A leading provider of integrated communications and printing solutions, R.R. Donnelley & Sons Co. (RRD) reported earnings per share (EPS) of 33 cents in the first quarter of 2011, which missed the Zacks Consensus Estimate by 3 cents.
The company failed to beat the Zacks Consensus Estimate due to higher costs related to pensions and other benefits in the quarter.
Operating Performance
EPS on a non-GAAP basis was flat on a year-over-year basis and excludes restructuring and impairment charges of 17 cents.
Net income came in at $68.6 million, slightly down from $69.5 million in the prior- year quarter. Net income margin declined 20 basis points (bps) to 2.7% in the quarter, primarily due to higher interest expense (up 4.0% year over year).
Gross margin increased to 24.3% in the quarter from 23.7% in the year-ago quarter attributed to the acquisition of Bowne, higher recovery on print-related by-products, higher volume and productivity improvements, partially offset by continued pricing pressure.
As a percentage of total revenue, SG&A expense was 12.7% in the reported quarter versus 11.3% in the year-ago quarter, primarily due to the acquisition of Bowne and higher pension and other benefits related expenses.
Operating income on a non-GAAP basis declined 1.7% year over year to $160.6 million in the quarter. As a result, operating margin decreased to 6.2% from 6.8% reported in the year-ago period. The decline was primarily credited to higher unallocated corporate costs for pension and other benefits related expenses.
Segment wise, U.S. Print and Related Services operating margin was 9.3% compared with 9.2% reported in the year-earlier quarter, attributable to productivity initiatives and higher recovery on print-related by-products, which more than offset the impact of continued price erosion.
International operating margin was 8.3% in the quarter versus 7.5% in the year-ago quarter due to increased volumes, partially offset by continued price erosion.
Revenue
Revenues increased 7.0% year over year to $2.58 billion but missed the Zacks Consensus Estimate of $2.63 billion. The year-over-year growth was driven by increased sales related to the acquisition of Bowne and favorable foreign exchange impact of $15.4 million.
However, excluding contribution from the acquisition, revenue inched down 0.4%, reflecting lower non-recurring revenue related to the U.S. Census project, the majority of which was recognized in the first quarter of 2010, and continued pricing pressure, partially offset by higher volume growth.
Net revenues comprise U.S. Print and Related Services revenues (75.1% of total sales), which increased 5.7% year over year to $1.94 billion due to the acquisition of Bowne and volume increase in logistics and financial print, partially offset by price declines across most products and services, coupled with the absence of non-recurring revenue from the U.S. Census in 2010. Excluding the contribution from Bowne, revenue declined 1.9% year over year.
International sales (24.9% of total sales) increased 11.0% to $642.4 million. The year- over-year growth was driven by increased volume, primarily in Asia, Europe and Latin America and the acquisition of Bowne, partially offset by continued pricing pressure. Excluding the contribution from Bowne, revenue grew 4.5% year over year.
Balance Sheet
R.R. Donnelley exited the quarter with $399.3 million of cash versus $519.1 million in the previous quarter. Long-term debt was $3.24 billion at quarter end compared with $3.40 billion at the end of the previous quarter.
R.R. Donnelley’s board of directors approved a new share buyback authorization worth $1 billion of the company's common stock through December 31, 2012.
R. R. Donnelley’s board of directors terminated the existing authorization to repurchase up to 10 million shares of the company's common stock. The company had roughly 207.5 million shares of its common stock outstanding as of April 29, 2011.
Recommendation
Management did not provide any guidance. The Zacks Consensus Estimate for earnings per share is currently pegged at 49 cents for the second quarter of 2011.
Donnelley is witnessing stabilization in demand, increase in volumes and new customer wins. We believe that strong alliances and customer wins including AT&T (T) and Verizon Wireless (VZ) will create value for the company over the long term. We also remain positive about the Journalism Online LLC acquisition.
However, higher pension expenses, continuing pricing pressure and a highly leveraged balance sheet are expected to create significant headwinds going forward.
We maintain our Neutral rating on a long-term basis (6-12 months). Currently, R.R. Donnelley has a Zacks #2 Rank, which implies a Buy rating on a short-term basis (1-3 months).
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