<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
FORM 10-Q
-----------
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-4694
R. R. DONNELLEY & SONS COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 36-1004130
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
77 WEST WACKER DRIVE, CHICAGO,
ILLINOIS 60601
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
REGISTRANT'S TELEPHONE NUMBER (312) 326-8000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to the
filing requirements for the past 90 days.
X
Yes------- No -------
NUMBER OF SHARES OF COMMON STOCK
OUTSTANDING
AS OF MARCH 31, 1998 141,899,978
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<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
INDEX NUMBER(S)
----- ---------
<S> <C>
Condensed Consolidated Statements of Income (Unaudited) for the
three months ended March 31, 1998 and 1997..................... 3
Condensed Consolidated Balance Sheets as of March 31, 1998
(Unaudited) and December 31, 1997.............................. 4
Condensed Consolidated Statements of Cash Flows (Unaudited) for
the three months ended March 31, 1998 and 1997................. 5
Notes to Condensed Consolidated Financial Statements
(Unaudited).................................................... 6-7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Comparison of First Quarter 1998 to First Quarter 1997.......... 8-9
Changes in Financial Condition.................................. 10
Subsequent Event................................................ 10
Other Information............................................... 10-12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK... 12
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS............................................ 13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......... 13
ITEM 5. OTHER INFORMATION............................................ 13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................. 13
</TABLE>
2
<PAGE>
R. R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
----------------
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
Net sales......................................... $ 1,161,396 $ 1,102,647
Cost of sales..................................... 943,337 909,544
------------ ------------
Gross profit...................................... 218,059 193,103
Selling and administrative expenses............... 130,220 120,778
------------ ------------
Earnings from operations.......................... 87,839 72,325
Other income (expense):
Interest expense................................. (19,947) (22,561)
Other, net....................................... 117 4,706
------------ ------------
Earnings before income taxes...................... 68,009 54,470
Provision for income taxes........................ 23,803 19,392
------------ ------------
Income from continuing operations................. $ 44,206 $ 35,078
Loss from discontinued operations, net of income
taxes............................................ -- (5,737)
------------ ------------
Net income........................................ $ 44,206 $ 29,341
============ ============
Income from continuing operations per share of
common stock
Basic............................................ $ 0.31 $ 0.24
Diluted.......................................... $ 0.30 $ 0.24
Net income per share of common stock
Basic............................................ $ 0.31 $ 0.20
Diluted.......................................... $ 0.30 $ 0.20
Cash dividends per basic share.................... $ 0.20 $ 0.19
Average basic shares outstanding.................. 143,928,000 145,785,000
Average diluted shares outstanding................ 146,222,000 146,953,000
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
R. R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
------------
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
MARCH 31, 1998 AND DECEMBER 31, 1997
(THOUSANDS OF DOLLARS)
<TABLE>
<S> <C> <C>
ASSETS
<CAPTION>
1998 1997
---------- -----------
<S> <C> <C>
Cash and equivalents.................................. $ 56,920 $ 47,814
Receivables, less allowance for doubtful accounts of
$18,105 and $16,259 at March 31, 1998 and December
31, 1997, respectively............................... 754,155 814,664
Inventories........................................... 194,227 201,402
Prepaid expenses...................................... 125,160 82,691
---------- -----------
Total current assets................................ 1,130,462 1,146,571
---------- -----------
Property, plant and equipment, at cost................ 4,216,860 4,214,765
Accumulated depreciation.............................. 2,456,704 2,426,649
---------- -----------
Net property, plant and equipment................... 1,760,156 1,788,116
Goodwill and other intangibles--net................... 386,597 385,512
Other noncurrent assets............................... 675,223 659,260
Net assets of discontinued operations................. 132,112 154,707
---------- -----------
Total assets........................................ $4,084,550 $ 4,134,166
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable...................................... $ 249,072 $ 291,666
Accrued compensation.................................. 123,398 152,235
Short-term debt....................................... 45,000 45,000
Current and deferred income taxes..................... 61,764 58,888
Other accrued liabilities............................. 277,788 264,833
---------- -----------
Total current liabilities........................... 757,022 812,622
---------- -----------
Long-term debt........................................ 1,274,874 1,153,226
Deferred income taxes................................. 230,867 229,538
Other noncurrent liabilities.......................... 353,211 347,283
Shareholders' equity:
Common stock, at stated value ($1.25 par value)..... 320,962 320,962
