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 March 31, 2004
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 incorporation or organization) |
(I.R.S. Employer Identification No.) | |
| 77 West Wacker Drive, Chicago, Illinois |
60601 | |
| (Address of principal executive offices) | (Zip code) | |
(312) 326-8000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Sections 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 such filing requirements for the past 90 days.
| Yes ü | No |
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
| Yes ü | No |
As of April 30, 2004, 242,958,358 shares of common stock were outstanding.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004
TABLE OF CONTENTS
| PART I | ||||
| FINANCIAL INFORMATION | ||||
| Item 1: |
||||
| Page | ||||
| Consolidated Balance Sheets as of March 31, 2004 (unaudited) and December 31, 2003 |
3 | |||
| Unaudited Consolidated Statements of Operations for the three months ended March 31, 2004 and 2003 |
4 | |||
| Unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 2004 and 2003 |
5 | |||
| 6 | ||||
| Item 2: |
Management’s Discussion and Analysis of Financial Condition and Results of Operation |
20 | ||
| Item 3: |
33 | |||
| Item 4: |
33 | |||
| PART II | ||||
| OTHER INFORMATION | ||||
| Item 1: |
34 | |||
| Item 2: |
34 | |||
| Item 4: |
34 | |||
| Item 6: |
35 | |||
| 39 | ||||
2
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of U.S. dollars, except share data)
| ASSETS | ||||||||
| MARCH 31, 2004 |
DECEMBER 31, 2003 |
|||||||
| (UNAUDITED) | ||||||||
| Current Assets |
||||||||
| Cash and cash equivalents |
$ | 174,258 | $ | 60,837 | ||||
| Receivables, less allowance for doubtful accounts of $32,055 (2003—$26,830) |
1,256,760 | 738,516 | ||||||
| Inventories |
455,588 | 154,288 | ||||||
| Prepaid expenses and other current assets |
60,685 | 23,351 | ||||||
| Deferred income taxes |
195,649 | 56,432 | ||||||
| Total Current Assets |
2,142,940 | 1,033,424 | ||||||
| Property, plant and equipment—net |
1,981,608 | 1,297,434 | ||||||
| Prepaid pension cost |
460,881 | 314,366 | ||||||
| Goodwill |
2,585,634 | 317,472 | ||||||
| Other intangible assets—net |
680,446 | 6,909 | ||||||
| Other assets |
372,959 | 253,258 | ||||||
| Total Assets |
$ | 8,224,468 | $ | 3,222,863 | ||||
| LIABILITIES | ||||||||
| Current Liabilities |
||||||||
| Accounts payable |
$ | 508,199 | $ | 303,959 | ||||
| Accrued liabilities |
815,261 | 427,485 | ||||||
| Short-term debt |
41,198 | 175,873 | ||||||
| Income taxes |
— | 6,805 | ||||||
| Deferred income taxes |
— | 3,374 | ||||||
| Total Current Liabilities |
1,364,658 | 917,496 | ||||||
| Long-term debt |
1,756,750 | 752,497 | ||||||
| Postretirement benefits |
329,578 | 12,031 | ||||||
| Deferred income taxes |
546,641 | 234,046 | ||||||
| Other liabilities |
539,264 | 323,641 | ||||||
| Total Liabilities |
$ | 4,536,891 | $ | 2,239,711 | ||||
| SHAREHOLDERS’ EQUITY |
||||||||
| Preferred stock, $1.00 par value |
— | — | ||||||
| Common stock, $1.25 par value |
303,698 | 176,111 | ||||||
| Additional paid-in capital |
2,831,305 | 132,351 | ||||||
| Retained earnings |
1,458,107 | 1,641,706 | ||||||
| Accumulated other comprehensive loss |
(132,145 | ) | (123,684 | ) | ||||
| Unearned compensation |
(47,444 | ) | (2,937 | ) | ||||
| Treasury stock, at cost, 25,716,124 shares in 2004 (2003—27,214,677 shares) |
(725,944 | ) | (840,395 | ) | ||||
| Total Shareholders’ Equity |
3,687,577 | 983,152 | ||||||
| Total Liabilities and Shareholders’ Equity |
$ | 8,224,468 | $ | 3,222,863 | ||||
(See notes to the consolidated financial statements)
3
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31, 2004 and 2003
(In thousands of U.S. dollars, except share and per share data)
(UNAUDITED)
| Three Months Ended March 31, |
||||||||
| 2004 |
2003 |
|||||||
| Net sales |
$ | 1,446,195 | $ | 1,073,817 | ||||
| Cost of sales |
1,173,699 | 841,026 | ||||||
| Selling, general and administrative expenses |
208,957 | 135,417 | ||||||
| Restructuring and impairment charges—net |
50,141 | 2,609 | ||||||
| Depreciation and amortization |
80,905 | 68,447 | ||||||
| Total operating expenses |
1,513,702 | 1,047,499 | ||||||
| Income (loss) from operations |
(67,507 | ) | 26,318 | |||||
| Interest expense—net |
16,964 | 12,399 | ||||||
| Investment and other income (expense)—net |
10,598 | (4,533 | ) | |||||
| Earnings (loss) before income taxes, minority interest and cumulative effect of change in accounting principle |
(73,873 | ) | 9,386 | |||||
| Income tax (benefit) expense |
(22,001 | ) | 3,571 | |||||
| Minority interest |
396 | 113 | ||||||
| Net earnings (loss) before cumulative effect of change in accounting principle |
(52,268 | ) | 5,702 | |||||
| Cumulative effect of change in accounting principle, net of tax (Note 15) |
(6,578 | ) | — | |||||
| Net earnings (loss) |
$ | (58,846 | ) | $ | 5,702 | |||
| Earnings per share (Note 11): |
||||||||
| Basic: |
||||||||
| Net earnings (loss) before cumulative effect of change in accounting principle |
$ | (0.35 | ) | $ | 0.05 | |||
| Cumulative effect of change in accounting principle |
(0.04 | ) | — | |||||
| Net earnings (loss) |
$ | (0.39 | ) | $ | 0.05 | |||
| Diluted: |
||||||||
| Net earnings (loss) before cumulative effect of change in accounting principle |
