ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
LSC COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except share and per share data)
(UNAUDITED)
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
17
|
|
|
$
|
21
|
|
|
Receivables, less allowances for doubtful accounts of $15 in 2019 (2018 - $14)
|
|
|
582
|
|
|
|
617
|
|
|
Inventories (Note 5)
|
|
|
213
|
|
|
|
197
|
|
|
Income tax receivable
|
|
|
7
|
|
|
|
4
|
|
|
Prepaid expenses and other current assets
|
|
|
36
|
|
|
|
28
|
|
|
Total current assets
|
|
|
855
|
|
|
|
867
|
|
|
Property, plant and equipment-net (Note 6)
|
|
|
485
|
|
|
|
508
|
|
|
Goodwill (Note 7)
|
|
|
103
|
|
|
|
103
|
|
|
Other intangible assets-net (Note 7)
|
|
|
130
|
|
|
|
156
|
|
|
Right-of-use assets for operating leases
|
|
|
188
|
|
|
|
—
|
|
|
Deferred income taxes
|
|
|
30
|
|
|
|
27
|
|
|
Other noncurrent assets
|
|
|
88
|
|
|
|
93
|
|
|
Total assets
|
|
$
|
1,879
|
|
|
$
|
1,754
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
347
|
|
|
$
|
372
|
|
|
Accrued liabilities
|
|
|
188
|
|
|
|
199
|
|
|
Short-term debt and current portion of long-term debt (Note 10)
|
|
|
192
|
|
|
|
108
|
|
|
Short-term operating lease liabilities
|
|
|
46
|
|
|
|
—
|
|
|
Total current liabilities
|
|
|
773
|
|
|
|
679
|
|
|
Long-term debt (Note 10)
|
|
|
639
|
|
|
|
659
|
|
|
Pension liabilities
|
|
|
100
|
|
|
|
132
|
|
|
Restructuring and multi-employer pension liabilities (Note 8)
|
|
|
42
|
|
|
|
45
|
|
|
Long-term operating lease liabilities
|
|
|
148
|
|
|
|
—
|
|
|
Other noncurrent liabilities
|
|
|
51
|
|
|
|
61
|
|
|
Total liabilities
|
|
$
|
1,753
|
|
|
$
|
1,576
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 9)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EQUITY
|
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value
|
|
|
|
|
|
|
|
|
|
Authorized: 65,000,000
|
|
|
|
|
|
|
|
|
|
Issued: 35,583,329 shares in 2019 (2018: 35,029,565)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Additional paid-in capital
|
|
|
832
|
|
|
|
828
|
|
|
Accumulated deficit
|
|
|
(209
|
)
|
|
|
(42
|
)
|
|
Accumulated other comprehensive loss (Note 13)
|
|
|
(472
|
)
|
|
|
(584
|
)
|
|
Treasury stock, at cost: 2,032,134 shares in 2019 (2018: 1,888,205)
|
|
|
(25
|
)
|
|
|
(24
|
)
|
|
Total equity
|
|
|
126
|
|
|
|
178
|
|
|
Total liabilities and equity
|
|
$
|
1,879
|
|
|
$
|
1,754
|
|
See Notes to the Condensed Consolidated Financial Statements
3
LSC COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)
(UNAUDITED)
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Net sales
|
|
$
|
869
|
|
|
$
|
943
|
|
|
$
|
1,714
|
|
|
$
|
1,872
|
|
|
Cost of sales
|
|
|
750
|
|
|
|
798
|
|
|
|
1,485
|
|
|
|
1,606
|
|
|
Selling, general and administrative expenses (exclusive of
depreciation and amortization)
|
|
|
80
|
|
|
|
82
|
|
|
|
165
|
|
|
|
165
|
|
|
Restructuring, impairment and other charges-net (Note 8)
|
|
|
24
|
|
|
|
11
|
|
|
|
37
|
|
|
|
17
|
|
|
Depreciation and amortization
|
|
|
31
|
|
|
|
34
|
|
|
|
62
|
|
|
|
72
|
|
|
(Loss) income from operations
|
|
|
(16
|
)
|
|
|
18
|
|
|
|
(35
|
)
|
|
|
12
|
|
|
Interest expense-net (Note 10)
|
|
|
19
|
|
|
|
18
|
|
|
|
38
|
|
|
|
38
|
|
|
Settlement of retirement benefit obligations (Note 12)
|
|
|
1
|
|
|
|
—
|
|
|
|
136
|
|
|
|
—
|
|
|
Investment and other (income)-net
|
|
|
(9
|
)
|
|
|
(13
|
)
|
|
|
(19
|
)
|
|
|
(24
|
)
|
|
(Loss) income before income taxes
|
|
|
(27
|
)
|
|
|
13
|
|
|
|
(190
|
)
|
|
|
(2
|
)
|
|
Income tax (benefit) expense
|
|
|
(3
|
)
|
|
|
5
|
|
|
|
(40
|
)
|
|
|
1
|
|
|
Net (loss) income
|
|
$
|
(24
|
)
|
|
$
|
8
|
|
|
$
|
(150
|
)
|
|
$
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per common share (Note 11)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net (loss) income per share
|
|
$
|
(0.69
|
)
|
|
$
|
0.24
|
|
|
$
|
(4.48
|
)
|
|
$
|
(0.09
|
)
|
|
Diluted net (loss) income per share
|
|
$
|
(0.69
|
)
|
|
$
|
0.23
|
|
|
$
|
(4.48
|
)
|
|
$
|
(0.09
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
33.5
|
|
|
|
34.0
|
|
|
|
33.4
|
|
|
34.3
|
|
|
Diluted
|
|
33.5
|
|
|
|
34.3
|
|
|
|
33.4
|
|
|
34.3
|
|
See Notes to the Condensed Consolidated Financial Statements
4
LSC COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
(UNAUDITED)
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Net (loss) income
|
|
$
|
(24
|
)
|
|
$
|
8
|
|
|
$
|
(150
|
)
|
|
$
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss), net of tax (Note 13):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation adjustments
|
|
|
1
|
|
|
|
(14
|
)
|
|
|
2
|
|
|
|
(9
|
)
|
|
Adjustment for net periodic pension plan cost
|
|
|
3
|
|
|
|
4
|
|
|
|
110
|
|
|
|
8
|
|
|
Other comprehensive income (loss)
|
|
|
4
|
|
|
|
(10
|
)
|
|
|
112
|
|
|
|
(1
|
)
|
|
Comprehensive (loss)
|
|
$
|
(20
|
)
|
|
$
|
(2
|
)
|
|
$
|
(38
|
)
|
|
$
|
(4
|
)
|
The adjustments for net pension plan cost were net of income tax expense of $1 million and $37 million for the three and six months ended June 30, 2019, respectively. The tax expense for the six months ended June 30, 2019 was primarily due to the settlements of retirement benefit obligations that are discussed in Note 13,
Comprehensive Income
. The adjustments for net pension plan cost were net of income tax expense of $1 million and $2 million for the three and six months ended June 30, 2018, respectively.
See Notes to the Condensed Consolidated Financial Statements
5
LSC COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(UNAUDITED)
|
|
|
Six Months Ended
|
|
|
|
|
June 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Cash Flows from Operating Activities
|
|
|
|
|
|
|
|
|
|
Net (loss)
|
|
$
|
(150
|
)
|
|
$
|
(3
|
)
|
|
Adjustments to reconcile net (loss) to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
|
Impairment charges
|
|
|
19
|
|
|
|
—
|
|
|
Depreciation and amortization
|
|
|
62
|
|
|
|
72
|
|
|
Provision for doubtful accounts receivable
|
|
|
4
|
|
|
|
4
|
|
|
Share-based compensation
|
|
|
4
|
|
|
|
8
|
|
|
Deferred income taxes
|
|
|
(39
|
)
|
|
|
4
|
|
|
Settlement of retirement benefit obligations
|
|
|
136
|
|
|
|
—
|
|
|
Other
|
|
|
1
|
|
|
|
4
|
|
|
Changes in operating assets and liabilities - net of acquisitions:
|
|
|
|
|
|
|
|
|
|
Accounts receivable-net
|
|
|
32
|
|
|
|
61
|
|
|
Inventories
|
|
|
(15
|
)
|
|
|
(49
|
)
|
|
Prepaid expenses and other current assets
|
|
|
1
|
|
|
|
(4
|
)
|
|
Accounts payable
|
|
|
(13
|
)
|
|
|
(81
|
)
|
|
Income taxes receivable
|
|
|
(3
|
)
|
|
|
2
|
|
|
Accrued liabilities and other
|
|
|
(36
|
)
|
|
|
(44
|
)
|
|
Net cash provided by (used in) operating activities
|
|
|
3
|
|
|
|
(26
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(49
|
)
|
|
|
(37
|
)
|
|
Acquisitions of businesses, net of cash acquired
|
|
|
(3
|
)
|
|
|
4
|
|
|
Net proceeds from sales and purchase of investments and other assets
|
|
|
—
|
|
|
|
1
|
|
|
Net cash (used in) investing activities
|
|
|
(52
|
)
|
|
|
(32
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities
|
|
|
|
|
|
|
|
|
|
Payments of current maturities and long-term debt
|
|
|
(22
|
)
|
|
|
(26
|
)
|
|
Net proceeds from credit facility borrowings
|
|
|
84
|
|
|
|
115
|
|
|
Payments for repurchase of common stock
|
|
|
—
|
|
|
|
(20
|
)
|
|
Dividends paid
|
|
|
(17
|
)
|
|
|
(18
|
)
|
|
Other financing activities
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
Net cash provided by financing activities
|
|
|
44
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate on cash and cash equivalents
|
|
|
1
|
|
|
|
(2
|
)
|
|
Net (decrease) in cash, cash equivalents and restricted cash
|
|
|
(4
|
)
|
|
|
(10
|
)
|
|
Cash, cash equivalents and restricted cash at beginning of year
|
|
|
24
|
|
|
|
35
|
|
|
Cash, cash equivalents and restricted cash at end of period
|
|
$
|
20
|
|
|
$
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation to the Condensed Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
As of
|
|
|
|
|
June 30, 2019
|
|
|
December 31, 2018
|
|
|
Cash and cash equivalents
|
|
$
|
17
|
|
|
$
|
21
|
|
|
Restricted cash included in prepaid expenses and other current assets
|
|
|
3
|
|
|
|
3
|
|
|
Total cash, cash equivalents and restricted cash shown in the condensed consolidated
statements of cash flows
|
|
$
|
20
|
|
|
$
|
24
|
|
See Notes to the Condensed Consolidated Financial Statements
6
LSC COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
Earnings
|
|
|
Other
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Treasury Stock
|
|
|
(Accumulated
|
|
|
Comprehensive
|
|
|
Total
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Shares
|
|
|
Amount
|
|
|
Deficit)
|
|
|
(Loss) Income
|
|
|
Equity
|
|
|
Balance at December 31, 2018
|
|
|
35
|
|
|
$
|
—
|
|
|
$
|
828
|
|
|
|
2
|
|
|
$
|
(24
|
)
|
|
$
|
(42
|
)
|
|
$
|
(584
|
)
|
|
$
|
178
|
|
|
Net (loss)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(126
|
)
|
|
|
—
|
|
|
|
(126
|
)
|
|
Issuance of share-based awards,
net of withholdings and other
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(1
|
)
|
|
Share-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
3
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3
|
|
|
Cash dividends paid
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(9
|
)
|
|
|
—
|
|
|
|
(9
|
)
|
|
Other comprehensive income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
108
|
|
|
|
108
|
|
|
Balance at March 31, 2019
|
|
|
36
|
|
|
$
|
—
|
|
|
$
|
831
|
|
|
|
2
|
|
|
$
|
(25
|
)
|
|
$
|
(177
|
)
|
|
$
|
(476
|
)
|
|
$
|
153
|
|
|
Net (loss)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(24
|
)
|
|
|
—
|
|
|
|
(24
|
)
|
|
Issuance of share-based awards,
net of withholdings and other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Share-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
Cash dividends paid
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(8
|
)
|
|
|
—
|
|
|
|
(8
|
)
|
|
Other comprehensive income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4
|
|
|
|
4
|
|
|
Balance at June 30, 2019
|
|
|
36
|
|
|
$
|
—
|
|
|
$
|
832
|
|
|
|
2
|
|
|
$
|
(25
|
)
|
|
$
|
(209
|
)
|
|
$
|
(472
|
)
|
|
$
|
126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
Earnings
|
|
|
Other
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Treasury Stock
|
|
|
(Accumulated
|
|
|
Comprehensive
|
|
|
Total
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Shares
|
|
|
Amount
|
|
|
Deficit)
|
|
|
(Loss) Income
|
|
|
Equity
|
|
|
Balance at December 31, 2017
|
|
35
|
|
|
$
|
—
|
|
|
$
|
816
|
|
|
|
—
|
|
|
$
|
(2
|
)
|
|
$
|
(90
|
)
|
|
$
|
(476
|
)
|
|
$
|
248
|
|
|
Net (loss)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(11
|
)
|
|
|
—
|
|
|
|
(11
|
)
|
|
Revenue recognition adjustments
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
9
|
|
|
|
—
|
|
|
|
9
|
|
|
Reclassification of tax rate change
to accumulated deficit
(Note 13)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
97
|
|
|
|
(97
|
)
|
|
|
—
|
|
|
Issuance of share-based awards,
net of withholdings and other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(2
|
)
|
|
Share-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
3
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3
|
|
|
Cash dividends paid
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(9
|
)
|
|
|
—
|
|
|
|
(9
|
)
|
|
Other comprehensive income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
9
|
|
|
|
9
|
|
|
Balance at March 31, 2018
|
|
|
35
|
|
|
$
|
—
|
|
|
$
|
819
|
|
|
|
—
|
|
|
$
|
(4
|
)
|
|
$
|
(4
|
)
|
|
$
|
(564
|
)
|
|
$
|
247
|
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
8
|
|
|
|
—
|
|
|
|
8
|
|
|
Repurchase of common stock
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2
|
|
|
|
(20
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(20
|
)
|
|
Issuance of share-based awards,
net of withholdings and other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Share-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
5
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5
|
|
|
Cash dividends paid
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(9
|
)
|
|
|
—
|
|
|
|
(9
|
)
|
|
Other comprehensive income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(10
|
)
|
|
|
(10
|
)
|
|
Balance at June 30, 2018
|
|
|
35
|
|
|
$
|
—
|
|
|
$
|
824
|
|
|
|
2
|
|
|
$
|
(24
|
)
|
|
$
|
(5
|
)
|
|
$
|
(574
|
)
|
|
$
|
221
|
|
During the three months ended March 31, 2018, the Company recorded $9 million in equity adjustments as a result of the adoption of
Accounting Standards Update No. 2014-09 “Revenue from Contracts with Customers (Topic 606)” (“ASC 606”)
. Refer to Note 3,
Revenue Recognition
, for ASC 606 disclosures. There were dividends declared per common share of $0.26 during each of the three months ended June 30, 2019 and 2018, and $0.52 during each of the six months ended June 30, 2019 and 2018.
See Notes to the Condensed Consolidated Financial Statements
7
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three and Six Months Ended June 30, 2019 and 2018
(tabular amounts in millions, except per share data)
Note 1. Overview and Basis of Presentation
Description of Business
The principal business of LSC Communications, Inc., a Delaware corporation, and its direct or indirect wholly-owned subsidiaries (“LSC Communications,” “the Company,” “we,” “our” and “us”) is to offer a broad scope of traditional and digital print, print-related services and office products. The Company serves the needs of publishers, merchandisers and retailers worldwide with a service offering that includes
e-services, logistics, warehousing and fulfillment and supply chain management services. The Company utilizes a broad portfolio of technology capabilities coupled with consultative attention to clients' needs to increase speed to market, reduce costs, provide postal savings to customers and improve efficiencies.
The Company prints magazines, catalogs, books and directories, and its office products offerings include filing products, envelopes, note-taking products, binder products, and forms.
Merger with Quad/Graphics, Inc.
On October 30, 2018, the Company entered into that certain Agreement and Plan of Merger (the “Merger Agreement”), by and among Quad/Graphics, Inc. (“Quad”), QLC Merger Sub, Inc. and LSC Communications, pursuant to which, subject to the satisfaction or waiver of certain conditions, LSC Communications would be merged with QLC Merger Sub, Inc., and become a wholly-owned subsidiary of Quad.
On July 22, 2019, Quad and LSC Communications entered into a letter agreement (the “Letter Agreement”), pursuant to which the parties agreed to terminate the Merger Agreement. Pursuant to the Letter Agreement, Quad agreed to pay LSC Communications the Regulatory Approval Reverse Termination Fee (as defined in the Merger Agreement) of $45 million in cash on the business day following the date of the Letter Agreement. Except for certain indemnification obligations of Quad related to LSC Communications assisting Quad with the financing under the Merger Agreement, the parties also agreed to release each other from any and all claims, counterclaims, demands, proceedings, actions, causes of action, orders, obligations, damages, debts, costs, expenses and other liabilities whatsoever and howsoever arising pursuant to or in connection with the Merger Agreement or the transactions provided for in the Merger Agreement.
