- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
FORM 10-Q
-----------
(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, 1997
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, 1997 146,354,054
--------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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, 1997 and 1996............... 3
Condensed Consolidated Balance Sheets as of March 31, 1997
(Unaudited) and December 31, 1996............................ 4
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the three months ended March 31, 1997 and 1996........... 5
Notes to Condensed Consolidated Financial Statements
(Unaudited).................................................. 6-7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Comparison of First Quarter 1997 to First Quarter 1996........ 8-10
Changes in Financial Condition................................ 10
Other Information............................................. 11-12
Outlook....................................................... 12-13
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS............................................ 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......... 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................. 14
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)
1997 1996
----------- -----------
Net sales............................................ $ 1,475,238 $ 1,535,412
Cost of sales........................................ 1,240,253 1,294,590
----------- -----------
Gross profit......................................... 234,985 240,822
Selling and administrative expenses.................. 173,846 178,479
Restructuring charge................................. -- 512,548
----------- -----------
Earnings (loss) from operations...................... 61,139 (450,205)
Interest expense..................................... 22,561 25,083
Other (income) expense--net.......................... (6,910) (26,576)
----------- -----------
Earnings (loss) before income taxes.................. 45,488 (448,712)
Provision (benefit) for income taxes................. 16,147 (71,794)
----------- -----------
Net income (loss).................................... $ 29,341 $ (376,918)
=========== ===========
Per common share:
Net income (loss).................................. $ 0.20 $ (2.45)
=========== ===========
Cash dividends..................................... $ 0.19 $ 0.18
=========== ===========
Average shares outstanding........................... 145,785,000 154,017,000
=========== ===========
See accompanying Notes to Condensed Consolidated Financial Statements.
3
R. R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
------------
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
MARCH 31, 1997 AND DECEMBER 31, 1996
(THOUSANDS OF DOLLARS)
ASSETS
1997 1996
----------- -----------
Cash and equivalents............................. $ 59,939 $ 31,142
Receivables, less allowance for doubtful accounts
of $33,153 and $24,735 at March 31, 1997 and
December 31, 1996, respectively................. 1,152,302 1,324,252
Inventories...................................... 282,026 288,506
Prepaid expenses................................. 148,899 108,957
----------- -----------
Total current assets........................... 1,643,166 1,752,857
----------- -----------
Property, plant and equipment, at cost........... 4,320,429 4,289,101
Accumulated depreciation......................... 2,380,885 2,344,374
----------- -----------
Net property, plant and equipment.............. 1,939,544 1,944,727
Goodwill and other intangibles--net.............. 520,122 541,319
Other noncurrent assets.......................... 646,944 610,101
----------- -----------
Total assets................................... $ 4,749,776 $ 4,849,004
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
1997 1996
----------- -----------
Accounts payable................................. $ 457,679 $ 487,914
Accrued compensation............................. 142,696 131,644
Short-term debt.................................. 33,296 33,296
Current and deferred income taxes................ 34,578 56,163
Other accrued liabilities........................ 383,267 438,530
----------- -----------
Total current liabilities...................... 1,051,516 1,147,547
----------- -----------
Long-term debt................................... 1,417,729 1,430,671
Deferred income taxes............................ 258,772 253,850
Other noncurrent liabilities..................... 381,514 385,655
Shareholders' equity:
Common stock, at stated value ($1.25 par
value)........................................ 320,962 320,962
Retained earnings, net of cumulative
translation adjustments of $30,884 and $26,580
at March 31, 1997 and December 31, 1996,
respectively.................................. 1,481,100 1,486,215
Unearned compensation.......................... (14,058) (5,402)
Reacquired common stock, at cost............... (147,759) (170,494)
----------- -----------
Total shareholders' equity................. 1,640,245 1,631,281
----------- -----------
Total liabilities and shareholders' equity. $ 4,749,776 $ 4,849,004
=========== ===========
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 THREE MONTHS ENDED MARCH 31
(THOUSANDS OF DOLLARS)
1997 1996
--------- ---------
Cash flows provided by (used for) operating activities:
Net income (loss)...................................... $ 29,341 $(376,918)
Restructuring charge, net of tax and minority interest. -- 410,912
Depreciation........................................... 81,617 91,556
Amortization........................................... 8,079 17,521
Gain on sale of assets................................. (8,173) (14,083)
Net change in operating working capital................ 94,522 69,327
Net change in other assets and liabilities............. (23,907) 1,931
Other.................................................. 93 892
--------- ---------
Net cash provided by operating activities................ 181,572 201,138
--------- ---------
Cash flows provided by (used for) investing activities:
Capital expenditures................................... (112,152) (143,862)
Other investments including acquisitions, net of cash
acquired.............................................. (33,914) (19,037)
Dispositions of assets................................. 22,765 15,623
--------- ---------
Net cash used for investing activities................... (123,301) (147,276)
--------- ---------
Cash flows provided by (used for) financing activities:
Net decrease in borrowings............................. (12,942) (21,767)
Disposition of reacquired common stock................. 12,735 6,544
Acquisition of common stock............................ (1,144) (4,537)
Cash dividends on common stock......................... (27,665) (27,724)
--------- ---------
Net cash used for financing activities................... (29,016) (47,484)
--------- ---------
Effect of exchange rate changes on cash and equivalents.. (458) 2,248
--------- ---------
Net increase in cash and equivalents..................... 28,797 8,626
Cash and equivalents at beginning of period.............. 31,142 33,122
--------- ---------
Cash and equivalents at end of period.................... $ 59,939 $ 41,748
========= =========
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, 1996 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 1996 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. Certain immaterial prior year amounts have been reclassified
to maintain comparability with current year classifications.
