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PBI > SEC Filings for PBI > Form 10-Q on 8-Nov-2013All Recent SEC Filings

Show all filings for PITNEY BOWES INC /DE/

Form 10-Q for PITNEY BOWES INC /DE/


8-Nov-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 targeted emerging markets

success in gaining regulatory approval for products where 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). All table amounts are shown in thousands of dollars, unless otherwise noted.
Overview
Third Quarter 2013 Results
For the third quarter of 2013, revenue decreased 1% to $939 million compared to $950 million in the third quarter of 2012. Equipment sales revenue increased 1% primarily due to sales of large production printers and inserters in North America and Asia Pacific. Supplies revenue grew 4% primarily due to the growing base of production print equipment installations and higher ink sales in our international markets. Software revenue grew 5% due to higher licensing revenue primarily in the U.S. Rentals and financing revenue decreased 7% and 8%, respectively, due a decline in the number of installed meters worldwide and lower equipment sales in prior periods. Support services revenue decreased 6% due to lower maintenance agreement revenue while business services revenue increased 5% from demand for our ecommerce solutions for cross border parcel delivery.

Net income from continuing operations attributable to common stockholders decreased to $77 million, or $0.38 per diluted share in the third quarter of 2013 compared to $88 million, or $0.44 per diluted share in the third quarter of 2012. This decrease resulted primarily from $35 million of pre-tax restructuring and asset impairment charges taken during the period. The majority of these charges related to an impairment of our world headquarters building based on a sales agreement signed during the quarter. The remainder of these charges related to initiatives we are undertaking to streamline our business operations and lower costs.


During the third quarter of 2013, we entered into an agreement to sell the North America Management Services operations (PBMS NA). The sale closed on October 1, 2013 and we received cash proceeds of $392 million. In addition, during the third quarter of 2013, we sold our Nordic furniture business. Total proceeds from this sale were not material.
During the second quarter of 2013, we entered into two separate agreements to sell the International Management Services business (PBMSi) and completed the sale of our International Mail Services operations (IMS) related to the international delivery of mail and catalogs. We closed on the agreements to sell PBMSi on July 5, 2013 and August 31, 2013. Total proceeds from the sale of PBMSi and IMS were not material.
PBMS (collectively PBMS NA and PBMSi), the Nordic furniture business and IMS are presented as discontinued operations in the Condensed Consolidated Statements of Income (Loss).
As a result of the above divestitures and certain organizational changes designed to realign our business units to reflect the clients served and how we review, analyze, measure and manage our operations, we have revised our business segment reporting. We have recast historical segment results to conform to our current segment presentation and to exclude discontinued operations.

Outlook
We have stated our intent to focus on three critical areas: stabilizing the mailing business, achieving operational excellence and driving growth with our digital commerce solutions.
Small & Medium Business Solutions revenue continues to be impacted, especially in North America, by the decline in physical mail volumes. We expect revenue to continue to be impacted by lower recurring revenue streams, but to a lesser degree as recurring revenues are expected to continue to moderate in their rate of decline. We have begun implementing a phased roll-out of our new "go-to-market" strategy in North America designed to improve the sales process and reduce costs by providing our clients broader access to products and services though online and direct sales channels. Within our international mailing markets we are continuing to expand our sales of our Connect+TM communications systems.
Within the Enterprise Business Solutions group, Production Mail is having a strong year due to sales of our high-speed production print equipment and production mail inserter systems. While we expect demand for these products to continue, we currently do not anticipate similar growth rates in 2014 due to the cyclical nature of these sales. Within our Presort Services segment, we expect increasing revenue due to the U.S. Postal Service's IMB mandate, as well as workshare improvements and new sales opportunities.
In our Digital Commerce Solutions segment, we anticipate growth to be driven by continued demand for our location intelligence and customer data and engagement solutions. In addition, we anticipate further growth will be driven by increasing volumes associated with our ecommerce solutions for cross-border package delivery.