Basis of Presentation
The condensed consolidated financial statements include the balance sheets, statements of operations and cash flows in conformity with accounting principles generally accepted in the United States (“GAAP”). All intercompany transactions have been eliminated in consolidation. These unaudited condensed consolidated interim financial statements include estimates and assumptions of management that affect the amounts reported in the condensed consolidated financial statements. Actual results could differ from these estimates.
During the third quarter of 2018, management changed the Company’s reportable segments and reporting units. Consequently, prior year amounts were restated to conform to the new segment structure. Refer to Note 14,
Segment Information
, for more information.
Note 2. Business Combination and Disposition
2018 Acquisition
On July 2, 2018, the Company completed the acquisition of R. R. Donnelley & Sons Company’s (“RRD”) Print Logistics business (“Print Logistics”), an integrated logistics services provider to the print industry with an expansive distribution network. The acquisition enhanced the Company’s logistics service offering and is included in the Magazines, Catalogs and Logistics segment. The original total purchase price was $58 million in cash, which was reduced to $52 million as a result of a $6 million net working capital settlement in the fourth quarter of 2018. Of the final total purchase price, $21 million was recorded in goodwill related to this acquisition.
8
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three and Six Months Ended June 30, 2019 and 2018
(tabular amounts in millions, except per share data)
2018 Disposition
On September 28, 2018, the Company completed the sale of its European printing business, which included web offset manufacturing facilities, a logistics and warehousing site and a location dedicated to premedia services, for proceeds of $47 million. The Company recorded a $25 million non-cash provision primarily for the write-off of a deferred tax asset associated with the disposition. The European printing business was included in the Europe segment, which was disclosed as part of the Other segment grouping.
Acquisition Information
The acquisition of Print Logistics was recorded by allocating the cost of the acquisition to the assets acquired, including other intangible assets, based on their estimated fair values at the acquisition date. The excess of the cost of the acquisition over the net amounts assigned to the fair value of the assets acquired was recorded in goodwill. The goodwill is primarily attributable to the synergies expected to arise as a result of the acquisition. The tax deductible goodwill related to Print Logistics was $25 million.
The purchase price allocation for Print Logistics was final as of December 31, 2018. There were no changes to the purchase price allocation for the acquisition as of June 30, 2019 compared to the disclosed purchase price allocation in the Company’s annual report on Form 10-K for the year ended December 31, 2018.
The final purchase price allocation for Print Logistics was as follows:
|
Accounts Receivable
|
|
$
|
40
|
|
|
Prepaid expenses and other current assets
|
|
|
1
|
|
|
Property, plant and equipment
|
|
|
8
|
|
|
Other intangible assets
|
|
|
17
|
|
|
Goodwill
|
|
|
21
|
|
|
Accounts payable and accrued liabilities
|
|
|
(35
|
)
|
|
Purchase price and net cash paid
|
|
$
|
52
|
|
The fair values of goodwill, other intangible assets and property, plant and equipment associated with Print Logistics were determined to be Level 3 under the fair value hierarchy, which included discounted cash flow analyses and comparable marketplace fair value data. Property, plant and equipment values were estimated using either the cost or, if a secondhand market existed, the market approach. The following table presents the fair value, valuation techniques and related unobservable inputs for these Level 3 measurements associated with Print Logistics:
|
|
|
Fair Value
|
|
|
Valuation Technique
|
|
Unobservable Input
|
|
Value
|
|
|
Customer relationships
|
|
$
|
17
|
|
|
Multi-period excess earnings method
|
|
Existing customer growth rate
|
|
(3.5%)
|
|
|
|
|
|
|
|
|
|
|
Attrition rate
|
|
7.5%
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
18.0%
|
|
For each of the three and six months ended June 30, 2019, the Company recorded a de minimis amount of acquisition-related expenses associated with contemplated acquisitions within selling, general and administrative expenses in the condensed consolidated statements of operations. For the three and six months ended June 30, 2018, the Company recorded $1 million and $2 million of acquisition-related expenses, respectively, associated with completed and contemplated acquisitions.
Pro forma results
The following unaudited pro forma financial information for the three and six months ended June 30, 2019 and 2018 presents the condensed consolidated statements of operations of the Company and the acquisition of Print Logistics as if the acquisition had occurred as of January 1 of the year prior to the acquisition.
9
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three and Six Months Ended June 30, 2019 and 2018
(tabular amounts in millions, except per share data)
The unaudited pro forma financial information is not intended to represent or be indicative of the Company’s condensed consolidated statements of operations that would have been reported had these acquisitions been completed as of the beginning of the period presented and should not be taken as indicative of the Company’s future condensed consolidated statements of operations. Pro forma adjustments are tax-effected at the applicable statutory tax rates.
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Net sales
|
|
$
|
869
|
|
|
$
|
984
|
|
|
$
|
1,714
|
|
|
$
|
1,957
|
|
|
Net (loss) income
|
|
|
(24
|
)
|
|
|
6
|
|
|
|
(150
|
)
|
|
|
(6
|
)
|
The following table outlines unaudited pro forma financial information for the three and six months ended June 30, 2019 and 2018:
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Amortization of purchased intangibles
|
|
$
|
4
|
|
|
$
|
5
|
|
|
$
|
9
|
|
|
$
|
10
|
|
There were no nonrecurring pro forma adjustments affecting net (loss) income for the three and six months ended June 30, 2019 and 2018.
Note 3. 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 and six months ended June 30, 2019 and 2018.
10
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three and Six Months Ended June 30, 2019 and 2018
(tabular amounts in millions, except per share data)
|
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
|
June 30, 2019
|
|
|
June 30, 2018
|
|
|
|
|
Magazines,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Magazines,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Catalogs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Catalogs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
|
|
|
|
|
|
|
Office
|
|
|
|
|
|
|
|
|
|
|
and
|
|
|
|
|
|
|
Office
|
|
|
|
|
|
|
|
|
|
|
|
|
Logistics
|
|
|
Book
|
|
|
Products
|
|
|
Other
|
|
|
Total
|
|
|
Logistics
|
|
|
Book
|
|
|
Products
|
|
|
Other
|
|
|
Total
|
|
|
Major Products / Service Lines
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book
(a)
|
|
$
|
—
|
|
|
$
|
289
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
289
|
|
|
$
|
—
|
|
|
$
|
266
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Magazines and Catalogs
(b)
|
|
$
|
297
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
44
|
|
|
$
|
341
|
|
|
$
|
372
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
92
|
|
|
$
|
464
|
|
|
North America
|
|
|
297
|
|
|
|
—
|
|
|
|
—
|
|
|
|
44
|
|
|
|
341
|
|
|
|
372
|
|
|
|
—
|
|
|
|
—
|
|
|
|
41
|
|
|
|
413
|
|
|
Europe
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
51
|
|
|
|
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Logistics
|
|
$
|
83
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
83
|
|
|
$
|
29
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Directories
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
17
|
|
|
$
|
17
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
30
|
|
|
$
|
30
|
|
|
North America
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
17
|
|
|
|
17
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
25
|
|
|
|
25
|
|
|
Europe
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office Products
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
139
|
|
|
$
|
—
|
|
|
$
|
139
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
154
|
|
|
$
|
—
|
|
|
$
|
154
|
|
|
Total
|
|
$
|
380
|
|
|
$
|
289
|
|
|
$
|
139
|
|
|
$
|
61
|
|
|
$
|
869
|
|
|
$
|
401
|
|
|
$
|
266
|
|
|
$
|
154
|
|
|
$
|
122
|
|
|
$
|
943
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Timing of Revenue Recognition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products and services
transferred at a point in
time
|
|
$
|
268
|
|
|
$
|
253
|
|
|
$
|
139
|
|
|
$
|
42
|
|
|
$
|
702
|
|
|
$
|
342
|
|
|
$
|
236
|
|
|
$
|
154
|
|
|
$
|
105
|
|
|
$
|
837
|
|
|
Products and services
transferred over time
|
|
|
112
|
|
|
|
36
|
|
|
|
—
|
|
|
|
19
|
|
|
|
167
|
|
|
|
59
|
|
|
|
30
|
|
|
|
—
|
|
|
|
17
|
|
|
|
106
|
|
|
Total
|
|
$
|
380
|
|
|
$
|
289
|
|
|
$
|
139
|
|
|
$
|
61
|
|
|
$
|
869
|
|
|
$
|
401
|
|
|
$
|
266
|
|
|
$
|
154
|
|
|
$
|
122
|
|
|
$
|
943
|
|
11
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three and Six Months Ended June 30, 2019 and 2018
(tabular amounts in millions, except per share data)
|
|
|
Six Months Ended
|
|
|
Six Months Ended
|
|
|
|
|
June 30, 2019
|
|
|
June 30, 2018
|
|
|
|
|
Magazines,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Magazines,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Catalogs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Catalogs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
|
|
|
|
|
|
|
Office
|
|
|
|
|
|
|
|
|
|
|
and
|
|
|
|
|
|
|
Office
|
|
|
|
|
|
|
|
|
|
|
|
|
Logistics
|
|
|
Book
|
|
|
Products
|
|
|
Other
|
|
|
Total
|
|
|
Logistics
|
|
|
Book
|
|
|
Products
|
|
|
Other
|
|
|
Total
|
|
|
Major Products / Service Lines
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book
(a)
|
|
$
|
—
|
|
|
$
|
549
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
549
|
|
|
$
|
—
|
|
|
$
|
515
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Magazines and Catalogs
(b)
|
|
$
|
616
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
88
|
|
|
$
|
704
|
|
|
$
|
772
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
191
|
|
|
$
|
963
|
|
|
North America
|
|
|
616
|
|
|
|
—
|
|
|
|
—
|
|
|
|
88
|
|
|
|
704
|
|
|
|
772
|
|
|
|
—
|
|
|
|
—
|
|
|
|
82
|
|
|
|
854
|
|
|
Europe
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
109
|
|
|
|
109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Logistics
|
|
$
|
167
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
167
|
|
|
$
|
56
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Directories
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
36
|
|
|
$
|
36
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
61
|
|
|
$
|
61
|
|
|
North America
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
36
|
|
|
|
36
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
52
|
|
|
|
52
|
|
|
Europe
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
9
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office Products
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
258
|
|
|
$
|
—
|
|
|
$
|
258
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
277
|
|
|
$
|
—
|
|
|
$
|
277
|
|
|
Total
|
|
$
|
783
|
|
|
$
|
549
|
|
|
$
|
258
|
|
|
$
|
124
|
|
|
$
|
1,714
|
|
|
$
|
828
|
|
|
$
|
515
|
|
|
$
|
277
|
|
|
$
|
252
|
|
|
$
|
1,872
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Timing of Revenue Recognition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products and services
transferred at a point in
time
|
|
$
|
556
|
|
|
$
|
481
|
|
|
$
|
258
|
|
|
$
|
85
|
|
|
$
|
1,380
|
|
|
$
|
711
|
|
|
$
|
457
|
|
|
$
|
277
|
|
|
$
|
217
|
|
|
$
|
1,662
|
|
|
Products and services
transferred over time
|
|
|
227
|
|
|
|
68
|
|
|
|
—
|
|
|
|
39
|
|
|
|
334
|
|
|
|
117
|
|
|
|
58
|
|
|
|
—
|
|
|
|
35
|
|
|
|
210
|
|
|
Total
|
|
$
|
783
|
|
|
$
|
549
|
|
|
$
|
258
|
|
|
$
|
124
|
|
|
$
|
1,714
|
|
|
$
|
828
|
|
|
$
|
515
|
|
|
$
|
277
|
|
|
$
|
252
|
|
|
$
|
1,872
|
|
|
|
(a)
|
Includes e-book formatting and supply chain management associated with book production
|
|
|
(b)
|
Includes premedia and co-mail
|
12
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three and Six Months Ended June 30, 2019 and 2018
(tabular amounts in millions, except per share data)
Contract Balances
The following table provides changes in contract assets and liabilities during the six months ended June 30, 2019:
|
|
|
Short-Term Contract Assets
|
|
|
Long-Term
Contract Assets
|
|
|
Contract Liabilities
|
|
|
Beginning Balance, January 1, 2019
|
|
$
|
44
|
|
|
$
|
30
|
|
|
$
|
16
|
|
|
Additions to unbilled accounts receivable
|
|
|
35
|
|
|
|
—
|
|
|
|
—
|
|
|
Unbilled accounts receivable recognized in
trade receivables
|
|
|
(33
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Payment of contract acquisition costs
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
Amortization of contract acquisition costs
|
|
|
—
|
|
|
|
(6
|
)
|
|
|
—
|
|
|
Revenue recognized that was included in
contract liabilities as of January 1, 2019
|
|
|
—
|
|
|
|
—
|
|
|
|
(9
|
)
|
|
Increases due to cash received
|
|
|
—
|
|
|
|
—
|
|
|
|
4
|
|
|
Ending Balance, June 30, 2019
|
|
$
|
46
|
|
|
$
|
26
|
|
|
$
|
11
|
|
The trade receivables balance was $461 million and $488 million as of June 30, 2019 and December 31, 2018, respectively.
Accounts Receivable
Transactions affecting the allowances for doubtful accounts receivable balance during the six months ended June 30, 2019 were as follows:
|
|
|
June 30, 2019
|
|
|
Balance, beginning of year
|
|
$
|
14
|
|
|
Provisions charged to expense
|
|
|
4
|
|
|
Write-offs and other
|
|
|
(3
|
)
|
|
Balance, end of period
|
|
$
|
15
|
|
Note 4. Leases
Financial Statement Impact of Adopting Accounting Standards Update No. 2016-02 “Leases (Topic 842)” (“ASU 2016-02” or “ASC 842”)
The Company adopted ASU 2016-02 on January 1, 2019 using the modified retrospective adoption method. The reported results for 2019 reflect the adoption of ASC 842 guidance while the reported results for 2018 were prepared and continue to be reported under the guidance of ASC 840, Leases, referred to herein as “previous guidance.”
In adopting ASC 842, the Company applied certain available practical expedients, including electing to combine lease and non-lease components of a contract and electing to apply the practical expedient “package” permitted under ASU 2016-02. This election allowed the Company to use the lease classification (operating or finance) previously determined at the start of a lease contract for any expired or existing leases as of the date of adoption.
The Company performed an analysis of all lease contracts existing as of January 1, 2019. Upon adoption of ASC 842, the Company added $206 million of right-of-use (“ROU”) assets and lease liabilities to its balance sheet related to operating leases. There were no changes to assets or liabilities relating to finance leases.
Based upon the balances that existed as of December 31, 2018, the Company recorded adjustments to the following accounts as of January 1, 2019:
13
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three and Six Months Ended June 30, 2019 and 2018
(tabular amounts in millions, except per share data)
|
|
|
As Reported
|
|
|
Adjustments
|
|
|
Adjusted
|
|
|
|
|
December 31,
2018
|
|
|
Adoption of ASU 2016-02
|
|
|
January 1,
2019
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ROU assets for operating leases
(a)
|
|
$
|
—
|
|
|
$
|
201
|
|
|
$
|
201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued liabilities
(a)
|
|
$
|
199
|
|
|
$
|
(1
|
)
|
|
$
|
198
|
|
|
Short-term operating lease liabilities
|
|
|
—
|
|
|
|
52
|
|
|
|
52
|
|
|
Long-term operating lease liabilities
|
|
|
—
|
|
|
|
154
|
|
|
|
154
|
|
|
Other noncurrent liabilities
(a)
|
|
|
61
|
|
|
|
(4
|
)
|
|
|
57
|
|
|
|
(a)
|
The total $5 adjustment shown in accrued liabilities and other noncurrent liabilities relates to straight-line rent accruals that were reclassified to ROU assets for operating leases.
|
Accounting Policy
Under ASC 842, the Company determines if a contract contains a lease at the inception of the contract. A contract contains a lease if it conveys to the Company the right to control the use of specified assets. Operating leases are included in ROU assets and in other current liabilities and other non-current liabilities. Finance lease assets are included in property, plant, and equipment, and liabilities are included in short-term and long-term debt. ROU assets and lease liabilities are recognized at the present value of future lease payments. The discount rate used to measure the amount recognized is the Company’s incremental borrowing rate if an implicit rate is not determinable from the lease contract. Operating lease cost is recognized on a straight-line basis over the term of the lease.
The Company leases land, production facilities, office space, and equipment. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. Further, the Company has elected not to separate lease and non-lease components of contracts for any asset classes, but rather to account for non-lease components together with their related lease components.
