R. R. Donnelley & Sons Company
Q4 2010 Earnings Call Transcript

Published: 22 Feb 2011

[Operator:]

Welcome to the RR Donnelley Fourth Quarter 2010 Results Conference Call. My name is John, and I'll be your operator for today's call. [Operator Instructions] I'll now turn the call over to Dave Gardella. You may begin, Dave.

[Dave Gardella:]

Thank you, John. Good morning, everyone, and thank you for joining us for RR Donnelley's Fourth Quarter 2010 Results Conference Call. Earlier this morning, we released our earnings report, a copy of which can be found in the Investors section of our website at rrdonnelley.com. During this call, we'll refer to forward-looking statements that are subject to uncertainty. For a complete discussion, please refer to the cautionary statement included in our earnings release and further detailed in our annual report on Form 10 K and other filings with the SEC. Further, we will discuss non GAAP and pro forma financial information. We believe the presentation of non GAAP and pro forma results provides you with useful supplementary information concerning the company's ongoing operations and is an appropriate way for you to evaluate the company's performance. They are, however, provided for informational purposes only. Please refer to the press release and related footnotes for GAAP information and a reconciliation of GAAP to non GAAP information. We also posted to our website, in the Investors section, a description as well as reconciliation of non GAAP measures to which we will refer on this call. We are joined this morning by Tom Quinlan, Miles McHugh, and Drew Coxhead. I'll now turn the call over to Tom.

[Thomas Quinlan:]

Thank you, Dave, and good morning, everyone. 2010 was a year that validated the decisions we made in 2009. As you remember, 2009 was a year during which economies worldwide were in chaos and businesses and consumers were accelerating changes in how they communicated and preferred to be communicated to. We looked to the strategy that we, as a management team, embraced in 2004 and did not waver from it, even when no one would have blamed us if we had. As a result of how we managed the business in 2009, 2010 became a year that we are very proud of. The strategic framework that we continue to pursue is built around four elements that we implement as One RR Donnelley. These are

[Miles McHugh:]

