The adjustments for net pension plan cost were net of income tax expense of $1 million and $36 million for the three months ended March 31, 2020 and 2019, respectively. The tax expense for the three months ended March 31, 2019 was primarily due to the settlements of retirement benefit obligations that are discussed in Note 13, Comprehensive Income.
There were dividends declared per common share of $0.26 during the three months ended March 31, 2019 (none during the three months ended March 31, 2020).
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three Months Ended March 31, 2020 and 2019
(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.
Voluntary Reorganization under Chapter 11
On April 13, 2020 (the “Petition Date”), the Company and certain of its subsidiaries filed voluntary petitions for relief under Chapter 11 of title 11 of the United States Code, 11 U.S.C. §§ 101-1532 (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”) (collectively, the “Chapter 11 Cases”). The Chapter 11 Cases are being jointly administered under the caption In re LSC Communications, Inc., 20-10950. We and our subsidiaries that are involved in the Chapter 11 Cases will continue to operate our businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code.
On April 15, 2020, the Bankruptcy Court entered orders granting interim approval of certain forms of relief that we requested, enabling us to conduct our business activities in the ordinary course, subject to the terms and conditions of such orders, including authorizing us to pay employee wages and benefits, to pay taxes and certain governmental fees and charges, to continue to operate our cash management system in the ordinary course, and to pay prepetition claims of certain of our vendors. For goods and services provided following the Petition Date, the Company expects to continue to pay vendors under normal terms.
During the pendency of the Chapter 11 Cases, attempts to prosecute, collect, secure or enforce remedies with respect to prepetition claims against the debtors, including litigation relating to the entities involved in the Chapter 11 Cases, are subject to the automatic stay provisions of section 362(a) of the Bankruptcy Code, as modified or amended by the terms of any order entered in the Chapter 11 Cases.
We have obtained debtor-in-possession financing of up to $100 million which, together with our normal operating cash flows, will provide liquidity for the Company to operate as usual and fulfill ongoing commitments to stakeholders during the pendency of the Chapter 11 Cases. Refer to Note 9, Debt, for information on the debtor-in-possession financing facility.
Going Concern
The accompanying condensed consolidated financial statements were prepared assuming that the Company will continue as a going concern and contemplate the continuity of our operations, realization of assets and satisfaction of liabilities and commitments in the normal course of business. Our ability to continue as a going concern is contingent upon our ability to comply with the covenants of the DIP Credit Agreement described in Note 9, Debt, and our ability to implement, subject to the Bankruptcy Court’s approval, a restructuring plan, among other factors.
While operating as debtors-in-possession under Chapter 11, we may sell or otherwise dispose of or liquidate assets or settle liabilities, subject to the approval of the Bankruptcy Court or as otherwise permitted in the ordinary course of business (and subject to restrictions in our debt agreements), for amounts other than those reflected in the accompanying condensed consolidated financial statements. Further, the restructuring plan could materially change the amounts and classifications of assets and liabilities reported in the condensed consolidated financial statements.
8
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three Months Ended March 31, 2020 and 2019
(tabular amounts in millions, except per share data)
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 condensed consolidated financial statements included in this quarterly report on Form 10-Q 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.
Coronavirus Pandemic (“COVID-19”)
During and subsequent to the first quarter of 2020, the novel coronavirus strain, known as COVID-19, continues to spread across the globe at an increasing rate. Measures taken by governmental authorities and private actors to limit the spread of this virus may interfere with the ability of the Company's employees, suppliers, and other business providers to carry out their assigned tasks or supply materials at ordinary levels of performance relative to the conduct of the business which may cause a material curtailment to certain business operations. Moreover, as a large part of the Company's business involves sales of books and other products used in schools and school facilities, if COVID-19 related measures continue to result in widespread and lengthy school closings, the Company's consolidated results of operations and financial condition will be adversely impacted. Books sold in retail stores have also been adversely impacted as both large chains and independent stores have been forced to close. Additionally, as COVID-19 has significantly impacted retailers' stores, distribution centers and supply chains, the Company expects to experience an adverse impact on our catalogs and office products businesses. Disruption across many other industries has also significantly impacted demand for advertising, which is expected to result in page count and volume reductions in magazines.
We continue to monitor the situation, to assess further possible implications to our business and customers, and to take actions in an effort to mitigate adverse consequences. The Company has expanded its work-from-home policy for its non-manufacturing employees, has focused on obtaining protective equipment and implementing social distancing and other policies for its manufacturing employees and continues to adhere to guidance issued by governmental authorities. The Company is unable to quantify the impact on our business at this time, but it could have a material adverse effect on our consolidated financial statements in the future.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law. Refer to Note 12, Taxes, for more information on the CARES Act.
Basis of Presentation
The condensed consolidated financial statements include the balance sheets and statements of operations, stockholders’ equity and cash flows in conformity with accounting principles generally accepted in the United States (“GAAP”). All intercompany transactions have been eliminated in consolidation. These unaudited condensed consolidated interim financial statements include estimates and assumptions of management that affect the amounts reported in the condensed consolidated financial statements. Actual results could differ from these estimates.
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 14, Segment Information, for reclassified balances for the three months ended March 31, 2019.
The Company adopted Accounting Standards Update No. 2016-13 “Financial Instruments-Credit Losses (Topic 326)” (“ASU 2016-13” or “ASC 326”) on January 1, 2020 using the modified retrospective adoption method. As a result of the adoption, the Company separately disclosed the amortized cost amount of total receivables separately from the allowance for credit losses in the condensed consolidated balance sheet. Refer to Note 2, Revenue Recognition, for more information.
Impact of Change in Accounting Principle
Beginning in the first quarter of 2020, the Company changed the method of accounting for the market-related value of assets for a class of assets within the U.S. Qualified Plan and Non-Qualified plans. This class of assets is currently comprised of liability-hedging investments, which represents approximately 60% of the plans’ assets. Liability-hedging investments provide a natural hedge against the changes in the recorded amount of net periodic pension cost. Refer to Note 11, Retirement Plans, in the Company’s Form
9
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three Months Ended March 31, 2020 and 2019
(tabular amounts in millions, except per share data)
10-K for the fiscal year ended December 31, 2019 for disclosure by asset classifications. The previous method of accounting was to use the market-related value of assets for all the plans’ assets when recognizing changes in fair value of plan assets ratably over a five-year period. As a result of the change in method of accounting the Company will no longer use the market-related value of liability-hedging investments. Instead, the fair value of liability-hedging investments will be immediately included in the calculation of net periodic pension cost. This change in accounting method is preferable because it accelerates the recognition of the fair value for this class of assets into net income or loss. No change is being made to the accounting principle for the other classes of pension assets, which represent the remaining 40% of the pension asset portfolio for the plan.
The change in accounting principle requires retrospective application and prospective disclosure. Refer below for the restatements on previously issued financial statements. Retrospective application was applied to periods beginning in 2017 as it was determined not to be possible to go further than that date due to the Company’s separation in 2016 from its prior parent company. Prior to the separation in 2016, the U.S. Qualified and Non-Qualified pension plans were legally owned by the Company’s prior parent company.
The cumulative effect of the change on accumulated deficit was an increase in deficit of $9 million as of January 1, 2019 and a $9 million decrease in accumulated other comprehensive loss, as shown in the condensed statement of stockholders’ equity.
The historical statements of cash flows are also being retrospectively restated as changes in net (loss) income, expense related to settlement of retirement obligations and pension income flow through the operating activities section with an offsetting impact to the change in accrued liabilities and other. There is no net impact to cash flows provided by (used in) operating activities.
