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RR Donnelley Reports Q1 Earnings Increase

Wednesday, May 03, 2006

Press release from the issuing company

CHICAGO, May 2 -- R.R. Donnelley & Sons Company today reported first-quarter 2006 net earnings from continuing operations of $114.2 million or $0.52 per diluted share on net sales of $2.3 billion compared to net earnings from continuing operations of $109.2 million or $0.50 per diluted share on net sales of $1.9 billion in the first quarter of 2005. The first-quarter 2006 net earnings from continuing operations included charges for restructuring ($16.2 million) and impairment ($0.4 million) totaling $16.6 million, substantially all associated with the reorganization of certain operations and the exiting of certain business activities. Net earnings from continuing operations in the first quarter of 2005 included charges for restructuring ($10.9 million), impairment ($1.3 million) and integration ($2.5 million) totaling $14.7 million, primarily related to the integration of the 2004 acquisition of Moore Wallace. The company's effective tax rate decreased to 35.5% in the first quarter of 2006 from 37.9% in the first quarter of 2005, primarily reflecting the benefit from a larger proportion of taxable income being generated in lower tax jurisdictions. The company recorded a net loss from discontinued operations of $2.3 million in both the first quarter of 2006 and the first quarter of 2005. Including discontinued operations, net earnings were $111.9 million or $0.51 per diluted share in the first quarter of 2006 compared to net earnings of $106.9 million or $0.49 per diluted share in the first quarter of 2005. 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 $124.4 million or $0.57 per diluted share in the first quarter of 2006 compared to $117.6 million or $0.54 per diluted share in the first quarter of 2005. Non-GAAP net earnings from continuing operations exclude restructuring, impairment and integration charges in the first quarters of both 2006 and 2005. A reconciliation of GAAP net earnings to non-GAAP net earnings for these adjustments is presented in the attached tables. "Strong sales growth across our platform, led by our Integrated Print Communications and Publishing and Retail Services segments, and continued cost discipline, generated our strong results during the first quarter," said Mark A. Angelson, RR Donnelley's Chief Executive Officer. "Previously announced client contract wins and renewals continue to impact our results and we are pleased that our momentum continued during the quarter." Angelson added, "In addition to the top-line growth in our existing operations, we supplemented our platform through the acquisition of OfficeTiger, which was completed last week, further to build on the business process outsourcing strengths added by last year's acquisition of the Astron Group. Our strength in business process outsourcing, in conjunction with our premedia and logistics capabilities, provides us with an unparalleled service offering that is increasingly important to our customers." Business Review (Continuing Operations) Following are the results for the company and each reportable segment. Summary Net sales in the quarter were $2.3 billion, up 17.7% from the first quarter of 2005. The increase was primarily due to acquisitions, namely the Astron Group, Asia Printers Group, Poligrafia, Spencer Press, the Charlestown, Indiana print operations of Adplex-Rhodes and Critical Mail Continuity Services, and new customer wins and increased volume with existing customers in the Integrated Print Communications and Publishing and Retail Services segments, offset in part by continued pricing pressure. The gross margin rate decreased to 26.7% in the first quarter of 2006 from 29.0% in the first quarter of 2005, reflecting a difference in the allocation of certain expenses between cost of sales and selling, general and administrative (SG&A) expense, and pricing pressure, higher energy prices, a shift in business mix and higher year-over-year paper prices, offset in part by benefits from cost reduction actions and procurement savings. SG&A expense as a percentage of net sales decreased to 11.6% in the first quarter of 2006 from 13.1% in the first quarter of 2005, reflecting in part a difference in the allocation of certain expenses between cost of sales and SG&A expense. SG&A expense in the first quarter of 2005 benefited from a $7.8 million expense reversal related to a value-added tax refund and collection of a bankruptcy receivable that was previously written off. Operating margin decreased to 9.3% in the first quarter of 2006 from 10.2% in the first quarter a year earlier. Excluding restructuring, impairment and integration charges of $16.6 million in the first quarter of 2006 and $14.7 million in the first quarter of 2005, the non-GAAP operating margin for the first quarter of 2006 was 10.1% compared to 11.0% for the first quarter of 2005, primarily related to the $7.8 million favorable expense reversal in the first quarter of 2005 related to a value-added tax refund and collection of a bankruptcy receivable that was previously written off, pricing pressure, a shift in business mix, higher energy prices and higher paper prices. 