Thanks, Tom. As Tom noted earlier, 2010 was another good year for RR Donnelley. Our top line grew 1.6% over 2009, and GAAP earnings per diluted share of $1.06 were $1.19 higher than the net loss per diluted share of $0.13 in 2009. And our non GAAP earnings per diluted share of $1.76 improved 10% or $0.16 over our non GAAP earnings per diluted share of $1.60 in 2009. Our commitment to our customers, as reflected by our investments in new capabilities and technologies, our exceptional customer service and our ongoing efforts to find deficiencies in our operations, continue to improve our earnings. In the fourth quarter, our top line momentum continued with sales of $2.7 billion, up 4.8% from the same period last year. On a pro forma basis, adjusting for the acquisitions of Bowne, Nimblefish and 8touches, all of which closed in the fourth quarter, our sales improved 2.1%. This growth includes an unfavorable impact of changes in foreign exchange rates and lower paper sales, which together negatively impact our revenue growth by 88 basis points. Fourth quarter GAAP income from operations was $85.7 million, compared to $28.5 million for the fourth quarter of 2009, with essentially all of that improvement coming from the reduction in restructuring and impairment and acquisition related charges. Restructuring and impairment charges were $83 million, and acquisition related expenses were $5.6 million in the fourth quarter of 2010, compared to $148.6 million in restructuring and impairment charges and $0.1 million of acquisition related expenses in the fourth quarter of 2009. A full reconciliation of our GAAP to nonage earnings is included in our earnings release. Non GAAP operating income in the fourth quarter of 2010 of $174.3 million was $2.9 million lower than the same period last year. Both our U.S. Print and Related Services segment and our International segments showed significant improvement in non GAAP operating income and margin, which is more than offset by increases in unallocated corporate expenses. Our non GAAP effective tax rate in the quarter was 10.0%, compared to 21.1% in the fourth quarter last year. This decrease was primarily due to the release of certain valuation allowances on deferred tax assets and a reduction of reserves related to a favorable resolution of state tax audits. Non GAAP earnings per diluted share in the fourth quarter of 2010 improved to $0.51, compared to $0.46 in the fourth quarter of 2009. Included in 2010 results are higher pension and post retirement benefits expense and higher provisions for bad debt in LIFO inventory, which collectively had an unfavorable EPS impact of approximately $0.09, while the lower tax rate I just noted had a positive EPS impact for approximately $0.06 on our year over year EPS. Now I will discuss our operating results by segment. Fourth quarter sales in our U.S. Print and Related Services segment grew 5.3% over fourth quarter of 2009 to $2.0 billion. On a pro forma basis, sales grew by $40.0 billion or 1.9%, driven by volume growth in nearly all of our offerings, partially offset by continued price pressure. In addition, lower pass-through paper sales negatively impacted our revenue growth by 58 basis points. Similar to the third quarter, we saw double-digit volume increases in our logistics, financial print and premedia offerings. Sales in our International segment in the fourth quarter were $682 million, up 3.5% over fourth quarter of 2009. On a pro forma basis, sales grew by $19.0 million or 2.7%, primarily driven by volume growth in Asia, Latin America, Europe and Canada. In addition, changes in foreign exchange rates negatively impacted revenue growth by approximately 176 basis points. As in the third quarter, we experienced volume declines in our Global Turnkey and Business Process Outsourcing units and continued price erosion in Asia and Europe. In the fourth quarter of 2010, our non GAAP unallocated corporate expenses were $73.7 million, an increase of $36.9 million from the fourth quarter of 2009. We continued to experience higher pension and other benefits related expenses, as well as higher bad debt in LIFO inventory provisions compared to the same period in 2009. The increase in our bad debt provision was primarily the result of a customer bankruptcy filing. We continue to maintain our favorable debt maturity profile. As of December 31, 2010, our total debt was approximately 79% fixed at an average interest rate of 7.4%. And our next maturity of $159 million is not due until January of 2012. In addition, we took steps in the quarter to further strengthen our liquidity. On December 17, we entered into a new three-year $1.75 billion committed revolving credit facility to replace our prior facility that was expiring in January of 2012. Operating cash flow less CapEx was approximately $523 million and was lower than our previous guidance by approximately $77 million. Approximately $18 million of this variance was related to cash restructuring and other payments related to the Bowne acquisition, which was not included in our previous guidance. The remaining variance was related to the working capital impact of fourth quarter revenue growth being more heavily weighted towards the last part of the quarter and the timing of certain tax payments and refunds. Before I turn the call back to Tom, I'll share with you some of our expectations for 2011. We expect continued year over year revenue growth in the low single digits over our 2010 pro forma revenue of $10.7 billion. This assessment excludes any impacts from changes in foreign exchange rates or fluctuations in pass-through paper sales. We expect our non GAAP operating margins to be in the range of 7.6% to 7.8%, a 30 to 50 basis point improvement over 2010 and inclusive of an increase in noncash pension expense of approximately $23 million. Depreciation and amortization expense is expected to be approximately $575 million. Interest expense is estimated to be approximately $240 million. Full year capital expenditures are expected to be in the range of $250 million to $275 million. Our non GAAP tax rate is expected to be in the range of 30% to 33%. We expect income attributable to non controlling interest to return to roughly 2009 levels. We assume the fully diluted share base to approximately 211 million shares. And lastly, we expect operating cash flow less CapEx of approximately $600 million. And while I don't get too specific about our quarterly projections, I would like to remind you a few items that will impact our year over year comparisons in the first quarter. First, from a revenue perspective, most of the revenue from last year's extensive U.S. Census project was recognized in the first quarter of 2010 and won't be repeated this year. Our full year revenue guidance includes overcoming the absence of this project in 2011. Second, with respect to the earnings impact of the Bowne acquisition, we expect a noncash inventory step-up charge of approximately $3.5 million in the first quarter. In addition, upon closing the acquisition, we immediately began to be hit with incremental purchase accounting related amortization expense, while the synergy benefits ramp up over time. As we noted upon announcing the acquisition, it is expected to be accretive to earnings in the first full year after closing. And third, from a cash flow perspective, the first quarter of 2010 included only a portion of the variable compensation payments that were earned in 2009. The first quarter of 2011 will include the second installment of the 2009 plan, as well as full payment for the 2010 plan. In addition as we continue our efforts to integrate Bowne, we expect higher restructuring charges in the first quarter of 2011 than we experienced in the first quarter of 2010. Our full year guidance for operating cash flow less CapEx of approximately $600 million includes the impact of these items. And with that, I will return you to Tom.

