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 September 30, ~~2019~~2020

☐	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: None

~~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 ~~November 1, 2019, 33,519,757~~October 23, 2020, 33,586,062 shares of common stock were outstanding.

LSC COMMUNICATIONS, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED ~~September~~SEPTEMBER 30, ~~2019~~2020

TABLE OF CONTENTS

~~PART I~~

		Page
PART I.FINANCIAL INFORMATION
Item 1:	Condensed Consolidated Financial Statements (unaudited) (Debtor-in-Possession)	3
	Condensed Consolidated Balance Sheets as of September 30, ~~2019~~2020 and December 31, ~~2018~~2019	3
	Condensed Consolidated Statements of Operations for the three and nine months ended September 30, ~~2019~~2020 and ~~2018~~2019	4
	Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, ~~2019~~2020 and ~~2018~~2019	5
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, ~~2019~~2020 and ~~2018~~2019	6
	Condensed Consolidated Statements of Stockholders' Equity for the three and nine months ended September 30, ~~2019~~2020 and ~~2018~~2019	7
	Notes to Condensed Consolidated Financial Statements	98
Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3142
Item 3:	Quantitative and Qualitative Disclosures About Market Risk	5361
Item 4:	Controls and Procedures	53
	62
Part II. Other Information		63
Item 1:	54
~~Item 1:~~ Legal Proceedings	5463
Item 1A:	Risk Factors	5463
Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	5469
Item 4:	Mine Safety Disclosures	5469
Item 6:	Exhibits	5470
	Signatures	5874

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

LSC COMMUNICATIONS, INC.

(DEBTOR-IN-POSSESSION)

CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions, except share and per share data)

(UNAUDITED)

	September 30,			December 31,			September 30,			December 31,
	2019			2018			2020			2019 (1)
ASSETS
Cash and cash equivalents	$	15		$	21		$	64		$	105
Receivables, less allowances for doubtful accounts of $13 in 2019 (2018 - $14)		532			617
Receivables
Amortized cost								440			484
Less: Allowance for credit losses								(14	)		(12	)
Receivables, net								426			472
Inventories (Note 5)		218			197			147			170
Income tax receivable		5			4			—			5
Assets held for sale (Note 6)								47			9
Prepaid expenses and other current assets		36			28			41			27
Total current assets		806			867			725			788
Property, plant and equipment-net (Note 6)		466			508			341			440
Goodwill (Note 7)		103			103			52			52
Other intangible assets-net (Note 7)		125			156			107			120
Right-of-use assets for operating leases		174			—			126			163
Deferred income taxes		31			27			7			9
Net pension asset (Note 12)								47			0
Other noncurrent assets		87			93			68			77
Total assets	$	1,792		$	1,754		$	1,473		$	1,649

LIABILITIES
Accounts payable	$	298		$	372		$	110		$	175
Accrued liabilities		223			199			187			211
Short-term debt and current portion of long-term debt (Note 10)		127			108			254			465
Short-term operating lease liabilities		44			—			30			42
Liabilities held for sale (Note 6)								14			0
Total current liabilities		692			679			595			893
Long-term debt (Note 10)		629			659			—			445
Pension liabilities		88			132			1			156
Restructuring and multi-employer pension liabilities (Note 8)		41			45			0			42
Long-term operating lease liabilities		137			—			99			129
Other noncurrent liabilities		53			61			43			56
Liabilities subject to compromise (Note 2)								912			0
Total liabilities	$	1,640		$	1,576		$	1,650		$	1,721

Commitments and contingencies (Note 9)

EQUITY
Common stock, $0.01 par value
Authorized: 65,000,000
Issued: 35,404,938 shares in 2019 (2018: 35,029,565)	$	—		$	—
Issued: 35,719,936 shares in 2020 (2019: 35,559,052)							$	0		$	0
Additional paid-in capital		834			828			837			835
Accumulated deficit		(185	)		(42	)		(591	)		(365	)
Accumulated other comprehensive loss (Note 14)		(472	)		(584	)		(398	)		(517	)
Treasury stock, at cost: 2,032,134 shares in 2019 (2018: 1,888,205)		(25	)		(24	)
Treasury stock, at cost: 2,133,874 shares in 2020 (2019: 2,084,055)								(25	)		(25	)
Total equity		152			178			(177	)		(72	)
Total liabilities and equity	$	1,792		$	1,754		$	1,473		$	1,649

(1) As Adjusted, see Impact of Change in Accounting Principle in Note 1

See Notes to the Condensed Consolidated Financial Statements

LSC COMMUNICATIONS, INC.

(DEBTOR-IN-POSSESSION)

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions, except per share data)

(UNAUDITED)

	Three Months Ended						Nine Months Ended						Three Months Ended						Nine Months Ended
	September 30,						September 30,						September 30,						September 30,
	2019			2018			2019			2018			2020			2019 (1)			2020			2019 (1)
Net sales	$	834		$	1,015		$	2,548		$	2,887		$	628		$	834		$	1,861		$	2,548
Cost of sales		716			862			2,201			2,468			530			716			1,614			2,201
Selling, general and administrative expenses (exclusive of depreciation and amortization)		88			77			253			242			64			88			200			253
Restructuring, impairment and other charges-net (Note 8)		10			1			47			18			56			10			114			47
Depreciation and amortization		29			34			91			106			24			29			79			91
(Loss) income from operations		(9	)		41			(44	)		53
(Loss) from operations														(46	)		(9	)		(146	)		(44	)
Interest expense-net (Note 10)		20			21			58			59			5			20			26			58
Settlement of retirement benefit obligations (Note 12)		1			—			137			—			63			1			63			134
Termination fee from Quad (Note 1)		(45	)		—			(45	)		—
Termination fee from Quad														0			(45	)		0			(45	)
Investment and other (income)-net		(9	)		(11	)		(28	)		(35	)		(14	)		(8	)		(35	)		(24	)
Income (loss) before income taxes		24			31			(166	)		29
Income tax expense (benefit)		—			35			(40	)		36
Net income (loss)	$	24		$	(4	)	$	(126	)	$	(7	)
Reorganization items, net (Note 2)														24			0			38			0
(Loss) income before income taxes														(124	)		23			(238	)		(167	)
Income tax (benefit)														(13	)		0			(12	)		(40	)
Net (loss) income													$	(111	)	$	23		$	(226	)	$	(127	)

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	)
Net (loss) income per common share (Note 11)
Basic net (loss) income per share													$	(3.29	)	$	0.66		$	(6.71	)	$	(3.82	)
Diluted net (loss) income per share													$	(3.29	)	$	0.66		$	(6.71	)	$	(3.82	)

Weighted-average number of common shares outstanding:
Basic	33.5				33.2			33.4			34.0		33.7				33.5			33.6			33.4
Diluted	33.5				33.2			33.4			34.0		33.7				33.5			33.6			33.4

(1) As Adjusted, see Impact of Change in Accounting Principle in Note 1

See Notes to the Condensed Consolidated Financial Statements

LSC COMMUNICATIONS, INC.

(DEBTOR-IN-POSSESSION)

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in millions)

(UNAUDITED)

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
)

$
—

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2020			2019 (1)			2020			2019 (1)
Net (loss) income	$	(111	)	$	23		$	(226	)	$	(127	)

Other comprehensive income (loss), net of tax (Note 14):
Translation adjustments		2			(2	)		(8	)		—
Adjustment for net periodic pension plan cost		121			3			127			113
Other comprehensive income (loss)		123			1			119			113
Comprehensive (loss) income	$	12		$	24		$	(107	)	$	(14	)

The adjustments for net pension plan cost were net of income tax expense of $17 million and $19 million for the three and nine months ended September 30, 2020, respectively. 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, 2020 and 2019 was primarily due to the settlements of retirement benefit obligations that are ~~discussed~~disclosed 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.~~

(1) As Adjusted, see Impact of Change in Accounting Principle in Note 1

See Notes to the Condensed Consolidated Financial Statements

LSC COMMUNICATIONS, INC.

(DEBTOR-IN-POSSESSION)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

(UNAUDITED)

	Nine Months Ended						Nine Months Ended
	September 30,						September 30,
	2019			2018			2020			2019 (1)
Cash Flows from Operating Activities
Net (loss)	$	(126	)	$	(7	)	$	(226	)	$	(127	)
Adjustments to reconcile net (loss) to net cash provided by (used in) operating activities:
Adjustments to reconcile net (loss) to net cash (used in) provided by operating activities:
Impairment charges		20			—			30			20
Depreciation and amortization		91			106			79			91
Provision for doubtful accounts receivable		7			5			5			7
Share-based compensation		6			10			2			6
Deferred income taxes		(42	)		30			(18	)		(42	)
Settlement of retirement benefit obligations		137			—			63			134
Gain on sale of investments and other assets, net								(2	)		0
Non-cash reorganization items, net								13			0
Other		(2	)		5			12			(2	)
Changes in operating assets and liabilities - net of acquisitions:
Changes in operating assets and liabilities - net of acquisitions and dispositions:
Accounts receivable-net		76			(44	)		27			76
Inventories		(21	)		(53	)		18			(21	)
Prepaid expenses and other current assets		4			(3	)		(12	)		4
Accounts payable		(53	)		(45	)		65			(53	)
Income taxes receivable		(1	)		8
Income taxes payable and receivable								4			(1	)
Accrued liabilities and other		(7	)		(38	)		(22	)		(3	)
Net cash provided by (used in) operating activities		89			(26	)
Changes in liabilities subject to compromise								(55	)		0
Net cash (used in) provided by operating activities								(17	)		89

Cash Flows from Investing Activities
Capital expenditures		(60	)		(52	)		(25	)		(60	)
Acquisitions of businesses, net of cash acquired		(3	)		(54	)		0			(3	)
Disposition of businesses		4			45			0			4
Net (payments) and proceeds from sales and purchase of investments		—			(3	)
Proceeds from sales of other assets		—			7
Net proceeds from sales and purchases of investments and other assets								3			0
Net cash (used in) investing activities		(59	)		(57	)		(22	)		(59	)

Cash Flows from Financing Activities
Payments of current maturities and long-term debt		(33	)		(39	)		0			(33	)
Net proceeds from credit facility borrowings		19			158			4			19
Debt issuance costs		(2	)		—			(1	)		(2	)
Payments for repurchase of common stock		—			(20	)
Dividends paid		(17	)		(26	)		0			(17	)
Other financing activities		(1	)		(1	)		0			(1	)
Net cash (used in) provided by financing activities		(34	)		72
Net cash provided by (used in) financing activities								3			(34	)

Effect of exchange rate on cash and cash equivalents		1			(1	)		(2	)		1
Net (decrease) in cash, cash equivalents and restricted cash		(3	)		(12	)		(38	)		(3	)
Cash, cash equivalents and restricted cash at beginning of year		24			35			106			24
Cash, cash equivalents and restricted cash at end of period	$	21		$	23		$	68		$	21

Reconciliation to the Condensed Consolidated Balance Sheets
	As of			As of
Reconciliation to the Consolidated Balance Sheets							As of
	September 30, 2019			December 31, 2018			September 30, 2020			December 31, 2019
Cash and cash equivalents	$	15		$	21		$	64		$	105
Restricted cash included in prepaid expenses and other current assets		6			3			4			1
Total cash, cash equivalents and restricted cash shown in the condensed consolidated statements of cash flows	$	21		$	24		$	68		$	106

(1) As Adjusted, see Impact of Change in Accounting Principle in Note 1

See Notes to the Condensed Consolidated Financial Statements

LSC COMMUNICATIONS, INC.

(DEBTOR-IN-POSSESSION)

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(in millions)

(UNAUDITED)

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

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

															Accumulated
					Additional										Other
	Common Stock				Paid-in		Treasury Stock					(Accumulated			Comprehensive			Total
	Shares		Amount		Capital		Shares		Amount			Deficit)			(Loss) Income			Equity
Balance at December 31, 2019		36	$	0	$	835		2	$	(25	)	$	(365	)	$	(517	)	$	(72	)
Net (loss)		0		0		0		0		0			(52	)		0			(52	)
Share-based compensation		0		0		1		0		0			0			0			1
Other comprehensive (loss)		0		0		0		0		0			0			(8	)		(8	)
Balance at March 31, 2020		36	$	0	$	836		2	$	(25	)	$	(417	)	$	(525	)	$	(131	)
Net (loss)		0		0		0		0		0			(63	)		0			(63	)
Share-based compensation		0		0	1			0		0			0			0			1
Other comprehensive income		0		0		0		0		0			0			4			4
Balance at June 30, 2020		36	$	0	$	837		2	$	(25	)	$	(480	)	$	(521	)	$	(189	)
Net (loss)		0		0		0		0		0			(111	)		0			(111	)
Share-based compensation		0		0		0		0		0			0			0			0
Other comprehensive income		0		0		0		0		0			0			123			123
Balance at September 30, 2020		36	$	0	$	837		2	$	(25	)	$	(591	)	$	(398	)	$	(177	)

~~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”)~~.

															Accumulated
					Additional										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		$	0	$	828		2	$	(24	)	$	(51	)	$	(575	)	$	178
Net (loss)		0		0		0		0		0			(125	)		0			(125	)
Issuance of share-based awards, net of withholdings and other		1		0		0		0		(1	)		0			0			(1	)
Share-based compensation		0		0		3		0		0			0			0			3
Cash dividends paid		0		0		0		0		0			(9	)		0			(9	)
Other comprehensive income		0		0		0		0		0			0			107			107
Balance at March 31, 2019		36	$	0	$	831		2	$	(25	)	$	(185	)	$	(468	)	$	153
Net (loss)		0		0		0		0		0			(25	)		0			(25	)
Share-based compensation		0		0		1		0		0			0			0			1
Cash dividends paid		0		0		0		0		0			(8	)		0			(8	)
Other comprehensive income		0		0		0		0		0			0			5			5
Balance at June 30, 2019		36	$	0	$	832		2	$	(25	)	$	(218	)	$	(463	)	$	126
Net income		0		0		0		0		0			23			0			23
Share-based compensation		0		0		2		0		0			0			0			2
Other comprehensive income		0		0		0		0		0			0			1			1
Balance at September 30, 2019		36	$	0	$	834		2	$	(25	)	$	(195	)	$	(462	)	$	152

Refer to Impact of Change in Accounting Principle in Note 3,1, ~~Revenue Recognition~~Overview and Basis of Presentation, for ~~ASC 606 disclosures.~~information on the adjustments made to accumulated deficit and accumulated other comprehensive loss in both periods.

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

2020).

See Notes to the Condensed Consolidated Financial Statements

LSC Communications, Inc.

(DEBTOR-IN-POSSESSION)

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Nine Months Ended September 30, ~~2019~~2020 and ~~2018~~2019

(tabular amounts in millions, except per share data)

Note 1. Overview and 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 with Quad/Graphics, Inc.~~Voluntary Reorganization under Chapter 11

On ~~October 30, 2018,~~April 13, 2020 (the “Petition Date”), the Company and certain of its subsidiaries filed voluntary petitions for relief under Chapter 11 of title 11 of the United States Code, 11 U.S.C. §§ 101-1532 (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”) (collectively, the “Chapter 11 Cases”).

Refer to Note 2, Voluntary Reorganization under Chapter 11, for more information on the Chapter 11 Cases and the Stock and Asset Purchase Agreement (“Purchase Agreement”) entered into on September 15, 2020.

Going Concern

The accompanying condensed consolidated financial statements were prepared assuming that ~~certain~~the Company will continue as a going concern and contemplate the continuity of our operations, realization of assets and satisfaction of liabilities and commitments in the normal course of business. Our ability to continue as a going concern is contingent upon our ability to comply with the covenants of the Debtor-in-Possession Credit Agreement described in Note 10, Debt, and ~~Plan of Merger (the “Merger Agreement”), by and among Quad/Graphics, Inc. (“Quad”), QLC Merger Sub, Inc. and LSC Communications, pursuant~~our ability to ~~which,~~implement, subject to the ~~satisfaction~~Bankruptcy Court’s approval, a plan of reorganization, among other factors.

While operating as debtors-in-possession under Chapter 11, we may sell or ~~waiver~~otherwise dispose of ~~certain conditions,~~ or liquidate assets or settle liabilities, subject to the approval of the Bankruptcy Court or as otherwise permitted in the ordinary course of business (and subject to restrictions in our debt agreements), for amounts other than those reflected in the accompanying condensed consolidated financial statements. Further, the plan of reorganization could materially change the amounts and classifications of assets and liabilities reported in the condensed consolidated financial statements.

As a result of the factors noted above, we believe there is substantial doubt about the Company’s ability to continue as a going concern. The condensed consolidated financial statements included in this quarterly report on Form 10-Q do not include any adjustments related to the recoverability and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

LSC Communications, ~~would~~Inc.

(DEBTOR-IN-POSSESSION)

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Nine Months Ended September 30, 2020 and 2019

(tabular amounts in millions, except per share data)

Coronavirus Pandemic (“COVID-19”)

During and subsequent to the nine months ended September 30, 2020, the novel coronavirus strain, known as COVID-19, continues to impact the world at an increasing rate. Measures taken by governmental authorities and private actors to limit the spread of this virus may interfere with the ability of the Company's employees, suppliers, and other business providers to carry out their assigned tasks or supply materials at ordinary levels of performance relative to the conduct of the business which may cause a material curtailment to certain business operations. Moreover, as a large part of the Company's business involves sales of books and other products used in schools and school facilities, if COVID-19 related measures continue to result in widespread and lengthy school closings, the Company's consolidated results of operations and financial condition will be ~~merged with QLC Merger Sub, Inc.,~~adversely impacted. Books sold in retail stores have also been adversely impacted as both large chains and ~~become a wholly-owned subsidiary of Quad.~~independent stores have been forced to close, although some retail stores have subsequently re-opened. Additionally, as COVID-19 has significantly impacted retailers' stores, distribution centers and supply chains, the Company has experienced an adverse impact on our catalogs and office products businesses. Disruption across many other industries has also significantly impacted demand for advertising, which may result in page count and volume reductions in magazines.

We continue to monitor the situation, to assess further possible implications to our business and customers, and to take actions in an effort to mitigate adverse consequences. The Company has expanded its work-from-home policy for its non-manufacturing employees, has focused on obtaining protective equipment and implementing social distancing and other policies for its manufacturing employees and continues to adhere to guidance issued by governmental authorities.

On ~~July 22, 2019, Quad~~March 27, 2020, the Coronavirus Aid, Relief, and ~~LSC Communications entered~~Economic Security Act (“CARES Act”) was signed into ~~a letter agreement (the “Letter Agreement”)~~law. Refer to Note 13, Taxes, pursuant to which the parties agreed to terminate the Merger Agreement. Pursuant to the Letter Agreement, Quad agreed to pay LSC Communications the Regulatory Approval Reverse Termination Fee (as defined in the Merger Agreement) of $45 million in cashfor more information on the business day following the date of the Letter Agreement. The Company incurred transaction costs of approximately $26 million associated with the Merger Agreement, of which $5 million was incurred in 2018. Except for certain indemnification obligations of Quad related to LSC Communications assisting Quad with the financing under the Merger Agreement, the parties also agreed to 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 or in connection with the Merger Agreement or the transactions provided for in the Merger Agreement.CARES Act.

Basis of Presentation

The condensed consolidated financial statements include the balance sheets and statements of operations, stockholders’ equity and cash flows in conformity with accounting principles generally accepted in the United States (“GAAP”). Certain immaterial reclassifications have been made to the prior period presentation to conform to the current period presentation. 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~~As a result of the ~~third~~Company’s segment analysis in the fourth quarter of ~~2018, management changed~~2019, Mexico met the ~~Company’s~~requirements to be classified as a reportable ~~segments and reporting units. Consequently,~~segment (previously included as a non-reportable segment). All prior year amounts ~~were restated~~have been reclassified to conform to the ~~new segment~~Company’s current reporting structure. Refer to Note 15, Segment Information, for ~~more information.~~reclassified balances for the three and nine months ended September 30, 2019.

~~Note 2. Business Combination and Disposition~~

~~2018 Acquisition~~

~~On July 2, 2018,~~The Company adopted Accounting Standards Update No. 2016-13 “Financial Instruments-Credit Losses (Topic 326)” (“ASU 2016-13” or “ASC 326”) on January 1, 2020 using 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 asmodified retrospective adoption method. As a result of ~~a $6 million net working capital settlement~~the adoption, the Company separately disclosed the amortized cost amount of total receivables separately from the allowance for credit losses in the ~~fourth quarter of 2018. Of the final total purchase price, $21 million was recorded in goodwill related~~condensed consolidated balance sheet. Refer to ~~this acquisition.~~Note 3, Revenue Recognition, for more information.

LSC Communications, Inc.

(DEBTOR-IN-POSSESSION)

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Nine Months Ended September 30, ~~2019~~2020 and ~~2018~~2019

(tabular amounts in millions, except per share data)

~~2018 Disposition~~Impact of Change in Accounting Principle

~~On September 28, 2018,~~Beginning in the first quarter of 2020, the Company ~~completed~~changed the ~~sale~~method 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 primarilyaccounting for the ~~write-off~~market-related value of assets for a ~~deferred tax asset associated with~~class of assets within the ~~disposition. The European printing business was included~~U.S. Qualified Plan and Non-Qualified plans. This class of assets is currently comprised of liability-hedging investments, which represents approximately 60% of the plans’ assets. Liability-hedging investments provide a natural hedge against the changes in the ~~Europe segment, which~~recorded amount of net periodic pension cost. Refer to Note 12, Retirement Plans, in the Company’s Form 10-K for the fiscal year ended December 31, 2019 for disclosure by asset classifications. The previous method of accounting was ~~disclosed as part~~to use the market-related value of assets for all the plans’ assets by recognizing changes in fair value of plan assets ratably over a five-year period. As a result of the ~~Other segment grouping.~~

~~Acquisition Information~~

~~The acquisition~~change in method of ~~Print Logistics was recorded by allocating~~accounting the ~~cost~~Company will no longer use the market-related value 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 toliability-hedging investments. Instead, the fair value of liability-hedging investments was immediately included in the calculation of net periodic pension cost. This change in accounting method is preferable because it accelerated the recognition of the fair value for this class of assets ~~acquired~~into net income or loss. No change was ~~recorded in goodwill. The goodwill is primarily attributable~~made to the ~~synergies expected to arise as a result~~accounting principle for the other classes of pension assets, which represent the remaining 40% of the ~~acquisition. The tax deductible goodwill related to Print Logistics was $25 million.~~pension asset portfolio for the plan.

