PART II
ITEM 5.
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MARKET FOR R.R. DONNELLEY & SONS COMPANYS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF SECURITIES
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RR Donnelleys common stock is listed and traded on the NASDAQ Stock Market and the Chicago Stock Exchange.
As of February 22, 2013, there were approximately 7,759 stockholders of record of our common stock. Quarterly closing prices of the
Companys common stock, as reported on NASDAQ, and dividends paid per share during the years ended December 31, 2012 and 2011, are contained in the chart below:
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Dividends Paid
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Closing Common Stock Prices
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2012
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2011
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2012
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2011
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High
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Low
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High
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Low
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First Quarter
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$
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0.26
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$
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0.26
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$
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15.13
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$
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11.35
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$
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19.39
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$
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17.49
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Second Quarter
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0.26
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0.26
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12.85
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10.02
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21.34
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18.58
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Third Quarter
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0.26
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0.26
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13.26
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10.60
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20.44
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13.33
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Fourth Quarter
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0.26
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0.26
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11.12
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8.58
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16.65
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13.27
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The Credit Agreement generally allows annual dividend payments of up to $200.0 million in aggregate,
though additional dividends may be allowed subject to certain conditions. See Exhibit 4.6 for additional details.
ISSUER
PURCHASES OF EQUITY SECURITIES
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Period
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Total
Number of
Shares
Purchased
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Average
Price Paid
per Share
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Total Number of
Shares Purchased
as Part of Publicly
Announced
Plans
or Programs
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Dollar
Value
of Shares that May
Yet be Purchased Under
the Plans or Programs(a)
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October 1, 2012October 31, 2012
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$
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$
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500,000,000
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November 1, 2012November 30, 2012
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$
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500,000,000
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December 1, 2012December 31, 2012
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$
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500,000,000
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Total
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$
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(a)
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On May 3, 2011, the Board of Directors of the Company approved a program that authorized the repurchase of up to $1.0 billion of the Companys common stock
through December 31, 2012. Share repurchases under the program were allowable through a variety of methods as determined by the Companys management. The repurchase authorizations did not obligate the Company to acquire any particular
amount of common stock or adopt any particular method of repurchase.
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As part of the share repurchase program,
the Company entered into an accelerated share repurchase agreement (ASR) in 2011 with an investment bank under which the Company repurchased $500.0 million of its common stock, receiving an initial delivery of 19.9 million
shares on May 10, 2011 and an additional 9.3 million shares on November 17, 2011. No other shares were repurchased under this share repurchase program.
As of January 1, 2013, no additional shares may be purchased under the authorized share repurchase program which expired on December 31, 2012.
17
EQUITY COMPENSATION PLANS
For information regarding equity compensation plans, see Item 12 of this Annual Report on Form 10-K.
PEER PERFORMANCE TABLE
The graph below compares five-year returns of the Companys common stock with those of the S&P 500 Index and a selected peer
group of companies. The comparison assumes all dividends have been reinvested, and an initial investment of $100 on December 31, 2007. The returns of each company in the peer group have been weighted to reflect their market capitalizations.
Because our services and customers are so diverse, the Company does not believe that any single published industry index is
appropriate for comparing stockholder return. Therefore, the peer group used in the performance graph combines two industry groups identified by Value Line Publishing, Inc., the publishing group (including printing companies) and the newspaper
group. The Company itself has been excluded, and its contributions to the indices cited have been subtracted out. Changes in the peer group from year to year result from companies being added to or deleted from the Value Line publishing group or
newspaper group.
Comparison of Five-Year Cumulative Total Return Among RR Donnelley, S&P 500 Index and Peer Group*
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Base
Period
2007
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Fiscal Years Ended December 31,
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Company Name / Index
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2008
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2009
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2010
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2011
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2012
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RR Donnelley
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100
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37.65
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66.58
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55.37
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48.68
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33.31
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Standard & Poors 500
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100
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63.00
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79.67
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91.68
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93.61
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108.59
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Peer Group
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100
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42.62
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65.07
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70.94
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74.01
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90.24
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Below are the specific companies included in the peer group.
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*Peer Group Companies
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A.H. Belo Corp.
American
Greetings
Consolidated Graphics Inc.
Deluxe Corp.
EW Scripps
Gannett Co.
Journal Communications
Inc.
McClatchy Co.
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McGraw-Hill Companies
Media
General
Meredith Corp.
New York Times
Co.
Scholastic Corp.
Washington
Post
Wiley (John) & Sons
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ITEM 6.
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SELECTED FINANCIAL DATA
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SELECTED FINANCIAL DATA
(in millions, except per share data)
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2012
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2011
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2010
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2009
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2008
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Net sales
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$
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10,221.9
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$
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10,611.0
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$
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10,018.9
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$
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9,857.4
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$
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11,581.6
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Net earnings (loss) from continuing operations attributable to RR Donnelley common shareholders
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(651.4
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(122.6
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221.7
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(27.3
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(191.7
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Net earnings (loss) from continuing operations attributable to RR Donnelley common shareholders per diluted share
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(3.61
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(0.63
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1.06
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(0.13
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(0.91
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Income from discontinued operations, net of tax
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1.8
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Net earnings (loss) attributable to RR Donnelley common shareholders
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(651.4
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(122.6
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221.7
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(27.3
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(189.9
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Net earnings (loss) attributable to RR Donnelley common shareholders per diluted share
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(3.61
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(0.63
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1.06
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(0.13
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(0.90
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Total assets
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7,262.7
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8,281.7
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9,083.2
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8,747.6
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9,494.3
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Long-term debt
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3,420.2
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3,416.8
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3,398.6
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2,982.5
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3,203.3
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Cash dividends per common share
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1.04
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1.04
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1.04
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1.04
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1.04
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Reflects
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results of acquired businesses from the relevant acquisition dates.
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Includes the following significant items:
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For 2012: Pre-tax restructuring and impairment charges of $1,118.5 million, $4.8 million net benefit from income tax adjustments including the
recognition of $26.1 million of previously unrecognized tax benefits due to the resolution of certain U.S. federal uncertain tax positions and a $22.4 million benefit related to the decline in value and reorganization of certain entities within the
International segment, partially offset by a valuation allowance provision of $32.7 million on certain deferred tax assets in Latin America and an $11.0 million provision related to certain foreign earnings no longer considered to be permanently
reinvested, $16.1 million pre-tax loss on the repurchases of $441.8 million of senior notes and termination of the Companys previous $1.75 billion unsecured revolving credit agreement (the Previous Credit Agreement) which was due
to expire on December 17, 2013, $4.1 million pre-tax impairment loss on an equity investment, $3.7 million pre-tax gain on pension curtailment and $2.5 million of acquisition-related expenses;
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For 2011: Pre-tax restructuring and impairment charges of $667.8 million, $74.8 million recognition of income tax benefits due to the expiration of
U.S. federal statutes of limitations for certain years,
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$69.9 million pre-tax loss on the repurchases of $427.8 million of senior notes, $38.7 million pre-tax
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19
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gain on pension curtailment, $15.3 million pre-tax contingent compensation expense related to the Journalism Online acquisition, $9.8 million pre-tax gain on the Helium investment and $2.2
million of acquisition-related expenses;
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For 2010: Pre-tax restructuring and impairment charges of $157.9 million, $13.5 million of acquisition-related expenses, $8.9 million pre-tax loss on
the currency devaluation in Venezuela, including an increase in loss attributable to noncontrolling interests of $3.6 million, and a pre-tax $1.1 million write-down of affordable housing investments;
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For 2009: Pre-tax restructuring and impairment charges of $382.7 million, $15.6 million of income tax expense due to the reorganization of entities
within the International segment, a $10.3 million pre-tax loss on the repurchases of $640.6 million of senior notes, reclassification of a pre-tax loss of $2.7 million from accumulated other comprehensive loss to loss on debt extinguishment due to
the change in the hedged forecasted interest payments resulting from the repurchase of senior notes, a $2.4 million write-down of affordable housing investments and $1.6 million of acquisition-related expenses; and
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For 2008: Pre-tax restructuring and impairment charges of $1,184.7 million, a $9.9 million pre-tax loss associated with the termination of
cross-currency swaps, a tax benefit of $228.8 million related to the decline in value and reorganization of certain entities within the International segment and a tax benefit of $38.0 million from the recognition of uncertain tax positions upon
settlement of certain U.S. federal tax audits for the years 2000 2002.
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ITEM 7.
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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The following discussion of RR Donnelleys financial condition and results of operations should be read together with our
consolidated financial statements and notes to those statements included in Item 15 of Part IV of this Annual Report on Form 10-K.
Business
R.R.
Donnelley & Sons Company (RR Donnelley, the Company, we, us, and our) is a global provider of integrated communications. The Company works collaboratively with more than 60,000
customers worldwide to develop custom communications solutions that reduce costs, drive top line growth, enhance return on investment and ensure compliance. Drawing on a range of proprietary and commercially available digital and conventional
technologies deployed across four continents, the Company employs a suite of leading Internet-based capabilities and other resources to provide premedia, printing, logistics and business process outsourcing services to clients in virtually every
private and public sector.
The Company operates primarily in the printing industry, with related product and service
offerings designed to offer customers complete solutions for communicating their messages to target audiences. The Companys reportable segments reflect the management reporting structure of the organization and the manner in which the chief
operating decision maker regularly assesses information for decision-making purposes, including the allocation of resources. The Companys segments and their product and service offerings are summarized below:
The U.S. Print and Related Services segment includes the Companys U.S. printing operations, managed as one integrated platform,
along with logistics, premedia, print management and other print related services. This segments product and related service offerings include magazines, catalogs, retail inserts, books, directories, financial printing and related services,
direct mail, forms, labels, office products, packaging, statement printing, premedia and logistics services.
The
International segment includes the Companys non-U.S. printing operations in Asia, Europe, Latin America and Canada. This segments product and related service offerings include magazines, catalogs, retail
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inserts, books, directories, financial printing and related services, direct mail, forms, labels, packaging, manuals, statement printing, premedia and logistics services. Additionally, this
segment includes the Companys business process outsourcing and Global Turnkey Solutions operations. Business process outsourcing provides transactional print and outsourcing services, statement printing, direct mail and print management
services through its operations in Europe, Asia and North America. Global Turnkey Solutions provides outsourcing capabilities, including product configuration, customized kitting and order fulfillment for technology, medical device and other
companies around the world through its operations in Europe, North America and Asia.
Corporate consists of unallocated
general and administrative activities and associated expenses including, in part, executive, legal, finance, information technology, human resources, certain facility costs and LIFO inventory provisions. In addition, certain costs and earnings of
employee benefit plans are included in Corporate and not allocated to operating segments. Corporate manages the Companys cash pooling structure, which enables participating international locations to draw on the Companys overseas cash
resources to meet local liquidity needs.
The Company separately reports its net sales and related costs of sales for its
product and service offerings. The Companys product offerings primarily consist of magazines, catalogs, retail inserts, books, directories, direct mail, financial print, forms, labels, statement printing, commercial print, office products,
packaging, manuals and print management. The Companys service offerings primarily consist of logistics, premedia, EDGAR-related and XBRL financial services and certain business outsourcing services.
Executive Overview
2012
FINANCIAL PERFORMANCE
The changes in the Companys income (loss) from operations, operating margin, net loss
attributable to RR Donnelley common shareholders and net loss attributable to RR Donnelley common shareholders per diluted share for the year ended December 31, 2012, from the year ended December 31, 2011, were due to the following
(in millions, except margin and per share data):
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Income
(Loss)
from
Operations
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Operating
Margin
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Net Earnings (Loss)
Attributable to
RR Donnelley
Common
Shareholders
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Net Earnings (Loss)
Attributable to
RR Donnelley
Common
Shareholders
per
Diluted Share
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For the year ended December 31, 2011
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$
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65.2
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0.6
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%
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$
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(122.6
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)
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$
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(0.63
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)
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2012 restructuring and impairment chargesnet
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(1,118.5
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)
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(10.9
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%)
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(981.9
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)
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(5.44
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)
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2011 restructuring and impairment chargesnet
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667.8
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6.3
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%
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532.8
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2.75
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Acquisition-related expenses
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(0.3
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)
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0.0
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%
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(0.2
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)
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Net gain (loss) on investments
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(12.1
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(0.06
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Loss on debt extinguishment
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33.5
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0.17
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Gain on pension curtailment
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(35.0
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)
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(0.3
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%)
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(21.5
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)
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(0.11
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2011 Journalism Online contingent compensation
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15.3
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0.1
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%
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9.7
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0.05
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Income tax adjustments
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(70.0
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)
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(0.36
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)
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Operations
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35.7
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0.6
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%
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(19.1
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)
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0.02
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For the year ended December 31, 2012
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$
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(369.8
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)
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(3.6
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%)
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$
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(651.4
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)
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$
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(3.61
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)
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2012 restructuring and impairment chargesnet:
included charges of $848.4 million for the
impairment of goodwill in the catalogs, magazines and retail inserts, books and directories and Europe reporting units; $158.0 million for the impairment of other intangible assets in the books and directories, catalogs,
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magazines and retail inserts and Latin America reporting units; pre-tax charges of $66.6 million for employee termination costs primarily related to the reorganization of sales and administrative
functions across all segments and the closing of five manufacturing facilities within the U.S. Print and Related Services segment and one manufacturing facility within the International segment; $25.3 million of lease termination and other
restructuring costs; and $20.2 million for impairment of other long-lived assets, primarily for machinery and equipment associated with facility closures and other asset disposals.
2011 restructuring and impairment chargesnet
: included charges of $392.3 million for the impairment of goodwill in the
commercial, forms and labels, Canada and Latin America reporting units; $90.7 million for the impairment of other intangible assets primarily in the forms and labels reporting unit; $76.7 million for employee termination costs; $59.6 million of
lease termination and other restructuring costs, including multi-employer pension plan complete or partial withdrawal charges of $15.1 million due to the closing of three manufacturing facilities within the U.S. Print and Related Services segment;
and $48.5 million for impairment of other long-lived assets, primarily for land, buildings, machinery and equipment and leasehold improvements associated with facility closures.
Acquisition-related expenses:
included pre-tax charges of $2.5 million ($2.2 million after-tax) related to legal, accounting and
other expenses for the year ended December 31, 2012 associated with acquisitions completed or contemplated. For the year ended December 31, 2011, these pre-tax charges were $2.2 million ($2.0 million after-tax).
Net gain (loss) on investments:
included a pre-tax impairment loss on an equity investment of $4.1 million ($2.6 million after-tax)
for the year ended December 31, 2012. The year ended December 31, 2011 included a pre-tax gain of $9.8 million ($9.5 million after-tax) as a result of the acquisition of Helium, in which the Company previously held an equity investment.
The pre-tax gain is net of the Companys portion of the transaction costs incurred by Helium as a result of the acquisition.
Loss on debt extinguishment:
included a pre-tax loss of $16.1 million ($10.6 million after-tax) for the year ended December 31, 2012 due to the repurchase of $341.8 million of the 4.95% senior
notes due April 1, 2014 and $100.0 million of the 5.50% senior notes due May 15, 2015 as well as the termination of the Previous Credit Agreement. The loss consisted of $27.2 million related to the premiums paid, unamortized debt issuance
costs and other expenses, partially offset by the elimination of $11.1 million of the fair value adjustment on the 4.95% senior notes. For the year ended December 31, 2011, a pre-tax loss on debt extinguishment of $69.9 million ($44.1 million
after-tax) was recognized due to the repurchase of $227.8 million of the 11.25% senior notes due February 1, 2019, $100.0 million of the 6.125% senior notes due January 15, 2017 and $100.0 million of the 5.50% senior notes due May 15,
2015.
Gain on pension curtailment:
included a pre-tax gain of $3.7 million ($2.8 million after-tax) for the year ended
December 31, 2012, related to the remeasurement of the U.K. pension plans assets and obligations that was required with the announced freeze on further benefit accruals as of December 31, 2012. For the year ended December 31,
2011, the Company recorded a pre-tax gain of $38.7 million ($24.3 million after-tax) related to the remeasurement of the U.S. pension plans assets and obligations that was required with the announced freeze on further benefit accruals under
all of the U.S. pension plans as of December 31, 2011.
2011 Journalism Online contingent compensation
: included
pre-tax expense of $15.3 million ($9.7 million after-tax) related to contingent compensation earned by the prior owners, based on achieving certain volume milestones for Journalism Onlines business following its acquisition by the Company.
Income tax adjustments:
included for the year ended December 31, 2012, the recognition of $26.1 million of
previously unrecognized tax benefits due to the resolution of certain U.S. federal uncertain tax positions and a $22.4 million benefit related to the decline in value and reorganization of certain entities within the International segment, partially
offset by a valuation allowance provision of $32.7 million on certain deferred tax assets in Latin America and an $11.0 million provision related to certain foreign earnings no longer considered to be permanently reinvested. For the year ended
December 31, 2011, an income tax
22
benefit of $74.8 million was recognized related to previously unrecognized tax benefits due to the expiration of U.S. federal statutes of limitation for certain years.
Operations:
reflected lower pension and other postretirement benefit plan expenses, cost savings from restructuring activities,
reduced depreciation and amortization expense and lower incentive compensation expense, partially offset by a net decrease in volume and unfavorable mix, price declines, lower recovery on print-related by-products, the Companys reinstated
401(k) match and higher healthcare costs. The 2011 effective tax rate reflected the recognition of previously unrecognized tax benefits due to changes in the expected resolution of certain state tax matters and the release of valuation allowances on
certain deferred tax assets. See further details in the review of operating results by segment that follows below.
2012 Overview
During 2012, the Company experienced the impact of continued economic uncertainty, overcapacity in the industry, and the
increasing impact of electronic substitution on certain product offerings. Net sales decreased during 2012 compared to 2011 in the U.S. Print and Related Services segment, as a result of lower overall volume, a decline in pass-through paper sales
and ongoing price pressures, and in the International segment, primarily due to changes in foreign exchanges rates. These decreases were partially offset by organic growth in certain products and services during 2012, despite the difficult
environment. In particular, the Company had organic growth in logistics, Asia, business process outsourcing and office products. The largest net sales declines were experienced in books and directories, due to the continuing impact of lower levels
of state and local funding for educational materials and the impact of electronic substitution on consumer books; magazines, catalogs and retail inserts, due to customers furnishing their own paper, unfavorable mix and price pressures; Europe, due
to lower technology manuals and directories volume; commercial print, due to lower volume and unfavorable mix; and variable print, due to lower volume in direct mail and statement printing.
During the years ended December 31, 2012 and 2011, the Company initiated several restructuring actions to further reduce the
Companys overall cost structure. These restructuring actions included the reorganization of sales and administrative functions across all segments as well as the closures of six manufacturing facilities during 2012. Additionally, the Company
announced a freeze on further benefit accruals under its U.S. pension plans effective as of December 31, 2011, and under its Canada pension plans effective as of March 31, 2012. Consequently, pension and other postretirement benefit plan
expense decreased in 2012 by $69.0 million as compared to the prior year. Further, the Company will make lower full-year payouts under its 2012 employee incentive compensation plans. As a result, incentive compensation expense decreased by $46.0
million as compared to 2011 on a consolidated basis, with approximately $28.8 million, $11.3 million and $5.9 million of the decrease reflected in the U.S. Print and Related Services segment, International segment and Corporate, respectively.
Net cash provided by operating activities for the year ended December 31, 2012 was $691.9 million as compared to $946.3
million for the year ended December 31, 2011. The decrease in cash provided by operating activities primarily resulted from higher pension and other postretirement benefit plan contributions, lower net sales, timing of cash collections and
payments related to the Companys reinstated 401(k) match, partially offset by lower incentive compensation payments and shifts in the timing of payments to suppliers.
On October 15, 2012, the Company entered into a $1.15 billion senior secured revolving credit facility (the Credit Agreement) which expires October 15, 2017. Borrowings under the
Credit Agreement bear interest at a base or Eurocurrency rate plus an applicable margin determined at the time of the borrowing. In addition, the Company pays facility commitment fees. The applicable margin and rate for the facility commitment fees
are set at agreed pricing levels until April 15, 2013 and will thereafter fluctuate dependent on the Credit Agreements credit ratings. The Credit Agreement replaced the Companys previous $1.75 billion unsecured revolving credit
agreement (the Previous Credit Agreement) which was due to expire on December 17, 2013. All amounts outstanding under the Previous Credit Agreement were repaid with borrowings under the Credit Agreement. The Credit Agreement is used
for general corporate purposes, including acquisitions and letters of credit.
23
OUTLOOK
Vision and Strategy
RR Donnelleys vision is to improve on our
existing position as a global provider of integrated communications by providing our customers with the highest quality products and services.
The Companys long-term strategy is focused on maximizing long-term shareholder value by driving profitable growth, continuing its focus on productivity and maintaining a disciplined approach to
capital deployment. The Company pursues three major strategic objectives, which are summarized below, along with more specific areas of focus.
|
|
|
Strategic Objective
|
|
2013 Priorities
|
Profitable growth
|
|
New product development
Leverage existing customer base to generate organic growth
Targeted mergers and acquisitions
|
|
|
Productivity and cost control
|
|
Disciplined cost management
Maintain variable cost structure
Use technology to continue to increase
productivity
|
|
|
Cash flow and liquidity
|
|
Prudent deployment of capital
Disciplined approach to mergers and acquisitions
Limit annual debt
maturities
|
The Companys long-term strategy is to generate profitable growth. In order to accomplish this, the
Company will continue to make targeted capital investments to support new business and leverage its global platform. The Company is focusing its information technology efforts on projects that facilitate integration and make it easier for customers
to manage their full range of communication needs. The Company is also working to more fully integrate its sales efforts to broaden customer relationships and meet our customers demands. The Companys global platform provides
differentiated solutions for its customers through its broad range of complementary print-related services, strong logistics capabilities, and its innovative leadership in both conventional and digital technologies.
Management believes productivity improvement and cost reduction are critical to the Companys competitiveness, while enhancing the
value the Company delivers to its customers. The Company continues to implement strategic initiatives across all platforms to reduce its overall cost structure and enhance productivity, including restructuring, consolidation, reorganization and
integration of operations, and streamlining of administrative and support activities.
The Company seeks to deploy its capital
using a balanced approach in order to ensure financial flexibility and provide returns to shareholders. Priorities for capital deployment, over time, include principal and interest payments on debt obligations, capital expenditures, targeted
acquisitions and distributions to shareholders. The Company believes that a strong financial condition is important to customers focused on establishing or growing long-term relationships with a stable provider of print and related services. The
Company also expects to make targeted acquisitions that extend its capabilities, drive cost savings and reduce future capital spending needs.
The Company uses several key indicators to gauge progress toward achieving these objectives. These indicators include net sales growth, operating margins, cash flow from operations and capital
expenditures. The Company targets long-term net sales growth at or above industry levels, while maintaining operating margins by achieving productivity improvements that offset the impact of price declines and cost inflation. Cash flows from
operations are expected to be stable over time, however, cash flows from operations in any given year can be significantly impacted by the timing of non-recurring or infrequent receipts and expenditures, the level of required pension and other
postretirement benefit plan contributions and the impact of working capital management efforts.
24
The Company faces many challenges and risks as a result of competing in highly competitive
global markets. Item 1A,
Risk Factors,
discusses many of these issues.
2013 Outlook
In 2013, the Company expects net sales to remain relatively consistent with 2012 as organic growth and price inflation in the
International segment are expected to be largely offset by continuing volume declines, price pressures and lower pass-through paper sales in certain product offerings in the U.S. Print and Related Services segment and projected unfavorable changes
in foreign exchange rates in the International segment. The highly competitive market conditions and unused industry capacity will continue to put price pressure on both transactional work and contract renewals. The Companys outlook assumes
that the U.S. and European economies will grow slowly in 2013, with somewhat faster growth in developing countries. The Company expects a subdued level of consumer discretionary spending and a stable or slightly reduced level of advertising spending
by U.S. businesses. We will continue to leverage the One RR Donnelley platform and powerful customer relationships in order to provide a larger share of our customers print and related communications needs. In addition, the Company
expects to continue cost control and productivity initiatives, including selected facility consolidations across certain platforms.
The Company initiated several restructuring actions in 2012 and 2011 to further reduce the Companys overall cost structure. These restructuring actions included the reorganization of sales and
administrative functions across all segments, as well as the closures of six manufacturing facilities during 2012. These and future cost reduction actions are expected to have a positive impact on operating earnings in 2013 and in future years.
U.S. Print and Related Services
Net sales in the U.S. Print and Related Services segment are expected to decrease in 2013 driven by ongoing price pressures, lower pass-through paper sales, volume declines and unfavorable mix primarily
in books and directories and magazines, catalogs and retail inserts. Lower volume is expected to result from a decline in consumer book demand driven by electronic substitution and declines in directory demand due to the impact of electronic
substitution and an expected decrease in advertising spending. These decreases are expected to be partially offset by an increase in educational book volumes due to anticipated slightly higher state spending. Net sales in magazines, catalogs and
retail inserts are also expected to decline due to price reductions on major contract renewals, unfavorable mix and lower pass-through paper sales. These declines are expected to be largely offset by higher logistics volumes, primarily driven by
sales resulting from the acquisitions of Presort and XPO and continuing growth in freight brokerage and courier services, and modest increases in most of the U.S. segments other products and services. Although there is continued uncertainty
around capital markets transactions activity, a substantial recovery could result in increased net sales within financial print.
Despite price pressures and lower volume, the Company expects the U.S. Print and Related Services operating income to increase from 2012, as the result of lower restructuring and impairment charges, an
improved cost structure from ongoing productivity efforts, and lower depreciation and amortization.
International
Net sales in the International segment are expected to increase from 2012 primarily driven by anticipated volume increases in Global
Turnkey Solutions and business process outsourcing, as well as the impact of price inflation in Latin America. Net sales in Asia are expected to remain stable as price pressure offsets expected volume growth in technology manuals and packaging and
related products. Europe is expected to experience continued declines in net sales driven by projected unfavorable changes in foreign exchange rates and lower pass-through paper sales, partially offset by higher projected volume in the financial
print offering in Europe.
25
Operating income in the International segment is expected to increase slightly from 2012 as
the higher volume and cost savings from ongoing productivity efforts will more than offset wage and other inflation in certain countries and price declines.
Other
The Companys pension and other postretirement benefit plans
were underfunded by $1,153.5 million and $243.1 million, respectively, as of December 31, 2012, as reported in the Companys Consolidated Balance Sheets and further described in Note 11,
Retirement Plans,
to the Consolidated
Financial Statements. Governmental regulations for measuring pension plan funded status differ from those required under accounting principles generally accepted in the United States of America (GAAP) for financial statement preparation.
Based on the plans regulatory funded status, required contributions in 2013 under all pension and other postretirement benefit plans are expected to be approximately $23.1 million, which is an expected decrease of approximately $125.6 million
compared to contributions made in 2012. The decrease in expected pension and other postretirement benefit plan contributions in 2013 are primarily a result of the provisions under the Surface Transportation Extension Act of 2012, signed on
July 6, 2012, designed to stabilize interest rates used to calculate the minimum required annual contributions for defined benefit pension plans.
The Company expects significantly lower cash inflows from reductions in working capital in 2013, reflecting the benefit realized from the Companys 2012 working capital management initiatives.
However, cash flows from operations in 2013 will benefit from the expected decrease in pension and other postretirement benefit plan contributions and lower payments for variable employee incentive compensation. The Company expects capital
expenditures to be in the range of $200 million to $225 million in 2013.
Significant Accounting Policies and Critical Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Companys
most critical accounting policies are those that are most important to the portrayal of its financial condition and results of operations, and which require the Company to make its most difficult and subjective judgments, often as a result of the
need to make estimates of matters that are inherently uncertain. The Company has identified the following as its most critical accounting policies and judgments. Although management believes that its estimates and assumptions are reasonable, they
are based upon information available when they are made, and therefore, actual results may differ from these estimates under different assumptions or conditions.
Revenue Recognition
The Company recognizes revenue for the majority of its
products upon the transfer of title and risk of ownership, which is generally upon shipment to the customer. Contracts and customer agreements 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 reasonable assurance as to collectability. Because substantially all of the Companys
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. Within the Companys financial print operations, which serve the global financial services end market, the Company produces highly
customized materials, such as regulatory S-filings and initial public offerings documents, as well as EDGAR-related and
26
XBRL services. Revenue is recognized for these services following final delivery of the printed product or upon completion of the service performed. With respect to the Companys logistics
operations, whose operations include the delivery of printed material, the Company recognizes revenue upon completion of the delivery of services. Revenues related to the Companys premedia operations, which include digital content management,
photography, color services and page production, are recognized in accordance with the terms of the contract, which are typically upon completion of the performed service and acceptance by the customer.
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, primarily in the Companys logistics operations, and out-of-pocket expenses are recorded gross. In the Companys Global Turnkey Solutions operations, each contract is
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 and bears credit risk and 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 Companys
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. As a result, the Companys reported sales and margins may be impacted by the mix of customer-supplied paper and Company-supplied paper.
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.
Accounts Receivable
The Company maintains an allowance for doubtful accounts, which is reviewed for estimated losses resulting from the inability of its customers to make required payments for products and services. 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 Companys past collection experience. The Companys estimates of the recoverability of accounts receivable could change, and additional changes to the allowance could be necessary in the
future, if any major customers creditworthiness deteriorates or actual defaults are higher than the Companys historical experience.
Inventories
The Company
records inventories at the lower of cost or market value. A majority of the Companys inventories are valued under the last-in first-out (LIFO) basis. Changes in inflation indices may cause an increase or decrease in the value of inventories
accounted for under the LIFO costing method. The Company maintains inventory allowances for excess and obsolete inventories determined in part by future demand forecasts. If there were a sudden and significant decrease in demand for its products, or
if there were a higher incidence of inventory obsolescence because of changing technology and customer requirements, the Company could be required to increase its inventory allowances.
Goodwill and Other Long-Lived Assets
The Companys methodology for
allocating the purchase price of acquisitions is based on established valuation techniques that reflect the consideration of a number of factors, including valuations performed by third-party appraisers when appropriate. Goodwill is measured as the
excess of the cost of an acquired entity over the fair value assigned to identifiable assets acquired and liabilities assumed. Based on its organization structure, the Company has identified fifteen reporting units for which cash flows are
determinable and to which goodwill may be allocated. Goodwill is either assigned to a specific reporting unit or allocated between reporting units based on the relative excess fair value of each reporting unit. When the Companys organization
structure
27
changes, new or revised reporting units may be identified, and goodwill is reallocated, if necessary, based on relative excess fair value.
The Company performs its goodwill impairment tests annually as of October 31, or more frequently if an event occurs or circumstances
change that would more likely than not reduce the fair value of a reporting unit below its carrying value. The Company 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. As part of its interim reviews, management analyzes potential changes in the value of individual reporting units based on each reporting units operating results for the period compared to expected results as of
the prior years annual impairment test. In addition, management considers how other key assumptions, including discount rates and expected long-term growth rates, used in the last annual impairment test, could be impacted by changes in market
conditions and economic events. Based on these interim assessments, management concluded that as of the interim periods, no events or changes in circumstances indicated that it was more likely than not that the fair value for any reporting unit had
declined below its carrying value.
As of October 31, 2012, all reporting units had goodwill except for commercial,
business process outsourcing, Canada and Latin America. Those reporting units with goodwill as of October 31, 2012 were reviewed for impairment using either a qualitative or quantitative assessment.
Qualitative Assessment for Impairment
For the forms and labels reporting unit, the Company performed a qualitative assessment to determine whether it was more likely than not that the fair value of the reporting unit was less than its
carrying amount. In performing this analysis the Company considered various factors, including the effect of market or industry changes and the reporting units actual results compared to projected results.
As part of the qualitative review for impairment, management analyzed the potential change in fair value of the forms and labels
reporting unit based on its operating results for the ten months ended October 31, 2012 compared to expected results. In addition, management considered how other key assumptions, such as the discount rate, used in the 2011 impairment test
could be impacted by changes in market conditions and economic events. Since October 31, 2011, the market value of the Companys stock has decreased and market yields on the Companys debt have remained relatively constant, which
management considered in performing its qualitative assessment of whether it was more likely than not that the fair value of the reporting unit was less than its carrying value. Based on this qualitative assessment, management concluded that as of
October 31, 2012, it was more likely than not that the fair value of the forms and labels reporting unit was greater than its carrying value. The forms and labels reporting units goodwill balance was $7.2 million as of October 31,
2012, related to the acquisition of Stratus on November 21, 2011.
Quantitative Assessment for Impairment
For the remaining ten reporting units with goodwill, a two-step method was used for determining goodwill impairment. In
the first step (Step One), the Company compared the estimated fair value of each reporting unit to its carrying amount, including goodwill. If the carrying amount of a reporting unit exceeded the estimated fair value, the second step
(Step Two) was completed to determine the amount of the impairment charge. Step Two requires the allocation of the estimated fair value of the reporting unit to the assets, including any unrecognized intangible assets, and liabilities in
a hypothetical purchase price allocation. Any remaining unallocated fair value represents the implied fair value of goodwill, which is compared to the corresponding carrying value of goodwill to compute the goodwill impairment charge.
As part of its impairment test for these reporting units, the Company engaged a third-party appraisal firm to assist the Company in its
determination of the estimated fair value. This determination included estimating the fair value using both the income and market approaches. The income approach requires management to estimate a number of factors for each reporting unit, including
projected future operating results, economic projections,
28
anticipated future cash flows, discount rates and the allocation of shared or corporate items. The market approach estimates fair value using comparable marketplace fair value data from within a
comparable industry grouping. The Company weighted both the income and market approach equally to estimate the concluded fair value of each reporting unit.
The determination of fair value in Step One and the allocation of that value to individual assets and liabilities in Step Two required the Company to make significant estimates and assumptions. These
estimates and assumptions primarily included, but are not limited to: the selection of appropriate peer group companies; control premiums appropriate for acquisitions in the industries in which the Company competes; the discount rate; terminal
growth rates; and forecasts of revenue, operating income, depreciation and amortization, restructuring charges and capital expenditures. The allocation of fair value under Step Two required several analyses to determine the fair value of assets and
liabilities including, among others, trade names, customer relationships, and property, plant and equipment.