[Thomas Quinlan:]

Thank you, Miles, and thank you for all that good news and the detail that you provided. Before we open it up for questions, there are two more points I'd like to make. First, we continue to build momentum in developing global solutions for customers. I use the word global not only to indicate that these customer relationships may draw on RR Donnelley's international resources but also to reflect the fact that they include a diverse mix of our products and services. We are seeing this reflected in the upward trend of customers who buy a half dozen or more categories of products and services from RR Donnelley. This number has grown 26% since 2007. During 2010, sales to these customers totaled nearly $4 billion and were up more than 6.5% versus 2009. This ability to sell more products and services creates many advantages. It makes our relationships more durable as we become integrated with our customers’ processes in more ways. It enables us to structure broad contractual agreements that are attractive to customers and that drive more volume into our platform. It increases the number of contacts we have in our accounts, which in turn makes it easier for us to introduce new products and services into our customer base. It reduces the number of vendor to vendor hand offs that customers have to manage, which is a tangible value-added benefit associated with the RR Donnelley offer. And finally, it gets us involved earlier with the customers when we can work with them to develop specifications and processes that streamline their projects, reduce their costs and improve their return on their investment. We will continue to drive One RR Donnelley global relationships. The second point I'd like to make is that we continue to see our employees respond, adapt and innovate and find ways to work through every challenge that is thrown at them. They do so while continuing to focus on working safely, which is the most important measure of operational excellence. You hear just a few RR Donnelley voices on the phone during these conference calls, but we are speaking about the accomplishments of nearly 58,000 employees worldwide. We believe that they are the best in the business, and we thank them for their efforts. And with this, operator, we'll open it up for questions.

[Operator:]

[Operator Instructions] We do have a question from Charlie Strauzer [CJS Securities].

[Charles Strauzer:]

Tom, just if you can expand a little bit more on your commentary about you're seeing a little bit better visibility in the business, and obviously, the trends continue to kind of pick up a little bit along the past couple of quarters. What are you seeing kind of going into this quarter here now that we're kind of more than half way through it? And what does the visibility look like more longer term for the year?

[Thomas Quinlan:]

I would tell you obviously today in the marketplace was kind of a crazy day, so I don't think this is a good example. But what I would tell you in spite of the high unemployment rate in the United States, the United States consumer to us is back. The United States consumer spent as much in 2010 as they did in 2007. And they saved more in 2010 than they did in 2007. And to us, this is significant because our customers will look to increase their brand awareness in the public eye, prospect for new customers and advertise more. Now I also think that the negatives that were out there 12 months ago are less negative. New foreclosures are down. So that's going to start to work its way through the system, and that's going to have a positive impact on economy. The Federal Reserve definitely wants to ring back inflation, which we might not like. But I don't think it's going to stunt the growth in the United States of whether it's expansion or recovery. I'm not sure which one it is, but it's one of the two that's taking place. Corporations are starting to be looked at differently. Corporations are starting to be, "Hey, how can you create jobs?" There's a difference of where the character was behind corporations over the last couple of years. Now we've gone from a financial system that was focused on investments to a financial system focused on speculation. And now we're going back to a financial system focused on investment. People are starting to value long-term prospects again. And so to us, that's great because we're positioned well to participate. Whether it's a recovery or an expansion, we're there to participate. And I think we've proved to you in the 2008, 2009 that we can operate in any economic environment that exists out there. I think we've proved that what we've built is working. We had organic growth of, as Miles went into, of 200 basis points, which again in our industry at our level at our scale, overcome the pricing pressures that we see in the long run business that our competitors are still out there with going to levels that we're surprised at. But again given our breadth of products and services, we can overcome that because of all the things that we can offer, both domestically and internationally, I think we've transformed this thing finally into being from a printing company into a collaborative integrated communications provider. And I think that it's going to be the differentiator for us in the marketplace going forward. Again, the multiple products that we have to offer for our customers allow for cost compression and increased return on their investment. And there's no one out there today that doesn't want to avail themselves to that. We're making the supply chain more efficient for people, and I do believe this is still in a GDP business. And all indications, our GDP is going to be in the low single digits. And we feel comfortable with what we're talking about here at the end of February to where we're showing top line growth. Again, we know, we sleep with one eye open. We know that there's things can pop up. Petroleum prices can go through the roof. There's going to be different things that are going to take place. But again I think we've got a platform that can adapt and is agile enough to handle anything that's going to be thrown at it. And the great thing is we've got history behind us or on our side with what took place in 2009.

