26, 2020 was 33,508,367.
Documents Incorporated By Reference
Portions of the registrant’s proxy statement related to its annual meeting of stockholders are incorporated by reference into Part III of this Form 10-K.
TABLE OF CONTENTS
PART I
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Form 10-K Item No. |
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Name of Item |
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Page |
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Item 1. |
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3 |
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Item 1A. |
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13 |
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Item 1B. |
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22 |
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Item 2. |
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22 |
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Item 3. |
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22 |
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Item 4. |
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22 |
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23 |
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Item 5. |
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24 |
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Item 6. |
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26 |
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Item 7. |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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28 |
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Item 7A. |
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46 |
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Item 8. |
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47 |
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Item 9. |
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Changes in Disagreements with Accountants on Accounting and Financial Disclosure |
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47 |
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Item 9A. |
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48 |
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Item 9B. |
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50 |
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Item 10. |
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Directors and Executive Officers of LSC Communications and Corporate Governance |
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51 |
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Item 11. |
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51 |
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Item 12. |
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Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
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51 |
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Item 13. |
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Certain Relationships and Related Transactions and Director Independence |
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52 |
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Item 14. |
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52 |
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Item 15. |
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53 |
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S-1 |
2
PART I
ITEM 1. BUSINESS
Company Overview
The principal business of LSC Communications, Inc., a Delaware corporation, and its direct or indirect wholly-owned subsidiaries (“LSC Communications,” “the Company,” “we,” “our” and “us”) is to offer a broad scope of traditional and digital print, print-related services and office products.
Capitalized terms used and not otherwise defined in Items 1, Business, and 7, Management’s Discussions and Analysis of Financial Condition and Results of Operations, are defined in the notes to the consolidated financial statements.
Merger Agreement
On October 30, 2018, the Company entered into that certain Agreement and Plan of Merger (the “Merger Agreement”), by and among Quad/Graphics, Inc. (“Quad”), QLC Merger Sub, Inc. and LSC Communications, pursuant to which, subject to the satisfaction or waiver of certain conditions, LSC Communications would be merged with QLC Merger Sub, Inc., and become a wholly-owned subsidiary of Quad.
On July 22, 2019, Quad and LSC Communications entered into a letter agreement (the “Letter Agreement”), pursuant to which the parties agreed to terminate the Merger Agreement. Pursuant to the Letter Agreement, Quad agreed to pay LSC Communications the Regulatory Approval Reverse Termination Fee (as defined in the Merger Agreement) of $45 million in cash on the business day following the date of the Letter Agreement. The Company incurred transaction costs of approximately $26 million associated with the Merger Agreement, of which $5 million was incurred in 2018. Except for certain indemnification obligations of Quad related to LSC Communications assisting Quad with the financing under the Merger Agreement, the parties also agreed to release each other from any and all claims, counterclaims, demands, proceedings, actions, causes of action, orders, obligations, damages, debts, costs, expenses and other liabilities whatsoever and howsoever arising pursuant to or in connection with the Merger Agreement or the transactions provided for in the Merger Agreement.
Going Concern
The consolidated financial statements have been prepared assuming the Company will continue as a going concern. Based on final results of operations for the year ended December 31, 2019, the Company concluded it was not in compliance with the Consolidated Leverage Ratio and Minimum Interest Ratio contained in the Credit Agreement as of December 31, 2019. The noncompliance occurred on the last day of the fourth quarter due to the following: the Company’s Consolidated Leverage Ratio exceeded the maximum level permitted and the Company’s Minimum Interest Ratio was below the minimum level permitted. On March 2, 2020, the Company entered into a Waiver, Forbearance Agreement and Fourth Amendment to Credit Agreement with lenders constituting a majority under the Credit Agreement that governs the Company’s Revolving Credit Facility and Term Loan Facility. The Waiver, Forbearance Agreement and Fourth Amendment to Credit Agreement waives the defaults or events of default that have occurred as a result of the financial covenant noncompliance on December 31, 2019 and prevents the lenders from directing the Administrative Agent to accelerate the debt or exercise other remedies as a result of certain other potential defaults or events of default which may occur under the Credit Agreement (the “Potential Defaults”) through the period ended May 14, 2020 (such period, the “Forbearance Period”). The Potential Defaults include potential breaches of the Company’s financial covenants with respect to the first quarter of 2020, failure to make principal and interest payments related to the Term Loan Facility, failure to deliver audited financial statements for the year ended December 31, 2019 without a going concern qualification or exception, and failure to provide notice with respect to the Potential Defaults. The Waiver, Forbearance Agreement and Fourth Amendment to Credit Agreement contains certain covenants and requirements, and failure to comply with these covenants and requirements could result in the termination of the Waiver, Forbearance Agreement and Fourth Amendment to Credit Agreement (and the Forbearance Period) prior to its stated term. Following the end of the Forbearance Period, the lenders may choose not to provide a full waiver of the Potential Defaults, should any occur. The Waiver, Forbearance Agreement and Fourth Amendment to Credit Agreement requires the Company to pay a waiver fee of 0.30% of the Aggregate Exposure of the Consenting Lenders as of the effective date of the Waiver, Forbearance Agreement and Fourth Amendment to Credit Agreement. Should any of the Potential Defaults occur, unless the Company obtains an extension or another waiver, upon the termination of the Forbearance Period, the Company’s debt under the Revolving Credit Facility and Term Loan Facility could be in default and could be accelerated by lenders, which would require the Company to pay all amounts outstanding and could result in a default under, and the acceleration of, our other debt. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.
3
The ability to continue as a going concern is dependent upon the Company entering into an amendment to the Credit Agreement, including revised covenants, or obtaining financing to replace the current facility, as well as continuing profitable operations, continuing to meet its obligations, and continuing to repay its liabilities arising from normal business operations when they become due. The Company has evaluated its plans to alleviate this doubt, which may include obtaining amended terms from its current lenders to allow for sufficient flexibility in the financial covenants after giving consideration to the Company’s current operations and strategic plans, or evaluating strategic alternatives in order to reduce the Company’s indebtedness. As of the issuance date of these consolidated financial statements, such plans cannot yet be considered probable (as defined by ASC 205-40, “Going Concern”) of occurring. Negotiations with our lenders may require the Company to raise additional capital and/or pursue the sale of non-core assets to reduce existing debt. There can be no assurance that the Company will be successful in its plans to refinance, to obtain alternative financing on acceptable terms or to sell non-strategic assets, when required or if at all. If such plans are not realized, the Company may be forced to limit its business activities or be unable to continue as a going concern, which will have a material adverse effect on our consolidated results of operations and financial condition. Management anticipates incurring certain one-time expenses, which may be significant, during 2020 relating to the plans it may pursue to alleviate the substantial doubt about the Company’s ability to continue as a going concern.
The consolidated financial statements included in this annual report on Form 10-K do not include any adjustments related to the recoverability and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The audit opinion on our consolidated financial statements includes an emphasis of matter paragraph related to the substantial doubt surrounding the Company’s ability to continue as a going concern.
Business Overview
The Company serves the needs of publishers, merchandisers and retailers worldwide with a service offering that includes e-services, logistics, warehousing and fulfillment and supply chain management services. The Company utilizes a broad portfolio of technology capabilities coupled with consultative attention to clients' needs to increase speed to market, reduce costs, provide postal savings to customers and improve efficiencies. The Company prints magazines, catalogs, books and directories, and its office products offerings include filing products, envelopes, note-taking products, binder products, and forms.
The Company’s product and service offerings include:
Magazines, catalogs and retail inserts: We are one of the largest producers of magazines and catalogs in North America. These products are manufactured to customers’ specifications using offset, digital or gravure printing processes in combination with either on-press finishing, saddle-stitch binding or patent binding.
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Our catalog customers include retailers and other direct-to-buyer sellers who design their own catalogs and use our production capabilities to print and distribute their catalogs to customers through the mail. |
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Our magazine customers are publishers who design their own magazines and use our production capabilities to print and distribute their magazines through the mail directly to their subscribers and through wholesalers to retailers and other “newsstands” for purchase by non-subscribers. |
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Until the Company sold its retail offset printing facilities on June 5, 2018, our retail insert customers included retailers who distribute their inserts in newspapers distributed to newspaper subscribers and via in-store distribution; however, we continue to print circulars for national retailers. |
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We made a number of acquisitions during 2017 that expanded and enhanced our product and service offerings: |
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Through our acquisition of CREEL Printing, LLC (“CREEL”), we expanded our customer base to include financial services firms, direct marketers, consumers and other types of customers who utilize targeted, personalized digital and sheetfed printing; |
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Our acquisition of Publishers Press, LLC (“Publishers Press”) enabled us to enhance our printing capabilities, especially in BtoB (business to business), trade and niche magazines; and |
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Our acquisition of HudsonYards Studios, LLC (“HudsonYards”) allowed us to enhance our digital and print premedia capabilities by providing high-quality creative retouching, computer-generated imagery, mechanical creation, press-ready file preparation, and interactive production services to our customers. |
In the U.S., we have a network of production facilities enabling the optimal combination of regional and national distribution. Additionally, we have production facilities in Mexico that efficiently produce goods for distribution in Latin America.
Logistics: We provide logistics solutions to the Company and other third parties in the United States.
4
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We acquired R.R. Donnelley & Sons’ (“RRD”) Print Logistics business (“Print Logistics”) during 2018. During 2017, we acquired The Clark Group, Inc. (“Clark Group”), and Fairrington Transportation Corp., F.T.C. Transport, Inc. and F.T.C. Services, Inc. (together, “Fairrington”) that expanded and enhanced our logistics offerings. |
Books: We are the largest producer of books in the U.S. Our book customers generally are publishers who seek to print hardcover and softcover books for the education, trade, and religious sectors. We believe we are well positioned to meet our book customers’ specific needs, whether they be colors, page counts, trim size, binding styles or quantities. Consumer trade books are typically produced using either offset or digital printing processes, and are bound in a variety of formats. Educational books include softcover and traditional casebound textbooks utilized by primary and secondary school and college students, as well as workbooks, teachers’ editions, and other formats.
Directories: We produce directories that are mainly phone directories that support local and small business advertising. Our customers for directory printing are generally marketing solution providers that publish online as well as printed directories.
Print-related services: In addition to printed products, we provide a number of print-related services.
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Our supply chain management offering includes procurement, warehousing, distribution, and inventory management for book publishers. |
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We provide e-book formatting and distribution services. |
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Our print management and sourcing offering serves customers looking to outsource non-core functions and add scale to their marketing efforts. |
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Our premedia offering includes high quality color retouching and other premedia services for both print and digitally delivered content to publishers and retailers. |
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Our mail services offering includes list processing and mail sortation services that, combined with our production scale, optimize postal costs for magazine and catalog customers. |
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We provide cross-customer sortation that reduces postal costs for our customers compared to what an individual customer could obtain. |
Office Products: We produce and distribute a wide range of branded and private label products, primarily within the five categories below, to retailers, wholesalers and direct-to-consumer:
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Filing products: Our filing products include a variety of presentation and storage materials for professionals and students. We sell our filing products under the Pendaflex™ and other brands, as well as under private label brands for third parties. |
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Envelopes: We produce envelopes for businesses and consumers within North America. Our key brands used for envelopes are Quality Park™ (since its acquisition in November 2017) and Ampad™, and we also produce private label envelopes for third parties. |
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Note-taking products: Our note-taking products include legal pads, journals, index cards, spiral notebooks, composition books and notebook filler paper. We sell our note-taking products under the TOPS™, Ampad, Oxford™, and other brands, as well as under private label brands for third parties. |
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Binder products: Our binder products include a variety of binders and binder accessories for professionals and students. We sell our binder products under the Cardinal™, Oxford and other brands, as well as under private label brands for third parties. |
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Forms: We produce business forms, tax forms, message and memo pads, financial forms, and recordkeeping materials for businesses within North America. Our key brand used for forms is Adams™, and we also produce private label forms for third parties. |
Segment Descriptions
As a result of the Company’s segment analysis in the fourth quarter of 2019, Mexico met the requirements to be classified as a reportable segment (previously included as a non-reportable segment). All prior year amounts have been reclassified to conform to the Company’s current reporting structure.
5
The Company’s segment and product and service offerings are summarized below:
Magazines, Catalogs and Logistics
The Magazines, Catalogs and Logistics segment primarily produces magazines and catalogs and provides logistics solutions to the Company and other third parties. The segment also provides certain other print-related services, including mail services. The segment has operations primarily in the U.S. The Magazines, Catalogs and Logistics segment is divided into two reporting units: magazines and catalogs; and logistics.
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.
Mexico
Mexico produces magazines, catalogs, statements, forms, and labels.
Other
The Other grouping consists of the following non-reportable segments: Directories, Print Management and Europe. Print Management provides outsourced print procurement and management services. Prior to the Company’s disposal of its European printing business in the third quarter of 2018, Europe produced magazines, catalogs and directories and provided packaging and pre-media services.
Corporate
Corporate consists of unallocated selling, general and administrative activities and associated expenses including executive, legal, finance, communications, certain facility costs and LIFO inventory provisions. In addition, share-based compensation expense is included in Corporate and not allocated to the operating segments.
Financial and other information related to these segments is included in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and in Note 19, Segment Information, to the consolidated financial statements.
6
Business Acquisitions and Dispositions
The following table lists the Company’s acquisitions since the beginning of 2016:
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Company |
Description |
Purchase Price |
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July 2, 2018 |
Print Logistics |
Integrated logistics services provider with distribution network |
$52 million in cash |
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November 29, 2017 |
Clark Group |
Third-party logistics provider of distribution, consolidation, transportation management and international freight forwarding services |
$25 million in cash |
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November 9, 2017 |
Quality Park |
Producer of envelopes, mailing supplies and assorted packaging items |
$41 million in cash |
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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 |
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August 21, 2017 |
NECI, LLC ("NECI") |
Supplier of commodity and specialty filing supplies |
$6 million in cash |
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August 17, 2017 |
Creel |
Offset and digital printing company |
$79 million in cash |
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July 28, 2017 |
Fairrington |
Full-service, printer-independent mailing logistics provider in the United States |
$19 million in cash and ~1.0 million shares of LSC Communications common stock (total value $39 million) |
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March 1, 2017 |
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 |
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December 2, 2016 |
Continuum Management Company, LLC (“Continuum”) |
Print procurement and management business |
$9 million in cash |
The Company’s dispositions are listed below:
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Commingle operations on August 20, 2019; |
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European printing business on September 28, 2018 for $47 million in cash; and |
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Retail offset printing facilities on June 5, 2018. |
For further information on the Print Logistics acquisition and the European disposition, see Note 3, Business Combinations and Disposition, to the consolidated financial statements.
Competitive Environment
According to the December 2019 IBIS World industry report “Printing in the U.S.,” estimated total annual printing industry revenue is approximately $80 billion, of which approximately $13 billion relates to our core segments of the print market and an additional approximately $33 billion pertains to related segments of the print market in which we are able to offer certain products. Despite consolidation in recent years, including several acquisitions completed by LSC Communications, the industry remains highly fragmented and LSC Communications is one of the largest players in our segment of the print market. The print and related services industry, in general, continues to have excess capacity and LSC Communications remains diligent in proactively identifying plant consolidation opportunities to keep our capacity in line with demand. Across the Company’s range of print products and services, competition is based primarily on the ability to deliver products for the lowest total cost, a factor driven not only by price, but also by materials and distribution costs. We expect that prices for print products and services will continue to be a focal point for customers in coming years.
7
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 Company’s product and service offerings have been impacted by the following:
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The impact of digital technologies has been felt in many print products. Digital technologies have impacted printed magazines as advertising spending continues to move from print to electronic media. |
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Catalogs have experienced volume reductions as our customers allocate more of their spending to online resources and also face competition from online retailers resulting in retailer compression. |
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The Company has seen an unprecedented drop in demand for magazines and catalogs in 2019, with the faster pace of decline in demand primarily due to the accelerated impact of digital disruption of demand for printed materials. |
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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. |
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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. |
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Electronic communication and transaction technology has also continued to drive electronic substitution in directory printing, in part driven by cost pressures at key customers. |
The future impact of technology on our business is difficult to predict; however, it is likely to result in additional expenditures to restructure impacted operations or develop new technologies. In addition, we have made targeted acquisitions and investments in our existing business to offer customers innovative services and solutions. Such acquisitions and investments include the acquisitions of Print Logistics in 2018 and Clark Group, Quality Park, Publishers Press, CREEL, Fairrington, and HudsonYards in 2017, which expanded our logistics, printing, digital, office products, and premedia capabilities, and 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 continues to affect the overall demand for most of the products in our Office Products segment. However, 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 are likely to include the reorganization of operations and the consolidation of facilities. Implementing such initiatives might result in future restructuring or impairment charges, which may be substantial. We also review our operations and management structure on a regular basis to appropriately balance risks and opportunities to maximize efficiencies and to support our long-term strategic goals.
During late 2018 and early 2019, the Company performed a comprehensive review of the Company’s entire operations to identify new revenue opportunities and cost savings. This review covered substantially all aspects of the Company – both operational and support functions – and involved key personnel from throughout the organization. The resulting revenue opportunities and cost savings initiatives were approved by senior management in the first quarter of 2019 and are expected to be implemented over the next three years. While the Company realized the benefits beginning in 2019 and expects to realize benefits at various points over the next three years, the Company incurred $10 million of expense during the year ended December 31, 2019 relating to the implementation of certain identified initiatives. As the Company continues to implement the identified initiatives, the Company expects to incur additional expense; however, the Company expects the resulting benefits (additional revenue and/or cost savings) to significantly exceed the additional expense.
8
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.
Raw Materials
We negotiate with suppliers to maximize our purchasing efficiencies. The primary raw materials we use in our printed products are paper and ink. We negotiate with paper suppliers to maximize our purchasing efficiencies and use a wide variety of paper grades and formats. In addition, a substantial amount of paper used in our printed products is supplied directly by customers. Variations in the cost and supply of certain paper grades used in the manufacturing process may affect our consolidated financial results. Generally, customers directly absorb the impact of changing prices on customer-supplied paper. For paper that we purchase, we have historically passed most changes in price through to our customers. We entered into a paper consignment agreement at the end of 2019 that will encompass substantially all of LSC Communications’ purchased paper by mid-2020 to reduce our working capital.
Contractual arrangements and industry practice should support our continued ability to pass on any future paper price increases, but there is no assurance that market conditions will continue to enable us to successfully do so. Higher paper prices and tight paper supplies may have an impact on customers’ demand for printed products. We also resell waste paper and other print-related by-products and may be impacted by changes in prices for these by-products.
We use a wide variety of ink formulations and colors in our manufacturing processes. Variations in the cost and supply of certain ink formulations may affect our consolidated financial results. We have undertaken various strategic initiatives to try to mitigate any foreseeable supply disruptions with respect to our ink requirements, including entering into a long term supply arrangement with a single supplier for a substantial portion of our ink supply. Certain contractual protections exist in our relationship with such supplier, such as price and quality protections and an ability to seek alternative sources of ink if the supplier breaches or is unable to perform certain of its obligations, which are intended to mitigate the risk of ink-related supply disruptions.
The primary materials used in the Office Products segment are paper, steel and polypropylene substrates. We negotiate with leading paper, plastic and steel suppliers to maximize our purchasing efficiencies. All of these materials are available from a number of domestic and international suppliers and we are not dependent upon any single supplier for any of these materials. We believe that adequate supply is available for each of these materials for the foreseeable future, although higher paper prices may have an impact on demand for our products.
Changes in material prices, including paper, may impact the Company’s operating margins as there may be a lag between when the Company experiences the changes and when they are absorbed by our customers.
Except for our long-term supply arrangement regarding ink and paper consignment agreement, we do not consider ourselves to be dependent upon any single vendor as a source of supply for our businesses, and we believe that sufficient alternative sources for the same, similar or alternative products are available.
Changes in the price of raw materials, crude oil and other energy costs impact our manufacturing costs. Crude oil and energy prices continue to be volatile. Should prices increase, we generally cannot pass on to customers the impact of higher energy prices on our manufacturing costs. We do enter into fixed price contracts for a portion of our natural gas purchases to mitigate the impact of changes in energy prices. We cannot predict sudden changes in energy prices and the impact that possible future changes in energy prices might have upon either future operating costs or customer demand and the related impact either will have on the Company’s consolidated statements of operations, balance sheets and cash flows.
Customers
Our printed products service retailers, including catalogers and merchandisers, and publishers of magazines, books and directories. Our customer base includes eight of the top ten catalogers in the United States, eight of the top ten magazine publishers in the United States, and all of the top ten book publishers based in North America. Our printed products are distributed through the United States Postal Service (“USPS”) or foreign postal services or to our customers by direct shipment, typically in bulk, to customer facilities and warehouses.
9
Our Office Products segment primarily services office superstores, office supply wholesalers, independent contract stationers, mass merchandisers and retailers and e-commerce resellers. The products that make up our Office Products segment are distributed to our customers by direct shipment, typically in bulk, to customer facilities and warehouses.
For each of the years ended December 31, 2019, 2018 and 2017, no customer accounted for 10% or more of the Company’s consolidated net sales.
Technology, Research and Development
The Company has a broad portfolio of technology capabilities that are utilized in the delivery of products and services to our customers. We believe that proprietary technology is required where it will provide a competitive advantage or where the desired technology is not readily available in the marketplace, and, as such, our proprietary technology portfolio contains an array of applications and technological capabilities that were developed to perform different functions, including storefront, digital asset management and distribution, manufacturing systems, warehousing, logistics and list management services and data analytics solutions. Our technology strategy is focused on the continued investment in key technologies that support services and solutions that allow for creation, management, production, distribution and analytics of publisher content in multi-channels to maximize their distribution and return for each title. We are also focusing our technology capabilities on developments that will allow us to pursue strategic relationships and expanded services, such as our full supply chain management offering within our book platform. Our continued activities in our Unified Technology Platform aligns investments across several offerings to support publishers including; order to cash for publishing, digital analytics offered through Harvest View, anti-piracy for publishers through our IntercepTag℠ solution and integrated warehouse offerings in our book fulfillment platform complementing our offset and digital print capabilities. To implement our research and development strategy, we expect to primarily invest in the maintenance and enhancement of our technology footprint within our facilities and in development activities that allow us to create new and differentiating technology capabilities.
Cybersecurity
Our cybersecurity program is designed to meet the needs and expectations of our customers who entrust us with certain sensitive business information. Our infrastructure and technology, expansive and highly trained workforce and comprehensive security and compliance program make us qualified to safely process, store and protect this customer information.
Our infrastructure and technology security capabilities are bolstered by our relationship with a leading data center services provider. Furthermore, our networks are monitored by intrusion detection services around the clock, and our systems and applications are routinely tested for vulnerabilities and are operated under a strict patch management program.
We employ a highly skilled IT workforce to implement our cybersecurity programs and to handle specific security responsibilities. As a result of annual mandatory security awareness training, our IT workforce is qualified to address security and compliance-related issues as they arise. Additionally, all of our IT employees are carefully screened, undergo a thorough background check and are bound by a nondisclosure agreement that details such employee’s security and legal responsibilities with regards to information handling. We believe our security and compliance team also diminishes the risk of system compromise and data exposure by rapidly and effectively addressing security incidents as they arise.
Intellectual Property
We consider patents, trademarks and other proprietary rights to be important to our business. We own over 140 patents worldwide, the majority of which are concentrated in our Office Products segment (utility and design patents), with the remainder falling into the following categories:
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Printing and binding patents: relate to manufacturing processes and systems used in the production of books, magazines and catalogs. |
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Co-mailing patents: relate to combining printed publications in an efficient manner to achieve postal savings. |
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New media patents: relate to methods for creating and formatting digital content for electronic publications. |
Office Products patents primarily relate to binders, notebooks, filing systems, forms, and envelopes.
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We also own approximately 350 trademarks worldwide, the majority of which are concentrated within our Office Products segment. Several of our most significant trademarks include registrations for the Adams, Ampad, Cardinal Brands, Oxford, Pendaflex, Quality Park, and TOPS office products brands. Additionally, we own the rights to a group of trademarks relating to our e-media publishing services, such as Newsstand™, LibreDigital™, LibreMarket™, LibrePublish™, and LibreAccess™.
While we consider our patents, trademarks and other proprietary rights to be valuable assets, we do not believe that our profitability and operations are dependent upon any single patent, trademark or other proprietary right.
Environmental Compliance
Our operations are subject to various international, federal, state and local laws and regulations relating to the protection of the environment, including those governing discharges to air and water, the management and disposal of hazardous materials, the cleanup of contaminated sites and health and safety matters. In the United States, these laws and regulations include the Clean Air Act, the Clean Water Act and the Resource Conservation and Recovery Act. Additionally, the Superfund regulation (the environmental program established in the Comprehensive Environmental Response, Compensation, and Liability Act to address abandoned hazardous waste sites) imposes joint and severable liability on each potentially responsible party. We are committed to complying with these and all other applicable environmental, health, and safety laws, and in order to reduce the risk of non-compliance, we maintain an Environmental, Health and Safety management system that includes an appropriate policy and standards, staff dedicated to environmental, health, and safety issues, and other measures.
While it is our policy to conduct our global operations in accordance with all applicable laws, regulations and other requirements, from time to time, our properties, products or operations may be affected by environmental issues. It is not possible to quantify with certainty the potential impact of actions regarding environmental matters, particularly remediation and other compliance efforts that we may undertake in the future. However, in the opinion of management, compliance with the present environmental protection laws, before taking into account estimated recoveries from third parties, will not have a material adverse effect on our consolidated financial statements.
Employees
As of December 31, 2019, the Company had approximately 20,000 total employees in the global workforce, of which approximately 16,800 employees were in the U.S. and approximately 3,200 were in international locations. Of the U.S. and international employees, approximately 3% and 51%, respectively, were covered by collective bargaining agreements. We have collective bargaining agreements with unionized employees in Canada and Mexico. Management believes that we have good relationships with our employees and collective bargaining groups.
Available Information
The Company maintains an Internet website at www.lsccom.com where the Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports are available without charge, as soon as reasonably practicable following the time they are filed with, or furnished to, the Securities and Exchange Commission (“SEC”). The Principles of Corporate Governance of the Company’s Board of Directors, the charters of the Audit, Human Resources and Corporate Responsibility and Governance Committees of the Board of Directors and the Company’s Principles of Ethical Business Conduct are also available on the Investor Relations portion of www.lsccom.com, and will be provided, free of charge, to any stockholder who requests a copy. References to the Company’s website address do not constitute incorporation by reference of the information contained on the website, and the information contained on the website is not part of this document.
Special Note Regarding Forward-Looking Statements
The Company has made forward-looking statements in this annual report on Form 10-K that are subject to risks and uncertainties. These statements are based on the beliefs and assumptions of the Company. Generally, forward-looking statements include information concerning possible or assumed future actions, events, or results of operations of the Company.
These statements may include, or be preceded or followed by, the words “anticipates,” “estimates,” “expects,” “projects,” “forecasts,” “intends,” “plans,” “continues,” “believes,” “may,” “will,” “goals” or variations of such words and similar expressions. Examples of forward-looking statements include, but are not limited to, statements, beliefs and expectations regarding our business strategies, market potential, future financial performance, dividends, results of pending legal matters, our goodwill and other intangible assets, price volatility and cost environment, our liquidity, our funding sources, expected pension contributions,
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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, 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:
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our ability to address the going concern considerations described in the footnotes to our audited consolidated financial statements included elsewhere in this annual report on Form 10-K and to generate sufficient liquidity to satisfy our obligations as they become due; |
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the competitive market for our products and industry fragmentation affecting our prices; |
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inability to improve operating efficiency to meet changing market conditions; |
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changes in technology, including electronic substitution and migration of paper based documents to digital data formats; |
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the volatility and disruption of the capital and credit markets, and adverse changes in the global economy; |
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the effects of global market and economic conditions on our customers; |
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the effect of economic weakness and constrained advertising; |
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uncertainty about future economic conditions; |
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increased competition as a result of consolidation among our competitors; |
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our ability to successfully integrate recent and future acquisitions; |
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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; |
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the effects of seasonality on our core businesses; |
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the effects of increases in capital expenditures; |
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changes in the availability or costs of key print production materials (such as paper, ink, energy, and other raw materials), the tight labor market, the availability of labor at our vendors or in prices received for the sale of by-products; |
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performance issues with key suppliers; |
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our ability to maintain our brands and reputation; |
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the retention of existing, and continued attraction of additional customers and key employees, including management; |
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the effect of economic and political conditions on a regional, national or international basis; |
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the effects of operating in international markets, including fluctuations in currency exchange rates; |
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changes in environmental laws and regulations affecting our business; |
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the ability to gain customer acceptance of our new products and technologies; |
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the effect of a material breach of or disruption to the security of any of our or our vendors’ systems; |
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the failure to properly use and protect customer and employee information and data; |
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the effect of increased costs of providing health care and other benefits to our employees; |
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the effect of catastrophic events; |
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the ability to maintain adequate payment terms with key vendors in light of recent credit downgrades; |
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the impact of the Tax Act; and |
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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 annual report on Form 10-K should consider these forward-looking statements only as the Company’s current plans, estimates and beliefs. The Company does not undertake and specifically declines any obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect future events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. The Company undertakes no obligation to update or revise any forward-looking statements in this annual report on Form 10-K to reflect any new events or any change in conditions or circumstances.
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ITEM 1A. RISK FACTORS
The Company’s consolidated statements of operations, balance sheets and cash flows can be adversely affected by various risks. These risks include the principal factors listed below and the other matters set forth in this annual report on Form 10-K. You should carefully consider all of these risks.
Risks Relating to the Business of the Company
Our management has concluded, and our independent registered public accounting firm has noted in their report on our consolidated financial statements as of and for the fiscal year ended December 31, 2019, that, due to our noncompliance of financial covenants under our Credit Agreement, substantial doubt exists as to our ability to continue as a going concern.
The consolidated financial statements have been prepared assuming the Company will continue as a going concern. Based on final results of operations for the year ended December 31, 2019, the Company concluded it was not in compliance with the Consolidated Leverage Ratio and Minimum Interest Ratio contained in the Credit Agreement as of December 31, 2019. The noncompliance occurred on the last day of the fourth quarter due to the following: the Company’s Consolidated Leverage Ratio exceeded the maximum level permitted and the Company’s Minimum Interest Ratio was below the minimum level permitted. On March 2, 2020, the Company entered into a Waiver, Forbearance Agreement and Fourth Amendment to Credit Agreement with lenders constituting a majority under the Credit Agreement that governs the Company’s Revolving Credit Facility and Term Loan Facility. The Waiver, Forbearance Agreement and Fourth Amendment to Credit Agreement waives the defaults or events of default that have occurred as a result of the noncompliance on December 31, 2019. The Waiver, Forbearance Agreement and Fourth Amendment to Credit Agreement also includes an undertaking from the lenders to forbear from exercising remedies for certain potential future defaults or events through the period ended May 14, 2020 (such period, the “Forbearance Period”), subject to the Company’s compliance with various undertakings in the Waiver, Forbearance Agreement and Fourth Amendment to Credit Agreement. The Waiver, Forbearance Agreement and Fourth Amendment to Credit Agreement contains certain covenants and requirements, and failure to comply with these covenants and requirements could result in the termination of the Waiver, Forbearance Agreement and Fourth Amendment to Credit Agreement prior to its stated term. Following the end of the Forbearance Period, the lenders may choose not to provide a full waiver of the Potential Defaults, should any occur. Unless the Company obtains an extension or another waiver, upon the termination of the Waiver, Forbearance Agreement and Fourth Amendment to Credit Agreement, the Company’s debt under the Revolving Credit Facility and Term Loan Facility could be in default and could be accelerated by lenders, which would require the Company to pay all amounts outstanding and could result in a default under, and the acceleration of, our other debt. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.
The degree to which our assets are leveraged and the terms of our debt could materially and adversely affect our ability to obtain additional capital, as well as the terms at which such capital might be offered to us.
The ability to continue as a going concern is dependent upon the Company entering into an amendment to the Credit Agreement, including revised covenants, or obtaining financing to replace the current facility, as well as continuing profitable operations, continuing to meet its obligations, and continuing to repay its liabilities arising from normal business operations when they become due. The Company has evaluated its plans to alleviate this doubt, which may include obtaining amended terms from its current lenders to allow for sufficient flexibility in the financial covenants after giving consideration to the Company’s current operations and strategic plans, or evaluating strategic alternatives in order to reduce the Company’s indebtedness. Negotiations with our lenders may require the Company to raise additional capital and/or pursue the sale of non-core assets to reduce existing debt. There can be no assurance that the Company will be successful in its plans to refinance, to obtain alternative financing on acceptable terms or to sell non-strategic assets, when required or if at all. If such plans are not realized, the Company may be forced to limit its business activities or be unable to continue as a going concern, which will have a material adverse effect on our consolidated results of operations and financial condition. Management anticipates incurring certain one-time expenses, which may be significant, during 2020 relating to the plans it may pursue to alleviate the substantial doubt about the Company’s ability to continue as a going concern.
The highly competitive market for our products and industry fragmentation may continue to create adverse price pressures.
The markets for the majority of our product categories are highly fragmented and we have a large number of competitors. Management believes that excess capacity in our markets, as well as increasing consolidation of our customer base has caused downward price pressure for our products and that this trend is likely to continue. In addition, consolidation in the markets in which we compete may increase competitive price pressures due to competitors lowering prices as a result of synergies achieved or lower cost platforms.
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We may be unable to improve our operating efficiency rapidly enough to meet market conditions.
Because the markets in which we compete are highly competitive, we must continue to improve our operating efficiency in order to maintain or improve our profitability. There is no assurance that we will be able to do so in the future. In addition, the need to reduce ongoing operating costs may result in significant up-front costs to reduce workforce, close or consolidate facilities, or upgrade equipment and technology, which could negatively impact the Company’s consolidated statements of operations, balance sheets and cash flows.
The substitution of electronic delivery for printed materials and decrease in printed page counts may continue to adversely affect our businesses.
Electronic delivery of documents and data, including the online distribution and hosting of media content, offer alternatives to traditional delivery of printed materials. Consumers continue to accept electronic substitution in directory printing and are replacing traditional reading of printed materials with online, hosted media content or e-reading devices. Additionally, customers may choose to decrease their printed page counts by using their printed product to drive customers to their websites. The extent to which consumers will continue to accept electronic delivery is uncertain and it is difficult to predict future rates of acceptance of these alternatives. Electronic delivery has negatively impacted some of our products, such as directories and books. Digital technologies have also impacted printed magazines, as advertising spending has continued to significantly transition from print to electronic media. To the extent that consumers and customers continue to accept these alternatives, our consolidated statements of operations, balance sheets and cash flows could be negatively impacted.
Global market and economic conditions, as well as the effects of these conditions on our customers’ businesses, could adversely affect us, as the financial condition of our customers may deteriorate.
Global economic conditions affect our customers’ businesses and the markets they serve. Because a significant part of our business relies on advertising spending, which is driven in part by economic conditions and consumer spending, a prolonged downturn in the global economy and an uncertain economic outlook could further reduce the demand for the printing and related services that we provide. Delays or reductions in customers’ spending would have an adverse effect on demand for our products and services, which could be material, and consequently could negatively impact our results of consolidated statements of operations, balance sheets and cash flows. Economic weakness and constrained advertising spending may result in decreased net sales, operating margins, earnings and growth rates and difficulty in managing inventory levels and collecting accounts receivable. Our exposure to industries experiencing financial difficulties and certain financially troubled customers could negatively impact our consolidated statements of operations, balance sheets and cash flows. Further, a lack of liquidity in the capital markets or a sustained period of unfavorable economic conditions could increase our exposure to credit risks of our customers and result in increases in bad debt write-offs and allowances for doubtful accounts receivable. We may experience operating margin declines, reflecting the effect of items such as competitive price pressures, inventory write-downs, cost increases for wages and materials, and increases in pension plan funding requirements. Economic downturns may also result in restructuring actions and associated expenses and impairment of long-lived assets, including goodwill and other intangibles. Uncertainty about future economic conditions makes it difficult for us to forecast operating results and to make decisions about future investments. In addition, a novel strain of coronavirus surfaced in Wuhan, China in December 2019, resulting in increased travel restrictions and extended shutdown of certain businesses in the region. The impact of the coronavirus on our business is uncertain at this time and will depend on future developments, but prolonged closures in China may disrupt our operations and the operations of our suppliers, distributors and customers, which could negatively impact our business, results of operations and financial condition.
Our business is subject to risks associated with seasonality, which could negatively impact our consolidated statements of operations, balance sheets and cash flows.
Our sales and cash flows are affected by seasonality, as print demand is affected by advertising and consumer spending trends. Historically, demand for printing of magazines, catalogs, retail inserts, books and office products is higher in the second half of the year, driven by increased advertising pages within magazines, holiday volume in catalogs and retail inserts, and back-to-school demand in books and office products. Specifically, the demand for trade books is stronger in the second half of the year due to the holiday season, while the market for educational books is stronger during this period due to the back-to-school season. These typical seasonal patterns can be impacted by overall trends in the U.S. and world economy. For these reasons, sequential quarterly comparisons are not a good indication of our performance or how we may perform in the future.
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Increases in commodity and other operating costs may adversely impact us.
The profitability of our Company depends in part on our ability to anticipate and react to changes in commodity costs, including paper, ink, energy and other raw materials, and other operating costs, including labor and transportation. Any volatility in certain commodity prices or fluctuation in labor costs could adversely affect our operating results by impacting our profitability. Increases in the prices of these inputs may increase our costs, and we may not be able to pass these increased costs on to customers through higher prices, or to the extent we pass along such costs by increasing our prices to our customers, it may adversely impact customers’ demand for our printing and related services.
Decreases in the market prices for waste paper or other byproducts may adversely impact us.
Decreases in the prices paid by third parties for waste paper and other print-related byproducts may make it infeasible for us to sell, or adversely impact the amounts we are paid, from sales of such byproducts.
We may be adversely affected by a decline in the availability of raw materials.
We are dependent on the availability of paper, ink and other raw materials to support our operations. Unforeseen developments in these markets could result in a decrease in the supply of paper, ink or other raw materials and could cause us to be unable to meet contractual commitments to our customers or result in a decline in our net sales.
We rely on a key supplier for ink and a separate key supplier for paper. If such suppliers breach or are unable to perform certain obligations under our arrangement with them, we may be unable to procure comparable supply from another supplier in a timely fashion, or when we are able to procure such supply, such supply may be on worse terms.
