RR Donnelley Posts Loss on Charges: Summary of Q4 Earnings Call By Trevor Shackelford March 1, 2006 -- R.R. Donnelley & Sons Company (NYSE: RRD) announced their fourth quarter and fiscal 2005 results recently. Total revenue for the company’s fourth quarter was $2.4 billion, 13.1% higher than the $2.1 billion reported for the fourth quarter of 2004. This increase was primarily due to the acquisitions of Astron Group, Asia Printers Group and Poligrafia. GAAP net loss from continuing operations for the quarter was $236 million, or $1.09 per share, compared to net earnings of $148.8 million, or $0.66 per diluted share reported for the same period in fiscal 2004. The loss includes a non-cash charge of $362.3 million involving the impairment of goodwill and other intangibles from the forms and labels business. Excluding these charges, net earnings from continuing operations for the quarter was $134.3 million, or $0.62 per diluted share. For the full year, total revenue was $8.4 billion, compared to $7.2 billion reported last year. 2005 GAAP earnings came in at $95.6 million, or $0.44 per diluted share, compared to $264.9 million, or $1.30 per diluted share reported in 2004. Non-GAAP net earnings for the year were $496.4 million, or $2.29 per diluted share. Contents of this Summary * Quarter Highlights * Segment Performance * Guidance * Raine Radar * Q & A Quarter Highlights • During the quarter, the company completed the sale of its Package Logistics business and announced that it is planning to sell its Peak Technologies business. • The company reported net income from discontinued operations for the quarter was $73.5 million, primarily attributable to certain tax benefits recognized as part of the sale of Peak Technologies. • Organic revenue growth for the quarter was 4.1%. • Total non-cash charges including $364.3 million in impairment, $13.4 million in restructuring, and integration charges of $1.9 million. • Full year GAAP operating margin was 5.3%, a decrease from 6.4% in 2004. Non-GAAP operating margin for the full year was 10.4%, an increase from 9% in 2004. • The effective tax rate for the quarter was 30.3% and for the full year was 38.3% • SG&A as a percentage of net sales increased to 12.3% in the fourth quarter of 2005 from 11.4% in the fourth quarter of 2004. • Net interest expense for the quarter was $33.9 million, an increase of $11.2 million over $22.7 million reported in the fourth quarter of 2004. • During the year the company spent $471 million in CAPEX. • The company ended the quarter with $367 million of cash and marketable securities. • During the year, the company generated approximately $972 million of cash from continuing operations, up 28% from $759 million reported in 2004. • Net debt at the end of 2005 was $2.3 billion. Net debt to EBITDA was 1.75 times and interest coverage was approximately 12 times. • The company announced a new share repurchase program of 10 million shares. Segment Performance Publishing and Retail Services Segment The publishing and retail services segment includes magazine, catalog, and retail directories and book businesses within North America, Europe and Asia. The segment also includes logistics and premedia. Net sales for the segment increased 10.9% to $1.2 billion from the fourth quarter of 2004 primarily due to the acquisitions. Organic growth for the segment was 5.8%. The segment’s operating margin, which was negatively impacted by restructuring, impairment and integration charges .was 12.7% in the fourth quarter of 2005, compared to 15.1% in the fourth quarter of 2004. Margins were also hurt by increased bonus and incentive plans as well as rising energy and paper costs. Integrated Print Communications Segment This segment includes the company’s direct mail, global capital markets, dynamic communication solutions, short-run commercial print, and Astron Group businesses. Net sales for the segment increased 27.4% to $703.5 million from the fourth quarter of 2004, primarily due to the acquisition of the Astron Group. The segment’s operating margin, which was also negatively impacted by restructuring, impairment, and integration charges decreased to 9.0% in the fourth quarter of 2005 from 11.2% last year. Forms and Labels Segment This segment includes forms, labels, office products, and its Latin American businesses. The company stated that certain businesses within the forms and labels market continue to be in secular decline. Net sales for the segment increased 0.6% to $442.8 million, in the fourth quarter of 2005 from the fourth quarter of 2004. The segment’s operating margin decreased to a loss in the fourth quarter of 2005 from 5.1% in the fourth quarter of 2004, primarily related to the non-cash goodwill and impairment charges of $362.3 million. Excluding these charges, operating margin decreased to 6.1% in the fourth quarter of 2005 from 7.4% in the fourth quarter of 2004, as a result of continued pricing pressure. Guidance For the full year of 2006, the company projected non-GAAP earnings per diluted share from continuing operations to be in the range of $2.45 to $2.50. This guidance assumes no shares repurchased under the authorization available to the company. GAAP earnings estimates were not provided since the company is still waiting to resolve certain tax issues. The company also expects double-digit revenue growth in 2006 from Astron Group. Raine Radar Like its competitor, Quebecor World, RR Donnelley took a large hit to its fourth quarter in the form of a goodwill impairment charge. However, unlike Quebecor, Donnelley is still profitable for the year and finds itself in a good position for 2006. It will continue to fuel its growth by acquiring commercial printers, who still find themselves in an industry full of excess capacity. Q & A 1. The company said that the pricing environment has been consistent and challenging. 2. Donnelley said that capacity utilization was better than last year. 3. The company stated that the payment of a plant level bonus of $500 to employees was a one-time arrangement. 4. Donnelley has identified over $100 million in increased productivity as part of its savings plan and expects another $100 million in 2007. 5. The company believes that the label business will decline slightly year-over-year. In general, this business is a cash business with very little CAPEX investment required. Donnelley anticipates that it will still have a relatively stable level of cash flow over the next couple of years. 6. The company stated that its share repurchase program is part of an overall capital deployment strategy; first is organic investment, second is strategic acquisitions and other opportunities to drive shareholder value, and third is returning the capital back to its shareholders. The company didn’t have a defined time line for the share repurchase program. 7. Donnelley intends to continue to grow via acquisitions but was reluctant to divulge any further details. 8. The company is not forecasting any substantial changes to the competitive pricing dynamics of the industry in the short to medium term. Trevor Shackelford is an Associate at Raine Media, Inc. and can be reached at [email protected] -- Click here to tell us what you think about this premium feature -- Click here to read recent comments from our readers