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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 SEPTEMBER 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 OCTOBER 31, 1995 153,628,487
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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 nine month periods ended September 30, 1995 and
1994.......................................................... 3
Condensed Consolidated Balance Sheets as of September 30, 1995
(Unaudited) and December 31, 1994............................. 4-5
Condensed Consolidated Statements of Cash Flows (Unaudited) for
the nine months ended September 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 Third Quarter and First
Nine Months 1995 to 1994...................................... 8
Outlook........................................................ 9
Changes in Financial Condition................................. 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 NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------- -------------------------
1995 1994 1995 1994
------------ ------------ ------------ ------------
Net sales.................. $ 1,704,793 $ 1,242,973 $ 4,513,515 $ 3,431,188
Cost of sales.............. 1,366,047 987,927 3,666,822 2,764,470
------------ ------------ ------------ ------------
Gross profit............... 338,746 255,046 846,693 666,718
Selling and administrative
expenses.................. 170,924 122,848 461,764 356,118
------------ ------------ ------------ ------------
Earnings from operations... 167,822 132,198 384,929 310,600
Interest expense........... 30,353 13,569 80,183 37,768
Other expense--net......... 2,091 880 5,687 6,356
------------ ------------ ------------ ------------
Earnings before income
taxes..................... 135,378 117,749 299,059 266,476
Provision for income taxes. 43,321 37,679 95,699 85,272
------------ ------------ ------------ ------------
Net income................. $ 92,057 $ 80,070 $ 203,360 $ 181,204
============ ============ ============ ============
Per common share:
Net income............... $ 0.60 $ 0.52 $ 1.33 $ 1.18
============ ============ ============ ============
Cash dividends........... $ 0.18 $ 0.16 $ 0.50 $ 0.44
============ ============ ============ ============
Average shares outstanding. 153,629,000 153,816,000 153,408,000 154,117,000
============ ============ ============ ============
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)
SEPTEMBER 30, 1995 AND DECEMBER 31, 1994
(THOUSANDS OF DOLLARS)
ASSETS
1995 1994
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Cash and equivalents............................... $ 19,231 $ 20,569
Receivables, less allowance for doubtful accounts
of $27,719 and $19,168 at September 30, 1995 and
December 31, 1994, respectively................... 1,264,766 987,520
Inventories, principally at LIFO cost.............. 532,374 311,237
Prepaid expenses................................... 50,914 34,004
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Total current assets............................. 1,867,285 1,353,330
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Property, plant and equipment, at cost............. 4,039,916 3,708,844
Accumulated depreciation........................... 2,044,975 1,852,084
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Net property, plant and equipment................ 1,994,941 1,856,760
Goodwill and other intangibles--net................ 1,023,247 887,071
Other noncurrent assets............................ 437,171 354,982
---------- ----------
Total assets..................................... $5,322,644 $4,452,143
========== ==========
See accompanying Notes to Condensed Consolidated Financial Statements.
4
R. R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
------------
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
SEPTEMBER 30, 1995 AND DECEMBER 31, 1994
(THOUSANDS OF DOLLARS)
LIABILITIES AND SHAREHOLDERS' EQUITY
1995 1994
---------- ----------
Accounts payable................................. $ 535,610 $ 422,703
Accrued compensation............................. 103,437 107,167
Short-term debt.................................. 32,400 32,400
Current and deferred income taxes................ 124,288 46,912
Other accrued liabilities........................ 270,072 192,668
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Total current liabilities...................... 1,065,807 801,850
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Long-term debt................................... 1,629,243 1,212,332
Deferred income taxes............................ 278,177 286,904
Other noncurrent liabilities..................... 236,905 172,688
Shareholders' equity:
Common stock, at stated value ($1.25 per
share)........................................ 330,612 330,612
Retained earnings, net of cumulative
translation adjustments of $15,981 and $18,235
at September 30, 1995 and December 31, 1994,
respectively.................................. 1,931,240 1,802,777
Reacquired common stock, at cost............... (149,340) (155,020)
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Total shareholders' equity................. 2,112,512 1,978,369
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Total liabilities and shareholders' equity. $5,322,644 $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 NINE MONTHS ENDED SEPTEMBER 30
(THOUSANDS OF DOLLARS)
1995 1994
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Cash flows provided by (used in) operating activities:
Net income.............................................. $ 203,360 $181,204
