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RR Donnelley Reports Q4 Net Loss, Issues 2006 Guidance

Thursday, February 23, 2006

Press release from the issuing company

CHICAGO, Feb. 22 -- R.R. Donnelley & Sons Company today reported a fourth-quarter 2005 net loss from continuing operations of $236.0 million or $1.09 per share on net sales of $2.4 billion compared to net earnings from continuing operations of $148.8 million or $0.66 per diluted share on net sales of $2.1 billion in the fourth quarter of 2004. The fourth-quarter 2005 net earnings from continuing operations included charges for impairment ($364.3 million), restructuring ($13.4 million) and integration ($1.9 million) totaling $379.6 million, primarily related to a non-cash charge for the recognition of impairment of goodwill and other intangibles of the company's North American forms and labels business. The non-cash impairment charge followed our annual impairment test of indefinite- lived assets, in accordance with FASB Statement No. 142, Accounting for Goodwill and Other Intangible Assets. The impairment test is performed on a reporting unit basis within each segment and, while it may result in non-cash charges or write-downs, an impairment evaluation does not result in recognition of increases in value, if any, in other segments, or in the business as a whole. Net earnings from continuing operations in the fourth quarter of 2004 included charges for restructuring ($10.1 million), impairment ($5.6 million) and integration ($5.6 million) totaling $21.3 million, primarily related to the integration of the 2004 acquisition of Moore Wallace, and a non-cash write-down of the company's investment in affordable housing of $14.4 million. 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, Peak Technologies, the sale of which closed during the fourth quarter of 2005, and Package Logistics are reported as discontinued operations in all periods presented. The company recorded net income from discontinued operations of $73.5 million in the fourth quarter of 2005, primarily attributable to certain tax benefits recognized as part of the sale of Peak Technologies, and a net loss from discontinued operations of $12.0 million in the fourth quarter of 2004. Including discontinued operations, net loss was $162.5 million or $0.75 per share in the fourth quarter of 2005 compared to net earnings of $136.8 million or $0.61 per diluted share in the fourth 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 net earnings from continuing operations totaled $134.3 million or $0.62 per diluted share in the fourth quarter of 2005 compared to $132.3 million or $0.59 per diluted share in the fourth quarter of 2004. Non- GAAP net earnings from continuing operations excluded restructuring, impairment and integration charges in the fourth quarters of both 2005 and 2004 and a non-cash write-down of the company's investment in affordable housing in the fourth quarter of 2004. For non-GAAP comparison purposes, the effective tax rate was 30.3% in the fourth quarter of 2005 and 38.3% in the fourth quarter of 2004. The lower tax rate used in the fourth quarter of 2005 primarily reflects the benefit from a larger proportion of taxable income being generated in lower tax jurisdictions and the reversal of non-US tax valuation allowances. A reconciliation of GAAP net earnings to non-GAAP net earnings for these adjustments is presented in the attached tables. "Our fourth-quarter performance exceeded our expectations, led by continued strong revenue growth in our Publishing and Retail Services and Integrated Print segments," said Mark A. Angelson, RR Donnelley's Chief Executive Officer. "I am especially pleased with our exceptionally strong cash from continuing operations of nearly a billion dollars for the year as well as the significant customer wins and renewals we have achieved, and the significant opportunities that we have afforded our employees. We continue to win in the marketplace and in the workplace." Angelson added, "We are pleased to announce an increase in our share repurchase program of up to 10 million shares, demonstrating the confidence we have in our ability to generate strong cash flow that will provide us with the added flexibility to execute on all aspects of our growth and capital deployment strategy, while very comfortably paying our dividend and servicing our debt." Business Review (Continuing Operations) Following are the results for the company and each reportable segment. Summary Net sales in the quarter were $2.4 billion, up 13.1% from the fourth quarter of 2004. The increase was primarily due to acquisitions, primarily the Astron Group, Asia Printers Group and Poligrafia, new customer wins and increased volume with existing customers in the Publishing and Retail Services and Integrated Print Communications segments. The gross margin rate decreased to 26.2% in the fourth quarter of 2005 from 27.4% in the fourth quarter of 2004, reflecting increased performance-based plant level bonuses 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 increased to 12.3% in the fourth quarter of 2005 from 11.4% in the fourth quarter of 2004, reflecting increased costs for incentive compensation that more than offset the benefits of our cost reduction efforts. Operating margin, which was negatively impacted by restructuring, impairment and integration charges of $379.6 million in the fourth quarter of 2005 and $21.3 million in the fourth quarter of 2004, decreased to a loss in the fourth quarter of 2005 from 10.4% in the fourth quarter a year earlier. Excluding restructuring, impairment and integration charges of $379.6 million and $21.3 million in the fourth quarters of 2005 and 2004, respectively, the non-GAAP operating margin for the fourth quarter of 2005 was 9.3% compared to 11.4% for the fourth quarter of 2004. The fourth quarter of 2005 included higher expenses for performance-based plant level bonuses, incentive compensation, paper and non-cash depreciation and purchase accounting-related amortization associated with acquisitions. 