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| PBI > SEC Filings for PBI > Form 10-K on 26-Feb-2009 | All Recent SEC Filings |
26-Feb-2009
Annual Report
Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) contains statements that are forward-looking. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially because of factors discussed in "Forward-Looking Statements" and elsewhere in this report.
Overview
Revenue grew 2% in 2008 to $6.3 billion, of which acquisitions contributed 3%.
Income from continuing operations was $447.5 million in 2008 compared with $361.2 million in 2007 and diluted earnings per share from continuing operations was $2.13 compared with $1.63 in 2007. Diluted earnings per share from continuing operations was reduced by restructuring charges and asset impairment charges of 69 cents and 87 cents, in 2008 and 2007, respectively. In 2008, diluted earnings per share from continuing operations also included positive tax adjustments of 4 cents related primarily to deferred tax assets associated with certain U.S. leasing transactions. In 2007, diluted earnings per share from continuing operations was also reduced by 5 cents for the purchase accounting alignment of MapInfo, and 16 cents for tax adjustments related principally to a valuation allowance for net operating losses outside the U.S.
Despite volatile economic conditions, particularly in the second half of 2008, certain of our business segments produced solid results, including both revenue and EBIT growth at International Mailing, Mail Services and Marketing Services. In addition, International Mailing, worldwide Production Mail, and Marketing Services improved their EBIT margins as well. These strong performances were offset by revenue declines at U.S. Mailing due to lower equipment sales due in part from the prior year stimulus from sales of shape-based kits, lower financing and rental revenues. Also, declines in worldwide Production Mail were due to the effects of a slowdown in U.S. sales as large enterprises curtailed large-ticket capital expenditures due to ongoing credit constraints and global economic uncertainty.
In late 2007, we announced a plan to lower our cost structure, accelerate efforts to improve operational efficiencies, enhance our customer experience, and to transition our product line. On completion of this program, which continued throughout 2008, we reduced our global workforce by roughly eight percent and improved margins in many of our business segments.
In addition, we generated $990 million in cash from operations during 2008.
See "Results of Operations" for 2008, 2007 and 2006 for a more detailed discussion of our results of operations.
Outlook
Our business model and the actions we have taken to significantly reduce costs and streamline our operations, will help mitigate, but do not eliminate the effects of prolonged global economic weakness and unanticipated currency fluctuations. Two external factors in particular, the strengthening of the U.S. dollar and the Japanese yen last year and the significant increase in pension costs related to recent changes in capital markets and other assumptions, will negatively impact 2009 reported results.
We expect our mix of revenue to continue to change, with a greater percentage of revenue coming from diversified revenue streams associated with fully featured smaller systems and a smaller percentage from larger system sales. In addition, we expect to derive further synergies from our recent acquisitions. We will continue to remain focused on enhancing our productivity and to allocate capital in order to optimize our returns.
Business segment revenue
The following table shows revenue in 2008 and 2007 by business segment.
Prior year results have been reclassified to conform to the current year presentation. Refer to Note 18 to the Consolidated Financial Statements for further detail on these changes.
