UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2011
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 1-4694
R.R. DONNELLEY & SONS COMPANY
(Exact name of registrant as specified in its charter)
Delaware | 36-1004130 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
111 South Wacker Drive, Chicago, Illinois |
60606 | |
(Address of principal executive offices) | (Zip code) |
(312) 326-8000
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large Accelerated filer | x | Accelerated filer | ¨ | |||
Non-Accelerated Filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of April 29, 2011, 207.5 million shares of common stock were outstanding.
R.R. DONNELLEY & SONS COMPANY
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2011
Page | ||||||
PART I | ||||||
3 | ||||||
Item 1: | 3 | |||||
Condensed Consolidated Balance Sheets as of March 31, 2011 and December 31, 2010 |
3 | |||||
Condensed Consolidated Statements of Operations for the three months ended March 31, 2011 and 2010 |
4 | |||||
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2011 and 2010 |
5 | |||||
6 | ||||||
Item 2: | Managements Discussion and Analysis of Financial Condition and Results of Operations |
23 | ||||
Item 3: | 37 | |||||
Item 4: | 37 | |||||
PART II | ||||||
38 | ||||||
Item 2: | 38 | |||||
Item 5: | 38 | |||||
Item 6: | 39 | |||||
Signatures | 43 |
2
Item 1. | Condensed Consolidated Financial Statements |
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (RR DONNELLEY)
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except share data)
(UNAUDITED)
March 31, 2011 |
December 31, 2010 |
|||||||
ASSETS |
||||||||
Cash and cash equivalents |
$ | 399.3 | $ | 519.1 | ||||
Receivables, less allowance for doubtful accounts of $73.3 in 2011 (2010$71.0) |
1,961.1 | 1,922.9 | ||||||
Income taxes receivable |
33.0 | 49.3 | ||||||
Inventories (Note 3) |
581.3 | 560.6 | ||||||
Prepaid expenses and other current assets |
137.6 | 115.4 | ||||||
Total current assets |
3,112.3 | 3,167.3 | ||||||
Property, plant and equipmentnet (Note 4) |
2,080.9 | 2,138.7 | ||||||
Goodwill (Note 5) |
2,554.3 | 2,526.8 | ||||||
Other intangible assetsnet (Note 5) |
753.9 | 775.0 | ||||||
Other noncurrent assets |
465.0 | 475.4 | ||||||
Total assets |
$ | 8,966.4 | $ | 9,083.2 | ||||
LIABILITIES |
||||||||
Accounts payable |
$ | 930.6 | $ | 939.8 | ||||
Accrued liabilities |
810.1 | 902.2 | ||||||
Short-term and current portion of long-term debt (Note 14) |
281.8 | 131.4 | ||||||
Total current liabilities |
2,022.5 | 1,973.4 | ||||||
Long-term debt (Note 14) |
3,236.4 | 3,398.6 | ||||||
Pension liability |
533.5 | 533.0 | ||||||
Postretirement benefits |
290.9 | 287.4 | ||||||
Deferred income taxes |
171.0 | 174.5 | ||||||
Other noncurrent liabilities |
454.4 | 470.9 | ||||||
Total liabilities |
6,708.7 | 6,837.8 | ||||||
Commitments and Contingencies (Note 13) |
||||||||
EQUITY (Note 11) |
||||||||
RR Donnelley shareholders equity |
||||||||
Preferred stock, $1.00 par value |
||||||||
Authorized: 2.0 shares; Issued: None |
| | ||||||
Common stock, $1.25 par value |
||||||||
Authorized: 500.0 shares; |
||||||||
Issued: 243.0 shares in 2011 and 2010 |
303.7 | 303.7 | ||||||
Additional paid-in capital |
2,875.5 | 2,907.0 | ||||||
Retained earnings |
650.4 | 670.2 | ||||||
Accumulated other comprehensive loss |
(457.4 | ) | (490.4 | ) | ||||
Treasury stock, at cost, 35.4 shares in 2011 (201036.4 shares) |
(1,134.1 | ) | (1,166.2 | ) | ||||
Total RR Donnelley shareholders equity |
2,238.1 | 2,224.3 | ||||||
Noncontrolling interests |
19.6 | 21.1 | ||||||
Total equity |
2,257.7 | 2,245.4 | ||||||
Total liabilities and equity |
$ | 8,966.4 | $ | 9,083.2 | ||||
(See Notes to Condensed Consolidated Financial Statements)
3
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (RR DONNELLEY)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)
(UNAUDITED)
Three Months
Ended March 31, |
||||||||
2011 | 2010 | |||||||
Net sales |
||||||||
Products |
$ | 2,266.4 | $ | 2,170.9 | ||||
Services |
317.1 | 244.2 | ||||||
Total net sales |
2,583.5 | 2,415.1 | ||||||
Products cost of sales (exclusive of depreciation and amortization shown below) |
1,726.8 | 1,660.8 | ||||||
Services cost of sales (exclusive of depreciation and amortization shown below) |
229.4 | 180.9 | ||||||
Selling, general and administrative expenses (exclusive of depreciation and amortization shown below) |
326.9 | 273.5 | ||||||
Restructuring and impairment chargesnet (Note 6) |
50.8 | 15.5 | ||||||
Depreciation and amortization |
140.2 | 138.6 | ||||||
Total operating expenses |
2,474.1 | 2,269.3 | ||||||
Income from operations |
109.4 | 145.8 | ||||||
Interest expensenet |
57.9 | 55.7 | ||||||
Investment and other expensenet |
(0.2 | ) | (9.0 | ) | ||||
Earnings before income taxes |
51.3 | 81.1 | ||||||
Income tax expense |
17.0 | 32.4 | ||||||
Net earnings |
34.3 | 48.7 | ||||||
Less: Income (loss) attributable to noncontrolling interests |
0.4 | (3.9 | ) | |||||
Net earnings attributable to RR Donnelley common shareholders |
$ | 33.9 | $ | 52.6 | ||||
Earnings per share attributable to RR Donnelley common shareholders (Note 9): |
||||||||
Basic net earnings per share |
$ | 0.16 | $ | 0.26 | ||||
Diluted net earnings per share |
$ | 0.16 | $ | 0.25 | ||||
Dividends declared per common share |
$ | 0.26 | $ | 0.26 | ||||
Weighted average number of common shares outstanding: |
||||||||
Basic |
207.2 | 205.6 | ||||||
Diluted |
209.8 | 209.0 |
(See Notes to Condensed Consolidated Financial Statements)
4
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (RR DONNELLEY)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(UNAUDITED)
Three Months Ended March 31, |
||||||||
2011 | 2010 | |||||||
OPERATING ACTIVITIES |
||||||||
Net earnings |
$ | 34.3 | $ | 48.7 | ||||
Adjustments to reconcile net earnings to cash (used in) provided by operating activities: |
||||||||
Impairment charges |
8.1 | 1.0 | ||||||
Depreciation and amortization |
140.2 | 138.6 | ||||||
Provision for doubtful accounts receivable |
4.2 | 2.4 | ||||||
Share-based compensation |
6.5 | 8.2 | ||||||
Deferred taxes |
(17.2 | ) | (8.5 | ) | ||||
Change in uncertain tax positions |
3.7 | | ||||||
(Gain) loss on sale of investments and other assetsnet |
(2.0 | ) | (0.4 | ) | ||||
Loss related to Venezuela currency devaluation |
| 8.9 | ||||||
Other |
7.8 | 9.7 | ||||||
Changes in operating assets and liabilitiesnet of acquisitions: |
||||||||
Accounts receivablenet |
(29.7 | ) | 1.0 | |||||
Inventories |
(17.1 | ) | 29.0 | |||||
Prepaid expenses and other current assets |
(9.5 | ) | (8.3 | ) | ||||
Accounts payable |
(18.9 | ) | (23.9 | ) | ||||
Income taxes payable and receivable |
12.8 | 8.8 | ||||||
Accrued liabilities and other |
(130.4 | ) | (139.6 | ) | ||||
Net cash (used in) provided by operating activities |
(7.2 | ) | 75.6 | |||||
INVESTING ACTIVITIES |
||||||||
Capital expenditures |
(47.1 | ) | (39.9 | ) | ||||
Acquisition of businesses, net of cash acquired |
(19.6 | ) | | |||||
Proceeds from return of capital and sale of investments and other assets |
2.3 | 0.3 | ||||||
Purchases of investments |
| (23.7 | ) | |||||
Transfers from restricted cash |
0.1 | | ||||||
Net cash used in investing activities |
(64.3 | ) | (63.3 | ) | ||||
FINANCING ACTIVITIES |
||||||||
Net change in short-term debt |
2.0 | (3.8 | ) | |||||
Payments of current maturities and long-term debt |
(0.3 | ) | (0.3 | ) | ||||
Payments of credit facility borrowings |
(10.0 | ) | | |||||
Issuance of common stock |
6.3 | 6.6 | ||||||
Dividends paid |
(53.7 | ) | (53.4 | ) | ||||
Distributions to noncontrolling interests |
(0.7 | ) | (0.7 | ) | ||||
Net cash used in financing activities |
(56.4 | ) | (51.6 | ) | ||||
Effect of exchange rate on cash and cash equivalents |
8.1 | (8.6 | ) | |||||
Net decrease in cash and cash equivalents |
(119.8 | ) | (47.9 | ) | ||||
Cash and cash equivalents at beginning of period |
519.1 | 499.2 | ||||||
Cash and cash equivalents at end of period |
$ | 399.3 | $ | 451.3 | ||||
(See Notes to Condensed Consolidated Financial Statements)
5
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (RR DONNELLEY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Tabular amounts in millions, except per share data, unless otherwise indicated)
1. Basis of Presentation
The accompanying unaudited condensed consolidated interim 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) for interim financial information and in accordance with the rules and regulations of the United States Securities and Exchange Commission (the SEC). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. These unaudited condensed consolidated interim financial statements reflect all normal and recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods and should be read in conjunction with the consolidated financial statements and the related notes thereto included in the Companys latest Annual Report on Form 10-K for the year ended December 31, 2010 filed with the SEC on February 22, 2011. Operating results for the three months ended March 31, 2011 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2011. All significant intercompany transactions have been eliminated in consolidation. These unaudited condensed consolidated interim financial statements include estimates and assumptions of management that affect the amounts reported in the condensed consolidated financial statements. Actual results could differ from these estimates.
2. Acquisitions
2011 Acquisitions
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. 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.
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. For the three months ended March 31, 2011, the Companys Condensed Consolidated Statement of Operations was not impacted by this acquisition.
The Journalism Online acquisition was recorded by allocating the cost of the acquisition to the assets acquired based on their estimated fair values at the acquisition date. The excess of the cost of the acquisition over the net amounts assigned to the fair value of the assets acquired was recorded as goodwill. Based on the valuation, the final purchase price allocation for this 2011 acquisition was as follows:
Property, plant and equipment and other long-term assets |
$ | 1.4 | ||
Goodwill |
18.6 | |||
Accounts payable and accrued liabilities |
(0.4 | ) | ||
Net cash paid |
$ | 19.6 | ||
The fair values of property, plant and equipment and goodwill associated with the acquisition of Journalism Online were determined to be Level 3 under the fair value hierarchy.
2010 Acquisitions
On December 31, 2010, the Company acquired the assets of 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.
6
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (RR DONNELLEY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Tabular amounts in millions, except per share data, unless otherwise indicated)
On December 14, 2010, the Company acquired the assets of 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 subsequently repaid $25.4 million of the debt assumed. Bownes operations are included in both the U.S. Print and Related Services and International segments.
The operations of these acquired businesses are complementary to the Companys existing products and services. As a result, the additions of these businesses are expected to improve the Companys ability to serve customers and reduce management, real estate and manufacturing costs.
The Bowne, Nimblefish and 8touches acquisitions were recorded by allocating the cost of the acquisitions to the assets acquired, including 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, none of which is tax deductible. Based on the valuations, the final purchase price allocations for these 2010 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 long-term assets |
127.3 | |||
Amortizable intangible assets |
159.8 | |||
Goodwill |
257.9 | |||
Accounts payable and accrued liabilities |
(159.7 | ) | ||
Pension benefits and other long-term 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 | ||
Pro forma results
The following unaudited pro forma financial information for the three months ended March 31, 2011 and 2010 presents the combined results of operations of the Company, Journalism Online, Bowne, Nimblefish and 8touches as if the acquisitions had occurred at January 1, 2010.
7
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (RR DONNELLEY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Tabular amounts in millions, except per share data, unless otherwise indicated)
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 period presented and should not be taken as indicative of the Companys future consolidated results of operations or financial condition. Pro forma adjustments are tax-effected at the applicable statutory tax rates.
Three Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
Net sales |
$ | 2,583.6 | $ | 2,593.5 | ||||
Net earnings attributable to RR Donnelley common shareholders |
59.6 | 28.0 | ||||||
Net earnings per share attributable to RR Donnelley common shareholders: |
||||||||
Basic |
$ | 0.29 | $ | 0.14 | ||||
Diluted |
$ | 0.28 | $ | 0.13 | ||||
The unaudited pro forma financial information for the three months ended March 31, 2011 and 2010 includes $28.5 million and $28.9 million, respectively, for the amortization of purchased intangibles. In addition, the unaudited pro forma financial information also includes restructuring and impairment charges from operations of $14.2 million and $51.9 million for the three months ended March 31, 2011 and 2010, respectively. The pro forma adjustments affecting net earnings attributable to RR Donnelley common shareholders for the three months ended March 31, 2011 and 2010 were as follows:
Three Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
Depreciation and amortization of purchased assets, pre-tax |
$ | 1.8 | $ | (1.2 | ) | |||
Acquisition expenses, pre-tax |
0.1 | 2.8 | ||||||
Restructuring and impairment charges, pre-tax |
36.6 | (32.2 | ) | |||||
Inventory fair value adjustment, pre-tax |
3.6 | (5.7 | ) | |||||
Other pro forma adjustments, pre-tax |
0.6 | (1.3 | ) | |||||
Income taxes |
(16.4 | ) | 15.4 |
3. Inventories
March 31, 2011 |
December 31, 2010 |
|||||||
Raw materials and manufacturing supplies |
$ | 256.5 | $ | 259.6 | ||||
Work in process |
204.0 | 184.3 | ||||||
Finished goods |
211.8 | 204.7 | ||||||
LIFO reserve |
(91.0 | ) | (88.0 | ) | ||||
Total |
$ | 581.3 | $ | 560.6 | ||||
8
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (RR DONNELLEY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Tabular amounts in millions, except per share data, unless otherwise indicated)
4. Property, Plant and Equipment
March 31, 2011 |
December 31, 2010 |
|||||||
Land |
$ | 110.3 | $ | 111.4 | ||||
Buildings |
1,210.0 | 1,197.9 | ||||||
Machinery and equipment |
6,142.5 | 6,098.8 | ||||||
Property, plant and equipmentgross cost |
7,462.8 | 7,408.1 | ||||||
Accumulated depreciation |
(5,381.9 | ) | (5,269.4 | ) | ||||
Total |
$ | 2,080.9 | $ | 2,138.7 | ||||
During the three months ended March 31, 2011 and 2010, depreciation expense was $106.2 million and $110.0 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 $6.2 million at March 31, 2011 and $6.5 million at December 31, 2010. These assets were included in other current assets in the Condensed Consolidated Balance Sheets at March 31, 2011 and December 31, 2010 at the lower of their historical net book value or their estimated fair value, less estimated costs to sell.
