Pitney Bowes Inc. 2011 Q1 Form 10-Q Summary
Business Context and Reporting Period
Pitney Bowes provides equipment, supplies, software, financing, rentals, support services, and business services for managing physical and digital communications. The filing covers the unaudited three months ended March 31, 2011, compared with the three months ended March 31, 2010. Operations are organized into Small & Medium Business Solutions and Enterprise Business Solutions, comprising seven reporting segments.
Financial Performance and Key Metrics
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Total revenue | $1,323 million | $1,348 million | Down 2% |
| Income from continuing operations | $92.8 million | $86.8 million | Up 7% |
| Net income attributable to common stockholders | $86.3 million | $79.0 million | Up 9% |
| Diluted EPS | $0.42 | $0.38 | Up $0.04 |
| Income from continuing operations EPS | $0.43 | $0.40 | Up $0.03 |
| EBIT | $251 million | $272 million | Down 8% |
| Cash flow from operations | $296.8 million | $301.6 million | Down 2% |
| Capital expenditures | $34.7 million | $28.4 million | Up $6.3 million |
| Dividends paid to common stockholders | $75.4 million | $75.6 million | Approximately flat |
Revenue mix shifted toward software and equipment sales, while recurring and service-related categories declined. Software revenue increased 19%, equipment sales increased 1%, support services declined 1%, business services declined 4%, supplies declined 3%, financing declined 5%, and rentals declined 8%.
Income from continuing operations before taxes was $134.2 million versus $160.0 million. The effective tax rate decreased to 30.9% from 45.8%, including a $9 million benefit from the favorable conclusion of a foreign tax examination. Net income benefited from the lower tax rate despite lower revenue and EBIT.
Calculated margins were approximately as follows: total EBIT margin of 19.0% versus 20.2%, pretax continuing-operations margin of 10.1% versus 11.9%, continuing-operations net margin of 7.0% versus 6.4%, and net income margin of 6.5% versus 5.9%.
Segment and Operating Changes
- Small & Medium Business Solutions revenue declined 4% to $680 million and EBIT declined 2% to $203 million. North America Mailing revenue declined 5%, primarily from lower financing, rental, supplies, and service revenue.
- Enterprise Business Solutions revenue was essentially flat at $643 million, while EBIT declined 27% to $48 million.
- Production Mail revenue increased 5%, but EBIT declined 40% because of investments in the Volly digital mail service, product-mix changes, and production-print investments.
- Software revenue increased 18% in the segment, with EBIT increasing 46% to $6 million.
- Mail Services revenue declined 3% and EBIT declined 59%, partly because of the February fire at the Dallas mail presort facility.
- SG&A declined 3% to $430 million, and research and development declined 15% to $34.8 million, reflecting cost-reduction initiatives and the completion of Connect+ development.
Cash Flow, Debt, Liquidity, and Capitalization
Cash and cash equivalents increased to $652.1 million at March 31, 2011 from $484.4 million at December 31, 2010. Operating cash flow was supported by collections and reductions in accounts receivable and finance receivables, as well as the timing of tax payments and refunds. These benefits were partly offset by $29.7 million of restructuring payments and a $79.4 million reduction in accounts payable and accrued liabilities.
Investing activities used $53.4 million, including $34.7 million of capital expenditures and $11.1 million of net investment purchases. Financing activities used $79.6 million, including dividends and $7.7 million of net debt repayment.
Long-term debt was $4.24 billion at March 31, 2011, with no significant change from year-end. Total debt, including current obligations and accrued amounts as presented in the financial-instrument disclosure, had a carrying value of approximately $4.27 billion and a fair value of approximately $4.41 billion. Commercial paper outstanding was $42 million at a weighted-average interest rate of 0.25%. The company had a $1.25 billion committed credit facility expiring in 2013, which was undrawn.
The company reported stockholders’ deficit of $25.1 million, compared with a deficit of $96.6 million at December 31, 2010. The board increased the share-repurchase authorization to $150 million, but no shares were repurchased during the quarter.
