UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q  

    

(Mark One)      

For the quarterly period ended March 31, 2018  

OR  

Commission file number

001-37729      

LSC Communications, Inc.

(Exact name of registrant as specified in its charter)

 

 

191 N. Wacker Drive, Suite 1400

Chicago, IL 60606

(Address of principal executive offices, including zip code)

(773) 272-9200  

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☒      

As of April 27, 2018, 34,962,612 shares of common stock were outstanding.        

 

    

 

 

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LSC COMMUNICATIONS, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2018

 

TABLE OF CONTENTS

  

PART I

 

 

 

  

2

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ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

LSC COMMUNICATIONS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions, except share and per share data)

(UNAUDITED)  

 

 

                              

                    

        

  

 

  

 

  

 

 

See Notes to the Condensed Consolidated Financial Statements

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LSC COMMUNICATIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions, except per share data)  

(UNAUDITED)  

 

  

      

                

                  

            

      

    

  

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See Notes to the Condensed Consolidated Financial Statements

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LSC COMMUNICATIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in millions)

(UNAUDITED)

 

 

The adjustments for net pension plan cost were net of income tax expense of $1 million for each of the three months ended March 31, 2018 and 2017.    

 

      

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See Notes to the Condensed Consolidated Financial Statements

 

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LSC COMMUNICATIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

(UNAUDITED)

 

 

 

              

 

 

See Notes to the Condensed Consolidated Financial Statements    

 

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LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three Months Ended March 31, 2018 and 2017

(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.  The Company utilizes a broad portfolio of technology capabilities coupled with consultative attention to clients' needs to increase speed to market, reduce costs, provide postal savings to customers and improve efficiencies.  The Company prints magazines, catalogs, retail inserts, books, and directories and its office products offerings include filing products, 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.  

 

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 a line item outside of income from operations, resulting in no impact to net income.  In the first quarter of 2018, $11 million of net pension income was reclassified from selling, general and administrative expenses to investment and other income-net in the condensed consolidated statement of operations for the three months ended March 31, 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.      

 

  

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LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three Months Ended March 31, 2018 and 2017

(tabular amounts in millions, except per share data)

 

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 three months ended March 31, 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.    

 

 

Note 2.  Business Combinations

 

2017 Acquisitions

 

On November 29, 2017, the Company acquired The Clark Group, (“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, 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 (“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.  

 

On March 1, 2017, the Company acquired HudsonYards Studios (“HudsonYards”), a digital and print premedia production company that provides high-quality creative retouching, computer-generated imagery, mechanical creation, press-ready file preparation, and interactive production services.  The 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.  

 

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LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three Months Ended March 31, 2018 and 2017

(tabular amounts in millions, except per share data)

 

The operations of Clark Group, Publishers Press, CREEL, Fairrington, and HudsonYards are included in the Print segment; specifically the magazines, catalogs and retail inserts reporting unit.  The operations of Quality Park and NECI are included in the Office Products segment.  

 

The acquisitions were recorded by allocating the cost of the acquisitions to the assets acquired, including other intangible assets, based on their estimated fair values at the acquisition date.  The excess of the cost of the acquisitions over the net amounts assigned to the fair value of the assets acquired was recorded in goodwill. The goodwill is primarily attributable to the synergies expected to arise as a result of the acquisitions.   

 

The preliminary tax deductible goodwill related to the Clark Group, Quality Park, Publishers Press, NECI, CREEL, Fairrington, and HudsonYards acquisitions was $38 million.

 

The purchase price allocations for the Clark Group and Quality Park are preliminary as of March 31, 2018 because the valuations necessary to assess the fair values of the net assets and liabilities acquired are still in process.  The primary areas that are not yet finalized relate to the valuation of certain assets and liabilities.  The final purchase price allocations may differ from what is currently reflected in the condensed consolidated financial statements and could affect goodwill impairment in the future.  The purchase price allocations for Publishers Press, NECI, CREEL, Fairrington, and HudsonYards are final as of March 31, 2018.  There were no significant changes to the purchase price allocations for all acquisitions as of March 31, 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 the material acquisitions noted above were as follows:

 

 

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 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 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 magazines, catalogs and retail inserts reporting unit as of December 31, 2017.  

 

As a result of a $1 million adjustment of previously recorded goodwill associated with the 2017 acquisitions, there was a reduction of goodwill impairment charges of $1 million during the three months ended March 31, 2018.    

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LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three Months Ended March 31, 2018 and 2017

(tabular amounts in millions, except per share data)

 

 

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.

 

For the three months ended March 31, 2018 and 2017, the Company recorded $1 million and a de minimis amount of acquisition-related expenses, respectively, associated with the completed and contemplated acquisitions described above within selling, general and administrative expenses in the condensed consolidated statements of operations.

 

 

Pro forma results  

 

The following unaudited pro forma financial information for the three months ended March 31, 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.

