Pitney Bowes Inc. 2012 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. Operations are reported in Small & Medium Business Solutions and Enterprise Business Solutions, comprising seven reporting segments. This filing covers the fiscal year ended December 31, 2012; fourth-quarter data are included in the annual filing and were revised for discontinued-operations presentation.
Management continued shifting the business toward digital communications, software, ecommerce, print outsourcing and other enterprise solutions while physical mail volumes declined. Marc B. Lautenbach became president and chief executive officer in December 2012.
Key financial metrics
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Total revenue | $4.904 billion | $5.123 billion | Down 4% |
| Income from continuing operations | $454 million | $419 million | Up 8% |
| Net income attributable to Pitney Bowes | $445 million | $617 million | Down 28% |
| Diluted EPS from continuing operations | $2.16 | $1.98 | Up 9% |
| Diluted EPS, total | $2.21 | $3.05 | Down 28% |
| Cash flow from operations | $660 million | $949 million | Down $289 million |
| Capital expenditures | $177 million | $156 million | Up $21 million |
| Cash, cash equivalents and short-term investments | $950 million | $869 million | Up $81 million |
| Total debt | $4.017 billion | $4.234 billion | Down $217 million |
Continuing-operations income increased despite lower revenue, primarily because restructuring and goodwill impairment charges declined and SG&A expense fell 5% to $1.598 billion. Income from continuing operations before taxes was $605 million, compared with $487 million in 2011. The effective tax rate increased to 24.9% from 13.9%, partly because of nonrecurring tax benefits recognized in 2011.
Revenue by source declined across most categories: equipment sales $938 million, supplies $284 million, software $413 million, rentals $570 million, financing $495 million, support services $690 million and business services $1.515 billion. Total cost of revenue increased to 49.6% of revenue from 48.5%, indicating lower gross margin.
Segment revenue and EBIT were $2.495 billion and $768 million for Small & Medium Business Solutions, and $2.409 billion and $248 million for Enterprise Business Solutions. Total segment EBIT was $1.016 billion, down 8% from 2011.
Material changes versus the prior comparable period
- Revenue declined 4% as equipment sales, financing, rentals, supplies and software were affected by economic uncertainty, pricing pressure, declining mail volumes and constrained European public-sector spending.
- Small & Medium Business Solutions revenue and EBIT each declined 7%, primarily reflecting lower North American mailing activity and fewer meters in service.
- Enterprise Business Solutions revenue declined 2% and EBIT declined 10%. Management Services EBIT fell 28% and Production Mail EBIT fell 21%; Mail Services revenue rose 8% but EBIT fell 2%.
- SG&A decreased by $92 million, reflecting prior restructuring actions, productivity initiatives, lower amortization and lower credit-loss provisions.
- Restructuring charges and asset impairments fell to $23 million from $137 million. The company recorded a $38 million restructuring charge, partly offset by a $15 million reversal of prior reserves.
- Net income benefited less from discontinued operations than in 2011. 2012 discontinued operations contributed $9 million, compared with $217 million in 2011, which included substantial tax benefits from IRS settlements.
- Operating cash flow fell primarily because of higher tax payments and lower collections of finance and accounts receivable. Financing cash uses included $550 million of debt repayments, $340 million of new debt issuance and approximately $301 million of common dividends.
- The company issued $230 million of term loans and $110 million of 5.25% notes due 2022, while redeeming $550 million of maturing debt. No commercial paper was outstanding at year-end.
Guidance, outlook, commentary and unusual items
- Management expects continued pressure from declining physical mail volumes and cautious customer spending, but expects growth in selected Enterprise Business Solutions areas, including ecommerce, print outsourcing and software.
- Investments in growth initiatives are expected to continue during the first half of 2013, with greater revenue and margin contribution expected in the second half. Newer revenue streams are expected to carry lower margins than the traditional Mailing business.
- Management expects improved equipment sales trends in 2013, supported by Connect+ communications systems and SendSuite Live shipping solutions, with a moderation in declines in rentals, financing and supplies expected in the second half.
- Marketing Services revenue was expected to decline 10% to 15% in 2013 and EBIT by approximately one-third because of lower fees under renegotiated contracts.
- The company began exploring strategic alternatives to exit International Mail Services, which was classified as a discontinued operation and held for sale. 2012 included $18 million of goodwill impairment, $10 million of asset impairment and a further $7 million write-down related to the proposed transaction terms.
- Restructuring actions are expected to generate annualized benefits of $45 million to $55 million; remaining restructuring reserves of $68 million were expected to be paid over 12 to 24 months.
- The company disclosed a $29 million cash-flow classification correction affecting 2011 and interim 2012 periods. Management concluded the correction was not material to previously issued financial statements.
- At year-end, the company had a $1.0 billion committed credit facility expiring in April 2016 and had not drawn on it. Credit-rating agencies reduced the company’s ratings during 2012.
Risks and contingencies
- Accelerated declines in physical mail volumes, postal regulation changes and customer migration to digital communications could reduce revenue and profitability.
- Liquidity and financing risk is significant because the company funds customer financing through capital markets, commercial paper, debt issuance and bank deposits. Higher borrowing costs, further credit downgrades or reduced capital-market access could constrain operations, investments, pension funding or dividends.
- Competition, pricing pressure and lower margins on digital and enterprise offerings may limit the success of the strategic transition.
- The company relies on third-party suppliers, outsourced providers and, in some cases, single-source suppliers, creating potential disruption risks.
- Information-technology failures, cyberattacks, privacy-law violations and intellectual-property claims could cause operational disruption, liability or reputational damage.
- The company is party to routine litigation, including a securities class action concerning alleged missed 2007 financial projections. Management does not believe a loss is reasonably possible based on its current assessment, but an adverse outcome could materially affect results.
- Unrecognized tax benefits totaled $147 million at year-end, of which $127 million could affect the effective tax rate if recognized. Tax examinations and unclaimed-property audits remain ongoing.
- Pension and retiree medical obligations remain substantial. Defined-benefit pension plans were underfunded by approximately $393 million in aggregate, and the unfunded retiree medical obligation was approximately $283 million.
Important facts for investors to verify
- Whether physical mail-volume declines stabilize or accelerate, and how quickly digital, software and ecommerce initiatives replace lost traditional revenue.
- Progress and final economics of the International Mail Services exit, including any additional impairment, transaction or restructuring costs.
- Debt maturities, refinancing requirements and the effect of reduced credit ratings on borrowing costs and liquidity.
- Sustainability of the $1.50 per-share annual dividend relative to operating cash flow and debt obligations.
- Performance of PBMSi, whose estimated fair value exceeded carrying value by only approximately 4% and could require additional goodwill impairment if results deteriorate.
- Execution of restructuring programs and realization of the projected $45 million to $55 million of annualized benefits.
- Resolution of the securities litigation, tax examinations, unclaimed-property audits and other contingencies.
- The effect of pension-plan freezes and retiree medical changes on future expense, funding requirements and cash flow.