R.R. Donnelley Reports Q1 Sales Decline, Partly Due to COVID-19 Impact on China Operations

R.R. Donnelley & Sons company reported financial results for the first quarter of 2020.

First quarter key messages

• GAAP net sales decreased 7.4%; non-GAAP organic net sales decreased 1.3%, which included a 2.9 percentage point reduction due to the COVID-19 impact in China
• GAAP income from operations down $14.5 million due to a non-cash goodwill impairment charge of $20.6 million; non-GAAP adjusted income from operations increased $18.7 million while adjusted operating margin improved 150 basis points
• GAAP loss per share of $0.18 included a first quarter goodwill impairment charge of $0.29; non-GAAP adjusted earnings per share of $0.33 increased $0.39 from prior year
• Continued strategic focus to optimize business portfolio – completed sale of Logistics Courier business and exited operations in Chile
• Operating cash flow improved $50.4 million from prior year; capital expenditures down $19.7 million
• Proactively increased borrowings on revolving credit facility to preserve financial flexibility; cash on hand was $450.7 million

Daniel Knotts

“2020 started very strong with our best first quarter adjusted income from operations and adjusted earnings per share since the spin in 2016,” said Dan Knotts, RRD president and chief executive officer. “During the quarter, we continued to aggressively drive our strategic priorities to improve our core operating performance and optimize our business portfolio, and the impact of those actions is reflected in our results. We also improved our debt profile by executing a series of transactions to extend our mid-term debt maturities and reduce our near-term debt maturities amidst a challenging capital markets environment. Looking ahead, we remain steadfast in our commitment to protect the health and safety of our teams around the world as we navigate these uncertain times. We are highly focused on the execution of our strategic initiatives and are taking decisive actions to mitigate the challenges created by this global pandemic.”

Financial highlights

The following tables provide an overview of RRD’s financial performance:

Click to expand.

Net sales in the quarter were $1.41 billion, down $112.4 million or 7.4% from the first quarter of 2019. The decrease includes an $87.7 million impact from dispositions in the Business Services segment, primarily the GDS business, and a $6.6 million reduction due to changes in foreign exchange rates.

On an organic basis, consolidated net sales declined 1.3%. The decline included an estimated reduction of approximately 2.9 percentage points due to the pandemic’s impact on sales in China where all operations were closed for approximately one month in the quarter and then gradually increased production. The Business Services segment was down 12.2% on a GAAP basis and 4.9% organically due primarily to declines in Commercial Print and Packaging products, both of which were negatively impacted by the China business disruption. The negative impact of COVID-19 was partially offset by growth in the Marketing Solutions segment, which grew 13.4% on a GAAP and non-GAAP organic basis from the first quarter of 2019 driven primarily by higher volumes in Direct Marketing which included sales from the 2020 Census project.

Income from operations was $8.8 million in the first quarter compared to income from operations of $23.3 million in the first quarter of 2019. The first quarter of 2020 included a non-cash charge of $20.6 million to recognize the impairment of goodwill in the logistics reporting unit. Although the Logistics reporting unit reported increases in both net sales and income from operations in the first quarter of 2020, future projections were reduced to reflect lower demand in the near term due to the COVID-19 pandemic. In addition, results in the first quarter of 2020 also included net restructuring and other charges of $11.3 million, a loss of $8.3 million from the disposition of the Logistics Courier business and ongoing investigation costs. Prior year GAAP results included net restructuring and other charges of $17.1 million and a gain on bankruptcy of a Brazil subsidiary of $4.6 million.

Non-GAAP adjusted income from operations of $55.1 million increased $18.7 million from the prior year period driven by a $21.4 million reduction in adjusted SG&A expense. First quarter 2020 adjusted income from operations benefited from productivity improvements, including those from closing its operations in Chile on February 28th, as well as volume from the 2020 Census project and lower incentive compensation expense. The current quarter’s results also reflected lower volume in China due to the impact of COVID-19 as well as unfavorable price.

Loss per share attributable to common stockholders was $0.18 in the first quarter of 2020 compared to a loss per share of $0.12 in the first quarter of 2019. The first quarter of 2020 included a $0.29 loss per share for the non-deductible goodwill impairment charge and a $0.10 loss per share on the sale of the Logistics Courier business. The first quarter of 2019 included a $0.07 gain on the bankruptcy liquidation of RRD Brazil.

