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RR Donnelley Reports Third-Quarter 2007 Results, Earnings Up

Wednesday, October 31, 2007

Press release from the issuing company

RR Donnelley & Sons today reported third-quarter 2007 net earnings of $175.0 million or $0.80 per diluted share on net sales of $2.9 billion compared to net earnings of $164.7 million or $0.75 per diluted share on net sales of $2.3 billion in the third quarter of 2006. Third-quarter net earnings included pre-tax charges for restructuring ($18.4 million) and impairment ($1.5 million) totaling $19.9 million in 2007 and restructuring charges of $6.6 million in 2006, substantially all related to the reorganization of certain operations and the exiting of certain business activities. The company's effective tax rate decreased to 25.1% in the third quarter of 2007 from 27.2% in the third quarter of 2006, primarily due to the lowering of the statutory rate in the United Kingdom that generated a $9.3 million reduction in net deferred tax liabilities, a greater proportion of earnings generated in lower tax jurisdictions and an increased benefit from the domestic manufacturing deduction in the third quarter of 2007 that more than offset the $23.5 million tax benefit from the realization of a U.S. deferred tax asset in the third quarter of 2006.
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 totaled $177.8 million or $0.81 per diluted share in the third quarter of 2007 compared to $146.2 million or $0.67 per diluted share in the third quarter of 2006. Non-GAAP net earnings exclude restructuring and impairment charges and the tax benefit due to a reduction in net deferred tax liabilities in the third quarter of 2007 and restructuring charges, the tax benefit from the realization of a U.S. deferred tax asset and the net loss from discontinued operations in the third quarter of 2006. For non-GAAP comparison purposes, the effective tax rate decreased to 29.9% in the third quarter of 2007 from 37.3% in the third quarter of 2006, primarily reflecting a greater proportion of earnings generated in lower tax jurisdictions and an increased benefit from the domestic manufacturing deduction. 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 results for the third quarter,” said Thomas J. Quinlan III, RR Donnelley's President and Chief Executive Officer. “Our consolidated revenue growth rate, pro forma for acquisitions, increased from the second quarter. By leveraging our global platform to drive efficiency and through our productivity efforts, we continued to close the margin gap between the historically lower margin businesses we acquired in 2007 and our historical margins. The integration of the acquisitions is proceeding as planned.”
Quinlan added, “Our strong balance sheet, liquidity and generation of $783 million in cash from continuing operations through nine months of 2007 enabled us to deliver on our promise of employing a balanced approach to the deployment of capital. In addition to our investments in the business and payment of our dividend, we repurchased 7.6 million shares thus far this year and, subsequent to the quarter-end, we announced the planned acquisition of Cardinal Brands, a business that complements well our TOPS product offering."
Business Review (Continuing Operations)

Due to a previously announced reorganization of managerial responsibilities, effective with the reporting of third-quarter 2007 results, the company reports its results in two reportable segments: 1) U.S. Print and Related Services and 2) International. The company reports, as Corporate, its unallocated expenses associated with general and administrative activities. The company has also conformed prior-period financial results to reflect this segment change in all periods presented.
Summary

During 2007, we acquired Banta Corporation, Perry Judd's and Von Hoffmann, which in aggregate carried a lower operating margin historically than we have been able to achieve. Our proven financial discipline and approach to achieving productivity increases already have had a positive margin impact on these operations, and we see opportunities for continued improvement.
Net sales in the quarter were $2.9 billion, an increase of 26.0% from the third quarter of 2006. The increase was due to acquisitions, new customer wins, increased volume with existing customers and favorable foreign exchange comparisons, offset in part by continued price pressure. The gross margin rate decreased to 27.1% in the third quarter of 2007 from 28.2% in the third quarter of 2006 reflecting pricing pressure and an unfavorable business mix that more than offset the benefits from higher sales volume and our productivity efforts. SG&A expense as a percentage of net sales decreased to 11.0% in the third quarter of 2007 from 11.6% in the third quarter of 2006, reflecting the benefits of our integration and productivity efforts. Operating margin, which was negatively impacted by charges for impairment and restructuring totaling $19.9 million in the third quarter of 2007 and by restructuring charges of $6.6 million in the third quarter of 2006 as well as the inclusion of the acquisitions, was 10.1% in the third quarter of 2007 compared to 11.3% in the third quarter of 2006.
Excluding charges for restructuring and impairment, non-GAAP operating margin decreased to 10.8% in the third quarter of 2007 from 11.6% in the third quarter of 2006, reflecting the inclusion of the acquired companies that collectively carried a lower margin historically as well as increased employee incentive compensation expense which more than offset the benefit from higher sales volume and our productivity efforts. Reconciliations of GAAP operating income and margin to non-GAAP operating income and margin are presented in the attached tables.
Segments
Net sales for the U.S. Print and Related Services segment increased 23.8% to $2.2 billion from the third quarter of 2006 due to the Banta, Perry JuddÂ’ s and Von Hoffmann acquisitions as well as sales increases in our book, financial print, logistics, office products and catalog offerings, offset in part by decreases in sales of directories, direct mail, statement printing and short-run commercial print. The segment's operating margin, which was negatively impacted by charges for restructuring and impairment of $11.8 million in the third quarter of 2007 and by restructuring charges of $0.8 million in the third quarter of 2006, decreased to 12.8% in the third quarter of 2007 from 14.3% in the third quarter of 2006. Excluding restructuring and impairment charges, the segment's non-GAAP operating margin decreased to 13.4% in the third quarter of 2007 from 14.3% in the third quarter of 2006 reflecting higher expense for employee incentives and non-cash purchase accounting-related amortization expenses that more than offset the benefits of our productivity initiatives.
Net sales for the International segment increased 33.1% to $748.3 million from the third quarter of 2006 due to the acquisition of Banta, sales growth in business process outsourcing, strong sales in export book volume from Asia and higher sales of books, forms, labels and commercial printing in Latin America as well as favorable foreign exchange comparisons. The segment's operating margin, which was negatively impacted by restructuring charges of $3.8 million in the third quarter of 2007 and $3.5 million in the third quarter of 2006, decreased to 7.2% in the third quarter of 2007 from 9.7% in the third quarter of 2006. Excluding restructuring charges, non-GAAP operating margin decreased to 7.7% in the third quarter of 2007 from 10.3% in the third quarter of 2006 due to continued price pressure and an unfavorable business mix.
Unallocated Corporate operating expenses decreased to $36.1 million in the third quarter of 2007 from $42.8 million in the third quarter of 2006. Excluding restructuring charges of $4.3 million in the third quarter of 2007 and $2.3 million in the third quarter of 2006, unallocated Corporate operating expenses decreased $8.7 million from the third quarter of 2006 to $31.8 million reflecting lower expenses for share-based and employee incentive compensation as well as the benefits of our productivity efforts.
Outlook - 2007 Full-Year Non-GAAP EPS from Continuing Operations
For the full year of 2007, RR Donnelley has increased its guidance and is now projecting non-GAAP net earnings per diluted share to be in the range of $2.85 to $2.88 from its previous guidance of $2.70 to $2.75. This guidance assumes no additional shares repurchased under the authorization available to the company. The non-GAAP effective tax rate for 2007 is expected to be approximately 31.9%.
GAAP net earnings per diluted share from continuing operations in 2007 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 full-year GAAP net earnings estimates at this time.

 

 

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