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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, 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 JULY 31, 1995 153,617,459
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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, 1995 and 1994...... 3
Condensed Consolidated Balance Sheets as of June 30, 1995
(Unaudited) and December 31, 1994............................. 4-5
Condensed Consolidated Statements of Cash Flows (Unaudited) for
the six months ended June 30, 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 Second Quarter and First
Half 1995 to 1994............................................. 8
Changes in Financial Condition................................. 9
Recent Developments............................................ 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
------------------------- -------------------------
1995 1994 1995 1994
------------ ------------ ------------ ------------
Net sales.................. $ 1,490,633 $ 1,117,338 $ 2,808,722 $ 2,188,215
Cost of sales.............. 1,212,501 899,519 2,300,775 1,776,543
------------ ------------ ------------ ------------
Gross profit............... 278,132 217,819 507,947 411,672
Selling and administrative
expenses.................. 155,485 118,120 290,840 233,270
------------ ------------ ------------ ------------
Earnings from operations... 122,647 99,699 217,107 178,402
Interest expense........... 27,246 12,472 49,830 24,199
Other expense--net......... 605 1,435 3,596 5,476
------------ ------------ ------------ ------------
Earnings before income
taxes..................... 94,796 85,792 163,681 148,727
Provision for income taxes. 30,335 27,454 52,378 47,593
------------ ------------ ------------ ------------
Net income................. $ 64,461 $ 58,338 $ 111,303 $ 101,134
============ ============ ============ ============
Per common share:
Net income............... $ 0.42 $ 0.38 $ 0.73 $ 0.66
============ ============ ============ ============
Cash dividends........... $ 0.16 $ 0.14 $ 0.32 $ 0.28
============ ============ ============ ============
Average shares outstanding. 153,526,000 154,367,000 153,308,000 154,288,000
============ ============ ============ ============
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, 1995 AND DECEMBER 31, 1994
(THOUSANDS OF DOLLARS)
ASSETS
1995 1994
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Cash and equivalents............................... $ 11,552 $ 20,569
Receivables, less allowance for doubtful accounts
of $24,342 and $19,168 at June 30, 1995 and
December 31, 1994, respectively................... 1,112,929 987,520
Inventories, principally at LIFO cost.............. 466,509 311,237
Prepaid expenses................................... 90,544 34,004
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Total current assets............................. 1,681,534 1,353,330
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Property, plant and equipment, at cost............. 3,929,694 3,708,844
Accumulated depreciation........................... 1,977,712 1,852,084
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Net property, plant and equipment................ 1,951,982 1,856,760
Goodwill and other intangibles--net................ 1,026,715 887,071
Other noncurrent assets............................ 408,241 354,982
---------- ----------
Total assets..................................... $5,068,472 $4,452,143
========== ==========
See accompanying Notes to Condensed Consolidated Financial Statements.
4
R. R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
------------
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
JUNE 30, 1995 AND DECEMBER 31, 1994
(THOUSANDS OF DOLLARS)
LIABILITIES AND SHAREHOLDERS' EQUITY
1995 1994
---------- ----------
Accounts payable................................. $ 469,789 $ 422,703
Accrued compensation............................. 84,461 107,167
Short-term debt.................................. 32,400 32,400
Current and deferred income taxes................ 100,003 46,912
Other accrued liabilities........................ 221,922 192,668
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Total current liabilities...................... 908,575 801,850
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Long-term debt................................... 1,600,335 1,212,332
Deferred income taxes............................ 282,284 286,904
Other noncurrent liabilities..................... 228,856 172,688
Shareholders' equity:
Common stock, at stated value.................. 330,612 330,612
Retained earnings, net of cumulative
translation adjustments of $17,894 and $18,235
at June 30, 1995 and December 31, 1994,
respectively.................................. 1,867,421 1,802,777
Reacquired common stock, at cost............... (149,611) (155,020)
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Total shareholders' equity................. 2,048,422 1,978,369
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Total liabilities and shareholders' equity. $5,068,472 $4,452,143
========== ==========
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)
1995 1994
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Cash flows provided by (used in) operating activities:
Net income............................................. $ 111,303 $ 101,134
Depreciation and amortization.......................... 192,284 150,888
