RR DONNELLEY
Document and Entity Information (USD $)
12 Months Ended
Dec. 31, 2016
Feb. 23, 2017
Jun. 30, 2016
Document And Entity Information [Abstract]
 
 
 
Document Type
10-K 
 
 
Amendment Flag
false 
 
 
Document Period End Date
Dec. 31, 2016 
 
 
Document Fiscal Year Focus
2016 
 
 
Document Fiscal Period Focus
FY 
 
 
Trading Symbol
RRD 
 
 
Entity Registrant Name
RR Donnelley & Sons Co 
 
 
Entity Central Index Key
0000029669 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Well-known Seasoned Issuer
Yes 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
Entity Common Stock, Shares Outstanding
 
69,885,993 
 
Entity Public Float
 
 
$ 1,170,819,591 
CONSOLIDATED STATEMENTS OF OPERATIONS (USD $)
In Millions, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2016
Dec. 31, 2015
Dec. 31, 2014
Income Statement [Abstract]
 
 
 
Products net sales
$ 5,288.1 
$ 5,312.1 
$ 5,566.2 
Services net sales
1,607.6 
1,625.2 
1,606.5 
Total net sales
6,895.7 
6,937.3 
7,172.7 
Products cost of sales (exclusive of depreciation and amortization)
4,164.4 
4,178.9 
4,362.3 
Services cost of sales (exclusive of depreciation and amortization)
1,354.5 
1,353.3 
1,336.5 
Total cost of sales
5,518.9 
5,532.2 
5,698.8 
Products gross profit
1,123.7 
1,133.2 
1,203.9 
Services gross profit
253.1 
271.9 
270.0 
Total gross profit
1,376.8 
1,405.1 
1,473.9 
Selling, general and administrative expenses (exclusive of depreciation and amortization)
900.8 
872.6 
933.1 
Restructuring, impairment and other charges-net (Note 4)
584.3 
62.7 
72.3 
Depreciation and amortization
204.2 
232.5 
254.6 
Other operating income
(11.9)
 
 
Income (loss) from operations
(300.6)
237.3 
213.9 
Interest expense-net (Note 14)
198.7 
204.1 
211.2 
Investment and other (income) expense-net
(2.1)
43.9 
22.1 
Loss on debt extinguishment
 
 
77.1 
Loss before income taxes
(497.2)
(10.7)
(96.5)
Income tax (benefit) expense (Note 13)
(12.3)
21.0 
(56.2)
Net loss from continuing operations
(484.9)
(31.7)
(40.3)
Net (loss) earnings from discontinued operations, net of income taxes
(9.7)
170.1 
161.1 
Net (loss) earnings
(494.6)
138.4 
120.8 
Less: Income (loss) attributable to noncontrolling interests
1.3 
(12.7)
3.4 
Net (loss) earnings attributable to RR Donnelley common stockholders
$ (495.9)
$ 151.1 
$ 117.4 
Continuing operations
$ (6.95)1
$ (0.28)1
$ (0.66)1
Discontinued operations
$ (0.14)1
$ 2.48 1
$ 2.43 1
Net (loss) earnings attributable to RR Donnelley stockholders
$ (7.09)1
$ 2.20 1
$ 1.77 1
Diluted net (loss) earnings per share attributable to RR Donnelley common stockholders (Note 16):
 
 
 
Continuing operations
$ (6.95)1
$ (0.28)1
$ (0.66)1
Discontinued operations
$ (0.14)1
$ 2.48 1
$ 2.43 1
Net (loss) earnings attributable to RR Donnelley stockholders
$ (7.09)1
$ 2.20 1
$ 1.77 1
Weighted average number of common shares outstanding
 
 
 
Basic
70.0 1
68.5 1
66.2 1
Diluted
70.0 1
68.5 1
66.2 1
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Parenthetical)
0 Months Ended 12 Months Ended
Oct. 2, 2016
Dec. 31, 2016
Income Statement [Abstract]
 
 
Reverse stock split
 
1-for-3 reverse stock split 
Reverse stock split, conversion ratio
0.3333 
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2016
Dec. 31, 2015
Dec. 31, 2014
Statement Of Income And Comprehensive Income [Abstract]
 
 
 
Net (loss) earnings
$ (494.6)
$ 138.4 
$ 120.8 
Other comprehensive (loss) income, net of tax (Note 17):
 
 
 
Translation adjustments
(38.3)
(55.7)
(45.2)
Adjustment for net periodic pension and other postretirement benefits plan cost
11.2 
34.8 
(240.9)
Change in fair value of available-for-sale securities
119.3 
 
 
Change in fair value of derivatives
 
0.1 
0.1 
Other comprehensive (loss) income
92.2 
(20.8)
(286.0)
Comprehensive (loss) income
(402.4)
117.6 
(165.2)
Less: comprehensive (loss) income attributable to noncontrolling interests
0.8 
(13.9)
2.9 
Comprehensive (loss) income attributable to RR Donnelley common stockholders
$ (403.2)
$ 131.5 
$ (168.1)
CONSOLIDATED BALANCE SHEETS (USD $)
In Millions, unless otherwise specified
Dec. 31, 2016
Dec. 31, 2015
ASSETS
 
 
Cash and cash equivalents
$ 317.5 
$ 288.7 
Receivables, less allowances for doubtful accounts of $35.9 in 2016 (2015 - $26.0) (Note 6)
1,354.4 
1,237.2 
Inventories (Note 7)
379.6 
352.8 
Prepaid expenses and other current assets
136.7 
86.8 
Investment in LSC and Donnelley Financial (Note 2)
328.7 
 
Current assets held for disposition (Note 2)
 
1,136.2 
Total current assets
2,516.9 
3,101.7 
Property, plant and equipment-net (Note 8)
650.3 
696.6 
Goodwill (Note 5)
602.0 
1,085.7 
Other intangible assets-net (Note 5)
171.9 
221.0 
Deferred income taxes (Note 13)
108.9 
93.1 
Other noncurrent assets
234.7 
229.1 
Noncurrent assets held for disposition (Note 2)
 
1,852.1 
Total assets
4,284.7 
7,279.3 
LIABILITIES
 
 
Accounts payable
1,001.2 
993.9 
Accrued liabilities (Note 10)
541.7 
462.1 
Short-term and current portion of long-term debt (Note 14)
8.2 
231.9 
Current liabilities held for disposition (Note 2)
 
649.4 
Total current liabilities
1,551.1 
2,337.3 
Long-term debt (Note 14)
2,379.2 
2,186.8 
Pension liabilities (Note 12)
119.4 
130.2 
Other postretirement benefits plan liabilities (Note 12)
134.1 
167.6 
Other noncurrent liabilities
193.1 
217.9 
Noncurrent liabilities held for disposition (Note 2)
 
1,542.9 
Total liabilities
4,376.9 
6,582.7 
Commitments and Contingencies (Note 11)
   
   
RR Donnelley stockholders' equity
 
 
Preferred stock, $1.00 par value Authorized: 2.0 shares; Issued: None
   
   
Common stock, $0.01 par value in 2016 (2015 - $1.25) Authorized: 165.0 shares; Issued: 89.0 shares in 2016 and 2015
0.9 
111.2 
Additional paid-in-capital
3,468.5 
3,386.8 
Accumulated deficit
(2,155.4)
(620.6)
Accumulated other comprehensive loss
(55.7)
(793.2)
Treasury stock, at cost, 19.1 shares in 2016 (2015 - 19.4 shares)
(1,364.0)
(1,401.5)
Total RR Donnelley stockholders' equity
(105.7)
682.7 
Noncontrolling interests
13.5 
13.9 
Total equity
(92.2)
696.6 
Total liabilities and equity
$ 4,284.7 
$ 7,279.3 
CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)
In Millions, except Share data, unless otherwise specified
Dec. 31, 2016
Dec. 31, 2015
Statement Of Financial Position [Abstract]
 
 
Receivables, allowance for doubtful accounts
$ 35.9 
$ 26.0 
Preferred stock, par value
$ 1.00 
$ 1.00 
Preferred stock, authorized
2,000,000 
2,000,000 
Preferred stock, Issued
Common stock, par value
$ 0.01 
$ 1.25 
Common stock, Authorized
165,000,000 
165,000,000 
Common stock, Issued
89,000,000 
89,000,000 
Treasury stock, shares
19,100,000 
19,400,000 
CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2016
Dec. 31, 2015
Dec. 31, 2014
OPERATING ACTIVITIES
 
 
 
Net (loss) earnings
$ (494.6)
$ 138.4 
$ 120.8 
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
 
