UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
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
(State or other jurisdiction of
incorporation or organization)
77 West Wacker Drive,
Chicago, Illinois
(Address of principal executive 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.
|
Number of shares of common stock outstanding
|
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
Index
|
|
Page
Number(s)
|
Condensed Consolidated Statements of Income (Unaudited) for the
three and six months ended June 30, 2000 and 1999 |
|
3 |
|
Condensed Consolidated Balance Sheets as of June 30, 2000
(Unaudited) and December 31, 1999 |
|
4 |
|
Condensed Consolidated Statements of Cash Flows (Unaudited) for
the six months ended June 30, 2000 and 1999 |
|
5 |
|
Notes to Condensed Consolidated Financial Statements
(Unaudited) |
|
6 - 10 |
|
| Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
|
|
Comparison of Second Quarter and First Half 2000 to 1999 |
|
11 - 17 |
|
|
Changes in Financial Condition |
|
17 - 18 |
|
|
Year 2000 and System Infrastructure |
|
18 |
|
|
Other Information |
|
18 - 21 |
|
| Item 3. Quantitative and Qualitative Disclosures about Market Risk |
|
21 |
|
| PART II |
|
| OTHER INFORMATION |
|
| Item 1. Legal Proceedings |
|
22 |
|
| Item 5. Other Information |
|
22 |
|
| Item 6. Exhibits and Reports on Form 8-K |
|
22 |
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Thousands of dollars, except per-share data)
| |
|
Three Months Ended
June 30
|
|
Six Months Ended
June 30
|
| |
|
2000
|
|
1999
|
|
2000
|
|
1999
|
| Net sales |
|
$1,388,805 |
|
|
$1,247,483 |
|
|
$2,731,775 |
|
|
$2,478,887 |
|
| Cost of sales |
|
1,119,175 |
|
|
988,234 |
|
|
2,221,122 |
|
|
1,976,702 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Gross profit |
|
269,630 |
|
|
259,249 |
|
|
510,653 |
|
|
502,185 |
|
| Selling and administrative expenses |
|
156,983 |
|
|
156,346 |
|
|
302,865 |
|
|
307,707 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Earnings from operations |
|
112,647 |
|
|
102,903 |
|
|
207,788 |
|
|
194,478 |
|
| Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
| Interest expense |
|
(24,960 |
) |
|
(23,726 |
) |
|
(47,101 |
) |
|
(43,621 |
) |
| Other, net |
|
3,922 |
|
|
8,098 |
|
|
6,859 |
|
|
10,889 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations before income
taxes |
|
91,609 |
|
|
87,275 |
|
|
167,546 |
|
|
161,746 |
|
| Income taxes |
|
35,269 |
|
|
33,601 |
|
|
64,505 |
|
|
62,272 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Income from continuing operations |
|
56,340 |
|
|
53,674 |
|
|
103,041 |
|
|
99,474 |
|
Loss from discontinued operations, net of income
taxes |
|
— |
|
|
(1,187 |
) |
|
— |
|
|
(3,007 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Net income |
|
$ 56,340 |
|
|
$ 52,487 |
|
|
$ 103,041 |
|
|
$ 96,467 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations per share of
common stock |
|
|
|
|
|
|
|
|
|
|
|
|
| Basic |
|
$ 0.46 |
|
|
$ 0.42 |
|
|
$ 0.84 |
|
|
$ 0.76 |
|
| Diluted |
|
0.46 |
|
|
0.41 |
|
|
0.84 |
|
|
0.75 |
|
Loss from discontinued operations per share of
common stock |
|
|
|
|
|
|
|
|
|
|
|
|
| Basic |
|
$ — |
|
|
$ (0.01 |
) |
|
$ — |
|
|
$ (0.02 |
) |
| Diluted |
|
— |
|
|
(0.01 |
) |
|
— |
|
|
(0.02 |
) |
| Net income per share of common stock |
|
|
|
|
|
|
|
|
|
|
|
|
| Basic |
|
$ 0.46 |
|
|
$ 0.41 |
|
|
$ 0.84 |
|
|
$ 0.74 |
|
| Diluted |
|
0.46 |
|
|
0.40 |
|
|
0.84 |
|
|
0.73 |
|
See accompanying Notes to Condensed Consolidated Financial Statements.
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
June 30, 2000 and December 31, 1999
(Thousands of dollars, except share data)
| ASSETS |
| |
|
2000
|
|
1999
|
| Cash and equivalents |
|
$ 56,263 |
|
|
$ 41,873 |
|
Receivables, less allowance for doubtful accounts of $17,296
in 2000 and $15,461 in 1999 |
|
795,771 |
|
|
865,305 |
|
| Inventories |
|
209,667 |
|
|
194,312 |
|
| Prepaid expenses |
|
82,924 |
|
|
51,781 |
|
| Refundable income taxes |
|
76,579 |
|
|
76,579 |
|
| |
|
|
|
|
|
|
| Total current assets |
|
1,221,204 |
|
|
1,229,850 |
|
| |
|
|
|
|
|
|
Net property, plant and equipment, at cost, less accumulated depreciation of
$2,927,759 in 2000 and $2,822,737 in 1999 |
|
1,667,572 |
|
|
1,710,669 |
|
Goodwill and other intangibles, net of accumulated amortization
of $240,326 in 2000 and $217,616 in 1999 |
|
547,780 |
|
|
397,983 |
|
| Other noncurrent assets |
|
559,689 |
|
|
514,962 |
|
| |
|
|
|
|
|
|
| Total assets |
|
$3,996,245 |
|
|
$3,853,464 |
|
| |
|
|
|
|
|
|
|
| LIABILITIES AND SHAREHOLDERS’ EQUITY |
| Accounts payable |
|
$ 297,888 |
|
|
$ 334,389 |
|
| Accrued compensation |
|
165,632 |
|
|
175,590 |
|
| Short-term debt |
|
511,189 |
|
|
419,555 |
|
| Current and deferred income taxes |
|
41,457 |
|
|
10,894 |
|
| Other accrued liabilities |
|
294,371 |
|
|
263,035 |
|
| |
|
|
|
|
|
|
| Total current liabilities |
|
1,310,537 |
|
|
1,203,463 |
|
| |
|
|
|
|
|
|
| Long-term debt |
|
753,955 |
|
|
748,498 |
|
| Deferred income taxes |
|
251,557 |
|
|
252,884 |
|
| Other noncurrent liabilities |
|
518,554 |
|
|
510,361 |
|
| |
|
|
|
|
|
|
| Total noncurrent liabilities |
|
1,524,066 |
|
|
1,511,743 |
|
| |
|
|
|
|
|
|
| Shareholders’ equity: |
|
|
|
|
|
|
| Common stock at stated value ($1.25 par value) |
|
|
|
|
|
|
| Authorized shares: 500,000,000; Issued 140,889,050
in 2000 and 1999 |
|
308,462 |
|
|
308,462 |
|
| Retained earnings |
|
1,566,960 |
|
|
1,521,474 |
|
| Accumulated other comprehensive income |
|
(70,012 |
) |
|
(64,154 |
) |
| Unearned compensation |
|
(8,020 |
) |
|
(6,222 |
) |
| Reacquired common stock, at cost |
|
(635,748 |
) |
|
(621,302 |
) |
| |
|
|
|
|
|
|
|
Total shareholders’ equity |
|
1,161,642 |
|
|
1,138,258 |
|
| |
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity |
|
$3,996,245 |
|
|
$3,853,464 |
|
| |
|
|
|
|
|
|
See accompanying Notes to Condensed Consolidated Financial Statements.
