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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1994
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-4694
R. R. DONNELLEY & SONS COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 36-1004130
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
77 WEST WACKER DRIVE, CHICAGO,
ILLINOIS 60601
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
REGISTRANT'S 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.
X
Yes------- No -------
NUMBER OF SHARES OF COMMON STOCK
OUTSTANDING
AS OF JULY 31, 1994 153,864,474
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PAGE
INDEX NUMBER(S)
----- ---------
Condensed Consolidated Statements of Income (Unaudited) for the
three and six month periods ended June 30, 1994 and 1993...... 3
Condensed Consolidated Balance Sheets (Unaudited) as of June
30, 1994 and December 31, 1993................................ 4-5
Condensed Consolidated Statements of Cash Flows (Unaudited) for
the six months ended June 30, 1994 and 1993................... 6
Notes to Condensed Consolidated Financial Statements (Unau-
dited)........................................................ 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations--Comparison of Second Quarter and First
Half 1994 to 1993............................................. 8
Financial Condition............................................ 8-9
2
R. R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
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CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------------ ------------------------
1994 1993 1994 1993
----------- ----------- ----------- -----------
Net sales................. $ 1,117,338 $ 993,964 $ 2,188,215 $ 1,954,305
Cost of sales............. 899,519 798,613 1,776,543 1,584,119
----------- ----------- ----------- -----------
Gross profit............ 217,819 195,351 411,672 370,186
Selling and administrative
expenses................. 118,120 105,431 233,270 209,285
Restructuring charge...... -- -- -- 90,000
----------- ----------- ----------- -----------
Earnings from
operations............. 99,699 89,920 178,402 70,901
Interest expense.......... (12,472) (11,254) (24,199) (22,464)
Other expense, net........ (1,435) (486) (5,476) (3,010)
----------- ----------- ----------- -----------
Earnings before income
taxes and cumulative
effect of accounting
changes ................. 85,792 78,180 148,727 45,427
Provision for income
taxes.................... 27,454 25,409 47,593 14,764
----------- ----------- ----------- -----------
Net income from operations
before cumulative effect
of accounting changes.... 58,338 52,771 101,134 30,663
Cumulative effect of
change in accounting for
post-retirement benefits
other than pensions (net
of tax benefits of $80.1
million)................. -- -- -- (127,700)
Cumulative effect of
change in accounting for
income taxes............. -- -- -- 58,200
----------- ----------- ----------- -----------
Net income (loss)......... $ 58,338 $ 52,771 $ 101,134 $ (38,837)
=========== =========== =========== ===========
Income (charge) per share:
Operations before
cumulative effects of
accounting changes..... $ 0.38 $ 0.34 $ 0.66 $ 0.20
Cumulative effect of
change in accounting
for post-retirement
benefits other than
pensions (net of tax
benefits).............. -- -- -- (0.82)
Cumulative effect of
change in accounting
for income taxes....... -- -- -- 0.37
----------- ----------- ----------- -----------
Net income (loss)....... $ 0.38 $ 0.34 $ 0.66 $ (0.25)
=========== =========== =========== ===========
Cash dividends.......... $ 0.14 $ 0.13 $ 0.28 $ 0.26
=========== =========== =========== ===========
Average number of shares
outstanding.............. 154,367,000 154,701,000 154,288,000 154,805,000
=========== =========== =========== ===========
See accompanying Notes to Condensed Consolidated Financial Statements.
3
R. R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
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CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
JUNE 30, 1994 AND DECEMBER 31, 1993
(THOUSANDS OF DOLLARS)
ASSETS
1994 1993
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Current assets:
Cash and equivalents............................... $ 19,949 $ 10,716
Receivables, less allowance for doubtful accounts
of $15,377 and $14,795 at June 30, 1994 and
December 31, 1993, respectively................... 818,423 825,207
Inventories, principally at LIFO cost.............. 283,954 243,714
Prepaid expenses................................... 40,571 30,277
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Total current assets............................. 1,162,897 1,109,914
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Property, plant and equipment, at cost............... 3,619,850 3,361,255
Accumulated depreciation............................. (1,812,226) (1,686,779)
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Net property, plant and equipment................ 1,807,624 1,674,476
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Goodwill--net........................................ 541,687 493,672
Other assets......................................... 434,679 375,964
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Total assets..................................... $ 3,946,887 $ 3,654,026
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See accompanying Notes to Condensed Consolidated Financial Statements.
