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RRD AT A GLANCE

P/E ► -9.57   EV/EBITDA ► -116   ROA ► -4.3% AVG ROE ► -20.1% AVG Debt to Equity ► 2.87 HIGH Current Ratio ► 1.39 AVG Interest Coverage Ratio ► -3.49 LOW

 

 

 

 

 

 

R.R. Donnelley & Sons Company is North America's premier printing and business service provider, serving multinational clients in publishing, advertising, retail , technology, healthcare and other industries. Since 2006, growth has been driven by targeted acquisitions of related companies, enabling the company to provide more complete and flexible communications service offerings. Facing intense price competition n the highly fragmented and competitive commercial print portion of the print and business services markets, R.R. Donnelley has increasingly focused attention on lowering costs through internal restructuring in the last three years.^[1]

R.R. Donnelley is vulnerable to changes in overall economic conditions, particularly in the U.S., where the company does 75% of its business. R.R. Donnelley is also vulnerable to changes in demand associated with substitution of new technologies and media for print services, and rising costs of postage and shipping. Although R.R. Donnelley is able to pass fluctuating costs of raw materials on to consumers, the company has faced a rise in manufacturing costs due to higher energy prices in recent years. ^[1]

In June, 2009, R.R. Donnelley's bid to buy the assets of competitor Quebecor World (IQW) expired. Quebecor rejected R.R. Donnelley's offer and expects to complete bankruptcy proceedings in July, 2009. ^[2][3]

Company Overview

Business and Financial Metrics

Based in Chicago, Illinois, R.R. Donnelley and Sons provides print and business process solutions including mass mailings, paper advertising, catalogs, and outsourced call centers. In the face of an evolving technological market and a global economic downturn, the company has seen slowed growth in sales and significant drops in earnings.

Net sales in 2007 increased by 24.4% from the preceding year. Approximately 84% of this increase was due to sales from four companies acquired between 2006 and 2007. Net sales in 2008 decreased slightly from the preceding year. Despite a 3.6% increase in sales from three companies acquired in 2007 and two additional companies acquired in 2008, declining volumes and prices in most product and service areas more than offset the increase. R.R. Donnelley's growth has been largely driven by acquisitions made between 2006 and 2008. Six companies acquired in that time have accounted for almost all of R.R. Donnelley's growth in the past two years, with existing R.R. Donnelley facilities reporting losses which negate gains from acquisitions.^[4]

	Annual Financial Data, in millions	2004	2005	2006	2007	2008[4]	Q12009[5]
Net sales		$7,156.4	$8,430.2	$9,316.6	$11,587.1	$11,581.6	$2,455.6
Net earnings (loss)		$178.3	$137.1	$400.6	($48.9)	($189.9)	$16.4

Business Segments

Service Types

R.R. Donnelley is primarily a commercial print service provider, but also offers business processes services, such as call centers. 62% of the company's revenues come from printing solutions, and 38% from other business services.^[6] The company's targeted acquisitions in 2006 and 2007 focused on expanding business services capacity. On April 27, 2006, R.R. Donnelley acquired Office Tiger Holdings, Inc, an integrated business process outsourcing firm with operations in North America, Europe, India, the Phillipines, and Sri Lanka. On January 9, 2007, R.R. Donnelley acquired Banta Corporation, a printing and digital imaging firm providing digital content support and e-business services. R.R. Donnelley is attentive to the evolving nature of the business services market and pursues acquisitions reflecting the role of new technologies. ^[1]

Geographic Segments

Contents 1 Company Overview 1.1 Business and Financial Metrics 1.2 Business Segments 1.2.1 Service Types 1.2.2 Geographic Segments 2 Trends and Forces 2.1 Slowed consumer activity in markets served by R.R. Donnelley's clients has lessened the demand for print and advertising products, slowing growth of R.R. Donnelley's sales. 2.2 The substitution of electronic communications for printed materials may adversely affect R.R. Donnelley's sales. 2.3 Rising costs of postage and delivery may lead R.R. Donnelley's clients to decrease or terminate mailer orders. 3 Competitors 3.1 Main Competitors 3.2 Competitor Metrics 4 References

75% of R.R. Donnelley's consolidated net sales are from the U.S. segment, with the remaining 25% from the international segment. The company also has a corporate segment, which consists of general administrative activities and associated expenses such as legal, finance, information technology, human resources, and other costs. ^[1] Net sales in the U.S. segment are vulnerable to the state of U.S. economy, to changes in advertising spending, to shrinking State education budgets, to decreased retail activity, and to changes in the postal rate. Net sales in the international segment are vulnerable to changing exchange rates, with sales decreasing as international currencies weaken. International sales are also vulnerable to the global economic climate. ^[7]

Trends and Forces

Slowed consumer activity in markets served by R.R. Donnelley's clients has lessened the demand for print and advertising products, slowing growth of R.R. Donnelley's sales.

