<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported) FEBRUARY 21, 1995
R.R. DONNELLEY & SONS COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 1-4694 36-1004130
(State or other (Commission file number) (IRS Employer
jurisdiction of Identification No.)
incorporation)
77 WEST WACKER DRIVE,
CHICAGO, ILLINOIS 60601
(Address of principal executive (Zip Code)
offices)
Registrant's Telephone Number (312) 326-8000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
ITEM 5. Other Events
The Company's 1994 Consolidated Financial Statements, Notes to Consolidated
Financial Statements, Report of Independent Public Accountants, Management's
Discussion and Analysis of Results of Operations and Management's Discussion
and Analysis of Financial Condition, included as Exhibit 99, are hereby
incorporated by reference.
ITEM 7. Financial Statements, Pro Forma Financial Information and Exhibits
(c) Exhibits
(12)Computation of Ratio of Earnings to Fixed Charges.
(23)Consent of Independent Public Accountants.
(27)Financial Data Schedule.
(99)R.R. Donnelley & Sons Company--Certain Financial Information as
of and for the Year Ended December 31, 1994:
--Consolidated Statements of Income
--Consolidated Balance Sheets
--Consolidated Statements of Cash Flows
--Consolidated Statements of Shareholders' Equity
--Notes to Consolidated Financial Statements
--Report of Independent Public Accountants
--Management's Discussion and Analysis of Results of Operations
--Management's Discussion and Analysis of Financial Condition
2
<PAGE>
SIGNATURE
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
R.R. Donnelley & Sons Company
February 21, 1995 /s/ William L. White
Date
--------------------------- By-----------------------------------
William L. White
Controller
(Authorized Officer and
Chief Accounting Officer)
3
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
12 Computation of Ratio of Earnings to Fixed Charges.
23 Consent of Independent Public Accountants.
27 Financial Data Schedule.
99 R.R. Donnelley & Sons Company--Certain Financial Information as of
and for the Year Ended December 31, 1994:
--Consolidated Statements of Income
--Consolidated Balance Sheets
--Consolidated Statements of Cash Flows
--Consolidated Statements of Shareholders' Equity
--Notes to Consolidated Financial Statements
--Report of Independent Public Accountants
--Management's Discussion and Analysis of Results of Operations
--Management's Discussion and Analysis of Financial Condition
</TABLE>
<PAGE>
EXHIBIT 12
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
STATEMENT OF COMPUTATION OF
RATIO OF EARNINGS TO FIXED CHARGES
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
DECEMBER 31, 1994
-------------------
<S> <C>
Earnings
Earnings before income taxes............................. $395,004
Interest expense......................................... 53,493
One-third of the company's operating leases (see note
below).................................................. 20,267
Amortization of capitalized interest..................... 6,129
--------
Earnings available for fixed charges..................... $474,893
========
Fixed Charges
Interest expense......................................... $ 53,493
Capitalized interest..................................... 10,233
--------
Interest incurred........................................ 63,726
One-third of the company's operating leases (see note
below).................................................. 20,267
--------
Fixed charges............................................ $ 83,993
========
Ratio of Earnings to Fixed Charges......................... 5.7
========
</TABLE>
- --------
Note: Management estimates one-third of current year's operating lease payments
to be the interest factor of such rentals.
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to (a) the inclusion of
our report dated January 26, 1995 in this Report on Form 8-K dated February 21,
1995 of R. R. Donnelley & Sons Company and (b) the incorporation by reference
of our report dated January 26, 1995 in the Company's previously filed
Registration Statements on Form S-8 (File Nos. 33-19803, 33-43632, 33-49431,
33-49809 and 33-52805), and Form S-3 (33-49539) and previously filed post-
effective amendments thereto.
Arthur Andersen LLP
Chicago, Illinois,
February 21, 1995
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<CASH> 20,569
<SECURITIES> 0
<RECEIVABLES> 1,006,688
<ALLOWANCES> 19,168
<INVENTORY> 311,237
<CURRENT-ASSETS> 1,353,330
<PP&E> 3,708,844
<DEPRECIATION> 1,852,084
<TOTAL-ASSETS> 4,452,143
<CURRENT-LIABILITIES> 801,850
<BONDS> 1,212,332
<COMMON> 330,612
0
0
<OTHER-SE> 1,647,757
<TOTAL-LIABILITY-AND-EQUITY> 4,452,143
<SALES> 4,888,786
<TOTAL-REVENUES> 4,888,786
<CGS> 3,938,494
<TOTAL-COSTS> 4,429,355
<OTHER-EXPENSES> 10,934
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 53,493
<INCOME-PRETAX> 395,004
<INCOME-TAX> 126,401
<INCOME-CONTINUING> 268,603
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 268,603
<EPS-PRIMARY> 1.75
<EPS-DILUTED> 0
</TABLE>
<PAGE>
EXHIBIT NO. 99
R.R. DONNELLEY & SONS COMPANY
CERTAIN FINANCIAL INFORMATION
AS OF AND FOR THE
YEAR ENDED DECEMBER 31, 1994
<PAGE>
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
THOUSANDS OF DOLLARS
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31
---------------------------------
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
Net sales.................................... $4,888,786 $4,387,761 $4,193,072
Cost of sales................................ 3,938,494 3,518,168 3,375,214
---------- ---------- ----------
Gross profit................................. 950,292 869,593 817,858
Selling and administrative expenses.......... 490,861 453,986 412,357
Restructuring charge......................... -- 90,000 --
---------- ---------- ----------
Earnings from operations..................... 459,431 325,607 405,501
Interest expense............................. 53,493 45,436 38,659
Other expense--net........................... 10,934 3,609 5,828
---------- ---------- ----------
Earnings before income taxes and cumulative
effect of accounting changes................ 395,004 276,562 361,014
Income taxes................................. 126,401 97,642 126,355
---------- ---------- ----------
Net income from operations before cumulative
effect of accounting changes................ 268,603 178,920 234,659
Cumulative effect of change in accounting
for:
Postretirement benefits other than pensions
(net of $80.1 million in tax benefits).... -- (127,700) --
Income taxes............................... -- 58,200 --
---------- ---------- ----------
Net Income............................... $ 268,603 $ 109,420 $ 234,659
========== ========== ==========
Income (charge) per common share:
Operations before cumulative effect of
accounting changes........................ $ 1.75 $ 1.16 $ 1.51
Cumulative effect of change in accounting
for:
Postretirement benefits other than pensions
(net of tax benefits)..................... -- (0.82) --
Income taxes............................... -- 0.37 --
---------- ---------- ----------
Net Income per Share of Common Stock..... $ 1.75 $ 0.71 $ 1.51
========== ========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
1
<PAGE>
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
THOUSANDS OF DOLLARS
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1994 1993
---------- ----------
<S> <C> <C>
Assets
Cash and equivalents................................. $ 20,569 $ 10,716
Receivables, less allowances for doubtful accounts of
$19,168 in 1994 and $14,795 in 1993................. 987,520 825,207
Inventories, principally at LIFO cost................ 311,237 243,714
