Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three and Nine Months Ended September 30, 2018 and 2017
(tabular amounts in millions, except per share data)
Note 1. Overview and B
asis of Presentation
Description of Business
The principal business of LSC Communications, Inc., a Delaware corporation, and its direct or indirect wholly-owned subsidiaries (“LSC Communications,” “the Company,” “we,” “our” and “us”) is to offer a broad scope of traditional and digital print, print-related services and office products. The Company serves the needs of publishers, merchandisers and retailers worldwide with a service offering that includes
e-services, logistics, warehousing and fulfillment and supply chain management. The Company utilizes a broad portfolio of technology capabilities coupled with consultative attention to clients' needs to increase speed to market, reduce costs, provide postal savings to customers and improve efficiencies.
The Company prints magazines, catalogs, books, directories, and its office products offerings include filing products, envelopes, note-taking products, binder products, and forms.
Description of Separation
On October 1, 2016 (the “separation date”), R. R. Donnelley & Sons Company (“RRD” or the “Parent”) completed the previously announced separation (the “separation”) into three separate independent publicly-traded companies: (i) its publishing and retail-centric print services and office products business (“LSC Communications”); (ii) its financial communications services business (“Donnelley Financial Solutions, Inc.” or “Donnelley Financial”) and (iii) a global, customized multichannel communications management company, which is the business of RRD after the separation. To effect the separation, RRD undertook a series of transactions to separate net assets and legal entities. RRD completed the distribution (the “distribution”) of 80.75% of the outstanding common stock of LSC Communications and Donnelley Financial to RRD stockholders on October 1, 2016. RRD retained a
19.25
% ownership stake in both LSC Communications and Donnelley Financial. On October 1, 2016, RRD stockholders of record as of the close of business on September 23, 2016 (“the record date”) received one share of LSC Communications common stock and one share of Donnelley Financial common stock for every eight shares of RRD common stock held as of the record date.
On March 28, 2017, RRD completed the sale of approximately 6.2 million shares of LSC Communications common stock, representing its entire 19.25% retained ownership
.
Basis of Presentation
The condensed consolidated financial statements include the balance sheets, statements of operations and cash flows in conformity with accounting principles generally accepted in the United States (“GAAP”). All intercompany transactions have been eliminated in consolidation. These unaudited condensed consolidated interim financial statements include estimates and assumptions of management that affect the amounts reported in the condensed consolidated financial statements. Actual results could differ from these estimates.
During the third quarter of 2018, management changed the Company’s reportable segments and reporting units and restated prior year amounts to conform to the new segment structure. Refer to Note 15,
Segment Information
, for more information. Additionally, certain prior year amounts were restated to conform to the Company’s current statement of operations and cash flows classifications.
The Company adopted Accounting
Standards Update No. 2017-07 “Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost” (“ASU 2017-07”) in the first quarter of 2018. As a result of the adoption of ASU 2017-07, the Company will reclassify $46 million and $45 million related to the years ended December 31, 2017 and 2016, respectively, of net pension income out of income from operations to investment and other (income)-net, resulting in no impact to net income. The Company reclassified $11 million and $34 million of net pension income from selling, general and administrative expenses to investment and other income-net in the condensed consolidated statement of operations for the three and nine months ended September 30, 2017.
The Company adopted
Accounting Standards Update No. 2016-18 “Statements of Cash Flows (Topic 230): Restricted Cash” (“ASU 2016-18”)
in the first quarter of 2018. The standard
requires
amounts generally described as restricted cash and restricted cash equivalents to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The standard does not provide a definition of restricted cash or restricted cash equivalents. The standard requires a retrospective transition method to be applied to each period presented. The Company included a reconciliation of beginning-of-period and end-of-period amounts in condensed consolidated statements of cash flows to the condensed consolidated balance sheets.
7
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three and Nine Months Ended September 30, 2018 and 2017
(tabular amounts in millions, except per share data)
Note 2. Business Combinations and Disposition
2018 Acquisition
On July 2, 2018, the Company completed the acquisition of RRD's 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. The
total purchase price was $58 million in cash, of which $25 million was recorded in goodwill. For the three and nine months ended September 30, 2018
, the Company’s condensed consolidated statement of operations included net sales of $80 million and $1 million of income from operations
attributable to the acquisition of Print Logistics.
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 $48 million. For the three months ended September 30, 2018, the European printing business had $60 million and $2 million of net sales and income from operations, respectively. For the nine months ended September 30, 2018, the European printing business had $178 million and $3 million of net sales and income from operations, respectively. See Note 7,
Restructuring, Impairment and Other Charges
, for information related to the gain recorded as a result of the disposition. Additionally, see Note 13,
Income Taxes
, for information related to the $25 million non-cash provision recorded primarily for the write-off of a deferred tax asset associated with the disposition.
2017 Acquisitions
On November 29, 2017, the Company acquired The Clark Group, Inc. (“Clark Group”), a third-party logistics provider of distribution, consolidation, transportation management and international freight forwarding services. The acquisition enhanced the Company’s logistics service offering. The total purchase price was $25 million in cash, of which $16 million was recorded in goodwill.
On November 9, 2017, the Company acquired Quality Park, a producer of envelopes, mailing supplies and assorted packaging items. The acquisition enhanced the Company’s office products offerings.
The total purchase price was $41 million in cash, resulting in a bargain purchase gain of $2 million. We reassessed the recognition and measurement of identifiable assets and liabilities acquired and concluded that all acquired assets and liabilities were recognized and that the valuation procedures and resulting estimates were appropriate.
On September 7, 2017, the Company acquired Publishers Press, LLC, a printing provider with capabilities such as web-offset printing, prepress and distribution services for magazines and retail brands. The acquisition enhanced the Company’s printing capabilities. The total purchase price was $68 million in cash, of which $1 million was recorded in goodwill.
On August 21, 2017, the Company acquired the assets of NECI, LLC (“NECI”),
a supplier of commodity and specialty filing supplies
. The acquisition enhanced the Company’s office products offerings. The purchase price, which included the Company’s estimate of contingent consideration, was $6 million in cash, of which $1 million was recorded in goodwill.
On
August 17, 2017, the Company acquired CREEL Printing, LLC (“CREEL”), an offset and digital printing company. The acquisition enhanced the capabilities of the Company’s offset and digital production platform and brought enhanced technologies to support our clients’ evolving needs, specifically in the magazine media and retail marketing industries. CREEL’s capabilities include full-color web and sheetfed printing, regionally distributed variable digital production, large-format printing, and integrated digital solutions. The purchase price, which included the Company’s estimate of contingent consideration, was $79 million in cash, of which $26 million was recorded in goodwill.
On July 28, 2017, the Company acquired Fairrington Transportation Corp., F.T.C. Transport, Inc. and F.T.C. Services, Inc. (“Fairrington”), a
full-service, printer-independent mailing logistics provider in the United States. The acquisition enhanced the Company’s logistics service offering. The purchase price was $19 million in cash and approximately 1.0 million shares of LSC Communications common stock, for a total transaction value of $39 million. Of the total purchase price, $22 million was recorded in goodwill.
8
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three and Nine Months Ended September 30, 2018 and 2017
(tabular amounts in millions, except per share data)
On March 1, 2017, the Company acquired HudsonYards Studios
, LLC
(“HudsonYards”), a digital and print premedia production company that provides high-quality creative retouching, computer-generated imagery, mechanical creation, press-ready
file preparation, and interactive production services. The acquisition enhanced the Company’s digital and premedia capabilities. The purchase price for HudsonYards was $3 million in cash, of which $2 million was recorded in goodwill.
Refer below for a summary of the segments and reporting units where the acquisitions are included as of September 30, 2018.
|
|
Segment
|
|
Reporting Unit
|
Print Logistics
|
|
Magazines, Catalogs and Logistics
|
|
Logistics
|
Clark Group
|
|
Magazines, Catalogs and Logistics
|
|
Logistics
|
Quality Park
|
|
Office Products
|
|
Office Products
|
Publishers Press
|
|
Magazines, Catalogs and Logistics
|
|
Magazines and Catalogs
|
NECI
|
|
Office Products
|
|
Office Products
|
CREEL
|
|
Magazines, Catalogs and Logistics
|
|
Magazines and Catalogs
|
Fairrington
|
|
Magazines, Catalogs and Logistics
|
|
Logistics
|
HudsonYards
|
|
Magazines, Catalogs and Logistics
|
|
Magazines and Catalogs
|
The acquisitions were recorded by allocating the cost of the acquisitions to the assets acquired, including other intangible assets, based on their estimated fair values at the acquisition date. The excess of the cost of the acquisitions over the net amounts assigned to the fair value of the assets acquired was recorded in goodwill. The goodwill is primarily attributable to the synergies expected to arise as a result of the acquisitions.
The preliminary tax deductible goodwill related to the Print Logistics, Clark Group, Quality Park, Publishers Press, NECI, CREEL, Fairrington, and HudsonYards acquisitions was $62 million.
The purchase price allocation for Print Logistics is preliminary as of September 30, 2018 because the valuations necessary to assess the fair values of the net assets and liabilities acquired are still in process, as well as the finalization of the working capital adjustments are pending. The purchase price allocation for Quality Park is preliminary as of September 30, 2018 as the finalization of the working capital adjustments are pending. The final purchase price allocations for Print Logistics and Quality Park may differ from what is currently reflected in the condensed consolidated financial statements.
