R.R. Donnelley & Sons (RRD) Q3 2020 Earnings Call Transcript

R.R. Donnelley & Sons (RRD)
Q3 2020 Earnings Call
Oct 28, 2020, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. And welcome to the RRD third-quarter 2020 results conference call. My name is Amy, and I will be your conference operator today. [Operator instructions] Please note that this call is being recorded.

I will now turn the call over to Johan Nystedt, RRD senior vice president of finance.

Johan Nystedt -- Senior Vice President of Finance

Thank you, Amy, and thank you, everyone, for joining RRD's third-quarter 2020 results conference call. Joining me on today's call are Dan Knotts, RRD's president and chief executive officer; and Terry Peterson, our chief financial officer. At the conclusion of today's prepared remarks, Dan, Terry, and I will take questions. As a reminder, we have prepared supplemental slides for today's call, which can be found on the Investors section of our website at rrd.com.

As we review third quarter results on today's call, I will be advancing the slides if you are connected by webcast. Alternatively, I will reference page numbers for the supplemental slides for those participants who wish to follow along by advancing the slides themselves. The information that will be reviewed during this call is addressed in more detail in our third-quarter press release, a copy of which is posted on the Investors section of our website at rrd.com. This information was also furnished to the SEC and the Form 8-K we filed yesterday.

Beginning in the third quarter of 2020, we have reflected our logistics business as discontinued operations for all products presented in the consolidated statements of operations. Our references today to net sales, SG&A, income from operations, net income or loss and per share amounts on this call will be on a continuing basis without logistics. In addition, we will also refer to forward-looking statements, including comments on our financial outlook and strategy, all of which involve risks and uncertainties. Therefore, our actual results could differ materially from our current expectations.

For a complete discussion of the factors that could cause our actual results to matter materially, please refer to the cautionary statement included in our earnings release and the risk factors included in our annual report on Form 10-K our quarterly reports on Form 10-Q and other filings with the SEC. Further, we will discuss non-GAAP financial information. We believe the presentation of non-GAAP results provide investors with useful supplementary information concerning the campus ongoing operations and is an appropriate way to evaluate the company's performance. These non-GAAP results are provided for informational purposes only.

Any references to non-GAAP financial measures are reconciled to the comparable GAAP financial measures in the Investors section of our website as part of our press release. I will now turn the call over to Dan.

Dan Knotts -- President and Chief Executive Officer

Great. Thanks, Johan. Good morning, everyone. Thank you for joining.

It's great to be with you today. On behalf of all of us at RRD, I hope that you and your families remain healthy and safe. On today's call, I'm going to provide an update on how we're navigating the current pandemic through the execution of our COVID-19 operating plan. I'm going to share several key actions taken to advance our long-term strategy, and I'm going to recap what we expect to see as we close out the year.

We delivered strong operating performance and financial results for the third quarter against a backdrop of uncertainty and volatility related to the global pandemic. While improving, the pace of recovery has been uneven and the resurgence of the virus across multiple geographies is threatening to elongate the recovery period. As such, our approach to executing our COVID-19 operating plan, which entails protecting our employees, maintaining operational continuity for our clients, and effectively managing our business performance remains firmly intact, and we are executing well in all three of these critical areas. As we've said from the outset of the pandemic, protecting the health and safety of our 35,000 employees is a top priority.

Across the company, we're maintaining a high level of discipline and adherence to our safety protocols, particularly as the cold and flu season approaches. Our cross-functional COVID-19 task force is meeting regularly to ensure the company adheres to the latest guidelines from the World Health Organization and centers for disease control. From a client perspective, we remain steadfast in our commitment to supporting more than 50,000 clients around the world, just like we've done for over 150 years. We're fully operational across our 250-plus global locations, and our talented sales, service and production teams are working diligently to produce the critical communications our clients are utilizing to connect with their customers during this unprecedented time.

Our clients' requirements are changing frequently in this volatile business environment, and the RR team is responding with the agility and creativity needed to deliver on our commitments. The third component of our COVID-19 plan is prudently managing our business performance through these near-term challenges while strengthening RRD for the long term. We are aggressively working to reduce cost, preserve liquidity and leverage the power of our portfolio to capture new sales opportunities, including those being created by the pandemic. During the quarter, we signed more new business, delivered on our substantial cost out plans, and improved our capital structure with a disciplined focus on generating cash flow.

On the top line, while organic sales declined 12.1% versus the prior year related to lower overall market demand, our organic sales performance significantly exceeded the midpoint of our expectations. We delivered adjusted income from operations equal to the prior year despite softer organic sales, reflecting the significant reductions we made in our operating and SG&A cost structures. Our adjusted operating margin increased 100 basis points versus the prior year and 400 basis points from the second quarter. And through our strong focus on working capital management, we achieved our third consecutive quarter of year-over-year operating cash flow improvement.

