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CORRECTING and REPLACING LSC Communications Reports Fourth-Quarter and Full-Year 2016 Results and Issues Full-Year 2017 Guidance

CHICAGO--(BUSINESS WIRE)--

The second paragraph, first sentence of the section labeled "Non-GAAP Adjusted EBITDA and Non-GAAP Net Income" should read: Non-GAAP net income totaled $15 million, or $0.48 per diluted share, in the fourth quarter of 2016 compared to non-GAAP net income in the fourth quarter of 2015 of $40 million, or $1.21 per diluted share (instead of Non-GAAP net income totaled $15 million, or $0.44 per diluted share, in the fourth quarter of 2016 compared to non-GAAP net income in the fourth quarter of 2015 of $40 million, or $1.23 per diluted share)

The corrected release reads:

LSC COMMUNICATIONS REPORTS FOURTH-QUARTER AND FULL-YEAR 2016 RESULTS AND ISSUES FULL-YEAR 2017 GUIDANCE

LSC Communications, Inc. (LKSD) today reported financial results for the fourth quarter of 2016 and guidance for the full year of 2017.

4Q 2016 Highlights:

  • Net sales of $919 million compared to $1.0 billion in the fourth quarter of 2015
  • GAAP net income of $9 million, or $0.26 per diluted share
  • Non-GAAP net income of $15 million, or $0.48 per diluted share
  • Non-GAAP adjusted EBITDA of $80 million, or 8.7% of net sales, compared to $111 million, or 11.1% of net sales, in the fourth quarter of 2015
  • Net cash provided by operating activities of $95 million
  • Non-GAAP free cash flow of $82 million

Full Year 2016 Highlights:

  • Net sales of $3.65 billion compared to $3.74 billion for full year 2015
  • GAAP net income of $106 million, or $3.23 per diluted share
  • Non-GAAP net income of $121 million, or $3.69 per diluted share
  • Non-GAAP adjusted EBITDA of $370 million, or 10.1% of net sales, compared to $398 million, or 10.6% of net sales for full year 2015
  • Company issues full-year 2017 guidance

“In our first quarter as a standalone company, we are pleased to have delivered results in line with our guidance,” said Thomas J. Quinlan III, LSC Communications’ Chairman and Chief Executive Officer. “In 2017, we expect to continue growing our industry-leading supply chain management services offering and are excited to execute our strategy as we enter our first full year as a standalone public company.”

Net Sales

Fourth quarter net sales were $919 million, down $85 million, or 8.5%, from the fourth quarter of 2015. After adjusting for the December 2, 2016 acquisition of Continuum, changes in foreign exchange rates, and pass-through paper sales, organic sales decreased 6.3% from the fourth quarter of 2015. The decrease in organic net sales was due to lower volume and price pressures in the Print segment.

GAAP Net Income

Fourth quarter 2016 net income was $9 million, or $0.26 per diluted share, compared to net income of $38 million, or $1.17 per diluted share, in the fourth quarter of 2015. The fourth quarter of 2016 includes $18 million of interest expense related to debt issued in connection with the October 1 separation from RR Donnelley & Sons Company, while no interest expense was allocated to LSC Communications in the fourth quarter of 2015. Also, fourth-quarter net income included after-tax charges of $6 million and $2 million in 2016 and 2015, respectively, 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 2016 was $80 million, or 8.7% of net sales, compared to $111 million, or 11.1% of net sales, in the fourth quarter of 2015. The decrease in non-GAAP adjusted EBITDA was primarily due to volume declines and price pressure in the Print segment, a lower LIFO reserve release in 2016 compared to 2015, and an increase in healthcare costs, partially offset by ongoing cost control initiatives.

Non-GAAP net income totaled $15 million, or $0.48 per diluted share, in the fourth quarter of 2016 compared to non-GAAP net income in the fourth quarter of 2015 of $40 million, or $1.21 per diluted share. The fourth quarter of 2016 includes $18 million of interest expense related to debt issued in connection with the separation from RR Donnelley, while no interest expense was allocated to LSC Communications in 2015 the fourth quarter of 2015. Reconciliations of net income to non-GAAP adjusted EBITDA and non-GAAP net income are presented in the attached schedules.