The purchase price allocations for the Clark Group, Publishers Press, NECI, CREEL, Fairrington, and HudsonYards acquisitions are final as of September 30, 2018. There were no significant changes to the purchase price allocations for 2017 acquisitions as of September 30, 2018 compared to the disclosed purchase price allocations in the Company’s annual report on Form 10-K for the year ended December 31, 2017.
The purchase price allocations for several of the acquisitions noted above were as follows:
9
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three and Nine Months Ended September 30, 2018 and 2017
(tabular amounts in millions, except per share data)
|
|
Print Logistics
|
|
|
Clark Group
|
|
|
Quality Park
|
|
|
Publishers Press
|
|
|
CREEL
|
|
|
Fairrington
|
|
Accounts Receivable
|
|
$
|
39
|
|
|
$
|
6
|
|
|
$
|
19
|
|
|
$
|
27
|
|
|
$
|
12
|
|
|
$
|
6
|
|
Inventories
|
|
|
—
|
|
|
|
—
|
|
|
|
27
|
|
|
|
13
|
|
|
|
5
|
|
|
|
—
|
|
Prepaid expenses and other current
assets
|
|
|
1
|
|
|
|
—
|
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
|
|
—
|
|
Property, plant and equipment
|
|
|
8
|
|
|
|
—
|
|
|
|
8
|
|
|
|
36
|
|
|
|
20
|
|
|
|
6
|
|
Other intangible assets
|
|
|
20
|
|
|
|
14
|
|
|
|
1
|
|
|
|
—
|
|
|
|
23
|
|
|
|
17
|
|
Other noncurrent assets
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
|
|
1
|
|
Goodwill (bargain purchase)
|
|
|
25
|
|
|
|
16
|
|
|
|
(2
|
)
|
|
|
1
|
|
|
|
26
|
|
|
|
22
|
|
Accounts payable and accrued liabilities
|
|
|
(35
|
)
|
|
|
(8
|
)
|
|
|
(11
|
)
|
|
|
(14
|
)
|
|
|
(9
|
)
|
|
|
(4
|
)
|
Deferred taxes - net
|
|
|
—
|
|
|
|
(3
|
)
|
|
|
(2
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(9
|
)
|
Purchase price, net of cash acquired
|
|
$
|
58
|
|
|
$
|
25
|
|
|
$
|
41
|
|
|
$
|
65
|
|
|
$
|
78
|
|
|
$
|
39
|
|
Less: value of common stock issued
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
20
|
|
Less: accrued but unpaid contingent
consideration
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
Net cash paid
|
|
$
|
58
|
|
|
$
|
25
|
|
|
$
|
41
|
|
|
$
|
65
|
|
|
$
|
77
|
|
|
$
|
19
|
|
In accordance with ASC 350,
Intangibles — Goodwill and Other
, the Company is required to test its goodwill for impairment annually, or more often if there is an indication that goodwill might be impaired. Given the historical valuations of the Company’s former magazines, catalogs and retail inserts reporting unit that have resulted in goodwill impairment in prior years, combined with the change in the composition of the carrying value of the reporting unit due to the acquisitions completed during the year ended December 31, 2017, the Company determined it necessary to perform goodwill impairment reviews on this reporting unit as of September 30, 2017, and again as of December 31, 2017 due to the acquisitions that were completed after September 30, 2017.
As a result of the goodwill impairment tests, and consistent with prior goodwill impairment tests, the Company’s former magazines, catalogs and retail inserts reporting unit’s fair value continued to be at a value below its carrying value. This is primarily due to the negative revenue trends experienced in recent years that are only partially offset by the impact of the new acquisitions.
The charges to recognize the impairment of goodwill in the magazines, catalogs and retail inserts reporting unit were $55 million and $18 million during the three months ended September 30, 2017 and December 31, 2017, respectively. The total charge was $73 million for 2017,
resulting in zero goodwill associated with the former magazines, catalogs and retail inserts reporting unit as of December 31, 2017.
As a result of the Company’s change in reportable segments and reporting units during the third quarter of 2018, as discussed in Note 15,
Segment Information
, the impairment charges recognized during the three months ended September 30, 2017 and the year ended December 31, 2017 in the Company’s former magazines, catalogs and retail inserts reporting units were restated in 2018 to the reporting units below:
|
|
Three Months Ended
|
|
|
Year Ended
|
|
|
|
September 30, 2017
|
|
|
December 31, 2017
|
|
Magazines and Catalogs
|
|
$
|
28
|
|
|
$
|
30
|
|
Logistics
|
|
|
22
|
|
|
|
38
|
|
Other
|
|
|
5
|
|
|
|
5
|
|
Total
|
|
$
|
55
|
|
|
$
|
73
|
|
10
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three and Nine Months Ended September 30, 2018 and 2017
(tabular amounts in millions, except per share data)
Goodwill will be tested in future periods based on the new reporting unit structure.
The fair values of goodwill, other intangible assets and property, plant and equipment associated with the acquisitions were determined to be Level 3 under the fair value hierarchy, which included
discounted cash flow analyses, comparable marketplace fair value data and management’s assumptions for the goodwill impairment charges.
Property, plant and equipment values were estimated using either the cost or market approach, if a secondhand market existed. The following table presents the fair value, valuation techniques and related unobservable inputs for these Level 3 measurements:
|
|
Fair Value
|
|
|
Valuation Technique
|
|
Unobservable Input
|
|
Value
|
|
Customer relationships
|
|
$
|
20
|
|
|
Multi-period excess earnings method
|
|
Existing customer growth rate
|
|
(3.5%)
|
|
|
|
|
|
|
|
|
|
Attrition rate
|
|
7.5%
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
18.0%
|
|
For the three and nine months ended September 30, 2018, the Company recorded $2 million and $4 million of acquisition-related expenses, respectively, associated with the completed and contemplated acquisitions within selling, general and administrative expenses in the condensed consolidated statements of operations. For the three and nine months ended September 30, 2017, the Company recorded $2 million and $3 million of acquisition-related expenses, respectively, associated with the completed and contemplated acquisitions.
Pro forma results
The following unaudited pro forma financial information for the three and nine months ended September 30, 2018 and 2017 presents the condensed consolidated statements of operations of the Company and the acquisitions described above, as if the acquisitions had occurred as of January 1 of the year prior to the acquisitions.
The unaudited pro forma financial information is not intended to represent or be indicative of the Company’s condensed consolidated statements of operations that would have been reported had these acquisitions been completed as of the beginning of the period presented and should not be taken as indicative of the Company’s future condensed consolidated statements of operations. Pro forma adjustments are tax-effected at the applicable statutory tax rates.
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Net sales
|
|
$
|
1,015
|
|
|
$
|
1,059
|
|
|
$
|
2,972
|
|
|
$
|
3,051
|
|
Net (loss) income
|
|
|
(4
|
)
|
|
|
(4
|
)
|
|
|
(10
|
)
|
|
|
1
|
|
Net (loss) earnings per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.12
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.29
|
)
|
|
$
|
0.03
|
|
Diluted
|
|
$
|
(0.12
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.29
|
)
|
|
$
|
0.03
|
|
The following table outlines unaudited pro forma financial information for the three and nine months ended September 30, 2018 and 2017:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Amortization of purchased intangibles
|
|
$
|
5
|
|
|
$
|
6
|
|
|
$
|
15
|
|
|
$
|
18
|
|
Additionally, the nonrecurring pro forma adjustments affecting net income for the three and nine months ended September 30, 2018 and 2017 were as follows:
11
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three and Nine Months Ended September 30, 2018 and 2017
(tabular amounts in millions, except per share data)
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Restructuring, impairment and other
charges, pre-tax
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(1
|
)
|
Other pro forma adjustments, pre-tax
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2
|
|
Income taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3
|
|
Acquisition-related expenses, pre-tax
|
|
|
—
|
|
|
|
(1)
|
|
|
|
—
|
|
|
|
(1
|
)
|
Inventory fair value adjustments,
pre-tax
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
Note: A negative number in the table above represents a decrease to income in pro forma net income.
Note 3. Revenue Recognition
Financial Statement Impact of Adopting ASC 606
The Company adopted Accounting Standards Update No. 2014-09 “Revenue from Contracts with Customers (Topic 606)” (“ASC 606”, or the “standard”) on January 1, 2018 using the modified retrospective method for all contracts not completed as of the date of adoption. The reported results for 2018 reflect the application of ASC 606 guidance while the reported results for 2017 were prepared and continue to be reported under the guidance of ASC 605,
Revenue Recognition
, which is also referred to herein as "previous guidance."
The Company assessed all aspects of the standard’s potential impact and focused further assessment on customized products, deferred revenue and certain items in inventory, which are areas that were determined could have had a material impact on the Company’s accounting for revenue. Potential impacts of other aspects of the standard have not had a material impact to the Company’s accounting for revenue.
The Company completed the evaluation of whether the accounting for revenue from customized products should be over time or at a point in time under the standard. Based on analysis of specific terms associated with current customer contracts, the Company concluded that revenue should be recognized at a point in time for substantially all customized products. This treatment is consistent with revenue recognition under previous guidance, where revenue was recognized when the products were completed and shipped to the customer (dependent upon specific shipping terms). Any contracts whereby revenue for customized products should be recognized over time, as opposed to a point in time, are immaterial due to the de minimis nature of any particular order under such contracts in production at any given point in time. As revenue recognition is dependent upon individual contractual terms, the Company will continue its evaluation of any new or amended contracts entered into, including contracts that the Company might assume as a result of acquisition activity.
