LSC COMMUNICATIONS 2017 Second Quarter Results August 3, 2017
LSC COMMUNICATIONS CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS This presentation includes certain "forward-looking statements" within the meaning of, and subject to the safe harbor created by, Section 21E of the Securities Exchange Act of 1934, as amended, with respect to the business, strategy and plans of LSC Communications and its expectations relating to future financial condition and performance. Statements that are not historical facts, including statements about LSC Communications management’s beliefs and expectations, are forward- looking statements. Words such as "believes," "anticipates," "estimates," "expects," "intends," "aims," "potential," "will," "would," "could," "considered," "likely," "estimate" and variations of these words and similar future or conditional expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. While LSC Communications believes these expectations, assumptions, estimates and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks and uncertainties, many of which are beyond LSC Communications’ control. By their nature, forward-looking statements involve risk and uncertainty because they relate to events and depend upon future circumstances that may or may not occur. Actual results may differ materially from LSC Communications’ current expectations depending upon a number of factors affecting the business and risks associated with the performance of the business. These factors include such risks and uncertainties detailed in LSC Communications’ Form 10-K filed on February 23, 2017 and LSC Communications’ periodic filings with the SEC. LSC Communications does not undertake to and specifically declines any obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect future events or circumstances after the date of such statement or to reflect the occurrence of anticipated or unanticipated events. 2 | LSC COMMUNICATIONS
NON-GAAP FINANCIAL INFORMATION This presentation 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. 3 | LSC COMMUNICATIONS
STRATEGIC FOCUS Highlights Key Initiatives + Experienced significant improvement in our earnings trend + Acquired Fairrington and compared to recent quarters announced Creel signing + Launched our IntercepTag SM + Announced two acquisitions that Technology Platform add new capabilities, new clients, and new solutions + Announced an equity investment in Artificial Intelligence technology + Invested in new advanced through AUTHORS, Inc. technology-driven solution + Continuing to work with a strategic offerings acquisition pipeline that will provide growth and synergy opportunities to + Office Products e-commerce sales benefit all stakeholders were up over 50% compared to the second quarter of last year 4 | LSC COMMUNICATIONS
Q2 2017 FINANCIAL SUMMARY ($ millions) Q2 2017 Q2 2016 Net sales $848 $906 As reported % change -6.4% Organic % change (1) -6.8% Total cost of sales 705 745 SG&A expenses 64 68 Restructuring, impairment, and other charges - net 21 5 Depreciation and amortization 39 44 Income from operations $19 $44 Interest expense (income) - net 16 (1) Investment and other expense - net 0 1 Income before income taxes $3 $44 Income tax (benefit) expense (2) 16 Net income $5 $28 Non-GAAP Adjusted EBITDA (2) $82 $93 Non-GAAP Adjusted EBITDA Margin (2) 9.7% 10.3% 5 | LSC COMMUNICATIONS (1) Please refer to slide 14 for organic revenue reconciliations (2) Please refer to slide 12 for reconciliation of non-GAAP measures
SEGMENT OVERVIEW Print Office Products Q2'17 Q2'16 Q2'17 Q2'16 ($ millions) ($ millions) Revenues $ 723 $ 764 Revenues $ 125 $ 142 Non-GAAP Adj EBITDA (1) Non-GAAP Adj EBITDA (1) $ 64 $ 78 $ 15 $ 17 Non-GAAP Adj EBITDA Margin (1) Non-GAAP Adj EBITDA Margin (1) 8.9% 10.2% 12.0% 12.0% + Print segment sales down 6.0% (2) on an organic basis in + Office Products sales down 12.0% (2) on an organic basis in Q2 2017 mainly due to lower volume and pricing pressure Q2 2017 primarily due to lower volume driven by continued contraction of brick & mortar retail industry CMR trends slightly improving, particularly in + Continue to experience strong growth from e-commerce catalogs and long-run magazines Organic decline in Book driven by lower than distribution channel anticipated volume in educational books + Non-GAAP Adjusted EBITDA margin remained flat (1) due + Non-GAAP Adjusted EBITDA margin decreased 130 basis to cost control and focusing on improved product mix points (1) primarily due to lower volume in the Book platform, an unfavorable product mix, and regular pricing pressure Recent acquisitions enhance capabilities and complement Continue to expand e-commerce channel while organic investments in co-mail and digital solutions providing cost-effective solutions for traditional channels (1) Please refer to slide 13 for reconciliation of non-GAAP measures 6 | LSC COMMUNICATIONS (2) Please refer to slide 14 for organic revenue reconciliations
STRONG LIQUIDITY AND DIVIDEND Q2 2017 Free Cash Flow (1) Debt and Liquidity (2) Dividend Yield (4) $ millions $ in millions $ in millions Q2'17 Q4'16 6% 5.1% Total Debt $ 744 $ 794 5% $ 98 $ 95 Cash $14 $(15) 4% Stated amount of the Revolving Credit Facility 400 400 31 - Less: availability reduction from covenants 3% 369 400 Amount available under the Revolving Credit Facility 2.0% Usage 2% - - Borrowings under Revolving Credit Facility $(1) 1% (20) (12) Letters of Credit Net Available Liquidity (2) $ 447 $ 483 0% S&P 500 Underfunded Pension (3) $ (280) $ (280) + 2.27x Non-GAAP Gross Leverage Ratio (2) + Strong working capital performance offset + July 20, 2017: Board of Directors declared by cash interest ($27mm) related to debt regular quarterly cash dividend of $0.25 issued related to the spin + Expect to fund cash portion of purchase payable September 5 for shareholders of price for announced acquisitions with cash record as of August 15 + Capital spending includes investments in on hand and drawings under the co-mail services capacity and our digital Revolving Credit Facility production platform for books (1) Please refer to slide 12 for a reconciliation of Free Cash Flow as a non-GAAP financial measure (2) Please refer to slide 15 for details concerning Net Available Liquidity and Debt Leverage Ratio calculations (3) All underfunded pension amounts represent values last reported in the 2016 Annual Report on Form 10-K (4) Dividend Yield is calculated as an annualized dividend ($1.00) per share divided by the closing LKSD stock price as of August 2, 2017 7 | LSC COMMUNICATIONS
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