LSC COMMUNICATIONS, INC. The following is management's discussion and analysis of the financial condition ofLSC Communications, Inc. as ofSeptember 30, 2020 andDecember 31, 2019 and the results of operations for the three and nine months endedSeptember 30, 2020 and 2019. 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 theSecurities and Exchange Commission ("SEC") onMarch 2, 2020 , for management's discussion and analysis of the financial condition of the company as ofDecember 31, 2019 andDecember 31, 2018 , and the results of operations for the years endedDecember 31, 2019 , 2018 and 2017. Company Overview The principal business ofLSC Communications, Inc. , aDelaware 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.
Voluntary Reorganization under Chapter 11
Background Information OnApril 13, 2020 (the "Petition Date"), the Company and certain of its subsidiaries filed voluntary petitions for relief under Chapter 11 of title 11 of the United States Code, 11 U.S.C. §§ 101-1532 (the "Bankruptcy Code") in theUnited States Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court ") (collectively, the "Chapter 11 Cases"). Refer to Note 2, Voluntary Reorganization under Chapter 11, for more information on the Chapter 11 Cases and impact to the Company's ability to continue as a going concern. The Chapter 11 Cases are being jointly administered under the caption In reLSC Communications, Inc. , 20-10950. We and our subsidiaries that are involved in the Chapter 11 Cases will continue to operate our businesses as "debtors-in-possession" under the jurisdiction of theBankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code. As a result of the commencement of the Chapter 11 Cases, the Company's operations and ability to develop and execute its business plan are subject to the risks and uncertainties associated with the reorganization process under the Bankruptcy Code. Following the outcome of the Chapter 11 Cases, the amount and composition of the Company's assets, liabilities, officers and/or directors, and the description of the Company's operations, properties, liquidity and capital resources included in this quarterly report may be significantly different.
Refer to Note 2, Voluntary Reorganization under Chapter 11, for more information.
OnApril 15, 2020 , theBankruptcy Court entered orders granting interim approval of certain motions (the "First Day Motions"), enabling us to conduct our business activities in the ordinary course, subject to the terms and conditions of such orders, including authorizing us to pay employee wages and benefits, to pay taxes and certain governmental fees and charges, to continue to operate our cash management system in the ordinary course, and to pay prepetition claims of certain of our vendors. The First Day Motions were subsequently approved by theBankruptcy Court on a final basis at hearings onMay 12, 2020 andJune 2, 2020 . Purchase Agreement OnJune 5, 2020 , theBankruptcy Court entered an order granting approval for a sale and bidding process through which we were authorized to determine the highest or otherwise best offer for the sale of all or substantially all of our assets pursuant to Section 363 of the Bankruptcy Code or a Chapter 11 plan of reorganization. In accordance with the order, onSeptember 15, 2020 , we, in consultation with the required consultation parties, selected the bid submitted byACR III Libra Holdings LLC , aDelaware limited liability company ("Buyer") as the bid which constitutes the highest or otherwise best bid for the Business (as defined below) (the "Successful Bid"). 42 -------------------------------------------------------------------------------- OnSeptember 15, 2020 , we and certain of our subsidiaries, including subsidiaries that are not involved in the Chapter 11 Cases (collectively, the "Sellers"), entered into a Stock and Asset Purchase Agreement (the "Purchase Agreement") with Buyer, and, solely with respect to Section 9.13 of the Purchase Agreement,Atlas Capital Resources III LP , aDelaware limited partnership, andAtlas Capital Resources (P) III LP , aDelaware limited partnership (each a "Guarantor"), pursuant to which, upon the terms and subject to the conditions set forth therein, Buyer will acquire substantially all of the assets of the Sellers (the "Business") as a going concern for (i) the Final Cash Consideration (as defined in the Purchase Agreement), subject to the Final Cash Consideration Cap (as defined in the Purchase Agreement), (ii) a credit bid and release of each Seller from the corresponding portion of each of the senior secured term loan B facility under the Prepetition Credit Agreement and the Prepetition Indenture (each as defined in the Purchase Agreement), in an aggregate amount equal to$63.437 million , and (iii) the assumption of certain specified liabilities of the Sellers, including obligations relating to the Company's qualified pension plan (the "Transactions"). Simultaneous with us entering into the Purchase Agreement, Buyer entered into that certain Amended and Restated Credit Bid Support Agreement, dated as ofSeptember 15, 2020 (the "CBSA"), by and amongACR III Libra Parent LLC , certain holders of the senior secured term loan B facility under the Prepetition Credit Agreement and holders of senior notes under the Prepetition Indenture (collectively, the "Junior Creditors"),Lapetus Capital III LLC and, solely for purposes of certain sections of such agreement, the Guarantors, which sets forth certain amounts that may be available for distribution to the Junior Creditors in connection with the credit bid. Pursuant to the CBSA, at the closing of the Transactions, Buyer may hold back from the amount available to distribute from Buyer to the Junior Creditors under the CBSA up to$43.75 million , relating to the net working capital adjustment, certain assumed expenses and certain real estate matters. If such holdback amount exceeds the Available Amount (as defined in the CBSA) (such excess amount, the "Deficiency Amount"), we will, in good faith and in consultation withAlixPartners, LLP , make a determination about whether the estate would remain solvent post-closing if the Deficiency Amount is held back from the Estimated Cash Consideration (as defined in the Purchase Agreement) at closing. If we determine that we are reasonably likely to be administratively insolvent if the Deficiency Amount is held back at the closing, (a) the Sellers will propose the maximum holdback amount that they calculate, in good faith and in consultation withAlixPartners, LLP , will allow us to remain solvent, and (b) thereafter, Buyer will have the option to (1) agree to such maximum holdback amount and take a residual claim on the Debtors' estate, ranking immediately junior to other administrative claims, for the difference or (2) terminate the Purchase Agreement. OnOctober 7, 2020 theBankruptcy Court entered an Order (I) Approving the Purchase Agreement among the Debtors and Buyer, (II) Approving the Sale of Debtors' Assets Free and Clear of Liens, Claims, Interests and Encumbrances, (III) Authorizing Assumption and Assignment of Certain Executory Contracts and Unexpired Leases and (IV) Granting Related Relief [Docket No. 876], pursuant to which theBankruptcy Court approved the Purchase Agreement and the Transactions. The closing of the Transactions is subject to closing conditions, including the achievement of certain bankruptcy-related milestones, regulatory approvals and other customary closing conditions. The Transactions are expected to close during the fourth quarter of 2020. DIP Financing
See Note 10, Debt, for information on the DIP Facility, which provides up to
