Delaware
(State or other
jurisdiction of
incorporation or
organization) |
36-1004130 (I.R.S.
Employer
|
77 West Wacker
Drive,
Chicago, Illinois (Address of
principal executive offices)
77 West Wacker
Drive,
Chicago, Illinois
(Address of principal executive offices)
|
|
60601 (Zip
Code)
| |
Registrants
Telephone Number (312) 326-8000
Indicate by check
mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to the filing
requirements for the past 90 days.
|
Number of shares
of common stock outstanding
|
|
as of October 31, 1999April 30, 2000
|
PART I
FINANCIAL INFORMATION
Item
1. Financial Statements
R.R. DONNELLEY
& SONS COMPANY AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Thousands of
dollars, except share data)Dollars, Except Per-Share Data)
|
|
Three Months
Ended
September 30March 31
| |
Nine Months Ended
September 30
|
|
| 2000
| |
1999
| | 1998
| | 1999
| | 1998
|
Net
sales |
|
$
1,340,1431,342,970 |
|
|
$
1,274,479 | | | $
3,715,129 | | | $
3,604,0401,231,404 |
|
Cost of
sales |
|
1,018,4881,101,947 |
|
|
980,459988,468 | | | 2,891,289 | | | 2,851,213 |
|
|
|
|
|
|
| | |
| | |
|
|
Gross
profit |
|
321,655241,023 |
|
|
294,020242,936 | | | 823,840 | | | 752,827 |
|
Selling and
administrative expenses |
|
163,965145,882 |
|
|
145,776151,361 | | | |
| | |
| | Earnings from
operations | | 95,141 |
|
|
471,67191,575 | | Other income
(expense): | Interest
expense | | (22,141 | ) | | (19,896 | ) | Other,
net | | 2,937 |
|
|
419,4252,792 | | | |
| | |
| | Earnings from
continuing operations before income taxes | | 75,937 | | | 74,471 |
|
Income
(loss)
from operations of businesses
held for saletaxes |
|
29,236 |
|
|
28,671 | | | |
| | |
| | Income from
continuing operations | | 46,701 |
|
|
(4,89045,800 |
) | Loss from
discontinued operations, net of income taxes |
| | | |
(80,0671,820 |
) |
|
|
|
|
|
| | |
| | |
|
|
Earnings from
operationsNet
income |
|
157,690 | | | 148,244 | | | 347,279 | | | 253,335 | | Other income
(expense): | | | | | | | | | | | | | Interest expense
| | (23,084 | ) | | (19,400 | ) | | (66,705 | ) | | (59,036 | ) | Gain on sale of
Metromail shares | |
$ 46,701 |
|
|
$
43,980 | | |
| | | 145,656 | | Gain on sale of
DESI | |
| | | 23,247 | | |
| | | 23,247 | | Other income
net shares | | 4,559 | | | 2,079 | | | 15,447 | | | 3,960 |
|
|
|
|
|
|
| | |
| | |
|
|
Earnings before
income taxes | | 139,165 | | | 154,170 | | | 296,021 | | | 367,162 | | Provision for
income taxes | | 53,578 | | | 54,927 | | | 113,968 | | | 164,975 | | | |
| | |
| | |
| | |
| | Net income
| | 85,587 | | | 99,243 | | | 182,053 | | | 202,187 | | | |
| | |
| | |
| | |
| | | Net incomeIncome from
continuing operations per share of common stock:stock |
|
|
|
| | | | | | |
|
|
Basic |
| $
0.38 | | |
$
0.670.34 | | Diluted | | 0.38 |
|
| 0.34 | | Loss from
discontinued operations per share of common stock | | | | | | | Basic | | $
| | | $
(0.01 | ) | Diluted | | | | | (0.01 | ) | Net income per
share of common stock | | | | | | | Basic | | $
0.38 | | |
$
0.72 | | | $
1.40 | | | $
1.430.33 |
|
Diluted |
|
$
0.670.38 |
|
|
$
0.71 | | | $
1.39 | | | $
1.41 | | | Cash dividends
per basic share | | $
0.22 | | | $
0.21 | | | $
0.64 | | | $
0.61 | | | | Average basic
shares outstanding | |
127,608,000 | | |
138,075,000 | | |
130,089,000 | | |
140,982,000 | | Average diluted
shares outstanding | |
128,408,000 | | |
140,245,000 | | |
131,234,000 | | |
143,211,0000.33 |
|
See accompanying
Notes to Condensed Consolidated Financial Statements.
R.R. DONNELLEY
& SONS COMPANY AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
September 30, 1999March 31, 2000
and December 31, 19981999
(Thousands of
dollars, except share data)
ASSETS |
|
| 2000
| |
1999
| | 1998
|
Cash and
equivalents |
|
$ 66,67348,270 |
|
|
$ 66,22641,873 |
|
Receivables,
less allowance for doubtful accounts of $17,255 in 1999 and$16,844
$14,279 in 19982000 and $15,461 in 1999 |
|
924,308842,854 |
|
|
843,094865,305 |
|
Inventories |
|
224,566211,229 |
|
|
182,931194,312 |
|
Prepaid
expenses |
|
49,422113,784 |
|
|
63,04051,781 | | Refundable
income taxes | | 76,579 | | | 76,579 |
|
|
|
|
|
|
|
|
Total current assets |
|
1,264,9691,292,716 |
|
|
1,155,2911,229,850 |
|
|
|
|
|
|
|
|
Property,Net property,
plant and equipment, at cost, less accumulated depreciation of
$2,883,536 in 2000 and $2,822,737 in
1999 |
|
4,623,8491,706,141 |
|
|
4,368,7541,710,669 | | Accumulated
depreciation | | 2,879,025 | | | 2,667,827 | | | |
| | |
| |
Net property,
plant and equipment | | 1,744,824 | | | 1,700,927 |
|
Goodwill and
other intangibles, net of accumulated amortization
of $205,330
of $229,293 in 2000 and $217,616 in
1999 and $183,589 in 1998 |
|
384,429555,637 |
|
|
381,394397,983 |
|
Other noncurrent
assets |
|
544,610558,165 |
|
|
515,029514,962 | | Net assets of
businesses held for sale | | 40,582 | | | 45,476 |
|
|
|
|
|
|
|
|
Total assets |
|
$3,979,414
4,112,659 |
|
|
$3,798,117
3,853,464 |
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS EQUITY |
Accounts payable
| | $
334,592 |
|
|
| Accounts
payable | | $ 331,257326,239 | | | $ 334,389 |
|
Accrued
compensation |
|
170,230144,962 |
|
|
188,187175,590 |
|
Short-term
debt |
|
60,000674,835 |
|
|
60,000419,555 |
|
Current and
deferred income taxes |
|
42,78020,412 |
|
|
2,26310,894 |
|
Other accrued
liabilities |
|
319,377308,454 |
|
|
242,251263,035 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
926,9791,474,902 |
|
|
823,9581,203,463 |
|
|
|
|
|
|
|
|
Long-term
debt |
|
1,300,122752,231 |
|
|
998,978748,498 |
|
Deferred income
taxes |
|
256,886250,284 |
|
|
260,692252,884 |
|
Other noncurrent
liabilities |
|
386,644519,595 |
|
|
413,611510,361 |
|
| |
| | |
| |
Total noncurrent liabilities | | 1,522,110 | | | 1,511,743 | | | |
| | |
| | Shareholders equity: |
|
|
|
|
|
|
Common stock at stated value ($1.25 par value) |
|
|
|
|
|
|
Authorized shares: 500,000,000;
Issued 140,889,050 in 19992000 and
140,889,050 in 19981999 |
|
308,462 |
|
|
308,462 |
|
Retained earnings |
|
1,390,4631,510,896 |
|
|
1,325,6341,521,474 |
|
Cumulative
translation adjustmentsAccumulated other comprehensive income |
|
(67,41459,181 |
) |
|
(55,05064,154 |
) |
Unearned compensation |
|
(6,9478,991 |
) |
|
(6,1186,222 |
) |
Reacquired common stock, at cost |
|
(515,781635,539 |
) |
|
(272,050621,302 |
) |
|
|
|
|
|
|
|
Total
shareholders equity |
|
1,108,7831,115,647 |
|
|
1,300,8781,138,258 |
|
|
|
|
|
|
|
|
Total
liabilities and shareholders equity |
|
$3,979,414
4,112,659 |
|
|
$3,798,117
3,853,464 |
|
|
|
|
|
|
| |
See accompanying Notes to Condensed Consolidated
Financial Statements.
R.R. DONNELLEY & SONS COMPANY AND
SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Nine Months Ended September 30
(Thousands of dollars)
| | 1999
| | 1998
|
---|
Cash flows
provided by (used for) operating activities: | | | | | | |
Net income
| | $
182,053 | | | $
202,187 | |
Loss from
operations of businesses held for sale, net of tax | | 3,010 | | | 80,067 | |
Gain on sale of
Metromail, net of tax | |
| | | (87,394 | ) |
Gain on sale of
DESI, net of tax | |
| | | (13,948 | ) |
Depreciation
| | 242,358 | | | 242,272 | |
Amortization
| | 36,158 | | | 38,162 | |
Gain on sale of
assets | | (4,794 | ) | | (7,855 | ) |
Net change in
operating working capital | | (72,205 | ) | | (17,540 | ) |
Net change in
other assets and liabilities | | (224 | ) | | 36,312 | |
Other | | 12,646 | | | (10,745 | ) | | |
| | |
| | Net cash
provided by operating activities | | 399,002 | | | 461,518 | | | |
| | |
| | Cash flows
provided by investing activities: | | | | | | |
Capital
expenditures | | (198,267
| ) | | (159,083 | ) |
Other
investments including acquisitions, net of cash acquired | | (170,394 | ) | | (49,994 | ) |
Dispositions of
assets | | 5,630 | | | 15,657 | |
Disposition of
Metromail, net of tax | |
| | | 238,438 | |
Disposition of
DESI, net of tax | |
| | | 35,641 | | | |
| | |
| | Net cash
provided by (used for) investing activities | | (363,031 | ) | | 80,659
| | | |
| | |
| | Cash flows
provided by (used for) financing activities: | | | | | | |
Net increase
(decrease) in borrowings | | 299,216 | | | (66,987 | ) |
Issuances of
common stock | | 15,196 | | | 64,324 | |
Acquisition of
common stock | | (265,154 | ) | | (443,674
| ) |
Cash dividends
on common stock | | (83,429 | ) | | (86,477 | ) | | |
| | |
| | Net cash used
for financing activities | | (34,171 | ) | | (532,814 | ) | | |
| | |
| | Effect of
exchange rate changes on cash and equivalents | | (1,353 | ) | | (174 | ) | Net increase in
cash from businesses held for sale | |
| | | 29,169 | | | |
| | |
| | Net change in
cash and equivalents | | 447 | | | 38,358 | | Cash and
equivalents at beginning of period | | 66,226 | | | 47,814 | | | |
| | |
| | Cash and
equivalents at end of period | | $
66,673 | | | $
86,172 | | | |
| | |
|
|
See accompanying
Notes to Condensed Consolidated Financial Statements.