As a result of
the 2012 annual goodwill impairment test, the Company recognized a total non-cash charge of $848.4 million for the impairment of goodwill in the magazines, catalogs and retail inserts, books and directories and Europe reporting units. The goodwill
impairment charge resulted from reductions in the estimated fair value of these reporting units, based on lower expectations for future revenue, profitability and cash flows as compared to expectations as of the last annual goodwill impairment test.
The lower expectations for magazines, catalogs and retail inserts were due to price pressures driven by excess capacity in the industry and erosion of ad pages and circulation of magazines. The lower expectations for books and directories were due
to lower demand for educational books as a result of state and local budget constraints, the impact of electronic substitution on consumer book and directory volumes and price pressure driven by excess capacity in the industry. The lower
expectations for Europe were due to lower volumes from existing customers and price pressures driven by excess capacity in the industry. As of December 31, 2012, there was $18.1 million of goodwill remaining in the magazines, catalogs and
retail inserts reporting unit. The books and directories and Europe reporting units had no remaining goodwill as of December 31, 2012.
Goodwill Impairment Assumptions
Although the Company believes its
estimates of fair value are reasonable, actual financial results could differ from those estimates due to the inherent uncertainty involved in making such estimates. Changes in assumptions concerning future financial results or other underlying
assumptions could have a significant impact on either the fair value of the reporting units, the amount of the goodwill impairment charge, or both. Future declines in the overall market value of the Companys equity and debt securities may also
result in a conclusion that the fair value of one or more reporting units has declined below its carrying value.
One measure
of the sensitivity of the amount of goodwill impairment charges to key assumptions is the amount by which each reporting unit passed (fair value exceeds the carrying amount) or failed (the carrying amount exceeds fair value)
Step One of the goodwill impairment test. For the seven reporting units that passed Step One, fair values exceeded the carrying amounts by between 17.4% and 382.0% of their respective estimated fair values. Relatively small changes in the
Companys key assumptions would not have resulted in any additional reporting units failing Step One. For the three reporting units that failed, the carrying amounts exceeded fair value by between 62.8% and 184.8% of their estimated fair
values. Relatively small changes in key assumptions would not have resulted in these reporting units passing Step One.
Generally, changes in estimates of expected future cash flows would have a similar effect on the estimated fair value of the reporting
unit. That is, a 1.0% decrease in estimated annual future cash flows would decrease the estimated fair value of the reporting unit by approximately 1.0%. The estimated long-term net sales growth rate can have a significant impact on the estimated
future cash flows, and therefore, the fair value of each reporting unit. A 1.0% decrease in the long-term net sales growth rate would have resulted in no additional reporting units failing Step One of the goodwill impairment test. Of the other key
assumptions that impact the estimated fair values, most reporting units have the greatest sensitivity to changes in the estimated discount rate. The discount
29
rate for the reporting units in the U.S. Print and Related Services segment was estimated to be 10.0% for all reporting units as of October 31, 2012. Estimated discount rates for units in
the International segment ranged from 12.0% to 16.0%. A 1.0% increase in estimated discount rates would have resulted in no additional reporting units failing Step One. The Company believes that its estimates of future cash flows and discount rates
are reasonable, but future changes in the underlying assumptions could differ due to the inherent uncertainty in making such estimates. Additionally, further price deterioration or lower volume could have a significant impact on the fair values of
the reporting units.
Other Long-Lived Assets
The Company evaluates the recoverability of other long-lived assets, including property, plant and equipment and certain identifiable intangible assets, whenever events or changes in circumstances
indicate that the carrying amount of an asset or asset group may not be recoverable. The Company performs impairment tests of indefinite-lived intangible assets on an annual basis or more frequently in certain circumstances. Factors which could
trigger an impairment review include significant underperformance relative to historical or projected future operating results, significant changes in the manner of use of the assets or the strategy for the overall business, a significant decrease
in the market value of the assets or significant negative industry or economic trends. When the Company determines that the carrying amount of long-lived assets may not be recoverable based upon the existence of one or more of the indicators, the
assets are assessed for impairment based on the estimated future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. If the carrying amount of an asset exceeds its estimated future undiscounted cash
flows, an impairment loss is recorded for the excess of the assets carrying amount over its fair value. During the year ended December 31, 2012, the Company recognized non-cash impairment charges of $158.0 million related to acquired
customer relationship intangible assets in the books and directories and magazines, catalogs and retail inserts reporting units within the U.S. Print and Related Services segment and the Latin America reporting unit within the International segment.
In addition, the Company recognized non-cash impairment charges of $23.6 million during the year ended December 31, 2012, related to land, buildings, machinery and equipment, leasehold improvements and other asset disposals, primarily as a
result of restructuring actions.
Commitments and Contingencies
The Company is subject to lawsuits, investigations and other claims related to environmental, employment, commercial and other matters, as
well as preference claims related to amounts received from customers and others prior to their seeking bankruptcy protection. Periodically, the Company reviews the status of each significant matter and assesses potential financial exposure. If the
potential loss from any claim or legal proceeding is considered probable and the related liability is estimable, the Company accrues a liability for the estimated loss. Because of uncertainties related to these matters, accruals are based on the
best information available at the time. As additional information becomes available, the Company reassesses the related potential liability and may revise its estimates.
The Company purchases third-party insurance for workers compensation, automobile and general liability claims that exceed a certain level. The Company is responsible for the payment of claims below
and above these insured limits, and consulting actuaries are utilized to assist the Company in estimating the obligation associated with incurred losses, which are recorded in accrued and other non-current liabilities. Historical loss development
factors for both the Company and the industry are utilized to project the future development of incurred losses, and these amounts are adjusted based upon actual claims experience and settlement. If actual experience of claims development is
significantly different from these estimates, an adjustment in future periods may be required. Expected recoveries of such losses are recorded in other current and other non-current assets.
Restructuring
The Company records restructuring charges when liabilities
are incurred as part of a plan approved by management with the appropriate level of authority for the elimination of duplicative functions, the closure of
30
facilities, or the exit of a line of business, generally in order to reduce the Companys overall cost structure. The restructuring liabilities might change in future periods based on
several factors that could differ from original estimates and assumptions. These include, but are not limited to: contract settlements on terms different than originally expected; ability to sublease properties based on market conditions at rates or
on timelines different than originally estimated; or changes to original plans as a result of acquisitions. Such changes might result in reversals of or additions to restructuring charges that could affect amounts reported in the Consolidated
Statements of Operations of future periods.
Accounting for Income Taxes
Significant judgment is required in determining the provision for income taxes and related accruals, deferred tax assets and liabilities
and any valuation allowance recorded against deferred tax assets. In the ordinary course of business, there are transactions and calculations where the ultimate tax outcome is uncertain. Additionally, the Companys tax returns are subject to
audit by various U.S. and foreign tax authorities. 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. The Consolidated Financial Statements as of
December 31, 2012 and 2011 reflect these tax positions. 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 Companys
historical financial statements.
The Company has recorded deferred tax assets related to future deductible items, including
domestic and foreign tax loss and credit carryforwards. The Company evaluates these deferred tax assets by tax jurisdiction. The utilization of these tax assets is limited by the amount of taxable income expected to be generated within the allowable
carryforward period and other factors. Accordingly, management has provided a valuation allowance to reduce certain of these deferred tax assets when management has concluded that, based on the weight of available evidence, it is more likely than
not that the deferred tax assets will not be fully realized. If actual results differ from these estimates, or the estimates are adjusted in future periods, adjustments to the valuation allowance might need to be recorded. As of December 31,
2012 and 2011, valuation allowances of $273.6 million and $273.2 million, respectively, were recorded in the Companys Consolidated Financial Statements.
Deferred U.S. income taxes and foreign withholding taxes are not provided on the excess of the investment value for financial reporting over the tax basis of investments in those foreign subsidiaries for
which such excess is considered to be permanently reinvested in those operations. The Company has recognized deferred tax liabilities of $9.1 million as of December 31, 2012 related to local withholding taxes on certain foreign earnings that
are not considered to be permanently reinvested.
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. The amount of expense recognized for these awards is determined by the Companys estimates of several factors, including future forfeitures of awards, expected volatility of the Companys stock and the
average life of options prior to expiration. See Note 17,
Stock and Incentive Programs for Employees
, to the Consolidated Financial Statements for further discussion.
Pension and Other Postretirement Benefit 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,
31
expected long-term rates of return, compensation increases, turnover rates and health care cost trend rates. The Company reviews its actuarial assumptions on an annual basis as of
December 31 (or more frequently if a significant event requiring remeasurement occurs) and modifies the assumptions based on current rates and trends when it is appropriate to do so. The effects of modifications are recognized immediately on
the Consolidated Balance Sheet, but are generally amortized into operating earnings over future periods, with the deferred amount recorded in accumulated other comprehensive income (loss). 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. The Company determines its assumption for the discount rate to be used for purposes of
computing pension and other postretirement benefit plan obligations based on an index of high-quality corporate bond yields and matched-funding yield curve analysis. The discount rates for pension benefits at December 31, 2012 and 2011 were
4.2% and 4.9%, respectively. The discount rates for postretirement benefits at December 31, 2012 and 2011 were 3.9% and 4.8%, respectively.
A one-percentage point decrease in the discount rates at December 31, 2012 would have increased the accumulated benefit obligation and projected benefit obligation by the following amounts (in
millions):
Pension Plans
|
|
|
|
|
Accumulated benefit obligation
|
|
$
|
640.0
|
|
Projected benefit obligation
|
|
|
641.9
|
|
Other Postretirement Benefit Plans
|
|
|
|
|
Accumulated benefit obligation
|
|
$
|
50.2
|
|
Pension and other postretirement benefit plan contributions are dependent on many factors, including
returns on invested assets and discount rates used to determine pension obligations. The Company made contributions of $140.7 million to its pension plans and $8.0 million to its other postretirement benefit plans in 2012. The Company estimates that
it will make cash contributions totaling approximately $23.1 million to its pension and other postretirement benefit plans in 2013.
On December 20, 2012, the Company announced a freeze on further benefit accruals under its U.K. pension plans as of December 31, 2012. Beginning January 1, 2013, participants ceased earning
additional benefits under the U.K. plan and no new participants entered these plans. The plan freeze required a remeasurement of the plans assets and obligations as of December 31, 2012, which resulted in a non-cash curtailment gain of
$3.7 million recognized in 2012. Additionally, on February 1, 2012, the Company announced a freeze on further benefit accruals under its Canadian pension plans as of March 31, 2012. On November 2, 2011, the Company announced a freeze
on further benefit accruals under all U.S. pension plans as of December 31, 2011. The remeasurement of the U.S. pension plans assets and obligations as of November 2, 2011 resulted in a non-cash curtailment gain of $38.7 million
recognized in 2011.
The Company employed a total return investment approach for its pension and other postretirement benefit
plans whereby a mix of equities, fixed income and, for certain pension plans, alternative investments are used to maximize the long-term return of pension and other postretirement benefit plan assets. The intent of this strategy is to minimize plan
contributions by outperforming the growth in plan liabilities over the long run. Risk tolerance is established through careful consideration of plan liabilities, plan funded status and corporate financial condition. The investment portfolios contain
a diversified blend of equity, fixed income and alternative investments. Furthermore, equity investments are diversified across geography, market capitalization and investment style. Fixed income investments are diversified across geography and
include holdings of corporate bonds, government and agency bonds and asset-backed securities. Investment risk is measured and monitored on an ongoing basis through annual liability measurements, periodic asset/liability studies and quarterly
investment portfolio reviews. As the majority of the Companys pension plans have been frozen as of December 31, 2012, the Company continues to evaluate its investment approach and may, over time, transition to a risk management
32
approach for its pension and other postretirement benefit plan investments. The overall investment objective of the risk management approach is to reduce the risk of significant decreases in the
plans funded status.
The expected long-term rate of return for plan assets is based upon many factors including
expected asset allocations, historical asset returns, current and expected future market conditions and risk. In addition, the Company considered the impact of the current interest rate environment on the expected long-term rate of return for
certain asset classes, particularly fixed income. The target asset allocation percentage for both the pension and other postretirement benefit plans was approximately 75.0% for equity and other securities and approximately 25.0% for fixed income.
The expected long-term rate of return on plan assets assumption at December 31, 2012 was 8.5% and 7.5% for the Companys major U.S. and Canadian pension plans, respectively, and 7.6% for the Companys U.S. other postretirement benefit
plan. The expected long-term rate of return on plan assets assumption that will be used to calculate net pension and other postretirement benefit plan expense in 2013 is 8.0% and 7.25% for the Companys major U.S. and Canadian pension plans,
respectively, and 7.25% for the Companys U.S. other postretirement benefit plan.
The Company also maintains several
pension plans in other international locations. The expected returns on plan assets and discount rates for these plans are determined based on each plans investment approach, local interest rates and plan participant profiles.
Off-Balance Sheet Arrangements
Other than non-cancelable operating lease commitments, the Company does not have off-balance sheet arrangements, financings or special purpose entities.
Financial Review
In the
financial review that follows, the Company discusses its consolidated results of operations, financial position, cash flows and certain other information. This discussion should be read in conjunction with the Companys consolidated financial
statements and related notes that begin on page F-1.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2012 AS COMPARED TO THE YEAR
ENDED DECEMBER 31, 2011
The following table shows the results of operations for the years ended December 31, 2012 and
2011, which reflects the results of acquired businesses from the relevant acquisition dates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(in millions, except percentages)
|
|
|
|
|
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
8,835.1
|
|
|
$
|
9,375.1
|
|
|
$
|
(540.0
|
)
|
|
|
(5.8
|
%)
|
Services
|
|
|
1,386.8
|
|
|
|
1,235.9
|
|
|
|
150.9
|
|
|
|
12.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
|
10,221.9
|
|
|
|
10,611.0
|
|
|
|
(389.1
|
)
|
|
|
(3.7
|
%)
|
Products cost of sales (exclusive of depreciation and amortization)
|
|
|
6,874.2
|
|
|
|
7,185.2
|
|
|
|
(311.0
|
)
|
|
|
(4.3
|
%)
|
Services cost of sales (exclusive of depreciation and amortization)
|
|
|
1,014.8
|
|
|
|
906.6
|
|
|
|
108.2
|
|
|
|
11.9
|
%
|
Selling, general and administrative expenses (exclusive of depreciation and amortization)
|
|
|
1,102.6
|
|
|
|
1,236.3
|
|
|
|
(133.7
|
)
|
|
|
(10.8
|
%)
|
Restructuring and impairment chargesnet
|
|
|
1,118.5
|
|
|
|
667.8
|
|
|
|
450.7
|
|
|
|
67.5
|
%
|
Depreciation and amortization
|
|
|
481.6
|
|
|
|
549.9
|
|
|
|
(68.3
|
)
|
|
|
(12.4
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
10,591.7
|
|
|
|
10,545.8
|
|
|
|
45.9
|
|
|
|
0.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
$
|
(369.8
|
)
|
|
$
|
65.2
|
|
|
$
|
(435.0
|
)
|
|
|
nm
|
|
33
Consolidated
Net sales of products for the year ended December 31, 2012 decreased $540.0 million, or 5.8%, to $8,835.1 million versus the same period in the prior year, including an $87.3 million, or 0.9%,
decrease due to the impact of changes in foreign exchange rates. Net sales of products decreased in the U.S. Print and Related Services segment, resulting from lower overall volume, decreased pass-through paper sales, ongoing price pressures and a
decline in capital markets transactions activity, and in the International segment, primarily due to changes in foreign exchange rates. These decreases were partially offset by organic growth in Asia, increased volume in business process outsourcing
and rebate adjustments to net sales to correct an over-accrual of rebates due to certain office products customers.
Net sales
from services for the year ended December 31, 2012 increased $150.9 million, or 12.2%, to $1,386.8 million versus the same period in the prior year, including a $5.6 million, or 0.5%, impact of unfavorable changes in foreign exchange rates. Net
sales from services increased due to higher logistics volume, driven primarily by growth in freight brokerage services, as well as increased volume in XBRL financial services.
Products cost of sales decreased $311.0 million to $6,874.2 million for the year ended December 31, 2012 versus the prior year, primarily due to lower overall volume, as well as lower pension and
other postretirement benefit plan expenses, primarily resulting from the freeze on further benefit accruals under all U.S. and Canadian pension plans beginning January 1, 2012 and April 1, 2012, respectively, and lower incentive
compensation expense, partially offset by lower recovery on print-related by-products and the Companys reinstated 401(k) match. Products cost of sales as a percentage of products net sales increased from 76.6% to 77.8%, reflecting unfavorable
product mix, price pressures, lower recovery on print-related by-products and the Companys reinstated 401(k) match.
Services cost of sales increased $108.2 million to $1,014.8 million for the year ended December 31, 2012 versus the prior year
primarily due to higher logistics volume, as well as increased XBRL financial services volume and the Companys reinstated 401(k) match, partially offset by lower pension and other postretirement benefit plan expense, resulting from the freeze
on further benefit accruals under all U.S. and Canadian pension plans, and lower incentive compensation expense. Services cost of sales as a percentage of services net sales decreased from 73.4% to 73.2%, reflecting favorable mix and pricing in
logistics, lower pension and other postretirement benefit plan expense and lower incentive compensation expense, offset by unfavorable mix and pricing in financial services and the Companys reinstated 401(k) match.
Selling, general and administrative expenses decreased $133.7 million to $1,102.6 million, and from 11.7% to 10.8% as a percentage of net
sales, for the year ended December 31, 2012 versus the prior year due to lower pension and other postretirement benefit plan expenses, primarily resulting from the freeze on further benefit accruals under all U.S. and Canadian pension plans,
cost savings from restructuring activities and lower incentive compensation expense.
For the year ended December 31,
2012, the Company recorded a net restructuring and impairment provision of $1,118.5 million compared to $667.8 million in 2011. In 2012, these charges included non-cash pre-tax charges of $848.4 million for the impairment of goodwill for the
magazines, catalogs and retail inserts and books and directories reporting units within the U.S. Print and Related Services segment and the Europe reporting unit within the International segment. The goodwill impairment charge resulted from
reductions in the estimated fair value of the magazines, catalogs and retail inserts, books and directories and Europe reporting units, based on lower expectations for future revenue, profitability and cash flows as compared to expectations as of
the last annual goodwill impairment test. The lower expectations for magazines, catalogs and retail inserts were due to price pressures driven by excess capacity in the industry and erosion of ad pages and circulation for magazines. The lower
expectations for books and directories were due to lower demand for educational books as a result of state and local budget constraints, the impact of electronic substitution on consumer book and directory volumes and price pressure driven by excess
capacity in the industry. The lower expectations for Europe were due to lower volumes from existing customers and price pressures driven by excess capacity in the industry. In addition, the Company recorded non-cash charges of $158.0 million related
to the impairment of acquired customer relationship intangible assets in
34
the books and directories and magazines, catalogs and retail inserts reporting units within the U.S. Print and Related Services segment and the Latin America reporting unit within the
International segment. For the year ended December 31, 2012, the Company also recorded $66.6 million for workforce reductions of 2,200 employees (2,146 of whom were terminated as of December 31, 2012) associated with actions resulting from
the reorganization of sales and administrative functions across all segments, the closing of five manufacturing facilities within the U.S. Print and Related Services segment and one manufacturing facility within the International segment and the
reorganization of certain operations. Additionally, the Company incurred other restructuring charges, including lease termination and other facility closure costs of $25.3 million and impairment charges of $20.2 million, primarily related to
machinery and equipment associated with the facility closings and other asset disposals.
For the year ended December 31,
2011, the Company recorded a net restructuring and impairment provision of $667.8 million. In 2011, these charges included non-cash pre-tax charges of $392.3 million for the impairment of goodwill for the commercial and forms and labels reporting
units within the U.S. Print and Related Services segment and the Latin America and Canada reporting units within the International segment. The goodwill impairment charge resulted from reductions in the estimated fair value of the commercial, forms
and labels, Canada and Latin America reporting units, based on lower expectations for future revenue, profitability and cash flows due to continued impacts of electronic substitution on demand for business forms and other products, as well as
continued price pressure. In addition, the Company recorded a non-cash charge of $90.7 million primarily related to the impairment of acquired customer relationship intangible assets in the forms and labels reporting unit within the U.S. Print and
Related Services segment. For the year ended December 31, 2011, the Company also recorded $76.7 million for workforce reductions of 2,899 employees (substantially all of whom were terminated as of December 31, 2012) associated with actions
resulting from the reorganization of certain operations, primarily related to the closings of certain facilities and headcount reductions due to the Bowne acquisition. In addition, these charges related to the closing of five manufacturing
facilities within the U.S. Print and Related Services segment. These actions also included the reorganization of certain operations within the U.S. Print and Related Services segment, as well as the reorganization of certain operations within the
International segment. Additionally, the Company incurred other restructuring charges, including lease termination and other facility closure costs of $59.6 million, of which $15.1 million related to multi-employer pension plan complete or partial
withdrawal charges primarily due to the closing of three manufacturing facilities, and $48.5 million of impairment charges primarily for land, buildings, machinery and equipment and leasehold improvements associated with the facility closings.
Depreciation and amortization decreased $68.3 million to $481.6 million for the year ended December 31, 2012 compared to
the prior year, primarily due to the impact of lower capital spending in recent years compared to historical levels, certain other intangible assets becoming fully amortized during the period and the impairment of $158.0 million and $90.7 million of
other intangible assets in the fourth quarters of 2012 and 2011, respectively. Depreciation and amortization included $87.6 million and $112.2 million of amortization of other intangible assets related to customer relationships, patents, trademarks,
licenses and agreements and trade names for the years ended December 31, 2012 and 2011, respectively.
The loss from
operations for the year ended December 31, 2012 was $369.8 million compared to income from operations of $65.2 million for the year ended December 31, 2011. The decrease was due to higher restructuring and impairment charges, lower overall
volume, price declines, lower recovery on print-related by-products, the Companys reinstated 401(k) match, higher healthcare costs and wage inflation in Latin America and Asia, partially offset by cost savings from restructuring activities,
lower pension and other postretirement benefit plan expense net of the prior year gain on pension curtailment, lower depreciation and amortization expense and lower incentive compensation expense.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(in millions, except percentages)
|
|
|
|
|
Interest expensenet
|
|
$
|
251.8
|
|
|
$
|
243.3
|
|
|
$
|
8.5
|
|
|
|
3.5
|
%
|
Investment and other expense (income)net
|
|
|
2.3
|
|
|
|
(10.6
|
)
|
|
|
12.9
|
|
|
|
nm
|
|
Loss on debt extinguishment
|
|
|
16.1
|
|
|
|
69.9
|
|
|
|
(53.8
|
)
|
|
|
(77.0
|
%)
|
35
Net interest expense increased by $8.5 million for the year ended December 31, 2012
versus the prior year, primarily due to higher average interest rates on senior notes and higher average credit facility borrowings and associated fees, partially offset by increased interest income on short-term investments.
Net investment and other expense (income) for the years ended December 31, 2012 and 2011 was expense of $2.3 million and income of
$10.6 million, respectively. The year ended December 31, 2012 included an impairment loss on an equity investment of $4.1 million. The year ended December 31, 2011 included a $10.0 million gain recognized on the acquisition of Helium, in
which the Company previously held an equity investment.
Loss on debt extinguishment for the year ended December 31, 2012
was $16.1 million due to the repurchase in 2012 of $341.8 million of the 4.95% senior notes due April 1, 2014 and $100.0 million of the 5.50% senior notes due May 15, 2015 as well as the termination of the Previous Credit Agreement. The
loss consisted of $27.2 million related to the premiums paid, unamortized debt issuance costs and other expenses, partially offset by the elimination of $11.1 million of the fair value adjustment on the 4.95% senior notes. Loss on debt
extinguishment for the year ended December 31, 2011 was $69.9 million. The loss was due to the repurchases in 2011 of $227.8 million of the 11.25% senior notes due February 1, 2019, $100.0 million of the 6.125% senior notes due
January 15, 2017 and $100.0 million of the 5.50% senior notes due May 15, 2015.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(in millions, except percentages)
|
|
|
|
|
Loss before income taxes
|
|
$
|
(640.0
|
)
|
|
$
|
(237.4
|
)
|
|
$
|
(402.6
|
)
|
|
|
169.6
|
%
|
Income tax expense (benefit)
|
|
|
13.6
|
|
|
|
(116.3
|
)
|
|
|
129.9
|
|
|
|
nm
|
|
Effective income tax rate
|
|
|
(2.1
|
%)
|
|
|
49.0
|
%
|
|
|
|
|
|
|
|
|
The effective income tax rate for the year ended December 31, 2012 was negative 2.1% compared to
positive 49.0% in 2011. The 2012 effective tax rate was impacted by the non-deductible goodwill impairment charges and the recognition of $26.1 million of previously unrecognized tax benefits due to the resolution of certain U.S. federal uncertain
tax positions and a $22.4 million benefit related to the decline in value and reorganization of certain entities within the International segment, partially offset by a valuation allowance provision of $32.7 million on certain deferred tax assets in
Latin America and a provision of $11.0 million related to certain foreign earnings no longer considered to be permanently reinvested. The effective tax rate for the year ended December 31, 2011 reflected recognition of $74.8 million of
previously unrecognized tax benefits due to the expiration of U.S. federal statutes of limitations for certain years and changes in the expected resolution of certain state tax matters, as well as the release of valuation allowances on certain
deferred tax assets in the U.S. and Europe.
Income (loss) attributable to noncontrolling interests was a loss of $2.2 million
for the year ended December 31, 2012 and income of $1.5 million for the year ended December 31, 2011.
Net loss
attributable to RR Donnelley common shareholders for the year ended December 31, 2012 was $651.4 million, or $3.61 per diluted share, compared to $122.6 million, or $0.63 per diluted share, for the year ended December 31, 2011. In addition
to the factors described above, the per share results reflect a decrease in weighted average diluted shares outstanding of 13.4 million primarily due to the purchase of shares as a result of the accelerated share repurchase in 2011.
36
U.S. Print and Related Services
The following tables summarize net sales, income (loss) from operations and certain items impacting comparability within the U.S. Print
and Related Services segment:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(in millions, except percentages)
|
|
Net sales
|
|
$
|
7,511.1
|
|
|
$
|
7,846.5
|
|
Income (loss) from operations
|
|
|
(276.8
|
)
|
|
|
232.9
|
|
Operating margin
|
|
|
(3.7
|
%)
|
|
|
3.0
|
%
|
Restructuring and impairment chargesnet
|
|
|
1,018.7
|
|
|
|
505.1
|
|
Journalism Online contingent compensation
|
|
|
|
|
|
|
15.3
|
|
The amounts included in the table below represent net sales by reporting unit and the descriptions
reflect the primary products or services provided by each reporting unit. Included in these net sales amounts are sales of other products or services that may be produced within a reporting unit to meet customer needs and improve operating
efficiency.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reporting unit
|
|
2012
Net Sales
|
|
|
2011
Net Sales
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(in millions, except percentages)
|
|
|
|
|
Magazines, catalogs and retail inserts(a)
|
|
$
|
1,836.3
|
|
|
$
|
1,919.3
|
|
|
$
|
(83.0
|
)
|
|
|
(4.3
|
%)
|
Variable print
|
|
|
1,190.1
|
|
|
|
1,250.1
|
|
|
|
(60.0
|
)
|
|
|
(4.8
|
%)
|
Books and directories(a)
|
|
|
1,132.5
|
|
|
|
1,277.1
|
|
|
|
(144.6
|
)
|
|
|
(11.3
|
%)
|
Financial print
|
|
|
855.6
|
|
|
|
907.6
|
|
|
|
(52.0
|
)
|
|
|
(5.7
|
%)
|
Logistics
|
|
|
770.7
|
|
|
|
688.9
|
|
|
|
81.8
|
|
|
|
11.9
|
%
|
Forms and labels
|
|
|
734.5
|
|
|
|
789.0
|
|
|
|
(54.5
|
)
|
|
|
(6.9
|
%)
|
Commercial
|
|
|
569.8
|
|
|
|
639.6
|
|
|
|
(69.8
|
)
|
|
|
(10.9
|
%)
|
Office products
|
|
|
262.5
|
|
|
|
220.7
|
|
|
|
41.8
|
|
|
|
18.9
|
%
|
Premedia
|
|
|
159.1
|
|
|
|
154.2
|
|
|
|
4.9
|
|
|
|
3.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total U.S. Print and Related Services
|
|
$
|
7,511.1
|
|
|
$
|
7,846.5
|
|
|
$
|
(335.4
|
)
|
|
|
(4.3
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Certain prior year amounts were restated to conform to the Companys current reporting unit structure.
|
Net sales for the U.S. Print and Related Services segment for the year ended December 31, 2012 were $7,511.1 million, a decrease of
$335.4 million, or 4.3%, compared to 2011. Net sales decreased due to lower volume in both books and directories, decreases in pass-through paper sales, lower commercial volume, decreased volume in direct mail and statement printing and price
declines, partially offset by increased freight brokerage services volume, the rebate adjustments to net sales to correct an over-accrual of rebates due to certain office products customers and increased XBRL financial services and office products
volume. An analysis of net sales by reporting unit follows:
|
|
|
Magazines, catalogs and retail inserts: Sales declined due to decreases in pass-through paper sales, unfavorable product mix in magazines and retail
inserts due to lower advertising spending, and price pressures, partially offset by higher catalog volume.
|
|
|
|
Variable print: Sales decreased as a result of lower direct mail and statement printing volume due in part to electronic substitution, a decline in
print and fulfillment volume and lower pricing.
|
|
|
|
Books and directories: Sales decreased due to lower volume in educational books, consumer books and directories, primarily as a result of the
continuing impact of lower levels of state funding for educational materials and electronic substitution of consumer books, as well as lower pass-through paper sales in directories and price declines for books, partially offset by favorable pricing
for directories.
|
37
|
|
|
Financial print: Sales decreased primarily due to a decline in capital markets transactions activity, lower volume in investment management and other
financial print products as well as price pressures, partially offset by an increase in XBRL financial services volume and sales resulting from the acquisition of Edgar Online.
|
|
|
|
Logistics: Sales increased primarily due to higher freight brokerage services volume as well as sales resulting from the acquisition of XPO, courier
services volume increases, higher fuel surcharges and increased co-mail and expedited logistics services volume.
|
|
|
|
Forms and labels: Sales declined due to lower forms and labels volume and price declines, partially offset by sales resulting from the Stratus
acquisition.
|
|
|
|
Commercial: Sales decreased due to lower volume from existing customers as well as price pressures.
|
|
|
|
Office products: Sales increased as the result of the rebate adjustments described above, binder volume increases from existing customers and favorable
pricing, primarily in note taking and binder products.
|
|
|
|
Premedia: Sales increased due to higher photography services volume from existing customers, partially offset by price declines on contract renewals.
|
U.S. Print and Related Services segment income from operations decreased $509.7 million for the year ended
December 31, 2012 mainly driven by higher restructuring and impairment charges, lower volume in various products, price declines and lower recovery on print-related by-products, partially offset by cost savings from restructuring activities,
lower depreciation and amortization expense and lower incentive compensation expense as well as the rebate adjustments described above. Operating margins decreased from positive 3.0% for the year ended December 31, 2011 to negative 3.7% for the
year ended December 31, 2012, of which 6.5 percentage points were due to higher restructuring and impairment charges. The remaining decrease was due to price declines, unfavorable product mix and lower recovery on print-related by-products.
International
The following tables summarize net sales, income from operations and certain items impacting comparability within the International
segment:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(in millions, except percentages)
|
|
Net sales
|
|
$
|
2,710.8
|
|
|
$
|
2,764.5
|
|
Income from operations
|
|
|
79.1
|
|
|
|
35.4
|
|
Operating margin
|
|
|
2.9
|
%
|
|
|
1.3
|
%
|
Restructuring and impairment chargesnet
|
|
|
89.2
|
|
|
|
157.0
|
|
Gain on pension curtailment
|
|
|
3.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reporting unit
|
|
2012
Net Sales
|
|
|
2011
Net Sales
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(in millions, except percentages)
|
|
|
|
|
Asia
|
|
$
|
685.9
|
|
|
$
|
629.6
|
|
|
$
|
56.3
|
|
|
|
8.9
|
%
|
Business process outsourcing
|
|
|
596.4
|
|
|
|
574.3
|
|
|
|
22.1
|
|
|
|
3.8
|
%
|
Latin America
|
|
|
476.9
|
|
|
|
522.4
|
|
|
|
(45.5
|
)
|
|
|
(8.7
|
%)
|
Europe
|
|
|
400.9
|
|
|
|
473.4
|
|
|
|
(72.5
|
)
|
|
|
(15.3
|
%)
|
Global Turnkey Solutions
|
|
|
289.7
|
|
|
|
290.9
|
|
|
|
(1.2
|
)
|
|
|
(0.4
|
%)
|
Canada
|
|
|
261.0
|
|
|
|
273.9
|
|
|
|
(12.9
|
)
|
|
|
(4.7
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total International
|
|
$
|
2,710.8
|
|
|
$
|
2,764.5
|
|
|
$
|
(53.7
|
)
|
|
|
(1.9
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38
Net sales for the International segment for the year ended December 31, 2012 were
$2,710.8 million, a decrease of $53.7 million, or 1.9%, compared to the prior year. The net sales decrease was primarily due to the impact of changes in foreign exchange rates of $92.9 million, or 3.4%, as well as a decline in capital markets
transactions activity, lower volume in Chile and Brazil, and decreased technology manuals volume in Europe, partially offset by increased volume in Asia and business process outsourcing and higher pass-through paper sales in Asia and Europe. An
analysis of net sales by reporting unit follows:
|
|
|
Asia: Sales increased due to higher volume in packaging products and technology manuals, higher book export volume and increased pass-through paper
sales, partially offset by a decline in capital markets transactions activity and price pressure.
|
|
|
|
Business process outsourcing: Sales increased due to higher pass-through sales in print management, increased volume from existing and new customers,
and higher outsourcing services volume, partially offset by changes in foreign exchange rates and lower direct mail volume.
|
|
|
|
Latin America: Sales decreased due to changes in foreign exchange rates, declines in book, catalog and magazine volume in Chile, and lower book and
forms volume in Brazil, partially offset by the favorable impact of inflationary pricing in Chile, Brazil and Argentina, higher forms volume in Venezuela, higher catalog and magazine volume in Argentina, increased security products volume in Brazil
and higher catalog and magazine volume in Mexico.
|
|
|
|
Europe: Sales decreased due to lower technology manuals volume, changes in foreign exchange rates, a decrease in directories volume and a decline in
capital markets transactions activity, partially offset by increased retail inserts and magazine volume and higher pass-through paper sales.
|
|
|
|
Global Turnkey Solutions: Sales decreased slightly due to lower volume from the loss of a customer during 2011, as well as price pressures, largely
offset by volume increases from new and existing customers.
|
|
|
|
Canada: Sales decreased due to declines in forms and commercial volumes as well as changes in foreign exchange rates, partially offset by higher
statement printing volume for a new customer.
|
International segment income from operations increased $43.7
million primarily due to lower restructuring and impairment charges, cost savings from restructuring activities, increased volume in certain products and outsourcing services, reduced depreciation and amortization expense, and lower incentive
compensation expense, partially offset by lower capital markets transactions activity, decreased technology manuals and directories volume in Europe, wage inflation in Latin America and Asia and price pressures. Operating margins increased from 1.3%
for the year ended December 31, 2011 to 2.9% for the December 31, 2012, of which 2.5 percentage points were due to lower restructuring and impairment charges. This increase was partially offset by unfavorable mix, wage inflation, price
pressures and higher pass-through sales in print management.