Going Concern The accompanying condensed consolidated financial statements were prepared assuming that the Company will continue as a going concern and contemplate the continuity of our operations, realization of assets and satisfaction of liabilities and commitments in the normal course of business. Our ability to continue as a going concern is contingent upon our ability to comply with the covenants of the DIP Credit Agreement described in Note 10, Debt, and our ability to implement, subject to theBankruptcy Court's approval, a restructuring plan, among other factors. While operating as debtors-in-possession under Chapter 11, we may sell or otherwise dispose of or liquidate assets or settle liabilities, subject to the approval of theBankruptcy Court or as otherwise permitted in the ordinary course of business (and subject to restrictions in our debt agreements), for amounts other than those reflected in the accompanying condensed consolidated financial statements. Further, the restructuring plan could materially change the amounts and classifications of assets and liabilities reported in the condensed consolidated financial statements. 43 -------------------------------------------------------------------------------- As a result of the factors noted above, we believe there is substantial doubt about the Company's ability to continue as a going concern. The condensed consolidated financial statements included in this quarterly report on Form 10-Q do not include any adjustments related to the recoverability and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
Coronavirus Pandemic ("COVID-19")
During and subsequent to the nine months endedSeptember 30, 2020 , the novel coronavirus strain, known as COVID-19, continues to spread across the globe at an increasing rate. Measures taken by governmental authorities and private actors to limit the spread of this virus may interfere with the ability of the Company's employees, suppliers, and other business providers to carry out their assigned tasks or supply materials at ordinary levels of performance relative to the conduct of the business which may cause a material curtailment to certain business operations. Moreover, as a large part of the Company's business involves sales of books and other products used in schools and school facilities, if COVID-19 related measures continue to result in widespread and lengthy school closings, the Company's condensed consolidated results of operations and financial condition will be adversely impacted. Books sold in retail stores have also been adversely impacted as both large chains and independent stores have been forced to close, although some retail stores have subsequently re-opened. Additionally, as COVID-19 has significantly impacted retailers' stores, distribution centers and supply chains, the Company has experienced an adverse impact on our catalogs and office products businesses. Disruption across many other industries has also significantly impacted demand for advertising, which may result in page count and volume reductions in magazines. We continue to monitor the situation, to assess further possible implications to our business and customers, and to take actions in an effort to mitigate adverse consequences. The Company has expanded its work-from-home policy for its non-manufacturing employees, has focused on obtaining protective equipment and implementing social distancing and other policies for its manufacturing employees and continues to adhere to guidance issued by governmental authorities.
On
Segment Descriptions As a result of the Company's segment analysis in the fourth quarter of 2019,Mexico met the requirements to be classified as a reportable segment (previously included as a non-reportable segment). All prior year amounts have been reclassified to conform to the Company's current reporting structure.
The Company's segment and product and service offerings are summarized below:
Magazines, Catalogs and Logistics
The Magazines, Catalogs and Logistics segment primarily produces magazines and catalogs and provides logistics solutions to the Company and other third parties. The segment also provides certain other print-related services, including mail services. The segment has operations primarily in theU.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 theU.S. The segment also provides supply-chain management services and warehousing and fulfillment services, as well as e-book formatting for book publishers. Office Products
The Office Products segment manufactures and sells branded and private label products in five core categories: filing products, envelopes, note-taking products, binder products, and forms.
44
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Mexico
Other
The Other grouping consists of the following non-reportable segments: Directories and Print Management. Print Management provides outsourced print procurement and management services.
Corporate
Corporate consists of unallocated selling, general and administrative activities
and associated expenses including executive, legal, finance, communications,
certain facility costs and last in, first out ("LIFO") inventory provisions. In
addition, share-based compensation expense is included in Corporate and not
allocated to the operating segments.
Outlook
Competitive Environment
According to the June 2020 IBIS World industry report "Printing in the
U.S. ," estimated total annual printing industry revenue is approximately $73
billion , of which approximately $12 billion relates to our core segments of the
print market and an additional approximately $30 billion pertains to related
segments of the print market in which we are able to offer certain products.
Despite consolidation in recent years, including several acquisitions completed
by LSC Communications , the industry remains highly fragmented and LSC
Communications is one of the largest players in our segment of the print
market. The print and related services industry, in general, continues to have
excess capacity and LSC Communications remains diligent in proactively
identifying plant consolidation opportunities to keep our capacity in line with
demand. Across the Company's range of print products and services, competition
is based primarily on the ability to deliver products for the lowest total cost,
a factor driven not only by price, but also by materials and distribution
costs. We expect that prices for print products and services will continue to be
a focal point for customers in coming years.
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 Company's product and service offerings have been impacted by the following:
• The impact of digital technologies has been felt in many print
products. Digital technologies have impacted printed magazines asadvertising spending continues to move from print to electronic media.
• Catalogs have experienced volume reductions as our customers allocate more
of their spending to online resources and also face competition from online
retailers resulting in retailer compression.
• The effect of COVID-19 in 2020 on the industries the Company services.
• The Company has seen an unprecedented drop in demand for magazines and
catalogs, with the faster pace of decline in demand primarily due to the
accelerated impact of digital disruption of demand for printed materials.
• Educational books within the college market continue to be impacted by
electronic substitution and other trends. The K-12 educational sector
continues to be focused on increasing digital distribution but there has
been inconsistent adoption across school systems.
• E-book substitution has impacted overall consumer print trade book volume,
although e-book adoption rates have stabilized and industry-wide print book
volume has been growing in recent years.
• Electronic communication and transaction technology has also continued to
drive electronic substitution in directory printing, in part driven by cost
pressures at key customers.
