RRD.WI Donnelley (R.R.) & Sons Co.

Highlights: CHICAGO, Aug. 1 /PRNewswire-FirstCall/ -- R.R. Donnelley & Sons Company (NYSE:RRD) today reported second-quarter 2006 net earnings from continuing operations of $124.4 million or $0.57 per diluted share on net sales of $2.3 billion compared to net earnings from continuing operations of $95.3 million or $0.44 per diluted share on net sales of $1.9 billion in the second quarter of 2005. The second-quarter 2006 net earnings from continuing operations included charges for restructuring ($12.7 million) and impairment ($1.9 million) totaling $14.6 million, substantially all of which were associated with the reorganization of certain operations and the exiting of certain business activities. Net earnings from continuing operations in the second quarter of 2005 included charges for restructuring ($22.2 million), integration ($2.6 million) and impairment ($2.2 million) totaling $27.0 million, primarily related to the integration of the 2004 acquisition of Moore Wallace. The company's effective tax rate decreased to 31.9% in the second quarter of 2006 from 35.8% in the second quarter of 2005, primarily reflecting the benefit from a larger proportion of taxable income being generated in lower tax jurisdictions, a reduction in the statutory tax rate in Canada and the reversal of non-US tax valuation allowances. Discontinued operations produced net income of $0.8 million in the second quarter of 2006 and a net loss of $4.6 million in the second quarter of 2005. Including discontinued operations, net earnings were $125.2 million or $0.57 per diluted share in the second quarter of 2006 compared to net earnings of $90.7 million or $0.42 per diluted share in the second quarter of 2005. 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 net earnings from continuing operations totaled $133.6 million or $0.61 per diluted share in the second quarter of 2006 compared to $110.6 million or $0.51 per diluted share in the second quarter of 2005. Non-GAAP net earnings from continuing operations exclude charges for restructuring and impairment in the second quarter of 2006 and exclude charges for restructuring, impairment and integration in the second quarter of 2005. 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 second-quarter results," said Mark A. Angelson, RR Donnelley's Chief Executive Officer. "Our Publishing and Retail Services segment delivered strong revenue growth and expanded margins. Our Integrated Print Communications segment, led by the financial print business, posted strong revenue and profit growth. We continued to win in the marketplace in each of our segments." Angelson added, "During the quarter, we benefited as we ramped up our new and expanded customer relationships and as we continued to integrate the strategic acquisitions that broadened our business services capabilities and the tuck-in acquisitions that increased our flexibility and responsiveness." Business Review (Continuing Operations) Following are the results for the company and each reportable segment. Summary Net sales in the quarter were $2.3 billion, up 17.7% from the second quarter of 2005. The increase was primarily due to acquisitions, namely The Astron Group, Asia Printers Group, OfficeTiger, Spencer Press, Poligrafia, the Charlestown, Indiana print operations of Adplex-Rhodes and Critical Mail Continuity Services, as well as new customer wins and increased volume with existing customers in the Publishing and Retail Services and Integrated Print Communications segments, offset in part by continued pricing pressure. The gross margin rate decreased to 27.5% in the second quarter of 2006 from 27.6% in the second quarter of 2005, reflecting, in part, higher year-over-year paper prices that largely were passed through to customers. SG&A expense as a percentage of net sales was 12.1% in both the second quarter of 2006 and 2005. Operating margin, which was negatively impacted by charges for