PITNEY BOWES INC quarterly report, Q2 FY2010

Pitney Bowes Inc. — 2010 Q2 Form 10-Q Summary

Business context and reporting period

Pitney Bowes provides mail-processing equipment, supplies, software, financing, rentals, support services and business services. Operations are organized into Small & Medium Business Solutions and Enterprise Business Solutions, comprising seven reporting segments.

This unaudited Form 10-Q covers the quarter and six months ended June 30, 2010, with comparisons to the corresponding 2009 periods.

Financial performance and position

Metric	Three months ended June 30	Six months ended June 30
Total revenue	$1.297 billion, down 6%	$2.645 billion, down 4%
Income from continuing operations	$68.6 million, down 41%	$155.4 million, down 30%
Pitney Bowes net income	$61.4 million, down 48%	$140.4 million, down 37%
Diluted EPS	$0.30, versus $0.57	$0.68, versus $1.07
Operating cash flow	$118 million, versus $207 million	$423.8 million, versus $483.4 million

Second-quarter net margin was approximately 4.7%, compared with approximately 8.5% in the prior-year quarter. Six-month net margin was approximately 5.3%, compared with approximately 8.0% in 2009.
Segment EBIT was $246.1 million in the second quarter, or approximately 19.0% of revenue, compared with $278.8 million, or approximately 20.2%, in 2009. Six-month segment EBIT was $518.4 million, versus $544.4 million.
Second-quarter revenue declined across six of seven segments. Marketing Services revenue increased 7%; Software declined 2%, while U.S. Mailing declined 8%, Production Mail declined 7%, Management Services declined 6% and Mail Services declined 9%.
Revenue by source in the quarter included equipment sales of $230.2 million, financing of $156.6 million, rentals of $150.1 million, support services of $175.3 million and business services of $421.8 million.
As of June 30, cash and cash equivalents were $459.5 million and short-term investments were $21.8 million. Total current assets were $2.950 billion against current liabilities of $2.416 billion.
Long-term debt was $4.233 billion, and notes payable plus the current portion of long-term obligations was $149.1 million. Commercial paper outstanding was approximately $143 million.
The company had an undrawn $1.25 billion committed credit facility maturing in 2013 and reported continued access to the commercial paper market.
Stockholders’ deficit was $120.7 million at June 30, 2010, compared with $3.2 million at December 31, 2009, primarily reflecting accumulated other comprehensive losses.
Common dividends declared were $0.365 per share in the quarter and $0.73 per share for the six months, compared with $0.36 and $0.72, respectively, in 2009.

Material changes versus the prior comparable period

Revenue weakness reflected reduced equipment placements, lower mail volumes, delayed customer capital spending, fewer installed meters, declining finance and rental portfolios, and lower business-service transaction volumes.
Management Services EBIT increased 37% and Software EBIT increased 11% in the quarter despite lower revenue, aided by productivity programs, operating integration and variable-cost initiatives.
Mail Services EBIT fell 75% to $5.4 million. A one-time out-of-period adjustment reduced second-quarter revenue by approximately $21 million and EBIT by approximately $16 million, primarily correcting estimates of earned but unbilled International Mail Services revenue for periods from 2007 through the first quarter of 2010.
Restructuring charges and asset impairments were $48.5 million in the second quarter and $69.2 million for the six months; there were no comparable charges in 2009.
Operating cash flow declined because of higher restructuring and tax payments. Cash generation benefited from decreases in accounts receivable and finance receivables, while inventory increased by $31.8 million.
Capital expenditures declined to $58.6 million for the six months from $90.2 million in 2009. Financing cash outflows included $77.3 million of reduced notes payable, $151.4 million of common dividends and $9.1 million of dividends to noncontrolling interests.
The six-month effective tax rate increased to 41.1% from 37.7%, including a $9.1 million non-cash charge related to U.S. health care reform and a $3.3 million tax expense related to prior-year non-U.S. leveraged-lease tax matters.

Guidance, outlook, risks and unusual items

Management stated that economic and business conditions remained weak and deteriorated during the second quarter, particularly among Small & Medium Business customers. The company no longer expected business conditions to improve as significantly in the second half of 2010 as previously anticipated.
Management expects a continuing shift toward smaller, fully featured systems and diversified recurring revenue streams, with a lower proportion of larger-system sales. It does not expect mail volumes to return to prior peak levels.
The 2009 transformation program is expected to continue through 2012, reduce positions by up to 10% and cost $250 million to $350 million pretax. Management targets annualized pretax benefits of at least $150 million to $200 million by 2012, net of system and related investments. Cumulative charges were $136.5 million through June 30, 2010, with approximately 1,300 terminations completed.
The company recorded $4.7 million of additional intangible-asset impairments in 2010. A small second-quarter acquisition had an anticipated purchase price of $11.5 million, including $10.9 million of identified intangible assets.
In July 2010, the company announced a planned third-quarter acquisition of Portrait Software PLC, subject to completion conditions and regulatory approvals.
Key risks include weak customer demand and mail volumes, customer credit risk, interest-rate and foreign-currency movements, postal and banking regulation, execution of restructuring and outsourcing programs, information-system interruptions, intellectual-property claims, supplier constraints, pension and health-care costs, tax examinations and acquisition integration.
The company is subject to tax examinations, including IRS examinations of 2001–2004 and 2005–2008 periods. Management stated that reserves were established but that resolutions could materially affect results, financial position or cash flows.
Pending litigation includes Driver’s Privacy Protection Act class actions involving Imagitas and a securities class action alleging missed financial projections. Management believes the matters are without merit or expects to prevail, but acknowledges litigation uncertainty and potential material effects.
On August 5, 2010, one credit-rating service lowered the company’s senior unsecured rating from A to BBB+. Management stated that derivative collateral requirements remained unchanged.
Management concluded that disclosure controls and procedures were effective as of June 30, 2010, and reported no material changes in internal control over financial reporting during the quarter.

Most important facts for investors to verify

Whether revenue declines in equipment, financing, rentals, supplies and business services stabilize or continue as customers delay purchases and mail volumes remain below historical peaks.
The timing, cash cost and realized savings from the transformation program, including the remaining restructuring reserves and planned workforce reductions.
The effect of the $21 million Mail Services revenue adjustment and whether similar estimation or billing issues recur.
Debt maturities, commercial paper dependence, credit ratings, interest-rate exposure and continued availability of the $1.25 billion credit facility.
Trends in finance receivables, credit losses, customer collections and the company’s ability to fund customer financing while maintaining dividends.
Potential tax liabilities from IRS and international examinations, uncertain tax positions and the prior-period leveraged-lease adjustment.
Completion, financing, regulatory approval and integration risks related to the planned Portrait Software acquisition.
Potential exposure from pending litigation, pension funding requirements and future asset impairments.