See Notes to the Condensed Consolidated and Combined Financial Statements
Notes to Condensed Consolidated and Combined Financial Statements (Unaudited)
For the Three and Nine Months Ended September 30, 2017 and 2016
(tabular amounts in millions, except per share data)
Note 1. Overview and B
asis of Presentation
Description of Business and Separation
The principal business of LSC Communications, Inc., a Delaware corporation, and its direct or indirect wholly-owned subsidiaries (“LSC Communications,” “the Company,” “we,” “our” and “us”) is to offer a broad scope of traditional and digital print, print-related services and office products. The Company serves the needs of publishers, merchandisers and retailers worldwide with a service offering that includes
e-services, warehousing and fulfillment and supply chain management. The Company utilizes a broad portfolio of technology capabilities coupled with consultative attention to clients' needs to increase speed to market, reduce costs, provide postal savings to customers and improve efficiencies.
The Company prints magazines, catalogs, retail inserts, books, and directories and its office products offerings include filing products, note-taking products, binder products, forms, and envelopes.
On October 1, 2016 (the “separation date”), R. R. Donnelley & Sons Company (“RRD” or the “Parent”) completed the previously announced separation (the “separation”) into three separate independent publicly-traded companies: (i) its publishing and retail-centric print services and office products business (“LSC Communications”); (ii) its financial communications services business (“Donnelley Financial Solutions, Inc.” or “Donnelley Financial”) and (iii) a global, customized multichannel communications management company, which is the business of RRD after the separation. To effect the separation, RRD undertook a series of transactions to separate net assets and legal entities. RRD completed the distribution (the “distribution”) of 80.75%, of the outstanding common stock of LSC Communications and Donnelley Financial to RRD stockholders on October 1, 2016. RRD retained a 19.25% ownership stake in both LSC Communications and Donnelley Financial. On October 1, 2016, RRD stockholders of record as of the close of business on September 23, 2016 (“the record date”) received one share of LSC Communications common stock and one share of Donnelley Financial common stock for every eight shares of RRD common stock held as of the record date.
On March 28, 2017, RRD completed the sale of approximately 6.2 million shares of LSC Communications common stock, representing its entire 19.25% retained ownership
.
In connection with the over-allotment option granted to the underwriters as part of the secondary sale by RRD, LSC Communications also sold approximately 0.9 million shares of common stock, receiving proceeds of $18 million, which were used for general corporate purposes.
In connection with the separation, LSC Communications, RRD and Donnelley Financial entered into commercial arrangements, transition services agreements and various other agreements related to the separation that remain in effect.
Final copies of such agreements are filed as exhibits to
this quarterly report on Form 10-Q.
Basis of Presentation
The accompanying condensed consolidated and combined financial statements reflect the consolidated balance sheets and statements of operations of the Company as an independent, publicly traded company for the periods after the separation, and the condensed combined balance sheets and statements of operations of the Company as a combined reporting entity of RRD for the periods prior to the separation.
The condensed consolidated and combined financial statements include the balance sheets, statements of operations and cash flows in conformity with accounting principles generally accepted in the United States (“GAAP”). These unaudited condensed consolidated and combined interim financial statements include estimates and assumptions of management that affect the amounts reported in the condensed consolidated and combined financial statements. Actual results could differ from these estimates.
Certain prior year amounts were restated to conform to the Company’s current consolidated and combined statement of operations classifications.
On October 1, 2016, the Company recorded certain separation-related adjustments primarily for certain assets and liabilities that were distributed as part of the separation from RRD. The adjustments primarily related to the assumption of certain pension obligations and plan assets in single employer plans for the Company’s employees and certain former employees and retirees of RRD. Refer to Note 8,
Equity
, for information on the separation-related adjustments recorded during the nine months ended September 30, 2017. Additional separation-related adjustments may be recorded in future periods.
7
LSC Communications, Inc.
Notes to Condensed Consolidated and Combined Financial Statements (Unaudited)
For the Three and Nine Months Ended September 30, 2017 and 2016
(tabular amounts in millions, except per share data)
Prior to the Separation
The condensed combined financial statements were prepared on a stand-alone basis and were derived from RRD’s consolidated financial statements and accounting records. They include certain expenses of RRD that were allocated to LSC Communications for certain corporate functions, including healthcare and pension benefits, information technology, finance, legal, human resources, internal audit, treasury, tax, investor relations and executive oversight. These expenses were allocated to the Company on the basis of direct usage, when available, with the remainder allocated on a pro rata basis by revenue, employee headcount, or other measures. The Company considered the allocation methodologies and results to be reasonable for all periods presented, however, these allocations may not be indicative of the actual expenses that LSC Communications would have incurred as an independent public company or the costs it may incur in the future. The income tax amounts in these combined financial statements were calculated based on a separate income tax return methodology and presented as if the Company’s operations were separate taxpayers in the respective jurisdictions.
All intercompany transactions and accounts have been eliminated. All intracompany transactions between LSC Communications, RRD and Donnelley Financial are considered to be effectively settled in the condensed consolidated and combined financial statements at the time the transaction is recorded. The total net effect of the settlement of these intracompany transactions is reflected in the condensed combined statement of cash flows as a financing activity.
Note 2. Business Combinations
2017 Acquisitions
On September 7, 2017, the Company acquired Publishers Press, a printing solutions provider with capabilities such as web-offset printing, prepress and distribution services for magazines and retail brands. The acquisition enhanced the Company’s printing capabilities. The total purchase price was $70 million in cash, of which $1 million was recorded in goodwill. For the three and nine months ended September 30, 2017, the Company’s condensed consolidated statement of operations included net sales of $11 million and a de minimis amount of income from operations
attributable to the acquisition of Publishers Press.
On August 21, 2017, the Company acquired the assets of NECI, LLC (“NECI”),
a supplier of commodity and specialty filing supplies
. The acquisition enhanced the Company’s office products offerings. The total purchase price was $5 million in cash, of which $1 million was recorded in goodwill. For the three and nine months ended September 30, 2017, the Company’s condensed consolidated statement of operations included net sales of $1 million and a de minimis amount of loss from operations attributable to the acquisition of NECI.
On
August 17, 2017, the Company acquired CREEL Printing (“CREEL”), an offset and digital printing company. The acquisition enhanced the capabilities of the Company’s offset and digital production platform and brought enhanced technologies to support our clients’ evolving needs, specifically in the magazine media and retail marketing industries. CREEL’s capabilities include full-color web and sheetfed printing, regionally distributed variable digital production, large-format printing, and integrated digital solutions. The purchase price, which included the Company’s estimate of contingent consideration, was $78 million in cash, of which $25 million was recorded in goodwill. Contingent consideration in the form of cash payments up to $10 million will be due to the sellers if and to the extent certain financial targets are achieved. As of the acquisition date, the Company estimated the fair value of the contingent consideration to be $1 million using a probability weighting of the potential payouts. For the three and nine months ended September 30, 2017, the Company’s condensed consolidated statement of operations included net sales of $18 million and income from operations of $3 million attributable to the acquisition of CREEL.
On July 28, 2017, the Company acquired Fairrington Transportation Corp., F.T.C. Transport, Inc. and F.T.C. Services, Inc. (“Fairrington”), a
full-service, printer-independent mailing logistics provider in the United States. The acquisition enhanced the Company’s logistics service offering. The purchase price was $20 million in cash and approximately 1.0 million shares of LSC Communications common stock, for a total transaction value of $40 million. Of the total purchase price, $22 million was recorded in goodwill.
For the three and nine months ended September 30, 2017, the Company’s condensed consolidated statement of operations included net sales of $11 million and a de minimis amount of income from operations attributable to the acquisition of Fairrington.
8
LSC Communications, Inc.
Notes to Condensed Consolidated and Combined Financial Statements (Unaudited)
For the Three and Nine Months Ended September 30, 2017 and 2016
(tabular amounts in millions, except per share data)
On March 1, 2017, the Company acquired Hudson
Yards Studios (“HudsonYards”), a digital and print premedia production company that provides
high-quality creative retouching, computer-generated imagery, mechanical creation, press-ready file preparation, and interactive production services. The acquisit
ion enhanced the Company’s digital and premedia capabilities. The purchase price for HudsonYards was $3 million in cash, of which $2 million was recorded in goodwill.
For the three months ended September 30, 2017, the Company’s condensed consolidated sta
tement of operations included net sales of $2 million and a de minimis operating loss attributable to the acquisition of HudsonYards
.
