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Note 1. Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation—The accompanying consolidated financial statements include the accounts of R.R. Donnelley & Sons Company and its subsidiaries (the “Company” or “RR Donnelley”) and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). All intercompany transactions have been eliminated in consolidation. The accounts of businesses acquired during 2009, 2008 and 2007 are included in the consolidated financial statements from the dates of acquisition (see Note 2).
Nature of Operations—The Company is a global provider of integrated communications which works collaboratively with more than 60,000 customers worldwide to develop custom communications solutions that reduce costs, enhance return on investment and ensure compliance. Drawing on a range of proprietary and commercially available digital and conventional technologies deployed across four continents, the Company employs a suite of leading Internet-based capabilities and other resources to provide premedia, printing, logistics and business process outsourcing products and services to leading clients in virtually every private and public sector.
Use of Estimates—The preparation of consolidated financial statements, in conformity with GAAP, requires the extensive use of management’s estimates and assumptions that affect the reported assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from these estimates. Estimates are used when accounting for items and matters including, but not limited to, allowance for uncollectible accounts receivable, inventory obsolescence, asset valuations and useful lives, employee benefits, self-insurance reserves, taxes, restructuring and other provisions and contingencies.
Foreign Operations—Assets and liabilities denominated in foreign currencies are translated into U.S. dollars at the exchange rate existing at the respective balance sheet dates. Income and expense items are translated at the average rates during the respective periods. Translation adjustments resulting from fluctuations in exchange rates are recorded as a separate component of other comprehensive income (loss) within shareholders’ equity while transaction gains and losses are recorded in net income (loss).
Fair Value Measurements—Certain assets and liabilities are required to be recorded at fair value on a recurring basis, while other assets and liabilities are recorded at fair value on a nonrecurring basis, generally as a result of impairment charges. Fair value is determined based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. The Company records the fair value of its forward contracts, pension plans and other postretirement plans on a recurring basis. Assets measured at fair value on a nonrecurring basis include long-lived assets held and used, long-lived assets held for sale, goodwill and other intangible assets. The fair value of cash and cash equivalents, accounts receivable, short-term debt and accounts payable approximate their carrying values. The three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies, is:
Level 1—Valuations based on quoted prices for identical assets and liabilities in active markets.
Level 2—Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
Level 3—Valuations based on unobservable inputs reflecting the Company’s own assumptions, consistent with reasonably available assumptions made by other market participants.
Revenue Recognition—The Company recognizes revenue for the majority of its products upon transfer of title and the passage of the risk of loss, which is generally upon shipment to the customer. Contracts generally specify F.O.B. shipping point terms. Under agreements with certain customers, custom products may be stored by the Company for future delivery. In these situations, the Company may receive a logistics or warehouse management fee for the services it provides. In certain of these cases, delivery and billing schedules are outlined in the customer agreement and product revenue is recognized when manufacturing is complete, title and risk of loss transfer to the customer, and there is a reasonable assurance as to collectability. Because the majority of products are customized, product returns are not significant; however, the Company accrues for the estimated amount of customer credits at the time of sale.
Revenue from services is recognized as services are performed. Within the Company’s financial print operations, which serve the global financial services end market, the Company produces highly customized materials such as regulatory S-filings, initial public offerings and EDGAR-related services. Revenue is recognized for these services following final delivery of the printed product or upon completion of the service performed. Revenues related to the Company’s premedia operations, which include digital content management, photography, color services and page production, are recognized in accordance with the terms of the contract, typically upon completion of the performed service and acceptance by the customer. With respect to the Company’s logistics operations, whose operations include the delivery of printed material, the Company recognizes revenue upon completion of the delivery of services. For each of the years ended December 31, 2009, 2008 and 2007, revenue from services was below 10% of the Company’s consolidated net sales.
The Company records deferred revenue in situations where amounts are invoiced but the revenue recognition criteria outlined above are not met. Such revenue is recognized when all criteria are subsequently met.
Certain revenues earned by the Company require judgment to determine if revenue should be recorded gross as a principal or net of related costs as an agent. Billings for third-party shipping and handling costs, primarily in the Company’s logistics operations, and out-of-pocket expenses are recorded gross. In the Company’s Global Turnkey Solutions operations, each contract is evaluated using various criteria to determine if revenue for components and other materials should be recognized on a gross or net basis. In general, these revenues are recognized on a gross basis if the Company has control over selecting vendors and pricing, is the primary obligor in the arrangement, bears all credit risk and bears the risk of loss for inventory in its possession. Revenue from contracts that do not meet these criteria is recognized on a net basis. Many of the Company’s operations process materials, primarily paper, that may be supplied directly by customers or may be purchased by the Company and sold to customers. No revenue is recognized for customer-supplied paper, but revenues for Company-supplied paper are recognized on a gross basis.
The Company records taxes collected from customers and remitted to governmental authorities on a net basis.
By-Product Recoveries—The Company records the sale of by-products as a reduction of cost of sales.
Cash and cash equivalents and restricted cash equivalents—The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Short-term securities consist of investment grade instruments of governments, financial institutions and corporations.
Long-term restricted cash equivalents—As of December 31, 2009, $41.6 million of restricted cash equivalents was held in trust to cover the January 2011 payment related to the termination of a significant long-term customer contract in the business process outsourcing reporting unit within the International segment. The long-term restricted cash equivalent is classified within other noncurrent assets in the Consolidated Balance Sheets.
Receivables—Receivables are stated net of allowances for doubtful accounts and primarily include trade receivables, notes receivable and miscellaneous receivables from suppliers. No single customer comprised more than 10% of the Company’s consolidated net sales in 2009, 2008 or 2007. Specific customer provisions are made when a review of significant outstanding amounts, utilizing information about customer creditworthiness and current economic trends, indicates that collection is doubtful. In addition, provisions are made at differing rates, based upon the age of the receivable and the Company’s historical collection experience. See Note 5 for details of activity affecting the allowance for doubtful accounts.
Inventories—Inventories include material, labor and factory overhead and are stated at the lower of cost or market. The cost of approximately 70.4% and 76.5% of the inventories at December 31, 2009 and 2008, respectively, has been determined using the Last-In, First-Out (LIFO) method. The decrease in this percentage from 2008 is primarily related to inventory reductions in the U.S. This method reflects the effect of inventory replacement costs within results of operations; accordingly, charges to cost of sales reflect recent costs of material, labor and factory overhead. The Company uses an external-index method of valuing LIFO inventories. The remaining inventories, primarily related to certain acquired and international operations, are valued using the First-In, First-Out (FIFO) or specific identification methods.
Long-lived Assets—The Company assesses potential impairments to its long-lived assets if events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Indefinite-lived intangible assets are reviewed annually for impairment, or more frequently, if events or changes in circumstances indicate that the carrying value may not be recoverable. An impaired asset is written down to its estimated fair value based upon the most recent information available. Estimated fair market value is generally measured by discounting estimated future cash flows. Long-lived assets, other than goodwill and intangible assets, that are held for sale are recorded at the lower of the carrying value or the fair market value less the estimated cost to sell.
Property, plant and equipment—Property, plant and equipment are recorded at cost and depreciated on a straight-line basis over their estimated useful lives. Useful lives range from 15 to 40 years for buildings and from 3 to 15 years for machinery and equipment. Maintenance and repair costs are charged to expense as incurred. Major overhauls that extend the useful lives of existing assets are capitalized. When properties are retired or disposed, the costs and accumulated depreciation are eliminated and the resulting profit or loss is recognized in the results of operations.
Goodwill—Goodwill is reviewed annually for impairment as of October 31 or more frequently if events or changes in circumstances indicate that it is more likely than not that the fair value of a reporting unit is below its carrying value. In performing this analysis, the Company compares each reporting unit’s fair value, estimated based on comparable company market valuations and expected future discounted cash flows to be generated by the reporting unit, to its carrying value. If the carrying value exceeds the reporting unit’s fair value, the Company performs an additional fair value measurement calculation to determine the impairment loss, which is charged to operations in the period identified (see Note 3).
Amortization—Certain costs to acquire and develop internal-use computer software are amortized over their estimated useful life using the straight-line method, up to a maximum of five years. Amortization expense related to internally-developed software was $18.0 million, $23.5 million and $27.5 million for the years ended December 31, 2009, 2008 and 2007, respectively. Deferred debt issue costs are amortized over the term of the related debt. Identifiable intangible assets, except for those intangible assets with indefinite lives, are recognized apart from goodwill and are amortized over their estimated useful lives. Identifiable intangible assets with indefinite lives are not amortized.
Financial Instruments—The Company uses derivative financial instruments to hedge exposures to interest rate and foreign exchange fluctuations in the ordinary course of business.
All derivatives are recorded as other assets or other liabilities on the balance sheet at their respective fair values with unrealized gains and losses recorded in comprehensive income (loss), net of applicable income taxes, or in the results of operations, depending on the purpose for which the derivative is held. Changes in the fair value of derivatives that do not meet the criteria for designation as a hedge at inception, or fail to meet the criteria thereafter, are recognized currently in results of operations. At inception of a hedge transaction, the Company formally documents the hedge relationship and the risk management objective for undertaking the hedge. In addition, the Company assesses, both at inception of the hedge and on an ongoing basis, whether the derivative in the hedging transaction has been highly effective in offsetting changes in fair value or cash flows of the hedged item and whether the derivative is expected to continue to be highly effective. The impact of any ineffectiveness is recognized currently in results of operations.
Share-Based Compensation—The Company recognizes share-based compensation expense based on estimated fair values for all share-based awards made to employees and directors, including stock options, restricted stock units and performance share units. The Company recognizes compensation expense for share-based awards expected to vest on a straight-line basis over the requisite service period of the award based on their grant date fair value.
Pension and Postretirement Plans—The Company records annual income and expense amounts relating to its pension and postretirement plans based on calculations which include various actuarial assumptions, including discount rates, mortality, assumed rates of return, compensation increases, turnover rates and healthcare cost trend rates. The Company reviews its actuarial assumptions on an annual basis and makes modifications to the assumptions based on current rates and trends when it is deemed appropriate to do so. The effect of modifications on the value of plan obligations and assets is recognized immediately within other comprehensive income (loss) and amortized into operating earnings over future periods. The Company believes that the assumptions utilized in recording its obligations under its plans are reasonable based on its experience, market conditions and input from its actuaries and investment advisors. See Note 11 for further discussion.
Taxes on Income—Deferred taxes are provided on an asset and liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company recognizes, as an adjustment to income tax expense, changes in the valuation allowance for acquired deferred tax assets after expiration of the measurement period. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. The Company is regularly audited by foreign and domestic tax authorities. These audits occasionally result in proposed assessments where the ultimate resolution might result in the Company owing additional taxes, including in some cases, penalties and interest. The Company recognizes a tax position in its financial statements when it is more likely than not (i.e., a likelihood of more than fifty percent) that the position would be sustained upon examination by tax authorities. This recognized tax position is then measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Although management believes that its estimates are reasonable, the final outcome of uncertain tax positions may be materially different from that which is reflected in the Company’s financial statements. The Company adjusts such reserves upon changes in circumstances that would cause a change to the estimate of the ultimate liability, upon effective settlement or upon the expiration of the statute of limitations, in the period in which such event occurs. See Note 12 for further discussion.
Comprehensive Income (Loss)—Comprehensive income (loss) for the Company consists of net earnings (loss), unrecognized actuarial gains and losses and prior service cost for pension and postretirement benefit plans, changes in the fair value of certain derivative financial instruments and foreign currency translation adjustments and is presented in the Consolidated Statements of Shareholders’ Equity.
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Note 2. Acquisitions
2009 Acquisitions
On June 18, 2009, the Company acquired Prospectus Central, LLC (“Prospectus”), an e-delivery company located in Fitzgerald, Georgia. The purchase price for Prospectus was $3.0 million. Prospectus’s operations are included in the U.S. Print and Related Services segment.
On January 2, 2009, the Company acquired the assets of PROSA, a web printing company located in Santiago, Chile. The purchase price for PROSA was approximately $23.6 million. PROSA’s operations are included in the International segment.
The operations of these acquired businesses are complementary to the Company’s existing products and services. As a result, the addition of these businesses is expected to improve the Company’s ability to serve customers, increase capacity utilization, and reduce management, procurement and manufacturing costs.
The PROSA and Prospectus acquisitions were recorded by allocating the cost of the acquisitions to the assets acquired, including intangible assets, based on their estimated fair values at the acquisition date. The excess of the cost of the acquisitions over the net amounts assigned to the fair value of the assets acquired was recorded as goodwill, none of which is tax deductible. Based on the valuations, the final purchase price allocations for these 2009 acquisitions are as follows:
|
Accounts receivable |
$ | 2.4 | ||
|
Property, plant and equipment |
9.2 | |||
|
Amortizable intangible assets |
11.6 | |||
|
Goodwill |
6.5 | |||
|
Accounts payable and accrued liabilities |
(2.5 | ) | ||
|
Deferred taxes—net |
(0.6 | ) | ||
|
Net cash paid |
$ | 26.6 | ||
The fair values of property, plant and equipment, goodwill and intangible assets associated with the acquisitions of PROSA and Prospectus were determined to be Level 3 under the fair value hierarchy. Property, plant and equipment values were estimated based on discussions with machinery and equipment brokers, dealer quotes, and internal expertise related to the equipment and current marketplace conditions. Intangible asset values, including customer relationships and a non-compete agreement, were estimated based on future cash flows and customer attrition rates discounted using an estimated weighted-average cost of capital.
2008 Acquisitions
On March 14, 2008, the Company acquired Pro Line Printing, Inc. (“Pro Line”), a multi-facility, privately held producer of newspaper inserts headquartered in Irving, Texas. The purchase price for Pro Line was approximately $122.2 million, net of cash acquired of $1.7 million and including acquisition costs of $4.3 million. Pro Line’s operations are included in the U.S. Print and Related Services segment.
The operations of Pro Line are complementary to the Company’s existing retail insert product line. As a result, this acquisition is expected to improve the Company’s ability to serve customers, increase capacity utilization, and reduce management, procurement and manufacturing costs.