Our positive results for the quarter were driven by the successful execution of our COVID-19 operating plan, and I am pleased with the high-level performance we delivered. The global pandemic is serving to disrupt long-standing business models and forcing many companies to rethink the way they communicate and connect with their customers. We are flexing our industry-leading portfolio of capabilities to support our clients as they pursue more effective ways to inspire, service, and transact with their customers. Our ability to serve as a trusted business partner, especially during this unprecedented time, capable of managing critical initiatives of varying scope and scale across a broad range of print and digital channels, has enabled us to expand existing client relationships while also adding new clients to our roster.

Let me share a few examples of notable wins we've secured over the past several months. We recently completed a significant new project with Aetna, a CVS health company. In light of the challenges many people are currently facing, coupled with a rapidly approaching flu season, Aetna sought to ship millions of care packages to its Medicare members to a partner that can manage a project of this scale with little lead time. RRD was that partner.

The care packages called Caring for You kits provide members with several items to encourage self-care while at home such as a thermometer, hand sanitizer, and face masks. Aetna turned to RRD to execute this critical, high visibility in large-scale project because of our ability to manage every component of the project, including all aspects of print production and fulfillment. We're also working with a major U.S.-based pharmaceutical company to support the launch of their new medical data device that will help patients better manage their diabetes. Building on our more than 20-year relationship, this client turned to RRD because of our scale, the breadth of our capabilities and our proven ability to meet their requirements.

We're managing all aspects of this project as well, including packaging design, packaging production, and kitting. With our extensive medical device kitting experience, we're enabling our clients to focus on the development of new and innovative products while we manage the business processes and project execution required to ensure supply chain continuity and reliability. Finally, we recently expanded our relationship with Direct Energy, one of North America's largest retail providers of electricity, natural gas and home and business energy-related services. This enhanced partnership began as an initiative to help Direct Energy increase the efficiency of their supply chain and has expanded to include the review and digitization of their assets to increase efficiencies and enforce brand consistency across all businesses.

We are also supporting Direct Energy to develop a new customer-facing website and mobile application for their home warranty service offering. These new opportunities, which range from large-scale project work to ongoing communications programs, are leveraging our broad range of capabilities from digital to print and demonstrate the agility, scale, and differentiated performance we are delivering to win new business in the markets we serve. As our clients' needs evolve, we are expanding our capabilities by developing new innovative offerings. We recently introduced a flex mailer, which is a patented recyclable mailing solution that converts mail packages to a smaller size that meets the UPS thickness and flexibility guidelines to qualify as an automated flat.

This offering provides notable cost savings for our clients while also reducing the environmental impact of the package. ERP, a long-standing client, recently utilized the flex mailer to deliver 50,000 face masks to their volunteers. Our solution enabled them to customize both the exterior and the interior of the package with their logo and marketing messaging while also saving on shipping costs. Additionally, we launched Touchless World by RRD, which is a comprehensive set of solutions that utilizes the power of dynamic, scanable smart tags.

Touchless World is enhanced with NFC, QRC and other 2D and 3D code technology to interact optimally with smartphones and enable easy consumer engagement. We're integrating these smart tags with the offerings we provide in our existing platforms, including labels, retail signage, commercial print, packaging, forms, and direct mail. Dynamic content can then be delivered across any of these mediums to a consumer smartphone and create a touchless experience. While we execute our operating plan to navigate through this challenging period, we are also advancing our strategic priorities to strengthen our core, drive our revenue, and improve our financial flexibility and build a stronger RRD for the long term.

In September, we entered into a definitive agreement to sell the DLS Worldwide portion of our logistics business to TFI International for $225 million in cash. This transaction has received regulatory approval. We also signed a separate definitive agreement to sell our international mail and parcel business last week. We expect both of these transactions to close by the end of the year after customary closing conditions are satisfied.

We plan to continue providing logistics services to our clients through commercial agreements completed with the respective buyers of these two businesses. With the divestiture of the remainder of our lower-margin logistics businesses, we are further optimizing our business portfolio, reducing our debt, and strengthening our balance sheet. These strategic transactions, combined with our cost takeout and revenue-generating actions in the quarter, reinforce our firm commitment to positioning RRD for the future through the execution of our long-term strategy. I'd like to personally thank our DLS Worldwide and International Mail and Parcel leadership teams and employees as well as the working groups across the company that have been involved in these transactions.

A tremendous amount of work goes into the smooth execution of any business divestiture, let alone two simultaneous transactions, and our teams have done a fantastic job of maintaining business continuity for our clients during this time. I'm very confident in our ability to complete the outstanding closing conditions and finalize these transactions by the end of the year. Before turning the call over to Terry, I would like to provide an update on what we expect to see across our two segments as we close the year. For marketing solutions, we've begun to see a gradual, albeit uneven return of client marketing spend as parts of the economy stabilize and businesses reopen.

