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RR Donnelley Reports Q1 Loss: Integration with Moore Progressing

Press release from the issuing company

CHICAGO--May 6, 2004-- R.R. Donnelley & Sons Company today reported financial results for its first quarter ended March 31, 2004. First quarter net sales totaled $1.45 billion, with a GAAP (Generally Accepted Accounting Principles) net loss of $58.8 million, or ($0.39) per share. The company's combination with Moore Wallace Incorporated, a leading single-source provider of print management and outsourced communications, was completed on February 27, 2004. Consequently, the results for the first quarter of 2004 include the operations of Moore Wallace for 34 days. The company believes that certain non-GAAP measures, when presented in conjunction with comparable GAAP 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 this indicator. 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 net earnings for the first quarter totaled $17.6 million, or $0.11 per diluted share. Non-GAAP net earnings exclude acquisition-related charges, restructuring and impairment charges, gain on the disposal of an investment, and the cumulative effect of a change in accounting principle. A reconciliation of GAAP net earnings to non-GAAP net earnings for these adjustments is presented in the attached tables. In addition, the company used an effective tax rate of 38.3% in calculating non-GAAP net earnings. Mark A. Angelson, RR Donnelley's Chief Executive Officer, said, "The new RR Donnelley is off to a promising start. I am encouraged by the first quarter results and the progress we've made to date in integrating the two companies. We now have in place a management team that reflects the best in leadership and is focused on proactive relationships with customers, and fiscal and operational discipline. We are moving quickly to evaluate all of our businesses and have set in motion our plan for portfolio optimization through financial controls and revenue growth. We have a considerable amount of work to do, but we see tremendous opportunities. "We have already begun to reap the benefits of our plan to enhance profitability through the elimination of duplicative infrastructure, procurement savings and asset rationalization. As a result, we remain confident in our previously disclosed expectation that the combination will be accretive to earnings in the first full year of operations before restructuring, acquisition- and integration-related charges. We now believe we will generate annualized cost savings of at least $100 million within the next 12 months." Mr. Angelson added, "We believe recent customer wins confirm the rationale behind the combination and signal confidence and support for the new RR Donnelley. Furthermore, these successes validate our ability not only to benefit from substantial cost synergies but also to leverage blue chip client relationships and a comprehensive portfolio of market-leading print-related products and services into a viable cross-selling platform to accelerate growth. We are particularly pleased with our new contract with IAC/InterActiveCorp. We believe it is the paradigm for future mutually successful relationships between us and our largest customers." Business Overview The company's net sales were up 35% overall due primarily to the combination with Moore Wallace. In addition, the company experienced strong growth in the Financial segment, the directories business within the Print segment, and certain international markets. Net sales for the Print segment increased 1.5%, driven by strength in the directories and premedia businesses. These increases were partially offset by weak net sales in the book business, which was impacted by continued softness in market demand for education and religious categories. The magazines, catalogs and retail business experienced level net sales, a result of higher volume with existing customers offset by lower pricing. Net sales for the Logistics segment increased 4% year over year due to continued organic growth in the print logistics and expedited services businesses and the comparative benefit of a March 2003 acquisition. The Financial segment delivered a very strong quarter with sales up 25% year over year due to increased activity in the global capital markets, especially improved domestic market conditions, increased compliance work, and several large transactions in Asia. The Other segment, which consists of the direct mail and international businesses (excluding legacy Moore Wallace direct mail and international operations), grew 18% year over year. The increase was driven by higher volume in the international business throughout Europe, Asia and Latin America as well as favorable European exchange rates. The benefit was partially offset by lower volume in the direct mail business. The combination of RR Donnelley and Moore Wallace was completed on February 27, 2004. Accordingly, the results of operations of the Forms & Labels, Commercial and Outsourcing segments are included in the company's results of operations only for the 34-day period ended March 31, 2004. Although the results of the company reflect only that 34-day period, management believes that the following discussion of trends affecting those three segments for the full three months ended March 31, 2004, compared to the prior year period, is relevant. Although customer retention remained stable, the Forms & Labels segment continued to be challenged by industry factors including volume declines, due in part to electronic substitution for multi-part forms and aggressive pricing competition. The Outsourcing segment benefited from Moore Wallace's December 2003 acquisition of Payment Processing Solutions and volume increases with a significant new customer. The Commercial segment significantly benefited from Moore Corporation's acquisition of Wallace Computer Services in May 2003. In addition, the segment benefited from increased demand in its domestic direct mail and commercial print operations, heightened economic activity in key markets served, particularly the advertising, financial and health care sectors, and continued success in cross-selling activities; however, lower volumes in the technical publications operations continue to be a challenge. Other Events In March 2004, the company issued $400.0 million of 3.75% senior unsecured notes due 2009 and $600.0 million of 4.95% senior unsecured notes due 2014. The proceeds from the issuance of these notes were used to repay Moore Wallace debt assumed in the combination, including $497.5 million under the senior secured credit facility and $403.0 million of 7.875% senior unsecured notes due 2011. Outlook For the full year 2004, RR Donnelley is targeting non-GAAP earnings per diluted share of approximately $1.50. Guidance for the quarter ended June 30, 2004 will be provided later in the quarter. The company has no plans to change its quarterly dividend rate of $0.26 per share in 2004.