For the nine months ended September 30, 2017, the Company’s condensed consolidated statement of operations included net s
ales of $5 million and a loss from operations of $1 million attributable to the acquisition of HudsonYards
.
The operations of Publishers Press, CREEL, Fairrington, and HudsonYards are included in the Print segment; specifically the magazines, catalogs and retail inserts reporting unit. The operations of NECI are included in the Office Products segment.
The acquisitions were recorded by allocating the cost of the acquisitions to the assets acquired, including other intangible assets, based on their estimated fair values at the acquisition date. The excess of the cost of the acquisitions over the net amounts assigned to the fair value of the assets acquired was recorded in goodwill. The goodwill is primarily attributable to the synergies expected to arise as a result of the acquisitions.
The preliminary tax deductible goodwill related to the Publishers Press, NECI, CREEL, Fairrington, and HudsonYards acquisitions was $33 million.
Based on the acquisition-date valuations, the preliminary purchase price allocations for Publishers Press, CREEL and Fairrington in the Print segment are as follows:
|
|
Publishers Press
|
|
|
CREEL
|
|
|
Fairrington
|
|
Accounts Receivable
|
|
$
|
25
|
|
|
$
|
13
|
|
|
$
|
6
|
|
Inventories
|
|
|
13
|
|
|
|
5
|
|
|
|
—
|
|
Prepaid expenses and other current assets
|
|
|
2
|
|
|
|
1
|
|
|
|
—
|
|
Property, plant and equipment
|
|
|
36
|
|
|
|
19
|
|
|
|
6
|
|
Other intangible assets
|
|
|
—
|
|
|
|
22
|
|
|
|
17
|
|
Other noncurrent assets
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
Goodwill
|
|
|
1
|
|
|
|
25
|
|
|
|
22
|
|
Accounts payable and accrued liabilities
|
|
|
(8
|
)
|
|
|
(7
|
)
|
|
|
(4
|
)
|
Deferred taxes-net
|
|
|
—
|
|
|
|
—
|
|
|
|
(9
|
)
|
Total purchase price, net of cash acquired
|
|
|
69
|
|
|
|
78
|
|
|
|
39
|
|
Less: value of common stock issued
|
|
|
—
|
|
|
|
—
|
|
|
|
20
|
|
Net cash paid:
|
|
$
|
69
|
|
|
$
|
78
|
|
|
$
|
19
|
|
Given the historical valuations of the magazines, catalogs and retail inserts reporting unit that have resulted in goodwill impairment in prior years, combined with the change in the composition of the carrying value of the reporting unit due to the recent acquisitions, the Company determined it necessary to perform an interim goodwill impairment review on this reporting unit as of September 30, 2017.
As a result, for the three months ended September, 2017, the Company recorded a non-cash charge of $55 million to recognize the impairment of goodwill for the magazines, catalogs and retail inserts reporting unit in the Print segment. Refer to Note 6,
Restructuring, Impairment and Other Charges
, for further details on this non-cash charge.
The purchase price allocations for Publishers Press, NECI, CREEL, and Fairrington are preliminary because the valuations necessary to assess the fair values of the net assets and liabilities acquired are still in process. The primary areas that are not yet finalized relate to the valuation of certain assets and liabilities. The final purchase price allocations may differ from what is currently reflected in the condensed consolidated financial statements, and could affect goodwill impairment in the future.
9
LSC Communications, Inc.
Notes to Condensed Consolidated and Combined Financial Statements (Unaudited)
For the Three and Nine Months Ended September 30, 2017 and 2016
(tabular amounts in millions, except per share data)
The fair values of other intangible assets and goodwill associated with the acquisitions were determined to be Level 3 under the fair value hierarchy. The following table presents the fair value, valuation techniques and related
unobservable inputs for these Level 3 measurements:
|
Fair Value
|
|
|
Valuation Technique
|
|
Unobservable Input
|
|
Range
|
Customer relationships
|
$
|
36
|
|
|
Relief-from-royalty-method
|
|
Growth rate
|
|
(3.0)% - 0.9%
|
|
|
|
|
|
|
|
Attrition rate
|
|
6.0% - 6.5%
|
|
|
|
|
|
|
|
Discount rate
|
|
15.0% - 23.0%
|
Trade names
|
|
3
|
|
|
Multi-period excess earnings method
|
|
Royalty rate
|
|
1.0% - 1.5%
|
|
|
|
|
|
|
|
Discount rate
|
|
15.0% - 19.0%
|
The fair values of property, plant and equipment associated with the acquisitions were determined to be Level 3 under the fair value hierarchy. Property, plant and equipment values were estimated using either the cost or market approach, if a secondhand market existed.
For the three and nine months ended September 30, 2017, the Company recorded $2 million and $3 million of acquisition-related expenses associated with the completed and contemplated acquisitions described above within selling, general and administrative expenses in the condensed consolidated statements of operations.
2016 Acquisition
On December 2, 2016, the Company acquired Continuum Management Company, LLC (“Continuum”),
a print procurement and management business. The acquisition enhanced the Company’s print management’s capabilities. The Company paid $7 million in
cash in 2016.
An additional $2 million in cash was paid during the three months ended March 31, 2017 as part of a final working capital adjustment for a total purchase price of $9 million, of which $5 million was recorded in goodwill.
The operations of Continuum are included in the Print segment.
There were no acquisition-related expenses during the three and nine months ended September 30, 2016.
Pro forma results
The following unaudited pro forma financial information for the three and nine months ended September 30, 2017 and 2016 presents the condensed consolidated and combined statements of operations of the Company and the acquisitions described above, as if the acquisitions had occurred as of January 1 of the year prior to the acquisitions.
The unaudited pro forma financial information is not intended to represent or be indicative of the Company’s condensed consolidated and combined statements of operations that would have been reported had these acquisitions been completed as of the beginning of the period presented and should not be taken as indicative of the Company’s future condensed consolidated statements of operations.
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30
|
|
|
September 30
|
|
|
|
|
2017
|
|
|
|
2016
|
|
|
|
2017
|
|
|
|
2016
|
|
Net sales
|
|
$
|
978
|
|
|
$
|
1,052
|
|
|
$
|
2,808
|
|
|
$
|
3,034
|
|
Net (loss) income
|
|
|
(6
|
)
|
|
|
40
|
|
|
|
(8
|
)
|
|
|
97
|
|
Net (loss) earnings per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.18
|
)
|
|
$
|
1.20
|
|
|
$
|
(0.24
|
)
|
|
$
|
2.90
|
|
Diluted
|
|
$
|
(0.18
|
)
|
|
$
|
1.20
|
|
|
$
|
(0.24
|
)
|
|
$
|
2.90
|
|
10
LSC Communications, Inc.
Notes to Condensed Consolidated and Combined Financial Statements (Unaudited)
For the Three and Nine Months Ended September 30, 2017 and 2016
(tabular amounts in millions, except per share data)
The following table outlines unaudited pro forma financial information for the three and nine months ended September 30, 2017 and 2016:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30
|
|
|
September 30
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Amortization of purchased intangibles
|
|
$
|
5
|
|
|
$
|
5
|
|
|
$
|
15
|
|
|
$
|
16
|
|
Additionally, the nonrecurring pro forma adjustments affecting net income for the three and nine months ended September 30, 2017 and 2016 were as follows:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30
|
|
|
September 30
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Acquisition-related expenses, pre-tax
|
|
$
|
(1
|
)
|
|
$
|
—
|
|
|
$
|
(1
|
)
|
|
$
|
—
|
|
Restructuring, impairment and other charges
|
|
|
—
|
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
—
|
|
Inventory fair value adjustments, pre-tax
|
|
|
1
|
|
|
|
—
|
|
|
|
1
|
|
|
|
(1
|
)
|
Other pro forma adjustments, pre-tax
|
|
|
—
|
|
|
|
1
|
|
|
|
2
|
|
|
|
2
|
|
Income taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
|
(1
|
)
|
Note: A negative number in the table above represents a decrease to income in pro forma net income.
