Completes Amendment of Credit Agreement
Providing Additional Liquidity
Announces the Planned Closure of Its Production
Facility in Torrance, California
LSC Communications, Inc. (NYSE: LKSD) today reported
financial results for the second quarter of 2019.
Financial Highlights:
- Completed amendment to credit agreement provides additional
liquidity
- Announced plan to close production facility in Torrance,
California, and sell the land and building resulting in net
proceeds of approximately $35 million
- Net cash provided by operating activities of $27 million in the
second quarter of 2019, compared to net cash used in operating
activities of $2 million in the second quarter of 2018
- Non-GAAP free cash flow of $6 million, compared to ($19)
million in the second quarter of 2018
- Net sales of $869 million compared to $943 million in the
second quarter of 2018
- Organic net sales decrease of 4.2% from the second quarter of
2018
- GAAP net loss of $24 million, or $0.69 per diluted share,
compared to net income of $8 million, or $0.23 per diluted share in
the second quarter of 2018
- Non-GAAP net income of $2 million, or $0.08 per diluted share,
compared to non-GAAP net income of $17 million, or $0.48 per
diluted share in the second quarter of 2018
- Non-GAAP adjusted EBITDA of $53 million, or 6.1% of net sales,
compared to $77 million, or 8.2% of net sales, in the second
quarter of 2018
“As we reduce costs, enhance our financial flexibility, and
focus on initiatives designed to deepen our customer relationships,
I am confident we will further strengthen our position within the
industry.” said Thomas J. Quinlan III, LSC Communications’
Chairman, President and Chief Executive Officer. “As a standalone
company operating in an evolving industry, we are taking decisive
steps to better position the Company for the future.”
Net Sales
Second quarter net sales were $869 million, down $74 million, or
7.7%, from the second quarter of 2018. After adjusting for
acquisitions, dispositions, changes in foreign exchange rates and
pass-through paper sales, organic net sales decreased 4.2% from the
second quarter of 2018. The decrease in organic net sales was
largely due to lower volume in Magazines, Catalogs and Logistics,
as well as Office Products, partially offset by volume growth in
Book and price increases in Office Products.
GAAP Net Loss
The second quarter 2019 net loss was $24 million, or $0.69 per
diluted share, compared to net income of $8 million, or $0.23 per
diluted share, in the second quarter of 2018. The second quarter
2019 net loss included after-tax charges of $26 million, primarily
due to the impairment of intangible assets in the Magazines,
Catalogs and Logistics segment and other restructuring costs. The
second quarter 2018 net income included after-tax charges of $9
million. These after-tax charges are excluded from the presentation
of non-GAAP net income. Additional details regarding the amount and
nature of these adjustments and other items are included in the
attached schedules.
Non-GAAP Adjusted EBITDA and Non-GAAP Net Loss
Non-GAAP adjusted EBITDA in the second quarter of 2019 was $53
million, or 6.1% of net sales, compared to $77 million, or 8.2% of
net sales, in the second quarter of 2018. The decrease in non-GAAP
adjusted EBITDA was primarily due to volume declines in the
Magazines, Catalogs and Logistics segment.
Non-GAAP net income totaled $2 million, or $0.08 per diluted
share, in the second quarter of 2019 compared to non-GAAP net
income of $17 million, or $0.48 per diluted share in the second
quarter of 2018. Reconciliations of net loss to non-GAAP adjusted
EBITDA and non-GAAP net income are presented in the attached
schedules.
2019 Guidance
The Company’s full-year guidance for 2019 has not changed from
the guidance provided on July 23, 2019 and is included in the table
below.
Guidance
Net sales
$3.45 to $3.55 billion
Non-GAAP adjusted EBITDA
$200 to $240 million
Net pension income
$35 million
Non-GAAP adjusted EBITDA excluding net
pension income
$165 to $205 million
Depreciation and amortization
$115 to $125 million
Interest expense
$75 to $79 million
Non-GAAP effective tax rate
30% to 35%
Capital expenditures
$75 to $85 million
Free cash flow (1)
$60 to $100 million
Diluted share count
34 to 35 million
(1)
Free cash flow is defined as net cash
provided by operating activities less capital expenditures. The
2019 Free Cash Flow Guidance includes $45 million of gross proceeds
received in connection with the Merger Agreement termination fee,
less estimated transaction costs of approximately $20 to $25
million. The $35 million expected net proceeds from the sale of the
land and building in Torrance, California is not included in free
cash flow.
Certain components of the guidance given in the table above are
provided on a non-GAAP basis only, without providing a
reconciliation to guidance provided on a GAAP basis. Information is
presented in this manner, consistent with SEC rules, because the
preparation of such a reconciliation could not be accomplished
without "unreasonable efforts." The Company does not have access to
certain information that would be necessary to provide such a
reconciliation, including non-recurring items that are not
indicative of the Company's ongoing operations. Such items include,
but are not limited to, restructuring charges, impairment charges,
pension settlement charges, acquisition-related expenses, gains or
losses on investments and business disposals, losses on debt
extinguishment, merger-related expenses and other similar gains or
losses not reflective of the Company's ongoing operations. The
Company does not believe that excluding such items is likely to be
significant to an assessment of the Company's ongoing operations,
given that such excluded items are not indicators of business
performance.
