RR Donnelley Reports Third Quarter 2004 Results CHICAGO, Nov. 4
/PRNewswire-FirstCall/ -- R.R. Donnelley & Sons Company
(NYSE:RRD) today reported third quarter 2004 net earnings from
continuing operations of $114.4 million or $0.52 per diluted share
on net sales of $2.0 billion compared to net earnings from
continuing operations of $57.9 million or $0.51 per diluted share
on net sales of $1.1 billion in the third quarter of 2003. The
third quarter 2004 results from continuing operations include
restructuring ($14.8 million), integration ($4.4 million) and
impairment ($2.4 million) charges totaling $21.6 million, primarily
related to the ongoing integration efforts following our February
27, 2004 acquisition of Moore Wallace. The effective tax rate in
the third quarter of 2004 was 29.4%, primarily due to a tax benefit
resulting from a loss on the disposition of an investment in Latin
America. Results from continuing operations in the third quarter of
2003 included restructuring and impairment charges of $1.4 million
and a $4.2 million gain on the disposition of an investment.
Effective with the third quarter of 2004, the package logistics
business and Momentum Logistics, Inc. (MLI) are reported as
discontinued operations (see discussion below). Net income, which
includes discontinued operations, was $112.8 million or $0.51 per
diluted share in the third quarter of 2004 compared to $53.8
million or $0.47 per diluted share in the third quarter of 2003.
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
from continuing operations totaled $113.9 million or $0.51 per
diluted share in the third quarter of 2004 compared to $53.6
million or $0.47 per diluted share in the third quarter of 2003.
Non-GAAP net earnings from continuing operations excluded
restructuring, integration and impairment charges and a loss on the
disposition of an investment in the third quarter of 2004 and
excluded restructuring and impairment charges and a gain on the
disposition of an investment in the third quarter of 2003. The
company used an effective tax rate of 38.3%, which it believes is
its pro forma annual tax rate, in calculating non-GAAP net
earnings. A reconciliation of GAAP net earnings to non-GAAP net
earnings for these adjustments is presented in the attached tables.
"Our strong third quarter results reflect our cost reduction
actions and our enhanced focus on providing solutions for
customers. Our Integrated Print business had an outstanding
quarter, with strong sales growth and margin expansion," said Mark
A. Angelson, RR Donnelley's Chief Executive Officer. "Our
Publishing and Retail Services business posted its third
consecutive quarter of sales growth and announced a number of new
wins that should benefit future periods." Angelson added, "The
integration of the Moore Wallace acquisition is progressing well
and our team remains focused on completing the integration and
growing our business." Business Review (Continuing Operations) RR
Donnelley's acquisition of Moore Wallace was completed on February
27, 2004. The reported financials for the company, therefore, do
not include the results of Moore Wallace in 2003 and for
approximately the first two months of 2004. Following are the
results for the company and each reportable segment. Summary Net
sales in the quarter were $2.0 billion, up 87% from the same
quarter in 2003, primarily as a result of the acquisition of Moore
Wallace and increased volume in the financial print business and
the Publishing and Retail Services segment. Gross margin improved
to 29.0% from 27.8% in last year's third quarter, primarily due to
the benefits achieved from restructuring and cost reduction actions
and incremental procurement savings. Selling, general and
administrative expenses, as a percentage of net sales, increased
from 12.0% in the third quarter of 2003 to 13.5% in the third
quarter of 2004, primarily as a result of increased costs for
employee incentives, post retirement benefits, Sarbanes-Oxley Act
compliance and litigation. Operating margin in the third quarter of
2004 increased to 9.4% from 9.2% in last year's third quarter,
despite increased restructuring, integration and impairment charges
in the third quarter of 2004. Excluding restructuring, integration
and impairment charges in the third quarter of both years, non-GAAP
operating margin for the third quarter of 2004 was 10.5% compared
to 9.4% for the third quarter last year, primarily as a result of
increased volume and the benefit of cost reduction actions.
Reconciliations of operating income and margin to non-GAAP
operating income and margin are presented in the attached tables.
