R.R. Donnelley & Sons,'s CEO Discusses Q1 2011 Results - Earnings Call, May 04, 2011 Transcript

| About: R.R. Donnelley (RRD)

R.R. Donnelley & Sons, (NASDAQ:RRD)

Q1 2011 Earnings Call, May 04, 2011

May 04, 2011 10:00 am ET

Executives

Thomas J. Quinlan - Chief Executive Officer, President and Director

Dave Gardella - Vice President of Investor Relations

Daniel N. Leib - Chief Financial Officer and Executive Vice President

Analysts

Charles Strauzer - CJS Securities, Inc.

Craig Huber -

Randall Pollock - Vanguard Group

Daniel R. Leben - Robert W. Baird & Co. Incorporated, Research Division

Thomas Cubeta - UBS Investment Bank, Research Division

Edward J. Atorino - The Benchmark Company, LLC, Research Division

Scott Wipperman - Goldman Sachs Group Inc., Research Division

Robert Schiffman - Credit Suisse

Operator

Welcome to the RR Donnelley First Quarter 2011 Results Conference Call. My name is Mitch, and I'll be your moderator for today's conference. [Operator Instructions] Please note that this conference is being recorded. I would now like to turn the call over to Dave Gardella. Mr. Gardella, you may begin.

Dave Gardella

Thank you, Mitch. Good morning, everyone, and thank you for joining us for RR Donnelley's First Quarter 2011 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 reconciliations of GAAP measures to which we will refer on this call.

We are joined this morning by Tom Quinlan, Dan Leib and Drew Coxhead. I'll now turn the call over to Tom.

Thomas J. Quinlan

Thank you, Dave, and good morning, everyone. This morning, after my opening remarks, I will turn it over to Dan Leib to take you through the quarter and our recent announcements in more detail. As previously announced, Miles McHugh is moving on. We wish Miles nothing but the best, and all of us thank him for his quality contributions, of which there has been many.

To most of you, Dan Leib is a familiar voice. He has been with us since May of 2004. Dan was heard on a number of these calls and many of you met him when he served as Vice President of Finance and Investor Relations. Since then, he has played key roles for us in operational finance, treasury, M&A and most recently as our group CFO. Dan's broad experience and diverse background has enabled a seamless transition into his new position as our Chief Financial Officer, and I'm very pleased to welcome Dan in this new role.

Before turning to a discussion of our first quarter, I will address our continuing commitment to pursuing a balanced approach to the deployment of capital. This approach and our debt maturity profile combined to provide the opportunity to return cash to shareholders, the flexibility to act when appropriate acquisition candidates arise and the ability to make capital expenditures that will yield returns to sustain RR Donnelley's position as the leader in our industry. In this context, and given our cash flow outlook, we believe that a leverage target in the range of 2.5 to 3x EBITDA on an ongoing basis is appropriate.

Our Board of Directors has authorized $1 billion share repurchase program, the first $500 million of which will be executed through an accelerated share repurchase, or ASR. The balance may be done through one or more additional ASRs and are -- and/or open market repurchases. Given the high dividend yield and the tax deductibility of the interest expense, we expect the repurchase to be a cash-positive transaction on an ongoing basis. Our board has also indicated an intention to maintain the dividend at the current annual level of $1.04 per share. RR Donnelley's strong cash flow, continuing stream of innovations, diverse product and service mix, and global reach position us to continue to drive value through the effective deployment of capital.

Now let me briefly recap the first quarter. We delivered $0.33 of non-GAAP earnings per share on revenue of nearly $2.6 billion. The 7% increase in revenue as compared to the first quarter of 2010 reflects the impact of the Bowne acquisition, in addition to the few smaller acquisitions that I will talk about a little later. Adjusting for the impact of these acquisitions, our first quarter revenue declined by approximately $10 million but it is important to note that this year-over-year decline was skewed by the nonrecurring United States Census work that we were rewarded in 2008. The most significant portion of the revenue associated with that complex, multiyear, nearly $50 million project was recognized in the first quarter of 2010. Looking forward, we remain on track to deliver the full year revenue growth, margin and cash flow guidance that we communicated on our last call.

As you know, RR Donnelley reached an important threshold during 2010, with revenues derived from business services constituting more than 10% of our total revenues. This trend continued during Q1 with revenues from our business services surpassing 12% of our total revenue. For example, our logistic services segment saw a strong growth with revenues up 18.6%, as we continue to leverage our scale as well as expand our service offering for our clients. Our domestic financial services platform, on a pro forma basis inclusive of Bowne, grew in excess of 5%, which demonstrates the value that our newly combined entity will continue to drive for our clients.

In addition, we continue to leverage our global reach to serve our customers, as Asia saw revenues increase nearly 40% due to increased production for both local and export consumption. Latin America had top line growth of 15%, as we continue to deliver value for our clients across multiple countries, and Europe grew by 19%, as we continue to win new business in both Western and Eastern Europe.

