Pitney Bowes Inc. — Form 10-Q Summary
Business context and reporting period
Pitney Bowes provides mail-processing equipment, supplies, software, financing, rentals, support services and business services through seven reporting segments grouped into Small & Medium Business Solutions and Enterprise Business Solutions. This unaudited Form 10-Q covers the three and nine months ended September 30, 2010, compared with the corresponding 2009 periods.
Key financial metrics
| Metric | Q3 2010 | Q3 2009 | 9M 2010 | 9M 2009 |
|---|---|---|---|---|
| Revenue | $1,345.7 million | $1,356.8 million | $3,991.2 million | $4,114.9 million |
| Income from continuing operations | $96.1 million | $110.3 million | $251.4 million | $333.3 million |
| Pitney Bowes net income | $88.9 million | $103.2 million | $229.4 million | $324.9 million |
| Diluted EPS from continuing operations | $0.44 | $0.51 | $1.15 | $1.54 |
| Diluted net EPS | $0.43 | $0.50 | $1.11 | $1.57 |
| Operating cash flow | $243 million | $249 million | $666.9 million | $732.4 million |
Q3 continuing-operations pretax margin was approximately 10.6%, compared with 12.4% in Q3 2009. Net income margin was approximately 6.6%, compared with 7.6%. For the nine-month period, continuing-operations pretax margin was approximately 10.2%, compared with 12.8%.
- Q3 revenue declined 1%; equipment sales and software each increased 10%, while supplies declined 7%, rentals 8%, financing 8%, support services 1% and business services 2%.
- Q3 total segment EBIT increased 1% to $279.3 million, despite lower revenue. Enterprise Business Solutions revenue increased 2% and EBIT increased 1%; Small & Medium Business Solutions revenue declined 4% while EBIT increased 1%.
- At September 30, 2010, cash and cash equivalents were $386.0 million, short-term investments were $21.4 million and total current assets were $2.85 billion.
- Notes payable and the current portion of long-term obligations were $135.7 million; long-term debt was $4.24 billion. Including current obligations, reported debt was approximately $4.38 billion.
- The company had $132 million of commercial paper outstanding and an undrawn $1.25 billion committed credit facility expiring in 2013.
- Stockholders’ deficit was $69.9 million at September 30, 2010, compared with $3.2 million at December 31, 2009.
- Capital expenditures were $90.2 million for the first nine months, compared with $126.5 million in 2009. Dividends paid to common stockholders were $227.2 million and stock repurchases were $100.0 million.
Material changes versus the prior comparable period
- Q3 net income from continuing operations fell 14% and diluted continuing-operations EPS fell from $0.51 to $0.44. The nine-month declines were 25% for net income and 25% for diluted continuing-operations EPS.
- Recurring revenue streams weakened: nine-month financing revenue declined 10%, rentals 6% and supplies 5%. Management attributed the pressure to lower prior equipment placements, reduced mail volumes, customer downsizing and economic uncertainty.
- Cost reductions and productivity initiatives improved support-service margins and helped offset some revenue pressure. Research and development expense declined $21.1 million year to date.
- Restructuring charges and asset impairments increased to $33.8 million in Q3 and $103.0 million year to date, versus $12.8 million in Q3 and year-to-date 2009.
- Operating cash flow declined 9% year to date, primarily because of lower net income and higher restructuring and tax payments. Cash declined $26.7 million during the first nine months.
- The company acquired Portrait Software plc on July 5, 2010, for $65.2 million net of cash acquired. The acquisition added $47.4 million of goodwill and contributed approximately 9% to Q3 software revenue growth; earnings impact was not material.
Guidance, outlook, risks and unusual items
- Management reported some positive signs but continued to describe the global economy, especially small-business demand, as uncertain. Recovery in rentals, financing and supplies is expected to lag recovery in equipment sales.
- Management expects a greater proportion of revenue to come from service-based and diversified offerings. It does not expect total mail volumes to return to prior peak levels.
- The 2009 transformation program is expected to continue through 2012, reduce approximately 10% of company positions and generate targeted annualized pretax benefits of at least $150 million to $200 million by 2012. Total pretax program costs are estimated at $250 million to $350 million. Approximately 1,700 terminations had occurred by September 30, 2010.
- A $21 million out-of-period adjustment reduced year-to-date Mail Services revenue and a $16 million amount reduced EBIT, primarily correcting earned-but-unbilled revenue rates for 2007 through the first quarter of 2010. Management stated the adjustment was not material to any individual prior period or anticipated 2010 results.
- Q3 diluted continuing-operations EPS included approximately $0.10 of restructuring charges. Year-to-date EPS was reduced by $0.32 for restructuring and impairments, $0.04 for health-care legislation and $0.07 for tax charges primarily related to expired out-of-the-money stock options.
- The company unwound $250 million of interest-rate swaps in August 2010 and received $31.8 million, which will reduce interest expense over the remaining term of the related notes.
- Year-to-date income tax expense included a $9.1 million deferred-tax-asset write-off related to U.S. health-care reform and $3.3 million of additional tax expense for prior non-U.S. periods. Tax examinations and uncertain tax positions could materially affect future results, cash flows or financial position.
- Key risks include economic conditions, customer credit, declining mail volumes, postal and banking regulation, interest rates, foreign exchange, execution of restructuring plans, acquisitions, information-system interruptions, intellectual-property claims, supplier performance, pension and health-care costs, and tax disputes.
- Pending legal matters include coordinated class actions involving Imagitas’ DriverSource program and a securities class action alleging missed financial projections. Management believes the matters lack merit, but adverse outcomes could be material.
Important facts for investors to verify
- Reconcile reported revenue and earnings trends with the impact of restructuring charges, tax adjustments, discontinued operations and the Mail Services out-of-period adjustment.
- Assess debt maturities, commercial-paper dependence, credit-facility availability and the company’s ability to fund dividends, restructuring, acquisitions and customer financing.
- Monitor the decline in finance receivables and recurring revenue streams, including whether equipment-sales recovery translates into rentals, supplies and financing growth.
- Evaluate whether the transformation program achieves its $150 million to $200 million annualized pretax benefit target while remaining within the $250 million to $350 million cost range.
- Review tax examinations, uncertain tax reserves and the potential effects of tax-law changes or adverse audit resolutions.
- Confirm the financial contribution and integration progress of Portrait Software and other acquisitions.