R. R. DONNELLEY & SONS COMPANY The following discussion of our financial condition and results of operations should be read together with the Consolidated Financial Statements and Notes to those statements included in Item 15 of Part IV of this Annual Report on Form 10-K. Business
For a description of our business, segments and product and service offerings, see Item 1, Business, of Part I of this Annual Report on Form 10-K.
Our product and service offerings primarily consist of commercial print, packaging, statements, direct marketing, labels, digital print and fulfillment, supply chain management, forms, business process outsourcing, and digital and creative solutions. Merger Agreement OnDecember 14, 2021 , we entered into a definitive merger agreement under which we agreed to be acquired by affiliates ofChatham Asset Management, LLC ("Chatham"), a leading private investment firm. Under the terms of the merger agreement, an affiliate of Chatham will acquire all of the outstanding shares of RRD common stock not already owned by Chatham, and RRD stockholders will receive$10.85 per share in cash for each share of RRD common stock. All regulatory approvals have been obtained and at a special meeting onFebruary 23, 2022 , RRD's stockholders approved the proposed merger. The merger with Chatham is expected to close onFebruary 25, 2022 . Upon completion of the transaction, RRD's shares will no longer trade on theNew York Stock Exchange and RRD will become a private company. Discontinued Operations OnNovember 2, 2020 , we sold DLS Worldwide and onNovember 3, 2020 we sold International Logistics, which represented the remaining parts of the broader Logistics business and were components of the Business Services reporting segment, for a cash purchase price of$225.0 million and$13.0 million respectively, subject to customary working capital adjustments. These transactions are part of our strategy to optimize our portfolio and reduce debt. As part of our plan, we previously sold the Print Logistics business inJuly 2018 and the Courier Logistics business inMarch 2020 . Accordingly, we have reflected the Print Logistics business,Logistics Courier business, the DLS Worldwide business, and the International Logistics business as discontinued operations. The financial results of these businesses have been excluded from continuing operations and segment results for all periods presented unless otherwise noted. Refer to Note 2 -Discontinued Operations to our Consolidated Financial Statements for additional information.
Executive Overview
Response to COVID-19
During 2021 and 2020, the COVID-19 pandemic created, and continues to create, significant business challenges for companies around the world, including many of our clients across the broad number of industries we serve. In response to the pandemic, we established a formal operating plan that we are utilizing to manage our business through this challenging global business environment. Our operating plan consists of three clear priorities: to protect the health and safety of our employees, to sustain operational and supply chain continuity, and to effectively manage our business performance and liquidity throughout this very volatile period. EMPLOYEES HEALTH AND SAFETY We are continually evolving our policies and procedures to adhere to the latest best practices being provided by theCenters for Disease Control ("CDC") andWorld Health Organization ("WHO"). Our cross-functionalCOVID Task Force created at the onset of the pandemic has developed safety measures, policies, and procedures for our workplace. We have implemented flexible working policies, including telecommuting and staggered shifts, while allowing for voluntary leaves of absence. We have encouraged vaccinations and recently have begun to welcome employees back into our offices using a cautious approach. We continue to enforce social distancing policies within all of our facilities, follow local and state guidelines concerning face coverings, and provide training for adherence to personal hygiene best practices in line withCDC andWHO guidelines.
SUPPLY CHAIN CONTINUITY
We have activated our business continuity plans and are leveraging our strong
supply chain partnerships to continue to meet the ongoing needs of our 25,000
global clients. We remain fully operational across the 28 countries in which we
operate.
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BUSINESS IMPACT
Although the COVID-19 pandemic continued to create challenges in 2021, we believe that there are three primary factors that are helping mitigate the top line impact from the pandemic. These factors include our diverse portfolio of products and services, the lack of client concentration, and the products and services we have introduced to meet the evolving needs of our clients. The extent to which the pandemic will continue to impact our business, results of operations, financial position and cash flows will depend on future developments which remain highly uncertain and cannot be fully predicted or estimated at this time. However, amidst the global uncertainty posed by COVID-19, we are positioning the Company to weather economic uncertainty and protect the short and long-term interests of our stakeholders. Continuing into 2022, we remain laser-focused on lowering our cost structure and on maintaining a sufficient level of liquidity.