For leases that include renewal options that the Company is reasonably certain to exercise, the Company includes the renewal period in its initial classification of the lease. Renewal options range from 1 year to 5 years.
The Company’s variable lease payments do not depend on a published index or rate, and therefore, are expensed as incurred.
The components of total net lease expense were as follows:
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
|
June 30, 2019
|
|
|
June 30, 2019
|
|
|
Operating lease expense
|
|
$
|
18
|
|
|
$
|
35
|
|
|
Sublease (income)
|
|
|
(2
|
)
|
|
|
(4
|
)
|
|
Variable lease expense
|
|
|
2
|
|
|
|
5
|
|
|
Total net lease expense
|
|
$
|
18
|
|
|
$
|
36
|
|
During each of the three and six months ended June 30, 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.
Supplemental non-cash information related to leases is included below:
14
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three and Six Months Ended June 30, 2019 and 2018
(tabular amounts in millions, except per share data)
|
|
|
Six Months Ended
|
|
|
|
|
June 30, 2019
|
|
|
ROU assets acquired in exchange for
lease obligations:
|
|
|
|
|
|
ROU assets
|
|
|
|
|
|
Operating leases
|
|
$
|
9
|
|
|
|
|
|
|
|
|
Lease obligations
|
|
|
|
|
|
Operating leases
|
|
$
|
9
|
|
During the six months ended June 30, 2019, the Company recorded $31 million of operating cash outflows from operating leases.
During the six months ended June 30, 2019, the Company recorded a de minimis amount of cash flows from financing leases. No finance lease ROU assets or obligations were acquired during the six months ended June 30, 2019.
Supplemental information related to leases is included below:
|
|
|
June 30, 2019
|
|
|
Weighted Average Remaining Lease Term (years)
|
|
|
|
|
|
Operating leases
|
|
|
5.2
|
|
|
Financing leases
|
|
|
2.4
|
|
|
|
|
|
|
|
|
Weighted Average Discount Rate
|
|
|
|
|
|
Operating leases
|
|
|
8.4
|
%
|
|
Financing leases
|
|
|
6.7
|
%
|
The annual maturities of lease liabilities as of June 30, 2019 were as follows:
|
|
|
Operating Leases
|
|
|
2019
|
|
$
|
29
|
|
|
2020
|
|
|
53
|
|
|
2021
|
|
|
45
|
|
|
2022
|
|
|
36
|
|
|
2023
|
|
|
25
|
|
|
2024 & thereafter
|
|
|
47
|
|
|
Total undiscounted lease payments
|
|
|
235
|
|
|
Imputed interest
|
|
|
(41
|
)
|
|
Total lease liabilities
|
|
$
|
194
|
|
During the six months ended June 30, 2019, the Company recorded a de minimis amount of maturities for finance lease liabilities. As of June 30, 2019, the Company has additional operating leases that have not commenced for an undiscounted amount of $5 million. These operating leases will commence during 2019 with lease terms of 3 years to 6 years.
The Company also is a sublessor to land and building subleases for certain locations resulting from the acquisition of businesses or disposition of the Company’s business components. Some of these subleases have variable payments, either because payments are structured to follow the head lease or because the sublease includes reimbursement for utilities and other expenses. We recognize the rent-related portion of lease payments, including changes based on a published index or rate, on a straight-line basis and the variable portion related to utilities and other expenses in the period incurred. Our subleases have various renewal and termination options which generally allow for renewal for 1 year to 5 years, or termination on 90 days’ notice.
15
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three and Six Months Ended June 30, 2019 and 2018
(tabular amounts in millions, except per share data)
Note 5. Inventories
The components of the Company’s inventories, net of excess and obsolescence reserves for raw materials and finished goods, at June 30, 2019 and December 31, 2018 were as follows:
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Raw materials and manufacturing supplies
|
|
$
|
123
|
|
|
$
|
119
|
|
|
Work in process
|
|
|
50
|
|
|
|
50
|
|
|
Finished goods
|
|
|
89
|
|
|
|
80
|
|
|
Last in, first out reserve
|
|
|
(49
|
)
|
|
|
(52
|
)
|
|
Total
|
|
$
|
213
|
|
|
$
|
197
|
|
Note 6. Property, Plant and Equipment
The components of the Company’s property, plant and equipment at June 30, 2019 and December 31, 2018 were as follows:
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Land
|
|
$
|
35
|
|
|
$
|
43
|
|
|
Buildings
|
|
|
698
|
|
|
|
709
|
|
|
Machinery and equipment
|
|
|
3,592
|
|
|
|
3,759
|
|
|
|
|
|
4,325
|
|
|
|
4,511
|
|
|
Less: Accumulated depreciation
|
|
|
(3,840
|
)
|
|
|
(4,003
|
)
|
|
Total
|
|
$
|
485
|
|
|
$
|
508
|
|
During the three and six months ended June 30, 2019, depreciation expense was
$24 million and $48 million, respectively. During the three and six months ended June 30, 2018, depreciation expense was $28 million and $59 million, respectively. Refer to Note 8,
Restructuring, Impairment and Other Charges
, for a discussion on impairment reviews performed as of June 30, 2019 and information on impairment recorded during the six months ended June 30, 2019.
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 $11 million and $3 million at June 30, 2019 and December 31, 2018, respectively. These assets were 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.
16
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three and Six Months Ended June 30, 2019 and 2018
(tabular amounts in millions, except per share data)
Note 7. Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill for the six months ended June 30, 2019 were as follows:
|
|
|
Magazines,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Catalogs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and Logistics
|
|
|
Book
|
|
|
Office Products
|
|
|
Other
|
|
|
Total
|
|
|
Net book value as of December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
523
|
|
|
$
|
354
|
|
|
$
|
110
|
|
|
$
|
5
|
|
|
$
|
992
|
|
|
Accumulated impairment losses
|
|
|
(502
|
)
|
|
|
(303
|
)
|
|
|
(79
|
)
|
|
|
(5
|
)
|
|
|
(889
|
)
|
|
Total
|
|
|
21
|
|
|
|
51
|
|
|
|
31
|
|
|
|
—
|
|
|
|
103
|
|
|
Net book value as of June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
523
|
|
|
|
354
|
|
|
|
110
|
|
|
|
5
|
|
|
|
992
|
|
|
Accumulated impairment losses
|
|
|
(502
|
)
|
|
|
(303
|
)
|
|
|
(79
|
)
|
|
|
(5
|
)
|
|
|
(889
|
)
|
|
Total
|
|
$
|
21
|
|
|
$
|
51
|
|
|
$
|
31
|
|
|
$
|
—
|
|
|
$
|
103
|
|
The components of other intangible assets at June 30, 2019 and December 31, 2018 were as follows:
|
|
|
June 30, 2019
|
|
|
December 31, 2018
|
|
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Net Book
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Net Book
|
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Value
|
|
|
Amount
|
|
|
Amortization
|
|
|
Value
|
|
|
Customer relationships
|
|
$
|
248
|
|
|
$
|
(142
|
)
|
|
$
|
106
|
|
|
$
|
268
|
|
|
$
|
(137
|
)
|
|
$
|
131
|
|
|
Trade names
|
|
|
30
|
|
|
|
(7
|
)
|
|
|
23
|
|
|
|
9
|
|
|
|
(6
|
)
|
|
|
3
|
|
|
Total amortizable other intangible
assets
|
|
|
278
|
|
|
|
(149
|
)
|
|
|
129
|
|
|
|
277
|
|
|
|
(143
|
)
|
|
|
134
|
|
|
Indefinite-lived trade names
|
|
|
1
|
|
|
|
—
|
|
|
|
1
|
|
|
|
22
|
|
|
|
—
|
|
|
|
22
|
|
|
Total other intangible assets
|
|
$
|
279
|
|
|
$
|
(149
|
)
|
|
$
|
130
|
|
|
$
|
299
|
|
|
$
|
(143
|
)
|
|
$
|
156
|
|
In the second quarter of 2019, the Company impaired certain definite-lived customer relationships with a net book value of $17 million. Refer to Note 8,
Restructuring, Impairment and Other Charges
, for a discussion on impairment reviews performed as of June 30, 2019 and information on impairment recorded during the six months ended June 30, 2019.
On January 1, 2019, all of Office Products’ tradenames (net book value of $21 million) were changed from indefinite-lived tradenames to definite-lived tradenames with a useful life of 15 years, as management determined that it was not possible to conclude the tradenames will generate cash flows for an indefinite period of time due to secular industry decline and changes in the usage of branded products.
During the three and six months ended June 30, 2019, amortization expense for other intangible assets was $4 million and $9 million, respectively. During the three and six months ended June 30, 2018, amortization expense for other intangible assets was $4 and $9 million, respectively.
The following table outlines the estimated annual amortization expense related to all amortizable intangible assets:
|
For the year ending December 31,
|
|
Amount
|
|
|
2019
|
|
$
|
18
|
|
|
2020
|
|
|
17
|
|
|
2021
|
|
|
15
|
|
|
2022
|
|
|
14
|
|
|
2023
|
|
|
13
|
|
|
2024 and thereafter
|
|
|
61
|
|
|
Total
|
|
$
|
138
|
|
17
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three and Six Months Ended June 30, 2019 and 2018
(tabular amounts in millions, except per share data)
Note 8. Restructuring, Impairment and Other Charges
For the three and six months ended June 30, 2019 and 2018, the Company recorded the following net restructuring, impairment and other charges disclosed in the consolidated statements of operations:
|
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Employee
|
|
|
Restructuring
|
|
|
Restructuring
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
June 30, 2019
|
|
Terminations
|
|
|
Charges
|
|
|
Charges
|
|
|
Impairment
|
|
|
Charges
|
|
|
Total
|
|
|
Magazines, Catalogs and Logistics
|
|
$
|
—
|
|
|
$
|
3
|
|
|
$
|
3
|
|
|
$
|
17
|
|
|
$
|
—
|
|
|
$
|
20
|
|
|
Book
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
|
1
|
|
|
Office Products
|
|
|
—
|
|
|
|
1
|
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Corporate
|
|
|
—
|
|
|
|
2
|
|
|
|
2
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2
|
|
|
Total
|
|
$
|
—
|
|
|
$
|
6
|
|
|
$
|
6
|
|
|
$
|
17
|
|
|
$
|
1
|
|
|
$
|
24
|
|
|
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
Employee
|
|
|
Restructuring
|
|
|
Restructuring
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
June 30, 2019
|
|
Terminations
|
|
|
Charges
|
|
|
Charges
|
|
|
Impairment
|
|
|
Charges
|
|
|
Total
|
|
|
Magazines, Catalogs and Logistics
|
|
$
|
5
|
|
|
$
|
7
|
|
|
$
|
12
|
|
|
$
|
19
|
|
|
$
|
—
|
|
|
$
|
31
|
|
|
Book
|
|
|
—
|
|
|
|
1
|
|
|
|
1
|
|
|
|
—
|
|
|
|
1
|
|
|
|
2
|
|
|
Office Products
|
|
|
—
|
|
|
|
1
|
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Corporate
|
|
|
—
|
|
|
|
3
|
|
|
|
3
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3
|
|
|
Total
|
|
$
|
5
|
|
|
$
|
12
|
|
|
$
|
17
|
|
|
$
|
19
|
|
|
$
|
1
|
|
|
$
|
37
|
|
|
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Employee
|
|
|
Restructuring
|
|
|
Restructuring
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
June 30, 2018
|
|
Terminations
|
|
|
Charges
|
|
|
Charges
|
|
|
Impairment
|
|
|
Charges
|
|
|
Total
|
|
|
Magazines, Catalogs and Logistics
|
|
$
|
1
|
|
|
$
|
5
|
|
|
$
|
6
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6
|
|
|
Book
|
|
|
1
|
|
|
|
1
|
|
|
|
2
|
|
|
|
—
|
|
|
|
1
|
|
|
|
3
|
|
|
Office Products
|
|
|
—
|
|
|
|
1
|
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Corporate
|
|
|
1
|
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
Total
|
|
$
|
3
|
|
|
$
|
7
|
|
|
$
|
10
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
11
|
|
|
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
Employee
|
|
|
Restructuring
|
|
|
Restructuring
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
June 30, 2018
|
|
Terminations
|
|
|
Charges
|
|
|
Charges
|
|
|
Impairment
|
|
|
Charges
|
|
|
Total
|
|
|
Magazines, Catalogs and Logistics
|
|
$
|
4
|
|
|
$
|
7
|
|
|
$
|
11
|
|
|
$
|
(1
|
)
|
|
$
|
—
|
|
|
$
|
10
|
|
|
Book
|
|
|
1
|
|
|
|
2
|
|
|
|
3
|
|
|
|
—
|
|
|
|
1
|
|
|
|
4
|
|
|
Office Products
|
|
|
1
|
|
|
|
1
|
|
|
|
2
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2
|
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Corporate
|
|
|
1
|
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
Total
|
|
$
|
7
|
|
|
$
|
10
|
|
|
$
|
17
|
|
|
$
|
(1
|
)
|
|
$
|
1
|
|
|
$
|
17
|
|
18
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three and Six Months Ended June 30, 2019 and 2018
(tabular amounts in millions, except per share data)
Restruct
uring
Charges
For the three and six months ended June 30, 2019, the Company incurred net other restructuring charges of $6 million and $12 million, respectively, primarily due to charges related to facility costs, as well as costs associated with new revenue opportunities and cost savings initiatives implemented in 2019, and pension withdrawal obligations related to facility closures. For the six months ended June 30, 2019, the Company incurred charges of $5 million for an aggregate of 234 employees, of whom 31 were terminated as of or prior to June 30, 2019,
primarily related to the closure of one facility in the Magazines, Catalogs and Logistics segment.
The Company recorded $2
million of net impairment charges for the six months ended June 30, 2019 related to machinery and equipment associated with facility closings in the Magazines, Catalogs and Logistics segment.
For the three and six months ended June 30, 2018, the Company incurred employee-related restructuring charges of $3 million and $7 million, respectively, for an aggregate of 304 employees, substantially all of whom were terminated as of or prior to June 30, 2019. These charges primarily related to the closure of one facility in the
Magazines, Catalogs and Logistics segment
and the reorganization of certain business units and corporate functions. The Company incurred other restructuring charges of $7 million and $10 million for the three and six months ended June 30, 2018, respectively, for facility costs, a loss related to the Company's disposition of its retail offset printing facilities and pension withdrawal obligations related to facility closures.
Impairment Reviews and Charges
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 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.
For the three months ended June 30, 2019, the Book and Office Products segments performed in line with expectations. However, the Company has seen an unprecedented drop in demand in its magazines and catalogs reporting unit, with the faster pace of decline in demand primarily due to the accelerated impact of digital disruption of demand for printed materials. In addition, the Company’s stock price has experienced a significant, sustained decline since the Company performed its annual goodwill impairment test (October 31, 2018).
Given the stock price decline, management determined that a further review of the reporting units’ goodwill for indicators of impairment was appropriate. The Company concluded that Book, Office Products and Logistics goodwill did not have indicators of impairment as the underlying assumptions from the 2018 review continue to be reasonable compared to performance thus far in 2019 and management’s current outlook. No other reporting unit, including magazines and catalogs, had a goodwill balance as of June 30, 2019.
Due to the unprecedented drop in demand in the magazines and catalogs reporting unit, management determined that a further review of the reporting unit’s intangible assets and property, plant and equipment for recoverability was appropriate:
|
|
•
|
As a result of the faster pace of decline in demand, negative revenue trends and lower expectations of future revenue to be derived from certain customer relationships, management determined that a certain definite-lived customer relationship intangible asset was not recoverable. This resulted in the Company recording a $17 million impairment charge for the three months ended June 30, 2019, which fully impaired the asset. The impairment was determined using Level 3 inputs and estimated based on cash flow analyses, which included management’s assumptions related to future revenues and profitability.
|
19
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three and Six Months Ended June 30, 2019 and 2018
(tabular amounts in millions, except per share data)
|
|
•
|
With respect to property, plant and equipment and right-of-use assets for operating leases within the magazines and catalogs reporting unit, management performed a Step 1 recoverability test in accordance with Accounting Standards Codification (“ASC”) 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 – which includes a hypothetical sale of assets – management determined that the estimated future undiscounted cash flows were in excess of the asset group’s carrying value, resulting in no impairment loss.
|
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, deferred tax assets 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 and six months ended June 30, 2019 and 2018, the Company recorded $1 million 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 $18 million in restructuring and multiemployer pension plan liabilities at June 30, 2019.
The Company’s withdrawal liabilities could be affected by the financial stability of other employers participating in such plans and any decisions by those employers to withdraw from such plans in the future. While it is not possible to quantify the potential impact of future events or circumstances, reductions in other employers’ participation in multiemployer pension plans, including certain plans from which the Company has previously withdrawn, could have a material effect on the Company’s previously estimated withdrawal liabilities and condensed consolidated balance sheets, statements of operations and cash flows.
