RR Donnelley Reports 4Q Loss of 292M

R.R. Donnelley & Sons Company today reported a fourth-quarter net loss from continuing operations of $292.9 million or $1.37 per diluted share on net sales of $3.1 billion compared to a net loss from continuing operations of $1.1 million or $0.01 per diluted share on net sales of $2.5 billion in the fourth quarter of 2006. The fourth-quarter 2007 net loss from continuing operations included pre-tax charges for impairment ($460.3 million) and restructuring ($16.9 million) totaling $477.2 million. The non-cash impairment charge of $460.3 million included: a pre-tax charge of $436.1 million following the company's annual impairment test of goodwill; and a pre-tax charge of $24.2 million related to the impairment of other long-lived assets. Substantially all of this impairment charge was related to the company's business process outsourcing reporting unit (which includes the businesses formerly known as Astron and OfficeTiger) within the International segment. Substantially all of the restructuring charge in the fourth quarter of 2007 was associated with the reorganization of certain operations and the exiting of certain business activities. Net loss from continuing operations in the fourth quarter of 2006 included pre-tax charges for impairment ($138.6 million) and restructuring ($29.7 million) totaling $168.3 million, primarily related to the impairment of goodwill of the company's business process outsourcing reporting unit and a pre-tax charge for the write-down of the Astron trade name intangible asset associated with the re-branding of Astron to RR Donnelley Global Document Solutions. The company recognized income tax expense of $51.0 million in the fourth quarter of 2007 on a loss from continuing operations, as the charge for impairment of goodwill is not deductible. Including discontinued operations, the net loss was $293.3 million or $1.37 per diluted share in the fourth quarter of 2007 and $1.2 million or $0.01 per diluted share in the fourth quarter of 2006.

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 $172.3 million or $0.80 per diluted share in the fourth quarter of 2007 compared to $153.6 million or $0.70 per diluted share in the fourth quarter of 2006. Non-GAAP net earnings from continuing operations exclude impairment and restructuring charges in the fourth quarter of 2007 and exclude impairment and restructuring charges, a non-cash write-down of the company's investment in affordable housing partnerships and a gain on the sale of an investment in the fourth quarter of 2006. For non-GAAP comparison purposes, the effective tax rate increased to 26.7% in the fourth quarter of 2007 from 19.2% in the fourth quarter of 2006, primarily due to the favorable settlement of tax audit issues in 2006. A reconciliation of GAAP net earnings (loss) to non-GAAP net earnings for these adjustments is presented in the attached tables.

"We are pleased with our performance in 2007," said Thomas J. Quinlan III, RR Donnelley's President and Chief Executive Officer. "Our consolidated revenue growth rate for the year, pro forma for acquisitions, was 2.5% as we actively managed our volume across the platform to maximize profitability throughout the year. We made great progress in closing the margin gap between the historically lower-margin businesses we acquired in 2007 and our historical margins, delivering on our full-year, non-GAAP operating margin guidance of 10%."

Quinlan added, "We are especially pleased with our strong cash flow from operations of nearly $1.2 billion for the year, an increase of more than 30% over 2006. As promised, we have employed a balanced approach to capital deployment, while maintaining investment grade credit metrics and the flexibility that our strong balance sheet and liquidity offers. The acquisitions we completed in 2007, in combination with the recently announced acquisition of Pro Line Printing, deepen our offering to our core customers, allow us to realize scale benefits and reduce our future capital requirements."

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 and Von Hoffmann, which in aggregate 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 margin impact on these operations, and the company sees opportunities for continued improvement. The acquisition of Cardinal Brands, Inc., which closed on December 27, 2007 did not materially impact the results of the company.

Net sales in the quarter were $3.1 billion, up 25.2% from the fourth quarter of 2006. The increase was due to acquisitions, new customer wins, increased volume with existing customers and favorable foreign exchange comparisons, offset in part by continued price pressure. The gross margin rate decreased to 25.1% in the fourth quarter of 2007 from 25.7% in the fourth quarter of 2006 due to an unfavorable business mix that more than offset the benefits from lower incentive compensation, higher sales volume and productivity efforts. SG&A expense as a percentage of net sales decreased to 10.5% in the fourth quarter of 2007 from 11.8% in the fourth quarter of 2006 due to the benefits of productivity initiatives, lower incentive compensation expenses and additional sales volume. Operating margin, which was negatively impacted by charges for impairment and restructuring of $477.2 million in the fourth quarter of 2007 and $168.3 million in the fourth quarter of 2006, decreased to (5.9%) in the fourth quarter of 2007 from 2.3% in the fourth quarter of 2006.

Excluding charges for restructuring and impairment, the non-GAAP operating margin in the fourth quarter of 2007 increased to 9.5% from 9.1% in the fourth quarter of 2006, as benefits of lower incentive compensation expense, our productivity efforts and increased volume were offset, in part, by price pressure, the inclusion of the acquired companies that in aggregate carried a lower operating margin historically and an unfavorable business mix. Reconciliations of GAAP operating income/(loss) 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 19.8% to $2.3 billion from the fourth quarter of 2006 due to the Banta, Perry Judd's and Von Hoffman acquisitions as well as sales increases for logistics services, books, stock products and financial print offerings, offset in part by volume decreases of commercial print and direct mail offerings. The segment's operating margin, which was negatively impacted by charges for restructuring and impairment of $5.2 million in the fourth quarter of 2007 and $7.5 million in the fourth quarter of 2006, increased to 12.5% from 12.3% in the fourth quarter of 2006. Excluding restructuring and impairment charges, the segment's non-GAAP operating margin was 12.7% in the fourth quarter of both 2007 and 2006, as the benefit of lower incentive compensation expenses was offset by price pressure, the inclusion of the acquired companies that in aggregate carried a lower operating margin historically and higher non-cash purchase accounting-related amortization expense.

Net sales for the International segment increased 42.9% to $819.0 million from the fourth quarter of 2006 due to the acquisition of Banta, favorable foreign exchange comparisons, strong sales in export book volume from Asia and higher sales of books, forms, labels and commercial printing in Latin America. The segment's operating margin, which was negatively impacted by charges for restructuring and impairment of $466.8 million in the fourth quarter of 2007 and $142.3 million in the fourth quarter of 2006, decreased to (49.7%) in the fourth quarter of 2007 from (18.1%) in the fourth quarter of 2006. Excluding restructuring and impairment charges, the segment's non-GAAP operating margin increased to 7.3% in the fourth quarter of 2007 from 6.7% in the fourth quarter of 2006 due to increased volume and a favorable business mix that more than offset price pressure.

Unallocated Corporate operating expense decreased to $59.8 million in the fourth quarter of 2007 from $72.1 million in the fourth quarter of 2006. Excluding charges for restructuring and impairment totaling $5.2 million in the fourth quarter of 2007 and $18.5 million in the fourth quarter of 2006, Corporate operating expense increased $1.0 million to $54.6 million in the fourth quarter of 2007 as increased information technology spending was offset, in part, by decreased incentive compensation expense.

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 $3.05 to $3.15. This guidance includes the expected impact of the previously announced acquisitions and assumes no shares repurchased under the authorization available to the company. The non-GAAP effective tax rate for 2008 is expected to be approximately 32% to 33%. 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.