By Ann Levine August 11, 2004 -- RR Donnelley & Sons (NYSE: RRD) today announced second quarter net sales of $2 billion and a net loss of $12.5 million of $0.06 per share. This compares to net earning of $19.3 million or $0.17 per share for the second quarter of 2003. On a non-GAAP basis, net earnings were $68.6 million or $0.31 per diluted share. Topics of this summary * Overall Results * Segment Results * Guidance * Q & A Overall Results Gross margins for the quarter were 25.3% over 22.3% on a year over year basis. The increase was due to restructuring activities and cost reductions. SG & A as a percentage of revenue increased to 13.3% during the quarter from 11.5% over the same period last year due to an increase in post-retirement costs, incentive compensation expenses and an increase in a provision for insurance and litigation. Operating income was $6.8 million and excluding impairment, restructuring and other charges, operating income was $140 million. Capital expenditures for the second quarter were $67 million and are expected to be less than $300 million for the full year. Corporate expenditures were $78.9 million during the quarter as a result of the acquisition and are expected to come down in the second half of the year. After listing significant sales and contract wins in the magazine space, Donnelley CEO Mark Angelson, said Donnelley is not about to rest on its laurels. Donnelly is investing and redesigning its long-run print platform. He went on to say that the giant is awake and hungry and the market place should stay tuned. More announcements will come in the future. Segment Results With the integration of Moore Wallace, Donnelley renamed and redefined its various segments and during today’s call reported progress in four segments. Publishing and Retail Services – This segment reported a 6.7% increase in net sales even though pricing remains soft. The increases were largely due to volume increases from an effective sales strategy and some improvement in print advertising. Integrated Print Communications and Global Solutions – This segment, made up of seven areas, reported net sales almost double on a year over year basis mainly due to the acquisition of Moore Wallace. The segment had volume improvement in financial print and in the global capital market which were offset by declines in direct mail, commercial print and hard to match comparables with last year’s release of the Harry Potter book. Forms and Labels – The segment continues to show a secular decline, although Donnelley sees opportunities to grow market share. Net sales in the segment increased to $478.7 million during the quarter, again, primarily due to the Moore Wallace acquisition.   Logistics – The segment saw an increase in net sales of 8.8%. The acquisition of Moore Wallace offset volume declines in package logistics. Logistics posted an operating loss of $82 million. Donnelley will sell its package logistics business and hopes the sale will close by the end of the third quarter. The business was characterized as non-core and inconsistent with financial goals. Guidance Donnelley did not offer third quarter guidance stating it would announce expectations for third quarter in the future. Full year EPS is expected at $1.55 with revenues in the $7.5-$8 billion range. Q & A 1. During the second quarter, Donnelley eliminated 1400 positions and year to date headcount had been reduced by 2175. 2. Forms and labels continue to have pricing pressures and pricing in this area remains the most competitive. Pricing in magazines remains essentially flat. Pricing has not changed much from 12 months ago. 3. The litigation provision of SG & A is not due to new or undisclosed litigation, Donnelley is making good faith judgments on litigation at the advice of outside professionals. 4. Donnelley is on track to reach its $300 million cost savings goal in three years. In terms of progress, the company today stated it is in the “third inning.” 5. Although not offering much detail on the package logistics business, Donnelley did offer the business is approximately a $600 million business. Sale of this business is expected to be more than $50 million but less than $100 million. The company is not retaining an equity or debt interest in the business. Its interest is to stay in the print, rather than packaging, logistics business. 6. Paper prices are up close to 20% and where it can, Donnelley passes the prices through. Contractual obligations prevent passing on prices in all cases. 7. Donnelley is looking at what was characterized as “tuck ins” with regard to acquisitions in lieu of capital expenditures. The company is largely focused on its “knitting.” 8. The company’s progress on cost structure has focused on eliminating duplication, reducing procurement costs, and asset rationalization. In reducing headcount, Donnelley has focused on positions that do not affect the customer or impact the manufacturing process. On the procurement side, Donnelly has worked with vendors to get the best possible cost they can. With asset rationalization, Donnelly is looking at all assets across the entire platform and is taking advantage of reducing costs where opportunities exist. 9. Wastepaper sales were about $12 million during the second quarter or up 10% from the first quarter. Volume was essentially flat. 10. Financial printing was up double digits during the quarter and not as high as the first quarter. Donnelly would not disclose performance citing customer sensitivity. 11. The company has $275 million in cash on its balance sheet and plans to use it as accretively as possible. The redesign of its long-run platform was cited as one use of the cash. 12. Plans for company headquarters include looking for alternative space. Donnelley does not have the need for the square footage it currently has. 13. Corporate expenses will drop substantially during the last two quarters. Corporate expenses have included the reduction of corporate staff, many of which had transitional responsibilities and were on payroll until May or June of this year. 14. Savings from restructuring were not disclosed during today’s call and the company stated these savings are a moving target and difficult to quantify.