A significant portion of our ink comes from a single supplier pursuant to a multi-year supply agreement. The ink industry has faced significant challenges in recent years, as the demand for ink has declined while the costs of raw materials used to manufacture ink have fluctuated. We rely on this ink supplier to meet a significant portion of our ink needs, and have negotiated a contract that provides us with favorable terms and certain contingencies from supply disruption. Additionally, we entered into a paper consignment agreement at the end of 2019 with one supplier that will encompass substantially all LSC Communications’ purchased paper by mid-2020.
A disruption in the supply of ink or paper from these suppliers, either from natural disaster, financial bankruptcy or other supply interruption, may require us to purchase a significant amount of ink or paper from other suppliers or assume the production ourselves, which in either case, may be on worse terms and slow our production, either of which could have a negative impact on our consolidated statements of operations, balance sheets and cash flows.
We may be subject to more intensive competition if our competitors pursue consolidations.
We currently have a large number of competitors in the markets in which we operate. If our competitors are able to successfully combine with one another, and we are not successful with our own efforts to consolidate or adapt effectively to increased competition, the competitive landscape we face could be significantly altered. Such consolidation could create stronger competitors with greater financial resources and broader manufacturing and distribution capabilities than our own, and the resulting increase in competitive pressures could negatively impact our consolidated statements of operations, balance sheets and cash flows.
Our business is dependent upon brand recognition and reputation, and the failure to maintain or enhance our brands or reputation would likely have an adverse effect on our business.
Our brand recognition, particularly in our Office Products segment, and reputation generally are important aspects of our business. Maintaining and further enhancing our brands and reputation will be important to retaining and attracting customers for our products. We also believe that the importance of our brand recognition and reputation for products will continue to increase as competition in the market for our products continues to increase. Our success in this area will be dependent on a wide range of factors, some of which are out of our control, including our ability to retain existing and obtain new customers and strategic partners, the quality and perceived value of our products, actions of our competitors, and positive or negative publicity. Our reputation also depends on the quality of our customer service, and if our customer service declines, our reputation may also decline. Damage to our reputation and loss of brand equity may reduce demand for our products and could negatively impact our consolidated statements of operations, balance sheets and cash flows.
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Catastrophic events may damage or destroy our factories, distribution centers or other facilities, which may disrupt our business.
Natural disasters, conflicts, wars, terrorist attacks, fires or other catastrophic events could cause damage or disruption to our factories, distribution centers or other facilities, which may adversely affect our ability to manage logistics, cause delays in the delivery of products and services to our customers, and create inefficiencies in our supply chain. An event of this nature could also prevent us from maintaining ongoing operations and from performing critical business functions. While we maintain backup systems and operate out of multiple facilities to reduce the potentially adverse effect of these types of events, a catastrophic event that results in the destruction of any of our major factories, distribution centers or other facilities could affect our ability to conduct normal business operations, which could negatively impact our consolidated statements of operations, balance sheets and cash flows.
There are risks associated with operations outside the United States.
Our operations outside of the United States during the year ended December 31, 2019 were primarily in Mexico and Canada, which accounted for 6% of our 2019 consolidated net sales. As a result, we are subject to the risks inherent in conducting business outside the United States, including the impact of economic and political instability of those countries in which we operate. Security disruptions within the regions in Mexico in which we operate may interfere with operations, which could negatively impact our supply chain.
We, particularly in the Office Products segment, are also subject to risks that could materially affect our operations and operating results with respect to potential changes in United States government trade policy and legislation, including changes to tax laws, withdrawal from or modification of certain international trade agreements, including the United States Mexico Canada Agreement (“USMCA”), the imposition of additional tariffs or other restrictions on trade on goods produced outside the United States for import into the United States and any changes in diplomatic relations with countries in which we operate or do business and compliance with applicable anti-corruption and sanctions laws and regulations.
We are exposed to risks related to potential adverse changes in currency exchange rates.
We are exposed to market risks resulting from changes in the currency exchange rates of the currencies in the countries in which we do business. Although operating in local currencies may limit the impact of currency rate fluctuations on the operating results of our non-U.S. subsidiaries, fluctuations in such rates may affect the translation of these results into our consolidated financial statements. To the extent borrowings, sales, purchases, net sales and expenses or other transactions are not in the applicable local currency, we may enter into foreign currency spot and forward contracts to hedge the currency risk. Management cannot be sure, however, that our efforts at hedging will be successful, and such efforts could, in certain circumstances, lead to losses.
The trend of increasing costs to provide health care and other benefits to our employees may continue.
We provide health care and other benefits to our employees. For many years, costs for health care have increased more rapidly than general inflation in the U.S. economy. If this trend in health care costs continues, our cost to provide such benefits could increase, adversely impacting our profitability. Changes to health care regulations in the U.S. may also increase our cost of providing such benefits. The full effect that a full or partial repeal of the Affordable Care Act or changes to other healthcare laws and regulations would have on our business remains unclear at this time, and could negatively impact our consolidated statements of operations, balance sheets and cash flows.
Changes in market conditions, changes in discount rates, or lower returns on assets may increase required pension plan contributions in future periods.
The funded status of our pension plans is dependent upon many factors, including returns on invested assets and the level of certain interest rates. As experienced in prior years, declines in the market value of the securities held by the plans coupled with historically low interest rates have substantially reduced, and in the future could further reduce, the funded status of the plans. These reductions may increase the level of expected required pension plan contributions in future years. Various conditions may lead to changes in the discount rates used to value the year-end benefit obligations of the plans, which could partially mitigate, or worsen, the effects of lower asset returns. If adverse conditions were to continue for an extended period of time, our costs and required cash contributions associated with pension plans may substantially increase in future periods.
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A decline in our expected profitability or the expected profitability of our individual reporting units could result in the impairment of assets, including goodwill, other long-lived assets and deferred tax assets.
We hold goodwill, other long-lived assets and deferred tax assets on our balance sheet. A decline in expected profitability, particularly if there is a decline in the global economy, could call into question the recoverability of our related goodwill, other long-lived tangible and intangible assets or deferred tax assets and require the write-down or write-off of these assets or, in the case of deferred tax assets, recognition of a valuation allowance through a charge to income. Such an occurrence has had and could continue to have a negative impact on our consolidated statements of operations, balance sheets and cash flows.
Changes in postal rates, regulations and delivery systems may adversely impact demand for our products and services.
Postal costs are a significant component of many of our customer’s cost structure. Postal rate changes and USPS regulations that result in higher overall costs can influence the volume that these clients will be willing to print and ultimately send through the USPS.
Current federal law limits postal rate increases (outside of an "exigent circumstance") to the increase in the Consumer Price Index. This cap works to ensure funding stability and predictability for mailers. Under this current federal law, the USPS implemented a rate adjustment in early 2020 affecting all market dominant classes (periodicals, standard mail, first class mail, package services and special services), which was based on an average inflation-based rate increase for each class of mail.
In December 2018, the U.S. Department of the Treasury released the White House Task Force report on the United States Postal System. The report provides a series of recommendations to overhaul the United States Postal Service’s business model in order to return it to sustainability without shifting additional costs to taxpayers. The effects of this report on postal rates, regulations and delivery systems are not yet known.
Federal law requires the Postal Regulatory Commission ("PRC") to conduct a periodic review of the overall rate-making structure for the USPS. The PRC filed order 5337 on December 5, 2019 to increase inflation-based pricing to include an additional 2% – 5% per year. The order was open for comment until February 3, 2020 and more information will be made available in the coming months. Until the final determination, mailers need to account for the possibility of a significant increase in their future postage expenses.
The result of such determination may be reduced demand for printed products, co-mail and freight services as our customers may move more aggressively into other delivery methods such as the many digital and mobile options now available to consumers, which may have an adverse effect on our business.
We are subject to environmental regulation and environmental compliance expenditures, which could increase our costs and subject us to liabilities.
The conduct of our businesses is subject to various environmental laws and regulations administered by federal, state and local government agencies in the United States, as well as to foreign laws and regulations administered by government entities and agencies in markets in which we operate. These laws and regulations and interpretations thereof may change, sometimes dramatically, as a result of political, economic or social events. Changes in laws, regulations or governmental policy and the related interpretations may alter the environment in which we do business and, therefore, may impact our results or increase our costs and liabilities.
Various laws and regulations addressing climate change are being considered at the federal and state levels. Proposals under consideration include limitations on the amount of greenhouse gas that can be emitted. Such proposals may have a negative impact on our consolidated statements of operations, balance sheets and cash flows if capital spend or increased resources are required for compliance.
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The success and growth of our business may depend on our ability to continually invest in our infrastructure which can result in significant expenses.
Capital expenditures, such as software upgrades or machinery replacements, may be necessary from time to time to preserve the competitiveness, success and growth of our business. The industry in which we operate is highly competitive and is expected to remain competitive. We may be required to invest amounts in capital expenditures that exceed our recent spending levels to replace worn out or obsolete machinery or otherwise remain competitive. If cash from operations is insufficient to provide for needed levels of capital expenditures and we are unable to obtain funds for such purposes elsewhere, we may be unable to make necessary upgrades or repairs to our software and facilities. An increase in capital expenditures could affect our ability to compete effectively and could have a negative impact on our consolidated statements of operations, balance sheets and cash flows.
The failure to adapt to technological changes to address the changing demands of customers or the failure to implement new required processes or procedures in connection with the expansion of our products and services into new areas may adversely impact our business.
Many of the end markets in which our customers compete are experiencing changes due to technological progress and changes in consumer preferences. In order to remain competitive, we will need to continue to adapt to future changes in technology, enhance our existing offerings and introduce new offerings to address the changing demands of customers. If we are unable to continue to exploit new and existing technologies to distinguish our products and services from those of our competitors or adapt to new distribution methods, our business may be adversely affected.
Technological developments, changing demands of customers and the expansion of our products and services into new areas may require additional investment in new equipment and technologies, as well as the implementation of additional necessary or required compliance procedures and processes to which we are not currently subject. The development of such solutions may be costly and there is no assurance that these solutions will be accepted by customers. Furthermore, our compliance with new procedures and processes may increase our costs and, in the event we are unable to comply, may reduce our customers’ willingness to work with us. If we are unable to adapt to technological changes on a timely basis or at an acceptable cost, or if we cannot comply with these necessary or required procedures or processes, customers’ demand for our products and services may be adversely affected.
Our services depend on the reliability of computer systems maintained by us and our vendors and the ability to implement and maintain information technology and security measures to protect against security breaches and data leakage.
We depend on our information technology and data processing systems to operate our business, and a significant malfunction or disruption in the operation of our systems, or a security breach or a data leak that compromises the confidential and sensitive information of ours and of our customers stored in those systems, could disrupt our business, harm our reputation with customers and adversely impact our ability to compete. These systems include systems that we own and operate, as well as those systems of our vendors.
Our systems are integral to the operation of our business, because they allow us to share information that may be confidential in nature to our customers across our offices worldwide, which allows us to increase global reach for our customers, or they allow us to offer products that are dependent upon access to the systems. Such systems are susceptible to malfunctions and interruptions due to equipment damage, power outages and a range of other hardware, software and network problems. Those systems are also susceptible to cybercrime, or threats of intentional disruption, which are increasing in terms of sophistication and frequency. Our systems are also susceptible to breaches due to intentional employee misconduct. For any of these reasons, we may experience systems malfunctions or interruptions or leakage of confidential information. A significant or large-scale malfunction or interruption of any one of our computer or data processing systems, or the leakage of confidential information due to a malfunction or breach of our systems or employee misconduct, could adversely affect our ability to manage and keep our operations running efficiently, and damage our reputation if we are unable to track transactions, deliver products and safeguard our customers’ confidential information. A malfunction that results in a wider or sustained disruption to our business could negatively impact our consolidated statements of operations, balance sheets and cash flows.
In addition, we may from time to time acquire companies or businesses that do not have cybersecurity practices and procedures consistent with ours, and we may need to invest in bringing those businesses onto our existing systems or updating them to comply with ours. Such systems may be more vulnerable to attack or malfunction than our systems until such time as we are able to integrate the business.
18
The availability and cost to hire and retain talented employees, including skilled labor and management, may adversely impact us.
Our success depends, in part, on our general ability to attract, develop, motivate and retain employees. The loss of a significant number of our employees or the inability to attract, hire, develop, train and retain personnel could have a serious negative effect on our business. Various locations may encounter competition with other manufacturers for skilled and unskilled labor. Many of these manufacturers may be able to offer significantly greater compensation and benefits or more attractive lifestyle choices than we offer. We are also impacted by the costs and other effects of compliance with U.S. and international regulations affecting our workforce. These regulations are increasingly focused on employment issues, including wage and hour, healthcare, immigration, retirement and other employee benefits and workplace practices. Claims of non-compliance with these regulations could result in liability and expense to the Company.
We have in the past acquired and may intend in the future to acquire other businesses and we may be unable to successfully integrate the operations of these businesses and may not achieve the cost savings and increased net sales anticipated as a result of these acquisitions.
Achieving the anticipated benefits of acquisitions will depend in part upon our ability to integrate these businesses in an efficient and effective manner. The integration of companies that have previously operated independently may result in significant challenges, and we may be unable to accomplish the integration smoothly or successfully. The integration of acquired businesses may also require the dedication of significant management resources, which may temporarily distract management’s attention from the day-to-day operations of the Company.
The Company’s strategy is, in part, predicated on the Company’s ability to realize cost savings and to increase net sales through the acquisition of businesses that add to the breadth and depth of the Company’s products and services. Achieving these cost savings and net sales increases is dependent upon a number of factors, many of which are beyond the Company’s control. In particular, the Company may not be able to realize the benefits of more comprehensive product and service offerings, anticipated integration of sales forces, asset rationalization and systems integration.
Risks Relating to Our Common Stock and the Securities Market
Delaware law and anti-takeover provisions in our organizational documents may discourage our acquisition by a third party, which could make it more difficult to acquire us and limit your ability to sell your shares at a premium.
Certain provisions of our Certificate of Incorporation and By-laws and Delaware law may discourage, delay or prevent a merger or acquisition that is opposed by our board of directors. These provisions include:
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the ability of our board of directors to issue preferred stock in one or more series with such rights, obligations and preferences as the board of directors may determine, without further vote or action by our stockholders; |
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advanced notice procedures for stockholders to nominate candidates for election to the board of directors and for stockholders to submit proposals for consideration at a meeting of stockholders; |
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inability of stockholders to act by written consent; |
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restrictions on the ability of our stockholders to call a special meeting of stockholders; and |
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the absence of cumulative voting rights for our stockholders. |
We are also subject to Section 203 of the Delaware General Corporation Law which, subject to certain exceptions, prohibits “business combinations” between a publicly-held Delaware corporation and an “interested stockholder,” which is generally defined as a stockholder who becomes a beneficial owner of 15% or more of a Delaware corporation’s voting stock for a three-year period following the date that such stockholder became an interested stockholder. This statute, as well as the provisions in our organizational documents, could have the effect of delaying, deterring or preventing certain potential acquisitions or a change in control of us.
Adverse credit market conditions may limit the Company’s ability to obtain future financing.
We may, from time to time, depend on access to the credit markets. Uncertainty and volatility in global financial markets may cause financial markets institutions to fail or may cause lenders to hoard capital and reduce lending. The failure of a financial institution that supports the Company’s existing credit agreement would reduce the size of its committed facility unless a replacement institution were added.
19
We have incurred substantial indebtedness and the degree to which we are currently leveraged may materially and adversely affect our business and consolidated statements of operations, balance sheets and cash flows.
We have $910 million of indebtedness as of December 31, 2019. Our ability to make payments on and to refinance our indebtedness, including the debt incurred in connection with the Company’s separation from RRD on October 1, 2016 (the “separation”), as well as any future debt that we may incur, will depend on our ability to generate cash in the future from operations, financings or asset sales. Our ability to generate cash is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. We may not generate sufficient funds to service our debt and meet our business needs, such as funding working capital or the expansion of our operations. If we are not able to repay or refinance our debt as it becomes due we may be forced to take disadvantageous actions, including facility closures, staff reductions, reducing financing in the future for working capital, capital expenditures and general corporate purposes, selling assets or dedicating an unsustainable level of our cash flow from operations to the payment of principal and interest on our indebtedness, and restricting future capital return to stockholders. In addition, our ability to withstand competitive pressures and to react to changes in the print and related services industry could be impaired. The lenders who hold our debt could also accelerate amounts due in the event that we default, which could potentially trigger a default or acceleration of the maturity of our other debt. If our debt is accelerated, we may not be able to repay our debt or borrow sufficient funds to refinance it. Even if we are able to obtain new financing, it may not be on commercially reasonable terms, on terms that are acceptable to us. If our debt is in default for any reason, our business and consolidated statements of operations, balance sheets and cash flows could be materially and adversely affected.
In addition, our leverage could put us at a competitive disadvantage compared to our competitors who may be less leveraged. These competitors could have greater financial flexibility to pursue strategic acquisitions and secure additional financing for their operations. Our leverage could also impede our ability to withstand downturns in our industry or the economy in general.
The agreements and instruments that govern our debt impose restrictions that may limit our operating and financial flexibility.
The Credit Agreement that governs our Term Loan Facility and Revolving Credit Facility and the indenture that governs the Senior Secured Notes contain a number of significant restrictions and covenants that limit our ability to:
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• |
incur additional debt; |
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• |
pay dividends, make other distributions or repurchase or redeem our capital stock; |
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• |
prepay, redeem or repurchase certain debt; |
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• |
make loans and investments; |
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• |
sell, transfer or otherwise dispose of assets; |
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• |
incur or permit to exist certain liens; |
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• |
enter into certain types of transactions with affiliates; |
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enter into agreements restricting our subsidiaries’ ability to pay dividends; and |
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• |
consolidate, merge or sell all or substantially all of our assets. |
These covenants can have the effect of limiting our flexibility in planning for or reacting to changes in our business and the markets in which we compete. In addition, the Credit Agreement that governs our Term Loan Facility and Revolving Credit Facility requires us to comply with certain financial maintenance covenants. Operating results below historical or current levels or other adverse factors, including a significant increase in interest rates, could result in our being unable to comply with the financial covenants contained in our Term Loan Facility and Revolving Credit Facility.
Complying with the covenants under our Term Loan Facility and Revolving Credit Facility and indenture may cause us to take actions that are not favorable to other creditors and may make it more difficult for us to successfully execute our business strategy and compete against companies that are not subject to such restrictions. If we violate covenants under our Term Loan Facility and Revolving Credit Facility and or indenture and are unable to obtain a waiver from our lenders, our debt under our Senior Secured Credit Facilities and or indenture, as applicable, would be in default and could be accelerated by our lenders, which would require us to pay all amounts outstanding. Because of cross-default provisions in the agreements and instruments governing our debt, a default under one agreement or instrument could result in a default under, and the acceleration of, our other debt.
20
We are exploring alternatives to address our balance sheet which could substantially dilute or eliminate the value of our common stock or funded debt.
We have commenced a process to identify and evaluate possible alternatives to address the substantial amount of funded debt on our consolidated balance sheet. We are in ongoing discussions with certain of our lenders regarding such possible alternatives. These alternatives may involve the issuance of new common stock that substantially dilutes or eliminates the value of our currently-outstanding common stock or the extinguishment of our common stock or funded debt by legal process. There can be no assurances that our current stockholders or funded debt creditors will receive any recovery in connection with such a transaction, even if our current business continues under new ownership or with a new capital structure. No assurances can be given that any discussions or efforts will successfully result in any such transaction or guarantee any such transaction’s terms or timing.
Despite our substantial indebtedness, we may be able to incur more debt.
Despite our substantial amount of indebtedness, we may be able to incur substantial additional debt, including secured debt, in the future. Although the indenture governing our Senior Notes and the Credit Agreement governing the Senior Secured Credit Facilities restrict the incurrence of additional debt, these restrictions are subject to a number of qualifications and exceptions. Also, these restrictions do not prevent us from incurring obligations that do not constitute indebtedness. The more indebtedness we incur, the further exposed we become to the risks associated with substantial leverage described above.
Stockholders’ percentage ownership in LSC Communications may be diluted in the future.
Stockholders’ percentage ownership in LSC Communications may be diluted in the future because of equity securities we issue, either as consideration for acquisitions, in connection with capital raises or for equity awards that we may grant to our directors, officers and employees. Further, to the extent that LSC Communications raises additional capital through the sale of equity or convertible debt securities, existing ownership interests will be diluted, and the terms of such financings may include liquidation or other preferences that adversely affect the rights of existing stockholders. Any such transaction will dilute stockholders’ ownership in LSC Communications.
The anticipated changes to London Inter-Bank Offered Rate (“LIBOR”) after 2021 could impact the cost of our variable rate indebtedness.
Some of our debt, including our credit facility, has a variable rate of interest linked to the LIBOR as a benchmark for establishing the rate. In July 2017, the United Kingdom’s Financial Conduct Authority (FCA), which regulates LIBOR, announced that it intends to stop persuading or compelling banks to submit rates for the calculation of LIBOR to the administrator of LIBOR after 2021. It is likely that banks will not continue to provide submissions for the calculation of LIBOR after 2021 and possible that they may not provide submissions before then. It is impossible to predict whether LIBOR will continue to be viewed as an acceptable market benchmark, what effects any changes to LIBOR or the transition to alternative reference rates may have on the on variable rate credit facility loans or on our business, financial condition or results of operations. The consequence of these developments cannot be entirely predicted but could include an increase in the cost of our variable rate indebtedness.
If LIBOR rates are no longer available or viewed as an acceptable market benchmark, and our lenders are required, or exercise discretion, to implement substitute reference rates for the calculation of interest rates under our credit facility, we may incur significant expenses in effecting the transition, and may be subject to disputes or litigation with lenders over the appropriateness or comparability to LIBOR of the substitute reference rates, which could have an adverse effect on our business, financial condition or results of operations.
21
ITEM 1B. UNRESOLVED STAFF COMMENTS
The Company has no unresolved written comments from the SEC staff regarding its periodic or current reports under the Securities Exchange Act of 1934.
ITEM 2. PROPERTIES
The Company’s principal executive office is currently located in leased office space at 191 N. Wacker Drive, Suite 1400, Chicago, IL 60606. The Company operates or owns the following:
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97 leased or owned locations in approximately 28 states in the U.S., which encompass approximately 25 million square feet, of which 37 are production facilities. |
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Approximately 9 million square feet of space is leased, comprised of 62 U.S. locations. |
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Approximately 16 million square feet of space is owned in 35 locations in the U.S. |
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10 international locations in 2 countries which encompass approximately 2 million square feet, of which 6 are manufacturing facilities. |
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Approximately 1 million square feet of space is leased, comprised of 5 international locations. |
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Approximately 1 million square feet of space is owned in 5 international locations. |
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6 of our international locations service our Office Products segment. |
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3 of our international locations service our Mexico segment. |
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1 of our international locations services our Book segment. |
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In Mexico, the Company has 6 production facilities. |
The Company’s facilities are reasonably maintained and suitable for the operations conducted in them. While the Company has a facility that provides the majority of our mailing services, which is located in Bolingbrook, Illinois, the Company does not believe that this facility, or any other facility, is individually material to our business. In addition, the Company owns or leases additional land for use as parking lots and other purposes in the U.S.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company’s customers and others file voluntary petitions for reorganization under United States bankruptcy laws. In such cases, certain pre-petition payments received by the Company from these parties could be considered preference items and subject to return. In addition, the Company may be party to certain litigation arising in the ordinary course of business. Management believes that the final resolution of these preference items and litigation will not have a material effect on the Company’s consolidated statements of operations, balance sheets and cash flows.
For a discussion of certain litigation involving the Company, including litigation associated with the merger, refer to Note 11, Commitments and Contingencies, to the consolidated financial statements.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
22
EXECUTIVE OFFICERS OF LSC COMMUNICATIONS, INC.
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Name, Age and |
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Positions with the Company |
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Business Experience |
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Thomas J. Quinlan, III 57, President, Chief Executive Officer and Chairman of the Board of Directors |
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Served as Chairman of the Board and Chief Executive Officer since October 2016. Prior to this, served as RRD’s President and Chief Executive Officer since April 2007 and from 2004 in various other positions, including Group President, Chief Financial Officer since April 2006 and Executive Vice President, Operations since February 2004. |
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Suzanne S. Bettman 55, Chief Administrative Officer and General Counsel |
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Served as Chief Administrative Officer and General Counsel since October 2016. Prior to this, served as RRD’s Executive Vice President, General Counsel, Corporate Secretary and Chief Compliance Officer since January 2007 and as its Senior Vice President, General Counsel since March 2004. |
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Andrew B. Coxhead 51, Chief Financial Officer |
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Served as Chief Financial Officer since October 2016. Prior to this, served as RRD’s Senior Vice President and Chief Accounting Officer since October 2007, and Corporate Controller from October 2007 to January 2013 and from 1995 in various other positions including in financial planning, accounting, manufacturing management, operational finance and mergers and acquisitions, including as Vice President, Assistant Controller. |
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Sarah L. Hoxie 39, Corporate Controller |
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Served as Corporate Controller since November 2019. Prior to this, served as LSC Communications' Director, SEC Reporting and Financial Accounting. Prior to joining the Company, served as a Senior Manager in Ernst & Young’s Assurance Services practice and worked with large multinational companies in the manufacturing, oil & gas, mining & metals and utilities industry sectors with both GAAP and IFRS reporting requirements. |
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David B. McCree 53, President, Book |
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Served as President, Book since October 2016 with an expanded role that includes Book operations and the Directory segment since January 2020. Prior to this, served as RRD's Senior Vice President, Sales since 2007 and from 1989 in various other positions including as Vice President of Manufacturing. |
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Matthew K. Roberts 51, President, Office Products |
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Served as President, Office Products since December 2018, Senior Vice President, Sales from 2014 and Vice President, Sales from 2008. |
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George Zengo 59, President, Magazines, Catalogs and Logistics |
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Served as President, Magazines, Catalogs and Logistics since January 2020. Prior to this, served as President, Logistics since 2017. Prior to the separation, Mr. Zengo served as Group Chief Sales Officer since 2009 and from 2004 in various other positions including as Group Chief Financial Officer. |
23
PART II
ITEM 5. MARKET FOR LSC COMMUNICATIONS’ COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Principal Market
The current principal market for LSC Communications’ common stock is the OTCQX® Best Market. On December 27, 2019, the Company announced that it received notification from the New York Stock Exchange (the “NYSE”) that it had commenced proceedings to delist the Company’s common stock from the NYSE and suspended trading. The delisting was effective in January 2020.
Stockholders
As of February 26, 2020, there were 4,222 stockholders of record of the Company’s common stock.
Dividends
In light of lower expectations for earnings and cash flows, on July 18, 2019 the Board of Directors suspended dividend payments in order to allocate greater capital to the Company’s debt reduction and ongoing operational restructuring programs. The dividend paid in June 2019 is the last dividend that will be paid for the foreseeable future.
Prior to the amendment to the Credit Agreement that was effective on August 5, 2019, the Company was generally allowed to declare and pay annual dividend payments of up to $50 million in the aggregate. However, the August 5, 2019 amendment removed the general allowance to declare and pay annual dividends of up to $50 million.
Issuer Purchases of Equity Securities
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Total Number |
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of Shares Purchased |
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Dollar Value of Shares |
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||
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Total Number |
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as Part of |
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that May Yet be |
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|||
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of Shares |
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Average Price |
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Publicly Announced |
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Purchased Under the |
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Purchased (a) |
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Paid per Share |
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Plans or Programs |
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Plans or Programs |
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||||
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October 1, 2019 - October 31, 2019 |
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51,921 |
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$ |
1.36 |
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— |
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$ |
— |
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November 1, 2019 - November 30, 2019 |
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— |
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— |
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— |
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$ |
— |
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December 1, 2019 - December 31, 2019 |
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— |
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— |
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— |
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$ |
— |
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Total |
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51,921 |
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$ |
1.36 |
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— |
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(a) |
Shares withheld for tax liability upon vesting of equity awards |
Equity Compensation Plans
For information regarding equity compensation plans, refer to Item 12 of Part III of this annual report on Form 10-K.
24
Peer Performance Table
The graph below compares the cumulative total stockholder return on the Company’s common stock from October 3, 2016, when regular way trading in the Company’s common stock commenced on the NYSE, through December 31, 2019, with the comparable cumulative return of the S&P SmallCap 600 index and a selected peer group of companies. The comparison assumes all dividends have been reinvested, and an initial investment of $100 on October 3, 2016. The returns of each company in the peer group have been weighted to reflect their market capitalizations. The Company itself has been excluded, and its contributions to the S&P SmallCap 600 index have been subtracted out. The peer group was determined by the Company's senior management team as a group of companies within the printing, publishing, and office products industries that most closely align with the Company’s business model.
25
ITEM 6. SELECTED FINANCIAL DATA
The table below reflects results of acquired businesses from the relevant acquisition dates. Refer to Note 3, Business Combinations and Disposition, to the consolidated financial statements for information on acquisitions.
The Company adopted Accounting Standards Update No. 2016-02 “Leases (Topic 842)” (“ASC 842”) on January 1, 2019 using the modified retrospective adoption method. Upon adoption of ASC 842, the Company added $206 million of right-of-use assets to its consolidated balance sheet related to operating leases. There was no impact to the Company’s consolidated statements of operations. See Note 5, Leases, for more information.
The Company adopted Accounting Standards Update No. 2014-09 “Revenue from Contracts with Customers (Topic 606)” (“ASC 606”, or the “standard”) on January 1, 2018 using the modified retrospective method for all contracts not completed as of the date of adoption. The reported results for 2019 and 2018 reflect the application of ASC 606 guidance while the reported results for years prior to 2018 were prepared and continue to be reported under the guidance of ASC 605, Revenue Recognition, which is also referred to herein as "previous guidance."
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in millions, except per share data |
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2019 |
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2018 |
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2017 |
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2016 |
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2015 |
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Net sales |
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$ |
3,326 |
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|
$ |
3,826 |
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|
$ |
3,603 |
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$ |
3,654 |
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$ |
3,743 |
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Net (loss) income |
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(295 |
) |
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|
(23 |
) |
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(57 |
) |
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|
106 |
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|
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74 |
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Net (loss) earnings per basic share (a) |
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(8.82 |
) |
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(0.67 |
) |
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(1.69 |
) |
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3.25 |
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2.27 |
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Net (loss) earnings per diluted share (a) |
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(8.82 |
) |
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(0.67 |
) |
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(1.69 |
) |
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3.23 |
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2.27 |
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Total assets |
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1,649 |
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1,754 |
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2,014 |
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1,952 |
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2,011 |
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Long-term debt (b) |
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|
445 |
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|
659 |
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|
699 |
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|
742 |
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3 |
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Cash dividends per common share |
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|
0.52 |
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1.04 |
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1.00 |
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0.25 |
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|
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— |
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(a) |
On October 1, 2016, RRD distributed approximately 26.2 million shares of LSC Communications common stock to RRD stockholders as a result of the separation. RRD retained an additional 6.2 million shares that were sold on March 28, 2017. The computation of net earnings per basic and diluted shares for periods prior to the separation was calculated using the 32.4 million shares distributed and retained by RRD on October 1, 2016. |
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(b) |
All outstanding amounts under the Company’s Term Loan Facility were classified as current as of December 31, 2019 due to the Company’s noncompliance with required debt ratios contained in the Credit Agreement. Refer to Item 1, Business, for more information. |
26
Includes the following significant items:
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2019: Pre-tax restructuring, impairment and other charges of $148 million ($122 million after-tax); pre-tax charge of $23 million ($16 million after-tax) for acquisition, merger and disposition-related expenses; pre-tax gain of $26 million (after-tax benefit of $19 million) on the sale of land and a building associated with a plant closure in the Magazines, Catalogs and Logistics segment in the fourth quarter of 2019; termination fee received from Quad of $45 million (after-tax benefit of $34 million); settlement of retirement obligations of $137 million ($102 million after-tax); and income tax expense of $67 million related to a valuation allowance recorded on the Company’s deferred tax assets. |
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2018: Pre-tax restructuring, impairment and other charges of $35 million ($27 million after-tax); pre-tax charge of $3 million ($2 million after-tax) for purchase accounting inventory step-up adjustments and changes to purchase price allocations related to prior acquisitions; pre-tax charge of $10 million ($8 million after-tax) for acquisition, merger and disposition-related expenses; and a $25 million non-cash charge recorded primarily for the write-off of a deferred tax asset associated with the disposition of the Company's European printing business. |
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2017: Pre-tax restructuring, impairment and other charges of $129 million ($92 million after-tax); pre-tax charge of $4 million ($3 million after-tax) for separation-related expenses, pre-tax benefit (net) of $1 million ($1 million after-tax benefit (net)) for purchase accounting adjustments, pre-tax charge of $5 million ($3 million after-tax) for acquisition-related expenses; and pre-tax loss of $3 million ($2 million after-tax) related to debt extinguishment; tax expense of $24 million related to U.S. tax reform legislation. |
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2016: Pre-tax restructuring, impairment and other charges of $18 million ($12 million after-tax); pre-tax charge of $5 million ($3 million after-tax) for separation-related expenses; and pre-tax charge of $1 million ($0 million after-tax) for lump-sum pension settlement payments. |
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2015: Pre-tax restructuring, impairment and other charges of $57 million ($39 million after-tax); pre-tax charges of $14 million for acquisition-related expenses ($13 million after-tax); pre-tax charges of $11 million ($7 million after-tax) for inventory purchase accounting adjustments for Courier; and tax expense of $6 million was recorded due to the receipt of an unfavorable court decision related to payment of prior year taxes in an international jurisdiction. |
27
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of LSC Communications’ financial condition and results of operation should be read together with the consolidated financial statements and Notes to those statements included in Item 15, Exhibits, Financial Statement Schedules, of Part IV of this annual report on Form 10-K.
Business
For a description of the Company’s business, segments and product offerings, refer to Item 1, Business, of Part I of this annual report on Form 10-K.
Merger Agreement
On October 30, 2018, the Company entered into that certain Agreement and Plan of Merger (the “Merger Agreement”), by and among Quad/Graphics, Inc. (“Quad”), QLC Merger Sub, Inc. and LSC Communications, pursuant to which, subject to the satisfaction or waiver of certain conditions, LSC Communications would be merged with QLC Merger Sub, Inc., and become a wholly-owned subsidiary of Quad.
On July 22, 2019, Quad and LSC Communications entered into a letter agreement (the “Letter Agreement”), pursuant to which the parties agreed to terminate the Merger Agreement. Pursuant to the Letter Agreement, Quad agreed to pay LSC Communications the Regulatory Approval Reverse Termination Fee (as defined in the Merger Agreement) of $45 million in cash on the business day following the date of the Letter Agreement. The Company incurred transaction costs of approximately $26 million associated with the Merger Agreement, of which $5 million was incurred in 2018. Except for certain indemnification obligations of Quad related to LSC Communications assisting Quad with the financing under the Merger Agreement, the parties also agreed to release each other from any and all claims, counterclaims, demands, proceedings, actions, causes of action, orders, obligations, damages, debts, costs, expenses and other liabilities whatsoever and howsoever arising pursuant to or in connection with the Merger Agreement or the transactions provided for in the Merger Agreement.
Segment Information
As a result of the Company’s segment analysis in the fourth quarter of 2019, Mexico met the requirements to be classified as a reportable segment (previously included as a non-reportable segment). All prior year amounts have been reclassified to conform to the Company’s current reporting structure.
OUTLOOK
Vision and Strategy
The Company works with its customers to offer a broad scope of print and print-related capabilities and manage their full range of communication needs. The Company is focused on enhancing its strong customer relationships by expanding to a broader range of offerings. The Company will focus on further expanding its supply chain offerings and driving growth in core and related businesses. The Company will continue to seek opportunities to grow by utilizing core capabilities to expand print and print-related products and services, grow core businesses, strategically increase our geographic coverage, and focus on the expansion of the office products brands. For instance, our end-to-end supply chain services offerings combine print, warehousing, fulfillment and supply chain management into a single workflow designed to increase speed to the market and improve efficiencies across the distribution process. Further, other innovative offerings and investments such as co-mailing services and logistics solutions help catalogers and magazine publishers reduce their overall cost of producing and distributing their product as postage expense often accounts for approximately half of these publishers’ costs to produce and deliver a catalog or magazine. We have also developed and deployed technologies to help book clients reduce the incidence of book piracy and have begun offering end-to-end fulfillment of subscription boxes to address client demand, which we believe will provide additional opportunity for us.
Management believes productivity improvement and cost reduction are critical to the Company’s continued competitiveness, and the flexibility of its platform enhances the value the Company delivers to its customers. Our plant rationalization process has resulted in the closure of several facilities in recent years, which we believe has allowed us to realize meaningful cost savings. These
28
cost savings primarily arise from facility related costs, such as overhead, employee costs and selling, general and administrative expenses. The Company continues to implement strategic initiatives across all platforms to reduce its overall cost structure, focus on safety initiatives and enhance productivity, including restructuring, consolidation, reorganization and integration of operations and streamlining of administrative and support activities.
The Company seeks to deploy its capital using a balanced and disciplined approach. Priorities for capital deployment, over time, include principal and interest payments on debt obligations, targeted acquisitions and capital expenditures. The Company believes that a strong financial condition is important to customers focused on establishing or growing long-term relationships.
Management uses several key indicators to gauge progress toward achieving these objectives. These indicators include organic sales growth, operating margins, cash flow from operations, capital expenditures, and Non-GAAP adjusted EBITDA. The Company targets long-term net sales growth at or above industry levels, while managing operating margins by achieving productivity improvements that offset the impact of price declines and cost inflation. Cash flows from operations are targeted to be stable over time, however, cash flows from operations in any given year can be significantly impacted by the timing of non-recurring or infrequent receipts and expenditures, volatility in the cost of raw materials, and the impact of working capital management efforts.
During late 2018 and early 2019, the Company performed a comprehensive review of the Company’s operations to identify new revenue opportunities and cost savings. This review covered substantially all aspects of the Company – both operational and support functions – and involved key personnel from throughout the organization. The resulting revenue opportunities and cost savings initiatives were approved by senior management in the first quarter of 2019 and the Company has implemented a substantial portion of the identified actions. Along with additional initiatives expected to be implemented over the next two years, these actions are expected to drive substantial benefits in 2020 and future years. Management also anticipates incurring certain one-time expenses, which may be significant, relating to the review and implementation of the identified initiatives.
2020 Outlook
In 2020, the Company expects overall net sales to decrease as compared to 2019 driven by continuing volume declines across each segment. In the Magazines, Catalogs and Logistics segment, the Company expects an organic net sales decline driven by the ongoing shift in advertiser spend from print to electronic media and declines in circulation and page counts. For the Book segment, the Company expects volume declines in college and religious books and consistent volumes in K-12 education books and trade books, along with modest growth in services revenues. Office Products net sales are expected to decrease in 2020 as compared to 2019 as a result of volume declines driven by continuing secular decline.