The unique conditions and impact of COVID-19 on different industries means that the pace of recovery and the mix of marketing activity will continue to vary greatly. With all of our marketing solutions' clients share is the need to reassess how changes in consumer behaviors are affecting their traditional marketing approach. In this context, integrated marketing programs with demonstrable ROI are critical to marketers as they're increasingly challenged to restore top-line growth. At the same time, clients' marketing budgets have been constrained, and they're being very selective about the projects and programs they push forward.

Increasingly, we believe that a premium will be placed on reliability and flexibility as clients adjust their marketing approach, and that RRD marketing solutions team is well-positioned to provide solutions that optimize our clients' overall marketing spend as the economy recovers. For business services, demand for print and support services will closely correlate with the return of consumer and business product spending and will also be industry-dependent. We saw a rebound begin to occur for select verticals during the third quarter. However, for certain industries, such as travel and hospitality, we expect to see a longer period for recovery.

We're also seeing the changes in consumer behaviors, the shift to e-commerce, and alternative methods for healthcare delivery are creating new opportunities for client acquisition and expansion across our supply chain, packaging, and labels businesses. As we look to the remainder of the year, we are focused on the ongoing execution of our COVID-19 operating plan while simultaneously advancing our long-term strategy. Our teams are executing well, and I am confident we will successfully navigate through this pandemic and emerge a stronger RRD. With that, I'll turn the call over to Terry.

Terry Peterson -- Chief Financial Officer

Thank you, Dan. Please turn to Slide 10 as I begin my prepared remarks. We entered the third quarter in the significant uncertainty and volatility. Despite the challenging business environment, we focused on the matters within our control.

On the sales front, we leveraged our broad set of capabilities to bring innovative new solutions to meet our clients' evolving needs and capture new opportunities created by the pandemic. On the cost front, we aggressively attacked both our operating and SG&A costs to minimize the bottom-line impact from lower demand. Further, we tightened our focus on working capital management in order to maximize liquidity at the same time, we continue to advance our strategic priorities by executing definitive agreements to sell our two remaining logistics businesses. Our focused efforts paid off as we reported a significant improvement in our organic sales performance as our actual results exceeded the midpoint of our previous guidance by over $100 million.

Our adjusted income from operations was flat to the prior year, which yielded a 100-basis-point improvement in our adjusted operating margin, and our operating cash flow showed year-over-year improvement for the third consecutive quarter. Overall, we are very pleased to report adjusted diluted earnings per share from continuing operations for the third quarter of $0.32, which was up 28% over the prior year. On a reported basis, net sales of $1.19 billion declined $225.9 million in the quarter, which included a reduction of $62.9 million associated with the previous disposition of our GDS business and closure of our operations in Chile. Net sales were down 12.1% organically which improved significantly from second quarter's organic decline rate of 17.8%.

Across our 10 different products and services categories, we saw notable differences in how the pandemic impacted demand. Similar to last quarter, for categories where the work is more transactional and clients can make quick decisions to reduce orders, like commercial print, digital print and fulfillment and direct marketing, we saw a greater reduction in demand. By contrast, other categories experienced less disruption and, in many cases, benefited from new products and additional COVID-19-related orders with supply chain services, packaging and labels, each reporting growth over the prior year. Most products and services categories reported improving year-over-year trends in the third quarter as compared to what was reported in the second quarter.

Our sales decline was also impacted by our continued efforts to exit unprofitable business, including the planned impact from closing facilities. And while we continue to believe that there are ongoing secular pressures in certain product categories, like commercial print, we are unable to differentiate those declines from the impact of COVID-19. Our direct marketing sales were also negatively impacted by the lapping of the Census work as that project was completed in the third quarter of this year. On Slide 11, our adjusted income from operations of $73.9 million was essentially flat versus the third quarter of 2019.

The combination of our ongoing cost reduction initiatives and favorable product mix more than offset the impact of lower volume and pricing. Adjusted SG&A expense of $137.5 million in the third quarter was down $30.5 million, or 18.2% from the prior year, reflecting the ongoing execution of our strategic initiative to lower our cost to serve. Adjusted earnings per share from continuing operations of $0.32 in the third quarter increased $0.07 as compared to $0.25 per share reported in the prior year period. In addition to being favorably impacted by lower expenses, our adjusted earnings also benefited from lower income taxes and interest expense.

The effective tax rate was 44.9% in the quarter, and it was favorable to the prior year, primarily due to recent tax law changes that allow for a greater deduction of interest expense. Interest expense in the current quarter was $3.1 million lower than the prior year period, primarily due to lower rates on our credit facility and term loan. Our GAAP results for the quarter included pre-tax restructuring and other charges of $54.2 million, which included a pre-tax charge of $34.5 million related to the estimated MEPP withdrawal obligations associated with the LSC bankruptcy and restructuring charges associated with our cost reduction initiatives. Prior year GAAP results included a significantly higher tax expense.