The ~~purchase price allocation~~change in accounting principle requires retrospective application and prospective disclosure. Refer below for ~~Print Logistics~~the restatements on previously issued financial statements. Retrospective application was ~~final~~applied to periods beginning in 2017 as ~~of December 31, 2018. There were no changes~~it was determined not to be possible to go further than that date due to the ~~purchase price allocation for the acquisition as of September 30, 2019 compared~~Company’s separation in 2016 from its prior parent company. Prior to the ~~disclosed purchase price allocation~~separation in 2016, the U.S. Qualified and Non-Qualified pension plans were legally owned by the Company’s ~~annual report on Form 10-K for the year ended December 31, 2018.~~ prior parent company.

The ~~final purchase price allocation~~cumulative effect of the change on accumulated deficit was an increase in deficit of $9 million as of January 1, 2019 and a $9 million decrease in accumulated other comprehensive loss, as shown in the condensed statement of stockholders’ equity.

The historical statements of cash flows are also being retrospectively restated as changes in net (loss) income, expense related to settlement of retirement obligations and pension income flow through the operating activities section with an offsetting impact to the change in accrued liabilities and other. There is no net impact to cash flows provided by (used in) operating activities.

The tables below represent the impact of the change in accounting principle on the condensed consolidated balance sheets and statement of stockholders’ equity for ~~Print Logistics was as follows:~~certain periods since 2018:

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

	Previously Disclosed in Form 10-K						As Reported with Change
	As of December 31, 2018			Impact of Change			As of December 31, 2018
Equity
(Accumulated deficit)	$	(42	)	$	(9	)	$	(51	)
Accumulated other comprehensive (loss) income		(584	)		9			(575	)

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, if a secondhand market 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%

	Previously Disclosed in Form 10-K						As Reported with Change
	As of December 31, 2019			Impact of Change			As of December 31, 2019
Equity
(Accumulated deficit)	$	(354	)	$	(11	)	$	(365	)
Accumulated other comprehensive (loss) income		(528	)		11			(517	)

For each of the three and nine months ended September 30, 2019, the Company recorded a de minimis amount of acquisition-related expenses associated with 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.

(DEBTOR-IN-POSSESSION)

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Nine Months Ended September 30, ~~2019~~2020 and ~~2018~~2019

(tabular amounts in millions, except per share data)

	Previously Disclosed in Form 10-Q						As Reported with Change
	As of March 31, 2019			Impact of Change			As of March 31, 2019
Equity
(Accumulated deficit)	$	(177	)	$	(8	)	$	(185	)
Accumulated other comprehensive (loss) income		(476	)		8			(468	)

	Previously Disclosed in Form 10-Q						As Reported with Change
	As of June 30, 2019			Impact of Change			As of June 30, 2019
Equity
(Accumulated deficit)	$	(209	)	$	(9	)	$	(218	)
Accumulated other comprehensive (loss) �� income		(472	)		9			(463	)

	Previously Disclosed in Form 10-Q						As Reported with Change
	As of September 30, 2019			Impact of Change			As of September 30, 2019
Equity
(Accumulated deficit)	$	(185	)	$	(10	)	$	(195	)
Accumulated other comprehensive (loss) income		(472	)		10			(462	)

The tables below represent the impact of the change in accounting principle on the condensed consolidated statements of operations and comprehensive income for the three and nine months ended September 30, 2019:

	Previously Disclosed in Form 10-Q						As Reported with Change
	Three Months Ended September 30, 2019			Impact of Change			Three Months Ended September 30, 2019
Settlement of retirement benefit obligations	$	1			0		$	1
Investment and other (income) expense		(9	)		1			(8	)
Income (loss) before income taxes		24			(1	)		23
Income tax (benefit)		0			0			0
Net income (loss)		24			(1	)		23
Basic net income (loss) per share		0.69			(0.03	)		0.66
Diluted net income (loss) per share		0.69			(0.03	)		0.66
Adjustment for net periodic pension plan cost		2			1			3
Other comprehensive income		0			1			1
Comprehensive income		24			0			24

LSC Communications, Inc.

(DEBTOR-IN-POSSESSION)

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Nine Months Ended September 30, 2020 and 2019

(tabular amounts in millions, except per share data)

	Previously Disclosed in Form 10-Q						As Reported with Change
	Nine Months Ended September 30, 2019			Impact of Change			Nine Months Ended September 30, 2019
Settlement of retirement benefit obligations	$	137		$	(3	)	$	134
Investment and other (income) expense		(28	)		4			(24	)
(Loss) before income taxes		(166	)		(1	)		(167	)
Income tax (benefit)		(40	)		0			(40	)
Net (loss)		(126	)		(1	)		(127	)
Basic net (loss) per share		(3.78	)		(0.04	)		(3.82	)
Diluted net (loss) per share		(3.78	)		(0.04	)		(3.82	)
Adjustment for net periodic pension plan cost		112			1			113
Other comprehensive income		112			1			113
Comprehensive (loss)		(14	)		0			(14	)

The tables below represent the impact of the change in accounting principle on the condensed consolidated balance sheet as of September 30, 2020 and the statements of operations and comprehensive income for the three and nine months ended September 30, 2020:

	Previous Accounting Method						As Reported
	As of September 30, 2020			Impact of Change			As of September 30, 2020
Equity
(Accumulated deficit)	$	(585	)	$	(6	)	$	(591	)
Accumulated other comprehensive (loss) income		(406	)		8			(398	)
Net pension asset		43			4			47

	Previous Accounting Method						As Reported
	Three Months Ended September 30, 2020			Impact of Change			Three Months Ended September 30, 2020
Settlement of retirement obligations	$	64		$	(1	)	$	63
Investment and other (income)		(11	)		(3	)		(14	)
(Loss) income before income taxes		(128	)		4			(124	)
Income tax (benefit) expense		(14	)		1			(13	)
Net (loss) income		(114	)		3			(111	)
Basic net (loss) income per share		(3.36	)		0.07			(3.29	)
Diluted net (loss) income per share		(3.36	)		0.07			(3.29	)
Adjustment for net periodic pension plan cost		123			(2	)		121
Other comprehensive income (loss)		125			(2	)		123
Comprehensive income		11			1			12

LSC Communications, Inc.

(DEBTOR-IN-POSSESSION)

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Nine Months Ended September 30, 2020 and 2019

(tabular amounts in millions, except per share data)

	Previous Accounting Method						As Reported
	Nine Months Ended September 30, 2020			Impact of Change			Nine Months Ended September 30, 2020
Settlement of retirement obligations	$	64		$	(1	)	$	63
Investment and other (income)		(28	)		(7	)		(35	)
(Loss) income before income taxes		(246	)		8			(238	)
Income tax (benefit) expense		(14	)		2			(12	)
Net (loss) income		(232	)		6			(226	)
Basic net (loss) income per share		(6.88	)		0.17			(6.71	)
Diluted net (loss) income per share		(6.88	)		0.17			(6.71	)
Adjustment for net periodic pension plan cost		130			(3	)		127
Other comprehensive income (loss)		122			(3	)		119
Comprehensive (loss) income		(110	)		3			(107	)

Note 2. Voluntary Reorganization under Chapter 11

Background Information

The Chapter 11 Cases are being jointly administered under the caption In re LSC Communications, Inc., 20-10950. We and our subsidiaries that are involved in the Chapter 11 Cases will continue to operate our businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code.

Significant Bankruptcy Court Actions

On April 15, 2020, the Bankruptcy Court entered orders granting interim approval of certain motions (the “First Day Motions”), enabling us to conduct our business activities in the ordinary course, subject to the terms and conditions of such orders, including authorizing us to pay employee wages and benefits, to pay taxes and certain governmental fees and charges, to continue to operate our cash management system in the ordinary course, and to pay prepetition claims of certain of our vendors. The First Day Motions were subsequently approved by the Bankruptcy Court on a final basis at hearings on May 12, 2020 and June 2, 2020.

Purchase Agreement

On June 5, 2020, the Bankruptcy Court entered an order granting approval for a sale and bidding process through which we were authorized to determine the highest or otherwise best offer for the sale of all or substantially all of our assets pursuant to Section 363 of the Bankruptcy Code or a Chapter 11 plan of reorganization. In accordance with the order, on September 15, 2020, we, in consultation with the required consultation parties, selected the bid submitted by ACR III Libra Holdings LLC, a Delaware limited liability company (“Buyer”) as the bid which constitutes the highest or otherwise best bid for the Business (as defined below) (the “Successful Bid”).

On September 15, 2020, we and certain of our subsidiaries, including subsidiaries that are not involved in the Chapter 11 Cases (collectively, the “Sellers”), entered into a Stock and Asset Purchase Agreement (the “Purchase Agreement”) with Buyer, and, solely with respect to Section 9.13 of the Purchase Agreement, Atlas Capital Resources III LP, a Delaware limited partnership, and Atlas Capital Resources (P) III LP, a Delaware limited partnership (each a “Guarantor”), pursuant to which, upon the terms and subject to the conditions set forth therein, Buyer will acquire substantially all of the assets of the Sellers (the “Business”) as a going concern for (i) the Final Cash Consideration (as defined in the Purchase Agreement), subject to the Final Cash Consideration Cap (as defined in the Purchase Agreement), (ii) a credit bid and release of each Seller from the corresponding portion of each of the senior secured term loan B facility under the Prepetition Credit Agreement and the Prepetition Indenture (each as defined in the Purchase Agreement), in an aggregate amount equal to $63.437 million, and (iii) the assumption of certain specified liabilities of the Sellers, including obligations relating to the Company’s qualified pension plan (the “Transactions”).

LSC Communications, Inc.

(DEBTOR-IN-POSSESSION)

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Nine Months Ended September 30, 2020 and 2019

(tabular amounts in millions, except per share data)

~~Pro forma results~~ Simultaneous with us entering into the Purchase Agreement, Buyer entered into that certain Amended and Restated Credit Bid Support Agreement, dated as of September 15, 2020 (the “CBSA”), by and among ACR III Libra Parent LLC, certain holders of the senior secured term loan B facility under the Prepetition Credit Agreement and holders of senior notes under the Prepetition Indenture (collectively, the “Junior Creditors”), Lapetus Capital III LLC and, solely for purposes of certain sections of such agreement, the Guarantors, which sets forth certain amounts that may be available for distribution to the Junior Creditors in connection with the credit bid. Pursuant to the CBSA, at the closing of the Transactions, Buyer may hold back from the amount available to distribute from Buyer to the Junior Creditors under the CBSA up to $43.75 million, relating to the net working capital adjustment, certain assumed expenses and certain real estate matters. If such holdback amount exceeds the Available Amount (as defined in the CBSA) (such excess amount, the “Deficiency Amount”), we will, in good faith and in consultation with AlixPartners, LLP, make a determination about whether the estate would remain solvent post-closing if the Deficiency Amount is held back from the Estimated Cash Consideration (as defined in the Purchase Agreement) at closing. If we determine that we are reasonably likely to be administratively insolvent if the Deficiency Amount is held back at the closing, (a) the Sellers will propose the maximum holdback amount that they calculate, in good faith and in consultation with AlixPartners, LLP, will allow us to remain solvent, and (b) thereafter, Buyer will have the option to (1) agree to such maximum holdback amount and take a residual claim on the Debtors’ estate, ranking immediately junior to other administrative claims, for the difference or (2) terminate the Purchase Agreement.

On October 7, 2020 the Bankruptcy Court entered an Order (I) Approving the Purchase Agreement among the Debtors and Buyer, (II) Approving the Sale of Debtors’ Assets Free and Clear of Liens, Claims, Interests and Encumbrances, (III) Authorizing Assumption and Assignment of Certain Executory Contracts and Unexpired Leases and (IV) Granting Related Relief [Docket No. 876], pursuant to which the Bankruptcy Court approved the Purchase Agreement and the Transactions. The closing of the Transactions is subject to closing conditions, including the achievement of certain bankruptcy-related milestones, regulatory approvals and other customary closing conditions. The Transactions are expected to close during the fourth quarter of 2020.

Debtor-In-Possession

The Debtors are currently operating as debtors in possession in accordance with the applicable provisions of the Bankruptcy Code. The Bankruptcy Court has approved motions filed by the Debtors that were designed primarily to mitigate the impact of the Chapter 11 Cases on the Company’s operations, customers and employees. In general, as debtors-in-possession under the Bankruptcy Code, the Debtors are authorized to continue to operate as an ongoing business, but may not engage in transactions outside the ordinary course of business without the prior approval of the Bankruptcy Court. Although payment of prepetition claims generally is not permitted, the Bankruptcy Court granted us authority to pay certain pre-petition claims in designated categories and subject to certain terms and conditions. This relief generally was designed to preserve the value of our business and assets. Among other things, the Bankruptcy Court authorized, but did not require, the Company to pay certain prepetition claims relating to employee wages and benefits, taxes, and certain vendors.

The Company and its debtor subsidiaries have filed monthly financial reports with the Bankruptcy Court since the filing date.

Debtor-In-Possession Financing

As previously disclosed, on April 15, 2020, we obtained debtor-in-possession financing of up to $100 million which, together with our normal operating cash flows, will provide liquidity for the Company to operate as usual and fulfill ongoing commitments to stakeholders during the pendency of the Chapter 11 Cases. The debtor-in-possession financing facility was approved on a final basis on June 2, 2020. Refer to Note 10, Debt, for information on the debtor-in-possession financing facility.

LSC Communications, Inc.

(DEBTOR-IN-POSSESSION)

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Nine Months Ended September 30, 2020 and 2019

(tabular amounts in millions, except per share data)

Automatic Stay

During the pendency of the Chapter 11 Cases, attempts to prosecute, collect, secure or enforce remedies with respect to prepetition claims against the debtors, including litigation relating to the entities involved in the Chapter 11 Cases, are subject to the automatic stay provisions of section 362(a) of the Bankruptcy Code, as modified or amended by the terms of any order entered in the Chapter 11 Cases. For goods and services provided following ~~unaudited pro forma~~the Petition Date, the Company expects to continue to pay vendors under normal terms.

Executory Contracts

Subject to certain exceptions, under the Bankruptcy Code, the Debtors may assume, amend or reject certain executory contracts and unexpired leases subject to the approval of the Bankruptcy Court and certain other conditions. Generally, the rejection of an executory contract or unexpired lease is treated as a pre-petition breach of such executory contract or unexpired lease and, subject to certain exceptions, relieves the Debtors from performing their future obligations under such executory contract or unexpired lease but entitles the contract counterparty or lessor to a prepetition general unsecured claim for damages caused by such deemed breach. Generally, the assumption of an executory contract or unexpired lease requires the Debtors to cure existing monetary defaults under such executory contract or unexpired lease and provide adequate assurance of future performance. Accordingly, any description of an executory contract or unexpired lease with the Debtors in this document, including, where applicable, a quantification of the Company’s obligations under any such executory contract or unexpired lease of the Debtors, is qualified by any overriding rejection rights the Company has under the Bankruptcy Code.

Potential Claims

Debtors have filed with the Bankruptcy Court schedules and statements setting forth, among other things, the assets and liabilities of each of the debtors, subject to the assumptions filed in connection therewith. These schedules and statements may be subject to further amendment or modification after filing. Differences in amounts recorded and claims filed by creditors will be investigated and resolved, including through the filing of objections with the Bankruptcy Court, where appropriate. The Bankruptcy Court does not allow for claims that have been acknowledged as duplicates. In addition, the Company may ask the Bankruptcy Court to disallow claims that the Company believes have been later amended or superseded, are without merit, are overstated or should be disallowed for other reasons. In addition, as a result of this process, the Company may identify additional liabilities that will need to be recorded or reclassified to liabilities subject to compromise in the Company’s condensed consolidated balance sheet. In light of the substantial number of claims filed, and expected to be filed, the claims resolution process may take considerable time to complete and likely will continue after the Chapter 11 Cases emerge from bankruptcy.

Accounting Considerations

The Company has applied Accounting Standards Codification (“ASC”) Topic 852, Reorganizations (“ASC 852”), in preparing the condensed consolidated financial statements. ASC 852 requires the financial statements, for periods subsequent to the commencement of the Chapter 11 Cases, to distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Accordingly, certain charges incurred during 2020 related to the Chapter 11 Cases are recorded as reorganization items, net in the Company’s condensed consolidated statement of operations.

In addition, pre-petition debtor obligations that may be impacted by the Chapter 11 Cases have been classified as liabilities subject to compromise in the Company’s condensed consolidated balance sheet at September 30, 2020. Generally, actions to enforce or otherwise effect payment of pre-petition liabilities are stayed. These liabilities are reported at the amounts the Company anticipates will be allowed by the Bankruptcy Court, even if they may be settled for lesser amounts. These amounts represent our current estimate of known or potential obligations to be resolved in connection with the Chapter 11 Cases, and may differ from actual future settlement amounts paid. Differences between liabilities estimated and claims filed, or to be filed, will be investigated and resolved in connection with the claims resolution process. We will continue to evaluate these liabilities throughout the Chapter 11 process and adjust amounts as necessary. Such adjustments may be material. These liabilities subject to compromise may not be fully secured and have a possibility of not being repaid at the full claim amount.

LSC Communications, Inc.

(DEBTOR-IN-POSSESSION)

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Nine Months Ended September 30, 2020 and 2019

(tabular amounts in millions, except per share data)

ASC 852 requires certain additional reporting for financial statements prepared between the Petition Date and the date of emergence from bankruptcy, including:

•

Reclassification of debtor pre-petition liabilities that are unsecured, under-secured or where it cannot be determined that the liabilities are fully secured, to a separate line item in the condensed consolidated balance sheet called, "Liabilities subject to compromise"; and

•

Segregation of reorganization items, net as a separate line in the condensed consolidated statement of operations, outside of loss from operations.

See below for more information regarding balances disclosed as reorganization items, net and liabilities subject to compromise.

Reorganization Items, Net

The debtors have incurred and will continue to incur significant costs associated with the reorganization.The amount of these charges, which since the Petition Date are being expensed as incurred, may significantly affect the Company’s results of operations. In accordance with applicable guidance, costs associated with the Chapter 11 Cases have been recorded as reorganization items, net within the Company's condensed consolidated statements of operations for the three and nine months ended September 30, ~~2019 and 2018 presents the condensed consolidated statements~~2020. See below for a summary 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~~charges:

	Three Months Ended			Nine Months Ended
	September 30, 2020			September 30, 2020
Professional fees	$	22		$	44
Adjustments of other claims		(5	)		(13	)
Debt fees		2			3
Other net expenses		5			4
Reorganization items, net	$	24		$	38

Professional fees included in reorganization items, net represent fees for post-petition expenses related to the ~~acquisition.~~ Chapter 11 Cases. Adjustments of other claims represents net gains on trade accounts payable claims that have been settled by the Bankruptcy Court. Debt fees are related to the Company’s DIP Credit Agreement. Other net expenses include amounts related to the Company’s key employee incentive and retention plans and gains related to the income statement impact of writing off leases that have been rejected by the Bankruptcy Court.

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 presentedCash paid for reorganization items, net was $19 million 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

Nine Months Ended

September 30,

September 30,

2019

2018

2019

2018

Net sales

$
834

$
1,015

$
2,548

$
2,972

Net income (loss)

24

(4
)

(126
)

(10
)

~~The following table outlines unaudited pro forma financial information for~~$26 million during the three and nine months ended September 30, ~~2019~~2020.

Liabilities Subject to Compromise

Liabilities subject to compromise at September 30, 2020 consisted of the following:

LSC Communications, Inc.

(DEBTOR-IN-POSSESSION)

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and ~~2018:~~Nine Months Ended September 30, 2020 and 2019

(tabular amounts in millions, except per share data)

Three Months Ended

Nine Months Ended

September 30,

September 30,

2019

2018

2019

2018

Amortization of purchased intangibles

$
5

$
5

$
14

$
15

	September 30, 2020
Debt	$	661
Accrued interest payable		21
Accounts Payable		66
Pension liabilities		93
Restructuring and multiemployer pension liabilities		60
Employee-related liabilities		7
Other liabilities		4
Total liabilities subject to compromise	$	912

~~There were 0 nonrecurring pro forma adjustments affecting net (loss) income~~Refer to Note 10, Debt, for more information on the ~~three~~debt balances classified as liabilities subject to compromise. Accrued interest payable relates to the Company’s debt. Pension liabilities relate to the Company’s Non-Qualified Plan. Restructuring liabilities consist of employee termination accruals. Multiemployer pension liabilities consist of withdrawal obligations that are either related or unrelated to facility closures. Employee-related liabilities primarily relate to the Company’s incentive compensation. Other liabilities include miscellaneous operating accruals.

Debtor-in-Possession Financial Information

The financial statements below represent the condensed combined financial statements of the debtors. The financial statements exclude the results of the Company’s subsidiaries that are not included in the Chapter 11 Cases. Intercompany transactions among the debtors have been eliminated in the financial statements contained herein. Intercompany transactions among the debtors and ~~nine months ended~~the non-filing entities have not been eliminated in the condensed combined financial statements below.

LSC Communications, Inc.

(DEBTOR-IN-POSSESSION)

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Nine Months Ended September 30, ~~2019~~2020 and ~~2018.~~ 2019

(tabular amounts in millions, except per share data)

Debtor’s Balance Sheet

	September 30,
	2020
ASSETS
Cash and cash equivalents	$	42
Receivables
Amortized cost		403
Less: Allowance for credit losses		(13	)
Receivables, net		390
Receivables, net from non-filing entities		51
Inventories		114
Income tax receivable		0
Assets held for sale		47
Prepaid expenses and other current assets		37
Total current assets		681
Property, plant and equipment-net		319
Goodwill		52
Other intangible assets-net		106
Right-of-use assets for operating leases		111
Investment in non-filing subsidiaries		211
Net pension asset		47
Other noncurrent assets		66
Total assets	$	1,593

LIABILITIES
Accounts payable	$	91
Accrued liabilities		173
Short-term debt and current portion of long-term debt		254
Short-term operating lease liabilities		27
Liabilities held for sale		14
Total current liabilities		559
Long-term operating lease liabilities		87
Other noncurrent liabilities		41
Liabilities subject to compromise		977
Total liabilities	$	1,664

Commitments and contingencies

EQUITY
Common stock, $0.01 par value		0
Additional paid-in capital		842
Accumulated deficit		(542	)
Accumulated other comprehensive loss		(346	)
Treasury stock, at cost		(25	)
Total equity		(71	)
Total liabilities and equity	$	1,593

LSC Communications, Inc.