 

 

The following table outlines unaudited pro forma financial information for the three months ended March 31, 2018 and 2017:

 

 

Additionally, the nonrecurring pro forma adjustments affecting net loss for the three months ended March 31, 2018 and 2017 were as follows:  

 

      

Note: A negative number in the table above represents a decrease to income in pro forma net income.

  

 

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LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three Months Ended March 31, 2018 and 2017

(tabular amounts in millions, except per share data)

 

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:

 

 

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LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three Months Ended March 31, 2018 and 2017

(tabular amounts in millions, except per share data)

 

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 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 three months ended March 31, 2018, to their pro forma amounts had the previous guidance been in effect:

 

 

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LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three Months Ended March 31, 2018 and 2017

(tabular amounts in millions, except per share data)

 

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.  

 

 

The differences between the reported balances and the pro forma balances above are due to the following impacts:

 

 

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 products, usually when production is completed.

 

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LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three Months Ended March 31, 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 supply chain management) is recognized as services are completed over time.

 

Revenue is measured as the amount of consideration we expect 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 results 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 and are 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 our 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 our 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.

 

 

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LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three Months Ended March 31, 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.

 

 

 

Contract Balances

 

The following table provides information about receivables, contract assets and contract liabilities from contracts with customers:

 

 

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LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three Months Ended March 31, 2018 and 2017

(tabular amounts in millions, except per share data)

 

Significant changes in the contract assets and the contract liabilities balances during the period are as follows:

 

 

 

Transactions affecting the allowances for doubtful accounts receivable balance during the three months ended March 31, 2018 were as follows:

 

 

 

Contract Acquisition Costs

 

In connection with the adoption of ASC 606, we are required to capitalize certain contract acquisition costs.  As of December 31, 2017 under previous guidance, we 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.  In the three months ended March 31, 2018, the amount of amortization was $3 million and there was no impairment loss in relation to costs capitalized.

 

 

 

Note 4.  Inventories

 

The components of the Company’s inventories, net of excess and obsolescence reserves for raw materials and finished goods, at March 31, 2018 and December 31, 2017 were as follows:    

 

 

            

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LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three Months Ended March 31, 2018 and 2017

(tabular amounts in millions, except per share data)

 

Note 5.  Property, Plant and Equipment

 

The components of the Company’s property, plant and equipment at March 31, 2018 and December 31, 2017 were as follows:

 

 

During the three months ended March 31, 2018 and 2017, depreciation expense was $31 million and $35 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 $7 million each at March 31, 2018 and December 31, 2017.  These assets were included in other current assets in the condensed consolidated balance sheets at the lower of their historical net book value or their estimated fair value, less estimated costs to sell.  

 

    

Note 6.  Goodwill and Other Intangible Assets  

   

The changes in the carrying amount of goodwill for the three months ended March 31, 2018 were as follows:

 

 

The components of other intangible assets at March 31, 2018 and December 31, 2017 were as follows:  

 

 

During the three months ended March 31, 2018 and 2017, amortization expense for other intangible assets was $5 million and $4 million, respectively.

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LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three Months Ended March 31, 2018 and 2017

(tabular amounts in millions, except per share data)

 

  

The following table outlines the estimated annual amortization expense related to other intangible assets:

 

           

 

Note 7.  Restructuring, Impairment and Other Charges      

 

For the three months ended March 31, 2018 and 2017, the Company recorded the following net restructuring, impairment and other charges:  

 

 

 

    

Restructuring and Impairment Charges        

 

For the three months ended March 31, 2018, the Company incurred employee-related restructuring charges of $4 million for an aggregate of 196 employees, of whom 132 were terminated as of or prior to March 31, 2018.  These charges primarily related to the closure of one facility in the Print segment and the reorganization of certain business units.  The Company incurred other restructuring charges of $3 million for the three months ended March 31, 2018 for facility costs and pension withdrawal obligations related to facility closures.   

 

As a result of a $1 million adjustment of previously recorded goodwill associated with the 2017 acquisitions, there was a reduction of $1 million of goodwill impairment charges during the three months ended March 31, 2018.  Refer to Note 2, Business Combinations, for more information.    

 

For the three months ended March 31, 2017, employee-related restructuring charges of $4 million related to an aggregate of 198 employees, substantially all of whom were terminated as of or prior to March 31, 2018.  These charges primarily related to the reorganization of certain business units and corporate functions.   

 

 

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LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three Months Ended March 31, 2018 and 2017

(tabular amounts in millions, except per share data)

 

Other Charges  

 

For the three months ended March 31, 2018, the Company recorded a de minimis amount of other charges for multiemployer pension plan withdrawal obligations unrelated to facility closures.  The total liability for the withdrawal obligations associated with the Company’s decision to withdraw from certain multiemployer pension plans included $3 million in accrued liabilities and $19 million in restructuring and multiemployer pension liabilities at March 31, 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 months ended March 31, 2017, the Company recorded other charges of $1 million for multiemployer pension plan withdrawal obligations unrelated to facility closures.