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 1) magazine, catalog and retail, 2) directories, 3) book, 4) Europe, 5) Asia, 6) logistics and 7) premedia businesses. Net sales for the Publishing and Retail Services segment increased 13.4% to $1.1 billion from the first quarter of 2005 primarily due to sales increases from all businesses within the segment and the acquisitions of the Asia Printers Group, Spencer Press, the Charlestown, Indiana print operations of Adplex-Rhodes and Poligrafia. The segment's operating margin, which was negatively impacted by restructuring and integration charges of $6.6 million and $1.8 million in the first quarters of 2006 and 2005, respectively, was 13.5% in the first quarter of 2006 compared to 15.5% in the first quarter of 2005. Operating margin benefited, in the first quarter of 2005, from the $7.8 million favorable expense reversal related to a value-added tax refund and collection of a bankruptcy receivable that was previously written off. Excluding restructuring and integration charges, the segment's non-GAAP operating margin for the first quarter of 2006 was 14.1% compared to 15.7% in the first quarter of 2005, primarily related to the $7.8 million favorable expense reversal in the first quarter of 2005 related to a value-added tax refund and collection of a bankruptcy receivable that was previously written off and higher energy prices. While higher paper prices decreased operating margin percentages slightly, they had no material impact on operating income, as price increases largely were passed directly through to customers. Productivity improvements more than offset pricing pressure. The Integrated Print Communications segment includes: our 1) direct mail and business communications services, 2) financial print, 3) short-run commercial print, and 4) the Astron Group businesses. Net sales for the Integrated Print Communications segment increased 36.7% to $727.3 million from the first quarter of 2005, primarily due to the acquisition of the Astron Group as well as sales growth in our financial print, short-run commercial print and direct mail and business communication services businesses. The segment's operating margin, which was negatively impacted by restructuring, impairment and integration charges of $3.0 million and $4.5 million in the first quarters of 2006 and 2005, respectively, decreased to 10.5% in the first quarter of 2006 from 12.1% in the first quarter of 2005. Excluding restructuring, impairment and integration charges, the segment's non-GAAP operating margin decreased to 10.9% in the first quarter of 2006 from 13.0% in the first quarter of 2005. This decrease was due to mix shift to lower margin businesses and incremental non-cash depreciation and purchase accounting- related amortization expenses associated with the acquisition of the Astron Group. The Forms and Labels segment includes: our 1) forms, 2) labels, 3) office products, 4) Latin America and 5) Canada businesses. Net sales for the segment increased 3.3% to $425.9 million in the first quarter of 2006 from the first quarter of 2005, primarily due to favorable foreign exchange rates and increased volume in our Latin America and Canada businesses. The segment's operating margin, which was negatively impacted by restructuring, impairment and integration charges of $1.0 million and $4.2 million in the first quarters of 2006 and 2005, respectively, increased to 7.9% in the first quarter of 2006 from 7.8% in the first quarter of 2005. Excluding restructuring, impairment and integration charges, non-GAAP operating margin decreased to 8.1% in the first quarter of 2006 from 8.8% in the first quarter of 2005, primarily due to continued pricing pressure, offset in part by increased sales volume and the benefits of our productivity efforts. Corporate operating expenses decreased to $48.4 million in the first quarter of 2006 from $52.0 million in the first quarter of 2005. Excluding restructuring and integration charges of $6.0 million and $4.2 million in the first quarters of 2006 and 2005, respectively, corporate operating expenses decreased $5.4 million to $42.4 million from the first quarter of the prior year primarily due to lower employee-related costs, offset in part by additional investment in information technology. Outlook -- 2006 Full-Year Non-GAAP EPS from Continuing Operations Reaffirmed 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 includes the expected dilutive impact from both the acquisition of OfficeTiger and the adoption of SFAS 123 - Share-Based Payment, but assumes no shares repurchased under the authorization available to the company. The non-GAAP effective tax rate for 2006 is expected to be approximately 35.5%.

 

 

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