Prepaid expenses..................................... 34,004 30,277
---------- ----------
Total Current Assets............................... 1,353,330 1,109,914
Net property, plant and equipment, at cost, less
accumulated depreciation of $1,852,084 in 1994 and
$1,686,779 in 1993.................................. 1,856,760 1,674,476
Goodwill and other intangibles, net of accumulated
amortization of $114,932 in 1994 and $85,330 in
1993................................................ 887,071 556,681
Other noncurrent assets.............................. 354,982 312,955
---------- ----------
Total Assets....................................... $4,452,143 $3,654,026
========== ==========
Liabilities
Accounts payable..................................... $ 422,703 $ 333,862
Accrued compensation................................. 107,167 78,284
Short-term debt...................................... 32,400 37,428
Current and deferred income taxes.................... 46,912 40,698
Other accrued liabilities............................ 192,668 195,169
---------- ----------
Total Current Liabilities.......................... 801,850 685,441
---------- ----------
Long-term debt....................................... 1,212,332 673,422
Deferred income taxes................................ 286,904 272,959
Other noncurrent liabilities......................... 172,688 178,213
---------- ----------
Total Noncurrent Liabilities....................... 1,671,924 1,124,594
---------- ----------
Shareholders' Equity
Common stock at stated value ($1.25 par value)
Authorized shares: 500,000,000; Issued: 158,608,800
in 1994 and 1993.................................... 330,612 330,612
Retained earnings, net of cumulative translation
adjustments of $18,235 in 1994 and $13,140 in 1993.. 1,802,777 1,629,673
Reacquired common stock, at cost..................... (155,020) (116,294)
---------- ----------
Total Shareholders' Equity......................... 1,978,369 1,843,991
---------- ----------
Total Liabilities and Shareholders' Equity........... $4,452,143 $3,654,026
========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
2
<PAGE>
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THOUSANDS OF DOLLARS
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31
-------------------------------
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
Cash flows provided by (used in) operating
activities:
Net income from operations before cumulative
effect of accounting changes............... $ 268,603 $ 178,920 $ 234,659
Depreciation and amortization............... 313,463 274,804 258,169
Net change in assets and liabilities........ (355,934) (4,342) (41,530)
Other....................................... (38,586) 3,241 743
--------- --------- ---------
Net Cash Provided By Operating Activities. 187,546 452,623 452,041
--------- --------- ---------
Cash flows used for investing activities:
Capital expenditures........................ (425,190) (306,512) (228,002)
Other investments including acquisitions,
net of cash acquired....................... (120,461) (177,743) (83,771)
--------- --------- ---------
Net Cash Used For Investing Activities.... (545,651) (484,255) (311,773)
--------- --------- ---------
Cash flows from (used for) financing
activities:
Net increase (decrease) in borrowings....... 500,951 143,286 (56,275)
Disposition of reacquired common stock...... 20,585 19,693 13,068
Acquisition of common stock................. (57,363) (47,513) (28,298)
Cash dividends on common stock.............. (92,352) (83,465) (79,242)
--------- --------- ---------
Net Cash From (Used For) Financing
Activities............................... 371,821 32,001 (150,747)
--------- --------- ---------
Effect of exchange rate changes on cash and
equivalents.................................. (3,863) (2,001) (1,313)
--------- --------- ---------
Net Increase (Decrease) in Cash and
Equivalents.................................. 9,853 (1,632) (11,792)
Cash and Equivalents at Beginning of Year..... 10,716 12,348 24,140
--------- --------- ---------
Cash and Equivalents at End of Year........... $ 20,569 $ 10,716 $ 12,348
========= ========= =========
The changes in assets and liabilities, net of balances assumed through
acquisitions, were as follows:
<CAPTION>
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
Decrease (Increase) in Assets:
Receivables--net............................ $(125,001) $ 5,835 $ (87,970)
Inventories--net............................ (53,214) (32,156) (32,568)
Prepaid expenses............................ (601) (8,463) 80,133
Other assets................................ (275,759) 31,609 (125,065)
Increase (Decrease) in Liabilities:
Accounts payable............................ 97,439 41,988 37,079
Accrued compensation........................ 28,603 (3,146) 22,108
Current and deferred income taxes........... 6,095 4,773 (3,859)
Deferred income taxes....................... 13,574 9,725 18,821
Other accrued liabilities................... (15,448) (1,110) 53,748
Other noncurrent liabilities................ (31,622) (53,397) (3,957)
--------- --------- ---------
Net Change in Assets and Liabilities...... $(355,934) $ (4,342) $ (41,530)
========= ========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
3
<PAGE>
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
THOUSANDS OF DOLLARS
<TABLE>
<CAPTION>
REACQUIRED
COMMON STOCK COMMON STOCK
-------------------- --------------------- RETAINED
SHARES AMOUNT SHARES AMOUNT EARNINGS TOTAL
----------- -------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1991...... 79,304,400 $231,481 (1,629,549) $ (66,515) $1,565,420 $1,730,386
Net income.............. 234,659 234,659
Par value of common
shares issued for stock
split effective
September 1, 1992...... 79,304,400 99,131 (1,629,549) (99,131) --
Treasury stock
purchases.............. (967,370) (28,298) (28,298)
Cash dividends.......... (79,242) (79,242)
Cost of common shares
issued under stock
programs............... 646,486 10,777 2,291 13,068
Translation adjustments. (21,596) (21,596)
----------- -------- ---------- --------- ---------- ----------
Balance at
December 31, 1992...... 158,608,800 330,612 (3,579,982) (84,036) 1,602,401 1,848,977
Net income before
cumulative effect of
accounting changes..... 178,920 178,920
Cumulative effect of
change in accounting
for:
Other postretirement
benefits, net of tax
benefits............. (127,700) (127,700)
Income taxes.......... 58,200 58,200
Treasury stock
purchases.............. (1,601,296) (47,513) (47,513)
Cash dividends.......... (83,465) (83,465)
Cost of common shares
issued under stock
programs............... 730,511 15,255 4,438 19,693
Translation adjustments. (3,121) (3,121)
----------- -------- ---------- --------- ---------- ----------
Balance at
December 31, 1993...... 158,608,800 330,612 (4,450,767) (116,294) 1,629,673 1,843,991
Net income.............. 268,603 268,603
Treasury stock
purchases.............. (1,958,193) (57,363) (57,363)
Cash dividends.......... (92,352) (92,352)
Cost of common shares
issued under stock
programs............... 885,478 18,637 1,948 20,585
Translation adjustments. (5,095) (5,095)
----------- -------- ---------- --------- ---------- ----------
Balance at
December 31, 1994...... 158,608,800 $330,612 (5,523,482) $(155,020) $1,802,777 $1,978,369
=========== ======== ========== ========= ========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
4
<PAGE>
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation--The consolidated financial statements include the
accounts of the company and its subsidiaries. Intercompany items and
transactions are eliminated in consolidation.
