CHICAGO–(BUSINESS WIRE)–LSC Communications, Inc. (NYSE: LKSD) today reported financial
results for the fourth quarter of 2018.
Highlights:
“We are very pleased with our free cash flow generation in the fourth
quarter, despite continued challenging industry conditions,” said Thomas
J. Quinlan III, LSC Communications’ Chairman, President and Chief
Executive Officer. “As we enter 2019, we continue to focus on providing
innovative customer solutions and ways to better reduce costs and
improve productivity resulting in increased earnings. We continue to
expect to close on the merger with Quad/Graphics in mid-2019.”
Net Sales
Fourth quarter net sales were $939 million, down $60 million, or 5.9%,
from the fourth quarter of 2017. After adjusting for acquisitions,
divestitures, changes in foreign exchange rates, pass-through paper
sales and the adoption of new revenue recognition standards, organic net
sales decreased 3.2% from the fourth quarter of 2017. The decrease in
organic net sales was largely due to lower volume in Magazine, Catalogs
& Logistics and Office Products partially offset by volume growth in
Book and price increases in Office Products.
GAAP Net Loss
The fourth quarter 2018 net loss was $16 million, or $0.47 per diluted
share, compared to a net loss of $58 million, or $1.68 per diluted
share, in the fourth quarter of 2017. The fourth quarter 2018 net loss
included after-tax charges of $20 million and the fourth quarter 2017
net loss included after-tax charges of $75 million, both of which 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 Income
Non-GAAP adjusted EBITDA in the fourth quarter of 2018 was $56 million,
or 6.0% of net sales, compared to $85 million, or 8.5% of net sales, in
the fourth quarter of 2017. The decrease in non-GAAP adjusted EBITDA was
primarily due to volume declines, unfavorable product mix and the sale
of our European printing business. Non-GAAP adjusted EBITDA margin in
the quarter was 250 basis points lower than the fourth quarter of last
year including the negative impact of higher paper sales, that are
essentially a pass-through cost.
Non-GAAP net income totaled $4 million, or $0.12 per diluted share, in
the fourth quarter of 2018 compared to non-GAAP net income of $17
million, or $0.50 per diluted share in the fourth quarter of 2017.
Reconciliations of net loss to non-GAAP adjusted EBITDA and non-GAAP net
income are presented in the attached schedules.
Segment Results
The Company reports its results using the following segments (1)
Magazines, Catalogs and Logistics, (2) Book, (3) Office Products, and
(4) other, which includes its Mexico operations, Directory, Print
Management and Europe.
Magazines, Catalogs and Logistics
Fourth quarter net sales in Magazines, Catalogs and Logistics were $476
million, a decrease of 1.6%, from the fourth quarter of 2017. After
adjusting for acquisitions, divestitures, changes in foreign exchange
rates, pass-through paper sales, and the adoption of new revenue
recognition standards, organic net sales decreased 6.9% from the fourth
quarter of 2017. This organic decline reflects ongoing volume declines
and price pressure.
Magazines, Catalogs and Logistics GAAP net loss from operations was $12
million, compared to a net loss from operations of $22 million in the
fourth quarter of 2017. Segment non-GAAP adjusted EBITDA in the fourth
quarter was $13 million and non-GAAP adjusted EBITDA margin was 2.7%.
The non-GAAP adjusted EBITDA margin decreased 330 basis points compared
with the fourth quarter of 2017, including the negative impact of higher
pass through paper sales. The remaining margin decline reflects the
negative impact on productivity of workforce availability and turnover,
and increased wages and benefit costs, as well as lower volume. These
pressures on margins were partially offset by cost reduction initiatives.
Book
Fourth quarter net sales in Book were $258 million, an increase of 5.1%,
from the fourth quarter of 2017. After adjusting for pass-through paper
sales and the adoption of new revenue recognition standards, organic net
sales increased 1.5% from the fourth quarter of 2017. The organic net
sales increase was primarily driven by education book volume.