4
R. R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
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CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
JUNE 30, 1994 AND DECEMBER 31, 1993
(THOUSANDS OF DOLLARS)
LIABILITIES AND SHAREHOLDERS' EQUITY
1994 1993
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Current liabilities:
Accounts payable..................................... $ 364,047 $ 333,862
Accrued compensation................................. 70,152 78,284
Short-term debt...................................... 37,400 37,428
Current and deferred income taxes.................... 53,281 40,698
Other accrued liabilities............................ 195,134 195,169
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Total current liabilities.......................... 720,014 685,441
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Long-term debt......................................... 841,779 673,422
Deferred income taxes.................................. 262,083 272,959
Other noncurrent liabilities........................... 216,307 178,213
Shareholders' equity:
Common stock, at stated value........................ 330,612 330,612
Retained earnings, including cumulative translation
adjustments
of ($4,934) and ($13,140) at June 30, 1994 and
December 31, 1993, respectively..................... 1,699,061 1,629,673
Reacquired common stock, at cost..................... (122,969) (116,294)
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Total shareholders' equity......................... 1,906,704 1,843,991
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Total liabilities and shareholders' equity......... $3,946,887 $3,654,026
========== ==========
See accompanying Notes to Condensed Consolidated Financial Statements.
5
R. R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30
(THOUSANDS OF DOLLARS)
1994 1993
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Cash flows provided by (used in) operating activities:
Net income from operations before cumulative effect of
accounting changes..................................... $101,134 $ 30,663
Depreciation and amortization........................... 150,888 133,870
Net change in assets and liabilities.................... 482 3,582
Other................................................... (100) 5,441
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Net cash provided by operating activities............. 252,404 173,556
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Cash flows used for investing activities:
Capital expenditures.................................... (233,528) (145,289)
Other capital investments including acquisitions........ (103,521) (32,696)
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Net cash used for investing activities................ (337,049) (177,985)
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Cash flows from (used for) financing activities:
Net increase in borrowings.............................. 138,069 64,637
Disposition of reacquired common stock.................. 17,367 12,428
Acquisition of common stock............................. (20,783) (23,335)
Cash dividends on common stock.......................... (43,211) (40,247)
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Net cash from financing activities.................... 91,442 13,483
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Effect of exchange rate changes on cash and equivalents... 2,436 (424)
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Net increase in cash and equivalents...................... 9,233 8,630
Cash and equivalents at beginning of period............... 10,716 12,348
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Cash and equivalents at end of period..................... $ 19,949 $ 20,978
======== =========
See accompanying Notes to Condensed Consolidated Financial Statements.
6
R. R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
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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, 1993 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 footnote 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 company's 1993 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.
Note 2. Components of the company's inventories at June 30, 1994 and December
31, 1993 were as follows:
(THOUSANDS OF
DOLLARS)
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JUNE 30, DECEMBER 31,
1994 1993
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Raw materials........................................... $150,317 $142,739
Work in process......................................... 193,488 154,477
Other, including goods held for customers and operating
supplies............................................... 35,515 32,192
LIFO reserve............................................ (47,896) (45,395)
Progress billings....................................... (47,470) (40,299)
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Total inventories................................... $283,954 $243,714
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Note 3. The following provides supplemental cash flow information:
(THOUSANDS OF
DOLLARS)
----------------------
SIX MONTHS ENDED
JUNE 30
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1994 1993
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Interest paid, net of capitalized interest.............. $ 24,137 $ 17,784
Income taxes paid....................................... $ 38,831 $ 14,644
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS--COMPARISON OF SECOND QUARTER 1994 TO SECOND QUARTER 1993
Net sales increased 12.4%, reflecting new products and services, higher
volume from existing and new customers and recent acquisitions. Net sales from
international operations increased 29%, resulting from strong demand from
computer hardware and software customers in Europe and Asia and from existing
and new customers in book, catalog and magazine operations in the United
Kingdom and Mexico. As a result of this growth, international operations
represented over 10% of consolidated net sales in the quarter. The growth in
international sales is expected to continue in the second half with the
consolidation of Editorial Lord Cochrane, the major independent printer in
South America, in which the company acquired a majority interest in the second
quarter of 1994.