Net change in assets and liabilities................... (260,133) 482
Other.................................................. (11,590) (100)
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Net cash provided by operating activities................ 31,864 252,404
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Cash flows used for investing activities:
Capital expenditures................................... (224,739) (233,528)
Other investments including acquisitions, net of cash
acquired.............................................. (23,812) (103,521)
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Net cash used for investing activities................... (248,551) (337,049)
--------- ---------
Cash flows from (used for) financing activities:
Net increase in borrowings............................. 249,584 138,069
Disposition of reacquired common stock................. 28,205 17,367
Acquisition of common stock............................ (20,744) (20,783)
Cash dividends on common stock......................... (49,052) (43,211)
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Net cash from financing activities....................... 207,993 91,442
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Effect of exchange rate changes on cash and equivalents.. (323) 2,436
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Net increase (decrease) in cash and equivalents.......... (9,017) 9,233
Cash and equivalents at beginning of period.............. 20,569 10,716
--------- ---------
Cash and equivalents at end of period.................... $ 11,552 $ 19,949
========= =========
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 June 30, 1995 and December
31, 1994 were as follows:
(THOUSANDS OF
DOLLARS)
----------------------
JUNE 30, DECEMBER 31,
1995 1994
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Raw materials and manufacturing supplies................ $285,154 $185,527
Work in process......................................... 244,036 208,553
Finished goods.......................................... 38,163 5,821
Progress billings....................................... (54,703) (45,523)
LIFO reserve............................................ (46,141) (43,141)
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Total inventories................................... $466,509 $311,237
======== ========
Note 3. The following provides supplemental cash flow information:
(THOUSANDS OF
DOLLARS)
----------------------
SIX MONTHS ENDED
JUNE 30
----------------------
1995 1994
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Cash flow data:
Interest paid, net of capitalized interest............. $ 41,312 $ 24,137
Income taxes paid...................................... $ 31,161 $ 38,831
Noncash investing and financing activities:
Liabilities incurred and assumed in connection with
acquisitions.......................................... $354,158 $ 87,110
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS--COMPARISON OF SECOND QUARTER 1995 TO SECOND QUARTER 1994
Net sales increased 33.4% from the prior year reflecting recent acquisitions
and mergers, increased materials sales, continued growth in foreign operations
and strong demand across most business units. Acquisitions and mergers
accounted for approximately 50% of the revenue increase in the quarter,
primarily due to the merger of the company's Global Software Services unit with
Corporate Software Inc. to form Stream International Inc. Higher materials
sales, principally paper provided to customers, accounted for approximately 30%
of the revenue growth in the quarter.
Net sales from foreign operations represented approximately 15% of total
sales for the quarter, up from approximately 10% in the prior year. The growth
in foreign sales reflected volume increases from both established foreign
operations and new operations in Latin America, Central Europe and Asia.
Demand in telecommunications was notably higher, reflecting the contract to
produce directories for Southwestern Bell and its affiliates, which began
production in the first quarter of 1995.
Gross profit increased 27.7%, which was less than the sales growth rate due
to the impact of higher paper costs, which are generally recovered, but at low
margins, and the change in revenue mix associated with the Stream International
merger. Selling and administrative expenses were 31.6% above the prior year,
reflecting volume related increases, recent expansions and new operations, and
the impact of the Stream International merger. Earnings from operations rose
23.0%, reflecting low margins on higher priced paper and the change in revenue
mix. Interest expense increased $14.8 million, reflecting higher interest rates
and debt balances to fund capital spending, increased working capital
requirements (primarily the impact of higher materials prices) and acquisitions
and mergers. As a result, net income and earnings per share grew 10.5%.
RESULTS OF OPERATIONS--COMPARISON OF FIRST HALF 1995 TO FIRST HALF 1994
Net sales increased 28.4% from the prior year, reflecting recent acquisitions
and mergers, increased materials sales, continued growth in foreign operations
and strong demand across most of the business units. Approximately 40% of the
revenue increase for the first half of the year was attributed to higher
materials sales, while 35% of the increase was due to acquisitions and mergers
(primarily Stream International).