Note 3. Inventories
The components of the Company’s inventories, net of excess and obsolescence reserves for raw materials and finished goods, at September 30, 2017 and December 31, 2016 were as follows:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Raw materials and manufacturing supplies
|
|
$
|
121
|
|
|
$
|
100
|
|
Work in process
|
|
|
74
|
|
|
|
58
|
|
Finished goods
|
|
|
99
|
|
|
|
93
|
|
Last in, First out reserve ("LIFO")
|
|
|
(57
|
)
|
|
|
(58
|
)
|
Total
|
|
$
|
237
|
|
|
$
|
193
|
|
Note 4. Property, Plant and Equipment
The components of the Company’s property, plant and equipment at September 30, 2017 and December 31, 2016 were as follows:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Land
|
|
$
|
46
|
|
|
$
|
42
|
|
Buildings
|
|
|
783
|
|
|
|
762
|
|
Machinery and equipment
|
|
|
4,133
|
|
|
|
4,173
|
|
|
|
|
4,962
|
|
|
|
4,977
|
|
Accumulated depreciation
|
|
|
(4,350
|
)
|
|
|
(4,369
|
)
|
Total
|
|
$
|
612
|
|
|
$
|
608
|
|
During the three and nine months ended September 30, 2017, depreciation expense was $34 million and
$102 million, respectively. During the three and nine months ended September 30, 2016, depreciation expense was $35 million and $112 million, respectively.
11
LSC Communications, Inc.
Notes to Condensed Consolidated and Combined Financial Statements (Unaudited)
For the Three and Nine Months Ended September 30, 2017 and 2016
(tabular amounts in millions, except per share data)
Note 5. Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill for the nine months ended September 30, 2017 were as follows:
|
|
Print
|
|
|
Office Products
|
|
|
Total
|
|
Net book value as of December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
852
|
|
|
$
|
109
|
|
|
$
|
961
|
|
Accumulated impairment losses
|
|
|
(798
|
)
|
|
|
(79
|
)
|
|
|
(877
|
)
|
Total
|
|
|
54
|
|
|
|
30
|
|
|
|
84
|
|
Acquisitions
|
|
|
52
|
|
|
|
1
|
|
|
|
53
|
|
Impairment charges
|
|
|
(55
|
)
|
|
|
—
|
|
|
|
(55
|
)
|
Net book value as of September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
914
|
|
|
|
110
|
|
|
|
1,024
|
|
Accumulated impairment losses
|
|
|
(863
|
)
|
|
|
(79
|
)
|
|
|
(942
|
)
|
Total
|
|
$
|
51
|
|
|
$
|
31
|
|
|
$
|
82
|
|
During the three months ended September 30, 2017, the Company recorded a non-cash charge of $55 million to recognize the impairment of goodwill for the magazines, catalogs and retail inserts reporting unit in the Print segment. See Note 6,
Restructuring, Impairment and Other Charges
, for further discussion regarding this impairment charge.
The components of other intangible assets at September 30, 2017 and December 31, 2016 were as follows:
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Net Book
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Net Book
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Value
|
|
|
Amount
|
|
|
Amortization
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
242
|
|
|
$
|
(120
|
)
|
|
$
|
122
|
|
|
$
|
205
|
|
|
$
|
(109
|
)
|
|
$
|
96
|
|
Trade names
|
|
|
7
|
|
|
|
(3
|
)
|
|
|
4
|
|
|
|
5
|
|
|
|
(2
|
)
|
|
|
3
|
|
Total amortizable other intangible assets
|
|
|
249
|
|
|
|
(123
|
)
|
|
|
126
|
|
|
|
210
|
|
|
|
(111
|
)
|
|
|
99
|
|
Indefinite-lived trade names
|
|
|
32
|
|
|
|
—
|
|
|
|
32
|
|
|
|
32
|
|
|
|
—
|
|
|
|
32
|
|
Total other intangible assets
|
|
$
|
281
|
|
|
$
|
(123
|
)
|
|
$
|
158
|
|
|
$
|
242
|
|
|
$
|
(111
|
)
|
|
$
|
131
|
|
The Company recorded additions to other intangible assets of $39 million for acquisitions during the three months ended September 30, 2017.
The components of other intangible assets added during the three months ended September 30, 2017 were as follows:
|
|
September 30, 2017
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
|
Amortization Period
|
|
|
|
Amount
|
|
|
(years)
|
|
Customer relationships
|
|
$
|
36
|
|
|
|
10.6
|
|
Trade names (amortizable)
|
|
|
3
|
|
|
|
5.0
|
|
|
|
$
|
39
|
|
|
|
|
|
During the three and nine months ended September 30, 2017, amortization expense for other intangible assets was $4 million and $12 million, respectively. During the three and nine months ended September 30, 2016, amortization expense for other intangible assets was $4 million and $13 million, respectively.
12
LSC Communications, Inc.
Notes to Condensed Consolidated and Combined Financial Statements (Unaudited)
For the Three and Nine Months Ended September 30, 2017 and 2016
(tabular amounts in millions, except per share data)
The following table outlines the estimated annual amortization expense related to other intangible assets:
For the year ending December 31,
|
|
Amount
|
|
2017
|
|
$
|
17
|
|
2018
|
|
|
15
|
|
2019
|
|
|
15
|
|
2020
|
|
|
14
|
|
2021
|
|
|
13
|
|
2022 and thereafter
|
|
|
64
|
|
Total
|
|
$
|
138
|
|
Note 6. Restructuring, Impairment and Other Charges
For the three months ended September 30, 2017 and 2016, the Company recorded the following net restructuring, impairment and other charges:
Three Months Ended
September 30, 2017
|
|
Employee
Terminations
|
|
|
Other
Restructuring
Charges
|
|
|
Total
Restructuring
Charges
|
|
|
Impairment
|
|
|
Other
Charges
|
|
|
Total
|
|
Print
|
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
55
|
|
|
$
|
1
|
|
|
$
|
58
|
|
Corporate
|
|
|
—
|
|
|
|
2
|
|
|
|
2
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2
|
|
Total
|
|
$
|
—
|
|
|
$
|
4
|
|
|
$
|
4
|
|
|
$
|
55
|
|
|
$
|
1
|
|
|
$
|
60
|
|
Three Months Ended
September 30, 2016
|
|
Employee
Terminations
|
|
|
Other
Restructuring
Charges
|
|
|
Total
Restructuring
Charges
|
|
|
Impairment
|
|
|
Other
Charges
|
|
|
Total
|
|
Print
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
(1
|
)
|
|
$
|
1
|
|
|
$
|
1
|
|
Corporate
|
|
|
2
|
|
|
|
—
|
|
|
|
2
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2
|
|
Total
|
|
$
|
2
|
|
|
$
|
1
|
|
|
$
|
3
|
|
|
$
|
(1
|
)
|
|
$
|
1
|
|
|
$
|
3
|
|
For the nine months ended September 30, 2017 and 2016, the Company recorded the following net restructuring, impairment and other charges:
Nine Months Ended
September 30, 2017
|
|
Employee
Terminations
|
|
|
Other
Restructuring
Charges
|
|
|
Total
Restructuring
Charges
|
|
|
Impairment
|
|
|
Other
Charges
|
|
|
Total
|
|
Print
|
|
$
|
6
|
|
|
$
|
5
|
|
|
$
|
11
|
|
|
$
|
55
|
|
|
$
|
3
|
|
|
$
|
69
|
|
Office Products
|
|
|
1
|
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
Corporate
|
|
|
—
|
|
|
|
17
|
|
|
|
17
|
|
|
|
—
|
|
|
|
—
|
|
|
|
17
|
|
Total
|
|
$
|
7
|
|
|
$
|
22
|
|
|
$
|
29
|
|
|
$
|
55
|
|
|
$
|
3
|
|
|
$
|
87
|
|
Nine Months Ended
September 30, 2016
|
|
Employee
Terminations
|
|
|
Other
Restructuring
Charges
|
|
|
Total
Restructuring
Charges
|
|
|
Impairment
|
|
|
Other
Charges
|
|
|
Total
|
|
Print
|
|
$
|
2
|
|
|
$
|
4
|
|
|
$
|
6
|
|
|
$
|
—
|
|
|
$
|
3
|
|
|
$
|
9
|
|
Corporate
|
|
|
2
|
|
|
|
—
|
|
|
|
2
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2
|
|
Total
|
|
$
|
4
|
|
|
$
|
4
|
|
|
$
|
8
|
|
|
$
|
—
|
|
|
$
|
3
|
|
|
$
|
11
|
|
13
LSC Communications, Inc.