Restructuring Reserve
The restructuring reserve as of December 31, 2018 and June 30, 2019, and changes during the six months ended June 30, 2019 were as follows:
|
|
|
December 31,
|
|
|
Restructuring
|
|
|
|
|
|
|
Cash
|
|
|
June 30,
|
|
|
|
|
2018
|
|
|
Charges
|
|
|
Other
|
|
|
Paid
|
|
|
2019
|
|
|
Employee terminations
|
|
$
|
8
|
|
|
$
|
5
|
|
|
$
|
—
|
|
|
$
|
(3
|
)
|
|
$
|
10
|
|
|
Multiemployer pension plan withdrawal
obligations
|
|
|
32
|
|
|
|
1
|
|
|
|
—
|
|
|
|
(3
|
)
|
|
|
30
|
|
|
Other
|
|
|
1
|
|
|
|
11
|
|
|
|
—
|
|
|
|
(9
|
)
|
|
|
3
|
|
|
Total
|
|
$
|
41
|
|
|
$
|
17
|
|
|
$
|
—
|
|
|
$
|
(15
|
)
|
|
$
|
43
|
|
The current portion of restructuring reserves of $19 million at June 30, 2019 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 June 30, 2019.
The Company anticipates that payments associated with the employee terminations reflected in the above table will be substantially completed by June 30, 2020.
Payments on all of the Company’s multiemployer pension plan withdrawal obligations are scheduled to be completed by 2034. Changes based on uncertainties in these estimated withdrawal obligations could affect the ultimate charges related to multiemployer pension plan withdrawal obligations.
The restructuring liabilities classified as “other” consisted of other facility closing costs.
20
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three and Six Months Ended June 30, 2019 and 2018
(tabular amounts in millions, except per share data)
Note 9. 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 two other previously and currently owned facilities. At the Superfund sites, the Comprehensive Environmental Response, Compensation and Liability Act provides that the Company’s liability could be joint and several, meaning that the Company could be required to pay an amount in excess of its proportionate share of the remediation costs.
The Company’s understanding of the financial strength of other potentially responsible parties at the multiparty sites and of other liable parties at the previously owned facilities has been considered, where appropriate, in the determination of the Company’s estimated liability. The Company established reserves, recorded in accrued liabilities and other noncurrent liabilities, that it believes are adequate to cover its share of the potential costs of remediation at each of the multiparty sites and the previously and currently owned facilities. It is not possible to quantify with certainty the potential impact of actions regarding environmental matters, particularly remediation and other compliance efforts that the Company may undertake in the future. However, in the opinion of management, compliance with the present environmental protection laws, before taking into account estimated recoveries from third parties, will not have a material effect on the Company’s condensed consolidated balance sheets, statements of operations and cash flows.
From time to time, the Company’s customers and others file voluntary petitions for reorganization under United States bankruptcy laws. In such cases, certain pre-petition payments received by the Company from these parties could be considered preference items and subject to return. In addition, the Company may be party to certain litigation arising in the ordinary course of business. Management believes that the final resolution of these preference items and litigation will not have a material effect on the Company’s condensed consolidated balance sheets, statements of operations and cash flows.
Note 10. Debt
The Company’s debt at June 30, 2019 and December 31, 2018 consisted of the following:
|
|
|
June 30, 2019
|
|
|
December 31, 2018
|
|
|
Borrowings under the Revolving Credit Facility
|
|
$
|
150
|
|
|
$
|
64
|
|
|
Term Loan Facility due September 30, 2022
(a)
|
|
|
239
|
|
|
|
260
|
|
|
8.75% Senior Secured Notes due October 15, 2023
|
|
|
450
|
|
|
|
450
|
|
|
Finance lease and other obligations
|
|
|
2
|
|
|
|
4
|
|
|
Unamortized debt issuance costs
|
|
|
(10
|
)
|
|
|
(11
|
)
|
|
Total debt
|
|
|
831
|
|
|
|
767
|
|
|
Less: current portion
|
|
|
(192
|
)
|
|
|
(108
|
)
|
|
Long-term debt
|
|
$
|
639
|
|
|
$
|
659
|
|
|
|
(a)
|
The borrowings under the Term Loan Facility are subject to a variable interest rate. As of June 30, 2019 and December 31, 2018, the interest rate was 7.87% and 8.02%, respectively.
|
__________________________________
On September 30, 2016, the Company issued $450 million of Senior Secured Notes (the “Senior Notes”).
On September 30, 2016 the Company entered into a credit agreement (the “Credit Agreement”) that provides for (i) a senior secured term loan B facility in an aggregate principal amount of $375 million (the “Term Loan Facility”) and (ii) a senior secured revolving credit facility in an aggregate principal amount of $400 million (the “Revolving Credit Facility”), 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.
21
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three and Six Months Ended June 30, 2019 and 2018
(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.
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 $21 million at June 30, 2019 and greater than its book value by approximately $22 million at December 31, 2018.
There were $150 million and $64 million of borrowings under the Revolving Credit Facility as of June 30, 2019 and December 31, 2018, respectively. The weighted-average interest rate on borrowings under the Company’s Revolving Credit Facility was 5.76% during the six months ended June 30, 2019.
22
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three and Six Months Ended June 30, 2019 and 2018
(tabular amounts in millions, except per share data)
There was
$19
million
and
$38
million
of net interest expense during the
three and six months ended June 30, 2019
, respectively. There was
$18
million
and
$38
million
of net inte
rest expense during the
three and six months ended June 30, 2018
, respectively.
Note 11. Earnings Per Share
During the six months ended June 30, 2019
, no shares of common stock were purchased by the Company.
On May 31, 2018, the Company completed the repurchase approved by the Board of Directors of 1.6 million shares of common stock for a total cost of $20 million.
During the six months ended June 30, 2019 and 2018,
a de minimis amount of shares were withheld from employees for tax liabilities upon vesting of equity awards.
Basic earnings (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 (“RSUs”), and performance share units (“PSUs”).
The following table shows the calculation of basic and diluted EPS, as well as a reconciliation of basic shares to diluted shares:
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Net (loss) income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.69
|
)
|
|
$
|
0.24
|
|
|
$
|
(4.48
|
)
|
|
$
|
(0.09
|
)
|
|
Diluted
|
|
$
|
(0.69
|
)
|
|
$
|
0.23
|
|
|
$
|
(4.48
|
)
|
|
$
|
(0.09
|
)
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(24
|
)
|
|
$
|
8
|
|
|
$
|
(150
|
)
|
|
$
|
(3
|
)
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares
outstanding
|
|
|
33.5
|
|
|
|
34.0
|
|
|
|
33.4
|
|
|
|
34.3
|
|
|
Dilutive options and awards
|
|
|
—
|
|
|
|
0.3
|
|
|
|
—
|
|
|
|
—
|
|
|
Diluted weighted average number of common
shares outstanding
|
|
|
33.5
|
|
|
|
34.3
|
|
|
|
33.4
|
|
|
|
34.3
|
|
|
Weighted-average number of anti-dilutive share-based awards:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock units
|
|
|
—
|
|
|
|
0.5
|
|
|
|
—
|
|
|
|
—
|
|
|
Options
|
|
|
—
|
|
|
|
0.2
|
|
|
|
—
|
|
|
|
—
|
|
Note 12. Retirement Plans
The Company is the sole sponsor of certain defined benefit pension plans that are included in the condensed consolidated balance sheets as of June 30, 2019 and December 31, 2018. The assets and certain obligations of the defined benefit pension plans includes plans qualified under Section 401(a) of the Internal Revenue Code of 1986, as amended (the “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 and six months ended June 30, 2019 and 2018 were as follows:
23
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three and Six Months Ended June 30, 2019 and 2018
(tabular amounts in millions, except per share data)
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
|
June 30, 2019
|
|
|
June 30, 2019
|
|
|
|
|
Qualified
|
|
|
Non-Qualified
& International
|
|
|
Total
|
|
|
Qualified
|
|
|
Non-Qualified
& International
|
|
|
Total
|
|
|
Interest cost
|
|
$
|
18
|
|
|
$
|
1
|
|
|
$
|
19
|
|
|
$
|
38
|
|
|
$
|
2
|
|
|
$
|
40
|
|
|
Expected return on plan assets
|
|
|
(30
|
)
|
|
|
—
|
|
|
|
(30
|
)
|
|
|
(63
|
)
|
|
|
—
|
|
|
|
(63
|
)
|
|
Amortization of actuarial loss
|
|
|
2
|
|
|
|
—
|
|
|
|
2
|
|
|
|
5
|
|
|
|
—
|
|
|
|
5
|
|
|
Settlement of retirement obligations
|
|
|
1
|
|
|
|
—
|
|
|
|
1
|
|
|
|
136
|
|
|
|
—
|
|
|
|
136
|
|
|
Net periodic benefit (income) loss
|
|
$
|
(9
|
)
|
|
$
|
1
|
|
|
$
|
(8
|
)
|
|
$
|
116
|
|
|
$
|
2
|
|
|
$
|
118
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
|
June 30, 2018
|
|
|
June 30, 2018
|
|
|
|
|
Qualified
|
|
|
Non-Qualified
& International
|
|
|
Total
|
|
|
Qualified
|
|
|
Non-Qualified
& International
|
|
|
Total
|
|
|
Interest cost
|
|
$
|
21
|
|
|
$
|
1
|
|
|
$
|
22
|
|
|
$
|
42
|
|
|
$
|
2
|
|
|
$
|
44
|
|
|
Expected return on plan assets
|
|
|
(39
|
)
|
|
|
—
|
|
|
|
(39
|
)
|
|
|
(78
|
)
|
|
|
—
|
|
|
|
(78
|
)
|
|
Amortization of actuarial loss
|
|
|
5
|
|
|
|
—
|
|
|
|
5
|
|
|
|
10
|
|
|
|
—
|
|
|
|
10
|
|
|
Net periodic benefit (income) loss
|
|
$
|
(13
|
)
|
|
$
|
1
|
|
|
$
|
(12
|
)
|
|
$
|
(26
|
)
|
|
$
|
2
|
|
|
$
|
(24
|
)
|
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 $135 million in settlement of retirement benefit obligations in the condensed consolidated statement of operations in the first quarter of 2019. This charge results 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. The long-term rate of return remained at 6.50% for the U.S. Qualified pension plan and did not change as a result of the settlement. The discount rate used to determine the net obligation for the U.S. Qualified pension plan at the settlement date was 4.3%, 10 basis points lower than the discount rate as of December 31, 2018.
There were additional immaterial lump-sum settlements related to the U.S. Qualified Plan (unrelated to the transaction noted above) during the three months ended June 30, 2019 that resulted in a non-cash settlement charge of $1 million.
Settlement of retirement obligations is disclosed separately in the condensed consolidated statements of operations, while the remaining net periodic (loss) income for the three and six months ended June 30, 2019 and 2018 is included in investment and other (income)-net.
Note 13. Comprehensive Income
The following table summarizes accumulated other comprehensive loss by component as of December 31, 2018 and June 30, 2019 and changes during the six months ended June 30, 2019.
|
|
|
Pension
|
|
|
Translation
|
|
|
|
|
|
|
|
|
Plan Cost
|
|
|
Adjustments
|
|
|
Total
|
|
|
Balance at December 31, 2018
|
|
$
|
(529
|
)
|
|
$
|
(55
|
)
|
|
$
|
(584
|
)
|
|
Other comprehensive income before reclassifications
|
|
|
106
|
|
|
|
2
|
|
|
|
108
|
|
|
Amounts reclassified from accumulated other comprehensive loss
|
|
|
4
|
|
|
|
—
|
|
|
|
4
|
|
|
Net change in accumulated other comprehensive loss
|
|
|
110
|
|
|
|
2
|
|
|
|
112
|
|
|
Balance at June 30, 2019
|
|
$
|
(419
|
)
|
|
$
|
(53
|
)
|
|
$
|
(472
|
)
|
24
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three and Six Months Ended June 30, 2019 and 2018
(tabular amounts in millions, except per share data)
In the first quarter of 2019, the Company completed a partial settlement of its retirement benefit obligations and, as a result, the Company’s pension assets and liabilities were remeasured as of the settlement date. The impact, net of tax, to the Company’s accumulated other comprehensive loss was a decrease of $105 million. Additional immaterial lump-sum settlements during the three months ended June 30, 2019 increased the balance by $1 million to a total net of tax impact of $106 million. Refer to Note 12,
Retirement Plans
, for more information.
The following table summarizes accumulated other comprehensive loss by component as of December 31, 2017 and June 30, 2018 and changes during the six months ended June 30, 2018.
|
|
|
Pension
|
|
|
Translation
|
|
|
|
|
|
|
|
|
Plan Cost
|
|
|
Adjustments
|
|
|
Total
|
|
|
Balance at December 31, 2017
|
|
$
|
(428
|
)
|
|
$
|
(48
|
)
|
|
$
|
(476
|
)
|
|
Other comprehensive loss before reclassifications
|
|
|
—
|
|
|
|
(9
|
)
|
|
|
(9
|
)
|
|
Amounts reclassified from accumulated other comprehensive loss
|
|
|
8
|
|
|
|
—
|
|
|
|
8
|
|
|
Reclassification to accumulated deficit
|
|
|
(97
|
)
|
|
|
—
|
|
|
|
(97
|
)
|
|
Net change in accumulated other comprehensive loss
|
|
|
(89
|
)
|
|
|
(9
|
)
|
|
|
(98
|
)
|
|
Balance at June 30, 2018
|
|
$
|
(517
|
)
|
|
$
|
(57
|
)
|
|
$
|
(574
|
)
|
The Company adopted
ASU 2018-02 “Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” (“ASU 2018-02”) in the first quarter of 2018.
As a result of applying this standard in the period of adoption, the Company reclassified $97 million relating to the change in tax rate from accumulated other comprehensive loss to accumulated deficit in the Company’s condensed consolidated balance sheet during the three months ended March 31, 2018.
ASU 2018-02 eliminated the stranded tax effects resulting from the U.S Tax Cuts and Jobs Act and improved the usefulness of information reported to financial statement users.
Refer to the condensed consolidated statements of comprehensive income for the components of comprehensive (loss) income for the three and six months ended June 30, 2019 and 2018.
Reclassifications from accumulated other comprehensive loss for the three and six months ended June 30, 2019 and 2018 were as follows:
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Amortization of pension plan cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss
(a)
|
|
$
|
2
|
|
|
$
|
5
|
|
|
$
|
5
|
|
|
$
|
10
|
|
|
Reclassifications before tax
|
|
|
2
|
|
|
|
5
|
|
|
|
5
|
|
|
|
10
|
|
|
Income tax expense
|
|
|
—
|
|
|
|
1
|
|
|
|
1
|
|
|
|
2
|
|
|
Reclassifications, net of tax
|
|
$
|
2
|
|
|
$
|
4
|
|
|
$
|
4
|
|
|
$
|
8
|
|
|
|
(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 12,
Retirement Plans
).
|
25
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three and Six Months Ended June 30, 2019 and 2018
(tabular amounts in millions, except per share data)
Note 14. Segment Information
During the third quarter of 2018, the Company realigned the reportable segments and reporting units to reflect its evolution since its separation from RRD in 2016, as well as changes from recent acquisition and disposal activity. 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, as well as provides logistics services to the Company and other third-parties. The segment also provides certain other print-related services, including mail-list management and sortation. 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, 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.
Other
The Other grouping consists of the following non-reportable segments: Europe, Directories, Mexico, and Print Management. Europe produced magazines, catalogs and directories, as well as provided packaging and pre-media services. The Company disposed of its European printing business in the third quarter of 2018 (refer to Note 2,
Business Combination and Disposition
, for more information). Mexico produces
magazines, catalogs, statements, forms, and labels. Print Management provides outsourced print procurement and management services.
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, share-based compensation expense is included in Corporate and not allocated to the operating segments.