% contribution
(Dollars in millions) 2008 2007 % change from acquisitions
------- ------- ---------- -------------------
Revenue:
U.S. Mailing $ 2,207 $ 2,364 (7 )% 0 %
International Mailing 1,133 1,070 6 % 1 %
Production Mail 616 623 (1 )% 0 %
Software 400 326 23 % 20 %
- ----- - ----- --- ------ ------ ------------
Mailstream Solutions 4,356 4,383 (1 )% 2 %
- ----- - ----- --- ------ ------ ------------
Management Services 1,172 1,135 3 % 6 %
Mail Services 542 441 23 % 10 %
Marketing Services 192 171 12 % 5 %
- ----- - ----- --- ------ ------ ------------
Mailstream Services 1,906 1,747 9 % 7 %
- ----- - ----- --- ------ ------ ------------
Total Revenue $ 6,262 $ 6,130 2 % 3 %
- ----- - ----- --- ------ ------ ------------
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Mailstream Solutions revenue decreased 1% to $4.4 billion. Within Mailstream Solutions:
U.S. Mailing's revenue decreased 7% due to lower equipment placements, rental revenue, and lower financing revenue. The lower equipment revenues were driven in part by the prior year benefits from the sale of mailing equipment shape-based upgrade kits and by customer buying decisions influenced by uncertainty created by weak economic conditions. International Mailing's revenue grew by 6% and benefited 2% from favorable foreign currency translation and 1% from acquisitions. Revenue growth benefited from strong growth in France, Germany, Norway and other parts of Europe as well as in Latin America; and continued growth in supplies. Worldwide revenue for Production Mail decreased 1% due to lower equipment sales in the U.S., parts of Europe and Latin America as economic uncertainty slowed large-ticket capital expenditures by many large enterprises worldwide. This decrease was partly offset by continued strong demand in the U.K. and France for high-speed, intelligent inserting systems. Software revenue increased 23% from prior year, driven by the positive impact of acquisitions of 20%. Software sales increased outside of the U.S., but declined within the U.S. driven by the economic uncertainty, which has resulted in fewer large-ticket licensing deals than in the prior year as customers assess the overall business environment.
Mailstream Services revenue grew 9% to $1.9 billion. Within Mailstream Services:
Management Services revenue grew 3% driven by acquisitions, which contributed 6% to segment revenue growth. The segment's revenue growth was partially offset by lower print and transaction volumes for some customers, especially in the U.S. financial services sector. Mail Services revenue grew 23% due to continued growth in presort and international mail services of 14% and acquisitions, which contributed 10% to segment revenue growth. Marketing Services revenue grew 12% driven primarily by higher volumes in our mover-source program, partially offset by the company's planned phased exit from the motor vehicle registration services program.
Business segment earnings before interest and taxes (EBIT)
We use EBIT as a measure of our segment profitability.
Refer to the reconciliation of segment amounts to income from continuing operations before income taxes and minority interest in Note 18 to the Consolidated Financial Statements.
The following table shows EBIT in 2008 and 2007 by business segment.
Prior year results have been reclassified to conform to the current year presentation. Refer to Note 18 to the Consolidated Financial Statements for further detail on these changes.
(Dollars in millions) 2008 2007 % change
------- ------- ---------
EBIT
U.S. Mailing $ 896 $ 965 (7 )%
International Mailing 185 162 14 %
Production Mail 81 74 10 %
Software 28 37 (23 )%
- ----- - ----- -- ------
Mailstream Solutions 1,190 1,238 (4 )%
- ----- - ----- -- ------
Management Services 70 76 (8 )%
Mail Services 69 57 22 %
Marketing Services 16 9 76 %
- ----- - ----- -- ------
Mailstream Services 155 142 9 %
- ----- - ----- -- ------
Total EBIT $ 1,345 $ 1,380 (3 )%
- ----- - ----- -- ------
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Mailstream Solutions EBIT decreased 4% to $1.2 billion. Within Mailstream Solutions:
U.S. Mailing's EBIT decreased 7% principally due to the lower revenue growth, but was partly offset by positive impacts of our ongoing actions to reduce costs and streamline operations. International Mailing's EBIT grew 14% as improved EBIT margins resulted from the Company's actions over the last two years to reduce costs through the outsourcing of manufacturing and the consolidation of back office operations. Production Mail's EBIT increased 10% due to ongoing actions to reduce administrative costs and improve gross margins in anticipation of a slowing capital investment environment. Software's EBIT decreased 23% primarily due to the lower revenues in the U.S., product mix and the planned investments in the expansion of the Company's distribution channel and globalization of its research and development infrastructure.
