<ins>FORM 10-Q</ins>

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------<ins>FORM 10-Q</ins>

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

-----------

FORM 10-Q

-----------

(Mark One)
[X]
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31,June 30, 1999

OR
[_]
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-4694

R. R. DONNELLEY && SONS COMPANY

(Exact name of registrant as specified in its charter)

Delaware 36-1004130
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

77 West Wacker Drive, Chicago,
Illinois 60601
(Address of principal executive (Zip Code)
offices)
Registrant's
Delaware
(State or other jurisdiction of
incorporation or organization) 36-1004130
(I.R.S. Employer
Identification No.)
77 West Wacker Drive,

Chicago, Illinois
(Address of principal executive offices) 60601
(Zip Code)

Registrant’s Telephone Number (312) 326-8000

Indicate by check
mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been
subject to the filing requirements for the past 90 days.

X
Yes------- No -------

Number of shares of common stock
outstanding
as of March 31, 1999 130,805,876

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

Yes ü No ü
Number of shares of common
stock outstanding
as of
July 31, 1999
127,671,691
PART
I
FINANCIAL INFORMATION
Item 1. Financial Statements

Index Page
Index

Number(s)
----- ---------
Condensed Consolidated Statements of Income
(Unaudited) for the

three and six months
ended March 31,June 30, 1999 and 1998..................... 1998 3
Condensed Consolidated Balance Sheets (Unaudited) as
of March 31,June 30,

1999
(Unaudited) and December 31,
1998.............................. 1998 4
Condensed Consolidated Statements of Cash Flows
(Unaudited) for

the threesix months ended
March 31,June 30, 1999 and 1998................. 1998 5
Notes to Condensed Consolidated Financial Statements

(Unaudited).................................................... 6 - 8

Item 2. Management'sManagement’s
Discussion and Analysis of Financial Condition and Results of
Operations
Comparison of Second Quarter and First QuarterHalf 1999 to
First Quarter 1998.......... 1998 9 - 11
13

Changes in Financial Condition.................................. 12
Subsequent Events............................................... 12
Condition 14
Year 2000....................................................... 12 - 13
Other Information............................................... 132000 14 - 15

Other Information 15 - 16

Item 3. Quantitative and Qualitative
Disclosures about Market Risk... 15

Risk 17
PART II
OTHER INFORMATION
Item 1. Legal Proceedings............................................ 16
Item 4. Submission of Matters to a Vote of Security Holders.......... 16
Proceedings 18
Item 5. Other Information............................................ 16
Information 18
Item 6. Exhibits and Reports on Form 8-K............................. 168-K
18

2
R.R. DONNELLEY && SONS COMPANY AND
SUBSIDIARIES

----------------

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(Thousands
(Thousands of dollars, except share data)

Three Months Ended
March 31
--------------------------

June 30 Six
Months Ended June 30
1999
1998
------------ ------------
1999
1998

Net sales.......................................... sales
$ 1,179,816 1,195,170
$ 1,173,598
1,155,964
$2,374,986
$2,329,561
Cost of sales...................................... 936,880 955,539
------------ ------------
sales
935,920 915,216 1,872,800 1,870,754
Gross profit....................................... 242,936 218,059
profit
259,250 240,748 502,186 458,807
Selling and
administrative expenses................ 151,361 130,220
expenses 156,346 143,429 307,707 273,649
Income (loss)
from operations of businesses

held for sale.......................................... (2,959) --
------------ ------------
sale (1,931 ) (80,067 ) (4,890 ) (80,067 )
Earnings from
operations........................... 88,616 87,839
operations 100,973 17,252 189,589 105,091
Other income
(expense):
Interest
expense.................................. (19,896) (19,947)
expense (23,726 ) (19,689 ) (43,621 ) (39,636 )
Gain on sale of
Metromail shares —
145,656 —
145,656
Other net........................................ 2,792 117
------------ ------------
income
—net 8,098 1,764 10,889 1,881
Earnings before
income taxes....................... 71,512 68,009
taxes 85,345 144,983 156,857 212,992
Provision for
income taxes......................... 27,532 23,803
------------ ------------
taxes 32,858 86,246 60,390 110,049
Net income......................................... $ 43,980 $ 44,206
============ ============
income
52,487 58,737 96,467 102,943
Net income per
share of common stock
Basic............................................. stock:
Basic $ 0.33 0.41 $ 0.31
Diluted........................................... 0.42 $ 0.33 0.74 $ 0.30
0.72
Diluted $0.40 $0.41 $0.73 $0.71
Cash dividends
per basic share..................... share $0.21 $ 0.21
0.20 $ 0.20
0.42 $0.40
Average basic
shares outstanding................... 132,777,000 143,928,000
outstanding
129,450,000
140,835,000
131,157,000
142,450,000
Average diluted
shares outstanding................. 134,359,000 146,220,000outstanding
130,601,000
143,824,000
132,632,000
144,995,000

See accompanying Notes to Condensed Consolidated
Financial Statements.

3
R.R. DONNELLEY && SONS COMPANY AND
SUBSIDIARIES

------------

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

March 31,
June 30, 1999 and December 31, 1998
(Thousands
(Thousands of dollars, except share data)

ASSETS
1999
1998
---------- ----------
Cash and
equivalents................................... equivalents $ 74,998 50,374 $66,226
Receivables,
less allowance for doubtful accounts of $15,112$15,269 in 1999 and
$14,279

$14,279 in 1998................... 799,531 1998 800,276 843,094
Inventories............................................ 189,344
Inventories
194,299 182,931
Prepaid
expenses....................................... 112,350 expenses 78,744 63,040
---------- ----------
Total current
assets................................. 1,176,223 assets 1,123,693 1,155,291
---------- ----------
Property, plant
and equipment, at cost................. 4,414,260 cost 4,593,680 4,368,754
Accumulated
depreciation............................... 2,731,757 depreciation 2,822,886 2,667,827
---------- ----------
Net property,
plant and equipment.................... 1,682,503 equipment 1,770,794 1,700,927
Goodwill and
other intangibles, net of accumulated amortization of $187,819$195,279

in 1999 and $183,589 in 1998. 389,947 1998 388,062 381,394
Other
noncurrent assets................................ 534,805 assets 542,108 515,029
Net assets of
businesses held for sale................. 42,517 sale 40,582 45,476
---------- ----------
Total assets......................................... $3,825,995 $3,798,117
========== ==========assets
$3,865,239
$3,798,117

LIABILITIES AND SHAREHOLDERS'SHAREHOLDERS’ EQUITY
Accounts
payable....................................... payable $ 303,083 284,475 $331,257
Accrued
compensation................................... 156,903 compensation 160,041 188,187
Short-term debt........................................ debt
60,000 60,000
Current and
deferred income taxes...................... 18,937 taxes 31,902 2,263
Other accrued
liabilities.............................. 294,100 liabilities 274,134 242,251
---------- ----------
Total current
liabilities............................ 833,023 liabilities 810,552 823,958
---------- ----------
Long-term debt......................................... 1,165,428 debt
1,292,003 998,978
Deferred income
taxes.................................. 257,765 taxes 254,659 260,692
Other
noncurrent liabilities........................... 415,944 liabilities 415,908 413,611
Shareholders'
Shareholders
’ equity:
Common stock,
at stated value ($1.25 par value)
Authorized
shares: 500,000,000; Issued 140,889,050 in 1999 and

140,889,050 in 1998.................... 1998 308,462 308,462
Retained
earnings.................................... 1,313,055 earnings 1,361,847 1,325,634
Cumulative
translation adjustments................... (62,338) (55,050)adjustments (63,184 ) (55,050 )
Unearned
compensation................................ (5,399) (6,118)compensation (4,712 ) (6,118 )
Reacquired
common stock, at cost..................... (399,945) (272,050)
---------- ----------cost (510,296 ) (272,050 )
Total
shareholders' equity....................... 1,153,835 shareholders’ equity 1,092,117 1,300,878
---------- ----------
Total
liabilities and shareholders' equity....... $3,825,995 $3,798,117
========== ==========shareholders’ equity $3,865,239
$3,798,117

See accompanying Notes to Condensed Consolidated
Financial Statements.

