R.R. Donnelley & Sons Co. (
reported fourth quarter 2012 non-GAAP earnings of 43 cents per
share, which comfortably exceeded the Zacks Consensus Estimate by
6 cents. However, earnings per share ("EPS") declined 6.5% year
over year and 15.7% sequentially in the reported quarter.
Revenues declined 2.5% year over year but jumped 35.0%
sequentially to $2.71 billion and were well ahead of the Zacks
Consensus Estimate of $2.53 billion. The year-over-year decline
was primarily due to volume declines, price erosion and 50 basis
points ("bps") unfavorable impact of lower pass-through paper
The sequential improvement was primarily driven by strong
revenue growth in Asia and Latin America. Logistics, premedia and
office products, magazine/catalog retail inserts, variable print
and commercial print also performed better in the fourth
During the quarter, Donnelley further expanded its logistics
offerings with the addition of Presort Solutions, a Midwest-based
commingled mail provider.
U.S. Print and related services revenues were down 40% from
the year-ago quarter to $1.98 billion due to significant lower
volumes along with continued pricing pressure across the segment
and reduced pass-through paper sales (110 bps). On a sequential
basis, segment revenues increased 5.9% due to improving trends in
variable print, commercial print, magazine, catalog and retail
inserts and logistics.
International sales increased 1.9% year over year and 11.3%
quarter over quarter to $729.3 million in the quarter. The
year-over-year growth was primarily driven by a positive 150 bps
impact from higher pass-through paper sales and favorable foreign
exchange as well as volume increases in Asia and Latin
Operating expenses (primarily excluding restructuring and
impairment charges of $1.02 billion) fell 2.7% year over year to
$2.48 billion. Sequentially, operating expenses surged 7.7% in
the last quarter.
The year-over-year decrease was primarily due to 4.6% decline
in products cost of sales. Selling, general & administrative
(SG&A) expense declined 1.5% from the year-ago quarter. These
fully offset a 13.6% sharp rise in services cost of sales.
However, all of these expenses jumped significantly on a
sequential basis. SG&A increased 15.1%, while products and
services cost of sales jumped 6.0% and 16.7% from the
The lower operating expense drove the operating results from
the year-ago quarter as operating margin improved 50 basis points
(bps) to 6.5%. However, operating margin contracted 360 bps from
the previous quarter due to higher expenses.
Balance Sheet and Cash Flow
Donnelley exited the quarter with $430.7 million of cash
versus $329.2 million in the previous quarter. Long-term debt
remained at $3.42 billion at the end of Dec, 2012.
In the fourth quarter, free cash flow was $476.5 million
compared with $417.4 million in the year-ago quarter. The
increase was driven by improved working capital performance.
Gross leverage at the end of fiscal 2012 was 2.8X, which improved
from 3.1X times in the previous quarter.
For fiscal 2013, Donnelley expects revenues to be in the range
of $10.1 billion to $10.3 billion. The guidance assumes
approximately $100.0 million negative impact from foreign
exchange rates and lower paper sales.
Adjusted earnings before interest, tax, depreciation and
amortization ("EBITDA") are expected to be in the range of 11.2%
to 11.4% for fiscal 2013. Depreciation and amortization is
expected to be in the range of $455.0 to $465.0 million, while
interest expense is likely to be in the range of $245.0 to $250.0
Capital expenditure is expected to be in the range of $200
million to $225 million and free cash flow in the range of $400
million to $500 million. Long-term gross leverage is projected to
be in the range of 2.25X to 2.75X.
Donnelley expects first quarter results to suffer from $6.0
million of lower pension income as well as from the absence of
$20.0 million related to customer rebate reversal adjustment in
office products offering in the year-ago quarter. Income tax is
also expected to be approximately 600 bps higher than the
We believe that Donnelley will achieve growth in fiscal 2013
due to its strong product pipeline. Donnelley plans to introduce
near field communication ("NFC") tags during the year, which will
boost its top-line growth going forward. Moreover, an improving
macro-economic condition in the domestic market and cost cutting
initiatives will boost profitability in the near term.
Donnelley's improving liquidity position is also a positive
catalyst in our view.
Moreover, Donnelley's continued focus on acquisitions will
extend its offerings beyond the traditional market. Donnelley's
multi-million dollar contract wins from various companies such as
Metro Inc., Chrysler and
Office Depot Inc. (
are the other positive catalysts.
However, we expect Donnelley to remain under pressure in the
near term due to continuing pricing pressure, volatility in raw
material prices, and increasing competition from
Quad/Graphics, Inc. (
and Dai Nippon Printing Co. Ltd. Moreover the increasing adoption
of the e-book reader from the likes of
is a major concern for its legacy printing business.
Currently, Donnelley has a Zacks Rank #3 (Hold).
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