LSC Communications Reports First Quarter 2019 Results and Reaffirms Full Year 2019 Guidance

CHICAGO–(BUSINESS WIRE)–LSC Communications, Inc. (NYSE: LKSD) today reported financial
results for the first quarter of 2019.

Highlights:

• Net sales of $845 million compared to $929 million in the first
  quarter of 2018
• Organic net sales decrease of 4.6% from the first quarter of 2018
• GAAP net loss of $126 million, or $3.79 per diluted share, compared to
  a net loss of $11 million, or $0.32 per diluted share in the first
  quarter of 2018
• Non-GAAP net loss of $5 million, or $0.16 per diluted share, compared
  to a non-GAAP net loss of $4 million, or $0.11 per diluted share in
  the first quarter of 2018
• Non-GAAP adjusted EBITDA of $42 million, or 5.0% of net sales,
  compared to $53 million, or 5.7% of net sales, in the first quarter of
  2018

“First quarter results were consistent with our expectations,” said
Thomas J. Quinlan III, LSC Communications’ Chairman, President and Chief
Executive Officer. “While we continue to see weakness in demand for
Magazines, Catalogs and Logistics, our Book and Office Products segments
both delivered year-over-year improvement in earnings and margins for
the quarter. We continue to expect to close on the previously-announced
merger with Quad/Graphics, Inc. in mid-2019.”

Net Sales

First quarter net sales were $845 million, down $84 million, or 9.1%,
from the first quarter of 2018. After adjusting for acquisitions,
divestitures, changes in foreign exchange rates, and pass-through paper
sales, organic net sales decreased 4.6% from the first quarter of 2018.
The decrease in organic net sales was largely due to lower volume in
Magazine, 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 first quarter 2019 net loss was $126 million, or $3.79 per diluted
share, compared to a net loss of $11 million, or $0.32 per diluted
share, in the first quarter of 2018. The first quarter 2019 net loss
included after-tax charges of $121 million, primarily due to a pension
settlement charge related to the pension risk transfer transaction
completed in January 2019. The first quarter 2018 net loss included
after-tax charges of $7 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 first quarter of 2019 was $42 million,
or 5.0% of net sales, compared to $53 million, or 5.7% of net sales, in
the first quarter of 2018. The decrease in non-GAAP adjusted EBITDA was
primarily due to volume declines and the sale of our European printing
business at the end of the third quarter of 2018.

Non-GAAP net loss totaled $5 million, or $0.16 per diluted share, in the
first quarter of 2019 compared to a non-GAAP net loss of $4 million, or
$0.11 per diluted share in the first quarter of 2018. 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 (until the Company disposed of its European
operations in September 2018).

Magazines, Catalogs and Logistics

First quarter net sales in Magazines, Catalogs and Logistics were $403
million, a decrease of 5.4% from the first quarter of 2018. After
adjusting for acquisitions, divestitures and pass-through paper sales,
organic net sales decreased 9.8% from the first quarter of 2018. This
organic sales decline was worse than the trend in recent quarters, as
the pace and impact of digital disruption of demand for printed
advertising and marketing materials has continued to accelerate.

Magazines, Catalogs and Logistics Segment GAAP loss from operations was
$31 million, compared to a loss from operations of $14 million in the
first quarter of 2018. Segment non-GAAP adjusted EBITDA in the first
quarter was a negative $5 million and non-GAAP adjusted EBITDA margin
was a negative 1.2% compared to non-GAAP adjusted EBITDA of $6 million
in the first quarter of 2018 and non-GAAP adjusted EBITDA margin of
1.4%. The decrease in non-GAAP adjusted EBITDA was primarily due to the
impact of lower volumes partially offset by the impact of synergies
associated with the Company’s logistics acquisitions.

Book

First quarter net sales in Book were $260 million, an increase of 4.3%
from the first quarter of 2018. After adjusting for pass-through paper
sales, organic net sales increased 2.7% from the first quarter of 2018.
The organic net sales increase was primarily driven by increased
education book volume.

Book Segment GAAP income from operations was $13 million, an increase of
$4 million compared to the first quarter of 2018. Segment non-GAAP
adjusted EBITDA in the quarter was $26 million and non-GAAP adjusted
EBITDA margin was 10.0%. The segment non-GAAP adjusted EBITDA margin
increased 40 bps compared with the first quarter of 2018, primarily due
to favorable product mix and cost reduction initiatives partially offset
by the continued impact of a tight labor market and the resulting
negative impact on productivity and wage rates.

Office Products

First quarter net sales in Office Products were $119 million, a decrease
of 3.3% from the first quarter of 2018. After adjusting for changes in
foreign exchange rates, organic net sales decreased 2.9% from the first
quarter of 2018. 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 to pass along higher costs for
materials and freight.

Office Products Segment GAAP income from operations was $8 million, an
increase of $6 million compared to the first quarter of 2018. Non-GAAP
adjusted EBITDA in the Office Products segment was $11 million for the
quarter, an increase of $3 million compared to last year’s first
quarter. Non-GAAP adjusted EBITDA margin increased 270 bps to 9.2% due
to the impact of the price increases, a favorable mix of branded versus
private label sales and synergies associated with the acquisition of
Quality Park, partially offset an increase in wage rates.

2019 Guidance

The Company reaffirms the following full-year guidance for 2019. This
guidance does not include any impact related to the previously announced
merger with Quad/Graphics, Inc.

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, the Company will not host a
conference call to review the first-quarter 2019 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.

Contacts

Investor Contact
Janet M. Halpin, Senior Vice President,
Treasurer & Investor Relations
E-mail: [email protected]
Tel:
773.272.9275

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