Retained earnings, net of cumulative translation
adjustments of $50,753 and $45,782 at March 31,
1998 and December 31, 1997, respectively........... 1,489,719 1,482,624
Unearned compensation............................... (8,443) (9,414)
Reacquired common stock, at cost.................... (333,662) (202,675)
---------- -----------
Total shareholders' equity...................... 1,468,576 1,591,497
---------- -----------
Total liabilities and shareholders' equity...... $4,084,550 $ 4,134,166
========== ===========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
4
<PAGE>
R. R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Cash flows provided by (used for) operating activities:
Net income............................................. $ 44,206 $ 29,341
Loss from discontinued operations, net of income taxes. -- 5,737
Depreciation........................................... 81,375 72,469
Amortization........................................... 7,781 6,373
Gain on sale of assets................................. (1,176) (8,173)
Net change in operating working capital................ (32,063) 117,638
Net change in other assets and liabilities............. 2,872 (33,980)
Other.................................................. (4,883) 3,172
--------- ---------
Net cash provided by operating activities................ 98,112 192,577
--------- ---------
Cash flows provided by (used for) investing activities:
Capital expenditures................................... (54,432) (103,606)
Other investments including acquisitions, net of cash
acquired.............................................. (17,567) (24,768)
Dispositions of assets................................. 1,176 22,765
--------- ---------
Net cash used for investing activities................... (70,823) (105,609)
--------- ---------
Cash flows provided by (used for) financing activities:
Net increase (decrease) in borrowings.................. 121,648 (24,173)
Disposition of reacquired common stock................. 17,539 12,735
Acquisition of common stock............................ (150,732) (1,144)
Cash dividends on common stock......................... (28,975) (27,665)
--------- ---------
Net cash used for financing activities................... (40,520) (40,247)
--------- ---------
Effect of exchange rate changes on cash and equivalents.. (258) (15)
--------- ---------
Net (decrease) increase in cash and equivalents from
continuing operations................................... (13,489) 46,706
Net increase (decrease) in cash from discontinued
operations.............................................. 22,595 (26,966)
Cash and equivalents at beginning of period.............. 47,814 21,317
--------- ---------
Cash and equivalents at end of period.................... $ 56,920 $ 41,057
========= =========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
5
<PAGE>
R. R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1. The condensed consolidated financial statements included herein are
unaudited (although the balance sheet at December 31, 1997 is condensed from
the audited balance sheet at that date) and have been prepared by the company
to conform with the requirements applicable to this quarterly report on Form
10-Q. Certain information and disclosures, normally included in financial
statements prepared in accordance with generally accepted accounting
principles, have been omitted as permitted by such requirements. However, the
company believes that the disclosures made are adequate to make the
information presented not misleading. These condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and the related notes included in the company's 1997 annual report
on Form 10-K.
The condensed consolidated financial statements included herein reflect, in
the opinion of the company, all adjustments (which include only normal,
recurring adjustments) necessary to present fairly the financial information
for such periods. Certain prior year amounts have been reclassified to
maintain comparability with current year classifications and to reflect the
reclassification of operations discontinued in 1997.
Note 2. Components of the company's inventories at March 31, 1998, and Dec.
31, 1997, were as follows:
<TABLE>
<CAPTION>
(THOUSANDS OF
DOLLARS)
------------------
1998 1997
-------- --------
<S> <C> <C>
Raw materials and manufacturing supplies.................... $114,196 $123,280
Work in process............................................. 169,361 153,142
Finished goods.............................................. 889 1,047
Progress billings........................................... (44,840) (31,715)
LIFO reserve................................................ (45,379) (44,352)
-------- --------
Total inventories....................................... $194,227 $201,402
======== ========
Note 3. The following provides supplemental cash flow information:
<CAPTION>
(THOUSANDS OF
DOLLARS)
------------------
THREE MONTHS
ENDED
MARCH 31
------------------
1998 1997
-------- --------
<S> <C> <C>
Interest paid, net of capitalized interest................. $ 8,521 $ 7,130
Income taxes paid.......................................... $ 19,908 $ 21,947
</TABLE>
Note 4. On Nov. 25, 1996, a purported class action was brought against the
company in federal district court in Chicago, Ill., on behalf of all current
and former African-American employees, alleging that the company racially
discriminated against them. The complaint seeks declaratory and injunctive
relief, and asks for actual, compensatory, consequential and punitive damages
in an amount not less than $500 million. Although plaintiffs seek nationwide
class certification, most of the specific factual assertions of the complaint
relate to the closing by the company of its Chicago catalog production
operations in 1993. Other general claims relate to other company locations.