4
R.R. DONNELLEY && SONS COMPANY AND
SUBSIDIARIES

------------

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the ThreeSix Months Ended March 31
(ThousandsJune 30
(Thousands of dollars)

1999
1998
--------- ---------
Cash flows
provided by (used for) operating activities:
Net income............................................. income
$ 43,980 96,467 $ 44,206102,943
Loss from
operations of businesses held for sale, net of tax................................................ 1,820 --
Depreciation........................................... 79,328 81,226
Amortization........................................... 12,234 11,045tax 3,010 80,067
Gain on sale of
Metromail, net of tax —
(87,394 )
Depreciation
159,320 161,969
Amortization
22,538 22,855
(Gain) on sale
of assets............................... (2,985) (1,176)assets (2,985 ) (8,587 )
Net change in
operating working capital................ (43,771) (32,063)capital (8,519 ) 24,245
Net change in
other assets and liabilities............. 18,459 650
Other.................................................. 1,862 (4,733)
--------- ---------
liabilities 27,297 77,079
Other (17,349 ) (17,007 )
Net cash
provided by operating activities................ 110,927 99,155
--------- ---------
activities 279,779 356,170
Cash flows
provided by (used for) investing activities:
Capital
expenditures................................... (64,393) (54,432)expenditures (133,173
) (108,429 )
Other
investments including acquisitions, net of cash acquired.............................................. (52,465) (18,609)acquired (155,966 ) (22,234 )
Dispositions of
assets................................. -- 1,176
--------- ---------
assets —
16,023
Disposition of
Metromail, net of tax —
238,438
Net cash
used forprovided by (used for) investing activities................... (116,858) (71,865)
--------- ---------
activities (289,139 ) 123,798

Cash flows
provided by (used for) financing activities:
Net increase
(decrease) in borrowings............................. 166,450 121,648borrowings 291,097 (195,552 )
Issuances of
common stock.............................. 1,464 17,539stock 14,274 53,539
Acquisition of
common stock............................ (123,559) (150,732)stock (254,520 ) (294,085
)
Cash dividends
on common stock......................... (28,017) (28,975)
--------- ---------
stock (55,340 ) (57,116 )
Net cash used
for financing activities................... 16,338 (40,520)
--------- ---------
activities (4,489 ) (493,214 )
Effect of
exchange rate changes on cash and equivalents.. (1,635) (259)
equivalents (2,003 ) (825 )
Net increase in
cash from businesses held for sale....... -- 22,595
--------- ---------
sale —
28,098
Net change in
cash and equivalents....................... 8,772 9,106
equivalents (15,852 ) 14,027
Cash and
equivalents at beginning of period.............. period 66,226 47,814
--------- ---------
Cash and
equivalents at end of period.................... period $ 74,998 50,374 $ 56,920
========= =========61,841

See accompanying Notes to Condensed Consolidated
Financial Statements.

5
R.R. DONNELLEY && SONS COMPANY AND
SUBSIDIARIES

------------

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note
NOTE
1. The condensed consolidated financial statements included herein
are unaudited (although the balance sheet at December 31, 1998 is
condensed from the audited balance sheet at that date) and have
been prepared by the company to conform with the requirements
applicable to this quarterly report on Form 10-Q. Certain
information and disclosures, normally included in financial
statements prepared in accordance with generally accepted
accounting principles, have been omitted as permitted by such
requirements. However, the company believes that the disclosures
made are adequate to make the information presented not
misleading. These condensed consolidated financial statements
should be read in conjunction with the consolidated financial
statements and the related notes included in the company'scompany’s
1998 Annual Report on Form 10-K.
The condensed consolidated financial statements included
herein reflect, in the opinion of the company, all adjustments
(which include only normal, recurring adjustments) necessary to
present fairly the financial information for such periods.
Certain prior year amounts have been reclassified to maintain
comparability with current year classifications.

Note
NOTE
2. Components of the company'scompany’s inventories at March 31,June 30, 1999,
and December 31, 1998, were as follows:

(Thousands of

Dollars)
------------------

1999
1998
-------- --------
Raw materials
and manufacturing supplies.................... $119,328 $121,490
supplies $117,837 $121,490
Work in process............................................. 165,078 process
178,858 150,775
Finished goods.............................................. 913 goods
1,405 1,220
Progress
billings........................................... (46,078) (42,217)
billings (52,864 ) (42,217 )
LIFO reserve................................................ (49,897) (48,337)
-------- --------reserve
(50,937 ) (48,337 )
Total
inventories....................................... $189,344 $182,931
======== ========

Noteinventories $194,299 $182,931
NOTE
3. The following provides supplemental cash flow information:

(Thousands of

Dollars)
------------------
Three
Six Months Ended
March 31
------------------

June 30
1999
1998
-------- --------
Interest paid.............................................. paid $ 5,693 37,101 $ 8,52139,253
Income taxes paid.......................................... paid $ 10,508 22,016 $ 19,90826,966

Note
NOTE
4. On November 25, 1996, a purported class action was brought
against the company in federal district court in Chicago,
Illinois, on behalf of all current and former African-American
employees, alleging that the company racially discriminated
against them in violation of the Civil Rights Act of 1871, as
amended, and the U.S. Constitution (Jones,(Jones, et al. v. R.R.
Donnelley && Sons Co.). The complaint seeks declaratory
and injunctive relief, and asks for actual, compensatory,
consequential and punitive damages in an amount not less than
$500 million. Although plaintiffs seek nationwide class
certification, most of the specific factual assertions of the
complaint relate to the closing by the company of its Chicago
catalog operations in 1993. Other general claims relate to other
company locations. On February 11,August 10, 1999, the magistratedistrict court judge
ruled that all claims relating todenied the Chicago catalog operations were
untimely. Plaintiffs have appealed this ruling. If the ruling of the
magistrate judge is upheld, the claims relating to other locations will still
be pending as is plaintiffs'company’s motion for class certification.

6
partial summary judgment on
the basis of timeliness. Discovery is underway.
R.R. DONNELLEY && SONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--STATEMENTS—(Continued)
On
December 18, 1995, a class action was filed against the company
in federal district court in Chicago alleging that older workers
were discriminated against in selection for termination upon the
closing of the Chicago catalog operations (Gerlib,(Gerlib, et al. v.
R.R. Donnelley && Sons Co.). The suit also alleges that
the company violated the Employee Retirement Income Security Act
(ERISA) in determining benefits payable to retiring or
terminated employees. On August 14, 1997, the court certified
classes in both the age discrimination and ERISA claims limited
to former employees of the Chicago catalog operations.
On June
30, 1998, a purported class action was filed against the company
in federal district court in Chicago on behalf of current and
former African-
AmericanAfrican-American employees, alleging that the company
racially discriminated against them in violation of Title VII of
the Civil Rights Act of 1964 (Adams,(Adams, et al. v. R.R. Donnelley
&& Sons Co.). While making many of the same general
discrimination claims contained in the Jones complaint,
the Adams plaintiffs are also claiming retaliation by the
company for the filing of discrimination charges or otherwise
complaining of race discrimination. The complaint seeks the same
relief and damages as sought in the Jones case.
Both the
Jones and Gerlib cases relate primarily to the
circumstances surrounding the closing of the Chicago catalog
operations. The company believes that it acted properly in the
closing of the operations. Further, with regard to all three
cases, the company believes it has a number of valid defenses to
all of the claims made and will vigorously defend its actions.
However, management is unable to make a meaningful estimate of
any loss that could result from an unfavorable outcome of any of
the pending cases.
In
addition, the company is a party to certain litigation arising
in the ordinary course of business which, in the opinion of
management, will not have a material adverse effect on the
operations or financial condition of the company.

Note
N
OTE
5. The company has adopted the Statement of Financial Accounting
Standards No. 130, Comprehensive Income. This statement
is intended to report a measure of all changes in shareholders'shareholders
’ equity that result from either recognized transactions or
other economic events, excluding capital stock transactions,
which impact shareholders'shareholders’ equity. For the company, the
only difference between net income and comprehensive income is
the effect of the increase in unrealized foreign currency
translation losses of $7$0.8 million and $5$8 million for the quartersthree
and six months ended March 31,June 30, 1999 and 1998, respectively.
Comprehensive income equaled $37$8 million and $39$13
million for the quartersthree and six months ended March 31,June 30, 1998. Total
comprehensive income was $52 million and $88 million for the
three and six months ended June 30, 1999 and 1998, respectively.

Note$51 million and $90
million for the three and six months ended June 30, 1998.
N
OTE
6. The company operates in the commercial printing industry.
Substantially all revenues result from the sale of printed
products and services to customers in the following markets:
Book Publishing Services, Financial Services, Magazine
Publishing Services, Merchandise Media and Telecommunications.
The company'scompany’s management has aggregated its commercial
print businesses as one reportable segment due tobecause of strong
similarities in the economic characteristics, nature of products
and services, production processes, class of customer and
distribution methods used. The company'scompany’s investment in
businesses held for sale has been disclosed as a separate
reportable segment, as the revenues generated from these
businesses are unrelated to the commercial printing industry--referindustry
—refer to "Businesses“Businesses Held for Sale"Sale” under Item 2
of this Form 10-Q for additional information.
The
company has disclosed earnings (loss) from operations as the
primary measure of segment earnings (loss). This is the measure
of profitability used by the company'scompany’s chief operating
decision-maker that is most consistent with the presentation of
profitability reported within the consolidated financial

statements. The accounting policies of the business segments
reported are the same as those described in the "Summary“Summary of
Significant Accounting Policies"
(F-6Policies” (page F-6 in the 1998
Annual Report on Form 10-K).

