By Trevor Shackelford December 5, 2006 -- R.R. Donnelley & Sons Company (NYSE: RRD) recently announced its third quarter 2006 net earnings from continuing operations of $165.1 million or $0.75 per diluted share on net sales of $2.3 billion compared to net earnings from continuing operations of $127.3 million or $0.59 per diluted share on net sales of $2.2 billion in the third quarter of 2005. The third quarter net earnings from continuing operations included pre-tax restructuring charges of $6.6 million. Net earnings from continuing operations in the third quarter of 2005 included pre-tax charges totaling $6.8 million, primarily related to the integration of the 2004 acquisition of Moore Wallace. Earnings were released six days after the company announced an agreement to purchase competitor Banta Corp. for $1.3 billion. The company is excited about its acquisition and is hopeful that it will expand the offerings that it will be able to offer to its customers. Contents of this Summary • Quarter Highlights • Segment Performance • Guidance • Raine Radar • Q & A Quarter Highlights • The company's effective tax rate decreased to 27.2% in the third quarter from 35.2% in the third quarter of 2005, primarily reflecting the tax benefit from the realization of a deferred tax asset. • Loss from discontinued operations was $0.4 million in the quarter and $25.2 million, primarily reflecting the results of Peak Technologies, in the third quarter of 2005. • Including discontinued operations, net earnings were $164.7 million or $0.75 per diluted share in the third quarter compared to net earnings of $102.1 million or $0.47 per diluted share in the third quarter of 2005. • The gross margin decreased to 28.2% in the third quarter from 28.4% in the third quarter of 2005, reflecting price pressure, business mix shift and higher energy prices that more than offset the benefits from higher sales volume and productivity efforts. • SG&A expense as a percentage of net sales decreased to 11.6% in the third quarter from 12.2% in the third quarter of 2005 reflecting the benefits of cost reduction efforts and lower integration expenses in the third quarter of 2006. • Operating margin was negatively impacted by restructuring charges of $6.6 million or 10.8% in the third quarter, compared to charges for restructuring, impairment and integration totaling $6.8 million or 11.3% in the third quarter of 2005. Segment Performance Publishing and Retail Services Segment Net sales for the segment increased 7.2% to $1.2 billion from the third quarter of 2005 primarily due to the acquisitions in 2005 of Spencer Press, Poligrafia, the Charlestown, IN, print operations of Adplex-Rhodes and the book business of the Asia Printers Group, and sales increases in international operations. The segment's operating margin was 17.3% in the quarter, compared to 16.3% in the third quarter of 2005. Excluding restructuring and impairment charges, the segment's non-GAAP operating margin in the third quarter was 17.4% compared to 16.4% in the third quarter of 2005, primarily resulting from increased sales volume and the benefits of productivity initiatives that more than offset the impact of price pressure. Integrated Print Communications Segment Net sales for the segment increased 4.5% to $689.0 million from the third quarter of 2005, primarily due to sales growth in short-run commercial print and financial print businesses as well as the acquisition of OfficeTiger, offset in part by lower sales in business communications services business. The segment's operating margin decreased to 7.8% in the third quarter, compared to 10.2% in the third quarter of 2005. Excluding restructuring and impairment charges, the segment's non-GAAP operating margin decreased to 8.2% in the third quarter of 2006 from 10.5% in the third quarter of 2005. This decrease was due to mix shift to lower margin businesses, continued price pressure, the performance of Astron's print-based businesses and volume declines in business communications services. Forms and Labels Segment Net sales for the segment increased 3.7% to $422.3 million in the third quarter of 2006 from the third quarter of 2005, primarily due to favorable foreign exchange rates and increased volume in Latin American and U.S. labels businesses. The segment's operating margin, increased to 10.0% in the third quarter, compared to 9.7% in the third quarter of 2005. Excluding restructuring, impairment and integration charges, non-GAAP operating margin was 10.1% in the third quarter of both 2006 and 2005, as continued price pressure offset the impact of increased sales volume and the benefits of productivity efforts. Corporate Segment Corporate operating expenses decreased to $42.8 million in the third quarter of 2006 from $52.4 million in the third quarter of 2005. Excluding charges for restructuring of $2.3 million in the third quarter and restructuring and integration totaling $2.2 million in the third quarter of 2005, corporate operating expenses decreased $9.7 million to $40.5 million from the third quarter of the prior year primarily reflecting the benefit of productivity efforts. Guidance For the full year of 2006, the company is projecting non-GAAP net earnings per diluted share from continuing operations to be in the range of $2.45 to $2.50, but trending toward the high end of the range. The non-GAAP effective tax rate for 2006 is expected to be approximately 35.2%. Raine Radar Donnelley is continuing its acquisitions with one of its biggest rivals: Banta Corp. The purchase makes it clear that RR Donnelley intends to play in and, if possible, own its clients’ document supply chain, whether that’s large tonnage catalog business, or smaller run 1-to-1 marketing programs. The company is assembling all of the products, software, and offerings to be able to make good on this and the results are showing already. The company’s profits surged this quarter, and the growth will likely continue. Q & A 1. RRD has been awarded a multi-year contract extension to provide the major share of Crain Communications' magazine printing and logistics services. The projected contract term value of this agreement is approximately $70 million and it both renews existing business and awards new work. 2. The company announced that they have signed a definitive agreement pursuant to which RRD will acquire Banta Corp. The cash deal is valued at approximately $1.3 billion, or $36.50 per share. The agreement has been unanimously approved by the boards of directors of both companies and is expected to close in the first quarter of 2007. 3. The new print on demand architecture purchased by RRD allows them to centralize the processing of digital print components and allow them to format the order and print it where they feel it is best optimized for distribution purposes. 4. RRD is really pushing cross selling and the enhancement of products to existing customers. They now have individual chemistry between the business leaders and sales leaders. They feel that by making each in charge of their own assets the cross selling should dramatically increase. 5. CEO Mark A. Angelson stated, "Our planned combination with Banta Corporation will benefit customers, employees and investors. The considerable overlap between the two companies creates immediate opportunities for cross-selling, procurement, manufacturing, premedia and logistics synergies. Importantly, our strong balance sheet and liquidity position enabled us to be opportune in the highly fragmented print market."