The company has filed a motion for partial summary judgment as to all claims
relating to its Chicago catalog operations on the grounds that those claims
are untimely and plaintiffs have filed a motion for class certification. Both
motions are pending.
6
<PAGE>
R. R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On Dec. 18, 1995, a purported class action was filed against the company in
federal district court in Chicago alleging that older workers were
discriminated against in selection for termination upon the closing of the
Chicago catalog operations. The suit also alleges that the company violated
the Employee Retirement Income Security Act (ERISA) in determining benefits
payable to retiring or terminated employees. On Oct. 8, 1996, plaintiffs filed
a motion to maintain the ERISA claims as a class action on behalf of all
company retirement plan participants who were eligible for early retirement
benefits at the time of their termination. On Aug. 14, 1997, the court denied
plaintiffs' motion and certified classes in both the age discrimination and
ERISA claims limited to former employees of the Chicago catalog operations.
Both pending cases relate at least in part to the circumstances surrounding
the closure of the Chicago catalog operations. The company believes that it
acted properly in the closing of the operations, has a number of valid
defenses to all of the claims made and is vigorously defending its actions.
However, management is unable to make a meaningful estimate of any loss that
could result from an unfavorable outcome of either pending case.
Note 5. The company adopted Statement of Financial Accounting Standard No.
130, Comprehensive Income, effective for its quarter ended March 31, 1998.
This statement is intended to report a measure of all changes in shareholders'
equity that result from either recognized transactions or other economic
events, excluding capital stock transactions, which impact shareholders'
equity. For the company, the only difference between net income and
comprehensive income is the effect of the increase in unrealized foreign
currency translation losses of $5 million and $7 million for the quarters
ended March 31, 1998 and 1997, respectively. Comprehensive income equaled $39
million and $22 million for the quarters ended March 31, 1998 and 1997,
respectively.
Note 6. Metromail Corporation, formerly a wholly-owned subsidiary of the
company, completed an initial public offering of its common stock in June
1996, reducing the company's ownership to approximately 38%. In March 1988,
Metromail entered into a merger agreement with The Great Universal Stores,
P.L.C. (GUS), pursuant to which GUS initiated a tender offer for the
outstanding shares of Metromail. In conjunction with the merger agreement, the
company committed to sell its interest in Metromail to GUS. On April 13, 1998,
the company received $297 million, or approximately $238 million after-tax,
for its entire interest in Metromail. The accounting for the transaction will
be reflected in the company's results for the quarter ending June 30, 1998.
7
<PAGE>
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
COMPARISON OF FIRST QUARTER 1998 TO FIRST QUARTER 1997
ABOUT THE COMPANY
R. R. Donnelley & Sons Company operates in a single industry segment as the
largest commercial printer in North America. The company is a leading provider
of printing and related services to the merchandising, magazine, book,
directory and financial markets. The company applies its superior skills,
scale and technology to deliver solutions that efficiently meet customers'
strategic business needs. The company has approximately 26,000 employees in 19
countries on four continents.
The commercial print industry is a large, fragmented industry consisting of
more than 52,000 firms and over 1 million employees in the United States and
generating approximately $140 billion in revenue. The company has market-
leading positions in five categories of the market served by its business
units: Merchandise Media, which serves the catalog, retail insert and direct-
mail markets; Magazine Publishing Services, which serves the consumer and the
trade and specialty magazine markets; Book Publishing Services, which serves
the trade and educational book markets; Telecommunications, which serves the
domestic and international directory markets; and Financial Services, which
serves the communication needs of the capital markets and the mutual fund and
healthcare industries. In addition to its domestic operations, the company has
operations in Europe, Latin America and Asia.
