NEW YORK, NY - Nov 10, 2008 -- Bowne & Co., Inc. , a global leader in shareholder and marketing communications services, today announced its third quarter and year-to-date operating results in a difficult capital markets environment as well as a 10% reduction in its workforce.
Revenue was $164.0 million in the third quarter of 2008 compared to $181.7 million in the third quarter of 2007, a decline of $17.7 million, or 9.8%. In the third quarter of 2008, the Company generated gross profit of $42.1 million, with a 25.7% gross margin contribution, compared to $63.1 million and a 34.7% gross margin contribution in the prior year period. Segment loss was ($7.3) million in the third quarter of 2008 compared to segment profit of $9.5 million in the third quarter of 2007. Loss from continuing operations was ($17.2) million, or ($0.62) per diluted share, compared to income of $0.9 million, or $0.03 per diluted share, in the third quarter of 2007.
For the nine months ended September 30, 2008, revenue was $609.7 million, down 7.0% from $655.9 million reported for the first nine months of 2007. In the first nine months of 2008, the Company generated gross profit of $199.6 million, with a 32.7% gross margin contribution, compared to $245.5 million and a 37.4% gross margin contribution in the comparable prior year period. Segment profit was $35.4 million in the first nine months of 2008 compared to $71.1 million in the comparable 2007 period. Segment profit margin in the first nine months of 2008 was 5.8%, compared to 10.8% in the same period in 2007. Loss from continuing operations was ($13.4) million, or ($0.49) per diluted share for the nine months ended September 30, 2008, compared to income of $27.0 million, or $0.87 per diluted share, in the comparable 2007 period.
Pro forma loss from continuing operations totaled ($11.9) million in the third quarter of 2008 and pro forma income from continuing operations of $4.4 million for the 2008 year-to-date period, compared to income of $2.2 million and $28.1 million, respectively, in the comparable prior year periods. This resulted in pro forma diluted loss per share of ($0.43) in the third quarter of 2008 and pro forma diluted earnings per share of $0.16 for the 2008 year-to-date period, compared to diluted earnings per share of $0.08 and $0.90, respectively, in the comparable 2007 periods. (See page 10, Pro Forma Supplemental Income Information, for a reconciliation between the non-GAAP financial measures and the Company's Condensed Consolidated Statements of Operations.)
"Activity in the capital markets is at its lowest level since the mid 1990s. We've taken steps to further streamline our operating environment, including a 10% reduction in workforce effective in November. Based upon actions implemented in 2008, we've now reduced our headcount by over 1,000 positions, or 24%, with an expected annualized cost savings of approximately $70 million," said Dave Shea, Chairman and Chief Executive Officer. "We're pleased with the progress we've made on our recent acquisitions, which are meeting our expectations and progressing on schedule. Although the current environment is very challenging, we're confident that the changes we've implemented will position us as an even stronger, more flexible company in the future."
Additional comments on the operating results in the third quarter and first nine months of 2008, as well as adjusted annual guidance given the current market environment, are provided below.
Capital markets services revenue, formerly referred to as transactional revenue, was $42.4 million in the third quarter of 2008, which is $37.2 million, or 46.7%, lower than the comparable 2007 period. For the first nine months of 2008, capital markets services revenue was $158.7 million, which is $65.3 million, or 29.2%, lower than 2007. Capital markets services revenue for both periods of time was at its lowest level since the mid 1990s. This decrease is directly related to the decline in overall capital markets activity. Specifically, overall filing activity decreased 32% during the quarter and the first nine months of 2008, and IPO activity declined 71% for the quarter and 66% year-to-date. The decline in the Company's capital markets services revenue was partially offset by an increase in revenue from Bowne Virtual Dataroom(TM) (VDR). VDR revenue, which is now reported as part of capital markets services revenue, increased 54.4% for the quarter and 59.4% year-to-date, to $3.6 million and $10.3 million, respectively.
Shareholder reporting services revenue, which includes compliance reporting, investment management services and translations services revenue, was $72.4 million and $300.5 million for the third quarter of 2008 and year-to-date periods, a increase of 9.8% for the quarter and a decrease of 1.8% year-to-date compared to the comparable 2007 periods, respectively. For the third quarter of 2008 and year-to-date periods, compliance reporting revenue decreased approximately 4.9% and 8.3%, investment management services revenue increased 19.3% and 3.8%, and translations services revenue increased 29.3% and 24.3%, respectively. Compliance reporting revenue in 2007 benefited from new SEC regulations regarding executive compensation proxy disclosures, and revenue from special notice and proxy filings in 2007 that did not recur in 2008. The increase in revenue from investment management services is primarily the result of revenue gained through the acquisition of Gcom2 Solutions, Inc. ("GCom") in February 2008 and Capital Systems, Inc. ("Capital") in July 2008.
Marketing and business communications services revenue increased $15.3 million, or 57.2%, to $42.1 million during the third quarter of 2008, and increased $30.5 million, or 32.4%, to $124.6 million during the first nine months of 2008. The increase in revenue is due to revenue contributions from the acquisitions of the digital print division of Rapid Solutions Group ("RSG"), Alliance Data Mail Services ("Alliance"), and GCom.
Acquisition activity and integration of acquired businesses: The Company has made substantial progress in the integration of its recent acquisitions of Alliance, acquired in November 2007; GCom, acquired in February 2008; RSG, acquired in April 2008: and Capital, acquired in July 2008. Together, these acquisitions contributed approximately $26.3 million in revenue during the third quarter and approximately $55.5 million during the first nine months of 2008. Diversifying Bowne's revenue stream has been an ongoing strategic goal during the past several years and the revenue contributions from the acquisitions of RSG, Alliance and GCom will continue to support that objective. As planned, the Company expects to complete the integration of these acquired businesses by the end of 2008.