The Pro Line and another immaterial printing-company acquisition were recorded by allocating the cost of the acquisitions to the assets acquired, including intangible assets and liabilities assumed, based on their estimated fair values at acquisition date. The excess of the cost of the acquisitions over the net amounts assigned to the fair value of the assets acquired and the liabilities assumed was recorded as goodwill, none of which is tax deductible. Based on these valuations, the final purchase price allocations are as follows:
|
Accounts receivable |
$ | 17.4 | ||
|
Inventories |
7.0 | |||
|
Other current assets |
0.7 | |||
|
Property, plant and equipment and other long-term assets |
101.8 | |||
|
Amortizable intangible assets |
15.5 | |||
|
Goodwill |
33.0 | |||
|
Accounts payable and accrued liabilities |
(29.9 | ) | ||
|
Deferred taxes—net |
(7.0 | ) | ||
|
Total purchase price—net of cash acquired |
138.5 | |||
|
Less: debt assumed and not repaid |
5.9 | |||
|
Net cash paid |
$ | 132.6 | ||
2007 Acquisitions
On January 9, 2007, the Company acquired Banta Corporation (“Banta”), a provider of comprehensive printing and digital imaging solutions to publishers and direct marketers, including digital content management and e-business services. Additionally, Banta provided a wide range of procurement management and other outsourcing capabilities to technology companies. The purchase price for Banta was approximately $1,352.7 million, net of cash acquired of $72.9 million and including $13.9 million of acquisition costs and the assumption of $17.6 million of Banta’s debt. Banta’s operations are included in the U.S. Print and Related Services segment, with the exception of its Global Turnkey Solutions operations, which are included in the International segment.
On January 24, 2007, the Company acquired Perry Judd’s Holdings Incorporated (“Perry Judd’s”), a provider of consumer and business-to-business catalogs, as well as consumer, trade, and association magazines. The purchase price for Perry Judd’s was approximately $181.5 million, net of cash acquired of $0.3 million and including acquisition costs of $2.6 million. Perry Judd’s operations are included in the U.S. Print and Related Services segment.
On May 16, 2007, the Company acquired Von Hoffmann, a U.S.-based printer of books and other products that serve primarily the education, trade and business-to-business catalog sectors. The purchase price for Von Hoffmann was approximately $412.5 million, including acquisition costs of $7.5 million. Von Hoffmann’s operations are included in the U.S. Print and Related Services segment.
On December 27, 2007, the Company acquired Cardinal Brands, Inc. (“Cardinal Brands”), a designer, developer and manufacturer of document-related business, consumer and hobby products. The purchase price for Cardinal Brands was approximately $121.6 million, net of cash acquired of $2.5 million and including acquisition costs of $3.9 million. Cardinal Brands’ operations are included in the U.S. Print and Related Services segment.
The operations of these acquired businesses were complementary to the Company’s existing products and services. As a result, the addition of these businesses improved the Company’s ability to serve customers, increased capacity utilization and reduced management, procurement and manufacturing costs. These acquisitions were recorded by allocating the cost of the assets acquired, including intangible assets and liabilities assumed, based on their estimated fair values at the acquisition dates. The excess of the cost of each acquisition over the net amounts assigned to the fair value of the assets acquired and the liabilities assumed was recorded as goodwill, none of which is tax deductible. Based on these valuations, the final purchase price allocations for all of the businesses acquired in 2007 are as follows:
|
Restricted cash equivalents |
$ | 102.5 | ||
|
Accounts receivable |
424.3 | |||
|
Inventories |
178.0 | |||
|
Other current assets |
11.2 | |||
|
Property, plant and equipment and other long-term assets |
586.0 | |||
|
Amortizable and non-amortizable intangible assets |
621.1 | |||
|
Goodwill |
790.4 | |||
|
Accounts payable and accrued liabilities |
(328.5 | ) | ||
|
Postretirement and pension benefits and other long-term liabilities |
(50.2 | ) | ||
|
Deferred taxes—net |
(266.5 | ) | ||
|
Total purchase price—net of cash acquired |
2,068.3 | |||
|
Less: debt assumed and not repaid |
17.6 | |||
|
Net cash paid |
$ | 2,050.7 | ||
At December 31, 2007, restricted cash equivalents of $69.9 million, of which $6.0 million was classified in other noncurrent assets, were held in a trust to cover payments, both current and long-term, due to certain current employees of RR Donnelley and retired and former employees of Banta Corporation. This trust was funded by Banta in October 2006 after Banta received an unsolicited proposal from a third party, other than the Company, to acquire Banta. This unsolicited proposal automatically triggered a requirement for Banta to fund the trust to cover such payments. The trust was originally adopted by the Board of Directors of Banta in 1991.
Pro forma results
The unaudited pro forma financial information for the year ended December 31, 2008 presents the combined results of operations of the Company, PROSA, Prospectus, Pro Line and another immaterial acquisition as if each acquisition had occurred at January 1, 2008. For the year ended December 31, 2009, there was no material impact from pro forma adjustments on net sales or net loss attributable to RR Donnelley common shareholders.
The unaudited pro forma financial information is not intended to represent or be indicative of the Company’s consolidated results of operations or financial condition that would have been reported had these acquisitions been completed as of the beginning of the periods presented and should not be taken as indicative of the Company’s future consolidated results of operations or financial condition. Pro forma adjustments are tax-effected at the applicable statutory tax rates.
| 2008 | ||||
|
Net sales |
$ | 11,627.2 | ||
|
Net loss attributable to RR Donnelley common shareholders |
(196.9 | ) | ||
|
Net loss per share attributable to RR Donnelley common shareholders: |
||||
|
Basic |
$ | (0.94 | ) | |
|
Diluted |
$ | (0.94 | ) | |
The unaudited pro forma financial information for 2008 includes $125.7 million for the amortization of purchased intangibles and $1,184.7 million for restructuring and impairment charges.
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Note 3. Restructuring and Impairment
The Company recorded restructuring and impairment charges of $382.7 million, $1,184.7 million and $839.0 million in the years ended December 31, 2009, 2008 and 2007, respectively. The charges in 2009 included $128.5 million for the impairment of goodwill, as well as charges, discounted for future cash payments, of $118.6 million for the termination of a significant long-term customer contract in the business process outsourcing reporting unit within the International segment, of which $117.2 million, $0.8 million and $0.6 million are reflected in other charges, impairment and employee terminations, respectively. Additionally in 2009, the Company recorded restructuring charges of $78.8 million for employee termination costs, other restructuring charges, including lease termination and other facility closure costs, of $32.1 million and $24.7 million of impairment charges for other long-lived assets. The charges in 2008 included $1,125.4 million for the impairment of goodwill and intangible assets, as well as $44.1 million for employee termination costs. Additionally, in 2008, the Company incurred other restructuring charges, including lease termination and other facility closure costs of $10.6 million, as well as $4.6 million of impairment charges for other long-lived assets. The charges in 2007 included $316.1 million for the write-off of the Moore Wallace, OfficeTiger and other trade names associated with the Company’s decision in June 2007 to unify most of its printing and related service offerings under the single RR Donnelley brand. In addition, the 2007 charges included $436.1 million for the impairment of goodwill associated with the business process outsourcing reporting unit within the International segment.
The restructuring charges recorded are based on restructuring plans that have been committed to by management and are, in part, based upon management’s best estimates of future events. Changes to the estimates may require future adjustments to the restructuring liabilities.
Restructuring and Impairment Costs Charged to Results of Operations
|
2009 |
Employee Terminations |
Other Charges |
Total Restructuring |
Impairment | Total | ||||||||||
|
U.S. Print and Related Services |
$ | 36.5 | $ | 19.2 | $ | 55.7 | $ | 108.1 | $ | 163.8 | |||||
|
International |
40.5 | 124.3 | 164.8 | 45.9 | 210.7 | ||||||||||
|
Corporate |
2.4 | 5.8 | 8.2 | — | 8.2 | ||||||||||
| $ | 79.4 | $ | 149.3 | $ | 228.7 | $ | 154.0 | $ | 382.7 | ||||||
In the fourth quarter of 2009, the Company recorded a non-cash charge of $128.5 million to reflect the impairment of goodwill, of which $93.8 million and $34.7 million are reflected in the U.S. Print and Related Services and International segments, respectively. The goodwill impairment charges of $93.8 million and $34.7 million resulted from reductions in the estimated fair value of the forms and labels and Canada reporting units, respectively, based on lower expectations for revenue due to declines in business and consumer spending and continued price pressure. Because the fair value of these reporting units was below their carrying amounts including goodwill, the Company performed an additional fair value measurement calculation to determine the amount of impairment loss. As part of this impairment calculation, the Company also estimated the fair value of the significant tangible and intangible long-lived assets of each reporting unit.
For the year ended December 31, 2009, the Company also recorded net restructuring and impairment charges, discounted for future cash payments, of $118.6 million for the termination of a significant long-term customer contract in the business process outsourcing reporting unit within the International segment, of which $117.2 million, $0.8 million and $0.6 million are reflected in other charges, impairment and employee terminations, respectively. In addition, for the year ended December 31, 2009, the Company recorded net restructuring charges of $78.8 million for employee termination costs for 4,043 employees, of whom 3,779 were terminated as of December 31, 2009, associated with actions resulting from the reorganization of certain operations. These actions included the closings of two magazine, catalog and retail insert manufacturing facilities, two book manufacturing facilities and one premedia facility within the U.S. Print and Related Services segment and the closing of two Global Turnkey Solutions manufacturing facilities, one business process outsourcing facility, one Latin America manufacturing facility and one European manufacturing facility within the International segment. Additionally, the Company incurred other restructuring charges, including lease termination and other facility closure costs, of $32.1 million for the year ended December 31, 2009. Finally, for the year ended December 31, 2009, the Company recorded $24.7 million of impairment charges primarily for machinery and equipment associated with the facility closings. The fair values of the machinery and equipment were determined to be Level 3 under the fair value hierarchy and were estimated based on discussions with machinery and equipment brokers, dealer quotes, internal expertise related to the equipment and current marketplace conditions.
|
2008 |
Employee Terminations |
Other Charges |
Total Restructuring |
Impairment | Total | ||||||||||
|
U.S. Print and Related Services |
$ | 22.1 | $ | 3.7 | $ | 25.8 | $ | 380.0 | $ | 405.8 | |||||
|
International |
21.6 | 3.4 | 25.0 | 749.7 | 774.7 | ||||||||||
|
Corporate |
0.4 | 3.5 | 3.9 | 0.3 | 4.2 | ||||||||||
| $ | 44.1 | $ | 10.6 | $ | 54.7 | $ | 1,130.0 | $ | 1,184.7 | ||||||
In the fourth quarter of 2008, the Company recorded a non-cash charge of $1,125.4 million to reflect the impairment of goodwill and intangible assets, of which $749.0 million and $376.4 million are reflected in the International and U.S. Print and Related Services segments, respectively. The goodwill impairment charges of $297.8 million, $249.4 million, $152.0 million, $78.6 million and $22.3 million resulted from reductions in the estimated fair value of the forms and labels, business process outsourcing, Canada, office products and Global Turnkey Solutions reporting units, respectively, based on lower expectations for revenue, profitability and cash flows resulting primarily from the impacts of the global economic downturn and resultant impacts on the Company’s customers. In addition, these reporting units were valued using a higher discount rate applied to estimated future cash flows. The higher discount rates reflect increases in borrowing rates and equity risk premiums implied by market conditions as of October 31, 2008 compared to October 31, 2007. Because the fair values of these reporting units were below their carrying amounts including goodwill, the Company performed an additional fair value measurement calculation to determine the amount of impairment loss. As part of this impairment calculation, the Company also estimated the fair value of the significant tangible and intangible long-lived assets of each reporting unit.
The Company also recorded a non-cash charge of $325.3 million for the impairment of acquired customer relationships in the business process outsourcing reporting unit. The impairment of these intangible assets resulted from overall declines in contract renewal rates, net sales growth and profit margins compared to prior estimates. These factors were also reflected in the overall decline in value of the reporting unit that caused impairment of its goodwill. After recording the goodwill and intangible asset impairment charges, remaining intangible assets in the business process outsourcing reporting unit were $24.3 million as of December 31, 2008.
For the year ended December 31, 2008, the Company also recorded net restructuring charges of $44.1 million, for employee termination costs for 2,245 employees, all of whom were terminated as of December 31, 2009, associated with actions resulting from the reorganization of certain operations and the exiting of certain business activities. These actions included the realignment and consolidation of the Canadian organization, management reorganization within Latin America, the closing of two Global Turnkey Solutions manufacturing facilities within the International segment and the realignment and consolidation of financial print organizations in the U.S. Print and Related Services and International segments. Additionally, the Company incurred other restructuring charges, including lease termination and other facility closure costs of $10.6 million for the year ended December 31, 2008. Finally, for the year ended December 31, 2008, the Company recorded $4.6 million of impairment charges for other long-lived assets.
|
2007 |
Employee Terminations |
Other Charges |
Total Restructuring |
Impairment | Total | ||||||||||
|
U.S. Print and Related Services |
$ | 21.0 | $ | 2.5 | $ | 23.5 | $ | 261.6 | $ | 285.1 | |||||
|
International |
20.3 | 3.8 | 24.1 | 514.6 | 538.7 | ||||||||||
|
Corporate |
8.0 | 4.8 | 12.8 | 2.4 | 15.2 | ||||||||||
| $ | 49.3 | $ | 11.1 | $ | 60.4 | $ | 778.6 | $ | 839.0 | ||||||
In the fourth quarter of 2007, the Company recorded a non-cash charge of $436.1 million to reflect impairment of goodwill in the business process outsourcing reporting unit within the International segment. As part of its annual impairment analysis for this reporting unit, the Company determined the fair value of the unit, in part based on estimates of future cash flows. The estimated future cash flows of this reporting unit reflected a reduction in the fair value of the business based on lower expectations for growth and profitability, resulting primarily from increased price competition for significant new contracts. Because the fair value of the reporting unit was below its carrying amount including goodwill, the Company performed an additional fair value measurement calculation to determine the amount of impairment loss. As part of this impairment calculation, the Company also estimated the fair value of the significant tangible and intangible long-lived assets of the reporting unit.
For the year ended December 31, 2007, the Company also recorded $342.5 million for impairment of other assets, of which $316.1 million reflects the write-off of the Moore Wallace, OfficeTiger and other trade names associated with the Company’s decision in June 2007 to unify most of its printing and related service offerings under the single RR Donnelley brand. Additionally, $26.4 million relates to the impairment of other long-lived assets, of which $19.1 million relates to the write-off of capitalized customer contract set-up costs in the business process outsourcing reporting unit. In addition, charges of $49.3 million were recorded related to workforce reductions of 1,169 employees (all of whom were terminated as of December 31, 2009), associated with actions resulting from the reorganization of certain operations and the exiting of certain business activities. These actions include management changes to simplify the management reporting structure and cost structure reductions including the closing of two manufacturing facilities within the U.S. Print and Related Services segment and two manufacturing facilities within the International segment. In addition, $11.1 million of other restructuring costs, which included lease terminations in exited facilities, were recorded for the year ended December 31, 2007.
