May 06, 2008 -- R.R. Donnelley & Sons Company today reported first-quarter net earnings from continuing operations of $182.0 million or $0.85 per diluted share on net sales of $3.0 billion compared to net earnings from continuing operations of $138.9 million or $0.63 per diluted share on net sales of $2.8 billion in the first quarter of 2007. The first-quarter net earnings from continuing operations included pre-tax charges, substantially all associated with the reorganization of certain operations and the exiting of certain business activities, for restructuring and impairment totaling $6.9 million in 2008 and totaling $11.4 million in 2007. The company's effective tax rate decreased to 16.3% in the first quarter of 2008 from 32.8% in the first quarter of 2007, primarily reflecting a $38.0 million benefit from the favorable settlement of certain federal income tax audits for the years 2000 through 2002.

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 $148.5 million or $0.69 per diluted share in the first quarter of 2008 compared to $145.9 or $0.66 per diluted share in the first quarter of 2007. First-quarter non-GAAP net earnings from continuing operations exclude restructuring and impairment charges and, in 2008, the benefit of the reversal of tax reserves. For non-GAAP comparison purposes, the effective tax rate increased to 33.8% from 33.1% in the first quarter of 2007. A reconciliation of GAAP net earnings to non-GAAP net earnings for these adjustments is presented in the attached tables.

"We are pleased with our first-quarter performance," said Thomas J. Quinlan III, RR Donnelley's President and Chief Executive Officer. "In the context of a challenging economic environment, we benefited from both the ability to manage our customers' print spend across our broad product and service offering and from the operational flexibility we have created through our historical platform investments. Our prudent capital management, our ability to leverage capacity at newly acquired companies and our focus on cost control allow us to reaffirm our stated operating target for full-year non-GAAP operating margin of slightly greater than 10.0%."

Quinlan added, "Our discipline in capital deployment has positioned us well, allowing us to maintain investment grade credit metrics and substantial liquidity. Since our last earnings call in February, we completed the Pro Line Printing acquisition, repurchased 2.7 million shares and paid our dividend."

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
During 2007, the company acquired Banta Corporation, Perry Judd's, Von Hoffmann and Cardinal Brands and in the first quarter of 2008, the company acquired Pro Line Printing. In aggregate, the acquired companies carried a lower operating margin historically than the company has been able to achieve. The company's proven financial discipline and approach to achieving productivity increases have had a positive impact on these operations, and the company sees opportunities for continued improvement.

Net sales in the quarter were $3.0 billion, up 7.3% from the first quarter of 2007. The increase was due to acquisitions and favorable foreign exchange rates, offset in part by continued price pressure. The gross margin rate decreased to 26.0% in the first quarter of 2008 from 26.4% in the first quarter of 2007 due to the inclusion of the acquired companies that in aggregate carried a lower margin historically, an unfavorable product mix and continued price pressure that more than offset the benefits from productivity efforts. SG&A expense as a percentage of net sales decreased slightly to 11.5% in the first quarter of 2008 from 11.6% in the first quarter of 2007 due to the benefits of our productivity initiatives and higher sales volume. Operating margin decreased to 9.0% in the first quarter of 2008 from 9.3% in the first quarter of 2007. The non-GAAP operating margin in the first quarter of 2008 decreased to 9.2% from 9.7% in the first quarter of 2007, as benefits from our productivity efforts were more than offset by the inclusion of the acquired companies that in aggregate carried a lower margin historically, changes in foreign exchange rates, an unfavorable product mix and continued price pressure. Reconciliations of GAAP operating income and margin to non-GAAP operating income and margin are presented in the attached tables.

Segments
Net sales for the U.S. Print and Related Services segment increased 6.6% to $2.2 billion from the first quarter of 2007 due to the acquisitions of Von Hoffmann, Cardinal Brands, Perry Judd's, Banta and Pro Line, as well as sales increases of logistics services, labels and catalogs, offset in part by decreased sales of commercial print, directories and forms. The segment's operating margin decreased to 11.9% in the first quarter of 2008 from 12.3% in the first quarter of 2007. The segment's non-GAAP operating margin decreased to 12.1% in the first quarter of 2008 from 12.6% in the first quarter of 2007, as the benefit of productivity efforts was offset by the inclusion of the acquired companies that in aggregate carried a lower operating margin historically.

Net sales for the International segment increased 9.5% to $756.4 million from the first quarter of 2007 primarily due to the impact of changes in foreign exchange rates, acquisitions and increased sales of our offerings in Asia, Latin America and Global Turnkey Solutions, offset by continued price pressure. The segment's operating margin decreased to 6.5% in the first quarter of 2008 from 7.7% in the first quarter of 2007. The segment's non-GAAP operating margin decreased to 6.8% in the first quarter of 2008 from 8.1% in the first quarter of 2007 due to changes in foreign exchange rates, an unfavorable business mix and continued price pressure.

Unallocated Corporate operating expense decreased to $46.0 million in the first quarter of 2008 from $54.3 million in the first quarter of 2007. Excluding restructuring reversals of $1.2 million in the first quarter of 2008 and restructuring charges of $4.1 million in the first quarter of 2007, Corporate operating expense decreased $3.0 million to $47.2 million in the first quarter of 2008, in part due to lower employee benefits expense and our productivity efforts.