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RR Donnelley Reports Q2 Results: $12.5M Net Loss

Thursday, August 05, 2004

Press release from the issuing company

CHICAGO, Aug. 4 -- R.R. Donnelley & Sons Company today reported second quarter 2004 net sales of $2.0 billion and a net loss of $12.5 million or $0.06 per share, compared with net earnings for the second quarter of 2003 of $19.3 million or $0.17 per diluted share. The second quarter 2004 results include restructuring, impairment and integration charges of $133.6 million, comprised of a non-cash impairment charge of $89.1 million ($53.6 million net of tax) related to the pending disposition of our package logistics business and $44.5 million of restructuring ($41.8 million), impairment ($0.1 million) and integration ($2.6 million) charges primarily related to the ongoing integration efforts following our February 27, 2004 acquisition of Moore Wallace. The second quarter of 2003 included restructuring and impairment charges of $5.3 million. The company believes that certain non-GAAP measures, when presented in conjunction with comparable GAAP measures, are useful because that information is an appropriate measure for evaluating the company's operating performance. Internally, the company uses this non-GAAP information as an indicator of business performance, and evaluates management's effectiveness with specific reference to this indicator. These measures should be considered in addition to, not a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP. Non-GAAP net earnings for the second quarter of 2004 totaled $68.6 million, or $0.31 per diluted share. Non-GAAP net earnings for this period excluded restructuring, impairment and integration charges. The company used an effective tax rate of 38.3% in calculating non-GAAP net earnings. A reconciliation of GAAP net earnings to non-GAAP net earnings for these adjustments is presented in the attached tables. "I am pleased with our progress in the second quarter, particularly with the integration of our acquisition of Moore Wallace, acquisition-related and other cost savings achievements, the near 7% top-line growth in the Publishing and Retail Services segment and the recent CIGNA cross-platform win," said Mark A. Angelson, RR Donnelley's Chief Executive Officer. "We are benefiting from a strengthening economy, but we are also demonstrating that our platform can be leveraged to deliver superior products and services while offering cost savings to our clients. "Our recent announcement of our agreement to sell the package logistics business is an important step for us. The sale will allow us to exit a non-core business that has required considerable management time in the past, and the continued ownership of which would be inconsistent with our strategic and financial goals. At the same time, we retain control over the distribution of our printed material." Angelson added, "While much work lies ahead, this quarter's results continue to demonstrate the commitment and performance of RR Donnelley's employees and the vast potential of the new RR Donnelley platform." Business Review RR Donnelley's acquisition of Moore Wallace was completed on February 27, 2004. The reported financials for the company, therefore, do not include the results of Moore Wallace in 2003 and approximately the first two months of 2004. Following are the results for the company and each reportable segment. Summary Net sales in the quarter were $2.0 billion, up 78% from the same quarter in 2003, primarily as a result of the acquisition of Moore Wallace. Gross margin improved to 25.3% from 22.3% in last year's second quarter, primarily due to the benefits achieved from restructuring and cost reduction actions. Selling, general and administrative expenses, as a percentage of net sales, increased from 11.5% in the second quarter of 2003 to 13.3% in the second quarter of 2004, primarily as a result of increased employee incentive costs and increased postretirement, insurance and litigation provisions. Increased restructuring, impairment and integration charges in the second quarter of 2004 relative to the second quarter of 2003 negatively impacted operating margin. Operating margin for the quarter was 0.3%, compared to 4.3% for last year's second quarter. Excluding restructuring, impairment and integration charges in the second quarter of both years, non-GAAP operating margin for the second quarter of 2004 was 6.9% compared to 4.7% for the second quarter last year, primarily as a result of increased volume in our Publishing and Retail Services segment and the benefits of cost reduction actions. Reconciliations of operating income and margin to non-GAAP operating income and margin are presented in the attached tables. Segments During the second quarter, the company realigned its segments and now reports its results, for all periods presented, in five reportable segments, 1) Publishing and Retail Services, 2) Integrated Print Communications and Global Solutions, 3) Forms and Labels, 4) Logistics and 5) Corporate. The Publishing and Retail Services segment includes 1) magazine, catalog and retail, 2) directories and 3) premedia. Net sales for the Publishing and Retail Services segment increased 6.7% to $550.8 million due to volume increases across all businesses in the segment. Operating margin declined by approximately 150 basis points to 7.0% in the second quarter of 2004 from the second quarter of 2003, primarily due to an increase in restructuring and impairment charges, which were $15.3 million in the second quarter of 2004 and $1.8 million in the second quarter of 2003. Excluding restructuring and impairment charges, increased volume and lower selling and administrative costs resulted in operating margin expansion to 9.8% in the second quarter of 2004 from 8.9% in the second quarter of 2003. The Integrated Print Communications and Global Solutions segment includes 1) financial print, 2) book, 3) direct mail, 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 $765.5 million from the second quarter of 2003, primarily as a result of the acquisition of Moore Wallace ($364.0 million) as well as increased sales in financial print and international markets. Operating margin, which was negatively impacted by restructuring and integration charges of $10.8 million in the second quarter of 2004 and restructuring and impairment charges of $2.5 million in the second quarter of 2003, increased approximately 160 basis points to 12.3% in the second