(DEBTOR-IN-POSSESSION)

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Nine Months Ended September 30, 2020 and 2019

(tabular amounts in millions, except per share data)

Debtor’s Statements of Operations

	Three Months Ended			Nine Months Ended
	September 30, 2020			September 30, 2020
Net sales	$	586		$	1,740
Cost of sales		501			1,526
Selling, general and administrative expenses (exclusive of depreciation and amortization)		60			188
Restructuring, impairment and other charges-net		56			112
Depreciation and amortization		23			75
(Loss) from operations		(54	)		(161	)
Interest expense-net		6			27
Investment and other (income)-net		48			27
Reorganization items, net		24			38
(Loss) before income taxes		(132	)		(253	)
Income tax (benefit)		(13	)		(15	)
Net (loss)	$	(119	)	$	(238	)

LSC Communications, Inc.

(DEBTOR-IN-POSSESSION)

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Nine Months Ended September 30, 2020 and 2019

(tabular amounts in millions, except per share data)

Debtor’s Statement of Cash Flows

	Nine Months Ended
	September 30, 2020
Cash Flows from Operating Activities
Net (loss)	$	(238	)
Adjustments to reconcile net (loss) to net cash (used in) operating activities:
Impairment charges		30
Depreciation and amortization		75
Provision for doubtful accounts receivable		5
Share-based compensation		2
Deferred income taxes		(18	)
Gain on sale of investments and other assets-net		(1	)
Settlement of retirement benefit obligations		63
Non-cash reorganization items, net		13
Other		12
Changes in operating assets and liabilities - net of acquisitions and dispositions:
Accounts receivable-net		29
Inventories		15
Prepaid expenses and other current assets		(12	)
Accounts payable		71
Income taxes payable and receivable		4
Accrued liabilities and other		(13	)
Changes in liabilities subject to compromise		(54	)
Net cash (used in) operating activities		(17	)

Cash Flows from Investing Activities
Capital expenditures		(24	)
Net proceeds from sales and purchases of investments and other assets		3
Net cash (used in) investing activities		(21	)

Cash Flows from Financing Activities
Net proceeds from credit facility borrowings		4
Debt issuance costs		(1	)
Other financing activities		(5	)
Net cash (used in) financing activities		(2	)

Effect of exchange rate on cash and cash equivalents		0
Net increase in cash, cash equivalents and restricted cash		(40	)
Cash, cash equivalents and restricted cash at beginning of year		85
Cash, cash equivalents and restricted cash at end of period	$	45

Reconciliation to the Debtor's Balance Sheet	As of
	September 30, 2020
Cash and cash equivalents	$	42
Restricted cash included in prepaid expenses and other current assets		3
Total cash, cash equivalents and restricted cash shown in the Debtor's statement of cash flows	$	45

LSC Communications, Inc.

(DEBTOR-IN-POSSESSION)

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Nine Months Ended September 30, 2020 and 2019

(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 September 30, ~~2019~~2020 and ~~2018.~~ 2019.

	Three Months Ended
	September 30, 2020
	Magazines,
	Catalogs
	and				Office
	Logistics		Book		Products		Mexico		Other		Total
Major Products / Service Lines
Book_(a)	$	0	$	222	$	0	$	0	$	0	$	222

Magazines and Catalogs _(b)	$	191	$	0	$	0	$	22	$	15	$	228

Logistics	$	64	$	0	$	0	$	0	$	0	$	64

Directories	$	0	$	0	$	0	$	0	$	9	$	9

Office Products	$	0	$	0	$	105	$	0	$	0	$	105
Total	$	255	$	222	$	105	$	22	$	24	$	628

Timing of Revenue Recognition
Products and services transferred at a point in time	$	168	$	185	$	105	$	22	$	9	$	489
Products and services transferred over time		87		37		0		0		15		139
Total	$	255	$	222	$	105	$	22	$	24	$	628

LSC Communications, Inc.

(DEBTOR-IN-POSSESSION)

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Nine Months Ended September 30, ~~2019~~2020 and ~~2018~~2019

(tabular amounts in millions, except per share data)

	Three Months Ended										Three Months Ended										Nine Months Ended
	September 30, 2019										September 30, 2018										September 30, 2020
	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		Mexico		Other		Total
Major Products / Service Lines
Book_(a)	$	—	$	256	$	—	$	—	$	256	$	—	$	282	$	—	$	—	$	282	$	0	$	624	$	0	$	0	$	0	$	624

Magazines and Catalogs _(b)	$	307	$	—	$	—	$	43	$	350	$	360	$	—	$	—	$	99	$	458		605		0		0		61		49		715
North America		307		—		—		43		350		360		—		—		44		403
Europe		—		—		—		—		—		—		—		—		55		55

Logistics	$	85	$	—	$	—	$	—	$	85	$	103	$	—	$	—	$	—	$	104		191		0		0		0		0		191

Directories	$	—	$	—	$	—	$	15	$	15	$	—	$	—	$	—	$	26	$	26		0		0		0		0		33		33
North America		—		—		—		15		15		—		—		—		21		21
Europe		—		—		—		—		—		—		—		—		5		5

Office Products	$	—	$	—	$	128	$	—	$	128	$	—	$	—	$	145	$	—	$	145		0		0		298		0		0		298
Total	$	392	$	256	$	128	$	58	$	834	$	463	$	282	$	145	$	125	$	1,015	$	796	$	624	$	298	$	61	$	82	$	1,861

Timing of Revenue Recognition
Products and services transferred at a point in time	$	279	$	215	$	128	$	39	$	661	$	329	$	245	$	145	$	105	$	824	$	539	$	526	$	298	$	61	$	33	$	1,457
Products and services transferred over time		113		41		—		19		173		134		37		—		20		191		257		98		0		0		49		404
Total	$	392	$	256	$	128	$	58	$	834	$	463	$	282	$	145	$	125	$	1,015	$	796	$	624	$	298	$	61	$	82	$	1,861

1222

LSC Communications, Inc.

(DEBTOR-IN-POSSESSION)

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Nine Months Ended September 30, ~~2019~~2020 and ~~2018~~2019

(tabular amounts in millions, except per share data)

	Nine Months Ended										Nine Months Ended										Three Months Ended
	September 30, 2019										September 30, 2018										September 30, 2019
	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		Mexico		Other		Total
Major Products / Service Lines
Book_(a)	$	—	$	805	$	—	$	—	$	805	$	—	$	797	$	—	$	—	$	797	$	0	$	256	$	0	$	0	$	0	$	256

Magazines and Catalogs _(b)	$	923	$	—	$	—	$	131	$	1,054	$	1,132	$	—	$	—	$	290	$	1,422	$	307	$	0	$	0	$	24	$	19	$	350
North America		923		—		—		131		1,054		1,132		—		—		126		1,258
Europe		—		—		—		—		—		—		—		—		164		164

Logistics	$	252	$	—	$	—	$	—	$	252	$	159	$	—	$	—	$	—	$	159	$	85	$	0	$	0	$	0	$	0	$	85

Directories	$	—	$	—	$	—	$	51	$	51	$	—	$	—	$	—	$	87	$	87	$	0	$	0	$	0	$	0	$	15	$	15
North America		—		—		—		51		51		—		—		—		73		73
Europe		—		—		—		—		—		—		—		—		14		14

Office Products	$	—	$	—	$	386	$	—	$	386	$	—	$	—	$	422	$	—	$	422	$	0	$	0	$	128	$	0	$	0	$	128
Total	$	1,175	$	805	$	386	$	182	$	2,548	$	1,291	$	797	$	422	$	377	$	2,887	$	392	$	256	$	128	$	24	$	34	$	834

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	$	279	$	215	$	128	$	24	$	15	$	661
Products and services transferred over time		340		109		—		58		507		252		95		—		54		401		113		41		0		0		19		173
Total	$	1,175	$	805	$	386	$	182	$	2,548	$	1,291	$	797	$	422	$	377	$	2,887	$	392	$	256	$	128	$	24	$	34	$	834

LSC Communications, Inc.

(DEBTOR-IN-POSSESSION)

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Nine Months Ended September 30, 2020 and 2019

(tabular amounts in millions, except per share data)

	Nine Months Ended
	September 30, 2019
	Magazines,
	Catalogs
	and				Office
	Logistics		Book		Products		Mexico		Other		Total
Major Products / Service Lines
Book_(a)	$	0	$	805	$	0	$	0	$	0	$	805

Magazines and Catalogs _(b)	$	923	$	0	$	0	$	73	$	58	$	1,054

Logistics	$	252	$	0	$	0	$	0	$	0	$	252

Directories	$	0	$	0	$	0	$	0	$	51	$	51

Office Products	$	0	$	0	$	386	$	0	$	0	$	386
Total	$	1,175	$	805	$	386	$	73	$	109	$	2,548

Timing of Revenue Recognition
Products and services transferred at a point in time	$	835	$	696	$	386	$	73	$	51	$	2,041
Products and services transferred over time		340		109		0		0		58		507
Total	$	1,175	$	805	$	386	$	73	$	109	$	2,548

(a)

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

(b)

Includes premedia and co-mail

13Accounts Receivable

As disclosed in Note 1, Overview and Basis of Presentation, the Company adopted ASU 2016-13 on January 1, 2020 using the modified retrospective adoption method. As a result of the adoption, the Company now records an allowance for credit losses on unbilled receivables which resulted in a de minimis amount of expense for each of the three and nine months ended September 30, 2020. There were no changes to the Company’s policy relating to its receivables. To recognize the initial adoption, the Company recorded a de minimis increase to its January 1, 2020 balance for allowance for credit losses and an offsetting impact to accumulated deficit in the condensed consolidated balance sheet.

Transactions affecting the allowances for doubtful accounts receivable balance during the nine months ended September 30, 2020 were as follows:

	Nine Months Ended
	September 30, 2020
Balance, beginning of year	$	12
Provisions charged to expense		5
Write-offs and other		(3	)
Balance, end of period	$	14

There was a de minimis amount of recoveries during the nine months ended September 30, 2020.

LSC Communications, Inc.

(DEBTOR-IN-POSSESSION)

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Nine Months Ended September 30, ~~2019~~2020 and ~~2018~~2019

(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:~~2020:

	Short-Term Contract Assets			Long-Term Contract Assets			Contract Liabilities			Short-Term Contract Assets			Long-Term Contract Assets			Contract Liabilities
Beginning Balance, January 1, 2019	$	44		$	30		$	16
Beginning Balance, January 1, 2020										$	40		$	14		$	17
Additions to unbilled accounts receivable		27			—			—			20			0			—
Unbilled accounts receivable recognized in trade receivables		(42	)		—			—			(35	)		0			—
Payment of contract acquisition costs		—			3			—			0			1
Amortization of contract acquisition costs		—			(9	)		—			0			(8	)		—
Revenue recognized that was included in contract liabilities as of January 1, 2019		—			—			(11	)
Revenue recognized that was included in contract liabilities as of January 1, 2020											—			—			(13	)
Increases due to cash received		—			—			10			—			—			11
Ending Balance, September 30, 2019	$	29		$	24		$	15
Ending Balance, September 30, 2020										$	25		$	7		$	15

The trade receivables balance was ~~$398~~$325 million and ~~$488~~$366 million as of September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively.

~~Accounts Receivable~~

~~Transactions affecting the allowances for doubtful accounts receivable balance~~ There was a de minimis amount of credit losses recognized on short-term contract assets recorded during the three and nine months ended September 30, ~~2019 were as follows:~~2020.

September 30, 2019

Balance, beginning of year

$
14

Provisions charged to expense

7

Write-offs and other

(8
)
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

December 31,
2018

Adoption of ASU 2016-02

January 1,
2019

Assets

ROU assets for operating leases _(a)

$
—

$
201

$
201

Liabilities

Accrued liabilities_(a)

$
199

$
(1
)

$
198

Short-term operating lease liabilities

—

52

52

Long-term operating lease liabilities

—

154

154

Other noncurrent liabilities_(a)

61

(4
)

57

~~(a)~~

~~The 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.~~

~~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; 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.

~~Variable lease payments do not depend on a published index or rate, and therefore, are expensed as incurred.~~Lease Expense

The components of total net lease expense were as follows:

							Three Months Ended					Nine Months Ended
	Three Months Ended			Nine Months Ended			September 30,					September 30,
	September 30, 2019			September 30, 2019			2020		2019			2020			2019
Operating lease expense	$	18		$	53		$	14	$	18		$	47		$	53
Sublease (income)		(2	)		(6	)		0		(2	)		(3	)		(6	)
Variable lease expense		3			8			2		3			7			8
Total net lease expense	$	19		$	55		$	16	$	19		$	51		$	55

During each of the three and nine months ended September 30, 2020 and 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:~~

1525

LSC Communications, Inc.

(DEBTOR-IN-POSSESSION)

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Nine Months Ended September 30, ~~2019~~2020 and ~~2018~~2019

(tabular amounts in millions, except per share data)

Cash Flow Information

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

				Nine Months Ended
	Nine Months Ended			September 30,
	September 30, 2019			2020		2019
ROU assets acquired in exchange for lease obligations:
ROU assets
Operating leases	$	14		$	14	$	14

Lease obligations			��
Operating leases	$	14		$	14	$	14

During the nine months ended September 30, 2020 and 2019, the Company recorded $39 million and $45 million of operating cash outflows from operating ~~leases.~~leases, respectively.

During each of the nine months ended September 30, 2020 and 2019, the Company recorded a de minimis amount of cash ~~flows~~outflows from financing leases. NaN finance lease ROU assets or obligations were acquired during the nine months ended September 30, ~~2019.~~2020.

Lease Terms and Discount Rates

Supplemental information regarding the weighted average lease term and discount rate for the lease liabilities as of September 30, 2020 is included below:

	September 30, ~~2019~~ 2020
Weighted Average Remaining Lease Term (years)
Operating leases		~~5.1~~4.5
Financing leases		~~2.3~~2.2

Weighted Average Discount Rate
Operating leases		~~8.3~~8.8	%
Financing leases		~~6.9~~7.9	%

LSC Communications, Inc.

(DEBTOR-IN-POSSESSION)

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Nine Months Ended September 30, 2020 and 2019

(tabular amounts in millions, except per share data)

Lease Maturities

The annual maturities of lease liabilities as of September 30, ~~2019~~2020 were as follows:

	Operating Leases			Operating Leases
2019	$	15
2020		53		$	10
2021		45			40
2022		36			35
2023		24			27
2024 & thereafter		46
2024					23
2025 & thereafter					22
Total undiscounted lease payments		219			157
Imputed interest		(38	)		(28	)
Total lease liabilities	$	181		$	129

During the nine months ended September 30, ~~2019,~~2020, the Company recorded a de minimis amount of maturities for finance lease liabilities. As of September 30, ~~2019,~~2020, the Company ~~has 0~~had a de minimis amount of additional operating leases that have not commenced. Additionally, as of September 30, 2020, the Company reclassed $12 million of lease liabilities to liabilities held for sale and $11 million of right-of-use assets to assets held for sale in the condensed consolidated balance sheet as a result of the sale of one of its manufacturing facilities in Las Vegas, Nevada that closed in October 2020.

The Company also 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 subleases have variable payments, either because payments are structured to follow the head lease 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 which generally allow for 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 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 September 30, ~~2019~~2020 and December 31, ~~2018~~2019 were as follows:

	September 30,			December 31,			September 30,			December 31,
	2019			2018			2020			2019
Raw materials and manufacturing supplies	$	115		$	119		$	54		$	91
Work in process		48			50			42			38
Finished goods		97			80			83			87
Last in, first out reserve		(42	)		(52	)		(32	)		(46	)
Total	$	218		$	197		$	147		$	170

Note 6. Property, Plant and Equipment

The components of the Company’s property, plant and equipment at September 30, ~~2019~~2020 and December 31, ~~2018~~2019 were as follows:

	September 30,			December 31,			September 30,			December 31,
	2019			2018			2020			2019
Land	$	35		$	43		$	32		$	35
Buildings		699			709			559			663
Machinery and equipment		3,578			3,759			2,694			3,006
		4,312			4,511			3,285			3,704
Less: Accumulated depreciation		(3,846	)		(4,003	)		(2,944	)		(3,264	)
Total	$	466		$	508		$	341		$	440

LSC Communications, Inc.

(DEBTOR-IN-POSSESSION)

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Nine Months Ended September 30, 2020 and 2019

(tabular amounts in millions, except per share data)

During the three and nine months ended September 30, 2020, depreciation expense was $18 million and $60 million, respectively. During the three and nine months ended September 30, 2019, depreciation expense was~~$23~~ $23 million and $71 ~~million, respectively. During the three and nine months ended September 30, 2018, depreciation expense was $27 million and $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~~2020.

In the ~~nine months ended~~third quarter of 2020, the Company signed an agreement to sell 1 of its manufacturing facilities in Reno, Nevada for $33 million. The facility was not included in assets held for sale as of September 30, ~~2019.~~2020 as the sale was not approved by the Bankruptcy Court until the fourth quarter of 2020.

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~~$47 million and $3$9 million at September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively. ~~These~~The increase during the nine months ended September 30, 2020 was due to the inclusion of assets of four manufacturing facilities (one in the Book segment and three in the Magazines, Catalogs and Logistics segments) during the third quarter. The balance at September 30, 2020 includes $24 million in assets related to the sale of one of the Company’s facilities in Las Vegas, Nevada, which was approved for sale by the Bankruptcy Court in September 2020. The Company also reclassed $14 million in liabilities to liabilities held for sale related to this facility as of September 30, 2020. The sale occurred in October 2020. Refer to Note 8, Restructuring, Impairment and Other Charges, for more information on this approved sale. Assets held for sale are ~~included in prepaid expenses and other current assets~~separately disclosed 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 nine months ended September 30, ~~2019~~2020 were as follows:

	Magazines,															Magazines,
	Catalogs															Catalogs						Office
	and Logistics			Book			Office Products			Other			Total			and Logistics			Book			Products			Mexico		Other			Total
Net book value as of December 31, 2018
Net book value as of December 31, 2019
Goodwill	$	523		$	354		$	110		$	5		$	992		$	523		$	354		$	110		$	0	$	5		$	992
Accumulated impairment losses		(502	)		(303	)		(79	)		(5	)		(889	)		(502	)		(354	)		(79	)		0		(5	)		(940	)
Total		21			51			31			—			103			21			0			31			0		0			52
Net book value as of September 30, 2019
Net book value as of September 30, 2020
Goodwill		523			354			110			5			992			523			354			110			0		5			992
Accumulated impairment losses		(502	)		(303	)		(79	)		(5	)		(889	)		(502	)		(354	)		(79	)		0		(5	)		(940	)
Total	$	21		$	51		$	31		$	—		$	103		$	21		$	0		$	31		$	0	$	0		$	52

The components of other intangible assets at September 30, ~~2019~~2020 and December 31, ~~2018~~2019 were as follows:

	September 30, 2019							December 31, 2018							September 30, 2020							December 31, 2019
	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	$	248	$	(145	)	$	103	$	268	$	(137	)	$	131	$	248	$	(160	)	$	88	$	248	$	(149	)	$	99
Trade names		30		(8	)		22		9		(6	)		3		27		(8	)		19		29		(8	)		21
Total amortizable other intangible assets		278		(153	)		125		277		(143	)		134
Indefinite-lived trade names		—		—			—		22		—			22
Total other intangible assets	$	278	$	(153	)	$	125	$	299	$	(143	)	$	156	$	275	$	(168	)	$	107	$	277	$	(157	)	$	120

LSC Communications, Inc.

In(DEBTOR-IN-POSSESSION)

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the ~~second quarter of~~Three and Nine Months Ended September 30, 2020 and 2019 ~~the Company impaired certain definite-lived customer relationships with a net book value of $17 million.~~

(tabular amounts in millions, except per share data)

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

During the three and nine months ended September 30, 2020, amortization expense for other intangible assets was ~~not possible to conclude the tradenames will generate cash flows for an indefinite period of time due to secular industry decline~~$5 million and ~~changes in the usage of branded products.~~

$13 million, respectively. During the three and nine months ended 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 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	$	18
2020		17	$	17
2021		15		14
2022		14		14
2023		14		14
2024 and thereafter		61
2024				13
2025 and thereafter				48
Total	$	139	$	120

~~LSC Communications, Inc.~~

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

~~For~~Note 8, Restructuring, Impairment and Other Charges, for information on the ~~Three~~goodwill and ~~Nine Months Ended~~intangible asset impairment reviews performed as of September 30, ~~2019 and 2018~~2020.

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

Note 8. Restructuring, Impairment and Other Charges

For the three and nine months ended September 30, ~~2019~~2020 and ~~2018,~~2019, the Company recorded the following net restructuring, impairment and other charges disclosed in the condensed consolidated statements of operations:

			Other		Total										Other		Total
Three Months Ended	Employee		Restructuring		Restructuring				Other				Employee		Restructuring		Restructuring				Other
September 30, 2019	Terminations		Charges		Charges		Impairment		Charges		Total
September 30, 2020													Terminations		Charges		Charges		Impairment		Charges		Total
Magazines, Catalogs and Logistics	$	—	$	4	$	4	$	—	$	—	$	4	$	1	$	18	$	19	$	2	$	0	$	21
Book		—		1		1		1		—		2		3		1		4		26		0		30
Office Products		—		2		2		—		—		2		0		0		0		0		0		0
Mexico														0		0		0		0		0		0
Other		—		—		—		—		—		—		5		0		5		0		0		5
Corporate		—		2		2		—		—		2		0		0		0		0		0		0
Total	$	—	$	9	$	9	$	1	$	—	$	10	$	9	$	19	$	28	$	28	$	0	$	56

			Other		Total										Other		Total
Nine Months Ended	Employee		Restructuring		Restructuring				Other				Employee		Restructuring		Restructuring				Other
September 30, 2019	Terminations		Charges		Charges		Impairment		Charges		Total
September 30, 2020													Terminations		Charges		Charges		Impairment		Charges		Total
Magazines, Catalogs and Logistics	$	5	$	11	$	16	$	19	$	—	$	35	$	8	$	40	$	48	$	4	$	0	$	52
Book		—		2		2		1		1		4		5		3		8		26		1		35
Office Products		—		3		3		—		—		3		2		1		3		0		0		3
Mexico														0		0		0		0		0		0
Other		—		—		—		—		—		—		5		0		5		0		0		5
Corporate		—		5		5		—		—		5		0		19		19		0		0		19
Total	$	5	$	21	$	26	$	20	$	1	$	47	$	20	$	63	$	83	$	30	$	1	$	114

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

1929

LSC Communications, Inc.

