Pitney Bowes Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2011. The financial statements are unaudited and prepared under U.S. GAAP. Pitney Bowes provides mailing equipment, supplies, software, rentals, financing, support services, and business services through Small & Medium Business Solutions and Enterprise Business Solutions.
Key Financial Metrics
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Total revenue | $1,299.7 million | $1,345.7 million | $3,937.3 million | $3,991.2 million |
| Income from continuing operations | $116.9 million | $96.1 million | $315.9 million | $251.4 million |
| Net income attributable to Pitney Bowes | $172.8 million | $88.9 million | $360.0 million | $229.4 million |
| Diluted EPS | $0.85 | $0.43 | $1.77 | $1.11 |
| Net cash from operating activities | Not provided | Not provided | $750.5 million | $666.1 million |
Revenue and profitability: Q3 revenue decreased 3.4% year over year; nine-month revenue decreased 1.4%. Q3 income from continuing operations before taxes was $99.8 million versus $142.9 million, while the income-tax benefit of $17.1 million versus a prior-year provision of $46.9 million supported reported earnings. Q3 continuing-operations diluted EPS was $0.56 versus $0.44. Approximate net margin was 13.3% in Q3 2011 versus 6.6% in Q3 2010, substantially influenced by tax benefits and unusual items.
Revenue mix: Q3 equipment sales declined 10%, supplies 4%, rentals 7%, financing 5%, and business services 3%; software increased 15% to $113.2 million. Nine-month software revenue increased 18% to $318.3 million, while rentals and financing declined 7% and 5%, respectively.
Segment performance: Q3 Small & Medium Business Solutions revenue declined 4% and EBIT declined 3% to $202.4 million. Enterprise Business Solutions revenue declined 3%, while EBIT increased 6% to $75.2 million. Production Mail EBIT fell to a $3.4 million loss; Software EBIT increased to $16.6 million; and Mail Services EBIT increased to $35.1 million, including insurance recoveries.
Cash Flow, Liquidity, Debt, and Capitalization
- Cash and cash equivalents were $715.2 million at September 30, 2011, up from $484.4 million at December 31, 2010. Short-term investments were $53.9 million.
- Nine-month operating cash flow was $750.5 million, including cash inflows from decreases in accounts receivable and finance receivables of $113.4 million and $169.1 million, respectively.
- Investing cash outflow was $140.5 million, including $123.0 million of capital expenditures and $100.3 million of net investment purchases, partly offset by $101.8 million of proceeds from leveraged-lease asset sales.
- Financing cash outflow was $374.4 million, including $225.7 million of common dividends, $100.0 million of share repurchases, and $50.0 million of net debt repayment.
- Long-term debt was $4.24 billion, generally unchanged from year-end 2010. Total debt, including current obligations, was approximately $4.25 billion. The company had no commercial paper outstanding at September 30, 2011.
- The company maintained a $1.25 billion committed credit facility, undrawn at quarter-end, supporting its commercial paper program. Management stated that liquidity sources were sufficient for operating, financing, pension, restructuring, and other expected requirements.
- Stockholders’ deficit was $45.3 million at September 30, 2011, compared with a deficit of $96.6 million at December 31, 2010.
Material Changes and Unusual Items
- Tax settlements: IRS settlements related to 2001–2004 examinations released $76 million of tax and interest reserves in Q3; $16 million benefited continuing operations and $60 million was recorded through discontinued operations. Management expected to release at least $30 million of additional reserves in Q4 related to 2005–2008 examinations.
- Discontinued operations: Q3 gain from discontinued operations was $60.4 million, compared with a $2.5 million loss in the prior year, primarily reflecting the IRS-related reserve release.
- Leveraged-lease sale: The company sold non-U.S. leveraged-lease assets for approximately $109 million of investment value and recognized a $27 million after-tax gain.
- Goodwill impairment: A $45.7 million impairment charge was recorded for International Mailing Services because of continuing underperformance and an estimated fair value below carrying value.
- Other impairments and restructuring: The company recorded $12 million of intangible-asset impairment charges and $64.0 million of restructuring and asset-impairment charges for the first nine months. The 2009 transformation program had cumulative charges of $301 million through September 30, 2011, with expected annualized pretax benefits of $250 million to $300 million by 2012.
- Dallas facility fire: The February 2011 fire reduced Q3 revenue by approximately $2 million and diluted EPS by $0.01. The company recognized $18 million of insurance recoveries and had received $40 million of insurance proceeds to date, including $34 million by September 30.
- Pensions: The company made a special $123 million U.S. pension contribution. Total pension contributions through September 30 were $147 million, and management expected additional 2011 contributions of approximately $8 million.
Outlook, Commentary, and Risks
Management described the economic environment as uncertain, particularly for small businesses. Recurring, high-margin revenue streams such as financing, rentals, and supplies were affected by weak demand and declining mail volumes, and management expected their recovery to lag equipment sales. The company continued to pursue cost reduction, a more variable cost structure, and growth in software and digital or hybrid communications. Management also expected a greater proportion of revenue to come from enterprise products and solutions.
Management stated that total mail volumes were not expected to return to prior peak levels and that future results would remain sensitive to economic conditions and mail-intensive industries. Other identified risks include postal and banking regulation, customer credit risk, interest rates, foreign currency, pension and benefit costs, execution of transformation plans, asset impairments, information-system interruptions, litigation, intellectual-property claims, supplier disruptions, privacy laws, and tax examinations.
The company disclosed approximately $400 million of additional tax and interest liability related to the 2001–2008 IRS examinations, previously paid through tax bonds. Remaining tax examinations and uncertain tax positions could materially affect earnings, financial position, or cash flow. Pending litigation was not considered reasonably likely to result in a loss based on management’s current assessment, although litigation outcomes remain inherently uncertain.
Investor Verification Points
- Separate recurring operating performance from the effects of tax reserve releases, leveraged-lease gains, insurance recoveries, goodwill impairment, and other unusual items.
- Assess the sustainability of declining equipment, rental, financing, supplies, and business-services revenue against software growth.
- Monitor International Mailing Services for further operating weakness, asset impairments, or goodwill impairment.
- Verify cash-flow quality, particularly the contribution from declining receivables and the impact of pension and restructuring payments.
- Review approximately $4.25 billion of debt, variable-rate exposure from interest-rate swaps, and the company’s reliance on commercial paper-market access.
- Track remaining IRS examinations, expected tax-reserve releases, and potential changes in uncertain tax liabilities.
- Evaluate pension funding needs, transformation-program costs and benefits, and the remaining $50 million share-repurchase authorization.
- Confirm the status and potential exposure of pending legal proceedings and other commitments described in Note 12.