RR Donnelley Reports Q2 2015 Results, Intent to Create Three Independent Publicly Traded Companies
RR Donnelley & Sons Company (RRD), Chicago, has reported financial results for the second quarter of 2015.
- Second-quarter net sales of $2.7 billion declined 5.3 percent from the second quarter of 2014; organic net sales declined 2.1 percent from the second quarter of 2014.
- Second-quarter GAAP net earnings attributable to common shareholders of $43.5 million, or $0.21 per diluted share, compared to GAAP net earnings attributable to common shareholders in the second quarter of 2014 of $64.7 million, or $0.32 per diluted share.
- Second-quarter non-GAAP net earnings attributable to common shareholders of $83.6 million, or $0.41 per diluted share, compared to non-GAAP net earnings attributable to common shareholders in the second quarter of 2014 of $84.4 million, or $0.42 per diluted share.
- Second-quarter operating cash flow of $205.3 million and free cash flow of $152.7 million exceeded the second quarter of 2014 by $55.2 million and $59.9 million, respectively.
- Company provides updated guidance for full-year 2015; includes the impact of the acquisition of Courier Corp., the sale of its operations in Venezuela and an updated view on the negative impact of foreign exchange rates.
- Company separately announces intent to create three independent publicly traded companies.
"Despite a challenging demand environment, we aggressively managed our cost structure to achieve a non-GAAP adjusted EBITDA margin of 11.3 percent," said Thomas J. Quinlan III, RR Donnelley's president and CEO. "In addition, we are pleased with our second quarter free cash flow of $152.7 million, which represented a 65 percent improvement from the second quarter of last year."
Quinlan continued, "As we look to the back half of 2015, we will continue to aggressively manage costs, which is reflected in our improved non-GAAP adjusted EBITDA margin guidance for full-year 2015."
Net sales in the quarter were $2.7 billion, down $154.4 million, or 5.3 percent, from the second quarter of 2014. After adjusting for the impact of acquisitions, changes in foreign exchange rates, dispositions and changes in pass-through paper, organic sales decreased 2.1 percent from the second quarter of 2014, as increases in the Strategic Services and International segments only partially offset declines in the Publishing and Retail Services and Variable Print segments.
Second-quarter 2015 net earnings attributable to common shareholders was $43.5 million, or $0.21 per diluted share, compared to net earnings attributable to common shareholders of $64.7 million, or $0.32 per diluted share, in the second quarter of 2014. The second-quarter net earnings attributable to common shareholders included pre-tax charges of $50.9 million and $28.3 million in 2015 and 2014, respectively, all of which are excluded from the presentation of non-GAAP net earnings attributable to common shareholders.
Non-GAAP adjusted EBITDA in the second quarter of 2015 was $309.2 million, or 11.3 percent of net sales, compared to $325.6 million, or 11.2 percent of net sales, in the second quarter of 2014. The decrease in non-GAAP adjusted EBITDA was due to volume declines in Variable Print and Publishing and Retail Services segments and price pressure in all four operating segments. These decreases were partially offset by productivity improvements and lower variable compensation expense, which also positively impacted margin.
Non-GAAP net earnings attributable to common shareholders totaled $83.6 million, or $0.41 per diluted share, in the second quarter of 2015 compared to $84.4 million, or $0.42 per diluted share, in the second quarter of 2014.
The company also announced that it intends to create three independent, publicly traded companies: one business focused on financial communications and data services; one business focused on publishing and retail-centric print services; and one business focused on customized multichannel communications management.
"Over the last decade, we have strengthened our business portfolio through a combination of organic growth and strategic acquisitions, developing new products and services, inventing fresh ways to serve customers, attracting additional talent and building information technology systems," noted Quinlan.
He continued, "We see a significant opportunity to unlock value by allowing these three businesses to pursue their own strategies and invest according to the unique dynamics of their respective industries. Each company will have the strategic focus, management resources and capital structure to enable it to strengthen its market position and pursue its growth opportunities, enhancing long-term value for stakeholders."
The creation of these three independent businesses is expected to deliver the following strategic and financial benefits:
- Each business to focus on its distinct strategic priorities, driving opportunities to accelerate growth and enhance long-term value.
