Business News

Pitney Bowes Announces Second Quarter Results for 2010

Wednesday 04. August 2010 - Pitney Bowes Inc. (NYSE:PBI) today reported second quarter 2010 results.

Revenue for the quarter was $1.3 billion, a decline of 6 percent compared with the prior year. Adjusted earnings per diluted share from continuing operations for the second quarter was $0.48 compared with $0.55 for the prior year. Adjusted earnings per diluted share reflected the impact of lower revenue as a result of weaker than expected business conditions in the second half of the quarter and a one-time charge of $0.05 primarily to correct rates used to estimate unbilled International Mail Services revenue in prior periods. Earnings per diluted share for the quarter on a Generally Accepted Accounting Principles (GAAP) basis were $0.30 compared with $0.57 per diluted share for the prior year. GAAP earnings per diluted share for the quarter included a $0.15 charge for restructuring costs associated with the company’s Strategic Transformation initiatives and asset impairments; a tax charge of $0.02 related to certain leveraged lease transactions outside the U.S.; a less than $0.01 tax charge primarily associated with out-of-the money stock options that expired during the quarter; and a $0.01 loss associated with discontinued operations.

Free cash flow for the quarter was $157 million, net of $70 million of tax payments. Free cash flow benefited from lower capital expenditures and lower finance receivables. On a GAAP basis, the company generated $118 million in cash from operations. During the quarter the company used $80 million of cash for dividends. Year-to-date, the company has generated $451 million in free cash flow and on a GAAP basis $424 million in cash from operations, which was used primarily to pay dividends and reduce debt.

The company’s results for the quarter are summarized in the table below:


Second Quarter
Adjusted EPS $0.48
Restructuring and Asset Impairments ($0.15)
Tax Charges ($0.02)
GAAP EPS from Continuing Operations $0.31
Discontinued Operations ($0.01)
GAAP EPS $0.30
Commenting on the quarter, Chairman, President and CEO Murray D. Martin said, “We continue to implement a broad range of actions to manage through a prolonged period of global economic weakness. After seeing some early signs of stabilization among our small to mid-sized customer base in the first quarter, we experienced a decline in activity levels in the latter part of the second quarter. Our actions are positioning the company to deliver long-term value to customers and shareholders, despite the near-term impact of weaker demand.”

Martin added, “We continued to generate strong free cash flow in the quarter, and are raising our free cash flow guidance for the year. In addition, our Strategic Transformation program is already generating meaningful results and contributed more than $20 million in net benefits during the quarter. The program is on track to achieve its objectives of improving our processes and reducing our cost of business while allowing us to invest in attractive growth opportunities.”

Business Segment Results

To provide a better perspective on the business, its financial results and trends, the company is now aggregating its business segments into two groups based on the customers it primarily serves: Small and Medium Business (SMB) Solutions and Enterprise Business Solutions. The SMB Solutions group consists of the company’s global Mailing operations. The Enterprise Business Solutions group includes the company’s global Production Mail, Software, Management Services, Mail Services and Marketing Services operations.

SMB Solutions


2Q 2010 Y-O-Y Change Change ex Currency
Revenue $683 million (6 %) (7 %)
EBIT $196 million (11 %)
Within the SMB Solutions Group:

U.S. Mailing


2Q 2010 Y-O-Y Change Change ex Currency
Revenue $468 million (8 %) (8 %)
EBIT
$167 million
(13 %)
Renewed concerns about uncertain business and economic conditions are reflected in an increased number and proportion of U. S. Mailing customers electing to extend their leases for existing equipment. Lease extensions are profitable transactions but generate less sales revenue than new equipment leases. The segment’s revenue was also adversely affected by lower rental and financing revenue from reduced equipment on lease as a result of lower sales in prior periods. Rental and financing revenue is relatively high-margin and the decline in this revenue accounted for the majority of the total year-over-year reduction in EBIT.

In mid-May, the company completed the U.S launch of its new, innovative Connect+ TM communications and mailing system. The global rollout will continue in phases going forward. Connect+ TM is being well received by customers as the industry’s first mailing system with web and application based software architecture and instant online access to numerous mailing, printing and reporting applications.

International Mailing


2Q 2010
Y-O-Y Change
Change ex Currency
Revenue $216 million (1 %) (2 %)
EBIT
$30 million
9 %
International Mailing revenue declined slightly with very little currency impact during the quarter. Consistent with the pattern in the U.S., customers increasingly opted for lease extensions for existing equipment, especially in the UK and other parts of Europe. Financing and rental revenue declined because of lower equipment sales in prior periods. EBIT margin improved versus the prior year in part due to past and ongoing productivity initiatives which offset the negative margin impact from lower financing revenue.

Enterprise Business Solutions


2Q 2010 Y-O-Y Change Change ex Currency
Revenue $614 million (6 %) (5 %)
EBIT
$50 million
(16 %)
The impacts for International Mail Services (IMS), noted earlier, reduced revenue and EBIT for the Enterprise Business Solutions group by $21 million and $16 million, respectively, in the quarter.

Within the Enterprise Business Solutions Group:

Worldwide Production Mail


2Q 2010 Y-O-Y Change Change ex Currency
Revenue $120 million (7 %) (6 %)
EBIT $ 9 million (14 %)
Revenue growth during the quarter was adversely impacted by the timing of installations of inserting systems and related software. As a result, worldwide Production Mail backlog remained above prior year at the end of the second quarter. Equipment sales revenue was further reduced as customers, particularly in Europe, made fewer capital investments in new equipment and displayed renewed concerns about future business conditions. The EBIT margin for the quarter declined on lower revenue when compared with the prior year.

