RR Donnelley Reports Q4 2016 Net Sales Up 3.7% From Q4 of Previous Year
CHICAGO — February 28, 2017 —RR Donnelley today reported financial results for the fourth quarter 2016. Key financial highlights include:
(1) Non-GAAP income from continuing operations, net earnings from continuing operations and diluted earnings per share exclude primarily charges for impairment and restructuring activities and acquisition and spinoff-related expenses. See pages 9 and 10 for a complete listing of items excluded and a reconciliation of GAAP income (loss) from operations, net loss from continuing operations and diluted loss per share to non-GAAP income from operations, net earnings from continuing operations and diluted earnings per share. (Click on Chart to Enlarge)
“The fourth quarter of 2016 was a pivotal quarter in our history as we completed the previously announced spinoffs of LSC Communications and Donnelley Financial Solutions at the beginning of the quarter and then began operating as a standalone company intensely focused on providing integrated multichannel communications, supply chain and logistics solutions to our customers,” says Dan Knotts, RR Donnelley’s president and CEO. “We are pleased with our fourth quarter results as we grew both our net sales and non-GAAP income from operations. And, although we exited the spin with debt leverage above our long-term target range, we remain on track to utilize the proceeds from disposing of our equity stakes in LSC Communications and Donnelley Financial Solutions, as well as cash generated from ongoing operating activities, to reduce our outstanding debt obligations.”
Unless otherwise noted, today’s results represent RR Donnelley as a standalone company following the October 1, 2016 spinoffs of LSC and Donnelley Financial which are now presented as discontinued operations for periods prior to October 1. 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.
Fourth Quarter 2016 Highlights
Net sales in the quarter were $1.88 billion, up $67.0 million or 3.7% from the fourth quarter of 2015. This increase was primarily due to $80.4 million in net sales previously recognized by reporting units that are now part of LSC and Donnelley Financial and $14.0 million from the previously announced acquisition of Precision Dialogue, partially offset by a negative $16.1 million impact from changes in foreign exchange rates, a $6.3 million reduction related to dispositions completed earlier in the year and a consolidated net organic sales decline of 0.4%. The decline in net organic sales was primarily driven by increased volume in the International and Strategic Services segments which was more than offset by lower postage pass through sales in Strategic Services, price declines across all three segments and lower volume in the Variable Print segment.
Gross profit in the fourth quarter of 2016 was $363.7 million or 19.4% of net sales versus $373.6 million or 20.6% of net sales in the 2015 quarter. Continued cost reductions were more than offset by modest price pressure in most product categories, unfavorable product mix and a one-time charge in the logistics reporting unit within the Strategic Services segment.
Selling, general and administrative expenses (“SG&A”) of $219.8 million in the fourth quarter of 2016 were up slightly from the 2015 reported amount of $217.3 million. Cost reductions and benefits from allocation differences due to the spinoffs were more than offset by higher spinoff-related expenses and additional expenses associated with higher net sales in 2016. As a percentage of net sales, SG&A was 11.7% in the fourth quarter of 2016 which improved from 12.0% reported in the fourth quarter of 2015.
Net loss from continuing operations of $488.1 million in the fourth quarter increased from a $16.1 million loss reported in the fourth quarter of 2015. The 2016 results included pre-tax charges of $560.0 million for net restructuring, impairment and other charges as compared to $13.0 million in 2015. The impairment charges in 2016 primarily related to goodwill and intangible assets in two reporting units within the Variable Print segment. On a non-GAAP basis, net earnings from continuing operations of $36.3 million decreased $1.0 million from the $37.3 million reported in the fourth quarter of 2015 and was primarily driven by higher income from operations and non-operating income and lower interest expense which were more than offset by a higher effective tax rate in the fourth quarter of 2016 primarily due to a charge to record a valuation allowance on certain state deferred tax assets.
Fourth quarter 2016 diluted loss per share from continuing operations of $6.98 compares to $0.24 from the fourth quarter of 2015. Excluding non-GAAP adjustments primarily consisting of restructuring, impairment and other charges recorded in both periods, non-GAAP diluted earnings per share from continuing operations decreased $0.02 to $0.51 in 2016 from $0.53 in 2015 primarily due to the higher effective tax rate.