Notes to Condensed Consolidated and Combined Financial Statements (Unaudited)
For the Three and Nine Months Ended September 30, 2017 and 2016
(tabular amounts in millions, except per share data)
Restructuring and Impairm
ent Charges
For the three and nine months ended September 30, 2017, the Company incurred employee-related restructuring charges of a de minimis amount and $7 million for an aggregate of 516 employees, of whom 450 were terminated as of or prior to September 30, 2017.
These charges primarily related to one facility closure in the Print segment and the reorganization of certain business units.
The Company incurred other restructuring charges of $4 million and $22 million for the three and nine months ended September 30, 2017, respectively, primarily related to charges incurred as a result of a terminated supplier contract and the exit from certain operations and facilities.
As explained in Note 2,
Business Combinations
, the Company completed several acquisitions during the three months ended September 30, 2017, three of which are now included in the Company’s magazines, catalogs and retail inserts reporting unit, which is part of the Print segment. The goodwill arising from each acquisition was determined on a stand-alone basis for each particular transaction based on each transaction’s individual facts and circumstances, in accordance with ASC 805,
Business Combinations
. Per the guidance in ASC 805, goodwill was recognized on each transaction given that the consideration transferred for each transaction was in excess of the net amounts of the identifiable assets acquired and the liabilities assumed. Furthermore, the consideration transferred, the identifiable assets acquired and the liabilities assumed were all measured at the acquisition-date fair value, which is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction, between market participants, at the acquisition date.
In accordance with ASC 350,
Intangibles — Goodwill and Other
, the Company is required to test its goodwill for impairment annually, or more often if there is an indication that goodwill might be impaired. For purposes of the goodwill impairment test, goodwill is not tested based upon the individual transactions that gave rise to the goodwill, but rather based upon the reporting unit’s total goodwill and the characteristics of the reporting unit in which the goodwill resides. Therefore, the level at which goodwill is tested for impairment is different from the level that originally created the goodwill. In the Company’s case, the test is performed based upon the total carrying value of the magazines, catalogs and retail inserts reporting unit and that reporting unit’s total implied fair value. Carrying value is determined based upon the net book value of assets and liabilities required for the operations of the magazines, catalogs and retail inserts reporting unit, while fair value is determined based upon a discounted cash flows analysis of the magazines, catalogs and retail inserts reporting unit. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit.
The Company’s policy is to perform its annual test of goodwill for impairment as of October 31 of each year. Prior to the acquisitions completed within the last twelve months, the 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 magazines, catalogs and retail inserts reporting unit that have resulted in goodwill impairment in prior years, combined with the change in the composition of the carrying value of the reporting unit due to the recent acquisitions, the Company determined it necessary to perform an interim goodwill impairment review on this reporting unit as of September 30, 2017.
As a result of the interim goodwill impairment test, and consistent with prior goodwill impairment tests, the magazines, catalogs and retail inserts reporting unit’s fair value continued to be at a value below its carrying value. This is primarily due to the negative revenue trends experienced in recent years that are only partially offset by the impact of the new acquisitions. As such, the Company recorded a non-cash charge of $55 million during the three and nine months ended September 30, 2017 to recognize the impairment of goodwill in this reporting unit. 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 three and nine months ended September 30, 2016, the Company incurred other restructuring charges of $1 million and $4 million, respectively. Additionally, the three and nine months ended September 30, 2016 included net restructuring charges of $2 million and $4 million, respectively, for employee termination costs for an aggregate of 48 employees, substantially all of whom were terminated as of or prior to September 30, 2017. These charges primarily related to one facility closure in the Print segment and the reorganization of certain operations. The Company also recorded a reversal of previously recorded impairment charges of $1 million for the three months ended September 30, 2016. There was also a de minimis amount of net impairment charges during the nine months ended September 30, 2016.
14
LSC Communications, Inc.
Notes to Condensed Consolidated and Combined Financial Statements (Unaudited)
For the Three and Nine Months Ended September 30, 2017 and 2016
(tabular amounts in millions, except per share data)
Restructuring Reserve
The restructuring reserve as of December 31, 2016 and September 30, 2017, and changes during the nine months ended September 30, 2017, were as follows:
|
|
December 31, 2016
|
|
|
Restructuring
Charges
|
|
|
Foreign
Exchange and
Other
|
|
|
Cash
Paid
|
|
|
September 30,
2017
|
|
Employee terminations
|
|
$
|
8
|
|
|
$
|
7
|
|
|
$
|
—
|
|
|
$
|
(11
|
)
|
|
$
|
4
|
|
Multiemployer pension plan withdrawal
obligations
|
|
|
18
|
|
|
|
1
|
|
|
|
—
|
|
|
|
(3
|
)
|
|
|
16
|
|
Lease terminations and other
|
|
|
2
|
|
|
|
16
|
|
|
|
—
|
|
|
|
(14
|
)
|
|
|
4
|
|
Total
|
|
$
|
28
|
|
|
$
|
24
|
|
|
$
|
—
|
|
|
$
|
(28
|
)
|
|
$
|
24
|
|
The current portion of restructuring reserves of $11 million at September 30, 2017 was included in accrued liabilities, while the long-term portion of $13 million, which primarily related to multiemployer pension plan withdrawal obligations related to facility closures and lease termination costs, was included in other noncurrent liabilities at September 30, 2017.
The Company anticipates that payments associated with the employee terminations reflected in the above table will be substantially completed by September 30, 2018.
Payments on all of the Company’s multiemployer pension plan withdrawal obligations are scheduled to be completed by 2034. Changes based on uncertainties in these estimated withdrawal obligations could affect the ultimate charges related to multiemployer pension plan withdrawals.
The restructuring liabilities classified as “lease terminations and other” consisted of lease terminations and other facility closing costs. Payments on certain of the lease obligations are scheduled to continue until 2018. Market conditions and the Company’s ability to sublease these properties could affect the ultimate charges related to the lease obligations. Any potential recoveries or additional charges could affect amounts reported in the Company’s condensed consolidated and combined financial statements.
Other Charges
For the three and nine months ended September 30, 2017, the Company recorded other charges of $1 million and $3 million, respectively, 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 other noncurrent liabilities are $6 million and $37 million, respectively, at September 30, 2017.
The Company’s withdrawal liabilities could be affected by the financial stability of other employers participating in such plans and any decisions by those employers to withdraw from such plans in the future. While it is not possible to quantify the potential impact of future events or circumstances, reductions in other employers’ participation in multiemployer pension plans, including certain plans from which the Company has previously withdrawn, could have a material effect on the Company’s previously estimated withdrawal liabilities and condensed consolidated and combined balance sheets, statements of operations and cash flows.
For the three and nine months ended September 30, 2016, the Company recorded other charges of $1 million and $3 million, respectively, for multiemployer pension plan withdrawal obligations unrelated to facility closures.
15
LSC Communications, Inc.
Notes to Condensed Consolidated and Combined Financial Statements (Unaudited)
For the Three and Nine Months Ended September 30, 2017 and 2016
(tabular amounts in millions, except per share data)
Note 7. Retirement Plans
The Company is the sole sponsor of certain defined benefit pension plans, which have been reflected in the condensed consolidated balance sheets as of September 30, 2017 and December 31, 2016. At the separation date,
the Company assumed and recorded certain pension obligations and plan assets in single employer plans for the Company’s employees and certain former employees and retirees. The Company recorded a net benefit plan obligation of $358 million as of October 1, 2016 related to these plans. On June 30, 2017, the Company recorded a $6 million increase to this net obligation as a result of the final actuarial valuation of the Company’s qualified plan assets that was completed in June 2017. Additionally, the Company’s United Kingdom pension plan was transferred to RRD at the separation date and, as a result, the Company recorded a reduction in its net benefit plan assets of $7 million as of October 1, 2016.