R.R. DONNELLEY
& SONS COMPANY AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) For the Three
Months Ended March 31 (Thousands of
dollars) | | 2000
| | 1999
|
---|
Cash flows
provided by (used for) operating activities: | | | | | | | Net
income | | $ 46,701 | | | $ 43,980 | | Loss
from discontinued operations, net of tax | | | | | 1,820 | |
Depreciation | | 80,509 | | | 79,328 | |
Amortization | | 14,378 | | | 12,234 | | Gain
on sale of assets | | (4,976 | ) | | (2,985 | ) | Net
change in operating working capital | | (85,287 | ) | | (43,771 | ) | Net
change in other assets and liabilities | | 8,074 | | | 18,459 | |
Other | | (3,552 | ) | | 1,862 | | | |
| | |
| | Net Cash
Provided by Operating Activities | | 55,847 | | | 110,927 | | | |
| | |
| | Cash flows
provided by (used for) investing activities: | | | | | | |
Capital expenditures | | (56,101 | ) | | (64,393 | ) |
Other investments including acquisitions, net of cash
acquired | | (207,343 | ) | | (52,465 | ) |
Dispositions of assets | | 5,222 | | | | | | |
| | |
| | Net Cash Used
For Investing Activities | | (258,222 | ) | | (116,858 | ) | | |
| | |
| | Cash flows
provided by (used for) financing activities: | | | | | | | Net
increase in borrowings | | 256,042 | | | 166,450 | |
Issuances of common stock | | 860 | | | 1,464 | |
Acquisition of common stock | | (21,361 | ) | | (123,559 | ) | Cash
dividends paid | | (26,926 | ) | | (28,017 | ) | | |
| | |
| | Net Cash
Provided by Financing Activities | | 208,615 | | | 16,338 | | | |
| | |
| | Effect of
exchange rate changes on cash and equivalents | | 157 | | | (1,635 | ) | | |
| | |
| | Net Increase in
Cash and Equivalents | | 6,397 | | | 8,772 | | Cash and
Equivalents at Beginning of Period | | 41,873 | | | 66,226 | | | |
| | |
| | Cash and
Equivalents at End of Period | | $ 48,270 | | | $ 74,998 | | | |
| | |
| |
See accompanying
Notes to Condensed Consolidated Financial Statements. R.R. DONNELLEY
& SONS COMPANY AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE
1. The condensed consolidated financial statements included herein are
unaudited (although the balance sheet at December 31, 19981999 is condensed
from the audited balance sheet at that date) and have been prepared by
the company to conform with the requirements applicable to this quarterly
report on Form 10-Q. Certain information and disclosures, normally
included in financial statements prepared in accordance with generally
accepted accounting principles, have been omitted as permitted by such
requirements. However, the company believes that the disclosures made are
adequate to make the information presented not misleading. These
condensed consolidated financial statements should be read in conjunction
with the consolidated financial statements and the related notes included
in the companys 19981999 Annual Report on Form 10-K.
The condensed
consolidated financial statements included herein reflect, in the opinion
of the company, all adjustments (which include only normal, recurring
adjustments) necessary to present fairly the financial information for
such periods. Certain prior year amounts have been reclassified to
maintain comparability with current year classifications.
NOTE
2. Components of the companys inventories at September 30,
1999,March 31, 2000, and
December 31, 1998,1999, were as follows:
|
|
(Thousands(Thousands of
Dollars)
|
|
| 2000
| |
1999
| | 1998
|
Raw materials
and manufacturing supplies |
|
$124,825122,108 |
|
|
$121,490125,014 |
|
Work in
process |
|
213,467176,386 |
|
|
150,775150,992 |
|
Finished
goods |
|
2,2891,813 |
|
|
1,2201,388 |
|
Progress
billings |
|
(65,07843,848 |
) |
|
(42,21739,901 |
) |
LIFO
reserve |
|
(50,93745,230 |
) |
|
(48,33743,181 |
) |
|
|
|
|
|
|
|
Total
inventories |
|
$224,566211,229 |
|
|
$182,931194,312 |
|
|
|
|
|
|
|
|
|
NOTE
3. The following provides supplemental cash flow information: |
|
|
|
(Thousands(Thousands of
Dollars)
|
|
|
NineThree Months
Ended
September 30March 31
|
|
|
19992000
|
|
19981999
|
Interest
paid |
|
$ 44,194 8,077 |
|
|
$ 44,200 5,693 |
|
Income taxes
paid |
|
$
61,45916,367 |
|
|
$123,220 10,508 |
|
NOTE
4. On November 25, 1996, a purported class action was brought against the
company in federal district court in Chicago, Illinois, on behalf of all
current and former African-American employees, alleging that the company
racially discriminated against them in violation of the Civil Rights Act
of 1871, as amended, and the U.S. Constitution (Jones, et al. v. R.R.
Donnelley & Sons Co.). The complaint seeks declaratory and
injunctive relief, and asks for actual, compensatory, consequential and
punitive damages in an amount not less than $500 million. Although
plaintiffs seek nationwide class certification, most of the specific
factual assertions of the complaint relate to the closing by the company
of its Chicago catalog operations in 1993. Other general claims relate
to other company locations. On August 10, 1999, the district court judge
denied the companys motion for partial summary judgment on the
basis of timeliness. Discovery is under way.
R.R. DONNELLEY
& SONS COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
On December 18, 1995, a
class action was filed against the company in federal district court in
Chicago alleging that older workers were discriminated against in
selection for termination upon the closing of the Chicago catalog
operations (Gerlib, et al. v. R.R. Donnelley & Sons Co.). The
suit also alleges that the company violated the Employee Retirement
Income Security Act (ERISA) in determining benefits payable to retiring
or terminated employees. On August 14, 1997, the court certified classes
in both the age discrimination and ERISA claims limited to former
employees of the Chicago catalog operations.
On June 30, 1998,
a purported class action was filed against the company in federal
district court in Chicago on behalf of current and former
African-American employees, alleging that the company racially
discriminated against them in violation of Title VII of the Civil Rights
Act of 1964 (Adams, et al. v. R.R. Donnelley & Sons Co.).
While making many of the same general discrimination claims contained in
the Jones complaint, the Adams plaintiffs are also
claiming retaliation by the company for the filing of discrimination
charges or otherwise complaining of race discrimination. The complaint
seeks the same relief and damages as sought in the Jones
case.
Both the Jones
and Gerlib cases relate primarily to the circumstances
surrounding the closing of the Chicago catalog operations. The company
believes that it acted properly in the closing of the operations.
Further, with regard to all three cases, the company believes it has a
number of valid defenses to all of the claims made and will vigorously
defend its actions. However, management is unable to make a meaningful
estimate of any loss that could result from an unfavorable outcome of
any of the pending cases.
In December 1999,
the U.S. Environmental Protection Agency, Region 5 (U.S. EPA) issued a
Notice of Violation against the company, pursuant to Section 113 of the
Clean Air Act (the Act). The notice alleges that the companys
facility in Willard, Ohio, violated the Act and Ohios State
Implementation Plan in installing and operating certain equipment
without appropriate air permits. While the notice does not specify the
remedy sought, upon final determination of a violation, U.S. EPA may
issue an administrative order requiring the installation of air
pollution control equipment, assess penalties, or commence civil or
criminal action against the company. The company responded to U.S. EPA
on March 10, 2000. The company does not believe that any unfavorable
result of this proceeding will have a material impact on the
companys financial position or results of operations. In addition, the
company is a party to certain litigation arising in the ordinary course
of business which, in the opinion of management, will not have a
material adverse effect on the operations or financial condition of the
company.
NOTE
5. The company has adopted Statement of Financial Accounting Standards (SFAS)
No. 130, Reporting Comprehensive Income.Income in 1998. This statement
is intended to report a measure of allreports changes in shareholders equity that result from either
recognized transactions or other economic events, excluding capital
stock transactions, which impact shareholders equity. For the
company, the only difference between net income and comprehensive income
iswas the effect of the change in unrealized foreign currency translation
lossesgains (losses) as follows:
|
|
(Thousands(Thousands of Dollars)
| |
(Thousands of
Dollars)
|
|
|
Three Months
Ended
September 30,
| |
Nine Months Ended
September 30,March 31
|
|
|
19992000
|
|
1998
| | 1999
| |
1998
|
Net
income |
|
$85,587 | 46,701 |
|
$
99,24343,980 | | $182,053 | | | $202,187 |
|
Unrealized
foreign currency gain (loss) |
|
(4,230 | )4,973 |
| 5,665 | |
(12,3647,288 | ) | | (6,863 |
) |
|
|
| |
|
| |
| |
|
|
|
Comprehensive
income |
|
$81,357 | 51,674 |
|
$104,90836,692 | | $169,689 | | | $195,324 |
|
|
|
| |
|
| |
| |
|
|
|
R.R. DONNELLEY
& SONS COMPANY AND SUBSIDIARIES NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
NOTE
6. The company operates inprimarily within the commercial print portion of
the printing industry.industry, with related service offerings designed to offer
customers complete solutions for communicating their messages to target
audiences. Substantially all revenues within commercial printing result
from the sale of printed products and services to customers in the
following markets:end-markets: Long-Run Magazines, Catalogs and Inserts; Book
Publishing Services,Services; Financial Services, MagazineServices; Telecommunications; Short-Run
Magazines and Catalogs (served by our Specialized Publishing Services
Merchandise Mediaoperation); and Telecommunications.International, which provides similar products and
services. The companys management has aggregated its commercial
print businesses as onePremedia services, which include capturing
content, converting it to the appropriate format and channeling it to
multiple communications media, are included within the reportable
segment because of strong
similarities in the economic characteristics, nature of products
and services, production processes, class of customer and
distribution methods used. The
companys investment in businesses held for sale has been
disclosed as a separate reportable segment, as the revenues
generated from these businesses are unrelated to the commercial
printing industryrefer to Businesses Held for Sale
Commercial Print and Subsequent Events under Item 2 of this
Form 10-Q for additional information..
