R.R. Donnelley & Sons Company (NYSE: RRD) (“RRD”) today reported
financial results for the second quarter of 2018.
Key messages
“I am pleased with our solid performance and the progress we made during
the quarter in executing our strategic growth objectives as a marketing
and business communications services company,” said Dan Knotts, RRD’s
President and Chief Executive Officer. “We delivered our third
consecutive quarter of organic growth, which continues to be driven by
our unique ability to help our clients manage the full range of
interactions they have with their customers across every critical touch
point – online, offline and in-store – with reduced complexity and
increased efficiency. Through the powerful combination of our Marketing
Solutions and Business Services capabilities, we believe we are well
positioned to win new business and execute our long-term growth
strategy. Excluding the negative impact of foreign exchange rates, our
adjusted income from operations and EBITDA also increased year over
year, largely attributable to productivity improvements and our
aggressive actions to address inflationary cost headwinds. Our operating
cash flow also improved significantly in the quarter in line with our
expectations. As we enter our seasonally stronger back half of the year,
we remain confident in our ability to execute our strategy, sustain our
organic sales growth and deliver our cost reduction plans to achieve our
full year guidance.”
Financial highlights
The following table provides an overview of RRD’s financial performance:
(1) See page 9 for a complete listing of items excluded and a
reconciliation of GAAP to non-GAAP amounts.
Net sales in the quarter were $1.68 billion, up $59.5 million or 3.7%
from the second quarter of 2017. On an organic basis, consolidated net
sales increased 2.7% primarily driven by higher volume and fuel
surcharges in the Business Services segment, partially offset by price
pressure. From a products and services perspective, Packaging, Logistics
and Direct Mail accounted for most of the increase while Commercial
Print was lower due to ongoing secular pressure and lower specialty card
sales.
Gross profit in the second quarter of 2018 was $290.6 million or 17.3%
of net sales versus $302.0 million or 18.6% of net sales in the prior
year quarter. The favorable impact of volume growth and cost reduction
initiatives was more than offset by unfavorable changes in foreign
exchange rates and modest price pressure.
Selling, general and administrative expenses (“SG&A”) of $208.0 million,
or 12.4% of net sales, in the second quarter of 2018 decreased from
$216.3 million, or 13.4% of net sales, in the prior year. The
improvement was primarily due to cost reduction initiatives, partially
offset by higher health care and performance based compensation expenses.
Income from operations was $25.5 million in the second quarter compared
to $34.4 million in the 2017 quarter. The second quarter of 2018
included pre-tax restructuring and other charges of $11.0 million. The
prior year period included pre-tax restructuring and other charges of
$3.8 million and $1.2 million for spinoff-related transaction expenses.
Non-GAAP income from operations of $36.5 million, or 2.2% of net sales,
decreased $2.9 million from $39.4 million, or 2.4% of net sales,
reported in the prior year period. Unfavorable changes in foreign
exchange rates reduced second quarter results by nearly $7 million as
compared to the 2017 quarter.
Net loss attributable to common stockholders of $13.0 million in the
second quarter compared to net earnings of $76.5 million in the second
quarter of 2017. During the second quarter of 2017, the debt-for-equity
exchange of most of the Company’s retained shares of Donnelley Financial
Solutions, Inc. (“Donnelley Financial”) for certain outstanding senior
notes resulted in an after tax net realized gain of $94.4 million. In
addition, the Company tendered certain outstanding debentures and senior
notes. These transactions resulted in a net after-tax loss on debt
extinguishments of $8.5 million. Non-GAAP net loss attributable to
common stockholders was $6.4 million, an increase of $2.3 million
compared to $4.1 million in the second quarter of 2017, primarily driven
by lower income from operations and higher taxes, partially offset by
lower interest expense.
Second quarter 2018 diluted loss per share attributable to common
stockholders was $0.18 compared to diluted earnings per share of $1.09
in the second quarter of 2017. While non-GAAP income before taxes was up
slightly in 2018 as compared to 2017, non-GAAP diluted loss per share
attributable to common stockholders of $0.09 in 2018 was unfavorable to
$0.06 reported in 2017 due to higher tax expense.
Other highlights and information
Cash used in operating activities during the six months ended June 30,
2018 was $128.0 million compared to $40.9 million in the prior year
period. The increase primarily related to net unfavorable changes in
working capital and higher tax payments. Capital expenditures in 2018
were $48.0 million versus $54.2 million in the prior year period and
proceeds from facility and other asset sales, including deposits
collected were $48.1 million in the 2018 period.
As of June 30, 2018, cash on hand was $257.0 million and total debt
outstanding was $2.26 billion, including $322.0 million drawn against
the credit facility. Availability under the credit facility was $351.8
million at June 30, 2018.
The Company has entered into an agreement to sell a property in an
international location for gross proceeds of approximately $250 million.
This transaction is subject to receiving governmental approval, and the
Company expects the transaction to close in 2020. The net book value of
these assets is insignificant. As of June 30, 2018, the Company has
collected, in accordance with the agreement, non-refundable deposits of
$44.6 million from the third party buyer with additional deposits
required to be paid prior to closing. Deposits collected are
unrestricted, but the Company expects the deposits to remain in a
foreign cash account until the government provides the necessary
approvals, closing is finalized and local taxes are paid.
