2008-08-20 23:41:04 -
- Fitch Ratings has affirmed R.R. Donnelley & Sons' (RRD) Issuer Default Rating (IDR) at 'BBB'. The Outlook remains Stable.
Fitch affirms the following:
--IDR at 'BBB';
--Senior unsecured revolving credit facility at 'BBB';
--Senior unsecured notes and debentures at 'BBB';
--Short-term IDR at 'F2'.
The ratings consider RRD's scale and diverse product offering
as the largest commercial printer in the U.S. and worldwide. Diversification extends geographically and across more than 15 core print products and related services which Fitch believes provide some defense against seasonal, cyclical and secular volatility. RRD has opportunities to sell across its entire platform and to provide total document management solutions which should put full service printers in a solid position to meet the printing needs of large clients. The ratings are also supported by the company's adequate financial flexibility and liquidity and its ability to generate meaningful free cash flow.
Rating concerns center on the fundamental challenges facing the printing industry, including substantial fragmentation; excess capacity; persisting pricing pressures; universal consolidation of printers, customers and suppliers; and declining demand resulting from advancements in digital technology and electronic content delivery. Also, consistent with other investment grade companies, Fitch acknowledges the event risk associated with potential leveraged transactions. This risk is typically correlated with stock price underperformance and market conditions such as interest rate levels and availability of risk capital. At this time, Fitch does not view this as a significant concern (and recognizes the recent bond indentures do include a change of control provision) but recognizes it could be heightened under different circumstances.
Fitch believes the commercial printing industry as a whole will underperform overall economic growth over the long term due to secular shifts facing a number of print categories. While the industry is cyclical and a downturn would likely result in negative revenue growth, RRD has an international presence (approximately 26% of revenue) and generates significant free cash flow meaning that absent a financial policy shift the company can comfortably endure a downturn in the U.S. economy. The rating incorporates the potential that organic U.S. revenue could be down in the mid-to-high single digits in a full U.S. economic downturn.
Fitch also believes RRD has the opportunity to grow organically by gaining share from smaller less well-capitalized competitors, and that this share shift could accelerate in a downturn (providing a potential volume offset to pressured pricing). RRD is attempting to convert more of its relationships toward centrally managed, contractual arrangements benefiting from clients outsourcing non-core processes. Fitch believes RRD should be able to leverage its scale and product diversity to drive revenue growth with large Fortune 500 customers by offering them a full-service, lower total system cost alternative. While pricing will remain pressured on the more commoditized offerings, RRD is one of the few players that can invest in technology and enhanced service capabilities.
Fitch also notes that an economic downturn could present the company with opportunities to augment organic growth by acquiring capacity at attractive transaction multiples. The company has proven to be a disciplined consolidator and successful integrator of acquisition targets. Since the beginning of 2007, the company has completed over $2 billion in acquisitions while maintaining ample financial flexibility, liquidity, and investment-grade credit metrics. With the limited number of large targets in the space, Fitch notes that the company would have to acquire several larger competitors in rapid sequence, in entirely debt-funded transactions and without a compelling plan to repay the debt with its substantial cash flow in order to exhaust Fitch's comfort range at the current rating.
Management has publicly reiterated its commitment to an investment-grade rating several times in the past year. Fitch is mindful that credit metrics will likely fluctuate over time between low 'BBB' and high 'BBB' as the company executes opportunistic acquisitions and then de-levers to create capacity for future transactions. While management does not specify an explicit leverage target, Fitch expects unadjusted leverage to average below or around 3 times (x) over the intermediate term.
RRD announced 5.9% revenue growth for the first six months of 2008, reflecting the acquisitions of Banta Corp., Perry Judd, Von Hoffmann, Cardinal Brands, Inc. and Pro Line Printing, Inc. and favorable changes in foreign exchange (FX). The growth in revenues from acquisitions and FX was offset by declines in volume and pricing across most products and services in the U.S. Print and Related Services segment. Pro forma revenue growth (reflecting the acquisitions as if they were completed on Jan. 1, 2007) was 0.7%. Last 12 months (LTM) ended June 30, 2008 consolidated EBITDA margins remained unchanged at 15.4% versus 2007 year-end EBITDA margin.
As of June 30, 2008, the company had total debt of $4.4 billion and LTM ended June 30, 2008 leverage of 2.4x. Liquidity is supported by $435 million in cash and approximately $1.2 billion available under its $2 billion credit facility, due 2012, reduced by $300 million in revolver borrowings, $487 million in commercial paper (CP) borrowing and $39 million in letters of credit. The $2 billion unsecured revolving credit facility supports the company's $2 billion CP program. At June 30, 2008, the company had $3.6 billion in fixed rate notes outstanding. None of the notes have financial covenant protection. There is a 15% of net tangible assets limitation on secured debt within the notes due in 2012 and 2017. There is also a change of control provision in the 2012 and 2017 notes that could be triggered if more than 50% of RRD shares are acquired or a majority of the board of directors are replaced, and after the occurrence of either of these events the credit rating (as defined) of the company is downgraded below investment grade.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
Fitch Ratings
Mike Simonton, CFA, +1-312-368-3138 (Chicago)
Rolando Larrondo, +1-212-908-9189 (New York)
Media Relations:
Cindy Stoller, +1-212-908-0526 (New York)