2017 Guidance

The Company provides the following full-year guidance for 2017:

           
          Guidance
Net sales         $3.55 to $3.65 billion
Non-GAAP adjusted EBITDA margin         9.75% to 10.25%
Depreciation and amortization         $155 to $165 million
Interest expense         $68 to $72 million
Non-GAAP effective tax rate         33% to 36%
Capital expenditures         $60 to $65 million
Free cash flow (1)         $125 to $155 million

(1) Free cash flow is defined as net cash provided by operating activities less capital expenditures

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, spinoff-related transaction expenses, pension settlement charges, acquisition-related expenses, gains or losses on investments and business disposals, losses on debt extinguishment 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.

Conference Call

LSC Communications will host a conference call and simultaneous webcast to discuss its fourth-quarter results today, Thursday, February 23, at 10:00 a.m. Eastern Time (9:00 a.m. Central Time). The live webcast will be accessible on LSC Communications’ web site: www.lsccom.com. Individuals wishing to participate must register in advance at the following 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 the Company’s web site for 90 days after the call.

About LSC Communications

LSC Communications (LKSD) is a global leader in traditional and digital print, print-related services and office products that serves the needs of publishers, merchandisers and retailers. The Company’s service offering includes e-services, warehousing and fulfillment and supply chain management. LSC utilizes a broad portfolio of technology capabilities coupled with consultative attention to clients' needs to increase speed to market, reduce costs, provide postal savings to customers and improve efficiencies. Strategically located operations provide local service and responsiveness while leveraging the economic, geographic and technological advantages of an international organization.

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 net income 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 net income 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 net income 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 and non-GAAP net income 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 may contain "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and the U.S. Private Securities Litigation Reform Act of 1995. Readers are cautioned not to place undue reliance on these forward-looking statements and any such forward-looking statements are qualified in their entirety by reference to the following cautionary statements. All forward-looking statements speak only as of the date of this news release and are based on current expectations and involve a number of assumptions, risks and uncertainties that could cause the actual results to differ materially from such forward-looking statements, including risks associated with the ability of LSC Communications to perform as expected as a separate, independent entity and risks associated with the volatility and disruption of the capital and credit markets, and adverse changes in the global economy. Readers are strongly encouraged to read the full cautionary statements contained in LSC’s filings with the SEC. LSC disclaims any obligation to update or revise any forward-looking statements.

 
LSC Communications, Inc.
Consolidated and Combined Balance Sheets
At December 31, 2016 and December 31, 2015
(in millions, except share and per share data)
(UNAUDITED)
               
December 31, 2016     December 31, 2015

Assets

   
 
Cash and cash equivalents $ 95 $ 95
Receivables, less allowances for doubtful accounts of $10 (2015: $11)

667

617
Inventories 193 218
Prepaid expenses and other current assets   21         30  
Total Current Assets  

976

        960  
Property, plant and equipment - net 608 718
Goodwill 84 81
Other intangible assets - net 131 148
Deferred income taxes 57 36
    Other noncurrent assets       96         68  
Total Assets     $

1,952

      $ 2,011  
 

Liabilities

 
Accounts payable $

294

$ 289
Accrued liabilities 237 203
Short-term and current portion of long-term debt   52         2  
Total Current Liabilities  

583

        494  
Long-term debt 742 3
Pension liabilities 279 1
Deferred income taxes 2 152
    Other noncurrent liabilities       106         84  
Total Liabilities      

1,712

        734  
Commitments and Contingencies
 

Equity

 
Common stock, $0.01 par value
Authorized: 65,000,000 shares

Issued: 32,449,669 shares in 2016

Additional paid-in capital 770
Retained earnings 1
Accumulated other comprehensive loss (531 ) (205 )
    Net parent company investment               1,482  
Total Equity         240         1,277  
Total Liabilities and Equity     $

1,952

      $ 2,011  

On October 1, 2016, LSC Communications, Inc. ("the Company") completed its separation from R.R. Donnelley & Sons ("RRD"). Prior to the separation, the Company's combined financial statements were derived from RRD's consolidated financial statements and accounting records. On October 1, 2016, the Company recorded certain separation-related adjustments related to certain assets and liabilities which were distributed as part of the separation from RRD, resulting in a net $244 million decrease to equity. This primarily included a net benefit obligation of $358 million related to pension plans and workers’ compensation liabilities of $39 million, of which $11 million was short-term and $28 million was long-term, and a workers’ compensation recovery asset of $5 million.