Credit Agreement Amendment
On August 2, 2019, the Company entered into an amendment to its
credit agreement to, among other things, decrease the minimum
Interest Coverage Ratio and increase the maximum Consolidated
Leverage Ratio, as defined in the agreement, which would have
increased the net available liquidity under the revolving credit
facility as of June 30, 2019 notwithstanding the reduction in the
revolving credit facility aggregate principal amount from $400
million to $300 million, which was also effected through the
amendment. The amendment also removed the general allowance to pay
annual dividends up to $50 million, as well as other changes that
generally further restrict the Company’s ability to incur
additional indebtedness, create liens and make investments and
acquisitions. The maturity date of the revolving credit facility
remains September 30, 2021, and the outstanding principal amount,
required amortization payments and maturity date of the term loan
facility remains the same. Additional details regarding the credit
agreement amendment can be found in the current report on Form 8-K
filed by the Company on August 5, 2019.
Facility Closure
The Company recently announced the planned closure of its
production facility in Torrance, California. The Company has
entered into an agreement to sell the land and building in Torrance
and expects to receive net proceeds of approximately $35
million.
Conference Call
LSC Communications will host a conference call and live webcast
to discuss its second quarter results today, Thursday, August 8, at
8:30 a.m. Eastern Time (7:30a.m. Central Time). The live webcast
will be accessible on LSC’s website, www.lsccom.com, or through
this link.
Individuals wishing to dial in to the call or access the live
webcast must register in advance. After registering, participants
will receive dial-in numbers, a passcode, and a link to access the
live event.
A webcast replay will be archived on LSC’s web site for 90 days
after the call.
About LSC Communications
With a rich history of industry experience, innovative solutions
and service reliability, LSC Communications (NYSE: LKSD) is a
global leader in print and digital media solutions. Our traditional
and digital print-related services and office products serve the
needs of publishers, merchandisers and retailers around the world.
With advanced technology and a consultative approach, our supply
chain solutions meet the needs of each business by getting their
content into the right hands as efficiently as possible.
For more information about LSC Communications, visit
www.lsccom.com.
Use of non-GAAP Information
This news release contains certain non-GAAP measures. The
Company believes that these non-GAAP measures, such as non-GAAP
adjusted EBITDA, non-GAAP adjusted EBITDA margin, non-GAAP net
income/loss and free cash flow, when presented in conjunction with
comparable GAAP measures, provide useful information about the
Company’s operating results and liquidity and enhance the overall
ability to assess the Company’s financial performance. The Company
uses these measures, together with other measures of performance
under GAAP, to compare the relative performance of operations in
planning, budgeting and reviewing the performance of its business.
Non-GAAP adjusted EBITDA, non-GAAP adjusted EBITDA margin, non-GAAP
net income/loss and free cash flow allow investors to make a more
meaningful comparison between the Company’s core business operating
results over different periods of time. The Company believes that
non-GAAP adjusted EBITDA, non-GAAP adjusted EBITDA margin, non-GAAP
net income/loss and free cash flow, when viewed with the Company’s
results under GAAP and the accompanying reconciliations, provides
useful information about the Company’s business without regard to
potential distortions. By eliminating potential differences in
results of operations between periods caused by factors such as
depreciation and amortization methods, historic cost and age of
assets, financing and capital structures, taxation positions or
regimes, restructuring, impairment and other charges and gain or
loss on certain equity investments and asset sales, the Company
believes that non-GAAP adjusted EBITDA, non-GAAP adjusted EBITDA
margin and non-GAAP net income/loss can provide useful additional
basis for comparing the current performance of the underlying
operations being evaluated. By adjusting for the level of capital
investment in operations, the Company believes that free cash flow
can provide useful additional basis for understanding the Company’s
ability to generate cash after capital investment and provides a
comparison to peers with differing capital intensity.
Forward Looking Statements
This news release may contain "forward-looking statements"
within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended, and the U.S. Private Securities Litigation Reform
Act of 1995. Readers are cautioned not to place undue reliance on
these forward-looking statements and any such forward-looking
statements are qualified in their entirety by reference to the
following cautionary statements. All forward-looking statements
speak only as of the date of this news release and are based on
current expectations and involve a number of assumptions, risks and
uncertainties that could cause the actual results to differ
materially from such forward-looking statements, including risks
associated with the ability of LSC Communications to perform as
expected as a separate, independent entity and risks associated
with the volatility and disruption of the capital and credit
markets, and adverse changes in the global economy. Readers are
strongly encouraged to read the full cautionary statements
contained in LSC’s filings with the SEC. LSC disclaims any
obligation to update or revise any forward-looking statements.