restructuring and impairment totaling $14.6 million in the second quarter of 2006 and by charges for restructuring, impairment and integration totaling $27.0 million in the second quarter of 2005, was 9.8% in the second quarter of 2006 compared to 9.1% in the second quarter of 2005. Excluding charges for restructuring, impairment and integration, the non-GAAP operating margin in the second quarter of 2006 was 10.4% compared to 10.5% in the second quarter of 2005. Pricing pressure, increased information technology investment and higher energy prices were offset, in part, by increased volume and the benefits of our productivity efforts. Reconciliations of GAAP operating income and margin to non-GAAP operating income and margin are presented in the attached tables. Segments The company reports its results in four reportable segments: 1) Publishing and Retail Services, 2) Integrated Print Communications, 3) Forms and Labels and 4) Corporate. The Publishing and Retail Services segment includes: our 1) magazine, catalog and retail, 2) directories, 3) book, 4) European, 5) Asian, 6) logistics and 7) premedia businesses. Net sales for the Publishing and Retail Services segment increased 14.8% to $1.1 billion from the second quarter of 2005 primarily due to sales increases in our international operations and directory business and the acquisitions of the Asia Printers Group, Spencer Press, the Charlestown, Indiana print operations of Adplex-Rhodes and Poligrafia. The segment's operating margin, which was negatively impacted by charges for restructuring of $3.2 million in the second quarter of 2006 and by charges for restructuring and impairment totaling $7.3 million in the second quarter of 2005, was 15.5% in the second quarter of 2006 compared to 14.3% in the second quarter of 2005. Excluding restructuring and impairment charges, the segment's non-GAAP operating margin for the second quarter of 2006 was 15.8% compared to 15.0% in the second quarter of 2005, primarily resulting from increased sales volume, favorable business mix shift and the benefits of our productivity initiatives that more than offset the impact of pricing pressure and higher energy and paper prices. The Integrated Print Communications segment includes: our 1) direct mail and business communications services, 2) financial print, 3) short-run commercial print and 4) business process outsourcing (The Astron Group and OfficeTiger) businesses. Net sales for the Integrated Print Communications segment increased 33.5% to $727.2 million from the second quarter of 2005, primarily due to the acquisitions of The Astron Group and OfficeTiger as well as sales growth in our financial print, short-run commercial print and direct mail businesses. The segment's operating margin, which was negatively impacted by charges for restructuring and impairment totaling $8.5 million in the second quarter of 2006 and by charges for restructuring, impairment and integration totaling $2.9 million in the second quarter of 2005, decreased to 9.6% in the second quarter of 2006 from 11.9% in the second quarter of 2005. Excluding restructuring, impairment and integration charges, the segment's non-GAAP operating margin decreased to 10.8% in the second quarter of 2006 from 12.4% in the second quarter of 2005. This decrease was due to mix shift to lower margin businesses and incremental non-cash depreciation and purchase accounting-related amortization expenses associated with the acquisitions of The Astron Group and OfficeTiger. The Forms and Labels segment includes: our 1) forms, 2) labels, 3) office products, 4) Latin American and 5) Canadian businesses. Net sales for the segment increased 3.5% to $423.6 million in the second quarter of 2006 from the second quarter of 2005, primarily due to favorable foreign exchange rates and increased volume in our Latin American business. The segment's operating margin, which was negatively impacted by charges for restructuring and