With respect to deferred revenue and certain items in inventory, the Company determined ASC 606 impacted the following situations:
|
•
|
Completed production billed to the customer but not yet shipped: Under previous guidance, for a majority of these situations the Company deferred revenue for completed production items for which the customer had requested to be billed (or for which the Company is entitled to bill under the contract), but for which the production items had not yet shipped to the customer. Under ASC 606, based upon our evaluation of the contractual terms, the Company is typically able to recognize revenue once it completes production depending on the specific facts and circumstances.
|
|
•
|
Completed production held in inventory (including consigned inventory): With certain customer contracts, the Company is permitted to complete a pre-defined amount of product and hold such inventory until the customer requests shipment (which generally is required to be delivered in the same year as production). For these items, the Company has the contractual right to receive payment once the production is completed, regardless of the ultimate delivery date. Under previous guidance, the Company held this as inventory and recognized revenue upon shipment to the customer. Under ASC 606, based upon our evaluation of the contractual terms, the Company is able to recognize revenue once it completes production.
|
12
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three and Nine Months Ended September 30, 2018 and 2017
(tabular amounts in millions, except per share data)
|
•
|
Safety stock: In very limited situations, the Company is permitted to produce and hold in inventory a pre-defined amount of safety stock. Similar
to completed production held in inventory, for these items the Company has the contractual right to receive payment for the pre-defined amount once the production is completed, regardless of the ultimate delivery date. Under previous guidance, the Company
held this as inventory and recognized revenue upon shipment to the customer. Under ASC 606, based upon our evaluation of the contractual terms, the Company is able to recognize revenue once it completes production.
|
Upon adoption of ASC 606, the Company eliminated any deferred revenue and inventory associated with the above three categories against its accumulated deficit within total equity. Based upon the balances that existed as of December 31, 2017, the Company recorded adjustments to the following accounts as of January 1, 2018:
|
|
As Reported
|
|
|
Adjustments
|
|
|
Adjusted
|
|
|
|
December 31,
|
|
|
Adoption of
|
|
|
January 1,
|
|
|
|
2017
|
|
|
ASC 606
|
|
|
2018
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables, net
|
|
$
|
727
|
|
|
$
|
32
|
|
|
$
|
759
|
|
Inventories
|
|
|
238
|
|
|
|
(32
|
)
|
|
|
206
|
|
Deferred income taxes
|
|
|
51
|
|
|
|
(3
|
)
|
|
|
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued liabilities
|
|
$
|
239
|
|
|
$
|
(12
|
)
|
|
$
|
227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
(Accumulated deficit) retained earnings
|
|
$
|
(90
|
)
|
|
$
|
9
|
|
|
$
|
(81
|
)
|
As a result of the above adjustments, total assets decreased by $3 million, total liabilities decreased by $12 million and total equity increased by $9 million. The equity adjustment was net of tax of $3 million.
The following tables compare impacted accounts from the reported condensed consolidated balance sheet and statement of operations, as of and for the nine months ended September 30, 2018, to their pro forma amounts had the previous guidance been in effect:
|
|
September 30, 2018
|
|
|
|
|
|
|
|
Adjustments
|
|
|
Pro forma as if the
|
|
|
|
|
|
|
|
Adoption of
|
|
|
previous standard
|
|
|
|
As Reported
|
|
|
ASC 606
|
|
|
were in effect
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables, net
|
|
$
|
772
|
|
|
$
|
(40
|
)
|
|
$
|
732
|
|
Inventories
|
|
|
244
|
|
|
|
39
|
|
|
|
283
|
|
Deferred income taxes
|
|
|
12
|
|
|
|
3
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
351
|
|
|
$
|
(1
|
)
|
|
$
|
350
|
|
Accrued liabilities
|
|
|
219
|
|
|
|
13
|
|
|
|
232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated deficit
|
|
$
|
(18
|
)
|
|
$
|
(10
|
)
|
|
$
|
(28
|
)
|
The difference between the reported balances and the pro forma balances above is due to the deferred revenue and inventory in the pro forma balances associated with completed production billed to the customer but not yet shipped, completed production held in inventory (including consigned inventory) and safety stock.
13
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three and Nine Months Ended September 30, 2018 and 2017
(tabular amounts in millions, except per share data)
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2018
|
|
|
September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma
|
|
|
|
|
|
|
|
|
|
|
Pro forma
|
|
|
|
|
|
|
|
Adjustments
|
|
|
as if the
|
|
|
|
|
|
|
Adjustments
|
|
|
as if the
|
|
|
|
|
|
|
|
from
|
|
|
previous
|
|
|
|
|
|
|
from
|
|
|
previous
|
|
|
|
|
|
|
|
Adoption of
|
|
|
standard
|
|
|
|
|
|
|
Adoption of
|
|
|
standard
|
|
|
|
As Reported
|
|
|
ASC 606
|
|
|
was in effect
|
|
|
As Reported
|
|
|
ASC 606
|
|
|
were in effect
|
|
Net sales
|
|
$
|
1,015
|
|
|
$
|
(11
|
)
|
|
$
|
1,004
|
|
|
$
|
2,887
|
|
|
$
|
(5
|
)
|
|
$
|
2,882
|
|
Cost of sales
|
|
|
862
|
|
|
|
(8
|
)
|
|
|
854
|
|
|
|
2,468
|
|
|
|
(4
|
)
|
|
|
2,464
|
|
Income tax expense
|
|
|
35
|
|
|
|
(1
|
)
|
|
|
34
|
|
|
|
36
|
|
|
|
—
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net (loss) per share
|
|
$
|
(0.12
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.18
|
)
|
|
$
|
(0.21
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.24
|
)
|
Diluted net (loss) per share
|
|
|
(0.12
|
)
|
|
|
(0.06
|
)
|
|
|
(0.18
|
)
|
|
|
(0.21
|
)
|
|
|
(0.03
|
)
|
|
|
(0.24
|
)
|
The differences between the reported balances and the pro forma balances above are due to the following impacts:
|
•
|
The completed production items for which control has passed to the customer and the customer had requested to be billed (or for which the Company is entitled to bill under the contract), but for which the production items had not yet shipped: Under ASC 606, the Company recognizes revenue for items for which control has passed to the customer, which is typically once it completes production, while under previous guidance revenue would have been deferred until the produced items were shipped.
|
|
•
|
Variable consideration relating to paper over-consumption penalties and under-consumption credits that are part of certain customer contracts and were previously recorded in cost of sales are now recorded within revenue.
|
The adoption of ASC 606 had no impact on the Company’s cash flows from operating activities.
Revenue Recognition Policy
The Company recognizes
revenue at a point in time for substantially all customized products. The point in time when revenue is recognized is when the
performance obligation has been completed and the customer obtains control of the products, which is generally
upon shipment to the customer (dependent upon specific shipping terms).
Under agreements with certain customers, custom products may be stored by the Company for future delivery. Based upon contractual terms,
the Company is typically able to recognize revenue once the performance obligation is satisfied and the customer obtains control of the completed product, usually when it completes production (depending on the specific facts and circumstances).
In these situations, the Company may also receive a logistics or warehouse management fee for the services it provides, which the Company recognizes over time as the services are provided.
With certain customer contracts, the Company is permitted to complete a pre-defined amount of custom products and hold such inventory until the customer requests shipment (which generally is required to be delivered in the same year as production). For these items, which include consigned inventory, the Company has the contractual right to receive payment once the production is completed, regardless of the ultimate delivery date. Based upon contractual terms, the Company recognizes revenue once the performance obligation has been satisfied and the customer obtains control of the completed products, usually when production is completed.
In very limited situations, the Company is permitted to produce and hold in inventory a pre-defined amount of custom products as safety stock. Similar to completed production held in inventory, for these items, the Company has the contractual right to receive payment for the pre-defined amount once the production is completed, regardless of the ultimate delivery date. Based upon our evaluation of the contractual terms, the Company is able to recognize revenue once the performance obligation has been satisfied and the customer obtains control of the completed product, usually when production is completed.
14
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three and Nine Months Ended September 30, 2018 and 2017
(tabular amounts in millions, except per share data)
Revenue from the Company’s print related services (including list processing, mail sortation services and s
upply chain management) is recognized as services are completed over time.
Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods or providing services, which is based on transaction prices set forth in contracts with customers and an estimate of variable consideration, as applicable.
Variable consideration resulting from volume rebates, fixed rebates, penalties or credits for paper consumption, and sales discounts that are offered within contracts between the Company and its customers is recognized in the period the related revenue is recognized. Estimates of variable consideration are based on stated contract terms and an analysis of historical experience. The amount of variable consideration is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period.
A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The majority of our contracts have a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts and, therefore, not distinct. For contracts with multiple performance obligations, such as co-mail and catalog production, the transaction price allocated to each performance obligation is based on the price stated in the customer contract, which represents the Company’s best estimate of the standalone selling price of each distinct good or service in the contract.
Billings for shipping and handling costs are recorded gross. The Company made an accounting policy election under ASC 606 to account for shipping and handling after the customer obtains control of the good as fulfillment activities rather than as a separate service to the customer. As a result, the Company accrues the costs of the shipping and handling if revenue is recognized for the related good before the fulfillment activities occur.
Many of the Company’s operations process materials, primarily paper, that may be supplied directly by customers or may be purchased by the Company and sold to customers as part of the end product. No revenue is recognized for customer-supplied paper, but revenues for Company-supplied paper are recognized on a gross basis. As a result, the Company’s reported sales and margins may be impacted by the mix of customer-supplied paper and Company-supplied paper.
The Company records taxes collected from customers and remitted to governmental authorities on a net basis.
Contracts do not contain a significant financing component as payment terms on invoiced amounts are typically between 30 to 120 days, based on the Company’s credit assessment of individual customers, as well as industry expectations.
