PITNEY BOWES INC quarterly report, Q2 FY2012

Pitney Bowes Inc. Form 10-Q Summary

Reporting period: Quarter and six months ended June 30, 2012. The unaudited filing covers a global provider of mailing, software, equipment, financing, and physical and digital communication services. The company reports through Small & Medium Business Solutions and Enterprise Business Solutions.

Financial Performance and Position

Metric	Q2 2012	Q2 2011	Six months 2012	Six months 2011
Total revenue	$1.246 billion	$1.314 billion	$2.501 billion	$2.638 billion
Income from continuing operations	$104.2 million	$106.2 million	$248.1 million	$198.9 million
Net income attributable to Pitney Bowes	$99.6 million	$100.9 million	$258.3 million	$187.2 million
Diluted EPS	$0.50	$0.49	$1.29	$0.92
Operating cash flow	Not separately provided	Not separately provided	$370.2 million	$449.4 million

Second-quarter revenue declined 5%, with equipment sales down 8%, supplies down 10%, rentals down 7%, financing down 10%, support services down 3%, and business services down 3%. Software declined 1%.
Six-month revenue also declined 5%, while continuing-operations income attributable to common stockholders increased to $239.0 million from $189.8 million, primarily reflecting lower expenses, reduced restructuring charges, and favorable tax items.
Approximate consolidated gross margin was 49.4% in Q2 2012 versus 50.3% in Q2 2011; the six-month margin was approximately 49.7% versus 49.6%.
Q2 income from continuing operations before taxes was $156.5 million, or approximately 12.6% of revenue. Six-month pretax income was $315.2 million, or approximately 12.6% of revenue.
SG&A declined 10% in the quarter and 7% year to date, reflecting prior restructuring actions, productivity initiatives, and lower depreciation and amortization.
Cash flow from operations was $370.2 million, down $79.2 million year over year. The decline primarily reflected higher tax payments, including taxes related to the leveraged-lease sale, and lower collections of receivables.
Cash and cash equivalents plus short-term investments totaled $538.3 million at June 30, 2012, compared with $869.2 million at December 31, 2011. Cash and equivalents alone were $499.8 million.
Debt carrying value was approximately $3.681 billion, including $375 million of current notes payable and current long-term obligations and $3.306 billion of long-term debt. Estimated debt fair value was $3.783 billion.
The company redeemed $400 million of notes due in October 2012 and prepaid a $150 million term loan. No commercial paper was outstanding at quarter-end; the company had a $1.0 billion committed credit facility that was undrawn.
Total assets were $7.345 billion and total liabilities were $6.967 billion. Pitney Bowes stockholders’ equity improved from a deficit of $39.0 million at year-end 2011 to $81.3 million at June 30, 2012.

Material Changes Versus the Prior Comparable Period

Small & Medium Business Solutions revenue fell 8% in Q2 and 7% year to date; related EBIT fell 6% and 4%, respectively, primarily due to lower mailing volumes, equipment demand, and installed meter counts.
Enterprise Business Solutions revenue fell 3% in Q2 and year to date, but EBIT increased 11% in Q2 and 21% year to date. Results benefited from improved Mail Services performance following the prior-year Dallas facility fire and related insurance recoveries.
Mail Services revenue increased 5% in Q2 and 4% year to date, although prior-year results were reduced by the Dallas fire. Excluding fire-related effects, current-period revenue decreased 2% in both periods.
Mail Services EBIT increased to $27.1 million in Q2 from $9.8 million and to $59.0 million year to date from $20.1 million. Current-period EBIT included insurance recoveries of $4 million in Q2 and $11 million year to date.
Restructuring charges and asset impairments declined to $1.1 million in both Q2 and the first six months, compared with $5.0 million and $31.0 million, respectively, in 2011.
The six-month effective tax rate declined to 21.3% from 32.2%. The 2012 rate included a $17 million tax benefit related to the leveraged-lease asset sale and $22 million of benefits from concluded tax examinations.
Foreign currency translation reduced Q2 revenue by approximately 2% and contributed to a $53.3 million decline in other comprehensive income for the quarter.

Outlook, Commentary, Risks, and Unusual Items

Management expects continued pressure on Small & Medium Business Solutions from declining physical mail volumes and alternative communications. It expects the rate of equipment-sales decline to lessen, partly because of Connect+ systems, but recurring revenue declines are expected to lag equipment declines.
Management anticipates growth in selected Enterprise Business Solutions businesses, including software licensing, Mail Services, and solutions integrating physical and digital communications. Digitally based products and services are not expected to have a significant revenue impact in 2012.
The company plans to streamline operations, increase cost flexibility, and shift its revenue mix toward enterprise-related products and solutions.
Unusual items included a $6 million loss on expired forward-starting interest-rate swaps, a $4 million make-whole payment partly offset by a $2 million gain on terminated swaps, an after-tax benefit associated with the leveraged-lease sale, and insurance proceeds related to the Dallas fire.
The company contributed $113 million to pension plans through June 30, including $95 million of special contributions, and expected approximately $10 million of additional contributions to each of its U.S. and foreign pension plans during the remainder of 2012.
Key risks include declining mail volumes, customer spending delays, economic weakness including Europe, credit losses, interest-rate and foreign-exchange volatility, pension obligations, tax examinations, regulatory changes, privacy and intellectual-property claims, systems interruptions, supplier and outsourcing issues, and execution of new products and acquisitions.
A securities class action remains pending concerning alleged missed financial projections in 2007. Management does not believe a loss is reasonably possible, but notes that an adverse outcome could materially affect financial position, results, or cash flows.
Management stated that disclosure controls and procedures were effective as of June 30, 2012, and that there were no material changes in internal control over financial reporting.

Important Facts for Investors to Verify

Whether declining equipment, supplies, rental, and financing revenue stabilizes as Connect+ and digital offerings expand.
The sustainability of earnings growth given the contribution from tax benefits, insurance recoveries, lower restructuring charges, and other non-recurring items.
Liquidity after the $550 million of debt repayments, pension contributions, dividends, and the decline in cash and investments.
Future refinancing needs, credit-rating changes, commercial-paper access, and compliance with the 3.5-to-1.0 adjusted leverage covenant.
Credit quality and delinquency trends in the finance receivables portfolio; approximately 1.7% of the portfolio was more than 90 days past due at June 30, 2012.
Potential cash requirements from pensions, restructuring reserves, tax uncertainties, and the pending securities litigation.