(DEBTOR-IN-POSSESSION)

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Nine Months Ended September 30, ~~2019~~2020 and ~~2018~~2019

(tabular amounts in millions, except per share data)

			Other		Total
Three Months Ended	Employee		Restructuring		Restructuring				Other
September 30, 2019	Terminations		Charges		Charges		Impairment		Charges		Total
Magazines, Catalogs and Logistics	$	0	$	4	$	4	$	0	$	0	$	4
Book		0		1		1		1		0		2
Office Products		0		2		2		0		0		2
Mexico		0		0		0		0		0		0
Other		0		0		0		0		0		0
Corporate		0		2		2		0		0		2
Total	$	0	$	9	$	9	$	1	$	0	$	10

			Other		Total
Nine Months Ended	Employee		Restructuring		Restructuring				Other
September 30, 2019	Terminations		Charges		Charges		Impairment		Charges		Total
Magazines, Catalogs and Logistics	$	5	$	11	$	16	$	19	$	0	$	35
Book		0		2		2		1		1		4
Office Products		0		3		3		0		0		3
Mexico		0		0		0		0		0		0
Other		0		0		0		0		0		0
Corporate		0		5		5		0		0		5
Total	$	5	$	21	$	26	$	20	$	1	$	47

Restructuring Charges

For the three and nine months ended September 30, 2020, the Company incurred net other restructuring charges of $19 million and $63 million. During the three months ended September 30, 2020, $12 million related to the impairment of property, plant and equipment for 1 of the Company’s manufacturing facilities in Las Vegas, Nevada that was sold in October 2020. As the gain related to the sale will be recorded in other restructuring charges in the fourth quarter of 2020, the impairment during the third quarter was recorded in other restructuring charges. The remaining other restructuring charges are primarily due to facility costs and costs to move equipment, professional fees, and expenses associated with new revenue opportunities and cost savings initiatives implemented in 2019.

For the three and nine months ended September 30, 2020, the Company incurred charges of $9 million and $20 million for an aggregate of 1,796 employees, of whom 1,029 were terminated as of or prior to September 30, 2020, primarily related to the closure of 5 facilities in the Magazines, Catalogs and Logistics segment, 1 facility in the Office Products segment and 1 facility in the Other grouping, and the reorganization of certain business units and corporate functions.

For the three and nine months ended September 30, 2019, the Company incurred net other restructuring charges of $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 268 employees, substantially all of whom 40 were terminated as of or prior to September 30, ~~2019,~~2020, primarily related to the closure of 1 facility in the Magazines, Catalogs and Logistics segment.

LSC Communications, Inc.

(DEBTOR-IN-POSSESSION)

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the ~~three months ended~~Three and Nine 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 1 facility2020 and 2019

(tabular amounts in the Magazines, Catalogs and Logistics segment and the reorganization of certain business units and corporate functions. The Company incurred net other restructuring charges of $1 million and $11 million for the three and nine months ended September 30, 2018 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, partially offset by a gain related to the disposition of the Company’s European printing business on September 28, 2018. millions, except per share data)

Impairment ~~Charges~~Reviews

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~~

Goodwill

As of September 30, 2020, only two reporting units had goodwill: Office Products ($31 million) and logistics ($21 million). For the Office Products and logistics reporting units, management assessed goodwill impairment risk by first performing a ~~significant, sustained decline – especially since the Merger Agreement termination was announced in late July 2019. Shortly after the Merger Agreement termination,~~qualitative review of entity specific, industry, market and general economic factors for each reporting unit. For both reporting units, the Company ~~announced~~was able to conclude that it ~~was indefinitely suspending its dividend and lowered its guidance for~~is more likely than not that the ~~year. As a result, the Company determined it necessary to perform goodwill impairment reviews on the Book, logistics and Office Products~~fair values of our reporting units ~~(the only reporting units~~are greater than their carrying values.

Other Intangible Assets and Property, Plant and Equipment

The Company performed a review of property, plant and equipment, right-of-use assets for operating leases and intangible assets and determined that ~~have goodwill) as~~no indicators of ~~August 31, 2019.~~ impairment were present.

The Company ~~performed a Step 1~~recorded $28 million and $30 million of impairment ~~test of goodwill in accordance with Accounting Standards Codification (“ASC”) 350, Intangibles-Goodwill~~during the three and ~~Other, which includes comparing the estimated fair value of each reporting unit~~nine months ended September 30, 2020, respectively, on machinery and equipment primarily due 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 acquisitionsfacility closings in the ~~industries in which the Company competes; the discount rate; terminal growth rates;~~Book and ~~forecasts of revenue, operating income, depreciation~~Magazines, Catalogs 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)~~

Logistics segments.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.~~

~~Given the continued decline~~unprecedented drop 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:~~appropriate during the second quarter of 2019. 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 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.

•

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%.

Future Interim Reviews

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 September 30, ~~2019~~2020 and ~~2018,~~2019, 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 $4~~is $20 million ~~in accrued liabilities and $17 million in restructuring and multiemployer pension plan liabilities~~ at September 30, ~~2019.~~

~~The Company’s withdrawal~~2020 and is disclosed as liabilities ~~could be affected by the financial stability of other employers participating in such plans and any decisions by those employers or the Company~~subject to ~~withdraw from such plans~~compromise 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.~~sheet. Refer to Note 2, Voluntary Reorganization under Chapter 11, for more information on liabilities subject to compromise.

2131

LSC Communications, Inc.

(DEBTOR-IN-POSSESSION)

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Nine Months Ended September 30, ~~2019~~2020 and ~~2018~~2019

(tabular amounts in millions, except per share data)

Restructuring Reserve

The restructuring reserve as of December 31, ~~2018~~2019 and September 30, ~~2019,~~2020, and changes during the nine months ended September 30, ~~2019~~2020 were as follows:

	December 31,		Restructuring				Cash			September 30,		December 31,		Restructuring		Reclass to Liabilities			Cash			September 30,
	2018		Charges		Other		Paid			2019		2019		Charges		Subject to Compromise			Paid			2020
Employee terminations	$	8	$	5	$	—	$	(6	)	$	7	$	29	$	19	$	(2	)	$	(24	)	$	22
Multiemployer pension plan withdrawal obligations		32		2		—		(4	)		30		31		0		(29	)		(2	)		0
Other		1		19		—		(16	)		4
Other and lease termination													2		44		(9	)		(37	)		0
Total	$	41	$	26	$	—	$	(26	)	$	41	$	62	$	63	$	(40	)	$	(63	)	$	22

The current portion of restructuring reserves of ~~$17~~$22 million at September 30, ~~2019~~2020 was included in accrued liabilities. As a result of the Company’s voluntary reorganization, $40 million of restructuring liabilities ~~while~~were reclassed to liabilities subject to compromise on the long-term portion of $24 million, which primarily related to multiemployer pension plan withdrawal obligations related to facility closures, was included in restructuring and multiemployer pension liabilitiesCompany’s condensed consolidated balance sheet at September 30, ~~2019.~~2020. Refer to Note 2, Voluntary Reorganization under Chapter 11, for more information on liabilities subject to compromise.

The Company anticipates that payments associated with the employee terminations reflected in the above table will be substantially completed by 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.2021.

The restructuring liabilities classified as “other” consisted of other facility closing ~~costs.~~costs, expenses to move equipment, professional fees, and costs associated with new revenue opportunities and cost savings initiatives implemented in 2019.

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 108 active federal and state Superfund and other multiparty remediation sites. In addition to these sites, the Company may also have the obligation to remediate 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, which are recorded in ~~accrued~~ liabilities ~~and other noncurrent liabilities,~~subject to compromise as of September 30, 2020, 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.

2232

LSC Communications, Inc.

(DEBTOR-IN-POSSESSION)

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Nine Months Ended September 30, ~~2019~~2020 and ~~2018~~2019

(tabular amounts in millions, except per share data)

Note 10. Debt

The Company’s debt at September 30, ~~2019~~2020 and December 31, ~~2018~~2019 consisted of the following:

							September 30,			December 31,
	September 30, 2019			December 31, 2018			2020			2019
Borrowings under the Revolving Credit Facility	$	85		$	64		$	253		$	249
Term Loan Facility due September 30, 2022 _(a)		229			260
Term Loan Facility due September 30, 2022								0			218
8.75% Senior Secured Notes due October 15, 2023		450			450			0			450
Finance lease and other obligations		2			4			1			2
Unamortized debt issuance costs		(10	)		(11	)		0			(9	)
Total debt		756			767			254			910
Less: current portion		(127	)		(108	)		(254	)		(465	)
Long-term debt	$	629		$	659		$	0		$	445

Liabilities Subject to Compromise

As a result of the Company’s reorganization filing, the debt balances below were reclassed from short-term and current portion of long-term debt and long-term debt to liabilities subject to compromise on the condensed consolidated balance sheet.

~~(a)~~

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

	September 30,
	2020
Term Loan Facility	$	219
Senior Secured Notes		450
Unamortized debt issuance costs		(8	)
Total debt in liabilities subject to compromise	$	661

As of September 30, 2020, the Revolving Credit Facility was reclassed out of liabilities subject to compromise to short-term debt on the condensed consolidated balance sheet. The change was made in the third quarter of 2020 once the Purchase Agreement was signed and it was determined the Revolving Credit Facility is fully secured.

Refer to Note 2, Voluntary Reorganization under Chapter 11, for more information on liabilities subject to compromise.

Historical Information

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.~~

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. 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.~~ 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. The following summarizes the changes to the minimum Interest Coverage Ratio 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~~

2333

LSC Communications, Inc.

(DEBTOR-IN-POSSESSION)

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Nine Months Ended September 30, ~~2019~~2020 and ~~2018~~2019

(tabular amounts in millions, except per share data)

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

~~The August 5, 2019 amendment resulted in a reduction in~~There were $253 million and $249 million of borrowings under the Revolving Credit Facility ~~aggregate principal amount from $400~~as of September 30, 2020 and December 31, 2019. The Company had $24 million ~~to $300 million and removed the general allowance to declare and pay annual dividends~~in outstanding letters 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 ofcredit issued under the Revolving Credit Facility ~~remains~~as of September 30, 2020. The weighted-average interest rate on borrowings under the ~~same.~~ Company’s Revolving Credit Facility was 3.82% during the nine months ended September 30, 2020. Refer to the Interest Expense section below for more information on the impact of the voluntary reorganization on interest expense recorded in 2020.

~~Additional Debt Issuances Information~~

~~The~~Prior to the reorganization, 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 $22~~$277 million at December 31, ~~2018. Recent announcements~~2019.

Prior to the reorganization, the borrowings under the Term Loan Facility were subject to a variable interest rate. As of December 31, 2019, the interest rate was 7.12%.

Voluntary Reorganization under Chapter 11

The commencement of the Chapter 11 Cases constituted an event of default with respect to the Senior Notes, the Term Loan Facility and the Revolving Credit Facility (the “Debt Instruments”). The Debt Instruments provide that as a result of the commencement of the Chapter 11 Cases, the principal and interest due thereunder shall be immediately due and payable. Any efforts to enforce payment obligations under the Debt Instruments will be automatically stayed as a result of the commencement of the Chapter 11 Cases, and the creditors’ right of enforcement in respect of the Debt Instruments are subject to the applicable provisions of the Bankruptcy Code.

Debtor-in-Possession Financing

As previously disclosed, on April 15, 2020 (the “Closing Date”), the Company entered into a Superpriority Secured Debtor-in-Possession Credit Agreement (the “DIP Credit Agreement”), upon the entry of an interim order of the Bankruptcy Court granting interim approval of the DIP Credit Agreement, among the Company, as borrower, the lenders from time to time party thereto (the “DIP Lenders”) and Bank of America, N.A. as administrative agent (in such capacity, the “DIP Agent”), pursuant to which the DIP Lenders committed to provide a senior secured superpriority debtor-in-possession credit facility in an aggregate principal amount not to exceed $100 million (the “DIP Facility”). The DIP Facility was approved on a final basis on June 2, 2020.

The DIP Facility consists of (i) revolving loans not to exceed an aggregate amount of $55 million (the “Revolving Loans”), and (ii) letters of credit not to exceed an aggregate amount of $45 million, with $5 million of that amount being available for the issuance of new letters of credit (together with the Revolving Loans, the “DIP Loan Commitments”).

Borrowings under the DIP Facility bear interest at a rate per annum equal to, at the Company’s option, either (i) the Alternate Base Rate (as defined in the DIP Credit Agreement) plus 5.75%, or (ii) LIBOR plus 6.75%. Upon an event of default under the DIP Credit Agreement (an “Event of Default”), an additional 2.00% may be added to the Interest Rate. In addition, the Company is required to pay (i) an unused line fee of 0.50% per annum (payable quarterly in arrears) on the average daily unused portion of the DIP Loan Commitments, (ii) a commitment fee of (x) 1.00% per annum on the DIP Loan Commitments, regardless of usage, plus (y) $100,000 per week for the first 20 weeks after the Closing Date, in each case, payable quarterly in arrears, (iii) a participation fee equal to 6.75% multiplied by the amounts available to be drawn under outstanding letters of credit, payable quarterly, and (iv) a fronting fee equal to 0.125% per annum on amounts available to be drawn under outstanding letters of credit, payable quarterly.

LSC Communications, Inc.

(DEBTOR-IN-POSSESSION)

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Nine Months Ended September 30, 2020 and 2019

(tabular amounts in millions, except per share data)

Proceeds of the loans made under the DIP Facility may be used only for the following purposes: (i) working capital and other general corporate purposes, including the ~~terminated Merger~~payment of professional fees and expenses, (ii) to pay the reasonable fees and expenses of the DIP Agent and the DIP Lenders (including the reasonable fees and expenses of counsel and financial advisors), (iii) to pay claims in respect of certain prepetition creditors, (iv) to repay indebtedness owed to holders of the Prepetition Priority Payment Obligations (as defined in the DIP Credit Agreement) (the “Prepetition Revolving Lenders”), and (v) making adequate protection payments to the Prepetition Revolving Lenders, the Prepetition Term Lenders and the Prepetition Secured Noteholders (each as defined in the DIP Credit Agreement).

In connection with the DIP Credit Agreement, certain subsidiaries of the Company became parties to a guarantee agreement as guarantors (collectively, the “Guarantors,” and ~~recent credit ratings downgrades,~~together with the Company, the “DIP Credit Parties”). Each of the Guarantors is a debtor and debtor-in-possession in the Chapter 11 Cases. The Guarantors have ~~caused downward pricing pressures~~guaranteed, on a joint and several basis, all of the obligations under the DIP Facility. To secure the obligations under the DIP Facility, the Company and the Guarantors have granted liens on substantially all of their assets, whether now owned or hereafter acquired.

The DIP Facility will mature on the ~~Company’s Term Loan Facility.~~earlier of (i) the date upon which any Plan of Reorganization (as defined in the DIP Credit Agreement) becomes effective, or (ii) the six-month anniversary following the Petition Date; provided that such maturity may be extended with the consent of the Required Lenders (as defined in the DIP Credit Agreement) to a date no later than nine months after the Petition Date.

~~There were $85~~The DIP Credit Agreement contains representations, warranties and covenants that are customary for debtor-in-possession facilities of this type, including, but not limited to, certain case milestones, specified restrictions on indebtedness, liens, guarantee obligations, liquidations and dissolutions, sales of assets, leases, payment of dividends and other restricted payments, voluntary payments of other indebtedness, investments, loans and advances, transactions with affiliates, sale and leaseback transactions and compliance with case milestones. The DIP Credit Agreement also contains customary events of default for facilities of this type, including failure to achieve the milestones and the occurrence of certain events in the Chapter 11 Cases.

The Company did not have borrowings related to the Revolving Loans as of September 30, 2020. The Company had $23 million ~~and $64 million~~in outstanding letters of ~~borrowings~~credit issued under the ~~Revolving Credit~~DIP Facility as of September 30, ~~2019~~2020.

Interest expense

There was $5 million and ~~December 31, 2018, respectively. The weighted-average~~$26 million of net interest ~~rate on borrowings under~~expense during the ~~Company’s Revolving Credit Facility was 5.68% during the~~three and nine months ended September 30, ~~2019.~~

2020, respectively. There was $20 million and $58million of net interest expense during the three and nine months ended September 30, 2019, respectively. ~~There~~If the Company was ~~$21~~not under voluntary reorganization, it would have incurred an additional $12 million and ~~$59~~$27 million of ~~net~~ interest expense during the three and nine months ended September 30, ~~2018, respectively.~~2020 related to its debt that is now classified as liabilities subject to compromise on the condensed consolidated balance sheet.

Note 11. Earnings Per Share

During the nine months ended September 30, 2020 and 2019, 0 shares of common stock were purchased by the ~~Company.~~ ~~On May 31, 2018, the Company 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,~~ Company; however, 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”).~~units.

2435

LSC Communications, Inc.

(DEBTOR-IN-POSSESSION)

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Nine Months Ended September 30, ~~2019~~2020 and ~~2018~~2019

(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					Nine Months Ended						Three Months Ended					Nine Months Ended
	September 30,					September 30,						September 30,					September 30,
	2019		2018			2019			2018			2020			2019 (1)		2020			2019 (1)
Net income (loss) per common share:
Net (loss) income per common share:
Basic	$	0.69	$	(0.12	)	$	(3.78	)	$	(0.21	)	$	(3.29	)	$	0.66	$	(6.71	)	$	(3.82	)
Diluted	$	0.69	$	(0.12	)	$	(3.78	)	$	(0.21	)	$	(3.29	)	$	0.66	$	(6.71	)	$	(3.82	)
Numerator:
Net income (loss)	$	24	$	(4	)	$	(126	)	$	(7	)
Net (loss) income												$	(111	)	$	23	$	(226	)	$	(127	)
Denominator:
Weighted average number of common shares outstanding		33.5		33.2			33.4			34.0			33.7			33.5		33.6			33.4
Dilutive options and awards		—		—			—			—			0			0		0			0
Diluted weighted average number of common shares outstanding		33.5		33.2			33.4			34.0			33.7			33.5		33.6			33.4
Weighted-average number of anti-dilutive share- based awards:
Restricted stock units		1.6		—			—			—
Options		0.2		—			—			—

(1) Refer to Note 1, Overview and Basis of Presentation, for information on the restated balances for the three and nine months ended September 30, 2019.

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 September 30, ~~2019~~2020 and December 31, ~~2018.~~2019. 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.~~the U.S. Qualified ~~Plan”)~~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 September 30, ~~2019~~2020 and ~~2018~~2019 were as follows:

	Three Months Ended								Nine Months Ended								Three Months Ended								Nine Months Ended
	September 30, 2019								September 30, 2019								September 30, 2020								September 30, 2020
	Qualified			Non-Qualified & International		Total			Qualified			Non-Qualified & International		Total			Qualified			Non-Qualified & International		Total			Qualified			Non-Qualified & International		Total
Interest cost	$	17		$	1	$	18		$	55		$	3	$	58		$	14		$	1	$	15		$	45		$	2	$	47
Expected return on plan assets		(30	)		—		(30	)		(93	)		—		(93	)		(30	)		0		(30	)		(90	)		0		(90	)
Amortization of actuarial loss		3			—		3			8			—		8			4			0		4			11			1		12
Settlement of retirement obligations		1			—		1			137			—		137			63			0		63			63			0		63
Net periodic benefit (income) loss	$	(9	)	$	1	$	(8	)	$	107		$	3	$	110
Net periodic loss																	$	51		$	1	$	52		$	29		$	3	$	32

	Three Months Ended								Nine Months Ended								Three Months Ended								Nine Months Ended
	September 30, 2018								September 30, 2018								September 30, 2019								September 30, 2019
	Qualified			Non-Qualified & International		Total			Qualified			Non-Qualified & International		Total			Qualified			Non-Qualified & International		Total			Qualified			Non-Qualified & International		Total
Interest cost	$	21		$	1	$	22		$	63		$	3	$	66		$	17		$	1	$	18		$	55		$	3	$	58
Expected return on plan assets		(39	)		—		(39	)		(117	)		—		(117	)		(29	)		0		(29	)		(90	)		0		(90	)
Amortization of actuarial loss		5			—		5			15			—		15			3			0		3			9			0		9
Settlement of retirement obligations																		1			—		1			134			0		134
Net periodic benefit (income) loss	$	(13	)	$	1	$	(12	)	$	(39	)	$	3	$	(36	)	$	(8	)	$	1	$	(7	)	$	108		$	3	$	111

2536

LSC Communications, Inc.

(DEBTOR-IN-POSSESSION)

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Nine Months Ended September 30, ~~2019~~2020 and ~~2018~~2019

(tabular amounts in millions, except per share data)

In the third quarter of 2020 and first quarter of 2019, the Company completed partial settlements of its retirement benefit obligations related to the U.S. Qualified Plan. In the third quarter of 2020, the Company offered a lump-sum window opportunity to certain active participants and terminated participants who were entititled to a pension benefit. 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~~purchased group annuity ~~contract~~contracts for certain retirees and beneficiaries from a third-party insurance company. As a result of the settlements, the Company’s pension assets and liabilities were remeasured as of the settlement ~~date. As of the~~date during each quarter. The remeasurement ~~date, the reduction~~ in the ~~reported~~third quarter of 2020 increased the plan’s funded status by $71 million, causing the plan to change from underfunded (pension liability) to a funded pension ~~obligation for the participants under the annuity contract was $477~~asset of $47 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~~balance sheet as of ~~operations in~~September 30, 2020.

Refer below for information on the ~~first quarter~~impact of ~~2019. This charge results~~each partial settlement.

	Third Quarter		First Quarter
	2020		2019
Reduction in reported pension obligation for participants involved in settlements	$	299	$	477
Reduction in plan assets		267		466
Non-cash settlement charge		63		132

The non-cash settlement charges result 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 6.5% 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.

The long-term rate of return for the U.S. Qualified pension plan was revised for the fourth quarter of 2020 as a result of the settlement. The revised long-term rate of return will be 4.8% in the fourth quarter of 2020, 120 basis points lower than the rate used during the nine months ended September 30, 2020. The discount rate used to determine the net obligation for the U.S. Qualified pension plan at the settlement date in 2020 was 2.8%, 50 basis points lower than the discount rate as of December 31, 2019.

In the first quarter of 2020, the Company adopted a change in method of accounting for the market-related value of assets for a class of assets within the U.S. Qualified Plan and Non-Qualified plans. The change in accounting method was retrospectively applied to periods in 2017, 2018 and 2019, and as a result, pension income shown above for the three and nine months ended September 30, 2019 has been restated. Refer to Impact of Change in Accounting Principle in Note 1, Overview and Basis of Presentation, for more information.

