R.R. Donnelley & Sons Co. :RRD-US: Earnings Analysis: Q3, 2016 By the Numbers : December 12, 2016

R.R. Donnelley & Sons Co. reports financial results for the quarter ended September 30, 2016.

We analyze the earnings along side the following peers of R.R. Donnelley & Sons Co. – InnerWorkings, Inc., Multi-Color Corporation, Deluxe Corporation, Cimpress N.V., Quad/Graphics, Inc. Class A, Thomson Reuters Corporation, Cenveo, Inc. and TEGNA, Inc. (INWK-US, LABL-US, DLX-US, CMPR-US, QUAD-US, TRI-US, CVO-US and TGNA-US) that have also reported for this period.

Highlights

  • Summary numbers: Revenues of USD 2,772.40 million, Net Earnings of USD -7.10 million.
  • Gross margins widened from 17.84% to 18.26% compared to the same period last year, operating (EBITDA) margins now 10.68% from 10.36%.
  • Year-on-year change in operating cash flow of -24.51% is about the same as the change in earnings, likely no significant movement in accruals or reserves.
  • Earnings declined although operating margins improved from 6.29% to 7.02%.

The table below shows the preliminary results and recent trends for key metrics such as revenues and net income growth:

2016-09-30 2016-06-30 2016-03-31 2015-12-31 2015-09-30
Relevant Numbers (Quarterly)
Revenues (mil) 2772.4 2729.7 2651.4 2934.6 2828
Revenue Growth (%YOY) -1.97 -0.67 -3.45 -4.39 -4.39
Earnings (mil) -7.1 -14.5 39.8 71 14.3
Earnings Growth (%YOY) -149.65 -133.33 78.48 264.1 -77.01
Net Margin (%) -0.26 -0.53 1.5 2.42 0.51
EPS -0.1 -0.21 0.57 1.02 0.21
Return on Equity (%) -4.91 -8.81 22.84 41.79 8.17
Return on Assets (%) -0.39 -0.82 2.22 3.85 0.76

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Market Share Versus Profits

Revenues History
Earnings History

RRD-US‘s change in revenue this period compared to the same period last year of -1.97% is almost the same as its change in earnings, and is about average among the announced results thus far in its peer group, suggesting that RRD-US is holding onto its market share. Also, for comparison purposes, revenues changed by 1.56% and earnings by 51.03% compared to the immediate last period.

Revenues Growth Versus Earnings Growth

Quadrant label definitions. Hover to know more

Leader, Earnings Focus, Laggard, Revenues Focus


Earnings Growth Analysis

The company’s year-on-year earnings decline did not come as a result of a contraction in gross margins or because of any cost control issues. Both gross margins and operating margins (EBITDA) margins actually improved over this time frame. Gross margins went from 17.84% to 18.26%, while operating margins improved from 10.36% to 10.68% over this period. For comparison, gross margins were 18.35% and EBITDA margins 6.86% in the immediate last period.

Gross Margin Versus EBITDA Margin

Quadrant label definitions. Hover to know more

Differentiated; Low Cost, Commodity; Low Cost, Commodity; High Cost, Differentiated; High Cost


Gross Margin Trend

Companies sometimes sacrifice improvements in revenues and margins in order to extend friendlier terms to customers and vendors. Capital Cube probes for such activity by comparing the changes in gross margins with any changes in working capital. If the gross margins improved without a worsening of working capital, it is possible that the company’s performance is a result of truly delivering in the marketplace and not simply an accounting prop-up using the balance sheet.

Gross Margin History
Working Capital Days History

RRD-US‘s improvement in gross margin has been accompanied by an improvement in its balance sheet as well. This suggests that gross margin improvements are likely from operating decisions and not accounting gimmicks. Its working capital days have declined to 26.62 days from 27.21 days for the same period last year.

Gross Margin Versus Working Capital Days

Quadrant label definitions. Hover to know more

Customer Financed, Cash Starved, Supplier Financed, Cash Rich


Cash Versus Earnings – Sustainable Performance?

RRD-US‘s change in operating cash flow of -24.51% compared to the same period last year is about the same as its change in earnings this period. Additionally, this change in operating cash flow is about average among its peer group. This suggests that the company did not use accruals or reserves to manage earnings this period, and that, all else being equal, the earnings number is sustainable.

Operating Cash Flow Growth Versus Earnings Growth

Quadrant label definitions. Hover to know more

Cash Flow based Earnings, Likely Non-cash Earnings, Low Cash Flow Base, Likely Undeclared Earnings


Margins

Despite an overall improvement in operating (EBIT) margins, the company’s earnings fell. EBIT margins went from 6.29% to 7.02%. The decline in earnings appears to be largely because of one-time items. Pretax margins declined from 1.81% to 0.21%.

EBIT Margin Versus PreTax Margin

Quadrant label definitions. Hover to know more

Operation driven Earnings, One-time Favorables, Low Earnings Base, One-time Unfavorables
EBIT Margin History
PreTax Margin History

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Company Profile

R.R. Donnelley & Sons Co. engages in the provision of multichannel communication solutions. It operates through the following segments: Publishing and Retail Services, Variable Print, Strategic Services, International, and Corporate, The Publishing and Retail Services segment offers magazines, catalogs, retail inserts, books, directories, and packaging. The Variable Print segment includes commercial and digital print, office products, direct mail, labels, statement printing, forms, and packaging. The Strategic Services segment provides logistics services, financial print products and related services, print management offerings, digital and creative solutions, and book publishing. The International segment comprises of magazines, catalogs, retail inserts, books, directories, direct mail, packaging, forms, labels, manuals, statement printing, commercial and digital print, logistics services, and digital and creative solutions. It also deals with business process outsourcing and Global Turnkey Solutions operations. The Corporate segment comprises of unallocated selling, general and administrative activities, and associated expenses including, in part, executive, legal, finance, communications, certain facility costs and last in, first out inventory provisions. The company was founded by Richard Robert Donnelley in 1864 and is headquartered in Chicago, IL.

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