LSC Communications Reports 38.8% Net Sales Decrease in Q2 Results

LSC Communications, Inc. reported financial results for the second quarter of 2020.

Financial Highlights:

• Net sales of $532 million compared to $869 million in the second quarter of 2019
• Organic net sales decrease of 29.1% from the second quarter of 2019
• GAAP net loss of $63 million, or $1.86 per diluted share, compared to net loss of $25 million, or $0.72 per diluted share, in the second quarter of 2019
• Non-GAAP net loss of $16 million, or $0.46 per diluted share, compared to non-GAAP net income of $3 million, or $0.09 per diluted share, in the second quarter of 2019
• Non-GAAP adjusted EBITDA of $15 million, or 2.8% of net sales, compared to $53 million, or 6.1% of net sales, in the second quarter of 2019
• Cash balance of $97 million as of June 30, 2020, providing sufficient liquidity to continue to fund ongoing operations
• No drawings under our debtor-in-possession ("DIP") credit facility

LSC Chairman and CEO Thomas Quinlan

“As we faced the unprecedented impacts of the COVID-19 pandemic during the entire second quarter, our focus has been on ensuring the health and safety of our employees, while continuing to meet our customers’ needs,” said Thomas J. Quinlan III, LSC Communications’ Chairman, President and Chief Executive Officer. “Our financial results for the quarter show that our aggressive actions to restructure our manufacturing footprint, reduce cost, and drive sustainable productivity improvement are working even in the face of the significant COVID impacts on our sales. I am also pleased with the progress of our court-supervised restructuring process to strengthen LSC’s financial position for the future. Our liquidity position remains strong, with nearly $100 million of cash on hand and full availability under our DIP facility. I want to thank our employees for their continued focus and dedication during these challenging times.”

Net Sales

Second quarter net sales were $532 million, down $337 million, or 38.8%, from the second quarter of 2019. After adjusting for dispositions, changes in foreign exchange rates and pass-through paper sales, organic net sales decreased 29.1% from the second quarter of 2019. The decrease in organic net sales was seen across all segments and largely driven by the significant impact of COVID-19 in addition to the ongoing impact of digital substitution on magazine and catalog volume.

GAAP Net Income/Loss

The second quarter 2020 net loss was $63 million, or $1.86 per diluted share, compared to net loss of $25 million, or $0.72 per diluted share, in the second quarter of 2019.

Non-GAAP Adjusted EBITDA and Non-GAAP Net Loss

Non-GAAP adjusted EBITDA in the second quarter of 2020 was $15 million, or 2.8% of net sales, compared to $53 million, or 6.1% of net sales, in the second quarter of 2019. The decrease in non-GAAP adjusted EBITDA was driven by volume declines and the impact of lower by-products prices. The aggressive cost savings actions and ongoing company-wide productivity initiatives helped to offset a significant portion of the earnings impact from volume declines during the quarter.

Non-GAAP net loss totaled $16 million, or $0.46 per diluted share, in the second quarter of 2020 compared to non-GAAP net income of $3 million, or $0.09 per diluted share in the second quarter of 2019. 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, (4) Mexico, and (5) other, which includes Directory and Print Management.

Magazines, Catalogs and Logistics

Second quarter net sales in Magazines, Catalogs and Logistics were $214 million, a decrease of 43.8%, from the second quarter of 2019. After adjusting for dispositions and pass-through paper sales, organic net sales decreased 30.6% from the second quarter of 2019. This organic decline was primarily due to the impact of COVID-19, as catalogers and retailers delayed or significantly reduced their print programs, as well as ongoing volume declines driven by digital substitution for printed materials.

Magazines, Catalogs and Logistics GAAP loss from operations was $57 million, compared to loss from operations of $42 million in the second quarter of 2019. Segment non-GAAP adjusted EBITDA in the second quarter was a loss of $24 million, compared to a loss of $9 million in the second quarter of 2019. The decline in Non-GAAP EBITDA was primarily due to volume declines including the impact of COVID-19, partially offset by productivity gains achieved through plant consolidations and the Company’s proactive cost savings program.

Book

Second quarter net sales in Book were $198 million, a decrease of 31.7% from the second quarter of 2019. After adjusting for pass-through paper sales, organic net sales decreased 23.0% from the second quarter of 2019. The organic net sales decrease was driven mainly by the impact of COVID-19 on educational book volumes due to the uncertainty around school openings. Demand for trade books remained strong, but volumes were negatively impacted by retail store closures and other distribution channel disruptions driven by the pandemic.

Book GAAP income from operations was $4 million, compared to income from operations of $18 million in the second quarter of 2019. Segment non-GAAP adjusted EBITDA in the quarter was $17 million and non-GAAP adjusted EBITDA margin was 8.6%, compared to $32 million in the second quarter of 2019 with a margin of 11.1%. The decrease in non-GAAP adjusted EBITDA was primarily due to the volume declines and lower by-products prices, partially offset by productivity and cost reduction initiatives.

Office Products

Second quarter net sales in Office Products were $81 million, a decrease of 42.2% compared to the second quarter of 2019. Sales declined on an organic basis from the second quarter of 2019 by 42.0%. The organic sales decline was primarily driven by the impacts of COVID-19, including closures of offices, schools, and retail stores. These declines were partially offset by increased sales to e-commerce retailers, which grew significantly during the quarter compared to last year.

Office Products income from operations was $0 million compared to $13 million in the second quarter of 2019. Non-GAAP adjusted EBITDA in the Office Products segment was $4 million for the quarter, a decrease of $13 million compared to last year’s second quarter due primarily to the volume declines partially offset by the impact of plant consolidations, productivity and cost reduction initiatives.

Business Reorganization Update

The Company continues to manage its court supervised restructuring process. As previously announced, the Company, along with most of its U.S. subsidiaries, voluntarily filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code on April 13, 2020 in the U.S. Bankruptcy Court for the Southern District of New York.

LSC has sufficient liquidity to operate its business safely and efficiently and remains committed to serving its clients with the same high standards of quality and reliability they expect. LSC is paying vendors in full under customary terms for all goods and services received on or after the filing date.

Source: LSC Communications