5. Goodwill and Other Intangible Assets
Goodwill at March 31, 2011 and December 31, 2010 was as follows:
Goodwill |
U.S. Print and Related Services |
International | Total | |||||||||
Net book value at December 31, 2010 |
||||||||||||
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 |
18.6 | | 18.6 | |||||||||
Foreign exchange and other adjustments |
(0.2 | ) | 9.1 | 8.9 | ||||||||
Net book value at March 31, 2011 |
||||||||||||
Goodwill |
3,160.1 | 1,337.9 | 4,498.0 | |||||||||
Accumulated impairment losses |
(939.2 | ) | (1,004.5 | ) | (1,943.7 | ) | ||||||
Total |
$ | 2,220.9 | $ | 333.4 | $ | 2,554.3 | ||||||
9
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (RR DONNELLEY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Tabular amounts in millions, except per share data, unless otherwise indicated)
The components of other intangible assets at March 31, 2011 and December 31, 2010 were as follows:
Other Intangible Assets |
March 31, 2011 | December 31, 2010 | ||||||||||||||||||||||
Gross Carrying Amount |
Accumulated Amortization |
Net Book Value |
Gross Carrying Amount |
Accumulated Amortization |
Net Book Value |
|||||||||||||||||||
Trademarks, licenses and agreements |
$ | 29.2 | $ | (23.3 | ) | $ | 5.9 | $ | 25.7 | $ | (23.0 | ) | $ | 2.7 | ||||||||||
Patents |
98.3 | (86.6 | ) | 11.7 | 98.3 | (83.6 | ) | 14.7 | ||||||||||||||||
Customer relationship intangibles |
1,254.9 | (551.3 | ) | 703.6 | 1,244.3 | (519.8 | ) | 724.5 | ||||||||||||||||
Trade names |
22.8 | (8.2 | ) | 14.6 | 22.7 | (7.7 | ) | 15.0 | ||||||||||||||||
Total amortizable purchased intangible assets |
1,405.2 | (669.4 | ) | 735.8 | 1,391.0 | (634.1 | ) | 756.9 | ||||||||||||||||
Indefinite-lived trade names |
18.1 | | 18.1 | 18.1 | | 18.1 | ||||||||||||||||||
Total purchased intangible assets |
$ | 1,423.3 | $ | (669.4 | ) | $ | 753.9 | $ | 1,409.1 | $ | (634.1 | ) | $ | 775.0 | ||||||||||
Amortization expense for other intangible assets was $28.5 million and $24.7 million for the three months ended March 31, 2011 and 2010, respectively. The estimated annual amortization expense related to intangible assets as of March 31, 2011 is as follows:
Amount | ||||
For the year ending December 31, |
||||
2011 |
$ | 113.8 | ||
2012 |
100.7 | |||
2013 |
98.0 | |||
2014 |
95.6 | |||
2015 |
88.1 | |||
2016 and thereafter |
268.1 | |||
Total |
$ | 764.3 | ||
6. Restructuring and Impairment Charges
Restructuring and Impairment Costs Charged to Results of Operations
For the three months ended March 31, 2011 and 2010, the Company recorded the following net restructuring and impairment charges:
March 31, 2011 | March 31, 2010 | |||||||||||||||||||||||||||||||
Employee Terminations |
Other Charges |
Impairment | Total | Employee Terminations |
Other Charges |
Impairment | Total | |||||||||||||||||||||||||
U.S. Print and Related Services |
$ | 14.8 | $ | 16.5 | $ | 6.9 | $ | 38.2 | $ | 2.9 | $ | 2.0 | $ | 1.0 | $ | 5.9 | ||||||||||||||||
International |
7.9 | 0.8 | 0.5 | 9.2 | 6.4 | 3.1 | | 9.5 | ||||||||||||||||||||||||
Corporate |
2.1 | 0.6 | 0.7 | 3.4 | (0.1 | ) | 0.2 | | 0.1 | |||||||||||||||||||||||
$ | 24.8 | $ | 17.9 | $ | 8.1 | $ | 50.8 | $ | 9.2 | $ | 5.3 | $ | 1.0 | $ | 15.5 | |||||||||||||||||
For the three months ended March 31, 2011, the Company recorded net restructuring charges of $24.8 million for employee termination costs for 709 employees, of whom 436 were terminated as of March 31, 2011,
10
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (RR DONNELLEY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Tabular amounts in millions, except per share data, unless otherwise indicated)
associated with actions resulting from the reorganization of certain operations. These charges primarily related to the closings of certain facilities and headcount reductions due to the Bowne acquisition. In addition, these charges included the announced closing of one book and directories manufacturing facility within the U.S. Print and Related Services segment. Additionally, the Company incurred other restructuring charges, including lease termination and other facility closure costs of $17.9 million for the three months ended March 31, 2011. For the three months ended March 31, 2011, the Company also recorded $8.1 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.
For the three months ended March 31, 2010, the Company recorded net restructuring charges of $9.2 million for employee termination costs for 504 employees, all of whom were terminated as of March 31, 2011, associated with the actions resulting from the reorganization of certain operations. These charges primarily related to the reorganization of certain operations within the business process outsourcing and Latin America reporting units within the International segment, as well as the continuing charges resulting from the closing of two Global Turnkey Solutions manufacturing facilities in 2009 within the International segment. Additionally, the Company incurred other restructuring charges, including lease termination and other facility closure costs of $5.3 million for the three months ended March 31, 2010. For the three months ended March 31, 2010, the Company also recorded $1.0 million of impairment charges primarily for machinery and equipment associated with the facility closings. The fair values of the machinery and equipment were determined to be Level 3 under the fair value hierarchy and were estimated based on discussions with machinery and equipment brokers, dealer quotes, internal expertise related to equipment and current marketplace conditions.
Restructuring Reserve
Activity impacting the Companys restructuring reserve for the three months ended March 31, 2011 is as follows:
December 31, 2010 |
Restructuring Costs Charged to Results of Operations |
Foreign Exchange and Other |
Cash Paid |
March 31, 2011 |
||||||||||||||||
Employee terminations |
$ | 11.2 | $ | 24.8 | $ | 0.3 | $ | (10.4 | ) | $ | 25.9 | |||||||||
Other |
42.8 | 17.9 | (1.7 | ) | (14.3 | ) | 44.7 | |||||||||||||
Total |
$ | 54.0 | $ | 42.7 | $ | (1.4 | ) | $ | (24.7 | ) | $ | 70.6 | ||||||||
The current portion of restructuring reserves of $43.8 million was included in accrued liabilities at March 31, 2011, while the long-term portion of $26.8 million, primarily related to multi-employer pension plan withdrawal charges and lease termination costs, was included in other noncurrent liabilities at March 31, 2011.
The Company anticipates that payments associated with the employee terminations reflected in the above table will be substantially completed by March of 2012.
As of March 31, 2011, the restructuring liabilities classified as other consist of multi-employer pension plan partial withdrawal charges, lease termination costs and other facility closing costs. Payments on certain of these lease obligations are scheduled to continue until 2017. Market conditions and the Companys ability to sublease these properties could affect the ultimate charge related to these lease obligations. Any potential recoveries or additional charges could affect amounts reported in the Consolidated Financial Statements of future periods.
11
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (RR DONNELLEY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Tabular amounts in millions, except per share data, unless otherwise indicated)
7. Employee Benefits
The components of the estimated pension and postretirement benefits expense for the three months ended March 31, 2011 and 2010 were as follows:
Three Months Ended March 31, |
||||||||
2011 | 2010 | |||||||
Pension expense |
||||||||
Service cost |
$ | 21.3 | $ | 20.1 | ||||
Interest cost |
48.1 | 46.0 | ||||||
Expected return on assets |
(67.1 | ) | (64.5 | ) | ||||
Amortization, net |
12.2 | 6.3 | ||||||
Net pension expense |
$ | 14.5 | $ | 7.9 | ||||
Postretirement benefits expense |
||||||||
Service cost |
$ | 2.3 | $ | 3.1 | ||||
Interest cost |
6.2 | 7.1 | ||||||
Expected return on assets |
(3.8 | ) | (3.9 | ) | ||||
Amortization, net |
(1.2 | ) | (2.4 | ) | ||||
Net postretirement benefits expense |
$ | 3.5 | $ | 3.9 | ||||
8. Share-Based Compensation
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 and restricted stock units. The total compensation expense related to all share-based compensation plans was $6.5 million and $8.2 million for the three months ended March 31, 2011 and 2010, respectively.
Stock Options
The Company granted 200,000 and 540,000 stock options during the three months ended March 31, 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 fair market value of the stock options was determined using the following assumptions:
2011 | 2010 | |||||||
Expected volatility |
36.69 | % | 35.61 | % | ||||
Risk-free interest rate |
2.54 | % | 2.75 | % | ||||
Expected life (years) |
6.25 | 6.25 | ||||||
Expected dividend yield |
4.57 | % | 4.19 | % |
The grant date fair market value of options granted was $4.39 and $4.81 for the three months ended March 31, 2011 and 2010, respectively.
12
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (RR DONNELLEY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Tabular amounts in millions, except per share data, unless otherwise indicated)
The following table is a summary of the Companys 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, 2010 |
4,155 | $ | 20.80 | 6.3 | $ | 14.4 | ||||||||||
Granted |
200 | 18.62 | 9.9 | |||||||||||||
Exercised |
(96 | ) | 8.06 | |||||||||||||
Cancelled/forfeited/expired |
(183 | ) | 25.19 | |||||||||||||
Outstanding at March 31, 2011 |
4,076 | $ | 20.73 | 6.5 | $ | 15.6 | ||||||||||
Exercisable at March 31, 2011 |
1,076 | $ | 11.58 | 5.5 | $ | 7.9 |
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Companys closing stock price on March 31, 2011 and December 31, 2010, 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 options on March 31, 2011 and December 31, 2010. 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 three months ended March 31, 2011 and 2010 was $1.0 million and $2.0 million, respectively.
Compensation expense recognized related to stock options for the three months ended March 31, 2011 and 2010 was $0.8 million and $0.7 million, respectively. As of March 31, 2011, $4.8 million of total unrecognized share-based compensation expense related to stock options is expected to be recognized over a weighted average period of 2.5 years.
Restricted Stock Units
Nonvested restricted stock unit awards as of March 31, 2011 and December 31, 2010, and changes during the three months ended March 31, 2011, were as follows:
Shares (Thousands) |
Weighted Average Grant Date Fair Value |
|||||||
Nonvested at December 31, 2010 |
5,430 | $ | 12.96 | |||||
Granted |
1,426 | 16.06 | ||||||
Vested |
(1,599 | ) | 12.16 | |||||
Forfeited |
(9 | ) | 11.85 | |||||
Nonvested at March 31, 2011 |
5,248 | $ | 14.05 | |||||
Compensation expense recognized related to restricted stock units for the three months ended March 31, 2011 and 2010 was $5.4 million and $7.5 million, respectively. As of March 31, 2011, there was $45.0 million of unrecognized share-based compensation expense related to nonvested restricted stock unit awards. That cost is expected to be recognized over a weighted-average period of 2.6 years. As of March 31, 2011, approximately 5.2 million restricted stock unit awards, with a weighted-average grant date fair market value of $14.05, are expected to vest over a weighted-average period of 2.6 years.
13
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (RR DONNELLEY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Tabular amounts in millions, except per share data, unless otherwise indicated)
Performance Share Units
For the three months ended March 31, 2011, a total of 235,000 performance share unit awards were granted to certain executive officers, payable upon the achievement of certain established performance targets for the three years ending December 31, 2013. Distributions under these awards are payable at the end of the performance period, which is January 1, 2011 through December 31, 2013, in common stock or cash, at the Companys discretion. The total potential payouts range from 117,500 shares to 235,000 shares should certain performance targets be achieved. 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.
Compensation expense is currently being recognized based on an estimated payout of 235,000 shares. Compensation expense recognized related to performance share unit awards for the three months ended March 31, 2011 was $0.3 million. As of March 31, 2011, there was $3.4 million of unrecognized share-based compensation expense related to performance share unit awards. The cost is expected to be recognized over a period of 2.8 years.
Other Information
On May 3, 2011, the Board of Directors of the Company approved a program authorizing the repurchase of up to $1.0 billion of the Companys common stock through December 31, 2012. In conjunction with this program, the Company terminated its existing authorization for the repurchase of up to 10 million shares of the Companys common stock. See Note 18 for further discussion.
9. Earnings per Share Attributable to RR Donnelley Common Shareholders
Three Months Ended March 31, |
||||||||
2011 | 2010 | |||||||
Numerator: |
||||||||
Net earnings attributable to RR Donnelley common shareholders |
$ | 33.9 | $ | 52.6 | ||||
Denominator: |
||||||||
Weighted average number of common shares outstanding |
207.2 | 205.6 | ||||||
Dilutive options and awards (a) |
2.6 | 3.4 | ||||||
Diluted weighted average number of common shares outstanding |
209.8 | 209.0 | ||||||
Net earnings per share attributable to RR Donnelley common shareholders: |
||||||||
Basic |
$ | 0.16 | $ | 0.26 | ||||
Diluted |
$ | 0.16 | $ | 0.25 | ||||
Cash dividends paid per common share |
$ | 0.26 | $ | 0.26 |
(a) | Diluted net earnings per share attributable to RR Donnelley common shareholders takes into consideration the dilution of certain unvested restricted stock awards and unexercised stock option awards. For the three months ended March 31, 2011 and 2010, restricted stock units of 3.4 million and 3.1 million, respectively, |
14
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (RR DONNELLEY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Tabular amounts in millions, except per share data, unless otherwise indicated)
were excluded as their effect would be anti-dilutive. For the three months ended March 31, 2011 and 2010, options to purchase 3.6 million shares and 3.5 million shares, respectively, were anti-dilutive because the option exercise price exceeded the fair value of the stock. |
10. Comprehensive Income (Loss)
Three Months Ended March 31, |
||||||||
2011 | 2010 | |||||||
Net earnings |
$ | 34.3 | $ | 48.7 | ||||
Translation adjustments |
26.1 | (6.4 | ) | |||||
Adjustment for net periodic pension and postretirement benefit cost, net of tax |
6.7 | 2.4 | ||||||
Change in fair value of derivatives, net of tax |
0.1 | 0.1 | ||||||
Comprehensive income |
67.2 | 44.8 | ||||||
Less: comprehensive income (loss) attributable to noncontrolling interests |
0.4 | (4.0 | ) | |||||
Comprehensive income attributable to RR Donnelley common shareholders |
$ | 66.8 | $ | 48.8 | ||||
For the three months ended March 31, 2011, the changes in other comprehensive income were net of tax provisions of $0.1 million related to the change in fair value of derivatives and $4.2 million for the adjustment for net periodic pension and postretirement benefit cost. For the three months ended March 31, 2010, the changes in other comprehensive income were net of tax provisions of $0.1 million related to the change in the fair value of derivatives and $1.4 million for the adjustment for net periodic pension and postretirement expense.
11. Equity
The following table summarizes the Companys equity activity for the three months ended March 31, 2011:
RR Donnelley Shareholders Equity |
Noncontrolling Interests |
Total Equity | ||||||||||
Balance at December 31, 2010 |
$ | 2,224.3 | $ | 21.1 | $ | 2,245.4 | ||||||
Net earnings |
33.9 | 0.4 | 34.3 | |||||||||
Other comprehensive income |
32.9 | | 32.9 | |||||||||
Share-based compensation |
6.2 | | 6.2 | |||||||||
Withholdings for share-based awards and other |
(5.5 | ) | | (5.5 | ) | |||||||
Cash dividends paid |
(53.7 | ) | | (53.7 | ) | |||||||
Distributions to noncontrolling interests |
| (1.9 | ) | (1.9 | ) | |||||||
Balance at March 31, 2011 |
$ | 2,238.1 | $ | 19.6 | $ | 2,257.7 | ||||||
15
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (RR DONNELLEY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Tabular amounts in millions, except per share data, unless otherwise indicated)
The following table summarizes the Companys equity activity for the three months ended March 31, 2010:
RR Donnelley Shareholders Equity |
Noncontrolling Interests |
Total Equity | ||||||||||
Balance at December 31, 2009 |
$ | 2,134.0 | $ | 27.0 | $ | 2,161.0 | ||||||
Net earnings (loss) |
52.6 | (3.9 | ) | 48.7 | ||||||||
Other comprehensive loss |
(3.8 | ) | (0.1 | ) | (3.9 | ) | ||||||
Share-based compensation |
8.2 | | 8.2 | |||||||||
Withholdings for share-based awards and other |
(1.8 | ) | | (1.8 | ) | |||||||
Cash dividends paid |
(53.4 | ) | | (53.4 | ) | |||||||
Distributions to noncontrolling interests |
| (0.7 | ) | (0.7 | ) | |||||||
Balance at March 31, 2010 |
$ | 2,135.8 | $ | 22.3 | $ | 2,158.1 | ||||||
12. Segment Information
The Company operates primarily in the printing industry, with related 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 products 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 related logistics, premedia and print-management services. This segments products and related service offerings include magazines, catalogs, retail inserts, books, directories, financial printing and related services, direct mail, forms, labels, office products, statement printing, premedia and logistics services.
International
The International segment includes the Companys non-U.S. printing operations in Asia, Europe, Latin America and Canada. This segments products and related service offerings include magazines, catalogs, retail inserts, books, directories, financial printing and related services, direct mail, forms, labels, 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
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
16
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (RR DONNELLEY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Tabular amounts in millions, except per share data, unless otherwise indicated)
inventory provisions. In addition, certain costs and earnings of employee benefit plans, primarily components of net pension and postretirement benefits expense other than service cost, are included in Corporate and not allocated to operating segments. In addition, 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 Condensed Consolidated Financial Statements.