impairment totaling $2.2 million in the second quarter of 2006 and by charges for restructuring, impairment and integration totaling $2.1 million in the second quarter of 2005, decreased to 7.5% in the second quarter of 2006 from 7.9% in the second quarter of 2005. Excluding restructuring, impairment and integration charges, non-GAAP operating margin decreased to 8.0% in the second quarter of 2006 from 8.4% in the second quarter of 2005, primarily due to continued pricing pressure, offset in part by increased sales volume and the benefits of our productivity efforts. Corporate operating expenses decreased to $53.8 million in the second quarter of 2006 from $60.9 million in the second quarter of 2005. Excluding charges for restructuring of $0.7 million in the second quarter of 2006 and restructuring and integration totaling $14.7 million in the second quarter of 2005, corporate operating expenses increased $6.9 million to $53.1 million from the second quarter of the prior year primarily due to additional investment in information technology. Outlook -- 2006 Full-Year Non-GAAP EPS from Continuing Operations Reaffirmed For the full year of 2006, RR Donnelley is projecting non-GAAP net earnings per diluted share from continuing operations to be in the range of $2.45 to $2.50, but trending toward the high end of the range. This guidance includes the expected dilutive impact from both the acquisition of OfficeTiger and the adoption, in the first quarter of 2006, of SFAS No. 123(R) -- Share-Based Payment, and assumes no shares repurchased under the authorization available to the company. The non-GAAP effective tax rate for 2006 is expected to be approximately 34.5%. GAAP net earnings per diluted share from continuing operations in 2006 may include restructuring, impairment and integration 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. Investor Day to be held September 26, 2006 in Chicago An Investor Day will be held near RR Donnelley's corporate headquarters in Chicago on Tuesday, September 26, 2006. The company plans to provide a review of its businesses and discuss its strategic initiatives, financial outlook, and priorities for capital deployment. Management presentations will be followed by a question and answer session. This meeting will be webcast and details will be posted in advance on the company's website, http://www.rrdonnelley.com/ . Conference Call RR Donnelley will host a conference call to discuss its second-quarter results on Tuesday, August 1, 2006, at 10:00 am Eastern Time (9:00 am Central Time). The company will provide a live webcast of the earnings conference call, which can be accessed via the Internet at http://www.rrdonnelley.com/ ("Investors"). 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 2894319. 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 solutions in commercial printing, direct mail, financial printing, print fulfillment, forms and labels, 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 http://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 execution of cross-selling, 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 disclaims any obligation to update or revise any forward-looking statements. R. R. Donnelley & Sons Company Consolidated Balance Sheets As of June 30, 2006 and December 31, 2005 (UNAUDITED) (In millions, except per share data) June 30, 2006 December 31, 2005 Assets Current Assets Cash and cash equivalents $138.5 $366.7 Receivables, less allowance for doubtful accounts 1,570.9 1,529.1 Inventories 522.6 481.4 Prepaid expenses and other current assets 91.4 67.5 Deferred income taxes 168.7 177.0 Total Current Assets 2,492.1 2,621.7 Property, plant and equipment - net 2,138.9 2,138.6 Goodwill 2,974.5 2,750.7 Other intangible assets - net 1,166.3 1,094.3 Prepaid pension cost 517.1 514.1 Other noncurrent assets 311.7 254.3 Total Assets $9,600.6 $9,373.7 Liabilities Current Liabilities Accounts payable 661.6 718.1 Accrued liabilities 810.8 