On July 2, 2018, the Company completed the previously announced sale of
its print logistics business for $60.0 million, subject to normal
working capital adjustments. Proceeds from the sale were used to reduce
borrowings outstanding under the credit facility. The Company expects to
report an insignificant gain on the transaction in the third quarter
with no cash taxes, and that the sale will have a slightly favorable
impact on the Company’s financial leverage.
Dividend
The Board of Directors declared a quarterly cash dividend of $0.03 per
common share. The dividend will be payable on September 4, 2018 to
stockholders of record as of the close of business on August 15, 2018.
The amount of the dividend reflects a reduction from the previous
quarter’s dividend of $0.14 per common share.
“We believe the revised dividend amount continues to provide a
competitive return to our stockholders while allowing us to accelerate
the pace at which we reposition our balance sheet and improve our
financial flexibility to support our strategy,” Knotts continued.
“Improving our capital structure will enhance our ability to make
strategic investments and accelerate our growth as a leading marketing
and business communications company. We remain committed to taking
actions such as this reduction, as well as the sale of our print
logistics business and other assets, to further reduce our debt and
financial leverage and create long-term value for our stockholders.”
2018 guidance
The Company’s full year guidance, adjusted primarily for the sale of
print logistics and expected stronger organic sales performance, is as
follows:
Conference call
RRD will host a conference call to discuss its second quarter results
Thursday, August 2, 2018 at 11:00 a.m. Eastern Time (10:00 a.m. Central
Time). Participants may listen to the call by dialing 612.234.9959
(access code 451788#). For those unable to listen live, a telephonic
replay of the call will be available until October 31, 2018 at
320.365.3844 (access code 451788#).
A slide presentation will be available on the Investors section of the
RRD website at www.rrd.com.
About RRD
RRD is a leading global provider of multichannel business communications
services and marketing solutions. With more than 50,000 customers and
43,000 employees across 34 countries, RRD offers the industry’s most
comprehensive offering of solutions designed to help companies—from Main
Street to Wall Street—optimize customer engagement and streamline
business operations across the complete customer journey. RRD offers a
comprehensive portfolio of capabilities, experience and scale that
enables organizations around the world to create, manage, deliver, and
optimize their marketing and business communications strategies.
For more information, visit the Company’s web site at www.rrd.com.
Use of non-GAAP information
This news release contains non-GAAP financial measures, including
non-GAAP SG&A, non-GAAP income from operations, non-GAAP Adjusted
EBITDA, non-GAAP effective tax rate, non-GAAP net earnings (loss)
attributable to common stockholders, non-GAAP diluted earnings (loss)
per share and non-GAAP organic net sales. The Company believes that
these non-GAAP measures, when presented in conjunction with comparable
GAAP measures, provide useful information about its operating results
and enhance the overall ability to assess the Company’s financial
performance. These measures should be considered in addition to, and not
as a substitute for, or superior to, measures of financial performance
prepared in accordance with GAAP. RRD uses these non-GAAP measures,
together with other measures of performance under GAAP, to compare the
relative performance of operations in planning, budgeting and reviewing
the performance of its business. Additional information relating to the
adjustments for the non-GAAP SG&A, non-GAAP income from operations,
non-GAAP Adjusted EBITDA, non-GAAP effective tax rate, non-GAAP net
earnings (loss) attributable to common stockholders, non-GAAP diluted
earnings (loss) per share and non-GAAP organic net sales for RRD is set
forth in the attached schedules.
Use of forward-looking statements
This news release includes certain “forward-looking statements” within
the meaning of, and subject to the safe harbor created by, Section 21E
of the Securities Exchange Act of 1934, as amended, with respect to the
business, strategy and plans of the Company and its expectations
relating to future financial condition and performance. These statements
include all those under the column labeled “Current Guidance August 1,
2018” in the table included under the “2018 Guidance” section.
Statements that are not historical facts, including statements about
RRD’s management’s beliefs and expectations, are forward-looking
statements. Words such as “believes,” “anticipates,” “estimates,”
“expects,” “intends,” “aims,” “potential,” “will,” “would,” “could,”
“considered,” “likely,” “estimate” and variations of these words and
similar future or conditional expressions are intended to identify
forward-looking statements but are not the exclusive means of
identifying such statements. While RRD believes these expectations,
assumptions, estimates and projections are reasonable, such
forward-looking statements are only predictions and involve known and
unknown risks and uncertainties, many of which are beyond RRD’s control.
By their nature, forward-looking statements involve risk and uncertainty
because they relate to events and depend upon future circumstances that
may or may not occur. Actual results may differ materially from RRD’s
current expectations depending upon a number of factors affecting the
business and risks associated with the performance of the business.
