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RR Donnelley Reports Q4: Revenues and Net Income Up

Press release from the issuing company

CHICAGO, Feb. 5 -- RR Donnelley today announced fourth quarter 2003 earnings per diluted share of $0.85, compared to earnings per diluted share of $0.42 in the year-earlier period. Revenues for the fourth quarter were $1.4 billion, up three percent from the prior year. Net income was $98 million, compared to net income of $48 million in the fourth quarter of 2002. Included in the above results for the fourth quarter of 2003 are restructuring and impairment charges of $7 million ($7 million after-tax, or six cents per diluted share), primarily attributable to impairment charges at the company's Latin America and logistics businesses. Also included in the fourth quarter results is a non-recurring tax benefit of $46 million ($46 million after-tax, or 40 cents per diluted share) comprised of a non-cash tax benefit of $40 million, or 35 cents per diluted share, due to favorable resolution of Internal Revenue Service (IRS) audits covering four years, and $6 million, or 5 cents per diluted share, of refundable income taxes in Latin America due to the realization of tax loss carrybacks. In the year-earlier quarter, results included restructuring and impairment charges of $24 million ($14 million after-tax, or 13 cents per diluted share). For the full-year 2003, the company reported earnings per diluted share of $1.54, compared to $1.24 for the full-year 2002. Revenues in 2003 were $4.8 billion, up one percent from 2002. Net income in 2003 was $177 million compared to $142 million for the prior year. Included in the above results for the full-year 2003 are restructuring and impairment charges of $16 million ($13 million after-tax, or 12 cents per diluted share). Also included in full-year 2003 results is the fourth quarter non-recurring tax benefit of $46 million ($46 million after-tax, or 40 cents per diluted share). Prior year results include restructuring and impairment charges of $89 million ($54 million after-tax, or 47 cents per diluted share), and a tax benefit of $30 million ($30 million after-tax, or 26 cents per diluted share) related to the company's settlement with the IRS on the deductibility of interest payments for corporate-owned life insurance. On January 12, 2004, the company announced that it expected its 2003 full- year earnings per diluted share to be $1.44, subject to final adjustments. At that time, the company expected that full-year 2003 results would include a one-time tax benefit of 31 cents per diluted share, and restructuring and impairment charges of 11 cents per diluted share. Final results for full-year 2003 included a non-recurring tax benefit as noted above of 40 cents per diluted share, or nine cents better than expected. Final results for full- year 2003 also included restructuring and impairment charges of 12 cents per diluted share, one cent higher than expected. In addition to these factors, the company's earnings per share from operations for full-year 2003 were two cents per diluted share higher than reflected in the previous announcement. The company's cash flow in 2003 was more than sufficient to fund necessary investments for the future and the annual dividend, which increased for the 33rd consecutive year. Capital expenditures were $203 million for the year, well below the prior year due to disciplined spending in a difficult operating environment. The company also maintained its focus on managing working capital, again finishing the year with working capital less than 3 percent of sales. Improved working capital management has reduced cash requirements by more than $200 million since 2000. Debt levels were reduced by $70 million from the prior year end. Segment Results The Print segment has not yet begun to experience the positive effect of an economic recovery. The company's domestic book revenues were disappointing, down 14 percent in the fourth quarter compared to a particularly strong fourth quarter in 2002. Reprint orders in the education and specialty segments were weaker in November and December than the company expected, which accounted for most of the shortfall from previous earnings guidance. The company increased print unit volumes in its magazine, catalog and retail business, despite a decrease in magazine industry ad pages in the fourth quarter. However, the company continues to see the year-over-year impact of lower pricing flow through, which more than offset volume gains, resulting in a one percent decrease in net sales. The company's telecommunications business remained strong, although sales decreased four percent in the quarter largely due to the timing shifts of some customer work into 2004 and increased customer furnished paper. "While economic issues continue to confront the printing industry, the changes we have made in our business over the past several years continue to pay off in the form of improved press utilization and lower operating costs," said John Campanelli, president of RR Donnelley Print Solutions. "Despite softness in the book industry, our commitment to service distinctiveness that has led to share gains over the past two years is unchanged," Campanelli added. The Logistics segment's net sales increased in the fourth quarter by 12 percent year over year, driven by organic growth in the print and package logistics businesses and the acquisition of Momentum Logistics. While the package business continued to experience strong growth, operating issues persisted and have depressed earnings. In the fourth quarter, the Logistics business reported a loss of $11 million, compared to a profit of $4 million in the same period of 2002. Lower earnings in the fourth quarter were driven primarily by the same factors that impacted third quarter performance, as well as higher restructuring and impairment charges. The slower than planned start up of the company's new supercenter in York, Penn., resulted in $4 million of higher costs in the fourth quarter. Most of the additional costs associated with the slow start up have now been eliminated, including the closure of a nearby second facility that remained open as a service contingency. The business-to- business package delivery operation of the Momentum Logistics acquisition lost $4 million in the fourth quarter. The company closed the business-to-business operation this week. Additionally, higher than expected transportation costs are being addressed through contract renegotiations with suppliers. The Financial segment performed well, as net sales for the quarter increased 28 percent over last year, primarily driven by higher activity in both domestic and international capital markets and market share gains. Actions previously taken to substantially lower the cost structure in this business enabled a sizeable improvement in earnings as sales increased. "We have room to grow within our lower cost structure," said Terry Trayvick, president of RR Donnelley Financial, "and we see upside potential as activity continues to rebound in the capital markets and we demonstrate the power of our new service model." Other revenue grew 24 percent in the fourth quarter, driven largely by growth in International, partially offset by lower sales in RRD Direct. The company's loss in its Other segment widened in the fourth quarter, driven by lower earnings in RRD Direct and Latin America and development costs in Asia, partially offset by stronger earnings in Europe. The company's fourth quarter earnings from operations for Corporate increased between years despite lower pension income, primarily due to lower workers' compensation costs and a non- recurring provision for litigation in 2002. Other Consolidated Items Full-year 2003 selling and administrative expenses included higher bad debt expense in Latin America, lower benefit plan earnings, and increased costs to support sales growth in Europe. Fourth quarter 2002 selling and administrative expenses included a benefit of $6 million to reclassify a portion of incentive compensation for the hourly workforce to cost of sales. Excluding the effect of this fourth quarter item in the prior year, fourth quarter selling and administrative expenses as a percentage of net sales was 10.3 percent in both years. Net interest expense in the fourth quarter 2003 increased due to lower capitalized interest partially offset by lower effective interest rates and lower average borrowings. For the full-year, net interest expense decreased primarily due to lower effective interest rates and lower average borrowings. Other expense for the quarter was lower than in the prior year primarily due to lower writedowns of affordable housing investments and a gain in 2003 on the sale of an investment. Other expense for the full-year was higher in 2003 due to lower gains on sale of investments and lower earnings on equity investments, partially offset by lower affordable housing writedowns and non- recurring 2002 expenses for corporate-owned life insurance.