2021 OVERVIEW
Net sales for the year endedDecember 31, 2021 were$4,963.7 million , an increase of$197.4 million , or 4.1%, compared to the year endedDecember 31, 2020 . Net sales increased$50.0 million due to favorable changes in foreign exchange rates and were unfavorably impacted by$6.5 million due to theChile business closure in 2020. Net sales also increased due to higher volume reflecting strengthening demand for many of our products and services and higher prices as we attempt to recover inflationary cost increases. Notably, higher demand for books and trading cards contributed to the growth in ourCommercial Print and Packaging products. The increase also reflects continued recovery from the COVID-19 pandemic, partially offset by large, non-recurring pandemic-related orders in 2020 and the Census project, which was fully completed in the third quarter of 2020. Income from operations for the year endedDecember 31, 2021 was$163.5 million , an increase of$55.4 million compared to the year endedDecember 31, 2020 . The increase was primarily driven by higher sales, cost control initiatives and lower restructuring and impairment expenses, partially offset by merger related expenses and an unfavorable impact of foreign exchange rates on expenses. We continue to assess opportunities to reduce our cost structure and enhance productivity throughout the business. During the year endedDecember 31, 2021 , we realized significant cost savings from recent and previous restructuring activities including the reorganization of administrative and support functions across all segments, several facility consolidations, and asset rationalization. These savings were partially offset by higher variable incentive compensation and the effect of unfavorable exchange rates on expenses. Selling, general and administrative expenses (exclusive of depreciation and amortization) increased by$3.1 million , or 0.5%, for the twelve months endedDecember 31, 2021 compared to the same period in 2020 reflecting higher sales and increased compensation expense, partially offset by cost control initiatives. Net cash provided by operating activities for the year endedDecember 31, 2021 was$92.1 million as compared to$149.8 million for the year endedDecember 31, 2020 . The decrease in operating cash flow in 2021 was primarily driven by$44.2 million of merger related cash payments including accelerated incentive compensation, the payment of a break fee and other professional fees. Operating cash flow was also impacted by$31.1 million of LSC bankruptcy related payments primarily associated with lump sum settlements of two MEPP plans, and a$17.5 million repayment of payroll taxes that were deferred in 2020 as part of the CARES Act. Operating cash flow also decreased due to working capital investments, particularly inventory, higher incentive compensation payments, and a$9.2 million payment to terminate certain interest rate swaps, partially offset by lower restructuring, tax and interest payments.
OUTLOOK
Vision and Strategy
We work with our clients to create, manage, deliver and optimize their
multichannel communications strategies. We have and will continue to develop our
creative and design, content management, digital and print production, supply
chain management and distribution services to address our clients' evolving
needs.
Our global platform provides differentiated solutions for our clients through
our broad range of complementary communications services and innovative
leadership in both conventional print and digital technologies. This platform
has enabled RRD to develop strong client relationships, and we are focused on
expanding these relationships to a broader range of our offerings. The
flexibility of our platforms enhances the value we deliver to our clients and we
intend to expand our capabilities in order to make it easier for clients to
manage their full range of communication needs.
We believe productivity improvements and cost reductions are critical to our
competitiveness. We continue to implement strategic initiatives across each of
our segments to reduce our overall cost structure and enhance productivity
primarily through restructuring which includes consolidations, reorganizations
and integrations of operations, streamlining of administrative and support
activities, and asset rationalization.
25
--------------------------------------------------------------------------------We seek to deploy our capital using a balanced approach in order to ensure financial flexibility and provide returns to stockholders. Our near-term priority for capital deployment is principal and interest payments on our debt obligations. We believe that a strong financial condition is important to clients focused on establishing or growing long-term relationships.
We use several key indicators to gauge progress toward achieving these objectives. These indicators include organic sales growth, operating margins, cash flow from operations and capital expenditures. We target long-term net sales growth, while improving operating margins by achieving productivity improvements that offset the impact of price declines and cost inflation. Cash flows from operations are targeted to be stable over time, but in any given year can be significantly impacted by the timing of non-recurring or infrequent receipts and expenditures, the level of required pension and OPEB plan contributions, the timing of tax payments and the impact of working capital changes. We face many challenges and risks as a result of competing in highly competitive global markets. Refer to Item 1A, Risk Factors, of Part I of this Annual Report on Form 10-K for further discussion.
