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| PBI > SEC Filings for PBI > Form 10-Q on 5-Aug-2009 | All Recent SEC Filings |
5-Aug-2009
Quarterly Report
Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) contains statements that are forward-looking. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially because of factors discussed in "Forward-Looking Statements" and elsewhere in this report.
The following analysis of our financial condition and results of operations should be read in conjunction with Pitney Bowes' Condensed Consolidated Financial Statements contained in this report and Pitney Bowes' Form 10-K for the year ended December 31, 2008.
Overview
For the second quarter, revenue decreased 13% to $1.38 billion due to continuing challenging global economic conditions and the negative impact of foreign currency translation, which negatively impacted revenue growth by 5%. Acquisitions positively impacted revenue growth by less than 1%.
Income from continuing operations attributable to Pitney Bowes Inc. common stockholders was $112.2 million or $0.54 per diluted share as compared with $0.63 earnings per diluted share in the second quarter of 2008. Income from continuing operations in the second quarter of 2009 included a non-cash tax charge associated with out-of-the money stock options that expired during the quarter of less than 1 cent per diluted share. Income from continuing operations in the second quarter of 2008 included restructuring charges and asset impairments of 6 cents per diluted share and the favorable settlement of a legal matter in Europe of 3 cents per diluted share.
Despite volatile and difficult global economic conditions which resulted in a decline in revenue growth for the quarter in the majority of our business segments, we were able to grow our net cash provided by operating activities by 3 percent to $483.4 million for the six months ended June 30, 2009 when compared to the same period in 2008. We also reduced our debt by $178.6 million during the six months ended June 30, 2009. EBIT margins, which were down from 2008, have increased in 6 of our 7 segments when compared to first quarter of 2009.
We remain focused on cost controls and reduced our SG&A expense by over $73 million, despite significant headwinds from the negative impacts of both foreign currencies and increased pension costs when compared to the prior year.
See "Results of Operations - Second Quarter of 2009 Compared to Second Quarter of 2008" for a more detailed discussion of our results of operations.
Outlook
Economic and business conditions in mail-intensive industries have not been improving and have actually declined further in some key geographies. Sales cycles for most capital purchase decisions by customers remain long. These factors have impacted our financial results, as the sustained economic downturn has had a negative effect on high-margin financing, rental, and supplies revenue streams. While the company has been successful in reducing its cost structure across its entire business and is shifting to a more variable cost structure, these actions have not been enough to offset the impact of lower revenue.
We continue to expect our mix of revenue to change, with a greater percentage of revenue coming from diversified revenue streams associated with fully featured smaller systems and a smaller percentage from larger system sales. We expect that our 2009 reported results will continue to be negatively impacted by the strengthened U.S. dollar and by the increase in pension costs related to recent changes in capital markets and assumptions used to calculate pension liabilities. We continue to remain focused on enhancing our productivity and evaluating additional opportunities within our businesses while continuing to allocate capital in order to optimize our returns.
Business segment results
The following table shows revenue and earnings before interest and taxes ("EBIT") by segment for the three months ended June 30, 2009 and 2008:
(Dollars in thousands)
Revenue EBIT (1)
---------------------------------------- --------------------------------------- --
Three Months Ended June 30, Three Months Ended June 30,
---------------------------------------- --------------------------------------- --
2009 2008 % change 2009 2008 % change
----------- ----------- ---------- ------------ ---------- --------- --
U.S. Mailing $ 505,159 $ 550,849 (8)% $ 195,044 $ 220,526 (12 )%
International Mailing 217,900 302,085 (28)% 27,069 51,462 (47 )%
Production Mail 130,137 149,400 (13)% 10,413 15,350 (32 )%
Software 82,823 102,250 (19)% 5,219 6,317 (17 )%
- --------- - --------- -- ------- -- --------- -- ------- -- ------ --
Mailstream Solutions 936,019 1,104,584 (15)% 237,745 293,655 (19 )%
- --------- - --------- -- ------- -- --------- -- ------- -- ------ --
Management Services 263,763 300,454 (12)% 16,140 18,230 (11 )%
Mail Services 138,598 134,764 3 % 21,723 15,980 36 %
Marketing Services 40,082 48,284 (17)% 3,147 3,527 (11 )%
- --------- - --------- -- ------- -- --------- -- ------- -- ------ --
Mailstream Services 442,443 483,502 (8)% 41,010 37,737 9 %
- --------- - --------- -- ------- -- --------- -- ------- -- ------ --
Total $ 1,378,462 $ 1,588,086 (13)% $ 278,755 $ 331,392 (16 )%
- --------- - --------- -- ------- -- --------- -- ------- -- ------ --
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(1) See reconciliation of segment amounts to Income from continuing operations before income taxes in Note 7 to the Condensed Consolidated Financial Statements.
