During the three months ended March 31, 2018, the Company recorded $9 million in equity adjustments as a result of the adoption of
Accounting Standards Update No. 2014-09 “Revenue from Contracts with Customers (Topic 606)” (“ASC 606”)
.
There were dividends declared per common share of $0.26 during each of the three months ended March 31, 2019 and 2018.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three Months Ended March 31, 2019 and 2018
(tabular amounts in millions, except per share data)
Note 1.
Overview and B
asis of Presentation
Description of Business
The principal business of LSC Communications, Inc., a Delaware corporation, and its direct or indirect wholly-owned subsidiaries (“LSC Communications,” “the Company,” “we,” “our” and “us”) is to offer a broad scope of traditional and digital print, print-related services and office products. The Company serves the needs of publishers, merchandisers and retailers worldwide with a service offering that includes
e-services, logistics, warehousing and fulfillment and supply chain management services. The Company utilizes a broad portfolio of technology capabilities coupled with consultative attention to clients' needs to increase speed to market, reduce costs, provide postal savings to customers and improve efficiencies.
The Company prints magazines, catalogs, books and directories, and its office products offerings include filing products, envelopes, note-taking products, binder products, and forms.
Merger Agreement
On October 30, 2018, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Quad/Graphics, Inc. (“Quad/Graphics”), and QLC Merger Sub, Inc., a direct, wholly-owned subsidiary of Quad/Graphics (“Merger Sub”). Pursuant to the Merger Agreement, subject to the terms and conditions therein, Merger Sub will merge with and into the Company (the “Merger”), with the Company continuing as the surviving corporation. Subject to the terms and conditions set forth in the Merger Agreement, at the effective time of the Merger (the “Effective Time”), each share of the Company’s common stock issued and outstanding immediately prior to the Effective Time, will be converted into the right to receive 0.625 shares of class A common stock of Quad/Graphics, without interest and subject to adjustment as provided in the Merger Agreement.
The Company and Quad/Graphics have made customary representations, warranties and covenants in the Merger Agreement. Subject to certain exceptions outlined in the Merger Agreement, the Company has agreed to covenants relating to the Company’s business during the period between the execution of the Merger Agreement and the consummation of the Merger, including restrictions on its ability to issue any shares of its capital stock, repurchase any shares of its capital stock and incur additional indebtedness outside the ordinary course of business. The Merger Agreement allows the Company to continue paying a regular quarterly dividend up to $0.26 per share.
On February 25, 2019, Quad/Graphics announced that its shareholders had voted to approve the issuance of Quad/Graphics’ class A common stock in the Merger on February 22, 2019.
On February 22, 2019, the Company held a Special Meeting of Stockholders in connection with the Merger. At the special meeting, the Company’s stockholders voted to adopt the Merger Agreement.
The Company and Quad/Graphics filed notification and report forms in connection with the transactions contemplated by the Merger Agreement with the U.S. Department of Justice (the “DOJ”) and the U.S. Federal Trade Commission pursuant to the Hart-Scott-Rodino Antitrust Improvement Act of 1976, as amended (the “HSR Act”) on November 13, 2018. On December 13, 2018, the Company and Quad/Graphics each received a request for additional information and documentary material (the “Second Request”) from the DOJ in connection with the DOJ’s review of the transactions contemplated by the Merger Agreement.
The HSR Act provides that the issuance of the Second Request extends the waiting period under the HSR Act until either 30 days after both the Company and Quad/Graphics have substantially complied with the Second Request or such later time as agreed to by the parties with the DOJ, unless the waiting period is terminated earlier by the DOJ. The Company continues to expect the Merger to be consummated in mid-2019.
Consummation of the Merger remains subject to the expiration of the waiting period under the HSR Act and other required regulatory approvals, and the satisfaction or waiver of the other closing conditions specified in the Merger Agreement.
8
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three Months Ended March 31, 2019 and 2018
(tabular amounts in millions, except per share data)
Basis of Presentation
The condensed consolidated financial statements include the balance sheets, statements of operations and cash flows in conformity with accounting principles generally accepted in the United States (“GAAP”). All intercompany transactions have been eliminated in consolidation. These unaudited condensed consolidated interim financial statements include estimates and assumptions of management that affect the amounts reported in the condensed consolidated financial statements. Actual results could differ from these estimates.
During the third quarter of 2018, management changed the Company’s reportable segments and reporting units. Consequently, prior year amounts were restated to conform to the new segment structure. Refer to Note 15,
Segment Information
, for more information.
Note 2. Business Combination and Disposition
2018 Acquisition
On July 2, 2018, the Company completed the acquisition of R. R. Donnelley & Sons Company’s (“RRD”) Print Logistics business (“Print Logistics”), an integrated logistics services provider to the print industry with an expansive distribution network. The acquisition enhanced the Company’s logistics service offering and is included in the Magazines, Catalogs and Logistics segment. The original total purchase price was $58 million in cash, which was reduced to $52 million as a result of a $6 million net working capital settlement in the fourth quarter of 2018. Of the final total purchase price, $21 million was recorded in goodwill related to this acquisition.
2018 Disposition
On September 28, 2018, the Company completed the sale of its European printing business, which included web offset manufacturing facilities, a logistics and warehousing site and a location dedicated to premedia services, for proceeds of $47 million. The Company recorded a $25 million non-cash provision primarily for the write-off of a deferred tax asset associated with the disposition. The European printing business was included in the Europe segment, which was disclosed as part of the Other segment grouping.
Acquisition Information
The acquisition of Print Logistics was recorded by allocating the cost of the acquisition to the assets acquired, including other intangible assets, based on their estimated fair values at the acquisition date. The excess of the cost of the acquisition over the net amounts assigned to the fair value of the assets acquired was recorded in goodwill. The goodwill is primarily attributable to the synergies expected to arise as a result of the acquisition.
The tax deductible goodwill related to Print Logistics was $25 million.
The purchase price allocation for Print Logistics was final as of December 31, 2018. There were no changes to the purchase price allocation for the acquisition as of March 31, 2019 compared to the disclosed purchase price allocation in the Company’s annual report on Form 10-K for the year ended December 31, 2018.
