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RR Donnelley Reports Fourth Quarter Net Sales of $2.1 billion

Wednesday, March 02, 2005

Press release from the issuing company

CHICAGO, March 1 -- R.R. Donnelley & Sons Company today reported fourth-quarter 2004 earnings from continuing operations of $148.8 million or $0.66 per diluted share on net sales of $2.1 billion compared to earnings from continuing operations of $109.1 million or $0.95 per diluted share on net sales of $1.2 billion in the fourth quarter of 2003. The fourth-quarter 2004 results from continuing operations include restructuring ($10.1 million), integration ($5.6 million) and impairment ($5.6 million) charges totaling $21.3 million, primarily related to the ongoing integration of our February 27, 2004 acquisition of Moore Wallace. Also included in the fourth quarter of 2004 results are a non-cash write-down of the company's investment in affordable housing of $14.4 million and a net tax benefit totaling $37.6 million, primarily resulting from the reversal of tax contingencies upon the expiration of certain state statutory limitations of $30.5 million and the reversal of a non-US deferred tax valuation allowance of $7.1 million. Results from continuing operations in the fourth quarter of 2003 included restructuring and impairment charges of $3.2 million, a non-cash write-down of the company's investment in affordable housing of $7.3 million, a gain on the disposition of an investment of $1.4 million and a tax benefit of $45.8 million related to the favorable resolution of Internal Revenue Service (IRS) audits and refundable income taxes in Latin America due to the realization of tax loss carrybacks. The company announced, on December 16, 2004, its intention to sell its Peak Technologies business. Accordingly, effective with the fourth quarter of 2004, Peak Technologies is reported as a discontinued operation along with the package logistics business and Momentum Logistics, Inc. (MLI), both of which were reported as discontinued operations, effective in the third quarter of 2004 (see discussion below). Net earnings, which include discontinued operations, were $136.8 million or $0.61 per diluted share in the fourth quarter of 2004 compared to $97.7 million or $0.85 per diluted share in the fourth 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 these indicators. 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 earnings from continuing operations totaled $132.3 million or $0.59 per diluted share in the fourth quarter of 2004 compared to $66.4 million or $0.58 per diluted share in the fourth quarter of 2003. The fourth quarter of 2003 non-GAAP earnings from continuing operations include approximately $0.03 per diluted share resulting from the reversal of excess employee incentive accruals that were expensed in prior quarters. Fourth-quarter non-GAAP earnings from continuing operations exclude restructuring and impairment charges and a non-cash write-down of the company's investment in affordable housing in both 2004 and 2003. Also excluded are integration charges in the fourth quarter of 2004 and a gain on the disposition of an investment in the fourth quarter of 2003. The company used an effective tax rate of 38.3% in the fourth quarter of both years, which it believes is its pro forma annual tax rate, in calculating non-GAAP earnings. A reconciliation of GAAP earnings to non-GAAP earnings for these adjustments is presented in the attached tables. "Our strong operating performance in the fourth quarter capped off a very successful 2004," said Mark A. Angelson, RR Donnelley's Chief Executive Officer. "During the fourth quarter, our Integrated Print Communications business delivered strong sales growth and margin expansion and our Publishing and Retail Services business continued to win new business, post top-line growth and generate a strong operating margin." Angelson added, "For the full year, non-GAAP operating margin improved to 9.0% and we generated cash flow from continuing operations of $759 million, driven by top line growth, merger related and other cost savings and productivity enhancements. Looking forward, we will continue to focus on these drivers of profitability and on 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 $2.1 billion, up 77% from the same quarter in 2003, primarily due to the acquisition of Moore Wallace and increased volume in the book and financial print businesses, international markets and the Publishing and Retail Services segment. Gross margin was 27.4% in the fourth quarter of 2004 compared to 27.2% in the fourth quarter of 2003, as the benefits from restructuring and cost reduction actions and procurement savings were offset, in part, by incremental costs of