The tables below represent the impact of the change in accounting principle on the condensed consolidated balance sheets and statement of stockholders’ equity for all periods since 2017:
|
|
|
Previously Disclosed in Form 10-K
|
|
|
|
|
|
|
As Reported with Change
|
|
|
|
|
As of December 31, 2017
|
|
|
Impact of Change
|
|
|
As of December 31, 2017
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Accumulated deficit)
|
|
$
|
(90
|
)
|
|
$
|
(7
|
)
|
|
$
|
(97
|
)
|
|
Accumulated other comprehensive loss
|
|
|
(476
|
)
|
|
|
7
|
|
|
|
(469
|
)
|
|
|
|
Previously Disclosed in Form 10-K
|
|
|
|
|
|
|
As Reported with Change
|
|
|
|
|
As of December 31, 2018
|
|
|
Impact of Change
|
|
|
As of December 31, 2018
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Accumulated deficit)
|
|
$
|
(42
|
)
|
|
$
|
(9
|
)
|
|
$
|
(51
|
)
|
|
Accumulated other comprehensive loss
|
|
|
(584
|
)
|
|
|
9
|
|
|
|
(575
|
)
|
|
|
|
Previously Disclosed in Form 10-K
|
|
|
|
|
|
|
As Reported with Change
|
|
|
|
|
As of December 31, 2019
|
|
|
Impact of Change
|
|
|
As of December 31, 2019
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Accumulated deficit)
|
|
$
|
(354
|
)
|
|
$
|
(11
|
)
|
|
$
|
(365
|
)
|
|
Accumulated other comprehensive loss
|
|
|
(528
|
)
|
|
|
11
|
|
|
|
(517
|
)
|
|
|
|
Previously Disclosed in Form 10-Q
|
|
|
|
|
|
|
As Reported with Change
|
|
|
|
|
As of March 31, 2019
|
|
|
Impact of Change
|
|
|
As of March 31, 2019
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Accumulated deficit)
|
|
$
|
(177
|
)
|
|
$
|
(8
|
)
|
|
$
|
(185
|
)
|
|
Accumulated other comprehensive loss
|
|
|
(476
|
)
|
|
|
8
|
|
|
|
(468
|
)
|
10
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three Months Ended March 31, 2020 and 2019
(tabular amounts in millions, except per share data)
|
|
|
Previously Disclosed in Form 10-Q
|
|
|
|
|
|
|
As Reported with Change
|
|
|
|
|
As of June 30, 2019
|
|
|
Impact of Change
|
|
|
As of June 30, 2019
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Accumulated deficit)
|
|
$
|
(209
|
)
|
|
$
|
(9
|
)
|
|
$
|
(218
|
)
|
|
Accumulated other comprehensive loss
|
|
|
(472
|
)
|
|
|
9
|
|
|
|
(463
|
)
|
|
|
|
Previously Disclosed in Form 10-Q
|
|
|
|
|
|
|
As Reported with Change
|
|
|
|
|
As of September 30, 2019
|
|
|
Impact of Change
|
|
|
As of September 30, 2019
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Accumulated deficit)
|
|
$
|
(185
|
)
|
|
$
|
(10
|
)
|
|
$
|
(195
|
)
|
|
Accumulated other comprehensive loss
|
|
|
(472
|
)
|
|
|
10
|
|
|
|
(462
|
)
|
The tables below represent the impact of the change in accounting principle on the condensed consolidated statements of operations and comprehensive income for all periods since 2017:
|
|
|
Previously Disclosed in Form 10-K
|
|
|
|
|
|
|
As Reported with Change
|
|
|
|
|
Year Ended
December 31, 2017
|
|
|
Impact of Change
|
|
|
Year Ended
December 31, 2017
|
|
|
Investment and other (income) expense
|
|
$
|
(47
|
)
|
|
$
|
10
|
|
|
$
|
(37
|
)
|
|
(Loss) before income taxes
|
|
|
(44
|
)
|
|
|
(10
|
)
|
|
|
(54
|
)
|
|
Income tax expense (benefit)
|
|
|
13
|
|
|
|
(3
|
)
|
|
|
10
|
|
|
Net (loss)
|
|
|
(57
|
)
|
|
|
(7
|
)
|
|
|
(64
|
)
|
|
Basic net (loss) per share
|
|
|
(1.69
|
)
|
|
|
(0.22
|
)
|
|
|
(1.91
|
)
|
|
Diluted net (loss) per share
|
|
|
(1.69
|
)
|
|
|
(0.22
|
)
|
|
|
(1.91
|
)
|
|
Adjustment for net periodic pension plan
cost
|
|
|
34
|
|
|
|
7
|
|
|
|
41
|
|
|
Other comprehensive income
|
|
|
55
|
|
|
|
7
|
|
|
|
62
|
|
|
Comprehensive (loss)
|
|
|
(2
|
)
|
|
|
—
|
|
|
|
(2
|
)
|
|
|
|
Previously Disclosed in Form 10-K
|
|
|
|
|
|
|
As Reported with Change
|
|
|
|
|
Year Ended
December 31, 2018
|
|
|
Impact of Change
|
|
|
Year Ended
December 31, 2018
|
|
|
Investment and other (income) expense
|
|
$
|
(48
|
)
|
|
$
|
2
|
|
|
$
|
(46
|
)
|
|
Income (loss) before income taxes
|
|
|
10
|
|
|
|
(2
|
)
|
|
|
8
|
|
|
Income tax expense
|
|
|
33
|
|
|
|
—
|
|
|
|
33
|
|
|
Net (loss)
|
|
|
(23
|
)
|
|
|
(2
|
)
|
|
|
(25
|
)
|
|
Basic net (loss) per share
|
|
|
(0.67
|
)
|
|
|
(0.04
|
)
|
|
|
(0.71
|
)
|
|
Diluted net (loss) per share
|
|
|
(0.67
|
)
|
|
|
(0.04
|
)
|
|
|
(0.71
|
)
|
|
Adjustment for net periodic pension plan
cost
|
|
|
(4
|
)
|
|
|
2
|
|
|
|
(2
|
)
|
|
Other comprehensive (loss) income
|
|
|
(11
|
)
|
|
|
2
|
|
|
|
(9
|
)
|
|
Comprehensive (loss)
|
|
|
(34
|
)
|
|
|
—
|
|
|
|
(34
|
)
|
11
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three Months Ended March 31, 2020 and 2019
(tabular amounts in millions, except per share data)
|
|
|
Previously Disclosed in Form 10-K
|
|
|
|
|
|
|
As Reported with Change
|
|
|
|
|
Year Ended
December 31, 2019
|
|
|
Impact of Change
|
|
|
Year Ended
December 31, 2019
|
|
|
Settlement of retirement benefit obligations
|
|
$
|
137
|
|
|
$
|
(3
|
)
|
|
$
|
134
|
|
|
Investment and other (income) expense
|
|
|
(37
|
)
|
|
|
6
|
|
|
|
(31
|
)
|
|
(Loss) before income taxes
|
|
|
(288
|
)
|
|
|
(3
|
)
|
|
|
(291
|
)
|
|
Income tax expense (benefit)
|
|
|
7
|
|
|
|
(1
|
)
|
|
|
6
|
|
|
Net (loss)
|
|
|
(295
|
)
|
|
|
(2
|
)
|
|
|
(297
|
)
|
|
Basic net (loss) per share
|
|
|
(8.82
|
)
|
|
|
(0.07
|
)
|
|
|
(8.89
|
)
|
|
Diluted net (loss) per share
|
|
|
(8.82
|
)
|
|
|
(0.07
|
)
|
|
|
(8.89
|
)
|
|
Adjustment for net periodic pension plan
cost
|
|
|
54
|
|
|
|
2
|
|
|
|
56
|
|
|
Other comprehensive income
|
|
|
56
|
|
|
|
2
|
|
|
|
58
|
|
|
Comprehensive (loss)
|
|
|
(239
|
)
|
|
|
—
|
|
|
|
(239
|
)
|
|
|
|
Previously Disclosed in Form 10-Q
|
|
|
|
|
|
|
