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RR Donnelley Increases Sales 8%

Thursday, November 03, 2011

Press release from the issuing company

R.R. Donnelley & Sons Company today reported third-quarter net earnings attributable to common shareholders of $158.0 million, or $0.83 per diluted share, on net sales of $2.7 billion compared to $53.3 million, or $0.25 per diluted share, on net sales of $2.5 billion in the third quarter of 2010. The third-quarter net earnings attributable to common shareholders included the recognition of previously unrecognized income tax benefits ($77.4 million, non-cash) as well as pre-tax charges for restructuring ($23.6 million) and impairment ($10.6 million, non-cash), a loss on debt extinguishment ($1.3 million), and acquisition-related expenses ($0.7 million) totaling $36.2 million, compared to pre-tax charges for restructuring ($20.2 million) and impairment ($28.5 million, non-cash) and acquisition-related expenses ($2.6 million) totaling $51.3 million in 2010. Additional details regarding the nature of these charges and the tax benefit are included in the attached schedules.

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 attributable to common shareholders totaled $98.0 million, or $0.51 per diluted share, in the third quarter of 2011 compared to $92.5 million, or $0.44 per diluted share, in the third quarter of 2010. Third-quarter non-GAAP net earnings attributable to common shareholders exclude the recognition of previously unrecognized tax benefits and the loss on debt extinguishment in the third quarter of 2011, and restructuring and impairment charges and acquisition expenses in both years. For non-GAAP comparison purposes, the effective tax rate decreased to 24.1% in the third quarter of 2011 from 35.7% in the third quarter of 2010, primarily due to certain state tax matters. A reconciliation of GAAP net earnings attributable to common shareholders to non-GAAP net earnings attributable to common shareholders is presented in the attached tables.

"We continue to have success in the marketplace, winning new work and expanding customer relationships. Given the challenging global economic environment and sluggish financial markets activity, we are pleased with our results," said Thomas J. Quinlan III, RR Donnelley's President and Chief Executive Officer. "Despite these headwinds, we generated more than $300 million of operating cash flow in the quarter, an increase of over $90 million from last year's third quarter. Our strong and stable cash flow funds our debt payments and our $1.04 per share annual dividend, while allowing us to reinvest in the business and prudently manage our capital structure. Execution of our previously announced accelerated share repurchase continued throughout the quarter, and we look forward to providing an update on the overall repurchase program in the coming months."

Quinlan continued, "In addition to expanding customer relationships, we continued to enhance the capabilities offered by our CustomPoint Solutions Group with the acquisition of Sequence Personal. The addition of these capabilities reflects our continued commitment to serve the evolving needs of our customers, particularly with innovative content creation, management and delivery solutions."

Business Review

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 $2.7 billion, up $195.2 million, or 7.8%, from the third quarter of 2010, including the impact of acquisitions. Pro forma for acquisitions, net sales grew by $40.7 million, or 1.5%, from the third quarter of 2010, driven by a $26.8 million (101 basis points) increase from favorable changes in foreign exchange rates, as well as volume growth in certain product offerings. Gross margin of 23.4% in the third quarter of 2011 compared to 23.7% in the third quarter of 2010 as pricing pressure was mostly offset by productivity improvements, a higher recovery on print-related by-products and lower variable compensation expense. SG&A expense as a percentage of net sales in the third quarter of 2011 increased to 11.1% from 10.5% in the third quarter of 2010 primarily due to the acquisition of Bowne and higher pension and other benefits-related expenses, partially offset by lower variable compensation expense. Operating earnings were negatively impacted by restructuring and impairment charges and acquisition expenses of $34.9 million in the third quarter of 2011 and $51.3 million in the third quarter of 2010, resulting in operating income of $156.8 million in 2011 and $148.7 million in 2010. Operating margin was 5.8% in 2011 and 6.0% in 2010.

Excluding restructuring and impairment charges and acquisition expenses, non-GAAP operating margin declined to 7.1% in the third quarter of 2011 from 8.0% in the third quarter of 2010. Pricing pressure more than offset continued productivity improvements, lower variable compensation expense and a higher recovery on print-related by-products.

Segments

Net sales for the U.S. Print and Related Services segment increased 6.3% from the third quarter of 2010 to $2.0 billion primarily due to the acquisition of Bowne and volume increases in commercial print and logistics, partially offset by volume declines in books and directories and continued pricing pressure across the segment. Pro forma for acquisitions, net sales in the segment decreased 0.4%. The segment's operating income, which was negatively impacted by charges for restructuring and impairment of $28.1 million in the third quarter of 2011 and $18.5 million in the third quarter of 2010, improved to $169.3 million in the third quarter of 2011 from $168.3 million in the third quarter of 2010. Excluding the restructuring and impairment charges, the segment's non-GAAP operating margin of 10.0% in the third quarter of 2011 was flat compared to the third quarter of 2010, as productivity improvements, lower variable compensation expense, a higher recovery on print-related by-products and volume increases in logistics and commercial print were offset by the volume declines in books and directories and continued pricing pressure across the segment.

Net sales for the International segment increased 12.3% from the third quarter of 2010 to $703.9 million, including increased sales due to the acquisition of Bowne. Pro forma for acquisitions, net sales grew by $49.2 million, or 7.5%, as changes in foreign exchange rates ($26.8 million or 409 basis points) and increased volume more than offset the impact of continued pricing pressure. The segment's operating income, which was negatively impacted by charges for restructuring of $4.6 million in the third quarter of 2011 and charges for restructuring and impairment of $29.6 million in the third quarter of 2010, improved to $36.7 million in the third quarter of 2011 from $23.5 million in the third quarter of 2010. Excluding the restructuring and impairment charges, the segment's non-GAAP operating margin declined to 5.9% in the third quarter of 2011 from 8.5% in the third quarter of 2010 as pricing pressure, an unfavorable impact from changes in foreign exchange rates (primarily due to export sales from certain operations) as well as wage and other inflation in certain countries were only partially offset by lower variable compensation expense.

Unallocated Corporate operating expenses increased to $49.2 million in the third quarter of 2011 as compared to $43.1 million in the third quarter of 2010. Excluding restructuring and impairment charges of $1.5 million and acquisition expenses of $0.7 million in the third quarter of 2011 and restructuring charges of $0.6 million and acquisition expenses of $2.6 million in the third quarter of 2010, unallocated Corporate operating expenses increased $7.1 million to $47.0 million in the third quarter of 2011. Higher pension and other benefits-related expenses and an increase in information technology spending driven by recent acquisitions were partially offset by a reduction in variable compensation expense.

 

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