We believe that our value-added packaging offering, which includes services such as design and sophisticated near-to-site assembly, will yield significant opportunities for organic growth. As consumers continue to be overwhelmed by the ever-fracturing media, for example, with hundreds of television channel options, packaging will play an increasingly important role in our customers' marketing communications budgets. Consumers' decision-making is shifting dramatically to the point of purchase, where packaging graphics, such as labels that we produce, play the greatest role.

In our magazine, catalog, retail inserts unit, we announced several significant new customer relationships during the quarter. For example, we were awarded a new multiyear agreement by L.L. Bean to produce its full line and specialty catalogs as well as to produce package inserts that ship with ordered products. Similarly, we were awarded a new, multiyear agreement by Bauer Publishing Group that will see RR Donnelley print, bind and drop ship 100% of Woman's World, a top-selling newsstand title. This new agreement also includes production of Life & Style weekly magazines distributed through the American Southeast.

In addition, our commercial print segment also experienced top line growth, as we continue to win new business and create value-added solutions for our expensive -- expansive client base. Across the board and around the world, we continue to leverage the unique benefits that only our integrated global platform offers to customers to win new business, renew existing relationships and expand our overall contractual and transactional opportunities.

Before turning it over to Dan, I will address 3 topics that reflect the continuing execution of our strategy. These are technology-based solutions that deliver value to new and existing RR Donnelley customers as either a standalone offering or in concert with our broader product and service portfolio; the joint technology development agreement we announced with KBA; and a new facility of the future that we will open this summer, one that will serve as the platform for continued innovation.

Our recent acquisition of Journalism Online through its Press+ offering provides our publishing customers with an array of Internet tools that they can use in order to drive greater value from their online content. These Internet-based applications offer the ability for publishers to enact a number of different paid-content models, including metered access, enhanced site functionality, mobile and tablet access and more. And Press+'s experienced and industry-savvy team, led by Steven Brill and Gordon Crovitz, has come aboard intact. As we approach publishers and other customers, we offer a unique set of capabilities that extends throughout the full spectrum of the supply chain.

If you haven't already done so, I invite you to see Nimblefish's work as you use your camera-equipped mobile device, whether you have a smartphone or a tablet, to activate the QR codes in our 2010 annual report. Doing so will take you to online videos that Nimblefish created, which are just one of the multichannel resources that enable our customers to incorporate into their 360-degree marketing communications.

Our 8touches solution opens the door to the development of direct-to-consumer applications, as it both extends and complements our offering for self-serve Internet order entry. 8touches provides marketers with an array of online templates that they can access, personalize and proof as they order direct mail pieces, brochures and other collateral materials.

Through our interest in Helium.com, we offer publishers access to custom content that can be presented in print or online. Our suite of pre-media services supports customers as they create and manage the digital assets that will come to life on screen or in print. Our print and DigiMag capabilities allow the simultaneous creation of hard copy and digital versions. Through sophisticated co-mail and co-palletization resources, we enable the efficient distribution of physical content.

Our direct response capabilities help publishers solicit new and renewed readers, and now through Press+, we offer the capability for publishers to enhance revenues as well. We believe that the integrated, end-to-end solutions that we can provide will continue to differentiate RR Donnelley from commodity ink-on-paper vendors.

RR Donnelley's expanding technology portfolio was recognized recently by our inclusion for the third consecutive year in the Ocean Tomo Patent Index, which represents companies that own the most valuable patents relative to their book value.

This brings me to my second topic, the joint announcement that we made during the quarter with German press producer KBA to develop, manufacture and sell next-generation, digital inkjet printing solutions. The technologies that have emerged from our development pipeline are already at work in our statement printing, direct mail and book facilities. Through this relationship with KBA, we will accelerate the monetization of our technologies portfolio's value as we jointly develop solutions that will be sold to the packaging, securities, commercial and newspaper segments. While we remain intensely proud of our unmatched print production capabilities, again, please note that describing RR Donnelley as a printer falls dramatically short of capturing all that we do.

Technology and engineering also factor into my final topic, which involves the work we consistently do to enhance our platform. This summer in suburban Chicago, we will open the doors of what we view as the facility of the future, a large-scale operation that combines multiple products and services that we provide under a single roof. In the first phase, we are bringing together, into a 0.5 million square foot facility, 2 existing RR Donnelley operations: a conventional, digital commercial printing operation; and a comprehensive, on-demand printing and complete fulfillment center. This combination of facilities will create the base scale required to launch this facility of the future and will generate cost synergies due to the efficiencies generated by the combination.

But it is critical to note that the larger value will be created by our ability to provide integrated and scaled product and service flexibility, all under one roof, for our customers in support of their integrated marketing and communications needs. For example, we serve retailers with complete merchandising services, producing and distributing the in-store signs, banners and other materials that they use in conjunction with their promotional calendars. Now, under a single roof, we can provide an online system that helps to plan and execute these promotional rollouts, prepress and related creative services, large and standard-sized digital and conventional print production, complete kitting and pack-out services and variable distribution solutions.

