DBRS Rates R.R. Donnelley & Sons Co at R-1(low)p and A(low)p

Dominion Bond Rating Service (“DBRS”) has today assigned ratings to R.R. Donnelley & Sons Company (“RR Donnelley” or the “Company”) as indicated above.

The ratings are underpinned by several key elements:
(1) RR Donnelley is the largest commercial printing company in North America. Thus, it exploits economies of scale.
(2) Both the Company’s product and customer base are highly diversified, which reduces business risk. No one customer accounts for more than 10% of revenue, and the Company prints many products such as magazines, books, and directories.
(3) Strong and recurring cash flow from operations (nearly US$900 million recently) facilitates financial flexibility.

RR Donnelley’s pre-eminent industry position was reinforced with recent gains in market share due to several factors. It has priced aggressively, as it has a lower cost structure due to minimal unionization in its U.S. operations and productivity gained from its updated printing equipment. The Company maintains keen customer development capabilities. Specifically, part of its strategy is to view customers as partners and create more customized services, which DBRS expects will add value in a chain that has largely become commoditized. Lastly, RR Donnelley continues to capitalize on its ability to cross-sell additional products to customers. Furthermore, by emphasizing one-stop business communications solutions, DBRS believes that RR Donnelley can secure its customers more firmly. The Company made two large acquisitions over the past year and a half, which augmented its product platform. It acquired Moore-Wallace Incorporated in February 2004 for US$2.8 billion, and The Astron Group in April 2005 for nearly US$1 billion. As a result, debt levels have increased significantly but remain reasonable given stable and sizable free cash flow. While these acquisitions are sizable, DBRS believes the Company can integrate them effectively as it has a history of doing so.

However, the Company still faces challenges. Excess capacity in the commercial print industry remains pervasive and it underscores the need for rationalization and productivity gains. This has constrained the Company’s ability to raise prices and has intensified competition. Electronic substitution remains an obstacle for the Company, as forms and labels are prepared in-house or are required in electronic form only. In addition, while advertising pages sold (a key industry measure) has exhibited some signs of improvement, it is premature to suggest a trend has been established.

Note:
p - This rating is based on public information.