War Between RRD, North America's Largest Printer, and Major Bondholder Continues to Rage

Chatham Asset Management continues to be a thorn in the side of the board of directors and senior management at Chicago-based R.R Donnelley & Sons (RRD), North America's largest printing conglomerate that's understandably ranked No. 1 on the 2020 Printing Impressions 350 list with sales of $5.5 billion.

Before RRD reported its second quarter 2021 financial results on Aug. 3, the Chatham, N.J.-based private equity firm already waged an attack in their ongoing war by filing a Schedule 13-D with the Security & Exchange Commission (SEC). The filing indicates that Chatham owns 10,820,100 shares of RRD common stock — which represents 14.99% of the outstanding shares — as well as being a huge bondholder with hundreds of million of dollars worth of RRD debt, which is due at various future dates.

According to the 13-D SEC filing, Chatham funds collectively own $66,122,000 of RRD's 6.125% Senior Notes due Nov.1, 2026, $162,876,000 of its 8.25% Senior Notes due July 1, 2027, $20,938,000 of 6.625% Debentures due April 15, 2029, $316,966,000 of RRD's 8.5% Senior Notes due April 15, 2029, and $11,074,000 of its 8.820% Debentures due April 15, 2031.

Similar to demands made last year, Anthony Melchiorre, managing member of Chatham Asset Management, wants the RRD board to not renew its "Poison Pill" shareholder rights plan that will expire on Aug. 28, 2021, and also seeks the board to concentrate its efforts on undertaking a strategic review of assets with an external advisor. "Such matters may include, among other things, [RRD's] business, operations, performance, management, capitalization, ownership structure, corporate governance, board composition, and strategic alternatives and direction," the filing indicated.

"[Chatham] may take other steps seeking to bring about changes to increase shareholder value ... [Chatham] may in the future take such actions with respect to their investment in [RRD] as they deem appropriate including, without limitation, seeking board representation, making proposals to [RRD] concerning, without limitation, changes to its business, operations, management, capitalization, ownership structure, corporate governance or board composition; purchasing additional shares; selling some or all of their Chatham shares ... ; or otherwise, engaging in short selling of or any hedging or similar transaction with respect to the Chatham shares," the filing continued.

RRD Points Out Debt Reduction Efforts

RRD responded to Chatham's demands via an SEC 8-K filing on Aug. 2. It read:

RRD is open to constructive input from any of its stockholders and has been engaged in frequent dialogue with Chatham for more than two years. In addition, the company’s board of directors and management continue to work extensively with external advisors to review strategic opportunities, including monetizing assets to unlock the intrinsic value of RRD. Since July 31, 2020, RRD has successfully executed the following transactions to accelerate its debt and leverage reduction:

• In November 2020, RRD completed the sales of its two remaining Logistics businesses for $238 million with the assistance of an external advisor.
• In December 2020, RRD generated $96 million in proceeds from liquidating certain insurance policies.
• RRD completed nine real estate sales yielding proceeds of $22 million.

In addition, RRD continues to make strategic investments to drive profitable growth through a disciplined approach to capital allocation. Recently, the company invested to increase production capacity in its core growth businesses, including labels and packaging, where RRD has delivered sales growth in each of the last four quarters.

RRD has extended several of its debt maturities which the company believes has contributed to the generation of stockholder value. Recent transactions include the following:

• In April and May 2020, RRD issued $450 million of senior secured notes due in 2026 and used the proceeds primarily to repay principal outstanding under its term loan and to reduce the outstanding balance under its credit facility.
• In April 2021, RRD extended the maturity date under its credit facility from September 2022 to April 2026.

RRD believes its strategic actions to monetize assets, invest in the company’s business to drive organic growth, reduce its cost structure and improve its balance sheet have produced significant stockholder value as evidenced by the increase in the company’s stock price. The stock price has risen from $1.13 on July 31, 2020, to $6.12 on July 30, 2021, an increase of 442%. Our stock price percentage increase during this period was greater than 2,963 of the companies included in the Russell 3000 index, where the average return for the year was 37%.

The board and the company’s management remain committed to taking actions to increase stockholder value while executing RRD’s strategy to strengthen the company’s position as a leading global provider of multichannel business and marketing communications.

Dan Knotts

RRD reported a strong rebound in its second quarter results, albeit in comparison to an extremely challenging Q2 2020 period during the height of the pandemic.

“RRD delivered strong second quarter performance as we continue to successfully execute our strategic initiatives, while protecting the health and safety of our global colleagues,” Dan Knotts, RRD president and CEO, said in the earnings release. “Our double-digit organic sales growth, driven by an improving market and increased volumes in our strategic product categories, marked our fourth consecutive quarter of improving sales trends.

"Through our ongoing actions to strengthen our core and enhance our financial flexibility, we reported Q2 adjusted income from operations that surpassed our pre-pandemic earnings in 2019, and our debt was at the lowest second quarter level since the spin," Knotts added. "Looking forward, we remain highly focused on driving sales growth and aggressively managing our cost structure to combat the ongoing challenges created by the global pandemic, inflation, and supply chain disruptions.”

Specifically, net sales in the second quarter were $1.15 billion, up $136 million or 13.5% from the same period in 2020. The increase results from strengthening demand for most of the RRD's products and services. Notably, higher demand for e-commerce sales contributed to four consecutive quarters of net sales growth in RRD's packaging and label products.

Organic net sales increased 11.4%, according to the earnings release. The Business Services segment was up 11.6% on a non-GAAP organic basis, while the Marketing Solutions segment was up 10.3% on a non-GAAP organic basis from the second quarter of 2020. The Business Services segment experienced growth in several of RRD's strategic focus areas, including packaging, labels, and supply chain management. Net sales in Marketing Solutions also experienced growth, led by higher volumes in digital print and fulfillment and direct marketing, partially offset by last year’s U.S. Census project, which was completed by RRD in mid-2020.

Nevertheless, loss per share from continuing operations attributable to common stockholders was $0.13 in the second quarter of 2021, compared to loss per share of $0.79 reported in the second quarter of 2020. Cash used in operating activities during the six months ended June 30, 2021, was $64.8 million, compared to $44.2 million in the prior year period, according to RRD's earnings release.

"The increase in cash used from operations during 2021 is primarily driven by $23.9 million of LSC bankruptcy-related payments mostly associated with lump sum settlements for employee retirement obligations, higher tax and incentive compensation payments, and a $9.2 million payment to terminate certain interest rate swap agreements," the release pointed out.

RRD Issues a Tepid Financial Outlook

RRD did indicate that it expects net sales to be up 1% to 3% for the year, despite the ongoing uncertainty amidst COVID-19. "While client demand for our products and services continues to strengthen, ongoing challenges including labor shortages, supply chain disruption, inflationary increases, and shipping delays caused by container shortages in key ports including China, remain," the release noted. "These issues, combined with the ongoing uncertainty related to the COVID-19 pandemic, create added challenges when predicting future business performance."

Operating cash flow is also expected to be slightly lower from the prior year, due to payments to settle LSC bankruptcy-related obligations and repayment of half of the employer portion of payroll taxes deferred in 2020. Capital expenditures are expected to be approximately $80 million. RRD also expects to receive an additional deposit of approximately $50 million this year as part of the agreement to sell its printing facility in China.

From Chatham's perspective, that past financial performance and outlook for the future is not good enough.