Book GAAP income from operations was $9 million, compared to income from
operations of $9 million in the fourth quarter of 2017. Segment non-GAAP
adjusted EBITDA in the quarter was $23 million and non-GAAP adjusted
EBITDA margin was 8.9%. The non-GAAP adjusted EBITDA margin decreased
380 bps compared with the fourth quarter of 2017, primarily due to the
impacts of tight labor market conditions and the resulting negative
impact on productivity and wage rates, the unfavorable impact related to
a gain on the sale of a facility in the fourth quarter of 2017, as well
as the negative impact of higher pass through paper sales. These
pressures on margins were partially offset by cost reduction initiatives.
Office Products
Fourth quarter net sales in Office Products were $140 million, a
decrease of 1.6% from the fourth quarter of 2017. After adjusting for
acquisitions, changes in foreign exchange rates and the adoption of new
revenue recognition standards, organic net sales decreased 5.9% from the
fourth quarter of 2017. The organic sales decline was primarily related
to lower volume in filing and note-taking products partially offset by
the impact of price increases implemented earlier in the year to address
higher costs for materials and freight.
Office Products income from operations was $10 million compared to $10
million in the fourth quarter of 2017. Non-GAAP adjusted EBITDA in the
Office Products segment was $16 million for the quarter, a decrease of
$2 million compared to last year’s fourth quarter. Non-GAAP adjusted
EBITDA margin decreased 120 bps to 11.4% due to an unfavorable mix of
branded versus private label sales and increased labor costs partially
offset by synergies associated with the acquisition of Quality Park and
the impact of the price increases implemented earlier in 2018.
Pension Transaction
In January 2019, the Company’s U.S. qualified pension plan used pension
trust assets to purchase a group annuity contract from an insurance
company for approximately $466 million. The contract transferred
approximately $477 million of outstanding defined benefit pension
obligations related to approximately 8,500 U.S. retirees and
beneficiaries to an insurance company. As a result of this transaction,
the insurance company is now required to pay and administer the
retirement benefits owed to these retirees and beneficiaries. This
transaction continues the Company’s pension de-risking strategy and does
not have an impact on the amount, timing, or form of the monthly
retirement benefit payments to the covered retirees and beneficiaries.
Additionally, this transaction did not impact the Company’s earnings or
cash flows in 2018.
In the first quarter of 2019, the pension transaction will result in a
non-cash pre-tax pension settlement charge of approximately $130 million
to $140 million, which will be excluded from the Company’s non-GAAP
results. In 2019, the Company expects annual non-cash net pension income
to decrease by approximately $13 million, to $35 million, due to the
reduction in pension trust assets related to the transaction combined
with a lower expected return on plan assets due to a change in asset
allocation as part of the de-risking strategy. The Company’s calculation
of non-GAAP adjusted EBITDA includes pension income as a component of
non-GAAP adjusted EBITDA, which is factored into the 2019 Guidance
discussed below. There are no required contributions to the Company’s
U.S. qualified pension plan in 2019. The Company expects to make
approximately $6 million of pension contributions in 2019, primarily for
the non-qualified pension plan.
2019 Guidance
The Company provides the following guidance for 2019 that reflects a
full year impact for the acquisition of the Print logistics business,
and the dispositions of the European printing business and retail
inserts business as well as the impact of lower pension income discussed
above. This guidance does not include any impact related to the
previously announced merger with Quad/Graphics.
|
Guidance |
2018 Actuals |
|||
| Net sales | $3.55 to $3.65 billion | $3.83 billion | ||
| Non-GAAP adjusted EBITDA | $250 to $290 million | $276 million | ||
| Net pension income | $35 million | $48 million | ||
| Non-GAAP adjusted EBITDA excluding net pension income | $215 to $255 million | $228 million | ||
| Depreciation and amortization | $115 to $125 million | $138 million | ||
| Interest expense | $75 to $79 million | $80 million | ||
| Non-GAAP effective tax rate | 27% to 31% | 27.1% | ||
| Capital expenditures | $75 to $85 million | $63 million | ||
| Free cash flow (1) | $60 to $100 million |
$99 million |
||
| Diluted share count | 34 to 35 million | 34.1 million | ||
|
(1) Free cash flow is defined as net cash provided by |
||||
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.
