Donnelley's Beat, With an Acquisition Kicker

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Includes: BNE, RRD
by: Zacks Investment Research

R.R. Donnelley & Sons Company (NASDAQ:RRD), a leading provider of integrated communications and printing solutions, reported fourth quarter 2009 results that beat the Zacks Consensus Estimate by 3 cents (see transcript here upon availability).

The challenging economic environment impacted RRD’s end-market demand and forced the company to lower prices in fiscal 2009. However, the company now expects demand to stabilize and even strengthen in future quarters. As a result, the company expects revenue growth in fiscal 2010.

Earnings

The company reported non-GAAP net income from continuing operations of $95.4 million, or 46 cents per share in the fourth quarter of 2009. This surpassed the Zacks Consensus Estimate of 43 cents, but fell from the prior-year quarter. The company had reported net income of $129.3 million or 63 cents per share in the fourth quarter of 2008.

Earnings partially benefited from the lower effective tax rate of 21.1% in the fourth quarter of 2009, which compares to 30.8% in the year-ago quarter, primarily due to a change in the mix of earnings across tax jurisdictions.

Net earnings included pre-tax charges for restructuring ($17.5 million) and impairments ($131.1 million) totaling $148.6 million in the fourth quarter of 2009. Notably, all of the restructuring and impairment charges in the quarter were related to the reorganization of certain operations and the exiting of certain business activities.

Revenue

Net revenue for the reported quarter declined 7.6% year over year to $2.58 billion, compared to $2.80 billion reported in the prior-year quarter. Revenue includes a 1.7% positive impact from changes in foreign exchange rates. Revenue fell due to a decline in volumes and continued pricing pressures across most of its products and services. However, on a sequential basis, revenue increased, validating the recovery in end-market demand.

Revenue by Segment

Net revenue comprises US Print and Related Services revenue, which decreased 10.9% to $1.92 billion due to volume and price declines across most products and services. The segment’s operating income was negatively impacted by higher incentive compensation expense and price and volume declines, partially offset by the benefits of continued productivity enhancement efforts.

As a result, non-GAAP operating margin decreased to 9.0% in the fourth quarter of 2009 from 11.7% in the fourth quarter of 2008.

International revenue increased 3.4% to $659.5 million from the fourth quarter of 2008. International revenues include a 7.2% negative impact from changes in foreign exchange rates, which was partially offset by volume declines in business process outsourcing and European units and pricing pressure in Europe.

Non-GAAP operating margin in the segment decreased to 6.2% from 7.0% in the year-ago period, mainly due to the impact of price and volume declines, as well as higher incentive compensation expense, partially offset by the benefits of continued productivity efforts and a lower bad debt provision.

Margins

Gross margin decreased to 23.3% in the quarter from 24.0% in the fourth quarter of 2008 due to volume and price declines and higher variable compensation expense, partially offset by continued productivity efforts and a lower LIFO inventory provision.

SG&A expense increased to 10.9% of total revenue in the quarter from 9.7% in the year-ago period due to lower revenue and higher variable compensation expense, partially offset by a lower bad debt provision. As a result, operating margin decreased to 6.9% from 8.8% in the fourth quarter of 2008.

Operating Performance

The company exited the quarter with $499.2 million in cash. Year-to-date operating cash flow of $1.43 billion increased by $407.8 million from 2008. In the current quarter, RRD generated $327 million in cash from operations. The company said that it had reduced its debt by $804.4 million over the past twelve months.

Acquisition of Bowne & Co.

R.R. Donnelley also announced its plans to acquire Bowne & Co., Inc. (BNE), a provider of shareholder and marketing communications services for approximately $481 million in cash, or $11.50 per share. This represents a 65% premium to Bowne’s closing price of $6.97 on February 23.

The agreement has been approved by the Boards of Directors of both companies. The acquisition is expected to close in the second half of fiscal 2010. The acquisition is expected to be accretive to R.R. Donnelley's earnings in the first full year after the closing of the transaction.

Headquartered in New York, Bowne has operations in North America, Latin America, Europe and Asia. The company generated $675 million in revenues during 2009 and offers digital one-to-one printing services for healthcare, transactional communications, financial services, marketing communications and other applications.

The acquisition of Bowne will expand and enhance R.R. Donnelley’s offering to its current customers, while also creating an opportunity to provide its products to Bowne’s clients. We remain positive on the company’s acquisition of Bowne.

Disclosure: No positions

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