Note 2. Components of the company's inventories at March 31, 1997 and
December 31, 1996 were as follows:
(THOUSANDS OF DOLLARS)
-----------------------
MARCH 31, DECEMBER 31,
1997 1996
--------- ------------
Raw materials and manufacturing supplies................ $141,438 $154,734
Work in process......................................... 185,307 183,248
Finished goods.......................................... 34,778 34,325
Progress billings....................................... (34,671) (40,475)
LIFO reserve............................................ (44,826) (43,326)
-------- --------
Total inventories................................... $282,026 $288,506
======== ========
Note 3. The following provides supplemental cash flow information:
(THOUSANDS OF DOLLARS)
-----------------------
THREE MONTHS ENDED
MARCH 31
-----------------------
1997 1996
--------- ------------
Interest paid, net of capitalized interest.............. $ 7,130 $ 11,494
Income taxes paid....................................... $ 21,947 $ 10,724
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 $561 million ($435
million after taxes and a minority interest benefit). Approximately $195
million of the charges related to its 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, of which $47 million was
incurred through March 1997, with the remaining $130 million expected to be
incurred through the first quarter of 1998. In addition, the company
recognized 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 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 following table presents the components of the company's restructuring
reserves along with charges against these reserves from their establishment
until March 31, 1997:
WRITEDOWN OF
PROPERTY AND
ORIGINAL INVESTMENTS RESTRUCTURING
RESTRUCTURING TO FAIR CASH RESERVES AS OF
CHARGES VALUE PAYMENTS MARCH 31, 1997
------------- ------------ -------- --------------
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 -- (47,439) 129,521
Impairment loss on
intangible assets and
investments............... 132,941 (132,941) -- --
-------- --------- -------- --------
Total restructuring
reserves.................. $560,632 $(383,672) $(47,439) $129,521
======== ========= ======== ========
Note 5. On November 25, 1996, a purported class action was brought against
the company in federal district court in Chicago, Ill., on behalf of all
current and former African-American employees, alleging that the company
racially discriminated against them. The complaint seeks declaratory and
injunctive relief, and asks for actual, compensatory, consequential and
punitive damages in an amount not less than $500 million. Most of the specific
factual assertions of the original complaint were related to the closing by
the company of its Chicago, Ill., catalog production operations begun in 1993.
The complaint was amended on February 7, 1997, to reflect more general claims
applicable to other company locations. Plaintiffs have filed a motion seeking
nationwide class certification. The company has filed a motion for partial
summary judgment as to all claims relating to its Chicago catalog operations
on the grounds that those claims are untimely.
On December 18, 1995, a purported class action was filed against the company
in federal district court in Chicago, Ill., alleging that older workers were
discriminated against in selection for termination upon the closing of the
Chicago catalog operations. The suit also alleges that the company violated
the Employee Retirement Income Security Act (ERISA) in determining benefits
payable to retiring or terminated employees. On October 8, 1996, plaintiffs
filed a motion to maintain the ERISA claims as a class action on behalf of all
company retirement plan participants who were eligible for early retirement
benefits at the time of their termination. The company's position is that the
proper ERISA class is limited to the former Chicago employees.
