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R.R. Donnelley Disappoints Again in Q3 Earnings; Cuts View

R.R. Donnelley & Sons Company 's RRD dismal performance continued in the third quarter of 2015 as results declined on a year-over-year basis.

R.R. Donnelley posted third-quarter non-GAAP earnings of 39 cents per share which was lower than the year-ago quarter figure of 39 cents. On a GAAP basis, the company's earnings were 7 cents, significantly down from 31 cents earned a year ago.

The company's bottom line was negatively impacted by pricing pressure across all the segments, volume decline at Publishing and Retail Services and Variable Print segments, and higher share count.

Quarter in Detail

R.R. Donnelley's revenues of $2.828 billion declined 4.4% year over year. Additionally, on an organic basis (adjusted for the impact of acquisitions, changes in foreign exchange rates, dispositions and changes in pass-through paper), revenues decreased 3.1%.

The year-over-year decline in top line was mainly due to persistent price erosion at every segment and volume decline at Publishing and Retail Services and Variable Print divisions, partially offset by volume improvements at Strategic Services and International divisions.

Publishing and Retail Services revenues improved 0.6% from the year-ago quarter to $684.9 million. After adjusting for 300 basis points (bps) related to the negative impact of lower pass-through paper sales, organic sales declined 6.4% year over year. The company also saw volume declines in all the reporting units under this segment. Pricing pressure in magazines, catalogs and retail inserts were also responsible for the decline.

Variable Print revenues were $935.9 million, down 5.3% from the year-ago quarter. On an organic basis, revenues were down 4.9% year over year due to lower volume in commercial and digital print, forms direct mail and labels.

The Strategic Services segment garnered revenues of $635.6 million, up 0.8% from the year-ago quarter. Quarterly organic growth was 0.1% backed by improvement in Logistics and Sourcing business.

International sales in the third quarter totaled $571.6 million, down 13.1% year over year, primarily due to unfavorable foreign exchange impact and dispositions of operations in Argentina and Venezuela. However, organic net sales (adjusting for the unfavorable Fx impact and dispositions completed during 2014) increased 0.1% as the volume decline in Asia, Europe and Canada were more than offset by volume increases in global turnkey and Latin America.

Non-GAAP gross margin was 22.2%, up 30 bps from the year-ago period, mainly supported by the ongoing cost-control initiatives, partially offset by price erosion, higher health care costs and volume decline at Publishing and Retail Services segment.

Non-GAAP operating profit decreased 1.9% from the year-ago quarter to $189.9 million. However, operating margin improved 20 bps year over year to 6.7%, mainly led by efficient cost management.

Non-GAAP net earnings for the quarter were $76 million or 36 cents per share compared with $78.9 million or 39 cents reported a year ago.

The commercial printing, information services and logistics provider exited the quarter with $257.3 million in cash and cash equivalents compared with $295.4 million in the previous quarter. Long-term debt (including current portion) came in at $3.676 billion. During the quarter, the company generated $143.2 million of cash from operating activities and $91.5 million free cash flow.

Guidance

Back-to-back dismal quarterly performance prompted R.R. Donnelley to lower the full-year revenue guidance to a range of $11.2-$11.4 billion (mid-point $11.3 billion), down from $11.4-$11.6 billion (mid-point $11.5 billion).

However, adjusted earnings before interest, tax, depreciation and amortization (EBITDA) margins are expected in the range of 10.6-10.8% for 2015, up from 10.5-10.7%. Interest expense is likely to range within $270.0-$275.0 million.

Capital expenditure is projected in the range of $225 million to $250 million and free cash flow within $400-$500 million.

Our Take

R.R. Donnelley once again reported dismal results in the third quarter with both earnings and revenues declining year over year. Moreover, the company's lowered revenue guidance for 2015 paints a gloomy picture ahead.

Nonetheless, we expect the company's strategic acquisitions to drive growth, going forward. At the same time, new and existing clients such as Williams-Sonoma WSM and Office Depot Inc. ODP will boost revenues.

Nonetheless, we believe persistent pricing pressure, volatility in raw material costs and intensifying competition will negatively affect R.R. Donnelley's bottom line in the near term. Moreover, increasing adoption of e-book among readers is a major concern for its legacy printing business.

A stock in the broader technology sector that is worth a look is Ambarella Inc. AMBA carrying a Zacks Rank #2 (Buy).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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