Nature of Operations--The operations of the company are in the information
industry. The company provides a wide variety of print and print-related
products and services for specific customers, virtually always under contract.
Some contracts provide for progress payments from customers as certain phases
of the work are completed; however, revenue is not recognized until the
production process has been completed in accordance with the terms of the
contracts. Some customers furnish paper for their work, while in other cases
the company purchases and sells the paper.
Cash and Equivalents--The company considers all highly liquid debt
instruments purchased with original maturities of three months or less to be
cash equivalents.
Inventories--Inventories include material, labor and factory overhead and are
substantially carried at Last-In, First-Out (LIFO) cost. This method reflects
the effect of inventory replacement costs in earnings; accordingly, charges to
cost of sales reflect recent costs of material, labor and factory overhead.
Foreign Currency Translation--Gains and losses arising from the translation
of the company's international subsidiaries' financial statements are reflected
in Retained Earnings.
Net Income Per Share of Common Stock--Net income per share is computed on the
basis of average shares outstanding during each year. No material dilution
would result if effect were given to the exercise of outstanding stock options
and the vesting of stock units.
Benefit Plans--The company's Retirement Benefit Plan (the Plan) is a non-
contributory defined benefit plan covering substantially all domestic
employees. Normal retirement age is 65 but provision is made for earlier
retirement. As required, the company uses the projected unit credit actuarial
cost method to determine pension cost for financial reporting purposes. In
conjunction with this method, the company amortizes deferred gains and losses
(using the corridor method), prior service costs and the transition credit (the
excess of Plan assets plus balance sheet accruals over the projected
obligation, as of January 1, 1987) over 19 years, representing the average
remaining service life of its active employee population. For tax and funding
purposes, the attained age normal actuarial cost method is used. Compared to
the projected unit credit method, the attained age normal method attributes a
greater proportion of the total retirement obligation to an employee's early
years of service.
Capitalization, Depreciation and Amortization--Property, plant and equipment
are stated at cost. Depreciation is computed principally on the straight-line
method based on useful lives of 15 to 33 years for buildings and 3 to 15 years
for machinery and equipment. Maintenance and repair costs are charged to
expense as incurred. Major overhauls are capitalized as reductions to
accumulated depreciation. When properties are retired or disposed, the costs
and related depreciation reserves are eliminated and the resulting profit or
loss is recognized in income. Goodwill ($558.0 million and $493.7 million, net
of accumulated amortization, at December 31, 1994 and 1993, respectively) is
amortized principally over periods ranging from 10 to 40 years. Other
intangibles represent the cost of acquiring print contracts and volume
guarantees and are amortized over the lives of the related agreements.
RESTRUCTURING CHARGE
On January 25, 1993, Sears, Roebuck and Co., a customer, announced its
decision to discontinue catalog operations during 1993. In response to Sears'
announcement, the company incurred a one-time charge of
5
<PAGE>
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
$60.8 million (net of the associated tax benefit) in the first quarter of 1993.
The charge primarily covered the costs associated with closing the company's
manufacturing facility in Chicago, Illinois, where the company produced the
Sears catalogs.
INVENTORIES
The components of the company's inventories as of December 31, 1994 and 1993,
were as follows:
<TABLE>
<CAPTION>
1994 1993
-------- --------
THOUSANDS OF
DOLLARS
<S> <C> <C>
Raw materials......................................... $165,615 $142,739
Work in process....................................... 182,914 154,477
Operating supplies.................................... 51,372 32,192
Progress billings..................................... (45,523) (40,299)
LIFO reserve ......................................... (43,141) (45,395)
-------- --------
Total............................................. $311,237 $243,714
======== ========
</TABLE>
VOLUNTARY EMPLOYEES' BENEFICIARY ASSOCIATIONS
The company maintains two Voluntary Employees' Beneficiary Associations
(VEBAs), one to fund employee welfare benefits and one to fund postretirement
medical and death benefits. The balances of the VEBAs (net of associated
liabilities) are recorded in the accompanying Consolidated Balance Sheets,
classified as current or noncurrent depending on the ultimate expected payment
date of the underlying liabilities. As of December 31, 1994, a net current
asset of $11.3 million was included in Prepaid Expenses representing the
current position of the company's employee welfare benefit plans funded by one
of the VEBAs ($9.8 million is included in Prepaid Expenses at December 31,
1993). The VEBA established to partially fund the company's liability for
postretirement medical and death benefits ($156 million at December 31, 1994
and $135 million at December 31, 1993) is included in Other Noncurrent
Liabilities as an offset to the related liability. For additional information,
refer to the notes on "Other Retirement Benefits."
PROPERTY, PLANT AND EQUIPMENT
The following table summarizes the components of Property, Plant and
Equipment (at cost):
<TABLE>
<CAPTION>
1994 1993
---------- ----------
THOUSANDS OF DOLLARS
<S> <C> <C>
Land................................................ $ 38,430 $ 39,033
Buildings........................................... 595,460 551,103
Machinery and equipment............................. 3,074,954 2,771,119
---------- ----------
Total........................................... $3,708,844 $3,361,255
========== ==========
</TABLE>
COMMITMENTS AND CONTINGENCIES
As of December 31, 1994, authorized expenditures on incomplete projects for
the purchase of property, plant and equipment totaled $265.6 million. Of this
total, $184.1 million has been contractually committed. The company has a
variety of commitments with suppliers for the purchase of paper, ink and other
materials for delivery in future years at prevailing market prices.
