RRD Reports Second Quarter 2019 Results

Q2 2019

Q2 2018

% Change

Net sales

$1.51 billion

$1.68 billion

(10.2%)

Income from operations

$20.9 million

$25.5 million

(18.0%)

Diluted loss per share

$(0.10)

$(0.18)

44.4%

Adjusted income from operations - non-GAAP (1)

$39.2 million

$36.5 million

7.4%

Adjusted diluted loss per share - non-GAAP (1)

$(0.03)

$(0.09)

66.7%

(1)

See page 9 for a complete listing of items excluded and a reconciliation of GAAP to non-GAAP amounts.

Current Guidance

July 30, 2019

Net sales

$6.40 billion to $6.60 billion

Adjusted income from operations - non-GAAP (1)

$225 million to $265 million

Adjusted diluted EPS - non-GAAP (1)

$0.60 to $0.90

Cash flow from operations (2)

$150 million to $180 million

Depreciation and amortization

Approximately $175 million

Interest expense - net

Approximately $160 million

Adjusted effective tax rate - non-GAAP (1), (3)

Approximately 50%

Capital expenditures (4)

$135 million to $145 million

Proceeds from facility sales (5)

Approximately $25 million

(1)

Certain components of the guidance given in the table above are provided on a non-GAAP basis only, without providing a reconciliation to guidance provided on a GAAP basis. Information is presented in this manner, consistent with SEC rules, because the preparation of such a reconciliation could not be accomplished without "unreasonable efforts." The Company does not have access to certain information that would be necessary to provide such a reconciliation, including non-recurring items and other items that are not indicative of the Company's ongoing operations. Such items include, but are not limited to, restructuring charges, impairment charges, pension settlement charges, acquisition-related expenses, gains or losses on investments and business disposals, losses on debt extinguishment, OPEB curtailments and other similar gains or losses not reflective of the Company's ongoing operations. The Company does not believe that excluding such items is likely to be significant to an assessment of the Company's ongoing operations, given that such excluded items are not believed to be indicators of business performance.

(2)

2019 cash flow from operations guidance includes restructuring payments related to the previously announced sale and relocation of a printing facility in Shenzhen, China and higher net tax payments primarily related to lower tax refunds relative to 2018.

(3)

2019 adjusted effective tax rate - non-GAAP guidance reflects a significantly higher rate than the statutory domestic rate primarily due to continued limitations on the Company’s domestic interest expense deduction. As earnings grow and interest expense is reduced, the Company expects the effective tax rate to improve over time.

(4)

2019 capital expenditures guidance assumed to be higher primarily related to investments associated with building a new facility in China in preparation for an expected sale of the existing facility for approximately $250 million, and additional investments related to the recently awarded 2020 Census contract. The Company expects its 2020 capital expenditures level to return to its previously stated range of 1.5% to 1.7% of net sales.

(5)

2019 proceeds from facility sales guidance reflects one additional non-refundable deposit expected to be collected related to the planned sale of the facility in China.

R.R. Donnelley & Sons Company

Condensed Consolidated Statements of Operations

For the Three and Six Months Ended June 30, 2019 and 2018

(UNAUDITED)

(in millions, except per share data)

For the Three Months Ended

June 30,

For the Six Months Ended

June 30,

2019

2018

2019

2018

Total net sales

$

1,508.7

$

1,679.5

$

3,030.6

$

3,387.3

Total cost of sales (1)

1,230.5

1,388.9

2,474.1

2,802.0

Total gross profit (1)

278.2

290.6

556.5

585.3

Selling, general and administrative expenses (SG&A) (1)

199.0

208.0

398.6

422.6

Restructuring and other - net

16.0

11.0

33.1

11.8

Depreciation and amortization

40.0

46.1

82.7

93.3

Other operating expense (income)

2.3

—

(2.1

)

(0.1

)

Income from operations

20.9

25.5

44.2

57.7

Interest expense - net

38.1

42.0

78.2

83.7

Investment and other income - net

(2.2

)

(3.6

)

(6.7

)

(9.2

)

Loss on debt extinguishment

—

—

—

0.1

Loss before income taxes

(15.0

)

(12.9

)

(27.3

)

(16.9

)

Income tax (benefit) expense

(7.6

)

(0.3

)

(11.4

)

5.0

Net loss

(7.4

)

(12.6

)

(15.9

)

(21.9

)

Less: (Loss) income attributable to noncontrolling interests

(0.4

)

0.4

(0.1

)

0.7

Net loss attributable to RRD common stockholders

$

(7.0

)

$

(13.0

)