As Reported with Change
|
|
|
|
|
Three Months Ended
March 31, 2019
|
|
|
Impact of Change
|
|
|
Three Months Ended
March 31, 2019
|
|
|
Settlement of retirement benefit obligations
|
|
$
|
135
|
|
|
$
|
(3
|
)
|
|
$
|
132
|
|
|
Investment and other (income) expense
|
|
|
(10
|
)
|
|
|
2
|
|
|
|
(8
|
)
|
|
(Loss) income before income taxes
|
|
|
(163
|
)
|
|
|
1
|
|
|
|
(162
|
)
|
|
Income tax (benefit)
|
|
|
(37
|
)
|
|
|
—
|
|
|
|
(37
|
)
|
|
Net (loss) income
|
|
|
(126
|
)
|
|
|
1
|
|
|
|
(125
|
)
|
|
Basic net (loss) income per share
|
|
|
(3.79
|
)
|
|
|
0.02
|
|
|
|
(3.77
|
)
|
|
Diluted net (loss) income per share
|
|
|
(3.79
|
)
|
|
|
0.02
|
|
|
|
(3.77
|
)
|
|
Adjustment for net periodic pension plan
cost
|
|
|
107
|
|
|
|
(1
|
)
|
|
|
106
|
|
|
Other comprehensive income (loss)
|
|
|
108
|
|
|
|
(1
|
)
|
|
|
107
|
|
|
Comprehensive (loss)
|
|
|
(18
|
)
|
|
|
—
|
|
|
|
(18
|
)
|
|
|
|
Previously Disclosed in Form 10-Q
|
|
|
|
|
|
|
As Reported with Change
|
|
|
|
|
Three Months Ended
June 30, 2019
|
|
|
Impact of Change
|
|
|
Three Months Ended
June 30, 2019
|
|
|
Settlement of retirement benefit obligations
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
Investment and other (income) expense
|
|
|
(9
|
)
|
|
|
1
|
|
|
|
(8
|
)
|
|
(Loss) before income taxes
|
|
|
(27
|
)
|
|
|
(1
|
)
|
|
|
(28
|
)
|
|
Income tax (benefit)
|
|
|
(3
|
)
|
|
|
—
|
|
|
|
(3
|
)
|
|
Net (loss)
|
|
|
(24
|
)
|
|
|
(1
|
)
|
|
|
(25
|
)
|
|
Basic net (loss) per share
|
|
|
(0.69
|
)
|
|
|
(0.03
|
)
|
|
|
(0.72
|
)
|
|
Diluted net (loss) per share
|
|
|
(0.69
|
)
|
|
|
(0.03
|
)
|
|
|
(0.72
|
)
|
|
Adjustment for net periodic pension plan
cost
|
|
|
3
|
|
|
|
1
|
|
|
|
4
|
|
|
Other comprehensive income
|
|
|
4
|
|
|
|
1
|
|
|
|
5
|
|
|
Comprehensive (loss)
|
|
|
(20
|
)
|
|
|
—
|
|
|
|
(20
|
)
|
12
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three Months Ended March 31, 2020 and 2019
(tabular amounts in millions, except per share data)
|
|
|
Previously Disclosed in Form 10-Q
|
|
|
|
|
|
|
As Reported with Change
|
|
|
|
|
Three Months Ended
September 30, 2019
|
|
|
Impact of Change
|
|
|
Three Months Ended
September 30, 2019
|
|
|
Settlement of retirement benefit obligations
|
|
$
|
1
|
|
|
|
—
|
|
|
$
|
1
|
|
|
Investment and other (income) expense
|
|
|
(9
|
)
|
|
|
1
|
|
|
|
(8
|
)
|
|
Income (loss) before income taxes
|
|
|
24
|
|
|
|
(1
|
)
|
|
|
23
|
|
|
Income tax expense
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Net income (loss)
|
|
|
24
|
|
|
|
(1
|
)
|
|
|
23
|
|
|
Basic net income (loss) per share
|
|
|
0.69
|
|
|
|
(0.03
|
)
|
|
|
0.66
|
|
|
Diluted net income (loss) per share
|
|
|
0.69
|
|
|
|
(0.03
|
)
|
|
|
0.66
|
|
|
Adjustment for net periodic pension plan
cost
|
|
|
2
|
|
|
|
1
|
|
|
|
3
|
|
|
Other comprehensive income
|
|
|
—
|
|
|
|
1
|
|
|
|
1
|
|
|
Comprehensive income
|
|
|
24
|
|
|
|
—
|
|
|
|
24
|
|
|
|
|
Previously Disclosed in Form 10-Q
|
|
|
|
|
|
|
As Reported with Change
|
|
|
|
|
Three Months Ended
December 31, 2019
|
|
|
Impact of Change
|
|
|
Three Months Ended
December 31, 2019
|
|
|
Settlement of retirement benefit obligations
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Investment and other (income) expense
|
|
|
(9
|
)
|
|
|
2
|
|
|
|
(7
|
)
|
|
(Loss) before income taxes
|
|
|
(122
|
)
|
|
|
(2
|
)
|
|
|
(124
|
)
|
|
Income tax expense (benefit)
|
|
|
47
|
|
|
|
(1
|
)
|
|
|
46
|
|
|
Net (loss)
|
|
|
(169
|
)
|
|
|
(1
|
)
|
|
|
(170
|
)
|
|
Basic net (loss) per share
|
|
|
(5.02
|
)
|
|
|
(0.03
|
)
|
|
|
(5.05
|
)
|
|
Diluted net (loss) per share
|
|
|
(5.02
|
)
|
|
|
(0.03
|
)
|
|
|
(5.05
|
)
|
The tables below represent the impact of the change in accounting principle on the condensed consolidated balance sheet as of March 31, 2020 and the statements of operations and comprehensive income for the three months ended March 31, 2020:
|
|
|
Previous Accounting Method
|
|
|
|
|
|
|
As Reported
|
|
|
|
|
March 31, 2020
|
|
|
Impact of Change
|
|
|
March 31, 2020
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Accumulated deficit)
|
|
$
|
(408
|
)
|
|
$
|
(9
|
)
|
|
$
|
(417
|
)
|
|
Accumulated other comprehensive loss
(income)
|
|
|
(535
|
)
|
|
|
10
|
|
|
|
(525
|
)
|
|
Pension liabilities
|
|
142
|
|
|
|
(1
|
)
|
|
|
141
|
|
|
|
|
Previous Accounting Method
|
|
|
|
|
|
|
As Reported
|
|
|
|
|
March 31, 2020
|
|
|
Impact of Change
|
|
|
March 31, 2020
|
|
|
Investment and other (income)
|
|
$
|
(8
|
)
|
|
$
|
(2
|
)
|
|
$
|
(10
|
)
|
|
(Loss) income before income taxes
|
|
|
(53
|
)
|
|
|
2
|
|
|
|
(51
|
)
|
|
Income tax expense
|
|
|
1
|
|
|
|
—
|
|
|
|
1
|
|
|
Net (loss) income
|
|
|
(54
|
)
|
|
|
2
|
|
|
|
(52
|
)
|
|
Basic net (loss) income per share
|
|
|
(1.61
|
)
|
|
|
0.05
|
|
|
|
(1.56
|
)
|
|
Diluted net (loss) income per share
|
|
|
(1.61
|
)
|
|
|
0.05
|
|
|
|
(1.56
|
)
|
|
Adjustment for net periodic pension plan
cost
|
|
|
4
|
|
|
|
(1
|
)
|
|
|
3
|
|
|
Other comprehensive (loss)
|
|
|
(7
|
)
|
|
|
(1
|
)
|
|
|
(8
|
)
|
|
Comprehensive (loss) income
|
|
|
(61
|
)
|
|
|
1
|
|
|
|
(60
|
)
|
13
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three Months Ended March 31, 2020 and 2019
(tabular amounts in millions, except per share data)
Note 2. Revenue Recognition
Disaggregated Revenue
The following tables provide information about disaggregated revenue by major products/service lines and timing of revenue recognition, and include a reconciliation of the disaggregated revenue with reportable segments for the three months ended March 31, 2020 and 2019.
