Pitney Bowes Inc. — 2010 Q1 Form 10-Q Summary
Business context and reporting period
Unaudited results for the three months ended March 31, 2010, compared with the three months ended March 31, 2009. Pitney Bowes provides mail-processing equipment, supplies, software, financing, rentals, support services and business services through seven reporting segments in Mailstream Solutions and Mailstream Services.
Financial performance and liquidity
| Metric | Q1 2010 | Q1 2009 | Change |
|---|---|---|---|
| Total revenue | $1.348 billion | $1.380 billion | Down 2% |
| Income from continuing operations | $86.8 million | $106.3 million | Down 18% |
| Pitney Bowes net income | $79.0 million | $104.4 million | Down 24% |
| Diluted EPS | $0.38 | $0.50 | Down $0.12 |
| Operating cash flow | $306.1 million | $276.5 million | Up 11% |
| Segment EBIT | $272.3 million | $265.7 million | Up 2% |
Income from continuing operations before taxes was $160.0 million, implying a pretax margin of approximately 11.9%. Pitney Bowes net income margin was approximately 5.9%; continuing-operations net margin was approximately 6.4%. The effective tax rate increased to 45.8% from 40.4%.
- Revenue by source included equipment sales of $239.9 million, financing revenue of $162.8 million, rental revenue of $155.4 million, software revenue of $83.1 million and business services revenue of $441.6 million.
- Cash and cash equivalents were $476.9 million at March 31, 2010, versus $412.7 million at December 31, 2009. Short-term investments were $19.2 million.
- Total debt consisted of $4.216 billion of long-term debt and $103.5 million of notes payable and current maturities. Commercial paper outstanding was approximately $99 million.
- The company had a $1.5 billion committed credit facility, undrawn at quarter-end, supporting its commercial paper program. Management stated that operating cash flow, cash and investments, commercial paper capacity, the credit facility and debt markets should be sufficient for anticipated requirements.
- Capital expenditures were $28.4 million, and cash dividends paid to common stockholders were $75.6 million. No common shares were repurchased during the quarter.
Material changes versus the prior comparable period
- Total revenue declined 2%, despite a 3% favorable foreign-currency translation impact. Financing revenue fell 11%, rental revenue fell 8%, supplies fell 3% and business services fell 3%. Equipment sales increased 3% and software increased 4%.
- U.S. Mailing revenue declined 8% and EBIT declined 10%, primarily due to lower rental revenue and a smaller finance-receivables portfolio. International Mailing revenue declined 1%, while EBIT increased 20% through productivity and administrative-consolidation actions.
- Production Mail revenue increased 14% and EBIT increased 115%, supported by demand for high-speed inserting systems. Software revenue increased 5% and EBIT increased 66%.
- Mailstream Services revenue declined 2%, but EBIT increased 34% as cost reductions, automation and a more variable cost structure improved profitability.
- Restructuring charges and asset impairments were $20.7 million, compared with none in the prior-year quarter. The 2010 result also included a $3.1 million loss from discontinued operations, compared with a $2.6 million gain in 2009.
- The higher 2010 tax rate included a $9.1 million charge from the write-off of deferred tax assets related to U.S. health care reform. Additional non-cash tax charges related to expired out-of-the-money options and restricted stock units were $8.6 million in 2010 versus $11.1 million in 2009.
- Operating cash flow improved by $29.7 million, principally from reductions in finance receivables and accounts receivable and favorable tax-payment timing. Financing cash outflows included $122.0 million of debt reduction.
Guidance, outlook, risks and unusual items
- Management reported continued weakness in mail-intensive industries and stated that recurring, higher-margin revenue streams, including financing, rentals and supplies, remained pressured.
- The company expects revenue mix to shift toward smaller, fully featured systems and diversified revenue streams, with less reliance on larger system sales. Management does not expect total mail volumes to return to prior peak levels and expects a greater proportion of annual earnings in the second half of 2010.
- The strategic transformation program is expected to continue through 2012, reduce up to 10% of company positions and incur total pretax costs of $250 million to $350 million. Management targets annualized pretax benefits of at least $150 million to $200 million by 2012. Approximately 900 employee terminations had occurred under the program by March 31, 2010.
- Restructuring reserves at March 31, 2010 totaled $54.0 million for the 2009 program and $27.0 million for the 2007 program. Most related liabilities were expected to be paid from operating cash flow within the following twelve months or, for the older program, within nine months.
- Management identified risks from economic conditions, customer demand, postal and banking regulation, declining mail volumes, customer credit risk, interest rates, foreign exchange, execution of transformation initiatives, information-system disruptions, privacy laws, intellectual-property claims, supplier performance, tax audits, pension costs and litigation.
- The IRS was examining tax years 2001–2008, and other jurisdictions had examinations of post-1999 years. The company stated that resolution could materially affect results, financial position or cash flows.
- Pending matters included stayed Driver’s Privacy Protection Act class actions involving Imagitas and a securities class action alleging missed financial projections. Management believes the claims are without merit or expects to prevail, but noted that litigation outcomes are inherently unpredictable.
- Debt carried an investment-grade rating of A/A1 at March 31, 2010. Interest-rate swaps and foreign-exchange contracts were used for hedging, not speculation.
Most important facts for investors to verify
- Whether declines in financing, rental, supplies and other recurring revenue stabilize or continue as mail volumes and equipment placements remain weak.
- Whether the transformation program delivers the targeted $150 million to $200 million of annualized pretax benefits and whether total costs remain within the $250 million to $350 million estimate.
- The sustainability of operating cash flow, particularly as finance receivables decline and restructuring, pension, tax, dividend and debt obligations continue.
- Debt maturities, commercial paper access, interest-rate exposure and the availability of the $1.5 billion credit facility.
- The ultimate resolution and potential financial impact of IRS examinations, uncertain tax positions and pending litigation.
- The effect of the elevated 45.8% effective tax rate and any potential additional deferred-tax-asset write-offs.
- Future adoption effects of new revenue-recognition guidance scheduled to become effective January 1, 2011, unless adopted earlier.