 
 
Impairment charges
558.3 
36.5 
47.3 
Depreciation and amortization
363.2 
454.0 
474.0 
Provision for doubtful accounts receivable
22.7 
15.4 
16.9 
Share-based compensation
12.9 
17.3 
17.7 
Deferred income taxes
(57.6)
(36.1)
(87.0)
Changes in uncertain tax positions
(3.6)
1.3 
(3.0)
Loss (gain) on investments and other assets - net
(11.4)
14.3 
(3.9)
Loss related to Venezuela currency remeasurement - net
 
30.3 
18.4 
Loss on debt extinguishment
96.1 
 
77.1 
Net pension and other postretirement benefits plan income
(59.8)
(44.5)
(48.7)
Net loss on pension and other postretirement benefits plan settlements and curtailments
79.3 
 
95.7 
Gain on bargain purchase
 
 
(9.5)
Other
19.0 
22.1 
44.0 
Changes in operating assets and liabilities - net of acquisitions:
 
 
 
Accounts receivable - net
(226.6)
(17.6)
(49.6)
Inventories
(37.9)
16.0 
(14.1)
Prepaid expenses and other current assets
2.7 
26.3 
(10.8)
Accounts payable
(19.4)
61.0 
81.4 
Income taxes payable and receivable
(53.7)
46.9 
(3.0)
Accrued liabilities and other
(41.9)
(104.0)
0.9 
Pension and other postretirement benefits plan contributions
(22.5)
(25.6)
(41.9)
Net cash provided by operating activities
125.2 
652.0 
722.7 
INVESTING ACTIVITIES
 
 
 
Capital expenditures
(172.1)
(207.6)
(223.6)
Acquisitions of businesses, net of cash acquired
(48.1)
(118.2)
(380.8)
Disposition of businesses
13.7 
0.6 
(1.6)
Proceeds from sales of investments and other assets
3.8 
27.1 
42.7 
Transfers (to)/from restricted cash
(4.3)
(0.5)
(12.3)
Other investing activities
(3.5)
(18.5)
(1.6)
Net cash used in investing activities
(210.5)
(317.1)
(577.2)
FINANCING ACTIVITIES
 
 
 
Proceeds from issuance of long-term debt
1,164.0 
 
400.0 
Net change in short-term debt
(17.5)
11.9 
(0.4)
Payments of current maturities and long-term debt
(1,013.2)
(272.7)
(811.5)
Payments on credit facility borrowings
(665.0)
 
 
Proceeds from credit facility borrowings
850.0 
 
 
Debt issuance costs
(37.5)
 
(13.7)
Dividends paid
(173.0)
(212.6)
(203.1)
Proceeds (payments) to settle forward contracts
 
33.3 
24.0 
Net transfer of cash and cash equivalents to LSC and Donnelley Financial
(84.4)
 
 
Other financing activities
5.6 
3.6 
(0.4)
Net cash (used in) provided by financing activities
29.0 
(436.5)
(605.1)
Effect of exchange rate on cash and cash equivalents
(15.8)
(36.7)
(40.9)
Net (decrease) increase in cash and cash equivalents
(72.1)
(138.3)
(500.5)
Cash and cash equivalents at beginning of year
389.6 
527.9 
1,028.4 
Cash and cash equivalents at end of period
317.5 
389.6 
527.9 
Supplemental non-cash disclosure:
 
 
 
Assumption of warehousing equipment related to customer contract
8.8 
 
 
Debt-for-debt exchange, including debt issuance costs of $5.5 million
300.0 
 
 
Settlement of accounts receivable for acquisition of a business
 
8.6 
 
Consolidated Graphics, Esselte and MultiCorpora
 
 
 
Supplemental non-cash disclosure:
 
 
 
Issuances of shares of RR Donnelley stock for acquisitions of businesses
 
155.2 
 
Courier Corporation
 
 
 
Supplemental non-cash disclosure:
 
 
 
Issuances of shares of RR Donnelley stock for acquisitions of businesses
 
 
$ 319.0 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Parenthetical) (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2016
Consolidated Graphics, Esselte and MultiCorpora
 
Debt-for-debt exchange, debt issuance costs
$ 5.5 
Issuance of stock for acquisitions of businesses
5.7 
Courier Corporation
 
Issuance of stock for acquisitions of businesses
2.7 
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (USD $)
In Millions, except Share data
Total
Common Stock
Additional Paid-in Capital
Treasury Stock
Retained Earnings (Accumulated Deficit)
Accumulated Other Comprehensive Loss
Total RR Donnelley's Shareholders' Equity
Noncontrolling Interest
Balance at Dec. 31, 2013
$ 653.7 
$ 101.2 
$ 3,004.9 
$ (1,512.8)
$ (473.4)
$ (488.1)
$ 631.8 
$ 21.9 
Balance (in shares) at Dec. 31, 2013
 
81,000,000 
 
(20,400,000)
 
 
 
 
Net earnings (loss)
120.8 
 
 
 
117.4 
 
117.4 
3.4 
Other comprehensive (loss) income
(286.0)
 
 
 
 
(285.5)
(285.5)
(0.5)
Share-based compensation
17.7 
 
17.7 
 
 
 
17.7 
 
Issuances of common stock
300.7 
6.7 
294.0 
 
 
 
300.7 
 
Issuances of common stock (in shares)
 
5,300,000 
 
 
 
 
 
 
Issuances of treasury stock
18.3 
 
(14.3)
32.6 
 
 
18.3 
 
Issuances of treasury stock (in shares)
 
 
 
300,000 
 
 
 
 
Issuance of share-based awards, net of withholdings and other
(3.5)
 
(45.0)
41.5 
 
 
(3.5)
 
Issuance of share-based awards, net of withholdings and other (in shares)
 
 
 
300,000 
 
 
 
 
Cash dividends paid
(203.1)
 
 
 
(203.1)
 
(203.1)
 
Noncontrolling interests in acquired business
2.7 
 
 
 
 
 
 
2.7 
Distributions to noncontrolling interests
(0.9)
 
 
 
 
 
 
(0.9)
Balance at Dec. 31, 2014
620.4 
107.9 
3,257.3 
(1,438.7)
(559.1)
(773.6)
593.8 
26.6 
Balance (in shares) at Dec. 31, 2014
 
86,300,000 
 
(19,700,000)
 
 
 
 
Net earnings (loss)
138.4 
 
 
 
151.1 
 
151.1 
(12.7)
Other comprehensive (loss) income
(20.8)
 
 
 
 
(19.6)
(19.6)
(1.2)
Share-based compensation
17.3 
 
17.3 
 
 
 
17.3 
 
Issuances of common stock
154.2 
3.3 
150.9 
 
 
 
154.2 
 
Issuances of common stock (in shares)
 
2,700,000 
 
 
 
 
 
 
Issuances of treasury stock
1.0 
 
(1.2)
2.2 
 
 
1.0 
 
Issuance of share-based awards, net of withholdings and other
(2.5)
 
(37.5)
35.0 
 
 
(2.5)
 
Issuance of share-based awards, net of withholdings and other (in shares)
 
 
 
300,000 
 
 
 
 
Cash dividends paid
(212.6)
 
 
 
(212.6)
 
(212.6)
 
Noncontrolling interests in acquired business
4.6 
 
 
 
 
 
 
4.6 
Noncontrolling interests in disposed businesses
(2.4)
 
 
 
 
 
 
(2.4)
Distributions to noncontrolling interests
(1.0)
 
 
 
 
 
 
(1.0)
Balance at Dec. 31, 2015
696.6 
111.2 
3,386.8 
(1,401.5)
(620.6)
(793.2)
682.7 
13.9 
Balance (in shares) at Dec. 31, 2015
 
89,000,000 
 
(19,400,000)
 
 
 
 
Net earnings (loss)
(494.6)
 
 
 
(495.9)
 
(495.9)
1.3 
Other comprehensive (loss) income
92.2 
 
 
 
 
92.7 
92.7 
(0.5)
Share-based compensation
12.9 
 
12.9 
 
 
 
12.9 
 
Par value amendment
 
(110.3)
110.3 
 
 
 
 
 
Issuance of share-based awards, net of withholdings and other
(4.0)
 
(41.5)
37.5 
 
 
(4.0)
 
Issuance of share-based awards, net of withholdings and other (in shares)
 
 
 
300,000 
 
 
 
 
Cash dividends paid
(173.0)
 
 
 
(173.0)
 
(173.0)
 
Distribution of LSC and Donnelley Financial
(221.1)
 