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Six Months Ended June 30
(Thousands of dollars)
| |
|
2000
|
|
1999
|
| Cash flows provided by (used for) operating activities: |
|
|
|
|
|
|
| Net income |
|
$ 103,041 |
|
|
$ 96,467 |
|
| Loss from discontinued operations, net of tax |
|
— |
|
|
3,007 |
|
| Depreciation |
|
161,660 |
|
|
159,320 |
|
| Amortization |
|
28,301 |
|
|
22,538 |
|
| Gain on sale of assets |
|
(6,045 |
) |
|
(2,985 |
) |
| Net change in operating working capital |
|
(13,531 |
) |
|
(8,519 |
) |
| Net change in other assets and liabilities |
|
18,776 |
|
|
27,297 |
|
| Other |
|
8,605 |
|
|
(17,346 |
) |
| |
|
|
|
|
|
|
| Net Cash Provided by Operating Activities |
|
300,807 |
|
|
279,779 |
|
| |
|
|
|
|
|
|
| Cash flows provided by (used for) investing activities: |
|
|
|
|
|
|
| Capital expenditures |
|
(122,535 |
) |
|
(133,173 |
) |
| Other investments including acquisitions, net of cash acquired |
|
(211,529 |
) |
|
(155,966 |
) |
| Dispositions of assets including investments, net of cash |
|
22,289 |
|
|
— |
|
| |
|
|
|
|
|
|
| Net Cash Used for Investing Activities |
|
(311,775 |
) |
|
(289,139 |
) |
| |
|
|
|
|
|
|
| Cash flows provided by (used for) financing activities: |
|
|
|
|
|
|
| Net increase in borrowings |
|
100,565 |
|
|
291,097 |
|
| Issuances of common stock |
|
1,957 |
|
|
14,274 |
|
| Acquisition of common stock |
|
(21,878 |
) |
|
(254,520 |
) |
| Cash dividends paid |
|
(53,879 |
) |
|
(55,340 |
) |
| |
|
|
|
|
|
|
| Net Cash Provided by (Used for) Financing Activities |
|
26,765 |
|
|
(4,489 |
) |
| |
|
|
|
|
|
|
| Effect of exchange rate changes on cash and equivalents |
|
(1,407 |
) |
|
(2,003 |
) |
| Net Change in Cash and Equivalents |
|
14,390 |
|
|
(15,852 |
) |
| Cash and Equivalents at Beginning of Period |
|
41,873 |
|
|
66,226 |
|
| |
|
|
|
|
|
|
| Cash and Equivalents at End of Period |
|
$ 56,263 |
|
|
$ 50,374 |
|
| |
|
|
|
|
|
|
See accompanying Notes to Condensed Consolidated Financial Statements.
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, 1999 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 1999 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.
NOTE
2. Components of the company’s inventories at June 30, 2000, and December 31, 1999, were as follows:
| |
|
(Thousands of
Dollars)
|
| |
|
2000
|
|
1999
|
| Raw materials and manufacturing supplies |
|
$124,175 |
|
|
$125,014 |
|
| Work in process |
|
177,072 |
|
|
150,992 |
|
| Finished goods |
|
1,446 |
|
|
1,388 |
|
| Progress billings |
|
(46,544 |
) |
|
(39,901 |
) |
| LIFO reserve |
|
(46,482 |
) |
|
(43,181 |
) |
| |
|
|
|
|
|
|
| Total |
|
$209,667 |
|
|
$194,312 |
|
| |
|
|
|
|
|
|
|
| NOTE
3. The following provides supplemental cash flow information: |
|
| |
|
(Thousands of
Dollars)
|
| |
|
Six Months Ended
June 30
|
| |
|
2000
|
|
1999
|
| Interest paid |
|
$ 46,786 |
|
|
$ 37,101 |
|
| Income taxes paid |
|
$ 25,704 |
|
|
$ 22,016 |
|
NOTE
4. On November 25, 1996, a purported class action was brought against the company in federal district court in Chicago, Illinois, on behalf of all current and former African-American employees, alleging that the company racially discriminated against them
in violation of the Civil Rights Act of 1871, as amended, and the U.S. Constitution (Jones, et al. v. R.R. Donnelley & Sons Co.). 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 operations in 1993. Other general claims relate to other company locations. On August 10, 1999, the
district court judge denied the company’s motion for partial summary judgment on the basis of timeliness.
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
On December 18, 1995, a 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 (Gerlib, et al. v. R.R. Donnelley & Sons Co.). 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 August 14, 1997, the court
certified classes in both the age discrimination and ERISA claims limited to former employees of the Chicago catalog operations.
On June 30, 1998, a purported class action was filed against the company in federal district court in Chicago on behalf of
current and former African-American employees, alleging that the company racially discriminated against them in violation of Title VII of the Civil Rights Act of 1964 (Adams, et al. v. R.R. Donnelley & Sons Co.). While making many of the same general discrimination claims contained in the Jones complaint, the Adams plaintiffs are also claiming retaliation by the company for the filing of
discrimination charges or otherwise complaining of race discrimination. The complaint seeks the same relief and damages as sought in the Jones case.
Both the Jones and Gerlib cases relate primarily to the circumstances surrounding the closing of the Chicago
catalog operations. The company believes that it acted properly in the closing of the operations. Further, with regard to all three cases, the company believes it has a number of valid defenses to all of the claims made and will vigorously defend its
actions. However, management is unable to make a meaningful estimate of any loss that could result from an unfavorable outcome of any of the pending cases.
In December 1999, the U.S. Environmental Protection Agency, Region 5 (U.S. EPA) issued a Notice of Violation against the
company, pursuant to Section 113 of the Clean Air Act (the Act). The notice alleges that the company’s facility in Willard, Ohio, violated the Act and Ohio’s State Implementation Plan in installing and operating certain equipment without
appropriate air permits. While the notice does not specify the remedy sought, upon final determination of a violation, U.S. EPA may issue an administrative order requiring the installation of air pollution control equipment, assess penalties, or commence
civil or criminal action against the company. The company responded to U.S. EPA on March 10, 2000. The company does not believe that any unfavorable result of this proceeding will have a material impact on the company’s financial position or results
of operations.
In addition, the company is a party to certain litigation arising in the ordinary course of business which, in the opinion of
management, will not have a material adverse effect on the operations or financial condition of the company.