7
R.R. DONNELLEY && SONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--STATEMENTS—(Continued)

Industry Segment Information

In Thousands Commercial

Print Businesses
Commercial

Held for

Sale Corporate Other⁽¹⁾ Adjustments⁽²⁾ Consolidated
In Thousands Print Sale Corporate Other(1) Adjustments(2)

Total
- ------------ ---------- ---------- --------- -------- -------------- ------------

First
Second Quarter Ended March 31, 1999
Sales................... $1,121,189 $199,123
Sales $1,141,359 $271,962 $ -- $58,627 $(199,123) $1,179,816
—
$53,811 $(271,962 ) $1,195,170
Earnings (loss) from
operations............. 79,281 (2,959) 10,382 1,912 -- 88,616

operations 94,215 (1,931 ) 7,126 1,563 — 100,973
Earnings (loss) before

income taxes........... 174,248 (2,959) (101,339) 1,562 -- 71,512
Assets.................. 3,014,358 213,343 677,357 91,763 (170,826) 3,825,995

Firsttaxes 101,703 (1,931 ) (15,881 ) 1,454 — 85,345
Assets 3,098,679 289,214 637,824 88,154 (248,632 ) 3,865,239
Second Quarter Ended March 31, 1998
Sales................... $1,117,444 $175,773
Sales $ -- $56,154 $(175,773) $1,173,598
1,102,233 $224,427 $— $53,731 $(224,427 ) $1,155,964
Earnings (loss) from
operations............. 79,894 -- 6,718 1,227 -- 87,839

operations 91,797 (80,067 ) 5,653 (131 ) — 17,252
Earnings (loss) before

income taxes........... 160,470 -- (93,583) 1,122 -- 68,009
Assets.................. 3,229,360 295,109 624,100 98,978 (162,997) 4,084,550taxes 97,520 (80,067 ) 127,603 (73 ) — 144,983
Assets 2,991,284 325,605 616,128 93,017 (279,062 ) 3,746,972
Six Months Ended June 30,
1999
Sales $2,262,548 $471,085 $— $112,438 $(471,085 ) $2,374,986
Earnings (loss) from

operations 187,082 (4,890 ) 3,922 3,475 — 189,589
Earnings (loss) before

income taxes 194,557 (4,890 ) (35,826 ) 3,016 — 156,857
Six Months Ended June 30,
1998
Sales $2,219,676 $400,200 $— $109,885 $(400,200 ) $2,329,561
Earnings (loss) from

operations 176,424 (80,067 ) 7,638 1,096 — 105,091
Earnings (loss) before

income taxes 187,858 (80,067 ) 104,152 1,049 — 212,992

- --------
(1) Represents other operating segments of the company.
(2) Refer to discussion of "Businesses Held for Sale," which describes the
separate presentation of the net assets and results of operations of
businesses held for sale.

Note
(1) Represents other
operating segments of the company.
(2) Refer to
discussion of “Businesses Held for Sale,” under Item
2 of this Form 10-Q which describes the separate presentation
of the net assets and results of operations of businesses held
for sale.
N
OTE
7. The company has used corporate-owned life insurance (COLI) to
fund employee benefits for several years. In 1996, the United
States Health Care Reform Act was passed, eliminating the
deduction for interest from loans borrowed against COLI
programs. 1998 was the final year of the phase-out period for
deductions. Without the COLI deduction, the company anticipates
a higher effective tax rate in 1999 and future years.
The
Internal Revenue Service (IRS), in its routine audit of the
company, has disallowed the $34 million of tax benefit that
resulted from the COLI interest deductions claimed by the
company in its 1990 to 1992 tax returns. The company has
challenged this position in a formal protest filed with the IRS
Appeals division. The company expects to resolve the issue
eventually in a manner that does not materially impact its
financial position or results of operations.

Note
NOTE
8. OnIn April 2, 1999, the company acquired certain net assets of the
Communicolor division of The Standard Register Company
(Communicolor). Communicolor, with locations in Newark, Ohio and
Eudora, Kansas, is a provider of personalization services and
printer of innovative direct-mail campaigns. The acquisition will bewas
accounted for using the purchase method of accounting.

On
In April 16, 1999, the company issued $200 million of 6 5/8%⁵/
8
%
debentures due 2029. Proceeds received from the sale were used
to reduce outstanding commercial paper borrowings incurred for
working capital purposes and in connection with the financing of
the company'scompany’s acquisitions of Communicolor and the
financial printing unit of Cadmus Communications, with the
remainder to be used for general corporate purposes. 8
NOTE
9. In March 1998, Metromail Corporation (Metromail) entered into a
merger agreement with The Great Universal Stores, P.L.C. (GUS),
pursuant to which GUS initiated a tender offer for the
outstanding shares of Metromail. In conjunction with the merger,
the company committed to sell its remaining 37% interest in
Metromail to GUS. In April 1998, the company received $297
million, or approximately $238 million after-tax, for its
remaining interest in Metromail. The company recognized a
pre-tax gain of $146 million ($87 million after-tax) from this
transaction.
NOTE
10. In the second quarter of 1998, the company recorded an $80
million impairment charge (with no associated tax benefit)
related to the write-down of goodwill at Corporate Software &
Technologies (CS&T). CS&T is reported as businesses held
for sale in the accompanying financial statements—refer to
“Businesses Held for Sale” under Item 2 Management'sof this Form
10-Q for additional information.
Item 2
Management’s Discussion and Analysis of
Financial Condition and Results of Operations

Comparison of Second Quarter and First QuarterSix Months of 1999 to First Quarter 1998

About the Company
R.R. Donnelley && Sons Company is the largest
commercial printer in North America. Our company is a leading
provider of printing and related services to the merchandising,
magazine, book, directory, financial and healthcare markets. We
use our superior skills, scale and technology to deliver
solutions that effectively meet our customers'customers’ needs. Our
common stock (DNY: NYSE) has been publicly traded since 1956. At
the end of March,June 1999, we had approximately 32,000 employees
working in our core printing operations on four continents. We
also had 4953 manufacturing plants with a broad range of
capabilities to serve our customers. While 91% of our revenue is
generated in the United States, we have extended our core
competencies into selected international markets.
Commercial printing in the United States is a large and
fragmented industry, and includes more than 50,000 firms that
employ more than one million people and generate approximately
$150 billion in annual revenue.
The segment of commercial printing that we serve generates
approximately $80 billion in annual revenue. Within this
segment, we have leadership positions in all five of our end
markets:

. Merchandise Media, serving the consumer and business-to-business catalog,
retail insert and direct mail markets;

. Magazine Publishing Services, serving the consumer, trade and specialty
magazine markets;

. Telecommunications, serving the global directory needs of
telecommunications providers;

. Book Publishing Services, serving the trade, children's, religious and
educational book markets; and

.
· Magazine Publishing Services, serving the consumer,
trade and specialty magazine markets;
· Merchandise Media, serving the consumer and
business-to-business catalog, retail insert and direct mail
markets;
· Telecommunications, serving the global directory needs
of telecommunications providers;
· Book Publishing Services, serving the trade, children
’s, religious and educational book markets; and

· Financial
Services, serving the communication needs of the financial
markets and healthcare industry.
In
addition to our U.S. operations, we operate in Mexico, South
America, Europe and China. For reporting purposes, revenues from
our international facilities primarily serving the directory
market are reported within Telecommunications. Revenues from our
two Mexico facilities that primarily serve the magazine market
are reported within Magazine Publishing Services. Our third
Mexico facility serves the book market and is reported within
Book Publishing Services. Revenues from other international
facilities serving more than one market are included in "Other."“
Other.” The "Other"“Other” classification also includes
net sales from R.R. Donnelley Logistics Services (DLS), our
logistics and distribution operation. DLS serves our print
services customers and others by consolidating and sorting mail
so that it is delivered to the postal system closer to the final
destination, resulting in reduced postage costs and improved
on-time delivery. Additionally, DLS delivers magazine newsstand,
newspaper inserts and financial services products. Finally,
revenue from Stream International Inc., which provides technical
and help-line computer support to its customers, is included in
"Other."“Other.”
While our
printing plants are geographically diverse, the supporting
technologies and knowledge base are shared. Our plants have a
range of production capabilities to serve the five basic
commercial print markets outlined earlier. We manufacture
products for these markets with the operational goal of
optimizing the efficiency of our common manufacturing platform.
As a result, most plants produce work for customers in two or
more of our end markets.

9
Sales
results by business unit for the second quarter and first quartersix
months of 1999 and 1998 are presented below:
Net Sales by Business Unit

FirstSecond Quarter Ended March 31,June
30,

(Thousands of Dollars) 1999 % of Total 1998 % of Total
----------------------------- ---------- ---------- ---------- ----------

Magazine Publishing Services.... Services
$ 281,424 270,850 23% $272,836 24% $ 291,678 25%

Merchandise Media............... 274,754 23% 290,877 25%
Telecommunications.............. 207,588 18% 190,013 Media 268,421 22% 275,301 24%
Telecommunications 192,909 16% 175,519 15%
Book Publishing Services........ 168,505 14% 165,815 14%
Services
177,307 15% 176,718 15%
Financial Services.............. 130,625 11% 123,551 10%
Other........................... 116,920 10% 111,664 10%
---------- ---- ---------- ----
$1,179,816 Services 173,479 15% 147,109 13%
Other 112,204 9% 108,481 9%
$1,195,170 100% $1,173,598 $1,155,964 100%
========== ==== ========== ====

Six Months Ended June 30,

(Thousands of Dollars) 1999 % of Sales 1998 % of Sales
Magazine Publishing Services
$552,274 23% $564,514 24%
Merchandise Media 541,033 23% 560,178 24%
Telecommunications 400,497 17% 365,532 16%
Book Publishing Services
347,327 15% 346,797 15%
Financial Services 304,733 13% 272,397 12%
Other 229,122 9% 220,143 9%
$2,374,986 100% $2,329,561 100%
Consolidated Results of Operations