During the second quarter of 2009, Mailstream Solutions revenue decreased 15% to $936 million and EBIT decreased 19% to $238 million, compared to the prior year. Within Mailstream Solutions:
U.S. Mailing's revenue decreased 8% primarily due to fewer placements of mailing equipment as customers continued to delay purchases of new equipment and extended leases on existing equipment due to the economic conditions. Revenue continues to be adversely affected by the ongoing changing mix to more fully featured smaller systems. Additionally, revenue continues to be impacted by an increase in lease renewals, which has a positive impact on profit margins but negatively impacts revenue in the current period. U.S. Mailing's EBIT decreased 12% principally due to lower financing revenue, meter rentals, and supplies sales because of lower business activity levels over the last year. International Mailing revenue decreased 28%, with 14% of this decline driven by the unfavorable impact of foreign currency translation. The remaining decrease was due to weak economic conditions internationally which appear to be lagging the U.S, particularly in Canada, Asia and certain key markets in Europe. This has resulted in ongoing deferred capital purchases for mailing equipment and delays by customers in adding new services. International Mailing's EBIT declined 47% to $27.1 million, primarily driven by our Canada and European operations, changes in currency which increased product costs and the unfavorable comparison to the settlement of a legal matter in 2008 for $7.5 million, which positively impacted EBIT in the prior year. Revenue for Production Mail decreased 13%, partly due to the unfavorable impact of foreign currency translation of 6%, and also as a result of lower equipment sales in the U.S., France, and Asia Pacific as economic uncertainty continues to delay large-ticket capital expenditures for many large enterprises worldwide. As a result, customers are keeping existing equipment longer than usual, which resulted in an increase in service revenue. Production Mail's EBIT decreased 32% driven by lower revenues and a shift in product mix to lower margin products. This was partially offset by an improved service margin due to prior year cost reduction initiatives and price increases on longer-service equipment. Software's revenue decreased 19%, with 7% of this decline driven by the unfavorable impact of foreign currency translation. The remaining decrease is principally due to consolidation in the financial services industry and slowness in the retail sector worldwide which continues to adversely impact the sales and renewal of software licenses. Uncertainty surrounding the economy has resulted in many large multi-national organizations changing their approval policies for capital expenditures, which has lengthened the sales cycle. Software's EBIT decreased 17%. Ongoing cost reduction measures helped offset the pressure on margin due to lower revenue and a mix of lower margin software sales.
During the second quarter of 2009, Mailstream Services revenue decreased 8% to $442 million and EBIT increased 9% to $41 million, compared to the prior year. Within Mailstream Services:
Revenue by source
The following table shows revenue by source for the three months ended June 30, 2009 and 2008:
(Dollars in thousands)
Three Months Ended June 30,
-------------------------------------- --
2009 2008 % change
------------ ----------- --------- --
Equipment sales $ 257,196 $ 311,650 (17 )%
Supplies 81,973 101,286 (19 )%
Software 87,380 109,120 (20 )%
Rentals 156,151 185,855 (16 )%
Financing 174,508 197,263 (12 )%
Support services 179,246 194,955 (8 )%
Business services 442,008 487,957 (9 )%
-- --------- - --------- -- ------ --
Total revenue $ 1,378,462 $ 1,588,086 (13 )%
-- --------- - --------- -- ------ --
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Equipment sales revenue decreased 17% compared to the prior year mostly due to fewer placements of mailing equipment as customers delayed purchases of new equipment and extended leases on existing equipment due to the economic conditions. Revenue also continues to be adversely affected by the ongoing changing mix in equipment placements to more fully featured smaller systems. Foreign currency translation had an unfavorable impact of 6%.
Supplies revenue decreased 19% compared to the prior year due to lower supplies usage resulting from lower mail volumes and fewer installed meters due to customer consolidations in the U.S. and internationally. Foreign currency translation had an unfavorable impact of 6%.
Software revenue decreased 20% compared to the prior year due to the impact of the global economic slowdown which has caused many businesses to delay their capital spending worldwide, thus impacting software revenues. Foreign currency translation had an unfavorable impact of 7%.
Rentals revenue decreased 16% compared to the prior year. In the U.S., customers continue to downsize to smaller, fully featured machines. We also see weakening economic conditions affecting our international rental markets of Canada and France. Foreign currency translation had an unfavorable impact of 3%.
Financing revenue decreased 12% compared to the prior year. Foreign currency translation had an unfavorable impact of 4%. In addition, lower equipment sales have resulted in a corresponding decline in our lease portfolios.
