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UNITED STATES
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, 1996
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, 1996 153,988,019
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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 months ended March 31, 1996 and 1995............... 3
Condensed Consolidated Balance Sheets as of March 31, 1996
(Unaudited) and December 31, 1995............................ 4-5
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the three months ended March 31, 1996 and 1995........... 6
Notes to Condensed Consolidated Financial Statements
(Unaudited).................................................. 7-8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Comparison of First Quarter 1996 to First Quarter 1995........ 9-11
Changes in Financial Condition................................ 11
Outlook....................................................... 12
2
R. R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
----------------
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31
(THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
1996 1995
----------- -----------
Net sales............................................. $ 1,546,995 $ 1,318,089
Cost of sales......................................... 1,306,173 1,088,274
----------- -----------
Gross profit.......................................... 240,822 229,815
Selling and administrative expenses................... 178,479 135,355
Restructuring charge.................................. 512,548 --
----------- -----------
Earnings (loss) from operations....................... (450,205) 94,460
Interest expense...................................... 25,083 22,584
Other (income) expense--net........................... (26,576) 2,991
----------- -----------
Earnings (loss) before income taxes................... (448,712) 68,885
Provision (benefit) for income taxes.................. (71,794) 22,043
----------- -----------
Net income (loss)..................................... $ (376,918) $ 46,842
=========== ===========
Per common share:
Net income (loss)................................... $ (2.45) $ 0.31
=========== ===========
Cash dividends...................................... $ 0.18 $ 0.16
=========== ===========
Average shares outstanding............................ 154,017,000 153,123,000
=========== ===========
See accompanying Notes to Condensed Consolidated Financial Statements.
3
R. R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
------------
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
MARCH 31, 1996 AND DECEMBER 31, 1995
(THOUSANDS OF DOLLARS)
ASSETS
1996 1995
---------- ----------
Cash and equivalents............................... $ 41,748 $ 33,122
Receivables, less allowance for doubtful accounts
of $25,631 and $25,311 at March 31, 1996 and
December 31, 1995, respectively................... 1,195,026 1,466,159
Inventories........................................ 416,677 380,078
Prepaid expenses................................... 44,566 28,600
---------- ----------
Total current assets............................. 1,698,017 1,907,959
---------- ----------
Property, plant and equipment, at cost............. 4,205,551 4,120,449
Accumulated depreciation........................... 2,244,760 2,111,461
---------- ----------
Net property, plant and equipment................ 1,960,791 2,008,988
Goodwill and other intangibles--net................ 821,203 1,024,954
Other noncurrent assets............................ 417,244 442,909
---------- ----------
Total assets..................................... $4,897,255 $5,384,810
========== ==========
See accompanying Notes to Condensed Consolidated Financial Statements.
4
R. R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
------------
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
MARCH 31, 1996 AND DECEMBER 31, 1995
(THOUSANDS OF DOLLARS)
LIABILITIES AND SHAREHOLDERS' EQUITY
1996 1995
---------- ----------
Accounts payable....................................... $ 503,936 $ 601,814
Accrued compensation................................... 94,266 126,483
Short-term debt........................................ 50,000 50,000
Current and deferred income taxes...................... 70,729 86,737
Other accrued liabilities.............................. 399,198 265,340
---------- ----------
Total current liabilities............................ 1,118,129 1,130,374
---------- ----------
Long-term debt......................................... 1,540,424 1,560,960
Deferred income taxes.................................. 234,364 300,840
Other noncurrent liabilities........................... 241,640 219,466
Shareholders' equity:
Common stock, at stated value........................ 330,612 330,612
Retained earnings, net of cumulative translation
adjustments of $36,867 and $29,031 at March 31, 1996
and December 31, 1995, respectively................. 1,580,134 1,994,098
Unearned compensation................................ (8,832) (9,297)
Reacquired common stock, at cost..................... (139,216) (142,243)
---------- ----------
Total shareholders' equity....................... 1,762,698 2,173,170
---------- ----------
Total liabilities and shareholders' equity....... $4,897,255 $5,384,810
========== ==========
See accompanying Notes to Condensed Consolidated Financial Statements.
