RR Donnelley Records Drop in Earnings on Higher Sales

Gross margin of 24.5 percent in the second quarter of 2011 was flat to the second quarter of 2010 as productivity efforts, the acquisition of Bowne, lower variable compensation expense and a higher recovery on print-related by-products were offset by lower volume, primarily in books and directories, and pricing pressure.

SG&A expense as a percentage of net sales in the second quarter of 2011 increased to 11.8 percent from 11.1 percent in the second quarter of 2010 primarily due to the acquisition of Bowne and higher pension and other benefits-related expenses.

Operating earnings were negatively impacted by restructuring and impairment charges and acquisition expenses of $76.6 million in the second quarter of 2011 and $14.0 million in the second quarter of 2010, resulting in operating income of $116.1 million in 2011 and $175.3 million in 2010. Operating margin was 4.4 percent in 2011 and 7.3 percent in 2010.

Excluding restructuring and impairment charges and acquisition expenses, non-GAAP operating margin declined to 7.3 percent in the second quarter of 2011 from 7.9 percent in the second quarter of 2010. Changes in foreign exchange rates, primarily due to export sales from certain international operations, and higher pass-through paper sales unfavorably impacted non-GAAP operating margin by approximately 29 basis points. The remainder of the margin decline was primarily due to lower volume, continued pricing pressure and higher unallocated Corporate costs for pension and other benefits-related expenses, which more than offset the impact of productivity initiatives and lower variable compensation expense.

Segments

Net sales for the U.S. Print and Related Services segment in the quarter increased 6.2 percent from the second quarter of 2010 to $1.9 billion primarily due to the acquisition of Bowne and volume increases in commercial, logistics and financial print, partially offset by volume declines in books and directories and continued pricing pressure across the segment. Pro forma for acquisitions, net sales in the U.S. Print and Related Services segment decreased by $50.7 million, or 2.6 percent, primarily due to volume declines in books and directories and continued pricing pressure across the segment.

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