           
LSC Communications, Inc.
Consolidated and Combined Statements of Income
For the Three and Twelve Months Ended December 31, 2016 and 2015
(in millions, except per share data)
(UNAUDITED)
 
   
For the Three Months For the Twelve Months
Ended December 31, Ended December 31,
      2 0 1 6   2 0 1 5 2 0 1 6   2 0 1 5
Net sales     $ 919     $ 1,004   $ 3,654     $ 3,743  
 
Cost of sales (1) 708 765 2,823 2,874
Cost of sales with RRD and affiliates (1)   73       60     208       216  
Total cost of sales 781 825 3,031 3,090
 
Selling, general and administrative expenses (SG&A) (1) 63 69 259 280
Restructuring, impairment and other charges - net 7 5 18 57
Depreciation and amortization       41       47     171       181  
Income from operations       27       58     175       135  
 
Interest expense (income) - net 18 18 (3 )
Investment and other income - net (1 )
                 
Income before income taxes       10       58     157       138  
 
Income tax expense 1 20 51 64
                 
Net income     $ 9     $ 38   $ 106     $ 74  
 
 
Net income per share:
Basic net earnings per share $ 0.26 $ 1.17 $

3.25

$ 2.27
Diluted net earnings per share $ 0.26 $ 1.17 $

3.23

$ 2.27
 
Weighted average number of common shares outstanding:
Basic

32.5

32.4

32.5

32.4
Diluted

32.8

32.4

32.8

32.4
 

Additional information:

Gross margin (1) 15.0 % 17.8 % 17.0 % 17.4 %
SG&A as a % of net sales (1) 6.9 % 6.9 % 7.1 % 7.5 %
Operating margin 2.9 % 5.8 % 4.8 % 3.6 %
Effective tax rate 10.0 % 34.5 % 32.5 % 46.4 %
(1) Exclusive of depreciation and amortization
(2) On October 1, 2016, RRD distributed approximately 26.2 million shares of LSC Communications common stock to RRD shareholders. RRD retained an additional 6.2 million shares. For periods shown above prior to the separation, basic and diluted earnings per share and the average number of shares outstanding were retrospectively restated for the number of LSC Communications, Inc. shares outstanding immediately following the separation, 32.4 million shares.
 
LSC Communications, Inc.
Reconciliation of GAAP Net Income to Non-GAAP Adjusted EBITDA
For the Three and Twelve Months Ended December 31, 2016 and 2015
(in millions)
(UNAUDITED)
             

 

For the Twelve

Months Ended

For the Three Months Ended
December 31, December 31, September 30, June 30, March 31,
2016 2016   2016   2016   2016
 
GAAP net income $ 106 $ 9 $ 38 $ 28 $ 31
 
Adjustments:
Restructuring, impairment and other charges - net (1) 18 7 3 5 3
Spinoff-related transaction expenses (2) 5 4 1
Pension settlement charge (3) 1 1
Depreciation and amortization 171 41 40 44 46
Interest expense-net 18 18 1 (1 )
Income tax expense   51     1       18       16       16  
Total Non-GAAP adjustments 264 71 63 65 65
 
Non-GAAP adjusted EBITDA $ 370   $ 80     $ 101     $ 93     $ 96  
 
Net sales $ 3,654 $ 919 $ 949 $ 906 $ 880
Non-GAAP adjusted EBITDA margin % 10.1 % 8.7 % 10.6 % 10.3 % 10.9 %
 

For the Twelve

Months Ended

For the Three Months Ended
December 31, December 31, September 30, June 30, March 31,
2015 2015   2015   2015   2015
 
GAAP net income $ 74 $ 38 $ 15 $ 12 $ 9
 
Adjustments:
Restructuring, impairment and other charges - net (1) 57 5 25 21 6
Acquisition-related expenses (4) 14 3 11
Purchase accounting inventory adjustments (5) 11 1 7 3
Depreciation and amortization 181 47 48 43 43
Interest income-net (3 ) (1 ) (1 ) (1 )
Income tax expense   64     20       31       7       6  
Total Non-GAAP adjustments 324 73 110 76 65
 