For
Net income for the firstsecond quarter of 1999 we reported net income of $44was $52 million,
or $0.33$0.40 per diluted share, compared to net income of $44$59
million, or $0.30$0.41 per diluted share for the prior year. Gross profityear quarter.
Second quarter 1999 included an after-tax loss from businesses
held for sale of $1.2 million ($0.01 per diluted share). Second
quarter 1998 included an $87 million after-tax gain on the sale
of Metromail ($0.61 per diluted share), and an $80 million
after-tax loss from businesses held for sale ($0.56 per diluted
share). Excluding the effects of these one-time items, net
income for the second quarter of 1999 was $54 million, or $0.41
per diluted share, compared to net income of $51 million, or
$0.36 per diluted share a year ago. The effective tax rate for
the second quarter of 1999 was 38.5%, lower than the comparable
quarter a year ago of 59%. In 1998, we did not record a tax
benefit in the second quarter on the $80 million impairment
charge due to the uncertainty with respect to our ability to
realize the tax loss in the future, which increased our overall
effective rate for the quarter and year-to-date.
Net income for the first quarter rose 11%half of 1999 was $96 million, or
$0.73 per diluted share, compared to $243 million, reflecting increased manufacturing productivity as discussed
below, despite relatively flat sales between years. First quarter net income reflectedof $103 million,
or $0.71 per diluted share for the prior year period. First half
1999 included an after-tax loss from businesses held for sale of
$3 million ($0.02 per diluted share). First half 1998 included
an $87 million after-tax gain on the sale of Metromail ($0.60
per diluted share) and an $80 million after-tax loss from
businesses held for sale ($0.55 per diluted share). Excluding
the effects of these one-time items, net income for the first
half of 1999 was $99 million, or $0.75 per diluted share,
compared to net income of $96 million, or $0.66 per diluted
share a higheryear ago. Excluding the impact of the 1998 Metromail
gain and the impairment charge noted above, the overall
effective tax rate ofincreased in 1999 to 38.5% versusfrom 35% for the prior year,in 1998
due to the phase-out of deductions for the company'scompany’s
corporate-owned life insurance programs (COLI). Diluted earnings
per share for the first quarter of
1999 also reflect the effect of the company's continuedcompany’s
share repurchase program. Excluding the loss from operations of businesses held for sale, first
quarter 1999 net income was $46 million, or $0.34 per diluted share.

Consolidated Net Sales
Net sales for the firstsecond quarter of 1999, including
materials such as paper and ink, were flat compared to the priorincreased $39 million, or 3%
from a year because ofago, despite lower paper prices and fewer
pass-through materialmaterials sales. Lower paperPaper prices across our Magazine
Publishing Services and reduced paper
sales impactedMerchandise Media markets have declined
approximately 10%–15% from the previous year. In several of
our markets, but primarily Magazine Publishing and Merchandise
Media. Telecommunications
salesMedia, the proportion of customer-supplied paper has increased
as a result of higher volumes, driven by page count increases
from increased advertising demand. Financial Services sales increased due to
the strength of our performance in the capital and healthcare markets despite
lower commercial volumes. Financial Services sales also include the revenues
from the acquisition of the financial printing unit of Cadmus Communications
since March 1, 1999 ($4 million). Book Publishing sales also increased,
reflecting higher volumes primarily for the one-color market. Firstresulting in fewer pass-through materials sales. Second
quarter 1999 sales net of materials (primarily paper and ink) grew by 5% in 1999,
reflecting the company'sincreased $49 million, or 7%
from a year ago, which reflected our emphasis on higher
value-added products and services. The acquisitions of Cadmus
Financial and Communicolor contributed $25 million in net sales
for the second quarter of 1999.
Second quarter 1999 net sales for the combined commercial
print market of Magazine Publishing Services and Merchandise
Media decreased 2% from a year ago, primarily as a result of
lower paper prices and more customer-supplied paper, partially
offset by higher volumes. Merchandise Media net sales for the
second quarter included $18 million from the Communicolor
acquisition in April 1999. Book Publishing Services net sales
were essentially flat for the second quarter, due to more
customer-supplied paper and the shutdown of a fulfillment and
distribution center that offset base volume increases. Net sales
for Telecommunications increased 10% for the second quarter,
driven primarily by both higher directory and non-directory
volumes and timing shifts from the fourth quarter of 1998. Net
sales for Financial Services increased 18% for the second
quarter, related primarily to market share gains in the capital
markets and higher mutual fund business activity levels.
First half 1999 net sales, including materials such as
paper and ink, increased $45 million, or 2% from a year ago,
despite lower paper prices and fewer pass-through materials
sales. For the first half of 1999, paper prices were down 10%
–15% from a year ago across the Magazine Publishing
Services and Merchandise Media markets. Sales net of materials
increased 6% for the first half of 1999,
reflecting our emphasis on higher value-added products and
services. The acquisitions of Cadmus Financial and Communicolor
contributed $29 million in net sales for the first half of 1999.

First half 1999 net sales for the combined Magazine
Publishing Services and Merchandise Media markets decreased 3%
from a year ago, which reflected lower paper prices and a shift
to more customer-supplied paper, partially offset by higher
volumes. Net sales for Telecommunications increased 10% for the
first half primarily due to higher volume and the timing shifts
from 1998 noted above. Book Publishing Services net sales were
flat for the first half of 1999, as strong one-color volumes
were offset by lower fulfillment and distribution revenues.
First half 1999 net sales for Financial Services increased 12%,
related primarily to volume increases, driven by our strong
performance in the capital markets and higher mutual fund
business activity levels.
Consolidated Expenses
Gross profit for the firstsecond quarter of 1999 increased 11%by
8% to $243$259 million compared to $218$241 million a year ago. Firstfor the same period
last year. Second quarter gross profit as a percentage of sales
increased to 20.6%21.7% from 18.6%20.8% a year ago. Gross profit for the
priorfirst half of 1999 increased by 9% to $502 million compared to
$459 million for the same period last year. First half gross
profit as a percentage of sales increased to 21.1% from 19.7% a
year drivenago. The increase in gross margin for both the second
quarter and first half of 1999 reflects primarily the results of
our continued productivity initiatives. As of June 30, 1999, we
have implemented specific targeted productivity improvement
plans at 20 of our manufacturing facilities. The initiatives are
targeted towards making our operations more productive by
continued improvements in manufacturing productivity.analyzing all aspects of the production process.
Selling and administrative expenses for the second quarter
of 1999 increased 16%9% to $151$156 million, or 12.8%13.1% of sales compared
to 11.1%12.4% for the prior year. ThisOf the 9% increase, reflected higher
marketing-related3% was a result
of the impact of the Communicolor and Cadmus acquisitions, and
the remainder was due primarily to investments in building
capabilities in areas such as procurement, paper services and
marketing.
Selling and administrative expenses increased selling costs from higher volumes, and
additional expenditures related to Year 2000 remediation which did not occur
in the first quarter of 1998. Earnings from operations for the first quarterhalf of
1999 increased slightlyby 12% to $89$308 million, despiteor 13.0% of sales
compared to 11.7% last year. Of the 12% increase, 3% was due to
an increase in Year 2000 and Information Technology spending
over the prior year, 2% was a loss from operationsresult of businesses held for sale of $3 millionthe Communicolor and
Cadmus acquisitions, and the remainder was due to higher volumes
as described in "Businesses Held for
Sale."

10
well as upgrading our capabilities as noted above.
Summary of Expense Trends

FirstSecond
Quarter Ended March 31, June 30,
1999
1998 % Increase
(Thousands

(Decrease)
(Thousands
of Dollars) 1999 1998 (Decrease)
---------------------- ---------- ---------- ---------- --- --- ---
Cost of
materials....... materials $ 429,014
417,049 $ 455,142 (5.7%
426,944 (2.32% )
Cost of
manufacturing... 416,304 408,126 2.0%
Depreciation............ 79,328 81,226 (2.3%manufacturing 428,575 395,719 8.30%
Depreciation
79,992 80,743 (0.93% )
Amortization............ 12,234 11,045 10.8%

Amortization
10,304 11,810 (12.75% )
Selling and
administrative......... 151,361 130,220 16.2%
administrative 156,346 143,429 9.01%
Net interest
expense.... 19,896 19,947 (0.3%expense 23,726 19,689 20.50%
Six Months
Ended June 30,
1999
1998 % Increase

(Decrease)
(Thousands
of Dollars)
Cost of
materials $
846,063 $
882,085 (4.08% )
Cost of
manufacturing 844,879 803,845 5.10%
Depreciation
159,320 161,969 (1.64% )
Amortization
22,538 22,855 (1.39% )
Selling and
administrative 307,707 273,649 12.45%
Net interest
expense 43,621 39,636 10.05%

