PITNEY BOWES INC quarterly report, Q2 FY2009

Pitney Bowes Inc. — Form 10-Q Summary

Reporting period: Quarter and six months ended June 30, 2009. The unaudited results cover Pitney Bowes’ Mailstream Solutions and Mailstream Services businesses, including mailing equipment, software, supplies, rentals, financing, support, management, mail, and marketing services.

Financial performance and position

Metric	Q2 2009	Q2 2008	Six months 2009	Six months 2008
Total revenue	$1.378 billion	$1.588 billion	$2.758 billion	$3.162 billion
Income from continuing operations	$116.7 million	$136.1 million	$223.0 million	$263.9 million
Pitney Bowes net income	$117.3 million	$128.5 million	$221.7 million	$247.6 million
Diluted EPS	$0.57	$0.61	$1.07	$1.17
Net cash from operating activities	Not separately provided	Not separately provided	$483.4 million	$470.4 million

Revenue declined 13% year over year in both the quarter and first six months. Management attributed the decline primarily to weak economic conditions, delayed customer capital spending, lower mail activity, and unfavorable foreign currency translation.
Q2 income from continuing operations attributable to common stockholders was $112.2 million, or $0.54 per diluted share, versus $131.3 million, or $0.63 per diluted share, in the prior year.
Q2 pretax income was $179.3 million, representing an approximately 13.0% pretax margin, compared with $206.5 million and an approximately 13.0% margin in 2008. Net income margin was approximately 8.5%, compared with 8.1%.
Segment EBIT was $278.8 million in Q2, down 16% from $331.4 million; EBIT margin declined to approximately 20.2% from 20.9%.
Mailstream Solutions revenue fell 15% and EBIT fell 19%. Mailstream Services revenue fell 8%, but EBIT increased 9%, supported by Mail Services growth and cost reductions.
Cash and cash equivalents were $445.3 million at June 30, 2009, versus $376.7 million at December 31, 2008. Total assets were $8.568 billion.
Long-term debt was $4.209 billion, while notes payable and the current portion of long-term obligations were $292.9 million. Management reported a $178.6 million reduction in debt during the first six months.
The company had $134 million of commercial paper outstanding and an undrawn $1.5 billion committed credit facility expiring in 2011. A $150 million tranche of 8.55% notes was due September 15, 2009.
Stockholders’ deficit improved to $30.3 million at June 30, 2009 from $187.9 million at year-end 2008, but remained negative.
Dividends declared were $0.36 per common share in Q2 and $0.72 per share for the first six months.

Cash flow and capital allocation

Operating cash flow increased 3% to $483.4 million, despite lower earnings. Benefits included lower finance receivables and accounts receivable, reflecting lower new business and strong collections.
Investing cash flow used $89.5 million, principally for $90.2 million of capital expenditures. No acquisitions occurred in the first six months of 2009.
Financing cash flow used $331.2 million, including a $476.1 million reduction in notes payable, $148.6 million of common dividends, and proceeds of $297.5 million from long-term debt issuance.
The company made no share repurchases in Q2 2009; approximately $73.4 million remained available under the repurchase program at June 30.

Material changes versus the prior comparable period

All major revenue sources declined in Q2: equipment sales fell 17%, supplies 19%, software 20%, rentals 16%, financing 12%, support services 8%, and business services 9%.
International Mailing was particularly weak, with revenue down 28% and EBIT down 47%, reflecting foreign currency effects, economic weakness, and an unfavorable comparison with a $7.5 million legal settlement recognized in 2008.
Mail Services was a relative bright spot: revenue increased 3% and EBIT increased 36%.
SG&A expense declined $73.4 million in Q2 and $126.4 million year to date, primarily from cost-reduction initiatives and currency benefits.
No restructuring charges or asset impairments were recorded in 2009 through June 30, compared with $18.8 million in Q2 2008 and $35.9 million in the first six months of 2008. The remaining restructuring liability was $92.0 million, principally expected to be paid by year-end.
The six-month effective tax rate increased to 37.7% from 35.6%, partly because of a $12.0 million write-off of deferred tax assets related to expired out-of-the-money stock options and vested stock units.
Discontinued operations contributed a $5.1 million after-tax gain in Q2 and a $7.7 million gain for the first six months, versus losses in the comparable 2008 periods. The 2009 gains primarily reflected releases of reserves and a bankruptcy settlement related to the former Capital Services business.

Guidance, outlook, risks, and unusual items

Management did not provide specific numerical earnings or revenue guidance in the filing.
Management expects difficult conditions in mail-intensive industries to continue, with longer sales cycles, delayed capital purchases, and continued pressure on high-margin financing, rental, and supplies revenue.
The company expects a greater revenue mix from smaller, fully featured systems and a lower mix from larger system sales. Reported 2009 results are expected to remain pressured by the stronger U.S. dollar and higher pension costs.
Management intends to continue cost controls, productivity initiatives, a shift toward a more variable cost structure, and evaluation of additional operating opportunities.
In March 2009, the company issued $300 million of 6.25% notes due 2019. It also entered into interest-rate swaps totaling $100 million in June and an additional $300 million in July to convert portions of 2012 fixed-rate debt to variable rates.
Foreign exchange contracts produced a $34.5 million Q2 loss in SG&A and a $35.6 million loss for the first six months. Net derivative liabilities were $27.3 million at June 30.
Key risks include economic weakness, customer credit risk, interest rates, foreign currency movements, postal regulation, alternative communications, product development and acceptance, outsourcing execution, pension and retiree medical costs, tax audits, information systems disruptions, privacy laws, intellectual property claims, and litigation.
Imagitas faces ten purported class actions alleging violations of the federal Drivers Privacy Protection Act. The company expects to prevail, but an adverse outcome could materially affect financial position, results, or cash flows.
The IRS and other tax authorities continue examining prior years. The company has recorded reserves for uncertain tax positions, but resolution could materially affect results, financial position, or cash flows.
Management stated that disclosure controls and procedures were effective as of June 30, 2009, with no material change in internal control over financial reporting during the quarter.

Important facts for investors to verify

Whether revenue declines and customer delays continued beyond Q2 2009, particularly in International Mailing, equipment, software, rentals, and financing.
The sustainability of operating cash flow, including the contribution from lower finance receivables and accounts receivable rather than underlying growth.
Debt maturities, commercial paper access, refinancing requirements, and the company’s ability to fund the $150 million September 2009 note repayment.
Progress and cash cost of the remaining $92.0 million restructuring liability.
Potential exposure from IRS and international tax examinations and related uncertain tax reserves.
The status and potential damages or operating restrictions associated with the Imagitas litigation.
The effect of pension funding needs, foreign exchange losses, interest-rate swaps, and continued currency volatility.
Whether the company can maintain its dividend and liquidity profile while operating with negative parent-company stockholders’ equity and substantial debt.