Restructuring Costs Capitalized as a Cost of Acquisition
During 2008 and 2007, the Company recorded $2.1 million and $63.7 million, respectively of restructuring costs related to employee terminations and other costs in connection with the acquisitions of Pro Line, Cardinal Brands, Banta, Perry Judd’s and Von Hoffman.
Restructuring Reserve
Activity impacting the Company’s restructuring reserve for the year ended December 31, 2009 is as follows:
| December 31, 2008 | Restructuring Costs Charged to Results of Operations |
Foreign Exchange and Other |
Cash Paid | December 31, 2009 |
|||||||||||
|
Employee terminations |
$ | 23.5 | $ | 79.4 | $ | 0.5 | $ | 83.0 | $ | 20.4 | |||||
|
Other |
11.1 | 149.3 | 3.5 | 43.4 | 120.5 | ||||||||||
|
Total |
$ | 34.6 | $ | 228.7 | $ | 4.0 | $ | 126.4 | $ | 140.9 | |||||
$92.2 million of the restructuring reserve is current and included in accrued liabilities at December 31, 2009, while the long-term portion of $48.7 million, primarily related to the termination of the significant long-term customer contract referred to above and lease termination costs, is included in other noncurrent liabilities at December 31, 2009.
The Company anticipates payments associated with employee terminations will be substantially completed by the end of 2010.
The restructuring liabilities classified as “other” consist of the estimated remaining payments related to the termination of the significant long-term customer contract referred to above, lease termination costs and other facility closing costs. The Company paid $57.5 million in January 2010 and expects to pay approximately $41.6 million as of December 31, 2009, subject to changes in foreign exchange rates, in January 2011, related to the termination of the significant long-term customer contract. The Company transferred funds to long-term restricted cash within other noncurrent assets in December 2009 for the January 2011 payment. Payments on certain lease obligations are scheduled to continue until 2017. Market conditions and the Company’s ability to sublease these properties could affect the ultimate charge related to these lease obligations. Any potential recoveries or additional charges could affect amounts reported in the Consolidated Financial Statements of future periods.
|
|||
Note 4. Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill for the year ended December 31, 2009 and 2008 was as follows:
| U.S. Print and Related Services |
International | Total | ||||||||||
|
Net book value at January 1, 2008 |
||||||||||||
|
Goodwill |
$ | 2,952.5 | $ | 1,317.2 | $ | 4,269.7 | ||||||
|
Accumulated impairment losses |
(408.0 | ) | (596.8 | ) | (1,004.8 | ) | ||||||
|
Total |
2,544.5 | 720.4 | 3,264.9 | |||||||||
|
Acquisitions |
33.1 | — | 33.1 | |||||||||
|
Foreign exchange and other adjustments |
(7.8 | ) | (64.2 | ) | (72.0 | ) | ||||||
|
Impairment charge |
(376.4 | ) | (423.7 | ) | (800.1 | ) | ||||||
|
Net book value at December 31, 2008 |
||||||||||||
|
Goodwill |
2,977.8 | 1,253.0 | 4,230.8 | |||||||||
|
Accumulated impairment losses |
(784.4 | ) | (1,020.5 | ) | (1,804.9 | ) | ||||||
|
Total |
2,193.4 | 232.5 | 2,425.9 | |||||||||
|
Acquisitions |
— | 6.5 | 6.5 | |||||||||
|
Foreign exchange and other adjustments |
(0.2 | ) | 29.6 | 29.4 | ||||||||
|
Impairment charges |
(93.8 | ) | (34.7 | ) | (128.5 | ) | ||||||
|
Net book value at December 31, 2009 |
||||||||||||
|
Goodwill |
2,977.6 | 1,289.1 | 4,266.7 | |||||||||
|
Accumulated impairment losses |
(878.2 | ) | (1,055.2 | ) | (1,933.4 | ) | ||||||
|
Total |
$ | 2,099.4 | $ | 233.9 | $ | 2,333.3 | ||||||
In the fourth quarters of 2009 and 2008, the Company recorded non-cash charges of $128.5 million and $800.1 million, respectively, to reflect impairment of goodwill. See Note 3 for further discussion regarding these impairment charges. Also, during the third quarter of 2008, the Company finalized its valuation of certain tax contingencies related to the 2006 acquisition of OfficeTiger. As a result, the Company recorded reductions of $15.0 million to goodwill and accrued liabilities. OfficeTiger’s operations are included in the International segment.
The components of other intangible assets at December 31, 2009 and 2008 were as follows:
| December 31, 2009 | December 31, 2008 | |||||||||||||||||||
| Gross Carrying Amount(1) |
Accumulated Amortization(1) |
Net Book Value |
Gross Carrying Amount(1) |
Accumulated Amortization(1) |
Net Book Value |
|||||||||||||||
|
Trademarks, licenses and agreements |
$ | 25.6 | $ | (22.3 | ) | $ | 3.3 | $ | 21.9 | $ | (21.9 | ) | $ | — | ||||||
|
Patents |
98.3 | (71.4 | ) | 26.9 | 98.3 | (59.1 | ) | 39.2 | ||||||||||||
|
Customer relationship intangibles |
1,125.0 | (440.1 | ) | 684.9 | 1,106.2 | (347.1 | ) | 759.1 | ||||||||||||
|
Trade names |
21.4 | (7.2 | ) | 14.2 | 19.4 | (4.7 | ) | 14.7 | ||||||||||||
|
Total amortizable purchased intangible assets |
1,270.3 | (541.0 | ) | 729.3 | 1,245.8 | (432.8 | ) | 813.0 | ||||||||||||
|
Indefinite-lived trade names |
18.1 | — | 18.1 | 18.1 | — | 18.1 | ||||||||||||||
|
Total purchased intangible assets |
$ | 1,288.4 | $ | (541.0 | ) | $ | 747.4 | $ | 1,263.9 | $ | (432.8 | ) | $ | 831.1 | ||||||
| (1) | Includes foreign exchange. Certain prior year amounts have been reclassified to reflect the Company’s current presentation of intangible assets. |
In the fourth quarter of 2008, the Company recorded a non-cash charge of $325.3 million to reflect impairment of customer relationship intangible assets in the business process outsourcing reporting unit.
During the years ended December 31, 2009 and 2008, the Company recorded additions to intangible assets of $11.6 million and $17.3 million, respectively. The components of other intangible assets acquired during 2009 and 2008 were as follows:
| December 31, 2009 | December 31, 2008 | |||||||||
| Amount | Weighted Average Amortization Period |
Amount | Weighted Average Amortization Period |
|||||||
|
Trademarks, licenses and agreements |
$ | 3.6 | 5.5 | $ | — | — | ||||
|
Customer relationship intangibles |
8.0 | 8.0 | 15.6 | 6.4 | ||||||
|
Indefinite-lived trade names |
— | — | 1.7 | — | ||||||
|
Total additions |
$ | 11.6 | $ | 17.3 | ||||||
Amortization expense for other intangibles was $99.1 million, $123.3 million and $119.7 million for the years ended December 31, 2009, 2008 and 2007, respectively. The following table outlines the estimated future amortization expense related to intangible assets as of December 31, 2009:
| Amount | |||
|
2010 |
$ | 99.0 | |
|
2011 |
98.1 | ||
|
2012 |
85.4 | ||
|
2013 |
83.1 | ||
|
2014 |
80.6 | ||
|
2015 and thereafter |
283.1 | ||
|
Total |
$ | 729.3 | |
|
|||
Note 5. Accounts Receivable
Transactions affecting the allowance for doubtful accounts during the years ended December 31, 2009, 2008 and 2007 were as follows:
| 2009 | 2008 | 2007 | ||||||||||
|
Balance, beginning of year |
$ | 80.5 | $ | 63.6 | $ | 79.8 | ||||||
|
Provisions charged to expense |
19.7 | 52.1 | 11.2 | |||||||||
|
Write-offs and other |
(29.9 | ) | (35.2 | ) | (27.4 | ) | ||||||
|
Balance, end of year |
$ | 70.3 | $ | 80.5 | $ | 63.6 | ||||||
|
|||
Note 6. Inventories
The components of the Company’s inventories at December 31, 2009 and 2008 were as follows:
| 2009 | 2008 | |||||||
|
Raw materials and manufacturing supplies |
$ | 229.9 | $ | 311.3 | ||||
|
Work in process |
190.1 | 183.2 | ||||||
|
Finished goods |
219.6 | 296.6 | ||||||
|
LIFO reserve |
(77.8 | ) | (95.4 | ) | ||||
|
Total |
$ | 561.8 | $ | 695.7 | ||||
The Company recognized a LIFO benefit of $17.6 million in 2009 and LIFO expense of $30.6 million and $0.4 million in 2008 and 2007, respectively.
|
|||
Note 7. Property, Plant and Equipment
The components of the Company’s property, plant and equipment at December 31, 2009 and 2008 were as follows:
| 2009 | 2008 | |||||||
|
Land |
$ | 89.6 | $ | 91.6 | ||||
|
Buildings |
1,140.0 | 1,143.1 | ||||||
|
Machinery and equipment |
6,001.7 | 5,935.3 | ||||||
| 7,231.3 | 7,170.0 | |||||||
|
Less: Accumulated depreciation |
(4,959.9 | ) | (4,606.0 | ) | ||||
|
Total |
$ | 2,271.4 | $ | 2,564.0 | ||||
During the years ended December 31, 2009, 2008 and 2007, depreciation expense was $461.6 million, $493.8 million and $451.1 million, respectively.
Assets Held for Sale
Primarily as a result of restructuring actions, certain facilities and equipment are considered held for sale. The net book value of assets held for sale was $8.7 million and $5.9 million at December 31, 2009 and 2008, respectively, which were included in current assets in the Consolidated Balance Sheets at December 31, 2009 and 2008 at the lower of their historical net book value or their estimated fair value, less estimated costs to sell.
|
|||
Note 8. Fair Value Measurement
Certain assets and liabilities are required to be recorded at fair value on a recurring basis. The Company’s only assets and liabilities adjusted to fair value on a recurring basis are forward contracts which are valued using market exchange rates. See Note 14 for further discussion on the fair value of the Company’s forward contracts as of December 31, 2009 and 2008.
In addition to assets and liabilities that are recorded at fair value on a recurring basis, the Company is required to record certain assets and liabilities at fair value on a nonrecurring basis, generally as a result of acquisitions or impairment charges. See Note 2 for further discussion on the fair value of assets and liabilities associated with acquisitions. Assets measured at fair value on a nonrecurring basis subsequent to initial recognition and still held at December 31, 2009 are summarized below:
| Impairment charge |
Fair value measurement (Level 3) |
December 31, 2009 net book value |
|||||||
|
Long-lived assets held and used(1) |
$ | 20.2 | $ | 4.0 | $ | 3.8 | |||
|
Long-lived assets held for sale(2) |
5.0 | 6.5 | 6.1 | ||||||
|
Goodwill(3) |
128.5 | 184.2 | 184.9 | ||||||
|
Total |
$ | 153.7 | $ | 194.7 | $ | 194.8 | |||
| (1) | Long-lived assets held and used with a carrying amount of $24.2 million were written down to their fair value of $4.0 million, resulting in an impairment charge of $20.2 million for the year. The fair values of machinery and equipment, used for measuring impairment, were determined using Level 3 inputs and were estimated based on discussions with machinery and equipment brokers, dealer quotes and internal expertise related to equipment and current marketplace conditions. |
| (2) | Long-lived assets held for sale with a carrying amount of $11.1 million were written down to their fair value of $6.5 million, less costs to sell of $0.4 million, resulting in an impairment charge of $5.0 million and a net book value of $6.1 million. The fair values of the land and buildings classified as held for sale were determined using Level 3 inputs and were estimated based on discussions with real estate brokers, review of comparable properties, if available, and internal expertise related to the current marketplace conditions. |
| (3) | Goodwill for the forms and labels and Canada reporting units with a carrying amount of $257.4 million and $55.3 million, respectively, was written down to its implied fair value of $163.6 million and $20.6 million, respectively, resulting in a combined impairment charge of $128.5 million for the year. The determination of the goodwill impairment was based on Level 3 inputs, which included discounted cash flow analyses, comparable marketplace fair value data, as well as management’s assumptions in valuing significant tangible and intangible assets. See Note 3 for further discussion on the factors leading to the recognition of the impairment. |
See Note 11 for the fair value of the Company’s pension and other postretirement plan assets and Note 13 for the fair value of the Company’s debt.
|
|||
Note 9. Accrued Liabilities
The components of the Company’s accrued liabilities at December 31, 2009 and 2008 were as follows:
| 2009 | 2008 | |||||
|
Employee-related liabilities |
$ | 202.7 | $ | 231.6 | ||
|
Restructuring liabilities |
92.2 | 30.0 | ||||
|
Deferred revenue |
151.4 | 153.5 | ||||
|
Other |
367.1 | 380.6 | ||||
|
Total accrued liabilities |
$ | 813.4 | $ | 795.7 | ||
Employee-related liabilities consist primarily of payroll, incentive compensation, sales commission and employee benefit accruals. Other accrued liabilities include income and other tax liabilities, interest expense accruals and miscellaneous operating accruals. The increase in restructuring liabilities is related to the termination of the long-term customer contract. The Company paid $57.5 million of this liability in January 2010.
|
|||
Note 10. Commitments and Contingencies
As of December 31, 2009, authorized expenditures on incomplete projects for the purchase of property, plant and equipment totaled approximately $54.5 million. Of this total, approximately $49.5 million has been committed. In addition, as of December 31, 2009, the Company has a commitment of $20.4 million for severance payments related to restructuring activities and $99.0 million for the termination of the long-term customer contract, of which $57.5 million was paid in January 2010 and $41.6 million, subject to changes in foreign exchange rates, will be paid in January 2011. The Company transferred $43.7 million to restricted cash within other noncurrent assets on the Consolidated Balance Sheets in December 2009 for the January 2011 payment. The Company also has contractual commitments of approximately $215.3 million for outsourced services, including technology, professional, maintenance and other services. The Company has a variety of contracts with suppliers for the purchase of paper, ink and other commodities for delivery in future years at prevailing market prices. As of December 31, 2009, the Company was committed to purchase $12.3 million of natural gas under these contracts.