Depreciation and amortization........................... 292,190 232,599
Net change in assets and liabilities.................... (287,651) (47,395)
Other................................................... (10,792) 5,598
--------- --------
Net cash provided by operating activities................. 197,107 372,006
--------- --------
Cash flows used for investing activities:
Capital expenditures.................................... (353,664) (338,584)
Other investments including acquisitions, net of cash
acquired............................................... (53,711) (104,860)
--------- --------
Net cash used for investing activities.................... (407,375) (443,444)
--------- --------
Cash flows from (used for) financing activities:
Net increase in borrowings.............................. 278,492 170,008
Disposition of reacquired common stock.................. 33,191 18,689
Acquisition of common stock............................. (27,952) (38,637)
Cash dividends on common stock.......................... (76,710) (67,821)
--------- --------
Net cash from financing activities........................ 207,021 82,239
--------- --------
Effect of exchange rate changes on cash and equivalents... 1,909 (57)
--------- --------
Net increase (decrease) in cash and equivalents........... (1,338) 10,744
Cash and equivalents at beginning of period............... 20,569 10,716
--------- --------
Cash and equivalents at end of period..................... $ 19,231 $ 21,460
========= ========
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 September 30, 1995 and
December 31, 1994 were as follows:
(THOUSANDS OF DOLLARS)
--------------------------
SEPTEMBER 30, DECEMBER 31,
1995 1994
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Raw materials and manufacturing supplies............ $ 315,037 $185,527
Work in process..................................... 298,700 208,553
Finished goods...................................... 40,540 5,821
Progress billings................................... (68,012) (45,523)
LIFO reserve........................................ (53,891) (43,141)
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Total inventories............................... $ 532,374 $311,237
========= ========
The company's cost of sales for the third quarter was increased by LIFO
provisions of $7.8 million and $1.3 million in 1995 and 1994, respectively. For
the nine months ended September 30, 1995 and 1994, LIFO provisions were $10.8
million and $3.8 million, respectively. In the third quarter of 1995, the
company changed from the double-extension method of valuing LIFO inventories to
the external-index method. The company believes that this change will result in
a better measurement of operating results by properly reflecting the effect of
productivity improvements in the company's cost of sales. Because the cumulative
effect of this change on periods prior to 1995 cannot be determined, the impact
has been reflected in current operations. The effect of the change on the first
two quarters of 1995 was immaterial, and therefore the financial statements for
those periods have not been restated. Net income for the quarter and nine months
ended September 30, 1995 was approximately $8 million ($0.05 per share) higher
than it would have been had the change not been made.
Note 3. The following provides supplemental cash flow information:
(THOUSANDS OF DOLLARS)
--------------------------
NINE MONTHS ENDED
SEPTEMBER 30
--------------------------
1995 1994
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Cash flow data:
Interest paid, net of capitalized interest......... $ 61,235 $ 30,797
Income taxes paid.................................. $ 63,706 $ 65,945
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 THIRD QUARTER 1995 TO THIRD QUARTER 1994
Net sales increased 37.2% from the prior year, reflecting acquisitions and
mergers, higher paper prices, continued growth in foreign operations and strong
demand across most business units. Acquisitions and mergers accounted for
approximately 39% 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., which is approximately 80% owned by the
company. Higher prices for paper provided to customers accounted for
approximately 30% of the revenue growth in the quarter.
Net sales from foreign operations represented approximately 16% of total
sales for the quarter, up from approximately 11% in the prior year. The growth
in foreign sales reflected acquisitions and volume increases from both
established foreign operations and newer operations in Latin America, Central
Europe and Asia.
Gross profit increased 32.8%, which was less than the sales growth rate due
to a change in revenue mix associated with the Stream International merger, a
higher LIFO provision ($6.5 million before taxes, or $0.03 per share after
taxes, above the prior year) and the impact of higher paper costs (which are
generally recovered, but at low margins). Selling and administrative expenses
were 39.1% above the prior year, reflecting volume related increases,
expansions and new operations, and the impact of the Stream International
merger. Interest expense increased $16.8 million, reflecting both higher
average interest rates and higher average debt balances associated with capital
spending, acquisitions and increased working capital needs primarily from
higher paper quantities and prices. As a result, net income increased 15.0% to
$92.1 million for the quarter. Earnings per share grew 15.4%, due to net income
growth and fewer shares outstanding.