$

(15.8

)

$

(22.6

)

Net loss per share attributable to RRD common stockholders:

Basic net loss per share

$

(0.10

)

$

(0.18

)

$

(0.22

)

$

(0.32

)

Diluted net loss per share

$

(0.10

)

$

(0.18

)

$

(0.22

)

$

(0.32

)

Weighted average common shares outstanding:

Basic

71.3

70.6

71.0

70.5

Diluted

71.3

70.6

71.0

70.5

Additional information:

Gross margin (1)

18.4

%

17.3

%

18.4

%

17.3

%

SG&A as a % of total net sales (1)

13.2

%

12.4

%

13.2

%

12.5

%

Operating margin

1.4

%

1.5

%

1.5

%

1.7

%

Effective tax rate

50.7

%

2.3

%

41.8

%

(29.6

%)

(1)

Exclusive of depreciation and amortization.

R.R. Donnelley & Sons Company

Condensed Consolidated Balance Sheets

As of June 30, 2019 and December 31, 2018

(UNAUDITED)

(in millions, except per share data)

6/30/2019

12/31/2018

Assets

Cash and cash equivalents

$

220.5

$

370.6

Receivables, less allowances for doubtful accounts

1,156.6

1,298.3

Inventories

335.5

329.7

Prepaid expenses and other current assets

127.3

101.1

Total Current Assets

1,839.9

2,099.7

Property, plant and equipment - net

520.9

531.3

Goodwill

553.1

553.4

Other intangible assets - net

101.0

113.3

Deferred income taxes

65.1

66.9

Operating lease assets

204.9

—

Other noncurrent assets

276.5

276.2

Total Assets

$

3,561.4

$

3,640.8

Liabilities

Accounts payable

779.2

987.3

Accrued liabilities and other

302.8

347.4

Short-term operating lease liabilities

68.0

—

Short-term and current portion of long-term debt

101.7

216.2

Total Current Liabilities

1,251.7

1,550.9

Long-term debt

2,019.7

1,875.3

Pension liabilities

92.1

97.9

Other postretirement benefits plan liabilities

66.5

67.8

Long-term income tax liability

82.5

91.1

Long-term operating lease liabilities

141.2

—

Other noncurrent liabilities

178.5

203.2

Total Liabilities

$

3,832.2

$

3,886.2

Equity

Common stock, $0.01 par value

Authorized: 165.0 shares;

Issued: 89.0 shares in 2019 and 2018

0.9

0.9

Additional paid-in capital

3,355.5

3,404.0

Accumulated deficit

(2,255.2

)

(2,225.7

)

Accumulated other comprehensive loss

(154.8

)

(153.8

)

Treasury stock, at cost, 18.2 shares in 2019 (2018 - 18.6 shares)

(1,231.2

)

(1,285.5

)

Total RRD stockholders' equity

(284.8

)

(260.1

)

Noncontrolling interests

14.0

14.7

Total Equity

$

(270.8

)

$

(245.4

)

Total Liabilities and Equity

$

3,561.4

$

3,640.8

R.R. Donnelley & Sons Company

Condensed Consolidated Statements of Cash Flows

For the Six Months Ended June 30, 2019 and 2018

(UNAUDITED)

(in millions)

2019

2018

Net loss

$

(15.9

)

$

(21.9

)

Adjustment to reconcile net loss to net cash used in operating activities

89.9

109.3

Changes in operating assets and liabilities

(187.3

)

(205.2

)

Pension and other postretirement benefits plan contributions

(3.8

)

(10.2

)

Net cash used in operating activities

$

(117.1

)

$

(128.0

)

Capital expenditures

(76.4

)

(48.0

)

All other cash provided by investing activities

8.9

44.9

Net cash used in investing activities

$

(67.5

)

$

(3.1

)

Net cash provided by financing activities

$

21.7

$

126.3

Effect of exchange rate on cash, cash equivalents and restricted cash

0.2

(10.2

)

Net decrease in cash, cash equivalents and restricted cash

$

(162.7

)

$

(15.0

)

Less: Transfer of cash and cash equivalents to assets held for sale

—

5.2

Net decrease in cash, cash equivalents and restricted cash

$

(162.7

)

$

(20.2

)

Cash, cash equivalents and restricted cash at beginning of year

403.6

301.5

Cash, cash equivalents and restricted cash at end of period

$

240.9

$

281.3

R.R. Donnelley & Sons Company

Reconciliation of GAAP to Non-GAAP Measures

For the Three Months Ended June 30, 2019 and 2018

(UNAUDITED)

