RRD Reports Second Quarter 2021 Results

NET SALES GROWTH OF 13% NEAR TOP END OF PREVIOUS GUIDANCE

INCOME FROM OPERATIONS IMPROVEMENT EXCEEDED PREVIOUS OUTLOOK; EPS ALSO UP SIGNIFICANTLY OVER PRIOR YEAR

TOTAL DEBT DOWN $494 MILLION FROM A YEAR AGO

COMPANY ISSUES IMPROVED FULL YEAR OUTLOOK

R.R. Donnelley & Sons Company (NYSE:RRD) ("RRD" or the "Company") today reported financial results for the second quarter of 2021.

Q2 Key messages

• GAAP net sales, including the impact of foreign exchange, increased 13.5%; Non-GAAP organic net sales increased 11.4%; largely driven by strengthening demand for most of the Company's products and continued recovery from the global impact of COVID-19
• GAAP and Non-GAAP income from operations up from prior year results; both benefitted from higher sales volumes and continued cost reductions, partially offset by higher variable incentive compensation expense, approximately $9 million of unfavorable foreign exchange and the prior year Census project
• GAAP operating margin improved 440 bps while Non-GAAP improved by 150 bps, driven by leverage on increased sales volumes and aggressive cost-out actions
• GAAP loss per share from continuing operations of $0.13 and Non-GAAP adjusted earnings per share from continuing operations of $0.07, both improved significantly from prior year
• Cash used in operating activities during the six months ended June 30, 2021 was $65 million compared to $44 million in the prior year period; current year amount includes $24 million of payments to settle LSC bankruptcy-related claims
• Gross leverage ratio of 3.8x improved 0.9x from June 30, 2020; net leverage ratio of 3.3x improved 0.6x from the same period

"RRD delivered strong second quarter performance as we continue to successfully execute our strategic initiatives while protecting the health and safety of our global colleagues," said Dan Knotts, RRD President and Chief Executive Officer. "Our double-digit organic sales growth, driven by an improving market and increased volumes in our strategic product categories, marked our fourth consecutive quarter of improving sales trends. Through our ongoing actions to strengthen our core and enhance our financial flexibility, we reported Q2 adjusted income from operations that surpassed our pre-pandemic earnings in 2019 and our debt was at the lowest second quarter level since the spin. Looking forward, we remain highly focused on driving sales growth and aggressively managing our cost structure to combat the ongoing challenges created by the global pandemic, inflation and supply chain disruptions."

Financial highlights

The following table provides an overview of RRD's financial performance:

Net sales in the second quarter were $1.15 billion, up $136.0 million or 13.5% from the same period in 2020. Second quarter net sales benefitted $21.7 million due to changes in foreign exchange rates. The increase also includes higher volume reflecting strengthening demand for most of the Company's products and services. Notably, higher demand for e-commerce sales have contributed to four consecutive quarters of net sales growth in the Company's Packaging and Labels products. Net sales also grew in the quarter due to continued recovery from the COVID-19 pandemic.

Organic net sales increased 11.4%. The Business Services segment was up 14.3% on a GAAP basis and 11.6% on a non-GAAP organic basis while the Marketing Solutions segment was up 10.3% both on a GAAP and non-GAAP organic basis from the second quarter of 2020. The Business Services segment experienced growth in several of our strategic focus areas including Packaging, Labels and Supply Chain Management. Net sales in Marketing Solutions also experienced growth, led by higher volumes in Digital Print and Fulfillment and Direct Marketing, partially offset by last year's Census project, which was completed in mid-2020.

Income from operations was $28.2 million in the second quarter of 2021 compared to loss from operations of $19.0 million in the second quarter of 2020. The second quarter of 2021 included net restructuring, impairment and other charges of $9.7 million, a decrease of $18.7 million from the prior year period primarily due to lower consulting and employee termination costs.