The components of the estimated net pension benefits plan income for the three and nine months ended September 30, 2017 and 2016 are disclosed in the table below. Amounts shown for the three and nine months ended September 30, 2017 include pension income for the Company’s qualified and non-qualified plans, certain plans in Mexico and plans acquired as a result of the acquisitions of Esselte Corporation (“Esselte”) and Courier Corporation (“Courier”). Amounts shown for the three and nine months ended September 30, 2016 include pension income for certain plans in the United Kingdom and Mexico and plans acquired as a result of the the acquisitions of Esselte and Courier.
|
|
Three Months Ended
September 30, 2017
|
|
|
Nine Months Ended
September 30, 2017
|
|
|
|
Qualified
|
|
|
Non-Qualified
& International
|
|
|
Qualified
|
|
|
Non-Qualified
& International
|
|
Interest cost
|
|
$
|
22
|
|
|
$
|
—
|
|
|
$
|
65
|
|
|
$
|
2
|
|
Expected return on plan assets
|
|
|
(38
|
)
|
|
|
—
|
|
|
|
(114
|
)
|
|
|
—
|
|
Amortization, net
|
|
|
4
|
|
|
|
1
|
|
|
|
12
|
|
|
|
1
|
|
Net periodic benefit (income) loss
|
|
$
|
(12
|
)
|
|
$
|
1
|
|
|
$
|
(37
|
)
|
|
$
|
3
|
|
|
|
Three Months Ended
September 30, 2016
|
|
|
Nine Months Ended
September 30, 2016
|
|
|
|
Qualified
|
|
|
Non-Qualified
& International
|
|
|
Qualified
|
|
|
Non-Qualified
& International
|
|
Interest cost
|
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
5
|
|
|
$
|
5
|
|
Expected return on plan assets
|
|
|
(3
|
)
|
|
|
(2
|
)
|
|
|
(8
|
)
|
|
|
(7
|
)
|
Amortization, net
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
Settlement
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
Net periodic benefit income
|
|
$
|
(1
|
)
|
|
$
|
—
|
|
|
$
|
(2
|
)
|
|
$
|
(1
|
)
|
Prior to the separation, certain employees of the Company participated in certain pension and postretirement healthcare plans sponsored by RRD. For RRD-sponsored defined benefit and postemployment plans, the Company recorded net pension and postretirement income of $8 million and $28 million for the three and nine months ended September 30, 2016 in addition to the amounts disclosed above.
The Company recorded non-cash settlement charges of $1 million in selling, general and administrative expenses in the three months ended June 30, 2016 in connection with settlement payments from an early buyout of certain former Esselte employees. These charges resulted from the recognition in earnings of a portion of the actuarial losses recorded in accumulated other comprehensive loss based on the proportion of the obligation settled.
16
LSC Communications, Inc.
Notes to Condensed Consolidated and Combined Financial Statements (Unaudited)
For the Three and Nine Months Ended September 30, 2017 and 2016
(tabular amounts in millions, except per share data)
Note 8. Equity
The Company’s equity as of December 31, 2016 and September 30, 2017 and changes during the nine months ended September 30, 2017 were as follows:
|
|
Total Equity
|
|
Balance at December 31, 2016
|
|
$
|
240
|
|
Net income
|
|
|
1
|
|
Other comprehensive income
|
|
|
28
|
|
Share-based compensation
|
|
|
10
|
|
Issuance of share-based awards, net of withholdings and other
|
|
|
(1
|
)
|
Cash dividends paid
|
|
|
(25
|
)
|
Issuance of common stock
|
|
|
38
|
|
Separation-related adjustments
|
|
|
(5
|
)
|
Balance at September 30, 2017
|
|
$
|
286
|
|
On July 28, 2017, the Company issued approximately 1.0 million shares of common stock in conjunction with the Fairrington acquisition, which shares had a closing date value of $20 million.
On March 28, 2017, in connection with the over-allotment option granted to the underwriters as part of the secondary sale by RRD, LSC Communications also completed the sale of approximately 0.9 million shares of common stock with a value of $18 million.
During the nine months ended September 30, 2017, the Company recorded certain separation-related adjustments due to the adjustment of assets and liabilities recorded as of the separation date.
The Company’s equity as of December 31, 2015 and September 30, 2016 and changes during the nine months ended September 30, 2016 were as follows:
|
|
Total Equity
|
|
Balance at December 31, 2015
|
|
$
|
1,277
|
|
Net income
|
|
|
97
|
|
Net transfers to parent company
|
|
|
(933
|
)
|
Other comprehensive loss
|
|
|
(4
|
)
|
Balance at September 30, 2016
|
|
$
|
437
|
|
During the three months ended September 30, 2016, the Company used the net proceeds from the debt issuances to fund an $806 million cash dividend to RRD in connection with the separation. The cash dividend is included in net transfers to parent company balance. Refer to Note 13,
Debt
, for more information.
Note 9. Earnings Per Share
During the three months ended September 30, 2017, the Company issued approximately 1.0 million shares of common stock in conjunction with the Fairrington acquisition. During the nine months ended September 30, 2017, no shares of common stock were purchased by the Company, however, shares were withheld from employees for tax liabilities upon vesting of equity awards.
On October 1, 2016 in connection with the separation, RRD distributed approximately 26.2 million shares of LSC Communications common stock to RRD stockholders and retained approximately 6.2 million shares. On March 28, 2017, RRD completed the sale of its approximately 6.2 million shares of LSC Communications common stock.
Additionally, on March 28, 2017, in connection with the over-allotment option granted to the underwriters as part of the secondary sale by RRD, LSC Communications completed the sale of
approximately
0.9 million shares of common stock.
17
LSC Communications, Inc.
Notes to Condensed Consolidated and Combined Financial Statements (Unaudited)
For the Three and Nine Months Ended September 30, 2017 and 2016
(tabular amounts in millions, except per share data)
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 i
ssuance of all potentially dilutive share-based awards, including stock options, restricted stock, RSUs, and PSUs. The computations of basic and diluted EPS for periods prior to the separation were calculated using the shares distributed and retained by RR
D on October 1, 2016. The same number of shares was used to calculate basic and diluted earnings per share since there were no LSC Communications equity awards outstanding prior to the separation.
The following table shows the calculation of basic and diluted EPS, as well as a reconciliation of basic shares to diluted shares:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Net (loss) earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.07
|
)
|
|
$
|
1.17
|
|
|
$
|
0.03
|
|
|
$
|
2.99
|
|
Diluted
|
|
$
|
(0.07
|
)
|
|
$
|
1.17
|
|
|
$
|
0.03
|
|
|
$
|
2.99
|
|
Dividends declared per common share
|
|
$
|
0.25
|
|
|
$
|
—
|
|
|
$
|
0.75
|
|
|
$
|
—
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(3
|
)
|
|
$
|
38
|
|
|
$
|
1
|
|
|
$
|
97
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
34.2
|
|
|
|
32.4
|
|
|
|
33.5
|
|
|
|
32.4
|
|
Dilutive options and awards
|
|
|
—
|
|
|
|
—
|
|
|
|
0.3
|
|
|
|
—
|
|
Diluted weighted average number of common shares outstanding
|
|
|
34.2
|
|
|
|
32.4
|
|
|
|
33.8
|
|
|
|
32.4
|
|
Note 10. Comprehensive Income
The components of other comprehensive income (loss) and income tax expense allocated to each component for the three and nine months ended September 30, 2017 and 2016 were as follows:
|
|
Three Months Ended
September 30, 2017
|
|
|
Nine Months Ended
September 30, 2017
|
|
|
|
Before Tax
Amount
|
|
|
Income Tax
Expense
|
|
|
Net of Tax
Amount
|
|
|
Before Tax
Amount
|
|
|
Income Tax
Expense
|
|
|
Net of Tax
Amount
|
|
Translation adjustments
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
20
|
|
|
$
|
—
|
|
|
$
|
20
|
|
Adjustment for net periodic pension plan cost
|
|
|
5
|
|
|
|
2
|
|
|
|
3
|
|
|
|
13
|
|
|
|
5
|
|
|
|
8
|
|
Other comprehensive income
|
|
$
|
7
|
|
|
$
|
2
|
|
|
$
|
5
|
|
|
$
|
33
|
|
|
$
|
5
|
|
|
$
|
28
|
|
|
|
Three Months Ended
September 30, 2016
|
|
|
Nine Months Ended
September 30, 2016
|
|
|
|
Before Tax
Amount
|
|
|
Income Tax
Expense
|
|
|
Net of Tax
Amount
|
|
|
Before Tax
Amount
|
|
|
Income Tax
Expense
|
|
|
Net of Tax
Amount
|
|
Translation adjustments
|
|
$
|
(2
|
)
|
|
$
|
—
|
|
|
$
|
(2
|
)
|
|
$
|
(3
|
)
|
|
$
|
—
|
|
|
$
|
(3
|
)
|
Adjustment for net periodic pension plan cost
|
|
|
1
|
|
|
|
—
|
|
|
|
1
|
|
|
|
4
|
|
|
|
5
|
|
|
|
(1
|
)
|
Other comprehensive (loss) income
|
|
$
|
(1
|
)
|
|
$
|
—
|
|
|
$
|
(1
|
)
|
|
$
|
1
|
|
|
$
|
5
|
|
|
$
|
(4
|
)
|
During the nine months ended September 30, 2016, translation adjustments and income tax expense on pension plan cost were adjusted to reflect previously recorded deferred taxes at their historical exchange rates.