While cost inflation driven primarily by tight labor market conditions will continue to pressure operating margins during 2020, the Company also expects to realize significant cost savings from restructuring initiatives, ongoing productivity efforts and some remaining integration related to the logistics acquisitions. The Company has initiated several restructuring actions during 2019 and early in 2020 to further reduce the Company’s overall cost structure. These restructuring actions included the closure of five manufacturing facilities in the Magazine, Catalog and Logistics segment, three in the Office Products segment and one each in the Book and Mexico segments. These cost reduction actions are expected to have significant positive impacts on operating earnings in 2020 and in future years. In addition, the Company expects to realize other cost reduction opportunities through its ongoing focus on productivity improvement, including initiatives identified as part of management’s ongoing comprehensive review of operations. The Company’s cost reduction initiatives may result in significant additional restructuring charges. These restructuring actions will be funded by cash generated from operations and cash on hand or, if necessary, by utilizing the Company’s credit facilities.
Cash flows from operations in 2020 are expected to benefit from the impact of working capital reductions driven by lower volume, but will be negatively impacted by higher expenditures related to restructuring actions. The Company expects capital expenditures to be in the range of $50 million to $60 million in 2020. Capital expenditures are expected to be primarily directed towards increased automation and productivity, equipment to enable cost reduction through facility closures, and growth opportunities driven mainly by specific customer needs.
The Company’s net pension liability was $162 million as of December 31, 2019, as reported on the Company’s consolidated balance sheet and further described in Note 15, Retirement Plans, to the consolidated financial statements. Governmental regulations for measuring pension plan funded status differ from those required under accounting principles generally accepted in the United States of America (“GAAP”) for financial statement preparation. Based on the plans’ regulatory funded status, there are no required contributions for the Company’s U.S. Qualified Plan in 2020. The Company does expect to make approximately $6 million of pension contributions in 2020, primarily for its Non-Qualified plan.
29
SIGNIFICANT ACCOUNTING POLICIES AND CRITICAL ESTIMATES
Basis of Presentation
The preparation of consolidated financial statements, in conformity with GAAP, requires the extensive use of management’s estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from these estimates. Estimates are used when accounting for items and matters including, but not limited to, allowance for uncollectible accounts receivable, inventory obsolescence, asset valuations and useful lives, taxes, restructuring and other provisions and contingencies.
The Company’s most critical accounting policies are those that are most important to the portrayal of its financial condition and results of operations, and that require the Company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. The Company has identified the following as its most critical accounting policies and judgments. Although management believes that its estimates and assumptions are reasonable, they are based upon information available when they are made, and therefore, actual results may differ from these estimates under different assumptions or conditions.
Revenue Recognition
As previously mentioned, the Company adopted ASC 606 on January 1, 2018 using the modified retrospective method for all contracts not completed as of the date of adoption. The reported results for 2019 and 2018 reflect the application of ASC 606 guidance while the reported results for years prior to 2018 were prepared and continue to be reported under the previous guidance.
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 product, usually when production is completed.
Revenue from the Company’s print related services (including list processing, mail sortation services and supply chain management) is recognized as services are completed over time.
Revenue is measured as the amount of consideration the Company expects 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 resulting 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 is 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.
30
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 the Company’s 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 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 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.
Refer to Note 4, Revenue Recognition, to the consolidated financial statements for information related to new standard.
Goodwill and Other Long-Lived Assets
Goodwill – Overview
The Company’s methodology for allocating the purchase price of acquisitions is based on established valuation techniques that reflect the consideration of a number of factors, including valuations performed by third-party appraisers when appropriate. Goodwill is measured as the excess of the cost of an acquired entity over the fair value assigned to identifiable assets acquired and liabilities assumed. Based on its current organization structure as of December 31, 2019, the Company has identified seven reporting units for which cash flows are determinable and to which goodwill may be allocated. Goodwill is assigned to a specific reporting unit, depending on the nature of the underlying acquisition.
The Company performs its goodwill impairment tests annually as of October 31, or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. The Company also performs an interim review for indicators of impairment each quarter to assess whether an interim impairment review is required for any reporting unit. As part of its interim reviews, management analyzes potential changes in the value of individual reporting units based on each reporting unit’s operating results for the period compared to expected results as of the prior year’s annual impairment test. In addition, management considers how other key assumptions, including discount rates and expected long-term growth rates, used in the last annual impairment test could be impacted by changes in market conditions and economic events.
31
The Company determines the fair value of its reporting units using both the income approach and the market approach. The determination of the fair value using the income approach requires management to make significant estimates and assumptions related to projected operating results (including forecasted revenue and operating income), anticipated future cash flows, and discount rates. The determination of the fair value using the market approach requires management to make significant assumptions related to the multiples of earnings before interest, income taxes, depreciation and amortization (“EBITDA”) used in the calculation. Additionally, the market approach estimates fair value using comparable marketplace fair value data from within a comparable industry grouping. The Company weighs both the income and market approach equally to estimate the concluded fair value of each reporting unit.
The determination of fair value and the allocation of that value to individual assets and liabilities requires the Company to make significant estimates and assumptions. These estimates and assumptions primarily include, but are not limited to: the selection of appropriate peer group companies; control premiums appropriate for acquisitions in the industries in which the Company competes; the discount rate; terminal growth rates; and forecasts of revenue, operating income, depreciation and amortization, restructuring charges and capital expenditures. As part of its impairment test for its reporting units, the Company engages a third-party valuation firm to assist in the Company’s determination of certain assumptions used to estimate fair values.
Interim Impairment Tests Performed in the Third Quarter of 2019
The Company’s stock price has experienced a significant, sustained decline – especially since the Merger Agreement termination was announced in late July 2019. Shortly after the Merger Agreement termination, the Company announced that it was indefinitely suspending its dividend and lowered its guidance for the year. As a result, the Company determined it necessary to perform goodwill impairment reviews on the Book, logistics and Office Products reporting units (the only reporting units that had goodwill) as of August 31, 2019. The Company performed a one-step method of for determining goodwill impairment for the three reporting units. As a result of the one-step impairment test for Book, logistics and Office Products, the Company did not recognize any goodwill impairment charges as of August 31, 2019 as the estimated fair values of the reporting units exceeded their respective carrying values. Book, logistics and Office Products passed with fair values that exceeded their carrying values by 28.2%, 55.9% and 16.8%, respectively.
Impairment Tests Performed in the Fourth Quarter of 2019
The Company performed its annual impairment test as of October 31, 2019. The goodwill balances as of October 31, 2019 for the three reporting units that had goodwill were as follows: logistics ($21 million), Book ($51 million) and Office Products ($31 million).
For the logistics, Book and Office Products reporting units, management assessed goodwill impairment risk by first performing a qualitative review of entity specific, industry, market and general economic factors for each reporting unit. As a result of the qualitative assessment for logistics and Office Products and considering that a goodwill impairment analysis was performed as of August 31, 2019 with no impairment recorded, the Company concluded it was more likely than not the fair values of the reporting units are greater than their carrying values, and therefore, the Company did not recognize any goodwill impairment charges.
For Book, the Company was not able to conclude that it is more likely than not that the fair values of our reporting units are greater than their carrying values, and therefore, a one-step method for determining goodwill impairment was applied as of October 31, 2019. The Company compared the estimated fair value of a reporting unit with its carrying amount, including goodwill.
As a result of the 2019 annual impairment test for Book, the Company fully impaired Book’s goodwill and recorded a $51 million goodwill impairment charge as the carrying value of the reporting unit did not exceed its estimated fair value. This is primarily due to the negative revenue trends experienced in the fourth quarter of 2019 and lower revenue forecasts in future years.
Goodwill Impairment Assumptions
Although the Company believes its estimates of fair value are reasonable, actual financial results could differ from those estimates due to the inherent uncertainty involved in making such estimates. Management prepares estimates and assumptions related to forecasts of future revenues, forecasts of future operating income, and the selection of the discount rates and EBITDA multiples. Changes in assumptions concerning future financial results or other underlying assumptions could have a significant impact on either the fair value of the reporting units, the amount of the goodwill impairment charge, or both. Future declines in the overall market value of the Company’s debt securities and changes in other economic conditions may also result in a conclusion that the fair value of one or more reporting units has declined below its carrying value.
32
Other Long-Lived Assets
The Company evaluates the recoverability of other long-lived assets, including property, plant and equipment, certain identifiable intangible assets, and right-of-use lease assets, whenever events or changes in circumstances indicate that the carrying value of an asset or asset group may not be recoverable. The Company performs impairment tests of indefinite-lived intangible assets on an annual basis or more frequently in certain circumstances.
Factors that could trigger an impairment review include significant underperformance relative to historical or projected future operating results, significant changes in the manner of use of the assets or the strategy for the overall business, a significant decrease in the market value of the assets or significant negative industry or economic trends. When the Company determines that the carrying value of long-lived assets may not be recoverable based upon the existence of one or more of the indicators, the assets are assessed for impairment based on the estimated future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. If the carrying value of an asset exceeds its estimated future undiscounted cash flows, an impairment loss is recorded for the excess of the asset’s carrying value over its fair value.
Given the continued decline in demand in the magazines and catalogs reporting unit, management determined that a further review of the reporting unit’s intangible assets and property, plant and equipment for recoverability was appropriate during the second, third and fourth quarters in 2019:
|
|
• |
As a result of the faster pace of decline in demand, negative revenue trends and lower expectations of future revenue to be derived from certain customer relationships, management determined that a certain definite-lived customer relationship intangible asset recorded in the magazines and catalogs reporting unit was not recoverable as a result of the recoverability test performed as of June 30, 2019. This resulted in the Company recording a $17 million impairment charge for the three months ended June 30, 2019, which fully impaired the asset. The impairment was determined using Level 3 inputs and estimated based on cash flow analyses, which included management’s assumptions related to future revenues and profitability. |
|
|
• |
With respect to property, plant and equipment and right-of-use assets for operating leases, the Company performed a Step 1 recoverability test in accordance with Accounting Standards Codification (“ASC”) 360, Property, Plant and Equipment. The recoverability test compares the estimated future undiscounted cash flows expected to result from the use of the asset group and its eventual disposition to the carrying value of the asset group; if the carrying value of the asset group exceeds its estimated future undiscounted cash flows, an impairment loss is recorded for the excess of the asset group’s carrying value over its fair value. Based upon management’s updated projection of cash flows for this asset group, management determined that the estimated future undiscounted cash flows were in excess of the asset group’s carrying value, resulting in no impairment loss as a result of these tests in 2019. |
In addition to the annual goodwill impairment test performed for Book as of October 31, 2019, the Company reviewed the reporting unit’s intangible assets and property, plant and equipment for recoverability in the fourth quarter of 2019. There were no impairment charges recorded as a result of the recoverability tests.
The Company recognized impairment charges of $18 million related to intangible assets and $10 million related to machinery and equipment for the Company during the year ended December 31, 2019. The impairment recognized on machinery and equipment was primarily associated with facility closings in the Magazines, Catalogs and Logistics and Book segments.
The Company will continue to perform interim reviews of goodwill for indicators of impairment each quarter to assess whether an interim impairment test is required for its goodwill balances or if recoverability tests are required for long-lived assets, including property, plant and equipment, and certain identifiable intangible assets, whenever events or changes in circumstances indicate that the carrying value of an asset or asset group may not be recoverable. Such reviews could result in future impairment charges, depending on the facts and circumstances in effect at the time of those reviews.
Pension
The Company is the sole sponsor of certain defined benefit plans, which have been reflected in the consolidated balance sheets at December 31, 2019 and 2018. The Company records annual income and expense amounts relating to its pension plans based on calculations that include various actuarial assumptions, including discount rates, mortality, assumed rates of return, compensation increases, and turnover rates. The Company reviews its actuarial assumptions on an annual basis and makes modifications to the assumptions based on current rates and trends when it is deemed appropriate to do so. The effects of modifications on the value of
33
plan obligations and assets is recognized immediately within other comprehensive income (loss) and amortized into investment and other (income)-net over future periods. The Company believes that the assumptions utilized in recording its obligations under its plans are reasonable based on its experience, market conditions and input from its actuaries and investment advisors.
In the first quarter of 2019, the Company completed a partial settlement of its retirement benefit obligations by purchasing a group annuity contract for certain retirees and beneficiaries from a third-party insurance company. As a result, the Company’s pension assets and liabilities were remeasured as of the settlement date. The Company recorded a non-cash settlement charge of $135 million in settlement of retirement benefit obligations in the consolidated statement of operations in the first quarter of 2019. There were additional immaterial lump-sum settlements (unrelated to the transaction noted above) during the year ended December 31, 2019 that resulted in non-cash settlement charges of $2 million.
The weighted-average discount rates used to determine the net benefit obligations for all pension benefit plans were 3.3% and 4.4% at December 31, 2019 and 2018, respectively.
A one-percentage point change in the discount rates at December 31, 2019 would have the following effects on the accumulated benefit obligation and projected benefit obligation for all pension benefit plans:
|
|
|
1% Increase |
|
|
1% Decrease |
|
||||||||||||||||||
|
|
|
(in millions) |
|
|||||||||||||||||||||
|
|
|
Qualified |
|
|
Non- Qualified & International |
|
|
Total |
|
|
Qualified |
|
|
Non- Qualified & International |
|
|
Total |
|
||||||
|
Accumulated benefit obligation |
|
$ |
(249 |
) |
|
$ |
(9 |
) |
|
$ |
(258 |
) |
|
$ |
306 |
|
|
$ |
11 |
|
|
$ |
317 |
|
|
Projected benefit obligation |
|
|
(249 |
) |
|
|
(9 |
) |
|
|
(258 |
) |
|
|
306 |
|
|
|
11 |
|
|
|
317 |
|
The Company’s U.S. pension plans are frozen and the Company has previously transitioned to a risk management approach for its U.S. pension plan assets. The overall investment objective of this approach is to further reduce the risk of significant decreases in the plan’s funded status by allocating a larger portion of the plan’s assets to investments expected to hedge the impact of interest rate risks on the plan’s obligation. Over time, the target asset allocation percentage for the pension plan is expected to decrease for equity and other “return seeking” investments and increase for fixed income and other “hedging” investments. The assumed long-term rate of return for plan assets, which is determined annually, is likely to decrease as the asset allocation shifts over time. The impact of a change in interest rates on the accumulated benefit obligation and projected benefit obligation would be partially offset by the corresponding impact on the fair value of pension assets of hedging investments. The impact of a change in interest rates would increase or decrease the fair value of pension assets of hedging investments.
The expected long-term rate of return for plan assets is based upon many factors including expected asset allocations, historical asset returns, current and expected future market conditions and risk. In addition, the Company considered the impact of the current interest rate environment on the expected long-term rate of return for certain asset classes, particularly fixed income. The target asset allocation percentage for the U.S. Qualified Plan was approximately 40.0% for return seeking investments and approximately 60.0% for hedging investments. The expected long-term rate of return on plan assets assumption used to calculate net pension plan expense in 2019 was 6.50% for the Company’s U.S. Qualified pension plan. The expected long-term rate of return on plan assets assumption that will be used to calculate net pension plan expense in 2020 is 6.00% for the Company’s U.S. Qualified pension plan.
A 0.25% change in the expected long-term rate of return on all plan assets at December 31, 2019 would have the following effects on 2019 and 2020 pension plan (income)/expense in the Company’s pension benefit plans:
|
|
|
0.25% Increase |
|
|
0.25% Decrease |
|
||
|
|
|
in millions |
|
|||||
|
2019 |
|
$ |
(5 |
) |
|
$ |
5 |
|
|
2020 |
|
|
(5 |
) |
|
|
5 |
|
Accounting for Income Taxes
The Company has recorded deferred tax assets related to future deductible items, including domestic and foreign tax loss and credit carryforwards. The Company evaluates these deferred tax assets by tax jurisdiction. The utilization of these tax assets is limited by the amount of taxable income expected to be generated within the allowable carryforward period and other factors. Accordingly, the Company has recorded valuation allowances to reduce certain of these deferred tax assets when management has concluded that,
34
based on the weight of available evidence, it is more likely than not that the deferred tax assets will not be fully realized. A significant piece of objective negative evidence is the cumulative loss incurred over the three-year period ended December 31, 2019, which limits the ability to consider other subjective evidence, such as our projections for future operating results. As a result, the Company appropriately scheduled out the future reversals of its deferred tax assets and liabilities. As of December 31, 2019 and 2018, valuation allowances of $77 million and $11 million, respectively, were recorded in the Company’s consolidated balance sheets. If actual results differ from these estimates, or the estimates are adjusted in future periods, adjustments to the valuation allowances might need to be recorded.
Significant judgment is required in determining the provision for income taxes and related accruals, deferred tax assets and liabilities and any valuation allowance recorded against deferred tax assets. In the ordinary course of business, there are transactions and calculations where the ultimate tax outcome is uncertain. Additionally, the Company’s tax returns are subject to audit by various U.S. and foreign tax authorities. The Company recognizes a tax position in its financial statements when it is more likely than not that the position would be sustained upon examination by tax authorities. This recognized tax position is then measured at the largest amount of benefit that is greater than fifty percent likely than not of being realized upon ultimate settlement. Although management believes that its estimates are reasonable, the final outcome of uncertain tax positions may be materially different from that which is reflected in the Company’s consolidated financial statements. As of December 31, 2019, a de minimis amount of unrecognized tax benefits were recognized in the consolidated balance sheets. The Company classifies interest expense and any related penalties related to income tax uncertainties as a component of income tax expense.
Refer to Note 16, Income Taxes, for further discussion.
Commitments and Contingencies
The Company is subject to lawsuits, investigations and other claims related to environmental, employment, commercial and other matters, as well as preference claims related to amounts received from customers and others prior to their seeking bankruptcy protection. Periodically, the Company reviews the status of each significant matter and assesses the potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and the related liability is estimable, the Company accrues a liability for the estimated loss. Because of uncertainties related to these matters, accruals are based on the best information available at the time. As additional information becomes available, the Company reassesses the related potential liability and may revise its estimates.
With respect to claims made under the Company’s third-party insurance for workers’ compensation, automobile and general liability, the Company is responsible for the payment of claims below and above insured limits, and consulting actuaries are utilized to assist the Company in estimating the obligation associated with any such incurred losses, which are recorded in accrued and other non-current liabilities. Historical loss development factors for both the Company and the industry are utilized to project the future development of such incurred losses, and these amounts are adjusted based upon actual claims experience and settlements. If actual experience of claims development is significantly different from these estimates, an adjustment in future periods may be required. Expected recoveries of such losses are recorded in other current and other non-current assets.
Accounts Receivable
The Company maintains an allowance for doubtful accounts receivable, which is reviewed for estimated losses resulting from the inability of its customers to make required payments for products and services. Specific customer provisions are made when a review of significant outstanding amounts, utilizing information about customer creditworthiness and current economic trends, indicates that collection is doubtful. In addition, provisions are made at differing rates, based upon the age of the receivable and the Company’s collection experience. The allowance for doubtful accounts receivable was $12 million and $14 million at December 31, 2019 and 2018, respectively. The Company’s estimates of the recoverability of accounts receivable could change, and additional changes to the allowance could be necessary in the future if any major customer’s creditworthiness deteriorates or actual defaults are higher than the Company’s historical experience.
FINANCIAL REVIEW
In the financial review that follows, the Company discusses its consolidated statements of operations, balance sheets, cash flows and certain other information. This discussion should be read in conjunction with the Company’s consolidated financial statements and the related notes that begin on page F-1.
35
Results of Operations for the Year Ended December 31, 2019 as Compared to the Year Ended December 31, 2018
The following table shows the results of operations for the years ended December 31, 2019 and 2018, which reflects the results of acquired businesses from the relevant acquisition dates:
|
|
|
2019 |
|
|
2018 |
|
|
$ Change |
|
|
% Change |
|
||||
|
|
|
(in millions, except percentages) |
|
|||||||||||||
|
Net sales |
|
$ |
3,326 |
|
|
$ |
3,826 |
|
|
$ |
(500 |
) |
|
|
(13.1 |
%) |
|
Cost of sales |
|
|
2,888 |
|
|
|
3,283 |
|
|
|
(395 |
) |
|
|
(12.0 |
%) |
|
Cost of sales as a % of net sales |
|
|
86.8 |
% |
|
|
85.8 |
% |
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses (exclusive of depreciation and amortization) |
|
|
327 |
|
|
|
328 |
|
|
|
(1 |
) |
|
|
(0.3 |
%) |
|
Selling, general and administrative expenses as a % of net sales |
|
|
9.8 |
% |
|
|
8.6 |
% |
|
|
|
|
|
|
|
|
|
Restructuring, impairment and other charges-net |
|
|
148 |
|
|
|
35 |
|
|
|
113 |
|
|
|
322.9 |
% |
|
Depreciation and amortization |
|
|
120 |
|
|
|
138 |
|
|
|
(18 |
) |
|
|
(13.0 |
%) |
|
(Loss) income from operations |
|
$ |
(157 |
) |
|
$ |
42 |
|
|
$ |
(199 |
) |
|
|
(473.8 |
%) |
Consolidated Results
Net sales for the year ended December 31, 2019 were $3,326 million, a decrease of $500 million or 13.1% compared to the year ended December 31, 2018. Net sales were impacted by:
|
|
• |
Lower volume, the dispositions of the Company’s European printing business and retail offset printing facilities in 2018 and a $43 million decrease in pass-through paper sales; and |
|
|
• |
The acquisition of Print Logistics in 2018. |
On a pro forma basis, the Company’s net sales for the year ended December 31, 2019 decreased by approximately $585 million or 14.9% compared to the year ended December 31, 2018 (refer to Note 3, Business Combinations and Disposition, to the consolidated financial statements). The decrease was primarily due to lower volume and the Company’s disposition of its European printing business and retail offset printing facilities in 2018.
Total cost of sales decreased $395 million, or 12.0%, for the year ended December 31, 2019 compared to the year ended December 31, 2018, primarily due to the dispositions of the Company’s European printing business and retail offset printing facilities in 2018, lower volume, a $26 million gain on the sale of land and a building associated with a plant closure in the Magazines, Catalogs and Logistics segment in the fourth quarter of 2019, and a gain on the sale of the Company’s commingle operations in 2019, partially offset by costs incurred by the acquisition of Print Logistics.
Selling, general and administrative expenses decreased by $1 million to $327 million for the years ended December 31, 2019 compared to the year ended December 31, 2018. This was driven by the disposition of the Company’s European printing business, partially offset by costs associated with the Merger Agreement.
For the year ended December 31, 2019, the Company recorded restructuring, impairment and other charges of $148 million. The charges primarily included:
|
|
• |
$51 million to recognize the impairment of goodwill in the Book segment. Refer to Note 10, Restructuring, Impairment and Other Charges, for more information; |
|
|
• |
Employee-related charges of $30 million for an aggregate of 2,150 employees, of whom 357 were terminated as of or prior to December 31, 2019, primarily related to five facility closures in the Magazines, Catalogs and Logistics segment and one facility closure in the Book segment; |
|
|
• |
Other restructuring charges of $37 million primarily due to facility costs, costs associated with new revenue opportunities and cost savings initiatives implemented in 2019, and pension withdrawal obligations related to facility closures; |
|
|
• |
$17 million for the impairment of certain definite-lived customer relationships intangible assets in the Magazines, Catalogs and Logistics segment; and |
|
|
• |
$10 million to recognize impairment charges primarily related to machinery and equipment associated with facility closings in the Magazines, Catalogs and Logistics and Book segments. |
36
For the year ended December 31, 2018, the Company recorded restructuring, impairment and other charges of $35 million. The charges included:
|
|
• |
Employee-related charges of $14 million for an aggregate of 811 employees, of whom 282 were terminated as of or prior to December 31, 2018, primarily related to two facility closures in the Magazines, Catalogs and Logistics segment, one facility closure in the Office Products segment and the reorganization of certain business units and corporate functions. |
|
|
• |
Other restructuring charges of $14 million primarily due to charges related to facility costs, a loss related to the Company's disposition of its retail offset printing facilities and pension withdrawal obligations related to facility closures; |
|
|
• |
$3 million to recognize impairment charges primarily related to machinery and equipment associated with facility closings in the Magazines, Catalogs and Logistics segment; and |
|
|
• |
$3 million to recognize the impairment of certain acquired indefinite-lived tradenames intangible assets in the Office Products segment. |
|
|
• |
The charges above were partially offset by a reduction of $1 million of goodwill impairment charges as a result of a $1 million adjustment of previously recorded goodwill associated with the 2017 acquisitions. |
Depreciation and amortization decreased $18 million to $120 million for the year ended December 31, 2019 compared to the year ended December 31, 2018 due to due to decreased capital spending in recent years compared to historical levels and the disposition of the Company’s European printing business, partially offset by the acquisition of Print Logistics.
|
|
|
2019 |
|
|
2018 |
|
|
$ Change |
|
|
% Change |
|
||||
|
|
|
(in millions, except percentages) |
|
|||||||||||||
|
Interest expense-net |
|
$ |
76 |
|
|
$ |
80 |
|
|
$ |
(4 |
) |
|
|
(5.0 |
%) |
|
Settlement of retirement benefit obligations |
|
|
137 |
|
|
|
— |
|
|
|
137 |
|
|
|
100.0 |
% |
|
Termination fee from Quad |
|
|
(45 |
) |
|
|
— |
|
|
|
(45 |
) |
|
|
100.0 |
% |
|
Investment and other (income)-net |
|
|
(37 |
) |
|
|
(48 |
) |
|
|
11 |
|
|
|
(22.9 |
%) |
Refer to Note 15, Retirement Plans, for information on the non-cash settlement charge related to retirement benefit obligations. Refer to Note 1, Overview and Basis of Presentation, for information on the termination fee received from Quad. Investment and other (income)-net primarily relates to the Company’s pension benefit plans in both years.
|
|
|
2019 |
|
|
2018 |
|
|
$ Change |
|
|||
|
|
|
(in millions, except percentages) |
|
|||||||||
|
Net (loss) income before income taxes |
|
$ |
(288 |
) |
|
$ |
10 |
|
|
$ |
(298 |
) |
|
Income tax expense |
|
|
7 |
|
|
|
33 |
|
|
|
(26 |
) |
|
Effective income tax rate |
|
|
(2.3 |
%) |
|
|
319.4 |
% |
|
|
|
|
The effective income tax rate was (2.3%) for the year ended December 31, 2019 and reflects a $67 million provision for a valuation allowance against U.S. deferred tax assets. Please refer to Note 16, Income Taxes, for further discussion.
The effective income tax rate was 319.4% for the year ended December 31, 2018 and reflects a $25 million non-cash tax provision related to the disposition of the Company’s European printing business.
Refer to the Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in the Company’s annual report on Form 10-K for the year ended December 31, 2018, as filed with the SEC on February 19, 2019, for a discussion of results of operations for the year ended 2018 as compared to the year ended 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.
37
Magazines, Catalogs and Logistics
|
|
|
2019 |
|
|
2018 |
|
|
Change |
|
|||
|
|
|
(in millions, except percentages) |
|
|||||||||
|
Net sales |
|
$ |
1,559 |
|
|
$ |
1,767 |
|
|
$ |
(208 |
) |
|
(Loss) from operations |
|
|
(114 |
) |
|
|
(31 |
) |
|
|
(83 |
) |
|
Operating margin |
|
|
(7.3 |
%) |
|
|
(1.8 |
%) |
|
(550) bps |
|
|
|
Gain on the sale of fixed assets |
|
|
(26 |
) |
|
|
— |
|
|
|
(26 |
) |
|
Restructuring, impairment and other charges-net |
|
|
67 |
|
|
|
20 |
|
|
|
47 |
|
Net sales for the Magazines, Catalogs and Logistics segment for the year ended December 31, 2019 were $1,559 million, a decrease of $208 million, or 11.7%, compared to 2018. Net sales decreased primarily due the unprecedented drop in long-run magazine and catalog volumes during 2019, with the faster pace of decline in demand primarily due to the accelerated impact of digital disruption of demand for printed materials. In addition, the disposition of the Company’s retail offset printing facilities, lower logistics volume, and a $35 million decrease in pass-through paper sales contributed to the decrease, all of which was partially offset by the acquisition of Print Logistics.
The increase in Magazines, Catalogs and Logistics segment loss from operations and change in operating margins was primarily due to higher restructuring, impairment and other charges and lower volume, partially offset by a $26 million gain on the sale of land and a building associated with a plant closure in the fourth quarter of 2019.
Book
|
|
|
2019 |
|
|
2018 |
|
|
Change |
|
|||
|
|
|
(in millions, except percentages) |
|
|||||||||
|
Net sales |
|
$ |
1,011 |
|
|
$ |
1,055 |
|
|
$ |
(44 |
) |
|
(Loss) income from operations |
|
|
(36 |
) |
|
|
58 |
|
|
|
(94 |
) |
|
Operating margin |
|
|
(3.6 |
%) |
|
|
5.5 |
% |
|
(910 bps) |
|
|
|
Restructuring, impairment and other charges-net |
|
|
66 |
|
|
|
6 |
|
|
|
60 |
|
Net sales for the Book segment for the year ended December 31, 2019 were $1,011 million, a decrease of $44 million, or 4.2%, compared to 2018, largely as a result of lower volume in digitally-printed and educational books, partially offset by higher volume in fulfillment and procurement services and a $2 million increase in paper sales.
The decrease in the operating income and margins was driven by higher restructuring, impairment, and other charges-net and higher labor costs in manufacturing and fulfillment operations.
Office Products
|
|
|
2019 |
|
|
2018 |
|
|
Change |
|
|||
|
|
|
(in millions, except percentages) |
|
|||||||||
|
Net sales |
|
$ |
517 |
|
|
$ |
562 |
|
|
$ |
(45 |
) |
|
Income from operations |
|
|
42 |
|
|
|
40 |
|
|
|
2 |
|
|
Operating margin |
|
|
8.1 |
% |
|
|
7.1 |
% |
|
100 bps |
|
|
|
Restructuring, impairment and other charges-net |
|
|
4 |
|
|
|
6 |
|
|
|
(2 |
) |
|
Purchase accounting adjustments |
|
|
— |
|
|
|
1 |
|
|
|
(1 |
) |
Net sales for the Office Products segment for the year ended December 31, 2019 were $517 million, a decrease of $45 million, or 8.1%, compared to 2018, largely as a result of lower volume in filing, envelopes and notetaking products.
The increase in Office Products segment income from operations and operating margin was primarily due to synergies realized from the integration of Quality Park and cost reductions, both of which increased the operating margin, partially offset by lower volume and higher labor costs.
38
Mexico
|
|
|
2019 |
|
|
2018 |
|
|
Change |
|
|||
|
|
|
(in millions, except percentages) |
|
|||||||||
|
Net sales |
|
$ |
91 |
|
|
$ |
97 |
|
|
$ |
(6 |
) |
|
Income from operations |
|
|
14 |
|
|
|
13 |
|
|
|
1 |
|
|
Operating margin |
|
|
15.4 |
% |
|
|
13.4 |
% |
|
200 bps |
|
|
Net sales for Mexico for the year ended December 31, 2019 were $91 million, a decrease of $6 million, or 5.7% compared to 2018. The decrease was primarily due to lower volume.
The increase in income from operations and operating margin was due to cost control initiatives.
Other
|
|
|
2019 |
|
|
2018 |
|
|
Change |
|
|||
|
|
|
(in millions, except percentages) |
|
|||||||||
|
Net sales |
|
$ |
149 |
|
|
$ |
347 |
|
|
$ |
(198 |
) |
|
Income from operations |
|
|
7 |
|
|
|
13 |
|
|
|
(6 |
) |
|
Operating margin |
|
|
4.7 |
% |
|
|
3.7 |
% |
|
100 bps |
|
|
|
Restructuring, impairment and other charges-net |
|
|
— |
|
|
|
1 |
|
|
|
(1 |
) |
Net sales for the Other grouping for the year ended December 31, 2019 were $149 million, a decrease of $198 million, or 57.0%, compared to 2018, primarily due to the disposition of the Company’s European printing business, lower directories volume and a $10 million decrease in pass-through paper sales, partially offset by higher sales in outsourced services.
The decrease in income from operations was primarily due to lower volume. The mix of volume helped to improve the operating margin compared to the prior year.
Corporate
The following table summarizes unallocated operating expenses and certain items impacting comparability within the activities presented as Corporate:
|
|
|
2019 |
|
|
2018 |
|
|
Change |
|
|||
|
|
|
(in millions, except percentages) |
|
|||||||||
|
Total operating expenses |
|
$ |
70 |
|
|
$ |
51 |
|
|
$ |
19 |
|
|
Significant components of total operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring, impairment and other charges-net |
|
|
11 |
|
|
|
2 |
|
|
|
9 |
|
|
Share-based compensation expenses |
|
|
7 |
|
|
|
12 |
|
|
|
(5 |
) |
|
Expenses related to acquisitions, the Merger Agreement and dispositions |
|
|
23 |
|
|
|
10 |
|
|
|
13 |
|
Refer to the Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in the Company’s annual report on Form 10-K for the year ended December 31, 2018, as filed with the SEC on February 19, 2019, for a discussion of information by segment for the year ended 2018 as compared to the year ended 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
39
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, gain on the sale of fixed assets associated with a plant closure, the termination fee from Quad, settlement of retirement benefit obligations, expenses related to acquisitions, the Merger Agreement and dispositions, purchase accounting adjustments, separation-related expenses, and loss on debt extinguishment.
A reconciliation of GAAP net income to non-GAAP adjusted EBITDA for the years ended December 31, 2019, 2018 and 2017 is presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019 |
|
|
2018 |
|
|
2017 |
|
|||
|
Net (loss) |
|
$ |
(295 |
) |
|
$ |
(23 |
) |
|
$ |
(57 |
) |
|
Restructuring, impairment and other charges- net |
|
|
148 |
|
|
|
35 |
|
|
|
129 |
|
|
Gain on the sale of fixed assets |
|
|
(26 |
) |
|
|
— |
|
|
|
— |
|
|
Termination fee from Quad |
|
|
(45 |
) |
|
|
— |
|
|
|
— |
|
|
Settlement of retirement benefit obligations |
|
|
137 |
|
|
|
— |
|
|
|
— |
|
|
Expenses related to acquisitions, the Merger Agreement and dispositions |
|
|
23 |
|
|
|
10 |
|
|
|
5 |
|
|
Purchase accounting adjustments |
|
|
— |
|
|
|
3 |
|
|
|
(1 |
) |
|
Separation-related expenses |
|
|
— |
|
|
|
— |
|
|
|
4 |
|
|
Loss on debt extinguishment |
|
|
— |
|
|
|
— |
|
|
|
3 |
|
|
Depreciation and amortization |
|
|
120 |
|
|
|
138 |
|
|
|
160 |
|
|
Interest expense-net |
|
|
76 |
|
|
|
80 |
|
|
|
72 |
|
|
Income tax expense (benefit) |
|
|
7 |
|
|
|
33 |
|
|
|
13 |
|
|
Non-GAAP adjusted EBITDA |
|
$ |
145 |
|
|
$ |
276 |
|
|
$ |
328 |
|
|
|
• |
Refer to Note 10, Restructuring, Impairment and Other Charges for information on restructuring, impairment and other charges for the years ended December 31, 2019, 2018 and 2017. |
|
|
• |
Termination fee from Quad: Refer to Note 1, Overview and Basis of Presentation, for more information on the fee received. |
|
|
• |
Gain on the sale of fixed assets: During the fourth quarter of 2019, the Company sold land and a building associated with a plant closure. The $26 million gain was recorded in cost of sales in the consolidated statement of operations. |
|
|
• |
Settlement of retirement benefit obligations: Refer to Note 15, Retirement Plans, for more information on the settlement charges. |
|
|
• |
Expenses related to acquisitions, the Merger Agreement and dispositions: The year ended December 31, 2019 included charges of $23 million primarily related to costs associated with the Merger Agreement. The year ended December 31, 2018 included charges of $10 million related to legal, accounting and other expenses associated with completed and contemplated acquisitions, costs associated with the Merger Agreement and the disposition of the Company’s European printing business. The year ended December 31, 2017 included charges of $5 million related to legal, accounting and other expenses associated with completed and contemplated acquisitions. |
|
|
• |
Purchase accounting adjustments: The year ended December 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. The year ended December 31, 2018 included net (benefit) charge of $(1) million as a result of purchase accounting inventory adjustments and a gain on acquisition. |
|
|
• |
Separation-related expenses: The year ended December 31, 2017 included a charge of $4 million for one-time transaction costs associated with becoming a standalone company. |
40
|
|
• |
Loss on debt extinguishment: The year ended December 31, 2017 included a loss of $3 million related to a partial debt extinguishment. |
|
|
• |
Income tax expense: The year ended December 31, 2019 includes income tax expense of $67 million related to a valuation allowance recorded on the Company’s deferred tax assets. The year ended December 31, 2018 included a $25 million non-cash provision recorded primarily for the write-off of a deferred tax asset associated with the disposition of the Company's European printing business. |
LIQUIDITY AND CAPITAL RESOURCES
The following sections describe the Company’s cash flows for the years ended December 31, 2019 and 2018.
|
|
|
2019 |
|
|
2018 |
|
|
||
|
Net cash (used in) provided by operating activities |
|
$ |
(4 |
) |
|
$ |
162 |
|
|
|
Net cash (used in) investing activities |
|
|
(34 |
) |
|
|
(55 |
) |
|
|
Net cash provided by (used in) financing activities |
|
|
119 |
|
|
|
(116 |
) |
|
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 $4 million for the year ended December 31, 2019 compared to net cash provided by operating activities of $162 million for the same period in 2018. The decrease in net cash provided by operating activities is primarily due to the timing of payments to suppliers, and lower operating earnings, partially offset by working capital reductions driven by lower volume, improvements in the timing of customer payments received and the net impact of the Quad termination fee less payments for related expenses.
