R.R. Donnelley Reports In Line - Analyst Blog
02 November 2011 - 11:02PM
Zacks
R.R. Donnelley & Sons Co. (RRD) reported
non-GAAP earnings per share (EPS) of 51 cents in the third quarter
2011, which was in line with the Zacks Consensus Estimate. The
reported EPS was up 16.0% from the previous-year quarter and
excludes restructuring and impairment charges and acquisition
expenses.
Operating Performance
Gross Profit increased 6.4% from the prior-year quarter to
$627.0 million. Gross margin slipped marginally to 23.4% compared
with 23.7% in the year-ago quarter due to pricing pressure, which
was however mostly offset by productivity improvements, a higher
recovery on print-related by-products and lower variable
compensation expense.
As a percentage of total revenue, selling general &
administrative (SG&A) expense was 11.1% in the reported quarter
versus 10.5% in the year-ago quarter. The increase was primarily
due to the acquisition of Bowne, and higher pension and other
benefits related expenses, which were partially offset by lower
variable compensation expense.
Operating income on a non-GAAP basis was down 4.2% year over
year to $191.7 million in the quarter. Operating margin decreased
to 7.1% from 8.0% reported in the year-ago period. Margins were
negatively impacted by pricing pressures that more than offset the
productivity improvements, lower variable compensation expense and
a higher recovery on print-related by-products.
U.S. Print and Related Services non-GAAP operating margin was
10.0%, which was flat compared with the previous-year quarter.
Margins were impacted by productivity improvements, lower variable
compensation expense, a higher recovery on print-related
by-products and volume increases in logistics and commercial print,
which were offset by the volume declines in books and directories
and continued pricing pressure across the segment.
International operating margin on-GAAP operating margin declined
to 5.9% from 8.5% in the prior-year quarter due to pricing pressure
coupled with an unfavorable impact from changes in foreign exchange
rates, as well as wage and other inflation in certain countries.
However, these factors were only partially offset by lower variable
compensation expense.
Revenue
Revenues on reported basis increased 7.8% year over year to
$2.68 billion, but missed the Zacks Consensus Estimate of $2.69
billion by a whisker.
Segment wise, revenue from Product, which comprises around 88.1%
of the revenues, increased 6.8% from the previous-year quarter to
$2.36 billion. Services, which comprises 11.9% of the revenues,
increased 16.1% from the prior-year quarter to $318.4 million.
U.S.print and related services revenue was up 6.3% from the
previous-year quarter to $2.0 billion, primarily led by the
acquisition of Bowne and volume increases in commercial print and
logistics, which was partially offset by volume declines in books
and directories and continued pricing pressure across the segment.
Including the adjustments made for the acquisitions, net sales in
the segment decreased 0.4%.
International sales increased 12.3% from the previous-year
quarter to $703.9 million, including increased sales due to the
acquisition of Bowne. Including the adjustments made for the
acquisitions, net sales increased by $49.2 million up 7.5%, as
changes in foreign exchange rates and increased volume more than
offset the impact of continued pricing pressure.
Balance Sheet
R.R. Donnelley exited the quarter with $368.1 million of cash
versus $363.0 million in the previous quarter. Long-term debt was
$3.42 billion at quarter end, compared with $3.43 billion at the
end of the previous quarter.
Recommendation
We remain Neutral on R.R. Donnelley on a long term basis (3-6
months). R.R. Donnelley is witnessing stabilization in demand, a
higher recovery on print-related by-products and volume increases
in logistics and commercial print and new customer wins. We believe
that strong alliances and customer wins including those of
AT&T Inc. (T) and Verizon
Communications Inc. (VZ) will create value for the company
over the long term.
However, we prefer to remain on the sidelines due to weak
macro-economic conditions prevailing in most of Donnelley’s current
and prospective markets. Moreover, higher pension expenses,
continuing pricing pressure, volatility in raw material prices and
a highly leveraged balance sheet are significant headwinds going
forward.
Currently, R.R. Donnelley has a Zacks #4 Rank, which implies a
Sell rating on a short-term basis (1-3 months).
DONNELLEY (RR) (RRD): Free Stock Analysis Report
AT&T INC (T): Free Stock Analysis Report
VERIZON COMM (VZ): Free Stock Analysis Report
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