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RR Donnelley Reports a Fourth-Quarter Net Loss of $326.7 million

Thursday, February 23, 2012

Press release from the issuing company

Highlights:

  • Full-year operating cash flow less capital expenditures of $695.4 million at high end of updated guidance range of $650 million to $700 million
  • Year-end debt of $3.7 billion decreased by $278.7 million from the third quarter of 2011
  • Fourth-quarter 2011 GAAP loss per diluted share of $1.78, compared to GAAP earnings per diluted share of $0.13 in the fourth quarter of 2010; GAAP results include non-cash impairment charges of $488.5 million, or $2.25 per diluted share, in the fourth quarter of 2011 and $61.5 million, or $0.29 per diluted share, in the fourth quarter of 2010
  • Fourth-quarter 2011 non-GAAP earnings per diluted share of $0.46, compared to non-GAAP earnings per diluted share of $0.51 in the fourth quarter of 2010
  • Full-year 2011 GAAP loss per diluted share of $0.63, compared to GAAP earnings per diluted share of $1.06 in 2010; GAAP results include non-cash impairment charges of $531.5 million, or $2.26 per diluted share, in 2011 and $92.5 million, or $0.40 per diluted share, in 2010
  • Full-year 2011 non-GAAP earnings per diluted share of $1.82, compared to non-GAAP earnings per diluted share of $1.76 in 2010
  • Company expects 2012 full-year non-GAAP earnings per diluted share in the range of $1.84 to $1.92

R.R. Donnelley & Sons Company (Nasdaq:RRD) today reported a fourth-quarter net loss attributable to common shareholders of $326.7 million, or $1.78 per diluted share, on net sales of $2.7 billion compared to net earnings of $27.0 million, or $0.13 per diluted share, on net sales of $2.7 billion in the fourth quarter of 2010. The fourth-quarter net loss attributable to common shareholders included pre-tax net charges totaling $483.9 million, primarily related to non-cash impairment, compared to pre-tax charges totaling $88.6 million, primarily related to restructuring and non-cash impairment in the fourth quarter of 2010. Additional details regarding the nature of these and other items are included in the attached schedules.

The Company believes that certain non-GAAP measures, when presented in conjunction with comparable GAAP (Generally Accepted Accounting Principles) measures, are useful because that information is an appropriate measure for evaluating the Company's operating performance. Internally, the Company uses this non-GAAP information as an indicator of business performance, and evaluates management's effectiveness with specific reference to these indicators. These measures should be considered in addition to, not a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP.

Non-GAAP net earnings attributable to common shareholders totaled $85.2 million, or $0.46 per diluted share, in the fourth quarter of 2011 compared to $107.2 million, or $0.51 per diluted share, in the fourth quarter of 2010. Fourth-quarter non-GAAP net earnings attributable to common shareholders exclude restructuring and impairment charges and acquisition expenses in the fourth quarters of 2011 and 2010; the gain on pension curtailment, contingent compensation on a prior acquisition, certain income tax adjustments and losses related to debt extinguishment in the fourth quarter of 2011 and the write-down of affordable housing investments in the fourth quarter of 2010. For non-GAAP comparison purposes, the effective tax rate increased to 18.8% in the fourth quarter of 2011 from 10.0% in the fourth quarter of 2010. Included in the effective tax rate in the fourth quarter of 2010 was a significant release of valuation allowances on deferred tax assets. A reconciliation of GAAP net earnings (loss) attributable to common shareholders to non-GAAP net earnings attributable to common shareholders is presented in the attached schedules.

"Although demand softened during the last few months of the year, we are pleased with the $695 million of operating cash flow less capital expenditures that we generated in 2011," said Thomas J. Quinlan III, RR Donnelley's President and Chief Executive Officer.  "We've paid down over $400 million of debt in the second half of 2011, ending the year with gross leverage of 2.9x, within our targeted leverage range of 2.5x to 3.0x."  

Quinlan continued, "While I am pleased with the customer wins we have added to the platform, we begin this year managing our cost structure even more aggressively.  Our expectation is that the customer wins, coupled with our aggressive cost management, will result in non-GAAP earnings per diluted share in the range of $1.84 to $1.92 for 2012. Looking forward, we expect to continue to generate strong cash flow, allowing us to invest in the platform, pay our $1.04 per share annual dividend and remain within our targeted leverage range of 2.5x to 3.0x." 

Business Review

The Company reports its results in two reportable segments: 1) U.S. Print and Related Services and 2) International. The Company reports as Corporate its unallocated expenses associated with general and administrative activities.  