LSC Communications, Inc. Condensed Consolidated Balance
Sheets As of June 30, 2019 and December 31, 2018 (in millions,
except share and per share data) (UNAUDITED)
June 30, 2019
December 31, 2018
Assets Cash and cash
equivalents
$
17
$
21
Receivables, less allowances for doubtful accounts of $15 in 2019
(2018 - $14)
582
617
Inventories
213
197
Income tax receivable
7
4
Prepaid expenses and other current assets
36
28
Total Current Assets
855
867
Property, plant and equipment-net
485
508
Goodwill
103
103
Other intangible assets-net
130
156
Right-of-use assets for operating leases
188
-
Deferred income taxes
30
27
Other noncurrent assets
88
93
Total Assets
$
1,879
$
1,754
Liabilities
Accounts payable
$
347
$
372
Accrued liabilities
188
199
Short-term debt and current portion of long-term debt
192
108
Short-term operating lease liabilities
46
-
Total Current Liabilities
773
679
Long-term debt
639
659
Pension liabilities
100
132
Restructuring and multi-employer pension liabilities
42
45
Long-term operating lease liabilities
148
-
Other noncurrent liabilities
51
61
Total Liabilities
1,753
1,576
Commitments and Contingencies
Equity Common stock, $0.01 par value
Authorized: 65,000,000 Issued: 35,583,329 shares in 2019 (2018:
35,029,565)
-
-
Additional paid-in capital
832
828
Accumulated deficit
(209
)
(42
)
Accumulated other comprehensive loss
(472
)
(584
)
Treasury stock, at cost: 2,032,134 shares in 2019 (2018: 1,888,205)
(25
)
(24
)
Total Equity
126
178
Total Liabilities and Equity
$
1,879
$
1,754
LSC Communications, Inc. Condensed Consolidated Statements
of Operations For the Three and Six Months Ended June 30, 2019 and
2018 (in millions, except per share data) (UNAUDITED)
For the Three Months Ended
June 30,
For the Six Months Ended June
30,
2019
2018
2019
2018
Net sales
$
869
$
943
$
1,714
$
1,872
Cost of sales (1)
750
798
1,485
1,606
Selling, general and administrative expenses (SG&A) (1)
80
82
165
165
Restructuring, impairment and other charges-net
24
11
37
17
Depreciation and amortization
31
34
62
72
(Loss) income from operations
(16
)
18
(35
)
12
Interest expense-net
19
18
38
38
Settlement of retirement benefit obligations
1
-
136
-
Investment and other (income)-net
(9
)
(13
)
(19
)
(24
)
(Loss) income before income taxes
(27
)
13
(190
)
(2
)
Income tax (benefit) expense
(3
)
5
(40
)
1
Net (loss) income
$
(24
)
$
8
$
(150
)
$
(3
)
Net (loss) income per common share: Basic net
(loss) income per share
$
(0.69
)
$
0.24
$
(4.48
)
$
(0.09
)
Diluted net (loss) income per share
$
(0.69
)
$
0.23
$
(4.48
)
$
(0.09
)
Weighted-average number of common shares outstanding:
Basic
33.5
34.0
33.4
34.3
Diluted
33.5
34.3
33.4
34.3
Additional information: Gross margin (1)
13.7
%
15.4
%
13.4
%
14.2
%
SG&A as a % of net sales (1)
9.2
%
8.7
%
9.6
%
8.8
%
Operating margin nm
1.9
%
nm
0.6
%
Effective tax rate
13.3
%
35.3
%
21.3
%
(35.7
%)
(1) Exclusive of depreciation and amortization nm = not
meaningful
LSC Communications, Inc. Reconciliation of GAAP
Net (Loss) Income to Non-GAAP Adjusted EBITDA For the Three and
Twelve Months Ended June 30, 2019 and 2018 (in millions)
(UNAUDITED)
For the TwelveMonths Ended For the
Three Months Ended June 30,2019 June 30,2019
March 31,2019 December 31,2018 September
30,2018 GAAP net (loss)
$
(170
)
$
(24
)
$
(126
)
$
(16
)
$
(4
)
Adjustments: Restructuring, impairment and other
charges - net (1)
55
24
13
17
1
Settlement of retirement benefit obligations (2)
136
1
135
-
-
Expenses related to acquisitions, the Merger Agreement and
dispositions (3)
20
5
7
6
2
Purchase accounting adjustments (4)
-
-
-
(1
)
1
Depreciation and amortization
128
31
31
32
34
Interest expense - net
80
19
19
21
21
Income tax (benefit) expense (5)
(8
)
(3
)
(37
)
(3
)
35
Total Non-GAAP adjustments
411
77
168
72
94
Non-GAAP adjusted EBITDA
$
241
$
53
$
42
$
56
$
90
Net sales
$
3,668
$
869
$
845
$
939
$
1,015
Non-GAAP adjusted EBITDA margin %
6.6
%
6.1
%
5.0
%
6.0
%
8.9
%
For the TwelveMonths Ended For the Three Months
Ended June 30,2018 June 30,2018 March
31,2018 December 31,2017 September 30,2017
GAAP net (loss) income
$
(64
)
$
8
$
(11
)
$
(58
)
$
(3
)
Adjustments: Restructuring, impairment and other
charges - net (1)
119
11
6
42
60
Separation-related expenses (6)
1
-
-
-
1
Expenses related to acquisitions, the Merger Agreement and
dispositions (3)
6
1
1
2
2
Purchase accounting adjustments (4)
2
-
3
(2
)
1
Loss on debt extinguishment (7)
3
-
-
3
-
Depreciation and amortization
153
34
38
42
39
Interest expense - net
77
18
20
20
19
Income tax expense (benefit)
14
5
(4
)
36
(23
)
Total Non-GAAP adjustments
375
69
64
143
99
Non-GAAP adjusted EBITDA
$
311
$
77
$
53
$
85
$
96
Net sales
$
3,806
$
943
$
929
$
999
$
935
Non-GAAP adjusted EBITDA margin %
8.2
%
8.2
%
5.7
%
8.5
%
10.3
%
(1)
Restructuring, impairment and other
charges-net: Restructuring charges for employee termination costs,
lease terminations, other costs, multiemployer pension plan
withdrawal obligations, impairment charges for goodwill, intangible
assets and other long-lived assets. Refer to the Reconciliation of
GAAP to Non-GAAP Measures schedules for more information.
