Analyst Report Written by Paul Bienstock Chartered Financial Analyst

Transcription

1 Analyst Report Written by Paul Bienstock Chartered Financial Analyst Paul Bienstock has worked on Wall Street for several years in various financial services roles and is a selfemployed investment analyst and equity trader RR Donnelley & Sons Company (NYSE: RRD) Analyst Report HOLD RECOMMENDATION ON RR DONNELLEY (RRD: $16.41) 5/12/2014 KEY STATISTICS Price Week High Cash ($MM) Week Low EPS (TTM) 0.83 Dividend 1.04 PE 19.8 Dividend Yield 6.3% Revenue (TTM) ($B) Market Cap ($B) 3.27 P/S 0.31 Enterprise Value ($B) 6.85 Book Value 4.34 EBITDA (TTM) 1.12 P/B 3.8 EV/EBITDA 6.1 We are assigning a neutral recommendation to the shares of R.R Donnelley as we believe that the risks/threats are balanced by the strengths/opportunities. In particular, we share the following concerns: the shift to from print to digital; high outstanding debt and leverage; increasing healthcare costs and continued pension contributions; and continued non-operating charges for repurchase of debt, restructuring operations, and other write-offs. On the other hand, the company benefits from an attractive dividend yield and reasonable valuation (aside from the trailing twelve month price to earnings multiple), strong free cash flow and low leverage targets, and improving cost controls. Further, the company is the leader in the printing market with a strong customer base and a broad product offering. Lastly, the company has reduced its reliance on the traditional print business. Description R.R. Donnelley & Sons Company ( RR Donnelley ), a Delaware corporation, helps organizations communicate more effectively by working to create, manage, produce, distribute and process content on behalf of our customers. The Company assists customers in developing and executing multichannel communication strategies that engage audiences reduce costs, drive revenues and increase compliance During the fourth quarter of 2013, management revised its reporting structure to four operating segments: Publishing and Retail Services, Variable Print, Strategic Services, and International.

2 SEGMENTS Publishing and Retail Services (26.5% of 2013 consolidated sales) The Publishing and Retail Services segment s primary product offerings include magazines, catalogs, retail inserts, books, directories and packaging Results: Net sales decreased due to price pressures in catalogs, magazines and retail inserts, decreases in pass-through paper sales and lower volume and unfavorable mix in directories, magazines and educational books, partially offset by volume increases in book fulfillment and packaging and consumer books and favorable pricing in directories and books. Publishing and Retail Services segment income from operations increased by $769.0 million for the year ended December 31, 2013 due to lower restructuring, impairment and other charges, as well as lower depreciation and amortization expense, higher volume and favorable mix in consumer books and book fulfillment and packaging. Operating margins increased from negative 22.6% for the year ended December 31, 2012 to positive 3.9% for the year ended December 31, 2013, of which 26.5 percentage points were due to lower restructuring, impairment and other charges Outlook: The Company expects net sales in this segment to decline driven by volume declines and unfavorable mix primarily in books, directories and magazines, price pressures and lower pass-through paper sales. Net sales in magazines, catalogs and retail inserts are also expected to decline due to price reductions on major contract renewals, lower pass-through paper sales and unfavorable mix. Lower volume is expected in magazines, due to an expected decrease in advertising spending and the recent increase in postage prices, and directories, due to the impact of electronic substitution. Net sales in books are expected to decline as a result of electronic substitution, primarily of consumer books, and the impact of state and local budget spending on educational book volumes. Variable Print (24.7% of 2013 Consolidated Sales) The Variable Print segment includes the Company s U.S. short-run and transactional printing operations. This segment s primary product offerings include commercial and digital print, direct mail, labels, statement printing, office products, forms and packaging Results: Net sales decreased due to lower volume and unfavorable mix within commercial and digital print and forms, the $22.7 million prior year adjustments to net sales to correct for an over-accrual of rebates owed to certain office products customers and price declines. These decreases were partially offset by sales from the acquisition of Meisel and an increase in labels and direct mail volume. Variable Print segment income from operations decreased by $4.2 million for the year ended December 31, 2013 mainly driven by the prior year rebate adjustments, lower volume and unfavorable mix within commercial and digital print, price pressures and