826.9 Short-term debt and current portion of long-term debt 330.2 269.1 Total Current Liabilities 1,802.6 1,814.1 Long-term debt 2,357.9 2,365.4 Postretirement benefits 333.4 330.6 Deferred income taxes 586.7 596.8 Other noncurrent liabilities 627.3 541.2 Liabilities from discontinued operations 3.5 1.4 Total Liabilities $5,711.4 $5,649.5 Shareholders' Equity Preferred stock, $1.00 par value - - Authorized shares: 2.0; Issued: None Common stock, $1.25 par value Authorized shares: 500.0 Issued shares: 243.0 in 2006 and 2005 303.7 303.7 Additional paid-in capital 2,850.6 2,888.2 Retained earnings 1,564.1 1,439.4 Accumulated other comprehensive loss (71.1) (90.2) Unearned compensation - (44.9) Treasury stock, at cost, 25.1 shares in 2006 (2005 - 25.5 shares) (758.1) (772.0) Total Shareholders' Equity $3,889.2 $3,724.2 Total Liabilities and Shareholders' Equity $9,600.6 $9,373.7 R. R. Donnelley & Sons Company Consolidated Statements of Operations Three and Six Months Ended June 30, 2006 and 2005 (In millions, except per share data) (UNAUDITED) Three months ending June 30, ADJUSTMENTS ADJUSTMENTS 2006 TO 2006 2005 TO 2005 GAAP NON-GAAP NON-GAAP GAAP NON-GAAP NON-GAAP Net sales $2,273.7 - $2,273.7 $1,932.1 - $1,932.1 Cost of sales (exclusive of depreciation and amortization shown below) 1,648.0 - 1,648.0 1,399.2 - 1,399.2 Selling, general and administrative expenses (exclusive of depreciation and amortization shown below) 275.2 - 275.2 233.2 (2.6) 230.6 Restructuring and impairment charges - net 14.6 (14.6) - 24.4 (24.4) - Depreciation and amortization 114.2 - 114.2 99.6 - 99.6 Total operating expenses 2,052.0 (14.6) 2,037.4 1,756.4 (27.0) 1,729.4 Income from continuing operations 221.7 14.6 236.3 175.7 27.0 202.7 Interest expense - net 35.6 - 35.6 23.7 - 23.7 Investment and other income (expense) - net (3.7) - (3.7) (3.8) - (3.8) Earnings from continuing operations before income taxes and minority interest 182.4 14.6 197.0 148.2 27.0 175.2 Income tax expense 58.2 5.4 63.6 53.1 11.7 64.8 Minority interest (0.2) - (0.2) (0.2) - (0.2) Net earnings from continuing operations 124.4 9.2 133.6 95.3 15.3 110.6 Income (loss) from discontinued operations - net of tax 0.8 (0.8) - (4.6) 4.6 - Net earnings $125.2 $8.4 $133.6 $90.7 $19.9 $110.6 Earnings per share: Basic: Net earnings from continuing operations $0.57 $0.62 $0.44 $0.52 Income (loss) from discontinued operations, net of tax - - (0.02) - Net earnings $0.57 $0.62 $0.42 $0.52 Diluted: Net earnings from continuing operations $0.57 $0.61 $0.44 $0.51 Income (loss) from discontinued operations, net of tax - - (0.02) - Net earnings $0.57 $0.61 $0.42 $0.51 Weighted average common shares outstanding: Basic 216.9 216.9 213.5 213.5 Diluted 218.9 218.9 215.1 215.1 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. Six months ending June 30, ADJUSTMENTS ADJUSTMENTS 2006 TO 2006 2005 TO 2005 GAAP NON-GAAP NON-GAAP GAAP NON-GAAP NON-GAAP Net sales $4,540.6 - $4,540.6 $3,858.6 - $3,858.6 Cost of sales (exclusive of depreciation and amortization shown below) 3,309.4 - 3,309.4 2,766.2 (0.1) 2,766.1 Selling, general and administrative expenses (exclusive of depreciation and amortization shown below) 537.3 - 537.3 484.7 (5.0) 479.7 Restructuring and impairment charges - net 31.2 (31.2) - 36.6 (36.6) - Depreciation and amortization 229.0 - 229.0 198.3 - 198.3 Total operating expenses 4,106.9 (31.2) 4,075.7 3,485.8 (41.7) 3,444.1 Income from continuing operations 433.7 31.2 464.9 372.8 41.7 414.5 Interest expense - net 70.5 - 70.5 44.8 - 44.8 Investment and other income (expense) - net (4.5) - (4.5) (4.4) - (4.4) Earnings from continuing operations before income taxes and minority interest 358.7 31.2 389.9 323.6 41.7 365.3 Income tax expense 120.7 11.6 132.3 119.6 18.0 137.6 Minority interest (0.6) - (0.6) (0.5) - (0.5) Net earnings from continuing operations 238.6 19.6 258.2 204.5 23.7 228.2 Income (loss) from discontinued operations - net of tax (1.5) 1.5 - (6.9) 6.9 - Net