 
 
(865.9)
644.8 
(221.1)
 
Distributions to noncontrolling interests
(1.2)
 
 
 
 
 
 
(1.2)
Balance at Dec. 31, 2016
$ (92.2)
$ 0.9 
$ 3,468.5 
$ (1,364.0)
$ (2,155.4)
$ (55.7)
$ (105.7)
$ 13.5 
Balance (in shares) at Dec. 31, 2016
 
89,000,000 
 
(19,100,000)
 
 
 
 
Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation and Summary of Significant Accounting Policies

Note 1. Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation —The accompanying consolidated financial statements include the accounts of R.R. Donnelley & Sons Company and its subsidiaries (the “Company” or “RR Donnelley”) and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). All intercompany transactions have been eliminated in consolidation. The accounts of businesses acquired during 2016, 2015, and 2014 are included in the consolidated financial statements from the dates of acquisition. During the fourth quarter of 2016, management realigned the Company’s reportable segments to reflect the impact of the Spinoff Transactions described below and to reflect the management reporting structure of the remaining business and the manner in which the chief operating decision maker regularly assesses information for decision-making purposes. All prior year amounts have been reclassified to conform to the Company’s current reporting structure. See Note 20, Segment Information, for additional details regarding the Company’s current reportable segments.

Spinoff Transactions

On October 1, 2016, the Company completed the separation of its financial communications and data services business (“Donnelley Financial Solutions, Inc.” or “Donnelley Financial”) and the publishing and retail-centric print services and office products business (“LSC Communications, Inc.” or “LSC”) into two separate publicly-traded companies (the "Separation"). The Company completed the tax free distribution of approximately 26.2 million shares, or 80.75%, of the outstanding common stock of Donnelley Financial and 26.2 million shares, or 80.75%, of the outstanding common stock of LSC, to the Company’s stockholders (the “Distribution”). The Distribution was made to the Company’s stockholders of record as of the close of business on September 23, 2016, who received one share of Donnelley Financial common stock and one share of LSC common stock for every eight shares of RR Donnelley common stock held as of the record date. As a result of the Distribution, Donnelley Financial and LSC are now independent public companies trading under the symbols “DFIN” and “LKSD”, respectively, on the New York Stock Exchange. Immediately following the Distribution, the Company held 6.2 million shares of Donnelley Financial Solutions common stock and 6.2 million shares of LSC common stock. The Company accounts for these investments as available-for-sale equity securities.

Beginning in the fourth quarter of 2016, the financial results of Donnelley Financial and LSC for periods prior to the Distribution have been reflected in the Company’s consolidated financial statements as discontinued operations. Sales from RR Donnelley to Donnelley Financial and LSC previously eliminated in consolidation have been recast and are now shown as external sales of RR Donnelley within the financial results of continuing operations. See Note 2, Discontinued Operations, for additional information.

Reverse Stock Split

Immediately following the Distribution on October 1, 2016, the Company effected a one for three reverse stock split for RR Donnelley common stock (the “Reverse Stock Split”). The Reverse Stock Split was approved by the Company’s Board of Directors on September 14, 2016 and previously approved by the Company’s stockholders at the annual meeting on May 19, 2016.

As a result of the Reverse Stock Split, the number of issued and outstanding and treasury shares of the Company’s common stock were reduced proportionally based on the Reverse Stock Split ratio of one share for every three shares of common stock held before the Reverse Stock Split. No fractional shares of RR Donnelley common stock were distributed to stockholders in connection with the Reverse Stock Split, but instead, all fractional shares were aggregated by the Company’s transfer agent and sold at the prevailing price in the open-market on October 6, 2016. The total number of aggregated shares of the Company’s common stock of 3,088 shares was sold for total net cash proceeds of less than $0.1 million which was then paid to stockholders in an amount equal to their respective pro rata share of the total net cash proceeds. All references in these consolidated financial statements to the number of shares of common stock and per share amounts have been retroactively adjusted to give effect to the Reverse Stock Split.  

Nature of Operations —RR Donnelley is a global, integrated communications provider enabling organizations to create, manage, deliver and optimize their multichannel marketing and business communications. The Company has a flexible and comprehensive portfolio of integrated communications solutions that allows its customers to engage audiences, reduce costs and drive revenues. RR Donnelley’s innovative content management offering, production platform, logistics services, supply chain management, outsourcing capabilities and customized consultative expertise assist its customers in the delivery of integrated messages across multiple media to highly targeted audiences at optimal times for customers in virtually every private and public sector.

Use of Estimates —The preparation of consolidated financial statements, in conformity with GAAP, requires the extensive use of management’s estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from these estimates. Estimates are used when accounting for items and matters including, but not limited to, allowance for uncollectible accounts receivable, inventory obsolescence, asset valuations and useful lives, employee benefits, self-insurance reserves, taxes, restructuring and other provisions and contingencies.

Foreign Operations —Assets and liabilities denominated in foreign currencies are translated into U.S. dollars at the exchange rates existing at the respective balance sheet dates. Income and expense items are translated at the average rates during the respective periods. Translation adjustments resulting from fluctuations in exchange rates are recorded as a separate component of other comprehensive income (loss) while transaction gains and losses are recorded in net earnings. Deferred taxes are not provided on cumulative foreign currency translation adjustments when the Company expects foreign earnings to be permanently reinvested.

Fair Value Measurements— Certain assets and liabilities are required to be recorded at fair value on a recurring basis. Fair value is determined based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. The Company records the fair value of its foreign exchange forward contracts, available-for-sale securities, interest rate swaps, pension plan assets and other postretirement plan assets on a recurring basis. Assets measured at fair value on a nonrecurring basis include long-lived assets held and used, long-lived assets held for sale, goodwill and other intangible assets. The fair value of cash and cash equivalents, accounts receivable, short-term debt and accounts payable approximate their carrying values. The three-tier value hierarchy, which prioritizes valuation methodologies based on the reliability of the inputs, is:

Level 1 Valuations based on quoted prices for identical assets and liabilities in active markets.

Level 2 Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

Level 3 Valuations based on unobservable inputs reflecting the Company’s own assumptions, consistent with reasonably available assumptions made by other market participants.

Revenue Recognition —The Company recognizes revenue for the majority of its products upon transfer of title and the passage of the risk of ownership, which is generally upon shipment to the customer. Contracts generally specify F.O.B. shipping point terms. Under agreements with certain customers, custom products may be stored by the Company for future delivery. In these situations, the Company may also receive a logistics or warehouse management fee for the services it provides. In certain of these cases, delivery and billing schedules are outlined in the customer agreement and product revenue is recognized when manufacturing is complete, title and risk of ownership transfer to the customer, and there is a reasonable assurance as to collectability. Because the majority of products are customized, product returns are not significant; however, the Company accrues for the estimated amount of customer credits at the time of sale.  

Revenue from services is recognized as services are performed. For the Company’s logistics operations, whose operations include the delivery of printed material and other products, the Company recognizes revenue upon completion of the delivery of services. Within the Company’s business process outsourcing operations, the Company provides various outsourcing services. Depending on the nature of the service performed, revenue is recognized for outsourcing services either as services are rendered or upon completion of the service. Revenues related to the Company’s digital and creative solutions operations, which include digital content management, photography, color services and page production, are recognized in accordance with the terms of the contract, typically upon completion of the performed service and acceptance by the customer.

The Company records deferred revenue in situations where amounts are invoiced but the revenue recognition criteria outlined above are not met. Such revenue is recognized when all criteria are subsequently met.

Certain revenues earned by the Company require judgment to determine if revenue should be recorded gross, as a principal, or net of related costs, as an agent. Billings for third-party shipping and handling costs as well as certain postage costs, primarily in the Company’s logistics operations, and out-of-pocket expenses are recorded gross. In the Company’s Global Turnkey Solutions and Sourcing operations, contracts are evaluated using various criteria to determine if revenue for components and other materials should be recognized on a gross or net basis. In general, these revenues are recognized on a gross basis if the Company has control over selecting vendors and pricing, is the primary obligor in the arrangement, bears all credit risk and bears the risk of loss for inventory in its possession. Revenue from contracts that do not meet these criteria is recognized on a net basis. Many of the Company’s operations process materials, primarily paper, that may be supplied directly by customers or may be purchased by the Company and sold to customers. No revenue is recognized for customer-supplied paper, but revenues for Company-supplied paper are recognized on a gross basis.

The Company records taxes collected from customers and remitted to governmental authorities on a net basis.

By-product recoveries —The Company records the sale of by-products as a reduction of cost of sales.