This facility serves as a model for our One RR Donnelley strategy, which enables customers to enjoy single-source convenience and control as we execute their most complex and time-sensitive projects. It eliminates hand offs to shave precious cycle time to deliver first-mover advantages to our customers. This facility has been engineered according to our unique customer service vision and includes space for continued growth. We believe that it will be a game changer, and you will hear more about it from us in the coming months. Taken together, our pattern of executions, internal R&D and reengineering illustrate the way in which we continue to transform RR Donnelley into a comprehensive provider of integrated communications.

And with that, I will turn it over to Dan.

Daniel N. Leib

Thanks, Tom. Overall, we are pleased with our first quarter results. Our first quarter sales of $2.6 billion represented an increase of $168.4 million or 7% over the same period last year, primarily as a result of the Bowne acquisition and inclusive of a $15.4 million favorable impact from changes in foreign exchange rates. On a pro forma basis, adjusting for the impact of Bowne and 3 smaller acquisitions, revenue declined approximately $10 million or 40 basis points. As Tom mentioned earlier, this decline reflects the absence of the U.S. Census project, which generated approximately $50 million in nonrecurring revenue, the vast majority of which was recognized in the first quarter of 2010. We nearly offset the impact of the Census through organic growth, and we remain on track to deliver full year, low single-digit, pro forma revenue growth as well as $600 million in operating cash flow less CapEx.

First quarter GAAP income from operations was $109.4 million compared to $145.8 million in the first quarter of last year. Most of the year-over-year decline was caused by an increase of $33.7 million in restructuring, impairment and acquisition-related charges, primarily due to the Bowne integration. A full reconciliation of our GAAP to non-GAAP earnings is included in our earnings release. First quarter non-GAAP operating income of $160.6 million was $2.7 million lower than the first quarter of 2010.

As we mentioned on our last earnings call, a few items negatively impacted our first quarter earnings comparison to prior year, specifically the absence of the U.S. Census project and a $3.6 million inventory step-up charge related to the Bowne acquisition. Excluding these items, the remaining variance was due primarily to improved productivity, increased volume, higher recovery on print-related by-products and the acquisition of Bowne, partially offset by continued price erosion and increased pension and other benefits-related expenses.

First quarter non-GAAP operating margin expanded in both our U.S. and International segments, as higher volume, productivity improvements and higher recovery on related by-products were partially offset by continued price pressure and the inventory step-up charge related to the acquisition of Bowne. Non-GAAP effective tax rate in the quarter was 32.7% compared to 35.6% in the first quarter of 2010. Driving the decrease in the rate was the onetime change -- charge in 2010 of $3.3 million associated with the Patient Protection and Affordable Care Act. Non-GAAP earnings per diluted share in the first quarter of 2011 were $0.33, flat to the first quarter of 2010.

Our U.S. Print and Related Services segment sales grew by 5.7% over the first quarter last year to $1.9 billion, driven by the acquisition of Bowne. On a pro forma basis, adjusting for acquisitions, U.S. Print sales declined by 1.9% or $37.5 million, reflecting the challenging year-over-year comparison. Increased volume in our logistics, financial print, commercial print and pre-media offerings were more than offset by the absence of the 2010 Census revenue, continued price pressure and lower volume in our variable-print office products and book-and-directory product offerings. Pass-through paper sales did not have a material impact in the quarter.

Sales in our International segment in the first quarter grew by 11.1% over the prior year to $642.4 million in the first quarter of 2011, driven by volume growth, the Bowne acquisition and a $15.2 million favorable impact of changes in foreign exchange rates. Pro forma revenue growth was 4.5% or $27.6 million, driven by volume growth in Asia, Europe and Latin America, partially offset by price pressure in Asia and Europe and volume declines in our business process outsourcing, global turnkey and Canada reporting units.

Our first quarter 2011 non-GAAP unallocated corporate expenses were $72.8 million, an increase of $23.2 million in the first quarter last year. The increase reflects higher pension expense, other benefits-related expenses and increased investments in IT as well as the wind-down of the legacy Bowne corporate expenses still reflected in our results.

We continue to maintain our favorable debt maturity profile. As of March 31, 2011, our total debt was approximately 79% fixed at an average interest rate of 7.4%. And over the next 3 years or so, we have only $159 million of term debt maturing. We had $110 million drawn on our $1.75 billion committed revolving facility -- credit facility as of March 31, 2011, and had nearly $2 billion of available liquidity as detailed on Page 12 of our earnings release.

Operating cash flow in the quarter was an outflow of approximately $7 million compared to cash inflow of approximately $76 million in the first quarter of 2010. As we mentioned on our last call, the first quarter of 2011 included variable compensation payments for the second 25% installment of our 2009 incentive plan, as well as full payment for the 2010 plan, while the first quarter of 2010 included only the 25% installment of the 2009 plan. Due to the differences in timing of payments under the prior year's plan and the overall level of achievement in each of the years, the variable compensation payment in the first quarter of 2011 was nearly $120 million higher than the first quarter of 2010.