NOTE
5. The company adopted Statement of Financial Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income in 1998. This statement reports 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 was the effect of the change in unrealized foreign currency translation gains (losses)
as follows:
| |
|
(Thousands of Dollars)
|
|
(Thousands of Dollars)
|
| |
|
Three Months Ended
June 30
|
|
Six Months Ended
June 30
|
| |
|
2000
|
|
1999
|
|
2000
|
|
1999
|
| Net income |
|
$ 56,340 |
|
|
$52,487 |
|
|
$103,041 |
|
|
$96,467 |
|
| Unrealized foreign currency gain (loss) |
|
(10,829 |
) |
|
(846 |
) |
|
(5,856 |
) |
|
(8,134 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Comprehensive income |
|
$ 45,511 |
|
|
$51,641 |
|
|
$ 97,185 |
|
|
$88,333 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE
6. The company operates primarily within the commercial print portion of the printing industry, with related service offerings designed to offer customers complete solutions for communicating their messages to target audiences. Substantially all revenues
within commercial printing result from the sale of printed products and services to customers in the following end-markets: Long-Run Magazines, Catalogs and Inserts; Book Publishing Services; Financial Services; Telecommunications; Short-Run Magazines and
Catalogs (served by our Specialized Publishing Services operation); and International, which provides similar products and services outside the United States. The company’s Premedia services, which include capturing content, converting it to the
appropriate format and channeling it to multiple communications media, are included within the reportable segment “Commercial Print.”
R.R. Donnelley Logistics Services (Donnelley Logistics) represents the company’s logistics and distribution services
operation for its print customers and other mailers. Donnelley Logistics serves its customers by consolidating and delivering printed product and parcels to the U.S. Postal Service closer to the final destination, thereby resulting in reduced postage
costs and improved delivery performance. Following the company’s acquisition of certain net assets of CTC Distribution Services LLC (CTC) in February 2000, the combined operations of Donnelley Logistics and CTC have been included within the
reportable segment “Logistics Services” for the three and six months ended June 30, 2000. Prior year amounts have been restated to reflect the current year presentation. Refer to Note 9 for additional information regarding the acquisition of CTC.
In connection with the acquisition of CTC, the company has changed its presentation of reported operating results for
Donnelley Logistics. Previously, net sales of Donnelley Logistics were classified net of transportation costs. For the three and six months ended June 30, 2000, the company reported net sales for Logistics Services on a gross basis, without deducting
transportation costs. Cost of sales for Logistics Services now includes the cost of transportation. The effect of this change for the three and six months ended June 30, 1999, was to increase both net sales and cost of sales by $52.3 million and $103.9
million, respectively; there was no impact on gross profit or earnings (loss) from operations.
For the three and six months ended June 30, 2000, Logistics Services’ operating results include net sales from CTC of $86
million and $150 million, respectively.
The company has disclosed earnings (loss) from operations as the primary measure of segment earnings (loss). This is the
measure of profitability used by the company’s chief operating decision-maker that is most consistent with the presentation of profitability reported within the consolidated financial statements. The accounting policies of the business segments
reported are the same as those described in the “Summary of Significant Accounting Policies” (F-6 in the 1999 Annual Report on Form 10-K).
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Industry Segment Information
In Thousands
|
|
Commercial
Print
|
|
Logistics
Services
|
|
Other (1)
|
|
Corporate
|
|
Discontinued
Operations (2)
|
|
Consolidated
Total
|
Second Quarter Ended June 30,
2000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net sales |
|
1,226,213 |
|
157,524 |
|
|
5,068 |
|
|
— |
|
|
— |
|
1,388,805 |
| Earnings (loss) from operations |
|
111,816 |
|
(467 |
) |
|
(8,938 |
) |
|
10,236 |
|
|
— |
|
112,647 |
Earnings (loss) from continuing
operations before income taxes |
|
117,567 |
|
(500 |
) |
|
(9,998 |
) |
|
(15,460 |
) |
|
— |
|
91,609 |
|
Second Quarter Ended June 30,
1999 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net sales |
|
1,127,158 |
|
63,440 |
|
|
56,885 |
|
|
— |
|
|
— |
|
1,247,483 |
| Earnings (loss) from operations |
|
95,318 |
|
1,334 |
|
|
(876 |
) |
|
7,127 |
|
|
— |
|
102,903 |
Earnings (loss) from continuing
operations before income taxes |
|
102,834 |
|
1,334 |
|
|
(1,011 |
) |
|
(15,882 |
) |
|
— |
|
87,275 |
|
Six Months Ended June 30,
2000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net Sales |
|
2,414,888 |
|
306,774 |
|
|
10,113 |
|
|
— |
|
|
— |
|
2,731,775 |
| Earnings (loss) from operations |
|
206,288 |
|
(1,073 |
) |
|
(12,755 |
) |
|
15,328 |
|
|
— |
|
207,788 |
Earnings (loss) from continuing
operations before income taxes |
|
216,787 |
|
(1,149 |
) |
|
(13,768 |
) |
|
(34,324 |
) |
|
— |
|
167,546 |
| Assets |
|
3,008,302 |
|
228,420 |
|
|
22,420 |
|
|
737,103 |
|
|
— |
|
3,996,245 |
|
Six Months Ended June 30,
1999 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net Sales |
|
2,235,049 |
|
125,535 |
|
|
118,303 |
|
|
— |
|
|
— |
|
2,478,887 |
| Earnings (loss) from operations |
|
188,923 |
|
2,813 |
|
|
(1,180 |
) |
|
3,922 |
|
|
— |
|
194,478 |
Earnings (loss) from continuing
operations before income taxes |
|
196,450 |
|
2,813 |
|
|
(1,692 |
) |
|
(35,825 |
) |
|
— |
|
161,746 |
| Assets |
|
3,057,794 |
|
35,222 |
|
|
93,734 |
|
|
637,906 |
|
|
40,582 |
|
3,865,238 |
(1)
|
Represents other operating segments of the company, including Red Rover Digital, Inc., the company’s wholly-owned subsidiary
and formerly its Online Services division, which assists customers in the delivery of content and commerce online. 1999 also includes the results of operations and assets of Stream International (refer to “Divestitures” in Item 2).
|
(2)
|
Refer to discussion of “Discontinued Operations” in Item 2, which describes the separate presentation of the net assets
and results of operations of discontinued operations.
|
NOTE
7. The company has used corporate-owned life insurance (COLI) to fund employee benefits for several years. In 1996, the United States Health Care Reform Act was passed, eliminating the deduction for interest from loans borrowed against COLI programs. 1998
was the final year of the phase-out for deductions. The Internal Revenue Service (IRS), in its routine audit of the company, has disallowed the $34 million of tax benefit that result from the COLI interest deductions claimed by the company in its 1990 to
1992 tax returns. The company has challenged this position in a formal protest filed with the IRS Appeals division.
On October 19, 1999, in a case involving a different corporate taxpayer, the U.S. Tax Court disallowed deductions for loans
against that taxpayer’s COLI program. Litigation involving other taxpayers also is pending in other courts. Should the position of the U.S. Tax Court be upheld and applied to others, the company could lose an additional maximum of $152 million in tax
benefits for
periods from 1993 through 1998. In addition, should all or a portion of the company’s COLI deductions ultimately be disallowed, the company would be liable for interest on those amounts. The company’s maximum exposure for interest should all
prior COLI deductions be disallowed is approximately $58 million after-tax through June 30, 2000.
The company believes that its circumstances differ from those involved in the recent Tax Court decision. During the fourth
quarter of 1999, however, the company recorded an additional tax provision of $51 million ($0.40 per diluted share) related to COLI. The company will continue to examine its position with respect to the Tax Court opinion and resolution of other pending
cases. The ultimate resolution of these issues may have a material impact on the company’s results of operations and financial condition.