6
<PAGE>
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The company has operating lease commitments totaling $364.9 million and
extending through various periods to 2009. The lease commitments total $49.2
million for 1995, range from $24.3 million to $44.3 million in each of the
years 1996-1999 and total $177.3 million for years 2000 and thereafter.
The company is not exposed to significant accounts receivable credit risk,
due to the diversity of industry classification, distribution channels and
geographic location of its customers. In addition, the company is a party to
certain litigation (other than the matters described below) arising in the
ordinary course of business which, in the opinion of management, will not have
a material adverse effect on the operations of the company. The company also
has future annual commitments to invest in various affordable housing limited
partnerships which provide annual tax benefits and credits in amounts greater
than the annual investments.
The company has appealed a 1993 decision in the Federal Trade Commission
(FTC) challenge to the company's 1990 acquisition of the Meredith/Burda
companies. A FTC administrative law judge found the acquisition has or may
substantially lessen competition in an alleged "high-volume publication gravure
printing" market and ordered the divestiture of the Meredith/Burda companies.
The company's appeal has the effect of staying the divestiture order. The
ruling is contrary to an earlier ruling by a Federal District Court which
allowed the acquisition to be consummated. Company management continues to
believe this acquisition was legally proper.
On December 27, 1994, a purported class action seeking compensatory and
punitive damages was filed in California state court against Metromail
Corporation, a wholly-owned subsidiary of the company, alleging among other
things, that inclusion of certain information in Metromail databases resulted
in invasions of privacy in violation of laws. Metromail believes that it has
several bases for challenging certification of the class and if such challenge
is successful, this litigation would not have a material adverse effect on the
company. Further, Metromail believes that it has a number of valid defenses to
the claims alleged, and will vigorously defend this suit. However, management
is unable to make a meaningful estimate of any loss which could result from an
unfavorable outcome of this litigation if the class is certified.
RETIREMENT BENEFIT PLAN
Net pension credits included in operating results for the Retirement Benefit
Plan (the Plan) were:
<TABLE>
<CAPTION>
1994 1993 1992
-------- -------- --------
THOUSANDS OF DOLLARS
<S> <C> <C> <C>
Service cost..................................... $ 28,158 $ 25,097 $ 20,455
Interest cost on the projected benefit
obligation...................................... 51,604 47,295 43,252
Actual return on Plan assets..................... 3,858 (106,595) (85,115)
Amortization of excess Plan net assets at
adoption of SFAS No. 87 and deferrals--net...... (97,293) 20,306 5,127
-------- -------- --------
Total........................................ $(13,673) $(13,897) $(16,281)
======== ======== ========
</TABLE>
The actuarial computations that derived the above amounts assumed a discount
rate on projected benefit obligations of 8.5% (7.5% at December 31, 1993 and
7.8% at December 31, 1992), an expected long-term rate of return on Plan assets
of 9.5% and annual salary increases of 5%.
Plan assets include primarily government and corporate debt securities and
marketable equity securities, and, to a lesser extent, commingled funds, real
estate and a group annuity contract purchased from a life
7
<PAGE>
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
insurance company. The funded status and prepaid pension cost (included in
Other Noncurrent Assets on the accompanying Consolidated Balance Sheets) are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1994 1993
------------ ------------
THOUSANDS OF DOLLARS
<S> <C> <C>
Fair value of Plan assets............................ $ 935,847 $ 962,153
--------- ---------
Actuarial present value of benefit obligations:
Vested............................................. 574,839 590,214
Non-vested......................................... 9,354 10,488
--------- ---------
Total accumulated benefit obligations................ 584,193 600,702
Additional amounts related to projected wage
increases........................................... 80,098 95,155
--------- ---------
Projected benefit obligations for services rendered
to date............................................. 664,291 695,857
--------- ---------
Excess of Plan assets over projected benefit
obligations......................................... 271,556 266,296
Unrecognized net deferrals........................... 4,948 6,385
Unrecognized net excess Plan assets to be amortized
through the year 2005............................... (108,347) (118,197)
--------- ---------
Prepaid Pension Costs................................ $ 168,157 $ 154,484
========= =========
</TABLE>
In the event of Plan termination, the Plan provides that no funds can revert
to the company and any excess assets over Plan liabilities must be used to fund
retirement benefits.
OTHER RETIREMENT BENEFITS
In addition to pension benefits, the company provides certain health care and
life insurance benefits for retired employees. Substantially all of the
company's domestic, full-time employees become eligible for those benefits upon
reaching age 55 while working for the company and having ten years continuous
service at retirement. Beginning in 1992, the company began a program to
partially fund the liabilities associated with these plans through a tax-exempt
trust. The trust is invested in various assets, primarily life insurance
covering some of the company's employees.
Effective January 1, 1993, the company adopted Statement of Financial
Accounting Standards No. 106 (SFAS 106), "Employers' Accounting for
Postretirement Benefits Other Than Pensions." SFAS 106 requires companies to
charge to expense the expected costs of postretirement health care and life
insurance (and similar benefits) during the years that the employees render
service. Previously, such costs were expensed as actual claims were paid. The
company elected to immediately recognize the transition obligation for future
benefits to be paid related to past employee services, resulting in a noncash
charge of $207.8 million before deferred income tax benefits ($127.7 million
after-tax or $0.82 per share) that represents the cumulative effect of the
change in accounting for the years prior to 1993.
The net accrual-basis expense for postretirement benefits during 1994 and
1993 included the following components:
<TABLE>
<CAPTION>
1994 1993
-------- -------
THOUSANDS OF
DOLLARS
<S> <C> <C>
Service cost........................................... $ 11,807 $11,580
Interest cost on the projected benefit obligations..... 18,532 17,486
Actual return on assets................................ (1,296) (5,545)
Deferrals--net......................................... (11,113) (3,832)
-------- -------
Total.............................................. $ 17,930 $19,689
======== =======
</TABLE>
The above table does not include a $23 million charge for postretirement
medical benefits associated with the closing of the company's Chicago
manufacturing facility; such amount was included in the 1993 restructuring
charge (see separate note above). The expense for postretirement medical and
death benefits for 1992 (recognized on a cash basis) was $12.4 million.