In addition, the first quarter of the year is a seasonally high usage of working capital in our financial services offering that is historically relieved over the balance of the year. This offering is now a more significant portion of our consolidated results, following the Bowne acquisition. As an example, first quarter working capital usage in the legacy Bowne business last year was approximately $30 million.

As Tom mentioned, our board of directors authorized a share repurchase program that enables us to repurchase up to $1 billion of the company's common stock by December 31 of 2012. We plan to enter into an accelerated share repurchase agreement in the next few days for the first $500 million of the program.

We are now targeting a leverage ratio in the range of 2.5 to 3x on a sustainable basis, recognizing that at times we may operate outside this range. We believe this capital structure will be supported by our ongoing ability to generate substantial cash flow, and we'll continue to provide an appropriate level of liquidity to continue to invest capital into the business through both CapEx and acquisitions to help fund future growth. We do not foresee the need for significant increases in CapEx or larger M&A, given stronger growth expectations in the service-based and digital print offerings and the relative investment dynamics associated with each. We also intend to maintain the $0.26 per share quarterly dividend.

Before I turn the call back to Tom, I want to share our expectations for the year, which include the impact of the share repurchase program. We continue to expect year-over-year revenue growth in the low single digits over our 2010 pro forma revenue of $10.7 billion. This estimate excludes any impacts from changes in foreign exchange rates or fluctuations in pass-through paper sales. We expect our non-GAAP operating margin 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 $570 million. Interest expense is estimated to be in the range of $245 million to $250 million, $5 million to $10 million higher than our previous guidance, primarily due to the impact of the share repurchase program. Full year capital expenditures are expected to be in the range of $250 million to $275 million. We believe this range of spending is appropriate for the size of the business, especially given the investment dynamics associated with digital print and our service-based offerings.

Our non-GAAP tax rate is expected to be in the range of 29% to 32%. We expect income attributable to noncontrolling interest to return to roughly 2009 levels. We assume the full year, fully diluted share base to be approximately 198 million shares, reflecting an estimate of the impact that the accelerated share repurchase will have on the fully diluted share count. The actual reduction in share count will depend on the share price at inception and over the course of the ASR, as well as the timing of the conclusion of the ASR. And lastly, we continue to expect operating cash flow less CapEx of approximately $600 million.

And with that, I will return you to Tom.

Thomas J. Quinlan

Thank you., Dan. The recent earthquake and tsunami in Japan and the awful tornadoes here in the United States serve as reminders of the fact that all is not under our control. We are grateful that none of our employees were injured and that none of our facilities were damaged. But we continue to keep in all our thoughts, all of those who were affected by these terrible events.

This also makes us even more appreciative and proud of the work that our employees do each day to address the things that can be controlled. Our employees posted a record year for safety in 2010 in another of our facilities. This one, in Crawfordsville, Indiana, was recommended for OSHA's VPP Star Status, which is an important achievement. We continue to regard safety as the first and most important measure of operational excellence at RR Donnelley.

And with that, operator, we will open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Charles Strauzer from CJS Securities.

Charles Strauzer - CJS Securities, Inc.

Tom, a quick question, if we could talk about the buyback. First of all, I applaud you for taking such a bold move here, and I just wanted to kind of get your sense of timing. Why now? It's been a few -- number of years since you bought back stock. I know it's probably one of the things where you probably look at your balance sheet versus the opportunities out there. What -- talk to us a little bit more about why now and why the size that you chose.

Thomas J. Quinlan

Thank you. Hopefully, everyone looks at this as a sign of capital stability and a degree of comfort that we have in the fundamental performance of the company on a go-forward basis. I think those of who you have been with us for a while, you know this management team is a big believer that we should provide -- as we prioritize things -- value-enhancing investments, to us, have been ahead of distributions, whether they're share buybacks or dividends. And I think as we look around over the next few years and as we've had conversations, the value-enhancing investments have much lower valuations than what we've seen in the past. If you remember the criteria that we used, why we do -- why we bring different properties onto this platform, we look at the impact of the customer, the cost component, "Can we impact that?" -- and capacity. And as we looked around and there's not a lot of large properties out there that we'd think would be good fits for our platform, so given that -- given the flexible capital structure that we've built over the years, the historical low interest rates, the spread environment, a high dividend yield, management and the board felt that returning excess cash flow to shareholders via share repurchase would be an appropriate action to take at this time. And obviously, as both Dan and I mentioned, this is a cash-positive transaction for us. And it's a change in our capital structure. The board is on board with us being at a 2.5 to 3x leverage to operate this business, and we're deploying capital in that way as we illustrated today.

Charles Strauzer - CJS Securities, Inc.

Great. Could we shift a little bit now to more of the business trends? And, obviously, you're kind of sticking with the guidance there. But talk about what areas in the business are you seeing better-than-expected growth, and then maybe give us a sense of kind of current quarter, some of the near-term trends.