RESULTS OF OPERATIONS FOR THE YEAR ENDED
Consolidated
The following table shows the results of operations for the years ended
Year Ended December 31,
2021 2020 $ Change % Change
(in millions, except percentages)
Net sales 4,963.7 4,766.3 197.4 4.1 %
Cost of sales 3,994.9 3,789.2 205.7 5.4 %
Gross profit 968.8 977.1 (8.3 ) (0.8 %)
Selling, general and administrative expenses
(exclusive of depreciation
and amortization) 600.6 597.5 3.1 0.5 %
Restructuring, impairment and other
charges-net 33.3 100.0 (66.7 ) (66.7 %)
Depreciation and amortization 130.5 145.7 (15.2 ) (10.4 %)
Other operating expense 40.9 25.8 15.1 58.5 %
Income from operations $ 163.5 $ 108.1 $ 55.4 51.2 %
Continuing Operations
Net sales for the year endedDecember 31, 2021 increased$197.4 million , or 4.1%, to$4,963.7 million versus the same period in 2020. Net sales increased$50.0 million due to favorable changes in foreign exchange rates and were unfavorably impacted by$6.5 million due to theChile business closure in 2020. In addition to these factors, net sales increased due to higher volume reflecting strengthening demand for many of our products and services. Notably, higher demand for e-commerce sales have contributed to the growth in our Packaging and Labels products and higher demand for books and cards have contributed to the growth of ourCommercial Print and Packaging products. The increase also reflects continued recovery from the COVID-19 pandemic, partially offset by the Census project, which was fully completed in the third quarter of 2020. Higher prices from our efforts to recover inflationary cost increases also contributed to the net sales increase. Cost of sales increased$205.7 million , or 5.4%, for the year endedDecember 31, 2021 versus the same period in 2020, primarily due to higher volume and higher cost of raw materials. As a percentage of net sales, cost of sales increased slightly for the twelve months endedDecember 31, 2021 versus the same period in 2020. Gross profit decreased$8.3 million to$968.8 million for the year endedDecember 31, 2021 versus the same period in 2020. Gross margin decreased from 20.5% to 19.5% for the twelve months endedDecember 31, 2021 versus the same period in 2020, primarily reflecting the impact of unfavorable foreign exchange rates on expenses and rising costs of raw materials. Selling, general and administrative expenses increased$3.1 million to$600.6 million for the year endedDecember 31, 2021 versus the same period in 2020, primarily as a result of higher volume, higher incentive compensation expense, partially due to the merger and the impact of a higher stock price on certain cash-settled incentive awards, and the impact of unfavorable exchange rates on expenses, partially offset by cost control initiatives. As a percentage of net sales, selling, general and administrative expenses decreased from 12.5% in the prior year to 12.1% in 2021. For the year endedDecember 31, 2021 , net restructuring, impairment and other charges decreased$66.7 million to$33.3 million versus the year endedDecember 31, 2020 . The decrease was primarily driven by lower restructuring activity, gains on sale of several facilities, including theChile facility, which was sold in the fourth quarter of 2021, and lower expenses related to LSC MEPP liabilities. 26 -------------------------------------------------------------------------------- Depreciation and amortization decreased$15.2 million to$130.5 million for the year endedDecember 31, 2021 versus the same period in 2020, primarily due to lower capital spending in recent years compared to historical levels. Depreciation and amortization included$18.9 million and$19.3 million of amortization of other intangible assets related to client relationships, trade names, trademarks, licenses and agreements for the twelve months endedDecember 31, 2021 and 2020, respectively. Other operating expense for the year endedDecember 31, 2021 was$40.9 million compared to$25.8 million for the same period in 2020. Other operating expenses in 2021 primarily included expenses related to the ongoingSEC and DOJ investigations, as well as a$12.0 million merger agreement break fee paid toAtlas River Parent Inc. ("Atlas") and other professional fees related to the planned merger. The prior year included expenses related to the ongoingSEC and DOJ investigations, as well as a$2.9 million loss on a business disposition. Income from operations for the year endedDecember 31, 2021 increased$55.4 million from 2020 to$163.5 million as a result of the factors discussed above. Year Ended December 31, 2021 2020 $ Change % Change (in millions, except percentages) Interest expense-net$ 127.6 $ 135.1 $ (7.5 ) (5.6 %) Investment and other income-net (19.9 ) (14.1 ) (5.8 ) 41.1 % Loss on debt extinguishment 7.1 3.0 4.1 136.7 % Net interest expense decreased by$7.5 million to$127.6 million for the year endedDecember 31, 2021 versus the same period in 2020. Net interest expense included$9.2 million related to the termination of certain interest rate swaps in the second quarter of 2021. Excluding the effects of the swap termination, our interest expense decreased approximately$16.7 million , primarily due to prior repurchases and repayment of higher interest rate debt and lower average borrowings and interest rates on the ABL Credit Facility. Investment and other income, net for the years endedDecember 31, 2021 and 2020 was$19.9 million and$14.1 million , respectively, and is principally comprised of net pension and OPEB income. Loss on debt extinguishment for the year endedDecember 31, 2021 was$7.1 million primarily due to costs related to the partial repayment of the Term Loan in the second quarter of 2021. Loss on debt extinguishment for the year endedDecember 31, 2020 was$3.0 million . See Note 11, Debt, to the Consolidated Financial Statements for further discussion. Year Ended December 31, 2021 2020
$ Change % Change
(in millions, except percentages)
Income (loss) from continuing operations
before income taxes $ 48.7 $ (15.9 ) $ 64.6 nm
Income tax expense 44.9 10.0 34.9 nm
Effective income tax rate 92.2 % 62.9 %
For 2021, we continue to report the tax impact of limitations on our interest
expense deduction. Non-deductible interest expense will be carried forward as a
deferred tax asset; however, it is more likely than not that the benefit of the
deferred tax asset will not be fully realized and a full valuation allowance was
recorded. Also included in 2021 is the tax impact of non-deductible
compensation.
Included in 2020 is the impact from the surrender of corporate owned life insurance policies as well as tax benefits from additional interest expense deductions as result of the CARES Act and additional tax guidance issued in 2020.
