(August 06, 2008) R.R. Donnelley & Sons Company today reported second-quarter net earnings from continuing operations of $145.1 million or $0.68 per diluted share on net sales of $2.9 billion compared to a net loss from continuing operations of $69.4 million or $0.32 per diluted share on net sales of $2.8 billion in the second quarter of 2007. The second-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 ($15.8 million) and impairment ($0.4 million) totaling $16.2 million in 2008. The net loss from continuing operations in the second quarter of 2007 included pre-tax charges for impairment ($316.7 million) and restructuring ($13.8 million), totaling $330.5 million. Substantially all of the second-quarter 2007 impairment charge related to the write-off of the Moore Wallace, OfficeTiger and other trade names and substantially all of the second quarter-2007 restructuring charges related to the reorganization of certain operations and exiting of certain business activities. The company's effective tax rate was 33.5% in the second quarter of 2008 compared to a net tax benefit of 37.8% in the second quarter of 2007 primarily due to a tax benefit recognized on the pre-tax loss resulting from the non-cash impairment charge included in the second quarter of 2007.

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 $156.4 million or $0.73 per diluted share in the second quarter of 2008 compared to $149.2 or $0.67 per diluted share in the second quarter of 2007. Second-quarter non-GAAP net earnings from continuing operations exclude restructuring and impairment charges in both 2008 and 2007. For non-GAAP comparison purposes, the effective tax rate increased to 33.3% in the second quarter of 2008 from 31.9% in the second quarter of 2007 due to a larger proportion of taxable income being generated in higher tax jurisdictions in 2008. A reconciliation of GAAP net earnings to non-GAAP net earnings for these adjustments is presented in the attached tables.

"As we mentioned in the pre-release of our second-quarter results on July 16, we are pleased with our results in the context of challenging global economic conditions," said Thomas J. Quinlan III, RR Donnelley's President and Chief Executive Officer. "The preparation and diligence in continuously managing our cost structure paid off as operating margins expanded, driven by our U.S. Print and Related Services segment. We reaffirm our full-year non-GAAP operating margin guidance of slightly greater than 10.0%."

Quinlan added, "We continue to employ a balanced approach to capital deployment allowing us to maintain investment grade credit metrics and substantial liquidity."

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
The company acquired Von Hoffmann in May of 2007, Cardinal Brands in December of 2007 and Pro Line Printing in March of 2008. In aggregate, these 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 $2.9 billion, up nearly 4.6% from the second quarter of 2007. The increase was due to acquisitions and favorable foreign exchange rates, offset in part by continued price pressure and volume declines. The gross margin rate decreased to 26.7% in the second quarter of 2008 from 27.1% in the second 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. While the gross margin rate decreased, the Company's aggressive cost management resulted in a larger decrease in SG&A as a percentage of revenue than the gross margin decrease. SG&A expense as a percentage of net sales decreased to 11.1% in the second quarter of 2008 from 11.9% in the second quarter of 2007 due to the benefits of our productivity initiatives. Operating margin, which was negatively impacted by charges for restructuring and impairment of $16.2 million in the second quarter of 2008 and $330.5 million in the second quarter of 2007, increased to 9.5% in the second quarter of 2008 from –1.9% in the second quarter of 2007.

Excluding charges for restructuring and impairment, the non-GAAP operating margin in the second quarter of 2008 increased to 10.0% from 9.9% in the second quarter of 2007, as benefits from our costs savings and productivity efforts offset continued price pressure, the inclusion of the acquired companies that in aggregate carried a lower margin historically and changes in foreign exchange rates.

Segments
Net sales for the U.S. Print and Related Services segment increased 4.5% to $2.2 billion from the second quarter of 2007 due to the acquisitions of Von Hoffmann, Cardinal Brands and Pro Line, as well as sales increases in logistics services and volume increases in stock products, direct mail and digital solutions, offset in part by decreases in commercial print, financial print and forms. The segment's operating margin, which was negatively impacted by charges for restructuring of $3.9 million in the second quarter of 2008 and restructuring and impairment charges of $263.3 million in the second quarter of 2007, increased to 13.1% from 0.2% in the second quarter of 2007. Excluding restructuring and impairment charges, the segment's non-GAAP operating margin increased to 13.3% in the second quarter of 2008 from 12.9% in the second quarter of 2007, as the benefit of productivity efforts more than offset the impact of continued price pressure and the inclusion of the acquired companies that in aggregate carried a lower margin historically.

Net sales for the International segment increased 4.8% to $762.0 million from the second quarter of 2007 due to the impact of changes in foreign exchange rates and increased sales in Global Turnkey Solutions and Latin America, partially offset by continued price pressure. The segment's operating margin, which was negatively impacted by charges for restructuring of $9.2 million in the second quarter of 2008 and restructuring and impairment charges of $65.6 million in the second quarter of 2007, increased to 5.1% in the second quarter of 2008 from –2.0% in the second quarter of 2007. Excluding restructuring and impairment charges, the segment's non-GAAP operating margin decreased to 6.3% in the second quarter of 2008 from 7.0% in the second quarter of 2007 due to changes in foreign exchange rates, an unfavorable business mix and continued price pressure.

Unallocated Corporate operating expense increased slightly to $44.7 million in the second quarter of 2008 from $43.6 million in the second quarter of 2007. Excluding restructuring and impairment charges of $3.1 million in the second quarter of 2008 and restructuring charges of $1.6 million in the second quarter of 2007, Corporate operating expense decreased slightly from $42.0 million to $41.6 million in the second quarter of 2008.

Outlook – 2008 Full-year non-GAAP EPS from Continuing Operations Reaffirmed
For the full year of 2008, RR Donnelley is projecting non-GAAP net earnings per diluted share from continuing operations to be in the range of $3.08 to $3.15. This guidance includes the expected impact of the previously completed acquisitions and assumes no additional shares repurchased under the authorization available to the company. The non-GAAP effective tax rate for 2008 is expected to be approximately 33.5% to 34.5%. GAAP net earnings per diluted share from continuing operations in 2008 may include restructuring and impairment charges, the resolution of certain tax items and other items that are not currently determinable, but may be significant. For that reason, the company is unable to provide full-year GAAP net earnings estimates at this time.