quarter of 2004. Excluding restructuring, impairment and integration charges, operating margin increased to 13.7% in the second quarter of 2004 from 11.3% in the second quarter of 2003, primarily as a result of increased sales volume and the benefits from restructuring and cost reductions in the financial print business. The Forms and Labels segment includes 1) forms, 2) labels, 3) Peak and 4) Latin America. Net sales for the Forms and Labels segment increased to $478.7 million in the second quarter of 2004 from $32.6 million in the second quarter of 2003, primarily as a result of the acquisition of Moore Wallace. The forms and labels business continued to be negatively impacted by electronic substitution for multi-part paper forms. Operating margin, which was negatively impacted by restructuring and integration charges of $5.2 million in the second quarter of 2004 and $1.0 million in the second quarter of 2003, increased to 7.4% from a loss in the prior year's second quarter. Excluding restructuring and integration charges, operating margin increased to 8.4% in the second quarter of 2004 from a loss in the second quarter of 2003, primarily as a result of the acquisition of Moore Wallace and improved performance in Latin America. The Logistics segment includes 1) print logistics and 2) package logistics. Net sales for the Logistics segment increased 8.8% to $233.8 million due to the acquisition of Moore Wallace, which more than offset volume declines in the package logistics business, resulting primarily from the shutdown of Momentum Logistics, Inc.'s business-to-business activities. During the second quarter of 2004, Logistics had an operating loss of $82.0 million. This reflected restructuring and impairment charges totaling $91.5 million, of which $89.1 million ($53.6 million net of tax) was a non-cash impairment charge related to the pending disposition of our package logistics business. Excluding restructuring and impairment charges, operating margin increased to 4.1% in the second quarter of 2004 from 0.5% in the second quarter of 2003, primarily as a result of benefits from cost reduction actions and improved efficiency. Corporate operating expenses increased by $47.1 million from the second quarter of 2003 to $78.9 million in the second quarter of 2004. The increase is primarily attributable to the acquisition of Moore Wallace, restructuring and integration charges of $10.8 million, increased employee incentive costs and increased insurance and litigation provisions. Six-Month Results For the first six months of 2004, the company reported net sales of $3.5 billion and a net loss of $71.3 million or $0.39 per share, compared with net earnings of $25.1 million or $0.22 per diluted share for the first six months of 2003. The first six month's results of 2004 include restructuring, impairment and integration charges of $251.9 million, comprised of a non-cash impairment charge of $89.1 million ($53.6 million net of tax) related to the pending disposition of our package logistics business and $162.8 million in restructuring ($64.1 million), impairment ($27.9 million) and integration ($70.8 million) charges primarily related to the ongoing integration efforts following our February 27, 2004 acquisition of Moore Wallace. During the first six months of 2004, the company recognized a gain on the sale of an investment of $15.3 million (pre-tax) and a $6.6 million net charge for the cumulative effect of a change in an accounting principle (adoption of FIN 46 further discussed on attached reconciling schedules). Results for the first half of 2003 included restructuring and impairment charges of $7.9 million. Non-GAAP net earnings for the first six months of 2004 totaled $86.2 million, or $0.46 per diluted share. Non-GAAP net earnings for this period excluded restructuring, impairment and integration charges, gain on the disposal of an investment and the cumulative effect of a change in an accounting principle. The company used an effective tax rate of 38.3% in calculating non-GAAP net earnings. A reconciliation of GAAP net earnings to non-GAAP net earnings for these adjustments is presented in the attached tables. Integration Detail Continuing the integration of our acquisition of Moore Wallace, the company recorded pre-tax restructuring charges of $41.8 million in the second quarter of 2004. Through the first six months of 2004, the company recorded $64.1 million of restructuring charges, substantially all of which will require cash payments. Restructuring charges were applied as follows: 2nd Quarter First Half $ in Millions 2004 2004 Severance $41.4 $63.0 Facility 0.4 1.1 Total $41.8 $64.1 Payments associated with these severance actions will be substantially completed by June 2005. Through the first six months of 2004, the company has eliminated approximately 2,175 positions. Outlook - 2004 Non-GAAP EPS Increased For the full year 2004, RR Donnelley is targeting non-GAAP earnings per diluted share of $1.55, an increase of $0.05 per diluted share from previous guidance. Guidance for the quarter ended September 30, 2004 will be provided later in the quarter. Non-GAAP net earnings exclude certain items that are unrelated to the ongoing operations of the business. These items include charges that are not currently determinable. For that reason, the company is unable to provide GAAP earnings estimates at this time. Historical Pro forma / Non-GAAP Information Posted to Company Website The company has received several requests from shareholders and analysts for pro forma comparative financial data reflecting the company's new segments. We have been specifically asked to provide "non-GAAP" comparative data for the new segments that combine the company's and Moore Wallace's results of operations, and eliminate significant non-comparable items such as restructuring, impairment and integration charges as well as the cost of sales impact resulting from inventory step-ups and backlog valuations recorded in purchase accounting. The company has posted to its website, http://www.rrdonnelley.com , tables and explanations presenting unaudited, pro forma and non-GAAP net sales and operating income of the new segments for the four quarters of 2003 and the first quarter of 2004. To the extent possible, the data has been reconciled to the reported results of the company and Moore Wallace for all periods presented. Please refer to the qualifying language on the website.

 

 

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