The final purchase price allocation for Print Logistics was as follows:
9
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three Months Ended March 31, 2019 and 2018
(tabular amounts in millions, except per share data)
Accounts Receivable
|
|
$
|
40
|
|
Prepaid expenses and other current assets
|
|
|
1
|
|
Property, plant and equipment
|
|
|
8
|
|
Other intangible assets
|
|
|
17
|
|
Goodwill
|
|
|
21
|
|
Accounts payable and accrued liabilities
|
|
|
(35
|
)
|
Purchase price and net cash paid
|
|
$
|
52
|
|
The fair values of goodwill, other intangible assets and property, plant and equipment associated with Print Logistics were determined to be Level 3 under the fair value hierarchy, which included discounted cash flow analyses and comparable marketplace fair value data. Property, plant and equipment values were estimated using either the cost or market approach, if a secondhand market existed. The following table presents the fair value, valuation techniques and related unobservable inputs for these Level 3 measurements associated with Print Logistics:
|
|
Fair Value
|
|
|
Valuation Technique
|
|
Unobservable Input
|
|
Value
|
|
Customer relationships
|
|
$
|
17
|
|
|
Multi-period excess earnings method
|
|
Existing customer growth rate
|
|
(3.5%)
|
|
|
|
|
|
|
|
|
|
Attrition rate
|
|
7.5%
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
18.0%
|
|
For the three months ended March 31, 2019 and 2018, the Company recorded a de minimis amount and $1 million of acquisition-related expenses, respectively, associated with the completed and contemplated acquisitions within selling, general and administrative expenses in the condensed consolidated statements of operations.
Pro forma results
The following unaudited pro forma financial information for the three months ended March 31, 2019 and 2018 presents the condensed consolidated statements of operations of the Company and the acquisition of Print Logistics, as if the acquisition had occurred as of January 1 of the year prior to the acquisition.
The unaudited pro forma financial information is not intended to represent or be indicative of the Company’s condensed consolidated statements of operations that would have been reported had these acquisitions been completed as of the beginning of the period presented and should not be taken as indicative of the Company’s future condensed consolidated statements of operations. Pro forma adjustments are tax-effected at the applicable statutory tax rates.
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Net sales
|
|
$
|
845
|
|
|
$
|
973
|
|
Net (loss)
|
|
|
(126
|
)
|
|
|
(12
|
)
|
The following table outlines unaudited pro forma financial information for the three months ended March 31, 2019 and 2018:
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Amortization of purchased intangibles
|
|
$
|
5
|
|
|
$
|
5
|
|
There were no nonrecurring pro forma adjustments affecting net (loss) for the three months ended March 31, 2019 and 2018.
10
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three Months Ended March 31, 2019 and 2018
(tabular amounts in millions, except per share data)
Note 3. Revenue Recognition
Disaggregated Revenue
The following tables provide information about disaggregated revenue by major products/service lines and timing of revenue recognition, and include a reconciliation of the disaggregated revenue with reportable segments for the three months ended March 31, 2019 and 2018.
|
|
Three Months Ended
|
|
|
|
March 31, 2019
|
|
|
|
Magazines,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Catalogs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
|
|
|
|
|
|
|
Office
|
|
|
|
|
|
|
|
|
|
|
|
Logistics
|
|
|
Book
|
|
|
Products
|
|
|
Other
|
|
|
Total
|
|
Major Products / Service Lines
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book
(a)
|
|
$
|
—
|
|
|
$
|
260
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Magazines and Catalogs
(b)
|
|
$
|
319
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
44
|
|
|
$
|
363
|
|
North America
|
|
|
319
|
|
|
|
—
|
|
|
|
—
|
|
|
|
44
|
|
|
|
363
|
|
Europe
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Logistics
|
|
$
|
84
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Directories
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
19
|
|
|
$
|
19
|
|
North America
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
19
|
|
|
|
19
|
|
Europe
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office Products
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
119
|
|
|
$
|
—
|
|
|
$
|
119
|
|
Total
|
|
$
|
403
|
|
|
$
|
260
|
|
|
$
|
119
|
|
|
$
|
63
|
|
|
$
|
845
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Timing of Revenue Recognition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products and services transferred at a point in
time
|
|
$
|
288
|
|
|
$
|
228
|
|
|
$
|
119
|
|
|
$
|
43
|
|
|
$
|
678
|
|
Products and services transferred over time
|
|
|
115
|
|
|
|
32
|
|
|
|
—
|
|
|
|
20
|
|
|
|
167
|
|
Total
|
|
$
|
403
|
|
|
$
|
260
|
|
|
$
|
119
|
|
|
$
|
63
|
|
|
$
|
845
|
|
11
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three Months Ended March 31, 2019 and 2018
(tabular amounts in millions, except per share data)
|
|
Three Months Ended
|
|
|
|
March 31, 2018
|
|
|
|
Magazines,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Catalogs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
|
|
|
|
|
|
|
Office
|
|
|
|
|
|
|
|
|
|
|
|
Logistics
|
|
|
Book
|
|
|
Products
|
|
|
Other
|
|
|
Total
|
|
Major Products / Service Lines
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book
(a)
|
|
$
|
—
|
|
|
$
|
249
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Magazines and Catalogs
(b)
|
|
$
|
400
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
99
|
|
|
$
|
499
|
|
North America
|
|
|
400
|
|
|
|
—
|
|
|
|
—
|
|
|
|
41
|
|
|
|
441
|
|
Europe
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
58
|
|
|
|
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Logistics
|
|
$
|
27
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Directories
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
31
|
|
|
$
|
31
|
|
North America
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
27
|
|
|
|
27
|
|
Europe
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office Products
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
123
|
|
|
$
|
—
|
|
|
$
|
123
|
|
Total
|
|
$
|
427
|
|
|
$
|
249
|
|
|
$
|
123
|
|
|
$
|
130
|
|
|
$
|
929
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Timing of Revenue Recognition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products and services transferred at a point in
time
|
|
$
|
369
|
|
|
$
|
221
|
|
|
$
|
123
|
|
|
$
|
112
|
|
|
$
|
825
|
|
Products and services transferred over time
|
|
|
58
|
|
|
|
28
|
|
|
|
—
|
|
|
|
18
|
|
|
|
104
|
|
Total
|
|
$
|
427
|
|
|
$
|
249
|
|
|
$
|
123
|
|
|
$
|
130
|
|
|
$
|
929
|
|
|
(a)
|
Includes e-book formatting and supply chain management associated with book production
|
|
(b)
|
Includes premedia and co-mail
|
Contract Balances
The following table provides changes in contract assets and liabilities during the three months ended March 31, 2019:
|
|
Short-Term Contract Assets
|
|
|
Long-Term
Contract Assets
|
|
|
Contract Liabilities
|
|
Beginning Balance, January 1, 2019
|
|
$
|
44
|
|
|
$
|
30
|
|
|
$
|
16
|
|
Additions to unbilled accounts receivable
|
|
|
31
|
|
|
|
—
|
|
|
|
—
|
|
Unbilled accounts receivable recognized in
trade receivables
|
|
|
(29
|
)
|
|
|
—
|
|
|
|
—
|
|
Amortization of contract acquisition costs
|
|
|
—
|
|
|
|
(3
|
)
|
|
|
—
|
|
Revenue recognized that was included in
contract liabilities as of January 1, 2019
|
|
|
—
|
|
|
|
—
|
|
|
|
(8
|
)
|
Increases due to cash received
|
|
|
—
|
|
|
|
—
|
|
|
|
6
|
|
Ending Balance, March 31, 2019
|
|
$
|
46
|
|
|
$
|
27
|
|
|
$
|
14
|
|
The trade receivables balance was $487 million and $488 million as of March 31, 2019 and December 31, 2018, respectively.