Total Sales | Intersegment Sales |
Net Sales |
Income
(Loss) from Operations |
Assets
of Operations |
Depreciation and Amortization |
Capital Expenditures |
||||||||||||||||||||||
Three months ended March 31, 2011 |
||||||||||||||||||||||||||||
U.S. Print and Related Services |
$ | 1,958.6 | $ | (17.5 | ) | $ | 1,941.1 | $ | 141.9 | $ | 6,441.5 | $ | 99.9 | $ | 17.3 | |||||||||||||
International |
661.1 | (18.7 | ) | 642.4 | 44.1 | 2,536.0 | 30.4 | 25.8 | ||||||||||||||||||||
Total operating segments |
2,619.7 | (36.2 | ) | 2,583.5 | 186.0 | 8,977.5 | 130.3 | 43.1 | ||||||||||||||||||||
Corporate |
| | | (76.6 | ) | (11.1 | ) | 9.9 | 4.0 | |||||||||||||||||||
Total operations |
$ | 2,619.7 | $ | (36.2 | ) | $ | 2,583.5 | $ | 109.4 | $ | 8,966.4 | $ | 140.2 | $ | 47.1 | |||||||||||||
Three months ended March 31, 2010 |
||||||||||||||||||||||||||||
U.S. Print and Related Services |
$ | 1,842.3 | $ | (5.5 | ) | $ | 1,836.8 | $ | 163.8 | $ | 6,233.0 | $ | 101.0 | $ | 26.1 | |||||||||||||
International |
590.4 | (12.1 | ) | 578.3 | 33.7 | 2,156.2 | 29.7 | 12.4 | ||||||||||||||||||||
Total operating segments |
2,432.7 | (17.6 | ) | 2,415.1 | 197.5 | 8,389.2 | 130.7 | 38.5 | ||||||||||||||||||||
Corporate |
| | | (51.7 | ) | 181.3 | 7.9 | 1.4 | ||||||||||||||||||||
Total operations |
$ | 2,432.7 | $ | (17.6 | ) | $ | 2,415.1 | $ | 145.8 | $ | 8,570.5 | $ | 138.6 | $ | 39.9 | |||||||||||||
13. Commitments and Contingencies
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 not discounted. The Company has been designated as a potentially responsible party in fifteen federal and state Superfund sites. In addition to the Superfund sites, the Company may also have the obligation to remediate seven other previously owned facilities and three other 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 Superfund sites and of other liable parties at the previously owned facilities has been considered, where 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 Superfund sites and the previously and currently owned facilities. While it is not possible to quantify with certainty the potential impact of actions
17
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (RR DONNELLEY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Tabular amounts in millions, except per share data, unless otherwise indicated)
regarding environmental matters, particularly remediation and other compliance efforts that the Company may undertake in the future, 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 adverse effect on the Companys consolidated annual 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 adverse effect on the Companys consolidated annual results of operations, financial position or cash flows.
14. Debt
The Companys debt consists of the following:
March 31, 2011 |
December 31, 2010 |
|||||||
Credit facility borrowings |
$ | 110.0 | $ | 120.0 | ||||
5.625% senior notes due January 15, 2012 |
158.6 | 158.6 | ||||||
4.95% senior notes due April 1, 2014 |
599.3 | 599.2 | ||||||
5.50% senior notes due May 15, 2015 |
499.7 | 499.6 | ||||||
8.60% senior notes due August 15, 2016 |
346.2 | 346.0 | ||||||
6.125% senior notes due January 15, 2017 |
622.1 | 622.0 | ||||||
11.25% senior notes due February 1, 2019 |
400.0 | 400.0 | ||||||
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 |
199.3 | 199.3 | ||||||
8.820% debentures due April 15, 2031 |
69.0 | 68.9 | ||||||
Other, including capital leases |
33.1 | 35.5 | ||||||
Total debt |
3,518.2 | 3,530.0 | ||||||
Less: current portion |
(281.8 | ) | (131.4 | ) | ||||
Long-term debt |
$ | 3,236.4 | $ | 3,398.6 | ||||
The fair values of the senior notes and debentures, which were based upon the 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 greater than its book value by approximately $312.6 million and $259.3 million at March 31, 2011 and December 31, 2010, respectively.
Interest income was $2.6 million and $1.9 million for the three months ended March 31, 2011 and 2010, respectively.
15. Derivatives
All derivatives are recorded as other current or noncurrent assets or other current or noncurrent liabilities on the Condensed 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
18
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (RR DONNELLEY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Tabular amounts in millions, except per share data, unless otherwise indicated)
Condensed Consolidated Statements 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 Condensed 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 Condensed 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 Condensed 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 most 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 operating unit, the Company is exposed to currency risk. Periodically, the Company uses foreign exchange forward contracts and cross-currency swaps to hedge exposures resulting from foreign exchange fluctuations. Accordingly, the implied gains and losses associated with the fair values of foreign currency exchange contracts and cross-currency swaps 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 receivables 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 Condensed 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 March 31, 2011 and December 31, 2010 was $129.2 million and $100.9 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 April 9, 2010, the Company entered into interest rate swap agreements to manage interest rate risk exposure. The interest rate swap agreements effectively changed the interest rate on $600 million of its fixed-rate senior notes to floating rate LIBOR plus a basis point spread. These interest rate swaps, with a notional value of $600 million, 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. 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 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. The fair values of the interest rate swaps were determined to be Level 2 under the fair value hierarchy and are valued using market interest rates.
19
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (RR DONNELLEY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Tabular amounts in millions, except per share data, unless otherwise indicated)
At March 31, 2011 and December 31, 2010, the total fair value of the Companys forward contracts, which were the only derivatives not designated as hedges, and fair value hedges and the accounts in the Condensed Consolidated Balance Sheets in which the fair value amounts are included are shown below:
March 31, 2011 | December 31, 2010 | |||||||
Derivatives not designated as hedges |
||||||||
Prepaid expenses and other current assets |
$ | 0.1 | $ | 0.5 | ||||
Accrued liabilities |
0.2 | 0.3 | ||||||
Derivatives designated as fair value hedges |
||||||||
Other noncurrent assets |
$ | 12.9 | $ | 16.8 |
The pre-tax gains related to derivatives not designated as hedges recognized in the Condensed Consolidated Statements of Operations for the three months ended March 31, 2011 and 2010 are shown in the table below:
Classification of Gain Recognized in
the |
Three months ended March 31, | |||||||||
2011 | 2010 | |||||||||
Derivatives not designated as hedges |
||||||||||
Foreign exchange forward contracts |
Selling, general and administrative expenses | $ | 1.6 | $ | 4.1 | |||||
Total gain recognized in the condensed consolidated statements of operations |
$ | 1.6 | $ | 4.1 | ||||||
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 or loss on the related interest rate swaps for the three months ended March 31, 2011 and 2010 are shown in the table below:
Classification of Gain (Loss) Recognized in
the |
Three months ended March 31, | |||||||||
2011 | 2010 | |||||||||
Fair Value Hedges |
||||||||||
Interest rate swaps |
Investment and other expense | $ | (3.9 | ) | $ | | ||||
Hedged items |
Investment and other expense | 4.1 | | |||||||
Total gain recognized as ineffectiveness in the condensed consolidated statements of operations |
Investment and other expense | $ | 0.2 | $ | | |||||
The pre-tax losses related to derivatives designated as cash flow hedges for the three months ended March 31, 2011 and 2010 are shown in the table below:
Gain (Loss) Recognized in OCI (Effective Portion) |
Classification of
Loss |
Loss Reclassified from AOCI into Income (Effective Portion) |
Classification of |
Gain (Loss) Recognized in Income (Ineffective Portion) |
||||||||||||||||||||||||
2011 | 2010 | 2011 | 2010 | 2011 | 2010 | |||||||||||||||||||||||
Cash Flow Hedges |
||||||||||||||||||||||||||||
Interest rate lock |
$ | | $ | | Interest expensenet | $ | (0.2 | ) | $ | (0.2 | ) | Interest expensenet | $ | | $ | | ||||||||||||
Total loss |
$ | | $ | | $ | (0.2 | ) | $ | (0.2 | ) | $ | | $ | | ||||||||||||||
20
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (RR DONNELLEY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Tabular amounts in millions, except per share data, unless otherwise indicated)
Terminated Derivatives
In May 2005, the Company terminated its interest rate lock agreements which were designated as cash flow hedges and used to hedge against fluctuations in interest rates. This termination resulted in a loss of $12.9 million recorded in accumulated other comprehensive loss, which was being recognized in interest expense over the term of the hedged forecasted interest payments. During the third quarter of 2009, the Company repurchased $174.2 million of the 4.95% senior notes due May 15, 2010 which were hedged as part of the interest rate lock agreements. A pre-tax loss of $2.7 million was reclassified from accumulated other comprehensive loss as a result of the change in expected forecasted interest payments for the senior notes due May 15, 2010. At March 31, 2011, a balance of $2.1 million remained in accumulated other comprehensive loss, of which $0.4 million is expected to be reclassified to earnings over the next twelve months.
16. 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 plan assets, foreign exchange forward contracts and interest rate swaps. See Note 15 for further discussion on the fair value of the Companys foreign exchange forward contracts and interest rate swaps as of March 31, 2011 and December 31, 2010.
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 impairment charges. See Note 2 for further discussion on the fair value of assets and liabilities associated with acquisitions. There have been no significant impairment charges since December 31, 2010.
See Note 14 for the fair value of the Companys debt.
17. New Accounting Pronouncements
In January 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2010-06 Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements (ASU 2010-06), which requires additional disclosures regarding transfers between Levels 1, 2 and 3 of the fair value hierarchy, as well as a more detailed reconciliation of recurring Level 3 measurements. Certain aspects of ASU 2010-06 were effective and adopted by the Company in the first quarter of 2010, with the remaining requirements effective and adopted by the Company in the first quarter of 2011. The adoption of ASU 2010-06 only required additional disclosures and did not have a material impact on the Companys consolidated financial position, annual results of operations or cash flows.
In July 2010, the FASB issued Accounting Standards Update No. 2010-20 Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses (ASU 2010-20), which amends existing disclosure requirements and requires additional quantitative and qualitative disclosures concerning financing receivables, credit risk exposures and the allowance for credit losses. Certain aspects of ASU 2010-20 were effective and adopted by the Company in the fourth quarter of 2010, with the remaining requirements effective and adopted by the Company in the first quarter of 2011. The adoption of ASU 2010-20 only required additional disclosures and did not have a material impact on the Companys consolidated financial position, annual results of operations or cash flows.
In December 2010, the FASB issued Accounting Standards Update No. 2010-29 Business Combinations (Topic 805): Disclosures of Supplementary Pro Forma Information for Business Combinations (ASU 2010-29),
21
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES (RR DONNELLEY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Tabular amounts in millions, except per share data, unless otherwise indicated)
which specifies that pro forma disclosures should be reported as if the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period and the pro forma disclosures must include a description of material, nonrecurring pro forma adjustments. ASU 2010-29 was effective and adopted by the Company in the first quarter of 2011. The adoption of ASU 2010-29 only impacted the Companys disclosures and did not have a material impact on the Companys consolidated financial position, annual results of operations or cash flows.
Note 18. Subsequent Events
On May 3, 2011, the Board of Directors of the Company approved a program that authorizes the repurchase of up to $1.0 billion of the Companys common stock through December 31, 2012. Share repurchases under the program may be made from time to time through a variety of methods as determined by the Companys management. The repurchase authorizations do not obligate the Company to acquire any particular amount of common stock or adopt any particular method of repurchase and may be modified, suspended or terminated at any time at the Companys discretion. The Company terminated its existing authorization of October 29, 2008 for the repurchase of up to 10 million shares of the Companys common stock.
As part of this program, the Company intends to enter into an accelerated share repurchase agreement (ASR) with an investment bank under which the Company will repurchase $500 million of its common stock, subject to adjustment. The Company expects to pay the $500 million purchase price and to receive an initial delivery of shares from the investment bank shortly after entering into the ASR. The total number of shares to be repurchased under the ASR will be determined based upon the volume weighted average price of the Companys common stock (subject to any discount or premium agreed upon with the investment bank) over an averaging period, which is expected to end around the end of the year. The investment bank will deliver any remaining shares to the Company shortly after the end of the averaging period.
The ASR will be accounted for as an initial stock purchase transaction and a forward stock purchase contract. The initial delivery of shares will result in an immediate reduction of the outstanding shares used to calculate the weighted-average common shares outstanding for basic and diluted net income per share from the effective date of the agreement. The forward stock purchase contract will be classified as an equity instrument.
22
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
Company Overview
R.R. Donnelley & Sons Company (RR Donnelley, the Company, we,, us, and our) is a global provider of integrated communications. Founded more than 146 years ago, the Company works collaboratively with more than 60,000 customers worldwide to develop custom communications solutions that reduce costs, 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 products and services to leading clients in virtually every private and public sector.
Business acquisitions
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 operations are included in the U.S. Print and Related Services segment.
On December 31, 2010, the Company acquired the assets of 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. 8touches operations are included in the U.S. Print and Related Services segment.
On December 14, 2010, the Company acquired the assets of Nimblefish Technologies (Nimblefish), a provider of multi-channel marketing services to leading retail, technology, telecommunications, hospitality and other customers. 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. Bownes operations are included in both the U.S. Print and Related Services and International segments.
Segment descriptions
The Company operates primarily in the commercial print portion of the printing industry, with related product and service offerings designed to offer customers complete solutions for communicating their messages to target audiences. The Companys segments and their products 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 related logistics, premedia and print management services. This segments products and related service offerings include magazines, catalogs, retail inserts, books, directories, financial printing and related services, direct mail, forms, labels, office products, statement printing, premedia and logistics services.
International
The International segment includes the Companys non-U.S. printing operations in Asia, Europe, Latin America and Canada. This segments products and related service offerings include magazines, catalogs, retail inserts, books, directories, financial printing and related services, direct mail, forms, labels, 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
23
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
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, primarily components of net pension and postretirement benefits expense other than service cost, are included in Corporate and not allocated to operating segments.
Executive Summary
Financial Performance: Three Months Ended March 31, 2011
The changes in the Companys income from operations, operating margin, net earnings attributable to RR Donnelley common shareholders and net earnings attributable to RR Donnelley common shareholders per diluted share for the three months ended March 31, 2011, from the three months ended March 31, 2010, were due primarily to the following (in millions, except margin and per share data):
Income from Operations |
Operating Margin |
Net Earnings Attributable to RR Donnelley Common Shareholders |
Net Earnings Attributable to RR Donnelley Common Shareholders Per Diluted Share |
|||||||||||||
For the three months ended March 31, 2010 |
$ | 145.8 | 6.0 | % | $ | 52.6 | $ | 0.25 | ||||||||
2011 restructuring and impairment charges |
(50.8 | ) | (2.0 | %) | (34.3 | ) | (0.17 | ) | ||||||||
2010 restructuring and impairment charges |
15.5 | 0.6 | % | 10.6 | 0.05 | |||||||||||
Acquisition-related expenses |
1.6 | 0.1 | % | 1.4 | 0.01 | |||||||||||
2010 Venezuela devaluation |
| | 4.5 | 0.02 | ||||||||||||
Operations |
(2.7 | ) | (0.5 | %) | (0.9 | ) | | |||||||||
For the three months ended March 31, 2011 |
$ | 109.4 | 4.2 | % | $ | 33.9 | $ | 0.16 | ||||||||
2011 pre-tax restructuring and impairment charges: included charges of $24.8 million for employee termination costs, substantially all of which were associated with restructuring actions resulting from the reorganization of certain operations; $17.9 million of other restructuring costs, primarily lease termination costs; and $8.1 million for impairment of long-lived assets. The majority of the restructuring and impairment charges related to the closings of certain facilities and headcount reductions due to the Bowne acquisition.
2010 pre-tax restructuring and impairment charges: included charges of $9.2 million for employee termination costs, substantially all of which were associated with restructuring actions resulting from the reorganization of certain operations and the exiting of certain business activities; $5.3 million of other restructuring costs; and $1.0 million for impairment of long-lived assets.
Acquisition-related expenses: included pre-tax charges of $0.4 million ($0.4 million after-tax) related to legal, accounting and other expenses for the three months ended March 31, 2011 associated with acquisitions completed. For the three months ended March 31, 2010, these pre-tax charges were $2.0 million ($1.8 million after-tax).
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.
24
Operations: reflected higher pension and other benefits-related expenses and continued price pressures, which was partially offset by higher volume in the International segment as well as higher print and other logistics services volumes and capital market transactions and cost savings from restructuring actions and productivity efforts. See further details in the review of operating results by segment that follows below.
First quarter overview
During the first quarter of 2011, the Companys net sales benefited from the acquisition of Bowne. On a consolidated basis, the Companys net sales increased $168.4 million, or approximately 7.0%, from the first quarter of 2010. However, pro forma for acquisitions, net sales declined approximately 0.4% (See Note 2 to the Condensed Consolidated Financial Statements). The pro forma net sales decline was primarily attributable to the one-time production and distribution of materials for the U.S. Census in the first quarter of 2010, along with continued price pressure and reductions in pass-through paper sales in directories. This decrease was mostly offset by increased business internationally, particularly in Asia, Europe and Latin America, as well as higher print and other logistics services volumes and capital market transactions. Lastly, changes in foreign exchange rates increased net sales $15.4 million, or 0.6%.
The Company also made significant progress in the integration of Bowne during the first quarter. Restructuring actions to eliminate duplicate facilities and personnel have been implemented throughout the affected operations. Along with the Companys continuing focus on productivity improvement, these actions are expected to result in significant cost savings.
OUTLOOK
Competition and Strategy
The print and related services industry, in general, continues to have excess capacity and remains highly competitive. Despite some consolidation in recent years, the printing industry remains highly fragmented. Across the Companys range of products and services, competition is based primarily on price, in addition to quality and the ability to service the special needs of customers. Management expects that prices for the Companys products and services will continue to be a focal point for customers in coming years. Therefore, the Company believes it needs to continue to lower its cost structure and differentiate its products and service offerings.
Technological changes, including the electronic distribution of documents and data, online distribution and hosting of media content, advances in digital printing, print-on-demand and Internet technologies, continue to impact the market for the Companys products and services. The Company seeks to leverage the distinctive capabilities of its products and services to improve its customers communications, whether in paper form or through electronic communications. The Companys goal remains to help its customers succeed by delivering effective and targeted communications in the right format to the right audiences at the right time. Management believes that with the Companys competitive strengths, including its broad range of complementary print-related services, strong logistics capabilities, technology leadership, depth of management experience, customer relationships and economies of scale, the Company has developed and can further develop valuable, differentiated solutions for its customers. The Company seeks to leverage its unified platform and strong customer relationships in order to serve a larger share of its customers print and related services needs.