R.R. Donnelley
Logistics Services (Donnelley Logistics) represents the companys
logistics and distribution services operation for its print customers
and other mailers. Donnelley Logistics serves its customers by
consolidating and delivering printed product and parcels to the U.S.
Postal Service closer to the final destination, thereby resulting in
reduced postage costs and improved delivery performance. Following the
companys acquisition of certain net assets of CTC Distribution
Services LLC (CTC) in February 2000, the combined operations of
Donnelley Logistics and CTC are now included within the reportable
segment Logistics Services for the quarter ended March 31,
2000. Prior year amounts have also been restated to reflect the current
year presentation. Refer to Note 8 for additional information regarding
the acquisition of CTC. In connection
with the acquisition of CTC, the company has changed its presentation of
reported operating results for Donnelley Logistics. Previously, net
sales of Donnelley Logistics were classified net of transportation
costs. For the quarter ended March 31, 2000, the company reported net
sales for Logistics Services on a gross basis, without deducting
transportation costs. Cost of sales for Logistics Services now includes
the cost of transportation. The effect of this change for the quarter
ended March 31, 1999, was to increase both net sales and cost of sales
by $52 million; there was no impact on gross profit or earnings (loss)
from operations. Since the date of
acquisition, Logistics Services operating results include net
sales from CTC of $65 million and a loss from operations (and loss from
continuing operations before income taxes) of $2.3 million. The company has
disclosed earnings (loss) from operations as the primary measure of
segment earnings (loss). This is the measure of profitability used by
the companys chief operating decision-maker that is most
consistent with the presentation of profitability reported within the
consolidated financial
statements. The accounting policies of the business segments reported are
the same as those described in the Summary of Significant
Accounting Policies (page F-6(F-6 in the 19981999 Annual Report on Form
10-K).-. R.R. DONNELLEY
& SONS COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued) Industry
Segment Information
In Thousands
|
|
Commercial
Print
|
|
BusinessesLogistics
Held for
SaleServices
|
|
CorporateOther
(1)
|
|
OtherCorporate(1)
|
|
AdjustmentsDiscontinued
Operations (2)(2)
|
|
Consolidated
Total
|
ThirdFirst
Quarter 1999Ended March 31,
2000 | Sales |
|
| $1,283,371
| | | | | | | | | | | | | Net
sales |
|
$175,0771,188,675 | | $149,251 | | | $ 5,044 |
|
|
$ |
|
|
$ 56,772 | |
|
$1,342,970 | Earnings (loss)
from operations | | 94,539 | | (175,077
606 |
) |
|
$1,340,143
(3,884 |
Earnings from
operations) |
|
153,6925,092 | |
| | | 2,052 | | | 1,946 |
|
|
|
|
95,141 | 157,690 |
Earnings (loss)
beforefrom continuing
operations before income taxes |
|
157,56199,287 |
|
(648 | ) | | (3,838 | ) | | (18,864 | ) | | | | 75,937 | Assets | | 3,087,910 | | 238,888 |
|
|
(20,14014,454 |
) |
|
1,744771,407 |
|
|
|
|
4,112,659 | 139,165 |
|
|
ThirdFirst
Quarter 1998Ended March 31,
1999 |
Sales | | $1,224,075
Net
sales |
|
$175,3811,107,891 | | $ 62,095 | | | $61,418 |
|
|
$
|
|
|
$ 50,404
| | $1,231,404 | Earnings (loss)
from operations | | 93,605 | | 1,480 |
|
|
$(175,381
305 |
) |
|
$1,274,479
(3,205 | Earnings
(loss) from
operations | | 154,309 | |
| | | (2,243 | ) | | (3,822 |
) |
|
|
|
91,575 | 148,244 |
Earnings (loss)
beforefrom continuing
operations before income taxes |
|
159,41693,617 |
|
1,480 |
|
|
(1,780681 |
) |
|
(3,46619,945 |
) |
|
|
| 74,471 | Assets |
|
154,170 | | | Nine Months
Ended September 30, 1999 | Sales | | $3,545,919
2,963,134 |
|
$646,162 | | | $
36,408 |
|
|
$169,210 | | | $(646,162
| ) | | $3,715,129
| Earnings
(loss) from
operations | | 340,774 | | (4,890 | ) | | 5,974 | | | 5,421 | | |
96,950 |
|
|
347,279 | Earnings
(loss) before
income taxes | | 352,117 | | (4,890 | ) | | (55,966 | ) | | 4,760 | | |
686,985 |
|
|
296,021 | Assets | | 3,237,900
42,517 |
|
191,852 | | | 605,773 | | | 95,159 | | | (151,270 | ) | | 3,979,414
| | | Nine Months
Ended September 30, 1998 | Sales | | $3,443,751
| | $575,581 | | | $
| | | $160,289 | | | $(575,581
| ) | | $3,604,040
| Earnings
(loss) from
operations | | 330,733 | | (80,067 | ) | | 5,395 | | | (2,726 | ) | |
| | | 253,335 | Earnings
(loss) before
income taxes | | 347,274 | | (80,067 | ) | | 102,372
| | | (2,417 | ) | |
| | | 367,162 | Assets | | 3,137,122
| | 201,184 | | | 584,779 | | | 93,017 | | | (155,712 | ) | | 3,860,390
3,825,994 |
(1)
|
Represents
other operating segments of the company.company, including Online Services
which assists customers in the delivery of content and commerce
online. First quarter 1999 also includes the results of operations and
assets of Stream International (refer to Divestitures in
Item 2).
|
(2)
|
Refer to
discussion of Businesses Held for Sale,Discontinued Operations underin Item 2 of this Form 10-Q, which
describes the separate presentation of the net assets and results of
operations of businesses held for sale.discontinued operations.
|
NOTE
7. The company has used corporate-owned life insurance (COLI) to fund
employee benefits for several years. In 1996, the United States Health
Care Reform Act was passed, eliminating the deduction for interest from
loans borrowed against COLI programs. 1998 was the final year of the
phase-out period for deductions. Without the COLI deduction, the companys
effective tax rate for the nine months ended September 30, 1999
increased to 38.5% from 35% for the same period in 1998,
excluding the impact of the 1998 Metromail and DESI gains, and
the 1998 CS&T impairment loss.
The Internal Revenue Service (IRS), in its
routine audit of the company, has disallowed the $34 million of tax
benefit that resultedresult from the COLI interest deductions claimed by the
company in its 1990 to 1992 tax returns. The company has challenged this
position in a formal protest filed with the IRS Appeals
division.
On October 19,
1999, in a case involving a different corporate taxpayer, the U.S. Tax
Court disallowed deductions for loans against that taxpayers COLI
program. Litigation involving other taxpayers also is also pending in other
courts. Should the position of the U.S. Tax Court be upheld and applied
to others, the company could lose an additional maximum of $152 million
in tax benefits for periods from 1993 through 1998. In addition, should
all or a portion of the companys COLI deductions ultimately be
disallowed, the company would be liable for interest on those amounts.
The companys maximum exposure for interest should all prior COLI
deductions be disallowed is approximately $48$55 million after-tax through
the
third quarter of 1999.March 31, 2000.
The company
believes that its circumstances differ from those involved in the recent
Tax Court decision, and has
established reserves for COLI that it believes to be
appropriate. However,decision. During the fourth quarter of 1999, however, the
company is examiningrecorded an additional tax provision of $51 million ($0.40 per
diluted share) related to COLI. The company will continue to examine its
position and
may find it necessarywith respect to change its reserve level based upon the Tax Court opinion and resolution of other
pending cases. The ultimate resolution of these issues may have a
material impact on the companys results of operations and
financial condition.
NOTE
8. In April 1999,On February 7, 2000, the company acquired certain net assets of CTC,
the Communicolor divisionlargest mailer of The Standard Register Company
(Communicolor). Communicolor, with locationsbusiness-to-home parcels in Newark, Ohio,
and Eudora, Kansas, is a providerthe U.S., for
approximately $160 million net of personalization services
and printer of innovative direct-mail campaigns.cash acquired. CTC, based in
Minneapolis, Minnesota, has 18 facilities nationwide. The acquisition
washas been accounted for using the purchase method of accounting.
In April 1999, the company issued $200 million The
purchase price has been allocated based upon estimated fair values at
date of 6 5/8% debentures due in 2029.
Proceeds received from the sale were used to reduce outstanding
commercial paper borrowings incurred for working capital
purposes and in connection with the financingacquisition, pending final determination of the company
s acquisitions of Communicolor and the financial printing
unit of Cadmus Communications, with the remainder used for
general corporate purposes.
NOTE
9. In March 1998, Metromail Corporation (Metromail) entered into a
merger agreement with The Great Universal Stores, P.L.C. (GUS),
pursuant to which GUS initiated a tender offer for the
outstanding shares of Metromail. In conjunction with the merger,
the company committed to sell its remaining 37% interest in
Metromail to GUS. In April 1998, the company received $297
million, or approximately $238 million after-tax, for its
remaining interest in Metromail. The company recognized a
pre-tax gain of $146 million ($87 million after-tax)acquired balances.
Goodwill from this transaction.