Support services revenue decreased 8% compared to the prior year, principally due to the unfavorable impact of foreign currency translation of 6%.
Business services revenue decreased 9% compared to the prior year due to lower transaction volumes at Management Services and Marketing Services. The unfavorable impact of foreign currency translation of 3% was partly offset by the positive impact of acquisitions which contributed 1%.
(Dollars in thousands)
Three Months Ended June 30,
----------------------------------
2009 2008
--------------- ---------------
Cost of equipment sales $ 139,770 $ 166,282
Cost of supplies $ 21,369 $ 26,419
Cost of software $ 21,570 $ 26,453
Cost of rentals $ 38,013 $ 39,671
Financing interest expense $ 25,438 $ 27,552
Cost of support services $ 101,223 $ 115,931
Cost of business services $ 352,306 $ 383,009
Selling, general and administrative $ 424,265 $ 497,689
Research and development $ 46,622 $ 53,168
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Cost of equipment sales as a percentage of revenue was 54.3% in the second quarter of 2009 compared with 53.4% in the prior year, primarily due to the unfavorable mix of lower margin equipment sales in Production Mail, which were partly offset by a favorable mix of higher margin equipment sales in International Mailing.
Cost of supplies as a percentage of revenue was unchanged at 26.1% in the second quarter of 2009 compared with the prior year.
Cost of software as a percentage of revenue was 24.7% in the second quarter of 2009 compared with 24.2% in the prior year due to an unfavorable mix.
Cost of rentals as a percentage of revenue was 24.3% in the second quarter of 2009 compared with 21.3% in the prior year primarily due to the fixed costs associated with meter depreciation on lower revenues in both the U.S. Mailing and International Mailing segments.
Financing interest expense as a percentage of revenue was 14.6% in the second quarter of 2009 compared with 14.0% in the prior year primarily due to a slightly higher interest rate and lower finance receivables levels. In computing our financing interest expense, which represents our cost of borrowing associated with the generation of financing revenues, we assumed a 10:1 leveraging ratio of debt to equity and applied our overall effective interest rate to the average outstanding finance receivables.
Cost of support services as a percentage of revenue was 56.5% in the second quarter of 2009 compared with 59.5% in the prior year due to margin improvements in Production Mail driven by the positive impacts of ongoing cost reduction initiatives and price increases on longer-service equipment.
Cost of business services as a percentage of revenue was 79.7% in the second quarter of 2009 compared with 78.5% in the prior year. This is due to lower volumes of higher margin print and transaction activity which has negatively impacted Management Services.
Selling, general and administrative ("SG&A") expenses as a percentage of revenue was 30.8% in the second quarter of 2009 compared with 31.3% in the prior year. SG&A expense declined $73.4 million, primarily as a result of our cost reduction initiatives which contributed 7% and the positive impact of foreign currency translation of 5%.
Research and development expenses decreased $6.5 million from the prior year, $2.4 million of which related to foreign currency translation. The decline in overall spending is due to the wind-down of duplicate costs related to our transition to offshore development capabilities.
Pre-tax restructuring reserves at June 30, 2009 are composed of the following:
(Dollars in thousands)
Balance at Balance at
March 31, Cash Non-cash June 30,
2009 Expenses payments charges 2009
------------ --------- --------- --------- ------------
Severance and benefit costs $ 80,115 $ - $ (13,948 ) $ - $ 66,167
Other exit costs 28,293 - (2,461 ) - 25,832
-- --------- ---- ---- - ------- ---- ---- -- ---------
Total $ 108,408 $ - $ (16,409 ) $ - $ 91,999
-- --------- ---- ---- - ------- ---- ---- -- ---------
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We recorded pre-tax restructuring charges and asset impairments during 2008 and 2007. These charges primarily related to a program we announced in November 2007 to lower our cost structure, accelerate efforts to improve operational efficiencies, and transition our product line.
As of June 30, 2009, 2,743 terminations have occurred under this program and approximately 300 additional positions have been eliminated. The majority of the liability at June 30, 2009 is expected to be paid by the end of 2009 from cash generated from operations.
Other interest expense
Other interest expense for the three months ended June 30, 2009 and 2008:
(Dollars in thousands)
Three Months Ended June 30,
----------------------------------------- --
2009 2008 % change
------------ ------------ ---------- --
Other interest expense $ 29,553 $ 30,137 (2 )%
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Other interest expense decreased by $0.6 million or 2% in the second quarter of 2009 compared to the prior year. This is driven primarily by lower average borrowings.