As a substitute for print, the impact of digital technologies has been felt mainly in directories, forms and statement printing, as electronic communication and transaction technology has eliminated or reduced the role of many traditional paper forms. Electronic substitution has continued to accelerate in directory printing in part driven by environmental concerns and cost pressures at key customers. Despite rapid growth in the adoption of e-books, the Company does not believe there has been a significant impact on the volume of print. However, management does expect to see an increasing impact on print book volume as e-book penetration continues to expand. The future impact of technology on the Companys business is difficult to predict and could result in additional expenditures to restructure impacted operations or develop new technologies. In addition, the Company has made targeted acquisitions that offer customers innovative services and solutions and further secure the Companys position as a technology leader in the industry.
25
The Company has implemented a number of strategic initiatives to reduce its overall cost structure and improve efficiency, including the restructuring, reorganization and integration of operations and streamlining of administrative and support activities. Future cost reduction initiatives could include the reorganization of operations and the consolidation of facilities. Implementing such initiatives might result in future restructuring or impairment charges, which may be substantial. Management also reviews the Companys operations and management structure on a regular basis to balance appropriate risks and opportunities to maximize efficiencies and to support the Companys long-term strategic goals. In addition, the integration of Bowne will continue to result in additional restructuring charges.
Seasonality
Advertising and consumer spending trends affect demand in several of the end-markets served by the Company. Historically, demand for printing of magazines, catalogs, retail inserts and books is higher in the second half of the year driven by increased advertising pages within magazines, and holiday catalog, retail insert and book volumes. This typical seasonal pattern can be impacted by overall trends in the U.S. and world economy. The Company expects the seasonality impact in 2011 and future years to be in line with historical patterns.
Raw Materials
The primary raw materials the Company uses in its print businesses are paper and ink. The Company negotiates with leading suppliers to maximize its purchasing efficiencies and uses a wide variety of paper grades, formats, ink formulations and colors. In addition, a substantial amount of paper used by the Company is supplied directly by customers. Variations in the cost and supply of certain paper grades and ink formulations used in the manufacturing process may affect the Companys consolidated financial results. Recent strengthening of economic conditions, combined with paper industry capacity reductions, caused paper prices to increase during the first quarter of 2011, and increases in future years are expected. Generally, customers directly absorb the impact of changing prices on customer-supplied paper. With respect to paper purchased by the Company, the Company has historically passed substantially all increases and decreases through to its customers. Contractual arrangements and industry practice should support the Companys continued ability to pass on any future paper price increases to a large extent, but there is no assurance that market conditions will continue to enable the Company to successfully do so. In addition, management believes that paper supply is consolidating, and there may be shortfalls in the future in supplies necessary to meet the demands of the entire marketplace. Higher paper prices and tight paper supplies may have an impact on customers demand for printed products.
The Company continues to monitor the impact of changes in the price of crude oil and other energy costs, which impacts the Companys ink suppliers, logistics operations and manufacturing costs. Crude oil prices continue to be volatile. The Company believes its logistics operations will continue to be able to pass a substantial portion of any increases in fuel prices directly to its customers in order to offset the impact of related cost increases. The Company generally cannot pass on to customers the impact of higher energy prices on its manufacturing costs. The Company cannot predict sudden changes in energy prices and the impact that possible future energy price increases or decreases might have upon either future operating costs or customer demand and the related impact either will have on the Companys consolidated annual results of operations, financial position or cash flows.
Distribution
The Companys products are distributed to end-users through the U.S. or foreign postal services, through retail channels, electronically or by direct shipment to customer facilities. Through its logistics operations, the Company manages the distribution of most customer products printed by the Company in the U.S. and Canada to maximize efficiency and reduce costs for customers.
26
Postal costs are a significant component of many customers cost structures and postal rate changes can influence the number of pieces that the Companys customers are willing to print and mail. On April 17, 2011, new postage rates went into effect for certain classes of mail in the United States. The new rates increased the cost of mailing these classes of mail by approximately 1.7%, which is the cap under the Postal Accountability and Enhancement Act (the Act). Under the Act, it is anticipated that postage will increase annually by an amount equal to or slightly less than the Consumer Price Index. As a leading provider of print logistics and the largest mailer of standard mail in the U.S., the Company works closely with the U.S. Postal Service and its customers on programs to minimize costs and ensure the viability of postal distribution. While the Company does not directly absorb the impact of higher postal rates on its customers mailings, demand for products distributed through the U.S. or foreign postal services is expected to be impacted by changes in the postal rates. In addition, the Company offers innovative products and services to minimize customers postal costs and has invested in equipment and technology to meet customer demand for these services.
Risks Related to Market Conditions
The Company performs its annual goodwill impairment tests 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. As part of its interim review for indicators of impairment, management analyzed potential changes in value of individual reporting units based on each reporting units operating results for the three months ended March 31, 2011 compared to expected results as of October 31, 2010. In addition, management considered how other key assumptions, including discount rates and expected long-term growth rates, used in the last fiscal years impairment analysis, could be impacted by changes in market conditions and economic events. Based on this interim assessment, management concluded that as of March 31, 2011, 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. Significant change in global economic conditions could result in changes to expectations of future financial results and key valuation assumptions. These changes could result in revisions of managements estimates of the fair value of the Companys reporting units and could result in a review for impairment of goodwill prior to October 31, 2011, the Companys next annual measurement date. Any required interim impairment reviews could result in a material goodwill impairment charge.
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 condensed consolidated financial statements and related notes.
27
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2011 AS COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2010
The following table shows the results of operations for the three months ended March 31, 2011 and 2010:
Three Months Ended March 31, | ||||||||||||||||
2011 | 2010 | $ Change | % Change | |||||||||||||
(in millions) | ||||||||||||||||
Net sales |
||||||||||||||||
Products |
$ | 2,266.4 | $ | 2,170.9 | $ | 95.5 | 4.4 | % | ||||||||
Services |
317.1 | 244.2 | 72.9 | 29.9 | % | |||||||||||
Total net sales |
2,583.5 | 2,415.1 | 168.4 | 7.0 | % | |||||||||||
Products cost of sales (exclusive of depreciation and amortization shown below) |
1,726.8 | 1,660.8 | 66.0 | 4.0 | % | |||||||||||
Services cost of sales (exclusive of depreciation and amortization shown below) |
229.4 | 180.9 | 48.5 | 26.8 | % | |||||||||||
Selling, general and administrative expenses (exclusive of depreciation and amortization shown below) |
326.9 | 273.5 | 53.4 | 19.5 | % | |||||||||||
Restructuring and impairment charges |
50.8 | 15.5 | 35.3 | 227.7 | % | |||||||||||
Depreciation and amortization |
140.2 | 138.6 | 1.6 | 1.2 | % | |||||||||||
Total operating expenses |
2,474.1 | 2,269.3 | 204.8 | 9.0 | % | |||||||||||
Income from operations |
$ | 109.4 | $ | 145.8 | $ | (36.4 | ) | (25.0 | %) |
Consolidated
Net sales of products for the three months ended March 31, 2011 increased $95.5 million, or 4.4%, to $2,266.4 million versus the same period in the prior year. Net sales of products increased due to the acquisition of Bowne, higher volume driven by increased business in Asia, Europe and Latin America and higher capital market transactions. Changes in foreign exchange rates also increased net sales by $14.1 million, or 0.6%. These increases were partially offset by decreases in net sales primarily attributable to the production and distribution of materials for the U.S. Census in the first quarter of 2010, continued price pressure and reductions in pass-through paper sales in directories.
Net sales from services for the three months ended March 31, 2011 increased $72.9 million, or 29.9%, to $317.1 million versus the same period in the prior year. Net sales from services increased due to the acquisition of Bowne, higher logistics volumes driven in part by growth in mail center and commingling services and changes in foreign exchange rates of $1.3 million, or 0.5%.
Products cost of sales increased $66.0 million to $1,726.8 million for the three months ended March 31, 2011 versus the same period in the prior year primarily due to the acquisition of Bowne and increased capital market transactions, partially offset by higher pricing on materials. Products cost of sales as a percentage of products net sales decreased from 76.5% to 76.2%, reflecting continued productivity efforts and a higher recovery on print-related by-products, partially offset by continued price pressures.
Services cost of sales increased $48.5 million to $229.4 million for the three months ended March 31, 2011 versus the same period in the prior year primarily due to the acquisition of Bowne and logistics volume increases. Services cost of sales decreased from 74.1% to 72.3%, reflecting the acquisition of Bowne and continued productivity efforts.
Selling, general and administrative expenses increased $53.4 million to $326.9 million for the three months ended March 31, 2011 versus the same period in the prior year due to the acquisition of Bowne and higher pension and other benefits-related expenses, partially offset by cost savings from restructuring activities. Selling, general and administrative expenses as a percentage of consolidated net sales increased from 11.3% to 12.7%, reflecting the acquisition of Bowne and increased pension and other benefits-related expenses.
28
For the three months ended March 31, 2011, the Company recorded net restructuring and impairment charges of $50.8 million compared to $15.5 million in the same period of 2010. In 2011, these charges included $24.8 million for workforce reductions of 709 employees (of whom 436 were terminated as of March 31, 2011) associated with actions resulting from the reorganization of certain operations. These charges primarily related to the closings of certain facilities and headcount reductions due to the Bowne acquisition. In addition, these charges included the announced closing of one book and directories manufacturing facility within the U.S. Print and Related Services segment. Additionally, the Company incurred other restructuring charges, including lease termination and other facility closure costs, of $17.9 million and $8.1 million of impairment charges primarily for machinery and equipment and leasehold improvements associated with the announced facility closings. Restructuring charges for the three months ended March 31, 2010 included $9.2 million for workforce reductions of 504 employees (all of whom were terminated as of March 31, 2011) associated with actions resulting from the reorganization of certain operations. These charges primarily related to the reorganization of certain operations within the business process outsourcing and Latin America reporting units within the International segment, as well as the continuing charges resulting from the closing of two Global Turnkey Solutions manufacturing facilities in 2009 within the International segment. In addition, the Company recorded $1.0 million of impairment charges of other long-lived assets and $5.3 million of other restructuring costs, including lease termination and other facility closure costs. Management believes that certain restructuring activities will continue throughout the remainder of 2011, as the Company continues to integrate Bowne and streamline its manufacturing, sales and administrative operations.
Depreciation and amortization increased $1.6 million to $140.2 million for the three months ended March 31, 2011 compared to the same period in 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 $28.5 million and $24.7 million of amortization of purchased intangibles related to customer relationships, patents, trade names, licenses and non-compete agreements for the three months ended March 31, 2011 and 2010, respectively.
Income from operations for the three months ended March 31, 2011 was $109.4 million, a decrease of 25.0% compared to the three months ended March 31, 2010. The decrease was primarily driven by the higher restructuring and impairment charges in 2011, continued price pressure and higher pension and other benefits-related expenses, partially offset by higher volume, primarily related to the Bowne acquisition, procurement savings and benefits achieved from restructuring activities.
Net interest expense increased by $2.2 million for the three months ended March 31, 2011 versus the same period in 2010, primarily due to the issuance of $400 million of 7.625% senior notes on June 21, 2010, partially offset by the repayment of $325.7 million of 4.95% senior notes that matured on May 15, 2010.
Net investment and other expense for the three months ended March 31, 2011 and 2010 was an expense of $0.2 million and $9.0 million, respectively. For the three months ended March 31, 2010, the Company recorded an $8.9 million loss related to the devaluation of the Venezuelan currency, of which $3.6 million increased the loss attributable to noncontrolling interests.
The effective income tax rate for the three months ended March 31, 2011 was 33.1% compared to 40.0% in the same period of 2010. The higher effective tax rate in 2010 was primarily due to a $3.3 million charge in the three months ended March 31, 2010 associated with the enactment of the Patient Protection and Affordable Care Act.
Income (loss) attributable to noncontrolling interests was income of $0.4 million for the three months ended March 31, 2011 and a loss of $3.9 million for the three months ended March 31, 2010. The loss in 2010 as compared to income in 2011 primarily reflects the impact of the 2010 currency devaluation in Venezuela.
29
Net earnings attributable to RR Donnelley common shareholders for the three months ended March 31, 2011 was $33.9 million or $0.16 per diluted share compared to $52.6 million or $0.25 per diluted share for the three months ended March 31, 2010. In addition to the factors described above, the per share results reflect an increase in weighted-average diluted shares outstanding of 0.8 million due to higher dilution resulting from the issuance of shares related to the vesting of restricted stock units and exercise of stock options.
U.S. Print and Related Services
The following table summarizes net sales, income from operations and certain items impacting comparability within the U.S. Print and Related Services segment:
Three Months Ended March 31, |
||||||||
2011 | 2010 | |||||||
(in millions) | ||||||||
Net sales |
$ | 1,941.1 | $ | 1,836.8 | ||||
Income from operations |
141.9 | 163.8 | ||||||
Operating margin |
7.3 | % | 8.9 | % | ||||
Restructuring and impairment charges |
38.2 | 5.9 |
For the Three Months Ended March, 31, |
||||||||||||||||
Reporting unit |
2011 | 2010 | $ Change | % Change | ||||||||||||
(in millions) | ||||||||||||||||
Magazines, catalogs and retail inserts |
$ | 458.0 | $ | 454.8 | $ | 3.2 | 0.7 | % | ||||||||
Books and directories |
316.7 | 328.6 | (11.9 | ) | (3.6 | %) | ||||||||||
Variable print |
315.0 | 341.3 | (26.3 | ) | (7.7 | %) | ||||||||||
Financial print |
240.8 | 125.5 | 115.3 | 91.9 | % | |||||||||||
Forms and labels |
199.3 | 206.5 | (7.2 | ) | (3.5 | %) | ||||||||||
Logistics |
161.4 | 136.1 | 25.3 | 18.6 | % | |||||||||||
Commercial |
154.2 | 147.2 | 7.0 | 4.8 | % | |||||||||||
Office products |
57.7 | 59.9 | (2.2 | ) | (3.7 | %) | ||||||||||
Premedia |
38.0 | 36.9 | 1.1 | 3.0 | % | |||||||||||
Total U.S. Print and Related Services |
$ | 1,941.1 | $ | 1,836.8 | $ | 104.3 | 5.7 | % | ||||||||
Net sales for the U.S. Print and Related Services segment for the three months ended March 31, 2011 were $1,941.1 million, an increase of $104.3 million, or 5.7%, compared to the same period in 2010. Net sales increased due to the acquisition of Bowne and higher logistics volumes and capital market transactions. The increases not related to the Bowne acquisition were more than offset by the production and distribution of materials for the U.S. Census in 2010, continued price pressures and lower volume in both books and directories. An analysis of net sales by reporting unit follows:
| Magazines, catalogs and retail inserts: Sales increased due to increases in pass-through paper sales and volume, mostly offset by continued price pressures. |
| Books and directories: Sales decreased primarily as a result of lower volume in both books and directories as well as lower pass-through paper sales in directories. |
| Variable print: Sales decreased as a result of the production and distribution of materials for the U.S. Census in 2010 and lower statement printing volume, partially offset by the acquisition of Bowne and higher direct mailings from financial services customers. |
| Financial print: Sales increased due to the Bowne acquisition, increased capital market transactions and higher investment management and compliance volume. |
30
| Forms and labels: Sales decreased due to continued price pressure on both forms and labels and lower forms volume, partially offset by increased volume in labels. |
| Logistics: Sales increased primarily due to higher print and other logistics services volumes along with growth in mail center and commingling services, as well as higher fuel surcharges. |
| Commercial: Sales increased due to higher volume from new customers, partially offset by increased price pressure. |
| Office products: Sales decreased due to lower volume and unfavorable mix. |
| Premedia: Sales increased due to volume from new customers and higher volume from existing customers, partially offset by lower pricing. |
U.S. Print and Related Services segment income from operations decreased $21.9 million for the three months ended March 31, 2011 mainly driven by higher restructuring and impairment charges and continued price pressures, partially offset by the acquisition of Bowne. Operating margins in the U.S. Print and Related Services segment decreased from 8.9% to 7.3% for the three months ended March 31, 2011, substantially all of which was attributable to higher restructuring and impairment charges.
