RR Donnelley Reports Q2 Net Sales Decline; Gross Debt Down $134M from Previous Year

Dan Knotts

R.R. Donnelley & Sons Company (RRD) today reported financial results for the second quarter of 2019.

“We delivered solid financial results that were in line with our expectations, marking our second consecutive quarter of earnings improvement. We also successfully launched our accelerated cash repatriation strategy to further reduce debt outstanding in 2019,” said Dan Knotts, RRD’s President and Chief Executive Officer. “For the quarter, we continued to see benefits from cost reduction initiatives and exiting unprofitable business. In addition, we completed the relocation of our printing facility in Shenzhen, China, on schedule, and we achieved all critical milestones to begin producing the 2020 Census, which started in July. Building on our first half performance, ongoing strategic initiatives, and robust sales pipeline, we are confident in our ability to deliver a strong 2019 and further advance RRD as a leading provider of marketing and business communications.”

Financial highlights

The following table provides an overview of RRD’s financial performance:

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Net sales in the quarter were $1.51 billion, down $170.8 million or 10.2% from the second quarter of 2018, including a $110.9 million impact from business dispositions, primarily the July 2018 disposition of the Print Logistics business, and a $17.5 million reduction due to changes in foreign exchange rates. On an organic basis, consolidated net sales decreased 2.5% driven by lower volume in the Business Services segment, which includes reductions in Commercial Print products due to the continued exit of unprofitable business, as well as a decline in the remaining non-print logistics business, partially offset by volume growth in Packaging. The Marketing Solutions segment grew 2.6% organically driven by higher volume in the Digital Print and Fulfillment and Direct Marketing products.

Income from operations was $20.9 million in the second quarter compared to $25.5 million in the second quarter of 2018. The second quarter of 2019 included a $5.0 million increase in restructuring and other charges primarily related to employee termination costs associated with the relocation of a printing facility in China. In addition, a gain on the sale of the Company’s Research and Development business was offset by a charge related to an unfavorable ruling on a state sales tax matter.

Non-GAAP adjusted income from operations of $39.2 million, or 2.6% of net sales, increased $2.7 million from $36.5 million, or 2.2% of net sales, reported in the prior year period. Favorable changes in foreign exchange rates of approximately $11 million, productivity improvements, benefits from dispositions, and lower depreciation and amortization expense were partially offset by lower volume and inflationary cost increases.

Loss per share attributable to common stockholders was ($0.10) in the second quarter of 2019, compared to diluted loss per share of ($0.18) in the second quarter of 2018. Non-GAAP adjusted diluted loss per share attributable to common stockholders of ($0.03) in 2019 improved from ($0.09) in 2018. The improvement was primarily driven by lower interest expense and higher adjusted income from operations partially offset by higher tax expense, which included a $3.4 million charge related to withholding taxes associated with the repatriation of foreign cash to the U.S.

Other highlights and information

Cash provided by operating activities of $12.9 million in the second quarter of 2019 increased $0.6 million versus the prior year period amount. Cash used in operating activities during the six months ended June 30, 2018 was $117.1 million compared to $128.0 million in the prior year period. The year-to-date improvement is primarily related to lower working capital partially offset by higher cash taxes and restructuring payments. Capital expenditures in the six months ended June 30, 2019 were $76.4 million versus $48.0 million in the prior year period. The 2019 amount includes incremental investments from the previously announced construction of a new facility in China and the 2020 Census project.

During the second quarter of 2019, the company sold its Research and Development business for $11.7 million of cash and recognized a pre-tax gain of $6.2 million, which is reflected in other operating income. Net proceeds were used to reduce debt outstanding.

The company finalized strategies to accelerate the repatriation of cash from foreign jurisdictions to the U.S. During the six months ended June 30, 2019, the company transferred $122 million of international cash to the U.S., which was used to reduce debt outstanding. Based on current regulations and process requirements in foreign countries, the company expects to transfer between $200 and $250 million to the U.S. during 2019, including amounts transferred during the first half of the year, and further reduce debt outstanding by December 31st. As of June 30, 2019, total debt outstanding was $2.12 billion, which is down $134 million from June 30, 2018. This comparison normalizes the seasonal impact of borrowing patterns, which generally results in higher mid-year debt outstanding.

As of June 30, 2019, cash on hand was $220.5 million and availability under the credit facility was $397.2 million after reflecting outstanding borrowings of $270.0 million.

Dividend

The Board of Directors declared a quarterly cash dividend of $0.03 per common share. The dividend is payable on September 3, 2019 to stockholders of record as of the close of business on August 15, 2019.

2019 Guidance

The Company reaffirms its full year guidance as follows:

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1. Certain components of the guidance given in the table above are provided on a non-GAAP basis only, without providing a reconciliation to guidance provided on a GAAP basis. Information is presented in this manner, consistent with SEC rules, because the preparation of such a reconciliation could not be accomplished without "unreasonable efforts." The Company does not have access to certain information that would be necessary to provide such a reconciliation, including non-recurring items and other items that are not indicative of the Company's ongoing operations. Such items include, but are not limited to, restructuring charges, impairment charges, pension settlement charges, acquisition-related expenses, gains or losses on investments and business disposals, losses on debt extinguishment, OPEB curtailments and other similar gains or losses not reflective of the Company's ongoing operations. The Company does not believe that excluding such items is likely to be significant to an assessment of the Company's ongoing operations, given that such excluded items are not believed to be indicators of business performance.
2. 2019 cash flow from operations guidance includes restructuring payments related to the previously announced sale and relocation of a printing facility in Shenzhen, China and higher net tax payments primarily related to lower tax refunds relative to 2018.
3. 2019 adjusted effective tax rate - non-GAAP guidance reflects a significantly higher rate than the statutory domestic rate primarily due to continued limitations on the Company’s domestic interest expense deduction. As earnings grow and interest expense is reduced, the Company expects the effective tax rate to improve over time.
4. 2019 capital expenditures guidance assumed to be higher primarily related to investments associated with building a new facility in China in preparation for an expected sale of the existing facility for approximately $250 million, and additional investments related to the recently awarded 2020 Census contract. The Company expects its 2020 capital expenditures level to return to its previously stated range of 1.5% to 1.7% of net sales.
5. 2019 proceeds from facility sales guidance reflects one additional non-refundable deposit expected to be collected related to the planned sale of the facility in China.

Source: R.R. Donnelley & Sons

The preceding press release was provided by a company unaffiliated with Printing Impressions. The views expressed within do not directly reflect the thoughts or opinions of the staff of Printing Impressions.