Pitney Bowes Inc. 2011 Form 10-K Summary
Business context and reporting period
Pitney Bowes is a global provider of hardware, software and services supporting physical, digital and hybrid communications. The company reports Small & Medium Business Solutions and Enterprise Business Solutions across seven segments. This filing covers the fiscal year ended December 31, 2011; fourth-quarter information is unaudited.
Key financial metrics
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Total revenue | $5.278 billion | $5.425 billion | Down 3% |
| Income from continuing operations attributable to common stockholders | $351 million | $310 million | Up 13% |
| Diluted EPS from continuing operations | $1.73 | $1.50 | Up 15% |
| Net income attributable to Pitney Bowes | $617 million | $292 million | Up 111% |
| Diluted EPS, including discontinued operations | $3.05 | $1.41 | Up 116% |
| Cash flow from operations | $920 million | $952 million | Down 3% |
| Capital expenditures | $156 million | $120 million | Up 30% |
| Cash and short-term investments | $869 million | $515 million | Up $354 million |
| Total debt | $4.234 billion | $4.289 billion | Down $55 million |
Income from continuing operations before taxes was $414 million, compared with $535 million in 2010. The continuing-operations net margin attributable to common stockholders was approximately 6.7%, compared with approximately 5.7% in 2010; the improvement was primarily driven by lower taxes and unusual items rather than revenue growth. The effective tax rate declined to 10.8% from 38.5%.
Revenue by source included equipment sales of $986 million, software of $427 million, financing of $603 million, rentals of $564 million, support services of $707 million and business services of $1.684 billion. Software revenue increased 9%; equipment sales, supplies, rentals, financing and business services declined.
Segment revenue and EBIT were $2.669 billion and $827 million for Small & Medium Business Solutions, and $2.609 billion and $261 million for Enterprise Business Solutions. Enterprise software revenue increased 9%, while Production Mail EBIT fell 47% and Management Services EBIT fell 18%.
Material changes versus the prior comparable period
- Revenue declined 3%, reflecting lower equipment sales, supplies, rental and financing revenue, and lower business-services revenue. Foreign currency translation provided a 2% favorable revenue impact.
- Income from continuing operations improved despite lower operating income, primarily because of $90 million of tax benefits from IRS settlements and a $34 million tax benefit related to the sale of non-U.S. leveraged lease assets.
- Discontinued operations contributed a $266 million after-tax gain in 2011, including a $264 million tax benefit from IRS settlements, compared with an $18 million loss in 2010. This substantially inflated reported net income and EPS.
- The company recorded $130 million of goodwill impairment charges and $17 million of intangible-asset impairment charges, primarily related to underperforming International Mailing Services and international Management Services operations.
- A Dallas mail-presort facility fire caused estimated lost revenue of approximately $20 million. The company recognized $27 million of insurance recoveries in other income and received $42 million of insurance proceeds through year-end.
- Operating cash flow decreased modestly, while cash increased because investing and financing outflows were lower. The company paid approximately $300 million in common dividends and repurchased $100 million of common stock.
- The 2009 restructuring program was substantially completed. Cumulative pre-tax costs were approximately $385 million, with projected annualized net benefits of approximately $300 million in 2012.
Guidance, outlook, risks and unusual items
Management expected physical mail volumes to continue their gradual decline in 2012, challenging Small & Medium Business revenue. Equipment sales were expected to improve gradually, helped by Connect+ communications systems, while software licensing, production-print placements and Mail Services were expected to offset part of the decline. Digital products and services were not expected to have a significant revenue impact in 2012.
Liquidity was supported by operating cash flow, $869 million of cash and short-term investments, continued commercial-paper market access and an undrawn $1.25 billion committed credit facility. No commercial paper was outstanding at December 31, 2011. However, $550 million of debt was scheduled to mature in 2012, and management was evaluating repayment and refinancing alternatives.
Material risks include continued physical-mail volume declines, postal and banking regulation, economic weakness and customer credit losses, dependence on capital markets and commercial paper, supplier and outsourcing interruptions, privacy and cybersecurity failures, information-technology disruptions, intellectual-property claims, foreign-exchange movements, pension and retiree-benefit obligations, tax examinations and litigation.
Litigation included Imagitas Driver’s Privacy Protection Act class actions and a securities class action concerning 2007 financial projections. Management believed a loss was not reasonably possible in each matter, but acknowledged that litigation outcomes are inherently unpredictable. The company also remained subject to tax and unclaimed-property audits.
Most important facts for investors to verify
- Separate recurring operating performance from the $266 million discontinued-operations gain and the 2011 tax benefits.
- Assess whether software growth, Connect+ adoption and Enterprise Business Solutions can offset ongoing declines in mailing equipment, financing, rentals and physical mail volumes.
- Review the $130 million goodwill impairment and the approximately 13% excess of fair value over carrying value for U.S. Management Services, which may indicate sensitivity to further impairment.
- Confirm the refinancing or repayment plan for the $550 million of debt maturing in 2012 and the sustainability of dividends and share repurchases.
- Evaluate pension and postretirement funding needs, including $95 million of pension contributions made in January 2012 and expected additional 2012 contributions.
- Reconcile reported EPS and cash flow for the effects of IRS settlements, insurance recoveries, leveraged-lease transactions, restructuring payments and other unusual items.