UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~March 31,~~September 30, 2019

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number

001-37729

LSC Communications, Inc.

(Exact name of registrant as specified in its charter)

Delaware

36-4829580

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

191 N. Wacker Drive, Suite 1400

Chicago, IL 60606

(Address of principal executive offices, including zip code)

(773) 272-9200

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Trading Symbol		Name of each exchange on which registered
Common Stock (Par Value $0.01)		LKSD		NYSE

Indicate by check mark whether the registrant 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 and has been subject to such filing requirements for the past 90 days.

Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).

Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☒

As of ~~April 26,~~November 1, 2019, ~~33,510,017~~33,519,757 shares of common stock were outstanding.

LSC COMMUNICATIONS, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED ~~March 31,~~September 30, 2019

TABLE OF CONTENTS

PART I

		Page
FINANCIAL INFORMATION
Item 1: Condensed Consolidated Financial Statements (unaudited)		2
~~Condensed Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018~~		3
Condensed Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018		3
Condensed Consolidated Statements of Operations for the three and nine months ended ~~March 31,~~September 30, 2019 and 2018		4
Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended ~~March 31,~~September 30, 2019 and 2018		5
Condensed Consolidated Statements of Cash Flows for the ~~three~~nine months ended ~~March 31,~~September 30, 2019 and 2018		6
Condensed Consolidated Statements of Stockholders' Equity for the three and nine months ended ~~March 31,~~September 30, 2019 and 2018		7
Notes to Condensed Consolidated Financial Statements		89
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations		2631
Item 3: Quantitative and Qualitative Disclosures About Market Risk		4253
Item 4: Controls and Procedures		4353

Part II. Other Information		4454
Item 1: Legal Proceedings		4454
Item 1A: Risk Factors		4454
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds		4454
Item 4: Mine Safety Disclosures		4554
Item 6: Exhibits		4554
Signatures		4858

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

LSC COMMUNICATIONS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions, except share and per share data)

(UNAUDITED)

	March 31,			December 31,			September 30,			December 31,
	2019			2018			2019			2018
ASSETS
Cash and cash equivalents	$	13		$	21		$	15		$	21
Receivables, less allowances for doubtful accounts of $16 in 2019 (2018 - $14)		616			617
Receivables, less allowances for doubtful accounts of $13 in 2019 (2018 - $14)								532			617
Inventories (Note 5)		221			197			218			197
Income tax receivable		8			4			5			4
Prepaid expenses and other current assets		26			28			36			28
Total current assets		884			867			806			867
Property, plant and equipment-net (Note 6)		502			508			466			508
Goodwill (Note 7)		103			103			103			103
Other intangible assets-net (Note 7)		151			156			125			156
Right-of-use assets for operating leases		192			—			174			—
Deferred income taxes		25			27			31			27
Other noncurrent assets		90			93			87			93
Total assets	$	1,947		$	1,754		$	1,792		$	1,754

LIABILITIES
Accounts payable	$	330		$	372		$	298		$	372
Accrued liabilities		235			199			223			199
Short-term debt and current portion of long-term debt (Note 10)		175			108			127			108
Short-term operating lease liabilities		45			—			44			—
Total current liabilities		785			679			692			679
Long-term debt (Note 10)		649			659			629			659
Pension liabilities		113			132			88			132
Restructuring and multi-employer pension liabilities (Note 8)		44			45			41			45
Long-term operating lease liabilities		153			—			137			—
Other noncurrent liabilities		50			61			53			61
Total liabilities	$	1,794		$	1,576		$	1,640		$	1,576

Commitments and contingencies (Note 9)

EQUITY
Common stock, $0.01 par value
Authorized: 65,000,000
Issued: 35,542,151 shares in 2019 (2018: 35,029,565)	$	—		$	—
Issued: 35,404,938 shares in 2019 (2018: 35,029,565)							$	—		$	—
Additional paid-in capital		831			828			834			828
Accumulated deficit		(177	)		(42	)		(185	)		(42	)
Accumulated other comprehensive loss (Note 13)		(476	)		(584	)
Accumulated other comprehensive loss (Note 14)								(472	)		(584	)
Treasury stock, at cost: 2,032,134 shares in 2019 (2018: 1,888,205)		(25	)		(24	)		(25	)		(24	)
Total equity		153			178			152			178
Total liabilities and equity	$	1,947		$	1,754		$	1,792		$	1,754

See Notes to the Condensed Consolidated Financial Statements

LSC COMMUNICATIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions, except per share data)

(UNAUDITED)

	Three Months Ended						Three Months Ended						Nine Months Ended
	March 31,						September 30,						September 30,
	2019			2018			2019			2018			2019			2018
Net sales	$	845		$	929		$	834		$	1,015		$	2,548		$	2,887
Cost of sales		735			808			716			862			2,201			2,468
Selling, general and administrative expenses (exclusive of depreciation and amortization)		85			83			88			77			253			242
Restructuring, impairment and other charges-net (Note 8)		13			6			10			1			47			18
Depreciation and amortization		31			38			29			34			91			106
(Loss) from operations		(19	)		(6	)
(Loss) income from operations								(9	)		41			(44	)		53
Interest expense-net (Note 10)		19			20			20			21			58			59
Settlement of retirement benefit obligations (Note 12)		135			—			1			—			137			—
Termination fee from Quad (Note 1)								(45	)		—			(45	)		—
Investment and other (income)-net		(10	)		(11	)		(9	)		(11	)		(28	)		(35	)
(Loss) before income taxes		(163	)		(15	)
Income tax (benefit)		(37	)		(4	)
Net (loss)	$	(126	)	$	(11	)
Income (loss) before income taxes								24			31			(166	)		29
Income tax expense (benefit)								—			35			(40	)		36
Net income (loss)							$	24		$	(4	)	$	(126	)	$	(7	)

Net (loss) per common share (Note 11)
Basic net (loss) per share	$	(3.79	)	$	(0.32	)
Diluted net (loss) per share	$	(3.79	)	$	(0.32	)
Net income (loss) per common share (Note 11)
Basic net income (loss) per share							$	0.69		$	(0.12	)	$	(3.78	)	$	(0.21	)
Diluted net income (loss) per share							$	0.69		$	(0.12	)	$	(3.78	)	$	(0.21	)

Weighted-average number of common shares outstanding:
Basic	33.3			34.7			33.5				33.2			33.4			34.0
Diluted	33.3			34.7			33.5				33.2			33.4			34.0

See Notes to the Condensed Consolidated Financial Statements

LSC COMMUNICATIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in millions)

(UNAUDITED)

Three Months Ended

March 31,

2019

2018

Net (loss)

$
(126
)

$
(11
)

Other comprehensive income, net of tax (Note 13):

Translation adjustments

1

5

Adjustment for net periodic pension plan cost, net of tax expense of $36 million and
$1 million for the three months ended March 31, 2019 and 2018, respectively

107

4

Other comprehensive income

108

9

Comprehensive (loss)

$
(18
)

$
(2
)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2019			2018			2019			2018
Net income (loss)	$	24		$	(4	)	$	(126	)	$	(7	)

Other comprehensive (loss) income, net of tax (Note 14):
Translation adjustments		(2	)		5			—			(4	)
Adjustment for net periodic pension plan cost		2			3			112			11
Other comprehensive income		—			8			112			7
Comprehensive income (loss)	$	24		$	4		$	(14	)	$	—

The adjustments for net pension plan cost were net of income tax expense of $1 million and $38 million for the three and nine months ended September 30, 2019, respectively. The tax expense for the nine months ended September 30, 2019 was primarily due to the settlements of retirement benefit obligations that are discussed in Note 14, Comprehensive Income. The adjustments for net pension plan cost were net of income tax expense of $2 million and $4 million for the three and nine months ended September 30, 2018, respectively.

See Notes to the Condensed Consolidated Financial Statements

LSC COMMUNICATIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

(UNAUDITED)

	Three Months Ended						Nine Months Ended
	March 31,						September 30,
	2019			2018			2019			2018
Cash Flows from Operating Activities
Net (loss)	$	(126	)	$	(11	)	$	(126	)	$	(7	)
Adjustments to reconcile net (loss) to net cash (used in) operating activities:
Adjustments to reconcile net (loss) to net cash provided by (used in) operating activities:
Impairment charges		2			—			20			—
Depreciation and amortization		31			38			91			106
Provision for doubtful accounts receivable		3			2			7			5
Share-based compensation		3			3			6			10
Deferred income taxes		(34	)		3			(42	)		30
Settlement of retirement benefit obligations		135			—			137			—
Other		1			2			(2	)		5
Changes in operating assets and liabilities - net of acquisitions:
Accounts receivable-net		(2	)		56			76			(44	)
Inventories		(24	)		(33	)		(21	)		(53	)
Prepaid expenses and other current assets		3			1			4			(3	)
Accounts payable		(33	)		(75	)		(53	)		(45	)
Income taxes receivable		(4	)		(8	)		(1	)		8
Accrued liabilities and other		21			(2	)		(7	)		(38	)
Net cash (used in) operating activities		(24	)		(24	)
Net cash provided by (used in) operating activities								89			(26	)

Cash Flows from Investing Activities
Capital expenditures		(28	)		(20	)		(60	)		(52	)
Acquisitions of businesses, net of cash acquired		(3	)		1			(3	)		(54	)
Disposition of businesses								4			45
Net (payments) and proceeds from sales and purchase of investments								—			(3	)
Proceeds from sales of other assets								—			7
Net cash (used in) investing activities		(31	)		(19	)		(59	)		(57	)

Cash Flows from Financing Activities
Payments of current maturities and long-term debt		(11	)		(13	)		(33	)		(39	)
Net proceeds from credit facility borrowings		67			55			19			158
Debt issuance costs								(2	)		—
Payments for repurchase of common stock								—			(20	)
Dividends paid		(9	)		(9	)		(17	)		(26	)
Other financing activities		(1	)		(2	)		(1	)		(1	)
Net cash provided by financing activities		46			31
Net cash (used in) provided by financing activities								(34	)		72

Effect of exchange rate on cash and cash equivalents		1			1			1			(1	)
Net (decrease) in cash, cash equivalents and restricted cash		(8	)		(11	)		(3	)		(12	)
Cash, cash equivalents and restricted cash at beginning of year		24			35			24			35
Cash, cash equivalents and restricted cash at end of period	$	16		$	24		$	21		$	23

Reconciliation to the Condensed Consolidated Balance Sheets
	As of			As of			As of			As of
	March 31, 2019			December 31, 2018			September 30, 2019			December 31, 2018
Cash and cash equivalents	$	13		$	21		$	15		$	21
Restricted cash included in prepaid expenses and other current assets		3			3			6			3
Total cash, cash equivalents and restricted cash shown in the condensed consolidated statements of cash flows	$	16		$	24		$	21		$	24

See Notes to the Condensed Consolidated Financial Statements

LSC COMMUNICATIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(in millions)

Retained

Accumulated

Additional

Earnings

Other

Common Stock

Paid-in

Treasury Stock

(Accumulated

Comprehensive

Total

Shares

Amount

Capital

Shares

Amount

Deficit)

(Loss) Income

Equity

Balance at December 31, 2018

35

$
—

$
828

2

$
(24
)

$
(42
)

$
(584
)

$
178

Net (loss)

—

—

—

—

—

(126
)

—

(126
)
Issuance of share-based awards, net of
withholdings and other

1

—

—

—

(1
)

—

—

(1
)
Share-based compensation

—

—

3

—

—

—

—

3

Cash dividends paid

—

—

—

—

—

(9
)

—

(9
)
Other comprehensive income

—

—

—

—

—

—

108

108

Balance at March 31, 2019

36

$
—

$
831

2

$
(25
)

$
(177
)

$
(476
)

$
153

(UNAUDITED)

												Retained			Accumulated																	Retained			Accumulated
					Additional							Earnings			Other										Additional							Earnings			Other
	Common Stock				Paid-in		Treasury Stock					(Accumulated			Comprehensive			Total			Common Stock				Paid-in		Treasury Stock					(Accumulated			Comprehensive			Total
	Shares		Amount		Capital		Shares		Amount			Deficit)			(Loss) Income			Equity			Shares		Amount		Capital		Shares		Amount			Deficit)			(Loss) Income			Equity
Balance at December 31, 2017	35		$	—	$	816		—	$	(2	)	$	(90	)	$	(476	)	$	248
Balance at December 31, 2018																						35	$	—	$	828		2	$	(24	)	$	(42	)	$	(584	)	$	178
Net (loss)		—		—		—		—		—			(11	)		—			(11	)		—		—		—		—		—			(126	)		—			(126	)
Revenue recognition adjustments		—		—		—		—		—			9			—			9
Reclassification of tax rate change to accumulated deficit (Note 13)		—		—		—		—		—			97			(97	)		—
Issuance of share-based awards, net of withholdings and other		—		—		—		—		(2	)		—			—			(2	)		1		—		—		—		(1	)		—			—			(1	)
Share-based compensation		—		—		3		—		—			—			—			3			—		—		3		—		—			—			—			3
Cash dividends paid		—		—		—		—		—			(9	)		—			(9	)		—		—		—		—		—			(9	)		—			(9	)
Other comprehensive income		—		—		—		—		—			—			9			9			—		—		—		—		—			—			108			108
Balance at March 31, 2018		35	$	—	$	819		—	$	(4	)	$	(4	)	$	(564	)	$	247
Balance at March 31, 2019																						36	$	—	$	831		2	$	(25	)	$	(177	)	$	(476	)	$	153
Net (loss)																						—		—		—		—		—			(24	)		—			(24	)
Issuance of share-based awards, net of withholdings and other																						—		—		—		—		—			—			—			—
Share-based compensation																						—		—		1		—		—			—			—			1
Cash dividends paid																						—		—		—		—		—			(8	)		—			(8	)
Other comprehensive income																						—		—		—		—		—			—			4			4
Balance at June 30, 2019																						36	$	—	$	832		2	$	(25	)	$	(209	)	$	(472	)	$	126
Net income																						—		—		—		—		—			24			—			24
Issuance of share-based awards, net of withholdings and other																						—		—		—		—		—			—			—			—
Share-based compensation																						—		—		2		—		—			—			—			2
Other comprehensive income																						—		—		—		—		—			—			—			—
Balance at September 30, 2019																						36	$	—	$	834		2	$	(25	)	$	(185	)	$	(472	)	$	152

												Retained			Accumulated
					Additional							Earnings			Other
	Common Stock				Paid-in		Treasury Stock					(Accumulated			Comprehensive			Total
	Shares		Amount		Capital		Shares		Amount			Deficit)			(Loss) Income			Equity
Balance at December 31, 2017	35		$	—	$	816		—	$	(2	)	$	(90	)	$	(476	)	$	248
Net (loss)		—		—		—		—		—			(11	)		—			(11	)
Revenue recognition adjustments		—		—		—		—		—			9			—			9
Reclassification of tax rate change to accumulated deficit (Note 14)		—		—		—		—		—			97			(97	)		—
Issuance of share-based awards, net of withholdings and other		—		—		—		—		(2	)		—			—			(2	)
Share-based compensation		—		—		3		—		—			—			—			3
Cash dividends paid		—		—		—		—		—			(9	)		—			(9	)
Other comprehensive income		—		—		—		—		—			—			9			9
Balance at March 31, 2018		35	$	—	$	819		—	$	(4	)	$	(4	)	$	(564	)	$	247
Net income		—		—		—		—		—			8			—			8
Repurchase of common stock		—		—		—		2		(20	)		—			—			(20	)
Issuance of share-based awards, net of withholdings and other		—		—		—		—		—			—			—			—
Share-based compensation		—		—	5			—		—			—			—			5
Cash dividends paid		—		—		—		—		—			(9	)		—			(9	)
Other comprehensive loss		—		—		—		—		—			—			(10	)		(10	)
Balance at June, 30, 2018		35	$	—	$	824		2	$	(24	)	$	(5	)	$	(574	)	$	221
Net (loss)		—		—		—		—		—			(4	)		—			(4	)
Repurchase of common stock		—		—		—		—		—			—			—			—
Issuance of share-based awards, net of withholdings and other		—		—		—		—		—			—			—			—
Share-based compensation		—		—		2		—		—			—			—			2
Cash dividends paid		—		—		—		—		—			(8	)		—			(8	)
Other comprehensive income		—		—		—		—		—			—			8			8
Balance at September 30, 2018		35	$	—	$	826		2	$	(24	)	$	(17	)	$	(566	)	$	219

During the three months ended March 31, 2018, the Company recorded $9 million in equity adjustments as a result of the adoption of Accounting Standards Update No. 2014-09 “Revenue from Contracts with Customers (Topic 606)” (“ASC 606”). Refer to Note 3, Revenue Recognition, for ASC 606 disclosures.

There were dividends declared per common share of ~~$0.26~~$0.52 during ~~each of~~the nine months ended September 30, 2019 (none during the three months ended ~~March 31, 2019~~September 30, 2019), $0.26 during the three months ended September 30, 2018 and $0.78 during the nine months ended September 30, 2018.

See Notes to the Condensed Consolidated Financial Statements

LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Nine Months Ended ~~March 31,~~September 30, 2019 and 2018

(tabular amounts in millions, except per share data)

Note 1. Overview and B~~asis~~Basis of Presentation

Description of Business

The principal business of LSC Communications, Inc., a Delaware corporation, and its direct or indirect wholly-owned subsidiaries (“LSC Communications,” “the Company,” “we,” “our” and “us”) is to offer a broad scope of traditional and digital print, print-related services and office products. The Company serves the needs of publishers, merchandisers and retailers worldwide with a service offering that includes e-services, logistics, warehousing and fulfillment and supply chain management services. The Company utilizes a broad portfolio of technology capabilities coupled with consultative attention to clients' needs to increase speed to market, reduce costs, provide postal savings to customers and improve efficiencies. The Company prints magazines, catalogs, books and directories, and its office products offerings include filing products, envelopes, note-taking products, binder products, and forms.

Merger ~~Agreement~~with Quad/Graphics, Inc.

On October 30, 2018, the Company entered into anthat certain Agreement and Plan of Merger (the “Merger Agreement”) ~~with~~, by and among Quad/Graphics, Inc. (“~~Quad/Graphics”~~Quad”), QLC Merger Sub, Inc. and LSC Communications, pursuant to which, subject to the satisfaction or waiver of certain conditions, LSC Communications would be merged with QLC Merger Sub, Inc., and become a ~~direct,~~ wholly-owned subsidiary of ~~Quad/Graphics (“~~Quad.

On July 22, 2019, Quad and LSC Communications entered into a letter agreement (the “Letter Agreement”), pursuant to which the parties agreed to terminate the Merger ~~Sub”).~~Agreement. Pursuant to the ~~Merger~~Letter Agreement, ~~subject~~Quad agreed to pay LSC Communications the terms and conditions therein, Merger Sub will merge with and into the Company (the “Merger”), with the Company continuing as the surviving corporation. Subject to the terms and conditions set forthRegulatory Approval Reverse Termination Fee (as defined in the Merger ~~Agreement, at~~Agreement) of $45 million in cash on the ~~effective time~~business day following the date of the ~~Merger (the “Effective Time”), each share~~Letter Agreement. The Company incurred transaction costs of the Company’s common stock issued and outstanding immediately prior to the Effective Time, will be converted into the right to receive 0.625 shares of class A common stock of Quad/Graphics, without interest and subject to adjustment as provided inapproximately $26 million associated with the Merger ~~Agreement.~~

~~The Company and Quad/Graphics have made customary representations, warranties and covenants~~Agreement, of which $5 million was incurred in 2018. Except for certain indemnification obligations of Quad related to LSC Communications assisting Quad with the ~~Merger Agreement. Subject to certain exceptions outlined in~~financing under the Merger Agreement, the ~~Company has~~parties also agreed to ~~covenants relating~~release each other from any and all claims, counterclaims, demands, proceedings, actions, causes of action, orders, obligations, damages, debts, costs, expenses and other liabilities whatsoever and howsoever arising pursuant to the Company’s business during the period between the execution of the Merger Agreement and the consummation of the Merger, including restrictions on its ability to issue any shares of its capital stock, repurchase any shares of its capital stock and incur additional indebtedness outside the ordinary course of business. The Merger Agreement allows the Company to continue paying a regular quarterly dividend up to $0.26 per share.

~~On February 25, 2019, Quad/Graphics announced that its shareholders had voted to approve the issuance of Quad/Graphics’ class A common stock in the Merger on February 22, 2019.~~

~~On February 22, 2019, the Company held a Special Meeting of Stockholders~~or in connection with the ~~Merger. At the special meeting, the Company’s stockholders voted to adopt the~~ Merger ~~Agreement.~~

~~The Company and Quad/Graphics filed notification and report forms in connection with~~Agreement or the transactions contemplated by the Merger Agreement with the U.S. Department of Justice (the “DOJ”) and the U.S. Federal Trade Commission pursuant to the Hart-Scott-Rodino Antitrust Improvement Act of 1976, as amended (the “HSR Act”) on November 13, 2018. On December 13, 2018, the Company and Quad/Graphics each received a requestprovided for ~~additional information and documentary material (the “Second Request”) from the DOJ~~ in ~~connection with the DOJ’s review of the transactions contemplated by~~ the Merger Agreement.