(2)
Settlement of retirement benefit
obligations: During the three months ended March 31, 2019, the
Company completed a partial settlement of its retirement benefit
obligations, and as a result, the Company’s pension assets and
liabilities were remeasured as of the settlement date. The Company
recorded a non-cash settlement charge of $135 million in settlement
of retirement benefit obligations in the condensed consolidated
statements of operations during the three months ended March 31,
2019. There were additional immaterial lump-sum settlements
(unrelated to the transaction noted above) that resulted in a
non-cash settlement charge of $1 million during the three months
ended June 30, 2019.
(3)
Expenses related to acquisitions, the
Merger Agreement and dispositions: Legal, accounting and other
expenses associated with completed and contemplated acquisitions
and dispositions; and costs associated with the agreement and plan
of merger between the Company, Quad/Graphics, Inc. and QLC Merger
Sub, Inc. (the "Merger Agreement").
(4)
Purchase accounting adjustments: Purchase
accounting inventory step-up adjustments and any gains associated
with acquisitions.
(5)
Income tax expense (benefit): The three
months ended March 31, 2019 included a $34 million benefit
associated with the Company's settlement of retirement benefit
obligations. The three months ended September 30, 2018 included a
$25 million non-cash provision primarily for the write-off of a
deferred tax asset associated with the Company's disposition of its
European printing business on September 28, 2018.
(6)
Separation-related expenses: One-time
transaction expenses associated with becoming a standalone
company.
(7)
Loss on debt extinguishment: Loss related
to a partial debt extinguishment.
LSC Communications, Inc. Reconciliation of GAAP to Non-GAAP
Measures For the Three Months Ended June 30, 2019 and 2018 (in
millions, except per share data) (UNAUDITED)
For the Three Months Ended
June 30, 2019
For the Three Months Ended
June 30, 2018
Net (loss) income
Net (loss) income per diluted
share
Net income
Net income per diluted
share
GAAP basis measures
$
(24
)
$
(0.69
)
$
8
$
0.23
Non-GAAP adjustments: Restructuring, impairment and
other charges - net (1)
20
0.58
8
0.21
Settlement of retirement benefit obligations (2)
-
0.01
-
-
Expenses related to acquisitions, the Merger Agreement and
dispositions (3)
6
0.18
1
0.03
Income tax adjustments
-
-
-
0.01
Total Non-GAAP adjustments
26
0.77
9
0.25
Non-GAAP measures
$
2
$
0.08
$
17
$
0.48
(1
)
Restructuring, impairment and other charges - net: Operating
results for the three months ended June 30, 2019 and 2018 were
affected by the pre-tax restructuring charges below of $24 million
($20 million after-tax) and $11 million ($8 million after-tax),
respectively.
For the Three Months Ended
June 30,
2019
2018
Other restructuring charges (a)
$
6
$
7
Employee termination costs (b)
-
3
Other charges (c)
1
1
Impairment charges - intangibles (d)
17
-
Total restructuring, impairment and other charges -
net
$
24
$
11
(a) For the three months ended
June 30, 2019 other restructuring charges included other facility
costs as well as costs associated with new revenue opportunities
and cost savings initiatives implemented in 2019, and
multi-employer pension plan withdrawal obligations related to
facility closures. For the three months ended June 30, 2018, other
restructuring charges included other facility costs, a loss related
to the Company's disposition of its retail offset printing
facilities and pension withdrawal obligations related to facility
closures.
(b) For the three months ended
June 30, 2018, employee-related termination costs resulted from the
reorganization of certain business units.
(c) Other charges related to the
Company's multi-employer pension plan withdrawal obligations
unrelated to facility closures.
(d) Due to the unprecedented drop
in demand in the magazines and catalogs reporting unit, management
determined that a further review of the reporting unit’s intangible
assets for recoverability was appropriate as of June 30, 2019. As a
result, the Company recorded a $17 million impairment charge
related to a certain definite-lived customer relationship
intangible asset in the magazines and catalog reporting unit for
the three months ended June 30, 2019, which fully impaired the
asset.
(2)
Settlement of retirement benefit
obligations: During the three months ended June 30, 2019, there
were immaterial lump-sum settlements that resulted in a total
non-cash settlement charge of $1 million (a de minimis amount of
after-tax charge).
(3)
Expenses related to acquisitions,
the Merger Agreement and dispositions: The three months ended June
30, 2019 included pre-tax charges of $5 million ($6 million
after-tax) primarily related to the Merger Agreement. The three
months ended June 30, 2018 included pre-tax charges of $1 million
($1 million after-tax) related to legal, accounting and other
expenses associated with completed and contemplated acquisitions
and dispositions.
Note: The income tax impact is
calculated using the tax rate in effect for the non-GAAP
adjustments.
LSC Communications, Inc. Reconciliation of GAAP to Non-GAAP
Measures For the Six Months Ended June 30, 2019 and 2018 (in
millions, except per share data) (UNAUDITED)
For the Six Months Ended June
30, 2019
For the Six Months Ended June
30, 2018
Net (loss) income
Net (loss) income per diluted
share
Net (loss) income
Net (loss) income per diluted
share
GAAP basis measures
$
(150
)
$
(4.48
)
$
(3
)
$
(0.09
)
Non-GAAP adjustments: Restructuring, impairment and
other charges - net (1)
33
0.99
12
0.32
Settlement of retirement benefit obligations (2)
101
3.03
-
-
Expenses related to acquisitions, the Merger Agreement and
dispositions (3)
12
0.36
1
0.04
Purchase accounting adjustments (4)
-
-
2
0.07
Income tax adjustments (5)
1
0.02
1
0.03
Total Non-GAAP adjustments
147
4.40
16
0.46
Non-GAAP measures
$
(3
)
$
(0.08
)
$
13
$
0.37
(1)
Restructuring, impairment and
other charges - net: Operating results for the six months ended
June 30, 2019 and 2018 were affected by the pre-tax restructuring
charges below of $37 million ($33 million after-tax) and $17
million ($12 million after-tax), respectively.