Corporate
The following table summarizes unallocated operating expenses and certain items impacting comparability within the activities presented as
Corporate:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(in millions)
|
|
Operating expenses
|
|
$
|
172.1
|
|
|
$
|
203.1
|
|
Restructuring and impairment chargesnet
|
|
|
10.6
|
|
|
|
5.7
|
|
Acquisition-related expenses
|
|
|
2.5
|
|
|
|
2.2
|
|
Gain on pension curtailment
|
|
|
|
|
|
|
38.7
|
|
39
Corporate operating expenses in the year ended December 31, 2012 were $172.1 million, a
decrease of $31.0 million compared to the same period in 2011. The decrease was driven by lower pension and other postretirement benefit plan expenses, primarily related to the freeze on further benefit accruals for all U.S. and Canadian pension
plans beginning January 1, 2012 and April 1, 2012, respectively, lower LIFO inventory provisions and lower incentive compensation expense, partially offset by the Companys reinstated 401(k) match and higher healthcare costs.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2011 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from
Operations
|
|
|
Operating
Margin
|
|
|
Net Earnings
(Loss) Attributable to
RR Donnelley
Common
Shareholders
|
|
|
Net Earnings (Loss)
Attributable to
RR Donnelley
Common
Shareholders
per
Diluted Share
|
|
|
|
(in millions, except per share and margin data)
|
|
For the year ended December 31, 2010
|
|
$
|
555.5
|
|
|
|
5.5
|
%
|
|
$
|
221.7
|
|
|
$
|
1.06
|
|
2011 restructuring and impairment chargesnet
|
|
|
(677.8
|
)
|
|
|
(6.3
|
%)
|
|
|
(532.8
|
)
|
|
|
(2.75
|
)
|
2010 restructuring and impairment chargesnet
|
|
|
157.9
|
|
|
|
1.6
|
%
|
|
|
130.0
|
|
|
|
0.62
|
|
Acquisition-related expenses
|
|
|
11.3
|
|
|
|
0.1
|
%
|
|
|
9.8
|
|
|
|
0.05
|
|
2011 gain on Helium investment
|
|
|
|
|
|
|
|
|
|
|
9.5
|
|
|
|
0.05
|
|
2011 loss on debt extinguishment
|
|
|
|
|
|
|
|
|
|
|
(44.1
|
)
|
|
|
(0.23
|
)
|
2011 gain on pension curtailment
|
|
|
38.7
|
|
|
|
0.4
|
%
|
|
|
24.3
|
|
|
|
0.13
|
|
2011 Journalism Online contingent compensation
|
|
|
(15.3
|
)
|
|
|
(0.1
|
%)
|
|
|
(9.7
|
)
|
|
|
(0.05
|
)
|
2010 Venezuela devaluation
|
|
|
|
|
|
|
|
|
|
|
4.5
|
|
|
|
0.02
|
|
Income tax adjustments
|
|
|
|
|
|
|
|
|
|
|
74.8
|
|
|
|
0.39
|
|
Operations
|
|
|
(15.1
|
)
|
|
|
(0.6
|
%)
|
|
|
(10.6
|
)
|
|
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2011
|
|
$
|
65.2
|
|
|
|
0.6
|
%
|
|
$
|
(122.6
|
)
|
|
$
|
(0.63
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 restructuring and impairment chargesnet
: included charges of $392.3 million and $90.7
million for the impairment of goodwill and other intangible assets, respectively; $76.7 million for employee termination costs; $59.6 million of lease termination and other restructuring costs, including multi-employer pension plan complete or
partial withdrawal charges of $15.1 million due to the closing of three manufacturing facilities within the U.S. Print and Related Services segment; and $48.5 million for impairment of other long-lived assets, primarily for land, buildings,
machinery and equipment and leasehold improvements associated with facility closures.
2010 restructuring and impairment
chargesnet
: included $61.0 million and $26.9 million of non-cash charges for the impairment of goodwill and other intangible assets, respectively; charges of $35.9 million for employee termination costs; $29.5 million of lease termination
and other restructuring costs, of which $13.6 million related to multi-employer pension plan partial withdrawal charges primarily attributable to two closed manufacturing facilities within the U.S. Print and Related Services segment; and $4.6
million for impairment of other long-lived assets.
Acquisition-related expenses:
included pre-tax charges of $2.2
million ($2.0 million after-tax) related to legal, accounting and other expenses for the year ended December 31, 2011 associated with acquisitions completed or contemplated. For the year ended December 31, 2010, these pre-tax charges were
$13.5 million ($11.8 million after-tax).
2011 gain on Helium investment:
included a pre-tax gain of $9.8 million as a
result of the acquisition of Helium, in which the Company previously held an equity investment. The pre-tax gain is net of the Companys portion of the transaction costs incurred by Helium as a result of the acquisition.
2011 loss on debt extinguishment:
included a pre-tax loss of $69.9 million on the repurchases of $227.8 million of the 11.25%
senior notes due February 1, 2019, $100.0 million of the 6.125% senior notes due
40
January 15, 2017 and $100.0 million of the 5.50% senior notes due May 15, 2015. The $69.9 million pre-tax loss also included the reclassification of a $0.5 million pre-tax loss from
accumulated other comprehensive loss to loss on debt extinguishment due to the change in the hedged forecasted interest payments resulting from the repurchase of the 5.50% senior notes.
2011 gain on pension curtailment:
included a pre-tax gain of $38.7 million related to the remeasurement of the plans assets
and obligations that was required with the announced freeze on further benefit accruals under all of the Companys U.S. pension plans as of December 31, 2011.
2011 Journalism Online contingent compensation
: included pre-tax expense of $15.3 million related to contingent compensation earned by the prior owners, based on achieving certain volume milestones
for Journalism Onlines business following its acquisition by the Company.
2010 Venezuela devaluation:
currency
devaluation in Venezuela resulted in a pre-tax loss of $8.9 million ($8.1 million after-tax) and an increase in loss attributable to noncontrolling interests of $3.6 million.
Recognition of income tax benefits:
included the recognition of previously unrecognized tax benefits due to the expiration of U.S. federal statutes of limitations for certain years. See discussion
in Note 12 to the Consolidated Financial Statements.
Operations:
reflected a net decrease in volume within the U.S.
Print and Related Services segment, higher pension plan and other benefits-related expenses and continued price pressures. These decreases were partially offset by higher volume in the International segment, higher recovery on by-products, cost
savings from restructuring actions, productivity efforts and lower incentive compensation expense. Income tax expense also decreased due to the recognition of previously unrecognized tax benefits related to certain state tax matters. In addition,
purchases of shares pursuant to the Companys share repurchase program resulted in higher interest expense and fewer weighted average shares outstanding. See further details in the review of operating results by segment that follows below.
The following table shows the results of operations for the years ended December 31, 2011 and 2010, which reflects the
results of acquired businesses from the relevant acquisition dates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(in millions, except percentages)
|
|
|
|
|
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
9,375.1
|
|
|
$
|
8,956.4
|
|
|
$
|
418.7
|
|
|
|
4.7
|
%
|
Services
|
|
|
1,235.9
|
|
|
|
1,062.5
|
|
|
|
173.4
|
|
|
|
16.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
|
10,611.0
|
|
|
|
10,018.9
|
|
|
|
592.1
|
|
|
|
5.9
|
%
|
Products cost of sales (exclusive of depreciation and amortization)
|
|
|
7,185.2
|
|
|
|
6,857.8
|
|
|
|
327.4
|
|
|
|
4.8
|
%
|
Services cost of sales (exclusive of depreciation and amortization)
|
|
|
906.6
|
|
|
|
785.1
|
|
|
|
121.5
|
|
|
|
15.5
|
%
|
Selling, general and administrative expenses (exclusive of depreciation and amortization)
|
|
|
1,236.3
|
|
|
|
1,123.4
|
|
|
|
112.9
|
|
|
|
10.0
|
%
|
Restructuring and impairment chargesnet
|
|
|
667.8
|
|
|
|
157.9
|
|
|
|
509.9
|
|
|
|
322.9
|
%
|
Depreciation and amortization
|
|
|
549.9
|
|
|
|
539.2
|
|
|
|
10.7
|
|
|
|
2.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
10,545.8
|
|
|
|
9,463.4
|
|
|
|
1,082.4
|
|
|
|
11.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
$
|
65.2
|
|
|
$
|
555.5
|
|
|
$
|
(490.3
|
)
|
|
|
(88.3
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Net sales of products for the year ended December 31, 2011 increased $418.7 million, or 4.7%, to $9,375.1 million versus the prior year. Net sales of products increased due to the acquisition of
Bowne, higher volume driven by increased business in Asia, Latin America and commercial print reporting units, changes in foreign
41
exchange rates of $59.5 million, or 0.7%, and increases in pass-through paper sales. These increases were partially offset by decreases in net sales primarily attributable to lower volume within
the books and directories reporting unit, the production and distribution of materials for the U.S. Census in 2010, continued price pressures and a decline in capital markets transactions activity.
Net sales from services for the year ended December 31, 2011 increased $173.4 million, or 16.3%, to $1,235.9 million versus the
prior year. Net sales from services increased due to the acquisition of Bowne and higher logistics volumes. Additionally, net sales from services increased due to changes in foreign exchange rates of $8.1 million, or 0.8%.
Products cost of sales increased $327.4 million to $7,185.2 million for the year ended December 31, 2011 versus the prior year,
primarily due to the acquisition of Bowne and higher materials costs, partially offset by lower incentive compensation expense, a gain on pension curtailment and a higher recovery on by-products. Products cost of sales as a percentage of products
net sales remained constant.
Services cost of sales increased $121.5 million to $906.6 million for the year ended
December 31, 2011 versus the prior year, primarily due to the acquisition of Bowne and higher logistics volume. Services cost of sales as a percentage of net sales decreased from 73.9% to 73.4%, reflecting lower incentive compensation expense,
a gain on pension curtailment and productivity improvements, partially offset by an unfavorable mix within the financial print reporting unit and an increase in costs of transportation within the logistics reporting unit.
Selling, general and administrative expenses increased $112.9 million to $1,236.3 million, or from 11.2% to 11.7% as a percentage of
consolidated net sales, for the year ended December 31, 2011 versus the prior year, due to the acquisition of Bowne and higher pension plan and other benefits-related expenses, partially offset by a gain on pension curtailment. These increases
were also partially offset by cost savings from lower incentive compensation expense and restructuring activities.
For the
year ended December 31, 2011, the Company recorded a net restructuring and impairment provision of $667.8 million compared to $157.9 million in 2010. In 2011, these charges included non-cash pre-tax charges of $392.3 million for the impairment
of goodwill for the commercial and forms and labels reporting units within the U.S. Print and Related Services segment and the Latin America and Canada reporting units within the International segment. The goodwill impairment charge resulted from
reductions in the estimated fair value of the commercial, forms and labels, Canada and Latin America reporting units, based on lower expectations for future revenue, profitability and cash flows due to continued impacts of electronic substitution on
demand for business forms and other products, as well as continued price pressure. In addition, the Company recorded a non-cash charge of $90.7 million primarily related to the impairment of acquired customer relationship intangible assets in the
forms and labels reporting unit within the U.S. Print and Related Services segment. For the year ended December 31, 2011, the Company also recorded $76.7 million for workforce reductions of 2,899 employees (substantially all of whom were
terminated as of December 31, 2012) associated with actions resulting from the reorganization of certain operations, primarily related to the closings of certain facilities and headcount reductions due to the Bowne acquisition. In addition,
these charges related to the closing of five manufacturing facilities within the U.S. Print and Related Services segment. These actions also included the reorganization of certain operations within two reporting units within the U.S. Print and
Related Services segment, as well as the reorganization of certain operations within two reporting units within the International segment. Additionally, the Company incurred other restructuring charges, including lease termination and other facility
closure costs of $59.6 million, of which $15.1 million related to multi-employer pension plan complete or partial withdrawal charges primarily due to the closing of three manufacturing facilities, and $48.5 million of impairment charges primarily
for land, buildings, machinery and equipment and leasehold improvements associated with the facility closings.
For the year
ended December 31, 2010, these charges included non-cash pre-tax charges of $61.0 million for the impairment of goodwill for the forms and labels reporting unit within the U.S. Print and Related Services
42
segment. The goodwill impairment charge resulted from reductions in the estimated fair value of the forms and labels reporting unit, based on lower expectations for future revenue and cash flows
due to continued impacts of electronic substitution on forms demand and increasing price pressure. In addition, the lower fair value reflects higher estimated spending on information technology and capital equipment, in part to better position this
reporting unit for increased growth in labels volume as forms demand continues to decline. Impairment charges also included $26.9 million for the impairment of acquired customer relationship intangible assets in the Global Turnkey Solutions
reporting unit within the International segment. The impairment of the customer relationship intangible asset primarily resulted from the termination of a customer contract. Additionally, for the year ended December 31, 2010, the Company
recorded $35.9 million for workforce reductions of 1,458 employees (all of whom were terminated as of December 31, 2012) associated with actions resulting from the reorganization of certain operations. These actions included the reorganization
of certain operations within the U.S. Print and Related Services segment due to the acquisition of Bowne. In addition, these actions included the closing of three manufacturing facilities within the International segment. Further, continuing charges
resulting from the closing of two manufacturing facilities in 2009 within the International segment were recorded in 2010. These actions also included the reorganization of certain operations within two reporting units and the closing of one
manufacturing facility within the U.S. Print and Related Services segment. In addition, the Company recorded $4.6 million of impairment charges of other long-lived assets and $29.5 million of other restructuring charges. The other restructuring
costs included $13.6 million related to multi-employer pension plan partial withdrawal charges primarily attributable to two closed manufacturing facilities within the U.S. Print and Related Services segment, as well as lease termination and other
facility closure costs.
Depreciation and amortization increased $10.7 million to $549.9 million for the year ended
December 31, 2011 compared to 2010, primarily due to higher amortization expense associated with customer relationship intangible assets resulting from the acquisition of Bowne, partially offset by the impact of lower capital spending in recent
years compared to historical levels. Depreciation and amortization included $112.2 million and $99.3 million of amortization of purchased intangibles related to customer relationships, patents, trade names, licenses and non-compete agreements for
the years ended December 31, 2011 and 2010, respectively.
Income from operations for the year ended December 31,
2011 was $65.2 million compared to $555.5 million for the year ended December 31, 2010, a decrease of 88.3%. The decrease was primarily driven by higher restructuring and impairment charges, continued price pressure and higher pension plan and
other benefits-related expenses, partially offset by higher volume, primarily related to the Bowne acquisition, a gain on pension curtailment, lower incentive compensation expense and benefits achieved from restructuring activities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(in millions, except percentages)
|
|
|
|
|
Interest expensenet
|
|
$
|
243.3
|
|
|
$
|
222.6
|
|
|
$
|
20.7
|
|
|
|
9.3
|
%
|
Investment and other expense (income)net
|
|
|
(10.6
|
)
|
|
|
9.9
|
|
|
|
(20.5
|
)
|
|
|
nm
|
|
Loss on debt extinguishment
|
|
|
69.9
|
|
|
|
|
|
|
|
69.9
|
|
|
|
nm
|
|
Net interest expense increased by $20.7 million for the year ended December 31, 2011 versus the same
period in 2010, primarily due to the issuance of $400.0 million of 7.625% senior notes on June 21, 2010 and $600.0 million of 7.25% senior notes on June 1, 2011, partially offset by the repayment of $325.7 million of 4.95% senior notes
that matured on May 15, 2010. Additionally, net interest expense increased due to borrowings under the Previous Credit Agreement used to finance the Companys accelerated share repurchase (ASR) and increased borrowing rates and
commitment fees as a result of the rating actions determined by the credit rating agencies. These increases were also partially offset by interest savings due to the repurchase of debt in June and September 2011.
Net investment and other expense (income) for the years ended December 31, 2011 and 2010 was income of $10.6 million and expense of
$9.9 million, respectively. The year ended December 31, 2011 included a $10.0 million gain recognized on the acquisition of Helium, in which the Company previously held an equity investment. For year ended December 31, 2010, the Company
recorded an $8.9 million loss related to the
43
devaluation of the Venezuelan currency, of which $3.6 million increased the loss attributable to noncontrolling interests as reflected below.
Loss on debt extinguishment for the year ended December 31, 2011 was $69.9 million. The loss was due to the repurchases of $227.8
million of the 11.25% senior notes due February 1, 2019, $100.0 million of the 6.125% senior notes due January 15, 2017 and $100.0 million of the 5.50% senior notes due May 15, 2015. These senior notes were repurchased to improve the
debt maturity profile of the Company and to take advantage of the low interest rate environment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(in millions, except percentages)
|
|
|
|
|
Earnings (loss) before income taxes
|
|
$
|
(237.4
|
)
|
|
$
|
323.0
|
|
|
$
|
(560.4
|
)
|
|
|
nm
|
|
Income tax expense (benefit)
|
|
|
(116.3
|
)
|
|
|
105.9
|
|
|
|
(222.2
|
)
|
|
|
nm
|
|
Effective income tax rate
|
|
|
49.0
|
%
|
|
|
32.8
|
%
|
|
|
|
|
|
|
|
|
The effective income tax rate for the year ended December 31, 2011 was 49.0% compared to 32.8% in
2010. The tax benefit for the year ended December 31, 2011 reflected recognition of $74.8 million of previously unrecognized tax benefits due to the expiration of U.S. federal statutes of limitations for certain years. The 2010 effective tax
rate reflected the release of a valuation allowance on deferred tax assets due to the forecasted increase in net earnings for certain operations within Latin America.
Income (loss) attributable to noncontrolling interests was income of $1.5 million for the year ended December 31, 2011 and a loss of $4.6 million for the year ended December 31, 2010. The loss
in 2010 as compared to income in 2011 primarily reflects the impact of the 2010 currency devaluation in Venezuela.
Net loss
attributable to RR Donnelley common shareholders for the year ended December 31, 2011 was $122.6 million, or $0.63 per diluted share, compared to net earnings attributable to RR Donnelley common shareholders of $221.7 million, or $1.06 per
diluted share, for the year ended December 31, 2010. In addition to the factors described above, the per share results reflect a decrease in weighted average diluted shares outstanding of 15.9 million primarily due to the purchase of
shares during the year ended December 31, 2011 as a result of the accelerated share repurchase program.
U.S. Print and Related
Services
The following tables summarize net sales, income from operations and certain items impacting comparability within
the U.S. Print and Related Services segment:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(in millions, except percentages)
|
|
Net sales
|
|
$
|
7,846.5
|
|
|
$
|
7,532.2
|
|
Income from operations
|
|
|
232.9
|
|
|
|
638.9
|
|
Operating margin
|
|
|
3.0
|
%
|
|
|
8.5
|
%
|
Restructuring and impairment chargesnet
|
|
|
505.1
|
|
|
|
94.0
|
|
Journalism Online contingent compensation
|
|
|
15.3
|
|
|
|
|
|
The amounts included in the table below represent net sales by reporting unit and the descriptions
reflect the primary products or services provided by each reporting unit. Included in these net sales amounts are sales of
44
other products or services that may be produced within a reporting unit to meet customer needs and improve operating efficiency.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reporting unit
|
|
2011
Net Sales
|
|
|
2010
Net Sales
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(in millions, except percentages)
|
|
|
|
|
Magazines, catalogs and retail inserts(a)
|
|
$
|
1,919.3
|
|
|
$
|
1,949.0
|
|
|
$
|
(29.7
|
)
|
|
|
(1.5
|
%)
|
Books and directories(a)
|
|
|
1,277.1
|
|
|
|
1,410.8
|
|
|
|
(133.7
|
)
|
|
|
(9.5
|
%)
|
Variable print
|
|
|
1,250.1
|
|
|
|
1,233.4
|
|
|
|
16.7
|
|
|
|
1.4
|
%
|
Financial print
|
|
|
907.6
|
|
|
|
556.5
|
|
|
|
351.1
|
|
|
|
63.1
|
%
|
Forms and Labels
|
|
|
789.0
|
|
|
|
822.4
|
|
|
|
(33.4
|
)
|
|
|
(4.1
|
%)
|
Logistics
|
|
|
688.9
|
|
|
|
598.4
|
|
|
|
90.5
|
|
|
|
15.1
|
%
|
Commercial
|
|
|
639.6
|
|
|
|
588.0
|
|
|
|
51.6
|
|
|
|
8.8
|
%
|
Office products
|
|
|
220.7
|
|
|
|
212.4
|
|
|
|
8.3
|
|
|
|
3.9
|
%
|
Premedia
|
|
|
154.2
|
|
|
|
161.3
|
|
|
|
(7.1
|
)
|
|
|
(4.4
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total U.S. Print and Related Services
|
|
$
|
7,846.5
|
|
|
$
|
7,532.2
|
|
|
$
|
314.3
|
|
|
|
4.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Certain prior year amounts were restated to conform to the Companys current reporting unit structure.
|
Net sales for the U.S. Print and Related Services segment for the year ended December 31, 2011 were $7,846.5 million, an increase of
$314.3 million, or 4.2%, compared to 2010. Net sales increased due to the acquisition of Bowne, as well as higher logistics and commercial volumes. The increases not related to the Bowne acquisition were more than offset by lower volume in books and
directories, the production and distribution of materials for the U.S. Census in 2010, continued price pressures and a decline in capital markets transactions activity within financial print. An analysis of net sales by reporting unit follows:
|
|
|
Magazines, catalogs and retail inserts: Sales decreased due to continued price pressures and lower volume, partially offset by higher pass-through
paper sales.
|
|
|
|
Books and directories: Sales decreased primarily as a result of lower volume in consumer books, educational books and directories, as well as lower
pass-through paper sales in directories. The decrease in the volume of consumer books was due to the increasing popularity of e-books and the liquidation of a large bookstore chain. The decrease in the volume of educational books was the result of
lower state funding for education instructional materials.
|
|
|
|
Variable print: Sales increased due to the acquisition of Bowne, higher volume due to a contract with a large retail chain and higher direct mailings
from financial services customers. These increases were partially offset by the production and distribution of materials for the U.S. Census in 2010, lower statement printing volume, reduction in pass-through postage sales and increased price
pressure.
|
|
|
|
Financial print: Sales increased as a result of the Bowne acquisition and higher volume in compliance and investment management transactions. These
increases were partially offset by a decline in capital markets transactions activity.
|
|
|
|
Forms and labels: Sales decreased primarily due to lower forms volume and continued price pressure on both forms and labels, partially offset by
increased volume in labels.
|
|
|
|
Logistics: Sales increased primarily due to higher print logistics services volumes along with higher fuel surcharges, as well as growth in mail center
and commingling services.
|
|
|
|
Commercial: Sales increased due to higher volume from new customers, as well as an increase in pass-through sales due to growth in print management,
partially offset by increased price pressure.
|
|
|
|
Office products: Sales increased due to new business from existing customers.
|
|
|
|
Premedia: Sales decreased primarily due to continued price pressures and lower volume from existing customers, partially offset by higher volume from
new customers.
|
45
Income from operations decreased $406.0 million for the year ended December 31, 2011,
mainly driven by higher restructuring and impairment charges, continued price pressures and lower volumes in books and directories, partially offset by the acquisition of Bowne and lower incentive compensation expense. Operating margins decreased
from 8.5% for the year ended December 31, 2010 to 3.0% for the year ended December 31, 2011, primarily due to higher restructuring and impairment charges. Operating margins also decreased due to higher pass-through paper sales in
magazines, catalogs and retail inserts, increased compliance volume in financial print and higher pass-through sales due to growth in print management.
International
The following tables summarize net sales, income from
operations and certain items impacting comparability within the International segment:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(in millions, except percentages)
|
|
Net sales
|
|
$
|
2,764.5
|
|
|
$
|
2,486.7
|
|
Income from operations
|
|
|
35.4
|
|
|
|
149.5
|
|
Operating margin
|
|
|
1.3
|
%
|
|
|
6.0
|
%
|
Restructuring and impairment chargesnet
|
|
|
157.0
|
|
|
|
50.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reporting unit
|
|
2011
Net Sales
|
|
|
2010
Net Sales
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(in millions, except percentages)
|
|
|
|
|
Asia
|
|
$
|
629.6
|
|
|
$
|
550.6
|
|
|
$
|
79.0
|
|
|
|
14.3
|
%
|
Business process outsourcing
|
|
|
574.3
|
|
|
|
553.4
|
|
|
|
20.9
|
|
|
|
3.8
|
%
|
Latin America
|
|
|
522.4
|
|
|
|
457.9
|
|
|
|
64.5
|
|
|
|
14.1
|
%
|
Europe
|
|
|
473.4
|
|
|
|
401.8
|
|
|
|
71.6
|
|
|
|
17.8
|
%
|
Global Turnkey Solutions
|
|
|
290.9
|
|
|
|
300.6
|
|
|
|
(9.7
|
)
|
|
|
(3.2
|
%)
|
Canada
|
|
|
273.9
|
|
|
|
222.4
|
|
|
|
51.5
|
|
|
|
23.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total International
|
|
$
|
2,764.5
|
|
|
$
|
2,486.7
|
|
|
$
|
277.8
|
|
|
|
11.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales for the International segment for the year ended December 31, 2011 were $2,764.5 million,
an increase of $277.8 million, or 11.2%, compared to 2010. The net sales increase was due to the acquisition of Bowne, increased business in Asia and Latin America, changes in foreign exchange rates of $67.1 million, or 2.7%, as well as higher
pass-through paper sales. An analysis of net sales by reporting unit follows:
|
|
|
Asia: Sales increased due to higher domestic sales of catalogs and retail inserts, increased volume from technology manuals and packaging products and
changes in foreign exchange rates, partially offset by a decline in capital markets transactions activity and continued price pressures.
|
|
|
|
Business process outsourcing: Sales increased due to changes in foreign exchange rates and higher pass-through sales, partially offset by lower direct
mailings and expiring contracts.
|
|
|
|
Latin America: Sales increased due to increased commercial print volumes in Argentina, Chile and Mexico, higher sales of books in Brazil and Chile, as
well as changes in foreign exchange rates, partially offset by the continued decline in forms volumes in Brazil and continued price pressures.
|
|
|
|
Europe: Sales increased due to higher pass-through paper sales, changes in foreign exchange rates, increased commercial print volume and the
acquisition of Bowne, partially offset by lower prices, as well as a decrease in technology and telecommunications packaging and directories volume.
|
|
|
|
Global Turnkey Solutions: Sales decreased due to lower volume from existing customers and an expiring contract, partially offset by volume increases
from a new customer contract and other existing customers.
|
|
|
|
Canada: Sales increased due to the acquisition of Bowne and changes in foreign exchange rates, partially offset by a decline in capital markets
transactions activity and lower forms volume.
|
46
Income from operations decreased $114.1 million for the year ended December 31 2011,
primarily due to higher impairment charges and continued price pressure, partially offset by the acquisition of Bowne. Operating margins decreased from 6.0% for the year ended December 31, 2010 to 1.3% for the year ended December 31, 2011,
primarily due to higher impairment charges, increased pass-through paper sales in Europe and lower prices, partially offset by higher volume.
Corporate
The following
table summarizes unallocated operating expenses and certain items impacting comparability within the activities presented as Corporate:
|
|
|
|
|
|
|
|
|
|
|
Years Ended
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(in millions)
|
|
Operating expenses
|
|
$
|
203.1
|
|
|
$
|
232.9
|
|
Restructuring and impairment chargesnet
|
|
|
5.7
|
|
|
|
13.3
|
|
Acquisition-related expenses
|
|
|
2.2
|
|
|
|
13.5
|
|
Gain on pension curtailment
|
|
|
38.7
|
|
|
|
|
|
Corporate operating expenses for the year ended December 31, 2011 were $203.1 million, a decrease of
$29.8 million compared to 2010. The decrease was primarily driven by a gain on pension curtailment of $38.7 million, largely offset by higher pension plan and other benefits-related expenses. The decrease was also due to a lower bad debt provision,
as well as a decline in acquisition-related and incentive compensation expenses, partially offset by an increase in information technology costs related to recent acquisitions and higher workers compensation expense.
RESTRUCTURING AND IMPAIRMENT CHARGES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
Employee
Terminations
|
|
|
Other
Charges
|
|
|
Total
Restructuring
|
|
|
Impairment
|
|
|
Total
|
|
|
|
(in millions)
|
|
U.S. Print and Related Services
|
|
$
|
48.5
|
|
|
$
|
18.8
|
|
|
$
|
67.3
|
|
|
$
|
951.4
|
|
|
$
|
1,018.7
|
|
International
|
|
|
11.4
|
|
|
|
3.8
|
|
|
|
15.2
|
|
|
|
74.0
|
|
|
|
89.2
|
|
Corporate
|
|
|
6.7
|
|
|
|
2.7
|
|
|
|
9.4
|
|
|
|
1.2
|
|
|
|
10.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
66.6
|
|
|
$
|
25.3
|
|
|
$
|
91.9
|
|
|
$
|
1,026.6
|
|
|
$
|
1,118.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2012, the Company recorded net restructuring and impairment charges of $1,118.5 million. These
charges included $848.4 million for the impairment of goodwill for the magazines, catalogs and retail inserts and books and directories reporting units within the U.S. Print and Related Services segment and the Europe reporting unit within the
International segment. In addition, the Company recorded non-cash charges of $158.0 million related to the impairment of acquired customer relationship intangible assets in the books and directories and magazines, catalogs and retail inserts
reporting units within the U.S. Print and Related Services segment and the Latin America reporting unit within the International segment. The Company also recorded $20.2 million of impairment charges, primarily related to machinery and equipment
associated with facility closings and other asset disposals. For the year ended December 31, 2012, the Company recorded $66.6 million for workforce reductions of 2,200 employees (2,146 of whom were terminated as of December 31, 2012)
associated with actions resulting from the reorganization of sales and administrative functions across all segments, the closing of five manufacturing facilities within the U.S. Print and Related Services segment and one manufacturing facility
47
within the International segment and the reorganization of certain operations. Additionally, the Company incurred other restructuring charges, including lease termination and other facility
closure costs of $25.3 million.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
Employee
Terminations
|
|
|
Other
Charges
|
|
|
Total
Restructuring
|
|
|
Impairment
|
|
|
Total
|
|
|
|
(in millions)
|
|
U.S. Print and Related Services
|
|
$
|
49.2
|
|
|
$
|
52.5
|
|
|
$
|
101.7
|
|
|
$
|
403.4
|
|
|
$
|
505.1
|
|
International
|
|
|
24.2
|
|
|
|
7.0
|
|
|
|
31.2
|
|
|
|
125.8
|
|
|
|
157.0
|
|
Corporate
|
|
|
3.3
|
|
|
|
0.1
|
|
|
|
3.4
|
|
|
|
2.3
|
|
|
|
5.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
76.7
|
|
|
$
|
59.6
|
|
|
$
|
136.3
|
|
|
$
|
531.5
|
|
|
$
|
667.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2011, the Company recorded net restructuring and impairment charges of $667.8 million. These
charges included $392.3 million for the impairment of goodwill within the commercial and forms and labels reporting units, reflected in the U.S. Print and Related Services segment and the Canada and Latin America reporting units within the
International segment. In addition, these charges included $90.7 million primarily related to impairment of the acquired customer relationship intangible assets in the forms and labels reporting unit within the U.S. Print and Related Services
segment, as well as $48.5 million of impairment charges, primarily for land, buildings, machinery and equipment and leasehold improvements associated with facility closings. These charges also included $76.7 million for workforce reductions of 2,899
employees (substantially all of whom were terminated as of December 31, 2012) associated with actions resulting from the reorganization of certain operations. These charges are primarily related to the closings of certain facilities and
headcount reductions due to the Bowne acquisition. In addition, these charges related to the closing of five manufacturing facilities within the U.S. Print and Related Services segment. These actions also included the reorganization of certain
operations within the within the U.S. Print and Related Services and International segments. Additionally, the Company incurred other restructuring charges, including lease termination and other facility closure costs of $59.6 million, of which
$15.1 million related to multi-employer pension complete or plan partial withdrawal charges primarily due to the closing of three manufacturing facilities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
Employee
Terminations
|
|
|
Other
Charges
|
|
|
Total
Restructuring
|
|
|
Impairment
|
|
|
Total
|
|
|
|
(in millions)
|
|
U.S. Print and Related Services
|
|
$
|
5.9
|
|
|
$
|
24.0
|
|
|
$
|
29.9
|
|
|
$
|
64.1
|
|
|
$
|
94.0
|
|
International
|
|
|
17.9
|
|
|
|
4.5
|
|
|
|
22.4
|
|
|
|
28.2
|
|
|
|
50.6
|
|
Corporate
|
|
|
12.1
|
|
|
|
1.0
|
|
|
|
13.1
|
|
|
|
0.2
|
|
|
|
13.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
35.9
|
|
|
$
|
29.5
|
|
|
$
|
65.4
|
|
|
$
|
92.5
|
|
|
$
|
157.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2010, the Company recorded net restructuring and impairment charges of $157.9 million. These
charges included $61.0 million for the impairment of goodwill within the forms and labels reporting unit in the U.S. Print and Related Services segment, $26.9 million for the impairment of acquired customer relationship intangible assets in the
Global Turnkey Solutions reporting unit within the International segment and $4.6 million for the impairment of other long-lived assets. Additionally, these charges included $35.9 million related to workforce reductions of 1,458 employees (all of
whom were terminated as of December 31, 2012), associated with actions resulting from reorganization of certain operations. These actions included the reorganization of certain operations within the U.S. Print and Related Services segment due
to the acquisition of Bowne. In addition, these actions included the closing of three manufacturing facilities within the International segment. Further, continuing charges resulting from the closing of two manufacturing facilities in 2009 within
the International segment were recorded in 2010. These actions also included the reorganization of certain operations and the closing of one manufacturing facility within the U.S. Print and Related Services segment. Finally, the Company recorded
$29.5 million of other restructuring charges, of which $13.6 million related to multi-employer pension plan partial withdrawal charges primarily attributable to two closed manufacturing facilities within the U.S. Print and Related Services segment,
as well as lease termination and other facility closure costs.
