Pitney Bowes Inc. — Form 10-Q Summary
Business context and reporting period
Pitney Bowes is a global provider of mailing, software, equipment, financing, support, business and communication services across Small & Medium Business Solutions and Enterprise Business Solutions. This unaudited Form 10-Q covers the three and nine months ended September 30, 2012, compared with the same periods in 2011.
Key financial metrics
| Metric | Q3 2012 | Q3 2011 | Change | 9M 2012 | 9M 2011 | Change |
|---|---|---|---|---|---|---|
| Total revenue | $1,216 million | $1,300 million | -6% | $3,717 million | $3,937 million | -6% |
| Income from continuing operations | $81 million | $117 million | -31% | $329 million | $316 million | +4% |
| Net income attributable to Pitney Bowes | $77 million | $173 million | -56% | $335 million | $360 million | -7% |
| Diluted EPS from continuing operations | $0.38 | $0.56 | -32% | $1.57 | $1.48 | +6% |
| Net cash from operating activities | Not separately provided | Not separately provided | $440 million | $750 million | -41% |
Q3 pretax income was $108 million versus $100 million in the prior-year quarter. The pretax margin improved to approximately 8.9% from 7.7%, while continuing-operations net margin declined to approximately 6.7% from 9.0%, primarily because the prior-year period included significant tax benefits. Nine-month continuing-operations net margin was approximately 8.9% versus 8.0% in 2011.
- Q3 revenue declines included software of 17%, financing of 9%, rentals of 8%, supplies of 10%, business services of 5%, equipment sales of 4% and support services of 2%.
- Q3 cost of revenue was 50.7% of revenue versus 49.3% in 2011. Equipment-sales cost increased to 49.8% of revenue from 44.0%, while rental and support-service cost ratios improved.
- Segment EBIT was $221 million in Q3, down 20%, and $734 million for nine months, down 7%. Small & Medium Business Solutions EBIT declined 11% in Q3; Enterprise Business Solutions EBIT declined 46%.
- Cash and cash equivalents were $425 million at September 30, 2012, with short-term investments of $36 million, compared with combined cash and short-term investments of $869 million at December 31, 2011.
- Total debt, including current and long-term obligations, was approximately $3.681 billion at September 30, 2012, versus $4.234 billion at December 31, 2011. Debt fair value was $3.910 billion.
- Capital expenditures were $128 million through nine months. Dividends paid to stockholders were $225 million, and no share repurchases occurred during 2012 through the reporting date.
Material changes versus the prior comparable period
- Revenue fell 6% in both Q3 and the first nine months, reflecting declining physical mail volumes, economic weakness, customer spending caution, Management Services account contractions and pricing pressure. Foreign currency translation reduced revenue by approximately 1%.
- Q3 continuing-operations earnings declined despite higher pretax income because the 2011 quarter benefited from $34 million of tax benefits on leveraged-lease asset sales and $18 million from tax examination resolutions. Q3 2012 included $36 million of tax benefits from examination resolutions and a $28 million tax accrual related to repatriation of non-U.S. earnings.
- Q3 2012 included $18 million of non-cash goodwill impairment and $10 million of fixed-asset and intangible-asset impairments related to the International Mail Services business. The comparable 2011 quarter included $46 million of goodwill impairment and $12 million of asset impairments for IMS, plus restructuring charges.
- Operating cash flow decreased $310 million year over year, primarily because of higher tax payments, including taxes related to leveraged-lease asset sales, the loss of bonus depreciation and lower receivable collections.
- The company redeemed $150 million of term debt in March and $400 million of notes in June. In October 2012, after the quarter end, it borrowed $220 million under term loan agreements maturing in 2015 and 2016.
- Stockholders’ equity improved from a deficit of $39 million at December 31, 2011 to positive equity of $125 million at September 30, 2012, primarily reflecting earnings and changes in accumulated other comprehensive loss.
Guidance, outlook, risks and unusual items
- Management expects continued pressure on Small & Medium Business Solutions from declining physical mail volumes and alternative communications, although it expects equipment-sales declines to improve over future periods. Recurring revenue improvement is expected to lag equipment-sales improvement.
- Management expects growth opportunities in Mail Services, ecommerce and physical-digital communication solutions. It announced an eBay partnership for international package-delivery ecommerce solutions and decided to exit the IMS international mail and catalog delivery business.
- The expected shift toward enterprise products and solutions is expected to reduce margins relative to traditional Mailing operations. Management expects a pretax restructuring charge of approximately $40 million to $60 million in the fourth quarter of 2012.
- Restructuring reserves totaled $59 million at September 30, 2012, with most remaining payments expected through 2014; some payments may extend beyond 2014. Management expects operating cash flow to fund these payments.
- Liquidity sources include operating cash flow, cash and investments, commercial paper capacity, a $1.0 billion committed credit facility expiring in April 2016, and capital-market access. The credit facility was undrawn and includes a maximum adjusted leverage ratio covenant of 3.5 to 1.0.
- Management identified risks from declining mail volumes, economic conditions, customer credit risk, access to capital, interest rates, foreign exchange, credit ratings, pension obligations, tax adjustments, regulatory changes, information systems, suppliers, litigation and intellectual-property claims.
- The company contributed $121 million to pension plans through September 30, including $95 million of special contributions, and expected approximately $10 million of additional contributions in Q4.
- A securities class action remains pending. Management expects to prevail and believes no loss has been incurred, but an adverse outcome could materially affect financial position, results or cash flows.
Important facts for investors to verify
- Whether the planned IMS exit, potential sale negotiations and related impairment charges result in additional losses, restructuring costs or proceeds.
- The timing and amount of the anticipated $40 million to $60 million fourth-quarter restructuring charge and its effect on cash flow and margins.
- Debt maturities, the use of the $220 million October term loans, commercial-paper reliance and compliance with the credit-facility leverage covenant.
- Whether declining mail volumes, lower installed meter counts, pricing pressure and Management Services contractions stabilize or continue to reduce recurring revenue.
- The sustainability of operating cash flow after pension contributions, restructuring payments, dividends, capital expenditures and tax payments.
- The effect of tax examinations, foreign-earnings repatriation, pension obligations and the pending litigation on future cash requirements.
- Management’s disclosure that controls and procedures were effective as of September 30, 2012, while recognizing that controls provide reasonable rather than absolute assurance.