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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 MARCH 31, 1995
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 APRIL 30, 1995 153,501,871
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PAGE
INDEX NUMBER(S)
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Condensed Consolidated Statements of Income (Unaudited) for
the three months ended March 31, 1995 and 1994............... 3
Condensed Consolidated Balance Sheets as of March 31, 1995
(Unaudited) and December 31, 1994............................ 4-5
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the three months ended March 31, 1995 and 1994........... 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 First Quarter 1995 to
First Quarter 1994........................................... 8
Changes in Financial Condition................................ 8
2
R. R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
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CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31
(THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
1995 1994
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Net sales.............................................. $ 1,318,089 $ 1,070,877
Cost of sales.......................................... 1,088,274 877,024
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Gross profit........................................... 229,815 193,853
Selling and administrative expenses.................... 135,355 115,150
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Earnings from operations............................... 94,460 78,703
Interest expense....................................... 22,584 11,728
Other expense--net..................................... 2,991 4,040
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Earnings before income taxes........................... 68,885 62,935
Provision for income taxes............................. 22,043 20,139
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Net income............................................. $ 46,842 $ 42,796
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Per common share:
Net income........................................... $ 0.31 $ 0.28
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Cash dividends....................................... $ 0.16 $ 0.14
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Average shares outstanding............................. 153,123,000 154,275,000
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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)
MARCH 31, 1995 AND DECEMBER 31, 1994
(THOUSANDS OF DOLLARS)
ASSETS
1995 1994
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Cash and equivalents............................... $ 14,511 $ 20,569
Receivables, less allowance for doubtful accounts
of $20,170 and $19,168 at March 31, 1995 and
December 31, 1994, respectively................... 987,890 987,520
Inventories, principally at LIFO cost.............. 365,072 311,237
Prepaid expenses................................... 74,028 34,004
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Total current assets............................. 1,441,501 1,353,330
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Property, plant and equipment, at cost............. 3,804,477 3,708,844
Accumulated depreciation........................... 1,919,839 1,852,084
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Net property, plant and equipment................ 1,884,638 1,856,760
Goodwill and other intangibles--net................ 884,660 887,071
Other noncurrent assets............................ 402,803 354,982
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Total assets..................................... $4,613,602 $4,452,143
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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)
MARCH 31, 1995 AND DECEMBER 31, 1994
(THOUSANDS OF DOLLARS)
LIABILITIES AND SHAREHOLDERS' EQUITY
1995 1994
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Accounts payable................................. $ 414,043 $ 422,703
Accrued compensation............................. 78,238 107,167
Short-term debt.................................. 32,400 32,400
Current and deferred income taxes................ 83,298 46,912
Other accrued liabilities........................ 207,782 192,668
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Total current liabilities...................... 815,761 801,850
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Long-term debt................................... 1,327,510 1,212,332
Deferred income taxes............................ 292,448 286,904
Other noncurrent liabilities..................... 175,533 172,688
Shareholders' equity:
Common stock, at stated value.................. 330,612 330,612
Retained earnings, net of cumulative
translation adjustments of $24,223 and $18,235
at March 31, 1995 and December 31, 1994,
respectively.................................. 1,823,164 1,802,777
Reacquired common stock, at cost............... (151,426) (155,020)
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Total shareholders' equity................. 2,002,350 1,978,369
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Total liabilities and shareholders' equity. $4,613,602 $4,452,143
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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 THREE MONTHS ENDED MARCH 31
(THOUSANDS OF DOLLARS)
1995 1994
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Cash flows provided by (used in) operating activities:
Net income............................................. $ 46,842 $ 42,796
Depreciation and amortization.......................... 92,178 76,124
Net change in assets and liabilities................... (100,835) (70,370)
Other.................................................. (7,239) 1,951
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Net cash provided by operating activities................ 30,946 50,501
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Cash flows used for investing activities:
Capital expenditures................................... (107,683) (113,922)