Discontinued Operations Net income from discontinued operations was$0.6 million for the twelve months endedDecember 31, 2021 compared to$124.9 million for the twelve months endedDecember 31, 2020 . The net income from discontinued operations for the twelve months endedDecember 31, 2021 reflects the settlement of certain contingencies associated with the business divestitures and final net working capital adjustments. Net income from discontinued operations in 2020 includes an after-tax net gain of$127.4 million (tax of$10.6 million ) recorded on the sale of three Logistics businesses sold during 2020, partially offset by a$20.6 million non-cash charge related to impairment of goodwill recorded in the first quarter of 2020. Net income attributable to RRD common stockholders for the year endedDecember 31, 2021 was$3.7 million compared to$98.5 million for the year endedDecember 31, 2020 . 27 --------------------------------------------------------------------------------
Information by Segment
Business Services
Year Ended December 31,
2021 2020
(in millions, except percentages)
Net sales $ 3,909.5 $ 3,685.2
Income from operations 292.4 227.9
Operating margin 7.5 % 6.2 %
Restructuring, impairment and other charges-net 7.0 21.4
Net sales for the Business Services segment for the year ended December 31, 2021
were $3,909.5 million , an increase of $224.3 million , or 6.1%, compared to 2020.
Net sales increased $50.0 million due to favorable changes in foreign exchange
rates and were unfavorably impacted by $6.5 million due to the Chile business
closure in 2020. Net sales also increased due to higher volume and higher prices
reflecting strengthening demand for many of our products and services. Notably,
higher demand for e-commerce sales have contributed to the growth in our
Packaging and Labels products and higher demand for books and cards have
contributed to the growth of our Commercial Print products. The increase also
reflects continued recovery from the COVID-19 pandemic, partially offset by
one-time pandemic related orders in 2020, primarily within our Supply chain
management offerings and continued low demand of Statement printing partially
resulting from secular decline accelerated by the COVID-19 pandemic. The
following table summarizes net sales by products and services in the Business
Services segment:
Year Ended December 31,
Products and Services 2021 2020 $ Change % Change
(in millions, except percentages)
Commercial print $ 1,535.5 $ 1,357.7 $ 177.8 13.1 %
Packaging $ 770.5 687.6 82.9 12.1 %
Labels $ 532.9 496.6 36.3 7.3 %
Statements $ 430.0 441.6 (11.6 ) (2.6 %)
Supply chain management $ 279.7 329.9 (50.2 ) (15.2 %)
Forms $ 195.3 202.4 (7.1 ) (3.5 %)
Business process outsourcing $ 165.6 169.4 (3.8 ) (2.2 %)
Total Business Services $ 3,909.5 $ 3,685.2 $ 224.3 6.1 %
Business Services segment income from operations increased $64.5 million to
$292.4 million for the year ended December 31, 2021 compared to the same period
in 2020, primarily due to increased volume, increased prices, cost reductions
and lower restructuring, impairment and other expenses, partially offset by the
impact of unfavorable foreign exchange rates on expenses of $29.5 million and
inflation.
Marketing Solutions
Year Ended December 31,
2021 2020
(in millions, except percentages)
Net sales $ 1,054.2 $ 1,081.1
Income from operations 61.5 56.3
Operating margin 5.8 % 5.2 %
Restructuring, impairment and other charges-net 7.5 9.9
Net sales for the Marketing Solutions segment for the year ended December 31,
2021 were $1,054.2 million , a decrease of $26.9 million , or 2.5%, compared to
2020. Net sales decreased due to lower volume in direct marketing attributable
to the 2020 Census contract, which was fully completed in the third quarter of
2020, partially offset by higher order volume reflecting continued recovery from
the COVID-19 pandemic. The following table summarizes net sales by products and
services in the Marketing Solutions segment:
Year Ended December 31,
Products and Services 2021 2020 $ Change % Change
(in millions, except percentages)
Direct marketing $ 534.4 $ 555.4 $ (21.0 ) (3.8 %)
Digital print and fulfillment $ 431.8 425.7 6.1 1.4 %
Digital and creative solutions $ 88.0 100.0 (12.0 ) (12.0 %)
Total Marketing Solutions $ 1,054.2 $ 1,081.1 $ (26.9 ) (2.5 %)
28-------------------------------------------------------------------------------- Marketing Solutions segment income from operations increased$5.2 million to$61.5 million for the year endedDecember 31, 2021 compared to the same period in 2020, primarily due to the favorable impact of cost control initiatives and lower restructuring expenses, partially offset by lower volumes and inflation.
Corporate
Corporate operating expenses in the year endedDecember 31, 2021 were$190.4 million , an increase of$14.3 million compared to the same period in 2020. The increase was primarily driven by merger related expenses and increased incentive compensation expense, largely attributable to an increase in our stock price, partially offset by lower restructuring expenses.
RESULTS OF OPERATIONS FOR THE YEAR ENDED
Our comparison of 2020 results to 2019 results is included in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 , under Part II Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations.