Thomas J. Quinlan

Sure. I think both -- yes, I'll start off first. I think if you look at the transactional business and you look at what our sales force has been able to do, we are very excited as far as what we were able to do in the quarter. When you go back to this first quarter and you do the comparison -- I'll take you back a couple of years, even earlier. 2008, when we found out we won the census, the United States Census, that is obviously a unbelievable victory for someone like us in our industry and to be -- have them do it with -- almost basically with us, as an entity, entirety, was a great thing for us to accomplish. We looked at each other, even back then, and said, "Hey, 2010 first quarter, we're going to -- this is going to be good for us." And a couple of us at that time even stared and said, "Well, it doesn't bode good for 2011 from a comparison standpoint." You think about what we've done over the years. When you've had situations like a Harry Potter, and we get that work in and all the revenue and good things that are associated with a large -- executing a large production like that. You look at -- on the financial side with IPOs that are big, whether financial service or credit cards, some of those things we've had to overcome. Even when we were smaller, an $11 billion company, it is still a big amount for us on a year-over-year basis. And I think as you -- as we talked to you this morning, we factored that into our numbers. Maybe we didn't do a good job of talking to you as far as the impact that, that would have on our first quarter '11. But as Dan reiterated today, we're still on track. We still feel good about what the year's going to bring. We're not coming off what we said last quarter. I think, again, the transactional business, as you've seen from us, has been positive. I think we've had great growth overseas. Some real good opportunities are taking place there as we talked about. If you look at some things that we've got some headwinds on, obviously, directories is one which we all know about. Books is another interesting one that we're faced with. I think this month, sometime this month of May, the great state of Texas will decide what they're going to do with their dollars that they have allocated towards the educational arena in their state. And that, to us, will dictate what the other large states will do: California, Florida, New York. If they come and decide to spend money in the areas that we are playing in, obviously that's great for our customers. We should be positioned well. That should be good for us. If they don't, then we're going to continue to face some headwinds there as we go forward. So, Dan?

Daniel N. Leib

The only thing I would add there is, in addition to the units that Tom identified, our logistics offering continue to have particular strength, consistent with what we saw over the past year. In the quarter, it was up about 19% in revenue.

Operator

And our next question comes from Dan Leben from Robert W. Baird & Co.

Daniel R. Leben - Robert W. Baird & Co. Incorporated, Research Division

Just first for me, what was the census number again?

Daniel N. Leib

Total project was $50 million in revenue, as we announced in 2008, expected, and the vast majority of that occurred in Q1.

Daniel R. Leben - Robert W. Baird & Co. Incorporated, Research Division

So excluding that and the Bowne acquisition, the other acquisitions and everything, kind of organic growth in the U.S. slowed from this kind of 1.5% to 2% rate we saw in the back half of last year to a few basis points -- tens of basis points positive. Any factor you could point out that makes you feel confident that, that's kind of a onetime timing, well, if we're comfortable with [ph] some acceleration as we get through the year?

Thomas J. Quinlan

Tom Quinlan.

[Technical Difficulty]

But I think what you're saying is, "How do we feel as far as on a go-forward basis?" We feel good. I think as you look at January and February getting off to the start it was, again, we look at this business as a GDP type of business. I think most people that are out there in our situation saw March kind of slow down a little bit. And April, as we look right now, kind of was where we thought it would be. But there is no indications out there that we see to where the United States consumer, and that's a big part for us, is pulling back. They impact our customers in a major way. Obviously, discretionary income because of the price of oil, gasoline; because of healthcare costs; because of states raising taxes. We've got to be cognizant of what that's going to mean for people as they continue to look to spend. I do look -- we do look at foreclosures. We think that the foreclosures have sort of stabilized, which we look at as a good thing for the economy. Overseas, we seem to be having some real good opportunities that we've availed ourselves to in the different products and services that seem to be going well. So as we sit here today, there's nothing that we want to raise an alarm about or come back and tell you that, "Look, there's another rocky road ahead of us." We think we're positioned well. We're going to be able to reinvest back into the business, to stay within the ranges that Dan talked about. We talked to you about the facility in Chicago that we're going to come together on. We're going to continue to look at acquisitions. They're going to be smaller. They're going to be along the lines of what you've seen us do from a technology side with the Nimblefishes, 8touches, Press+. There's some great capabilities and solutions that we can continue to add to our customers that is going to drive print, packaging, fulfillment, logistics. These technology add-ons that we've done, they can stand by themselves, granted. But the big thing for us and where we're going to see whether or not we've been successful is, "What more revenue does that drive to our platform?" The great thing with some of these -- I mean, with what Steven and Gordon have built over at Press+ is we don't have to gouge you on pricing. We don't have to keep your data. We're not looking to keep your data. But it's another opportunity for our long-run customers to improve their revenue without us having to impact advertising. How many times does somebody have that opportunity to go ahead and do that? So again, we're pretty upbeat about what we see. We're always cautious. We always keep our eyes open, knowing that something's out there that's going to come back and can hit us. But I think the platform that we've got; the way our sales is going out to our customers adding value, reducing their costs, improving their return on investment, the way that our facilities are operating, more than Six Sigma plus; all those things add up to where we feel pretty good as far as what we're sitting here today and seeing for 2011.

