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RR Donnelley Earns $127 Million in Q3

Friday, November 04, 2005

Press release from the issuing company

CHICAGO, Nov. 3 -- R.R. Donnelley & Sons Company today reported third quarter 2005 earnings from continuing operations of $127.3 million or $0.59 per diluted share on net sales of $2.2 billion compared to earnings from continuing operations of $116.7 million or $0.53 per diluted share on net sales of $1.9 billion in the third quarter of 2004. The third quarter 2005 earnings from continuing operations included charges for restructuring ($3.2 million), impairment ($2.3 million) and integration ($1.3 million) totaling $6.8 million. These charges are primarily related to the company's productivity efforts. Earnings from continuing operations in the third quarter of 2004 included charges for restructuring ($14.9 million), impairment ($2.4 million) and integration ($4.4 million) totaling $21.7 million. These charges were primarily related to the integration of the 2004 acquisition of Moore Wallace. During the fourth quarter of 2004, the company completed the sale of its Package Logistics business, as well as announced its intention to sell its Peak Technologies business. Accordingly, Package Logistics is reported as a discontinued operation in the third quarter of 2004, and Peak Technologies is treated as a discontinued operation in the third quarters of 2004 and 2005. The company recorded a net loss from discontinued operations of $25.2 million in the third quarter of 2005 and $3.9 million in the third quarter of 2004. The net loss from discontinued operations in the third quarter of 2005 included a pre-tax impairment charge of $36.6 million ($22.1 million net of tax) to reduce the net assets of Peak Technologies to their estimated fair value less the costs estimated to be incurred to sell the business based on the terms of the agreement to sell Peak Technologies announced on October 21, 2005. Net earnings, which include discontinued operations, were $102.1 million or $0.47 per diluted share in the third quarter of 2005 compared to net earnings of $112.8 million or $0.51 per share in the third quarter of 2004. The effective tax rate in the third quarter of 2005 was 35.2% versus 29.9% in the third quarter of 2004. The effective tax rate in the third quarter of 2005 reflects the company's revised full-year 2005 tax rate estimate of 36.3%. The lower full-year estimate is largely the result of the increasing proportion of taxable income generated in lower tax jurisdictions. The effective tax rate in the third quarter of 2004 was abnormally low due to the use of existing tax loss carry-forwards to offset a gain recorded on the sale of one of the company's investments in Latin America. 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 $134.1 million or $0.62 per diluted share in the third quarter of 2005 compared to $116.7 million or $0.53 per diluted share in the third quarter of 2004. Non- GAAP earnings from continuing operations exclude restructuring, impairment and integration charges in the third quarters of both 2005 and 2004. For non-GAAP comparison purposes, the company used an effective tax rate of 34.0% in the third quarter of 2005 and 38.3% in the third quarter of 2004. The lower tax rate used in the third quarter of 2005 reflects the company's revised full- year 2005 tax rate estimate of 36.3%. A reconciliation of GAAP earnings to non-GAAP earnings for these adjustments is presented in the attached tables. "We are pleased with our third quarter results, which exceeded our expectations," said Mark A. Angelson, RR Donnelley's Chief Executive Officer. "Overall, we delivered strong revenue growth, profit margins and cash flow from operations. In addition, we announced several key business wins and welcomed Asia Printers Group, Poligrafia and the Charlestown, Indiana print operations of AdPlex-Rhodes to the RR Donnelley family during the quarter. Based upon our strong third quarter performance, we are raising our non-GAAP full-year EPS guidance to $2.21, an increase of $0.04 from previous guidance." Business Review (Continuing Operations) Following are the results for the company and each reportable segment. Summary Net sales in the quarter were $2.2 billion, up 14.2% from the third quarter of 2004. The increase was primarily due to new customer wins and increased volume with existing customers in the Publishing and Retail Services and Integrated Print Communications segments, and the acquisition of the Astron Group and Asia Printers Group. The gross margin (exclusive of depreciation and amortization) in the quarter decreased to 28.4% in the third quarter of 2005 from 29.0% in the third quarter of 2004, reflecting continued industry-wide pricing pressure and higher year-over-year paper prices, offset in part by benefits from cost reduction actions and procurement savings. Selling, general and administrative expense as a percentage of net sales decreased to 12.2% in the third quarter of 2005 from 12.9% in the third quarter of 2004, reflecting the benefit of the company's cost reduction actions as well as sales leverage. Restructuring, impairment and integration charges as a percentage of net sales decreased 80 basis points in the third quarter of 2005 from the third quarter of 2004. Operating margin increased to 10.8% in the third quarter of 2005 from 9.9% in the third quarter a year earlier. Excluding restructuring, impairment and integration charges of $21.7 million and $6.8 million in the third quarters of 2004 and 2005, respectively, the non-GAAP operating margin for the third quarters of both 2004 and 2005 was 11.1%. The operating margin in the third quarter of 2005 included $11.9 million of incremental depreciation and amortization expenses associated with the purchase accounting treatment of tangible and intangible assets of the Astron Group. 