R.R. Donnelley & Sons Co. (RRD) reported fourth-quarter 2014 non-GAAP earnings of 52 cents per share which were up 6.1% on a year-over-year basis.
Quarter Details
Revenues grew 11.4% year over year to $3.07 billion, primarily boosted by the acquisitions of Consolidated Graphics and Esselte operations. Sales, on an organic basis, edged up 0.5% from the year-ago quarter.
Publishing and Retail Services revenues declined 8.5% from the year-ago quarter to $682.7 million. Of the total decline, 70 basis points (bps) pertained to the negative impact of lower pass-through paper sales, which lowered organic sales by 7.8% year over year. The company also saw volume declines in books and directories. Pricing pressure in magazines, catalogs and retail inserts further added to the fall in revenues.
Variable Print revenues were $1.03 billion, up 52.8% from the year-ago quarter. This year-over-year increase was primarily driven by the Consolidated Graphics and Esselte acquisitions. On an organic basis, revenues were up 1.2% year over year on the back of higher volumes.
The Strategic Services segment registered revenues of $669.6 million, up 8.2% from the year-ago quarter. Quarterly organic growth was 8.5% due to improvement in Logistics (up 9.5% year over year) and sourcing (up 34.3% year over year). Increase in sourcing business was largely attributable to new customer wins and better-than-expected growth in the financial print (up 4.1%).
International sales in the second quarter totaled $686.7 million, down 4.1% from the year-ago quarter, primarily due to unfavorable foreign exchange impact. However, organic net sales inched up 1.3% in the quarter owing to timing shift of a major customer project.
Non-GAAP Gross margin was 21.8%, down 16 bps from the year-ago quarter, mainly due to price erosion, and higher wages and other related costs.
Operating expenses increased to $457.7 million from $414.9 million in the year-ago quarter. This year-over-year increase was mainly on account of a rise in selling, general & administrative expenses. Operating expense, as a percentage of revenues, declined 15 bps to 14.9%, backed by a favorable business mix.
Non-GAAP operating profit increased 11.2% from the year-ago quarter to $209.9 million. However, operating margin remained flat on a year-over-year basis at 6.8%.
Non-GAAP net earnings for the quarter were $105.8 million or 52 cents per share compared with $89.8 million or 49 cents per share reported in the year-ago quarter.
R.R. Donnelley exited the quarter with $527.9 million in cash and cash equivalents versus $269.2 million in the previous quarter. Long-term debt (including current portion) stood at $3.63 billion. Cash flow from operating activities came in at $468.8 million. Free cash flow for the company was $409.7 million.
Guidance
R.R. Donnelley provided its fiscal 2015 guidance. The company expects revenues in the range of $11.7–$11.9 billion (mid-point $11.8 billion), higher than the actual revenue figure of $11.6 billion reported in fiscal 2014.
Adjusted earnings before interest, tax, depreciation and amortization (EBITDA) margins are expected in the range of 10.3–5% for fiscal 2015. Interest expense is likely to come within $265.0–$275.0 million.
Capital expenditure is predicted in the range of $225 to $250 million and free cash flow in the range of $400–$500 million.
Recommendation
R.R. Donnelley reported encouraging fourth-quarter results. The company’s strategic acquisitions positively impacted its top-line performance. At the same time, new client wins such as ZAGG Inc (ZAGG) and existing clients such as Williams-Sonoma (WSM) and Office Depot Inc. (ODP) help the company generate incremental revenues.
Nonetheless, we expect R.R. Donnelley to remain under pressure in the near term due to continuing pricing pressure, volatility in raw material prices and increasing market competition. Moreover, an increasing adoption of the e-book among readers remains a major concern for its legacy printing business.
Currently, Donnelley has a Zacks Rank #3 (Hold).
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