Daniel R. Leben - Robert W. Baird & Co. Incorporated, Research Division

And is there any -- you mentioned the U.S. consumer being a piece of the business. Is there any impact from Easter moving a couple of weeks later? I'm particularly thinking about kind of the mag/cat, retail. Did some of those things get pushed out into April from March?

Thomas J. Quinlan

I mean, all of us -- the good thing being here for me is you've got people that I get to work with that have been doing this for a couple of decades. Easter -- holidays don't impact us as much as I would tell you, and they would -- we've obviously seen a presidential year and an Olympic year. So despite the timing of Easter for us with our end customers and the weather issues that take place and all these factors, again, that aren't controlled, not a big impact there. But where we do and what we kind of -- when you look out to 2012 and having an Olympic year and having a presidential election year, that bodes well for what we do.

Operator

Our next question comes from Ed Atorino from Benchmark.

Edward J. Atorino - The Benchmark Company, LLC, Research Division

I had a question about product. You went through that. Dan, did you say the tax rate, 29% to 32%? Did I get that right?

Daniel N. Leib

Yes.

Edward J. Atorino - The Benchmark Company, LLC, Research Division

Would you break out the impact on SG&A from the acquisition? And will SG&A, going forward, be the sort of same percent of sales as in the 1Q?

Daniel N. Leib

Yes, I think, without getting into specific SG&A guidance, if you look at the increase in SG&A, there's a piece of it which is incentive -- or rather a piece of it which is IT-related, a piece of it which is pension-related and then the other piece is from the acquisition. If you look at the historical Bowne run rate of about $45 million in SG&A, that number has come down by about 1/3 or so and continues to be actions taking place, and that took place later in the quarter. So that will continue to come down a bit.

Operator

Our next question comes from Craig Huber from Access 342.

Craig Huber -

A few questions. I mean, first, I'm just curious, for this Bowne acquisition, what was the year-over-year percent change in revenues there? Can you help us with that?

Daniel N. Leib

Yes, sure. Real tough to measure as the integration is well under way. So you can look back at their historical. Tom made the comment that, on a pro forma basis, the U.S. platform for Bowne or financial print aspect of Bowne and Donnelley together is up 5% -- or over 5% rather. And so it's tough to tell because we've gone through integration activities and harmonized the sales force, and it's tough to break it out as standalone unit.

Craig Huber -

Okay, then this number for corporate expenses is $73 million, up 47%. I assume that's not a run rate for the full year -- for the rest of the year. What should investors expect corporate expense to be for full year, please?

Daniel N. Leib

I think as you look at what caused the increase in corporate expense, the pension, as we've mentioned, is expected to be up $23 million year-to-year. And the other items, particularly Bowne, which would be, as I mentioned, coming down a bit. So I think there will be an increase on a year-to-year basis. It should not be as significant as we experienced in the first quarter.

Craig Huber -

And then also, Tom, I typically like to ask, "Could you just talk about the pricing environment right now?" What's the average percent change for pricing out there right now, for this quarter you just finished, I guess? And then what was it a year ago? Has it changed much?

Thomas J. Quinlan

It hasn't changed. And I sound like a broken record with you, Craig, over the years of talking about it with you, but it's still -- it's out there. We don't make excuses for it. We know it's going to continue to be out there. I think the -- I would tell you that not as any more challenged than what's it been in the past. I think the great thing for us right now is our customers are -- or we are proving to our customers or our customers -- end-customers are proving that print is a viable means of communication that they're going to continue to use. "Where does it fit into the mix of what they're trying to do?" and "How does that all come together?" are the questions that our sales force with our people and our customers are working together to figure out. So those are all bright spots as we look out to see what we're doing from a physical distribution of content, from digital logistics. We're going to be able to -- we're going to have to make sure that we can continue to add value for our clients, so that their customers will want to buy the products and services or go on the trips or whatever it may be that they're looking to do, in addition to the long run products that are out there. So no dramatic change as we're looking here and, again, as we had volume up in most categories.

Craig Huber -

Do you think, Tom, the average number may be generally in the range of, say, down 1% to 3% for the quarter, year-over-year, the pricing?

Thomas J. Quinlan

Depending on the product. Yes, I think 1% to 2% is probably better.

Daniel N. Leib

And my other big question here has to do with this share buyback. You've touched on this a lot. But I'm just curious, how much did it come into your line of thinking to announce a $1 billion share buyback here? What the impact may be to your credit rating? I mean, it's been very important to you guys over the years.

Thomas J. Quinlan

Yes, and it still obviously is. I mean, I think as you -- we've got great dialogue, great communication over the years with the 3 agencies. We continue to do that. I think as you -- as we look at it, given the cash flows that we see in the foreseeable future for us, we think that our metrics are still going to be strong metrics out there in the marketplace. And again, we're a tough animal to analyze for everybody, for you guys, for them, for anybody that looks at us, because who do you compare us against? You've got all these products and services. You've got the scale that you've got. You've got the global reach that you have, and who do you go compare us back to? And it's tough but, again, we think at the end of the day the numbers tell a good story and will continue to tell a good story.

