RR Donnelley Reports Financial Performance for Q1 2017
CHICAGO — May 3, 2017 — RR Donnelley & Sons Company has reported financial results for the first quarter 2017. Unless otherwise noted, the results represent RRD following the October 1, 2016 spinoffs of LSC Communications and Donnelley Financial Solutions which are presented as discontinued operations for periods prior to October 1, 2016. Further, all references to the number of shares and per share amounts have been retroactively adjusted to give effect to the one-for-three reverse stock split which took place October 1, 2016 immediately following the spinoffs.
Key financial highlights include:
“Our first quarter financial performance represented a solid start to the year as we grew both our net sales and non-GAAP income from operations for the third consecutive quarter,” said Dan Knotts, RRD’s President and Chief Executive Officer. “In addition, we exceeded our expectations for operating cash flow in the quarter from achieving planned improvements in working capital initiatives earlier than expected, and we reduced our debt outstanding during the quarter. With the spinoffs behind us, we are focused on growing our business, and I am pleased to report that we remain on track to deliver against our previous net sales and income from operations guidance for 2017, and are raising our full year non-GAAP diluted earnings per share and operating cash flow guidance due to lower expected taxes.”
First Quarter 2017 Highlights
Net sales in the quarter were $1.68 billion, up $30.7 million or 1.9% from the first quarter of 2016. This increase was primarily due to $38.7 million in net sales previously recognized by reporting units that are now part of LSC and Donnelley Financial and $13.8 million from the 2016 acquisition of Precision Dialogue, partially offset by a $9.3 million unfavorable impact from changes in foreign exchange rates and a $2.3 million reduction related to dispositions completed in 2016. Excluding the impact of these items, consolidated net organic sales declined 0.7%. Net volume growth in the Strategic Services and International segments and favorable changes in fuel surcharges were more than offset by lower postage pass through sales in the Strategic Services segment, modest price erosion across all segments and net volume declines in the Variable Print segment.
Gross profit in the first quarter of 2017 was $327.8 million or 19.6% of net sales versus $332.5 million or 20.2% of net sales in the prior year quarter. Continued cost reductions were more than offset by modest price pressure in most reporting units and unfavorable mix.
Selling, general and administrative expenses (“SG&A”) of $222.7 million, or 13.3% of net sales, in the first quarter of 2017 decreased from $229.3 million, or 13.9% of net sales, in the prior year. The current period included benefits from cost reduction initiatives while the prior year period included higher legal expenses and allocated costs from the pre-spin entity. Partially offsetting these items were higher variable compensation expense in all segments and lower pension and other postretirement benefits income in the current year.
Income from operations of $47.4 million in the first quarter decreased by $10.2 million from $57.6 million reported in the 2016 quarter. A $12.3 million gain from the sale of two businesses in the first quarter of 2016 and higher restructuring charges in 2017 contributed to the decrease. Non-GAAP income from operations of $58.6 million, or 3.5% of net sales, increased $7.4 million from $51.2 million, or 3.1% of net sales, reported in the prior year period as lower SG&A and depreciation and amortization expense more than offset lower gross profit.
Net loss attributable to common stockholders from continuing operations was $50.1 million in the first quarter compared to net earnings of $3.6 million in the first quarter of 2016. The 2017 results included a loss of $51.6 million related to the sale of the Company’s equity interest in LSC. In addition, the 2017 effective tax rate was significantly lower than 2016 primarily due to a valuation allowance recorded in conjunction with the disposition of the LSC stock. Non-GAAP net earnings attributable to common stockholders from continuing operations was $10.0 million, an increase of $11.1 million compared to a net loss of $1.1 million in the first quarter of 2016, primarily driven by higher income from operations and a lower effective tax rate primarily due to a favorable tax rate change obtained in Asia.
First quarter 2017 diluted loss per share attributable to common stockholders from continuing operations was $0.71 compared to diluted earnings per share of $0.05 from the first quarter of 2016. Non-GAAP diluted earnings per share attributable to common stockholders from continuing operations increased $0.16 to $0.14 in 2017 from a diluted loss per share of $0.02 in 2016.
Key financial highlights by segment include:
Net sales decreased 0.4% from the first quarter of 2016 as net sales from the digital print and inserting operations of Precision Dialogue and volume increases in the Commercial and Digital Print reporting unit were more than offset by volume declines in the segment’s other reporting units and modest price erosion throughout the segment.
Income from operations was down $10.0 million versus the prior year first quarter. Non-GAAP income from operations was down $10.3 million versus the first quarter of 2016 primarily due to modest price declines, higher actual costs in the current period versus allocated costs from the pre-spin entity in the prior year period and unfavorable mix.
Net sales in the quarter increased 10.4% from the first quarter of 2016. Net sales in 2017 included $35.9 million related to sales previously recognized by reporting units that are now part of LSC and Donnelley Financial, volume increases in the Sourcing and Logistics reporting units, an increase in fuel surcharges of $9.1 million and net sales from Precision Dialogue’s data analytics services offering. Partially offsetting these increases were lower postage pass through sales of $25.0 million, volume declines within Digital and Creative Solutions and modest price declines.
Income from operations was up $0.7 million compared to the prior year quarter. Non-GAAP income from operations was up $2.3 million versus the first quarter of 2016 as the impact of higher net sales and productivity improvements more than offset modest price declines.
Net sales declined 1.3% from the first quarter of 2016 primarily due to significant volume increases in the Asia reporting unit which were more than offset by volume declines in the Global Turnkey Solutions, Canada and Business Process Outsourcing reporting units, an unfavorable impact of changes in foreign exchange rates and modest price pressure.
Income from operations declined $20.1 million compared to the prior year quarter which included a gain of $12.3 million on the disposition of two businesses. Non-GAAP income from operations decreased $5.2 million as compared to the first quarter of 2016 primarily due to unfavorable mix and higher actual costs in the current period versus allocated costs from the pre-spin entity in the prior year period which more than offset lower depreciation and amortization expense.
Unallocated corporate expenses were down $19.2 million versus the prior year quarter. Non-GAAP unallocated corporate expenses were down $20.6 million from the first quarter of 2016. The prior year period included higher allocated costs from the pre-spin entity and an $8.0 million legal settlement. Benefits in the current year from cost reduction initiatives were partially offset by lower pension and other postretirement benefits income.
Cash used in operations in the first quarter was $18.6 million compared to $192.8 million in the prior year quarter. Capital expenditures in the first quarter were $26.1 million versus $48.1 million in the prior year quarter which included $17.7 million related to discontinued operations. Prior year cash flow amounts include the activities of LSC and Donnelley Financial and have not been restated.
As of March 31, 2017, cash on hand was $244.3 million and total debt outstanding was $2.25 billion, including $40.0 million drawn against the credit facility. Availability under the credit facility was $458.2 million at March 31, 2017.
During March 2017, the Company completed the disposition of its equity interest in LSC and used the net proceeds of $121.4 million to pay down borrowings under the credit facility. As previously announced, the Company plans to dispose of its 19.25% equity interest in Donnelley Financial and use the net proceeds to reduce debt during 2017.
2017 Full Year Guidance