RR Donnelley Reports Its Fourth Quarter and Full-Year 2020 Financial Results

R.R. Donnelley & Sons Company (RRD) reported financial results for the fourth quarter and full year of 2020.

Q4 Key messages

• GAAP net sales, including the impact of dispositions and FX, decreased 5.6%; Non-GAAP organic net sales decreased 4.8%; both decline rates improved sequentially from the prior two quarters
• GAAP earnings per share from continuing operations of $0.46 and Non-GAAP adjusted earnings per share from continuing operations of $0.71 both increased significantly from the prior year
• Both GAAP and Non-GAAP income from operations roughly flat to prior year; GAAP operating margin improved 30 bps while Non-GAAP improved by 50 bps, both benefitted from cost reduction actions
• Operating cash flow of $124.6 million in the quarter is down from prior year; 2020 amount includes $47 million paid to terminate 25 deferred compensation plans and cash taxes on the gain from selling the Logistics businesses in addition to the expected impact from accelerating working capital improvements to earlier quarters in 2020
• Gross leverage ratio of 3.7x improves 1.0x from September 30, 2020 and 0.5x from December 31, 2019; net leverage ratio of 3.0x improves 0.7x from both September 30, 2020 and December 31, 2019
• Generated significant cash from non-operating activities, including $244 million primarily from the dispositions of the Logistics businesses and three building sales, and an additional $96 million from liquidating certain life insurance policies

Daniel Knotts

“We delivered a strong fourth quarter to finish an extraordinary year. I am proud of the RRD team’s ongoing resilience and commitment to protect the health and safety of our global colleagues while delivering the essential marketing and business communications our clients need to propel their businesses,” said Dan Knotts, RRD President and Chief Executive Officer. “Our teams continue to deliver innovative solutions to our clients, aggressively execute our cost reduction plans, and make meaningful progress in improving our capital structure. For the second consecutive year, we achieved full year growth in adjusted income from operations and increased operating margins by lowering our cost structure, expanding client relationships, and securing new business. Additionally, we significantly reduced debt outstanding, extended upcoming maturities, and expanded our liquidity as we continue our drive to improve balance sheet flexibility. Our team is doing an incredible job in managing RRD through these unprecedented times and remains highly focused on advancing our strategic priorities into 2021.”

Financial Highlights

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In November 2020, the Company closed on the previously announced sales of its DLS Worldwide and International Logistics businesses. The Company received $230.8 million in net proceeds for the two businesses, including $22.5 million held in escrow, and recorded a $134.4 million after tax gain on the divestitures in the fourth quarter of 2020. During the first quarter of 2020, the Company also sold its Courier Logistics business. The Company has reflected the Logistics Courier business, the DLS Worldwide business, and the International Logistics business as discontinued operations, and the financial results of these businesses have been excluded from continuing operations and segment results for all periods presented unless otherwise noted.

Net sales in the fourth quarter were $1.35 billion, down $80.6 million or 5.6% from the fourth quarter of 2019. The decrease includes a $24.5 million impact from business dispositions, primarily our European statements business which we sold in the fourth quarter of 2019, and lower sales as a result of the COVID-19 pandemic. The 2020 quarter also reflected an $11.5 million increase due to changes in foreign exchange rates.

Organic net sales declined 4.8%. The Business Services segment was up 0.4% on a GAAP basis and 1.7% on a non-GAAP organic basis while the Marketing Solutions segment was down 22.8% on a GAAP and non-GAAP organic basis from the fourth quarter of 2019. The Business Services segment experienced growth driven primarily by higher Supply Chain Services and Packaging product volumes. However, both segments were negatively impacted by lower volumes resulting from the COVID-19 pandemic and lower pricing, partially offset by new pandemic related sales. The Marketing Solutions segment was further impacted by a reduction in Census related sales as the project was successfully completed earlier in 2020.

Income from operations was $78.1 million in the fourth quarter compared to income from operations of $78.9 million in the fourth quarter of 2019.

