Provides Preliminary Results for Second Quarter
2019 and Updates Full Year 2019 Guidance
Board Determines to Suspend Dividend
LSC Communications, Inc. (NYSE: LKSD) (“LSC”) today
announced that LSC and Quad/Graphics, Inc. (NYSE: QUAD) (“Quad”)
have mutually agreed to terminate the merger agreement (the
“Agreement”) pursuant to which Quad/Graphics would acquire LSC in
an all-stock transaction valued at approximately $1.4 billion. In
accordance with the Agreement, in connection with the termination,
Quad will pay LSC a termination fee of $45 million. The Agreement
was previously announced on October 31, 2018. On June 20, 2019, the
U.S. Department of Justice (the “DOJ”) announced that it had filed
a lawsuit in the United States District Court for the Northern
District of Illinois to enjoin Quad’s proposed acquisition of
LSC.
Thomas J. Quinlan III, LSC’s Chairman, Chief Executive Officer
and President, said, “We disagree with the DOJ’s conclusion
regarding our transaction, especially in the context of industry
trends. However, we and Quad recognize the significant additional
time and resources that would be required to challenge the DOJ’s
complaint and have therefore decided mutually that it is in the
best interests of our respective companies to terminate the merger
agreement. The LSC Board of Directors and senior management are
confident that LSC has strong capabilities to innovate and further
develop our leadership position in the industry. We are incredibly
grateful to all of our employees for their work throughout the
process. We are as dedicated as ever to serving our clients’ needs
with the same level of service, innovation and industry-leading
solutions that they have come to expect. Moving forward, we will
continue to drive shareholder value.”
LSC Preliminary Second Quarter 2019 Results
LSC also today announced that it currently expects the following
estimated financial results for the second-quarter 2019:
- Total net sales of $865 to $875 million
- GAAP net loss of $22 to $26 million
- Non-GAAP adjusted EBITDA of $51 to $55 million
- Net cash provided by operating activities of $25 to $29
million
- Non-GAAP free cash flow of $4 to $8 million
Mr. Quinlan stated, "While our Book and Office Products segments
performed in line with expectations during the second quarter, we
have seen an unprecedented drop in demand in our Magazines,
Catalogs and Logistics segment. This faster pace of decline in
demand in the MCL segment results primarily from the accelerated
impact of digital disruption of demand for printed materials. As a
result, we are updating our 2019 full year guidance and expect our
year end reported leverage to be approximately 3x.”
Mr. Quinlan concluded, “In light of lower expectations for
earnings and cash flows, the Board of Directors has suspended
dividend payments in order to allocate greater capital to LSC’s
debt reduction and ongoing operational restructuring programs. We
believe our ongoing operational restructuring programs, the $45
million break-up fee being paid by Quad and the suspension of the
dividend provide LSC with stable financial ground to move forward
in our increasingly competitive and evolving industry.”
LSC’s consolidated financial statements for the three and six
months ended June 30, 2019 are not yet available. The following
expectations regarding LSC’s results for this period are
preliminary, based solely upon management estimates based on
currently available information, and subject to completion of
financial and operating closing procedures as of and for the three
months ended June 30, 2019. Accordingly, you should not place undue
reliance on these estimates. All of these estimates constitute
“forward-looking statements” as described below in “Forward Looking
Statements.”
LSC’s independent registered public accounting firm, Deloitte
& Touche LLP, has not audited, reviewed or performed any
procedures with respect to this preliminary financial data and,
accordingly, does not express an opinion or any other form of
assurance with respect to this data.
Updated 2019 Guidance
LSC’s updated full-year guidance for 2019 in the table below
reflects the impact of the expectation for the continued negative
trends in the MCL segment in the second half of the year.
Updated
Guidance
Previous
Guidance
Net sales
$3.45 to $3.55 billion
$3.55 to $3.65 billion
Non-GAAP adjusted EBITDA
$200 to $240 million
$250 to $290 million
Net pension income
$35 million
$35 million
Non-GAAP adjusted EBITDA excluding net
pension income
$165 to $205 million
$215 to $255 million
Depreciation and amortization
$115 to $125 million
$115 to $125 million
Interest expense
$75 to $79 million
$75 to $79 million
Non-GAAP effective tax rate
30% to 35%
27% to 31%
Capital expenditures
$75 to $85 million
$75 to $85 million
Free cash flow (1)
$60 to $100 million
$60 to $100 million
Diluted share count
34 to 35 million
34 to 35 million
(1)
Free cash flow is defined as net cash
provided by operating activities less capital expenditures. The
2019 Free Cash Flow Guidance includes $45 million of gross proceeds
received in connection with the Merger Agreement termination fee,
less estimated transaction costs of approximately $20 to $25
million.
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." LSC 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 LSC'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 LSC's ongoing operations. LSC does not
believe that excluding such items is likely to be significant to an
assessment of LSC's ongoing operations, given that such excluded
items are not the indicators of business performance focused on by
management in assessing LSC’s operations.
Board Determines to Suspend Dividend
LSC announced that its Board of Directors has decided not to
declare a quarterly dividend on its common stock in the third
quarter of 2019, making the dividend paid in June 2019 the last
dividend that will be paid for the foreseeable future. Suspending
the dividend will allow LSC to redeploy approximately $35 million
in cash annually.
Second-Quarter 2019 Results and Conference Call
LSC now plans to release its complete report on second-quarter
2019 results on Thursday, August 8, 2019. In light of the
termination of the merger agreement, LSC will resume quarterly
conference calls to discuss its earnings. The conference call and
live webcast will begin at 8:30 am Eastern Time. The live webcast
will be accessible on LSC’s website, www.lsccom.com, or through
this link.