|
|
|
Three Months Ended
|
|
|
|
|
March 31, 2020
|
|
|
|
|
Magazines,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Catalogs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
|
|
|
|
|
|
|
Office
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Logistics
|
|
|
Book
|
|
|
Products
|
|
|
Mexico
|
|
|
Other
|
|
|
Total
|
|
|
Major Products / Service Lines
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book (a)
|
|
$
|
—
|
|
|
$
|
204
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Magazines and Catalogs (b)
|
|
$
|
250
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
23
|
|
|
$
|
21
|
|
|
$
|
294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Logistics
|
|
$
|
77
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Directories
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
14
|
|
|
$
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office Products
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
112
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
112
|
|
|
Total
|
|
$
|
327
|
|
|
$
|
204
|
|
|
$
|
112
|
|
|
$
|
23
|
|
|
$
|
35
|
|
|
$
|
701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Timing of Revenue Recognition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products and services transferred at a
point in time
|
|
$
|
225
|
|
|
$
|
172
|
|
|
$
|
112
|
|
|
$
|
23
|
|
|
$
|
14
|
|
|
$
|
546
|
|
|
Products and services transferred over
time
|
|
|
102
|
|
|
|
32
|
|
|
|
—
|
|
|
|
—
|
|
|
|
21
|
|
|
|
155
|
|
|
Total
|
|
$
|
327
|
|
|
$
|
204
|
|
|
$
|
112
|
|
|
$
|
23
|
|
|
$
|
35
|
|
|
$
|
701
|
|
14
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three Months Ended March 31, 2020 and 2019
(tabular amounts in millions, except per share data)
|
|
|
Three Months Ended
|
|
|
|
|
March 31, 2019
|
|
|
|
|
Magazines,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Catalogs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
|
|
|
|
|
|
|
Office
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Logistics
|
|
|
Book
|
|
|
Products
|
|
|
Mexico
|
|
|
Other
|
|
|
Total
|
|
|
Major Products / Service Lines
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book (a)
|
|
$
|
—
|
|
|
$
|
260
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Magazines and Catalogs (b)
|
|
$
|
319
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
24
|
|
|
$
|
20
|
|
|
$
|
363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Logistics
|
|
$
|
84
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Directories
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
19
|
|
|
$
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office Products
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
119
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
119
|
|
|
Total
|
|
$
|
403
|
|
|
$
|
260
|
|
|
$
|
119
|
|
|
$
|
24
|
|
|
$
|
39
|
|
|
$
|
845
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Timing of Revenue Recognition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products and services transferred at a
point in time
|
|
$
|
288
|
|
|
$
|
228
|
|
|
$
|
119
|
|
|
$
|
24
|
|
|
$
|
19
|
|
|
$
|
678
|
|
|
Products and services transferred over
time
|
|
|
115
|
|
|
|
32
|
|
|
|
—
|
|
|
|
—
|
|
|
|
20
|
|
|
|
167
|
|
|
Total
|
|
$
|
403
|
|
|
$
|
260
|
|
|
$
|
119
|
|
|
$
|
24
|
|
|
$
|
39
|
|
|
$
|
845
|
|
|
|
(a)
|
Includes e-book formatting and supply chain management associated with book production
|
|
|
(b)
|
Includes premedia and co-mail
|
Accounts Receivable
As disclosed in Note 1, Overview and Basis of Presentation, the Company adopted ASU 2016-13 on January 1, 2020 using the modified retrospective adoption method. As a result of the adoption, the Company now records an allowance for credit losses on unbilled receivables which resulted in a de minimis amount of expense for the three months ended March 31, 2020. There were no changes to the Company’s policy relating to its receivables. To recognize the initial adoption, the Company recorded a de minimis increase to its January 1, 2020 balance for allowance for credit losses and an offsetting impact to accumulated deficit in the condensed consolidated balance sheet.
Transactions affecting the allowances for doubtful accounts receivable balance during the three months ended March 31, 2020 were as follows:
|
|
|
Three Months Ended
|
|
|
|
|
March 31, 2020
|
|
|
Balance, beginning of year
|
|
$
|
12
|
|
|
Provisions charged to expense
|
|
|
1
|
|
|
Balance, end of period
|
|
$
|
13
|
|
There was a de minimis amount of write-offs and recoveries during the three months ended March 31, 2020.
15
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three Months Ended March 31, 2020 and 2019
(tabular amounts in millions, except per share data)
Contract Balances
The following table provides changes in contract assets and liabilities during the three months ended March 31, 2020:
|
|
|
Short-Term
Contract Assets
|
|
|
Long-Term
Contract Assets
|
|
|
Contract
Liabilities
|
|
|
Beginning Balance, January 1, 2020
|
|
$
|
40
|
|
|
$
|
14
|
|
|
$
|
17
|
|
|
Additions to unbilled accounts receivable
|
|
|
17
|
|
|
|
—
|
|
|
|
—
|
|
|
Unbilled accounts receivable recognized in
trade receivables
|
|
|
(28
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Payment of contract acquisition costs
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Amortization of contract acquisition costs
|
|
|
—
|
|
|
|
(3
|
)
|
|
|
—
|
|
|
Write-off due to termination of contract
acquisition costs
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Revenue recognized that was included in
contract liabilities as of January 1, 2020
|
|
|
—
|
|
|
|
—
|
|
|
|
(12
|
)
|
|
Increases due to cash received
|
|
|
—
|
|
|
|
—
|
|
|
|
11
|
|
|
Ending Balance, March 31, 2020
|
|
$
|
29
|
|
|
$
|
11
|
|
|
$
|
16
|
|
The trade receivables balance was $371 million and $366 million as of March 31, 2020 and December 31, 2019, respectively. There was a de minimis amount of credit losses recognized on short-term contract assets recorded during the three months ended March 31, 2020.
Note 3. Leases
Lease Expense
The components of total net lease expense were as follows:
|
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
|
March 31, 2020
|
|
|
March 31, 2019
|
|
|
Operating lease expense
|
|
$
|
17
|
|
|
$
|
17
|
|
|
Sublease (income)
|
|
|
(2
|
)
|
|
|
(2
|
)
|
|
Variable lease expense
|
|
|
2
|
|
|
|
3
|
|
|
Total net lease expense
|
|
$
|
17
|
|
|
$
|
18
|
|
During each of the three months ended March 31, 2020 and 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.
16
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three Months Ended March 31, 2020 and 2019
(tabular amounts in millions, except per share data)
Cash Flow Information
Supplemental non-cash information related to leases is included below:
|
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
|
March 31, 2020
|
|
|
March 31, 2019
|
|
|
ROU assets acquired in exchange for
lease obligations:
|
|
|
|
|
|
|
|
|
|
ROU assets
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
$
|
4
|
|
|
$
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease obligations
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
$
|
4
|
|
|
$
|
2
|
|
During the three months ended March 31, 2020 and 2019, the Company recorded $14 million and $16 million of operating cash outflows from operating leases, respectively.
During each of the three months ended March 31, 2020 and 2019, the Company recorded a de minimis amount of cash outflows from financing leases. No finance lease ROU assets or obligations were acquired during the three months ended March 31, 2020 and 2019.
Lease Terms and Discount Rates
Supplemental information regarding the weighted average lease term and discount rate for the lease liabilities as of March 31, 2020 is included below:
|
|
|
March 31, 2020
|
|
|
Weighted Average Remaining Lease Term (years)
|
|
|
|
|
|
Operating leases
|
|
|
4.9
|
|
|
Financing leases
|
|
|
2.0
|
|
|
|
|
|
|
|
|
Weighted Average Discount Rate
|
|
|
|
|
|
Operating leases
|
|
|
8.7
|
%
|
|
Financing leases
|
|
|
6.9
|
%
|
17
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three Months Ended March 31, 2020 and 2019
(tabular amounts in millions, except per share data)
Lease Maturities
The annual maturities of lease liabilities as of March 31, 2020 were as follows:
|
|
|
Operating Leases
|
|
|
2020
|
|
$
|
39
|
|
|
2021
|
|
|
45
|
|
|
2022
|
|
|
34
|
|
|
2023
|
|
|
24
|
|
|
2024
|
|
|
19
|
|
|
2025 & thereafter
|
|
|
28
|
|
|
Total undiscounted lease payments
|
|
|
189
|
|
|
Imputed interest
|
|
|
(26
|
)
|
|
Total lease liabilities
|
|
$
|
163
|
|
During the three months ended March 31, 2020, the Company recorded a de minimis amount of maturities for finance lease liabilities. As of March 31, 2020, the Company has additional operating leases that have not commenced for an undiscounted amount of $1 million.