For most of 1997, the company owned approximately 80% of Stream
International Holdings Inc. (SIH), which included three business units: Modus
Media International (software replication, documentation, and kitting and
assembly), Corporate Software & Technology (licensing and fulfillment,
customized documentation, license administration and user training) and Stream
International (technical and help-line support). SIH was formed in April 1995
by a merger of the company's Global Software Services business with Corporate
Software Inc.
In December 1997, SIH was reorganized into three separate businesses, and
the company's interest was restructured such that the company now owns 87% of
the common stock of Stream International Inc., 86% of the common stock of
Corporate Software & Technology Holdings, Inc. (CS&T) and non-voting preferred
stock of Modus Media International Holdings, Inc. (MMI). As a result of the
restructuring and the company's intention to dispose of its interest in CS&T,
the company has reported its interests in CS&T and MMI as discontinued
operations and reclassified the prior years' consolidated financial results.
The financial results of Stream International are reported in the consolidated
results of the company's continuing operations.
Sales results by business unit for the first quarter of 1998 and 1997 are
presented below:
NET SALES BY BUSINESS UNIT
<TABLE>
<CAPTION>
FIRST QUARTER ENDED MARCH 31,
(THOUSANDS OF DOLLARS) 1998 % OF TOTAL 1997 % OF TOTAL
----------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Merchandise Media............... $ 290,851 25% $ 286,111 26%
Magazine Publishing Services.... 331,002 29% 299,575 27%
Book Publishing Services........ 168,357 14% 171,049 16%
Telecommunications.............. 190,013 16% 173,311 16%
Financial Services.............. 123,551 11% 115,279 10%
Other........................... 57,622 5% 57,322 5%
---------- ---- ---------- ----
$1,161,396 100% $1,102,647 100%
========== ==== ========== ====
</TABLE>
8
<PAGE>
CONSOLIDATED RESULTS OF OPERATIONS
The company reported first quarter 1998 income from continuing operations
and net income of $44 million, or $0.30 per diluted share. In the previous
year's first quarter, the company reported income from continuing operations
and net income of $35 million, or $0.24 per diluted share, and $29 million or
$0.20 per diluted share, respectively.
CONSOLIDATED NET SALES
Net sales increased by $59 million, or 5%, to $1.2 billion, reflecting
volume growth in most business units. Merchandise Media and Magazine increased
due to growth across most product categories and the impact of increases in
paper prices. Telecommunications increased as a result of a significant
customer's change in production cycle to move work previously done in the
fourth quarter into the first quarter and continued growth in international
directories. Financial Services increased due to the strength of the capital
markets. Book declined due to weakness in the four-color trade market and a
decline in computer titles pending a major software release.
CONSOLIDATED EXPENSES
Gross profit in the first quarter of 1998 increased 13% to $218 million due
to lower costs driven by the benefit of recent restructuring activities and
the company's focus on continuous productivity improvement, as well as to
increased revenues. In addition, in the previous year's first quarter the
company incurred higher expenses associated with the development of the
company's logistics and fulfillment businesses and the start-up of the Roanoke
book facility.
Selling and administrative expenses for the first quarter of 1998 increased
8% to $130 million, due to volume increases in most business units and
increases in system-related expenditures. The ratio of selling and
administrative expenses to net sales was 11% in both the first quarters of
1998 and 1997. Earnings from operations increased by 21% to $88 million,
corresponding to an improvement in operating margins from 6.6% to 7.6% of net
sales.
SUMMARY OF EXPENSE TRENDS
<TABLE>
<CAPTION>
FIRST QUARTER ENDED
MARCH 31, % INCREASE
(THOUSANDS OF DOLLARS) 1998 1997 (DECREASE)
---------------------- ---------- ---------- ---------- --- --- ---
<S> <C> <C> <C> <C> <C> <C>
Cost of materials....... $ 455,142 $ 426,841 6.6%
Cost of manufacturing... 399,039 403,861 (1.2%)
Depreciation............ 81,375 72,469 12.3%
Amortization............ 7,781 6,373 22.1%
Selling and
administrative......... 130,220 120,778 7.8%
Net interest expense.... 19,947 22,561 (11.6%)
</TABLE>
NONOPERATING ITEMS
Interest expense decreased approximately $3 million due to lower average
debt balances associated with improved balance sheet management, resulting in
lower working capital and capital expenditures. Other income declined
approximately $5 million due primarily to a non-recurring gain in the first
quarter of 1997 on the sale of the company's interest in a magazine
distribution venture in the United Kingdom.