Segments During the third quarter, as a result of the pending sale
of the company's package logistics business and the shutdown of
MLI, management revised its reportable segments to eliminate the
previously reported Logistics segment and to aggregate the
remaining logistics operations (primarily print logistics) with the
company's Publishing and Retail Services segment, resulting in four
reportable segments, 1) Publishing and Retail Services, 2)
Integrated Print Communications and Global Solutions, 3) Forms and
Labels and 4) Corporate. The Publishing and Retail Services segment
includes 1) Magazine, Catalog and Retail, 2) Directories, 3)
Logistics and 4) Premedia. Net sales for the Publishing and Retail
Services segment increased 7.5% to $695.9 million due to the
acquired Moore Wallace logistics business and volume increases in
the magazine, catalog and retail and logistics businesses.
Increased advertising pages and the impact of new assignments
offset pricing pressure. Operating margin increased by
approximately 10 basis points to 14.6% in the third quarter of 2004
from the third quarter of 2003. Restructuring and impairment
charges increased to $1.7 million in the third quarter of 2004 from
a $0.5 million impairment charge in the third quarter of 2003.
Excluding restructuring and impairment charges, operating margin
expanded to 14.9% in the third quarter of 2004 from 14.6% in the
third quarter of 2003 due to increased volume, benefits from our
procurement initiatives and the inclusion of the Moore Wallace
logistics business in this segment. The Integrated Print
Communications and Global Solutions segment includes 1) Book, 2)
Direct Mail, 3) Financial Print, 4) Business Communications
Services, 5) Short-Run Commercial Print, 6) Europe and 7) Asia. Net
sales for the Integrated Print Communications and Global Solutions
segment more than doubled to $795.9 million from the third quarter
of 2003, primarily as a result of the acquisition of Moore Wallace
($379.7 million) as well as increased sales in financial print and
international markets. The book business, driven by strengthening
sales to the education market, also posted positive sales growth.
Operating margin, which was negatively impacted by restructuring,
integration and impairment charges of $5.7 million in the third
quarter of 2004 and restructuring and impairment charges of $0.7
million in the third quarter of 2003, increased approximately 400
basis points to 14.1% in the third quarter of 2004. Excluding
restructuring, impairment and integration charges, operating margin
increased to 14.8% in the third quarter of 2004 from 10.3% in the
third quarter of 2003, primarily as a result of increased sales
volume and the benefit of cost reduction actions. The Forms and
Labels segment includes 1) Forms, 2) Labels 3) Latin America and 4)
Peak. Net sales for the Forms and Labels segment increased to
$476.7 million in the third quarter of 2004 from $32.4 million in
the third quarter of 2003, primarily as a result of the acquisition
of Moore Wallace. The Forms and Labels segment continued to be the
company's most price competitive business, as excess capacity in
the industry has led to aggressive discounting. Operating margin
increased to 7.6% from a loss in the prior year's third quarter.
Excluding restructuring, integration and impairment charges, which
were $10.2 million in the third quarter of 2004 and $0 in the third
quarter of 2003, operating margin increased to 9.8% in the third
quarter of 2004 from a loss in the third quarter of 2003 due to the
acquisition of Moore Wallace and improved performance in Latin
America. Corporate operating expenses increased by $35.2 million
from the third quarter of 2003 to $64.3 million in the third
quarter of 2004. The increase is primarily attributable to the
acquisition of Moore Wallace and the associated amortization of
intangibles, additional restructuring, integration and impairment
charges of $3.8 million and increased costs for employee
incentives, Sarbanes-Oxley Act compliance and litigation. Excluding
restructuring and integration charges, corporate costs in the third
quarter of 2004 sequentially decreased by $7.8 million from the
second quarter of 2004, reflecting the benefit of cost reduction
actions. Nine-Month Results The company reported net earnings from
continuing operations of $114.4 million or $0.57 per diluted share
on net sales of $5.2 billion for the first nine months of 2004
compared to net earnings from continuing operations of $82.8
million or $0.73 per diluted share on net sales of $3.0 billion for
the first nine months of 2003. Results from continuing operations
during the first nine months of 2004 include restructuring ($75.9
million), integration ($75.2 million) and impairment ($16.8
million) charges totaling $167.9 million, primarily related to the
ongoing integration efforts following the acquisition of Moore
Wallace. These results also include a net gain on the disposition
of investments of $14.3 million (pre-tax). Results from continuing
operations for the first nine months of 2003 included restructuring
and impairment charges of $9.3 million and a $4.2 million gain on
the disposition of an investment. Net income, which includes
discontinued operations and, in 2004, a $6.6 million net charge for
the cumulative effect of a change in an accounting principle
(adoption of FIN 46 further discussed on attached reconciling
schedules), was $41.6 million or $0.21 per diluted share for the
first nine months of 2004 compared to $78.8 million or $0.69 per
diluted share for the first nine months of 2003. Non-GAAP net
earnings from continuing operations totaled $201.4 million or $1.02
per diluted share in the first nine months of 2004 compared to
$83.1 million or $0.73 per diluted share in the first nine months
of 2003. Non-GAAP net earnings from continuing operations excluded
restructuring, impairment and integration charges, the net gain on
the disposition of investments and the cumulative effect of a
change in an accounting principle in the first nine months of 2004
and excluded restructuring and impairment charges and the gain on
the disposition of an investment in the first nine months of 2003.