Turning now to the balance sheet and cash flow on Slide 12. As of September 30, 2020, we had total cash on hand of $415 million and total debt outstanding of $2.02 billion, including $410 million drawn against our credit facility. Remaining availability on the credit facility was $128 million at the end of the quarter, and total available liquidity, including cash on hand, was $543 million, which was $83 million higher than the end of the second quarter. Net cash provided by operating activities of $69.4 million in the quarter improved $40.1 million due to working capital improvements, deferral of the employer paid portion of payroll taxes, as allowed for under the CARES Act, and lower interest payments.

Capital expenditures of $16.3 million in the quarter were $14.7 million lower compared to the 2019 period due to the strategic investments we made in 2019 related to the new China facility and the 2020 Census project as well as lower spend in 2020 as we continue to preserve liquidity during this volatile period. Recently, we took two important steps toward optimizing our business portfolio. We signed a definitive agreement to sell our Logistics DLS Worldwide business for $225 million in September. And, last week, we signed a definitive agreement to sell our International Logistics business for an undisclosed amount.

Both transactions are expected to close before the end of the year at a significant book gain, and we plan to use the net proceeds from the divestitures to further reduce debt outstanding. With the completion of these transactions, we will have fully divested our logistics businesses, but we'll continue to support our clients' logistics requirements through commercial agreements with the buyers of these businesses. In regards to the pending sale of our printing facility in Shenzhen, China on Slide 13, the buyer continues to work with the government to obtain the necessary approvals so we can complete the sale. Once the transaction closes, we expect to record a significant gain on the sale.

During the third quarter, we collected another scheduled deposit of $24.1 million from the buyer. To date, we have collected $122.3 million in deposits, and we are scheduled to collect one additional deposit of $48 million in 2021. Our contract with the buyer requires them to pay the final installment in 2022, even if the government's approval is further delayed. If the buyer fails to comply with the terms of the agreement or terminate for any reason, RRD is entitled to retain 30% of the purchase price in liquidated damages.

Slide 14 shows the various maturities of our outstanding debt as of December 31 and September 30. Since the beginning of the year, we have successfully reduced the amounts due on our senior notes and debentures maturing through 2024 by $642 million. In aggregate, these maturities now total $380 million, which is down from over $1 billion at the beginning of the year. During the third quarter, we opportunistically repurchased $14.5 million of senior notes due in 2021 and 2022.

Yesterday, we notified the remaining holders of our 7.875% senior notes due March 15, 2021, that we plan to redeem the remaining $83.3 million of aggregate principal outstanding on December 4. The redemption price is equal to the sum of 100% of the principal amount of the senior notes, a make-whole amount calculated in accordance with the terms of the related indenture and accrued and unpaid interest to the redemption date. After this redemption is complete, we expect the remaining maturities due in 2021 will be reduced to $56 million, and we expect to repay them using existing liquidity. The extent to which the pandemic will ultimately impact our business, results of operations, financial position and cash flows cannot be fully predicted or estimated at this time.

As such, we are unable to provide our typical full year guidance. With that said, I would like to conclude my prepared remarks on Slide 15 with perspectives on our expected fourth quarter performance and liquidity as we manage RRD through the pandemic. We have updated our net sales forecast, taking into consideration current demand projections for our products and services, among other factors. Based on this assessment, we expect fourth-quarter net sales to be unfavorable to the prior year by $200 million to $275 million, including a reduction of $25 million from the recent dispositions of GDS and Chile.

Organically, this represents a range of down approximately 12% to 18% and takes into consideration the ongoing impact from the pandemic and census work in the prior year period that will not repeat. While difficult to predict with certainty, it is possible that our fourth-quarter adjusted income from operations may be lower than the amounts reported in the third quarter of 2020 and the fourth quarter of 2019. Fourth-quarter results will benefit from additional cost reductions, but it is difficult to predict how much the pandemic will impact demand for our products and services, including onetime orders specifically related to COVID-19. Interest expense is also expected to be significantly lower than the third quarter amount.

Operating cash flow is expected to be lower than the amount reported in the fourth quarter of 2019 as working capital improvements have been achieved earlier in 2020. We also expect operating cash flow to be negatively impacted due to the divestitures of our logistics businesses. Once the sale of our DLS Worldwide business closes, we expect to use the net cash proceeds plus additional cash on hand to reduce our borrowings under our credit facility. By year-end, we expect that gross debt outstanding will be between $350 million and $400 million lower than the amount outstanding at the end of third quarter.

As I previously mentioned, our liquidity consists of availability on the revolving credit facility and cash on hand. On September 30, RRD had total liquidity of $543 million. We expect to maintain higher cash balances and amounts outstanding on our credit facility until we close the DLS Worldwide sale. We believe our liquidity is sufficient to fund operations as well as our upcoming debt maturities in 2021.

In addition, we continue to pursue opportunities to monetize assets, including certain investments and sales of real estate and non-core businesses. Lastly, we are not currently subject to maintenance financial covenants in our debt agreements, which reduces our financing risk. And now, operator, let's open up the line for questions.

Questions & Answers:

Operator

Thank you. [Operator instructions] Your first question today comes from the line of Charles Strauzer with CJS Securities. Please proceed with your question.