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 September 30, ~~2019~~2020 and ~~2018~~2019 is included in the investment and other (income)-net.

Note 13. Taxes

The CARES Act is intended to provide emergency relief to both businesses and individuals impacted by the COVID-19 pandemic.

Income Taxes

The CARES Act enacted several provisions that may impact corporations including the carryback of certain net operating losses and the expensing of additional interest under certain circumstances. The Company has estimated that these provisions will 0t result in a benefit for the nine months ended September 30, 2020. As the Company assesses additional guidance issued by the U.S. Treasury Department, the IRS and other standard-setting bodies related to the CARES Act, it may record an impact to the income tax provision.

LSC Communications, Inc.

(DEBTOR-IN-POSSESSION)

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Nine Months Ended September 30, 2020 and 2019

(tabular amounts in millions, except per share data)

Payroll Taxes

The CARES Act allows companies to defer payments of the employer share (6.2% of wages) of Social Security payroll taxes from the date of enactment through December 31, 2020. NaN percent of the taxes deferred are required to be paid by December 31, 2021 with the remaining 50 percent by December 31, 2022. As of September 30, ~~2019,~~2020, the ~~Company’s net deferred tax assets totaled $30 million, inclusive of $11~~Company accrued $23 million of ~~valuation allowances.~~payroll taxes that will benefit from this adoption. The Company ~~has provided valuation allowances~~expects to ~~reduce~~continue to defer payroll taxes through the ~~carrying value~~end 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.2020.

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 14. Comprehensive Income

The following table summarizes accumulated other comprehensive loss by component as of December 31, 2019 and September 30, 2020 and changes during the nine months ended September 30, 2020.

	Pension			Translation
	Plan Cost			Adjustments			Total
Balance at December 31, 2019	$	(464	)	$	(53	)	$	(517	)
Other comprehensive (loss) before reclassifications		118			(8	)		110
Amounts reclassified from accumulated other comprehensive loss		9			0			9
Net change in accumulated other comprehensive income (loss)		127			(8	)		119
Balance at September 30, 2020	$	(337	)	$	(61	)	$	(398	)

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

	Pension			Translation						Pension			Translation
	Plan Cost			Adjustments			Total			Plan Cost			Adjustments			Total
Balance at December 31, 2018	$	(529	)	$	(55	)	$	(584	)	$	(520	)	$	(55	)	$	(575	)
Other comprehensive income before reclassifications		106			—			106			106			0			106
Amounts reclassified from accumulated other comprehensive loss		6			—			6			7			0			7
Net change in accumulated other comprehensive loss		112			—			112			113			0			113
Balance at September 30, 2019	$	(417	)	$	(55	)	$	(472	)	$	(407	)	$	(55	)	$	(462	)

~~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 third quarter of 2020 and first quarter of 2019, the Company completed a partial ~~settlement~~settlements of its retirement benefit obligations and, as a result, the Company’s pension assets and liabilities were remeasured as of the settlement ~~date.~~date in each quarter. The impact, net of tax, to the Company’s accumulated other comprehensive loss was a decrease of ~~$105 million.~~$118 million during the three months ended September 30, 2020. The impact, net of tax, was $104 million during the three months ended March 31, 2019 (including the restatement noted above). Additional immaterial lump-sum settlements during the nine months ended September 30, 2019 increased the ~~net accumulated other comprehensive loss~~ balance by $1$2 million to a total net of tax impact of ~~$106~~$106 million. Refer to Note 12, Retirement Plans, for more information.

In the first quarter of 2020, the Company adopted a change in method of accounting for the market-related value of assets for a class of assets within the U.S. Qualified Plan and Non-Qualified plans. The ~~following table summarizes~~change in accounting method was retrospectively applied to periods in 2017, 2018 and 2019, and as a result, the pension rollforward for accumulated other comprehensive loss ~~by component as of December 31, 2017~~above and ~~September 30, 2018~~reclassification table below have been restated for the three and ~~changes during the~~ nine months ended September 30, ~~2018.~~

Pension

Translation

Plan Cost

Adjustments

Total

Balance at December 31, 2017

$
(428
)

$
(48
)

$
(476
)
Other comprehensive (loss) before reclassifications

—

(4
)

(4
)
Amounts reclassified from accumulated other comprehensive loss

11

—

11

Reclassification to accumulated deficit

(97
)

—

(97
)
Net change in accumulated other comprehensive loss

(86
)

(4
)

(90
)
Balance at September 30, 2018

$
(514
)

$
(52
)

$
(566
)

~~The Company adopted~~ 2019. Refer to Notes 1, ~~ASU 2018-02 “Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification~~Overview and Basis of ~~Certain Tax Effects from Accumulated Other Comprehensive Income” (“ASU 2018-02”) in the first quarter of 2018.~~ PresentationAs 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., and 12, ~~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.~~Retirement Plans, for more information.

Refer to the condensed consolidated statements of comprehensive income for the components of comprehensive (loss) income for the three and nine months ended September 30, ~~2019~~2020 and ~~2018.~~2019.

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

Three Months Ended

Nine Months Ended

September 30,

September 30,

2019

2018

2019

2018

Amortization of pension plan cost:

Net actuarial loss _(a)

$
3

$
5

$
8

$
15

Reclassifications before tax

3

5

8

15

Income tax expense

1

2

2

4

Reclassifications, net of tax

$
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 in investment and other income-net in the condensed consolidated statements of operations (see Note 12, ~~Retirement Plans~~).

2738

LSC Communications, Inc.

(DEBTOR-IN-POSSESSION)

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Nine Months Ended September 30, ~~2019~~2020 and ~~2018~~2019

(tabular amounts in millions, except per share data)

Reclassifications from accumulated other comprehensive loss for the three and nine months ended September 30, 2020 and 2019 were as follows:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2020		2019 (1)		2020		2019 (1)
Amortization of pension plan cost:
Net actuarial loss _(a)	$	4	$	3	$	12	$	9
Reclassifications before tax		4		3		12		9
Income tax expense		1		1		3		2
Reclassifications, net of tax	$	3	$	2	$	9	$	7

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

(1)As Adjusted – Refer to the narrative above on the change in accounting principle.

Note 15. Segment Information

~~During~~As a result of the ~~third~~Company’s segment analysis in the fourth quarter of ~~2018,~~2019, Mexico met the ~~Company realigned the~~ requirements to be classified as a reportable ~~segments and reporting units to reflect its evolution since its separation from RRD in 2016,~~segment (previously included as ~~well as changes from recent acquisition and disposal activity.~~a non-reportable segment). 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~~and provides logistics ~~services~~solutions to the Company and other ~~third-parties.~~third parties. The segment also provides certain other print-related services, including ~~mail-list management and sortation.~~mail services. The segment has operations primarily in the U.S. The Magazines, Catalogs and Logistics segment is divided into 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 and 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 5 core categories: filing products, envelopes, note-taking products, binder products, and forms.

~~Other~~

Mexico

Mexico produces magazines, catalogs, statements, forms, and labels.

LSC Communications, Inc.

(DEBTOR-IN-POSSESSION)

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Nine Months Ended September 30, 2020 and 2019

(tabular amounts in millions, except per share data)

Other

The Other grouping consists of the following non-reportable segments: ~~Europe,~~ Directories ~~Mexico,~~ and Print Management. ~~Europe produced magazines, catalogs~~Print Management provides outsourced print procurement and ~~directories, as well as provided packaging and pre-media~~management 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~~.~~PrintManagementprovidesoutsourcedprintprocurementandmanagementservices~~.

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.

~~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)~~

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

Three Months Ended

Net

from

and

Capital

September 30, 2019

Sales

Operations

Amortization

Expenditures

Magazines, Catalogs and Logistics

$
392

$
(6
)

$
13

$
6

Book

256

5

12

4

Office Products

128

8

3

—

Total reportable segments

776

7

28

10

Other

58

5

1

—

Corporate

—

(21
)

—

1

Total operations

$
834

$
(9
)

$
29

$
11

Income (Loss)

Depreciation

Nine Months Ended

Net

from

Assets of

and

Capital

September 30, 2019

Sales

Operations

Operations

Amortization

Expenditures

Magazines, Catalogs and Logistics

$
1,175

$
(79
)

$
749

$
41

$
28

Book

805

36

572

37

28

Office Products

386

29

293

9

1

Total reportable segments

2,366

(14
)

1,614

87

57

Other

182

17

83

3

1

Corporate

—

(47
)

95

1

2

Total operations

$
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						Income (Loss)			Depreciation
Nine Months Ended	Net		from			Assets of		and		Capital
September 30, 2018	Sales		Operations			Operations		Amortization		Expenditures
Three Months Ended												Net		from			and		Capital
September 30, 2020												Sales		Operations			Amortization		Expenditures
Magazines, Catalogs and Logistics	$	1,291	$	(19	)	$	795	$	47	$	20	$	255	$	(38	)	$	11	$	5
Book		797		49			610		39		25		222		(13	)		9		2
Office Products		422		30			363		11		1		105		10			2		1
Mexico													22		4			1		0
Total reportable segments		2,510		60			1,768		97		46		604		(37	)		23		8
Other		377		23			102		8		3		24		(5	)		1		0
Corporate		—		(30	)		102		1		3		0		(4	)		0		0
Total operations	$	2,887	$	53		$	1,972	$	106	$	52	$	628	$	(46	)	$	24	$	8

			Income (Loss)					Depreciation
Nine Months Ended	Net		from			Assets of		and		Capital
September 30, 2020	Sales		Operations			Operations		Amortization		Expenditures
Magazines, Catalogs and Logistics	$	796	$	(130	)	$	520	$	35	$	15
Book		624		(18	)		444		32		8
Office Products		298		17			287		8		1
Mexico		61		10			58		2		0
Total reportable segments		1,779		(121	)		1,309		77		24
Other		82		0			16		1		0
Corporate		0		(25	)		148		1		1
Total operations	$	1,861	$	(146	)	$	1,473	$	79	$	25

LSC Communications, Inc.

(DEBTOR-IN-POSSESSION)

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Nine Months Ended September 30, ~~2019~~2020 and ~~2018~~2019

(tabular amounts in millions, except per share data)

			Income (Loss)			Depreciation
Three Months Ended	Net		from			and		Capital
September 30, 2019	Sales		Operations			Amortization		Expenditures
Magazines, Catalogs and Logistics	$	392	$	(6	)	$	13	$	6
Book		256		5			12		4
Office Products		128		8			3		0
Mexico		24		4			1		0
Total reportable segments		800		11			29		10
Other		34		1			0		0
Corporate		0		(21	)		0		1
Total operations	$	834	$	(9	)	$	29	$	11

			Income (Loss)					Depreciation
Nine Months Ended	Net		from			Assets of		and		Capital
September 30, 2019	Sales		Operations			Operations		Amortization		Expenditures
Magazines, Catalogs and Logistics	$	1,175	$	(79	)	$	749	$	41	$	28
Book		805		36			572		37		28
Office Products		386		29			293		9		1
Mexico		73		11			75		3		1
Total reportable segments		2,439		(3	)		1,689		90		58
Other		109		6			8		0		0
Corporate		0		(47	)		95		1		2
Total operations	$	2,548	$	(44	)	$	1,792	$	91	$	60

Restructuring, impairment and other charges by segment for the three and nine months ended September 30, ~~2019~~2020 and ~~2018~~2019 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,~~December 2019, the FASB issued Accounting Standards Update No. ~~2018-15 “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40)~~2019-12 Income Taxes (Topic 740): ~~Customer’s~~Simplifying the Accounting for ~~Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract” (“~~Income Taxes ("ASU ~~2018-15”~~2019-12"). ASU ~~2018-15 aligns the~~2019-12 removes certain exceptions for intraperiod tax allocations and interim calculations, and adds guidance to reduce complexity in accounting for ~~implementation costs~~income taxes, including a modification in the guidance for ~~cloud computing arrangements with~~franchise taxes that are partially based on income and recognizing deferred taxes for a subsequent step-up in the ~~accounting for costs involved in implementing an internal-use software license.~~tax basis of goodwill. ASU ~~2018-15~~2019-12 is effective in the first quarter of ~~2020;~~2021. Early adoption of ASU 2019-12 is permitted; however, ~~as early adoption is permitted,~~ the Company ~~adopted ASU 2018-15~~plans to adopt the standard in the first quarter of ~~2019.~~2021. The ~~adoption did not have a material~~Company is in the process of assessing the impact ~~during~~of the ~~nine months ended September 30, 2019.~~new standard.

~~ITEM~~-ITEM 2. MANAGEMENT’S 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 September 30, ~~2019~~2020 and December 31, ~~2018~~2019 and the results of operations for the three and nine months ended September 30, ~~2019~~2020 and ~~2018.~~2019. 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,~~March 2, 2020, for management’s discussion and analysis of the financial condition of the company as of December 31, ~~2018~~2019 and December 31, ~~2017,~~2018, and the results of operations for the years ended December 31, 2019, 2018 ~~2017~~ and ~~2016.~~2017.

Company Overview

Voluntary Reorganization under Chapter 11

Background Information

On April 13, 2020 (the “Petition Date”), the Company and certain of its subsidiaries filed voluntary petitions for relief under Chapter 11 of title 11 of the United States Code, 11 U.S.C. §§ 101-1532 (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”) (collectively, the “Chapter 11 Cases”). Refer to Note 2, Voluntary Reorganization under Chapter 11, for more information on the Chapter 11 Cases and impact to the Company’s ability to continue as a going concern.

~~Merger~~The Chapter 11 Cases are being jointly administered under the caption In re LSC Communications, Inc., 20-10950. We and our subsidiaries that are involved in the Chapter 11 Cases will continue to operate our businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with ~~Quad/Graphics, Inc.~~the applicable provisions of the Bankruptcy Code.

As a result of the commencement of the Chapter 11 Cases, the Company’s operations and ability to develop and execute its business plan are subject to the risks and uncertainties associated with the reorganization process under the Bankruptcy Code. Following the outcome of the Chapter 11 Cases, the amount and composition of the Company’s assets, liabilities, officers and/or directors, and the description of the Company’s operations, properties, liquidity and capital resources included in this quarterly report may be significantly different.

Refer to Note 2, Voluntary Reorganization under Chapter 11, for more information.

Significant Bankruptcy Court Actions

Purchase Agreement

Simultaneous with us entering into the Purchase Agreement, Buyer entered into that certain Amended and Restated Credit Bid Support Agreement, dated as of September 15, 2020 (the “CBSA”), by and among ACR III Libra Parent LLC, certain holders of the senior secured term loan B facility under the Prepetition Credit Agreement and holders of senior notes under the Prepetition Indenture (collectively, the “Junior Creditors”), Lapetus Capital III LLC and, solely for purposes of certain sections of such agreement, the Guarantors, which sets forth certain amounts that may be available for distribution to the Junior Creditors in connection with the credit bid. Pursuant to the CBSA, at the closing of the Transactions, Buyer may hold back from the amount available to distribute from Buyer to the Junior Creditors under the CBSA up to $43.75 million, relating to the net working capital adjustment, certain assumed expenses and certain real estate matters. If such holdback amount exceeds the Available Amount (as defined in the CBSA) (such excess amount, the “Deficiency Amount”), we will, in good faith and in consultation with AlixPartners, LLP, make a determination about whether the estate would remain solvent post-closing if the Deficiency Amount is held back from the Estimated Cash Consideration (as defined in the Purchase Agreement) at closing. If we determine that we are reasonably likely to be administratively insolvent if the Deficiency Amount is held back at the closing, (a) the Sellers will propose the maximum holdback amount that they calculate, in good faith and in consultation with AlixPartners, LLP, will allow us to remain solvent, and (b) thereafter, Buyer will have the option to (1) agree to such maximum holdback amount and take a residual claim on the Debtors’ estate, ranking immediately junior to other administrative claims, for the difference or (2) terminate the Purchase Agreement.

On October ~~30, 2018,~~7, 2020 the ~~Company~~Bankruptcy Court entered ~~into that certain~~an Order (I) Approving the Purchase Agreement among the Debtors and ~~Plan~~Buyer, (II) Approving the Sale of ~~Merger (the “Merger Agreement”), by~~Debtors’ Assets Free and ~~among Quad/Graphics, Inc. (“Quad”), QLC Merger Sub, Inc.~~Clear of Liens, Claims, Interests and ~~LSC Communications, pursuant to which, subject to the satisfaction or waiver~~Encumbrances, (III) Authorizing Assumption and Assignment of ~~certain conditions, LSC Communications would be merged with QLC Merger Sub, Inc.,~~Certain Executory Contracts and ~~become a wholly-owned subsidiary of Quad.~~

~~On July 22, 2019, Quad~~Unexpired Leases and ~~LSC Communications entered into a letter agreement (the “Letter Agreement”)~~(IV) Granting Related Relief [Docket No. 876], pursuant to which the ~~parties agreed~~Bankruptcy Court approved the Purchase Agreement and the Transactions. The closing of the Transactions is subject to ~~terminate~~closing conditions, including the ~~Merger Agreement. Pursuant~~achievement of certain bankruptcy-related milestones, regulatory approvals and other customary closing conditions. The Transactions are expected to close during the fourth quarter of 2020.

DIP Financing

See Note 10, Debt, for information on the DIP Facility, which provides up to $100 million of financing in the form of revolving loans and letters of credit.

Going Concern

The accompanying condensed consolidated financial statements were prepared assuming that the Company will continue as a going concern and contemplate the continuity of our operations, realization of assets and satisfaction of liabilities and commitments in the normal course of business. Our ability to continue as a going concern is contingent upon our ability to comply with the covenants of the DIP Credit Agreement described in Note 10, Debt, and our ability to implement, subject to the ~~Letter Agreement, Quad agreed~~Bankruptcy Court’s approval, a restructuring plan, among other factors.

While operating as debtors-in-possession under Chapter 11, we may sell or otherwise dispose of or liquidate assets or settle liabilities, subject to ~~pay LSC Communications~~ the ~~Regulatory Approval Reverse Termination Fee (as defined~~approval of the Bankruptcy Court or as otherwise permitted in the ~~Merger Agreement)~~ordinary course of ~~$45 million~~business (and subject to restrictions in ~~cash~~our debt agreements), for amounts other than those reflected in the accompanying condensed consolidated financial statements. Further, the restructuring plan could materially change the amounts and classifications of assets and liabilities reported in the condensed consolidated financial statements.

Coronavirus Pandemic (“COVID-19”)

During and subsequent to the nine months ended September 30, 2020, the novel coronavirus strain, known as COVID-19, continues to spread across the globe at an increasing rate. Measures taken by governmental authorities and private actors to limit the spread of this virus may interfere with the ability of the Company's employees, suppliers, and other business providers to carry out their assigned tasks or supply materials at ordinary levels of performance relative to the conduct of the business which may cause a material curtailment to certain business operations. Moreover, as a large part of the Company's business involves sales of books and other products used in schools and school facilities, if COVID-19 related measures continue to result in widespread and lengthy school closings, the Company's condensed consolidated results of operations and financial condition will be adversely impacted. Books sold in retail stores have also been adversely impacted as both large chains and independent stores have been forced to close, although some retail stores have subsequently re-opened. Additionally, as COVID-19 has significantly impacted retailers' stores, distribution centers and supply chains, the Company has experienced an adverse impact on our catalogs and office products businesses. Disruption across many other industries has also significantly impacted demand for advertising, which may result in page count and volume reductions in magazines.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law. Refer to Note 13, Taxes, for more information on the business day following the date of the Letter Agreement. The Company incurred transaction costs of approximately $26 million associated with the Merger Agreement, of which $5 million was incurred in 2018. Except for certain indemnification obligations of Quad related to LSC Communications assisting Quad with the financing under the Merger Agreement, the parties also agreed to 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 or in connection with the Merger Agreement or the transactions provided for in the Merger Agreement.CARES Act.

Segment Descriptions

~~During~~As a result of the ~~third~~Company’s segment analysis in the fourth quarter of ~~2018,~~2019, Mexico met the ~~Company realigned the~~requirements to be classified as a reportable ~~segments and reporting units to reflect its evolution since its separation from~~ ~~R. R. Donnelley & Sons Company’s (“RRD”)~~ ~~in 2016,~~segment (previously included as ~~well as changes from recent acquisition and disposal activity.~~a non-reportable segment). All prior year amounts have been reclassified to conform to the Company’s current reporting structure.

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

Mexico

Mexico produces magazines, catalogs, statements, forms, and labels.

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 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’s dispositions are listed below:~~

•

~~Commingle operations on August 20, 2019;~~

•

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

•

R~~etail 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 ~~August 2019~~June 2020 IBIS World industry report “Printing in the U.S.,” estimated total annual printing industry revenue is approximately ~~$77~~$73 billion, of which approximately ~~$13~~$12 billion relates to our core segments of the print market and an additional approximately ~~$31~~$30 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 Company’s product and service offerings have been impacted by the following:

•

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 effect of COVID-19 in 2020 on the industries the Company services.

•

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; 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 continues to affect the overall demand for most of the products in our Office Products segment. 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 c~~ost~~cost reduction initiatives 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~~realized the benefits beginning in 2019 and expects to realize benefits at various points over the next three years, the Company has incurred ~~$3.0 million and $5.6~~$14 million of expense, of which $4 million was recorded during the ~~three and~~ nine months ended September 30, ~~2019, respectively,~~2020, 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 September 30, 2019.~~

~~Impairment Charges~~

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 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.

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.~~

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:

•

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%.

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.

~~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.

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~~.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, adhesives and paper consignment agreement, 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 condensed 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 developed prior to the Company’s voluntary reorganization, the Company ~~expects~~expected to make cash contributions of approximately $6 million to its pension benefit plans for the full year in ~~2019, of which $4~~2020. Through the Petition Date, $1 million has been contributed ~~during~~and no further contributions will be made until a determination is made by the ~~nine months ended September 30, 2019.~~ Bankruptcy Court.

In the ~~first~~third quarter of ~~2019,~~2020, the Company completed a partial settlement of its retirement benefit obligations by ~~purchasing~~offering a ~~group annuity contract for~~lump-sum window opportunity to certain ~~retirees~~active participants and ~~beneficiaries from~~terminated participants who were entititled to a ~~third-party insurance company.~~pension benefit. 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~~$63 million in settlement of retirement benefit obligations in the condensed consolidated statement of operations in the third quarter of 2020.