The company used an effective tax rate of 38.3%, which it believes
is its pro forma annual tax rate, in calculating non-GAAP net
earnings. A reconciliation of GAAP net earnings to non-GAAP net
earnings for these adjustments is presented in the attached tables.
Restructuring Detail Continuing the integration of our acquisition
of Moore Wallace, the company recorded pre-tax restructuring
charges in continuing operations of $14.8 million in the third
quarter of 2004. Through the first nine months of 2004, the company
recorded $75.9 million of restructuring charges in continuing
operations, substantially all of which have required or will
require cash payments. Restructuring charges were applied as
follows: Three months Nine months ended ended $ in Millions
9/30/2004 9/30/2004 Severance $12.9 $73.7 Facility 1.9 2.2 Total
$14.8 $75.9 Payments associated with these severance actions are
expected to be substantially completed by June 2005. Through the
first nine months of 2004, the company has eliminated approximately
2,955 positions (750 positions in discontinued operations).
Discontinued Operations During the third quarter of 2004, the
company entered into an agreement to sell its package logistics
business and completed the shutdown of MLI. The sale of the package
logistics business closed on October 29, 2004. The results of
operations and financial position of the package logistics business
and MLI are reported as discontinued operations beginning in the
third quarter of 2004. The company has also conformed prior period
financial results to reflect package logistics and MLI as
discontinued operations in all periods presented. The net loss from
discontinued operations was $1.6 million in the third quarter of
2004 and included pre-tax restructuring and impairment charges of
$3.4 million at MLI. The net loss from discontinued operations was
$66.2 million in the first nine months of 2004 and included pre-tax
restructuring and impairment charges of $108.5 million; $89.4
million at the package logistics business and $19.1 million at MLI.
Conference Call RR Donnelley will host a conference call to discuss
its third quarter results on Thursday, November 4, 2004, 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/ ("Investor
Relations"). For those unable to participate on the live call, a
replay will be archived on the company's website for 30 days after
the call. About RR Donnelley RR Donnelley (NYSE:RRD) is the world's
premier full-service global print provider and the largest printing
company in North America, serving customers in the publishing,
healthcare, advertising, retail, technology, financial services,
and many other industries. Founded 140 years ago, the company
provides solutions in commercial printing, forms and labels, direct
mail, financial printing, print fulfillment, business communication
outsourcing, logistics, online services, digital photography, and
content and database management. 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 website 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.
