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RR Donnelley Reports First Quarter 2008 Results

05/06/2008

CHICAGO -- May 6, 2008 -- Highlights:
 

  • First-Quarter 2008 GAAP net earnings from continuing operations of $182.0 million or $0.85 per diluted share vs. net earnings from continuing operations of $138.9 million or $0.63 per diluted share in 2007
  • First-Quarter 2008 Non-GAAP net earnings from continuing operations of $148.5 million or $0.69 per diluted share vs. net earnings from continuing operations of $145.9 million or $0.66 per diluted share
  • Increases the low end of the range of 2008 Non-GAAP net earnings per diluted share from continuing operations guidance by $0.03 to a revised range of $3.08 to $3.15
  • Repurchased 2.7 million shares of common stock year-to-date through today; remaining share authorization of 7.3 million shares

R.R. Donnelley & Sons Company (NYSE:RRD) 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.

Outlook - 2008 Full-Year Non-GAAP EPS from Continuing Operations
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, representing a $0.03 increase in the low end of the range. This guidance includes the expected impact of the previously announced 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 33.0% to 34.0%. 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.

Conference Call
RR Donnelley will host a conference and simultaneous webcast to discuss its first quarter results today, Tuesday, May 6, at 10:00 a.m. Eastern Time (9:00 a.m. Central Time). The live webcast will be accessible on RR Donnelley's web site: www.rrdonnelley.com. Individuals wishing to participate can join the conference call by dialing 706.634.1139. A webcast replay will be archived on the Company's web site for 30 days after the call. In addition, a telephonic replay of the call will be available for seven days at 706.645.9291, passcode 42407662.

About RR Donnelley
RR Donnelley (NYSE: RRD) is the world's premier full-service provider of print and related services, including business process outsourcing. Founded more than 140 years ago, the company provides products and solutions in commercial printing, direct mail, financial printing, print fulfillment, labels, forms, logistics, call centers, transactional print-and-mail, print management, online services, digital photography, color services, and content and database management to customers in the publishing, healthcare, advertising, retail, technology, financial services and many other industries. The largest companies in the world and others rely on RR Donnelley's scale, scope and insight through a comprehensive range of online tools, variable printing services and market-specific solutions. For more information, visit the company's web site at www.rrdonnelley.com.

Use of Forward-Looking Statements
This news release contains "forward-looking statements" as defined in the U.S. Private Securities Litigation Reform Act of 1995. Readers are cautioned not to place undue reliance on these forward-looking statements and any such forward-looking statements are qualified in their entirety by reference to the following cautionary statements. All forward-looking statements speak only as of the date of this news release and are based on current expectations and involve a number of assumptions, risks and uncertainties that could cause the actual results to differ materially from such forward-looking statements. The company does not undertake to and specifically declines any obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect future events or circumstances after the date of such statement or to reflect the occurrence of anticipated or unanticipated events. The factors that could cause material differences in the expected results of RR Donnelley include, without limitation, the following: the successful execution and integration of acquisitions and the performance of the company's businesses following acquisitions; the ability to implement comprehensive plans for the integration of the sales force, cost containment, asset rationalization and other key strategies; competitive pressures in all markets in which the company operates; factors that affect customer demand, including changes in postal rates and postal regulations, changes in the capital markets, changes in advertising markets, the rate of migration from paper-based forms to digital format, customers' budgetary constraints and customers' changes in short-range and long-range plans; shortages or changes in availability, or increases in costs of, key materials (such as ink, paper and fuel); and other risks and uncertainties described in RR Donnelley's periodic filings with the Securities and Exchange Commission (SEC). Readers are strongly encouraged to read the full cautionary statements contained in RR Donnelley's filings with the SEC.

RR Donnelley Investor Contact:
Dan Leib
Senior Vice President, Treasurer
312.326.7710
dan.leib@rrd.com
RR Donnelley Media Contact:
Doug Fitzgerald
Executive Vice President
Communications
630.322.6830
doug.fitzgerald@rrd.com

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