Both cases relate at least in part to the circumstances surrounding the
closure of the Chicago catalog operations. The company believes that it acted
properly in the closing of the operations, has a number of valid defenses to
all of the claims made and is vigorously defending its actions. However,
management is unable to make a meaningful estimate of any loss which could
result from an unfavorable outcome of either case.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
COMPARISON OF FIRST QUARTER 1997 TO FIRST QUARTER 1996
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 in North America, with approximately 38,000
employees in 26 countries on five continents.
The company is organized into sectors, which include the following business
units and subsidiaries:
Commercial Print Sector, which includes Merchandise Media (catalogs,
retail advertising circulars and direct mail products) and Magazine
Publishing Services (consumer and trade magazines). These businesses share
common requirements in scale, equipment, services and distribution.
Information Management Sector, which includes Book Publishing Services,
Telecommunications (domestic directories) and Financial Services (financial
printing and communications-process services). These businesses serve
customers that need to reproduce and distribute information in a variety of
formats globally and share requirements for speed, flexibility and
integrated manufacturing.
This sector also includes Information Services, which includes the 77
Capital venture-capital fund, creative design and communication services,
and a variety of information services. These operations provide direct
marketing, graphics-management and graphic-design services.
Global Commercial Print Sector, which includes the company's directory,
book, magazine and catalog operations outside North America--in Europe,
Latin America and Asia.
Stream International Holdings Inc. (Stream), which includes Modus Media
International (software replication, documentation and kitting and
assembly), Corporate Software & Technology (licensing and fulfillment,
customized documentation, license administration and user training) and
Stream International (technical and help-line support). The business was
formed in April 1995 by a merger of the company's Global Software Services
businesses with Corporate Software Inc. Approximately 80% owned by the
company, it is the world's largest software manufacturer, marketer and
technical support and service provider.
Sales results by business unit for the first quarter of 1997 and 1996 are
presented below:
NET SALES BY BUSINESS UNIT
% OF % OF
FIRST QUARTER ENDED MARCH 31, 1997 SALES 1996 SALES
----------------------------- -------- ----- -------- -----
Stream...................................... $421,943 29% $391,518 26%
Merchandise Media........................... 278,129 19 291,439 19
Magazine Publishing Services................ 267,555 18 277,969 18
Book Publishing Services.................... 171,049 12 156,140 10
Telecommunications.......................... 136,239 9 148,614 10
Financial Services.......................... 115,279 8 88,114 6
Global Commercial Print..................... 71,039 5 82,507 5
Other....................................... 14,005 -- 99,111 6
CONSOLIDATED RESULTS OF OPERATIONS
The company reported first quarter 1997 net income of $29 million, or $0.20
per share. In the previous year's first quarter the company reported a loss of
$377 million, or $2.45 per share, reflecting
8
a $512 million pre-tax restructuring charge recorded in the period ($411
million after taxes and a minority interest benefit). Excluding the charge, net
income for the first quarter of 1996 totaled $34 million, or $0.22 per share.
First quarter 1997 net income declined 14% and earnings per share declined 9%
from the comparable quarter in 1996, excluding the 1996 restructuring charge.
The company's performance in the first quarter of 1997 was impacted by higher
expenses associated with the continued development of the company's logistics
and fulfillment businesses and the startup of a short-run, four-color book
printing facility in Roanoke, Virginia (Roanoke facility) and the restructuring
of the company's gravure and book printing operations.
CONSOLIDATED NET SALES
Net sales during the first quarter of 1997 decreased $60 million, or 4%, to
approximately $1.5 billion, reflecting lower paper prices from the comparable
quarter in 1996 (down approximately $50 million), and the company's
deconsolidation of Metromail Corporation (Metromail) due to reduced ownership
following the second quarter 1996 public offering (down $56 million). These
declines were partially offset by increased demand, primarily in the Book
Publishing Services and Financial Services business units and Stream.
Net sales from foreign operations represented approximately $249 million, or
17% of total net sales in the first quarter, down 7% from $269 million, or 17%
of total net sales in the year-earlier quarter. The decline in foreign sales
principally reflects the discontinuation of magazine and catalog printing
operations in the United Kingdom and the worldwide repositioning of Stream's
international manufacturing operations, partially offset by revenue gains in
central Europe.