45
-------------------------------------------------------------------------------- The future impact of technology on our business is difficult to predict; however, it is likely to result in additional expenditures to restructure impacted operations or develop new technologies. In addition, we have made targeted acquisitions and investments in our existing business to offer customers innovative services and solutions. Such acquisitions and investments include the acquisitions of Print Logistics in 2018 andClark Group ,Quality Park ,Publishers Press ,CREEL , Fairrington, and HudsonYards in 2017, which expanded our logistics, printing, digital, office products, and premedia capabilities, and 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 continues to affect the overall demand for most of the products in our Office Products segment. However, 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 are likely to include the reorganization of operations and the consolidation of facilities. Implementing such initiatives might result in future restructuring or impairment charges, which may be substantial. We also review our operations and management structure on a regular basis to appropriately balance risks and opportunities to maximize efficiencies and to support our long-term strategic goals. During late 2018 and early 2019, the Company performed a comprehensive review of the Company's entire operations to identify new revenue opportunities and cost savings. This review covered substantially all aspects of the Company - both operational and support functions - and involved key personnel from throughout the organization. The resulting revenue opportunities and cost savings initiatives were approved by senior management in the first quarter of 2019 and are expected to be implemented over the next three years. While the Company realized the benefits beginning in 2019 and expects to realize benefits at various points over the next three years, the Company has incurred$14 million of expense, of which$4 million was recorded during the nine months endedSeptember 30, 2020 , relating to the implementation of certain identified initiatives. As the Company continues to implement the identified initiatives, the Company expects to incur additional expense; however, the Company expects the resulting benefits (additional revenue and/or cost savings) to significantly exceed the additional expense. Raw Materials We negotiate with suppliers to maximize our purchasing efficiencies. The primary raw materials we use in our printed products are paper and ink. We negotiate with paper suppliers to maximize our purchasing efficiencies and use a wide variety of paper grades and formats. In addition, a substantial amount of paper used in our printed products is supplied directly by customers. Variations in the cost and supply of certain paper grades used in the manufacturing process may affect our consolidated financial results. Generally, customers directly absorb the impact of changing prices on customer-supplied paper. For paper that we purchase, we have historically passed most changes in price through to our customers. Contractual arrangements and industry practice should support our continued ability to pass on any future paper price increases, but there is no assurance that market conditions will continue to enable us to successfully do so. Higher paper prices and tight paper supplies may have an impact on customers' demand for printed products. We also resell waste paper and other print-related by-products and may be impacted by changes in prices for these by-products. We use a wide variety of ink formulations and colors in our manufacturing processes. Variations in the cost and supply of certain ink formulations may affect our consolidated financial results. We have undertaken various strategic initiatives to try to mitigate any foreseeable supply disruptions with respect to our ink requirements, including entering into a long term supply arrangement with a single supplier for a substantial portion of our ink supply. Certain contractual protections exist in our relationship with such supplier, such as price and quality protections and an ability to seek alternative sources of ink if the supplier breaches or is unable to perform certain of its obligations, which are intended to mitigate the risk of ink-related supply disruptions. 46 -------------------------------------------------------------------------------- The primary materials used in the Office Products segment are paper, steel and polypropylene substrates. We negotiate with leading paper, plastic and steel suppliers to maximize our purchasing efficiencies. All of these materials are available from a number of domestic and international suppliers and we are not dependent upon any single supplier for any of these materials. We believe that adequate supply is available for each of these materials for the foreseeable future, although higher paper prices may have an impact on demand for our products. Changes in material prices, including paper, may impact the Company's operating margins as there may be a lag between when the Company experiences the changes and when they are absorbed by our customers. Except for our long-term supply arrangement regarding ink, adhesives and paper consignment agreement, we do not consider ourselves to be dependent upon any single vendor as a source of supply for our businesses, and we believe that sufficient alternative sources for the same, similar or alternative products are available. Changes in the price of raw materials, crude oil and other energy costs impact our manufacturing costs. Crude oil and energy prices continue to be volatile. Should prices increase, we generally cannot pass on to customers the impact of higher energy prices on our manufacturing costs. We do enter into fixed price contracts for a portion of our natural gas purchases to mitigate the impact of changes in energy prices. We cannot predict sudden changes in energy prices and the impact that possible future changes in energy prices might have upon either future operating costs or customer demand and the related impact either will have on the Company's condensed consolidated statements of operations, balance sheets and cash flows. Pension Benefit Plans The funded status of the Company's pension benefit plans is dependent upon many factors, including returns on invested assets and the level of certain market interest rates. Market conditions may lead to changes in the discount rates (used to value the year-end benefit obligations of the plans) and the market value of the securities held by the plans, which could significantly increase or decrease the funded status of the plans. The Company reviews its actuarial assumptions on an annual basis as ofDecember 31 . Based on estimates developed prior to the Company's voluntary reorganization, the Company expected to make cash contributions of approximately$6 million to its pension benefit plans for the full year in 2020. Through the Petition Date,$1 million has been contributed and no further contributions will be made until a determination is made by theBankruptcy Court . In the third quarter of 2020, the Company completed a partial settlement of its retirement benefit obligations by offering a lump-sum window opportunity to certain active participants and terminated participants who were entititled to a pension benefit. As a result, the Company's pension assets and liabilities were remeasured as of the settlement date. The Company recorded a non-cash settlement charge of$63 million in settlement of retirement benefit obligations in the condensed consolidated statement of operations in the third quarter of 2020. Beginning in the first quarter of 2020, the Company changed the method of accounting for the market-related value of assets for a class of assets within theU.S. Qualified Plan and Non-Qualified plans. The change in accounting method was retrospectively applied to periods in 2017, 2018 and 2019. Refer to Impact of Change in Accounting Principle in Note 1, Overview and Basis of Presentation, for more information. The remeasurement in the third quarter of 2020 increased the plan's funded status by$71 million , causing the plan to change from underfunded (pension liability) to a funded pension asset of$47 million in the condensed consolidated balance sheet as ofSeptember 30, 2020 . Based on the fair value of assets and the estimated discount rate used to value the benefit obligations of the Non-Qualified and international plans as ofSeptember 30, 2020 , the Company estimates the unfunded status of these pension benefit plans to be approximately$98 million . The underfunded status of all pension plans was$162 million atDecember 31, 2019 .
See Note 12, Retirement Plans, for more information on the Company's pension benefit plans.
Significant Accounting Policies
Other than the policies implemented as a result of the Company's Chapter 11
Cases, 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
47
--------------------------------------------------------------------------------FINANCIAL REVIEW
In the financial review that follows, the Company discusses its condensed consolidated balance sheets, statements of operations, cash flows and certain other information. This discussion should be read in conjunction with the Company's condensed consolidated financial statements and the related notes.
Results of Operations for the Three Months Ended
The following table shows the results of operations for the three months ended
Three Months Ended
September 30,
2020 2019 $ Change % Change
(in millions, except percentages)
Net sales $ 628 $ 834 $ (206 ) (24.6 %)
Cost of sales 530 716 (186 ) (26.0 %)
Cost of sales as a % of net sales 84.4 % 85.9 %
Selling, general and administrative
expenses (exclusive of
depreciation and amortization) 64 88 (24 ) (27.3 %)
Selling, general and administrative
expenses as a % of net sales 10.2 % 10.6 %
Restructuring, impairment and other
charges-net 56 10 46 460.0 %
Depreciation and amortization 24 29 (5 ) (17.2 %)
(Loss) from operations $ (46 ) $ (9 ) $ (37 ) 411.1 %
Condensed Consolidated Results
Net sales for the three months endedSeptember 30, 2020 were$628 million , a decrease of$206 million , or 24.6%, compared to the three months endedSeptember 30, 2019 . Net sales were impacted by lower volume, which was partially caused by the impact of COVID-19, and a$58 million decrease in pass-through paper sales.