                             RESULTS OF OPERATIONS
Revenue by source and the related cost of revenue are shown in the following
tables:
                                                                        Revenue
                                 Three Months Ended September 30,                  Nine Months Ended September 30,
                                 2013            2012        % change             2013               2012         % change
Equipment sales            $      201,830     $ 199,609          1  %     $      634,779         $   618,620          3  %
Supplies                           69,696        66,878          4  %            216,254             213,665          1  %
Software                           98,164        93,476          5  %            285,658             302,377         (6 )%
Rentals                           128,225       137,149         (7 )%            391,590             414,922         (6 )%
Financing                         113,955       123,999         (8 )%            346,646             373,695         (7 )%
Support services                  166,785       176,769         (6 )%            505,226             529,615         (5 )%
Business services                 160,131       151,909          5  %            458,061             446,654          3  %
Total revenue              $      938,786     $ 949,789         (1 )%     $    2,838,214         $ 2,899,548         (2 )%



                                                                    Cost of Revenue
                             Three Months Ended September 30,                             Nine Months Ended September 30,
                                                   Percentage of Revenue                                       Percentage of Revenue
                      2013            2012          2013           2012          2013            2012           2013           2012
Cost of
equipment sales  $    92,307       $  95,008         45.7 %         47.6 %   $   307,992     $   278,457         48.5 %         45.0 %
Cost of supplies      21,840          20,689         31.3 %         30.9 %        67,794          65,423         31.3 %         30.6 %
Cost of software      29,698          29,227         30.3 %         31.3 %        80,093          85,023         28.0 %         28.1 %
Cost of rentals       25,612          25,182         20.0 %         18.4 %        79,791          87,258         20.4 %         21.0 %
Financing
interest expense      20,306          19,604         17.8 %         15.8 %        59,979          61,385         17.3 %         16.4 %
Cost of support
services             103,004         107,074         61.8 %         60.6 %       315,275         334,274         62.4 %         63.1 %
Cost of business
services             112,447         103,230         70.2 %         68.0 %       322,970         298,689         70.5 %         66.9 %
Total cost of
revenue          $   405,214       $ 400,014         43.2 %         42.1 %   $ 1,233,894     $ 1,210,509         43.5 %         41.7 %

Equipment sales
Equipment sales revenue increased 1% to $202 million and 3% to $635 million in the quarter and year-to-date periods, respectively, compared to the same periods in 2012. The increase in the quarter was driven primarily by the installation of a large production printer in New Zealand and several inserters in North America. Equipment sales for the year-to-date period were favorably impacted by the installation of production printers and inserting equipment in North America and revenue of $3 million for scale updates resulting from a postal rate change in France; however, lower mail volumes in North America continue to have an unfavorable impact on mailing equipment sales in North America. Cost of equipment sales as a percentage of revenue decreased to 45.7% in the quarter compared to 47.6% in the prior year quarter primarily due to higher mix of lease extension equipment sales. For the year-to-date period, cost of equipment sales as a percentage of revenue increased to 48.5% from 45.0% in the same period in 2012 primarily due to a higher mix of lower margin product sales. Supplies
Supplies revenue increased 4% to $70 million and 1% to $216 million in the quarter and year-to-date periods, respectively, compared to the same periods in 2012. The increase in the quarter and year-to-date periods was primarily due to supply sales related to the growing base of production print equipment installations and higher ink revenue in our international markets due to favorable pricing in the U.K. and stabilization in meter population trends. Cost of supplies as a percentage of revenue for the quarter and year-to-date periods was 31.3%, slightly higher than 30.9% in the prior year quarter and 30.6% in the 2012 year-to-date period, primarily due to lower margins on production print equipment supplies sales.


Software
Software revenue increased 5% to $98 million in the quarter compared to the prior year period primarily due to favorable software licensing revenue in our Digital Commerce Solutions segment. Revenue also benefited from our digital mail delivery service offering (VollyTM). For the year-to-date period, software revenue decreased 6% to $286 million compared to the same period in the prior year, primarily due to $14 million of revenue in the prior year from two significant contracts signed in 2012. Uncertain economic conditions and constrained public sector spending in our international markets have also impacted software sales. These decreases were partially offset by revenue from VollyTM of $8 million. Cost of software as a percentage of revenue improved to 30.3% in the quarter compared with 31.3% in the prior year quarter and to 28.0% in the year-to-date period compared to 28.1% in the prior year period, primarily due to cost reduction initiatives.
Rentals
Rentals revenue decreased 7% to $128 million and 6% to $392 million in the quarter and year-to-date periods, respectively, compared to the same periods in 2012, primarily due to lower mail volumes and fewer meters in service. Cost of rentals as a percentage of revenue increased to 20.0% in the quarter compared to 18.4% in the prior year quarter primarily due to pricing pressures and a change in product mix. Cost of rentals as a percentage of revenue for the year-to-date period improved to 20.4% compared to 21.0% in the prior year period primarily due to lower depreciation expense.
Financing
Financing revenue decreased 8% to $114 million and 7% to $347 million in the quarter and year-to-date periods, respectively, compared to the same periods in 2012, primarily due to lower equipment sales in prior periods. Financing interest expense as a percentage of revenue for the quarter and year-to-date periods increased to 17.8% and 17.3%, respectively, compared to 15.8% and 16.4% in the comparable prior year periods 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 6% in the quarter to $167 million and 5% in the year-to-date period to $505 million, compared to the same periods in 2012. The decrease was primarily driven by lower maintenance agreement revenue due to declining meter population, lower new equipment placements worldwide and lower maintenance agreement revenue on new placements. Cost of support services as a percentage of revenue for the quarter increased to 61.8% compared to 60.6% in the prior year quarter due to lower revenues. Cost of support services as a percentage of revenue for the year-to-date period improved to 62.4% compared to 63.1% in the 2012 year-to-date period due to productivity initiatives in our International Mailing business, which more than offset the impact of lower revenues.
Business Services
Business services revenue increased 5% in the quarter to $160 million and 3% in the year-to-date period to $458 million compared to the same periods in 2012. The quarter and year-to-date periods benefited from revenue from our ecommerce solutions for cross-border package delivery; however, these benefits were partially offset by lower marketing services fees under certain contract renewals of $7 million in the quarter and $17 million in the year-to-date period. Cost of business services as a percentage of revenue increased in the quarter to 70.2% from 68.0% in the prior year quarter and to 70.5% in the year-to-date period compared to 66.9% in the 2012 year-to-date period. The increase was primarily due to continuing investment in our ecommerce offering and lower marketing services fees.