Other investments including acquisitions, net of cash
acquired.............................................. (21,184) (13,112)
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Net cash used for investing activities................... (128,867) (127,034)
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Cash flows from (used for) financing activities:
Net increase in borrowings............................. 115,178 96,976
Disposition of reacquired common stock................. 20,836 16,270
Acquisition of common stock............................ (13,233) (6,696)
Cash dividends on common stock......................... (24,476) (21,588)
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Net cash from financing activities....................... 98,305 84,962
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Effect of exchange rate changes on cash and equivalents.. (6,442) 2,425
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Net increase (decrease) in cash and equivalents.......... (6,058) 10,854
Cash and equivalents at beginning of period.............. 20,569 10,716
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Cash and equivalents at end of period.................... $ 14,511 $ 21,570
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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, 1994 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 company's 1994 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 March 31, 1995 and
December 31, 1994 were as follows:
(THOUSANDS OF
DOLLARS)
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MARCH DECEMBER 31,
31, 1995 1994
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Raw materials............................................ $207,486 $165,615
Work in process.......................................... 188,743 182,914
Operating supplies....................................... 54,791 51,372
Progress billings........................................ (41,307) (45,523)
LIFO reserve............................................. (44,641) (43,141)
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Total inventories.................................... $365,072 $311,237
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Note 3. The following provides supplemental cash flow information:
(THOUSANDS OF
DOLLARS)
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THREE MONTHS ENDED
MARCH 31
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1995 1994
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Interest paid, net of capitalized interest............... $ 12,314 $ 5,731
Income taxes paid........................................ $ 5,496 $ 10,424
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS--COMPARISON OF FIRST QUARTER 1995 TO FIRST QUARTER 1994
Net sales increased 23.1% from the prior year reflecting increased material
sales, strong demand across most business units and continued growth in foreign
operations. Approximately one-half of the first quarter revenue growth was
related to higher materials sales, mainly paper provided to customers. Higher
volume in the quarter was also attributed to increased demand in
telecommunications, primarily from the start-up of the recently announced
Southwestern Bell contract, and in book publishing services. Net sales from
foreign operations were 70% higher than the prior year and represented more
than 13% of consolidated sales in the quarter. The growth in foreign sales
reflected volume increases and new operations in Europe, Asia and Latin
America. Strong growth in foreign sales is expected to continue throughout
1995.
Gross profit increased 18.6%, reflecting higher volume partially offset by
higher depreciation and amortization, increased start-up expenses associated
with recent capital expenditures and the impact of higher paper costs, which
are generally recovered, but at low margins. Tight market conditions for
certain grades of paper are expected to continue for the remainder of 1995, but
are not expected to have a significant impact on the company due to guaranteed
quantity allocations from suppliers coupled with the company's production
efficiencies and ability to substitute different grades of paper. Selling and
administrative expenses were 17.5% higher than the prior year, due to higher
volume, recent expansions and new operations. Earnings from operations
increased 20% over the prior year, reflecting the slightly lower ratio of
selling and administrative expenses to gross profit. Interest expense increased
$10.9 million resulting from both higher debt balances to fund acquisitions and
expansions and higher interest rates. Net income grew 9.5%, primarily due to
volume increases, partially offset by higher interest expense. Earnings per
share were $0.31, up 10.7%, reflecting net income growth and fewer average
shares outstanding.
On April 21, 1995, the company merged its Global Software Services business
unit with Corporate Software Inc. to form Stream International Inc. ("Stream"),
the world's largest manufacturer and reseller of computer software and related
services. The company owns approximately 80% of Stream and will account for the
merger as a purchase. The merger will add an estimated $400 million to
consolidated net sales in 1995 and is expected to have no material impact on
consolidated net income in 1995. Management expects the merger to have a
positive effect on consolidated sales and net income in 1996.
CHANGES IN 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 operations and growth. Net income plus depreciation
and amortization was $139.0 million, up 16.9% from the prior year.
Capital expenditures during the first three months totaled $107.7 million,
including purchases of new equipment to meet the growing needs of present and
new customers and expansion of manufacturing plants. Full year capital spending
is expected to be $400 million. Working capital increased $74.3 million from
December 31, 1994, due to increased inventories to support business growth and
higher paper prices, higher prepaid expenses (relating to VEBA payments and
deposits for paper) and lower accrued compensation (reflecting higher year-end
commission and bonus accruals), which were partially offset by higher deferred
tax liabilities.
