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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 JUNE 30, 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 JULY 31, 1996 153,238,963
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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, 1996 and
1995........................................................ 3
Condensed Consolidated Balance Sheets as of June 30, 1996
(Unaudited) and December 31, 1995........................... 4
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the six months ended June 30, 1996 and 1995............. 5
Notes to Condensed Consolidated Financial Statements
(Unaudited)................................................. 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations--Comparison of Second Quarter and First
Half 1996 to 1995........................................... 8-11
Changes in Financial Condition............................... 11
Other Information............................................ 11-12
Outlook...................................................... 12-13
2
R. R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
----------------
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
Net sales................ $ 1,577,500 $ 1,490,633 $ 3,124,496 $ 2,808,722
Cost of sales............ 1,287,438 1,212,501 2,593,611 2,300,775
------------ ------------ ------------ ------------
Gross profit............. 290,062 278,132 530,885 507,947
Selling and
administrative expenses. 184,792 155,356 363,273 290,674
Restructuring charge..... 48,084 -- 560,632 --
------------ ------------ ------------ ------------
Earnings (loss) from
operations.............. 57,186 122,776 (393,020) 217,273
Interest expense......... 24,713 27,013 49,796 49,867
Gain on Metromail stock
offering................ (44,158) -- (44,158) --
Other (income) expense--
net..................... (2,982) 967 (29,558) 3,725
------------ ------------ ------------ ------------
Earnings (loss) before
income taxes............ 79,613 94,796 (369,100) 163,681
Provision (benefit) for
income taxes............ 25,336 30,335 (46,458) 52,378
------------ ------------ ------------ ------------
Net income (loss)........ $ 54,277 $ 64,461 $ (322,642) $ 111,303
============ ============ ============ ============
Per common share:
Net income (loss)...... $ 0.35 $ 0.42 $ (2.09) $ 0.73
============ ============ ============ ============
Cash dividends......... $ 0.18 $ 0.16 $ 0.36 $ 0.32
============ ============ ============ ============
Average shares
outstanding............. 154,113,294 153,526,000 154,062,081 153,308,000
============ ============ ============ ============
See accompanying Notes to Condensed Consolidated Financial Statements.
3
R. R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
------------
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
JUNE 30, 1996 AND DECEMBER 31, 1995
(THOUSANDS OF DOLLARS)
ASSETS
1996 1995
----------- -----------
Cash and equivalents........................... $ 30,693 $ 33,122
Receivables, less allowance for doubtful
accounts of $25,134 and $25,311 at June 30,
1996 and December 31, 1995, respectively...... 1,065,759 1,466,159
Inventories.................................... 356,857 380,078
Prepaid expenses............................... 21,058 28,600
----------- -----------
Total current assets......................... 1,474,367 1,907,959
----------- -----------
Property, plant and equipment, at cost......... 4,191,238 4,120,449
Accumulated depreciation....................... (2,276,165) (2,111,461)
----------- -----------
Net property, plant and equipment............ 1,915,073 2,008,988
Goodwill and other intangibles--net............ 562,661 1,024,954
Other noncurrent assets........................ 547,766 442,909
----------- -----------
Total assets................................. $ 4,499,867 $ 5,384,810
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable............................... $ 405,975 $ 601,814
Accrued compensation........................... 86,796 126,483
Short-term debt................................ 50,000 50,000
Current and deferred income taxes.............. 76,131 86,737
Other accrued liabilities...................... 435,796 265,340
----------- -----------
Total current liabilities.................... 1,054,698 1,130,374
----------- -----------
Long-term debt................................. 1,228,345 1,560,960
Deferred income taxes.......................... 238,958 300,840
Other noncurrent liabilities................... 187,087 219,466
Shareholders' equity:
Common stock, at stated value ($1.25 par
value)...................................... 330,612 330,612
Retained earnings, net of cumulative
translation adjustments of $33,284 and
$29,031 at June 30, 1996 and December 31,
1995, respectively.......................... 1,611,593 1,994,098
Unearned compensation........................ (7,801) (9,297)
Reacquired common stock, at cost............. (143,625) (142,243)
----------- -----------
Total shareholders' equity............... 1,790,779 2,173,170
----------- -----------
Total liabilities and shareholders'
equity.................................. $ 4,499,867 $ 5,384,810
=========== ===========
See accompanying Notes to Condensed Consolidated Financial Statements.