12
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three Months Ended March 31, 2019 and 2018
(tabular amounts in millions, except per share data)
Accounts Receivable
Transactions affecting the allowances for doubtful accounts receivable balance during the three months ended March 31, 2019 were as follows:
|
|
March 31, 2019
|
|
Balance, beginning of year
|
|
$
|
14
|
|
Provisions charged to expense
|
|
|
3
|
|
Write-offs and other
|
|
|
(1
|
)
|
Balance, end of year
|
|
$
|
16
|
|
Note 4. Leases
Financial Statement Impact of Adopting Accounting Standards Update No. 2016-02 “Leases (Topic 842)” (“ASU 2016-02” or “ASC 842”)
The Company adopted ASU 2016-02 on January 1, 2019 using the modified retrospective adoption method. The reported results for 2019 reflect the adoption of ASC 842 guidance while the reported results for 2018 were prepared and continue to be reported under the guidance of ASC 840, Leases, referred to herein as “previous guidance.”
In adopting ASC 842, the Company applied certain available practical expedients, including electing to combine lease and non-lease components of a contract and electing to apply the practical expedient “package” permitted under ASU 2016-02. This election allowed the Company to use the lease classification (operating or finance) previously determined at the start of a lease contract for any expired or existing leases as of the date of adoption.
The Company performed an analysis of all lease contracts existing as of January 1, 2019. Upon adoption of ASC 842, the Company added $206 million of right-of-use (“ROU”) assets and lease liabilities to its balance sheet related to operating leases. There were no changes to assets or liabilities relating to finance leases.
Based upon the balances that existed as of December 31, 2018, the Company recorded adjustments to the following accounts as of January 1, 2019:
|
|
As Reported
|
|
|
Adjustments
|
|
|
Adjusted
|
|
|
|
December 31,
2018
|
|
|
Adoption of ASU 2016-02
|
|
|
January 1,
2019
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
ROU assets for operating leases
|
|
$
|
—
|
|
|
$
|
201
|
|
|
$
|
201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued liabilities
(a)
|
|
$
|
199
|
|
|
$
|
(1
|
)
|
|
$
|
198
|
|
Short-term operating lease liabilities
|
|
|
—
|
|
|
|
52
|
|
|
|
52
|
|
Long-term operating lease liabilities
|
|
|
—
|
|
|
|
154
|
|
|
|
154
|
|
Other noncurrent liabilities
(a)
|
|
|
61
|
|
|
|
(4
|
)
|
|
|
57
|
|
|
(a)
|
The total $5 adjustment relates to straight-line rent accruals that were reclassified to ROU assets for operating leases.
|
13
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three Months Ended March 31, 2019 and 2018
(tabular amounts in millions, except per share data)
Accounting Policy
Under ASC 842, the Company determines if a contract contains a lease at the inception of the contract. A contract contains a lease if it conveys to the Company the right to control the use of specified assets. Operating leases are included in ROU assets and in other current liabilities and other non-current liabilities. Finance lease assets are included in property, plant, and equipment, and liabilities are included in short-term and long-term debt. ROU assets and lease liabilities are recognized at the present value of future lease payments. The discount rate used to measure the amount recognized is the Company’s incremental borrowing rate, if an implicit rate is not determinable from the lease contract. Operating lease cost is recognized on a straight-line basis over the term of the lease.
The Company leases land, production facilities, office space, and equipment. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. Further, the Company has elected not to separate lease and non-lease components of contracts for any asset classes, but rather to account for non-lease components together with their related lease components.
For leases that include renewal options that the Company is reasonably certain to exercise, the Company includes the renewal period in its initial classification of the lease. Renewal options range from 1 year to 5 years.
The Company’s variable lease payments do not depend on a published index or rate, and therefore, are expensed as incurred.
The components of total net lease cost were as follows:
|
|
Three Months Ended
|
|
|
|
March 31, 2019
|
|
Operating lease cost
|
|
$
|
17
|
|
Sublease (income)
|
|
|
(2
|
)
|
Variable lease cost
|
|
|
3
|
|
Total net lease cost
|
|
$
|
18
|
|
During the three months ended March 31, 2019, the Company incurred a de minimis amount of finance lease cost, consisting of finance lease ROU asset amortization and interest on finance lease liabilities, and a de minimis amount of cost associated with short-term leases.
Supplemental non-cash information related to leases is included below:
|
|
Three Months Ended
|
|
|
|
March 31, 2019
|
|
ROU assets acquired in exchange for
lease obligations:
|
|
|
|
|
ROU assets
|
|
|
|
|
Operating leases
|
|
$
|
2
|
|
|
|
|
|
|
Lease obligations
|
|
|
|
|
Operating leases
|
|
$
|
2
|
|
During the three months ended March 31, 2019, the Company recorded $16 million of operating cash outflows from operating leases.
During the three months ended March 31, 2019, the Company recorded a de minimis amount of cash flows from financing leases. No finance lease ROU assets or obligations were acquired during the three months ended March 31, 2019.