18
LSC Communications, Inc.
Notes to Condensed Consolidated and Combined Financial Statements (Unaudited)
For the Three and Nine Months Ended September 30, 2017 and 2016
(tabular amounts in millions, except per share data)
Accumulated other comprehensive loss by component as of December 31
, 2016 and September 30, 2017 and changes during the nine months ended September 30, 2017 were as follows:
|
|
Pension
Plan Cost
|
|
|
Translation
Adjustments
|
|
|
Total
|
|
Balance at December 31, 2016
|
|
$
|
(462
|
)
|
|
$
|
(69
|
)
|
|
$
|
(531
|
)
|
Other comprehensive income before reclassifications
|
|
|
—
|
|
|
|
20
|
|
|
|
20
|
|
Amounts reclassified from accumulated other comprehensive loss
|
|
|
8
|
|
|
|
—
|
|
|
|
8
|
|
Net change in accumulated other comprehensive loss
|
|
|
8
|
|
|
|
20
|
|
|
|
28
|
|
Balance at September 30, 2017
|
|
$
|
(454
|
)
|
|
$
|
(49
|
)
|
|
$
|
(503
|
)
|
Accumulated other comprehensive loss by component as of December 31, 2015 and September 30, 2016 and changes during the nine months ended September 30, 2016, were as follows:
|
|
Pension
Plan Cost
|
|
|
Translation
Adjustments
|
|
|
Total
|
|
Balance at December 31, 2015
|
|
$
|
(46
|
)
|
|
$
|
(159
|
)
|
|
$
|
(205
|
)
|
Other comprehensive loss before reclassifications
|
|
|
—
|
|
|
|
(3
|
)
|
|
|
(3
|
)
|
Amounts reclassified from accumulated other comprehensive loss
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
(1
|
)
|
Net change in accumulated other comprehensive loss
|
|
|
(1
|
)
|
|
|
(3
|
)
|
|
|
(4
|
)
|
Balance at September 30, 2016
|
|
$
|
(47
|
)
|
|
$
|
(162
|
)
|
|
$
|
(209
|
)
|
Reclassification from accumulated other comprehensive loss for the three and nine months ended September 30, 2017 and 2016 were as follows:
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
Classification in the Condensed
Consolidated & Combined
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
Statements of Operations
|
Amortization of pension plan cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss
|
|
$
|
5
|
|
|
$
|
—
|
|
|
$
|
13
|
|
|
$
|
1
|
|
|
(a)
|
Settlement
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
|
Reclassifications before tax
|
|
|
5
|
|
|
|
—
|
|
|
|
13
|
|
|
|
2
|
|
|
|
Income tax expense (benefit)
|
|
|
2
|
|
|
|
(1
|
)
|
|
|
5
|
|
|
|
3
|
|
|
|
Reclassifications, net of tax
|
|
$
|
3
|
|
|
$
|
1
|
|
|
$
|
8
|
|
|
$
|
(1
|
)
|
|
|
|
(a)
|
These accumulated other comprehensive income components are included in the calculation of net periodic pension plan (income) expense that is recognized substantially all in selling, general and administrative expenses in the condensed consolidated and combined statements of operations (see Note 7,
Retirement Plans
).
|
Note 11. Segment Information
The Company’s segment and product and service offerings are summarized below:
Print
The Print segment produces magazines, catalogs, retail inserts, books, and directories. The segment also provides supply-chain management and certain other print-related services, including mail-list management and sortation, e-book formatting and distribution. The segment has operations in the U.S., Europe and Mexico. The Print segment is divided into the magazines, catalogs and retail inserts, book, Europe and directories reporting units.
19
LSC Communications, Inc.
Notes to Condensed Consolidated and Combined Financial Statements (Unaudited)
For the Three and Nine Months Ended September 30, 2017 and 2016
(tabular amounts in millions, except per share data)
Office Products
The Office Products segment manufactures and sells branded and private label products in five core categories: filing products, note-taking products, binder products, forms, and envelopes.
Corporate
Corporate consists of unallocated selling, general and administrative activities and associated expenses including, in part, executive, legal, finance, communications, certain facility costs and LIFO inventory provisions. In addition, certain costs and earnings of employee benefit plans, such as pension benefit plan income and share-based compensation, are included in Corporate and not allocated to the operating segments. Prior to the separation, many of these costs were based on allocations from RRD, however, the Company has incurred such costs directly after the separation.
Information by Segment
The Company has disclosed income (loss) from operations as the primary measure of segment earnings (loss). This is the measure of profitability used by the Company’s chief operating decision-maker and is most consistent with the presentation of profitability reported with the condensed consolidated and combined financial statements.
|
|
Net
Sales
|
|
|
Income (loss)
from
Operations
|
|
|
Depreciation
and
Amortization
|
|
|
Capital
Expenditures
|
|
Three months ended
September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Print
|
|
$
|
819
|
|
|
$
|
(10
|
)
|
|
$
|
35
|
|
|
$
|
9
|
|
Office Products
|
|
|
116
|
|
|
|
11
|
|
|
|
4
|
|
|
|
1
|
|
Total operating segments
|
|
|
935
|
|
|
|
1
|
|
|
|
39
|
|
|
|
10
|
|
Corporate
|
|
|
—
|
|
|
|
(8
|
)
|
|
|
—
|
|
|
|
5
|
|
Total operations
|
|
$
|
935
|
|
|
$
|
(7
|
)
|
|
$
|
39
|
|
|
$
|
15
|
|
|
|
Net
Sales
|
|
|
Income (loss)
from
Operations
|
|
|
Depreciation
and
Amortization
|
|
|
Capital
Expenditures
|
|
Three months ended
September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Print
|
|
$
|
822
|
|
|
$
|
48
|
|
|
$
|
36
|
|
|
$
|
14
|
|
Office Products
|
|
|
127
|
|
|
|
11
|
|
|
|
4
|
|
|
|
1
|
|
Total operating segments
|
|
|
949
|
|
|
|
59
|
|
|
|
40
|
|
|
|
15
|
|
Corporate
|
|
|
—
|
|
|
|
(2
|
)
|
|
|
—
|
|
|
|
1
|
|
Total operations
|
|
$
|
949
|
|
|
$
|
57
|
|
|
$
|
40
|
|
|
$
|
16
|
|
|
|
Net
Sales
|
|
|
Income (loss)
from
Operations
|
|
|
Assets of
Operations
|
|
|
Depreciation
and
Amortization
|
|
|
Capital
Expenditures
|
|
Nine months ended
September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Print
|
|
$
|
2,252
|
|
|
$
|
24
|
|
|
$
|
1,667
|
|
|
$
|
106
|
|
|
$
|
41
|
|
Office Products
|
|
|
352
|
|
|
|
32
|
|
|
|
316
|
|
|
|
11
|
|
|
|
3
|
|
Total operating segments
|
|
|
2,604
|
|
|
|
56
|
|
|
|
1,983
|
|
|
|
117
|
|
|
|
44
|
|
Corporate
|
|
|
—
|
|
|
|
(26
|
)
|
|
|
90
|
|
|
|
1
|
|
|
|
7
|
|
Total operations
|
|
$
|
2,604
|
|
|
$
|
30
|
|
|
$
|
2,073
|
|
|
$
|
118
|
|
|
$
|
51
|
|
20
LSC Communications, Inc.