Cash and cash equivalents —The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Short-term securities consist of investment grade instruments of governments, financial institutions and corporations.

Receivables— Receivables are stated net of allowances for doubtful accounts and primarily include trade receivables, notes receivable and miscellaneous receivables from suppliers. No single customer comprised more than 10% of the Company’s consolidated net sales in 2016, 2015 or 2014. Specific customer provisions are made when a review of significant outstanding amounts, utilizing information about customer creditworthiness and current economic trends, indicates that collection is doubtful. In addition, provisions are made at differing rates, based upon the age of the receivable and the Company’s historical collection experience. See Note 6, Accounts Receivable, for details of activity affecting the allowance for doubtful accounts receivable.

Inventories —Inventories include material, labor and factory overhead and are stated at the lower of cost or market and net of excess and obsolescence reserves for raw materials and finished goods. Provisions for excess and obsolete inventories are made at differing rates, utilizing historical data and current economic trends, based upon the age and type of the inventory. Specific excess and obsolescence provisions are also made when a review of specific balances indicates that the inventories will not be utilized in production or sold. The cost of 44.6% and 45.9% of the inventories at December 31, 2016 and 2015, respectively, has been determined using the Last-In, First-Out (LIFO) method. This method is intended to reflect the effect of inventory replacement costs within results of operations; accordingly, charges to cost of sales generally reflect recent costs of material, labor and factory overhead. The Company uses an external-index method of valuing LIFO inventories. The remaining inventories, primarily related to certain acquired and international operations, are valued using the First-In, First-Out or specific identification methods.

Long-Lived Assets —The Company assesses potential impairments to its long-lived assets if events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impaired asset is written down to its estimated fair value based upon the most recent information available. Estimated fair market value is generally measured by discounting estimated future cash flows. Long-lived assets, other than goodwill and other intangible assets, that are held for sale are recorded at the lower of the carrying value or the fair market value less the estimated cost to sell.

Property, plant and equipment —Property, plant and equipment are recorded at cost and depreciated on a straight-line basis over their estimated useful lives. Useful lives range from 15 to 40 years for buildings, the lesser of 7 years or the lease term for leasehold improvements and from 3 to 15 years for machinery and equipment. Maintenance and repair costs are charged to expense as incurred. Major overhauls that extend the useful lives of existing assets are capitalized. When properties are retired or disposed, the costs and accumulated depreciation are eliminated and the resulting profit or loss is recognized in the results of operations.

Goodwill —Goodwill is reviewed for impairment annually as of October 31 or more frequently if events or changes in circumstances indicate that it is more likely than not that the fair value of a reporting unit is below its carrying value.

For certain reporting units, the Company may perform a qualitative, rather than quantitative, assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. In performing this qualitative analysis, the Company considers various factors, including the excess of prior year estimates of fair value compared to carrying value, the effect of market or industry changes and the reporting units’ actual results compared to projected results. Based on this qualitative analysis, if management determines that it is more likely than not that the fair value of the reporting unit is greater than its carrying value, no further impairment testing is performed.

For the remaining reporting units, the Company compares each reporting unit’s fair value, estimated based on comparable company market valuations and expected future discounted cash flows to be generated by the reporting unit, to its carrying value. If the carrying value exceeds the reporting unit’s fair value, the Company performs an additional fair value measurement calculation to determine the impairment loss, which is charged to operations in the period identified. See Note 4, Restructuring, Impairment and Other Charges, for additional information.

The Company also performs an interim review for indicators of impairment at each quarter-end to assess whether an interim impairment review is required for any reporting unit. In the Company’s interim review for indicators of impairment as of December 31, 2016, management concluded that there were no indicators that the fair value of any of the reporting units with goodwill was more likely than not below its carrying value.

Amortization —Certain costs to acquire and develop internal-use computer software are capitalized and amortized over their estimated useful life using the straight-line method, up to a maximum of five years. Amortization expense, primarily related to internally-developed software and excluding amortization expense related to other intangible assets, was $17.6 million, $14.9 million and $16.5 million for the years ended December 31, 2016, 2015 and 2014, respectively. Deferred debt issuance costs are amortized over the term of the related debt. Other intangible assets are recognized separately from goodwill and are amortized over their estimated useful lives. Other intangible assets with indefinite lives are not amortized. See Note 5, Goodwill and Other Intangible Assets, for further discussion of other intangible assets and the related amortization expense.

Financial Instruments —The Company uses derivative financial instruments to hedge exposures to interest rate and foreign exchange fluctuations in the ordinary course of business.

All derivatives are recorded as other current or noncurrent assets or other current or noncurrent liabilities on the balance sheet at their respective fair values with unrealized gains and losses recorded in other comprehensive income (loss), net of applicable income taxes, or in the results of operations, depending on the purpose for which the derivative is held. For derivatives designated and that qualify as fair value hedges, the gain or loss on the derivative, as well as the offsetting gain or loss on the hedged item attributable to the hedged risk, are recognized in the results of operations. Changes in the fair value of derivatives that do not meet the criteria for designation as a hedge at inception, or fail to meet the criteria thereafter, are recognized currently in the results of operations. At inception of a hedge transaction, the Company formally documents the hedge relationship and the risk management objective for undertaking the hedge. In addition, the Company assesses, both at inception of the hedge and on an ongoing basis, whether the derivative in the hedging transaction has been highly effective in offsetting changes in fair value of the hedged item and whether the derivative is expected to continue to be highly effective. The impact of any ineffectiveness is recognized currently in the results of operations.

The Company’s foreign exchange forward contracts and interest rate swaps are subject to enforceable master netting agreements that allow the Company to settle positive and negative positions with the respective counterparties. The Company settles foreign exchange forward contracts on a net basis when possible. Foreign exchange forward contracts that can be settled on a net basis are presented net in the Consolidated Balance Sheets. Interest rate swaps are settled on a gross basis and presented gross in the Consolidated Balance Sheets. See Note 15, Derivatives, for additional information.

Share-Based Compensation —The Company recognizes share-based compensation expense based on estimated fair values for all share-based awards made to employees and directors, including stock options, restricted stock units and performance share units. The Company recognizes compensation expense for share-based awards expected to vest on a straight-line basis over the requisite service period of the award based on their grant date fair value. See Note 18, Stock and Incentive Programs for Employees and Directors, for further discussion.

Pension and Other Postretirement Benefits Plans —The Company records annual income and expense amounts relating to its pension and other postretirement benefit plans based on calculations which include various actuarial assumptions, including discount rates, mortality, assumed rates of return, compensation increases, turnover rates and healthcare cost trend rates. The Company reviews its actuarial assumptions on an annual basis and makes modifications to the assumptions based on current rates and trends when it is deemed appropriate to do so. The effect of modifications on the value of plan obligations and assets is recognized immediately within other comprehensive income (loss) and amortized into operating earnings over future periods. The Company believes that the assumptions utilized in recording its obligations under its plans are reasonable based on its experience, market conditions and input from its actuaries and investment advisors. See Note 12, Retirement Plans, for additional information.

Taxes on Income —Deferred taxes are provided using an asset and liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

The Company recognizes deferred tax liabilities related to taxes on certain foreign earnings that are not considered to be permanently reinvested. No deferred tax liabilities are recognized for foreign earnings that are considered to be permanently reinvested. Management regularly evaluates whether foreign earnings are expected to be permanently reinvested. This evaluation requires judgment about the future operating and liquidity needs of the Company and its foreign subsidiaries. Changes in economic and business conditions, foreign or U.S. tax laws, or the Company’s financial situation could result in changes to these judgments and the need to record additional tax liabilities.

The Company is regularly audited by foreign and domestic tax authorities. These audits occasionally result in proposed assessments where the ultimate resolution might result in the Company owing additional taxes, including in some cases, penalties and interest. The Company recognizes a tax position in its financial statements when it is more likely than not (i.e., a likelihood of more than fifty percent) that the position would be sustained upon examination by tax authorities. This recognized tax position is then measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Although management believes that its estimates are reasonable, the final outcome of uncertain tax positions may be materially different from that which is reflected in the Company’s financial statements. The Company adjusts such reserves upon changes in circumstances that would cause a change to the estimate of the ultimate liability, upon effective settlement or upon the expiration of the statute of limitations, in the period in which such event occurs. See Note 13, Income Taxes, for further discussion.