Revenue growth is expected to increase in the second half of 1995, primarily
reflecting the impact of acquisitions and the Stream International merger,
higher materials sales and continued growth in foreign sales. Significant
revenue increases are expected with the anticipated release of Microsoft
Corporation's Windows 95(R) operating system. Through Stream International, the
company is a major global manufacturing and service provider to Microsoft
Corporation.
Gross profit increased 23.4%, which was lower than the sales growth due to
the impact of higher paper prices (which are generally recovered, but at low
margins) and the change in revenue mix associated with the Stream International
merger. Selling and administrative expenses increased 24.7% reflecting volume
increases and expenses associated with acquisitions and new operations,
particularly the Stream International merger. Earnings from operations
increased 21.7%, which included the impact of higher paper prices and the
change in revenue mix. Interest expense increased $25.6 million, reflecting
both higher interest rates and debt levels associated with capital spending,
increased working capital requirements (primarily the impact of higher
materials prices) and recent acquisitions and mergers. Net income grew 10.1%,
primarily due to volume increases, partially offset by the higher interest
expense. Earnings per share were $0.73, an increase of 10.6%, reflecting net
income growth and fewer shares outstanding.
8
CHANGES IN FINANCIAL CONDITION
With the growth in cash flow, the company's credit facility and the shelf
registration discussed below, management believes the company has the financial
strength and flexibility to fund current operations and growth. For the first
half, net income from operations plus depreciation and amortization was $303.6
million, up 20.5% from the prior year.
Capital expenditures during the first half totaled $224.7 million, including
the purchases and upgrades of equipment to meet the growing needs of present
and new customers and expansion of manufacturing plants. Working capital
increased $221.5 million from December 31, 1994, due to business growth, the
impact of the tight paper market and recent acquisitions and mergers.
Management estimates that the tight paper market increased the company's
working capital by approximately $150 million, primarily through higher
receivables and inventory balances.
At June 30, 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. In late June and early
July, the company issued $300 million of debt securities in the form of medium-
term notes, ranging in maturity from three to ten years at a weighted average
interest rate of 6.62%. 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.
Stream International has a credit facility of $200 million with a number of
banks. The credit facility provides funding for working capital requirements
and other credit needs. At June 30, 1995, Stream International had outstanding
borrowings against this line of credit of $110 million.
RECENT DEVELOPMENTS
On August 4, 1995, the Federal Trade Commission released its unanimous
opinion upholding the legality of the company's 1990 acquisition of the
Meredith/Burda companies, ending the earlier challenge to the acquisition.
9
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On August 4, 1995, the Federal Trade Commission ("FTC") issued a final order
dismissing an administrative complaint brought against the company to require
divestiture of the Meredith/Burda companies.
In July, 1990, the FTC filed a complaint in U.S. District Court seeking a
preliminary injunction to enjoin the company from consummating the acquisition
of the Meredith/Burda companies, alleging that consummation might substantially
lessen competition in certain alleged rotogravure printing markets. The
acquisition was closed in September, 1990, after the U.S. District Court denied
the FTC's motion for an injunction. In October, 1990, the FTC Staff initiated
an administrative action challenging the acquisition on the same grounds raised
before the U.S. District Court in the injunction proceeding and seeking
divestiture. On December 30, 1993, an administrative law judge ("ALJ") of the
FTC ruled that the acquisition did create a "dominant firm" and significantly
increased concentration in the "high volume publication rotogravure market."
The ALJ ordered divestiture of the plants which had been acquired in the
Meredith/Burda acquisition.
The final order results from the appeal by the company of the ALJ's opinion.
The FTC found that the market proposed by the FTC Staff was not a relevant
market for the purposes of assessing the legality of the acquisition, and that
even assuming a broader market definition, there was no likelihood that the
acquisition of the Meredith/Burda companies would lead to anticompetitive
effects.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
10(a) Retirement and Release Agreement with retiring executive*
10(b) Employment Agreement among Stream International, R. R. Donnelley
& Sons Company and Rory Cowan*
12 Statement of Computation of Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
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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
1995.
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)
August 11, 1995
Date __________________________
11