NOTE
10. In May 1998, Donnelley Enterprises Solutions Incorporated
(DESI) entered intotransaction of approximately $150 million (based upon
the preliminary purchase price allocation) is being amortized over a merger agreement with Bowne & Co.,
Inc. (Bowne), pursuant to which Bowne initiated a tender offer
to acquire all outstanding shares of DESI. In conjunction with
the merger, the company committed to sell its remaining interest
in DESI to Bowne. In July 1998, the company received $45
million, or approximately $36 million after-tax, for its
remaining interest in DESI. The company recognized a pre-tax
gain of $23 million ($14 million after-tax) from this
transaction.
NOTE
11. In the second quarter of 1998, the company recorded an $80
million impairment charge (with no associated tax benefit)
related to the write-down of goodwill at Corporate Software &
Technologies (CS&T). CS&T is reported as businesses held
for sale in the accompanying financial statementsrefer to
Businesses Held for Sale and Subsequent Events
under Item 2 of this Form 10-Q for additional information.
20
year period.
Item
2
Managements Discussion and Analysis of Financial
Condition and Results of Operations
Comparison of
ThirdFirst Quarter and2000 to First Nine Months ofQuarter 1999 to 1998
About the
Company
R.R. Donnelley
& Sons Company is a leading North
Americanpremier provider of commercial printer andprinting,
information services company.
Our company provides services from content management through
logistics and distributionlogistics. We help our customers communicate
more efficiently and effectively as they use words and images to inform,
educate, entertain and sell. In each of our businesses, we use our
distinctive capabilities to manage and distribute words and images in
ways that provide the merchandising, magazine, book,
directory, financial and healthcare markets. In all of these
areas, the company applies its superior skill, scale and
technologygreatest value to deliver solutions that efficiently meet customers
strategic business needs.every customer. Our common stock
(DNY: NYSE)(NYSE: DNY) has been publicly traded since 1956. At the end of September
1999,March
2000, we had approximately 32,00034,000 employees working in our core
printing operations on four continents. We also had 53have
55 manufacturing plants with a broad range of capabilities to serve our
customers.customers needs. While 90% of our revenue is generated in the
United States, we have extended our core competencies into
selected international markets.markets, 88% of our revenue is currently
generated in the United States.
Commercial printingPrinting in the
United States is a large and fragmented industry and includesthat generates more
than 50,000 firms that
employ$150 billion in annual revenue. The commercial printing portion of
the industry accounts for more than one million people and$80 billion in annual revenue. The
commercial printing end-markets that we currently serve generate approximately
$150more
than $40 billion in annual revenue.
The segment of commercial printing that we serve generates
approximately $80 billionWe are first or
second in annual revenue. Within this
segment, we have leadership positionsrevenue in all five of our end
markets:primary
end-markets: Long-Run
Magazines, Catalogs and Insertsserving the consumer and
business-to-business catalog, magazine, and advertising
markets; Book
Publishing Servicesserving the trade, childrens,
religious, professional and educational book markets; Financial
Servicesserving the global communication needs of the
financial markets and mutual fund companies, as well as the banking,
insurance and health care industries;
Telecommunicationsserving the global directory needs
of telecommunications providers; and Specialized
Publishing Servicesserving the needs of publishers of
short-run magazines and catalogs. Given the
competitive nature of the U.S. commercial printing industry, our intent
is to differentiate ourselves based on our service offerings. Our
related services, designed to offer our customers complete solutions for
communicating their messages to target audiences regardless of the means
of distribution, include:
Premediacapturing content, converting it to the
appropriate format and channeling it to multiple communications media,
including print and the Internet; Online
Serviceshelping customers effectively leverage the Internet
and their established brands by delivering content and commerce online;
and Logistics
Servicesdelivering parcels and printed products, primarily via
the U.S. Postal Service, more efficiently, saving significant amounts of
time and money. We believe print
is a vital component of the communications process and expect the print
market to grow due to its unique capabilities, such as portability and
high-quality graphics that cannot be duplicated by other communications
methods. In addition, we see opportunities to create and expand
complementary businesses that leverage our core competencies and help
our customers succeed.
Our objective is to
create above-average shareholder value through our strategies
to:
|
·
|
Magazine Publishing Services, serving the consumer,
trade and specialty magazine markets;transform our
core printing businesses;
|
|
·
|
Merchandise Media, serving the consumerspeed growth in
our high-value businesses; and
business-to-business catalog, retail insert and direct mail
markets;
|
|
·
|
Telecommunications, servinglogically
extend into complementary businesses.
| The new business
opportunities that we pursue will leverage our established strengths and
will further our goal of managing and distributing words and images to
help our customers succeed in informing, educating, entertaining and
selling. Our distinctive
capabilities include: | · | relationships
with customers who are the global directory needs
of telecommunications providers;leaders in their respective
industries;
|
|
·
|
Book Publishing Services, serving the trade, children
s, religiousa reputation
for quality and educational book markets; andservice;
|
|
·
|
Financial Services, servingstanding as a
trusted, neutral partner who recognizes the communication needscritical importance of
protecting the financial marketsconfidentially of customer content;
| | · | expertise in
handling digital content; |
| · | scale to
partner with best-of-class providers and healthcare industry.deliver economical solutions
for our customers; and |
| · | technology to
seamlessly help our customers deliver their messages through various
communications channels.
|
In addition to
our U.S. operations, we operate in Mexico, South America, Europe and
China. For reporting purposes, revenues from our international facilities in China and
England serving primarily serving the directory market are reported within
Telecommunications. Revenues fromOne of our twofacilities in Mexico facilities that primarily serve the
magazine market are reported within Magazine Publishing
Services. Our third Mexico facility serves the book
market and is reported within Book Publishing Services. RevenuesRevenue from our
other internationaltwo facilities servingin Mexico that serve primarily the magazine market,
as well as revenues from our facilities in Poland and South America,
which serve more than one market, are included in Other.International. The
Other classification alsowithin Commercial Print includes net
sales from R.R. Donnelley
Logistics Services (DLS), our logisticsPremedia and distribution
operation. DLS serves our print services customersRRD Direct, which supplies direct mail products
and others by
consolidating and sorting mail so that it is delivered to the
postal system closer to the final destination, resulting in
reduced postage costs and improved on-time delivery.
Additionally, DLS delivers magazine newsstand, newspaper inserts
and financial services products. Finally, revenue from Stream
International Inc., which provides technical and help-line
computer support to its customers, is included in Other.
services.
While our
printingmanufacturing plants, financial service centers and sales offices are
geographically diverse,located throughout the United States and selected international markets,
the supporting technologies and knowledge base are shared.common. Our plantslocations
have a range of production capabilities to serve the five
basic commercial print markets outlined earlier.our customers and
end-markets. We manufacture products for these markets with the operational goal of
optimizing the efficiency of ourthe common manufacturing and distribution
platform. As a result, most plants produce work for customers in two or
morethree of our end markets.end-markets.
Sales results by business unit for the third quarter and
first nine months of 1999 and 1998 are presented below:
Net Sales by
Business UnitEnd-Market
ThirdFirst
Quarter Ended September 30,March 31
(Thousands of Dollars)
|
|
19992000
|
|
% of
Total
|
|
19981999
|
|
% of
Total
|
Magazine
Publishing ServicesLong-Run
Magazines, Catalogs and Inserts |
|
$ 288,212451,008 | |
|
22%33.6 | % |
|
$ 290,536442,894 | |
|
23%36.0 | % |
Merchandise
Media | | 332,700 | | 25% | | 330,852 | | 26% | Telecommunications |
|
212,367210,120 |
| 16% |
|
198,61515.6 | % |
|
16%207,588 | | | 16.9 | % |
Book Publishing
Services |
|
211,295182,032 |
| 16% |
|
203,88213.6 | % |
|
16%170,019 | | | 13.8 | % |
Financial
Services |
|
167,156136,109 |
| 12% |
|
133,55510.1 | % |
|
10%131,254 | | | 10.6 | % | International | | 82,235 | | | 6.1 | % | | 59,340 | | | 4.8 | % | Specialized
Publishing Services | | 62,987 | | | 4.7 | % | | 47,544 | | | 3.9 | % |
Other |
|
128,41364,184 |
| 9% |
|
117,0394.8 | % |
|
9%49,252 | | | 4.0 | % |
|
|
| |
| |
| |
| | | $1,340,143
| | 100% | | $1,274,479
| | 100% |
|
|
| |
| |
| |
|
Nine Months
Ended September 30,
(Thousands of Dollars)
| | 1999
| | % of
Sales
| | 1998
| | % of
Sales
|
---|
Magazine
Publishing Services |
|
$
840,486 |
|
|
23% |
|
|
$
855,050Total
Commercial Print |
|
24%1,188,675 | | | 88.5 | % | | 1,107,891 | | | 90.0 | % |
Merchandise
MediaLogistics
Services |
|
873,732 | 149,251 |
24% |
|
891,030 | 11.1 |
25% |
Telecommunications% |
|
612,863 | 62,095 |
16% |
|
564,146 | 5.0 |
16% | Book
Publishing Services | | 558,621 | | 15% | | 550,680 | | 15% | Financial
Services | | 471,889 | | 13% | | 405,952 | | 11%% |
Other |
|
357,5385,044 |
| 9% |
|
337,1820.4 | % |
|
9%61,418 | | | 5.0 | % |
|
|
| |
| |
| |
| |
|
$3,715,129
|
|
|
100% | |
$3,604,040
|
|
100% |
| | Total Net
Sales | | $1,342,970 | | | 100.0 | % | | $1,231,404 | | | 100.0 | % |
|
|
|
|
|
|
|
|
|
| |
| | Cost of
materials | | (463,384 | ) | | | | | (429,014 | ) | | | | Cost of
transportation | | (122,078 | ) | | | | | (48,999 | ) | | | | | |
| | | | | |
| | | | |
Total Value-Added Revenue | | $ 757,508 | | | | | | $ 753,391 | | | | | | |
| | | | | |
| | | | |
Consolidated
Results of Operations
Net income for the third quarter of 1999 was $86 million,
or $0.67 per diluted share, compared to net income of $99
million, or $0.71 per diluted share for the prior year third
quarter. Third quarter 1998 included a $14 million after-tax
gain on the sale of DESI ($0.10 per diluted share). Excluding
the effect of this one-time item, net income for the third
quarter of 1998 was $85 million, or $0.61 per diluted share.