LIQUIDITY AND CAPITAL RESOURCES
We believe that we have sufficient liquidity to support our ongoing operations and to invest in future growth to create value for our stockholders. Our operating cash flows, existing cash balances and available capacity under our asset-based senior secured revolving credit facility (the "ABL Credit Facility") are our primary sources of liquidity and are expected to be used for, among other things, capital expenditures, completion of restructuring programs and payment of interest and principal on our long-term debt obligations. The following describes our cash flows for the years endedDecember 31, 2021 , 2020 and 2019. Year Ended December 31, 2021 2020 2019 (in millions)
Net cash provided by operating activities
$ 139.3 Net cash (used in) provided by investing activities (55.3 ) 305.0 (25.8 ) Net cash used in financing activities (75.3 ) (329.3
) (289.4 ) Effect of exchange rates on cash, cash equivalents and restricted cash
1.2 8.3 (3.9 )
Net (decrease) increase in cash, cash equivalents
and restricted cash $ (37.3 ) $ 133.8
Operating cash inflows are largely attributable to sales of our products and
services. Operating cash outflows are largely attributable to recurring
expenditures for raw materials, labor, rent, interest, taxes and other operating
activities.
29-------------------------------------------------------------------------------- Net cash provided by operating activities in 2021 was$92.1 million ,$57.7 million lower than in 2020. The decrease in operating cash provided by operating activities in 2021 was primarily driven by$44.2 million of merger related cash payments including accelerated incentive compensation, the payment of a break fee and professional fees. Further, during 2021 we made$31.1 million of LSC bankruptcy related payments primarily associated with lump sum settlements of two MEPP plans, and a$17.5 million repayment of payroll taxes deferred in 2020 as part of the CARES Act. Operating cash flow also decreased due to working capital investments, higher incentive compensation payments, and a$9.2 million payment to terminate certain interest rates swaps, partially offset by lower restructuring, tax and interest payments. In addition, the prior year amount benefitted from the deferral of payroll taxes of$35.1 million . Included in net cash provided by operating activities were the following operating cash (outflows) inflows: Year Ended December 31, 2021 2020 2019 (in millions) Income tax payments, net of tax refunds$ (39.2 ) $ (61.5 ) $ (60.9 ) Interest payments (114.4 ) (125.8 ) (158.6 ) Performance-based compensation payments (59.4 ) (48.4 ) (45.4 ) Merger related payments: Accelerated Incentive Compensation (25.5 ) - - Break fee payment to Atlas (12.0 ) - - Professional fees (6.7 ) - - Restructuring and MEPP payments (59.8 ) (71.9 ) (42.6 ) LSC bankruptcy related payments, including MEPP (31.1 ) (3.7 ) - Payments on interest rate swap terminations (9.2 ) - - Payments to deferred compensation participants - (47.0 ) - Pension and other postretirement benefits plan contributions (5.0 ) (9.5 ) (8.6 )
Significant cash (outflows) inflows included in investing and financing activities for each period were as follows:
Year Ended December 31,
2021 2020 2019
(in millions)
Capital expenditures $ (73.3 ) $ (85.6 ) $ (138.8 )
Acquisition of business - - (3.0 )
Dispositions of businesses, net of cash disposed (1.4 ) 247.6 50.6
Proceeds from sales of property, plant and equipment 19.2 43.0
65.4
Proceeds related to life insurance policies 0.2 100.0
-
Proceeds from issuance of long-term debt 451.1 -
-
Payments on other short-term debt - - (37.9 ) Payments of current maturities and long-term debt (524.8 ) (281.0 ) (223.0 ) Net proceeds (payments) under credit facilities 32.0 (42.0 ) (17.0 ) Dividends paid - (2.1 ) (8.5 ) Capital expenditures in 2021 were$12.3 million and$65.5 million lower than in 2020 and 2019, respectively. Capital expenditures in 2019 were higher primarily due to investments associated with building a new facility in advance of the expected sale and relocation of a printing facility inShenzhen, China and additional investments related to the 2020 Census contract. Proceeds from disposition of businesses included the sales of Courier Logistics, DLS Worldwide, and International Logistics in 2020 and the sale of the GDS and R&D businesses in 2019. Proceeds from sale of investments and other assets in 2021 included cash proceeds from the sale of restructured facilities of$13.4 million . Proceeds from sale of investments and other assets in 2020 primarily included$25.1 million cash received as a deposit for the expected sale of a printing facility inShenzhen, China and cash proceeds from the sale of restructured facilities of$13.7 million . In 2020, we also received$100.0 million in proceeds primarily from the termination of certain life insurance policies. Proceeds from issuances of long-term debt during the year endedDecember 31, 2021 reflects the issuance of$450 million of 6.125% senior secured notes due 2026 during the second quarter. Payments of current maturities and long-term debt in 2021 primarily reflects the repayment of$387.6 million of principal on the Term Loan, the redemption in December of the$79.3 million of notes maturing inFebruary 2022 and repayment of the$55.6 million of the debentures that matured onApril 15, 2021 . Payments of current maturities and long-term debt in 2020 represent repurchases of outstanding debt with maturities from 2020 to 2024 along with the repayment of the remaining balance of the notes that matured onJune 15, 2020 . We had$32.0 million of outstanding borrowings under our ABL Credit Facility onDecember 31, 2021 . 30 --------------------------------------------------------------------------------
Dividends
OnApril 6, 2020 , the Board of Directors of the Company decided to suspend all dividend payments as part of the Company's response to the COVID-19 outbreak. See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, Executive Overview, Response to COVID-19 Section for further discussion. Each of our ABL Credit Agreement, Term Loan Credit Agreement and indenture for our Secured Notes limit availability to make dividend payments, subject to specified exceptions. Our Board of Directors must review and approve future dividend payments and will determine whether to declare additional dividends based on our operating performance, expected future cash flows, debt levels, liquidity needs and investment opportunities.