Mailstream Services EBIT increased 9% to $155 million. Within Mailstream Services:
Management Services EBIT decreased 8% due to weakness in the Company's management services businesses outside the U.S., particularly in the U.K. and Germany. These decreases were partially offset by actions taken to reduce the fixed cost structure of its U.S. operations. Mail Services EBIT increased 22% as a result of operating leverage from an increase in mail volume and increased operating efficiency, partly offset by the integration costs associated with acquisitions in the U.S. and U.K. Marketing Services EBIT increased by 76% driven by higher volumes in the Company's mover-source program and its phased exit from the motor vehicle registration services program.
Revenue by source
(Dollars in millions) 2008 2007 % change
------- ------- ----------
Equipment sales $ 1,252 $ 1,336 (6 )%
Supplies 392 393 0 %
Software 424 346 23 %
Rentals 728 739 (1 )%
Financing 773 790 (2 )%
Support services 769 761 1 %
Business services 1,924 1,765 9 %
- ----- - ----- --- ------
Total revenue $ 6,262 $ 6,130 2 %
- ----- - ----- --- ------
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Equipment sales revenue decreased 6% compared to the prior year. Lower sales of equipment in U.S. Mailing were primarily due to the postal rate case in 2007, which resulted in incremental sales of mailing equipment shape-based upgrade kits during that period and pulled sales forward from 2008, weakening global economic conditions, and product shift toward smaller, fully featured postage machines. International sales revenue, excluding the positive impact from foreign currency of 2% and acquisitions of 2%, increased 2% principally due to a postal rate change in the first quarter of 2008 in France, combined with higher equipment placements throughout Europe. Foreign currency translation contributed an overall favorable impact of 1% to equipment sales revenue.
Supplies revenue in 2008 was flat compared to the prior year. The decline of supplies revenue in the U.S was due to lower volumes, offset by an increase in supplies revenue in Europe as our customers continue to migrate to digital technology. Foreign currency translation contributed 1% to supplies revenue.
Rentals revenue decreased 1% compared to the prior year. Favorable foreign currency translation of 1% and higher demand in France were offset by lower revenue in the U.S., as our customers continue to downsize to smaller, fully featured machines.
Financing revenue decreased 2% compared to the prior year. Lower equipment sales have resulted in a corresponding decline in the U.S. lease portfolio.
Support services revenue increased 1% from the prior year primarily due to the favorable impact of foreign currency translation of 1%. Renewals and pricing increases offset the impact of customers down-sizing their equipment.
Business services revenue increased 9% from the prior year, of which acquisitions contributed 7%. The additional growth was driven by higher revenues in Mail Services and Marketing Services, partly offset by lower transaction volumes in Management Services.
Costs of revenue
Percentage of Revenue
--------------------------
(Dollars in millions) 2008 2007 2008 2007
------- ------- ----------- -----------
Cost of equipment sales $ 663 $ 697 53.0 % 52.2 %
Cost of supplies $ 104 $ 107 26.5 % 27.1 %
Cost of software $ 101 $ 82 23.9 % 23.7 %
Cost of rentals $ 154 $ 171 21.1 % 23.2 %
Cost of support services $ 448 $ 433 58.3 % 56.9 %
Cost of business services $ 1,508 $ 1,381 78.4 % 78.2 %
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Cost of equipment sales as a percentage of revenue increased to 53.0% in 2008 compared with 52.2% in the prior year, primarily due to the increase in mix of lower margin equipment sales outside the U.S. and the prior year sales of high margin upgrade kits.
Cost of supplies as a percentage of revenue decreased to 26.5% in 2008 compared with 27.1% in the prior year. This variance is driven by a change in the mix of business.
Cost of software as a percentage of revenue increased to 23.9% in 2008 compared with 23.7% in the prior year primarily due to a change in the mix of business.
Cost of rentals as a percentage of revenue decreased to 21.1% in 2008 compared with 23.2% in the prior year primarily due to lower depreciation costs related to the transition of our product line.
Cost of support services as a percentage of revenue increased to 58.3% in 2008 compared with 56.9% in the prior year. Improvements in our Production Mail segment due to the impact of our transition initiatives were more than offset by higher service costs in our U.S. and International Mailing businesses.