48
The Company made cash payments of $101.4 million, $104.2 million and $158.1 million for
restructuring activities during the years ended December 31, 2012, 2011 and 2010, respectively. Of the $158.1 million paid in 2010, $95.8 million related to the termination of a significant long-term customer contract. These outlays were all
funded using cash generated from operations and cash on hand.
In 2013, the Company expects to realize further cost savings
associated with the restructuring actions taken in 2012, primarily through reduced employee and facility costs. Restructuring actions included the reorganization of sales and administrative functions across all segments as well as the closures of
six manufacturing facilities during the year ended December 31, 2012. In addition, the Company expects to identify other cost reduction opportunities within both current and newly acquired businesses and possibly take further actions in 2013,
which may result in significant additional restructuring charges. These restructuring actions will be funded by cash generated from operations and cash on hand or, if necessary, the Company will fund these costs by utilizing its credit facilities.
LIQUIDITY AND CAPITAL RESOURCES
The following describes the Companys cash flows for the years ended December 31, 2012, 2011 and 2010.
Cash Flows From Operating Activities
Operating cash inflows are largely
attributable to sales of the Companys products and services. Operating cash outflows are largely attributable to recurring expenditures for raw materials, labor, rent, interest, taxes and other operating activities.
2012 compared to 2011
Net cash provided by operating activities was $691.9 million for the year ended December 31, 2012, compared to $946.3 million for the
year ended December 31, 2011. The decrease in cash provided by operating activities primarily resulted from higher pension and other postretirement benefit plan contributions, lower net sales and the timing of cash collections, and payments
related to the Companys reinstated 401(k) match. These decreases were partially offset by lower incentive compensation payments in the first quarter of 2012 (for incentives earned in 2011) compared to 2011 (for incentives earned in 2010) and
shifts in the timing of payments to suppliers.
2011 compared to 2010
Net cash provided by operating activities was $946.3 million for the year ended December 31, 2011, compared to $752.5 million for the
year ended December 31, 2010. The increase in operating cash flow reflected improvements in working capital management, including the benefits of process and systems integration efforts related to the Bowne acquisition, improved credit and
collections efforts, inventory reductions and increased standardization of vendor payment terms. The increase in operating cash flow also reflected the $57.5 million payment in January 2010 related to the termination of a long-term customer contract
in 2009 and lower income tax payments. These increases were partially offset by higher incentive compensation payments in the first quarter of 2011 (for incentives earned in 2010) compared to 2010 (for incentives earned in 2009) due to better
operating results in 2010 as compared to the operating results of 2009. Additionally, the payments for incentives earned in 2009 were deferred equally over four years, while the incentives earned in 2010 were fully paid in 2011. Further decreases
were due to restructuring and pension payments related to the Bowne acquisition and higher interest payments primarily related to the June 2010 issuance of $400.0 million of long-term senior notes. Higher interest payments were also due to increased
borrowings under the Previous Credit Agreement in 2011 used to finance the Companys ASR, as well as higher interest rates and commitment fees related to the rating actions of credit rating agencies, as compared to the Companys borrowings
under the previous $2.0 billion unsecured and committed revolving credit facility in place in 2010.
49
Cash Flows From Investing Activities
2012 compared to 2011
Net cash used in investing activities for the year
ended December 31, 2012 was $284.8 million compared to $375.4 million for the year ended December 31, 2011. Capital expenditures for the year ended December 31, 2012 were $205.9 million, a decrease of $45.0 million compared to 2011.
The Company also recorded cash proceeds from the sale of investments and other assets of $50.7 million during the year ended December 31, 2012, primarily related to the sale-leaseback of an office building and related property, compared to
$27.2 million during the year ended December 31, 2011. Net cash used for acquisitions during the year ended December 31, 2012 was $126.9 million for the acquisitions of Edgar Online, Meisel, XPO and Presort, compared to $142.4 million for
the acquisitions of Helium, Stratus, LibreDigital, Journalism Online, Genesis and Sequence during the year ended December 31, 2011. The Company continues to fund capital expenditures primarily through cash provided by operations.
2011 compared to 2010
Net cash used in investing activities for the year ended December 31, 2011 was $375.4 million compared to $674.5 million for the year
ended December 31, 2010. Net cash used for acquisitions during the year ended December 31, 2011 was $142.4 million for the acquisitions of Helium, Stratus, LibreDigital, Journalism Online, Genesis and Sequence, compared to $439.8 million
for the acquisitions of Bowne, Nimblefish and 8touches during the year ended December 31, 2010. The Company also used $7.0 million to purchase a long-term investment during the year ended December 31, 2011. During 2010, the Company
purchased long-term investments, as well as short-term deposits that were subsequently liquidated, for a net payment of $16.8 million. Capital expenditures for the year ended December 31, 2011 were $250.9 million, an increase of $21.5 million
compared to 2010.
Cash Flows From Financing Activities
2012 compared to 2011
Net cash used in financing activities for the year
ended December 31, 2012 was $438.0 million compared to $651.0 million for the year ended December 31, 2011. During the year ended December 31, 2012, the Company received proceeds of $450.0 million from the issuance of 8.25%
senior notes due March 15, 2019, which, along with cash on hand, were used to repurchase $341.8 million of the 4.95% senior notes due April 1, 2014 and $100.0 million of the 5.50% senior notes due May 15, 2015. The Company repaid the
$158.6 million of 5.625% senior notes that matured during the first quarter with borrowings under the Previous Credit Agreement. During the year ended December 31, 2011, the Company received proceeds from the issuance of $600.0 million of 7.25%
long-term senior notes due May 15, 2018 and paid $500.0 million for the acquisition of the Companys common stock under its accelerated share repurchase, which was entered into during the second quarter of 2011. The Company also paid a
total of $493.4 million to repurchase senior notes in the aggregate principal amount of $427.8 million, maturing February 1, 2019, January 15, 2017 and May 15, 2015.
2011 compared to 2010
Net cash used in financing activities for the year
ended December 31, 2011 was $651.0 million compared to $58.0 million in 2010. During the year ended December 31, 2011, the Company received proceeds from the issuance of $600.0 million of long-term senior notes and paid $500.0
million for the acquisition of the Companys common stock under its ASR, which was entered into during the second quarter of 2011. The Company also paid a total of $493.4 million to repurchase senior notes in the aggregate principal amount of
$427.8 million, maturing February 1, 2019, January 15, 2017 and May 15, 2015. These increases were partially offset by proceeds of $65.0 million received from net borrowings under the Previous Credit Agreement as of
December 31, 2011, as compared to $120.0 million for 2010. For the year ended December 31, 2010, the Company received proceeds of $400.0 million from the issuance of long-term senior notes, paid $325.7 million for the May 15, 2010
maturity of senior notes and repaid $27.3 million of debt assumed as part of the 2010 acquisitions.
50
Other
The Companys cash balances are held in numerous locations throughout the world, including substantial amounts held outside of the United States. Cash and cash equivalents of $430.7 million as of
December 31, 2012 included $65.6 million in the U.S. and $365.1 million at international locations. In 2013, the Companys foreign subsidiaries are expected to make intercompany payments to the U.S. of approximately $80 million from
foreign cash balances as of December 31, 2012. These payments will be made in satisfaction of intercompany obligations, and additional payments up to approximately $340 million with respect to these intercompany obligations are expected to be
made in future years. The Company has recognized deferred tax liabilities of $9.1 million as of December 31, 2012 related to local withholding taxes on certain foreign earnings that are not considered to be permanently reinvested. Certain other
cash balances of foreign subsidiaries may be subject to U.S. or local country income or withholding taxes if repatriated to the U.S. In addition, repatriation of some foreign cash balances is further restricted by local laws. Management regularly
evaluates whether foreign cash balances are expected to be permanently reinvested. This evaluation requires judgment about the future operating and liquidity needs of the Companys foreign subsidiaries. Changes in economic and business
conditions, foreign or U.S. tax laws, or the Companys financial situation could result in changes to these judgments and the need to record additional tax liabilities.
Included in cash and cash equivalents of $430.7 million at December 31, 2012 were short-term investments in the amount of $96.5 million, which primarily consist of short-term deposits and money
market funds. These investments are with institutions with sound credit ratings and are believed to be highly liquid.
Dividends
Cash dividends paid to shareholders totaled $187.1 million, $205.2 million and $214.4 million in 2012, 2011 and 2010,
respectively. The Companys Board of Directors must review and approve future dividend payments and will determine whether to declare additional dividends based on the Companys operating performance, expected future cash flows, debt
levels, liquidity needs and investment opportunities. On January 10, 2013, the Board of Directors of the Company declared a quarterly cash dividend of $0.26 per common share, payable on March 1, 2013 to shareholders of record on
January 25, 2013.
Contractual Cash Obligations and Other Commitments and Contingencies
The following table quantifies the Companys future contractual obligations as of December 31, 2012:
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Payments Due In
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Total
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2013
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2014
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2015
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2016
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2017
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Thereafter
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(in millions)
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Debt
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$
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3,429.6
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|
|
$
|
18.4
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|
|
$
|
259.2
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|
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$
|
304.1
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|
|
$
|
350.7
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|
|
$
|
525.0
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|
|
$
|
1,972.2
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Interest due on debt(a)
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|
|
1,522.0
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|
|
|
241.0
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|
|
|
237.0
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|
|
|
224.9
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|
|
|
216.6
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|
|
|
170.4
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|
|
|
432.1
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Operating leases(b)
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|
|
606.1
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|
152.2
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|
117.6
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|
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86.2
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|
|
|
59.9
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|
|
|
45.9
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|
|
|
144.3
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Pension and other postretirement benefit plan contributions
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108.1
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|
|
23.1
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|
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85.0
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Outsourced services
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|
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110.7
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|
|
|
91.5
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|
|
13.8
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|
|
3.8
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|
|
|
0.8
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|
|
|
0.8
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|
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Incentive compensation
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|
46.6
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|
|
46.6
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Deferred compensation
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|
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95.9
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|
|
|
12.3
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|
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2.4
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|
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2.3
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|
|
2.1
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|
|
2.1
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|
|
|
74.7
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Other
|
|
|
129.3
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(c)
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|
|
91.2
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|
|
13.5
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|
|
|
5.6
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|
|
|
2.1
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|
|
|
2.1
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|
|
|
14.8
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Total as of December 31, 2012
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$
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6,048.3
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$
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676.3
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|
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$
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728.5
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$
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626.9
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$
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632.2
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$
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746.3
|
|
|
$
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2,638.1
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(a)
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Interest due on debt includes scheduled interest payments, net of $46.5 million of estimated cash receipts from interest rate swaps.
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(b)
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Operating leases include obligations to landlords.
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51
(c)
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Other represents contractual obligations for multi-employer pension withdrawal obligations ($25.1 million), employee restructuring-related severance payments ($23.4
million), purchases of property, plant and equipment ($36.6 million), purchases of natural gas ($6.6 million) and contingent consideration ($9.3 million). Additionally, the Company has included $8.4 million of uncertain tax liabilities that are
classified as current liabilities in the Consolidated Balance Sheets as payments due in 2013. Excluded from the table are $39.5 million of uncertain tax liabilities, as the Company is unable to reasonably estimate the ultimate amount or timing of
settlement or other resolution.
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The contractual obligations included above for pension and other postretirement
benefit plans include the 2013 and 2014 estimated contribution payments and do not include the obligations for subsequent periods, as the Company is unable to reasonably estimate the ultimate amount.
The minimum annual contributions to the multi-employer pension plans are determined by the terms and conditions of each plan to which the
Company contributes. Although the Company cannot currently estimate the amount of multi-employer pension plan contributions that will be required for 2013, the Company expects contributions to be consistent with those of prior years.
LIQUIDITY
The Company
believes it has sufficient liquidity to support its ongoing operations and to invest in future growth to create value for its shareholders. Operating cash flows and the Credit Agreement are the Companys primary sources of liquidity and are
expected to be used for, among other things, payment of interest and principal on the Companys long term debt obligations, capital expenditures as necessary to support productivity improvement and growth, completion of restructuring programs,
acquisitions and distributions to shareholders that may be approved by the Board of Directors.
The Company maintains cash
pooling structures that enable participating international locations to draw on the pools cash resources to meet local liquidity needs. Foreign cash balances may be loaned from certain cash pools to U.S. operating entities on a temporary basis
in order to reduce the Companys short-term borrowing costs or for other purposes.
On October 15, 2012, the Company
entered into a $1.15 billion senior secured revolving credit facility which expires October 15, 2017. Borrowings under this Credit Agreement bear interest at a base or Eurocurrency rate plus an applicable margin determined at the time of the
borrowing. In addition, the Company pays facility commitment fees. The applicable margin and rate for the facility commitment fees are set at agreed-upon pricing levels until April 15, 2013 and will thereafter fluctuate dependent on the Credit
Agreements credit ratings. The Credit Agreement replaced the Previous Credit Agreement which was due to expire on December 17, 2013. All amounts outstanding under the Previous Credit Agreement were repaid with borrowings under the Credit
Agreement. The Credit Agreement is used for general corporate purposes, including acquisitions and letters of credit. The Companys obligations under the Credit Agreement are guaranteed by material domestic subsidiaries and are secured by a
pledge of the equity interests of certain subsidiaries, including most of its domestic subsidiaries, and a security interest in substantially all of the domestic current assets and mortgages of certain domestic real property of the Company.
The Credit Agreement is subject to a number of covenants, including a minimum Interest Coverage Ratio and a maximum Leverage
Ratio, as defined and calculated pursuant to the Credit Agreement, that, in part, restrict the Companys ability to incur additional indebtedness, create liens, engage in mergers and consolidations, make restricted payments and dispose of
certain assets and may also limit the use of proceeds. The Credit Agreement generally allows annual dividend payments of up to $200.0 million in aggregate, though additional dividends may be allowed subject to certain conditions. As of
December 31, 2012, the Company had $71.1 million in outstanding letters of credit, of which $38.9 million reduced the availability under the Credit Agreement. There were no borrowings under the Credit Agreement as of December 31, 2012,
leaving approximately $1.1 billion of
52
availability under the Credit Agreement. Based on the Companys results of operations for the year ended December 31, 2012 and existing debt, the Company had the ability to utilize
approximately $1.1 billion of availability under the Credit Agreement and not be in violation of the terms of the agreement.
The Company was in compliance with its debt covenants as of December 31, 2012, and expects to remain in compliance based on
managements estimates of operating and financial results for 2013 and the foreseeable future. However, continuing declines in market and economic conditions or demand for certain of the Companys products and services could impact the
Companys ability to remain in compliance with its debt covenants in future periods. As of December 31, 2012, the Company met all the conditions required to borrow under the Credit Agreement and management expects the Company to continue
to meet the applicable borrowing conditions.
The failure of a financial institution supporting the Credit Agreement would
reduce the size of the Companys committed facility unless a replacement institution was added. Currently, the Credit Agreement is supported by fifteen U.S. and international financial institutions.
The Company also had $170.0 million in credit facilities outside of the U.S. as of December 31, 2012, most of which were
uncommitted. As of December 31, 2012, total borrowings under the Credit Agreement and the Foreign Facilities (the Combined Facilities) were $10.4 million. At December 31, 2012, approximately $1.3 billion was available under the
Companys Combined Facilities.
On August 1, 2012, Standard & Poors Rating Services
(S&P) lowered the Companys long-term corporate credit and senior unsecured debt ratings from BB+ with a negative outlook to BB with a stable outlook. On September 19, 2012, S&P assigned a rating of BBB- to the Credit
Agreement. On November 6, 2012, S&P reaffirmed Companys long-term corporate credit rating of BB and revised the outlook from stable to negative.
On September 19, 2012, Moodys Investors Service (Moodys) lowered the Companys senior unsecured debt ratings from Ba2 to Ba3, assigned a rating of Baa2 to the Credit Agreement and
reaffirmed the Companys long-term corporate family rating of Ba2 with a negative outlook.
As a result of the
August 1, 2012 downgrade by S&P, the interest rate on the Companys 11.25% senior notes due February 1, 2019 was increased from 12.0%, as of the June 13, 2012 downgrade by Moodys, to 12.25%. The September 19, 2012
downgrade by Moodys further increased the rate on these notes from 12.25% to 12.50%. Subsequent to April 15, 2013, the applicable margin used in the calculation of interest on borrowings under the Credit Agreement and rate for the related
facility commitment fees will fluctuate dependent on the Credit Agreements credit ratings. The terms and conditions of future borrowings may also be impacted as a result of the ratings downgrades.
Acquisitions
During the
three months ended December 31, 2012, the Company paid $37.5 million, net of cash acquired, to purchase Presort and Meisel. During the three months ended September 30, 2012, the Company paid $90.1 million, net of cash acquired, to purchase
EDGAR Online and XPO. The Company financed these acquisitions with a combination of cash on hand and borrowings under the Credit Agreement and Previous Credit Agreement.
During the three months ended December 31, 2011, the Company paid $29.0 million, net of cash acquired, to purchase Stratus. During the three months ended September 30, 2011, the Company paid
$37.9 million, net of cash acquired, to purchase LibreDigital, Genesis and Sequence. During the three months ended June 30, 2011, the Company paid $55.9 million, net of cash acquired, to purchase the remaining equity of Helium. Additionally,
during the three months ended March 31, 2011, the Company paid $19.6 million, net of cash acquired, to purchase Journalism Online. The Company financed the acquisitions with cash on hand.
53
During the three months ended December 31, 2010, the Company paid $485.6 million to
purchase Bowne, Nimblefish and 8touches. The Company financed all of these acquisitions with cash on hand and through borrowings under the previous $2.0 billion unsecured and committed revolving credit facility.
Debt Issuances
On
March 13, 2012, the Company issued $450.0 million of 8.25% senior notes due March 15, 2019. Interest on the notes is payable semi-annually on March 15 and September 15 of each year, commencing on September 15, 2012. The net
proceeds from the offering and cash on hand were used to repurchase $341.8 million of the 4.95% senior notes due April 1, 2014 and $100.0 million of the 5.50% senior notes due May 15, 2015.
On June 1, 2011, the Company issued $600.0 million of 7.25% senior notes due May 15, 2018. Interest on the notes is payable
semi-annually on May 15 and November 15 of each year, commencing on November 15, 2011. The net proceeds from the offering were used to repurchase $216.2 million of the 11.25% senior notes due February 1, 2019, $100.0 million of
the 6.125% senior notes due January 15, 2017 and $100.0 million of the 5.50% senior notes due May 15, 2015. The remaining net proceeds were used for general corporate purposes and to repay outstanding borrowings under the Previous Credit
Agreement. On September 28, 2011, the Company repurchased an additional $11.6 million of the 11.25% senior notes due February 1, 2019.
On June 21, 2010, the Company issued $400.0 million of 7.625% senior notes due June 15, 2020. Interest on the notes is payable semi-annually on June 15 and December 15 of each year.
The Company used the net proceeds to repay borrowings under the previous $2.0 billion unsecured and committed revolving credit facility that were drawn on May 13, 2010 and used, together with cash on hand, to repay $325.7 million of senior
notes due May 15, 2010. The remaining net proceeds were used for general corporate purposes.
Other Significant Events
On May 3, 2011, the Board of Directors of the Company approved a program that authorized the repurchase of up to $1.0 billion of the
Companys common stock through December 31, 2012 and terminated its existing authorization of October 29, 2008 for the repurchase of up to 10 million shares. The repurchase authorizations did not obligate the Company to acquire
any particular amount of common stock or adopt any particular method of repurchase.
As part of the share repurchase program,
on May 5, 2011, the Company entered into an ASR with an investment bank under which the Company agreed to repurchase $500 million of its common stock. On May 10, 2011, the Company paid the $500 million purchase price and received an
initial delivery of 19.9 million shares from the investment bank. The shares delivered were subject to a 20%, or $100.0 million holdback, which resulted in the Company receiving an additional 9.3 million shares on November 17, 2011.
The additional shares received were calculated based upon the $17.13 volume weighted average price of the Companys common stock over an averaging period, subject to a discount agreed upon with the investment bank. No other shares were
repurchased under this share repurchase program. As of January 1, 2013, no additional shares may be purchased under the May 3, 2011 program, as it expired on December 31, 2012.
Risk Management
The Company is exposed to interest rate risk on its
variable-rate debt and price risk on its fixed-rate debt. At December 31, 2012, the Companys exposure to rate fluctuations on variable-interest borrowings was $678.8 million, including $658.0 million notional value of interest rate swap
agreements (See Note 14,
Derivatives
, to the Consolidated Financial Statements) and $20.8 million in borrowings under international credit facilities and other long-term debt. Including the effect of the fixed to floating interest rate swaps,
approximately 80.3% of the Companys outstanding term debt was comprised of fixed-rate debt as of December 31, 2012.
54
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 spot and forward
contracts to hedge the currency risk. As of December 31, 2012, the aggregate notional amount of outstanding foreign exchange forward contracts was approximately $654.2 million (See Note 14,
Derivatives
, to the Consolidated Financial
Statements). Net unrealized losses from these foreign exchange contracts were $23.4 million at December 31, 2012. The Company does not use derivative financial instruments for trading or speculative purposes.
The Company assesses market risk based on changes in interest rates utilizing a sensitivity analysis that measures the potential loss in
earnings, fair values and cash flows based on a hypothetical 10% change in interest rates. Using this sensitivity analysis, such changes would not have a material effect on interest income or expense and cash flows and would change the fair values
of fixed rate debt at December 31, 2012 by approximately $114.2 million.
OTHER INFORMATION
Environmental, Health and Safety
For a discussion of certain environmental, health and safety issues involving the Company, see Note 10,
Commitments and Contingencies,
to the Consolidated Financial Statements.
Litigation and Contingent Liabilities
For a discussion of certain litigation involving the Company, see Note 10,
Commitments and Contingencies,
to the Consolidated Financial Statements.
New Accounting Pronouncements and Pending Accounting Standards
During 2012, 2011 and 2010, the Company adopted various accounting standards. See Note 21,
New Accounting Pronouncements
, to the Consolidated Financial Statements for a description of the
accounting standards adopted during 2012.
Pending standards and their estimated effect on the Companys consolidated
financial statements are described in Note 21,
New Accounting Pronouncements
, to the Consolidated Financial Statements.
ITEM 7A.
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
Market Risk
The Company is exposed to interest rate risk on its
variable-rate debt, price risk on its fixed-rate debt and the impact of foreign currency fluctuations in certain countries in which it operates. The Company discusses risk management in various places throughout this document, including discussions
in Item 7 concerning Liquidity and Capital Resources and in the Notes to Consolidated Financial Statements (Note 14,
Derivatives
).
Credit Risk
The Company
is exposed to credit risk on accounts receivable balances. This risk is mitigated due to the Companys large, diverse customer base, dispersed over various geographic regions and industrial sectors. No single customer comprised more than 10% of
the Companys consolidated net sales in 2012, 2011 or 2010. The Company maintains provisions for potential credit losses and any such losses to date have normally been within
55
the Companys expectations. The Company evaluates the solvency of its customers on an ongoing basis to determine if additional allowances for doubtful accounts need to be recorded.
Additional economic disruptions or a further slowdown in the economy could result in significant additional charges.
Commodities
The primary raw materials used by the Company are paper and ink. To reduce price risk caused by market fluctuations, the
Company has incorporated price adjustment clauses in certain sales contracts. Management believes a hypothetical 10% change in the price of paper and other raw materials would not have a significant effect on the Companys consolidated annual
results of operations or cash flows because these costs are generally passed through to its customers.
ITEM 8.
|
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|
The financial information required by Item 8 is contained in Item 15 of Part IV.
ITEM 9.
|
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|
None.
ITEM 9A.
|
CONTROLS AND PROCEDURES
|
Disclosure
Controls and Procedures
As required by Rule 13a-15(b) and Rule 15d-15(e) of the Securities Exchange Act of 1934, the
Companys management, including the Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining effective disclosure controls and procedures, as defined under Rules 13a-15(e) and 15d-15(e) of the
Securities Exchange Act of 1934. As of December 31, 2012, an evaluation was performed under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Companys disclosure controls and procedures. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that disclosure controls and procedures as of December 31, 2012 were
effective in ensuring information required to be disclosed in our SEC reports was recorded, processed, summarized, and reported within the time periods specified in the SECs rules and forms, and that such information was accumulated and
communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There have not been
any changes in the Companys internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) that occurred during the quarter ended December 31, 2012 that have materially
affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.
Report of
Management on Internal Control Over Financial Reporting
The management of the Company, including the Companys Chief
Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934).
Management of the Company, including the Companys Chief Executive Officer and Chief Financial Officer, assessed the effectiveness
of the Companys internal control over financial reporting as of December 31,
56
2012. Management based this assessment on criteria for effective internal control over financial reporting described in Internal ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
Based on this assessment, management determined that, as of
December 31, 2012, the Company maintained effective internal control over financial reporting.
Deloitte &
Touche LLP, an independent registered public accounting firm, who audited the consolidated financial statements of the Company included in this Annual Report on Form 10-K , has also audited the effectiveness of the Companys internal control
over financial reporting as stated in its report appearing below.
February 26, 2013
57
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
R.R. Donnelley & Sons Company
Chicago,
Illinois
We have audited the internal control over financial reporting of R.R. Donnelley & Sons Company and
subsidiaries (the Company) as of December 31, 2012, based on criteria established in
Internal ControlIntegrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission. The
Companys management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management
on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Companys internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that
a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process
designed by, or under the supervision of, the companys principal executive and principal financial officers, or persons performing similar functions, and effected by the companys board of directors, management, and other personnel to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over
financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could
have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2012, based on the criteria established in
Internal ControlIntegrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated
financial statements as of and for the year ended December 31, 2012 of the Company and our report dated February 26, 2013 expressed an unqualified opinion on those financial statements.
/s/ DELOITTE & TOUCHE LLP
Chicago, Illinois
February 26, 2013
58
ITEM 9B.
|
OTHER INFORMATION
|
None.
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share data and unless otherwise indicated)
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 2012, 2011 and 2010 are included in the consolidated financial statements from the dates of acquisition (see
Note 2).
Nature of Operations
The Company is a global provider of integrated communications which works
collaboratively with more than 60,000 customers worldwide to develop custom communications solutions that reduce costs, drive top line growth, enhance return on investment and ensure compliance. Drawing on a range of proprietary and commercially
available digital and conventional technologies deployed across four continents, the Company employs a suite of leading Internet-based capabilities and other resources to provide premedia, printing, logistics and business process outsourcing
services to clients 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 managements 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 (loss). Deferred taxes are not provided on cumulative foreign currency translation adjustments when the Company expects foreign earnings
to be permanently reinvested. Throughout the three years ended December 31, 2012, the three-year cumulative inflation for Venezuela using the blended Consumer Price Index and National Consumer Price Index exceeded 100%. As a result,
Venezuelas economy is considered highly inflationary and the financial statements of the Companys Venezuelan entities are remeasured as if the functional currency were the U.S. Dollar. Consistent with historical practices and the
Companys future intent, the financial statements were remeasured based on the official rate determined by the government of Venezuela. On January 8, 2010, the government of Venezuela changed its primary fixed exchange rate from 2.15
Bolivars per U.S. Dollar to 4.3 Bolivars per U.S. Dollar, devaluing the Bolivar by 50%. This devaluation resulted in a pre-tax loss of $8.9 million ($8.1 million after-tax) and a reduction in income attributable to noncontrolling interest
of $3.6 million.
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, 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.
F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share data and unless otherwise indicated)(Continued)
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
Companys 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.
During the year ended December 31, 2012, the
Company identified and recognized $22.7 million, of which $19.8 million was recognized in the first quarter of 2012, to correct an over-accrual for rebates owed to certain office products customers, which understated accounts receivable and net
sales during the years 2008 through 2011. Following qualitative and quantitative review, the Company concluded that the over-accrual was not material to any prior period, the full year 2012 or to the trend of annual operating
results.
Revenue from services is recognized as services are performed. Within the Companys financial print operations,
which serve the global financial services end market, the Company produces highly customized materials such as regulatory S-filings, initial public offerings, XBRL and EDGAR-related services. Revenue is recognized for these services following final
delivery of the printed product or upon completion of the service performed. With respect to the Companys logistics operations, whose operations include the delivery of printed material and other products, the Company recognizes revenue upon
completion of the delivery of services. Revenues related to the Companys premedia 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.
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, primarily in the Companys logistics operations, and
out-of-pocket expenses are recorded gross. In the Companys Global Turnkey Solutions 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 Companys 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 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.
The Company records taxes collected from customers and remitted to governmental authorities on a net basis.
F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share data and unless otherwise indicated)(Continued)
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 Companys consolidated net sales in 2012, 2011 or 2010. 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 Companys
historical collection experience. See Note 5 for details of activity affecting the allowance for doubtful accounts.
Inventories
Inventories include material, labor and factory overhead and are stated at the lower of cost or market. The cost
of approximately 64.0% and 65.7% of the inventories at December 31, 2012 and 2011, respectively, has been determined using the Last-In, First-Out (LIFO) method. This method reflects the effect of inventory replacement costs within results of
operations; accordingly, charges to cost of sales 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 (FIFO) 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. Indefinite-lived intangible assets are reviewed annually for impairment, or more frequently, if events or changes in circumstances indicate that the carrying value 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 units fair value, estimated based on comparable company market valuations and expected future discounted cash flows to be generated by the
F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share data and unless otherwise indicated)(Continued)
reporting unit, to its carrying value. If the carrying value exceeds the reporting units 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 3 for further discussion.
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 $26.6 million,
$21.8 million and $15.3 million for the years ended December 31, 2012, 2011 and 2010, respectively. Deferred debt issue costs are amortized over the term of the related debt. Identifiable intangible assets, except for those intangible assets
with indefinite lives, are recognized apart from goodwill and are amortized over their estimated useful lives. Identifiable intangible assets with indefinite lives are not amortized. See Note 4 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 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 or cash flows 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. See Note 14 for further discussion.
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 17 for further discussion.
Pension and Other Postretirement Benefit 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 11 for further discussion.
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
F-10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share data and unless otherwise indicated)(Continued)
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 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 Companys 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 12 for further discussion.
Comprehensive Income
(Loss)
Comprehensive income (loss) for the Company consists of net earnings (loss), unrecognized actuarial gains and losses, prior service cost for pension and other postretirement benefit plans, changes in the fair value of certain
derivative financial instruments and foreign currency translation adjustments. See Note 16 for further discussion.
Note 2. Acquisitions
2012 Acquisitions
On December 28, 2012, the Company acquired Presort Solutions (Presort), a provider of mail presorting services to businesses in various industries. The acquisition of Presort will expand
the range of logistics co-mailing capabilities that the Company can provide to its customers and will enhance its integrated offerings. The purchase price for Presort was $12.1 million, net of cash acquired of $0.6 million. Presorts operations
are included in the U.S. Print and Related Services segment.
On December 17, 2012, the Company acquired Meisel
Photographic Corporation (Meisel), a provider of custom designed visual graphics products to the retail market. The acquisition of Meisel will expand and enhance the range of services the Company offers to its customers. The purchase
price for Meisel was $25.4 million, net of cash acquired of $1.0 million. Meisels operations are included in the U.S. Print and Related Services segment.
On September 6, 2012, the Company acquired Express Postal Options International (XPO), a provider of international outbound mailing services to pharmaceutical, e-commerce, financial
services, information technology, catalog, direct mail and other businesses. The acquisition of XPO expanded the range of logistics capabilities that the Company can provide to its customers and enhanced its integrated offerings. The purchase price
for XPO, which includes the Companys estimate of contingent consideration, was $23.5 million, net of cash acquired of $1.0 million. The former owners of XPO may receive contingent consideration in the form of cash payments of up to $4.0
million subject to XPO achieving certain gross profit targets. As of the acquisition date, the Company estimated the fair value of the contingent consideration to be $3.5 million using a probability weighting of the potential payouts. Subsequent
changes in the estimated contingent consideration from the final purchase price allocation will be recognized in selling, general and administrative expenses in the Consolidated Statements of Operations. XPOs operations are included in the
U.S. Print and Related Services segment.
F-11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share data and unless otherwise indicated)(Continued)
On August 14, 2012, the Company acquired EDGAR Online, a leading provider of
disclosure management services, financial data and enterprise risk analytics software and solutions. The acquisition of EDGAR Online expanded and enhanced the range of services that the Company offers to its customers. The purchase price for EDGAR
Online was $71.5 million, including debt assumed of $1.4 million and net of cash acquired of $2.1 million. Immediately following the acquisition, the Company repaid the $1.4 million of debt assumed. EDGAR Onlines operations are included in the
U.S. Print and Related Services segment.
For the year ended December 31, 2012, the Company recorded $2.5 million of
acquisition-related expenses associated with acquisitions completed or contemplated, within selling, general and administrative expenses in the Consolidated Statements of Operations.