Future minimum rental commitments under non-cancelable operating leases are as follows:
|
Year Ended December 31 |
Amount | ||
|
2010 |
$ | 137.4 | |
|
2011 |
108.8 | ||
|
2012 |
84.5 | ||
|
2013 |
66.5 | ||
|
2014 and thereafter |
228.4 | ||
| $ | 625.6 | ||
The Company has non-cancelable operating lease commitments totaling $625.6 million extending through various periods to 2052. Rent expense was $215.0 million, $219.8 million and $219.3 million in the years ended December 31, 2009, 2008 and 2007, respectively.
Litigation
The Company is subject to laws and regulations relating to the protection of the environment. The Company provides for expenses associated with environmental remediation obligations when such amounts are probable and can be reasonably estimated. Such accruals are adjusted as new information develops or circumstances change and are not discounted. The Company has been designated as a potentially responsible party in twelve federal and state Superfund sites. In addition to the Superfund sites, the Company may also have the obligation to remediate five other previously owned facilities and three other currently owned facilities. At the Superfund sites, the Comprehensive Environmental Response, Compensation and Liability Act provides that the 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 Superfund sites and of other liable parties at the previously owned facilities has been considered, where appropriate, in the determination of the Company’s estimated liability. The Company established reserves, recorded in accrued liabilities and other noncurrent liabilities, that it believes are adequate to cover its share of the potential costs of remediation at each of the Superfund sites and the previously and currently owned facilities. While 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, in the opinion of management, compliance with the present environmental protection laws, before taking into account estimated recoveries from third parties, will not have a material adverse effect on the Company’s consolidated annual results of operations, financial position or 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 could be considered preference items and subject to return. In addition, the Company may be party to certain litigation arising in the ordinary course of business. Management believes that the final resolution of these preference items and litigation will not have a material adverse effect on the Company’s consolidated annual results of operations, financial position or cash flows.
|
|||
Note 11. Retirement Plans
The Company sponsors various funded and unfunded pension plans for most of its full-time employees in the U.S., Canada and certain international locations. The Company also participates in various multi-employer pension plans. Benefits are generally based upon years of service and compensation. These plans are funded in conformity with the applicable government regulations. The Company funds at least the minimum amount required for all qualified plans using actuarial cost methods and assumptions acceptable under government regulations. Most of the Company’s regular full-time U.S. employees become eligible for these benefits at or after reaching age 50 while working for the Company and having 5 years of vested service.
In addition to pension benefits, the Company provides certain healthcare and life insurance benefits for retired employees. Most of the Company’s regular full-time U.S. employees become eligible for these benefits at or after reaching age 55 if working for the Company and having 10 years of continuous service. For employees who began employment with the Company prior to January 1, 2002, the Company subsidizes coverage and funds liabilities associated with these plans through a tax-exempt trust. The assets of the trust are invested in trust-owned life insurance policies covering certain employees of the Company. The underlying assets of the policies are invested primarily in marketable equity, corporate fixed income and government securities.
The pension and postretirement obligations are calculated using generally accepted actuarial methods and are measured as of December 31. Actuarial gains and losses are amortized using the corridor method over the average remaining service life of active plan participants.
The components of the net periodic benefit expense (income) and total expense (income) are as follows:
| Pension Benefits | Postretirement Benefits | |||||||||||||||||||||||
| 2009 | 2008 | 2007 | 2009 | 2008 | 2007 | |||||||||||||||||||
|
Service cost |
$ | 70.1 | $ | 86.3 | $ | 93.1 | $ | 10.3 | $ | 12.4 | $ | 12.6 | ||||||||||||
|
Interest cost |
177.6 | 168.8 | 153.2 | 31.0 | 30.3 | 29.1 | ||||||||||||||||||
|
Expected return on plan assets |
(256.2 | ) | (267.3 | ) | (243.4 | ) | (15.5 | ) | (16.3 | ) | (15.2 | ) | ||||||||||||
|
Amortization of prior service credit |
(5.3 | ) | (5.2 | ) | (7.3 | ) | (14.6 | ) | (14.6 | ) | (14.6 | ) | ||||||||||||
|
Amortization of actuarial loss |
8.9 | 0.6 | 3.8 | (2.6 | ) | 0.1 | 5.5 | |||||||||||||||||
|
Net periodic benefit expense (income) |
(4.9 | ) | (16.8 | ) | (0.6 | ) | 8.6 | 11.9 | 17.4 | |||||||||||||||
|
Curtailments |
— | (0.1 | ) | (5.2 | ) | — | — | — | ||||||||||||||||
|
Special termination benefit cost |
— | — | 0.6 | — | — | — | ||||||||||||||||||
|
Total expense (income) |
$ | (4.9 | ) | $ | (16.9 | ) | $ | (5.2 | ) | $ | 8.6 | $ | 11.9 | $ | 17.4 | |||||||||
|
Weighted average assumption used to calculate net periodic benefit expense: |
||||||||||||||||||||||||
|
Discount rate |
6.8 | % | 6.4 | % | 5.7 | % | 6.9 | % | 6.3 | % | 5.8 | % | ||||||||||||
|
Rate of compensation increase |
4.0 | % | 4.0 | % | 4.0 | % | 4.0 | % | 4.0 | % | 4.0 | % | ||||||||||||
|
Expected return on plan assets |
8.3 | % | 8.3 | % | 8.4 | % | 8.0 | % | 8.0 | % | 7.6 | % | ||||||||||||
The following provides a reconciliation of the benefit obligation, plan assets and the funded status of the pension and postretirement plans as of December 31, 2009 and 2008:
| Pension Benefits | Postretirement Benefits | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
|
Benefit obligation at beginning of year |
$ | 2,672.8 | $ | 2,702.4 | $ | 466.9 | $ | 500.2 | ||||||||
|
Service cost |
70.1 | 86.3 | 10.3 | 12.4 | ||||||||||||
|
Interest cost |
177.6 | 168.8 | 31.0 | 30.3 | ||||||||||||
|
Plan participants’ contributions |
1.3 | 1.8 | 19.5 | 22.0 | ||||||||||||
|
Medicare reimbursements |
— | — | 3.0 | 3.3 | ||||||||||||
|
Acquisitions and other |
— | 40.2 | — | — | ||||||||||||
|
Actuarial loss (gain) |
348.9 | (64.8 | ) | 24.8 | (46.7 | ) | ||||||||||
|
Curtailments and settlements |
— | (17.4 | ) | — | — | |||||||||||
|
Foreign currency translation |
39.8 | (85.1 | ) | 3.9 | (5.2 | ) | ||||||||||
|
Benefits paid |
(142.4 | ) | (159.4 | ) | (45.7 | ) | (49.4 | ) | ||||||||
|
Benefit obligation at end of year |
$ | 3,168.1 | $ | 2,672.8 | $ | 513.7 | $ | 466.9 | ||||||||
|
Fair value of plan assets at beginning of year |
$ | 2,191.4 | $ | 3,384.6 | $ | 160.2 | $ | 232.0 | ||||||||
|
Actual return on assets |
548.6 | (1,031.4 | ) | 20.7 | (65.8 | ) | ||||||||||
|
Acquisitions and other |
(0.3 | ) | 41.7 | — | — | |||||||||||
|
Employer contributions |
22.2 | 39.8 | 24.9 | 21.4 | ||||||||||||
|
Plan participants’ contributions |
1.3 | 1.8 | 22.5 | 22.0 | ||||||||||||
|
Settlements |
— | (17.4 | ) | — | — | |||||||||||
|
Foreign currency translation |
33.6 | (68.3 | ) | — | — | |||||||||||
|
Benefits paid |
(142.4 | ) | (159.4 | ) | (45.7 | ) | (49.4 | ) | ||||||||
|
Fair value of plan assets at end of year |
$ | 2,654.4 | $ | 2,191.4 | $ | 182.6 | $ | 160.2 | ||||||||
|
Funded status at end of year |
$ | (513.7 | ) | $ | (481.4 | ) | $ | (331.1 | ) | $ | (306.7 | ) | ||||
The accumulated benefit obligation for all defined benefit pension plans was $3,091.3 million and $2,616.7 million at December 31, 2009 and December 31, 2008, respectively.
Amounts recognized on the Consolidated Balance Sheets as of December 31, 2009 and 2008 are reflected in the following table.
| Pension Benefits | Postretirement Benefits | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
|
Prepaid pension cost (included in other noncurrent assets) |
$ | 1.8 | $ | 15.6 | $ | — | $ | — | ||||||||
|
Accrued benefit cost (included in accrued liabilities) |
(5.7 | ) | (5.5 | ) | (6.6 | ) | (14.8 | ) | ||||||||
|
Pension liability |
(509.8 | ) | (491.5 | ) | — | — | ||||||||||
|
Postretirement benefits |
— | — | (324.5 | ) | (291.9 | ) | ||||||||||
|
Net liability recognized in the consolidated balance sheets |
$ | (513.7 | ) | $ | (481.4 | ) | $ | (331.1 | ) | $ | (306.7 | ) | ||||
The amounts in accumulated other comprehensive loss on the Consolidated Balance Sheets, excluding tax effects, that have not yet been recognized as components of net periodic benefit cost at December 31, 2009 and 2008 are as follows:
| Pension Benefits | Postretirement Benefits | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
|
Accumulated other comprehensive (income) loss |
||||||||||||||||
|
Net actuarial loss |
$ | 1,102.8 | $ | 1,046.3 | $ | 46.8 | $ | 25.5 | ||||||||
|
Net transition obligation |
0.3 | 0.2 | — | — | ||||||||||||
|
Net prior service credit |
(48.3 | ) | (53.6 | ) | (38.6 | ) | (53.2 | ) | ||||||||
|
Total |
$ | 1,054.8 | $ | 992.9 | $ | 8.2 | $ | (27.7 | ) | |||||||
The amounts recognized in other comprehensive income in 2009 as components of net periodic benefit costs are as follows:
| Pension Benefits |
Postretirement Benefits |
|||||||
|
Amortization of: |
||||||||
|
Net actuarial (gain) loss |
$ | (8.9 | ) | $ | 2.6 | |||
|
Net prior service credit |
5.3 | 14.6 | ||||||
|
Amounts arising during the period: |
||||||||
|
Net actuarial loss |
55.4 | 19.6 | ||||||
|
Foreign currency loss (gain) |
10.1 | (0.9 | ) | |||||
|
Total |
$ | 61.9 | $ | 35.9 | ||||
Actuarial gains and losses in excess of 10% of the greater of the projected benefit obligation or the market-related value of plan assets are recognized as a component of net periodic benefit costs over the average remaining service period of a plan’s active employees. Unrecognized prior service costs or credit are also recognized as a component of net periodic benefit cost over the average remaining service period of a plan’s active employees. The amounts in accumulated other comprehensive income that are expected to be recognized as components of net periodic benefit costs over the next year are shown below:
| Pension Benefits |
Postretirement Benefits |
|||||||
|
Amortization of: |
||||||||
|
Net actuarial loss |
$ | 30.8 | $ | 1.3 | ||||
|
Net prior service credit |
(5.3 | ) | (10.8 | ) | ||||
|
Total |
$ | 25.5 | $ | (9.5 | ) | |||
The following provides the weighted average assumptions used to determine the benefit obligation at the measurement date:
| Pension Benefits | Postretirement Benefits |
|||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||
|
Discount rate |
6.0 | % | 6.8 | % | 5.7 | % | 6.9 | % | ||||
|
Rate of compensation increase |
4.0 | % | 4.0 | % | 4.0 | % | 4.0 | % | ||||
|
Health care cost trend: |
||||||||||||
|
Current |
||||||||||||
|
Pre-Age 65 |
— | — | 7.0 | % | 8.6 | % | ||||||
|
Post-Age 65 |
— | — | 7.0 | % | 9.7 | % | ||||||
|
Ultimate |
— | — | 6.0 | % | 6.0 | % | ||||||
Summary of under-funded or unfunded pension benefit plans with projected benefit obligation in excess of plan assets as of December 31, 2009 and 2008:
| Pension Benefits | ||||||
| 2009 | 2008 | |||||
|
Projected benefit obligation |
$ | 3,161.9 | $ | 2,669.3 | ||
|
Fair value of plan assets |
2,645.0 | 2,172.3 | ||||
Summary of pension plans with accumulated benefit obligations in excess of plan assets:
| Pension Benefits | ||||||
| 2009 | 2008 | |||||
|
Accumulated benefit obligation |
$ | 3,084.6 | $ | 2,612.7 | ||
|
Fair value of plan assets |
2,643.6 | 2,171.3 | ||||
The current health care cost trend rate gradually declines through 2019 to the ultimate trend rate and remains level thereafter. A one-percentage point change in assumed health care cost trend rates would have the following effects:
| 1% Increase |
1% Decrease |
||||||
|
Total postretirement service and interest cost components |
$ | 0.5 | $ | (0.5 | ) | ||
|
Postretirement benefit obligation |
6.2 | (5.6 | ) | ||||
The Company determines its assumption for the discount rate to be used for purposes of computing annual service and interest costs based on an index of high-quality corporate bond yields and matched-funding yield curve analysis as of the measurement date.
The Company also maintains several pension plans in international locations. The assets, liabilities and expense associated with these plans are not material to the Company’s consolidated financial statements. The expected returns on plan assets and discount rates for these plans are determined based on each plan’s investment approach, local interest rates, and plan participant profiles.
The Company expects to make cash contributions of approximately $21.8 million to its pension plans and approximately $10.5 million to its postretirement plans in 2010, and additional non-required contributions could be made. While the Company cannot currently estimate the amount of pension plan contributions that will be required in 2011 and future years, larger contributions to the pension plans could be necessary.
The Medicare Prescription Drug, Improvement and Modernization Act of 2003 included a prescription drug benefit under Medicare Part D, as well as a federal subsidy that began in 2006, to sponsors of retiree health care plans that provide a benefit that is at least actuarially equivalent, as defined in the Act, to Medicare Part D. Two of the Company’s retiree health care plans are at least actuarially equivalent to Medicare Part D and eligible for the federal subsidy. During the years ended December 31, 2009 and 2008, the Company received approximately $3.0 million and $3.3 million, respectively, in Medicare reimbursements. Cash flow from the subsidy is expected to be approximately $1.4 million in 2010.
