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RR Donnelley Reports Big Revenue Decline, Small Profit

August 5, 2009

"We continued to be impacted by the global economic recession during the second quarter, as most of the end-markets that we serve experienced reduced demand. The pace of decline was similar to that which we experienced during the first quarter and consistent with our expectations," said Thomas J. Quinlan III, RR Donnelley's President and Chief Executive Officer. "During the first six months of 2009, our focused management of costs and working capital has resulted in cash flow from operations of over $850 million, an increase of nearly $480 million from the prior year."

Quinlan added, "We are focused on maximizing cash flow and maintaining liquidity. Despite the challenging operating environment, over the past 12 months we have reduced our debt level by nearly $800 million and ended the second quarter of 2009 with available liquidity of $2.4 billion."

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
Net sales in the quarter were $2.4 billion, down 19.4% from the second quarter of 2008 including a 3.0% negative impact from changes in foreign exchange rates. The remaining decrease was caused by volume declines and continued price pressures across most products and services due to the global economic slowdown. Gross margin decreased to 25.4% in the second quarter of 2009 from 26.7% in the second quarter of 2008 due to price and volume declines and lower by-products recovery, offset in part by the benefits of our continued productivity efforts and lower variable compensation expense. SG&A expense as a percentage of net sales in the second quarter of 2009 increased to 11.6% from 11.1% in the second quarter of 2008 as the impact of the net sales decline and higher acquisition-related expenses more than offset the benefit of productivity efforts. Operating margin, which was negatively impacted by charges for restructuring and impairment of $48.2 million in the second quarter of 2009 and $16.2 million in the second quarter of 2008, as well as acquisition-related expenses of $1.4 million in the second quarter of 2009, decreased to 5.7% in the second quarter of 2009 from 9.5% in the second quarter of 2008.

Excluding charges for restructuring and impairment and acquisition-related expenses, the non-GAAP operating margin in the second quarter of 2009 decreased to 7.8% from 10.0% in the second quarter of 2008, as the benefits from our productivity efforts and lower expense for variable compensation were more than offset by volume and price declines.

Segments
Net sales for the U.S. Print and Related Services segment in the quarter decreased 17.6% to $1.8 billion from the second quarter of 2008 due to volume and price declines across all products and services. The segment’s operating margin, which was negatively impacted by charges for restructuring and impairment of $26.0 million in the second quarter of 2009 and $3.9 million in the second quarter of 2008, decreased to 7.8% in the second quarter of 2009 from 13.1% in the second quarter of 2008. Excluding restructuring and impairment charges, the segment’s non-GAAP operating margin decreased to 9.2% in the second quarter of 2009 from 13.3% in the second quarter of 2008, as the impact of volume and price declines and lower by-products recovery were only partially offset by the benefits of continued productivity efforts and lower variable compensation expense.

Net sales for the International segment in the quarter decreased 24.6% to $574.4 million from the second quarter of 2008 including an 11.4% negative impact from changes in foreign exchange rates. The remaining decrease was caused by volume declines in most product lines and price pressure in Europe and Asia. The segment’s operating margin, which was negatively impacted by charges for restructuring and impairment of $20.9 million in the second quarter of 2009 and restructuring charges of $9.2 million in the second quarter of 2008, decreased to 4.0% in the second quarter of 2009 from 5.1% in the second quarter of 2008. Excluding restructuring and impairment charges, the segment’s non-GAAP operating margin increased to 7.6% in the second quarter of 2009 from 6.3% in the second quarter of 2008 as favorable changes in foreign exchange rates, the elimination of amortization expense on certain intangible assets that were impaired in the fourth quarter of 2008, the benefits of continued productivity efforts and lower variable compensation expense more than offset the impact of volume and price declines.

Unallocated Corporate operating expense decreased to $26.4 million in the second quarter of 2009 from $44.7 million in the second quarter of 2008. Excluding restructuring charges of $1.3 million and acquisition-related expenses of $1.4 million in the second quarter of 2009 and restructuring and impairment charges of $3.1 million in the second quarter of 2008, Corporate operating expense decreased $17.9 million to $23.7 million in the second quarter of 2009, primarily due to lower LIFO inventory provisions, continued cost controls and lower variable compensation expense.

Conference Call
RR Donnelley will host a conference call and simultaneous webcast to discuss its second-quarter results today, Wednesday, August 5, at 10:00 a.m. Eastern Time (9:00 a.m. Central Time). The live webcast will be accessible on RR Donnelley’s web site: www.rrdonnelley.com. 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 16853367.

About RR Donnelley
RR Donnelley (NASDAQ: RRD) is a global provider of integrated communications. Founded more than 144 years ago, the company works collaboratively with more than 60,000 customers worldwide to develop custom communications solutions that reduce costs, enhance ROI and ensure compliance. Drawing on a range of proprietary and commercially available digital and conventional technologies deployed across four continents, the company employs a suite of leading Internet-based capabilities and other resources to provide premedia, printing, logistics and business process outsourcing services to leading clients in virtually every private and public sector. For more information, visit the company's web site at www.rrdonnelley.com.
 

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