R.R. Donnelley & Sons Co.
) reported earnings of 44 cents per share (excluding restructuring
and impairment charges, acquisition expenses and loss on debt
extinguishment) in the first quarter of 2012, which were ahead of
the Zacks Consensus Estimate of 37 cents. Earnings surged 33.3%
year over year, primarily driven by stringent cost savings during
Revenue declined 2.3% year over year to $2.52 billion, in line
with the Zacks Consensus Estimate. Segment-wise, revenue from
Product, which comprises around 87.0% of revenues, decreased 3.1%
from the year-ago quarter to $2.20 billion. Services, which
comprised 13.0% of the revenue, increased 3.6% year over year to
U.S. print and related services revenue was down 2.3% from the
previous-year quarter to $1.88 billion, due to a decrease in books
and directories and financial print volumes along with continued
pricing pressure across the segment. This offset the volume
increases in logistics and office products. International sales
remained flat year over year at $643.5 million during the
Non-GAAP gross profit was down 8.2% year over year to $580.0
million. Gross margin slipped significantly to 23.0% from 24.3% in
the year-ago quarter. This was due to pricing pressure and
unfavorable product mix.
Selling general & administrative (SG&A) expense
increased 13.3% year over year to $283.2 million. As a percentage
of total revenue, SG&A expense was 11.2% in the reported
quarter versus 12.6% in the year-ago quarter. The improvement was
primarily attributed to higher productivity and variable cost
Operating income on a non-GAAP basis improved 7.0% year over
year to $171.7 million in the quarter. Operating margin increased
to 6.8% from 6.2% in the year-ago period. Net income increased
15.0% year over year to $78.8 million, while margin crept up to
3.1% from 2.7% reported in the year ago quarter.
R.R. Donnelley exited the quarter with $415.0 million of cash
versus $449.7 million in the previous quarter. Long-term debt was
$3.76 billion at the end of the quarter. Cash outflow from
operations was $52.0 million at the end of the quarter.
R.R. Donnelley expects fiscal 2012 non-GAAP earnings in the
range of $1.84 to $1.92 per share, slightly above the Zacks
Consensus Estimate of $1.83. Moreover, non-GAAP effective tax rate
for 2012 is expected in the range of 29.0% to 32.0%. For fiscal
2012, free cash flow is expected to be at least $500.0 million.
We remain Neutral on the company over the long term (6-12
months) despite its increasing volumes and new customer wins. We
believe that strong alliances and customer wins including those of
Verizon Communications Inc.
Office Depot Inc.
) will create value for the company over the long term.
However, we expect Donnelley to remain under pressure due to
weak macroeconomic conditions prevailing in most of its current as
well as prospective markets. Moreover, higher pension expenses,
continuing pricing pressure, volatility in raw material prices and
a highly leveraged balance sheet are significant headwinds going
Currently, Donnelley has a Zacks #3 Rank, which implies a Hold
rating in the short term (1-3 months).
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