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PBI > SEC Filings for PBI > Form 10-Q on 3-May-2013All Recent SEC Filings

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Form 10-Q for PITNEY BOWES INC /DE/


3-May-2013

Quarterly Report


Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
This Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) contains statements that are forward-looking. We want to caution readers that any forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the Securities Act) and
Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act) in this Form 10-Q may change based on various factors. These forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties and actual results could differ materially. Words such as "estimate", "target", "project", "plan", "believe", "expect", "anticipate", "intend", and similar expressions may identify such forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Factors which could cause future financial performance to differ materially from the expectations as expressed in any forward-looking statement made by or on our behalf include, without limitation:
declining physical mail volumes

mailers' utilization of alternative means of communication or competitors' products

access to capital at a reasonable cost to continue to fund various discretionary priorities, including business investments, pension contributions and dividend payments

timely development and acceptance of new products and services

successful entry into new markets

success in gaining product approval in new markets where regulatory approval is required

changes in postal or banking regulations

interrupted use of key information systems

third-party suppliers' ability to provide product components, assemblies or inventories

our success at managing the relationships with our outsource providers, including the costs of outsourcing functions and operations not central to our business

changes in privacy laws

intellectual property infringement claims

regulatory approvals and satisfaction of other conditions to consummate and integrate any acquisitions

negative developments in economic conditions, including adverse impacts on customer demand

our success at managing customer credit risk

significant changes in pension, health care and retiree medical costs

changes in interest rates, foreign currency fluctuations or credit ratings

income tax adjustments or other regulatory levies for prior audit years and changes in tax laws, rulings or regulations

impact on mail volume resulting from concerns over the use of the mail for transmitting harmful biological agents

changes in international or national political conditions, including any terrorist attacks

acts of nature

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Condensed Consolidated Financial Statements contained in this report and our Annual Report to Stockholders on Form 10-K for the year ended December 31, 2012 (2012 Annual Report).
Overview
For the first quarter of 2013, revenue decreased 4% to $1,167 million compared to $1,220 million in the first quarter of 2012. Software revenue declined 17% due to fewer large dollar value licensing deals, a continued slowdown in our global markets due to uncertain economic conditions and constrained public sector spending. Financing revenue declined 8% due to the impact of lower equipment sales in prior periods. Support services revenue declined 5% due to lower new equipment placements and business services revenue declined 2% due to continued pricing pressures on new business and contract renewals. Foreign currency translation had a less than 1% unfavorable impact on revenue in the quarter.

During the quarter, we redeemed an aggregate $405 million of debt scheduled to mature in 2014-2016 through a cash tender offer. We also issued $425 million of 30-year fixed rate debt. The net proceeds received were $412 million and were used to fund the tender offer. Income from continuing operations includes a net charge of $25 million from the early redemption of debt, consisting primarily of premium payments, the write-off of unamortized costs, fees, and a gain from the unwind of interest rate swaps associated with the debt. The expense impact due to the interest rate differential between the new debt issued and the debt redeemed will be an increase of approximately $10 million over the remainder of the year.


Net income from continuing operations attributable to common stockholders decreased to $70 million, or $0.34 per diluted share in the first quarter of 2013 compared to $141 million or $0.70 per diluted share in the first quarter of 2012, primarily due to lower revenue in the current year period and $22 million of tax benefits recognized in the prior year period from the conclusion of tax examinations.

Through March 31, 2013, we generated $132 million of cash from operations. We paid dividends to our common shareholders of $75 million and funded capital investments of $39 million.
Outlook
Worldwide economic weakness continues to create a challenging business environment causing many of our customers to remain cautious about spending and, therefore, impacting the performance of our business segments. Small and Medium Business Solutions (SMB) revenues will continue to be challenged by the decline in physical mail volumes as alternative means of communications evolve and gain further acceptance. We anticipate that the historical equipment sales trends should show improvement in future periods, due in part to global sales of our Connect+TM communications systems and SendSuite LiveTM shipping solutions. A slowing of the rate of decline for overall SMB revenue will lag that of equipment sales because recurring revenue streams typically lag the trends in equipment sales.