The Presort, Meisel, XPO and EDGAR Online acquisitions were recorded by allocating the cost of the acquisitions to the assets acquired,
including other intangible assets, based on their estimated fair values at the acquisition date. The excess of the cost of the acquisitions and the fair value of the contingent consideration over the net amounts assigned to the fair value of the
assets acquired was recorded as goodwill. The preliminary tax deductible goodwill related to these acquisitions was $25.8 million. The Presort and Meisel purchase price allocations are preliminary as the Company is still in the process of obtaining
data to finalize the estimated fair values of certain account balances. The purchase price allocations of XPO and EDGAR Online are final. Based on the current valuations, the purchase price allocations for these acquisitions were as follows:
|
|
|
|
|
Accounts receivable
|
|
$
|
18.7
|
|
Inventories
|
|
|
1.4
|
|
Prepaid expenses and other current assets
|
|
|
4.6
|
|
Property, plant and equipment
|
|
|
8.3
|
|
Amortizable other intangible assets
|
|
|
36.4
|
|
Other noncurrent assets
|
|
|
15.1
|
|
Goodwill
|
|
|
57.9
|
|
Accounts payable and accrued liabilities
|
|
|
(20.2
|
)
|
Other noncurrent liabilities
|
|
|
(0.1
|
)
|
Deferred taxes-net
|
|
|
10.4
|
|
|
|
|
|
|
Total purchase price-net of cash acquired
|
|
|
132.5
|
|
Less: debt assumed
|
|
|
1.4
|
|
Less: fair value of contingent consideration
|
|
|
3.5
|
|
|
|
|
|
|
Net cash paid
|
|
$
|
127.6
|
|
|
|
|
|
|
F-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share data and unless otherwise indicated)(Continued)
The fair values of technology, amortizable other intangible assets, contingent
consideration and goodwill associated with the acquisitions of Presort, Meisel, XPO and EDGAR Online 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
|
|
$
|
29.9
|
|
|
Excess earnings, with and without method
|
|
Discount rate
Attrition rate
|
|
16.0% - 17.0%
7.0% - 20.0%
|
Technology
|
|
|
14.5
|
|
|
Excess earnings,
relief-from-royalty method, cost approach
|
|
Discount rate
Obsolescence factor
Royalty rate (after-tax)
|
|
16.0% - 17.0%
10.0% - 20.0%
4.5%
|
Trade names
|
|
|
3.5
|
|
|
Relief-from-royalty method
|
|
Discount rate
Royalty rate (after-tax)
|
|
15.5% - 17.0%
0.3% - 1.2%
|
Non-compete agreements
|
|
|
3.0
|
|
|
With and without method
|
|
Discount rate
|
|
16.5% - 17.5%
|
Contingent consideration
|
|
|
3.5
|
|
|
Probability weighted discounted future cash flows
|
|
Discount rate
|
|
4.5%
|
2011 Acquisitions
On November 21, 2011, the Company acquired StratusGroup, Inc. (Stratus), a full service manufacturer of custom pressure sensitive label and paperboard packaging products for health and
beauty, food, beverage and other segments. Stratus decorative labeling and paperboard resources complement the Companys prime label, corrugated and other global packaging capabilities. The purchase price for Stratus was $28.8 million net
of cash acquired of $0.1 million. Stratus operations are included in the U.S. Print and Related Services segment.
On
September 6, 2011, the Company acquired Genesis Packaging & Design Inc. (Genesis), a full service provider of custom packaging, including designing, printing, die cutting, finishing and assembling. The addition of Genesis
complements the Companys existing packaging and merchandising business with a centrally located facility and enhanced ability to service customers in a range of industries. The purchase price for Genesis was $10.1 million. Genesis
operations are included in the U.S. Print and Related Services segment.
On August 16, 2011, the Company acquired
LibreDigital, Inc. (LibreDigital), a leading provider of digital content distribution, e-reading software, content conversion, data analytics and business intelligence services. LibreDigitals capabilities enable the Company to
offer a broader selection of digital content creation and delivery services to publishing, retail, e-reader provider and other customers. The purchase price for LibreDigital was $19.5 million net of cash acquired of $0.1 million. LibreDigitals
operations are included in the U.S. Print and Related Services segment.
On August 15, 2011, the Company acquired
Sequence Personal LLC (Sequence), a provider of proprietary software that enables readers to select relevant content to be digitally produced as specialized publications. Sequences software offers publishers and other customers a
practical way to increase revenues by allowing advertisers to select unique ad selection criteria for targeted delivery. The purchase price for Sequence, which includes the Companys estimate of contingent consideration, was $14.6 million, net
of cash acquired of $0.1 million. A former equity holder of Sequence may receive contingent consideration in the form of cash payments of up to $14.0 million, subject to Sequence achieving certain milestones related to volume or revenue in 2013 and
2014. As of the acquisition date, the Company estimated the fair value of the contingent consideration to be $6.8 million using a probability weighting of the potential payouts. The Company has subsequently revised the estimated fair value of the
contingent consideration as the result of a decrease in the
F-13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share data and unless otherwise indicated)(Continued)
likelihood of achieving the 2013 and 2014 milestones. The adjustment to the fair value of the contingent consideration was recognized in selling, general and administrative expenses in the
Consolidated Statements of Operations. Any further changes in the estimated contingent consideration will also be recognized in the Consolidated Statements of Operations. Sequences operations are included in the U.S. Print and Related Services
segment.
On June 21, 2011, the Company acquired Helium, Inc. (Helium), an online community offering
publishers, catalogers and other customers stock and custom content, as well as a comprehensive range of editorial solutions. The ability to bundle Heliums content development solutions with the Companys complete offering of content
delivery resources addresses customers needs across the full breadth of the supply chain. As the Company previously held a 23.7% equity investment in Helium, the purchase price for the remaining equity of Helium was $57.0 million net of cash
acquired of $0.1 million and included an amount due from Helium of $1.1 million. The fair value of the Companys previously held equity investment was $12.8 million, resulting in the recognition of a $10.0 million gain, which is reflected in
investment and other expense (income) in the Consolidated Statements of Operations for the year ended December 31, 2011. The fair value of the previously held equity investment was determined based on the purchase price paid for the remaining
equity less an estimated control premium. The inputs used to determine the fair value of the previously held equity investment were determined to be Level 3 under the fair value hierarchy. Heliums operations are included in the U.S. Print and
Related Services segment.
On March 24, 2011, the Company acquired Journalism Online, LLC (Journalism
Online), an online provider of tools that allow consumers to purchase online subscriptions from publishers. Journalism Onlines Press+ offering provides subscription management and online content payment services that increase the breadth
of services the Company offers to its existing base of publishing customers. The purchase price for Journalism Online was $19.6 million net of cash acquired of $0.4 million. Journalism Onlines operations are included in the U.S. Print and
Related Services segment.
For the year ended December 31, 2011, the Company recorded $2.2 million of acquisition-related
expenses, associated with acquisitions completed or contemplated, within selling, general and administrative expenses in the Consolidated Statements of Operations.
The Stratus, Genesis, LibreDigital, Sequence, Helium and Journalism Online acquisitions were recorded by allocating the cost of the acquisitions to the assets acquired, including other intangible assets,
based on their estimated fair values at the acquisition date. The excess of the cost of the acquisitions and the fair value of the previously-held investments in Helium and contingent consideration over the net amounts assigned to the fair
F-14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share data and unless otherwise indicated)(Continued)
value of the assets acquired was recorded as goodwill. The tax deductible goodwill related to these acquisitions was $46.7 million. Based on the valuations, the final purchase price allocations
for these acquisitions were as follows:
|
|
|
|
|
Accounts receivable
|
|
$
|
6.0
|
|
Inventories
|
|
|
2.3
|
|
Prepaid expenses and other current assets
|
|
|
0.4
|
|
Property, plant and equipment and other noncurrent assets
|
|
|
16.8
|
|
Amortizable other intangible assets
|
|
|
16.2
|
|
Goodwill
|
|
|
117.6
|
|
Accounts payable and accrued liabilities
|
|
|
(8.2
|
)
|
Other noncurrent liabilities
|
|
|
(2.9
|
)
|
Deferred taxes-net
|
|
|
14.2
|
|
|
|
|
|
|
Total purchase price-net of cash acquired
|
|
|
162.4
|
|
Less: fair value of Companys previously-held investments in Helium
|
|
|
13.9
|
|
Less: fair value of contingent consideration
|
|
|
6.8
|
|
|
|
|
|
|
Net cash paid
|
|
$
|
141.7
|
|
|
|
|
|
|
The fair values of property, plant and equipment, amortizable other intangible assets, contingent
consideration and goodwill associated with the acquisitions of Stratus, Genesis, LibreDigital, Sequence, Helium and Journalism Online were determined to be Level 3 under the fair value hierarchy. Property, plant and equipment values were estimated
based on discussions with machinery and equipment brokers, dealer quotes and internal expertise related to the equipment and current marketplace conditions. Customer relationships intangible asset values were estimated based on expected future cash
flows discounted using an estimated weighted average cost of capital. Estimates of future customer attrition rates were considered in estimating the expected future cash flows from customer relationships. Tradename intangible asset values were
estimated based on the relief-from-royalty method.
2010 Acquisitions
On December 31, 2010, the Company acquired 8touches, an online provider of tools that allow real estate associates, brokers, Multiple
Listing Service (MLS) associations and other marketers to create customized communications materials. The purchase price for 8touches was $1.1 million. 8touches operations are included in the U.S. Print and Related Services segment.
On December 14, 2010, the Company acquired Nimblefish Technologies (Nimblefish), a provider of multi-channel
marketing services to leading retail, technology, telecom, hospitality and other customers. The purchase price for Nimblefish was $3.9 million, including debt assumed of $2.0 million. The Company subsequently repaid $1.9 million of the debt assumed
in December 2010. Nimblefishs operations are included in the U.S. Print and Related Services segment.
On
November 24, 2010, the Company acquired Bowne & Co., Inc. (Bowne), a provider of shareholder and marketing communication services with operations in North America, Latin America, Europe and Asia. The purchase price for
Bowne was $465.2 million, including debt assumed of $26.2 million and net of cash acquired of $41.4 million. Immediately following the acquisition, the Company repaid $25.4 million of the debt assumed. Bownes operations are included in both
the U.S. Print and Related Services and International segments.
F-15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share data and unless otherwise indicated)(Continued)
The operations of these acquired businesses are complementary to the Companys
existing products and services. As a result, the additions of these businesses have improved the Companys ability to serve customers and reduced redundant management, real estate and manufacturing costs. For the year ended December 31,
2010, the Companys Consolidated Financial Statements included $61.2 million of net sales and a net loss of $9.3 million related to these acquired businesses. For the year ended December 31, 2010, the Company recorded $13.5 million of
acquisition-related expenses, associated with acquisitions completed or contemplated, within selling, general and administrative expenses in the Consolidated Statements of Operations.
The Bowne, Nimblefish and 8touches acquisitions were recorded by allocating the cost of the acquisitions to the assets acquired,
including other intangible assets, based on their estimated fair values at the acquisition date. The excess of the cost of the acquisitions over the net amounts assigned to the fair value of the assets acquired was recorded as goodwill, most of
which is not tax deductible. Based on the valuations, the final purchase price allocations for these acquisitions were as follows:
|
|
|
|
|
Accounts receivable
|
|
$
|
129.0
|
|
Inventories
|
|
|
32.1
|
|
Prepaid expenses and other current assets
|
|
|
18.1
|
|
Property, plant and equipment and other noncurrent assets
|
|
|
127.3
|
|
Amortizable other intangible assets
|
|
|
159.8
|
|
Goodwill
|
|
|
257.9
|
|
Accounts payable and accrued liabilities
|
|
|
(159.7
|
)
|
Pension benefits and other noncurrent liabilities
|
|
|
(76.7
|
)
|
Deferred taxesnet
|
|
|
(17.6
|
)
|
|
|
|
|
|
Total purchase pricenet of cash acquired
|
|
|
470.2
|
|
Less: debt assumed
|
|
|
28.2
|
|
|
|
|
|
|
Net cash paid
|
|
$
|
442.0
|
|
|
|
|
|
|
The fair values of property, plant and equipment, amortizable other intangible assets and goodwill
associated with the acquisitions of Bowne, Nimblefish and 8touches were determined to be Level 3 under the fair value hierarchy. Property, plant and equipment values were estimated using the cost approach or market approach, if a secondhand market
existed. Customer relationships intangible asset values were estimated based on expected future cash flows discounted using an estimated weighted-average cost of capital. Estimates of future customer attrition rates were considered in estimating the
expected future cash flows from customer relationships. The tradename intangible asset value was estimated based on the relief-from-royalty method.
Pro forma results
The following unaudited pro forma financial
information for the years ended December 31, 2012 and 2011 presents the combined results of operations of the Company and the 2012 and 2011 acquisitions described above, as if the 2012 acquisitions had occurred at January 1, 2011 and the
2011 acquisitions had occurred at January 1, 2010.
The unaudited pro forma financial information is not intended to
represent or be indicative of the Companys consolidated results of operations or financial condition that would have been reported had these acquisitions been completed as of the beginning of the periods presented and should not be taken as
indicative of
F-16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share data and unless otherwise indicated)(Continued)
the Companys future consolidated results of operations or financial condition. Pro forma adjustments are tax-effected at the applicable statutory tax rates.
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
Net sales
|
|
$
|
10,461.1
|
|
|
$
|
10,837.1
|
|
Net loss attributable to RR Donnelley common shareholders
|
|
|
(641.8
|
)
|
|
|
(149.5
|
)
|
Net loss per share attributable to RR Donnelley common shareholders:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(3.56
|
)
|
|
$
|
(0.77
|
)
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(3.56
|
)
|
|
$
|
(0.77
|
)
|
|
|
|
|
|
|
|
|
|
The unaudited pro forma financial information for the years ended December 31, 2012 and 2011
included $92.6 million and $122.8 million, respectively, for the amortization of purchased intangibles. The unaudited pro forma financial information includes restructuring and impairment charges from operations of $1,115.8 million and $670.0
million for the years ended December 31, 2012 and 2011, respectively. Additionally, the pro forma adjustments affecting net loss attributable to RR Donnelley common shareholders for the years ended December 31, 2012 and 2011 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
Depreciation and amortization of purchased assets, pre-tax
|
|
$
|
(6.3
|
)
|
|
$
|
(12.9
|
)
|
Acquisition-related expenses, pre-tax
|
|
|
4.8
|
|
|
|
1.2
|
|
Restructuring and impairment charges, pre-tax
|
|
|
2.7
|
|
|
|
(2.2
|
)
|
Inventory fair value adjustments, pre-tax
|
|
|
0.3
|
|
|
|
(0.2
|
)
|
Other pro forma adjustments, pre-tax
|
|
|
0.1
|
|
|
|
(14.3
|
)
|
Income taxes
|
|
|
(3.6
|
)
|
|
|
12.4
|
|
Note 3. Restructuring and Impairment
The Company recorded restructuring and impairment charges of $1,118.5 million, $667.8 million and $157.9 million for
the years ended December 31, 2012, 2011 and 2010, respectively. The charges in 2012 included $848.4 million and $158.0 million for the impairment of goodwill and acquired customer relationship intangible assets, respectively. Additionally in
2012, the Company recorded restructuring charges of $66.6 million for employee termination costs, $25.3 million for other restructuring charges, primarily attributable to lease termination and other facility closure costs, and $20.2 million of
impairment charges for other long-lived assets. The charges in 2011 included $392.3 million for the impairment of goodwill and $90.7 million of impairment primarily related to acquired customer relationship intangible assets. Additionally in 2011,
the Company recorded restructuring charges of $76.7 million for employee termination costs, $59.6 million for other restructuring charges, of which $15.1 million related to multi-employer pension plan complete or partial withdrawal charges primarily
attributable to the closing of three manufacturing facilities within the U.S. Print and Related Services segment and the remaining amount related to lease termination and other facility closure costs, and $48.5 million of impairment charges for
other long-lived assets. The charges in 2010 included $87.9 million for the impairment of goodwill and acquired customer relationship intangible assets. Additionally in 2010, the Company recorded restructuring charges of $35.9 million for employee
termination costs, $29.5 million for other restructuring charges, of which $13.6 million related to multi-employer pension plan partial withdrawal charges primarily attributable to two closed manufacturing facilities within the U.S. Print and
Related Services segment and the remaining amount related to lease termination and other facility closure costs, and $4.6 million of impairment charges for other long-lived assets.
F-17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share data and unless otherwise indicated)(Continued)
The restructuring charges recorded are based on restructuring plans that have been
committed to by management and are, in part, based upon managements best estimates of future events. Changes to the estimates may require future adjustments to the restructuring liabilities.
Restructuring and Impairment Costs Charged to Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
Employee
Terminations
|
|
|
Other
Charges
|
|
|
Total
Restructuring
|
|
|
Impairment
|
|
|
Total
|
|
U.S. Print and Related Services
|
|
$
|
48.5
|
|
|
$
|
18.8
|
|
|
$
|
67.3
|
|
|
$
|
951.4
|
|
|
$
|
1,018.7
|
|
International
|
|
|
11.4
|
|
|
|
3.8
|
|
|
|
15.2
|
|
|
|
74.0
|
|
|
|
89.2
|
|
Corporate
|
|
|
6.7
|
|
|
|
2.7
|
|
|
|
9.4
|
|
|
|
1.2
|
|
|
|
10.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
66.6
|
|
|
$
|
25.3
|
|
|
$
|
91.9
|
|
|
$
|
1,026.6
|
|
|
$
|
1,118.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the fourth quarter of 2012, as a result of the Companys annual goodwill impairment test, the
Company recorded non-cash charges of $461.7 million and $318.7 million to recognize the impairment of goodwill in the magazines, catalogs and retail inserts and books and directories reporting units, respectively, within the U.S. Print and Related
Services segment and $68.0 million of non-cash charges to recognize goodwill impairment in the Europe reporting unit within the International segment. The goodwill impairment charges resulted from a reduction in the estimated fair value of these
three reporting units based on lower expectations for future revenue, profitability and cash flows as compared to expectations as of the last annual goodwill impairment test. The lower expectations for magazines, catalogs and retail inserts were due
to price pressures driven by excess capacity in the industry and erosion of ad pages and circulation for magazines. The lower expectations for books and directories were due to lower demand for educational books as a result of state and local budget
constraints, the impact of electronic substitution on consumer book and directory volumes and price pressures driven by excess capacity in the industry. The lower expectations for Europe were due to lower volumes from existing customers and price
pressures driven by excess capacity in the industry. Because the fair values of these reporting units were below their carrying amounts, including goodwill, the Company performed an additional fair value measurement calculation to determine the
amount of impairment charge for each reporting unit. As part of this calculation, the Company also estimated the fair values of the significant tangible and intangible long-lived assets of each reporting unit. The goodwill impairment charges were
determined using Level 3 inputs, including discounted cash flow analyses, comparable marketplace fair value data and managements assumptions in valuing the significant tangible and intangible assets.
During the fourth quarter of 2012, the Company recorded non-cash charges of $158.0 million related to the impairment of acquired customer
relationship intangible assets in the books and directories and magazines, catalogs and retail inserts reporting units within the U.S. Print and Related Services segment and the Latin America reporting unit within the International segment. The
impairment of the acquired customer relationship intangible assets resulted from lower expectations for future revenue to be derived from these relationships, driven by the same factors that caused the goodwill impairment in the books and
directories and magazines, catalogs and retail inserts reporting units and driven by the impact of electronic substitution on forms and statement printing in the Latin America reporting unit. The impairment of the acquired customer relationship
intangible assets was determined using Level 3 inputs and estimated based on cash flow analysis, which included estimates of customer attrition rates and managements assumptions related to future revenues and profitability. After recording the
impairment charges, remaining customer relationship intangible assets in the books and directories, magazines, catalogs and retail inserts and Latin America reporting units were $3.1 million, $22.8 million and $8.0 million, respectively, as of
December 31, 2012. See Note 8 for further discussion of these Level 3 inputs.
For the year ended December 31, 2012,
the Company also recorded net restructuring charges of $66.6 million for employee termination costs for 2,200 employees, of whom 2,146 were terminated as of December 31,
F-18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share data and unless otherwise indicated)(Continued)
2012. These charges primarily related to actions resulting from the reorganization of sales and administrative functions across all segments, the closing of five manufacturing facilities within
the U.S. Print and Related Services segment and one manufacturing facility within the International segment and the reorganization of certain operations. Additionally, the Company incurred lease termination and other restructuring charges of $25.3
million for the year ended December 31, 2012. For the year ended December 31, 2012, the Company also recorded $20.2 million of impairment charges primarily related to land, buildings, machinery and equipment and leasehold improvements
associated with the facility closings and other asset disposals. The fair values of the land, buildings, machinery and equipment and leasehold improvements 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
Employee
Terminations
|
|
|
Other
Charges
|
|
|
Total
Restructuring
|
|
|
Impairment
|
|
|
Total
|
|
U.S. Print and Related Services
|
|
$
|
49.2
|
|
|
$
|
52.5
|
|
|
$
|
101.7
|
|
|
$
|
403.4
|
|
|
$
|
505.1
|
|
International
|
|
|
24.2
|
|
|
|
7.0
|
|
|
|
31.2
|
|
|
|
125.8
|
|
|
|
157.0
|
|
Corporate
|
|
|
3.3
|
|
|
|
0.1
|
|
|
|
3.4
|
|
|
|
2.3
|
|
|
|
5.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
76.7
|
|
|
$
|
59.6
|
|
|
$
|
136.3
|
|
|
$
|
531.5
|
|
|
$
|
667.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the fourth quarter of 2011, as a result of the Companys annual goodwill impairment test, the
Company recorded non-cash charges of $170.4 million and $99.9 million to recognize the impairment of goodwill in the commercial and forms and labels reporting units, respectively, within the U.S. Print and Related Services segment, as well as
non-cash charges of $62.2 million and $59.8 million to recognize the impairment of goodwill in the Canada and Latin America reporting units, respectively, within the International segment. These goodwill impairment charges resulted from reductions
in the estimated fair value of the commercial, forms and labels, Canada and Latin America reporting units, based on lower expectations for future revenue, profitability and cash flows due to the continued impact of electronic substitution on demand
for business forms and other products and continued price pressure. Because the fair values of these reporting units were below their carrying amounts, including goodwill, the Company performed an additional fair value measurement calculation to
determine the amount of impairment loss. As part of this calculation, the Company also estimated the fair value of the significant tangible and intangible long-lived assets of these reporting units. The goodwill impairments were determined using
Level 3 inputs, including discounted cash flow analyses, comparable marketplace fair value data and managements assumptions in valuing the significant tangible and intangible assets.
Additionally, during the fourth quarter of 2011, the Company recorded non-cash charges of $90.7 million primarily related to the
impairment of acquired customer relationship intangible assets in the forms and labels reporting unit within the U.S. Print and Related Services segment. The impairment of the acquired customer relationship intangible assets resulted from lower
expectations for future revenue, profitability and cash flows due to the continued impact of electronic substitution on demand for business forms and continued price pressure. The impairment of the acquired customer relationship intangible assets
was determined using Level 3 inputs and estimated based on cash flow analysis, which included estimates of customer attrition rates and managements assumptions related to future revenues and profitability. After recording the impairment
charge, the remaining customer relationship intangible asset in the forms and labels reporting unit was $12.2 million as of December 31, 2011, related to the acquisition of Stratus on November 21, 2011.
For the year ended December 31, 2011, the Company also recorded net restructuring charges of $76.7 million for employee termination
costs for 2,899 employees, substantially all of whom were terminated as of December 31, 2012. These charges primarily related to the closings of certain facilities and headcount reductions due to the Bowne acquisition. These charges also
related to the closing of five manufacturing facilities within the
F-19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share data and unless otherwise indicated)(Continued)
U.S. Print and Related Services segment. These actions included the reorganization of certain operations within the U.S. Print and Related Services and International segments. Additionally, the
Company incurred multi-employer pension plan complete or partial withdrawal charges, lease termination and other restructuring charges of $59.6 million for the year ended December 31, 2011. The multi-employer pension plan complete or partial
withdrawal charges of $15.1 million were primarily attributable to the closing of three manufacturing facilities within the U.S. Print and Related Services segment. For the year ended December 31, 2011, the Company also recorded $48.5 million
of impairment charges primarily related to land, buildings, machinery and equipment and leasehold improvements associated with the facility closings. The fair values of the land, buildings, machinery and equipment and leasehold improvements 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
Employee
Terminations
|
|
|
Other
Charges
|
|
|
Total
Restructuring
|
|
|
Impairment
|
|
|
Total
|
|
U.S. Print and Related Services
|
|
$
|
5.9
|
|
|
$
|
24.0
|
|
|
$
|
29.9
|
|
|
$
|
64.1
|
|
|
$
|
94.0
|
|
International
|
|
|
17.9
|
|
|
|
4.5
|
|
|
|
22.4
|
|
|
|
28.2
|
|
|
|
50.6
|
|
Corporate
|
|
|
12.1
|
|
|
|
1.0
|
|
|
|
13.1
|
|
|
|
0.2
|
|
|
|
13.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
35.9
|
|
|
$
|
29.5
|
|
|
$
|
65.4
|
|
|
$
|
92.5
|
|
|
$
|
157.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the fourth quarter of 2010, as a result of the Companys annual impairment test, the Company
recorded a non-cash charge of $61.0 million to reflect the impairment of goodwill in the forms and labels reporting unit within the U.S. Print and Related Services segment. The goodwill impairment charge of $61.0 million resulted from reductions in
the estimated fair value of the forms and labels reporting unit, based on lower expectations for future revenue and cash flows due to the continued impacts of electronic substitution on forms demand and increasing price pressure. In addition, the
lower fair value reflected higher estimated spending on information technology and capital equipment, in part to better position this reporting unit for increased growth in labels volume as forms demand continues to decline. Because the fair
value of this reporting unit was below its carrying amount including goodwill, the Company performed an additional fair value measurement calculation to determine the amount of impairment loss. As part of this calculation, the Company also estimated
the fair value of the significant tangible and intangible long-lived assets of this reporting unit. The goodwill impairment was determined using Level 3 inputs, including discounted cash flow analyses, comparable marketplace fair value data, as well
as managements assumptions in valuing the significant tangible and intangible assets.
Additionally, during the third
quarter of 2010, the Company recorded a non-cash charge of $26.9 million for the impairment of acquired customer relationship intangible assets in the Global Turnkey Solutions reporting unit within the International segment. The impairment of the
acquired customer relationship intangible assets primarily resulted from the termination of a customer contract and was determined using Level 3 inputs and estimated based on cash flow analysis and managements assumptions related to future
revenues and profitability of certain customers. After recording the impairment charge, remaining customer relationship intangible assets in the Global Turnkey Solutions reporting unit were $43.0 million as of December 31, 2010.
For the year ended December 31, 2010, the Company recorded net restructuring charges of $35.9 million for employee termination costs
for 1,458 employees, all of whom were terminated as of December 31, 2012, associated with actions resulting from the reorganization of certain operations. These actions included the reorganization of certain operations within the U.S. Print and
Related Services segment due to the acquisition of Bowne. In addition, these actions included the closing of three manufacturing facilities within the International segment. Further, continuing charges resulting from the closing of two manufacturing
facilities in 2009 within the International segment were recorded in 2010. These actions also included the reorganization of certain
F-20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share data and unless otherwise indicated)(Continued)
operations within the U.S. Print and Related Services segment. Additionally, the Company incurred other restructuring charges of $29.5 million for the year ended December 31, 2010, of which
$13.6 million related to multi-employer pension plan partial withdrawal charges primarily attributable to two closed manufacturing facilities within the U.S. Print and Related Services segment. The remaining charges included lease termination and
other facility closure costs partially offset by gains on the sales of two previously closed facilities within both the International and U.S. Print and Related Services segment. Finally, for the year ended December 31, 2010, the Company
recorded $4.6 million of impairment charges primarily for machinery and equipment and leasehold improvements associated with the facility closings. The fair values of the machinery and equipment and leasehold improvements were determined to be Level
3 under the fair value hierarchy and were estimated based on discussions with machinery and equipment brokers, dealer quotes and internal expertise related to the equipment and current marketplace conditions.
Restructuring Reserve
Activity impacting the Companys restructuring reserve for the year ended December 31, 2012 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2011
|
|
|
Restructuring
Charges
|
|
|
Foreign
Exchange and
Other
|
|
|
Cash Paid
|
|
|
December 31,
2012
|
|
Employee terminations
|
|
$
|
27.2
|
|
|
$
|
66.6
|
|
|
$
|
(1.7
|
)
|
|
$
|
(68.7
|
)
|
|
$
|
23.4
|
|
Multi-employer pension withdrawal obligations
|
|
|
27.9
|
|
|
|
(0.4
|
)
|
|
|
|
|
|
|
(2.4
|
)
|
|
|
25.1
|
|
Lease terminations and other
|
|
|
32.6
|
|
|
|
25.7
|
|
|
|
2.0
|
|
|
|
(30.3
|
)
|
|
|
30.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
87.7
|
|
|
$
|
91.9
|
|
|
$
|
0.3
|
|
|
$
|
(101.4
|
)
|
|
$
|
78.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The current portion of restructuring reserves of $35.8 million was included in accrued liabilities at
December 31, 2012, while the long-term portion of $42.7 million, primarily related to multi-employer pension plan complete or partial withdrawal obligations and lease termination costs, was included in other noncurrent liabilities at
December 31, 2012.
The Company anticipates that payments associated with the employee terminations reflected in the
above table will be substantially completed by December 2013 and payments on certain of the multi-employer pension plan complete or partial withdrawal obligations are scheduled to be substantially completed by 2031.
As of December 31, 2012, 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 2026. Market conditions and the Companys ability to sublease these properties could affect
the ultimate charge related to the lease obligations. Any potential recoveries or additional charges could affect amounts reported in the Consolidated Financial Statements of future periods.
Activity impacting the Companys restructuring reserve for the year ended December 31, 2011 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2010
|
|
|
Restructuring
Charges
|
|
|
Foreign
Exchange and
Other
|
|
|
Cash Paid
|
|
|
December 31,
2011
|
|
Employee terminations
|
|
$
|
11.2
|
|
|
$
|
76.7
|
|
|
$
|
(0.5
|
)
|
|
$
|
(60.2
|
)
|
|
$
|
27.2
|
|
Multi-employer pension withdrawal obligations
|
|
|
13.6
|
|
|
|
15.1
|
|
|
|
|
|
|
|
(0.8
|
)
|
|
|
27.9
|
|
Lease terminations and other
|
|
|
29.2
|
|
|
|
44.5
|
|
|
|
2.1
|
|
|
|
(43.2
|
)
|
|
|
32.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
54.0
|
|
|
$
|
136.3
|
|
|
$
|
1.6
|
|
|
$
|
(104.2
|
)
|
|
$
|
87.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share data and unless otherwise indicated)(Continued)
The current portion of restructuring reserves of $43.9 million was included in accrued
liabilities at December 31, 2011, while the long-term portion of $43.8 million, primarily related to multi-employer pension plan complete or partial withdrawal obligations and lease termination costs, was included in other noncurrent
liabilities at December 31, 2011.
As of December 31, 2011, the restructuring liabilities classified as lease
terminations and other consisted of lease terminations, other facility closing costs and contract termination costs.
Note 4. Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill for the years ended December 31, 2012 and 2011 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Print and
Related Services
|
|
|
International
|
|
|
Total
|
|
Net book value at January 1, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
3,141.7
|
|
|
$
|
1,298.5
|
|
|
$
|
4,440.2
|
|
Accumulated impairment losses
|
|
|
(939.2
|
)
|
|
|
(974.2
|
)
|
|
|
(1,913.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,202.5
|
|
|
|
324.3
|
|
|
|
2,526.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions
|
|
|
118.3
|
|
|
|
|
|
|
|
118.3
|
|
Foreign exchange and other adjustments
|
|
|
(17.4
|
)
|
|
|
(13.3
|
)
|
|
|
(30.7
|
)
|
Impairment charges
|
|
|
(270.3
|
)
|
|
|
(122.0
|
)
|
|
|
(392.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net book value at December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
3,242.6
|
|
|
|
1,278.4
|
|
|
|
4,521.0
|
|
Accumulated impairment losses
|
|
|
(1,209.5
|
)
|
|
|
(1,089.4
|
)
|
|
|
(2,298.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,033.1
|
|
|
|
189.0
|
|
|
|
2,222.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions
|
|
|
57.9
|
|
|
|
|
|
|
|
57.9
|
|
Foreign exchange and other adjustments
|
|
|
(1.3
|
)
|
|
|
6.1
|
|
|
|
4.8
|
|
Impairment charges
|
|
|
(780.4
|
)
|
|
|
(68.0
|
)
|
|
|
(848.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net book value at December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
3,299.2
|
|
|
|
1,321.5
|
|
|
|
4,620.7
|
|
Accumulated impairment losses
|
|
|
(1,989.9
|
)
|
|
|
(1,194.4
|
)
|
|
|
(3,184.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,309.3
|
|
|
$
|
127.1
|
|
|
$
|
1,436.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the fourth quarters of 2012 and 2011, the Company recorded non-cash charges of $848.4 million and
$392.3 million, respectively, to reflect impairment of goodwill. See Note 3 for further discussion regarding these impairment charges.
F-22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share data and unless otherwise indicated)(Continued)
The components of other intangible assets at December 31, 2012 and 2011 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
|
December 31, 2011
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net Book
Value
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net Book
Value
|
|
Customer relationships
|
|
$
|
731.1
|
|
|
$
|
(388.0
|
)
|
|
$
|
343.1
|
|
|
$
|
1,164.4
|
|
|
$
|
(613.6
|
)
|
|
$
|
550.8
|
|
Patents
|
|
|
98.3
|
|
|
|
(98.1
|
)
|
|
|
0.2
|
|
|
|
98.3
|
|
|
|
(95.8
|
)
|
|
|
2.5
|
|
Trademarks, licenses and agreements
|
|
|
31.7
|
|
|
|
(26.1
|
)
|
|
|
5.6
|
|
|
|
28.7
|
|
|
|
(24.4
|
)
|
|
|
4.3
|
|
Trade names
|
|
|
27.1
|
|
|
|
(11.2
|
)
|
|
|
15.9
|
|
|
|
23.9
|
|
|
|
(9.3
|
)
|
|
|
14.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amortizable other intangible assets
|
|
|
888.2
|
|
|
|
(523.4
|
)
|
|
|
364.8
|
|
|
|
1,315.3
|
|
|
|
(743.1
|
)
|
|
|
572.2
|
|
Indefinite-lived trade names
|
|
|
18.1
|
|
|
|
|
|
|
|
18.1
|
|
|
|
18.1
|
|
|
|
|
|
|
|
18.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other intangible assets
|
|
$
|
906.3
|
|
|
$
|
(523.4
|
)
|
|
$
|
382.9
|
|
|
$
|
1,333.4
|
|
|
$
|
(743.1
|
)
|
|
$
|
590.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The gross carrying amount and accumulated amortization for customer relationships were adjusted as of
December 31, 2012 to reflect the impairment of certain customer relationships recognized in periods prior to December 31, 2011. This adjustment had no impact on the net book value of other intangible assets as reported on the
Companys Consolidated Balance Sheet.