For the Six Months Ended June
30,
2019
2018
Other restructuring charges (a)
$
12
$
10
Employee termination costs (b)
5
7
Other charges (c)
1
1
Impairment charges - intangibles (d)
17
-
Impairment charges - machinery and equipment (e)
2
-
Reduction of goodwill impairment charges (f)
-
(1
)
Total restructuring, impairment and other charges - net
$
37
$
17
(a) For the six months ended June 30, 2019, other restructuring
costs included other facility costs as well as costs associated
with new revenue opportunities and cost savings initiatives
implemented in 2019, and multi-employer pension plan withdrawal
obligations related to facility closures. The six months ended June
30, 2018 included other facility costs, a loss related to the
Company's disposition of its retail offset printing facilities and
pension withdrawal obligations related to facility closures. (b)
For the six months ended June 30, 2019, employee-related
termination costs primarily resulted from the closure of one
facility in the Magazines, Catalogs and Logistics segment. For the
six months ended June 30, 2018 employee-related termination costs
resulted from the closure of one facility in the Magazines,
Catalogs and Logistics segment and the reorganization of certain
business units and corporate functions. (c) Other charges related
to the Company's multi-employer pension plan withdrawal obligations
unrelated to facility closures. (d) Due to the unprecedented drop
in demand in the magazines and catalogs reporting unit, management
determined that a further review of the reporting unit’s intangible
assets for recoverability was appropriate as of June 30, 2019. As a
result, the Company recorded a $17 million impairment charge
related to a certain definite-lived customer relationship
intangible asset in the magazines and catalogs reporting unit for
the six months ended June 30, 2019, which fully impaired the asset.
(e) For the six months ended June 30, 2019, the Company recorded $2
million of net impairment charges related to machinery and
equipment associated with facility closings in the Magazines,
Catalogs and Logistics segment. (f) For the six months ended June
30, 2018, there was a reduction of $1 million of goodwill
impairment charges as a result of a $1 million adjustment of
previously recorded goodwill associated with prior acquisitions.
(2)
Settlement of retirement benefit obligations: During the three
months ended March 31, 2019, the Company completed a partial
settlement of its retirement benefit obligations, and as a result,
the Company’s pension assets and liabilities were remeasured as of
the settlement date. The Company recorded a pre-tax non-cash
settlement charge of $135 million during the three months ended
March 31, 2019. There were additional immaterial lump-sum
settlements that resulted in non-cash settlement charges of $1
million during the three months ended June 30, 2019. There were
total pre-tax non-cash settlement charges of $136 million ($101
million after-tax) in settlement of retirement benefit obligations
in the condensed consolidated statements of operations during the
six months ended June 30, 2019.
(3)
Expenses related to acquisitions, the Merger Agreement and
dispositions: The six months ended June 30, 2019 included pre-tax
charges of $12 million ($12 million after-tax) primarily related to
the Merger Agreement. The six months ended June 30, 2018 included
pre-tax charges of $2 million ($1 million after-tax) related to
legal, accounting and other expenses associated with completed and
contemplated acquisitions and dispositions.
(4)
Purchase accounting adjustments: The six months ended June 30, 2018
included pre-tax charges of $3 million ($2 million after-tax) as a
result of purchase accounting inventory step-up adjustments and
changes to purchase price allocations related to prior
acquisitions.
(5)
Income tax adjustments: Included tax expense of $1 million for each
of the six months ended June 30, 2019 and 2018 that was recorded
due to the unfavorable impact associated with share-based
compensation awards that lapsed during each of the periods.
Note: The income tax impact is calculated using the tax rate in
effect for the non-GAAP adjustments.