Charles Strauzer -- CJS Securities -- Analyst

Hi. Good morning.

Terry Peterson -- Chief Financial Officer

Good morning, Charles.

Dan Knotts -- President and Chief Executive Officer

Hi, Charles.

Charles Strauzer -- CJS Securities -- Analyst

Hey, just a point of clarification. The -- with the sale of DLS and the international logistics businesses, are those both being reported as discontinued ops in the schedule that you reported at the back of the press release?

Terry Peterson -- Chief Financial Officer

Yeah. The back we've restated everything for -- to pull out the impact of DLS worldwide and international as well as if you go back to the beginning of the year, the courier business that we sold back in March. So, when we've adjusted those 2019 numbers, as well as the earlier 2020 numbers, those three logistics businesses have been pulled out of all the numbers that are presented in those tables at the very back of the press release.

Charles Strauzer -- CJS Securities -- Analyst

Great. That's helpful. Thank you. And then just looking at the business in general, you know, I know you gave, you know, a fair amount of color into kind of the workings of, you know, some of the declines in some of the different pieces of the business.

But, you know, where are you seeing perhaps, you know, some pickup? Are you seeing any pickup at all in direct marketing specifically in commercial print? And as you talk to your clients going into Q4, you know, what's the general tone there?

Dan Knotts -- President and Chief Executive Officer

Hey, Charlie. It's Dan. Just to touch on that question and respond across a number of those product categories and businesses. You know, within marketing solutions, from a direct marketing standpoint, you know, we are seeing, you know, clients have a strong desire to return back to the mail stream, which is -- which obviously represents a very good thing and a good sign going forward.

The challenge there that they're facing is the, you know, economy and as the virus, a bit of a resurgence, etc., is making sure that they're utilizing that marketing spend most effectively and the timing of that is appropriate. So, we remain cautiously optimistic about, you know, direct marketing continuing to rebound with the caveat that, you know, the resurging virus and businesses and the economies close down that's going to elongate that recovery a bit more. From a commercial print standpoint, you know, I'd say it's -- the recovery is happening, albeit slower than what we would like it to occur. But we are seeing that continue to rebound a bit.

We have, you know, from a facility consolidation, platform rationalization standpoint, closed a number of facilities and exited business as a result of that. But general trend improving, heading in the right direction on that front. Strong quarter for packaging labels supply chain, driven by the things that we mentioned relative to the pickup in product, pickup in product spending, pickup in e-commerce, online orders, etc. So that recovered in the Q3 nicely.

And we expect as those dynamics of the market continue to happen, we should be the recipient of ongoing strength in those product categories. You know, think about retail -- retail and store signage, that's all about foot traffic and the recovery there as well. So based on the elongated recovery, I think that's going to be a bit slower to on a going-forward basis. So, all in all, general trend upward, as represented by the organic -- significant organic improvement from Q1 to Q2 and remain -- we remain cautiously optimistic that those trends will continue.

Charles Strauzer -- CJS Securities -- Analyst

Got it. And I assume that, you know, the growth in packaging is related to the work coming out of the new China plant. Is that fair to say?

Dan Knotts -- President and Chief Executive Officer

I would say what's more fair to say is it's a combination of activity in China as well as activity in the U.S. packaging side, our teams are performing very well there, and we are seeing increased demand in that platform. So not just related to China. It's related to the U.S.

position as well.

Charles Strauzer -- CJS Securities -- Analyst

Excellent. And then just looking at the cash flows and the balance sheet, you've done a very good job of obviously deploying the cash to reduce your debt. Is that really the main priority as the use of cash here or other things that play?

Terry Peterson -- Chief Financial Officer

Well, you know, Charlie, this is Terry again. Certainly, make sure that the liquidity is sufficient to handle all the unknowns and the uncertainties created by the pandemic is and continues to be our top priority. But debt reduction and debt repayment, satisfying upcoming maturities, that priority is right at the top as well. But especially as we close on these logistics transactions and, you know, receive a fairly large infusion of cash from those sales, you know, we're feeling more comfortable with the amount of liquidity that we have, which is why we will feel like we can accomplish both of those objectives by, you know, still preserving liquidity for the unknowns as well as paying down debt for the -- throughout the fourth quarter.

Charles Strauzer -- CJS Securities -- Analyst

Great. And then just lastly for me, just looking at the facility that's coming due in '22, is there any update on potentially extending or amending that?

Terry Peterson -- Chief Financial Officer

Yeah. You know, at this point, we haven't announced anything on that. That credit facility is still just under two years away from maturing. So, you know, we will, you know, certainly begin to work on addressing that.

And doing that, generally will aim for doing that before that facility becomes current. So, I would expect we will be tackling that in the early part of 2021.

Charles Strauzer -- CJS Securities -- Analyst

Great. Thank you very much.

