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R.R. Donnelley & Sons Co. reported third quarter 2013 non-GAAP earnings of 39 cents per share, beating the Zacks Consensus Estimate by a couple of cents. However, earnings per share were down on a year over year basis.

Quarter Details

Quarterly revenues were up 4.2% year over year to $1.91 billion, but missed the Zacks Consensus Estimate by $2.54 billion. The year-over-year growth can be attributed to volume growth in many offerings, the shift in timing of a project in Latin America as well as a rise in pass-through postage revenues.

U.S. Print and related services revenues moved up 3.1% from the year-ago quarter to $1.91 billion, primarily driven by higher revenues from 2012 acquisitions. On an organic basis, the U.S. segment posted growth of 0.6% as volume growth in most offerings more than offset price erosion.

Donnelley’s logistics business recorded another quarter of substantial growth, driven by higher volume in all its offerings, which includes pass-through postage volumes that resulted from the Presort Solutions acquisition in late 2012. On an organic basis, logistics witnessed 14% growth, which was mainly influenced by increased volumes in nearly all of its product offerings.

International sales in the third quarter of 2013 were $704.9 million, up 7.6% from the year-ago quarter. Organic net sales grew 7.0% with 280 basis points (bps) attributable to a timing shift of a major customer project in Latin America, Other than business process outsourcing, all other offerings in the International segment realized volume growth in the quarter.

Selling, general & administrative expenses as a percentage of revenues increased 110 bps from the year-ago quarter, which was attributed to higher variable compensation and lower pension income.

Adjusted non-GAAP operating profit was $173.8 million compared to an operating loss of $4.75 billion reported in the year ago quarter. Non-GAAP net earnings for the quarter were $71.4 million or 39 cents per share.

Balance Sheet and Cash Flow

Donnelley exited the quarter with $462.8 million in cash versus $354.4 million in the previous quarter. Long-term debt was at $3.24 billion, remaining flat sequentially.

Free cash flow in the quarter was $193.9 million, a solid increase from $107.3 million in the previous quarter, driven by lower pension and other post retirement, post tax plan contributions.

Guidance

Donnelley provided its fiscal 2013 guidance. The company expects revenues to be in the range of $10.35 billion to $10.45 billion. Adjusted earnings before interest, tax, depreciation and amortization (EBITDA) are expected to be in the range of 11.0% to 11.2% for fiscal 2013. Depreciation and amortization is expected to be in the range of $435.0 to $440.0 million, while interest expense is likely to be $260.0 million.

Capital expenditure is expected to be in the range of $200 million to $225 million and free cash flow in the range of $400 million to $500 million.

Recommendation

Donnelley reported mixed third quarter results with earnings beating the Zacks Consensus Estimate, while revenues falling substantially short.

Although, Donnelley continually focuses on acquisitions and wins contracts from various companies such as Williams-Sonoma (WSM - Snapshot Report) and Office Depot Inc. (ODP - Analyst Report), the deteriorating macroeconomic conditions continue to dampen its business prospects.

We expect Donnelley to remain under pressure in the near term due to continuing pricing pressure, volatility in raw material prices, and increasing competition. Moreover the increasing adoption of the e-book reader from the likes of Amazon (AMZN - Analyst Report) remains a major concern for its legacy printing business.

Currently, Donnelley has a Zacks Rank #5 (Strong Sell).

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