The timing of revenue recognition, billings and cash collections results in accounts receivable and unbilled receivables (contract assets), and customer advances and deposits (contract liabilities) on the condensed consolidated balance sheet. Revenue recognition generally coincides with the Company’s contractual right to consideration and the issuance of invoices to customers. Depending on the nature of the performance obligation and arrangements with customers, the timing of the issuance of invoices may result in contract assets or contract liabilities. Contract assets related to unbilled receivables are recognized for satisfied performance obligations for which the Company cannot yet issue an invoice. Contract liabilities result from advances or deposits from customers on performance obligations not yet satisfied.
Because the majority of the Company’s products are customized, product returns are not significant; however, the Company accrues for the estimated amount of customer returns at the time of sale.
15
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three and Nine Months Ended September 30, 2018 and 2017
(tabular amounts in millions, except per share data)
Disaggregated Revenue
The following table provides information about disaggregated revenue by major products/service lines and timing of revenue recognition, and includes a reconciliation of the disaggregated revenue with reportable segments.
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2018
|
|
|
September 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)
|
|
$
|
—
|
|
|
$
|
282
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
282
|
|
|
$
|
—
|
|
|
$
|
797
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
797
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Magazines and Catalogs
(b)
|
|
$
|
353
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
99
|
|
|
$
|
452
|
|
|
$
|
1,126
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
290
|
|
|
$
|
1,416
|
|
North
America
|
|
|
353
|
|
|
|
—
|
|
|
|
—
|
|
|
|
44
|
|
|
|
397
|
|
|
|
1,126
|
|
|
|
—
|
|
|
|
—
|
|
|
|
126
|
|
|
|
1,252
|
|
Europe
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
55
|
|
|
|
55
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
164
|
|
|
|
164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Logistics
|
|
$
|
110
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
110
|
|
|
$
|
165
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Directories
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
26
|
|
|
$
|
26
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
87
|
|
|
$
|
87
|
|
North
America
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
21
|
|
|
|
21
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
73
|
|
|
|
73
|
|
Europe
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5
|
|
|
|
5
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
14
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office Products
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
145
|
|
|
$
|
—
|
|
|
$
|
145
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
422
|
|
|
$
|
—
|
|
|
$
|
422
|
|
Total
|
|
$
|
463
|
|
|
$
|
282
|
|
|
$
|
145
|
|
|
$
|
125
|
|
|
$
|
1,015
|
|
|
$
|
1,291
|
|
|
$
|
797
|
|
|
$
|
422
|
|
|
$
|
377
|
|
|
$
|
2,887
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Timing of Revenue Recognition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products and services transferred at a point in time
|
|
$
|
329
|
|
|
$
|
245
|
|
|
$
|
145
|
|
|
$
|
105
|
|
|
$
|
824
|
|
|
$
|
1,039
|
|
|
$
|
702
|
|
|
$
|
422
|
|
|
$
|
323
|
|
|
$
|
2,486
|
|
Products and services transferred over time
|
|
|
134
|
|
|
|
37
|
|
|
|
—
|
|
|
|
20
|
|
|
|
191
|
|
|
|
252
|
|
|
|
95
|
|
|
|
—
|
|
|
|
54
|
|
|
|
401
|
|
Total
|
|
$
|
463
|
|
|
$
|
282
|
|
|
$
|
145
|
|
|
$
|
125
|
|
|
$
|
1,015
|
|
|
$
|
1,291
|
|
|
$
|
797
|
|
|
$
|
422
|
|
|
$
|
377
|
|
|
$
|
2,887
|
|
|
(a)
|
Includes e-book formatting and supply chain management associated with book production.
|
|
(b)
|
Includes premedia and co-mail
|
16
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three and Nine Months Ended September 30, 2018 and 2017
(tabular amounts in millions, except per share data)
Contract Balances
The following table provides information about receivables, contract assets and contract liabilities from contracts with customers:
|
|
September 30, 2018
|
|
|
January 1, 2018
|
|
Trade receivables
|
|
$
|
585
|
|
|
$
|
647
|
|
Short-term contract assets
|
|
|
38
|
|
|
|
31
|
|
Long-term contract assets
|
|
|
33
|
|
|
|
36
|
|
Short-term contract liabilities
|
|
|
18
|
|
|
|
21
|
|
Significant changes in the contract assets and the contract liabilities balances during the period are as follows:
|
|
Nine Months Ended
|
|
|
|
September 30, 2018
|
|
|
|
Contract Assets
|
|
|
Contract Liabilities
|
|
Revenue recognized that was included in contract liabilities as of January 1, 2018
|
|
$
|
—
|
|
|
$
|
(18
|
)
|
Increases due to cash received
|
|
|
—
|
|
|
|
15
|
|
Payment of contract acquisition costs
|
|
|
5
|
|
|
|
—
|
|
Additions to unbilled accounts receivable
|
|
|
37
|
|
|
|
—
|
|
Amortization of contract acquisition costs
|
|
|
(8
|
)
|
|
|
—
|
|
Unbilled accounts receivable recognized
as receivables
|
|
|
(30
|
)
|
|
|
—
|
|
Transactions affecting the allowances for doubtful accounts receivable balance during the nine months ended September 30, 2018 were as follows:
|
|
September 30, 2018
|
|
Balance, beginning of year
|
|
$
|
11
|
|
Provisions charged to expense
|
|
|
5
|
|
Write-offs and other
|
|
|
(2
|
)
|
Balance, end of period
|
|
$
|
14
|
|
Contract Acquisition Costs
In connection with the adoption of ASC 606, the Company is required to capitalize certain contract acquisition costs. As of December 31, 2017 under previous guidance, the Company had capitalized $36 million in contract acquisition costs related to contracts that were not completed. The Company did not have any other costs that were required to be capitalized on January 1, 2018 with the adoption of ASC 606. For contracts that have a duration of less than one year, the Company follows the ASC 606 practical expedient approach and expenses these costs when incurred; for contracts with life exceeding one year, the Company records these costs in proportion to each completed contract performance obligation. For the three and nine months ended September 30, 2018, the amount of amortization was $2 million and $8 million, respectively, and there was no impairment loss in relation to costs capitalized.
17
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three and Nine Months Ended September 30, 2018 and 2017
(tabular amounts in millions, except per share data)
Note 4. Inventories
The components of the Company’s inventories, net of excess and obsolescence reserves for raw materials and finished goods, at September 30, 2018 and December 31, 2017 were as follows:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Raw materials and manufacturing supplies
|
|
$
|
142
|
|
|
$
|
114
|
|
Work in process
|
|
|
63
|
|
|
|
69
|
|
Finished goods
|
|
|
92
|
|
|
|
112
|
|
Last in, first out ("LIFO") reserve
|
|
|
(53
|
)
|
|
|
(57
|
)
|
Total
|
|
$
|
244
|
|
|
$
|
238
|
|
Note 5. Property, Plant and Equipment
The components of the Company’s property, plant and equipment at September 30, 2018 and December 31, 2017 were as follows:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Land
|
|
$
|
43
|
|
|
$
|
45
|
|
Buildings
|
|
|
709
|
|
|
|
739
|
|
Machinery and equipment
|
|
|
3,765
|
|
|
|
4,012
|
|
|
|
|
4,517
|
|
|
|
4,796
|
|
Less: Accumulated depreciation
|
|
|
(4,003
|
)
|
|
|
(4,220
|
)
|
Total
|
|
$
|
514
|
|
|
$
|
576
|
|
During the three and nine months ended September 30, 2018, depreciation expense was
$27 million and
$86 million, respectively. During the three and nine months ended September 30, 2017, depreciation expense was $34 million and $102 million, respectively.
Assets Held for Sale
Primarily as a result of restructuring actions, certain facilities and equipment are considered held for sale. The net book value of assets held for sale was $4 million at September 30, 2018 and $7 million at December 31, 2017. 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.
18
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three and Nine Months Ended September 30, 2018 and 2017
(tabular amounts in millions, except per share data)
Note 6. Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill for the nine months ended September 30, 2018 were as follows:
|
|
Magazines,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Catalogs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and Logistics
|
|
|
Book
|
|
|
Office Products
|
|
|
Other
|
|
|
Total
|
|
Net book value as of December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
502
|
|
|
$
|
354
|
|
|
$
|
110
|
|
|
$
|
78
|
|
|
$
|
1,044
|
|
Accumulated impairment losses
|
|
|
(502
|
)
|
|
|
(303
|
)
|
|
|
(79
|
)
|
|
|
(78
|
)
|
|
|
(962
|
)
|
Total
|
|
|
—
|
|
|
|
51
|
|
|
|
31
|
|
|
|
—
|
|
|
|
82
|
|
Acquisition
|
|
|
25
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
25
|
|
Net book value as of September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
527
|
|
|
|
354
|
|
|
|
110
|
|
|
|
5
|
|
|
|
996
|
|
Accumulated impairment losses
|
|
|
(502
|
)
|
|
|
(303
|
)
|
|
|
(79
|
)
|
|
|
(5
|
)
|
|
|
(889
|
)
|
Total
|
|
$
|
25
|
|
|
$
|
51
|
|
|
$
|
31
|
|
|
$
|
—
|
|
|
$
|
107
|
|
The components of other intangible assets at September 30, 2018 and December 31, 2017 were as follows:
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Net Book
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Net Book
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Value
|
|
|
Amount
|
|
|
Amortization
|
|
|
Value
|
|
Customer relationships
|
|
$
|
271
|
|
|
$
|
(133
|
)
|
|
$
|
138
|
|
|
$
|
256
|
|
|
$
|
(125
|
)
|
|
$
|
131
|
|
Trade names
|
|
|
9
|
|
|
|
(6
|
)
|
|
|
3
|
|
|
|
9
|
|
|
|
(4
|
)
|
|
|
5
|
|
Total amortizable other intangible
assets
|
|
|
280
|
|
|
|
(139
|
)
|
|
|
141
|
|
|
|
265
|
|
|
|
(129
|
)
|
|
|
136
|
|
Indefinite-lived trade names
|
|
|
24
|
|
|
|
—
|
|
|
|
24
|
|
|
|
24
|
|
|
|
—
|
|
|
|
24
|
|
Total other intangible assets
|
|
$
|
304
|
|
|
$
|
(139
|
)
|
|
$
|
165
|
|
|
$
|
289
|
|
|
$
|
(129
|
)
|
|
$
|
160
|
|
The Company recorded customer relationships additions to other intangible assets of $20 million for the Print Logistics acquisition during the three months ended September 30, 2018, that has an amortization period of 10 years.