NOTE
8. The following summarizes share information as a basis for both the basic and diluted earnings per share computation in accordance with SFAS No. 128, Earnings per Share:
|
|
In Thousands
|
|
|
Three Months
Ended June 30,
|
|
Six Months Ended
June 30,
|
|
|
2000
|
|
1999
|
|
2000
|
|
1999
|
| Average shares outstanding—basic |
|
121,907 |
|
129,450 |
|
122,040 |
|
131,157 |
| Effect of dilutive securities |
|
1,211 |
|
1,151 |
|
980 |
|
1,475 |
| |
|
|
|
|
|
|
|
|
| Average shares outstanding—diluted |
|
123,118 |
|
130,601 |
|
123,020 |
|
132,632 |
| |
|
|
|
|
|
|
|
|
NOTE
9. On February 7, 2000, the company acquired certain net assets of CTC, the largest mailer of business-to-home parcels in the United States, for approximately $161 million, net of cash acquired. CTC, based in Minneapolis, Minn., has 18 facilities
nationwide. The acquisition has been accounted for using the purchase method of accounting. The purchase price has been allocated based upon estimated fair values at date of acquisition, pending final determination of acquired balances. Goodwill from this
transaction of approximately $150 million (based upon the preliminary purchase price allocation) is being amortized over a 20-year period.
NOTE
10. In July 2000, the Emerging Issues Task Force reached a final consensus on the classification of shipping and handling fees (Issue No. 00-10, “Accounting for Shipping and Handling Fees and Costs”). This consensus states that all
amounts billed to a customer in a sale transaction related to shipping and handling, if any, represent revenue to the vendor and should be classified as revenue. The implementation date of this standard is fourth quarter 2000. The company does not believe
that the new standard will have a material impact on the reporting of its segments.
Item 2
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Comparison of Second Quarter and First Six Months of 2000 to 1999
About the Company
R.R. Donnelley & Sons Company is a leading commercial printer, communications services and logistics company. We help our
customers communicate more efficiently and effectively as they use words and images to inform, educate, entertain and sell. In each of our businesses, we use our distinctive capabilities to manage and distribute words and images in ways that provide the
greatest value to every customer. Our common stock (NYSE: DNY) has been publicly traded since 1956. At the end of June 2000, we had approximately 34,000 employees on four continents. We offer a full range of integrated service solutions to serve our
customers’ needs from over 100 manufacturing, service and logistics locations. While we have extended our core competencies into selected international markets, 89% of our revenue is currently generated in the United States.
Printing in the United States is a large and fragmented industry that generates more than $150 billion in annual revenue. The
commercial printing portion of the industry accounts for more than $80 billion in annual revenue. The commercial printing end-markets that we currently serve generate more than $40 billion in annual revenue.
We are first or second in annual revenue in all five of our primary end-markets:
Long-Run Magazines, Catalogs and Inserts—serving the consumer and business-to-business catalog, magazine and
advertising markets;
Book Publishing Services—serving the trade, children’s, religious, professional and educational book markets;
Financial Services—serving the global communication needs of the financial markets and mutual fund companies, as
well as the banking, insurance and health care industries;
Telecommunications—serving the global directory needs of telecommunications providers; and
Specialized Publishing Services—serving the needs of publishers of short-run magazines and catalogs.
We believe print is a vital component of the communications process and expect the print market to grow due to its unique
capabilities, such as portability and high-quality graphics that cannot be duplicated by other communications methods. In addition, we see opportunities to create and expand complementary businesses that leverage our core competencies and help our
customers succeed. Our intent is to differentiate ourselves based on our service offerings. Our related services, designed to offer our customers complete solutions for communicating their messages to target audiences regardless of the means of
distribution, include:
Premedia—capturing content, converting it to the appropriate format and channeling it to multiple communications
media, including print and the Internet;
Logistics Services—more efficiently delivering parcels and printed products through a nationwide network and the
U.S. Postal Service, as well as expedited delivery capabilities, saving significant amounts of time and money; and
Red Rover Digital, Inc.—helping customers effectively leverage the Internet and their established brands by
delivering content and commerce online.
Our objective is to create above-average shareholder value through our strategies to:
|
·
|
transform our core printing businesses through process variability reduction and continuous improvement;
|
|
·
|
speed growth in our service-oriented businesses; and
|
|
·
|
logically extend into complementary businesses which leverage our customer relationships and capabilities.
|
The new business opportunities that we pursue will leverage our established strengths and will further our goal of managing
and distributing words and images to help our customers succeed in informing, educating, entertaining and selling.
Our established strengths include:
|
·
|
long-standing customer relationships;
|
|
·
|
a strong brand and reputation for quality, service and reliability;
|
|
·
|
standing as a trusted, neutral partner;
|
|
·
|
expertise in content management;
|
|
·
|
scale to deliver economical solutions for our customers;
|
|
·
|
technology to seamlessly help our customers deliver their messages through various communications channels; and
|
|
·
|
diversified portfolio of businesses and platforms to meet the most demanding customer needs.
|
In addition to our U.S. operations, we operate in Mexico, South America, Europe and China. For reporting purposes, revenues
from our facilities in China and England serving primarily the directory market are reported within Telecommunications. One of our facilities in Mexico serves the book market and is reported within Book Publishing Services. Revenue from our other two
facilities in Mexico that serve primarily the magazine market, as well as revenues from our facilities in Poland and South America, which serve more than one market, are included in International. The “Other” classification within Commercial
Print includes net sales from Premedia and RRD Direct, which supplies direct mail products and services.
While our operations and sales offices are located throughout the United States and selected international markets, the
supporting technologies and knowledge base are common. Our manufacturing plants have a range of production capabilities to serve our customers and end-markets, and as a result, most produce work for customers in more than one of our end-markets.