DISCONTINUED OPERATIONS
The operations of MMI and CS&T are reported as discontinued operations in
conjunction with the restructuring of the company's ownership interest in SIH,
as discussed above. After-tax losses for discontinued operations were $6
million, or $0.04 per diluted share, in the first quarter of 1997.
9
<PAGE>
CHANGES IN FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
For the first quarter of 1998, net cash flow provided by operating
activities was $98 million, down $94 million from last year's first quarter.
Increased net income was offset by a decline in cash provided from operating
working capital (defined as inventories, accounts receivable and prepaid
expenses, minus accounts payable, accrued compensation and other accrued
liabilities) predominantly due to a smaller decline in receivables and the
payment of incentive compensation. Capital expenditures totaled $54 million
for the first quarter of 1998. Spending was directed principally to projects
that are expected to further enhance productivity. Full-year capital spending
is expected to total between $325 million and $350 million. Management
believes that the company's cash flow and borrowing capacity are sufficient to
fund current operations and growth.
At March 31, 1998, the company had an unused revolving credit facility of
$550 million with a number of banks. This credit facility provides support for
the issuance of commercial paper and other credit needs.
SUBSEQUENT EVENT
Metromail Corporation, formerly a wholly-owned subsidiary of the company,
completed an initial public offering of its common stock in June 1996,
reducing the company's ownership to approximately 38%. In March 1998,
Metromail entered into a merger agreement with The Great Universal Stores
P.L.C. (GUS), pursuant to which GUS initiated a tender offer for the
outstanding shares of Metromail. In conjunction with the merger agreement, the
company committed to sell its interest in Metromail to GUS. On April 13, 1998,
the company received $297 million, or approximately $238 million after tax,
for its entire interest in Metromail. The accounting for the transaction will
be reflected in the company's results for the quarter ending June 30, 1998.
OTHER INFORMATION
Share repurchase--In January 1998, the board of directors authorized a
program to repurchase up to $500 million of the company's common stock in
privately negotiated or open-market transactions over an 18-month period. The
program will include shares purchased for issuance under various stock option
plans.
The company will utilize the Metromail proceeds to support the $500 million
share buyback, which was accelerated during the first quarter of 1998 in
anticipation of the receipt of such proceeds. During the quarter, the company
purchased approximately 3.7 million shares, at an average price of $39.40 per
share.
Technology--The company remains a technology leader, investing not only in
print-related technologies, such as computer-to-plate and digital printing,
but also in areas such as distribution of content and images over the
Internet. Technology is applied to enhance customers' products across the
entire manufacturing process. The company's recent investments have been
focused on a digital infrastructure to support the movement of work from
customers' desktops across the company's manufacturing process, enabling
output in multiple media. The company is focused on investing in technologies
that contribute to its financial performance and help it deliver products,
services and solutions its competitors cannot easily duplicate.
Process control and information systems are becoming increasingly important
to the effective management of the company. Increased spending on new systems
and updating of existing systems
10
<PAGE>
will be necessary. In the near term, these efforts will be focused on ensuring
that processes and systems are Year 2000 compliant, and the company will defer
other infrastructure and systems initiatives that would support continuous
productivity improvements and enhanced service capabilities until after the
company is Year 2000 compliant.
The Year 2000 compliance issues stem from the computer industry's practice
of conserving data storage by using two digits to represent a year. Systems
and hardware using this format may process data incorrectly or fail with the
use of dates in the next century. These types of failures can influence
applications that rely on dates to perform calculations (such as an accounts
receivable aging report), as well as systems such as building security and
heating.
The company's effort to address Year 2000 compliance issues continues. The
effort consists of evaluating internal computing infrastructure, business
applications and shop-floor systems for Year 2000 compliance and replacing or
renovating systems and applications as necessary to assure such compliance.
This effort will be completed by mid-1999. In addition, the company will
evaluate compliance by external companies and systems that interact with those
of the company, and test to ensure all systems work together. Company
employees, assisted by the expertise of external consultants where necessary,
staff the Year 2000 compliance effort.