Notes to Condensed Consolidated and Combined Financial Statements (Unaudited)
For the Three and Nine Months Ended September 30, 2017 and 2016
(tabular amounts in millions, except per share data)
|
|
Net
Sales
|
|
|
Income (loss)
from
Operations
|
|
|
Assets of
Operations
|
|
|
Depreciation
and
Amortization
|
|
|
Capital
Expenditures
|
|
Nine months ended
September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Print
|
|
$
|
2,338
|
|
|
$
|
114
|
|
|
$
|
1,602
|
|
|
$
|
118
|
|
|
$
|
28
|
|
Office Products
|
|
|
397
|
|
|
|
38
|
|
|
|
323
|
|
|
|
12
|
|
|
|
3
|
|
Total operating segments
|
|
|
2,735
|
|
|
|
152
|
|
|
|
1,925
|
|
|
|
130
|
|
|
|
31
|
|
Corporate
|
|
|
—
|
|
|
|
(4
|
)
|
|
|
23
|
|
|
|
—
|
|
|
|
4
|
|
Total operations
|
|
$
|
2,735
|
|
|
$
|
148
|
|
|
$
|
1,948
|
|
|
$
|
130
|
|
|
$
|
35
|
|
Restructuring, impairment and other charges by segment for the three and nine months ended September 30, 2017 and 2016 are disclosed in Note 6,
Restructuring, Impairment and Other Charges.
Note 12. Commitments and Contingencies
The Company is subject to laws and regulations relating to the protection of the environment. The Company accrues for expenses associated with environmental remediation obligations when such amounts are probable and can be reasonably estimated. Such accruals are adjusted as new information develops or circumstances change and are generally not discounted. The Company has been designated as a potentially responsible party or has received claims in 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 four other previously and currently owned facilities. At the Superfund sites, the Comprehensive Environmental Response, Compensation and Liability Act provides that the Company’s liability could be joint and several, meaning that the Company could be required to pay an amount in excess of its proportionate share of the remediation costs.
The Company’s understanding of the financial strength of other potentially responsible parties at the multiparty sites and of other liable parties at the previously owned facilities has been considered, where appropriate, in the determination of the Company’s estimated liability. The Company established reserves, recorded in accrued liabilities and other noncurrent liabilities, that it believes are adequate to cover its share of the potential costs of remediation at each of the multiparty sites and the previously and currently owned facilities. It is not possible to quantify with certainty the potential impact of actions regarding environmental matters, particularly remediation and other compliance efforts that the Company may undertake in the future. However, in the opinion of management, compliance with the present environmental protection laws, before taking into account estimated recoveries from third parties, will not have a material effect on the Company’s condensed consolidated and combined balance sheets, statements of operations and cash flows.
From time to time, the Company’s customers and others file voluntary petitions for reorganization under United States bankruptcy laws. In such cases, certain pre-petition payments received by the Company from these parties could be considered preference items and subject to return. In addition, the Company may be party to certain litigation arising in the ordinary course of business. Management believes that the final resolution of these preference items and litigation will not have a material effect on the Company’s condensed consolidated and combined balance sheets, statements of operations and cash flows.
Note 13. Debt
The Company’s debt at September 30, 2017 and December 31, 2016 consisted of the following:
|
September 30, 2017
|
|
|
December 31, 2016
|
|
Borrowings under the Revolving Credit Facility
|
$
|
140
|
|
|
$
|
—
|
|
Term Loan Facility due September 30, 2022
(a)
|
|
304
|
|
|
|
353
|
|
8.75% Senior Secured Notes due October 15, 2023
|
|
450
|
|
|
|
450
|
|
Capital lease obligations
|
|
3
|
|
|
|
6
|
|
Unamortized debt issuance costs
|
|
(13
|
)
|
|
|
(15
|
)
|
Total debt
|
|
884
|
|
|
|
794
|
|
Less: current portion
|
|
(177
|
)
|
|
|
(52
|
)
|
Long-term debt
|
$
|
707
|
|
|
$
|
742
|
|
21
LSC Communications, Inc.
Notes to Condensed Consolidated and Combined Financial Statements (Unaudited)
For the Three and Nine Months Ended September 30, 2017 and 2016
(tabular amounts in millions, except per share data)
|
(a)
|
The borrowings under the Term Loan Facility are subject to a variable interest rate. As of September 30, 2017 and December 31, 2016, the interest rate was 7.24% and 7.00%, respectively.
|
__________________________________
On September 30, 2016, the Company issued $450 million of 8.75% Senior Secured Notes (the “Senior Notes”) due October 15, 2023. Interest on the Senior Notes is due semi-annually on April 15 and October 15, commencing on April 15, 2017. Net proceeds from the offering of the Senior Notes (the “Notes Offering”) were distributed to RRD in the form of a dividend. The Company did not retain any proceeds from the Notes Offering.
The Senior Notes were issued pursuant to an indenture where certain wholly-owned domestic subsidiaries of the Company guarantee the Senior Notes (the “Guarantors”). The Senior Notes are fully and unconditionally guaranteed, on a senior secured basis, jointly and severally, by the Guarantors, which are comprised of each of the Company’s existing and future direct and indirect wholly-owned U.S. subsidiaries that guarantee the Company’s obligations. The Senior Notes are not guaranteed by the Company’s foreign subsidiaries or unrestricted subsidiaries. The Senior Notes and the related guarantees are secured on a first-priority lien basis by the collateral, subject to certain exceptions and permitted liens. The Indenture governing the Senior Notes contains certain covenants applicable to the Company and its restricted subsidiaries, including limitations on: (1) liens; (2) indebtedness; (3) mergers, consolidations and acquisitions; (4) sales, transfers and other dispositions of assets; (5) loans and other investments; (6) dividends and other distributions, stock repurchases and redemptions and other restricted payments; (7) restrictions affecting subsidiaries; (8) transactions with affiliates; and (9) designations of unrestricted subsidiaries. Each of these covenants is subject to important exceptions and qualifications.
On September 30, 2016 the Company entered into a credit agreement (the “Credit Agreement”) which provides for (i) a new senior secured term loan B facility in an aggregate principal amount of $375 million (the “Term Loan Facility”) and (ii) a new senior secured revolving credit facility in an aggregate principal amount of $400 million (the “Revolving Credit Facility”). The interest rate per annum applicable to the Term Loan Facility is equal to, at the Company’s option, either a base rate plus a margin of 5.00% or LIBOR plus a margin of 6.00%. The LIBOR rate is subject to a “floor” of 1%. The interest rate per annum applicable to the Revolving Credit Facility is equal to a base rate plus a margin ranging from 1.75% to 2.25%, or LIBOR plus a margin ranging from 2.75% to 3.25%, in either case based upon the Consolidated Leverage Ratio of the Company and its restricted subsidiaries. Interest on the Credit Agreement is due at least quarterly and commenced on December 31, 2016. The Term Loan Facility will amortize in quarterly installments of $13 million for the first eight quarters and $11 million for subsequent quarters. The debt issuance costs and original issue discount are being amortized over the life of the facilities using the effective interest method. The Term Loan Facility will mature on September 30, 2022 and the Revolving Credit Facility will mature on September 30, 2021.
The proceeds of any collection or other realization of collateral received in connection with the exercise of remedies and any distribution in respect of collateral in any bankruptcy proceeding will be applied first to repay amounts due under the Revolving Credit Facility before the lenders under the Term Loan Facility or the holders of the Senior Notes receive such proceeds.
The Credit Agreement is subject to a number of covenants, including, but not limited to, a minimum Interest Coverage Ratio and a Consolidated Leverage Ratio, as defined in and calculated pursuant to the Credit Agreement, that, in part, restrict the Company’s ability to incur additional indebtedness, create liens, engage in mergers and consolidations, make restricted payments and dispose of certain assets. The Credit Agreement generally allows annual dividend payments of up to $50 million in aggregate, though additional dividends may be allowed subject to certain conditions. Each of these covenants is subject to important exceptions and qualifications.
The Company used the net proceeds from the Term Loan Facility to fund a cash dividend to RRD and to pay fees and expenses both related to the separation from RRD in October 2016. The Company intends to use any additional borrowings under the Credit Facilities for general corporate purposes, including the financing of permitted investments.
On February 2, 2017, the Company paid in advance the full amount of required amortization payments, $50 million, for the year ended December 31, 2017 for the Term Loan Facility.
The fair values of the Senior Notes and Term Loan Facility, which were determined using the market approach based upon interest rates available to the Company for borrowings with similar terms and maturities, were determined to be Level 2 under the fair value hierarchy. The fair value of the Company’s debt was greater than its book value by approximately $24 million and $22 million at September 30, 2017 and December 31, 2016, respectively.
22
LSC Communications, Inc.
Notes to Condensed Consolidated and Combined Financial Statements (Unaudited)
For the Three and Nine Months Ended September 30, 2017 and 2016
(tabular amounts in millions, except per share data)
There was $19 million and $52 million of net interest expense during the three and nine months ended September 30, 2017, respectively. There was $1 million and a de minimis amount of net i
nterest expense during the three and nine months ended September 30, 2016, respectively.
