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PBI > SEC Filings for PBI > Form 10-Q on 2-May-2014All Recent SEC Filings

Show all filings for PITNEY BOWES INC /DE/

Form 10-Q for PITNEY BOWES INC /DE/


2-May-2014

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, acquisitions 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

our ability to successfully implement a new Enterprise Resource Planning (ERP) system and fully realize the related savings and efficiencies

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, 2013 (2013 Annual Report). All table amounts are shown in thousands of dollars, unless otherwise noted.
Overview
First Quarter 2014 Results
For the first quarter of 2014, revenue increased 3% to $937 million compared to $909 million in the first quarter of 2013. This increase was driven primarily by growth from our ecommerce solutions for cross-border parcel delivery and double-digit software licensing growth. Also contributing to revenue growth in the quarter was a 9% increase in supplies revenue primarily due to higher sales in North America due to improved marketing effectiveness from our go-to-market strategy, higher supply sales in our Production Mail operations from the growing base of production print equipment installations and certain pricing actions taken during the quarter. Offsetting these increases were a 4% decline in equipment sales primarily due to a decline in sales of large production printers due to a comparably strong prior year quarter, a decline of 4% and 3% in rentals and financing revenue, respectively, due to a decline in the number of installed meters worldwide and a 3% decline in support services revenue due to lower maintenance agreement revenue.

Net income from continuing operations attributable to common stockholders decreased to $42 million, or $0.21 per diluted share, in the first quarter of 2014 compared to $59 million, or $0.29 per diluted share, in the first quarter of 2013. This decrease resulted primarily


from the costs associated with the early extinguishment of debt (see Liquidity and Capital Resources) and restructuring charges taken during the period.

On April 15, 2014, Pitney Bowes of Canada Ltd. (PB Canada) completed the sale of its Document Imaging Solutions (DIS) business, which consisted of hardware (copiers and printers), document management software solutions and the related lease portfolio to Konica Minolta Business Solutions (Canada) Ltd. (Konica Minolta) and a business equipment leasing services provider in two separate transactions. PB Canada and Konica Minolta also entered into a strategic alliance whereby Konica Minolta will represent PB Canada's mailing business in certain territories in Canada. The sale is consistent with our overall strategic direction and will help us sharpen our focus on delivering our core products and solutions in Canada. The DIS business is reflected as a discontinued operation in the unaudited Condensed Consolidated Statements of Income for all periods presented.
Outlook
We continue to focus on three critical areas: stabilizing the mailing business, achieving operational excellence and driving growth in our Digital Commerce Solutions segment.
Within the Small & Medium Business Solutions group, we expect revenue and profit growth to continue to be challenged by the decline in physical mail volumes. However, we anticipate revenue and profit trends will show continued improvement in 2014, due in part to the "go-to-market" strategy implemented in North America and currently being rolled-out in Europe. Our go-to-market strategy provides our clients broader access to products and services through online and direct sales channels, broader solutions to serve the rapid growth in parcel shipments and a more agile workforce. In addition, postal agencies in North America recently announced discounts for postage meter users, which are anticipated to enhance the value proposition of meter usage in North America and further stabilize recurring stream revenues. Within our international mailing markets, the stabilization in meter population which began in 2013 is expected to continue in 2014, resulting in the continued improvement in recurring stream revenue trends. Within the Enterprise Business Solutions group, we expect demand for our production mail inserter and sortation equipment and high-speed production print equipment to continue; however, we do not anticipate growth over the prior year due to significant sales of production printers during 2013. Within our Presort Services segment, we expect increasing revenue due to workshare improvements and new sales opportunities.
In our Digital Commerce Solutions segment, we anticipate growth to be driven by continued demand for our ecommerce cross-border parcel management solutions, as well as our location intelligence, customer data and engagement software solutions.
During the first quarter of 2014, we began work on the initial phases of a new global ERP system. The implementation of the ERP system will occur in stages and is anticipated to be a multi-year process. We will make a significant investment and incur incremental expenses over the course of the implementation of this system. In 2014, we anticipate these expenses could approximate $0.10 per diluted share. The ERP system is expected to provide operating cost savings through the elimination of redundant systems and strategic efficiencies through the use of a standardized, integrated system.