LSC Communications,
Inc. Total Company GAAP to Non-GAAP Adjusted EBITDA and Margin
Reconciliation For the Three Months Ended June 30, 2019 and 2018
and Twelve Months Ended June 30, 2019 (in millions) (UNAUDITED)
Total LSC Communications
Q2 2019 LTM
Q2 2019
Q1 2019
Q4 2018
Q3 2018
Q2 2018
Q1 2018
Net sales
$
3,668
$
869
$
845
$
939
$
1,015
$
943
$
929
GAAP net (loss) income
(170
)
(24
)
(126
)
(16
)
(4
)
8
(11
)
Restructuring, impairment and other charges - net
55
24
13
17
1
11
6
Settlement of retirement benefit obligations
136
1
135
-
-
-
-
Expenses related to acquisitions, the Merger Agreement and
dispositions
20
5
7
6
2
1
1
Purchase accounting adjustments
-
-
-
(1
)
1
-
3
Depreciation and amortization
128
31
31
32
34
34
38
Interest expense - net
80
19
19
21
21
18
20
Income tax (benefit) expense
(8
)
(3
)
(37
)
(3
)
35
5
(4
)
Non-GAAP Adjusted EBITDA
$
241
$
53
$
42
$
56
$
90
$
77
$
53
Non-GAAP Adjusted EBITDA margin
6.6
%
6.1
%
5.0
%
6.0
%
8.9
%
8.2
%
5.7
%
Net cash provided by (used in) operating activities
$
191
$
27
($
24
)
$
188
$
-
($
2
)
($
24
)
Capital expenditures
(75
)
(21
)
(28
)
(11
)
(15
)
(17
)
(20
)
Free cash flow
$
116
$
6
($
52
)
$
177
($
15
)
($
19
)
($
44
)
LSC Communications, Inc. Segment GAAP to Non-GAAP Adjusted
EBITDA and Margin Reconciliation For the Three Months Ended June
30, 2019 and 2018 and Twelve Months Ended June 30, 2019 (in
millions) (UNAUDITED)
Magazines, Catalogs and Logistics
Q2 2019 LTM
Q2 2019
Q1 2019
Q4 2018
Q3 2018
Q2 2018
Q1 2018
Net sales
$
1,722
$
380
$
403
$
476
$
463
$
401
$
427
(Loss) income from operations
($
84
)
($
42
)
($
31
)
($
12
)
$
1
($
6
)
($
14
)
Depreciation and amortization
59
13
15
15
16
15
16
Restructuring, impairment and other charges - net
41
20
11
10
-
6
4
Non-GAAP Adjusted EBITDA
$
16
($
9
)
($
5
)
$
13
$
17
$
15
$
6
Non-GAAP Adjusted EBITDA margin
0.9
%
(2.4
%)
(1.2
%)
2.7
%
3.7
%
3.7
%
1.4
%
Capital expenditures
$
32
$
12
$
10
$
4
$
6
$
5
$
9
Book Q2 2019 LTM Q2 2019 Q1 2019
Q4 2018 Q3 2018 Q2 2018 Q1 2018 Net
sales
$
1,089
$
289
$
260
$
258
$
282
$
266
$
249
Income from operations
$
61
$
18
$
13
$
9
$
21
$
19
$
9
Depreciation and amortization
50
13
12
13
12
13
14
Restructuring, impairment and other charges - net
4
1
1
1
1
3
1
Non-GAAP Adjusted EBITDA
$
115
$
32
$
26
$
23
$
34
$
35
$
24
Non-GAAP Adjusted EBITDA margin
10.6
%
11.1
%
10.0
%
8.9
%
12.1
%
13.2
%
9.6
%
Capital expenditures
$
37
$
7
$
17
$
6
$
7
$
9
$
9
LSC Communications, Inc. Segment GAAP to Non-GAAP Adjusted
EBITDA and Margin Reconciliation For the Three Months Ended June
30, 2019 and 2018 and Twelve Months Ended June 30, 2019 (in
millions) (UNAUDITED)
Office Products
Q2 2019 LTM
Q2 2019
Q1 2019
Q4 2018
Q3 2018
Q2 2018
Q1 2018
Net sales
$
543
$
139
$
119
$
140
$
145
$
154
$
123
Income from operations
$
46
$
13
$
8
$
10
$
15
$
13
$
2
Depreciation and amortization
12
3
3
2
4
3
4
Restructuring, impairment and other charges - net
5
1
-
4
-
1
1
Purchase accounting adjustments
-
-
-
-
-
-
1
Non-GAAP Adjusted EBITDA
$
63
$
17
$
11
$
16
$
19
$
17
$
8
Non-GAAP Adjusted EBITDA margin
11.6
%
12.2
%
9.2
%
11.4
%
13.1
%
11.0
%
6.5
%
Capital expenditures
$
1
$
1
$
-
$
-
$
-
$
1
$
-
Other
Q2 2019 LTM
Q2 2019
Q1 2019
Q4 2018
Q3 2018
Q2 2018
Q1 2018
Net sales
$
316
$
61
$
63
$
67
$
125
$
122
$
130
Income from operations
$
24
$
8
$
4
$
3
$
9
$
7
$
7
Depreciation and amortization
6
1
1
2
2
2
4
Restructuring, impairment and other charges - net
1
-
-
1
-
-
-
Non-GAAP Adjusted EBITDA
$
31
$
9
$
5
$
6
$
11
$
9
$
11
Non-GAAP Adjusted EBITDA margin
9.8
%
14.8
%
7.9
%
9.0
%
8.8
%
7.4
%
8.5
%
Capital expenditures
$
2
$
-
$
1
$
-
$
1
$
1
$
1
Corporate
Q2 2019 LTM
Q2 2019
Q1 2019
Q4 2018
Q3 2018
Q2 2018
Q1 2018
Net sales
($
2
)
$
-
$
-
($
2
)
$
-
$
-
$
-
Operating expenses
($
52
)
($
13
)
($
13
)
($
21
)
($
5
)
($
15
)
($
10
)
Investment and other (income)-net
(43
)
(9
)
(10
)
(13
)
(11
)
(13
)
(11
)
Depreciation and amortization
1
1
-
-
-
1
-
Restructuring, impairment and other charges - net
4
2
1
1
-
1
-
Expenses related to acquisitions, the Merger Agreement and