Net Sales by End-Market
Second Quarter Ended June 30
(Thousands of Dollars)
|
|
2000
|
|
% of Total
|
|
1999
|
|
% of Total
|
| Long-Run Magazines, Catalogs and Inserts |
|
$ 423,722 |
|
|
30.5% |
|
$ 409,262 |
|
|
32.8% |
| Telecommunications |
|
192,598 |
|
|
13.9% |
|
192,909 |
|
|
15.5% |
| Book Publishing Services |
|
195,523 |
|
|
14.1% |
|
177,307 |
|
|
14.2% |
| Financial Services |
|
206,803 |
|
|
14.9% |
|
173,479 |
|
|
13.9% |
| International |
|
75,235 |
|
|
5.4% |
|
61,240 |
|
|
4.9% |
| Specialized Publishing Services |
|
65,474 |
|
|
4.7% |
|
47,941 |
|
|
3.8% |
| Other |
|
66,858 |
|
|
4.8% |
|
65,020 |
|
|
5.2% |
| |
|
|
|
|
|
|
|
|
|
|
| Total Commercial Print |
|
1,226,213 |
|
|
88.3% |
|
1,127,158 |
|
|
90.3% |
| Logistics Services |
|
157,524 |
|
|
11.3% |
|
63,440 |
|
|
5.1% |
| Other |
|
5,068 |
|
|
0.4% |
|
56,885 |
|
|
4.6% |
| |
|
|
|
|
|
|
|
|
|
|
| Total Net Sales |
|
$1,388,805 |
|
|
100.0% |
|
$1,247,483 |
|
|
100.0% |
| |
|
|
|
|
|
|
|
|
|
|
| Cost of materials |
|
(441,596 |
) |
|
|
|
(417,049 |
) |
|
|
| Cost of transportation |
|
(125,032 |
) |
|
|
|
(49,883 |
) |
|
|
| |
|
|
|
|
|
|
|
|
|
|
| Total Value-Added Revenue |
|
$ 822,177 |
|
|
|
|
$ 780,551 |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30
(Thousands of Dollars)
|
|
2000
|
|
% of Total
|
|
1999
|
|
% of Total
|
| Long-Run Magazines, Catalogs and Inserts |
|
$ 874,731 |
|
|
32.0% |
|
$ 852,156 |
|
|
34.4% |
| Telecommunications |
|
402,718 |
|
|
14.7% |
|
400,497 |
|
|
16.2% |
| Book Publishing Services |
|
377,555 |
|
|
13.8% |
|
347,327 |
|
|
14.0% |
| Financial Services |
|
342,912 |
|
|
12.6% |
|
304,733 |
|
|
12.3% |
| International |
|
157,470 |
|
|
5.8% |
|
120,579 |
|
|
4.9% |
| Specialized Publishing Services |
|
128,461 |
|
|
4.7% |
|
94,645 |
|
|
3.8% |
| Other |
|
131,041 |
|
|
4.8% |
|
115,112 |
|
|
4.6% |
| |
|
|
|
|
|
|
|
|
|
|
| Total Commercial Print |
|
2,414,888 |
|
|
88.4% |
|
2,235,049 |
|
|
90.2% |
| Logistics Services |
|
306,774 |
|
|
11.2% |
|
125,535 |
|
|
5.1% |
| Other |
|
10,113 |
|
|
0.4% |
|
118,303 |
|
|
4.7% |
| |
|
|
|
|
|
|
|
|
|
|
| Total Net Sales |
|
$2,731,775 |
|
|
100.0% |
|
$2,478,887 |
|
|
100.0% |
| |
|
|
|
|
|
|
|
|
|
|
| Cost of materials |
|
(904,980 |
) |
|
|
|
(846,063 |
) |
|
|
| Cost of transportation |
|
(247,110 |
) |
|
|
|
(98,882 |
) |
|
|
| |
|
|
|
|
|
|
|
|
|
|
| Total Value-Added Revenue |
|
$1,579,685 |
|
|
|
|
$1,533,942 |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
Consolidated Results of Operations
For the second quarter, net income from continuing operations was $56 million in 2000, or $0.46 per diluted share, compared
with $54 million in 1999, or $0.41 per diluted share. The 12% increase over 1999 in earnings per diluted share from continuing operations for the second quarter reflected lower average shares outstanding, as well as an increase in earnings from
operations. Earnings per diluted share from continuing operations of $0.41 in the second quarter of 1999 included a $0.01 favorable impact from Stream International (Stream); refer to “Divestitures.”
Earnings from operations rose $10 million, or 9%, to $113 million in the second quarter of 2000 from the same period a year
ago. This increase was driven primarily by the strength of our Long-Run Magazines, Catalogs and Inserts and Book Publishing Services operations, as well as lower administrative expenses related to Year 2000, partially offset by additional systems
investments and growth-related expenditures. Second quarter 2000 also saw a rebound in Financial Services’ domestic capital markets after a slower first quarter. For comparative purposes, earnings from operations were up 11% in the second quarter of
2000, excluding the impact of Stream in 1999.
For the first half of the year, net income from continuing operations was $103 million in 2000, or $0.84 per diluted share,
compared with net income from continuing operations of $99 million in 1999, or $0.75 per diluted share. The 12% increase over 1999 in earnings per diluted share from continuing operations for the first half reflected lower average shares outstanding, as
well as an increase in earnings from operations. Earnings per diluted share from continuing operations of $0.75 in the first half of 1999 included a $0.01 favorable impact from Stream. The effective tax rate throughout the first half of both years was 38.5%
.
Earnings from operations rose $13 million, or 7%, to $208 million in the first half of 2000 from the same period a year ago.
This first half increase was also driven primarily by the strength of our Long-Run Magazines, Catalogs and Inserts and Book Publishing Services operations, as well as lower administrative expenses related to Year 2000, despite additional systems
investments and growth-related expenditures. For comparative purposes, earnings from operations were up 9% in the first half of 2000, excluding the impact of Stream in 1999.
Consolidated earnings per diluted share in 1999 of $0.40 for the second quarter and $0.73 for the first half included a loss
from discontinued operations of $0.01 and $0.02, respectively (refer to “Discontinued Operations”).
Consolidated Net Sales and Value-Added Revenue
Net sales, which includes materials such as paper and ink, increased $141 million in the second quarter of 2000, or 11%, from
a year ago. Second quarter net sales for the Commercial Print segment were up 9% from a year ago. The level of net sales, particularly for our Long-Run Magazine, Catalogs and Inserts operations is impacted by the amount of pass-through material sales and
paper prices. Second quarter net sales for Long-Run Magazine, Catalogs and Inserts increased 4% from the prior year, which reflected increased volume in the retail and magazine markets, and higher paper prices, offset in part by a lower volume of
pass-through material sales. Paper prices for the second quarter of 2000 for major grades of paper used within the Long-Run Magazine, Catalogs and Inserts operations were up approximately 6% from a year ago. Second quarter net sales for Telecommunications
were essentially flat compared with the prior year, as an increase in domestic and international directory volumes was offset by a reduction in non-directory volumes. Book Publishing Services’ second quarter net sales increased 10%, primarily
reflecting higher volumes within the educational market and improved price/mix due to an increase in hardcover books. Financial Services’ second quarter net sales, a record high, were up 19% from a year ago primarily due to volume increases in both
the international and domestic capital markets, as well as in investor communications.
Net sales increased $253 million in the first half of 2000, or 10% from a year ago. Year-to-date net sales for the Commercial
Print segment were up 8% from a year ago. Year-to-date net sales for Long-Run Magazine, Catalogs and Inserts increased 3% from the prior year, which reflected volume increases across all major markets and higher paper prices, offset in part by a lower
volume of pass-through material sales. Paper prices for the first half of 2000 for major grades of paper employed within the Long-Run Magazine, Catalogs and Inserts market were up approximately 3% from a year ago. Net sales for the first half of 2000 for
Telecommunications were essentially flat compared with the prior year, as an increase in domestic and international directory volumes was offset by a reduction in non-directory volumes. Book Publishing Services’ year-to-date net sales increased 9%,
driven by higher volumes within the consumer and educational markets. Financial Services’ year-to-date net sales were up 13% from a year ago, primarily due to the second quarter volume increases noted above. Financial Services’ domestic net
sales were negatively impacted by a slowdown in capital markets activity late in 1999 due to Year 2000 concerns, which affected early first quarter billings, and greater overall market volatility. Domestic capital market billings rebounded by March 2000.