earnings $237.1 $21.1 $258.2 $197.6 $30.6 $228.2 Earnings per share: Basic: Net earnings from continuing operations $1.10 $1.19 $0.95 $1.06 Income (loss) from discontinued operations, net of tax (0.01) - (0.03) - Net earnings $1.09 $1.19 $0.92 $1.06 Diluted: Net earnings from continuing operations $1.09 $1.18 $0.94 $1.06 Income (loss) from discontinued operations, net of tax (0.01) - (0.03) - Net earnings $1.08 $1.18 $0.91 $1.06 Weighted average common shares outstanding: Basic 216.4 216.4 214.4 214.4 Diluted 218.3 218.3 216.1 216.1 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. R.R. Donnelley & Sons Company Reconciliation of GAAP to Non-GAAP Measures IN MILLIONS, EXCEPT PER SHARE DATA (UNAUDITED) Three months ended June 30, 2006 Net Income (loss) earnings from Net (loss) per continuing Operating earnings diluted operations margin (loss) share GAAP basis measures $221.7 9.8% $125.2 $0.57 Non-GAAP adjustments: Restructuring and impairment charges, net (1) 14.6 0.6% 9.2 0.04 Integration charges (2) - - - - Income tax adjustments (3) - - Net (income) loss from discontinued operations (4) (0.8) - Total non-GAAP adjustments 14.6 0.6% 8.4 0.04 Non-GAAP measures $236.3 10.4% $133.6 $0.61 Three months ended June 30, 2005 Net Income earnings from Net (loss) per continuing Operating earnings diluted operations margin (loss) share GAAP basis measures $175.7 9.1% $90.7 $0.42 Non-GAAP adjustments: Restructuring and impairment charges, net (1) 24.4 1.3% 15.1 0.07 Integration charges (2) 2.6 0.1% 1.6 0.01 Income tax adjustments (3) (1.4) (0.01) Net (income) loss from discontinued operations (4) 4.6 0.02 Total non-GAAP adjustments 27.0 1.4% 19.9 0.09 Non-GAAP measures $202.7 10.5% $110.6 $0.51 (1) Restructuring and impairment (pre-tax): Operating results for the three months ended June 30, 2006 and 2005 were affected by the following restructuring and impairment charges: -- 2006 included $10.2 million for employee termination costs substantially all of which were associated with restructuring actions resulting from the reorganization of certain operations and the exiting of certain business activities; $2.5 million of other restructuring costs, primarily lease termination costs; and $1.9 million for impairment of other long-lived assets. -- 2005 included $5.0 million for employee termination costs primarily related to the elimination of duplicative administrative functions resulting from the Moore Wallace acquisition and other actions to restructure operations; $17.2 million of other restructuring costs, primarily related to lease termination costs and relocation costs associated with the Moore Wallace acquisition and the relocation of a Logistics facility, and $2.2 million of impairment of long-lived assets primarily related to the abandonment of assets in the Forms and Labels and Publishing and Retail Services segments. (2) Integration charges (pre-tax): Operating income included post-acquisition integration charges of $2.6 million in the three months ended June 30, 2005 related to the Moore Wallace acquisition. (3) Income tax adjustments: Income tax expense for the three months ended June 30,2005 included certain items and adjustments to reflect the Company's estimated pro-forma tax rate of 37.0%. (4) Net (income) loss from discontinued operations: The net income from discontinued operations for the three months ended June 30,2006 primarily reflects the expected sublease of a facility previously occupied by the Company's package logistics business. For the three months ended June 30, 2005, the net loss from discontinued operations primarily reflects the results of the Peak Technologies business. R.R. Donnelley & Sons Company Reconciliation of GAAP to Non-GAAP Measures IN MILLIONS, EXCEPT PER SHARE DATA (UNAUDITED) Six months ended June 30, 2006 Net Income (loss) earnings from Net (loss) per continuing Operating earnings diluted operations margin (loss) share GAAP basis measures $433.7 9.6% $237.1 $1.08 