RR Donnelley Reports Second Quarter 2004 Results Second Quarter
2004 Highlights CHICAGO, Aug. 4 /PRNewswire-FirstCall/ -- R.R.
Donnelley & Sons Company (NYSE:RRD) today reported second
quarter 2004 net sales of $2.0 billion and a net loss of $12.5
million or $0.06 per share, compared with net earnings for the
second quarter of 2003 of $19.3 million or $0.17 per diluted share.
The second quarter 2004 results include restructuring, impairment
and integration charges of $133.6 million, comprised of a non-cash
impairment charge of $89.1 million ($53.6 million net of tax)
related to the pending disposition of our package logistics
business and $44.5 million of restructuring ($41.8 million),
impairment ($0.1 million) and integration ($2.6 million) charges
primarily related to the ongoing integration efforts following our
February 27, 2004 acquisition of Moore Wallace. The second quarter
of 2003 included restructuring and impairment charges of $5.3
million. 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
for the second quarter of 2004 totaled $68.6 million, or $0.31 per
diluted share. Non-GAAP net earnings for this period excluded
restructuring, impairment and integration charges. The company used
an effective tax rate of 38.3% 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.
"I am pleased with our progress in the second quarter, particularly
with the integration of our acquisition of Moore Wallace,
acquisition-related and other cost savings achievements, the near
7% top-line growth in the Publishing and Retail Services segment
and the recent CIGNA cross-platform win," said Mark A. Angelson, RR
Donnelley's Chief Executive Officer. "We are benefiting from a
strengthening economy, but we are also demonstrating that our
platform can be leveraged to deliver superior products and services
while offering cost savings to our clients. "Our recent
announcement of our agreement to sell the package logistics
business is an important step for us. The sale will allow us to
exit a non-core business that has required considerable management
time in the past, and the continued ownership of which would be
inconsistent with our strategic and financial goals. At the same
time, we retain control over the distribution of our printed
material." Angelson added, "While much work lies ahead, this
quarter's results continue to demonstrate the commitment and
performance of RR Donnelley's employees and the vast potential of
the new RR Donnelley platform." Business Review 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 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 78% from the same quarter in 2003, primarily as a
result of the acquisition of Moore Wallace. Gross margin improved
to 25.3% from 22.3% in last year's second quarter, primarily due to
the benefits achieved from restructuring and cost reduction
actions. Selling, general and administrative expenses, as a
percentage of net sales, increased from 11.5% in the second quarter
of 2003 to 13.3% in the second quarter of 2004, primarily as a
result of increased employee incentive costs and increased
postretirement, insurance and litigation provisions. Increased
restructuring, impairment and integration charges in the second
quarter of 2004 relative to the second quarter of 2003 negatively
impacted operating margin. Operating margin for the quarter was
0.3%, compared to 4.3% for last year's second quarter. Excluding
restructuring, impairment and integration charges in the second
quarter of both years, non-GAAP operating margin for the second
quarter of 2004 was 6.9% compared to 4.7% for the second quarter
last year, primarily as a result of increased volume in our
Publishing and Retail Services segment and the benefits 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 second quarter, the company
realigned its segments and now reports its results, for all periods
presented, in five reportable segments, 1) Publishing and Retail
Services, 2) Integrated Print Communications and Global Solutions,
3) Forms and Labels, 4) Logistics and 5) Corporate. The Publishing
and Retail Services segment includes 1) magazine, catalog and
retail, 2) directories and 3) premedia. Net sales for the
Publishing and Retail Services segment increased 6.7% to $550.8
million due to volume increases across all businesses in the
segment. Operating margin declined by approximately 150 basis
points to 7.0% in the second quarter of 2004 from the second
quarter of 2003, primarily due to an increase in restructuring and
impairment charges, which were $15.3 million in the second quarter
of 2004 and $1.8 million in the second quarter of 2003. Excluding
restructuring and impairment charges, increased volume and lower
selling and administrative costs resulted in operating margin
expansion to 9.8% in the second quarter of 2004 from 8.9% in the
second quarter of 2003. The Integrated Print Communications and
Global Solutions segment includes 1) financial print, 2) book, 3)
direct mail, 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 $765.5 million from the second quarter of 2003,
primarily as a result of the acquisition of Moore Wallace ($364.0
million) as well as increased sales in financial print and
international markets. Operating margin, which was negatively
impacted by restructuring and integration charges of $10.8 million
in the second quarter of 2004 and restructuring and impairment
charges of $2.5 million in the second quarter of 2003, increased
approximately 160 basis points to 12.3% in the second quarter of
2004. Excluding restructuring, impairment and integration charges,
operating margin increased to 13.7% in the second quarter of 2004
from 11.3% in the second quarter of 2003, primarily as a result of
increased sales volume and the benefits from restructuring and cost
reductions in the financial print business. The Forms and Labels
segment includes 1) forms, 2) labels, 3) Peak and 4) Latin America.