higher incentive compensation expense. Operating margins decreased slightly from 7.7% for the year ended December 31, 2012 to 7.6% for the year ended December 31, 2013, due to the prior year rebate adjustments, price declines, unfavorable mix and higher incentive compensation expense, largely offset by lower restructuring, impairment and other charges, and cost savings from restructuring activities Outlook: The Company expects net sales to increase driven by the acquisition of Consolidated Graphics and proposed acquisition of Esselte, as well as organic growth in certain products. An increase in volume from the healthcare industry is expected to drive higher organic net sales in commercial and digital print. Higher volume in direct mail, in-store marketing materials and packaging is also expected in Continued volume growth in labels is anticipated, including net sales growth as a result of higher volume in radio-frequency identification labels. Strategic Services (23.4% of 2013 Consolidated s Sales) The Strategic Services segment includes the Company s financial print products and related services, logistics services, digital and creative solutions and print management offerings Results: Net sales increased primarily due to revenue from acquisitions, including incremental pass-through postage revenue, as well as an increase in capital markets transactions activity and volume increases in freight brokerage services, print logistics, digital and creative solutions and courier services. Strategic Services segment income from operations increased by $173.8 million for the year ended December 31, 2013 mainly driven by lower restructuring, impairment and other charges, an

3 increase in capital markets transactions activity, higher volume in logistics, and cost savings from restructuring activities. Operating margins expanded to 9.5% of revenue due to lower restructuring, impairment and other charges Outlook: The Company expects net sales in the Strategic Services segment to increase from 2013 primarily due to higher logistics volume, largely driven by continuing growth in freight brokerage services, print logistics and co-mail services. Net sales in financial are expected to increase in 2014 as compared to Strong capital markets transactions activity is currently expected to continue in 2014, but the level of such activity across the full year will depend on continued favorable market conditions. An increase in compliance volume is also expected due to enhanced service offerings and targeted sales efforts. Net sales for digital and creative solutions and sourcing are expected to increase compared to 2013 due to higher volume. International (25.4% of 2013 Consolidated Sales) The International segment includes the Company s non-u.s. printing operations in Asia, Europe, Latin America and Canada. This segment s product and service offerings include 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. Additionally, this segment includes the Company s business process outsourcing and Global Turnkey Solutions operations. Business process outsourcing provides transactional print and outsourcing services, statement printing, direct mail and print management offerings through its operations in Europe, Asia and North America. Global Turnkey Solutions provides outsourcing capabilities, including product configuration, customized kitting and order fulfillment for technology, medical device and other companies around the world through its operations in Europe, North America and Asia Results: The increase in net sales was due to price increases driven by inflation and higher volume in Latin America, increased book export and packaging products and technology manuals volume in Asia, higher pass-through paper sales in Asia and Europe and favorable mix and increased volume within Global Turnkey Solutions. International s segment income from operations increased by $55.7 million primarily due to price increases driven by inflation and higher volume in Latin America, lower restructuring, impairment and other charges, higher volume in Asia, cost savings from restructuring activities and reduced depreciation and amortization expense. Operating margins increased from 3.5% for the year ended December 31, 2012 to 5.5% for the year ended December 31, 2013, due to lower restructuring, impairment and other charges. The remainder of the increase reflected price increases driven by inflation in Latin America, cost savings from restructuring activities, lower pass-through print management sales, reduced depreciation and amortization expense and favorable mix Outlook: Net sales in the International segment are expected to increase from 2013 primarily driven by anticipated volume increases in Global Turnkey Solutions, Asia and business process outsourcing, as well as the impact of price inflation in Latin America. Net sales in Asia are expected to increase slightly due to volume growth in book export, packaging products and technology manuals and labels, as well as higher pass-through