[Charles Strauzer:]

If you could talk a little bit too about how the economy improving has impacted or benefited the acquisition pipeline? I know it's always a lengthy conversation with targets that you've had over the years that people may or may not be keen to want to sell their companies in a downturn. Are you seeing any pickup in activity or an increase in people coming to you looking to maybe come to the Donnelley platform?

[Thomas Quinlan:]

I would tell you, Charlie, that it's been the same as it has been in the past. I mean there are obviously you know the sizes of the properties that are out there now. We don't comment on that. But I would tell you there's no difference to where things where in the past, as far as what opportunities are being presented to us. But the great thing that we've got going on for our customers and for our clients is that we're able to go to marketplace, not just in niches. We're able to take our whole platform, and let our customers leverage that platform. So they get the ability by being with us, they get brand management and compliance. We are able to help them control their expenses by eliminating waste. We reduce their processes and their obsolescence. Sometimes, you can save them costs on their employees and headcount costs that they may have. We can standardize and optimize their design, of what their workflows are. And obviously we improve their cycle times, which allows them to focus on their business. There is no player out there today that I can tell you that we need to bring on to this platform from that standpoint. You saw what we did with Nimblefish, Bowne and 8touches. Those are great examples of what we were able to do from a technology innovation side to help us continue to add value for our customers and to be out there for them. Again, the two simple things that we live on

[Operator:]

Next question is from Dan Leben [Robert W. Baird].

[Daniel Leben:]

Could you talk a little bit about the growth in the U.S. business? And some of your other large segments, mag/cat, retail books and directories, et cetera. Just give us a sense of what that looked like both from a volume and overall growth perspectives.

[Thomas Quinlan:]

I'll let Miles go through the volume in a second from the numbers that will be filed in the [10]K. What I'll talk to you a little bit about is somewhat along the same lines. But we talked a little bit this morning about services in nonprint revenues. That's something that we're excited about as well. When you think about logistics, you think about premedia, you think about the BPO business. We really started to go ahead and have some good days there, which again have allowed our customers to reap the benefits of those as well. Pricing is still tough. Pricing is, especially in the long run businesses, are tough. But again, the product and services that we're able to offer help us offset that as we go through there. When you think about Donnelly, you think about how we've taken this aircraft carrier, and we sort of moved it just a little bit to the right. As we've seen what's going to take place or we see what is taking place with printing, this has allowed us to go ahead and still have top line growth in, obviously, a very challenged industry which none of us ran away from. When you think about our initiatives, when you think about just one real good example, Dan, when we go to a large retail and we can go ahead and tell them all these products and services that we can offer to them. Just to give you a little bit of a hint as far as what we can do for one particular customer, we can do their HR benefits information and kits, their new hire orientation kits, their benefit enrollments, all their benefit informations. We can do direct mail for them, the four-color variable print. We can do forms. We can do store signage, catalogs, any employee training material, retail inserts. They can come to us, and they don't have to go to anybody else. So again, we are fortunate. I'm fortunate. We've got the best front line managers in the business. We've got the best customer service people in the business. The experiences that those customers have with our people allows us to build further momentum with them as well. And we love when one and one equals three, and then we keep going after it. So Miles will give you some more details on that.