Many of the factors that could cause material differences in the
expected results of RR Donnelley relate to the integration of Moore
Wallace Incorporated, which was acquired by RR Donnelley on
February 27, 2004. These factors include, without limitation, the
following: the development and execution of comprehensive plans for
asset rationalization, the ability to eliminate duplicative
overhead without excessive cost or adversely affecting the
business, the potential loss of customers and employees as a result
of the transaction, the ability to achieve procurement savings by
leveraging total spending across the organization, the success of
the organization in leveraging its comprehensive product offering
to the combined customer base as well as the ability of the
organization to complete the integration of the combined companies
without losing focus on the business. In addition, the ability of
the combined company to achieve the expected net sales, accretion
and synergy savings will also be affected by the effects of
competition (in particular the response to the transaction in the
marketplace), the effects of pricing of paper and other raw
materials and fuel price fluctuations and shortages of supply, the
rate of migration from paper-based forms to digital formats, the
impact of currency fluctuations in the countries in which RR
Donnelley operates, general economic and other factors beyond the
combined company's control, 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
and Sons Company Consolidated Balance Sheets At September 30, 2004
and December 31, 2003 IN MILLIONS, EXCEPT PER SHARE DATA
(UNAUDITED) At September At December 30, 2004 31, 2003 Assets
Current Assets Cash and cash equivalents $416.5 $60.8 Receivables,
less allowance for doubtful accounts of $51.2 ($26.8 in 2003)
1,332.1 690.2 Inventories 517.0 154.3 Prepaid expenses and other
current assets 44.2 22.4 Deferred income taxes 200.2 51.6 Total
Current Assets 2,510.0 979.3 Property, plant and equipment - net
1,854.3 1,279.1 Prepaid pension cost 468.1 314.4 Goodwill 2,561.3
167.8 Other intangible assets - net 683.3 5.4 Other assets 311.3
252.6 Assets of discontinued operations 129.9 227.3 Total Assets
$8,518.2 $3,225.9 Liabilities Current Liabilities Accounts payable
$518.9 $282.7 Accrued liabilities 941.4 423.0 Short-term debt 199.2
175.1 Total Current Liabilities 1,659.5 880.8 Long-term debt
1,583.2 750.4 Postretirement benefits 340.1 12.0 Deferred income
taxes 594.4 221.8 Other liabilities 543.4 323.4 Liabilities of
discontinued operations 28.1 54.3 Total Liabilities 4,748.7 2,242.7
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 2004 (2003 -
140.9) 303.7 176.1 Additional paid in capital 2,845.7 132.4
Retained earnings 1,414.0 1,641.7 Accumulated other comprehensive
loss (105.0) (123.7) Unearned compensation (34.7) (2.9) Reacquired
common stock, at cost, 22.1 in 2004 (27.2 in 2003) (654.2) (840.4)
Total Shareholders' Equity 3,769.5 983.2 Total Liabilities and
Shareholders' Equity $8,518.2 $3,225.9 R. R. Donnelley and Sons
Company Consolidated Statements of Operations Three and Nine Months
Ended September 30, 2004 and 2003 (IN MILLIONS, EXCEPT PER SHARE
DATA) (UNAUDITED) Three months ended September 30, ADJUSTMENTS
ADJUSTMENTS TO TO 2004 NON-GAAP 2004 2003 NON-GAAP 2003 GAAP (a)
NON-GAAP GAAP (a) NON-GAAP Net sales $1,968.5 $- $1,968.5 $1,053.3
$- $1,053.3 Cost of sales 1,397.8 (1.4) 1,396.4 760.8 760.8
Selling, general and administrative expense 266.7 (3.0) 263.7 125.9
125.9 Restructuring and impairments - net 17.2 (17.2) - 1.4 (1.4) -
Depreciation and amortization 101.0 101.0 68.1 68.1 Total operating
expenses 1,782.7 (21.6) 1,761.1 956.2 (1.4) 954.8 Income from
continuing operations 185.8 21.6 207.4 97.1 1.4 98.5 Interest
expense - net 22.5 - 22.5 12.3 - 12.3 Investment and other income
(expense) (0.6) 0.9 0.3 4.8 (4.2) 0.6 Earnings from continuing
operations before taxes, minority interest and cumulative effect of
change in accounting principle 162.7 22.5 185.2 89.6 (2.8) 86.8