Total cost of sales decreased
As a percentage of net sales, cost of sales decreased from 85.9% for the three months endedSeptember 30, 2019 to 84.4% for the three months endedSeptember 30, 2020 primarily due to cost control initiatives. Selling, general and administrative expenses decreased$24 million , or 27.3%, for the three months endedSeptember 30, 2020 compared to the three months endedSeptember 30, 2019 , primarily due to lower volume, higher expenses in 2019 related to the previously terminated merger agreement, and cost control initiatives.
For the three months ended
• Net other restructuring charges of
related to the impairment of property, plant and equipment for one of the
Company's manufacturing facilities in
expenses to move equipment, costs associated with new revenue opportunities
and cost savings initiatives implemented in 2019;
• Employee termination costs of
employees, of whom 586 were terminated as of or prior to
primarily related to the closure of three facilities in the Magazines,
Catalogs and Logistics and Book segments and Other grouping; and
•
associated with facility closings in the Book and Magazines, Catalogs and
Logistics segments.
48
-------------------------------------------------------------------------------- For the three months endedSeptember 30, 2019 , the Company recorded restructuring, impairment and other charges of$10 million . The charges were primarily due to facility costs, costs associated with new revenue opportunities and cost savings initiatives implemented during the quarter, and multiemployer withdrawal obligations related to facility closures. Depreciation and amortization decreased$5 million to$24 million for the three months endedSeptember 30, 2020 compared to the three months endedSeptember 30, 2019 , due to decreased capital spending in recent years compared to historical levels. Three Months Ended September 30, 2020 2019 (1) $ Change % Change (in millions, except percentages) Interest expense-net$ 5 $ 20 $ (15 ) (75.0 %) Settlement of retirement benefit obligations 63 1 62 6200.0 % Termination fee from Quad - (45 ) 45 (100.0 %) Investment and other (income)-net (14 ) (8 ) (6 ) 75.0 % Reorganization items, net 24 - 24 100.0 % Interest expense is lower for the three months endedSeptember 30, 2020 compared to the three months endedSeptember 30, 2019 primarily due to the Company's voluntary reorganization. Refer to Note 10, Debt, for more information. Refer to Note 12, Retirement Plans, for information on the non-cash settlement charge related to retirement benefit obligations. Investment and other (income)-net primarily relates to the Company's pension benefit plans in both years. Refer to Note 2, Voluntary Reorganization under Chapter 11, for information on reorganization items. The$45 million Termination fee from Quad in the third quarter of 2019 related to the merger agreement. Three Months Ended September 30, 2020 2019 (1) $ Change (in millions, except percentages) (Loss) income before income taxes$ (124 ) $ 23 $ (147 ) Income tax (benefit) (13 ) - (13 ) Effective income tax rate 10.0 % 3.1 % The effective income tax rate for the three months endedSeptember 30, 2020 was 10.0% compared to 3.1% for the three months endedSeptember 30, 2019 . The effective income tax rate for the three months endedSeptember 30, 2020 reflects the Company's limited ability to benefitU.S. results as the Company has a valuation allowance recorded on itsU.S. deferred tax assets; the effective income tax rate also reflects the benefit related to the pension settlement resulting from the intraperiod exception when there is income from other comprehensive income and a loss from continuing operations.
The effective rate for the three months ended
(1) As Adjusted - Refer to Impact of Change in Accounting Principle in Note 1,
Overview and Basis of Presentation, for information on restated balances for
settlement of retirement benefit obligations and investment and other
(income)-net.
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.
49
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Magazines, Catalogs and Logistics
Three Months Ended
September 30,
2020 2019 Change
(in millions, except percentages)
Net sales $ 255 $ 392 $ (137 )
(Loss) from operations (38 ) (6 ) (32 )
Operating margin (14.9 %) (1.5 %) (1340 bps)
Restructuring, impairment and other
charges-net 21 4 17
Net sales for the Magazines, Catalogs and Logistics segment for the three months
ended September 30, 2020 were $255 million , a decrease of $137 million , or
34.8%, compared to the three months ended September 30, 2019 . The Magazines,
Catalogs and Logistics segment's net sales decreased primarily due to lower
volume in magazines, catalogs and logistics which was partially caused by the
impact of COVID-19, and a $40 million decrease in pass-through paper sales.
The change in Magazines, Catalogs and Logistics segment loss from operations and
operating margins was primarily due to lower volume, partially offset by cost
control initiatives.
Book
Three Months Ended
September 30,
2020 2019 Change
(in millions, except percentages)
Net sales $ 222 $ 256 $ (34 )
(Loss) income from operations (13 ) 5 (18 )
Operating margin (5.9 %) 2.0 % (790 bps)
Restructuring, impairment and other
charges-net 30 2 28
Net sales for the Book segment for the three months ended September 30, 2020
were $222 million , a decrease of $34 million , or 13.0%, compared to the three
months ended September 30, 2019 , primarily due to lower volume and a $12 million
decrease in pass-through paper sales.
The decrease in the operating income and margins was driven by higher restructuring, impairment and other charges and lower volume, partially offset by cost control initiatives.
Office Products
Three Months Ended
September 30,
2020 2019 Change
(in millions, except percentages)
Net sales $ 105 $ 128 $ (23 )
Income from operations 10 8 2
Operating margin 9.5 % 6.3 % 320 bps
Restructuring, impairment and other
charges-net - 2 (2 )
Net sales for the Office Products segment for the three months ended September
30, 2020 were $105 million , a decrease of $23 million , or 17.4%, compared to the
three months ended September 30, 2019 . The decrease was largely as a result of
lower volume across several products, which was primarily caused by the impact
of COVID-19.
The increase in Office Products segment income from operations and operating
margin was primarily due to cost control initiatives and lower restructuring,
impairment and other charges, partially offset by lower volume.