Dan Knotts -- President and Chief Executive Officer

Hey, Charlie. It's Dan. I want to come back to the other part of the use of -- from a cash standpoint, while we have -- while our capital spending is lower, we are absolutely continuing to invest back into our business. One of our strategic priorities about that centers around and supports driving revenue is investing to expand and grow -- expand capacity and grow in our higher-value, higher-growth categories.

So, from a capital standpoint, it is down, but we remain focused on investing back in the business, and we are prioritizing growth investments in packaging and labels, direct marketing, as an example. So not taking the eye off the ball there and position ourselves as the economy and markets do recover, that we've got the capacity required to support the growth our clients are looking for us to provide.

Charles Strauzer -- CJS Securities -- Analyst

Excellent. Thank you, Dan.

Dan Knotts -- President and Chief Executive Officer

Thanks, Charlie.

Operator

And your next question today comes from the line of Jason Kim with Goldman Sachs. Please proceed with your question.

Jason Kim -- Goldman Sachs -- Analyst

Good morning, and thank you. I would love to get your thoughts on the durability of your margin expansion that you have seen so far, which has been impressive to protect your bottom line in the face of some typical top-line environment. How much of the cost savings you think is permanent? And how much of the savings do you want to reinvest in the business as you see topline recover in the future?

Dan Knotts -- President and Chief Executive Officer

Hey, Jason. It's Dan. I'll take that one. Early on, when we saw this hit, and I think it's important to take you back a bit that we originally saw the impact of the pandemic hit in China in February time frame, which our experience of moving through that.

And as I said on the last call, our China team did a phenomenal job of managing through that and continues to do so. So as that virus the pandemic spread to the U.S., we had that experience, we saw that impact, and we ran various scenarios at that point in time. The what if scenarios, if it looks like this, it looks like that. And there's really two approaches that we contemplated.

One is, you know, we will adjust as we go or the other approach is we are going to aggressively look to reduce our cost structure and figure out how to operate at a new level. And when I talk about adjusting the cost structure, the vast majority of that is permanent reductions, not temporary reductions. So, when we think about facility closures and consolidations, platform radiation activity, the headcount -- the difficult decisions we make -- had to make for headcount reductions. Those actions were meant to be taken to reduce our overall fixed cost infrastructure for the long term.

And we consistently talked about the need to lower our cost to serve. And that's exactly what we're doing, and that needs to be done on a permanent basis. You know, I'm very proud of the fact that if you look at, you know, a 12% organic sales decline, dramatically improved from Q2. Our teams are working hard, winning new business to offset the market demand impact that we're currently facing with COVID.

But if you look at a 12% top-line drop and still being able to deliver adjusted income from operations that was essentially equal to the prior year on a 12.1% organic sales decline, that's a tremendous accomplishment, a tremendous attribute to our team and our ability to manage, effectively managing our business and adjust our cost structure to our revenues. So, the short answer to your question is the majority of those costs are permanent reductions to our business model, and particularly as it relates to facility closures. Now having said that, I think the other important part for everybody to understand is that there's a balance here. And the balance is what you believe about the ability for the market to recover and in particularly related to specific product offerings.

And adjusting, there is some aspect of this that remains flexible because the last thing we want to do is take capacity offline or skill sets offline on a permanent basis, see the market recover, and we don't have the opportunity to participate in that because we took those costs offline. So, we've taken a very aggressive approach, a very aggressive posture to permanently reducing our cost structure. Having said that, we've also been very strategic and thoughtful about where those cost reductions have come from and where they're not coming from yet as we want to continue to be positioned as the market rebounds to be able to satisfy the needs of our clients and the return to growth for those clients. In terms of the cost savings themselves, Terry touched on what we're planning and looking at from a use of cash standpoint, debt reduction remains a top priority.

Liquidity remains a top priority as part of that, and investing back in our business strategically remains a critical component of the use of those funds as well.

Terry Peterson -- Chief Financial Officer

Yeah. And Jason, just to add on to that, too. I would say that like every quarter, we are continually implementing more actions to take a swing at that cost structure and make ourselves more efficient. And as we -- especially as we look forward to, you know, times when the pandemic is largely behind us, and we start to open up, you know, things like travel and maybe restate some of our travel practices and employee cost of living increases as we start to reintroduce some of those costs again into the cost structure, our challenge, and then what we're challenging all our folks to be able to demonstrate, is to identify other cost savings to be able to offset that even though there are some temporary reductions or some increases that will eventually come back in.

Our goal and plan is to not see the effects of those because they will be offset by -- and funded by other cost-saving actions.

Jason Kim -- Goldman Sachs -- Analyst

That's great. That's very helpful. And then on the top line, as far as the fourth-quarter organic revenue guidance is concerned, like how are you thinking about the year-over-year trends being a little softer in fourth quarter versus what you saw in the third quarter. Are there any onetime issues we should be aware of that are less favorable in 4Q versus 3Q? Or is it just your conservatism in terms of pace of economic recovery stepping choppy in your markets that's leading you to guide for organic revenue trends to be a bit weaker versus 3Q?