Net income for the first nine months of 1999 was $182
million, or $1.39 per diluted share, compared to net income of
$202 million, or $1.41 per diluted share for the prior
year-to-date period. The first nine months of 1999 included an
after-tax loss from businesses held for sale of $3 million
($0.02 per diluted share). The first nine months of 1998
included an $87 million after-tax gain on the sale of Metromail
($0.61 per diluted share), a $14 million after-tax gain on the
sale of DESI ($0.10 per diluted share), and an $80 million
after-tax loss from businesses held for sale ($0.56 per diluted
share). Excluding the effects of these one-time items, net
income for the first nine months of 1999 was $185 million, or
$1.41 per diluted share, compared to net income of $181 million,
or $1.26 per diluted share in 1998. Excluding the impact of the
1998 Metromail and DESI gains and the $80 million after-tax loss
from businesses held for sale noted above, the overall effective
tax rate increased in 1999 to 38.5% from 35% in 1998 due to the
phase-out of deductions for the companys corporate-owned
life insurance programs (COLI). Diluted earnings per share for
1999 also reflect the effects of the companys share
repurchase programs.
Consolidated Net Sales
Net sales forFor the thirdfirst
quarter, we reported net income from continuing operations of $47
million in 2000, or $0.38 per diluted share, compared with net income
from continuing operations of $44 million in 1999, or $0.34 per diluted
share. Earnings per diluted share of $0.34 in the first quarter of 1999
including
materials such as paper and ink, increased $66 million, or 5%included a $0.01 favorable impact from a year ago, despite lower paper prices and fewer
pass-through materials sales. Paper prices across our Magazine
Publishing Services and Merchandise Media markets have declined
more than 10%Stream International (Stream);
refer to Divestitures. The first quarter effective tax rate
for both years was 38.5%. The 12% increase in earnings per share from
continuing operations reflected the previous year. In severalbenefit of our markets,
but primarily Magazine Publishing and Merchandise Media, the
proportion of customer-supplied paper has increased in 1999
resulting in
fewer pass-through materials sales. The acquisitions of Cadmus
Financial and Communicolor contributed $26 million inshare repurchase
activity, as well as higher net sales
for the third quarter of 1999. Third quarter 1999 sales net of
materials increased $65 million, or 8%income from a year ago, which
reflected our emphasis on higher value-added products and
services.continuing
operations.
ThirdEarnings from
operations increased 4% to $95 million in the first quarter of 2000. For
comparative purposes, earnings from operations excluding Stream in 1999
increased 6% for the first quarter of 2000. This increase was due to the
strength of our core commercial print operations during the first
quarter of 2000, as well as lower administrative expenses from reduced
Year 2000 expenditures. Higher interest expense during the first quarter
of 2000 reflected our increased borrowings to fund acquisitions and
working capital. First quarter
1999 consolidated earnings per share of $0.33 included a ($0.01) loss
from discontinued operations (refer to Discontinued
Operations). Consolidated
Net Sales and Value-Added Revenue Net sales, which
includes materials such as paper and ink, increased $112 million in the
first quarter of 2000, or 9% from a year ago. First quarter net sales
for the combined commercial
printCommercial Print segment were up 7% from a year ago. The level
of net sales, particularly for our Long-Run Magazine, Catalogs and
Inserts market, is impacted by the amount of pass-through material
sales. First quarter net sales for Long-Run Magazine, Publishing ServicesCatalogs and
Merchandise
MediaInserts increased 2% from the prior year, which reflected volume
increases across all major markets, offset in part by lower pass-through
material sales. Paper prices during the first quarter of 2000 for major
grades of paper employed within the Long-Run Magazine, Catalogs and
Inserts market were up approximately 1% from a year ago. First quarter
net sales for Telecommunications were essentially flat compared towith the
prior year, as an increase in directory volumes was offset by a
reduction in non-directory volumes. Book Publishing Services first
quarter net sales increased 7%, primarily reflecting higher volumes
within the consumer and educational markets. Financial Services
first quarter net sales were up 4% from a year ago, despiteprimarily due to the
strength of its international operations. Financial Services
domestic net sales were negatively impacted by a slowdown in capital
markets activity late in 1999 due to Year 2000 concerns, which affected
early first quarter billings, and greater overall market volatility.
Capital market billings rebounded by March 2000. First quarter net
sales in 2000 for the Logistics Services segment more than doubled from
a year ago, primarily due to the acquisition of CTC on February 7, 2000
(refer to Note 8). Since the date of acquisition, CTC has contributed
approximately $65 million in net sales. As discussed in Note 6, first
quarter net sales in 1999 for Donnelley Logistics have been restated to
reflect sales on a gross basis, before deducting transportation
costs. For comparative
purposes, first quarter net sales in 1999 included approximately $59
million of sales related to Stream, which we divested in the fourth
quarter of 1999 (refer to Divestitures). The price of
paper can be volatile. In periods of rising prices, our net sales and
cost of materials increase; in periods of falling prices, our net sales
and material costs decline. For some customers, we purchase paper and
pass through this cost at a margin that is lower than print and other
related-services; other customers furnish their own paper.
Customer-furnished paper is not included in our financial results. With
respect to Logistics Services, transportation costs are passed through
to our customers and therefore are included in our net sales.
Value-added revenue represents net sales, less the cost of materials
(principally paper and ink), and less the cost of transportation related
to Logistics Services. Value-added revenue eliminates the effects of
material prices and more customer-supplied paper. Merchandise Media
net sales for the third quarter included $20 million from
Communicolor. Book Publishing Services net sales increased 4%
for the third quarter due to higher base volumes, partially
offset by lower fulfillment and distribution revenues. Net sales
for Telecommunications increased 7% for the third quarter,
driven primarily by higher directory and non-directory volumes.
Net sales for Financial Services increased 25% for the third
quarter, related primarily to market share gains in the capital
markets and higher international volume.transportation costs that are largely beyond our
control.
For the first nine monthsquarter of
1999, net sales, including
materials such as paper and ink,2000, value-added revenue increased $111 million, or 3%1% from a year ago, despite lower paper prices and fewer
pass-through materials sales. For the first nine months ofago; excluding Stream
in 1999, paper prices were down over 10%value-added revenue increased 9% from a year ago across the
Magazine Publishing Services and Merchandise Media markets. The
acquisitions of Cadmus and Communicolor contributed $55 million
in net sales for the first nine months of 1999. Sales net of
materials increased 7% for the first nine months of 1999,
reflecting our emphasis on higher value-added products and
services.
For the first nine months of 1999, net sales for the
combined Magazine Publishing Services and Merchandise Media
markets decreased 2% from a year ago, which reflected lower
paper prices and a shift to more customer-supplied paper,
partially offset by higher volumes. Net sales for
Telecommunications increasedago. Of this 9%
for the first nine months of
1999 primarilyincrease excluding Stream, 5% was due to higher volume and timing shifts from the
fourth quarter of 1998. Book Publishing Services net sales
increased 1% for the first nine months of 1999, as the effect of
volume increases from the strong education and one-color markets
was largely offset by lower fulfillment and distribution
revenues. Financial Services net sales for the first nine months
of 1999 increased 16%, related primarily to volume increases,
driven by our strong performance in capital markets and
increased international activity.acquisitions.
Consolidated
Expenses
Gross profit for
the thirdfirst quarter of 1999 increased2000 fell by 9%1% to $322$241 million, compared to $294with $243
million for the same period
last year. Third quarter grossa year ago. Gross profit as a percentage of net sales increasedfell to
24.0%17.9% from 23.1% a year ago. Gross profit for the
first nine months of 1999 increased by 9% to $824 million
compared to $753 million last year, and gross profit as a
percentage of sales increased to 22.2% from 20.9%19.7% a year ago. The increaseLogistics Services segment, which
reflects lower gross margins than commercial print, represented a higher
proportion of consolidated net sales in the first quarter of 2000 (11%
versus 5% a year ago). The decrease in gross margin for both the third quarterwas also due to a
decrease within Financial Services because of a slowdown in domestic
capital markets activity. Within our core commercial print operations
(Long-Run Magazines, Catalogs and first nine months of 1999 reflected primarily the resultsInserts, as well as Book Publishing
Services) we continued to realize productivity improvements as a result
of our continued productivity initiatives. As of September 30, 1999, we
have implemented specific productivity improvement plans at 26
of our manufacturing facilities. The initiatives are targeted
toward making our operations more productive by analyzing all
aspects of the production process.emphasis on Process Variability Reduction and Six Sigma
application and training.
Selling and administrative expenses forCost of materials
is impacted by the thirdprice of scrap (by-product) paper that we sell.
Income from the sale of by-products is recorded as a reduction in our
cost of materials. For the first quarter of 1999 increased 12% to $1642000, we recognized a
reduction in our cost of materials of $16 million or 12.2%from the sale of
sales
compared to 11.4% forby-products, which doubled from the priorfirst quarter a year period. Of the 12%
increase, 5% wasago, primarily
as a result of the impact of recent acquisitions,
and the remainder was due primarily to increased Financial
Services volume and building enhanced capabilities within paper
services and corporate-wide strategy.higher by-products prices.
Selling and
administrative expenses for the first nine
monthsquarter of 1999 increased2000 fell by 12%4%, or $5
million, to
$472
$146 million, or 12.7%which represented 10.9% of net sales compared to 11.6% last year. Of the 12% increase, 4%with 12.3% a
year ago. The first quarter 2000 decline was primarily a result of lower
Year 2000-related expenses ($10 million), and the impactelimination of Stream
expenses ($15 millionrefer to Divestitures), partially
offset by recent acquisitions ($8 million) and the remainder
was due primarily to increased Financial Services volumeadditional information
technology and upgrading our capabilities as noted above.growth-related expenditures.