8
<PAGE>
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The liability (included in Other Noncurrent Liabilities on the accompanying
Consolidated Balance Sheets) for postretirement benefits, net of the partial
funding, is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1994 1993
------------ ------------
THOUSANDS OF DOLLARS
<S> <C> <C>
Actuarial present value of benefit obligations:
Retirees........................................... $ 136,854 $ 152,334
Fully eligible active plan participants............ 7,056 4,413
Other active plan participants..................... 65,595 87,077
--------- ---------
Total accumulated benefit obligations................ 209,505 243,824
Fair value of Plan assets............................ (156,416) (134,731)
Unrecognized net deferrals........................... 37,542 (805)
--------- ---------
Excess of Accumulated Benefit Obligations Over Plan
Assets.............................................. $ 90,631 $ 108,288
========= =========
</TABLE>
The actuarial computations assumed a discount rate of 8.5% (7.5% at December
31, 1993) to determine the accumulated postretirement benefit obligation, an
expected long-term rate of return on plan assets of 9.0% and a health care cost
trend rate of 7.8% initially, declining gradually to 5.4% in 2023 and
thereafter, to measure the accumulated postretirement benefit obligation.
Effective January 1, 1993, certain features of the plan were amended. For
future retirees, the company introduced retiree cost-sharing and implemented
programs intended to stem rising costs. Also, the company has adopted a
provision which limits its future obligation to absorb health care cost
inflation. The features of the new plan provisions have been reflected in the
assumed health care cost trend rate disclosed above. However, a one percentage
point increase in the assumed health care cost trend rate would increase the
1994 postretirement benefit expense (service cost and interest cost) by $2
million and the accumulated postretirement benefit obligation as of December
31, 1994 by $11.6 million.
INCOME TAXES
Effective January 1, 1993, the company adopted Statement of Financial
Accounting Standards No. 109 (SFAS 109), "Accounting for Income Taxes." SFAS
109 requires, among other things, the application of current statutory income
tax rates in computing deferred income tax balances. In the first quarter of
1993, the company recognized the cumulative effect, through January 1, 1993, of
the accounting change, reflecting the difference between current statutory tax
rates and the generally higher rates that were used to establish the deferred
income tax balances, resulting in noncash income of $58.2 million (equivalent
to $0.37 per share).
Cash payments for income taxes were $101.6 million, $75.2 million and $105.9
million in 1994, 1993 and 1992, respectively. The components of income tax
expense for the years ending December 31, 1994, 1993 and 1992, were as follows:
<TABLE>
<CAPTION>
1994 1993 1992
-------- ------- --------
THOUSANDS OF DOLLARS
<S> <C> <C> <C>
Federal
Current...................................... $ 79,483 $72,049 $108,494
Deferred*.................................... 23,218 7,339 (5,966)
State.......................................... 23,700 18,254 23,827
-------- ------- --------
Total...................................... $126,401 $97,642 $126,355
======== ======= ========
</TABLE>
- --------
*The 1993 deferred income tax expense includes $6.2 million for the one-time
adjustment of previously recorded deferred taxes due to the increase in the
U.S. statutory rate.
9
<PAGE>
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The significant deferred tax assets and liabilities at December 31, 1994 and
1993, were as follows:
<TABLE>
<CAPTION>
1994 1993
--------- ---------
MILLIONS OF DOLLARS
<S> <C> <C>
Deferred tax liabilities:
Accelerated depreciation........................... $ 206 $ 176
Investments in safe harbor leases.................. 37 46
Pensions........................................... 61 57
Other.............................................. 65 72
--------- ---------
Total deferred tax liabilities................... 369 351
--------- ---------
Deferred tax assets:
Postretirement benefits............................ 36 43
Accrued liabilities................................ 25 34
Other.............................................. 37 15
--------- ---------
Total deferred tax assets........................ 98 92
--------- ---------
Net Deferred Tax Liabilities......................... $ 271 $ 259
========= =========
</TABLE>
The following table outlines the reconciling differences between the U.S.
statutory tax rates and the rates used by the company in the determination of
net income:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Federal statutory rate....................................... 35.0% 35.0% 34.0%
State and local income taxes, net of U.S. federal income tax
benefit..................................................... 3.9 4.3 4.4
Differences resulting from purchase accounting............... 1.3 2.0 1.1
Benefits resulting from life insurance programs.............. (4.7) (5.5) (3.2)
Affordable housing investment credits........................ (3.1) (2.5) --
Other........................................................ (0.4) (0.2) (1.3)
---- ---- ----
Subtotal..................................................... 32.0 33.1 35.0
Adjustment of deferred taxes for the increase in the U.S.
federal statutory income tax rate........................... -- 2.2 --
---- ---- ----
Total.................................................... 32.0% 35.3% 35.0%
==== ==== ====
</TABLE>
DEBT FINANCING AND INTEREST EXPENSE
The company's debt at December 31, consisted of the following:
<TABLE>
<CAPTION>
1994 1993
---------- --------
THOUSANDS OF
DOLLARS
<S> <C> <C>
9.125% Debentures due December 1, 2000..................... $ 199,574 $199,502
7.0% Notes due January 1, 2003............................. 109,686 109,647
8.875% Debentures due April 15, 2021....................... 149,652 149,638
Medium term Notes.......................................... 200,000 --
Commercial paper........................................... 484,061 218,664
Other...................................................... 101,759 33,399
---------- --------
Total.................................................. $1,244,732 $710,850
========== ========
</TABLE>
10
<PAGE>
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Based upon the interest rates currently available to the company for
borrowings with similar terms and maturities, the fair value of the company's
debt approximates its book value at December 31, 1994. The company's notes and
debentures are not actively traded and contain no call provisions.
At December 31, 1994, the company had an available credit facility of $550
million with a group of domestic and foreign banks. The credit arrangement
provides support for the issuance of commercial paper and other credit needs.
Borrowings under the facility (none during the past two years) bear interest at
various rates not exceeding the banks' prime rates. The company pays an annual
fee of 0.07% on the total unused credit facility. At December 31, 1994, the
company had an effective shelf registration statement permitting it to issue,
from time to time, up to $300 million in debt securities. Under shelf
registration statements, the company issued $200 million of medium term notes
during the fourth quarter of 1994. The notes bear interest at rates ranging
between 7.01% and 7.96% (with a weighted average interest rate of 7.55%) with
maturities as follows: 1997--$91 million, 1998--$5 million and 1999--$104
million. The proceeds from these issues were used to retire commercial paper
debt.