Beginning in the first quarter of 2020, the Company changed the method of accounting for the market-related value of assets for a class of assets within the U.S. Qualified Plan and Non-Qualified plans. The change in accounting method was retrospectively applied to periods in 2017, 2018 and 2019. ~~There were additional immaterial lump-sum settlements (unrelated~~Refer to Impact of Change in Accounting Principle in Note 1, Overview and Basis of Presentation, for more information.

The remeasurement in the ~~transaction noted above) during~~third quarter of 2020 increased the ~~nine months ended~~plan’s funded status by $71 million, causing the plan to change from underfunded (pension liability) to a funded pension asset of $47 million in the condensed consolidated balance sheet as of September 30, ~~2019 that resulted in non-cash settlement charges of $2 million.~~

2020.Based on the fair value of assets and the estimated discount rate used to value the benefit obligations of the Non-Qualified and international plans as of September 30, ~~2019,~~2020, the Company estimates the unfunded status of ~~the~~these pension benefit plans to be approximately ~~$148 million compared to $137~~$98 million. The underfunded status of all pension plans was $162 million at December 31, ~~2018.~~2019.

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~~Other than the policies implemented as a result of the Company’s Chapter 11 Cases, 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~~2019. Refer to Note 2, ~~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~~Voluntary Reorganization under Chapter 11, for ~~more information.~~information on the policies for balances affected by the voluntary reorganization.

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 September 30, ~~2019~~2020 as Compared to the Three Months Ended September 30, ~~2018~~ 2019

The following table shows the results of operations for the three months ended September 30, ~~2019~~2020 and ~~2018,~~2019, which reflects the results of the acquired businesses from the relevant acquisition dates:

	Three Months Ended												Three Months Ended
	September 30,												September 30,
	2019			2018			$ Change			% Change			2020			2019			$ Change			% Change
	(in millions, except percentages)												(in millions, except percentages)
Net sales	$	834		$	1,015		$	(181	)		(17.9	%)	$	628		$	834		$	(206	)		(24.6	%)
Cost of sales		716			862			(146	)		(16.9	%)		530			716			(186	)		(26.0	%)
Cost of sales as a % of net sales		85.9	%		84.9	%								84.4	%		85.9	%
Selling, general and administrative expenses (exclusive of depreciation and amortization)		88			77			11			14.3	%		64			88			(24	)		(27.3	%)
Selling, general and administrative expenses as a % of net sales		10.6	%		7.6	%								10.2	%		10.6	%
Restructuring, impairment and other charges-net		10			1			9			900.0	%		56			10			46			460.0	%
Depreciation and amortization		29			34			(5	)		(14.7	%)		24			29			(5	)		(17.2	%)
(Loss) income from operations	$	(9	)	$	41		$	(50	)		(122.0	%)
(Loss) from operations													$	(46	)	$	(9	)	$	(37	)		411.1	%

Condensed Consolidated Results

Net sales for the three months ended September 30, ~~2019~~2020 were ~~$834~~$628 million, a decrease of ~~$181~~$206 million, or ~~17.9%~~24.6%, compared to the three months ended September 30, ~~2018.~~2019. Net sales were impacted by ~~the disposition of the Company’s European printing business in 2018,~~ lower volume, which was partially caused by the impact of COVID-19, and a ~~$23~~$58 million decrease in pass-through paper sales.

Total cost of sales decreased ~~$146~~$186 million, or ~~16.9%~~26.0%, for the three months ended September 30, ~~2019~~2020 compared to the three months ended September 30, ~~2018,~~2019, primarily driven by ~~the disposition of the Company’s European printing business,~~ 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 and higher costs as a result of product mix.~~cost control initiatives.

As a percentage of net sales, cost of sales ~~increased~~decreased from ~~84.9%~~85.9% for the three months ended September 30, ~~2018~~2019 to ~~85.9%~~84.4% for the three months ended September 30, 2020 primarily due to cost control initiatives.

Selling, general and administrative expenses decreased $24 million, or 27.3%, for the three months ended September 30, 2020 compared to the three months ended September 30, 2019, primarily due to lower volume, higher ~~labor costs~~expenses in 2019 related to the previously terminated merger agreement, and ~~product mix.~~cost control initiatives.

~~Selling, general and administrative expenses increased $11 million to $88 million for~~For the three months ended September 30, ~~2019 compared to~~2020, the ~~three months ended September 30, 2018~~Company recorded restructuring, impairment and other charges of $56 million. The charges primarily ~~due to costs associated with the Merger Agreement, partially offset by~~ ~~the disposition of the Company’s European printing business.~~included:

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

•

Net other restructuring charges of $19 million primarily due to $12 million related to the impairment of property, plant and equipment for one of the Company’s manufacturing facilities in Las Vegas, Nevada, facility costs, expenses to move equipment, costs associated with new revenue opportunities and cost savings initiatives implemented in 2019;

•

Employee termination costs of $9 million related to an aggregate of 764 employees, of whom 586 were terminated as of or prior to September 30, 2020 primarily related to the closure of three facilities in the Magazines, Catalogs and Logistics and Book segments and Other grouping; and

•

$28 million of net impairment charges related to machinery and equipment associated with facility closings in the Book and Magazines, Catalogs and Logistics segments.

For the three months ended September 30, 2019, the Company recorded restructuring, impairment and other charges of $10 million. The charges were primarily due to facility costs, costs associated with new revenue opportunities and cost savings initiatives implemented during the quarter, and multiemployer withdrawal obligations related to facility closures.

For the three months ended September 30, 2018, the Company recorded restructuring, impairment and other charges of $1 million. The charges primarily included net other restructuring charges of $1 million mainly due to facility costs 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 on September 28, 2018.

~~Depreciation~~Depreciation and amortization decreased $5 million to ~~$29~~$24 million for the three months ended September 30, ~~2019~~2020 compared to the three months ended September 30, ~~2018,~~2019, due to decreased capital spending in recent years compared to historical ~~levels and~~levels.

	Three Months Ended
	September 30,
	2020			2019 (1)			$ Change			% Change
	(in millions, except percentages)
Interest expense-net	$	5		$	20		$	(15	)		(75.0	%)
Settlement of retirement benefit obligations		63			1			62			6200.0	%
Termination fee from Quad		—			(45	)		45			(100.0	%)
Investment and other (income)-net		(14	)		(8	)		(6	)		75.0	%
Reorganization items, net		24			—			24			100.0	%

Interest expense is lower for the ~~disposition of~~three months ended September 30, 2020 compared to the three months ended September 30, 2019 primarily due to the Company’s ~~European printing business.~~voluntary reorganization. Refer to Note 10, Debt

Three Months Ended

September 30,

2019

2018

$ Change

% Change

(in millions, except percentages)

Interest expense-net

$
20

$
21

$
(1
)

(4.8
%)
Settlement of retirement benefit obligations

1

—

1

100.0
%
Termination fee from Quad

(45
)

—

(45
)

100.0
%
Investment and other (income)-net

(9
)

(11
)

2

(18.2
%)

, for more information. 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. Refer to Note 2, Voluntary Reorganization under Chapter 11, for information on reorganization items. The $45 million Termination fee from Quad in the third quarter of 2019 related to the merger agreement.

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
%

	Three Months Ended
	September 30,
	2020			2019 (1)			$ Change
	(in millions, except percentages)
(Loss) income before income taxes	$	(124	)	$	23		$	(147	)
Income tax (benefit)		(13	)		—			(13	)
Effective income tax rate		10.0	%		3.1	%

The effective income tax rate for the three months ended September 30, ~~2019~~2020 was ~~4.3%~~10.0% compared to ~~112.3%~~3.1% for the three months ended September 30, ~~2018.~~ 2019. The effective income tax rate for the three months ended September 30, 2020 reflects the Company’s limited ability to benefit U.S. results as the Company has a valuation allowance recorded on its U.S. deferred tax assets; the effective income tax rate also reflects the benefit related to the pension settlement resulting from the intraperiod exception when there is income from other comprehensive income and a loss from continuing operations.

The effective rate for the three months ended September 30, 2019 reflects the benefit of costs associated with the terminated ~~Merger Agreement~~merger agreement that were previously considered non-deductible.

~~The effective income tax rate~~(1) As Adjusted - Refer to Impact of Change in Accounting Principle in Note 1, Overview and Basis of Presentation, for ~~the three months ended September 30, 2018 reflects a $25 million non-cash tax provision related to the disposition~~information on restated balances for settlement of ~~the Company’s European printing business. Additionally, the rate was impacted by the U.S. Tax Cuts~~retirement benefit obligations 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 deductionsinvestment and ~~permanent book-to-tax differences.~~ other (income)-net.

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

September 30,

2019

2018

Change

(in millions, except percentages)

Net sales

$
392

$
463

$
(71
)
(Loss) income from operations

(6
)

1

(7
)
Operating margin

(1.5
%)

0.2
%

(170 bps)

Restructuring, impairment and other charges-net

4

—

4

Magazines, Catalogs and Logistics

	Three Months Ended
	September 30,
	2020			2019			Change
	(in millions, except percentages)
Net sales	$	255		$	392		$	(137	)
(Loss) from operations		(38	)		(6	)		(32	)
Operating margin		(14.9	%)		(1.5	%)	(1340 bps)
Restructuring, impairment and other charges-net		21			4			17

Net sales for the Magazines, Catalogs and Logistics segment for the three months ended September 30, ~~2019~~2020 were ~~$392~~$255 million, a decrease of ~~$71~~$137 million, or ~~15.5%~~34.8%, compared to the three months ended September 30, ~~2018.~~2019. The Magazines, Catalogs and Logistics segment’s net sales decreased primarily due to ~~the unprecedented drop~~lower volume in ~~long-run magazine~~magazines, catalogs and ~~catalog volumes during 2019, with~~logistics which was partially caused by 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~~COVID-19, and a ~~$13~~$40 million decrease in pass-through paper ~~sales contributed to the decrease.~~sales.

The ~~changes~~change in Magazines, Catalogs and Logistics segment loss from operations and operating margins ~~were~~was primarily due to lower ~~volumes noted above, as well as higher restructuring, impairment and other charges.~~volume, partially offset by cost control initiatives.

~~Book~~

Book

	Three Months Ended									Three Months Ended
	September 30,									September 30,
	2019			2018			Change			2020			2019			Change
	(in millions, except percentages)									(in millions, except percentages)
Net sales	$	256		$	282		$	(26	)	$	222		$	256		$	(34	)
Income from operations		5			21			(16	)
(Loss) income from operations											(13	)		5			(18	)
Operating margin		2.0	%		7.4	%	(540 bps)				(5.9	%)		2.0	%	(790 bps)
Restructuring, impairment and other charges-net		2			1			1			30			2			28

Net sales for the Book segment for the three months ended September 30, ~~2019~~2020 were ~~$256~~$222 million, a decrease of ~~$26~~$34 million, or ~~9.6%~~13.0%, compared to the three months ended September 30, ~~2018,~~2019, primarily due to lower volume ~~particularly in educational and religious books,~~ and a $9$12 million decrease in pass-through paper sales.

The decrease in the ~~Book segment~~operating income ~~from operations~~ and ~~operating~~ margins was ~~primarily due to~~driven by higher restructuring, impairment and other charges and lower volume, ~~and increased labor costs.~~partially offset by cost control initiatives.

Office Products

	Three Months Ended									Three Months Ended
	September 30,									September 30,
	2019			2018			Change			2020			2019			Change
	(in millions, except percentages)									(in millions, except percentages)
Net sales	$	128		$	145		$	(17	)	$	105		$	128		$	(23	)
Income from operations		8			15			(7	)		10			8			2
Operating margin		6.3	%		10.3	%	(400 bps)				9.5	%		6.3	%	320 bps
Restructuring, impairment and other charges-net		2			—			2			—			2			(2	)

Net sales for the Office Products segment for the three months ended September 30, ~~2019~~2020 were ~~$128~~$105 million, a decrease of ~~$17~~$23 million, or ~~11.7%~~17.4%, compared to the three months ended September 30, ~~2018,~~2019. The decrease was largely as a result of lower volume ~~in envelopes and filing products.~~across several products, which was primarily caused by the impact of COVID-19.

The ~~decrease~~increase in Office Products segment income from operations and operating margin was primarily due to cost control initiatives and lower ~~volume~~restructuring, impairment and ~~higher labor costs,~~other charges, partially offset by ~~synergies realized from the integration of Quality Park.~~

lower volume.

Mexico

	Three Months Ended
	September 30,
	2020			2019			Change
	(in millions, except percentages)
Net sales	$	22		$	24		$	(2	)
Income from operations		4			4			—
Operating margin		18.2	%		16.7	%	150 bps

Net sales for the Mexico segment were $22 million for the three months ended September 30, 2020, a decrease of $2 million or 11.2%, compared to the three months ended September 30, 2019. The decrease in net sales was due to lower volume primarily caused a $3 million decrease due to changes in foreign exchange rates. There were no significant changes to income from operations as a result of cost control initiatives, which improved the operating margin.~~Other~~

Other

	Three Months Ended									Three Months Ended
	September 30,									September 30,
	2019			2018			Change			2020			2019			Change
	(in millions, except percentages)									(in millions, except percentages)
Net sales	$	58		$	125		$	(67	)	$	24		$	34		$	(10	)
Income from operations		5			9		$	(4	)
(Loss) income from operations											(5	)		1		$	(6	)
Operating margin		8.6	%		7.2	%	140 bps				-20.8	%		2.9	%	(2,370) bps
Restructuring, impairment and other charges-net											5			—			5

Net sales for the Other grouping for the three months ended September 30, ~~2019~~2020 were ~~$58~~$24 million, a decrease of ~~$67~~$10 million, or ~~52.6%~~32.1%, compared to the three months ended September 30, ~~2018,~~2019, primarily due to ~~the disposition of the Company’s European printing business,~~ lower directories volume, ~~and~~ a $1$6 million decrease in pass-through paper ~~sales.~~sales, and lower sales in outsourced services which were primarily impacted by COVID-19.

The change in income from operations and operating margin was primarily due to higher restructuring, impairment and other charges and lower volume.

Corporate

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

	Three Months Ended						Three Months Ended
	September 30,						September 30,
	2019		2018		Change		2020		2019		Change
	(in millions, except percentages)						(in millions, except percentages)
Total operating expenses	$	21	$	5	$	16	$	4	$	21	$	(17	)
Significant components of total operating expenses:
Restructuring, impairment and other charges-net		2		—		2		—		2		(2	)
Share-based compensation expenses		2		2		—		—		2		(2	)
Expenses related to acquisitions, the Merger Agreement and dispositions		10		2		8		—		10		(10	)

Results of Operations for the Nine Months Ended September 30, ~~2019~~2020 as Compared to the Nine Months Ended September 30, ~~2018~~2019

The following table shows the results of operations for the nine months ended September 30, ~~2019~~2020 and ~~2018,~~2019, which reflects the results of the acquired businesses from the relevant acquisition dates:

	Nine Months Ended												Nine Months Ended
	September 30,												September 30,
	2019			2018			$ Change			% Change			2020			2019			$ Change			% Change
	(in millions, except percentages)												(in millions, except percentages)
Net sales	$	2,548		$	2,887		$	(339	)		(11.7	%)	$	1,861		$	2,548		$	(687	)		(26.9	%)
Cost of sales		2,201			2,468			(267	)		(10.8	%)		1,614			2,201			(587	)		(26.7	%)
Cost of sales as a % of net sales		86.4	%		85.5	%								86.7	%		86.4	%
Selling, general and administrative expenses (exclusive of depreciation and amortization)		253			242			11			4.5	%		200			253			(53	)		(20.9	%)
Selling, general and administrative expenses as a % of net sales		9.9	%		8.4	%								10.7	%		9.9	%
Restructuring, impairment and other charges-net		47			18			29			161.1	%		114			47			67			142.6	%
Depreciation and amortization		91			106			(15	)		(14.2	%)		79			91			(12	)		(13.2	%)
(Loss) income from operations	$	(44	)	$	53		$	(97	)		(183.0	%)
(Loss) from operations													$	(146	)	$	(44	)	$	(102	)		231.8	%

Condensed Consolidated Results

Net sales for the nine months ended September 30, ~~2019~~2020 were ~~$2,548~~$1,861 million, a decrease of ~~$339~~$687 million, or ~~11.7%~~26.9%, compared to the nine months ended September 30, ~~2018.~~2019. Net sales were impacted ~~by:~~

•

~~The dispositions of the Company’s European printing business~~by lower volume, which was partially caused by the impact of COVID-19, 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~~$173 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.~~ pass-through paper sales.

Total cost of sales decreased ~~$267~~$587 million, or ~~10.8%~~26.7%, for the nine months ended September 30, ~~2019~~2020 compared to the nine months ended September 30, ~~2018,~~2019, 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.~~cost control initiatives.

As a percentage of net sales, cost of sales increased from ~~85.5%~~86.4% for the ~~three~~nine months ended September 30, ~~2018~~2019 to ~~86.4%~~86.7% for nine months ended September 30, ~~2019~~2020 primarily due to ~~higher labor costs and product mix.~~lower volume.

Selling, general and administrative expenses ~~increased $11~~decreased $53 million, or ~~4.5%~~20.9%, for the nine months ended September 30, ~~2019~~2020 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~~lower volume, higher expenses in 2019 related to the ~~Merger Agreement.~~previously terminated merger agreement, and cost control initiatives.

For the nine months ended September 30, 2020, the Company recorded restructuring, impairment and other charges of $114 million. The charges primarily included:

•

Net other restructuring charges of $63 million including $12 million related to the impairment of property, plant and equipment for one of the Company’s manufacturing facilities in Las Vegas, Nevada, facility costs, expenses to move equipment, costs associated with new revenue opportunities and cost savings initiatives implemented in 2019;

•

Employee termination costs of $20 million related to an aggregate of 1,796 employees, of whom 1,029 were terminated as of or prior to September 30, 2020 primarily related to the closure offive facilities in the Magazines, Catalogs and Logistics segment, one facility in the Office Products segment and one facility in the Other grouping, and the reorganization of certain business units and corporate functions; and

•

$30 million of net impairment charges related to machinery and equipment associated with facility closings in the Book and Magazines, Catalogs and Logistics segments.

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~~$12 million to ~~$91~~$79 million for the nine months ended September 30, ~~2019~~2020 compared to the nine months ended September 30, ~~2018,~~2019, due to decreased capital spending in recent years compared to historical ~~levels and~~levels.

	Nine Months Ended
	September 30,
	2020			2019 (1)			$ Change			% Change
	(in millions, except percentages)
Interest expense-net	$	26		$	58		$	(32	)		(55.2	%)
Settlement of retirement benefit obligations		63			134			(71	)		(53.0	%)
Termination fee from Quad		—			(45	)		45			100.0	%
Investment and other (income)-net		(35	)		(24	)		(11	)		45.8	%
Reorganization items, net		38			—			38			100.0	%

Interest expense is lower for the ~~disposition of~~nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 primarily due to 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
%)

voluntary reorganization. Refer to Note 10, Debt, for more information. 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. Refer to Note 2, Voluntary Reorganization under Chapter 11, for information on reorganization items. The $45 million Termination fee from Quad received in the third quarter of 2019 related to the merger agreement.

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
%

	Nine Months Ended
	September 30,
	2020			2019 (1)			$ Change
	(in millions, except percentages)
Net (loss) before income taxes	$	(238	)	$	(167	)	$	(71	)
Income tax expense (benefit)		(12	)		(40	)		28
Effective income tax rate		4.9	%		23.8	%

The effective income tax rate for the nine months ended September 30, ~~2019~~2020 was ~~23.8%~~4.9% compared to ~~124.3%~~23.8% for the nine months ended September 30, ~~2018.~~ 2019. The effective income tax rate for the nine months ended September 30, 2020 reflects the Company’s limited ability to benefit U.S. results as the Company has a valuation allowance recorded on its U.S. deferred tax assets. The effective income tax rate also reflects the benefit related to the pension settlement resulting from the intraperiod exception when there is income from other comprehensive income and a loss from continuing operations.

The effective income tax rate for the nine months ended September 30, 2019 reflects the benefit of costs associated with the terminated ~~Merger Agreement~~merger agreement that were previously considered non-deductible.

~~The effective income tax rate~~(1) As Adjusted - Refer to Impact of Change in Accounting Principle in Note 1, Overview and Basis of Presentation, for ~~the nine months ended September 30, 2018 reflects a $25 million non-cash tax provision related to the disposition~~information on restated balances for settlement 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 deductionsretirement benefit obligations and ~~permanent book-to-tax differences.~~investment and other (income)-net.

Information by Segment

Magazines, Catalogs and Logistics

	Nine Months Ended									Nine Months Ended
	September 30,									September 30,
	2019			2018			Change			2020			2019			Change
	(in millions, except percentages)									(in millions, except percentages)
Net sales	$	1,175		$	1,291		$	(116	)	$	796		$	1,175		$	(379	)
(Loss) from operations		(79	)		(19	)		(60	)		(130	)		(79	)		(51	)
Operating margin		(6.7	%)		(1.5	%)	(520) bps				(16.3	%)		(6.7	%)	(960) bps
Restructuring, impairment and other charges-net		35			10			25			52			35			17

Net sales for the Magazines, Catalogs and Logistics segment for the nine months ended September 30, ~~2019~~2020 were ~~$1,175~~$796 million, a decrease of ~~$116~~$379 million, or ~~9.0%~~32.2%, compared to the nine months ended September 30, ~~2018.~~2019. The Magazines, Catalogs and Logistics segment’s net sales decreased primarily due to ~~the unprecedented drop~~lower volume in ~~long-run magazine~~magazines, catalogs and ~~catalog volumes during 2019, with~~logistics which was partially caused by 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,~~COVID-19, and a ~~$17~~$112 million decrease in pass-through paper ~~sales contributed to the decrease, all of which was partially offset by the acquisition of Print Logistics.~~sales.

The ~~increase~~change 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.~~ charges, partially offset by cost control initiatives.

Book

	Nine Months Ended									Nine Months Ended
	September 30,									September 30,
	2019			2018			Change			2020			2019			Change
	(in millions, except percentages)									(in millions, except percentages)
Net sales	$	805		$	797		$	8		$	624		$	805		$	(181	)
Income from operations		36			49			(13	)
(Loss) income from operations											(18	)		36			(54	)
Operating margin		4.5	%		6.1	%	(160 bps)				(2.9	%)		4.5	%	(740 bps)
Restructuring, impairment and other charges-net		4			5			(1	)		35			4			31

Net sales for the Book segment for the nine months ended September 30, ~~2019~~2020 were ~~$805~~$624 million, ~~an increase~~a decrease of $8$181 million, or ~~1.0%~~22.5%, compared to the nine months ended September 30, ~~2018,~~2019, primarily due to ~~increased fulfillment and procurement services, higher~~lower volume ~~in digitally-printed and educational books~~which was partially caused by the impact of COVID-19 and a $6$46 million ~~increase~~decrease in pass-through paper ~~sales, partially offset by lower volume in religious books.~~sales.