Supplemental information related to leases is included below:
14
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three Months Ended March 31, 2019 and 2018
(tabular amounts in millions, except per share data)
|
|
March 31, 2019
|
|
Weighted Average Remaining Lease Term (years)
|
|
|
|
|
Operating leases
|
|
|
5.5
|
|
Financing leases
|
|
|
2.4
|
|
|
|
|
|
|
Weighted Average Discount Rate
|
|
|
|
|
Operating leases
|
|
|
8.3
|
%
|
Financing leases
|
|
|
6.7
|
%
|
The annual maturities of lease liabilities as of March 31, 2019 were as follows:
|
|
Operating Leases
|
|
2019
|
|
$
|
44
|
|
2020
|
|
|
51
|
|
2021
|
|
|
43
|
|
2022
|
|
|
34
|
|
2023
|
|
|
24
|
|
2024 & thereafter
|
|
|
47
|
|
Total undiscounted lease payments
|
|
|
243
|
|
Imputed interest
|
|
|
(47
|
)
|
Total lease liabilities
|
|
$
|
196
|
|
During the three months ended March 31, 2019, the Company recorded a de minimis amount of maturities for finance lease liabilities. As of March 31, 2019, the Company has additional operating leases that have not commenced for an undiscounted amount of $9 million. These operating leases will commence during 2019 with lease terms of 4 years to 5 years.
The Company also has land and building subleases for certain locations resulting from the acquisition of businesses or disposition of components. Some of these leases have variable payments, either because payments are structured to follow the head lease (where the Company is the lessee) or because the sublease includes reimbursement for utilities and other expenses. We recognize the rent-related portion of lease payments, including changes based on a published index or rate, on a straight-line basis and the variable portion related to utilities and other expenses in the period incurred. Our subleases have various renewal and termination options whereby the sublease can be renewed for 6 months to 5 years, or the sublease can be terminated by providing 90 days’ notice. Sublessees have full discretion to exercise renewal or termination options.
Note 5. Inventories
The components of the Company’s inventories, net of excess and obsolescence reserves for raw materials and finished goods, at March 31, 2019 and December 31, 2018 were as follows:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Raw materials and manufacturing supplies
|
|
$
|
132
|
|
|
$
|
119
|
|
Work in process
|
|
|
56
|
|
|
|
50
|
|
Finished goods
|
|
|
84
|
|
|
|
80
|
|
Last in, first out reserve
|
|
|
(51
|
)
|
|
|
(52
|
)
|
Total
|
|
$
|
221
|
|
|
$
|
197
|
|
15
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three Months Ended March 31, 2019 and 2018
(tabular amounts in millions, except per share data)
Note
6
. Property, Plant and Equipment
The components of the Company’s property, plant and equipment at March 31, 2019 and December 31, 2018 were as follows:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Land
|
|
$
|
43
|
|
|
$
|
43
|
|
Buildings
|
|
|
712
|
|
|
|
709
|
|
Machinery and equipment
|
|
|
3,614
|
|
|
|
3,759
|
|
|
|
|
4,369
|
|
|
|
4,511
|
|
Less: Accumulated depreciation
|
|
|
(3,867
|
)
|
|
|
(4,003
|
)
|
Total
|
|
$
|
502
|
|
|
$
|
508
|
|
During the three months ended March 31, 2019 and 2018, depreciation expense was
$24 million and $31 million, respectively. Refer to Note 8,
Restructuring, Impairment and Other Charges
, for information on impairment recorded during the three months ended March 31, 2019.
Assets Held for Sale
Primarily as a result of restructuring actions, certain facilities and equipment are considered held for sale. The net book value of assets held for sale was $3 million at March 31, 2019 and December 31, 2018. These assets were included in prepaid expenses and other current assets in the condensed consolidated balance sheets at the lower of their historical net book value or their estimated fair value, less estimated costs to sell.
Note 7. Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill for the three months ended March 31, 2019 were as follows:
|
|
Magazines,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Catalogs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and Logistics
|
|
|
Book
|
|
|
Office Products
|
|
|
Other
|
|
|
Total
|
|
Net book value as of December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
523
|
|
|
$
|
354
|
|
|
$
|
110
|
|
|
$
|
5
|
|
|
$
|
992
|
|
Accumulated impairment losses
|
|
|
(502
|
)
|
|
|
(303
|
)
|
|
|
(79
|
)
|
|
|
(5
|
)
|
|
|
(889
|
)
|
Total
|
|
|
21
|
|
|
|
51
|
|
|
|
31
|
|
|
|
—
|
|
|
|
103
|
|
Net book value as of March 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
523
|
|
|
|
354
|
|
|
|
110
|
|
|
|
5
|
|
|
|
992
|
|
Accumulated impairment losses
|
|
|
(502
|
)
|
|
|
(303
|
)
|
|
|
(79
|
)
|
|
|
(5
|
)
|
|
|
(889
|
)
|
Total
|
|
$
|
21
|
|
|
$
|
51
|
|
|
$
|
31
|
|
|
$
|
—
|
|
|
$
|
103
|
|
The components of other intangible assets at March 31, 2019 and December 31, 2018 were as follows:
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Net Book
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Net Book
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Value
|
|
|
Amount
|
|
|
Amortization
|
|
|
Value
|
|
Customer relationships
|
|
$
|
268
|
|
|
$
|
(141
|
)
|
|
$
|
127
|
|
|
$
|
268
|
|
|
$
|
(137
|
)
|
|
$
|
131
|
|
Trade names
|
|
|
30
|
|
|
|
(7
|
)
|
|
|
23
|
|
|
|
9
|
|
|
|
(6
|
)
|
|
|
3
|
|
Total amortizable other intangible
assets
|
|
|
298
|
|
|
|
(148
|
)
|
|
|
150
|
|
|
|
277
|
|
|
|
(143
|
)
|
|
|
134
|
|
Indefinite-lived trade names
|
|
|
1
|
|
|
|
—
|
|
|
|
1
|
|
|
|
22
|
|
|
|
—
|
|
|
|
22
|
|
Total other intangible assets
|
|
$
|
299
|
|
|
$
|
(148
|
)
|
|
$
|
151
|
|
|
$
|
299
|
|
|
$
|
(143
|
)
|
|
$
|
156
|
|
16
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three Months Ended March 31, 2019 and 2018
(tabular amounts in millions, except per share data)
On January 1, 2019, all of Office Products’ tradenames (net book value of $21 million) were changed from indefinite-lived tradenames to definite-lived tradenames with a useful life of 15 years, as management determined that it was not possible to conclude the tradenames will generate cash flows for an indefinite period of time due to secular industry decline and changes in the usage of branded products.
