RR Donnelley Reports Q2 2020 Financials, Including 23% Net Sales Drop, Higher Operating Cash Flow

RR Donnelley held an investor presentation to discuss its second quarter results. Above is one of the slides from it. Click to enlarge.

R.R. Donnelley & Sons Company (RRD) today reported financial results for the second quarter of 2020.

Second quarter key messages

• GAAP net sales decreased 23%; non-GAAP organic net sales decreased 17.1%; June net sales performance was the strongest month in the quarter as local economies began to reopen
• GAAP (loss) income from operations was down $36.8 million versus the prior year; non-GAAP adjusted income from operations decreased $14.1 million; additional cost-out actions implemented throughout the quarter
• GAAP loss per share was $0.79; non-GAAP adjusted loss per share of $0.09 reflects the impact from COVID-19
• Operating cash flow in the quarter increased $22.5 million from the prior year period driven by working capital improvements; year-to-date improvement now at $72.9 million; capital expenditures were down $18.6 million in the quarter
• Completed three debt exchanges, repaid the 2020 Senior Notes and repurchased additional debt due in 2021 during the quarter; aggregate maturities for Senior Notes and Debentures due in 2020 to 2024 now total $394 million, down $628 million from the beginning of the year

Daniel Knotts

“The second quarter was a very challenging period as we swiftly responded to the worldwide impact from the COVID-19 pandemic. We acted quickly to protect our employees and adapt our operations to meet the essential communications requirements of our more than 50,000 global clients,” said Dan Knotts, RRD President and Chief Executive Officer. “We also took significant steps to improve our financial flexibility and protect our liquidity. During the quarter, we executed three debt exchanges, repaid our 2020 notes and repurchased additional debt due in 2021. Further, our operating cash flow improved from the prior year for the second consecutive quarter.”

“While we expect continued uncertainty and volatility for the foreseeable future, our priorities remain clear,” Knotts added. “We will continue to be responsive to our clients’ evolving needs while protecting our employees, adjusting our cost structure and maintaining the necessary liquidity to run our business. Despite the challenges, I am confident that the actions we are taking will enable us to successfully navigate through short-term uncertainty and position us to be an even stronger RRD in the future.”

Financial highlights

The following table provides an overview of RRD’s financial performance:

Click to enlarge.

Net sales in the quarter were $1.16 billion, down $346.5 million or 23% from the second quarter of 2019. The decrease includes a $94.2 million impact from dispositions in the Business Services segment, primarily the Global Document Solutions and Logistics Courier businesses, and a $9.8 million reduction due to changes in foreign exchange rates.

On an organic basis, consolidated net sales declined 17.1%. The Business Services segment was down 23% on a GAAP basis and 15.7% organically while the Marketing Solutions segment was down 22.9% on a GAAP and non-GAAP organic basis from the second quarter of 2019. Both segments were negatively impacted by lower volumes resulting from the COVID-19 pandemic and modest price reductions, while the Business Services results were further impacted by lower fuel surcharges in its Logistics business.

Loss from operations was $15.9 million in the second quarter compared to income from operations of $20.9 million in the second quarter of 2019. The second quarter of 2020 included net restructuring and other charges of $28.5 million, an increase of $12.5 million from the prior year period due primarily to the Company’s aggressive actions to reduce its cost structure as a result of the pandemic. In addition, the quarter included $8.8 million of other charges primarily for the recently completed debt exchanges and ongoing investigation costs in RRD Brazil.

Non-GAAP adjusted income from operations of $25.1 million decreased $14.1 million from the prior year period. The decline was driven by the global impact of COVID-19 and price pressure, partially offset by the actions to reduce its cost structure. In addition, the 2020 results for the quarter also benefited from lower variable incentive compensation and employee healthcare expenses and the favorable impact from changes in foreign exchange rates. Adjusted SG&A expense was down $47.7 million in the 2020 period.

Loss per share attributable to common stockholders was $0.79 in the second quarter of 2020 compared to a loss per share of $0.10 in the second quarter of 2019. Results for the 2020 quarter were unfavorable to the prior year primarily due to the COVID-19 pandemic and an unfavorable effective tax rate.

Non-GAAP adjusted loss per share attributable to common stockholders of $0.09 in the second quarter of 2020 was unfavorable to the loss per share of $0.03 in the second quarter of 2019 driven by lower adjusted income from operations and a negative effective tax rate, partially offset by lower interest expense.