26
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three and Six Months Ended June 30, 2019 and 2018
(tabular amounts in millions, except per share data)
Information by Segment
The Company has disclosed income (loss) from operations as the primary measure of segment earnings (loss). This is the measure of profitability used by the Company’s chief operating decision-maker and is most consistent with the presentation of profitability reported with the condensed consolidated financial statements.
|
|
|
|
|
|
|
Income (Loss)
|
|
|
Depreciation
|
|
|
|
|
|
|
Three Months Ended
|
|
Net
|
|
|
from
|
|
|
and
|
|
|
Capital
|
|
|
June 30, 2019
|
|
Sales
|
|
|
Operations
|
|
|
Amortization
|
|
|
Expenditures
|
|
|
Magazines, Catalogs and Logistics
|
|
$
|
380
|
|
|
$
|
(42
|
)
|
|
$
|
13
|
|
|
$
|
12
|
|
|
Book
|
|
|
289
|
|
|
|
18
|
|
|
|
13
|
|
|
|
7
|
|
|
Office Products
|
|
|
139
|
|
|
|
13
|
|
|
|
3
|
|
|
|
1
|
|
|
Total reportable segments
|
|
|
808
|
|
|
|
(11
|
)
|
|
|
29
|
|
|
|
20
|
|
|
Other
|
|
|
61
|
|
|
|
8
|
|
|
|
1
|
|
|
|
—
|
|
|
Corporate
|
|
|
—
|
|
|
|
(13
|
)
|
|
|
1
|
|
|
|
1
|
|
|
Total operations
|
|
$
|
869
|
|
|
$
|
(16
|
)
|
|
$
|
31
|
|
|
$
|
21
|
|
|
|
|
|
|
|
|
Income (Loss)
|
|
|
|
|
|
|
Depreciation
|
|
|
|
|
|
|
Six Months Ended
|
|
Net
|
|
|
from
|
|
|
Assets of
|
|
|
and
|
|
|
Capital
|
|
|
June 30, 2019
|
|
Sales
|
|
|
Operations
|
|
|
Operations
|
|
|
Amortization
|
|
|
Expenditures
|
|
|
Magazines, Catalogs and Logistics
|
|
$
|
783
|
|
|
$
|
(73
|
)
|
|
$
|
734
|
|
|
$
|
28
|
|
|
$
|
22
|
|
|
Book
|
|
|
549
|
|
|
|
31
|
|
|
|
637
|
|
|
|
25
|
|
|
|
24
|
|
|
Office Products
|
|
|
258
|
|
|
|
21
|
|
|
|
339
|
|
|
|
6
|
|
|
|
1
|
|
|
Total reportable segments
|
|
|
1,590
|
|
|
|
(21
|
)
|
|
|
1,710
|
|
|
|
59
|
|
|
|
47
|
|
|
Other
|
|
|
124
|
|
|
|
12
|
|
|
|
77
|
|
|
|
2
|
|
|
|
1
|
|
|
Corporate
|
|
|
—
|
|
|
|
(26
|
)
|
|
|
92
|
|
|
|
1
|
|
|
|
1
|
|
|
Total operations
|
|
$
|
1,714
|
|
|
$
|
(35
|
)
|
|
$
|
1,879
|
|
|
$
|
62
|
|
|
$
|
49
|
|
|
|
|
|
|
|
|
Income (Loss)
|
|
|
Depreciation
|
|
|
|
|
|
|
Three Months Ended
|
|
Net
|
|
|
from
|
|
|
and
|
|
|
Capital
|
|
|
June 30, 2018
|
|
Sales
|
|
|
Operations
|
|
|
Amortization
|
|
|
Expenditures
|
|
|
Magazines, Catalogs and Logistics
|
|
$
|
401
|
|
|
$
|
(6
|
)
|
|
$
|
15
|
|
|
$
|
5
|
|
|
Book
|
|
|
266
|
|
|
|
19
|
|
|
|
13
|
|
|
|
9
|
|
|
Office Products
|
|
|
154
|
|
|
|
13
|
|
|
|
3
|
|
|
|
1
|
|
|
Total reportable segments
|
|
|
821
|
|
|
|
26
|
|
|
|
31
|
|
|
|
15
|
|
|
Other
|
|
|
122
|
|
|
|
7
|
|
|
|
2
|
|
|
|
1
|
|
|
Corporate
|
|
|
—
|
|
|
|
(15
|
)
|
|
|
1
|
|
|
|
1
|
|
|
Total operations
|
|
$
|
943
|
|
|
$
|
18
|
|
|
$
|
34
|
|
|
$
|
17
|
|
|
|
|
|
|
|
|
Income (Loss)
|
|
|
|
|
|
|
Depreciation
|
|
|
|
|
|
|
Six Months Ended
|
|
Net
|
|
|
from
|
|
|
Assets of
|
|
|
and
|
|
|
Capital
|
|
|
June 30, 2018
|
|
Sales
|
|
|
Operations
|
|
|
Operations
|
|
|
Amortization
|
|
|
Expenditures
|
|
|
Magazines, Catalogs and Logistics
|
|
$
|
828
|
|
|
$
|
(20
|
)
|
|
$
|
690
|
|
|
$
|
31
|
|
|
$
|
14
|
|
|
Book
|
|
|
515
|
|
|
|
28
|
|
|
|
598
|
|
|
|
27
|
|
|
|
18
|
|
|
Office Products
|
|
|
277
|
|
|
|
15
|
|
|
|
367
|
|
|
|
7
|
|
|
|
1
|
|
|
Total reportable segments
|
|
|
1,620
|
|
|
|
23
|
|
|
|
1,655
|
|
|
|
65
|
|
|
|
33
|
|
|
Other
|
|
|
252
|
|
|
|
14
|
|
|
|
195
|
|
|
|
6
|
|
|
|
2
|
|
|
Corporate
|
|
|
—
|
|
|
|
(25
|
)
|
|
|
71
|
|
|
|
1
|
|
|
|
2
|
|
|
Total operations
|
|
$
|
1,872
|
|
|
$
|
12
|
|
|
$
|
1,921
|
|
|
$
|
72
|
|
|
$
|
37
|
|
27
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three and Six Months Ended June 30, 2019 and 2018
(tabular amounts in millions, except per share data)
Restructuring, impairment and other
charges by segment for the
three and six months ended June 30, 2019
and
2018
are discl
osed in Note
8
,
Restructuring, Impairment and Other Charges.
Note 15. New Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2016-13 “Financial Instruments-Credit Losses (Topic 326)” (“ASU 2016-13”). ASU 2016-13 changes the accounting for credit losses on financial instruments, including accounts receivable. The standard will require the Company to measure expected credit losses on trade receivables based on historical experience, current conditions, and reasonable forecasts. ASU 2016-13 is effective in the first quarter of 2020. The Company is in the process of assessing the impact of the new standard but does not anticipate a significant impact.
In August 2018, the FASB issued Accounting Standards Update No. 2018-15 “
Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract” (“ASU 2018-15”).
ASU 2018-15 aligns the accounting for implementation costs for cloud computing arrangements with the accounting for costs involved in implementing an internal-use software license. ASU 2018-15 is effective in the first quarter of 2020; however, as early adoption is permitted, the Company adopted ASU 2018-15 in the first quarter of 2019. The adoption did not have a material impact during the six months ended June 30, 2019.
Note 16. Subsequent Events
On August 7, 2019, the Company entered into an agreement to sell the land and building associated with its production facility in Torrance, California and expects to receive net proceeds of approximately $35 million, subject to customary contractual terms and conditions.
28
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is management’s discussion and analysis of the financial condition of LSC Communications, Inc. as of June 30, 2019 and December 31, 2018 and the results of operations for the three and six months ended June 30, 2019 and 2018. This commentary should be read in conjunction with the condensed consolidated financial statements and accompanying notes included in Item 1,
Condensed Consolidated Financial Statements
. Refer to the Company’s annual report on Form 10-K, as filed with the Securities and Exchange Commission (“SEC”) on February 19, 2019, for management’s discussion and analysis of the financial condition of the company as of December 31, 2018 and December 31, 2017, and the results of operations for the years ended December 31, 2018, 2017 and 2016.
Company Overview
The principal business of LSC Communications, Inc., a Delaware corporation, and its direct or indirect wholly-owned subsidiaries (“LSC Communications,” “the Company,” “we,” “our” and “us”) is to offer a broad scope of traditional and digital print, print-related services and office products.
Merger with Quad/Graphics, Inc.
On October 30, 2018, the Company entered into that certain Agreement and Plan of Merger (the “Merger Agreement”), by and among Quad/Graphics, Inc. (“Quad”), QLC Merger Sub, Inc. and LSC Communications, pursuant to which, subject to the satisfaction or waiver of certain conditions, LSC Communications would be merged with QLC Merger Sub, Inc., and become a wholly-owned subsidiary of Quad.
On July 22, 2019, Quad and LSC Communications entered into a letter agreement (the “Letter Agreement”), pursuant to which the parties agreed to terminate the Merger Agreement. Pursuant to the Letter Agreement, Quad agreed to pay LSC Communications the Regulatory Approval Reverse Termination Fee (as defined in the Merger Agreement) of $45 million in cash on the business day following the date of the Letter Agreement. Except for certain indemnification obligations of Quad related to LSC Communications assisting Quad with the financing under the Merger Agreement, the parties also agreed to release each other from any and all claims, counterclaims, demands, proceedings, actions, causes of action, orders, obligations, damages, debts, costs, expenses and other liabilities whatsoever and howsoever arising pursuant to or in connection with the Merger Agreement or the transactions provided for in the Merger Agreement.
Retention Award Agreements
On August 5, 2019, the Human Resources Committee of the Company’s Board of Directors (the “HR Committee”) approved (i) grants of cash retention awards (the “Retention Awards”) to the Company’s named executive officers and certain other employees and (ii) the form of award agreement (the “Retention Award Agreement”), pursuant to which such grants of retention awards will be made. One-third of each Retention Award will vest on August 5, 2020, subject to the grantee’s continued employment with the Company through such date. The remaining two-thirds of each Retention Award will vest ratably following each of the Company’s 2021 and 2022 fiscal years, in each case subject to the Company’s achievement of the applicable performance metric and the grantee’s continued employment with the Company through the date the HR Committee certifies the achievement of such performance. If the grantee’s employment is terminated prior to payment in full of the Retention Award due to death, his or her estate will receive a pro-rated portion of the unvested portion of Retention Award, based on the number of days worked in the full vesting period. The unvested portion of each Retention Award will be forfeited upon any other termination of employment. The amounts of the Retention Awards for each of the named executive officers are as follows: (i) Thomas J. Quinlan III, $2,400,000; (ii) Suzanne S. Bettman, $810,000; (iii) Andrew B. Coxhead, $810,000; (iv) Kent A. Hansen, $325,0000; and (v) Richard T. Lane, $675,000.
The foregoing description of the terms of the Retention Award Agreement does not purport to be complete and is qualified in its entirety by the provisions of the form of Retention Award Agreement, which filed as Exhibit 10.31 to this Form 10-Q and incorporated by reference herein.
29
Segment Descriptions
During the third quarter of 2018, the Company realigned the reportable segments and reporting units to reflect its evolution since its separation from
R. R. Donnelley & Sons Company’s (“RRD”)
in 2016, as well as changes from recent acquisition and disposal activity. All prior year amounts have been reclassified to conform to the Company’s current reporting structure.
The Company’s segments and their product offerings are summarized below:
Magazines, Catalogs and Logistics
The Magazines, Catalogs and Logistics segment primarily produces magazines and catalogs, as well as provides logistics services to the Company and other third-parties. The segment also provides certain other print-related services, including mail-list management and sortation. 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, 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.
Other
The Other grouping consists of the following non-reportable segments: Europe, Directories, Mexico, and Print Management. Europe produced magazines, catalogs and directories, as well as provided packaging and pre-media services. The Company disposed of its European printing business in the third quarter of 2018 (refer to Note 2,
Business Combination and Disposition
, for more information). Mexico produces
magazines, catalogs, statements, forms, and labels.
Print Management
provides outsourced print procurement and management services.
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, share-based compensation expense is included in Corporate and not allocated to the operating segments.
30
Business Combina
tion
and Disposition
s
The following table lists the Company’s acquisitions since 2016:
|
Date
|
Company
|
Description
|
Purchase Price
|
|
July 2, 2018
|
RRD's Print Logistics business ("Print Logistics")
|
Integrated logistics services provider with distribution network
|
$52 million in cash
|
|
November 29, 2017
|
The Clark Group, Inc. ("Clark Group")
|
Third-party logistics provider of distribution, consolidation, transportation management and international freight forwarding services
|
$25 million in cash
|
|
November 9, 2017
|
Quality Park
|
Producer of envelopes, mailing supplies and assorted packaging items
|
$41 million in cash
|
|
September 7, 2017
|
Publishers Press, LLC ("Publishers Press")
|
Printing provider with capabilities such as web-offset printing, prepress and distribution services for magazines and retail brands
|
$68 million in cash
|
|
August 21, 2017
|
NECI, LLC ("NECI")
|
Supplier of commodity and specialty filing supplies
|
$6 million in cash
|
|
August 17, 2017
|
CREEL Printing, LLC ("Creel")
|
Offset and digital printing company
|
$79 million in cash
|
|
July 28, 2017
|
Fairrington Transportation Corp., F.T.C. Transport, Inc. and F.T.C. Services, Inc. (“Fairrington”)
|
Full-service, printer-independent mailing logistics provider in the United States
|
$19 million in cash and ~1.0 million shares of LSC Communications common stock (total value $39 million)
|
|
March 1, 2017
|
HudsonYards Studios, LLC ("HudsonYards")
|
Digital and print premedia production company that provides high-quality creative retouching, computer-generated imagery, mechanical creation, press-ready file preparation, and interactive production services
|
$3 million in cash
|
|
December 2, 2016
|
Continuum Management Company, LLC (“Continuum”)
|
Print procurement and management business
|
$9 million in cash
|
The Company sold its European printing business on September 28, 2018 for $47 million in cash. The
Company sold its retail offset printing facilities on June 5, 2018.
For further information on the Print Logistics acquisition and the European disposition, see Note 2,
Business Combination and Disposition
, to the condensed consolidated financial statements.
Outlook
Competitive Environment
According to the August 2019 IBIS World industry report
“Printing in the U.S.,”
estimated total annual printing industry revenue is approximately $77 billion, of which approximately $13 billion relates to our core segments of the print market and an additional approximately $31 billion pertains to related segments of the print market in which we are able to offer certain products. Despite consolidation in recent years, including several acquisitions completed by LSC Communications, the industry remains highly fragmented and LSC Communications is one of the largest players in our segment of the print market. The print and related services industry, in general, continues to have excess capacity and LSC Communications remains diligent in proactively identifying plant consolidation opportunities to keep our capacity in line with demand. Across the Company’s range of print products and services, competition is based primarily on the ability to deliver products for the lowest total cost, a factor driven not only by price, but also by materials and distribution costs. We expect that prices for print products and services will continue to be a focal point for customers in coming years.
31
Value-added services, such as LSC Communications’ co-mail, logistics and supply chain management offerings, enable customers to lower their total costs. Technological changes, including the electronic distribution of documents and data, online distribution and hosting of media content, and advances in digital printing, print-on-demand and internet technologies, continue to impact the market for our products and services. The impact of digital technologies has been felt in many print products. Digital technologies have impacted printed magazines as some advertising spending has moved from print to electronic media.
Catalogs have experienced volume reductions as our customers allocate more of their spending to online resources and also face stiff competition from online retailers resu
lting in retailer compression. The Company has seen an unprecedented drop in demand for
magaz
ines and catalogs in 2019
, with the faster pace of decline in demand primarily due to the accelerated impact of digital disruption of demand for printed materials
.
Educational books within the college market continue to be impacted by electronic substitution and other trends. The K-12 educational sector continues to be focused on increasing digital distribution but there has been inconsistent adoption across school systems.
E-book substitution has impacted overall consumer print trade book volume, although e-book adoption
rates have stabilized and industry-wide print book volume has been growing in recent years.
In addition, retail inserts have experienced volume reductions primarily as a result of store closures and reduced newspaper circulation.
Electronic
communication and transaction technology has also continued to drive electronic substitution in directory printing, in part driven by cost pressures at key customers.
The future impact of technology on our business is difficult to predict and could result in additional expenditures to restructure impacted operations or develop new technologies. In addition, we have made targeted acquisitions and investments in our existing business to offer customers innovative services and solutions. Such acquisitions and investments include the acquisitions of Print Logistics in 2018 and Clark Group, Quality Park, Publishers Press, NECI, CREEL, Fairrington, and HudsonYards in 2017, which expanded our logistics, printing, digital, office products, and premedia capabilities, and Continuum Management Company, LLC (“Continuum”) in 2016, which expanded our print management capabilities. These acquisitions and investments further secure our position as a technology leader in the industry.
Technological advancement and innovation has affected the overall demand for most of the products in our Office Products segment. While these changes continue to impact demand, the overall market for our products remains large and we believe share growth is attainable. We compete against a range of both domestic and international competitors in each of our product categories within the segment. Due to the increasing percentage of private label products in the market, resellers have created a highly competitive environment where purchasing decisions are based largely on price, quality and the supplier’s ability to service the customer. As consumer preferences shift towards private label, resellers have increased the pressure on suppliers to better differentiate their product offering, oftentimes through product exclusivity, product innovation and development of private label products.
We have experienced robust growth within our e-commerce channel, where a significant majority of our sales are branded products.
