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.
Currently, Donnelley has a Zacks
Rank #3 (Hold).
AMAZON.COM INC (AMZN): Free Stock Analysis Report
OFFICE DEPOT (ODP): Free Stock Analysis Report
QUAD GRAPHICS (QUAD): Free Stock Analysis Report
DONNELLEY (RR) (RRD): Free Stock Analysis Report
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