Note 4. Inventories
The components of the Company’s inventories, net of excess and obsolescence reserves for raw materials and finished goods, at March 31, 2020 and December 31, 2019 were as follows:
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Raw materials and manufacturing supplies
|
|
$
|
70
|
|
|
$
|
91
|
|
|
Work in process
|
|
|
38
|
|
|
|
38
|
|
|
Finished goods
|
|
|
89
|
|
|
|
87
|
|
|
Last in, first out reserve
|
|
|
(41
|
)
|
|
|
(46
|
)
|
|
Total
|
|
$
|
156
|
|
|
$
|
170
|
|
Note 5. Property, Plant and Equipment
The components of the Company’s property, plant and equipment at March 31, 2020 and December 31, 2019 were as follows:
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Land
|
|
$
|
34
|
|
|
$
|
35
|
|
|
Buildings
|
|
|
662
|
|
|
|
663
|
|
|
Machinery and equipment
|
|
|
2,989
|
|
|
|
3,006
|
|
|
|
|
|
3,685
|
|
|
|
3,704
|
|
|
Less: Accumulated depreciation
|
|
|
(3,261
|
)
|
|
|
(3,264
|
)
|
|
Total
|
|
$
|
424
|
|
|
$
|
440
|
|
During the three months ended March 31, 2020 and 2019, depreciation expense was $21 million and $24 million, respectively. Refer to Note 8, Restructuring, Impairment and Other Charges, for a discussion on impairment reviews performed as of March 31, 2020 and information on impairment recorded during the three months ended March 31, 2020 and 2019.
18
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three Months Ended March 31, 2020 and 2019
(tabular amounts in millions, except per share data)
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 $6 million and $9 million at March 31, 2020 and December 31, 2019, respectively. These assets are included in prepaid expenses and other current assets in the condensed consolidated balance sheets at the lower of their historical net book value or their estimated fair value, less estimated costs to sell.
Note 6. Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill for the three months ended March 31, 2020 were as follows:
|
|
|
Magazines,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Catalogs
|
|
|
|
|
|
|
Office
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and Logistics
|
|
|
Book
|
|
|
Products
|
|
|
Mexico
|
|
|
Other
|
|
|
Total
|
|
|
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
|
|
|
Net book value as of March 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
523
|
|
|
|
354
|
|
|
|
110
|
|
|
|
—
|
|
|
|
5
|
|
|
|
992
|
|
|
Accumulated impairment losses
|
|
|
(502
|
)
|
|
|
(354
|
)
|
|
|
(79
|
)
|
|
|
—
|
|
|
|
(5
|
)
|
|
|
(940
|
)
|
|
Total
|
|
$
|
21
|
|
|
$
|
—
|
|
|
$
|
31
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
52
|
|
The components of other intangible assets at March 31, 2020 and December 31, 2019 were as follows:
|
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Net Book
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Net Book
|
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Value
|
|
|
Amount
|
|
|
Amortization
|
|
|
Value
|
|
|
Customer relationships
|
|
$
|
248
|
|
|
$
|
(153
|
)
|
|
$
|
95
|
|
|
$
|
248
|
|
|
$
|
(149
|
)
|
|
$
|
99
|
|
|
Trade names
|
|
|
29
|
|
|
|
(8
|
)
|
|
|
21
|
|
|
|
29
|
|
|
|
(8
|
)
|
|
|
21
|
|
|
Total other intangible assets
|
|
$
|
277
|
|
|
$
|
(161
|
)
|
|
$
|
116
|
|
|
$
|
277
|
|
|
$
|
(157
|
)
|
|
$
|
120
|
|
During the three months ended March 31, 2020 and 2019, amortization expense for other intangible assets was $4 million and $5 million, respectively.
The following table outlines the estimated annual amortization expense related to all amortizable intangible assets:
|
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 7, Restructuring, Impairment and Other Charges, for information on the goodwill and intangible asset impairment reviews performed as of March 31, 2020.
19
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three Months Ended March 31, 2020 and 2019
(tabular amounts in millions, except per share data)
Note 7. Restructuring, Impairment and Other Charges
For the three months ended March 31, 2020 and 2019, the Company recorded the following net restructuring, impairment and other charges disclosed in the condensed consolidated statements of operations:
|
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Employee
|
|
|
Restructuring
|
|
|
Restructuring
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
March 31, 2020
|
|
Terminations
|
|
|
Charges
|
|
|
Charges
|
|
|
Impairment
|
|
|
Charges
|
|
|
Total
|
|
|
Magazines, Catalogs and Logistics
|
|
$
|
—
|
|
|
$
|
10
|
|
|
$
|
10
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
11
|
|
|
Book
|
|
|
1
|
|
|
|
2
|
|
|
|
3
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3
|
|
|
Office Products
|
|
|
2
|
|
|
|
—
|
|
|
|
2
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2
|
|
|
Mexico
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Corporate
|
|
|
—
|
|
|
|
10
|
|
|
|
10
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10
|
|
|
Total
|
|
$
|
3
|
|
|
$
|
22
|
|
|
$
|
25
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
26
|
|
|
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Employee
|
|
|
Restructuring
|
|
|
Restructuring
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
March 31, 2019
|
|
Terminations
|
|
|
Charges
|
|
|
Charges
|
|
|
Impairment
|
|
|
Charges
|
|
|
Total
|
|
|
Magazines, Catalogs and Logistics
|
|
$
|
5
|
|
|
$
|
4
|
|
|
$
|
9
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
11
|
|
|
Book
|
|
|
—
|
|
|
|
1
|
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
Office Products
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Mexico
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Corporate
|
|
|
—
|
|
|
|
1
|
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
Total
|
|
$
|
5
|
|
|
$
|
6
|
|
|
$
|
11
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
13
|
|
Restructuring Charges
For the three months ended March 31, 2020, the Company incurred net other restructuring charges of $22 million, primarily due to facility costs and costs to move equipment, expenses associated with new revenue opportunities, and cost savings initiatives implemented in 2019. For the three months ended March 31, 2020, the Company incurred charges of $3 million for an aggregate of 397 employees, of whom 197 were terminated as of or prior to March 31, 2020, primarily related to the closure of one facility in the Office Products segment.
For the three months ended March 31, 2019, the Company incurred charges of $5 million for an aggregate of 240 employees, primarily related to the closure of one facility in the Magazines, Catalogs and Logistics segment. The Company incurred net other restructuring charges of $6 million for the three months ended March 31, 2019 primarily due to charges related to facility costs, as well as costs associated with new revenue opportunities and cost savings initiatives implemented during the quarter. The Company recorded $2 million of net impairment charges related to machinery and equipment associated with facility closings in the Magazines, Catalogs and Logistics segment.
Impairment Reviews
The Company performs interim reviews of goodwill for indicators of impairment each quarter to assess whether an interim impairment review is required for any reporting unit. Additionally, 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. As part of its interim reviews, management analyzes operating results for the period compared to expected results as of the prior year’s review, key assumptions such as discount rates and
20
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three Months Ended March 31, 2020 and 2019
(tabular amounts in millions, except per share data)
expected long-term growth rates, changes in the overall market value of the Company’s equity and debt securities, significant negative industry and economic trends, as well as other factors.
Goodwill
Due the potential impact of COVID-19 on the company’s future performance, management determined that a further review of the reporting units’ goodwill for indicators of impairment was appropriate. As discussed in Note 1, Overview and Basis of Presentation, COVID-19 has the potential to have a negative impact across several of the Company’s segments. As of March 31, 2020, only two reporting units had goodwill: Office Products ($31 million) and logistics ($21 million).
For the Office Products and logistics 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. For both reporting units, 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 March 31, 2020.
The Company performed a Step 1 impairment test of goodwill in accordance with Accounting Standards Codification (“ASC”) 350, Intangibles-Goodwill and Other, which includes comparing the estimated fair value of each reporting unit to its carrying amount, including goodwill. If the carrying amount of a reporting unit is greater than zero and its fair value exceeds its carrying amount, goodwill of the reporting unit is considered not impaired. However, if the carrying amount of a reporting unit exceeds its fair value, the goodwill is considered impaired and a full or partial write-off of goodwill would be required.
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.
As a result of the interim impairment tests Office Products and logistics, the Company did not recognize any goodwill impairment charges as the estimated fair values of the reporting units exceeded their respective carrying values by 10% and 32%, respectively.