5
R. R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31
(THOUSANDS OF DOLLARS)
1996 1995
--------- ---------
Cash flows provided by (used in) operating activities:
Net income............................................. $(376,918) $ 46,842
Restructuring charge................................... 512,548 --
Depreciation........................................... 91,556 79,212
Amortization........................................... 17,521 12,966
Net change in operating working capital................ 55,402 (95,432)
Net change in other assets and liabilities............. (84,240) (11,936)
Other.................................................. 892 (706)
--------- ---------
Net cash provided by operating activities................ 216,761 30,946
--------- ---------
Cash flows used for investing activities:
Capital expenditures................................... (143,862) (107,683)
Other investments including acquisitions, net of cash
acquired.............................................. (19,037) (21,184)
--------- ---------
Net cash used for investing activities................... (162,899) (128,867)
--------- ---------
Cash flows from (used for) financing activities:
Net increase (decrease) in borrowings.................. (21,767) 115,178
Disposition of reacquired common stock................. 6,544 20,836
Acquisition of common stock............................ (4,537) (13,233)
Cash dividends on common stock......................... (27,724) (24,476)
--------- ---------
Net cash from (used for) financing activities............ (47,484) 98,305
--------- ---------
Effect of exchange rate changes on cash and equivalents.. 2,248 (6,442)
--------- ---------
Net increase (decrease) in cash and equivalents.......... 8,626 (6,058)
Cash and equivalents at beginning of period.............. 33,122 20,569
--------- ---------
Cash and equivalents at end of period.................... $ 41,748 $ 14,511
========= =========
See accompanying Notes to Condensed Consolidated Financial Statements.
6
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, 1995 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 1995 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, 1996 and
December 31, 1995 were as follows:
(THOUSANDS OF DOLLARS)
-----------------------
MARCH 31, DECEMBER 31,
1996 1995
--------- ------------
Raw materials and manufacturing supplies................ $242,603 $230,694
Work in process......................................... 232,224 213,741
Finished goods.......................................... 29,533 34,041
Progress billings....................................... (34,134) (47,549)
LIFO reserve............................................ (53,549) (50,849)
-------- --------
Total inventories................................... $416,677 $380,078
======== ========
Note 3. The following provides supplemental cash flow information:
(THOUSANDS OF DOLLARS)
-----------------------
THREE MONTHS ENDED
MARCH 31
-----------------------
1996 1995
--------- ------------
Interest paid, net of capitalized interest.............. $ 11,494 $ 12,314
Income taxes paid....................................... $ 10,724 $ 5,496
7
Note 4. In the first quarter of 1996, the company provided for the
restructuring and realignment of its gravure printing operations in North
America, the repositioning of other businesses, the write-down of certain
equipment, and the impairment of intangible assets and investments in non-core
businesses. These actions resulted in a one-time pre-tax charge of $512
million, or $2.67 per share after tax. Approximately $195 million of the
charge is related to the gravure platform realignment. Approximately $189
million is related to other manufacturing restructuring, including $92 million
to reposition Stream International's worldwide operations. Pre-tax cash
outlays associated with the restructuring and realignment charge are expected
to total approximately $147 million and will be incurred in 1996 and 1997. In
addition, the company is recognizing the impairment of approximately $128
million in equipment, intangibles and investments in non-core businesses. The
impairment loss was calculated based on the excess of the carrying amount of
the assets over the assets' fair values. The fair value of an asset is
generally determined as the discounted estimates of future cash flows
generated by the asset.