 

 

Restructuring Reserve

 

The restructuring reserve as of March 31, 2018 and December 31, 2017, and changes during the three months ended March 31, 2018 were as follows:

 

 

The current portion of restructuring reserves of $17 million at March 31, 2018 was included in accrued liabilities, while the long-term portion of $29 million, which primarily related to multiemployer pension plan withdrawal obligations related to facility closures, was included in restructuring and multiemployer pension liabilities at March 31, 2018.    

      

During the three months ended March 31, 2018, the Company reclassified $19 million of multiemployer pension plan withdrawal obligations from non-restructuring liabilities to restructuring liabilities, of which $3 million and $16 million were recorded in the current and long-term portions of the reserves, respectively.  The reclassification was primarily due to 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 March 31, 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 withdrawals.    

 

The restructuring liabilities classified as “other” consisted of other facility closing costs.  

 

 

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LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three Months Ended March 31, 2018 and 2017

(tabular amounts in millions, except per share data)

 

Note 8.  Commitments and Contingencies  

 

The Company is subject to laws and regulations relating to the protection of the environment.  The Company accrues for expenses associated with environmental remediation obligations when such amounts are probable and can be reasonably estimated. Such accruals are adjusted as new information develops or circumstances change and are generally not discounted.  The Company has been designated as a potentially responsible party or has received claims in eleven 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. 

 

 

Note 9.  Debt

 

The Company’s debt at March 31, 2018 and December 31, 2017 consisted of the following:  

 

  

__________________________________

 

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. 

 

 

 

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LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three Months Ended March 31, 2018 and 2017

(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.  The Credit Agreement generally allows annual dividend payments of up to $50 million in aggregate, though additional dividends may be allowed subject to certain conditions. Each of these covenants is subject to important exceptions and qualifications.  

 

 

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 on the Term Loan Facility before and after the amendment include:

 

 

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.      

 

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 Company (other than customary administrative fees).  

 

On February 2, 2017, the Company paid in advance the full amount of required amortization payments, $50 million, for the year ended December 31, 2017 for the Term Loan Facility.

 

 

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 $16 million and $20 million at March 31, 2018 and December 31, 2017, respectively.  

 

There were $130 million and $75 million of borrowings under the Revolving Credit Facility as of March 31, 2018 and December 31, 2017, respectively.  The weighted-average interest rate on borrowings under the Company’s Revolving Credit Facility was 4.73% during the three months ended March 31, 2018.  

 

There were $20 million and $17 million of net interest expense during the three months ended March 31, 2018 and 2017, respectively.

        

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LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three Months Ended March 31, 2018 and 2017

(tabular amounts in millions, except per share data)

 

 

Note 10.  Equity

 

The Company’s equity as of December 31, 2017 and March 31, 2018 and changes during the three months ended March 31, 2018 were as follows:

 

  

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.    

 

The Company’s equity as of December 31, 2016 and March 31, 2017 and changes during the three months ended March 31, 2017 were as follows:

 

              

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.  

    

 

Note 11.  Earnings Per Share

 

During the three months ended March 31, 2018 and 2017, no shares of common stock were purchased by the Company, however, a de minimis amount of shares were withheld from employees for tax liabilities upon vesting of equity awards.     

 

Basic 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.

 

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LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three Months Ended March 31, 2018 and 2017

(tabular amounts in millions, except per share data)

 

The following table shows the calculation of basic and diluted EPS, as well as a reconciliation of basic shares to diluted shares:

 

                  

 

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 March 31, 2018 and December 31, 2017.  The components of the estimated net pension (income) loss for the three months ended March 31, 2018 and 2017 were as follows:

 

 

The net pension income of $12 million and $11 million for the three months ended March 31, 2018 and 2017, respectively, is included in the investment and other income-net line item in the condensed consolidated statements of operations.    

    

 

Note 13.  Comprehensive Income

 

The following table summarizes accumulated other comprehensive loss by component as of December 31, 2017 and March 31, 2018 and changes during the three months ended March 31, 2018.  

 

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LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three Months Ended March 31, 2018 and 2017

(tabular amounts in millions, except per share data)

 

 

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 as of 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 March 31, 2017 and changes during the three months ended March 31, 2017.

 

 

Refer to the condensed consolidated statements of comprehensive income for the components of comprehensive income for the three months ended March 31, 2018 and 2017.

 

Reclassifications from accumulated other comprehensive loss for the three months ended March 31, 2018 and 2017 were as follows:    

 

  

      

 

Note 14.  Shared-Based Compensation

 

The Company’s employees participate in the Company’s 2016 Performance Incentive Plan (the “2016 PIP”).  Under the 2016 PIP, the Company may grant cash or bonus awards, stock options, stock appreciation rights, restricted stock awards (“RSAs”), restricted stock units (“RSUs”), performance awards or combinations thereof to certain officers, directors and key employees. 