Other Intangible Assets and Property, Plant and Equipment
Given the continued decline in demand in the magazines and catalogs reporting unit and the potential impact of COVID-19, management determined that a further review of the reporting unit’s property, plant and equipment and right-of-use assets for operating leases for recoverability was appropriate during the first quarter of 2020. 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 the first quarter of 2020.
21
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three Months Ended March 31, 2020 and 2019
(tabular amounts in millions, except per share data)
In addition to the interim tests noted above, the Company reviewed the Office Products’ intangible assets and Books’ intangible assets and property, plant and equipment for recoverability. There were no impairment charges recorded as a result of the recoverability tests.
Future Interim Reviews
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.
Other Charges
For each of the three months ended March 31, 2020 and 2019, the Company recorded de minimis amount of other charges for multiemployer pension plan withdrawal obligations unrelated to facility closures. The total liability for the withdrawal obligations associated with the Company’s decision to withdraw from certain multiemployer pension plans included $3 million in accrued liabilities and $17 million in restructuring and multiemployer pension plan liabilities at March 31, 2020.
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 or the Company to withdraw from such plans in the future. While it is not possible to quantify the potential impact of future events or circumstances, reductions in other employers’ participation in multiemployer pension plans, including certain plans from which the Company has previously withdrawn, could have a material effect on the Company’s previously estimated withdrawal liabilities and condensed consolidated balance sheets, statements of operations and cash flows.
Restructuring Reserve
The restructuring reserve as of December 31, 2019 and March 31, 2020, and changes during the three months ended March 31, 2020 were as follows:
|
|
|
December 31,
|
|
|
Restructuring
|
|
|
Cash
|
|
|
March 31,
|
|
|
|
|
2019
|
|
|
Charges
|
|
|
Paid
|
|
|
2020
|
|
|
Employee terminations
|
|
$
|
29
|
|
|
$
|
3
|
|
|
$
|
(5
|
)
|
|
$
|
27
|
|
|
Multiemployer pension plan withdrawal
obligations
|
|
|
31
|
|
|
|
1
|
|
|
|
(2
|
)
|
|
|
30
|
|
|
Other and lease termination
|
|
|
2
|
|
|
|
19
|
|
|
|
(13
|
)
|
|
|
8
|
|
|
Total
|
|
$
|
62
|
|
|
$
|
23
|
|
|
$
|
(20
|
)
|
|
$
|
65
|
|
The current portion of restructuring reserves of $41 million at March 31, 2020 was included in accrued liabilities, while the long-term portion of $24 million, which primarily related to multiemployer pension plan withdrawal obligations related to facility closures, was included in restructuring and multiemployer pension liabilities at March 31, 2020.
The Company anticipates that payments associated with the employee terminations reflected in the above table will be substantially completed by March 31, 2021.
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 withdrawal obligations.
The restructuring liabilities classified as “other” consisted of other facility closing costs and costs associated with new revenue opportunities and cost savings initiatives implemented in 2019.
22
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three Months Ended March 31, 2020 and 2019
(tabular amounts in millions, except per share data)
Note 8. Commitments and Contingencies
The Company is subject to laws and regulations relating to the protection of the environment. The Company accrues for expenses associated with environmental remediation obligations when such amounts are probable and can be reasonably estimated. Such accruals are adjusted as new information develops or circumstances change and are generally not discounted. The Company has been designated as a potentially responsible party or has received claims in nine active federal and state Superfund and other multiparty remediation sites. In addition to these sites, the Company may also have the obligation to remediate 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.
Note 9. Debt
The Company’s debt at March 31, 2020 and December 31, 2019 consisted of the following:
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Borrowings under the Revolving Credit Facility
|
|
$
|
249
|
|
|
$
|
249
|
|
|
Term Loan Facility due September 30, 2022 (a)
|
|
|
219
|
|
|
|
218
|
|
|
8.75% Senior Secured Notes due October 15, 2023
|
|
|
450
|
|
|
|
450
|
|
|
Finance lease and other obligations
|
|
|
1
|
|
|
|
2
|
|
|
Unamortized debt issuance costs
|
|
|
(8
|
)
|
|
|
(9
|
)
|
|
Total debt
|
|
|
911
|
|
|
|
910
|
|
|
Less: current portion
|
|
|
(911
|
)
|
|
|
(465
|
)
|
|
Long-term debt
|
|
$
|
—
|
|
|
$
|
445
|
|
|
|
(a)
|
The borrowings under the Term Loan Facility are subject to a variable interest rate. As of March 31, 2020 and December 31, 2019, the interest rate was 7.02% and 7.12%, 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”), which was reduced to $300 million per the amendment effective on August 5, 2019. The debt issuance costs and original issue discount are being amortized over the life of the facilities using the effective interest method.
23
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three Months Ended March 31, 2020 and 2019
(tabular amounts in millions, except per share data)
The Credit Agreement is subject to a number of covenants, including, but not limited to, a minimum Interest Coverage Ratio and a Consolidated Leverage Ratio, as defined in and calculated pursuant to the Credit Agreement, that, in part, restrict the Company’s ability to incur additional indebtedness, create liens, engage in mergers and consolidations, make restricted payments and dispose of certain assets. Each of these covenants is subject to important exceptions and qualifications.
Credit Agreement Amendments
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.
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.
Waiver, Forbearance Agreement and Fourth Amendment to Credit Agreement
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 waived the defaults or events of default that occurred as a result of the financial covenant noncompliance on December 31, 2019 and prevented 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”). As a result of the noncompliance as of December, 31, 2019, the Company annual report on Form 10-K disclosed there was substantial doubt about the Company’s ability to continue as a going concern as of December 31, 2019.
24
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three Months Ended March 31, 2020 and 2019
(tabular amounts in millions, except per share data)
Voluntary Reorganization under Chapter 11
The commencement of the Chapter 11 Cases constituted an event of default with respect to the Senior Notes, the Term Loan Facility and the Revolving Credit Facility (the “Debt Instruments”). The Debt Instruments provide that as a result of the commencement of the Chapter 11 Cases, the principal and interest due thereunder shall be immediately due and payable. Any efforts to enforce payment obligations under the Debt Instruments will be automatically stayed as a result of the commencement of the Chapter 11 Cases, and the creditors’ right of enforcement in respect of the Debt Instruments are subject to the applicable provisions of the Bankruptcy Code.
Debtor-in-Possession Financing
As previously disclosed, on April 15, 2020 (the “Closing Date”), the Company entered into a Superpriority Secured Debtor-in-Possession Credit Agreement (the “DIP Credit Agreement”), upon the entry of an interim order of the Bankruptcy Court granting interim approval of the DIP Credit Agreement, among the Company, as borrower, the lenders from time to time party thereto (the “DIP Lenders”) and Bank of America, N.A. as administrative agent (in such capacity, the “DIP Agent”), pursuant to which the DIP Lenders committed to provide a senior secured superpriority debtor-in-possession credit facility in an aggregate principal amount not to exceed $100 million (the “DIP Facility”).
The DIP Facility consists of (i) revolving loans not to exceed an aggregate amount of $55 million (the “Revolving Loans”), subject to the limitation in the next succeeding sentence, and (ii) letters of credit not to exceed an aggregate amount of $45 million, with $5 million of that amount being available for the issuance of new letters of credit (together with the Revolving Loans, the “DIP Loan Commitments”). During the interim period prior to the entry of a final order of the Bankruptcy Court authorizing the DIP Facility (the “Final Order”), the Company’s capacity to incur Revolving Loans is limited to an aggregate amount of up to $27.5 million.
Borrowings under the DIP Facility bear interest at a rate per annum equal to, at the Company’s option, either (i) the Alternate Base Rate (as defined in the DIP Credit Agreement) plus 5.75%, or (ii) LIBOR plus 6.75%. Upon an event of default under the DIP Credit Agreement (an “Event of Default”), an additional 2.00% may be added to the Interest Rate. In addition, the Company is required to pay (i) an unused line fee of 0.50% per annum (payable quarterly in arrears) on the average daily unused portion of the DIP Loan Commitments, (ii) a commitment fee of (x) 1.00% per annum on the DIP Loan Commitments, regardless of usage, plus (y) $100,000 per week for the first 20 weeks after the Closing Date, in each case, payable quarterly in arrears, (iii) a participation fee equal to 6.75% multiplied by the amounts available to be drawn under outstanding letters of credit, payable quarterly, and (iv) a fronting fee equal to 0.125% per annum on amounts available to be drawn under outstanding letters of credit, payable quarterly.