Dan Knotts -- President and Chief Executive Officer

Yeah. I think -- it's Dan. I think the way I would describe that is, you know, as we sit here today, we are giving our best snapshot of what we think that the fourth quarter -- the range or what the fourth quarter is going to look like. And if you think about our business mix and our business profile, there are some components of that that are fairly predictable.

If you think about statements as monthly statements, as an example, that business is on the more predictable side. But if you think about our commercial print, digital print, that's a daily transactional order flow. Or if you think about even forms and labels type business, that's a daily inventory pull from a client standpoint. We really have a very short-term visibility -- short-term visibility to client demand.

So, at this point in time, we're taking the -- providing the range that we think is most appropriate. Relative to the year-over-year comparisons, Terry had mentioned Census in Q3, Q4 last year was strong. Census is not here in Q3 and Q4 of this year. So that is a year-over-year comp, not a significant quarter-over-quarter comp change.

So, you know, the -- it's very uncertain. We're all reading the news, seeing the resurgence of COVID. We're seeing economies in states and counties and cities and towns, greater lockdowns, etc., consumer spending in the fourth quarter is going to be a critical component of this as well. So very hard to predict in this uncertain volatile environment.

Jason Kim -- Goldman Sachs -- Analyst

OK. That's fair. And then on the working capital, in the past couple of years, obviously, fourth quarter has been a very strong free cash flow quarter, and working capital was a big component of that. But just given the strong outperformance in working capital this year in managing that, any color you can give us in terms of the magnitude of the change you expect from your usual seasonal patterns in fourth quarter?

Terry Peterson -- Chief Financial Officer

Yes. I did indicate in my prepared remarks that, you know, we do expect operating cash flow in the fourth quarter to be less than what we've seen in the past. And working capital is, you know the primary driver for that. In the past, we've had much higher working capital levels going into the fourth quarter.

That we've worked down as we have come off of our busy season and turned a lot of that into collections. So, we'll still have some of that this year, but kind of our starting point is certainly less than what it's been in the past years. And, you know, while we'll shooting and still working to be more efficient than we've been in the past, even at the end of the quarter, we, you know, -- I do believe that we have actually seen some of that cash flow that we might have otherwise seen come through in the fourth quarter. We've seen that actually come through in the earlier quarters here.

So we do expect it to be down. It's hard to say for sure how much that will be down, but definitely down. And I'd also expect that, that's still going to be higher than what we saw in the third quarter. So somewhere between that third-quarter amount.

The prior amounts from a fourth-quarter time frame. So that's really kind of what our expectation is at this point. But again, there are some challenges with heavy visibility and being able to predict that as reliably as we've otherwise been able to in past years.

Jason Kim -- Goldman Sachs -- Analyst

Understood. And then my last question is regarding the asset sales. Any tax leakage you should be incorporating into your Logistics DLS business? And then what would be the NOL balance you will have at the sale? And lastly, are there any other assets that you think is attractive to monetize for the company?

Terry Peterson -- Chief Financial Officer

I'll -- I missed the first part of your question, but on the NOLs, we will actually have a gain from the sale of the logistics businesses. And some of that gain will have a gain on both books and -- as well as for taxes. But we will be able to shelter a significant portion of that tax gain with the utilization of loss carryforwards from the past. So, there will be only a small tax leakage as a result of that sale.

But it is tax -- there is a tax gain on it. But again, we'll be able to shelter most, not quite all of it, but most of that will be sheltered with the past operating loss carryforwards. And did I get the first part of your question?

Jason Kim -- Goldman Sachs -- Analyst

That -- any other assets? Oh, yeah. I was just asking about if there will be any tax leakage from your asset sales, but you answered it.

Terry Peterson -- Chief Financial Officer

Yes.

Jason Kim -- Goldman Sachs -- Analyst

And any other assets that you think will be attractive to monetize?

Terry Peterson -- Chief Financial Officer

Well, we're constantly looking at facilities that we own. We've constantly got, you know, a number that are on the market that we are looking to sell. But nothing on the real estate front as large as the property in Shenzhen, China or the activity that we've seen here so far. On the business front, you know, again, in my prepared remarks, we continue to look at parts of the portfolio.

As we are always seeking ways to monetize and get more focused and kind of the core part of our business that supports our strategy going forward. So, nothing to announce there at all. You know, we're always evaluating and looking at opportunities in the marketplace, but that does not necessarily mean those turn into completed transactions.

Dan Knotts -- President and Chief Executive Officer

Yeah. Just to add to that, an important component of our long-term strategy, as we talk about in terms of driving our financial -- improving our financial flexibility portfolio optimization has played a key role in that. If you look at our historical performance, going back a couple of years, the sale of our Print Logistics business, our R&D business, our GDS Europe statement business, the exiting of Brazil and Chile, and now the sale of the additional logistics businesses that we've announced, courier, earlier in the year, International Mail and DLS Worldwide that we just recently announced and mentioned on our call, those are all critical components, and we're part of our identified longer-term strategic roadmap. So, as we go forward, portfolio optimization will remain a component of our longer-term strategy.

