R.R. Donnelley & Sons Company (RRD), a leading provider of integrated communications and printing solutions, reported third quarter fiscal year 2009 results that beat the Zacks Consensus estimates. This was despite the huge decline from the year-ago period as a result of the loss of a significant — but unidentified — customer.

R.R. Donnelley is not immune to the current challenging economic environment, which impacted end-market demand and forced the company to lower prices. However, the company now expects demand to stabilize and even strengthen in future quarters. As a result, the company expects low single-digit sequential revenue growth for the fourth quarter of 2009.

The company reported non-GAAP net income from continuing operations of $111.9 million, or 54 cents per share in the third quarter of 2009. This surpassed the Zacks Consensus Estimate of 43 cents, but fell substantially from the prior-year quarter. The company had reported net income of $183.2 million or 87 cents per share in the third quarter of 2008.

Net earnings included pre-tax charges for restructuring ($129.7 million) and impairment ($2.0 million) totaling $131.7 million and acquisition expenses of $0.1 million in the third quarter of 2009. Substantially all of the restructuring and impairment charges in the quarter were related to the termination of a significant long-term customer contract in Sept. in the business process outsourcing reporting unit within the International segment.

Net revenue for the reported quarter declined 14.0% year over year to $2.46 billion, compared to $2.86 billion reported in the prior-year quarter. Revenue includes a 1.8% negative impact from changes in foreign exchange rates. Revenue fell due to a decline in volumes and continued pricing pressures across most of its products and services, partially offset by fees received for the transition of a customer contract. However, on a sequential basis, revenue increased by approximately 6.0%, validating the recovery in end-market demand.

Net revenue comprises U.S. Print and Related Services revenue, which decreased 14.9% to $1.8 billion, while International revenue decreased 11.5% to $638.3 million from the third quarter of 2008. International revenues include a 7.0% negative impact from changes in foreign exchange rates.

Margins

Gross margin decreased to 25.2% in the quarter from 27.0% in the third quarter of 2008 due to volume and price declines, higher variable compensation expense and lower pricing on by-products recoveries. SG&A expense increased to 10.2% of total revenue in the quarter from 9.8% in year-ago period due to higher variable compensation expense that more than offset the benefits of productivity efforts. As a result, operating margin decreased to 9.1% from 11.5% in the third quarter of 2008.

Operating Performance

The company exited the quarter with $414.9 million in cash. Year-to-date operating cash flow of $1.1 billion increased by $406.8 million from the first nine months of 2008. The company said that it had reduced its debt by nearly $1 billion over the past twelve months.

Zacks Investment Research
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