Management believes currently that the cost of the Year 2000 initiative is
not a material issue that would cause reported financial information not to be
indicative of future operating results or financial condition.
Litigation--On November 25, 1996, a purported class action was brought
against the company in federal district court in Chicago, Ill., on behalf of
current and former African-American employees, alleging that the company
racially discriminated against them. The complaint seeks declaratory and
injunctive relief, and asks for actual, compensatory, consequential and
punitive damages in an amount not less than $500 million. Although plaintiffs
seek nationwide class certification, most of the specific factual assertions
of the complaint relate to the closing by the company of its Chicago catalog
production operations begun in 1993. Other general claims relate to other
company locations. The company has filed a motion for partial summary judgment
as to all claims relating to its Chicago catalog operations on the grounds
that those claims are untimely and plaintiffs have filed a motion for class
certification. Both motions are pending.
On December 18, 1995, a purported class action was filed against the company
in federal district court in Chicago alleging that older workers were
discriminated against in selection for termination upon closing of the Chicago
catalog operations. The suit also alleges that the company violated the
Employee Retirement Income Security Act (ERISA) in determining benefits
payable to retiring or terminating employees. On October 8, 1996, plaintiffs
filed a motion to maintain the ERISA claims as a class action on behalf of all
company retirement plan participants who were eligible for early retirement
benefits at the time of their termination. On August 14, 1997, the court
denied plaintiffs' motion and certified classes in both the age discrimination
and ERISA claims limited to former employees of the Chicago catalog
operations.
Both pending cases relate at least in part to the circumstances surrounding
the closing of the Chicago catalog operations. The company believes that it
acted properly in the closing of the operations, has a number of valid
defenses to all of the claims made and is vigorously defending its actions.
However, management is unable to make a meaningful estimate of any loss that
could result from an unfavorable outcome of either pending case.
Environmental Regulations--The company is subject to various laws and
regulations relating to employee health and safety and to environmental
protection. The company's policy is to be in compliance with all such laws and
regulations that govern protection of the environment and employee
11
<PAGE>
health and safety. The company does not anticipate that compliance with such
environmental, safety and health laws and regulations will have a material
adverse effect upon the company's competitive or consolidated financial
position.
Outlook--The commercial printing business in North America (the company's
primary geographic market) is highly competitive in most product categories
and geographic regions. Industry analysts consider most of the commercial
printing markets to suffer from overcapacity, and competition, therefore, is
fierce. Competition is based largely on price, quality and servicing the
special needs of customers.
The company is a large consumer of paper, acquired for customers and by
customers. The cost and supply of certain paper grades consumed in the
manufacturing process will continue to affect the company's financial results.
Although prices were slightly higher in the first quarter, management
currently does not foresee any disruptive conditions affecting prices and
supply of paper in 1998.
Postal costs are a significant component of the cost structure of the
customers of the company. Changes anticipated in postal rates in 1998,
however, are expected to be manageable for most key customer segments, and
favorable U.S. Postal Service financial performance could possibly delay the
implementation of any new rates beyond 1998.
Additionally, proposed changes to the Postal Service's legislative charter
also could affect the postal communication and commerce environment. While the
proposed legislative changes are controversial, aspects of the proposal could
strengthen the company's position as a postal intermediary. Even in the
absence of legislative reform, the company's ability to improve the cost
efficiency of mail processing and distribution will enhance its positioning in
the postal business marketplace.
In addition to paper and postage costs, consumer confidence and economic
growth are key drivers of print demand. Most experts expect continued strength
in the domestic economy; however, a significant change in the economic outlook
could affect demand for the company's products, particularly in the financial
printing market.
Management believes the company's competitive strengths--including its
comprehensive service offerings, depth of customer relationships, technology
leadership, management experience and economies of scale--should result in
profitable growth throughout 1998 and well into the future.