$ | (0.35 | ) | $ | 0.05 | |||
| Cumulative effect of change in accounting principle |
(0.04 | ) | — | |||||
| Net earnings (loss) |
$ | (0.39 | ) | $ | 0.05 | |||
| Weighted average number of common shares outstanding: |
||||||||
| Basic |
151,278 | 113,101 | ||||||
| Diluted |
151,278 | 113,696 | ||||||
(See notes to the consolidated financial statements)
4
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 2004 and 2003
(In thousands of U.S. dollars)
(UNAUDITED)
| Three Months Ended March 31, |
||||||||
| 2004 |
2003 |
|||||||
| OPERATING ACTIVITIES |
||||||||
| Net earnings (loss) |
$ | (58,846 | ) | $ | 5,702 | |||
| Adjustments to reconcile net earnings (loss) to cash provided by operating activities: |
||||||||
| Cumulative effect of change in accounting principle |
6,578 | — | ||||||
| Depreciation and amortization |
80,905 | 68,447 | ||||||
| Impairment charges |
27,780 | (76 | ) | |||||
| Gain on sale of investment and other assets—net |
(17,789 | ) | (1,943 | ) | ||||
| Fair market value adjustment for inventory and backlog |
66,943 | — | ||||||
| Restructuring charges—net |
22,345 | 2,685 | ||||||
| Deferred taxes |
(22,652 | ) | 1,146 | |||||
| Changes in operating assets and liabilities—net of acquisitions: |
||||||||
| Accounts receivable—net |
130,306 | 34,307 | ||||||
| Inventories |
(44,800 | ) | (31,303 | ) | ||||
| Prepaid expenses |
439 | 19,150 | ||||||
| Accounts payable |
(72,633 | ) | (16,513 | ) | ||||
| Accrued liabilities and other |
24,460 | (13,166 | ) | |||||
| Net cash provided by operating activities |
143,036 | 68,436 | ||||||
| INVESTING ACTIVITIES |
||||||||
| Capital expenditures |
(26,827 | ) | (50,022 | ) | ||||
| Acquisition of businesses—net of cash acquired |
68,366 | (17,000 | ) | |||||
| Proceeds from sale of investment and other assets |
38,721 | 3,096 | ||||||
| Net cash provided by (used in) investing activities |
80,260 | (63,926 | ) | |||||
| FINANCING ACTIVITIES |
||||||||
| Net change in short-term debt |
(142,242 | ) | 113,280 | |||||
| Proceeds from issuance of long-term debt |
1,032,053 | 566 | ||||||
| Payments on long-term debt |
(985,754 | ) | (110,110 | ) | ||||
| Dividends paid |
(29,793 | ) | (28,326 | ) | ||||
| Other |
14,999 | 203 | ||||||
| Net cash used in financing activities |
(110,737 | ) | (24,387 | ) | ||||
| Effect of exchange rate on cash and cash equivalents |
862 | (183 | ) | |||||
| Net increase (decrease) in cash and cash equivalents |
113,421 | (20,060 | ) | |||||
| Cash and cash equivalents at beginning of period |
60,837 | 60,543 | ||||||
| Cash and cash equivalents at end of period |
$ | 174,258 | $ | 40,483 | ||||
| Supplemental non-cash disclosure: |
||||||||
| Issuance of 102.1 million shares of RR Donnelley common stock for acquisition of business |
$ | 2,804,865 | $ | — | ||||
(See notes to the consolidated financial statements)
5
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Tabular amounts in thousands of U.S. dollars, except share and per share data)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated interim financial statements include the accounts of R.R. Donnelley & Sons Company and its subsidiaries (the “Company” or “RR Donnelley”) and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in accordance with the rules and regulations of the United States Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. These consolidated interim financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods. These consolidated interim financial statements should be read in conjunction with the consolidated financial statements and the related notes thereto included in both the Company’s and Moore Wallace Incorporated’s (“Moore Wallace”) latest Annual Reports on Form 10-K filed on February 23, 2004 and March 1, 2004, respectively. Operating results for the three months ended March 31, 2004 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2004. All significant intercompany transactions have been eliminated in consolidation. Certain prior year amounts have been reclassified to conform to the current presentation.
These consolidated interim financial statements of the Company have been prepared in conformity with GAAP, and include estimates and assumptions of management that affect the amounts reported in the consolidated financial statements. Actual results could differ from these estimates.
On February 27, 2004, the Company acquired all of the outstanding shares of Moore Wallace (the “Combination”), a leading provider of printed products and print management services (see Note 2). The Company’s results of operations for the three months ended March 31, 2004 include the results of Moore Wallace from February 27, 2004 (the “Combination Date”). The allocation of the purchase price is preliminary and subject to change based upon the determination and receipt of additional information, including the finalization of the fair values of intangible assets and fixed assets acquired and the measurement of certain liabilities assumed in connection with the Combination.
2. COMBINATION
On February 27, 2004, the Company acquired all of the outstanding shares of Moore Wallace in exchange for consideration of 0.63 shares of the Company’s common stock for each outstanding common share of Moore Wallace. Management believes the Combination will enhance the Company’