Second quarter and year-to-date net sales for the Logistics Services segment more than doubled from a year ago, primarily due
to the acquisition of CTC on February 7, 2000 (refer to Note 9). CTC has contributed approximately $86 million and $150 million, respectively, in net sales for the three and six months ended June 30, 2000. As discussed in Note 6, net sales in 1999 for
Donnelley Logistics have been restated to reflect sales on a gross basis, before deducting transportation costs.
For comparative purposes, second quarter and year-to-date net sales in 1999 included approximately $54 million and $112
million, respectively, of sales from Stream, which we divested in the fourth quarter of 1999 (refer to “Divestitures”).
The price of paper can be volatile. In periods of rising prices, our net sales and cost of materials increase; in periods of
falling prices, our net sales and material costs decline. For some customers, we purchase paper and pass through this cost at a margin that is lower than print and other related-services; other customers furnish their own paper. Customer-furnished paper
is not included in our financial results. With respect to Logistics Services, transportation costs are passed through to our customers and therefore are included in our net sales. Value-added revenue represents net sales, less the cost of materials
(principally paper and ink) and less the cost of transportation related to Logistics Services. Value-added revenue eliminates the effects of material prices and transportation costs that are largely beyond our control.
For the second quarter of 2000, value-added revenue increased 5% from a year ago; excluding Stream in 1999, value-added
revenue increased 13% from a year ago. Of this 13% increase, 5% was due to acquisitions.
For the first half of 2000, value-added revenue increased 3% from a year ago; excluding Stream in 1999, value-added revenue
increased 11% from a year ago. Of this 11% increase, 5% was due to acquisitions.
Consolidated Expenses
Gross profit for the second quarter of 2000 rose by 4% to $270 million, compared with $259 million a year ago. Gross profit as
a percentage of net sales fell to 19.4% from 20.8% a year ago. The Logistics Services segment, which reflects lower gross margins than Commercial Print, represented a higher proportion of consolidated net sales in the second quarter of 2000 (11% versus 5%
a year ago for both the quarter and year-to-date). This decrease in gross margin was partially offset by our core commercial print operations (Long-Run Magazines, Catalogs and Inserts as well as Book Publishing Services) as we continued to realize
productivity improvements as a result of our emphasis on Process Variability Reduction and Six Sigma application and training.
Cost of materials is impacted by the price of scrap (by-product) paper that we sell. Income from the sale of by-products is
recorded as a reduction in our cost of materials. For the second quarter of 2000, we recognized a reduction in our cost of materials of $17 million from the sale of by-products, which more than doubled from the second quarter a year ago, primarily as a
result of higher by-products prices.
Gross profit for the first half of 2000 rose by 2% to $511 million, compared with $502 million a year ago. Gross profit as a
percentage of net sales fell to 18.7% from 20.3% a year ago primarily due to the expansion of our lower margin Logistics Services segment. This decrease in gross profit was partially offset by margin improvements in our core commercial print operations
due to productivity improvements and higher by-products pricing. The sale of by-products reduced our cost of materials by $33 million in the first half of 2000, up $18 million from the first half a year ago.
Selling and administrative expenses for the second quarter of 2000 were $157 million, essentially flat compared with the prior
year. This represented 11.3% of net sales compared with 12.5% a year ago. The elimination of Stream expenses ($15 million) and lower Year 2000-related expenses ($9 million) was offset by recent acquisitions ($8 million), higher investment in information
systems infrastructure ($6 million) and increased spending to expand into complementary businesses ($7 million).
Selling and administrative expenses for the first half of 2000 fell by 2%, or $5 million, to $303 million, which represented
11.1% of net sales compared with 12.4% a year ago. The decline in the first half of the year was primarily a result of the elimination of Stream expenses ($30 million) and lower Year 2000-related expenses ($19 million). This was partially offset by recent
acquisitions ($17 million), higher investment in information systems infrastructure ($9 million) and increased spending to expand into complementary businesses ($10 million).
Summary of Expense Trends
| Second Quarter Ended June 30 |
|
|
|
|
|
% Increase |
(Thousands of Dollars)
|
|
2000
|
|
1999
|
|
(Decrease)
|
| Cost of materials |
|
$441,596 |
|
$417,049 |
|
5.9% |
| Cost of transportation |
|
125,032 |
|
49,883 |
|
150.7% |
| Cost of manufacturing |
|
457,473 |
|
431,005 |
|
6.1% |
| Depreciation |
|
81,151 |
|
79,992 |
|
1.4% |
| Amortization |
|
13,923 |
|
10,304 |
|
35.1% |
| Selling and administrative |
|
156,983 |
|
156,346 |
|
0.4% |
| Net interest expense |
|
24,960 |
|
23,726 |
|
5.2% |
| Six Months Ended June 30 |
|
|
|
|
|
% Increase |
(Thousands of Dollars)
|
|
2000
|
|
1999
|
|
(Decrease)
|
| Cost of materials |
|
$904,980 |
|
$846,063 |
|
7.0% |
|
| Cost of transportation |
|
247,110 |
|
98,882 |
|
149.9% |
|
| Cost of manufacturing |
|
879,071 |
|
849,898 |
|
3.4% |
|
| Depreciation |
|
161,660 |
|
159,320 |
|
1.5% |
|
| Amortization |
|
28,301 |
|
22,538 |
|
25.6% |
|
| Selling and administrative |
|
302,865 |
|
307,707 |
|
(1.6% |
) |
| Net interest expense |
|
47,101 |
|
43,621 |
|
8.0% |
|
Nonoperating Items
Interest expense for the second quarter of 2000 was approximately $25 million, up $1.2 million from a year ago due to higher
debt levels to fund acquisitions and working capital and higher commercial paper interest rates.
Other income, net, for the second quarter of 2000 was $3.9 million, down $4.2 million from the same quarter a year ago,
primarily due to foreign currency translation losses and lower earnings from equity-based investments.
Interest expense for the first half of 2000 was approximately $47 million, up $3.5 million from a year ago. This increase was
due to higher debt levels to fund acquisitions and working capital and higher commercial paper interest rates.
Other income, net, for the first half of 2000 was $6.9 million, down $4.0 million from last year primarily due to foreign
currency translation losses.
Discontinued Operations
For the three and six months ended June 30, 1999, we recorded a pretax loss from discontinued operations of $2 million ($1.2
million after-tax) and $5 million ($3 million after-tax), respectively, related to our remaining 86% investment in Corporate Software & Technology (CS&T), a software distribution business. Our ownership interest in CS&T resulted from the
restructuring of our 80%-owned investment in Stream International Holdings, Inc. (SIH) in December 1997. In addition to CS&T, SIH held investments in Stream, which provided outsource technical support services, and Modus Media International (MMI), a
manufacturing and fulfillment business (refer to “Divestitures”). As of December 1997, we had converted our equity and debt positions in CS&T to 86% of the common stock of CS&T.
In November 1999, we sold our entire interest in CS&T to the management of CS&T for cash proceeds of approximately $41
million. We did not recognize any gain or loss from the sale in 1999.
Divestitures
At the time our ownership interest in SIH was restructured in December 1997, we converted our debt and equity positions in
Stream into 87% of the common stock of that business and sold our equity and debt positions in MMI for nonvoting preferred stock of MMI.
