R.R. Donnelley & Sons Company’s RRD dismal performance continued with the second-quarter 2015 results declining on a year-over-year basis.
R.R. Donnelley’s second-quarter non-GAAP earnings of 41 cents per share were a penny lower than the year-ago quarter figure. On a GAAP basis, the company’s earnings were 21 cents per share compared with 32 cents a year ago.
The company’s bottom line was negatively impacted by pricing pressure across all the segments, volume decline at Publishing and Retail Services and Variable Print segments, and higher share count.
Quarter in Detail
R.R. Donnelley’s revenues of $2.748 billion declined 5.3% year over year. Additionally, on an organic basis (i.e. adjusted for the impact of acquisitions, changes in foreign exchange rates, dispositions and changes in pass-through paper), revenues decreased 2.1%.
The year-over-year decline in top line was mainly due to persistent price erosion at every segment and volume decline at Publishing and Retail Services and Variable Print divisions, partially offset by volume improvement in Strategic Services.
Publishing and Retail Services revenues declined 7.1% from the year-ago quarter to $581.7 million. After adjusting for 280 basis points (bps) related to the negative impact of lower pass-through paper sales and the Courier acquisition, organic sales declined 6% year over year. The company also saw volume declines in all the reporting units under this segment. Pricing pressure in magazines, catalogs and retail inserts were also responsible for the revenue decline.
Variable Print revenues were $911.3 million, down 4.8% from the year-ago quarter. On an organic basis, revenues were down 4.6% year over year due to lower volume and price erosion across the segment.
The Strategic Services segment garnered revenues of $697.6 million, up 1.5% from the year-ago quarter. Quarterly organic growth was 2.1% backed by improvement in Logistics and Sourcing business.
International sales in the second quarter totaled $557.5 million, down 11.7% year over year, primarily due to unfavorable foreign exchange impact and dispositions of operations in Argentina and Venezuela. However, organic net sales (i.e. adjusting for the unfavorable Fx impact and dispositions completed during 2014) increased 1.4% in the quarter.
Non-GAAP gross margin was 22.5%, down 40 bps from the year-ago period, mainly due to price erosion, higher health care costs and volume decline at Publishing and Retail Services segment, partially offset by the ongoing cost-control initiatives and favorable business mix.
Non-GAAP operating profit decreased 3.6% from the year-ago quarter to $196.4 million. However, operating margin improved 13 bps year over year to 7.1%, mainly led by lower operating expenses as a percentage of sales.
Non-GAAP net earnings for the quarter were $83.6 million or 41 cents per share compared with $84.4 million or 42 cents reported in the year-ago quarter.
The commercial printing, information services and logistics provider exited the quarter with $295.4 million in cash and cash equivalents versus $268.7 million in the previous quarter. Long-term debt (including current portion) came in at $3.747 billion. During the quarter, the company generated $205.3 million of cash from operating activities and $152.7 million free cash flow.
Guidance
Back-to-back dismal quarterly performance prompted R.R. Donnelley to lower the full-year revenue guidance. The company now expects revenues in the range of $11.4–$11.6 billion (mid-point $11.5 billion), down from $11.7–$11.9 billion (mid-point $11.8 billion).
However, adjusted earnings before interest, tax, depreciation and amortization (EBITDA) margins are expected in the range of 10.5–10.7% for 2015, up from 10.3–10.5%. Interest expense is likely to come within $270.0–$275.0 million.
Capital expenditure is projected in the range of $225 million to $250 million and free cash flow within $400–$500 million.
Our Take
R.R. Donnelley once again reported dismal results in the second quarter with both the top line and the bottom line both declining year over year. Moreover, the company’s lowered revenue guidance for 2015 depicts a gloomy picture ahead.
Nonetheless, we expect the company’s strategic acquisitions to drive growth, going forward. At the same time, client wins and existing clients such as Williams-Sonoma WSM and Office Depot Inc. ODP will boost the company’s revenues.
Nonetheless, we expect persistent pricing pressure, volatility in raw material costs and intensifying competition to affect 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.
A stock in the broader technology sector that is worth a look is Ambarella Inc. AMBA carrying a Zacks Rank #2 (Buy).
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