Non-GAAP adjusted EBITDA $ 398   $ 111     $ 125     $ 88     $ 74  
 
Net sales $ 3,743 $ 1,004 $ 999 $ 879 $ 861
Non-GAAP adjusted EBITDA margin % 10.6 % 11.1 % 12.5 % 10.0 % 8.6 %
(1)   Restructuring, impairment and other charges- net: Pre-tax charges for employee termination costs, lease termination, other costs, multi-employer pension plan withdrawal obligations, and impairment of intangible assets and other long-lived assets.
 
(2) Spinoff-related transaction expenses: One-time transaction expenses associated with the separation from RRD.
 
(3) Pension settlement charge: Pre-tax charge recognized for lump-sum pension settlement payments.
 
(4) Acquisition-related expenses: Legal, accounting and other expenses associated with completed acquisitions.
 
(5) Purchase accounting inventory adjustments: Recognition of charges as a result of inventory purchase accounting adjustments.
 
LSC Communications, Inc.
Reconciliation of GAAP to Non-GAAP Measures
For the Three Months Ended December 31, 2016 and 2015
(in millions, except per share data)
(UNAUDITED)
           
 
For the Three Months Ended For the Three Months Ended
December 31, 2016 December 31, 2015
Net income per diluted Net income per diluted
Net income share Net income share
GAAP basis measures $ 9 $ 0.26 $ 38 $ 1.17
 
Non-GAAP adjustments:
 
Restructuring, impairment and other charges - net (1) 4

0.14

4

0.11

Spinoff-related transaction expenses (2) 2

0.08

Income tax adjustment (3) (3 ) (0.09 )
Purchase accounting inventory adjustment (4)           1      

0.02

 
Total Non-GAAP adjustments   6      

0.22

  2      

0.04

 
Non-GAAP measures $ 15     $

0.48

$ 40     $

1.21

 
 
(1) Restructuring, impairment and other charges - net: Operating results for the three months ended December 31, 2016 and 2015 were affected by the following pre-tax restructuring charges of $7 million ($4 million after-tax) and $5 million ($4 million after-tax), respectively:
 

2016

2015

Employee termination costs (a) $ 4 $ 2
Other restructuring charges (b) 3 2

Impairment charges - net (c)

(1 )
Other charges (d)   1       1
Total restructuring, impairment and other charges - net $ 7     $ 5
 
(a) For the three months ended December 31, 2016, employee termination costs resulted from the expected closure of another facility in the first quarter of 2017 and the reorganization of certain operations. For the three months ended December 31, 2015, employee termination costs resulted from the reorganization of certain operations.
(b) Includes lease termination and other facility costs.

(c) Impairment charges primarily related to gain on the sale of previously impaired assets for the three months ended December 31, 2016.

(d) Other charges related to the Company's multi-employer pension plan withdrawal obligations unrelated to facility closures.
 
(2) Spinoff-related transaction expenses: Included pre-tax charges of $4 million ($2 million after-tax) for one-time transaction expenses associated with the separation from RRD for the three months ended December 31, 2016.
 
(3) Income tax adjustment: Included a tax benefit of $3 million that was recorded due to an unfavorable court decision related to payment of prior year taxes in an international jurisdiction for the three months ended December 31, 2015.
 
(4) Purchase accounting inventory adjustment: Included a pre-tax charge of $1 million ($1 million after-tax) as a result of an inventory purchase accounting adjustment for Courier Corporation ("Courier") for the three months ended December 31, 2015.
 
Note: The income tax impact is calculated using the tax rate in effect for the non-GAAP adjustments.
 