These factors include such risks and uncertainties detailed in RRD’s
periodic public filings with the SEC, including but not limited to those
discussed under the “Risk Factors” section in RRD’s Form 10-K for the
fiscal year ended December 31, 2017, and other filings with the SEC and
in other investor communications of RRD from time to time. RRD does not
undertake to and specifically disclaims any obligation to publicly
release the results of any revisions to these forward-looking statements
that may be made to reflect future events or circumstances after the
date of such statement or to reflect the occurrence of anticipated or
unanticipated events.
Net (loss) income per share attributable to RRD common
stockholders:
Additional information:
(1) Exclusive of depreciation and amortization.
Assets
Liabilities
Equity
Incomefromoperations
Investmentand otherincome -net
Income tax(benefit)expense
Net lossattributableto commonstockholders
Net lossattributableto commonstockholdersper
dilutedshare
Incomefromoperations
Investmentand otherincome -net
Income tax(benefit)expense
Netearnings(loss)attributableto commonstockholders
Netearnings(loss)attributableto commonstockholdersper
dilutedshare
Restructuring and other – net: charges incurred in the
second quarter of 2018 included pre-tax charges of $5.2 million
for employee termination costs; $3.8 million of lease termination
and other restructuring costs; $1.4 million related to impairment
of buildings, machinery and equipment associated with facility
closures; and $0.6 for multi-employer pension plan withdrawal
obligations unrelated to facility closures. Charges incurred in
the second quarter of 2017 included pre-tax charges of $2.4
million for employee termination costs; $1.1 million of lease
termination and other restructuring costs; $0.6 million for
multi-employer pension plan withdrawal obligations unrelated to
facility closures; and $0.3 million net gain related to the sale
of previously impaired equipment.
Spinoff-related transaction expenses: included charges
related to consulting and other expenses for the three months
ended June 30, 2017 associated with the 2016 spinoff transactions.
Pension settlement charges: included a $1.0 million pension
settlement charge for the three months ended June 30, 2018.
Loss on debt extinguishments: related to the premiums paid
in connection with the tenders, unamortized debt issuance costs
and other expenses due to the repurchase of debentures and senior
notes and the debt-for-equity exchange of senior notes during the
three months ended June 30, 2017.
Net gain on investments: included pre-tax non-cash net
realized gain of $92.4 million ($94.4 million after-tax) for the
three months ended June 30, 2017, resulting from the
debt-for-equity exchange of a portion of the Company’s retained
shares of Donnelley Financial for certain outstanding senior notes.
Income tax adjustment: related to the recognition of a
deferred income tax benefit for the three months ended June 30,
2018.
Incomefromoperations
Investmentand otherincome -net
Income taxexpense
Net lossattributableto commonstockholders
Net lossattributableto commonstockholdersper
dilutedshare
SG&A (1)
Incomefromoperations
Investmentand otherincome -net
Income tax(benefit)expense
Netearningsattributableto commonstockholders
Netearningsattributableto commonstockholdersper
dilutedshare
Restructuring and other – net: charges incurred in the six
months ended June 30, 2018 included pre-tax charges of $8.4
million for employee termination costs; $5.4 million of lease
termination and other restructuring costs; a $4.9 million net gain
on the sale of previously impaired assets; $1.7 million related to
impairment of buildings, machinery and equipment associated with
facility closures; and $1.2 for multi-employer pension plan
withdrawal obligations unrelated to facility closures. Charges
incurred in the six months ended June 30, 2017 included pre-tax
charges of $8.8 million for employee termination costs; $2.7
million of lease termination and other restructuring costs; $1.2
million for multi-employer pension plan withdrawal obligations
unrelated to facility closures; and $0.2 million of net impairment
charges of long-lived assets.
Spinoff-related transaction expenses: included charges
related to consulting and other expenses for the six months ended
June 30, 2017 associated with the 2016 spinoff transactions.
Pension settlement charges: included a $1.3 million pension
settlement charge for the six months ended June 30, 2018.
Loss on debt extinguishments: related to the premiums paid
in connection with the tenders, unamortized debt issuance costs
and other expenses due to the repurchase of debentures and senior
notes and the debt-for-equity exchange of senior notes during the
six months ended June 30, 2017.
Net gain on investments: pre-tax non-cash net realized gain
of $92.4 million ($94.4 million after-tax) resulting from the
debt-for-equity exchange of a portion of the Company’s retained
shares of Donnelley Financial for certain outstanding senior notes
and a pre-tax gain of $1.3 million ($0.7 million after-tax)
resulting from the sale of certain of the Company’s affordable
housing investments, partially offset by a pre-tax loss of $51.6
million ($51.6 million after-tax) resulting from the sale of the
Company’s retained interest in LSC during the six months ended
June 30, 2017.
Income tax adjustment: included an adjustment to the
provisional amounts recorded at December 31, 2017 for the impact
of the Tax Cuts and Jobs Act of 2017, offset by the recognition of
a deferred income tax benefit for the six months ended June 30,
2018.
For the Three Months Ended June 30, 2018
Non-GAAP Adjustments
For the Three Months Ended June 30, 2017
Non-GAAP Adjustments
For the Six Months Ended June 30, 2018
Non-GAAP Adjustments
For the Six Months Ended June 30, 2017
Non-GAAP Adjustments
Adjustments
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