Selling, general and administrative (SG&A) SG&A expense decreased $16 million, or 4%, to $355 million in the quarter, and $44 million, or 4%, to $1,067 million in the year-to-date period compared to the same periods in 2012. These reductions were achieved as a result of our focus on operational excellence and the benefits of productivity initiatives in process, such as the new "go-to-market" initiative.

Restructuring charges and asset impairments Restructuring Charges
In order 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 have identified certain actions that we believe will provide 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, which will be recognized as specific initiatives are approved and implemented. We anticipate 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. Restructuring charges, net for the three and nine months ended September 30, 2013 were $9 million and $28 million, respectively. These charges consist primarily of severance and benefits for workforce reductions.


Asset Impairments
During the third quarter of 2013, we entered into an agreement to sell our corporate headquarters building and certain surrounding parcels of land. Based on the terms of the sale, we recorded a non-cash impairment charge of $26 million. We expect to close on the sale by the end of the second quarter of 2014.

Other expense, net
Other expense, net for the nine months ended September 30, 2013 of $25 million consists of the costs associated with the early redemption of debt during the first quarter. See Liquidity and Capital Resources - Financings and Capitalization for a detailed discussion.

Income taxes
See Note 13 to the Condensed Consolidated Financial Statements.

Discontinued operations
See Note 4 to the Condensed Consolidated Financial Statements.

Preferred stock dividends of subsidiaries attributable to noncontrolling interests
See Note 10 to the Condensed Consolidated Financial Statements.

Business segment results
During the third quarter of 2013, we changed our reporting segments in response to organizational changes made that realigned our business units to reflect the clients served and how we review, analyze, measure and manage our operations. There were no changes to the Small & Medium Business Solutions group, but certain business activities within our Enterprise Business Solutions group were consolidated under a new reporting segment, Digital Commerce Solutions. Historical segment results have been recast to conform to our current presentation and to exclude discontinued operations. The principal products and services of each of our reporting segments are as follows:
Small & Medium Business Solutions:
North America Mailing: Includes the revenue and related expenses from the sale, rental and financing of mailing equipment and supplies for small and medium size businesses to efficiently create mail and evidence postage in the U.S. and Canada.
International Mailing: Includes the revenue and related expenses from the sale, rental and financing of mailing equipment and supplies for small and medium size businesses to efficiently create mail and evidence postage in areas outside North America.

Enterprise Business Solutions:
Production Mail: Includes the worldwide revenue and related expenses from the sale, support and other professional services of our high-speed sorting and production print equipment and production mail systems to large enterprise clients to process inbound and outbound mail.
Presort Services: Includes worldwide revenue and related expenses from presort mail services for our large enterprise clients to qualify large mail volumes for postal worksharing discounts.

Digital Commerce Solutions:
Digital Commerce Solutions: Includes the worldwide revenue and related expenses from (i) the sale and support services of non-equipment-based mailing, client relationship and communication and location intelligence software; (ii) direct marketing services for targeted clients; (iii) our digital mail delivery service offering (VollyTM); and (iv) our cross-border e-commerce solutions.