At December 31, 1994, the company had $538.6 million of commercial paper and
short-term debt outstanding, of which $32.4 million represents management's
current estimate of the 1995 net repayment. The remaining $506.2 million is
classified as long term since the company has the ability and intent to
maintain such debt on a long-term basis. The weighted average interest rate on
all commercial paper debt outstanding during 1994 was 4.3% (6.0% at December
31, 1994).
The following table summarizes interest expense included in the Consolidated
Statements of Income:
<TABLE>
<CAPTION>
1994 1993 1992
-------- ------- -------
THOUSANDS OF DOLLARS
<S> <C> <C> <C>
Interest incurred.................................. $ 63,726 $51,922 $43,882
Amount capitalized as property, plant and
equipment......................................... (10,233) (6,486) (5,223)
-------- ------- -------
Total.......................................... $ 53,493 $45,436 $38,659
======== ======= =======
</TABLE>
Interest paid, net of capitalized interest, was $51.8 million, $42.9 million
and $38.4 million in 1994, 1993 and 1992, respectively.
STOCK AND INCENTIVE PROGRAMS FOR MANAGEMENT EMPLOYEES
Stock Unit Awards and Restricted Stock Awards--At December 31, 1994 and 1993,
the company had outstanding 10,000 and 80,000 stock units, respectively, which
had been granted to officers and selected managers prior to 1990. Certain of
these units are payable upon or subsequent to termination of employment and
others are payable upon vesting, normally five years after the date of grant.
Payment of these awards will be made in shares of common stock equal to the
number of units awarded, in cash equal to the market value at the date of
distribution, or a combination thereof, at the company's option. The expense
for these grants was recognized in the year granted. When an award of stock
units is paid, the recipient will receive an additional amount in cash equal to
dividends paid on an equivalent number of shares of common stock during the
vesting period, plus interest. The values of the dividends and interest
accounts were $46,000 and $232,000 at December 31, 1994 and 1993, respectively.
At December 31, 1994 and 1993, the company had outstanding 328,000 and
275,000, respectively, restricted shares granted to certain officers. These
shares are registered in the names of the recipients, but are subject to
conditions of forfeiture and restrictions on sale or transfer for five years
from the grant date. Dividends on the restricted shares are paid currently to
the recipients and, accordingly, the restricted shares are treated as
outstanding shares. The expense of the grant is recognized evenly over the
vesting period.
11
<PAGE>
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The value of the stock units and restricted stock awards was $10.0 million
and $11.0 million based upon the closing price of the company's stock at each
year end ($29.50 and $31.13 at December 31, 1994 and 1993, respectively).
Charges to expense for both stock plans were $1.5 million, $1.1 million and
$1.2 million in 1994, 1993 and 1992, respectively.
Stock Purchase Plan--The company has a stock purchase plan for selected
managers and key staff employees. Under the plan, the company is required to
contribute an amount equal to 70% of participants' contributions, of which 50%
is applied to the purchase of stock and 20% is paid in cash. The number of
shares required for the plan for the year 1994 will depend upon the extent to
which eligible participants subscribe during the subscription period in the
first quarter of 1995 and the price of the stock on March 16, 1995. Amounts
charged to expense for this plan were $6.1 million, $6.2 million, and $5.8
million in 1994, 1993 and 1992, respectively.
Incentive Compensation Plans--The company has incentive compensation plans
covering selected officers. Amounts charged to expense for supplementary
compensation ($3.3 million in 1994, $2.6 million in 1993 and $2.7 million in
1992), are determined from the level of achievement of performance measures
related to earnings, margins and returns applied to the participants' base
salaries. Similar incentive and gain sharing compensation plans exist for other
officers, managers, supervisors and production employees.
Stock Options--The company has granted stock options annually from 1983 to
1994. Exercise prices are 100% of the market price of common stock on the date
of grant. The employee options vest over three, four or five years and may be
exercised, once vested, up to ten years from the date of grant. Under the 1991
Stock Incentive Plan, a maximum of 1.2 million shares were available for future
grants of stock options and restricted stock awards as of December 31, 1994.
Information relating to stock options, which includes 2.4 million shares
granted under a broad base stock option program for non-management employees,
for the years ended December 31 is shown below.
<TABLE>
<CAPTION>
1994 1993
--------------------------- --------------------------
NUMBER OF PER SHARE OPTION NUMBER OF PER SHARE OPTION
SHARES ON DATE OF GRANT SHARES ON DATE OF GRANT
---------- ---------------- --------- ----------------
<S> <C> <C> <C> <C>
Stock options granted... 4,016,500 $28.44 to $30.94 1,399,200 $28.94 to $30.19
Stock options canceled
or expired............. 274,220 $19.63 to $31.38 17,040 $19.63 to $31.38
Stock options exercised. 370,627 $11.44 to $23.94 248,201 $11.00 to $23.94
At end of year:
Stock options
outstanding.......... 11,056,758 $15.66 to $31.38 7,685,105 $11.44 to $31.38
Stock options
exercisable.......... 4,764,756 $15.66 to $31.38 3,850,079 $11.44 to $31.38
</TABLE>
Other Information--Under the stock programs, authorized unissued shares or
treasury shares may be used. If authorized unissued shares are used, not more
than 11.3 million shares may be issued in the aggregate. The company intends to
reacquire shares of its common stock to meet the stock requirements of these
programs in the future.
EMPLOYEE STOCK OWNERSHIP PLAN
Contributions to the company's Employee Stock Ownership Plan were
discontinued in response to the change in tax law that eliminated the
previously available tax credit. Under this plan, 1.2 million shares are held
in trust as of December 31, 1994, for formerly eligible employees. There are no
charges to operations for this plan, except for certain administrative
expenses.
12
<PAGE>
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
STOCK SPLIT
On July 23, 1992, the Board of Directors declared a 2-for-1 common stock
split. The split was completed on September 1, 1992, by the distribution of one
share of common stock, par value $1.25 per share, for each share held by
stockholders of record on August 7, 1992. Information relating to stock
options, stock units, reacquired common stock, the Shareholders Rights Plan,
and the net income and dividends per share included in the Consolidated
Financial Statements and related notes reflects the stock split.
PREFERRED STOCK
The company has two million shares of $1.00 par value preferred stock
authorized for issuance. The Board of Directors may divide the preferred stock
into one or more series and fix the redemption, dividend, voting, conversion,
sinking fund, liquidation and other rights. The company has no present plans to
issue any preferred stock. One million of the shares are reserved for issuance
under the Shareholder Rights Plan discussed below.
