R.R. Donnelley & Sons Co. (RRD), a leading provider of integrated communications and printing solutions, reported first quarter 2010 results that beat the Zacks Consensus Estimate by 3 cents.
Operating Performance
The company reported non-GAAP net income of $69.5 million, or 33 cents per share in the first quarter of 2010. This surpassed the reported net income of $49.2 million or 24 cents per share in the first quarter of 2009 and the Zacks Consensus Estimate of 30 cents. Lower operating expenses boosted the bottom line.
Earnings partially benefitted from the lower effective tax rate of 35.6% in the first quarter of 2010, compared to 37.1% in the year-ago quarter, primarily due to a change in the mix of earnings across tax jurisdictions and increased benefit from the domestic manufacturing deduction in 2010, partially offset by a one-time charge associated with the enacted Patient Protection and Affordable Care Act.
Net earnings excluded pre-tax charges for restructuring ($14.5 million) and impairment charges ($1 million) totaling $15.5 million in the first quarter of 2010 compared to restructuring ($41.4 million) and impairment ($12.8 million) charges totaling $54.2 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 increased to 23.7% in the quarter from 23.3% in the year-ago period due to continued productivity efforts and a higher recovery in print-related by-products, partially offset by continued pricing pressure.
SG&A expense decreased to 11.3% of total revenue in the quarter from 11.5% in the year-ago period, primarily due to continued productivity gains. Therefore, the improved cost structure resulted in operating margin expansion of 100 basis points year-over-year to 6.8% in the first quarter of 2010. Operating margins benefitted from productivity efforts and higher by-products recoveries, partially offset by continued pricing pressure.
Revenue
Net revenue for the reported quarter declined 1.7% year-over-year to $2.42 billion, compared to $2.46 billion reported in the prior-year quarter. Revenue includes a 2.0% positive impact from changes in foreign exchange rates. Revenue fell 3.6%, excluding favorable foreign currency due to 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.
Segment Performance
Net revenue comprises U.S. Print and Related Services revenue (76% of total sales), which decreased 3.7% to $1.84 billion due to 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 9.2% in the first quarter of 2010 from 7.7% in the first quarter of 2009.
International revenue (24% of total sales) increased 5.5% to $578.3 million from the first quarter of 2009. International revenues include a 9.0% positive impact from changes in foreign exchange rates, which was partially offset by volume declines. Non-GAAP operating margin in the segment increased to 7.5% from 6.3% in the year-ago period, mainly due to favorable product mix and the benefits of continued productivity efforts, partially offset by the impact of price erosion.
Balance Sheet
The company exited the quarter with $490.2 million in cash. Long-term debt (including current portion) stood at $3.32 billion. The company generated operating cash flow of $75.6 million. Capital expenditures were $35.7 million in the quarter.
Guidance
Donnelley reaffirmed its revenue and cash flow guidance. The challenging economic environment impacted RRD’s end-market demand and forced the company to lower prices in fiscal 2009, resulting in decreased revenue.
However, the company expects demand to stabilize and as a result, the company expects revenue growth in fiscal 2010. The company expects revenue to grow in the low single-digit range excluding acquisitions and expects to generate operating cash flow less capital expenditures in the $600 – $650 million range.
Management did not provide guidance for earnings. The Zacks Consensus Estimate is currently pegged at 35 cents for the second quarter and $1.53 for the full year 2010.
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