Cost of business services as a percentage of revenue was 78.4% in 2008 compared with 78.2% in the prior year. For Mail Services, continued integration costs associated with the current year acquisitions of a multi-site presort operation in the U.S. and U.K. were more than offset by the successful integration of other recently acquired sites and productivity improvements.
Selling, general and administrative expenses
Percentage of Revenue
--------------------------
(Dollars in millions) 2008 2007 2008 2007
------- ------- ----------- -----------
$ 1,948 $ 1,907 31.1 % 31.1 %
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Selling, general and administrative expenses, as a percentage of total revenue, remained flat at 31.1%. The benefits gained from our transition initiatives were offset by lower revenue growth and a shift in the mix of our business as well as higher credit loss expenses in the U.S. Software, which is continuing to become a larger portion of our overall business, has a relatively higher selling, general and administrative expense ratio.
(Dollars in millions) 2008 2007 % change
----- ----- ----------
$ 206 $ 186 11 %
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Research and development expenses increased $20 million, or 11%, as we continue to invest in developing new technologies, enhancing our products, and expanding our offshore development capabilities. R&D expenses as a percentage of total revenue increased to 3.3% in 2008 from 3.0% in 2007.
Net interest expense
(Dollars in millions) 2008 2007 % change
----- ----- ---------
$ 216 $ 242 (11 )%
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Net interest expense decreased $25 million or 11%, from prior year due to lower average interest rates during the year. Our variable and fixed rate debt mix, after adjusting for the effect of interest rate swaps, was 22% and 78%, respectively, at December 31, 2008.
We do not allocate interest costs to our business segments.
Income taxes / effective tax rate
2008 2007
------ ----
34.3 % 42.4 %
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The effective tax rate declined 8.1% in 2008 primarily as a result of a $54 million tax charge in 2007 related principally to a valuation allowance for certain deferred tax assets and tax rate changes outside the U.S.
Minority interest (preferred stock dividends of subsidiaries)
(Dollars in millions) 2008 2007 % change
----- ----- ---------
$ 21 $ 19 8 %
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Minority interest includes dividends paid to preferred stockholders in subsidiary companies. In August 2008, we redeemed 100% of the outstanding Cumulative Preferred Stock issued previously by a subsidiary company for $10 million. This redemption resulted in a net loss of $1.8 million accounting for the year over year increase.
Discontinued operations
(Dollars in millions) 2008 2007
----- -----
Revenue $ - $ -
Pretax income $ - $ -
Net income $ (28 ) $ 6
- --- -- --
Total discontinued operations, net of tax $ (28 ) $ 6
- --- -- --
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Net loss in 2008 includes accruals of tax and interest on uncertain tax positions. 2007 includes a gain of $11.3 million from uncertain tax positions, net of an interest accrual for uncertain tax positions of $5.8 million. See Note 2 to the Consolidated Financial Statements for further discussion and details of discontinued operations.
Business segment revenue
The following table shows revenue in 2007 and 2006 by business segment.
Results have been reclassified to conform to the current year presentation. Refer to Note 18 to the Consolidated Financial Statements for further detail on these changes.
