Unlock stock picks and a broker-level newsfeed that powers Wall Street.
Donnelley Beats on Both Lines
Zacks Equity Research
R.R. Donnelley & Sons Co. (RRD) 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
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 sales.
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 quarter.
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 America.
Margins
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 previous-quarter, respectively.
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.
Guidance
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 million.
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 year-ago quarter.
Recommendation
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. (ODP) 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. (QUAD) and Dai Nippon Printing Co. Ltd. Moreover the increasing adoption of the e-book reader from the likes of Amazon (AMZN) is a major concern for its legacy printing business.