- Greater flexibility to execute tailored business strategies and compete in evolving markets.
- Even more focused brand strategy to support each business's marketing plan.
- Tailored capital structures reflective of each business's financial and growth profiles.
- Better-optimized investment policies.
- Market recognition of standalone growth prospects and profitability.
- Enable investors' valuations to reflect each business's unique operating and financial dynamics.
"We recognize that parts of the current portfolio will be more successful pursuing different strategies, and that these particular businesses offer the scale, expertise, product and service mix and other resources to excel as standalone companies," Quinlan added. "Creating three independent companies will allow each to more quickly capitalize on opportunities created by continued technological innovation and globalization within the markets they serve."
Financial Communications Services Company (FinancialCo)
FinancialCo will be a leading, financial communications services company serving both the investment and capital markets worldwide. With proprietary technology, extensive capabilities and deep subject matter expertise, FinancialCo will support its customers with content management, multichannel content distribution, data management and analytics, collaborative workflow and business reporting tools and translations services. FinancialCo's one-stop-shop offering leverages a unique combination of technology, service and regulatory expertise built through the combination of RR Donnelley's financial print business, Bowne Financial and EDGAR Online.
As a standalone company with trailing 12-month net sales for the period ended June 30, 2015 of approximately $1 billion, the company believes FinancialCo will be positioned to aggressively invest in leading technology and workflow tools to support its customer communications requirements in a growing and fast evolving marketplace and to generate strong margins and cash flow to capitalize on significant opportunities in content collaboration, data analytics and compliance/regulatory services.
Publishing and Retail-Centric Print Services Company (PRSCo)
Publishers, merchandisers and retailers worldwide trust PRSCo to prepare, produce and distribute their periodicals, catalogs, inserts, books, office products and directories.
As a standalone company with trailing 12-month net sales for the period ended June 30, 2015 of approximately $3.5 billion, the company believes PRSCo will continue to expand its unmatched scope of print-related capabilities to better serve customers worldwide and will be well positioned for further value creation through continued cost restructuring and accretive acquisition opportunities. The company's expertise, deep customer relationships and strong cash flow generation are expected to support both organic and acquisition opportunities.
Customized Multichannel Communications Management Company (CMCo)
CMCo will be a global, customized multichannel communications management provider that assists organizations around the world in creating, managing and executing their multichannel communications strategies. CMCo will offer customized digital and printed communications services, including direct mail, short-run commercial printing, statements, business process outsourcing, supply chain management, logistics, creative design, content management, forms, labels, packaging, kitting and fulfillment and more.
As a standalone company with trailing 12-month net sales for the period ended June 30, 2015 of approximately $7 billion and deep relationships with Fortune 1000 customers, the company believes there are clear growth opportunities for CMCo driven by increasing demand for customized multichannel communications and it is well positioned to capture these opportunities by offering integrated solutions that help customers better manage their brand execution, marketing and supply chain strategies. CMCo is expected to have capital flexibility to fund growth investments and develop additional capabilities.
Transaction Details/Next Steps
The transaction is expected to take the form of a tax-free distribution to RR Donnelley shareholders of FinancialCo and PRSCo in two new, independent, publicly traded stocks. The company expects to complete the spinoffs prior to the end of 2016. Immediately following the completion of the transactions, existing RR Donnelley shareholders will own shares in all three companies.
The leadership, governance, corporate branding and other matters for each company are still being developed and the company will provide interim updates as appropriate.
RR Donnelley management intends to continue to recommend to the board of directors a quarterly dividend of $0.26 per share, consistent with its current level, until the transactions have been consummated. Following the completion of the transactions, each company will determine its appropriate capital allocation policy. While the capital structures of each company have not been finalized, it is expected that the currently outstanding RR Donnelley notes will remain at CMCo and that CMCo will receive certain cash proceeds in connection with the capitalization of each of PRSCo and FinancialCo.
The transactions are subject to customary conditions, including obtaining rulings from the Internal Revenue Service and/or tax opinions, execution of inter-company agreements and final approval by the company's board of directors.
Centerview Partners LLC and BofA Merrill Lynch are serving as financial advisors to RR Donnelley. Sullivan & Cromwell LLP is serving as legal advisor.
For more information, visit www.rrdonnelley.com.