We anticipate revenue growth in certain of our Enterprise Business Solutions segments from continued expansion in Mail Services' presort operations, new ecommerce initiatives and market acceptance for our new solutions that help customers grow their business by more effectively managing their physical and digital communications with their customers. We will continue to fund investments to build capacity and infrastructure to support our ecommerce products and solutions. We are also committed to improving the performance of our Software business and recently appointed new leadership to focus on improving the cost structure and growing this business.

Our growth strategies will focus on leveraging our expertise in physical communications with our expanding capabilities in digital and hybrid communications. We will continue to develop and invest in products, software, services and solutions that help customers grow their business by more effectively communicating with their customers across physical, digital and hybrid channels. We expect our mix of business will continue to shift to more enterprise related products and solutions, and that these new revenue streams will have lower margins than our traditional Mailing business.

In order to drive operational excellence, on April 29, management decided to embark on a process designed to enhance our responsiveness to changing market conditions, further streamline our business operations, reduce our cost structure and create long-term flexibility to invest in growth. We are analyzing a wide range of opportunities for both process and operational improvements. We anticipate that these primarily cash related actions will result in restructuring charges in the range of $75 to $125 million and will be recognized as specific initiatives are approved and implemented. We expect to begin implementing actions and taking charges in the second quarter. We are anticipating annualized pre-tax benefits of $100 to $125 million, net of investments, from these actions and expect to reach this benefit run rate by 2015.

Each quarter our Board of Directors considers our recent and projected earnings and other capital needs and priorities in deciding whether to approve the amount and payment of a dividend. On April 29, 2013, our Board of Directors declared a cash dividend of $0.1875 per share for the second quarter of 2013.


                             RESULTS OF OPERATIONS
Revenue by source and the related cost of revenue are shown in the following
tables:
Revenue
                          Three Months Ended March 31,
($ amounts in 000s)     2013            2012        % change
Equipment sales     $    214,999    $   220,179       (2 )%
Supplies                  74,287         76,365       (3 )%
Software                  87,012        104,350      (17 )%
Rentals                  136,379        140,389       (3 )%
Financing                116,762        126,748       (8 )%
Support services         165,486        173,518       (5 )%
Business services        372,031        378,587       (2 )%
Total revenue       $  1,166,956    $ 1,220,136       (4 )%



Cost of revenue
                                      Three Months Ended March 31,
                                                       Percentage of Revenue
($ amounts in 000s)           2013         2012         2013           2012
Cost of equipment sales    $ 109,337    $  96,916        50.9 %         44.0 %
Cost of supplies              23,262       23,871        31.3 %         31.3 %
Cost of software              20,706       21,093        23.8 %         20.2 %
Cost of rentals               27,755       30,225        20.4 %         21.5 %
Financing interest expense    19,875       21,139        17.0 %         16.7 %
Cost of support services     108,009      115,087        65.3 %         66.3 %
Cost of business services    291,648      286,817        78.4 %         75.8 %
Total cost of revenue      $ 600,592    $ 595,148        51.5 %         48.8 %

Equipment sales
Equipment sales revenue decreased 2% to $215 million in the quarter compared to the prior year quarter. The decline in equipment sales was driven primarily by lower sales in our mailing businesses as our clients continue to postpone or defer new equipment purchases due to the continued decline in mail volumes and uncertain economic environment. This decline was partially offset by revenue of $3 million for scale updates resulting from a postal rate change in France, increased sales of our Connect+TM communications systems in France and Germany and increased sales of large production print equipment. Cost of equipment sales as a percentage of revenue increased to 50.9% in the quarter compared to 44.0% in the prior year quarter due to a higher mix of lower margin product sales, pricing pressure on competitive placements and fewer lease extensions compared to the prior year period.
Supplies
Supplies revenue decreased 3% to $74 million in the quarter compared to the prior year quarter, primarily due to declines in our mailing business from reduced mail volumes and fewer installed meters worldwide, partially offset by improving supplies sales from the sales of Connect+TM communications systems and production print equipment. Cost of supplies as a percentage of revenue was 31.3% in the first quarter of 2013 and first quarter of 2012. Software
Software revenue decreased 17% to $87 million in the quarter compared to the prior year quarter. The decrease was primarily due to fewer large dollar licensing contracts and delays in some contract signings in our North American markets, and uncertain economic conditions and constrained public sector spending in our international markets. Software revenue in the prior year quarter also included $13 million from two significant software contracts. Revenue in the current year quarter included $2 million of licensing revenue from providing our VollyTM software solution to Australia Post.