The decrease in the operating income and margins was driven by ~~higher labor costs in manufacturing and fulfillment operations, partially offset by higher~~lower volume and ~~lower~~higher restructuring, impairment and other ~~charges-net.~~charges.

Office Products

	Nine Months Ended									Nine Months Ended
	September 30,									September 30,
	2019			2018			Change			2020			2019			Change
	(in millions, except percentages)									(in millions, except percentages)
Net sales	$	386		$	422		$	(36	)	$	298		$	386		$	(88	)
Income from operations		29			30			(1	)		17			29			(12	)
Operating margin		7.5	%		7.1	%	40 bps				5.7	%		7.5	%	(180) bps
Restructuring, impairment and other charges-net		3			2			1			3			3			—
Purchase accounting adjustments		—			1			(1	)

Net sales for the Office Products segment for the nine months ended September 30, ~~2019~~2020 were ~~$386~~$298 million, a decrease of ~~$36~~$88 million, or ~~8.5%~~22.7%, compared to the nine months ended September 30, ~~2018,~~2019. The decrease was largely as a result of lower volume ~~in filing, notetaking~~across several products, ~~and envelopes.~~which was primarily caused by the impact of COVID-19.

The decrease in Office Products segment income from operations and operating margin was primarily due to lower volume, partially offset by cost control initiatives.

Mexico

	Nine Months Ended
	September 30,
	2020			2019			Change
	(in millions, except percentages)
Net sales	$	61		$	73		$	(12	)
Income from operations		10			11			(1	)
Operating margin		16.4	%		15.1	%	130 bps

Net sales for the Mexico segment were $61 million for the nine months ended September 30, 2020, a decrease of $12 million or 16.1%, compared to the six months ended September 30, 2019. The decrease in net sales was due to lower volume primarily caused by a $7 million decrease due to changes in foreign exchange rates and the impact of COVID-19. The decrease in income from operations was primarily due to lower volume, and ~~higher labor costs,~~was partially offset by ~~synergies realized from the integration of Quality Park and~~ cost ~~reductions, both of~~control initiatives which ~~increased~~improved the operating margin.

Other

	Nine Months Ended									Nine Months Ended
	September 30,									September 30,
	2019			2018			Change			2020			2019			Change
	(in millions, except percentages)									(in millions, except percentages)
Net sales	$	182		$	377		$	(195	)	$	82		$	109		$	(27	)
Income from operations		17			23			(6	)		—			6			(6	)
Operating margin		9.3	%		6.1	%	320 bps			—		%		5.5	%	(550 bps)
Restructuring, impairment and other charges-net											5			—			5

Net sales for the Other grouping for the nine months ended September 30, 2020 were $82 million, a decrease of $27 million, or 25.5%, compared to the nine months ended September 30, 2019, ~~were $182 million, a decrease of $195 million, or 51.6%, compared to the three months ended September 30, 2018,~~ primarily due to ~~the disposition of the Company’s European printing~~ ~~business,~~ a $9$15 million decrease in pass-through paper sales, lower sales in outsourced services which were partially impacted by COVID-19 and lower directories ~~volume, partially offset by higher sales in outsourced services.~~

volume. The ~~decrease in income from operations and~~ change in operating ~~margins~~margin was primarily due to ~~lower volume. The~~ mix of ~~volume helped to improve the operating margin compared to the prior year.~~work and higher restructuring, impairment and other charges.

Corporate

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

	Nine Months Ended							Nine Months Ended
	September 30,							September 30,
	2019		2018		Change			2020		2019		Change
	(in millions, except percentages)							(in millions)
Total operating expenses	$	47	$	30	$	17		$	25	$	47	$	(22	)
Significant components of total operating expenses:
Restructuring, impairment and other charges-net		5		1		4			19		5		14
Share-based compensation expenses		6		10		(4	)		2		6		(4	)
Expenses related to acquisitions, the Merger Agreement and dispositions		22		4		18
Expenses related to acquisitions, merger agreement and dispositions									—		22		(22	)

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, reorganization items, net, share-based compensation expense, and expenses related to acquisitions, merger agreement and dispositions. In the ~~Merger Agreement~~first quarter of 2020, the Company began including share-based compensation expense as a non-GAAP measure. As the share-based compensation expense recorded in the current period represents expense for previously issued grants that will vest at a lower share price than originally expensed, management determined that share-based compensation expense represents a non-GAAP measure. The reconciliation for the three and ~~dispositions, and purchase accounting adjustments.~~ nine months ended September 30, 2019 below has been restated to reflect this change.

A reconciliation of GAAP net income to non-GAAP adjusted EBITDA for the three and nine months ended September 30, ~~2019~~2020 and ~~2018~~2019 is presented in the following table:

	Three Months Ended						Nine Months Ended						Three Months Ended						Nine Months Ended
	September 30,						September 30,						September 30,						September 30,
	2019			2018			2019			2018			2020			2019 (1)			2020			2019 (1)
Net income (loss)	$	24		$	(4	)	$	(126	)	$	(7	)
Restructuring, impairment and other charges-net		10			1			47			18
													(in millions)						(in millions)
Net (loss) income													$	(111	)	$	23		$	(226	)	$	(127	)
Restructuring, impairment and other charges- net														56			10			114			47
Settlement of retirement benefit obligations														63			1			63			134
Reorganization items, net														24			—			38			—
Share-based compensation expense														—			2			2			6
Termination fee from Quad		(45	)		—			(45	)		—			—			(45	)		—			(45	)
Settlement of retirement benefit obligations		1			—			137			—
Expenses related to acquisitions, the Merger Agreement and dispositions		10			2			22			4
Purchase accounting adjustments		—			1			—			4
Expenses related to acquisitions, merger agreement and dispositions														—			10			—			22
Depreciation and amortization		29			34			91			106			24			29			79			91
Interest expense-net		20			21			58			59			5			20			26			58
Income tax expense (benefit)		—			35			(40	)		36
Income tax (benefit)														(13	)		—			(12	)		(40	)
Non-GAAP adjusted EBITDA	$	49		$	90		$	144		$	220		$	48		$	50		$	84		$	146

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 and Nine Months Ended September 30, ~~2019~~2020 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.

•

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

•

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

•

Reorganization items, net: The Company recorded net reorganization items of $24 million and $38 million for certain charges directly related to the Chapter 11 Cases during the three and nine months ended September 30, 2020, respectively. Refer to Note 2, Voluntary Reorganization under Chapter 11, for more information.

•

Share-based compensation expenses: The Company incurred a de minimis amount and $2 million of expenses during the three and nine months ended September 30, 2020, respectively, in relation to its share-based compensation plans. The Company incurred $2 million and $6 million of expenses during the three and nine months ended September 30, 2019, respectively. There were no new plans granted in 2020.

•

Termination fee from Quad: The three and nine months ended September 30, 2019 included a $45 million termination fee paid to the Company related to the merger agreement.

•

Expenses related to acquisitions, ~~the Merger Agreement~~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.~~previously terminated merger agreement.

(1) As Adjusted - Refer to Impact of Change in Accounting Principle in Note 1, Overview and Basis of Presentation, for information on restated balances.

•

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 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, capital expenditures necessary to support productivity improvement and strategic investment, and completion of restructuring programs.

The following sections describe the Company’s cash flows for the nine months ended September 30, ~~2019~~2020 and ~~2018.~~2019.

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

	Nine Months Ended
	September 30,
	2020			2019
	(in millions)
Net cash (used in) provided by operating activities	$	(17	)	$	89
Net cash (used in) investing activities		(22	)		(59	)
Net cash provided by (used in) financing activities		3			(34	)

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~~used in operating activities was ~~$89~~$17 million for the nine months ended September 30, ~~2019~~2020 compared to ~~$26~~$89 million ~~used in~~provided by operating activities for the nine months ended September 30, ~~2018.~~ 2019. The ~~increase~~change was primarily due to ~~timing of net working capital impacts~~a decrease in sales volume, a decrease in cash collected on receivables, and ~~the termination fee received from Quad,~~increases in cash paid for restructuring activities, prepaid expenses, and liabilities subject to compromise. These changes were partially offset by ~~costs related to the Merger Agreement.~~decreases in inventory and cash paid on accounts payable.

Cash Flows from Investing Activities

Net cash used in investing activities for the nine months ended September 30, ~~2019~~2020 was ~~$59~~$22 million compared to ~~$57~~$59 million for the same period in ~~2018. Significant changes are as follows:~~2019. The decrease was primarily due to $35 million of lower capital expenditures during the nine months ended September 30, 2020 compared to the same period in 2019.

Cash Flows from Financing Activities

Net cash provided by financing activities for the nine months ended September 30, 2020 was $3 million compared to $34 million used in financing activities for the same period in 2019. There was minimal financing activity during the nine months ended September 30, 2020 compared to the following significant activity during the nine months ended September 30, 2019:

•

~~Capital expenditures increased by~~ $819 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;of net proceeds from credit facility borrowings;

•

~~Cash paid for acquisitions~~$33 million in payments of ~~businesses, net of cash acquired, was impacted by the acquisition of Print Logistics in 2018~~current maturities and ~~purchase price adjustments resulting from finalization of working capital calculations in each period;~~long-term debt; and

•

~~Proceeds~~$17 million 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.dividends paid.

~~Cash Flows from Financing Activities~~

Net cash used in financing activities for the three months ended September 30, 2019 was $34 million compared to $72 million provided by operating activities for 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 nine months ended September 30, 2019 totaled $17 million.~~

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.Dividends ~~Suspending the dividend will allow the Company to redeploy approximately $35 million in cash annually.~~

~~Prior to~~As a result of the ~~amendment to the~~DIP Credit Agreement, ~~that was effective on August 5, 2019 that is described below,~~ the Company ~~was generally allowed to declare and pay annual~~is restricted from issuing dividend ~~payments of up to $50 million in the aggregate. However, the August 5, 2019 amendment removed the general allowance to declare and pay annual dividends of up to $50 million.~~

~~See further discussion below for information regarding the August 5, 2019 amendment to the Credit Agreement.~~payments.

LIQUIDITY

Cash and cash equivalents were ~~$15~~$64 million and ~~$21~~$105 million as of September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, 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 September 30, ~~2019~~2020 included $8$42 million in the U.S. and $7$22 million at international locations.

Until September 30, 2019, the Company maintained cash pooling structures that enabled participating international locations to draw on the pools’ cash resources to meet local liquidity needs. Foreign cash balances 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 September 30, 2019, $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.~~2019.

Historical Information

Debt Issuances

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.~~

~~The Credit Agreement is subject to a number~~As 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. Each of these covenants is subject to important exceptions and qualifications.

~~Credit Agreement Amendments~~

~~On December 20, 2018,~~September 30, 2020, 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. 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. The following summarizes the changes to the minimum Interest Coverage Ratio 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~~

~~Other terms, including the outstanding principal, maturity date and other debt covenants 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 $85~~had $253 million of borrowings under the Revolving Credit Facility as of September 30, 2019. Based on the Company’s condensed consolidated statements of operations for the nine months ended September 30, 2019 and existing debt, the Company would have had the ability to utilize $154 million of the $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 $85 million in borrowings.

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

September 30, 2019

(in millions)

Availability

Stated amount of the Revolving Credit Facility

$
300

Less: availability reduction from covenants

146

Amount available under the Revolving Credit Facility

$
154

Usage

Borrowings under the Revolving Credit Facility

$
85

Impact on availability related to outstanding letters of credit

—

Total usage

$
85

Current availability at September 30, 2019

$
69

Cash

15

Net Available Liquidity

$
84

As of September 30, 2019, the Company’s leverage as defined in the Credit Agreement was 3.44, compared to a maximum permitted ratio under the Credit Agreement of 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 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 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 September 30, 2019,~~Facility. Additionally, the Company had ~~$53~~$24 million in outstanding letters of credit issued under the Revolving Credit ~~Facility.~~

~~The Company’s debt maturities~~Facility as of September 30, ~~2019~~2020.

Voluntary Reorganization under Chapter 11

The commencement of the Chapter 11 Cases constituted an event of default with respect to the Senior Notes, the Term Loan Facility and the Revolving Credit Facility (the “Debt Instruments”). The Debt Instruments provide that as a result of the commencement of the Chapter 11 Cases, the principal and interest due thereunder shall be immediately due and payable. Any efforts to enforce payment obligations under the Debt Instruments will be automatically stayed as a result of the commencement of the Chapter 11 Cases, and the creditors’ right of enforcement in respect of the Debt Instruments are ~~shown~~subject to the applicable provisions of the Bankruptcy Code.

	September 30,
	2020
Term Loan Facility	$	219
Senior Secured Notes		450
Unamortized debt issuance costs		(8	)
Total debt in liabilities subject to compromise	$	661

As of September 30, 2020, the Revolving Credit Facility was reclassed out of liabilities subject to compromise to short-term debt on the condensed consolidated balance sheet. The change was made in the ~~following table:~~third quarter of 2020 once the Purchase Agreement was signed and it was determined the Revolving Credit Facility is fully secured.

Debt Maturity Schedule

Total

2019

2020

2021

2022

2023

Thereafter

Borrowings under the Credit
Agreement

$
318

$
96

$
43

$
43

$
136

$
—

$
—

Senior secured notes

450

—

—

—

—

450

—

Finance lease obligations and
other borrowings

1

—

1

—

—

—

—

Total_(a)

$
769

$
96

$
44

$
43

$
136

$
450

$
—

~~(a)~~

Excludes unamortized debt issuance costs of $4 million and $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”~~Debtor-in-Possession Financing

As previously disclosed, on April 15, 2020 (the “Closing Date”), the Company entered into a Superpriority Secured Debtor-in-Possession Credit Agreement (the “DIP Credit Agreement”), upon the entry of an interim order of the Bankruptcy Court granting interim approval of the DIP Credit Agreement, among the Company, as borrower, the lenders from time to time party thereto (the “DIP Lenders”) ~~downgraded~~and Bank of America, N.A. as administrative agent (in such capacity, the “DIP Agent”), pursuant to which the DIP Lenders committed to provide a senior secured superpriority debtor-in-possession credit facility in an aggregate principal amount not to exceed $100 million (the “DIP Facility”). The DIP Facility was approved on a final basis on June 2, 2020.

Borrowings under the DIP Facility bear interest at a rate per annum equal to, at the Company’s option, either (i) the Alternate Base Rate (as defined in the DIP Credit Agreement) plus 5.75%, or (ii) LIBOR plus 6.75%. Upon an event of default under the DIP Credit Agreement (an “Event of Default”), an additional 2.00% may be added to the Interest Rate. In addition, the Company is required to pay (i) an unused line fee of 0.50% per annum (payable quarterly in arrears) on the average daily unused portion of the DIP Loan Commitments, (ii) a commitment fee of (x) 1.00% per annum on the DIP Loan Commitments, regardless of usage, plus (y) $100,000 per week for the first 20 weeks after the Closing Date, in each case, payable quarterly in arrears, (iii) a participation fee equal to 6.75% multiplied by the amounts available to be drawn under outstanding letters of credit, ~~ratings as noted below~~payable quarterly, and ~~lowered the issuer~~(iv) a fronting fee equal to 0.125% per annum on amounts available to be drawn under outstanding letters of 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.~~payable quarterly.

Proceeds of the loans made under the DIP Facility may be used only for the following purposes: (i) working capital and other general corporate purposes, including the payment of professional fees and expenses, (ii) to pay the reasonable fees and expenses of the DIP Agent and the DIP Lenders (including the reasonable fees and expenses of counsel and financial advisors), (iii) to pay claims in respect of certain prepetition creditors, (iv) to repay indebtedness owed to holders of the Prepetition Priority Payment Obligations (as defined in the DIP Credit Agreement) (the “Prepetition Revolving Lenders”), and (v) making adequate protection payments to the Prepetition Revolving Lenders, the Prepetition Term Lenders and the Prepetition Secured Noteholders (each as defined in the DIP Credit Agreement). In connection with the DIP Credit Agreement, certain subsidiaries of the Company became parties to a guarantee agreement as guarantors (collectively, the “Guarantors,” and together with the Company, the “DIP Credit Parties”). Each of the Guarantors is a debtor and debtor-in-possession in the Chapter 11 Cases. The Guarantors have guaranteed, on a joint and several basis, all of the obligations under the DIP Facility. To secure the obligations under the DIP Facility, the Company and the Guarantors have granted liens on substantially all of their assets, whether now owned or hereafter acquired. The DIP Facility will mature on the earlier of (i) the date upon which any Plan of Reorganization (as defined in the DIP Credit Agreement) becomes effective, or (ii) the six-month anniversary following the Petition Date; provided that such maturity may be extended with the consent of the Required Lenders (as defined in the DIP Credit Agreement) to a date no later than nine months after the Petition Date. The DIP Credit Agreement contains representations, warranties and covenants that are customary for debtor-in-possession facilities of this type, including, but not limited to, certain case milestones, specified restrictions on indebtedness, liens, guarantee obligations, liquidations and dissolutions, sales of assets, leases, payment of dividends and other restricted payments, voluntary payments of other indebtedness, investments, loans and advances, transactions with affiliates, sale and leaseback transactions and compliance with case milestones. The DIP Credit Agreement also contains customary events of default for facilities of this type, including failure to achieve the milestones and the occurrence of certain events in the Chapter 11 Cases. The Company did not have borrowings related to the Revolving Loans as of September 30, 2020. The Company had $23 million in outstanding letters of credit issued under the DIP Facility as of September 30, 2020.	~~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~~As a result of the Company’s voluntary reorganization, the majority of its debt obligations were reclassed to liabilities subject to compromise on the condensed consolidated balance sheet as of September 30, 2020. As a result, the Company is not currently exposed to interest rate risk on its variable debt and price risk on its fixed-rate debt. At September 30, 2019, the Company’s variable-interest borrowings were $318 million, or approximately 41.4%, of the Company’s total debt.

The Company assesses market risk based on changes in interest rates utilizing a sensitivity analysis that measures the potential loss in earnings, fair values and cash flows based on a hypothetical 10% change in interest rates. Using this sensitivity analysis, such changes would not have a material effect on interest income or expense and cash flows and would change the fair values of fixed-rate debt at September 30, 2019 by approximately $18 millionrisk..

The Company is exposed to the impact of foreign currency fluctuations in certain countries in which it operates. The exposure to foreigncurrency 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 currency of the Polish Zloty until the sale of the Company’s European printing business in the third quarter of 2018.~~peso. 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 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,~~2019, as filed with the SEC on ~~February 19, 2019,~~March 2, 2020, 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 effects of the Bankruptcy Court rulings in the Chapter 11 Cases and the outcome of the proceedings in general;

•

the potential adverse effects of the Chapter 11 Cases on our liquidity or results of operations or our ability to pursue business strategies, maintain business and operational relationships and retain key executives;

•

our ability to complete definitive documentation in connection with any Chapter 11 transaction satisfactory to the Company and our stakeholders, and our ability to obtain requisite support for any proposed transaction from various stakeholders and confirm and consummate that transaction in accordance with its terms;

•

whether the conditions contained in the Purchase Agreement are satisfied and the Transactions are consummated and the timing thereof;

•

our ability to obtain a new credit facility, or “exit financing” upon our emergence from Chapter 11;

•

our ability to generate sufficient liquidity to satisfy our obligations as they become due;

•

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;

•

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 tax legislation, including the ~~Tax~~CARES Act; ~~and~~

•

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

•

the effect of COVID-19 on our business.

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 in Item 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 sinceDecember 31, ~~2018.~~2019. 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,~~2019, as filed with the SEC on ~~February 19, 2019.~~March 2, 2020.

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 September 30, ~~2019~~2020 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 September 30, ~~2019~~2020 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 September 30, ~~2019~~2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER 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.

Voluntary Reorganization under Chapter 11

As discussed more fully in Note 2, Voluntary Reorganization under Chapter 11, to the condensed consolidated financial ~~statements.~~ statements, on April 13, 2020 (the “Petition Date”), the Company and certain of its subsidiaries filed voluntary petitions for relief under Chapter 11 of title 11 of the United States Code, 11 U.S.C. §§ 101-1532 (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”) (collectively, the “Chapter 11 Cases”). The Chapter 11 Cases are being jointly administered under the caption In re LSC Communications, Inc., 20-10950. We and our subsidiaries that are involved in the Chapter 11 Cases will continue to operate our businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code.

On June 5, 2020, the Bankruptcy Court entered an order granting approval for a sale and bidding process through which we are authorized to determine the highest or otherwise best offer for the sale of all or substantially all of our assets pursuant to Section 363 of the Bankruptcy Code or a Chapter 11 plan of reorganization. In accordance with the order, on September 15, 2020, we, in consultation with the required consultation parties, selected the bid submitted by ACR III Libra Holdings LLC, a Delaware limited liability company (“Buyer”) as the bid which constitutes the highest or otherwise best bid for the Business (as defined below) (the “Successful Bid”).

Refer to Note 2, Voluntary Reorganization under Chapter 11, for more information.

ITEM 1A. RISK FACTORS

~~There~~Other than the risk factors noted below, 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,~~2019, as filed with the SEC on ~~February 19, 2019, except~~March 2, 2020:

We are subject to the risks and uncertainties associated with Chapter 11 proceedings.

For the duration of the Chapter 11 Cases, our operations and our ability to develop and execute our business plan, as well as our continuation as a going concern, are subject to the risks and uncertainties associated with bankruptcy, including:

•

our ability to develop, confirm and consummate a Chapter 11 plan of reorganization or alternative restructuring transaction;

•

our ability to obtain Bankruptcy Court approval with respect to motions filed in the Chapter 11 Cases from time to time;

•

our ability to maintain our relationships with our suppliers, service providers, customers, employees and other third parties;

•

our ability to maintain contracts that are critical to our operations;

•

our ability to develop and execute our business plan;

•

our ability to obtain acceptable and appropriate financing;

•

the ability of third parties to seek and obtain Bankruptcy Court approval to terminate contracts and other agreements with us;

•

the ability of third parties to seek and obtain Bankruptcy Court approval to terminate or shorten the exclusivity period for us to propose and confirm a Chapter 11 plan, to appoint a Chapter 11 trustee, or to convert the Chapter 11 Cases to a Chapter 7 proceeding; and

•

the actions and decisions of our creditors and other third parties who have interests in our Chapter 11 Cases that may be inconsistent with our plans.