Proceeds of the loans made under the DIP Facility may be used only for the following purposes: (i) working capital and other general corporate purposes, including the payment of professional fees and expenses, (ii) to pay the reasonable fees and expenses of the DIP Agent and the DIP Lenders (including the reasonable fees and expenses of counsel and financial advisors), (iii) to pay claims in respect of certain prepetition creditors, (iv) to repay indebtedness owed to holders of the Prepetition Priority Payment Obligations (as defined in the DIP Credit Agreement) (the “Prepetition Revolving Lenders”), and (v) making adequate protection payments to the Prepetition Revolving Lenders, the Prepetition Term Lenders and the Prepetition Secured Noteholders (each as defined in the DIP Credit Agreement).
In connection with the DIP Credit Agreement, certain subsidiaries of the Company became parties to a guarantee agreement as guarantors (collectively, the “Guarantors,” and together with the Company, the “DIP Credit Parties”). Each of the Guarantors is a debtor and debtor-in-possession in the Chapter 11 Cases. The Guarantors have guaranteed, on a joint and several basis, all of the obligations under the DIP Facility. To secure the obligations under the DIP Facility, the Company and the Guarantors have granted liens on substantially all of their assets, whether now owned or hereafter acquired.
The DIP Facility will mature on the earliest of the following dates: (i) unless the Final Order is entered, May 15, 2020, (ii) the date upon which any Plan of Reorganization (as defined in the DIP Credit Agreement) becomes effective, or (iii) the six-month anniversary following the Petition Date, provided that such maturity may be extended with the consent of the Required Lenders (as defined in the DIP Credit Agreement) to a date no later than nine months after the Petition Date.
25
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three Months Ended March 31, 2020 and 2019
(tabular amounts in millions, except per share data)
The DIP Credit Agreement contains representations, warranties and covenants that are customary for debtor-in-possession facilities of this type, including, but not limited to, certain case milestones, specified restrictions on indebtedness, liens, guarantee obligations, liquidations and dissolutions, sales of assets, leases, payment of dividends and other restricted payments, voluntary payments of other indebtedness, investments, loans and advances, transactions with affiliates, sale and leaseback transactions and compliance with case milestones. The DIP Credit Agreement also contains customary events of default for facilities of this type, including failure to achieve the milestones and the occurrence of certain events in the Chapter 11 Cases.
The DIP Facility is subject to final approval by the Bankruptcy Court.
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 $546 million and $277 million at March 31, 2020 and December 31, 2019, respectively.
There were $249 million of borrowings under the Revolving Credit Facility as of both March 31, 2020 and December 31, 2019. The weighted-average interest rate on borrowings under the Company’s Revolving Credit Facility was 4.65% during the three months ended March 31, 2020.
There was $18 million and $19 million of net interest expense during the three months ended March 31, 2020 and 2019, respectively.
Note 10. Earnings Per Share
During the three months ended March 31, 2020 and 2019, no shares of common stock were purchased by the Company; however, a de minimis amount of shares were withheld from employees for tax liabilities upon vesting of equity awards.
Basic (loss) 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, and performance share units.
The following table shows the calculation of basic and diluted EPS, as well as a reconciliation of basic shares to diluted shares:
|
|
|
Three Months Ended
|
|
|
|
|
March 31,
|
|
|
|
|
2020
|
|
|
2019 (1)
|
|
|
Net (loss) per common share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(1.56
|
)
|
|
$
|
(3.77
|
)
|
|
Diluted
|
|
$
|
(1.56
|
)
|
|
$
|
(3.77
|
)
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Net (loss)
|
|
$
|
(52
|
)
|
|
$
|
(125
|
)
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares
outstanding
|
|
|
33.6
|
|
|
|
33.3
|
|
|
Dilutive options and awards
|
|
|
—
|
|
|
|
—
|
|
|
Diluted weighted average number of common
shares outstanding
|
|
|
33.6
|
|
|
|
33.3
|
|
26
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three Months Ended March 31, 2020 and 2019
(tabular amounts in millions, except per share data)
Refer to Note 1, Overview and Basis of Presentation, for information on the restated balances for the three months ended March 31, 2019.
Note 11. Retirement Plans
The Company is the sole sponsor of certain defined benefit pension plans that are included in the condensed consolidated balance sheets as of March 31, 2020 and December 31, 2019. 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, the U.S. Qualified Plan and related non-qualified benefits (the “Non-Qualified Plan”).
The components of the estimated net pension loss (income) for the three months ended March 31, 2020 and 2019 were as follows:
|
|
|
Three Months Ended
|
|
|
|
|
March 31, 2020
|
|
|
|
|
Qualified
|
|
|
Non-Qualified
& International
|
|
|
Total
|
|
|
Interest cost
|
|
$
|
15
|
|
|
$
|
1
|
|
|
$
|
16
|
|
|
Expected return on plan assets
|
|
|
(30
|
)
|
|
|
—
|
|
|
|
(30
|
)
|
|
Amortization of actuarial loss
|
|
|
4
|
|
|
|
—
|
|
|
|
4
|
|
|
Net periodic benefit (income) loss
|
|
$
|
(11
|
)
|
|
$
|
1
|
|
|
$
|
(10
|
)
|
|
|
|
Three Months Ended
|
|
|
|
|
March 31, 2019
|
|
|
|
|
Qualified
|
|
|
Non-Qualified
& International
|
|
|
Total
|
|
|
Interest cost
|
|
$
|
20
|
|
|
$
|
1
|
|
|
$
|
21
|
|
|
Expected return on plan assets
|
|
|
(31
|
)
|
|
|
—
|
|
|
|
(31
|
)
|
|
Amortization of actuarial loss
|
|
|
3
|
|
|
|
—
|
|
|
|
3
|
|
|
Settlement of retirement obligations
|
|
|
132
|
|
|
|
—
|
|
|
|
132
|
|
|
Net periodic benefit loss
|
|
$
|
124
|
|
|
$
|
1
|
|
|
$
|
125
|
|
In the first quarter of 2020, the Company adopted a change in method of accounting for the market-related value of assets for a class of assets within the U.S. Qualified Plan and Non-Qualified plans. The change in accounting method was retrospectively applied to periods in 2017, 2018 and 2019, and as a result, pension income shown above for the three months ended March 31, 2019 has been restated. Refer to Note 1, Overview and Basis of Presentation, for more information.
In the first quarter of 2019, the Company completed a partial settlement of its retirement benefit obligations related to the U.S. Qualified Plan 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. 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 $132 million in settlement of retirement benefit obligations in the condensed consolidated statement of operations in the first quarter of 2019. 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.
Settlement of retirement obligations is disclosed separately in the condensed consolidated statements of operations, while the remaining net periodic (loss) income for the three months ended March 31, 2020 and 2019 is included in the investment and other (income)-net.
Note 12. Taxes
27
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three Months Ended March 31, 2020 and 2019
(tabular amounts in millions, except per share data)
The CARES Act is intended to provide emergency relief to both businesses and individuals impacted by the COVID-19 pandemic.
Income Taxes
The CARES Act enacted several provisions that may impact corporations including the carryback of certain net operating losses and the expensing of additional interest under certain circumstances. The Company has estimated that these provisions will not result in a benefit for the three months ended March 31, 2020. As the Company assesses additional guidance issued by the U.S. Treasury Department, the IRS and other standard-setting bodies related to the CARES Act, it may record an impact to the income tax provision.
Payroll Taxes
The CARES Act allows companies to defer payments of the employer share (6.2% of wages) of Social Security payroll taxes from the date of enactment through December 31, 2020. Fifty percent of the taxes deferred are required to be paid by December 31, 2021 with the remaining fifty percent by December 31, 2022. As of March 31, 2020, the Company accrued $2 million of payroll taxes that will benefit from this adoption. The Company expects to continue to defer payroll taxes through the end of 2020.