50
--------------------------------------------------------------------------------Mexico Three Months Ended September 30, 2020 2019 Change (in millions, except percentages) Net sales $ 22$ 24 $ (2 ) Income from operations 4 4 - Operating margin 18.2 % 16.7 % 150 bps Net sales for theMexico segment were$22 million for the three months endedSeptember 30, 2020 , a decrease of$2 million or 11.2%, compared to the three months endedSeptember 30, 2019 . The decrease in net sales was due to lower volume primarily caused a$3 million decrease due to changes in foreign exchange rates. There were no significant changes to income from operations as a result of cost control initiatives, which improved the operating margin. Other Three Months Ended September 30, 2020 2019 Change (in millions, except percentages) Net sales $ 24 $ 34 $ (10 ) (Loss) income from operations (5 ) 1 $ (6 ) Operating margin -20.8 % 2.9 % (2,370) bps Restructuring, impairment and other charges-net 5 - 5 Net sales for the Other grouping for the three months endedSeptember 30, 2020 were$24 million , a decrease of$10 million , or 32.1%, compared to the three months endedSeptember 30, 2019 , primarily due to lower directories volume, a$6 million decrease in pass-through paper sales, and lower sales in outsourced services which were primarily impacted by COVID-19.
The change in income from operations and operating margin was primarily due to higher restructuring, impairment and other charges and lower volume.
Corporate
The following table summarizes unallocated operating expenses and certain items impacting comparability within the activities presented as Corporate:
Three Months Ended
September 30,
2020 2019 Change
(in millions, except percentages)
Total operating expenses $ 4 $ 21 $ (17 )
Significant components of total
operating
expenses:
Restructuring, impairment and other
charges-net - 2 (2 )
Share-based compensation expenses - 2 (2 )
Expenses related to acquisitions, the
Merger
Agreement and dispositions - 10 (10 )
51
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Results of Operations for the Nine Months Ended
The following table shows the results of operations for the nine months ended
Nine Months Ended
September 30,
2020 2019 $ Change % Change
(in millions, except percentages)
Net sales $ 1,861 $ 2,548 $ (687 ) (26.9 %)
Cost of sales 1,614 2,201 (587 ) (26.7 %)
Cost of sales as a % of net sales 86.7 % 86.4 %
Selling, general and administrative
expenses (exclusive of
depreciation and amortization) 200 253 (53 ) (20.9 %)
Selling, general and administrative
expenses as a % of net sales 10.7 % 9.9 %
Restructuring, impairment and other
charges-net 114 47 67 142.6 %
Depreciation and amortization 79 91 (12 ) (13.2 %)
(Loss) from operations $ (146 ) $ (44 ) $ (102 ) 231.8 %
Condensed Consolidated Results
Net sales for the nine months endedSeptember 30, 2020 were$1,861 million , a decrease of$687 million , or 26.9%, compared to the nine months endedSeptember 30, 2019 . Net sales were impacted by lower volume, which was partially caused by the impact of COVID-19, and a$173 million decrease in pass-through paper sales.
Total cost of sales decreased
As a percentage of net sales, cost of sales increased from 86.4% for the nine months endedSeptember 30, 2019 to 86.7% for nine months endedSeptember 30, 2020 primarily due to lower volume. Selling, general and administrative expenses decreased$53 million , or 20.9%, for the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 , primarily due to lower volume, higher expenses in 2019 related to the previously terminated merger agreement, and cost control initiatives.
For the nine months ended
• Net other restructuring charges of
related to the impairment of property, plant and equipment for one of the
Company's manufacturing facilities in
expenses to move equipment, costs associated with new revenue opportunities
and cost savings initiatives implemented in 2019;
• Employee termination costs of
employees, of whom 1,029 were terminated as of or prior to
2020 primarily related to the closure of five facilities in the Magazines,
Catalogs and Logistics segment, one facility in the Office Products segment
and one facility in the Other grouping, and the reorganization of certain
business units and corporate functions; and
•
associated with facility closings in the Book and Magazines, Catalogs and
Logistics segments.
For the nine months ended
• Net other restructuring charges of
costs, costs associated with new revenue opportunities and cost savings
initiatives implemented in 2019, and pension withdrawal obligations related
to facility closures;
52
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• Employee termination costs of
employees, of whom 40 were terminated as of or prior to
primarily related to the closure of one facility in the Magazines, Catalogs
and Logistics segment; and
• $17 million for the impairment of certain definite-lived customerrelationships intangible assets in the Magazines, Catalogs and Logistics
segment.
Depreciation and amortization decreased $12 million to $79 million for the nine
months ended September 30, 2020 compared to the nine months ended September 30,
2019 , due to decreased capital spending in recent years compared to historical
levels.
Nine Months Ended
September 30,
2020 2019 (1) $ Change % Change
(in millions, except percentages)
Interest expense-net $ 26 $ 58 $ (32 ) (55.2 %)
Settlement of retirement benefit obligations 63 134 (71 ) (53.0 %)
Termination fee from Quad - (45 ) 45 100.0 %
Investment and other (income)-net (35 ) (24 ) (11 ) 45.8 %
Reorganization items, net 38 - 38 100.0 %
Interest expense is lower for the nine months ended September 30, 2020 compared
to the nine months ended September 30, 2019 primarily due to the Company's
voluntary reorganization. Refer to Note 10, Debt, for more information. Refer to
Note 12, Retirement Plans, for information on the non-cash settlement charge
related to retirement benefit obligations. Investment and other (income)-net
primarily relates to the Company's pension benefit plans in both years. Refer to
Note 2, Voluntary Reorganization under Chapter 11, for information on
reorganization items. The $45 million Termination fee from Quad received in the
third quarter of 2019 related to the merger agreement.
Nine Months Ended
September 30,
2020 2019 (1) $ Change
(in millions, except percentages)
Net (loss) before income taxes
(12 ) (40 ) 28
Effective income tax rate 4.9 % 23.8 %
The effective income tax rate for the nine months ended September 30, 2020 was
4.9% compared to 23.8% for the nine months ended September 30, 2019 . The
effective income tax rate for the nine months ended September 30, 2020 reflects
the Company's limited ability to benefit U.S. results as the Company has a
valuation allowance recorded on its U.S. deferred tax assets. The effective
income tax rate also reflects the benefit related to the pension settlement
resulting from the intraperiod exception when there is income from other
comprehensive income and a loss from continuing operations.
The effective income tax rate for the nine months ended
(1) As Adjusted - Refer to Impact of Change in Accounting Principle in Note 1,
Overview and Basis of Presentation, for information on restated balances for
settlement of retirement benefit obligations and investment and other
(income)-net.
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.