Nonoperating Items
Interest expense increased $4 million for both the quarter
and the first quarter was approximately $20 million in bothsix months of 1999 due to higher average debt
levels related to recent acquisitions and 1998. Lower commercial paper and medium-term note interest expense in
1999 was offset by higher interest expense on borrowingsthe completion of foreign
subsidiaries.the
share repurchase program.
Other income, net, in the second quarter of 1999 reflectsof $8
million was $6 million higher than a gainyear ago due to lower COLI
expense ($2 million), additional foreign exchange gains ($2
million), and other smaller miscellaneous items. For the first
half of 1999, in addition to the items noted above, we had a $3
million gain on the sale of real estate.
In April 1998, we sold our remaining interest in Metromail
to The Great Universal Stores, P.L.C. (GUS). We received $297
million in cash proceeds, or approximately $238 million
after-tax, and recognized a pre-tax gain of $146 million ($87
million after-tax) on this transaction.
Businesses Held for Sale
During 1996, Stream International Holdings, Inc. (SIH), an
80%-owned equity investment of the company, reorganized into
three independent businesses: Stream International, which
provides outsource technical support services; Corporate
Software && Technology (CS&T)&T), a software distribution
company; and Modus Media International (MMI), a global
manufacturing and fulfillment business. CS&T and MMI comprised substantially all of the company's investment
and net income in SIH.
On December 15, 1997, SIH'sSIH’s businesses became
separate companies and our ownership interest in SIH was
restructured. We converted our equity and debt positions in
Stream International into 87% of the common stock of that
business. Additionally, webusiness and converted our equity and debt positions in CS&T&T
into 86% of the common stock of CS&T and&T. Additionally, we sold
our equity and debt positions in MMI for non-voting preferred
stock of MMI. The disposition of our interest in CS&T&T will
be effected through the sale of the business, which is now
planned to occur during 1999. In connection with the planned
disposition of CS&T,&T, we have reported our interest in CS&T&
T as businesses held for sale. During
At the time our ownership interests were restructured in
December 1997, we had prepared a formal plan of disposition to
sell the entire CS&T business as a going concern, which we
had expected to execute within twelve months. By the second
quarter of 1998, intensified competition had negatively impacted
both current operating results and our valuation of CS&T.
Accordingly, in the second quarter of 1998, we recorded an $80
million impairment charge (with no associated tax benefit)
related to the writedown of goodwill at CS&T. As of December
1998, the net assets and results of operations of businesses
held for sale were reclassified from discontinued operations
because the planned sale of CS&T&T did not occur in 1998 as
originally intended. We have continued to actively pursue the
sale of our interest in CS&T during 1999. The net assets of
CS&T&T are included in net assets of businesses held for sale
as of March 31,June 30, 1999 and December 31, 1998. The non-
votingOur investment in the
non-voting preferred stock inof MMI at both June 30, 1999 and
December 31, 1998 is included in other non-current assets as of
March 31, 1999 and 1998.assets.
In the firstsecond quarter of 1999, we recorded a $3$2 million
($1.81.2 million after-
tax)after-tax) loss from operations of businesses held
for sale, related to CS&T.

During 1998, we recorded an $80 million impairment charge (with no
associated tax benefit) related toand for the write-downfirst half of goodwill on the books of
CS&T. In 1997,1999 we recorded a $100$5
million ($603.0 million after-tax) impairment
charge to adjust the carrying costsloss from operations of
CS&T and MMI to their estimated net
realizable values.businesses held for sale.
Summary financial information of businesses held for sale
has been disclosed within the "Industry“Industry Segment Information"Information
” (Note 6 of the Notes to Condensed Consolidated Financial
Statements included in Part I of this Form 10-Q).

Changes in Financial Condition
Liquidity and Capital Resources
Net cash provided by operating activities in the first
quarterhalf of 1999 totaled $111$280 million, up $12down $76 million from a year
ago. The net change in other assets and liabilities of $50
million between these same periods related primarily to the
same period in 1998. This was
driven by an increase intiming of income tax liabilities andpayments due on the second quarter 1998
gain on the sale of Metromail. Accrued income taxes of $59
million at June 30, 1998 represented additional cash provided by
operations for the first half of 1998. Operating working capital
increased accounts payable,
partially offset$33 million for the first half of 1999 compared to a
year ago, driven primarily by increasedhigher accounts receivable
balances and higher accrued compensation payments. Capital
expenditures totaled $64 million for the first quartersix months of 1999 compared to $54totaled $133
million a year ago.versus the $108 million spent in the first half of 1998.
Spending was directed principally to projects that further
enhance productivity and to upgrade our systems infrastructure
and capabilities companywide. Full-year capital spending is
expected to exceed $300 million in 1999 in support of selected
growth opportunities, including our expansion in Poland andthe opening of a new telephone
directory plant in Brazil.Brazil and expanding our Poland operations.
Management believes that the company'scompany’s cash flow and
borrowing capacity are sufficient to fund current operations and
growth.

On March 1,
Our 1999 we purchasedacquisition activity through June 30 includes the
net assets of the financial printing unit of Cadmus
Communications.Communication in March 1999, the net assets of the Communicolor
division of The purchase includesStandard Register Company in April 1999, the net
assets of the Brazilian book printer Hamburg Gráfica
Editora in May 1999, and operationsthe buyout of five service
centersour partner’s 50%
interest in Baltimore, Charlotte, Raleigh, Richmondthe Argentinian printer Atlántida Cochrane in
June 1999.
In April 1999, we issued $200 million of debentures
primarily for financing of acquisitions and New York, as well as a
print-on-demand and fulfillment facility in Charlotte and selected software
products.the completion of
our share repurchase programs. At March 31,June 30, 1999, we had an
unused revolving credit facility of $400 million with a number
of banks. This credit facility provides support for the issuance
of commercial paper and other credit needs.

Subsequent Events

On April 2, 1999, we acquired certain net assets of the Communicolor division
of The Standard Register Company. Communicolor, with locations in Newark, Ohio
and Eudora, Kansas, is a provider of personalization services and printer of
innovative direct-mail campaigns. The acquisition will be accounted for using
the purchase method of accounting.

On April 16, 1999, we issued $200 million of 6 5/8% debentures due 2029.
Proceeds received from the sale were used to reduce outstanding commercial
paper borrowings incurred for working capital purposes and in connection with
the financing of the company's acquisitions of Communicolor and the financial
printing unit of Cadmus Communications, with the remainder to be used for
general corporate purposes.

Year 2000
Process control and information systems are becoming
increasingly important to the effective management of the
company. Increased spending on new systems and updating of
existing systems continues to be necessary. In the near term,
we areWe have most
recently been focusing these efforts on ensuring that processes
and systems are Year 2000 compliant. In addition, the company is
focused on an initiative to upgrade and standardize the company'scompany
’s information technology infrastructure, which has the
incidental effect of addressing certain of the company'scompany’s
Year 2000 compliance issues. We have deferred a number of other
infrastructure and systems initiatives that would support
continuous productivity improvements and enhanced service
capabilities until after the company completes its Year 2000
efforts.
The Year 2000 compliance issue stems from the computer
industry'sindustry’s practice of conserving data storage by using two
digits to represent a year. Systems and hardware using this
format may process data incorrectly or fail with the use of
dates in the next century. These types of failures can influence
applications that rely on dates to perform calculations (such as
an accounts receivable aging report), as well as facility
systems (such as building security and heating) and
manufacturing equipment.

12
The company'scompany’s efforts to address Year 2000 compliance
issues in our core business include:

. evaluating internal computing infrastructure, business applications and
shop-floor systems for Year 2000 compliance,

. replacing or renovating systems and applications as necessary to assure
such compliance, and

.
·
evaluating internal computing infrastructure, business
applications and shop-floor systems for Year 2000 compliance,

·
replacing or renovating systems and applications as necessary
to assure such compliance, and
·
testing the replaced or renovated systems and applications.
Our efforts in these respects are well under way,substantially complete.
All but 11 low priority business applications have been
renovated, tested and we continue to expect
that substantially all phases of such effortsredeployed, and the remaining applications
will be completedredeployed by mid-1999.October, 1999. Solutions have been
deployed to address 95% of the 2,000 non-compliant shop-floor
systems in use throughout the U.S. and other locations. The
balance of the systems are scheduled to be addressed by October,
1999. Our infrastructure compliance work, including replacement
of non-compliant equipment, is nearly complete, as is testing
for all significant desktop applications in use throughout the
company.
In addition to our internal remediation activities, we
have completed an initial
evaluation of compliancereadiness by our key U.S. suppliers
and vendors. Wevendors, including those serving our wholly-owned foreign
operations. Of 875 suppliers and vendors evaluated through
personal interviews and site visits, less than 3% have been
designated by us as deficient in their efforts. Action plans are
continuingbeing executed to evaluateaddress each of these deficient situations and
at this time none is judged to be a significant risk to the
continuity of operations. Nonetheless, we will be conducting
follow-up assessments of these and other external companies, including customers whose
systems interact with ours,critical suppliers and
continue to expect to substantially complete
this evaluation by mid-1999.vendors throughout the remainder of the year. Separate Year 2000
compliance programs are in progress at Stream International and
CS&T.&T.
Although the company expects internal systems to be Year
2000 compliant as described above, we are implementinghave implemented a process
for development of contingency plans that will specify what we plan
to do if critical systems, processes, suppliers, vendors and
external companies encounter Year 2000 issues. The contingency
planning effort focuses on those areas where our testing or
evaluation does not demonstrate Year 2000 compliance,readiness, or where
the criticality of the business process would make contingency
planning prudent. Specific plansWhile the specifics of each location’s
plan will be developed throughoutvary, the coursegeneral approach includes ensuring that key
personnel, both local and at the Year 2000 program office, are
on-site at the cut-over; backing up critical systems immediately
prior to year-end; and identifying alternate methods of the year as these areas are
identified.doing
business with suppliers and customers if needed.
Company employees, assisted by the expertise of external
consultants where necessary, staff the Year 2000 compliance
efforts. Actual spending on our Year 2000 initiative in 1998 was
$45 million, which is reflected in administrative expense.
Management expects 1999 expenses to be similar.between $45 and $48
million of which $31 million was incurred in the first half of
the year. These estimated expenses do not include costs being
capitalized with respect to the company'scompany’s information and
technology infrastructure upgrade and standardization initiative
or estimated costs associated with Year 2000 initiatives at
Stream International or CS&T.&T.
Our failure to be Year 2000 compliant, or the failure of
our key suppliers, vendors or customers to achieve compliance in
a timely manner, could have a material adverse effect on the
company. Despite our efforts, a short-term disruption in some of
our operations could occur which our contingency planning
attempts to, but may not fully, address. In particular, the
company’s ability to operate in foreign markets could be
materially affected by a failure of the local infrastructure.

