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RR Donnelley Reports Strong First Quarter

Friday, May 06, 2005

Press release from the issuing company

CHICAGO, May 5 -- R.R. Donnelley & Sons Company today reported first-quarter 2005 earnings from continuing operations of $109.2 million or $0.50 per diluted share on net sales of $1.9 billion compared to a loss from continuing operations of $41.4 million or $0.28 per share on net sales of $1.3 billion in the first quarter of 2004. The first-quarter 2005 results from continuing operations include charges for restructuring ($10.9 million), impairment ($1.3 million) and integration ($2.5 million) totaling $14.7 million, primarily related to the ongoing integration of our February 27, 2004 acquisition of Moore Wallace. Results from continuing operations in the first quarter of 2004 included charges for restructuring ($19.9 million), impairment ($14.3 million) and integration ($68.2 million, primarily comprised of adjustments to cost of sales for fair market value of acquired inventory and backlog) totaling $102.4 million as well as a gain on the disposition of an investment in Latin America of $15.3 million and the cumulative effect of a change in an accounting principle (adoption of FIN 46R further discussed on attached reconciling schedules) of $6.6 million (net of tax). The company announced on December 16, 2004 its intention to sell its Peak Technologies business. Accordingly, Peak Technologies is reported as a discontinued operation in the first quarter of both 2005 and 2004. Momentum Logistics, Inc., which was shut down during the third quarter of 2004 and the package logistics business, which was sold during the fourth quarter of 2004 are also reported as discontinued operations in the first quarter of 2004. The company recorded a net loss from discontinued operations of $2.3 million in the first quarter of 2005 and $10.9 million in the first quarter of 2004. Net earnings, which include discontinued operations and, in the first quarter of 2004, the $6.6 million net charge for the cumulative effect of a change in an accounting principle, were $106.9 million or $0.49 per diluted share in the first quarter of 2005 compared to a loss of $58.9 million or $0.39 per share in the first quarter of 2004. The company believes that certain non-GAAP measures, when presented in conjunction with comparable GAAP (Generally Accepted Accounting Principles) 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 $117.6 million or $0.54 per diluted share in the first quarter of 2005 compared to $19.5 million or $0.13 per diluted share in the first quarter of 2004. First-quarter non- GAAP earnings from continuing operations exclude restructuring, impairment and integration charges in both 2005 and 2004. Also excluded are the gain on the disposition of an investment and the cumulative effect of a change in an accounting principle in the first quarter of 2004. The company used an effective tax rate of 38.3% in the first 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. "We are very pleased with our first quarter results, which exceeded our expectations," said Mark A. Angelson, RR Donnelley's Chief Executive Officer. "During the quarter, our Publishing and Retail Services business posted double-digit sales growth, expanded operating margins and announced a number of significant customer wins. Our Integrated Print Communications business, led by our document-based outsourcing group, also exceeded our expectations with strong revenue and profit performance. Although it is still early in the year, our strong first-quarter performance has lead us to increase our non- GAAP full-year EPS guidance to $2.07, an increase of $0.10 from our previous guidance." Angelson added, "In just over a year since the acquisition of Moore Wallace, by focusing relentlessly on the drivers of profitability, RR Donnelley today has become a much stronger company. Our planned acquisition of The Astron Group coupled with our unparalleled platform and our deep customer relationships position us well for continued success." Business Review (Continuing Operations) RR Donnelley's acquisition of Moore Wallace was completed on February 27, 2004. Consequently, the results for the first quarter of 2004 include the operations of Moore Wallace for only 34 days in the quarter. Following are the results for the company and each reportable segment. Summary Net sales in the quarter were $1.9 billion, up 49.5% from the same quarter in 2004, primarily due to the acquisition of Moore Wallace and revenue growth in the Publishing and Retail Services segment. Gross margin increased to 29.0% in the first quarter of 2005 from 20.5% in the first quarter of 2004, reflecting, in part, the benefits from cost reduction actions and procurement savings. Gross margin in the