53
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Magazines, Catalogs and Logistics
Nine Months Ended
September 30,
2020 2019 Change
(in millions, except percentages)
Net sales $ 796 $ 1,175 $ (379 )
(Loss) from operations (130 ) (79 ) (51 )
Operating margin (16.3 %) (6.7 %) (960) bps
Restructuring, impairment and other
charges-net 52 35 17
Net sales for the Magazines, Catalogs and Logistics segment for the nine months
ended September 30, 2020 were $796 million , a decrease of $379 million , or
32.2%, compared to the nine months ended September 30, 2019 . The Magazines,
Catalogs and Logistics segment's net sales decreased primarily due to lower
volume in magazines, catalogs and logistics which was partially caused by the
impact of COVID-19, and a $112 million decrease in pass-through paper sales.
The change in Magazines, Catalogs and Logistics segment loss from operations and
operating margins was primarily due to lower volume and higher restructuring,
impairment and other charges, partially offset by cost control initiatives.
Book
Nine Months Ended
September 30,
2020 2019 Change
(in millions, except percentages)
Net sales $ 624 $ 805 $ (181 )
(Loss) income from operations (18 ) 36 (54 )
Operating margin (2.9 %) 4.5 % (740 bps)
Restructuring, impairment and other
charges-net 35 4 31
Net sales for the Book segment for the nine months ended September 30, 2020 were
$624 million , a decrease of $181 million , or 22.5%, compared to the nine months
ended September 30, 2019 , primarily due to lower volume which was partially
caused by the impact of COVID-19 and a $46 million decrease in pass-through
paper sales.
The decrease in the operating income and margins was driven by lower volume and higher restructuring, impairment and other charges.
Office Products
Nine Months Ended
September 30,
2020 2019 Change
(in millions, except percentages)
Net sales $ 298 $ 386 $ (88 )
Income from operations 17 29 (12 )
Operating margin 5.7 % 7.5 % (180) bps
Restructuring, impairment and other
charges-net 3 3 -
Net sales for the Office Products segment for the nine months ended
September 30, 2020 were $298 million , a decrease of $88 million , or 22.7%,
compared to the nine months ended September 30, 2019 . The decrease was largely
as a result of lower volume across several products, which was primarily caused
by the impact of COVID-19.
The decrease in Office Products segment income from operations and operating margin was primarily due to lower volume, partially offset by cost control initiatives.
54
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Mexico Nine Months Ended September 30, 2020 2019 Change (in millions, except percentages) Net sales $ 61$ 73 $ (12 ) Income from operations 10 11 (1 ) Operating margin 16.4 % 15.1 % 130 bps
Net sales for the
Other
Nine Months Ended
September 30,
2020 2019 Change
(in millions, except percentages)
Net sales $ 82 $ 109 $ (27 )
Income from operations - 6 (6 )
Operating margin - % 5.5 % (550 bps)
Restructuring, impairment and other
charges-net 5 - 5
Net sales for the Other grouping for the nine months ended
Corporate
The following table summarizes unallocated operating expenses and certain items impacting comparability within the activities presented as Corporate:
Nine Months Ended
September 30,
2020 2019 Change
(in millions)
Total operating expenses $ 25 $ 47 $ (22 )
Significant components of total operating
expenses:
Restructuring, impairment and other charges-net 19 5 14 Share-based compensation expenses 2 6 (4 )
Expenses related to acquisitions, merger agreement
and dispositions - 22 (22 )
55
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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, settlement of retirement benefit obligations, reorganization items, net, share-based compensation expense, and expenses related to acquisitions, merger agreement and dispositions. In the first quarter of 2020, the Company began including share-based compensation expense as a non-GAAP measure. As the share-based compensation expense recorded in the current period represents expense for previously issued grants that will vest at a lower share price than originally expensed, management determined that share-based compensation expense represents a non-GAAP measure. The reconciliation for the three and nine months endedSeptember 30, 2019 below has been restated to reflect this change. A reconciliation of GAAP net income to non-GAAP adjusted EBITDA for the three and nine months endedSeptember 30, 2020 and 2019 is presented in the following table: Three Months Ended Nine Months Ended September 30, September 30, 2020 2019 (1) 2020 2019 (1) (in millions) (in millions) Net (loss) income$ (111 ) $ 23$ (226 ) $ (127 ) Restructuring, impairment and other charges- net 56 10 114 47 Settlement of retirement benefit obligations 63 1 63 134 Reorganization items, net 24 - 38 - Share-based compensation expense - 2 2 6 Termination fee from Quad - (45 ) - (45 ) Expenses related to acquisitions, merger agreement and dispositions - 10 - 22 Depreciation and amortization 24 29 79 91 Interest expense-net 5 20 26 58 Income tax (benefit) (13 ) - (12 ) (40 ) Non-GAAP adjusted EBITDA $ 48 $ 50 $ 84$ 146
The adjustments to arrive at non-GAAP adjusted EBITDA are summarized below:
• Restructuring, impairment and other charges-net: Refer to Results of
Operations for the Three and Nine Months Ended September 30, 2020 as
Compared to the Three and Nine Months Ended September 30, 2019 for
information on the charges.
• Settlement of retirement obligations: Refer to Note 12, Retirement Plans,
for more information on the settlement charges.
• Reorganization items, net: The Company recorded net reorganization items of
Chapter 11 Cases during the three and nine months ended
respectively. Refer to Note 2, Voluntary Reorganization under Chapter 11,
for more information.
56
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• Share-based compensation expenses: The Company incurred a de minimis amount
and $2 million of expenses during the three and nine months ended
September 30, 2020 , respectively, in relation to its share-based
compensation plans. The Company incurred $2 million and $6 million of
expenses during the three and nine months ended September 30, 2019 ,
respectively. There were no new plans granted in 2020.
• Termination fee from Quad: The three and nine months ended
2019 included a
the merger agreement.
• Expenses related to acquisitions, merger agreement and dispositions: The
three and nine months ended
million and
merger agreement.
(1) As Adjusted - Refer to Impact of Change in Accounting Principle in Note 1, Overview and Basis of Presentation, for information on restated balances.
LIQUIDITY AND CAPITAL RESOURCES
The following sections describe the Company's cash flows for the nine months
ended
Nine Months Ended
September 30,
2020 2019
(in millions)
Net cash (used in) provided by operating activities
(22 ) (59 )
Net cash provided by (used in) financing
activities 3 (34 )
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$17 million for the nine months endedSeptember 30, 2020 compared to$89 million provided by operating activities for the nine months endedSeptember 30, 2019 . The change was primarily due to a decrease in sales volume, a decrease in cash collected on receivables, and increases in cash paid for restructuring activities, prepaid expenses, and liabilities subject to compromise. These changes were partially offset by decreases in inventory and cash paid on accounts payable.