Income tax expense 47.9 23.0 70.9 31.7 1.5 33.2 Minority interest
0.4 0.4 - - Net earnings from continuing operations before
cumulative effect of change in accounting principle 114.4 (0.5)
113.9 57.9 (4.3) 53.6 Income (loss) from discontinued operations -
net (1.6) 1.6 - (4.1) 4.1 - Net earnings before cumulative effect
of change in accounting principle 112.8 1.1 113.9 53.8 (0.2) 53.6
Cumulative effect of change in accounting principle - net of tax -
- - - - - Net earnings $112.8 $1.1 $113.9 $53.8 $(0.2) $53.6
Earnings per share: Basic Net earnings from continuing operations
before cumulative effect of change in accounting principle $0.52
$0.52 $0.51 $0.47 Loss from discontinued operations (0.01) - (0.04)
- Cumulative effect of change in accounting principle - net of tax
- - - - Net earnings $0.51 $0.52 $0.47 $0.47 Diluted Net earnings
from continuing operations before cumulative effect of change in
accounting principle $0.52 $0.51 $0.51 $0.47 Loss from discontinued
operations (0.01) - (0.04) - Cumulative effect of change in
accounting principle - net of tax - - - - Net earnings $0.51 $0.51
$0.47 $0.47 Weighted average common shares outstanding Basic 219.3
219.3 113.3 113.3 Diluted 221.5 221.5 114.6 114.6 R. R. Donnelley
and Sons Company Consolidated Statements of Operations Three and
Nine Months Ended September 30, 2004 and 2003 (IN MILLIONS, EXCEPT
PER SHARE DATA) (UNAUDITED) Nine months ended September 30,
ADJUSTMENTS ADJUSTMENTS TO TO 2004 NON-GAAP 2004 2003 NON-GAAP 2003
GAAP (a) NON-GAAP GAAP (a) NON-GAAP Net sales $5,178.8 $- $5,178.8
$2,987.7 $- $2,987.7 Cost of sales 3,829.4 (69.1) 3,760.3 2,216.0
2,216.0 Selling, general and administrative expense 739.2 (6.1)
733.1 386.8 386.8 Restructuring and impairments - net 92.7 (92.7) -
9.3 (9.3) - Depreciation and amortization 284.8 284.8 203.6 203.6
Total operating expenses 4,946.1 (167.9) 4,778.2 2,815.7 (9.3)
2,806.4 Income from continuing operations 232.7 167.9 400.6 172.0
9.3 181.3 Interest expense - net 63.1 - 63.1 36.8 - 36.8 Investment
and other income (expense) 5.6 (14.3) (8.7) (5.1) (4.2) (9.3)
Earnings from continuing operations before taxes, minority interest
and cumulative effect of change in accounting principle 175.2 153.6
328.8 130.1 5.1 135.2 Income tax expense 59.3 66.6 125.9 47.0 4.8
51.8 Minority interest 1.5 1.5 0.3 0.3 Net earnings from continuing
operations before cumulative effect of change in accounting
principle 114.4 87.0 201.4 82.8 0.3 83.1 Income (loss) from
discontinued operations - net (66.2) 66.2 - (4.0) 4.0 - Net
earnings before cumulative effect of change in accounting principle
48.2 153.2 201.4 78.8 4.3 83.1 Cumulative effect of change in
accounting principle - net of tax (6.6) 6.6 - - - - Net earnings
$41.6 $159.8 $201.4 $78.8 $4.3 $83.1 Earnings per share: Basic Net
earnings from continuing operations before cumulative effect of
change in accounting principle $0.58 $1.03 $0.74 $0.73 Loss from
discontinued operations (0.34) - (0.04) - Cumulative effect of
change in accounting principle - net of tax (0.03) - - - Net
earnings $0.21 $1.03 $0.70 $0.73 Diluted Net earnings from
continuing operations before cumulative effect of change in
accounting principle $0.57 $1.02 $0.73 $0.73 Loss from discontinued
operations (0.33) (0.04) - Cumulative effect of change in
accounting principle - net of tax (0.03) - - - Net earnings $0.21
$1.02 $0.69 $0.73 Weighted average common shares outstanding Basic
196.2 196.2 113.2 113.2 Diluted 198.2 198.2 114.0 114.0 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. (a) Please see the following
schedules "Reconciliation of GAAP Net Earnings to Non-GAAP Net
Earnings" for descriptions of the adjustments, one schedule for the
three months ended September 30, 2004 and September 30, 2003 and a
second schedule for the nine months ended September 30, 2004 and
September 30, 2003. Reconciliation of GAAP Net Earnings to Non-GAAP
Net Earnings IN MILLIONS (UNAUDITED) Three Months Three Months
Ended Ended September September 30, 2004 30, 2003 NON-GAAP
