PITNEY BOWES INC quarterly report, Q1 FY2012

Pitney Bowes Inc. 2012 Q1 Form 10-Q Summary

Business context and reporting period

Pitney Bowes is a global provider of software, hardware and services integrating physical and digital communications. The filing covers the unaudited three months ended March 31, 2012, compared with the three months ended March 31, 2011. Operations are reported through Small & Medium Business Solutions and Enterprise Business Solutions, comprising seven reporting segments.

Key financial metrics

Metric	Q1 2012	Q1 2011	Change
Total revenue	$1,256 million	$1,323 million	Down 5%
Income from continuing operations	$144 million	$93 million	Up 55%
Net income attributable to Pitney Bowes	$159 million	$86 million	Up 84%
Diluted EPS	$0.79	$0.42	Up $0.37
Income from continuing operations per diluted share	$0.69	$0.43	Up $0.26
Net cash from operating activities	$96 million	$297 million	Down $201 million
Cash and cash equivalents	$916 million	$652 million at March 31, 2011	Up $264 million
Cash and short-term investments	$951 million	$869 million at December 31, 2011	Up $82 million

Revenue declined across equipment sales, supplies, rentals, financing, support services and business services, while software revenue increased 5%. Total revenue declined approximately 5.1%, but income from continuing operations before taxes increased to $159 million from $134 million. The pretax margin was approximately 12.6%, compared with 10.1% in the prior-year quarter. Net income attributable to Pitney Bowes represented approximately 12.6% of revenue, compared with 6.5% in Q1 2011.

Total cost of revenue declined to $627 million from $674 million, and its percentage of revenue improved to 50.0% from 51.0%. SG&A expense declined 4%, and no restructuring or asset impairment charges were recorded in Q1 2012 versus $26 million in Q1 2011.

Segment and operating developments

Small & Medium Business Solutions revenue declined 7% to $629 million and EBIT declined 2% to $198 million. North America Mailing revenue fell 9%, primarily because customers delayed equipment purchases, extended leases and reduced mail-related spending.
Enterprise Business Solutions revenue declined 3% to $626 million, while EBIT increased 32% to $64 million.
Production Mail revenue declined 13% and EBIT declined 61%, reflecting delayed customer capital spending and lower-margin product sales.
Software revenue increased 5% and EBIT increased 94%, driven by higher U.S. licensing revenue and lower amortization expense.
Management Services revenue declined 5% and EBIT declined 37%, reflecting prior-period account contractions, terminations and pricing pressure.
Mail Services revenue increased 4% and EBIT increased 211%. The comparison benefited from the prior-year Dallas facility fire and a $7 million insurance recovery recognized in Q1 2012; excluding these items, revenue declined 1% and EBIT increased 42%.

Cash flow, debt and liquidity

Operating cash flow was $96 million, reduced by a $95 million special pension contribution, $69 million of taxes related to the leveraged lease sale and $26 million of restructuring payments.
Investing activities used $4 million, including $50 million of capital expenditures, substantially offset by $106 million of proceeds from the sale of non-U.S. leveraged lease assets.
Financing activities used $45 million, including $150 million of long-term debt repayment and $75 million of dividends, partially offset by $178 million of commercial paper borrowings.
Total debt carrying value was approximately $4.26 billion at March 31, 2012, compared with $4.23 billion at December 31, 2011; estimated fair value was $4.42 billion.
Commercial paper outstanding was $178 million at a weighted-average interest rate of 0.40%. The company prepaid a $150 million term loan scheduled to mature in the fourth quarter of 2012 and had an additional $400 million of long-term debt scheduled to mature in that quarter.
In April 2012, the company replaced its $1.25 billion committed credit facility with a four-year $1.0 billion facility. It had not drawn on the new facility as of the filing date. The facility includes a maximum adjusted leverage ratio of 3.5 to 1.0.
The company expected cash flow from operations, cash and investments, commercial paper capacity and access to capital markets to support operations, debt service, dividends, capital expenditures and customer deposits.

Material changes versus the prior comparable period

Revenue decreased 5%, led by declines in equipment sales of 9%, supplies of 8%, rentals of 10% and financing revenue of 10%.
Profitability improved despite lower revenue because of lower cost of revenue, productivity initiatives, lower credit losses, the absence of prior-year restructuring charges and favorable unusual tax and other items.
The effective tax rate declined to 9.3% from 30.9%, including $22 million of benefits from tax examinations and a $17 million tax benefit related to the leveraged lease sale.
Discontinued operations contributed $19 million after tax in Q1 2012, compared with a $2 million loss in Q1 2011, primarily from tax benefits related to the former Capital Services business.
Finance receivables, net, declined to approximately $2.31 billion from $2.36 billion at year-end 2011. Approximately 1.6% of the finance receivable portfolio was more than 90 days past due at March 31, 2012.
Stockholders’ equity improved from a deficit of $39 million at December 31, 2011 to positive equity of $91 million at March 31, 2012, primarily due to net income and other comprehensive income.

Guidance, outlook, risks and unusual items

Management expected Small & Medium Business Solutions revenue to remain challenged by declining physical mail volumes and cautious customer spending. Equipment sales were expected to improve gradually, particularly in the second half of 2012, partly due to Connect+ communications systems, although overall SMB revenue recovery was expected to lag equipment sales. Management anticipated growth in selected Enterprise Business Solutions segments from multi-year software licenses and expansion of Mail Services.

The company planned to increase investment in digital and hybrid communications solutions during the second quarter and fund those investments through expanded productivity initiatives. Management expected a greater proportion of revenue to come from enterprise-related products and solutions, while digitally based products and services were not expected to have a significant impact on 2012 revenue.

Unusual items included a $13 million after-tax gain on the leveraged lease asset sale, $7 million of insurance recoveries related to the Dallas fire, $22 million of tax examination benefits and $19 million of discontinued-operation tax benefits.
Key risks include declining physical mail volumes, customer spending delays, competition and alternative communications, customer credit losses, economic conditions, interest-rate and foreign-exchange changes, pension and healthcare costs, tax examinations, privacy and postal regulation, information-system interruptions, intellectual-property claims and litigation.
The 2009 restructuring program was substantially complete, but remaining cash payments were expected through 2014 and beyond in certain cases. The company expected operating cash flow to fund these payments.
The company reported ongoing litigation, including a securities class action, but stated that it did not believe a loss was reasonably possible based on its current understanding. Litigation outcomes remain inherently uncertain.
Management stated that disclosure controls and procedures were effective as of March 31, 2012, and that there were no material changes in internal control over financial reporting.

Important facts for investors to verify

Whether the anticipated second-half 2012 equipment recovery and Connect+ adoption offset continuing declines in physical mail volumes.
The sustainability of earnings growth excluding tax benefits, the leveraged lease gain, insurance recoveries and discontinued-operations benefits.
Liquidity and refinancing plans for the additional $400 million of debt maturing in the fourth quarter of 2012, including compliance with the new 3.5-to-1 adjusted leverage covenant.
Future pension contributions, restructuring cash payments and their effect on operating cash flow.
Trends in finance receivable balances, delinquencies, credit losses and allowance adequacy.
Performance of Software and Mail Services growth initiatives relative to declines in North America Mailing, Production Mail and Management Services.
Potential changes in tax reserves, pending litigation and regulatory matters that could materially affect results or cash flows.