~~The HSR Act provides that the issuance~~

Basis of the Second Request extends the waiting period under the HSR Act until either 30 days after both the Company and Quad/Graphics have substantially complied with the Second Request or such later time as agreed to by the parties with the DOJ, unless the waiting period is terminated earlier by the DOJ. The Company continues to expect the Merger to be consummated in mid-2019.Presentation

Consummation of the Merger remains subject to the expiration of the waiting period under the HSR Act and other required regulatory approvals, and the satisfaction or waiver of the other closing conditions specified in the Merger Agreement.

~~LSC Communications, Inc.~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~

~~For the Three Months Ended March 31, 2019 and 2018~~

~~(tabular amounts in millions, except per share data)~~

~~Basis of Presentation~~

The condensed consolidated financial statements include the balance sheets, statements of operations and cash flows in conformity with accounting principles generally accepted in the United States (“GAAP”). All 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.

During the third quarter of 2018, management changed the Company’s reportable segments and reporting units. Consequently, prior year amounts were restated to conform to the new segment structure. Refer to Note 15, Segment Information, for more information.

Note 2. Business Combination and Disposition

2018 Acquisition

On July 2, 2018, the Company completed the acquisition of R. R. Donnelley & Sons Company’s (“RRD”) Print Logistics business (“Print Logistics”), an integrated logistics services provider to the print industry with an expansive distribution network. The acquisition enhanced the Company’s logistics service offering and is included in the Magazines, Catalogs and Logistics segment. The original total purchase price was $58 million in cash, which was reduced to $52 million as a result of a $6 million net working capital settlement in the fourth quarter of 2018. Of the final total purchase price, $21 million was recorded in goodwill related to this acquisition.

LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Nine Months Ended September 30, 2019 and 2018

(tabular amounts in millions, except per share data)

2018 Disposition

On September 28, 2018, the Company completed the sale of its European printing business, which included web offset manufacturing facilities, a logistics and warehousing site and a location dedicated to premedia services, for proceeds of $47 million. The Company recorded a $25 million non-cash provision primarily for the write-off of a deferred tax asset associated with the disposition. The European printing business was included in the Europe segment, which was disclosed as part of the Other segment grouping.

Acquisition Information

The acquisition of Print Logistics was recorded by allocating the cost of the acquisition to the assets acquired, including other intangible assets, based on their estimated fair values at the acquisition date. The excess of the cost of the acquisition over the net amounts assigned to the fair value of the assets acquired was recorded in goodwill. The goodwill is primarily attributable to the synergies expected to arise as a result of the acquisition.

The tax deductible goodwill related to Print Logistics was $25 million.

The purchase price allocation for Print Logistics was final as of December 31, 2018. There were no changes to the purchase price allocation for the acquisition as of ~~March 31,~~September 30, 2019 compared to the disclosed purchase price allocation in the Company’s annual report on Form 10-K for the year ended December 31, 2018.

The final purchase price allocation for Print Logistics was as follows:

~~LSC Communications, Inc.~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~

~~For the Three Months Ended March 31, 2019 and 2018~~

~~(tabular amounts in millions, except per share data)~~

Accounts Receivable	$	40
Prepaid expenses and other current assets		1
Property, plant and equipment		8
Other intangible assets		17
Goodwill		21
Accounts payable and accrued liabilities		(35	)
Purchase price and net cash paid	$	52

The fair values of goodwill, other intangible assets and property, plant and equipment associated with Print Logistics were determined to be Level 3 under the fair value hierarchy, which included discounted cash flow analyses and comparable marketplace fair value data. Property, plant and equipment values were estimated using either the cost or, ~~market approach,~~ if a secondhand market ~~existed.~~existed, the market approach. The following table presents the fair value, valuation techniques and related unobservable inputs for these Level 3 measurements associated with Print Logistics:

	Fair Value		Valuation Technique	Unobservable Input	Value
Customer relationships	$	17	Multi-period excess earnings method	Existing customer growth rate	(3.5%)
				Attrition rate	7.5%
				Discount rate	18.0%

For each of the three and nine months ended ~~March 31,~~September 30, 2019, ~~and 2018,~~ the Company recorded a de minimis amount ~~and $1 million~~ of acquisition-related expenses ~~respectively,~~ associated with ~~the completed and~~ contemplated acquisitions within selling, general and administrative expenses in the condensed consolidated statements of operations. These de minimis amounts exclude costs associated with the Merger Agreement. For the three and nine months ended September 30, 2018, the Company recorded $2 million and $4 million of acquisition-related expenses, respectively, associated with completed and contemplated acquisitions.

LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Nine Months Ended September 30, 2019 and 2018

(tabular amounts in millions, except per share data)

Pro forma results

The following unaudited pro forma financial information for the three and nine months ended ~~March 31,~~September 30, 2019 and 2018 presents the condensed consolidated statements of operations of the Company and the acquisition of Print Logistics as if the acquisition had occurred as of January 1 of the year prior to the acquisition.

The unaudited pro forma financial information is not intended to represent or be indicative of the Company’s condensed consolidated statements of operations 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 Company’s future condensed consolidated statements of operations. Pro forma adjustments are tax-effected at the applicable statutory tax rates.

	Three Months Ended						Three Months Ended					Nine Months Ended
	March 31,						September 30,					September 30,
	2019			2018			2019		2018			2019			2018
Net sales	$	845		$	973		$	834	$	1,015		$	2,548		$	2,972
Net (loss)		(126	)		(12	)
Net income (loss)								24		(4	)		(126	)		(10	)

The following table outlines unaudited pro forma financial information for the three and nine months ended ~~March 31,~~September 30, 2019 and 2018:

Three Months Ended

March 31,

2019

2018

Amortization of purchased intangibles

$
5

$
5

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2019		2018		2019		2018
Amortization of purchased intangibles	$	5	$	5	$	14	$	15

There were no0 nonrecurring pro forma adjustments affecting net (loss) income for the three and nine months ended ~~March 31,~~September 30, 2019 and 2018.

~~LSC Communications, Inc.~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~

~~For the Three Months Ended March 31, 2019 and 2018~~

~~(tabular amounts in millions, except per share data)~~

Note 3. Revenue Recognition

Disaggregated Revenue

The following tables provide information about disaggregated revenue by major products/service lines and timing of revenue recognition, and include a reconciliation of the disaggregated revenue with reportable segments for the three and nine months ended ~~March 31,~~September 30, 2019 and 2018.

Three Months Ended

March 31, 2019

Magazines,

Catalogs

and

Office

Logistics

Book

Products

Other

Total

Major Products / Service Lines

Book_(a)

$
—

$
260

$
—

$
—

$
260

Magazines and Catalogs _(b)

$
319

$
—

$
—

$
44

$
363

     North America

319

—

—

44

363

     Europe

—

—

—

—

—

Logistics

$
84

$
—

$
—

$
—

$
84

Directories

$
—

$
—

$
—

$
19

$
19

     North America

—

—

—

19

19

     Europe

—

—

—

—

—

Office Products

$
—

$
—

$
119

$
—

$
119

Total

$
403

$
260

$
119

$
63

$
845

Timing of Revenue Recognition

Products and services transferred at a point in
     time

$
288

$
228

$
119

$
43

$
678

Products and services transferred over time

115

32

—

20

167

Total

$
403

$
260

$
119

$
63

$
845

LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Nine Months Ended ~~March 31,~~September 30, 2019 and 2018

(tabular amounts in millions, except per share data)

	Three Months Ended										Three Months Ended										Three Months Ended
	March 31, 2018										September 30, 2019										September 30, 2018
	Magazines,										Magazines,										Magazines,
	Catalogs										Catalogs										Catalogs
	and				Office						and				Office						and				Office
	Logistics		Book		Products		Other		Total		Logistics		Book		Products		Other		Total		Logistics		Book		Products		Other		Total
Major Products / Service Lines
Book_(a)	$	—	$	249	$	—	$	—	$	249	$	—	$	256	$	—	$	—	$	256	$	—	$	282	$	—	$	—	$	282

Magazines and Catalogs _(b)	$	400	$	—	$	—	$	99	$	499	$	307	$	—	$	—	$	43	$	350	$	360	$	—	$	—	$	99	$	458
North America		400		—		—		41		441		307		—		—		43		350		360		—		—		44		403
Europe		—		—		—		58		58		—		—		—		—		—		—		—		—		55		55

Logistics	$	27	$	—	$	—	$	—	$	27	$	85	$	—	$	—	$	—	$	85	$	103	$	—	$	—	$	—	$	104

Directories	$	—	$	—	$	—	$	31	$	31	$	—	$	—	$	—	$	15	$	15	$	—	$	—	$	—	$	26	$	26
North America		—		—		—		27		27		—		—		—		15		15		—		—		—		21		21
Europe		—		—		—		4		4		—		—		—		—		—		—		—		—		5		5

Office Products	$	—	$	—	$	123	$	—	$	123	$	—	$	—	$	128	$	—	$	128	$	—	$	—	$	145	$	—	$	145
Total	$	427	$	249	$	123	$	130	$	929	$	392	$	256	$	128	$	58	$	834	$	463	$	282	$	145	$	125	$	1,015

Timing of Revenue Recognition
Products and services transferred at a point in time	$	369	$	221	$	123	$	112	$	825	$	279	$	215	$	128	$	39	$	661	$	329	$	245	$	145	$	105	$	824
Products and services transferred over time		58		28		—		18		104		113		41		—		19		173		134		37		—		20		191
Total	$	427	$	249	$	123	$	130	$	929	$	392	$	256	$	128	$	58	$	834	$	463	$	282	$	145	$	125	$	1,015

LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Nine Months Ended September 30, 2019 and 2018

(tabular amounts in millions, except per share data)

	Nine Months Ended										Nine Months Ended
	September 30, 2019										September 30, 2018
	Magazines,										Magazines,
	Catalogs										Catalogs
	and				Office						and				Office
	Logistics		Book		Products		Other		Total		Logistics		Book		Products		Other		Total
Major Products / Service Lines
Book_(a)	$	—	$	805	$	—	$	—	$	805	$	—	$	797	$	—	$	—	$	797

Magazines and Catalogs _(b)	$	923	$	—	$	—	$	131	$	1,054	$	1,132	$	—	$	—	$	290	$	1,422
North America		923		—		—		131		1,054		1,132		—		—		126		1,258
Europe		—		—		—		—		—		—		—		—		164		164

Logistics	$	252	$	—	$	—	$	—	$	252	$	159	$	—	$	—	$	—	$	159

Directories	$	—	$	—	$	—	$	51	$	51	$	—	$	—	$	—	$	87	$	87
North America		—		—		—		51		51		—		—		—		73		73
Europe		—		—		—		—		—		—		—		—		14		14

Office Products	$	—	$	—	$	386	$	—	$	386	$	—	$	—	$	422	$	—	$	422
Total	$	1,175	$	805	$	386	$	182	$	2,548	$	1,291	$	797	$	422	$	377	$	2,887

Timing of Revenue Recognition
Products and services transferred at a point in time	$	835	$	696	$	386	$	124	$	2,041	$	1,039	$	702	$	422	$	323	$	2,486
Products and services transferred over time		340		109		—		58		507		252		95		—		54		401
Total	$	1,175	$	805	$	386	$	182	$	2,548	$	1,291	$	797	$	422	$	377	$	2,887

(a)

Includes e-book formatting and supply chain management associated with book production

(b)

Includes premedia and co-mail

~~Contract Balances~~

~~The following table provides changes in contract assets and liabilities during the three months ended March 31, 2019:~~

Short-Term Contract Assets

Long-Term
Contract Assets

Contract Liabilities

Beginning Balance, January 1, 2019

$
44

$
30

$
16

Additions to unbilled accounts receivable

31

—

—

Unbilled accounts receivable recognized in
trade receivables

(29
)

—

—

Amortization of contract acquisition costs

—

(3
)

—

Revenue recognized that was included in
contract liabilities as of January 1, 2019

—

—

(8
)
Increases due to cash received

—

—

6

Ending Balance, March 31, 2019

$
46

$
27

$
14

~~The trade receivables balance was $487 million and $488 million as of March 31, 2019 and December 31, 2018, respectively.~~

1213

LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Nine Months Ended ~~March 31,~~September 30, 2019 and 2018

(tabular amounts in millions, except per share data)

Contract Balances

The following table provides changes in contract assets and liabilities during the nine months ended September 30, 2019:

	Short-Term Contract Assets			Long-Term Contract Assets			Contract Liabilities
Beginning Balance, January 1, 2019	$	44		$	30		$	16
Additions to unbilled accounts receivable		27			—			—
Unbilled accounts receivable recognized in trade receivables		(42	)		—			—
Payment of contract acquisition costs		—			3			—
Amortization of contract acquisition costs		—			(9	)		—
Revenue recognized that was included in contract liabilities as of January 1, 2019		—			—			(11	)
Increases due to cash received		—			—			10
Ending Balance, September 30, 2019	$	29		$	24		$	15

The trade receivables balance was $398 million and $488 million as of September 30, 2019 and December 31, 2018, respectively.

Accounts Receivable

Transactions affecting the allowances for doubtful accounts receivable balance during the ~~three~~nine months ended ~~March 31,~~September 30, 2019 were as follows:

	March 31, 2019			September 30, 2019
Balance, beginning of year	$	14		$	14
Provisions charged to expense		3			7
Write-offs and other		(1	)		(8	)
Balance, end of year	$	16
Balance, end of period				$	13

Note 4. Leases

Financial Statement Impact of Adopting Accounting Standards Update No. 2016-02 “Leases (Topic 842)” (“ASU 2016-02” or “ASC 842”)

The Company adopted ASU 2016-02 on January 1, 2019 using the modified retrospective adoption method. The reported results for 2019 reflect the adoption of ASC 842 guidance while the reported results for 2018 were prepared and continue to be reported under the guidance of ASC 840, Leases, referred to herein as “previous guidance.”

In adopting ASC 842, the Company applied certain available practical expedients, including electing to combine lease and non-lease components of a contract and electing to apply the practical expedient “package” permitted under ASU 2016-02. This election allowed the Company to use the lease classification (operating or finance) previously determined at the start of a lease contract for any expired or existing leases as of the date of adoption.

The Company performed an analysis of all lease contracts existing as of January 1, 2019. Upon adoption of ASC 842, the Company added $206 million of right-of-use (“ROU”) assets and lease liabilities to its balance sheet related to operating leases. There were no changes to assets or liabilities relating to finance leases.

Based upon the balances that existed as of December 31, 2018, the Company recorded adjustments to the following accounts as of January 1, 2019:

LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Nine Months Ended September 30, 2019 and 2018

(tabular amounts in millions, except per share data)

	As Reported		Adjustments			Adjusted		As Reported		Adjustments			Adjusted
	December 31, 2018		Adoption of ASU 2016-02			January 1, 2019		December 31, 2018		Adoption of ASU 2016-02			January 1, 2019
Assets
ROU assets for operating leases(a)	$	—	$	201		$	201	$	—	$	201		$	201

Liabilities
Accrued liabilities_(a)	$	199	$	(1	)	$	198	$	199	$	(1	)	$	198
Short-term operating lease liabilities		—		52			52		—		52			52
Long-term operating lease liabilities		—		154			154		—		154			154
Other noncurrent liabilities_(a)		61		(4	)		57		61		(4	)		57

(a)

The ~~total~~aggregate $5 million adjustment shown in accrued liabilities and other noncurrent liabilities relates to straight-line rent accruals that were reclassified to ROU assets for operating leases.

~~LSC Communications, Inc.~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~

~~For the Three Months Ended March 31, 2019 and 2018~~

~~(tabular amounts in millions, except per share data)~~

Accounting Policy

Under ASC 842, the Company determines if a contract contains a lease at the inception of the contract. A contract contains a lease if it conveys to the Company the right to control the use of specified assets. Operating leases are included in ROU assets and in other current liabilities and other non-current liabilities. Finance lease assets are included in property, plant, and equipment, and liabilities are included in short-term and long-term debt. ROU assets and lease liabilities are recognized at the present value of future lease payments. The discount rate used to measure the amount recognized is the Company’s incremental borrowing rate if an implicit rate is not determinable from the lease contract. Operating lease cost is recognized on a straight-line basis over the term of the lease.

The Company leases land, production facilities, office space, and equipment. Leases with an initial term of 12 months or less are not recorded on the balance sheet; ~~we recognize~~the Company recognizes lease expense for these leases on a straight-line basis over the lease term. Further, the Company has elected not to separate lease and non-lease components of contracts for any asset classes, but rather to account for non-lease components together with their related lease components.

For leases that include renewal options that the Company is reasonably certain to exercise, the Company includes the renewal period in its initial classification of the lease. Renewal options range from 1 year to 5 years.

~~The Company’s variable~~Variable lease payments do not depend on a published index or rate, and therefore, are expensed as incurred.

The components of total net lease ~~cost~~expense were as follows:

Three Months Ended

March 31, 2019

Operating lease cost

$
17

Sublease (income)

(2
)
Variable lease cost

3

Total net lease cost

$
18

	Three Months Ended			Nine Months Ended
	September 30, 2019			September 30, 2019
Operating lease expense	$	18		$	53
Sublease (income)		(2	)		(6	)
Variable lease expense		3			8
Total net lease expense	$	19		$	55

During each of the three and nine months ended ~~March 31,~~September 30, 2019, the Company incurred a de minimis amount of finance lease cost, consisting of finance lease ROU asset amortization and interest on finance lease liabilities, and a de minimis amount of cost associated with short-term leases.

Supplemental non-cash information related to leases is included below:

Three Months Ended

March 31, 2019

ROU assets acquired in exchange for
lease obligations:

ROU assets

Operating leases

$
2

Lease obligations

Operating leases

$
2

~~During the three months ended March 31, 2019, the Company recorded $16 million of operating cash outflows from operating leases.~~

During the three months ended March 31, 2019, the Company recorded a de minimis amount of cash flows from financing leases. No finance lease ROU assets or obligations were acquired during the three months ended March 31, 2019.

~~Supplemental information related to leases is included below:~~

1415

LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Nine Months Ended ~~March 31,~~September 30, 2019 and 2018

(tabular amounts in millions, except per share data)

	Nine Months Ended
	September 30, 2019
ROU assets acquired in exchange for lease obligations:
ROU assets
Operating leases	$	14

Lease obligations			��
Operating leases	$	14

During the nine months ended September 30, 2019, the Company recorded $45 million of operating cash outflows from operating leases.

During the nine months ended September 30, 2019, the Company recorded a de minimis amount of cash flows from financing leases. NaN finance lease ROU assets or obligations were acquired during the nine months ended September 30, 2019.

Supplemental information regarding the weighted average lease term and discount rate is included below:

	~~March 31,~~ September 30, 2019
Weighted Average Remaining Lease Term (years)
Operating leases		~~5.5~~5.1
Financing leases		~~2.4~~2.3

Weighted Average Discount Rate
Operating leases		8.3	%
Financing leases		~~6.7~~6.9	%

The annual maturities of lease liabilities as of ~~March 31,~~September 30, 2019 were as follows:

	Operating Leases			Operating Leases
2019	$	44		$	15
2020		51			53
2021		43			45
2022		34			36
2023		24			24
2024 & thereafter		47			46
Total undiscounted lease payments		243			219
Imputed interest		(47	)		(38	)
Total lease liabilities	$	196		$	181

During the ~~three~~nine months ended ~~March 31,~~September 30, 2019, the Company recorded a de minimis amount of maturities for finance lease liabilities. As of ~~March 31,~~September 30, 2019, the Company has 0 additional operating leases that have not ~~commenced for an undiscounted amount of $9 million. These operating leases will commence during 2019 with lease terms of 4 years to 5 years.~~commenced.

The Company also ~~has~~is a sublessor to land and building subleases for certain locations resulting from the acquisition of businesses or disposition of the Company’s business components. Some of these ~~leases~~subleases have variable payments, either because payments are structured to follow the head lease ~~(where the Company is the lessee)~~ or because the sublease includes reimbursement for utilities and other expenses. We recognize the rent-related portion of lease payments, including changes based on a published index or rate, on a straight-line basis and the variable portion related to utilities and other expenses in the period incurred. Our subleases have various renewal and termination options ~~whereby the sublease can be renewed~~which generally allow for ~~6 months~~renewal for 1 year to 5 years, or termination notice that generally ranges from 90 days to 180 days.

LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the ~~sublease can be terminated by providing 90 days’ notice. Sublessees have full discretion to exercise renewal or termination options.~~ Three and Nine Months Ended September 30, 2019 and 2018

(tabular amounts in millions, except per share data)

Note 5. Inventories

The components of the Company’s inventories, net of excess and obsolescence reserves for raw materials and finished goods, at ~~March 31,~~September 30, 2019 and December 31, 2018 were as follows:

	March 31,			December 31,			September 30,			December 31,
	2019			2018			2019			2018
Raw materials and manufacturing supplies	$	132		$	119		$	115		$	119
Work in process		56			50			48			50
Finished goods		84			80			97			80
Last in, first out reserve		(51	)		(52	)		(42	)		(52	)
Total	$	221		$	197		$	218		$	197

~~LSC Communications, Inc.~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~

~~For the Three Months Ended March 31, 2019 and 2018~~

~~(tabular amounts in millions, except per share data)~~

Note 6. Property, Plant and Equipment

The components of the Company’s property, plant and equipment at ~~March 31,~~September 30, 2019 and December 31, 2018 were as follows:

	March 31,			December 31,			September 30,			December 31,
	2019			2018			2019			2018
Land	$	43		$	43		$	35		$	43
Buildings		712			709			699			709
Machinery and equipment		3,614			3,759			3,578			3,759
		4,369			4,511			4,312			4,511
Less: Accumulated depreciation		(3,867	)		(4,003	)		(3,846	)		(4,003	)
Total	$	502		$	508		$	466		$	508

During the three and nine months ended ~~March 31,~~September 30, 2019, depreciation expense was$23 million and $71 million, respectively. During the three and nine months ended September 30, 2018, depreciation expense was ~~$24~~$27 million and ~~$31~~$86 million, respectively. Refer to Note 8, Restructuring, Impairment and Other Charges, for a discussion on impairment reviews performed as of September 30, 2019 and information on impairment recorded during the ~~three~~nine months ended ~~March 31,~~September 30, 2019.

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 $11 million and $3 million at ~~March 31,~~September 30, 2019 and December 31, ~~2018.~~2018, respectively. These assets ~~were~~are included in prepaid expenses and other current assets in the condensed consolidated balance sheets at the lower of their historical net book value or their estimated fair value, less estimated costs to sell.

LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Nine Months Ended September 30, 2019 and 2018

(tabular amounts in millions, except per share data)

Note 7. Goodwill and Other Intangible Assets

The changes in the carrying amount of goodwill for the ~~three~~nine months ended ~~March 31,~~September 30, 2019 were as follows:

	Magazines,															Magazines,
	Catalogs															Catalogs
	and Logistics			Book			Office Products			Other			Total			and Logistics			Book			Office Products			Other			Total
Net book value as of December 31, 2018
Goodwill	$	523		$	354		$	110		$	5		$	992		$	523		$	354		$	110		$	5		$	992
Accumulated impairment losses		(502	)		(303	)		(79	)		(5	)		(889	)		(502	)		(303	)		(79	)		(5	)		(889	)
Total		21			51			31			—			103			21			51			31			—			103
Net book value as of March 31, 2019
Net book value as of September 30, 2019
Goodwill		523			354			110			5			992			523			354			110			5			992
Accumulated impairment losses		(502	)		(303	)		(79	)		(5	)		(889	)		(502	)		(303	)		(79	)		(5	)		(889	)
Total	$	21		$	51		$	31		$	—		$	103		$	21		$	51		$	31		$	—		$	103

The components of other intangible assets at ~~March 31,~~September 30, 2019 and December 31, 2018 were as follows:

	March 31, 2019							December 31, 2018							September 30, 2019							December 31, 2018
	Gross Carrying		Accumulated			Net Book		Gross Carrying		Accumulated			Net Book		Gross Carrying		Accumulated			Net Book		Gross Carrying		Accumulated			Net Book
	Amount		Amortization			Value		Amount		Amortization			Value		Amount		Amortization			Value		Amount		Amortization			Value
Customer relationships	$	268	$	(141	)	$	127	$	268	$	(137	)	$	131	$	248	$	(145	)	$	103	$	268	$	(137	)	$	131
Trade names		30		(7	)		23		9		(6	)		3		30		(8	)		22		9		(6	)		3
Total amortizable other intangible assets		298		(148	)		150		277		(143	)		134		278		(153	)		125		277		(143	)		134
Indefinite-lived trade names		1		—			1		22		—			22		—		—			—		22		—			22
Total other intangible assets	$	299	$	(148	)	$	151	$	299	$	(143	)	$	156	$	278	$	(153	)	$	125	$	299	$	(143	)	$	156

~~LSC Communications, Inc.~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~

~~For the Three Months Ended March 31, 2019 and 2018~~

~~(tabular amounts in millions, except per share data)~~

In the second quarter of 2019, the Company impaired certain definite-lived customer relationships with a net book value of $17 million.

On January 1, 2019, all of Office Products’ tradenames (net book value of $21 million) were changed from indefinite-lived tradenames to definite-lived tradenames with a useful life of 15 years, as management determined that it was not possible to conclude the tradenames will generate cash flows for an indefinite period of time due to secular industry decline and changes in the usage of branded products.

During ~~each of~~ the three and nine months ended ~~March 31,~~September 30, 2019, amortization expense for other intangible assets was $5 million and $14 million, respectively. During the three and nine months ended September 30, 2018, amortization expense for other intangible assets was $5 ~~million.~~ and $14 million, respectively.

Refer to Note 8, Restructuring, Impairment and Other Charges, for information on the goodwill and intangibles impairment reviews performed during the nine months ended September 30, 2019.

The following table outlines the estimated annual amortization expense related to all amortizable intangible assets:

For the year ending December 31,	Amount		Amount
2019	$	19	$	18
2020		19		17
2021		17		15
2022		16		14
2023		15		14
2024 and thereafter		69		61
Total	$	155	$	139

LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Nine Months Ended September 30, 2019 and 2018

(tabular amounts in millions, except per share data)

Note 8. Restructuring, Impairment and Other Charges

For the three and nine months ended ~~March 31,~~September 30, 2019 and 2018, the Company recorded the following net restructuring, impairment and other ~~charges:~~charges disclosed in the consolidated statements of operations:

			Other		Total										Other		Total
Three Months Ended	Employee		Restructuring		Restructuring				Other				Employee		Restructuring		Restructuring				Other
March 31, 2019	Terminations		Charges		Charges		Impairment		Charges		Total
September 30, 2019													Terminations		Charges		Charges		Impairment		Charges		Total
Magazines, Catalogs and Logistics	$	5	$	4	$	9	$	2	$	—	$	11	$	—	$	4	$	4	$	—	$	—	$	4
Book		—		1		1		—		—		1		—		1		1		1		—		2
Office Products														—		2		2		—		—		2
Other														—		—		—		—		—		—
Corporate		—		1		1		—		—		1		—		2		2		—		—		2
Total	$	5	$	6	$	11	$	2	$	—	$	13	$	—	$	9	$	9	$	1	$	—	$	10

			Other		Total											Other		Total
Three Months Ended	Employee		Restructuring		Restructuring					Other
March 31, 2018	Terminations		Charges		Charges		Impairment			Charges		Total
Nine Months Ended														Employee		Restructuring		Restructuring				Other
September 30, 2019														Terminations		Charges		Charges		Impairment		Charges		Total
Magazines, Catalogs and Logistics	$	3	$	2	$	5	$	(1	)	$	—	$	4	$	5	$	11	$	16	$	19	$	—	$	35
Book		—		1		1		—			—		1		—		2		2		1		1		4
Office Products		1		—		1		—			—		1		—		3		3		—		—		3
Other															—		—		—		—		—		—
Corporate															—		5		5		—		—		5
Total	$	4	$	3	$	7	$	(1	)	$	—	$	6	$	5	$	21	$	26	$	20	$	1	$	47

				Other			Total
Three Months Ended	Employee			Restructuring			Restructuring				Other
September 30, 2018	Terminations			Charges			Charges		Impairment		Charges		Total
Magazines, Catalogs and Logistics	$	(1	)	$	1		$	—	$	—	$	—	$	—
Book		—			1			1		—		—		1
Office Products		—			—			—		—		—		—
Other		1			(1	)		—		—		—		—
Corporate		—			—			—		—		—		—
Total	$	—		$	1		$	1	$	—	$	—	$	1

			Other			Total
Nine Months Ended	Employee		Restructuring			Restructuring					Other
September 30, 2018	Terminations		Charges			Charges		Impairment			Charges		Total
Magazines, Catalogs and Logistics	$	3	$	8		$	11	$	(1	)	$	—	$	10
Book		1		3			4		—			1		5
Office Products		1		1			2		—			—		2
Other		1		(1	)		—		—			—		—
Corporate		1		—			1		—			—		1
Total	$	7	$	11		$	18	$	(1	)	$	1	$	18

~~Restructuring and Impairment Charges~~

~~For the three months ended March 31, 2019, the Company incurred charges of $5 million for an aggregate of 240 employees, of whom 16 were terminated as of or prior to March 31, 2019,~~ ~~primarily related to the closure of one facility in the Magazines, Catalogs and Logistics segment.~~ The Company incurred net other restructuring charges of $6 million for the three months ended March 31, 2019 primarily due to charges related to facility costs, as well as costs associated with new revenue opportunities and cost savings initiatives implemented during the quarter. The Company recorded $2 ~~million of net impairment charges related to machinery and equipment associated with facility closings in the Magazines, Catalogs and Logistics segment.~~

1719

LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Nine Months Ended ~~March 31,~~September 30, 2019 and 2018

(tabular amounts in millions, except per share data)

Restructuring Charges

For the three and nine months ended ~~March 31, 2018,~~September 30, 2019, the Company incurred ~~employee-related~~net other restructuring charges of $4$9 million and $21 million, respectively, primarily due to charges related to facility costs, costs associated with new revenue opportunities and cost savings initiatives implemented in 2019, and pension withdrawal obligations related to facility closures. For the nine months ended September 30, 2019, the Company incurred charges of $5 million for an aggregate of ~~196~~268 employees, ~~substantially all~~ of whom 40 were terminated as of or prior to ~~March 31, 2019.~~September 30, 2019, primarily related to the closure of 1 facility in the Magazines, Catalogs and Logistics segment.

For the three months ended September 30, 2018, the Company incurred a de minimis amount of employee-related termination charges, which was offset by a reversal of previously incurred employee-related restructuring charges of less than $1 million. For the nine months ended September 30, 2018, the Company incurred charges of $7 million for an aggregate of 329 employees. These charges primarily related to the closure of ~~one~~1 facility in the Magazines, Catalogs and Logistics segment and the reorganization of certain business ~~units.~~units and corporate functions. The Company incurred net other restructuring charges of $3$1 million and $11 million for the three and nine months ended ~~March 31,~~September 30, 2018 ~~for~~primarily due to charges related to facility costs, a loss related to the Company's disposition of its retail offset printing facilities and pension withdrawal obligations related to facility ~~closures.~~ closures, partially offset by a gain related to the disposition of the Company’s European printing business on September 28, 2018.

Impairment Charges

The Company performs interim reviews of goodwill for indicators of impairment each quarter to assess whether an interim impairment review is required for any reporting unit. Additionally, the Company evaluates the recoverability of other long-lived assets, including property, plant and equipment and certain identifiable intangible assets, whenever events or changes in circumstances indicate that the carrying value of an asset or asset group may not be recoverable. As part of its interim reviews, management analyzes operating results for the period compared to expected results as of the prior year’s review, key assumptions such as discount rates and expected long-term growth rates, changes in the overall market value of the Company’s equity and debt securities, significant negative industry and economic trends, as well as other factors.

The Company’s stock price has experienced a significant, sustained decline – especially since the Merger Agreement termination was announced in late July 2019. Shortly after the Merger Agreement termination, the Company announced that it was indefinitely suspending its dividend and lowered its guidance for the year. As a result, the Company determined it necessary to perform goodwill impairment reviews on the Book, logistics and Office Products reporting units (the only reporting units that have goodwill) as of August 31, 2019.

The Company performed a Step 1 impairment test of goodwill in accordance with Accounting Standards Codification (“ASC”) 350, Intangibles-Goodwill and Other, which includes comparing the estimated fair value of each reporting unit to its carrying amount, including goodwill. If the carrying amount of a reporting unit is greater than zero and its fair value exceeds its carrying amount, goodwill of the reporting unit is considered not impaired. However, if the carrying amount of a reporting unit exceeds its fair value, the goodwill is considered impaired and a full or partial write-off of goodwill would be required.

The fair value determinations included estimating the fair value of each reporting unit using both the income and market approaches. The income approach requires management to estimate a number of factors for each reporting unit, including projected future operating results, economic projections, anticipated future cash flows, discount rates and the allocation of shared or corporate items. The market approach estimates fair value using comparable marketplace fair value data from within a comparable industry grouping. The Company weighted both the income and market approach equally to estimate the concluded fair value of each reporting unit.

The determination of fair value and the allocation of that value to individual assets and liabilities requires the Company to make significant estimates and assumptions. These estimates and assumptions primarily include, but are not limited to: the selection of appropriate peer group companies; control premiums appropriate for acquisitions in the industries in which the Company competes; the discount rate; terminal growth rates; and forecasts of revenue, operating income, depreciation and amortization, restructuring charges and capital expenditures. As part of its impairment test for these reporting units, the Company engaged a third-party valuation firm to assist in the Company’s determination of certain assumptions used to estimate fair values.

LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Nine Months Ended September 30, 2019 and 2018

(tabular amounts in millions, except per share data)

As a result of ~~a $1 million adjustment of previously recorded goodwill associated with~~ the ~~2017 acquisitions, there was a reduction of $1 million of~~Step 1 impairment test for Book, logistics and Office Products, the Company did not recognize any goodwill impairment charges ~~during~~as the estimated fair values of the reporting units exceeded their respective carrying values. Book, logistics and Office Products passed with fair values that exceeded their carrying values by 22.0%, 35.8% and 14.4%, respectively.

Due to the factors noted above, the Company evaluated the recoverability of its definite-lived intangible assets and concluded that for the three months ended ~~March 31, 2018.~~ September 30, 2019, the assets were recoverable.

Given the continued decline in demand in the magazines and catalogs reporting unit, as well as the factors noted above, management determined that a further review of the reporting unit’s intangible assets and property, plant and equipment for recoverability was appropriate:

•

As a result of the faster pace of decline in demand, negative revenue trends and lower expectations of future revenue to be derived from certain customer relationships, management determined that a certain definite-lived customer relationship intangible asset recorded in the magazines and catalogs reporting unit was not recoverable. This resulted in the Company recording a $17 million impairment charge for the three months ended June 30, 2019, which fully impaired the asset. The impairment was determined using Level 3 inputs and estimated based on cash flow analyses, which included management’s assumptions related to future revenues and profitability.

•

With respect to property, plant and equipment and right-of-use assets for operating leases, the Company performed a Step 1 recoverability test in accordance with ASC 360, Property, Plant and Equipment. The recoverability test compares the estimated future undiscounted cash flows expected to result from the use of the asset group and its eventual disposition to the carrying value of the asset group; if the carrying value of the asset group exceeds its estimated future undiscounted cash flows, an impairment loss is recorded for the excess of the asset group’s carrying value over its fair value. Based upon management’s updated projection of cash flows for this asset group – which includes a hypothetical sale of assets – management determined that the estimated future undiscounted cash flows were in excess of the asset group’s carrying value, resulting in 0 impairment loss. Magazines and catalogs passed with estimated future cash flows that exceeded its carrying value by 105%.

The Company will continue to perform interim reviews of goodwill for indicators of impairment each quarter to assess whether an interim impairment test is required for its goodwill balances or if recoverability tests are required for long-lived assets, including property, plant and equipment, and certain identifiable intangible assets, whenever events or changes in circumstances indicate that the carrying value of an asset or asset group may not be recoverable. Such reviews could result in future impairment charges, depending on the facts and circumstances in effect at the time of those reviews.

Other Charges

For ~~each of~~ the three and nine months ended ~~March 31,~~September 30, 2019 and 2018, the Company recorded a de minimis amount and $1 million, respectively, of other charges for multiemployer pension plan withdrawal obligations unrelated to facility closures. The total liability for the withdrawal obligations associated with the Company’s decision to withdraw from certain multiemployer pension plans included $3$4 million in accrued liabilities and ~~$19~~$17 million in restructuring and multiemployer pension plan liabilities at ~~March 31,~~September 30, 2019.

The Company’s withdrawal liabilities could be affected by the financial stability of other employers participating in such plans and any decisions by those employers or the Company to withdraw from such plans in the future. While it is not possible to quantify the potential impact of future events or circumstances, reductions in other employers’ participation in multiemployer pension plans, including certain plans from which the Company has previously withdrawn, could have a material effect on the Company’s previously estimated withdrawal liabilities and condensed consolidated balance sheets, statements of operations and cash flows.

LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Nine Months Ended September 30, 2019 and 2018

(tabular amounts in millions, except per share data)

Restructuring Reserve

The restructuring reserve as of December 31, 2018 and ~~March 31,~~September 30, 2019, and changes during the ~~three~~nine months ended ~~March 31,~~September 30, 2019 were as follows:

	December 31,		Restructuring				Cash			March 31,		December 31,		Restructuring				Cash			September 30,
	2018		Charges		Other		Paid			2019		2018		Charges		Other		Paid			2019
Employee terminations	$	8	$	5	$	—	$	—		$	13	$	8	$	5	$	—	$	(6	)	$	7
Multiemployer pension plan withdrawal obligations		32		1		—		(2	)		31		32		2		—		(4	)		30
Other		1		5		—		(2	)		4		1		19		—		(16	)		4
Total	$	41	$	11	$	—	$	(4	)	$	48	$	41	$	26	$	—	$	(26	)	$	41

The current portion of restructuring reserves of ~~$23~~$17 million at ~~March 31,~~September 30, 2019 was included in accrued liabilities, while the long-term portion of ~~$25~~$24 million, which primarily related to multiemployer pension plan withdrawal obligations related to facility closures, was included in restructuring and multiemployer pension liabilities at ~~March 31,~~September 30, 2019.

The Company anticipates that payments associated with the employee terminations reflected in the above table will be substantially completed by ~~March 31,~~September 30, 2020.

Payments on all of the Company’s multiemployer pension plan withdrawal obligations are scheduled to be completed by 2034. Changes based on uncertainties in these estimated withdrawal obligations could affect the ultimate charges related to multiemployer pension plan withdrawal obligations.

The restructuring liabilities classified as “other” consisted of other facility closing costs.

~~LSC Communications, Inc.~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~

~~For the Three Months Ended March 31, 2019 and 2018~~

~~(tabular amounts in millions, except per share data)~~

Note 9. Commitments and Contingencies

The Company is subject to laws and regulations relating to the protection of the environment. The Company accrues for expenses associated with environmental remediation obligations when such amounts are probable and can be reasonably estimated. Such accruals are adjusted as new information develops or circumstances change and are generally not discounted. The Company has been designated as a potentially responsible party or has received claims in ~~ten~~10 active federal and state Superfund and other multiparty remediation sites. In addition to these sites, the Company may also have the obligation to remediate ~~three~~3 other previously and currently owned facilities. At the Superfund sites, the Comprehensive Environmental Response, Compensation and Liability Act provides that the Company’s 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 Company’s understanding of the financial strength of other potentially responsible parties at the multiparty sites and of other liable parties at the previously owned facilities has been considered, where appropriate, in the determination of the Company’s estimated liability. The Company established reserves, recorded in accrued liabilities and other noncurrent liabilities, that it believes are adequate to cover its share of the potential costs of remediation at each of the multiparty sites and the previously and currently owned facilities. It is not possible to quantify with certainty the potential impact of actions regarding environmental matters, particularly remediation and other compliance efforts that the Company may undertake in the future. However, in the opinion of management, compliance with the present environmental protection laws, before taking into account estimated recoveries from third parties, will not have a material effect on the Company’s condensed consolidated balance sheets, statements of operations and cash flows.

From time to time, the Company’s customers and others file voluntary petitions for reorganization under United States bankruptcy laws. In such cases, certain pre-petition payments received by the Company from these parties could be considered preference items and subject to return. In addition, the Company may be party to certain litigation arising in the ordinary course of business. Management believes that the final resolution of these preference items and litigation will not have a material effect on the Company’s condensed consolidated balance sheets, statements of operations and cash flows.

LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Nine Months Ended September 30, 2019 and 2018

(tabular amounts in millions, except per share data)

Note 10. Debt

The Company’s debt at ~~March 31,~~September 30, 2019 and December 31, 2018 consisted of the following:

	March 31, 2019			December 31, 2018			September 30, 2019			December 31, 2018
Borrowings under the Revolving Credit Facility	$	133		$	64		$	85		$	64
Term Loan Facility due September 30, 2022 _(a₎		249			260
Term Loan Facility due September 30, 2022 _(a)								229			260
8.75% Senior Secured Notes due October 15, 2023		450			450			450			450
Capital lease and other obligations		2			4
Finance lease and other obligations								2			4
Unamortized debt issuance costs		(10	)		(11	)		(10	)		(11	)
Total debt		824			767			756			767
Less: current portion		(175	)		(108	)		(127	)		(108	)
Long-term debt	$	649		$	659		$	629		$	659

(a)

The borrowings under the Term Loan Facility are subject to a variable interest rate. As of ~~March 31,~~September 30, 2019 and December 31, 2018, the interest rate was ~~8.00%~~7.45% and 8.02%, respectively.

On September 30, 2016, the Company issued $450 million of Senior Secured Notes (the “Senior Notes”).

On September 30, 2016 the Company entered into a credit agreement (the “Credit Agreement”) that provides for (i) a senior secured term loan B facility in an aggregate principal amount of $375 million (the “Term Loan Facility”) and (ii) a senior secured revolving credit facility in an aggregate principal amount of $400 million (the “Revolving Credit Facility”)., which was reduced to $300 million per the amendment effective on August 5, 2019. The debt issuance costs and original issue discount are being amortized over the life of the facilities using the effective interest method.