Benefit payments are expected to be paid as follows:
| Pension Benefits |
Postretirement Benefits-Gross |
Estimated Medicare Subsidy Reimbursements |
|||||||
|
2010 |
$ | 157.9 | $ | 34.9 | $ | 1.4 | |||
|
2011 |
160.8 | 35.8 | 1.4 | ||||||
|
2012 |
166.4 | 36.0 | 1.4 | ||||||
|
2013 |
171.9 | 36.8 | 1.4 | ||||||
|
2014 |
178.1 | 37.5 | 1.4 | ||||||
|
2015-2019 |
1,032.5 | 193.4 | 6.3 | ||||||
Employee 401(k) Savings Plans—The Company maintains savings plans that are qualified under Section 401(k) of the Internal Revenue Code. Substantially all of the Company’s U.S. employees are eligible for these plans. Under this plan, employees may contribute a percentage of eligible compensation on both a before-tax basis and after-tax basis. The Company generally matches a percentage of a participating employee’s before-tax contributions. The Company suspended its 401(k) match for 2009. The total expense attributable to the match was $20.6 million and $27.8 million in 2008 and 2007, respectively.
Plan Assets
The Company employs a total return investment approach for its pension and postretirement benefit plans, whereby a mix of equities and fixed income investments are used to maximize the long-term return of pension and postretirement plan assets. The intent of this strategy is to minimize plan expenses by outperforming plan liabilities over the long run. Risk tolerance is established through careful consideration of plan liabilities, plan funded status, and corporate financial condition. The investment portfolios contain a diversified blend of equity and fixed income investments. Furthermore, equity investments are diversified across geography and market capitalization through investments in U.S. large-capitalization stocks, U.S. small-capitalization stocks and international securities. Investment risk is measured and monitored on an ongoing basis through annual liability measurements, periodic asset/liability studies and quarterly investment portfolio reviews. The expected long-term rate of return for plan assets is based upon many factors including asset allocations, historical asset returns, current and expected future market conditions, risk and active management premiums. The prospective target asset allocation percentage for both the pension and postretirement plans is approximately 75% for equity and other securities and approximately 25% for fixed income.
The Company segregated its plan assets by the following major categories and levels for determining their fair value as of December 31, 2009 and 2008:
Cash and cash equivalents—Carrying value approximates fair value. As such, these assets are classified as Level 1.
Equity—The values of individual equity securities were based on quoted prices in active markets. As such, these assets are classified as Level 1. Additionally, the Company invests in certain equity funds that are valued at calculated net asset value per share (“NAV”), but are not quoted on active markets. As such, these assets were classified as Level 2.
Fixed income—Fixed income securities are typically priced based on a valuation model rather than a last trade basis and are not exchange-traded. Inputs to the valuation models include utilizing dealer quotes, analyzing market information, estimating prepayment speeds and evaluating underlying collateral. Accordingly, the Company classified these fixed income securities as Level 2. Fixed income securities also include investments in various asset-backed securities that are part of a government sponsored program. The prices of these asset-backed securities were obtained by independent third parties using multi-dimensional, collateral specific prepayments tables. Inputs include monthly payment information and collateral performance. As the values of these assets was determined based on models incorporating observable inputs, these assets were classified as Level 2. The Company also invests in certain fixed income funds that were priced on active markets and were classified as Level 1.
Derivatives and other—This category includes assets and liabilities that are futures or swaps traded on a primary exchange and are priced by multiple providers. Accordingly, the Company classified these assets and liabilities as Level 1. This category also includes various other assets in which carrying value approximates fair value.
Real estate—The fair market value of real estate investment trusts is based on observable inputs for similar assets in active markets, for instance, appraisals and market comparables. Accordingly, the real estate investments were categorized as Level 2. The Company also invests in certain exchange traded real estate investment trust funds that were classified as Level 1.
Private equity—Includes the Company’s interest in various private equity funds that are valued by the investment manager on a periodic basis with models that use market, income and cost valuation methods. The valuation inputs are not highly observable, and these interests are not actively traded on an open market. Accordingly, this interest was categorized as Level 3.
Guaranteed investment contract—Includes various insurance contracts that have a contractual value that is a function of the number of units and unit value for each of these investment options, but is not a direct, look-through ownership interest. The accounts are predominately invested in equity securities that are priced on the active markets in which the security is traded. As such, these assets are classified as Level 2.
The valuation methodologies described above may generate a fair value calculation that may not be indicative of net realizable value or future fair values. While the Company believes the valuation methodologies used are appropriate, the use of different methodologies or assumptions in calculating fair value could result in different amounts. The Company invests in various assets in which valuation is determined by NAV. The Company believes that the NAV is representative of fair value at the reporting date, as there are no significant restrictions on redemption on these investments or other reasons to indicate that the investment would be redeemed at an amount different than the NAV.
The fair values of the Company’s pension plan assets at December 31, 2009, by asset category are as follows:
|
Asset Category |
Total | Level 1 | Level 2 | Level 3 | ||||||||
|
Cash and cash equivalents |
$ | 37.3 | $ | 37.3 | $ | — | $ | — | ||||
|
Equity |
1,736.2 | 1,422.3 | 313.9 | — | ||||||||
|
Fixed income |
735.9 | 211.2 | 524.7 | — | ||||||||
|
Derivatives and other |
2.9 | 0.7 | 2.2 | — | ||||||||
|
Real estate |
62.4 | 5.9 | 56.5 | — | ||||||||
|
Private equity |
6.9 | — | — | 6.9 | ||||||||
|
Guaranteed investment contracts |
72.8 | — | 72.8 | — | ||||||||
|
Total |
$ | 2,654.4 | $ | 1,677.4 | $ | 970.1 | $ | 6.9 | ||||
The fair values of the Company’s other postretirement benefit plan assets at December 31, 2009, by asset category are as follows:
|
Asset Category |
Total | Level 1 | Level 2 | Level 3 | ||||||||
|
Cash and cash equivalents |
$ | 0.9 | $ | 0.9 | $ | — | $ | — | ||||
|
Equity |
10.6 | 10.6 | — | — | ||||||||
|
Derivatives and other |
8.2 | 8.2 | — | — | ||||||||
|
Guaranteed investment contracts |
162.9 | — | 162.9 | — | ||||||||
|
Total |
$ | 182.6 | $ | 19.7 | $ | 162.9 | $ | — | ||||
The following table provides a summary of changes in the fair value of the Company’s Level 3 assets:
| Private Equity |
||||||||||
|
Balance at January 1, 2009 |
$ | 2.5 | ||||||||
|
Unrealized losses |
(1.0 | ) | ||||||||
|
Purchases, sales and settlements |
5.4 | |||||||||
|
Balance at December 31, 2009 |
$ | 6.9 | ||||||||
|
|||
Note 12. Income Taxes
Income taxes have been based on the following components of earnings (loss) from continuing operations before income taxes for the years ended December 31, 2009, 2008 and 2007:
| 2009 | 2008 | 2007 | ||||||||||
|
U.S. |
$ | 123.9 | $ | 200.5 | $ | 516.3 | ||||||
|
Foreign |
(30.8 | ) | (469.8 | ) | (424.9 | ) | ||||||
|
Total |
$ | 93.1 | $ | (269.3 | ) | $ | 91.4 | |||||
The components of income tax expense (benefit) from continuing operations for the years ended December 31, 2009, 2008 and 2007 were as follows:
| 2009 | 2008 | 2007 | ||||||||||
|
Federal: |
||||||||||||
|
Current |
$ | 95.0 | $ | (49.0 | ) | $ | 189.8 | |||||
|
Deferred |
(35.5 | ) | 2.4 | (1.0 | ) | |||||||
|
State: |
||||||||||||
|
Current |
21.1 | 16.2 | 17.2 | |||||||||
|
Deferred |
(2.5 | ) | (3.6 | ) | (18.7 | ) | ||||||
|
Foreign: |
||||||||||||
|
Current |
52.5 | 52.6 | 18.7 | |||||||||
|
Deferred |
(16.1 | ) | (102.5 | ) | (69.5 | ) | ||||||
|
Total |
$ | 114.5 | $ | (83.9 | ) | $ | 136.5 | |||||
The following table outlines the reconciliation of differences between the Federal statutory tax rate and the Company’s effective tax rate:
| 2009 | 2008 | 2007 | |||||||
|
Federal statutory rate |
35.0 | % | 35.0 | % | 35.0 | % | |||
|
International reorganization |
16.9 | 89.4 | — | ||||||
|
Restructuring and impairment charges |
91.6 | (113.7 | ) | 172.7 | |||||
|
Foreign tax rate differential |
(51.7 | ) | 7.0 | (50.5 | ) | ||||
|
State and local income taxes, net of U.S. federal income tax benefit |
10.2 | (8.3 | ) | 16.3 | |||||
|
Adjustment of uncertain tax positions |
6.5 | 6.9 | (14.4 | ) | |||||
|
Adjustment of interest on uncertain tax positions |
(4.7 | ) | 3.6 | 14.9 | |||||
|
Change in valuation allowances |
27.6 | 5.4 | (9.3 | ) | |||||
|
Domestic manufacturing deduction |
(7.1 | ) | — | (11.5 | ) | ||||
|
Other |
(1.3 | ) | 5.9 | (3.9 | ) | ||||
|
Effective income tax rate |
123.0 | % | 31.2 | % | 149.3 | % | |||
Included in 2009 is an expense of $15.6 million relating to the reorganization of certain entities within the international segment.
Included in 2008 is a benefit of $228.8 million related to the decline in value and reorganization of certain entities within the International segment and $38.0 million from the recognition of uncertain tax positions upon the final settlement of certain U.S. federal income tax audits for the years 2000-2002.
Included in 2007 is a benefit of $9.3 million from the reduction in net deferred tax liabilities due to a decrease in the statutory tax rate in the United Kingdom.
Deferred income taxes
The significant deferred tax assets and liabilities at December 31, 2009 and 2008 were as follows:
| 2009 | 2008 | |||||||
|
Deferred tax assets: |
||||||||
|
Pensions and postretirement |
$ | 321.7 | $ | 304.3 | ||||
|
Accrued liabilities |
193.5 | 148.6 | ||||||
|
Net operating loss and other tax carryforwards |
306.8 | 277.0 | ||||||
|
Other |
90.0 | 89.1 | ||||||
|
Total deferred tax assets |
912.0 | 819.0 | ||||||
|
Valuation allowance |
(277.5 | ) | (224.7 | ) | ||||
|
Net deferred tax assets |
$ | 634.5 | $ | 594.3 | ||||
|
Deferred tax liabilities: |
||||||||
|
Intangible assets |
$ | 328.8 | $ | 350.9 | ||||
|
Accelerated depreciation |
295.6 | 298.1 | ||||||
|
Investments |
8.7 | 15.1 | ||||||
|
Other |
46.2 | 54.6 | ||||||
|
Total deferred tax liabilities |
679.3 | 718.7 | ||||||
|
Net deferred tax liabilities |
$ | 44.8 | $ | 124.4 | ||||
The above amounts are classified as current or long-term in the Consolidated Balance Sheets in accordance with the asset or liability to which they relate on a jurisdiction by jurisdiction basis.
As of December 31, 2009, the Company had domestic and foreign net operating loss and other tax carryforwards of approximately $17.2 million and $289.6 million, respectively ($67.5 million and $209.5 million, respectively, at December 31, 2008), of which $190.4 million expire between 2010 and 2019. Limitations on the utilization of these tax assets may apply. The Company has provided a valuation allowance 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. During 2009, the valuation allowance increased $52.8 million, of which $36.8 million related to the net operating loss resulting from the termination of a significant long-term customer contract that will not be fully realized.
Deferred U.S. income taxes and foreign withholding taxes are not provided on the excess of the investment value for financial reporting over the tax basis of investments in foreign subsidiaries, because such excess is considered to be permanently reinvested in those operations.
Cash payments for income taxes were $198.9 million, $241.6 million and $191.1 million in 2009, 2008 and 2007, respectively. Cash refunds for income taxes were $164.1 million, $9.2 million and less than $0.1 million in 2009, 2008 and 2007, respectively.
The Company’s income taxes payable for federal and state purposes have been reduced by the tax benefits associated with dispositions of employee stock options. The Company receives an income tax benefit calculated as the tax effect of the difference between the fair market value of the stock issued at the time of exercise and the option price. These benefits were credited directly to RR Donnelley shareholders’ equity and amounted to $0.4 million in 2008 and $20.2 million in 2007.
For the year ended December 31, 2009, the changes in other comprehensive income were net of tax benefits of $36.2 million related to the change in funded status for pension and postretirement plans and related to the adjustment for net periodic pension and postretirement benefit cost and net of tax provisions of $1.5 million related to changes in the fair value of derivatives. For the year ended December 31, 2008, the changes in other comprehensive income were net of tax benefits of $493.1 million related to the change in funded status for pension and postretirement plans and related to the adjustment for net periodic pension and postretirement benefit cost, as well as net of tax provisions of $13.0 million related to unrealized foreign currency gains and $1.3 million related to changes in the fair value of derivatives. For the year ended December 31, 2007, the changes in other comprehensive income were net of tax provisions of $72.8 million related to the change in funded status for pension and postretirement plans and related to the adjustment for net periodic pension and postretirement benefit cost, as well as net of tax benefits of $5.1 million related to unrealized foreign currency losses and $0.9 million related to changes in the fair value of derivatives.
Uncertain tax positions
Changes in the Company’s unrecognized tax benefits at December 31, 2009, 2008 and 2007 were as follows:
| 2009 | 2008 | 2007 | ||||||||||
|
Balance at beginning of year |
$ | 162.9 | $ | 212.2 | $ | 224.9 | ||||||
|
Additions for tax positions of the current year |
19.2 | 19.3 | 8.4 | |||||||||
|
Additions for tax positions of prior years |
2.4 | 14.1 | 10.0 | |||||||||
|
Reductions for tax positions of prior years |
(3.5 | ) | (48.1 | ) | (0.9 | ) | ||||||
|
Settlements during the year |
(1.5 | ) | (17.2 | ) | (6.2 | ) | ||||||
|
Lapses of applicable statutes of limitations |
(7.3 | ) | (12.5 | ) | (27.6 | ) | ||||||
|
Foreign exchange and other |
4.2 | (4.9 | ) | 3.6 | ||||||||
|
Balance at end of year |
$ | 176.4 | $ | 162.9 | $ | 212.2 | ||||||
As of December 31, 2009, 2008 and 2007, the Company had $176.4 million, $162.9 million and $212.2 million, respectively, of unrecognized tax benefits. Unrecognized tax benefits of $127.3 million as of December 31, 2009, if recognized, would have decreased income taxes, the corresponding effective income tax rate and net loss. This potential impact on net earnings (loss) reflects the reduction of these unrecognized tax benefits, net of certain deferred tax assets and the federal tax benefit of state income tax items. The Company recognized $0.6 million and $0.9 million of previously unrecognized state and international tax benefits, respectively, due to settlements during the year. The Company recognized $1.8 million, $8.5 million and $0.4 million of previously unrecognized federal, state and international tax benefits, due to the expiration of statutes of limitations and resolution of audits during the year. As a result, the Company recorded $10.9 million as a decrease in income tax expense for the year ended December 31, 2009.
