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RR Donnelley Reports Strong Q3 Results On Cost Reductions

Friday, November 05, 2004

Press release from the issuing company

CHICAGO, Nov. 4 -- R.R. Donnelley & Sons Company today reported third quarter 2004 net earnings from continuing operations of $114.4 million or $0.52 per diluted share on net sales of $2.0 billion compared to net earnings from continuing operations of $57.9 million or $0.51 per diluted share on net sales of $1.1 billion in the third quarter of 2003. The third quarter 2004 results from continuing operations include restructuring ($14.8 million), integration ($4.4 million) and impairment ($2.4 million) charges totaling $21.6 million, primarily related to the ongoing integration efforts following our February 27, 2004 acquisition of Moore Wallace. The effective tax rate in the third quarter of 2004 was 29.4%, primarily due to a tax benefit resulting from a loss on the disposition of an investment in Latin America. Results from continuing operations in the third quarter of 2003 included restructuring and impairment charges of $1.4 million and a $4.2 million gain on the disposition of an investment. Effective with the third quarter of 2004, the package logistics business and Momentum Logistics, Inc. (MLI) are reported as discontinued operations (see discussion below). Net income, which includes discontinued operations, was $112.8 million or $0.51 per diluted share in the third quarter of 2004 compared to $53.8 million or $0.47 per diluted share in the third quarter of 2003. 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 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. Non-GAAP net earnings from continuing operations excluded restructuring, integration and impairment charges and a loss on the disposition of an investment in the third quarter of 2004 and excluded restructuring and impairment charges and a gain on the disposition of an investment in the third quarter of 2003. The company used an effective tax rate of 38.3%, which it believes is its pro forma annual tax rate, 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. "Our strong third quarter results reflect our cost reduction actions and our enhanced focus on providing solutions for customers. Our Integrated Print business had an outstanding quarter, with strong sales growth and margin expansion," said Mark A. Angelson, RR Donnelley's Chief Executive Officer. "Our Publishing and Retail Services business posted its third consecutive quarter of sales growth and announced a number of new wins that should benefit future periods." Angelson added, "The integration of the Moore Wallace acquisition is progressing well and our team remains focused on completing the integration and growing our business." Business Review (Continuing Operations) 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 for 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 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 attached tables. Segments 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. Excluding restructuring and impairment charges, operating margin expanded to 14.9% in the third quarter of 2004 from 14.6% in the third quarter of 2003 due to increased volume, benefits from our procurement initiatives and the inclusion of the Moore Wallace logistics business in this segment. 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 per diluted share on net sales of $5.2 billion for the first nine months of 2004 compared to net earnings from continuing operations of $82.8 million or $0.73 per diluted share on net sales of $3.0 billion for the first nine months of 2003. Results from continuing operations during the first nine months of 2004 include restructuring ($75.9 million), integration ($75.2 million) and impairment ($16.8 million) charges totaling $167.9 million, primarily related to the ongoing integration efforts following the acquisition of Moore Wallace. These results also include a net gain on the disposition of investments of $14.3 million (pre-tax). Results from continuing operations for the first nine months of 2003 included restructuring and impairment charges of $9.3 million and a $4.2 million gain on the disposition of an investment. Net income, which includes discontinued operations and, in 2004, 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), was $41.6 million or $0.21 per diluted share for the first nine months of 2004 compared to $78.8 million or $0.69 per diluted share for the first nine months of 2003. Non-GAAP net earnings from continuing operations totaled $201.4 million or $1.02 per diluted share in the first nine months of 2004 compared to $83.1 million or $0.73 per diluted share in the first nine months of 2003. Non-GAAP net earnings from continuing operations excluded restructuring, impairment and integration charges, the net gain on the disposition of investments and the cumulative effect of a change in an accounting principle in the first nine months of 2004 and excluded restructuring and impairment charges and the gain on the disposition of an investment in the first nine months of 2003. The company used an effective tax rate of 38.3%, which it believes is its pro forma annual tax rate, 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. Restructuring Detail Continuing the integration of our acquisition of Moore Wallace, the company recorded pre-tax restructuring charges in continuing operations of $14.8 million in the third quarter of 2004. Through the first nine months of 2004, the company recorded $75.9 million of restructuring charges in continuing operations, substantially all of which have required or will require cash payments. Payments associated with these severance actions are expected to be substantially completed by June 2005. Through the first nine months of 2004, the company has eliminated approximately 2,955 positions (750 positions in discontinued operations). Discontinued Operations During the third quarter of 2004, the company entered into an agreement to sell its package logistics business and completed the shutdown of MLI. The sale of the package logistics business closed on October 29, 2004. The results of operations and financial position of the package logistics business and MLI are reported as discontinued operations beginning in the third quarter of 2004. The company has also conformed prior period financial results to reflect package logistics and MLI as discontinued operations in all periods presented. The net loss from discontinued operations was $1.6 million in the third quarter of 2004 and included pre-tax restructuring and impairment charges of $3.4 million at MLI. The net loss from discontinued operations was $66.2 million in the first nine months of 2004 and included pre-tax restructuring and impairment charges of $108.5 million; $89.4 million at the package logistics business and $19.1 million at MLI.

 

 

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