SUMMARY OF EXPENSE TRENDS
FIRST QUARTER ENDED MARCH 31, % INCREASE
THOUSANDS OF DOLLARS 1997 1996 (DECREASE)
- ----------------------------- --------- -------- ----------
Cost of materials................................. $ 693,430 $731,807 (5)%
Cost of manufacturing............................. 457,127 453,706 1
Depreciation...................................... 81,617 91,556 (11)
Amortization...................................... 8,079 17,521 (54)
Selling and administrative........................ 173,846 178,479 (3)
Net interest expense.............................. 22,561 25,083 (10)
EXPENSES
Gross profit in the first quarter of 1997 declined 2% to $235 million, due to
the company's reduced ownership of Metromail (down $19 million) and higher
expenses associated with the continued development of the company's logistics
and fulfillment businesses and the startup of the Roanoke facility. In
addition, the indirect costs of restructuring activities (including the costs
of transferring employees, equipment, retraining employees and moving work
among plants) led to temporarily higher manufacturing costs in the company's
gravure platform and in the United Kingdom during the period. These declines
were partially offset by manufacturing cost improvements in most business
units.
Selling and administrative expenses in the first quarter of 1997 declined 3%
to $174 million, due to the company's reduced ownership of Metromail (down $17
million) offset by volume-related increases primarily in the Financial Services
business unit. The ratio of selling and administrative expense to net sales, at
12%, was the same in both the first quarters of 1997 and 1996. Interest expense
9
decreased approximately $3 million, due to lower average debt balances
associated with improvements in operating working capital and the reduction of
debt using a portion of the proceeds of the fourth quarter 1996 public offering
of Donnelley Enterprise Solutions Incorporated (DESI). Other income in the
first quarter 1997 decreased $20 million, primarily due to non-recurring events
in the first quarter of 1996, including a $14 million gain on the sale of
investments in the company's venture capital portfolio and a $12 million
minority interest benefit arising from Stream's portion of the restructuring
charge. These non-recurring events were offset by a $6 million gain, during the
first quarter of 1997, on the sale of the company's interest in a magazine
distribution venture in the United Kingdom.
RESULTS OF OPERATIONS OF PRINT-RELATED BUSINESSES AND OF STREAM
Print-Related Businesses
Net sales for the company's print-related businesses (all consolidated
business units other than Stream and excluding Metromail) decreased $34
million, or 3%, to approximately $1.1 billion, primarily reflecting lower paper
prices. This decline was partially offset by increased demand primarily in the
Book Publishing Services and Financial Services business units. Print-related
businesses had operating income of $69 million, a 1% decline from the same
quarter in 1996, excluding the 1996 restructuring charge. The decrease was
attributable primarily to higher expenses associated with the continued
development of the company's logistics and fulfillment businesses and the
startup costs of the Roanoke facility.
Stream
Net sales for Stream increased $30 million, or 8%, to $422 million. Stream
had an operating loss of approximately $8 million in the first quarter of both
1997 and 1996. The gain in revenues and improved margins and earnings in the
1997 first quarter were offset by an additional bad debt provision.
CHANGES IN FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
For the quarter, net cash flow provided by operating activities decreased $20
million to $181 million. The decline is primarily due to $19 million in
restructuring-related expenditures and increases in cash expenses related to
development costs and business startups, partially offset by improvements in
operating working capital.
Operating working capital (defined as inventories, accounts receivable and
prepaid expenses, minus accounts payable, accrued compensation and other
accrued liabilities, including the restructuring reserve) decreased $95 million
in the first quarter of 1997 due primarily to a decrease in accounts receivable
and inventory compared to a $69 million decrease during the first quarter of
1996. 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 $112 million, including purchases for the new Roanoke
facility and purchases related to revamping the company's gravure manufacturing
platform. Full-year capital spending is expected to be between $450 million and
$500 million.
At March 31, 1997, 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, certain
subsidiaries of the company had credit facilities with unused borrowing
capacities totaling approximately $103 million at March 31, 1997.
10
OTHER INFORMATION
Stream--On April 30, 1997, Stream announced that a registration statement
had been filed with the Securities and Exchange Commission for a proposed
initial public offering of common shares of its outsource technical support
business unit. Immediately prior to the closing of the proposed offering,
Stream will be reorganized such that the only business it conducts will be the
outsource technical support business and will change its name to Stream
International Inc. Stream's two other business units, Corporate Software &
Technology and Modus Media International, will be spun off as two subsidiaries
of a separate entity, the equity of which will be distributed to the current
Stream stockholders. After completion of the reorganization and public
offering, the company will own less than 40% of the outstanding shares of
Stream International and less than a majority interest in the remaining two
business units and will thereafter account for these interests using the
equity method. Proceeds to the company from the completed offering will be
used to pay down debt and for general corporate purposes. The planned offering
of Stream International shares will be made only by means of a prospectus.