first quarter of 2004 was negatively impacted by $67.4 million of integration charges, primarily related to fair value adjustments for inventory and backlog due to the acquisition of Moore Wallace. Selling, general and administrative expense, as a percentage of net sales, decreased to 13.1% in the first quarter of 2005 from 15.4% in the first quarter of 2004 reflecting the benefit of cost reduction actions, lower expenses for litigation, insurance, termination benefits and sales and use taxes and recoveries related to an international tax refund and the collection of a previously written-off bankruptcy receivable. Operating margin in the first quarter of 2005 increased to 10.2% from a loss in last year's first quarter. Excluding restructuring, integration and impairment charges in the first quarter of both years, non-GAAP operating margin for the first quarter of 2005 increased to 11.0% from 4.2% as operating income nearly quadrupled from last year's first quarter, primarily as a result of the acquisition of Moore Wallace, 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) Publishing and Retail Services, 2) Integrated Print Communications, 3) Forms and Labels and 4) Corporate. Due to a previously announced reorganization of managerial responsibilities, effective with the first quarter of 2005 results, the book, European and Asian businesses, previously reported within the Integrated Print Communications segment, are reported within the Publishing and Retail Services segment. The company has also conformed prior period financial results to reflect this segment change in all periods presented. The Publishing and Retail Services segment includes our 1) magazine, catalog and retail, 2) directories, 3) book, 4) logistics, 5) premedia, 6) European and 7) Asian businesses. Net sales for the Publishing and Retail Services segment increased 16.6% to $985.2 million due to sales increases in all businesses within the segment and the acquisition of Moore Wallace. Operating margin, which was negatively impacted by restructuring and integration charges of $1.8 million in the first quarter of 2005 and restructuring and impairment charges of $20.1 million in the first quarter of 2004 was 15.1% in the first quarter of 2005 compared to 6.8% in the first quarter of 2004. Excluding restructuring, impairment and integration charges, non-GAAP operating margin increased to 15.3% in the first quarter of 2005 from 9.1% in the first quarter of 2004 due to strong sales growth and the benefit of previous cost reduction and procurement initiatives. The Integrated Print Communications segment includes our 1) direct mail, 2) financial print, 3) business communications services and 4) short-run commercial print businesses. Net sales for the Integrated Print Communications segment doubled to $531.4 million from the first quarter of 2004, primarily due to the acquisition of Moore Wallace as well as increased sales in our financial print business. Operating margin, which was negatively impacted by restructuring, integration and impairment charges, of $4.5 million in the first quarter of 2005 and of $20.0 million in the first quarter of 2004, increased to 13.3% in the first quarter of 2005 from 1.4% in the first quarter of 2004. Excluding restructuring, impairment and integration charges, non- GAAP operating margin increased to 14.2% in the first quarter of 2005 from 8.9% in the first quarter of 2004, primarily as a result of increased sales volume and the benefit of cost reduction actions. 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 $409.9 million in the first quarter of 2005 from $177.9 million in the first quarter of 2004, 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 $4.2 million in the first quarter of 2005 and restructuring and integration charges of $53.1 million in the first quarter of 2004 increased to 7.1% from a loss in the prior year's first quarter. Excluding restructuring, impairment and integration charges, non- GAAP operating margin increased to 8.2% in the first quarter of 2005 from 8.0% in the first quarter of 2004 due to the acquisition of Moore Wallace and improved performance in Latin America. Corporate operating expenses decreased by $18.6 million from the first quarter of 2004 to $52.0 million in the first quarter of 2005. The decrease is attributable to cost reduction activities and decreased expenses for restructuring, litigation, insurance, termination benefits and sales and use taxes that more than offset the increase in cost due to the acquisition. Outlook - 2005 Full-Year Non-GAAP EPS Increased For the full year of 2005, RR Donnelley is targeting non-GAAP earnings per diluted share from continuing operations of $2.07, an increase of $0.10 per diluted share from previous guidance.

 

 

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