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. During the quarter the company combined its European direct mail operations with the operations of the Astron Group. To align the financial reporting of this business with management accountabilities, the European direct mail business is now being included within the Integrated Print Communications segment rather than the Publishing and Retail Services segment, where historically the business had been included. This reporting realignment is reflected in the financial results included in this press release and supporting schedules and is not material to the historical financial results of the Publishing and Retail Services and Integrated Print Communications segments. The Publishing and Retail Services segment includes our magazine, catalog, and retail, directories and book businesses within North America, Europe and Asia, and our logistics, and premedia businesses. Net sales for the Publishing and Retail Services segment increased 12.9% to $1.1 billion from the third quarter of 2004 due primarily to sales increases within the North American directory, magazine, catalog, and retail, and European and Asian businesses, as well as the acquisition of the Asia Printers Group. The segment's operating margin, which was negatively impacted by restructuring and impairment charges of $1.2 million and $2.6 million in the third quarters of 2005 and 2004, respectively, was 16.0% in the third quarter of 2005 compared to 15.8% in the third quarter of 2004. Excluding restructuring and impairment charges, the segment's non-GAAP operating margin for the third quarters of both 2004 and 2005 was 16.1%. The Integrated Print Communications segment includes our direct mail, global capital markets, dynamic communication solutions, short-run commercial print, and Astron Group businesses. Net sales for the Integrated Print Communications segment increased 30.0% to $675.3 million from the third quarter of 2004, primarily due to the acquisition of the Astron Group as well as sales growth in the dynamic communication solutions and North American direct mail businesses. The segment's operating margin, which was negatively impacted by restructuring, impairment and integration charges of $2.5 million and $4.9 million in the third quarters of 2005 and 2004, respectively, increased to 11.0% in the third quarter of 2005 from 10.7% in the third quarter of 2004. Excluding restructuring, impairment and integration charges, the segment's non-GAAP operating margin decreased to 11.3% in the third quarter of 2005 from 11.6% in the third quarter of 2004. This decrease was due to incremental depreciation and amortization expenses associated with the purchase accounting impact related to the acquisition of the Astron Group. The Forms and Labels segment includes our forms, labels, office products and Latin American businesses. Certain businesses within the Forms and Labels market continue to be in secular decline. Net sales for the segment decreased 2.5% to $408.2 million in the third quarter of 2005 from the third quarter of 2004. The segment's operating margin, which was negatively impacted by restructuring, impairment and integration charges of $0.7 million and $10.1 million in the third quarters of 2005 and 2004, respectively, increased to 9.4% in the third quarter of 2005 from 8.3% in the third quarter of 2004. Excluding restructuring, impairment and integration charges, non-GAAP operating margin decreased to 9.6% in the third quarter of 2005 from 10.7% in the third quarter of 2004. This decrease was due to the continued challenging pricing environment as well as the timing of certain expenses. Corporate operating expenses decreased to $52.4 million in the third quarter of 2005 from $53.9 million in the third quarter of 2004. Excluding restructuring and integration charges of $2.4 million and $4.1 million in the third quarters of 2005 and 2004, respectively, corporate operating expenses totaled $50.0 million in the third quarter of 2005 versus $49.8 million in the third quarter of the prior year. Outlook - 2005 Full-Year Non-GAAP EPS Increased For the full year of 2005, RR Donnelley is projecting non-GAAP earnings per diluted share from continuing operations of $2.21, an increase of $0.04 per diluted share from previous guidance. Non-GAAP earnings per diluted share from continuing operations exclude certain items that management believes are unrelated to the ongoing operations of the business. In 2005, these items may include restructuring, impairment and integration charges, the resolution of certain tax items and other items that are not currently determinable, but may be significant. For that reason, the company is unable to provide GAAP earnings estimates at this time.

 

 

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