4
R. R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30
(THOUSANDS OF DOLLARS)
1996 1995
--------- ---------
Cash flows provided by (used for) operating activities:
Net income (loss)...................................... $(322,642) $ 111,303
Restructuring charge, net of tax and minority interest. 435,380 --
Depreciation........................................... 176,608 159,093
Amortization........................................... 33,155 33,191
Gain on Metromail stock offering....................... (44,158) --
Net change in operating working capital................ 144,747 (255,525)
Net change in other assets and liabilities............. (20,221) (24,851)
Other.................................................. (7,787) 8,653
--------- ---------
Net cash provided by operating activities................ 395,082 31,864
--------- ---------
Cash flows provided by (used for) investing activities:
Capital expenditures................................... (235,997) (224,739)
Proceeds from receivables from Metromail............... 248,510 --
Other investments including acquisitions, net of cash
acquired.............................................. (22,368) (23,812)
--------- ---------
Net cash used for investing activities................... (9,855) (248,551)
--------- ---------
Cash flows provided by (used for) financing activities:
Net increase (decrease) in borrowings.................. (332,616) 249,584
Disposition of reacquired common stock................. 25,849 28,205
Acquisition of common stock............................ (25,831) (20,744)
Cash dividends on common stock......................... (55,514) (49,052)
--------- ---------
Net cash from (used for) financing activities............ (388,112) 207,993
--------- ---------
Effect of exchange rate changes on cash and equivalents.. 456 (323)
--------- ---------
Net decrease in cash and equivalents..................... (2,429) (9,017)
--------- ---------
Cash and equivalents at beginning of period.............. 33,122 20,569
--------- ---------
Cash and equivalents at end of period.................... $ 30,693 $ 11,552
========= =========
See accompanying Notes to Condensed Consolidated Financial Statements.
5
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 June 30, 1996 and
December 31, 1995 were as follows:
(THOUSANDS OF
DOLLARS)
------------------
1996 1995
-------- --------
Raw materials and manufacturing supplies.................... $213,493 $230,694
Work in process............................................. 216,159 213,741
Finished goods.............................................. 29,033 34,041
Progress billings........................................... (45,579) (47,549)
LIFO reserve................................................ (56,249) (50,849)
-------- --------
Total inventories....................................... $356,857 $380,078
======== ========
Note 3. The following provides supplemental cash flow information:
(THOUSANDS OF
DOLLARS)
------------------
SIX MONTHS ENDED
JUNE 30
------------------
1996 1995
-------- --------
Cash flow data:
Interest paid, net of capitalized interest................. $50,561 $41,312
Income taxes paid.......................................... $31,847 $31,161
6
Note 4. In the first half 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 pre-tax charges of $560 million, or
$2.82 per share after tax. Approximately $195 million of the charges related
to the gravure platform realignment and approximately $233 million related to
other manufacturing restructuring. Pre-tax cash outlays associated with the
restructuring and realignment charges are expected to total approximately $177
million and will be incurred in 1996 and 1997. In addition, the company is
recognizing the impairment of approximately $133 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. Reflected in
the total charges is $127 million to reposition Stream International's
worldwide operations.