ADJUSTMENTS TO NET EARNINGS: Integration charges (a) $4.4 $-
Restructuring and impairment charges (b) 17.2 1.4 Total non-GAAP
adjustments to income from continuing operations 21.6 1.4 (Gain)
loss on disposition of investments (c) 0.9 (4.2) Total non-GAAP
adjustments to investment and other income 0.9 (4.2) Total non-GAAP
adjustments to continuing operations earnings before tax 22.5 (2.8)
Income tax adjustment (d) (23.0) (1.5) Loss from discontinued
operations - net (e) 1.6 4.1 TOTAL NON-GAAP ADJUSTMENTS TO NET
EARNINGS $1.1 $(0.2) (a) Amount represents post-acquisition
integration charges of $4.4 million. (b) Amount for the three
months ended September 30, 2004, includes $14.8 million for
restructuring charges and $2.4 million for asset impairment
charges. Amount for the three months ended September 30, 2003,
includes $0.5 million for restructuring charges and $0.9 million
for asset impairment charges. (c) Amount represents the pre-tax
loss on the sale of an investment in Latin America during the three
months ended September 30, 2004, and the pre-tax gain from the sale
of an equity investment during the three months ended September 30,
2003. (d) Amount represents the tax effect of the reconciling items
and an adjustment for the three months ended September 30, 2004 and
September 30, 2003, to reflect the company's pro forma effective
tax rate of 38.3%. (e) Amount represents loss from discontinued
operations, net of tax. Reconciliation of GAAP Net Earnings to
Non-GAAP Net Earnings IN MILLIONS (UNAUDITED) Nine Months Nine
Months Ended Ended September September 30, 2004 30, 2003 NON-GAAP
ADJUSTMENTS TO NET EARNINGS: Integration charges (a) $75.2 $-
Restructuring and impairment charges (b) 92.7 9.3 Total non-GAAP
adjustments to income from continuing operations 167.9 9.3 Gain on
disposition of investments (c) (14.3) (4.2) Total non-GAAP
adjustments to investment and other income (14.3) (4.2) Total
non-GAAP adjustments to continuing operations earnings before tax
153.6 5.1 Income tax adjustment (d) (66.6) (4.8) Loss from
discontinued operations - net (e) 66.2 4.0 Cumulative effect of
change in accounting principle (f) 6.6 - TOTAL NON-GAAP ADJUSTMENTS
TO NET EARNINGS $159.8 $4.3 (a) Amount includes adjustments to cost
of sales for fair market value of acquired inventory and backlog
($66.9 million) and other post- acquisition integration charges
($8.3 million). (b) Amount for the nine months ended September 30,
2004, includes $75.9 million for restructuring charges and $16.8
million for asset impairment charges. Amount for the nine months
ended September 30, 2003, includes $8.4 million for restructuring
charges and $0.9 million for asset impairment charges. (c) Amount
represents the net pre-tax gain on the sale of investments in Latin
America during the nine months ended September 30, 2004, and the
pre-tax gain from the sale of an equity investment during the nine
months ended September 30, 2003. (d) Amount represents the tax
effect of the reconciling items and an adjustment for the nine
months ended September 30, 2004 and September 30, 2003, to reflect
the company's pro forma effective tax rate of 38.3%. (e) Amount
represents loss from discontinued operations, net of tax. (f)
During the three months ended March 31, 2004, the company recorded
a cumulative effect of a change in accounting principle reflecting
the adoption of the Financial Accounting Standards Board
Interpretation No. 46 "Consolidation of Variable Interest
Entities." The change reflects the difference between the carrying
amount of the company's investments in certain partnerships related
to affordable housing and the underlying carrying values of the
partnerships upon consolidating these entities into the company's
financial statements. R. R. Donnelley and Sons Company Segment GAAP
to Non-GAAP Operating Income and Margin Reconciliation For the
three and nine months ended September 30, 2004 and 2003 $ IN
MILLIONS (UNAUDITED) Integrated Print Communications Publishing and