Cash flows from Investing Activities
Net cash used in investing activities for the year ended December 31, 2019 was $34 million compared to $55 million for the same period in 2018. Significant changes are as follows:
|
|
• |
Capital expenditures increased by $8 million compared to the same period in 2018, primarily due to increased spend on machinery and equipment in order to increase automation and productivity in the Book and Magazines, Catalogs and Logistics segments: |
|
|
• |
Cash paid for acquisitions of businesses, net of cash acquired, was impacted by the acquisition of Print Logistics in 2018 and purchase price adjustments resulting from finalization of working capital calculations in each period; |
|
|
• |
Proceeds of $6 million for the year ended December 31, 2019 for the disposition of the Company’s commingle operations; |
|
|
• |
Net proceeds of $34 million for the year ended December 31, 2019 primarily due to the sale of land and a building associated with a plant closure in the Magazines, Catalogs and Logistics segment, compared to net proceeds from the sales and purchase of investments and other assets of $9 million for the year ended December 31, 2018; and |
|
|
• |
Proceeds of $47 million for the year ended December 31, 2018 for the disposition of the Company’s European printing business. |
Cash flows from Financing Activities
Net cash provided by financing activities for the year ended December 31, 2019 was $119 million compared to cash used in financing activities of $6 million for the same period in 2018. Significant changes are as follows:
|
|
• |
The Company paid down $44 million of long-term debt and current maturities during the year ended December 31, 2019, compared to $50 million during the year ended December 31, 2018; |
|
|
• |
The Company received net proceeds from credit facility borrowings of $183 million for the year ended December 31, 2019, compared to net payments of $9 million for the year ended December 31, 2018; |
41
|
|
• |
The Company paid $20 million to repurchase common stock during the year ended December 31, 2018; and |
|
|
• |
$18 million of lower dividends for the year ended December 31, 2019 compared to the year ended December 31, 2018. |
Refer to the Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in the Company’s annual report on Form 10-K for the year ended December 31, 2018, as filed with the SEC on February 19, 2019, for a discussion of cash flow (from operating, investing and financing activities) for the year ended 2018 as compared to the year ended 2017.
Dividends
Cash dividends declared and paid to stockholders during the year ended December 31, 2019 totaled $17 million.
In light of lower expectations for earnings and cash flows, on July 18, 2019 the Board of Directors suspended dividend payments in order to allocate greater capital to the Company’s debt reduction and ongoing operational restructuring programs. The dividend paid in June 2019 is the last dividend that will be paid for the foreseeable future.
Prior to the amendment to the Credit Agreement that was effective on August 5, 2019 that is described below, the Company was generally allowed to declare and pay annual dividend payments of up to $50 million in the aggregate. However, the August 5, 2019 amendment removed the general allowance to declare and pay annual dividends of up to $50 million.
See further discussion below for information regarding the August 5, 2019 amendment to the Credit Agreement.
Contractual Cash Obligations and Other Commitments and Contingencies
The following table quantifies the Company’s future contractual obligations as of December 31, 2019:
|
|
|
Payments Due In |
|
|||||||||||||||||||||||||
|
|
|
Total |
|
|
2020 |
|
|
2021 |
|
|
2022 |
|
|
2023 |
|
|
2024 |
|
|
Thereafter |
|
|||||||
|
|
|
(in millions) |
|
|||||||||||||||||||||||||
|
Debt (a) |
|
$ |
922 |
|
|
$ |
472 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
450 |
|
|
$ |
— |
|
|
$ |
— |
|
|
Interest due on debt (b) |
|
|
191 |
|
|
|
55 |
|
|
|
51 |
|
|
|
46 |
|
|
|
39 |
|
|
|
— |
|
|
|
— |
|
|
Multi-employer pension withdrawals obligations |
|
|
102 |
|
|
|
8 |
|
|
|
8 |
|
|
|
8 |
|
|
|
8 |
|
|
|
8 |
|
|
|
62 |
|
|
Operating leases |
|
|
190 |
|
|
|
53 |
|
|
|
43 |
|
|
|
33 |
|
|
|
22 |
|
|
|
15 |
|
|
|
24 |
|
|
Deferred compensation |
|
|
7 |
|
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1 |
|
|
|
5 |
|
|
Pension plan contributions (c) |
|
|
12 |
|
|
|
6 |
|
|
|
6 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Incentive compensation |
|
|
8 |
|
|
|
8 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Outsourced services |
|
|
35 |
|
|
|
24 |
|
|
|
8 |
|
|
|
3 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Other (d) |
|
|
38 |
|
|
|
38 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Total as of December 31, 2019 |
|
$ |
1,505 |
|
|
$ |
665 |
|
|
$ |
116 |
|
|
$ |
90 |
|
|
$ |
519 |
|
|
$ |
24 |
|
|
$ |
91 |
|
|
|
(a) |
Excludes unamortized debt issuance costs of $4 million and $5 million related to the Company’s Term Loan Facility and 8.75% Senior Notes due October 15, 2023, respectively, and a discount of $3 million related to the Company’s Term Loan Facility. These amounts do not represent contractual obligations with a fixed amount or maturity date. All outstanding amounts under the Company’s Term Loan Facility were classified as current as of December 31, 2019 due to the Company’s |
noncompliance with required debt ratios contained in the Credit Agreement. Refer to Item 1, Business, for more information.
|
|
(b) |
Includes scheduled interest payments for the 8.75% Senior Notes and estimates for the Term Loan Facility. |
|
|
(c) |
Includes estimated pension plan contributions for 2020 and 2021 and does not include the obligations for subsequent periods as the Company is unable to reasonably estimate those amounts. |
|
|
(d) |
Other primarily includes employee restructuring-related severance payments ($29 million) and purchases of property, plant and equipment ($9 million). |
42
Liquidity
Cash and cash equivalents were $105 million and $21 million as of December 31, 2019 and 2018, respectively.
The Company’s cash balances are held in several locations throughout the world, including amounts held outside of the United States. Cash and cash equivalents as of December 31, 2019 included $85 million in the U.S. and $20 million in international locations.
Until September 30, 2019, the Company maintained cash pooling structures that enabled participating international locations to draw on the pools’ cash resources to meet local liquidity needs. Foreign cash balances were permitted to 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. The pooling structure was discontinued in October 2019. As of December 31, 2019, the Company had $249 million of borrowings under the Revolving Credit Facility and had no availability to further draw. Additionally, the Company had $51 million in outstanding letters of credit issued under the Revolving Credit Facility as of December 31, 2019.
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. Each of these covenants is subject to important exceptions and qualifications.
Credit Agreement
On December 20, 2018, the Company amended the Credit Agreement to, among other things, defer certain changes to the minimum Interest Coverage Ratio and the maximum Consolidated Leverage Ratio. Effective August 5, 2019, the Company further amended the Credit Agreement to, among other things, defer certain changes to the minimum Interest Coverage Ratio and the maximum Consolidated Leverage Ratio. The following summarizes the changes to the minimum Interest Coverage Ratio and the maximum Consolidated Leverage Ratio:
|
|
|
Original |
|
December 20, 2018 |
|
August 5, 2019 |
|
Maximum Consolidated Leverage Ratio |
|
|
|
|
|
|
|
Current ratio |
|
3.25 to 1.00 |
|
3.25 to 1.00 |
|
3.75 to 1.00 |
|
Step-down ratio |
|
3.00 to 1.00 |
|
3.00 to 1.00 |
|
3.50 to 1.00 and 3.25 to 1.00 |
|
Step-down as of date (quarter ending on or after) |
|
March 31, 2019 |
|
March 31, 2020 |
|
June 30, 2020 and March 31, 2021 |
|
|
|
|
|
|
|
|
|
Minimum Interest Coverage Ratio |
|
|
|
|
|
|
|
Current ratio |
|
3.25 to 1.00 |
|
3.25 to 1.00 |
|
2.50 to 1.00 |
|
Step-up ratio |
|
3.50 to 1.00 |
|
3.50 to 1.00 |
|
2.75 to 1.00 and 3.00 to 1.00 |
|
Step-up as of date (quarter ending on or after) |
|
March 31, 2019 |
|
March 31, 2020 |
|
September 30, 2020 and June 30, 2021 |
Other terms, including the outstanding principal, maturity date and other debt covenants remained the same under the December 20, 2018 amendment.
43
The August 5, 2019 amendment resulted in a reduction in the Revolving Credit Facility aggregate principal amount from $400 million to $300 million and removed the general allowance to pay annual dividends of up to $50 million. The August 5, 2019 amendment included other changes that generally further 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 outstanding principal and maturity date of the Term Loan Facility remains the same, while the maturity date of the Revolving Credit Facility remains the same.
The consolidated financial statements have been prepared assuming the Company will continue as a going concern. Based on final results of operations for the year ended December 31, 2019, the Company concluded it was not in compliance with the Consolidated Leverage Ratio and Minimum Interest Ratio contained in the Credit Agreement as of December 31, 2019. The noncompliance occurred on the last day of the fourth quarter due to the following: the Company’s Consolidated Leverage Ratio exceeded the maximum level permitted and the Company’s Minimum Interest Ratio was below the minimum level permitted. On March 2, 2020, the Company entered into a Waiver, Forbearance Agreement and Fourth Amendment to Credit Agreement with lenders constituting a majority under the Credit Agreement that governs the Company’s Revolving Credit Facility and Term Loan Facility. The Waiver, Forbearance Agreement and Fourth Amendment to Credit Agreement waives the defaults or events of default that have occurred as a result of the financial covenant noncompliance on December 31, 2019 and prevents the lenders from directing the Administrative Agent to accelerate the debt or exercise other remedies as a result of certain other potential defaults or events of default which may occur under the Credit Agreement (the “Potential Defaults”) through the period ended May 14, 2020 (such period, the “Forbearance Period”). The Potential Defaults include potential breaches of the Company’s financial covenants with respect to the first quarter of 2020, failure to make principal and interest payments related to the Term Loan Facility, failure to deliver audited financial statements for the year ended December 31, 2019 without a going concern qualification or exception, and failure to provide notice with respect to the Potential Defaults. The Waiver, Forbearance Agreement and Fourth Amendment to Credit Agreement contains certain covenants and requirements, and failure to comply with these covenants and requirements could result in the termination of the Waiver, Forbearance Agreement and Fourth Amendment to Credit Agreement (and the Forbearance Period) prior to its stated term. Following the end of the Forbearance Period, the lenders may choose not to provide a full waiver of the Potential Defaults, should any occur. The Waiver, Forbearance Agreement and Fourth Amendment to Credit Agreement requires the Company to pay a waiver fee of 0.30% of the Aggregate Exposure of the Consenting Lenders as of the effective date of the Waiver, Forbearance Agreement and Fourth Amendment to Credit Agreement. Should any of the Potential Defaults occur, unless the Company obtains an extension or another waiver, upon the termination of the Forbearance Period, the Company’s debt under the Revolving Credit Facility and Term Loan Facility could be in default and could be accelerated by lenders, which would require the Company to pay all amounts outstanding and could result in a default under, and the acceleration of, our other debt. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.
Going Concern
The financial statements included in this annual report on Form 10-K have been prepared assuming the Company will continue as a going concern.
The ability to continue as a going concern is dependent upon the Company entering into an amendment to the Credit Agreement, including revised covenants, or obtaining financing to replace the current facility, as well as continuing profitable operations, continuing to meet its obligations, and continuing to repay its liabilities arising from normal business operations when they become due. The Company has evaluated its plans to alleviate this doubt, which may include obtaining amended terms from its current lenders to allow for sufficient flexibility in the financial covenants after giving consideration to the Company’s current operations and strategic plans, or evaluating strategic alternatives in order to reduce the Company’s indebtedness. As of the issuance date of these consolidated financial statements, such plans cannot yet be considered probable (as defined by ASC 205-40, “Going Concern”) of occurring. Negotiations with our lenders may require the Company to raise additional capital and/or pursue the sale of non-core assets to reduce existing debt. There can be no assurance that the Company will be successful in its plans to refinance, to obtain alternative financing on acceptable terms or to sell non-strategic assets, when required or if at all. If such plans are not realized, the Company may be forced to limit its business activities or be unable to continue as a going concern, which will have a material adverse effect on our consolidated results of operations and financial condition. Management anticipates incurring certain one-time expenses, which may be significant, during 2020 relating to the plans it may pursue to alleviate the substantial doubt about the Company’s ability to continue as a going concern.
If we need to raise additional capital through public or private debt or equity financings, strategic relationships, or other arrangements, this capital might not be available to us in a timely manner, on acceptable terms, or at all. Our failure to raise sufficient capital when needed could severely constrain or prevent us from, among other factors, developing new or enhancing existing services or products, acquiring other services or technologies, or funding significant capital expenditures and may have a material adverse
44
effect on our business, financial position, results of operations, and cash flows, as well as impair our ability to service our debt obligations. If additional funds were raised through the issuance of equity or convertible debt securities, the percentage of stock owned by the then-current stockholders could be reduced. Furthermore, such equity or any debt securities that we issue might have rights, preferences, or privileges senior to holders of our common stock. In addition, trends in the securities and credit markets may restrict our ability to raise any such additional funds, at least in the near term.
As a result of the factors noted above, we believe there is substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements included in this annual report on Form 10-K do not include any adjustments related to the recoverability and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The audit opinion on our consolidated financial statements includes an emphasis of matter paragraph related to the substantial doubt surrounding the Company’s ability to continue as a going concern.
Other Information
On July 26, 2019, S&P Global Ratings (“S&P”) downgraded the Company’s credit ratings as noted below and lowered the issuer credit rating from B to CCC+. On August 14, 2019, Moody's Investors Service (“Moody’s) downgraded the Company’s credit ratings as noted below and changed the outlook from stable to negative.
|
|
|
Moody's |
|
S&P |
||||
|
|
|
Prior Rating |
|
New Rating |
|
Prior Rating |
|
New Rating |
|
Corporate family |
|
B2 |
|
B3 |
|
not applicable |
|
not applicable |
|
Revolving Credit Facility |
|
Ba2 |
|
Ba3 |
|
BB- |
|
B |
|
Term Loan Facility |
|
B2 |
|
B3 |
|
B- |
|
CCC+ |
|
Senior Notes |
|
B2 |
|
B3 |
|
B- |
|
CCC+ |
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 December 31, 2019, the Company’s variable-interest borrowings were $471 million, or approximately 51.1%, of the Company’s total debt.
The Company assesses market risk based on changes in interest rates utilizing a sensitivity analysis that measures the potential loss in earnings, fair values and cash flows based on a hypothetical 10% change in interest rates. Using this sensitivity analysis, such changes would not have a material effect on interest income or expense and cash flows and would change the fair values of fixed-rate debt at December 31, 2019 by approximately $19 million.
The Company is exposed to the impact of foreign currency fluctuations in certain countries in which it operates. The exposure to
foreign currency movements is limited in many countries because the operating revenues and expenses of its various subsidiaries and business units are substantially in the local currency of the country in which they operate. To the extent that borrowings, sales, purchases, revenues, expenses or other transactions are not in the local currency of the subsidiary, the Company is exposed to currency risk and may enter into foreign exchange forward contracts to hedge the currency risk. The Company is primarily exposed to the currencies of the Canadian dollar and Mexican peso, and was exposed to the currency of the Polish Zloty until the sale of the Company’s European printing business in the third quarter of 2018. The Company does not use derivative financial instruments for trading or speculative purposes.
OTHER INFORMATION
Environmental, Health and Safety
For a discussion of certain environmental, health and safety issues involving the Company, refer to Note 12, Commitments and Contingencies, to the consolidated financial statements.
45
Litigation and Contingent Liabilities
For a discussion of certain litigation involving the Company, refer to Note 12, Commitments and Contingencies, to the consolidated financial statements.
New Accounting Pronouncements and Pending Accounting Standards
Recently issued accounting standards and their estimated effect on the Company’s consolidated financial statements are also described in Note 22, New Accounting Pronouncements, and throughout the notes to the consolidated financial statements.
Off-Balance Sheet Arrangements
The Company does not have off-balance sheet arrangements, financings or special purpose entities.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to a variety of market risks that may adversely impact the Company's results of operations and financial condition, including changes in interest and foreign currency exchange rates, changes in the economic environment that would impact credit positions and changes in the prices of certain commodities. The Company's management takes an active role in the risk management process and has developed policies and procedures that require specific administrative and business functions to assist in the identification, assessment and control of various risks. These risk management strategies may not fully insulate the Company from adverse impacts due to market risks.
Interest Rate Risk
The Company is exposed to interest rate risk on variable rate debt obligations and price risk on fixed rate debt. As of December 31, 2019, the Company had:
|
|
• |
Fixed rate debt outstanding of $450 million at a current weighted average interest rate of 8.75%; and |
|
|
• |
Variable rate debt outstanding of $471 million at December 31, 2019, which is comprised primarily of $222 million remaining on the Term Loan Facility and $249 million outstanding on the Revolving Credit Facility. |
For the year ended December 31, 2019, the Term Loan and the Revolving Credit Facility had current weighted-average interest rates of 7.73% and 5.47%, respectively. Refer to Debt Issuances, included in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Note 13, Debt, for more information. A hypothetical 10% change in interest rates in the near term would not have a material effect on interest expense or cash flows. A hypothetical 10% adverse change in interest rates in the near term would change the fair value of fixed rate debt at December 31, 2019, by approximately $19 million.
Foreign Currency Risk and Translation Exposure
The Company is exposed to the impact of foreign currency fluctuations in certain countries in which it operates. The exposure to foreign currency movements is limited in most countries because the operating revenues and expenses of its various subsidiaries and business units are substantially in the local currency of the country in which they operate.
Although operating in local currencies may limit the impact of currency rate fluctuations on the results of operations of the Company's non-United States subsidiaries and business units, rate fluctuations may impact the consolidated financial position as the assets and liabilities of its foreign operations are translated into U.S. dollars in preparing the Company's consolidated balance sheets. As of December 31, 2019, the Company's foreign subsidiaries had net current assets (defined as current assets less current liabilities) subject to foreign currency translation risk of $34 million. The potential decrease in net current assets as of December 31, 2019, from a hypothetical 10% adverse change in quoted foreign currency exchange rates in the near term would be approximately $3 million. This sensitivity analysis assumes a parallel shift in all major foreign currency exchange rates verses the U.S. dollar. Exchange rates rarely move in the same direction relative to the U.S. dollar due to positive and negative correlations of the various global currencies. This assumption may overstate the impact of changing exchange rates on individual assets and liabilities denominated in a foreign currency.
46
These international operations are subject to risks typical of international operations, including, but not limited to, differing economic conditions, changes in political climate, potential restrictions on the movement of funds, differing tax structures, and other regulations and restrictions. Accordingly, future results could be adversely impacted by changes in these or other factors.
Credit Risk
Credit risk is the possibility of loss from a customer's failure to make payments according to contract terms. Prior to granting credit, each customer is evaluated, taking into consideration the prospective customer's financial condition, payment experience, credit bureau information and other financial and qualitative factors that may affect the customer's ability to pay. Specific credit reviews and standard industry credit scoring models are used in performing this evaluation. Customers' financial condition is continuously monitored as part of the normal course of business. Some of the Company's customers are highly leveraged or otherwise subject to their own operating and regulatory risks. Based on those customer account reviews and due to the continued uncertainty of the global economy, the Company has established an allowance for doubtful accounts of $12 million as of December 31, 2019.
The Company has a large, diverse customer base and does not have a high degree of concentration with any single customer account. During the year ended December 31, 2019, the Company's largest customer accounted for less than 10% of the Company's net sales. Even if the Company's credit review and analysis mechanisms work properly, the Company may experience financial losses in its dealings with customers and other parties. Any increase in nonpayment or nonperformance by customers could adversely impact the Company's results of operations and financial condition. Economic disruptions in the near term could result in significant future charges.
Commodity Risk
The primary raw materials used by the Company are paper and ink. At this time, the Company's supply of raw materials is readily available from numerous vendors; however, based on market conditions, that could change in the future. The Company generally buys these raw materials based upon market prices that are established with the vendor as part of the procurement process.
To reduce price risk caused by market fluctuations, the Company has incorporated price adjustment clauses in certain sales contracts. Although the Company is able to pass most commodity cost increases through to its customers, management believes a hypothetical 10% adverse change in the price of paper and other raw materials in the near term would have a significant effect on demand for the Company’s products due to the increase in total costs to our customers. Management is not able to quantify the likely impact of such a change in raw material prices on the Company’s consolidated statements of operations or cash flows.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial information required by Item 8 is contained in Item 15 of Part IV of this annual report on Form 10-K.
ITEM 9. CHANGES IN DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
47
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As required by Rule 13a-15(b) and Rule 15d-15(e) of the Securities Exchange Act of 1934, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining effective disclosure controls and procedures, as defined under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. As of December 31, 2019, an evaluation was performed under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that disclosure controls and procedures as of December 31, 2019 were effective in ensuring information required to be disclosed in the Company’s SEC reports was recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information was accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Refer to the Report of Management on Internal Control Over Financial Reporting for more information.
Changes in Internal Control Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended December 31, 2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Report of Management on Internal Control Over Financial Reporting
The management of the Company, including the Company’s Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934).
Management of the Company, including the Company’s Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2019. Management based this assessment on criteria for effective internal control over financial reporting described in the “Internal Control—Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on management’s assessment, management determined that, as of December 31, 2019, the Company maintained effective internal control over financial reporting.
Deloitte & Touche LLP, an independent registered public accounting firm, who audited the consolidated financial statements of the Company included in this annual report on Form 10-K, has also audited the effectiveness of the Company’s internal control over financial reporting as stated in its report appearing below.
March 2, 2020
48
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of LSC Communications, Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of LSC Communications, Inc. and subsidiaries (the “Company”) as of December 31, 2019, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2019, of the Company and our report dated March 2, 2020, expressed an unqualified opinion on those financial statements and included explanatory paragraphs regarding the Company’s ability to continue as a going concern and related to the changes in accounting principles due to the adoption of Accounting Standards Update No. 2016-02, “Leases (Topic 842)” and Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers (Topic 606).”
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ DELOITTE & TOUCHE LLP
Chicago, IL
March 2, 2020
49
ITEM 9B. OTHER INFORMATION
The Company determined that Sarah L. Hoxie, Corporate Controller, serves as the Company’s Principal Accounting Officer and she has signed the annual report on Form 10-K in this capacity.
50
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF LSC COMMUNICATIONS AND CORPORATE GOVERNANCE
Information regarding directors and executive officers of the Company is incorporated herein by reference to the descriptions under “Proposal 1: Election of Directors,” “About the Continuing Directors,” “The Board’s Committees and their Functions” and “Section 16(a) Beneficial Ownership Reporting Compliance” of the Company’s Proxy Statement for the Annual Meeting of Stockholders (the “2020 Proxy Statement”). See also the information with respect to the Company’s executive officers at the end of Part I of this annual report on Form 10-K under the caption Executive Officers of LSC Communications, Inc.
The Company has adopted a policy statement entitled Code of Ethics that applies to its chief executive officer and senior financial officers. In the event that an amendment to, or a waiver from, a provision of the Code of Ethics is made or granted, the Company intends to post such information on its web site, www.lsccom.com. A copy of the Company’s Code of Ethics has been filed as an exhibit to this annual report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive and director compensation is incorporated by reference to the material under the captions “Compensation Discussion and Analysis,” “Human Resources Committee Report,” “Executive Compensation,” “Potential Payments Upon Termination or Change in Control,” “Director Compensation,” and “2019 CEO Pay Ratio” of the 2020 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information regarding security ownership of certain beneficial owners and management is incorporated herein by reference to the material under the heading “Stock Ownership” of the 2020 Proxy Statement.
Information as of December 31, 2019 concerning compensation plans under which LSC Communications’ equity securities are authorized for issuance are as follows:
|
|
|
|
|
|
|
|
|
Number of Securities |
|
|
|
Number of Securities |
|
|
|
|
|
Remaining Available for |
|
|
|
to Be Issued upon |
|
Weighted-Average |
|
|
Future Issuance under |
|
|
|
|
Exercise of |
|
Exercise Price of |
|
|
Equity Compensation Plans |
|
|
|
|
Outstanding Options, |
|
Outstanding Options, |
|
|
(Excluding Securities |
|
|
|
|
Warrants and Rights |
|
Warrants and Rights (b) |
|
|
Reflected in Column (1)) |
|
|
|
|
(1) |
|
(2) |
|
|
(3) |
|
|
Plan Category |
|
|
|
|
|
|
|
|
|
Equity compensation plan approved by security holders |
|
1,789,875 (a) |
|
$ |
32.30 |
|
|
3,581,951 (c) |
|
|
(a) |
Includes 1,632,630 shares issuable upon the vesting of restricted stock units. |
|
|
(b) |
Restricted stock units were excluded when determining the weighted-average exercise price of outstanding options, warrants and rights. |
|
|
(c) |
The 2016 Performance Incentive Plan allows grants in the form of cash or bonus awards, stock options, stock appreciation rights, restricted stock, stock units or combinations thereof. The maximum number of shares of common stock that may be granted with respect to bonus awards, including performance awards or fixed awards in the form of restricted stock or other form, is 6,600,000 in the aggregate, of which 3,581,951 remain available for issuance. |
51
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Information regarding certain relationships and related transactions and director independence is incorporated herein by reference to the material under the heading “Certain Relationships and Related Party Transactions,” “The Board’s Committees and Their Functions” and “Corporate Governance—Director Independence” of the 2020 Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information regarding principal accounting fees and services is incorporated herein by reference to the material under the heading “The Company’s Independent Registered Public Accounting Firm - Fees” of the 2020 Proxy Statement.
52
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
|
(a) |
1. Financial Statements |
The financial statements listed in the accompanying index (page F-1) to the financial statements are filed as part of this annual report on Form 10-K.
|
(b) |
Exhibits |
The exhibits listed on the accompanying index (pages E-1 through E-4) are filed as part of this annual report on Form 10-K.
|
(c) |
Financial Statement Schedules omitted |
Certain schedules have been omitted because the required information is included in the consolidated financial statements and notes thereto or because they are not applicable or not required.
53
ITEM 15(a). INDEX TO FINANCIAL STATEMENTS
|
|
|
Page |
|
|
F-2 |
|
|
|
F-3 |
|
|
|
F-4 |
|
|
Consolidated Balance Sheets as of December 31, 2019 and 2018 |
|
F-5 |
|
|
F-6 |
|
|
|
F-7 |
|
|
|
F-8 |
|
|
|
F-52 |
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of LSC Communications, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of LSC Communications, Inc. and subsidiaries (the "Company") as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income, stockholders’ equity and cash flows, for each of the three years in the period ended December 31, 2019, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 2, 2020, expressed an unqualified opinion on the Company's internal control over financial reporting.
Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company was not in compliance with certain covenants contained in its Credit Agreement as of December 31, 2019 but has entered into a “Waiver, Forbearance Agreement and Fourth Amendment to Credit Agreement” with the lenders constituting a majority under the Credit Agreement that is in effect through May 14, 2020, absent further events of default. Unless the Company obtains an extension or another waiver beyond May 14, 2020, the Company could be in default of the Revolving Credit Facility and Term Loan Facility and all amounts then outstanding could be accelerated by the lenders. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Changes in Accounting Principles
As discussed in Note 1 to the financial statements, the Company has changed its method of accounting for leases in the year ended December 31, 2019 due to the adoption of Accounting Standards Update No. 2016-02, “Leases (Topic 842)” under the modified retrospective method, and the Company changed its method of accounting for revenue from contracts with customers in the year ended December 31, 2018 due to the adoption of Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” under the modified retrospective method.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ DELOITTE & TOUCHE LLP
Chicago, Illinois
March 2, 2020
We have served as the Company's auditor since 2015.
F-2
LSC COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)
|
|
|
|
|
|||||||||
|
|
|
Year Ended December 31, |
|
|||||||||
|
|
|
2019 |
|
|
2018 |
|
|
2017 |
|
|||
|
Net sales |
|
$ |
3,326 |
|
|
$ |
3,826 |
|
|
$ |
3,603 |
|
|
Cost of sales |
|
|
2,888 |
|
|
|
3,283 |
|
|
|
3,026 |
|
|
Selling, general and administrative expenses (exclusive of depreciation and amortization) |
|
|
327 |
|
|
|
328 |
|
|
|
307 |
|
|
Restructuring, impairment and other charges-net (Note 10) |
|
|
148 |
|
|
|
35 |
|
|
|
129 |
|
|
Depreciation and amortization |
|
|
120 |
|
|
|
138 |
|
|
|
160 |
|
|
(Loss) income from operations |
|
|
(157 |
) |
|
|
42 |
|
|
|
(19 |
) |
|
Interest expense-net (Note 13) |
|
|
76 |
|
|
|
80 |
|
|
|
72 |
|
|
Settlement of retirement benefit obligations (Note 15) |
|
|
137 |
|
|
|
— |
|
|
|
— |
|
|
Termination fee from Quad (Note 1) |
|
|
(45 |
) |
|
|
— |
|
|
|
— |
|
|
Investment and other (income)-net |
|
|
(37 |
) |
|
|
(48 |
) |
|
|
(47 |
) |
|
(Loss) income before income taxes |
|
|
(288 |
) |
|
|
10 |
|
|
|
(44 |
) |
|
Income tax expense |
|
|
7 |
|
|
|
33 |
|
|
|
13 |
|
|
Net (loss) |
|
$ |
(295 |
) |
|
$ |
(23 |
) |
|
$ |
(57 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) per common share (Note 14) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net (loss) per share |
|
$ |
(8.82 |
) |
|
$ |
(0.67 |
) |
|
$ |
(1.69 |
) |
|
Diluted net (loss) per share |
|
$ |
(8.82 |
) |
|
$ |
(0.67 |
) |
|
$ |
(1.69 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
33.4 |
|
|
33.8 |
|
|
33.8 |
|
|||
|
Diluted |
|
33.4 |
|
|
33.8 |
|
|
33.8 |
|
|||
Refer to Notes to the Consolidated Financial Statements
F-3
LSC COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(in millions)
|
|
|
Year Ended December 31, |
|
|||||||||
|
|
|
2019 |
|
|
2018 |
|
|
2017 |
|
|||
|
Net (loss) |
|
$ |
(295 |
) |
|
$ |
(23 |
) |
|
$ |
(57 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss), net of tax (Note 17): |
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation adjustments |
|
|
2 |
|
|
|
(7 |
) |
|
|
21 |
|
|
Adjustment for net periodic pension plan cost |
|
|
54 |
|
|
|
(4 |
) |
|
|
34 |
|
|
Other comprehensive income (loss) |
|
|
56 |
|
|
|
(11 |
) |
|
|
55 |
|
|
Comprehensive (loss) |
|
$ |
(239 |
) |
|
$ |
(34 |
) |
|
$ |
(2 |
) |
The adjustments for net pension plan cost were net of income tax expense of $18 million for the twelve months ended December 31, 2019, benefit of $1 million for the year ended December 31, 2018 and expense of $15 million for the year ended December 31, 2017.
Refer to Notes to the Consolidated Financial Statements
F-4
LSC COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(in millions, except share and per share data)
|
|
|
December 31, |
|
||||||
|
|
|
2019 |
|
|
2018 |
|
|||
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
105 |
|
|
$ |
21 |
|
|
|
Receivables, less allowances for doubtful accounts of $12 in 2019 (2018 - $14) |
|
|
472 |
|
|
|
617 |
|
|
|
Inventories (Note 7) |
|
|
170 |
|
|
|
197 |
|
|
|
Income tax receivable |
|
|
5 |
|
|
|
4 |
|
|
|
Prepaid expenses and other current assets |
|
|
36 |
|
|
|
28 |
|
|
|
Total current assets |
|
|
788 |
|
|
|
867 |
|
|
|
Property, plant and equipment-net (Note 8) |
|
|
440 |
|
|
|
508 |
|
|
|
Goodwill (Note 9) |
|
|
52 |
|
|
|
103 |
|
|
|
Other intangible assets-net (Note 9) |
|
|
120 |
|
|
|
156 |
|
|
|
Right-of-use assets for operating leases |
|
|
163 |
|
|
|
— |
|
|
|
Deferred income taxes |
|
|
9 |
|
|
|
27 |
|
|
|
Other noncurrent assets |
|
|
77 |
|
|
|
93 |
|
|
|
Total assets |
|
$ |
1,649 |
|
|
$ |
1,754 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES |
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
175 |
|
|
$ |
372 |
|
|
|
Accrued liabilities (Note 11) |
|
|
211 |
|
|
|
199 |
|
|
|
Short-term debt and current portion of long-term debt (Note 13) |
|
|
465 |
|
|
|
108 |
|
|
|
Short-term operating lease liabilities |
|
|
42 |
|
|
|
— |
|
|
|
Total current liabilities |
|
|
893 |
|
|
|
679 |
|
|
|
Long-term debt (Note 13) |
|
|
445 |
|
|
|
659 |
|
|
|
Pension liabilities |
|
|
156 |
|
|
|
132 |
|
|
|
Restructuring and multi-employer pension liabilities (Note 10) |
|
|
42 |
|
|
|
45 |
|
|
|
Long-term operating lease liabilities |
|
|
129 |
|
|
|
— |
|
|
|
Other noncurrent liabilities |
|
|
56 |
|
|
|
61 |
|
|
|
Total liabilities |
|
$ |
1,721 |
|
|
$ |
1,576 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 12) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EQUITY |
|
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value |
|
|
|
|
|
|
|
|
|
|
Authorized: 65,000,000 |
|
|
|
|
|
|
|
|
|
|
Issued: 35,559,052 shares in 2019 (2018: 35,029,565) |
|
$ |
— |
|
|
$ |
— |
|
|
|
Additional paid-in capital |
|
|
835 |
|
|
|
828 |
|
|
|
Accumulated deficit |
|
|
(354 |
) |
|
|
(42 |
) |
|
|
Accumulated other comprehensive loss (Note 17) |
|
|
(528 |
) |
|
|
(584 |
) |
|
|
Treasury stock, at cost: 2,084,055 shares in 2019 (2018: 1,888,205) |
|
|
(25 |
) |
|
|
(24 |
) |
|
|
Total equity |
|
|
(72 |
) |
|
|
178 |
|
|
|
Total liabilities and equity |
|
$ |
1,649 |
|
|
$ |
1,754 |
|
|
Refer to Notes to the Consolidated Financial Statements
F-5
LSC COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
|
|
|
Year ended December 31, |
|
|||||||||
|
|
|
2019 |
|
|
2018 |
|
|
2017 |
|
|||
|
Cash Flows from Operating Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) |
|
$ |
(295 |
) |
|
$ |
(23 |
) |
|
$ |
(57 |
) |
|
Adjustments to reconcile net (loss) to net cash (used in) provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment charges |
|
|
79 |
|
|
|
6 |
|
|
|
88 |
|
|
Depreciation and amortization |
|
|
120 |
|
|
|
138 |
|
|
|
160 |
|
|
Provision for doubtful accounts receivable |
|
|
7 |
|
|
|
7 |
|
|
|
3 |
|
|
Share-based compensation |
|
|
7 |
|
|
|
12 |
|
|
|
13 |
|
|
Deferred income taxes |
|
|
2 |
|
|
|
21 |
|
|
|
(15 |
) |
|
Settlement of retirement benefit obligations |
|
|
137 |
|
|
|
— |
|
|
|
— |
|
|
Gain on sale of investments and other assets-net |
|
|
(34 |
) |
|
|
(3 |
) |
|
|
(10 |
) |
|
Other |
|
|
6 |
|
|
|
7 |
|
|
|
5 |
|
|
Changes in operating assets and liabilities - net of acquisitions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable-net |
|
|
137 |
|
|
|
103 |
|
|
|
(7 |
) |
|
Inventories |
|
|
27 |
|
|
|
(6 |
) |
|
|
5 |
|
|
Prepaid expenses and other current assets |
|
|
(3 |
) |
|
|
(2 |
) |
|
|
(1 |
) |
|
Accounts payable |
|
|
(177 |
) |
|
|
(38 |
) |
|
|
103 |
|
|
Income taxes receivable and payable |
|
|
(2 |
) |
|
|
11 |
|
|
|
(7 |
) |
|
Accrued liabilities and other |
|
|
(15 |
) |
|
|
(71 |
) |
|
|
(75 |
) |
|
Net cash (used in) provided by operating activities |
|
|
(4 |
) |
|
|
162 |
|
|
|
205 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(71 |
) |
|
|
(63 |
) |
|
|
(60 |
) |
|
Acquisitions of businesses, net of cash acquired |
|
|
(3 |
) |
|
|
(48 |
) |
|
|
(236 |
) |
|
Disposition of businesses |
|
|
6 |
|
|
|
47 |
|
|
|
— |
|
|
Net proceeds from sales and purchases of investments and other assets |
|
|
34 |
|
|
|
9 |
|
|
|
18 |
|
|
Net cash (used in) investing activities |
|
|
(34 |
) |
|
|
(55 |
) |
|
|
(278 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of long-term debt |
|
|
— |
|
|
|
— |
|
|
|
65 |
|
|
Payments of current maturities and long-term debt |
|
|
(44 |
) |
|
|
(50 |
) |
|
|
(118 |
) |
|
Net proceeds (payments) from credit facility borrowings |
|
|
183 |
|
|
|
(9 |
) |
|
|
75 |
|
|
Debt issuance costs |
|
|
(2 |
) |
|
|
(1 |
) |
|
|
(1 |
) |
|
Proceeds from issuance of common stock |
|
|
— |
|
|
|
— |
|
|
|
18 |
|
|
Payments for repurchase of common stock |
|
|
— |
|
|
|
(20 |
) |
|
|
— |
|
|
Dividends paid |
|
|
(17 |
) |
|
|
(35 |
) |
|
|
(34 |
) |
|
Other financing activities |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(2 |
) |
|
Payments from RRD-net |
|
|
— |
|
|
|
— |
|
|
|
3 |
|
|
Net cash provided by (used in) financing activities |
|
|
119 |
|
|
|
(116 |
) |
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate on cash and cash equivalents |
|
|
1 |
|
|
|
(2 |
) |
|
|
5 |
|
|
Net increase (decrease) in cash, cash equivalents and restricted cash |
|
|
82 |
|
|
|
(11 |
) |
|
|
(62 |
) |
|
Cash, cash equivalents and restricted cash at beginning of year |
|
|
24 |
|
|
|
35 |
|
|
|
97 |
|
|
Cash, cash equivalents and restricted cash at end of period |
|
$ |
106 |
|
|
$ |
24 |
|
|
$ |
35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental non-cash disclosure: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of approximately 1.0 million shares of LSC Communications, Inc. common stock for acquisition of a business |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation to the Consolidated Balance Sheets |
|
As of December 31, |
|
|
|
|
|
|||||
|
|
|
2019 |
|
|
2018 |
|
|
|
|
|
||
|
Cash and cash equivalents |
|
$ |
105 |
|
|
$ |
21 |
|
|
|
|
|
|
Restricted cash included in prepaid expenses and other current assets |
|
|
1 |
|
|
|
3 |
|
|
|
|
|
|
Total cash, cash equivalents and restricted cash shown in the condensed consolidated statements of cash flows |
|
$ |
106 |
|
|
$ |
24 |
|
|
|
|
|
Refer to Notes to the Consolidated Financial Statements
F-6
LSC COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained |
|
|
Accumulated |
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
|
|
|
|
Earnings |
|
|
Other |
|
|
|
|
|
|||
|
|
|
Common Stock |
|
|
Paid-in |
|
|
Treasury Stock |
|
|
(Accumulated |
|
|
Comprehensive |
|
|
Total |
|
||||||||||||||
|
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Shares |
|
|
Amount |
|
|
Deficit) |
|
|
(Loss) Income |
|
|
Equity |
|
||||||||
|
Balance at December 31, 2016 |
|
|
32 |
|
|
$ |
— |
|
|
$ |
770 |
|
|
|
— |
|
|
$ |
— |
|
|
$ |
1 |
|
|
$ |
(531 |
) |
|
$ |
240 |
|
|
Net (loss) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(57 |
) |
|
|
— |
|
|
|
(57 |
) |
|
Separation-related adjustments |
|
|
— |
|
|
|
— |
|
|
|
(5 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(5 |
) |
|
Issuance of common stock |
|
|
2 |
|
|
|
— |
|
|
|
38 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
38 |
|
|
Issuance of share-based awards, net of withholdings and other |
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(2 |
) |
|
|
— |
|
|
|
— |
|
|
|
(2 |
) |
|
Share-based compensation |
|
|
— |
|
|
|
— |
|
|
|
13 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
13 |
|
|
Cash dividends paid |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(34 |
) |
|
|
— |
|
|
|
(34 |
) |
|
Other comprehensive income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
55 |
|
|
|
55 |
|
|
Balance at December 31, 2017 |
|
|
35 |
|
|
$ |
— |
|
|
$ |
816 |
|
|
|
— |
|
|
$ |
(2 |
) |
|
$ |
(90 |
) |
|
$ |
(476 |
) |
|
$ |
248 |
|
|
Net (loss) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(23 |
) |
|
|
— |
|
|
|
(23 |
) |
|
Repurchase of common stock |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2 |
|
|
|
(20 |
) |
|
|
— |
|
|
|
— |
|
|
|
(20 |
) |
|
Revenue recognition adjustments |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
9 |
|
|
|
— |
|
|
|
9 |
|
|
Reclassification of tax rate change to accumulated deficit |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
97 |
|
|
|
(97 |
) |
|
|
— |
|
|
Issuance of share-based awards, net of withholdings and other |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(2 |
) |
|
|
— |
|
|
|
— |
|
|
|
(2 |
) |
|
Share-based compensation |
|
|
— |
|
|
|
— |
|
|
|
12 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
12 |
|
|
Cash dividends paid |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(35 |
) |
|
|
— |
|
|
|
(35 |
) |
|
Other comprehensive loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(11 |
) |
|
|
(11 |
) |
|
Balance at December 31, 2018 |
|
|
35 |
|
|
$ |
— |
|
|
$ |
828 |
|
|
|
2 |
|
|
$ |
(24 |
) |
|
$ |
(42 |
) |
|
$ |
(584 |
) |
|
$ |
178 |
|
|
Net (loss) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(295 |
) |
|
|
— |
|
|
|
(295 |
) |
|
Issuance of share-based awards, net of withholdings and other |
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1 |
) |
|
|
— |
|
|
|
— |
|
|
|
(1 |
) |
|
Share-based compensation |
|
|
— |
|
|
|
— |
|
|
|
7 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
7 |
|
|
Cash dividends paid |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(17 |
) |
|
|
— |
|
|
|
(17 |
) |
|
Other comprehensive income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
56 |
|
|
|
56 |
|
|
Balance at December 31, 2019 |
|
|
36 |
|
|
$ |
— |
|
|
$ |
835 |
|
|
|
2 |
|
|
$ |
(25 |
) |
|
$ |
(354 |
) |
|
$ |
(528 |
) |
|
$ |
(72 |
) |
There were dividends declared per common share of $0.52, $1.04 and $1.00 during the years ended December 31, 2019, 2018 and 2017, respectively.