The following tables show revenue and EBIT by business segment for the three and nine months ended September 30, 2013 and 2012. Segment EBIT is determined by deducting from segment revenue the related costs and expenses attributable to the segment. Segment EBIT excludes interest, taxes, general corporate expenses, restructuring charges and impairment charges, which are not allocated to a particular business segment. Management uses segment EBIT to measure profitability and performance at the segment level. Management


presents segment EBIT because it believes segment EBIT provides investors with an analysis of the company's operating performance and underlying trends of the businesses. 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 2 to the Condensed Consolidated Financial Statements for a reconciliation of segment EBIT to income from continuing operations before income taxes.

                                                                               Revenue
                                        Three Months Ended September 30,                  Nine Months Ended September 30,
                                        2013            2012        % change             2013               2012         % change
North America Mailing             $      422,821     $ 447,920         (6 )%     $    1,286,085         $ 1,362,709         (6 )%
International Mailing                    142,443       141,630          1  %            448,684             449,583          -  %
Small & Medium Business Solutions        565,264       589,550         (4 )%          1,734,769           1,812,292         (4 )%

Production Mail                          116,477       114,889          1  %            360,352             337,582          7  %
Presort Services                         105,093       105,909         (1 )%            322,954             322,401          -  %
Enterprise Business Solutions            221,570       220,798          -  %            683,306             659,983          4  %

Digital Commerce Solutions               151,952       139,441          9  %            420,139             427,273         (2 )%

Total                             $      938,786     $ 949,789         (1 )%     $    2,838,214         $ 2,899,548         (2 )%


                                                                            EBIT
                                       Three Months Ended September 30,               Nine Months Ended September 30,
                                       2013            2012        % change          2013            2012        % change
North America Mailing             $     167,433     $ 168,934         (1 )%     $     488,301     $ 514,975         (5 )%
International Mailing                    15,456        11,206         38  %            52,967        51,670          3  %
Small & Medium Business Solutions       182,889       180,140          2  %           541,268       566,645         (4 )%

Production Mail                          10,620        10,125          5  %            34,239        28,439         20  %
Presort Services                         20,398        19,167          6  %            65,132        82,728        (21 )%
Enterprise Business Solutions            31,018        29,292          6  %            99,371       111,167        (11 )%

Digital Commerce Solutions               10,196         2,971        243  %            20,134        23,674        (15 )%

Total                             $     224,103     $ 212,403          6  %     $     660,773     $ 701,486         (6 )%

Small & Medium Business Solutions
Small & Medium Business Solutions revenue for the quarter and year-to-date periods decreased 4% to $565 million and $1,735 million, respectively, compared to the same periods in 2012. EBIT for the quarter increased 2% to $183 million compared to the prior year quarter and decreased 4% in the year-to-date period to $541 million compared to the prior year period. North America Mailing
Revenue for the North America Mailing segment in the quarter and year-to-date periods decreased 6% to $423 million and $1,286 million, respectively, compared to the same periods in 2012. Recurring revenues, comprised of supplies, rentals and financing revenue, declined 7% in the quarter and 6% in the year-to-date period. We continue to see declining recurring revenues due to fewer meters in service and lower financing transactions due to declining equipment sales in prior periods. Equipment sales decreased 1% in the quarter and 5% in the year-to-date period compared to the prior year periods, primarily due to declining mail volumes.
EBIT decreased 1% to $167 million in the quarter and 5% to $488 million in the year-to-date period compared to the prior year periods, primarily due to the decline in revenue; however, EBIT margin improved due to process improvements and cost reduction initiatives. We


are in the midst of implementing a new "go-to-market" strategy designed to improve the sales process and reduce costs by providing our clients broader access to products and services though online and direct sales channels.

International Mailing
Revenue for the International Mailing segment increased 1% in the quarter to $142 million and was flat for the year-to-date period at $449 million compared to the same periods in 2012. Recurring stream revenues were flat in the quarter and down 2% in the year-to-date period compared to the prior year periods. Within recurring revenues, rentals revenue declined 9% in the quarter and 13% in the year-to-date period primarily due to a change in mix from rentals to equipment sales in France in 2012, and fewer installed meters in the U.K. We are starting to see a stabilization in meter population trends in our international markets. Supplies revenue increased 7% in the quarter and 2% in the year-to-date period as compared to the prior year periods due to a stabilization in meter population, favorable pricing in the U.K. and higher sales in Asia-Pacific. Equipment sales increased 1% in the quarter and year-to-date periods primarily due to increased sales in France and Germany, partially offset by lower equipment sales in the U.K. due to the continuing uncertain economic environment. Year-to-date equipment sales also benefited from revenue for scale updates resulting from a postal rate change in France.
EBIT increased 38% in the quarter to $15 million and 3% in the year-to-date . . .

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