We have implemented a number of strategic initiatives to reduce our overall cost structure and improve efficiency, including the restructuring, reorganization and integration of operations and streamlining of administrative and support activities. Future cost reduction initiatives could include the reorganization of operations and the consolidation of facilities. Implementing such initiatives might result in future restructuring or impairment charges, which may be substantial. We also review our operations and management structure on a regular basis to appropriately balance risks and opportunities to maximize efficiencies and to support our long-term strategic goals.
During late 2018 and early 2019, the Company performed a comprehensive review of the Company’s entire operations to identify new revenue opportunities and cost savings. This review covered substantially all aspects of the Company – both operational and support functions – and involved key personnel from throughout the organization. The resulting revenue opportunities and cost savings initiatives were approved by senior management in the first quarter of 2019 and are expected to be implemented over the next three years. While the Company expects to realize the benefits beginning in 2019 and at various points over the next three years, the Company incurred $1.1 million and $2.6 million of expense during the three and six months ended June 30, 2019, respectively, relating to the implementation of certain identified initiatives. As the Company continues to implement the identified initiatives, the Company expects to incur additional expense; however, the Company expects the resulting benefits (additional revenue and/or cost savings) to significantly exceed the additional expense. Refer to Note 8,
Restructuring, Impairment and Other Charges
, for information on the charges recorded during the three and six months ended June 30, 2019.
32
Impairment Reviews and Charges
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 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.
For the three months ended June 30, 2019, the Book and Office Products segments performed in line with expectations. However, the Company has seen an unprecedented drop in demand in its magazines and catalogs reporting unit, with the faster pace of decline in demand primarily due to the accelerated impact of digital disruption of demand for printed materials. In addition, the Company’s stock price has experienced a significant, sustained decline since the Company performed its annual goodwill impairment test (October 31, 2018).
Given the stock price decline, management determined that a further review of the reporting units’ goodwill for indicators of impairment was appropriate. The Company concluded that Book, Office Products and Logistics goodwill did not have indicators of impairment as the underlying assumptions from the 2018 review continue to be reasonable compared to performance thus far in 2019 and management’s current outlook. No other reporting unit, including magazines and catalogs, had a goodwill balance as of June 30, 2019.
Due to the unprecedented drop in demand in the magazines and catalogs reporting unit, management determined that a further review of the reporting unit’s intangible assets and property, plant and equipment for recoverability was appropriate:
|
|
•
|
As a result of the faster pace of decline in demand, negative revenue trends and lower expectations of future revenue to be derived from certain customer relationships, management determined that a certain definite-lived customer relationship intangible asset was not recoverable. This resulted in the Company recording a $17 million impairment charge for the three months ended June 30, 2019, which fully impaired the asset. The impairment was determined using Level 3 inputs and estimated based on cash flow analyses, which included management’s assumptions related to future revenues and profitability.
|
|
|
•
|
With respect to property, plant and equipment and right-of-use assets for operating leases within the magazines and catalogs reporting unit, management performed a Step 1 recoverability test in accordance with Accounting Standards Codification (“ASC”) 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 – which includes a hypothetical sale of assets – management determined that the estimated future undiscounted cash flows were in excess of the asset group’s carrying value, resulting in no impairment loss.
|
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, deferred tax assets 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.
Raw Materials
We negotiate with suppliers to maximize our purchasing efficiencies. The primary raw materials we use in our printed products are paper and ink. We negotiate with paper suppliers to maximize our purchasing efficiencies and use a wide variety of paper grades and formats. In addition, a substantial amount of paper used in our printed products is supplied directly by customers. Variations in the cost and supply of certain paper grades used in the manufacturing process may affect our consolidated financial results. Generally, customers directly absorb the impact of changing prices on customer-supplied paper. For paper that we purchase, we have historically passed most changes in price through to our customers.
33
Contractual arrangements and industry practice should support our continued ability to pass on any future paper price increases, but there is no assurance that market conditions will continue to enable us to successfully do so. Higher paper prices and tight paper supplies may have an impact on customers’ demand for printed products. We also resell waste paper and other print-related by-products and may be impacted by changes in prices for these by-products
.
We use a wide variety of ink formulations and colors in our manufacturing processes. Variations in the cost and supply of certain ink formulations may affect our consolidated financial results. We have undertaken various strategic initiatives to try to mitigate any foreseeable supply disruptions with respect to our ink requirements, including entering into a long term supply arrangement with a single supplier for a substantial portion of our ink supply. Certain contractual protections exist in our relationship with such supplier, such as price and quality protections and an ability to seek alternative sources of ink if the supplier breaches or is unable to perform certain of its obligations, which are intended to mitigate the risk of ink-related supply disruptions.
The primary materials used in the Office Products segment are paper, steel and polypropylene substrates. We negotiate with leading paper, plastic and steel suppliers to maximize our purchasing efficiencies. All of these materials are available from a number of domestic and international suppliers and we are not dependent upon any single supplier for any of these materials. We believe that adequate supply is available for each of these materials for the foreseeable future, although higher paper prices may have an impact on demand for our products.
Changes in material prices, including paper and freight, may impact the Company’s operating margins as there may be a lag between when the Company experiences the changes and when they are absorbed by our customers.
Except for our long-term supply arrangement regarding ink, we do not consider ourselves to be dependent upon any single vendor as a source of supply for our businesses, and we believe that sufficient alternative sources for the same, similar or alternative products are available.
Changes in the price of raw materials, crude oil and other energy costs impact our manufacturing costs. Crude oil and energy prices continue to be volatile. Should prices increase, we generally cannot pass on to customers the impact of higher energy prices on our manufacturing costs. We do enter into fixed price contracts for a portion of our natural gas purchases to mitigate the impact of changes in energy prices. We cannot predict sudden changes in energy prices and the impact that possible future changes in energy prices might have upon either future operating costs or customer demand and the related impact either will have on the Company’s consolidated statements of operations, balance sheets and cash flows.
Pension Benefit Plans
The funded status of the Company’s pension benefit plans is dependent upon many factors, including returns on invested assets and the level of certain market interest rates. Market conditions may lead to changes in the discount rates (used to value the year-end benefit obligations of the plans) and the market value of the securities held by the plans, which could significantly increase or decrease the funded status of the plans. The Company reviews its actuarial assumptions on an annual basis as of December 31. Based on current estimates, the Company expects to make cash contributions of approximately $6 million to its pension benefit plans for the full year in 2019, of which $3 million has been contributed during the six months ended June 30, 2019.
In the first quarter of 2019, the Company completed a partial settlement of its retirement benefit obligations by purchasing a group annuity contract for certain retirees and beneficiaries from a third-party insurance company. As a result, the Company’s pension assets and liabilities were remeasured as of the settlement date. The Company recorded a non-cash settlement charge of $135 million in settlement of retirement benefit obligations in the condensed consolidated statement of operations in the first quarter of 2019. There were additional immaterial lump-sum settlements (unrelated to the transaction noted above) during the three months ended June 30, 2019 that resulted in a non-cash settlement charge of $1 million.
Based on the fair value of assets and the estimated discount rate used to value benefit obligations as of June 30, 2019, the Company estimates the unfunded status of the pension benefit plans to be approximately $100 million compared to $137 million at December 31, 2018.
See Note 12,
Retirement Plans
, for more information on the Company’s pension benefit plans.
34
Dividend Policy
On July 23, 2019, LSC Communications announced that its Board of Directors has determined to suspend the Company’s quarterly cash dividend.
Significant Accounting Policies
There have been no changes to the Company’s significant accounting policies disclosed in the annual report on Form 10-K for the year-ended December 31, 2018, with the exception of leases. On January 1, 2019, the Company adopted
Accounting Standards Update No. 2016-02 “Leases (Topic 842)” (“ASU 2016-02”), as discussed in the Company’s annual report on Form 10-K.
Upon adoption of ASC 842, the Company added $206 million of right-of-use (“ROU”) assets and lease liabilities to its condensed consolidated balance sheet related to operating leases. There was no impact to the Company’s condensed consolidated statements of operations. See Note 4,
Leases
, for more information.
35
FINANCIAL REVIEW
In the financial review that follows, the Company discusses its condensed consolidated balance sheets, statements of operations, cash flows and certain other information. This discussion should be read in conjunction with the Company’s condensed consolidated financial statements and the related notes.
Results of Operations for the Three Months Ended June 30, 2019 as Compared to the Three Months ended June 30, 2018
The following table shows the results of operations for the three months ended June 30, 2019 and 2018, which reflects the results of the acquired businesses from the relevant acquisition dates:
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
|
(in millions, except percentages)
|
|
|
Net sales
|
|
$
|
869
|
|
|
$
|
943
|
|
|
$
|
(74
|
)
|
|
|
(7.7
|
%)
|
|
Cost of sales
|
|
|
750
|
|
|
|
798
|
|
|
|
(48
|
)
|
|
|
(6.0
|
%)
|
|
Cost of sales as a % of net sales
|
|
|
86.3
|
%
|
|
|
84.6
|
%
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses (exclusive of
depreciation and amortization)
|
|
|
80
|
|
|
|
82
|
|
|
|
(2
|
)
|
|
|
(2.4
|
%)
|
|
Selling, general and administrative expenses as a % of net sales
|
|
|
9.2
|
%
|
|
|
8.7
|
%
|
|
|
|
|
|
|
|
|
|
Restructuring, impairment and other charges-net
|
|
|
24
|
|
|
|
11
|
|
|
|
13
|
|
|
|
118.2
|
%
|
|
Depreciation and amortization
|
|
|
31
|
|
|
|
34
|
|
|
|
(3
|
)
|
|
|
(8.8
|
%)
|
|
(Loss) income from operations
|
|
$
|
(16
|
)
|
|
$
|
18
|
|
|
$
|
(34
|
)
|
|
|
(188.9
|
%)
|
Condensed Consolidated Results
Net sales for the three months ended June 30, 2019 were $869 million, a decrease of $74 million, or 7.7%, compared to the three months ended June 30, 2018. Net sales were impacted by:
|
|
•
|
The dispositions of the Company’s European printing business and retail offset printing facilities in 2018, and lower volume in magazines and catalogs and Office Products;
|
|
|
•
|
Partially offset by the acquisition of Print Logistics in 2018, higher volume in books and a $2 million increase in pass-through paper sales.
|
Additionally, on a pro forma basis, the Company’s net sales decreased by approximately $115 million or 11.6% (see Note 2,
Business Combination and Disposition
, to the condensed consolidated financial statements). The decrease was primarily due to the Company’s disposition of its European printing business and retail offset printing facilities in 2018.
Total cost of sales decreased $48 million, or 6.0%, for the three months ended June 30, 2019 compared to the three months ended June 30, 2018, primarily driven by the dispositions of the Company’s European printing business and retail offset printing facilities and lower volume, partially offset by costs incurred by the acquisition of Print Logistics.
As a percentage of net sales, cost of sales increased from 84.6% for the three months ended June 30, 2018 to 86.3% for the three months ended June 30, 2019 primarily due to higher labor costs and product mix.
Selling, general and administrative expenses decreased $2 million to $80 million for the three months ended June 30, 2019 compared to the three months ended June 30, 2018 primarily due to
the disposition of the Company’s European printing business, partially offset by costs associated with the Merger Agreement and costs incurred by the acquisition of Print Logistics.
As a percentage of net sales, selling, general and administrative expenses increased from 8.7% for the three months ended June 30, 2018 to 9.2% for the three months ended June 30, 2019 primarily due to costs associated with the Merger Agreement.
For the three months ended June 30, 2019, the Company recorded restructuring, impairment and other charges of $24 million. The charges primarily included:
36
|
|
•
|
Net
other restructuring charges of
$6
million
primarily due to facility costs,
costs associated with new revenue opportunities and cost savings initiatives implemented during the quarter
, and
multiemployer withdrawal obligations related to facility closures
; and
|
|
|
•
|
$17 million for the impairment of certain definite-lived customer relationships intangible assets in the Magazines, Catalogs and Logistics segment.
|
For the three months ended June 30, 2018, the Company recorded restructuring, impairment and other charges of $11 million. The charges primarily included:
|
|
•
|
Other restructuring charges of $7 million for facility costs, a loss related to the Company’s disposition of its retail offset printing facilities, and multiemployer withdrawal obligations related to facility closures; and
|
|
|
•
|
Employee termination costs of $3 million related to an aggregate of 108 employees, substantially all of whom were terminated as of or prior to June 30, 2019, primarily related to the reorganization of certain business units and corporate functions.
|
Depreciation and amortization decreased $3 million to $31 million for the three months ended June 30, 2019 compared to the three months ended June 30, 2018 due to decreased capital spending in recent years compared to historical levels and the disposition of the Company’s European printing business, partially offset by the acquisition of Print Logistics.
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
|
(in millions, except percentages)
|
|
|
Interest expense-net
|
|
$
|
19
|
|
|
$
|
18
|
|
|
$
|
1
|
|
|
|
5.6
|
%
|
|
Settlement of retirement benefit obligations
|
|
|
1
|
|
|
|
—
|
|
|
|
1
|
|
|
|
100.0
|
%
|
|
Investment and other (income)-net
|
|
|
(9
|
)
|
|
|
(13
|
)
|
|
|
4
|
|
|
|
(30.8
|
%)
|
Net interest expense increased by $1 million for the three months ended June 30, 2019 compared to the three months ended June 30, 2018. Refer to Note 12,
Retirement Plans
, for information on the non-cash settlement charge related to retirement benefit obligations. Investment and other (income)-net primarily relates to the Company’s pension benefit plans in both years.
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
$ Change
|
|
|
|
|
(in millions, except percentages)
|
|
|
(Loss) income before income taxes
|
|
$
|
(27
|
)
|
|
$
|
13
|
|
|
$
|
(40
|
)
|
|
Income tax (benefit) expense
|
|
|
(3
|
)
|
|
|
5
|
|
|
|
(8
|
)
|
|
Effective income tax rate
|
|
|
13.3
|
%
|
|
|
35.3
|
%
|
|
|
|
|
The effective income tax rate for the three months ended June 30, 2019 was 13.3% compared to 35.3% for the three months ended June 30, 2018.
The effective rate for three months ended June 30, 2019 reflects the impact of nondeductible costs associated with the Merger Agreement.
The effective income tax rate for the three months ended June 30, 2018 reflects the impact of the U.S. Tax Cuts and Jobs Act (“Tax Act”) including the reduction of the U.S. federal corporate tax rate from 35.0% to 21.0%, partially offset by the tax resulting from the inclusion of certain foreign-sourced earnings, referred to as the global intangible low-taxed income ("GILTI") tax, as well as changes in deductions and permanent book-to-tax differences.
Information by Segment
The following tables summarize net sales, income (loss) from operations and certain items impacting comparability within each of the reportable segments and Corporate. The descriptions of the reporting units generally reflect the primary products provided by each reporting unit.
37
Magazines, Catalogs and Logistics
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Change
|
|
|
|
|
(in millions, except percentages)
|
|
|
Net sales
|
|
$
|
380
|
|
|
$
|
401
|
|
|
$
|
(21
|
)
|
|
(Loss) from operations
|
|
|
(42
|
)
|
|
|
(6
|
)
|
|
|
(36
|
)
|
|
Operating margin
|
|
|
(11.1
|
%)
|
|
|
(1.5
|
%)
|
|
(960 bps)
|
|
|
Restructuring, impairment and other charges-net
|
|
|
20
|
|
|
|
6
|
|
|
|
14
|
|
Net sales for the Magazines, Catalogs and Logistics segment for the three months ended June 30, 2019 were $380 million, a decrease of $21 million, or 5.3%, compared to the three months ended June 30, 2018. The Magazines, Catalogs and Logistics segment’s net sales decreased primarily due to an unprecedented drop in long-run magazine and catalog volumes, with the faster pace of decline in demand primarily due to the accelerated impact of digital disruption of demand for printed materials. In addition, the disposition of the Company’s retail offset printing facilities and a $5 million decrease in pass-through paper sales contributed to the decrease, all of which was partially offset by the acquisition of Print Logistics.
The increase in Magazines, Catalogs and Logistics segment loss from operations and change in operating margins was primarily due to higher restructuring, impairment and other charges and the lower volumes noted above.
Book
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Change
|
|
|
|
|
(in millions, except percentages)
|
|
|
Net sales
|
|
$
|
289
|
|
|
$
|
266
|
|
|
$
|
23
|
|
|
Income from operations
|
|
|
18
|
|
|
|
19
|
|
|
|
(1
|
)
|
|
Operating margin
|
|
|
6.2
|
%
|
|
|
7.1
|
%
|
|
(90 bps)
|
|
|
Restructuring, impairment and other charges-net
|
|
|
1
|
|
|
|
3
|
|
|
|
(2
|
)
|
Net sales for the Book segment for the three months ended June 30, 2019 were $289 million, an increase of $23 million, or 9.2%, compared to the three months ended June 30, 2018, primarily due to higher volume in digitally-printed and educational books, increased fulfillment and procurement services and an $11 million increase in pass-through paper sales.
