R.R. Donnelley eyes lower leverage, cuts debt by $222 million in 2012

By Lisa Kerner

Charlotte, N.C., Feb. 26 - R.R. Donnelley & Sons Co. ended the fourth quarter with improved free cash flow of $476.5 million, compared to $417.4 million for the prior-year period, said chief financial officer Daniel Leib during the company's earnings call on Tuesday.

Full-year free cash flow of $486 million exceeded prior guidance by $36 million, according to Leib.

"Total debt as of December 31, 2012 was $3.4 billion," said Leib, adding that during 2012, R.R. Donnelley paid down $222 million in debt.

"As of December 31, 2012, we had no borrowings outstanding under our new $1.15 billion secured revolving credit agreement."

Net available liquidity at year-end was $1.5 billion, more than a $200 million improvement over the quarter ended Sept. 30.

"Our term debt is 80% fixed at an average interest rate of approximately 7.5%, and our next scheduled term debt maturity of $258 million is due April 2014," Leib said on the call.

Driving cash flow

Chief executive officer Thomas J. Quinlan, III commented on two measures of the company's performance-free cash flow and operating income.

"We have said before that one of the pillars of our strategy is to drive free cash flow and margin through aggressive cost compression," Quinlan said.

"Our fourth-quarter free cash flow came in better than expected, reflecting improved underlying business performance and our aggressive work in capital and cost management."

Quinlan attributed the enhanced business performance to revenue and market trends.

R.R. Donnelley generated $747.5 million of non-GAAP operating income for the year, a 5% improvement over 2011.

"Additionally, our non-GAAP operating margin of 7.3% improved 60 basis points from 2011," said Quinlan.

Reducing leverage

In May 2011, the company revised its targeted gross leverage to between 2.5 times and 3 times and came in at 3.2 times for that period.

"Since then, through strong free cash flow generation and debt repayment, we have delivered, reducing debt by almost $640 million and ending 2012 at 2.8 times."

Long term, R.R. Donnelley's goal is to reduce its targeted gross leverage to the range of 2.25 times to 2.75 times, from the previous range of 2.5 times to 3.0 times.

Encouraged by results so far in 2013, Quinlan expects 2013 full-year free cash flow to be in the range of $400 million to $500 million.

Financial highlights

The Chicago-based integrated communication solutions provider ended the fourth quarter 2012 with revenue of $2.7 billion, a 2.2% decline from the fourth quarter of 2011. For the full-year 2012, R.R. Donnelley's revenue fell 3.7% to $10.2 billion.

The company had a fourth-quarter net loss of $849 million, or $4.70 per diluted shares, on net sales of $2.7 billion compared to a net loss of $326.7 million, or $1.78 per diluted share, on net sales of $2.7 billion in the fourth quarter of 2011.

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