Non-GAAP adjusted earnings per share attributable to common stockholders of $0.33 in the first quarter of 2020 increased from a loss per share of $0.06 in the first quarter of 2019 primarily driven by higher adjusted income from operations, lower interest expense and a significantly lower effective tax rate. The effective tax rate in 2020 includes a benefit of $0.10 per share due to a change in the federal tax law as part of the CARES Act, which increases the deductibility of interest expense in 2019 and 2020.

Other highlights and information

Cash used in operating activities of $79.6 million in the first quarter of 2020 improved $50.4 million versus the prior year period amount. The significant improvement is primarily due to improvements in working capital and lower tax and interest payments versus the prior year. Capital expenditures in the first quarter of 2020 were $17.7 million versus $37.4 million in the prior year period.

As of March 31, 2020, cash on hand was $450.7 million and total debt outstanding was $2.17 billion. Availability under the credit facility was $192.9 million at March 31, 2020. During the first quarter, RRD increased its cash balances through borrowings under the revolving credit facility as a proactive measure in response to COVID-19 and entered into a series of debt transactions to preserve financial flexibility.

RRD previously announced in March a series of privately negotiated transactions with its largest senior note holder, which proactively addressed a significant portion of its mid-term senior note maturities. As part of these transactions, the company repurchased in March nearly $27 million of senior notes due in 2022 and 2024 at a discount using a draw from its revolving credit facility. In addition, the company agreed to exchange $277 million of senior notes due in 2023, 2024 and 2029 (collectively “Old Senior Notes”) for $297 million of new 8.5% senior unsecured notes due in April 2029 (“New Senior Notes”). As of March 31, 2020, $50 million of the Old Senior Notes had been exchanged for $54 million of New Senior Notes. The balance of the exchange was completed in early April.

RRD also opportunistically repurchased $51 million of senior notes and debentures due in 2020 and 2021 to reduce future interest and principal payments. As of March 31, 2020, $31 million of the repurchases were completed and the remaining $20 million was settled in early April. The 2020 maturities have now been reduced to $65 million and the 2021 maturities have been reduced to $178 million.

On March 2, 2020, the company sold its Logistics Courier business within the Business Services segment for net proceeds of $9.7 million. The disposition of this business resulted in a loss of $8.3 million during the three months ended March 31, 2020, which was recorded under other operating expense (income) in the Condensed Consolidated Statements of Operations.

Update on response to COVID-19 pandemic

RRD previously announced its actions in response to the COVID-19 pandemic on April 6, 2020. Since that time, the company continues to execute against its business continuity plans while meeting the needs of its 50,000 global clients. Its printing and distribution operations continue to be classified as essential and remain open with the exception of certain small facilities in the Caribbean.

Protecting the health of RRD employees continues to be a top focus for the company. The company continues to monitor recommendations and adhere to best practices published by the World Health Organization and the Centers for Disease Control. In addition to the actions previously announced, the company has further implemented procedures to screen employees as they enter the workplace. In addition, employees are being supplied with a combination of disposable masks, cloth masks, and face shields, some of which are being manufactured at RRD facilities.

RRD continues to aggressively accelerate both permanent and temporary cost reduction actions to lessen the impact from lower sales volume as a result of the COVID-19 pandemic. Recent actions include implementing an employee furlough program with RRD paid medical benefits, temporarily closing production facilities most heavily impacted by client volume decreases while shifting production to other facilities in order to lower costs while continuing to meet client requirements, suspending all 2020 employee merit increases, implementing a hiring freeze, restricting domestic and international travel, delaying capital projects and reducing consulting and other discretionary spend. Also, the board of directors suspended the quarterly dividend effective April 6, 2020.

In addition, the company is also receiving pandemic-related orders in many parts of its business, including special notification letters, government mailings, product packaging, labels, signage, mail-in ballots, test kit assembly, emergency kits, digital creative and COVID-19 specific consumer research and analytics.

The extent to which the pandemic will ultimately impact the company’s business, results of operations, financial position and cash flows cannot be fully predicted or estimated at this time and will depend on future developments which are highly uncertain, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures, among other future developments. In the nearer term, the company expects second quarter sales to be $300 to $375 million lower than the prior year which includes an approximate $94 million reduction due to recent business dispositions.

In March of 2020, the company increased its borrowings under the revolving credit facility as a proactive measure to preserve financial flexibility. As of March 31, the company had $643.6 million of total liquidity consisting of cash on hand and availability under the revolving credit facility which the company currently believes is sufficient to repay its 2020 and 2021 maturities. As of April 24, total liquidity was approximately $550 million after several scheduled interest payments and the remaining debt repurchase in early April were funded, in addition to normal working capital needs. Currently, the company is not subject to maintenance financial covenants in its debt agreements.

Source: RR Donnelley