I don’t like to clutter Reprographics 101 with too many articles about companies who are not in the reprographics industry, but I found this article – about R.R. Donnelly & Sons Company (NYSE: RRD), one of the largest offset printing companies in the world – to be quite interesting.
This article was written by an “investor-type” person; the article is directed at RRD from an “investment” perspective (to, or not to). What prompted the author to write the article was the plunge in RRD’s stock price – stock price was $14.41 on January 14th, and, today, RRD is right around $11.49. That’s a pretty serious plunge. The author does not think there will be a rebound in RRD’s stock price, at least in the near term. In his article, he "looks under the hood."
The reason why I decided to share this information with my Reprographics 101 blog-visitors: the author makes some interesting comments, which, I think, are somewhat related to what’s been happening in the “reprographics business and industry.”
In today’s post, I’m going to share just some of the stuff that Michael Terry wrote, but, at the end of the post, I’ve provided a link to the full article. (There are lots of interesting graphics, charts and tables in the full article.)
Okay, here we go…..
An Open Book: Inside R.R. Donnelley's Capital Structure
by: Michael Terry / January 25, 2012 | from www.seekingalpha.com
Company Description:
R.R. Donnelley & Sons Company provides premedia, printing, logistics and business process outsourcing products and services to leading clients in virtually every private and public sector. Donnelley conducts operations through two reportable segments, U.S. Print and Related Services (74% of 9Mo 2011 Sales) and the International segment (26% of 9Mo 2011 Sales).
Summary:
R.R. Donnelley is the largest player in a declining industry. The company is attempting to transition the business into the digital age while expanding their traditional business to meet the needs of their customer base (and prospective customers). I view Donnelley as a levered company with pressure on every one of their business lines - pressure which will only increase going forward. With that said, the company currently generates a decent amount of cash flow (north of $600MM TTM) and free cash flow (north of $400MM TTM) which it has used for capital expenditures, acquiring businesses and doing share repurchases. The company has also been opportunistic about issuing debt (in June of 2011 they issued $600MM in notes and used the proceeds to buy back some of their outstanding debt). Ultimately, if the company were viewed in isolation, it would resemble a mature company. Unfortunately, the industry is in a secular state of decline, which is different than being a mature industry.
Industry Background:
The printing industry is a fragmented and mature industry undergoing a transformational change ad the digital age has been thrust upon it. The company stated industry challenges very well in their last 10Q, which I will summarize here:
The print and related services industry, in general, continues to have excess capacity and remains highly competitive. Despite some consolidation in recent years, the printing industry remains highly fragmented. Across the company's range of products and services, competition is based primarily on price, in addition to quality and the ability to service the special needs of customers.
Technological changes, including the electronic distribution of documents and data, online distribution and hosting of media content, advances in digital printing, print-on-demand and Internet technologies, continue to impact the market for the company's products and services.
As a substitute for print, the impact of digital technologies has been felt mainly in directories, forms and statement printing, as electronic communication and transaction technology has eliminated or reduced the role of many traditional paper forms. Electronic substitution has continued to accelerate in directory printing in part driven by environmental concerns and cost pressures at key customers. In addition, rapid growth in the adoption of e-books is having an increasing impact on consumer print book volume, though only a limited impact on educational and specialty books.
In other words, the company is operating in an industry undergoing significant change and is currently price based - which means very little ability to raise prices. Taking out costs can only achieve so much.
(Extracted from commentary later on in the article):
Rather than replace existing equipment as it depreciates, the company has acquired new/bolt-on businesses (more information regarding acquisition activity can be found in the company's 10Q cited earlier). As is obvious from the company's acquisitions over the last two years, RRD recognizes the changing landscape of the printing industry and is in the midst of diversifying their business and transitioning to the "digital age". This, when done properly is shareholder friendly in the near and longer term while it is negative to the debt portion of the capital structure as it is typically cash and debt financed.
Conclusion:
In conclusion, an investment in the company is an investment in an industry in decline. While the company is the largest player in the space, I do not see a catalyst to drive prices higher. If choosing my spot within the capital structure, I would be buying into shorter maturity debt.
If you want to read the full article that Michael Terry wrote, you can access that article at this link:
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