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. The Publishing and Retail Services segment includes our magazine, catalog, and retail, directories and book businesses within North America, Europe and Asia, logistics and premedia businesses. Net sales for the Publishing and Retail Services segment increased 10.9% to $1.2 billion from the fourth quarter of 2004 primarily due to the acquisition of the Asia Printers Group and Poligrafia and sales increases within the Asian and domestic magazine, catalog, and retail businesses. The segment's operating margin, which was negatively impacted by restructuring, impairment and integration charges of $6.0 million and $1.8 million in the fourth quarters of 2005 and 2004, respectively, was 12.7% in the fourth quarter of 2005 compared to 15.1% in the fourth quarter of 2004. Excluding restructuring, impairment and integration charges, the segment's non-GAAP operating margin for the fourth quarter of 2005 was 13.2% compared to 15.3% in the fourth quarter of 2004 as our productivity efforts were more than offset by increased costs of performance- based plant level bonuses, incentive compensation, energy, and paper. While higher paper prices depress operating margin percentages, they have no material impact on operating income, as price increases largely are passed directly through to customers. The Integrated Print Communications segment includes our direct mail, global capital markets, dynamic communication solutions, short-run commercial print, and the Astron Group businesses. Net sales for the Integrated Print Communications segment increased 27.4% to $703.5 million from the fourth quarter of 2004, primarily due to the acquisition of the Astron Group as well as sales growth in our direct mail, short-run commercial and dynamic communication solutions businesses. The segment's operating margin, which was negatively impacted by restructuring, impairment and integration charges of $0.9 million and $6.9 million in the fourth quarters of 2005 and 2004, respectively, decreased to 9.0% in the fourth quarter of 2005 from 11.2% in the fourth quarter of 2004. Excluding restructuring, impairment and integration charges, the segment's non-GAAP operating margin decreased to 9.1% in the fourth quarter of 2005 from 12.4% in the fourth quarter of 2004. This decrease was due, in part, to incremental non-cash depreciation and purchase accounting-related amortization expenses associated with the acquisition of the Astron Group, business mix and increased costs of performance-based plant level bonuses. 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 increased 0.6% to $442.8 million in the fourth quarter of 2005 from the fourth quarter of 2004. The segment's operating margin, which was negatively impacted by restructuring, impairment and integration charges of $362.4 million and $10.1 million in the fourth quarters of 2005 and 2004, respectively, decreased to a loss in the fourth quarter of 2005 from 5.1% in the fourth quarter of 2004, primarily related to a non-cash goodwill and other intangibles impairment charge of $362.3 million. Excluding restructuring, impairment and integration charges, non-GAAP operating margin decreased to 6.1% in the fourth quarter of 2005 from 7.4% in the fourth quarter of 2004, primarily due to continued pricing pressure. Corporate operating expenses increased to $44.3 million in the fourth quarter of 2005 from $32.9 million in the fourth quarter of 2004. Excluding restructuring, impairment and integration charges of $10.3 million and $2.5 million in the fourth quarters of 2005 and 2004, respectively, corporate operating expenses increased $3.6 million to $34.0 million from the fourth quarter of the prior year primarily related to increased incentive compensation. Full-Year Results The company reported net earnings from continuing operations of $95.6 million or $0.44 per diluted share on net sales of $8.4 billion for the full year of 2005 compared to net 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. The full-year 2005 net earnings from continuing operations included charges for impairment ($370.1 million), restructuring ($49.7 million), and integration ($8.3 million) totaling $428.1 million, primarily related to a non-cash charge for the recognition of impairment of goodwill and other intangibles of the company's North American forms and labels business and our productivity efforts. Full-year 2004 net earnings from continuing operations included charges for restructuring ($85.1 million), impairment ($22.3 million) and integration ($80.8 million) totaling $188.2 million, primarily related to the integration of the 2004 acquisition of Moore Wallace, and a non-cash write-down of the company's investment in affordable housing of $14.4 million. Operating margin, which was negatively impacted by restructuring, impairment and integration charges, decreased to 5.3% for the full year of 2005 from 6.4% for the full year of 2004. Excluding restructuring, integration and impairment charges, non-GAAP operating margin increased to 10.4% for the full year of 2005 from 9.0% for the full year of 2004, primarily as a result of increased volume and the benefit of cost reduction efforts. The effective tax rate was 71.5% in 2005 primarily due to the non-deductibility of the non-cash impairment charge. Results from continuing operations for the full year of 2004 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. Net earnings, which include discontinued operations and, 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) in 2004, were $137.1 million or $0.63 per diluted share for the full year of 2005 compared to $178.3 million or $0.88 per diluted share for the full year of 2004. Non-GAAP net earnings from continuing operations totaled $496.4 million or $2.29 per diluted share in the full year of 2005 compared to $337.0 million or $1.65 per diluted share in the full year of 2004. Full-year non-GAAP net earnings from continuing operations excluded restructuring, impairment and integration charges in both 2005 and 2004. Also excluded are a non-cash write-down of the company's investment in affordable housing, net gains on the disposition of investments and the cumulative effect of a change in an accounting principle in 2004. For non-GAAP comparison purposes, the effective tax rate was 34.8% in 2005 and 38.3% in 2004, reflecting a larger proportion of taxable income being generated in lower tax jurisdictions and the reversal of non-US tax valuation allowances. A reconciliation of GAAP net earnings to non-GAAP net earnings for these adjustments is presented in the attached tables. Outlook - 2006 Full-Year Non-GAAP EPS from Continuing Operations For the full year of 2006, RR Donnelley is projecting non-GAAP net earnings per diluted share from continuing operations to be in the range of $2.45 to $2.50. This guidance assumes no shares repurchased under the authorization available to the company, but includes the impact from the adoption of SFAS 123 - Share-Based Payment. The non-GAAP effective tax rate for 2006 is expected to be 35.6%.

 

 

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