During the three and nine months ended September 30, 2018, amortization expense for other intangible assets was $5 million and $14 million, respectively. During the three and nine months ended September 30, 2017, amortization expense for other intangible assets was $4 million and $12 million, respectively.
The following table outlines the estimated annual amortization expense related to other intangible assets:
For the year ending December 31,
|
|
Amount
|
|
2018
|
|
$
|
18
|
|
2019
|
|
|
18
|
|
2020
|
|
|
18
|
|
2021
|
|
|
16
|
|
2022
|
|
|
14
|
|
2023 and thereafter
|
|
|
71
|
|
Total
|
|
$
|
155
|
|
19
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three and Nine Months Ended September 30, 2018 and 2017
(tabular amounts in millions, except per share data)
Note 7. Restructuring, Impairment and Other Charges
For the three and nine months ended September 30, 2018 and 2017, the Company recorded the following net restructuring, impairment and other charges:
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Employee
|
|
|
Restructuring
|
|
|
Restructuring
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
September 30, 2018
|
|
Terminations
|
|
|
Charges
|
|
|
Charges
|
|
|
Impairment
|
|
|
Charges
|
|
|
Total
|
|
Magazines, Catalogs and Logistics
|
|
$
|
(1
|
)
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Book
|
|
|
—
|
|
|
|
1
|
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
Office Products
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Other
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Employee
|
|
|
Restructuring
|
|
|
Restructuring
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
September 30, 2017
|
|
Terminations
|
|
|
Charges
|
|
|
Charges
|
|
|
Impairment
|
|
|
Charges
|
|
|
Total
|
|
Magazines, Catalogs and Logistics
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
50
|
|
|
$
|
—
|
|
|
$
|
51
|
|
Book
|
|
|
—
|
|
|
|
1
|
|
|
|
1
|
|
|
|
—
|
|
|
|
1
|
|
|
|
2
|
|
Office Products
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5
|
|
|
|
—
|
|
|
|
5
|
|
Corporate
|
|
|
—
|
|
|
|
2
|
|
|
|
2
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2
|
|
Total
|
|
$
|
—
|
|
|
$
|
4
|
|
|
$
|
4
|
|
|
$
|
55
|
|
|
$
|
1
|
|
|
$
|
60
|
|
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
Employee
|
|
|
Restructuring
|
|
|
Restructuring
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
September 30, 2018
|
|
Terminations
|
|
|
Charges
|
|
|
Charges
|
|
|
Impairment
|
|
|
Charges
|
|
|
Total
|
|
Magazines, Catalogs and Logistics
|
|
$
|
3
|
|
|
$
|
8
|
|
|
$
|
11
|
|
|
$
|
(1
|
)
|
|
$
|
—
|
|
|
$
|
10
|
|
Book
|
|
|
1
|
|
|
|
3
|
|
|
|
4
|
|
|
|
—
|
|
|
|
1
|
|
|
|
5
|
|
Office Products
|
|
|
1
|
|
|
|
1
|
|
|
|
2
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2
|
|
Other
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Corporate
|
|
|
1
|
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
Total
|
|
$
|
7
|
|
|
$
|
11
|
|
|
$
|
18
|
|
|
$
|
(1
|
)
|
|
$
|
1
|
|
|
$
|
18
|
|
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
Employee
|
|
|
Restructuring
|
|
|
Restructuring
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
September 30, 2017
|
|
Terminations
|
|
|
Charges
|
|
|
Charges
|
|
|
Impairment
|
|
|
Charges
|
|
|
Total
|
|
Magazines, Catalogs and Logistics
|
|
$
|
1
|
|
|
$
|
3
|
|
|
$
|
4
|
|
|
$
|
50
|
|
|
$
|
1
|
|
|
$
|
55
|
|
Book
|
|
|
4
|
|
|
|
1
|
|
|
|
5
|
|
|
|
—
|
|
|
|
2
|
|
|
|
7
|
|
Office Products
|
|
|
1
|
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
Other
|
|
|
1
|
|
|
|
1
|
|
|
|
2
|
|
|
|
5
|
|
|
|
—
|
|
|
|
7
|
|
Corporate
|
|
|
—
|
|
|
|
17
|
|
|
|
17
|
|
|
|
—
|
|
|
|
—
|
|
|
|
17
|
|
Total
|
|
$
|
7
|
|
|
$
|
22
|
|
|
$
|
29
|
|
|
$
|
55
|
|
|
$
|
3
|
|
|
$
|
87
|
|
20
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three and Nine Months Ended September 30, 2018 and 2017
(tabular amounts in millions, except per share data)
Restructuring and Impairment Charges
For the three months ended September 30, 2018, the Company incurred a de minimis amount of employee-related termination charges, which was offset by a reversal of previously incurred employee-related restructuring charges of less than $1 million. For the nine months ended September 30, 2018, the Company incurred charges of $7 million for an aggregate of 329 employees, of whom 275 were terminated as of or prior to September 30, 2018,
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 net other restructuring charges of $1 million and $11 million for the three and nine months ended September 30, 2018 primarily due to charges related to facility costs, a loss related to the Company's disposition of its retail offset printing facilities and pension withdrawal obligations related to facility closures, partially offset by a gain related to the disposition of the Company’s European printing business on September 28, 2018.
For the three and nine months ended September 30, 2017, the Company incurred employee-related restructuring charges of a de minimis amount and $7 million for an aggregate of 516 employees, substantially all of whom were terminated as of or prior to September 30, 2018. These charges primarily related to one facility closure in the Book segment and the reorganization of certain business units. The Company incurred other restructuring charges of $4 million and $22 million for the three and nine months ended September 30, 2017, respectively, primarily related to charges incurred as a result of a terminated supplier contract and the exit from certain operations and facilities. Refer to Note 2,
Business Combinations and Disposition
, for information on the non-cash charge of $55 million of impairment recorded during the three and nine months ended September 30, 2017.
Other Charges
For the three and nine months ended September 30, 2018, the Company recorded a de minimis amount and $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 $19 million in restructuring and multiemployer pension plan liabilities at September 30, 2018.
The Company’s withdrawal liabilities could be affected by the financial stability of other employers participating in such plans and any decisions by those employers to withdraw from such plans in the future. While it is not possible to quantify the potential impact of future events or circumstances, reductions in other employers’ participation in multiemployer pension plans, including certain plans from which the Company has previously withdrawn, could have a material effect on the Company’s previously estimated withdrawal liabilities and condensed consolidated balance sheets, statements of operations and cash flows.
For the three and nine months ended September 30, 2017, the Company recorded other charges of $1 million and $3 million, respectively, for multiemployer pension plan withdrawal obligations unrelated to facility closures.
Restructuring Reserve
The restructuring reserve as of September 30, 2018 and December 31, 2017, and changes during the nine months ended September 30, 2018 were as follows:
|
|
December 31,
|
|
|
Restructuring
|
|
|
|
|
|
|
Cash
|
|
|
September 30,
|
|
|
|
2017
|
|
|
Charges
|
|
|
Other
|
|
|
Paid
|
|
|
2018
|
|
Employee terminations
|
|
$
|
8
|
|
|
$
|
6
|
|
|
$
|
—
|
|
|
$
|
(12
|
)
|
|
$
|
2
|
|
Multiemployer pension plan withdrawal
obligations
|
|
|
16
|
|
|
|
2
|
|
|
|
19
|
|
|
|
(4
|
)
|
|
|
33
|
|
Other
|
|
|
2
|
|
|
|
8
|
|
|
|
—
|
|
|
|
(9
|
)
|
|
|
1
|
|
Total
|
|
$
|
26
|
|
|
$
|
16
|
|
|
$
|
19
|
|
|
$
|
(25
|
)
|
|
$
|
36
|
|
The current portion of restructuring reserves of $9 million at September 30, 2018 was included in accrued liabilities, while the long-term portion of $27 million, which primarily related to multiemployer pension plan withdrawal obligations related to facility closures, was included in restructuring and multiemployer pension liabilities at September 30, 2018.
21
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three and Nine Months Ended September 30, 2018 and 2017
(tabular amounts in millions, except per share data)
During the three months ended March 31, 2018, the Company reclassified $19 million of multiemployer pension plan withdrawal obligations from non-restructuring liabilities to restructuring liabilities, of which $3
million and $16 million were recorded in the current and long-term portions of the reserves, respectively. The reclassification was primarily due to a facility closure in the Print segment during the three months ended March 31, 2018.
The Company anticipates that payments associated with the employee terminations reflected in the above table will be substantially completed by September 30, 2019.