As of December 31, 2009, it is reasonably possible that the total amounts of unrecognized tax benefits will decrease within 12 months by as much as $17.8 million due to resolution of audits or expirations of statutes of limitations related to U.S. federal and state tax positions.
The Company classifies interest expense and any related penalties related to income tax uncertainties as a component of income tax expense. The total interest expense, net of tax benefits, related to remaining tax uncertainties recognized in the Consolidated Statements of Operations for the years ended December 31, 2009, 2008 and 2007 was $6.2 million, $8.9 million and $13.9 million, respectively. Additionally, for the year ended December 31, 2009, the Company recorded a reduction of $8.3 million in the interest component of income tax expense resulting from adjustments to its estimate of accumulated interest associated with income tax uncertainties. Penalties in the amount of $0.7 million, $1.0 million and $1.4 million, respectively, were recognized for the years ended December 31, 2009, 2008 and 2007. Accrued interest of $52.1 million and $65.8 million related to income tax uncertainties were reported as a component of other noncurrent liabilities on the Consolidated Balance Sheets at December 31, 2009 and 2008, respectively. Accrued penalties of $5.8 million and $3.4 million related to income tax uncertainties were reported in other noncurrent liabilities on the Consolidated Balance Sheets at December 31, 2009 and 2008, respectively.
The Company has tax years from 2000 that remain open and subject to examination by the IRS, certain state taxing authorities and certain foreign tax jurisdictions.
Tax Holidays
The Company has been granted “tax holidays” in certain foreign countries as an incentive to attract international investment. Generally, a tax holiday is an agreement between the Company and a foreign government under which the Company receives certain tax benefits in that country, such as exemption from taxation on profits derived from export related activities. The Company’s tax holiday agreements expire from 2010 through 2011. The aggregate effect on income tax expense in 2009, 2008 and 2007, as a result of these agreements, was approximately $10.6 million, $15.3 million and $15.0 million, respectively.
|
|||
Note 13. Debt
The Company’s debt at December 31, 2009 and 2008 consists of the following:
| 2009 | 2008 | |||||||
|
Commercial paper |
$ | — | $ | 289.8 | ||||
|
Credit facility borrowings |
— | 200.0 | ||||||
|
3.75% senior notes due April 1, 2009 |
— | 400.0 | ||||||
|
4.95% senior notes due May 15, 2010 |
325.7 | 499.6 | ||||||
|
5.625% senior notes due January 15, 2012 |
158.5 | 624.5 | ||||||
|
4.95% senior notes due April 1, 2014 |
599.0 | 598.8 | ||||||
|
5.50% senior notes due May 15, 2015 |
499.6 | 499.5 | ||||||
|
8.60% senior notes due August 15, 2016 |
345.3 | — | ||||||
|
6.125% senior notes due January 15, 2017 |
621.5 | 621.0 | ||||||
|
11.25% senior notes due February 1, 2019 |
400.0 | — | ||||||
|
8.875% debentures due April 15, 2021 |
80.9 | 80.9 | ||||||
|
6.625% debentures due April 15, 2029 |
199.3 | 199.2 | ||||||
|
8.820% debentures due April 15, 2031 |
68.9 | 68.9 | ||||||
|
Other, including capital leases |
23.7 | 44.6 | ||||||
|
Total debt |
3,322.4 | 4,126.8 | ||||||
|
Less: current portion |
(339.9 | ) | (923.5 | ) | ||||
|
Long-term debt |
$ | 2,982.5 | $ | 3,203.3 | ||||
The fair value of debt was determined to be Level 2 under the fair value hierarchy and was based upon the interest rates available to the Company for borrowings with similar terms and maturities. The fair value of the Company’s debt was greater than its book value by approximately $177.9 million at December 31, 2009 and lower by $556.2 million at December 31, 2008.
On January 14, 2009, the Company issued $400.0 million of 11.25% senior notes due February 1, 2019. The net proceeds from the offering were used to pay down short-term debt. If the Company experiences certain downgrades in its credit ratings, these notes would be subject to a coupon step-up resulting in higher interest payments.
On August 26, 2009, the Company issued $350.0 million of 8.60% senior notes due August 15, 2016. The net proceeds from the offering, along with borrowings under the Company’s revolving credit facility (the “Facility”) and cash on hand, were used to repurchase $466.4 million of the 5.625% senior notes due January 15, 2012 and $174.2 million of the 4.95% senior notes due May 15, 2010. These repurchases resulted in a pre-tax loss on debt extinguishment of $10.3 million, which is reflected in investment and other income (expense) on the Consolidated Statements of Operations for the year ended December 31, 2009.
As of December 31, 2009, the Company had no borrowings outstanding under the Facility. The weighted average interest rate on borrowings during the year ended December 31, 2009 was 1.3%.
Additionally, the Company had $138.7 million in credit facilities (the “Foreign Facilities”) at its foreign locations, most of which are uncommitted. As of December 31, 2009 and 2008, total borrowings under the Facility and the Foreign Facilities (the “Combined Facilities”) were $12.7 million and $231.9 million, respectively. As of December 31, 2009, the Company had $44.1 million in outstanding letters of credit, of which $37.8 million reduced availability under the Combined Facilities. At December 31, 2009, approximately $2.1 billion was available under the Company’s Combined Facilities, of which the Company may borrow an additional $1.4 billion, as borrowings above $1.4 billion would cause the Company to violate certain debt covenants in the Facility.
The Company was in compliance with its debt covenants as of December 31, 2009, and is expected to remain in compliance based on management’s estimates of operating and financial results for 2010 and the foreseeable future.
At December, 31, 2009, the future maturities of debt, including capitalized leases, consisted of the following:
| Amount | |||
|
2010 |
$ | 339.9 | |
|
2011 |
1.6 | ||
|
2012 |
160.1 | ||
|
2013 |
0.8 | ||
|
2014 |
600.9 | ||
|
2015 and thereafter |
2,229.7 | ||
|
Total |
$ | 3,333.0 | |
The following table summarizes interest expense included in the Consolidated Statements of Operations:
| 2009 | 2008 | 2007 | ||||||||||
|
Interest incurred |
$ | 246.6 | $ | 240.6 | $ | 242.9 | ||||||
|
Less: interest income |
(9.9 | ) | (11.7 | ) | (12.1 | ) | ||||||
|
Less: interest capitalized as property, plant and equipment |
(2.1 | ) | (2.5 | ) | (3.5 | ) | ||||||
|
Interest expense, net |
$ | 234.6 | $ | 226.4 | $ | 227.3 | ||||||
Interest paid was $226.5 million, $223.8 million and $185.3 million in 2009, 2008 and 2007, respectively.
|
|||
Note 14. Derivatives
All derivatives are recorded as other assets or other liabilities on the Consolidated Balance Sheets at their respective fair values with unrealized gains and losses recorded in other comprehensive income (loss), net of applicable income taxes, or in the Consolidated Statements of Operations, depending on the purpose for which the derivative is held. Changes in the fair value of derivatives that do not meet the criteria for designation as a hedge at inception, or fail to meet the criteria thereafter, are recognized currently in the Consolidated Statements of Operations. At the inception of a hedge transaction, the Company formally documents the hedge relationship and the risk management objective for undertaking the hedge. In addition, the Company assesses both at inception of the hedge and on an ongoing basis, whether the derivative in the hedging transaction has been highly effective in offsetting changes in fair value or cash flows of the hedged item and whether the derivative is expected to continue to be highly effective. The impact of any ineffectiveness is recognized currently in the Consolidated Statements of Operations.
The Company is exposed to the impact of foreign currency fluctuations in certain countries in which it operates. The exposure to foreign currency movements is limited in most countries because the operating revenues and expenses of its various subsidiaries and business units are substantially in the local currency of the country in which they operate. To the extent borrowings, sales, purchases, revenues, expenses or other transactions are not in the local currency of the operating unit, the Company is exposed to currency risk. Periodically, the Company uses foreign exchange forward contracts and cross-currency swaps to hedge exposures resulting from foreign exchange fluctuations. Accordingly, the implied gains and losses associated with the fair values of foreign currency exchange contracts and cross-currency interest rate swaps are generally offset by gains and losses on underlying payables, receivables and net investments in foreign subsidiaries. The Company does not use derivative financial instruments for trading or speculative purposes.
The Company has entered into foreign exchange forward contracts in order to manage the currency exposure of certain receivables and liabilities. The foreign exchange forward contracts were not designated as hedges, and accordingly, the fair value gains or losses from these foreign currency derivatives are recognized currently in the Consolidated Statements of Operations, generally offsetting the foreign exchange gains or losses on the exposures being managed. The aggregate notional value of the forward contracts at December 31, 2009 and 2008 was $437.0 million and $299.4 million, respectively. The fair values of foreign exchange forward contracts were determined to be Level 2 under the fair value hierarchy and are valued using market exchange rates.
At December 31, 2009 and 2008, the total fair value of the Company’s forward contracts and the accounts in the Consolidated Balance Sheets in which the fair value amounts are included are shown below:
|
Derivatives not designated as hedges |
2009 | 2008 | ||||
|
Prepaid expenses and other current assets |
$ | 1.3 | $ | 9.7 | ||
|
Accrued liabilities |
6.8 | 3.0 | ||||
The pre-tax gains (losses) related to derivatives not designated as hedges recognized in the Consolidated Statements of Operations for the years ended December 31, 2009, 2008 and 2007 are shown in the table below:
|
Classification of Gain (Loss) |
2009 | 2008 | 2007 | |||||||||
|
Foreign exchange forward contracts |
Selling, general and administrative expenses | $ | (13.7 | ) | $ | — | $ | 1.0 | ||||
|
Total gain (loss) recognized in the consolidated statements of operations |
$ | (13.7 | ) | $ | — | $ | 1.0 | |||||
The pre-tax gains (losses) related to derivatives designated as hedges for the years ended December 31, 2009 and 2008 are shown in the table below:
| Gain (Loss) Recognized in OCI (Effective Portion) |
Classification of |
Gain (Loss) Reclassified from AOCI into Income (Effective Portion) |
Classification of Gain (Loss) Recognized in Income (Ineffective Portion) |
Gain (Loss) Recognized in Income (Ineffective Portion) |
||||||||||||||||||||||
| 2009 | 2008 | 2009 | 2008 | 2009 | 2008 | |||||||||||||||||||||
|
Cash Flow Hedges |
||||||||||||||||||||||||||
|
Cross-currency swaps |
$ | — | $ | 68.6 | Investment and other income (expense) |
$ | — | $ | 68.2 | Investment and other income (expense) |
$ | — | $ | (9.9 | ) | |||||||||||
|
Interest rate lock |
— | — | Interest expense—net |
(1.1 | ) | (1.6 | ) | Interest expense—net |
— | — | ||||||||||||||||
|
Interest rate lock |
— | — | Investment and other income (expense) |
— | — | Investment and other income (expense) |
(2.7 | ) | — | |||||||||||||||||
|
Total gain (loss) |
— | 68.6 | (1.1 | ) | 66.6 | (2.7 | ) | (9.9 | ) | |||||||||||||||||
|
Net Investment Hedge |
||||||||||||||||||||||||||
|
Cross-currency swaps |
— | 21.9 | Investment and other income (expense) |
— | 21.2 | Investment and other income (expense) |
— | — | ||||||||||||||||||
|
Total gain (loss) |
$ | — | $ | 90.5 | $ | (1.1 | ) | $ | 87.8 | $ | (2.7 | ) | $ | (9.9 | ) | |||||||||||
The pre-tax gains (losses) related to derivatives designated as hedges for the year ended December 31, 2007 are shown in the table below:
| Gain (Loss) Recognized in OCI (Effective Portion) |
Classification of Gain (Loss) Reclassified from AOCI into Income (Effective Portion) |
Gain (Loss) Reclassified from AOCI into Income (Effective Portion) |
Classification of Gain (Loss) Recognized in Income (Ineffective Portion) |
Gain (Loss) Recognized in Income (Ineffective Portion) |
|||||||||||
|
Cash Flow Hedges |
|||||||||||||||
|
Cross-currency swaps |
$ | 8.0 | Investment and other income (expense) |
$ | 7.4 | Investment and other income (expense) |
$ | — | |||||||
|
Interest rate lock |
— | Interest expense—net |
(1.6 | ) | Interest expense—net |
— | |||||||||
|
Interest rate lock |
— | Investment and other income (expense) |
— | Investment and other income (expense) |
— | ||||||||||
|
Total gain (loss) |
8.0 | 5.8 | — | ||||||||||||
|
Net Investment Hedge |
|||||||||||||||
|
Cross-currency swaps |
(21.8 | ) | Investment and other income (expense) |
(22.9 | ) | Investment and other income (expense) |
1.1 | ||||||||
|
Total gain (loss) |
$ | (13.8 | ) | $ | (17.1 | ) | $ | 1.1 | |||||||
Terminated Derivatives
In October 2008, the Company terminated its outstanding cross-currency swaps with a notional amount of $1,130.8 million, which were used to hedge against fluctuations in currency rates of the British pound sterling and Euro. This termination resulted in net pre-tax cash proceeds to the Company of $22.5 million and recognition of a pre-tax loss of $9.9 million during 2008. These cross-currency swaps consisted of British pound sterling (“GBP”) swaps, which exchanged GBP for U.S. dollars, Eurodollar (“EUR”) swaps, which exchanged EUR for U.S. dollars and GBP swaps, which exchanged GBP for EUR. These swaps required the Company to pay a fixed interest rate on the GBP notional amount and receive a fixed interest rate on the U.S. dollar notional amount and pay a fixed interest rate on the GBP notional amount and receive a fixed interest rate on the EUR notional amount, respectively.