 

Total compensation expense related to all share based compensation plans for the Company’s employees, officers and directors was $3 million for each of the three months ended March 31, 2018 and 2017.  There were net tax benefits of a de minimis amount and $1 million for the three months ended March 31, 2018 and 2017, respectively.

 

There was no significant activity related to stock options, RSAs and performance restricted stock during the three months ended March 31, 2018.

  

 

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LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three Months Ended March 31, 2018 and 2017

(tabular amounts in millions, except per share data)

 

Restricted Stock Units

 

A summary of the Company’s RSU activity for LSC Communications, RRD and Donnelley Financial employees, officers and directors as of December 31, 2017 and March 31, 2018, and changes during the three months ended March 31, 2018 is presented below.

 

 

During the three months ended March 31, 2018, 459,855 RSUs were granted to certain executive officers and senior management. The shares are subject to time-based vesting and will cliff vest on March 2, 2021.  As of March 31, 2018, the total potential payout for the awards granted during the three months ended March 31, 2018 is 459,855 RSUs.  The fair value of these awards was determined based on the Company’s stock price on the grant date reduced by the present value of expected dividends through the vesting period.  These awards are subject to forfeiture upon termination of employment prior to vesting, subject in some cases to early vesting upon specified events, including death, permanent disability or retirement of the grantee or change of control of the Company.

 

Compensation expense related to LSC Communications, RRD and Donnelley Financial RSUs held by Company employees, officers and directors was $2 million for each of the three months ended March 31, 2018 and 2017.  As of March 31, 2018, there was $11 million of unrecognized share-based compensation expense related to the approximately 0.9 million RSUs outstanding, with a weighted-average grant date fair value of $19.29, that are expected to vest over a weighted average period of 2.0 years. 

 

 

Performance Share Units  

 

A summary of performance share units (“PSUs”) activity for the Company’s employees as of December 31, 2017 and March 31, 2018, and changes during the three months ended March 31, 2018 is presented below.

 

 

The 2018 and 2017 grants consisted of 242,965 and 28,520 PSUs, respectively, granted during the three months ended March 31, 2018 and 2017 to certain members of senior management, respectively, payable upon the achievement of certain established performance targets.  The performance period for the units awarded in 2018 and 2017 is January 1, 2018 to December 31, 2020 and January 1, 2017 to December 31, 2017, respectively.  The performance target for the PSUs granted in 2017 was exceeded, and compensation expense is now being recognized based on an estimated payout of 33,708 shares.  In addition to being subject to achievement of the performance target, the PSUs granted in 2018 and 2017 are also subject to time-based vesting on March 2, 2021 and March 2, 2020, respectively.  Both the performance-based vesting and the time-based vesting must be met for the PSUs to vest.     

 

The fair value of these awards was determined based on the Company’s stock price on the grant date reduced by the present value of expected dividends through the vesting period.  These awards are subject to forfeiture upon termination of employment prior to vesting, subject in some cases to early vesting upon specified events, including death, permanent disability or retirement of the grantee or change of control of the Company.  

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LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three Months Ended March 31, 2018 and 2017

(tabular amounts in millions, except per share data)

 

 

Compensation expense for the 2018 PSUs granted during the three months ended March 31, 2018 is being recognized based on an estimated payout of 242,965 shares.  There was a de minimis amount of compensation expense related to PSUs for each of the three months ended March 31, 2018 and 2017.  As of March 31, 2018, there was $3 million of unrecognized compensation expense related to PSUs, which is expected to be recognized over a weighted average period of 2.8 years.        

      

 

Note 15.  Segment Information

 

The Company’s segment and product and service offerings are summarized below:

 

 

Print  

 

The Print segment produces magazines, catalogs, retail inserts, books, and directories.  The segment also provides supply-chain management, logistics and certain other print-related services, including mail-list management and sortation, e-book formatting and distribution.  The segment has operations in the U.S., Europe and Mexico.  The Print segment is divided into the magazines, catalogs and retail inserts, book, Europe and directories reporting units.  

   

   

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. 

 

 

Corporate 

 

Corporate consists of unallocated selling, general and administrative activities and associated expenses including, in part, executive, legal, finance, communications, certain facility costs and LIFO inventory provisions.  In addition, certain costs and earnings of employee benefit plans, such as pension benefit plan income and share-based compensation, are included in Corporate and not allocated to the operating segments.

 

 

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.