Net sales for the Forms and Labels segment increased to $478.7
million in the second quarter of 2004 from $32.6 million in the
second quarter of 2003, primarily as a result of the acquisition of
Moore Wallace. The forms and labels business continued to be
negatively impacted by electronic substitution for multi-part paper
forms. Operating margin, which was negatively impacted by
restructuring and integration charges of $5.2 million in the second
quarter of 2004 and $1.0 million in the second quarter of 2003,
increased to 7.4% from a loss in the prior year's second quarter.
Excluding restructuring and integration charges, operating margin
increased to 8.4% in the second quarter of 2004 from a loss in the
second quarter of 2003, primarily as a result of the acquisition of
Moore Wallace and improved performance in Latin America. The
Logistics segment includes 1) print logistics and 2) package
logistics. Net sales for the Logistics segment increased 8.8% to
$233.8 million due to the acquisition of Moore Wallace, which more
than offset volume declines in the package logistics business,
resulting primarily from the shutdown of Momentum Logistics, Inc.'s
business-to-business activities. During the second quarter of 2004,
Logistics had an operating loss of $82.0 million. This reflected
restructuring and impairment charges totaling $91.5 million, of
which $89.1 million ($53.6 million net of tax) was a non-cash
impairment charge related to the pending disposition of our package
logistics business. Excluding restructuring and impairment charges,
operating margin increased to 4.1% in the second quarter of 2004
from 0.5% in the second quarter of 2003, primarily as a result of
benefits from cost reduction actions and improved efficiency.
Corporate operating expenses increased by $47.1 million from the
second quarter of 2003 to $78.9 million in the second quarter of
2004. The increase is primarily attributable to the acquisition of
Moore Wallace, restructuring and integration charges of $10.8
million, increased employee incentive costs and increased insurance
and litigation provisions. Six-Month Results For the first six
months of 2004, the company reported net sales of $3.5 billion and
a net loss of $71.3 million or $0.39 per share, compared with net
earnings of $25.1 million or $0.22 per diluted share for the first
six months of 2003. The first six month's results of 2004 include
restructuring, impairment and integration charges of $251.9
million, comprised of a non-cash impairment charge of $89.1 million
($53.6 million net of tax) related to the pending disposition of
our package logistics business and $162.8 million in restructuring
($64.1 million), impairment ($27.9 million) and integration ($70.8
million) charges primarily related to the ongoing integration
efforts following our February 27, 2004 acquisition of Moore
Wallace. During the first six months of 2004, the company
recognized a gain on the sale of an investment of $15.3 million
(pre-tax) and 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). Results for the first
half of 2003 included restructuring and impairment charges of $7.9
million. Non-GAAP net earnings for the first six months of 2004
totaled $86.2 million, or $0.46 per diluted share. Non-GAAP net
earnings for this period excluded restructuring, impairment and
integration charges, gain on the disposal of an investment and the
cumulative effect of a change in an accounting principle. The
company used an effective tax rate of 38.3% 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.
Integration Detail Continuing the integration of our acquisition of
Moore Wallace, the company recorded pre-tax restructuring charges
of $41.8 million in the second quarter of 2004. Through the first
six months of 2004, the company recorded $64.1 million of
restructuring charges, substantially all of which will require cash
payments. Restructuring charges were applied as follows: 2nd
Quarter First Half $ in Millions 2004 2004 Severance $41.4 $63.0
Facility 0.4 1.1 Total $41.8 $64.1 Payments associated with these
severance actions will be substantially completed by June 2005.