In the fourth quarter of 2012, the Company recorded non-cash charges of $152.3
million and $5.7 million to reflect the impairment of acquired customer relationships within the U.S. Print and Related Services and International segments, respectively. In the fourth quarter of 2011, the Company recorded non-cash charges of $90.7
million to reflect the impairment of acquired customer relationships and other intangible assets within the U.S. Print and Related Services segment. See Note 3 for further discussion regarding these impairment charges.
During the years ended December 31, 2012 and 2011, the Company recorded additions to other intangible assets of $36.4 million and
$19.9 million, respectively. The components of other intangible assets added during 2012 and 2011 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
|
December 31, 2011
|
|
|
|
Amount
|
|
|
Weighted
Average
Amortization
Period
|
|
|
Amount
|
|
|
Weighted
Average
Amortization
Period
|
|
Customer relationships
|
|
$
|
29.9
|
|
|
|
6.1
|
|
|
$
|
14.7
|
|
|
|
13.9
|
|
Trade names
|
|
|
3.5
|
|
|
|
1.7
|
|
|
|
1.1
|
|
|
|
3.5
|
|
Trademarks, licenses and agreements
|
|
|
3.0
|
|
|
|
4.3
|
|
|
|
4.1
|
|
|
|
4.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total additions
|
|
$
|
36.4
|
|
|
|
|
|
|
$
|
19.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share data and unless otherwise indicated)(Continued)
Amortization expense for other intangible assets was $87.6 million, $112.2 million and
$99.3 million for the years ended December 31, 2012, 2011 and 2010, respectively. The following table outlines the estimated future amortization expense related to other intangible assets as of December 31, 2012:
|
|
|
|
|
|
|
Amount
|
|
2013
|
|
$
|
64.5
|
|
2014
|
|
|
63.6
|
|
2015
|
|
|
57.9
|
|
2016
|
|
|
39.4
|
|
2017
|
|
|
32.9
|
|
2018 and thereafter
|
|
|
106.5
|
|
|
|
|
|
|
Total
|
|
$
|
364.8
|
|
|
|
|
|
|
Note 5. Accounts Receivable
Transactions affecting the allowance for doubtful accounts during the years ended December 31, 2012, 2011 and 2010
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Balance, beginning of year
|
|
$
|
62.6
|
|
|
$
|
71.0
|
|
|
$
|
70.3
|
|
Provisions charged to expense
|
|
|
8.7
|
|
|
|
18.8
|
|
|
|
22.8
|
|
Write-offs and other
|
|
|
(21.7
|
)
|
|
|
(27.2
|
)
|
|
|
(22.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
49.6
|
|
|
$
|
62.6
|
|
|
$
|
71.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 6. Inventories
The components of the Companys inventories at December 31, 2012 and 2011 were as follows:
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
Raw materials and manufacturing supplies
|
|
$
|
214.2
|
|
|
$
|
218.0
|
|
Work in process
|
|
|
158.8
|
|
|
|
171.2
|
|
Finished goods
|
|
|
229.3
|
|
|
|
218.1
|
|
LIFO reserve
|
|
|
(92.1
|
)
|
|
|
(96.4
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
510.2
|
|
|
$
|
510.9
|
|
|
|
|
|
|
|
|
|
|
The Company recognized a LIFO benefit of $4.3 million in 2012 and expense of $8.4 million and $10.2
million in 2011 and 2010, respectively.
F-24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share data and unless otherwise indicated)(Continued)
Note 7. Property, Plant and Equipment
The components of the Companys property, plant and equipment at December 31, 2012 and 2011 were as follows:
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
Land
|
|
$
|
98.7
|
|
|
$
|
107.4
|
|
Buildings
|
|
|
1,167.0
|
|
|
|
1,173.2
|
|
Machinery and equipment
|
|
|
6,022.7
|
|
|
|
6,054.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,288.4
|
|
|
|
7,335.0
|
|
Accumulated depreciation
|
|
|
(5,671.8
|
)
|
|
|
(5,480.4
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,616.6
|
|
|
$
|
1,854.6
|
|
|
|
|
|
|
|
|
|
|
On September 20, 2012, the Company entered into a sale-leaseback agreement in which it sold an
office building and land at fair market value for net proceeds of $34.2 million, and entered into an operating lease of the property through September 2027. The $7.6 million gain on the sale of the property is being amortized over the remaining life
of the lease and is recorded in selling, general and administrative expenses in the Consolidated Statements of Operations.
During the years ended December 31, 2012, 2011 and 2010, depreciation expense was $367.4 million, $415.9 million and $424.6 million,
respectively.
Assets Held for Sale
Primarily as a result of restructuring actions, certain facilities and equipment are considered held for sale. The net book value of assets held for sale was $19.2 million and $20.2 million at
December 31, 2012 and 2011, respectively. These assets were included in other current assets in the Consolidated Balance Sheets at the lower of their historical net book value or their estimated fair value, less estimated costs to sell.
Note 8. Fair Value Measurement
Certain assets and liabilities are required to be recorded at fair value on a recurring basis. The Companys only
assets and liabilities adjusted to fair value on a recurring basis are pension and other postretirement benefit plan assets, foreign exchange forward contracts and interest rate swaps. See Note 11 for the fair value of the Companys pension and
other postretirement benefit plan assets as of December 31, 2012 and 2011 and Note 14 for further discussion on the fair value of the Companys foreign exchange forward contracts and interest rate swaps as of December 31, 2012 and
2011.
In addition to assets and liabilities that are recorded at fair value on a recurring basis, the Company is required to
record certain assets and liabilities at fair value on a nonrecurring basis, generally as a result of acquisitions or the remeasurement of assets resulting in impairment charges. See Note 2 for further discussion on the fair value of assets and
liabilities associated with acquisitions. Assets measured at fair value on a
F-25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share data and unless otherwise indicated)(Continued)
nonrecurring basis subsequent to initial recognition during the years ended December 31, 2012, 2011 and 2010 are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
Impairment
charge
|
|
|
Fair value
measurement
(Level 3)
|
|
|
Net book
value
|
|
Long-lived assets held and used
|
|
$
|
8.0
|
|
|
$
|
9.8
|
|
|
$
|
8.5
|
|
Long-lived assets held for sale or disposal
|
|
|
15.6
|
|
|
|
16.4
|
|
|
|
6.3
|
|
Goodwill
|
|
|
848.4
|
|
|
|
18.1
|
|
|
|
18.1
|
|
Other intangible assets
|
|
|
158.0
|
|
|
|
3.1
|
|
|
|
3.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,030.0
|
|
|
$
|
47.4
|
|
|
$
|
36.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
Impairment
charge
|
|
|
Fair value
measurement
(Level 3)
|
|
|
Net book
value
|
|
Long-lived assets held and used
|
|
$
|
14.7
|
|
|
$
|
68.8
|
|
|
$
|
61.3
|
|
Long-lived assets held for sale or disposal
|
|
|
34.3
|
|
|
|
12.8
|
|
|
|
11.7
|
|
Goodwill
|
|
|
392.3
|
|
|
|
|
|
|
|
|
|
Other intangible assets
|
|
|
90.7
|
|
|
|
2.2
|
|
|
|
2.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
532.0
|
|
|
$
|
83.8
|
|
|
$
|
75.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
Impairment
charge
|
|
|
Fair value
measurement
(Level 3)
|
|
|
Net book
value
|
|
Long-lived assets held and used
|
|
$
|
2.2
|
|
|
$
|
3.0
|
|
|
$
|
2.7
|
|
Long-lived assets held for sale or disposal
|
|
|
2.2
|
|
|
|
3.6
|
|
|
|
3.5
|
|
Goodwill
|
|
|
61.0
|
|
|
|
102.7
|
|
|
|
102.7
|
|
Other intangible assets
|
|
|
26.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
92.3
|
|
|
$
|
109.3
|
|
|
$
|
108.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, 2012 and 2010, the fair values of assets held for sale were reduced
by $0.7 million and $0.1 million, respectively, for estimated costs to sell. There were no estimated costs to sell related to long-lived assets held for sale as of December 31, 2011.
During the year ended December 31, 2012, goodwill for the magazines, catalogs and retail inserts, books and directories and Europe
reporting units were written down to implied fair values of $18.1 million for magazines, catalogs and retail inserts, and zero for both the books and directories and Europe reporting units, respectively. During the year ended December 31, 2011,
goodwill for the commercial, forms and labels, Canada and Latin America reporting units as of October 31, 2011, were written down to implied fair values of zero. As of December 31, 2011, $7.4 million of goodwill remained on the forms and
labels reporting unit related to the acquisition of Stratus, which was acquired on November 21, 2011. During the year ended December 31, 2010, goodwill for the forms and labels reporting unit was written down to an implied fair value of
$102.7 million.
During the year ended December 31, 2012, certain acquired customer relationship assets related to the
books and directories, magazines, catalogs and retail inserts and Latin America reporting units were written down to an implied fair value of $3.1 million for the books and directories reporting unit, and zero for both the magazines, catalogs and
retail inserts and Latin America reporting units, respectively. After recording the impairment charges, remaining customer relationship intangible assets in the books and directories, magazines, catalogs and retail inserts and Latin America
reporting units were $3.1 million, $22.8 million and $8.0 million, respectively, as
F-26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share data and unless otherwise indicated)(Continued)
of December 31, 2012. During the year ended December 31, 2011, certain acquired customer relationship assets, substantially all of which were related to the forms and labels reporting
unit, were written down to an implied fair value of zero. The remaining acquired customer relationship asset in the forms and labels reporting unit as of December 31, 2011 was $12.2 million related to the acquisition of Stratus on
November 21, 2011. Additionally, other intangible assets for the financial print reporting unit were written down to an implied fair value of $2.2 million during the year ended December 31, 2011. During the year ended December 31,
2010, certain acquired customer relationship assets for the Global Turnkey Solutions reporting unit were written down to an implied fair value of zero. After recording the impairment charge, remaining customer relationship assets in the Global
Turnkey Solutions reporting unit were $43.0 million as of December 31, 2010. See Note 3 for further discussion regarding the impairment charge.
The Companys accounting and finance management determines the valuation policies and procedures for Level 3 fair value measurements and is responsible for the development and determination of
unobservable inputs.
The fair values of the long-lived assets held and used and long-lived assets held for sale or disposal
were determined using Level 3 inputs 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. Unobservable inputs obtained from third parties are adjusted as necessary for the condition and attributes of the specific asset.
Determination of goodwill impairment was based on Level 3 inputs, which included discounted cash flow analyses, comparable marketplace fair value data, as well as managements assumptions in valuing
significant tangible and intangible assets. See Note 3 for further discussion on the factors leading to the recognition of the impairment.
Determinations of other intangible assets impairment charges were based on Level 3 measurements 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
|
|
$
|
3.1
|
|
|
Excess earnings
|
|
Discount rate
Attrition rate
|
|
12.5%-15.0%
2.0%-15.9%
|
See Note 13 for the fair value of the Companys debt.
Note 9. Accrued Liabilities
The components of the Companys accrued liabilities at December 31, 2012 and 2011 were as follows:
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
Employee-related liabilities
|
|
$
|
266.3
|
|
|
$
|
285.8
|
|
Deferred revenue
|
|
|
150.8
|
|
|
|
139.5
|
|
Restructuring liabilities
|
|
|
35.8
|
|
|
|
43.9
|
|
Other
|
|
|
372.3
|
|
|
|
347.8
|
|
|
|
|
|
|
|
|
|
|
Total accrued liabilities
|
|
$
|
825.2
|
|
|
$
|
817.0
|
|
|
|
|
|
|
|
|
|
|
Employee-related liabilities consist primarily of payroll, incentive compensation, sales commission,
workers compensation and employee benefit accruals. Incentive compensation accruals include amounts earned
F-27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share data and unless otherwise indicated)(Continued)
pursuant to the Companys primary employee incentive compensation plans. Other accrued liabilities include income and other tax liabilities, interest expense accruals and miscellaneous
operating accruals.
Note 10. Commitments and Contingencies
As of December 31, 2012, authorized expenditures on incomplete projects for the purchase of property, plant and
equipment totaled approximately $77.1 million. Of this total, approximately $36.6 million had been committed. In addition, as of December 31, 2012, the Company had a commitment of $23.4 million for severance payments related to employee
restructuring activities. The Company also has contractual commitments of approximately $110.7 million for outsourced services, including technology, professional, maintenance and other services. The Company has a variety of contracts with suppliers
for the purchase of paper, ink and other commodities for delivery in future years at prevailing market prices. In addition, the Company has natural gas purchase commitments that are at fixed prices. As of December 31, 2012, the Company was
committed to purchase $6.6 million of natural gas under these contracts.
Future minimum rental commitments under operating
leases are as follows:
|
|
|
|
|
Year Ended December 31
|
|
Amount
|
|
2013
|
|
$
|
133.1
|
|
2014
|
|
|
101.9
|
|
2015
|
|
|
74.7
|
|
2016
|
|
|
52.7
|
|
2017
|
|
|
41.1
|
|
2018 and thereafter
|
|
|
129.2
|
|
|
|
|
|
|
|
|
$
|
532.7
|
|
|
|
|
|
|
The Company has operating lease commitments totaling $532.7 million extending through various periods to
2044. Rent expense was $143.7 million, $152.7 million and $212.5 million for the years ended December 31, 2012, 2011 and 2010, respectively.
Future rental commitments for leases have not been reduced by minimum non-cancelable sublease rentals aggregating approximately $40.5 million. The Company remains secondarily liable under these leases in
the event that the sub-lessee defaults under the sublease terms. The Company does not believe that material payments will be required as a result of the secondary liability provisions of the primary lease agreements.
Litigation
The Company
is subject to laws and regulations relating to the protection of the environment. The Company provides for expenses associated with environmental remediation obligations when such amounts are probable and can be reasonably estimated. Such accruals
are adjusted as new information develops or circumstances change and are generally not discounted. The Company has been designated as a potentially responsible party in ten active federal and state Superfund and other multiparty remediation sites.
In addition to these sites, the Company may also have the obligation to remediate eleven other previously and currently owned facilities. At the Superfund sites, the Comprehensive Environmental Response, Compensation and Liability Act provides that
the Companys liability could be joint and several, meaning that the Company could be required to pay an amount in excess of its proportionate share of the remediation costs.
The Companys understanding of the financial strength of other potentially responsible parties at the multiparty sites and of other
liable parties at the previously owned facilities has been considered, where
F-28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share data and unless otherwise indicated)(Continued)
appropriate, in the determination of the Companys estimated liability. The Company established reserves, recorded in accrued liabilities and other noncurrent liabilities, that it believes
are adequate to cover its share of the potential costs of remediation at each of the multiparty sites and the previously and currently owned facilities. It is not possible to quantify with certainty the potential impact of actions regarding
environmental matters, particularly remediation and other compliance efforts that the Company may undertake in the future. However, in the opinion of management, compliance with the present environmental protection laws, before taking into account
estimated recoveries from third parties, will not have a material effect on the Companys consolidated results of operations, financial position or cash flows.
From time to time, the Companys customers and others file voluntary petitions for reorganization under United States bankruptcy laws. In such cases, certain pre-petition payments received by the
Company from these parties could be considered preference items and subject to return. In addition, the Company may be party to certain litigation arising in the ordinary course of business. Management believes that the final resolution of these
preference items and litigation will not have a material effect on the Companys consolidated results of operations, financial position or cash flows.
Note 11. Retirement Plans
The Company sponsors for the benefit of most of its employees in the U.S., Canada and certain other international
locations, various defined benefit retirement income pension plans, including both funded and unfunded arrangements. Further benefit accruals under the primary defined benefit plans maintained by the Company have been frozen. Benefits are generally
based upon years of service and compensation. These defined benefit retirement income plans are funded in conformity with the applicable government regulations. The Company funds at least the minimum amount required for all funded plans using
actuarial cost methods and assumptions acceptable under government regulations.
On December 20, 2012, the Company
announced a freeze on further benefit accruals under its U.K. pension plan as of December 31, 2012. Beginning January 1, 2013, participants ceased earning additional benefits under the plans and no new participants entered these plans. The
U.K. plan freeze required a remeasurement of the plans assets and obligations as of December 31, 2012, which resulted in a non-cash curtailment gain of $3.7 million, which was recognized in the Consolidated Statement of Operations during
the fourth quarter of 2012. Additionally, on February 1, 2012, the Company announced a freeze on further benefit accruals under its Canadian pension plans as of March 31, 2012. On November 2, 2011, the Company announced a freeze on
further benefit accruals under all of its U.S. pension plans as of December 31, 2011. The remeasurement of the U.S. pension plans assets and obligations as of November 2, 2011, resulted in a non-cash curtailment gain of $38.7
million, which was recognized in the Consolidated Statement of Operations during the fourth quarter of 2011. The remeasurement of the U.S. pension plans assets and obligations also resulted in a reduction in the Companys pension
liability of $61.6 million as of December 31, 2011.
The Company also participates in various multi-employer pension
plans in the U.S. and makes contributions pursuant to the terms of the applicable collective bargaining agreements. In addition to the pension plans, the Company sponsors a 401(k) savings plan, which is a defined contribution retirement income plan.
Former employees are entitled to certain healthcare and life insurance benefits provided they have met certain eligibility
requirements. Generally, the Companys benefits eligible U.S. employees become eligible for these retiree healthcare benefits if they meet all of the following requirements at the time of termination: (a) have attained at least 55 or more
points (full years of service and age combined), (b) are at least fifty years of age, (c) have at least two years of continuous, regular, full-time, benefits-eligible service and (d) have completed at least two or more years of
continuous service with a participating employer, which ends on their termination
F-29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share data and unless otherwise indicated)(Continued)
date. Different requirements need to be met in order to receive subsidized medical and life insurance coverage. Certain of the plan expenses are paid through a tax-exempt trust. Most of the
assets of the trust are invested in trust-owned life insurance policies covering certain current and former employees of the Company. The underlying assets of the policies are invested primarily in marketable equity, corporate fixed income and
government securities.
On August 3, 2011, the Company announced the decision to convert its current prescription drug
program for certain medicare-eligible retirees to a group-based Company sponsored Medicare Part D program, or Employer Group Waiver Program (EGWP), available due to the adoption of the Patient Protection and Affordable Care Act.
Beginning January 1, 2013, the EGWP subsidies provided to or for the benefit of this program will be used to reduce the Companys net retiree medical and prescription drug costs on a group by group basis until such net costs of the Company
for such group are eliminated, and any EGWP subsidies received in excess of the amount necessary to offset such net costs will be used to reduce the included group of retirees premiums. The Company accounted for this change as a plan
amendment requiring remeasurement of plan assets and obligations, which resulted in the Company reducing its postretirement benefits liability by $81.5 million in the second quarter of 2011.
As noted above, the Company also maintains several pension and other postretirement benefit plans in certain international locations. The
expected returns on plan assets and discount rates for these plans are determined based on each plans investment approach, local interest rates and plan participant profiles.
The pension and other postretirement benefit plan obligations are calculated using generally accepted actuarial methods and are measured
as of December 31. Prior to the plan freezes, actuarial gains and losses were amortized using the corridor method over the average remaining service life of active plan participants. Actuarial gains and losses for frozen plans are amortized
using the corridor method over the average remaining expected life of active plan participants.
The components of the net
periodic benefit (income) expense and total (income) expense were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Postretirement Benefits
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Service cost
|
|
$
|
5.9
|
|
|
$
|
86.6
|
|
|
$
|
80.4
|
|
|
$
|
6.6
|
|
|
$
|
8.2
|
|
|
$
|
12.2
|
|
Interest cost
|
|
|
189.2
|
|
|
|
192.0
|
|
|
|
184.0
|
|
|
|
18.4
|
|
|
|
22.7
|
|
|
|
28.4
|
|
Expected return on plan assets
|
|
|
(262.6
|
)
|
|
|
(266.4
|
)
|
|
|
(258.7
|
)
|
|
|
(13.9
|
)
|
|
|
(14.8
|
)
|
|
|
(15.5
|
)
|
Amortization of prior service credit
|
|
|
0.6
|
|
|
|
(4.4
|
)
|
|
|
(1.9
|
)
|
|
|
(19.7
|
)
|
|
|
(12.5
|
)
|
|
|
(10.8
|
)
|
Amortization of actuarial loss (gain)
|
|
|
32.1
|
|
|
|
50.1
|
|
|
|
29.7
|
|
|
|
(0.1
|
)
|
|
|
0.1
|
|
|
|
1.3
|
|
Curtailments
|
|
|
(3.7
|
)
|
|
|
(38.7
|
)
|
|
|
(0.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlements
|
|
|
1.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit (income) expense
|
|
|
(37.4
|
)
|
|
|
19.2
|
|
|
|
33.1
|
|
|
|
(8.7
|
)
|
|
|
3.7
|
|
|
|
15.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average assumption used to calculate net periodic benefit expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
4.9
|
%
|
|
|
5.5
|
%
|
|
|
6.0
|
%
|
|
|
4.8
|
%
|
|
|
5.2
|
%
|
|
|
5.7
|
%
|
Rate of compensation increase
|
|
|
0.9
|
%
|
|
|
4.0
|
%
|
|
|
4.0
|
%
|
|
|
3.6
|
%
|
|
|
3.6
|
%
|
|
|
4.0
|
%
|
Expected return on plan assets
|
|
|
8.4
|
%
|
|
|
8.4
|
%
|
|
|
8.3
|
%
|
|
|
7.6
|
%
|
|
|
7.6
|
%
|
|
|
7.6
|
%
|
F-30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share data and unless otherwise indicated)(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Postretirement Benefits
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Benefit obligation at beginning of year
|
|
$
|
3,923.6
|
|
|
$
|
3,583.1
|
|
|
$
|
403.1
|
|
|
$
|
490.3
|
|
Service cost
|
|
|
5.9
|
|
|
|
86.6
|
|
|
|
6.6
|
|
|
|
8.2
|
|
Interest cost
|
|
|
189.2
|
|
|
|
192.0
|
|
|
|
18.4
|
|
|
|
22.7
|
|
Plan participants contributions
|
|
|
1.2
|
|
|
|
1.2
|
|
|
|
14.4
|
|
|
|
17.8
|
|
Medicare reimbursements
|
|
|
|
|
|
|
|
|
|
|
3.3
|
|
|
|
3.3
|
|
Actuarial loss (gain)
|
|
|
411.2
|
|
|
|
306.4
|
|
|
|
27.6
|
|
|
|
(22.5
|
)
|
Plan amendments and other
|
|
|
2.6
|
|
|
|
(0.5
|
)
|
|
|
0.5
|
|
|
|
(72.4
|
)
|
Curtailments and settlements
|
|
|
(6.5
|
)
|
|
|
(61.6
|
)
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
|
|
17.5
|
|
|
|
(5.4
|
)
|
|
|
1.1
|
|
|
|
(0.8
|
)
|
Benefits paid
|
|
|
(175.9
|
)
|
|
|
(178.2
|
)
|
|
|
(44.8
|
)
|
|
|
(43.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
$
|
4,368.8
|
|
|
$
|
3,923.6
|
|
|
$
|
430.2
|
|
|
$
|
403.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
2,849.6
|
|
|
$
|
3,029.6
|
|
|
$
|
174.7
|
|
|
$
|
191.9
|
|
Actual return on assets
|
|
|
389.9
|
|
|
|
(44.4
|
)
|
|
|
21.0
|
|
|
|
(4.7
|
)
|
Settlements
|
|
|
(3.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Employer contributions
|
|
|
140.7
|
|
|
|
44.7
|
|
|
|
8.0
|
|
|
|
13.2
|
|
Medicare reimbursements
|
|
|
|
|
|
|
|
|
|
|
3.3
|
|
|
|
|
|
Plan participants contributions
|
|
|
1.2
|
|
|
|
1.2
|
|
|
|
14.4
|
|
|
|
17.8
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
10.2
|
|
|
|
|
|
Foreign currency translation
|
|
|
13.5
|
|
|
|
(3.3
|
)
|
|
|
0.3
|
|
|
|
|
|
Benefits paid
|
|
|
(175.9
|
)
|
|
|
(178.2
|
)
|
|
|
(44.8
|
)
|
|
|
(43.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
$
|
3,215.3
|
|
|
$
|
2,849.6
|
|
|
$
|
187.1
|
|
|
$
|
174.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status at end of year
|
|
$
|
(1,153.5
|
)
|
|
$
|
(1,074.0
|
)
|
|
$
|
(243.1
|
)
|
|
$
|
(228.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accumulated benefit obligation for all defined benefit pension plans was $4,343.9 million and
$3,901.7 million at December 31, 2012 and 2011, respectively.
Amounts recognized in the Consolidated Balance Sheets as
of December 31, 2012 and 2011 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Postretirement Benefits
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Prepaid pension cost (included in other noncurrent assets)
|
|
$
|
4.4
|
|
|
$
|
9.5
|
|
|
$
|
|
|
|
$
|
|
|
Accrued benefit cost (included in accrued liabilities)
|
|
|
(7.4
|
)
|
|
|
(7.2
|
)
|
|
|
(1.4
|
)
|
|
|
(1.1
|
)
|
Pension liabilities
|
|
|
(1,150.5
|
)
|
|
|
(1,076.3
|
)
|
|
|
|
|
|
|
|
|
Postretirement benefits
|
|
|
|
|
|
|
|
|
|
|
(241.7
|
)
|
|
|
(227.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net liabilities recognized in the consolidated balance sheets
|
|
$
|
(1,153.5
|
)
|
|
$
|
(1,074.0
|
)
|
|
$
|
(243.1
|
)
|
|
$
|
(228.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share data and unless otherwise indicated)(Continued)
The amounts included in accumulated other comprehensive loss in the Consolidated Balance
Sheets, excluding tax effects, that have not yet been recognized as components of net periodic benefit cost at December 31, 2012 and 2011 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Postretirement Benefits
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Accumulated other comprehensive loss (income)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss (gain)
|
|
$
|
1,828.9
|
|
|
$
|
1,574.3
|
|
|
$
|
1.6
|
|
|
$
|
(9.1
|
)
|
Net transition obligation
|
|
|
0.2
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
Net prior service credit
|
|
|
|
|
|
|
|
|
|
|
(68.0
|
)
|
|
|
(87.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,829.1
|
|
|
$
|
1,574.5
|
|
|
$
|
(66.4
|
)
|
|
$
|
(96.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The pre-tax amounts recognized in other comprehensive income (loss) in 2012 as components of net periodic
benefit costs were as follows:
|
|
|
|
|
|
|
|
|
|
|
Pension
Benefits
|
|
|
Postretirement
Benefits
|
|
Amortization of:
|
|
|
|
|
|
|
|
|
Net actuarial (loss) gain
|
|
$
|
(32.1
|
)
|
|
$
|
0.1
|
|
Net prior service credit
|
|
|
(0.6
|
)
|
|
|
19.7
|
|
Amounts arising during the period:
|
|
|
|
|
|
|
|
|
Net actuarial loss
|
|
|
283.9
|
|
|
|
10.5
|
|
Net prior service credit
|
|
|
0.6
|
|
|
|
|
|
Foreign currency gain
|
|
|
2.8
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
254.6
|
|
|
$
|
30.5
|
|
|
|
|
|
|
|
|
|
|
Actuarial gains and losses in excess of 10.0% of the greater of the projected benefit obligation or the
market-related value of plan assets were recognized as a component of net periodic benefit costs over the average remaining service period of a plans active employees. As a result of the plan freezes, the actuarial gains and losses are
recognized as a component of net periodic benefit costs over the average remaining life of a plans active employees. Unrecognized prior service costs or credit are also recognized as a component of net periodic benefit cost over the average
remaining service period of a plans active employees. The amounts in accumulated other comprehensive loss that are expected to be recognized as components of net periodic benefit costs in 2013 are shown below:
|
|
|
|
|
|
|
|
|
|
|
Pension
Benefits
|
|
|
Postretirement
Benefits
|
|
Amortization of:
|
|
|
|
|
|
|
|
|
Net actuarial loss
|
|
$
|
50.2
|
|
|
$
|
0.1
|
|
Net prior service credit
|
|
|
|
|
|
|
(19.7
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
50.2
|
|
|
$
|
(19.6
|
)
|
|
|
|
|
|
|
|
|
|
F-32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share data and unless otherwise indicated)(Continued)
The weighted average assumptions used to determine the benefit obligation at the measurement date were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Postretirement
Benefits
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Discount rate
|
|
|
4.2
|
%
|
|
|
4.9
|
%
|
|
|
3.9
|
%
|
|
|
4.8
|
%
|
Rate of compensation increase
|
|
|
n/a
|
|
|
|
0.9
|
%
|
|
|
3.6
|
%
|
|
|
3.6
|
%
|
Health care cost trend:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-Age 65
|
|
|
|
|
|
|
|
|
|
|
7.4
|
%
|
|
|
7.0
|
%
|
Post-Age 65
|
|
|
|
|
|
|
|
|
|
|
7.4
|
%
|
|
|
7.0
|
%
|
Ultimate
|
|
|
|
|
|
|
|
|
|
|
5.8
|
%
|
|
|
5.9
|
%
|
The following table provides a summary of under-funded or unfunded pension benefit plans with projected
benefit obligation in excess of plan assets as of December 31, 2012 and 2011:
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
|
2012
|
|
|
2011
|
|
Projected benefit obligation
|
|
$
|
4,348.3
|
|
|
$
|
3,906.7
|
|
Fair value of plan assets
|
|
|
3,190.3
|
|
|
|
2,823.2
|
|
The following table provides a summary of pension plans with accumulated benefit obligations in excess of
plan assets as of December 31, 2012 and 2011:
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
|
2012
|
|
|
2011
|
|
Accumulated benefit obligation
|
|
$
|
4,321.6
|
|
|
$
|
3,881.6
|
|
Fair value of plan assets
|
|
|
3,187.4
|
|
|
|
2,818.7
|
|
The current health care cost trend rate gradually declines through 2019 to the ultimate trend rate and
remains level thereafter. A one-percentage point change in assumed health care cost trend rates would have the following effects:
|
|
|
|
|
|
|
|
|
|
|
1.0%
Increase
|
|
|
1.0%
Decrease
|
|
Postretirement benefit obligation
|
|
$
|
6.8
|
|
|
$
|
(5.7
|
)
|
Total postretirement service and interest cost components
|
|
|
0.5
|
|
|
|
(0.5
|
)
|
The Company determines its assumption for the discount rate to be used for purposes of computing annual
service and interest costs based on an index of high-quality corporate bond yields and matched-funding yield curve analysis as of the measurement date.
On July 6, 2012, the Surface Transportation Extension Act of 2012 (the Act) was signed into law. The Act includes certain pension-related provisions designed to stabilize interest rates
used to calculate the minimum required annual contributions for defined benefit pension plans. The Company anticipates that provisions in the Act will significantly reduce the minimum required annual contributions related to its defined benefit
pension plans over the next few years, though these contributions are dependent on many factors, including returns on invested assets and discount rates used to determine pension obligations. The Company made contributions of
F-33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share data and unless otherwise indicated)(Continued)
$140.7 million to its pension plans and $8.0 million to its postretirement plans during the year ended December 31, 2012. The Company expects to make cash contributions of approximately
$21.7 million to its pension plans and approximately $1.4 million to its postretirement plans in 2013, and additional non-required contributions could be made. The Company currently estimates the amount of pension and other postretirement benefit
plan contributions that will be required in 2014 to be approximately $85 million.
The Medicare Prescription Drug, Improvement
and Modernization Act of 2003 included a prescription drug benefit under Medicare Part D, as well as a federal subsidy that began in 2006, to sponsors of retiree health care plans that provide a benefit that is at least actuarially equivalent, as
defined in the Act, to Medicare Part D. Two of the Companys retiree health care plans are at least actuarially equivalent to Medicare Part D and were eligible for the federal subsidy. During the years ended December 31, 2012 and 2011, the
Company received approximately $3.3 million in subsidies in each year. The Company will no longer receive certain of these subsidies after January 1, 2013, when the EGWP subsidies became effective.
Benefit payments are expected to be paid as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
Benefits
|
|
|
Postretirement
Benefits-Gross
|
|
|
Estimated
Subsidy
Reimbursements
|
|
2013
|
|
$
|
189.3
|
|
|
$
|
35.7
|
|
|
$
|
5.9
|
|
2014
|
|
|
192.2
|
|
|
|
36.1
|
|
|
|
6.3
|
|
2015
|
|
|
195.6
|
|
|
|
36.6
|
|
|
|
6.8
|
|
2016
|
|
|
201.1
|
|
|
|
37.0
|
|
|
|
7.1
|
|
2017
|
|
|
210.3
|
|
|
|
37.3
|
|
|
|
7.6
|
|
2018-2022
|
|
|
1,178.8
|
|
|
|
188.0
|
|
|
|
44.1
|
|
Plan Assets
The Company employed a total return investment approach for its pension and other postretirement benefit plans, whereby a mix of equities, fixed income and alternative investments are used to maximize the
long-term return of pension and other postretirement benefit plan assets. The intent of this strategy is to minimize plan expenses by outperforming plan liabilities over the long run. Risk tolerance is established through careful consideration of
plan liabilities, plan funded status and corporate financial condition. The investment portfolios contain a diversified blend of equity, fixed income and alternative investments. Furthermore, equity investments are diversified across geography,
market capitalization and investment style. Fixed income investments are diversified across geography and include holdings of corporate bonds, government and agency bonds and asset-backed securities. Investment risk is measured and monitored on an
ongoing basis through annual liability measurements, periodic asset/liability studies and quarterly investment portfolio reviews. The expected long-term rate of return for plan assets is based upon many factors including asset allocations,
historical asset returns, current and expected future market conditions, risk and active management premiums. The target asset allocation percentage for both the pension and other postretirement benefit plans was approximately 75% for equity and
other securities and approximately 25% for fixed income.