The composition of the company's restructuring reserves is as follows:
WRITEDOWN OF
PROPERTY AND
ORIGINAL INVESTMENTS RESTRUCTURING
RESTRUCTURING TO FAIR CASH RESERVES AS OF
RESERVE VALUE PAYMENTS MARCH 31, 1996
------------- ------------ -------- --------------
Restructuring loss on
writedown of property,
plant and equipment, and
other assets.............. $236,848 $(236,848) -- $ --
Restructuring expenditures
to reposition operations
and close facilities...... 147,619 -- -- 147,619
Impairment loss on
intangible assets and
investments............... 128,081 (128,081) -- --
-------- --------- --- --------
Total restructuring
reserves.................. $512,548 $(364,929) -- $147,619
======== ========= === ========
8
ABOUT THE COMPANY
R.R. Donnelley & Sons Company is a world leader in distributing, managing
and reproducing print and digital information for the publishing, retailing,
merchandising and information technology markets worldwide. The company is the
largest commercial printer headquartered in North America, with approximately
41,000 employees in 26 countries on five continents.
The company is organized into the following business sectors, which
accounted for the following sales results during the first quarter of 1996:
Commercial Print Sector, which includes consumer and trade magazines ($302
million, or 20% of 1996 first quarter consolidated net sales), and catalogs,
retail advertising circulars, direct mail products ($275 million, or 18% of
1996 first quarter consolidated net sales).
Global Commercial Print Sector, which includes the company's commercial
print operations outside the United States--in Europe, Latin America and Asia
($83 million, or 5% of 1996 first quarter consolidated net sales).
Information Management Sector, which includes Book Publishing Services ($159
million, or 10% of 1996 first quarter consolidated net sales),
Telecommunications ($150 million, or 10% of 1996 first quarter consolidated
net sales), and Financial Services ($88 million, or 6% of 1996 first quarter
consolidated net sales), as well as the Metromail subsidiary ($56 million, or
4% of 1996 first quarter consolidated net sales), the company's Digital
Division, the 77 Capital venture-capital fund, creative design and
communication services and a variety of information services ($40 million, or
2% of 1996 first quarter consolidated net sales).
Stream International, the world's largest software manufacturer, marketer
and technical-support and services provider, approximately 80% owned by the
company, formed in April 1995 from the merger of the company's Global Software
Services business with Corporate Software Inc. ($394 million, or 25% of 1996
first quarter consolidated net sales).
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS
COMPARISON OF FIRST QUARTER 1996 TO FIRST QUARTER 1995
RESULTS OF OPERATIONS
The company reported a first quarter 1996 net loss of $377 million, or
($2.45) per share, reflecting the company's previously announced $512 million
pre-tax restructuring charge ($411 million after taxes and a minority interest
benefit) recorded during the period. Excluding the one-time charge, net income
declined by 27% from last year's first quarter to $34 million and earnings per
share decreased 29% to $0.22. First quarter sales of $1.5 billion were up 17
percent from the year-earlier quarter.
The company's 1996 first-quarter earnings performance declined primarily due
to the drop in by-product paper prices ($11.3 million), higher paper and
postage prices in 1995 which depressed demand for catalogs and magazines in
the quarter, a sluggish trade book sales environment due to the weak 1995
holiday sales season, and a number of developments that affected the
performance of Stream International, notably the slower-than-expected
corporate demand for new systems and software, as well as software price
competition.
9
NET SALES
Net sales increased $229 million, or 17%, to $1.5 billion, reflecting
acquisitions and mergers, higher materials sales (primarily paper) and
continued growth in foreign operations. Approximately $190 million of the net
sales increase was due to acquisitions and mergers (primarily Stream
International), while higher paper prices accounted for approximately $103
million of the gain. These increases were partially offset by lower net sales
in the book, catalog and magazine business units due to soft market
conditions.
Net sales from foreign operations represented approximately $269 million, or
17% of total net sales in the 1996 quarter, up 54% from $175 million, or 13%
of total net sales in the first quarter of 1995. The growth in foreign sales
reflected acquisitions (primarily Stream International) and volume increases
from established operations in Latin America, Europe and Asia.
