STAMFORD, Conn., November 03, 2008 - Pitney Bowes Inc. today reported third quarter 2008 financial results.
The company's third quarter revenue increased 3 percent to $1.5 billion and adjusted income from continuing operations was $139 million. Adjusted income for the quarter excludes pre-tax charges of $40 million related to previously announced restructuring initiatives to reduce costs, accelerate operational improvements and transition the company's product lines. Adjusted income also excludes $9 million of pre-tax charges related to impairments of certain intangible assets in the Management Services and Marketing Services segments. On a Generally Accepted Accounting Principles (GAAP) basis, the company reported income from continuing operations of $100 million and net income of $98 million.
Adjusted earnings per diluted share from continuing operations for the third quarter was $0.67, which compares with $0.63 for the prior year. On a GAAP basis, the company reported earnings per diluted share from continuing operations of $0.48 for the quarter, compared with $0.58 per diluted share for the prior year. Earnings per diluted share for the quarter was $0.47 including discontinued operations, compared with $0.58 in the prior year.
Free cash flow for the quarter was $252 million, while on a GAAP basis cash from operations was $281 million. Year-to-date, free cash flow was $653 million, while on a GAAP basis cash from operations was $742 million.
During the quarter, the company used $73 million of cash for dividends and $61 million to buy back 1.7 million of its shares. The remaining authorization for future share repurchases was $73 million at the end of the third quarter. Year-to-date, the company has returned $553 million to shareholders in the form of dividends and share repurchases.
Commenting on the company's performance, President and CEO Murray D. Martin noted, "Our business model of high recurring revenue and our diverse customer base provide us with a measure of stability as these turbulent economic events unfold around the world. The rapid and significant appreciation of the U.S. dollar near the end of the quarter resulted in a slightly negative impact on earnings versus the prior year and had a $0.03 negative impact on the third quarter versus the second quarter earnings.
"Concerns about the availability of credit and the status of the economy have delayed some customers' buying decisions, particularly for large ticket sales in our software and production mail businesses. However, aggressive cost management, as part of the transition initiatives we began at the end of last year, reduced our cost structure as a percent of revenue, and improved our year-over-year EBIT margins in U.S. Mailing, International Mailing, U.S. Management Services, Production Mail, and Marketing Services.
"We continue to generate very strong free cash flow and expect that trend to continue. In fact, we are forecasting annual free cash flow in excess of $800 million, marking our third and largest increase in our outlook this year.
"The combination of our business model, strong free cash flow, and excellent credit ratings has allowed us continuous access to the commercial paper markets. We have issued commercial paper at more normal maturity levels and at favorable interest rates, even during this period of market uncertainty. Our strong liquidity position enables us to satisfy all of our financing needs. We will continue to be prudent on how we spend and invest our cash to maximize shareholder return."
Business Segment Results
Mailstream Solutions revenue was $1.1 billion which was equal to last year, while earnings before interest and taxes (EBIT) grew 3 percent to $291 million when compared with the prior year.
Within Mailstream Solutions:
U.S. Mailing's revenue declined 5 percent to $549 million and EBIT declined one percent to $223 million. Because of actions the company has taken to reduce costs, the EBIT margin for U.S. Mailing improved to 40.6 percent. The decline in revenue was due primarily to lower mailing equipment and supplies sales as many government and major account customers deferred upgrade decisions for new equipment or extended leases on existing equipment.
International Mailing's revenue grew 7 percent to $272 million and EBIT increased 23 percent to $41 million. Revenue growth benefited from increased rentals in France; increased equipment sales in Norway, other parts of Europe, and Asia; and continued good growth in supplies. Revenue growth also benefited by about 4 percent from favorable currency translation and by about 2 percent from acquisitions. EBIT margin comparisons with the prior year were favorably affected by an improving administrative cost structure in Europe.
Worldwide revenue for Production Mail grew 2 percent to $155 million and EBIT increased 37 percent to $23 million. Favorable currency translation contributed about 2 percent to revenue growth. Revenue growth from higher equipment placements in the UK, Germany and other parts of Europe was offset by lower equipment sales in the U.S., where economic uncertainty has slowed large-ticket capital investment for many large financial services companies. The EBIT margin improved due to aggressive cost actions in anticipation of delayed buying decisions.
Software revenue increased 7 percent to $94 million while EBIT decreased 39 percent to $3 million. Revenue was flat, when compared with the prior year, after excluding the effect of acquisitions, which contributed about 7 percent to revenue growth. Software sales were adversely affected by the ongoing weak economic conditions worldwide causing some large enterprise accounts to continue to postpone their purchase decisions. The decline in EBIT margin was due to the planned global investment in sales and marketing, increased investment in research and development, as well as lower revenue growth.
Mailstream Services reported revenue growth of 9 percent to $478 million, while EBIT declined one percent to $38 million when compared with the prior year.
Within Mailstream Services:
Management Services' revenue increased 4 percent to $288 million while EBIT decreased 6 percent to $16 million. The segment's revenue growth for the quarter benefited from last year's acquisition of a French business services company, which added about 6 percent to revenue growth, and favorable currency translation, which added about one percent to revenue growth. Revenue growth was adversely affected by lower transaction volumes for some customers, especially in the U.S. financial services sector. EBIT margin in the segment benefited from improvements in the U.S., where the margin increased to our near-term target of 10 percent because of the company's focus on productivity initiatives. However, the margin benefits from the U.S. actions were more than offset by the costs associated with the acquisition in France.
Mail Services revenue grew 25 percent to $140 million, while EBIT decreased one percent to $15 million. Revenue growth was driven by both presort and international mail services. Acquisitions added about 14 percent to revenue growth. As has been the case in past expansion periods, the EBIT benefits from operating leverage were more than offset in the quarter by the costs associated with the acquisition of a multi-site presort operation in the U.S. and two UK international mail services sites. The company expects positive EBIT margin contributions from these sites in 2009 as they become fully integrated.
Marketing Services revenue increased 4 percent to $50 million and EBIT increased 15 percent to $6 million. The company's phased exit from the motor vehicle registration services program adversely affected the segment's revenue growth, while positively impacting EBIT margin versus the prior year.
Based upon the year-to-date results and the outlook for the remainder of the year, the company's full-year free cash flow is expected to exceed $800 million. The company has revised its revenue growth expectations for the year to 2 to 4 percent and its expected adjusted earnings per diluted share from continuing operations for the year to $2.75 to $2.82, primarily due to the rapid and significant strengthening of the U.S. dollar, as well as the uncertainty resulting from the weak economic environment. This guidance is based on exchange rates in effect on October 31, 2008.
Based on actions identified to date, the company expects to incur full-year pre-tax charges for restructuring and asset impairments of approximately $100 million or $0.35 per diluted share, of which $85 million or $0.30 per diluted share has been recorded during the first nine months of the year. The company is identifying further actions before the end of the year to reduce its cost structure and improve operational efficiency.
On a GAAP basis, earnings per diluted share from continuing operations is expected to be in the range of $2.37 to $2.44.
In conclusion Mr. Martin noted, "While we anticipate continued economic uncertainty for the remainder of 2008 and into 2009, our products and services are designed to provide efficiencies, cost savings and revenue growth opportunities for our customers. We will also continue to aggressively manage our cost structure. As a result, we believe we are well positioned to continue to grow our earnings in the fourth quarter and during 2009 despite these market challenges."
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