At March 31, 1995, the company had an unused revolving credit facility of
$550 million with a number of banks. This credit facility provides support for
the issuance of commercial paper and other credit needs. At March 31, 1995, the
company had an effective shelf registration statement permitting it to issue,
from time to time, up to $300 million of debt securities in the form of medium-
term notes. The company also had an effective shelf registration statement
permitting it to issue, from time to time, up to an additional $500 million of
debt securities. The company has no current intention to issue debt securities
under the latter registration statement in 1995.
8
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In January, 1995, an administrative complaint by the U.S. Environmental
Protection Agency Region V ("Region V") seeking $304,500 in penalties was filed
against the company's Warsaw, Indiana facility alleging violations of the
Resource Conservation and Recovery Act. The complaint alleges that filtercake
from wastewater treatment operations was mischaracterized by the company as
non-hazardous waste. The complaint also alleges failure to give certain land
disposal restriction notices. The company subsequently submitted evidence to
Region V that the proper notifications were given in all but two instances, and
Region V has requested that the allegations relating to those notices be
dropped. Region V has also filed a Motion for Accelerated Decision.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) The company held its Annual Meeting of Stockholders on March 23, 1995.
(b) The following matters were voted upon at the Annual Meeting of
Stockholders:
1. The election of the nominees for Directors of the First Class who will
serve for a term to expire at the Annual Meeting of Stockholders to be held
in 1998 was voted on by the stockholders. The nominees, all of whom were
elected, were: Martha Layne Collins, Charles C. Haffner III, Richard M.
Morrow, H. Blair White and Stephen M. Wolf. The Inspectors of Election
certified the following vote tabulations:
FOR WITHHELD NON-VOTES
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Martha Layne Collins....................... 131,663,241 939,602 0
Charles C. Haffner III..................... 131,653,126 949,717 0
Richard M. Morrow.......................... 131,684,025 918,818 0
H. Blair White............................. 131,681,694 921,149 0
Stephen M. Wolf............................ 131,603,406 999,437 0
2. The 1995 Stock Incentive Plan proposed by the company was approved by
the stockholders. The Inspectors of Election certified the following vote
tabulations:
FOR AGAINST ABSTAIN NON-VOTES
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108,513,928 23,570,297 518,618 0
3. A stockholder proposal requesting that the company endorse the
Coalition for Environmentally Responsible Economies (CERES) Principles was
rejected by the stockholders. The Inspectors of Election certified the
following vote tabulations:
FOR AGAINST ABSTAIN NON-VOTES
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10,877,180 104,259,327 8,913,048 8,553,288
4. A stockholder proposal regarding the company's maquiladora operations
was rejected by the stockholders. The Inspectors of Election certified the
following vote tabulations:
FOR AGAINST ABSTAIN NON-VOTES
--- ------- ------- ---------
9,669,154 103,476,477 10,903,924 8,553,288
9
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
2 Contribution Agreement, dated as of April 21, 1995, among
R. R. Donnelley & Sons Company, R. R. Donnelley Global
Software Services Corp., and Software Holdings, Inc.*
12 Statement of Computation of Ratio of Earnings to Fixed
Charges
27 Financial Data Schedule.
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*The company agrees to furnish copies of omitted exhibits and schedules to the
Securities and Exchange Commission upon request.
(b) A current Report on Form 8-K was filed during the first quarter of 1995.
The Report was dated February 21, 1995 and included item 5, "Other Events," and
item 7, "Financial Statements, Pro Forma Financial Information and Exhibits,"
including the following financial statements:
R. R. Donnelley & Sons Company--Certain Financial Information as of and
for the Year Ended December 31, 1994:
--Consolidated Statements of Income
--Consolidated Balance Sheets
--Consolidated Statements of Cash Flows
--Consolidated Statements of Shareholders' Equity
--Notes to Consolidated Financial Statements
--Report of Independent Public Accountants
--Management's Discussion and Analysis of Results of Operations
--Management's Discussion and Analysis of Financial Condition
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/ Peter F. Murphy
By __________________________________
Peter F. Murphy
Controller
(Authorized Officer and
Chief Accounting Officer)
May 12, 1995
Date __________________________
11