and Retail Global Forms and Consoli- Services Solutions Labels
Corporate dated Three Months Ended September 30, 2004 Net sales
$695.9 $795.9 $476.7 $- $1,968.5 Operating expense 594.0 684.0
440.4 64.3 1,782.7 Operating income (loss) 101.9 111.9 36.3 (64.3)
185.8 Operating margin % 14.6% 14.1% 7.6% nm 9.4% Non-GAAP
Adjustments Restructuring charges 0.8 3.6 8.8 1.6 14.8 Impairment
charges 0.9 0.7 0.8 - 2.4 Integration charges - 1.4 0.6 2.4 4.4
Total Non-GAAP Adjustments 1.7 5.7 10.2 4.0 21.6 Operating income
(loss) before restructuring, impairment and integration charges
$103.6 $117.6 $46.5 $(60.3) $207.4 Operating margin before
restructuring, impairment and integration charges % 14.9% 14.8%
9.8% nm 10.5% Nine Months Ended September 30, 2004 Net sales
$1,979.3 $2,043.0 $1,156.5 $- $5,178.8 Operating expense 1,796.0
1,810.9 1,121.5 217.7 4,946.1 Operating income (loss) 183.3 232.1
35.0 (217.7) 232.7 Operating margin % 9.3% 11.4% 3.0% nm 4.5%
Non-GAAP Adjustments Restructuring charges 24.6 15.9 16.3 19.1 75.9
Impairment charges 14.4 1.6 0.8 - 16.8 Integration charges - 19.1
51.3 4.8 75.2 Total Non-GAAP Adjustments 39.0 36.6 68.4 23.9 167.9
Operating income (loss) before restructuring, impairment and
integration charges $222.3 $268.7 $103.4 $(193.8) $400.6 Operating
margin before restructuring, impairment and integration charges %
11.2% 13.2% 8.9% nm 7.7% Three Months Ended September 30, 2003 Net
sales $647.4 $373.5 $32.4 $- $1,053.3 Operating expense 553.3 335.9
37.9 29.1 956.2 Operating income (loss) 94.1 37.6 (5.5) (29.1) 97.1
Operating margin % 14.5% 10.1% (17.0)% nm 9.2% Non-GAAP Adjustments
Restructuring charges - 0.4 - 0.1 0.5 Impairment charges 0.5 0.3 -
0.1 0.9 Integration charges - - - - - Total Non-GAAP Adjustments
0.5 0.7 - 0.2 1.4 Operating income (loss) before restructuring,
impairment and integration charges $94.6 $38.3 $(5.5) $(28.9) $98.5
Operating margin before restructuring, impairment and integration
charges % 14.6% 10.3% (17.0)% nm 9.4% Nine Months Ended September
30, 2003 Net sales $1,821.9 $1,072.8 $93.0 $- $2,987.7 Operating
expense 1,630.6 975.9 109.3 99.9 2,815.7 Operating income (loss)
191.3 96.9 (16.3) (99.9) 172.0 Operating margin % 10.5% 9.0%
(17.5)% nm 5.8% Non-GAAP Adjustments Restructuring charges 2.0 4.1
1.1 1.2 8.4 Impairment charges 0.5 0.3 - 0.1 0.9 Integration
charges - - - - - Total Non-GAAP Adjustments 2.5 4.4 1.1 1.3 9.3
Operating income (loss) before restructuring, impairment and
integration charges $193.8 $101.3 $(15.2) $(98.6) $181.3 Operating
margin before restructuring, impairment and integration charges %
10.6% 9.4% (16.3)% nm 6.1% 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 and Sons Company Condensed
Consolidated Statements of Cash Flows For the nine months ended
September 30, 2004 and 2003 IN MILLIONS (UNAUDITED) September 30,
September 30, 2004 2003 Operating Activities Net earnings $41.6
$78.8 Net loss from discontinued operations 66.2 4.0 Adjustment to
reconcile net earnings from continuing operations before cumulative
effect of change in accounting principle 493.6 245.8 Changes in
operating assets and liabilities (76.3) (77.2) Net cash provided by
operating activities of continuing operations 525.1 251.4 Net cash
provided by (used in) investing activities of continuing operations
2.7 (100.6) Net cash used in financing activities of continuing
operations (180.5) (111.7) Effect of exchange rates on cash and
cash equivalents 3.4 1.3 Net cash provided by (used in)
discontinued operations 5.0 (35.3) Net increase in cash and cash
equivalents 355.7 5.1 Cash and cash equivalents at beginning of
period 60.8 60.5 Cash and cash equivalents at end of period $416.5
$65.6 DATASOURCE: R.R. Donnelley & Sons Company CONTACT: Media,
Doug Fitzgerald, Sr. Vice President, Marketing &
Communications, +1-312-326-7740, or , or Investors, Dan Leib, Vice
President, Investor Relations, +1-312-326-7710, or , both of R.R.
Donnelley & Sons Company Web site: http://www.rrdonnelley.com/
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