International
The following table summarizes net sales, income from operations and certain items impacting comparability within the International segment:
Three Months Ended March 31, |
||||||||
2011 | 2010 | |||||||
(in millions) | ||||||||
Net sales |
$ | 642.4 | $ | 578.3 | ||||
Income from operations |
44.1 | 33.7 | ||||||
Operating margin |
6.9 | % | 5.8 | % | ||||
Restructuring and impairment charges |
9.2 | 9.5 |
Net Sales for the Three Months Ended March, 31, |
||||||||||||||||
Reporting unit |
2011 | 2010 | $ Change |
% Change |
||||||||||||
(in millions) | ||||||||||||||||
Asia |
$ | 135.9 | $ | 98.4 | $ | 37.5 | 38.1 | % | ||||||||
Business process outsourcing |
135.0 | 148.3 | (13.3 | ) | (9.0 | %) | ||||||||||
Europe |
114.1 | 95.9 | 18.2 | 19.0 | % | |||||||||||
Latin America |
112.6 | 97.9 | 14.7 | 15.0 | % | |||||||||||
Global Turnkey Solutions |
74.6 | 82.1 | (7.5 | ) | (9.1 | %) | ||||||||||
Canada |
70.2 | 55.7 | 14.5 | 26.0 | % | |||||||||||
Total International |
$ | 642.4 | $ | 578.3 | $ | 64.1 | 11.1 | % | ||||||||
Net sales for the International segment for the three months ended March 31, 2011 were $642.4 million, an increase of $64.1 million, or 11.1%, compared to the same period in 2010. The net sales increase is due to increased business in Asia, Europe and Latin America, the acquisition of Bowne and changes in foreign exchange rates of $15.2 million, or 2.6%. An analysis of net sales by reporting unit follows:
| Asia: Sales increased due to higher volume of books exported to the U.S. and Europe, higher domestic sales of catalogs and retail inserts and increased volume from technology manuals and packaging products, partially offset by continued price pressures. |
31
| Business process outsourcing: Sales decreased due to lower direct mailings, pass-through sales and expiring contracts. |
| Europe: Sales increased due to higher commercial print volume, increased technology manuals and other packaging products volume and the acquisition of Bowne, partially offset by declining prices and lower directory volume. |
| Latin America: Sales increased due to higher commercial print volumes in Argentina, Chile and Mexico, increased sales of books in Brazil and Chile and changes in foreign exchange rates, partially offset by the continued decline in forms volumes in Brazil. |
| Global Turnkey Solutions: Sales decreased due to lower volume from one existing customer and an expiring contract, partially offset by volume increases across the rest of the reporting unit. |
| Canada: Sales increased due to the acquisition of Bowne and changes in foreign exchange rates, partially offset by lower forms volume. |
Income from operations increased $10.4 million primarily due to increased business in Asia, Europe and Latin America and the acquisition of Bowne. Operating margins as a percentage of sales increased from 5.8% to 6.9% for the three months ended March 31, 2011. The increase resulted from higher volumes, partially offset by lower prices.
Corporate
Corporate operating expenses in the three months ended March 31, 2011 were $76.6 million, an increase of $24.9 million compared to the same period in 2010. The increase was driven by higher pension and other benefits-related expenses, an increase in information technology spending, higher restructuring and impairment charges of $3.3 million and the acquisition of Bowne.
LIQUIDITY AND CAPITAL RESOURCES
The following describes the Companys cash flows for the three months ended March 31, 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.
Net cash used in operating activities was $7.2 million for the three months ended March 31, 2011, compared to net cash provided by operating activities of $75.6 million for the same period last year. The decrease in operating cash flow reflects significantly higher incentive compensation payments in the first quarter of 2011 compared to 2010 because the payments in 2010 were under the 2009 incentive compensation plan, which deferred payments over four years. Additionally, the higher incentive compensation payments in 2011 were due to better operating results in 2010 as compared to the results in 2009. The remaining decreases were due to restructuring payments related to the Bowne acquisition and increases in working capital associated with higher financial services and international volumes, partially offset by the $57.5 million payment in January 2010 related to the termination of the long-term customer contract in 2009.
Cash Flows From Investing Activities
Net cash used in investing activities for the three months ended March 31, 2011 was $64.3 million compared to $63.3 million for the three months ended March 31, 2010. Net cash used for the acquisition of Journalism Online in the three months ended March 31, 2011 was $19.6 million. The Company used $12.0 million to purchase a long-term investment and $11.7 million to purchase a short-term deposit during the three
32
months ended March 31, 2010. Capital expenditures were $47.1 million, an increase of $7.2 million compared to the first quarter of 2010. The Company expects that capital expenditures for 2011 will be approximately $250 million to $275 million, compared to $229.4 million in 2010.
Cash Flows From Financing Activities
Net cash used in financing activities for the three months ended March 31, 2011 was $56.4 million compared to $51.6 million in the same period of 2010. Net repayments under the Companys revolving credit agreement (the Credit Agreement) were $10.0 million for the three months ended March 31, 2011. The net change in short-term debt was a cash inflow of $2.0 million during the three months ended March 31, 2011 as compared to a cash outflow of $3.8 million in 2010.
Dividends
On January 13, 2011, the Board of Directors of the Company declared a quarterly cash dividend of $0.26 per common share payable to RR Donnelley shareholders of record on January 28, 2011, and the total amount of $53.7 million was paid on March 1, 2011. On April 7, 2011, the Board of Directors of the Company declared a quarterly cash dividend of $0.26 per common share payable on June 1, 2011 to RR Donnelley shareholders of record on April 22, 2011.
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 are the Companys primary source of liquidity and are expected to be used for, among other things, interest and principal on the Companys debt obligations, capital expenditures as necessary to support productivity improvement and growth, completion of restructuring programs, dividend payments that may be approved by the Board of Directors, additional acquisitions and future common stock or debt repurchases based upon market conditions.
Cash and cash equivalents of $399.3 million as of March 31, 2011 included $54.3 million that were readily available in the U.S. and $345.0 million that were available at international locations, most of which is subject to U.S. federal income taxes and some of which could be subject to local country taxes if repatriated to the U.S. In addition, repatriation of some foreign cash is further restricted by local laws. The Company maintains a cash pooling structure that enables participating international locations to draw on the Companys overseas cash resources to meet local liquidity needs. In addition, foreign cash balances may be loaned to U.S. operating entities on a temporary basis in order to reduce the Companys short-term borrowing costs or for other purposes.
The Company has a $1.75 billion revolving unsecured and committed credit agreement (the Credit Agreement) which expires December 17, 2013, subject to a possible one-year extension if agreed to by the lending financial institutions. Borrowings under the Credit Agreement bear interest at a rate dependent on the Companys credit ratings at the time of borrowing and will be calculated according to a base or Eurocurrency rate plus an applicable margin. The Company pays annual commitment fees at rates dependent on the Companys credit ratings. The Credit Agreement can be used for general corporate purposes, including letters of credit and as a backstop for the issuance of commercial paper. The Credit Agreement is subject to a number of financial covenants that, in part, may limit the use of proceeds, and the ability of the Company to create liens on assets, incur subsidiary debt, engage in mergers and consolidations, or dispose of assets. The financial covenants require a minimum interest coverage ratio and a maximum leverage ratio, both to be computed on a pro forma basis as defined in the Credit Agreement. Based on the Companys results of operations for the twelve months ended March 31, 2011 and existing term debt structure, as shown in the table below, the Company could utilize approximately $1.6 billion of the $1.75 billion Credit Agreement and not be in violation of those financial covenants. However, the Company does not expect the reduction in availability on the Credit Agreement to impact its ability to meet its liquidity requirements. In addition, borrowings under the Credit Agreement are subject to certain conditions, all of which were met at March 31, 2011. As of March 31, 2011, there were $110.0 million of borrowings outstanding under the Credit Agreement.
33
The Company also has $108.3 million in credit facilities outside of the U.S., most of which are uncommitted. As of March 31, 2011, the Company had $59.3 million in outstanding letters of credit, of which $37.4 million reduced availability under the Credit Agreement and $14.0 million reduced availability under uncommitted facilities outside of the U.S. As of March 31, 2011, the Company had no commercial paper outstanding. The failure of a financial institution supporting the Credit Agreement would reduce the size of our committed facility unless a replacement institution were added. Currently, the Facility is supported by 21 U.S. and international financial institutions. The current availability on the Credit Agreement is shown in the following table:
March 31, 2011 |
||||
(in millions) | ||||
Availability |
||||
Committed credit facility |
$ | 1,750.0 | ||
Availability reduction from covenants |
70.6 | |||
1,679.4 | ||||
Usage |
||||
Borrowings under the committed credit facility |
110.0 | |||
110.0 | ||||
Current availability at March 31, 2011 |
$ | 1,569.4 | ||
The Company was in compliance with its debt covenants as of March 31, 2011, and is expected to remain in compliance based on managements estimates of operating and financial results for 2011 and the foreseeable future; however, as of March 31, 2011, as shown in the table above, the Company may borrow approximately $1.6 billion of the $1.75 billion currently not utilized under the Credit Agreement, as borrowings above $1.6 billion would cause the Company to violate certain debt covenants in the Credit Agreement. In addition, the Company met all the conditions required to borrow under the Credit Agreement as of March 31, 2011 and management expects the Company to continue to meet the applicable borrowing conditions.
On March 31, 2011, Moodys Investors Service reaffirmed the Companys senior unsecured debt ratings and short-term credit rating at Baa3 and P-3, respectively, but placed the Companys ratings on negative outlook. On April 29, 2011, Standard & Poors Ratings Services reaffirmed the Companys long-term corporate credit and senior unsecured debt ratings at BBB and maintained the Companys short-term credit rating at A-3.
On March 24, 2011, the Company acquired Journalism Online for a purchase price of $20.0 million. The Company financed the acquisition with cash on hand.
On May 3, 2011, the Board of Directors of the Company approved a program that authorizes the repurchase of up to $1.0 billion of the Companys common stock through December 31, 2012. Share repurchases under the program may be made from time to time through a variety of methods as determined by the Companys management. The repurchase authorizations do not obligate the Company to acquire any particular amount of common stock or adopt any particular method of repurchase and may be modified, suspended or terminated at any time at the Companys discretion. The Company terminated its existing authorization of October 29, 2008 for the repurchase of up to 10 million shares of the Companys common stock.
As part of this program, the Company intends to enter into an accelerated share repurchase agreement (ASR) with an investment bank under which the Company will repurchase $500 million of its common stock, subject to adjustment. The Company expects to pay the $500 million purchase price and to receive an initial delivery of shares from the investment bank shortly after entering into the ASR. The total number of shares to be repurchased under the ASR will be determined based upon the volume weighted average price of the Companys common stock (subject to any discount or premium agreed upon with the investment bank) over an averaging
34
period, which is expected to end around the end of the year. The investment bank will deliver any remaining shares to the Company shortly after the end of the averaging period. The Company expects the upfront payment of $500 million will be funded using a combination of borrowings under the Companys credit agreement and cash on hand.
The ASR will be accounted for as an initial stock purchase transaction and a forward stock purchase contract. The initial delivery of shares will result in an immediate reduction of the outstanding shares used to calculate the weighted-average common shares outstanding for basic and diluted net income per share from the effective date of the agreement. The forward stock purchase contract will be classified as an equity instrument.
RISK MANAGEMENT
The Company is exposed to interest rate risk on its variable debt and price risk on its fixed-rate debt. As of March 31, 2011, approximately 79.5% of the Companys outstanding debt was comprised of fixed-rate debt. At March 31, 2011, the Companys exposure to rate fluctuations on variable-interest borrowings was $724.2 million, including $600.0 million notional value of interest rate swap agreements (See Note 15, Derivatives, to the Condensed Consolidated Financial Statements) and $124.2 million in borrowings under the Credit Agreement, international credit facilities and other long-term debt.
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 most 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 operating unit, the Company is exposed to currency risk and may enter into foreign exchange forward contracts to hedge the currency risk. As of March 31, 2011, the aggregate notional amount of outstanding foreign exchange forward contracts was approximately $129.2 million. Net unrealized losses from these foreign exchange forward contracts were $0.1 million at March 31, 2011. 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 March 31, 2011 and December 31, 2010 by approximately $93.1 million and $101.8 million, respectively.
CAUTIONARY STATEMENT
We have made forward-looking statements in this Quarterly Report on Form 10-Q that are subject to risks and uncertainties. These statements are based on the beliefs and assumptions of the Company. Generally, forward-looking statements include information concerning possible or assumed future actions, events, or results of operations of the Company.
These statements may include, or be preceded or followed by, the words may, will, should, might, could, would, potential, possible, believe, expect, anticipate, intend, plan, estimate, hope or similar expressions. The Company claims the protection of the Safe Harbor for Forward-Looking Statements contained in the Private Securities Litigation Reform Act of 1995 for all forward-looking statements.
Forward-looking statements are not guarantees of performance. The following important factors, in addition to those discussed elsewhere in this Form 10-Q, could affect the future results of the Company and could cause those results or other outcomes to differ materially from those expressed or implied in our forward-looking statements:
| the volatility and disruption of the capital and credit markets, and adverse changes in the global economy; |
35
| successful execution and integration of acquisitions, including the integration of Bowne; |
| successful negotiation of future acquisitions; and the ability of the Company to integrate operations successfully and achieve enhanced earnings or effect cost savings; |
| the ability to implement comprehensive plans for the integration of sales forces, cost containment, asset rationalization, system integration and other key strategies; |
| the ability to divest non-core businesses; |
| future growth rates in the Companys core businesses; |
| competitive pressures in all markets in which the Company operates; |
| the Companys ability to access unsecured debt in the capital markets and the participants ability to perform to our contractual lending and insurance agreements; |
| changes in technology, including the electronic substitution and migration of paper based documents to digital data formats; |
| factors that affect customer demand, including changes in postal rates and postal regulations, changes in the capital markets, changes in advertising markets, customers budgetary constraints and changes in customers short-range and long-range plans; |
| the ability to gain customer acceptance of the Companys new products and technologies; |
| the ability to secure and defend intellectual property rights and, when appropriate, license required technology; |
| customer expectations and financial strength; |
| performance issues with key suppliers; |
| changes in the availability or costs of key materials (such as ink, paper and fuel) or in the prices received for the sale of by-products; |
| changes in ratings of the Companys debt securities; |
| the ability to generate cash flow or obtain financing to fund growth; |
| the effect of inflation, changes in currency exchange rates and changes in interest rates; |
| the effect of changes in laws and regulations, including changes in accounting standards, trade, tax, environmental compliance (including the emission of greenhouse gases and other air pollution controls), health and welfare benefits (including the Patient Protection and Affordable Care Act, as modified by the Health Care and Education Reconciliation Act, and further healthcare reform initiatives), price controls and other regulatory matters and the cost, which could be substantial, of complying with these laws and regulations; |
| contingencies related to actual or alleged environmental contamination; |
| the retention of existing, and continued attraction of additional, customers and key employees; |
| the effect of a material breach of security of any of the Companys systems; |
| the effect of labor disruptions or labor shortages; |
| the effect of economic and political conditions on a regional, national or international basis; |
| the effect of economic weakness and constrained advertising; |
| uncertainty about future economic conditions; |
| the possibility of future terrorist activities or the possibility of a future escalation of hostilities in the Middle East or elsewhere; |
36
| the possibility of a regional or global health pandemic outbreak; |
| adverse outcomes of pending and threatened litigation; and |
| other risks and uncertainties detailed from time to time in the Companys filings with the SEC, including under Risk Factors in the Companys Annual Report on Form 10-K. |
Because forward-looking statements are subject to assumptions and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. Undue reliance should not be placed on such statements, which speak only as of the date of this document or the date of any document that may be incorporated by reference into this document.
Consequently, readers of this Quarterly Report should consider these forward-looking statements only as our current plans, estimates and beliefs. We do not undertake and specifically decline any obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect future events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. We undertake no obligation to update or revise any forward-looking statements in this Quarterly Report to reflect any new events or any change in conditions or circumstances.
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
See Item 2 of Part I under Liquidity and Capital Resources.
Item 4. | Controls and Procedures |
(a) 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 March 31, 2011, 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 March 31, 2011 were effective in ensuring information required to be disclosed in this Quarterly Report 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.
(b) 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 March 31, 2011 that had materially affected, or were reasonably likely to materially affect, the Companys internal control over financial reporting.
37
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
ISSUER PURCHASES OF EQUITY SECURITIES
Period |
(a)
Total Number of Shares Purchased (2) |
(b) Average Price Paid per Share |
(c) Total Number
of Shares Purchased as Part of Publicly Announced Plans or Programs |
(d) Maximum Number of Shares that May Yet be Purchased Under the Plans or Programs (1) |
||||||||||||
January 1, 2011 January 31, 2011 |
57,168 | $ | 17.71 | | 10,000,000 | |||||||||||
February 1, 2011 February 28, 2011 |
169,304 | 18.49 | | 10,000,000 | ||||||||||||
March 1, 2011 March 31, 2011 |
349,753 | 18.09 | | 10,000,000 | ||||||||||||
Total |
576,225 | $ | 18.17 | | 10,000,000 | |||||||||||
(1) | As of March 31, 2011, the Company was authorized under the terms of its share repurchase program to repurchase 10.0 million shares. Such purchases may be made from time to time and discontinued at any time. |
(2) | Shares withheld for tax liabilities upon vesting of equity awards. |
Item 5. | Other Information |
(a) Miles W. McHugh has resigned as the Companys Executive Vice President, Chief Financial Officer effective on May 3, 2011.
(b) On May 3, 2011, the Company announced that Daniel N. Leib has been appointed as Executive Vice President, Chief Financial Officer effective May 3, 2011.