Operator

Our next question comes from Scott Wipperman from Goldman Sachs.

Scott Wipperman - Goldman Sachs Group Inc., Research Division

Maybe if I can just follow up on the previous question. Can you just talk about the decision, I mean, to announce the buyback and the new leverage target in the context of the investment-grade ratings? I mean, Moody's obviously just recently changed your outlook to negative, signaled they actually wanted you to de-lever. So -- I mean, these actions would seem to be a clear signal to the market that you're willing to put the investment-grade ratings at risk. And I guess I was just hoping you can address that for bondholders, talk about how you think about your credit ratings going forward, your comfort level of operating as a high-yield company.

Thomas J. Quinlan

I think you're making an assumption that we're going to a high yield. You may know something that I don't know. But no, I think we're comfortable operating in a 2.5 to 3x. I think if you go back and when I specifically would say on the quarterly calls, we're 2 to 2.5x, 2008 was not a great year. 2009 was where we just wanted to make sure we could keep the doors open. So I mean, the fact that we have survived that, come through that, the fact that we've got the products and services that we've got and that we've got the customer relationships that we've got and the value that we're bringing to our customers, we feel good as far as what the future holds for us. And then when you look at the acquisition candidates that are out there, there's not a large -- I mean, one of the things that each of you would come back at us at is you were worried that we were going to go buy someone of significant size. And we would addressed that and talked to you about that. So I think that's one equation, as I talked to you about today. And size is obviously big. There's not those properties out there to broaden our platform that will add the value that we talked to, of customer costs and capacity. So as we look at a deployment of capital and we've tried to be prudent with you guys over the years that we've gone through it, we think now is an appropriate time, given what we see with the business, given where the interest rate environment is to have a distribution of capital to the equity investors. Does that mean we're going to ignore bond investors? No. We've said over the years that we're going -- we try to take care of all of our stakeholders, whether they're equity investors, bond investors, retirees -- obviously, customers first, employees and vendors, and we work every day to try to go ahead and make sure that we accomplish that. We think that this is a move that's going to take place that will be a good use of capital. It's cash positive. There's not too many times in one's career that they can make an investment like this and be able to say those words. So again, I think this is a good transaction for us at the right time. We are not ignoring, at all, our bond investors and we continue to -- the commitments that we made on the payments that we have, we will continue to do that. I think if you look at our pricing over the years when we've gone to market, I would tell you that our pricing has not been at the, what I'll call, the lower end of the range for an investment-grade credit with our credit metrics. So I think we have been priced by the bond investors in an area that -- they understand the industry that we deal in and they understand the company. So we're going to continue to look for bond investors to be a source of cash here. We'll continue to borrow underneath our credit facility. We're going to continue to have cash on hand, pay people on time and try to be good corporate citizens.

Scott Wipperman - Goldman Sachs Group Inc., Research Division

That's helpful, and I definitely appreciate the response. I guess, did you speak to the rating agencies prior to making this announcement?

Thomas J. Quinlan

We've got great dialogue with them, and we would never want to, obviously, have something like this take place and them hearing it for the first time, or seeing it at 6:30 East Coast time this morning would not be a nice -- that would not be good form. But we've have conversations and, obviously, they are hard at work and going to take the necessary steps and go through the necessary actions that they've got to go through.

Operator

Our next question comes from Thomas Cubeta from UBS.

Thomas Cubeta - UBS Investment Bank, Research Division

My question's been asked, thank you.

Operator

Our next question comes from Robert Schiffman from Crédit Suisse.

Robert Schiffman - Credit Suisse

Most of my questions have been answered as well, but it seems like this whole timing of the buyback and leverage is that you got a lot of free cash flow. You don't have maturities. You don't see any big CapEx. But it also seems like you don't really care that much about your cost of capital right now. And is that implying that -- it might be going to BB, but you don't really care so much because you have no borrowing expectations over the next 12 to 24 months?

Thomas J. Quinlan

No, I appreciate the question. Trust me, we care about our cost of capital. And again, I enjoy the fact that some of you are giving us ratings before the people that are getting paid to do it are giving it to us. But we do care about our cost of capital. We're not here for 90 days or 60 days. We run this business that we're looking at it, that we want to be around for the next 145 years. It's not run as if we're going to -- we're worried about what's going to be for the next 60, 90 days. I mean, I don't have a crystal ball. One of the things that I think I've learned and this management team has learned is that you make sure that whenever you want to get capital, that's at the time where you cannot get it. And whenever you don't need it, that's the time you can go ahead and get it. So I think -- we make sure that we're able to keep the doors open every day, and that we're not scrambling around to where we've put you in harm because we don't have access to the capital markets. So we do care about it. We've got a great credit facility with well-known banks. That is a great piece of paper for us, too, to -- is a checkbook. And again, I think we've got access to the capital markets in any way or shape or form that we want to go ahead and access the capital markets. And we won't make an excuse that says, "Okay, we missed our number because of interest expense."