Contractual Cash Obligations and other Commitments
As ofDecember 31, 2021 , we had$1.5 billion of outstanding debt. The next scheduled principal payment of$75.0 million is due in 2023. In addition, we have certain contractual obligations for the purchase of property, plant and equipment of$31.2 million payable in 2022. During the year endedDecember 31, 2020 , we deferred the employer portion of payroll tax of$35.1 million as part of the CARES Act. We repaid the first half of the deferred amount in the fourth quarter of 2021 and we have an obligation to repay the remaining one-half in the fourth quarter of 2022. We also have certain other contractual obligations, including certain MEPP withdrawal obligations (see Note 5, Restructuring, Impairment and Other Charges and Note 9, Retirement Plans, to the Consolidated Financial Statements, for further discussion) and obligations to pay transition tax (see Note 10, Income Taxes, to the Consolidated Financial Statements, for further discussion). We expect to be able to meet these obligations using our cash flow from operations, cash balances, and availability under our ABL Credit Facility. Cash and cash equivalents were$280.2 million as ofDecember 31, 2021 , a decrease of$8.6 million compared toDecember 31, 2020 . Included in Cash and cash equivalents atDecember 31, 2021 were$1.9 million of short-term investments, which primarily consisted of short-term deposits and money market funds. These investments are held at institutions with sound credit ratings and are highly liquid. Liquidity Our cash balances are held in numerous locations throughout the world, including substantial amounts held outside ofthe United States . Cash and cash equivalents as ofDecember 31, 2021 included$14.1 million in theU.S. and$266.1 million at international locations. We maintain cash pooling structures that enable participating international locations to draw on our international cash resources to meet local liquidity needs. Foreign cash balances may be loaned from certain cash pools toU.S. operating entities on a temporary basis in order to reduce our short-term borrowing costs or for other purposes. During the year endedDecember 31, 2021 , we transferred approximately$64 million of cash held in international jurisdictions to theU.S. which was used to reduce debt outstanding. In future years we have further opportunities to repatriate foreign cash, primarily generated from current year earnings, in a tax efficient manner. As ofDecember 31, 2021 , we were in compliance with the covenants under our debt agreements and expect to remain in compliance based on our estimates of operating and financial results for 2022 and the foreseeable future. As ofDecember 31, 2021 , we met all the conditions required to borrow under the ABL Credit Agreement and we expect to continue to meet the borrowing conditions. As ofDecember 31, 2021 , we had$32.0 million of outstanding borrowings and$67.3 million of letters of credit issued under the ABL Credit Facility. Based on the Borrowing Base as ofDecember 31, 2021 and outstanding letters of credit, we had$550.7 million of borrowing capacity available under the ABL Credit Facility. We also had$143.4 million in other uncommitted credit facilities, primarily outside theU.S. , of which we had$111.9 million in outstanding letters of credit, bank guarantees and bank acceptance drafts. 31 -------------------------------------------------------------------------------- The current availability under the ABL Credit Facility as ofDecember 31, 2021 is shown in the table below: December 31, 2021 Availability (in millions) ABL Credit Facility $ 650.0 Usage Borrowings under the ABL Credit Facility $ 32.0 Outstanding letters of credit 67.3 $ 99.3 Current availability at December 31, 2021 $ 550.7 Cash and cash equivalents 280.2 Total available liquidity(a) $ 830.9
(a) Total available liquidity does not include credit facilities of non-
subsidiaries, which are uncommitted facilities.
