By Trevor Shackelford May 15, 2006 -- R.R. Donnelley & Sons Company (NYSE: RRD) announced their first quarter results recently. Total revenue for the company’s first quarter was $2.3 billion, 17.7% higher than the $1.9 billion reported for the first quarter of 2005. The increase was primarily due to acquisitions, new customer wins, and increased volume with existing customers. The company reported first-quarter 2006 net earnings from continuing operations of $114.2 million, or $0.52 per diluted share, compared to net earnings from continuing operations of $109.2 million, or $0.50 per diluted share, in the first quarter of 2005. The company recorded a net loss from discontinued operations of $2.3 million in both the first quarter of 2006 and the first quarter of 2005. Including discontinued operations, net earnings were $111.9 million, or $0.51 per diluted share, in the first quarter of 2006 compared to net earnings of $106.9 million, or $0.49 per diluted share, in the first quarter of 2005. Contents of this Summary * Quarter Highlights * Segment Performance * Guidance * Raine Radar * Q & A Quarter Highlights • Corporate operating expenses decreased to $48.4 million in the first quarter of 2006 from $52.0 million in the first quarter of 2005. • The company will appoint Thomas J. Quinlan, III as its interim Chief Financial Officer, effective May 11, 2006. Mr. Quinlan will replace Glenn R. Richter, who will become Chief Administrative Officer of Nuveen Investments. • The company's effective tax rate decreased to 35.5% in the first quarter of 2006 from 37.9% in the first quarter of 2005, primarily reflecting the benefit from a larger proportion of taxable income being generated in lower tax jurisdictions. • The company recorded a net loss from discontinued operations of $2.3 million in both the first quarter of 2006 and the first quarter of 2005. • Corporate operating expenses decreased to $48.4 million in the first quarter of 2006 from $52.0 million in the first quarter of 2005. • In addition to the top-line growth of existing operations, the company supplemented growth through the acquisition of OfficeTiger, which was completed last week, further building on the business process outsourcing strengths added by last year's acquisition of the Astron Group. • GAAP SG&A as a percentage of net sales decreased to 12.3% in the first quarter of 2006 from 13% in the first quarter of 2005. • During the year the company spent $90.9 million in CAPEX. • The company ended the quarter with $320.7 million of cash and marketable securities, compared to $371.8 million in the first quarter 2005. Segment Performance Publishing and Retail Services Segment Net sales for the Publishing and Retail Services segment increased 13.4% to $1.1 billion from the first quarter of 2005. This was primarily due to increased sales from all businesses within the segment 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 was negatively impacted by restructuring and integration charges of $6.6 million and $1.8 million in the first quarter of 2006. The segment's non-GAAP operating margin for the first quarter of 2006 was 14.1% compared to 15.7% in the first quarter of 2005. Integrated Print Communications Segment Net sales for the Integrated Print Communications segment increased 36.7% to $727.3 million from the first quarter of 2005. This was primarily due to the acquisition of the Astron Group as well as sales growth in financial print, short-run commercial print and direct mail and business communication services businesses. The segment's operating margin was negatively impacted by restructuring, impairment and integration charges of $3.0 million and $4.5 million in the first quarter of 2006. Excluding restructuring, impairment and integration charges, the segment's non-GAAP operating margin decreased to 10.9% in the first quarter of 2006 from 13.0% in the first quarter of 2005. This decrease was due to a shift in mix to lower margin businesses and incremental non-cash depreciation and purchase accounting-related amortization expenses associated with the acquisition of the Astron Group. Forms and Labels Segment Net sales for the segment increased 3.3% to $425.9 million in the first quarter of 2006 from the first quarter of 2005. This was primarily due to favorable foreign exchange rates and increased volume in the Latin America and Canada businesses. The segment's operating margin was negatively impacted by restructuring, impairment and integration charges of $1.0 million and $4.2 million in the first quarter of 2006. Excluding restructuring, impairment and integration charges, non-GAAP operating margin decreased to 8.1% in the first quarter of 2006 from 8.8% in the first quarter of 2005, primarily due to continued pricing pressure, offset in part by increased sales volume and the benefits of productivity efficiencies. Guidance 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. This guidance includes the expected dilutive impact from both the acquisition of OfficeTiger and the adoption of SFAS 123 (R) - Share-Based Payment, but assumes no shares repurchased under the authorization available to the company. The non-GAAP effective tax rate for 2006 is expected to be approximately 35.5%. Raine Radar RR Donnelley has had a very strong quarter, and is projecting a solid 2006. The company has made smart acquisitions, acquired new customers, renewed contracts with existing customers such as Martha Stewart Living, and continued to make wise decisions in trimming costs. Donnelley will look to continue its growth both organically and through acquisition. So far, the company has made significant strides in becoming the leader for large bulk printing projects. Q & A 1. The company’s stated strategy the last 12-18 months will not change for the rest of the year. Donnelley will continue to grow through acquisitions that are less capital intensive and have higher return. 2. The company believes that one of their core strengths is listening to their customers, and from doing so, they have found that the customer wants a company that can manage their documents and the business processes that surround that management. 3. Donnelley believes that because of their large scale they have on of the largest digital platforms in the industry and they expect digital print to grow over time. 4. The company said that EBITDA margins were down primarily due to the Astron’s printing business. 5. The company continues to believe that the label business will decline slightly year-over-year. In general, this business is a cash business with very little CAPEX investment required. Donnelley anticipates that it will still have a relatively stable level of cash flow over the next couple of years. 6. The company is not forecasting any substantial changes to the competitive pricing dynamics of the industry in the short to medium term.