Is R.R. Donnelley's Ink Fading?

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Printing major R.R. Donnelley (NYS: RRD) recently posted lower-than-expected second-quarter earnings, affected by one-time expenses, low volumes and high pricing pressure. The company's shares saw a steep fall of 11% on the day the results were announced. Let's take a look at what's going on.

The numbers
Net income for the quarter plunged to a mere $12.2 million from $88.8 million a year ago. The revenue increased by 9% to $2.6 billion, mainly due to the acquisition of marketing communications provider Bowne and in part because of favorable foreign currency rates. However, excluding the impact of the acquisition, revenues were flat from a year ago.

It's important to point out that the company incurred several one-time expenses such as restructuring and impairment charges and acquisitions expenses worth $76.6 million in 2011. Excluding the impact of these items, net income stood at $105.6 million, compared with $99.5 million last year.

Gross margins remained flat at 24.5%, hurt by pricing pressures and low volumes. One-time charges pulled the operating margin down to 4.4% from 7.3%. Moreover, higher pension and other benefits-related expenditure after the Bowne acquisition sent selling, general and administrative expenses higher.

The U.S. business of the company, which accounts for over 70% of the revenues, saw growth of 6.2%, with net sales at $1.9 billion. However, barring the impact of the acquisition, net sales of the segment declined by 2.6%. This puts a big question mark on the company's performance.

Added woes
R.R. Donnelley ended the quarter with cash and cash equivalents of $363 million, compared to $399.3 million in the previous quarter. Additionally, long-term debt increased to $3.43 billion as compared to $3.24 billion a year ago. A company in a struggling environment with an unhealthy balance sheet seems dangerous to me.

R.R. Donnelley has major customers such as AT&T (NYS: T) and Verizon (NYS: VZ) . However, demand trends are working against R.R. Donnelley, as customers no longer want similar printing services and are overtly cost-conscious. The company must be efficient enough to incorporate the changing trend or be ready to lose out. R.R. Donnelley plans to address these issues in the second half of the year. Thus, the company has to work hard on its fundamentals, orders, and credibility.

The Foolish bottom line
Lacking pricing power and suffering from low volumes, R.R. Donnelley could shape up to be one more company that gets blown away in a bad economy. Although new and old contracts may add to its sales, it is likely that the company will struggle to fight these challenging fundamentals.

At the time this article was published Navjot Kaur does not own any shares in the companies mentioned above.Motley Fool newsletter serviceshave recommended buying shares of AT&T. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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