dispositions
20
5
7
6
2
1
1
Purchase accounting adjustments
-
-
-
(1
)
1
-
2
Non-GAAP Adjusted EBITDA
$
16
$
4
$
5
($
2
)
$
9
$
1
$
4
Capital expenditures
$
3
$
1
$
-
$
1
$
1
$
1
$
1
LSC Communications, Inc. Condensed Consolidated Statements
of Cash Flows For the Six Months Ended June 30, 2019 and 2018 (in
millions) (UNAUDITED)
2019
2018
Net (loss)
$
(150
)
$
(3
)
Adjustment to reconcile net (loss) to net cash provided by (used
in) operating activities: Impairment charges
19
-
Depreciation and amortization
62
72
Provision for doubtful accounts receivable
4
4
Share-based compensation
4
8
Deferred income taxes
(39
)
4
Settlement of retirement benefit obligations
136
-
Other
1
4
Changes in operating assets and liabilities - net of acquisitions:
Accounts receivable - net
32
61
Inventories
(15
)
(49
)
Prepaid expenses and other current assets
1
(4
)
Accounts payable
(13
)
(81
)
Income taxes receivable
(3
)
2
Accrued liabilities and other
(36
)
(44
)
Net cash provided by (used in) operating activities
$
3
$
(26
)
Capital expenditures
(49
)
(37
)
Acquisitions of businesses, net of cash acquired
(3
)
4
Net proceeds from sales and purchase of investments and other
assets
-
1
Net cash (used in) investing activities
$
(52
)
$
(32
)
Payments of current maturities and long-term debt
(22
)
(26
)
Net proceeds from credit facility borrowings
84
115
Payments for repurchase of common stock
-
(20
)
Dividends paid
(17
)
(18
)
Other financing activities
(1
)
(1
)
Net cash provided by financing activities
$
44
$
50
Effect of exchange rate on cash and cash equivalents
1
(2
)
Net (decrease) in cash, cash equivalents and restricted cash
$
(4
)
$
(10
)
Cash, cash equivalents and restricted cash at beginning of year
24
35
Cash, cash equivalents and restricted cash at end of period
$
20
$
25
Reconciliation to the Condensed Consolidated Balance
Sheets As of June 30, 2019 As of December 31,
2018 Cash and cash equivalents
$
17
$
21
Restricted cash included in prepaid expenses and other current
assets
3
3
Total cash, cash equivalents and restricted cash shown in the
condensed consolidated statements of cash flows
$
20
$
24
LSC Communications, Inc. Reconciliation of Reported to Pro
Forma Net Sales For the Three Months Ended June 30, 2019 and 2018
(in millions) (UNAUDITED)
Magazines,Catalogs &Logistics
Book OfficeProducts Other Total LSC
Q2 2018 Net Sales as Reported
$
401
$
266
$
154
$
122
$
943
Adjustments(1)
41
-
-
-
41
Q2 2018 Net Sales Pro Forma
$
442
$
266
$
154
$
122
$
984
Q2 2019 Net Sales as Reported
$
380
$
289
$
139
$
61
$
869
Adjustments(1)
-
-
-
-
-
Q2 2019 Net Sales Pro Forma
$
380
$
289
$
139
$
61
$
869
As Reported % Change
(5.3
%)
9.2
%
(9.7
%)
(50.1
%)
(7.7
%)
Pro Forma % Change
(14.0
%)
9.2
%
(9.7
%)
(50.1
%)
(11.6
%)
Non-GAAP Adjustments: Impact of changes in foreign exchange
rates ---% ---%
(0.2
%)
0.3
%
---% Impact of pass-through paper sales
(1.1
%)
4.1
%
---%
(2.9
%)
0.2
%
Impact of dispositions (2)
(4.1
%)
---% ---%
(45.9
%)
(7.6
%)
Q2 2019 Organic % Change (3)
(8.8
%)
5.1
%
(9.5
%)
(1.6
%)
(4.2
%)
The reported results of the Company include the results of acquired
businesses from the acquisition date forward. The Company has
provided this schedule to reconcile reported net sales for the
three months ended June 30, 2019 and 2018 to pro forma net sales as
if the acquisitions took place as of January 1, 2018 for purposes
of this schedule.(1) Adjusted for net sales of acquired
businesses:There were no acquisitions during the three months ended
June 30, 2019.For the three months ended June 30, 2018, the
adjustments for net sales of acquired businesses reflect the net
sales of RR Donnelley's Print Logistics business ("Print
Logistics") (acquired July 2, 2018).(2) Adjusted for the
disposition of the Company’s retail offset printing facilities on
June 5, 2018 and the sale of the Company's European printing
business on September 28, 2018.(3) Adjusted for the impact of
acquisitions and dispositions, changes in FX rates, and
pass-through paper sales.
LSC Communications, Inc.
