LSC Communications Q4 Net Sales Decrease 17.1%; Receives Waiver from Lenders
LSC Communications, Inc. reported financial results for the fourth quarter of 2019.
- Net sales of $778 million compared to $939 million in the fourth quarter of 2018
- Organic net sales decrease of 14.1% from the fourth quarter of 2018
- GAAP net loss of $169 million, or $5.02 per diluted share, compared to net loss of $16 million, or $0.47 per diluted share, in the fourth quarter of 2018
- Non-GAAP net loss of $34 million, or $1.03 per diluted share, compared to non-GAAP net income of $4 million, or $0.12 per diluted share, in the fourth quarter of 2018
- Non-GAAP adjusted EBITDA of $1 million, or 0.1% of net sales, compared to $56 million, or 6.0% of net sales, in the fourth quarter of 2018
- Cash balance of $105 million as of December 31, 2019; sufficient liquidity to continue to fund ongoing operations
- Company evaluating opportunities to reduce debt with support from lenders under its credit agreement through a Waiver and Forbearance Agreement
“Since the termination of the proposed merger with Quad Graphics in July of 2019, we have acted decisively to manage our operational and financial position by narrowing our strategic focus and aligning our manufacturing platform to address the significant structural changes in the industry,” said Thomas J. Quinlan III, LSC Communications’ Chairman, President and Chief Executive Officer.
“As part of this plan, we have closed or are in the process of closing eight manufacturing plants. We are also aggressively pursuing new business opportunities, including a recent significant win with a major book publisher. These are not steps we could have taken while the Quad merger was pending. While the financial results of our ongoing operational actions in 2019 will not be seen until 2020 and beyond, as one of the country’s largest and most experienced printers with the leading mailing distribution network, we are well positioned to continue to compete and deliver exceptional products and services to our clients.”
Fourth quarter net sales were $778 million, down $161 million, or 17.1%, from the fourth quarter of 2018. After adjusting for dispositions, changes in foreign exchange rates and pass-through paper sales, organic net sales decreased 14.1% from the fourth quarter of 2018. The decrease in organic net sales was largely due to the ongoing impact of digital substitution on magazine and catalog volume and lower book volume driven by higher back-to-school production in the first half of the year as well as the effect of college textbook rental programs and digital alternatives.
GAAP Net Income/Loss
The fourth quarter 2019 net loss was $169 million, or $5.02 per diluted share, compared to net loss of $16 million, or $0.47 per diluted share, in the fourth quarter of 2018. The fourth quarter 2019 net loss included after-tax charges of $135 million while the fourth quarter 2018 net loss included after-tax charges of $20 million. These items 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 fourth quarter of 2019 was $1 million, or 0.1% of net sales, compared to $56 million, or 6.0% of net sales, in the fourth quarter of 2018. The decrease in non-GAAP adjusted EBITDA was driven by volume declines across the Magazines, Catalogs and Logistics and Book segments, the impact of lower by-products prices, and wage increases. These decreases were partially offset by the impact of ongoing company-wide productivity initiatives.
Non-GAAP net loss totaled $34 million, or $1.03 per diluted share, in the fourth quarter of 2019 compared to non-GAAP net income of $4 million, or $0.12 per diluted share in the fourth quarter of 2018. Reconciliations of net loss to non-GAAP adjusted EBITDA and non-GAAP net income are presented in the attached schedules.
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
Fourth quarter net sales in Magazines, Catalogs and Logistics were $384 million, a decrease of 19.2%, from the fourth quarter of 2018. After adjusting for dispositions and pass-through paper sales, organic net sales decreased 14.3% from the fourth quarter of 2018. This organic decline is primarily due to ongoing volume declines driven by digital substitution for printed materials.
Magazines, Catalogs and Logistics GAAP net loss from operations was $35 million, compared to a net loss from operations of $12 million in the fourth quarter of 2018. Segment non-GAAP adjusted EBITDA in the fourth quarter was a loss of $16 million. The EBITDA decline was primarily due to volume declines and lower by-products prices, partially offset by productivity gains achieved through plant consolidations and the company’s comprehensive cost savings program.
Fourth quarter net sales in Book were $206 million, a decrease of 20.2%, from the fourth quarter of 2018. After adjusting for pass-through paper sales, organic net sales decreased 18.3% from the fourth quarter of 2018. The organic net sales decrease was primarily driven by lower college book volumes, reflecting high customer inventory levels due to growth in textbook rental programs and the impact of digital textbook alternatives. Volumes for trade books, elementary and secondary education books, and religious books were all down slightly in the quarter, but by amounts consistent with normal industry cycles.
Book GAAP loss from operations was $72 million, compared to income from operations of $9 million in the fourth quarter of 2018. Segment non-GAAP adjusted EBITDA in the quarter was $2 million and non-GAAP adjusted EBITDA margin was 1.0%. The non-GAAP adjusted EBITDA margin decreased 790 bps compared with the fourth quarter of 2018, primarily due to the lower education book volumes. In addition, the impacts of targeted wage increases to address labor market conditions and lower by-products prices were partially offset by productivity & cost reduction initiatives.
The Company recently secured a contract with a major book publisher, with work commencing no later than January 2021.
Fourth quarter net sales in Office Products were $131 million, a decrease of 6.9% on an as-reported and organic basis from the fourth 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 earlier in the year to address higher costs for materials and freight.
Office Products income from operations was $13 million compared to $10 million in the fourth quarter of 2018. Non-GAAP adjusted EBITDA in the Office Products segment was $17 million for the quarter, an increase of $1 million compared to last year’s fourth quarter. Non-GAAP adjusted EBITDA margin increased 160 bps to 13.0% due to a favorable mix of branded versus private label sales, the impact of price increases, productivity and cost reduction initiatives.
Credit Agreement Waiver, Forbearance Agreement and Liquidity
LSC Communications filed its Annual Report on a Form 10-K, including its annual audited financial statements for the fiscal year ended December 31, 2019, and the related management's discussion and analysis (collectively, the "Form 10-K").
As noted in the Form 10-K, LSC Communications is actively evaluating opportunities to delever its capital structure. Certain risks related to the Company’s highly-leveraged capital structure are described in the Form 10-K.
On March 2, 2020, LSC Communications entered into a Waiver, Forbearance Agreement and Fourth Amendment to Credit Agreement (the “Agreement”) with lenders under the Company’s Credit Agreement. The Agreement waives the defaults or events of default that have occurred as a result of noncompliance with financial covenants relating to the Company’s Consolidated Leverage Ratio and Minimum Interest Ratio on December 31, 2019. The Agreement also includes an undertaking from lenders to forbear from exercising remedies for certain potential future defaults or events of default through the period ended May 14, 2020, subject to LSC Communications’ compliance with various undertakings in the Agreement.
As of December 31, 2019, LSC Communications had a cash balance of $105 million, which the Company believes provides substantial liquidity to fund its current operations.
Quinlan continued, “We appreciate the support we have received from our revolver and term loan lenders for the waiver as we continue to engage in productive discussions regarding opportunities to strengthen our capital structure. We remain firmly committed to serving our clients with the same high standards of quality and reliability that they expect. We also appreciate the strong support of our vendors and the continuing dedication of our employees in recent months and going forward as they work to support our mutual success.”
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 the staff of Printing Impressions.