[Miles McHugh:]

Sure. For the fourth quarter, as I mentioned, we had about 5.3% revenue growth in our U.S. Print and Related Services segment and about 3.5% in our International segment. In the U.S., about 58 basis points of that was related to lower pass-through paper sales. So overall, good growth. When you break it out into the different categories

[Thomas Quinlan:]

On the International side too, just to share with you, we've seen significant growth because of the supply chain and packaging services. Whether it's related to e readers or mobile phones, we're participating in that. It's not something we're running away from, it's something that we've got the ability to also play in as they continue to develop. So we're excited about that.

[Daniel Leben:]

And then, Miles, you mentioned the other benefits related expenses in the press release in the corporate side. Can you just talk about whether there's kind of heading for 2010 bonus levels or is there something that's more recurring that we need to think about for 2011 ?

[Miles McHugh:]

Well, the year over year comparison, the bigger driver is the one we've seen all year long, and that's the higher pension expense. That's the post retirement benefits expense. It's a level amount of expense each quarter. So we've seen the same higher expenses in the fourth quarter versus fourth quarter '09 that we saw throughout earlier quarters in the year. But the rest of the benefit related expenses, medical and some of the others, are up similarly to where we were seeing earlier in the quarter. The one item that is a little unusual is the customer bankruptcy filing that increased our bad debt expense. It was about an $11 million expense in the fourth quarter. And that pushed us just under $7 million worse for the quarter than last year, because throughout 2010, we've been running favorably to 2009 on the bad debt expense. So as luck would have it, the fourth quarter turned the other direction because of this particular customer bankruptcy filing. But otherwise, expenses at the corporate level are fairly in line with what we've been seeing in the past.

[Daniel Leben:]

Just talk about how you view rising paper prices? Obviously, that can create some issues on the demand side for print. But is this an opportunity for you to more move into the digital? Just tell us how historically it's worked with paper price and how you expect that to work going forward.

[Thomas Quinlan:]

This continuing closing of capacity, it's raising operating rates, resulting in mills announcing, just last week, increases for April 1, I think, across most grades they're looking for. Don't forget, that was an attempt in January also to raise prices, and it didn't happen at that time or stick. I would tell you that our scale of what from a paper-purchasing standpoint obviously helps us with our customers. And again when I talk about pennies, nickels and dimes, that's where we got to continue to bring value to our customers. I think the mills have done a great job of getting their platform sort of right sized. And I think we've got to continue to do a good job for our customers, to go ahead and mitigate the cost increases that they're going to see. When you think about the USPS to go off of that a little bit, when you think about what could have occurred in 2010 and what didn't occur from a rate increase, any rate increase isn't good. But one that is known and is more manageable, like that was put into place or will be put into place hopefully not on April 17, which is tax day, but I think they're looking for sometime around the middle of April for that to go into play, and then it'll back at the ball again in May. We do think even with all the issues that are surrounding the USPS, Pat Donahoe's on board, 30 years of experience looking to go ahead and try to make the post office continue to make distribution of physical content in this country viable. And we think some of the cost initiatives that he does have under way will help us and help obviously the 600,000 plus employees that the USPS has.

[Miles McHugh:]

Let me add one more to kind of follow-up to your question on corporate expenses and the pension and particularly the bad debt expense. If you put in the context for the whole quarter, the International segment and the U.S. Print and Related services segment, both had increased operating margins, had really good performance in the quarter. At the corporate level, we had the bad debt expense increase from the one the customer bankruptcy, which added or took was a drag of about $0.04. And the Bowne acquisition costs through the quarter hurt us by about $0.01. So that's about a $0.05 drag on the quarter. And then the lower tax rate increased $0.09 to $0.10. So when you kind of offset all of those, the underlying performance of the business really showed through. Both operating segments did very well, top line revenue growth, as we talked about. And all the momentum behind the customer initiatives and the growth dynamics that we've been talking about are coming through to higher operating margins, which were not only shown in the quarter but in our guidance for next year. We're also expecting further improvements in our margins. So we see not only a good quarter but a good carry through into 2011.

[Operator:]

The next question is from Edward Atorino [The Benchmark Company].

[Edward Atorino:]

You said that bad debt was $0.04?

[Miles McHugh:]

It was $11 million, approximately $0.04, a little below that.