~~LSC Communications, Inc.~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~

~~For the Three Months Ended March 31, 2019 and 2018~~

~~(tabular amounts in millions, except per share data)~~

The Credit Agreement is subject to a number of covenants, including, but not limited to, a minimum Interest Coverage Ratio and a Consolidated Leverage Ratio, as defined in and calculated pursuant to the Credit Agreement, that, in part, restrict the Company’s ability to incur additional indebtedness, create liens, engage in mergers and consolidations, make restricted payments and dispose of certain assets. ~~The Credit Agreement generally allows annual dividend payments of up to $50 million in the aggregate, though additional dividends may be allowed subject to certain conditions.~~ Each of these covenants is subject to important exceptions and qualifications.

Credit Agreement Amendments

On December 20, 2018, the Company amended the Credit Agreement to, among other things, defer certain changes to the minimum Interest Coverage Ratio and the maximum Consolidated Leverage Ratio. ~~As a result,~~Effective August 5, 2019, the Company further amended the Credit Agreement to, among other things, defer certain changes to the minimum Interest Coverage Ratio and the maximum Consolidated Leverage ~~Ratio will be reduced~~Ratio. The following summarizes the changes to ~~3.00 to 1.00 with respect to any fiscal quarter ending on or after March 31, 2020, as opposed to March 31, 2019, as originally contemplated in~~ the ~~Credit Agreement. The~~ minimum Interest Coverage Ratio ~~will be increased~~and the maximum Consolidated Leverage Ratio:

	Original	December 20, 2018	August 5, 2019
Maximum Consolidated Leverage Ratio
Current ratio	3.25 to 1.00	3.25 to 1.00	3.75 to 1.00
Step-down ratio	3.00 to 1.00	3.00 to 1.00	3.50 to 1.00 and 3.25 to 1.00
Step-down as of date (quarter ending on or after)	March 31, 2019	March 31, 2020	June 30, 2020 and March 31, 2021

Minimum Interest Coverage Ratio
Current ratio	3.25 to 1.00	3.25 to 1.00	2.50 to 1.00
Step-up ratio	3.50 to 1.00	3.50 to 1.00	2.75 to 1.00 and 3.00 to 1.00
Step-up as of date (quarter ending on or after)	March 31, 2019	March 31, 2020	September 30, 2020 and June 30, 2021

LSC Communications, Inc.

Notes to ~~3.50 to 1.00 with respect to any test period ending on or after March 31, 2020, as opposed to March 31,~~Condensed Consolidated Financial Statements (Unaudited)

For the Three and Nine Months Ended September 30, 2019 ~~as originally contemplated~~and 2018

(tabular amounts in ~~the Credit Agreement.~~ millions, except per share data)

Other terms, including the outstanding principal, maturity date and other debt covenants ~~remain~~remained the same under the December 20, 2018 amendment.

The August 5, 2019 amendment resulted in a reduction in the Revolving Credit Facility aggregate principal amount from $400 million to $300 million and removed the general allowance to declare and pay annual dividends of up to $50 million. The August 5, 2019 amendment included other changes that generally further restrict the Company’s ability to incur additional indebtedness, create liens, engage in mergers and consolidations, make restricted payments and dispose of certain assets. The outstanding principal and maturity date of the Term Loan Facility remains the same, while the maturity date of the Revolving Credit Facility remains the same.

Additional Debt Issuances Information

The fair values of the Senior Notes and Term Loan Facility that were determined using the market approach based upon interest rates available to the Company for borrowings with similar terms and maturities, were determined to be Level 2 under the fair value hierarchy. The fair value of the Company’s debt was lower than its book value by approximately $149 million at September 30, 2019 and greater than its book value by approximately ~~$30 million and~~ $22 million at ~~March 31, 2019 and~~ December 31, ~~2018, respectively.~~ 2018. Recent announcements at the Company, including the terminated Merger Agreement and recent credit ratings downgrades, have caused downward pricing pressures on the Company’s Term Loan Facility.

There were ~~$133~~$85 million and $64 million of borrowings under the Revolving Credit Facility as of ~~March 31,~~September 30, 2019 and December 31, 2018, respectively. The weighted-average interest rate on borrowings under the Company’s Revolving Credit Facility was ~~5.76%~~5.68% during the ~~three~~nine months ended ~~March 31,~~September 30, 2019.

There ~~were $19~~was $20 million and ~~$20~~$58 million of net interest expense during the three and nine months ended ~~March 31,~~September 30, 2019, respectively. There was $21 million and $59 million of net interest expense during the three and nine months ended September 30, 2018, respectively.

Note 11. Earnings Per Share

During the ~~three~~nine months ended ~~March 31,~~September 30, 2019 ~~and 2018~~, no0 shares of common stock were purchased by the Company. On May 31, 2018, the Company ~~however,~~ completed the repurchase approved by the Board of Directors of 1.6 million shares of common stock for a total cost of $20 million. During the nine months ended September 30, 2019 and 2018, a de minimis amount of shares were withheld from employees for tax liabilities upon vesting of equity awards.

Basic earnings (loss) per share (“EPS”) is calculated by dividing net earnings attributable to the Company’s stockholders by the weighted average number of common shares outstanding for the period. In computing diluted EPS, basic EPS is adjusted for the assumed issuance of all potentially dilutive share-based awards, including stock options, restricted stock, restricted stock units (“RSUs”), and performance share units (“PSUs”).

2024

LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Nine Months Ended ~~March 31,~~September 30, 2019 and 2018

(tabular amounts in millions, except per share data)

The following table shows the calculation of basic and diluted EPS, as well as a reconciliation of basic shares to diluted shares:

	Three Months Ended						Three Months Ended					Nine Months Ended
	March 31,						September 30,					September 30,
	2019			2018			2019		2018			2019			2018
Net (loss) per common share:
Net income (loss) per common share:
Basic	$	(3.79	)	$	(0.32	)	$	0.69	$	(0.12	)	$	(3.78	)	$	(0.21	)
Diluted	$	(3.79	)	$	(0.32	)	$	0.69	$	(0.12	)	$	(3.78	)	$	(0.21	)
Numerator:
Net (loss)	$	(126	)	$	(11	)
Net income (loss)							$	24	$	(4	)	$	(126	)	$	(7	)
Denominator:
Weighted average number of common shares outstanding		33.3			34.7			33.5		33.2			33.4			34.0
Dilutive options and awards		—			—			—		—			—			—
Diluted weighted average number of common shares outstanding		33.3			34.7			33.5		33.2			33.4			34.0
Weighted-average number of anti-dilutive share- based awards:
Restricted stock units								1.6		—			—			—
Options								0.2		—			—			—

Note 12. Retirement Plans

The Company is the sole sponsor of certain defined benefit pension plans that are included in the condensed consolidated balance sheets as of ~~March 31,~~September 30, 2019 and December 31, 2018. The assets and certain obligations of the defined benefit pension plans includes plans qualified under Section 401(a) of the Internal Revenue Code of 1986, as amended (the “U.S. Qualified Plan”) and related non-qualified benefits (the “Non-Qualified Plan”).

The components of the estimated net pension loss (income) for the three and nine months ended ~~March 31,~~September 30, 2019 and 2018 were as follows:

	Three Months Ended								Three Months Ended								Nine Months Ended
	March 31, 2019								September 30, 2019								September 30, 2019
	Qualified			Non-Qualified & International		Total			Qualified			Non-Qualified & International		Total			Qualified			Non-Qualified & International		Total
Interest cost	$	20		$	1	$	21		$	17		$	1	$	18		$	55		$	3	$	58
Expected return on plan assets		(33	)		—		(33	)		(30	)		—		(30	)		(93	)		—		(93	)
Amortization of actuarial loss		3			—		3			3			—		3			8			—		8
Settlement of retirement obligations		135			—		135			1			—		1			137			—		137
Net periodic benefit loss	$	125		$	1	$	126
Net periodic benefit (income) loss									$	(9	)	$	1	$	(8	)	$	107		$	3	$	110

	Three Months Ended								Three Months Ended								Nine Months Ended
	March 31, 2018								September 30, 2018								September 30, 2018
	Qualified			Non-Qualified & International		Total			Qualified			Non-Qualified & International		Total			Qualified			Non-Qualified & International		Total
Interest cost	$	21		$	1	$	22		$	21		$	1	$	22		$	63		$	3	$	66
Expected return on plan assets		(39	)		—		(39	)		(39	)		—		(39	)		(117	)		—		(117	)
Amortization of actuarial loss		5			—		5			5			—		5			15			—		15
Net periodic benefit (income) loss	$	(13	)	$	1	$	(12	)	$	(13	)	$	1	$	(12	)	$	(39	)	$	3	$	(36	)

2125

LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Nine Months Ended ~~March 31,~~September 30, 2019 and 2018

(tabular amounts in millions, except per share data)

In the first quarter of 2019, the Company completed a partial settlement of its retirement benefit obligations related to the U.S. Qualified Plan by purchasing a group annuity contract for certain retirees and beneficiaries from a third-party insurance company. As a result, the Company’s pension assets and liabilities were remeasured as of the settlement date. As of the remeasurement date, the reduction in the reported pension obligation for the participants under the annuity contract was $477 million, and the reduction in plan assets was $466 million. The Company recorded a non-cash settlement charge of $135 million in settlement of retirement benefit obligations in the condensed consolidated statement of operations in the first quarter of 2019. This charge results from the recognition in earnings of a portion of the actuarial losses recorded in accumulated other comprehensive loss based on the proportion of the obligation settled.

The long-term rate of return remained at ~~6.50%~~6.5% for the U.S. Qualified pension plan and did not change as a result of the settlement. The discount rate used to determine the net obligation for the U.S. Qualified pension plan at the settlement date was 4.3%, 10 basis points lower than the discount rate as of December 31, 2018.

There were additional immaterial lump-sum settlements related to the U.S. Qualified Plan (unrelated to the transaction noted above) during the nine months ended September 30, 2019 that resulted in non-cash settlement charges of $2 million.

Settlement of retirement obligations is disclosed separately in the condensed consolidated statements of operations, while the remaining net periodic (loss) income for the three and nine months ended ~~March 31,~~September 30, 2019 and 2018 is included in ~~the~~ investment and other (income)-net.

Note 13. Income Taxes

As of September 30, 2019, the Company’s net deferred tax assets totaled $30 million, inclusive of $11 million of valuation allowances. The Company has provided valuation allowances to reduce the carrying value of certain deferred tax assets, as management has concluded that, based on the weight of available evidence, it is more likely than not that the deferred tax assets will not be fully realized. As such, the valuation allowances represent that portion of the deferred tax assets that management believes will not be realized.

Available evidence includes, but is not limited to, the evaluation of historical taxable income and projections of future taxable income. The assumptions utilized in determining future taxable income require significant judgment and could differ from management’s current assumptions and estimates due to actual operating results or management’s future actions. If the Company were to experience significant taxable losses in future periods and/or projections of future taxable income were to show periods of sustained taxable loss, then the Company might conclude that an increase to the valuation allowances is required. Such an increase could be up to 100% of the net deferred tax assets, based on management’s assessment of whether it is more likely than not that the deferred tax assets will not be fully realized.

Note ~~13.~~14. Comprehensive Income

The following table summarizes accumulated other comprehensive loss by component as of December 31, 2018 and ~~March 31,~~September 30, 2019 and changes during the ~~three~~nine months ended ~~March 31,~~September 30, 2019.

	Pension			Translation						Pension			Translation
	Plan Cost			Adjustments			Total			Plan Cost			Adjustments			Total
Balance at December 31, 2018	$	(529	)	$	(55	)	$	(584	)	$	(529	)	$	(55	)	$	(584	)
Other comprehensive income before reclassifications		105			1			106			106			—			106
Amounts reclassified from accumulated other comprehensive loss		2			—			2			6			—			6
Net change in accumulated other comprehensive loss		107			1			108			112			—			112
Balance at March 31, 2019	$	(422	)	$	(54	)	$	(476	)
Balance at September 30, 2019										$	(417	)	$	(55	)	$	(472	)

LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Nine Months Ended September 30, 2019 and 2018

(tabular amounts in millions, except per share data)

In the first quarter of 2019, the Company completed a partial settlement of its retirement benefit obligations and, as a result, the Company’s pension assets and liabilities were remeasured as of the settlement date. The impact, net of tax, to the Company’s accumulated other comprehensive loss was a decrease of $105 million. Additional immaterial lump-sum settlements during the nine months ended September 30, 2019 increased the net accumulated other comprehensive loss balance by $1 million to a total net of tax impact of $106 million. Refer to Note 12, Retirement Plans, for more information.

The following table summarizes accumulated other comprehensive loss by component as of December 31, 2017 and ~~March 31,~~September 30, 2018 and changes during the ~~three~~nine months ended ~~March 31,~~September 30, 2018.

	Pension			Translation						Pension			Translation
	Plan Cost			Adjustments			Total			Plan Cost			Adjustments			Total
Balance at December 31, 2017	$	(428	)	$	(48	)	$	(476	)	$	(428	)	$	(48	)	$	(476	)
Other comprehensive income before reclassifications		—			5			5
Other comprehensive (loss) before reclassifications											—			(4	)		(4	)
Amounts reclassified from accumulated other comprehensive loss		4			—			4			11			—			11
Reclassification to accumulated deficit		(97	)		—			(97	)		(97	)		—			(97	)
Net change in accumulated other comprehensive loss		(93	)		5			(88	)		(86	)		(4	)		(90	)
Balance at March 31, 2018	$	(521	)	$	(43	)	$	(564	)
Balance at September 30, 2018										$	(514	)	$	(52	)	$	(566	)

The Company adopted ASU 2018-02 “Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” (“ASU 2018-02”) in the first quarter of 2018. As a result of applying this standard in the period of adoption, the Company reclassified $97 million relating to the change in tax rate from accumulated other comprehensive loss to accumulated deficit in the Company’s condensed consolidated balance sheet during the three months ended March 31, 2018. ASU 2018-02 eliminated the stranded tax effects resulting from the U.S Tax Cuts and Jobs Act and improved the usefulness of information reported to financial statement users.

Refer to the condensed consolidated statements of comprehensive income for the components of comprehensive (loss) income for the three and nine months ended ~~March 31,~~September 30, 2019 and 2018.

~~LSC Communications, Inc.~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~

~~For the Three Months Ended March 31, 2019 and 2018~~

~~(tabular amounts in millions, except per share data)~~

Reclassifications from accumulated other comprehensive loss for the three and nine months ended ~~March 31,~~September 30, 2019 and 2018 were as follows:

	Three Months Ended				Three Months Ended				Nine Months Ended
	March 31,				September 30,				September 30,
	2019		2018		2019		2018		2019		2018
Amortization of pension plan cost:
Net actuarial loss _(a)	$	3	$	5	$	3	$	5	$	8	$	15
Reclassifications before tax		3		5		3		5		8		15
Income tax expense		1		1		1		2		2		4
Reclassifications, net of tax	$	2	$	4	$	2	$	3	$	6	$	11

(a)

Amortization of pension plan cost is included in the calculation of net periodic pension plan (income) expense that is recognized ~~all~~ in investment and other income-net in the condensed consolidated statements of operations (see Note 12, Retirement Plans).

~~Note 14. Stock and Incentive Programs~~

The Company’s employees participate in the Company’s 2016 Performance Incentive Plan (the “2016 PIP”). Under the 2016 PIP, the Company may grant cash or bonus awards, stock options, stock appreciation rights, restricted stock awards (“RSAs”), RSUs, performance awards or combinations thereof to certain officers, directors and key employees.

Total compensation expense related to all share based compensation plans for the Company’s employees, officers and directors was $3 million for each of the three months ended March 31, 2019 and 2018. ~~There was a de minimis amount of excess tax benefits for each of the three months ended March 31, 2019 and 2018.~~

~~There was no significant activity related to stock options, RSAs, performance restricted stock, and PSUs during the three months ended March 31, 2019.~~

~~Restricted Stock Units~~

A summary of the Company’s RSU activity for LSC Communications employees, officers and directors as of December 31, 2018 and March 31, 2019, and changes during the three months ended March 31, 2019 is presented below.

Weighted

Shares

Average Grant

(thousands)

Date Fair Value

Nonvested at December 31, 2018

897

$
19.65

Granted

927

6.28

Vested

(338
)

25.59

Forfeited

(2
)

17.62

Nonvested at March 31, 2019

1,484

$
9.94

During the three months ended March 31, 2019, 926,870 RSUs were granted to certain senior management of the Company. The shares are subject to time-based vesting and will cliff vest on February 25, 2022. As of March 31, 2019, the total potential payout for the awards granted during the three months ended March 31, 2019 is 926,870 RSUs. The fair value of these awards was determined based on the Company’s stock price on the grant date reduced by the present value of expected dividends through the vesting period. These awards are subject to forfeiture upon termination of employment prior to vesting, subject in some cases to early vesting upon specified events, including death, permanent disability or retirement of the grantee or change of control of the Company.

Compensation expense related to LSC Communications, RRD and Donnelley Financial RSUs held by Company employees, officers and directors was $1 million and $2 million for the three months ended March 31, 2019 and 2018, respectively.

2327

LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Nine Months Ended ~~March 31,~~September 30, 2019 and 2018

(tabular amounts in millions, except per share data)

As of March 31, 2019 there was $10 million of unrecognized share-based compensation expense related to approximately 1.5 million RSUs outstanding, with a weighted-average grant date fair value of $9.94, that are expected to vest over a weighted-average period of 2.5 years.

Note 15. Segment Information

During the third quarter of 2018, the Company realigned the reportable segments and reporting units to reflect its evolution since its separation from RRD in 2016, as well as changes from recent acquisition and disposal activity. All prior year amounts have been reclassified to conform to the Company’s current reporting structure.

The Company’s segment and product and service offerings are summarized below:

Magazines, Catalogs and Logistics

The Magazines, Catalogs and Logistics segment primarily produces magazines and catalogs, as well as provides logistics services to the Company and other third-parties. The segment also provides certain other print-related services, including mail-list management and sortation. The segment has operations primarily in the U.S. The Magazines, Catalogs and Logistics segment is divided into ~~two~~2 reporting units: magazines and catalogs; and logistics.

Book

The Book segment produces books for publishers primarily in the U.S. The segment also provides supply-chain management services, warehousing and fulfillment services, as well as e-book formatting for book publishers.

Office Products

The Office Products segment manufactures and sells branded and private label products in ~~five~~5 core categories: filing products, envelopes, note-taking products, binder products, and forms.

Other

The Other grouping consists of the following non-reportable segments: Europe, Directories, Mexico, and Print Management. Europe produced magazines, catalogs and directories, as well as provided packaging and pre-media services. The Company disposed of its European printing business in the third quarter of 2018 (refer to Note 2, Business Combination and Disposition, for more information). Mexico produces magazines, catalogs, statements, forms, and ~~labels.~~ labels.PrintManagementprovidesoutsourcedprintprocurementandmanagement ~~services.~~ services.

Corporate

Corporate consists of unallocated selling, general and administrative activities and associated expenses including, in part, executive, legal, finance, communications, certain facility costs and LIFO inventory provisions. In addition, share-based compensation expense is included in Corporate and not allocated to the operating segments.

2428

LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Nine Months Ended ~~March 31,~~September 30, 2019 and 2018

(tabular amounts in millions, except per share data)

Information by Segment

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 Company’s chief operating decision-maker and is most consistent with the presentation of profitability reported with the condensed consolidated financial statements.