Software


2Q 2010 Y-O-Y Change Change ex Currency
Revenue $ 81 million (2 %) (3 %)
EBIT $ 6 million 11 %
Revenue declined slightly in the quarter versus the prior year due primarily to the continued transition to annuity-based pricing for some software solutions. Excluding the impacts of this transition, revenue growth would have been slightly positive versus the prior year. The company’s actions to integrate its operations and focus its product offerings have resulted in continued year-over-year improvement in the Software segment EBIT margin. The company plans to continue expansion of its SaaS offerings and recurring revenue streams from term licenses. The company recently formed an alliance with salesforce.com, for example, to deliver software as a service solutions in the salesforce.com ecosystem that will help agents and insurance carriers increase profitability and strengthen customer relationships. During the quarter, the company announced its planned acquisition of Portrait Software plc and expects to complete the transaction in the third quarter. Portrait Software plc will further enhance the company’s analytics and customer communications management capabilities.

Management Services


2Q 2010 Y-O-Y Change Change ex Currency
Revenue $249 million (6 %) (5 %)
EBIT $ 22 million 37 %
As expected, revenue for the quarter declined as a result of account contractions and terminations in the U.S. last year. Revenue also reflected a customer decision, at end of contract, to close some outsourced postal-related facilities that Management Services had previously operated. Outside the U.S., where the company principally provides print and customer communication services to enterprise accounts in Europe, revenue declined on lower volumes. However, EBIT margins improved globally versus the prior year, led by continuing margin improvement in Europe and the U.S. resulting from the company’s focus on more profitable contracts, ongoing productivity initiatives, and a continued transition to a more variable cost structure.

Mail Services


2Q 2010 Y-O-Y Change Change ex Currency
Revenue $126 million (9 %) (9 %)
EBIT $ 5 million (75 %)
Mail Services continues to process increasing volumes of U.S. domestic presort mail and diversify its mix of mail as it grows Standard Class mail volumes. Overall volume of mail processed increased from both new and existing customers and was driven in part by the company’s unique ability to help mailers benefit from the discounts available when properly utilizing the Intelligent Mail Barcode. Presort-related revenue for the quarter grew and the EBIT margin improved.

As noted earlier, revenue growth and margin were impacted by an adjustment made in the IMS portion of the business. During the quarter, the company made a one-time out of period adjustment primarily to correct the rates used previously to estimate earned but unbilled revenue for the periods 2007 through the first quarter 2010. The aggregate adjustment reduced second quarter revenue and EBIT, but the impact of this adjustment was not material on any individual quarter during these periods.

Marketing Services


2Q 2010 Y-O-Y Change Change ex Currency
Revenue $ 37 million 7 % 7 %
EBIT $ 7 million 30 %
Revenue improved versus the prior year primarily because of increased vendor advertising revenue for the Movers’ Source kits. EBIT margin improved year-over-year due to ongoing productivity initiatives.

2010 Guidance

This guidance discusses future results which are inherently subject to unforeseen risks and developments. As such, discussions about the business outlook should be read in the context of an uncertain future, as well as the risk factors identified in the safe harbor language at the end of this release.

The company is modifying its revenue and earnings guidance as a result of the business trends during the second quarter; the economic and business outlook for the remainder of the year and the one-time adjustment in the second quarter. The global economy and business environment have not stabilized or improved as quickly as the company anticipated when it provided guidance earlier in the year. The company noted deterioration in conditions as the second quarter progressed, particularly among the customers in its SMB segment group. Based on the uncertainty surrounding the current economic outlook, the company now does not expect the business environment to improve as much as it had previously expected in the second half of the year.

Given the continued volatility and uncertainty concerning currency, the company will only provide revenue guidance on a constant currency basis. The company now expects revenue for the year on a constant currency basis in the range of flat to a three percent decline when compared with the prior year. Adjusted EPS from continuing operations for the year is expected to be in the range of $2.10 to $2.30 and GAAP EPS is expected to be in the range of $1.49 to $1.85. GAAP EPS includes tax charges of $.13 per diluted share related to out of the money stock options; certain capital lease transactions outside the U.S. and health care legislation enacted in the beginning of the year. GAAP EPS also includes expected restructuring and asset impairment charges in the range of $.32 to $.48 related to the company’s previously announced Strategic Transformation program.

Based on the strong generation of free cash flow in the first half of the year and the outlook for the remainder of the year, the company is increasing its free cash flow guidance for the year by $50 million. The company now expects to generate free cash flow for 2010 in the range of $700 million to $800 million.

The company’s expected earnings results for 2010 are summarized below.


Full Year 2010
Adjusted EPS $2.10 to $2.30
Restructuring and Asset Impairments ($0.32 to $0.48)
Tax Charges ($0.13)
GAAP EPS from Continuing Operations $1.49 to $1.85
Mr. Martin concluded, “Given diminished economic growth expectations globally in the second half of the year, and a more cautious sentiment among our customers, we are reducing our full-year revenue and earnings guidance. However, we are also increasing our free cash flow guidance. We remain confident in and committed to our long-term growth strategies and Strategic Transformation program, and our strong free cash flow gives us significant financial and strategic flexibility.”