Pitney Bowes Inc. — FY2010 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2010, with fourth-quarter comparative data. Pitney Bowes provides mail-processing equipment and integrated physical, digital and hybrid communications solutions through seven reporting segments in Small & Medium Business Solutions and Enterprise Business Solutions. Approximately 30% of revenue and 35% of pretax income came from outside the United States.
Key financial metrics
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Total revenue | $5.425 billion | $5.569 billion | (3%) |
| Income from continuing operations | $328.8 million | $453.0 million | (27%) |
| Net income | $292.4 million | $423.4 million | (31%) |
| Diluted EPS | $1.41 | $2.04 | (31%) |
| Continuing-operations diluted EPS | $1.50 | $2.08 | (28%) |
| Gross profit | $2.747 billion | $2.831 billion | (3%) |
| Gross margin | 50.6% | 50.8% | Down 0.2 points |
| Continuing-operations net margin | 6.1% | 8.1% | Down 2.0 points |
| Cash flow from operations | $952.1 million | $824.1 million | Up $128.0 million |
| Capital expenditures | $119.8 million | $166.7 million | Down $47.0 million |
| Total debt | $4.293 billion | $4.440 billion | Down $146.9 million |
| Cash and cash equivalents | $484.4 million | $412.7 million | Up $71.6 million |
Revenue by source reflected a mixed recovery: equipment sales increased 2% to $1.030 billion and software increased 5% to $382.4 million, while supplies declined 5%, rentals 7%, financing 8% and business services 3%. Segment EBIT was $1.117 billion, compared with $1.138 billion in 2009. Enterprise Business Solutions EBIT increased 7% to $284.7 million, offsetting a 4% decline in Small & Medium Business Solutions EBIT to $832.2 million.
Financing liquidity included $50 million of commercial paper outstanding at year-end and an undrawn $1.25 billion committed credit facility expiring in 2013. Long-term debt was $4.239 billion; no long-term notes mature in 2011. Contractual obligations totaled $7.130 billion, including $4.175 billion of long-term debt and $1.681 billion of interest payments.
Material changes versus the prior comparable period
- Revenue declined 3%, primarily because lower recurring revenue from financing, rentals, supplies and business services more than offset higher equipment and software sales.
- Profitability weakened materially as restructuring and asset-impairment charges rose to $182.3 million from $48.7 million, and the effective tax rate increased to 38.5% from 34.6%.
- Management Services revenue fell 6% following the loss of several large postal contracts, but EBIT increased 28% through cost alignment and productivity initiatives.
- Mail Services EBIT declined 23%, including a $16 million pretax adverse impact from a one-time out-of-period adjustment correcting estimated unbilled international mail revenue.
- Operating cash flow increased to $952 million, aided by a $180 million decrease in finance receivables and a $43 million decrease in accounts receivable. Cash was allocated to debt reduction, dividends, share repurchases and acquisitions.
- The company repurchased 4.7 million shares for $100 million and paid $301.5 million in common-stock dividends. The quarterly dividend was increased to $0.37 per share in February 2011.
- Pitney Bowes acquired Portrait Software for approximately $65 million and completed smaller acquisitions totaling approximately $12 million.
Guidance, outlook, risks and unusual items
Management did not provide specific 2011 revenue or earnings guidance in the filing. It reported some positive business signs in the second half of 2010 but continued uncertainty, particularly among small businesses. Recurring, high-margin revenue streams were expected to recover more slowly than equipment sales, and management did not expect total mail volumes to return to prior peak levels.
The Strategic Transformation program is expected to cost $300 million to $350 million pretax, primarily for severance and benefits, with targeted annualized pretax benefits of $250 million to $300 million by 2012. Approximately 2,000 employee terminations had occurred by year-end 2010, and cumulative program charges were approximately $250 million. Remaining restructuring liabilities were expected to be funded primarily from operating cash flow.
- Principal business risks include declining physical mail volumes, postal and banking regulation, economic weakness, customer credit losses, access to commercial paper and capital markets, interest rates and foreign exchange.
- Additional risks include execution of transformation and outsourcing initiatives, information-system disruption, privacy and data-security compliance, supplier concentration, intellectual-property claims and government-contracting requirements.
- The company had approximately $531.8 million of unrecognized tax benefits and remained subject to multiple tax examinations. Resolution of tax matters could materially affect earnings, cash flow and financial position.
- Pension and postretirement obligations remained significant. Planned 2011 pension contributions were approximately $145 million, and total pension funded status was a deficit of approximately $337.7 million at year-end 2010.
- Pending litigation included Driver’s Privacy Protection Act claims involving Imagitas and a securities class action concerning alleged missed financial projections. Management expected to prevail, but acknowledged that adverse outcomes could be material.
- Discontinued operations produced an $18.1 million net loss in 2010, primarily from interest on uncertain tax positions and additional tax charges.
Most important facts for investors to verify
- Whether financing, rental and supplies revenue stabilizes as equipment placements and mail volumes evolve.
- Whether the Strategic Transformation program delivers the targeted $250 million to $300 million annualized pretax benefits by 2012 without impairing revenue or service quality.
- The sustainability of operating cash flow, particularly as finance receivables decline and restructuring payments continue.
- Debt refinancing needs beginning in 2012, including $550 million of scheduled long-term debt maturities, and continued access to commercial paper markets.
- Changes in credit losses, delinquency trends and residual values across the approximately $2.6 billion net finance-receivables portfolio.
- Potential cash and earnings effects from tax audits, unrecognized tax benefits, pension funding and pending litigation.
- Progress in shifting revenue toward enterprise products, software and other digital or hybrid communications offerings as physical mail volumes decline.