R.R. Donnelley Reports Mixed 4Q

R.R. Donnelley & Sons Co. ( RRD - Analyst Report ) reported non-GAAP earnings of 46 cents per share in the fourth quarter 2011, which topped the Zacks Consensus Estimate of 44 cents. However, the reported earnings moved down 9.8% from the previous-year quarter and exclude restructuring and impairment charges and acquisition expenses.

Revenue

The reported revenues edged up 0.5% year over year to $2.72 billion, which missed the Zacks Consensus Estimate of $2.80 billion.

Segment wise, revenue from Product, which comprises around 87.8% of the revenues, decreased 1.13% from the previous-year quarter to $2.39 billion. Services, which comprised 12.2% of the revenues, increased 14.0% from the prior-year quarter to $333.9 million.

U.S. print and related services revenue was down 1.0% from the previous-year quarter to $2.0 billion, due to decrease in volume in books and directories and financial print along with continued pricing pressure across the segment, which offset the volume increases in logistics and office products. Including the adjustments made for the acquisitions, net sales in the segment decreased 5.1%.

International sales increased 4.9% from the previous-year quarter to $715.7 million. Including the adjustments made for the acquisitions, net sales increased 0.5%, as changes in foreign exchange rates and increased volume more than offset the impact of continued pricing pressure.

Operating Performance

Non-GAAP gross profit was down 5.3% year over year to $591.3 million. Gross margin slipped marginally to 21.7% compared with 23.1% in the year-ago quarter. This was due to pricing pressure and unfavorable product mix.

As a percentage of total revenue, selling general & administrative (SG&A) expense was 10.8% in the reported quarter versus 11.6% in the year-ago quarter. The improvement was primarily attributed to higher productivity and variable cost control.

Operating income on a non-GAAP basis was down 4.3% year over year to $166.8 million in the quarter. Operating margin decreased to 6.1% from 6.4% in the year-ago period. Margins were affected by an unfavorable product mix, pricing pressure and higher benefits related expense.

Balance Sheet

R.R. Donnelley exited the quarter with $449.7 million of cash versus $368.1 million in the previous quarter. Long-term debt was $3.42 billion, flat with the previous quarter.

Outlook

R.R. Donnelley expects fiscal 2012 non-GAAP earnings to be in the range of $1.84 and $1.92 per share, below the Zacks Consensus Estimate of $1.79. Moreover, the non-GAAP effective tax rate for 2012 is expected to be in the range of 28.0% to 32.0%

Recommendation

We remain Neutral on the company over the long term (6-12 months) despite its increasing volumes and new customer wins. We believe that strong alliances and customer wins including those of AT&T Inc. ( T - Analyst Report ) and Verizon Communications Inc. ( VZ - Analyst Report ) and more recently Office Depot Inc. ( ODP - Analyst Report ) will create value for the company over the long term.

However, we expect Donnelley to remain under pressure due to weak macro-economic conditions prevailing in most of its current as well as prospective markets.

Moreover, higher pension expenses, continuing pricing pressure, volatility in raw material prices and a highly leveraged balance sheet are significant headwinds going forward. Currently, Donnelley has a Zacks #4 Rank, which implies a Sell rating in the short term (1-3 months).