Income taxes
The effective tax rate for the second quarter of 2009 was 34.9% compared with 34.1% in the prior year. The 2009 tax rate was increased by a $0.9 million write-off of deferred tax assets associated with the expiration of out-of-the-money vested stock options and the vesting of stock units previously granted to our employees.
Discontinued operations
The following table shows selected financial information included in discontinued operations for the three months ended June 30, 2009 and 2008, respectively:
(Dollars in thousands)
Three Months Ended June 30,
--------------------------------
2009 2008
------------- ---------------
Net gain (loss) from discontinued operations, net of tax $ 5,102 $ (2,831 )
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For the three months ended June 30, 2009, $10.9 million of pre-tax income, net of $4.2 million in tax, represents the release of reserves related to the expiration of an indemnity agreement in April 2009 associated with the sale of our Capital Services portfolio in 2006. This income was partially offset by the accrual of interest on uncertain tax positions. The net loss for the three months ended June 30, 2008 relates to the accrual of interest on uncertain tax positions.
The following table details dividends paid to preferred stockholders for the three months ended June 30, 2009 and 2008:
(Dollars in thousands)
Three Months Ended June 30,
-----------------------------------
2009 2008
--------------- ---------------
Preferred stock dividends of subsidiaries $ 4,571 $ 4,796
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Results of Operations - Six Months Ended June 30, 2009 compared to Six Months Ended December 31, 2008
Revenue by source
(Dollars in thousands)
Six Months Ended June 30,
------------------------------------- --
2009 2008 % change
----------- ----------- --------- --
Equipment sales $ 489,021 $ 614,363 (20 )%
Supplies 170,002 208,886 (19 )%
Software 167,106 214,525 (22 )%
Rentals 324,281 370,808 (13 )%
Financing 357,306 396,202 (10 )%
Support services 353,593 386,480 (9 )%
Business services 896,737 970,779 (8 )%
- --------- - --------- -- ------ --
Total revenue $ 2,758,046 $ 3,162,043 (13 )%
- --------- - --------- -- ------ --
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Equipment sales revenue decreased 20% compared to the prior year due to lower placements of mailing equipment as more customers have delayed purchases of new equipment and extended their leases on existing equipment due to the economic conditions. Revenue also continues to be adversely affected by the ongoing changing mix in equipment placements to more fully featured smaller systems. Foreign currency translation had an unfavorable impact of 7%.
Supplies revenue decreased 19% compared to the prior year due to lower supplies usage resulting from lower mail volumes and fewer installed meters due to customer consolidations. Foreign currency translation had an unfavorable impact of 6%.
Software revenue decreased 22% compared to the prior year primarily due to the impact of the global economic slowdown which has caused many businesses to delay their capital spending worldwide, thus impacting our software revenues. Foreign currency translation had an unfavorable impact of 9%.
Rentals revenue decreased 13% compared to the prior year as customers in the U.S. continue to downsize to smaller, fully featured machines. We also see weakening economic conditions affecting our international rental markets specifically in France and Canada. Foreign currency translation had an unfavorable impact of 3%.
Financing revenue decreased 10% compared to the prior year due to lower equipment sales which have resulted in a corresponding decline in our lease portfolios. Foreign currency translation had an unfavorable impact of 5%.
Support services revenue decreased 9% compared to the prior year, principally due to the unfavorable impact of foreign currency translation of 7%.
Business services revenue decreased 8% compared to the prior year. Lower volumes at Management Services more than offset the increase in mail volumes processed at Mail Services. The unfavorable impact of foreign currency translation of 3% was partly offset by the positive impact of acquisitions which contributed 2%.
(Dollars in thousands)
Six Months Ended June 30,
--------------------------------
2009 2008
------------- ---------------
Cost of equipment sales $ 262,855 $ 327,395
Cost of supplies $ 44,710 $ 54,291
Cost of software $ 41,067 $ 54,190
Cost of rentals $ 73,864 $ 77,975
Financing interest expense $ 49,890 $ 57,928
Cost of support services $ 199,549 $ 229,926
Cost of business services $ 712,213 $ 762,300
Selling, general and administrative $ 867,793 $ 994,184
Research and development $ 93,571 $ 103,168
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Cost of equipment sales as a percentage of revenue was 53.8% in the first six months of 2009 compared with 53.3% in the prior year, primarily due to an unfavorable mix of lower margin equipment sales in Production Mail. This was partly offset by higher margin equipment sales in International Mailing.
Cost of supplies as a percentage of revenue was 26.3% in the first six months of 2009 compared with 26.0% in the prior year due to the lower sales volume and product mix.
Cost of software as a percentage of revenue was 24.6% in the first six months of 2009 compared with 25.3% in the prior year due to a favorable mix.
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