During each of the three months ended March 31, 2019 and 2018, amortization expense for other intangible assets was $5 million.
The following table outlines the estimated annual amortization expense related to all amortizable intangible assets:
For the year ending December 31,
|
|
Amount
|
|
2019
|
|
$
|
19
|
|
2020
|
|
|
19
|
|
2021
|
|
|
17
|
|
2022
|
|
|
16
|
|
2023
|
|
|
15
|
|
2024 and thereafter
|
|
|
69
|
|
Total
|
|
$
|
155
|
|
Note 8. Restructuring, Impairment and Other Charges
For the three months ended March 31, 2019 and 2018, the Company recorded the following net restructuring, impairment and other charges:
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Employee
|
|
|
Restructuring
|
|
|
Restructuring
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
March 31, 2019
|
|
Terminations
|
|
|
Charges
|
|
|
Charges
|
|
|
Impairment
|
|
|
Charges
|
|
|
Total
|
|
Magazines, Catalogs and Logistics
|
|
$
|
5
|
|
|
$
|
4
|
|
|
$
|
9
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
11
|
|
Book
|
|
|
—
|
|
|
|
1
|
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
Corporate
|
|
|
—
|
|
|
|
1
|
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
Total
|
|
$
|
5
|
|
|
$
|
6
|
|
|
$
|
11
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
13
|
|
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Employee
|
|
|
Restructuring
|
|
|
Restructuring
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
March 31, 2018
|
|
Terminations
|
|
|
Charges
|
|
|
Charges
|
|
|
Impairment
|
|
|
Charges
|
|
|
Total
|
|
Magazines, Catalogs and Logistics
|
|
$
|
3
|
|
|
$
|
2
|
|
|
$
|
5
|
|
|
$
|
(1
|
)
|
|
$
|
—
|
|
|
$
|
4
|
|
Book
|
|
|
—
|
|
|
|
1
|
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
Office Products
|
|
|
1
|
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
Total
|
|
$
|
4
|
|
|
$
|
3
|
|
|
$
|
7
|
|
|
$
|
(1
|
)
|
|
$
|
—
|
|
|
$
|
6
|
|
Restructuring and Impairment Charges
For the three months ended March 31, 2019, the Company incurred charges of $5 million for an aggregate of 240 employees, of whom 16 were terminated as of or prior to March 31, 2019,
primarily related to the closure of one facility in the Magazines, Catalogs and Logistics segment.
The Company incurred net other restructuring charges of $6 million for the three months ended March 31, 2019 primarily due to charges related to facility costs,
as well as costs associated with new revenue opportunities and cost savings initiatives implemented during the quarter. The Company recorded $2
million of net impairment charges related to machinery and equipment associated with facility closings in the Magazines, Catalogs and Logistics segment.
17
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three Months Ended March 31, 2019 and 2018
(tabular amounts in millions, except per share data)
For the three months ended March 31, 2018, the Company incurred employee-related restructuring charges of $4 million for an aggregate of 196 employees, substantially all of whom were terminated as of or prior to March 31, 2019. These charges primarily
related to the closure of one facility in the Magazines, Catalogs and Logistics segment and the reorganization of certain business units. The Company incurred other restructuring charges of $3 million for the three months ended March 31, 2018 for facilit
y 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 durin
g the three months ended March 31, 2018.
Other Charges
For each of the three months ended March 31, 2019 and 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 plan liabilities at March 31, 2019.
The Company’s withdrawal liabilities could be affected by the financial stability of other employers participating in such plans and any decisions by those employers to withdraw from such plans in the future. While it is not possible to quantify the potential impact of future events or circumstances, reductions in other employers’ participation in multiemployer pension plans, including certain plans from which the Company has previously withdrawn, could have a material effect on the Company’s previously estimated withdrawal liabilities and condensed consolidated balance sheets, statements of operations and cash flows.
Restructuring Reserve
The restructuring reserve as of December 31, 2018 and March 31, 2019, and changes during the three months ended March 31, 2019 were as follows:
|
|
December 31,
|
|
|
Restructuring
|
|
|
|
|
|
|
Cash
|
|
|
March 31,
|
|
|
|
2018
|
|
|
Charges
|
|
|
Other
|
|
|
Paid
|
|
|
2019
|
|
Employee terminations
|
|
$
|
8
|
|
|
$
|
5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
13
|
|
Multiemployer pension plan withdrawal
obligations
|
|
|
32
|
|
|
|
1
|
|
|
|
—
|
|
|
|
(2
|
)
|
|
|
31
|
|
Other
|
|
|
1
|
|
|
|
5
|
|
|
|
—
|
|
|
|
(2
|
)
|
|
|
4
|
|
Total
|
|
$
|
41
|
|
|
$
|
11
|
|
|
$
|
—
|
|
|
$
|
(4
|
)
|
|
$
|
48
|
|
The current portion of restructuring reserves of $23 million at March 31, 2019 was included in accrued liabilities, while the long-term portion of $25 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, 2019.
The Company anticipates that payments associated with the employee terminations reflected in the above table will be substantially completed by March 31, 2020.
Payments on all of the Company’s multiemployer pension plan withdrawal obligations are scheduled to be completed by 2034. Changes based on uncertainties in these estimated withdrawal obligations could affect the ultimate charges related to multiemployer pension plan withdrawal obligations.
The restructuring liabilities classified as “other” consisted of other facility closing costs.
