Note 2. Discontinued Operations

On October 1, 2016, RRD 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 accounted for these investments as available-for-sale equity securities. In March 2017, the Company sold the 6.2 million shares of LSC common stock it retained upon spinoff for net proceeds of $121.4 million, resulting in a realized loss of $51.6 million, which was recorded within investment and other income-net in the Consolidated Statements of Operations for the year ended December 31, 2017. In June 2017, the Company completed a non-cash debt-for-equity exchange in which RRD exchanged 6,143,208 of its retained shares of Donnelley Financial common stock for the extinguishment of $111.6 million in aggregate principal amount of RRD indebtedness, resulting in a realized net gain of $92.4 million, which was recorded within investment and other income-net in the Consolidated Statements of Operations for the year ended December 31, 2017. In August 2017, the Company disposed of its remaining 99,594 shares of Donnelley Financial common stock in exchange for the extinguishment of $1.9 million in aggregate principal amount of RRD indebtedness, resulting in a realized net gain of $1.6 million. See Note 11, Debt, for further discussion of these debt-for-equity transactions. As of December 31, 2017, the Company no longer held any shares of LSC or Donnelley Financial.

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.

Sales from RRD to Donnelley Financial and LSC previously eliminated in consolidation have been recast and are shown as external sales within the financial results of continuing operations. The net sales were $150.4 million and $153.4 million for the years ended December 31, 2016 and 2015. 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
Net sales	$	3,303.4		$	4,472.9
Cost of sales		2,534.7			3,414.2
Operating expenses ^(a)		615.9			708.7
Interest and other (income) expense, net^(b)		151.4			71.6
Earnings before income taxes		1.4			278.4
Income tax expense		11.1			108.3
Net (loss) earnings from discontinued operations	$	(9.7	)	$	170.1

(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 retired in connection with the Separation totaling $55.9 million and $73.3 million for the years ended December 31, 2016 and 2015. 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 significant non-cash items and capital expenditures of discontinued operations:

	Year Ended December 31,
	2016			2015
Depreciation and amortization	$	159.0		$	221.5
Pension settlement charges	77.7				—
Impairment charges		1.5			7.1
Loss on debt extinguishments	96.1				—
Assumption of warehousing equipment related to client contract	8.8				—
Purchase of property, plant and equipment		(49.0	)		(74.0	)

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 Agreements"). 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 Agreements generally provides for a term of services starting at the Separation date and continuing for a period of up to 24 months following the Separation. The Company recognized $7.7 million and $3.3 million for the years ended December 31, 2017 and 2016, respectively, as a reduction of costs within selling, general and administrative expenses 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 the following transactions with LSC and Donnelley Financial during the years ended December 31, 2017 and 2016.

	Year ended December 31,
	2017		2016
Net sales to LSC and Donnelley Financial	$	279.5	$	98.0
Purchases from LSC and Donnelley Financial		159.4		79.0

The Company also recognized $126.1 million and $17.8 million of net cash inflow from Donnelley Financial and LSC within operating activities in the Consolidated Statements of Cash Flows during the years ended December 31, 2017 and 2016, respectively.