Refer to Notes to the Consolidated Financial Statements
F-7
LSC Communications, Inc.
Notes to Consolidated Financial Statements
(tabular amounts in millions, except per share data)
Note 1. Overview and Basis of Presentation
Description of Business
The principal business of LSC Communications, Inc., a Delaware corporation, and its direct or indirect wholly-owned subsidiaries (“LSC Communications,” “the Company,” “we,” “our” and “us”) is to offer a broad scope of traditional and digital print, print-related services and office products. The Company serves the needs of publishers, merchandisers and retailers worldwide with a service offering that includes e-services, logistics, warehousing and fulfillment and supply chain management services. The Company utilizes a broad portfolio of technology capabilities coupled with consultative attention to clients' needs to increase speed to market, reduce costs, provide postal savings to customers and improve efficiencies. The Company prints magazines, catalogs, books and directories, and its office products offerings include filing products, envelopes, note-taking products, binder products, and forms.
Merger Agreement
On October 30, 2018, the Company entered into that certain Agreement and Plan of Merger (the “Merger Agreement”), by and among Quad/Graphics, Inc. (“Quad”), QLC Merger Sub, Inc. and LSC Communications, pursuant to which, subject to the satisfaction or waiver of certain conditions, LSC Communications would be merged with QLC Merger Sub, Inc., and become a wholly-owned subsidiary of Quad.
On July 22, 2019, Quad and LSC Communications entered into a letter agreement (the “Letter Agreement”), pursuant to which the parties agreed to terminate the Merger Agreement. Pursuant to the Letter Agreement, Quad agreed to pay LSC Communications the Regulatory Approval Reverse Termination Fee (as defined in the Merger Agreement) of $45 million in cash on the business day following the date of the Letter Agreement. The Company incurred transaction costs of approximately $26 million associated with the Merger Agreement, of which $5 million was incurred in 2018. Except for certain indemnification obligations of Quad related to LSC Communications assisting Quad with the financing under the Merger Agreement, the parties also agreed to release each other from any and all claims, counterclaims, demands, proceedings, actions, causes of action, orders, obligations, damages, debts, costs, expenses and other liabilities whatsoever and howsoever arising pursuant to or in connection with the Merger Agreement or the transactions provided for in the Merger Agreement.
Basis of Presentation
The 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.
As a result of the Company’s segment analysis in the fourth quarter of 2019, Mexico met the requirements to be classified as a reportable segment (previously included as a non-reportable segment). All prior year amounts have been reclassified to conform to the Company’s current reporting structure. Refer to Note 19, Segment Information, for more information.
The Company adopted Accounting Standards Update No. 2016-02 “Leases (Topic 842)” (“ASU 2016-02” or “ASC 842”) on January 1, 2019 using the modified retrospective adoption method. Refer to Note 5, Leases, for more information.
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 2019 and 2018 reflect the application of ASC 606 guidance while the reported results for 2017 were prepared and continue to be reported under previous guidance.
F-8
Going Concern
The consolidated financial statements have been prepared assuming the Company will continue as a going concern. Based on final results of operations for the year ended December 31, 2019, the Company concluded it was not in compliance with the Consolidated Leverage Ratio and Minimum Interest Ratio contained in the Credit Agreement of December 31, 2019. The noncompliance occurred on the last day of the fourth quarter due to the following: the Company’s Consolidated Leverage Ratio exceeded the maximum level permitted and the Company’s Minimum Interest Ratio was below the minimum level permitted. On March 2, 2020, the Company entered into a Waiver, Forbearance Agreement and Fourth Amendment to Credit Agreement with lenders constituting a majority under the Credit Agreement that governs the Company’s Revolving Credit Facility and Term Loan Facility. The Waiver, Forbearance Agreement and Fourth Amendment to Credit Agreement waives the defaults or events of default that have occurred as a result of the financial covenant noncompliance on December 31, 2019 and prevents the lenders from directing the Administrative Agent to accelerate the debt or exercise other remedies as a result of certain other potential defaults or events of default which may occur under the Credit Agreement (the “Potential Defaults”), through the period ended May 14, 2020 (such period, the “Forbearance Period”). The Potential Defaults include potential breaches of the Company’s financial covenants with respect to the first quarter of 2020, failure to make principal and interest payments related to the Term Loan Facility, failure to deliver audited financial statements for the year ended December 31, 2019 without a going concern qualification or exception, and failure to provide notice with respect to the Potential Defaults. The Waiver, Forbearance Agreement and Fourth Amendment to Credit Agreement contains certain covenants and requirements, and failure to comply with these covenants and requirements could result in the termination of the Waiver, Forbearance Agreement and Fourth Amendment to Credit Agreement (and the Forbearance Period) prior to its stated term. Following the end of the Forbearance Period, the lenders may choose not to provide a full waiver of the Potential Defaults, should any occur. The Waiver, Forbearance Agreement and Fourth Amendment to Credit Agreement requires the Company to pay a waiver fee of 0.30% of the Aggregate Exposure of the Consenting Lenders as of the effective date of the Waiver and Forbearance Agreement. Should any of the Potential Defaults occur, unless the Company obtains an extension or another waiver, upon the termination of the Forbearance Period, the Company’s debt under the Revolving Credit Facility and Term Loan Facility could be in default and could be accelerated by lenders, which would require the Company to pay all amounts outstanding and could result in a default under, and the acceleration of, our other debt. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.
The ability to continue as a going concern is dependent upon the Company entering into an amendment to the Credit Agreement, including revised covenants, or obtaining financing to replace the current facility, as well as continuing profitable operations, continuing to meet its obligations, and continuing to repay its liabilities arising from normal business operations when they become due. The Company has evaluated its plans to alleviate this doubt, which may include obtaining amended terms from its current lenders to allow for sufficient flexibility in the financial covenants after giving consideration to the Company’s current operations and strategic plans, or evaluating strategic alternatives in order to reduce the Company’s indebtedness. As of the issuance date of these consolidated financial statements, such plans cannot yet be considered probable (as defined by ASC 205-40, “Going Concern”) of occurring. Negotiations with our lenders may require the Company to raise additional capital and/or pursue the sale of non-core assets to reduce existing debt. There can be no assurance that the Company will be successful in its plans to refinance, to obtain alternative financing on acceptable terms or to sell non-strategic assets, when required or if at all. If such plans are not realized, the Company may be forced to limit its business activities or be unable to continue as a going concern, which will have a material adverse effect on our consolidated results of operations and financial condition. Management anticipates incurring certain one-time expenses, which may be significant, during 2020 relating to the plans it may pursue to alleviate the substantial doubt about the Company’s ability to continue as a going concern.
If we need to raise additional capital through public or private debt or equity financings, strategic relationships, or other arrangements, this capital might not be available to us in a timely manner, on acceptable terms, or at all. Our failure to raise sufficient capital when needed could severely constrain or prevent us from, among other factors, developing new or enhancing existing services or products, acquiring other services or technologies, or funding significant capital expenditures and may have a material adverse effect on our business, financial position, results of operations, and cash flows, as well as impair our ability to service our debt obligations. If additional funds were raised through the issuance of equity or convertible debt securities, the percentage of stock owned by the then-current stockholders could be reduced. Furthermore, such equity or any debt securities that we issue might have rights, preferences, or privileges senior to holders of our common stock. In addition, trends in the securities and credit markets may restrict our ability to raise any such additional funds, at least in the near term.
The consolidated financial statements included in this annual report on Form 10-K do not include any adjustments related to the recoverability and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The audit opinion on our consolidated financial statements includes an emphasis of matter paragraph related to the substantial doubt surrounding the Company’s ability to continue as a going concern.
F-9
Note 2. Significant Accounting Policies
Use of Estimates—The preparation of the consolidated financial statements, in conformity with GAAP, requires the extensive use of management’s estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and reported amounts of revenue and expenses during the reporting periods.
Actual results could differ from these estimates. Estimates are used when accounting for items and matters including, but not limited to, allowance for uncollectible accounts receivable, inventory obsolescence, asset valuations and useful lives, employee benefits, self-insurance reserves, taxes, restructuring and other provisions and contingencies.
Foreign Operations—Assets and liabilities denominated in foreign currencies are translated into U.S. dollars at the exchange rates existing at the respective balance sheet dates. Income and expense items are translated at the average rates during the respective periods. Translation adjustments resulting from fluctuations in exchange rates are recorded as a separate component of other comprehensive income (loss) while transaction gains and losses are recorded in net earnings.
Fair Value Measurements—Certain assets and liabilities are required to be recorded at fair value on a recurring basis. Fair value is determined based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. The Company records the fair value of its pension plan assets on a recurring basis. Assets measured at fair value on a nonrecurring basis include long-lived assets held and used, long-lived assets held for sale, goodwill and other intangible assets. The fair value of cash and cash equivalents, accounts receivable, short-term debt and accounts payable approximate their carrying values. The three-tier value hierarchy, which prioritizes valuation methodologies based on the reliability of the inputs, is:
Level 1—Valuations based on quoted prices for identical assets and liabilities in active markets.
Level 2—Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
Level 3—Valuations based on unobservable inputs reflecting the Company’s own assumptions, consistent with reasonably available assumptions made by other market participants.
Revenue Recognition—As explained in Note 1, Overview and Basis of Presentation, the Company adopted ASC 606, on January 1, 2018 using the modified retrospective method for all contracts not completed as of the date of adoption. The reported results for 2019 and 2018 reflect the application of ASC 606 guidance while the reported results for 2017 were prepared and continue to be reported under previous guidance.
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 product, usually when production is completed.
F-10
Revenue from the Company’s print related services (including list processing, mail sortation services and supply chain management) is recognized as services are completed over time.
Revenue is measured as the amount of consideration the Company expects 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 resulting 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 is 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 the Company’s 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 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 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.
Refer to Note 4, Revenue Recognition, for further discussion.
By-product recoveries—The Company records the sale of by-products as a reduction of cost of sales.
Cash and cash equivalents—The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Short-term securities consist of investment grade instruments of governments, financial institutions and corporations.
F-11
Receivables—Receivables are stated net of allowances for doubtful accounts and primarily include trade receivables, notes receivable and miscellaneous receivables from suppliers. No single customer comprised more than 10% of our net sales in 2019, 2018 or 2017. Specific customer provisions are made when a review of significant outstanding amounts, utilizing information about customer creditworthiness and current economic trends, indicates that collection is doubtful. In addition, provisions are made at differing rates, based upon the age of the receivable and the Company’s historical collection experience. Refer to Note 6, Accounts Receivable, for details of activity affecting the allowance for doubtful accounts receivable.
Inventories—Inventories include material, labor and factory overhead and are stated at the lower of cost or net realizable value and net of excess and obsolescence reserves for raw materials and finished goods. Provisions for excess and obsolete inventories are made at differing rates, utilizing historical data and current economic trends, based upon the age and type of the inventory. Specific excess and obsolescence provisions are also made when a review of specific balances indicates that the inventories will not be utilized in production or sold.
The cost of 65.1% and 63.0% of the inventories at December 31, 2019 and 2018, respectively, has been determined using the Last-In, First-Out (“LIFO”) method. The LIFO method is intended to reflect the effect of inventory replacement costs within the consolidated statements of operations; accordingly, charges to cost of sales generally reflect recent costs of material, labor and factory overhead. The Company uses an external-index method of valuing LIFO inventories. The remaining inventories, primarily related to certain acquired and international operations, are valued using the First-In, First-Out (“FIFO”) or specific identification methods.
Long-Lived Assets—The Company assesses potential impairments to its long-lived assets if events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Indefinite-lived intangible assets are reviewed annually for impairment or more frequently if events or changes in circumstances indicate that the carrying value may not be recoverable. An impaired asset is written down to its estimated fair value based upon the most recent information available. Estimated fair market value is generally measured by discounting estimated future cash flows. Long-lived assets, other than goodwill and other intangible assets, that are held for sale, are recorded at the lower of the carrying value or the fair market value less the estimated cost to sell.
Property, plant and equipment—Property, plant and equipment are recorded at cost and depreciated on a straight-line basis over their estimated useful lives. Useful lives range from 15 to 40 years for buildings, the lesser of 7 years or the lease term for leasehold improvements and from 3 to 15 years for machinery and equipment. Maintenance and repair costs are charged to expense as incurred. Major overhauls that extend the useful lives of existing assets are capitalized. When properties are retired or disposed, the costs and accumulated depreciation are eliminated and the resulting profit or loss is recognized in the results of operations.
Goodwill—Goodwill is assigned to a specific reporting unit, depending on the nature of the acquired company.
Goodwill is reviewed for impairment annually as of October 31 or more frequently if events or changes in circumstances indicate that it is more likely than not that the fair value of a reporting unit is below its carrying value.
For certain reporting units, the Company may perform a qualitative, rather than quantitative, assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. In performing this qualitative analysis, the Company considers various factors, including the excess of prior year estimates of fair value compared to carrying value, the effect of market or industry changes and the reporting unit’s actual results compared to projected results. Based on this qualitative analysis, if management determines that it is more likely than not that the fair value of the reporting unit is greater than its carrying value, no further impairment testing is performed.
For the remaining reporting units, the Company compares each reporting unit’s fair value, estimated based on comparable company market valuations and expected future discounted cash flows to be generated by the reporting unit, to its carrying value. As a result of the Company’s early adoption of ASU 2017-04 “Intangibles – Goodwill and Other (Topic 350)” during the third quarter of 2017, if the carrying value exceeds the reporting unit’s fair value, the Company recognizes an impairment charge equal to the amount by which the carrying value exceeds the reporting unit’s fair value not to exceed the total amount of goodwill recorded.
Refer to Note 10, Restructuring, Impairment and Other Charges, for more information regarding the Company’s impairment reviews.
Amortization—Certain costs to acquire and develop internal-use computer software are capitalized and amortized over their estimated useful life using the straight-line method, up to a maximum of 3 years. Amortization expense, primarily related to internally-developed software and excluding amortization expense related to other intangible assets, was $9 million, $9 million and $5 million for the years ended December 31, 2019, 2018 and 2017, respectively. Deferred debt issuance costs are amortized over the term of the related debt.
F-12
Other intangible assets, except for those intangible assets with indefinite lives, are recognized separately from goodwill and are amortized over their estimated useful lives. Other intangible assets with indefinite lives are not amortized. Refer to Note 9, Goodwill and Other Intangible Assets, for further discussion of other intangible assets and the related amortization expense.
Share-Based Compensation— The Company recognizes compensation expense for share-based awards expected to vest on a straight-line basis over the requisite service period of the award based on their grant date fair value. Refer to Note 18, Stock and Incentive Programs, for further discussion.
Leases— As explained in Note 1, Overview and Basis of Presentation, the Company adopted ASC 842, on January 1, 2019 using the modified retrospective adoption method.
Under ASC 842, the Company determines if a contract contains a lease at the inception of the contract. A contract contains a lease if it conveys to the Company the right to control the use of specified assets. Operating leases are included in ROU assets and in other current liabilities and other non-current liabilities. Finance lease assets are included in property, plant, and equipment, and liabilities are included in short-term and long-term debt. ROU assets and lease liabilities are recognized at the present value of future lease payments. The discount rate used to measure the amount recognized is the Company’s incremental borrowing rate if an implicit rate is not determinable from the lease contract. Operating lease cost is recognized on a straight-line basis over the term of the lease.
The Company leases land, production facilities, office space, and equipment. Leases with an initial term of 12 months or less are not recorded on the balance sheet; the Company recognizes lease expense for these leases on a straight-line basis over the lease term. Further, the Company has elected not to separate lease and non-lease components of contracts for any asset classes, but rather to account for non-lease components together with their related lease components.
For leases that include renewal options that the Company is reasonably certain to exercise, the Company includes the renewal period in its initial classification of the lease. Renewal options range from 1 year to 3 years.
Variable lease payments do not depend on a published index or rate, and therefore, are expensed as incurred.
Pension Benefits Plans— The Company records annual income and expense amounts relating to its pension plans based on calculations that include various actuarial assumptions, including discount rates, mortality, assumed rates of return, compensation increases, and turnover rates. The Company reviews its actuarial assumptions on an annual basis and makes modifications to the assumptions based on current rates and trends when it is deemed appropriate to do so. The effect of modifications on the value of plan obligations and assets is recognized immediately within other comprehensive income (loss) and amortized into operating earnings over future periods. The Company believes that the assumptions utilized in recording its obligations under its plans are reasonable based on its experience, market conditions and input from its actuaries and investment advisors. Refer to Note 15, Retirement Plans, for information on settlements recorded by the Company in 2019.
Taxes on Income—The Company has recorded deferred tax assets related to future deductible items, including domestic and foreign tax loss and credit carryforwards. The Company evaluates these deferred tax assets by tax jurisdiction. The utilization of these tax assets is limited by the amount of taxable income expected to be generated within the allowable carryforward period and other factors. Accordingly, the Company has recorded valuation allowances to reduce certain of these deferred tax assets when management has concluded that, based on the weight of available evidence, it is more likely than not that the deferred tax assets will not be fully realized. A significant piece of objective negative evidence is the cumulative loss incurred over the three-year period ended December 31, 2019, which limits the ability to consider other subjective evidence, such as our projections for future operating results. As a result, the Company appropriately scheduled out the future reversals of its deferred tax assets and liabilities. As of December 31, 2019 and 2018, valuation allowances of $77 million and $11 million, respectively, were recorded in the Company’s consolidated balance sheets. If actual results differ from these estimates, or the estimates are adjusted in future periods, adjustments to the valuation allowance might need to be recorded. In evaluating the Company’s ability to recover its deferred taxes, the Company considers all available positive and negative evidence.
Significant judgment is required in determining the provision for income taxes and related accruals, deferred tax assets and liabilities and any valuation allowance recorded against deferred tax assets. In the ordinary course of business, there are transactions and calculations where the ultimate tax outcome is uncertain. Additionally, the Company’s tax returns are subject to audit by various U.S. and foreign tax authorities. The Company recognizes a tax position in its financial statements when it is more likely than not (a likelihood of more than fifty percent) that the position would be sustained upon examination by tax authorities. This recognized tax position is then measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Although management believes that its estimates are reasonable, the final outcome of uncertain tax positions may be materially different from that which is reflected in the Company’s consolidated financial statements. As of December 31, 2019, a de minimis amount of unrecognized tax benefits were recognized in the consolidated balance sheets. The Company classifies interest expense and any related penalties related to income tax uncertainties as a component of income tax expense. Refer to Note 16, Income Taxes, for further discussion.
F-13
Comprehensive Income (Loss)—Comprehensive income (loss) for the Company consists of net earnings, unrecognized actuarial gains and losses and foreign currency translation adjustments. Refer to Note 17, Comprehensive Income, for further discussion.
Note 3. Business Combinations and Disposition
2018 Acquisition
On July 2, 2018, the Company completed the acquisition of R.R. Donnelley & Sons’ Print Logistics business (“Print Logistics”), an integrated logistics services provider to the print industry with an expansive distribution network. The acquisition enhanced the Company’s logistics service offering and is included in the Company’s logistics segment. The original total purchase price was $58 million in cash, which was reduced to $52 million as a result of a $6 million net working capital settlement in the fourth quarter of 2018. Of the final total purchase price, $21 million was recorded in goodwill related to this acquisition.
2018 Disposition
On September 28, 2018, the Company completed the sale of its European printing business, which included web offset manufacturing facilities, a logistics and warehousing site and a location dedicated to premedia services, for proceeds of $47 million. See Note 16, Income Taxes, for information related to a $25 million non-cash provision recorded primarily for the write-off of a deferred tax asset associated with the disposition. The European printing business was included in the Europe segment, which was disclosed as part of the Other segment grouping.
Acquisition Information
The acquisition of Print Logistics was recorded by allocating the cost of the acquisition to the assets acquired, including other intangible assets, based on their estimated fair values at the acquisition date. The excess of the cost of the acquisition over the net amounts assigned to the fair value of the assets acquired was recorded in goodwill. The goodwill is primarily attributable to the synergies expected to arise as a result of the acquisitions. The tax deductible goodwill related to the Print Logistics acquisition was $25 million.
The purchase price allocation for Print Logistics was final as of December 31, 2018. There were no changes to the purchase price allocation as of December 31, 2019 compared to the disclosed purchase price allocation in the Company’s annual report on Form 10-K for the year ended December 31, 2018.
The final purchase price allocation for Print Logistics was as follows:
|
Accounts Receivable |
|
$ |
40 |
|
|
Prepaid expenses and other current assets |
|
|
1 |
|
|
Property, plant and equipment |
|
|
8 |
|
|
Other intangible assets |
|
|
17 |
|
|
Goodwill |
|
|
21 |
|
|
Accounts payable and accrued liabilities |
|
|
(35 |
) |
|
Purchase price and net cash paid |
|
$ |
52 |
|
F-14
The fair values of goodwill, other intangible assets and property, plant and equipment associated with Print Logistics were determined to be Level 3 under the fair value hierarchy, which included discounted cash flow analyses and comparable marketplace fair value data. Property, plant and equipment values were estimated using either the cost, or if a secondhand market existed, the market approach. The following table presents the fair value, valuation techniques and related unobservable inputs for these Level 3 measurements associated with Print Logistics:
|
|
|
Fair Value |
|
|
Valuation Technique |
|
Unobservable Input |
|
Value |
|
|
|
Customer relationships |
|
$ |
17 |
|
|
Multi-period excess earnings method |
|
Existing customer growth rate |
|
(3.5%) |
|
|
|
|
|
|
|
|
|
|
Attrition rate |
|
7.5% |
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
18.0% |
|
For the years ended December 31, 2019, 2018 and 2017, the Company recorded a de minimis amount, $2 million and $5 million, respectively, associated with the completed and contemplated acquisitions within selling, general and administrative expenses in the consolidated statements of operations.
Pro forma results
The following unaudited pro forma financial information for the year ended December 31, 2019 and 2018 presents the consolidated statements of operations of the Company and the acquisition of Print Logistics as if the acquisition had occurred as of January 1 of the year prior to the acquisition.
The unaudited pro forma financial information is not intended to represent or be indicative of the Company’s consolidated statements of operations that would have been reported had this acquisition been completed as of the beginning of the period presented and should not be taken as indicative of the Company’s future consolidated statements of operations. Pro forma adjustments are tax-effected at the applicable statutory tax rates.
|
|
|
Year ended December 31, |
|
|||||
|
|
|
2019 |
|
|
2018 |
|
||
|
Net sales |
|
$ |
3,326 |
|
|
$ |
3,911 |
|
|
Net (loss) |
|
|
(295 |
) |
|
|
(26 |
) |
|
Net (loss) per common share |
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(8.82 |
) |
|
$ |
(0.77 |
) |
|
Diluted |
|
$ |
(8.82 |
) |
|
$ |
(0.77 |
) |
The following table outlines unaudited pro forma financial information for the years ended December 31, 2019 and 2018:
|
|
|
Year ended December 31, |
|
|||||
|
|
|
2019 |
|
|
2018 |
|
||
|
Amortization of purchased intangibles |
|
$ |
18 |
|
|
$ |
19 |
|
There were no nonrecurring pro forma adjustments affecting net (loss) income for the years ended December 31, 2019 and 2018.
Note 4. Revenue Recognition
Revenue is measured as the amount of consideration the Company expects 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.
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).
Revenue from the Company’s print related services (including list processing, mail sortation services and supply chain management) is recognized as services are completed over time.
F-15
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.
Refer to Note 2, Significant Accounting Policies, for further information on the Company’s revenue recognition policies.
Disaggregated 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.
|
|
|
Year Ended |
|
|||||||||||||||||||||||||
|
|
|
December 31, 2019 |
|
|||||||||||||||||||||||||
|
|
|
Magazines, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Catalogs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and |
|
|
|
|
|
|
Office |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
Logistics |
|
|
Book |
|
|
Products |
|
|
Mexico |
|
|
Other |
|
|
Corporate |
|
|
Total |
|
|||||||
|
Major Products / Service Lines |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book (a) |
|
$ |
— |
|
|
$ |
1,011 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
1,011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Magazines and Catalogs (b) |
|
$ |
1,218 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
91 |
|
|
$ |
81 |
|
|
$ |
— |
|
|
$ |
1,390 |
|
|
North America |
|
|
1,218 |
|
|
|
— |
|
|
|
— |
|
|
|
91 |
|
|
|
81 |
|
|
|
— |
|
|
|
1,390 |
|
|
Europe |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Logistics |
|
$ |
341 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
341 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Directories |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
68 |
|
|
$ |
— |
|
|
$ |
68 |
|
|
North America |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
68 |
|
|
|
— |
|
|
|
68 |
|
|
Europe |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office Products |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
517 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(1 |
) |
|
$ |
516 |
|
|
Total |
|
$ |
1,559 |
|
|
$ |
1,011 |
|
|
$ |
517 |
|
|
$ |
91 |
|
|
$ |
149 |
|
|
$ |
(1 |
) |
|
$ |
3,326 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Timing of Revenue Recognition |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products and services transferred at a point in time |
|
$ |
1,106 |
|
|
$ |
871 |
|
|
$ |
517 |
|
|
$ |
91 |
|
|
$ |
68 |
|
|
$ |
(1 |
) |
|
$ |
2,652 |
|
|
Products and services transferred over time |
|
|
453 |
|
|
|
140 |
|
|
|
— |
|
|
|
— |
|
|
|
81 |
|
|
|
— |
|
|
|
674 |
|
|
Total |
|
$ |
1,559 |
|
|
$ |
1,011 |
|
|
$ |
517 |
|
|
$ |
91 |
|
|
$ |
149 |
|
|
$ |
(1 |
) |
|
$ |
3,326 |
|
F-16
|
|
|
Year Ended |
|
|||||||||||||||||||||||||
|
|
|
December 31, 2018 |
|
|||||||||||||||||||||||||
|
|
|
Magazines, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Catalogs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and |
|
|
|
|
|
|
Office |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
Logistics |
|
|
Book |
|
|
Products |
|
|
Mexico |
|
|
Other |
|
|
Corporate |
|
|
Total |
|
|||||||
|
Major Products / Service Lines |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book (a) |
|
$ |
— |
|
|
$ |
1,055 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
1,055 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Magazines and Catalogs (b) |
|
$ |
1,497 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
97 |
|
|
$ |
241 |
|
|
$ |
— |
|
|
$ |
1,835 |
|
|
North America |
|
|
1,497 |
|
|
|
— |
|
|
|
— |
|
|
|
97 |
|
|
|
77 |
|
|
|
— |
|
|
|
1,671 |
|
|
Europe |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
164 |
|
|
|
— |
|
|
|
164 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Logistics |
|
$ |
270 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
270 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Directories |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
106 |
|
|
$ |
— |
|
|
$ |
106 |
|
|
North America |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
92 |
|
|
|
— |
|
|
|
92 |
|
|
Europe |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
14 |
|
|
|
— |
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office Products |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
562 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(2 |
) |
|
$ |
560 |
|
|
Total |
|
$ |
1,767 |
|
|
$ |
1,055 |
|
|
$ |
562 |
|
|
$ |
97 |
|
|
$ |
347 |
|
|
$ |
(2 |
) |
|
$ |
3,826 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Timing of Revenue Recognition |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products and services transferred at a point in time |
|
$ |
1,371 |
|
|
$ |
929 |
|
|
$ |
562 |
|
|
$ |
97 |
|
|
$ |
270 |
|
|
$ |
(2 |
) |
|
$ |
3,227 |
|
|
Products and services transferred over time |
|
|
396 |
|
|
|
126 |
|
|
|
— |
|
|
|
— |
|
|
|
77 |
|
|
|
— |
|
|
|
599 |
|
|
Total |
|
$ |
1,767 |
|
|
$ |
1,055 |
|
|
$ |
562 |
|
|
$ |
97 |
|
|
$ |
347 |
|
|
$ |
(2 |
) |
|
$ |
3,826 |
|
|
|
(a) |
Includes e-book formatting and supply chain management associated with book production |
|
|
(b) |
Includes premedia and co-mail |
Due to the Company’s adoption of ASC 606 using the modified retrospective method on January 1, 2018, disaggregated revenue information is not disclosed for the year ended December 31, 2017.
F-17
Contract Balances
The following table provides changes in contract assets and liabilities during the year ended December 31, 2019.
|
|
|
Short-Term Contract Assets |
|
|
Long-Term Contract Assets |
|
|
Contract Liabilities |
|
|||
|
Beginning Balance, January 1, 2019 |
|
$ |
44 |
|
|
$ |
30 |
|
|
$ |
16 |
|
|
Additions to unbilled accounts receivable |
|
|
38 |
|
|
|
— |
|
|
|
— |
|
|
Unbilled accounts receivable recognized in trade receivables |
|
|
(42 |
) |
|
|
— |
|
|
|
— |
|
|
Payment of contract acquisition costs |
|
|
— |
|
|
|
3 |
|
|
|
— |
|
|
Amortization of contract acquisition costs |
|
|
— |
|
|
|
(12 |
) |
|
|
— |
|
|
Write-off due to termination of contract acquisition costs |
|
|
— |
|
|
|
(7 |
) |
|
|
— |
|
|
Revenue recognized that was included in contract liabilities as of January 1, 2019 |
|
|
— |
|
|
|
— |
|
|
|
(12 |
) |
|
Increases due to cash received |
|
|
— |
|
|
|
— |
|
|
|
13 |
|
|
Ending Balance, December 31, 2019 |
|
$ |
40 |
|
|
$ |
14 |
|
|
$ |
17 |
|
The trade receivables balances as of December 31, 2019 and 2018 were $366 million and $488 million, respectively.
Contract Acquisition Costs
In connection with the adoption of ASC 606, the Company is required to capitalize certain contract acquisition costs. 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. For the year ended December 31, 2019, the amount of amortization was $12 million and there was $7 million of impairment loss related to costs capitalized. For the year ended December 31, 2018, the amount of amortization was $11 million and there was no impairment loss in relation to costs capitalized.
Note 5. Leases
Financial Statement Impact of Adopting Accounting Standards Update No. 2016-02 “Leases (Topic 842)” (“ASU 2016-02” or “ASC 842”)
The Company adopted ASU 2016-02 on January 1, 2019 using the modified retrospective adoption method. The reported results for 2019 reflect the adoption of ASC 842 guidance while the reported results for 2018 were prepared and continue to be reported under the guidance of ASC 840, Leases, referred to herein as “previous guidance.”
In adopting ASC 842, the Company applied certain available practical expedients, including electing to combine lease and non-lease components of a contract and electing to apply the practical expedient “package” permitted under ASU 2016-02. This election allowed the Company to use the lease classification (operating or finance) previously determined at the start of a lease contract for any expired or existing leases as of the date of adoption.
The Company performed an analysis of all lease contracts existing as of January 1, 2019. Upon adoption of ASC 842, the Company added $206 million of right-of-use (“ROU”) assets and lease liabilities to its balance sheet related to operating leases. There were no changes to assets or liabilities relating to finance leases.
F-18
Based upon the balances that existed as of December 31, 2018, the Company recorded adjustments to the following accounts as of January 1, 2019:
|
|
|
As Reported |
|
|
Adjustments |
|
|
Adjusted |
|
|||
|
|
|
December 31, 2018 |
|
|
Adoption of ASU 2016-02 |
|
|
January 1, 2019 |
|
|||
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
ROU assets for operating leases (a) |
|
$ |
— |
|
|
$ |
201 |
|
|
$ |
201 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued liabilities (a) |
|
$ |
199 |
|
|
$ |
(1 |
) |
|
$ |
198 |
|
|
Short-term operating lease liabilities |
|
|
— |
|
|
|
52 |
|
|
|
52 |
|
|
Long-term operating lease liabilities |
|
|
— |
|
|
|
154 |
|
|
|
154 |
|
|
Other noncurrent liabilities (a) |
|
|
61 |
|
|
|
(4 |
) |
|
|
57 |
|
|
|
(a) |
The aggregate $5 million adjustment shown in accrued liabilities and other noncurrent liabilities relates to straight-line rent accruals that were reclassified to ROU assets for operating leases. |
Accounting Policy
Under ASC 842, the Company determines if a contract contains a lease at the inception of the contract. A contract contains a lease if it conveys to the Company the right to control the use of specified assets. Operating leases are included in ROU assets and in other current liabilities and other non-current liabilities. Finance lease assets are included in property, plant, and equipment, and liabilities are included in short-term and long-term debt. ROU assets and lease liabilities are recognized at the present value of future lease payments. The discount rate used to measure the amount recognized is the Company’s incremental borrowing rate if an implicit rate is not determinable from the lease contract. Operating lease cost is recognized on a straight-line basis over the term of the lease.
The Company leases land, production facilities, office space, and equipment. Leases with an initial term of 12 months or less are not recorded on the balance sheet; the Company recognizes lease expense for these leases on a straight-line basis over the lease term. Further, the Company has elected not to separate lease and non-lease components of contracts for any asset classes, but rather to account for non-lease components together with their related lease components.
For leases that include renewal options that the Company is reasonably certain to exercise, the Company includes the renewal period in its initial classification of the lease. Renewal options range from 1 year to 3 years.
Variable lease payments do not depend on a published index or rate, and therefore, are expensed as incurred.
The components of total net lease expense were as follows:
|
|
|
Year Ended |
|
|
|
|
|
December 31, 2019 |
|
|
|
Operating lease expense |
|
$ |
71 |
|
|
Sublease (income) |
|
|
(8 |
) |
|
Variable lease expense |
|
|
11 |
|
|
Total net lease expense |
|
$ |
74 |
|
Operating lease expense includes $4 million of impairment recorded on ROU assets due to facility closures in Magazines, Catalogs and Logistics ($3 million) and Office Products ($1 million). The impairment charges are recorded in other restructuring charges.
During the year ended December 31, 2019, the Company incurred a de minimis amount of finance lease cost, consisting of finance lease ROU asset amortization and interest on finance lease liabilities, and a de minimis amount of cost associated with short-term leases.
F-19
Supplemental non-cash information related to leases is included below:
|
|
|
Year Ended |
|
|
|
|
|
December 31, 2019 |
|
|
|
ROU assets acquired in exchange for lease obligations: |
|
|
|
|
|
ROU assets |
|
|
|
|
|
Operating leases |
|
$ |
18 |
|
|
|
|
|
|
|
|
Lease obligations |
|
|
|
|
|
Operating leases |
|
$ |
18 |
|
During the year ended December 31, 2019, the Company recorded $61 million of operating cash outflows from operating leases.
During the year ended December 31, 2019, the Company recorded a de minimis amount of cash flows from financing leases. No finance lease ROU assets or obligations were acquired during the year ended December 31, 2019.