Robert Schiffman - Credit Suisse

But you can understand why bondholders are pretty upset. You've talked about having a commitment to investment-grade metric, and the new range you're giving is outside the investment-grade metric that both Moody's and Fitch have. That's why we're jumping to conclusions. So just what do you want to say to bondholders who are now looking at spreads that are meaningfully wider than where they were when we went home last night?

Thomas J. Quinlan

Well, again, I think the answers that I've given you this morning are my answers towards it. It is something that we believe is the right deployment of capital. We, again -- unsure of where the rating agencies will come out on this because, again, we do still think we've got great numbers that are going to be presented to you. So we'll see what they do over the next week or so and see where they come out, and we'll go from there.

Operator

Our next question comes from Randal Pollock from Vanguard.

Randall Pollock - Vanguard Group

Just a 2-part question. Can you generalize how oil prices and housing starts impact your bottom line? And separately, could you just review your credit line, the size, availability and any covenants?

Thomas J. Quinlan

Sure, I'll take the first. Dan will take the second. Ink is petroleum-based. We're still trying to figure out ways that cannot be the case, but we haven't figured it out yet. So as oil prices go up, that obviously affects manufacturing materials that we use in our business. As oil prices go up, that obviously impacts people's wallets and pocketbooks because if the drive or to heat their homes, whatever it may be, there's money that's coming out of their pockets to go for something that's a necessity that cannot be spent on maybe something that's discretionary. So I think we -- it's simple. It's not physics. It's not anything that's complex. If those prices, those inputs go up for us, they go up for our customers and consumer and there's an impact to our business. I'll let Dan take...

Daniel N. Leib

Sure, yes. So we have a $1.75 billion unsecured committed revolving credit agreement, as Tom mentioned, with very quality banks. We -- the agreement expires December 17 of 2013. The covenants under it are a 4x debt covenant and a 3x interest coverage covenant. And if you -- the last page of the earnings release has a liquidity schedule that breaks out that at the end of March of 2011, our available liquidity inclusive of $400 million of cash was 1.967 -- $1.969 billion, so almost $2 billion. And we had $110 million drawn under the facility at the end of March.

Operator

Our last question comes from Charles Strauzer from CJS Securities.

Charles Strauzer - CJS Securities, Inc.

Hey, just a quick follow-up. When you look at the SG&A line, I don't know if you've kind of broken this out. But if you can take a look at -- apples-to-apples, if you take out Bowne and the pension increase, what would've SG&A looked like, plus or minus the 4 percentage point, if you have that?

Thomas J. Quinlan

So as Dan looks that up, on the SG&A item, I think, again, this is -- you noticed for a while we're going to continue to look at reducing those costs as you think about the facility that we talked about. There're some costs, from a SG&A standpoint, as we look around to make sure that everyone is delivering what they need to deliver. Can we be more productive in selling than what we currently are? Those steps are underway -- always underway to see how we can do better and reduce that. We know we've got to do that. We'll continue to look forward to doing that.

Charles Strauzer - CJS Securities, Inc.

And Tom, while Dan's looking that up, if you can talk a little bit more about -- obviously, you've been getting a lot of questions about the buyback today and the use of your cash and stuff. And obviously, you're going to be generating a fair amount of free cash flow, not only this year but for the foreseeable future, obviously. Can I assume -- or can we all assume as stakeholders here that you'll be applying that free cash flow to pay down that portion of the debt that you have taken on to pay down the -- to buy back the stock?

Thomas J. Quinlan

Well, what I would tell you is we -- it's a new day and age for us. We're going to operate between 2.5 and 3x. We may be slightly above that at certain times, but that is where we're going to be. The board's onboard with it, concurs with it. The dividend is still -- our intention is to continue to keep the dividend, and we are going to deploy capital as we've always have deployed capital since we've been together with you. We're not going to change how we look at that, the way to deploy capital. And I think it's served us well over the years as we've gone about it, so that's [indiscernible]...

Charles Strauzer - CJS Securities, Inc.

I appreciate that.

Thomas J. Quinlan

Headed with that. Okay.

Daniel N. Leib

And just back to the question, you would show -- take approximately $40 million out and it would be about 11.1%, which is slightly improved from last year.

Thomas J. Quinlan

Look, everybody, we appreciate everyone joining today's call, taking the time out here today to be with us. Understand, our strategic framework has not changed. We're going to continue to look to have continuous improvement, drive out costs, enhance productivity. We're going to continue to look to maximize the value of our products and services, our geographic diversity. Our customers change communication mix or look to go someplace else in the world, we're going to be there for them. We're developing innovations for people. We want to continue to be value added within the supply chain, help our customers achieve their goals. And we're going to have integrated solutions for our customers that are going to draw everything that we do in this platform. So again, we appreciate your time. We look forward to seeing everybody in another 90 days, and hope everyone has a great day. Thank you.

Operator

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

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