There were $140 million of borrowings under the Revolving Credit Facility as of September 30, 2017 and no borrowings as of December 31, 2016.
The weighted average interest rate on borrowings under the Credit Agreement was 4.31% during the nine months ended September 30, 2017.
Note 14. 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.
Prior to the separation, the Company had not historically operated as a stand-alone business. In connection with the separation, the Company entered into commercial arrangements with RRD.
Under the terms of the commercial arrangements, RRD continues to provide, among other things, logistics, premedia, production and sales services to LSC Communications. In addition, LSC Communications continues to provide sales support services to RRD’s Asia and Mexico print and graphics management businesses in order to facilitate the importing of books and related products to the U.S. RRD also provides LSC Communications certain global outsourcing, technical support and other services.
Allocations from RRD
Prior to the separation, RRD provided LSC Communications certain services, which included, but were not limited to, information technology, finance, legal, human resources, internal audit, treasury, tax, investor relations and executive oversight. RRD charged the Company for these services based on direct usage, when available, with the remainder allocated on a pro rata basis by revenue, headcount, or other measures. These allocations were reflected as follows in the condensed combined statements of operations for the three and nine months ended September 30, 2016:
|
|
Three Months Ended
September 30, 2016
|
|
|
Nine Months Ended
September 30, 2016
|
|
Costs of goods sold
|
|
$
|
25
|
|
|
$
|
67
|
|
Selling, general and administrative
|
|
|
42
|
|
|
|
114
|
|
Depreciation and amortization
|
|
|
1
|
|
|
|
5
|
|
Total allocations from RRD
|
|
$
|
68
|
|
|
$
|
186
|
|
The Company considered the expense methodologies and financial results to be reasonable for all periods presented. However, these allocations may not be indicative of the actual expenses that may have been incurred as an independent public company or the costs LSC Communications may incur in the future.
After the separation, the Company no longer receives or records allocations from RRD. The Company records transactions with RRD as external arms-length transactions in the Company’s condensed consolidated financial statements.
23
LSC Communications, Inc.
Notes to Condensed Consolidated and Combined Financial Statements (Unaudited)
For the Three and Nine Months Ended September 30, 2017 and 2016
(tabular amounts in millions, except per share data)
Transactions with RR Donnelley
Revenues and Purchases
Given that RRD sold its remaining stake in LSC Communications on March 28, 2017, the following information is presented through 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. Net revenues from related party sales were $19 million and $40 million for the three and nine months ended September 30, 2016, respectively. These amounts are included in the condensed consolidated and combined statements of operations.
LSC Communications utilizes RRD for freight, logistics and premedia services. Included in the condensed consolidated and combined financial statements were costs of sales related to freight, logistics and premedia services purchased from RRD of $51 million for the three months ended March 31, 2017.
Such amounts were
$43 million and $135 million for the three and nine months ended September 30, 2016, respectively.
Note 15. New Accounting Pronouncements
In March 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2017-07 “Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost” (“ASU 2017-07”). This ASU requires entities to disaggregate the service cost component from other components of net benefit cost and present it with other employee compensation costs. All other components of net benefit cost will need to be presented elsewhere on the income statement outside of income from operations. Only the service cost component would be eligible for capitalization into inventory. The standard is effective in the first quarter 2018. As a result of the adoption of ASU 2017-07, the Company expects to reclassify approximately $46 million and $45 million related to the years ended December 31, 2017 and 2016, respectively, of net pension income out of income from operations to a line item outside of income from operations, resulting in no impact to net income.
In January 2017, the FASB issued Accounting Standards Update No. 2017-04 “Intangibles – Goodwill and Other (Topic 350) Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”). The standard eliminates Step 2 of the goodwill impairment test, and instead, recognizes an impairment charge for the amount by which the carrying value exceeds the reporting unit’s fair value not to exceed the total amount of goodwill allocated. The standard is effective in the first quarter of 2020, with early adoption permitted on testing dates after January 1, 2017. The Company adopted ASU 2017-04 during the third quarter of 2017 and applied the standard to the
interim goodwill impairment review of the magazines, catalogs and retail inserts reporting unit included in the Print segment as of September 30, 2017.
In January 2017, the FASB issued Accounting Standards Update No. 2017-01 "Business Combinations (Topic 805): Clarifying the Definition of a Business" (“ASU 2017-01”) in order to clarify the definition of a business as it relates to whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The standard becomes effective in the first quarter of 2018. The Company plans to adopt the standard in the first quarter of 2018. The impact is not expected to be material.
In August 2016, the FASB
issued Accounting Standards Update No. 2016-15 “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments” (“ASU 2016-15”), which provided guidance on eight specific cash flow classification issues to reduce existing diversity in practice. The standard becomes effective in the first quarter of 2018. Early adoption of ASU 2016-15 is permitted, however, the Company plans to adopt the standard in the first quarter of 2018. The Company does not expect a significant impact to presentation on its condensed consolidated and combined statements of cash flows.
24
LSC Communications, Inc.
Notes to Condensed Consolidated and Combined Financial Statements (Unaudited)
For the Three and Nine Months Ended September 30, 2017 and 2016
(tabular amounts in millions, except per share data)
In March 2016, the FASB issued Accounting Standards Update No. 2016-09 “Stock Compensation (Topic 718)
– Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”) which simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures and statutory withholding r
equirements, as well as the classification of share-based payment transactions on the statement of cash flows. The standard became effective in the first quarter of 2017. As early adoption of ASU 2016-09 is permitted, the Company adopted the standard in t
he fourth quarter of 2016. The election to early adopt ASU 2016-09 requires any adjustments as of January 1, 2016, the beginning of the annual period that includes the interim period of adoption, to be reflected. The requirements of ASU 2016-09 did not hav
e a material impact to any of the periods presented.
In February 2016, the FASB
issued Accounting Standards Update No. 2016-02 “Leases (Topic 842) Section A—Leases: Amendments to the FASB Accounting Standards Codification” (“ASU 2016-02”), which requires lessees to put most leases on the balance sheet but recognize expense on the income statement in a manner similar to current accounting. For lessors, ASU 2016-02 also modifies the classification criteria and the accounting for sales-type and direct financing leases. The standard requires a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements and is effective in the first quarter of 2019. Early adoption of ASU 2016-02 is permitted, however, the Company plans to adopt the standard in the first quarter of 2019. The Company is evaluating the impact of ASU 2016-02.
In May 2014, the FASB issued Accounting Standards Update No. 2014-09 “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”), which outlines a single comprehensive model for entities to use in accounting for revenue using a five-step process that supersedes virtually all existing revenue guidance. ASU 2014-09 also requires additional quantitative and qualitative disclosures. In August 2015, the FASB issued Accounting Standards Update No. 2015-14 “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date” (“ASU 2015-14”), which defers the effective date of ASU 2014-09 to January 1, 2018. Early adoption of ASU 2014-09 is permitted in the first quarter of 2017.
The Company plans to adopt the standard in the first quarter of 2018. The standard allows the option of either a full retrospective adoption, meaning the standard is applied to all periods presented, or a modified retrospective adoption approach, meaning the standard is applied only to the most current period. The Company currently anticipates adopting the standard using the modified retrospective adoption approach.
During the second quarter of 2017, the Company completed the evaluation of whether the accounting for revenue of customized products should be over time or at a point in time under the new standard. Based on analysis of specific terms associated with current customer contracts, the Company has concluded that revenue should be recognized at a point in time for customized products. This treatment is consistent with revenue recognition under the current guidance, where revenue is recognized when the products are completed and shipped to the customer (dependent upon specific shipping terms). The Company will continue its evaluation of any new or amended contracts entered into through the date of adoption, including contracts that the Company might assume as a result of acquisition activity.
The Company is continuing to assess all other potential impacts of the standard, including disclosure requirements and the accounting for inventory billed but not yet shipped. Under the current guidance, the Company defers revenue for inventory billed but not yet shipped. Under the new standard, in certain situations the Company may be able to recognize revenue for inventory billed but not yet shipped, which could accelerate the timing, but not the total amount, of revenue recognized and would not impact the timing of cash flows.
The Company anticipates it will be able to complete its analysis of all potential impacts of the standard, implement any system and process changes that might be necessary and educate the appropriate employees with respect to the new standard in order to effectively adopt the standard beginning in the first quarter of 2018.
25