Payments on all of the Company’s multiemployer pension plan withdrawal obligations are scheduled to be completed by 2034. Changes based on uncertainties in these estimated withdrawal obligations could affect the ultimate charges related to multiemployer pension plan withdrawal obligations.
The restructuring liabilities classified as “other” consisted of other facility closing costs.
Note 8. Commitments and Contingencies
The Company is subject to laws and regulations relating to the protection of the environment. The Company accrues for expenses associated with environmental remediation obligations when such amounts are probable and can be reasonably estimated. Such accruals are adjusted as new information develops or circumstances change and are generally not discounted. The Company has been designated as a potentially responsible party or has received claims in nine active federal and state Superfund and other multiparty remediation sites. In addition to these sites, the Company may also have the obligation to remediate three other previously and currently owned facilities. At the Superfund sites, the Comprehensive Environmental Response, Compensation and Liability Act provides that the Company’s liability could be joint and several, meaning that the Company could be required to pay an amount in excess of its proportionate share of the remediation costs.
The Company’s understanding of the financial strength of other potentially responsible parties at the multiparty sites and of other liable parties at the previously owned facilities has been considered, where appropriate, in the determination of the Company’s estimated liability. The Company established reserves, recorded in accrued liabilities and other noncurrent liabilities, that it believes are adequate to cover its share of the potential costs of remediation at each of the multiparty sites and the previously and currently owned facilities. It is not possible to quantify with certainty the potential impact of actions regarding environmental matters, particularly remediation and other compliance efforts that the Company may undertake in the future. However, in the opinion of management, compliance with the present environmental protection laws, before taking into account estimated recoveries from third parties, will not have a material effect on the Company’s condensed consolidated balance sheets, statements of operations and cash flows.
From time to time, the Company’s customers and others file voluntary petitions for reorganization under United States bankruptcy laws. In such cases, certain pre-petition payments received by the Company from these parties could be considered preference items and subject to return. In addition, the Company may be party to certain litigation arising in the ordinary course of business. Management believes that the final resolution of these preference items and litigation will not have a material effect on the Company’s condensed consolidated balance sheets, statements of operations and cash flows.
22
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three and Nine Months Ended September 30, 2018 and 2017
(tabular amounts in millions, except per share data)
Note 9. Debt
The Company’s debt at September 30, 2018 and December 31, 2017 consisted of the following:
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
Borrowings under the Revolving Credit Facility
|
|
$
|
229
|
|
|
$
|
75
|
|
Term Loan Facility due September 30, 2022
(a)
|
|
|
270
|
|
|
|
306
|
|
8.75% Senior Secured Notes due October 15, 2023
|
|
|
450
|
|
|
|
450
|
|
Capital lease and other obligations
|
|
|
8
|
|
|
|
3
|
|
Unamortized debt issuance costs
|
|
|
(11
|
)
|
|
|
(12
|
)
|
Total debt
|
|
|
946
|
|
|
|
822
|
|
Less: current portion
|
|
|
(276
|
)
|
|
|
(123
|
)
|
Long-term debt
|
|
$
|
670
|
|
|
$
|
699
|
|
|
(a)
|
The borrowings under the Term Loan Facility are subject to a variable interest rate. As of September 30, 2018 and December 31, 2017, the interest rate was 7.74% and 7.07%, respectively.
|
__________________________________
On September 30, 2016, the Company issued $450 million of Senior Secured Notes (the “Senior Notes”).
On September 30, 2016 the Company entered into a credit agreement (the “Credit Agreement”) that provides for (i) a senior secured term loan B facility in an aggregate principal amount of $375 million (the “Term Loan Facility”) and (ii) a senior secured revolving credit facility in an aggregate principal amount of $400 million (the “Revolving Credit Facility”). The debt issuance costs and original issue discount are being amortized over the life of the facilities using the effective interest method.
The Credit Agreement is subject to a number of covenants, including, but not limited to, a minimum Interest Coverage Ratio and a Consolidated Leverage Ratio, as defined in and calculated pursuant to the Credit Agreement, that, in part, restrict the Company’s ability to incur additional indebtedness, create liens, engage in mergers and consolidations, make restricted payments and dispose of certain assets. The Credit Agreement generally allows annual dividend payments of up to $50 million in the aggregate, though additional dividends may be allowed subject to certain conditions. Each of these covenants is subject to important exceptions and qualifications.
Term Loan Facility
On November 17, 2017, the Company amended the Credit Agreement to reduce the interest rate for the Term Loan Facility by 50 basis points and the LIBOR “floor” was also reduced by 25 basis points.
Other terms, including the outstanding principal, maturity date and debt covenants were not amended. Select terms of the Term Loan Facility before and after the amendment include:
|
|
Before Amendment
|
|
|
After Amendment
|
|
Interest rate (Company's option)
|
|
Base rate + 5.00%; or
LIBOR + 6.00%
|
|
|
Base rate + 4.50%; or
LIBOR + 5.50%
|
|
LIBOR floor
|
|
1.00%
|
|
|
0.75%
|
|
Amortization
|
|
$13 million, first eight quarters;
$11 million quarterly thereafter
(as of original effective date)
|
|
|
$13 million, first eight quarters;
$11 million quarterly thereafter
(as of original effective date)
|
|
Maturity
|
|
September 30, 2022
|
|
|
September 30, 2022
|
|
Under the terms of the Term Loan Facility, each of the syndicated lenders is deemed to have loaned a specific amount to the Company and has the right to repayment from the Company directly. Therefore, we concluded that the Term Loan Facility is a loan syndication under U.S. GAAP. As such, in order to determine whether the debt was modified or extinguished as a result of the amendment, we examined the amount of principal pre- and post-amendment by individual lender. As a result, we determined that $65 million of outstanding principal had been extinguished as of November 17, 2017, even though the total outstanding principal amongst all lenders pre- and post-amendment remained unchanged.
23
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three and Nine Months Ended September 30, 2018 and 2017
(tabular amounts in millions, except per share data)
Consequently, the amendment resulted in a pre-tax loss on debt extinguishment of $3 million related to the unamortized discount and debt issuance costs attributable to the $65
million of outstanding principal that had been considered extinguished. There was no net impact as of November 17, 2017 to cash and cash equivalents, total outstanding principal remained unchanged, and no cash was exchanged between the lenders and the Co
mpany (other than customary administrative fees)
.
On February 2, 2017, the Company paid in advance for the Term Loan Facility the full amount of required amortization payments, $50 million, for the year ended December 31, 2017.
Additional Debt Issuances Information
The fair values of the Senior Notes and Term Loan Facility that were determined using the market approach based upon interest rates available to the Company for borrowings with similar terms and maturities, were determined to be Level 2 under the fair value hierarchy. The fair value of the Company’s debt was greater than its book value by approximately $10 million and $20 million at September 30, 2018 and December 31, 2017, respectively.
There were $229 million and $75 million of borrowings under the Revolving Credit Facility as of September 30, 2018 and December 31, 2017, respectively. The weighted-average interest rate on borrowings under the Company’s Revolving Credit Facility was 5.09% during the nine months ended September 30, 2018.
There were $21 million and $59 million of net interest expense during the three and nine months ended September 30, 2018, respectively. There were $19 million and $52 million of net interest expense during the three and nine months ended September 30, 2017, respectively.
Note 10. Equity
The Company’s equity balances and changes were as follows:
|
|
Total Equity
|
|
|
Total Equity
|
|
|
|
2018
|
|
|
2017
|
|
Balance at January 1
|
|
$
|
248
|
|
|
$
|
240
|
|
Net (loss) income
|
|
|
(7
|
)
|
|
|
1
|
|
Other comprehensive income
|
|
|
7
|
|
|
|
28
|
|
Share-based compensation
|
|
|
10
|
|
|
|
10
|
|
Issuance of share-based awards, net of
withholdings and other
|
|
|
(2
|
)
|
|
|
(1
|
)
|
Repurchase of common stock
|
|
|
(20
|
)
|
|
|
—
|
|
Revenue recognition adjustments
|
|
|
9
|
|
|
|
—
|
|
Cash dividends paid
|
|
|
(26
|
)
|
|
|
(25
|
)
|
Issuance of common stock
|
|
|
—
|
|
|
|
38
|
|
Separation-related adjustments
|
|
|
—
|
|
|
|
(5
|
)
|
Balance at September 30
|
|
$
|
219
|
|
|
$
|
286
|
|
24
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three and Nine Months Ended September 30, 2018 and 2017
(tabular amounts in millions, except per share data)
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 three months ended March 31, 2018, the Company recorded $9 million in equity adjustments as a result of the adoption of ASC 606. Refer to Note 3,
Revenue Recognition
, for more information.
On July 28, 2017, the Company issued approximately 1.0
million shares of common stock in conjunction with the Fairrington acquisition, which shares had a closing date value of $20
million.
On March 28, 2017, in connection with the over-allotment option granted to the underwriters as part of the secondary sale by RRD, LSC Communications completed the sale of approximately 0.9 million shares of common stock, receiving proceeds of $18 million.
During the nine months ended September 30, 2017, the Company recorded certain separation-related adjustments related to the adjustment of assets and liabilities resulting from transactions with RRD.
Note 11. Earnings Per Share
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.
There were no shares of common stock purchased by the Company during the three and nine months ended September 30, 2017. During the nine months ended September 30, 2018 and 2017,
a de minimis amount of shares were withheld from employees for tax liabilities upon vesting of equity awards.