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The company is exposed to market risk from changes in interest rates and
foreign exchange rates. However, since approximately 70% of the company's debt
is at fixed interest rates, the company's exposure to interest rate
fluctuations is immaterial to the consolidated financial statements of the
company as a whole. The company's exposure to adverse changes in foreign
exchange rates is also immaterial to the consolidated financial statements of
the company as a whole, although the company occasionally uses financial
instruments to hedge what exposure to foreign exchange rate changes it may
have. The company does not use financial instruments for trading purposes and
is not a party to any leveraged derivatives. Further disclosure relating to
financial instruments is included in the Debt Financing and Interest Expense
note in the Notes to Consolidated Financial Statements included in the
company's 1997 annual report on Form 10-K.
12
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On November 25, 1996, a purported class action was brought against the
company alleging racial discrimination and seeking actual, compensatory,
consequential and punitive damages in an amount not less than $500 million. On
December 18, 1995, a purported class action was brought against the company
alleging age discrimination in connection with the 1993 closing of the
company's Chicago, Ill., catalog operations, and violation of the Employee
Retirement Income Security Act. These actions are described in part I of this
quarterly report on Form 10-Q.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The company held its Annual Meeting of Stockholders on March 26, 1998.
(b) The following matters were voted upon at the Annual Meeting of
Stockholders:
1. The election of the nominees for Directors of the First Class, who
will serve for a term to expire at the Annual Meeting of Stockholders to be
held in 2001, was voted on by the stockholders. The nominees, all of whom
were elected, were Martha Layne Collins, William L. Davis, Oliver R.
Sockwell and Stephen M. Wolf. The Inspectors of Election certified the
following vote tabulations:
<TABLE>
<CAPTION>
NON-
FOR WITHHELD VOTES
----------- --------- -----
<S> <C> <C> <C>
Martha Layne Collins.......................... 129,635,103 1,342,868 0
William L. Davis.............................. 129,625,373 1,352,598 0
Oliver R. Sockwell............................ 129,310,311 1,667,660 0
Stephen M. Wolf............................... 129,650,043 1,327,928 0
</TABLE>
2. A proposal to amend the 1995 Stock Incentive Plan was approved by the
stockholders. The Inspectors of Election certified the following vote
tabulations:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN NON-VOTE
----------- ---------- ------- --------
<S> <C> <C> <C>
106,906,224 23,218,429 853,318 0
</TABLE>
3. A stockholder proposal relating to executive compensation was rejected
by the stockholders. The Inspectors of Election certified the following
vote tabulations:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN NON-VOTE
--------- ----------- --------- ---------
<S> <C> <C> <C>
4,756,339 119,623,003 1,307,207 5,291,422
</TABLE>
ITEM 5. OTHER INFORMATION
Certain statements in this filing, including the discussions of management
expectations for 1998, constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such forward-
looking statements involve known and unknown risks, uncertainties and other
factors that may cause actual results to differ materially from the future
results expressed or implied by those statements. Refer to Part I, Item 1 of
the company's 1997 Annual Report on Form 10-K for a description of such
factors.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
<TABLE>
<S> <C>
27 Financial Data Schedule
</TABLE>
- --------
(b) A Report on Form 8-KA was filed on February 18, 1998 and included Item 5
"Other Events" and Item 7 "Financial Statements, Pro Forma Financial
Information and Exhibits."
13
<PAGE>
SIGNATURE
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES AND 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
/s/ Peter F. Murphy
By __________________________________
Corporate Controller
(Authorized Officer and
Chief Accounting Officer)
May 1, 1998
Date __________________________
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 56,920
<SECURITIES> 0
<RECEIVABLES> 772,260
<ALLOWANCES> 18,105
<INVENTORY> 194,227
<CURRENT-ASSETS> 1,130,462
<PP&E> 4,216,860
<DEPRECIATION> 2,456,704
<TOTAL-ASSETS> 4,084,550
<CURRENT-LIABILITIES> 757,022
<BONDS> 1,274,874
320,962
0
<COMMON> 0
<OTHER-SE> 1,147,614
<TOTAL-LIABILITY-AND-EQUITY> 4,084,550
<SALES> 1,161,396
<TOTAL-REVENUES> 1,161,396
<CGS> 943,337
<TOTAL-COSTS> 1,073,557
<OTHER-EXPENSES> (117)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19,947
<INCOME-PRETAX> 68,009
<INCOME-TAX> 23,803
<INCOME-CONTINUING> 44,206
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 44,206
<EPS-PRIMARY> 0.31
<EPS-DILUTED> 0.30
</TABLE>