LSC Communications, Inc.
Reconciliation of GAAP to Non-GAAP Measures
For the Twelve Months Ended December 31, 2016 and 2015
(in millions, except per share data)
(UNAUDITED)
             
 
For the Twelve Months Ended For the Twelve Months Ended
December 31, 2016 December 31, 2015

 

Net income per diluted

 

Net income per diluted

Net income

  share

Net income

  share
GAAP basis measures $ 106 $

3.23

$ 74 $ 2.27
 
Non-GAAP adjustments:
 
Restructuring, impairment and other charges - net (1) 12

0.37

39 1.20
Spinoff-related transaction expenses (2) 3 0.09
Acquisition-related expenses (3) 13 0.40
Purchase accounting inventory adjustment (4) 7

0.21

Income tax adjustment (5)         6     0.19
Total Non-GAAP adjustments   15    

0.46

  65    

2.00

Non-GAAP measures $ 121   $

3.69

$ 139   $

4.27

 
(1) Restructuring, impairment and other charges - net: Operating results for the twelve months ended December 31, 2016 and 2015 were affected by the following pre-tax restructuring charges of $18 million ($12 million after-tax) and $57 million ($39 million after-tax), respectively:
 

2016

2015

Employee termination costs (a) $ 8 $ 20
Other restructuring charges (b) 7 7

Impairment charges - net (c)

8
Other charges (d)   3     22
Total restructuring, impairment and other charges - net $ 18   $ 57
 
(a) For the twelve months ended December 31, 2016, employee termination costs resulted from one facility closure in the Print segment, the expected closure of another facility in the first quarter of 2017 and the reorganization of certain operations. For the twelve months ended December 31, 2015, employee termination costs resulted from the closure of two facilities in the Print segment, the integration of Courier and the reorganization of certain operations.
(b) Includes lease termination and other facility costs.

(c) Impairment charges primarily related to buildings, machinery and equipment associated with facility closings.

(d) For the twelve months ended December 31, 2016, other charges related to the Company's multi-employer pension plan withdrawal obligations unrelated to facility closures. For the twelve months ended December 31, 2015, the Company recorded other charges, including integration charges of $19 million for payments made to certain Courier employees upon the termination of Courier’s executive severance plan, immediately prior to the acquisition.
 
(2) Spinoff-related transaction expenses: Included pre-tax charges of $5 million ($3 million after-tax) for one-time transaction expenses associated with the separation from RRD for the twelve months ended December 31, 2016.
 
(3) Acquisition-related expenses: For the twelve months ended December 31, 2015, pre-tax charges of $14 million ($13 million after-tax) related to legal, accounting and other expenses associated with completed acquisitions.
 
(4) Purchase accounting inventory adjustment: Included pre-tax charges of $11 million ($7 million after-tax) as a result of an inventory purchase accounting adjustment for Courier for the twelve months ended December 31, 2015.
 
(5) Income tax adjustment: Included tax expense of $6 million that was recorded due to an unfavorable court decision related to payment of prior year taxes in an international jurisdiction for the twelve months ended December 31, 2015.
 
Note: The income tax impact is calculated using the tax rate in effect for the non-GAAP adjustments.
 
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LSC Communications, Inc.
Segment GAAP to Non-GAAP Adjusted EBITDA and Margin Reconciliation
For the Three Months Ended December 31, 2016 and 2015
(in millions)
(UNAUDITED)
 
 
    Print     Office Products     Corporate     Consolidated
           

For the Three Months Ended December 31, 2016

Net sales $ 789 $ 130 $ $ 919
Income (loss) from operations 27 16 (16 ) 27
Operating margin % 3.4 % 12.3 % nm 2.9 %
Investment and other income-net (1 ) (1 )
 

Non-GAAP Adjustments

Depreciation and amortization 36 4 1 41
Restructuring charges - net 6 1 7
Spinoff-related transaction expenses 4 4
Impairment charges - net (1 ) (1 )
Other charges   1                         1  
Total Non-GAAP adjustments 42 4 6 52
 
 
Non-GAAP Adjusted EBITDA $ 69 $ 20 $ (9 ) $ 80
Non-GAAP Adjusted EBITDA margin % 8.7 % 15.4 % nm 8.7 %
 
Capital expenditures $ 11 $ $ 2 $ 13
 
 

For the Three Months Ended December 31, 2015

Net sales $ 873 $ 131 $ $ 1,004
Income from operations 43 10 5 58
Operating margin % 4.9 % 7.6 % nm 5.8 %
 

Non-GAAP Adjustments

Depreciation and amortization 43 4