Basic earnings per share (“EPS”) is calculated by dividing net earnings attributable to the Company’s stockholders by the weighted average number of common shares outstanding for the period. In computing diluted EPS, basic EPS is adjusted for the assumed issuance of all potentially dilutive share-based awards, including stock options, restricted stock, RSUs, and PSUs.
The following table shows the calculation of basic and diluted EPS, as well as a reconciliation of basic shares to diluted shares:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Net (loss) earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.12
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.21
|
)
|
|
$
|
0.03
|
|
Diluted
|
|
$
|
(0.12
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.21
|
)
|
|
$
|
0.03
|
|
Dividends declared per common share
|
|
$
|
0.26
|
|
|
$
|
0.25
|
|
|
$
|
0.78
|
|
|
$
|
0.75
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(4
|
)
|
|
$
|
(3
|
)
|
|
$
|
(7
|
)
|
|
$
|
1
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
33.2
|
|
|
|
34.2
|
|
|
|
34.0
|
|
|
|
33.5
|
|
Dilutive options and awards
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.3
|
|
Diluted weighted average number of common shares
outstanding
|
|
|
33.2
|
|
|
|
34.2
|
|
|
|
34.0
|
|
|
|
33.8
|
|
25
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three and Nine Months Ended September 30, 2018 and 2017
(tabular amounts in millions, except per share data)
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 September 30, 2018 and December 31, 2017.
The components of the estimated net pension (income) loss for the three and nine months ended September 30, 2018 and 2017 were as follows:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2018
|
|
|
September 30, 2018
|
|
|
|
Qualified
|
|
|
Non-Qualified
& International
|
|
|
Total
|
|
|
Qualified
|
|
|
Non-Qualified
& International
|
|
|
Total
|
|
Interest cost
|
|
$
|
21
|
|
|
$
|
1
|
|
|
$
|
22
|
|
|
$
|
63
|
|
|
$
|
3
|
|
|
$
|
66
|
|
Expected return on plan assets
|
|
|
(39
|
)
|
|
|
—
|
|
|
|
(39
|
)
|
|
|
(117
|
)
|
|
|
—
|
|
|
|
(117
|
)
|
Amortization of actuarial loss
|
|
|
5
|
|
|
|
—
|
|
|
|
5
|
|
|
|
15
|
|
|
|
—
|
|
|
|
15
|
|
Net periodic benefit (income) loss
|
|
$
|
(13
|
)
|
|
$
|
1
|
|
|
$
|
(12
|
)
|
|
$
|
(39
|
)
|
|
$
|
3
|
|
|
$
|
(36
|
)
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2017
|
|
|
September 30, 2017
|
|
|
|
Qualified
|
|
|
Non-Qualified
& International
|
|
|
Total
|
|
|
Qualified
|
|
|
Non-Qualified
& International
|
|
|
Total
|
|
Interest cost
|
|
$
|
22
|
|
|
$
|
—
|
|
|
$
|
22
|
|
|
$
|
65
|
|
|
$
|
2
|
|
|
$
|
67
|
|
Expected return on plan assets
|
|
|
(38
|
)
|
|
|
—
|
|
|
|
(38
|
)
|
|
|
(114
|
)
|
|
|
—
|
|
|
|
(114
|
)
|
Amortization of actuarial loss
|
|
|
4
|
|
|
|
1
|
|
|
|
5
|
|
|
|
12
|
|
|
|
1
|
|
|
|
13
|
|
Net periodic benefit (income) loss
|
|
$
|
(12
|
)
|
|
$
|
1
|
|
|
$
|
(11
|
)
|
|
$
|
(37
|
)
|
|
$
|
3
|
|
|
$
|
(34
|
)
|
The total net periodic income for the three and nine months ended September 30, 2018 and 2017 is included in the investment and other income-net line item in the condensed consolidated statements of operations.
Note 13. Income Taxes
U.S. Tax Cuts and Jobs Act (“Tax Act”)
The Company’s accounting for the Tax Act remains provisional for amounts recorded as of December 31, 2017. As disclosed in the Company’s annual report on Form 10-K (Note 14,
Income Taxes
) for the year ended December 31, 2017, the Company was able to reasonably estimate certain effects, and therefore, recorded provisional adjustments associated with the one-time transition tax on the deemed repatriation of post-1986 undistributed earnings of foreign subsidiaries and the remeasurement of deferred taxes. The Company has not recorded any potential deferred tax effects related to global intangible low-taxed income (“GILTI”) and has not made a policy decision regarding whether to record deferred taxes on GILTI or in the period in which the tax is incurred.
The Company has not made any additional measurement-period adjustments related to these items during the nine months ended September 30, 2018. The Company is continuing to gather additional information to complete the accounting for these items and expects to complete the accounting within the prescribed measurement period.
26
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three and Nine Months Ended September 30, 2018 and 2017
(tabular amounts in millions, except per share data)
2018 Disposition
As described in Note 2,
Business Combinations and Disposition
, the Company completed the sale of its European printing business on September 28, 2018. The 2018 tax provision reflects the impact of the sale which includes the elimination of tax balances related to the sold entities. A $25 million non-cash provision was recorded primarily for the write-off of a deferred tax asset associated with the entities disposed.
Income Tax Rates
The effective income tax rates for the three and nine months ended September 30, 2018
reflect a $25 million non-cash tax provision related to the disposition of the Company’s European printing business. Additionally, the rates were impacted by 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.
Note 14. Comprehensive Income
The following table summarizes accumulated other comprehensive loss by component as of December 31, 2017 and September 30, 2018 and changes during the nine months ended September 30, 2018.
|
|
Pension
|
|
|
Translation
|
|
|
|
|
|
|
|
Plan Cost
|
|
|
Adjustments
|
|
|
Total
|
|
Balance at December 31, 2017
|
|
$
|
(428
|
)
|
|
$
|
(48
|
)
|
|
$
|
(476
|
)
|
Other comprehensive loss before reclassifications
|
|
|
—
|
|
|
|
(4
|
)
|
|
|
(4
|
)
|
Amounts reclassified from accumulated other comprehensive loss
|
|
|
11
|
|
|
|
—
|
|
|
|
11
|
|
Reclassification to accumulated deficit
|
|
|
(97
|
)
|
|
|
—
|
|
|
|
(97
|
)
|
Net change in accumulated other comprehensive loss
|
|
|
(86
|
)
|
|
|
(4
|
)
|
|
|
(90
|
)
|
Balance at September 30, 2018
|
|
$
|
(514
|
)
|
|
$
|
(52
|
)
|
|
$
|
(566
|
)
|
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 eliminates the stranded tax effects resulting from the Tax Act and will improve the usefulness of information reported to financial statement users.
The following table summarizes accumulated other comprehensive loss by component as of December 31, 2016 and September 30, 2017 and changes during the nine months ended September 30, 2017.
|
|
Pension
|
|
|
Translation
|
|
|
|
|
|
|
|
Plan Cost
|
|
|
Adjustments
|
|
|
Total
|
|
Balance at December 31, 2016
|
|
$
|
(462
|
)
|
|
$
|
(69
|
)
|
|
$
|
(531
|
)
|
Other comprehensive income before reclassifications
|
|
|
—
|
|
|
|
20
|
|
|
|
20
|
|
Amounts reclassified from accumulated other comprehensive loss
|
|
|
8
|
|
|
|
—
|
|
|
|
8
|
|
Net change in accumulated other comprehensive loss
|
|
|
8
|
|
|
|
20
|
|
|
|
28
|
|
Balance at September 30, 2017
|
|
$
|
(454
|
)
|
|
$
|
(49
|
)
|
|
$
|
(503
|
)
|
Refer to the condensed consolidated statements of comprehensive income for the components of comprehensive income for the three and nine months ended September 30, 2018 and 2017.
27
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three and Nine Months Ended September 30, 2018 and 2017
(tabular amounts in millions, except per share data)
Reclassifications from accumulated other
comprehensive loss for the three and nine months ended September 30, 2018 and 2017
were as follows:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Amortization of pension plan cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss
(a)
|
|
$
|
5
|
|
|
$
|
5
|
|
|
$
|
15
|
|
|
$
|
13
|
|
Reclassifications before tax
|
|
|
5
|
|
|
|
5
|
|
|
|
15
|
|
|
|
13
|
|
Income tax expense
|
|
|
2
|
|
|
|
2
|
|
|
|
4
|
|
|
|
5
|
|
Reclassifications, net of tax
|
|
$
|
3
|
|
|
$
|
3
|
|
|
$
|
11
|
|
|
$
|
8
|
|
|
(a)
|
These accumulated other comprehensive income components are included in the calculation of net periodic pension plan (income) expense that is recognized substantially all in investment and other income-net in the condensed consolidated statements of operations (see Note 12,
Retirement Plans
).
|
Note 15. 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 and warehousing and fulfillment services, as well as e-book formatting for book publishers.
Office Products
The Office Products segment manufactures and sells branded and private label products in five core categories: filing products, envelopes, note-taking products, binder products, and forms.
Other
The Other grouping consists of the following non-reportable segments: Europe, Directories, Mexico, and Print Management. Mexico produces
magazines, catalogs, statements, forms, and labels. Print Management provides outsourced print procurement and management services. The Company disposed of its European printing business in the third quarter of 2018.
28
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three and Nine Months Ended September 30, 2018 and 2017
(tabular amounts in millions, except per share data)
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.
