Pitney Bowes Inc. Form 10-Q Summary
Business context and reporting period
Pitney Bowes is a global provider of software, hardware and services supporting physical, digital and hybrid communications. The filing covers the quarter and six months ended June 30, 2013. Operations are organized into Small & Medium Business Solutions and Enterprise Business Solutions, comprising seven reporting segments. The interim financial statements are unaudited.
Key financial metrics
| Metric | Three months ended June 30, 2013 | Three months ended June 30, 2012 | Six months ended June 30, 2013 | Six months ended June 30, 2012 |
|---|---|---|---|---|
| Total revenue | $1.158 billion | $1.166 billion | $2.276 billion | $2.336 billion |
| Income from continuing operations | $15 million | $108 million | $91 million | $253 million |
| Net income attributable to Pitney Bowes | $(9) million | $100 million | $58 million | $258 million |
| Diluted EPS | $(0.05) | $0.50 | $0.29 | $1.29 |
| Cash flow from operating activities | Not separately provided | Not separately provided | $279 million | $340 million |
| Gross margin, based on reported cost of revenue | 50.6% | 52.1% | 50.5% | 52.4% |
Revenue was pressured by declining physical mail volumes, fewer installed meters, lower software licensing activity and international economic weakness. Equipment sales increased 9% in the quarter, primarily from large production print and inserting equipment installations. Production Mail revenue increased 18%, while Mail Services revenue increased 10%. Software revenue declined 8%, Marketing Services declined 17%, and North America Mailing declined 5% in the quarter.
Total segment EBIT was $249 million in the quarter and $465 million year to date, compared with $254 million and $517 million, respectively, in the comparable 2012 periods. Segment EBIT margins were approximately 21.5% for the quarter and 20.4% year to date.
At June 30, 2013, cash and cash equivalents were $609 million and short-term investments were $23 million, compared with combined cash and short-term investments of $950 million at December 31, 2012. Total debt was $3.654 billion, all classified as long-term debt at quarter-end, compared with $4.017 billion at year-end 2012. The company had a $1.0 billion committed credit facility, no commercial paper outstanding at quarter-end, and stated that available liquidity and operating cash flow were sufficient for current needs.
Material changes versus the prior comparable period
- Second-quarter revenue decreased 1%; six-month revenue decreased 3%.
- Second-quarter income from continuing operations attributable to common stockholders fell to $11 million from $103 million, primarily because of a $98 million goodwill impairment charge and $20 million of restructuring and asset-impairment charges.
- Gross margin declined because of a higher mix of lower-margin equipment sales, reduced supplies margins, and margin pressure in business services.
- Operating cash flow declined $61 million year to date, partly because of debt tender-offer costs, higher income-tax payments and higher payments of accounts payable and accrued liabilities.
- The company issued $425 million of 6.7% senior notes due 2043, tendered $405 million of notes due 2014 through 2016, and redeemed $375 million of notes due 2013.
- Goodwill decreased to $2.013 billion from $2.136 billion, primarily due to the $98 million impairment charge and foreign-currency effects.
- Common dividends paid year to date were $113 million, or $0.5625 per share, versus $150 million, or $0.75 per share, in the prior-year period.
Guidance, outlook, risks and unusual items
Management expects restructuring charges of approximately $75 million to $125 million and annualized pretax benefits of $100 million to $125 million, net of investments, with the benefit run rate expected by 2015. Most remaining restructuring payments are expected through 2014, with some extending beyond that period.
Management expects improvement in equipment sales and recurring revenue streams during the second half of 2013, supported by Connect+ communications systems and SendSuite Live shipping solutions. It expects growth in Mail Services, ecommerce initiatives and digital and hybrid communication solutions. The company also expects the business mix to shift toward enterprise products and solutions, which generally carry lower margins than traditional mailing operations.
During the quarter, the company agreed to sell its International Management Services operations, with one transaction closing July 5, 2013 and another expected by the end of the third quarter. On July 30, 2013, it agreed to sell North America Management Services to an affiliate of Apollo Global Management for $400 million in cash, subject to adjustments and customary closing conditions. Closing was expected in the fourth quarter, with proceeds primarily intended for debt reduction. Management expects an $80 million to $100 million charge, or $0.40 to $0.50 per share, when the business is reported as discontinued operations, primarily due to tax effects.
Important risks include declining physical mail volumes, customer adoption of alternative communications, economic weakness, pricing pressure, execution of restructuring and divestitures, access to capital, customer credit risk, pension and healthcare costs, interest rates, foreign exchange, tax audits, regulatory changes, information-system disruptions, supplier and outsourcing dependencies, litigation and intellectual-property claims.
Other unusual items included a $25 million net loss from early debt redemption, a $98 million goodwill impairment for North America Management Services, $20 million of restructuring and asset-impairment charges, and a $24 million after-tax loss from discontinued operations for the six-month period.
Important facts for investors to verify
- Completion, final proceeds and post-closing adjustments for the North America and International Management Services divestitures.
- The expected $80 million to $100 million discontinued-operations charge and the use of divestiture proceeds to reduce debt.
- Execution of the restructuring program, total charges incurred, cash payments and delivery of the targeted $100 million to $125 million annualized savings.
- Trends in physical mail volumes, installed meters, software licensing, equipment mix and recurring revenue.
- Goodwill valuation assumptions for remaining reporting units, particularly North America Management Services before its sale.
- Liquidity after debt maturities, dividends, restructuring payments and anticipated divestiture-related costs, including the effect of reduced credit ratings.
- Customer credit quality and finance-receivable performance; net finance receivables were $2.083 billion at June 30, 2013.
- Potential tax effects from pending IRS examinations and other uncertain tax positions.