RR Donnelley Q1 Shrinking Margins

RR Donnelley reports its Q1 results. Thomas J. Quinlan III, RR Donnelley's President and Chief Executive Officer said “We are pleased with our first-quarter performance.... Our prudent capital management, our ability to leverage capacity at newly acquired companies and our focus on cost control allow us to reaffirm our stated operating target for full-year non-GAAP operating margin of slightly greater than 10.0%."

The press release went on to discuss how recent acquisitions all had lower historical margins. Read these excerpts:

U.S. Print and Related Services.... ‘the benefit of productivity efforts was offset by the inclusion of the acquired companies that in aggregate carried a lower operating margin historically.”

Net sales for the International segment... “non-GAAP operating margin decreased to 6.8% in the first quarter of 2008 from 8.1% in the first quarter of 2007 due to changes in foreign exchange rates, an unfavourable business mix and continued price pressure.” That’s margin pressure.

It appears that the recent acquisitions have driven margins downward to the point where they are affecting overall corporate performance. The President and CEO is making some very boldfaced comments that they feel confident in their ability to leverage capacity and effect cost controls. This means improved profit margins. The financial jury is still out as to whether they will be able to improve margins.

Thomas Quinlan is giving himself some wiggle room by stating the margin goal is slightly better than 10% when many of their existing businesses have historically operated at margins well in excess of 10%.

Lots of pigeons need to come home to roost to skate this one onside. So far Q1 is not a successful quarter for margins.