Segment Highlights
VARIABLE PRINT:
Net sales in the quarter were $833.6 million, down $6.4 million or 0.8% from the fourth quarter of 2015. Net sales in 2016 benefited from growth in the commercial and digital print and labels reporting units as well as the digital print and inserting operations of Precision Dialogue but was more than offset primarily by softness in direct mail and continued secular declines in forms.
Loss from operations was $493.5 million in the fourth quarter as compared to income from operations of $64.3 million during the prior year fourth quarter. Excluding restructuring, impairment and other charges recorded in both periods, fourth quarter 2016 non-GAAP income from operations for the segment was $64.7 million, up $0.4 million from $64.3 million for the fourth quarter of 2015 as productivity improvements, the Precision Dialogue acquisition and lower depreciation and amortization expense were mostly offset by the impact of price and volume declines.
STRATEGIC SERVICES:
Net sales in the quarter were $497.3 million, up $80.7 million or 19.4% from the fourth quarter of 2015. Net sales in 2016 included $76.7 million related to sales previously recognized by reporting units that are now part of LSC and Donnelley Financial. Stronger logistics and sourcing volume, as well as sales from Precision Dialogue’s data analytics services offering, were partially offset by lower postage pass through sales of $15.5 million.
Income from operations was $1.5 million in the fourth quarter, a decrease of $10.3 million from $11.8 million during the prior year fourth quarter. Excluding non-GAAP adjustments recorded in both periods, fourth quarter 2016 non-GAAP income from operations was $1.6 million, down from $12.3 million for the fourth quarter of 2015 primarily due to a one-time charge in the logistics reporting unit and continued price pressure.
INTERNATIONAL:
Net sales in the quarter were $545.4 million, down $7.3 million or 1.3% from the fourth quarter of 2015. Strong growth in the Asia and Latin America reporting units and net sales previously recognized by a reporting unit that is now part of LSC were more than offset by the impact of unfavorable changes in foreign exchange rates, volume declines in the remaining International reporting units and small dispositions earlier in the year.
Income from operations was $48.9 million in the fourth quarter, an increase of $11.9 million from 2015. Excluding non-GAAP adjustments recorded in both periods primarily for restructuring and impairment, fourth quarter 2016 non-GAAP income from operations of $51.8 million increased $2.8 million as compared to the fourth quarter of 2015 primarily due to stronger volume in Asia and Latin America.
CORPORATE:
Unallocated corporate expenses were $23.8 million in the fourth quarter, down from the $25.7 million reported in 2015. Excluding spinoff-related transaction expenses recorded in the fourth quarter of 2016 and other non-GAAP adjustments recorded in both periods, fourth quarter 2016 unallocated corporate expenses were $16.3 million, an improvement of $8.7 million from the fourth quarter of 2015 primarily due to cost reduction initiatives and allocation differences due to the spinoffs.
Other Highlights
Cash flow from operations in the fourth quarter was $117.4 million which included spinoff-related cash payments of $29.7 million. Capital expenditures in the fourth quarter were $24.2 million. Prior year and pre-spin 2016 cash flow amounts include the activities of LSC and Donnelley Financial and have not been restated.
As of December 31, 2016, cash on hand was $317.5 million and total debt outstanding was $2.39 billion, including $185.0 million drawn against the credit facility. Availability under the credit facility was $402.6 million at December 31, 2016.
As previously announced, the Company plans to dispose of its 19.25% equity positions in LSC and Donnelley Financial and use the net proceeds to reduce debt during 2017.
2017 Guidance
(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 that are not indicative of the Company's ongoing operations. Such items include, but are not limited to, restructuring charges, impairment charges, spinoff-related transaction expenses, pension settlement charges, acquisition-related expenses, gains or losses on investments and business disposals, losses on debt extinguishment 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 indicators of business performance.
(2) 2016 capital expenditures and cash flow from operations have not been restated and include activities of LSC and Donnelley Financial for the nine-month period prior to the spinoffs on October 1, 2016. (Click on Chart to Enlarge)
