Donnelley's Second Quarter Beat - Analyst Blog

A leading provider of integrated communications and printing solutions,

(

) reported second quarter 2010 results that beat the Zacks Consensus Estimate by 11 cents. Revenues were slightly above the Zacks Consensus Estimate of $2.4 billion.

The company reported non-GAAP net income of $99.5 million, or 47 cents per share in the second quarter of 2010. This surpassed the reported net income of $76.3 million or 37 cents per share in the second quarter of 2009 and the Zacks Consensus Estimate of 36 cents.

Earnings mainly benefited from the lower effective tax rate of 26.2% in the reported quarter, compared with 37.5% in the year-ago quarter, primarily due to a valuation allowance on deferred tax assets in the second quarter of 2010. Lower operating expenses partially boosted the bottom line.

Net earnings excluded pre-tax charges for restructuring ($9.2 million) and impairment charges ($1.5 million) totaling $10.7 million in the quarter, compared with restructuring ($40.1 million) and impairment ($8.1 million) charges totaling $48.2 million in the comparable year-ago period. Substantially all of the restructuring and impairment charges in the quarter were related to the reorganization of certain operations and the exiting of certain business activities.

Gross margin decreased to 24.5% in the quarter from 25.4% in the year-ago quarter due to continued pricing pressure and higher pension and other benefits-related expenses as well as higher incentive compensation expense, partially offset by increased volume and a higher recovery on print-related by-products.

SG&A expense fell to 11.1% of total revenue in the quarter from 11.6% in the year-ago quarter, primarily due to continued productivity gains and a lower provision for bad debt expense, partially offset by a higher incentive compensation expense. Operating margin expanded just 10 basis points year over year to 7.9% in the second quarter of 2010, benefiting from productivity efforts, increased volume and higher by-products recoveries but offset by a continued pricing pressure and higher incentive compensation expense.

Net revenues for the reported quarter upped 2.2% year over year to $2.41 billion, compared with $2.36 billion in the prior-year quarter. Revenues were positively impacted by increased volume, partially offset by a decline in paper sales as a result of lower paper prices and an increase in the relative amount of customer-supplied paper. Sales were also negatively affected by the continued pricing pressures across most of its products and services.

Net revenues comprise U.S. Print and Related Services revenues (75% of total sales), which increased 1.6% to $1.81 billion due to rise in volume in logistics, educational books, direct mail and commercial print, partially offset by lower paper sales and price declines across most products and services. The segment’s operating income was positively impacted by benefits of continued productivity enhancement efforts and higher by-products recoveries, which were more than offset by the impact of price erosion. As a result, the non-GAAP operating margin increased to 10.1% in the quarter from 9.2% in the year-ago quarter.

International revenues (25% of total sales) increased 4.3% to $599.3 million from the second quarter of 2009. International revenues had minimal impact from changes in foreign exchange rates. Rise in revenues was mainly attributable to increased volume in Asia, Europe and Global Turnkey Solutions, partially offset by price declines across most platforms. Non-GAAP operating margin in the segment increased to 8.2% from 7.6% in the year-ago period, mainly due to a favorable product mix and the benefits of continued productivity efforts, partially offset by the impact of price erosion and higher incentive compensation expense.

The company exited the quarter with $661.7 million in cash versus $490.2 million in the previous quarter. Long-term debt (including current portion) stood at $3.41 billion at the quarter end versus $3.32 billion at the end of the previous quarter. The company generated operating cash flow of $193.5 million versus $75.6 million in the previous quarter.

The company expects demand to stabilize and as a result anticipates that revenues will grow year over year in the second half of 2010. Management did not provide any earnings guidance. The Zacks Consensus Estimate is currently pegged at 43 cents for the third quarter and $1.57 for the full-year 2010.

Currently, R.R. Donnelly has a Zacks #4 Rank, indicating a short-term Sell rating. Over the long term, we have a Neutral recommendation on the stock.

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