paper sales, largely offset by price pressures. Business process outsourcing net sales are expected to increase as higher volume in outsourcing services is expected to be partially offset by a decline in print-management pass-through sales. Higher net sales are expected in Global Turnkey Solutions due to volume increases, partially offset by price declines on contract renewals. A net sales increase in Europe is expected due to higher passthrough paper sales and increases in print and packaging, retail inserts and magazine volume, partially offset by projected unfavorable changes in foreign exchange rates, the impact of electronic substitution on directories volume, a decline in technology manuals volume and price pressures. Net sales in Canada are expected to remain constant as increases in labels, statement printing and in-store marketing volume are expected to be offset by declines in commercial and digital print volume and price pressures Strategy The Company s long-term strategy is focused on maximizing long-term shareholder value by driving profitable growth, continuing its focus on productivity and maintaining a disciplined approach to capital deployment. Profitable Growth: the Company using its capital investments to support new business and leverage its global platform. The Company is focusing its information technology efforts on projects that facilitate integration and make it easier for customers to manage their full range of communication needs. The Company is also working to more fully integrate its sales efforts to broaden customer relationships and meet its customers demands. The Company s global platform provides differentiated solutions for its customers through its broad range of complementary print-related services, strong logistics capabilities, and its innovative leadership in both conventional and digital technologies. The priorities for achieving profitable growth in 2014

4 involve providing comprehensive communications solutions for targeted vertical segments, leveraging the existing customer base to generate organic growth, and completing targeted mergers and acquisitions Productivity and Cost reduction: The Company continues to implement strategic initiatives across all platforms to reduce its overall cost structure and enhance productivity, including restructuring, consolidation, reorganization and integration of operations, and streamlining of administrative and support activities. The priorities for achieve productivity and cost reduction in 2014 include maintaining a variable cost structure, using technology to continue to increase productivity, and implementing a disciplined approach to managing costs Capital Deployment: The Company seeks to deploy its capital using a balanced approach in order to ensure financial flexibility and provide returns to shareholders. Priorities for capital deployment, over time, include principal and interest payments on debt obligations, distributions to shareholders, targeted acquisitions and capital expenditures. The Company believes that a strong financial condition is important to customers focused on establishing or growing long-term relationships with a stable provider of integrated communications. The Company also expects to make targeted acquisitions that extend its capabilities, drive cost savings and reduce future capital spending needs. The Company s acquisition of Consolidated Graphics and proposed acquisition of Esselte are expected to enhance existing capabilities and improve the ability to serve customers. The Company is focused on successfully integrating the acquisitions and expects to drive cost savings from synergies and provide additional capacity to meet customer needs. Acquisitions and Dispositions On March 25, 2014, the Company acquired substantially all of the North American operations of Esselte Corporation ( Esselte ), a developer and manufacturer of nationally branded and private label office and stationery products. The acquisition, combined with the Company s existing products, created a more competitive and efficient office products supplier capable of supplying enhanced offerings across the combined customer base. The purchase price for Esselte was $78.2 million in cash and 1.0 million shares of RR Donnelley common stock, or a total transaction value of $96.5 million based on the Company s closing share price on March 24, Esselte s operations will be are included in the Variable Print segment. On March 10, 2014, the Company acquired the assets of MultiCorpora R&D Inc. and MultiCorpora International Inc. (together MultiCorpora ) for approximately $6.1 million. MultiCorpora is an international provider of translation technology solutions. The acquisition of MultiCorpora expanded the capabilities of the Company s translation services offering which supports clients multi-lingual communications. MultiCorpora s operations are included in the Strategic Services segment. On January 31, 2014, the Company acquired Consolidated Graphics, Inc. ( Consolidated Graphics ), a provider of digital and commercial printing, fulfillment services, print management and proprietary Internet-based technology solutions, with operations in North America, Europe and Asia. The acquisition enhanced the Company s ability to provide integrated communications solutions for its customers. The company acquired Consolidated Graphics for $660.6 million, including the assumption of $118.4 million in debt. The company paid $359.9 million in cash and issued 16.0 million shares of RR Donnelley common stock. Consolidated Graphics operations are included in the Variable Print segment. For the three months ended March 31, 2014, the Company s Condensed Consolidated Financial Statements included net sales of $157.9 million and an operating loss of $21.7 million related to the Consolidated Graphics acquisition, including restructuring, impairment and other charges of $17.1 million and a charge of $12.1 million resulting from an inventory purchase accounting adjustment.. On February 7, 2014, the Company sold the assets and liabilities of Office Tiger Global Real Estate Service Inc. ( GRES ), its commercial and residential real estate advisory services, for net proceeds of $1.7 million and a loss of $0.8 million. The operations of the GRES business were included in the International segment. During the fourth quarter of 2013, the Company sold the assets and liabilities of R.R. Donnelley SAS ( MRM France ), its direct mail business located in Cosne sur Loire, France, for a loss of $17.9 million, which was recognized in net investment and other expense (income) in the Consolidated Statements of Operations. The operations of the MRM France business were included in the International segment. STRENGTHS

5 Strong Customer Base: The Company serves over 60,000 customers on a world-wide basis across a wide range of industries and geographies. The company serves most of the large corporations in the United States, including 100% of the Fortune 100, 95% of the Fortune 500, and 95% of the Fortune 100. Its customers include Wal-Mart, Ford, Goldman Sachs, Proctor and Gamble, Verizon, Eli Lilly, Time Warner, Prudential Financial, and a host of other well-known corporations Strong Product Diversification: The company has significantly reduced its dependence on the core Publishing and Retail Service segments as revenues from this segment have declined from 70% of revenue in 2000 to 24% of Pro-forma revenues in 2013 as the company s total revenues has expanded from $5.2 billion to $11.5 billion (on a pro-forma basis) during the same time period. International sales has grown to 23% of revenues on a pro-forma basis in 2013 (up from 6% in 2000) while Variable Media Revenues account for 32% of revenues in 2013 (up from 4% in 2000); revenue from Strategic Services accounts from the remainder of sales (21% of revenues in 2013 and 20% of revenues in 2000). The company has entered new geographic markets and expanded its penetration of other non-u.s markets, as well as added new categories in Variable Media (Commercial and Digital Printing; Statement Printing, Labels; Forms; and Office Products). Broadest Product and Service Offering: All of the company s major competitors only participate in a few of the major product categories. RR Donnelley, on the other hand, participates in all of the major product categories, including Digital Print, Commercial, Direct Marketing, MCR and Directories, Books, Forms and Labels, Financial Print, Statement Outsourcing, Global Packaging, Document BPO, and Print Management. As a result, the firm can better serve its customer needs and offer comprehensive as well as end to end solutions Scale and Cost Control: Based on Pro-forma revenues for the twelve months ending September 30, 2013, the company reported $11.5 billion in revenues, which is more than double its nearest competitor, Quad Graphics, which recorded less than $5 billion in revenues during the same time period. In fact, the next three largest competitors, Transcontinental, Ceneveo, and Deluxe, reported between $1.5 billion to $2 billion of annual revenues. Due to the company s size, it has economies of scale in procurement, product, and distribution. Further, over 70% of the firm s cost structure is highly variable as 46% of its costs are a 100% variable (direct materials, freight/cost of transportation, and incentive compensation), and 25% of its costs are between 75% to 100% variable (employee benefits, director labor, travel and entertainment and selling and administrative expenses. Attractive Financial Profile: The Company has been able to generate strong consistent free cash flow in both good and challenging environments. In particular, the firm has reported between $475 million to $550 million of continuing free cash flow on annual basis during Gross leverage, during the same time period (excluding for 2013), has been between 2.5 times to 2.9 times. Gross leverage rose to 3.3 times at the end of 2013 as R R Donnelley prefunded the pending CGX acquisition and built cash