Summary of
Expense Trends
ThirdFirst
Quarter, Ended September 30,March 31, |
| | | | |
1999%Increase
| |
1998
| | % Increase
(Decrease)
|
(Thousands
of Dollars)
| | | |
|
2000
|
|
1999
|
|
(Decrease)
|
Cost of
materials |
|
$
478,455463,384 |
|
$
478,068429,014 |
|
0.08%8.0 | % | Cost of
transportation |
| 122,078 | | 48,999 | | 149.1 | % |
Cost of
manufacturing |
|
443,375421,598 |
|
406,781418,893 |
|
9.00%0.6 |
% |
Depreciation |
|
83,03880,509 |
|
80,30379,328 |
|
3.41%1.5 |
% |
Amortization |
|
13,62014,378 |
|
15,30712,234 |
|
(11.02%17.5 |
)% |
Selling and
administrative |
|
163,965145,882 |
|
145,776151,361 |
|
12.48%(3.6 |
%) |
Net interest
expense |
|
23,084 | | 19,400 | | 18.99% | | | | Nine Months
Ended September 30, | |
1999
| |
1998
| | % Increase
(Decrease)
|
---|
(Thousands
of Dollars)
| | | | |
| |
| |
|
---|
Cost of
materials22,141 |
|
$1,324,519
19,896 |
|
$1,360,153
11.3 |
| (2.62% | ) | Cost of
manufacturing | | 1,288,254
| | 1,210,626
| | 6.41% | | Depreciation
| | 242,358 | | 242,272 | | 0.04% | | Amortization
| | 36,158 | | 38,162 | | (5.25% | ) | Selling and
administrative | | 471,671 | | 419,425 | | 12.46% | | Net interest
expense | | 66,705 | | 59,036 | | 12.99% | % |
Non-operatingNonoperating
Items
Interest expense increased $4 million for the quarter and
$8 million
for the first nine monthsquarter of 19992000 was approximately $22 million, up $2
million from a year ago due to higher average debt levels related toassociated with recent
acquisitions and share
repurchase activity.increased working capital.
Other income,
net, for the first quarter of 2000 was $2.9 million, which is comparable
to a year ago and reflected a gain on the sale of real estate ($4.5
million), offset in part by lower earnings from equity-based
investments. In 1999, other income, net, reflected a gain of $3 million
on the thirdsale of real estate. Discontinued
Operations In the first
quarter of 1999, was $5.0we recorded a pretax loss from discontinued operations
of $3 million ($2 million after-tax) related to our remaining 86%
investment in Corporate Software & Technology (CS&T), a software
distribution business. Our ownership interest in CS&T resulted from
the restructuring of our 80%-owned investment in Stream International
Holdings, Inc. (SIH) in December 1997. In addition to CS&T, SIH held
investments in Stream, which provided outsource technical support
services, and exceededModus Media International (MMI), a manufacturing and
fulfillment business (refer to Divestitures). As of December
1997, we had converted our equity and debt positions in CS&T to 86%
of the prior year third quarter by
approximately $2.0 million due to lower COLI expense ($1.0
million) and other miscellaneous net non-operating gains.common stock of CS&T.
In April 1998,November 1999, we
sold our remainingentire interest in Metromail. We received $297 million inCS&T to the management of CS&T for
cash proceeds of approximately $41 million. We did not recognize any
gain or approximately $238 million after-tax, and recognized a pre-tax
gain of $146 million ($87 million after-tax) on this
transaction. In July 1998, we sold our remaining interestloss from the sale in DESI. We received $45 million, or approximately $36 million
after-tax, and recognized a pre-tax gain of $23 million ($14
million after-tax) on this transaction.1999.
Businesses Held for SaleDivestitures
During 1996, Stream International Holdings, Inc. (SIH), an
80%-owned equity investment ofAt the company, reorganized into
three independent businesses: Stream International, which
provides outsource technical support services; Corporate
Software & Technology (CS&T), a software distribution
company; and Modus Media International (MMI), a global
manufacturing and fulfillment business.
On December 15, 1997, SIHs businesses became
separate companies andtime our
ownership interest in SIH was restructured. Werestructured in December 1997, we
converted our equitydebt and debtequity positions in Stream International into 87% of the common
stock of that business and converted our equity and debt positions in CS&T
into 86% of the common stock of CS&T. Additionally, we sold our equity and debt positions in MMI for
non-votingnonvoting preferred stock of MMI. In connection with the planned disposition of CS
&T, we have reported our interest in CS&T as businesses
held for sale.
At the timeIn November 1999,
we sold 93% of our ownership interests were restructured in
December 1997, we had prepared a formal plan of disposition to
sell the entire CS&T business as a going concern, which we
had expected to execute within twelve months. By the second
quarter of 1998, intensified competition had negatively impacted
both current operating results and our valuation of CS&T.
Accordingly,investment in the second quartercommon stock of 1998, we recorded an $80Stream to a group
led by Bain Capital for approximately $96 million impairment charge (with no associatedin cash. We recognized
a pretax gain of $40 million and a tax benefit)
relatedbenefit of $35 million (total of
$75 million after-tax) from this transaction. The tax benefit in 1999
was recognized because of our ability to carry back the writedown of goodwill at CS&T. As of December 1998,capital tax
losses generated from the
net assets and results of operations of businesses held for sale
were reclassified from discontinued operations because the
planned sale of CS&T did not occurStream to years 1996 through 1998. We
now have a 6% investment in 1998 as originally
intended. The netStream, representing the remaining 7% of our
original 87% interest, that has been reflected in other noncurrent
assets of CS&T are included in net assets
of businesses held for sale as of September 30, 1999March 31, 2000 and December 31, 1998. Our investment1999. For reporting
purposes, Stream was consolidated in the non-voting preferred
stock of MMI at both September 30, 1999 and December 31, 1998 is
included in other non-current assets.-our financial results until
November 1999.
For comparison
purposes, our 87% ownership interest in Stream for the first nine months ended September 30,quarter of
1999 we
recorded a $5represented approximately $59 million ($3.0in net sales/value-added
revenue, $17 million after-tax) lossin gross profit, and $2 million in income from
operationsoperations. The impact on net income for the first quarter of businesses held for sale.1999 from
Stream was approximately $1 million, or $0.01 per diluted
share.
On September 30, 1999, CS&T entered into an Agreement
and Plan of Merger pursuant to which the management of CS&T
will acquire CS&T. Upon closing, which is anticipated in
NovemberIn October 1999,
we expect to receivesold our remaining investment in nonvoting preferred stock of MMI for
approximately $40.4$60 million ($47 million in cash proceeds in exchange for our entire interest in CS&T.
and a $13 million
promissory note due no later than October 2002). The promissory note is
interest-bearing at 9.5% per annum, payable quarterly. We recognized
both a pretax and after-tax gain of $3 million from this
transaction.
Summary financial informationAs a result of
businesses held forthese divestitures and the sale has been disclosed withinof CS&T (refer to Discontinued
Operations), we generated approximately $77 million in refundable
income taxes from the Industry Segment Information
(Note 6carryback of the Notestax losses, expected to Condensed Consolidated Financial
Statements includedbe received
in Part I of this Form 10-Q). See
Subsequent Events under Item 2 of this Form 10-Q for
additional information relating to Stream International and MMI.
2000.
Changes in
Financial Condition
Liquidity and
Capital Resources
Net cash provided
by operating activities forin the first nine monthsquarter of 19992000 totaled $399$56
million, down $63$55 million from a year ago, primarily due primarily to a higher
investment in operating working capital in 1999.capital. The increase in operating
working capital in 1999 was driven primarily by increased inventory levelshigher receivables and
inventories to support higherincreased sales volumes, and higher accrued compensation
payments. Cashflow from operations in 1999 was also negatively
impacted by payment of $22 million in the third quarter for
settlement of claims made by the U.S. Attorney and the U.S.
Postal Service related to postage due for reorders over a
10-year period ending August 1999.volume.
Capital
expenditures forin the first nine monthsquarter of 19992000 totaled $198$56 million compared
to $159with $64 million for the first nine
months of 1998.a year ago. Spending was directed principally to
projects
that further enhance productivity and to upgrade our systems
infrastructure and capabilities companywide.investments in productivity. Full-year 2000 capital spending is expected
to approximaterange from $300 to $350 million in 1999 in support of selected growth opportunities,
including the opening
of a new telephone directory plant in Brazil and expansion of our Poland operations. Management believes thatoperations, a new directory plant in
York, England, as well as investments to standardize and upgrade systems
company-wide. In February 2000,
we purchased CTC, which approximately doubled the company
s cash flowsize of our Logistics
Services business and borrowing capacity are sufficientexpanded our distribution capabilities (refer to
fund
current operationsNote 8). During the first quarter of 2000, we also acquired Dallas-based
Omega Studios, known for producing high-quality digital photography,
turnkey creative concept, layout design and growth.desktop publishing services;
the Florida financial printer EVACO; and the Seattle-based premedia
provider Iridio, Inc. In addition, we invested in Noosh, Inc., a
business-to-business Internet-based service designed to improve the
process of buying, selling and managing print.
In the current quarter, we acquired the net assets of a
California-based transportation company, Freight Systems Inc.,
and a 30% equity investment in an Internet website design firm,
Multimedia Live. InMarch 1999, we
also acquired the net assets ofpurchased the financial printing unit of Cadmus FinancialCommunications. The
purchase included the assets and operations of five service centers in
March 1999, the
net assets of the Communicolor division of The Standard Register
CompanyBaltimore, Charlotte, Raleigh, Richmond and New York, as well as a
print-on-demand and fulfillment facility in April 1999,Charlotte and the net assets of the Brazilian book
printer Hamburg Gráfica Editora in May 1999, and purchased
our partners 50% interest in the Argentinian printer Atl
ántida in June 1999.selected
software products.
In April 1999, we issued $200Net borrowings
during the first quarter of 2000 increased $90 million of debentures
primarilyover the same
period for the prior year to finance recent acquisitions and the completion of the
share repurchase program we announced in September 1998.working
capital needs. At September 30, 1999,March 31, 2000, we had an unused revolving credit
facility of $400 million with a number of banks. This credit facility
provides support for the issuance of commercial paper and other credit
needs.
Subsequent EventsYear 2000 and
System Infrastructure
On October 7, 1999, Stream International entered into a
merger agreement pursuant to which our 87% interest in Stream
will be reduced to 6%, and we will receive approximately $94
million in cash proceeds. The transaction is expected to close
in November 1999.
