Fitch Ratings Revises RR Donnelley's Outlook

NEW YORK—Fitch Ratings has affirmed RR Donnelley's (RRD) Issuer Default Rating (IDR) at BB+ and revised the Rating Outlook to “Negative” from “Stable.” In a previous notice, Fitch had stated its concern that revenue declines in the low-to-mid single digits could pressure cash flows and slow down absolute debt reduction, and thereby lead to an outlook revision or rating change.

RRD revised guidance for 2012 revenues to $10.4-$10.5 billion, which includes $160 million related to the unfavorable impact of foreign exchange and pass through paper revenues. The company’s previous guidance for revenues was to be flat to slightly up from 2011 revenues of $10.6 billion, excluding the impact of foreign exchange and pass through papers.

While the guidance change in absolute terms is de minimis, Fitch said it is concerned organic revenue growth will continue to be challenged and, given the limited headroom within the ratings, any unexpected weakness in the economy or in RRD’s operating performance could reduce the level of cash generated, slowing the pace of absolute debt reduction.

Fitch noted that RRD affirmed its guidance of approximately $300 million in free cash flow (after dividends), which Fitch believes is achievable. While Fitch now expects revenues to be down in the low single digits, Fitch expects EBITDA to remain unchanged relative to 2011 EBITDA of $1.2 billion.

As of June 30, 2012, RRD had total debt of $3.8 billion. Fitch calculates unadjusted gross leverage (without adding back restructuring charges) at 3.2 times (x). The ratings reflect the company’s intention to reduce absolute levels of debt.

Given RRD’s cash flow generation, Fitch believes that the company can meet its pension funding requirements and reduce debt balances in order to get closer to the lower end of RRD’s stated leverage target of 2.5x-3.0x, which Fitch believes is appropriate for the ratings at this time. As with ratings on any business facing secular challenges, Fitch may continue to tighten the targeted leverage metric for a given rating category as business risk increases.

Fitch believes that debt reduction will need to be a primary use of free cash flow (FCF) going forward in order to maintain current ratings. Given the secular challenges facing the company, deleveraging will primarily be driven through debt level reductions. There is no tolerance in the ratings for material share buy backs and/or increases in the current dividend level.