Our growth initiatives continue to focus on leveraging our expertise in physical communications with our expanding capabilities in digital and hybrid communications and developing products, software, services and solutions that help our clients grow their businesses by more effectively communicating with their customers.


                             RESULTS OF OPERATIONS
Revenue by source and the related cost of revenue are shown in the following
tables:
                                    Revenue
                          Three Months Ended March 31,
                         2014              2013      % change
Equipment sales   $    189,056          $ 196,767      (4 )%
Supplies                79,517             73,218       9  %
Software                91,555             87,012       5  %
Rentals                123,579            129,114      (4 )%
Financing              110,050            113,887      (3 )%
Support services       158,252            162,589      (3 )%
Business services      185,488            146,776      26  %
Total revenue     $    937,497          $ 909,363       3  %



                                             Cost of Revenue
                                      Three Months Ended March 31,
                                                       Percentage of Revenue
                              2014         2013         2014           2013
Cost of equipment sales    $  82,534    $  94,543        43.7 %         48.0 %
Cost of supplies              24,154       22,846        30.4 %         31.2 %
Cost of software              30,164       24,791        32.9 %         28.5 %
Cost of rentals               25,444       26,398        20.6 %         20.4 %
Financing interest expense    19,653       19,019        17.9 %         16.7 %
Cost of support services      98,981      102,529        62.5 %         63.1 %
Cost of business services    128,936      102,355        69.5 %         69.7 %
Total cost of revenue      $ 409,866    $ 392,481        43.7 %         43.2 %

Equipment sales
Equipment sales revenue decreased 4% to $189 million in the quarter compared to the first quarter of 2013. This decrease was primarily driven by fewer sales of large production printers compared to the prior year due to an unusually strong prior year quarter. Cost of equipment sales as a percentage of revenue decreased to 43.7% in the quarter compared to 48.0% in the prior year quarter primarily due to fewer sales of production printers, which have a lower margin relative to other products.

Supplies
Supplies revenue increased 9% to $80 million in the quarter compared to the first quarter of 2013. The increase was primarily due to targeted outreach to customers and sales effectiveness in connection with our go-to-market strategy, increased supply sales due to the growing base of production print equipment installations, the stabilization of meter population trends in our international markets and certain pricing actions taken during the quarter. Cost of supplies as a percentage of revenue for the quarter was 30.4% compared to 31.2% in the prior year quarter primarily due to improved margins on supplies sales.

Software
Software revenue increased 5% to $92 million in the quarter compared to the prior year quarter primarily due to higher licensing revenue. Cost of software as a percentage of revenue increased to 32.9% in the quarter compared with 28.5% in the prior year quarter primarily due to investments in the specialization of the software sales channel.


Rentals
Rentals revenue decreased 4% to $124 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 for the quarter was 20.6%, consistent with 20.4% in the prior year quarter. Financing
Financing revenue decreased 3% to $110 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 for the quarter increased to 17.9% compared to 16.7% in the prior year period 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 3% in the quarter to $158 million compared to the first quarter of 2013, primarily due to a decline in equipment maintenance revenue resulting from fewer mailing machines in service. Cost of support services as a percentage of revenue for the quarter improved to 62.5% compared to 63.1% in the prior year quarter primarily due to margin improvement in our Production Mail segment from expense reductions. Business Services
Business services revenue increased 26% in the quarter to $185 million compared to the first quarter of 2013. This increase was driven by higher revenue from our ecommerce solutions for cross-border parcel delivery as demand continues to grow and higher revenue in our Presort Services operations due to improved qualification for postal rate discounts. Cost of business services as a percentage of revenue for the quarter was 69.5% compared to 69.7% in the prior year quarter.

Selling, general and administrative (SG&A) SG&A expense for the quarter was $351 million, which was flat compared to the first quarter of 2013. However, as a percentage of revenue, SG&A expense for the first quarter of 2014 improved to 37.5% compared to 38.7% in the first quarter of 2013 and also included expenses of $5 million related to the new ERP implementation. This improvement was primarily due to cost stabilization as a result of our focus on operational excellence and the benefits of productivity initiatives, including the go-to-market initiative.