(in millions, except per share data)

For the Three Months Ended June 30, 2019

For the Three Months Ended June 30, 2018

SG&A (1)

Income
from
operations

Investment
and other
income -
net

Income
tax
(benefit)
expense

Net loss
attributable
to common
stockholders

Net loss
attributable
to common
stockholders
per diluted
share

Income
from
operations

Investment
and other
income -
net

Income
tax
(benefit)
expense

Net loss
attributable
to common
stockholders

Net loss
attributable
to common
stockholders
per diluted
share

GAAP basis measures

$

199.0

$

20.9

$

(2.2

)

$

(7.6

)

$

(7.0

)

$

(0.10

)

$

25.5

$

(3.6

)

$

(0.3

)

$

(13.0

)

$

(0.18

)

Non-GAAP adjustments:

Restructuring and other-net (2)

—

16.0

—

14.1

1.9

0.03

11.0

—

4.2

6.8

0.10

All other (3)

0.1

2.3

(2.1

)

1.4

3.0

0.04

—

(1.0

)

1.2

(0.2

)

(0.01

)

Total Non-GAAP adjustments

0.1

18.3

(2.1

)

15.5

4.9

0.07

11.0

(1.0

)

5.4

6.6

0.09

Non-GAAP measures

$

199.1

$

39.2

$

(4.3

)

$

7.9

$

(2.1

)

$

(0.03

)

$

36.5

$

(4.6

)

$

5.1

$

(6.4

)

$

(0.09

)

Additional non-GAAP information:

2019

2018

Gross margin (1)

18.4

%

17.3

%

Adjusted SG&A as a % of total net sales (1)

13.2

%

12.4

%

Adjusted operating margin

2.6

%

2.2

%

Adjusted effective tax rate

146.3

%

(566.7

(1)

Exclusive of depreciation and amortization.

(2)

Restructuring and other - net: charges incurred in the second quarter of 2019 primarily included pre-tax charges of $10.8 million for employee termination costs and $4.5 million for other restructuring charges. Charges incurred in the second quarter of 2018 included pre-tax charges of $5.2 million for employee termination costs; $3.7 million of lease termination and other restructuring costs; $1.4 million related to impairment of buildings, machinery and equipment associated with facility closures; and $0.7 million for multi-employer pension plan withdrawal obligations.

(3)

All other: primarily included reserves for an unfavorable state sales tax matter and expenses related to the ongoing SEC and Department of Justice (“DOJ”) investigation, partially offset by the net gain on the sale of our R&D business for the three months ended June 30, 2019. For the three months ended June 30, 2018, included a pension settlement charge and recognition of a deferred income tax benefit.

R.R. Donnelley & Sons Company

Reconciliation of GAAP to Non-GAAP Measures

For the Six Months Ended June 30, 2019 and 2018

(UNAUDITED)

(in millions, except per share data)

For the Six Months Ended June 30, 2019

For the Six Months Ended June 30, 2018

SG&A (1)

Income
from
operations

Investment
and other
income -
net

Income
tax
(benefit)
expense

Net loss
attributable
to common
stockholders

Net loss
attributable
to common
stockholders
per diluted
share

Income
from
operations

Investment
and other
income -
net

Income
tax
expense

Net loss
attributable
to common
stockholders

Net loss
attributable
to common
stockholders
per diluted
share

GAAP basis measures

$

398.6

$

44.2

$

(6.7

)

$

(11.4

)

$

(15.8

)

$

(0.22

)

$

57.7

$

(9.2

)

$

5.0

$

(22.6

)

$

(0.32

)

Non-GAAP adjustments:

Restructuring and other-net (2)

—

33.1

—

22.1

11.0

0.15

11.8

—

4.3

7.5

0.11

All other (3)

(0.2

)

(1.7

)

(2.1

)

2.0

(1.6

)

(0.02

)

(0.1

)

(1.3

)

(0.3

)

1.6

0.02

Total Non-GAAP adjustments

(0.2

)

31.4

(2.1

)

24.1

9.4

0.13

11.7

(1.3

)

4.0

9.1

0.13

Non-GAAP measures

$

398.4

$

75.6

$

(8.8

)

$

12.7

$

(6.4

)

$

(0.09

)

$

69.4

$

(10.5

)

$

9.0

$

(13.5

)

$

(0.19

)

Additional non-GAAP information:

2019

2018

Gross margin (1)

18.4

%

17.3

%

Adjusted SG&A as a % of total net sales (1)

13.1

%

12.5

%

Adjusted operating margin

2.5

%

2.0

%

Adjusted effective tax rate

204.8

%

-236.8

%

(1)

Exclusive of depreciation and amortization.