18
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three Months Ended March 31, 2019 and 2018
(tabular amounts in millions, except per share data)
Note
9
. Commitments and Contingencies
The Company is subject to laws and regulations relating to the protection of the environment. The Company accrues for expenses associated with environmental remediation obligations when such amounts are probable and can be reasonably estimated. Such accruals are adjusted as new information develops or circumstances change and are generally not discounted. The Company has been designated as a potentially responsible party or has received claims in ten active federal and state Superfund and other multiparty remediation sites. In addition to these sites, the Company may also have the obligation to remediate 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 10. Debt
The Company’s debt at March 31, 2019 and December 31, 2018 consisted of the following:
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
Borrowings under the Revolving Credit Facility
|
|
$
|
133
|
|
|
$
|
64
|
|
Term Loan Facility due September 30, 2022
(a
)
|
|
|
249
|
|
|
|
260
|
|
8.75% Senior Secured Notes due October 15, 2023
|
|
|
450
|
|
|
|
450
|
|
Capital lease and other obligations
|
|
|
2
|
|
|
|
4
|
|
Unamortized debt issuance costs
|
|
|
(10
|
)
|
|
|
(11
|
)
|
Total debt
|
|
|
824
|
|
|
|
767
|
|
Less: current portion
|
|
|
(175
|
)
|
|
|
(108
|
)
|
Long-term debt
|
|
$
|
649
|
|
|
$
|
659
|
|
|
(a)
|
The borrowings under the Term Loan Facility are subject to a variable interest rate. As of March 31, 2019 and December 31, 2018, the interest rate was 8.00% and 8.02%, respectively.
|
__________________________________
On September 30, 2016, the Company issued $450 million of Senior Secured Notes (the “Senior Notes”).
On September 30, 2016 the Company entered into a credit agreement (the “Credit Agreement”) that provides for (i) a senior secured term loan B facility in an aggregate principal amount of $375 million (the “Term Loan Facility”) and (ii) a senior secured revolving credit facility in an aggregate principal amount of $400 million (the “Revolving Credit Facility”). The debt issuance costs and original issue discount are being amortized over the life of the facilities using the effective interest method.
19
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three Months Ended March 31, 2019 and 2018
(tabular amounts in millions, except per share data)
The Credit Agreement is subject to a number of covenants, including, but not limited to, a minimum Interest Coverage Ratio and a Consolidated Leverage Ratio, as defined in and calculated pursuant
to the Credit Agreement, that, in part, restrict the Company’s ability to incur additional indebtedness, create liens, engage in mergers and consolidations, make restricted payments and dispose of certain assets. The Credit Agreement generally allows ann
ual dividend payments of up to
$50
million in
the
aggregate, though additional dividends may be allowed subject to certain conditions. Each of these covenants is subject to important exceptions and qualifications.
Credit Agreement
On December 20, 2018, the Company amended the Credit Agreement to, among other things, defer certain changes to the minimum Interest Coverage Ratio and the maximum Consolidated Leverage Ratio. As a result, the maximum Consolidated Leverage Ratio will be reduced to 3.00 to 1.00 with respect to any fiscal quarter ending on or after March 31, 2020, as opposed to March 31, 2019, as originally contemplated in the Credit Agreement. The minimum Interest Coverage Ratio will be increased to 3.50 to 1.00 with respect to any test period ending on or after March 31, 2020, as opposed to March 31, 2019, as originally contemplated in the Credit Agreement. Other terms, including the outstanding principal, maturity date and other debt covenants remain the same.
Additional Debt Issuances Information
The fair values of the Senior Notes and Term Loan Facility that were determined using the market approach based upon interest rates available to the Company for borrowings with similar terms and maturities, were determined to be Level 2 under the fair value hierarchy. The fair value of the Company’s debt was greater than its book value by approximately $30 million and $22 million at March 31, 2019 and December 31, 2018, respectively.
There were $133 million and $64 million of borrowings under the Revolving Credit Facility as of March 31, 2019 and December 31, 2018, respectively. The weighted-average interest rate on borrowings under the Company’s Revolving Credit Facility was 5.76% during the three months ended March 31, 2019.
There were $19 million and $20 million of net interest expense during the three months ended March 31, 2019 and 2018, respectively.
Note 11. Earnings Per Share
During the three months ended March 31, 2019 and 2018
, 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, restricted stock units (“RSUs”), and performance share units (“PSUs”).
20
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three Months Ended March 31, 2019 and 2018
(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:
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Net (loss) per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(3.79
|
)
|
|
$
|
(0.32
|
)
|
Diluted
|
|
$
|
(3.79
|
)
|
|
$
|
(0.32
|
)
|
Numerator:
|
|
|
|
|
|
|
|
|
Net (loss)
|
|
$
|
(126
|
)
|
|
$
|
(11
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average number of common shares
outstanding
|
|
|
33.3
|
|
|
|
34.7
|
|
Dilutive options and awards
|
|
|
—
|
|
|
|
—
|
|
Diluted weighted average number of common shares
outstanding
|
|
|
33.3
|
|
|
|
34.7
|
|
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, 2019 and December 31, 2018. The assets and certain obligations of the defined benefit pension plans includes plans qualified under Section 401(a) of the Internal Revenue Code of 1986, as amended (the “U.S. Qualified Plan”) and related non-qualified benefits (the “Non-Qualified Plan”).
The components of the estimated net pension loss (income) for the three months ended March 31, 2019 and 2018 were as follows:
|
|
Three Months Ended
|
|
|
|
March 31, 2019
|
|
|
|
Qualified
|
|
|
Non-Qualified
& International
|
|
|
Total
|
|
Interest cost
|
|
$
|
20
|
|
|
$
|
1
|
|
|
$
|
21
|
|
Expected return on plan assets
|
|
|
(33
|
)
|
|
|
—
|
|
|
|
(33
|
)
|
Amortization of actuarial loss
|
|
|
3
|
|
|
|
—
|
|
|
|
3
|
|
Settlement of retirement obligations
|
|
|
135
|
|
|
|
—
|
|
|
|
135
|
|
Net periodic benefit loss
|
|
$
|
125
|
|
|
$
|
1
|
|
|
$
|
126
|
|
|
|
Three Months Ended
|
|
|
|
March 31, 2018
|
|
|
|
Qualified
|
|
|
Non-Qualified
& International
|
|
|
Total
|
|
Interest cost
|
|
$
|
21
|
|
|
$
|
1
|
|
|
$
|
22
|
|
Expected return on plan assets
|
|
|
(39
|
)
|
|
|
—
|
|
|
|
(39
|
)
|
Amortization of actuarial loss
|
|
|
5
|
|
|
|
—
|
|
|
|
5
|
|
Net periodic benefit (income) loss
|
|
$
|
(13
|
)
|
|
$
|
1
|
|
|
$
|
(12
|
)
|
21
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three Months Ended March 31, 2019 and 2018
(tabular amounts in millions, except per share data)
In the first quarter of 2019, the Company completed a partial settlement of its retirement benefit obligations
related to the U.S. Qualified Plan
by purchasing a group annuity contract for certain retirees and beneficiaries
from a third-party insurance company. As a result, the Company’s pension assets an
d liabilities were
remeasured as of the settlement date. As of the remeasurement date, the reduction in the reported pension obligation for the participants under the an
nuity contract was
$477 million, and the reduction
in plan assets was
$466 million
. The Company recorded
a non-cash sett
lement charge of $135
million
in settlement of retirement benefit obligations
in the condensed consolidated statement of operation
s
in
the first quarter of 2019. This charge results from the recognition in earnings of a portion of the actuarial losses recorded in accumulated other comprehensive loss based on the proportion of the obligation settled.