Cost of software as a percentage of revenue increased to 23.8% in the quarter compared with 20.2% in the prior year quarter primarily due to the decline in revenue.
Rentals
Rentals revenue decreased 3% to $136 million in the quarter compared to the prior year quarter, primarily due to lower mail volumes and fewer meters in service. Cost of rentals as a percentage of revenue improved to 20.4% in the quarter compared to 21.5% in the prior year quarter primarily due to lower depreciation expense.
Financing
Financing revenue decreased 8% to $117 million in the quarter compared to the prior year quarter, primarily due to lower equipment sales in prior periods. Financing interest expense as a percentage of revenue increased to 17.0% in the quarter compared to 16.7% in the prior year quarter due to higher effective interest rates. In computing our financing interest expense, which represents our cost of borrowing associated with the generation of financing revenue, we assume a 10:1 leveraging ratio of debt to equity and apply our overall effective interest rate to the average outstanding finance receivables. Support Services
Support services revenue decreased 5% to $165 million in the quarter compared with the prior year quarter. The decrease was primarily driven by lower new equipment placements worldwide. Cost of support services as a percentage of revenue improved to 65.3% in the quarter compared with 66.3% in the prior year quarter due to productivity initiatives in our international mailing operations. Business Services
Business services revenue decreased 2% to $372 million in the quarter compared to the prior year quarter. The decrease was partly due to continuing pricing pressures on new business and contract renewals and the loss of some customer contracts in our Management Services business; and lower marketing fees related to certain marketing category contract renewals and fewer household moves in our Marketing Services business. These decreases were partially offset by revenue from our ecommerce cross-border package delivery solution initiated in the fourth quarter of 2012. Cost of business services as a percentage of revenue increased to 78.4% in the quarter compared with 75.8% in the prior year quarter primarily due to margin compression in our Management Services business and investment and start-up costs associated with our ecommerce business. Selling, general and administrative (SG&A) SG&A expense decreased 7% to $377 million in the quarter compared with the prior year quarter driven primarily by lower salaries and benefits. Other expense (income), net
Other expense, net for the three months ended March 31, 2013 of $25 million consists of the costs associated with the early redemption of debt. See Liquidity and Capital Resources - Financings and Capitalization for a detailed discussion.

Other income, net in the three months ended March 31, 2012 of $3 million is comprised of $7 million of insurance proceeds received in connection with the 2011 fire at our Dallas presort facility partially offset by a loss of $4 million on the sale of non-U.S. leveraged lease assets.

Income taxes
See Note 7 to the unaudited Condensed Consolidated Financial Statements.

Discontinued operations
See Note 15 to the unaudited Condensed Consolidated Financial Statements.

Preferred stock dividends of subsidiaries attributable to noncontrolling interests
See Note 6 to the unaudited Condensed Consolidated Financial Statements.


Business segment results
We conduct our business activities in seven reporting segments within two business groups, Small & Medium Business Solutions and Enterprise Business Solutions. The following tables show revenue and EBIT by business segment for the three months ended March 31, 2013 and 2012. We are now reporting the IMS business as a discontinued operation. IMS was previously included in our Mail Services segment. We determine segment EBIT, a non-GAAP measure, by deducting from segment revenue the related costs and expenses attributable to the segment. Segment EBIT excludes interest, taxes, general corporate expenses not allocated to a particular business segment, restructuring charges, asset impairments and goodwill charges, which are recognized on a consolidated basis. Management uses segment EBIT to measure profitability and performance at the segment level. Segment EBIT may not be indicative of our overall consolidated performance and therefore, should be read in conjunction with our condensed consolidated results of operations. Refer to Note 13 to the Condensed Consolidated Financial Statements for a reconciliation of segment EBIT to income from continuing operations before income taxes.

