AP NEWS

RRD Reports Second Quarter 2018 Results

August 1, 2018

CHICAGO--(BUSINESS WIRE)--Aug 1, 2018--R.R. Donnelley & Sons Company (NYSE: RRD) (“RRD”) today reported financial results for the second quarter of 2018.

Key messages

Net sales increased 3.7%, and organic sales grew 2.7% - represents third consecutive quarter of organic growth Income from operations includes unfavorable foreign exchange rate impact of nearly $7 million versus 2017 on both a GAAP and non-GAAP basis Net cash provided by operating activities of $12.3 million in the quarter increased $48.2 million versus the prior year period Print logistics sale completed on July 2, 2018; proceeds of $60.0 million, subject to customary working capital adjustments, were used to reduce credit facility borrowings Full year guidance adjusted primarily for the sale of print logistics and expected stronger organic sales performance Board of Directors approved a quarterly dividend of $0.03 per common share

“I am pleased with our solid performance and the progress we made during the quarter in executing our strategic growth objectives as a marketing and business communications services company,” said Dan Knotts, RRD’s President and Chief Executive Officer. “We delivered our third consecutive quarter of organic growth, which continues to be driven by our unique ability to help our clients manage the full range of interactions they have with their customers across every critical touch point – online, offline and in-store – with reduced complexity and increased efficiency. Through the powerful combination of our Marketing Solutions and Business Services capabilities, we believe we are well positioned to win new business and execute our long-term growth strategy. Excluding the negative impact of foreign exchange rates, our adjusted income from operations and EBITDA also increased year over year, largely attributable to productivity improvements and our aggressive actions to address inflationary cost headwinds. Our operating cash flow also improved significantly in the quarter in line with our expectations. As we enter our seasonally stronger back half of the year, we remain confident in our ability to execute our strategy, sustain our organic sales growth and deliver our cost reduction plans to achieve our full year guidance.”

Financial highlights

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

Net sales in the quarter were $1.68 billion, up $59.5 million or 3.7% from the second quarter of 2017. On an organic basis, consolidated net sales increased 2.7% primarily driven by higher volume and fuel surcharges in the Business Services segment, partially offset by price pressure. From a products and services perspective, Packaging, Logistics and Direct Mail accounted for most of the increase while Commercial Print was lower due to ongoing secular pressure and lower specialty card sales.

Gross profit in the second quarter of 2018 was $290.6 million or 17.3% of net sales versus $302.0 million or 18.6% of net sales in the prior year quarter. The favorable impact of volume growth and cost reduction initiatives was more than offset by unfavorable changes in foreign exchange rates and modest price pressure.

Selling, general and administrative expenses (“SG&A”) of $208.0 million, or 12.4% of net sales, in the second quarter of 2018 decreased from $216.3 million, or 13.4% of net sales, in the prior year. The improvement was primarily due to cost reduction initiatives, partially offset by higher health care and performance based compensation expenses.

Income from operations was $25.5 million in the second quarter compared to $34.4 million in the 2017 quarter. The second quarter of 2018 included pre-tax restructuring and other charges of $11.0 million. The prior year period included pre-tax restructuring and other charges of $3.8 million and $1.2 million for spinoff-related transaction expenses. Non-GAAP income from operations of $36.5 million, or 2.2% of net sales, decreased $2.9 million from $39.4 million, or 2.4% of net sales, reported in the prior year period. Unfavorable changes in foreign exchange rates reduced second quarter results by nearly $7 million as compared to the 2017 quarter.

Net loss attributable to common stockholders of $13.0 million in the second quarter compared to net earnings of $76.5 million in the second quarter of 2017. During the second quarter of 2017, the debt-for-equity exchange of most of the Company’s retained shares of Donnelley Financial Solutions, Inc. (“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. Non-GAAP net loss attributable to common stockholders was $6.4 million, an increase of $2.3 million compared to $4.1 million in the second quarter of 2017, primarily driven by lower income from operations and higher taxes, partially offset by lower interest expense.

Second quarter 2018 diluted loss per share attributable to common stockholders was $0.18 compared to diluted earnings per share of $1.09 in the second quarter of 2017. While non-GAAP income before taxes was up slightly in 2018 as compared to 2017, non-GAAP diluted loss per share attributable to common stockholders of $0.09 in 2018 was unfavorable to $0.06 reported in 2017 due to higher tax expense.

Other highlights and information

Cash used in operating activities during the six months ended June 30, 2018 was $128.0 million compared to $40.9 million in the prior year period. The increase primarily related to net unfavorable changes in working capital and higher tax payments. Capital expenditures in 2018 were $48.0 million versus $54.2 million in the prior year period and proceeds from facility and other asset sales, including deposits collected were $48.1 million in the 2018 period.

As of June 30, 2018, cash on hand was $257.0 million and total debt outstanding was $2.26 billion, including $322.0 million drawn against the credit facility. Availability under the credit facility was $351.8 million at June 30, 2018.

