Pitney Bowes Inc. 2009 Form 10-K Summary
Business context and reporting period
Pitney Bowes provides mail processing equipment, financing, rentals, supplies, software and integrated mailstream services worldwide. Operations are organized into Mailstream Solutions and Mailstream Services, comprising seven reporting segments. This filing covers the fiscal year ended December 31, 2009; fourth-quarter revenue was $1.454 billion and fourth-quarter net income was $98.6 million.
Key financial metrics
| Metric | 2009 | 2008 | Change |
|---|---|---|---|
| Revenue | $5.569 billion | $6.262 billion | Down 11% |
| Income from continuing operations | $453.0 million | $468.2 million | Down 3% |
| Pitney Bowes Inc. net income | $423.4 million | $419.8 million | Up 1% |
| Diluted EPS | $2.04 | $2.00 | Up 2% |
| Operating cash flow | $824.1 million | $1.009 billion | Down 18% |
| Capital expenditures | $166.7 million | $237.3 million | Down 30% |
| Total debt | $4.440 billion | $4.705 billion | Down $266 million |
| Cash and cash equivalents | $412.7 million | $376.7 million | Up $36.1 million |
Net income margin was approximately 7.6%, compared with 6.7% in 2008. Continuing-operations margin was approximately 8.1%. Gross profit was $2.831 billion, or approximately 50.8% of revenue, versus $3.196 billion, or approximately 51.0%, in 2008. Segment EBIT was $1.138 billion, or approximately 20.4% of revenue, versus $1.345 billion, or 21.5%, in 2008.
- Mailstream Solutions revenue declined 13% to $3.808 billion and EBIT declined 19% to $960 million.
- Mailstream Services revenue declined 5% to $1.761 billion, while EBIT increased 11% to $178 million.
- Equipment sales declined 20%, financing revenue declined 10%, rental revenue declined 11%, and business services revenue declined 6%.
- SG&A expense decreased $170 million, or 9%, despite $14 million of higher pension costs and $9 million of higher credit-loss expense.
- Research and development expense was $182 million, or 3.3% of revenue.
- Cash dividends on common stock were $1.44 per share. The board subsequently approved a quarterly dividend of $0.365 per share, the 28th consecutive annual increase.
Material changes versus the prior comparable period
- Revenue fell primarily because of the global economic downturn, delayed customer equipment purchases, extended leases, lower mail volumes, weaker supplies usage, and unfavorable foreign-currency translation.
- Six of seven business segments experienced revenue declines. Software EBIT improved 32% through integration and productivity initiatives, while Mailstream Services improved profitability through productivity and automation.
- Restructuring and asset-impairment charges declined to $48.7 million from $200.3 million.
- The company reduced debt by approximately $242 million through cash generation and financing actions and made no common-stock repurchases in 2009. Approximately $73.4 million remained available under the repurchase authorization.
- Stockholders’ equity improved from a deficit of $286.8 million to positive equity of $13.7 million, partly reflecting reduced accumulated comprehensive losses and the year’s earnings.
- The company contributed $125 million voluntarily to defined-benefit pension plans and amended U.S. pension plans to freeze future benefit accruals after December 31, 2014.
Guidance, outlook, commentary, risks and unusual items
Management expects weak economic conditions, extended sales cycles, lower equipment demand and permanently reduced mail volumes to continue affecting results. The company expects revenue mix to shift toward smaller, fully featured systems and diversified recurring revenue streams.
A strategic transformation program is expected to continue through 2012 and may reduce positions by up to 10%. Management estimates total pretax costs of $250 million to $350 million, primarily cash severance and benefit costs, and targets annualized pretax benefits of at least $150 million to $200 million after related investments. The program produced $67.3 million of 2009 charges and had resulted in 548 terminations by year-end; the earlier 2007 program had produced 2,999 terminations.
- Liquidity sources include operating cash flow, cash and investments, commercial paper and a $1.5 billion undrawn committed credit facility available through 2011. Commercial paper outstanding at year-end was $221 million.
- Long-term debt maturities were reported as $550 million in 2012, $375 million in 2013, $450 million in 2014 and $2.8 billion thereafter. The company maintained investment-grade ratings of A/A1.
- Contractual obligations totaled $7.435 billion, including $4.175 billion of long-term debt, $1.762 billion of interest payments, $322 million of operating leases and $325 million of purchase obligations.
- Net finance receivables were $2.726 billion, exposing the company to customer credit losses, residual-value risk and funding-market risk.
- Material risks include postal-regulatory changes, accelerated substitution of electronic communications for physical mail, capital-market disruption, credit deterioration, supplier concentration, information-system interruption, privacy regulation, litigation, tax examinations, foreign-currency movements and pension funding requirements.
- Imagitas faced ten purported class actions alleging violations of the federal Drivers Privacy Protection Act. The Eleventh Circuit affirmed a favorable lower-court ruling, but plaintiffs petitioned for rehearing en banc in January 2010.
- The company and certain current and former officers were defendants in a securities class action filed in October 2009 concerning alleged missed financial projections. Management stated that it considered the case without merit.
- Unrecognized tax benefits increased to $515.6 million at year-end. IRS examinations of tax years 2001–2004 and 2005–2008, as well as other jurisdictional examinations, could materially affect results, cash flow or financial position.
- No goodwill or long-lived-asset impairments were identified in 2009, but one international Management Services reporting unit had only a 14% fair-value cushion over carrying value.
Most important facts for an investor to verify
- Whether recurring cost reductions and the transformation program can offset continuing revenue and mail-volume declines.
- The timing, funding and refinancing of the $550 million of debt maturities beginning in 2012 and the company’s continued access to commercial paper.
- Credit performance, allowance adequacy and residual values within the $2.726 billion finance-receivables portfolio.
- The ultimate cost and benefit realization of the $250 million to $350 million transformation program.
- Potential exposure from tax audits and the $515.6 million of unrecognized tax benefits.
- Outcomes of the Imagitas litigation and the securities class action.
- Pension funding needs, investment performance and the effect of the planned 2014 U.S. pension accrual freeze.
- The sustainability of the dividend given leverage, pension contributions, restructuring cash payments and lower operating cash flow.