Note 13. Comprehensive Income
The following table summarizes accumulated other comprehensive loss by component as of December 31, 2019 and March 31, 2020 and changes during the three months ended March 31, 2020.
|
|
|
Pension
|
|
|
Translation
|
|
|
|
|
|
|
|
|
Plan Cost
|
|
|
Adjustments
|
|
|
Total
|
|
|
Balance at December 31, 2019
|
|
$
|
(464
|
)
|
|
$
|
(53
|
)
|
|
$
|
(517
|
)
|
|
Other comprehensive (loss) before reclassifications
|
|
|
—
|
|
|
|
(11
|
)
|
|
|
(11
|
)
|
|
Amounts reclassified from accumulated other comprehensive loss
|
|
|
3
|
|
|
|
—
|
|
|
|
3
|
|
|
Net change in accumulated other comprehensive income (loss)
|
|
|
3
|
|
|
|
(11
|
)
|
|
|
(8
|
)
|
|
Balance at March 31, 2020
|
|
$
|
(461
|
)
|
|
$
|
(64
|
)
|
|
$
|
(525
|
)
|
The following table summarizes accumulated other comprehensive loss by component as of December 31, 2018 and March 31, 2019 and changes during the three months ended March 31, 2019.
|
|
|
Pension
|
|
|
Translation
|
|
|
|
|
|
|
|
|
Plan Cost
|
|
|
Adjustments
|
|
|
Total
|
|
|
Balance at December 31, 2018
|
|
$
|
(520
|
)
|
|
$
|
(55
|
)
|
|
$
|
(575
|
)
|
|
Other comprehensive income before reclassifications
|
|
|
104
|
|
|
|
1
|
|
|
|
105
|
|
|
Amounts reclassified from accumulated other comprehensive loss
|
|
|
2
|
|
|
|
—
|
|
|
|
2
|
|
|
Net change in accumulated other comprehensive loss
|
|
|
106
|
|
|
|
1
|
|
|
|
107
|
|
|
Balance at March 31, 2019
|
|
$
|
(414
|
)
|
|
$
|
(54
|
)
|
|
$
|
(468
|
)
|
In the first quarter of 2020, the Company adopted a change in method of accounting for the market-related value of assets for a class of assets within the U.S. Qualified Plan and Non-Qualified plans. The change in accounting method was retrospectively applied to periods in 2017, 2018 and 2019, and as a result, the pension rollforward for accumulated other comprehensive loss above and reclassification table below have been restated for the three months ended March 31, 2019. Refer to Notes 1, Overview and Basis of Presentation, and 11, Retirement Plans, for more information.
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 $104 million during the three months ended March 31, 2019 (including the restatement noted above). Refer to Note 11, Retirement Plans, for more information.
28
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three Months Ended March 31, 2020 and 2019
(tabular amounts in millions, except per share data)
Refer to the condensed consolidated statements of comprehensive income for the components of comprehensive (loss) income for the three months ended March 31, 2020 and 2019.
Reclassifications from accumulated other comprehensive loss for the three months ended March 31, 2020 and 2019 were as follows:
|
|
|
Three Months Ended
|
|
|
|
|
March 31,
|
|
|
|
|
2020
|
|
|
2019 (1)
|
|
|
Amortization of pension plan cost:
|
|
|
|
|
|
|
|
|
|
Net actuarial loss (a)
|
|
$
|
4
|
|
|
$
|
3
|
|
|
Reclassifications before tax
|
|
|
4
|
|
|
|
3
|
|
|
Income tax expense
|
|
|
1
|
|
|
|
1
|
|
|
Reclassifications, net of tax
|
|
$
|
3
|
|
|
$
|
2
|
|
(a) Amortization of pension plan cost is included in the calculation of net periodic pension plan (income) expense that is recognized in investment and other income-net in the condensed consolidated statements of operations (see Note 11, Retirement Plans).
(1) As Adjusted – Refer to the narrative above on the change in accounting method.
Note 14. 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.
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.
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.
29
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three Months Ended March 31, 2020 and 2019
(tabular amounts in millions, except per share data)
Other
The Other grouping consists of the following non-reportable segments: Directories and Print Management. Print Management provides outsourced print procurement and management 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.
Information by Segment
The Company has disclosed income (loss) from operations as the primary measure of segment earnings (loss). This is the measure of profitability used by the Company’s chief operating decision-maker and is most consistent with the presentation of profitability reported with the condensed consolidated financial statements.
|
|
|
|
|
|
|
Income (Loss)
|
|
|
|
|
|
|
Depreciation
|
|
|
|
|
|
|
Three Months Ended
|
|
Net
|
|
|
from
|
|
|
Assets of
|
|
|
and
|
|
|
Capital
|
|
|
March 31, 2020
|
|
Sales
|
|
|
Operations
|
|
|
Operations
|
|
|
Amortization
|
|
|
Expenditures
|
|
|
Magazines, Catalogs and Logistics
|
|
$
|
327
|
|
|
$
|
(35
|
)
|
|
$
|
597
|
|
|
$
|
11
|
|
|
$
|
7
|
|
|
Book
|
|
|
204
|
|
|
|
(9
|
)
|
|
|
468
|
|
|
|
12
|
|
|
|
4
|
|
|
Office Products
|
|
|
112
|
|
|
|
7
|
|
|
|
282
|
|
|
|
3
|
|
|
|
—
|
|
|
Mexico
|
|
|
23
|
|
|
|
3
|
|
|
|
51
|
|
|
|
1
|
|
|
|
—
|
|
|
Total reportable segments
|
|
|
666
|
|
|
|
(34
|
)
|
|
|
1,398
|
|
|
|
27
|
|
|
|
11
|
|
|
Other
|
|
|
35
|
|
|
|
3
|
|
|
|
29
|
|
|
|
—
|
|
|
|
—
|
|
|
Corporate
|
|
|
—
|
|
|
|
(12
|
)
|
|
|
128
|
|
|
|
—
|
|
|
|
—
|
|
|
Total operations
|
|
$
|
701
|
|
|
$
|
(43
|
)
|
|
$
|
1,555
|
|
|
$
|
27
|
|
|
$
|
11
|
|
|
|
|
|
|
|
|
Income (Loss)
|
|
|
|
|
|
|
Depreciation
|
|
|
|
|
|
|
Three Months Ended
|
|
Net
|
|
|
from
|
|
|
Assets of
|
|
|
and
|
|
|
Capital
|
|
|
March 31, 2019
|
|
Sales
|
|
|
Operations
|
|
|
Operations
|
|
|
Amortization
|
|
|
Expenditures
|
|
|
Magazines, Catalogs and Logistics
|
|
$
|
403
|
|
|
$
|
(31
|
)
|
|
$
|
795
|
|
|
$
|
15
|
|
|
$
|
10
|
|
|
Book
|
|
|
260
|
|
|
|
13
|
|
|
|
647
|
|
|
|
12
|
|
|
|
17
|
|
|
Office Products
|
|
|
119
|
|
|
|
8
|
|
|
|
329
|
|
|
|
3
|
|
|
|
—
|
|
|
Mexico
|
|
|
24
|
|
|
|
3
|
|
|
|
68
|
|
|
|
1
|
|
|
|
1
|
|
|
Total reportable segments
|
|
|
806
|
|
|
|
(7
|
)
|
|
|
1,839
|
|
|
|
31
|
|
|
|
28
|
|
|
Other
|
|
|
39
|
|
|
|
1
|
|
|
|
22
|
|
|
|
—
|
|
|
|
—
|
|
|
Corporate
|
|
|
—
|
|
|
|
(13
|
)
|
|
|
86
|
|
|
|
—
|
|
|
|
—
|
|
|
Total operations
|
|
$
|
845
|
|
|
$
|
(19
|
)
|
|
$
|
1,947
|
|
|
$
|
31
|
|
|
$
|
28
|
|
Restructuring, impairment and other charges by segment for the three months ended March 31, 2020 and 2019 are disclosed in Note 7, Restructuring, Impairment and Other Charges.
30
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three Months Ended March 31, 2020 and 2019
(tabular amounts in millions, except per share data)
Note 15. New Accounting Pronouncements
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 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.
31