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RR Donnelley Profit Up 38% on Revenue Increase of 18% in Q2

Wednesday, August 02, 2006

Press release from the issuing company

CHICAGO, Aug. 1 -- R.R. Donnelley & Sons Company today reported second-quarter 2006 net earnings from continuing operations of $124.4 million or $0.57 per diluted share on net sales of $2.3 billion compared to net earnings from continuing operations of $95.3 million or $0.44 per diluted share on net sales of $1.9 billion in the second quarter of 2005. The second-quarter 2006 net earnings from continuing operations included charges for restructuring ($12.7 million) and impairment ($1.9 million) totaling $14.6 million, substantially all of which were associated with the reorganization of certain operations and the exiting of certain business activities. Net earnings from continuing operations in the second quarter of 2005 included charges for restructuring ($22.2 million), integration ($2.6 million) and impairment ($2.2 million) totaling $27.0 million, primarily related to the integration of the 2004 acquisition of Moore Wallace. The company's effective tax rate decreased to 31.9% in the second quarter of 2006 from 35.8% in the second quarter of 2005, primarily reflecting the benefit from a larger proportion of taxable income being generated in lower tax jurisdictions, a reduction in the statutory tax rate in Canada and the reversal of non-US tax valuation allowances. Discontinued operations produced net income of $0.8 million in the second quarter of 2006 and a net loss of $4.6 million in the second quarter of 2005. Including discontinued operations, net earnings were $125.2 million or $0.57 per diluted share in the second quarter of 2006 compared to net earnings of $90.7 million or $0.42 per diluted share in the second 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 $133.6 million or $0.61 per diluted share in the second quarter of 2006 compared to $110.6 million or $0.51 per diluted share in the second quarter of 2005. Non-GAAP net earnings from continuing operations exclude charges for restructuring and impairment in the second quarter of 2006 and exclude charges for restructuring, impairment and integration in the second quarter of 2005. A reconciliation of GAAP net earnings to non-GAAP net earnings for these adjustments is presented in the attached tables. "We are pleased with our second-quarter results," said Mark A. Angelson, RR Donnelley's Chief Executive Officer. "Our Publishing and Retail Services segment delivered strong revenue growth and expanded margins. Our Integrated Print Communications segment, led by the financial print business, posted strong revenue and profit growth. We continued to win in the marketplace in each of our segments." Angelson added, "During the quarter, we benefited as we ramped up our new and expanded customer relationships and as we continued to integrate the strategic acquisitions that broadened our business services capabilities and the tuck-in acquisitions that increased our flexibility and responsiveness." 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 second quarter of 2005. The increase was primarily due to acquisitions, namely The Astron Group, Asia Printers Group, OfficeTiger, Spencer Press, Poligrafia, the Charlestown, Indiana print operations of Adplex-Rhodes and Critical Mail Continuity Services, as well as new customer wins and increased volume with existing customers in the Publishing and Retail Services and Integrated Print Communications segments, offset in part by continued pricing pressure. The gross margin rate decreased to 27.5% in the second quarter of 2006 from 27.6% in the second quarter of 2005, reflecting, in part, higher year-over-year paper prices that largely were passed through to customers. SG&A expense as a percentage of net sales was 12.1% in both the second quarter of 2006 and 2005. Operating margin, which was negatively impacted by charges for restructuring and impairment totaling $14.6 million in the second quarter of 2006 and by charges for restructuring, impairment and integration totaling $27.0 million in the second quarter of 2005, was 9.8% in the second quarter of 2006 compared to 9.1% in the second quarter of 2005. Excluding charges for restructuring, impairment and integration, the non-GAAP operating margin in the second quarter of 2006 was 10.4% compared to 10.5% in the second quarter of 2005. Pricing pressure, increased information technology investment and higher energy prices were offset, in part, by increased volume and the benefits of our productivity efforts. 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) European, 5) Asian, 6) logistics and 7) premedia businesses. Net sales for the Publishing and Retail Services segment increased 14.8% to $1.1 billion from the second quarter of 2005 primarily due to sales increases in our international operations and directory business 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 charges for restructuring of $3.2 million in the second quarter of 2006 and by charges for restructuring and impairment totaling $7.3 million in the second quarter of 2005, was 15.5% in the second quarter of 2006 compared to 14.3% in the second quarter of 2005. Excluding restructuring and impairment charges, the segment's non-GAAP operating margin for the second quarter of 2006 was 15.8% compared to 15.0% in the second quarter of 2005, primarily resulting from increased sales volume, favorable business mix shift and the benefits of our productivity initiatives that more than offset the impact of pricing pressure and higher energy and paper prices. The Integrated Print Communications segment includes: our 1) direct mail and business communications services, 2) financial print, 3) short-run commercial print and 4) business process outsourcing (The Astron Group and OfficeTiger) businesses. Net sales for the Integrated Print Communications segment increased 33.5% to $727.2 million from the second quarter of 2005, primarily due to the acquisitions of The Astron Group and OfficeTiger as well as sales growth in our financial print, short-run commercial print and direct mail businesses. The segment's operating margin, which was negatively impacted by charges for restructuring and impairment totaling $8.5 million in the second quarter of 2006 and by charges for restructuring, impairment and integration totaling $2.9 million in the second quarter of 2005, decreased to 9.6% in the second quarter of 2006 from 11.9% in the second quarter of 2005. Excluding restructuring, impairment and integration charges, the segment's non-GAAP operating margin decreased to 10.8% in the second quarter of 2006 from 12.4% in the second 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 acquisitions of The Astron Group and OfficeTiger. The Forms and Labels segment includes: our 1) forms, 2) labels, 3) office products, 4) Latin American and 5) Canadian businesses. Net sales for the segment increased 3.5% to $423.6 million in the second quarter of 2006 from the second quarter of 2005, primarily due to favorable foreign exchange rates and increased volume in our Latin American business. The segment's operating margin, which was negatively impacted by charges for restructuring and impairment totaling $2.2 million in the second quarter of 2006 and by charges for restructuring, impairment and integration totaling $2.1 million in the second quarter of 2005, decreased to 7.5% in the second quarter of 2006 from 7.9% in the second quarter of 2005. Excluding restructuring, impairment and integration charges, non-GAAP operating margin decreased to 8.0% in the second quarter of 2006 from 8.4% in the second 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 $53.8 million in the second quarter of 2006 from $60.9 million in the second quarter of 2005. Excluding charges for restructuring of $0.7 million in the second quarter of 2006 and restructuring and integration totaling $14.7 million in the second quarter of 2005, corporate operating expenses increased $6.9 million to $53.1 million from the second quarter of the prior year primarily due to 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, but trending toward the high end of the range. This guidance includes the expected dilutive impact from both the acquisition of OfficeTiger and the adoption, in the first quarter of 2006, of SFAS No. 123 -- Share-Based Payment, and assumes no shares repurchased under the authorization available to the company. The non-GAAP effective tax rate for 2006 is expected to be approximately 34.5%.

 

 

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