Cash Flows from Investing Activities
Net cash used in investing activities for the nine months endedSeptember 30, 2020 was$22 million compared to$59 million for the same period in 2019. The decrease was primarily due to$35 million of lower capital expenditures during the nine months endedSeptember 30, 2020 compared to the same period in 2019.
Cash Flows from Financing Activities
Net cash provided by financing activities for the nine months endedSeptember 30, 2020 was$3 million compared to$34 million used in financing activities for the same period in 2019. There was minimal financing activity during the nine months endedSeptember 30, 2020 compared to the following significant activity during the nine months endedSeptember 30, 2019 : •$19 million of net proceeds from credit facility borrowings; •$33 million in payments of current maturities and long-term debt; and •$17 million of dividends paid. 57
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Dividends
As a result of the DIP Credit Agreement, the Company is restricted from issuing dividend payments.
LIQUIDITY
Cash and cash equivalents were
The Company's cash balances are held in several locations throughout the world, including amounts held outside ofthe United States . Cash and cash equivalents as ofSeptember 30, 2020 included$42 million in theU.S. and$22 million at international locations. UntilSeptember 30, 2019 , the Company maintained cash pooling structures that enabled participating international locations to draw on the pools' cash resources to meet local liquidity needs. Foreign cash balances were permitted to be loaned from certain cash pools toU.S. operating entities on a temporary basis in order to reduce the Company's short-term borrowing costs or for other purposes. The pooling structure was discontinued inOctober 2019 . Historical Information Debt Issuances
On
OnSeptember 30, 2016 , the Company entered into a credit agreement (the "Credit Agreement") that provides for (i) a senior secured term loan B facility in an aggregate principal amount of$375 million (the "Term Loan Facility") and (ii) a senior secured revolving credit facility in an aggregate principal amount of$400 million (the "Revolving Credit Facility"), which was reduced to$300 million per the amendment effective onAugust 5, 2019 . As ofSeptember 30, 2020 , the Company had$253 million of borrowings under the Revolving Credit Facility. Additionally, the Company had$24 million in outstanding letters of credit issued under the Revolving Credit Facility as ofSeptember 30, 2020 .
Voluntary Reorganization under Chapter 11
The commencement of the Chapter 11 Cases constituted an event of default with
respect to the Senior Notes, the Term Loan Facility and the Revolving Credit
Facility (the "Debt Instruments"). The Debt Instruments provide that as a result
of the commencement of the Chapter 11 Cases, the principal and interest due
thereunder shall be immediately due and payable. Any efforts to enforce payment
obligations under the Debt Instruments will be automatically stayed as a result
of the commencement of the Chapter 11 Cases, and the creditors' right of
enforcement in respect of the Debt Instruments are subject to the applicable
provisions of the Bankruptcy Code.
As a result of the Company's reorganization filing, the debt balances below were
reclassed from short-term and current portion of long-term debt and long-term
debt to liabilities subject to compromise on the condensed consolidated balance
sheet.
September 30,
2020
Term Loan Facility $ 219
Senior Secured Notes 450
Unamortized debt issuance costs (8 )
Total debt in liabilities subject to compromise $ 661
As of September 30, 2020 , the Revolving Credit Facility was reclassed out of
liabilities subject to compromise to short-term debt on the condensed
consolidated balance sheet. The change was made in the third quarter of 2020
once the Purchase Agreement was signed and it was determined the Revolving
Credit Facility is fully secured.
58
--------------------------------------------------------------------------------Debtor-in-Possession Financing
As previously disclosed, onApril 15, 2020 (the "Closing Date"), the Company entered into a Superpriority Secured Debtor-in-Possession Credit Agreement (the "DIP Credit Agreement"), upon the entry of an interim order of theBankruptcy Court granting interim approval of the DIP Credit Agreement, among the Company, as borrower, the lenders from time to time party thereto (the "DIP Lenders") andBank of America, N.A . as administrative agent (in such capacity, the "DIP Agent"), pursuant to which the DIP Lenders committed to provide a senior secured superpriority debtor-in-possession credit facility in an aggregate principal amount not to exceed$100 million (the "DIP Facility"). The DIP Facility was approved on a final basis onJune 2, 2020 . The DIP Facility consists of (i) revolving loans not to exceed an aggregate amount of$55 million (the "Revolving Loans"), and (ii) letters of credit not to exceed an aggregate amount of$45 million , with$5 million of that amount being available for the issuance of new letters of credit (together with the Revolving Loans, the "DIP Loan Commitments"). Borrowings under the DIP Facility bear interest at a rate per annum equal to, at the Company's option, either (i) the Alternate Base Rate (as defined in the DIP Credit Agreement) plus 5.75%, or (ii) LIBOR plus 6.75%. Upon an event of default under the DIP Credit Agreement (an "Event of Default"), an additional 2.00% may be added to the Interest Rate. In addition, the Company is required to pay (i) an unused line fee of 0.50% per annum (payable quarterly in arrears) on the average daily unused portion of the DIP Loan Commitments, (ii) a commitment fee of (x) 1.00% per annum on the DIP Loan Commitments, regardless of usage, plus (y)$100,000 per week for the first 20 weeks after the Closing Date, in each case, payable quarterly in arrears, (iii) a participation fee equal to 6.75% multiplied by the amounts available to be drawn under outstanding letters of credit, payable quarterly, and (iv) a fronting fee equal to 0.125% per annum on amounts available to be drawn under outstanding letters of credit, payable quarterly. Proceeds of the loans made under the DIP Facility may be used only for the following purposes: (i) working capital and other general corporate purposes, including the payment of professional fees and expenses, (ii) to pay the reasonable fees and expenses of the DIP Agent and the DIP Lenders (including the reasonable fees and expenses of counsel and financial advisors), (iii) to pay claims in respect of certain prepetition creditors, (iv) to repay indebtedness owed to holders of the Prepetition Priority Payment Obligations (as defined in the DIP Credit Agreement) (the "Prepetition Revolving Lenders"), and (v) making adequate protection payments to the Prepetition Revolving Lenders, the Prepetition Term Lenders and the Prepetition Secured Noteholders (each as defined in the DIP Credit Agreement). In connection with the DIP Credit Agreement, certain subsidiaries of the Company became parties to a guarantee agreement as guarantors (collectively, the "Guarantors," and together with the Company, the "DIP Credit Parties"). Each of the Guarantors is a debtor and debtor-in-possession in the Chapter 11 Cases. The Guarantors have guaranteed, on a joint and several basis, all of the obligations under the DIP Facility. To secure the obligations under the DIP Facility, the Company and the Guarantors have granted liens on substantially all of their assets, whether now owned or hereafter acquired. The DIP Facility will mature on the earlier of (i) the date upon which any Plan of Reorganization (as defined in the DIP Credit Agreement) becomes effective, or (ii) the six-month anniversary following the Petition Date; provided that such maturity may be extended with the consent of the Required Lenders (as defined in the DIP Credit Agreement) to a date no later than nine months after the Petition Date. The DIP Credit Agreement contains representations, warranties and covenants that are customary for debtor-in-possession facilities of this type, including, but not limited to, certain case milestones, specified restrictions on indebtedness, liens, guarantee obligations, liquidations and dissolutions, sales of assets, leases, payment of dividends and other restricted payments, voluntary payments of other indebtedness, investments, loans and advances, transactions with affiliates, sale and leaseback transactions and compliance with case milestones. The DIP Credit Agreement also contains customary events of default for facilities of this type, including failure to achieve the milestones and the occurrence of certain events in the Chapter 11 Cases.
