LSC Communications Reports Q4 and FY 2018 Results and Issues 2019 Guidance

CHICAGO - February 20, 2019 - LSC Communications, Inc. reported financial results for the fourth quarter of 2018.

Highlights

• Net sales of $939 million compared to $999 million in the fourth quarter of 2017
• Organic net sales decrease of 3.2% from the fourth quarter of 2017
• GAAP net loss of $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
• Non-GAAP net income of $4 million, or $0.12 per diluted share, compared to non-GAAP net income of $17 million, or $0.50 per diluted share in the fourth quarter of 2017
• Non-GAAP adjusted EBITDA of $56 million, or 6.0% of net sales, compared to $85 million, or 8.5% of net sales, in the fourth quarter of 2017
• Net cash provided by operating activities of $188 million compared to $147 million in the fourth quarter of 2017
• Non-GAAP free cash flow of $177 million compared to $138 million in the fourth quarter of 2017
• Company completes significant pension risk transfer transaction in the first quarter of 2019

Thomas J. Quinlan III

“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 Mexicooperations, 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.

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Source: LSC Communications 

The preceding press release was provided by a company unaffiliated with Printing Impressions. The views expressed within do not directly reflect the thoughts or opinions of Printing Impressions.