(2)

Restructuring and other - net: charges incurred in the six months ended June 30, 2019 primarily included pre-tax charges of $18.9 million for employee termination costs and $12.7 million for lease termination and other restructuring charges. Charges incurred in the six months ended June 30, 2018 included pre-tax charges of $8.4 million for employee termination costs; $5.1 million of lease termination and other restructuring costs; a $4.9 million net gain on the sale of previously impaired assets; $1.7 million related to impairment of buildings, machinery and equipment associated with facility closures; and $1.5 million for multi-employer pension plan withdrawal obligations.

(3)

All other: primarily included the net gain on the sale of our R&D business and the bankruptcy liquidation of RRD Brazil, partially offset by reserves for an unfavorable state sales tax matter and expenses related to an ongoing SEC and DOJ investigation for the six months ended June 30, 2019. For the six months ended June 30, 2018, primarily included a pension settlement charge.

R.R. Donnelley & Sons Company

Segment GAAP to Non-GAAP Income from Operations and Non-GAAP Adjusted EBITDA and Margin Reconciliation

For the Three Months Ended June 30, 2019 and 2018

(UNAUDITED)

(in millions)

Business Services

Marketing
Solutions

Corporate

Consolidated

For the Three Months Ended June 30, 2019

Net sales

$

1,231.2

$

277.5

$

—

$

1,508.7

Income (loss) from operations

41.6

6.0

(26.7

)

20.9

Operating margin %

3.4

%

2.2

%

nm

1.4

%

Non-GAAP Adjustments

Restructuring and other-net

13.8

0.5

1.7

16.0

Other

—

—

2.3

2.3

Total Non-GAAP adjustments

13.8

0.5

4.0

18.3

Non-GAAP income (loss) from operations

$

55.4

$

6.5

$

(22.7

)

$

39.2

Non-GAAP operating margin %

4.5

%

2.3

%

nm

2.6

%

Depreciation and amortization

26.6

11.4

2.0

40.0

Investment and other income-net (1)

1.1

—

3.2

4.3

Non-GAAP Adjusted EBITDA

$

83.1

$

17.9

$

(17.5

)

$

83.5

Non-GAAP Adjusted EBITDA margin %

6.7

%

6.5

%

nm

5.5

%

For the Three Months Ended June 30, 2018

Net sales

$

1,409.0

$

270.5

$

—

$

1,679.5

Income (loss) from operations

38.3

8.6

(21.4

)

25.5

Operating margin %

2.7

%

3.2

%

nm

1.5

%

Non-GAAP Adjustments

Restructuring and other-net

6.1

2.0

2.9

11.0

Total Non-GAAP adjustments

6.1

2.0

2.9

11.0

Non-GAAP income (loss) from operations

$

44.4

$

10.6

$

(18.5

)

$

36.5

Non-GAAP operating margin %

3.2

%

3.9

%

nm

2.2

%

Depreciation and amortization

33.2

11.7

1.2

46.1

Investment and other income-net (1)

0.5

—

4.1

4.6

Non-GAAP Adjusted EBITDA

$

78.1

$

22.3

$

(13.2

)

$

87.2

Non-GAAP Adjusted EBITDA margin %

5.5

%

8.2

%

nm

5.2

%

(1)

Represents amounts in investment and other income-net that are not non-GAAP adjustments, and primarily includes pension and postretirement benefits interest cost, expected return on plan assets and net amortization; and gains on company-owned life insurance. Non-GAAP adjustments from investment and other income-net included $2.1 million of spinoff adjustments and $1.0 million of non-cash pension settlement charges for the three months ended June 30, 2019 and 2018, respectively. 

R.R. Donnelley & Sons Company

Segment GAAP to Non-GAAP Income from Operations and Non-GAAP Adjusted EBITDA and Margin Reconciliation

For the Six Months Ended June 30, 2019 and 2018

(UNAUDITED)

(in millions)

Business Services

Marketing
Solutions

Corporate

Consolidated

For the Six Months Ended June 30, 2019

Net sales

$

2,467.5

$

563.1

$

—

$

3,030.6

Income (loss) from operations

70.2

14.5

(40.5

)

44.2

Operating margin %

2.8

%

2.6

%

nm

1.5

%

Non-GAAP Adjustments

Restructuring and other-net

27.0

0.7

5.4

33.1

Other

—

—

(1.7

)

(1.7

)