PERCENTAGE OF NET SALES BY BUSINESS UNIT
FIRST QUARTER ENDED MARCH 31, 1996 1995 1994
----------------------------- ---- ---- ----
Stream International....................................... 25% 15% 13%
Consumer & Trade Magazines................................. 20 23 24
Catalogs, Retail, Direct-Mail.............................. 18 21 24
Book Publishing............................................ 10 13 13
Telecommunications......................................... 10 10 9
Financial Services......................................... 6 6 7
Global Commercial Print.................................... 5 5 3
Other...................................................... 6 7 7
EXPENSES
Gross profit increased 5%, to $241 million, due to higher volume in
Telecommunications, Financial Services, Information Services and Direct Mail,
as well as additional volume created by acquisitions and mergers (primarily
Stream International). This increase was lower than the sales growth rate
primarily due to the impact of the change in revenue mix associated with the
Stream International merger and the decline in by-product paper prices.
Selling and administrative expenses increased 32%, to $178 million,
primarily reflecting higher expenses associated with Corporate Software Inc.
The ratio of selling and administrative expenses to net sales, at 12% in the
quarter, increased from the 1995 ratio of 10%, reflecting the impact of Stream
International. Interest expense increased $2 million, reflecting both higher
average interest rates and higher average debt balances associated with
capital spending, acquisitions and increased working capital needs driven by
higher paper quantities and prices. Other income increased $30 million
primarily due to $14 million in gains on the sales of investments in the
company's venture capital portfolio and a $12 million minority interest
benefit arising from Stream International's portion of the restructuring
charge.
SUMMARY OF EXPENSE TRENDS
FIRST QUARTER ENDED MARCH 31, % INCREASE
THOUSANDS OF DOLLARS 1996 % INCREASE 1995 (DECREASE) 1994
- ----------------------------- -------- ---------- -------- ---------- --------
Cost of manufacturing......... $447,899 8% $413,124 14% $363,712
Cost of materials............. 749,197 29% 582,972 33% 437,188
Depreciation.................. 91,556 16% 79,212 24% 63,944
Amortization.................. 17,521 35% 12,966 6% 12,180
Selling and administrative.... 178,480 32% 135,355 18% 115,150
Net interest expense.......... 25,083 11% 22,584 93% 11,728
10
CHANGES IN FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
For the quarter, excluding the one-time charge, operating cash flow (net
income plus depreciation and amortization) was $143 million, up 3% from the
first quarter of 1995. In addition, operating working capital (defined as
inventories, accounts receivable and prepaid expenses, minus accounts payable,
accrued compensation and other accrued liabilities, excluding the
restructuring reserve), decreased $55 million during the first quarter of
1996, primarily due to a decrease in accounts receivable, compared to a $95
million increase during the first quarter of 1995. Management believes that
the company's cash flow and borrowing capacity are sufficient to fund current
operations and growth. Capital expenditures in the quarter totaled $144
million, including purchases of equipment to meet the growing needs of
customers and purchases related to improving manufacturing productivity and
efficiency. Full year capital spending is expected to be between $500 million
and $550 million.
At March 31, 1996, the company had an available 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, certain
subsidiaries of the company had credit facilities with unused borrowing
capacities totaling approximately $100 million at March 31, 1996.
OTHER INFORMATION
Metromail--On March 7, 1996, the company announced that a registration
statement had been filed with the Securities and Exchange Commission for a
proposed initial public offering of common shares of Metromail. Upon
consummation of the offering, the company will retain a significant minority
interest in Metromail. Proceeds from the completed offering will be used by
Metromail to retire certain indebtedness owed to the company. The company in
turn will use the payment from Metromail to pay down debt and for general
corporate purposes. The planned offering will be made only by means of a
prospectus.
Corporate Restructuring--On March 28, 1996, the company announced a $512
million pre-tax charge to first quarter earnings ($411 million or $2.67 per
share after tax) to restructure and realign its gravure printing operations in
North America, reposition other businesses, and write down certain equipment,
investments in non-core businesses and intangible assets. Approximately $195
million of the charge is related to the gravure platform realignment.
Approximately $189 million is related to other manufacturing restructuring,
including approximately $92 million to reposition Stream International's
worldwide operations. Additionally, the company has written down approximately
$128 million in equipment, intangibles and investments in non-core businesses.