Discontinued Operations
Discontinued Operations

Note 2. Discontinued Operations

On October 1, 2016, RR Donnelley completed the Separation and Distribution. Immediately following the Distribution, the Company held approximately 6.2 million shares of Donnelley Financial Solutions common stock and approximately 6.2 million shares of LSC common stock. The Company accounts for these investments as available-for-sale equity securities. The value of the Company’s investment in Donnelley Financial and LSC was approximately $328.7 million as of December 31, 2016.

In conjunction with the Separation, the Company entered into certain agreements with Donnelley Financial and LSC, to implement the legal and structural separation from Donnelley Financial and LSC, govern the relationship between the Company, Donnelley Financial and LSC up to and after the completion of the Separation, and allocate between the Company, Donnelley Financial and LSC various assets, liabilities and obligations, including, among other things, employee benefits, intellectual property and tax-related assets and liabilities. These agreements included the Separation and Distribution Agreement, Transition Services Agreement, Tax Disaffiliation Agreement, Patent Assignment and License Agreement, Trademark Assignment and License Agreement, Data Assignment and License Agreement, Software, Copyright and Trade Secret Assignment and License Agreement, Stockholder and Registration Rights Agreement and commercial and other arrangements and agreements.

After the Separation, RR Donnelley no longer consolidates the financial results of Donnelley Financial or LSC within its financial results of continuing operations. The financial results of Donnelley Financial were previously included in the financial reporting unit within the Strategic Services segment. The financial results of LSC were previously included in Publishing and Retail Services segment as well as the office products reporting unit within the Company’s Variable Print segment, substantially all of the operations previously reported as the Europe reporting unit within the Company’s International segment, all Mexican operations within the Latin America reporting unit of the Company’s International segment and the co-mail and related list services operations within the logistics reporting unit within the Company’s Strategic Services segment.

Sales from RR Donnelley to Donnelley Financial and LSC previously eliminated in consolidation have been recast and are now shown as external sales within the financial results of continuing operations. The net sales were $150.4 million, $153.4 million and $152.5 million for the years ended December 31, 2016, 2015 and 2014. For all the periods prior to the Separation, the financial results of Donnelley Financial and LSC are presented as net earnings from discontinued operations in the Consolidated Statements of Operations and assets and liabilities held for disposition in the Consolidated Balance Sheets. For all the periods after the Separation, discontinued operations includes spinoff transaction costs primarily related to losses on debt extinguishments related to debt repaid in conjunction with the spinoff transactions, the interest expense related to said debt and other spinoff related expenses. Interest expense was allocated to discontinued operations for interest expense directly attributable to the operations of the discontinued operations and interest expense related to corporate level debt that was repurchased in conjunction with the spinoff transactions.

The following table presents the financial results of discontinued operations:

 

Year ended

 

 

December 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2016

 

 

2015

 

 

2014

 

Net sales

$

3,303.4

 

 

$

4,472.9

 

 

$

4,583.3

 

Cost of sales

 

2,534.7

 

 

 

3,414.2

 

 

 

3,506.5

 

Operating expenses (a)

 

615.9

 

 

 

708.7

 

 

 

774.8

 

Interest and other (income) expense, net (b)

 

151.4

 

 

 

71.6

 

 

 

58.4

 

Earnings before income taxes

 

1.4

 

 

 

278.4

 

 

 

243.6

 

Income tax expense

 

11.1

 

 

 

108.3

 

 

 

82.5

 

Net loss from discontinued operations

$

(9.7

)

 

$

170.1

 

 

$

161.1

 

 

(a)

Includes spinoff transaction costs incurred of $81.2 million and $13.6 million, respectively, during the years ended December 31, 2016 and 2015.

 

(b)

Includes the related interest expense of the corporate level debt which was purchased in connection with the Separation totaling $55.9 million, $73.3 million and $73.3 million for the years ended December 31, 2016, 2015 and 2014. Also includes the losses on the extinguishment of corporate level debt executed in conjunction with the spinoff transactions totaling $96.1 million for the year ended December 31, 2016.

The following table presents the aggregate carrying amount of the major classes of assets and liabilities of discontinued operations:

 

December 31, 2015

 

Carrying amounts of assets included as part of discontinued operations:

 

 

 

Cash and cash equivalents

$

100.9

 

Receivables, less allowances for doubtful accounts

 

763.2

 

Inventories

 

239.2

 

Prepaid expenses and other current assets

 

32.9

 

Current assets held for disposition

 

1,136.2

 

Property, plant and equipment-net

 

751.5

 

Goodwill

 

657.9

 

Other intangible assets-net

 

217.0

 

Deferred income taxes

 

85.1

 

Other noncurrent assets

 

140.6

 

Noncurrent assets held for disposition

 

1,852.1

 

Total assets held for disposition in the consolidated balance sheets

$

2,988.3

 

 

 

 

 

Carrying amounts of liabilities included as part of discontinued operations:

 

 

 

Accounts payable

$

328.4

 

Accrued liabilities

 

318.3

 

Short-term and current portion of long-term debt

 

2.7

 

Current liabilities held for disposition

 

649.4

 

Long-term debt

 

1,001.5

 

Pension liabilities

 

384.2

 

Other noncurrent liabilities

 

157.2

 

Noncurrent liabilities held for disposition

 

1,542.9

 

Total liabilities held for disposition in the consolidated balance sheets

$

2,192.3

 

The following table presents the significant non-cash items and capital expenditures of discontinued operations: 

 

Year ended

 

 

December 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2016

 

 

2015

 

 

2014

 

Depreciation and amortization

$

159.0

 

 

$

221.5

 

 

$

219.4

 

Pension settlement charges

77.7

 

 

 

 

 

95.7

 

Impairment charges

 

1.5

 

 

 

7.1

 

 

 

22.0

 

Loss on debt extinguishments

96.1

 

 

 

 

 

 

 

Gain on bargain purchase

 

 

 

 

 

 

 

(9.5

)

Assumption of warehousing equipment related to customer contract

8.8

 

 

 

 

 

 

 

Purchase of property, plant and equipment

 

(49.0

)

 

 

(74.0

)

 

 

(89.6

)

In connection with the Separation, the Company entered into transition services agreements with Donnelley Financial and LSC, under which the companies will provide one another with certain services to help ensure an orderly transition following the Separation (the "Transition Services Agreement"). The charges for these services are intended to allow the companies, as applicable, to recover the direct and indirect costs incurred in providing such services. The Transition Services Agreement generally provides for a term of services starting at the Separation date and continuing for a period of up to twenty-four months following the Separation. During the three-month period ending December 31, 2016, the Company recognized $3.3 million as a reduction of costs within selling, general and administrative expenses within the consolidated statements of operations from the Transition Services Agreement.

The Company also entered into various commercial agreements which govern sales transactions between the companies. Under these commercial agreements, the Company recognized $98.0 million of net sales to Donnelley Financial and LSC during the three-month period ending December 31, 2016. Additionally, the Company purchased $79.0 million of products and services from Donnelley Financial and LSC during the three-month period ending December 31, 2016. The Company also recognized $17.8 million of net cash inflow from Donnelley Financial and LSC within the Company’s operating cash provided by operating activities. The Company had accounts receivable of approximately $78.1 million recorded within Receivables and accounts payable of approximately $62.6 million within Accounts Payable in the Consolidated Balance Sheets at December 31, 2016 associated with Donnelley Financial and LSC.  Additionally, included within Accrued Liabilities in the Consolidated Balance Sheets as of December 31, 2016 was $78.0 million of cash due to Donnelley Financial and LSC, to be paid in the second quarter of 2017, as required by a provision in the Separation and Distribution Agreement.

Acquisitions and Dispositions
Acquisitions and Dispositions

Note 3. Acquisitions and Dispositions

2016 Acquisition

On August 4, 2016, the Company acquired Precision Dialogue Holdings, LLC (“Precision Dialogue”), a provider of email marketing, direct mail marketing and other services with operations in the United States for a purchase price, net of cash acquired, of approximately $59.2 million. The acquisition expanded the Company’s ability to help its customers measure communications effectiveness and audience engagement. Precision Dialogue contributed $22.4 million in sales and a loss before income taxes of $2.8 million during the period ended December 31, 2016 and is included within the operating results of the Variable Print and Strategic Services segments.

The Precision Dialogue acquisition 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 over the net amounts assigned to the fair value of the assets acquired was recorded as goodwill. The goodwill associated with this acquisition is primarily attributable to the synergies expected to arise as a result of the acquisition. The total tax deductible goodwill related to the Precision Dialogue acquisition was $8.8 million.