Total Non-GAAP adjustments

27.0

0.7

3.7

31.4

Non-GAAP income (loss) from operations

$

97.2

$

15.2

$

(36.8

)

$

75.6

Non-GAAP operating margin %

3.9

%

2.7

%

nm

2.5

%

Depreciation and amortization

55.9

23.5

3.3

82.7

Investment and other income-net (1)

2.3

—

6.5

8.8

Non-GAAP Adjusted EBITDA

$

155.4

$

38.7

$

(27.0

)

$

167.1

Non-GAAP Adjusted EBITDA margin %

6.3

%

6.9

%

nm

5.5

%

For the Six Months Ended June 30, 2018

Net sales

$

2,825.1

$

562.2

$

—

$

3,387.3

Income (loss) from operations

78.1

20.9

(41.3

)

57.7

Operating margin %

2.8

%

3.7

%

nm

1.7

%

Non-GAAP Adjustments

Restructuring and other-net

4.5

3.5

3.8

11.8

Net gain on disposal of business

(0.1

)

—

—

(0.1

)

Total Non-GAAP adjustments

4.4

3.5

3.8

11.7

Non-GAAP income (loss) from operations

$

82.5

$

24.4

$

(37.5

)

$

69.4

Non-GAAP operating margin %

2.9

%

4.3

%

nm

2.0

%

Depreciation and amortization

67.2

23.6

2.5

93.3

Investment and other income-net (1)

0.9

—

9.6

10.5

Non-GAAP Adjusted EBITDA

$

150.6

$

48.0

$

(25.4

)

$

173.2

Non-GAAP Adjusted EBITDA margin %

5.3

%

8.5

%

nm

5.1

%

(1)

Represents amounts in investment and other income-net that are not non-GAAP adjustments, and primarily includes pension and postretirement benefits interest cost, expected return on plan assets and net amortization; and gains on company-owned life insurance. Non-GAAP adjustments from investment and other income-net included $2.1 million of spinoff adjustments and $1.3 million of non-cash pension settlement charges for the six months ended June 30, 2019 and 2018, respectively.

R.R. Donnelley & Sons Company

Reconciliation of Reported to Organic Net Sales

For the Three Months Ended June 30, 2019

(UNAUDITED)

Business Services

Marketing Solutions

Consolidated

Reported net sales change

(12.6

%) 

2.6

%

(10.2

%) 

Less:

Year-over-year impact of changes in foreign currency rates

(1.2

%) 

---

%

(1.0

%) 

Year-over-year impact of dispositions (1)

(7.9

%) 

---

%

(6.7

%) 

Net organic sales change

(3.5

%) 

2.6

%

(2.5

%) 

(1)

Adjusted for net sales of our Print Logistics business, disposed in the third quarter of 2018; RRD Brazil, disposed in the first quarter of 2019; and R&D business, disposed of in the second quarter of 2019.

R.R. Donnelley & Sons Company

Reconciliation of Reported to Organic Net Sales

For the Six Months Ended June 30, 2019

(UNAUDITED)

Business Services

Marketing Solutions

Consolidated

Reported net sales change

(12.7

%) 

0.2

%

(10.5

%) 

Less:

Year-over-year impact of changes in foreign currency rates

(1.4

%) 

---

%

(1.1

%) 

Year-over-year impact of dispositions (1)

(7.7

%) 

---

%

(6.5

%) 

Net organic sales change

(3.6

%) 

0.2

%

(2.9

%) 

(2)

Adjusted for net sales of our Print Logistics business, disposed in the third quarter of 2018; RRD Brazil, disposed in the first quarter of 2019; and R&D business, disposed of in the second quarter of 2019.

R.R. Donnelley & Sons Company

Reconciliation of GAAP Net Loss to Non-GAAP Adjusted EBITDA

For the Three Months Ended June 30, 2019 and 2018

(UNAUDITED)

(in millions)

For the Three Months Ended June 30,

2019

2018

GAAP net loss attributable to RRD common stockholders

$

(7.0

)

$

(13.0

)

Adjustments

(Loss) income attributable to noncontrolling interests

(0.4

)

0.4

Income tax benefit

(7.6

)

(0.3

)

Interest expense - net

38.1

42.0

Depreciation and amortization

40.0

46.1

Restructuring and other-net

16.0

11.0

Pension settlement charges

—

1.0

Other

4.4

—

Total Non-GAAP adjustments

90.5

100.2

Non-GAAP adjusted EBITDA

$

83.5

$

87.2

Net sales

$

1,508.7

$

1,679.5

Non-GAAP adjusted EBITDA margin %

5.5

%

5.2

%