Pre-tax cash outlays associated with the restructuring charge are expected
to total approximately $147 million and will be incurred in 1996 and 1997. The
remaining $365 million relates to non-cash items, primarily the write-down of
fixed assets and goodwill. Because of this write-down, 1996 depreciation and
amortization expenses will be approximately $11 million (before taxes) less
than they would have been had the charge not been incurred.
11
OUTLOOK
The commercial printing business in North America (the company's primary
geographic market) is highly competitive in most product categories and
geographic regions. Industry analysts consider most commercial print markets
to have excess capacity. Competition is largely based on price, quality and
servicing the special needs of customers.
Management believes the company's prospects in 1996 will be challenging. The
company's primary printing markets have been relatively weak in the first
quarter. However, the company has substantial capacity committed under long-
term contracts and the outlook for advertising seems positive, since 1996 is a
major election year and the United States is hosting the 1996 Olympics. These
events tend to increase advertising, resulting in higher demand for printed
materials. Additionally, volume increases are likely across the book, catalog
and magazine businesses in the second half of 1996, driven in part by postal
rate relief as the new United States Postal classification system takes
effect. Despite slower than expected corporate demand for software and
software price discounting in early 1996, the company believes Stream
International should see improved sales and profits for the year.
The company is a large consumer of paper, acquired for and by customers. As
in 1995, the cost and supply of certain paper grades consumed in the
manufacturing process will continue to affect the company's financial results.
In 1995, rising prices and tight supply caused revenues to increase as costs
of paper were recovered, but at low margins. Management believes that the
industry will experience declining paper prices and balanced supplies in 1996,
as signs of price discounting have surfaced in the first quarter of the year.
In addition to paper consumed in the manufacturing process, the company is
also affected by the price of by-product paper which it sells. Financial
results in 1996 will continue to be negatively impacted by decreased by-
product prices, although the company anticipates no material further decline
in prices during the remainder of the year.
Additionally, there is currently proposed legislation before the United
States Congress proposing to initially reduce and eventually eliminate the
deduction for interest on loans borrowed against corporate-owned life
insurance (COLI). The company has used this deduction for several years and is
carefully watching any changes in legislation that may reduce or eliminate it
going forward.
In summary, the company's competitive strengths of worldwide geographic
coverage, strategic raw materials purchasing (primarily paper and ink),
comprehensive service offerings, technology advantage and economies of scale
should result in strong sales and earnings growth in 1996.
12
PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) The company held its Annual Meeting of Stockholders on March 28, 1996.
(b) The following matters were voted upon at the Annual Meeting of
Stockholders:
1. The election of the nominees for Directors of the Second Class who
will serve for a term to expire at the Annual Meeting of Stockholders to be
held in 1999 was voted on by the stockholders. The nominees, all of whom
were elected, were: James R. Donnelley, Judith H. Hamilton, John M.
Richman, William D. Sanders, and Bide L. Thomas. The Inspectors of Election
certified the following vote tabulations:
FOR WITHHELD NON-VOTES
----------- --------- ---------
James R. Donnelley........................ 133,279,759 1,484,443 0
Judith H. Hamilton........................ 133,235,770 1,528,432 0
John M. Richman........................... 133,179,165 1,585,037 0
William D. Sanders........................ 133,274,540 1,489,662 0
Bide L. Thomas............................ 133,240,362 1,523,840 0
2. 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
--------- ----------- ---------- ---------
4,925,021 107,811,496 13,793,853 8,233,832
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
3(i) Restated Certificate of Incorporation, as filed and effective on March 28,
1996.
4 Form of Rights Agreement, dated as of April 25, 1996, between R.R.
Donnelley & Sons Company and First Chicago Trust Company of New York.
10 Donnelley Shares Stock Option Plan, as amended on January 25, 1996, and
including Donnelley Shares Stock Option Plan for UK Employees.
27 Financial Data Schedule
(b) A current Report on Form 8-K was filed during the first quarter of 1996.
The Report was dated March 28, 1996 and included Item 5, "Other Events," and
Item 7, "Financial Statements, Pro Forma Financial Information and Exhibits".
13
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 3, 1996
Date __________________________
14