OnApril 16, 2021 , we amended the ABL Credit Facility to, among other things, extend the maturity date fromSeptember 29, 2022 toApril 16, 2026 and reduce the aggregate commitments from$800 million to$650 million . The failure of a financial institution supporting the ABL Credit Facility would reduce the amount of underlying commitments unless a replacement institution was added. Currently, the ABL Credit Facility is supported by eightU.S. financial institutions. OnNovember 4, 2021 ,Moody's Investors Service, Inc. ("Moody's) placed our credit ratings under review for potential downgrade in connection with the initial announcement of a merger transaction. Our credit ratings from Moody's andS&P Global Ratings ("S&P") as ofDecember 31, 2021 are shown in the table below: S&P Moody's Long-term corporate credit rating B (stable) B2 (under review) Senior unsecured debt B- B3 Term Loan B+ B1 At the request of Chatham, we amended our Term Loan Credit Agreement onFebruary 7, 2022 . The Term Loan Credit Agreement amendment provides, among other things, to permit the Chatham merger transaction, refinance$150 million of the existing term loans, provide for a tranche of$600 million of new incremental term loans, extend the maturity date of all the term loans toNovember 1, 2026 and change the reference rate to be based on the secured overnight financing rate (SOFR). Jefferies will also be appointed as the administrative agent under the Term Loan Credit Agreement and certain covenants and other provisions will be modified. The effectiveness of the term loan amendment is conditioned upon the consummation of the Chatham merger transaction. Also at the request of Chatham, we amended our existing ABL Credit Agreement inFebruary 2022 . Upon the effectiveness of the amendment, the ABL Credit Agreement will be amended to, among other things, permit the Chatham merger transaction and change the reference rate forU.S. Dollar borrowings to SOFR, for Sterling borrowings to SONIA and for Yen borrowings to TIBOR. Wells Fargo will also be appointed as the administrative agent under the ABL Credit Agreement and certain negative covenants will be modified to permit the Chatham merger transaction. The effectiveness of the ABL amendment is conditioned upon the consummation of the Chatham merger transaction.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Our most critical accounting policies are those that are most important to the portrayal of our financial condition and results of operations, and which require us to make our most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. We have identified the following as our most critical accounting policies and judgments. Although we believe that our estimates and assumptions are reasonable, they are based upon information available when they are made, and therefore, actual results may differ from these estimates under different assumptions or conditions.
Revenue Recognition
All revenue recognized in the Consolidated Statements of Operations is considered to be revenue from contracts with clients.
32
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Our products revenue is primarily recognized at a point in time. We generally
recognize revenue for products upon the transfer of control of the products to
the client which typically occurs upon transfer of title and risk of ownership,
which is generally upon shipment to the client. For certain products, we are
able to recognize revenue for completed inventory billed but not yet shipped at
the client's direction.
Our services revenue is recognized both at a point in time as well as over time.
Our business process outsourcing and digital and creative solutions revenue is
recognized over time or at a point in time, depending on the nature of the
service which could be either recurring or project-based.
Our methodology for allocating the purchase price of acquisitions is based on established valuation techniques, and when appropriate, includes valuations performed by management or third-party appraisers. Based on our current organization structure, we have identified 14 reporting units for which cash flows are determinable and to which goodwill may be allocated.Goodwill is either assigned to a specific reporting unit or allocated between reporting units based on the relative excess fair value of each reporting unit. We perform our goodwill impairment tests annually as ofOctober 31 or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value, indicating a possible impairment may exist. As ofOctober 31, 2021 , seven reporting units had goodwill. The commercial print, digital print and fulfillment, forms, content and creative services, business process outsourcing,Latin America andCanada reporting units had no goodwill as ofOctober 31, 2021 . In the impairment test for goodwill, the estimated fair value of each reporting unit is compared to its carrying value, including goodwill. If the carrying value of a reporting unit exceeds the estimated fair value, an impairment loss is recognized equal to the excess, limited to the total amount of goodwill allocated to that reporting unit.
Qualitative Assessment for Impairment
For all of our reporting units with goodwill, in 2021, we performed a qualitative assessment to determine whether it was more likely than not that the fair value of the reporting unit was less than its carrying value. In performing this analysis, we considered various factors, including the effect of market or industry changes and the reporting unit's actual results compared to projected results. In addition, we considered how other key assumptions used in the prior annual goodwill impairment test could be impacted by changes in market conditions and economic events, including the impact of COVID-19. As part of the qualitative review of impairment, we analyzed the potential change in fair value of the reporting units based on their operating results for the ten months endedOctober 31, 2021 compared to expected results. Based on our qualitative assessment, we concluded that as ofOctober 31, 2021 , it was more likely than not that the fair value of each of the reporting units was greater than its carrying value. Other Long-Lived Assets We evaluate the recoverability of other long-lived assets, including property, plant and equipment and certain identifiable intangible assets, whenever events or changes in circumstances indicate that the carrying value of an asset or asset group may not be recoverable. Factors which could trigger an impairment review include significant underperformance relative to historical or projected future operating results, significant changes in the manner of use of the assets or the strategy for the overall business, a significant decrease in the market value of the assets or significant negative industry or economic trends. When we determine that the carrying value of long-lived assets may not be recoverable based upon the existence of one or more of the indicators, the assets are assessed for impairment based on the estimated future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. If the carrying value of an asset exceeds its estimated future undiscounted cash flows, an impairment loss is recorded for the excess of the asset's carrying value over its fair value. 33 --------------------------------------------------------------------------------
Pension and OPEB Plans
We record annual income and expense amounts and our year-end obligations relating to our pension and OPEB plans based on calculations which include various actuarial methods and assumptions, including discount rates, mortality, utilization rates of retiree health care accounts, and healthcare cost trend rates, among others. We review our actuarial assumptions on an annual basis as ofDecember 31 (or more frequently if a significant event requiring re-measurement occurs) and makes modification to the assumptions based on current rates and trends when it deems it appropriate to do so. The effect of modifications of actuarial assumptions on the value of the pension and OPEB obligations is recognized within other comprehensive income (loss) and amortized into earnings over future periods. We believe that the assumptions utilized in recording our obligations under our plans are reasonable based on our experience, market conditions and input from our actuaries and investment advisors. The discount rates for pension benefits atDecember 31, 2021 and 2020 were 2.7% and 2.4%, respectively. The discount rates for OPEB plans were 2.7% and 2.2% atDecember 31, 2021 and 2020, respectively.