employee incentives, primarily due to the reversal of incentive accruals in the fourth quarter of 2003, and integration expenses. Selling, general and administrative expense, as a percentage of net sales, was 11.4% in the fourth quarter of 2004 compared to 11.3% in the fourth quarter of 2003, as the benefit of cost reduction actions was offset by increased costs of bad debt, pension and post retirement benefits, Sarbanes-Oxley Act compliance, and integration. Operating margin in the fourth quarter of 2004 increased to 10.4% from 10.1% in last year's fourth quarter, despite increased restructuring, integration and impairment charges in the fourth quarter of 2004. Excluding restructuring, integration and impairment charges in the fourth quarter of both years, non-GAAP operating margin for the fourth quarter of 2004 was 11.4% compared to 10.4% for the fourth quarter of 2003, primarily as a result of increased volume and the benefit of cost reduction actions. Reconciliations of GAAP operating income and margin to non-GAAP operating income and margin are presented in the attached tables. Segments The company reports its results in four reportable segments, 1) Integrated Print Communications and Global Solutions, 2) Publishing and Retail Services, 3) Forms and Labels and 4) Corporate. During the fourth quarter of 2004, the company finalized the allocation of the purchase price of Moore Wallace and, accordingly, has allocated the amortization of identifiable intangibles to each operating segment (see attached schedules for conforming 2004 quarterly results by segment). The Integrated Print Communications and Global Solutions segment includes our 1) book, 2) direct mail, 3) financial print, 4) business communications services, 5) short-run commercial print, 6) European and 7) Asian businesses. Net sales for the Integrated Print Communications and Global Solutions segment more than doubled to $835.3 million from the fourth quarter of 2003, primarily due to the acquisition of Moore Wallace ($396.1 million) as well as increased sales in our book, financial print and international businesses. Operating margin, which was negatively impacted by restructuring, integration and impairment charges of $6.9 million in the fourth quarter of 2004 and restructuring charges of $0.9 million in the fourth quarter of 2003, nearly doubled to 12.7% in the fourth quarter of 2004. Excluding restructuring, impairment and integration charges, non-GAAP operating margin increased to 13.5% in the fourth quarter of 2004 from 6.7% in the fourth quarter of 2003, primarily as a result of increased sales volume and the benefit of cost reduction actions. The Publishing and Retail Services segment includes our 1) magazine, catalog and retail, 2) directories, 3) logistics and 4) premedia businesses. Net sales for the Publishing and Retail Services segment increased 5.8% to $832.6 million due to the acquisition of Moore Wallace's logistics business and volume increases in the magazine, catalog and retail and logistics businesses. Operating margin, which was negatively impacted by restructuring, impairment and integration charges of $1.8 million in the fourth quarter of 2004 and net restructuring and impairment charges of $0.3 million in the fourth quarter of 2003 was 14.8% in the fourth quarter of 2004 compared to 15.3% in the fourth quarter of 2003. Excluding restructuring, impairment and integration charges, non-GAAP operating margin decreased to 15.0% in the fourth quarter of 2004 from 15.3% in the fourth quarter of 2003. Operating margin in the fourth quarter of 2003 was positively impacted by a $5.2 million (or approximately 66 basis points) reversal of excess employee incentive accruals that were expensed in prior quarters. The Publishing and Retail Services segment continued to realize benefits from volume increases and cost reduction efforts. The Forms and Labels segment includes our 1) forms, 2) labels and 3) Latin American businesses. Net sales for the Forms and Labels segment increased to $443.9 million in the fourth quarter of 2004 from $39.8 million in the fourth quarter of 2003, primarily due to 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, which was negatively impacted by restructuring, integration and impairment charges of $10.1 million in the fourth quarter of 2004 and net restructuring and impairment charges of $3.1 million in the fourth quarter of 2003 increased to 5.3% from a loss in the prior year's fourth quarter. Excluding restructuring, impairment and integration charges, non-GAAP operating margin increased to 7.6% in the fourth quarter of 2004 from a loss in the fourth quarter of 2003 due to the acquisition of Moore Wallace and improved performance in Latin America. Corporate operating