The decrease in the Book segment income from operations and operating margins was primarily due to increased labor costs.
Office Products
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Change
|
|
|
|
|
(in millions, except percentages)
|
|
|
Net sales
|
|
$
|
139
|
|
|
$
|
154
|
|
|
$
|
(15
|
)
|
|
Income from operations
|
|
|
13
|
|
|
|
13
|
|
|
|
—
|
|
|
Operating margin
|
|
|
9.4
|
%
|
|
|
8.4
|
%
|
|
100 bps
|
|
|
Restructuring, impairment and other charges-net
|
|
|
1
|
|
|
|
1
|
|
|
|
—
|
|
Net sales for the Office Products segment for the three months ended June 30, 2019 were $139 million, a decrease of $15 million, or 9.7%, compared to the three months ended June 30, 2018, largely as a result of lower volume in filing and binder products.
38
The
Office Products segment income from operations
remained consistent at $13 million for the three months ended June 30, 2019 and 2018. The increase
in
operating margins was
due to
cost re
ductions and
synergies realized from t
he integration of Quality Park.
Other
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Change
|
|
|
|
|
(in millions, except percentages)
|
|
|
Net sales
|
|
$
|
61
|
|
|
$
|
122
|
|
|
$
|
(61
|
)
|
|
Income from operations
|
|
|
8
|
|
|
|
7
|
|
|
|
1
|
|
|
Operating margin
|
|
|
13.1
|
%
|
|
|
5.7
|
%
|
|
740 bps
|
|
Net sales for the Other grouping for the three months ended June 30, 2019 were $61 million, a decrease of $61 million, or 50.1%, compared to the three months ended June 30, 2018, primarily due to the disposition of the Company’s European printing business, a $4 million decrease in pass-through paper sales and lower directories volume, partially offset by higher sales in outsourced print procurement and management services.
The increase in income from operations and operating margin was primarily due to mix of volume.
Corporate
The following table summarizes unallocated operating expenses and certain items impacting comparability within the activities presented as Corporate:
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Change
|
|
|
|
|
(in millions, except percentages)
|
|
|
Total operating expenses
|
|
$
|
13
|
|
|
$
|
15
|
|
|
$
|
(2
|
)
|
|
Significant components of total operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring, impairment and other charges-net
|
|
|
2
|
|
|
|
1
|
|
|
|
1
|
|
|
Share-based compensation expenses
|
|
|
1
|
|
|
|
5
|
|
|
|
(4
|
)
|
|
Expenses related to acquisitions, the Merger
Agreement and dispositions
|
|
|
5
|
|
|
|
1
|
|
|
|
4
|
|
39
Results of Operations for the Six Months Ended June 30, 2019 as Compared to the Six Months Ended June 30, 2018
The following table shows the results of operations for the six months ended June 30, 2019 and 2018, which reflects the results of the acquired businesses from the relevant acquisition dates:
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
|
(in millions, except percentages)
|
|
|
Net sales
|
|
$
|
1,714
|
|
|
$
|
1,872
|
|
|
$
|
(158
|
)
|
|
|
(8.4
|
%)
|
|
Cost of sales
|
|
|
1,485
|
|
|
|
1,606
|
|
|
|
(121
|
)
|
|
|
(7.5
|
%)
|
|
Cost of sales as a % of net sales
|
|
|
86.6
|
%
|
|
|
85.8
|
%
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses (exclusive of depreciation
and amortization)
|
|
|
165
|
|
|
|
165
|
|
|
|
—
|
|
|
|
---
|
%
|
|
Selling, general and administrative expenses as a % of net sales
|
|
|
9.6
|
%
|
|
|
8.8
|
%
|
|
|
|
|
|
|
|
|
|
Restructuring, impairment and other charges-net
|
|
|
37
|
|
|
|
17
|
|
|
|
20
|
|
|
|
117.6
|
%
|
|
Depreciation and amortization
|
|
|
62
|
|
|
|
72
|
|
|
|
(10
|
)
|
|
|
(13.9
|
%)
|
|
(Loss) income from operations
|
|
$
|
(35
|
)
|
|
$
|
12
|
|
|
$
|
(47
|
)
|
|
|
(391.7
|
%)
|
Condensed Consolidated Results
Net sales for the six months ended June 30, 2019 were $1,714 million, a decrease of $158 million, or 8.4%, compared to the six months ended June 30, 2018. Net sales were impacted by:
|
|
•
|
The dispositions of the Company’s European printing business and retail offset printing facilities in 2018, and lower volume in magazines and catalogs, Directories and Office Products;
|
|
|
•
|
Partially offset by the acquisition of Print Logistics in 2018, higher volume in books and a $3 million increase in pass-through paper sales.
|
Additionally, on a pro forma basis, the Company’s net sales decreased by approximately $243 million or 12.4% (see Note 2,
Business Combination and Disposition
, to the condensed consolidated financial statements). The decrease was primarily due to the Company’s disposition of its European printing business and retail offset printing facilities in 2018.
Total cost of sales decreased $121 million, or 7.5%, for the six months ended June 30, 2019 compared to the six months ended June 30, 2018, primarily driven by the dispositions of the Company’s European printing business and retail offset printing facilities and lower volume, partially offset by costs incurred by the acquisition of Print Logistics.
As a percentage of net sales, cost of sales increased from 85.8% for the three months ended June 30, 2018 to 86.6% for three months ended June 30, 2019 primarily due to higher labor costs and product mix.
Selling, general and administrative expenses remained consistent at $165 million for the six months ended June 30, 2019 compared to the six months ended June 30, 2018, primarily due to costs associated with the Merger Agreement and costs incurred by the acquisition of Print Logistics, partially offset by the disposition of the Company’s European printing business.
As a percentage of net sales, selling, general and administrative expenses increased from 8.8% for the six months ended June 30, 2018 to 9.6% for the six months ended June 30, 2019 primarily due to costs associated with the Merger Agreement.
For the six months ended June 30, 2019, the Company recorded restructuring, impairment and other charges of $37 million. The charges primarily included:
|
|
•
|
Net other restructuring charges of $12 million primarily due to facility costs, costs associated with new revenue opportunities and cost savings initiatives implemented in 2019, and multiemployer withdrawal obligations related to facility closures;
|
|
|
•
|
Employee termination costs of $5 million related to an aggregate of 234 employees, of whom 31 were terminated as of or prior to June 30, 2019 primarily related to the closure of one facility in the Magazines, Catalogs and Logistics segment;
|
40
|
|
•
|
$17 million for the impairment of certain definite-lived customer relationships intangible assets in the Magazines,
Catalogs and Logistics segment; and
|
|
|
•
|
$2 million of net impairment charges related to machinery and equipment associated with facility closings
in the Magazines, Catalogs and Logistics segment.
|
For the six months ended June 30, 2018, the Company recorded restructuring, impairment and other charges of $17 million. The charges primarily included:
|
|
•
|
Other restructuring charges of $10 million for facility costs, a loss related to the Company’s disposition of its retail offset printing facilities, and multiemployer withdrawal obligations related to facility closures; and
|
|
|
•
|
Employee termination costs of $7 million related to an aggregate of 304 employees, substantially all of whom were terminated as of or prior to June 30, 2019. These charges primarily related to one facility closure in the Print segment and the reorganization of certain business units and corporate functions.
|
Depreciation and amortization decreased $10 million to $62 million for the six months ended June 30, 2019 compared to the six months ended June 30, 2018 due to decreased capital spending in recent years compared to historical levels and the disposition of the Company’s European printing business, partially offset by the acquisition of Print Logistics.
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
|
(in millions, except percentages)
|
|
|
Interest expense-net
|
|
$
|
38
|
|
|
$
|
38
|
|
|
$
|
—
|
|
|
|
---
|
%
|
|
Settlement of retirement benefit obligations
|
|
|
136
|
|
|
|
—
|
|
|
|
136
|
|
|
|
100.0
|
%
|
|
Investment and other (income)-net
|
|
|
(19
|
)
|
|
|
(24
|
)
|
|
|
5
|
|
|
|
(20.8
|
%)
|
Net interest expense was $38 million for each of the six months ended June 30, 2019 and 2018. Investment and other (income)-net primarily relates to the Company’s pension benefit plans in both years. Refer to Note 12,
Retirement Plans
, for information on the non-cash settlement charge related to retirement benefit obligations.
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
$ Change
|
|
|
|
|
(in millions, except percentages)
|
|
|
Net (loss) before income taxes
|
|
$
|
(190
|
)
|
|
$
|
(2
|
)
|
|
$
|
(188
|
)
|
|
Income tax (benefit) expense
|
|
|
(40
|
)
|
|
|
1
|
|
|
|
(41
|
)
|
|
Effective income tax rate
|
|
|
21.3
|
%
|
|
|
(35.7
|
%)
|
|
|
|
|
The effective income tax rate for the six months ended June 30, 2019 was 21.3% compared to (35.7%) for the six months ended June 30, 2018.
The effective income tax rate for the six months ended June 30, 2019 reflects the impact of nondeductible costs associated with the Merger Agreement.
The effective income tax rate for the six months ended June 30, 2018 reflects the impact of the Tax Act including the reduction of the U.S. federal corporate tax rate from 35.0% to 21.0%, partially offset by the tax resulting from the inclusion of certain foreign-sourced earnings, referred to as the GILTI tax, as well as changes in deductions and permanent book-to-tax differences.
Information by Segment
The following tables summarize net sales, income (loss) from operations and certain items impacting comparability within each of the reportable segments and Corporate. The descriptions of the reporting units generally reflect the primary products provided by each reporting unit.
41
M
agazines, Catalogs and Logistics
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Change
|
|
|
|
|
(in millions, except percentages)
|
|
|
Net sales
|
|
$
|
783
|
|
|
$
|
828
|
|
|
$
|
(45
|
)
|
|
(Loss) from operations
|
|
|
(73
|
)
|
|
|
(20
|
)
|
|
|
(53
|
)
|
|
Operating margin
|
|
|
(9.3
|
%)
|
|
|
(2.4
|
%)
|
|
(690) bps
|
|
|
Restructuring, impairment and other charges-net
|
|
|
31
|
|
|
|
10
|
|
|
|
21
|
|
Net sales for the Magazines, Catalogs and Logistics segment for the six months ended June 30, 2019 were $783 million, a decrease of $45 million, or 5.3%, compared to the six months ended June 30, 2018. The Magazines, Catalogs and Logistics segment’s net sales decreased primarily due to an unprecedented drop in long-run magazine and catalog volumes, with the faster pace of decline in demand primarily due to the accelerated impact of digital disruption of demand for printed materials. In addition, the disposition of the Company’s retail offset printing facilities and a $4 million decrease in pass-through paper sales contributed to the decrease, all of which was partially offset by the acquisition of Print Logistics.
The increase in Magazines, Catalogs and Logistics segment loss from operations and change in operating margins was primarily due to
higher restructuring, impairment and other charges
and
lower volume.
Book
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Change
|
|
|
|
|
(in millions, except percentages)
|
|
|
Net sales
|
|
$
|
549
|
|
|
$
|
515
|
|
|
$
|
34
|
|
|
Income from operations
|
|
|
31
|
|
|
|
28
|
|
|
|
3
|
|
|
Operating margin
|
|
|
5.6
|
%
|
|
|
5.4
|
%
|
|
20 bps
|
|
|
Restructuring, impairment and other charges-net
|
|
|
2
|
|
|
|
4
|
|
|
|
(2
|
)
|
Net sales for the Book segment for the six months ended June 30, 2019 were $549 million, an increase of $34 million, or 6.8%, compared to the six months ended June 30, 2018, primarily due to higher volume in digitally-printed and educational books, increased fulfillment and procurement services and a $15 million increase in pass-through paper sales.
The increase in the operating income and margins was driven by higher volume and lower restructuring, impairment, and other charges-net, partially offset by higher labor costs in manufacturing and fulfillment operations.
Office Products
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Change
|
|
|
|
|
(in millions, except percentages)
|
|
|
Net sales
|
|
$
|
258
|
|
|
$
|
277
|
|
|
$
|
(19
|
)
|
|
Income from operations
|
|
|
21
|
|
|
|
15
|
|
|
|
6
|
|
|
Operating margin
|
|
|
8.1
|
%
|
|
|
5.4
|
%
|
|
270 bps
|
|
|
Restructuring, impairment and other charges-net
|
|
|
1
|
|
|
|
2
|
|
|
|
(1
|
)
|
|
Purchase accounting adjustments
|
|
|
—
|
|
|
|
1
|
|
|
|
(1
|
)
|
Net sales for the Office Products segment for the six months ended June 30, 2019 were $258 million, a decrease of $19 million, or 6.8%, compared to the six months ended June 30, 2018, largely as a result of lower volume in filing and notetaking products.
42
The in
crease in Office Products segment income from operations a
nd operating margins
was due to
cost reductions, synergies realized from the integration of Quality Park, and lower restructuring, impairment and other charges and purchase accounting adjustments
.
Other
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Change
|
|
|
|
|
(in millions, except percentages)
|
|
|
Net sales
|
|
$
|
124
|
|
|
$
|
252
|
|
|
$
|
(128
|
)
|
|
Income from operations
|
|
|
12
|
|
|
|
14
|
|
|
|
(2
|
)
|
|
Operating margin
|
|
|
9.7
|
%
|
|
|
5.6
|
%
|
|
410 bps
|
|
Net sales for the Other grouping for the six months ended June 30, 2019 were $124 million, a decrease of $128 million, or 51.1%, compared to the three months ended June 30, 2018, primarily due to the disposition of the Company’s European printing
business, a $8 million decrease in pass-through paper sales and lower directories volume, partially offset by higher sales in outsourced print procurement and management services.
The decrease in income from operations was primarily due to lower volume. The mix of volume helped to improve the operating margin compared to the prior year.
Corporate
The following table summarizes unallocated operating expenses and certain items impacting comparability within the activities presented as Corporate:
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Change
|
|
|
|
|
(in millions, except percentages)
|
|
|
Total operating expenses
|
|
$
|
26
|
|
|
$
|
25
|
|
|
$
|
1
|
|
|
Significant components of total operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring, impairment and other charges-net
|
|
|
3
|
|
|
|
1
|
|
|
|
2
|
|
|
Share-based compensation expenses
|
|
|
4
|
|
|
|
8
|
|
|
|
(4
|
)
|
|
Expenses related to acquisitions, the Merger
Agreement and dispositions
|
|
|
12
|
|
|
|
2
|
|
|
|
10
|
|
Non-GAAP Measures
The Company believes that certain non-GAAP measures, such as Non-GAAP adjusted EBITDA, provide useful information about the Company’s operating results and enhance the overall ability to assess the Company’s financial performance. The Company uses these measures, together with other measures of performance under GAAP, to compare the relative performance of operations in planning, budgeting and reviewing the performance of its business. Non-GAAP adjusted EBITDA allows investors to make a more meaningful comparison between the Company’s core business operating results over different periods of time. The Company believes that Non-GAAP adjusted EBITDA, when viewed with the Company’s results under GAAP and the accompanying reconciliations, provides useful information about the Company’s business without regard to potential distortions. By eliminating potential differences in results of operations between periods caused by factors such as depreciation and amortization methods and restructuring, impairment and other charges, the Company believes that Non-GAAP adjusted EBITDA can provide a useful additional basis for comparing the current performance of the underlying operations being evaluated.
43
Non-GAAP adjusted EBITDA is not presented in accordance with GAAP and has important limitations as an analytical tool. Readers should not consider these measures in isolation or as a substitute for analysis of our results as reported under GAAP. In addition, these measures are defined differently by different companies in our industry and, accordingly, such measures may not be comparable to similarly-titled measures of other companies.