Segment Profit: The Company generated segment loss of ($7.3) million in the third quarter and segment profit of $35.4 million year to-date, compared to segment profit of $9.5 million and $71.1 million in the comparable prior year periods. The decline in capital markets services revenue is the primary driver of the reduction in segment profit in the third quarter and first nine months of 2008.
Restructuring activities: The Company continually reviews its business, manages its costs and aligns its resources with market demand, especially in light of reduced activity in the capital markets and the resulting reduction in capital markets revenue. As a result, the Company has been taking the opportunity over the last several years to reduce fixed costs, eliminate redundancies and better position the Company to respond to changing economic conditions.
During the fourth quarter of 2008, the Company initiated a reduction in force as it continues to rationalize its resources and in response to the continued downturn in capital markets activity. The Company reduced its headcount by approximately 330 positions, which included a broad range of functions and was enterprise-wide. The Company expects that these actions will result in annualized savings of approximately $21.0 to $23.0 million. The related restructuring charges resulting from these actions are expected to result in a fourth quarter pre-tax charge of approximately $4.0 to $6.0 million.
During 2008, including the recent reduction in workforce, the Company implemented initiatives designed to achieve approximately $70.0 million in annualized cost reductions. These initiatives were part of the Company's continued focus on improving its cost structure and realizing operating efficiencies, and in response to the downturn in overall capital markets activity. The cost reductions included the elimination of a total of approximately 1,000 positions, or 24% of the Company's total headcount.
Balance Sheet and Cash Flow: The Balance Sheet at September 30, 2008 includes $16.3 million in cash and marketable securities, which is $87.4 million lower than the prior year-end. This decline reflects a decrease in operating income, the utilization of cash to help fund the acquisitions of GCom, RSG, and Capital, the utilization of cash to fund restructuring and integration costs, and the funding of capital expenditures.
Average days sales outstanding was 70 days for the nine months ended September 30, 2008 and 69 days for the comparable period in 2007. Work-in-process inventory was $19.6 million at September 30, 2008 compared to $19.1 million at September 30, 2007. As of September 30, 2008 the Company had $39 million outstanding under its $150 million five-year senior, unsecured revolving credit facility that expires in May 2010, and $75.0 million outstanding under the Company's Convertible Subordinated Debentures ("the Notes").
October 1, 2008 marked the five-year anniversary of the Notes, and was also the first day on which the "put" and "call" option became exercisable. On this date, holders of approximately $66.7 million of the Notes exercised their right to have the Company repurchase their Notes. As a result, the Company repurchased approximately $66.7 million of the Notes in cash, at par, plus accrued interest, using its existing revolving credit facility. As of November 10, 2008, approximately $8.3 million of the Notes remain outstanding, and the Company has $108 million outstanding under the revolving credit facility.
Business Outlook: In August 2008, the Company had revised its business outlook for 2008. As a result of further declines in overall capital markets activity and the additional workforce reductions initiated in late October of 2008, the Company is further revising its business outlook for 2008 for the following:
-- to reflect the anticipated continued significant downturn in industry- wide capital markets activity. The Company is currently estimating its revenue from capital markets services at approximately $195 to $205 million. This represents our lowest level of transactional revenue since the mid 1990s.
-- to reflect a slight reduction in non-transactional revenue. The Company is currently estimating its revenue from non-transactional activities at $585 million to $600 million in 2008 as compared to our previous estimate of $605 million to $625 million. The reduced estimate is primarily due to lower revenue growth which the Company believes is partly associated with the general downturn in the economy.
-- to reflect its recent acquisitions. The acquisitions of Alliance and GCom were included in the original guidance provided in March 2008; however, the acquisitions of RSG and Capital were not contemplated as part of the original guidance. The Company will complete the integration of these acquired businesses in the fourth quarter of 2008, and is beginning to realize the benefits resulting from the operating efficiencies and cost reduction synergies. As previously disclosed, the annualized revenue from these four acquisitions is estimated at $110 to $120 million, and the segment profit on an annual basis is estimated at $25 to $30 million. The Company expects that these four acquisitions will contribute approximately $70 to $75 million in revenue and $5 to $6 million in segment profit in 2008 to Bowne's consolidated operating results. We had previously estimated that these acquisitions would contribute approximately $80 million to $85 million in revenue and $9 million to $11 million in segment profit in 2008 to Bowne's operating results. The reduced 2008 contributions are primarily due to lower overall capital markets activity and a slight delay in completing certain integration activities.
-- to reflect the estimated impact of additional reductions in workforce that was implemented during the fourth quarter of 2008. As previously noted, the Company made an additional reduction in its workforce and eliminated approximately 330 positions as part of its ongoing efforts to streamline its operations and realize operating efficiencies, as well as in response to the continued downturn in overall capital markets activity. The annual cost savings as a result of these workforce reductions is expected to be approximately $21 to $23 million; the 2008 benefit to segment profit is estimated at approximately $1.0 million. This cost reduction initiative will result in fourth quarter pre-tax restructuring charges of approximately $4.0 million to $6.0 million.
The Company notes that forward-looking statements of future performance made in this release are based upon current expectations and are subject to factors that could cause actual results to differ materially from those suggested here, including demand for and acceptance of the Company's services, new technological developments, competition and general economic or market conditions, particularly in the domestic and international capital markets.
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