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R.R. Donnelley & Sons Co. reported fourth quarter 2013 non-GAAP earnings of 49 cents per share, comfortably beating the Zacks Consensus Estimate of 37 cents. Earnings per share were up 14.0% on a year-over-year basis, driven by higher year-over-year growth revenues.

Quarter Details

Quarterly revenues were up 3.6% year over year to $2.76 billion and comfortably beat the Zacks Consensus Estimate of $2.68 billion. The year-over-year growth can be attributed to volume growth in many offerings and increase in pass-through postage revenue. Organic sales registered growth of 2.3% in the reported quarter.

During the fourth quarter of 2013, the company changed its reportable segments to reflect changes in the reporting structure of the organization. The revised reporting structure includes four operating segments: Publishing and Retail Services, Variable Print, Strategic Services, and International, as well as unallocated Corporate expenses.

Publishing & Retail Services revenues declined 1.1% from the year-ago quarter to $746.1 million. Variable Print revenues declined 1.8% on a year over year basis to $674.4 million in the reported quarter. Strategic Services of $618.6 million registered robust growth of 19.7% on a year over basis.

International sales in the fourth quarter of 2013 were $716.2 million, up 2.1% from the year-ago quarter.

Selling, general & administrative expenses (SG&A) as a percentage of revenues increased 40 basis points (bps) from the year-ago quarter due to higher variable compensation and lower pension income.

Depreciation and amortization (D&A), on the other hand, declined 60 bps from the year-ago quarter. Operating expenses on the whole increased 2.0% on a year over year basis.

Adjusted non-GAAP operating profit increased 20 bps from the year-ago quarter to $188.7 million. Non-GAAP net earnings for the quarter were $89.8 million compared with $78.1 million in the year-ago quarter.


Balance Sheet and Cash Flow

Donnelley exited the quarter with $1.03 billion in cash and cash equivalents versus $462.8 million in the previous quarter. Long-term debt was at $3.59 billion compared with $3.24 billion in the prior quarter.

Guidance

Donnelley also provided guidance for 2014. The company expects revenues to be in the range of $11.5 billion to $11.7 billion, higher than the Zacks Consensus Estimate of $11.0 billion.
Adjusted earnings before interest, tax, depreciation and amortization (EBITDA) are expected to be in the range of 10.5% to 11.0% for 2014. D&A is expected to be in the range of $500.0 to $510.0 million, while interest expense is likely to be between $275.0 million to $285.0 million.

Capital expenditure is expected to be in the range of $225.0 million to $250.0 million and free cash flow in the range of $400 million to $500 million.

Recommendation

Donnelley reported encouraging fourth quarter results with both earnings and revenue beating the Zacks Consensus Estimate quite convincingly.

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

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

Currently, Donnelley has a Zacks Rank #3 (Hold).

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