Through the first six months of 2004, the company has eliminated
approximately 2,175 positions. Outlook - 2004 Non-GAAP EPS
Increased For the full year 2004, RR Donnelley is targeting
non-GAAP earnings per diluted share of $1.55, an increase of $0.05
per diluted share from previous guidance. Guidance for the quarter
ended September 30, 2004 will be provided later in the quarter.
Non-GAAP net earnings exclude certain items that are unrelated to
the ongoing operations of the business. These items include charges
that are not currently determinable. For that reason, the company
is unable to provide GAAP earnings estimates at this time.
Historical Pro forma / Non-GAAP Information Posted to Company
Website The company has received several requests from shareholders
and analysts for pro forma comparative financial data reflecting
the company's new segments. We have been specifically asked to
provide "non-GAAP" comparative data for the new segments that
combine the company's and Moore Wallace's results of operations,
and eliminate significant non-comparable items such as
restructuring, impairment and integration charges as well as the
cost of sales impact resulting from inventory step-ups and backlog
valuations recorded in purchase accounting. The company has posted
to its website, http://www.rrdonnelley.com/ , tables and
explanations presenting unaudited, pro forma and non-GAAP net sales
and operating income of the new segments for the four quarters of
2003 and the first quarter of 2004. To the extent possible, the
data has been reconciled to the reported results of the company and
Moore Wallace for all periods presented. Please refer to the
qualifying language on the website. Conference Call RR Donnelley
will host a conference call to discuss its second quarter results
on Thursday, August 5, 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 press
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 Securities and
Exchange Commission (SEC). Readers are strongly encouraged to read
the full cautionary statements described 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 June 30, 2004 and December
31, 2003 IN MILLIONS, EXCEPT PER SHARE DATA At June 30, At December
31, 2004 2003 (Unaudited) Assets Current Assets Cash and cash
equivalents $275.4 $60.8 Receivables, less allowance for doubtful
accounts of $41.4 in 2004 ($26.8 in 2003) 1,249.7 738.5 Inventories
460.8 154.3 Prepaid expenses and other current assets 45.7 79.8
Deferred income taxes 227.2 - Total Current Assets 2,258.8 1,033.4
Property, plant and equipment - net 1,899.5 1,297.4 Prepaid pension
cost 465.8 314.4 Goodwill 2,631.6 317.5 Other intangible assets -
net 693.9 6.9 Other assets 325.1 253.3 Total Assets $8,274.7
$3,222.9 Liabilities Current Liabilities Accounts payable $501.4
$304.0 Accrued liabilities 819.8 427.4 Short-term debt 39.2 175.9
Income taxes 12.5 6.8 Deferred income taxes - 3.4 Total Current
Liabilities 1,372.9 917.5 Long-term debt 1,748.5 752.5
Postretirement benefits 336.0 12.0 Deferred income taxes 528.1
234.0 Other liabilities 554.2 323.7 Total Liabilities 4,539.7
2,239.7 Shareholders' Equity Preferred stock, $1.00 par value
Authorized shares: 2.0; Issued shares: None - - Common stock, $1.25
par value Authorized shares: 500.0 Issued shares: 243.0 in 2004
(140.9 in 2003) 303.7 176.1 Additional paid in capital 2,842.1
132.4 Retained earnings 1,414.4 1,641.7 Accumulated other
comprehensive loss (125.1) (123.7) Unearned compensation (39.3)
(2.9) Reacquired common stock, at cost, 25.7 shares in 2004 (27.2
in 2003) (660.8) (840.4) Total Shareholders' Equity 3,735.0 983.2
Total Liabilities and Shareholders' Equity $8,274.7 $3,222.9 R. R.
