PITNEY BOWES INC quarterly report, Q3 FY2009

Pitney Bowes Inc. 2009 Q3 Form 10-Q Summary

Business context and reporting period

Pitney Bowes provides integrated mail and document management solutions through Mailstream Solutions and Mailstream Services. This unaudited Form 10-Q covers the three and nine months ended September 30, 2009, compared with the corresponding 2008 periods.

Financial performance and financial position

Metric	Q3 2009	Q3 2008	9M 2009	9M 2008
Total revenue	$1.357 billion	$1.548 billion	$4.115 billion	$4.710 billion
Income from continuing operations	$110.3 million	$106.8 million	$333.3 million	$370.7 million
Pitney Bowes net income	$103.2 million	$98.2 million	$324.9 million	$345.8 million
Diluted EPS	$0.50	$0.47	$1.57	$1.64
Cash flow from operations	Not provided for the quarter	Not provided for the quarter	$732.4 million	$756.1 million

Q3 revenue declined 12%; nine-month revenue declined 13%. Foreign currency translation reduced Q3 revenue by approximately 2% and nine-month revenue by approximately 5%.
Q3 income from continuing operations attributable to common stockholders was $105.7 million, or $0.51 diluted EPS, versus $100.3 million and $0.48 in the prior year.
Approximate Q3 continuing-operations pretax margin was 12.4%, compared with 11.4% in 2008. Net income margin was approximately 7.6%, compared with 6.8%.
Segment EBIT was $277.0 million, down 16%, producing an approximate 20.4% EBIT margin versus 21.2% in the prior year. Mailstream Solutions EBIT fell 21%, while Mailstream Services EBIT increased 26%.
At September 30, 2009, cash and cash equivalents were $441.1 million and short-term investments were $17.7 million. Net finance receivables totaled approximately $2.736 billion.
Long-term debt was $4.219 billion, notes payable and the current portion of long-term obligations were $170.8 million, and commercial paper outstanding was $165 million. The company also had an undrawn $1.5 billion committed credit facility expiring in 2011.
Net cash increased $64.5 million during the first nine months. Investing used $153.6 million, including $126.5 million of capital expenditures; financing used $525.9 million, including $223.2 million of common dividends.
Common stockholders’ equity increased from a deficit of $187.9 million at December 31, 2008 to positive equity of $77.5 million at September 30, 2009, largely reflecting retained earnings and accumulated other comprehensive income changes.

Material changes versus the prior comparable period

Revenue declined across every major source: equipment sales decreased 24%, supplies 14%, software 13%, rentals 10%, financing 12%, support services 8%, and business services 7% in Q3.
Customers delayed capital purchases, extended existing leases, downsized to smaller systems, and reduced mail and transaction volumes. These factors pressured high-margin equipment, financing, rental, supplies, and software revenue.
Cost reductions lowered nine-month SG&A by $173.7 million, although SG&A as a percentage of revenue increased to 32.0% from 31.7% because of lower revenue and higher pension costs.
Q3 restructuring charges were $12.8 million pretax, including $10.0 million of severance and benefit costs and $2.8 million of other exit costs. The prior-year quarter included substantially higher restructuring and impairment charges, which contributed to the year-over-year EPS improvement.
The effective tax rate decreased to 34.3% in Q3 from 39.4%; the nine-month rate was broadly unchanged at 36.6% versus 36.8%. The nine-month 2009 rate included a $12.2 million noncash write-off of deferred tax assets.
Debt management actions included issuing $300 million of 6.25% notes due 2019, repaying $150 million of 8.55% notes, reducing commercial paper, and entering interest-rate swaps on $400 million of notes due 2012.
No acquisitions occurred during the first nine months of 2009, compared with $69.0 million of acquisition spending in the prior-year period. No common shares were repurchased in 2009 through September 30.

Guidance, outlook, commentary, risks and unusual items

Management expected economic conditions, long sales cycles, weak mail-intensive industries, lower mail volumes, currency effects, and higher pension costs to continue negatively affecting 2009 results.
The company initiated a strategic transformation program and targeted annualized pretax benefits of at least $150 million to $200 million, net of investments, with a full benefit run rate targeted by 2012. Future costs could be significant and will be recorded as actions are approved and implemented.
Management stated that operating cash flow, cash and liquid investments, commercial paper capacity, the credit facility, and debt markets should be sufficient to fund capital needs, customer financing, restructuring payments, taxes, interest, dividends, pensions, acquisitions, and potential share repurchases.
Pension funding expectations were revised to up to $18 million each for U.S. and foreign plans in 2009. Future funding remains sensitive to investment returns and discount rates.
Discontinued operations generated a $5.3 million net gain for the first nine months, including $6.0 million after tax from a bankruptcy settlement and $6.7 million after tax from the release of indemnity reserves. Q3 discontinued operations recorded a $2.4 million loss related to interest on uncertain tax positions.
Tax authorities continue to examine multiple years and jurisdictions. The company is disputing an IRS summons for certain workpapers and states that resolution of tax uncertainties could materially affect results, financial position, or cash flow.
Legal matters include ten purported class actions involving the discontinued Imagitas DriverSource program and a securities class action filed October 28, 2009. The company believes the claims are without merit, but adverse outcomes could be material.
Key risks include economic weakness, customer credit risk, interest rates, foreign exchange, pension costs, restructuring execution and asset impairments, postal and banking regulation, privacy and intellectual property claims, information-system interruptions, and tax adjustments.
In October 2009, after quarter-end, a subsidiary issued $300 million of perpetual voting preferred stock and redeemed $344 million of existing variable-term preferred stock. These were nonrecognized subsequent events at September 30.

Important facts for investors to verify

Whether the $150 million to $200 million strategic transformation benefit target is achieved, and the amount and timing of associated restructuring costs.
Whether declining equipment, financing, rental, supplies, and software revenue stabilizes as economic conditions and customer capital spending recover.
Debt maturities, commercial paper dependence, interest-rate swap exposure, and the availability and conditions of the $1.5 billion credit facility.
Changes in finance-receivable credit losses, customer credit quality, and cash conversion as new business remains weak.
Outcomes of the IRS examinations, tax-workpaper dispute, Imagitas litigation, and the securities class action.
Pension funding requirements and sensitivity to year-end asset returns and discount rates.
The impact of the 2011 revenue-recognition guidance, which the company was still evaluating.