The following table presents the components of the company's restructuring
reserves along with charges against these reserves from their establishment
until June 30, 1996 (in thousands of dollars):
WRITEDOWN OF
PROPERTY AND
ORIGINAL INVESTMENTS RESTRUCTURING
RESTRUCTURING TO FAIR CASH RESERVES AS OF
RESERVES VALUE PAYMENTS JUNE 30, 1996
------------- ------------ -------- --------------
Restructuring loss on
writedown of property,
plant and equipment, and
other assets............... $250,731 $(250,731) $ -- $ --
Restructuring expenditures
to reposition
operations and close
facilities................. 176,960 -- (4,545) 172,415
Impairment loss on
intangible assets and
investments................ 132,941 (132,941) -- --
-------- --------- ------- --------
Total restructuring
reserves............... $560,632 $(383,672) $(4,545) $172,415
======== ========= ======= ========
Note 5. On June 19, 1996, Metromail (the company's previously wholly-owned
subsidiary, which is a leading provider of market-oriented consumer
information and reference services) completed an initial public offering of
13.8 million shares of its common stock at $20.50 per share. As a result of
the offering, the company's interest in Metromail has been reduced to
approximately 38%. Approximately $250 million of the proceeds from the
completed offering were used by Metromail to retire certain indebtedness owed
to the company. The company in turn used the payment from Metromail to pay
down debt and for general corporate purposes. The transaction resulted in a
pre-tax gain for the company of approximately $44 million and a deferred tax
provision of approximately $18 million. As a result of this transaction, the
company has changed its method of accounting for Metromail from consolidation
to the equity method, effective July 1, 1996. Under the equity method, the
company will recognize in income its proportionate share of the net income of
Metromail.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
COMPARISON OF SECOND QUARTER 1996 TO SECOND QUARTER 1995
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
38,000 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 second quarter of 1996:
Commercial Print Sector, which includes consumer and trade magazines
($275 million, or 17% of 1996 second quarter consolidated net sales), and
catalogs, retail advertising circulars and direct mail products ($270
million, or 17% of 1996 second 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 ($75 million, or 5% of 1996 second quarter consolidated net sales).
Information Management Sector, which includes Telecommunications ($165
million, or 11% of 1996 second quarter consolidated net sales), Book
Publishing Services ($163 million, or 10% of 1996 second quarter
consolidated net sales) and Financial Services ($114 million, or 7% of 1996
second quarter consolidated net sales), as well as Metromail ($69 million,
or 4% of 1996 second 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 ($42 million,
or 3% of 1996 second quarter consolidated net sales). As described below,
on June 19, 1996, the company's interest in Metromail was reduced to
approximately 38% as a result of the completion of Metromail's initial
public offering of common stock.
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. ($404 million, or
26% of 1996 second quarter consolidated net sales).
NET SALES BY BUSINESS UNIT
AS A PERCENTAGE OF CONSOLIDATED NET SALES
SECOND QUARTER FIRST HALF
ENDED JUNE 30, ENDED JUNE 30,
-------------- --------------
1996 1995 1994 1996 1995 1994
---- ---- ---- ---- ---- ----
Stream International/Global Software Services..... 26 24 13 26 19 13
Consumer & Trade Magazines........................ 17 19 23 19 21 23
Catalogs, Retail, Direct-Mail..................... 17 18 23 17 20 23
Telecommunications................................ 11 10 11 10 10 11
Book Publishing................................... 10 12 14 10 13 14
Financial Services................................ 7 6 7 6 6 7
Global Commercial Print........................... 5 5 3 5 5 3
Other............................................. 7 6 6 7 6 6
CONSOLIDATED RESULTS OF OPERATIONS
The company reported second quarter 1996 net income of $54 million, or $0.35
per share, reflecting a $48 million pre-tax restructuring charge recorded in
the second quarter of 1996 ($24 million after taxes and a minority interest
benefit) which was primarily related to the continued repositioning of Stream
International's manufacturing businesses, as well as a $44 million pre-tax
gain ($26 million after taxes) related to the June 1996 Metromail IPO.
Excluding the restructuring charge and the Metromail gain, net income declined
by 19% from last year's second quarter to $52 million and earnings per share
decreased $0.08 to $0.34. Second quarter sales of $1.6 billion were up 6% from
the year-earlier quarter.