Donnelley and Sons Company Consolidated Statements of Operations
Three and Six Months Ended June 30, 2004 and 2003 (In millions,
except per share data) (UNAUDITED) Three months ended June 30,
ADJUSTMENTS ADJUSTMENTS TO TO 2004 NON-GAAP 2004 2003 NON-GAAP 2003
GAAP (1) NON-GAAP GAAP (1) NON-GAAP Net sales $2,028.8 - $2,028.8
$1,142.5 - $1,142.5 Cost of sales 1,515.9 (0.3) 1,515.6 887.3 887.3
Selling, general and administrative expense 269.2 (2.3) 266.9 131.7
131.7 Restructuring and impairments - net 131.0 (131.0) - 5.3 (5.3)
- Depreciation and amortization 105.9 105.9 69.3 69.3 Total
operating expenses 2,022.0 (133.6) 1,888.4 1,093.6 (5.3) 1,088.3
Income (loss) from operations 6.8 133.6 140.4 48.9 5.3 54.2
Interest expense - net 23.7 - 23.7 12.2 - 12.2 Investment and other
income (expense) (4.4) - (4.4) (5.4) - (5.4) Earnings (loss) before
income taxes, minority interest and cumulative effect of change in
accounting principle (21.3) 133.6 112.3 31.3 5.3 36.6 Income tax
expense (benefit) (9.5) 52.5 43.0 11.8 2.0 13.8 Minority interest
0.7 - 0.7 0.2 - 0.2 Net earnings (loss) before cumulative effect of
change in accounting principle (12.5) 81.1 68.6 19.3 3.3 22.6
Cumulative effect of change in principle - net of tax - - - - - -
Net earnings (loss) $(12.5) $81.1 $68.6 $19.3 $3.3 $22.6 Earnings
per share: Basic Net earnings (loss) before cumulative effect of
change in accounting principle $(0.06) $0.31 $0.17 $0.20 Cumulative
effect of change in principle - net of tax - - - - Net earnings
(loss) $(0.06) $0.31 $0.17 $0.20 Diluted Net earnings (loss) before
cumulative effect of change in accounting principle $(0.06) $0.31
$0.17 $0.20 Cumulative effect of change in principle - net of tax -
- - - Net earnings (loss) $(0.06) $0.31 $0.17 $0.20 Weighted
average common shares outstanding Basic 218.0 218.0 113.1 113.1
Diluted 218.0 219.8 114.2 114.2 NOTE: 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. (1) Please see the following schedules
"Reconciliation of GAAP Net Earnings (loss) to Non-GAAP Net
Earnings (loss)" for descriptions of the adjustments, one schedule
for the three months ended June 30, 2004 and June, 30 2003 and a
second schedule for the six months ended June 30, 2004 and June 30,
2003. R. R. Donnelley and Sons Company Consolidated Statements of
Operations Three and Six Months Ended June 30, 2004 and 2003 (In
millions, except per share data) (UNAUDITED) Six months ended June
30, ADJUSTMENTS ADJUSTMENTS TO TO 2004 NON-GAAP 2004 2003 NON-GAAP
2003 GAAP (1) NON-GAAP GAAP (1) NON-GAAP Net sales $3,475.0 -
$3,475.0 $2,216.3 - $2,216.3 Cost of sales 2,689.6 (67.7) 2,621.9
1,728.3 1,728.3 Selling, general and administrative expense 478.1
(3.1) 475.0 267.1 267.1 Restructuring and impairments - net 181.1
(181.1) - 7.9 (7.9) - Depreciation and amortization 186.8 186.8
137.7 137.7 Total operating expenses 3,535.6 (251.9) 3,283.7
2,141.0 (7.9) 2,133.1 Income (loss) from operations (60.6) 251.9
191.3 75.3 7.9 83.2 Interest expense - net 40.7 - 40.7 24.6 - 24.6
Investment and other income (expense) 6.2 (15.3) (9.1) (9.9) -
(9.9) Earnings (loss) before income taxes, minority interest and
cumulative effect of change in accounting principle (95.1) 236.6
141.5 40.8 7.9 48.7 Income tax expense (benefit) (31.5) 85.7 54.2
15.4 3.0 18.4 Minority interest 1.1 - 1.1 0.3 - 0.3 Net earnings
(loss) before cumulative effect of change in accounting principle
(64.7) 150.9 86.2 25.1 4.9 30.0 Cumulative effect of change in
principle - net of tax (6.6) 6.6 - - - - Net earnings (loss)
$(71.3) $157.5 $86.2 $25.1 $4.9 $30.0 Earnings per share: Basic Net
earnings (loss) before cumulative effect of change in accounting