Restructuring charges
Restructuring charges, net for the three months ended March 31, 2014 were $10 million. There were no restructuring charges recognized in the three months ended March 31, 2013. See Note 6 to the unaudited Condensed Consolidated Financial Statements.

Other expense
Other expense of $62 million and $25 million for the three months ended March 31, 2014 and 2013, respectively, consists of the costs associated with the early redemption of debt. See Liquidity and Capital Resources - Financings and Capitalization for a detailed discussion.

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

Discontinued operations
Discontinued operations includes the worldwide Management Services business (PBMS), International Mailing Services business (IMS) and Nordic furniture business, which were sold during 2013 and DIS, which was classified as a discontinued operation at March 31, 2014 and subsequently sold in April 2014. The operations of DIS exclude certain corporate and indirect business expenses, primarily service, sales and infrastructure support expenses, which were historically allocated to this business. The costs previously allocated to DIS and excluded from discontinued operations were $3 million and $4 million for the quarters ended March 31, 2014 and 2013, respectively. In addition, in computing interest expense related to DIS, we assumed a 10:1 leverage ratio of debt to equity and applied the overall effective interest rate to the DIS average outstanding finance receivables. Also see Note 4 to the unaudited Condensed Consolidated Financial Statements.

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


Business segment results
During 2013, we sold certain businesses and realigned our segment reporting to reflect the clients served, the solutions we offer, and how we manage, review, analyze and measure our operations. During the first quarter of 2014, we reclassified our shipping solutions operations from the Small & Medium Business Solutions segment group to the Digital Commerce Solutions segment. Also during the first quarter of 2014, the DIS business, originally included in the North America Mailing segment, was classified as a discontinued operation. Historical segment results have been recast to conform to our current segment 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 of high-speed, high-volume inserting and sortation equipment and production printer systems and supplies to large enterprise clients to process inbound and outbound mail and related support and other professional services. Presort Services: Includes 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, customer engagement, geocoding and location intelligence software; (ii) our shipping and cross-border ecommerce solutions; (iii) direct marketing services for targeted clients; and (iv) our digital mail delivery service offering.

We determine segment earnings before interest and taxes (EBIT) 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 other items, which are not allocated to a particular business segment. Management uses segment EBIT to measure profitability and performance at the segment level. Management believes segment EBIT provides an analysis of our 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 consolidated results of operations. Refer to Note 2 to the unaudited Condensed Consolidated Financial Statements for a reconciliation of segment EBIT to income from continuing operations before income taxes.


Revenue and EBIT for reportable segments is presented below.

                                                    Revenue
                                          Three Months Ended March 31,
                                         2014              2013      % change
North America Mailing             $    381,027          $ 388,836      (2 )%
International Mailing                  153,268            152,976       -  %
Small & Medium Business Solutions      534,295            541,812      (1 )%

Production Mail                        105,216            109,453      (4 )%
Presort Services                       116,491            110,900       5  %
Enterprise Business Solutions          221,707            220,353       1  %

Digital Commerce Solutions             181,495            147,198      23  %

Total                             $    937,497          $ 909,363       3  %


                                                      EBIT
                                          Three Months Ended March 31,
                                         2014             2013       % change
North America Mailing             $    160,338         $ 148,458        8  %
International Mailing                   24,819            17,390       43  %
Small & Medium Business Solutions      185,157           165,848       12  %

Production Mail                          7,737             7,832       (1 )%
Presort Services                        23,896            23,488        2  %
Enterprise Business Solutions           31,633            31,320        1  %

