RR Donnelley Discloses Q3 2017 Results with Slight Increase in Net Sales

Dan Knotts

CHICAGO - November 1, 2017 - R.R. Donnelley & Sons Company reported financial results for the third quarter 2017. Unless otherwise noted, these results represent RRD following the Oct. 1, 2016 spinoffs of LSC Communications and Donnelley Financial Solutions which are presented as discontinued operations for periods prior to Oct. 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 Oct. 1, 2016 immediately following the spinoffs.

Key Financial Highlights Include:

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"We delivered solid results for the quarter with growth in both our net sales and non-GAAP diluted earnings per share," said Dan Knotts, RRD's president and CEO. "Through our ongoing focus on cost reduction initiatives and capital structure improvements, along with lower taxes, we were able to more than offset the negative impact of changes in foreign exchange rates and the devastating hurricanes in the South. We are now in the midst of our busiest time of the year, and we are focused on delivering a strong finish to 2017."

Third Quarter 2017 Highlights

Net sales in the quarter were $1.73 billion, up $9.3 million or 0.5% from the third quarter of 2016. On an organic basis, consolidated net sales decreased 0.4% driven by volume growth in the International and Strategic Services segments and favorable changes in fuel surcharges which were more than offset by net volume declines in the Variable Print segment, lower postage pass through sales in the Strategic Services segment and modest price erosion across all segments.

Gross profit in the third quarter of 2017 was $324.4 million or 18.7% of net sales versus $364.2 million or 21.1% of net sales in the prior year quarter. The positive impact from our cost reduction initiatives was more than offset by an OPEB curtailment gain in the prior year period and unfavorable mix, modest price pressure, start-up costs related to a new facility in Asia and higher costs of transportation as a result of the hurricanes in the current period.

Selling, general and administrative expenses (“SG&A”) of $207.7 million, or 12.0% of net sales, in the third quarter of 2017 decreased from $218.1 million, or 12.6% of net sales, in the prior year. The improvement was primarily due to higher allocated costs from the pre-spin operations in the prior year period, cost reduction initiatives and a legal settlement which were partially offset by unfavorable changes in foreign exchange rates and higher variable incentive compensation expense.

Income from operations of $35.9 million in the third quarter decreased $48.1 million from $84.0 million in the 2016 quarter. The prior year period included the OPEB curtailment gain and restructuring charges while the current period included a goodwill impairment charge in Digital and Creative Solutions, which is part of the Strategic Services segment, and restructuring charges. Non-GAAP income from operations of $69.7 million, or 4.0% of net sales, decreased $6.7 million from $76.4 million, or 4.4% of net sales, reported in the prior year period primarily due to unfavorable changes in foreign exchange rates of $7.8 million and lower gross profit, partially offset by lower SG&A and depreciation and amortization expense.

Net loss attributable to common stockholders from continuing operations of $8.0 million in the third quarter compared to net earnings of $22.0 million in the third quarter of 2016. The third quarter of 2017 included a loss on debt extinguishments primarily related to the amendment of the Company’s credit agreement and a net gain on investments resulting from the debt-for-equity exchange of the remaining portion of the Company’s retained shares of common stock of Donnelley Financial for certain of its outstanding senior notes. Non-GAAP net earnings attributable to common stockholders from continuing operations was $21.1 million, an increase of $8.3 million compared to net earnings of $12.8 million in the third quarter of 2016, primarily driven by a lower effective tax rate and lower interest expense partially offset by lower income from operations.

Third quarter 2017 diluted loss per share attributable to common stockholders from continuing operations was $0.11 compared to diluted earnings per share of $0.31from the third quarter of 2016. Non-GAAP diluted earnings per share attributable to common stockholders from continuing operations was $0.30 in 2017 compared to diluted earnings per share of $0.18 in 2016.

Key Financial Highlights by Segment Include:

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VARIABLE PRINT

Net sales decreased 2.9% from the third quarter of 2016 primarily due to volume decreases in Commercial and Digital Print and Direct Mail, partially offset by volume increases in Statement Printing and Labels.

Income from operations was down $10.8 million versus the prior year third quarter. Non-GAAP income from operations was down $8.5 million versus the third quarter of 2016 primarily due to lower volume and unfavorable mix in Commercial and Digital Print, modest price declines and higher actual costs in the current period versus allocated costs from the pre-spin operations in the prior year period which more than offset increases primarily in Statement Printing and Labels.

STRATEGIC SERVICES

Net sales in the quarter decreased 0.3% from the third quarter of 2016. Volume increases and slightly higher fuel surcharges in Logistics were more than offset by lower postage pass through sales of $19.4 million and lower volume in Sourcing.

Income from operations was down $28.1 million compared to the prior year quarter. The third quarter of 2017 included an impairment charge of $21.3 million related to goodwill in the Digital and Creative Solutions reporting unit. Non-GAAP income from operations was down $7.3 million versus the third quarter of 2016 due to higher costs of transportation partially related to the recent hurricanes, unfavorable mix and modest price declines.

INTERNATIONAL

Net sales grew 6.8% from the third quarter of 2016 primarily due to significant volume increases in Asia, partially offset by volume declines primarily in Global Turnkey Solutions and modest price erosion in Asia.

Income from operations declined $15.4 million compared to the prior year quarter. Non-GAAP income from operations decreased $13.9 million as compared to the third quarter of 2016 primarily due to lower volume in Global Turnkey Solutions, unfavorable changes in foreign exchange rates, modest price declines, cost inflation, higher actual costs in the current period versus allocated costs from the pre-spin operations in the prior year period and start-up expenses associated with the new packaging business in Asia, all of which were partially offset by higher volume in Asia.

CORPORATE

Unallocated corporate expenses were down $6.2 million versus the prior year quarter which included an OPEB curtailment gain of $19.6 million. Non-GAAP unallocated corporate expenses were down $23.0 million from the third quarter of 2016 which included higher allocated costs from the pre-spin operations. In addition, cost reduction initiatives, lower healthcare costs and a favorable legal settlement were partially offset by unfavorable changes in foreign exchange rates and lower pension and other postretirement benefits income.

Other Highlights

Cash used in operating activities in the first nine months of 2017 was $12.6 million compared to cash provided by operating activities of $7.8 million in the comparable prior year period. The 2017 amount includes $9 million of spinoff-related cash payments. Capital expenditures in the first nine months of 2017 were $77.2 million versus $147.9 million in the comparable prior year period which included $49.0 million related to discontinued operations. Prior year cash flow amounts include the activities of LSC and Donnelley Financial and have not been restated.

On September 29, 2017, the Company entered into an asset-based amended and restated revolving credit facility of up to $800 million, subject to a borrowing base.

As of September 30, 2017, cash on hand was $225.8 million and total debt outstanding was $2.25 billion, including $350.0 million drawn against the credit facility. Availability under the credit facility was $384.9 million at September 30, 2017.

2017 Full Year Guidance

The Company revised its 2017 full year guidance with the following highlights.

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Source: RR Donnelley.