On May 3, 2011, the Company and Mr. Leib entered into an amended and restated employment agreement (the Amended and Restated Employment Agreement) pursuant to which Mr. Leib agreed to serve as the Companys Executive Vice President, Chief Financial Officer. Under the terms of the Amended and Restated Employment Agreement Mr. Leib will:
| Receive a base salary to be paid at a rate of $500,000 per year; and |
| Be eligible to receive an annual bonus with a target bonus opportunity of 150% of base salary. |
The Amended and Restated Employment Agreement further provides that if the Company terminates Mr. Leibs employment without Cause (as defined in the Amended and Restated Employment Agreement) or Mr. Leib terminates his employment for Good Reason (as defined in the Amended and Restated Employment Agreement):
| the Company will pay Mr. Leib an amount equal to 1.5 times his then current base salary and target bonus paid over 18 months; |
| Mr. Leib will be entitled to 18 months of COBRA-subsidized medical benefits; and |
| all outstanding equity grants previously issued to Mr. Leib will vest 100% as of the date of termination. |
Mr. Leib, 44, has been Group Chief Financial Officer and Senior Vice President, Mergers and Acquisitions of the Company since August 2009 and was Treasurer until February 2010; prior thereto Mr. Leib served as the Companys Senior Vice President, Treasurer, Mergers and Acquisitions and Investor Relations since July 2007. Prior to this, from May 2004 to 2007, Mr. Leib served in various capacities in financial management, corporate strategy and investor relations with the Company.
38
Item 6. | Exhibits |
3.1 | Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2007, filed on August 2, 2007) | |
3.2 | By-Laws (incorporated by reference to Exhibit 3.2 to the Companys Current Report on Form 8-K dated January 8, 2009, filed on January 13, 2009) | |
4.1 | Instruments, other than those defining the rights of holders of long-term debt not registered under the Securities Exchange Act of 1934 of the registrant and of all subsidiaries for which consolidated or unconsolidated financial statements are required to be filed are being omitted pursuant to paragraph (4)(iii)(A) of Item 601 of Regulation S-K. Registrant agrees to furnish a copy of any such instrument to the Commission upon request. | |
4.2 | Indenture dated as of November 1, 1990 between the Company and Citibank, N.A., as Trustee (incorporated by reference to Exhibit 4 filed with the Companys Form SE filed on March 26, 1992) | |
4.3 | Indenture dated as of March 10, 2004 between the Company and LaSalle National Bank Association, as Trustee (incorporated by reference to Exhibit 4.4 to the Companys Quarterly Report on Form 10-Q for the quarter ended March 31, 2004, filed on May 10, 2004) | |
4.4 | Indenture dated as of May 23, 2005 between the Company and LaSalle Bank National Association, as Trustee (incorporated by reference to Exhibit 4.1 to the Companys Current Report on Form 8-K dated May 23, 2005, filed on May 25, 2005) | |
4.5 | Indenture dated as of January 3, 2007 between the Company and LaSalle Bank National Association, as Trustee (incorporated by reference to Exhibit 4.1 to the Companys Registration Statement on Form S-3 filed on January 3, 2007) | |
4.6 | Credit Agreement dated December 17, 2010 among the Company, the Banks named therein and Bank of America, N.A., as Administrative Agent (incorporated by reference to Exhibit 99.1 to the Companys Current Report on Form 8-K dated December 17, 2010, filed on December 17, 2010) | |
10.1 | Policy on Retirement Benefits, Phantom Stock Grants and Stock Options for Directors (incorporated by reference to Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2008, filed on August 6, 2008)* | |
10.2 | Non-Employee Director Compensation Plan (incorporated by reference to Exhibit 10.2 to the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2004, filed on March 14, 2005)* | |
10.3 | Amended Non-Employee Director Compensation Plan (incorporated by reference to Exhibit 10.3 to the Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2007, filed on August 2, 2007)* | |
10.4 | Amended Non-Employee Director Compensation Plan (incorporated by reference to Exhibit 10.4 to the Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2010, filed on August 4, 2010)* | |
10.5 | Amended Non-Employee Director Compensation Plan dated May 21, 2009 (incorporated by reference to Exhibit 10.4 to the Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2009, filed on August 5, 2009)* | |
10.6 | Directors Deferred Compensation Agreement, as amended (incorporated by reference to Exhibit 10(b) to the Companys Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, filed on November 12, 1998)* | |
10.7 | Amended and Restated Non-Qualified Deferred Compensation Plan (incorporated by reference to Exhibit 10.5 to the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2007, filed on February 27, 2008)* |
39
10.8 | 2000 Stock Incentive Plan, as amended (incorporated by reference to Exhibit 10(a) to the Companys Quarterly Report on Form 10-Q for the quarter ended September 30, 2003, filed on November 12, 2003)* | |
10.9 | 2000 Broad-based Stock Incentive Plan, as amended (incorporated by reference to Exhibit 10(a) to the Companys Quarterly Report on Form 10-Q for the quarter ended September 30, 2003, filed on November 12, 2003)* | |
10.10 | 2004 Performance Incentive Plan (incorporated by reference to Exhibit 10.9 to the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2008, filed on February 25, 2009)* | |
10.11 | Amended and Restated R.R. Donnelley & Sons Company Unfunded Supplemental Benefit Plan (incorporated by reference to Exhibit 10.11 to the Companys Quarterly Report on Form 10-Q for the quarter ended September 30, 2010, filed on November 3, 2010)* | |
10.12 | Amendment to Amended and Restated R.R. Donnelley & Sons Company Unfunded Supplemental Benefit Plan (incorporated by reference to Exhibit 10.12 to the Companys Quarterly Report on Form 10-Q for the quarter ended September 30, 2010, filed on November 3, 2010)* | |
10.13 | Supplemental Executive Retirement Plan for Designated ExecutivesB (incorporated by reference to Exhibit 10.1 to Moore Wallace Incorporateds (Commission file number 1-8014) Quarterly Report on Form 10-Q for the quarter ended September 30, 2001, filed on November 14, 2001)* | |
10.14 | 2003 Long Term Incentive Plan (incorporated by reference to Exhibit 10.12 to the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2008, filed on February 25, 2009)* | |
10.15 | 2000 Inducement Option Grant Agreement (incorporated by reference to Exhibit 99.1 to Moore Wallace Incorporateds (formerly Moore Corporation Limited, Commission file number 1-8014) Registration Statement on Form S-8 filed on February 13, 2003)* | |
10.16 | 2003 Inducement Option Grant Agreement (incorporated by reference to Exhibit 4.4 to Moore Wallace Incorporateds (Commission file number 1-8014) Registration Statement on Form S-8 filed September 29, 2003)* | |
10.17 | Form of Option Agreement for certain executive officers (incorporated by reference to Exhibit 10.17 to the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2004, filed on March 14, 2005)* | |
10.18 | Form of Cash Bonus Agreement for certain executive officers (incorporated by reference to Exhibit 10.16 to the Companys Quarterly Report on Form 10-Q for the quarter ended March 31, 2010, filed on May 5, 2010)* | |
10.19 | Form of Restricted Stock Unit Award Agreement for certain executive officers, as amended (incorporated by reference to Exhibit 10.17 to the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2008, filed on February 25, 2009)* | |
10.20 | Form of Restricted Stock Unit Award Agreement for certain executive officers, as amended (incorporated by reference to Exhibit 10.18 to the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2008, filed on February 25, 2009)* | |
10.21 | Form of Restricted Stock Unit Award Agreement for certain executive officers, as amended (incorporated by reference to Exhibit 10.19 to the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2008, filed on February 25, 2009)* | |
10.22 | Form of Restricted Stock Unit Award Agreement for directors (incorporated by reference to Exhibit 10.21 to the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2004, filed on March 14, 2005)* |
40
10.23 | Form of Restricted Stock Unit Award Agreement for directors (incorporated by reference to Exhibit 10.25 to the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2007, filed on February 27, 2008)* | |
10.24 | Form of Amendment to Director Restricted Stock Unit Awards dated May 21, 2009 (incorporated by reference to Exhibit 10.23 to the Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2009, filed on August 5, 2009)* | |
10.25 | Form of Amendment to Director Restricted Stock Unit Awards (incorporated by reference to Exhibit 10.22 to the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2008, filed on February 25, 2009)* | |
10.26 | Form of Restricted Stock Unit Award Agreement for directors (incorporated by reference to Exhibit 10.23 to the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2008, filed on February 25, 2009)* | |
10.27 | Form of Director Restricted Stock Unit Awards (incorporated by reference to Exhibit 10.26 to the Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2009, filed on August 5, 2009)* | |
10.28 | Form of Performance Share Unit Award Agreement (filed herewith)* | |
10.29 | Amended and Restated Employment Agreement dated as of November 30, 2008 between the Company and Thomas J. Quinlan, III (incorporated by reference to Exhibit 10.24 to the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2008, filed on February 25, 2009)* | |
10.30 | Amended and Restated Employment Agreement dated as of November 30, 2008 between the Company and John R. Paloian (incorporated by reference to Exhibit 10.25 to the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2008, filed on February 25, 2009)* | |
10.31 | Amended and Restated Employment Agreement dated as of November 28, 2008 between the Company and Daniel L. Knotts (incorporated by reference to Exhibit 10.26 to the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2008, filed on February 25, 2009)* | |
10.32 | Amended and Restated Employment Agreement dated as of December 18, 2008 between the Company and Suzanne S. Bettman (incorporated by reference to Exhibit 10.27 to the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2008, filed on February 25, 2009)* | |
10.33 | Amended and Restated Employment Agreement dated as of December 18, 2008 between the Company and Miles W. McHugh (incorporated by reference to Exhibit 10.28 to the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2008, filed on February 25, 2009)* | |
10.34 | Amended and Restated Employment Agreement dated as of May 3, 2011 between the Company and Daniel N. Leib (filed herewith)* | |
10.35 | Form of Indemnification Agreement for directors (incorporated by reference to Exhibit. 10.32 to the Companys Quarterly Report on Form 10-Q for the quarter ended September 30, 2005, filed on November 8, 2005)* | |
10.36 | Amended Management By Objective Plan (incorporated by reference to Exhibit 10.34 to the Companys Quarterly Report on Form 10-Q for the quarter ended September 30, 2010, filed on November 3, 2010)* | |
10.37 | Amended 2009 Management by Objective Plan (incorporated by reference to Exhibit 10.33 to the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2009, filed on February 24, 2010)* |
41
14 | Code of Ethics (incorporated by reference to Exhibit 14 to the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2003, filed on March 1, 2004) | |
21 | Subsidiaries of the Company (incorporated by reference to Exhibit 21 to the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2010, filed on February 22, 2011) | |
31.1 | Certification by Thomas J. Quinlan, III, President and Chief Executive Officer, required by Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934 (filed herewith) | |
31.2 | Certification by Daniel N. Leib, Executive Vice President and Chief Financial Officer, required by Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934 (filed herewith) | |
32.1 | Certification by Thomas J. Quinlan, III, President and Chief Executive Officer, required by Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and Section 1350 of Chapter 63 of Title 18 of the United States Code (filed herewith) | |
32.2 | Certification by Daniel N. Leib, Executive Vice President and Chief Financial Officer, required by Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and Section 1350 of Chapter 63 of Title 18 of the United States Code (filed herewith) | |
101.INS | XBRL Instance Document | |
101.SCH | XBRL Taxonomy Extension Schema Document | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
* | Management contract or compensatory plan or arrangement. |
42
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
R.R. DONNELLEY & SONS COMPANY | ||
By: | /s/ DANIEL N. LEIB | |
Daniel N. Leib Executive Vice President and Chief Financial Officer | ||
By: | /s/ ANDREW B. COXHEAD | |
Andrew B. Coxhead Senior Vice President and Controller (Chief Accounting Officer) |
Date: May 4, 2011
43
Exhibit 10.28
R.R. DONNELLEY & SONS COMPANY
PERFORMANCE UNIT AWARD (2004 PIP)
This Performance Unit Award (Award) is granted as of February 28, 2011 (the Grant Date), by R. R. Donnelley & Sons Company (the Company) to XXXXXX(Grantee).
1. Grant of Award. The Company hereby credits to Grantee XX,XXX stock units (the Performance Units), subject to the restrictions and on the terms and conditions set forth herein. This Award is made pursuant to the provisions of the R. R. Donnelley & Sons Company 2004 Performance Incentive Plan (2004 PIP). Capitalized terms not defined herein shall have the meanings specified in the 2004 PIP. Grantee shall indicate acceptance of this Award by signing and returning a copy hereof.
2. Determination of Achievement; Distribution of Award.
(a) The number of shares of common stock, par value $1.25 per share, of the Company (the Common Stock) payable in respect of the Performance Units will be determined based on the performance of the Company against the Calculated Cash Flow Matrix as shown on Attachment A hereto. Promptly following December 31, 2013 (or promptly following such earlier date as of which, pursuant to Section 4 hereof, a determination of the attainment by the Company of the targets set forth on the Calculated Cash Flow Matrix is to be made), the Committee (as defined in the 2004 PIP) shall determine whether and to what extent the Calculated Cash Flow target has been met.
(b) Distribution with respect to this Award shall be made to Grantee as soon as practicable following the determination described in (a) above but no later than 60 days thereafter. Distribution of this Award may be made in Common Stock, cash (based upon the fair market value of the Common Stock on the date of distribution) or any combination thereof as determined by the Committee.
3. Dividends; Voting.
(a) No dividends or dividend equivalents will accrue with respect to the Performance Units.
(b) Grantee shall have no rights to vote shares of common stock represented by the Performance Units unless and until distribution with respect to this Award is made in Common Stock pursuant to paragraph 2(b) above.
4. Treatment upon Separation or Termination.
(a) Notwithstanding any other agreement with Grantee to the contrary, if Grantee terminates his employment for Good Reason (as defined in the Grantees employment agreement) or the Company terminates the Grantees employment without Cause (as defined in the Grantees employment agreement) the Performance Units shall vest and be payable, if at all, on the same terms and conditions that would have applied had Grantees employment not terminated (i.e., performance measured on December 31, 2013).
(b) Notwithstanding any other agreement with Grantee to the contrary, if Grantees employment terminates by reason of death or Disability (as defined as total and permanent
1
disability under the Companys long-term disability plan for senior executives), fifty percent of any unvested Performance Units shall vest and become payable, assuming the attainment of target performance (100% achievement) or, if greater, based on actual performance through the date of death or determination of Disability.
(c) If Grantees employment terminates by reason of retirement on or after age 65 or by reason of a Qualifying Retirement (together, Retirement), a pro-rated portion of the Performance Units shall vest and be payable, if at all, on the same terms and conditions that would have applied had Grantees employment not terminated (i.e., performance measured on December 31, 2013). The pro-rated portion of the Performance Units shall be determined by multiplying the total number of Performance Units by a fraction, the numerator of which is the total number of days between February 28, 2011 and the date of Grantees termination by reason of Retirement and the denominator of which is 1038. A Qualifying Retirement is defined as
(i) Grantee is an active participant in a Company sponsored retirement benefit plan and is eligible to commence benefits thereunder at the time of cessation of employment and the Company has not terminated Grantees employment for cause (a Grantee that is a participant in the Retirement Benefit Plan of R.R. Donnelley & Sons Company (the RR Donnelley Pension Plan) is eligible to commence benefits under the plan if Grantee is eligible to commence benefits under the traditional formula of the RR Donnelley Pension Plan, or would have been eligible to commence benefits under the traditional formula of the RR Donnelley Pension Plan had Grantee been a participant in the traditional formula of the RR Donnelley Pension Plan during his or her service with R.R. Donnelley & Sons Company and/or any subsidiary at the time of cessation of employment);
(ii) Grantee is not an active participant in a Company sponsored retirement benefit plan but Grantee would have been eligible to commence benefits under the traditional formula of the RR Donnelley Pension Plan had Grantee been a participant in the traditional formula of the RR Donnelley Pension Plan during his or her service with the Company and/or any subsidiary at the time of cessation of employment; or
(iii) a cessation of employment that the Committee determines is a Qualifying Retirement.
(d) Notwithstanding any other agreement with Grantee to the contrary, if Grantees employment is terminated by the Company for Cause or is terminated by Grantee other than for Good Reason or by reason of Retirement, any unvested Performance Units shall be forfeited.
5. Treatment upon Change in Control. Notwithstanding anything provided in the 2004 PIP or any other agreement with Grantee to the contrary, upon the Acceleration Date associated with a Change in Control, all of the Performance Units shall vest and become payable at the mid performance level with respect to that number of shares of Common Stock that would be payable or, if greater, based on actual performance through the Change in Control Date.
2
6. Withholding Taxes
(a) As a condition precedent to the issuance to Grantee of any shares of Common Stock pursuant to this Award, the Grantee shall, upon request by the Company, pay to the Company such amount of cash as the Company may be required, under all applicable federal, state, local or other laws or regulations, to withhold and pay over as income or other withholding taxes (the Required Tax Payments) with respect to the Award. If Grantee shall fail to advance the Required Tax Payments after request by the Company, the Company may, in its discretion, deduct any Required Tax Payments from any amount then or thereafter payable by the Company to Grantee.