Non-GAAP adjustments: Restructuring and impairment charges, net (1) 31.2 0.7% 19.6 0.09 Integration charges (2) - - - - Income tax adjustments (3) - - Net loss from discontinued operations (4) 1.5 0.01 Total non-GAAP adjustments 31.2 0.7% 21.1 0.10 Non-GAAP measures $464.9 10.2% $258.2 $1.18 Six months ended June 30, 2005 Net Income earnings from Net (loss) per continuing Operating earnings diluted operations margin (loss) share GAAP basis measures $372.8 9.7% $197.6 $0.91 Non-GAAP adjustments: Restructuring and impairment charges, net (1) 36.6 0.9% 22.7 0.11 Integration charges (2) 5.1 0.1% 3.2 0.02 Income tax adjustments (3) (2.2) (0.01) Net loss from discontinued operations (4) 6.9 0.03 Total non-GAAP adjustments 41.7 1.0% 30.6 0.15 Non-GAAP measures $414.5 10.7% $228.2 $1.06 (1) Restructuring and impairment (pre-tax): Operating results for the six months ended June 30, 2006 and 2005 were affected by the following restructuring and impairment charges: -- 2006 included $23.7 million for employee termination costs substantially all of which were associated with restructuring actions resulting from the reorganization of certain operations and the exiting of certain business activities; $5.2 million of other restructuring costs, primarily lease termination costs; and $2.3 million for impairment of other long-lived assets. -- 2005 included $8.2 million for employee termination costs primarily related to the elimination of duplicative administrative functions resulting from the Moore Wallace acquisition and other actions to restructure operations; $24.9 million of other restructuring costs, primarily related to lease termination costs and relocation costs associated with the Moore Wallace acquisition, the relocation of a Logistics facility, and the exiting of a U.K. financial print facility, and $3.5 million of impairment of long-lived assets primarily related to the abandonment of assets in the Forms and Labels and Publishing and Retail Services segments. (2) Integration charges (pre-tax): Operating income included post-acquisition integration charges of $5.1 million in the six months ended June 30, 2005 primarily related to the Moore Wallace acquisition and Corporate information systems integration. (3) Income tax adjustments: Income tax expense in 2005 included certain items and adjustments to reflect the Company's estimated pro-forma tax rate of 37.7%. (4) Net loss from discontinued operations: Net loss from discontinued operations for the six months ended June 30, 2006 primarily reflects costs resulting from a subtenant bankruptcy related to a facility previously occupied by the Company's package logistics business. For the six months ended June 30, 2005, the net loss from discontinued operations primarily includes the results of the Peak Technologies business. R. R. Donnelley & Sons Company Segment GAAP to Non-GAAP Operating Income and Margin Reconciliation For the three months ended June 30, 2006 and 2005 $ IN MILLIONS (UNAUDITED) Integrated Publishing Print Forms and Retail Communi- and Consol- Services cations Labels Corporate idated Three Months Ended June 30, 2006 Net Sales $1,122.9 $727.2 $423.6 $- $2,273.7 Operating Expense 949.2 657.1 391.9 53.8 2,052.0 Operating Income (Loss) 173.7 70.1 31.7 (53.8) 221.7 Operating Margin % 15.5% 9.6% 7.5% nm 9.8% Non-GAAP Adjustments Restructuring charges 3.2 7.1 1.7 0.7 12.7 Impairment charges - 1.4 0.5 - 1.9 Integration charges - - - - - Total Non-GAAP Adjustments 3.2 8.5 2.2 0.7 14.6 Operating income (loss) excluding restructuring, impairment and integration charges $176.9 $78.6 $33.9 $(53.1) $236.3 Operating margin before restructuring, impairment and integration charges % 15.8% 10.8% 8.0% nm 10.4% Depreciation and amortization 58.4 34.2 14.5 7.1 114.2 Capital expenditures 60.4 17.7 6.0 2.7 86.8 Three Months Ended June 30, 2005 Net Sales $978.3 $544.7 $409.1 $- $1,932.1 Operating Expense 838.5 480.1 376.9 60.9 1,756.4 Operating Income (Loss) 139.8 64.6 32.2 (60.9) 175.7 Operating Margin % 14.3% 11.9% 7.9% nm 9.1% Non-GAAP Adjustments Restructuring charges 6.2 2.6 0.9 12.5 22.2 Impairment charges 1.1 0.2 0.9 - 2.2 Integration charges - 0.1 0.3 2.2 2.6 Total Non-GAAP Adjustments 7.3 2.9 2.1 14.7 27.0 Operating income (loss) excluding restructuring, impairment and integration $147.1 $67.5 $34.3 $(46.2) $202.7 Operating margin before restructuring, impairment and integration charges % 15.0% 12.4% 8.4% nm 10.5% Depreciation and amortization 51.9 24.7 15.6 7.4 99.6 Capital expenditures 100.1 15.5 4.6 10.2 130.4 R. R. Donnelley & Sons Company Segment GAAP to Non-GAAP Operating Income and Margin Reconciliation For the six months ended June 30, 2006 and 2005 $ IN MILLIONS (UNAUDITED) Integrated Publishing Print Forms and Retail Communi- and Consol- Services cations Labels Corporate idated Six Months Ended June 30, 2006 Net Sales $2,236.5 $1,454.7 $849.4 $- $4,540.6 Operating Expense 1,912.2 1,308.3 784.2 102.2 4,106.9 Operating Income (Loss) 324.3 146.4 65.2 (102.2) 433.7 Operating Margin % 14.5% 10.1% 7.7% nm 9.6% Non-GAAP Adjustments Restructuring charges 9.8 9.7 2.7 6.7 28.9 Impairment charges - 1.8 0.5 - 2.3 Integration charges - - - - - Total Non-GAAP Adjustments 9.8 11.5 3.2 6.7 31.2 Operating income (loss) excluding restructuring, impairment and integration charges $334.1 $157.9 $68.4 $(95.5) $464.9 Operating margin before restructuring, impairment and integration charges % 14.9% 10.9% 8.1% nm 10.2% Depreciation and amortization 117.4 67.5 29.1 15.0 229.0 Capital expenditures 126.0 35.5 10.2 6.0 177.7 Six Months Ended June 30, 2005 Net Sales $1,960.6 $1,076.7 $821.3 $- $3,858.6 Operating Expense 1,668.3 947.7 757.0 112.8 3,485.8 Operating Income (Loss) 292.3 129.0 64.3 (112.8) 372.8 Operating Margin % 14.9% 12.0% 7.8% nm 9.7% Non-GAAP Adjustments Restructuring charges 7.5 6.8 3.6 15.2 33.1 Impairment charges 1.1 0.3 2.1 - 3.5 Integration charges 0.5 0.2 0.8 3.6 5.1 Total Non-GAAP Adjustments 9.1 7.3 6.5 18.8 41.7 Operating income (loss) excluding restructuring, impairment and integration $301.4 $136.3 $70.8 $(94.0) $414.5 Operating margin before restructuring, impairment and integration charges % 15.4% 12.7% 8.6% nm 10.7% Depreciation and amortization 103.4 48.2 31.7 15.0 198.3 Capital expenditures 178.3 21.3 9.7 14.9 224.2 R. R. Donnelley & Sons Company Condensed Consolidated Statements of Cash Flows For the six months ended June 30, 2006 and 2005 (In millions) (UNAUDITED) 2006 2005 OPERATING ACTIVITIES Net earnings $237.1 $197.6 Net loss from discontinued operations 1.5 6.9 Adjustments to reconcile net earnings to cash provided by operating activities 295.0 309.7 Changes in operating assets and liabilities of continuing operations (290.3) (85.4) Net cash provided by operating activities of continuing operations 243.3 428.8 Net cash used in operating activities of discontinued operations (0.5) (8.2) Net cash provided by operating activities 242.8 420.6 INVESTING ACTIVITIES Net cash used in investing activities of continuing operations (412.3) (1,142.5) Net cash used in investing activities of discontinued operations - (0.5) Net cash used in investing activities (412.3) (1,143.0) FINANCING ACTIVITIES Net cash provided by (used in) financing activities of continuing operations (62.7) 536.1 Net cash provided by (used in) financing activities (62.7) 536.1 Effect of exchange rates on cash flows and cash equivalents 4.0 (3.9) Net decrease in cash and cash equivalents (228.2) (190.2) Cash and cash equivalents at beginning of period 366.7 641.8 Cash and cash equivalents at end of period $138.5 $451.6 Supplemental non-cash disclosure: Acquisition of assets through direct financing $10.8 $- Acquisition of business - purchase price payable 8.7 - R.R. Donnelley & Sons Company Revenue Reconciliation Reported to Pro Forma For the three months ended June 30, 2006 and 2005 $ IN MILLIONS (UNAUDITED) Adjustment for net sales of Reported net acquired Pro forma net sales