Revenue                                 Three Months Ended March 31,
($ amounts in 000s)                   2013            2012        % change
North America Mailing             $    430,375    $   461,305       (7 )%
International Mailing                  167,455        168,014        -  %
Small & Medium Business Solutions      597,830        629,319       (5 )%
Production Mail                        118,802        115,016        3  %
Software                                80,721        100,327      (20 )%
Management Services                    225,256        230,630       (2 )%
Mail Services                          118,855        114,636        4  %
Marketing Services                      25,492         30,208      (16 )%
Enterprise Business Solutions          569,126        590,817       (4 )%
Total                             $  1,166,956    $ 1,220,136       (4 )%


EBIT                                      Three Months Ended March 31,
($ amounts in 000s)                      2013             2012       % change
North America Mailing             $    154,505         $ 178,171      (13 )%
International Mailing                   17,749            19,997      (11 )%
Small & Medium Business Solutions      172,254           198,168      (13 )%
Production Mail                          3,055             2,779      (10 )%
Software                                 4,890            10,692      (54 )%
Management Services                     12,545            13,315       (6 )%
Mail Services                           19,349            34,245      (43 )%
Marketing Services                       1,986             4,817      (59 )%
Enterprise Business Solutions           41,825            65,848      (36 )%
Total                             $    214,079         $ 264,016      (19 )%

Small & Medium Business Solutions
Small & Medium Business Solutions revenue decreased 5% and EBIT decreased 13% to $598 million and $172 million, respectively, in the quarter compared to the prior year quarter. Within the Small & Medium Business Solutions group:
North America Mailing
Revenue for the North America Mailing segment decreased 7% to $430 million in the quarter compared to the prior year quarter. Contributing to this decrease was a 10% decline in equipment sales due to continued concerns about economic conditions and declining mail volumes. Financing revenue declined 9% due to declining equipment sales in prior periods. Rentals revenue declined 3% primarily due to fewer meters in service and supplies revenue declined 6% due to lower mail volumes and a declining installed meter base.
EBIT decreased 13% to $155 million in the quarter compared to the prior year quarter primarily due to the decline in revenue and fewer lease extensions during the quarter compared to the prior year quarter.


International Mailing
Revenue for the International Mailing segment was $167 million in the quarter compared to $168 million in the prior year quarter. Revenue for the current year quarter included $3 million for scale updates resulting from a postal rate change in France and increased sales of our Connect+TM communications systems in Germany and France. However, these revenue benefits were offset by lower equipment sales in the U.K. due to the continuing uncertain economic environment and lower equipment sales in the Nordics compared to a particularly strong prior year quarter.
EBIT decreased 11% to $18 million in the quarter compared to the prior year quarter primarily due to the costs related to facilities consolidation.

Enterprise Business Solutions
Enterprise Business Solutions revenue decreased 4% and EBIT decreased 36% to $569 million and $42 million, respectively, in the quarter compared to the prior year quarter. Within the Enterprise Business Solutions group:
Production Mail
Revenue for the Production Mail segment increased 3% to $119 million in the quarter compared to the prior year quarter primarily due to increased installations of large production print equipment and initial licensing revenue from providing our VollyTM software solution to Australia Post.
EBIT for the quarter was $3 million, consistent with the prior year quarter. EBIT benefited from the higher revenue but this benefit was offset by the higher mix of lower margin printer sales.

Software
Revenue for the Software segment decreased 20% to $81 million in the quarter compared to the prior year quarter. The decrease was primarily due to fewer large dollar licensing contracts and delays in some contract signings in our North American markets, and uncertain economic conditions and constrained public sector spending in our international markets. Software revenue in the prior year quarter also included $13 million from two significant software contracts. EBIT decreased 54% to $5 million in the quarter compared to the prior year quarter primarily due to the decline in revenue and continued investment in product development.

Management Services
Revenue for the Management Services segment decreased 2% to $225 million and EBIT decreased 6% to $13 million in the quarter compared to the prior year quarter. The decrease in revenue and EBIT was primarily due to continued pricing pressure on new business and contract renewals and the loss of some customer contracts.

Mail Services
Revenue for the Mail Services segment increased 4% to $119 million in the quarter primarily due to revenue from our ecommerce cross-border package delivery solution initiated in the fourth quarter of 2012.
EBIT for the quarter decreased 43% to $19 million compared to the prior year quarter. Prior year EBIT included a $7 million benefit from fire-related insurance recoveries. The underlying decrease in EBIT was primarily due to investments and costs related to the startup phase of our new ecommerce offering.