(b) Grantee may elect to satisfy his obligation to advance the Required Tax Payments by any of the following means: (1) a cash payment to the Company, (2) delivery to the Company of previously owned whole shares of Stock for which Grantee has good title, free and clear of all liens and encumbrances, having a fair market value, determined as of the date the obligation to withhold or pay taxes first arises in connection with the Award (the Tax Date), equal to the Required Tax Payments, or (3) directing the Company to withhold a number of shares of Common Stock otherwise issuable to Grantee pursuant to this Award having a fair market value, determined as of the Tax Date, equal to the Required Tax Payments or any combination of (1)-(3). Any fraction of a share of Common Stock that would be required to satisfy such an obligation shall be disregarded and the remaining amount due shall be paid in cash by Grantee. No certificate representing a share of Common Stock shall be delivered until the Required Tax Payments have been satisfied in full. For purposes of this Award, the fair market value of a share of Common Stock on a specified date shall be determined by reference to the average of the high and low transaction prices in trading of the Common Stock on such date, or, if no such trading in the Common Stock occurred on such date, then on the next preceding date when such trading occurred.
7. Miscellaneous
(a) The Company shall pay all original issue or transfer taxes with respect to the issuance or delivery of shares of Common Stock pursuant hereto and all other fees and expenses necessarily incurred by the Company in connection therewith, and will use reasonable efforts to comply with all laws and regulations which, in the opinion of counsel for the Company, shall be applicable thereto.
(b) Nothing in this Award shall confer upon Grantee any right to continue in the employ of the Company or any other company that is controlled, directly or indirectly, by the Company or to interfere in any way with the right of the Company to terminate Grantees employment at any time.
(c) No interest shall accrue at any time on this Award or the Performance Units.
(d) This Award shall be governed in accordance with the laws of the state of Illinois.
(e) This Award shall be binding upon and inure to the benefit of any successor or successors to the Company.
3
(f) Neither this Award nor the Performance Units nor any rights hereunder or thereunder may be transferred or assigned by Grantee other than by will or the laws of descent and distribution or pursuant to beneficiary designation procedures approved by the Company or other procedures approved by the Company. Any other transfer or attempted assignment, pledge or hypothecation, whether or not by operation of law, shall be void.
(g) The Committee, as from time to time constituted, shall have the right to determine any questions that arise in connection with this Agreement or the Performance Units. This Agreement and the Performance Units are subject to the provisions of the Plan and shall be interpreted in accordance therewith.
(h) If there is any inconsistency between the terms and conditions of this Award and the terms and conditions of the Employment Agreement, the terms and conditions of the Employment Agreement shall control.
IN WITNESS WHEREOF, the Company has caused this Award to be duly executed by its duly authorized officer.
R. R. DONNELLEY & SONS COMPANY | ||
By: | /s/ Thomas Carroll | |
Name: | Thomas Carroll | |
Title: | EVP, Chief Human Resources Officer |
All of the terms of this Agreement are accepted as of this day of , 2011.
|
Grantee: |
4
Attachment A
CALCULATED CASH FLOW:
Calculated cash flow shall be determined using Adjusted EBITDA less capital expenditures plus or minus the change in Working Capital. Adjusted EBITDA is non-GAAP EBITDA excluding pension and OPEB expense, stock-based compensation expense and LIFO inventory provisions (consistent with the Base Case projections). Working Capital is accounts receivable plus inventory less accounts payable.
Calculated cash flow shall be adjusted by the Committee, as it shall deem reasonably necessary and appropriate, to avoid any increase or diminution in the opportunity conveyed by the Performance Units that could result from (whether at the time of or subsequent to) any acquisition or disposition of any business or division (whether by merger, stock purchase or sale, sale or purchase of assets, or otherwise) made by the Company.
CALCULATED CASH FLOW MATRIX:
Performance against this matrix shall be measured over the first through twelfth full calendar quarters after January 1, 2011. Performance Units related to this performance objective will be vested and payable at the end of such performance period, to the extent the applicable calculated cash flow measures are achieved, interpolating the multiple for calculated cash flow between $3.3 billion and 3.7 billion.
PSU payouts based on target attainment
Payout | ||||||||||||||||||||
in billions | Target | Percentage | Quinlan | Paloian | Knotts | |||||||||||||||
< $ | 3.3 | 0 | % | 0 | 0 | 0 | ||||||||||||||
Min |
$ | 3.3 | 50 | % | 50,000 | 35,000 | 32,500 | |||||||||||||
Mid |
$ | 3.5 | 75 | % | 75,000 | 52,500 | 48,750 | |||||||||||||
Max (target) |
$ | 3.7 | 100 | % | 100,000 | 70,000 | 65,000 |
5
Exhibit 10.34
RR DONNELLEY |
Global Headquarters 111 South Wacker Drive |
May 3, 2011
Daniel N. Leib
[address]
Dear Dan:
In recognition of your importance to R.R. Donnelley & Sons Company, its officers, directors, subsidiaries, affiliates, and successors or assigns (Donnelley or Company) and to further the Companys interests, we are pleased to offer you a new employment letter (Agreement). The purpose of this letter is to amend and restate in its entirety the employment agreement dated February 15, 2006, between you and R.R. Donnelley & Sons Company (Donnelley or Company), as amended by letter dated November 25, 2008. All capitalized terms used but not defined in this agreement (Agreement) shall have the meanings assigned to such terms in Annex A.
The terms of this Agreement are as follows:
1. | Title and Responsibilities. You will serve as Executive Vice President, Chief Financial Officer, based in Chicago, Illinois, in accordance with the terms and provisions of this Agreement as well as any employment and other policies applicable to employees of the Company and its subsidiaries from time to time during the term of your employment. You will have the customary duties, responsibilities and authorities of such position. You will also receive such office, staffing and other assistance as is commensurate with that received by other executives at your level in the Company. You will spend a substantial amount of time at the Companys office in New York, as may be reasonably agreed upon by the Chief Executive Officer and you. |
2. | Employment at Will. You and we hereby acknowledge that your employment with the Company constitutes at-will employment and that either party may terminate your employment at any time upon written notice of termination within a reasonable period of time before the effective date of your Separation from Service. |
3. | Compensation. You will receive the following compensation and benefits, from which the Company may withhold any amounts required by applicable law: |
a. | Base Salary. The Company will pay you a base salary (Base Salary) at the rate of $500,000 per year. This Base Salary will be paid in accordance with the normal payroll practices of the Company. |
b. | Annual Bonus. In respect of each calendar year of the Company, you will be eligible to receive an annual bonus (the Annual Bonus) in accordance with the Companys annual incentive compensation plan (Plan) with a target bonus opportunity of 150% of Base Salary. The performance objectives for your Annual Bonus with respect to each calendar year will be determined as provided for in the Plan. Any Annual Bonus which you become entitled to receive shall be paid to you at the time set forth in the Plan. |
c. | Vacation. You will be eligible for four weeks vacation annually. |
d. | Benefits. You will continue to be eligible to participate in the employee benefit plan and programs generally applicable to RR Donnelley employees. |
e. | Car Allowance. You will receive a car allowance in the amount of $1,400 per month. |
f. | Financial Planning, Supplemental Life and Disability. You will be entitled to a Financial Planning allowance, and Supplemental Executive Life and Supplemental Executive Disability Insurance consistent with other executives at your level in the Company. |
g. | Perquisites. You will be eligible to receive any other perquisites or employee benefits provided to other executive officers of the Company. |
4. | Severance. If your Separation from Service with the Company (and its at least 80% owned subsidiaries and affiliates) is initiated by the Company without Cause or your Separation from Service is initiated by you for Good Reason, the following will apply: |
a. | Severance Pay. The Company will pay you an amount equal to one and one-half times your Annualized Total Compensation (Severance Pay), subject to the prompt execution by you of the Companys customary release and in consideration of your obligations described in the Section below entitled Restrictive Covenants. Such Severance Pay shall be payable in equal installments on the 15th and last days of each of the 18 months following the thirtieth (30th) day after the date of your Separation from Service (if the 15th or last day of a month is not a business day, on the closest business day to such day). This Severance Pay constitutes Separation Pay under the terms of the R.R. Donnelley & Sons Company Separation Pay Plan (SPP) and all provisions of the SPP shall apply thereto and no other amount shall be payable under the SPP; provided, however, that nothing in this sentence is intended to limit your rights to any other payments or benefits to which you are otherwise entitled under this Agreement or applicable law. |
All payments made pursuant to this Agreement shall be reduced by applicable tax withholdings.
Any disputes regarding Severance Pay will be governed by the claims and appeals procedures of the SPP.
2
b. | Benefits. Your medical, dental and vision insurance coverage in effect immediately before the date of your Separation from Service will continue to be available to you under the group health plan continuation coverage laws (COBRA), for a period of 18 months following the date of your Separation from Service (the COBRA Period). If you elect COBRA coverage, it will be available to you for the 18-month COBRA Period at the same cost your insurance coverage is available to active employees (and the portion of the cost of coverage paid by the Company that does not constitute COBRA Premium Subsidy under the SPP shall be reflected in an IRS Form 1099 as imputed income to you). Your short-term and long-term disability, group life insurance and accidental death and dismemberment insurance, Supplemental Executive Life Insurance and Supplemental Executive Disability Insurance end on the date of your Separation from Service; provided, however, that nothing in this sentence is intended to limit your rights to elect any conversion or continuation rights that may be provided under any of the preceding insurance policies or plans. |
c. | Resignations. You shall resign from such offices and directorships, if any, of the Company that you may hold from time to time. |
d. | Indemnification. Your rights of indemnification under the Companys organizational documents, any plan or agreement at law or otherwise and your rights thereunder to directors and officers liability insurance coverage for, in both cases, actions as an officer of the Company shall survive your Separation from Service. |
e. | Vesting of Equity Grants. Any outstanding stock options, grants, restricted stock awards or other equity grants issued to you from time to time, will vest 100% immediately as of the date of your Separation from Service. |
f. | Section 409A. If you are a specified employee within the meaning set forth in the document entitled 409A: Policy of R.R. Donnelley & Sons Company and its Affiliates Regarding Specified Employees on the date of your Separation from Service, then any amounts payable pursuant to this Agreement or otherwise that (i) become payable as a result of your Separation from Service and (ii) are subject to section 409A of the Code as a result of your Separation from Service shall not be paid until the earlier of (x) the first business day of the sixth month occurring after the month in which the date of your Separation from Service occurs and (y) the date of your death. Notwithstanding the immediately preceding sentence, amounts payable to you as a result of your involuntary Separation from Service that do not exceed two times the lesser of (i) your annualized compensation based upon your annual rate of Base Salary for the year prior to the year in which the date of your Separation from Service occurs and (ii) the maximum amount that may be taken into account under section 401(a)(17) of the Code in the year in which the date of your Separation from Service occurs may be paid as otherwise scheduled. If any compensation or benefits provided by this Agreement may result in the application |
3
of section 409A of the Code, then the Company shall, in consultation with you, modify this Agreement to the extent permissible under section 409A of the Code in the least restrictive manner as necessary to exclude such compensation and benefits from the definition of deferred compensation within the meaning of such section 409A of the Code or in order to comply with the provisions of section 409A of the Code. By signing this Agreement you acknowledge that if any amount paid or payable to you becomes subject to section 409A of the Code, you are solely responsible for the payment of any taxes and interest due as a result. |
5. | Restrictive Covenants. You and Donnelley recognize that, due to the nature of your employment and relationship with Donnelley, you will have access to and develop confidential business information, proprietary information, and trade secrets relating to the business and operations of Donnelley. You acknowledge that such information is valuable to the business of Donnelley, and that disclosure to, or use for the benefit of, any person or entity other than Donnelley, would cause substantial damage to Donnelley. You further acknowledge that your duties for Donnelley include the opportunity to develop and maintain relationships with Donnelley customers, employees, representatives and agents on behalf of Donnelley and that access to and development of those close relationships with Donnelley customers render your services special, unique and extraordinary. In recognition that the good will and relationships described herein are assets and extremely valuable to Donnelley, and that loss of or damage to those relationships would destroy or diminish the value of Donnelley, you agree as follows. The parties hereby deem the payment of 18 months of Annualized Total Compensation (which shall not be in addition to amounts payable to you pursuant to paragraph 4(a) hereof) to be the minimum consideration for the restrictive covenant obligations set forth below. |
a. | Noncompetition. In consideration of the covenants and agreements of the Company herein contained, the payments to be made by the Company pursuant to this Agreement, the positions of trust and confidence you occupy and have occupied with the Company and the information of a highly sensitive and confidential nature obtained as a result of such positions, you agree that, from the date of your Separation from Service for any reason, including a Separation from Service initiated by Donnelley with or without Cause, and for 18 months thereafter, you will not, directly or indirectly, either as an employee, employer, consultant, agent, principal, partner, stockholder, corporate officer, director or in any other individual or representative capacity, worldwide, engage in any business which is competitive with the business of Donnelley. You may, however, own stock or the rights to own stock in a company covered by this paragraph that is publicly owned and regularly traded on any national exchange or in the over-the-counter market, so long as your holdings of stock or rights to own stock do not exceed the lesser of (i) 1% of the capital stock entitled to vote in the election of directors or (ii) the combined value of the stock or rights to acquire stock does not exceed your gross annual earnings from the Company. |
4
b. | Importance of Customer Relationships. You recognize that Donnelleys relationship with the customer or customers you serve, and with other employees, is special and unique, based upon the development and maintenance of good will resulting from the customers and other employees contacts with Donnelley and its employees, including you. As a result of your position and customer contacts, you recognize that you will gain valuable information about (i) Donnelleys relationship with its customers, their buying habits, special needs, purchasing policies, (ii) the skills, capabilities and other employment-related information about Donnelley employees, and (iii) other matters which you would not otherwise know and which is not otherwise readily available. Such knowledge is essential to the business of Donnelley and you recognize that your Separation from Service shall require Donnelley to rebuild that customer relationship to retain the customers business. You recognize that during a period following your Separation from Service, Donnelley is entitled to protection from your using the information and customer and employee relationships with which you have been entrusted by Donnelley during your employment. |
c. | Nonsolicitation of Customers. You shall not, while employed by Donnelley and for a period of 18 months from the date of Separation from Service with Donnelley for any reason, including your Separation from Service initiated by Donnelley with or without Cause, directly or indirectly, either on your own behalf or on behalf of any other person, firm or entity, solicit or provide services which are the same as or similar to the services Donnelley provided or offered while you were employed by Donnelley to any customer or prospective customer of Donnelley (i) with whom you had direct contact in the course of your employment with Donnelley or about whom you learned confidential information as a result of your employment with Donnelley or (ii) with whom any person over whom you had supervisory authority at any time had direct contact during the course of his or her employment with Donnelley or about whom such person learned confidential information as a result of his or her employment with Donnelley. |
d. | Nonsolicitation of Employees. You shall not while employed by Donnelley and for a period of two years from the date of your Separation from Service with Donnelley for any reason, including your Separation from Service initiated by Donnelley, with or without Cause, either directly or indirectly solicit, induce or encourage any Donnelley employee(s) to terminate their employment with Donnelley or to accept employment with any entity, including but not limited to a competitor, supplier or customer of Donnelley, nor shall you cooperate with any others in doing or attempting to do so. As used herein, the term solicit, induce or encourage includes, but is not limited to, (a) initiating communications with a Donnelley employee relating to possible employment, (b) offering bonuses or additional compensation to encourage Donnelley employees to terminate their employment with Donnelley and accept employment with a competitor, supplier or customer of Donnelley, or (c) referring Donnelley employees to personnel or agents employed by competitors, suppliers or customers of Donnelley. |
5
e. | Confidential Information. You are prohibited from, at any time during your employment with the Company or thereafter, disclosing or using any Confidential Information for your benefit or any other person or entity, unless directed or authorized in writing by the Company to do so, until such time as the information becomes generally known to the public without your fault. Confidential Information means information (i) disclosed to or known by you as a consequence of your employment with the Company, (ii) not generally known to others outside the Company, and (iii) that relates to the Companys marketing, sales, finances, operations, processes, methods, techniques, devices, software programs, projections, strategies and plans, personnel information, industry contacts made during your employment, and customer information, including customer needs, contacts, particular projects, and pricing. These restrictions are in addition to any confidentiality restrictions in any other agreement you may have signed with the Company. |
f. | Obligation upon Subsequent Employment. If you accept employment with any future employer during the time period that equals the greater of one year following the date of your Separation from Service with Donnelley and the Severance Period (regardless of whether you actually receive severance benefits during that period), you will deliver a copy of this Agreement to such employer and advise such employer concerning the existence of your obligations under this Agreement. |
g. | Companys Right to Injunctive Relief. By execution of this Agreement, you acknowledge and agree that the Company would be damaged irreparably if any provision under this Restrictive Covenants Section were breached by you and money damages would be an inadequate remedy for any such nonperformance or breach. Accordingly, the Company and its successors or permitted assigns in order to protect its interests, shall pursue, in addition to other rights and remedies existing in its favor, an injunction or injunctions to prevent any breach or threatened breach of any of such provisions and to enforce such provisions specifically (without posting a bond or other security). With respect to such enforcement, the prevailing party in such litigation shall be entitled to recover from the other party any and all attorneys fees, costs and expenses incurred by or on behalf of that party in enforcing or attempting to enforce any provision under this Restrictive Covenants Section or any other rights under this Agreement. |
6. | General. |
a. | Acknowledgement of Reasonableness and Severability. You acknowledge and agree that the provisions of this Agreement, including the Restrictive Covenants Section are reasonable and valid in geographic, temporal and subject matter scope and in all other respects, and do not impose limitations greater than are necessary to protect the goodwill, Confidential Information and other business interests of the Company. If any court subsequently determines that any part of this Agreement, including the Restrictive Covenants Section, is invalid or |
6
unenforceable, the remainder of the Agreement shall not be affected and shall be given full effect without regard to the invalid portions. Further, any court invalidating any provision of this Agreement shall have the power to revise the invalidated provisions such that the provision is enforceable to the maximum extent permitted by applicable law. |
b. | Non-duplication of Severance Pay. If, upon ultimate Separation from Service, the separation pay for which you would be eligible under the R.R. Donnelley & Sons Company Separation Pay Plan applicable to employees generally, if any, would be greater than the separation pay payable under to this Agreement, then your Severance Pay shall be increased to correspond to the pay you would have been eligible for under such Plan. To avoid duplicate payments, if you are eligible to receive severance under this Agreement, you hereby waive any payments under the R.R. Donnelley & Sons Company Separation Pay Plan. |
c. | Employee Breach. If you breach this Agreement or any other agreement you have signed with the Company, the Company may, in its complete discretion, stop making any of the payments provided for in this Agreement. |
d. | Arbitration. Any controversy arising out of or relating to this Agreement or the breach of this Agreement that cannot be resolved by you and the Company, including any dispute as to the calculation of any payments hereunder, and the terms of this Agreement, shall be determined by a single arbitrator in New York, New York, in accordance with the rules of JAMS; provided, however, that either party may seek preliminary injunctive relief to maintain or restore the status quo pending a decision of the arbitrator, and the parties consent to the exclusive jurisdiction of the courts of the State of Delaware or the Federal courts of the United States of America located in the District of Delaware in connection therewith. The decision of the arbitrator shall be final and binding and may be entered in any court of competent jurisdiction. The arbitrator may award the party he determines has prevailed in the arbitration any legal fees and other fees and expenses that may be incurred in respect of enforcing its respective rights. |
e. | Governing Law. All disputes arising under or related to this Agreement shall at all times be governed by and construed in accordance with the internal laws (as opposed to the conflict of law provisions) and decisions of the State of Delaware as applied to agreements executed in and to be fully performed within that State. |
f. | Notice and Execution. This Agreement may be executed in counterparts. Any notice or request required or permitted to be given hereunder shall be sufficient if in writing and deemed to have been given if delivered personally or sent by certified mail, return receipt requested, to you at the address above, and to the Company at its Corporate Headquarters (Attn: Corporate Secretary). |
7
g. | Entire Agreement. This Agreement shall constitute the entire agreement between the parties with respect to the subject matter contained herein, and fully supersedes any prior agreements or understandings between us. This Agreement may not be changed or amended orally, but only in writing signed by both parties. |
h. | Waiver. The failure of either party hereto to enforce at any time any provision of this Agreement shall not be construed as a waiver of such provision nor in any way to affect the validity of this Agreement or any part hereof or the right of such party thereafter to enforce each and every such provision. No waiver of any breach of this Agreement shall be held to constitute a waiver of any other or subsequent breach. |
i. | Assignments and Successors. The rights and obligations of the Company under this Agreement shall inure to the benefit of and be binding upon its successors and assigns. Your rights and obligations under this Agreement shall inure to the benefit of and be binding upon your designated beneficiary or legal representative, provided, however, that you may not assign any of your rights and obligations hereunder. |
If the foregoing terms and conditions are acceptable and agreed to by you, please sign on the line provided below to signify such acceptance and agreement and return the executed copy to the Chief Human Resources Officer.
