Pitney Bowes Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited results for the three months ended March 31, 2013. Pitney Bowes provides hardware, software, financing and services supporting physical, digital and hybrid communications through Small & Medium Business Solutions and Enterprise Business Solutions.
Key financial metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Total revenue | $1,167 million | $1,220 million | (4%) |
| Income from continuing operations | $74 million | $146 million | (49%) |
| Net income attributable to Pitney Bowes | $68 million | $159 million | (57%) |
| Diluted EPS | $0.33 | $0.79 | (58%) |
| Operating cash flow | $132 million | $71 million | +$61 million |
| Segment EBIT | $214 million | $264 million | (19%) |
Continuing-operations net margin was approximately 6.4%, compared with 11.9% in the prior-year quarter. Segment EBIT margin was approximately 18.4%, compared with 21.6%. Total cost of revenue increased to 51.5% of revenue from 48.8%, reflecting weaker mix and margin pressure.
- Revenue declines included software of 17%, financing of 8%, support services of 5%, rentals of 3%, supplies of 3%, business services of 2% and equipment sales of 2%.
- Small & Medium Business Solutions revenue declined 5% and EBIT declined 13% to $172 million.
- Enterprise Business Solutions revenue declined 4% and EBIT declined 36% to $42 million. Software EBIT fell 54%, while Mail Services revenue increased 4% but EBIT fell 43% due partly to ecommerce start-up costs and the absence of a prior-year insurance benefit.
- SG&A declined 7% to $377 million, primarily from lower salaries and benefits.
- The effective tax rate was 27.1%, versus 9.6% in Q1 2012. The prior-year rate benefited from $17 million related to leveraged-lease asset sales and $22 million from resolved tax examinations; Q1 2013 included approximately $4 million from retroactive U.S. tax legislation.
Liquidity, debt and cash flow
- Cash and cash equivalents were $910 million at March 31, 2013; cash plus short-term investments was $947 million, compared with $950 million at December 31, 2012.
- Total debt was $4.033 billion, including $375 million current debt and $3.658 billion long-term debt. The filing reports estimated debt fair value of $4.229 billion.
- The company issued $425 million of 6.7% notes due 2043 and used net proceeds of $412 million to fund a tender offer for $405 million of notes due 2014–2016. The transaction generated a $25 million net loss and is expected to increase interest expense by approximately $10 million over the remainder of 2013.
- No commercial paper was outstanding at quarter-end. A $1.0 billion committed credit facility expires in April 2016 and had not been drawn.
- Operating cash flow of $132 million benefited from receivable collections, lower pension contributions and lower restructuring payments compared with 2012. Capital expenditures were $39 million, dividends paid were $75 million and cash decreased by $4 million during the quarter.
- A $375 million debt maturity was scheduled for June 2013 and management expected to fund it with available cash.
Material changes, outlook and unusual items
- Management cited declining physical mail volumes, customer spending caution, uncertain economic conditions, constrained public-sector spending, pricing pressure and lower equipment placements as major revenue and margin pressures.
- The company exited its International Mail Services operations; U.S. operations were sold during Q1 2013. Discontinued operations produced a $2 million loss in Q1 2013; Q1 2012 included $18 million of income, including significant tax benefits. IMS revenue was $20 million in Q1 2013 versus $36 million in Q1 2012.
- On April 29, 2013, management announced a cost-reduction and operational-improvement program expected to generate $75 million to $125 million of restructuring charges, primarily cash-related, beginning in Q2. Annualized pretax benefits of $100 million to $125 million, net of investments, are expected by 2015.
- Management expects continued pressure in Small & Medium Business Solutions, potential improvement in equipment trends from Connect+ and SendSuite Live, growth in Mail Services and ecommerce initiatives, and continued investment in digital, hybrid and ecommerce capabilities. Newer enterprise revenue streams are expected to carry lower margins than traditional Mailing products.
- The board declared a Q2 2013 dividend of $0.1875 per share. No share repurchases occurred during the quarter; $50 million remained under the repurchase authorization.
- Foreign currency translation reduced revenue by less than 1% and reduced comprehensive income through a $42 million translation loss.
Risks and contingencies
Material risks include ongoing physical-mail volume declines, substitution by digital communications, customer credit risk, access to capital and credit-rating changes, interest-rate and foreign-currency exposure, pension and healthcare costs, tax examinations and reserves, postal and banking regulation, cybersecurity or information-system interruptions, supplier and outsourcing dependencies, intellectual-property claims, economic weakness and execution of restructuring, ecommerce and software initiatives. Management stated that there were no material changes to the risk factors in the 2012 Annual Report.
The company reported that disclosure controls and procedures were effective as of March 31, 2013, with no material changes in internal control over financial reporting. A previously disclosed securities class action was dismissed in March 2013, and the plaintiff did not appeal.
Important facts for investors to verify
- Whether the announced $75 million–$125 million restructuring program achieves the projected $100 million–$125 million annualized pretax benefit by 2015 and the amount and timing of related charges.
- Liquidity after the June 2013 $375 million debt maturity, including cash usage and future refinancing needs.
- Whether revenue and EBIT stabilize in North America Mailing, Software, Management Services and Marketing Services.
- The effect of the new 6.7% debt and retired notes on future interest expense and leverage.
- Trends in finance-receivable delinquencies, credit-loss allowances and customer credit quality.
- The sustainability of dividends and any future share repurchases relative to cash flow, debt obligations and pension or restructuring requirements.