The Company segregated its plan assets by the following major
categories and levels for determining their fair value as of December 31, 2012 and 2011:
Cash and cash
equivalents
Carrying value approximates fair value. As such, these assets were classified as Level 1. The Company also invests in certain short-term investments which are valued using the amortized cost method. As such, these assets were
classified as Level 2.
Equity
The values of individual equity securities were based on quoted prices in active
markets. As such, these assets are classified as Level 1. Additionally, the Company invests in certain equity funds that are
F-34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share data and unless otherwise indicated)(Continued)
valued at calculated net asset value per share (NAV), but are not quoted on active markets. As such, these assets were classified as Level 2. Additionally, this category includes
underlying securities in trust owned life insurance policies which are invested in certain equity securities. These investments are not quoted on active markets; therefore, they are classified as Level 2.
Fixed income
Fixed income securities are typically priced based on a valuation model rather than a last trade basis and are
not exchange-traded. These valuation models involve utilizing dealer quotes, analyzing market information, estimating prepayment speeds and evaluating underlying collateral. Accordingly, the Company classified these fixed income securities as Level
2. Fixed income securities also include investments in various asset-backed securities that are part of a government sponsored program. The prices of these asset-backed securities were obtained by independent third parties using multi-dimensional,
collateral specific prepayments tables. Inputs include monthly payment information and collateral performance. As the values of these assets was determined based on models incorporating observable inputs, these assets were classified as Level 2. The
Company also invests in certain fixed income funds that were priced on active markets and were classified as Level 1. Additionally, this category includes underlying securities in trust owned life insurance policies which are invested in certain
fixed income securities. These investments are not quoted on active markets; therefore, they are classified as Level 2.
Derivatives and other
This category includes assets and liabilities that are futures or swaps traded on a primary exchange and
are priced by multiple providers. Accordingly, the Company classified these assets and liabilities as Level 1. This category also includes various other assets in which carrying value approximates fair value. Additionally, this category includes
investments in commodity and structured credit funds that are not quoted on active markets; therefore, they are classified as Level 2.
Real estate
The fair market value of real estate investment trusts is based on observable inputs for similar assets in active markets, for instance, appraisals and market comparables.
Accordingly, the real estate investments were categorized as Level 2. The Company also invests in certain exchange-traded real estate investment trust funds that were classified as Level 1.
Private equity
Includes the Companys interest in various private equity funds that are valued by the investment manager
on a periodic basis with models that use market, income and cost valuation methods. The valuation inputs are not highly observable, and these interests are not actively traded on an open market. Accordingly, this interest was categorized as Level 3.
For Level 2 and Level 3 plan assets, management reviews significant investments on a quarterly basis including investigation
of unusual fluctuations in price or returns and obtaining an understanding of the pricing methodology to assess the reliability of third-party pricing estimates.
The valuation methodologies described above may generate a fair value calculation that may not be indicative of net realizable value or future fair values. While the Company believes the valuation
methodologies used are appropriate, the use of different methodologies or assumptions in calculating fair value could result in different amounts. The Company invests in various assets in which valuation is determined by NAV. The Company believes
that the NAV is representative of fair value at the reporting date, as there are no significant restrictions on redemption of these investments or other reasons to indicate that the investment would be redeemed at an amount different than the NAV.
F-35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share data and unless otherwise indicated)(Continued)
The fair values of the Companys pension plan assets at December 31, 2012 and
2011, by asset category were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
|
December 31, 2011
|
|
Asset Category
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Cash and cash equivalents
|
|
$
|
56.9
|
|
|
$
|
27.4
|
|
|
$
|
29.5
|
|
|
$
|
|
|
|
$
|
65.2
|
|
|
$
|
43.4
|
|
|
$
|
21.8
|
|
|
$
|
|
|
Equity
|
|
|
2,169.0
|
|
|
|
1,887.4
|
|
|
|
281.6
|
|
|
|
|
|
|
|
1,857.0
|
|
|
|
1,604.4
|
|
|
|
252.6
|
|
|
|
|
|
Fixed income
|
|
|
828.0
|
|
|
|
240.5
|
|
|
|
587.5
|
|
|
|
|
|
|
|
779.1
|
|
|
|
214.8
|
|
|
|
564.3
|
|
|
|
|
|
Derivatives and other
|
|
|
8.9
|
|
|
|
0.5
|
|
|
|
8.4
|
|
|
|
|
|
|
|
6.9
|
|
|
|
3.6
|
|
|
|
3.3
|
|
|
|
|
|
Real estate
|
|
|
113.6
|
|
|
|
|
|
|
|
113.6
|
|
|
|
|
|
|
|
111.3
|
|
|
|
7.1
|
|
|
|
104.2
|
|
|
|
|
|
Private equity
|
|
|
38.9
|
|
|
|
|
|
|
|
|
|
|
|
38.9
|
|
|
|
30.1
|
|
|
|
|
|
|
|
|
|
|
|
30.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,215.3
|
|
|
$
|
2,155.8
|
|
|
$
|
1,020.6
|
|
|
$
|
38.9
|
|
|
$
|
2,849.6
|
|
|
$
|
1,873.3
|
|
|
$
|
946.2
|
|
|
$
|
30.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair values of the Companys other postretirement benefit plan assets at December 31, 2012
and 2011, all of which were determined to be Level 2 under the fair value hierarchy, by asset category were as follows:
|
|
|
|
|
|
|
|
|
Asset Category
|
|
2012
|
|
|
2011
|
|
Cash and cash equivalents
|
|
$
|
8.4
|
|
|
$
|
17.7
|
|
Equity
|
|
|
133.3
|
|
|
|
114.3
|
|
Fixed income
|
|
|
35.9
|
|
|
|
42.7
|
|
Derivatives and other
|
|
|
9.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
187.1
|
|
|
$
|
174.7
|
|
|
|
|
|
|
|
|
|
|
The following table provides a summary of changes in the fair value of the Companys Level 3 assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Private
Equity
|
|
|
|
|
|
|
|
Balance at January 1, 2011
|
|
$
|
15.5
|
|
|
|
|
|
|
|
Unrealized lossesnet
|
|
|
3.2
|
|
|
|
|
|
|
|
Purchases, sales and settlements
|
|
|
11.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2011
|
|
$
|
30.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gainsnet
|
|
|
5.8
|
|
|
|
|
|
|
|
Purchases, sales and settlements
|
|
|
3.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2012
|
|
$
|
38.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee 401(k) Savings Plan
For the benefit of most of its U.S. employees, the Company
maintains a defined contribution retirement savings plan that is intended to be qualified under Section 401(a) of the Internal Revenue Code. Under this plan, employees may contribute a percentage of eligible compensation on both a before-tax
and after-tax basis. The Company may match a percentage of a participating employees before-tax contributions. The plan provides that annual matching contributions are discretionary. In 2012, the Company made matching contributions for most
U.S. employees on a pay period basis equal to 40% of contributions on up to 6% of eligible compensation. The cost of the match was determined by the level of eligible employee before-tax contributions and Roth 401(k) contributions made to the plan.
The Company recognized expense of $30.8 million for matching contributions under its reinstated 401(k) match for the year ended December 31, 2012. The Company suspended its 401(k) match for 2013 and did not make any matching contributions in
2011 and 2010.
F-36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share data and unless otherwise indicated)(Continued)
Multi-Employer Pension Plans
The Company contributes to six defined benefit
multi-employer pension plans in which employees across several facilities within the U.S. Print and Related Services segment do or did participate. The Company is required to make contributions to these plans as determined by the terms and
conditions of collective bargaining agreements and plan terms. For the years ended December 31, 2012, 2011 and 2010, the Company made regular contributions of $1.3 million, $1.7 million and $1.7 million, respectively, to these multi-employer
pension plans. The Company cannot currently estimate the amount of multi-employer pension plan contributions that will be required in 2013 and future years, but these contributions could significantly increase due to other employers
withdrawals, changes in the funded status of the plans or changes in the Companys workforce. The Companys contributions for 2012, 2011 and 2010 represented more than 5.0% of total contributions for three of the multi-employer pension
plans.
Multi-employer plans receive contributions from two or more unrelated employers pursuant to one or more collective
bargaining agreements and the assets contributed by one employer may be used to fund the benefits of all employees covered within the plan. The risk and level of uncertainty related to participating in these multi-employer pension plans differs
significantly from the risk associated with the Company-sponsored defined benefit plans. For example, investment decisions are made by parties unrelated to the Company and the financial stability of other employers participating in a plan may affect
the Companys obligations under the plan. In addition, the Companys liability, were it to withdraw from a plan, may be disproportionate to the Companys obligations for continuing to participate in the plan.
The Companys participation in multi-employer pension plans is subject to collective bargaining agreements with expiration dates
ranging from December 5, 2012 (contract renewal negotiations are ongoing) to December 31, 2013. All six plans to which the Company contributes are estimated to be underfunded as of December 31, 2012, with five plans having a Pension
Protection Act zone status of red and one having a zone status of yellow. All six plans have rehabilitation plans in place. A zone status of red identifies plans that are under 65.0% funded, with a short-term credit balance deficiency. A zone status
of yellow identifies plans that are 65% or more, but less than 80.0% funded. All six of the plans have imposed surcharges due to their critical funding status. Surcharges are imposed by a multi-employer pension plan when the plan reaches critical
status, as defined under the Pension Protection Act, and such surcharges are based on a percentage of required contributions for each plan year.
There were no charges due to partial or complete withdrawal liabilities for the year ended December 31, 2012. For the year ended December 31, 2011, the Company recorded charges of $15.1 million
relating to the complete or partial withdrawal from certain multi-employer pension plans primarily resulting from the closure of three manufacturing facilities. These charges were recorded as restructuring and impairment charges and represent the
Companys best estimate of the expected settlement of these withdrawal liabilities. For the year ended December 31, 2010, the Company recorded charges of $13.6 million relating to the partial withdrawal from certain multi-employer pension
plans resulting from the closure of two manufacturing facilities. As of December 31, 2011, the Company had completely withdrawn from two multi-employer pension plans and had partially withdrawn from three other plans. While it is not possible
to quantify the potential impact of future events or circumstances, further reductions in participation or withdrawal from these multi-employer pension plans could have a material impact on the Companys consolidated annual results of
operations, financial position, or cash flows.
F-37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share data and unless otherwise indicated)(Continued)
Note 12. Income Taxes
Income taxes have been based on the following components of earnings (loss) from operations before income taxes for the
years ended December 31, 2012, 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
U.S.
|
|
$
|
(710.1
|
)
|
|
$
|
(274.5
|
)
|
|
$
|
171.0
|
|
Foreign
|
|
|
70.1
|
|
|
|
37.1
|
|
|
|
152.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(640.0
|
)
|
|
$
|
(237.4
|
)
|
|
$
|
323.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of income tax expense (benefit) from operations for the years ended December 31,
2012, 2011 and 2010 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Federal:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
8.6
|
|
|
$
|
(10.1
|
)
|
|
$
|
100.1
|
|
Deferred
|
|
|
(55.5
|
)
|
|
|
(82.1
|
)
|
|
|
(1.7
|
)
|
State:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
10.5
|
|
|
|
(19.5
|
)
|
|
|
(1.2
|
)
|
Deferred
|
|
|
(18.3
|
)
|
|
|
(21.5
|
)
|
|
|
(10.3
|
)
|
Foreign:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
46.5
|
|
|
|
36.3
|
|
|
|
41.6
|
|
Deferred
|
|
|
21.8
|
|
|
|
(19.4
|
)
|
|
|
(22.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
13.6
|
|
|
$
|
(116.3
|
)
|
|
$
|
105.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table outlines the reconciliation of differences between the Federal statutory tax rate and
the Companys effective income tax rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Federal statutory tax rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
Adjustment of uncertain tax positions
|
|
|
3.1
|
|
|
|
30.2
|
|
|
|
(4.0
|
)
|
Foreign tax rate differential
|
|
|
3.2
|
|
|
|
15.5
|
|
|
|
(6.1
|
)
|
Adjustment of interest on uncertain tax positions
|
|
|
0.6
|
|
|
|
10.1
|
|
|
|
0.6
|
|
Domestic manufacturing deduction
|
|
|
0.5
|
|
|
|
2.2
|
|
|
|
(2.6
|
)
|
Acquisition-related expenses
|
|
|
(0.1
|
)
|
|
|
(0.1
|
)
|
|
|
1.2
|
|
Change in valuation allowances
|
|
|
(4.4
|
)
|
|
|
(1.0
|
)
|
|
|
(4.4
|
)
|
State and local income taxes, net of U.S. federal income tax benefit
|
|
|
|
|
|
|
(1.6
|
)
|
|
|
(0.2
|
)
|
Restructuring and impairment charges
|
|
|
(40.1
|
)
|
|
|
(39.5
|
)
|
|
|
8.3
|
|
International reorganization
|
|
|
3.9
|
|
|
|
|
|
|
|
|
|
Foreign withholding tax
|
|
|
(1.7
|
)
|
|
|
|
|
|
|
2.2
|
|
Enactment of Health Care Reform Act
|
|
|
|
|
|
|
|
|
|
|
1.0
|
|
Other
|
|
|
(2.1
|
)
|
|
|
(1.8
|
)
|
|
|
1.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
(2.1
|
%)
|
|
|
49.0
|
%
|
|
|
32.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in 2012 is a benefit of $26.1 million reflecting the recognition of previously unrecognized tax
benefits due to the resolution of certain U.S. federal uncertain tax positions and a $22.4 million benefit related to
F-38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share data and unless otherwise indicated)(Continued)
the decline in value and reorganization of certain entities within the International segment, partially offset by a valuation allowance provision of $32.7 million on certain deferred tax assets
in Latin America and an $11.0 million provision related to certain foreign earnings no longer considered to be permanently reinvested.
Included in 2011 is a benefit of $74.8 million reflecting the expiration of U.S. federal statutes of limitations for certain years.
Included in 2010 is a benefit of $19.3 million reflecting the release of a valuation allowance on deferred tax assets due to the
forecasted increase in net earnings for certain operations within the Latin America reporting unit.
Deferred income taxes
The significant deferred tax assets and liabilities at December 31, 2012 and 2011 were as follows:
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Pension and other postretirement benefit plan liabilities
|
|
$
|
524.1
|
|
|
$
|
489.3
|
|
Net operating losses and other tax carryforwards
|
|
|
331.6
|
|
|
|
339.3
|
|
Accrued liabilities
|
|
|
155.2
|
|
|
|
178.5
|
|
Other
|
|
|
99.4
|
|
|
|
81.8
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
1,110.3
|
|
|
|
1,088.9
|
|
Valuation allowances
|
|
|
(273.6
|
)
|
|
|
(273.2
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
836.7
|
|
|
$
|
815.7
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Accelerated depreciation
|
|
$
|
(226.3
|
)
|
|
$
|
(257.7
|
)
|
Other intangible assets
|
|
|
(98.6
|
)
|
|
|
(212.5
|
)
|
Inventories
|
|
|
(30.7
|
)
|
|
|
(47.1
|
)
|
Other
|
|
|
(30.2
|
)
|
|
|
(22.5
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(385.8
|
)
|
|
|
(539.8
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
450.9
|
|
|
$
|
275.9
|
|
|
|
|
|
|
|
|
|
|
The above amounts are classified as current or long-term in the Consolidated Balance Sheets in accordance
with the asset or liability to which they relate on a jurisdiction by jurisdiction basis.
Transactions affecting the
valuation allowances on deferred tax assets during the years ended December 31, 2012, 2011 and 2010 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Balance, beginning of year
|
|
$
|
273.2
|
|
|
$
|
259.5
|
|
|
$
|
277.5
|
|
Current year expense (benefit)net
|
|
|
28.2
|
|
|
|
2.4
|
|
|
|
(9.6
|
)
|
Write-offs
|
|
|
(37.9
|
)
|
|
|
(1.8
|
)
|
|
|
(9.4
|
)
|
Foreign exchange and other
|
|
|
10.1
|
|
|
|
13.1
|
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
273.6
|
|
|
$
|
273.2
|
|
|
$
|
259.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2012, the Company had domestic and foreign net operating loss and other tax
carryforwards of approximately $87.6 million and $244.0 million, respectively ($75.1 million and $264.2
F-39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share data and unless otherwise indicated)(Continued)
million, respectively, at December 31, 2011), of which $175.9 million expires between 2013 and 2022. Limitations on the utilization of these tax assets may apply. The Company has provided
valuation allowances to reduce the carrying value of certain deferred tax assets, as management has concluded that, based on the weight of available evidence, it is more likely than not that the deferred tax assets will not be fully realized.
Deferred income taxes are not provided on the excess of the investment value for financial reporting over the tax basis of
investments in those foreign subsidiaries for which such excess is considered to be permanently reinvested in those operations. The Company has recognized deferred tax liabilities of $9.1 million and $3.0 million as of December 31, 2012 and
December 31, 2011, respectively, related to local withholding taxes on certain foreign earnings which are not considered to be permanently reinvested. Determination of the amount of unrecognized U.S. income tax liabilities with respect to
certain foreign earnings which have been reinvested abroad is not practical.
Cash payments for income taxes were $100.0
million, $106.5 million and $181.1 million in 2012, 2011 and 2010, respectively. Cash refunds for income taxes were $18.5 million, $11.2 million and $52.0 million in 2012, 2011 and 2010, respectively.
The Companys income taxes payable for federal and state purposes has been reduced by the tax benefits associated with the exercise
of employee stock options and the vesting of restricted stock units. A component of the income tax benefit, calculated as the tax effect of the difference between the fair market value at the time stock options are exercised or restricted stock
units vest and the grant date fair market value, directly increases or reduces RR Donnelley shareholders equity. For the year ended December 31, 2012, the tax expense recognized as a reduction of RR Donnelley shareholders equity was $1.2
million. For the years ended December 31, 2011 and 2010, tax benefits of $3.6 million and $1.1 million, respectively, were recognized in RR Donnelley shareholders equity.
See Note 16 for details of the income tax expense or benefit allocated to each component of other comprehensive income.
Uncertain tax positions
Changes in the Companys unrecognized tax benefits at December 31, 2012, 2011 and 2010 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Balance at beginning of year
|
|
$
|
76.4
|
|
|
$
|
157.1
|
|
|
$
|
176.4
|
|
Additions for tax positions of the current year
|
|
|
6.3
|
|
|
|
6.1
|
|
|
|
10.2
|
|
Additions for tax positions of prior years
|
|
|
3.9
|
|
|
|
6.0
|
|
|
|
9.5
|
|
Reductions for tax positions of prior years
|
|
|
(29.6
|
)
|
|
|
(26.9
|
)
|
|
|
(18.1
|
)
|
Settlements during the year
|
|
|
(5.6
|
)
|
|
|
(3.3
|
)
|
|
|
(9.6
|
)
|
Lapses of applicable statutes of limitations
|
|
|
(3.5
|
)
|
|
|
(62.3
|
)
|
|
|
(13.6
|
)
|
Foreign exchange and other
|
|
|
|
|
|
|
(0.3
|
)
|
|
|
2.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
47.9
|
|
|
$
|
76.4
|
|
|
$
|
157.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2012, 2011 and 2010, the Company had $47.9 million, $76.4 million and $157.1
million, respectively, of unrecognized tax benefits. Unrecognized tax benefits of $29.3 million as of December 31, 2012, if recognized, would have decreased income taxes and the corresponding effective income tax rate and increased net
earnings. This potential impact on net earnings (loss) reflects the reduction of these unrecognized tax benefits, net of certain deferred tax assets and the federal tax benefit of state income tax items.
F-40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share data and unless otherwise indicated)(Continued)
As of December 31, 2012, it is reasonably possible that the total amount of
unrecognized tax benefits will decrease within twelve months by as much as $16.9 million due to the resolution of audits or expirations of statutes of limitations related to U.S. federal, state and international tax positions.
The Company classifies interest expense and any related penalties related to income tax uncertainties as a component of income tax
expense. The total interest expense, net of tax benefits, related to tax uncertainties recognized in the Consolidated Statements of Operations for the years ended December 31, 2012 and 2011, was a benefit of $4.1 million and $24.0 million,
respectively, due to the reversal of interest accrued on previously unrecognized tax benefits that were recognized during the year. For the year ended December 31, 2010, the Company recognized total interest expense, net of tax benefits,
related to tax uncertainties of $1.9 million. Benefits of $1.1 million and $2.5 million were recognized for the years ended December 31, 2012 and 2011, respectively, from the reversal of accrued penalties. A provision for penalties of $0.9
million was recognized for the year ended December 31, 2010. Accrued interest of $8.5 million and $13.4 million related to income tax uncertainties were reported as a component of other noncurrent liabilities in the Consolidated Balance Sheets
at December 31, 2012 and 2011, respectively. Accrued penalties of $2.7 million and $3.9 million related to income tax uncertainties were reported in other noncurrent liabilities in the Consolidated Balance Sheets at December 31, 2012 and
2011, respectively.
The Company has tax years from 2003 that remain open and subject to examination by the IRS, certain state
taxing authorities and certain foreign tax jurisdictions.
Tax Holidays
The Company has been granted tax holidays in certain foreign countries as an incentive to attract international investment.
Generally, a tax holiday is an agreement between the Company and a foreign government under which the Company receives certain tax benefits in that country. The Companys most significant tax holiday agreements expired in 2011. The aggregate
effect on income tax expense in 2012, 2011 and 2010, as a result of these agreements, was approximately $0.2 million, $7.9 million and $8.1 million, respectively.
Note 13. Debt
The Companys debt at December 31, 2012 and 2011 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
Borrowings under credit agreement
|
|
$
|
|
|
|
$
|
65.0
|
|
5.625% senior notes due January 15, 2012
|
|
|
|
|
|
|
158.6
|
|
4.95% senior notes due April 1, 2014
|
|
|
258.1
|
|
|
|
599.5
|
|
5.50% senior notes due May 15, 2015
|
|
|
299.9
|
|
|
|
399.8
|
|
8.60% senior notes due August 15, 2016
|
|
|
347.4
|
|
|
|
346.8
|
|
6.125% senior notes due January 15, 2017
|
|
|
523.3
|
|
|
|
522.9
|
|
7.25% senior notes due May 15, 2018
|
|
|
600.0
|
|
|
|
600.0
|
|
11.25% senior notes due February 1, 2019(a)
|
|
|
172.2
|
|
|
|
172.2
|
|
8.25% senior notes due March 15, 2019
|
|
|
450.0
|
|
|
|
|
|
7.625% senior notes due June 15, 2020
|
|
|
400.0
|
|
|
|
400.0
|
|
8.875% debentures due April 15, 2021
|
|
|
80.9
|
|
|
|
80.9
|
|
6.625% debentures due April 15, 2029
|
|
|
199.4
|
|
|
|
199.3
|
|
8.820% debentures due April 15, 2031
|
|
|
69.0
|
|
|
|
69.0
|
|
Other(b)
|
|
|
38.4
|
|
|
|
46.5
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
3,438.6
|
|
|
|
3,660.5
|
|
Less: current portion
|
|
|
(18.4
|
)
|
|
|
(243.7
|
)
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
3,420.2
|
|
|
$
|
3,416.8
|
|
|
|
|
|
|
|
|
|
|
F-41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share data and unless otherwise indicated)(Continued)
(a)
|
On May 17, 2011, June 14, 2012, August 2, 2012 and September 20, 2012, the interest rate on the 11.25% senior notes due February 1,
2019 was increased to 11.75%, 12.0%, 12.25% and 12.50%, respectively, as a result of downgrades in the ratings of the notes by the rating agencies.
|
(b)
|
Includes miscellaneous debt obligations, fair value adjustments to the 4.95% senior notes due April 1, 2014 and 8.25% senior notes due March 15, 2019 related
to the Companys fair value hedges and capital leases.
|
The fair values of the senior notes and debentures,
which were determined using the market approach based upon interest rates available to the Company for borrowings with similar terms and maturities, were determined to be Level 2 under the fair value hierarchy. The fair value of the Companys
debt was less than its book value by approximately $3.7 million and $80.1 million at December 31, 2012 and 2011, respectively.
On October 15, 2012, the Company entered into a $1.15 billion senior secured revolving credit facility (the Credit Agreement) which expires October 15, 2017. Borrowings under the
Credit Agreement bear interest at a base or Eurocurrency rate plus an applicable margin determined at the time of the borrowing. In addition, the Company pays facility commitment fees. The applicable margin and rate for the facility commitment fees
are set at agreed upon pricing levels until April 15, 2013 and will fluctuate thereafter dependent on the Credit Agreements credit ratings. The Credit Agreement replaced the Companys previous $1.75 billion unsecured revolving credit
agreement (the Previous Credit Agreement) which was due to expire on December 17, 2013. All amounts outstanding under the Previous Credit Agreement were repaid with borrowings under the Credit Agreement resulting in a $4.0 million
pre-tax loss on debt extinguishment related to unamortized debt issuance costs. The Credit Agreement is used for general corporate purposes, including acquisitions and letters of credit. The Companys obligations under the Credit Agreement are
guaranteed by material domestic subsidiaries and are secured by a pledge of the equity interests of certain subsidiaries, including most of its domestic subsidiaries, and a security interest in substantially all of the domestic current assets and
mortgages of certain domestic real property of the Company.
The Credit Agreement is subject to a number of covenants,
including a minimum interest coverage ratio and a maximum leverage ratio, that, in part, restrict the Companys ability to incur additional indebtedness, create liens, engage in mergers and consolidations, make restricted payments and dispose
of certain assets and may also limit the use of proceeds. The Credit Agreement generally allows annual dividend payments of up to $200.0 million in aggregate, though additional dividends may be allowed subject to certain conditions.
On March 13, 2012, the Company issued $450.0 million of 8.25% senior notes due March 15, 2019. Interest on the notes is payable
semi-annually on March 15 and September 15 of each year, commencing on September 15, 2012. The net proceeds from the offering and cash on hand were used to repurchase $341.8 million of the 4.95% senior notes due April 1, 2014 and
$100.0 million of the 5.50% senior notes due May 15, 2015. The repurchases resulted in a pre-tax loss on debt extinguishment of $12.1 million for the year ended December 31, 2012, consisting of a loss of $23.2 million related to the
premiums paid, unamortized debt issuance costs and other expenses, partially offset by the elimination of $11.1 million of the fair value adjustment on the 4.95% senior notes.
On January 15, 2012, proceeds from borrowings under the Previous Credit Agreement were used to pay the $158.6 million 5.625% senior notes that matured on January 15, 2012.
On June 1, 2011, the Company issued $600.0 million of 7.25% senior notes due May 15, 2018. Interest on the notes is payable
semi-annually on May 15 and November 15 of each year, commencing on November 15, 2011. The net proceeds from the offering were used to repurchase $216.2 million of the 11.25% senior notes due
F-42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share data and unless otherwise indicated)(Continued)
February 1, 2019, $100.0 million of the 6.125% senior notes due January 15, 2017 and $100.0 million of the 5.50% senior notes due May 15, 2015. The remaining net proceeds were used
for general corporate purposes and to repay outstanding borrowings under the Previous Credit Agreement. On September 28, 2011, the Company repurchased an additional $11.6 million of the 11.25% senior notes due February 1, 2019. The
repurchases resulted in pre-tax losses on debt extinguishment of $69.9 million for the year ended December 31, 2011.
As
of December 31, 2012, the Company had no borrowings outstanding under the Credit Agreement. The weighted average interest rate on borrowings under the Credit Agreement and Previous Credit Agreement during the years ended December 31, 2012
and 2011 was 2.19% and 2.08% per annum, respectively.
Additionally, the Company had $170.0 million in credit facilities
(the Foreign Facilities) at its foreign locations, most of which are uncommitted. As of December 31, 2012 and 2011, total borrowings under the Credit Agreement, Previous Credit Agreement and the Foreign Facilities (the
Combined Facilities) were $10.4 million and $82.2 million, respectively. As of December 31, 2012, the Company had $71.1 million in outstanding letters of credit. At December 31, 2012, approximately $1.3 billion was available
under the Companys Combined Facilities.
At December, 31, 2012, the future maturities of debt, including capitalized
leases, were as follows:
|
|
|
|
|
|
|
Amount
|
|
2013
|
|
$
|
18.4
|
|
2014
|
|
|
259.2
|
|
2015
|
|
|
304.1
|
|
2016
|
|
|
350.7
|
|
2017
|
|
|
525.0
|
|
2018 and thereafter
|
|
|
1,972.2
|
|
|
|
|
|
|
Total
|
|
$
|
3,429.6
|
|
|
|
|
|
|
The following table summarizes interest expense included in the Consolidated Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Interest incurred
|
|
$
|
271.1
|
|
|
$
|
259.8
|
|
|
$
|
233.3
|
|
Less: interest income
|
|
|
(15.2
|
)
|
|
|
(13.6
|
)
|
|
|
(9.1
|
)
|
Less: interest capitalized as property, plant and equipment
|
|
|
(4.1
|
)
|
|
|
(2.9
|
)
|
|
|
(1.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
$
|
251.8
|
|
|
$
|
243.3
|
|
|
$
|
222.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid net of interest received was $250.1 million, $252.2 million and $235.2 million in 2012,
2011 and 2010, respectively.
Note 14. Derivatives
All derivatives are recorded as other current or noncurrent assets or other current or noncurrent liabilities in the
Consolidated Balance Sheets at their respective fair values. Unrealized gains and losses related to derivatives are recorded in other comprehensive income (loss), net of applicable income taxes, or in the Consolidated Statements of Operations,
depending on the purpose for which the derivative is held. For derivatives designated and that qualify as cash flow hedges, the effective portion of the unrealized gain or loss related to the derivatives
F-43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share data and unless otherwise indicated)(Continued)
are generally recorded in other comprehensive income (loss) until the transaction affects earnings. 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 Consolidated Statements 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 Consolidated Statements of Operations. At the 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 or cash flows of the hedged item and whether the derivative is expected to continue to be highly effective. The impact of any ineffectiveness is also recognized currently in the Consolidated Statements of Operations.
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 borrowings, sales,
purchases, revenues, expenses or other transactions are not in the local currency of the subsidiary or operating unit, the Company is exposed to currency risk. Periodically, the Company uses foreign exchange spot and forward contracts to hedge
exposures resulting from foreign exchange fluctuations. Accordingly, the implied gains and losses associated with the fair values of foreign currency exchange contracts are generally offset by gains and losses on underlying payables, receivables and
net investments in foreign subsidiaries. The Company does not use derivative financial instruments for trading or speculative purposes.
The Company has entered into foreign exchange forward contracts in order to manage the currency exposure of certain assets and liabilities. The foreign exchange forward contracts were not designated as
hedges, and accordingly, the fair value gains or losses from these foreign currency derivatives are recognized currently in the Consolidated Statements of Operations, generally offsetting the foreign exchange gains or losses on the exposures being
managed. The aggregate notional value of the forward contracts at December 31, 2012 and 2011 was $654.2 million and $78.3 million, respectively. The fair values of foreign exchange forward contracts were determined to be Level 2 under the fair
value hierarchy and are valued using market exchange rates.
On March 13, 2012, the Company entered into interest rate
swap agreements to manage interest rate risk exposure, effectively changing the interest rate on $400.0 million of its fixed-rate senior notes to a floating rate based on LIBOR plus a basis point spread. The interest rate swaps, with a notional
value of $400.0 million, are designated as fair value hedges against changes in the value of the Companys $450.0 million 8.25% senior notes due March 15, 2019, which are attributable to changes in the benchmark interest rate.
On April 9, 2010, the Company entered into interest rate swap agreements to manage interest rate risk exposure, effectively changing
the interest rate on $600.0 million of its fixed-rate senior notes to a floating rate based on LIBOR plus a basis point spread. The interest rate swaps, with a notional value of $600.0 million at inception, are designated as fair value hedges
against changes in the value of the Companys 4.95% senior notes due April 1, 2014 which are attributable to changes in the benchmark interest rate. During March 2012, the Company repurchased $341.8 million of the 4.95% senior notes due
April 1, 2014, and related interest rate swaps with a notional amount of $342.0 million were terminated, resulting in proceeds of $11.0 million for the fair value of the interest rate swaps.
The fair values of interest rate swaps were determined to be Level 2 under the fair value hierarchy and were developed using the market
standard methodology of netting the discounted future fixed cash payments and the discounted expected variable cash receipts. The variable cash receipts are based on the expectation of future
F-44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share data and unless otherwise indicated)(Continued)
interest rates derived from observed market interest rate curves. In addition, credit valuation adjustments, which consider the impact of any credit enhancements to the contracts, are
incorporated in the fair values to account for potential nonperformance risk. The Company evaluates the credit value adjustments of the interest rate swap agreements, which take into account the possibility of counterparty and the Companys own
default, on at least a quarterly basis.
The Company manages credit risk for its derivative positions on a
counterparty-by-counterparty basis, considering the net portfolio exposure with each counterparty, consistent with its risk management strategy for such transactions. The Companys agreements with each of its counterparties contain a provision
where the Company could be declared in default on its derivative obligations if it either defaults or, in certain cases, is capable of being declared in default of any of its indebtedness greater than specified thresholds. These agreements also
contain a provision where the Company could be declared in default subsequent to a merger or restructuring type event if the creditworthiness of the resulting entity is materially weaker.