The long-term rate of return remained
at 6.50% for the U.S. Qualified pension plan and did not change as a result of the settlement. The discount rate used to determine the net obligation for the U.S. Qualified pension plan at the settlement date was 4.3%, 10 basis points lower than the disc
ount rate as of December 31, 2018.
Settlement of retirement obligations is disclosed separately in the condensed consolidated statements of operations, while the remaining net periodic (loss) income for the three months ended March 31, 2019 and 2018 is included in the investment and other (income)-net.
Note 13. Comprehensive Income
The following table summarizes accumulated other comprehensive loss by component as of December 31, 2018 and March 31, 2019 and changes during the three months ended March 31, 2019.
|
|
Pension
|
|
|
Translation
|
|
|
|
|
|
|
|
Plan Cost
|
|
|
Adjustments
|
|
|
Total
|
|
Balance at December 31, 2018
|
|
$
|
(529
|
)
|
|
$
|
(55
|
)
|
|
$
|
(584
|
)
|
Other comprehensive income before reclassifications
|
|
|
105
|
|
|
|
1
|
|
|
|
106
|
|
Amounts reclassified from accumulated other comprehensive loss
|
|
|
2
|
|
|
|
—
|
|
|
|
2
|
|
Net change in accumulated other comprehensive loss
|
|
|
107
|
|
|
|
1
|
|
|
|
108
|
|
Balance at March 31, 2019
|
|
$
|
(422
|
)
|
|
$
|
(54
|
)
|
|
$
|
(476
|
)
|
In the first quarter of 2019, the Company completed a partial settlement of its retirement benefit obligations and, as a result, the Company’s pension assets and liabilities were remeasured as of the settlement date. The impact, net of tax, to the Company’s accumulated other comprehensive loss was a decrease of $105 million. Refer to Note 12,
Retirement Plans
, for more information.
The following table summarizes accumulated other comprehensive loss by component as of December 31, 2017 and March 31, 2018 and changes during the three months ended March 31, 2018.
|
|
Pension
|
|
|
Translation
|
|
|
|
|
|
|
|
Plan Cost
|
|
|
Adjustments
|
|
|
Total
|
|
Balance at December 31, 2017
|
|
$
|
(428
|
)
|
|
$
|
(48
|
)
|
|
$
|
(476
|
)
|
Other comprehensive income before reclassifications
|
|
|
—
|
|
|
|
5
|
|
|
|
5
|
|
Amounts reclassified from accumulated other comprehensive loss
|
|
|
4
|
|
|
|
—
|
|
|
|
4
|
|
Reclassification to accumulated deficit
|
|
|
(97
|
)
|
|
|
—
|
|
|
|
(97
|
)
|
Net change in accumulated other comprehensive loss
|
|
|
(93
|
)
|
|
|
5
|
|
|
|
(88
|
)
|
Balance at March 31, 2018
|
|
$
|
(521
|
)
|
|
$
|
(43
|
)
|
|
$
|
(564
|
)
|
The Company adopted
ASU 2018-02 “Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” (“ASU 2018-02”) in the first quarter of 2018.
As a result of applying this standard in the period of adoption, the Company reclassified $97 million relating to the change in tax rate from accumulated other comprehensive loss to accumulated deficit in the Company’s condensed consolidated balance sheet during the three months ended March 31, 2018.
ASU 2018-02 eliminated the stranded tax effects resulting from the U.S Tax Cuts and Jobs Act and improved the usefulness of information reported to financial statement users.
Refer to the condensed consolidated statements of comprehensive income for the components of comprehensive (loss) income for the three months ended March 31, 2019 and 2018.
22
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three Months Ended March 31, 2019 and 2018
(tabular amounts in millions, except per share data)
Reclassifications from accumulated other
comprehensive loss for the
three months ended March 31, 2019
and
2018 were as follows:
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Amortization of pension plan cost:
|
|
|
|
|
|
|
|
|
Net actuarial loss
(a)
|
|
$
|
3
|
|
|
$
|
5
|
|
Reclassifications before tax
|
|
|
3
|
|
|
|
5
|
|
Income tax expense
|
|
|
1
|
|
|
|
1
|
|
Reclassifications, net of tax
|
|
$
|
2
|
|
|
$
|
4
|
|
|
(a)
|
Amortization of pension plan cost is included in the calculation of net periodic pension plan (income) expense that is recognized all in investment and other income-net in the condensed consolidated statements of operations (see Note 12,
Retirement Plans
).
|
Note 14. Stock and Incentive Programs
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”), 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, 2019 and 2018.
There was a de minimis amount of excess tax benefits for each of the three months ended March 31, 2019 and 2018.
There was no significant activity related to stock options, RSAs, performance restricted stock, and PSUs during the three months ended March 31, 2019.
Restricted Stock Units
A summary of the Company’s RSU activity for LSC Communications employees, officers and directors as of December 31, 2018 and March 31, 2019, and changes during the three months ended March 31, 2019 is presented below.
|
|
|
|
|
|
Weighted
|
|
|
|
Shares
|
|
|
Average Grant
|
|
|
|
(thousands)
|
|
|
Date Fair Value
|
|
Nonvested at December 31, 2018
|
|
|
897
|
|
|
$
|
19.65
|
|
Granted
|
|
|
927
|
|
|
|
6.28
|
|
Vested
|
|
|
(338
|
)
|
|
|
25.59
|
|
Forfeited
|
|
|
(2
|
)
|
|
|
17.62
|
|
Nonvested at March 31, 2019
|
|
|
1,484
|
|
|
$
|
9.94
|
|
During the three months ended March 31, 2019, 926,870 RSUs were granted to certain senior management of the Company. The shares are subject to time-based vesting and will cliff vest on February 25, 2022. As of March 31, 2019, the total potential payout for the awards granted during the three months ended March 31, 2019 is 926,870 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 $1 million and $2 million for the three months ended March 31, 2019 and 2018, respectively.