businesses sales Three Months Ended June 30, 2006 Publishing and Retail Services $1,122.9 $- $1,122.9 Integrated Print Communications 727.2 8.7 735.9 Forms and Labels 423.6 - 423.6 Corporate - - - Consolidated $2,273.7 $8.7 $2,282.4 Three Months Ended June 30, 2005 Publishing and Retail Services $978.3 $63.3 $1,041.6 Integrated Print Communications 544.7 142.4 687.1 Forms and Labels 409.1 - 409.1 Corporate - - - Consolidated $1,932.1 $205.7 $2,137.8 Net sales change Publishing and Retail Services 14.8% 7.8% Integrated Print Communications 33.5% 7.1% Forms and Labels 3.5% 3.5% Corporate Consolidated 17.7% 6.8% The reported results of the company include the results of acquired businesses from the acquisition date forward. The company has provided this schedule to reconcile reported net sales for the three months ended June 30, 2006 and 2005 to pro forma net sales as if the acquisitions took place at the beginning of the respective periods. For the quarter ended June 30, 2006 the adjustment for net sales of acquired businesses reflects the net sales of OfficeTiger (acquired April 27, 2006) as if the acquisition had occurred on April 1, 2006. For the quarter ended June 30, 2005 the adjustment for net sales of acquired businesses reflects the net sales of The Astron Group (acquired June 20, 2005), Asia Printers Group (acquired July 7, 2005), the Charlestown, Indiana print facility acquired from Adplex-Rhodes (acquired August 18, 2005), Poligrafia (acquired September 5, 2005), Spencer Press (acquired November 9, 2005) and OfficeTiger (acquired April 27, 2006) for the three months ended June 30, 2005 as if the respective acquisitions had occurred on April 1, 2005. R.R. Donnelley & Sons Company Revenue Reconciliation Reported to Pro Forma For the six months ended June 30, 2006 and 2005 $ IN MILLIONS (UNAUDITED) Adjustment for net sales of Reported net acquired Pro forma net sales businesses sales Six Months Ended June 30, 2006 Publishing and Retail Services $2,236.5 $- $2,236.5 Integrated Print Communications 1,454.7 35.2 1,489.9 Forms and Labels 849.4 - 849.4 Corporate - - - Consolidated $4,540.6 $35.2 $4,575.8 Six Months Ended June 30, 2005 Publishing and Retail Services $1,960.6 $120.7 $2,081.3 Integrated Print Communications 1,076.7 299.5 1,376.2 Forms and Labels 821.3 - 821.3 Corporate - - - Consolidated $3,858.6 $420.2 $4,278.8 Net sales change Publishing and Retail Services 14.1% 7.5% Integrated Print Communications 35.1% 8.3% Forms and Labels 3.4% 3.4% Corporate Consolidated 17.7% 6.9% The reported results of the company include the results of acquired businesses from the acquisition date forward. The company has provided this schedule to reconcile reported net sales for the six months ended June 30, 2006 and 2005 to pro forma net sales as if the acquisitions took place at the beginning of the respective periods. For the six months ended June 30, 2006 the adjustment for net sales of acquired businesses reflects the net sales of OfficeTiger (acquired April 27, 2006) as if the acquisition had occurred on January 1, 2006. For the six months ended June 30, 2005 the adjustment for net sales of acquired businesses reflects the net sales of The Astron Group (acquired June 20, 2005), Asia Printers Group (acquired July 7, 2005), the Charlestown, Indiana print facility acquired from Adplex-Rhodes (acquired August 18, 2005), Poligrafia (acquired September 5, 2005), Spencer Press (acquired November 9, 2005) and OfficeTiger (acquired April 27, 2006) for the six months ended June 30, 2005 as if the respective acquisitions had occurred on January 1, 2005. DATASOURCE: R.R. Donnelley & Sons Company CONTACT: Media Contacts, Doug Fitzgerald, Senior Vice President Marketing & Communications, +1-630-322-6830, , or Investor Contact, Dan Leib, Vice President, Investor Relations, +1-312-326-7710, , both of R.R. Donnelley & Sons Company Web site: http://www.rrdonnelley.com/

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