RR Donnelley's Q2 2017 Financials in Range with Expectations

CHICAGO — August 2, 2017 — RR Donnelley & Sons Company reported financial results for the second quarter 2017. Unless otherwise noted, the results represent RRD following the October 1, 2016 spinoffs of LSC Communications, Inc. (“LSC”) and Donnelley Financial Solutions, Inc. (“Donnelley Financial”) which are presented as discontinued operations for periods prior to October 1, 2016. Further, all references to the number of shares and per share amounts have been retroactively adjusted to give effect to the one-for-three reverse stock split which took place October 1, 2016 immediately following the spinoffs.

Key financial highlights include:

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Dan Knotts

"Our overall second quarter performance was within the range of our expectations. However, while net sales remained stable, income from operations was negatively impacted by unfavorable mix in several of our businesses and changes in foreign exchange rates,” says Dan Knotts, RRD’s president and CEO.

He continues, "In addition, we incurred investments and start-up costs in Asia as we quickly ramp up a new packaging production facility to support a significant business opportunity that we expect will begin to generate incremental sales volume later in the third quarter. We continue to make good progress in advancing our long term strategic priorities while aggressively managing our cost structure, and as we look to the back half of the year, we remain confident in our ability to deliver against our previous guidance for 2017.”

Second Quarter 2017 Highlights
Net sales in the quarter were $1.65 billion, up $13.4 million or 0.8% from the second quarter of 2016. On an organic basis, consolidated net sales declined 0.8% driven by volume growth in the International and Strategic Services segments and favorable changes in fuel surcharges which were more than offset by lower postage pass through sales in the Strategic Services segment, net volume declines in the Variable Print segment and modest price erosion across all segments.

Gross profit in the second quarter of 2017 was $303.1 million or 18.4% of net sales versus $316.4 million or 19.4% of net sales in the prior year quarter. The decline was primarily due to unfavorable mix in several businesses, modest price pressure in all segments and unfavorable changes in foreign exchange rates.

Selling, general and administrative expenses (“SG&A”) of $213.2 million, or 13.0% of net sales, in the second quarter of 2017 decreased from $233.6 million, or 14.3% of net sales, in the prior year. This decline was primarily due to pension settlement charges of $20.4 million in the second quarter of 2016 while higher bad debt expense and allocated costs from the pre-spin operations in the prior year period were offset by unfavorable changes in foreign exchange rates and higher variable incentive compensation expense in the current year period.

Income from operations of $38.6 million in the second quarter increased $13.9 million from $24.7 million in the 2016 quarter. The prior year period included the pension settlement charges and higher restructuring and impairment charges. Non-GAAP income from operations of $43.6 million, or 2.6% of net sales, decreased $11.1 millionfrom $54.7 million, or 3.4% of net sales, reported in the prior year period primarily due to lower gross profit partially offset by lower depreciation and amortization expense.

Net earnings attributable to common stockholders from continuing operations was $76.5 million in the second quarter compared to a net loss of $23.2 million in the second quarter of 2016. During the second quarter of 2017, the debt-for-equity exchange of most of the Company’s retained shares of Donnelley Financial for certain outstanding senior notes resulted in an after tax net realized gain of $94.4 million. In addition, the Company tendered certain outstanding debentures and senior notes. These transactions resulted in a net after-tax loss on debt extinguishments of $8.5 million. The prior year period included the after tax impact of the pension settlement charges and higher restructuring and impairment charges. Non-GAAP net loss attributable to common stockholders from continuing operations was $4.1 million, a decrease of $4.9 million compared to net earnings of $0.8 million in the second quarter of 2016, primarily driven by lower income from operations partially offset by lower interest expense.

Second quarter 2017 diluted earnings per share attributable to common stockholders from continuing operations was $1.09 compared to a diluted loss per share of $0.33 from the second quarter of 2016. Non-GAAP diluted loss per share attributable to common stockholders from continuing operations was $0.06 in 2017 compared to diluted earnings per share of $0.01 in 2016.

Key financial highlights by segment include:

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VARIABLE PRINT
Net sales decreased 0.9% from the second quarter of 2016 primarily due to volume decreases in Direct Mail and Commercial and Digital Print and modest price erosion throughout the segment, partially offset by net sales from the digital print and inserting operations of Precision Dialogue.

Income from operations was down $9.0 million versus the prior year second quarter. Non-GAAP income from operations was down $9.5 million versus the second quarter of 2016 primarily due to unfavorable mix in Commercial and Digital Print, higher actual costs in the current period versus allocated costs from the pre-spin operations in the prior year period, modest price declines and lower net volume.

STRATEGIC SERVICES
Net sales in the quarter increased 1.5% from the second quarter of 2016. Net sales in 2017 included $23.2 million in net spin-related sales increases, volume increases in Logistics and Sourcing, net sales from Precision Dialogue’s data analytics services offering and slightly higher fuel surcharges. Partially offsetting these increases were lower postage pass through sales of $32.2 million, volume declines within Digital and Creative Solutions and modest price declines in Logistics.

Income from operations was down $4.9 million compared to the prior year quarter. Non-GAAP income from operations was down $5.1 million versus the second quarter of 2016 due to unfavorable mix and modest price declines.

INTERNATIONAL
Net sales grew 2.8% from the second quarter of 2016 primarily due to significant volume increases in Asia, partially offset by volume declines in Global Turnkey Solutions and Business Process Outsourcing, a $14.1 million unfavorable impact from changes in foreign exchange rates and modest price erosion in Asia.

Income from operations declined $12.5 million compared to the prior year quarter. Non-GAAP income from operations decreased $13.8 million as compared to the second quarter of 2016 primarily due to unfavorable changes in foreign exchange rates and mix, cost inflation, higher actual costs in the current period versus allocated costs from the pre-spin operations in the prior year period, modest price declines and start-up expenses associated with the new packaging business in Asia which is expected to generate sales beginning in the third quarter.

CORPORATE
Unallocated corporate expenses were down $40.3 million versus the prior year quarter. The prior year period included pension settlement charges of $20.4 million and higher restructuring charges. Non-GAAP unallocated corporate expenses were down $17.3 million from the second quarter of 2016 which included higher allocated costs from the pre-spin operations. In addition, lower bad debt expense and cost reduction initiatives were partially offset by lower pension and other postretirement benefits income.

Other Highlights
Cash used in operations in the first half of 2017 was $51.8 million compared to $100.3 million in the prior year first half. The 2017 amount includes $9 million of spinoff-related cash payments. Capital expenditures in the first half of 2017 were $54.2 million versus $101.4 million in the prior year first half which included $31.2 millionrelated to discontinued operations. Prior year cash flow amounts include the activities of LSC and Donnelley Financial and have not been restated.

As of June 30, 2017, cash on hand was $224.0 million and total debt outstanding was $2.25 billion, including $350.0 million drawn against the credit facility. Availability under the credit facility was $329.0 million at June 30, 2017.

During the second quarter of 2017, the Company completed a tax-free debt-for-equity exchange of most of the Company’s retained shares of Donnelley Financial for certain outstanding senior notes with a principal outstanding balance of $111.6 million. The Company is in the process of disposing of the remaining 99,594 shares of Donnelley Financial common stock in a tax-free transaction. In addition, the Company repurchased $202.8 million of certain senior notes and debentures using borrowings under its credit agreement.

2017 Full Year Guidance
The Company reaffirmed its 2017 full year guidance previously issued on May 2, 2017 with the following highlights.

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