Based on the valuation, the final purchase price allocation for the Precision Dialogue acquisition was as follows:

Accounts receivable

$

11.5

 

Inventories

 

0.4

 

Prepaid expenses and other current assets

 

0.8

 

Property, plant and equipment

 

6.9

 

Other intangible assets

 

14.1

 

Other noncurrent assets

 

1.2

 

Goodwill

 

42.5

 

Accounts payable and accrued liabilities

 

(11.4

)

Deferred taxes-net

 

(6.8

)

Total purchase price-net of cash acquired

 

59.2

 

Less: debt assumed

 

11.1

 

Net cash paid

$

48.1

 

The fair values of other intangible assets, technology and goodwill associated with the Precision Dialogue acquisition were determined to be Level 3 under the fair value hierarchy.  The following table presents the fair value, valuation techniques and related unobservable inputs for these Level 3 measurements:

 

Fair Value

 

 

Valuation Technique

 

Unobservable Input

 

Range

 

Customer relationships

$

11.0

 

 

Excess earnings

 

Discount rate

Attrition rate

 

16.0%

7.0% - 8.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

Trade names

 

1.4

 

 

Relief-from-royalty method

 

Discount rate

Royalty rate (pre-tax)

 

16.0%

0.75% - 1.25%

 

 

 

 

 

 

 

 

 

 

 

 

 

Technology

0.6

 

 

Relief-from-royalty method

 

Discount rate

Royalty rate (pre-tax)        Obsolescence factor

 

16.0%

15.0%                             0.0% - 40.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-compete agreements

 

1.7

 

 

With or without method

 

Discount rate

 

 

16.0%

 

 

 

The fair values of property, plant and equipment associated with the acquisition of Precision Dialogue were determined to be Level 3 under the fair value hierarchy and were estimated using either the market approach, if a secondhand market existed, or the cost approach.

For the year ended December 31, 2016, the Company recorded $2.7 million of acquisition-related expenses, respectively, associated with completed or contemplated acquisitions within selling, general and administrative expenses in the Consolidated Statements of Operations.

2016 Dispositions

On January 11, 2016, the Company sold two entities within the business process outsourcing reporting unit for net proceeds of $13.4 million, all of which was received in 2016. Additionally, during 2016 the Company sold three immaterial entities for proceeds of $0.3 million. The dispositions of these entities resulted in a net gain of $11.9 million during the period ended December 31, 2016, which was recorded in other operating income in the Consolidated Statements of Operations. The operations of these entities were included within the International segment.

2015 Acquisitions

The Company completed four insignificant acquisitions in 2015, one of which included the settlement of accounts receivable in exchange for the acquisition of the business.  These acquisitions were 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 over the net amounts assigned to the fair value of the assets acquired was recorded as goodwill. The goodwill associated with these acquisitions is primarily attributable to the synergies expected to arise as a result of the acquisitions.

The tax deductible goodwill related to these acquisitions was $9.8 million.

Based on the valuations, the final purchase price allocations for the 2015 acquisitions were as follows:

 

Accounts receivable

$

3.4

 

Inventories

 

0.2

 

Prepaid expenses and other current assets

 

0.6

 

Property, plant and equipment

 

5.7

 

Other intangible assets

 

5.2

 

Other noncurrent assets

 

0.2

 

Goodwill

 

15.2

 

Accounts payable and accrued liabilities

 

(5.6

)

Other noncurrent liabilities

 

(4.7

)

Total purchase price-net of cash acquired

 

20.2

 

Less: debt assumed

 

3.7

 

Less: settlement of accounts receivable for acquisition of a business

 

8.6

 

Less: value of common stock issued

 

1.0

 

Net cash paid

$

6.9

 

 

The fair values of other intangible assets and goodwill associated with these acquisitions were determined to be Level 3 under the fair value hierarchy.  The following table presents the fair value, valuation techniques and related unobservable inputs for these Level 3 measurements:

 

 

Fair Value

 

 

Valuation Technique

 

Unobservable Input

 

Range

 

Customer relationships

$

4.9

 

 

Excess earnings

 

Discount rate

Attrition rate

 

15.0% - 17.0%

5.0% - 10.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-compete agreements

 

0.3

 

 

Excess earnings

 

Discount rate

 

 

17.0%

 

 

The fair values of property, plant and equipment associated with these acquisitions were determined to be Level 3 under the fair value hierarchy and were estimated using either the market approach, if a secondhand market existed, or cost approach.

For the year ended December 31, 2015, the Company recorded $0.5 million of acquisition-related expenses associated with acquisitions completed or contemplated, within selling, general and administrative expenses in the Consolidated Statements of Operations.

2015 Disposition

On April 29, 2015, the Company sold its 50.1% interest in its Venezuelan operating entity. The proceeds were de minimis, and the sale resulted in a net loss of $14.7 million, which was recognized in net investment and other expense in the Consolidated Statement of Operations for the year ended December 31, 2015. The Company’s Venezuelan operations had net sales of $16.3 million and a loss before income taxes of $38.4 million, including the net loss as a result of the sale, for the year ended December 31, 2015.  For the year ended December 31, 2014, the Company’s Venezuelan operations had net sales of $101.5 million and earnings before income taxes of $4.3 million. The operations of the Venezuela business were included in the International segment.

2014 Acquisitions

On January 31, 2014, the Company acquired Consolidated Graphics, Inc. (“Consolidated Graphics”), a provider of digital and commercial printing, fulfillment services, print management and proprietary Internet-based technology solutions, with operations in North America, Europe and Asia. The acquisition enhanced the Company’s ability to provide integrated communications solutions for its customers. The purchase price for Consolidated Graphics was $359.9 million in cash and 5.3 million shares of RR Donnelley common stock, or a total transaction value of $660.6 million based on the Company’s closing share price on January 30, 2014, plus the assumption of Consolidated Graphics’ debt of $118.4 million. Immediately following the acquisition, the Company repaid substantially all of the debt assumed. Consolidated Graphics’ operations are included in the Variable Print segment, with the exception of operations in the Czech Republic and Japan which are included in the International segment.

For the year ended December 31, 2014, the Company recorded $7.0 million of acquisition-related expenses associated with acquisitions completed or contemplated, within selling, general and administrative expenses in the Consolidated Statements of Operations.

The Consolidated Graphics acquisition was recorded by allocating the cost of the acquisition to the assets acquired, including other intangible assets, based on its estimated fair value at the applicable acquisition date. The excess of the cost of the Consolidated Graphics acquisition over the amounts assigned to the fair value of the assets acquired was recorded as goodwill. The goodwill associated with this acquisition was primarily attributable to the synergies expected to arise as a result of the acquisition.

The tax deductible goodwill related to the Consolidated Graphics acquisition was $63.4 million.

Based on the valuations, the final purchase price allocation for this acquisition as well as the purchase price allocation for an insignificant acquisition were as follows:

 

Accounts receivable

$

171.3

 

Inventories

 

65.9

 

Prepaid expenses and other current assets

 

15.4

 

Property, plant and equipment

 

297.0

 

Other intangible assets

 

179.3

 

Other noncurrent assets

 

10.4

 

Goodwill

 

296.6

 

Accounts payable and accrued liabilities

 

(159.5

)

Other noncurrent liabilities

 

(41.5

)

Deferred taxes-net

 

(116.6

)

Total purchase price-net of cash acquired

 

718.3

 

Less: debt assumed

 

118.4

 

Less: value of common stock issued

 

300.7

 

Net cash paid

$

299.2

 

 

The fair values of other intangible assets and goodwill associated with the acquisition of Consolidated Graphics were determined to be Level 3 under the fair value hierarchy. The following table presents the fair values, valuation techniques and related unobservable inputs for these Level 3 measurements:

 

 

Fair Value

 

Valuation Technique

 

Unobservable Input

 

Range

Customer relationships

$    161.6

 

Excess earnings

 

Discount rate

Attrition rate

 

17.0% - 19.0%

5.0% - 15.0%

 

 

 

 

 

 

 

 

Trade names

17.7

 

Relief-from-royalty method

 

Discount rate

Royalty rate (pre-tax)

 

19.0%

0.5%

 

 

 

 

 

 

 

 

 

The fair values of property, plant and equipment associated with these acquisitions were determined to be Level 3 under the fair value hierarchy. Property, plant and equipment values were estimated using either the cost or market approach, if a secondhand market existed.