Digital Commerce Solutions               9,531              (279 )     NM

Total                             $    226,321         $ 196,889       15  %

Small & Medium Business Solutions
Small & Medium Business Solutions (SMB) revenue decreased 1% to $534 million for the quarter compared to the prior year quarter while EBIT increased 12% to $185 million for the quarter compared to the prior year quarter. Foreign currency translation had a less than 1% impact on total SMB revenue and EBIT. North America Mailing
Revenue for the North America Mailing segment in the quarter decreased 2% to $381 million compared to the prior year quarter. Recurring revenues, comprised of supplies, rentals and financing revenue, declined 2% in the quarter. Rentals revenue and financing revenue continued to decline due to fewer meters in service and declining equipment sales in prior periods; however, these declines were partially offset by higher supply sales due to targeted outreach to customers and sales effectiveness in connection with our go-to-market strategy and certain pricing actions taken during the quarter. Equipment sales decreased 1% in the quarter as lower sales in Canada more than offset a 2% increase in U.S. equipment sales, which benefited from our go-to-market sales strategy. EBIT increased 8% to $160 million in the quarter compared to the prior year quarter despite the decline in revenue due to the benefits of our go-to-market sales strategy and ongoing cost reduction and cost control initiatives. Our go-to-market sales strategy was 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 in the quarter of $153 million was flat compared to the prior year quarter. Recurring stream revenues were flat in the quarter compared to the prior year quarter. Within recurring revenues, rentals revenue declined 7% in the quarter primarily due to a migration from the rental of equipment to the financing of equipment in France and supplies revenue increased 5% in the quarter primarily driven by higher sales in the U.K. and Germany due to stabilization in meter population.
EBIT increased 43% to $25 million in the quarter compared to the prior year quarter primarily due to ongoing cost reduction and cost control initiatives.

Enterprise Business Solutions
Enterprise Business Solutions revenue for the quarter increased 1% to $222 million compared to the prior year quarter and EBIT increased 1% to $32 million for the quarter compared to the prior year quarter. Foreign currency translation had a less than 1% impact on total Enterprise Business Solutions revenue and EBIT.
Production Mail
Revenue for the Production Mail segment in the quarter decreased 4% to $105 million compared to the prior year quarter. Equipment sales decreased 9% in the quarter, primarily due to fewer installations of production printers as installations in the prior year quarter were unusually strong as a result of significant installations for certain enterprise customers. Supplies revenue for the quarter increased 51%, and accounted for a 2% growth in total Production Mail revenue, due to the growing base of installed production printers and inserting equipment.
EBIT for the quarter decreased 1% to $8 million compared to the prior year quarter primarily due to the decline in revenue; however, EBIT margin improved due to fewer sales of production printers, which have a lower margin relative to other products.

Presort Services
Revenue for the Presort Services segment increased 5% to $116 million compared to the prior year quarter primarily due to higher volumes of First Class mail processed and improved qualification for postal rate discounts.
EBIT for the quarter increased 2% to $24 million primarily due to the increase in revenue, but was adversely impacted by the costs associated with the consolidation of two processing facilities.

Digital Commerce Solutions
Digital Commerce Solutions
Revenue for the Digital Commerce Solutions segment increased 23% in the quarter to $181 million compared to the prior year quarter primarily due to growth in our ecommerce cross-border parcel delivery solution and higher software licensing revenue. EBIT for the quarter increased $10 million from the prior year quarter primarily due to the increase in revenue and provided operating leverage to partially offset the continued investments in ecommerce technology and infrastructure and the specialization of the software sales channel.


LIQUIDITY AND CAPITAL RESOURCES
We believe that existing cash and investments, cash generated from operations and borrowing capacity under our commercial paper program are currently sufficient to support our cash needs, including discretionary uses such as capital investments, dividends and share repurchases. Cash and cash equivalents and short-term investments were $930 million at March 31, 2014 and $939 million at December 31, 2013.

Cash Flow Summary
Net cash provided by operating activities for the three months ended March 31, 2014 was $106 million compared to $132 million for the three months ended March 31, 2013. The decrease in cash flow from operations was driven by cash payments for debt extinguishment, lower income and working capital changes partially offset by lower tax payments.
Net cash used in investing activities for the three months ended March 31, 2014 was $59 million compared to $65 million for the three months ended March 31, 2013. Cash flow from investing activities in 2014 benefited from lower capital expenditures and withdrawals from reserve deposit accounts, partially offset by the timing of investment maturities.
Net cash used in financing activities for the three months ended March 31, 2014 was $50 million compared to $66 million for the three months ended March 31, 2013. During the first quarter of 2014, we received cash proceeds of $493 million from the issuance of debt and repaid $500 million of existing debt. During the first quarter of 2013, we received cash proceeds of $412 million from the issuance of debt and repaid $405 million of existing debt. See Financings and Capitalization section below for further details.

Financings and Capitalization
We are a Well-Known Seasoned Issuer with the SEC, 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 . . .

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