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
|
|
September 30, 2018
|
|
Sales
|
|
|
Operations
|
|
|
Amortization
|
|
|
Expenditures
|
|
Magazines, Catalogs and Logistics
|
|
$
|
463
|
|
|
$
|
1
|
|
|
$
|
16
|
|
|
$
|
6
|
|
Book
|
|
|
282
|
|
|
|
21
|
|
|
|
12
|
|
|
|
7
|
|
Office Products
|
|
|
145
|
|
|
|
15
|
|
|
|
4
|
|
|
|
—
|
|
Total reportable segments
|
|
|
890
|
|
|
|
37
|
|
|
|
32
|
|
|
|
13
|
|
Other
|
|
|
125
|
|
|
|
9
|
|
|
|
2
|
|
|
|
1
|
|
Corporate
|
|
|
—
|
|
|
|
(5
|
)
|
|
|
—
|
|
|
|
1
|
|
Total operations
|
|
$
|
1,015
|
|
|
$
|
41
|
|
|
$
|
34
|
|
|
$
|
15
|
|
|
|
|
|
|
|
Income (Loss)
|
|
|
Depreciation
|
|
|
|
|
|
Three Months Ended
|
|
Net
|
|
|
from
|
|
|
and
|
|
|
Capital
|
|
September 30, 2017
|
|
Sales
|
|
|
Operations
|
|
|
Amortization
|
|
|
Expenditures
|
|
Magazines, Catalogs and Logistics
|
|
$
|
409
|
|
|
$
|
(41
|
)
|
|
$
|
18
|
|
|
$
|
6
|
|
Book
|
|
|
276
|
|
|
|
26
|
|
|
|
14
|
|
|
|
2
|
|
Office Products
|
|
|
116
|
|
|
|
11
|
|
|
|
4
|
|
|
|
1
|
|
Total reportable segments
|
|
|
801
|
|
|
|
(4
|
)
|
|
|
36
|
|
|
|
9
|
|
Other
|
|
|
134
|
|
|
|
5
|
|
|
|
3
|
|
|
|
1
|
|
Corporate
|
|
|
—
|
|
|
|
(19
|
)
|
|
|
—
|
|
|
|
5
|
|
Total operations
|
|
$
|
935
|
|
|
$
|
(18
|
)
|
|
$
|
39
|
|
|
$
|
15
|
|
|
|
|
|
|
|
Income (Loss)
|
|
|
|
|
|
|
Depreciation
|
|
|
|
|
|
Nine Months Ended
|
|
Net
|
|
|
from
|
|
|
Assets of
|
|
|
and
|
|
|
Capital
|
|
September 30, 2018
|
|
Sales
|
|
|
Operations
|
|
|
Operations
|
|
|
Amortization
|
|
|
Expenditures
|
|
Magazines, Catalogs and Logistics
|
|
$
|
1,291
|
|
|
$
|
(19
|
)
|
|
$
|
795
|
|
|
$
|
47
|
|
|
$
|
20
|
|
Book
|
|
|
797
|
|
|
|
49
|
|
|
|
610
|
|
|
|
39
|
|
|
|
25
|
|
Office Products
|
|
|
422
|
|
|
|
30
|
|
|
|
363
|
|
|
|
11
|
|
|
|
1
|
|
Total reportable segments
|
|
|
2,510
|
|
|
|
60
|
|
|
|
1,768
|
|
|
|
97
|
|
|
|
46
|
|
Other
|
|
|
377
|
|
|
|
23
|
|
|
|
102
|
|
|
|
8
|
|
|
|
3
|
|
Corporate
|
|
|
—
|
|
|
|
(30
|
)
|
|
|
102
|
|
|
|
1
|
|
|
|
3
|
|
Total operations
|
|
$
|
2,887
|
|
|
$
|
53
|
|
|
$
|
1,972
|
|
|
$
|
106
|
|
|
$
|
52
|
|
29
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three and Nine Months Ended September 30, 2018 and 2017
(tabular amounts in millions, except per share data)
|
|
|
|
|
|
Income (Loss)
|
|
|
|
|
|
|
Depreciation
|
|
|
|
|
|
Nine Months Ended
|
|
Net
|
|
|
from
|
|
|
Assets of
|
|
|
and
|
|
|
Capital
|
|
September 30, 2017
|
|
Sales
|
|
|
Operations
|
|
|
Operations
|
|
|
Amortization
|
|
|
Expenditures
|
|
Magazines, Catalogs and Logistics
|
|
$
|
1,099
|
|
|
$
|
(51
|
)
|
|
$
|
813
|
|
|
$
|
52
|
|
|
$
|
20
|
|
Book
|
|
|
777
|
|
|
|
53
|
|
|
|
621
|
|
|
|
46
|
|
|
|
12
|
|
Office Products
|
|
|
352
|
|
|
|
32
|
|
|
|
316
|
|
|
|
11
|
|
|
|
3
|
|
Total reportable segments
|
|
|
2,228
|
|
|
|
34
|
|
|
|
1,750
|
|
|
|
109
|
|
|
|
35
|
|
Other
|
|
|
376
|
|
|
|
22
|
|
|
|
233
|
|
|
|
8
|
|
|
|
9
|
|
Corporate
|
|
|
—
|
|
|
|
(60
|
)
|
|
|
90
|
|
|
|
1
|
|
|
|
7
|
|
Total operations
|
|
$
|
2,604
|
|
|
$
|
(4
|
)
|
|
$
|
2,073
|
|
|
$
|
118
|
|
|
$
|
51
|
|
Restructuring, impairment and other charges by segment for the three and nine months ended September 30, 2018 and 2017 are disclosed in Note 7,
Restructuring, Impairment and Other Charges.
Note 16. Related Parties
On March 28, 2017, RRD completed the sale of approximately 6.2 million shares of LSC Communications common stock, representing its entire 19.25% retained ownership.
Transactions with RRD
Revenues and Purchases
Given that RRD sold its remaining stake in LSC Communications on March 28, 2017, the following information is presented for the three months ended March 31, 2017 only.
LSC Communications generates net revenue from sales to RRD’s subsidiaries. Net revenues from related party sales were $32 million for the three months ended March 31, 2017.
LSC Communications utilizes RRD for freight, logistics and premedia services. There were cost of sales of $51 million related to freight, logistics and premedia services purchased from RRD for the three months ended March 31, 2017.
These amounts are included in the condensed consolidated statements of operations.
Note 17. New Accounting Pronouncements
In February 2016, the FASB
issued Accounting Standards Update No. 2016-02 “Leases (Topic 842) Section A—Leases: Amendments to the FASB Accounting Standards Codification” (“ASU 2016-02”), which requires lessees to put most leases on the balance sheet but recognize expense on the income statement in a manner similar to current accounting. For lessors, ASU 2016-02 also modifies the classification criteria and the accounting for sales-type and direct financing leases.
The standard is effective in the first quarter of 2019.
Early adoption of ASU 2016-02 is permitted, however, the Company plans to adopt the standard in the first quarter of 2019. In July 2018, the FASB issued Accounting Standards Update No. 2018-11 “Leases (Topic 842): Targeted Improvements” (“ASU 2018-11”), which permits companies to initially apply the new leases standard at the adoption date and not restate periods prior to adoption. The Company plans to adopt ASU 2018-11.
The Company is currently evaluating the impact of the provisions of ASU 2016-02 and anticipates it will be able to complete its analysis of all potential impacts of the standard, implement any system and process changes that might be necessary and educate the appropriate employees with respect to the new standard in order to effectively adopt the standard beginning in the first quarter of 2019.
30
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three and Nine Months Ended September 30, 2018 and 2017
(tabular amounts in millions, except per share data)
Note 18. Subsequent Events
On October 30, 2018, the Company entered into an Agreement and Plan of Merger (the
“Merger Agreement”
) with Quad/Graphics, Inc. (
“Quad”
), and QLC Merger Sub, Inc., a direct, wholly-owned subsidiary of Quad (
“Merger Sub”
). Pursuant to the Merger Agreement, subject to the terms and conditions therein, Merger Sub will merge with and into the Company (the
“Merger”
), with the Company continuing as the surviving corporation. Subject to the terms and conditions set forth in the Merger Agreement, at the effective time of the Merger (the “Effective Time”), each share of the Company’s common stock issued and outstanding immediately prior to the Effective Time, will be converted into the right to receive 0.625 shares of class A common stock of Quad, without interest and subject to adjustment as provided in the Merger Agreement.
The Company and Quad have made customary representations, warranties and covenants in the Merger Agreement. Subject to certain exceptions outlined in the Merger Agreement, the Company has agreed to covenants relating to the Company’s business during the period between the execution of the Merger Agreement and the consummation of the Merger, including restrictions on its ability to issue any shares of its capital stock, repurchase any shares of its capital stock and incurring additional indebtedness outside the ordinary course of business. The Merger Agreement allows the Company to continue paying a regular quarterly dividend up to $0.26 per share.
On October 30, 2018, concurrently with the execution of the Merger Agreement, the Company and the trustees (the “Trustees”) under the Amended and Restated Voting Trust Agreement, dated as of June 25, 2010, pursuant to which certain shares of capital stock of Quad are held by the Quad/Graphics, Inc. Voting Trust (the “Voting Trust”), entered into a voting and support agreement (the “Voting Agreement”). Pursuant to the Voting Agreement, the Trustees will vote all of the shares of Quad held by the Voting Trust, which they have, directly or indirectly, the right to vote or direct the voting thereof, in favor of the issuance of class A shares of Quad common stock in the Merger, and against any alternative acquisition proposal involving Quad or other action that would reasonably be expected to breach the obligations of Quad under the Merger Agreement or the Trustees under the Voting Agreement, or otherwise reasonably be expected to delay or adversely affect the Merger or the other transactions contemplated by the Merger Agreement.
31