2014 Dispositions

On August 15, 2014, the Company sold the assets and liabilities of Journalism Online, LLC (“Journalism Online”), a provider of online subscription management services, for net proceeds of $10.5 million resulting in a gain of $11.2 million during the year ended December 31, 2014. As a result of a final sale price adjustment in accordance with the agreement, a $0.2 million loss was recognized during the year ended December 31, 2015, resulting in a total net gain of $11.0 million. The gain and loss were included in net investment and other expense in the Consolidated Statement of Operations. The operations of the Journalism Online business were included in the Strategic Services segment.

On August 11, 2014, the Company’s subsidiary, RR Donnelley Argentina S.A. (“RRDA”), filed for bankruptcy liquidation in bankruptcy court in Argentina. The bankruptcy petition was approved by the court shortly thereafter and a bankruptcy trustee was appointed. As a result of the bankruptcy liquidation, the Company recorded a loss of $16.4 million in net investment and other expense for the year ended December 31, 2014. Effective as of the court’s approval, the operating results of RRDA are no longer included in the Company’s consolidated results of operations. RRDA had net sales of $22.1 million and a loss before income taxes of $3.4 million for the year ended December 31, 2014. The operations of RRDA were included in the International segment.

On February 7, 2014, the Company sold the assets and liabilities of Office Tiger Global Real Estate Service Inc. (“GRES”), its commercial and residential real estate advisory services, for net proceeds of $1.8 million and a loss of $0.8 million, which was recognized in net investment and other expense in the Consolidated Statements of Operations. The operations of the GRES business were included in the International segment.

 

Restructuring, Impairment and Other Charges
Restructuring, Impairment and Other Charges

Note 4. Restructuring, Impairment and Other Charges

Restructuring, Impairment and Other Charges Recognized in Results of Operations

 

2016

Employee

Terminations

 

 

Other

Restructuring

Charges

 

 

Total

Restructuring

Charges

 

 

Impairment

 

 

Other

Charges

 

 

Total

 

Variable Print

$

1.4

 

 

$

1.7

 

 

$

3.1

 

 

$

557.9

 

 

$

1.9

 

 

$

562.9

 

Strategic Services

 

1.8

 

 

 

(0.1

)

 

 

1.7

 

 

 

 

 

 

0.4

 

 

 

2.1

 

International

 

9.6

 

 

 

1.8

 

 

 

11.4

 

 

 

(2.5

)

 

 

 

 

 

8.9

 

Corporate

 

9.1

 

 

 

0.1

 

 

 

9.2

 

 

 

1.2

 

 

 

 

 

 

10.4

 

Total

$

21.9

 

 

$

3.5

 

 

$

25.4

 

 

$

556.6

 

 

$

2.3

 

 

$

584.3

 

 

Restructuring and Impairment Charges

For the year ended December 31, 2016, the Company recorded net restructuring charges of $21.9 million for employee termination costs. These charges primarily related to the reorganization of certain corporate administrative functions and operations and two facility closures in the International segment. Additionally, the Company incurred lease termination and other restructuring charges of $3.5 million for the year ended December 31, 2016. For the year ended December 31, 2016, the Company also recorded $0.9 million of net gains on the sale of previously impaired assets.

Additionally in the year ended December 31, 2016, the Company recorded non-cash charges of $416.2 million and $111.6 million to recognize the impairment of goodwill in the commercial and digital print and statement printing reporting units, respectively, which are included within the Variable Print segment. The goodwill impairment charges in the commercial and digital print and statement printing reporting units were due to the continued declines in sales, primarily due to decreased volume, which resulted in a reduction in the estimated fair value of the reporting unit based on lower expectations of future revenue, profitability and cash flows as compared to the expectations as of the October 31, 2016 annual goodwill impairment test. The goodwill impairment charges were determined using the Level 3 inputs, including discounted cash flow analysis, comparable marketplace fair value data and management’s assumptions in valuing the significant tangible and intangible assets.

For the year ended December 31, 2016, the Company recorded non-cash charges of $29.7 million primarily for the impairment of certain acquired customer relationship intangible assets in the commercial and digital print reporting unit within the Variable Print segment. The impairment of the customer relationship intangible assets resulted from lower expectations of future revenue to be derived from those relationships. The impairment of the customer relationship assets was determined using Level 3 inputs and estimated based on cash flow analyses, which included management’s assumptions related to future revenues and profitability.

Other Charges

For the year ended December 31, 2016, the Company recorded charges of $2.3 million for multi-employer pension plan withdrawal obligations unrelated to facility closures. The total liabilities for the withdrawal obligations associated with the Company’s decision to withdraw from all multi-employer pension plans included in accrued liabilities and other noncurrent liabilities are $4.9 million and $34.8 million, respectively, as of December 31, 2016. See Note 12, Retirement Plans, for further discussion of multi-employer pension plans.

The Company’s multi-employer pension plan withdrawal liabilities could be affected by the financial stability of other employers participating in the plans and any decisions by those employers to withdraw from the 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 multi-employer pension plans, including certain plans from which the Company has previously withdrawn, could have a material impact on the Company’s previously estimated withdrawal liabilities, consolidated results of operations, financial position or cash flows.

 

2015

Employee

Terminations

 

 

Other

Restructuring

Charges

 

 

Total

Restructuring

Charges

 

 

Impairment

 

 

Other

Charges

 

 

Total

 

Variable Print

$

3.1

 

 

$

4.7

 

 

$

7.8

 

 

$

(0.5

)

 

$

1.8

 

 

$

9.1

 

Strategic Services

 

4.4

 

 

 

0.1

 

 

 

4.5

 

 

 

0.9

 

 

 

0.4

 

 

 

5.8

 

International

 

11.9

 

 

 

3.2

 

 

 

15.1

 

 

 

28.5

 

 

 

 

 

 

43.6

 

Corporate

 

3.0

 

 

 

1.2

 

 

 

4.2

 

 

 

 

 

 

 

 

 

4.2

 

Total

$

22.4

 

 

$

9.2

 

 

$

31.6

 

 

$

28.9

 

 

$

2.2

 

 

$

62.7

 

 

Restructuring and Impairment Charges

For the year ended December 31, 2015, the Company recorded net restructuring charges of $22.4 million for employee termination costs. These charges primarily related to a facility closure in the International segment, one facility closure in the Variable Print segment and the reorganization of certain operations. Additionally, the Company incurred lease termination and other restructuring charges of $9.2 million for the year ended December 31, 2015. For the year ended December 31, 2015, the Company also recorded $1.0 million of net gains primarily related to the sale of previously impaired buildings and machinery and equipment associated with facility closings. The fair values of the buildings and machinery and equipment were determined to be Level 3 under the fair value hierarchy and were estimated based on discussions with real estate brokers, review of comparable properties, if available, discussions with machinery and equipment brokers, dealer quotes and internal expertise related to the current marketplace conditions.

In the third quarter of 2015, as the result of the Company’s interim goodwill impairment review performed under the Company’s previous segment and reporting unit structure, the Company recorded non-cash charges of $13.7 million and $4.3 million to recognize the impairment of goodwill in the former Europe and Latin America reporting units, respectively, both of which are within the International segment. The goodwill impairment charge in the former Europe reporting unit was due to the announced reorganization of certain operations which resulted in a reduction in the estimated fair value of the reporting unit based on lower expectations of future revenue, profitability and cash flows as compared to the expectations as of prior year annual goodwill impairment test. The goodwill impairment charges were determined using Level 3 inputs, including discounted cash flow analyses, comparable marketplace fair value data and management’s assumptions in valuing the significant tangible and intangible assets.

For the year ended December 31, 2015, the Company recorded non-cash charges of $11.9 million for the impairment of intangible assets, including $9.2 million and $2.2 million related to the impairment of certain acquired customer relationship intangible assets in the previous labels reporting unit within the Variable Print segment and the Latin America reporting unit within the International segment, respectively. The impairment of the customer relationship intangible assets resulted from lower expectations of future revenue to be derived from those relationships. The impairment of the customer relationship assets was determined using Level 3 inputs and estimated based on cash flow analyses, which included management’s assumptions related to future revenues and profitability.

Other Charges

For the year ended December 31, 2015, the Company recorded charges of $2.2 million of charges for multi-employer pension plan withdrawal obligations unrelated to facility closures. The total liabilities for the withdrawal obligations associated with the Company’s decision to withdraw from all multi-employer pension plans included in accrued liabilities and other noncurrent liabilities are $4.7 million and $38.0 million, respectively, as of December 31, 2015. See Note 12, Retirement Plans, for further discussion of multi-employer pension plans.