At December 31, 2012 and 2011, the total fair value of the Companys foreign exchange forward contracts, which were the only
derivatives not designated as hedges, and fair value hedges, along with the accounts in the Consolidated Balance Sheets in which the fair value amounts are included were as follows:
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
Derivatives not designated as hedges
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
$
|
0.6
|
|
|
$
|
0.3
|
|
Accrued liabilities
|
|
|
24.0
|
|
|
|
0.3
|
|
Derivatives designated as fair value hedges
|
|
|
|
|
|
|
|
|
Other noncurrent assets
|
|
$
|
14.7
|
|
|
$
|
19.9
|
|
The pre-tax losses related to derivatives not designated as hedges recognized in the Consolidated
Statements of Operations for the years ended December 31, 2012, 2011 and 2010 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classification of Loss
Recognized in the Consolidated
Statements of Operations
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Derivatives not designated as hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
Selling, general and administrative expenses
|
|
$
|
24.8
|
|
|
$
|
4.7
|
|
|
$
|
2.5
|
|
For derivatives designated as fair value hedges, the pre-tax (gains) losses related to the hedged items,
attributable to changes in the hedged benchmark interest rate and the offsetting gain on the related interest rate swaps for the years ended December 31, 2012, 2011 and 2010 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classification of (Gain) Loss
Recognized in the
Consolidated
Statements of Operations
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Fair Value Hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
Investment and other expense (income)net
|
|
$
|
(5.7
|
)
|
|
$
|
(3.1
|
)
|
|
$
|
(16.8
|
)
|
Hedged items
|
|
Investment and other expense (income)net
|
|
|
4.4
|
|
|
|
1.9
|
|
|
|
14.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gain recognized as ineffectiveness in the consolidated statements of operations
|
|
Investment and other expense (income)net
|
|
$
|
(1.3
|
)
|
|
$
|
(1.2
|
)
|
|
$
|
(2.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share data and unless otherwise indicated)(Continued)
The Company also recognized a net reduction to interest expense of $8.0 million, $9.9
million and $6.8 million for the years ended December 31, 2012, 2011 and 2010, respectively, related to the Companys fair value hedges, which includes interest accruals on the derivatives and amortization of the basis in the hedged items.
Note 15. Earnings per Share
Basic earnings (loss) per share is calculated by dividing net earnings (loss) attributable to RR Donnelley common
shareholders by the weighted average number of common shares outstanding for the period. In computing diluted earnings (loss) per share, basic earnings (loss) per share is adjusted for the assumed issuance of all potentially dilutive share-based
awards, including stock options, restricted stock units and performance share units. Performance share units are considered anti-dilutive and excluded if the performance targets upon which the issuance of the shares is contingent have not yet been
achieved as of the end of the current period. Additionally, stock options are considered anti-dilutive when the exercise price exceeds the average market value of the Companys stock price during the applicable period.
On May 3, 2011, the Board of Directors of the Company approved a program that authorized the repurchase of up to $1.0 billion of the
Companys common stock through December 31, 2012. Share repurchases under the program were allowable through a variety of methods as determined by the Companys management. The repurchase authorizations did not obligate the Company to
acquire any particular amount of common stock or adopt any particular method of repurchase.
As part of the share repurchase
program, the Company entered into an accelerated share repurchase agreement (ASR) in 2011 with an investment bank under which the Company repurchased $500.0 million of its common stock, receiving an initial delivery of
19.9 million shares on May 10, 2011 and an additional 9.3 million shares on November 17, 2011. Both the initial and final delivery of shares resulted in a reduction of the outstanding shares used to calculate the weighted average
common shares outstanding for basic and diluted net earnings per share. No other shares were repurchased under this share repurchase program.
During the years ended December 31, 2012 and 2010, no shares of common stock were purchased by the Company.
The reconciliation of the numerator and denominator of the basic and diluted earnings (loss) per share calculation and the anti-dilutive share-based awards for the years ended December 31, 2012, 2011
and 2010 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Net earnings (loss) per share attributable to RR Donnelley common shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(3.61
|
)
|
|
$
|
(0.63
|
)
|
|
$
|
1.07
|
|
Diluted
|
|
$
|
(3.61
|
)
|
|
$
|
(0.63
|
)
|
|
$
|
1.06
|
|
Dividends declared per common share
|
|
$
|
1.04
|
|
|
$
|
1.04
|
|
|
$
|
1.04
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) attributable to RR Donnelley common shareholders
|
|
$
|
(651.4
|
)
|
|
$
|
(122.6
|
)
|
|
$
|
221.7
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
180.4
|
|
|
|
193.8
|
|
|
|
206.4
|
|
Dilutive options and awards
|
|
|
|
|
|
|
|
|
|
|
3.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average number of common shares outstanding
|
|
|
180.4
|
|
|
|
193.8
|
|
|
|
209.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of anti-dilutive share-based awards:
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock units
|
|
|
3.6
|
|
|
|
5.0
|
|
|
|
2.7
|
|
Performance share units
|
|
|
0.4
|
|
|
|
0.2
|
|
|
|
|
|
Stock options
|
|
|
4.6
|
|
|
|
4.0
|
|
|
|
3.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
8.6
|
|
|
|
9.2
|
|
|
|
6.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share data and unless otherwise indicated)(Continued)
Note 16. Comprehensive Income
Income tax expense allocated to each component of other comprehensive income (loss) for the years ended
December 31, 2012, 2011 and 2010 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
Before
Tax
Amount
|
|
|
Income
Tax
Expense
(Benefit)
|
|
|
Net of
Tax
Amount
|
|
|
Before
Tax
Amount
|
|
|
Income
Tax
Expense
(Benefit)
|
|
|
Net of
Tax
Amount
|
|
|
Before
Tax
Amount
|
|
|
Income
Tax
Expense
|
|
|
Net of
Tax
Amount
|
|
Translation adjustments
|
|
$
|
11.4
|
|
|
$
|
|
|
|
$
|
11.4
|
|
|
$
|
(70.1
|
)
|
|
$
|
|
|
|
$
|
(70.1
|
)
|
|
$
|
12.6
|
|
|
$
|
|
|
|
$
|
12.6
|
|
Adjustment for net periodic pension and other postretirement benefit plan cost
|
|
|
(285.1
|
)
|
|
|
(107.5
|
)
|
|
|
(177.6
|
)
|
|
|
(485.9
|
)
|
|
|
(182.8
|
)
|
|
|
(303.1
|
)
|
|
|
68.6
|
|
|
|
26.6
|
|
|
|
42.0
|
|
Change in fair value of derivatives
|
|
|
0.8
|
|
|
|
0.3
|
|
|
|
0.5
|
|
|
|
1.1
|
|
|
|
0.4
|
|
|
|
0.7
|
|
|
|
0.6
|
|
|
|
0.3
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
$
|
(272.9
|
)
|
|
$
|
(107.2
|
)
|
|
$
|
(165.7
|
)
|
|
$
|
(554.9
|
)
|
|
$
|
(182.4
|
)
|
|
$
|
(372.5
|
)
|
|
$
|
81.8
|
|
|
$
|
26.9
|
|
|
$
|
54.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes changes in accumulated other comprehensive income (loss) by component for
the years ended December 31, 2012, 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in the
Fair Value of
Derivatives
|
|
|
Pension and
Other
Postretirement
Benefit Plan
Cost
|
|
|
Translation
Adjustments
|
|
|
Total
|
|
Balance at January 1, 2010
|
|
$
|
(2.1
|
)
|
|
$
|
(646.4
|
)
|
|
$
|
103.5
|
|
|
$
|
(545.0
|
)
|
Change in comprehensive income
|
|
|
0.3
|
|
|
|
42.0
|
|
|
|
12.3
|
|
|
|
54.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010
|
|
$
|
(1.8
|
)
|
|
$
|
(604.4
|
)
|
|
$
|
115.8
|
|
|
$
|
(490.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in comprehensive income (loss)
|
|
|
0.7
|
|
|
|
(303.1
|
)
|
|
|
(70.5
|
)
|
|
|
(372.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2011
|
|
$
|
(1.1
|
)
|
|
$
|
(907.5
|
)
|
|
$
|
45.3
|
|
|
$
|
(863.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in comprehensive income (loss)
|
|
|
0.5
|
|
|
|
(177.6
|
)
|
|
|
11.2
|
|
|
|
(165.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2012
|
|
$
|
(0.6
|
)
|
|
$
|
(1,085.1
|
)
|
|
$
|
56.5
|
|
|
$
|
(1,029.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 17. Stock and Incentive Programs for Employees
The Company recognizes compensation expense based on estimated grant date fair values for all share-based awards issued
to employees and directors, including stock options, restricted stock units and performance stock units. The Company estimates the fair value of share-based awards on the date of grant. The Company recognizes these compensation costs for only those
awards expected to vest, on a straight-line basis over the requisite service period of the award, which is generally the vesting term of three to four years for restricted stock awards and stock options. The Company estimates the number of awards
expected to vest based, in part, on historical forfeiture rates and also based on managements expectations of employee turnover within the specific employee groups receiving each type of award. Forfeitures are estimated at the time of grant
and revised, if necessary, in subsequent periods, if actual forfeitures differ from those estimates.
F-47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share data and unless otherwise indicated)(Continued)
Share-Based Compensation Expense
The total compensation expense related to all share-based compensation plans was $25.4 million, $28.3 million and $28.6 million for the
years ended December 31, 2012, 2011 and 2010, respectively. The income tax benefit related to share-based compensation expense was $9.9 million, $11.0 million and $11.2 million for the years ended December 31, 2012, 2011 and 2010,
respectively. As of December 31, 2012, $20.9 million of total unrecognized compensation expense related to share-based compensation plans is expected to be recognized over a weighted-average period of 2.1 years. The total unrecognized
share-based compensation expense to be recognized in future periods as of December 31, 2012 does not consider the effect of share-based awards that may be issued in subsequent periods.
Share-Based Compensation Plans
The Company has one share-based
compensation plan under which it may grant future awards, as described below, and four terminated or expired share-based compensation plans under which awards remain outstanding.
The 2012 Performance Incentive Plan (the 2012 PIP) was approved by shareholders to provide incentives to key employees of the
Company and its subsidiaries. Awards under the 2012 PIP are generally not restricted to any specific form or structure and could include, without limitation, stock options, stock units, restricted stock awards, cash or stock bonuses and stock
appreciation rights. There were 10 million shares of common stock reserved and authorized for issuance under the 2012 PIP. At December 31, 2012, there were 9.8 million shares of common stock authorized and available for grant under
the 2012 PIP.
General Terms of Awards
Under various incentive plans, the Company has granted certain employees non-qualified stock options and restricted stock units. The Human Resources Committee of the Board of Directors has discretion to
establish the terms and conditions for grants, including the number of shares, vesting and required service or other performance criteria. The maximum term of any award under the 2012 and 2004 PIPs is ten years.
For all of the Companys stock options outstanding at December 31, 2012, the exercise price of the stock option equals the fair
market value of the Companys common stock on the option grant date. Options generally vest over four years or less from the date of grant, upon retirement or upon a change in control of the Company. Options granted prior to November 2004 and
after December 2006 expire ten years from the date of grant or five years after the date of retirement, whichever is earlier.
The rights granted to the recipient of restricted stock unit awards generally accrue ratably over the restriction or vesting period,
which is generally four years. Restricted stock unit awards are subject to forfeiture upon termination of employment prior to vesting, subject in some cases to early vesting upon specified events, including death or permanent disability of the
grantee, termination of the grantees employment under certain circumstances or a change in control of the Company. The Company records compensation expense of restricted stock unit awards based on the fair market value of the awards at the
date of grant ratably over the period during which the restrictions lapse. Dividends are not paid to restricted stock unit holders.
The Company also issues restricted stock units as share-based compensation for members of the Board of Directors. Director restricted stock units granted after January 2009 vest ratably over three years
from the date of grant with the opportunity to defer any tranche of vesting restricted stock units until termination of service on the Board of Directors. Awards granted between January 2008 and January 2009 vested ratably over three years from the
date of grant and were amended in May 2009 to provide the opportunity to defer any tranche of vesting restricted stock units until termination of service on the Board of Directors. For awards granted prior to January
F-48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share data and unless otherwise indicated)(Continued)
2008, one-third of the restricted stock units vested on the third anniversary of the grant date, and the remaining two-thirds of the restricted stock units vested upon termination of the
holders service on the Board of Directors; the holder could also elect to defer delivery of the initial one-third of the restricted stock units until termination of service on the Board of Directors. In the event of termination of a
holders service on the Board of Directors prior to a vesting date, all restricted stock units of such holder will vest. All awards granted prior to December 31, 2007 are payable in shares of common stock or cash. In 2009, the option to
have awards paid in cash was removed for awards granted in 2008 and future years. Awards that may be paid in cash are classified as liability awards due to their expected settlement in cash, and are included in accrued liabilities in the
Consolidated Balance Sheets. Compensation expense for these awards is measured based upon the fair market value of the awards at the end of each reporting period. Awards payable only in shares are classified as equity awards due to their expected
settlement in common stock. Compensation expense for these awards is measured based upon the fair market value of the awards at the date of grant. Dividend equivalents are accrued for shares awarded to the Board of Directors and paid in the form of
cash.
The Company has granted performance share unit awards to certain executive officers during the years ended
December 31, 2012 and 2011. Distributions under these awards are payable at the end of their respective performance periods (December 31, 2014 and 2013) in common stock or cash, at the Companys discretion. The number of share units
awarded can range from zero to 100%, depending on achievement of a targeted performance metric. These awards are subject to forfeiture upon termination by the Company under certain circumstances prior to vesting. The Company expenses the cost of the
performance share unit awards based on the fair market value of the awards at the date of grant and the estimated achievement of the performance metric, ratably over the performance period of three years.
Stock Options
The Company granted 1,221,000, 200,000 and 540,000 stock options during the years ended December 31, 2012, 2011 and 2010,
respectively. The fair market value of each stock option award is estimated on the date of grant using the Black-Scholes-Merton option pricing model. The assumptions used to determine the fair market value of the stock options were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Expected volatility
|
|
|
39.71
|
%
|
|
|
36.69
|
%
|
|
|
35.61
|
%
|
Risk-free interest rate
|
|
|
1.18
|
%
|
|
|
2.54
|
%
|
|
|
2.75
|
%
|
Expected life (years)
|
|
|
6.25
|
|
|
|
6.25
|
|
|
|
6.25
|
|
Expected dividend yield
|
|
|
5.06
|
%
|
|
|
4.57
|
%
|
|
|
4.19
|
%
|
The grant date fair market value of options granted was $2.96, $4.39 and $4.81 for the years ended
December 31, 2012, 2011 and 2010, respectively.
F-49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share data and unless otherwise indicated)(Continued)
The following table is a summary of the Companys 2012 stock option activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
Under
Option
(thousands)
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term
(years)
|
|
|
Aggregate
Intrinsic Value
(millions)
|
|
Outstanding at December 31, 2011
|
|
|
3,995
|
|
|
$
|
20.75
|
|
|
|
5.9
|
|
|
$
|
9.5
|
|
Granted
|
|
|
1,221
|
|
|
|
13.22
|
|
|
|
9.2
|
|
|
|
|
|
Exercised
|
|
|
(197
|
)
|
|
|
7.09
|
|
|
|
|
|
|
|
|
|
Cancelled/forfeited/expired
|
|
|
(293
|
)
|
|
|
28.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2012
|
|
|
4,726
|
|
|
|
18.90
|
|
|
|
6.2
|
|
|
|
2.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at December 31, 2012
|
|
|
4,677
|
|
|
|
18.96
|
|
|
|
6.2
|
|
|
|
2.1
|
|
Exercisable at December 31, 2012
|
|
|
713
|
|
|
$
|
7.09
|
|
|
|
6.2
|
|
|
$
|
1.4
|
|
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the
difference between the Companys closing stock price on December 31, 2012 and 2011, respectively, and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option
holders exercised their in-the-money options on December 31, 2012 and 2011. This amount will change in future periods based on the fair market value of the Companys stock and the number of options outstanding. Total intrinsic value of
options exercised for the years ended December 31, 2012, 2011 and 2010 was $1.2 million, $1.0 million and $3.0 million, respectively.
Compensation expense related to stock options for the years ended December 31, 2012, 2011 and 2010 was $3.2 million, $2.7 million and $3.1 million, respectively. As of December 31, 2012, $3.2
million of total unrecognized compensation expense related to stock options is expected to be recognized over a weighted average period of 2.5 years.
Cash received from the option exercises for the year ended December 31, 2012, 2011 and 2010 was $1.4 million, $1.0 million and $2.4 million, respectively. The actual tax benefit realized for the tax
deduction from option exercises totaled $0.5 million, $0.4 million and $1.1 million for the years ended December 31, 2012, 2011 and 2010, respectively.
Excess tax benefits on stock option exercises, shown as financing cash inflows as a component of issuance of common stock in the Consolidated Statements of Cash Flows, were $0.4 million, $0.3 million and
$0.8 million for the years ended December 31, 2012, 2011 and 2010, respectively.
Restricted Stock Units
Nonvested restricted stock unit awards as of December 31, 2012 and 2011, and changes during the year ended December 31, 2012
were as follows:
|
|
|
|
|
|
|
|
|
|
|
Shares
(thousands)
|
|
|
Weighted-Average
Grant Date
Fair Value
|
|
Nonvested at December 31, 2011
|
|
|
4,989
|
|
|
$
|
13.94
|
|
Granted
|
|
|
1,048
|
|
|
|
10.53
|
|
Vested
|
|
|
(2,622
|
)
|
|
|
15.24
|
|
Forfeited
|
|
|
(169
|
)
|
|
|
12.58
|
|
|
|
|
|
|
|
|
|
|
Nonvested at December 31, 2012
|
|
|
3,246
|
|
|
$
|
11.85
|
|
|
|
|
|
|
|
|
|
|
F-50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share data and unless otherwise indicated)(Continued)
Compensation expense related to restricted stock units was $21.0 million, $24.4 million
and $25.5 million for the years ended December 31, 2012, 2011 and 2010, respectively. As of December 31, 2012, there was $16.0 million of unrecognized share-based compensation expense related to approximately 3.1 million restricted
stock unit awards, with a weighted-average grant date fair value of $11.72, that are expected to vest over a weighted-average period of 2.0 years.
Excess tax benefits on restricted stock units that vested, shown as financing cash inflows as a component of issuance of common stock in the Consolidated Statements of Cash Flows, were $3.2
million, $5.7 million and $6.0 million for the years ended December 31, 2012, 2011 and 2010, respectively.
Performance Share Units
Nonvested performance share unit awards as of December 31, 2012 and 2011, and changes during the year ended
December 31, 2012, were as follows:
|
|
|
|
|
|
|
|
|
|
|
Shares
(thousands)
|
|
|
Weighted-Average
Grant Date
Fair Value
|
|
Nonvested at December 31, 2011
|
|
|
235
|
|
|
$
|
15.54
|
|
Granted
|
|
|
233
|
|
|
|
10.12
|
|
|
|
|
|
|
|
|
|
|
Nonvested at December 31, 2012
|
|
|
468
|
|
|
$
|
12.84
|
|
|
|
|
|
|
|
|
|
|
During the years ended December 31, 2012 and 2011, 233,000 and 235,000 performance share unit awards
were granted to certain executive officers, payable upon the achievement of certain established performance targets. The performance periods for the shares awarded during the years ended December 31, 2012 and 2011 are January 1, 2012
through December 31, 2014 and January 1, 2011 through December 31, 2013, respectively. Distributions under these awards are payable at the end of the performance period in common stock or cash, at the Companys discretion. The
total potential payouts for awards granted during the years ended December 31, 2012 and 2011 range from 116,500 to 233,000 shares and 117,500 to 235,000 shares, respectively, should certain performance targets be achieved. The fair value of
these awards was determined on the date of grant based on the Companys stock price reduced by the present value of expected dividends through the vesting period. These awards are subject to forfeiture upon termination of employment prior to
vesting, subject in some cases to early vesting upon specified events, including death or permanent disability of the grantee or a change in control of the Company. No performance share unit awards were granted during the year ended
December 31, 2010.
Compensation expense for the awards granted in 2012 is currently being recognized based on the
maximum estimated payout of 233,000 shares. Compensation expense for awards granted during 2011 is currently being recognized based on an estimated payout of 50%, or 117,500 shares. Compensation expense related to performance share unit awards for
the years ended December 31, 2012 and 2011 was $1.2 million and $1.2 million, respectively. There was no compensation expense recognized related to performance share unit awards for the year ended December 31, 2010. As of December 31,
2012, there was $1.7 million of unrecognized compensation expense related to performance share unit awards, which is expected to be recognized over a weighted average period of 1.8 years.
Board of Directors Liability Awards
At December 31, 2012,
2011and 2010, approximately 147,263, 147,263 and 145,459 restricted stock units issued to directors were outstanding for liability awards, respectively. For the years ended December 31, 2012, 2011 and 2010, the compensation expense recorded for
these awards was income of $0.2 million, and expense of
F-51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share data and unless otherwise indicated)(Continued)
$0.1 million and $0.4 million, respectively. The Board of Directors equity awards are included above in the section Restricted Stock Units.
Other Information
Authorized unissued shares or treasury shares may be used for issuance under the Companys share-based compensation plans. The
Company intends to use treasury shares of its common stock to meet the stock requirements of its awards in the future. On May 3, 2011, the Companys Board of Directors approved a share repurchase program, which authorized the repurchase of
up to $1.0 billion of the Companys common stock through December 31, 2012 and terminated its existing authorization of October 29, 2008 for the repurchase of up to 10 million shares. During the year ended December 31, 2011,
the Company purchased 29.2 million shares of its common stock at a total cost of $500.0 million under the ASR (see Note 15) entered into on May 5, 2011. No shares were repurchased for the years ended December 31, 2012 and 2010.
Note 18. Preferred Stock
The Company has two million shares of $1.00 par value preferred stock authorized for issuance. The Board of Directors
may divide the preferred stock into one or more series and fix the redemption, dividend, voting, conversion, sinking fund, liquidation and other rights. The Company has no present plans to issue any preferred stock.
Note 19. Segment Information
The Company operates primarily in the printing industry, with related product and service offerings designed to offer
customers complete solutions for communicating their messages to target audiences. The Companys reportable segments reflect the management reporting structure of the organization and the manner in which the chief operating decision-maker
regularly assesses information for decision-making purposes, including the allocation of resources. The Companys segments and their product and service offerings are summarized below:
U.S. Print and Related Services
The U.S. Print and Related Services
segment includes the Companys U.S. printing operations, managed as one integrated platform, along with logistics, premedia, print management and other print related services. This segments product and related service offerings include
magazines, catalogs, retail inserts, books, directories, financial printing and related services, direct mail, forms, labels, office products, packaging, statement printing, premedia and logistics services.
The U.S. Print and Related Services segment accounted for approximately 73% of the Companys consolidated net sales in 2012.
International
The International segment includes the Companys non-U.S. printing operations in Asia, Europe, Latin America and Canada. This
segments product and related service offerings include magazines, catalogs, retail inserts, books, directories, financial printing and related services, direct mail, forms, labels, packaging, manuals, statement printing, premedia and logistics
services. Additionally, this segment includes the Companys business process outsourcing and Global Turnkey Solutions operations. Business process outsourcing provides transactional print and outsourcing services, statement printing, direct
mail and print management services through its operations in Europe, Asia and North America. Global Turnkey Solutions provides outsourcing capabilities, including product configuration, customized kitting and order fulfillment for technology,
medical device and other companies around the world through its operations in Europe, North America and Asia.
F-52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share data and unless otherwise indicated)(Continued)
The International segment accounted for approximately 27% of the Companys
consolidated net sales in 2012.
Corporate
Corporate consists of unallocated general and administrative activities and associated expenses including, in part, executive, legal, finance, information technology, human resources, certain facility
costs and LIFO inventory provisions. In addition, certain costs and earnings of employee benefit plans are included in Corporate and not allocated to operating segments. Corporate manages the Companys cash pooling structure, which enables
participating international locations to draw on the Companys overseas cash resources to meet local liquidity needs.
The Company has disclosed income (loss) from operations as the primary measure of segment earnings (loss). This is the measure of
profitability used by the Companys chief operating decision-maker and is most consistent with the presentation of profitability reported within the Consolidated Financial Statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Sales
|
|
|
Intersegment
Sales
|
|
|
Net
Sales
|
|
|
Income (Loss)
from
Operations
|
|
|
Assets of
Operations
|
|
|
Depreciation
and
Amortization
|
|
|
Capital
Expenditures
|
|
Year ended December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Print and Related Services
|
|
$
|
7,553.0
|
|
|
$
|
(41.9
|
)
|
|
$
|
7,511.1
|
|
|
$
|
(276.8
|
)
|
|
$
|
4,587.7
|
|
|
$
|
329.3
|
|
|
$
|
96.9
|
|
International
|
|
|
2,793.0
|
|
|
|
(82.2
|
)
|
|
|
2,710.8
|
|
|
|
79.1
|
|
|
|
2,191.9
|
|
|
|
108.5
|
|
|
|
43.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating segments
|
|
|
10,346.0
|
|
|
|
(124.1
|
)
|
|
|
10,221.9
|
|
|
|
(197.7
|
)
|
|
|
6,779.6
|
|
|
|
437.8
|
|
|
|
139.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(172.1
|
)
|
|
|
483.1
|
|
|
|
43.8
|
|
|
|
66.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operations
|
|
$
|
10,346.0
|
|
|
$
|
(124.1
|
)
|
|
$
|
10,221.9
|
|
|
$
|
(369.8
|
)
|
|
$
|
7,262.7
|
|
|
$
|
481.6
|
|
|
$
|
205.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Print and Related Services
|
|
$
|
7,887.2
|
|
|
$
|
(40.7
|
)
|
|
$
|
7,846.5
|
|
|
$
|
232.9
|
|
|
$
|
5,692.0
|
|
|
$
|
389.2
|
|
|
$
|
104.7
|
|
International
|
|
|
2,833.6
|
|
|
|
(69.1
|
)
|
|
|
2,764.5
|
|
|
|
35.4
|
|
|
|
2,310.1
|
|
|
|
120.2
|
|
|
|
90.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating segments
|
|
|
10,720.8
|
|
|
|
(109.8
|
)
|
|
|
10,611.0
|
|
|
|
268.3
|
|
|
|
8,002.1
|
|
|
|
509.4
|
|
|
|
195.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(203.1
|
)
|
|
|
279.6
|
|
|
|
40.5
|
|
|
|
55.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operations
|
|
$
|
10,720.8
|
|
|
$
|
(109.8
|
)
|
|
$
|
10,611.0
|
|
|
$
|
65.2
|
|
|
$
|
8,281.7
|
|
|
$
|
549.9
|
|
|
$
|
250.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Print and Related Services
|
|
$
|
7,558.7
|
|
|
$
|
(26.5
|
)
|
|
$
|
7,532.2
|
|
|
$
|
638.9
|
|
|
$
|
6,495.7
|
|
|
$
|
391.8
|
|
|
$
|
99.2
|
|
International
|
|
|
2,538.6
|
|
|
|
(51.9
|
)
|
|
|
2,486.7
|
|
|
|
149.5
|
|
|
|
2,460.9
|
|
|
|
115.2
|
|
|
|
88.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating segments
|
|
|
10,097.3
|
|
|
|
(78.4
|
)
|
|
|
10,018.9
|
|
|
|
788.4
|
|
|
|
8,956.6
|
|
|
|
507.0
|
|
|
|
187.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(232.9
|
)
|
|
|
126.6
|
|
|
|
32.2
|
|
|
|
41.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operations
|
|
$
|
10,097.3
|
|
|
$
|
(78.4
|
)
|
|
$
|
10,018.9
|
|
|
$
|
555.5
|
|
|
$
|
9,083.2
|
|
|
$
|
539.2
|
|
|
$
|
229.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share data and unless otherwise indicated)(Continued)
(a)
|
Corporate assets consist primarily of the following items at December 31, 2012: current and deferred income tax assets net of valuation allowances of $377.1
million, property, plant and equipment of $63.5 million and deferred compensation plan assets of $57.2 million, partially offset by LIFO reserves of $92.1 million; December 31, 2011: current and deferred income tax assets net of valuation
allowances of $201.1 million, property, plant and equipment of $73.0 million and deferred compensation plan assets of $50.6 million, partially offset by LIFO reserves of $96.4 million; and December 31, 2010: property, plant and equipment of
$64.6 million and deferred compensation plan assets of $46.5 million
|
Restructuring and impairment charges by
segment for 2012, 2011 and 2010 are described in Note 3.
Note 20. Geographic Area and Products and Services Information
The table below presents net sales and long-lived assets by geographic region. The amounts in this table differ from
the segment data presented in Note 19 because each operating segment includes operations in multiple geographic regions, based on the Companys management reporting structure.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
Europe
|
|
|
Asia
|
|
|
Other
|
|
|
Combined
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
7,719.9
|
|
|
$
|
1,025.8
|
|
|
$
|
733.0
|
|
|
$
|
743.2
|
|
|
$
|
10,221.9
|
|
Long-lived assets(a)
|
|
|
1,915.4
|
|
|
|
181.4
|
|
|
|
167.7
|
|
|
|
201.5
|
|
|
|
2,466.0
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
8,073.1
|
|
|
$
|
1,067.6
|
|
|
$
|
668.0
|
|
|
$
|
802.3
|
|
|
$
|
10,611.0
|
|
Long-lived assets(a)
|
|
|
1,902.7
|
|
|
|
207.3
|
|
|
|
164.2
|
|
|
|
226.5
|
|
|
|
2,500.7
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
7,761.6
|
|
|
$
|
970.3
|
|
|
$
|
600.1
|
|
|
$
|
686.9
|
|
|
$
|
10,018.9
|
|
Long-lived assets(a)
|
|
|
2,014.2
|
|
|
|
218.5
|
|
|
|
172.6
|
|
|
|
208.8
|
|
|
|
2,614.1
|
|
(a)
|
Includes net property, plant and equipment, noncurrent deferred tax assets and other noncurrent assets.
|
The following table summarizes net sales by the Companys products and services categories for the years ended December 31,
2012, 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
Products and services
|
|
2012
Net Sales
|
|
|
2011
Net Sales
|
|
|
2010
Net Sales
|
|
Magazines, catalogs and retail inserts
|
|
$
|
2,445.1
|
|
|
$
|
2,468.4
|
|
|
$
|
2,394.0
|
|
Variable printing
|
|
|
1,579.5
|
|
|
|
1,611.6
|
|
|
|
1,550.3
|
|
Books and directories
|
|
|
1,411.1
|
|
|
|
1,670.3
|
|
|
|
1,739.3
|
|
Forms and labels
|
|
|
943.9
|
|
|
|
1,027.8
|
|
|
|
1,072.0
|
|
Commercial
|
|
|
748.9
|
|
|
|
819.2
|
|
|
|
759.2
|
|
Financial print
|
|
|
747.4
|
|
|
|
893.2
|
|
|
|
577.0
|
|
Packaging and related products
|
|
|
407.0
|
|
|
|
373.0
|
|
|
|
351.6
|
|
Global Turnkey Solutions
|
|
|
289.7
|
|
|
|
290.9
|
|
|
|
300.6
|
|
Office products
|
|
|
262.5
|
|
|
|
220.7
|
|
|
|
212.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total products
|
|
|
8,835.1
|
|
|
|
9,375.1
|
|
|
|
8,956.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Logistics services
|
|
|
786.7
|
|
|
|
706.8
|
|
|
|
616.0
|
|
Financial print related services
|
|
|
212.9
|
|
|
|
161.3
|
|
|
|
70.6
|
|
Business process outsourcing
|
|
|
211.0
|
|
|
|
203.2
|
|
|
|
210.7
|
|
Premedia and related services
|
|
|
176.2
|
|
|
|
164.6
|
|
|
|
165.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total services
|
|
|
1,386.8
|
|
|
|
1,235.9
|
|
|
|
1,062.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$
|
10,221.9
|
|
|
$
|
10,611.0
|
|
|
$
|
10,018.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share data and unless otherwise indicated)(Continued)
Note 21. New Accounting Pronouncements
In July 2012, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update
No. 2012-02 Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment (ASU 2012-02), which provides the option to perform a qualitative, rather than quantitative, assessment to
determine whether it is more likely than not an indefinite-lived intangible asset is impaired. ASU 2012-02 would have been effective for the Company in the first quarter of 2013; however, as permitted, the Company early adopted ASU 2012-02 in the
third quarter of 2012. ASU 2012-02 reduced the complexity of testing indefinite-lived intangible assets for impairment, but otherwise did not have a material impact on the Companys consolidated financial position, results of operations or cash
flows.
In December 2011, the FASB issued Accounting Standards Update No. 2011-11 Balance Sheet (Topic 210):
Disclosures about Offsetting Assets and Liabilities (ASU 2011-11), which requires disclosures of gross and net information about financial and derivative instruments eligible for offset in the statement of financial position or
subject to a master netting agreement. In January 2013, the FASB issued Accounting Standards Update No. 2013-01 Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities (ASU
2013-01), which narrows the scope of the disclosure requirements to derivatives, securities borrowings, and securities lending transactions that are either offset or subject to a master netting arrangement. ASU 2011-11 and ASU 2013-01 will be
effective for the Company in the first quarter of 2013 and may require additional disclosures, but otherwise are not expected to have a material impact on the Companys consolidated financial position, results of operations or cash flows.
In June 2011, the FASB issued Accounting Standards Update No. 2011-05 Comprehensive Income (Topic 220):
Presentation of Comprehensive Income (ASU 2011-05), which prohibits the presentation of other comprehensive income in the statement of changes in stockholders equity and requires the presentation of net income, items of other
comprehensive income and total comprehensive income in one continuous statement or two separate but consecutive statements. In December 2011, the FASB issued Accounting Standards Update No. 2011-12 Comprehensive Income (Topic 220):
Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05 (ASU 2011-12), which deferred the
requirement to present reclassification adjustments for each component of other comprehensive income on the face of the financial statements. In February 2013, the FASB issued Accounting Standards Update No. 2013-02 Comprehensive Income
(Topic 220): Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income (ASU 2013-02), which requires disclosures of the amounts reclassified out of accumulated other comprehensive income by component,
including the respective line items of net income if the amount is required to be reclassified to net income in its entirety in the same reporting period. ASU 2011-05 and 2011-12 were effective and adopted by the Company in the first quarter of 2012
and ASU 2013-02 will be effective for the Company in the first quarter of 2013. The ASUs have impacted and will impact the Companys financial statement presentation, but otherwise did not and will not impact the Companys consolidated
financial position, results of operations or cash flows.
In May 2011, the FASB issued Accounting Standards Update
No. 2011-04 Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (ASU 2011-04), which amends the definition of fair value measurement
principles and disclosure requirements to eliminate differences between U.S. GAAP and International Financial Reporting Standards. ASU 2011-04 requires new quantitative and qualitative disclosures about the sensitivity of recurring Level 3
measurement disclosures, as well as transfers between Level 1 and Level 2 of the fair value hierarchy. ASU 2011-04 was effective and adopted by the Company in the first quarter of 2012 and impacted the Companys disclosures, but otherwise did
not have a material impact on the Companys consolidated financial position, results of operations or cash flows.
F-55