8
For the first half of 1996, the company reported a net loss of $323 million,
or $2.09 per share, reflecting the $560 million pre-tax restructuring charges
($435 million after taxes and a minority interest benefit) recorded in the
first half of 1996, as well as the Metromail gain recorded in the second
quarter of 1996. Excluding the restructuring charges and the Metromail gain,
net income declined by 23% from last year's first half to $86 million.
Earnings per share decreased $0.17 to $0.56. First half sales of $3.1 billion
were up 11% from the year-earlier period.
Excluding the restructuring charges and the Metromail gain, the company's
1996 second-quarter and first-half earnings performance declined primarily due
to the drop in by-product paper prices (a $30 million impact on a year-to-date
basis), and a number of developments that affected the performance of Stream
International (notably the slower-than-expected corporate demand for new
systems and software and substantially reduced demand for printing and disk
replication, as well as software price competition). In addition, higher paper
and postage prices in 1995 depressed the demand for magazine pages and
circulation in 1996 and the trade book sales environment was sluggish during
the first half of 1996 due to excessive retail inventories resulting from the
weak 1995 holiday sales season.
CONSOLIDATED NET SALES
Net sales for the second quarter increased $87 million, or 6%, to $1.6
billion due to higher paper prices and growth across many business units, most
notably Stream International, Financial Services and Telecommunications.
Higher paper prices accounted for approximately $21 million of the increase.
These increases were partially offset by lower volume in Book Publishing,
Latin America and Consumer Magazines due to soft market conditions.
Net sales from foreign operations represented approximately $258 million, or
16% of total net sales in the second quarter, up 17% from $220 million, or 15%
of total net sales in the second quarter of 1995. The growth in foreign sales
reflected volume increases from Stream International and operations in Europe
and Asia, partially offset by decreased volume in Latin America due to
recessionary conditions in Argentina and Brazil.
Net sales for the first half increased $316 million, or 11%, to $3.1
billion, reflecting higher paper prices and growth across many business units,
most notably Stream International (in part due to the acquisition of Corporate
Software Inc. in April 1995), Financial Services, Telecommunications,
Information Services and European operations. Higher paper prices accounted
for approximately $124 million of the increase. These increases were partially
offset by lower volume in Book Publishing Services, Consumer Magazines,
Catalog Services and Latin America due to soft market conditions.
Net sales from foreign operations represented approximately $525 million, or
17% of total net sales in the first half, up 31% from $402 million, or 14% of
total net sales in the first half of 1995. The growth in foreign sales
reflected volume increases from Stream International and operations in Europe
and Asia, partially offset by decreased volume in Latin America due to
recessionary conditions in Argentina and Brazil.
CONSOLIDATED EXPENSES
Gross profit for the second quarter increased 4% to $290 million due to the
sales growth as noted above, partially offset by lower by-product revenue
(down $19 million). Selling and administrative expenses increased 19% to $185
million, primarily reflecting increases in Stream International's expenses
($12 million higher than the 1995 second quarter), higher expenses at
Metromail and increased volume-related expenses in Financial Services. The
ratio of selling and administrative expenses to net sales, at 12% in the
quarter, increased from the 1995 ratio of 10%, primarily reflecting the higher
expenses at Stream International and Metromail. Interest expense decreased $2
million, reflecting decreased debt balances and lower interest rates.
9
For the first half, gross profit increased 5% to $531 million due to the
sales growth as noted above, partially offset by lower by-product revenue
(down $30 million). Selling and administrative expenses increased 25% to $363
million, reflecting increases in Stream International's expenses ($44.7
million higher than the 1995 first half), higher expenses at Metromail and
increased volume-related expenses in Financial Services. The ratio of selling
and administrative expenses to net sales, at 12% in the first half, increased
from the 1995 ratio of 10% reflecting higher expenses at Stream International
(partially due to the acquisition of Corporate Software Inc. in April 1995)
and Metromail. Other income increased $33 million, primarily due to
approximately $17 million of minority interest benefits resulting from the
restructuring charges and approximately $16 million of gains on the sales of
investments in the company's venture-capital portfolio.