Non-GAAP adjusted EBITDA excludes restructuring, impairment and other charges-net, settlement of retirement benefit obligations, expenses related to acquisitions, the Merger Agreement and dispositions, and purchase accounting adjustments. A reconciliation of GAAP net income to non-GAAP adjusted EBITDA for the three and six months ended June 30, 2019 and 2018 is presented in the following table:
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Net (loss) income
|
|
$
|
(24
|
)
|
|
$
|
8
|
|
|
$
|
(150
|
)
|
|
$
|
(3
|
)
|
|
Restructuring, impairment and other charges-net
|
|
|
24
|
|
|
|
11
|
|
|
|
37
|
|
|
|
17
|
|
|
Settlement of retirement benefit obligations
|
|
|
1
|
|
|
|
—
|
|
|
|
136
|
|
|
|
—
|
|
|
Expenses related to acquisitions, the
Merger Agreement and dispositions
|
|
|
5
|
|
|
|
1
|
|
|
|
12
|
|
|
|
2
|
|
|
Purchase accounting adjustments
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3
|
|
|
Depreciation and amortization
|
|
|
31
|
|
|
|
34
|
|
|
|
62
|
|
|
|
72
|
|
|
Interest expense-net
|
|
|
19
|
|
|
|
18
|
|
|
|
38
|
|
|
|
38
|
|
|
Income tax (benefit) expense
|
|
|
(3
|
)
|
|
|
5
|
|
|
|
(40
|
)
|
|
|
1
|
|
|
Non-GAAP adjusted EBITDA
|
|
$
|
53
|
|
|
$
|
77
|
|
|
$
|
95
|
|
|
$
|
130
|
|
The adjustments to arrive at non-GAAP adjusted EBITDA are summarized below:
|
|
•
|
Restructuring, impairment and other charges-net: Refer to
Results of Operations for the Three Months Ended June 30, 2019 as Compared to the Three Months Ended June 30, 2018
and
Results of Operations for the Six Months Ended June 30, 2019 as Compared to the Three Months Ended June 30, 2018
for information on the charges.
|
|
|
•
|
Settlement of retirement obligations: Refer to Note 12,
Retirement Plans
, for more information on the settlement charges.
|
|
|
•
|
Expenses related to acquisitions, the Merger Agreement and dispositions: The three and six months ended June 30, 2019 included charges of $5 million and $12 million, respectively, primarily related to
costs associated with the Merger Agreement. The three and six months ended June 30, 2018 included charges of $1 million and
$2 million, respectively, related to legal, accounting and other expenses associated with completed and contemplated acquisitions and dispositions.
|
|
|
•
|
Purchase accounting adjustments: The six months ended June 30, 2018 included charges of $3 million as a result of purchase accounting inventory step-up adjustments and changes to purchase price allocations related to prior acquisitions.
|
LIQUIDITY AND CAPITAL RESOURCES
The Company believes it has sufficient liquidity to support its ongoing operations and to strategically invest in opportunities to create value for its stockholders. Operating cash flows and the Revolving Credit Facility are the Company’s primary sources of liquidity and are expected to be used for, among other things, payments of interest and principal on the Company’s debt obligations, capital expenditures necessary to support productivity improvement and strategic investment, and completion of restructuring programs.
The following sections describe the Company’s cash flows for the six months ended June 30, 2019 and 2018.
|
|
|
Six Months Ended
|
|
|
|
|
June 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Net cash provided by (used in) operating
activities
|
|
$
|
3
|
|
|
$
|
(26
|
)
|
|
Net cash (used in) investing activities
|
|
|
(52
|
)
|
|
|
(32
|
)
|
|
Net cash provided by financing
activities
|
|
|
44
|
|
|
|
50
|
|
44
Cash Flows from Operating Activities
Operating cash inflows are largely attributable to sales of the Company’s products. Operating cash outflows are largely attributable to recurring expenditures for raw materials, labor, rent, interest, taxes and other operating activities.
Net cash provided by operating activities was $3 million for the six months ended June 30, 2019 compared to $26 million used in operating activities for the six months ended June 30, 2018. The change was primarily due to timing of net working capital impacts.
Cash Flows from Investing Activities
Net cash used in investing activities for the six months ended June 30, 2019 was $52 million compared to $32 million for the same period in 2018. Significant changes are as follows:
|
|
•
|
Capital expenditures increased by
$12
million compared to the same period in 2018, primarily due to increased spend on machinery and equipment in order to increase automation and productivity in the Book and Magazines, Catalogs and Logistics segments; and
|
|
|
•
|
Cash flows from investing activities were also impacted by finalization of working capital calculations in each year.
|
Cash Flows from Financing Activities
Net cash provided by financing activities for the three months ended June 30, 2019 was $44 million compared to $50 million for the same period in 2018. Significant changes are as follows:
|
|
•
|
The Company paid $22 million of long-term debt and current maturities during the six months ended June 30, 2019, compared to $26 million during the six months ended June 30, 2018;
|
|
|
•
|
The Company received net proceeds from credit facility borrowings of $84 million for the six months ended June 30, 2019, compared to $115 million in the prior period; the net proceeds were higher in 2018 due to the pending acquisition of Print Logistics on June 30, 2018; and
|
|
|
•
|
The Company paid $20 million to repurchase common stock during the six months ended June 30, 2018, with no such activity during 2019.
|
Dividends
Cash dividends declared and paid to stockholders during the six months ended June 30, 2019 totaled $17 million.
In light of lower expectations for earnings and cash flows, on July 18, 2019 the Board of Directors suspended dividend payments in order to allocate greater capital to the Company’s debt reduction and ongoing operational restructuring programs. The dividend paid in June 2019 is the last dividend that will be paid for the foreseeable future. Suspending the dividend will allow the Company to redeploy approximately $35 million in cash annually.
Prior to the amendment to the Credit Agreement that was effective on August 5, 2019 that is described below, the Company was generally allowed to declare and pay annual dividend payments of up to $50 million in the aggregate. However, the August 5, 2019 amendment removed the general allowance to declare and pay annual dividends of up to $50 million.
See further discussion below for information regarding the August 5, 2019 amendment to the Credit Agreement.
LIQUIDITY
Cash and cash equivalents were $17 million and $21 million as of June 30, 2019 and December 31, 2018, respectively.
The Company’s cash balances are held in several locations throughout the world, including amounts held outside of the United States. Cash and cash equivalents as of June 30, 2019 included $10 million in the U.S. and $7 million at international locations.
45
The Company maintains cash pooling structures that enable participating international locations to draw on the pools’ cash resources to meet local liquidity needs. Foreign cash balances may be loaned from certain cash pools to U.S. operating entities on a temporary basis in order to reduce the Company’s short-term borrowing costs or for other purposes. As of
June 30, 2019
,
$18
million of international cash was loaned to U.S. operating entities.
Debt Issuances
On September 30, 2016, the Company issued $450 million of Senior Secured Notes (the “Senior Notes”).
On September 30, 2016 the Company entered into a credit agreement (the “Credit Agreement”) that provides for (i) a senior secured term loan B facility in an aggregate principal amount of $375 million (the “Term Loan Facility”) and (ii) a senior secured revolving credit facility in an aggregate principal amount of $400 million (the “Revolving Credit Facility”), 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.
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 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.
46
Additional Debt Issuances Information
There were $150 million of borrowings under the Revolving Credit Facility as of June 30, 2019. Based on the Company’s condensed consolidated statements of operations for the six months ended June 30, 2019 and existing debt, the Company would have had the ability to utilize $193 million of the $400 million Revolving Credit Facility and not have been in violation of the terms of the agreement. Availability under the Revolving Credit Facility was reduced by $150 million in borrowings. If the August 5, 2019 Credit Agreement amendment had been effective as of June 30, 2019, the Company would have had the ability to utilize the entire $300 million Revolving Credit Facility and not have been in violation. This availability would have been reduced by $150 million in borrowings and $41 million of outstanding letters of credit, for a net availability of $126 million, including cash.
The current availability under the Revolving Credit Facility and net availability as of June 30, 2019 is shown in the table below:
|
|
|
June 30, 2019
|
|
|
|
|
(in millions)
|
|
|
Availability
|
|
|
|
|
|
Stated amount of the Revolving Credit Facility
|
|
$
|
400
|
|
|
Less: availability reduction from covenants
|
|
|
207
|
|
|
Amount available under the Revolving Credit Facility
|
|
$
|
193
|
|
|
|
|
|
|
|
|
Usage
|
|
|
|
|
|
Borrowings under the Revolving Credit Facility
|
|
$
|
150
|
|
|
Impact on availability related to outstanding letters of credit
|
|
|
—
|
|
|
Total usage
|
|
$
|
150
|
|
|
|
|
|
|
|
|
Current availability at June 30, 2019
|
|
$
|
43
|
|
|
Cash
|
|
|
17
|
|
|
Net Available Liquidity
|
|
$
|
60
|
|
The Company was in compliance with its debt covenants as they were in effect as of June 30, 2019, and expects to remain in compliance with the August 5, 2019 amended covenants based on management’s estimates of operating and financial results for 2019 and the foreseeable future. However, continued declines in market and economic conditions or demand for certain of the Company’s products beyond those included in management’s projections could impact the Company’s ability to remain in compliance with its debt covenants in future periods
. As of June 30, 2019, the Company’s leverage as defined in the Credit Agreement was 3.09, compared to a maximum permitted ratio under the Credit Agreement of 3.25 (which was increased to 3.75 with the August 5, 2019 amendment). The full definition of the Consolidated Leverage Ratio is included in the Credit Agreement filed as an exhibit to this quarterly report on Form 10-Q.
As of June 30, 2019, the Company met all the conditions required to borrow under the Credit Agreement and management expects the Company to continue to meet the applicable borrowing conditions under the Credit Agreement.
The failure of a financial institution supporting the Revolving Credit Facility would reduce the size of the Company’s committed facility unless a replacement institution were added. Currently, the Revolving Credit Facility is supported by fifteen U.S. and international financial institutions.
As of June 30, 2019, the Company had $41 million in outstanding letters of credit issued under the Revolving Credit Facility.
The Company’s debt maturities as of June 30, 2019 are shown in the following table:
|
|
|
Debt Maturity Schedule
|
|
|
|
|
Total
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
2022
|
|
|
2023
|
|
|
Thereafter
|
|
|
Borrowings under the Credit
Agreement
|
|
$
|
393
|
|
|
$
|
171
|
|
|
$
|
43
|
|
|
$
|
43
|
|
|
$
|
136
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Senior secured notes
|
|
|
450
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
450
|
|
|
|
—
|
|
|
Finance lease obligations and
other borrowings
|
|
|
2
|
|
|
|
1
|
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Total
(a)
|
|
$
|
845
|
|
|
$
|
172
|
|
|
$
|
44
|
|
|
$
|
43
|
|
|
$
|
136
|
|
|
$
|
450
|
|
|
$
|
—
|
|
47
|
|
(a)
|
Excludes unamortized de
bt issuance costs of
$4
million and
$6
million related to the Company’s Term Loan Facility and 8.75% Senior Notes due October 15, 2023, r
espectively, and a discount of
$4
million related to the Company’s Term Loan Facility. These amounts do not represent contractual obligations with a fixed amount or maturity date.
|
MANAGEMENT OF MARKET RISK
The Company is exposed to interest rate risk on its variable debt and price risk on its fixed-rate debt. At June 30, 2019, the Company’s variable-interest borrowings were $393 million, or approximately 46.5%, of the Company’s total debt.
The Company assesses market risk based on changes in interest rates utilizing a sensitivity analysis that measures the potential loss in earnings, fair values and cash flows based on a hypothetical 10% change in interest rates. Using this sensitivity analysis, such changes would not have a material effect on interest income or expense and cash flows and would change the fair values of fixed-rate debt at June 30, 2019 by approximately $15 million
.
The Company is exposed to the impact of foreign currency fluctuations in certain countries in which it operates. The exposure to foreign currency movements is limited in many countries because the operating revenues and expenses of its various subsidiaries and business units are substantially in the local currency of the country in which they operate. To the extent that borrowings, sales, purchases, revenues, expenses or other transactions are not in the local currency of the subsidiary, the Company is exposed to currency risk and may enter into foreign exchange forward contracts to hedge the currency risk. The Company is primarily exposed to the currencies of the Canadian dollar and Mexican peso, and was exposed to the currency of the Polish Zloty until the sale of the Company’s European printing business in the third quarter of 2018. The Company does not use derivative financial instruments for trading or speculative purposes.
OTHER INFORMATION
Litigation and Contingent Liabilities
For a discussion of certain litigation involving the Company, see Note 9,
Commitments and Contingencies,
to the condensed consolidated financial statements.
New Accounting Pronouncements and Pending Accounting Standards
Recently issued accounting standards and their estimated effect on the Company’s condensed consolidated financial statements are described in Note 15,
New Accounting Pronouncements
, and throughout the notes to the condensed consolidated financial statements.
Available Information
The Company maintains an Internet website at www.lsccom.com where the Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on form 8-K and all amendments to those reports are available without charge, as soon as reasonably practicable following the time they are filed with, or furnished to, the SEC. The Principles of Corporate Governance of the Company’s Board of Directors, the charters of the Audit, Human Resources and Corporate Responsibility and Governance Committees of the Board of Directors and the Company’s Principles of Ethical Business Conduct are also available on the Investor Relations portion of www.lsccom.com, and will be provided, free of charge, to any stockholder who requests a copy. References to the Company’s website address do not constitute incorporation by reference of the information contained on the website, and the information contained on the website is not part of this document.
CAUTIONARY STATEMENT
The Company has made forward-looking statements in this quarterly report on Form 10-Q that are subject to risks and uncertainties. These statements are based on the beliefs and assumptions of the Company. Generally, forward-looking statements include information concerning possible or assumed future actions, events, or results of operations of the Company.
48
These statements may include, or be preceded
or followed by, the words
“anticipates,” “estimates,” “expects,” “projects,” “forecasts,” “intends,” “plans,” “continues,” “believes,” “may,” “will,” “goals” or variations of such words and similar expressions. Examples of forward-looking statements include, but are not limited to, statements, beliefs and expectations regarding our business strategies, market potential, future financial performance, d
ividends
, results of pending legal matters, our goodwill and other intangible assets, price volatility and cost environment, our liquidity, our funding sources, expected pension contributions, capital expenditures and funding, our financial covenants, repayments of debt, off-balance sheet arrangements and contractual obligations, our accounting policies, general views about future operating results and other events or developments that we expect or anticipate will occur in the future. These forward-looking statements are subject to a number of important factors, includ
ing those factors disclosed in
Item 1A,
Risk Factors
, in section Part II
of this quarterly report on Form 10-Q
,
and
Item 1A
,
Risk Factors
,
in section Part I
in the Company’s annual report on Form 10-K for
the year ended
December 31, 2018
, as filed w
ith the SEC on
February 19, 2019
,
that could cause our actual results to differ materially from those indicated in any such forward-looking statements. These factors include, but are not limited to:
|
|
•
|
the competitive market for our products and industry fragmentation affecting our prices;
|
|
|
•
|
inability to improve operating efficiency to meet changing market conditions;
|
|
|
•
|
changes in technology, including electronic substitution and migration of paper based documents to digital data formats;
|
|
|
•
|
the volatility and disruption of the capital and credit markets, and adverse changes in the global economy;
|
|
|
•
|
the effects of global market and economic conditions on our customers;
|
|
|
•
|
the effect of economic weakness and constrained advertising;
|
|
|
•
|
uncertainty about future economic conditions;
|
|
|
•
|
increased competition as a result of consolidation among our competitors;
|
|
|
•
|
our ability to successfully integrate recent and future acquisitions;
|
|
|
•
|
factors that affect customer demand, including changes in postal rates, postal regulations, delivery systems and service levels, changes in advertising markets and customers’ budgetary constraints;
|
|
|
•
|
our ability to access debt and the capital markets due to adverse credit market conditions;
|
|
|
•
|
the effects of seasonality on our core businesses;
|
|
|
•
|
the effects of increases in capital expenditures;
|
|
|
•
|
changes in the availability or costs of key print production materials (such as paper, ink, energy, and other raw materials), the tight labor market, the availability of labor at our vendors or in prices received for the sale of by-products;
|
|
|
•
|
performance issues with key suppliers;
|
|
|
•
|
our ability to maintain our brands and reputation;
|
|
|
•
|
the retention of existing, and continued attraction of additional customers and key employees, including management;
|
|
|
•
|
the effect of economic and political conditions on a regional, national or international basis;
|
|
|
•
|
the effects of operating in international markets, including fluctuations in currency exchange rates;
|
|
|
•
|
changes in environmental laws and regulations affecting our business;
|
|
|
•
|
the ability to gain customer acceptance of our new products and technologies;
|
|
|
•
|
the effect of a material breach of or disruption to the security of any of our or our vendors’ systems;
|
49
|
|
•
|
the failure to properly use and protect customer and employee information and data;
|
|
|
•
|
the effect of increased costs of providing health care and other benefits to our employees;
|
|
|
•
|
the effect of catastrophic events;
|
|
|
•
|
the impact of the Tax Act; and
|
|
|
•
|
increases in requirements to fund or pay withdrawal costs or required contributions related to the Company’s pension plans.
|
Because forward-looking statements are subject to assumptions and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. Undue reliance should not be placed on such statements, which speak only as of the date of this document or the date of any document that may be incorporated by reference into this document.
Consequently, readers of this quarterly report on Form 10-Q should consider these forward-looking statements only as the Company’s current plans, estimates and beliefs. The Company does not undertake and specifically declines any obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect future events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. The Company undertakes no obligation to update or revise any forward-looking statements in this quarterly report on Form 10-Q to reflect any new events or any change in conditions or circumstances.