 

 

          

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LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three Months Ended March 31, 2018 and 2017

(tabular amounts in millions, except per share data)

 

 

Restructuring, impairment and other charges by segment for the three months ended March 31, 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.  In January 2018, the FASB issued Accounting Standards Update No. 2018-01 “Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842” (“ASU 2018-01”).  The amendments in ASU 2018-01 permit an entity to elect an optional transition practical expedient to not evaluate under Topic 842 land easements that exist or expired before the entity’s adoption of Topic 842 and that were not previously accounted for as leases under Topic 840.  An entity that does not elect this practical expedient should evaluate all existing or expired land easements in connection with the adoption of the new lease requirements in Topic 842 to assess whether they meet the definition of a lease.  The Company plans to elect the optional transition practical expedient.  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.  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.     

 

  

Note 18.  Subsequent Events

 

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LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three Months Ended March 31, 2018 and 2017

(tabular amounts in millions, except per share data)

 

On May 2, 2018, the Company announced that it has entered into a definitive agreement to acquire RRD’s Print Logistics business, a leading integrated logistics services provider to the print industry with an expansive distribution network.  

 

On May 2, 2018, the Company announced that it has entered into a definitive agreement to sell its retail offset printing facilities, which are included in the Company’s magazines, catalogs and retail inserts reporting unit, to Trend Offset Printing.  

 

The acquisition and sale have not been completed as of May 3, 2018, the date of the filing of the Form 10-Q for the quarter ended March 31, 2018.  

 

 

 

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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 March 31, 2018 and December 31, 2017 and the results of operations for the three months ended March 31, 2018 and 2017.  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 on February 22, 2018, for management’s discussion and analysis of the financial condition of the company as of December 31, 2017 and December 31, 2016, and the results of operations for the years ended December 31, 2017, 2016 and 2015.                          

                  

                 

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.

      

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.  

 

    

Segment Descriptions

 

The Company’s segments and their product offerings are summarized below:

 

 

Print

 

We are the largest producer of books in the U.S. and one of the largest producers of catalogs, magazines and retail inserts in North America.  The Print segment produces magazines, catalogs, retail inserts, books, and directories.  The segment also provides supply-chain management, logistics and certain other print-related services, including mail-list management and sortation, e-book formatting and distribution.  The segment has operations in the U.S., Europe and Mexico.  The Print segment is divided into the magazines, catalogs and retail inserts, book, Europe and directories reporting units.

 

 

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.

 

 

Corporate

 

Corporate consists of unallocated selling, general and administrative activities and associated expenses including, in part, executive, legal, finance, communications, certain facility costs and LIFO inventory provisions.  In addition, certain costs and earnings of employee benefit plans, such as pension benefit plan income and share-based compensation, are included in Corporate and not allocated to the operating segments.

 

 

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Business Combinations

 

The following table lists the Company’s acquisitions since the beginning of 2017:

 

 

For further information on the above acquisitions, see Note 2, Business Combinations, to the condensed consolidated financial statements.  

  

 

Outlook

 

Competitive Environment

 

According to the January 2018 IBIS World industry report “Printing in the U.S.,” estimated total annual printing industry revenue is approximately $75 billion, of which approximately $12 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 segment 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.  

 

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 resulting in retailer compression.  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.

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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 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. 

 

 

Seasonality

 

Advertising and consumer spending trends affect demand in several of the end-markets served by LSC Communications. Historically, demand for printing of magazines, catalogs, retail inserts, books and office products is higher in the second half of the year, driven by increased advertising pages within magazines, holiday volume in catalogs and retail inserts, and back-to-school demand in books and office products.  These typical seasonal patterns can be impacted by overall trends in the U.S. and world economy.  The Company expects the seasonal impact in 2018 to be in line with historical patterns.

 

 

Raw Materials

 

The primary raw materials we use in our Print segment are paper and ink.  We negotiate with leading 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 print business 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.  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 negotiate with leading suppliers to maximize our purchasing efficiencies and use a wide variety of ink formulations and colors. Variations in the cost and supply of certain ink formulations used in the manufacturing process 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.

 

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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 ink suppliers and 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 balance sheets, statements of operations and cash flows.

 

 

Pension Benefit Plans

 

The funded status of the Company’s pension benefits 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 2018, of which $1 million has been contributed during three months ended March 31, 2018.  

 

Based on the fair value of assets and the estimated discount rate used to value benefit obligations as of March 31, 2018, the Company estimates the unfunded status of the pension benefit plans would approximate $140 million compared to $187 million at December 31, 2017.

 

See Note 12, Retirement Plans, for more information on the Company’s pension benefit plans.

 

 

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, 2017, with the exception of revenue recognition.  During the first quarter of 2018, the Company adopted ASU 2014-09 “Revenue from Contracts with Customers (Topic 606) (“ASC 606”, or the “standard”), as discussed in the Company’s annual report on Form 10-K.  The adoption of ASC 606 did not have a material impact on the Company’s financial position or results of operations.  See Note 3, Revenue Recognition, for more information. 

 

 

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.

