LSC Q1 Results Show Decreases in Book, Magazine, and Catalog Printing Volume

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

Financial Highlights:

• Net sales of $701 million compared to $845 million in the first quarter of 2019
• Organic net sales decrease of 11.2% from the first quarter of 2019
• GAAP net loss of $52 million, or $1.56 per diluted share, compared to net loss of $125 million, or $3.77 per diluted share, in the first quarter of 2019
• Non-GAAP net loss of $25 million, or $0.75 per diluted share, compared to non-GAAP net loss of $5 million, or $0.14 per diluted share, in the first quarter of 2019
• Non-GAAP adjusted EBITDA of $21 million, or 3.0% of net sales, compared to $43 million, or 5.1% of net sales, in the first quarter of 2019
• Cash balance of $56 million as of March 31, 2020 and $100 million in debtor-in-possession (“DIP”) facility, providing sufficient liquidity to continue to fund ongoing operations
• Increased Non-GAAP EBITDA Margin in the Office Products segment by 150 bps due to increased productivity, plant consolidations and cost savings initiatives

LSC Chairman and CEO Thomas Quinlan

“Over the last year, we have taken a number of important steps to enhance LSC’s operational and financial position in response to significant changes in our industry,” said Thomas J. Quinlan III, LSC Communications’ Chairman, President and Chief Executive Officer. “Our results for the first quarter reflect the ongoing impact of the shift to digital in the industry, as well as our aggressive initiatives to streamline our manufacturing footprint and drive productivity. In order to best position LSC for the future, we voluntarily entered a court-supervised restructuring process and have secured $100 million in new financing.

"At the same time, we, as well as our clients and vendors, have been impacted by the unprecedented COVID-19 pandemic, and our team is taking the necessary steps to fortify our business while continuing to meet our clients’ needs, supported by our improved liquidity. As always, our top priority is the health and safety of employees. I want to express my appreciation for our employees’ continued commitment to health and safety while at the same time continuing to serve our clients’ needs.”

Net Sales

First quarter net sales were $701 million, down $144 million, or 17.0%, from the first quarter of 2019. After adjusting for dispositions, changes in foreign exchange rates and pass-through paper sales, organic net sales decreased 11.2% from the first quarter of 2019. The decrease in organic net sales was largely due to lower educational book volumes and the ongoing impact of digital substitution on magazine and catalog volume.

GAAP Net Income/Loss

The first quarter 2020 net loss was $52 million, or $1.56 per diluted share, compared to net loss of $125 million, or $3.77 per diluted share, in the first quarter of 2019. The first quarter 2020 net loss included after-tax charges of $27 million while the first quarter 2019 net loss included after-tax charges of $120 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 first quarter of 2020 was $21 million, or 3.0% of net sales, compared to $43 million, or 5.1% of net sales, in the first quarter of 2019. The decrease in non-GAAP adjusted EBITDA was driven by volume declines in 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 $25 million, or $0.75 per diluted share, in the first quarter of 2020 compared to non-GAAP net loss of $5 million, or $0.14 per diluted share in the first 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

First quarter net sales in Magazines, Catalogs and Logistics were $327 million, a decrease of 18.9%, from the first quarter of 2019. After adjusting for dispositions and pass-through paper sales, organic net sales decreased 10.2% from the first quarter of 2019. This organic decline is primarily due to ongoing volume declines driven by digital substitution for printed materials.

Magazines, Catalogs and Logistics GAAP loss from operations was $35 million, compared to loss from operations of $31 million in the first quarter of 2019. Segment non-GAAP adjusted EBITDA in the first quarter was a loss $13 million, compared to a loss of $5 million in the first quarter of 2019. The decline in Non-GAAP EBITDA was primarily due to volume declines and lower by-products prices, partially offset by productivity gains achieved through plant consolidations and the company’s cost savings program.

Book

First quarter net sales in Book were $204 million, a decrease of 21.4%, from the first quarter of 2019. After adjusting for pass-through paper sales, organic net sales decreased 18.0% from the first quarter of 2019. The organic net sales decrease was primarily driven by lower educational book volumes due to relatively high client and distribution channel inventory levels. In addition, religious book volumes declined temporarily as the Company transitioned its primary bible production capabilities to a different facility. This transition was completed early in the second quarter. These declines were partially offset by increases in trade volume.

Book GAAP loss from operations was $9 million, compared to income from operations of $13 million in the first quarter of 2019. Segment non-GAAP adjusted EBITDA in the quarter was $6 million and non-GAAP adjusted EBITDA margin was 2.9%, compared to $26 million in the first quarter of 2019 with a margin of 10.0%. The decrease in non-GAAP adjusted EBITDA was primarily due to the volume declines and lower by-products prices, partially offset by productivity & cost reduction initiatives.

Office Products

First quarter net sales in Office Products were $112 million, a decrease of 5.6% compared to the first quarter of 2019. Sales declined on an organic basis from the first quarter of 2019 by 5.5%. The organic sales decline was primarily related to lower volume in envelopes, note-taking, and binder products, partially offset by higher volume in filing products.

Office Products income from operations was $7 million compared to $8 million in the first quarter of 2019. Non-GAAP adjusted EBITDA in the Office Products segment was $12 million for the quarter, an increase of $1 million compared to last year’s first quarter. Non-GAAP adjusted EBITDA margin increased 150 bps to 10.7% due the impact of plant consolidations, productivity and cost reduction initiatives.

Business Reorganization

As previously announced on April 13, 2020, the Company, along with most of its U.S. subsidiaries, has voluntarily filed for business reorganization under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of New York.

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

LSC’s subsidiaries in Mexico and Canada are not included in the court proceedings and will continue to operate in the normal course.

Source: LSC Communications