[Edward Atorino:]

It looks like Bowne if I'm looking at the numbers; Bowne had a down quarter year over year?

[Miles McHugh:]

I don't think that's right. We don't have...

[Edward Atorino:]

I'm looking at the addition of Bowne. Maybe I'm reading the numbers wrong.

[Miles McHugh:]

It's mixed in with the acquisition related costs and the inventory step-up and a lot of the purchase accounting changes that you see. So it really makes it tough compare quarter to quarter.

[Thomas Quinlan:]

And we're seeing, as far as the Bowne transaction goes, we're off to a real, real good start from an integration standpoint. Dan Knotts has done a terrific job in getting us off to a good start. We're looking at the manufacturing, the composition, customer service, purchasing. Again, our scale should bring benefits there. Distribution costs, our scale should bring benefits there. Real estate, we've probably impacted 20 sites already within a short period of time. So we feel good as far as about that property.

[Edward Atorino:]

Since Quad bought World Color, they've closed kind of four, five plants, is that having any impact? Or is it just a lot of stuff just going away?

[Thomas Quinlan:]

I won't speak to what they've got going on in their house. But again, I will tell you what I say, the number of companies that participate in our space are going to continue to be challenged because these companies do not have the product depth or breadth that we have. So it's going to be a challenge when you can only respond with price. And it just leaves you on a tough trail going in one direction because price alone is not going to be sustainable. Again, as I talked about during the speech, in order for someone to try to duplicate what we've got it's going to take years and a lot of money. We've been able to adapt RR Donnelley, before we got here, it's obviously been our culture that's been able to adapt to times. TV was going to eliminate the value that RR Donnelley brought to our customers. The Internet was going to knock out us. The electronic devices that are out there that have emerged are all going to do away with what we're doing. But instead, we have embraced the technology enhancements and continue to add value to our customers in the supply chain. And we expect things to change, and we need to continue to change with them. And as I said, I think us being not inward looking about looking for customers and finding out where our customers are looking to go, how we can be consultative with them, is paying dividends for us.

[Edward Atorino:]

Your low single digit forecast, I know I'm splitting hairs. Sounds like that's better than the one two that you had talked about before.

[Thomas Quinlan:]

I still think splitting hairs is probably a good definition. First quarter 2010, we were fortunate enough to be the recipients to do the United States Census. And that's a pretty good headwind we're going at after 2011. So if you think about what you're building, just please take that into account. Again though, we're very optimistic, probably the most optimistic that I've been, sitting in this chair, since we started doing this. And it's the value that we're able to bring to customers. It's our global print management strategy. It's the efforts of our people in Asia, in Europe, in Latin America, Canada that are really trying to find solutions for customers and bring those solutions forward to them.

[Edward Atorino:]

Are the European economic problems impacting you at all or are your businesses is managing to do better despite Europe's problems?

[Thomas Quinlan:]

I would tell you whenever there's a problem in the world, we are impacted by it, no matter what. But I think we are doing very well in Europe. Again, as I might have said before, we were full in capacity in certain parts of Europe last year. We're hoping for that again to take place. In Europe, for those of you not familiar with it, in our vertical, it is 10x worse than what you see here. So we're having some good days over there too and hope that to continue in 2011.

[Edward Atorino:]

You said that there's some restructuring related to Bowne across the year?

[Thomas Quinlan:]

Yes.

[Miles McHugh:]

Yes, and just given the timing of closing, just before the end of the year, a lot higher percentage, I guess I should say, of that restructuring is going to occur in the first quarter or first part of the year. And then the synergies ramp up over time. So we still think it's got great opportunity. As I mentioned we still expect it to be accretive in the first full year after it closed. But we are going to hit the first quarter with more restructuring charges because of it.

[Operator:]

Next question is from Craig Huber [Access 342].

[Craig Huber -:]

My first question is some clarification please. Incentive compensation that you booked in the quarter, how was it in 4Q '10 versus the year ago quarter?