% contribution
(Dollars in millions) 2007 2006 % change from acquisitions
------- ------- ---------- -------------------
Revenue:
U.S. Mailing $ 2,364 $ 2,362 0 % 1 %
International Mailing 1,070 1,013 6 % 0 %
Production Mail 623 596 5 % 2 %
Software 326 182 79 % 31 %
- ----- - ----- --- ------ ------ ------------
Mailstream Solutions 4,383 4,153 6 % 3 %
- ----- - ----- --- ------ ------ ------------
Management Services 1,135 1,074 6 % 3 %
Mail Services 441 358 23 % 4 %
Marketing Services 171 145 18 % 14 %
- ----- - ----- --- ------ ------ ------------
Mailstream Services 1,747 1,577 11 % 5 %
- ----- - ----- --- ------ ------ ------------
Total Revenue $ 6,130 $ 5,730 7 % 4 %
- ----- - ----- --- ------ ------ ------------
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Mailstream Solutions revenue increased 6% to $4.4 billion. Within Mailstream Solutions:
U.S. Mailing's revenue remained flat. Revenue benefited from growth in supplies, payment solutions, and the sale of equipment related to shape-based rating. However, results were unfavorably impacted by lower equipment sales due to the wind-down of meter migration and weak economic conditions. International Mailing's revenue grew by 6%, including favorable foreign currency translation of 8%. The segment's results were negatively impacted by lower sales and rentals in Europe as delays in postal liberalization across Europe affected customer purchases. Worldwide revenue for Production Mail grew by 5%, primarily driven by favorable foreign currency of 3% and acquisitions as higher equipment placements in the U.S. were offset by lower sales in Europe. Software's revenue grew by 79% driven by continued strong worldwide demand for our software solutions, the acquisition of MapInfo, and favorable foreign currency translation of 4%.
Mailstream Services revenue increased 11% to $1.7 billion. Within Mailstream Services:
Management Services revenue increased by 6% due to the acquisition of Asterion SAS and favorable foreign currency translation of 2%. The segment's revenue growth was negatively impacted by weakness in our legal solutions vertical as well as print contracts in 2006 that did not repeat in 2007. Mail Services revenue increased by 23% due to continued growth in presort and cross-border mail services. Marketing Services revenue increased by 18% driven primarily by acquisitions. Revenue growth for this segment was negatively affected by lower revenue from our motor vehicle registration services program.
Business segment earnings before interest and taxes (EBIT)
We use EBIT as a measure of our segment profitability.
Refer to the reconciliation of segment amounts to income from continuing operations before income taxes and minority interest in Note 18 to the Consolidated Financial Statements.
Results have been reclassified to conform to the current year presentation. Refer to Note 18 to the Consolidated Financial Statements for further detail on these changes.
(Dollars in millions) 2007 2006 % change
------- ------- ---------
EBIT
U.S. Mailing $ 965 $ 950 2 %
International Mailing 162 179 (10 )%
Production Mail 74 69 9 %
Software 37 30 22 %
- ----- - ----- -- ------
Mailstream Solutions 1,238 1,228 1 %
- ----- - ----- -- ------
Management Services 76 83 (9 )%
Mail Services 57 37 53 %
Marketing Services 9 20 (55 )%
- ----- - ----- -- ------
Mailstream Services 142 140 1 %
- ----- - ----- -- ------
Total EBIT $ 1,380 $ 1,368 1 %
- ----- - ----- -- ------
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Mailstream Solutions EBIT increased 1% to $1.2 billion. Within Mailstream Solutions:
U.S. Mailing's EBIT grew 2% due to the increase in mix of higher margin revenue from payment solutions and supplies as well as our continued focus on controlling operating expenses. International Mailing EBIT decreased 10%. The segment's profitability was adversely impacted by lower equipment sales and rentals in Europe, and incremental costs in 2007 related to back office operations, including the outsourcing of our European order and financial processing. Production Mail EBIT increased 9% driven primarily by revenue growth and net legal recoveries of approximately $4 million in Europe. Software EBIT increased 22%, driven by revenue growth partially offset by integration costs for the MapInfo acquisition.
Mailstream Services EBIT increased 1% to $142 million. Within Mailstream Services:
Management Services EBIT decreased 9% due to continued weakness in our legal solutions vertical. Mail Services EBIT grew by 53% driven by revenue growth, successful integration of acquired sites, and increased operating efficiencies. Marketing Services EBIT decreased 55%, principally due to lower revenue in our motor vehicle registration services program.
Revenue by source
(Dollars in millions) 2007 2006 % change
------- ------- ----------
Equipment sales $ 1,336 $ 1,373 (3 )%
Supplies 393 340 16 %
Software 346 202 71 %
Rentals 739 785 (6 )%
Financing 790 725 9 %
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