Non-GAAP adjusted income from operations of $41.0 million increased $20.1 million from the prior year period. The increase was primarily due to the impact of higher net sales and ongoing cost control initiatives. This was partially offset by higher variable incentive compensation primarily due to an increase in the Company's stock price, unfavorable foreign exchange of approximately $9 million, which was mostly associated with operations in China, and the impact of last year's Census project.

Loss per share from continuing operations attributable to common stockholders was $0.13 in the second quarter of 2021 compared to loss per share of $0.79 reported in the second quarter of 2020. The 2021 results benefitted from higher income from operations, including lower restructuring, impairment and other charges and lower income taxes, slightly offset by higher interest expense, which included $9.2 million to terminate interest rate swap agreements associated with the portion of term loans repaid in the quarter and a loss on debt extinguishment of $6.2 million.

Non-GAAP adjusted earnings per share from continuing operations attributable to common stockholders of $0.07 in the second quarter of 2021 increased from a loss per share of $0.10 in the second quarter of 2020 primarily due to higher adjusted income from operations and lower adjusted interest expense, partially offset by unfavorable income taxes. The 2021 effective tax rate was negatively impacted by an increase in a foreign statutory income tax rate while the prior year effective tax rate benefitted from the CARES Act.

Other highlights and information

Cash used in operating activities during the six months ended June 30, 2021 was $64.8 million compared to $44.2 million in the prior year period. The increase in cash used from operations during 2021 is primarily driven by $23.9 million of LSC bankruptcy-related payments mostly associated with lump sum settlements for employee retirement obligations, higher tax and incentive compensation payments and a $9.2 million payment to terminate certain interest rate swap agreements. These factors were partially offset by lower restructuring and interest payments.

Capital expenditures in the six months ended June 30, 2021 were $29.9 million compared to $38.1 million in the prior year period.

As of June 30, 2021, cash on hand was $237.2 million, down $51.6 million from December 31, 2020. Total debt outstanding at the end of the quarter was $1.54 billion, up $38.8 million from December 31, 2020 and down $494 million from June 30, 2020. Availability under the credit facility was $462 million at June 30, 2021.

During 2020, the Company completed the sale of its DLS Worldwide, International Logistics and Courier Logistics businesses. The Company has reflected the Logistics businesses as discontinued operations, and the financial results of these businesses have been excluded from continuing operations and segment results for all periods presented unless otherwise noted.

Outlook

While client demand for our products and services continues to strengthen, ongoing challenges including labor shortages, supply chain disruption, inflationary increases and shipping delays caused by container shortages in key ports including China, remain. These issues, combined with the ongoing uncertainty related to the COVID-19 pandemic, create added challenges when predicting future business performance. Against that backdrop, the Company is providing the following improved guidance for the year.

• Net sales for the year are now expected to be up 1% to 3% taking into consideration reductions from the Census project and one-time pandemic related projects in the last half of 2020, offset by further economic recovery as the year progresses.
• The Company has significantly improved its expectation for non-GAAP adjusted income from operations and now expects it to be approximately flat to the prior year after including the negative impact of foreign exchange. At current exchange rates, foreign exchange is now expected to be $28 million unfavorable for the year. This outlook also assumes the Company continues to overcome the impact from future inflation, labor shortages and supply chain disruptions while continuing to benefit from aggressive cost-reduction actions. Previously, the Company had expected its full year non-GAAP adjusted income from operations to be flat to up slightly versus the prior year excluding the unpredictable impact from changes in foreign exchange.
• Depreciation expense is expected to be approximately $135 million for the year.
• Non-GAAP interest expense is expected to be approximately $120 million excluding the second quarter GAAP only charge of $9.2 million associated with terminating certain interest rate swap agreements in connection with the April, 2021 term loan prepayment. The approximately $15 million reduction is expected to include benefits from prior repurchases and repayment of higher interest rate debt along with lower average borrowings and a lower average interest rate in 2021 as compared to 2020.
• The full year Non-GAAP effective tax rate is expected to be approximately 38% which is higher than reported in 2020 as non-recurring benefits from the CARES Act were reflected in the prior year.
• Operating cash flow is expected to be slightly lower than the prior year reflecting a reduction due to payments to settle LSC bankruptcy-related obligations and repayment of half of the employer portion of payroll taxes deferred in 2020. Capital expenditures are expected to be approximately $80 million. As part of our agreement to sell the printing facility in China, the Company expects to collect one additional deposit of approximately $50 million later in 2021. The Company also expects to continue generating proceeds from monetizing other assets including proceeds from selling additional facilities.