Investor Conference Call
Due to the pending merger with Quad/Graphics, the Company will not host
a conference call to review the fourth-quarter and full-year 2018
financial results.
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 contains forward-looking statements within the meaning
of federal securities laws regarding the Company. These forward-looking
statements relate to, among other things, the proposed transaction
between the Company and Quad/Graphics and include expectations,
estimates and projections concerning the business and operations,
strategic initiatives and value creation plans of the Company. In
accordance with “safe harbor” provisions of the Private Securities
Litigation Reform Act of 1995, these statements may include, or be
preceded or followed by, the words “anticipates,” “estimates,”
“expects,” “projects,” “forecasts,” “intends,” “plans,” “continues,”
“believes,” “may,” “will,” “goals” or variations of such words and
similar expressions. Examples of forward-looking statements include, but
are not limited to, statements, beliefs and expectations regarding our
business strategies, market potential, future financial performance,
dividends, costs to be incurred in connection with the separation,
results of pending legal matters, our goodwill and other intangible
assets, price volatility and cost environment, our liquidity, our
funding sources, expected pension contributions, capital expenditures
and funding, our financial covenants, repayments of debt, off-balance
sheet arrangements and contractual obligations, our accounting policies,
general views about future operating results and other events or
developments that we expect or anticipate will occur in the future.
These forward-looking statements are subject to a number of important
factors, including those factors disclosed in “Item 1A Risk Factors” in
Part I in the Company’s annual report on Form 10-K for the year ended
December 31, 2018, as filed with the SEC on February 19, 2019, that
could cause our actual results to differ materially from those indicated
in any such forward-looking statements. Additional factors include, but
are not limited to: (1) the ability to complete the proposed transaction
between the Company and Quad/Graphics on the anticipated terms and
timetable; (2) the ability to obtain approval by the stockholders of the
Company and shareholders of Quad/Graphics related to the proposed
transaction and the ability to satisfy various other conditions to the
closing of the proposed transaction contemplated by the merger
agreement; (3) the ability to obtain governmental approvals of the
proposed transaction on the proposed terms and schedule, and any
conditions imposed on the combined entities in connection with
consummation of the proposed transaction; (4) the risk that the cost
savings and any other synergies from the proposed transaction may not be
fully realized or may take longer to realize than expected; (5)
disruption from the proposed transaction making it more difficult to
maintain relationships with customers, employees or suppliers; (6) the
competitive market for our products and industry fragmentation affecting
our prices; (7) inability to improve operating efficiency to meet
changing market conditions; (8) changes in technology, including
electronic substitution and migration of paper based documents to
digital data formats; (9) the volatility and disruption of the capital
and credit markets, and adverse changes in the global economy; (10) the
effects of global market and economic conditions on our customers; (11)
the effect of economic weakness and constrained advertising; (12)
uncertainty about future economic conditions; (13) increased competition
as a result of consolidation among our competitors; (14) our ability to
successfully integrate recent and future acquisitions; (15) factors that
affect customer demand, including changes in postal rates, postal
regulations, delivery systems and service levels, changes in advertising
markets and customers’ budgetary constraints; (16) vulnerability to
adverse events as a result of becoming a stand-alone company after
separation from R. R. Donnelley & Sons Company (“RRD”), including the
inability to obtain as favorable of terms from third-party vendors; (17)
our ability to access debt and the capital markets due to adverse credit
market conditions; (18) the effects of seasonality on our core
businesses; (19) the effects of increases in capital expenditures; (20)
changes in the availability or costs of key materials (such as paper,
ink, energy, and other raw materials) or in prices received for the sale
of by-products; (21) performance issues with key suppliers; (22) our
ability to maintain our brands and reputation; (23) the retention of
existing, and continued attraction of additional customers and key
employees, including management; (24) the effect of economic and
political conditions on a regional, national or international basis;