We use the full yield curve approach in the estimation of the interest components of net pension and OPEB plan expense (income) by applying the specific spot rates along the yield curve used in the determination of the projected benefit obligation to the relevant projected cash flows.
A one-percentage point change in the discount rates atDecember 31, 2021 would have the following effects on the accumulated benefit obligation and projected benefit obligation: Pension Plans 1.0% 1.0% Increase Decrease (in millions) Accumulated benefit obligation$ (133.6 ) $ 161.7 Projected benefit obligation (134.7 ) 162.9 OPEB 1.0% 1.0% Increase Decrease (in millions)
Accumulated benefit obligation
The majority of our pension plans are frozen and we have transitioned to a risk management approach for ourU.S. pension plan assets. The overall investment objective of this approach is to further reduce the risk of significant decreases in the plan's funded status by allocating a larger portion of the plan's assets to investments expected to hedge the impact of interest rate risks on the plan's obligation. Over time, the target asset allocation percentage for the pension plan is expected to decrease for equity and other "return seeking" investments and increase for fixed income and other "hedging" investments. The assumed long-term rate of return for plan assets, which is determined annually, is likely to decrease as the asset allocation shifts over time. The expected long-term rate of return for plan assets is based upon many factors including expected asset allocations, historical asset returns, current and expected future market conditions and risk. In addition, we considered the impact of the current interest rate environment on the expected long-term rate of return for certain asset classes, particularly fixed income. The target asset allocation percentage for the primaryU.S. pension plan was approximately 15.0% for return seeking investments and approximately 85.0% for hedging investments. The expected long-term rate of return on plan assets assumption used to calculate net pension and OPEB plan expense in 2021 was 5.00% and 5.75% for majorU.S. pension and OPEB plans, respectively. The expected long-term rates of return on plan assets assumption that will be used to calculate net pension and OPEB plan expense (income) in 2022 are 3.75% and 5.25% for our majorU.S. pension and OPEB plans, respectively.
A 0.25% change in the expected long-term rate of return on plan assets at
0.25% 0.25%
Increase Decrease
(in millions)
U.S. pension plans $ (1.4 ) $ 1.4
OPEB (0.5 ) 0.5
34-------------------------------------------------------------------------------- We also maintain several pension plans in international locations. The expected returns on plan assets and discount rates for those plans are determined based on each plan's investment approach, local interest rates and plan participant profiles. Accounting for Income Taxes Significant judgment is required in determining the provision for income taxes and related accruals, deferred tax assets and liabilities and any valuation allowances recorded against deferred tax assets. In the ordinary course of business, there are transactions and calculations where the ultimate tax outcome is uncertain. Additionally, our tax returns are subject to audit by variousU.S. and foreign tax authorities. We recognize a tax position in our 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 we believe that our estimates are reasonable, the final outcome of uncertain tax positions may be materially different from that which is reflected in our historical financial statements. We have recorded deferred tax assets related to future deductible items, including domestic and foreign tax loss and credit carryforwards. We evaluate these deferred tax assets by tax jurisdiction. The utilization of these tax assets is limited by the amount of taxable income expected to be generated within the allowable carryforward period and other factors. Accordingly, we have recorded a valuation allowance to reduce certain of these deferred tax assets when we have 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. If actual results differ from these estimates, or the estimates are adjusted in future periods, adjustments to the valuation allowance might need to be recorded. As ofDecember 31, 2021 and 2020, valuation allowances of$200.7 million and$195.7 million , respectively, were recorded in our Consolidated Balance Sheet. DeferredU.S. income taxes and foreign taxes have historically not been provided on the excess of the investment value for financial reporting over the tax basis of investments in those foreign subsidiaries for which such excess is considered to be permanently reinvested in those operations.
See Note 10, Income Taxes, to the Consolidated Financial Statements for further discussion.
OTHER INFORMATION
Environmental, Health and Safety
For a discussion of certain environmental, health and safety issues involving us, see Note 8, Commitments and Contingencies, to the Consolidated Financial Statements.
Litigation and Contingent Liabilities
For a discussion of certain litigation involving us, see Note 8, Commitments and Contingencies, to the Consolidated Financial Statements.
New Accounting Pronouncements
Recently issued accounting standards and their estimated effect on our Consolidated Financial Statements are also described in Note 18, New Accounting Pronouncements, to the Consolidated Financial Statements.
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