principle $(0.35) $0.47 $0.22 $0.27 Cumulative effect of change in
principle - net of tax (0.04) - - - Net earnings (loss) $(0.39)
$0.47 $0.22 $0.27 Diluted Net earnings (loss) before cumulative
effect of change in accounting principle $(0.35) $0.46 $0.22 $0.26
Cumulative effect of change in principle - net of tax (0.04) - - -
Net earnings (loss) $(0.39) $0.46 $0.22 $0.26 Weighted average
common shares outstanding Basic 184.6 184.6 113.1 113.1 Diluted
184.6 186.5 113.8 113.8 NOTE: 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. (1) Please see the following schedules
"Reconciliation of GAAP Net Earnings (loss) to Non-GAAP Net
Earnings (loss)" for descriptions of the adjustments, one schedule
for the three months ended June 30, 2004 and June, 30 2003 and a
second schedule for the six months ended June 30, 2004 and June 30,
2003. Reconciliation of GAAP Net Earnings (Loss) to Non-GAAP Net
Earnings (Loss) In millions (Unaudited) Three Months Three Months
Ended Ended June 30, June 30, 2004 2003 NON-GAAP ADJUSTMENTS TO NET
EARNINGS (LOSS): Integration charges (1) $2.6 $--- Restructuring
and impairment charges (2) 131.0 5.3 Total non-GAAP adjustments to
income from operations 133.6 5.3 Total non-GAAP adjustments to
earnings before taxes 133.6 5.3 Income tax adjustment (3) (52.5)
(2.0) TOTAL NON-GAAP ADJUSTMENTS TO NET EARNINGS (LOSS) $81.1 $3.3
(1) Amount represents integration charges of $2.6 million. (2)
Amount for the three months ended June 30, 2004, includes $41.8
million for restructuring charges and $89.2 million for asset
impairment charges. Amount for the three months ended June 30,
2003, includes $4.8 million for restructuring charges and $0.5
million for asset impairment charges. (3) Amount represents the tax
effect of the reconciling items and an adjustment for the three
months ended June 30, 2004, to reflect the company's pro forma
effective tax rate of 38.3%. Reconciliation of GAAP Net Earnings
(Loss) to Non-GAAP Net Earnings (Loss) In millions (Unaudited) Six
Months Six Months Ended Ended June 30, June 30, 2004 2003 NON-GAAP
ADJUSTMENTS TO NET EARNINGS (LOSS): Integration charges (1) $70.8
$--- Restructuring and impairment charges (2) 181.1 7.9 Total
non-GAAP adjustments to income from operations 251.9 7.9 Gain on
disposition of investment (3) (15.3) --- Total non-GAAP adjustments
to investment and other income (15.3) --- Total non-GAAP
adjustments to earnings before taxes 236.6 7.9 Income tax
adjustment (4) (85.7) (3.0) Cumulative effect of change in
accounting principle (5) 6.6 --- TOTAL NON-GAAP ADJUSTMENTS TO NET
EARNINGS (LOSS) $157.5 $4.9 (1) Amount includes adjustments to cost
of sales for fair market value of acquired inventory and backlog
($66.9 million) and other integration charges ($3.9 million). (2)
Amount for the six months ended June 30, 2004, includes $64.1
million for restructuring charges and $117.0 million for asset
impairment charges. Amounts for the six months ended June 30, 2003,
includes $7.4 million for restructuring charges and $0.5 million
for asset impairment charges. (3) Amount represents the gain on the
sale of an investment held in Latin America during the three months
ended March 31, 2004. (4) Amount represents the tax effect of the
reconciling items and an adjustment for the six months ended June
30, 2004, to reflect the company's pro forma effective tax rate of
38.3%. (5) 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 six months ended June 30,
2004 and 2003 $ in millions (UNAUDITED) Integrated Print Communi-
Publishing cations and and Forms Retail Global and Consoli-
Services Solutions Labels Logistics Corporate dated Three Months
Ended June 30, 2004 Net sales $550.8 $765.5 $478.7 $233.8 -