 

2014

Employee

Terminations

 

 

Other

Restructuring

Charges

 

 

Total

Restructuring

Charges

 

 

Impairment

 

 

Other

Charges

 

 

Total

 

Variable Print

$

13.2

 

 

$

7.9

 

 

$

21.1

 

 

$

11.4

 

 

$

7.6

 

 

$

40.1

 

Strategic Services

 

2.8

 

 

 

(0.1

)

 

 

2.7

 

 

 

 

 

 

3.9

 

 

 

6.6

 

International

 

6.1

 

 

 

1.3

 

 

 

7.4

 

 

 

13.7

 

 

 

 

 

 

21.1

 

Corporate

 

2.5

 

 

 

2.0

 

 

 

4.5

 

 

 

 

 

 

 

 

 

4.5

 

Total

$

24.6

 

 

$

11.1

 

 

$

35.7

 

 

$

25.1

 

 

$

11.5

 

 

$

72.3

 

 

Restructuring and Impairment Charges

For the year ended December 31, 2014, the Company recorded net restructuring charges of $24.6 million for employee termination costs. These charges primarily related to the integration of Consolidated Graphics, including the closure of seven Consolidated Graphics facilities, as well as one additional facility closure within the Variable Print segment and the reorganization of certain operations. Additionally, the Company incurred lease termination and other restructuring charges of $11.1 million for the year ended December 31, 2014, including charges related to multi-employer pension plan withdrawal obligations as a result of facility closures. The Company also recorded $11.8 million of impairment charges primarily related to buildings and machinery and equipment associated with facility closings. The fair values of the buildings and machinery and equipment were determined to be Level 3 under the fair value hierarchy and were estimated based on discussions with real estate brokers, review of comparable properties, if available, discussions with machinery and equipment brokers, dealer quotes and internal expertise related to the current marketplace conditions.

During the fourth quarter of 2014, the Company recorded non-cash impairment charges of $7.8 million and $4.1 million related to the impairment of acquired customer relationship intangible assets within the International and Variable Print segments, respectively. The impairment of the customer relationship intangible assets resulted from a decline in expected future revenue and certain customer losses in the Canada reporting unit within the International segment and the loss of certain customers in the commercial and digital print reporting unit within the Variable Print segment. During the year ended December 31, 2014, the Company also recorded non-cash charges of $1.4 million related to the impairment of trade names in the commercial and digital print reporting unit within the Variable Print segment as a result of the integration of Consolidated Graphics. The impairment of the customer relationship assets was determined using Level 3 inputs and estimated based on cash flow analyses, which included management’s assumptions related to future revenues and profitability.

Other Charges

For the year ended December 31, 2014, the Company recorded charges of $11.5 million as a result of its decision to withdraw from all multi-employer pension plans serving facilities that are currently operating. These charges for multi-employer pension plan withdrawal obligations, unrelated to facility closures, represent the Company’s best estimate of the expected settlement of these withdrawal liabilities. See Note 12, Retirement Plans, for further discussion of multi-employer pension plans.

Restructuring Reserve

The restructuring reserve as of December 31, 2016 and 2015, and changes during the year ended December 31, 2016, were as follows:

 

 

December 31, 2015

 

 

Restructuring

Charges

 

 

Foreign

Exchange and

Other

 

 

Cash

Paid

 

 

December 31, 2016

 

Employee terminations

$

6.1

 

 

$

21.9

 

 

$

(3.6

)

 

$

(16.8

)

 

$

7.6

 

Multi-employer pension plan withdrawal obligations

 

12.7

 

 

 

0.7

 

 

 

 

 

 

(1.6

)

 

 

11.8

 

Lease terminations and other

 

2.3

 

 

 

2.8

 

 

 

(0.1

)

 

 

(3.4

)

 

 

1.6

 

Total

$

21.1

 

 

$

25.4

 

 

$

(3.7

)

 

$

(21.8

)

 

$

21.0

 

 

The current portion of restructuring reserves of $6.0 million at December 31, 2016 was included in accrued liabilities, while the long-term portion of $15.0 million, primarily related to multi-employer pension plan withdrawal obligations related to facility closures and lease termination costs, was included in other noncurrent liabilities at December 31, 2016.

The Company anticipates that payments associated with the employee terminations reflected in the above table will be substantially completed by December 2017.

Payments on all of the Company’s multi-employer pension plan withdrawal obligations are scheduled to be substantially completed by 2036. Changes based on uncertainties in these estimated withdrawal obligations could affect the ultimate charges related to multi-employer pension plan withdrawals. See Note 12, Retirement Plans, for further discussion on multi-employer pension plans.

The restructuring liabilities classified as “lease terminations and other” consisted of lease terminations, other facility closing costs and contract termination costs. Payments on certain of the lease obligations are scheduled to continue until 2018. Market conditions and the Company’s ability to sublease these properties could affect the ultimate charges related to the lease obligations. Any potential recoveries or additional charges could affect amounts reported in the Company’s financial statements.

The restructuring reserve as of December 31, 2015 and 2014, and changes during the year ended December 31, 2015, were as follows:

 

 

December 31, 2014

 

 

Restructuring

Charges

 

 

Foreign

Exchange and

Other

 

 

Cash

Paid

 

 

December 31, 2015

 

Employee terminations

$

8.8

 

 

$

22.4

 

 

$

(3.5

)

 

$

(21.6

)

 

$

6.1

 

Multi-employer pension plan withdrawal obligations

 

13.5

 

 

 

0.5

 

 

 

0.1

 

 

 

(1.4

)

 

 

12.7

 

Lease terminations and other

 

4.3

 

 

 

8.7

 

 

 

(0.3

)

 

 

(10.4

)

 

 

2.3

 

Total

$

26.6

 

 

$

31.6

 

 

$

(3.7

)

 

$

(33.4

)

 

$

21.1

 

 

The current portion of restructuring reserves of $6.6 million at December 31, 2015 was included in accrued liabilities, while the long-term portion of $14.5 million, primarily related to multi-employer pension plan complete or partial withdrawal obligations related to facility closures and lease termination costs, was included in other noncurrent liabilities at December 31, 2015.

Payments associated with the employee terminations reflected in the above table were completed by December 2016.  

Goodwill and Other Intangible Assets
Goodwill and Other Intangible Assets

Note 5. Goodwill and Other Intangible Assets

As a result of the Separation, goodwill of approximately $657.9 million was distributed with LSC and Donnelley Financial. The goodwill distributed consisted of the goodwill of the former Publishing and Retail Services segment and certain portions of the goodwill of the Strategic Services segment including the entire goodwill of the former financial reporting unit and a portion of each of the digital and creative solutions and logistics reporting units. The portion of the digital and creative solutions’ and logistics’ reporting units goodwill distributed was determined based upon the relative fair value as of October 1, 2016 of the businesses being disposed of in comparison to the overall fair value of the reporting unit as a whole. This resulted in the allocation of $25.5 million, or all, of the goodwill of the digital and creative solutions reporting unit and $104.2 million of the logistics reporting unit to the LSC disposal group.

The changes in the carrying amount of goodwill for the years ended December 31, 2016 and 2015 were as follows:

 

 

 

Variable

Print

 

 

Strategic

Services

 

 

International

 

 

Total

 

Net book value as of January 1, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

$

1,794.6

 

 

$

336.4

 

 

$

1,184.4

 

 

 

3,315.4

 

Accumulated impairment losses

 

(1,022.9

)

 

 

(148.7

)

 

 

(1,044.6

)

 

 

(2,216.2

)

Total

 

771.7

 

 

 

187.7

 

 

 

139.8

 

 

 

1,099.2

 

Acquisitions

 

2.3

 

 

 

7.5

 

 

 

5.4

 

 

 

15.2

 

Foreign exchange and other adjustments

 

(2.4

)

 

 

 

 

 

(8.3

)

 

 

(10.7

)

Impairment charges

 

 

 

 

 

 

 

(18.0

)

 

 

(18.0

)

Net book value as of December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

1,794.5

 

 

 

343.9

 

 

 

1,098.0

 

 

 

3,236.4

 

Accumulated impairment losses

 

(1,022.9

)

 

 

(148.7

)

 

 

(979.1

)

 

 

(2,150.7

)

Total

$

771.6

 

 

$

195.2

 

 

$

118.9

 

 

$

1,085.7

 

Acquisitions

 

21.2

 

 

 

21.3

 

 

 

 

 

 

42.5

 

Foreign exchange and other adjustments

 

7.5

 

 

 

 

 

 

(5.9

)

 

 

1.6

 

Impairment charges

 

(527.8

)

 

 

 

 

 

 

 

 

(527.8

)

Net book value as of December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

1,823.0

 

 

 

365.2