Pitney Bowes Inc. — Q2 2011 Form 10-Q Summary
Business context and reporting period
Pitney Bowes provides mailing equipment, supplies, software, financing, rentals, support services and business services across seven reporting segments grouped into Small & Medium Business Solutions and Enterprise Business Solutions. The filing covers the unaudited three and six months ended June 30, 2011, compared with the corresponding 2010 periods.
Key financial metrics
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|
| Total revenue | $1,314 million | $1,297 million | $2,638 million | $2,645 million |
| Income from continuing operations | $106 million | $69 million | $199 million | $155 million |
| Net income attributable to Pitney Bowes | $101 million | $61 million | $187 million | $140 million |
| Diluted EPS | $0.49 | $0.30 | $0.92 | $0.68 |
| Operating cash flow | Not separately provided | Not separately provided | $449 million | $424 million |
- Q2 revenue increased 1%; six-month revenue was essentially flat.
- Q2 net margin was approximately 7.7%, compared with 4.7% in the prior-year quarter. Six-month net margin was approximately 7.1%, compared with 5.3% in 2010.
- Q2 income from continuing operations before taxes was $159 million, versus $104 million; the corresponding six-month figures were $293 million and $264 million.
- Effective tax rates were 33.3% for Q2 2011 and 32.2% for the first six months, compared with 33.9% and 41.1%, respectively, in 2010.
- Cash and cash equivalents were $578 million at June 30, 2011, up from $484 million at December 31, 2010. Short-term investments were $46 million.
- Long-term debt was $4.240 billion at June 30, 2011. The company reported no outstanding commercial paper at quarter-end and had access to a $1.25 billion committed credit facility, undrawn and expiring in 2013.
- Total stockholders’ deficit improved to approximately $1 million from $97 million at year-end, but remained a deficit.
- Dividends declared were $0.37 per common share in Q2 and $0.74 per share for the first six months.
Revenue and segment developments
| Q2 2011 revenue source | Revenue | Year-over-year change |
|---|
| Equipment sales | $243 million | 7% increase |
| Supplies | $79 million | 2% increase |
| Software | $106 million | 20% increase |
| Rentals | $143 million | 5% decrease |
| Financing | $150 million | 4% decrease |
| Support services | $177 million | 1% increase |
| Business services | $418 million | 1% decrease |
- Enterprise Business Solutions revenue increased 4% to $645 million and EBIT increased 12% to $55 million. Software revenue increased 19%, while Production Mail revenue increased 10%.
- Small & Medium Business Solutions revenue declined 1% to $670 million, but EBIT increased 3% to $203 million. North America Mailing revenue declined 5%, while International Mailing revenue increased 13%, substantially aided by foreign currency translation.
- Total segment EBIT increased 5% to $258 million. Consolidated results also reflected $45 million of corporate expenses, $49 million of net interest expense and $5 million of restructuring and impairment charges.
Cash flow, capital allocation and liquidity
- Six-month operating cash flow was $449 million, including a $123 million special U.S. pension contribution, $52 million of restructuring payments and $140 million of cash generated from lower finance receivables.
- Investing cash outflow was $109 million, including $88 million of capital expenditures and $36 million of net investment purchases. Capital expenditures were elevated by replacement of equipment destroyed in the Dallas facility fire.
- Financing cash outflow was $253 million, including $151 million of common dividends, $50 million of debt reduction and $50 million of share repurchases.
- The company repurchased 2.1 million shares for $50 million through June 30, 2011, with approximately $100 million remaining under the authorization.
- Management stated that operating cash flow, cash and liquid investments, commercial paper capacity, the credit facility and debt markets should be sufficient for expected requirements.
Material changes versus the prior comparable period
- Profitability improved materially despite nearly flat revenue, reflecting lower restructuring charges, productivity actions, lower credit losses and favorable segment mix.
- Q2 restructuring and impairment charges fell to $5 million from $49 million. Cumulative charges under the 2009 transformation program reached $284 million through June 30, 2011; total program costs are expected to be $300 million to $350 million, with targeted annualized benefits of $250 million to $300 million by 2012.
- Recurring revenue streams weakened: six-month rental revenue declined 7% and financing revenue declined 5%, reflecting lower equipment placements, lease extensions, customer downsizing and a smaller lease portfolio.
- Software growth strengthened, supported by acquisitions, foreign currency translation and higher licensing revenue.
- Foreign currency translation contributed approximately 3% to Q2 revenue growth and materially affected international segment results.
- The Dallas mail presort facility fire reduced Q2 revenue and diluted EPS by approximately $9 million and $0.03, respectively. A replacement facility began processing mail at the end of June, and management expected capacity to recover to at least pre-fire levels in Q3.
Outlook, risks and unusual items
- Management described the worldwide economy as uncertain, particularly for small businesses, and expects recovery in rental, financing and supplies revenue to lag equipment-sales recovery.
- The company expects a continuing shift toward enterprise products and solutions and is pursuing physical, digital and hybrid communications opportunities. It does not expect total mail volumes to return to prior peak levels.
- In July 2011, the company reached IRS settlements concerning tax years 2001–2004. It expected to release approximately $50 million of tax reserves, including approximately $30 million through discontinued operations, while owing approximately $400 million of tax and interest previously paid through tax bonds. Management stated that the settlement would not affect cash.
- The company expects to contribute up to $130 million to U.S. pension plans and $25 million to foreign plans during 2011; contributions through June 30 were $127 million and $12 million, respectively.
- Key risks include economic weakness, declining physical mail volumes, customer credit losses, interest-rate and foreign-exchange movements, pension and health-care costs, execution of restructuring plans, tax examinations, regulatory changes, litigation, information-system interruptions, intellectual-property claims and supplier or operational disruptions.
- Interest-rate swaps with an aggregate notional value of $850 million converted certain fixed-rate debt payments into variable-rate payments based on LIBOR spreads, increasing exposure to future interest-rate changes.
- Management stated that disclosure controls and procedures were effective as of June 30, 2011, and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether software growth and Enterprise Business Solutions expansion can offset continuing declines in rentals, financing, supplies and physical mail volumes.
- The timing and cash cost of the 2009 transformation program, including achievement of the targeted $250 million to $300 million annualized benefits.
- The final financial and tax effects of the IRS settlements and remaining examinations for 2005–2008 and other jurisdictions.
- Recovery of Dallas mail presort operations, insurance proceeds and any continuing effects on Mail Services revenue and EBIT.
- Debt maturities, variable-rate exposure from the interest-rate swaps and continued access to commercial paper and credit markets.
- Future pension funding requirements and the effect of the company’s stockholders’ deficit and sizable leverage on capital allocation.
- Potential outcomes of pending litigation, including the securities class action and remaining Imagitas-related claims; the filing states management does not believe a loss is reasonably possible but notes litigation remains inherently unpredictable.