Other Information
Share repurchase--In September 1998,repurchase—In early July, 1999 we
completed the board of directors authorized a
program to repurchase up to $300 million stock repurchase program announced in
September 1998. Under that authorization, we repurchased a total
of the company's common stock in
privately negotiated or open-market transactions. The program includes shares
purchased for issuance under various stock option plans.

During the quarter, the company purchased approximately 3.68.2 million shares at an average price of $36.14 per share. The program$36.71. Since July
1996, we have repurchased approximately 27.9 million shares, or
about 18 percent of our outstanding shares, at a total cost of
approximately $1 billion. Our debt-to-market-capitalization
ratio at June 30, 1999 was approximately 25 percent, which
management believes is expected to be
completed by mid-1999.

Technology--Weappropriate.
Technology—We remain a technology leader,
investing not only in print-
relatedprint-related technologies such as
computer-to-plate, customer connectivity and digital imaging
capabilities, but also in Internet-based business models, such
as our SelectSource(R)SelectSource® and HouseNet(R)HouseNet® services. These
businesses help our customers effectively deliver their content
on the Internet.
SelectSource and HouseNet address the online needs of
catalogers and publishers, respectively. SelectSource offers
content conversion and site development services for catalog and
retail customers. HouseNet, an online community of interest
focused on home improvement topics, aggregates content around
the themes of home, garden, crafts and money management to offer
a one-
stopone-stop information resource for consumers. HouseNet was
recently named Yahoo!'s’s number-one site for home improvement
information for 1998.
Book Publishing Services also applies technology to create
solutions that enable our customers to manage and distribute
content in multiple media formats. Our digital archiving and
customer publishing solution allows education customers to build
books online. In addition, Book Publishing Services is the
leading supplier of conversion services to the emerging
electronic book marketplace.

13
In the production process for print, increased
digitization allows us to implement world-class manufacturing
techniques. Digital workflows, coupled with on-press
instrumentation and advanced statistical process control
techniques, allow us to more effectively manage both our
manufacturing assets and our raw material inputs. Additionally,
new digital imaging capabilities are allowing higher levels of
customization, enabling highly personalized printed products to
be delivered to consumers.
We are focused on investing in technologies that help us
deliver products, services and solutions that are valued by our
customers and thereby contribute to our financial performance.
Litigation--On November 25, 1996, a purported class action was brought
against the company in federal district court in Chicago, Illinois, on behalf
of all current and former African-American employees, alleging that the
company racially discriminated against them in violation
Litigation—See Note 4 of the Civil Rights
ActNotes to
Condensed Consolidated Financial Statements included in Part I
of 1871, as amended, and the U.S. Constitution (Jones, et al. v. R.R.
Donnelley & Sons Co.). The complaint seeks declaratory and injunctive relief,
and asks for actual, compensatory, consequential and punitive damages in an
amount not less than $500 million. Although plaintiffs seek nationwide class
certification, most of the specific factual assertions of the complaint relate
to the closing by the company of its Chicago catalog operations in 1993. Other
general claims relate to other company locations. On February 11, 1999, the
magistrate judge ruled that all claims relating to the Chicago catalog
operations were untimely. Plaintiffs have appealed this ruling. If the ruling
of the magistrate judge is upheld, the claims relating to other locations will
still be pending as is plaintiffs' motion for class certification.

On December 18, 1995, a class action was filed against the company in
federal district court in Chicago alleging that older workers were
discriminated against in selection for termination upon the closing of the
Chicago catalog operations (Gerlib, et al. v. R.R. Donnelley & Sons Co.). The
suit also alleges that the company violated the Employee Retirement Income
Security Act (ERISA) in determining benefits payable to retiring or terminated
employees. On August 14, 1997, the court certified classes in both the age
discrimination and ERISA claims limited to former employees of the Chicago
catalog operations.

On June 30, 1998, a purported class action was filed against the company in
federal district court in Chicago on behalf of current and former African-
American employees, alleging that the company racially discriminated against
them in violation of Title VII of the Civil Rights Act of 1964 (Adams, et al.
v. R.R. Donnelley & Sons Co.). While making many of the same general
discrimination claims contained in the Jones complaint, the Adams plaintiffs
are also claiming retaliation by the company for the filing of discrimination
charges or otherwise complaining of race discrimination. The complaint seeks
the same relief and damages as sought in the Jones case.

Both the Jones and Gerlib cases relate primarily to the circumstances
surrounding the closing of the Chicago catalog operations. The company
believes that it acted properly in the closing of the operations. Further,
with regard to all three cases, the company believes it has a number of valid
defenses to all of the claims made and will vigorously defend its actions.
However, management is unable to make a meaningful estimate of any loss that
could result from an unfavorable outcome of any of the pending cases.

In addition, the company is a party to certain litigation arising in the
ordinary course of business which, in the opinion of management, will not have
a material adverse effect on the operations or financial condition of the
company.

14
Form 10-Q.
Environmental Regulations--OurRegulations—Our business is subject
to various laws and regulations relating to employee health and
safety and to environmental protection. Our policy is to comply
with all laws and regulations that govern protection of the
environment and employee health and safety. We do not anticipate
that compliance will have a material adverse effect on our
competitive or consolidated financial positions.

Outlook--The
Outlook—The commercial printing industry in
the United States (our primary geographic market) is highly
competitive in most product categories and geographic regions.
Competition is largely based on price, quality and servicing the
special needs of customers. Industry analysts believe that there
is overcapacity in most commercial printing markets. Therefore,
competition is fierce.
We are a large user of paper, bought by us or supplied to
us by our customers. The cost and supply of certain paper grades
used in the manufacturing process will continue to affect our
financial results, primarily at the revenue line. However,
management currently does not see any disruptive conditions
affecting prices and supply of paper in 1999.
Postal costs are a significant component of our customers'customers
’ cost structure. Changes in postal rates, which became
effective in January 1999, are not expected to negatively affect
the company. In fact, postal rate increases enhance the value of
R.R. Donnelley Logistic ServicesDLS to our customers, as we are able to improve the cost and
efficiency of mail processing and distribution. This ability to
deliver mail on a more precise schedule and at a lower cost
enhances our position in the marketplace.
In addition to paper and postage costs, consumer
confidence and economic growth are key drivers of print demand.
While current economic conditions remain favorable, there is
uncertainty around the future business environment. A
significant change in the economic outlook could affect demand
for the company'scompany’s products, particularly in the financial
printing market.
In the longer term, technological changes, including the
electronic distribution of information, present both risks and
opportunities for the company. We believe that with our
competitive strengths, including our comprehensive service
offerings, technology leadership, depth of management
experience, customer relationships and economies of scale, we
can develop the most valuable solutions for our customers, which
should result in sustained growth in shareholder value.
Item 3

Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk from changes in interest
rates and foreign exchange rates. However, we generally maintain
more than half of our debt at fixed rates (approximately 62%67% at
March 31,June 30, 1999), and therefore our exposure to short-term
interest rate fluctuations is immaterial to the consolidated
financial statements as a whole. Our exposure to adverse changes
in foreign exchange rates also is immaterial to our consolidated
financial statements as a whole, and we occasionally use
financial instruments to hedge exposures to foreign exchange
rate changes. We do not use financial instruments for trading
purposes and are not a party to any leveraged derivatives.
Further disclosure relating to financial instruments is included
in the Debt Financing and Interest Expense note in the Notes to
Consolidated Financial Statements included in our 1998 Annual
Report on Form 10-K.

15
PART II
OTHER INFORMATION

Item 1. Legal Proceedings
On each of November 25, 1996, and June 30, 1998, purported
class actions were brought against the company alleging racial
discrimination and seeking actual, compensatory, consequential
and punitive damages in an amount not less than $500 million. On
December 18, 1995, a class action was brought against the
company alleging age discrimination in connection with the 1993
closing of the company'scompany’s Chicago catalog operations, and
violation of the Employee Retirement Income Security Act. These
actions are described in partPart I of this quarterly report on Form
10-Q.

Item 4. Submission of Matters to a Vote of Security Holders

(a) The company held its Annual Meeting of Stockholders on March 25, 1999.

(b) The following matters were voted upon at the Annual Meeting of
Stockholders:

1. The election of the nominees for Directors of Class 2, who will serve
for a term to expire at the Annual Meeting of Stockholders to be held in
2002, was voted on by the stockholders. The nominees, all of whom were
elected, were Joseph B. Anderson, Jr., Judith H. Hamilton and Bide L.
Thomas. The Inspectors of Election certified the following vote
tabulations:

For Withheld
----------- ---------

Joseph B. Anderson, Jr.............................. 116,969,991 1,523,554
Judith H. Hamilton.................................. 117,614,177 879,368
Bide L. Thomas...................................... 117,571,873 921,672

2. A stockholder proposal regarding pay equity was rejected by the
stockholders. The Inspectors of Election certified the following vote
tabulations:

For % Against % Abstain % Non-Vote %
---------- --- ---------- --- --------- --- --------- ---

18,339,202 15% 92,019,201 78% 2,603,423 2% 5,531,719 5%

3. A stockholder proposal regarding global corporate standards was
rejected by the stockholders. The Inspectors of Election certified the
following vote tabulations:

For % Against % Abstain % Non-Vote %
--------- --- ----------- --- --------- --- --------- ---

3,640,553 3% 103,809,782 87% 5,511,491 5% 5,531,719 5%

Item 5. Other Information
Certain statements in this filing, including the
discussions of management expectations for 1999,future periods and
Year 2000 compliance, constitute "forward-looking statements"“forward-looking statements
” within the meaning of the Private Securities Litigation
Reform Act of 1995. Such forward-
lookingforward-looking statements involve
known and unknown risks, uncertainties and other factors that
may cause actual results to differ materially from the future
results expressed or implied by those statements. Refer to Part
I, Item 1 of the company'scompany’s 1998 Annual Report on Form 10-K
for a description of such factors.

Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits

12 Computation of
Earnings to Fixed Charges
27 Financial Data
Schedule

(b) No current report on Form 8-K was filed during the
firstsecond quarter of 1999.

16
SIGNATURE
Pursuant to the requirements of the Securities and
Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned thereunto duly
authorized.

R.R. Donnelley & Sons Company

/s/ Gregory A. Stoklosa
By __________________________________
Corporate Controller
(Authorized Officer and
Chief Accounting Officer)

May 14, 1999
R.R. D
ONNELLEY
& SONS
COMPANY
/
S
/ GREGORY
A. STOKLOSA
By

Corporate Controller

(Authorized Officer and
Chief
Accounting Officer)

August 13, 1999
Date __________________________

Index		Page ~~Index~~ Number(s) ~~----- ---------~~
Condensed Consolidated Statements of Income (Unaudited) for the three and six months ended ~~March 31,~~June 30, 1999 and ~~1998.....................~~ 1998		3

Condensed Consolidated Balance Sheets (Unaudited) as of ~~March 31,~~June 30, 1999 ~~(Unaudited)~~ and December 31, ~~1998..............................~~ 1998		4

Condensed Consolidated Statements of Cash Flows (Unaudited) for the ~~three~~six months ended ~~March 31,~~June 30, 1999 and ~~1998.................~~ 1998		5

Notes to Condensed Consolidated Financial Statements (Unaudited)~~....................................................~~		6 - 8 9

Item 2. ~~Management's~~Management’s Discussion and Analysis of Financial Condition and Results of Operations
Comparison of Second Quarter and First ~~Quarter~~Half 1999 to ~~First Quarter 1998..........~~ 1998		9 - 11 13

Changes in Financial ~~Condition.................................. 12 Subsequent Events............................................... 12~~ Condition		14

Year ~~2000....................................................... 12 - 13 Other Information............................................... 13~~2000		14 - 15

Other Information		15 - 16

Item 3. Quantitative and Qualitative Disclosures about Market ~~Risk... 15~~ Risk		17

PART II
OTHER INFORMATION
Item 1. Legal ~~Proceedings............................................ 16 Item 4. Submission of Matters to a Vote of Security Holders.......... 16~~ Proceedings		18

Item 5. Other ~~Information............................................ 16~~ Information		18

Item 6. Exhibits and Reports on Form ~~8-K............................. 16~~8-K		18

	(Thousands of Dollars) ~~------------------~~
	1999		1998 ~~-------- --------~~
Raw materials and manufacturing ~~supplies.................... $119,328 $121,490~~ supplies	$117,837		$121,490
Work in ~~process............................................. 165,078~~ process	178,858		150,775
Finished ~~goods.............................................. 913~~ goods	1,405		1,220
Progress ~~billings........................................... (46,078) (42,217)~~ billings	(52,864	)	(42,217	)
LIFO ~~reserve................................................ (49,897) (48,337) -------- --------~~reserve	(50,937	)	(48,337	)

Total ~~inventories....................................... $189,344 $182,931 ======== ======== Note~~inventories	$194,299		$182,931


NOTE 3. The following provides supplemental cash flow information:

	(Thousands of Dollars) ~~------------------ Three~~
	Six Months Ended ~~March 31 ------------------~~ June 30
	1999		1998 ~~-------- --------~~
Interest ~~paid..............................................~~ paid	$ ~~5,693~~ 37,101		$ ~~8,521~~39,253
Income taxes ~~paid..........................................~~ paid	$ ~~10,508~~ 22,016		$ ~~19,908~~26,966

	Three Months Ended ~~March 31 --------------------------~~ June 30				Six Months Ended June 30
	1999		1998 ~~------------ ------------~~		1999		1998
Net ~~sales..........................................~~ sales	$ ~~1,179,816~~ 1,195,170		$ ~~1,173,598~~ 1,155,964		$2,374,986		$2,329,561
Cost of ~~sales...................................... 936,880 955,539 ------------ ------------~~ sales	935,920		915,216		1,872,800		1,870,754

Gross ~~profit....................................... 242,936 218,059~~ profit	259,250		240,748		502,186		458,807
Selling and administrative ~~expenses................ 151,361 130,220~~ expenses	156,346		143,429		307,707		273,649
Income (loss) from operations of businesses held for ~~sale.......................................... (2,959) -- ------------ ------------~~ sale	(1,931	)	(80,067	)	(4,890	)	(80,067	)

Earnings from ~~operations........................... 88,616 87,839~~ operations	100,973		17,252		189,589		105,091
Other income (expense):
Interest ~~expense.................................. (19,896) (19,947)~~ expense	(23,726	)	(19,689	)	(43,621	)	(39,636	)
Gain on sale of Metromail shares	—		145,656		—		145,656
Other ~~net........................................ 2,792 117 ------------ ------------~~ income —net	8,098		1,764		10,889		1,881

Earnings before income ~~taxes....................... 71,512 68,009~~ taxes	85,345		144,983		156,857		212,992
Provision for income ~~taxes......................... 27,532 23,803 ------------ ------------~~ taxes	32,858		86,246		60,390		110,049

Net ~~income......................................... $ 43,980 $ 44,206 ============ ============~~ income	52,487		58,737		96,467		102,943


Net income per share of common ~~stock Basic.............................................~~ stock:
Basic	$ ~~0.33~~ 0.41		$ ~~0.31 Diluted...........................................~~ 0.42		$ ~~0.33~~ 0.74		$ ~~0.30~~ 0.72
Diluted	$0.40		$0.41		$0.73		$0.71

Cash dividends per basic ~~share.....................~~ share	$0.21		$ ~~0.21~~ 0.20		$ ~~0.20~~ 0.42		$0.40


Average basic shares ~~outstanding................... 132,777,000 143,928,000~~ outstanding	129,450,000		140,835,000		131,157,000		142,450,000
Average diluted shares ~~outstanding................. 134,359,000 146,220,000~~outstanding	130,601,000		143,824,000		132,632,000		144,995,000

	1999		1998 ~~---------- ----------~~
ASSETS
Cash and ~~equivalents...................................~~ equivalents	$ ~~74,998~~ 50,374		$66,226
Receivables, less allowance for doubtful accounts of ~~$15,112~~$15,269 in 1999 and ~~$14,279~~ $14,279 in ~~1998................... 799,531~~ 1998	800,276		843,094 ~~Inventories............................................ 189,344~~
Inventories	194,299		182,931
Prepaid ~~expenses....................................... 112,350~~ expenses	78,744		63,040 ~~---------- ----------~~

Total current ~~assets................................. 1,176,223~~ assets	1,123,693		1,155,291 ~~---------- ----------~~

Property, plant and equipment, at ~~cost................. 4,414,260~~ cost	4,593,680		4,368,754
Accumulated ~~depreciation............................... 2,731,757~~ depreciation	2,822,886		2,667,827 ~~---------- ----------~~

Net property, plant and ~~equipment.................... 1,682,503~~ equipment	1,770,794		1,700,927
Goodwill and other intangibles, net of accumulated amortization of ~~$187,819~~$195,279 in 1999 and $183,589 in ~~1998. 389,947~~ 1998	388,062		381,394
Other noncurrent ~~assets................................ 534,805~~ assets	542,108		515,029
Net assets of businesses held for ~~sale................. 42,517~~ sale	40,582		45,476 ~~---------- ----------~~

Total ~~assets......................................... $3,825,995 $3,798,117 ========== ==========~~assets	$3,865,239		$3,798,117


LIABILITIES AND ~~SHAREHOLDERS'~~SHAREHOLDERS’ EQUITY
Accounts ~~payable.......................................~~ payable	$ ~~303,083~~ 284,475		$331,257
Accrued ~~compensation................................... 156,903~~ compensation	160,041		188,187
Short-term ~~debt........................................~~ debt	60,000		60,000
Current and deferred income ~~taxes...................... 18,937~~ taxes	31,902		2,263
Other accrued ~~liabilities.............................. 294,100~~ liabilities	274,134		242,251 ~~---------- ----------~~

Total current ~~liabilities............................ 833,023~~ liabilities	810,552		823,958 ~~---------- ----------~~