Gross profit increased 11.5%, reflecting higher sales volume partially offset
by higher depreciation and amortization, a higher LIFO provision and higher
start-up expenses. Selling and administrative expenses increased 12% (less than
the 12.4% growth in net sales), due to higher volume, recent expansions and new
operations. Total other expense increased $2.2 million, primarily reflecting
higher interest expense (due to larger commercial paper balances and higher
interest rates) and lower investment income. The effective tax rate of 32% in
1994 was lower than the 1993 rate of 32.5% reflecting benefits associated with
life insurance programs and credits associated with affordable housing
programs, partially offset by the impact of the higher federal statutory income
tax rate. Net income increased 10.5%, as a result of volume increases and a
lower effective tax rate. Earnings per share were $0.38 per share, up 11.8%,
reflecting the growth in net income and fewer average shares outstanding.
RESULTS OF OPERATIONS--COMPARISON OF FIRST HALF 1994 TO FIRST HALF 1993
Net sales increased 12%, reflecting new products and services, higher volume
from existing and new customers and recent acquisitions. Net sales from
international operations increased 24%, resulting from strong demand from
computer hardware and software customers in Europe and Asia, and from existing
and new customers in book, catalog and magazine operations in the United
Kingdom and Mexico. As a result of this growth, international operations
represented over 10% of consolidated net sales in the first half. The growth in
international sales is expected to continue in the second half with the
consolidation of Editorial Lord Cochrane, as discussed in the second quarter
comparison.
Gross profit increased 11.2%, reflecting higher sales volume partially offset
by higher depreciation and amortization, a higher LIFO provision and higher
start-up expenses. Selling and administrative expenses increased 11.5% (less
than the 12% growth in net sales), due to increased volume, recent expansions
and new operations. Total other expense increased $4.2 million, primarily
reflecting higher interest expense (due to larger commercial paper balances and
higher interest rates) and lower investment income. The effective tax rate of
32% in 1994 was lower than the 1993 rate of 32.5%, reflecting benefits
associated with life insurance programs and credits associated with affordable
housing programs, partially offset by the impact of the higher federal
statutory income tax rate. Due to volume increases and the lower effective tax
rate, net income increased 10.6% in the first half, excluding the restructuring
charge and accounting changes reflected in the first quarter of 1993. First
half earnings per share of $0.66 increased 11.9% over 1993, excluding the one-
time items recorded in the first quarter of 1993, reflecting growth in net
income and fewer average shares outstanding.
FINANCIAL CONDITION
With the growth in cash flow and the credit facilities and shelf registration
discussed below, management believes the company has the financial strength and
flexibility to fund current
8
operations and growth. Net income from operations plus depreciation and
amortization increased to $252 million, up 12% over the prior year, excluding
the restructuring charge recorded in the first quarter of 1993.
Capital investments during the first half totaled $337 million, including new
equipment to meet the growing needs of present and new customers; expansion of
manufacturing plants; and acquisitions and joint venture investments. Full year
capital investments are expected to be $500 million, including the second-
quarter acquisition of a majority interest in Editorial Lord Cochrane. Working
capital increased by $18 million from December 31, 1993, primarily from higher
inventory levels to support expected second half volume increases, partially
offset by higher accounts payable balances.
At June 30, 1994, the company continues to have two unused revolving credit
facilities totaling $550 million with a number of banks. These credit
facilities provide support for the issuance of commercial paper and other
credit needs. As of June 30, 1994, the company continues to have effective
shelf registration statements permitting it to issue, from time to time, up to
$500 million in debt securities.
9
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
10(a) Retirement Agreement with retiring executive*
10(b) Donnelley Shares Stock Option Plan, as amended on July 28, 1994
12 Statement of Computation of Ratio of Earnings to Fixed Charges
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*Management Contract or Compensation Plan or Arrangement.
(b) No current Report on Form 8-K was filed during the second quarter of
1994.
10
SIGNATURE
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES 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
/s/ William L. White
By __________________________________
William L. White
Controller
(Authorized Officer and
Chief Accounting Officer)
August 12, 1994
Date __________________________
11