Non-GAAP adjusted income from operations of $94.5 million increased $1.2 million from the prior year period. The increase was primarily due to aggressive actions taken to reduce the Company’s cost structure and lower depreciation and amortization expense. These benefits were partially offset by the impact of lower sales, higher variable incentive compensation and unfavorable F/X of nearly $10 million which was mostly associated with operations in China.

Earnings per share from continuing operations attributable to common stockholders was $0.46 in the fourth quarter of 2020 compared to $0.05 reported in the fourth quarter of 2019. The 2020 results were positively impacted by a reduction in income taxes from recent tax law guidance and lower interest expense reflecting lower interest rates and decreased debt levels.

Non-GAAP adjusted earnings per share from continuing operations attributable to common stockholders of $0.71 in the fourth quarter of 2020 increased from $0.43 in the fourth quarter of 2019 primarily due to favorable income taxes, lower interest expense, and higher adjusted income from operations.

Other highlights and information (including discontinued operations)

Cash provided by operating activities during the twelve months ended December 31, 2020 was $149.8 million compared to $139.3 million in the prior year period. The full year increase is primarily related to the deferral of the employer portion of payroll taxes of approximately $35 million as part of the CARES Act, working capital improvements and lower interest payments, partially offset by $47 million paid in connection with the termination of 25 deferred compensation plans and higher restructuring payments. As required by the CARES Act, the Company expects to repay half of the payroll tax deferral at the end of 2021 and the remainder at the end of 2022.

Capital expenditures in the twelve months ended December 31, 2020 were $85.6 million versus $138.8 million in the prior year period. The Company collected $290.6 million of proceeds during the year from selling the Logistics businesses and other long-lived assets, primarily buildings, and generated $100 million in proceeds from certain insurance policies which included the fourth quarter liquidation.

As of December 31, 2020, cash on hand was $288.8 million, up $96.9 million from 2019, and total debt outstanding was $1.5 billion, a reduction of $315 million from 2019. Availability under the credit facility was $575.9 million at December 31, 2020. Total liquidity, including cash on hand, was $865 million, up from $543 million at September 30, 2020.

Gross leverage ratio of 3.7x at December 31, 2020 improved from 4.2x at December 31, 2019 and improved from 4.7x at September 30, 2020. Net leverage ratio of 3.0x at December 31, 2020 improved from 3.7x at both December 31, 2019 and September 30, 2020.

Outlook

As the COVID-19 infection rates remain elevated in many parts of the world, the path forward continues to present many uncertainties. As such, the Company is unable to furnish its typical guidance for 2021. However, the Company is providing the following observations and guidance for 2021.

• Net sales for the year are expected to be flat to up low single digits taking into consideration reductions from the Census project and one-time pandemic related projects in the last half of 2020 offset by a modest economic recovery as the year progresses. However, net sales in the first quarter are expected to be between $1.09 and $1.15 billion, down 5 to 10 percent organically since the pandemic did not begin impacting most of the Company’s businesses until late March 2020 and due to last year’s Census work which wrapped up in mid-2020.
• Excluding the unpredictable impact from changes in foreign exchange rates, non-GAAP adjusted income from operations and the resulting operating margin are expected to be flat to up slightly from the prior year as the Company continues to benefit from aggressive cost-reduction actions. Results for the first quarter are expected to be slightly lower than the prior year period given the exceptionally strong first quarter of 2020 which included the Census work.
• Interest expense is expected to range from $120 to $125 million benefitting from lower average borrowings and a lower average interest rate throughout 2021.
• The full year Non-GAAP effective tax rate is expected to be approximately 35% which is higher than reported in 2020 as non-recurring benefits were reflected in 2020 and the benefit from the CARES Act has expired.
• Operating cash flow is expected to be slightly lower than the prior year reflecting a reduction due to the repayment of half of the employer portion of payroll taxes deferred in 2020. Capital expenditures are expected to be approximately $80 million and as part of our agreement to sell the printing facility in China, the Company expects to collect one additional deposit of approximately $50 million in 2021. The Company also expects to continue generating additional proceeds from monetizing other assets including proceeds from selling additional facilities.

Source: RR Donnelley