In May 2005, the Company terminated its interest rate lock agreements which were used to hedge against fluctuations in interest rates. This termination resulted in a loss of $12.9 million recorded in accumulated other comprehensive income, which was being recognized in interest expense over the term of the hedged forecasted interest payments. During the third quarter of 2009, the Company repurchased $174.2 million of the 4.95% senior notes due May 15, 2010 which were hedged as part of the interest rate lock agreements. A pre-tax loss of $2.7 million was reclassified from accumulated other comprehensive income to investment and other expense in the Consolidated Statements of Operations as a result of the change in expected forecasted interest payments for the senior notes due May 15, 2010. At December 31, 2009, a balance of $2.6 million remains in accumulated other comprehensive income, of which $0.4 million is expected to be reclassified to interest expense over the next year.
|
|||
Note 15. Guarantees
The Company has unconditionally guaranteed the repayment of certain loans and related interest and fees for certain of its consolidated subsidiaries. The guarantees continue until the loans, including accrued interest and fees, have been paid in full. The maximum amount of the guarantees may vary, but is limited to the sum of the total due and unpaid principal amounts plus related interest and fees. Additionally, the maximum amount of the guarantees, certain of which are denominated in foreign currencies, will vary based on fluctuations in foreign exchange rates. As of December 31, 2009, the maximum principal amount guaranteed was approximately $80.2 million.
|
|||
Note 16. Earnings per Share
| 2009 | 2008 | 2007 | ||||||||||
|
Numerator: |
||||||||||||
|
Net loss attributable to RR Donnelley common shareholders |
$ | (27.3 | ) | $ | (189.9 | ) | $ | (48.9 | ) | |||
|
Denominator: |
||||||||||||
|
Weighted average number of common shares outstanding |
205.2 | 210.2 | 218.0 | |||||||||
|
Dilutive options and awards(a) |
— | — | — | |||||||||
|
Diluted weighted average number of common shares outstanding |
205.2 | 210.2 | 218.0 | |||||||||
|
Net loss per share attributable to RR Donnelley common shareholders: |
||||||||||||
|
Basic |
$ | (0.13 | ) | $ | (0.90 | ) | $ | (0.22 | ) | |||
|
Diluted |
$ | (0.13 | ) | $ | (0.90 | ) | $ | (0.22 | ) | |||
|
Cash dividends paid per common share |
$ | 1.04 | $ | 1.04 | $ | 1.04 | ||||||
| (a) |
Diluted net loss per share attributable to RR Donnelley common shareholders takes into consideration the dilution of certain unvested restricted stock awards and unexercised stock option awards. For the years ended December 31, 2009, 2008 and 2007, common stock equivalents of 9.7 million, 5.4 million and 4.9 million, respectively, were excluded as their effect would be anti-dilutive. For the years ended December 31, 2009, 2008 and 2007, restricted stock units of 5.5 million, 1.8 million and 1.4 million, respectively, were excluded as their effect would be anti-dilutive. For the years ended December 31, 2009, 2008 and 2007, options to purchase 4.2 million shares, 3.6 million shares and 3.5 million shares, respectively, were anti-dilutive because the option exercise price exceeded the fair value of the stock. |
During the year ended December 31, 2009, no shares of common stock were purchased by the Company in the open market. During the year ended December 31, 2008, the Company purchased in the open market 10.0 million shares of its common stock at a total cost of $278.8 million. During the year ended December 31, 2007, the Company purchased in the open market approximately 7.7 million shares of its common stock at a total cost of $309.5 million.
|
|||
Note 17. Stock and Incentive Programs for Employees
The Company recognizes compensation expense, based on estimated fair values, for all share-based awards made to employees and directors, including stock options, restricted stock units and performance share units. The Company estimates the fair value of share-based awards on the date of grant, using an option-pricing model where applicable. The Company recognizes these compensation costs for only those awards expected to vest, on a straight-line basis over the requisite service period of the award, which is generally the vesting term of three to four years for restricted stock awards, performance share units and stock options. The Company estimated the number of awards expected to vest based, in part, on historical forfeiture rates and also based on management’s expectations of employee turnover within the specific employee groups receiving each type of award. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods, if actual forfeitures differ from those estimates.
Share-Based Compensation Expense
The total compensation expense related to all share-based compensation plans was $24.0 million, $21.9 million and $27.9 million for the years ended December 31, 2009, 2008 and 2007, respectively. The income tax benefit related to share-based compensation expense was $9.6 million, $8.8 million and $11.2 million for the years ended December 31, 2009, 2008 and 2007. As of December 31, 2009, $32.7 million of total unrecognized compensation cost related to share-based compensation is expected to be recognized over a weighted-average period of 2.3 years. The total unrecognized share-based compensation cost to be recognized in future periods as of December 31, 2009 does not consider the effect of share-based awards that may be issued in subsequent periods.
During the year ended December 31, 2007, the Company executed separation agreements with certain members of management. The agreements stated that all remaining unvested share-based awards previously granted to these individuals became fully vested upon their separation date. The Company recorded $3.3 million of restructuring expense to recognize the remaining unvested portion of these awards for the year ended December 31, 2007. In addition, the Company recorded $0.5 million for the year ended December 31, 2007, of incremental restructuring expense upon the modification of these awards to reflect their increase in fair value from the grant date.
Share-Based Compensation Plans
The Company has one share-based compensation plan available under which it may grant future awards, as described below, and seven terminated or expired share-based compensation plans under which awards remain outstanding.
RR Donnelley 2004 Performance Incentive Plan
The 2004 Performance Incentive Plan (the “2004 PIP”) was approved by shareholders to provide incentives to key employees of the Company and its subsidiaries. Awards under the 2004 PIP are generally not restricted to any specific form or structure and could include, without limitation, stock options, stock units, restricted stock awards, cash or stock bonuses and stock appreciation rights. There are 17 million shares of common stock of the Company reserved and authorized for issuance under the 2004 PIP, as amended.
General Terms of Awards
Under various incentive plans, the Company has granted certain employees non-qualified stock options, restricted stock units and performance share units. The Human Resources Committee of the Board of Directors has discretion to establish the terms and conditions for grants, including the number of shares, vesting and required service or other performance criteria. The maximum term of any award under the 2004 PIP is ten years. At December 31, 2009, there were 5.9 million shares of common stock authorized and available for grant under the 2004 PIP.
For all of the Company’s stock options outstanding at December 31, 2009, the exercise price of the stock option equals the fair market value of the Company’s common stock on the option grant date. Options generally vest over four years or less from the date of grant, upon retirement or upon a change in control of the Company. Options granted prior to November 2004 and after December 2006 expire ten years from the date of grant or five years after the date of retirement, whichever is earlier, while options granted between November 2004 and December 2006 expire five years from the date of grant.
The rights granted to the recipient of restricted stock unit awards generally accrue ratably over the restriction or vesting period, which is generally four years or less, except that restricted stock units awarded in March 2008 vest 100% on the fourth anniversary of the grant. Restricted stock unit awards are subject to forfeiture upon termination of employment prior to vesting, subject in some cases to early vesting upon specified events, including death or permanent disability of the grantee, termination of the grantee’s employment under certain circumstances or a change in control of the Company. The Company expenses the cost of restricted stock unit awards based on the fair market value of the shares at the date of grant ratably over the period during which the restrictions lapse.
The Company also issues restricted stock units as share-based compensation for members of the Board of Directors. Director restricted stock units granted after January 2009 vest ratably over three years from the date of grant with the opportunity to defer any tranche of vesting restricted stock units until termination of service on the Board of Directors. Awards granted between January 2008 and January 2009 vest ratably over three years from the date of grant and were amended in May 2009 to provide the opportunity to defer any tranche of vesting restricted stock units until termination of service on the Board of Directors. For awards granted prior to January 2008, one-third of the restricted stock units vest on the third anniversary of the grant date, and the remaining two-thirds of the restricted stock units vest upon termination of the holder’s service on the Board of Directors; the holder could also elect to defer delivery of the initial one-third of the restricted stock units until termination of service on the Board of Directors. In the event of termination of service on the Board of Directors prior to a vesting date, all restricted stock units will vest. All awards granted prior to December 31, 2007 are payable in shares of common stock or cash. In 2009, the option to have awards paid in cash was removed for awards granted in 2008 and future years. Awards that may be paid in cash are classified as liability awards due to their expected settlement in cash, and are included in accrued liabilities in the Consolidated Balance Sheets. Compensation expense for these awards is measured based upon the fair market value of the awards at the end of each reporting period. Awards payable only in shares are classified as equity awards due to their expected settlement in common stock. Compensation expense for these awards is measured based upon the grant date fair value of awards.
The Company has granted performance share unit awards to certain executive officers. Distributions under these awards are payable at the end of the performance period in common stock or cash, at the Company’s discretion. Should certain performance targets be achieved, the amount payable under these awards could reach 250% of the initial award. These awards are subject to forfeiture upon termination of employment prior to vesting, subject in some cases to early vesting upon specified events, including death or permanent disability of the grantee, termination of the grantee’s employment under certain circumstances or a change in control of the Company. The Company expenses the cost of the performance share unit awards, based on the fair market value of the awards at the date of grant and assumptions surrounding the achievement of a performance targets, ratably over the performance period.
Stock Options
The Company granted 1,520,468, 754,000 and 470,000 stock options in the years ended December 31, 2009, 2008 and 2007, respectively. The fair value of each stock option award is estimated on the date of grant using the Black-Scholes-Merton option pricing model. The fair value of the stock options was determined using the following assumptions:
| 2009 | 2008 | 2007 | |||||||
|
Expected volatility |
29.67 | % | 22.78 | % | 20.34 | % | |||
|
Risk-free interest rate |
2.27 | % | 2.96 | % | 4.52 | % | |||
|
Expected life (years) |
6.25 | 6.25 | 7.00 | ||||||
|
Expected dividend yield |
3.63 | % | 3.31 | % | 2.85 | % |
The grant date fair value of options granted was $1.47, $5.63 and $7.84 for the years ended December 31, 2009, 2008 and 2007, respectively.
The following table is a summary of the Company’s 2009 stock option activity:
| Shares Under Option (thousands) |
Weighted Average Exercise Price |
Weighted Average Remaining Contractual Term (years) |
Aggregate Intrinsic Value (millions) |
||||||||
|
Outstanding at December 31, 2008 |
3,624 | $ | 28.76 | 5.1 | $ | 0.7 | |||||
|
Granted |
1,520 | 7.09 | 9.2 | ||||||||
|
Exercised |
(74 | ) | 19.79 | ||||||||
|
Cancelled/forfeited/expired |
(902 | ) | 32.70 | ||||||||
|
Outstanding at December 31, 2009 |
4,168 | $ | 20.17 | 6.4 | $ | 26.6 | |||||
|
Vested and expected to vest at December 31, 2009 |
4,168 | $ | 20.17 | 6.4 | $ | 26.6 | |||||
|
Exercisable at December 31, 2009 |
824 | $ | 18.04 | 2.0 | $ | 3.5 | |||||
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on December 31, 2009 and 2008 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on December 31, 2009 and 2008. This amount will change in future periods based on the fair market value of the Company’s stock and the number of options outstanding. Total intrinsic value of options exercised for the years ended December 31, 2009 and 2008 was $0.1 million and $1.0 million, respectively.
Compensation expense recognized related to stock options for the years ended December 31, 2009, 2008 and 2007 was $2.4 million, $2.5 million and $2.4 million, respectively. As of December 31, 2009, $5.2 million of total unrecognized compensation expense related to stock options is expected to be recognized over a weighted average period of 2.3 years.
Cash received from the option exercises as of and for the year ended December 31, 2009, 2008 and 2007 was $1.5 million, $1.8 million and $95.5 million, respectively. The actual tax benefit realized for the tax deduction from option exercises totaled $0.1 million, $0.4 million and $20.2 million for the years ended December 31, 2009, 2008 and 2007, respectively.
Excess tax benefits on stock option exercises shown as financing cash inflows as a component in issuance of common stock, net in the Consolidated Statements of Cash Flows were $0.1 million and $9.6 million for the years ended December 31, 2008 and 2007, respectively. There were no excess tax benefits on stock option exercises for the year ended December 31, 2009.
Restricted Stock Units
Nonvested restricted stock unit awards as of December 31, 2009 and 2008, and changes during the year ended December 31, 2009 were as follows:
| Shares (thousands) |
Weighted-Average Grant Date Fair Value |
|||||
|
Nonvested at December 31, 2008 |
1,797 | $ | 30.47 | |||
|
Granted |
4,200 | 5.83 | ||||
|
Vested |
(385 | ) | 32.36 | |||
|
Forfeited |
(132 | ) | 20.68 | |||
|
Nonvested at December 31, 2009 |
5,480 | $ | 11.08 | |||
Compensation expense recognized related to restricted stock units was $21.6 million, $21.3 million and $21.6 million, for the years ended December 31, 2009, 2008 and 2007, respectively. As of December 31, 2009, there was $27.5 million of unrecognized share-based compensation expense related to nonvested restricted stock unit awards. That cost is expected to be recognized over a weighted-average period of 2.3 years. As of December 31, 2009, approximately 5.5 million restricted stock unit awards, with a weighted-average grant date fair value of $11.08, are expected to vest over a weighted-average period of 2.3 years.
Performance Share Unit Awards
No performance share unit awards were granted during the years ended December 31, 2009 and 2008. During the year ended December 31, 2007, the Company granted performance share unit awards to certain executive officers. Distributions under these awards are payable at the end of the performance period in common stock or cash, at the Company’s discretion. Should certain performance targets be achieved, the amount payable under these awards could have reached 250% of the initial award. The performance period ended December 31, 2009 and the minimum performance targets for these awards were not reached. Therefore, no shares were awarded pursuant to these units and the units expired per the terms of the awards.
There was no compensation expense recognized related to performance share unit awards for the year ended December 31, 2009. During 2008, compensation expense related to the awards granted in 2007 was reversed in the amount of $1.9 million, because the Company no longer expected the required performance targets to be achieved. No additional 2008 expense was recorded. Compensation expense recognized related to performance share unit awards for the year ended December 31, 2007 was $3.9 million.
Board of Directors Awards
At December 31, 2009, 2008 and 2007, approximately 386,000, 223,000 and 226,000, respectively, restricted stock units issued to directors were outstanding. For the years ended December 31, 2009 and 2007, the compensation expense recorded for these restricted stock units was $0.9 million and $2.6 million, respectively. For the year ended December 31, 2008, the Company recorded income of $3.0 million due to declines in the Company’s stock price.