Long-term ~~debt......................................... 1,165,428~~ debt	1,292,003		998,978
Deferred income ~~taxes.................................. 257,765~~ taxes	254,659		260,692
Other noncurrent ~~liabilities........................... 415,944~~ liabilities	415,908		413,611 ~~Shareholders'~~
Shareholders ’ equity:
Common stock, at stated value ($1.25 par value)
Authorized shares: 500,000,000; Issued 140,889,050 in 1999 and 140,889,050 in ~~1998....................~~ 1998	308,462		308,462
Retained ~~earnings.................................... 1,313,055~~ earnings	1,361,847		1,325,634
Cumulative translation ~~adjustments................... (62,338) (55,050)~~adjustments	(63,184	)	(55,050	)
Unearned ~~compensation................................ (5,399) (6,118)~~compensation	(4,712	)	(6,118	)
Reacquired common stock, at ~~cost..................... (399,945) (272,050) ---------- ----------~~cost	(510,296	)	(272,050	)

Total ~~shareholders' equity....................... 1,153,835~~ shareholders’ equity	1,092,117		1,300,878 ~~---------- ----------~~

Total liabilities and ~~shareholders' equity....... $3,825,995 $3,798,117 ========== ==========~~shareholders’ equity	$3,865,239		$3,798,117

	1999		1998 ~~--------- ---------~~
Cash flows provided by (used for) operating activities:
Net ~~income.............................................~~ income	$ ~~43,980~~ 96,467		$ ~~44,206~~102,943
Loss from operations of businesses held for sale, net of tax................................................ 1,820 -- Depreciation........................................... 79,328 81,226 Amortization........................................... 12,234 11,045tax	3,010		80,067
Gain on sale of Metromail, net of tax	—		(87,394	)
Depreciation	159,320		161,969
Amortization	22,538		22,855
(Gain) on sale of ~~assets............................... (2,985) (1,176)~~assets	(2,985	)	(8,587	)
Net change in operating working ~~capital................ (43,771) (32,063)~~capital	(8,519	)	24,245
Net change in other assets and liabilities............. 18,459 650 Other.................................................. 1,862 (4,733) --------- --------- liabilities	27,297		77,079
Other	(17,349	)	(17,007	)

Net cash provided by operating ~~activities................ 110,927 99,155 --------- ---------~~ activities	279,779		356,170

Cash flows provided by (used for) investing activities:
Capital ~~expenditures................................... (64,393) (54,432)~~expenditures	(133,173	)	(108,429	)
Other investments including acquisitions, net of cash ~~acquired.............................................. (52,465) (18,609)~~acquired	(155,966	)	(22,234	)
Dispositions of ~~assets................................. -- 1,176 --------- ---------~~ assets	—		16,023
Disposition of Metromail, net of tax	—		238,438

Net cash ~~used for~~provided by (used for) investing ~~activities................... (116,858) (71,865) --------- ---------~~ activities	(289,139	)	123,798

Cash flows provided by (used for) financing activities:
Net increase (decrease) in ~~borrowings............................. 166,450 121,648~~borrowings	291,097		(195,552	)
Issuances of common ~~stock.............................. 1,464 17,539~~stock	14,274		53,539
Acquisition of common ~~stock............................ (123,559) (150,732)~~stock	(254,520	)	(294,085	)
Cash dividends on common ~~stock......................... (28,017) (28,975) --------- ---------~~ stock	(55,340	)	(57,116	)

Net cash used for financing ~~activities................... 16,338 (40,520) --------- ---------~~ activities	(4,489	)	(493,214	)

Effect of exchange rate changes on cash and ~~equivalents.. (1,635) (259)~~ equivalents	(2,003	)	(825	)
Net increase in cash from businesses held for ~~sale....... -- 22,595 --------- ---------~~ sale	—		28,098

Net change in cash and ~~equivalents....................... 8,772 9,106~~ equivalents	(15,852	)	14,027
Cash and equivalents at beginning of ~~period..............~~ period	66,226		47,814 ~~--------- ---------~~

Cash and equivalents at end of ~~period....................~~ period	$ ~~74,998~~ 50,374		$ ~~56,920 ========= =========~~61,841

In Thousands	Commercial Print	Businesses ~~Commercial~~ Held for Sale		Corporate		Other⁽¹⁾		Adjustments⁽²⁾		Consolidated ~~In Thousands Print Sale Corporate Other(1) Adjustments(2)~~ Total ~~- ------------ ---------- ---------- --------- -------- -------------- ------------~~ ~~First~~
Second Quarter ~~Ended March 31,~~ 1999 ~~Sales................... $1,121,189 $199,123~~
Sales	$1,141,359	$271,962		$ ~~-- $58,627 $(199,123) $1,179,816~~ —		$53,811		$(271,962	)	$1,195,170
Earnings (loss) from ~~operations............. 79,281 (2,959) 10,382 1,912 -- 88,616~~ operations	94,215	(1,931	)	7,126		1,563		—		100,973
Earnings (loss) before income ~~taxes........... 174,248 (2,959) (101,339) 1,562 -- 71,512 Assets.................. 3,014,358 213,343 677,357 91,763 (170,826) 3,825,995 First~~taxes	101,703	(1,931	)	(15,881	)	1,454		—		85,345
Assets	3,098,679	289,214		637,824		88,154		(248,632	)	3,865,239


Second Quarter ~~Ended March 31,~~ 1998 ~~Sales................... $1,117,444 $175,773~~
Sales	$ ~~-- $56,154 $(175,773) $1,173,598~~ 1,102,233	$224,427		$—		$53,731		$(224,427	)	$1,155,964
Earnings (loss) from ~~operations............. 79,894 -- 6,718 1,227 -- 87,839~~ operations	91,797	(80,067	)	5,653		(131	)	—		17,252
Earnings (loss) before income ~~taxes........... 160,470 -- (93,583) 1,122 -- 68,009 Assets.................. 3,229,360 295,109 624,100 98,978 (162,997) 4,084,550~~taxes	97,520	(80,067	)	127,603		(73	)	—		144,983
Assets	2,991,284	325,605		616,128		93,017		(279,062	)	3,746,972


Six Months Ended June 30, 1999
Sales	$2,262,548	$471,085		$—		$112,438		$(471,085	)	$2,374,986
Earnings (loss) from operations	187,082	(4,890	)	3,922		3,475		—		189,589
Earnings (loss) before income taxes	194,557	(4,890	)	(35,826	)	3,016		—		156,857


Six Months Ended June 30, 1998
Sales	$2,219,676	$400,200		$—		$109,885		$(400,200	)	$2,329,561
Earnings (loss) from operations	176,424	(80,067	)	7,638		1,096		—		105,091
Earnings (loss) before income taxes	187,858	(80,067	)	104,152		1,049		—		212,992

Second Quarter Ended ~~March 31,~~June 30, (Thousands of Dollars)	1999	% of Total	1998	% of Total ~~----------------------------- ---------- ---------- ---------- ----------~~
Magazine Publishing ~~Services....~~ Services	$ ~~281,424~~ 270,850	23%	$272,836	24% ~~$ 291,678 25%~~
Merchandise ~~Media............... 274,754 23% 290,877 25% Telecommunications.............. 207,588 18% 190,013~~ Media	268,421	22%	275,301	24%
Telecommunications	192,909	16%	175,519	15%
Book Publishing ~~Services........ 168,505 14% 165,815 14%~~ Services	177,307	15%	176,718	15%
Financial Services.............. 130,625 11% 123,551 10% Other........................... 116,920 10% 111,664 10% ---------- ---- ---------- ---- $1,179,816 Services	173,479	15%	147,109	13%
Other	112,204	9%	108,481	9%

	$1,195,170	100% ~~$1,173,598~~	$1,155,964	100% ~~========== ==== ========== ====~~

Six Months Ended June 30, (Thousands of Dollars)	1999	% of Sales	1998	% of Sales
Magazine Publishing Services	$552,274	23%	$564,514	24%
Merchandise Media	541,033	23%	560,178	24%
Telecommunications	400,497	17%	365,532	16%
Book Publishing Services	347,327	15%	346,797	15%
Financial Services	304,733	13%	272,397	12%
Other	229,122	9%	220,143	9%

	$2,374,986	100%	$2,329,561	100%

Second Quarter Ended ~~March 31,~~ June 30,	1999	1998	% Increase ~~(Thousands~~ (Decrease)
(Thousands of Dollars) ~~1999 1998 (Decrease) ---------------------- ---------- ---------- ---------- --- --- ---~~	1999	1998	% Increase ~~(Thousands~~ (Decrease)
Cost of ~~materials.......~~ materials	$ ~~429,014~~ 417,049	$ ~~455,142 (5.7%~~ 426,944	(2.32%	)
Cost of ~~manufacturing... 416,304 408,126 2.0% Depreciation............ 79,328 81,226 (2.3%~~manufacturing	428,575	395,719	8.30%
Depreciation	79,992	80,743	(0.93%	) ~~Amortization............ 12,234 11,045 10.8%~~
Amortization	10,304	11,810	(12.75%	)
Selling and ~~administrative......... 151,361 130,220 16.2%~~ administrative	156,346	143,429	9.01%
Net interest ~~expense.... 19,896 19,947 (0.3%~~expense	23,726	19,689	20.50%


Six Months Ended June 30,	1999	1998	% Increase (Decrease)
(Thousands of Dollars)	1999	1998	% Increase (Decrease)
Cost of materials	$ 846,063	$ 882,085	(4.08%	)
Cost of manufacturing	844,879	803,845	5.10%
Depreciation	159,320	161,969	(1.64%	)
Amortization	22,538	22,855	(1.39%	)
Selling and administrative	307,707	273,649	12.45%
Net interest expense	43,621	39,636	10.05%

12		Computation of Earnings to Fixed Charges
27		Financial Data Schedule