R.R. Donnelley (RRD) Q2 Earnings & Revenues Decline Y/Y

R.R. Donnelley & Sons Company’s (NASDAQ:RRD) dismal performance continued in the second quarter of 2016 as both earnings and revenues registered year-over-year declines.

The company posted second-quarter non-GAAP earnings of 34 cents per share, which were lower than the year-ago tally of 41 cents. On a GAAP basis, the company’s loss came in at 7 cents as against an earnings of 21 cents reported a year ago. The company’s bottom line was hurt by foreign currency fluctuations and a higher share count.

Quarter in Detail

R.R. Donnelley’s revenues of $2.730 billion declined 0.7% year over year mainly due to volume decline at the Variable Print division, International and Publishing and Retail Services segments, which were partially offset by volume growth at the Strategic Services segment. Also, foreign currency fluctuations negatively impacted the quarter’s results.

Publishing and Retail Services revenues increased 6.8% to $621 million. After adjusting for the impact of the Courier acquisition and the negative impact of lower pass-through paper sales, organic sales recorded a 2.3% year-over-year decline.

Variable Print revenues were $883.4 million, down 3.1% year over year. On an organic basis, revenues were down 3.1% due to lower volume in commercial and digital print, forms direct mail, and labels coupled with pricing pressure.

The Strategic Services segment garnered revenues of $705.9 million, up 1.2% from the year-ago period. Organic sales increased a marginal 0.2% mainly due to strong performance at logistics.

International sales in the second quarter totaled $519.4 million, down 0.7% year over year, primarily due to unfavorable foreign exchange impact and the disposition of two entities. Organic sales (adjusting for unfavorable foreign exchange and dispositions) dropped 2.9%, primarily due to volume declines in Asia and Global Turnkey Solutions.

Non-GAAP gross margin was 22.2%, down 30 basis points (bps) from the year-ago period, mainly due to price erosion and volume declines.

Non-GAAP operating profit decreased 6.9% to $182.7 million. Also, operating margin contracted 40 bps year over year to 6.7%, mainly due to higher selling, general and administrative expenses as a percentage of revenues.

Non-GAAP net earnings for the quarter were $71.1 million or 34 cents per share, compared with $83.6 million or 41 cents a year ago.

The commercial printing, information services and logistics provider exited the quarter with $290.6 million in cash and cash equivalents, compared with $263.7 million in the previous quarter. Long-term debt (including current portion) was $3.619 billion as of Jun 30, 2016.

During the quarter, cash flow for operating activities was $92.5 million and free cash flow was $39.2 million.

Guidance

R.R. Donnelley updated its 2016 outlook. The company now expects full-year revenues at the low-end of the range of $11.3 billion–$11.5 billion (previously the company expected revenues to be in the range of $11.3–$11.5 billion). Adjusted earnings before interest, tax, depreciation and amortization (EBITDA) margin are now expected to be toward the higher end of the previously guided range of 10.4%–10.6%. Interest expense is expected within the range of $260 million– $270 million.

The company continues to expect capital expenditure in the range of $200 million to $225 million, while free cash flow will likely be in the range of $400–$500 million.

Our Take

R.R. Donnelley failed to come up with an upbeat performance in the second quarter as both earnings and revenues declined year over year. The company updated its 2016 outlook.

We expect the company’s strategic acquisitions to drive growth. New and existing clients should also boost revenues.

Nonetheless, we believe that persistent pricing pressure, volatility in raw material costs and intensifying competition will negatively impact R.R. Donnelley’s bottom line in the near term. Moreover, increasing adoption of e-book among readers is a major concern for its legacy printing business.

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