We don't put out there what businesses for lots of reasons. We would be evaluating in that area, but we will continue to pursue portfolio optimization opportunities as they make sense for us to do so.

Jason Kim -- Goldman Sachs -- Analyst

Understood. Thank you very much.

Dan Knotts -- President and Chief Executive Officer

Thank you, Jason. Appreciate it.

Operator

Your next question comes from the line of Bill Mastoris with Baird. Please proceed with your question.

Bill Mastoris -- Baird -- Analyst

Thank you. Dan, I'd like to go back to one of your earlier comments about the retail industry and about the slowdown in foot traffic it seems as though throughout the retail industry that you've had this tremendous surge in digital sales. And I'm just wondering, for your own planning purposes, are you assuming that this is going to be kind of a steady state and that foot traffic will come back? Or are these structural changes where things like volumes and maybe margins are going to plateau. So that would be my first question.

And I do have a follow-up.

Dan Knotts -- President and Chief Executive Officer

Yeah. On the retail side, there's a lot to that question, right? And a lot of that's going to be predicated in your conversations with retailers and reading about what different retailers are saying, certainly arise in in e-commerce, but they continue to believe that in-store is a component -- a critical component of their marketing campaign and delivering well-rounded consumer experience. So, yeah, we do expect put traffic. We do expect to see rebound input traffic as the economy opens up, restrictions open up.

Now, people get back out there, and it's really about, you know, completing that full retail experience, even though folks make a moment to buy and still buy online, continue to believe that the retail category in the brick-and-mortar will play a role in those companies' marketing strategies. Having said that, it's also important to recognize that there are extreme differences between types of retailers. And if you think about what we're seeing from a -- for example, from a, you know, grocery store standpoint to other big box retailers, having very strong in-store experience and online experience versus others that are not faring so well, we do believe that there'll be a continued shift in in brick-and-mortar as those companies work to figure out what model and their strategies on a going-forward basis. But, you know, we do -- the short answer there is we do expect to see that recovery occur, and we expect to participate in that as it does occur.

Bill Mastoris -- Baird -- Analyst

OK. And so, the next question I have is for Terry. And Terry, I want to make sure I heard you properly, and that is that the $87.8 million, which are due April 15 next year, that $55 million that that is either going to come out of cash from the balance sheet or be redeemed through the ABL. Did -- I just want to make sure.

Did I hear that correctly?

Terry Peterson -- Chief Financial Officer

Yes, that is correct.

Bill Mastoris -- Baird -- Analyst

OK. And then, finally, with all the changes that you've had in your business over the last several years, some of the dispositions and whatnot, I'm just wondering, what is the new minimum liquidity level that you really need to run the company in this COVID-19 environment?

Terry Peterson -- Chief Financial Officer

Yes. That certainly has come down a little bit. But again, we operations over internationally. So, we maintain liquidity pools, both internationally for those countries to support their working capital and seasonal needs.

And then in the states as well. So, if you're asking for liquidity, you know, it's needs – you know, I'm going to feel comfortable with $300 million, $400 million at a minimum for the business going forward. But, you know, we are continuing to maintain liquidity in excess of that right now because of – you know, just because of the added uncertainty with the pandemic right now.

Bill Mastoris -- Baird -- Analyst

Great. Thank you for all the color, and good luck in the upcoming quarter.

Dan Knotts -- President and Chief Executive Officer

Thank you, Bill.

Terry Peterson -- Chief Financial Officer

Yeah, thanks, Bill.

Operator

[Operator instructions] And this concludes our question-and-answer session for today. I will now turn the call back to Dan Knotts for closing remarks.

Dan Knotts -- President and Chief Executive Officer

Great. Thank you. A summary of our key takeaways for the call can be found on Slide 17 of our presentation. In closing, I'd like to thank all of our employees around the world for your tremendous commitment to RRD during this challenging and unprecedented time, in particular, thank you to our service and operations teams, our sales teams, for continuing to deliver for our clients in spite of the many challenges we are facing.

We're incredibly appreciative of your efforts and dedication to our company. With that, Johan, back to you.

Johan Nystedt -- Senior Vice President of Finance

Thanks, Dan. As a reminder, information to access the telephonic replay of RRD's third-quarter 2020 results can be found in our third quarter press release. A copy of which is posted on the investors section of our website at rrd.com. Thank you for joining us, and that concludes the RRD third-quarter 2020 earnings call.

Operator

[Operator signoff]

Duration: 55 minutes

Call participants:

Johan Nystedt -- Senior Vice President of Finance

Dan Knotts -- President and Chief Executive Officer

Terry Peterson -- Chief Financial Officer

Charles Strauzer -- CJS Securities -- Analyst

Jason Kim -- Goldman Sachs -- Analyst

Bill Mastoris -- Baird -- Analyst

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