expenses increased by $15.2 million from the fourth quarter of 2003 to $32.9 million in the fourth quarter of 2004. The increase is primarily attributable to the acquisition of Moore Wallace and additional costs of restructuring, impairment and integration, Sarbanes-Oxley Act compliance, employee incentives and pension and post retirement benefits. Full-Year Results The company reported earnings from continuing operations of $264.9 million or $1.30 per diluted share on net sales of $7.2 billion for the full year of 2004 compared to earnings from continuing operations of $191.9 million or $1.67 per diluted share on net sales of $4.2 billion for the full year of 2003. Results from continuing operations include restructuring ($85.0 million), integration ($80.8 million) and impairment ($22.4 million) charges totaling $188.2 million for the full year of 2004, primarily related to the ongoing integration of our acquisition of Moore Wallace and included restructuring and impairment charges of $12.5 million for the full year of 2003. Operating margin for the full year of 2004 decreased to 6.4% from 7.0% for the full year of 2003 due to increased restructuring, impairment and integration charges. Excluding restructuring, integration and impairment charges in both 2004 and 2003, non-GAAP operating margin increased to 9.0% for the full year of 2004 from 7.3% for the full year of 2003, primarily as a result of increased volume and the benefit of cost reduction efforts. Results from continuing operations for the full year of 2004 also include a non-cash write-down of the company's investment in affordable housing that was nearly offset by the net gain on the disposition of investments, and a net tax benefit totaling $37.6 million, primarily resulting from the reversal of tax contingencies upon the expiration of certain state statutory limitations of $30.5 million and the reversal of a non-US deferred tax valuation allowance of $7.1 million. Results from continuing operations for the full year of 2003 also included a non-cash write-down of the company's investment in affordable housing of $7.3 million, a gain on the disposition of investments of $5.6 million and a tax benefit of $45.8 million related to the favorable resolution of Internal Revenue Service (IRS) audits and refundable income taxes in Latin America due to the realization of tax loss carrybacks. Net earnings, which include 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 46R further discussed on attached reconciling schedules), were $178.3 million or $0.88 per diluted share for the full year of 2004 compared to $176.5 million or $1.54 per diluted share for the full year of 2003. Non-GAAP earnings from continuing operations totaled $337.0 million or $1.65 per diluted share in the full year of 2004 compared to $149.6 million or $1.31 per diluted share in the full year of 2003. Full-year non-GAAP earnings from continuing operations exclude restructuring and impairment charges, a non-cash write-down of the company's investment in affordable housing and net gains on the disposition of investments in both 2004 and 2003. Also excluded are integration charges and the cumulative effect of a change in an accounting principle in 2004. The company used an effective tax rate of 38.3% in both years, which it believes is its pro forma annual tax rate, in calculating non-GAAP earnings. A reconciliation of GAAP earnings to non-GAAP earnings for these adjustments is presented in the attached tables. Restructuring Detail In connection with the ongoing integration of Moore Wallace, the company recorded pre-tax restructuring charges in continuing operations of $10.1 million in the fourth quarter of 2004. For the full year of 2004, the company recorded $85.0 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. During 2004, the company eliminated approximately 3,214 positions (799 positions in discontinued operations). Discontinued Operations During the fourth quarter of 2004, the company announced its intention to sell its Peak Technologies business. During the third quarter of 2004, the company entered into an agreement to sell its package logistics business, the sale of which closed on October 29, 2004, and completed the shutdown of its MLI business. Accordingly, Peak Technologies, the package logistics business and MLI are reported as discontinued operations. The company has also conformed prior period financial results to reflect Peak Technologies, package logistics and MLI as discontinued operations in all periods presented. The company recorded a net loss from discontinued operations of $12.0 million during the fourth quarter of 2004 and $80.0 million during the full year of 2004.

 

 

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