 

 

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Results of Operations for the Three Months Ended March 31, 2018 as Compared to the Three Months Ended March 31, 2017

 

The following table shows the results of operations for the three months ended March 31, 2018 and 2017, which reflects the results of the acquired businesses from the relevant acquisition dates:

 

 

Condensed Consolidated Results            

 

Net sales for the three months ended March 31, 2018 were $929 million, an increase of $108 million, or 13.2%, compared to the three months ended March 31, 2017.  Net sales were impacted by:

 

 

Additionally, on a pro forma basis, the Company’s net sales decreased by approximately $14 million or 1.5% (see Note 2, Business Combinations, to the condensed consolidated financial statements).    

 

Total cost of sales increased $116 million, or 16.8%, for the three months ended March 31, 2018 compared to the three months ended March 31, 2017, primarily due to the cost of sales incurred by the 2017 acquired companies, an $11 million increase due to changes in foreign exchange rates, primarily in Polish Zloty, increased costs of raw materials, and the mix of volume.

 

As a percentage of net sales, cost of sales increased from 84.3% for the three months ended March 31, 2017 to 87.0% for the three months ended March 31, 2018 primarily due to price pressures and increased costs of raw materials.

 

Selling, general and administrative expenses increased $7 million to $83 million for the three months ended March 31, 2018 compared to the three months ended March 31, 2017, primarily driven by expenses incurred by the 2017 acquired companies, partially offset by lower separation-related expenses.            

 

As a percentage of net sales, selling, general and administrative expenses decreased from 9.3% for the three months ended March 31, 2017 to 8.9% for the three months ended March 31, 2018 primarily due to cost control initiatives.

 

For the three months ended March 31, 2018, the Company recorded restructuring, impairment and other charges of $6 million. The charges primarily included:  

 

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For the three months ended March 31, 2017, the Company recorded restructuring, impairment and other charges of $6 million. The charges included:

 

 

Depreciation and amortization decreased $2 million to $38 million for the three months ended March 31, 2018 compared to the three months ended March 31, 2017 due to decreased capital spending in recent years compared to historical levels, partially offset by depreciation and amortization incurred by the 2017 acquired companies.

 

 

Net interest expense increased by $3 million for the three months ended March 31, 2018 compared to the three months ended March 31, 2017 due to increased borrowings on the Company’s $400 million senior secured revolving credit facility (the “Revolving Credit Facility”).  The investment and other (income)-net balance in both years primarily relates to the Company’s pension benefit plans.      

 

  

The effective income tax rate for the three months ended March 31, 2018 was 24.0% compared to 148.1% for the three months ended March 31, 2017.  The effective income tax rate for the three months ended March 31, 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%.  The effective income tax rate for the three months ended March 31, 2017 reflects the unfavorable impact associated with share-based compensation awards that lapsed in 2017.     

  

 

Information by Segment

 

The following tables summarize net sales, income (loss) from operations and certain items impacting comparability within each of the reportable segments and Corporate.  The descriptions of the reporting units generally reflect the primary products provided by each reporting unit.  

 

 

Print

 

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Net sales for the Print segment for the three months ended March 31, 2018 were $806 million, an increase of $96 million, or 13.5%, compared to the three months ended March 31, 2017.  Print segment net sales were impacted as follows by changes in the net sales of its reporting units:    

 

  

The decrease in Print segment income from operations and operating margins was primarily due to mix of volume and price pressures.

  

 

Office Products

 

  

Net sales for the Office Products segment for the three months ended March 31, 2018 were $123 million, an increase of $12 million, or 10.8%, compared to the three months ended March 31, 2017, largely as a result of the acquisitions in 2017, partially offset by lower volume in filing and form products.

 

The decrease in Office Products segment income from operations and operating margins was due to increased costs of raw materials and lower mix of branded products compared to private label products.

 

 

Corporate

 

The following table summarizes unallocated operating expenses and certain items impacting comparability within the activities presented as Corporate:

 

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Corporate operating expenses for the three months ended March 31, 2018 were $10 million, as compared to $14 million for the three months ended March 31, 2017.  

  

 

Non-GAAP Measures

 

The Company believes that certain non-GAAP measures, such as Non-GAAP adjusted EBITDA, provide useful information about the Company’s operating results and enhance the overall ability to assess the Company’s financial performance.  The Company uses these measures, together with other measures of performance under GAAP, to compare the relative performance of operations in planning, budgeting and reviewing the performance of its business.  Non-GAAP adjusted EBITDA allows investors to make a more meaningful comparison between the Company’s core business operating results over different periods of time.  The Company believes that Non-GAAP adjusted EBITDA, when viewed with the Company’s results under GAAP and the accompanying reconciliations, provides useful information about the Company’s business without regard to potential distortions.  By eliminating potential differences in results of operations between periods caused by factors such as depreciation and amortization methods and restructuring, impairment and other charges, the Company believes that Non-GAAP adjusted EBITDA can provide a useful additional basis for comparing the current performance of the underlying operations being evaluated.