SUMMARY OF CONSOLIDATED EXPENSE TRENDS
SECOND QUARTER ENDED JUNE
30, % INCREASE % INCREASE
(THOUSANDS OF DOLLARS) 1996 (DECREASE) 1995 (DECREASE) 1994
- ------------------------- ---------- ---------- ---------- ---------- --------
Cost of materials........ $743,794 6% $703,960 54% $455,641
Cost of manufacturing.... 442,958 8% 408,435 10% 370,882
Depreciation............. 85,052 10% 79,881 29% 61,859
Amortization............. 15,634 (23)% 20,225 57% 12,905
Selling and
administrative.......... 184,793 19% 155,356 31% 118,147
Net interest expense..... 24,713 (9)% 27,013 117% 12,472
FIRST HALF ENDED JUNE 30, % INCREASE % INCREASE
(THOUSANDS OF DOLLARS) 1996 (DECREASE) 1995 (DECREASE) 1994
- ------------------------- ---------- ---------- ---------- ---------- --------
Cost of materials........ $1,492,991 16% $1,286,933 44% $894,410
Cost of manufacturing.... 890,857 8% 821,558 12% 734,594
Depreciation............. 176,608 11% 159,093 27% 124,843
Amortization............. 33,155 -- 33,191 27% 26,045
Selling and
administrative.......... 363,272 25% 290,674 25% 233,150
Net interest expense..... 49,796 -- 49,867 106% 24,199
RESULTS OF OPERATIONS OF PRINT-RELATED BUSINESSES AND OF STREAM INTERNATIONAL
Print-Related Businesses
The company's print-related businesses (all business sectors other than
Stream International) had net sales of $1.2 billion, a 3% increase over last
year's second quarter net sales of $1.1 billion. The increase was attributable
primarily to growth in the Information Management sector, most notably
Financial Services, Telecommunications and Metromail, due to strong market
conditions. Excluding the restructuring charge, the print-related businesses
had operating income of $107 million, a 9% decrease from the same quarter in
1995. The decrease was attributable to unfavorable by-products pricing and
decreased earnings in Latin America due to recessionary market conditions in
Argentina and Brazil.
For the first half, the company's print-related businesses had net sales of
$2.32 billion, a 3% increase over last year's first half net sales of $2.26
billion. The increase was attributable primarily to increased volume in
Financial Services, Telecommunications, Information Services and Metromail, in
addition to strong growth in European sales. Excluding the restructuring
charges, the print-related
10
businesses had first half operating income of $178 million, a 15% decrease
from $209 million in the first half of 1995. The decrease was attributable to
the drop in by-product paper prices and decreased earnings in Latin America
due to unfavorable market conditions.
Stream International
Stream International had second quarter 1996 net sales of $404 million, a
13% increase over last year's second quarter net sales of $357 million. The
sales growth was primarily due to increased demand for help-desk and other
value-added services, partially offset by a substantially decreased demand for
printed product and disk replication. Stream International had a second
quarter operating loss of $2 million, compared to earnings of $4 million in
1995's second quarter. For the first half, Stream International had net sales
of $796 million, a 45% increase over last year's first half net sales of $548
million. This sales growth was attributable in part to the inclusion of
Corporate Software Inc. beginning in April 1995, as well as increased demand
for help-desk and other value-added services. Stream International had a first
half operating loss of $10 million, compared to earnings of $8 million in the
first half of 1995. The earnings decrease primarily resulted from the sooner-
than-expected drop in demand for printing and disk replication, which is being
replaced by demand for electronic ordering and delivery and CD-ROM capability.
Stream International is actively pursuing methods to capitalize on these
electronic and digital opportunities. Operating earnings were also unfavorably
impacted by decreased demand for software updates and software price
competition.
CHANGES IN FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
For the first half, cash flow from operations totaled $395 million, up $363
million from the first half of 1995. Of this amount, operating working capital
reductions provided cash of $145 million during the first half of 1996,
compared to a $256 million use of cash during the first half of 1995. This
improvement primarily resulted from decreases in receivables and inventories
in the first half of 1996 versus increases in these components during the
first half of 1995 (largely due to the impact of paper prices). Management
believes that the company's cash flow and borrowing capacity are sufficient to
fund current operations and growth. Capital expenditures in the first half
totaled $236 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 June 30, 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 $130 million at June 30, 1996.