The Company did not have borrowings related to the Revolving Loans as of
MANAGEMENT OF MARKET RISK As a result of the Company's voluntary reorganization, the majority of its debt obligations were reclassed to liabilities subject to compromise on the condensed consolidated balance sheet as ofSeptember 30, 2020 . As a result, the Company is not currently exposed to interest rate risk. 59 -------------------------------------------------------------------------------- The Company is exposed to the impact of foreign currency fluctuations in certain countries in which it operates. The exposure to foreign currency movements is limited in many countries because the operating revenues and expenses of its various subsidiaries and business units are substantially in the local currency of the country in which they operate. To the extent that borrowings, sales, purchases, revenues, expenses or other transactions are not in the local currency of the subsidiary, the Company is exposed to currency risk and may enter into foreign exchange forward contracts to hedge the currency risk. The Company is primarily exposed to the currencies of the Canadian dollar and Mexican peso. The Company does not use derivative financial instruments for trading or speculative purposes. OTHER INFORMATION
Litigation and Contingent Liabilities
For a discussion of certain litigation involving the Company, see Note 9, Commitments and Contingencies, to the condensed consolidated financial statements.
New Accounting Pronouncements and Pending Accounting Standards
Recently issued accounting standards and their estimated effect on the Company's condensed consolidated financial statements are described in Note 16, New Accounting Pronouncements, and throughout the notes to the condensed consolidated financial statements.
Available Information The Company maintains an Internet website at www.lsccom.com where the Company's annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on form 8-K and all amendments to those reports are available without charge, as soon as reasonably practicable following the time they are filed with, or furnished to, theSEC . The Principles of Corporate Governance of the Company's Board of Directors, the charters of the Audit, Human Resources and Corporate Responsibility and Governance Committees of the Board of Directors and the Company's Principles of Ethical Business Conduct are also available on the Investor Relations portion of www.lsccom.com, and will be provided, free of charge, to any stockholder who requests a copy. References to the Company's website address do not constitute incorporation by reference of the information contained on the website, and the information contained on the website is not part of this document. CAUTIONARY STATEMENT The Company has made forward-looking statements in this quarterly report on Form 10-Q that are subject to risks and uncertainties. These statements are based on the beliefs and assumptions of the Company. Generally, forward-looking statements include information concerning possible or assumed future actions, events, or results of operations of the Company. 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, 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 II of this quarterly report on Form 10-Q, and Item 1A, Risk Factors, in section Part I in the Company's annual report on Form 10-K for the year endedDecember 31, 2019 , as filed with theSEC onMarch 2, 2020 , that could cause our actual results to differ materially from those indicated in any such forward-looking statements. These factors include, but are not limited to:
• the effects of the
outcome of the proceedings in general;
• the potential adverse effects of the Chapter 11 Cases on our liquidity or
results of operations or our ability to pursue business strategies,
maintain business and operational relationships and retain key executives?
60
--------------------------------------------------------------------------------• our ability to complete definitive documentation in connection with any
Chapter 11 transaction satisfactory to the Company and our stakeholders,
and our ability to obtain requisite support for any proposed transaction
from various stakeholders and confirm and consummate that transaction in
accordance with its terms?
• whether the conditions contained in the Purchase Agreement are satisfied
and the Transactions are consummated and the timing thereof;
• our ability to obtain a new credit facility, or "exit financing" upon our
emergence from Chapter 11?
• our ability to generate sufficient liquidity to satisfy our obligations as
they become due;
• the competitive market for our products and industry fragmentation
affecting our prices;
• inability to improve operating efficiency to meet changing market conditions;
• changes in technology, including electronic substitution and migration of
paper based documents to digital data formats;
• the volatility and disruption of the capital and credit markets, and
adverse changes in the global economy;
• the effects of global market and economic conditions on our customers;
• the effect of economic weakness and constrained advertising; • uncertainty about future economic conditions;
• increased competition as a result of consolidation among our competitors;
• our ability to successfully integrate future acquisitions;
• factors that affect customer demand, including changes in postal rates,
postal regulations, delivery systems and service levels, changes in
advertising markets and customers' budgetary constraints;
• the effects of seasonality on our core businesses;
• the effects of increases in capital expenditures;
• changes in the availability or costs of key print production materials
(such as paper, ink, energy, and other raw materials), the tight labor
market, the availability of labor at our vendors or in prices received for
the sale of by-products;
• performance issues with key suppliers;
• our ability to maintain our brands and reputation;
• the retention of existing, and continued attraction of additional customers
and key employees, including management;
• the effect of economic and political conditions on a regional, national or
international basis;
• the effects of operating in international markets, including fluctuations
in currency exchange rates;
• changes in environmental laws and regulations affecting our business;
• the ability to gain customer acceptance of our new products and technologies;
• the effect of a material breach of or disruption to the security of any of
our or our vendors' systems;
• the failure to properly use and protect customer and employee information
and data;
• the effect of increased costs of providing health care and other benefits
to our employees;
• the effect of catastrophic events;
• the ability to maintain adequate payment terms with key vendors in light of
recent credit downgrades;
• the impact of tax legislation, including the CARES Act;
• increases in requirements to fund or pay withdrawal costs or required
contributions related to the Company's pension plans; and
• the effect of COVID-19 on our business.
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.
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