R.R. Donnelley Beats on Bottom-Line - Analyst Blog
August 03 2011 - 9:37AM
Zacks
R.R. Donnelley & Sons Co. (RRD) reported
earnings per share (EPS) of 53 cents in the second quarter of 2011,
which made it past the Zacks Consensus Estimate by 2 cents.
Operating Performance
EPS on a non-GAAP basis increased 12.8% on a year-over-year
basis and excludes restructuring and impairment charges and
acquisition expenses.
Net income came in at $105.6 million, up from $99.5 million in
the prior-year quarter. Net income margin declined 11 basis points
(bps) to 4.02% in the quarter.
Gross margin remained flat year over year at 24.5% in the
quarter, as productivity efforts, the acquisition of Bowne, lower
variable compensation expense and a higher recovery on
print-related by-products were offset by lower volume, primarily in
books and directories, and pricing pressure.
As a percentage of total revenue, selling general &
administrative (SG&A) expense was 11.8% in the reported quarter
versus 11.1% in the year-ago quarter, primarily due to the
acquisition of Bowne, and higher pension and other benefits related
expenses.
Operating income on a non-GAAP basis was up 1.8% year over year
to $192.7 million in the quarter. Operating margin decreased to
7.3% from 7.9% reported in the year-ago period. Changes in foreign
exchange rates, due to export sales from certain international
operations, and higher pass-through paper sales negatively impacted
the non-GAAP operating margin by approximately 29 basis points.
Segment wise, U.S. Print and Related Services operating margin
was 10.3% compared with 10.1% reported in the year-earlier quarter.
The yearly gain in the segment’s operating margin was attributable
to productivity initiatives, lower variable compensation expense
and a higher recovery on print-related by-products, which offset
the impact of volume declines and continued pricing pressure.
International operating margin was 7.6% in the quarter versus
8.2% in the year-ago quarter. The decline was on account of changes
in foreign exchange rate; primarily due to export sales from
certain operations, as well as pricing pressure more than offset
the benefits of increased volume and productivity efforts.
Revenue
Revenues increased 8.9% year over year to $2.62 billion, but
missed the Zacks Consensus Estimate of $2.69 billion.
Net revenue comprise U.S. Print and Related Services revenue
(73.2% of total sales), which increased 6.2% year over year to
$1.92 billion. The increase was primarily due to the acquisition of
Bowne and volume increases in commercial, logistics and financial
print, partially offset by volume declines in books and directories
and continued pricing pressure across the segment.
International sales (26.8% of total sales) increased 17.2% to
$702.5 million. The year- over-year growth was driven by increased
sales related to the acquisition of Bowne.
Balance Sheet
R.R. Donnelley exited the quarter with $363.0 million of cash
versus $399.3 million in the previous quarter. Long-term debt was
$3.43 billion at quarter end compared with $3.24 billion at the end
of the previous quarter.
Recommendation
Management did not provide any guidance. The Zacks Consensus
Estimate projects an EPS of 56 cents for the third quarter of
2011.
Donnelley is witnessing stabilization in demand, increase in
volumes and new customer wins. We believe that strong alliances and
customer wins including AT&T Inc. (T) and
Verizon Communications Inc. (VZ) will create value
for the company over the long term. We also remain positive about
the Journalism Online LLC acquisition.
However, higher pension expenses, continuing pricing pressure
and a highly leveraged balance sheet are expected to create
significant headwinds going forward.
We maintain our Neutral rating on a long-term basis (6-12
months). Currently, R.R. Donnelley has a Zacks #3 Rank, which
implies a Hold rating on a short-term basis (1-3 months).
DONNELLEY (RR) (RRD): Free Stock Analysis Report
AT&T INC (T): Free Stock Analysis Report
VERIZON COMM (VZ): Free Stock Analysis Report
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