Note 2. Discontinued Operations

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

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

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

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

The following table presents the financial results of discontinued operations:

	Year ended
	December 31,

	2016			2015		2014
Net sales	$	3,303.4		$	4,472.9	$	4,583.3
Cost of sales		2,534.7			3,414.2		3,506.5
Operating expenses ^(a)		615.9			708.7		774.8
Interest and other (income) expense, net^(b)		151.4			71.6		58.4
Earnings before income taxes		1.4			278.4		243.6
Income tax expense		11.1			108.3		82.5
Net loss from discontinued operations	$	(9.7	)	$	170.1	$	161.1

(a)

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

(b)

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

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

	December 31, 2015
Carrying amounts of assets included as part of discontinued operations:
Cash and cash equivalents	$	100.9
Receivables, less allowances for doubtful accounts		763.2
Inventories		239.2
Prepaid expenses and other current assets		32.9
Current assets held for disposition		1,136.2
Property, plant and equipment-net		751.5
Goodwill		657.9
Other intangible assets-net		217.0
Deferred income taxes		85.1
Other noncurrent assets		140.6
Noncurrent assets held for disposition		1,852.1
Total assets held for disposition in the consolidated balance sheets	$	2,988.3

Carrying amounts of liabilities included as part of discontinued operations:
Accounts payable	$	328.4
Accrued liabilities		318.3
Short-term and current portion of long-term debt		2.7
Current liabilities held for disposition		649.4
Long-term debt		1,001.5
Pension liabilities		384.2
Other noncurrent liabilities		157.2
Noncurrent liabilities held for disposition		1,542.9
Total liabilities held for disposition in the consolidated balance sheets	$	2,192.3

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

	Year ended
	December 31,

	2016			2015			2014
Depreciation and amortization	$	159.0		$	221.5		$	219.4
Pension settlement charges	77.7				—		95.7
Impairment charges		1.5			7.1			22.0
Loss on debt extinguishments	96.1				—			—
Gain on bargain purchase		—			—			(9.5	)
Assumption of warehousing equipment related to customer contract	8.8				—			—
Purchase of property, plant and equipment		(49.0	)		(74.0	)		(89.6	)

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

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