Reconciliation of Reported to Pro Forma Net Sales For the Six
Months Ended June 30, 2019 and 2018 (in millions) (UNAUDITED)
Magazines,Catalogs &Logistics Book
OfficeProducts Other Total LSC Q2 2018 YTD
Net Sales as Reported
$
828
$
515
$
277
$
252
$
1,872
Adjustments(1)
85
-
-
-
85
Q2 2018 YTD Net Sales Pro Forma
$
913
$
515
$
277
$
252
$
1,957
Q2 2019 YTD Net Sales as Reported
$
783
$
549
$
258
$
124
$
1,714
Adjustments(1)
-
-
-
-
-
Q2 2019 YTD Net Sales Pro Forma
$
783
$
549
$
258
$
124
$
1,714
As Reported % Change
(5.3
%)
6.8
%
(6.8
%)
(51.1
%)
(8.4
%)
Pro Forma % Change
(14.2
%)
6.8
%
(6.8
%)
(51.1
%)
(12.4
%)
Non-GAAP Adjustments: Impact of changes in foreign exchange
rates ---% ---%
(0.3
%)
(0.1
%)
(0.1
%)
Impact of pass-through paper sales
(0.5
%)
2.9
%
---%
(2.9
%)
0.2
%
Impact of dispositions (2)
(4.4
%)
---% ---%
(46.8
%)
(8.1
%)
Q2 2019 YTD Organic % Change (3)
(9.3
%)
3.9
%
(6.5
%)
(1.3
%)
(4.4
%)
The reported results of the Company include the results of acquired
businesses from the acquisition date forward. The Company has
provided this schedule to reconcile reported net sales for the six
months ended June 30, 2019 and 2018 to pro forma net sales as if
the acquisitions took place as of January 1, 2018 for purposes of
this schedule.(1) Adjusted for net sales of acquired
businesses:There were no acquisitions during the six months ended
June 30, 2019.For the six months ended June 30, 2018, the
adjustments for net sales of acquired businesses reflect the net
sales of Print Logistics (acquired July 2, 2018).(2) Adjusted for
the disposition of the Company’s retail offset printing facilities
on June 5, 2018 and the sale of the Company's European printing
business on September 28, 2018.(3) Adjusted for the impact of
acquisitions and dispositions, changes in FX rates, and
pass-through paper sales.
LSC Communications, Inc.
Liquidity, Debt and Pension Summary As of June 30, 2019 and
December 31, 2018 (in millions) (UNAUDITED)
Total
Liquidity (1) June 30, 2019 December 31, 2018
Availability Stated amount of the Revolving Credit Facility
(2)
$
400
$
400
Less: availability reduction from covenants
207
122
Amount available under the Revolving Credit Facility
$
193
$
278
Usage Borrowings under Revolving Credit Facility
$
150
$
64
Impact on availability related to outstanding letters of credit
-
-
Total usage
$
150
$
64
Availability (3)
$
43
$
214
Cash
17
21
Net Available Liquidity
$
60
$
235
Short-term and current portion of long-term debt
$
192
$
108
Long-term debt
639
659
Total debt
$
831
$
767
Non-GAAP adjusted EBITDA for the twelve months ended June
30, 2019 and the year ended December 31, 2018
$
241
$
276
Non-GAAP Gross Leverage (defined as total debt divided by
non-GAAP adjusted EBITDA(4))
3.45
2.78
Credit Agreement Consolidated Leverage Ratio (5)
3.09
2.54
Estimated Unfunded Status of
Pension Benefit Plans Based on the fair value of assets
and the estimated discount rate used to value benefit obligations
as of June 30, 2019, the Company estimates unfunded status of the
pension benefit plans would approximate $100 million compared to
$137 million at December 31, 2018. Qualified Non-Qualified &
International Total Estimated pension liabilities
$
2,020
$
94
$
2,114
Estimated pension assets
2,010
4
2,014
Estimated unfunded status at June 30, 2019
$
(10
)
$
(90
)
$
(100
)
(1)
Liquidity does not include
uncommitted credit facilities located outside of the U.S.
(2)
The Company has a $400 million
senior secured revolving credit agreement (the “Revolving Credit
Facility”) which expires on September 30, 2021. The Revolving
Credit Facility is subject to a number of covenants, including, but
not limited to, a minimum Interest Coverage Ratio and a maximum
Consolidated Leverage Ratio, as defined in and calculated pursuant
to the Revolving Credit Facility, that, in part, restrict the
Company’s ability to incur additional indebtedness, create liens,
engage in mergers and consolidations, make restricted payments and
dispose of certain assets. There were $150 million and $64 million
of borrowings under the Revolving Credit Facility as of June 30,
2019 and December 31, 2018, respectively. Effective August 5, 2019,
the aggregate principal amount was reduced to $300 million as a
result of an amendment to the Company's Credit Agreement.
(3)
The Company would have had the
ability to utilize $193 million of the $400 million Revolving
Credit Facility and not have been in violation of the terms of the
agreement as of June 30, 2019. Availability under the Revolving
Credit Facility was reduced by $150 million in borrowings. If the
August 5, 2019 Credit Agreement amendment had been effective as of
June 30, 2019, the Company would have had the ability to utilize
the entire $300 million Revolving Credit Facility and not have been
in violation. This availability would have been reduced by $150
million in borrowings and $41 million of outstanding letters of
credit, for a net availability of $109 million.
(4)
The leverage ratio calculation
includes non-GAAP adjusted EBITDA since the respective closing date
of each acquisition and does not include a full 12 months of
non-GAAP adjusted EBITDA.
(5)
The Consolidated Leverage Ratio
as defined in the Credit Agreement was 3.09 at June 30, 2019. The
Consolidated Leverage Ratio was 2.54 at December 31, 2018.
Effective August 5, 2019, the Company amended the Credit Agreement
to increase the maximum permitted ratio from 3.25 to 3.75. Per the
amendment, the ratio will step down to 3.50 on June 30, 2020 and
further down to 3.25 on March 31, 2021. The full definition of
Consolidated Leverage Ratio is included in the Credit Agreement
filed as an exhibit to the quarterly report on Form 10-Q for the
six months ended June 30, 2019.
View source
version on businesswire.com: https://www.businesswire.com/news/home/20190808005134/en/
Investor Contact Janet M. Halpin, Senior Vice President,
Treasurer & Investor Relations E-mail:
investor.relations@lsccom.com Tel: 773.272.9275
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