SHAREHOLDER RIGHTS PLAN
The company maintains a Shareholder Rights Plan (the Plan) designed to deter
coercive or unfair takeover tactics, to prevent a person or group from gaining
control of the company without offering fair value to all shareholders and to
deter other abusive takeover tactics which are not in the best interest of
shareholders.
Under the terms of the Plan, each share of common stock is accompanied by
one-quarter of a right; each full right entitles the shareholder to purchase
from the company, one one-hundredth of a newly issued share of Series A Junior
Preferred Stock at an exercise price of $225.
The rights become exercisable ten days after a public announcement that an
acquiring person (as defined in the Plan) has acquired 20% or more of the
outstanding common stock of the company (the Stock Acquisition Date) or ten
days after the commencement of a tender offer which would result in a person
owning 30% or more of such shares. The company can redeem the rights for $.05
per right at any time until twenty days following the Stock Acquisition Date
(the 20-day period can be shortened or lengthened by the company). The rights
will expire on August 8, 1996 unless redeemed earlier by the company.
If, subsequent to the rights becoming exercisable, the company is acquired in
a merger or other business combination at any time when there is a 20% or more
holder, the rights will then entitle a holder to buy shares of the acquiring
company with a market value equal to twice the exercise price of each right.
Alternatively, if a 20% holder acquires the company by means of a merger in
which the company and its stock survives, or if any person acquires 30% or more
of the company's common stock, each right not owned by a 20% or more
shareholder, would become exercisable for common stock of the company (or, in
certain circumstances, other consideration) having a market value equal to
twice the exercise price of the right.
ACQUISITIONS
The company made several acquisitions, joint venture and equity investments
in 1994, 1993 and 1992, none of which, either individually or in the aggregate,
were material to the company's financial statements. The acquisitions were
accounted for using the purchase method; accordingly, the assets and
liabilities of the acquired entities have been recorded at their estimated fair
values at their respective dates of acquisition.
13
<PAGE>
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
GEOGRAPHIC SEGMENTS
The following table summarizes the company's results of operations and
identifiable assets, as of and for the years ended December 31, 1994, 1993 and
1992:
<TABLE>
<CAPTION>
1994 1993 1992
---------- ---------- ----------
THOUSANDS OF DOLLARS
<S> <C> <C> <C>
Net sales:
Domestic.................................. $4,343,477 $3,999,367 $3,844,053
Foreign................................... 553,395 390,282 349,941
Less transfers between geographic areas... (8,086) (1,888) (922)
---------- ---------- ----------
Total................................... $4,888,786 $4,387,761 $4,193,072
========== ========== ==========
Earnings from operations:
Domestic*................................. $ 497,120 $ 362,364 $ 436,522
Foreign................................... 4,118 (598) 1,766
Corporate and other expenses--net......... (41,807) (36,159) (32,787)
---------- ---------- ----------
Total................................... $ 459,431 $ 325,607 $ 405,501
========== ========== ==========
Identifiable assets:
Domestic.................................. $3,719,974 $3,186,229 $3,023,177
Foreign................................... 541,614 307,727 264,452
Investment in unconsolidated affiliates... 80,580 74,188 53,646
Corporate and other....................... 109,975 85,882 68,972
---------- ---------- ----------
Total................................... $4,452,143 $3,654,026 $3,410,247
========== ========== ==========
</TABLE>
- --------
*1993 domestic earnings from operations includes a $90 million restructuring
charge recorded during the first quarter of 1993 related primarily to the
closing of the company's Chicago manufacturing facility.
Sales to affiliates are at negotiated prices based on specific market
conditions. Earnings from operations is net sales less cost of sales, selling
and administrative expenses, assessments to operating units for various
corporate expenses and goodwill amortization. In computing earnings from
operations, none of the following items has been added or deducted: interest
expense, income taxes and equity in income from unconsolidated investees.
Identifiable assets are those assets of the company that are identified with
the operations in each geographic area. Corporate and other assets are
principally investments.
Since December 31, 1991, foreign identifiable assets have grown 113%, which
is attributable to acquisitions, new locations and expansions of existing
businesses. Significant investments have been made in China, Poland, Ireland,
Singapore, United Kingdom, Japan, Korea, Australia, France, Germany, Mexico and
South America resulting in sales gains from the introduction of the company's
products to international markets and the creation of new products and services
by the foreign segment. Most of these operations remain in their start-up and
expansion phases and accordingly, the growth in foreign net sales (113% since
1991) has outpaced the growth in foreign operating earnings due to normal but
significant start-up costs.
14
<PAGE>
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
We have audited the accompanying consolidated balance sheets of R. R.
Donnelley & Sons Company (a Delaware corporation) and Subsidiaries as of
December 31, 1994 and 1993, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three years ended December
31, 1994. These financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion the financial statements referred to above present fairly, in
all material respects, the financial position of R. R. Donnelley & Sons Company
and Subsidiaries as of December 31, 1994 and 1993, and the results of its
operations and its cash flows for each of the three years ended December 31,
1994, in conformity with generally accepted accounting principles.
As explained in the Notes to Consolidated Financial Statements, effective
January 1, 1993, the company changed its method of accounting for
postretirement benefits other than pensions and its method of accounting for
income taxes.
Arthur Andersen LLP
Chicago, Illinois
January 26, 1995
15
<PAGE>
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
COMPARISON OF 1994 WITH 1993
Net sales increased 11.4% reflecting increased global demand and volume
growth across most product categories, new products and services, new customers
and recent acquisitions. Net sales from foreign operations increased 42% and
represented over 11% of consolidated net sales. The growth in foreign sales,
which is expected to continue in 1995, was the result of volume increases
realized from recent expansions and start-up operations in Europe, Asia and
Latin America, including the acquisition of Chilean-based Cochrane, S.A. (51%
owned by the company), which was consolidated in operating results beginning
July 1, 1994.
Gross profit grew 9.3%, slightly lower than the growth in net sales, as the
volume increase was partially offset by higher paper costs (which are
recovered, but at lower overall margins), depreciation, amortization and start-
up costs. Tight market conditions for certain grades of paper are expected to
continue in 1995, but are not expected to have a significant impact on the
company due to guaranteed quantity allocations from suppliers coupled with the
company's production efficiencies and ability to substitute different paper
grades. Selling and administrative expenses increased 8.1% primarily resulting
from volume related increases. The ratio of selling and administrative expenses
to net sales, at 10% in 1994, was down from 10.3% in 1993.