RESULTS OF OPERATIONS--COMPARISON OF FIRST NINE MONTHS 1995 TO FIRST NINE
MONTHS 1994
Net sales increased 31.5% from the prior year. The growth reflected
acquisitions and mergers, higher paper prices, continued growth in foreign
operations and strong demand across most business units. Approximately 36% of
the revenue increase was due to acquisitions and mergers, primarily Stream
International, while higher paper prices accounted for approximately 24% of the
gain.
Net sales from foreign operations represented approximately 16% of total
sales for the first nine months, up from approximately 11% in the prior year.
The growth in foreign sales reflected acquisitions and volume increases from
both established foreign operations and newer operations in Latin America,
Central Europe and Asia.
Gross profit increased 27.0%, which was lower than the sales growth rate due
to the impact of the change in revenue mix associated with the Stream
International merger, a higher LIFO provision ($7.0 million before taxes, or
$0.03 per share after taxes, above the prior year) and higher paper costs
(which are generally recovered, but at low margins). Selling and administrative
expenses increased 29.7%, reflecting volume increases and expenses of acquired
companies (primarily Stream International) and new operations. Interest expense
increased $42.4 million, reflecting both higher average interest rates and
higher average debt balances associated with capital spending, acquisitions and
increased working capital needs primarily from higher paper quantities and
prices. Net income grew 12.2%, primarily due to volume increases, partially
offset by the higher interest expense. Earnings per share were $1.33, an
increase of 12.7% from the prior year, reflecting net income growth and fewer
shares outstanding.
8
OUTLOOK
Strong sales growth is expected to continue during the remainder of 1995,
reflecting the impact of growth in existing businesses, acquisitions and
mergers (primarily Stream International), higher paper prices and foreign sales
growth. Demand for software services is expected to continue to grow in the
fourth quarter and well into 1996, reflecting the release of Microsoft's
Windows 95(R) operating system. Effects of companies acquired as well as higher
materials sales (including higher paper prices) will continue to impact the
company's financial results. In addition, higher paper costs will likely cause
the fourth-quarter LIFO provision to increase.
CHANGES IN FINANCIAL CONDITION
For the first nine months, operating cash flow (net income plus depreciation
and amortization) was $495.6 million, up 19.8% from the prior year. 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.
Capital expenditures during the first nine months totaled $353.7 million,
including purchases of equipment to meet the growing needs of present and new
customers and expansions of manufacturing plants. Full year capital spending is
expected to be $450 million. Working capital increased $250 million from
December 31, 1994, due to the impact of the tight paper market, business growth
and acquisitions and mergers. Management estimates that the tight paper market
increased the company's working capital by approximately $175 million,
primarily through higher receivables and inventory balances.
At September 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 addition, the
company has an effective shelf registration statement permitting it to issue up
to an additional $500 million of debt securities. The company has no current
intention to issue debt securities under the registration statement during
1995.
In addition, certain subsidiaries of the company have credit facilities with
unused borrowing capacities totaling approximately $75 million at September 30,
1995.
9
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In January, 1995, an administrative complaint by the U.S. Environmental
Protection Agency 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 originally also alleged failure of the company
to give certain land disposal restriction notices, but the administrative law
judge granted a motion to dismiss these allegations, reducing the penalties now
sought by the complaint to $210,000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
3(ii)(a) By-Laws, as amended
3(ii)(b) Amendments to By-Laws adopted on September 29 and October
26, 1995
10(a) 1986 Stock Incentive Plan, as amended on October 26, 1995*
10(b) 1991 Stock Incentive Plan, as amended on October 26, 1995*
10(c) 1993 Stock Purchase Plan, as amended on October 26, 1995*
10(d) Agreement with retiring executive*
12 Statement of Computation of Ratio of Earnings to Fixed
Charges
18 Letter re change in accounting principles
27 Financial Data Schedule
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*Management Contract or Compensatory Plan, Contract, or Arrangement
(b) No current Report on Form 8-K was filed during the third 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)
11/13/95
Date __________________________
11