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Mixed 3Q for Donnelley

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R.R. Donnelley & Sons Co. reported third quarter 2012 non-GAAP earnings of 51 cents per share, which comfortably exceeded the Zacks Consensus Estimate of 45 cents. However, earnings remained flat on a year-over-year basis.

Quarter Details

Revenue declined 6.5% year over year to $2.51 billion and fell shy of the Zacks Consensus Estimate of $2.56 billion. The year-over-year decline was primarily due to unfavorable foreign exchange, declining prices and adverse impact of lower pass-through paper sales.

Moreover, the decline in total revenue was led by an 8.2% year-on-year fall in the Product revenue to $2.17 billion, partially offset by a 6.0% year-over-year increase in Services revenue to $337.6 million.

U.S. Print and Related Services revenue was down 6.4% from the previous-year quarter to $1.85 billion, due to significant lower volumes along with continued pricing pressure across the segment and reduced pass-through paper sales. International sales declined 6.9% year over year to $655.4 million during the quarter.

Non-GAAP operating expenses decreased 4.7% year over year to $2.31 billion, primarily attributed to a lower selling, general & administrative (SG&A) expense (down 14.9% year over year). As a percentage of total revenue, SG&A expense was 10.1% in the reported quarter versus 11.1% in the year-ago quarter. The improvement was primarily attributed to higher productivity and variable cost control, coupled with lower pension expense.

The lower operating expense drove the operating results. Operating income on a non-GAAP basis improved 5.3% year over year to $201.9 million in the quarter. Operating margin increased to 8% from 7.1% in the year-ago period.

However, higher interest expense (up 1.3%) and income tax expense (up 46.2%) negatively impacted net income in the quarter. Donnelley reported net income of $92.7 million or 51 cents per share (excluding one-time items) compared with $98.7 million or 51 cents in the year-ago quarter.

Donnelley exited the quarter with $392.9 million of cash versus $369.0 million in the previous quarter. Long-term debt remained at $3.42 billion at the end of September 30, 2012.


For fiscal 2012, Donnelley expects revenue to be in the range of $10.1 billion to $10.2 billion. Operating margin is forecasted in the range of 7.2% to 7.3%.

Donnelley expects non-GAAP earnings guidance in the range of $1.84 to $1.92 per share. Non-GAAP effective tax rate is expected between 30% and 33%. Free cash flow is expected to be approximately $450 million.


Donnelley is expanding its scope beyond traditional markets primarily through acquisitions. The company’s continued focus on acquisitions will also spur its already dominant market position and drive long-term growth. Moreover, the company’s multi-million dollar contract wins from various companies such as Metro Inc., Chrysler and Office Depot Inc. (ODP - Free Report) are the other long-term positive catalysts.  

However, we expect Donnelley to remain under pressure in the near term due to weak macroeconomic conditions prevailing in most of its current as well as prospective markets. Moreover, continuing pricing pressure, volatility in raw material prices, a highly leveraged balance sheet, and increasing competition from Quad/Graphics, Inc. (QUAD - Free Report) and Dai Nippon Printing Co. Ltd. are significant headwinds going forward.

We have a Neutral recommendation over the long term (6-12 months). Currently, Donnelley has a Zacks #4 Rank, which implies a Sell rating in the short term (1-3 months).

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