Other highlights and information

Cash provided by operating activities of $35.4 million in the second quarter of 2020 improved $22.5 million versus the prior year amount. Cash used in operating activities during the six months ended June 30, 2020 was $44.2 compared to $117.1 million in the prior year period. The significant improvement in both periods is primarily due to working capital improvements in addition to lower tax and interest payments and cash deferrals from the CARES Act. Capital expenditures in the six months ended June 30, 2020 of $38.1 million were down from $76.4 million in the prior year period primarily due to the 2019 expenditures associated with the China facility relocation and the Census project as well as lower spend in 2020 during the COVID-19 pandemic.

As of June 30, 2020, cash on hand was $341.9 million and total debt outstanding was $2 billion. Total outstanding debt is down $133 million from March 31, 2020 and is down $86 million from June 30, 2019. Availability under the credit facility was $117.8 million at June 30, 2020, while total liquidity, including cash on hand, was $460 million.

During the current quarter, the Company completed three debt exchanges, repaid the 2020 Senior Notes using cash on hand and repurchased an additional $28 million of Senior Notes and Debentures due in 2021. During the first half of 2020, the Company has reduced its maturities on its Senior Notes and Debentures due in 2020 to 2024 from $1 billion at December 31, 2019 to $394 million as of June 30, 2020, a reduction of $628 million.

COVID-19 pandemic update

As previously reported, the Company took swift actions to activate its business continuity plans when the COVID-19 pandemic began impacting its business in the first quarter. RRD’s core operating plan for navigating COVID-19 includes three pillars: protecting the health and safety of its employees, maintaining operational continuity, and effectively managing its business performance. Most of the Company’s operations have been classified as essential and RRD continues to successfully deliver against the needs of its more than 50,000 global clients.

The Company’s cross-functional COVID-19 Task Force continues to meet diligently to ensure that RRD is closely adhering to the latest available guidelines from the Centers for Disease Control and World Health Organization to keep its employees safe. Within its manufacturing facilities, the site leaders are implementing stringent safety measures while continuing to deliver for the Company’s clients. RRD developed a phased approach for slowly and cautiously ending work from home arrangements. More than 10,000 RRD employees continue to work primarily from home.

BUSINESS IMPLICATIONS

The COVID-19 pandemic impacted the Company’s financial results throughout the second quarter. May results reported the greatest negative impact while June results were up significantly as local economies began to reopen. The Company believes there are three primary factors that are helping to lessen the top line impact from the pandemic as follows:

• Diversification of its products and services – the Company offers 11 different product and service categories, each of which are impacted differently by the pandemic. Products and services that are more transactional, like commercial print, digital print and fulfillment and direct mail, experienced significantly larger declines than other product categories like supply chain services, packaging, logistics and labels, where the impact on demand was significantly less.
• Limited client and industry concentration – RRD’s clients operate in nearly all types of industries and geographies and the Company is not disproportionately exposed to any one industry. The Company did experience significant reductions in demand from clients in the travel and hospitality industry while demand from other clients from industries like not-for-profit, distribution and logistics, financial services and essential retailers was less impacted.
• RRD introduced new products and services to meet the evolving needs of its clients – the Company saw important opportunities to stand by its clients and help them navigate their new conditions and realities. RRD began producing protective face shields for other businesses, delivered new COVID-19 signage, fulfilled additional regulatory mailings and began kitting and distributing new COVID-19 test kits, among many other new offerings.

The Company continues to aggressively accelerate both temporary and permanent cost reduction actions to lessen the impact from lower sales volume as a result of the COVID-19 pandemic. Recent actions include implementing an employee furlough program with RRD paid medical benefits, closing production facilities, suspending all 2020 employee merit increases, restricting domestic and international travel and delaying capital projects.

To protect liquidity, the Company continues to hold an elevated amount of cash on hand while borrowings under the Company’s credit facility also remain temporarily higher. In addition, the Company is not currently subject to maintenance financial covenants in its debt agreements.

OUTLOOK

As infection rates continue to increase in many parts of the world, the path forward presents many uncertainties and RRD continues to evaluate a range of possible recovery scenarios. Because of these uncertainties, the Company is unable to furnish typical guidance for the balance of the year. For the third quarter, however, management expects that net sales will be unfavorable to the prior year between $325 and $400 million. This reflects further impact from the pandemic, Census work in the prior year period that will not repeat and a decline of $92 million from recent business dispositions. In addition, third quarter results will benefit from additional cost reductions and lower interest expense.

Click to enlarge.

Source: RR Donnelley