Other Information
Authorized unissued shares or treasury shares may be used for issuance under the Company’s share-based compensation plan. The Company intends to use treasury shares of its common stock to meet the stock requirements of its awards in the future. During the year ended December 31, 2008, the Company purchased in the open market 10 million shares of its common stock at a total cost of $278.8 million. On October 29, 2008, the Company’s Board of Directors approved a new share repurchase program, authorizing the repurchase of up to 10 million shares. As of December 31, 2009, no shares had been repurchased under this program.
|
|||
Note 18. Preferred Stock
The Company has two million shares of $1.00 par value preferred stock authorized for issuance. The Board of Directors may divide the preferred stock into one or more series and fix the redemption, dividend, voting, conversion, sinking fund, liquidation and other rights. The Company has no present plans to issue any preferred stock.
|
|||
Note 19. Segment Information
The Company operates primarily in the printing industry, with related service offerings designed to offer customers complete solutions for communicating their messages to target audiences. The Company’s reportable segments reflect the management reporting structure of the organization and the manner in which the chief operating decision-maker regularly assesses information for decision-making purposes, including the allocation of resources. The Company’s segments and their products and service offerings are summarized below:
U.S. Print and Related Services
The U.S. Print and Related Services segment includes the Company’s U.S. printing operations, managed as one integrated platform, along with related logistics, premedia and print-management services. This segment’s products and related service offerings include magazines, catalogs, retail inserts, books, directories, financial print, direct mail, forms, labels, office products, premedia and logistics services.
The U.S. Print and Related Services segment accounted for approximately 75% of the Company’s consolidated net sales in 2009.
International
The International segment includes the Company’s non-U.S. printing operations in Asia, Europe, Latin America and Canada. Additionally, this segment includes the Company’s business process outsourcing and Global Turnkey Solutions operations. Business process outsourcing provides transactional print and outsourcing services, statement printing, direct mail and print management services through its operations in Europe, Asia and North America. Global Turnkey Solutions provides outsourcing capabilities, including product configuration, customized kitting and order fulfillment for technology, medical device and other companies around the world through its operations in Europe, North America and Asia.
The International segment accounted for approximately 25% of the Company’s consolidated net sales in 2009.
Corporate
Corporate consists of unallocated general and administrative activities and associated expenses including, in part, executive, legal, finance, information technology, human resources, certain facility costs and LIFO inventory provisions. In addition, certain costs and earnings of employee benefit plans, primarily components of net pension and postretirement benefits expense other than service cost, are included in Corporate and not allocated to operating segments.
The Company has disclosed income (loss) from continuing 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 within the consolidated financial statements.
| Total Sales | Intersegment Sales |
Net Sales |
Income (loss) from continuing operations |
Assets of Continuing Operations |
Depreciation and Amortization |
Capital Expenditures |
|||||||||||||||||
|
Year ended December 31, 2009 |
|||||||||||||||||||||||
|
U.S. Print and Related Services |
$ | 7,464.5 | $ | (27.5 | ) | $ | 7,437.0 | $ | 489.2 | $ | 6,317.5 | $ | 422.2 | $ | 101.4 | ||||||||
|
International |
2,477.1 | (56.7 | ) | 2,420.4 | (36.0 | ) | 2,221.8 | 122.6 | 60.9 | ||||||||||||||
|
Total operating segments |
9,941.6 | (84.2 | ) | 9,857.4 | 453.2 | 8,539.3 | 544.8 | 162.3 | |||||||||||||||
|
Corporate(1) |
— | — | — | (108.9 | ) | 208.3 | 34.2 | 32.7 | |||||||||||||||
|
Total continuing operations |
$ | 9,941.6 | $ | (84.2 | ) | $ | 9,857.4 | $ | 344.3 | $ | 8,747.6 | $ | 579.0 | $ | 195.0 | ||||||||
|
Year ended December 31, 2008 |
|||||||||||||||||||||||
|
U.S. Print and Related Services |
$ | 8,722.9 | $ | (18.7 | ) | $ | 8,704.2 | $ | 708.9 | $ | 7,108.3 | $ | 432.9 | $ | 187.9 | ||||||||
|
International |
2,937.0 | (59.6 | ) | 2,877.4 | (564.6 | ) | 1,975.6 | 166.4 | 104.4 | ||||||||||||||
|
Total operating segments |
11,659.9 | (78.3 | ) | 11,581.6 | 144.3 | 9,083.9 | 599.3 | 292.3 | |||||||||||||||
|
Corporate(1) |
— | — | — | (184.8 | ) | 410.4 | 41.3 | 30.6 | |||||||||||||||
|
Total continuing operations |
$ | 11,659.9 | $ | (78.3 | ) | $ | 11,581.6 | $ | (40.5 | ) | $ | 9,494.3 | $ | 640.6 | $ | 322.9 | |||||||
|
Year ended December 31, 2007 |
|||||||||||||||||||||||
|
U.S. Print and Related Services |
$ | 8,625.1 | $ | (23.2 | ) | $ | 8,601.9 | $ | 823.8 | $ | 7,636.8 | $ | 405.1 | $ | 307.1 | ||||||||
|
International |
3,015.0 | (29.8 | ) | 2,985.2 | (315.0 | ) | 3,150.2 | 161.1 | 151.7 | ||||||||||||||
|
Total operating segments |
11,640.1 | (53.0 | ) | 11,587.1 | 508.8 | 10,787.0 | 566.2 | 458.8 | |||||||||||||||
|
Corporate(1) |
— | — | — | (193.7 | ) | 1,299.7 | 32.1 | 23.2 | |||||||||||||||
|
Total continuing operations |
$ | 11,640.1 | $ | (53.0 | ) | $ | 11,587.1 | $ | 315.1 | $ | 12,086.7 | $ | 598.3 | $ | 482.0 | ||||||||
| (1) | Corporate assets consist primarily of the following items at December 31, 2009: fixed assets of $65.4 million and deferred compensation plan assets of $50.0 million; December 31, 2008: cash and cash equivalents of $60.0 million, benefit plan assets of $14.3 million, deferred compensation plan assets of $44.5 million, investments in affordable housing of $27.4 million and fixed assets of $65.9 million; and December 31, 2007: cash and cash equivalents of $99.3 million, benefit plan assets of $833.2 million, deferred compensation plan assets of $52.2 million, investments in affordable housing of $29.5 million and fixed assets of $77.6 million. |
Restructuring and impairment charges by segment for 2009, 2008 and 2007 are described in Note 3.
|
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Note 20. Geographic Area and Product Information
The table below presents net sales and long-lived assets by geographic region. The amounts in this table differ from the segment data presented in Note 19 because each operating segment includes operations in multiple geographic regions, based on the Company’s management reporting structure.
| U.S. | Europe | Asia | Other | Combined | |||||||||||
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2009 |
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Net sales |
$ | 7,647.1 | $ | 1,063.9 | $ | 470.5 | $ | 675.9 | $ | 9,857.4 | |||||
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Long-lived assets(1) |
2,079.9 | 282.0 | 169.0 | 175.1 | 2,706.0 | ||||||||||
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2008 |
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|
Net sales |
$ | 8,938.4 | $ | 1,409.6 | $ | 509.7 | $ | 723.9 | $ | 11,581.6 | |||||
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Long-lived assets(1) |
2,345.6 | 276.8 | 180.9 | 153.0 | 2,956.3 | ||||||||||
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2007 |
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|
Net sales |
$ | 8,883.2 | $ | 1,563.4 | $ | 457.5 | $ | 683.0 | $ | 11,587.1 | |||||
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Long-lived assets(1) |
3,271.2 | 356.2 | 156.2 | 193.7 | 3,977.3 | ||||||||||
| (1) | Includes net property, plant and equipment, prepaid pension cost and other noncurrent assets. |
|
Products and services |
2009 Net Sales |
2008 Net Sales |
2007 Net Sales |
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|
Magazines, catalogs and retail inserts |
$ | 2,487.7 | $ | 3,183.7 | $ | 2,879.5 | |||
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Books and directories |
1,979.3 | 2,165.0 | 2,465.2 | ||||||
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Variable printing |
1,454.0 | 1,553.9 | 1,639.9 | ||||||
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Forms and labels |
1,105.2 | 1,242.5 | 1,251.9 | ||||||
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Commercial printing |
624.4 | 746.1 | 797.9 | ||||||
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Financial print |
487.8 | 645.7 | 685.0 | ||||||
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Global Turnkey Solutions |
321.6 | 455.1 | 468.5 | ||||||
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Office products |
228.7 | 271.7 | 107.7 | ||||||
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Print management |
236.7 | 201.3 | 274.4 | ||||||
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Total products |
8,925.4 | 10,465.0 | 10,570.0 | ||||||
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Logistics services |
508.7 | 667.0 | 569.9 | ||||||
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Premedia and related services |
160.9 | 178.7 | 166.4 | ||||||
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Business process outsourcing and other |
262.4 | 270.9 | 280.8 | ||||||
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Total services |
932.0 | 1,116.6 | 1,017.1 | ||||||
|
Total net sales |
$ | 9,857.4 | $ | 11,581.6 | $ | 11,587.1 | |||
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Note 21. New Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (“FASB”) issued The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles (GAAP) (“Codification”). The Codification is the single official source of authoritative U.S. accounting and reporting standards applicable for all nongovernmental entities, with the exception of guidance issued by the SEC. The Codification did not change GAAP, but organized it into an online research system sorted by individual accounting Topics, which are further divided into Subtopics. The FASB now issues new standards in the form of Accounting Standards Updates. The Codification is effective for financial statements issued for periods ending after September 15, 2009. The adoption of the Codification did not have a material impact on the Company’s consolidated financial position, annual results of operations or cash flows.
In September 2006, the FASB issued Accounting Standards Codification 820 “Fair Value Measurements and Disclosures” (“ASC 820”), which was adopted in the first quarter of 2008 for financial assets and the first quarter of 2009 for non-financial assets. This Topic clarified the definition of fair value, established a framework for measuring fair value and expanded the disclosures on fair value measurements. The adoption of ASC 820 did not have a material impact on the Company’s consolidated financial position, annual results of operations or cash flows.
In December 2007, the FASB issued Accounting Standards Codification 805 “Business Combinations” (“ASC 805”), which the Company adopted as of January 1, 2009. ASC 805 retained the requirement that the acquisition method of accounting (formerly known as the purchase method) be used for all business combinations and changed the accounting treatment for certain acquisition related costs, restructuring activities, and acquired contingencies, among other changes. It continued to require the identification and recognition of intangible assets separate from goodwill and was required to be adopted for acquisitions consummated after December 31, 2008, with certain provisions applied to earlier acquisitions. The adoption of ASC 805 did not have a material impact on the Company’s consolidated financial position, annual results of operations or cash flows for the year ended December 31, 2009. However, the Company expects that its adoption will reduce the Company’s operating earnings over time due to required recognition of acquisition and restructuring costs through operating earnings. The magnitude of this impact will be dependent on the number, size and nature of acquisitions in periods subsequent to adoption.
In December 2007, the FASB issued Accounting Standards Codification 810-10-65-1 (“ASC 810-10-65-1”) within the Consolidation Topic, which amended the accounting for and disclosure of the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. This guidance clarified the definition and classification of a noncontrolling interest, revised the presentation of noncontrolling interests in the consolidated income statement, established a single method of accounting for changes in a parent’s ownership interest in a subsidiary that does not result in deconsolidation, and required that a parent recognize a gain or loss in net earnings (loss) when a subsidiary is deconsolidated. It also required expanded disclosures in the consolidated financial statements that clearly identify and distinguish between the interests of the parent’s owners and the interests of the noncontrolling owners of a subsidiary. ASC 810-10-65-1 was adopted by the Company as of January 1, 2009 and did not have a material impact on the Company’s consolidated financial position, annual results of operations or cash flows. The required changes in presentation have been reflected in the Consolidated Balance Sheets, Statements of Operations and Statements of Cash Flows and in the notes to the Consolidated Financial Statements, where applicable.
In March 2008, the FASB issued Accounting Standards Codification 815-10-65-1 (“ASC 815-10-65-1”), which amended the disclosure requirements for derivative instruments and hedging activities. Entities are now required to provide enhanced disclosures about how and why an entity uses derivative instruments, how those instruments are accounted for, and how derivative instruments affect the entity’s statements of financial position, operations or cash flows. ASC 815-10-65-1 was adopted by the Company during the first quarter of 2009 and, as reflected in Note 14 to the Consolidated Financial Statements, did not have a material impact on the Company’s consolidated financial position, annual results of operations or cash flows.
In April 2009, the FASB issued new guidance within the Business Combinations Subtopic, Accounting Standards Codification 805-20 (“ASC 805-20”), which the Company adopted as of January 1, 2009. This new guidance amended the Business Combinations Subtopic to require that assets acquired and liabilities assumed in a business combination that arise from contingencies be recognized at fair value, if fair value can be determined during the measurement period. If the fair value cannot be determined, the contingency is recognized at the acquisition date in accordance with Accounting Standards Codification 450 “Contingencies,” if it meets the criteria for recognition in that guidance. The adoption of the new guidance within ASC 805-20 did not have a material impact on the Company’s consolidated financial position, annual results of operations or cash flows.
In April 2009, the FASB issued new guidance within the Fair Value Measurements and Disclosures Subtopic, Accounting Standards Codification 820-10, which the Company adopted during the second quarter of 2009. This new guidance amended the Fair Value Measurements and Disclosures Subtopic to require disclosures about fair value of financial instruments for interim reporting periods, as well as in annual financial statements. The adoption of these new disclosure requirements did not have a material impact on the Company’s consolidated financial position, annual results of operations or cash flows.
In May 2009, the FASB issued Accounting Standards Codification 855 “Subsequent Events” (“ASC 855”), which established the principles for subsequent events and was adopted by the Company during the second quarter of 2009. The adoption of ASC 855, as reflected in Note 22 to the Consolidated Financial Statements, did not have a material impact on the Company’s consolidated financial position, annual results of operations or cash flows.
In August 2009, the FASB issued Accounting Standards Update No. 2009-05 “Measuring Liabilities at Fair Value” (“ASU 2009-05”), which amends the Fair Value Measurements and Disclosures Topic by providing additional guidance clarifying the measurement of liabilities at fair value, and was adopted by the Company in the fourth quarter of 2009. The adoption of ASU 2009-05 did not have a material impact on the Company’s consolidated financial position, annual results of operations or cash flows.
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Note 22. Subsequent Events
The Company evaluated and disclosed material subsequent events in the accompanying consolidated financial statements and footnotes through February 24, 2010, the date of issuance of its Annual Report on Form 10-K for the year ended December 31, 2009.
On February 23, 2010, the Company announced that it had signed a definitive agreement to acquire Bowne & Co., Inc. (“Bowne”) for approximately $481 million in cash. Bowne, a provider of shareholder and marketing communication services, is headquartered in New York, New York, and has operations in North America, Latin America, Europe and Asia. The acquisition is expected to close in the second half of 2010 and is subject to customary closing conditions, including regulatory approval and approval of Bowne shareholders.
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