Conference call

RRD will host a conference call to discuss its second quarter results on Wednesday, August 4, 2021 at 11:00 a.m. Eastern Time (10:00 a.m. Central Time). Participants must register in advance in order to either join the webcast or request the dial-in information to join by telephone. Registration links for both the webcast and the telephone options are available on the Events & Presentations page of the Investor Relations website. For those unable to join live, a replay of the webcast will be available until October 31, 2021 under the Past Events section of the Investor Relations website.

A slide presentation will be available on the Investors section of the RRD web site at www.rrd.com or by clicking through this link.

About RRD

RRD is a leading global provider of multichannel business communications services and marketing solutions. With 30,000 clients and 33,000 employees across 28 countries, RRD offers the industry's most comprehensive offering of solutions designed to help companies—from Main Street to Wall Street—optimize customer engagement and streamline business operations across the complete customer journey. RRD offers a comprehensive portfolio of capabilities, experience and scale that enables organizations around the world to create, manage, deliver, and optimize their marketing and business communications strategies.

For more information, visit the Company's web site at www.rrd.com.

Use of non-GAAP information

This news release contains non-GAAP financial measures, including non-GAAP SG&A, non-GAAP income from operations, non-GAAP Adjusted EBITDA, non-GAAP interest expense, non-GAAP effective tax rate, non-GAAP net earnings (loss) attributable to common stockholders, non-GAAP diluted earnings (loss) per share, non-GAAP organic net sales and gross and net leverage ratios. The Company believes that these non-GAAP measures, when presented in conjunction with comparable GAAP measures, provide useful information about its operating results and enhance the overall ability to assess the Company's financial performance. These measures should be considered in addition to, and not as a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP. RRD uses these non-GAAP measures, together with other measures of performance under GAAP, to compare the relative performance of operations in planning, budgeting and reviewing the performance of its business. Additional information relating to the adjustments for the non-GAAP SG&A, non-GAAP income from operations, non-GAAP Adjusted EBITDA, non-GAAP effective tax rate, non-GAAP net earnings (loss) attributable to common stockholders, non-GAAP diluted earnings (loss) per share, non-GAAP organic net sales and gross and net leverage ratios for RRD is set forth in the attached schedules.

Use of forward-looking statements

This news release includes certain "forward-looking statements" within the meaning of, and subject to the safe harbor created by, Section 21E of the Securities Exchange Act of 1934, as amended, with respect to the business, strategy and plans of the Company and its expectations relating to future financial condition and performance. Statements that are not historical facts, including statements about RRD's management's beliefs and expectations, are forward-looking statements. Words such as "believes," "anticipates," "estimates," "expects," "intends," "aims," "potential," "will," "would," "could," "considered," "likely," "estimate" and variations of these words and similar future or conditional expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. While RRD believes these expectations, assumptions, estimates and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks and uncertainties, many of which are beyond RRD's control. By their nature, forward-looking statements involve risk and uncertainty because they relate to events and depend upon future circumstances that may or may not occur. Actual results may differ materially from RRD's current expectations depending upon a number of factors affecting the business and risks associated with the performance of the business. These factors include such risks and uncertainties detailed in RRD's periodic public filings with the SEC, including but not limited to those discussed under the "Risk Factors" section in RRD's Form 10-K for the fiscal year ended December 31, 2020 and Form 10-Q for the quarter ended March 31, 2021, and other filings with the SEC and in other investor communications of RRD from time to time. RRD does not undertake to and specifically disclaims any obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect future events or circumstances after the date of such statement or to reflect the occurrence of anticipated or unanticipated events.