Supplemental information regarding the weighted average lease term and discount rate is included below:
|
|
|
December 31, 2019 |
|
|
|
Weighted Average Remaining Lease Term (years) |
|
|
|
|
|
Operating leases |
|
|
5.0 |
|
|
Financing leases |
|
|
2.1 |
|
|
|
|
|
|
|
|
Weighted Average Discount Rate |
|
|
|
|
|
Operating leases |
|
|
8.6 |
% |
|
Financing leases |
|
|
6.9 |
% |
The annual maturities of lease liabilities as of December 31, 2019 were as follows:
|
|
|
Operating Leases |
|
|
|
2020 |
|
$ |
53 |
|
|
2021 |
|
|
45 |
|
|
2022 |
|
|
35 |
|
|
2023 |
|
|
24 |
|
|
2024 |
|
|
19 |
|
|
2025 & thereafter |
|
|
28 |
|
|
Total undiscounted lease payments |
|
|
204 |
|
|
Imputed interest |
|
|
(33 |
) |
|
Total lease liabilities |
|
$ |
171 |
|
During the year ended December 31, 2019, the Company recorded a de minimis amount of maturities for finance lease liabilities. As of December 31, 2019, the Company has no additional operating leases that have not commenced.
The Company also is a sublessor to land and building subleases for certain locations resulting from the acquisition of businesses or disposition of the Company’s business components. Some of these subleases have variable payments, either because payments are structured to follow the head lease or because the sublease includes reimbursement for utilities and other expenses. We recognize the rent-related portion of lease payments, including changes based on a published index or rate, on a straight-line basis and the variable portion related to utilities and other expenses in the period incurred. Our subleases have various renewal and termination options which generally allow for renewal for 1 year to 5 years, or termination notice that generally ranges from 90 days to 180 days.
F-20
Note 6. Accounts Receivable
Transactions affecting the allowances for doubtful accounts receivable balance during the years ended December 31, 2019, 2018 and 2017 were as follows:
|
|
|
2019 |
|
|
2018 |
|
|
2017 |
|
|||
|
Balance, beginning of year |
|
$ |
14 |
|
|
$ |
11 |
|
|
$ |
10 |
|
|
Provisions charged to expense |
|
|
7 |
|
|
|
7 |
|
|
|
3 |
|
|
Write-offs and other |
|
|
(9 |
) |
|
|
(4 |
) |
|
|
(2 |
) |
|
Balance, end of period |
|
$ |
12 |
|
|
$ |
14 |
|
|
$ |
11 |
|
Note 7. Inventories
The components of the Company’s inventories, net of excess and obsolescence reserves for raw materials and finished goods, at December 31, 2019 and 2018 were as follows:
|
|
|
2019 |
|
|
2018 |
|
||
|
Raw materials and manufacturing supplies |
|
$ |
91 |
|
|
$ |
119 |
|
|
Work in process |
|
|
38 |
|
|
|
50 |
|
|
Finished goods |
|
|
87 |
|
|
|
80 |
|
|
Last in, first out reserve |
|
|
(46 |
) |
|
|
(52 |
) |
|
Total |
|
$ |
170 |
|
|
$ |
197 |
|
During the years ended December 31, 2019, 2018 and 2017, the Company recognized LIFO benefit of $6 million, $5 million benefit and $1 million, respectively.
Note 8. Property, Plant and Equipment
The components of the Company’s property, plant and equipment at December 31, 2019 and 2018 were as follows:
|
|
|
2019 |
|
|
2018 |
|
||
|
Land |
|
$ |
35 |
|
|
$ |
43 |
|
|
Buildings |
|
|
663 |
|
|
|
709 |
|
|
Machinery and equipment |
|
|
3,006 |
|
|
|
3,759 |
|
|
|
|
|
3,704 |
|
|
|
4,511 |
|
|
Less: Accumulated depreciation |
|
|
(3,264 |
) |
|
|
(4,003 |
) |
|
Total |
|
$ |
440 |
|
|
$ |
508 |
|
During the years ended December 31, 2019, 2018 and 2017, depreciation expense was $94 million, $112 million and $137 million, respectively.
Refer to Note 10, Restructuring, Impairment and Other Charges, for information on impairment recorded.
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 $9 million and $3 million at December 31, 2019 and 2018, respectively. These assets were included in other current assets in the consolidated balance sheets at the lower of their historical net book value or their estimated fair value, less estimated costs to sell. In the fourth quarter of 2019, the Company sold land and a building that were previously recorded as assets held for sale (net book value of $8 million) associated with a plant closure that occurred in 2019 in the Magazines, Catalogs and Logistics segment. Refer to Note 10, Restructuring, Impairment and Other Charges, for information on the gain recorded related to this sale. Additionally, the Company moved land and building to assets held for sale (net book value of $7 million) in the fourth quarter of 2019 related to a plant closure in the Magazines, Catalogs and Logistics segment.
F-21
Note 9. Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill for the years ended December 31, 2019 and 2018 were as follows:
|
|
|
Magazines, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Catalogs |
|
|
|
|
|
|
Office |
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
and Logistics |
|
|
Book |
|
|
Products |
|
|
Mexico |
|
|
Other |
|
|
Total |
|
||||||
|
Net book value as of January 1, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
$ |
502 |
|
|
$ |
354 |
|
|
$ |
110 |
|
|
$ |
— |
|
|
$ |
78 |
|
|
$ |
1,044 |
|
|
Accumulated impairment losses |
|
|
(502 |
) |
|
|
(303 |
) |
|
|
(79 |
) |
|
|
— |
|
|
|
(78 |
) |
|
|
(962 |
) |
|
Total |
|
|
— |
|
|
|
51 |
|
|
|
31 |
|
|
|
— |
|
|
|
— |
|
|
|
82 |
|
|
Acquisition |
|
|
21 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
21 |
|
|
Net book value as of December 31, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
$ |
523 |
|
|
$ |
354 |
|
|
$ |
110 |
|
|
$ |
— |
|
|
$ |
5 |
|
|
$ |
992 |
|
|
Accumulated impairment losses |
|
|
(502 |
) |
|
|
(303 |
) |
|
|
(79 |
) |
|
|
— |
|
|
|
(5 |
) |
|
|
(889 |
) |
|
Total |
|
|
21 |
|
|
|
51 |
|
|
|
31 |
|
|
|
— |
|
|
|
— |
|
|
|
103 |
|
|
Impairment charges |
|
|
— |
|
|
|
51 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
51 |
|
|
Net book value as of December 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
|
523 |
|
|
|
354 |
|
|
|
110 |
|
|
|
— |
|
|
|
5 |
|
|
|
992 |
|
|
Accumulated impairment losses |
|
|
(502 |
) |
|
|
(354 |
) |
|
|
(79 |
) |
|
|
— |
|
|
|
(5 |
) |
|
|
(940 |
) |
|
Total |
|
$ |
21 |
|
|
$ |
— |
|
|
$ |
31 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
52 |
|
During the year ended December 31, 2019, the Company recorded charges of $51 million to recognize the impairment of goodwill for Book segment. There was no impairment of goodwill during the year ended December 31, 2018.
As a result of the Company’s disposition of its European printing business on September 28, 2018, Europe’s goodwill (included in the Other grouping) as of the disposition date, $73 million of gross goodwill and accumulated impairment losses for a net $0 balance, was written off on the disposition date.
The components of other intangible assets at December 31, 2019 and 2018 were as follows:
|
|
|
December 31, 2019 |
|
|
December 31, 2018 |
|
||||||||||||||||||
|
|
|
Gross Carrying |
|
|
Accumulated |
|
|
Net Book |
|
|
Gross Carrying |
|
|
Accumulated |
|
|
Net Book |
|
||||||
|
|
|
Amount |
|
|
Amortization |
|
|
Value |
|
|
Amount |
|
|
Amortization |
|
|
Value |
|
||||||
|
Customer relationships |
|
$ |
248 |
|
|
$ |
(149 |
) |
|
$ |
99 |
|
|
$ |
268 |
|
|
$ |
(137 |
) |
|
$ |
131 |
|
|
Trade names |
|
|
29 |
|
|
|
(8 |
) |
|
|
21 |
|
|
|
9 |
|
|
|
(6 |
) |
|
|
3 |
|
|
Total amortizable other intangible assets |
|
|
277 |
|
|
|
(157 |
) |
|
|
120 |
|
|
|
277 |
|
|
|
(143 |
) |
|
|
134 |
|
|
Indefinite-lived trade names |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
22 |
|
|
|
— |
|
|
|
22 |
|
|
Total other intangible assets |
|
$ |
277 |
|
|
$ |
(157 |
) |
|
$ |
120 |
|
|
$ |
299 |
|
|
$ |
(143 |
) |
|
$ |
156 |
|
In the second quarter of 2019, the Company impaired certain definite-lived customer relationships with a net book value of $17 million within the Magazines, Catalogs and Logistics segment. Additionally, the Company recorded $1 million of impairment related to certain trade names during the year ended December 31, 2019.
On January 1, 2019, all of Office Products’ tradenames (net book value of $21 million) were changed from indefinite-lived tradenames to definite-lived tradenames with a useful life of 15 years, as management determined that it was not possible to conclude the tradenames will generate cash flows for an indefinite period of time due to secular industry decline and changes in the usage of branded products.
F-22
Amortization expense for other intangible assets was $18 million for each of the years ended December 31, 2019, 2018 and 2017.
The following table outlines the estimated annual amortization expense related to other intangible assets as of December 31, 2019:
|
For the year ending December 31, |
|
Amount |
|
|
|
2020 |
|
$ |
17 |
|
|
2021 |
|
|
15 |
|
|
2022 |
|
|
14 |
|
|
2023 |
|
|
13 |
|
|
2024 |
|
|
13 |
|
|
2025 and thereafter |
|
|
48 |
|
|
Total |
|
$ |
120 |
|
Refer to Note 10, Restructuring, Impairment and Other Charges, for discussion of goodwill and intangibles impairment charges recorded during the years ended December 31, 2019 and 2018.
Note 10. Restructuring, Impairment and Other Charges
Year Ended December 31, 2019
|
|
|
|
|
|
|
Other |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Year Ended |
|
Employee |
|
|
Restructuring |
|
|
Restructuring |
|
|
|
|
|
|
Other |
|
|
|
|
|
||||
|
December 31, 2019 |
|
Terminations |
|
|
Charges |
|
|
Charges |
|
|
Impairment |
|
|
Charges |
|
|
Total |
|
||||||
|
Magazines, Catalogs and Logistics |
|
$ |
24 |
|
|
$ |
18 |
|
|
$ |
42 |
|
|
$ |
25 |
|
|
$ |
— |
|
|
$ |
67 |
|
|
Book |
|
|
5 |
|
|
|
5 |
|
|
|
10 |
|
|
|
54 |
|
|
|
2 |
|
|
|
66 |
|
|
Office Products |
|
|
1 |
|
|
|
3 |
|
|
|
4 |
|
|
|
— |
|
|
|
— |
|
|
|
4 |
|
|
Mexico |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Other |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Corporate |
|
|
— |
|
|
|
11 |
|
|
|
11 |
|
|
|
— |
|
|
|
— |
|
|
|
11 |
|
|
Total |
|
$ |
30 |
|
|
$ |
37 |
|
|
$ |
67 |
|
|
$ |
79 |
|
|
$ |
2 |
|
|
$ |
148 |
|
Restructuring Charges
For the year ended December 31, 2019, the Company incurred employee-related charges of $30 million for an aggregate of 2,150 employees, of whom 357 were terminated as of or prior to December 31, 2019, primarily related to five facility closures in the Magazines, Catalogs and Logistics segment and one facility closure in the Book segment. During the fourth quarter of 2019, the Company recorded a $26 million gain in cost of goods sold (in the consolidated statement of operations) related to the sale of land and a building associated with a plant closure in the Magazines, Catalogs and Logistics segment. The Company also incurred other restructuring charges of $37 million primarily due to facility costs, costs associated with new revenue opportunities and cost savings initiatives implemented in 2019, lease costs, and pension withdrawal obligations related to facility closures.
Impairment Charges
For the year ended December 31, 2019, the Company recorded the following net impairment charges, which are explained further below:
|
|
|
Property, Plant |
|
|
Other Intangible |
|
|
|
|
|
|
|
|
|
||
|
|
|
and Equipment |
|
|
Assets |
|
|
Goodwill |
|
|
Total |
|
||||
|
Magazines, Catalogs and Logistics |
|
$ |
8 |
|
|
$ |
17 |
|
|
$ |
— |
|
|
$ |
25 |
|
|
Book |
|
|
2 |
|
|
|
1 |
|
|
|
51 |
|
|
|
54 |
|
|
Total |
|
$ |
10 |
|
|
$ |
18 |
|
|
$ |
51 |
|
|
$ |
79 |
|
F-23
Goodwill
The Company performs its goodwill impairment tests annually as of October 31, or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. The Company also performs an interim review for indicators of impairment each quarter to assess whether an interim impairment review is required for any reporting unit. As part of its interim reviews, management analyzes potential changes in the value of individual reporting units based on each reporting unit’s operating results for the period compared to expected results as of the prior year’s annual impairment test. In addition, management considers how other key assumptions, including discount rates and expected long-term growth rates, used in the last annual impairment test could be impacted by changes in market conditions and economic events.
The Company determines the fair value of its reporting units using both the income approach and the market approach. The determination of the fair value using the income approach requires management to make significant estimates and assumptions related to projected operating results (including forecasted revenue and operating income), anticipated future cash flows, and discount rates. The determination of the fair value using the market approach requires management to make significant assumptions related to the multiples of earnings before interest, income taxes, depreciation and amortization (“EBITDA”) used in the calculation. Additionally, the market approach estimates fair value using comparable marketplace fair value data from within a comparable industry grouping. The Company weighs both the income and market approach equally to estimate the concluded fair value of each reporting unit.
The determination of fair value and the allocation of that value to individual assets and liabilities requires the Company to make significant estimates and assumptions. These estimates and assumptions primarily include, but are not limited to: the selection of appropriate peer group companies; control premiums appropriate for acquisitions in the industries in which the Company competes; the discount rate; terminal growth rates; and forecasts of revenue, operating income, depreciation and amortization, restructuring charges and capital expenditures. As part of its impairment test for its reporting units, the Company engages a third-party valuation firm to assist in the Company’s determination of certain assumptions used to estimate fair values.
Interim Impairment Tests Performed in the Third Quarter of 2019
The Company’s stock price has experienced a significant, sustained decline – especially since the Merger Agreement termination was announced in late July 2019. Shortly after the Merger Agreement termination, the Company announced that it was indefinitely suspending its dividend and lowered its guidance for the year. As a result, the Company determined it necessary to perform goodwill impairment reviews on the Book, logistics and Office Products reporting units (the only reporting units that had goodwill) as of August 31, 2019. The Company performed a one-step method of for determining goodwill impairment for the three reporting units. As a result of the one-step impairment test for Book, logistics and Office Products, the Company did not recognize any goodwill impairment charges as of August 31, 2019 as the estimated fair values of the reporting units exceeded their respective carrying values. Book, logistics and Office Products passed with fair values that exceeded their carrying values by 28.2%, 55.9% and 16.8%, respectively.
Impairment Tests Performed in the Fourth Quarter of 2019
The Company performed its annual impairment test as of October 31, 2019. The goodwill balances as of October 31, 2019 for the three reporting units that had goodwill were as follows: logistics ($21 million), Book ($51 million) and Office Products ($31 million).
For the logistics, Book and Office Products reporting units, management assessed goodwill impairment risk by first performing a qualitative review of entity specific, industry, market and general economic factors for each reporting unit. As a result of the qualitative assessment for logistics and Office Products and considering that a goodwill impairment analysis was performed as of August 31, 2019 with no impairment recorded, the Company concluded it was more likely than not the fair values of the reporting units are greater than their carrying values, and therefore, the Company did not recognize any goodwill impairment charges.
For Book, the Company was not able to conclude that it is more likely than not that the fair values of our reporting units are greater than their carrying values, and therefore, a one-step method for determining goodwill impairment was applied as of October 31, 2019. The Company compared the estimated fair value of a reporting unit with its carrying amount, including goodwill.
As a result of the 2019 annual impairment test for Book, the Company fully impaired Book’s goodwill and recorded a $51 million goodwill impairment charge as the carrying value of the reporting unit did not exceed its estimated fair value. This is primarily due to the negative revenue trends experienced in the fourth quarter of 2019 and lower revenue forecasts in future years.
F-24
Other Intangible Assets
The Company evaluates the recoverability of other long-lived assets, including property, plant and equipment and certain identifiable intangible assets, whenever events or changes in circumstances indicate that the carrying value of an asset or asset group may not be recoverable. The Company performs impairment tests of indefinite-lived intangible assets on an annual basis or more frequently in certain circumstances.
Factors that could trigger an impairment review include significant underperformance relative to historical or projected future operating results, significant changes in the manner of use of the assets or the strategy for the overall business, a significant decrease in the market value of the assets or significant negative industry or economic trends. When the Company determines that the carrying value of long-lived assets may not be recoverable based upon the existence of one or more of the indicators, the assets are assessed for impairment based on the estimated future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. If the carrying value of an asset exceeds its estimated future undiscounted cash flows, an impairment loss is recorded for the excess of the asset’s carrying value over its fair value.
Given the continued decline in demand in the magazines and catalogs reporting unit, management determined that a further review of the reporting unit’s intangible assets and property, plant and equipment for recoverability was appropriate during the second, third and fourth quarters in 2019:
|
|
• |
As a result of the faster pace of decline in demand, negative revenue trends and lower expectations of future revenue to be derived from certain customer relationships, management determined that a certain definite-lived customer relationship intangible asset recorded in the magazines and catalogs reporting unit was not recoverable as a result of the recoverability test performed as of June 30, 2019. This resulted in the Company recording a $17 million impairment charge for the three months ended June 30, 2019, which fully impaired the asset. The impairment was determined using Level 3 inputs and estimated based on cash flow analyses, which included management’s assumptions related to future revenues and profitability. After recording the impairment charges, remaining definite-lived customer relationships in the Magazines, Catalogs and Logistics segment were $38 million as of December 31, 2019. |
|
|
• |
With respect to property, plant and equipment and right-of-use assets for operating leases, the Company performed a Step 1 recoverability test in accordance with Accounting Standards Codification (“ASC”) 360, Property, Plant and Equipment. The recoverability test compares the estimated future undiscounted cash flows expected to result from the use of the asset group and its eventual disposition to the carrying value of the asset group; if the carrying value of the asset group exceeds its estimated future undiscounted cash flows, an impairment loss is recorded for the excess of the asset group’s carrying value over its fair value. Based upon management’s updated projection of cash flows for this asset group, management determined that the estimated future undiscounted cash flows were in excess of the asset group’s carrying value, resulting in no impairment loss as a result of these tests in 2019. |
In addition to the annual goodwill impairment test performed for Book as of October 31, 2019, the Company reviewed the reporting unit’s intangible assets and property, plant and equipment for recoverability in the fourth quarter of 2019. There were no impairment charges recorded as a result of the recoverability tests.
The Company recognized impairment charges of $18 million related to intangible assets and $10 million related to machinery and equipment for the Company during the year ended December 31, 2019. The impairment recognized on machinery and equipment was primarily associated with facility closings in the Magazines, Catalogs and Logistics and Book segments.
The Company will continue to perform interim reviews of goodwill for indicators of impairment each quarter to assess whether an interim impairment test is required for its goodwill balances or if recoverability tests are required for long-lived assets, including property, plant and equipment, and certain identifiable intangible assets, whenever events or changes in circumstances indicate that the carrying value of an asset or asset group may not be recoverable. Such reviews could result in future impairment charges, depending on the facts and circumstances in effect at the time of those reviews.
F-25
Fair Value Measurement
The fair value as of the measurement date, net book value as of the end of the year and related impairment charge for assets measured at fair value on a nonrecurring basis subsequent to initial recognition during the year ended December 31, 2019 is disclosed below.
|
|
|
Year Ended |
|
|
As of |
|
||||||
|
|
|
December 31, 2019 |
|
|
December 31, 2019 |
|
||||||
|
|
|
|
|
|
|
Fair Value |
|
|
|
|
|
|
|
|
|
Impairment |
|
|
Measurement |
|
|
Net Book |
|
|||
|
|
|
Charge |
|
|
(Level 3) |
|
|
Value |
|
|||
|
Long-lived assets held and used |
|
$ |
10 |
|
|
$ |
— |
|
|
$ |
— |
|
|
Goodwill |
|
|
51 |
|
|
|
— |
|
|
|
— |
|
|
Customer relationships |
|
|
17 |
|
|
|
— |
|
|
|
— |
|
|
Indefinite-lived tradenames |
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
Total |
|
$ |
79 |
|
|
$ |
— |
|
|
$ |
— |
|
The fair values of the buildings and machinery and equipment were determined to be Level 3 under the fair value hierarchy and were estimated based on discussions with real estate brokers, review of comparable properties, if available, discussions with machinery and equipment brokers, dealer quotes and internal expertise related to the current marketplace conditions.
The Company’s accounting and finance management determines the valuation policies and procedures for Level 3 fair value measurements and is responsible for the development and determination of unobservable inputs.
Other Charges
For the year ended December 31, 2019, the Company recorded other charges of $2 million 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 in accrued liabilities and restructuring and multiemployer pension plan liabilities are $4 million and $17 million, respectively, at December 31, 2019. Refer to Note 15, Retirement Plans, for further discussion of multi-employer pension plans.
The Company’s withdrawal liabilities could be affected by the financial stability of other employers participating in such plans and any decisions by those employers to withdraw from such plans in the future. While it is not possible to quantify the potential impact of future events or circumstances, reductions in other employers’ participation in 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 consolidated statements of operations, balance sheets and cash flows.
Year Ended December 31, 2018
|
|
|
|
|
|
|
Other |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
Employee |
|
|
Restructuring |
|
|
Restructuring |
|
|
|
|
|
|
Other |
|
|
|
|
|
||||
|
|
|
Terminations |
|
|
Charges |
|
|
Charges |
|
|
Impairment |
|
|
Charges |
|
|
Total |
|
||||||
|
Magazines, Catalogs and Logistics |
|
$ |
10 |
|
|
$ |
8 |
|
|
$ |
18 |
|
|
$ |
2 |
|
|
$ |
— |
|
|
$ |
20 |
|
|
Book |
|
|
— |
|
|
|
4 |
|
|
|
4 |
|
|
|
— |
|
|
|
2 |
|
|
|
6 |
|
|
Office Products |
|
|
1 |
|
|
|
2 |
|
|
|
3 |
|
|
|
3 |
|
|
|
— |
|
|
|
6 |
|
|
Mexico |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Other |
|
|
1 |
|
|
|
— |
|
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
|
1 |
|
|
Corporate |
|
|
2 |
|
|
|
— |
|
|
|
2 |
|
|
|
— |
|
|
|
— |
|
|
|
2 |
|
|
Total |
|
$ |
14 |
|
|
$ |
14 |
|
|
$ |
28 |
|
|
$ |
5 |
|
|
$ |
2 |
|
|
$ |
35 |
|
F-26
Restructuring Charges
For the year ended December 31, 2018, the Company incurred employee-related charges of $14 million for an aggregate of 811 employees, substantially all of whom were terminated as of or prior to December 31, 2019, primarily related to two facility closures in the Magazines, Catalogs and Logistics segment, one facility closure in the Office Products segment and the reorganization of certain business units and corporate functions. The Company also incurred other restructuring charges of $14 million primarily due to charges related to facility costs, a loss related to the Company's disposition of its retail offset printing facilities and pension withdrawal obligations related to facility closures.
Impairment Charges
For the year ended December 31, 2018, the Company recorded the following net impairment charges, which are explained further below:
|
|
|
Property, Plant |
|
|
Other Intangible |
|
|
|
|
|
|
|
|
|
||
|
|
|
and Equipment |
|
|
Assets |
|
|
Goodwill |
|
|
Total |
|
||||
|
Magazines, Catalogs and Logistics |
|
$ |
3 |
|
|
$ |
— |
|
|
$ |
(1 |
) |
|
$ |
2 |
|
|
Office Products |
|
|
— |
|
|
|
3 |
|
|
|
— |
|
|
|
3 |
|
|
Total |
|
$ |
3 |
|
|
$ |
3 |
|
|
$ |
(1 |
) |
|
$ |
5 |
|
Property, Plant and Equipment
The net charges of $3 million primarily related to machinery and equipment associated with facility closings in the Magazines, Catalogs and Logistics segment.
Other Intangible Assets – Indefinite-Lived Tradenames
The Company recorded charges of $3 million for the impairment of certain acquired indefinite-lived tradenames intangible assets in the Office Products segment. The impairment of the indefinite-lived tradenames intangible assets resulted from negative revenue trends experienced in recent years and lower expectations of future revenue to be derived from those tradenames. The impairment was determined using Level 3 inputs and estimated based on cash flow analyses, which included management’s assumptions related to future revenues and profitability. After recording the impairment charges, remaining indefinite-lived tradenames in the Office Products segment is $21 million. On January 1, 2019, all of Office Products’ tradenames were changed from indefinite-lived tradenames to definite-lived tradenames. Refer to Note 9, Goodwill and Other Intangible Assets, for more information.
Goodwill
The year ended December 31, 2018 included a reduction of $1 million of goodwill impairment charges as a result of a $1 million adjustment of previously recorded goodwill associated with the 2017 acquisitions.
F-27
Fair Value Measurements
The fair value as of the measurement date, net book value as of the end of the year and related impairment charge for assets measured at fair value on a nonrecurring basis subsequent to initial recognition during the year ended December 31, 2018 is disclosed below.
|
|
|
Year Ended |
|
|
As of |
|
||||||
|
|
|
December 31, 2018 |
|
|
December 31, 2018 |
|
||||||
|
|
|
|
|
|
|
Fair Value |
|
|
|
|
|
|
|
|
|
Impairment |
|
|
Measurement |
|
|
Net Book |
|
|||
|
|
|
Charge |
|
|
(Level 3) |
|
|
Value |
|
|||
|
Long-lived assets held and used |
|
$ |
3 |
|
|
$ |
— |
|
|
$ |
— |
|
|
Indefinite-lived tradenames |
|
|
3 |
|
|
|
21 |
|
|
|
21 |
|
|
Total |
|
$ |
6 |
|
|
$ |
21 |
|
|
$ |
21 |
|
The table above excludes the reduction of $1 million of goodwill impairment charges mentioned in the above section Goodwill.
The fair values of the buildings and machinery and equipment were determined to be Level 3 under the fair value hierarchy and were estimated based on discussions with real estate brokers, review of comparable properties, if available, discussions with machinery and equipment brokers, dealer quotes and internal expertise related to the current marketplace conditions.
The Company’s accounting and finance management determines the valuation policies and procedures for Level 3 fair value measurements and is responsible for the development and determination of unobservable inputs. The following table presents the fair value, valuation techniques and related unobservable inputs for these Level 3 measurements for the year ended December 31, 2018:
|
|
|
|
|
|
|
Valuation |
|
Unobservable |
|
|
|
|
|
Fair Value |
|
|
Technique |
|
Input |
|
Range |
|
|
Indefinite-lived tradenames |
|
$ |
22 |
|
|
Relief-from- |
|
Royalty Rate |
|
0.5% - 1.5% |
|
|
|
|
|
|
|
royalty |
|
|
|
|
Other Charges
For the year ended December 31, 2018, the Company recorded other charges of $2 million 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 in accrued liabilities and restructuring and multiemployer pension plan liabilities are $3 million and $19 million, respectively, at December 31, 2018. Refer to Note 15, Retirement Plans, for further discussion of multi-employer pension plans.
Year Ended December 31, 2017
|
|
|
|
|
|
|
Other |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
Employee |
|
|
Restructuring |
|
|
Restructuring |
|
|
|
|
|
|
Other |
|
|
|
|
|
||||
|
|
|
Terminations |
|
|
Charges |
|
|
Charges |
|
|
Impairment |
|
|
Charges |
|
|
Total |
|
||||||
|
Magazines, Catalogs and Logistics |
|
$ |
6 |
|
|
$ |
4 |
|
|
$ |
10 |
|
|
$ |
75 |
|
|
$ |
1 |
|
|
$ |
86 |
|
|
Book |
|
|
5 |
|
|
|
2 |
|
|
|
7 |
|
|
|
5 |
|
|
|
3 |
|
|
|
15 |
|
|
Office Products |
|
|
1 |
|
|
|
— |
|
|
|
1 |
|
|
|
3 |
|
|
|
— |
|
|
|
4 |
|
|
Mexico |
|
|
1 |
|
|
|
— |
|
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
|
1 |
|
|
Other |
|
|
— |
|
|
|
1 |
|
|
|
1 |
|
|
|
5 |
|
|
|
— |
|
|
|
6 |
|
|
Corporate |
|
|
— |
|
|
|
17 |
|
|
|
17 |
|
|
|
— |
|
|
|
— |
|
|
|
17 |
|
|
Total |
|
$ |
13 |
|
|
$ |
24 |
|
|
$ |
37 |
|
|
$ |
88 |
|
|
$ |
4 |
|
|
$ |
129 |
|
F-28
Restructuring Charges
For the year ended December 31, 2017, the Company incurred employee-related restructuring charges of $13 million for an aggregate of 776 employees, substantially all of whom were terminated as of or prior to December 31, 2019. These charges primarily related to three facility closures in the Book segment, one facility closure in the Magazines, Catalogs and Logistics segment and the reorganization of certain business units. The Company also incurred other restructuring charges of $24 million primarily related to the exit from certain operations and facilities, as well as charges as a result of a terminated supplier contact.
Impairment Charges
For the year ended December 31, 2017, the Company recorded the following net impairment charges, which are explained further below:
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, Plant |
|
|
Intangible |
|
|
|
|
|
|
|
|
|
||
|
|
|
and Equipment |
|
|
Assets |
|
|
Goodwill |
|
|
Total |
|
||||
|
Magazines, Catalogs and Logistics |
|
$ |
7 |
|
|
|
— |
|
|
$ |
68 |
|
|
$ |
75 |
|
|
Book |
|
|
— |
|
|
|
5 |
|
|
|
— |
|
|
|
5 |
|
|
Office Products |
|
|
— |
|
|
|
3 |
|
|
|
— |
|
|
|
3 |
|
|
Other |
|
|
— |
|
|
|
— |
|
|
|
5 |
|
|
|
5 |
|
|
Total |
|
$ |
7 |
|
|
$ |
8 |
|
|
$ |
73 |
|
|
$ |
88 |
|
Property, Plant and Equipment
The net charges of $7 million primarily related to impairment of machinery and equipment in the Company’s magazines and catalogs reporting unit, which is included in the Magazines, Catalogs and Logistics segment, resulting from general volume declines.
Other Intangible Assets - Indefinite-Lived Tradenames
The Company also recorded charges of $8 million for the impairment of certain acquired indefinite-lived tradename intangible assets, including $3 million in the Office Products segment and $5 million in the Book segment. The impairment of the indefinite-lived tradename intangible assets resulted from negative revenue trends experienced in recent years and lower expectations of future revenue to be derived from those tradenames. The impairment was determined using Level 3 inputs and estimated based on cash flow analyses, which included management’s assumptions related to future revenues and profitability. After recording the impairment charges, remaining indefinite-lived tradenames in the Office Products and Book segments were $23 million and $1 million, respectively.
Goodwill
With respect to the goodwill impairment charges, the Company completed several acquisitions during the year ended December 31, 2017, five of which were included in the Company’s former magazines, catalogs and retail inserts reporting unit, which was part of the former Print segment.
Prior to the acquisitions completed within the last twelve months, the former magazines, catalogs and retail inserts reporting unit had zero goodwill recorded, as goodwill associated with this reporting unit had been fully impaired in prior years. Given the historical valuations of the former 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 former reporting unit due to the acquisitions completed as of September 30, 2017, the Company determined it necessary to perform an interim goodwill impairment review on this former reporting unit as of September 30, 2017.
F-29
As a result of the interim goodwill impairment test, and consistent with prior goodwill impairment tests, the former magazines, catalogs and retail inserts reporting unit’s fair value continued to be at a value below its carrying value. This was primarily due to the negative revenue trends experienced in recent years that are only partially offset by the impact of the new acquisitions. As such, the Company recorded charges of $55 million to recognize the impairment of goodwill in this former reporting unit as of September 30, 2017. The goodwill impairment charges were determined using Level 3 inputs, including discounted cash flow analyses, comparable marketplace fair value data and management’s assumptions.
For the quarter ended December 31, 2017, the Company completed the acquisition of The Clark Group, Inc. (“Clark Group”) that became part of the former magazines, catalogs and retail inserts reporting unit. Given the amount by which the carrying amount of the former reporting unit exceeded its fair value in the goodwill impairment test performed as of September 30, 2017, combined with the fact that management’s assessment of the fair value did not materially change since that date, an additional goodwill impairment charge of $18 million was recorded in the period ended December 31, 2017, which represented all of the goodwill arising from the Clark Group acquisition and additional amounts related to acquisitions completed during the quarter ended September 30, 2017.
The total charge to recognize the impairment of goodwill in the former magazines, catalogs and retail inserts reporting unit was $73 million for 2017, resulting in zero goodwill associated with former the magazines, catalogs and retail inserts reporting unit as of December 31, 2017.
Fair Value Measurement
The fair value as of the measurement date, net book value as of the end of the year and related impairment charge for assets measured at fair value on a nonrecurring basis subsequent to initial recognition during the year ended December 31, 2017 is disclosed below.
|
|
|
Year Ended |
|
|
As of |
|
||||||
|
|
|
December 31, 2017 |
|
|
December 31, 2017 |
|
||||||
|
|
|
|
|
|
|
Fair Value |
|
|
|
|
|
|
|
|
|
Impairment |
|
|
Measurement |
|
|
Net Book |
|
|||
|
|
|
Charge |
|
|
(Level 3) |
|
|
Value |
|
|||
|
Long-lived assets held and used |
|
$ |
7 |
|
|
$ |
— |
|
|
$ |
— |
|
|
Goodwill |
|
|
73 |
|
|
|
— |
|
|
|
— |
|
|
Indefinite-lived tradenames |
|
|
8 |
|
|
|
23 |
|
|
|
23 |
|
|
Total |
|
$ |
88 |
|
|
$ |
23 |
|
|
$ |
23 |
|
The fair values of the buildings and machinery and equipment were determined to be Level 3 under the fair value hierarchy and were estimated based on discussions with real estate brokers, review of comparable properties, if available, discussions with machinery and equipment brokers, dealer quotes and internal expertise related to the current marketplace conditions.
The Company’s accounting and finance management determines the valuation policies and procedures for Level 3 fair value measurements and is responsible for the development and determination of unobservable inputs. The following table presents the fair value, valuation techniques and related unobservable inputs for these Level 3 measurements for the year ended December 31, 2017:
|
|
|
|
|
|
|
Valuation |
|
Unobservable |
|
|
|
|
|
Fair Value |
|
|
Technique |
|
Input |
|
Range |
|
|
Indefinite-lived tradenames |
|
$ |
24 |
|
|
Relief-from- |
|
Royalty Rate |
|
0.5% - 1.5% |
|
|
|
|
|
|
|
royalty |
|
|
|
|
Other Charges
For the year ended December 31, 2017, the Company recorded other charges of $4 million 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 in accrued liabilities and restructuring and multiemployer pension plan liabilities are $6 million and $37 million, respectively, at December 31, 2017. Refer to Note 15, Retirement Plans, for further discussion of multi-employer pension plans.
F-30
Restructuring Reserve
The restructuring reserve as of December 31, 2019 and 2018, and changes during the year ended December 31, 2019, were as follows:
|
|
|
December 31, |
|
|
Restructuring |
|
|
|
|
|
|
Cash |
|
|
December 31, |
|
||||
|
|
|
2018 |
|
|
Charges |
|
|
Other |
|
|
Paid |
|
|
2019 |
|
|||||
|
Employee terminations |
|
$ |
8 |
|
|
$ |
30 |
|
|
$ |
— |
|
|
$ |
(9 |
) |
|
$ |
29 |
|
|
Multiemployer pension plan withdrawal obligations |
|
|
32 |
|
|
|
5 |
|
|
|
— |
|
|
|
(6 |
) |
|
|
31 |
|
|
Other and lease termination |
|
|
1 |
|
|
|
27 |
|
|
|
— |
|
|
|
(26 |
) |
|
|
2 |
|
|
Total |
|
$ |
41 |
|
|
$ |
62 |
|
|
$ |
— |
|
|
$ |
(41 |
) |
|
$ |
62 |
|
The current portion of restructuring reserves of $37 million at December 31, 2019 was included in accrued liabilities, while the long-term portion of $25 million, which primarily related to multi-employer pension plan withdrawal obligations related to facility closures, was included in restructuring and multiemployer pension plan liabilities at December 31, 2019.
The Company anticipates that payments associated with the employee terminations reflected in the above table will be substantially completed by December 31, 2020.
Payments on all of the Company’s multiemployer pension plan withdrawal obligations are scheduled to be completed by 2034. Changes based on uncertainties in these estimated withdrawal obligations could affect the ultimate charges related to multiemployer pension plan withdrawals. Refer to Note 15, Retirement Plans, for further discussion of multiemployer pension plans.
The activity in restructuring liabilities classified as “other and lease termination” primarily consisted of other facility closing costs, costs associated with new revenue opportunities and cost savings initiatives implemented in 2019 and lease termination costs.
The restructuring reserve as of December 31, 2018 and 2017, and changes during the year ended December 31, 2018, were as follows:
|
|
|
December 31, |
|
|
Restructuring |
|
|
|
|
|
|
Cash |
|
|
December 31, |
|
||||
|
|
|
2017 |
|
|
Charges |
|
|
Other |
|
|
Paid |
|
|
2018 |
|
|||||
|
Employee terminations |
|
$ |
8 |
|
|
$ |
14 |
|
|
$ |
— |
|
|
$ |
(14 |
) |
|
$ |
8 |
|
|
Multiemployer pension plan withdrawal obligations |
|
|
16 |
|
|
|
3 |
|
|
|
19 |
|
|
|
(6 |
) |
|
|
32 |
|
|
Other |
|
|
2 |
|
|
|
8 |
|
|
|
— |
|
|
|
(9 |
) |
|
|
1 |
|
|
Total |
|
$ |
26 |
|
|
$ |
25 |
|
|
$ |
19 |
|
|
$ |
(29 |
) |
|
$ |
41 |
|
The current portion of restructuring reserves of $15 million at December 31, 2018 was included in accrued liabilities, while the long-term portion of $26 million, which primarily related to multi-employer pension plan withdrawal obligations related to facility closures, was included in restructuring and multiemployer pension plan liabilities at December 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 facility closures in the Magazines, Catalogs and Logistics and Book segments during the three months ended March 31, 2018.