On July 25, 1996, the company announced its intention to repurchase shares
of its common stock having an aggregate purchase price of up to $250 million
through June 30, 1997. Shares acquired under this program will be retired. The
April 25, 1996 authorization to repurchase up to 1.8 million shares of stock
for use under various employee benefit plans will remain in effect.
OTHER INFORMATION
Metromail--On June 19, 1996, Metromail completed an initial public offering
of its common stock. As a result of the offering, the company's interest in
Metromail has been reduced to approximately 38%. Approximately $250 million of
the proceeds from the completed offering were used by Metromail
11
to retire certain indebtedness owed to the company. The company in turn used
the payment from Metromail to pay down debt and for general corporate
purposes. The transaction resulted in a pre-tax gain of approximately $44
million ($26 million after taxes). As a result of this transaction, the
company has changed its method of accounting for Metromail from consolidation
to the equity method. Under the equity method, the company will recognize in
income its proportionate share of the net income of Metromail.
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 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 wrote down approximately $128 million in
equipment, intangibles and investments in non-core businesses, in accordance
with FASB 121.
On July 25, 1996, the company announced a charge of $48 million before taxes
($24 million or $0.16 per share after tax) primarily to restructure Stream
International's software manufacturing, printing, kitting and fulfillment
operations. The restructuring reflects changes in customer demand, which is
shifting from disk-based media and printed materials to CD-ROM and other forms
of electronic media, packaging and delivery.
Pre-tax cash outlays associated with the restructuring and realignment
charges are expected to total approximately $177 million and will be incurred
in 1996 and 1997. The remaining $383 million relates to non-cash items, mainly
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 charges not been
incurred.
Human Resources and Plant Closings--As part of the restructuring during the
first half of 1996 as noted above, the company has announced plans to close or
consolidate six operations, including gravure-printing plants in Newton, NC
and Casa Grande, AZ; Stream International manufacturing facilities in
Crawfordsville, IN and Weathersby, England; a book prepress operation in
Barbados; and a stand-alone book bindery in Scranton, PA. Through these
actions, the Metromail public offering and other streamlining initiatives
underway, the company expects to reduce its workforce by approximately 15%
over the next year (from the 41,000 employees as of December 31, 1995), with
most of the reductions coming in 1996.
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.
Despite weaknesses in the company's primary printing markets during the first
half of 1996, demand is beginning to rebound in the book, catalog and magazine
businesses and management believes second-half results will improve. In
addition, there is substantial capacity committed under long-term contracts.
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 second half of the year relative to the
first half as it actively pursues methods to capitalize on the electronic and
digital opportunities in the software market.
12
The company is a large consumer of paper, acquired for and by customers;
therefore, the cost and supply of certain paper grades consumed in the
manufacturing process will continue to affect the company's financial results.
As paper price discounting has surfaced during the first half of 1996,
management believes that the industry will continue to experience declining
paper prices and balanced supplies during the remainder 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
the second half of 1996 will continue to be negatively impacted by decreased
by-product prices compared to 1995.
Additionally, there is currently 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 second-half performance that is stronger than the second half
of 1995 and the first half of 1996.
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PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
10(a) 1986 Stock Incentive Plan, as amended*
10(b) 1991 Stock Incentive Plan, as amended*
10(c) Memorandum of Agreement and Understanding among Stream
International Holdings, Inc., R. R. Donnelley & Sons Company and
Rory J. Cowan*
27 Financial Data Schedule
- ----------
*Management contract or compensatory plan or arrangement
(b) No current Report on Form 8-K was filed during the second quarter of
1996.
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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
Corporate Controller
(Authorized Officer and
Chief Accounting Officer)
August 2, 1996
Date __________________________
15