$2,028.8 Operating expense 512.2 671.6 443.5 315.8 78.9 2,022.0
Operating income (loss) 38.6 93.9 35.2 (82.0) (78.9) 6.8 Operating
margin % 7.0% 12.3% 7.4% -35.1% nm 0.3% Non-GAAP Adjustments
Restructuring charges 15.2 10.7 4.5 2.4 9.0 41.8 Impairment charges
0.1 - - 89.1 - 89.2 Integration charges - 0.1 0.7 - 1.8 2.6 Total
Non-GAAP Adjustments 15.3 10.8 5.2 91.5 10.8 133.6 Operating income
(loss) before restructuring, impairment and integration charges
$53.9 $104.7 $40.4 $9.5 ($68.1) $140.4 Operating Margin before
restructuring, impairment and integration charges % 9.8% 13.7% 8.4%
4.1% nm 6.9% Six Months Ended June 30, 2004 Net sales $1,086.1
$1,247.1 $679.9 $461.9 - $3,475.0 Operating expense 1,011.7 1,127.0
681.8 562.4 152.7 3,535.6 Operating income (loss) 74.4 120.1 (1.9)
(100.5) (152.7) (60.6) Operating margin % 6.9% 9.6% -0.3% -21.8% nm
-1.7% Non-GAAP Adjustments Restructuring charges 20.0 12.3 7.5 6.7
17.6 64.1 Impairment charges 13.5 0.9 - 102.6 - 117.0 Integration
charges - 17.7 50.7 - 2.4 70.8 Total Non-GAAP Adjustments 33.5 30.9
58.2 109.3 20.0 251.9 Operating income (loss) before restructuring,
impairment and integration charges $107.9 $151.0 $56.3 $8.8
($132.7) $191.3 Operating Margin before restructuring, impairment
and integration charges % 9.9% 12.1% 8.3% 1.9% nm 5.5% Three Months
Ended June 30, 2003 Net sales $516.4 $378.7 $32.6 $214.8 - $1,142.5
Operating expense 472.3 338.3 37.5 213.7 31.8 1,093.6 Operating
income (loss) 44.1 40.4 (4.9) 1.1 (31.8) 48.9 Operating margin %
8.5% 10.7% -15.0% 0.5% nm 4.3% Non-GAAP Adjustments Restructuring
charges 1.8 2.0 1.0 - - 4.8 Impairment charges - 0.5 - - - 0.5
Integration charges - - - - - - Total Non-GAAP Adjustments 1.8 2.5
1.0 - - 5.3 Operating income (loss) before restructuring,
impairment and integration charges $45.9 $42.9 ($3.9) $1.1 ($31.8)
$54.2 Operating Margin before restructuring, impairment and
integration charges % 8.9% 11.3% -12.0% 0.5% nm 4.7% Six Months
Ended June 30, 2003 Net sales $1,031.8 $699.3 $60.6 $424.6 -
$2,216.3 Operating expense 940.4 639.6 71.4 418.8 70.8 2,141.0
Operating income (loss) 91.4 59.7 (10.8) 5.8 (70.8) 75.3 Operating
margin % 8.9% 8.5% -17.8% 1.4% nm 3.4% Non-GAAP Adjustments
Restructuring charges 2.0 3.2 1.1 - 1.1 7.4 Impairment charges -
0.5 - - - 0.5 Integration charges - - - - - - Total Non-GAAP
Adjustments 2.0 3.7 1.1 - 1.1 7.9 Operating income (loss) before
restructuring, impairment and integration charges $93.4 $63.4
($9.7) $5.8 ($69.7) $83.2 Operating Margin before restructuring,
impairment and integration charges % 9.1% 9.1% -16.0% 1.4% nm 3.8%
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 Condensed Consolidated Statements of Cash Flows For
the six months ended June 30, 2004 and 2003 In millions (Unaudited)
June 30, June 30, 2004 2003 OPERATING ACTIVITIES Net earnings
(loss) before cumulative effect of change in accounting $(71.3)
$25.1 Adjustments to reconcile net earnings (loss) before
cumulative effect of accounting change to cash provided by
operating activities 377.0 143.1 Changes in operating assets and
liabilities 22.9 (13.7) Net cash provided by operating activities
328.6 154.5 INVESTING ACTIVITIES Net cash provided by (used in)
investing activities 25.9 (112.4) FINANCING ACTIVITIES Net cash
used in financing activities (139.4) (53.3) Effect of exchange
rates on cash and cash equivalents (0.5) .4 Net increase (decrease)
in cash and cash equivalents 214.6 (10.8) Cash and cash equivalents
at beginning of period 60.8 60.5 Cash and cash equivalents at end
of period $275.4 $49.7 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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