In November 1999, we sold 93% of our investment in the common stock of Stream to a group led by Bain Capital for approximately
$96 million in cash. We recognized a pretax gain of $40 million and a tax benefit of $35 million (total of $75 million after-tax) from this transaction. The tax benefit in 1999 was recognized because of our ability to carry back the capital tax losses
generated from the sale of Stream to years 1996 through 1998. We now have a 6% investment in Stream, representing the remaining 7% of our original 87% interest, that has been reflected in other noncurrent assets as of June
30, 2000 and December 31, 1999. For reporting purposes, Stream was consolidated in our financial results until November 1999.
For comparison purposes, our 87% ownership interest in Stream for the three and six months ended June 30, 1999 represented
approximately $54 million and $112 million, respectively, in net sales/value-added revenue; $17 million and $34 million, respectively, in gross profit; and $2 million and $3 million, respectively, in income from operations. The impact on net income for
the three and six months ended June 30, 1999 from Stream was approximately $1 million and $2 million, respectively, or $0.01 per diluted share.
In October 1999, we sold our remaining investment in nonvoting preferred stock of MMI for approximately $60 million ($47
million in cash and a $13 million promissory note due no later than October 2002). The promissory note is interest-bearing at 9.5% per annum, payable quarterly. We recognized both a pretax and after-tax gain of $3 million from this transaction.
As a result of these divestitures and the sale of CS&T (refer to “Discontinued Operations”), we generated
approximately $77 million in refundable income taxes from the carryback of tax losses, expected to be received in 2000.
In June 2000, we sold our interest in RRD India and its wholly-owned subsidiary, Tata Donnelley Ltd., to Tata Sons Limited for
approximately $12.5 million in cash; there was no gain or loss recognized from this transaction.
Changes in Financial Condition
Liquidity and Capital Resources
Net cash provided by operating activities in the first half of 2000 totaled $301 million, up $21 million from the prior year.
Capital expenditures in the first half of 2000 totaled $123 million compared with $133 million a year ago. Spending was
directed principally to investments in productivity and international expansion. Full-year 2000 capital spending is expected to range from $300 million to $350 million in support of selected opportunities, including expansion of our Poland operations, a
new directory plant in Flaxby, England, as well as investments to standardize and upgrade systems company-wide.
In February 2000, we purchased CTC, which approximately doubled the size of our Logistics Services business and expanded our
distribution capabilities (refer to Note 9). During the first half of 2000, we also acquired Dallas-based Omega Studios, known for producing high-quality digital photography, turnkey creative concept, layout design and desktop publishing services; the
Florida financial printer EVACO; and the Seattle-based premedia provider Iridio, Inc. In addition, we invested in Noosh, Inc., a business-to-business Internet-based service designed to improve the process of buying, selling and managing print.
In March 1999, we purchased the financial printing unit of Cadmus Communications. The purchase included the assets and
operations of five service centers in Baltimore, Charlotte, Raleigh, Richmond and New York, as well as a print-on-demand and fulfillment facility in Charlotte and selected software products. In April 1999, we purchased the net assets of the Communicolor
division of the Standard Register Company. In May 1999, we purchased the net assets of the Brazilian book printer Hamburg Gráfica Editora.
Net cash provided by borrowings during the first half of 2000 decreased $191 million over the same period from a year ago due
to a debenture issuance of $200 million in April 1999 to finance acquisitions and our share repurchase programs. At June 30, 2000, we had an unused
revolving credit facility of $425 million with a number of banks. This credit facility provides support for the issuance of commercial paper and other credit needs.
Year 2000 and System Infrastructure
Process control and information systems are increasingly important to the effective management of the company. The upgrade and
standardization of our systems is necessary for us to succeed in using information technology to our strategic advantage. In 1999, we focused our efforts on ensuring that processes and systems were Year 2000 compliant. In addition, we began ongoing
initiatives to upgrade and standardize our information technology infrastructure. In 1999, we deferred a number of other infrastructure and systems initiatives that would support continuous productivity improvements and enhance service capabilities, while
we completed our Year 2000 efforts.
During the transition from 1999 to 2000, all operations were fully supported by trained personnel. Key efforts were focused on
four business-critical factors: safety of employees, continuity of production, environmental compliance and reporting, and continuity of systems to support the ability of personnel to continue working (such as the availability of utilities or operation of
payroll systems). At the end of the transition, no Year 2000 issues affecting any business-critical factors were reported by any operation. To the extent that date-related issues were reported, they were limited to instances where personnel available at
the site were able to promptly correct the issue without disruption to our operations.
For the three and six months ended June 30, 2000, spending on our Year 2000 initiative was $1.3 million and $3.7 million,
respectively, of which $0.4 million and $1.4 million, respectively, was reflected in administrative expense and the remainder in cost of sales. We spent $15.5 million and $31.1 million, respectively, on Year 2000 costs for the three and six months ended
June 30, 1999, of which $9.3 million and $20.5 million, respectively, was reflected in administrative expense and the remainder in cost of sales. These expenses do not include costs capitalized with respect to our information and technology infrastructure
upgrade and standardization initiatives. As internal resources completed their Year 2000 assignments, they were reallocated to technology projects that had been deferred, as well as to other productivity projects. These projects are expected to improve
our ability to share information across the company, make informed decisions rapidly and enhance future productivity.
Other Information
Share Repurchase—In September 1999, the board of directors authorized a share repurchase program for up to $300
million of the company’s common stock in privately negotiated or open-market transactions. The program includes shares purchased for issuance under various stock option plans. During the first half of 2000, we slowed our share repurchase activity to
allow for a broad review of our investment opportunities, and purchased approximately 0.9 million shares, at an average price of $23.75. This program extends through September 2000.
Technology—We remain a technology leader, investing in print-related technologies such as computer-to-plate and
digital printing, in Internet-based business models such as Red Rover Digital, and in Internet-enabled services such as SENDD™ and ImageMerchant™ (see page 19 for a description of these services). We are focused on investing in technologies that
contribute to our financial performance and help us deliver products, services and solutions that are valued by our customers.
During 1999 and the first half of 2000, we received recognition for our technology leadership from both eWeek (formerly
PC Week) and Information Week. Among all U.S. companies, we were named:
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#6 of the top 100 in Enterprise Solutions (PC Week, September 13, 1999)
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#19 of the top 100 Innovators in E-Business Networking (eWeek, May 8, 2000)
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#25 of the top 100 in Internet Technology (PC Week, May 11, 1999)
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#36 of the top 100 in Desktop and Mobile Technology (PC Week, June 21, 1999)
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#66 of the top 500 e-business leaders (PC Week, November 15, 1999)
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#88 of the top 500 leading IT innovators (Information Week, September 27, 1999)
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Red Rover Digital, SENDD, ImageMerchant, Digital Print and E-Books—During the second quarter of 2000, we launched
Red Rover Digital, Inc. (Red Rover), a wholly-owned subsidiary formerly our Online Services division. Red Rover is a leading Internet professional services firm that delivers a full spectrum of integrated solutions to enhance its clients’ business,
brands and customer relationships. Red Rover provides digital communications and commerce solutions to merchants and publishers, helping them maximize content to foster enduring, profitable customer relationships. Content is more than text. It is the
words, images, product information, sound and video that capture and convey our customers brand to the market place.