Metromail--On June 19, 1996, Metromail completed an initial public offering
of its common stock, resulting in the company's interest in Metromail being
reduced to approximately 38% and the company changing its method of accounting
for Metromail from consolidation to the equity method. Under the equity
method, the company recognizes in income its proportionate share of net income
of Metromail. Metromail had net sales and operating earnings of $56 million
and $1 million, respectively, in the first quarter of 1996.
DESI--On November 4, 1996, DESI completed an initial public offering of its
common stock, resulting in the company's interest in DESI being reduced to
approximately 43% and the company changing its method of accounting for DESI
from consolidation to the equity method. Under the equity method, the company
recognizes in income its proportionate share of net income of DESI. DESI's net
sales and operating earnings were not material to the consolidated results of
the company in 1996.
Corporate Restructurings--On March 28, 1996, the company announced a $512
million pre-tax charge to first quarter earnings ($411 million after taxes and
a minority interest benefit) 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 was related to the gravure platform
realignment. Approximately $189 million was related to other manufacturing
restructuring, including approximately $92 million to reposition Stream's
worldwide operations. Additionally, the company wrote down approximately $128
million in equipment, intangibles and investments in non-core businesses, in
accordance with SFAS 121.
On July 25, 1996, the company announced a $48 million pre-tax restructuring
charge ($24 million after taxes and a minority interest benefit) primarily to
restructure Stream'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
through the first quarter of 1998 ($47 million of this amount has been paid
through March 31, 1997). The remaining $383 million relates to non-cash items,
mainly the write-down of fixed assets and goodwill.
Human Resources and Plant Closings--As part of the first-half 1996
restructuring discussed above, the company has discontinued catalog and
magazine printing operations in the United Kingdom, closed Stream's
Crawfordsville, Ind., documentation printing and diskette replication
operations, consolidated a stand-alone book bindery in Scranton, Pa., and
closed a book prepress operation in
11
Barbados. In addition, as part of the first-half 1996 restructuring, the
company announced plans to close gravure-printing plants in Newton, N.C. and
Casa Grande, Ariz.
Litigation--On November 25, 1996, a purported class action was brought
against the company in federal district court in Chicago, Ill., on behalf of
all current and former African-American employees, alleging that the company
racially discriminated against them. The complaint seeks declaratory and
injunctive relief, and asks for actual, compensatory, consequential and
punitive damages in an amount not less than $500 million. Most of the specific
factual assertions of the original complaint were related to the closing by the
company of its Chicago, Ill., catalog production operations begun in 1993. The
complaint was amended on February 7, 1997, to reflect more general claims
applicable to other company locations. Plaintiffs have filed a motion seeking
nationwide class certification. The company has filed a motion for partial
summary judgment as to all claims relating to its Chicago catalog operations on
the grounds that those claims are untimely.
On December 18, 1995, a purported class action was filed against the company
in federal district court in Chicago, Ill., alleging that older workers were
discriminated against in selection for termination upon the closing of the
Chicago catalog operations. The suit also alleges that the company violated the
Employee Retirement Income Security Act (ERISA) in determining benefits payable
to retiring or terminated employees. On October 8, 1996, plaintiffs filed a
motion to maintain the ERISA claims as a class action on behalf of all company
retirement plan participants who were eligible for early retirement benefits at
the time of their termination. The company's position is that the proper ERISA
class is limited to the former Chicago employees.
Both cases relate at least in part to the circumstances surrounding the
closure of the Chicago catalog operations. The company believes that it acted
properly in the closing of the operations, has a number of valid defenses to
all of the claims made and is vigorously defending its actions. However,
management is unable to make a meaningful estimate of any loss which could
result from an unfavorable outcome of either case.
Corporate-Owned Life Insurance--As part of the Health Insurance Portability
and Accountability Act enacted in August 1996, the income tax deduction for
interest on loans from corporate-owned life insurance (COLI) policies is being
phased out and then eliminated, effective in 1999. The company has used loans
from COLI to finance certain employee benefits liabilities, and the loss of the
interest deduction may cause the company's effective tax rate to rise as the
deduction is phased out over the next few years.
Share Repurchase--The company announced and completed the repurchase of $250
million of its common stock in 1996, which was in addition to its ordinary
purchase of 1.8 million shares for issuance under various employee stock plans.