with no debt retirement. At the beginning of 2013, the company lowered its long-term sustainable leverage target to 2.25 times (down from 2.75 times). Also, working capital efficiency has significantly improved over the past three years. Trailing four quarter average working capital as a percentage of revenues fell from 15.1% at the end of September 2011 to 12.8% at the end of December 2013 as days outstanding fell (automation of collection process; streamlined payment capabilities; and continued focus). The company s liquidity has also been enhanced with a solid cash position and availability on its revolver. Attractive Dividend: The Company currently pays a quarterly dividend of $0.26 a share. Based on a current price of $16.40 as of May 9, 2014, the dividend yield is 6.30%, which is significantly above the current dividend yield of 1.94% for the S&P 500. Further, the company s quarterly dividend has been $0.26 a share since the 2Q Lastly, the company s operating cash flow of almost $700 million in 2013 was more than adequate to fund over $215 million in capital projects and the dividend payments of $189 million. RISKS/THREATS Shift from print to digital: The printing industry has struggled to adapt to the following changes which have negatively impacted the demand for RR Donnelley s services, including the electronic transmission of documents and data, online hosting of media content, advances in digital printing, and internet technologies. Over the past few years, there has been a shift away from reading of print materials, such as newspapers and magazines, toward the viewing content, documents and data at online websites and other electronic media. For example, consumers are accessing the New York Times and the Wall Street Journal at their respective websites via desktop and mobile computers, smartphones, e-readers, tablets, and other devices. Further, the growing popularity of e-readers, such as Kindle, Nook, and other tablets has limited the growth in traditional volume of books sold. Concurrently, advertising dollars and budget have been re-allocated from print magazines and traditional publications to electronic media, and this has also resulted in weak/lower volume for the company s traditional core business.

6 Economic Sensitivity: The demand for advertising from the company s customers correlates with changes in the level of economic activity. Since several of company s segments depend on customer advertising, any economic weakness could adversely impact the need for printing and related services that it provides. In addition, the magnitude of bad-debt write-offs and allows for doubtful accounts receivables tend to increase during slower growth periods and recessions. Also, economic downturns could also result in restructuring actions and associated expenses and impairment of long-lived assets, including goodwill and other intangibles. External Financing: Despite strong free cash flow, the company has utilized external financing to support its acquisition strategy, retirement of existing debt, and other investments. The company s ability to obtain future financing depends on the general availability of credit, its credit ratings and credit capacity at the time it pursues such financing. There is a chance that it may face higher borrowing costs, and or find it more difficult to borrow money during tougher economic conditions and/or tighter credit markets, particularly in light of the company s speculative grade credit rating and high level of outstanding debt (relative to cash flow and equity). Lastly, the failure of a financial institution that supports the Company s existing credit agreement would reduce the size of its committed facility and make it more difficult for the company to support and expand its operations. Covenants/Financial Flexibility. The company s current $1.15 billion senior secured revolving credit facility (the Credit Agreement ) contains several covenants, including a minimum Interest Coverage Ratio and a maximum Leverage Ratio. These covenants restrict the ability to incur additional debt, dispose certain assets, create liens, engage in mergers and acquisitions, and make restricted payments. If the company cannot access additional outside financing, its existing cash is not sufficient, and/or future financing require more restrictive covenants, the company would encounter greater difficulty in acquiring companies or entering new markets, servicing/refining existing debt, making capital expenditures or funding other projects need for its operations. Raw Materials: The purchases of paper, ink, energy and other raw materials represent a large portion of the Company s costs. Any increase in the cost of these inputs could pressure margins, particular, if the company is not able to pass these costs on to customers through higher prices. In addition, the Company may not be able to resell waste paper and other print-related byproducts or may be adversely impacted by decreases in the prices for these by-products. Increases