On October 13, 1999, we sold our remaining investment in
MMI, which consisted of 9.50% Series Senior Cumulative Preferred
shares, for a total of $60.2 million ($47.5 million in cash and
a $12.7 million promissory note due no later than October 13,
2002). The promissory note due from MMI has an annual rate of
interest of 9.5%, payable quarterly. We will recognize a pre-tax
gain of $2.6 million on this transaction.
During October 1999, we paid $18 million to acquire an
additional 20.65% interest in Editorial Lord Cochrane S.A.
(Cochrane). This purchase increased our ownership percentage in
Cochrane from 78% to 99%.
Process control
and information systems are increasingly important to the effective
management of the company. Increased
spending on newThe upgrade and standardization of our
systems and updating of existing systems
continuesis necessary for us to be necessary. We recently havesucceed in using information technology
to our strategic advantage. In 1999, we focused theseour efforts on ensuring
that processes and systems arewere Year 2000 compliant. In addition, the company has been engaged in an
initiativewe
began ongoing initiatives to upgrade and standardize our information
technology infrastructure, which has the incidental effect of addressing
certain of the companys Year 2000 compliance issues. We
haveinfrastructure. In 1999, we deferred a number of other
infrastructure and systems initiatives that would support continuous
productivity improvements and enhancedenhance service capabilities, pending
completion ofwhile we
completed our Year 2000 efforts.
TheDuring the
transition from 1999 to 2000, all operations were fully supported by
trained personnel. Key efforts were focused on four business-critical
factors: safety of employees, continuity of production, environmental
compliance and reporting, and continuity of systems to support the
ability of personnel to continue working (such as the availability of
utilities or operation of payroll systems). At the end of the
transition, no Year 2000 complianceissues affecting any business-critical factors
were reported by any operation. To the extent that date-related issues
were reported, they were limited to instances where personnel available
at the site were able to promptly correct the issue stems from the computer
industrys practice of conserving data storage by using two
digitswithout disruption
to represent a year. Systems and hardware using this
format may process data incorrectly or fail with the use of
dates in the next century. These types of failures can influence
applications that rely on dates to perform calculations (such as
an accounts receivable aging report), as well as facility
systems (such as building security and heating) and
manufacturing equipment.our operations.
The companys efforts to address YearFor the first
quarter of 2000, compliance
issues in our core business include:
| ·
|
evaluating internal computing infrastructure, business
applications and shop-floor systems for Year 2000 compliance,
|
| ·
|
replacing or renovating systems and applications as necessary
to assure such compliance, and
|
| ·
|
testing the replaced or renovated systems and applications.
|
Our efforts in these respects are substantially complete.
All but two low-priority business applications have been
renovated, tested and redeployed, and the remaining applications
will be redeployed during November 1999. Solutions have been
deployed to address more than 98% of the 2,000 non-compliant
shop-floor systems in use throughout the United States and other
locations, and contingency plans have been developed to address
any remaining system issues. Our infrastructure compliance work,
including replacement of non-compliant equipment, is nearly
complete, as is compliance work for all significant desktop
applications in use throughout the company.
In addition to our internal remediation activities, we
have completed an evaluation of readiness by our key suppliers
and vendors, including those serving our wholly-owned foreign
operations. Of 875 suppliers and vendors evaluated through
personal interviews and site visits, fewer than 3% have been
designated by us as deficient in their efforts. Action plans are
being executed to address each of these deficient situations and
at this time none is judged to be a significant risk to the
continuity of operations. Nonetheless, we are conducting
follow-up assessments of these and other critical suppliers and
vendors. Separate Year 2000 compliance programs are in progress
at Stream International and CS&T.
Although the company expects internal systems to be Year
2000 compliant as described above, we have developed contingency
plans that specify what we plan to do if critical systems,
processes, suppliers, vendors or external companies encounter
Year 2000 issues. Our contingency planning effort
focuses on those areas where our testing or evaluation does not
demonstrate Year 2000 readiness, or where the criticality of the
business process would make contingency planning prudent. While
the specifics of each locations plan varies, the general
approach includes ensuring that key personnel, both local and at
the Year 2000 program office, are on-site during the year-end
cut-over; backing up critical systems immediately prior to
year-end; and identifying alternate methods of doing business
with suppliers and customers, if needed.
Company employees, assisted by the expertise of external
consultants where necessary, staff the Year 2000 compliance
efforts. Actual spending on our Year 2000 initiative in 1998 was $45$2.4 million,
of which is$1.1 million was reflected in administrative expense.
Management expects 1999 expenses to be between $48expense and the
remainder in cost of sales. We spent $15.5 million and
$50 million, of which $41 million was incurredon Year 2000 costs in
the first nine
monthsquarter of 1999, of which $11.2 million was reflected in
administrative expense and the year.remainder in cost of sales. These estimated
expenses do not include costs being capitalized with respect to the companysour
information and technology infrastructure upgrade and standardization
initiative or estimated costs associated withinitiatives. As internal resources complete their Year 2000 initiatives at Stream International or CS&T.
Our failureassignments,
they have been reallocated to be Year 2000 compliant, or the failure oftechnology projects that had been
deferred, as well as to other productivity projects. These projects are
expected to improve our key suppliers, vendors or customers to achieve compliance in
a timely manner, could have a material adverse effect on the
company. Despite our efforts, a short-term disruption in some of
our operations could occur which our contingency planning
attempts to, but may not fully, address. In particular, the
companys ability to operate in foreign markets could be
materially affected by a failure ofshare information across the local infrastructure.
company,
make informed decisions rapidly, and enhance future
productivity.
Share
repurchaseRepurchaseIn September, 1999, the board of directors
authorized a share repurchase program to repurchasefor up to $300 million of the
companys common stock in privately negotiated or open-market
transactions. The program includes shares purchased for issuance under
various stock option plans. Pursuant toDuring the first quarter of 2000, we slowed
our share repurchase program announced in September 1999,
we repurchased 0.25 million shares under this program at an
average priceactivity as a result of $28.83.increased acquisition
activity.
Since July 1996, under other share repurchase programs,During the first
quarter of 2000, we have repurchasedpurchased approximately 28.10.9 million shares, or about 18%at an
average price of our outstanding shares, at a total cost of approximately $1
billion.$23.75. This program extends through September
2000.
TechnologyWe remain a technology leader, investing not only in
print-related technologies such as computer-to-plate customer connectivity and digital
imaging
capabilities, but alsoprinting, in Internet-based business models such as Online Services, and
in Internet-enabled services such as SENDD and ImageMerchant
(see below for a description of these services). We are focused on
investing in technologies that contribute to our SelectSource®financial performance
and HouseNet® services. These
businesses help us deliver products, services and solutions that are valued by
our customers effectively deliver their content
on the Internet.customers.
SelectSource During 1999, we received
recognition for our technology leadership from both PC Week and
HouseNet addressInformation Week. Among all U.S. companies, we were
named: | · | #6 of the top
100 in Enterprise Solutions (PC Week, September 13,
1999) |
| · | #25 of the top
100 in Internet Technology (PC Week, May 11, 1999) |
| · | #36 of the top
100 in Desktop and Mobile Technology (PC Week, June 21,
1999) |
| · | #66 of the top
500 e-business leaders (PC Week, November 15, 1999) |
| · | #88 of the top
500 leading IT innovators (Information Week, September 27,
1999) |
Online
Services, SENDD, ImageMerchant, Digital Print and
E-BooksOnline Services offers solutions to meet all of our
customers Internet needs. Online Services provides a full suite of
scalable e-commerce solutions including consulting, Web site design and
development, content production services to stock the
online needsshelves or populate the site with content, and marketing services
to effectively drive site traffic. The markets that Online Services
currently serves include: | · | eCommerceto help catalogers and retailers showcase their
products on the Internet and drive sales |
| · | ePublishto help magazine publishers extend and enhance
their brands online by offering content as well as commerce and
community |
| · | eDirectoryto help businesses navigate and use the
Internet to gain exposure and streamline their business
processes. |
Our recent
partnerships and investments in this arena strengthen our Online
Services offering, expand our solutions and help our customers leverage
the power of catalogers and publishers, respectively. SelectSource offers
content conversion and site development services for catalog and
retailthe Internet to communicate with their
customers. HouseNet, an online community of interest
focused on home improvement topics, aggregates content around
the themes of home, garden, crafts and money management to offer
a one-stop information resource for consumers. HouseNet was
named Yahoo!s number-one site for home improvement
information for 1998.
To meet our
Financial Services customers needs for speed, convenience,
confidentiality and accuracy, we developed SENDD. The software allows
work groups around the world to simultaneously proof a document securely
via the Internet. Financial Services is also working closely with the
Securities and Exchange Commission (SEC) on the modernization efforts
under way for EDGAR (Electronic Data Gathering and Retrieval). We
currently provide EDGAR electronic filing services for our customers,
enabling them to communicate with their target audiences while meeting
tight time frames and stringent filing requirements. We will continue to
develop our offerings and educate our clients as the SEC enhances EDGAR
in the future. In our premedia
production process, increased digitization allows us to capture customer
content and distribute it via various communication media, including
print and the Internet. We have developed technology that allows a
customer to securely archive its digital content in an R.R. Donnelley
database and access it via the Internet so that it can be repurposed for
multiple uses. This ImageMerchant software allows customers to more
effectively manage their media assets. Customer benefits include lower
costs, faster production times and consistent quality because images are
repurposed rather than recreated. Analysis tools further enhance the
value of ImageMerchant. Additionally, we
are a leading provider of digital print, which allows customized
marketing to an audience of one. With digital printing, images can be
varied as they are printed, allowing for each piece to be highly
personalized. Book Publishing
Services also applies technology to create solutions that enable our
customers to manage and distribute content in multiple media formats. Our digital archiving and
customer publishing solution allows education customers to build
books online. In addition, Book Publishing Services is the
leading supplier of conversion services to the emerging
electronic book marketplace.