Summary    

Net sales in the quarter were $2.7 billion, up $13.7 million, or 0.5%, from the fourth quarter of 2010. Pro forma for acquisitions, net sales decreased 3.7%, due to volume declines in certain product offerings, price erosion and a 76 basis point unfavorable impact of changes in foreign exchange rates.  Gross margin of 22.9% in the fourth quarter of 2011 declined from 23.1% in the fourth quarter of 2010 as an unfavorable product mix and pricing pressure more than offset the impact of productivity actions, the pension curtailment gain and lower variable compensation expense. SG&A expense as a percentage of net sales in the fourth quarter of 2011 improved to 11.1% from 11.8% in the fourth quarter of 2010 primarily due to productivity actions as well as lower variable compensation expense, partially offset by the contingent compensation on a prior acquisition and higher pension and other benefits-related expenses. The operating loss of $317.1 million, which was impacted by restructuring and impairment charges, the pension curtailment gain, the contingent compensation and acquisition expenses totaling $483.9 million in the fourth quarter of 2011, compared to operating income of $85.7 million in the fourth quarter of 2010, which included restructuring and impairment charges and acquisition expenses totaling $88.6 million.  

Excluding restructuring and impairment charges, the pension curtailment gain, contingent compensation on a prior acquisition and acquisition expenses, non-GAAP operating margin declined to 6.1% in the fourth quarter of 2011 from 6.4% in the fourth quarter of 2010. An unfavorable product mix, pricing pressure and higher benefits-related expense more than offset continued productivity actions and lower variable compensation expense.

Segments

Net sales for the U.S. Print and Related Services segment decreased 1.0% from the fourth quarter of 2010 to $2.0 billion. Pro forma for acquisitions, net sales in the segment decreased 5.1%, as volume declines in books and directories and financial print and continued pricing pressure across the segment more than offset volume increases in logistics and office products. The segment's operating loss of $211.1 million in the fourth quarter of 2011, which was negatively impacted by charges for restructuring and impairment of $373.7 million and the contingent compensation on a prior acquisition of $15.3 million, decreased $338.4 million from operating income of $127.3 million in the fourth quarter of 2010, which included charges for restructuring and impairment of $66.1 million. The segment's non-GAAP operating margin of 8.9% in the fourth quarter of 2011 declined from 9.6% in the fourth quarter of 2010, as volume declines and pricing pressure more than offset productivity and lower variable compensation expense.

Net sales for the International segment increased 4.9% from the fourth quarter of 2010 to $715.7 million. Pro forma for acquisitions, net sales grew by 0.5%, as increased volume in business process outsourcing and Asia and higher pass-through paper sales more than offset the impact of continued pricing pressure and a$20.6 million (302 basis point) unfavorable impact of changes in foreign exchange rates. The segment's operating loss of $89.0 million in the fourth quarter of 2011, which was negatively impacted by charges for restructuring and impairment of $133.4 million, decreased $138.6 million from the operating income of $49.6 million in the fourth quarter of 2010, which included charges for restructuring and impairment of $5.0 million. The segment's non-GAAP operating margin declined to 6.2% in the fourth quarter of 2011 from 8.0% in the fourth quarter of 2010 as an unfavorable product mix and pricing pressure were only partially offset by lower variable compensation expense. 

Unallocated Corporate operating expenses decreased to $17.0 million in the fourth quarter of 2011 as compared to $91.2 million in the fourth quarter of 2010. Excluding the gain on pension curtailment of $38.7 million and acquisition-related expenses of $0.2 million in the fourth quarter of 2011 and restructuring charges of $11.9 million and acquisition expenses of $5.6 million in the fourth quarter of 2010, unallocated Corporate operating expenses decreased $18.2 million to$55.5 million in the fourth quarter of 2011. A lower provision for bad debt (fourth quarter of 2010 was unfavorably impacted by a customer bankruptcy filing) and a reduction in variable compensation expense were partially offset by higher benefits-related expense.

Outlook - 2012 Full-Year Non-GAAP EPS

For the full year of 2012, RR Donnelley is projecting non-GAAP net earnings per diluted share to be in the range of $1.84 to $1.92. This guidance assumes no additional shares are repurchased under the authorization available to the company. The non-GAAP effective tax rate for 2012 is expected to be in the range of 28% to 32%. GAAP net earnings per diluted share in 2012 may include restructuring and impairment charges, acquisition costs, the resolution of certain tax items and other items that are not currently determinable, but may be significant. For that reason, the company is unable to provide full-year GAAP net earnings estimates at this time. 

Conference Call

RR Donnelley will host a conference call and simultaneous webcast to discuss its fourth-quarter and full-year results today, Wednesday, February 22, at 10:00 a.m. Eastern Time (9:00 a.m. Central Time). The live webcast will be accessible on RR Donnelley's web site: www.rrdonnelley.com. Individuals wishing to participate can join the conference call by dialing 847.413.9014, confirmation number 31610164. A webcast replay will be archived on the Company's web site for 30 days after the call. In addition, a telephonic replay of the call will be available for seven days at 630.652.3042, passcode 9850121#.

 

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