in the cost of materials may adversely impact customers demand for the Company s printing and related services. The Company is dependent on the availability of paper, ink and other raw materials to support its operations. Any interruption or decrease if the supply of paper, ink or other raw materials and could cause a decline in the Company s revenues. Acquisitions: The Company has acquired other companies in order to diversify its operations and expand its platform of products and services. In order to realize the anticipated benefits from these acquisitions, the company must be able to integrate these businesses in an efficient and effective manner. The integration of companies may result in significant challenges, and the Company may be unable to accomplish the integration smoothly or successfully. The integration of acquired businesses may also require the dedication of significant management resources, which may temporarily distract management s attention from the day-to-day operations of the Company. In addition, the process of integrating operations may cause an interruption of or loss of momentum in, the activities of one or more of the Company s businesses and the loss of key personnel from the Company or the acquired businesses. Further, employee uncertainty and lack of focus during the integration process may disrupt the businesses of the Company or the acquired businesses. The Company may not be able to realize the benefits of more comprehensive product and service offerings, anticipated integration of sales forces, asset rationalization and systems integration Healthcare/Pensions: The Company provides health care and other benefits to both employees and retirees. For many years, costs for health care have increased more rapidly than general inflation in the U.S. economy. If this trend in health care costs continues, the Company s cost to provide such benefits could increase, adversely impacting the Company s profitability. Further, recent changes to health care regulations in the U.S. may also increase the Company s cost of providing such benefits. As experienced in prior years, declines in the market value of the securities held by the plans coupled with historically low interest rates have reduced, and in the future could materially reduce, the funded status of the plans. These reductions have increased the level of expected required pension and other postretirement benefits plan contributions in future years. Market conditions may lead to changes in the discount rates used to value the year-end benefit obligations of the plans, which could partially mitigate or worsen the effects of lower asset returns. If adverse market conditions were to continue for an extended period of time, the Company s costs and required cash contributions associated with pension and other postretirement benefits plans may substantially increase in future periods. In 2013, the decline in pension benefit obligation (from $4369 million to $3953 million) and an increase in plan assets (from $3215 million to $3707 million), reduced the funded deficit fell from $1154 million at the end of 2012 to $245 million at the end of 2013.

7 Restructuring charges: The Company s financial results have been negatively impacted by restructuring charges, loss on retirement of debt, and other charges. Restructuring, impairment and other charges totaled $133.5 million in 2013, $ million in 2012, and $667.8 million in 2011, Further, the company recognized loss on debt extinguishment of $81.9 million in 2013, $16.1 million in 2012, and $69.9 million in We anticipated that the company will continue to report additional charges for the rest of 2014 and beyond. 1Q 2014 Results Revenues in the 1Q 2014 were $2,673.8 million, up 5.3% from revenues of in the 1Q 2013 of $2,538.5 million. Excluding the acquisition of Consolidated Graphics, other acquisitions and dispositions, a negative impact from foreign exchange rates and pass through paper sales, organic sales fell by 0.1% in the quarter. Lower volume in the variable print and publishing and retail service segments as well as lower prices offset higher volume from the strategic services and international segments. Net sales of products for the three months ended March 31, 2014 was up 4.5% to $2,225.7 million versus the same period in 2013, including a contribution of $157.9 million from the acquisition of Consolidated Graphics. Excluding the impact of Consolidated Graphics, product revenue decreased due to lower prices, a decline in pass-through print management sales, lower investment management and compliance volume in financial print and the sale of MRM France during the fourth quarter of Product sales did benefit from higher prices in Latin America, increased volume in Asia and an increase in capital markets transactions activity. Gross margins on as a percentage of product revenues decreased slightly from 21.7% in 2013 to 21.6% to 2014, reflecting price pressures and higher incentive compensation expense, partially offset by