R.R. Donnelley & Sons Co.
) reported second quarter 2012 earnings of 49 cents per share,
which comfortably exceeded the Zacks Consensus Estimate of 43
cents. However, earnings declined 7.5% year over year in the
Revenue declined 3.6% year over year to $2.53 billion and was
slightly short of the Zacks Consensus Estimate. The shortfall was
due to unfavorable foreign exchange, volume decline in certain
product lines, declining prices and unfavorable impact of lower
pass-through paper sales, which fully offset volume growth in
certain product offerings.
Product revenue (87.0% of total revenue) decreased 7.1% year
over year to $2.20 billion, partially offset by a 13.0% year over
year jump in services revenue (13.0% of total revenue) in the
U.S.print and related services revenue was down 4.0% from the
previous-year quarter to $1.85 billion, due to significant lower
volumes along with continued pricing pressure across the segment
and lower pass-through paper sales, which fully offset the volume
increases in logistics and office products. International sales
declined 2.8% year over year to $682.6 million during the
Operating expenses decreased 4.1% year over year to $2.33
billion, primarily attributed to a lower selling, general &
administrative (SG&A) expense (down 10.7% year over year). As a
percentage of total revenue, SG&A expense was 10.9% in the
reported quarter versus 11.8% in the year-ago quarter. The
improvement was primarily attributed to higher productivity and
variable cost control, coupled with lower pension expense.
The lower operating expense drove higher margins in the reported
quarter. Operating income on a non-GAAP basis improved 3.0% year
over year to $198.4 million in the quarter. Operating margin
increased to 7.8% from 7.3% in the year-ago period.
However, higher interest expense (up 3.8%) and income tax (up
76.7%) negatively impacted net income in the quarter. Donnelley
reported net income of $88.5 million or 49 cents per share
(excluding one-time items) compared with $105.6 million or 53 cents
in the year-ago quarter.
Donnelley exited the quarter with $369.0 million of cash versus
$415.0 million in the previous quarter. Long-term debt was $3.42
billion at the end of June 30, 2012 compared with $3.76 billion at
the end of the previous quarter. Cash flow from operations was $9.9
million compared to an outflow of $52.0 million in the previous
Donnelley expects revenue to be in the range of $10.4 billion to
$10.5 billion for fiscal 2012. Operating margin is forecasted to
remain within the range of 7.2% to 7.3% for the full year.
Donnelley reiterated fiscal 2012 non-GAAP earnings guidance in
the range of $1.84 to $1.92 per share. Non-GAAP effective tax rate
for 2012 is expected in the range of 30% to 34% (up from prior
guidance of 29.0% to 32.0%). For fiscal 2012, free cash flow is
expected to be approximately $500.0 million.
We expect Donnelley shares to remain under pressure in the near
term due to weak macroeconomic conditions prevailing in most of its
current as well as prospective markets. We believe that continuing
pricing pressure, volatility in raw material prices and a highly
leveraged balance sheet are significant headwinds going
Donnelley continues to face significant threats from digital
technologies that enable much easier transfer, designing, resetting
and reproduction of data. This affects big projects such as books
and journals, in which the number of printed pages are much
Additionally, with publishers increasingly coming out with
digital versions of books and sophisticated e-book readers from
Barnes & Noble Inc.
) becoming increasingly available, the interest in commercially
printed paperbacks and hard covers is waning.
In such a scenario, Donnelley is expanding its scope beyond
traditional markets primarily through acquisitions. The company's
continued focus on acquisitions will also spur its already dominant
market position and drive long-term growth, in our view.
However, until that happens we prefer to remain on the
sidelines. We have a Neutral recommendation over the long term
(6-12 months). Currently, Donnelley has a Zacks #3 Rank, which
implies a Hold rating in the short term (1-3 months).
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