 

Non-GAAP adjusted EBITDA is not presented in accordance with GAAP and has important limitations as an analytical tool.  Readers should not consider these measures in isolation or as a substitute for analysis of our results as reported under GAAP.  In addition, these measures are defined differently by different companies in our industry and, accordingly, such measures may not be comparable to similarly-titled measures of other companies.

 

Non-GAAP adjusted EBITDA excludes restructuring, impairment and other charges-net, purchase accounting adjustments, acquisition-related expenses, and separation-related expenses.  A reconciliation of GAAP net income to non-GAAP adjusted EBITDA for the three months ended March 31, 2018 and 2017 is presented in the following table:

 

 

The adjustments to arrive at non-GAAP adjusted EBITDA are summarized below:

 

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LIQUIDITY AND CAPITAL RESOURCES

 

The Company believes it has sufficient liquidity to support its ongoing operations and to invest in future growth to create value for its stockholders. Operating cash flows and the Company’s 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, distributions to stockholders that may be approved by the Board of Directors, acquisitions, capital expenditures necessary to support productivity improvement and growth, and completion of restructuring programs.

 

The following sections describe the Company’s cash flows for the three months ended March 31, 2018 and 2017.

 

 

                

Cash Flows from Operating Activities

 

Operating cash inflows are largely attributable to sales of the Company’s products.  Operating cash outflows are largely attributable to recurring expenditures for raw materials, labor, rent, interest, taxes and other operating activities.  

 

Net cash used in operating activities was $24 million for the three months ended March 31, 2018 compared to $64 million provided by operating activities for the same period in 2017.  The decrease in net cash provided by operating activities was driven by the timing of supplier payments and increase in inventories.    

 

 

Cash Flows from Investing Activities  

 

Net cash used in investing activities for the three months ended March 31, 2018 was $19 million compared to $25 million for the same period in 2017.  Significant changes are as follows:

 

 

    

Cash Flows from Financing Activities

 

Net cash provided by financing activities for the three months ended March 31, 2018 was $31 million compared to $48 million used in financing activities for the same period in 2017.  Significant changes are as follows:

 

 

 

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Dividends

 

Cash dividends declared and paid to stockholders during the three months ended March 31, 2018 totaled $9 million.  On April 4, 2018, the Board of Directors declared a quarterly cash dividend of $0.26 per common share, payable on June 4, 2018 to stockholders of record on May 15, 2018.      

 

The Credit Agreement generally allows annual dividend payments of up to $50 million in aggregate, though additional dividends may be allowed subject to certain conditions.  The timing, declaration, amount and payment of any future dividends to the Company’s stockholders falls within the discretion of the Company’s Board of Directors.  The decisions of the Company’s Board of Directors regarding the payment of future dividends depends on many factors, including but not limited to the Company’s financial condition, future prospects, earnings, capital requirements and debt service obligations, as well as legal requirements, regulatory constraints, industry practice and other factors that the Board of Directors may deem relevant. In addition, the terms of the agreements governing the Company’s existing debt or debt that the Company may incur in the future may limit or prohibit the payment of dividends.  There can be no assurance that the Company will continue to pay a dividend.   

 

 

LIQUIDITY

 

Cash and cash equivalents were $23 million and $34 million as of March 31, 2018 and December 31, 2017, 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 March 31, 2018 included $6 million in the U.S. and $17 million at international locations.

 

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 March 31, 2018, $62 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”).  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 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 on the Term Loan Facility before and after amendment include:

 

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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 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.    

 

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 Company (other than customary administrative fees).  

 

On February 2, 2017, the Company paid in advance the full amount of required amortization payments, $50 million, for the year ended December 31, 2017 for the Term Loan Facility.

 

 

Additional Debt Issuances Information

 

There were $130 million of borrowings under the Revolving Credit Facility as of March 31, 2018.  Based on the Company’s condensed consolidated statements of operations for the three months ended March 31, 2018 and existing debt, the Company would have had the ability to utilize the entire $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 $130 million in borrowings and $53 million related to outstanding letters of credit. 

    

The current availability under the Revolving Credit Facility and net availability as of March 31, 2018 is shown in the table below:    

  

  

The Company was in compliance with its debt covenants as of March 31, 2018, and expects to remain in compliance based on management’s estimates of operating and financial results for 2018 and the foreseeable future.  However, declines in market and economic conditions or demand for certain of the Company’s products could impact the Company’s ability to remain in compliance with its debt covenants in future periods. As of March 31, 2018, 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.

 

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 March 31, 2018, the Company had $53 million in outstanding letters of credit issued under the Revolving Credit Facility, all of which reduced the availability thereunder.  As of March 31, 2018, the Company also had $16 million in other uncommitted credit facilities, all of which were outside the U.S. (the “Other Facilities”).  As of March 31, 2018, letters of credit and guarantees of a de minimis amount were issued and reduced availability under the Other Facilities.