price increases driven by wages and other inflation in Latin America and cost savings from restructuring activities. Net sales from services for the three months ended March 31, 2014 increased by 9.6%, to $448.1 million versus the same period in The increase in net sales from services was primarily due to higher volume in freight brokerage services, print logistics, international mail, courier services and creative and prepress services as well as an increase in capital markets transaction activity. These increases were partially offset by the disposition of GRES. Services gross margin as a percentage of revenues decreased from 23.7% in 2013 to 20.8% to 2014, primarily from pass-through postage sales. Additionally, changes in gross margin reflected favorable mix in logistics and capital markets transactions and an increase in pension and other postretirement benefits plan income, partially offset by higher incentive compensation expense and increased transportation costs. Due to lower product and service gross margins, company-wide gross margins fell to 21.4% of sales in the 1Q 2014 as compared to 22.0% of sales in the 1Q Selling, general and administrative expenses increased to $316.5 million in the 1Q 2014 (11.8% as a percentage of net sales) as compared to $282.million in the 1Q 2013 (11.1% as a percentage of sales), reflecting additional costs related to the Consolidated Graphics acquisition, higher incentive compensation expense, wage and other inflation in Latin America and Asia and the prior year reversal of an earn out from an acquisition, partially offset by an increase in pension and other postretirement benefits plan income. During the three months ended March 31, 2014, the Company recorded net restructuring, impairment and other charges of $45.2 million compared to $22.7 million in the same period in Due to a contraction in gross margins and higher SGA and other expenses, EBITDA for the three months ending March 31, 2014 fell to $211.5 million (7.9% of revenues), down from EBITDA for the three months ending March 31, 2013 of $253.4 million (10% of revenues). On a non-gaap basis, which excludes non-cash and other one-time expenses, adjusted EBITDA was $276.5 million (10.3% of net sales) in the first quarter of 2014 as compared to adjusted EBITDA of $277.1 million (10.9% of net sales) in the first quarter of Lower prices, higher costs (wages and other costs) offset higher volume, a more favorable product mix, and the contribution of two months of results from the Consolidated Graphics acquisition. Based on slightly higher interest expense and investment expense and a $77.1 million loss from the early retirement of debt, the company reported a GAAP net loss attributable to common shareholders of $29.0 million ($0.15 a share) in the 1Q 2014 as compared to GAAP net earnings attributable to common shareholders of $27.1 million ($0.15 a share) in the 1Q Excluding pre-tax charges of $148.1 million and $62.5 million in 2014 and 2013 respectively, non-gaap net earnings were $59.7 million ($0.31 a share) in the 1Q 2014 as compared to non-gaap net earnings of $68.1 million ($0.37 a share) in the 1Q Net cash used in operating activities was $80.4 million for the three months ended March 31, 2014, compared to $95.8 million used for the same period in The decrease in net cash used in operating activities reflected lower cash used for working

8 capital and lower cash tax payments that were partially offset by higher pension and other postretirement benefit plan contributions, higher payments related to incentive compensation and higher interest payments Net cash used in investing activities for the three months ended March 31, 2014 was $427.4 million compared to $33.1 million for the three months ended March 31, The company spent $381.6 million to acquire Consolidated Graphics, Esselte and MultiCorpora. Capital expenditures were $49.0 million during the first three months of 2014, an increase of $11.1 million as compared to the same period of During the three months ended December 31, 2013, the Company sold the assets and liabilities of MRM France for a loss of $17.9 million, which included cash incentive payments due to the purchase r of $18.8 million, of which $12.0 million was paid as of March 31, 2014 Net cash used in financing activities for the three months ended March 31, 2014 was $196.8 million compared to net cash provided by financing activities of $3.7 million in the same period in During the three months ended March 31, 2014, the Company received proceeds of $400.0 million from the issuance of 6.00% senior notes due April 1, 2024, which were used to repurchase $211.0 million of the 8.25% senior notes due March 15, 2019, $100.0 million of the 7.25% senior notes due May 15, 2018, and $50.0 million of the 7.625% senior notes due June 15, The Company also repaid $118.3 million of debt and interest assumed from the Consolidated Graphics acquisition during the three months ended March 31, LIQUIDITY/DEBT The company had cash and cash equivalents of $ million as of March 31, The company had almost $3.6 billion of outstanding senior notes and debentures with over $2.7 billion of the debt maturing after The Company also has a $1.15 billion senior secured revolving Credit Agreement which expires October 15, The Company was in compliance with all terms of the Credit Agreement prior to a recent amendment. The Company s obligations under the Credit Agreement are guaranteed by its material and certain other domestic subsidiaries and are secured by a pledge of the equity interests of certain subsidiaries, including most of its domestic subsidiaries, and a security interest in substantially all of the domestic current assets and mortgages of certain domestic real property of the Company. The company currently has availability of almost $1035 million under its credit agreement. There were $10.0 million in borrowings under the Credit Agreement as of March 31, The company s credit agreement is rated a BB+ with a positive outlook from Standard & Poor s Rating Services and Baa2 with a negative outlook from Moody s Investor Service; its unsecured debt is rated at BB- by S&P and Ba2 by Moody s. Disclosure: I have no positions in any stocks mentioned. I wrote this article myself, it expresses my own opinions and is written in good faith. The compensation I receive is not related to the views and opinions expressed in this research report. I have no business relationship with any company whose stock is mentioned in the article. None of the information or opinions expressed constitutes a solicitation for the purchase or sale of any security. FORWARD-LOOKING DISCLAIMER This report may contain certain forward-looking statements and information, as defined within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, and is subject to the Safe Harbor created by those sections. This material contains statements about expected future events and/or financial results that are forwardlooking in nature and subject to risks and uncertainties. Such forward- looking statements by definition involve risks, uncertainties and other factors, which may cause the actual results, performance or achievements of mentioned company to be materially different from the statements made herein. COMPLIANCE PROCEDURE Content is researched, written and reviewed on a best-effort basis. This document, article or report is written and authored by Paul Bienstock, Chartered Financial Analyst. An outsourced research services provider represented by Paul Bienstock, Chartered Financial Analyst, provided Small Cap Specialists, LLC this article or report. However, we are only human and are prone to make mistakes. If you notice any errors or omissions, please notify us below. Small Cap Specialists, LLC and BrokerBank Securities, Inc. are not entitled to veto, interfere or alter the articles, documents or report once created and reviewed by the outsourced research provider represented by Paul Bienstock, Chartered Financial Analyst.

9 If you wish to have your company covered in more detail by our team, or wish to learn more about our services, please contact us at For any urgent concerns or inquiries, please contact us at NO WARRANTY OR LIABILITY ASSUMED RRD has not compensated Small Cap Specialists, LLC, BrokerBank Securities, Inc., or Paul Bienstock, Chartered Financial Analyst for the creation or dissemination of this report. Small Cap Specialists, LLC and BrokerBank Securities, Inc., is not responsible for any error which may be occasioned at the time of printing of this document or any error, mistake or shortcoming. Small Cap Specialists, LLC and BrokerBank Securities, Inc. do not hold any positions in RRD. No liability is accepted by Small Cap Specialists, LLC and BrokerBank Securities, Inc. whatsoever for any direct, indirect or consequential loss arising from the use of this document. Small Cap Specialists, LLC and BrokerBank Securities, Inc. expressly disclaims any fiduciary responsibility or liability for any consequences, financial or otherwise arising from any reliance placed on the information in this document. Small Cap Specialists, LLC and BrokerBank Securities, Inc. do not (1) guarantee the accuracy, timeliness, completeness or correct sequencing of the information, or (2) warrant any results from use of the information. The included information is subject to change without notice. Small Cap Specialists, LLC is the party responsible for hosting the full analyst report. BrokerBank Securities in the party responsible for issuing the press release and Paul Bienstock, Chartered Financial Analyst, is the author of research report. Small Cap Specialists, LLC has compensated Paul Bienstock, Chartered Financial Analyst two hundred dollars and fifty dollars for the right to disseminate this report. BrokerBank Securities, Inc. has been compensated one hundred dollars to issue press release by Small Cap Specialists, LLC. Information in this release is fact checked and produced on a best efforts basis by Paul Bienstock, Chartered Financial Analyst.