LSC COMMUNICATIONS 2017 First Quarter Results May 4, 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 Key Initiatives Highlights +Reaffirmed our full-year guidance + Increased book educational market contract signings +Significant progress in growing + Acquired HudsonYards Studios supply chain services + Invested in co-mail capacity coming +Expanded digital and print online in the second half of this year premedia production capabilities + Drove growth and optimized product, +Strong growth and demand in price and marketing approach by co-mail services utilizing real-time data for online office products retailers +E-commerce office products sales + Continue to work with a strategic remain strong and continue to acquisition pipeline that will provide outpace market growth opportunities to benefit all stakeholders 4 | LSC COMMUNICATIONS
Q1 2017 FINANCIAL SUMMARY ($ millions) Q1 2017 Q1 2016 Net Sales $821 $880 As Reported % Change -6.7% Organic % Change (1) -7.1% Total Cost of Sales $692 $722 SG&A Expenses $65 $62 Restructuring, Impairment, and Other Charges- Net $6 $3 Depreciation and Amortization $40 $46 Income from Operations $18 $47 Interest Expense- Net $17 $0 Income before Income Taxes $1 $47 Income Tax Expense $2 $16 Net (Loss) / Income ($1) $31 (2) Non-GAAP Adjusted EBITDA $65 $96 (2) Non-GAAP Adjusted EBITDA Margin 7.9% 10.9% 5 | LSC COMMUNICATIONS (1) Please refer to slide 13 for organic revenue reconciliations (2) Please refer to slide 11 for reconciliation of non-GAAP measures
SEGMENT OVERVIEW Print Office Products Q1'17 Q1'16 Q1'17 Q1'16 ($ millions) ($ millions) Revenues $ 710 $ 752 Revenues $ 111 $ 128 (1) (1) Non-GAAP Adj EBITDA $ 52 $ 76 Non-GAAP Adj EBITDA $ 14 $ 18 (1) (1) Non-GAAP Adj EBITDA Margin 7.3% 10.1% Non-GAAP Adj EBITDA Margin 12.6% 14.1% + Print segment sales down 6.0% (2) on an organic basis in + Office Products sales down 13.3% (2) on an organic basis in Q1 2017 due to lower volume and pricing pressure Q1 2017 primarily due to lower volume in filing, note taking, and binder products as the office supplies + Organic sales decline partially offset by growth in service superstores continue to close locations, pricing pressure offerings (CMR co-mail and Book supply chain and unfavorable sales timing compared to Q1 2016 management) and in Mexico + Non-GAAP Adjusted EBITDA margin decreased 150 basis + Non-GAAP Adjusted EBITDA margin decreased 280 basis points (1) due to lower volume and pricing pressure, points (1) primarily due to lower volume, an unfavorable partially offset by cost control initiatives and productivity mix, and pricing pressure, partially offset by higher improvement commodity price levels for materials by-products and cost reductions Investments in co-mail services, digital print assets and Continue to expand e-commerce channel while HudsonYards acquisition to further enhance service offerings providing cost-effective solutions for traditional channels (1) Please refer to slide 12 for reconciliation of non-GAAP measures 6 | LSC COMMUNICATIONS (2) Please refer to slide 13 for organic revenue reconciliations
$ millions STRONG LIQUIDITY AND DIVIDEND Q1 2017 Free Cash Flow (1) Debt and Liquidity (2) Dividend Yield (3) $ millions $ in millions $ in millions 3.8% Q1'17 Q4'16 4% $ 744 $ 794 Total Debt 3% $64 $21 $ 89 $ 95 Cash 2.0% Stated amount of the Revolving Credit Facility 400 400 2% $43 - - Less: availability reduction from covenants Amount available under the Revolving Credit Facility 400 400 1% Usage Borrowings under Revolving Credit Facility - - 0% Letters of Credit (13) (12) S&P 500 Net Available Liquidity (2) $ 476 $ 483 + Strong free cash flow due to working + 2.2x Non-GAAP Gross Leverage Ratio (2) + April 6, 2017: Board of Directors declared capital improvements regular quarterly cash dividend of $0.25 for + Used cash on hand to pay in advance the shareholders of record as of May 15 + Capital spending includes investments in full $50 million of Term Loan B facility amortization payments due in 2017 co-mail services capacity and our digital production platform for books (1) Please refer to slide 11 for a reconciliation of Free Cash Flow as a non-GAAP financial measure (2) Please refer to slide 14 for details concerning Net Available Liquidity and Debt Leverage Ratio calculations (3) Dividend Yield is calculated as an annualized dividend ($1.00) per share divided by the closing LKSD stock price as of May 3, 2017 7 | LSC COMMUNICATIONS
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