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RR Donnelley Reports Third Quarter 2008 Results

11/05/2008

CHICAGO -- November 5, 2008 -- Highlights:
 

  • Third-quarter 2008 GAAP net earnings from continuing operations of $168.2 million or $0.80 per diluted share vs. net earnings from continuing operations of $175.0 million or $0.80 per diluted share in 2007
  • Third-quarter 2008 non-GAAP net earnings from continuing operations of $183.2 million or $0.87 per diluted share, an increase of 7.4% over the $0.81 in non-GAAP earnings per diluted share in the third quarter of 2007
  • Repurchased 10 million shares of common stock year-to-date through today
  • Additional share repurchases have been authorized, bringing the total available authorization back to 10 million shares

R.R. Donnelley & Sons Company (NYSE:RRD) today reported third-quarter net earnings from continuing operations of $168.2 million or $0.80 per diluted share on net sales of $2.9 billion compared to net earnings from continuing operations of $175.0 million or $0.80 per diluted share on net sales of $2.9 billion in the third quarter of 2007. The third-quarter net earnings from continuing operations in both 2008 and 2007 included pre-tax charges, substantially all associated with the reorganization of certain operations and the exiting of certain business activities, for restructuring ($22.9 million) and impairment ($0.5 million) totaling $23.4 million in 2008 and for restructuring ($18.4 million) and impairment ($1.5 million), totaling $19.9 million in 2007. The company's effective tax rate increased to 32.0% in the third quarter of 2008 from 25.1% in the third quarter of 2007 primarily due to the favorable impact on the 2007 tax rate of the lower statutory tax rate in the United Kingdom that generated a $9.3 million reduction in net deferred tax liabilities, a larger proportion of taxable income being generated in higher tax jurisdictions and a higher effective tax rate on foreign earnings in 2008 that was partially offset by the benefit in the current quarter from the resolution of uncertain tax positions.

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 $183.2 million or $0.87 per diluted share in the third quarter of 2008 compared to $177.8 or $0.81 per diluted share in the third quarter of 2007. Third-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 32.3% in the third quarter of 2008 from 29.9% in the third quarter of 2007 due to both a larger proportion of taxable income being generated in higher tax jurisdictions and a higher effective tax rate on foreign earnings in 2008. A reconciliation of GAAP net earnings to non-GAAP net earnings for these adjustments is presented in the attached tables.

"Given these unprecedented times, we are pleased with the earnings generated in the quarter," said Thomas J. Quinlan III, RR Donnelley's President and Chief Executive Officer. "In a challenging revenue environment, we have generated nearly $700 million in cash from operations through the third quarter of 2008, validating our strategy and demonstrating the benefits of our diverse and flexible platform and broad product offering. We continued to secure new business, including the recently announced print management deals with Houghton Mifflin Harcourt Publishing Company and Harrah's. Through continued expense management, we reaffirm our full-year non-GAAP operating margin guidance for the year of slightly greater than 10.0%."

Quinlan added, "Our discipline in capital deployment and management as well as the resulting strong balance sheet and liquidity profile differentiate us in our industry and position us to serve our customers well."

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 Cardinal Brands in December of 2007 and Pro Line Printing in March of 2008. 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 $2.9 billion, down 1.6% from the third quarter of 2007. The decrease was caused by volume declines and continued price pressure primarily due to the global economic slowdown, offset in part by acquisitions and favorable foreign exchange rates. Gross margin decreased slightly to 27.0% in the third quarter of 2008 from 27.1% in the third quarter of 2007 due to volume and price declines, as well as the inclusion of the acquired companies that in aggregate carried a lower margin historically, offset in part by the benefits of our productivity efforts and a variable compensation expense reduction. SG&A expense as a percentage of net sales decreased to 9.8% in the third quarter of 2008 from 11.0% in the third quarter of 2007, primarily due to variable compensation expense reduction. Operating margin, which was negatively impacted by charges for restructuring and impairment of $23.4 million in the third quarter of 2008 and $19.9 million in the third quarter of 2007, increased to 10.7% in the third quarter of 2008 from 10.1% in the third quarter of 2007.

Excluding charges for restructuring and impairment, the non-GAAP operating margin in the third quarter of 2008 increased to 11.5% from 10.8% in the third quarter of 2007, as the reduction in variable compensation expense improved margins by 277 basis points and the benefits from our productivity efforts offset the impact of volume and price declines and the inclusion of the acquired companies that in aggregate carried a lower margin historically.

Segments
Net sales for the U.S. Print and Related Services segment decreased 0.8% to $2.1 billion from the third quarter of 2007 due to volume declines across most product lines and continued price pressure primarily due to the global economic slowdown. Partially offsetting these declines were sales from the acquisitions of Cardinal Brands and Pro Line Printing, as well as sales increases in logistics services and volume increases in forms and labels. The segment's operating margin, which was negatively impacted by charges for restructuring and impairment of $16.7 million in the third quarter of 2008 and $11.8 million in the third quarter of 2007, increased to 13.4% from 12.8% in the third quarter of 2007. Excluding restructuring and impairment charges, the segment's non-GAAP operating margin increased to 14.2% in the third quarter of 2008 from 13.4% in the third quarter of 2007, as the reduction in variable compensation expense and the benefits of our productivity efforts more than offset the impact of volume and price declines and the inclusion of the acquired companies that in aggregate carried a lower margin historically.

Net sales for the International segment decreased 3.6% to $721.2 million from the third quarter of 2007 due to volume declines in business process outsourcing services, European print and financial print as well as continued price pressure. Partially offsetting these declines were favorable foreign exchange rates and volume increases in Asia printing services and Latin America. The segment's operating margin, which was negatively impacted by charges for restructuring and impairment of $5.0 million in the third quarter of 2008 and charges for restructuring of $3.8 million in the third quarter of 2007, increased to 8.4% in the third quarter of 2008 from 7.2% in the third quarter of 2007. Excluding restructuring and impairment charges, the segment's non-GAAP operating margin increased to 9.1% in the third quarter of 2008 from 7.7% in the third quarter of 2007 due to productivity and cost management initiatives and the variable compensation expense reduction, which more than offset volume and price pressure and an unfavorable change in foreign exchange rates.

Unallocated Corporate operating expense increased to $42.4 million in the third quarter of 2008 from $36.1 million in the third quarter of 2007. Excluding restructuring charges of $1.7 million in the third quarter of 2008 and $4.3 million in the third quarter of 2007, Corporate operating expense increased from $31.8 million to $40.7 million in the third quarter of 2008 due to increases in both the LIFO inventory provision and the bad debt provision partially offset by the variable compensation expense reduction.

Outlook - 2008 Full-year non-GAAP EPS from Continuing Operations Revised
Although the economic outlook is more uncertain, 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 $3.11. 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 32.5% to 33.5%. 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.

Conference Call
RR Donnelley will host a conference and simultaneous webcast to discuss its third quarter results today, Wednesday, November 5, 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 65893129.

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 144 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; the volatility and disruption of the capital and credit markets, and adverse changes in the global economy; our ability to access unsecured debt in the capital markets and our beliefs regarding the reliability of the participants to our contractual lending agreements; factors that affect customer demand, including changes in postal rates and postal regulations, 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; customers' financial strength; 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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