Donnelley Beats on Q1 Earnings, Misses Revs

Zacks

R.R. Donnelley & Sons Co. (RRD) reported first quarter 2014 non-GAAP earnings of 31 cents per share, beating the Zacks Consensus Estimate by 7 cents. However, earnings per share were down 17.7% on a year-over-year basis.

Quarter Details

Quarterly revenues were up 5.3% year over year to $2.67 billion but missed the Zacks Consensus Estimate of $2.85 billion. The year-over-year growth can be attributed to the acquisition of Consolidated Graphics.

Publishing and Retail Services revenues declined 3.3% from the year-ago quarter to $642.7 million in the reported quarter. Of the total decline, 150 basis points (bps) were related to the negative impact of lower pass-through paper sales, resulting in an organic year-over-year decline of 1.8%.
    
Variable Print revenue was $792.1 million, up 22.2% from the year-ago quarter. This year-over-year increase was primarily due to the Consolidated Graphics acquisition. On an organic basis, revenue was down 2.3% year over year.

The Strategic Services segment registered revenues of $619.7 million, up 4.7% from the year-ago quarter. Organic growth for the quarter was 4.7%. Higher volume, a favorable product mix and productivity-related savings were more than offset by increased transportation costs.

International sales in the first quarter of 2014 were $619.3 million, down 2.3% from the year-ago quarter. Organic net sales grew 0.5% in the quarter. Volume-driven revenue increases drove organic growth in Latin America, Asia and Canada, consistent with recent trends. Continued volume declines and low-margin outsourcing work consistent with the trend led to organic decline in the BPO offering.

Gross margin was 21.9%, down 10 bps from the year-ago quarter. Price erosion, inflationary pressures on wage and other costs, and increased transportation costs on the domestic front more than offset higher volume and a favorable product mix.

Operating expenses increased to $424.3 million in the reported quarter from $394.8 million in the year-ago quarter. This year-over-year increase was mainly on account of a rise in selling, general & administrative expenses.

Selling, general & administrative expenses as a percentage of revenues increased 40 bps from the year-ago quarter, which was attributed to higher variable compensation and lower pension income.

Adjusted non-GAAP operating profit declined 1.5% from the year-ago quarter to $161.0 million in the reported quarter. However, operating margin declined 40 bps from the year-ago quarter.

 Non-GAAP net earnings for the quarter were $59.7 million or 31 cents per share compared with $68.1 million or 37 cents per share reported in the year-ago quarter.

Acquisitions

Since the beginning of 2014, Donnelley has made certain important acquisitions including the likes of Consolidated Graphics, the North American operations of Esselte and Multicorpora.

Ever since its acquisition, Consolidated Graphics significantly expanded Donnelley’s digital production capabilities and also expanded its territorial operations.

By acquiring the North American operations of Esselte, Donnelley has been able to expand its current product offering and thus give itself greater access to more shelf space, both virtual and brick-and-mortar. The acquisition of MultiCorpora is expected to enhance Donnelley’s language solutions technology and translations capabilities.


Balance Sheet and Cash Flow

Donnelley exited the quarter with $308.4 million in cash versus $462.8 million in the previous quarter. Long-term debt was at $3.63 billion compared with $3.24 billion in the prior quarter.

Free cash outflow in the quarter was $129.4 million versus an outflow of $133.7 million in the year-ago quarter. As of Mar 31, 2014 Donnelley had $10 million in borrowings outstanding under its revolving credit agreement.

Guidance

Donnelley provided its fiscal 2014 guidance. The company expects revenues to be in the range of $11.5 billion to $11.8 billion while the Zacks Consensus Estimate for the same is pegged at $11.6 billion.

Adjusted earnings before interest, tax, depreciation and amortization (:EBITDA) are expected to be in the range of 10.5% to 11.0% for fiscal 2014. Depreciation and amortization expense is expected to be in the range of $485.0 to $495.0 million, while interest expense is likely to be between $275.0 million and $285.0 million.

Capital expenditure is expected to be in the range of $225.0 million to $250.0 million and free cash flow in the range of $400 million to $500 million.

Management expects its service offerings to drive growth going forward.

Recommendation

Donnelley reported mixed first quarter results with earnings beating the Zacks Consensus Estimate but revenues falling short of the same.

Although, Donnelley continually focuses on acquisitions and wins contracts from various companies such as Williams-Sonoma (WSM) and Office Depot Inc. (ODP), the deteriorating macroeconomic conditions continue to dampen its business prospects.

We expect Donnelley to remain under pressure in the near term due to continuing pricing pressure, volatility in raw material prices, and increasing competition. Moreover the increasing adoption of the e-book reader from the likes of Amazon (AMZN) remains a major concern for its legacy printing business.

Currently, Donnelley has a Zacks Rank #5 (Strong Sell).

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