Marketing Services
Revenue for the Marketing Services segment decreased 16% to $25 million and EBIT decreased 59% to $2 million in the quarter compared to the prior year quarter. The decrease in revenue and EBIT was due to lower marketing fees related to certain marketing category contract renewals and fewer household moves. We expect that similar revenue and EBIT trends will continue throughout the year.


LIQUIDITY AND CAPITAL RESOURCES
We believe that cash generated from operations, existing cash and investments, borrowing capacity under our commercial paper program and our credit line facility are currently sufficient to support our cash needs, including items like business operations, debt repayments and customer deposits as well as discretionary uses such as capital investments, dividends and share repurchases. Cash and cash equivalents and short-term investments were $947 million at March 31, 2013 and $950 million at December 31, 2012.
We have had the ability to supplement short-term liquidity through our consistent and uninterrupted access to the commercial paper market to date. We have an effective shelf registration statement and the ability to fund the long-term needs of our business through broad and efficient access to capital markets, cash flow, proceeds from divestitures and a credit line facility. Within the last 12 months, the rating agencies reduced our credit ratings. There can be no assurances that one or more of the rating agencies will not take additional adverse actions in the future.
We continuously review our liquidity profile through published credit ratings and the credit default swap market. We also monitor the creditworthiness of those banks acting as derivative counterparties, depository banks or credit providers.

Cash Flow Summary
Net cash provided by operating activities for the three months ended March 31, 2013 was $132 million compared to $71 million for the three months ended March 31, 2012. Cash flow from operations in the current year benefited from higher accounts receivable and finance receivable collections of $49 million, a special contribution of $95 million to our pension plans in 2012, lower restructuring payments of $10 million and proceeds of $5 million from the unwinding of interest rate swaps. These benefits were partially offset by lower net income, including the net loss of $25 million in connection with the Tender Offer, and higher payments of accounts payable and accrued liabilities.
Net cash used in investing activities for the three months ended March 31, 2013 was $65 million, a decrease of $86 million compared to cash provided by investing activities of $21 million for the three months ended March 31, 2012. Cash flow from investing activities in 2012 benefited from proceeds of $106 million received from the sale of leveraged lease assets.
Net cash used in financing activities was $66 million for the three months ended March 31, 2013 compared to $45 million for the three months ended March 31, 2012. See Financings and Capitalization section below for details of significant cash flows from financing activities.

Financings and Capitalization
We are a Well-Known Seasoned Issuer as defined in the Securities Act, which allows us to issue debt securities, preferred stock, preference stock, common stock, purchase contracts, depositary shares, warrants and units in an expedited fashion. We have a commercial paper program that is an important source of liquidity for us and a committed credit facility of $1.0 billion to support our commercial paper issuances. The credit facility expires in April 2016. We have not drawn upon the credit facility.
At March 31, 2013, there were no outstanding commercial paper borrowings. During the quarter, commercial paper borrowings averaged $100 million at a weighted-average interest rate of 0.41% and the maximum amount outstanding at any time was $300 million.
During the quarter, we completed a cash tender offer (the Tender Offer) for a portion of our 4.875% Notes due 2014, our 5.000% Notes due 2015, and our 4.750% Notes due 2016 (the Subject Notes). Holders who validly tendered their notes received the principal amount of the notes tendered, all accrued and unpaid interest and a premium amount. An aggregate $405 million of the Subject Notes were tendered. A net loss of $25 million, consisting of the premium payments, the write-off of unamortized costs and fees, partially offset by a gain from the unwinding of interest rate swap agreements, was recognized as Other expense (income), net on the Condensed Consolidated Statements of Income.
Also in the quarter, we issued $425 million of 30-year notes with a fixed-rate of 6.7%. Interest is payable quarterly commencing in June 2013. The notes mature in 2043, but may be redeemed, at our option, in whole or in part, at any time on or after March 7, 2018 at a redemption price equal to 100% of the principal amount, plus accrued and unpaid interest. The net proceeds of $412 million were used to fund the repurchase of notes under the Tender Offer.
In June 2013, we have $375 million of debt scheduled to mature and will fund . . .

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