			Income (Loss)					Depreciation						Income (Loss)			Depreciation
Three Months Ended	Net		from			Assets of		and		Capital		Net		from			and		Capital
March 31, 2019	Sales		Operations			Operations		Amortization		Expenditures
September 30, 2019												Sales		Operations			Amortization		Expenditures
Magazines, Catalogs and Logistics	$	403	$	(31	)	$	795	$	15	$	10	$	392	$	(6	)	$	13	$	6
Book		260		13			647		12		17		256		5			12		4
Office Products		119		8			329		3		—		128		8			3		—
Total reportable segments		782		(10	)		1,771		30		27		776		7			28		10
Other		63		4			90		1		1		58		5			1		—
Corporate		—		(13	)		86		—		—		—		(21	)		—		1
Total operations	$	845	$	(19	)	$	1,947	$	31	$	28	$	834	$	(9	)	$	29	$	11

			Income (Loss)					Depreciation						Income (Loss)					Depreciation
Three Months Ended	Net		from			Assets of		and		Capital
March 31, 2018	Sales		Operations			Operations		Amortization		Expenditures
Nine Months Ended												Net		from			Assets of		and		Capital
September 30, 2019												Sales		Operations			Operations		Amortization		Expenditures
Magazines, Catalogs and Logistics	$	427	$	(14	)	$	742	$	16	$	9	$	1,175	$	(79	)	$	749	$	41	$	28
Book		249		9			565		14		9		805		36			572		37		28
Office Products		123		2			372		4		—		386		29			293		9		1
Total reportable segments		799		(3	)		1,679		34		18		2,366		(14	)		1,614		87		57
Other		130		7			194		4		1		182		17			83		3		1
Corporate		—		(10	)		84		—		1		—		(47	)		95		1		2
Total operations	$	929	$	(6	)	$	1,957	$	38	$	20	$	2,548	$	(44	)	$	1,792	$	91	$	60

			Income (Loss)			Depreciation
Three Months Ended	Net		from			and		Capital
September 30, 2018	Sales		Operations			Amortization		Expenditures
Magazines, Catalogs and Logistics	$	463	$	1		$	16	$	6
Book		282		21			12		7
Office Products		145		15			4		—
Total reportable segments		890		37			32		13
Other		125		9			2		1
Corporate		—		(5	)		—		1
Total operations	$	1,015	$	41		$	34	$	15

			Income (Loss)					Depreciation
Nine Months Ended	Net		from			Assets of		and		Capital
September 30, 2018	Sales		Operations			Operations		Amortization		Expenditures
Magazines, Catalogs and Logistics	$	1,291	$	(19	)	$	795	$	47	$	20
Book		797		49			610		39		25
Office Products		422		30			363		11		1
Total reportable segments		2,510		60			1,768		97		46
Other		377		23			102		8		3
Corporate		—		(30	)		102		1		3
Total operations	$	2,887	$	53		$	1,972	$	106	$	52

LSC Communications, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Nine Months Ended September 30, 2019 and 2018

(tabular amounts in millions, except per share data)

Restructuring, impairment and other charges by segment for the three and nine months ended ~~March 31,~~September 30, 2019 and 2018 are disclosed in Note 8, Restructuring, Impairment and Other Charges.

Note 16. New Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2016-13 “Financial Instruments-Credit Losses (Topic 326)” (“ASU 2016-13”). ASU 2016-13 changes the accounting for credit losses on financial instruments, including accounts receivable. The standard will require the Company to measure expected credit losses on trade receivables based on historical experience, current conditions, and reasonable forecasts. ASU 2016-13 is effective in the first quarter of 2020. The Company is in the process of assessing the impact of the new standard but does not anticipate a significant impact.

In August 2018, the FASB issued Accounting Standards Update No. 2018-13 “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”). ASU modifies the disclosure requirements for fair value measurements. ASU 2018-13 is effective in the first quarter of 2020. The Company does not anticipate a significant impact.

In August 2018, the FASB issued Accounting Standards Update No. 2018-14 “Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans” (“ASU 2018-14”). ASU 2018-14 modifies the annual disclosure requirements for employers that sponsor defined benefit pension plans. ASU 2018-14 is effective for 2020 year-end disclosures. Early adoption of ASU 2018-14 is permitted; however, the Company plans to adopt the standard for the 2020 year-end disclosures. The Company does not anticipate a significant impact.

In August 2018, the FASB issued Accounting Standards Update No. 2018-15 “~~Intangibles—~~“Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract” (“ASU 2018-15”). ASU 2018-15 aligns the accounting for implementation costs for cloud computing arrangements with the accounting for costs involved in implementing an internal-use software license. ASU 2018-15 is effective in the first quarter of 2020; however, as early adoption is permitted, the Company adopted ASU 2018-15 in the first quarter of 2019. The adoption did not have a material impact induring the ~~first quarter of~~nine months ended September 30, 2019.

ITEM 2. MANAGEMENT’S ~~DISCUSSION~~DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is management’s discussion and analysis of the financial condition of LSC Communications, Inc. as of ~~March 31,~~September 30, 2019 and December 31, 2018 and the results of operations for the three and nine months ended ~~March 31,~~September 30, 2019 and 2018. This commentary should be read in conjunction with the condensed consolidated financial statements and accompanying notes included in Item 1, Condensed Consolidated Financial Statements. Refer to the Company’s annual report on Form 10-K, as filed with the Securities and Exchange Commission (“SEC”) on February 19, 2019, for management’s discussion and analysis of the financial condition of the company as of December 31, 2018 and December 31, 2017, and the results of operations for the years ended December 31, 2018, 2017 and 2016.

Company Overview

Merger ~~Agreement~~with Quad/Graphics, Inc.

~~The Company and Quad/Graphics have made customary representations, warranties and covenants~~Agreement, of which $5 million was incurred in 2018. Except for certain indemnification obligations of Quad related to LSC Communications assisting Quad with the ~~Merger Agreement. Subject to certain exceptions outlined in~~financing under the Merger Agreement, the ~~Company has~~parties also agreed to ~~covenants relating~~release each other from any and all claims, counterclaims, demands, proceedings, actions, causes of action, orders, obligations, damages, debts, costs, expenses and other liabilities whatsoever and howsoever arising pursuant to the Company’s business during the period between the execution of the Merger Agreement and the consummation of the Merger, including restrictions on its ability to issue any shares of its capital stock, repurchase any shares of its capital stock and incurring additional indebtedness outside the ordinary course of business. The Merger Agreement allows the Company to continue paying a regular quarterly dividend up to $0.26 per share.

~~On February 25, 2019, Quad/Graphics announced that its shareholders had voted to approve the issuance of Quad/Graphics’ class A common stock in the Merger on February 22, 2019.~~

~~The Company and Quad/Graphics filed notification and report forms in connection with~~Agreement or the transactions contemplated by the Merger Agreement with the U.S. Department of Justice (the “DOJ”) and the U.S. Federal Trade Commission pursuant to the Hart-Scott-Rodino Antitrust Improvement Act of 1976, as amended (the “HSR Act”) on November 13, 2018. On December 13, 2018, the Company and Quad/Graphics each received a requestprovided for ~~additional information and documentary material (the “Second Request”) from the DOJ in connection with the DOJ’s review of the transactions contemplated by the Merger Agreement.~~

The HSR Act provides that the issuance of the Second Request extends the waiting period under the HSR Act until either 30 days after both the Company and Quad/Graphics have substantially complied with the Second Request or such later time as agreed to by the parties with the DOJ, unless the waiting period is terminated earlier by the DOJ. The Company continues to expect the Merger to be consummated in mid-2019.

Segment Descriptions

During the third quarter of 2018, the Company realigned the reportable segments and reporting units to reflect its evolution since its separation from R. R. Donnelley & Sons Company’s (“RRD”) in 2016, as well as changes from recent acquisition and disposal activity. All prior year amounts have been reclassified to conform to the Company’s current reporting structure.

The Company’s segments and their product offerings are summarized below:

Magazines, Catalogs and Logistics

Book

Office Products

The Office Products segment manufactures and sells branded and private label products in five core categories: filing products, envelopes, note-taking products, binder products, and forms.

Other

The Other grouping consists of the following non-reportable segments: Europe, Directories, Mexico, and Print Management. Europe produced magazines, catalogs and directories, as well as provided packaging and pre-media services. The Company disposed of its European printing business in the third quarter of 2018 (refer to Note 2, Business Combination and Disposition, for more information). Mexico produces magazines, catalogs, statements, forms, and labels. Print Management provides outsourced print procurement and management services.

Corporate

Corporate consists of unallocated selling, general and administrative activities and associated expenses including, in part, executive, legal, finance, communications, certain facility costs and ~~LIFO~~last in, first out (“LIFO”) inventory provisions. In addition, share-based compensation expense is included in Corporate and not allocated to the operating segments.

Business Combination and Dispositions

The following table lists the Company’s acquisitions since 2016:

Date	Company	Description	Purchase Price
July 2, 2018	RRD's Print Logistics business ("Print Logistics")	Integrated logistics services provider with distribution network	$52 million in cash
November 29, 2017	The Clark Group, Inc. ("Clark Group")	Third-party logistics provider of distribution, consolidation, transportation management and international freight forwarding services	$25 million in cash
November 9, 2017	Quality Park	Producer of envelopes, mailing supplies and assorted packaging items	$41 million in cash
September 7, 2017	Publishers Press, LLC ("Publishers Press")	Printing provider with capabilities such as web-offset printing, prepress and distribution services for magazines and retail brands	$68 million in cash
August 21, 2017	NECI, LLC ("NECI")	Supplier of commodity and specialty filing supplies	$6 million in cash
August 17, 2017	CREEL Printing, LLC ("Creel")	Offset and digital printing company	$79 million in cash
July 28, 2017	Fairrington Transportation Corp., F.T.C. Transport, Inc. and F.T.C. Services, Inc. (“Fairrington”)	Full-service, printer-independent mailing logistics provider in the United States	$19 million in cash and ~1.0 million shares of LSC Communications common stock (total value $39 million)
March 1, 2017	HudsonYards Studios, LLC ("HudsonYards")	Digital and print premedia production company that provides high-quality creative retouching, computer-generated imagery, mechanical creation, press-ready file preparation, and interactive production services	$3 million in cash
December 2, 2016	Continuum Management Company, LLC (“Continuum”)	Print procurement and management business	$9 million in cash

The ~~Company sold its European printing business on September 28, 2018 for $47 million in cash. The~~ ~~Company sold its retail offset printing facilities on June 5, 2018.~~Company’s dispositions are listed below:

•

Commingle operations on August 20, 2019;

•

European printing business on September 28, 2018 for $47 million in cash; and

•

Retail offset printing facilities on June 5, 2018.

For further information on the Print Logistics acquisition and the European disposition, see Note 2, Business Combination and Disposition, to the condensed consolidated financial statements.

Outlook

Competitive Environment

According to the ~~February~~August 2019 IBIS World industry report “Printing in the U.S.,” estimated total annual printing industry revenue is approximately $77 billion, of which approximately ~~$12~~$13 billion relates to our core segments of the print market and an additional approximately $31 billion pertains to related segments of the print market in which we are able to offer certain products. Despite consolidation in recent years, including several acquisitions completed by LSC Communications, the industry remains highly fragmented and LSC Communications is one of the largest players in our segment of the print market. The print and related services industry, in general, continues to have excess capacity and LSC Communications remains diligent in proactively identifying plant consolidation opportunities to keep our capacity in line with demand. Across the Company’s range of print products and services, competition is based primarily on the ability to deliver products for the lowest total cost, a factor driven not only by price, but also by materials and distribution costs. We expect that prices for print products and services will continue to be a focal point for customers in coming years.

Value-added services, such as LSC Communications’ co-mail, logistics and supply chain management offerings, enable customers to lower their total costs. Technological changes, including the electronic distribution of documents and data, online distribution and hosting of media content, and advances in digital printing, print-on-demand and internet technologies, continue to impact the market for our products and services. ~~The impact of digital technologies has been felt in many print products. Digital technologies have impacted printed magazines as some advertising spending has moved from print to electronic media.~~ Catalogs have experienced volume reductions as our customers allocate more of their spending to online resources and also face stiff competition from online retailers resulting in retailer compression. Educational books within the college market continue to be impacted by electronic substitution and other trends. The K-12 educational sector continues to be focused on increasing digital distribution but there has been inconsistent adoption across school systems. ~~E-book substitution has impacted overall consumer print trade book volume, although e-book adoption~~ ~~rates have stabilized and industry-wide print book volume has been growing in recent years.~~ ~~In addition, retail inserts have experienced volume reductions primarily as a result of store closures and reduced newspaper circulation.~~ ~~Electronic~~ ~~communication and transaction technology has also continued to drive electronic substitution in directory printing, in part driven by cost pressures at key customers.~~

•

The impact of digital technologies has been felt in many print products. Digital technologies have impacted printed magazines as advertising spending continues to move from print to electronic media.

•

Catalogs have experienced volume reductions as our customers allocate more of their spending to online resources and also face stiff competition from online retailers resulting in retailer compression.

•

The Company has seen an unprecedented drop in demand for magazines and catalogs in 2019, with the faster pace of decline in demand primarily due to the accelerated impact of digital disruption of demand for printed materials.

•

Educational books within the college market continue to be impacted by electronic substitution and other trends. The K-12 educational sector continues to be focused on increasing digital distribution but there has been inconsistent adoption across school systems.

•

E-book substitution has impacted overall consumer print trade book volume, although e-book adoption rates have stabilized and industry-wide print book volume has been growing in recent years.

•

Electronic communication and transaction technology has also continued to drive electronic substitution in directory printing, in part driven by cost pressures at key customers.

The future impact of technology on our business is difficult to ~~predict and could~~predict; however, it is likely to result in additional expenditures to restructure impacted operations or develop new technologies. In addition, we have made targeted acquisitions and investments in our existing business to offer customers innovative services and solutions. Such acquisitions and investments include the acquisitions of Print Logistics in 2018 and Clark Group, Quality Park, Publishers Press, NECI, CREEL, Fairrington, and HudsonYards in 2017, which expanded our logistics, printing, digital, office products, and premedia capabilities, and Continuum Management Company, LLC (“Continuum”) in 2016, which expanded our print management capabilities. These acquisitions and investments further secure our position as a technology leader in the industry.

Technological advancement and innovation ~~has affected~~continues to affect the overall demand for most of the products in our Office Products segment. ~~While these changes continue to impact demand,~~However, the overall market for our products remains large and we believe share growth is attainable. We compete against a range of both domestic and international competitors in each of our product categories within the segment. Due to the increasing percentage of private label products in the market, resellers have created a highly competitive environment where purchasing decisions are based largely on price, quality and the supplier’s ability to service the customer. As consumer preferences shift towards private label, resellers have increased the pressure on suppliers to better differentiate their product offering, oftentimes through product exclusivity, product innovation and development of private label products. We have experienced robust growth within our e-commerce channel, where a significant majority of our sales are branded products.

We have implemented a number of strategic initiatives to reduce our overall cost structure and improve efficiency, including the restructuring, reorganization and integration of operations and streamlining of administrative and support activities. Future ~~cost~~cost reduction initiatives ~~could~~are likely to 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. We also review our operations and management structure on a regular basis to appropriately balance risks and opportunities to maximize efficiencies and to support our long-term strategic goals.

During late 2018 and early 2019, the Company performed a comprehensive review of the Company’s entire operations to identify new revenue opportunities and cost savings. This review covered substantially all aspects of the Company – both operational and support functions – and involved key personnel from throughout the organization. The resulting revenue opportunities and cost savings initiatives were approved by senior management in the first quarter of 2019 and are expected to be implemented over the next three years. While the Company expects to realize the benefits beginning in 2019 and at various points over the next three years, the Company incurred ~~$1.5~~$3.0 million and $5.6 million of expense during the three and nine months ended ~~March 31,~~September 30, 2019, respectively, relating to the implementation of certain identified initiatives. As the Company continues to implement the identified initiatives, the Company expects to incur additional expense; however, the Company expects the resulting benefits (additional revenue and/or cost savings) to significantly exceed the additional expense. Refer to Note 8, Restructuring, Impairment and Other Charges, for information on the charges recorded during the three and nine months ended ~~March~~September 30, 2019.

Impairment Charges

As a result of the Step 1 impairment test for Book, logistics and Office Products, the Company did not recognize any goodwill impairment charges as the estimated fair values of the reporting units exceeded their respective carrying values. Book, logistics and Office Products passed with fair values that exceeded their carrying values by 22.0%, 35.8% and 14.4%, respectively.

Due to the factors noted above, the Company evaluated the recoverability of its definite-lived intangible assets and concluded that for the three months ended September 30, 2019, the assets were recoverable.

•

With respect to property, plant and equipment and right-of-use assets for operating leases, the Company performed a Step 1 recoverability test in accordance with Accounting Standards Codification (“ASC”) 360, Property, Plant and Equipment. The recoverability test compares the estimated future undiscounted cash flows expected to result from the use of the asset group and its eventual disposition to the carrying value of the asset group; if the carrying value of the asset group exceeds its estimated future undiscounted cash flows, an impairment loss is recorded for the excess of the asset group’s carrying value over its fair value. Based upon management’s updated projection of cash flows for this asset group – which includes a hypothetical sale of assets – management determined that the estimated future undiscounted cash flows were in excess of the asset group’s carrying value, resulting in no impairment loss. Magazines and catalogs passed with estimated future cash flows that exceeded its carrying value by 105%.

Income Taxes

Raw Materials

We negotiate with suppliers to maximize our purchasing efficiencies. The primary raw materials we use in our printed products are paper and ink. We negotiate with paper suppliers to maximize our purchasing efficiencies and use a wide variety of paper grades and formats. In addition, a substantial amount of paper used in our printed products is supplied directly by customers. Variations in the cost and supply of certain paper grades used in the manufacturing process may affect our consolidated financial results. Generally, customers directly absorb the impact of changing prices on customer-supplied paper. For paper that we purchase, we have historically passed most changes in price through to our customers.

Contractual arrangements and industry practice should support our continued ability to pass on any future paper price increases, but there is no assurance that market conditions will continue to enable us to successfully do so. Higher paper prices and tight paper supplies may have an impact on customers’ demand for printed products. We also resell waste paper and other print-related by-products and may be impacted by changes in prices for these by-products.

We use a wide variety of ink formulations and colors in our manufacturing processes. Variations in the cost and supply of certain ink formulations may affect our consolidated financial results. We have undertaken various strategic initiatives to try to mitigate any foreseeable supply disruptions with respect to our ink requirements, including entering into a long term supply arrangement with a single supplier for a substantial portion of our ink supply. Certain contractual protections exist in our relationship with such supplier, such as price and quality protections and an ability to seek alternative sources of ink if the supplier breaches or is unable to perform certain of its obligations, which are intended to mitigate the risk of ink-related supply disruptions.

The primary materials used in the Office Products segment are paper, steel and polypropylene substrates. We negotiate with leading paper, plastic and steel suppliers to maximize our purchasing efficiencies. All of these materials are available from a number of domestic and international suppliers and we are not dependent upon any single supplier for any of these materials. We believe that adequate supply is available for each of these materials for the foreseeable future, although higher paper prices may have an impact on demand for our products.

Changes in material prices, including paper and freight, may impact the Company’s operating margins as there may be a lag between when the Company experiences the changes and when they are absorbed by our customers.

Except for our long-term supply arrangement regarding ink, we do not consider ourselves to be dependent upon any single vendor as a source of supply for our businesses, and we believe that sufficient alternative sources for the same, similar or alternative products are available.

Changes in the price of raw materials, crude oil and other energy costs impact our manufacturing costs. Crude oil and energy prices continue to be volatile. Should prices increase, we generally cannot pass on to customers the impact of higher energy prices on our manufacturing costs. We do enter into fixed price contracts for a portion of our natural gas purchases to mitigate the impact of changes in energy prices. We cannot predict sudden changes in energy prices and the impact that possible future changes in energy prices might have upon either future operating costs or customer demand and the related impact either will have on the Company’s consolidated statements of operations, balance sheets and cash flows.

Pension Benefit Plans

The funded status of the Company’s pension benefit plans is dependent upon many factors, including returns on invested assets and the level of certain market interest rates. Market conditions may lead to changes in the discount rates (used to value the year-end benefit obligations of the plans) and the market value of the securities held by the plans, which could significantly increase or decrease the funded status of the plans. The Company reviews its actuarial assumptions on an annual basis as of December 31. Based on current estimates, the Company expects to make cash contributions of approximately $6 million to its pension benefit plans for the full year in 2019, of which $1$4 million has been contributed during the ~~three~~nine months ended ~~March 31,~~September 30, 2019.

In the first quarter of 2019, the Company completed a partial settlement of its retirement benefit obligations by purchasing a group annuity contract for certain retirees and beneficiaries from a third-party insurance company. As a result, the Company’s pension assets and liabilities were remeasured as of the settlement date. The Company recorded a non-cash settlement charge of $135 million in settlement of retirement benefit obligations in the condensed consolidated statement of operations in the first quarter of 2019. There were additional immaterial lump-sum settlements (unrelated to the transaction noted above) during the nine months ended September 30, 2019 that resulted in non-cash settlement charges of $2 million.

Based on the fair value of assets and the estimated discount rate used to value benefit obligations as of ~~March 31,~~September 30, 2019, the Company estimates the unfunded status of the pension benefit plans to be approximately ~~$105~~$148 million compared to $137 million at December 31, 2018.

See Note 12, Retirement Plans, for more information on the Company’s pension benefit plans.

Dividend Policy

On July 23, 2019, LSC Communications announced that its Board of Directors has determined to suspend the Company’s quarterly cash dividend.

Significant Accounting Policies

There have been no changes to the Company’s significant accounting policies disclosed in the annual report on Form 10-K for the year-ended December 31, 2018, with the exception of leases. On January 1, 2019, the Company adopted Accounting Standards Update No. 2016-02 “Leases (Topic 842)” (“ASU 2016-02”), as discussed in the Company’s annual report on Form 10-K. Upon adoption of ASC 842, the Company added $206 million of right-of-use (“ROU”) assets and lease liabilities to its condensed consolidated balance sheet related to operating leases. There was no impact to the Company’s condensed consolidated statements of operations. See Note 4, Leases, for more information.

FINANCIAL REVIEW

In the financial review that follows, the Company discusses its condensed consolidated balance sheets, statements of operations, cash flows and certain other information. This discussion should be read in conjunction with the Company’s condensed consolidated financial statements and the related notes.