Individuals wishing to dial in to the call or access the live
webcast must register in advance at this link. After registering,
participants will receive dial-in numbers, a passcode, and a link
to access the live event.
A webcast replay will be archived on LSC’s web site for 90 days
after the call.
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. LSC
believes that these non-GAAP measures, such as non-GAAP adjusted
EBITDA, non-GAAP adjusted EBITDA margin, non-GAAP effective tax
rate and free cash flow, when presented in conjunction with
comparable GAAP measures, provide useful information about LSC’s
operating results and liquidity and enhance the overall ability to
assess LSC’s financial performance. LSC 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 effective tax
rate and free cash flow allow investors to make a more meaningful
comparison between LSC’s core business operating results over
different periods of time. LSC believes that non-GAAP adjusted
EBITDA, non-GAAP adjusted EBITDA margin, non-GAAP effective tax
rate and free cash flow, when viewed with LSC’s results under GAAP
and the accompanying reconciliations, provides useful information
about LSC’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, LSC believes that non-GAAP adjusted
EBITDA, non-GAAP adjusted EBITDA margin and non-GAAP effective tax
rate 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, LSC
believes that free cash flow can provide useful additional basis
for understanding LSC’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 LSC. These
forward-looking statements relate to, among other things, the
proposed transaction between LSC and Quad/Graphics and include
expectations, estimates and projections concerning the business and
operations, strategic initiatives and value creation plans of LSC.
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
LSC’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) disruption from the abandoned transaction
making it more difficult to maintain relationships with customers,
employees or suppliers; (2) the competitive market for our products
and industry fragmentation affecting our prices; (3) inability to
improve operating efficiency to meet changing market conditions;
(4) changes in technology, including electronic substitution and
migration of paper based documents to digital data formats; (5) the
volatility and disruption of the capital and credit markets, and
adverse changes in the global economy; (6) the effects of global
market and economic conditions on our customers; (7) the effect of
economic weakness and constrained advertising; (8) uncertainty
about future economic conditions; (9) increased competition as a
result of consolidation among our competitors; (10) our ability to
successfully integrate recent and future acquisitions; (11) 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; (12)
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; (13) our ability to
access debt and the capital markets due to adverse credit market
conditions; (14) the effects of seasonality on our core businesses;
(15) the effects of increases in capital expenditures; (16) 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; (17) performance issues with key suppliers; (18)
our ability to maintain our brands and reputation; (19) the
retention of existing, and continued attraction of additional
customers and key employees, including management; (20) the effect
of economic and political conditions on a regional, national or
international basis; (21) the effects of operating in international
markets, including fluctuations in currency exchange rates; (22)
changes in environmental laws and regulations affecting our
business; (23) the ability to gain customer acceptance of our new
products and technologies; (24) the effect of a material breach of
or disruption to the security of any of our or our vendors’
systems; (25) the failure to properly use and protect customer and
employee information and data; (26) the effect of increased costs
of providing health care and other benefits to our employees; (27)
the effect of catastrophic events; (28) potential tax liability of
the separation; (29) the impact of the U.S. Tax Cuts and Jobs Act
(“Tax Act”); (30) lack of history as an operating company and costs
and other issues associated with being an independent company; (31)
failure to achieve certain intended benefits of the separation;
(32) failure of RRD or Donnelley Financial Solutions, Inc. to
satisfy their respective obligations under agreements entered into
in connection with the separation; (33) increases in requirements
to fund or pay withdrawal costs or required contributions related
to LSC’s pension plans and (24) the factors set forth in “Item 1A
Risk Factors” in Part I in LSC’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.
Reconciliations of EBITDA, Non-GAAP EBITDA and Free Cash
Flow For the Three Months Ended June 30, 2019 and 2018
(Unaudited) (in millions)
Three Months Ended June
30,
2019
2018
Low High Actual Net (loss) income
$
(26
)
$
(22
)
$
8
Interest expense-net
19
19
18
Income tax (benefit) expense
(2
)
(4
)
5
Depreciation and amortization
31
31
34
Restructuring, impairment and other charges (a)
24
25
11
Settlement of retirement benefit obligations (b)
1
1
-
Expenses related to acquisitions and the Merger (c)
4
5
1
Non-GAAP EBITDA
$
51
$
55
$
77
Free Cash Flow Reconciliation Net cash provided by
(used in) operating activities
$
25
$
29
$
(2
)
Capital expenditures
(21
)
(21
)
(17
)
Free cash flow
$
4
$
8
$
(19
)
(a) Restructuring, impairment and other charges-net:
Restructuring charges for employee termination costs, other costs,
multiemployer pension plan withdrawal obligations, and impairment
charges for intangible assets and other long-lived assets. (b)
Settlement of retirement benefit obligations: There were lump-sum
settlements that we expect will result in an immaterial non-cash
settlement charge during the three months ended June 30, 2019. (c)
Expenses related to acquisitions and the Merger: The three months
ended June 30, 2019 included charges primarily related to costs
associated with the Merger. The three months ended June 30, 2018
included charges related to legal, accounting and other expenses
associated with completed and contemplated acquisitions.
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version on businesswire.com: https://www.businesswire.com/news/home/20190723005261/en/
Investor Contact Janet M. Halpin, Senior Vice President,
Treasurer & Investor Relations E-mail:
investor.relations@lsccom.com 773-272-9275
Media Contact Steve Frankel / Jamie Moser / Adam Pollack
Joele Frank, Wilkinson Brimmer Katcher 212-355-4449
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