R.R. Donnelley faces decreased demand for print advertising when the level of economic activity in the markets served by its customers decreases.^[8] A prolonged economic downturn resulted in declining sales throughout the commercial printing industry in 2008, with the most significant changes in the second half of the year. Although consumer and advertising spending tend to be higher in the second half of the year, the effect of this seasonal trend was dramatically diminished in 2008.^[1]

The substitution of electronic communications for printed materials may adversely affect R.R. Donnelley's sales.

The increasing availability of and openness to electronic media solutions is a potential source of competition for print media. R.R. Donnelley is involved in markets, such as statement printing, forms, and directories, where the impact of new technologies has been pronounced, as well as in markets where such substitution is not yet significant, such as books. Pressures to choose electronic media over print media include ease of use, environmental concerns, and price. In 2008, accelerating electronic substitution was a factor in decreased sales.

However, R.R. Donnelley has sought targeted acquisitions and committed research and development resource to incorporate complimentary new technologies into its business strategy. Such technologies include digital content management, premedia services, print personalization and print-on-demand services. ^[7] Furthermore, in 2009 R.R. Donnelley announced an imaging technology breakthrough that will lower costs while maintaining the same quality as inkjet prints. The company plans to use this proprietary technology beginning in 2010. ^[9] In May, 2009, the world's largest distributor of books, digital books, and entertainment media, Baker & Taylor, Inc, selected R.R. Donnelley to establish and manage its digital print-on-demand services. ^[10]

Rising costs of postage and delivery may lead R.R. Donnelley's clients to decrease or terminate mailer orders.

R.R. Donnelley's products are frequently distributed through the U.S. or foreign postal services. Changes in postal rates are faced entirely by the company's clients, and do not impact production costs. Increases in postal rates may decrease the number of units that clients are willing to print and mail. U.S. mail postage rate increases of approximately 2.9%, which is the maximum allowed under the Postal Accountability and Enhancement Act, went into effect in May of 2008^[1] and again in May of 2009.^[11] R.R. Donnelley is the largest mailer of standard mail in the U.S., and works with the Postal Service and customers in an effort to keep costs low. The company has also invested in alternative equipment and technology to more efficiently meet customer's needs.^[1]

Competitors

The commercial printing industry is large and fragmented. Of the 35,000 companies, the majority are small local to midsized companies with one plant and fewer than 20 employees. R.R. Donnelley is the largest company in the industry, with its closest competitor in size, Quebecor World (IQW), currently in the midst of bankruptcy proceedings.^[12] Although consolidation in the industry has increased during the recent economic downturn,^[3] and R.R. Donnelley uses acquisitions to drive growth, the largest 50 companies account for only 30% of the commercial printing market.^[12] Excess capacity in the industry fuels intense price competition. R.R. Donnelley has been able to attract and maintain clients in this market, benefiting from economies of scale.

Main Competitors

• Quebecor World (IQW)

Competitor Metrics

	Earnings of Printing Industry Leaders, in millions	2004	2005	2006	2007	2008
R.R. Donnelley[4]		$178.3	$137.1	$400.6	($48.9)	($189.9)
Quebecor World[13]		$103.3	($209.5)	($3.9)	($2256.8)	($1575.8)

In 2009, R.R. Donnelley's main competitor, Quebecor World, filed for bankruptcy in Canada and for Chapter 11 bankruptcy in the United States and is currently undergoing restructuring. R.R. Donnelley made multiple bids to acquire the company's assets, which expired in June of 2009. ^[3]

References

1. ↑ ^{1.0 1.1 1.2 1.3 1.4 1.5 1.6 1.7} RRD 2008 10-K, Item 1: Business, page 3
2. ↑ The Wall Street Journal, "R.R. Donnelley Bid To Acquire Quebecor World Expires," 06/10/09
3. ↑ ^{3.0 3.1 3.2} DM News, "Printers look to merge in slowdown," 06/12/09
4. ↑ ^{4.0 4.1 4.2} RRD 2008 10-K, Item 6: Selected Financial Data, page 17
5. ↑ RRD 2009-1 10-Q, Condensed Consolidated Statements of Operations, page 4
6. ↑ ^{6.0 6.1} The Online Investor, "Company Spotlight - R.R. Donnelley 02/25/08
7. ↑ ^{7.0 7.1} RRD 2008 10-K, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations, page 18
8. ↑ RRD 2008 10-K, Item 1A: Risk Factors, page 9
9. ↑ JC Online, "People and Products," 05/19/09
10. ↑ Yahoo Finance Press Release, "Baker & Taylor Launch New Digital Print on Demand Platform," 05/28/09
11. ↑ The United States Postal Service, "Postal Service Mailing Services Prices to Change on May 11," 02/10/09
12. ↑ ^{12.0 12.1} Hoovers, "The Commercial Printing Industry," 01/01/2009
13. ↑ IQW 2008 20-F, Item 3A: Select Financial Information, page 3