Interest expense increased $8.1 million, due to higher interest rates and
debt levels to fund acquisitions and expansions. Other expense was $7.3 million
above the prior year reflecting lower investment income and higher minority
interest expense.
The effective income tax rate of 32% in 1994 was lower than the 1993 rate
resulting from tax credits for affordable housing investments and the one-time
impact on the deferred income tax provision in 1993, related to the federal tax
rate increase. Net income, excluding the one-time effect of accounting changes,
a restructuring charge and the deferred income tax charge all reflected in
1993, increased 9.2% reflecting the volume increase and a lower effective
income tax rate. Earnings per share of $1.75 increased 10.1%, excluding the
one-time items, reflecting net income growth and fewer shares outstanding.
COMPARISON OF 1993 WITH 1992
Net sales grew at a rate of 4.6% due to an increased volume of services
provided to customers, including volume added through the company's global
expansion into new areas. Strong demand for global software services, financial
printing services and services for book publishers and volume increases
associated with acquisitions in new product areas were partially offset by the
negative effects of a stronger dollar (lower translation of foreign revenues,
particularly those of the company's U.K. operations) and lower catalog volume
primarily associated with the decision by Sears, Roebuck & Co. to discontinue
its catalog operations.
Gross profit grew at a greater rate than net sales, 6.3%, reflecting better
coverage of fixed costs through higher volume, a more favorable mix of sales
and lower raw material prices. Earnings from operations included a $90 million
restructuring charge recorded during the first quarter (an after-tax charge of
$0.39 per share) related primarily to the closing of the company's Chicago
manufacturing facility following the decision by Sears to discontinue its
catalog operations. Excluding this charge, earnings from operations would have
been $415.6 million, a 2.5% increase over the prior year, reflecting the gross
profit improvement partially offset by higher selling and administrative
expenses (a 10.1% increase) resulting primarily from the additional costs
associated with newly acquired and start-up operations and the expansion of the
company's global sales presence.
The $6.8 million increase in interest expense resulted from higher
outstanding debt balances due to acquisitions, investments in joint ventures
and additional VEBA funding for employee benefits. Other expense decreased $2.2
million reflecting improved earnings on investments partially offset by
expenses associated with company owned life insurance programs.
16
<PAGE>
The 1993 provision for income taxes included the one-time effect of the
higher federal statutory income tax rate on deferred taxes, which reduced net
income by $6.2 million (equivalent to $0.04 per share); excluding this one-time
charge, the 1993 effective income tax rate of 33.1% would have been lower than
the 1992 rate of 35.0%, reflecting the benefits associated with life insurance
programs and credits associated with affordable housing investments. Net income
from operations before cumulative effect of accounting changes reflected the
restructuring charge and increased selling and administrative expenses
partially offset by the favorable factors discussed above with respect to gross
profit. Excluding the restructuring charge and deferred income tax charge, net
income from operations before cumulative effect of accounting changes would
have been $245.9 million (equivalent to $1.59 per share).
During the first quarter of 1993, the company adopted two new accounting
standards for postretirement benefits and income taxes. The one-time charge for
postretirement benefits, net of associated tax benefits of $80.1 million, was
$127.7 million (equivalent to $0.82 per share). The accounting standard for
postretirement benefits resulted in additional expenses which reduced operating
income by $0.05 per share. The accounting standard for income taxes resulted in
a one-time credit of $58.2 million (equivalent to $0.37 per share). As
discussed above, the income tax standard also required the company to increase
its 1993 income tax provision by $6.2 million.
17
<PAGE>
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
The Consolidated Balance Sheets present the company's financial position at
the end of each of the last two years. The statements list the company's assets
and liabilities, and the equity of its shareholders. Major changes in the
financial position are summarized in the Consolidated Statements of Cash Flows.
The Consolidated Statements of Cash Flows summarize the changes in the
company's cash and equivalents for each of the last three years and help to
show the relationship between operations (presented in the Consolidated
Statements of Income) and liquidity and financial resources (presented in the
Consolidated Balance Sheets).
Management believes the company has the financial strength and flexibility to
fund current operations and growth. In 1994, net income from operations plus
depreciation and amortization was $582.1 million, an increase of $61.3 million,
or 11.8%, from 1993 (excluding the restructuring charge and the deferred income
tax charge relating to the increase in the federal statutory income tax rate
recorded in 1993).
The company's working capital continues to be adequate for the operation and
expansion of the business. Working capital--particularly cash, accounts
receivable and inventories--is closely controlled and continually monitored.
Emphasis continues on overall balance sheet management. Working capital
increased by $127 million from December 31, 1993, primarily from increased
receivables and inventory reflecting recent acquisitions and volume increases
partially offset by higher accounts payable and accrued compensation. The
increase in goodwill and other intangibles reflected recent acquisitions and
costs ($257 million in 1994) associated with acquiring long-term print
contracts and volume guarantees. Proceeds from debt issuances were used to fund
capital expansion, acquisitions and costs associated with long-term print
contracts and volume guarantees.
Capital expenditures during 1994 totaled $425 million ($307 million in 1993)
and an additional $120 million ($178 million in 1993) was invested in
acquisitions and joint venture investments. This capital investment reflects
the company's continued program to expand and upgrade operations, targeting
geographic markets in the United States, Europe, Asia and Latin America. Recent
investments have strategically placed new equipment and operations to meet the
growing global needs of present and new customers. Capital expenditures for
1995 are estimated at $400 million and will be financed primarily from
operating cash flows. Other expenditures in 1995 are expected to be
commensurate with and to support the growth in sales and earnings.
At December 31, 1994, the company had a revolving credit facility of $550
million with a number of banks (see the Notes to Consolidated Financial
Statements). This credit facility provides support for the issuance of
commercial paper and other credit needs. Under shelf registration statements,
during the fourth quarter of 1994, the company issued $200 million of medium
term notes with interest rates ranging from 7.01% to 7.96% (7.55% weighted
average rate) due between 1997 and 1999. The proceeds from these issues were
used to retire commercial paper debt. At December 31, 1994, the company had an
effective shelf registration statement permitting it to issue, from time to
time, up to $300 million in additional debt securities.
Late in 1994, a purported class action lawsuit seeking compensatory and
punitive damages was filed against Metromail, a wholly-owned subsidiary of the
company. See "Commitments and Contingencies" in the Notes to Consolidated
Financial Statements for further information.
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