F-31
Note 11. Accrued Liabilities
The components of the Company’s accrued liabilities at December 31, 2019 and 2018 were as follows:
|
|
|
2019 |
|
|
2018 |
|
||
|
Employee-related liabilities |
|
$ |
69 |
|
|
$ |
71 |
|
|
Customer-related liabilities |
|
|
35 |
|
|
|
38 |
|
|
Deferred revenue |
|
|
18 |
|
|
|
15 |
|
|
Restructuring liabilities |
|
|
37 |
|
|
|
15 |
|
|
Other |
|
|
52 |
|
|
|
60 |
|
|
Total accrued liabilities |
|
$ |
211 |
|
|
$ |
199 |
|
Employee-related liabilities consist primarily of payroll, workers’ compensation, employee benefits, and incentive compensation. Incentive compensation accruals include amounts earned pursuant to the Company’s primary employee incentive compensation plans. Customer-related liabilities include accruals for rebates, volume discounts and other customer discounts. Other accrued liabilities include miscellaneous operating accruals, other tax liabilities and accrued interest.
Note 12. Commitments and Contingencies
As of December 31, 2019, the Company had commitments of $29 million for severance payments related to employee restructuring activities. In addition, as of December 31, 2019, the Company had commitments of approximately $9 million for the purchase of property, plant and equipment related to incomplete projects. The Company also has contractual commitments of approximately $35 million for outsourced services, including professional, maintenance and other services.
Refer to Note 5, Leases, for a summary of annual maturities of operating lease liabilities.
Litigation
The Company is subject to laws and regulations relating to the protection of the environment. The Company accrues for expenses associated with environmental remediation obligations when such amounts are probable and can be reasonably estimated. Such accruals are adjusted as new information develops or circumstances change and are generally not discounted. The Company has been designated as a potentially responsible party or has received claims in ten active federal and state Superfund and other multiparty remediation sites. In addition to these sites, the Company may also have the obligation to remediate three other previously and currently owned facilities. At the Superfund sites, the Comprehensive Environmental Response, Compensation and Liability Act provides that the Company’s liability could be joint and several, meaning that the Company could be required to pay an amount in excess of its proportionate share of the remediation costs.
The Company’s understanding of the financial strength of other potentially responsible parties at the multiparty sites and of other liable parties at the previously owned facilities has been considered, where appropriate, in the determination of the Company’s estimated liability. The Company established reserves, recorded in accrued liabilities and other noncurrent liabilities, that it believes are adequate to cover its share of the potential costs of remediation at each of the multiparty sites and the previously and currently owned facilities. It is not possible to quantify with certainty the potential impact of actions regarding environmental matters, particularly remediation and other compliance efforts that the Company may undertake in the future. However, in the opinion of management, compliance with the present environmental protection laws, before taking into account estimated recoveries from third parties, will not have a material effect on the Company’s condensed consolidated balance sheets, statements of operations and cash flows.
From time to time, the Company’s customers and others file voluntary petitions for reorganization under United States bankruptcy laws. In such cases, certain pre-petition payments received by the Company from these parties could be considered preference items and subject to return. In addition, the Company may be party to certain litigation arising in the ordinary course of business. Management believes that the final resolution of these preference items and litigation will not have a material effect on the Company’s consolidated balance sheets, statements of operations and cash flows.
F-32
Note 13. Debt
The Company’s debt at December 31, 2019 and 2018 consisted of the following:
|
|
|
2019 |
|
|
2018 |
|
||
|
Borrowings under the Revolving Credit Facility |
|
$ |
249 |
|
|
$ |
64 |
|
|
Term Loan Facility due September 30, 2022 (a) |
|
|
218 |
|
|
|
260 |
|
|
8.75% Senior Secured Notes due October 15, 2023 |
|
|
450 |
|
|
|
450 |
|
|
Finance lease and other obligations |
|
|
2 |
|
|
|
4 |
|
|
Unamortized debt issuance costs |
|
|
(9 |
) |
|
|
(11 |
) |
|
Total debt |
|
|
910 |
|
|
|
767 |
|
|
Less: current portion |
|
|
(465 |
) |
|
|
(108 |
) |
|
Long-term debt |
|
$ |
445 |
|
|
$ |
659 |
|
|
|
(a) |
The weighted-average interest rate on borrowings under the Company’s Revolving Credit Facility was 5.47% and 5.19% during the year ended December 31, 2019 and 2018, respectively. |
|
|
(b) |
The borrowings under the Term Loan Facility are subject to a variable interest rate. As of December 31, 2019 and 2018, the interest rate was 7.12% and 8.02%, respectively. |
On September 30, 2016, the Company issued $450 million of Senior Secured Notes (the “Senior Notes”).
On September 30, 2016 the Company entered into a credit agreement (the “Credit Agreement”) that provides for (i) a senior secured term loan B facility in an aggregate principal amount of $375 million (the “Term Loan Facility”) and (ii) a senior secured revolving credit facility in an aggregate principal amount of $400 million (the “Revolving Credit Facility”). The debt issuance costs and original issue discount are being amortized over the life of the facilities using the effective interest method.
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. Each of these covenants is subject to important exceptions and qualifications.
Credit Agreement
On December 20, 2018, the Company amended the Credit Agreement to, among other things, defer certain changes to the
minimum Interest Coverage Ratio and the maximum Consolidated Leverage Ratio. Effective August 5, 2019, the Company further amended the Credit Agreement to, among other things, defer certain changes to the minimum Interest Coverage Ratio and the maximum Consolidated Leverage Ratio. The following summarizes the changes to the minimum Interest Coverage Ratio and the maximum Consolidated Leverage Ratio:
|
|
|
Original |
|
December 20, 2018 |
|
August 5, 2019 |
|
Maximum Consolidated Leverage Ratio |
|
|
|
|
|
|
|
Current ratio |
|
3.25 to 1.00 |
|
3.25 to 1.00 |
|
3.75 to 1.00 |
|
Step-down ratio |
|
3.00 to 1.00 |
|
3.00 to 1.00 |
|
3.50 to 1.00 and 3.25 to 1.00 |
|
Step-down as of date (quarter ending on or after) |
|
March 31, 2019 |
|
March 31, 2020 |
|
June 30, 2020 and March 31, 2021 |
|
|
|
|
|
|
|
|
|
Minimum Interest Coverage Ratio |
|
|
|
|
|
|
|
Current ratio |
|
3.25 to 1.00 |
|
3.25 to 1.00 |
|
2.50 to 1.00 |
|
Step-up ratio |
|
3.50 to 1.00 |
|
3.50 to 1.00 |
|
2.75 to 1.00 and 3.00 to 1.00 |
|
Step-up as of date (quarter ending on or after) |
|
March 31, 2019 |
|
March 31, 2020 |
|
September 30, 2020 and June 30, 2021 |
F-33
Other terms, including the outstanding principal, maturity date and other debt covenants remained the same under the December 20, 2018 amendment.
The August 5, 2019 amendment resulted in a reduction in the Revolving Credit Facility aggregate principal amount from $400 million to $300 million and removed the general allowance to declare and pay annual dividends of up to $50 million. The August 5, 2019 amendment included other changes that generally further 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 outstanding principal and maturity date of the Term Loan Facility remains the same, while the maturity date of the Revolving Credit Facility remains the same.
As of December 31, 2019, the Company had $51 million in outstanding letters of credit issued under the Revolving Credit Facility. As of December 31, 2019, the Company also had no other uncommitted credit facilities. As of December 31, 2019, there were $249 million of borrowings under the Revolving Credit Facility.
Based on final results of operations for the year ended December 31, 2019, the Company concluded it was not in compliance with the Consolidated Leverage Ratio and Minimum Interest Ratio contained in the Credit Agreement as of December 31, 2019. The noncompliance occurred on the last day of the fourth quarter due to the following: the Company’s Consolidated Leverage Ratio exceeded the maximum level permitted and the Company’s Minimum Interest Ratio was below the minimum level permitted. On March 2, 2020, the Company entered into a Waiver, Forbearance Agreement and Fourth Amendment to Credit Agreement with lenders constituting a majority under the Credit Agreement that governs the Company’s Revolving Credit Facility and Term Loan Facility. The Waiver, Forbearance Agreement and Fourth Amendment to Credit Agreement waives the defaults or events of default that have occurred as a result of the financial covenant noncompliance on December 31, 2019 and prevents the lenders from directing the Administrative Agent to accelerate the debt or exercise other remedies as a result of certain other potential defaults or events of default which may occur under the Credit Agreement (the “Potential Defaults”), through the period ended May 14, 2020 (such period, the “Forbearance Period”). The Potential Defaults include potential breaches of the Company’s financial covenants with respect to the first quarter of 2020, failure to make principal and interest payments related to the Term Loan Facility, failure to deliver audited financial statements for the year ended December 31, 2019 without a going concern qualification or exception, and failure to provide notice with respect to the Potential Defaults. The Waiver, Forbearance Agreement and Fourth Amendment to Credit Agreement contains certain covenants and requirements, and failure to comply with these covenants and requirements could result in the termination of the Waiver, Forbearance Agreement and Fourth Amendment to Credit Agreement (and the Forbearance Period) prior to its stated term. Following the end of the Forbearance Period, the lenders may choose not to provide a full waiver of the Potential Defaults, should any occur. The Waiver, Forbearance Agreement and Fourth Amendment to Credit Agreement requires the Company to pay a waiver fee of 0.30% of the Aggregate Exposure of the Consenting Lenders as of the effective date of the Waiver and Forbearance Agreement. Should any of the Potential Defaults occur, unless the Company obtains an extension or another waiver, upon the termination of the Forbearance Period, the Company’s debt under the Revolving Credit Facility and Term Loan Facility could be in default and could be accelerated by lenders, which would require the Company to pay all amounts outstanding and could result in a default under, and the acceleration of, our other debt. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.
The Waiver, Forbearance Agreement and Fourth Amendment to Credit Agreement amends certain provisions of the Credit Agreement and subjects the Company to certain restrictions on operating activities, including (i) until May 15, 2020, prohibiting actions that would not be permitted during the existence of a Default or Event of Default under the Credit Agreement (with certain exceptions), notwithstanding the waiver and forbearance relief granted; (ii) limiting the amount of cash which may be held at and investments which may be made in foreign subsidiaries; and (iii) reducing the threshold for determining what constitutes an “Asset Sale” under the Credit Agreement and prohibiting Asset Sales unless consented to in writing by lenders constituting a majority. The Waiver and Forbearance Agreement also provides that the agreement and the Forbearance Period may be terminated if the Company repays any principal amount of the Term Loan Facility or pays any amounts due under the Senior Notes, in each case without making a simultaneous and equivalent payment of principal of the Revolving Loans and a corresponding permanent reduction of the Total Revolving Commitments under the Credit Agreement. During the Forbearance Period, the loans under the Credit Agreement shall not accrue interest at the default rate set forth in the Credit Agreement.
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 lower than its book value by approximately $277 million at December 31, 2019 and greater than its book value by approximately $22 million at December 31, 2018.
F-34
At December 31, 2019, the future maturities of debt, including capitalized leases, were as follows:
|
|
|
Amount |
|
|
|
2020 |
|
$ |
472 |
|
|
2021 |
|
|
— |
|
|
2022 |
|
|
— |
|
|
2023 |
|
|
450 |
|
|
2024 |
|
|
— |
|
|
2025 and thereafter |
|
|
— |
|
|
Total (a) |
|
$ |
922 |
|
(a) Excludes unamortized debt issuance costs of $4 million and $5 million related to the Company’s Term Loan Facility and 8.75% Senior Notes due October 15, 2023, respectively, and a discount of $3 million related to the Company’s Term Loan Facility. These amounts do not represent contractual obligations with a fixed amount or maturity date.
The following table summarizes interest expense included in the consolidated statements of operations:
|
|
|
2019 |
|
|
2018 |
|
|
2017 |
|
|||
|
Interest incurred |
|
$ |
77 |
|
|
$ |
82 |
|
|
$ |
73 |
|
|
Less: interest income |
|
|
(1 |
) |
|
|
(2 |
) |
|
|
(1 |
) |
|
Interest expense-net |
|
$ |
76 |
|
|
$ |
80 |
|
|
$ |
72 |
|
Interest paid, net of interest received, was $73 million, $76 million and $69 million for the years ended December 31, 2019, 2018 and 2017, respectively.
Note 14. Earnings Per Share
During the years ended December 31, 2019, 2018 and 2017, a de minimis amount of shares were withheld from employees for tax liabilities upon vesting of equity awards. On May 31, 2018, the Company completed the repurchase approved by the Board of Directors of 1.6 million shares of common stock for a total cost of $20 million. During the year ended December 31, 2017, the Company issued approximately 1.0 million shares of common stock in conjunction with the acquisition of Fairrington Transportation Corp., F.T.C. Transport, Inc. and F.T.C. Services, Inc. (“Fairrington”).
Basic earnings per share (“EPS”) is calculated by dividing net earnings attributable to the Company’s stockholders by the weighted average number of common shares outstanding for the period. In computing diluted EPS, basic EPS is adjusted for the assumed issuance of all potentially dilutive share-based awards, including stock options, restricted stock, restricted stock units (“RSUs”), and performance share units (“PSUs”).
The following table shows the calculation of basic and diluted EPS, as well as a reconciliation of basic shares to diluted shares:
|
|
|
2019 |
|
|
2018 |
|
|
2017 |
|
|||
|
Net (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(8.82 |
) |
|
$ |
(0.67 |
) |
|
$ |
(1.69 |
) |
|
Diluted |
|
$ |
(8.82 |
) |
|
$ |
(0.67 |
) |
|
$ |
(1.69 |
) |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) |
|
$ |
(295 |
) |
|
$ |
(23 |
) |
|
$ |
(57 |
) |
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding |
|
33.4 |
|
|
|
33.8 |
|
|
|
33.8 |
|
|
|
Dilutive options and awards |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Diluted weighted average number of common shares outstanding |
|
33.4 |
|
|
|
33.8 |
|
|
|
33.8 |
|
|
F-35
Note 15. Retirement Plans
Defined Benefits Overview
The Company is the sole sponsor of certain defined benefit pension plans that are included in the consolidated balance sheets as of December 31, 2019 and 2018. The Company’s primary single employer defined benefit pension plans are frozen. No new employees will be permitted to enter these plans and participants will earn no additional benefits. The assets and certain obligations of the defined benefit pension plans includes plans qualified under Section 401(a) of the Internal Revenue Code of 1986, as amended (the “Qualified Plan”) and related non-qualified benefits (the “Non-Qualified Plan”). The Qualified Plan will be funded in conformity with the applicable government regulations, such that the Company from time to time contributes at least the minimum amount required using actuarial cost methods and assumptions acceptable under government regulations. The Non-Qualified Plan is unfunded, and the Company pays retiree benefits as they become due.
The Company engages outside actuaries to assist in the determination of the obligations and costs under these plans. The Company records annual income and expense amounts relating to its pension plans based on calculations that include various actuarial assumptions such as discount rates, mortality, assumed rate of return, compensation increases, and turnover rates. The Company reviews its actuarial assumptions on an annual basis and makes modifications to the assumptions based on current rates and trends when it is deemed appropriate to do so. The effect of modifications on the value of plan obligations and assets is recognized immediately within other comprehensive income (loss) and amortized into investment and other (income)-net over future periods. The Company believes that the assumptions utilized in recording its obligations under its plans are reasonable based on its experience, market conditions and input from its actuaries and investment advisors.
The benefit plan obligations are calculated using generally accepted actuarial methods and are measured as of December 31. Actuarial gains and losses for frozen plans are amortized using the corridor method over the average remaining expected life of active and inactive plan participants.
In the first quarter of 2019, the Company completed a partial settlement of its retirement benefit obligations by purchasing a group annuity contract for certain retirees and beneficiaries from a third-party insurance company. As a result, the Company’s pension assets and liabilities were required to be remeasured as of the settlement date. As of the remeasurement date, the reduction in the reported pension obligation for the participants under the annuity contract was $477 million, and the reduction in plan assets was $466 million. The Company recorded a non-cash settlement charge of $135 million in the first quarter of 2019 that is disclosed in settlements of retirement obligations in the consolidated statement of operations. This charge resulted from the recognition in earnings of a portion of the actuarial losses recorded in accumulated other comprehensive loss based on the proportion of the obligation settled. There were additional immaterial lump-sum settlements related to the U.S. Qualified Plan (unrelated to the transaction noted above) during the year ended December 31, 2019 that resulted in non-cash settlement charges of $2 million.
The Company made contributions totaling $6 million to its pension plans during the year ended December 31, 2019. Based on the plans’ regulatory funded status, there are no required contributions for the Company’s U.S. Qualified Plan in 2020. The required contributions in 2020, primarily for the Non-Qualified Plan, are expected to be approximately $6 million.
F-36
Defined Benefit Plans – Financial Information
Financial information regarding the Qualified, Non-Qualified and International plans is shown below:
|
|
|
2019 |
|
|
2018 |
|
|
2017 |
|
|||||||||||||||||||||||||||
|
|
|
|
|
|
|
Non-Qualified |
|
|
|
|
|
|
|
|
|
|
Non-Qualified |
|
|
|
|
|
|
|
|
|
|
Non-Qualified |
|
|
|
|
|
|||
|
|
|
Qualified |
|
|
& International |
|
|
Total |
|
|
Qualified |
|
|
& International |
|
|
Total |
|
|
Qualified |
|
|
& International |
|
|
Total |
|
|||||||||
|
Interest cost |
|
$ |
73 |
|
|
$ |
4 |
|
|
$ |
77 |
|
|
$ |
84 |
|
|
$ |
3 |
|
|
$ |
87 |
|
|
$ |
86 |
|
|
$ |
3 |
|
|
$ |
89 |
|
|
Expected return on plan assets |
|
|
(123 |
) |
|
|
— |
|
|
|
(123 |
) |
|
|
(155 |
) |
|
|
— |
|
|
|
(155 |
) |
|
|
(153 |
) |
|
|
— |
|
|
|
(153 |
) |
|
Amortization of actuarial loss |
|
|
10 |
|
|
|
1 |
|
|
|
11 |
|
|
|
19 |
|
|
|
1 |
|
|
|
20 |
|
|
|
17 |
|
|
|
1 |
|
|
|
18 |
|
|
Settlements |
|
|
137 |
|
|
|
— |
|
|
|
137 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Net periodic benefit (income) expense |
|
$ |
97 |
|
|
$ |
5 |
|
|
$ |
102 |
|
|
$ |
(52 |
) |
|
$ |
4 |
|
|
$ |
(48 |
) |
|
$ |
(50 |
) |
|
$ |
4 |
|
|
$ |
(46 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average assumption used to calculate net periodic benefit (income) expense: |
|
|||||||||||||||||||||||||||||||||||
|
Discount rate |
|
|
4.3 |
% |
|
|
4.6 |
% |
|
|
4.3 |
% |
|
|
3.5 |
% |
|
|
3.8 |
% |
|
|
3.5 |
% |
|
|
4.3 |
% |
|
|
4.3 |
% |
|
|
4.3 |
% |
|
Expected return on plan assets |
|
|
6.5 |
% |
|
|
7.8 |
% |
|
|
6.5 |
% |
|
|
6.7 |
% |
|
|
7.8 |
% |
|
|
6.7 |
% |
|
|
6.9 |
% |
|
|
7.9 |
% |
|
|
6.9 |
% |
The accumulated benefit obligation for the Qualified Plan was $2,159 million and $2,318 million at December 31, 2019 and 2018, respectively. The accumulated benefit obligation for the LSC Communications sponsored defined benefit Non-Qualified and international pension plans was $95 million and $86 million at December 31, 2019 and 2018, respectively.
|
|
|
2019 |
|
|
2018 |
|
||||||||||||||||||
|
|
|
|
|
|
|
Non-Qualified |
|
|
|
|
|
|
|
|
|
|
Non-Qualified |
|
|
|
|
|
||
|
|
|
Qualified |
|
|
& International |
|
|
Total |
|
|
Qualified |
|
|
& International |
|
|
Total |
|
||||||
|
Benefit obligation at beginning of year |
|
$ |
2,318 |
|
|
$ |
88 |
|
|
$ |
2,406 |
|
|
$ |
2,572 |
|
|
$ |
95 |
|
|
$ |
2,667 |
|
|
Interest cost |
|
|
73 |
|
|
|
4 |
|
|
|
77 |
|
|
|
84 |
|
|
|
3 |
|
|
|
87 |
|
|
Actuarial loss (gain) |
|
|
325 |
|
|
|
11 |
|
|
|
336 |
|
|
|
(211 |
) |
|
|
(6 |
) |
|
|
(217 |
) |
|
Settlements |
|
|
(474 |
) |
|
|
(1 |
) |
|
|
(475 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Benefits paid |
|
|
(83 |
) |
|
|
(5 |
) |
|
|
(88 |
) |
|
|
(127 |
) |
|
|
(4 |
) |
|
|
(131 |
) |
|
Benefit obligation at end of year |
|
$ |
2,159 |
|
|
$ |
97 |
|
|
$ |
2,256 |
|
|
$ |
2,318 |
|
|
$ |
88 |
|
|
$ |
2,406 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year |
|
$ |
2,265 |
|
|
$ |
4 |
|
|
$ |
2,269 |
|
|
$ |
2,478 |
|
|
$ |
2 |
|
|
$ |
2,480 |
|
|
Actual return on assets |
|
|
382 |
|
|
|
— |
|
|
|
382 |
|
|
|
(86 |
) |
|
|
— |
|
|
|
(86 |
) |
|
Employer contributions |
|
|
— |
|
|
|
6 |
|
|
|
6 |
|
|
|
— |
|
|
|
6 |
|
|
|
6 |
|
|
Settlements |
|
|
(474 |
) |
|
|
(1 |
) |
|
|
(475 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Benefits paid |
|
|
(83 |
) |
|
|
(5 |
) |
|
|
(88 |
) |
|
|
(127 |
) |
|
|
(4 |
) |
|
|
(131 |
) |
|
Fair value of plan assets at end of year |
|
$ |
2,090 |
|
|
|
4 |
|
|
$ |
2,094 |
|
|
$ |
2,265 |
|
|
$ |
4 |
|
|
$ |
2,269 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unfunded status at end of year |
|
$ |
(69 |
) |
|
$ |
(93 |
) |
|
$ |
(162 |
) |
|
$ |
(53 |
) |
|
$ |
(84 |
) |
|
$ |
(137 |
) |
F-37
|
|
|
2019 |
|
|
2018 |
|
||||||||||||||||||
|
|
|
|
|
|
|
Non-Qualified |
|
|
|
|
|
|
|
|
|
|
Non-Qualified |
|
|
|
|
|
||
|
|
|
Qualified |
|
|
& International |
|
|
Total |
|
|
Qualified |
|
|
& International |
|
|
Total |
|
||||||
|
Accrued benefit cost (included in accrued liabilities) |
|
$ |
— |
|
|
$ |
(6 |
) |
|
$ |
(6 |
) |
|
$ |
— |
|
|
$ |
(5 |
) |
|
$ |
(5 |
) |
|
Pension liabilities |
|
|
(69 |
) |
|
|
(87 |
) |
|
|
(156 |
) |
|
|
(53 |
) |
|
|
(79 |
) |
|
|
(132 |
) |
|
Net liabilities recognized in the consolidated balance sheets |
|
$ |
(69 |
) |
|
$ |
(93 |
) |
|
$ |
(162 |
) |
|
$ |
(53 |
) |
|
$ |
(84 |
) |
|
$ |
(137 |
) |
The amounts included in accumulated other comprehensive loss in the consolidated balance sheets, excluding tax effects, that have not been recognized as components of net periodic cost at December 31, 2019 and 2018 were as follows:
|
|
|
2019 |
|
|
2018 |
|
||||||||||||||||||
|
|
|
|
|
|
|
Non-Qualified |
|
|
|
|
|
|
|
|
|
|
Non-Qualified |
|
|
|
|
|
||
|
|
|
Qualified |
|
|
& International |
|
|
Total |
|
|
Qualified |
|
|
& International |
|
|
Total |
|
||||||
|
Accumulated other comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss |
|
$ |
(604 |
) |
|
$ |
(33 |
) |
|
$ |
(637 |
) |
|
$ |
(686 |
) |
|
$ |
(22 |
) |
|
$ |
(708 |
) |
|
Total |
|
$ |
(604 |
) |
|
$ |
(33 |
) |
|
$ |
(637 |
) |
|
$ |
(686 |
) |
|
$ |
(22 |
) |
|
$ |
(708 |
) |
The pre-tax amounts recognized in other comprehensive loss in 2019 as components of net periodic costs were as follows:
|
|
|
|
|
|
|
Non-Qualified |
|
|
|
|
|
|
|
|
|
Qualified |
|
|
& International |
|
|
Total |
|
|||
|
Amortization of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss |
|
$ |
10 |
|
|
$ |
1 |
|
|
$ |
11 |
|
|
Amounts arising during the period: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlements |
|
|
137 |
|
|
|
— |
|
|
|
137 |
|
|
Net actuarial (loss) gain |
|
|
(65 |
) |
|
|
(12 |
) |
|
|
(77 |
) |
|
Total |
|
$ |
82 |
|
|
$ |
(11 |
) |
|
$ |
71 |
|
Actuarial gains and losses in excess of 10.0% of the greater of the projected benefit obligation or the market-related value of plan assets were recognized as a component of net periodic benefit costs over the average remaining service period of a plan’s active employees. Unrecognized prior service costs or credits are also recognized as a component of net periodic benefit cost over the average remaining service period of a plan’s active employees. The amounts in accumulated other comprehensive loss that are expected to be recognized as components of net periodic benefit costs in 2020 are shown below.
|
|
|
|
|
|
|
Non- Qualified |
|
|
|
|
|
|
|
|
|
Qualified |
|
|
& International |
|
|
Total |
|
|||
|
Amortization of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss |
|
$ |
18 |
|
|
$ |
1 |
|
|
$ |
19 |
|
The weighted-average assumptions used to determine the net benefit obligation at the measurement date were as follows:
|
|
|
2019 |
|
|
2018 |
|
||||||||||||||||||
|
|
|
|
|
|
|
Non-Qualified |
|
|
|
|
|
|
|
|
|
|
Non-Qualified |
|
|
|
|
|
||
|
|
|
Qualified |
|
|
& International |
|
|
Total |
|
|
Qualified |
|
|
& International |
|
|
Total |
|
||||||
|
Discount rate |
|
|
3.3 |
% |
|
|
3.4 |
% |
|
|
3.3 |
% |
|
|
4.4 |
% |
|
|
4.5 |
% |
|
|
4.4 |
% |
F-38
The following table provides a summary of pension plans with projected benefit obligations in excess of plan assets as of December 31, 2019 and 2018:
|
|
|
2019 |
|
|
2018 |
|
||||||||||||||||||
|
|
|
|
|
|
|
Non-Qualified |
|
|
|
|
|
|
|
|
|
|
Non-Qualified |
|
|
|
|
|
||
|
|
|
Qualified |
|
|
& International |
|
|
Total |
|
|
Qualified |
|
|
& International |
|
|
Total |
|
||||||
|
Projected benefit obligation |
|
$ |
2,159 |
|
|
$ |
97 |
|
|
$ |
2,256 |
|
|
$ |
2,318 |
|
|
$ |
85 |
|
|
$ |
2,403 |
|
|
Fair value of plan assets |
|
|
2,090 |
|
|
|
4 |
|
|
|
2,094 |
|
|
|
2,265 |
|
|
|
— |
|
|
$ |
2,265 |
|
The following table provides a summary of pension plans with accumulated benefit obligations in excess of plan assets as of December 31, 2019 and 2018:
|
|
|
2019 |
|
|
2018 |
|
||||||||||||||||||
|
|
|
|
|
|
|
Non-Qualified |
|
|
|
|
|
|
|
|
|
|
Non-Qualified |
|
|
|
|
|
||
|
|
|
Qualified |
|
|
& International |
|
|
Total |
|
|
Qualified |
|
|
& International |
|
|
Total |
|
||||||
|
Accumulated benefit obligation |
|
$ |
2,159 |
|
|
$ |
93 |
|
|
$ |
2,252 |
|
|
$ |
2,318 |
|
|
$ |
85 |
|
|
$ |
2,403 |
|
|
Fair value of plan assets |
|
|
2,090 |
|
|
|
1 |
|
|
|
2,091 |
|
|
|
2,265 |
|
|
|
— |
|
|
|
2,265 |
|
The Company determines its assumption for the discount rate to be used for purposes of computing annual service and interest costs based on an index of high-quality corporate bond yields and matched-funding yield curve analysis as of the measurement date.
Benefit payments are expected to be paid as follows:
|
|
|
|
|
|
|
Non-Qualified |
|
|
|
|
|
|
|
|
|
Qualified |
|
|
& International |
|
|
Total |
|
|||
|
2020 |
|
$ |
95 |
|
|
$ |
6 |
|
|
$ |
101 |
|
|
2021 |
|
|
100 |
|
|
|
6 |
|
|
|
106 |
|
|
2022 |
|
|
106 |
|
|
|
6 |
|
|
|
112 |
|
|
2023 |
|
|
110 |
|
|
|
6 |
|
|
|
116 |
|
|
2024 |
|
|
116 |
|
|
|
6 |
|
|
|
122 |
|
|
2025-2029 |
|
|
608 |
|
|
|
30 |
|
|
|
638 |
|
Defined Benefit Plans - Plan Assets
The Company’s overall investment approach for its U.S. Qualified Plan is to reduce the risk of significant decreases in the plan’s funded status by allocating a larger portion of the plan’s assets to investments expected to hedge the impact of interest rate risks on the plan’s obligation. Over time, the target asset allocation percentage for the pension plan is expected to decrease for equity and other “return seeking” investments and increase for fixed income and other “hedging” investments. The assumed long-term rate of return for plan assets, which is determined annually, is likely to decrease as the asset allocation shifts over time. The expected long-term rate of return for plan assets is based upon many factors including asset allocation, historical asset returns, current and expected future market conditions, risk and active management premiums. The target asset allocation percentage as of December 31, 2018 for the U.S. Qualified Plan was approximately 40.0% for return seeking investments and approximately 60.0% for hedging investments. Management reviews the performance of its investments on a quarterly basis.
The Company segregated its plan assets by the following major categories and levels for determining their fair value as of December 31, 2019 and 2018:
Cash and cash equivalents—Carrying value approximates fair value. As such, these assets were classified as Level 1. The Company also invests in certain short-term investments that are valued using the amortized cost method. As such, these assets were classified as Level 2.
Equity—The value of individual equity securities was based on quoted prices in active markets. As such, these assets are classified as Level 1.
F-39
Fixed income—Fixed income securities are typically priced based on a valuation model rather than a last trade basis and are not exchange-traded. These valuation models involve utilizing dealer quotes, analyzing market information, estimating prepayment speeds and evaluating underlying collateral. Accordingly, the Company classified these fixed income securities as Level 2. Fixed income securities also include investments in various asset-backed securities that are part of a government sponsored program. The prices of these asset-backed securities were obtained by independent third parties using multi-dimensional, collateral specific prepayments tables. Inputs include monthly payment information and collateral performance. As the values of these assets was determined based on models incorporating observable inputs, these assets were classified as Level 2. Additionally, this category includes underlying securities in trust owned life insurance policies that are invested in certain fixed income securities. These investments are not quoted on active markets; therefore, they are classified as Level 2.
Other—This category includes investments in commodity and structured credit funds that are not quoted on active markets; therefore, they are classified as Level 2.
Investments measured at NAV as a practical expedient—The Company invests in certain equity, fixed income, real estate and private equity funds that are valued at calculated NAV per share. In accordance with FASB guidance investments that are measured at fair value using the NAV per share as a practical expedient have not been classified in the fair value hierarchy.
The valuation methodologies described above may generate a fair value calculation that may not be indicative of net realizable value or future fair values. While the Company believes the valuation methodologies used are appropriate, the use of different methodologies or assumptions in calculating fair value could result in different amounts. The Company invests in various assets in which valuation is determined by NAV. The Company believes that the NAV is representative of fair value at the reporting date, as there are no significant restrictions on redemption of these investments or other reasons to indicate that the investment would be redeemed at an amount different than the NAV.
The fair values of the Company’s pension plan assets at December 31, 2019 and 2018, by asset category were as follows:
|
|
|
December 31, 2019 |
|
|
December 31, 2018 |
|
||||||||||||||||||
|
Asset Category |
|
Level 1 |
|
|
Level 2 |
|
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Total |
|
||||||
|
Cash and cash equivalents |
|
$ |
22 |
|
|
$ |
13 |
|
|
$ |
35 |
|
|
$ |
54 |
|
|
$ |
17 |
|
|
$ |
71 |
|
|
Equity |
|
|
357 |
|
|
|
— |
|
|
|
357 |
|
|
|
343 |
|
|
|
— |
|
|
|
343 |
|
|
Fixed income |
|
|
52 |
|
|
|
1,259 |
|
|
|
1,311 |
|
|
|
— |
|
|
|
1,389 |
|
|
|
1,389 |
|
|
Other |
|
|
— |
|
|
|
2 |
|
|
|
2 |
|
|
|
— |
|
|
|
1 |
|
|
|
1 |
|
|
Investments measurement at NAV as a practical expedient |
|
|
— |
|
|
|
— |
|
|
|
389 |
|
|
|
— |
|
|
|
— |
|
|
|
465 |
|
|
Total |
|
$ |
431 |
|
|
$ |
1,274 |
|
|
$ |
2,094 |
|
|
$ |
397 |
|
|
$ |
1,407 |
|
|
$ |
2,269 |
|
Other Plans
Employer 401(k) Savings Plan—Effective September 2, 2016, LSC Communications initiated its own 401(k) plan. Under the LSC Savings Plan (the “Plan”), eligible employees have the option to contribute a percentage of eligible compensation on both a before-tax and after-tax basis. Effective January 1, 2017, LSC Communications amended the Plan to provide a company match equal to $0.50 of every pre-tax and Roth 401(k) dollar a participating employee contributes to the Plan up to the first 3.0% of such participant’s pay.
Multiemployer Pension Plans—Multiemployer plans receive contributions from two or more unrelated employers pursuant to one or more collective bargaining agreements and the assets contributed by one employer may be used to fund the benefits of all employees covered within the plan. The risk and level of uncertainty related to participating in these multiemployer pension plans differs significantly from the risk associated with the Company-sponsored defined benefit plans. For example, investment decisions are made by parties unrelated to the Company and the financial stability of other employers participating in a plan may affect the Company’s obligations under the plan.
During the years ended December 31, 2019, 2018 and 2017, the Company recorded restructuring, impairment and other charges relating to multiemployer pension plan withdrawal obligations of:
|
Year Ended |
|
Unrelated to |
|
|
Related to |
|
|
|
|
|
||
|
December 31, |
|
Facility Closures |
|
|
Facility Closures |
|
|
Total |
|
|||
|
2019 |
|
$ |
2 |
|
|
$ |
5 |
|
|
$ |
7 |
|
|
2018 |
|
$ |
2 |
|
|
$ |
3 |
|
|
$ |
5 |
|
|
2017 |
|
$ |
4 |
|
|
$ |
1 |
|
|
$ |
5 |
|
F-40
Refer to Note 10, Restructuring, Impairment and Other Charges, for further details of charges related to complete or partial multiemployer pension plan withdrawal liabilities recognized in the consolidated statements of operations.
The Company’s withdrawal liabilities could be affected by the financial stability of other employers participating in the plans and any decisions by those employers to withdraw from the plans in the future. While it is not possible to quantify the potential impact of future events or circumstances, reductions in other employers’ participation in multiemployer pension plans, including certain plans from which the Company has previously withdrawn, could have a material impact on the Company’s previously estimated withdrawal liabilities, may affect consolidated statements of operations, balance sheets or cash flows.
As a result of the acquisition of Courier, the Company participates in two multiemployer pension plans as of December 31, 2019, for one of which the Company’s contributions represent approximately 85% of the total plan contributions. Both plans are estimated to be underfunded and have a red zone status, designated as a result of low contribution funding levels, under the Pension Protection Act. As a result of a plant closure in the Book segment, the Company expects to withdraw from these two multiemployer plans in 2020. The Company recorded a multiemployer liability of $2 million primarily in long-term restructuring and multi-employer pension liabilities in the consolidated balance sheet as of December 31, 2019.
During each of the years ended December 31, 2019, 2018 and 2017, the Company made de minimis contributions to these two multiemployer pension plans. Additionally, the Company made $9 million of contributions related to other plans from which the Company has completely withdrawn from for each of the years ended December 31, 2019, 2018 and 2017.
Note 16. Income Taxes
Income tax expense (benefit) information
Income taxes have been based on the following components of (loss) earnings from operations before income taxes for the years ended December 31, 2019, 2018 and 2017:
|
|
|
2019 |
|
|
2018 |
|
|
2017 |
|
|||
|
U.S. |
|
$ |
(313 |
) |
|
$ |
(18 |
) |
|
$ |
(71 |
) |
|
Foreign |
|
|
25 |
|
|
|
28 |
|
|
|
27 |
|
|
Total |
|
$ |
(288 |
) |
|
$ |
10 |
|
|
$ |
(44 |
) |
The components of income tax expense (benefit) from operations for the years ended December 31, 2019, 2018 and 2017 were as follows:
|
|
|
2019 |
|
|
2018 |
|
|
2017 |
|
|||
|
Current |
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal |
|
$ |
— |
|
|
$ |
4 |
|
|
$ |
20 |
|
|
U.S. state and local |
|
|
— |
|
|
|
1 |
|
|
|
1 |
|
|
Foreign |
|
|
5 |
|
|
|
7 |
|
|
|
7 |
|
|
Current income tax expense |
|
|
5 |
|
|
|
12 |
|
|
|
28 |
|
|
Deferred |
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal |
|
|
(5 |
) |
|
|
(3 |
) |
|
|
(11 |
) |
|
U.S. state and local |
|
|
6 |
|
|
|
(2 |
) |
|
|
(4 |
) |
|
Foreign |
|
|
1 |
|
|
|
26 |
|
|
|
— |
|
|
Deferred income tax expense (benefit) |
|
|
2 |
|
|
|
21 |
|
|
|
(15 |
) |
|
Income tax expense |
|
$ |
7 |
|
|
$ |
33 |
|
|
$ |
13 |
|
Refer to Note 17, Comprehensive Income, for details of the income tax expense or benefit allocated to each component of other comprehensive loss.
F-41
2018 Disposition
As described in Note 3, Business Combinations and Disposition, the Company completed the sale of its European printing business on September 28, 2018. The 2018 tax provision reflects the impact of the sale which includes the elimination of tax balances related to the sold entities. A $25 million non-cash provision was recorded primarily for the write-off of a deferred tax asset associated with the entities disposed. As part of the write-off, tax carryforwards of $125 million and the associated valuation allowances of $108 million were disposed of as part of the sale.