Results of Operations for the Three Months Ended ~~March 31,~~September 30, 2019 as Compared to the Three Months Ended ~~March 31,~~September 30, 2018

The following table shows the results of operations for the three months ended ~~March 31,~~September 30, 2019 and 2018, which reflects the results of the acquired businesses from the relevant acquisition dates:

	Three Months Ended												Three Months Ended
	March 31,												September 30,
	2019			2018			$ Change			% Change			2019			2018			$ Change			% Change
	(in millions, except percentages)												(in millions, except percentages)
Net sales	$	845		$	929		$	(84	)		(9.1	%)	$	834		$	1,015		$	(181	)		(17.9	%)
Cost of sales		735			808			(73	)		(9.0	%)		716			862			(146	)		(16.9	%)
Cost of sales as a % of net sales		87.0	%		87.0	%								85.9	%		84.9	%
Selling, general and administrative expenses (exclusive of depreciation and amortization)		85			83			2			2.4	%		88			77			11			14.3	%
Selling, general and administrative expenses as a % of net sales		10.1	%		8.9	%								10.6	%		7.6	%
Restructuring, impairment and other charges-net		13			6			7			116.7	%		10			1			9			900.0	%
Depreciation and amortization		31			38			(7	)		(18.4	%)		29			34			(5	)		(14.7	%)
(Loss) from operations	$	(19	)	$	(6	)	$	(13	)		216.7	%
(Loss) income from operations													$	(9	)	$	41		$	(50	)		(122.0	%)

Condensed Consolidated Results

Net sales for the three months ended ~~March 31,~~September 30, 2019 were ~~$845~~$834 million, a decrease of ~~$84~~$181 million, or ~~9.1%~~17.9%, compared to the three months ended ~~March 31,~~September 30, 2018. Net sales were impacted ~~by:~~

~~The dispositions~~by the disposition of the Company’s European printing business ~~and retail offset printing facilities~~ in 2018, lower volume and ~~lower volume;~~

~~Partially offset by the acquisition of Print Logistics~~a $23 million decrease in ~~2018 and higher volume in books.~~

~~Additionally, on a pro forma basis, the Company’s net sales decreased by approximately $128 million or 13.2% (see Note 2,~~ ~~Business Combination and Disposition, to the condensed consolidated financial statements).~~ pass-through paper sales.

Total cost of sales decreased ~~$73~~$146 million, or ~~9.0%~~16.9%, for the three months ended ~~March 31,~~September 30, 2019 compared to the three months ended ~~March 31,~~September 30, 2018, primarily driven by the ~~dispositions~~disposition of the Company’s European printing business, ~~and retail offset printing facilities and~~ lower volume, a gain on the sale of the Company’s commingle operations in 2019, and a higher LIFO benefit recorded in 2019. The decrease was partially offset by higher labor costs ~~incurred by the acquisition~~and higher costs as a result of ~~Print Logistics.~~ product mix.

As a percentage of net sales, cost of sales ~~remained consistent at 87.0%~~increased from 84.9% for the three months ended ~~March 31,~~September 30, 2018 to 85.9% for the three months ended September 30, 2019 primarily due to higher labor costs and ~~2018.~~product mix.

Selling, general and administrative expenses increased $2$11 million to ~~$85~~$88 million for the three months ended ~~March 31,~~September 30, 2019 compared to the three months ended ~~March 31,~~September 30, 2018 primarily due to costs associated with the Merger ~~and costs incurred by the acquisition of Print Logistics,~~Agreement, partially offset by the disposition of the Company’s European printing business.

As a percentage of net sales, selling, general and administrative expenses increased from ~~8.9%~~7.6% for the three months ended ~~March 31,~~September 30, 2018 to ~~10.1%~~10.6% for the three months ended ~~March 31,~~September 30, 2019 primarily due to costs associated with the ~~Merger.~~Merger Agreement.

For the three months ended ~~March 31,~~September 30, 2019, the Company recorded restructuring, impairment and other charges of ~~$13~~$10 million. The charges ~~primarily included:~~

~~Net other restructuring charges of $6 million~~were primarily due to ~~charges related to~~ facility costs, ~~and~~ costs associated with new revenue opportunities and cost savings initiatives implemented during the ~~quarter;~~

•

Employee termination costs of $5 million related to an aggregate of 240 employees, of whom 16 were terminated as of or prior to March 31, 2019 primarily related to the closure of one facility in the Magazines, Catalogs and Logistics segment; and

~~$2 million of net impairment charges~~quarter, andmultiemployer withdrawal obligations related to ~~machinery and equipment associated with~~ facility ~~closings~~ ~~in the Magazines, Catalogs and Logistics segment.~~closures.

For the three months ended ~~March 31,~~September 30, 2018, the Company recorded restructuring, impairment and other charges of $6$1 million. The charges ~~included:~~

~~Employee termination costs of $4 million related to an aggregate of 196 employees, substantially all of whom were terminated as of or prior to March 31, 2019~~ primarily ~~related to one facility closure in the Magazines, Catalogs and Logistics segment and the reorganization of certain business units;~~

~~Other~~included net other restructuring charges of $3$1 million ~~for~~mainly due to facility costs and multiemployer pension plan withdrawal obligations related to facility ~~closures; and~~

Asclosures, partially offset by a ~~result~~gain related to the disposition of ~~a $1 million adjustment of previously recorded goodwill associated with~~ the ~~2017 acquisitions, there was a reduction of $1 million of goodwill impairment charges during the three months ended March 31,~~Company’s European printing business on September 28, 2018.

~~Depreciation~~Depreciation and amortization decreased $7$5 million to ~~$31~~$29 million for the three months ended ~~March 31,~~September 30, 2019 compared to the three months ended ~~March 31,~~September 30, 2018, due to decreased capital spending in recent years compared to historical levels and the ~~dispositions~~disposition of the Company’s European printing ~~business and retail offset printing facilities.~~

business.

	Three Months Ended												Three Months Ended
	March 31,												September 30,
	2019			2018			$ Change			% Change			2019			2018			$ Change			% Change
	(in millions, except percentages)												(in millions, except percentages)
Interest expense-net	$	19		$	20		$	(1	)		(5.0	%)	$	20		$	21		$	(1	)		(4.8	%)
Settlement of retirement benefit obligations		135			—			135			100.0	%		1			—			1			100.0	%
Termination fee from Quad														(45	)		—			(45	)		100.0	%
Investment and other (income)-net		(10	)		(11	)		1			(9.1	%)		(9	)		(11	)		2			(18.2	%)

~~Net interest expense decreased by $1 million~~Refer to Note 12, Retirement Plans, for information on the ~~three months ended March 31, 2019 compared~~non-cash settlement charge related to retirement benefit obligations. Refer to Note 1, Overview and Basis of Presentation, for information on the ~~three months ended March 31, 2018.~~termination fee received from Quad. Investment and other (income)-net primarily relates to the Company’s pension benefit plans in both years. ~~Refer to Note 12,~~ ~~Retirement Plans, for information on the non-cash settlement charge related to retirement benefit obligations.~~

Three Months Ended

March 31,

2019

2018

$ Change

(in millions, except percentages)

Net (loss) before income taxes

$
(163
)

$
(15
)

$
(148
)
Income tax (benefit)

(37
)

(4)

(33
)
Effective income tax rate

22.7
%

24.0
%

	Three Months Ended
	September 30,
	2019			2018			$ Change
	(in millions, except percentages)
Income before income taxes	$	24		$	31		$	(7	)
Income tax expense		—			35			(35	)
Effective income tax rate		4.3	%		112.3	%

The effective income tax rate for the three months ended ~~March 31,~~September 30, 2019 was ~~22.7%~~4.3% compared to ~~24.0%~~112.3% for the three months ended ~~March 31,~~September 30, 2018. The effective rate for the three months ended September 30, 2019 reflects the benefit of costs associated with the terminated Merger Agreement that were previously considered non-deductible.

The effective income tax rate for the three months ended March 31, 2019 reflects the impact of nondeductible costs associated with the Merger and share-based compensation awards that either lapsed or vested. The effective income tax rate for the three months ended March 31,September 30, 2018 reflects a $25 million non-cash tax provision related to the ~~impact~~disposition of the Company’s European printing business. Additionally, the rate was impacted by the U.S. Tax Cuts and Jobs Act (“Tax Act”) including the reduction of the U.S. federal corporate tax rate from 35.0% to 21.0%. , partially offset by the tax resulting from the inclusion of certain foreign-sourced earnings, referred to as the global intangible low-taxed income ("GILTI") tax, as well as changes in deductions and permanent book-to-tax differences.

Information by Segment

The following tables summarize net sales, income (loss) from operations and certain items impacting comparability within each of the reportable segments and Corporate. The descriptions of the reporting units generally reflect the primary products provided by each reporting unit.

Magazines, Catalogs and Logistics

	Three Months Ended									Three Months Ended
	March 31,									September 30,
	2019			2018			Change			2019			2018			Change
	(in millions, except percentages)									(in millions, except percentages)
Net sales	$	403		$	427		$	(24	)	$	392		$	463		$	(71	)
(Loss) from operations		(31	)		(14	)		(17	)
(Loss) income from operations											(6	)		1			(7	)
Operating margin		(7.7	%)		(3.3	%)	(440) bps				(1.5	%)		0.2	%	(170 bps)
Restructuring, impairment and other charges-net		11			4			7			4			—			4

Net sales for the Magazines, Catalogs and Logistics segment for the three months ended ~~March 31,~~September 30, 2019 were ~~$403~~$392 million, a decrease of ~~$24~~$71 million, or ~~5.4%~~15.5%, compared to the three months ended ~~March 31,~~September 30, 2018. The Magazines, Catalogs and Logistics segment’s net sales decreased primarily due to the unprecedented drop in long-run magazine and catalog volumes during 2019, with the faster pace of decline in demand primarily due to the accelerated impact of digital disruption of demand for printed materials. In addition, lower logistics volume and a $13 million decrease in pass-through paper sales contributed to the decrease.

The changes in Magazines, Catalogs and Logistics segment loss from operations and operating margins were primarily due to lower volumes noted above, as well as higher restructuring, impairment and other charges.

Book

	Three Months Ended
	September 30,
	2019			2018			Change
	(in millions, except percentages)
Net sales	$	256		$	282		$	(26	)
Income from operations		5			21			(16	)
Operating margin		2.0	%		7.4	%	(540 bps)
Restructuring, impairment and other charges-net		2			1			1

Net sales for the Book segment for the three months ended September 30, 2019 were $256 million, a decrease of $26 million, or 9.6%, compared to the three months ended September 30, 2018, primarily due to lower volume, particularly in educational and religious books, and a $9 million decrease in pass-through paper sales.

The decrease in the Book segment income from operations and operating margins was primarily due to lower volume and increased labor costs.

Office Products

	Three Months Ended
	September 30,
	2019			2018			Change
	(in millions, except percentages)
Net sales	$	128		$	145		$	(17	)
Income from operations		8			15			(7	)
Operating margin		6.3	%		10.3	%	(400 bps)
Restructuring, impairment and other charges-net		2			—			2

Net sales for the Office Products segment for the three months ended September 30, 2019 were $128 million, a decrease of $17 million, or 11.7%, compared to the three months ended September 30, 2018, largely as a result of lower volume in envelopes and filing products.

The decrease in Office Products segment income from operations and operating margin was primarily due to lower volume and higher labor costs, partially offset by synergies realized from the integration of Quality Park.

Other

	Three Months Ended
	September 30,
	2019			2018			Change
	(in millions, except percentages)
Net sales	$	58		$	125		$	(67	)
Income from operations		5			9		$	(4	)
Operating margin		8.6	%		7.2	%	140 bps

Net sales for the Other grouping for the three months ended September 30, 2019 were $58 million, a decrease of $67 million, or 52.6%, compared to the three months ended September 30, 2018, primarily due to the disposition of the Company’s European printing business, lower directories volume and a $1 million decrease in pass-through paper sales.

The change in income from operations and operating margin was primarily due to lower volume.

Corporate

The following table summarizes unallocated operating expenses and certain items impacting comparability within the activities presented as Corporate:

	Three Months Ended
	September 30,
	2019		2018		Change
	(in millions, except percentages)
Total operating expenses	$	21	$	5	$	16
Significant components of total operating expenses:
Restructuring, impairment and other charges-net		2		—		2
Share-based compensation expenses		2		2		—
Expenses related to acquisitions, the Merger Agreement and dispositions		10		2		8

Results of Operations for the Nine Months Ended September 30, 2019 as Compared to the Nine Months Ended September 30, 2018

The following table shows the results of operations for the nine months ended September 30, 2019 and 2018, which reflects the results of the acquired businesses from the relevant acquisition dates:

	Nine Months Ended
	September 30,
	2019			2018			$ Change			% Change
	(in millions, except percentages)
Net sales	$	2,548		$	2,887		$	(339	)		(11.7	%)
Cost of sales		2,201			2,468			(267	)		(10.8	%)
Cost of sales as a % of net sales		86.4	%		85.5	%
Selling, general and administrative expenses (exclusive of depreciation and amortization)		253			242			11			4.5	%
Selling, general and administrative expenses as a % of net sales		9.9	%		8.4	%
Restructuring, impairment and other charges-net		47			18			29			161.1	%
Depreciation and amortization		91			106			(15	)		(14.2	%)
(Loss) income from operations	$	(44	)	$	53		$	(97	)		(183.0	%)

Condensed Consolidated Results

Net sales for the nine months ended September 30, 2019 were $2,548 million, a decrease of $339 million, or 11.7%, compared to the nine months ended September 30, 2018. Net sales were impacted by:

•

The dispositions of the Company’s European printing business and retail offset printing facilities in 2018, lower volume in magazines and catalogs, Office Products and Directories, and a $20 million decrease in pass-through paper sales; and

•

The acquisition of Print Logistics in 2018 and higher volume in books.

Additionally, on a pro forma basis, the Company’s net sales decreased by approximately $424 million or 14.3% (see Note 2, Business Combination and Disposition, to the condensed consolidated financial statements). The decrease was primarily due to the Company’s disposition of its European printing business and retail offset printing facilities in 2018.

Total cost of sales decreased $267 million, or 10.8%, for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018, primarily driven by the dispositions of the Company’s European printing business and retail offset printing facilities, lower volume, a gain on the sale of the Company’s commingle operations in 2019, and a higher LIFO benefit recorded in 2019, partially offset by costs incurred by the acquisition of Print Logistics.

As a percentage of net sales, cost of sales increased from 85.5% for the three months ended September 30, 2018 to 86.4% for nine months ended September 30, 2019 primarily due to higher labor costs and product mix.

Selling, general and administrative expenses increased $11 million, or 4.5%, for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018, primarily due to costs associated with the Merger Agreement and costs incurred by the acquisition of Print Logistics, partially offset by the disposition of the Company’s European printing business.

As a percentage of net sales, selling, general and administrative expenses increased from 8.4% for the nine months ended September 30, 2018 to 9.9% for the nine months ended September 30, 2019 primarily due to costs associated with the Merger Agreement.

For the nine months ended September 30, 2019, the Company recorded restructuring, impairment and other charges of $47 million. The charges primarily included:

•

Net other restructuring charges of $21 million primarily due to facility costs, costs associated with new revenue opportunities and cost savings initiatives implemented in 2019, and pension withdrawal obligations related to facility closures;

•

Employee termination costs of $5 million related to an aggregate of 268 employees, of whom 40 were terminated as of or prior to September 30, 2019 primarily related to the closure of one facility in the Magazines, Catalogs and Logistics segment; and

•

$17 million for the impairment of certain definite-lived customer relationships intangible assets in the Magazines, Catalogs and Logistics segment.

For the nine months ended September 30, 2018, the Company recorded restructuring, impairment and other charges of $18 million. The charges primarily included:

•

Net other restructuring charges of $11 million primarily due to facility costs, a loss related to the Company’s disposition of its retail offset printing facilities, and multiemployer pension plan withdrawal obligations related to facility closures, partially offset by a gain related to the disposition of the Company’s European printing business; and

•

Employee termination costs of $7 million related to an aggregate of 329 employees. These charges primarily related to the closure of one facility in the Magazines, Catalogs and Logistics segment and the reorganization of certain business units and corporate functions.

Depreciation and amortization decreased $15 million to $91 million for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018, due to decreased capital spending in recent years compared to historical levels and the disposition of the Company’s European printing business, partially offset by the acquisition of Print Logistics.

	Nine Months Ended
	September 30,
	2019			2018			$ Change			% Change
	(in millions, except percentages)
Interest expense-net	$	58		$	59		$	(1	)		(1.7	%)
Settlement of retirement benefit obligations		137			—			137			100.0	%
Termination fee from Quad		(45	)		—			(45	)		100.0	%
Investment and other (income)-net		(28	)		(35	)		7			(20.0	%)

Refer to Note 12, Retirement Plans, for information on the non-cash settlement charge related to retirement benefit obligations. Refer to Note 1, Overview and Basis of Presentation, for information on the termination fee received from Quad. Investment and other (income)-net primarily relates to the Company’s pension benefit plans in both years.

	Nine Months Ended
	September 30,
	2019			2018			$ Change
	(in millions, except percentages)
Net (loss) income before income taxes	$	(166	)	$	29		$	(195	)
Income tax (benefit) expense		(40	)		36			(76	)
Effective income tax rate		23.8	%		124.3	%

The effective income tax rate for the nine months ended September 30, 2019 was 23.8% compared to 124.3% for the nine months ended September 30, 2018. The effective income tax rate for the nine months ended September 30, 2019 reflects the benefit of costs associated with the terminated Merger Agreement that were previously considered non-deductible.

The effective income tax rate for the nine months ended September 30, 2018 reflects a $25 million non-cash tax provision related to the disposition of the Company’s European printing business. Additionally, the rate was impacted by the Tax Act including the reduction of the U.S. federal corporate tax rate from 35.0% to 21.0%, partially offset by the tax resulting from the inclusion of certain foreign-sourced earnings, referred to as the GILTI tax, as well as changes in deductions and permanent book-to-tax differences.

Information by Segment

Magazines, Catalogs and Logistics

	Nine Months Ended
	September 30,
	2019			2018			Change
	(in millions, except percentages)
Net sales	$	1,175		$	1,291		$	(116	)
(Loss) from operations		(79	)		(19	)		(60	)
Operating margin		(6.7	%)		(1.5	%)	(520) bps
Restructuring, impairment and other charges-net		35			10			25

Net sales for the Magazines, Catalogs and Logistics segment for the nine months ended September 30, 2019 were $1,175 million, a decrease of $116 million, or 9.0%, compared to the nine months ended September 30, 2018. The Magazines, Catalogs and Logistics segment’s net sales decreased primarily due to the unprecedented drop in long-run magazine and catalog volumes during 2019, with the faster pace of decline in demand primarily due to the accelerated impact of digital disruption of demand for printed materials. In addition, the disposition of the Company’s retail offset printing facilities, lower logistics volume, and a $17 million decrease in pass-through paper sales contributed to the decrease, all of which was partially offset by the acquisition of Print ~~Logistics and a $1 million increase in pass-through paper sales.~~Logistics.

The increase in Magazines, Catalogs and Logistics segment loss from operations and change in operating margins was primarily due to lower volume and higher restructuring, impairment and other charges.

Book

	Three Months Ended								Nine Months Ended
	March 31,								September 30,
	2019			2018			Change		2019			2018			Change
	(in millions, except percentages)								(in millions, except percentages)
Net sales	$	260		$	249		$	11	$	805		$	797		$	8
Income from operations		13			9			4		36			49			(13	)
Operating margin		5.0	%		3.6	%	140 bps			4.5	%		6.1	%	(160 bps)
Restructuring, impairment and other charges-net		1			1			—		4			5			(1	)

Net sales for the Book segment for the ~~three~~nine months ended ~~March 31,~~September 30, 2019 were ~~$260~~$805 million, an increase of ~~$11~~$8 million, or ~~4.3%~~1.0%, compared to the ~~three~~nine months ended ~~March 31,~~September 30, 2018, primarily due to increased fulfillment and procurement services, higher volume in digitally-printed and educational books ~~increased fulfillment services,~~ and a $4$6 million increase in pass-through paper ~~sales.~~sales, partially offset by lower volume in religious books.

The ~~increase~~decrease in the ~~Book segment~~operating income ~~from operations~~ and ~~operating~~ margins was ~~primarily due to mix of volume.~~driven by higher labor costs in manufacturing and fulfillment operations, partially offset by higher volume and lower restructuring, impairment, and other charges-net.

Office Products

	Three Months Ended									Nine Months Ended
	March 31,									September 30,
	2019			2018			Change			2019			2018			Change
	(in millions, except percentages)									(in millions, except percentages)
Net sales	$	119		$	123		$	(4	)	$	386		$	422		$	(36	)
Income from operations		8			2			6			29			30			(1	)
Operating margin		6.7	%		1.6	%	510 bps				7.5	%		7.1	%	40 bps
Restructuring, impairment and other charges-net		—			1			(1	)		3			2			1
Purchase accounting adjustments		—			1			(1	)		—			1			(1	)

Net sales for the Office Products segment for the ~~three~~nine months ended ~~March 31,~~September 30, 2019 were ~~$119~~$386 million, a decrease of $4$36 million, or ~~3.3%~~8.5%, compared to the ~~three~~nine months ended ~~March 31,~~September 30, 2018, largely as a result of lower volume in filing, notetaking products and ~~filing products.~~envelopes.