[Miles McHugh:]

Total incentive for the fourth quarter was $36 million, almost $37 million in the fourth quarter of this year. And it was about $51 million last year, so about $14 million less than the prior year. And that's just given overall that's quarter by quarter. For the full year, it's not so much different because in 2009, higher percentage of full year's expense was in the fourth quarter, whereas it was more evenly spread in 2010.

[Craig Huber -:]

Tom, can you speak, if you would, about the pricing pressure out there? I assume you would say that the fourth quarter here was pricing down on average roughly 1% to 3%. Is that a fair range to think about on year-over-year basis? And also can you talk about the categories that were materially better than that number and what was worse?

[Thomas Quinlan:]

What I would tell you Craig is pricing, as it has been for a number of years, is still challenged. It is still aggressive. I would tell you that, as I mentioned, I think, a little bit earlier in the call, the long run products

[Craig Huber -:]

Miles, if I could ask on the corporate expenses. As you know for 2010, I think you booked out $206 million there, up from $99 million in 2009. It was more like $180 million in 2007, 2008 on a full year basis. What should investors expect here for 2011 especially as you can see it right now for corporate?

[Miles McHugh:]

I think we're still going to expect increasing corporate expenses in 2011. The combination of the higher pension expense, which is a noncash expense along with other benefits expense, is going to continue. I mentioned pension expense being $23 million higher in 2011, than what we saw in 2010. So that's, given the way the accounting works, a fairly predictable number. We'll probably have a little bit more IT spending also in 2011, just as a lot of the technology driven initiatives and other customer focus kicks in throughout the year. So pension may be all in with OPEB being more in the $30 million increase range.

[Craig Huber -:]

What was your funding status for your pension for the year end?

[Miles McHugh:]

From a funding status benefit on the pension plans, we ended the year about $515 million underfunded, which is a little more underfunded than the $514 million we were underfunded for the end of last year or the end of 2009. The post retirement benefit plans are primarily unfunded. Although we have some funding for those, but those normally are unfunded. So underfunding of the pension plan increased a little bit, but now the asset returns were significantly better, as you would expect, because of the way the equity and debt markets work this year. But the discount rate, which drives the liability measurement side of the equation, fell year over year so you had more than offsetting reduction of increase in your discounted liability than you saw in the asset returns.

[Thomas Quinlan:]

Craig in this year 2011, as Miles touched on; we do not have a significant cash contribution that's required to be made to the U.S. retirement plan.

[Miles McHugh:]

We've talked about that as if things don't change, we expect in 2012 to have a higher contribution requirement. But right now we don't see any sort of significant increase in 2011.

[Operator:]

Last question is from Jamie Clement [ph].

[Unidentified Analyst:]

As you guys break out and talk about your services component of your business, Bowne wasn't putting much ink on paper over the last couple of years. Is the majority of Bowne's incoming revenue, would you consider that services?

[Miles McHugh:]

I would say a good portion of Bowne's revenues is services. And frankly, our historical financial print business was very similar to Bowne so the combination of the two have very much similar spread of services versus non services, so they're more heavily services weighted than some of the other traditional parts of our business.

[Unidentified Analyst:]

But as the year you guys are now going to be sort of breaking those services numbers out separately because of the 10% threshold, right? Is that what said earlier the call?

[Miles McHugh:]

Right. Having the acquisition of Bowne of course, more heavily weights the financial print part of our business, which was in itself more heavily weighted toward services, so that in part leads to why we're growing over the 10% services threshold.

[Thomas Quinlan:]

'' Just to close on that point I think when you think about again, the properties that we acquired last year, some of the other properties that are out there, you're going to see us more and more having bigger number take place as the year goes on, and we think that is definitely the right strategy and definitely a strategy that's going to help our customers. So appreciate the question. Appreciate everybody joining the call today, taking the time out to be with us. Hopefully, some of the takeaways from this, we believe, are the organic growth for 2010. We are very excited about what we achieved in 2010. Hats off to our employees that made it happen. We also think, from an innovation technology standpoint, the global print management, the budget that we built for 2011. Again we're up and running almost two months into the year, and we're going to try to go ahead and meet those objectives and goals that we mentioned to you this morning. Look forward to talking to everybody in about another 90 days, and hope everyone has a good day. Thank you.

[Operator:]

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.