 

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The Company’s debt maturities as of March 31, 2018 are shown in the following table:

 

 

 

The Company expects to complete the acquisition of RRD’s Print Logistics business in Q3 2018.   The total purchase price is expected to be funded with a combination of cash on hand and drawings under the Revolving Credit Facility.  

 

Additionally, the Company expects to complete the sale of its retail offset printing facilities, which are included in the Company’s magazines, catalogs and retail inserts reporting unit, to Trend Offset Printing in Q2 2018.    

 

  

Other

 

On February 15, 2018, the Company’s Board of Directors approved an initial share repurchase authorization of up to $20 million of common stock under which the Company may buy back LSC Communications’ shares at its discretion from February 15, 2018 through August 15, 2019.  The Company expects to fund the repurchases, if any, from a combination of cash on hand, future cash flows and borrowings under its Revolving Credit Facility.  As of March 31, 2018, no shares had been repurchased under this authorization.

 

 

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 March 31, 2018, the Company’s variable-interest borrowings were $430 million, or approximately 48.8%, 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 March 31, 2018 by approximately $16 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, Mexican peso and Polish Zloty. 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 8, Commitments and Contingencies, to the condensed consolidated financial statements.

 

 

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New Accounting Pronouncements and Pending Accounting Standards

 

Recently issued accounting standards and their estimated effect on the Company’s condensed consolidated financial statements are also described in Note 17, New Accounting Pronouncements, and throughout the notes to the condensed consolidated financial statements.  

 

 

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.

 

These statements may include, or be preceded or followed by, the words  “anticipates,” “estimates,” “expects,” “projects,” “forecasts,” “intends,” “plans,” “continues,” “believes,” “may,” “will,” “goals” or variations of such words and similar expressions.  Examples of forward-looking statements include, but are not limited to, statements, beliefs and expectations regarding our business strategies, market potential, future financial performance, dividends, costs to be incurred in connection with the separation, 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, including those factors disclosed in “Item 1A Risk Factors” in section Part I in the Company’s annual report on Form 10-K for the year ended December 31, 2017, as filed with the SEC on February 22, 2018, that could cause our actual results to differ materially from those indicated in any such forward-looking statements. These factors include, but are not limited to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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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.

 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

See Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations of Part I under “Management of Market Risk.”  There have been no significant changes to the Company’s market risk since December 31, 2017.  For a discussion of exposure to market risk, refer to Part II, Item 7A Quantitative and Qualitative Disclosures about Market Risk disclosed in the Company’s annual report on Form 10-K for the year ended December 31, 2017, as filed with the SEC on February 22, 2018.        

    

 

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ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

As required by Rule 13a-15(b) and Rule 15d-15(e) of the Securities Exchange Act of 1934, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining effective disclosure controls and procedures, as defined under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934.  As of March 31, 2018 an evaluation was performed under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that disclosure controls and procedures as of March 31, 2018 were effective in ensuring information required to be disclosed in the Company’s SEC reports was recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information was accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.  

 

 

Changes in Internal Control over Financial Reporting

 

During the quarter ended March 31, 2018, the Company implemented a new payroll system, which was considered a change in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act).  There were no other changes in internal control over financial reporting during the three months ended March 31, 2018.        

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PART II – OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

For a discussion of certain litigation involving the Company, see Note 8, Commitments and Contingencies, to the condensed consolidated financial statements.    

 

 

ITEM 1A. RISK FACTORS  

 

There have been no material changes to the risk factors disclosed in the Company’s annual report on Form 10-K for the year ended December 31, 2017, as filed with the SEC on February 22, 2018.        

 

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

Issuer Purchases of Equity Securities

 

 

 

On February 15, 2018, the Company’s Board of Directors approved an initial share repurchase authorization of up to $20 million of common stock under which the Company may buy back LSC Communications’ shares at its discretion from February 15, 2018 through August 15, 2019.  The Company expects to fund the repurchases, if any, from a combination of cash on hand, cash flow and borrowings under its $400 million Revolving Credit Facility.  As of March 31, 2018, no shares had been repurchased under this authorization.  

 

 

  

Dividends

 

The Credit Agreement generally allows annual dividend payments of up to $50 million in aggregate, though additional dividends may be allowed subject to certain conditions.  The decisions of the Company’s Board of Directors regarding the payment of future dividends depends on many factors, including but not limited to the Company’s financial condition, future prospects, earnings, capital requirements and debt service obligations, as well as legal requirements, regulatory constraints, industry practice and other factors that the Board of Directors may deem relevant.          

      

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable    

    

 

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ITEM 6. EXHIBITS    

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

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___________________________

 

* Management contract or compensatory plan or arrangement

 

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Date: May 3, 2018             

  

 

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