Very truly yours,
R. R. Donnelley & Sons Company | ||
By: | /S/ THOMAS J. QUINLAN, III | |
Thomas J. Quinlan, III President & Chief Executive Officer |
ACCEPTED AND AGREED to this 3rd day of May, 2011. |
/S/ DANIEL N. LEIB |
Daniel N. Leib |
8
Annex A
Definitions
1. | Annualized Total Compensation means Base Salary plus Annual Bonus (at the target level) for one year at the rate in effect immediately before the date of your Separation from Service, but, for these calculations only, your Base Salary and target bonus percentage shall not be less than the amount set forth in Section 3, above. |
2. | Cause means (i) your willful and continued failure to perform substantially your duties with the Company (other than any such failure resulting from your incapacity due to physical or mental illness or any such failure subsequent to your being delivered a notice of termination without Cause) after a written demand for substantial performance is delivered to you by the Chief Executive Officer or the Board that identifies the manner in which you have not performed your duties, (ii) your willful engaging in conduct which is demonstrably and materially injurious (monetarily or otherwise) to the business, reputation, character or community standing of the Company, (iii) conviction of or the pleading of nolo contendere with regard to a felony or any crime involving fraud, dishonesty or moral turpitude, or (iv) a refusal or failure to attempt in good faith to follow the written direction of the Chief Executive Officer or the Board (provided that such written direction is consistent with your duty and station) promptly upon receipt of such written direction. A termination for Cause after a Change in Control shall be based only on events occurring after such Change in Control; provided, however, the foregoing limitation shall not apply to an event constituting Cause which was not discovered by the Company prior to a Change in Control. For the purposes of this definition, no act or failure to act by you shall be considered willful unless done or omitted to be done by you in bad faith and without reasonable belief that your action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or based upon the advice of the Companys principal outside counsel shall be conclusively presumed to be done, or omitted to be done, by you in good faith and in the best interests of the Company. Notwithstanding the foregoing, the Company shall provide you with a reasonable amount of time, after a notice and demand for substantial performance is delivered to you, to cure any such failure to perform, and if such failure is so cured within a reasonable time thereafter, such failure shall not be deemed to have occurred. |
3. | Committee means a committee designated by the Chief Human Resources Officer of the Company. |
4. | Good Reason means, without your express written consent, the occurrence of any of the following events: |
i. | A change in your duties or responsibilities (including reporting responsibilities) that taken as a whole represents a material and adverse diminution of your duties, responsibilities or status with the Company (other than a temporary change that results from or relates to your incapacitation due to physical or mental illness); |
9
ii. | A material reduction by the Company in your rate of annual base salary or annual target bonus opportunity (including any material and adverse change in the formula for such annual bonus target) as the same may be increased from time to time; |
iii. | Any requirement of the Company that your office be more than seventy-five (75) miles from Chicago, Illinois; and |
iv. | Any material breach of the Agreement by the Company. |
Notwithstanding the foregoing, a Good Reason event shall not be deemed to have occurred if the Company cures such action, failure or breach within ten (10) days after receipt of notice thereof given by employee. Your right to terminate employment for Good Reason shall not be affected by your incapacities due to mental or physical illness and your continued employment shall not constitute consent to, or a waiver of rights with respect to, any event or condition constituting Good Reason; provided, however, that you must provide notice of termination of employment within ninety (90) days following the initial existence of an event constituting Good Reason or such event shall not constitute Good Reason under this Agreement.
5. | Separation from Service means a termination of employment with the Company within the meaning of Treasury Regulation § 1.409A-1(h). |
10
EXHIBIT 31.1
Certification Pursuant to Rule 13a-14(a) and Rule 15d-14(a)
of the Securities Exchange Act of 1934
I, Thomas J. Quinlan, III, certify that:
1. | I have reviewed this quarterly report on Form 10-Q of R.R. Donnelley & Sons Company; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) | designed such disclosure controls and procedures, or caused such disclosures controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; |
(c) | evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over the financial reporting; and |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent function): |
(a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
(b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: May 4, 2011
/s/ THOMAS J. QUINLAN, III |
Thomas J. Quinlan, III President and Chief Executive Officer |
EXHIBIT 31.2
Certification Pursuant to Rule 13a-14(a) and Rule 15d-14(a)
of the Securities Exchange Act of 1934
I, Daniel N. Leib, certify that:
1. | I have reviewed this quarterly report on Form 10-Q of R.R. Donnelley & Sons Company; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; |
(b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; |
(c) | evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over the financial reporting; and |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent function): |
(a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
(b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: May 4, 2011
/s/ DANIEL N. LEIB |
Daniel N. Leib Executive Vice President and Chief Financial Officer |
EXHIBIT 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
CERTIFICATION PURSUANT TO RULE 13a-14(a) AND RULE 15d-14(a)
SECTION 1350, CHAPTER 63 OF TITLE 18
OF THE UNITED STATES CODE,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of R. R. Donnelley & Sons Company (the Company) on Form 10-Q for the period ending March 31, 2011 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Thomas J. Quinlan, III, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) | The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
(2) | The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. |
May 4, 2011 | /s/ THOMAS J. QUINLAN, III | |||
Thomas J. Quinlan, III President and Chief Executive Officer |
EXHIBIT 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
CERTIFICATION PURSUANT TO RULE 13a-14(a) AND RULE 15d-14(a)
SECTION 1350, CHAPTER 63 OF TITLE 18
OF THE UNITED STATES CODE,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of R. R. Donnelley & Sons Company (the Company) on Form 10-Q for the period ending March 31, 2011 as filed with the Securities and Exchange Commission on the date hereof (the Report), Daniel N. Leib, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) | The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
(2) | The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. |
May 4, 2011 | /s/ DANIEL N. LEIB | |||
Daniel N. Leib Executive Vice President and Chief Financial Officer |
L5M)-U/I)IJ8%Y/_7-:(5?Z"11DFM:MY
M<=Z%MRH%6JGD`50R]<1VI9/YE=Z:7"T3D^=;/$#6M>S/S.QFXNS/K')&?"A&
M7J'J5QPZ&8^$?X^MXA&8VGM#HPWJX#\AXMQ2SB_'_\3F`"8=4E^`!#XDHYG:
M;Q!AOR#+PT'!?",,6'TQQ^IPFA7+ZR2#\JO$M=B-67FEW8_U(@][&"_S$F3/
M'491A946G,3F%S![\XN_2C]SHI]BV%D0DU++`ZCE7+Q0C9]*/]7XF8=([F$4
M58V?A=!/-7X>2BV7!?1NB$-`L,$PD_R!F0%PMW., Y)I5Z/:_$A$Q+:@\/*
M\R.[Q56L*LI.;*YB,LC`+/XH=668^[ER']-,X'.7";`DQRQXH:&]C+@UBBN2
M/)H!L[5HXL6%0](JK9IOBA>?3>ZD!>'"6?YQ4?UCENI4>^'A"*@"VDU?0WL?
M]SDVH4,> T';CGL[).
MJRO5O@\MZZ0!QVFO-Y`JB34M[&HZ*VMWZ=2`H)%O0-H#7=EE/X%CQP:DW9&J
M?"D9D)H,2+>G;$1OSHI,YO77-70UY"X/V9G#GV'1%5+TA33S0.]+I0[)5$J#
M#$'2W_J&;E0BK`,##4&%E`@I$4(&(8/,"YD74B+%EVH4Q4%GU71636@@64@G
MBP.60)XA4C"*@R(WI$O%J3QR+_7ZLX7':)VG4-SU)H];8/[>\MGK+P2HX
M7Y/!T'VB'L!I_HJ8X\;Q(F..",!RU,]P<\0<@/7&Y@"^(_:+A?N$#Y^P,72H
M10>+-PH>-Y17L4B!.A;4>@)6>68CF!XX&9N!^I*^.;A+OSC&]D#F2S@,3^16
M%__&*625`-CS;,H:S-NQ.FUP;[B=3=_#Y5B6:;(*RUUJCY`SGO<+I>Q"RP0L
MDR.N&QUQ"PW./>C.>S;*XOTG"@!%`4`BP0$U94X2*$
F.+EC84&6@"31]Q?
MKRM]9'%@S$(E8=U=CXD-GC>$&\CZ?XS8M0_1K9JI3&S9JAK#-J^HX=G3(@]2
M!V[@&=^JT7\'[2VM;5F#HD_;-R?^&]?@M+;%YOR^[,+0J,U86N-B@R(*NU4[
M,`K]>[8%4458L9_[TH7G#%E?'!.__PN/MVHA:FN7UKC0(+5MZLB-YC(TP^\]
M5PPE(K8\T_K\**@)59-O?"W53&P0&Y3@TTFE*=AZWI0=FNG+BL;F.W9#+,RZ
MP/L!9=OQX1:Q`=8ZAH$M852QJI]
M>\&X+>]M;L@*%SY6W0X?K%O/7`Z_R8RFU/R0JRI^6!A9F_*D5G*FR`E:$*X1
M2V';J="'95:A)-SYUGM@Q/$CT')TZ&'V2HR-TSMJK077(&T&S4754S&=C?,B
MDI6BZ6PL&ZI+PH]=3&>MN1">*!=3]C*=C7K)56A?TZF?UW=FD)\&'(3K%@+V
MVQ]`OC[&LQ!QVJ@+*7=[45HB$B'OHQC1_[;WM\V)(\D:,/S]1)S_H-M[)M83
M-V:0>#'TS'2$V^Z>]7FZV[[;GMTXGQRR5)B:%A*K%[N]O_[)+$D@0&`)!*J"
M/'MV&[!4E9EU569655:F.QVM]*E;$P5:<'@DYW@?<5;B3(QCD+DH[5$THGW)
M93HZP0EQ)6=B1:4FA]!*GJ7V]CA)?@3\G]^-`FM5S'XPCX*KP'$B..8S`EQ.I@VCDH\]O``!`R,#VCYUSG<)HC`4B:I
M9IQ:@YG:PT:'\`$Q"C2-8\8R_I7/`.ENSM7G[/QX3/T`U#D)M3CW$Q-M^CR(
M81S/%IRV*"F@!V$(D'I,MF.:VI?I_)FIM>F<1+0)*(*P,[I8U%+-82-#@M1S
M(7]_LMR2:'DYY;EW(?SABJ-SX=JXKKQ#*P`K2M")P,WF2_1.=G5[_?73R?M6
MT^C-D_Y6]Q43O'XYOE.";TW_QA=SV1:[)NF+I9;>RQ3J3:.;2^&J_JH@L(0$
MJZ-/_#6XB,*1YX,VMDL);FE/KI7\7RYMBUUM0]-*6>V4I.L@B+84D=%IOTE/
MW,VFM!06306D5+"/VVZUSU=3D;<5^G;W)79G-^A]MNJ,S\Z_LO!F>&_^J'+?
MM=-?VK!"U=5ZA%-YF8%3HK,P(!,F(7U6YS7E354I`3G=0JGM`@.
MC-!JX6TDA*%1Q+@*@;$&@?9+I@1/9AO_I`
M6760LXJ2>
JU:#UTFDQQ'J00D/]3M]96>"^@I11CSTI`KRV%(SRJP'L12C
MA7O'/@LCW]5P]S@(&$7`U3X'3GOG4BG%`I%.I`MW@H-.LZL6#I3W#B_&GA_R
M_XC337'WEK1AS;-`-X[^+@_A82YMA:H[*'G*4?8@(J5"8`O*XH`EH-@:Y*O(
M(:3B<4E%`I!G2U*7R]<\+C,K#PS.FP-%4:"B=54L*'4G]E4Q&:RWL!+E6U4L
M:&)]T*HB7@$%491^3C&/E8(HZO=1#&5W`,A3K8Z2ME1G)!1"<1Q:4,H-4=H?
M)SAD5O`'I!=EUH(40"'K%#AM2W71G.(G:H.!3)N9%#Y!NK"&2:!+Y1Z2+JP)
M!G(5=:#D:7MK]^V.9:&4HB4*1$L
MF(-9_'%=5K."B
U>_B3>#'A/,N&YSJO
M:8?VJB'"GFUN@Y4/M9&)I$SKD6D<*+!"/#;($/3W`+6/6.F82.YPBG7P_'F\
MK6:Z,",.;%XO0F+M11\\S7+#$;:T/%>8"PVF>NZ4=]DCYRYF0Y3>+,)
M;+2TDV_,8OP9S<9TDK9UG*3+4U.,`(PC#[7_#V3+PU<4:Z)HH,=L4SBF^/R%
M`R*&OP-Z0.C)VY^](S4]IHS::T"="T<;7&`\')#"OSV,4^\J8_(!1$$)I3
M6/];4!M_SP(/YRSSQ:083KGP9UPT-"LFV.?!=UP]9@"+S)ESS"7/.H*Y]1,<
M!%]^@GN1#W-9JAD.?-`,W\$,3PML5C/+!]K)ARC@+@L"E.\CR#(64FJ46]V%
M^0ZRO,.JCP)"Z%>`FZ1]\ORQJ5V[0_Q70`%1G]OR_-0>S*8VS@4^Y-!%.#)#
MK*^FB>;FT!*,O,@!B"*D)YZ/XP\FE\>F^3'MSYKU%S?F66AQX6$[KEN)3UMQ
MVE7ME9D^(,^>/60&J;%_9#":8MXD/UB(05]D39WX''B<(@VIP0S%W/*D'
M\:2.)R:S%^:E"O,Z?Z6T_:)GY8+*(@K9FEA8L5K.:X/>1T!Q(=9^A'?^I-@*!`2@+$FNMDQQX0
M02@(?SW56U(E,3B*J^KR#+]!J=SWY!W/%N]'XPUO3L3.\-XQR`LB9-"]$D)&
M&1=)JOQ?1^$A20F#CE0K)L)!32Y$1RIUL*7++'V@L%*WQTD6)(N]A8&2!)22
M0)[R5>I\[]X+CZT(G3P;==T.W5