Because of the risks and uncertainties associated with the Chapter 11 Cases, we cannot accurately predict or quantify the ultimate impact of events that will occur during the Chapter 11 Cases that may be inconsistent with our plans.

Operating under Bankruptcy Court protection for a long period of time may harm our business.

A long period of operations under Bankruptcy Court protection could have a material adverse effect on our business, financial condition, results of operations and liquidity. During the pendency of the Chapter 11 Cases, our senior management will be required to spend a significant amount of time and effort dealing with the reorganization instead of focusing exclusively on our business operations. A prolonged period of operating under Bankruptcy Court protection also may make it more difficult to retain management and other key personnel necessary to the success and growth of our business. In addition, the longer the Chapter 11 Cases continue, the more likely it is that our customers and suppliers will lose confidence in our ability to reorganize our business successfully and will seek to establish alternative commercial relationships. Furthermore, so long as the Chapter 11 Cases continue, we will be required to incur substantial costs for professional fees and other expenses associated with the administration of the Chapter 11 Cases.

We may not be able to obtain confirmation of a Chapter 11 plan of reorganization or complete any Bankruptcy Court-approved sales of our Company or assets, or we may not be able to realize adequate consideration for such sales.

In connection with the Chapter 11 Cases, we may attempt to sell all or certain of our assets pursuant to a sale under section 363 of the Bankruptcy Code or otherwise reorganize the Company pursuant to a Chapter 11 plan of reorganization (each, a “Transaction”). There can be no assurance that we will be successful in completing any Transactions because there may not be buyers willing to enter into any Transactions, we may not receive sufficient consideration for such assets, or there may be objections from our stakeholders. If we are unable to complete these Transactions, it may be necessary to seek additional funding sources or possibly convert to a Chapter 7 liquidation process. If these Transactions are completed, they may not generate the anticipated or desired outcomes.

Additionally, to successfully obtain confirmation of a plan of reorganization, we must meet certain statutory requirements with respect to adequacy of disclosure with respect to the Chapter 11 plan of reorganization, solicit and obtain the requisite acceptances of such a plan and fulfill other statutory conditions for confirmation of such plan, which have not occurred to date.

Even if a Chapter 11 plan of reorganization is consummated, we may not be able to achieve our stated goals and there is substantial doubt regarding our ability to continue as a going concern.

Even if a Chapter 11 plan of reorganization is consummated, we may continue to face a number of risks, such as further deterioration in economic conditions, changes in our industry, changes in demand for our products and increasing expenses. Some of these risks become more acute when a case under the Bankruptcy Code continues for a protracted period without indication of how or when the case may be completed. As a result of these risks and others, we cannot guarantee that any ~~risk factor~~Chapter 11 plan of reorganization will achieve our stated goals.

As a result of the Chapter 11 Cases, our financial results may be volatile and may not reflect historical trends.

During the Chapter 11 Cases, we expect our financial results to continue to be volatile as restructuring activities and expenses, contract terminations and rejections, and claims assessments significantly impact our consolidated financial statements. As a result, our historical financial performance is likely not indicative of our financial performance after the date of the bankruptcy filing. In addition, if we emerge from the Chapter 11 Cases, the amounts reported in subsequent consolidated financial statements may materially change relative to historical consolidated financial statements, including as a result of revisions to our operating plans pursuant to a plan of reorganization. We also may be required to adopt fresh-start accounting, in which case our assets and liabilities will be recorded at fair value as of the fresh start reporting date, which may differ materially from the recorded values of assets and liabilities on our consolidated balance sheets. Our financial results after the application of fresh-start accounting also may be different from historical trends.

We may be subject to claims that will not be discharged in the Chapter 11 proceedings, which could have a material adverse effect on our financial condition and results of operations.

The Bankruptcy Code provides that the confirmation of a plan of reorganization discharges a debtor from substantially all debts arising prior to confirmation. With few exceptions, all claims that arose prior to confirmation of a plan of reorganization (i) would be subject to compromise and/or treatment under the plan of reorganization and/or (ii) would be discharged in accordance with the terms of such plan of reorganization. Any claims not ultimately discharged through the plan of reorganization could be asserted against the reorganized entities and may have an adverse effect on our financial condition and results of operations on a post-reorganization basis.

We may experience increased levels of employee attrition as a result of the Chapter 11 Cases.

As a result of the Chapter 11 Cases, we may experience increased levels of employee attrition, and our employees likely will face considerable distraction and uncertainty. A loss of key personnel or material erosion of employee morale could adversely affect our business and results of operations. Our ability to engage, motivate and retain key employees or take other measures intended to motivate and incent key employees to remain with us through the pendency of the Chapter 11 Cases is limited by restrictions on implementation of incentive programs under the Bankruptcy Code. The loss of services of members of our senior management team could impair our ability to execute our strategy and implement operational initiatives, which would be likely to have a material adverse effect on our business, financial condition and results of operations.

In certain instances, a Chapter 11 proceeding may be converted to a proceeding under Chapter 7.

There can be no assurance as to whether we will successfully reorganize and emerge from the Chapter 11 Cases or, if we do successfully reorganize, as to when we would emerge from the Chapter 11 Cases. If the Bankruptcy Court finds that it would be in the best interest of creditors and/or the Debtors, the Bankruptcy Court may convert our Chapter 11 Cases to proceedings under Chapter 7. In such event, a Chapter 7 trustee would be appointed or elected to liquidate the Debtors’ assets for distribution in accordance with the priorities established by the Bankruptcy Code. The Debtors believe that liquidation under Chapter 7 would result in significantly smaller distributions being made to the Debtors’ creditors than those provided for in a Chapter 11 plan of reorganization because of (i) the likelihood that the assets would have to be sold or otherwise disposed of in a disorderly fashion over a short period of time rather than reorganizing or selling in a controlled manner the Debtors’ businesses as a going concern, (ii) additional administrative expenses

involved in the appointment of a Chapter 7 trustee, and (iii) additional expenses and claims, some of which would be entitled to priority, that would be generated during the liquidation and from the rejection of leases and other executory contracts in connection with a cessation of operations.

We are subject to risks and uncertainties with respect to the actions and decisions of our creditors and other third parties who have interests in our Chapter 11 Cases that may be inconsistent with our plans.

These risks and uncertainties could significantly affect our business and operations in various ways. For example, negative publicity or events associated with the Chapter 11 Cases have adversely affected, and could continue to adversely affect, our relationships with our vendors and employees, as well as with customers, which in turn could adversely affect our operations and financial condition. In addition, pursuant to the Bankruptcy Code, we need Bankruptcy Court approval for transactions outside the ordinary course of business, which may limit our ability to respond to certain events in a timely manner or take advantage of certain opportunities. Because of the risks and uncertainties associated with the Chapter 11 Cases, we cannot predict or quantify the ultimate impact that events occurring during the pendency of the Chapter 11 Cases will have on our business, financial condition, results of operations, or the certainty as to our ability to continue as a going concern. As a result of the Chapter 11 Cases, realization of assets and liquidation of liabilities are subject to uncertainty. While operating under the protection of the Bankruptcy Code, and subject to Bankruptcy Court approval or otherwise as permitted in the normal course of business, we may sell or otherwise dispose of a portion

or all of our assets and liquidate or settle liabilities for amounts other than those reflected in our consolidated financial statements. Further, a plan of reorganization could materially change the amounts and classifications reported in our consolidated historical financial statements, which do not give effect to any adjustments to the carrying value of assets or amounts of liabilities that might be necessary as a consequence of confirmation of a plan of reorganization.

It is expected that our common stock will receive nothing as part of the confirmation of our restructuring plan.

The Company’s stockholders are cautioned that we expect that the Company’s stockholders will receive nothing in exchange for their common stock upon the Company’s emergence from bankruptcy and that the common stock will have no value. Therefore, trading in our common stock during the pendency of the Chapter 11 Cases is highly speculative. Stockholders should expect to receive a total loss on their investment. It is expected that the Company’s outstanding common stock will be cancelled and extinguished upon confirmation of a restructuring plan by the Bankruptcy Court. Accordingly, the Company urges extreme caution with respect to existing and future investments in its securities.

Trading in our securities during the pendency of the Chapter 11 Cases poses substantial risks.

As described above, the Company’s stockholders are cautioned that we expect that they will receive nothing in exchange for their common stock upon the Company’s emergence from bankruptcy. It is possible the Company’s other outstanding securities may be cancelled and extinguished upon confirmation of a restructuring plan by the Bankruptcy Court. In such an event, the Company’s security holders would not be entitled to receive or retain any cash, securities or other property on account of their cancelled securities. Trading prices for the Company’s securities may bear little or no relation to actual recovery, if any, by holders thereof in the Company’s Chapter 11 Cases. Accordingly, the Company urges extreme caution with respect to existing and future investments in its securities.

The Debtors may be unable to comply with restrictions or with budget, liquidity or other covenants imposed by the agreements governing the DIP Facility. Such non-compliance could result in an event of default under the DIP Credit Agreement that, if not cured or waived, would have a material adverse effect on our business, financial condition and results of operations.

The agreements governing the DIP Facility impose a number of restrictions on the Debtors. Specifically, the terms of the credit agreements governing the DIP financing impose certain obligations including, among other things, affirmative covenants requiring the Company to provide financial information, budgets and other information to the agents under the DIP financing, and negative covenants restricting the Debtors’ ability to incur additional indebtedness, grant liens, dispose of assets, pay dividends or take certain other actions, in each case except as permitted by the terms and conditions of the DIP Credit Agreement. Covenants under the DIP Credit Agreement include general affirmative covenants such as compliance with all applicable laws, preservation and maintenance of collateral and property (including maintenance of adequate insurance policies regarding collateral), preservation of the Debtors’ corporate existence, compliance with certain case milestones and use of the loans under the DIP Facility in accordance with the approved budget, as well as negative covenants such as prohibiting the Debtors from incurring or permitting any other debt, investments, liens or dispositions unless specifically permitted.

The DIP Credit Agreement includes a series of milestones related to the ~~now-abandoned merger~~Chapter 11 Cases. The milestones require the Company to achieve a series of intermediate milestones and failure to comply with ~~Quad/Graphics~~these covenants or milestones would result in an event of default under the DIP Credit Agreement and permit the DIP Lenders to accelerate the loans and otherwise exercise remedies under the loan documentation for the DIP Facility. Our ability to comply with these provisions may be affected by events beyond our control and our failure to comply, or obtain a waiver in the event we cannot comply with a covenant or achieve a milestone, could result in an event of default under the agreements governing the DIP Facility.

We may not have sufficient cash to maintain our operations during the Chapter 11 Cases or fund our emergence from the bankruptcy.

Because of our financial condition, we will have heightened exposure to, and less ability to withstand, the operating risks that are customary in our industry, such as fluctuations in input prices and currency exchange rates. Any of these factors could result in the need for substantial additional funding. A number of other factors, including the Chapter 11 Cases, our financial results in recent years, our substantial indebtedness and the competitive environment we face, adversely affect the availability and terms of funding that might be available to us during, and upon emergence from, Chapter 11. As such, we may not be able to source capital at rates acceptable to us, or at all, to fund our current operations or our exit from bankruptcy. The inability to obtain necessary additional funding on acceptable terms would have a material adverse impact on us and on our ability to sustain our operations.

Our business, results of operations and financial condition may be adversely affected by pandemic infectious diseases, particularly the novel coronavirus strain known as COVID-19.

Pandemic infectious diseases, such as the current COVID-19 strain, may adversely impact our business, condensed consolidated results of operations and financial condition. COVID-19, as well as measures taken by governmental authorities and private actors to limit the spread of this virus, may interfere with the ability of our employees, suppliers, and other business providers to carry out their assigned tasks or supply materials at ordinary levels of performance relative to the conduct of our business which may cause us to materially curtail certain of our business operations. Moreover, as a large part of the Company's business involves sales of books and other products used in schools and school facilities, if COVID-19 related measures continue to result in widespread and lengthy school closings, the Company's condensed consolidated results of operations and financial condition will be adversely impacted. Additionally, as COVID-19 has significantly impacted retailers' stores, distribution centers and supply chains, the Company expects to experience an adverse impact on our catalogs and office products businesses. Disruption across many other industries has also significantly impact demand for advertising, which is ~~no longer~~expected to result in page count and volume reductions in magazines.

The Purchase Agreement may be terminated in accordance with its terms and the Transactions may not be completed.

Consummation of the Purchase Agreement is subject to a number of conditions that must be fulfilled in order to consummate the Transactions. Those conditions include, among others: (i) conditions relating to the accuracy of the parties’ respective representations and warranties made in the Purchase Agreement and the performance of the parties’ respective pre-closing covenants, including Sellers’ performance of certain covenants related to Sellers’ real property interests; (ii) the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act applicable to the Transactions and the receipt of certain other regulatory approvals, including approval from the Mexican Federal Antitrust Commission; (iii) the credit bid and release having been delivered and effective contemporaneously with the closing, and (iv) the Estimated Cash Consideration (as defined in the Purchase Agreement) expected to be paid at the closing not being less than an amount equal to the sum of all indebtedness, liabilities and other obligations outstanding under (a) the DIP Facility and (b) the senior secured term loan B facility under the Prepetition Credit Agreement. There can be no assurance that the conditions to Buyer’s and the Sellers’ obligations to consummate the Transactions under the Purchase Agreement will be satisfied or that any of the transactions comprising the Transactions will be consummated on the terms set forth in the Purchase Agreement or at all.

Failure to complete the Transactions could negatively impact our future business and financial results.

The Purchase Agreement contains a number of conditions that must be satisfied or waived prior to the completion of the Transactions. There can be no assurance that all of the conditions to the Purchase Agreement will be so satisfied or waived. If the conditions to the Purchase Agreement are not satisfied or waived, the Company will be unable to complete the Transactions and the Purchase Agreement may be terminated.

If the Transactions are not completed for any reason, our business and financial results may be adversely affected in a number of ways, including:

•

the manner in which customers, vendors, business partners and other third parties perceive the Company may be negatively impacted, which in turn could affect our marketing operations and our ability to compete for new business or obtain renewals in the marketplace more broadly;

•

we may experience negative reactions from employees; and

•

we will have expended time and resources that could otherwise have been spent on our existing businesses and the pursuit of other opportunities that could have been beneficial to the Company, including other opportunities in the chapter 11 cases, and our ongoing business and financial results may be adversely affected.

We will be subject to business uncertainties while the Transactions are pending, which could adversely affect our businesses.

Uncertainty about the effect of the Transactions on employees and customers may have an adverse effect on the Company. These uncertainties may impair our ability to attract, retain and motivate key personnel until the Transactions are completed and for a period of time thereafter, and could cause customers and other constituencies of the Company to seek to change their existing business relationships with us. Employee retention may be particularly challenging while the Transactions are pending, as employees may experience uncertainty about their roles within the Buyer following completion of the Transactions. In addition, the Purchase Agreement restricts us from entering into certain corporate transactions and taking other specified actions without the consent of Buyer and generally requires the Company to continue operating in the ordinary course of business in all material respects, until the completion of the Transactions. These restrictions may prevent us from pursuing attractive business opportunities that may arise prior to the completion of the Transactions.

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

Issuer Purchases of Equity Securities

There were no repurchases during the three months ended September 30, ~~2019.~~2020.

Dividends

~~In light~~As a result of ~~lower expectations for earnings and cash flows, on July 18, 2019~~ the ~~Board~~DIP Credit Agreement, the Company is restricted from issuing dividend payments.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

The commencement of ~~Directors suspended dividend payments in order to allocate greater capital~~the Chapter 11 Cases constituted an event of default with respect to the Company’s ~~debt reduction~~8.75% Senior Secured Notes due October 15, 2023, Term Loan Facility due September 30, 2022 and ~~ongoing operational restructuring programs.~~Revolving Credit Facility (the “Debt Instruments”). The ~~dividend paid in June 2019 is~~Debt Instruments provide that as a result of the ~~last dividend that~~commencement of the Chapter 11 Cases, the principal and interest due thereunder shall be immediately due and payable. Any efforts to enforce payment obligations under the Debt Instruments will be ~~paid for~~automatically stayed as a result of the ~~foreseeable future. Suspending~~commencement of the ~~dividend will allow~~Chapter 11 Cases, and the ~~Company to redeploy approximately $35 million~~creditors’ right of enforcement in ~~cash annually.~~

~~Prior~~respect of the Debt Instruments are subject to the ~~amendment~~applicable provisions of the Bankruptcy Code.

Refer to the Credit Agreement that was effective on August 5, 2019, the Company was generally allowed to declare and pay annual dividend payments of up to $50 million in the aggregate. However, the August 5, 2019 amendment removed the general allowance to declare and pay annual dividends of up to $50 million. Note 2, Voluntary Reorganization under Chapter 11, for more information.

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)

4.2	Description of the LSC Communications, Inc. Securities Registered under Section 12 of the Exchange Act (incorporated by reference to Exhibit 4.2 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019, filed on March 2, 2020)

4.3

Rights Agreement, which includes as Exhibit A the forms of Rights Certificate and Election to Exercise and as Exhibit B the form of Certificate of Designation and Terms of the Participating Preferred Stock. (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on March 2, 2020)


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~~Waiver, Forbearance Agreement and Fourth Amendment to Credit Agreement dated as of March 2, 2020, by and among LSC Communications, Inc. ~~Performance Incentive Plan~~, the other Loan Parties, the Lenders party thereto and Bank of America, N.A., as Administrative Agent (incorporated by reference to Exhibit ~~10.2~~10.5 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019, filed on March 2, 2020)

10.6	Superpriority Secured Debtor-in-Possession Credit Agreement dated as of April 15, 2020 among the LSC Communications, Inc., as borrower, the lenders from time to time party thereto and Bank of America, N.A., as administrative agent and issuing bank (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 3, 2016)*April 17, 2020)

~~10.6~~10.7

Instrument of Resignation, Appointment and Acceptance, dated as of June 16, 2020, among LSC Communications, Inc., the Subsidiary Guarantors party thereto, Wilmington Trust, National Association and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on June 19, 2020)

10.8	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)*

10.9
~~10.7~~		Amendment to Amended and Restated LSC Communications, Inc. 2016 Performance Incentive Plan dated October 17, 2019 ~~(filed herewith)~~(incorporated by reference to Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q filed on November 7, 2019)*


~~10.8~~	10.10	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)*


~~10.9~~	10.11	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)*


~~10.10~~	10.12	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 (the “SERP-B”) (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)*


~~10.11~~	10.13	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)*


~~10.12~~	10.14	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)*


~~10.13~~	10.15	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)*

10.16

Employment Agreement Waiver, dated as of April 1, 2020, between LSC Communications, Inc. and Thomas J. Quinlan III (incorporated by reference to Exhibit 10.14 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, filed on May 6, 2020)*


~~10.14~~	10.17	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)*


~~10.15~~	10.18	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)*


~~10.16~~	10.19	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)*


~~10.17~~	10.20	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)*


~~10.18~~	10.21	Participation Agreement between ~~Kent A. Hansen~~David B. McCree and the Company, dated as of February 26, 2018 (incorporated by reference to Exhibit 10.19 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, filed on May 6, 2020)*

10.22

Participation Agreement between Matthew K. Roberts and the Company, dated as of January ~~24,~~21, 2019 (incorporated by reference to Exhibit 10.20 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, filed on May 6, 2020)*

10.23

Participation Agreement between George B. Zengo and the Company, dated as of March 1, 2018 (incorporated by reference to Exhibit ~~10.3~~10.21 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, filed on May 6, 2020)*

10.24

Participation Agreement between Sarah L. Hoxie and the Company, dated as of January 23, 2020 (incorporated by reference to Exhibit 10.20 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019, filed on March 2, 2020)*

10.25	LSC Communications, Inc. Key Employee Incentive Plan effective as of June 2, 2020 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on ~~January~~June 26, ~~2018)~~2020)*

~~10.19~~

10.26

~~Participation Agreement between Richard T. Lane and~~Form of Award Letter for the ~~Company, dated as of January 24, 2018~~Key Employee Incentive Plan (incorporated by reference to Exhibit ~~10.4~~10.2 to the Company’s Current Report on Form 8-K filed on ~~January~~June 26, ~~2018)~~2020)*


~~10.20~~	10.27	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)*


~~10.21~~	10.28	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)*

~~10.22~~		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)*


~~10.23~~	10.29	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)*

~~10.24~~		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)*


~~10.25~~	10.30	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)*

10.31

Form of LTIP Performance-Vested Award Agreement (for 2020) (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on February 18, 2020)*

10.32

Form of LTIP Cash-Vested Award Agreement (for 2020) (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on February 18, 2020)*

~~10.26~~

10.33

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)*


~~10.27~~	10.34	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)*


~~10.28~~	10.35	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)*


~~10.29~~	10.36	Non-Employee Director Compensation Plan effective as of February 12, 2020 (incorporated by reference to Exhibit 10.32 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019, filed on March 2, 2020)*

10.37

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)*


~~10.30~~	10.38	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~~	10.39	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~~	10.40	Stock and Asset Purchase Agreement, ~~and Plan~~dated as of ~~Merger~~September 15, 2020, by and among ~~Quad/Graphics, Inc. QLC Merger Sub,~~LSC Communications, Inc. and certain of its subsidiaries party thereto, ACR III Libra Holdings LLC and, solely with respect to Section 9.13 of the ~~Company dated as of October 30, 2018~~Purchase Agreement, Atlas Capital Resources III LP and Atlas Capital Resources (P) III LP. (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed ~~October 31, 2018)~~on September 15, 2020)


~~10.33~~	14.1	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


101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document


104		The cover page from the Company’s Quarterly Report on Form 10-Q for the ~~quarter~~three and nine months ended September 30, ~~2019,~~2020, has been formatted in Inline XBRL.

* Management contract or compensatory plan or arrangement

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~~SARAH L. HOXIE
		~~Kent A. Hansen~~Sarah L. Hoxie
		~~Chief~~Corporate Controller and Principal Accounting Officer ~~and Controller~~

Date: ~~November 7, 2019~~ October 29, 2020

5874

												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
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

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

	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%

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

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

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

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

Current availability at September 30, 2019	$	69
Cash		15
Net Available Liquidity	$	84

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