The ~~increase~~decrease in Office Products segment income from operations ~~and operating margins~~ was primarily due to ~~mix of~~lower volume ~~cost reductions,~~and higher labor costs, partially offset by synergies realized from the integration of Quality Park and ~~lower restructuring, impairment and other charges and purchase accounting adjustments.~~cost reductions, both of which increased the operating margin.

Other

	Three Months Ended									Nine Months Ended
	March 31,									September 30,
	2019			2018			Change			2019			2018			Change
	(in millions, except percentages)									(in millions, except percentages)
Net sales	$	63		$	130		$	(67	)	$	182		$	377		$	(195	)
Income from operations		4			7			(3	)		17			23			(6	)
Operating margin		6.3	%		5.4	%	90 bps				9.3	%		6.1	%	320 bps

Net sales for the Other grouping for the ~~three~~nine months ended ~~March 31,~~September 30, 2019 were ~~$63~~$182 million, a decrease of ~~$67~~$195 million, or ~~52.0%~~51.6%, compared to the three months ended ~~March 31,~~September 30, 2018, primarily due to the disposition of the Company’s European printing business, a $4$9 million decrease in pass-through paper sales and lower directories volume,, partially offset by higher sales in outsourced ~~print procurement and management~~ services.

The decrease in income from operations and change in operating margins was primarily due to lower ~~volume and~~volume. The mix of volume ~~partially offset by cost control initiatives which~~ helped to improve the operating margin compared to the prior year.

Corporate

The following table summarizes unallocated operating expenses and certain items impacting comparability within the activities presented as Corporate:

	Three Months Ended						Nine Months Ended
	March 31,						September 30,
	2019		2018		Change		2019		2018		Change
	(in millions, except percentages)						(in millions, except percentages)
Total operating expenses	$	13	$	10	$	3	$	47	$	30	$	17
Significant components of total operating expenses:
Restructuring, impairment and other charges-net		1		—		1		5		1		4
Share-based compensation expenses		3		3		—		6		10		(4	)
Expenses related to acquisitions and the Merger		7		1		6
Expenses related to acquisitions, the Merger Agreement and dispositions								22		4		18

Non-GAAP Measures

The Company believes that certain non-GAAP measures, such as Non-GAAP adjusted EBITDA, provide useful information about the Company’s operating results and enhance the overall ability to assess the Company’s financial performance. The Company uses these measures, together with other measures of performance under GAAP, to compare the relative performance of operations in planning, budgeting and reviewing the performance of its business. Non-GAAP adjusted EBITDA allows investors to make a more meaningful comparison between the Company’s core business operating results over different periods of time. The Company believes that Non-GAAP adjusted EBITDA, when viewed with the Company’s results under GAAP and the accompanying reconciliations, provides useful information about the Company’s business without regard to potential distortions. By eliminating potential differences in results of operations between periods caused by factors such as depreciation and amortization methods and restructuring, impairment and other charges, the Company believes that Non-GAAP adjusted EBITDA can provide a useful additional basis for comparing the current performance of the underlying operations being evaluated.

Non-GAAP adjusted EBITDA is not presented in accordance with GAAP and has important limitations as an analytical tool. Readers should not consider these measures in isolation or as a substitute for analysis of our results as reported under GAAP. In addition, these measures are defined differently by different companies in our industry and, accordingly, such measures may not be comparable to similarly-titled measures of other companies.

Non-GAAP adjusted EBITDA excludes restructuring, impairment and other charges-net, the termination fee from Quad, settlement of retirement benefit obligations, ~~purchase accounting adjustments, and~~ expenses related to acquisitions, the Merger Agreement and ~~the Merger.~~dispositions, and purchase accounting adjustments. A reconciliation of GAAP net income to non-GAAP adjusted EBITDA for the three and nine months ended ~~March 31,~~September 30, 2019 and 2018 is presented in the following table:

	Three Months Ended						Three Months Ended						Nine Months Ended
	March 31,						September 30,						September 30,
	2019			2018			2019			2018			2019			2018
Net (loss)	$	(126	)	$	(11	)
Net income (loss)							$	24		$	(4	)	$	(126	)	$	(7	)
Restructuring, impairment and other charges-net		13			6			10			1			47			18
Termination fee from Quad								(45	)		—			(45	)		—
Settlement of retirement benefit obligations		135			—			1			—			137			—
Expenses related to acquisitions and the Merger		7			1
Expenses related to acquisitions, the Merger Agreement and dispositions								10			2			22			4
Purchase accounting adjustments		—			3			—			1			—			4
Depreciation and amortization		31			38			29			34			91			106
Interest expense-net		19			20			20			21			58			59
Income tax (benefit)		(37	)		(4	)
Income tax expense (benefit)								—			35			(40	)		36
Non-GAAP adjusted EBITDA	$	42		$	53		$	49		$	90		$	144		$	220

The adjustments to arrive at non-GAAP adjusted EBITDA are summarized below:

~~Restructuring, impairment and other charges-net: Refer to~~ ~~Results of Operations for the Three Months Ended March 31, 2019 as Compared to the Three Months Ended March 31, 2018~~ ~~for information on charges.~~

•

Restructuring, impairment and other charges-net: Refer to Results of Operations for the Three Months Ended September 30, 2019 as Compared to the Three Months Ended September 30, 2018 and Results of Operations for the Nine Months Ended September 30, 2019 as Compared to the Nine Months Ended September 30, 2018 for information on the charges.

~~Settlement of retirement obligations: Refer to Note 12,~~ ~~Retirement Plans, for more information on the settlement charges.~~

•

Termination fee from Quad: Refer to Note 1, Overview and Basis of Presentation, for more information on the fee received.

~~Expenses related to acquisitions and the Merger: The three months ended March 31, 2019 included charges of $~~7 ~~million primarily related to~~ ~~costs associated with the Merger. The three months ended March 31, 2018 included charges of~~ ~~$1 million related to legal, accounting and other expenses associated with completed and contemplated acquisitions.~~

•

Settlement of retirement obligations: Refer to Note 12, Retirement Plans, for more information on the settlement charges.

•

Expenses related to acquisitions, the Merger Agreement and dispositions: The three and nine months ended September 30, 2019 included charges of $10 million and $22 million, respectively, primarily related to costs associated with the Merger Agreement. The three and nine months ended September 30, 2018 included charges of $2 million and $4 million, respectively, related to legal, accounting and other expenses associated with completed and contemplated acquisitions and dispositions.

Purchase accounting adjustments: three months ended March 31, 2018 included charges of $3 million as a result of purchase accounting inventory step-up adjustments and changes to purchase price allocations related to prior acquisitions.
•
Purchase accounting adjustments: The three and nine months ended September 30, 2018 included charges of $1 million and $4 million, respectively, as a result of purchase accounting inventory step-up adjustments and changes to purchase price allocations related to prior acquisitions.

•

Income tax expense: The three and nine months ended September 30, 2018 included a $25 million non-cash provision recorded primarily for the write-off of a deferred tax asset associated with the disposition of the Company's European printing business.

LIQUIDITY AND CAPITAL RESOURCES

The Company believes it has sufficient liquidity to support its ongoing operations and to strategically invest in ~~future growth~~opportunities to create value for its stockholders. Operating cash flows and the Revolving Credit Facility are the Company’s primary sources of liquidity and are expected to be used for, among other things, payments of interest and principal on the Company’s debt obligations, ~~distributions to stockholders that may be approved by the Board of Directors and in accordance with the Merger Agreement,~~ capital expenditures necessary to support productivity improvement and ~~growth,~~strategic investment, and completion of restructuring programs.

The following sections describe the Co~~mpany’s~~Company’s cash flows for the ~~three~~nine months ended ~~March 31,~~September 30, 2019 and 2018.

Three Months Ended

March 31,

2019

2018

Net cash (used in) operating
activities

$
(24
)

$
(24
)
Net cash (used in) investing activities

(31
)

(19
)
Net cash provided by financing
activities

46

31

	Nine Months Ended
	September 30,
	2019			2018
Net cash provided by (used in) operating activities	$	89		$	(26	)
Net cash (used in) investing activities		(59	)		(57	)
Net cash (used in) provided by financing activities		(34	)		72

Cash Flows from Operating Activities

Operating cash inflows are largely attributable to sales of the Company’s products. Operating cash outflows are largely attributable to recurring expenditures for raw materials, labor, rent, interest, taxes and other operating activities.

Net cash provided by operating activities was $89 million for the nine months ended September 30, 2019 compared to $26 million used in operating activities ~~was $24 million~~ for ~~each of~~ the ~~three~~nine months ended ~~March 31, 2019 and~~September 30, 2018. The ~~operating cash flows in both periods were impacted by~~ ~~the~~increase was primarily due to timing of ~~customer payments, which were~~net working capital impacts and the termination fee received from Quad, partially offset by costs related to the ~~timing of supplier payments and inventory expenditures.~~Merger Agreement.

Cash Flows from Investing Activities

Net cash used in investing activities for the ~~three~~nine months ended ~~March 31,~~September 30, 2019 was ~~$31~~$59 million compared to ~~$19~~$57 million for the same period in 2018. Capital expenditures increased by $8 million compared to the same period in 2018, primarily due to increased spend on machinery and equipment to increase automation and productivity in the Book and Magazines, Catalogs and Logistics segments. Significant changes are as follows:

•

Capital expenditures increased by $8 million compared to the same period in 2018, primarily due to increased spend on machinery and equipment in order to increase automation and productivity in the Book and Magazines, Catalogs and Logistics segments;

•

Cash paid for acquisitions of businesses, net of cash acquired, was impacted by the acquisition of Print Logistics in 2018 and purchase price adjustments resulting from finalization of working capital calculations in each period; and

•

Proceeds of $4 million for the nine months ended September 30, 2019 for the disposition of the Company’s commingle operations and $45 million for the nine months ended September 30, 2018 for the disposition of the Company’s European printing business.

Cash Flows from Financing Activities

Net cash ~~provided by~~used in financing activities for the three months ended ~~March 31,~~September 30, 2019 was ~~$46~~$34 million compared to ~~$31~~$72 million provided by ~~financing~~operating activities for the same period in ~~2018, driven by net proceeds of $67 million from credit facility borrowings during the three months ended March 31, 2019, compared to $55 million during the same period in~~ 2018. Significant changes are as follows:

•

The Company paid $33 million of long-term debt and current maturities during the nine months ended September 30, 2019, compared to $39 million during the nine months ended September 30, 2018;

•

The Company received net proceeds from credit facility borrowings of $19 million for the nine months ended September 30, 2019, compared to $158 million in the prior period; the net proceeds were higher in 2018 due to the acquisition of Print Logistics in 2018;

•

The Company paid $20 million to repurchase common stock during the nine months ended September 30, 2018, with no such activity during 2019; and

•

$9 million of lower dividends for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018.

Dividends

Cash dividends declared and paid to stockholders during the ~~three~~nine months ended ~~March 31,~~September 30, 2019 totaled $9$17 million. ~~On April 10,~~

In light of lower expectations for earnings and cash flows, on July 18, 2019 the Board of Directors ~~declared a quarterly~~suspended dividend payments in order to allocate greater capital to the Company’s debt reduction and ongoing operational restructuring programs. The dividend paid in June 2019 is the last dividend that will be paid for the foreseeable future. Suspending the dividend will allow the Company to redeploy approximately $35 million in cash ~~dividend of $0.26 per common share, payable on June 4, 2019 to stockholders of record on May 15, 2019.~~ annually.

~~The~~Prior to the amendment to the Credit Agreement that was effective on August 5, 2019 that is described below, the Company was generally ~~allows~~allowed to declare and pay annual dividend payments of up to $50 million in the ~~aggregate, though additional~~aggregate. However, the August 5, 2019 amendment removed the general allowance to declare and pay annual dividends ~~may be allowed subject~~of up to ~~certain conditions. The timing, declaration, amount and payment of any future dividends~~$50 million.

See further discussion below for information regarding the August 5, 2019 amendment to the Company’s stockholders falls within the discretion of the Company’s Board of Directors. The decisions of the Company’s Board of Directors regarding the payment of future dividends depends on many factors, including but not limited to the Company’s financial condition, future prospects, earnings, capital requirements and debt service obligations, as well as legal requirements, regulatory constraints, industry practice and other factors that the Board of Directors may deem relevant. In addition, the terms of the agreements governing the Company’s existing debt or debt that the Company may incur in the future may limit or prohibit the payment of dividends. There can be no assurance that the Company will continue to pay a dividend. The Merger Agreement permits the Company to continue paying a quarterly dividend up to $0.26 per share and restricts the Company from incurring additional indebtedness outside of the ordinary course of business. Credit Agreement.

LIQUIDITY

Cash and cash equivalents were ~~$13~~$15 million and $21 million as of ~~March 31,~~September 30, 2019 and December 31, 2018, respectively.

The Company’s cash balances are held in several locations throughout the world, including amounts held outside of the United States. Cash and cash equivalents as of ~~March 31,~~September 30, 2019 included $6$8 million in the U.S. and $7 million at international locations.

~~The~~Until September 30, 2019, the Company ~~maintains~~maintained cash pooling structures that ~~enable~~enabled participating international locations to draw on the pools’ cash resources to meet local liquidity needs. Foreign cash balances ~~may~~were permitted to be loaned from certain cash pools to U.S. operating entities on a temporary basis in order to reduce the Company’s short-term borrowing costs or for other purposes. As of ~~March 31,~~September 30, 2019, $8$24 million of international cash was loaned to U.S. operating entities. The pooling structure was discontinued in October 2019 and the outstanding loan of $24 million was paid by the U.S. operating entities.

Debt Issuances

On September 30, 2016, the Company issued $450 million of Senior Secured Notes (the “Senior Notes”).

Credit Agreement Amendments

	Original	December 20, 2018	August 5, 2019
Maximum Consolidated Leverage Ratio
Current ratio	3.25 to 1.00	3.25 to 1.00	3.75 to 1.00
Step-down ratio	3.00 to 1.00	3.00 to 1.00	3.50 to 1.00 and 3.25 to 1.00
Step-down as of date (quarter ending on or after)	March 31, 2019	March 31, 2020	June 30, 2020 and March 31, 2021

Minimum Interest Coverage Ratio
Current ratio	3.25 to 1.00	3.25 to 1.00	2.50 to 1.00
Step-up ratio	3.50 to 1.00	3.50 to 1.00	2.75 to 1.00 and 3.00 to 1.00
Step-up as of date (quarter ending on or after)	March 31, 2019	March 31, 2020	September 30, 2020 and June 30, 2021

Other terms, including the outstanding principal, maturity date and other debt covenants ~~remain~~remained the same under the December 20, 2018 amendment.

The August 5, 2019 amendment resulted in a reduction in the Revolving Credit Facility aggregate principal amount from $400 million to $300 million and removed the general allowance to pay annual dividends of up to $50 million. The August 5, 2019 amendment included other changes that generally further restrict the Company’s ability to incur additional indebtedness, create liens, engage in mergers and consolidations, make restricted payments and dispose of certain assets. The outstanding principal and maturity date of the Term Loan Facility remains the same, while the maturity date of the Revolving Credit Facility remains the same.

Additional Debt Issuances Information

There were ~~$133~~$85 million of borrowings under the Revolving Credit Facility as of ~~March 31,~~September 30, 2019. Based on the Company’s condensed consolidated statements of operations for the ~~three~~nine months ended ~~March 31,~~September 30, 2019 and existing debt, the Company would have had the ability to utilize ~~$257~~$154 million of the ~~$400~~$300 million Revolving Credit Facility and not have been in violation of the terms of the agreement. Availability under the Revolving Credit Facility was reduced by ~~$133~~$85 million in borrowings.

The current availability under the Revolving Credit Facility and net availability as of ~~March 31,~~September 30, 2019 is shown in the table below:

	March 31, 2019		September 30, 2019
	(in millions)		(in millions)
Availability
Stated amount of the Revolving Credit Facility	$	400	$	300
Less: availability reduction from covenants		143		146
Amount available under the Revolving Credit Facility	$	257	$	154

Usage
Borrowings under the Revolving Credit Facility	$	133	$	85
Impact on availability related to outstanding letters of credit		—		—
Total usage	$	133	$	85

Current availability at March 31, 2019	$	124
Current availability at September 30, 2019			$	69
Cash		13		15
Net Available Liquidity	$	137	$	84

The Company was in compliance with its debt covenants as of March 31, 2019, and expects to remain in compliance based on management’s estimates of operating and financial results for 2019 and the foreseeable future. However, declines in market and economic conditions or demand for certain of the Company’s products could impact the Company’s ability to remain in compliance with its debt covenants in future periods. As a result of the Company’s amendment of its Credit Agreement during the fourth quarter of 2018, the maximum Consolidated Leverage Ratio steps down to 3.00 on March 31, 2020, one year later from the previous date of March 31, 2019 and the minimum Interest Coverage Ratio will be increased to 3.50 to 1.00 with respect to any test period ending on or after March 31, 2020, as opposed to March 31, 2019. As of ~~March 31,~~September 30, 2019, the Company’s leverage as defined in the Credit Agreement was ~~2.82,~~3.44, compared to a maximum permitted ratio under the Credit Agreement of ~~3.25.~~3.75. The full definition of the Consolidated Leverage Ratio is included in the Credit Agreement filed as an exhibit to this quarterly report on Form 10-Q. As of ~~March 31,~~September 30, 2019, the Company met all the conditions required to borrow under the Credit Agreement and management expects the Company to continue to meet the applicable borrowing ~~conditions.~~ conditions under the Credit Agreement.

The Company was in compliance with its debt covenants as of September 30, 2019, and expects to remain in compliance based on management’s estimates of operating and financial results for 2019 and the foreseeable future. However, continued declines in market and economic conditions or demand for certain of the Company’s products beyond those included in management’s projections could impact the Company’s ability to remain in compliance with its debt covenants in future periods. Furthermore, should the Company’s vendors demand changes in payment terms in light of recent credit downgrades, the Company’s ability to remain in compliance with its debt covenants in future periods could be impacted.

The failure of a financial institution supporting the Revolving Credit Facility would reduce the size of the Company’s committed facility unless a replacement institution were added. Currently, the Revolving Credit Facility is supported by fifteen U.S. and international financial institutions.

As of ~~March 31,~~September 30, 2019, the Company had ~~$46~~$53 million in outstanding letters of credit issued under the Revolving Credit ~~Facility, none of which reduced the availability thereunder.~~Facility.

The Company’s debt maturities as of ~~March 31,~~September 30, 2019 are shown in the following table:

	Debt Maturity Schedule														Debt Maturity Schedule
	Total		2019		2020		2021		2022		2023		Thereafter		Total		2019		2020		2021		2022		2023		Thereafter
Borrowings under the Credit Agreement	$	386	$	164	$	43	$	43	$	136	$	—	$	—	$	318	$	96	$	43	$	43	$	136	$	—	$	—
Senior secured notes		450		—		—		—		—		450		—		450		—		—		—		—		450		—
Capital lease obligations and other borrowings		2		1		1		—		—		—		—
Finance lease obligations and other borrowings																1		—		1		—		—		—		—
Total_(a)	$	838	$	165	$	44	$	43	$	136	$	450	$	—	$	769	$	96	$	44	$	43	$	136	$	450	$	—

(a)

Excludes unamortized debt issuance costs of $4 million and $6$5 million related to the Company’s Term Loan Facility and 8.75% Senior Notes due October 15, 2023, respectively, and a discount of $4 million related to the Company’s Term Loan Facility. These amounts do not represent contractual obligations with a fixed amount or maturity date.

On July 26, 2019, S&P Global Ratings (“S&P”) downgraded the Company’s credit ratings as noted below and lowered the issuer credit rating from B to CCC+. On August 14, 2019, Moody's Investors Service (“Moody’s) downgraded the Company’s credit ratings as noted below and changed the outlook from stable to negative.

	Moody's		S&P
	Prior Rating	New Rating	Prior Rating	New Rating
Corporate Family	B2	B3	not applicable	not applicable
Revolving Credit Facility	Ba2	Ba3	BB-	B
Term Loan Facility	B2	B3	B-	CCC+
Senior Notes	B2	B3	B-	CCC+

MANAGEMENT OF MARKET RISK

The Company is exposed to interest rate risk on its variable debt and price risk on its fixed-rate debt. At ~~March 31,~~September 30, 2019, the Company’s variable-interest borrowings were ~~$386~~$318 million, or approximately ~~46.1%~~41.4%, of the Company’s total debt.

The Company assesses market risk based on changes in interest rates utilizing a ~~sensitivity~~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,~~September 30, 2019 by approximately ~~$13~~$18 million.

The Company is exposed to the impact of foreign currency fluctuations in certain countries in which it operates. The exposure to foreign currency movements is limited in many countries because the operating revenues and expenses of its various subsidiaries and business units are substantially in the local currency of the country in which they operate. To the extent that borrowings, sales, purchases, revenues, expenses or other transactions are not in the local currency of the subsidiary, the Company is exposed to currency risk and may enter into foreign exchange forward contracts to hedge the currency risk. The Company is primarily exposed to the ~~currencies~~currencies of the Canadian dollar and Mexican peso, and was exposed to the ~~currencies~~currency of the Polish Zloty until the sale of the Company’s European printing business in the third quarter of 2018. The Company does not use derivative financial instruments for trading or speculative purposes.

