By Pat Veverica of Raine Consulting November 11, 2003 -- R.R. Donnelley & Sons (NYSE: RRD) today announced third quarter net sales of $2 billion and a net earnings from continued operations of $114.4M. This compares to net sales of $1.1 billion with net earnings of $57.9 million for the same period last year. On a non-GAAP basis, net earnings from continuing operations totaled $113.9 million or $0.51 per diluted share in the third quarter of 2004 compared to $53.6 million or $0.47 per diluted share in the third quarter of 2003. Raine’s Radar: In recent news, Quebecor World filed suit against R.R. Donnelley and three former Quebecor World employees, seeking an injunction prohibiting Donnelley and the former Quebecor employees from using or disclosing Quebecor’s trade secrets and other relief.In commenting in the Q&A session, regarding the lawsuit filed by this “segment competitor,” Donnelley CEO Angelson stated that the Company has concluded that it is without merit and will vigorously defend against it. Topics of this summary Overall Results Segment Results Guidance Q & A Overall Results Net sales in the quarter were $2.0 billion, up 87% from the same quarter in 2003, primarily as a result of the acquisition of Moore Wallace and increased volume in the financial print business and the Publishing and Retail Services segment. Gross margin improved to 29.0% from 27.8% in last year’s third quarter, primarily due to the benefits achieved from restructuring and cost reduction actions and incremental procurement savings. Selling, general and administrative expenses, as a percentage of net sales, increased from 12.0% in the third quarter of 2003 to 13.5% in the third quarter of 2004, primarily as a result of increased costs for employee incentives, post retirement benefits, Sarbanes-Oxley Act compliance and litigation. Operating margin in the third quarter of 2004 increased to 9.4% from 9.2% in last year’s third quarter, despite increased restructuring, integration and impairment charges in the third quarter of 2004. Excluding restructuring, integration and impairment charges in the third quarter of both years, non-GAAP operating margin for the third quarter of 2004 was 10.5% compared to 9.4% for the third quarter last year, primarily as a result of increased volume and the benefit of cost reduction actions. (Reconciliations of operating income and margin to non-GAAP operating income and margin are presented in the press release on the Donnelley web site.) Listing significant sales and contract wins in many of their segments, of note were wins in the Direct Mail space, including clients such as H&R Block, Bank of America Fleet, Xerox, Talk America and Time Inc. Angelson pointed to these wins as evidence that Donnelley is not a commodity printer, but is seen as a partner who increases returns on the packages they mail for clients. Financial delivered an outstanding quarter, with double-digit increase in revenues and doubled EBIT. Angelson is pleased and proud of the speed and accuracy of the integration of Moore Wallace since the acquisition was completed earlier this year. Segment Results During the third quarter, as a result of the pending sale of the company’s package logistics business and the shutdown of MLI, management revised its reportable segments to eliminate the previously reported Logistics segment and to aggregate the remaining logistics operations (primarily print logistics) with the company’s Publishing and Retail Services segment, resulting in four reportable segments, 1) Publishing and Retail Services, 2) Integrated Print Communications and Global Solutions, 3) Forms and Labels and 4) Corporate. The Publishing and Retail Services segment includes 1) Magazine, Catalog and Retail, 2) Directories, 3) Logistics and 4) Premedia. Net sales for the Publishing and Retail Services segment increased 7.5% to $695.9 million due to the acquired Moore Wallace logistics business and volume increases in the magazine, catalog and retail and logistics businesses. Increased advertising pages and the impact of new assignments offset pricing pressure. Operating margin increased by approximately 10 basis points to 14.6% in the third quarter of 2004 from the third quarter of 2003. Restructuring and impairment charges increased to $1.7 million in the third quarter of 2004 from a $0.5 million impairment charge in the third quarter of 2003. The Integrated Print Communications and Global Solutions segment includes 1) Book, 2) Direct Mail, 3) Financial Print, 4) Business Communications Services, 5) Short-Run Commercial Print, 6) Europe and 7) Asia. Net sales for the Integrated Print Communications and Global Solutions segment more than doubled to $795.9 million from the third quarter of 2003, primarily as a result of the acquisition of Moore Wallace ($379.7 million) as well as increased sales in financial print and international markets. The book business, driven by strengthening sales to the education market, also posted positive sales growth. Operating margin, which was negatively impacted by restructuring, integration and impairment charges of $5.7 million in the third quarter of 2004 and restructuring and impairment charges of $0.7 million in the third quarter of 2003, increased approximately 400 basis points to 14.1% in the third quarter of 2004. Excluding restructuring, impairment and integration charges, operating margin increased to 14.8% in the third quarter of 2004 from 10.3% in the third quarter of 2003, primarily as a result of increased sales volume and the benefit of cost reduction actions. The Forms and Labels segment includes 1) Forms, 2) Labels 3) Latin America and 4) Peak. Net sales for the Forms and Labels segment increased to $476.7 million in the third quarter of 2004 from $32.4 million in the third quarter of 2003, primarily as a result of the acquisition of Moore Wallace. The Forms and Labels segment continued to be the company’s most price competitive business, as excess capacity in the industry has led to aggressive discounting. Operating margin increased to 7.6% from a loss in the prior year’s third quarter. Excluding restructuring, integration and impairment charges, which were $10.2 million in the third quarter of 2004 and $0 in the third quarter of 2003, operating margin increased to 9.8% in the third quarter of 2004 from a loss in the third quarter of 2003 due to the acquisition of Moore Wallace and improved performance in Latin America. Corporate operating expenses increased by $35.2 million from the third quarter of 2003 to $64.3 million in the third quarter of 2004. The increase is primarily attributable to the acquisition of Moore Wallace and the associated amortization of intangibles, additional restructuring, integration and impairment charges of $3.8 million and increased costs for employee incentives, Sarbanes-Oxley Act compliance and litigation. Excluding restructuring and integration charges, corporate costs in the third quarter of 2004 sequentially decreased by $7.8 million from the second quarter of 2004, reflecting the benefit of cost reduction actions. Nine-Month Results The company reported net earnings from continuing operations of $114.4 million or $0.57 Guidance Donnelley did not offer revised fourth quarter guidance stating that they are “dealing with lots of moving parts.” They did note, however, that some or all of the excess of Q3 actual results vs. previous guidance for the quarter will flow into Q4, and cautioned that the package logistics business recently sold accounted for $.02 per share, which should be factored in to any calculations. Q & A FTE employee headcount at the end of Q3 was approximately 46,000, down by 780 since Q2. YTD, the Company has taken out a total of 2950 people. Price pressure remains about what it was 3 months ago, it is intense in all segments, but is particularly so in the forms and labels business. This business is in a decline, due to excess capacity in the marketplace. The accrual for the $15M settlement in the Jones lawsuit has been fully accrued by Q3. $12M of this amount was accrued in previous quarters. Regarding acquisitions, the Company stated that nothing has changed; they intend to make acquisitions for several businesses in several geographic locations, but “nothing needle-moving at this time.” Paper prices on average were up about 7% in Q3; for the year it was estimated that paper was up about 10% or so. It was noted that paper prices have stepped up again for Q4, quite significantly. Regarding the Company’s outsourcing business: It is growing for variety of reasons. The Company will announce today that they are today taking the Financial Print business unit and dividing it. The CCS business and the BCS businesses will be combined into one unit going forward. The Capital Markets business will be managed on a standalone basis separate from its’ CCS counterpart. Establishing more of a link between the forms/labels business and commercial products, and putting it under one leadership will assist in the selling process with customers. It was expected that now sales reps will be allowed to truly sell across all platforms.