The following table outlines the reconciliation of differences between the Federal statutory tax rate and the Company’s effective income tax rate:
|
|
|
2019 |
|
|
2018 |
|
|
2017 |
|
|||
|
Federal statutory tax rate |
|
|
21.0 |
% |
|
|
21.0 |
% |
|
|
35.0 |
% |
|
Intraperiod allocation exception under ASC 740-20 |
|
|
6.4 |
|
|
|
— |
|
|
|
— |
|
|
State and local income taxes, net of U.S. federal income tax benefit |
|
|
4.0 |
|
|
|
(12.0 |
) |
|
|
4.0 |
|
|
Disposition of European printing business |
|
|
— |
|
|
|
242.4 |
|
|
|
— |
|
|
International investment tax credit |
|
|
— |
|
|
|
6.2 |
|
|
|
25.9 |
|
|
Domestic manufacturing deduction |
|
|
— |
|
|
|
— |
|
|
|
1.3 |
|
|
Section 162(m) limitation |
|
|
(0.1 |
) |
|
|
8.2 |
|
|
|
(5.1 |
) |
|
Meals and entertainment disallowance |
|
|
(0.1 |
) |
|
|
4.4 |
|
|
|
(1.3 |
) |
|
Withholding taxes |
|
|
(0.1 |
) |
|
|
3.2 |
|
|
|
— |
|
|
Foreign tax rate differential |
|
|
(0.2 |
) |
|
|
9.6 |
|
|
|
6.5 |
|
|
Fringe benefits disallowance |
|
|
(0.2 |
) |
|
|
4.5 |
|
|
|
— |
|
|
Non-deductible share-based compensation |
|
|
(0.5 |
) |
|
|
11.4 |
|
|
|
(8.9 |
) |
|
Impact of the Tax Act |
|
|
|
|
|
|
|
|
|
|
|
|
|
Transition tax |
|
|
— |
|
|
|
9.0 |
|
|
|
(36.2 |
) |
|
Deferred tax effects |
|
|
— |
|
|
|
4.4 |
|
|
|
(19.2 |
) |
|
Foreign income inclusion |
|
|
(1.0 |
) |
|
0.7 |
|
|
|
— |
|
|
|
Impairment charges |
|
|
(3.2 |
) |
|
|
1.3 |
|
|
|
(21.8 |
) |
|
Change in valuation allowances |
|
|
(29.3 |
) |
|
|
(5.0 |
) |
|
|
(22.6 |
) |
|
Other |
|
|
1.0 |
|
|
|
10.1 |
|
|
|
11.9 |
|
|
Effective income tax rate |
|
|
(2.3 |
%) |
|
|
319.4 |
% |
|
|
(30.5 |
%) |
The income tax expense or benefit from continuing operations is generally determined without regard to other categories of earnings, such as other comprehensive income (“OCI”). An exception is provided, however, under ASC 740-20, Income Taxes, when there is income from OCI and a loss from continuing operations in the current year. The tax benefit allocated to continuing operations is the amount by which the loss from continuing operations reduces the tax expense recorded with respect to OCI, even though a valuation allowance has been established against the deferred tax asset in the current year. Thus, the Company recorded a valuation allowance of $67 million in continuing operations, representing an $85 million valuation allowance on continuing operations partially offset by a tax benefit of $18 million related to income in OCI (and a corresponding tax provision of $18 million in OCI), as shown in the reconciliation above.
F-42
Deferred income taxes
The significant deferred tax assets and liabilities at December 31, 2019 and 2018 were as follows:
|
|
|
2019 |
|
|
2018 |
|
||
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
|
Pension plan liabilities |
|
$ |
47 |
|
|
$ |
41 |
|
|
Lease liabilities |
|
|
40 |
|
|
|
— |
|
|
Accrued liabilities |
|
|
37 |
|
|
|
35 |
|
|
Interest expense carryforward |
|
|
32 |
|
|
|
15 |
|
|
Net operating losses and other tax carryforwards |
|
|
19 |
|
|
|
17 |
|
|
Foreign depreciation |
|
|
5 |
|
|
|
6 |
|
|
Other |
|
|
2 |
|
|
|
3 |
|
|
Total deferred tax assets |
|
|
182 |
|
|
|
117 |
|
|
Valuation allowances |
|
|
(77 |
) |
|
|
(11 |
) |
|
Net deferred tax assets |
|
$ |
105 |
|
|
$ |
106 |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
|
ROU assets |
|
$ |
(38 |
) |
|
$ |
— |
|
|
Accelerated depreciation |
|
|
(29 |
) |
|
|
(38 |
) |
|
Other intangible assets |
|
|
(17 |
) |
|
|
(25 |
) |
|
Revenue recognition |
|
|
(6 |
) |
|
|
(4 |
) |
|
Inventories |
|
|
(2 |
) |
|
|
(7 |
) |
|
Other |
|
|
(6 |
) |
|
|
(5 |
) |
|
Total deferred tax liabilities |
|
|
(98 |
) |
|
|
(79 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets |
|
$ |
7 |
|
|
$ |
27 |
|
Transactions affecting the valuation allowances on deferred tax assets during the years ended December 31, 2019, 2018 and 2017 were as follows:
|
|
|
2019 |
|
|
2018 |
|
|
2017 |
|
|||
|
Balance, beginning of year |
|
$ |
11 |
|
|
$ |
115 |
|
|
$ |
87 |
|
|
Current year expense-net |
|
|
66 |
|
|
|
— |
|
|
|
9 |
|
|
Disposition of European printing business |
|
|
— |
|
|
|
(108 |
) |
|
|
— |
|
|
Foreign exchange and other |
|
|
— |
|
|
|
4 |
|
|
|
19 |
|
|
Balance, end of year |
|
$ |
77 |
|
|
$ |
11 |
|
|
$ |
115 |
|
Management assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets. A significant piece of objective negative evidence evaluated is the U.S. cumulative loss incurred over the three-year period ended December 31, 2019. Such objective evidence limits the ability to consider other subjective evidence, such as our projections for future operating results. Further, the Company appropriately scheduled out the future reversals of its deferred tax assets and liabilities and determined in the U.S. that it anticipates a $2 million deferred tax liability due to future unfavorable timing differences (i.e., the reversal of deferred tax liabilities that exceeds the deferred tax assets in certain years; the remaining deferred tax asset primarily relates to an entity in Mexico that has cumulative income over a three-year period). Therefore, the U.S. valuation allowance exceeds the net U.S. deferred tax assets by $2 million. On the basis of these evaluations, a $67 million valuation allowance has been recorded, partially offset by a $1 million unrelated valuation allowance release. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence such as our projections for growth.
As of December 31, 2019, the Company had interest expense carryforward, domestic and foreign net operating loss deferred tax assets and other tax carryforwards of approximately $51 million and $0 million ($32 million and $0 million, respectively, at December 31, 2018), of which $11 million expires between 2020 and 2029. Limitations on the utilization of these tax assets may apply.
F-43
Cash payments for income taxes were $9 million, $11 million and $36 million during the years ended December 31, 2019, 2018 and 2017, respectively. Cash refunds for income taxes were $2 million, $10 million and a de minimis amount during the years ended December 31, 2019, 2018 and 2017, respectively.
Uncertain tax positions
As of December 31, 2019, the Company had a de minimis amount of unrecognized tax benefits and no unrecognized tax benefits as of December 31, 2018 and 2017. Interest expense and any related penalties related to income tax uncertainties are classified as a component of income tax expense. There was a de minimis amount of interest expense, net of tax benefits, related to tax uncertainties recognized in the consolidated statements of operations for the years ended December 31, 2019, and no interest expense for the years ended December 31, 2018 and 2017. No benefits were recognized for the years ended December 31, 2019, 2018 and 2017 from the reversal of accrued penalties. There was a de minimis amount of interest accrued related to income tax uncertainties at December 31, 2019 and no interest expense as of December 31, 2018. There were no accrued penalties related to income tax uncertainties for the years ended December 31, 2019 and 2018.
Note 17. Comprehensive Income
The following table summarizes the change in accumulated other comprehensive loss by component for the years ended December 31, 2019, 2018 and 2017.
|
|
|
Pension |
|
|
Translation |
|
|
|
|
|
||
|
|
|
Plan Cost |
|
|
Adjustments |
|
|
Total |
|
|||
|
Balance at December 31, 2016 |
|
$ |
(462 |
) |
|
$ |
(69 |
) |
|
$ |
(531 |
) |
|
Other comprehensive income before reclassifications |
|
|
23 |
|
|
|
21 |
|
|
|
44 |
|
|
Amounts reclassified from accumulated other comprehensive loss |
|
|
11 |
|
|
|
— |
|
|
|
11 |
|
|
Net change in accumulated other comprehensive loss |
|
|
34 |
|
|
|
21 |
|
|
|
55 |
|
|
Balance at December 31, 2017 |
|
$ |
(428 |
) |
|
$ |
(48 |
) |
|
$ |
(476 |
) |
|
Other comprehensive loss before reclassifications |
|
|
(19 |
) |
|
|
(7 |
) |
|
|
(26 |
) |
|
Amounts reclassified from accumulated other comprehensive loss |
|
|
15 |
|
|
|
— |
|
|
|
15 |
|
|
Reclassification to accumulated deficit |
|
|
(97 |
) |
|
|
— |
|
|
|
(97 |
) |
|
Net change in accumulated other comprehensive loss |
|
|
(101 |
) |
|
|
(7 |
) |
|
|
(108 |
) |
|
Balance at December 31, 2018 |
|
$ |
(529 |
) |
|
$ |
(55 |
) |
|
$ |
(584 |
) |
|
Other comprehensive income before reclassifications |
|
|
46 |
|
|
|
2 |
|
|
|
48 |
|
|
Amounts reclassified from accumulated other comprehensive loss |
|
|
8 |
|
|
|
— |
|
|
|
8 |
|
|
Net change in accumulated other comprehensive loss |
|
|
54 |
|
|
|
2 |
|
|
|
56 |
|
|
Balance at December 31, 2019 |
|
$ |
(475 |
) |
|
$ |
(53 |
) |
|
$ |
(528 |
) |
In the first quarter of 2019, the Company completed a partial settlement of its retirement benefit obligations and, as a result, the Company’s pension assets and liabilities were remeasured as of the settlement date. The impact, net of tax, to the Company’s accumulated other comprehensive loss was a decrease of $105 million. Additional immaterial lump-sum settlements during the year ended December 31, 2019 increased the net accumulated other comprehensive loss balance by $2 million to a total net of tax impact of $107 million. Refer to Note 15, Retirement Plans, for more information.
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 consolidated balance sheet during the three months ended March 31, 2018. ASU 2018-02 eliminated the stranded tax effects resulting from the Tax Act and improved the usefulness of information reported to financial statement users.
Refer to the statements of comprehensive income for the components of comprehensive income for the years ended December 31, 2019, 2018 and 2017.
F-44
Reclassifications from accumulated other comprehensive loss for the years ended December 31, 2019, 2018 and 2017 were as follows:
|
|
|
2019 |
|
|
2018 |
|
|
2017 |
|
|||
|
Amortization of pension plan cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss (a) |
|
$ |
11 |
|
|
$ |
20 |
|
|
$ |
18 |
|
|
Reclassifications before tax |
|
|
11 |
|
|
|
20 |
|
|
|
18 |
|
|
Income tax expense |
|
|
3 |
|
|
|
5 |
|
|
|
7 |
|
|
Reclassifications, net of tax |
|
$ |
8 |
|
|
$ |
15 |
|
|
$ |
11 |
|
|
|
(a) |
These accumulated other comprehensive income components are included in the calculation of net periodic pension benefits plan (income) expense that is recognized all in investment and other (income)-net in the consolidated statements of operations (refer to Note 15, Retirement Plans). |
Note 18. Stock and Incentive Programs
General Terms of the Awards
The Company’s employees participate in the Company’s 2016 Performance Incentive Plan (the “2016 PIP”). Under the 2016 PIP, the Company may grant cash or bonus awards, stock options, stock appreciation rights, restricted stock awards (“RSAs”), RSUs, performance awards or combinations thereof to certain officers, directors and key employees. The Human Resources Committee of the Company’s Board of Directors has discretion to establish the terms and conditions for grants, including the number of shares, vesting and required service or other performance criteria. The maximum term of any award under the 2016 PIP is ten years. Options generally expire ten years from the date of grant or five years after the date of retirement, whichever is earlier.
The rights granted to the recipient of RSAs, RSUs and performance restricted stock (“PRS”) generally accrue ratably over the restriction or vesting period, which is generally three years. RSUs and RSAs are subject to forfeiture upon termination of employment prior to vesting, subject in some cases to early vesting upon specified events, including death or permanent disability of the grantee, termination of the grantee’s employment under certain circumstances or a change in control of the Company. Compensation expense is based on the fair market value of the awards on the date of grant expensed ratably over the periods during which restrictions lapse.
Share-Based Compensation Expense
Total compensation expense related to all share based compensation plans for the Company’s employees, officers and directors was $7 million, $12 million and $13 million for the years ended December 31, 2019, 2018 and 2017, respectively. There were net tax benefits of a de minimis amount, $1 million and $2 million for the years ended December 31, 2019, 2018 and 2017, respectively.
Stock Options
There was no significant activity related to stock options during the year December 31, 2019.
Restricted Stock Units
A summary of the Company’s RSU activity for LSC Communications employees, officers and directors as of December 31, 2018 and 2019, and changes during the year ended December 31, 2019, is presented below.
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
Shares |
|
|
Average Grant |
|
||
|
|
|
(thousands) |
|
|
Date Fair Value |
|
||
|
Nonvested at December 31, 2018 |
|
|
897 |
|
|
$ |
19.65 |
|
|
Granted |
|
|
927 |
|
|
|
6.28 |
|
|
Vested |
|
|
(338 |
) |
|
|
25.59 |
|
|
Forfeited |
|
|
(182 |
) |
|
|
10.15 |
|
|
Nonvested at December 31, 2019 |
|
|
1,304 |
|
|
$ |
9.93 |
|
F-45
During the year ended December 31, 2019, 926,870 RSUs were granted to certain executive officers and senior management. The shares are subject to time-based vesting and will cliff vest on February 25, 2022. As of December 31, 2019, the total potential payout for the awards granted during the year ended December 31, 2019 is 810,780 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 $4 million, $6 million and $9 million for the years ended December 31, 2019, 2018 and 2017, respectively. As of December 31, 2019, there was $6 million of unrecognized share-based compensation expense related to approximately 1.3 million RSUs outstanding, with a weighted-average grant date fair value of $9.93, that are expected to vest over a weighted-average period of 1.7 years.
Restricted Stock Awards
A summary of RSA activity for the Company’s employees as of December 31, 2018 and 2019, and changes during the year ended December 31, 2019, is presented below.
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
Shares |
|
|
Average Grant |
|
||
|
|
|
(thousands) |
|
|
Date Fair Value |
|
||
|
Nonvested at December 31, 2018 |
|
|
45 |
|
|
$ |
26.26 |
|
|
Vested |
|
|
(42 |
) |
|
|
26.26 |
|
|
Forfeited |
|
|
(3 |
) |
|
|
26.26 |
|
|
Nonvested at December 31, 2019 |
|
|
— |
|
|
$ |
— |
|
Compensation expense related to RSAs was $1 million for each of the years ended December 31, 2019, 2018 and 2017.
Performance Restricted Stock
A summary of PRS activity for the Company’s employees as of December 31, 2018 and 2019, and changes during the year ended December 31, 2019, is presented below.
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
Shares |
|
|
Average Grant |
|
||
|
|
|
(thousands) |
|
|
Date Fair Value |
|
||
|
Nonvested at December 31, 2018 |
|
|
133 |
|
|
$ |
27.16 |
|
|
Vested |
|
|
(89 |
) |
|
|
26.26 |
|
|
Forfeited |
|
|
(11 |
) |
|
|
28.94 |
|
|
Nonvested at December 31, 2019 |
|
|
33 |
|
|
$ |
28.94 |
|
During the years ended December 31, 2017 and 2016, 44,760 and 266,072 shares of PRS were granted to certain executive officers, payable upon the achievement of certain established performance targets. The performance periods for the shares awarded in 2017 and 2016 are January 1, 2017 to December 31, 2017 and October 1, 2016 to September 30, 2019, respectively. In addition to being subject to achievement of the performance target, the shares awarded in 2017 are also subject to time-based vesting on March 2, 2020. In addition to being subject to achievement of the performance target, the shares awarded in 2016 are also subject to time-based vesting in 3 even tranches on October 1, 2017, October 1, 2018 and October 1, 2019. 88,694 shares vested on October 2, 2019. For all awards, the performance-based vesting and the time-based vesting must be met for the PRS to vest.
The fair value of these awards was determined on the date of grant based on the Company’s stock price. These awards are subject to forfeiture upon termination of employment prior to vesting, subject in some cases to early vesting upon specified events, including death, permanent disability or retirement of the grantee or change of control of the Company.
F-46
Compensation expense for the awards granted during the year ended December 31, 2017 is being recognized based on an estimated payout of 33,370 shares. Compensation expense for the awards granted during the year ended December 31, 2016 was recognized based on a payout of 266,072 shares. Compensation expense related to PRS for the years ended December 31, 2019, 2018 and 2017 was $2 million, $3 million and $3 million, respectively. As of December 31, 2019, there was a de minimis amount of unrecognized compensation expense related to PRS, which is expected to be recognized over a weighted average period of 0.2 years.
Performance Share Units
A summary of PSU activity for the Company’s employees as of December 31, 2018 and 2019, and changes during the year ended December 31, 2019, is presented below.
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
Shares |
|
|
Average Grant |
|
||
|
|
|
(thousands) |
|
|
Date Fair Value |
|
||
|
Nonvested at December 31, 2018 |
|
|
258 |
|
|
$ |
13.85 |
|
|
Forfeited |
|
|
(27 |
) |
|
|
13.68 |
|
|
Nonvested at December 31, 2019 |
|
|
231 |
|
|
$ |
13.87 |
|
There were no shares granted in 2019. Shares granted in 2018 and 2017 consisted of 248,583 and 28,520 PSUs, respectively, granted during the years ended December 31, 2018 and 2017 to certain members of senior management, respectively, payable upon the achievement of certain established performance targets. As of December 31, 2019, compensation expense for the PSUs granted in 2017 is being recognized based on an estimated payout of 24,612 shares. As of December 31, 2019, no compensation expense is being recognized for the PSUs granted in 2018 due to the Company’s expected performance against the target. 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.
There was a de minimis amount and $1 million of compensation expense related to PSUs for each of the years ended December 31, 2019 and 2018, respectively. As of December 31, 2019, there was a de minimis amount of unrecognized compensation expense related to PSUs granted in 2017, which is expected to be recognized over a weighted average period of 0.2 years. There is no unearned compensation as of December 31, 2019 related to PSUs granted in 2018.
Note 19. Segment Information
As a result of the Company’s segment analysis in the fourth quarter of 2019, Mexico met the requirements to be classified as a reportable segment (previously included as a non-reportable segment). All prior year amounts have been reclassified to conform to the Company’s current reporting structure.
The Company’s segment and product and service offerings are summarized below:
Magazines, Catalogs and Logistics
The Magazines, Catalogs and Logistics segment primarily produces magazines and catalogs and provides logistics solutions to the Company and other third parties. The segment also provides certain other print-related services, including mail services. The segment has operations primarily in the U.S. The Magazines, Catalogs and Logistics segment is divided into two reporting units: magazines and catalogs; and logistics. The Magazines, Catalogs and Logistics segment accounted for approximately 47% of the Company’s consolidated net sales in 2019.
F-47
Book
The Book segment produces books for publishers primarily in the U.S. The segment also provides supply-chain management services and warehousing and fulfillment services, as well as e-book formatting for book publishers. The Book segment accounted for approximately 30% of the Company’s consolidated net sales in 2019.
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. The Office Products segment accounted for approximately 16% of the Company’s consolidated net sales in 2019.
Mexico
Mexico produces magazines, catalogs, statements, forms, and labels. The Mexico segment accounted for approximately 3% of the Company’s net sales in 2019.
Other
The Other grouping consists of the following non-reportable segments: Directories, Print Management and Europe. Print Management provides outsourced print procurement and management services. Prior to the Company’s disposal of its European printing business in the third quarter of 2018, Europe produced magazines, catalogs and directories and provided packaging and pre-media services. The Other grouping consists of approximately 4% of the Company’s consolidated net sales in 2019.
Corporate
Corporate consists of unallocated selling, general and administrative activities and associated expenses including executive, legal, finance, communications, certain facility costs and LIFO inventory provisions. In addition, share-based compensation expense is included in Corporate and not allocated to the operating segments.
Information by Segment
The Company has disclosed income (loss) from operations as the primary measure of segment earnings (loss). This is the measure of profitability used by the Company’s chief operating decision-maker and is most consistent with the presentation of profitability reported with the consolidated financial statements.
|
|
|
|
|
|
|
Income (Loss) |
|
|
|
|
|
|
Depreciation |
|
|
|
|
|
||
|
Year Ended |
|
Net |
|
|
from |
|
|
Assets of |
|
|
and |
|
|
Capital |
|
|||||
|
December 31, 2019 |
|
Sales |
|
|
Operations |
|
|
Operations |
|
|
Amortization |
|
|
Expenditures |
|
|||||
|
Magazines, Catalogs and Logistics |
|
$ |
1,559 |
|
|
$ |
(114 |
) |
|
$ |
645 |
|
|
$ |
54 |
|
|
$ |
35 |
|
|
Book |
|
|
1,011 |
|
|
|
(36 |
) |
|
|
482 |
|
|
|
49 |
|
|
|
30 |
|
|
Office Products |
|
|
517 |
|
|
|
42 |
|
|
|
275 |
|
|
|
12 |
|
|
|
2 |
|
|
Mexico |
|
|
91 |
|
|
|
14 |
|
|
|
69 |
|
|
|
4 |
|
|
|
1 |
|
|
Total reportable segments |
|
|
3,178 |
|
|
|
(94 |
) |
|
|
1,471 |
|
|
|
119 |
|
|
|
68 |
|
|
Other |
|
|
149 |
|
|
|
7 |
|
|
|
29 |
|
|
|
1 |
|
|
|
— |
|
|
Corporate |
|
|
(1 |
) |
|
|
(70 |
) |
|
|
149 |
|
|
|
— |
|
|
|
3 |
|
|
Total operations |
|
$ |
3,326 |
|
|
$ |
(157 |
) |
|
$ |
1,649 |
|
|
$ |
120 |
|
|
$ |
71 |
|
|
|
F-48
|
|
|
|
|
|
|
Income (loss) |
|
|
|
|
|
|
Depreciation |
|
|
|
|
|
||
|
Year Ended |
|
Net |
|
|
from |
|
|
Assets of |
|
|
and |
|
|
Capital |
|
|||||
|
December 31, 2018 |
|
Sales |
|
|
Operations |
|
|
Operations |
|
|
Amortization |
|
|
Expenditures |
|
|||||
|
Magazines, Catalogs and Logistics |
|
$ |
1,767 |
|
|
$ |
(31 |
) |
|
$ |
726 |
|
|
$ |
62 |
|
|
$ |
24 |
|
|
Book |
|
|
1,055 |
|
|
|
58 |
|
|
|
572 |
|
|
|
52 |
|
|
|
31 |
|
|
Office Products |
|
|
562 |
|
|
|
40 |
|
|
|
298 |
|
|
|
13 |
|
|
|
1 |
|
|
Mexico |
|
|
97 |
|
|
|
13 |
|
|
|
73 |
|
|
|
4 |
|
|
|
1 |
|
|
Total reportable segments |
|
|
3,481 |
|
|
|
80 |
|
|
|
1,669 |
|
|
|
131 |
|
|
|
57 |
|
|
Other |
|
|
347 |
|
|
|
13 |
|
|
|
5 |
|
|
|
6 |
|
|
|
2 |
|
|
Corporate |
|
|
(2 |
) |
|
|
(51 |
) |
|
|
80 |
|
|
|
1 |
|
|
|
4 |
|
|
Total operations |
|
$ |
3,826 |
|
|
$ |
42 |
|
|
$ |
1,754 |
|
|
$ |
138 |
|
|
$ |
63 |
|
|
|
|
|
|
|
|
Income (loss) |
|
|
|
|
|
|
Depreciation |
|
|
|
|
|
||
|
Year Ended |
|
Net |
|
|
from |
|
|
Assets of |
|
|
and |
|
|
Capital |
|
|||||
|
December 31, 2017 |
|
Sales |
|
|
Operations |
|
|
Operations |
|
|
Amortization |
|
|
Expenditures |
|
|||||
|
Magazines, Catalogs and Logistics |
|
$ |
1,583 |
|
|
$ |
(73 |
) |
|
$ |
780 |
|
|
$ |
72 |
|
|
$ |
24 |
|
|
Book |
|
|
1,022 |
|
|
|
62 |
|
|
|
553 |
|
|
|
60 |
|
|
|
13 |
|
|
Office Products |
|
|
495 |
|
|
|
42 |
|
|
|
377 |
|
|
|
15 |
|
|
|
5 |
|
|
Mexico |
|
|
98 |
|
|
|
14 |
|
|
|
74 |
|
|
|
3 |
|
|
|
6 |
|
|
Total reportable segments |
|
|
3,198 |
|
|
|
45 |
|
|
|
1,784 |
|
|
|
150 |
|
|
|
48 |
|
|
Other |
|
|
405 |
|
|
|
14 |
|
|
|
148 |
|
|
|
8 |
|
|
|
4 |
|
|
Corporate |
|
|
— |
|
|
|
(78 |
) |
|
|
82 |
|
|
|
2 |
|
|
|
8 |
|
|
Total operations |
|
$ |
3,603 |
|
|
$ |
(19 |
) |
|
$ |
2,014 |
|
|
$ |
160 |
|
|
$ |
60 |
|
Corporate assets primarily consisted of the following items at December 31, 2019, 2018 and 2017:
|
|
|
2019 |
|
|
2018 |
|
|
2017 |
|
|||
|
Cash and cash equivalents |
|
$ |
80 |
|
|
$ |
11 |
|
|
$ |
12 |
|
|
Software |
|
|
17 |
|
|
|
19 |
|
|
|
17 |
|
|
Long-term investments |
|
|
16 |
|
|
|
14 |
|
|
|
13 |
|
|
Property, plant and equipment, net |
|
|
15 |
|
|
|
14 |
|
|
|
14 |
|
|
Prepaid expenses and other current assets |
|
|
15 |
|
|
|
12 |
|
|
|
10 |
|
|
Receivables, less allowances for doubtful accounts |
|
|
14 |
|
|
|
17 |
|
|
|
19 |
|
|
Right-of-use assets for operating leases |
|
|
10 |
|
|
|
— |
|
|
|
— |
|
|
Deferred income tax assets, net of valuation allowance |
|
|
1 |
|
|
|
22 |
|
|
|
19 |
|
|
LIFO reserves |
|
|
(46 |
) |
|
|
(52 |
) |
|
|
(57 |
) |
Refer to Note 5, Leases, for information on the Company’s adoption of ASC 842 on January 1, 2019.
Restructuring, impairment and other charges by segment for the year ended December 31, 2019, 2018 and 2017 are described in Note 10, Restructuring, Impairment and Other Charges.
F-49
Note 20. Geographic Areas
The table below presents net sales and long-lived assets by geographic region.
|
|
|
North America (b) |
|
|
Europe |
|
|
Mexico |
|
|
Consolidated |
|
||||
|
2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
3,176 |
|
|
$ |
52 |
|
|
$ |
98 |
|
|
$ |
3,326 |
|
|
Long-lived assets (a) |
|
|
487 |
|
|
|
— |
|
|
|
30 |
|
|
|
517 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
3,495 |
|
|
$ |
225 |
|
|
$ |
106 |
|
|
$ |
3,826 |
|
|
Long-lived assets (a) |
|
|
571 |
|
|
|
— |
|
|
|
30 |
|
|
|
601 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
3,226 |
|
|
$ |
271 |
|
|
$ |
106 |
|
|
$ |
3,603 |
|
|
Long-lived assets (a) |
|
|
607 |
|
|
|
32 |
|
|
|
36 |
|
|
|
675 |
|
|
|
(a) |
Includes net property, plant and equipment and other noncurrent assets. |
|
|
(b) |
North America includes the United States and Canada. |
As explained in Note 3, Business Combinations and Disposition, the Company completed the sale of its European printing business (formerly known as the Europe segment) on September 28, 2018. The Company’s Office Products segment maintains operations in Europe.
Note 21. 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. RRD’s ownership was initially retained on October 1, 2016 as a result of RRD’s separation into three separate independent publicly-traded companies, which included LSC Communications and Donnelley Financial Solutions.
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.
There were cost of sales of $51 million for the three months ended March 31, 2017 related to freight, logistics and premedia services purchased from RRD. This amount is included in the consolidated statement of operations.
Note 22. New Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2016-13 “Financial Instruments-Credit Losses (Topic 326)” (“ASU 2016-13”). ASU 2016-13 changes the accounting for credit losses on financial instruments, including accounts receivable. The standard will require the Company to measure expected credit losses on trade receivables based on historical experience, current conditions, and reasonable forecasts. ASU 2016-13 is effective in the first quarter of 2020. Upon adoption of ASU 2016-13, the Company is required to recognize an allowance for doubtful accounts on all accounts receivable balances, including unbilled accounts receivables, even if the risk of loss is remote. Based upon the balances that exist as of December 31, 2019, the Company will record a de minimis increase to its allowance for doubtful accounts in the first quarter of 2020.
F-50
In August 2018, the FASB issued Accounting Standards Update No. 2018-13 “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”). ASU modifies the disclosure requirements for fair value measurements. ASU 2018-13 is effective in the first quarter of 2020. The Company does not anticipate a significant impact.
In August 2018, the FASB issued Accounting Standards Update No. 2018-14 “Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans” (“ASU 2018-14”). ASU 2018-14 modifies the annual disclosure requirements for employers that sponsor defined benefit pension plans. ASU 2018-14 is effective for 2020 year-end disclosures. Early adoption of ASU 2018-14 is permitted; however, the Company plans to adopt the standard for the 2020 year-end disclosures. The Company does not anticipate a significant impact.
In August 2018, the FASB issued Accounting Standards Update No. 2018-15 “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract” (“ASU 2018-15”). ASU 2018-15 aligns the accounting for implementation costs for cloud computing arrangements with the accounting for costs involved in implementing an internal-use software license. ASU 2018-15 is effective in the first quarter of 2020; however, as early adoption is permitted, the Company adopted ASU 2018-15 in the first quarter of 2019. The adoption did not have a material impact during the year ended December 31, 2019.
In December 2019, the FASB issued Accounting Standards Update No. 2019-12 Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes" ("ASU 2019-12"). ASU 2019-12 removes certain exceptions for intraperiod tax allocations and interim calculations, and adds guidance to reduce complexity in accounting for income taxes, including a modification in the guidance for franchise taxes that are partially based on income and recognizing deferred taxes for a subsequent step-up in the tax basis of goodwill. ASU 2019-12 is effective in the first quarter of 2021. Early adoption of ASU 2019-12 is permitted; however, the Company plans to adopt the standard in the first quarter of 2021. The Company is in the process of assessing the impact of the new standard.
F-51
UNAUDITED INTERIM FINANCIAL INFORMATION
(tabular amounts in millions, except per share data)
|
|
|
First Quarter |
|
|
Second Quarter |
|
|
Third Quarter |
|
|
Fourth Quarter |
|
|
Full Year |
|
|||||
|
2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
845 |
|
|
$ |
869 |
|
|
$ |
834 |
|
|
$ |
778 |
|
|
$ |
3,326 |
|
|
Cost of sales |
|
|
735 |
|
|
|
750 |
|
|
|
716 |
|
|
|
687 |
|
|
|
2,888 |
|
|
(Loss) income from operations |
|
|
(19 |
) |
|
|
(16 |
) |
|
|
(9 |
) |
|
|
(113 |
) |
|
|
(157 |
) |
|
Net (loss) income |
|
|
(126 |
) |
|
|
(24 |
) |
|
|
24 |
|
|
|
(169 |
) |
|
|
(295 |
) |
|
Net (loss) earnings per basic share |
|
|
(3.79 |
) |
|
|
(0.69 |
) |
|
|
0.69 |
|
|
|
(5.02 |
) |
|
|
(8.82 |
) |
|
Net (loss) earnings per diluted share |
|
|
(3.79 |
) |
|
|
(0.69 |
) |
|
|
0.69 |
|
|
|
(5.02 |
) |
|
|
(8.82 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
929 |
|
|
$ |
943 |
|
|
$ |
1,015 |
|
|
$ |
939 |
|
|
$ |
3,826 |
|
|
Cost of sales |
|
|
808 |
|
|
|
798 |
|
|
|
862 |
|
|
|
815 |
|
|
|
3,283 |
|
|
(Loss) income from operations |
|
|
(6 |
) |
|
|
18 |
|
|
|
41 |
|
|
|
(11 |
) |
|
|
42 |
|
|
Net (loss) income |
|
|
(11 |
) |
|
|
8 |
|
|
|
(4 |
) |
|
|
(16 |
) |
|
|
(23 |
) |
|
Net (loss) earnings per basic share |
|
|
(0.32 |
) |
|
|
0.24 |
|
|
|
(0.12 |
) |
|
|
(0.47 |
) |
|
|
(0.67 |
) |
|
Net (loss) earnings per diluted share |
|
|
(0.32 |
) |
|
|
0.23 |
|
|
|
(0.12 |
) |
|
|
(0.47 |
) |
|
|
(0.67 |
) |
The amounts above reflect the results of acquired businesses from the relevant acquisition dates and include the following significant items:
|
|
|
Pre-tax |
|
|
After-tax |
|
||||||||||||||||||||||||||||||||||
|
2019 |
|
First Quarter |
|
|
Second Quarter |
|
|
Third Quarter |
|
|
Fourth Quarter |
|
|
Full Year |
|
|
First Quarter |
|
|
Second Quarter |
|
|
Third Quarter |
|
|
Fourth Quarter |
|
|
Full Year |
|
||||||||||
|
Termination fee from Quad |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(45 |
) |
|
$ |
— |
|
|
$ |
(45 |
) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(34 |
) |
|
$ |
— |
|
|
$ |
(34 |
) |
|
Settlement of retirement benefit obligations |
|
|
135 |
|
|
|
1 |
|
|
|
1 |
|
|
|
— |
|
|
|
137 |
|
|
|
101 |
|
|
|
— |
|
|
|
1 |
|
|
|
— |
|
|
|
102 |
|
|
Gain on the sale of fixed assets |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(26 |
) |
|
|
(26 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(19 |
) |
|
|
(19 |
) |
|
Expenses related to acquisitions, the Merger Agreement and dispositions |
|
|
7 |
|
|
|
5 |
|
|
|
10 |
|
|
|
1 |
|
|
|
23 |
|
|
|
6 |
|
|
|
6 |
|
|
|
4 |
|
|
|
— |
|
|
|
16 |
|
|
Restructuring, impairment and other charges-net |
|
|
13 |
|
|
|
24 |
|
|
|
10 |
|
|
|
101 |
|
|
|
148 |
|
|
|
13 |
|
|
|
20 |
|
|
|
3 |
|
|
|
86 |
|
|
|
122 |
|
|
|
|
Pre-tax |
|
|
After-tax |
|
||||||||||||||||||||||||||||||||||
|
2018 |
|
First Quarter |
|
|
Second Quarter |
|
|
Third Quarter |
|
|
Fourth Quarter |
|
|
Full Year |
|
|
First Quarter |
|
|
Second Quarter |
|
|
Third Quarter |
|
|
Fourth Quarter |
|
|
Full Year |
|
||||||||||
|
Purchase accounting adjustments |
|
$ |
3 |
|
|
$ |
— |
|
|
$ |
1 |
|
|
$ |
(1 |
) |
|
$ |
3 |
|
|
$ |
2 |
|
|
$ |
— |
|
|
$ |
1 |
|
|
$ |
(1 |
) |
|
$ |
2 |
|
|
Acquisition, merger and disposition-related expenses |
|
|
1 |
|
|
|
1 |
|
|
|
2 |
|
|
|
6 |
|
|
|
10 |
|
|
|
— |
|
|
|
1 |
|
|
|
2 |
|
|
|
5 |
|
|
|
8 |
|
|
Restructuring, impairment and other charges-net |
|
|
6 |
|
|
|
11 |
|
|
|
1 |
|
|
|
17 |
|
|
|
35 |
|
|
|
4 |
|
|
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8 |
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1 |
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14 |
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27 |
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F-52
INDEX TO EXHIBITS
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4.2 |
Description of the LSC Communications, Inc. Securities Registered under Section 12 of the Exchange Act (filed herewith) |
E-1
E-2
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101.INS |
XBRL Instance Document – The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
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101.SCH |
Inline XBRL Taxonomy Extension Schema Document |
E-3
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101.CAL |
Inline XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF |
Inline XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB |
Inline XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE |
Inline XBRL Taxonomy Extension Presentation Linkbase Document |
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104 |
The cover page from the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, has been formatted in Inline XBRL. |
* Management contract or compensatory plan or arrangement
E-4
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 2nd day of March 2020.
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LSC COMMUNICATIONS, INC. |
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By: |
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/ S / Andrew B. Coxhead |
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Andrew B. Coxhead Chief Financial Officer (Principal Financial Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated, on the 2nd day of March 2020.
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Signature and Title |
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Signature and Title |
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/ S / THOMAS J. QUINLAN III |
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/ S / JUDITH H. HAMILTON * |
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Thomas J. Quinlan III |
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Judith H. Hamilton |
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President and Chief Executive Officer |
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Director |
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Chairman of the Board, Director |
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(Principal Executive Officer) |
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/ S / ANDREW B. COXHEAD |
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/ S / FRANCIS J. JULES * |
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Andrew B. Coxhead |
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Francis J. Jules |
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Chief Financial Officer |
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Director |
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(Principal Financial Officer) |
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/ S / SARAH L. HOXIE |
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/ S / THOMAS F. O’TOOLE * |
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Sarah L. Hoxie |
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Thomas F. O’Toole |
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Corporate Controller |
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Director |
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(Principal Accounting Officer) |
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/ S / M. SHÂN ATKINS * |
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/ S / DOUGLAS W. STOTLAR * |
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M. Shân Atkins |
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Douglas W. Stotlar |
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Director |
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Director |
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/ S / MARGARET A. BREYA * |
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/ S / SHIVAN S. SUBRAMANIAM * |
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Margaret A. Breya |
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Shivan S. Subramaniam |
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Director |
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Director |
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By: |
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/ S / Suzanne S. Bettman |
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Suzanne S. Bettman As Attorney-in-Fact |
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* |
By Suzanne S. Bettman as Attorney-in-Fact pursuant to Powers of Attorney executed by the directors listed above, which Powers of Attorney have been filed with the Securities and Exchange Commission |
S-1