OTHER INFORMATION

Litigation and Contingent Liabilities

For a discussion of certain litigation involving the Company, see Note 9, Commitments and Contingencies, to the condensed consolidated financial statements.

New Accounting Pronouncements and Pending Accounting Standards

Recently issued accounting standards and their estimated effect on the Company’s condensed consolidated financial statements are ~~also~~ described in Note 16, New Accounting Pronouncements, and throughout the notes to the condensed consolidated financial statements.

Available Information

The Company maintains an Internet website at www.lsccom.com where the Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on form 8-K and all amendments to those reports are available without charge, as soon as reasonably practicable following the time they are filed with, or furnished to, the SEC. The Principles of Corporate Governance of the Company’s Board of Directors, the charters of the Audit, Human Resources and Corporate Responsibility and Governance Committees of the Board of Directors and the Company’s Principles of Ethical Business Conduct are also available on the Investor Relations portion of www.lsccom.com, and will be provided, free of charge, to any stockholder who requests a copy. References to the Company’s website address do not constitute incorporation by reference of the information contained on the website, and the information contained on the website is not part of this document.

CAUTIONARY STATEMENT

The Company has 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 “anticipates,” “estimates,” “expects,” “projects,” “forecasts,” “intends,” “plans,” “continues,” “believes,” “may,” “will,” “goals” or variations of such words and similar expressions. Examples of forward-looking statements include, but are not limited to, statements, beliefs and expectations regarding our business strategies, market potential, future financial performance, dividends, results of pending legal matters, our goodwill and other intangible assets, price volatility and cost environment, our liquidity, our funding sources, expected pension contributions, capital expenditures and funding, our financial covenants, repayments of debt, off-balance sheet arrangements and contractual obligations, our accounting policies, general views about future operating results and other events or developments that we expect or anticipate will occur in the future. These forward-looking statements are subject to a number of important factors, including those factors disclosed in Item 1A, Risk Factors, in section Part II of this quarterly report on Form 10-Q, and Item 1A, Risk Factors, in section Part I in the Company’s annual report on Form 10-K for the year ended December 31, 2018, as filed with the SEC on February 19, 2019, that could cause our actual results to differ materially from those indicated in any such forward-looking statements. These factors include, but are not limited to:

~~the competitive market for our products and industry fragmentation affecting our prices;~~

•

the competitive market for our products and industry fragmentation affecting our prices;

~~inability to improve operating efficiency to meet changing market conditions;~~

~~changes in technology, including electronic substitution and migration of paper based documents to digital data formats;~~

~~the volatility and disruption of the capital and credit markets, and adverse changes in the global economy;~~

~~the effects of global market and economic conditions on our customers;~~

~~the effect of economic weakness and constrained advertising;~~

~~uncertainty about future economic conditions;~~

~~increased competition as a result of consolidation among our competitors;~~

~~our ability to successfully integrate recent and future acquisitions;~~

~~factors that affect customer demand, including changes in postal rates, postal regulations, delivery systems and service levels, changes in advertising markets and customers’ budgetary constraints;~~

~~our ability to access debt and the capital markets due to adverse credit market conditions;~~

~~the effects of seasonality on our core businesses;~~

~~the effects of increases in capital expenditures;~~

changes in the availability or costs of key print production materials (such as paper, ink, energy, and other raw materials), the tight labor market, the availability of labor at our vendors or in prices received for the sale of by-products;

~~performance issues with key suppliers;~~

~~our ability to maintain our brands and reputation;~~

~~the retention of existing, and continued attraction of additional customers and key employees, including management;~~

~~the effect of economic and political conditions on a regional, national or international basis;~~

~~the effects of operating in international markets, including fluctuations in currency exchange rates;~~

~~changes in environmental laws and regulations affecting our business;~~

~~the ability to gain customer acceptance of our new products and technologies;~~

~~the effect of a material breach of or disruption to the security of any of our or our vendors’ systems;~~

•

inability to improve operating efficiency to meet changing market conditions;

~~the failure to properly use and protect customer and employee information and data;~~

•

changes in technology, including electronic substitution and migration of paper based documents to digital data formats;

~~the effect of increased costs of providing health care and other benefits to our employees;~~

•

the volatility and disruption of the capital and credit markets, and adverse changes in the global economy;

~~the effect of catastrophic events;~~

•

the effects of global market and economic conditions on our customers;

~~the impact of the Tax Act;~~

•

the effect of economic weakness and constrained advertising;

~~increases in requirements to fund or pay withdrawal costs or required contributions related to the Company’s pension plans;~~

•

uncertainty about future economic conditions;

~~our inability to consummate the Merger;~~

•

increased competition as a result of consolidation among our competitors;

limitations in the Merger Agreement that restrict LSC Communication's ability to pursue alternatives to the Merger that might result in greater value to LSC Communications stockholders than the Merger;

•

our ability to successfully integrate recent and future acquisitions;

~~failure to consummate the Merger that could negatively impact the stock price and the future business and financial results of LSC Communications;~~

•

factors that affect customer demand, including changes in postal rates, postal regulations, delivery systems and service levels, changes in advertising markets and customers’ budgetary constraints;

~~significant transaction and merger-related costs that LSC Communications may incur in connection with the Merger, which may be in excess of those anticipated; and~~

•

our ability to access debt and the capital markets due to adverse credit market conditions;

~~LSC Communications may be a target of further securities class action and derivative lawsuits which could result in substantial costs and may delay or prevent the Merger from being consummated.~~

•

the effects of seasonality on our core businesses;

•

the effects of increases in capital expenditures;

•

performance issues with key suppliers;

•

our ability to maintain our brands and reputation;

•

the retention of existing, and continued attraction of additional customers and key employees, including management;

•

the effect of economic and political conditions on a regional, national or international basis;

•

the effects of operating in international markets, including fluctuations in currency exchange rates;

•

changes in environmental laws and regulations affecting our business;

•

the ability to gain customer acceptance of our new products and technologies;

•

the effect of a material breach of or disruption to the security of any of our or our vendors’ systems;

•

the failure to properly use and protect customer and employee information and data;

•

the effect of increased costs of providing health care and other benefits to our employees;

•

the effect of catastrophic events;

•

the ability to maintain adequate payment terms with key vendors in light of recent credit downgrades;

•

the impact of the Tax Act; and

•

increases in requirements to fund or pay withdrawal costs or required contributions related to the Company’s pension plans.

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 on Form 10-Q should consider these forward-looking statements only as the Company’s current plans, estimates and beliefs. The Company does not undertake and specifically declines 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. The Company undertakes no obligation to update or revise any forward-looking statements in this quarterly report on Form 10-Q to reflect any new events or any change in conditions or circumstances.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See Management of Market Risk inItem 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations. There have been no significant changes to the Company’s market risk since December 31, 2018. For a discussion of exposure to market risk, refer to Part II, Item 7A, Quantitative and Qualitative Disclosures about Market Risk, disclosed in the Company’s annual report on Form 10-K for the year ended December 31, 2018, as filed with the SEC on February 19, 2019.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) and Rule 15d-15(e) of the Securities Exchange Act of 1934, the Company’s 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,~~September 30, 2019 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 Company’s 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,~~September 30, 2019 were effective in ensuring information required to be disclosed in the Company’s SEC reports was recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information was accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended ~~March 31,~~September 30, 2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – ~~OTHE~~ROTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

For a discussion of certain litigation involving the Company, see Note 9, Commitments and Contingencies, to the condensed consolidated financial statements.

~~Merger Litigation~~

Three substantially similar actions have been filed by an alleged LSC Communications stockholder against some or all of LSC Communications, the directors of LSC Communications, Quad/Graphics and merger sub.

On December 21, 2018, an action captioned Joe Waters v. LSC, et al., No. 1:18-cv-08419, was filed in the U.S. District Court for the Northern District of Illinois against LSC Communications, the directors of LSC Communications, Quad/Graphics and merger sub on behalf of a putative class of LSC Communications stockholders.

On January 2, 2019, an action captioned David Wefer v. LSC, et al., No. 1:19-cv-00007, was filed in the U.S. District Court for the Southern District of New York against LSC Communications and the directors of LSC Communications. On February 27, 2019, Mr. Wefer filed a notice of voluntary dismissal without prejudice, which the court entered on the same date.

On January 7, 2019, an action captioned Patrick Plumley v. LSC, et al., No. 1:19-cv-00030-UNA, was filed in the U.S. District Court for the District of Delaware against LSC Communications, the directors of LSC Communications, Quad/Graphics and merger sub on behalf of a putative class of LSC Communications stockholders.

The lawsuits include similar allegations challenging the adequacy or completeness of the disclosures to LSC Communications stockholders made in the initial version of the joint proxy statement/prospectus filed on December 11, 2018 regarding the merger, and the complaints assert claims under Section 14(a) and 20(a) of the Exchange Act against some or all of LSC Communications, the members of the LSC Communications board and Quad/Graphics. The complaints allege, among other things, that the initial version of this joint proxy statement/prospectus filed on December 11, 2018 misstated or omitted material information regarding the financial projections prepared by LSC management, the value of shares of LSC Communications common stock and the financial analyses performed by LSC Communications’ financial advisor and the sales process leading up to the merger. The complaints seek injunctive relief, including to enjoin the merger, damages in the event the merger is consummated and an award of attorneys’ fees, in addition to other relief.

ITEM 1A. RISK FACTORS

There have been no significant changes to the risk factors disclosed in the Company’s annual report on Form 10-K for the year ended December 31, 2018, as filed with the SEC on February 19, ~~2019.~~2019, except that any risk factor related to the now-abandoned merger with Quad/Graphics is no longer applicable to the Company.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Purchases of Equity Securities

Total Number

of Shares Purchased

Dollar Value of Shares

Total Number

as Part of

that May Yet be

of Shares

Average Price

Publicly Announced

Purchased Under the

Purchased _(a)

Paid per Share

Plans or Programs

Plans or Programs

January 1, 2019 - January 31, 2019

—

$
—

—

$
—

February 1, 2019 - February 28, 2019

—

—

—

$
—

March 1, 2019 - March 31, 2019

143,929

8.42

—

$
—

Total

143,929

$
8.42

—

There were no repurchases during the three months ended September 30, 2019.

~~(a)~~

~~Shares withheld for tax liabilities upon vesting of equity awards~~

Dividends

In light of lower expectations for earnings and cash flows, on July 18, 2019 the Board of Directors suspended dividend payments in order to allocate greater capital to the Company’s debt reduction and ongoing operational restructuring programs. The dividend paid in June 2019 is the last dividend that will be paid for the foreseeable future. Suspending the dividend will allow the Company to redeploy approximately $35 million in cash annually.

Prior to the amendment to the Credit Agreement that was effective on August 5, 2019, the Company was generally ~~allows~~allowed to declare and pay annual dividend payments of up to $50 million in the ~~aggregate, though additional~~aggregate. However, the August 5, 2019 amendment removed the general allowance to declare and pay annual dividends ~~may be allowed subject to certain conditions. The timing, declaration, amount and payment~~ of any future dividends to the Company’s stockholders falls within the discretion of the Company’s Board of Directors. The decisions of the Company’s Board of Directors regarding the payment of future dividends depends on many factors, including but not limited to the Company’s financial condition, future prospects, earnings, capital requirements and debt service obligations, as well as legal requirements, regulatory constraints, industry practice and other factors that the Board of Directors may deem relevant. In addition, the terms of the agreements governing the Company’s existing debt or debt that the Company may incur in the future may limit or prohibit the payment of dividends. There can be no assurance that the Company will continue to pay a dividend. The Merger Agreement permits the Company to continue paying a quarterly dividend up to ~~$0.26 per share and restricts the Company from incurring additional indebtedness outside of the ordinary course of business.~~$50 million.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable

ITEM 6. EXHIBITS

3.1		Amended and Restated Certificate of Incorporation of LSC Communications, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on October 3, 2016)

3.2		Amended and Restated By-laws of LSC Communications, Inc. (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed on October 3, 2016)

4.1		Indenture, dated as of September 30, 2016, among LSC Communications, Inc., the subsidiary guarantors party thereto and Wells Fargo Bank, National Association, as Trustee and as Collateral Agent (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on October 3, 2016)

10.1		Credit Agreement, dated as of September 30, 2016, among LSC Communications, Inc., the lenders party thereto, Bank Of America, N.A., as Administrative Agent Swing Line Lender and an L/C Issuer, Citigroup Global Markets Inc. and JPMorgan Chase Bank, N.A., as Co-Syndication Agents (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 3, 2016)

10.2		Amendment No. 1 to Credit Agreement dated as of November 17, 2017, by and among LSC Communications, Inc., the other Loan Parties, the 2017 Refinancing Term Lenders party thereto and Bank of America, N.A., as administrative agent and collateral agent (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2018, filed on May 3, 2018)

10.3		Amendment No. 2 to Credit Agreement dated as of December 20, 2018, by and among LSC Communications, Inc. the other Loan Parties, the Lenders party thereto and Bank of America, N. A., as administrative agent and collateral agent (incorporated by reference to Exhibit 10.3 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018, filed on February 19, 2019))

10.4		Amendment No. 3 to Credit Agreement dated as of August 2, 2019, by and among LSC Communications, Inc., the other Loan Parties, the Lenders party thereto and Bank of America, N. A., as administrative agent and collateral agent (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on August 5, 2019)

10.5		2016 LSC Communications, Inc. Performance Incentive Plan (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on October 3, 2016)*

~~10.5~~10.6		Amended and Restated LSC Communications, Inc. 2016 Performance Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on May 23, 2017)*

~~10.6~~10.7		Amendment to Amended and Restated LSC Communications, Inc. 2016 Performance Incentive Plan dated October 17, 2019 (filed herewith)*

10.8		LSC Communications, Inc. Nonqualified Deferred Compensation Plan, amended and restated effective as of August 1, 2018 (incorporated by reference to Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q filed on August 2, 2018)*

~~10.7~~10.9		LSC Unfunded Supplemental Pension Plan effective October 1, 2016 (incorporated by reference to Exhibit 10.4 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, filed on February 23, 2017)*

~~10.8~~10.10		Supplemental Executive Retirement Plan-B for Designated Executives effective January 1, 2001 as amended effective December 31, 2004, January 1, 2005 and September 30, 2016 (incorporated by reference to Exhibit 10.5 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, filed on February 23, 2017)*

~~10.9~~10.11		LSC Communications Annual Incentive Plan as amended and restated effective January 17, 2019 (incorporated by reference to Exhibit 10.9 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018, filed on February 19, 2019)*

~~10.10~~10.12		Assignment of Employment Agreement and Acceptance of Assignment, dated as of September 29, 2016, between LSC Communications, Inc., R. R. Donnelley & Sons Company and Thomas J. Quinlan III (incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed on October 3, 2016)*

~~10.11~~10.13		Amendment to Employment Agreement, dated as of October 25, 2017, between LSC Communications, Inc. and Thomas J. Quinlan III (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 31, 2017)*

~~10.12~~10.14		Key Employee Severance Plan effective October 25, 2017 (incorporated by reference to Exhibit 10.15 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017, filed on November 2, 2017)*

~~10.13~~10.15		Form of Participation Agreement for the Key Employee Severance Plan (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on January 19, 2018)*

~~10.14~~10.16		Participation Agreement between Suzanne S. Bettman and the Company, dated as of January 24, 2018 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on January 26, 2018)*

~~10.15~~10.17		Participation Agreement between Andrew B. Coxhead and the Company, dated as of January 24, 2018 (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on January 26, 2018)*

~~10.16~~10.18		Participation Agreement between Kent A. Hansen and the Company, dated as of January 24, 2018 (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on January 26, 2018)*

~~10.17~~10.19		Participation Agreement between Richard T. Lane and the Company, dated as of January 24, 2018 (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on January 26, 2018)*

~~10.18~~10.20		Form of Stock Option Award Agreement (for 2009 to 2012) converted from R. R. Donnelley & Sons Company to the Company pursuant to the Separation Agreement (incorporated by reference to Exhibit 10.17 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, filed on February 23, 2017)*

~~10.19~~10.21		Form of Performance Restricted Stock Award (for 2017) (incorporated by reference to Exhibit 10.29 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2017, filed on May 4, 2017)*

~~10.20~~10.22		Form of Performance Unit Award Agreement (for 2018) (incorporated by reference to Exhibit 10.20 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017, filed on February 22, 2018)*

~~10.21~~10.23		Form of Stock Unit Award Agreement (for 2017) (incorporated by reference to Exhibit 10.30 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2017, filed on May 4, 2017)*

~~10.22~~10.24		Form of Restricted Stock Unit Award Agreement (for 2018) (incorporated by reference to Exhibit 10.25 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017, filed on February 22, 2018)*

~~10.23~~10.25		Form of Restricted Stock Unit Award Agreement (for 2019) (incorporated by reference to Exhibit 10.25 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018, filed on February 19, 2019)*

~~10.24~~10.26		Form of Director Indemnification Agreement (incorporated by reference to Exhibit 10.9 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2016, filed on November 10, 2016)*

~~10.25~~10.27		Policy on Retirement Benefits, Phantom Stock Grants and Stock Options for Directors as amended to March 2000 (incorporated by reference to Exhibit 10.16 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, filed on February 23, 2017)*


~~10.26~~10.28		Non-Employee Director Compensation Plan effective as of October 30, 2018 (incorporated by reference to Exhibit 10.28 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018, filed on February 19, 2019)*

~~10.27~~10.29		Form of Director Restricted Stock Unit Award as amended (for 2004-2007) converted from R. R. Donnelley & Sons Company to the Company pursuant to the Separation Agreement (incorporated by reference to Exhibit 10.12 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, filed on February 23, 2017)*

~~10.28~~		Form of Director Restricted Stock Unit Award (for 2014-2016) converted from R. R. Donnelley & Sons Company to the Company pursuant to the Separation Agreement (incorporated by reference to Exhibit 10.13 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, filed on February 23, 2017)*

~~10.29~~10.30		Form of Director Restricted Stock Unit Award Agreement (for 2018) (incorporated by reference to Exhibit 10.21 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017, filed on November 2, 2017)*

10.31		Form of Retention Bonus Letter (incorporated by reference to Exhibit 10.31 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2019, filed on August 8, 2019)*

10.32		Agreement and Plan of Merger by and among Quad/Graphics, Inc. QLC Merger Sub, Inc. and the Company dated as of October 30, 2018 (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K, filed October 31, 2018)

10.33		Letter Agreement dated July 22, 2019 by and between Quad/Graphics, Inc. and the Company (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed July 23, 2019)

14.1		Code of Ethics for the Chief Executive Officer and Senior Financial Officers (incorporated by reference to Exhibit 14.1 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, filed on February 23, 2017)

31.1		Certification by Thomas J. Quinlan, III, 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 Andrew B. Coxhead, 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, 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 Andrew B. Coxhead, 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 – The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH		Inline XBRL Taxonomy Extension Schema Document

101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document

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104		The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2019, has been formatted in Inline XBRL.

* Management contract or compensatory plan or arrangement

S~~IGNATURES~~SIGNATURES

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.

LSC COMMUNICATIONS, INC.

By:		/s/ ANDREW B. COXHEAD
		Andrew B. Coxhead
		Chief Financial Officer

By:		/s/ KENT A. HANSEN
		Kent A. Hansen
		Chief Accounting Officer and Controller

Date: ~~April 30,~~November 7, 2019

4858

	Short-Term Contract Assets			Long-Term Contract Assets			Contract Liabilities
Beginning Balance, January 1, 2019	$	44		$	30		$	16
Additions to unbilled accounts receivable		31			—			—
Unbilled accounts receivable recognized in trade receivables		(29	)		—			—
Amortization of contract acquisition costs		—			(3	)		—
Revenue recognized that was included in contract liabilities as of January 1, 2019		—			—			(8	)
Increases due to cash received		—			—			6
Ending Balance, March 31, 2019	$	46		$	27		$	14

	Three Months Ended
	March 31, 2019
Operating lease cost	$	17
Sublease (income)		(2	)
Variable lease cost		3
Total net lease cost	$	18

				Weighted
	Shares			Average Grant
	(thousands)			Date Fair Value
Nonvested at December 31, 2018		897		$	19.65
Granted		927			6.28
Vested		(338	)		25.59
Forfeited		(2	)		17.62
Nonvested at March 31, 2019		1,484		$	9.94

					Total Number
					of Shares Purchased		Dollar Value of Shares
	Total Number				as Part of		that May Yet be
	of Shares		Average Price		Publicly Announced		Purchased Under the
	Purchased _(a)		Paid per Share		Plans or Programs		Plans or Programs
January 1, 2019 - January 31, 2019		—	$	—		—	$	—
February 1, 2019 - February 28, 2019		—		—		—	$	—
March 1, 2019 - March 31, 2019		143,929		8.42		—	$	—
Total		143,929	$	8.42		—