Red Rover has helped numerous merchants and publishers enhance business and relationships with their customers. From strategic
positioning, through site development and production, to the continuous support of e-business, Red Rover’s comprehensive services are a potent tool for growing successful online brands.
To meet our Financial Services customers’ needs for speed, convenience, confidentiality and accuracy, we developed SENDD.
The software allows work groups around the world to simultaneously proof a document securely via the Internet. Financial Services is also working closely with the Securities and Exchange Commission (SEC) on the modernization efforts under way for EDGAR
(Electronic Data Gathering and Retrieval). We currently provide EDGAR electronic filing services for our customers, enabling them to communicate with their target audiences while meeting tight time frames and stringent filing requirements. We will
continue to develop our offerings and educate our clients as the SEC enhances EDGAR in the future.
In our premedia production process, increased digitization allows us to capture customer content and distribute it via various
communication media, including print and the Internet. We have developed technology that allows a customer to securely archive its digital content in an R.R. Donnelley database and access it via the Internet so that it can be repurposed for multiple uses.
This ImageMerchant software allows customers to more effectively manage their media assets. Customer benefits include lower costs, faster production times and consistent quality because images are repurposed rather than recreated. Analysis tools further
enhance the value of ImageMerchant.
Additionally, we are a leading provider of digital print, which allows customized marketing to an audience of one. With
digital printing, images can be varied as they are printed, allowing for each piece to be highly personalized.
Book Publishing Services also applies technology to create solutions that enable our customers to manage and distribute
content in multiple media formats. We currently convert content for many major e-book vendors.
Litigation—In 1996, a purported class action was brought against us in federal district court in Chicago,
Illinois, on behalf of all current and former African-American employees, alleging that we racially discriminated against them in violation of the Civil Rights Act of 1871, as amended, and the U.S. Constitution (Jones, et al. v. R.R. Donnelley & Sons Co.). 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 of our Chicago catalog operations in 1993. Other
general claims relate to other company locations. In August 1999, the district court judge denied our motion for partial summary judgment on the basis of timeliness.
In 1995, a purported class action was filed against us 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 (Gerlib, et al. v. R.R. Donnelley & Sons Co.). The suit also alleges that we violated the Employee Retirement Income Security Act (ERISA) in determining benefits payable to retiring or terminated employees. In August 1997, the court certified
classes in both the age discrimination and ERISA claims limited to former employees of the Chicago catalog operations.
In 1998, a purported class action was filed against us in federal district court in Chicago on behalf of current and former
African-American employees, alleging that the company racially discriminated against them in violation of Title VII of the Civil Rights Act of 1964 (Adams, et al. v. R.R. Donnelley & Sons Co.). While making many of the same general discrimination claims contained in the 1996 case, the plaintiffs in this case also claim retaliation by the company for the filing of discrimination charges or
otherwise complaining of race discrimination. The complaint seeks the same relief and damages as sought in the 1996 case.
The 1996 and 1995 cases relate primarily to the circumstances surrounding the closing of the Chicago catalog
operations. We believe we acted properly in the closing of the operations. We also believe we have a number of valid defenses to all of the claims made and will vigorously defend our actions. However, because the cases are in the early stages, we cannot
make a meaningful estimate of any loss that could result from an unfavorable outcome of any of the pending cases.
In December 1999, the U.S. Environmental Protection Agency, Region 5 (U.S. EPA) issued a Notice of Violation against us,
pursuant to section 113 of the Clean Air Act (the Act). The notice alleges that our facility in Willard, Ohio, violated the Act and Ohio’s State Implementation Plan in installing and operating certain equipment without appropriate air permits. While
the notice does not specify the remedy sought, upon final determination of a violation, U.S. EPA may issue an administrative order requiring the installation of air pollution control equipment, assess penalties, or commence civil or criminal action
against us. We responded to U.S. EPA on March 10, 2000. We do not believe that any unfavorable result of this proceeding will have a material impact on our financial position or results of operations.
In addition, we are a party to certain litigation arising in the ordinary course of business which, in the opinion of
management, will not have a material adverse effect on the operations or financial condition of the company.
Environmental Regulations—Our business is subject to various laws and regulations relating to employee health and
safety and to environmental protection. Our policy is to comply with all laws and regulations that govern protection of the environment and employee health and safety. We do not anticipate that compliance will have a material adverse effect on our
competitive or consolidated financial positions.
Outlook—Our primary business remains commercial printing and our primary geographic market is the United States.
The environment remains highly competitive in most of our product categories and geographic regions. Competition is based largely on price, quality and servicing the special needs of customers. Industry analysts believe that there is overcapacity in most
commercial printing markets. Therefore, competition is intense. Our intent is to differentiate our service offering so that we are viewed by our customers as a partner who can help them more effectively use words and images in a variety of ways, whether
through print or the Internet, to reach their target audiences.
We are a large user of paper, bought by us or supplied to us by our customers. The cost and supply of certain paper grades
used in the manufacturing process will continue to affect our financial results.
However, management currently does not see any disruptive conditions affecting prices and supply of paper in 2000.
Postal costs are a significant component of our customers’ cost structures. Changes in postal rates, which are
anticipated early in 2001, may negatively affect the demand for our core print capabilities, but the proposed postal rate increases will enhance the value of Logistics Services to our customers, as we are able to improve the cost efficiency of mail
processing and distribution.
In addition to paper and postage costs, consumer confidence and economic growth are key drivers of print demand. A significant
change in the economic outlook could affect demand for our products, particularly in the financial printing market.
In the longer term, technological changes, including the electronic distribution of information, present both risks and
opportunities for the company. Many of our new business initiatives are designed to leverage our distinctive capabilities to participate in the rapid growth in electronic communications. Our goal remains to manage and distribute words and images,
regardless of the means of distribution, to help our customers succeed in informing, educating, entertaining and selling. We believe that with our competitive strengths, including our comprehensive service offerings, technology leadership, depth of
management experience, customer relationships and economies of scale, we can develop the most valuable solutions for our customers, which should result in increased shareholder value.
Item 3
Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk from changes in interest rates and foreign exchange rates. However, we generally maintain more
than half of our debt at fixed rates (approximately 58% at June 30, 2000), and our exposure to short-term interest rate fluctuations is not material to the consolidated financial statements as a whole. Our exposure to adverse changes in foreign exchange
rates also is immaterial to our consolidated financial statements as a whole, and we occasionally use financial instruments to hedge exposures to foreign exchange rate changes. We do not use financial instruments for trading purposes and are 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 our 1999 Annual Report on Form 10-K.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
On each of November 25, 1996, and June 30, 1998, purported class actions were 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 class action was brought against the company alleging age discrimination in connection with the 1993
closing of the company’s Chicago 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 5. Other Information
Certain statements in this filing, including the discussions of management expectations for 2000, 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 1999 Annual Report on Form 10-K for a description of such factors.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
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Ratio of Earnings to Fixed Charges |
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Financial Data Schedule |
(b) No current report on Form 8-K was filed during the second quarter of 2000.
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.
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R.R. DONNELLEY
& SONS
COMPANY
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/S
/ VIRGINIA
L. SEGGERMAN
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Chief Accounting Officer)
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August 14, 2000
Date
