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RR Donnelley Reports $687 million Loss

Thursday, February 26, 2009

Press release from the issuing company

R.R. Donnelley & Sons Company today reported a fourth-quarter net loss from continuing operations of $686.9 million or $3.35 per diluted share on net sales of $2.8 billion compared to a net loss from continuing operations of $292.9 million or $1.37 per diluted share on net sales of $3.1 billion in the fourth quarter of 2007. The fourth-quarter net loss from continuing operations included pre-tax charges for impairment ($1,127.6 million) and restructuring ($10.7 million) totaling $1,138.3 million in 2008 and for impairment ($460.3 million) and restructuring ($16.9 million) totaling $477.2 million in 2007. As detailed in the attached tables, substantially all of the charges are non-cash and follow the Company’s annual impairment test of goodwill and intangible assets. Substantially all of the restructuring charges in both the fourth quarter of 2008 and the fourth quarter of 2007 were associated with the reorganization of certain operations and the exiting of certain business activities. The Company recorded an income tax benefit of $273.4 million in the fourth quarter of 2008 primarily reflecting deductions related to the decline in value and reorganization of certain entities within the International segment.

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 $129.3 million or $0.63 per diluted share in the fourth quarter of 2008 compared to $172.3 million or $0.80 per diluted share in the fourth quarter of 2007. Fourth-quarter non-GAAP net earnings from continuing operations exclude impairment and restructuring charges in both 2008 and 2007. For non-GAAP comparison purposes, the effective tax rate increased to 30.8% in the fourth quarter of 2008 from 26.7% in the fourth quarter of 2007 due to lower benefits from the release of tax valuation allowances and a lower benefit from the expiration of state tax statutes of limitations in 2008. A reconciliation of GAAP net earnings to non-GAAP net earnings for these adjustments is presented in the attached tables.

"Volatility in the global economy has resulted in significant declines in demand across nearly all of the diverse industries that we serve," said Thomas J. Quinlan III, RR Donnelley's President and Chief Executive Officer. "Though our industry has been adversely impacted, we generated over $1 billion in cash from operations in 2008. We will continue to focus on two primary elements of our strategy. These are to achieve operational excellence in serving our customers and to maintain a very strong liquidity position by maximizing cash flow and deploying it prudently."

Quinlan added, “We believe that the breadth of our product, service, and geographic offerings, our scale and our proprietary technologies create significant competitive advantages that position us well to maintain our leadership position."

Business Review (Continuing Operations)

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.

Summary

Net sales in the quarter were $2.8 billion, down 9.5% from the fourth quarter of 2007. The decrease was caused by volume declines, unfavorable foreign exchange rates and continued price pressure primarily due to the worsening global recession, offset slightly by acquisitions. Gross margin decreased to 24.0% in the fourth quarter of 2008 from 25.1% in the fourth quarter of 2007 due to volume and price declines and an increase in the LIFO provision, offset in part by the benefits of our productivity efforts and a reduction in our variable compensation expense. SG&A expense as a percentage of net sales improved to 9.7% in the fourth quarter of 2008 from 10.5% in the fourth quarter of 2007, primarily due to the benefit of productivity initiatives and reduced variable compensation expense, offset in part by an increase in the bad debt provision. Operating income in both periods was negatively impacted by charges for impairment and restructuring of $1,138.3 million in the fourth quarter of 2008 and $477.2 million in the fourth quarter of 2007 that resulted in an operating loss of $892.9 million in the fourth quarter of 2008 and $183.4 million in the fourth quarter of 2007.

Excluding charges for impairment and restructuring, the non-GAAP operating margin in the fourth quarter of 2008 decreased to 8.8% from 9.5% in the fourth quarter of 2007, as the benefits from our productivity efforts and reduction in variable compensation expense were more than offset by volume and price declines.

Segments

Net sales for the U.S. Print and Related Services segment in the quarter decreased 4.9% to $2.2 billion from the fourth quarter of 2007 due to volume declines and price pressure across most product lines, driven primarily by economic conditions. Partially offsetting these declines were sales from the acquisitions of Cardinal Brands and Pro Line Printing. The segment’s operating income, which was negatively impacted by charges for impairment and restructuring of $380.2 million in the fourth quarter of 2008 and $5.2 million in the fourth quarter of 2007, decreased to an operating loss of $128.3 million in the fourth quarter of 2008 compared to operating income of $283.8 million in the fourth quarter of 2007. Excluding impairment and restructuring charges, the segment’s non-GAAP operating margin decreased to 11.7% in the fourth quarter of 2008 from 12.7% in the fourth quarter of 2007, as the impact of volume and price declines was partially offset by the benefits of our productivity efforts and the reduction in variable compensation expense.

Net sales for the International segment in the quarter decreased 22.1% to $637.8 million from the fourth quarter of 2007 due to volume declines and unfavorable foreign exchange rates in most reporting units as well as continued price pressure. Partially offsetting these declines were volume increases in Latin America and Asia. The segment’s operating income was negatively impacted by charges for impairment and restructuring of $757.5 million in the fourth quarter of 2008 and $466.8 million in the fourth quarter of 2007 that resulted in an operating loss of $712.8 million in the fourth quarter of 2008 and $407.4 million in the fourth quarter of 2007. Excluding impairment and restructuring charges, the segment’s non-GAAP operating margin decreased to 7.0% in the fourth quarter of 2008 from 7.3% in the fourth quarter of 2007 as the impact of volume and price declines as well as a higher bad debt provision was partially offset by productivity and cost management initiatives and the reduction in variable compensation expense.

Unallocated Corporate operating expense decreased to $51.8 million in the fourth quarter of 2008 from $59.8 million in the fourth quarter of 2007. Excluding charges for restructuring of $0.6 million in the fourth quarter of 2008 and charges for restructuring and impairment of $5.2 million in the fourth quarter of 2007, Corporate operating expense decreased $3.4 million to $51.2 million in the fourth quarter of 2008, as lower variable compensation expense and the benefits of productivity initiatives were partially offset by higher bad debt and LIFO provisions.

Outlook

As a consequence of the unpredictable global environment and its potential impacts on competitors and customers, the Company will not provide full-year earnings per share guidance for 2009 on its conference call today. However, the Company will provide detail behind its strategic and operational plans on the call.

 

 

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