Material Changes Versus the Prior Comparable Period
- Total revenue declined 2%, driven primarily by lower rentals, financing, business services, supplies, and support services.
- EBIT declined 8%, reflecting revenue pressure, weaker Enterprise Business Solutions profitability, the Dallas facility fire, and investments in digital and production-print initiatives.
- Net income increased 9% and diluted EPS increased to $0.42, primarily because the effective tax rate fell substantially.
- Operating cash flow was broadly stable, while financing cash use declined materially because the prior-year period included $122 million of commercial-paper repayment.
- Finance receivables declined to $2.50 billion from $2.57 billion at year-end, consistent with lower equipment sales and collections exceeding new financing.
- Comprehensive income increased to $145.6 million from $53.2 million, primarily due to favorable foreign-currency translation adjustments.
Outlook, Commentary, Risks, and Unusual Items
Management described the economic environment as uncertain, particularly for small businesses. Recurring revenue streams, including financing, rental, and supplies revenue, were under pressure and are expected to recover more slowly than equipment sales. Management does not expect total mail volumes to return to prior peak levels and expects the revenue mix to continue shifting toward enterprise, software, digital, and hybrid communications solutions.
The 2009 transformation program is expected to continue through 2012, reduce approximately 10% of company positions, and incur total pretax costs of $300 million to $350 million. Cumulative charges reached $277 million through March 31, 2011, including $27 million recorded in the quarter. Management is targeting annualized pretax benefits of $250 million to $300 million by 2012, net of system and related investments.
A February fire destroyed the company’s largest mail presort facility in Dallas. Management estimated a negative first-quarter impact of approximately $7 million to both revenue and EBIT. The replacement facility was expected to be operational in the second quarter, and the company received a $15 million advance on insurance proceeds early in the second quarter. Japan-related disaster impacts were described as minimal, although supply-chain disruptions remained a potential risk.
In April 2011, the company entered into $450 million of interest-rate swaps that effectively convert the fixed-rate payments on its 4.875% notes due in 2014 into variable-rate payments based on three-month LIBOR plus 305 basis points. Existing $400 million swaps convert fixed-rate payments on notes due in 2012 into variable rates.
Key risks include declining physical mail volumes, economic weakness, customer credit risk, interest-rate and foreign-currency movements, execution of the transformation program, potential asset impairments, tax examinations, pension and retiree medical costs, litigation, intellectual-property claims, privacy and regulatory changes, information-system interruptions, supplier disruptions, and natural disasters.
Tax authorities continue to examine multiple periods and jurisdictions. The company stated that unrecognized tax benefits could decrease by up to one-third during the following 12 months, but the resolution of tax matters could materially affect results, financial position, or cash flows. The filing also discloses pending litigation, including securities litigation and remaining claims involving the Imagitas DriverSource program; management expects to prevail but notes that litigation outcomes are inherently uncertain.
Important Facts for Investors to Verify
- Whether software growth and enterprise-oriented offerings can offset continued declines in rentals, financing, supplies, and physical mail volumes.
- The timing and cost of rebuilding the Dallas presort facility, the amount and timing of insurance recoveries, and the facility’s operating performance after reopening.
- Actual restructuring costs, workforce reductions, cash payments, and realization of the targeted $250 million to $300 million annualized benefits.
- Changes in finance-receivable balances, delinquencies, charge-offs, and allowance adequacy as equipment sales and the leasing portfolio decline.
- Exposure to higher interest rates following the April 2011 swaps and the company’s ability to refinance or manage approximately $4.27 billion of debt.
- Developments in IRS and international tax examinations, including potential changes to tax reserves and unrecognized tax benefits.
- Outcomes of pending litigation and any related effect on financial position, cash flow, or business operations.
- Whether cash generation, the undrawn credit facility, commercial-paper access, and debt-market access remain sufficient to fund dividends, pensions, restructuring, customer financing, acquisitions, and other capital needs.