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R.R. Donnelley (RRD) Q1 Earnings & Revenues Decline Y/Y

R.R. Donnelley & Sons Company’s RRD dismal performance continued in the first quarter of 2016 as both the top and bottom line registered year-over-year declines.

The company posted first-quarter non-GAAP earnings of 22 cents per share, which were lower than the year-ago tally of 26 cents. However, on a GAAP basis, the company’s earnings came in at 19 cents, higher than 11 cents earned a year ago.

The company’s bottom line was hurt by pricing pressure across all its segments, volume decline at the Publishing and Retail Services, and Variable Print segments, and a higher share count.

Quarter in Detail

R.R. Donnelley’s revenues of $2.651 billion declined 3.4% year over year mainly due to persistent price erosion at Publishing and Retail Services, and volume decline at the Strategic Services and Variable Print divisions, which were partially offset by volume growth at the International division.

Publishing and Retail Services revenues increased 3.9% from to $596.3 million. After adjusting for the impact of the Courier acquisition and the negative impact of lower pass-through paper sales of 210 basis points (bps), organic sales recorded a 2.2% year-over-year decline.

Variable Print revenues were $901.8 million, down 5% year over year. On an organic basis, revenues were down 4.7% due to lower volume in commercial and digital print, forms direct mail, and labels.

The Strategic Services segment garnered revenues of $634.6 million, down 4.9% from the year-ago period. Organic sales dropped 5.7% mainly due to soft performances at financial and logistics.

International sales in the first quarter totaled $518.7 million, down 6.7% year over year, primarily due to unfavorable foreign exchange impact and the disposition of operations in Venezuela, Austria and Switzerland. However, organic sales (adjusting for unfavorable foreign exchange and dispositions) inched up 1.9% driven primarily by volume growth in Canada.

Non-GAAP gross margin was 21.5%, up 36 bps from the year-ago period, mainly supported by the ongoing cost-control initiatives, positive impact of the Courier acquisition and foreign exchange rates, partially offset by price erosion and volume declines.

Non-GAAP operating profit decreased marginally to $143.2 million. However, operating margin improved 10 bps year over year to 7.4%, mainly backed by efficient cost management.

Non-GAAP net earnings for the quarter were $47.2 million or 22 cents per share, compared with $51.9 million or 26 cents a year ago.

The commercial printing, information services and logistics provider exited the quarter with $263.7 million in cash and cash equivalents, compared with $389.6 million in the previous quarter. Long-term debt (including current portion) was $3.577 billion as of Mar 31, 2016.

During the quarter, the company used $192.8 million of cash for operating activities and had a negative cash flow of $240.9 million at the quarter end.

Guidance

R.R. Donnelley reiterated its 2016 outlook which was given during its fourth-quarter 2015 earnings release. The company continues to expect full-year revenues in the range of $11.3–$11.5 billion. Adjusted earnings before interest, tax, depreciation and amortization (EBITDA) margins are expected to be 10.4–10.6%. Interest expense is likely to be within $260.0–$270.0 million.

Capital expenditure is projected in the range of $200 million to $225 million, while and free cash flow should be $400–$500 million.

Our Take

R.R. Donnelley failed to come up with an upbeat performance in the first quarter as both earnings and revenues declined year over year.

Nonetheless, we expect the company’s strategic acquisitions to drive growth. New and existing clients should also boost revenues.

Nonetheless, we believe that persistent pricing pressure, volatility in raw material costs and intensifying competition will negatively impact R.R. Donnelley’s bottom line in the near term. Moreover, increasing adoption of e-book among readers is a major concern for its legacy printing business.

Some stocks in the broader technology sector that are worth considering include Amkor Technology, Inc. AMKR, AXT Inc. AXTI and Silicon Motion Technology Corp. SIMO, each sporting a Zacks Rank #1 (Strong Buy).

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