(25) the effects of operating in international markets, including
fluctuations in currency exchange rates; (26) changes in environmental
laws and regulations affecting our business; (27) the ability to gain
customer acceptance of our new products and technologies; (28) the
effect of a material breach of or disruption to the security of any of
our or our vendors’ systems; (29) the failure to properly use and
protect customer and employee information and data; (30) the effect of
increased costs of providing health care and other benefits to our
employees; (31) the effect of catastrophic events; (32) potential tax
liability of the separation; (33) the impact of the U.S. Tax Cuts and
Jobs Act (“Tax Act”); (34) lack of history as an operating company and
costs and other issues associated with being an independent company;
(35) failure to achieve certain intended benefits of the separation;
(36) failure of RRD or Donnelley Financial Solutions, Inc. to satisfy
their respective obligations under agreements entered into in connection
with the separation; (37) increases in requirements to fund or pay
withdrawal costs or required contributions related to the Company’s
pension plans and (38) the factors set forth in “Item 1A Risk Factors”
in Part I in the Company’s annual report on Form 10-K for the year ended
December 31, 2018, as filed with the SEC on February 19, 2019. We have
based our forward-looking statements on our current expectations,
estimates and projections about our industry. We caution that these
statements are not guarantees of future performance and you should not
rely unduly on them, as they involve risks, uncertainties, and
assumptions that we cannot predict. In addition, we have based many of
these forward-looking statements on assumptions about future events that
may prove to be inaccurate. While our management considers these
assumptions to be reasonable, they are inherently subject to significant
business, economic, competitive, regulatory and other risks,
contingencies and uncertainties, most of which are difficult to predict
and many of which are beyond our control. Accordingly, our actual
results may differ materially from the future performance that we have
expressed or forecast in our forward-looking statements. We undertake no
obligation to update any forward-looking statements except to the extent
required by applicable law.
No Offer or Solicitation
This news release relates to a proposed business combination between
Quad/Graphics and the Company. This news release is for informational
purposes only and is neither an offer to purchase, nor a solicitation of
an offer to sell, any securities or the solicitation of any vote in any
jurisdiction pursuant to the proposed transactions or otherwise, nor
shall there be any sale, issuance or transfer or securities in any
jurisdiction in contravention of applicable law. No offer of securities
shall be made except by means of a prospectus meeting the requirements
of Section 10 of the Securities Act of 1933, as amended.
Additional Information and Where to Find It
In connection with the proposed transaction, an amendment to the
registration statement on Form S-4 was filed with the SEC by
Quad/Graphics on January 15, 2019. This registration statement became
effective on February 4, 2019. INVESTORS AND SECURITY HOLDERS ARE
ENCOURAGED TO READ THE REGISTRATION STATEMENT AND ANY OTHER RELEVANT
DOCUMENTS FILED WITH THE SEC, INCLUDING THE DEFINITIVE JOINT PROXY
STATEMENT/PROSPECTUS INCLUDED AS PART OF THE REGISTRATION STATEMENT
BECAUSE THEY CONTAIN IMPORTANT INFORMATION ABOUT THE PROPOSED
TRANSACTION. The definitive joint proxy statement/prospectus was mailed
to stockholders of the Company on January 22, 2019. Investors and
security holders will be able to obtain the documents free of charge at
the SEC’s website, www.sec.gov,
from the Company at its website, www.lsccom.com,
or by contacting the Company’s Investor Relations at investor.relations@lsccom.com
or (773) 272-9275.
Participants in the Solicitation Relating to the Merger
Quad/Graphics and the Company and their respective directors and
executive officers and other members of management and employees may be
deemed to be participants in the solicitation of proxies in respect of
the proposed transaction. Information concerning the Company’s
participants is set forth in the proxy statement, filed April 10, 2018,
for the Company’s 2018 annual meeting of stockholders as filed with the
SEC on Schedule 14A. Additional information regarding the interests of
such participants in the solicitation of proxies in respect of the
proposed transaction is contained in the registration statement and
definitive joint proxy statement/prospectus and other relevant materials
to be filed with the SEC when they become available.
Contacts
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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