23
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three Months Ended March 31, 2019 and 2018
(tabular amounts in millions, except per share data)
As of March 31, 2019 there was $10 million of unrecognized share-based compensation expense related to approximately 1.5 million RSUs outstanding, with a weighted-average grant date fair value of $9.94, that are expected to vest over a weighted-average period of 2.5 years.
Note 15. Segment Information
During the third quarter of 2018, the Company realigned the reportable segments and reporting units to reflect its evolution since its separation from RRD in 2016, as well as changes from recent acquisition and disposal activity. All prior year amounts have been reclassified to conform to the Company’s current reporting structure.
The Company’s segment and product and service offerings are summarized below:
Magazines, Catalogs and Logistics
The Magazines, Catalogs and Logistics segment primarily produces magazines and catalogs, as well as provides logistics services to the Company and other third-parties. The segment also provides certain other print-related services, including mail-list management and sortation. The segment has operations primarily in the U.S. The Magazines, Catalogs and Logistics segment is divided into two reporting units: magazines and catalogs; and logistics.
Book
The Book segment produces books for publishers primarily in the U.S. The segment also provides supply-chain management services, warehousing and fulfillment services, as well as e-book formatting for book publishers.
Office Products
The Office Products segment manufactures and sells branded and private label products in five core categories: filing products, envelopes, note-taking products, binder products, and forms.
Other
The Other grouping consists of the following non-reportable segments: Europe, Directories, Mexico, and Print Management. Europe produced magazines, catalogs and directories, as well as provided packaging and pre-media services. The Company disposed of its European printing business in the third quarter of 2018 (refer to Note 2,
Business Combination and Disposition
, for more information). Mexico produces
magazines, catalogs, statements, forms, and labels. Print Management provides outsourced print procurement and management services.
Corporate
Corporate consists of unallocated selling, general and administrative activities and associated expenses including, in part, executive, legal, finance, communications, certain facility costs and LIFO inventory provisions. In addition, share-based compensation expense is included in Corporate and not allocated to the operating segments.
24
LSC Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three Months Ended March 31, 2019 and 2018
(tabular amounts in millions, except per share data)
Information by Segment
The Company has disclosed income (loss) from operations as the primary measure of segment earnings (loss). This is the measure of profitability used by the Company’s chief operating decision-maker and is most consistent with the presentation of profitability reported with the condensed consolidated financial statements.
|
|
|
|
|
|
Income (Loss)
|
|
|
|
|
|
|
Depreciation
|
|
|
|
|
|
Three Months Ended
|
|
Net
|
|
|
from
|
|
|
Assets of
|
|
|
and
|
|
|
Capital
|
|
March 31, 2019
|
|
Sales
|
|
|
Operations
|
|
|
Operations
|
|
|
Amortization
|
|
|
Expenditures
|
|
Magazines, Catalogs and Logistics
|
|
$
|
403
|
|
|
$
|
(31
|
)
|
|
$
|
795
|
|
|
$
|
15
|
|
|
$
|
10
|
|
Book
|
|
|
260
|
|
|
|
13
|
|
|
|
647
|
|
|
|
12
|
|
|
|
17
|
|
Office Products
|
|
|
119
|
|
|
|
8
|
|
|
|
329
|
|
|
|
3
|
|
|
|
—
|
|
Total reportable segments
|
|
|
782
|
|
|
|
(10
|
)
|
|
|
1,771
|
|
|
|
30
|
|
|
|
27
|
|
Other
|
|
|
63
|
|
|
|
4
|
|
|
|
90
|
|
|
|
1
|
|
|
|
1
|
|
Corporate
|
|
|
—
|
|
|
|
(13
|
)
|
|
|
86
|
|
|
|
—
|
|
|
|
—
|
|
Total operations
|
|
$
|
845
|
|
|
$
|
(19
|
)
|
|
$
|
1,947
|
|
|
$
|
31
|
|
|
$
|
28
|
|
|
|
|
|
|
|
Income (Loss)
|
|
|
|
|
|
|
Depreciation
|
|
|
|
|
|
Three Months Ended
|
|
Net
|
|
|
from
|
|
|
Assets of
|
|
|
and
|
|
|
Capital
|
|
March 31, 2018
|
|
Sales
|
|
|
Operations
|
|
|
Operations
|
|
|
Amortization
|
|
|
Expenditures
|
|
Magazines, Catalogs and Logistics
|
|
$
|
427
|
|
|
$
|
(14
|
)
|
|
$
|
742
|
|
|
$
|
16
|
|
|
$
|
9
|
|
Book
|
|
|
249
|
|
|
|
9
|
|
|
|
565
|
|
|
|
14
|
|
|
|
9
|
|
Office Products
|
|
|
123
|
|
|
|
2
|
|
|
|
372
|
|
|
|
4
|
|
|
|
—
|
|
Total reportable segments
|
|
|
799
|
|
|
|
(3
|
)
|
|
|
1,679
|
|
|
|
34
|
|
|
|
18
|
|
Other
|
|
|
130
|
|
|
|
7
|
|
|
|
194
|
|
|
|
4
|
|
|
|
1
|
|
Corporate
|
|
|
—
|
|
|
|
(10
|
)
|
|
|
84
|
|
|
|
—
|
|
|
|
1
|
|
Total operations
|
|
$
|
929
|
|
|
$
|
(6
|
)
|
|
$
|
1,957
|
|
|
$
|
38
|
|
|
$
|
20
|
|
Restructuring, impairment and other charges by segment for the three months ended March 31, 2019 and 2018 are disclosed in Note 8,
Restructuring, Impairment and Other Charges.
Note 16. New Accounting Pronouncements
In August 2018, the FASB issued Accounting Standards Update No. 2018-15 “
Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract” (“ASU 2018-15”).
ASU 2018-15 aligns the accounting for implementation costs for cloud computing arrangements with the accounting for costs involved in implementing an internal-use software license. ASU 2018-15 is effective in the first quarter of 2020; however, as early adoption is permitted, the Company adopted ASU 2018-15 in the first quarter of 2019. The adoption did not have a material impact in the first quarter of 2019.
25