Donnelley Reports Modest 3Q - Analyst Blog

A leading provider of integrated communications and printing solutions, R.R. Donnelley & Sons Co. (RRD) reported third quarter 2010 results. Earnings on a non-GAAP basis were 44 cents per share, beating the Zacks Consensus by a penny.

Earnings on a non-GAAP basis decreased 19.0% year over year from 54 cents reported in the prior-year quarter. Earnings on a GAAP basis increased significantly to 25 cents from 6 cents reported in the prior-year quarter.

Revenue

Revenues increased 1.0% year over year to $2.48 billion, slightly below the Zacks Consensus Estimate of $2.53 billion. Third quarter revenue growth was impacted by an unfavorable foreign exchange and lower paper sales. This was offset by higher volumes in the U.S. Print and Related Services segment.

Net revenues comprise U.S. Print and Related Services revenues (75% of total sales), which increased 2.0% year over year to $1.86 billion due to a rise in volume in logistics, financial print and direct mail partially offset by price declines across most products and services, as well as lower paper sales.

International sales decreased 1.8% to $626.7 million, primarily due to unfavorable foreign exchange rates and the fees received for the transition of a customer contract in the third quarter of 2009.

International sales were positively affected by increasing volumes in Asia, Europe and Latin America, partially offset by the lost volume related to the termination of significant customer contracts in 2009 and persisting pricing weakness.

Operating Performance

Gross margin decreased to 23.7% in the quarter from 25.2% 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 increased to 10.5% of total revenue in the quarter from 10.2% in the year-ago quarter, primarily due to higher provision for bad debts and higher acquisition related expenses, partially offset by R. R. Donnelley's productivity initiatives.

Operating income on a non-GAAP basis declined 11.2% year over year to $200.0 million in the quarter. The decline was primarily driven by continued pricing pressure and higher pension expense.

Segment wise, U.S. Print and Related Services operating margin increased 80 basis points to 10.0%, due to productivity efforts, a higher recovery on print-related by-products and lower depreciation and amortization expense. International operating margin decreased 10 basis points to 8.5% in the quarter, due to continued price erosion.

Balance Sheet

R.R. Donnelley exited the quarter with $731.6 million of cash versus $661.7 million in the previous quarter. Long-term debt stood at $3.41 billion at quarter-end, flat compared with the previous quarter.

Our Take

R.R. Donnelley continues to expect strong revenue growth for the fourth quarter 2010 and fiscal 2011. Management did not provide any earnings guidance. The Zacks Consensus Estimate is currently pegged at 45 cents for the fourth quarter and $1.68 for the full-year 2010.

We maintain a Neutral rating on a long-term basis (6-12 months) due to continued pricing pressure and lower paper sales, which may hurt long-term profitability. Although R.R. Donnelley expects demand to stabilize and consumer spending to improve over the long term, we expect a slow recovery in its results in 2011 due to the lingering effects of the economic crisis.

Currently, R.R. Donnelley has a Zacks #3 Rank, which implies a Hold rating on a short-term basis (1-3 months).