The Company has entered into an agreement to sell a property in an international location for gross proceeds of approximately $250 million. This transaction is subject to receiving governmental approval, and the Company expects the transaction to close in 2020. The net book value of these assets is insignificant. As of June 30, 2018, the Company has collected, in accordance with the agreement, non-refundable deposits of $44.6 million from the third party buyer with additional deposits required to be paid prior to closing. Deposits collected are unrestricted, but the Company expects the deposits to remain in a foreign cash account until the government provides the necessary approvals, closing is finalized and local taxes are paid.

On July 2, 2018, the Company completed the previously announced sale of its print logistics business for $60.0 million, subject to normal working capital adjustments. Proceeds from the sale were used to reduce borrowings outstanding under the credit facility. The Company expects to report an insignificant gain on the transaction in the third quarter with no cash taxes, and that the sale will have a slightly favorable impact on the Company’s financial leverage.

Dividend

The Board of Directors declared a quarterly cash dividend of $0.03 per common share. The dividend will be payable on September 4, 2018 to stockholders of record as of the close of business on August 15, 2018. The amount of the dividend reflects a reduction from the previous quarter’s dividend of $0.14 per common share.

“We believe the revised dividend amount continues to provide a competitive return to our stockholders while allowing us to accelerate the pace at which we reposition our balance sheet and improve our financial flexibility to support our strategy,” Knotts continued. “Improving our capital structure will enhance our ability to make strategic investments and accelerate our growth as a leading marketing and business communications company. We remain committed to taking actions such as this reduction, as well as the sale of our print logistics business and other assets, to further reduce our debt and financial leverage and create long-term value for our stockholders.”

2018 guidance

The Company’s full year guidance, adjusted primarily for the sale of print logistics and expected stronger organic sales performance, is as follows:

Conference call

RRD will host a conference call to discuss its second quarter results Thursday, August 2, 2018 at 11:00 a.m. Eastern Time (10:00 a.m. Central Time). Participants may listen to the call by dialing 612.234.9959 (access code 451788#). For those unable to listen live, a telephonic replay of the call will be available until October 31, 2018 at 320.365.3844 (access code 451788#).

A slide presentation will be available on the Investors section of the RRD website at www.rrd.com.

About RRD

RRD is a leading global provider of multichannel business communications services and marketing solutions. With more than 50,000 customers and 43,000 employees across 34 countries, RRD offers the industry’s most comprehensive offering of solutions designed to help companies—from Main Street to Wall Street—optimize customer engagement and streamline business operations across the complete customer journey. RRD offers a comprehensive portfolio of capabilities, experience and scale that enables organizations around the world to create, manage, deliver, and optimize their marketing and business communications strategies.

For more information, visit the Company’s web site at www.rrd.com.

Use of non-GAAP information

This news release contains non-GAAP financial measures, including non-GAAP SG&A, non-GAAP income from operations, non-GAAP Adjusted EBITDA, non-GAAP effective tax rate, non-GAAP net earnings (loss) attributable to common stockholders, non-GAAP diluted earnings (loss) per share and non-GAAP organic net sales. The Company believes that these non-GAAP measures, when presented in conjunction with comparable GAAP measures, provide useful information about its operating results and enhance the overall ability to assess the Company’s financial performance. These measures should be considered in addition to, and not as a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP. RRD uses these non-GAAP measures, together with other measures of performance under GAAP, to compare the relative performance of operations in planning, budgeting and reviewing the performance of its business. Additional information relating to the adjustments for the non-GAAP SG&A, non-GAAP income from operations, non-GAAP Adjusted EBITDA, non-GAAP effective tax rate, non-GAAP net earnings (loss) attributable to common stockholders, non-GAAP diluted earnings (loss) per share and non-GAAP organic net sales for RRD is set forth in the attached schedules.

Use of forward-looking statements

This news release includes certain “forward-looking statements” within the meaning of, and subject to the safe harbor created by, Section 21E of the Securities Exchange Act of 1934, as amended, with respect to the business, strategy and plans of the Company and its expectations relating to future financial condition and performance. These statements include all those under the column labeled “Current Guidance August 1, 2018” in the table included under the “2018 Guidance” section. Statements that are not historical facts, including statements about RRD’s management’s beliefs and expectations, are forward-looking statements. Words such as “believes,” “anticipates,” “estimates,” “expects,” “intends,” “aims,” “potential,” “will,” “would,” “could,” “considered,” “likely,” “estimate” and variations of these words and similar future or conditional expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. While RRD believes these expectations, assumptions, estimates and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks and uncertainties, many of which are beyond RRD’s control. By their nature, forward-looking statements involve risk and uncertainty because they relate to events and depend upon future circumstances that may or may not occur. Actual results may differ materially from RRD’s current expectations depending upon a number of factors affecting the business and risks associated with the performance of the business. These factors include such risks and uncertainties detailed in RRD’s periodic public filings with the SEC, including but not limited to those discussed under the “Risk Factors” section in RRD’s Form 10-K for the fiscal year ended December 31, 2017, and other filings with the SEC and in other investor communications of RRD from time to time. RRD does not undertake to and specifically disclaims any obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect future events or circumstances after the date of such statement or to reflect the occurrence of anticipated or unanticipated events.

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