The number of shares outstanding at March 31, 1997, was 146 million, with an
average outstanding number of shares for the quarter of 146 million. In the
first quarter of 1996, the average outstanding number of shares was 154
million.
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
suffer from overcapacity leading to fierce competition. Competition is largely
based on price, quality and servicing the special needs of customers.
The company believes that demand for most product categories should continue
to improve over similar periods in 1996. This belief may be affected, however,
by certain factors in the Financial Services and Telecommunications business
units. Recent Federal Reserve actions relating to short-
12
term interest rates and proposed tax changes have created uncertainty in the
capital markets. The uncertainty has affected transaction flow, which may
impact results in the Financial Services business unit, particularly in the
second half of the year. A significant customer of the Telecommunications
business unit has modified its production cycle to move work that has been
traditionally produced in the fourth quarter into the first quarter of next
year. In the short term, this action will affect revenue and earnings
comparisons in the current year. In the long term, it should create
manufacturing efficiencies as the work is moved to slower production periods.
In addition, the company expects higher expenses associated with the continued
development of the company's logistics and fulfillment businesses, the startup
of the Roanoke facility and the costs of restructuring activities, along with
continued pricing pressures in some businesses, to continue to impact operating
results throughout the year, particularly in the second quarter.
Over the past three years, the company has adopted the principles of Economic
Value Added (EVA) as its primary financial framework. The objective of this
system is to put in place a system of value-based metrics that measures
periodic progress toward shareholder value. The EVA framework guided many of
the company's actions in the past 18 months. The company moved to improve its
manufacturing efficiencies in 1996 by initiating the restructuring of its U.S.
gravure printing platform; the closure of its magazine and catalog print
operations in the United Kingdom; and integration of its Digital Division
assets into other operations. These actions should generate sustainable cost
savings in the long run. During 1997, as the restructuring continues, operating
efficiency will decline temporarily due to the movement of equipment,
retraining of people and movement of printing among facilities. This short-term
disruption will continue to occur through 1997, but should provide tangible
benefits in future years.
Over time, the company believes that the application of the EVA financial
framework to the company's decision-making process is likely to produce slower
revenue growth, enhanced free cash flow, a stronger competitive position and
improved returns on invested capital.
13
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On November 25, 1996, a purported class action was brought against the
company alleging racial discrimination and seeking actual, compensatory,
consequential and punitive damages in an amount not less than $500 million. On
December 18, 1995, a purported class action was brought against the company
alleging age discrimination in connection with the 1993 closing of the
company's Chicago, Il. catalog operations, and violation of the Employee
Retirement Income Security Act. These actions are described in the company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1996.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The company held its Annual Meeting of Stockholders on March 27, 1997.
(b) The following matters were voted upon at the Annual Meeting of
Stockholders:
1. The election of the nominees for Directors of the Third Class, who
will serve for a term to expire at the Annual Meeting of Stockholders to be
held in 2000, was voted on by the stockholders. The nominees, all of whom
were elected, were James R. Donnelley, Thomas S. Johnson, George A. Lorch
and M. Bernard Puckett. The Inspectors of Election certified the following
vote tabulations:
FOR WITHHELD NON-VOTES
----------- --------- ---------
James R. Donnelley........................ 121,281,217 9,623,753 0
Thomas S. Johnson......................... 121,188,126 9,716,844 0
George A. Lorch........................... 121,169,954 9,735,016 0
M. Bernard Puckett........................ 121,238,909 9,666,061 0
2. A stockholder proposal relating to executive compensation was rejected
by the stockholders. The Inspectors of Election certified the following
vote tabulations:
FOR AGAINST ABSTAIN NON-VOTE
--------- ----------- --------- ---------
6,729,102 113,446,600 5,824,011 4,905,257
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3(ii)(a) By-Laws
3(ii)(b) Amendment to By-laws adopted March 10, 1997, and effective March 18, 1997
10(a) Employment Agreement between R. R. Donnelley & Sons Company and William L.
Davis*
10(b) Premium-Priced Option Agreement between R. R. Donnelley & Sons Company and
William L. Davis*
27 Financial Data Schedule
- --------
* Management contract or compensatory plan or arrangement
(b) A current Report on Form 8-K was filed on April 30, 1997 and included
Item 5, "Other Events" and Item 7, "Financial Statements, Pro Forma Financial
Information and Exhibits."
14
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)
May 7, 1997
Date __________________________
15