In the production processWe
currently convert content for print, increased
digitization allows us to implement world-class manufacturing
techniques. Digital workflows, coupled with on-press
instrumentation and advanced statistical process control
techniques, allow us to more effectively manage both our
manufacturing assets and our raw material inputs. Additionally,
new digital imaging capabilities are allowing higher levels of
customization, enabling highly personalized printed products to
be delivered to consumers.many major e-book vendors.
We are focusedLitigationIn 1996, a purported class action was
brought against us in federal district court in Chicago, Illinois, on
investingbehalf of all current and former African-American employees, alleging
that we racially discriminated against them in technologies that help us
deliver products, servicesviolation of the Civil
Rights Act of 1871, as amended, and solutions that are valued bythe U.S. Constitution (Jones, et
al. v. R.R. Donnelley & Sons Co.). The complaint seeks
declaratory and injunctive relief, and asks for actual, compensatory,
consequential and punitive damages in an amount not less than $500
million. Although plaintiffs seek nationwide class certification, most
of the specific factual assertions of the complaint relate to the
closing of our customers and thereby contributeChicago catalog operations in 1993. Other general claims
relate to other company locations. In August 1999, the district court
judge denied our financial performance.
motion for partial summary judgment on the basis of
timeliness.
LitigationSee Note 4In 1995, a
purported class action was filed against us in federal district court in
Chicago alleging that older workers were discriminated against in
selection for termination upon the closing of the NotesChicago catalog
operations (Gerlib, et al. v. R.R. Donnelley & Sons Co.). The
suit also alleges that we violated the Employee Retirement Income
Security Act (ERISA) in determining benefits payable to Condensed Consolidated Financial Statements includedretiring or
terminated employees. In August 1997, the court certified classes in
Part Iboth the age discrimination and ERISA claims limited to former employees
of the Chicago catalog operations. In 1998, a
purported class action was filed against us in federal district court in
Chicago on behalf of current and former African-American employees,
alleging that the company racially discriminated against them in
violation of Title VII of the Civil Rights Act of 1964 (Adams, et al.
v. R.R. Donnelley & Sons Co.). While making many of the same
general discrimination claims contained in the 1996 case, the plaintiffs
in this case also claim retaliation by the company for the filing of
discrimination charges or otherwise complaining of race discrimination.
The complaint seeks the same relief and damages as sought in the 1996
case. The 1996
and 1995 cases relate primarily to the circumstances surrounding the
closing of the Chicago catalog operations. We believe we acted properly
in the closing of the operations. We also believe we have a number of
valid defenses to all of the claims made and will vigorously defend our
actions. However, because the cases are in the preliminary stages, we
cannot make a meaningful estimate of any loss that could result from an
unfavorable outcome of any of the pending cases. In December 1999,
the U.S. Environmental Protection Agency, Region 5 (U.S. EPA) issued a
Notice of Violation against us, pursuant to section 113 of the Clean Air
Act (the Act). The notice alleges that our facility in Willard, Ohio,
violated the Act and Ohios State Implementation Plan in installing
and operating certain equipment without appropriate air permits. While
the notice does not specify the remedy sought, upon final determination
of a violation, U.S. EPA may issue an administrative order requiring the
installation of air pollution control equipment, assess penalties, or
commence civil or criminal action against us. We responded to U.S. EPA
on March 10, 2000. We do not believe that any unfavorable result of this
Form 10-Q.proceeding will have a material impact on our financial position or
results of operations. In addition, we
are a party to certain litigation arising in the ordinary course of
business which, in the opinion of management, will not have a material
adverse effect on the operations or financial condition of the
company.
Environmental
RegulationsOur business is subject to various laws and
regulations relating to employee health and safety and to environmental
protection. Our policy is to comply with all laws and regulations that
govern protection of the environment and employee health and safety. We
do not anticipate that compliance will have a material adverse effect on
our competitive or consolidated financial positions.
OutlookTheOur primary business remains commercial
printing industry inand our primary geographic market is the United States (our primary geographic market) isStates. The
environment remains highly competitive in most of our product categories
and geographic regions. Competition is based largely based on price, quality and
servicing the special needs of customers. Industry analysts believe that
there is overcapacity in most commercial printing markets. Therefore,
competition is fierce.intense. Our intent is to differentiate our service
offering so that we are viewed by our customers as a partner who can
help them more effectively use words and images in a variety of ways,
whether through print or the Internet, to reach their target
audiences.
We are a large
user of paper, bought by us or supplied to us by our customers. The cost
and supply of certain paper grades used in the manufacturing process
will continue to affect our financial results, primarily at the revenue line.results. However, management
currently does not see any disruptive conditions affecting prices and
supply of paper in 1999.2000.
Postal costs are
a significant component of our customers cost structures. However, changesChanges
in postal rates, which became effectiveare anticipated early in January 1999, did not2001, may negatively
affect the company. In fact,demand for our core print capabilities, but postal rate
increases enhance the value of DLSLogistics Services to our customers, as
we are able to improve the cost and
efficiency of mail processing and
distribution. This ability to
deliver mail on a more precise schedule and at a lower cost
enhances our position in the marketplace.
In addition to
paper and postage costs, consumer confidence and economic growth are key
drivers of print demand. While current economic conditions remain favorable, there is
uncertainty around the future business environment. A significant change in the economic outlook
could affect demand for the companysour products, particularly in the financial
printing market.
In the longer
term, technological changes, including the electronic distribution of
information, present both risks and opportunities for the company. Many
of our new business initiatives are designed to leverage our distinctive
capabilities to participate in the rapid growth in electronic
communications. Our goal remains to manage and distribute words and
images, regardless of the means of distribution, to help our customers
succeed in informing, educating, entertaining and selling. We believe
that with our competitive strengths, including our comprehensive service
offerings, technology leadership, depth of management experience,
customer relationships and economies of scale, we can develop the most
valuable solutions for our customers, which should result in sustained growth inincreased
shareholder value.
Item
3
Quantitative
and Qualitative Disclosures About Market Risk
We are exposed to
market risk from changes in interest rates and foreign exchange rates.
However, we generally maintain more than half of our debt at fixed rates
(approximately 67%51% at September 30, 1999)March 31, 2000), and therefore our exposure to short-term
interest rate fluctuations is immaterialnot material to the consolidated financial
statements as a whole. Our exposure to adverse changes in foreign
exchange rates also is immaterial to our consolidated financial
statements as a whole, and we occasionally use financial instruments to
hedge exposures to foreign exchange rate changes. We do not use
financial instruments for trading purposes and are not a party to any
leveraged derivatives. Further disclosure relating to financial
instruments is included in the Debt Financing and Interest Expense note
in the Notes to Consolidated Financial Statements included in our 19981999
Annual Report on Form 10-K.
PART
II
OTHER
INFORMATION
Item 1. Legal
Proceedings
On each of
November 25, 1996, and June 30, 1998, purported class actions were
brought against the company alleging racial discrimination and seeking
actual, compensatory, consequential and punitive damages in an amount
not less than $500 million. On December 18, 1995, a class action was
brought against the company alleging age discrimination in connection
with the 1993 closing of the companys Chicago catalog operations,
and violation of the Employee Retirement Income Security Act. These
actions are described in Partpart I of this quarterly report on Form
10-Q.
Item 4.
Submission of Matters to a Vote of Security Holders | (a) The company
held its Annual Meeting of Stockholders on March 23, 2000. |
| (b) The
following matters were voted upon at the Annual Meeting of
Stockholders: |
| 1. The election
of the nominees for Directors of Class 3, who will serve for a term to
expire at the Annual Meeting of Stockholders to be held in 2003, was
voted on by the stockholders. The nominees, all of whom were elected,
were James R. Donnelley, Thomas S. Johnson and George A. Lorch. The
Inspectors of Election certified the following vote
tabulations: |
| | For
| | Withheld
|
---|
James R.
Donnelley | | 104,230,650 | | 815,312 | Thomas S.
Johnson | | 104,208,723 | | 837,239 | George A.
Lorch | | 104,191,250 | | 854,712 |
| 2. A proposal
to adopt a new stock incentive plan was approved by the stockholders.
The Inspectors of Election certified the following vote
tabulations: |
For
| | %
| | Against
| | %
| | Abstain
| | %
| | Non-Vote
| | %
|
---|
66,585,386 | | 63% | | 31,614,656 | | 30% | | 831,187 | | 1% | | 6,014,733 | | 6% | |
3. A stockholder proposal
regarding pay equity was rejected by the stockholders. The Inspectors
of Election certified the following vote tabulations: | | For
| | %
| | Against
| | %
| | Abstain
| | %
| | Non-Vote
| | %
|
---|
6,234,321 | | 6% | | 89,524,283 | | 85% | | 3,272,625 | | 3% | | 6,014,733 | | 6% | |
4. A stockholder proposal
regarding global corporate standards was rejected by the
stockholders. The Inspectors of Election certified the following vote
tabulations: | | For
| | %
| | Against
| | %
| | Abstain
| | %
| | Non-Vote
| | %
|
---|
4,088,254 | | 4% | | 89,199,355 | | 85% | | 5,743,620 | | 5% | | 6,014,733 | | 6% |
Item 5.
Other Information
Certain
statements in this filing, including the discussions of management
expectations for future periods and
Year 2000, compliance, constitute forward-looking
statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve
known and unknown risks, uncertainties and other factors that may
cause actual results to differ materially from the future results
expressed or implied by those statements. Refer to Part I, Item 1 of
the companys 19981999 Annual Report on Form 10-K for a description
of such factors.-factors.
Item 6.
Exhibits and Reports on Form 8-K.
(a)
Exhibits
10 | | Consulting
Agreement between Cheryl A. Francis and R.R. Donnelley & Sons
Company | | | 12 |
|
ComputationRatio of
Earnings to Fixed Charges |
| | 27 |
|
Financial
Data Schedule |
(b) No current
report on Form 8-K was filed during the thirdfirst quarter of
1999.2000.
SIGNATURE
Pursuant to
the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
|
R.R.
DONNELLEY
& SONS
COMPANY
|
|
Corporate ControllerActing Chief
Financial Officer
|
|
(Authorized(Authorized
Officer and
|
|
Chief
Accounting Officer)
|
Date
|