Business News

Pitney Bowes Announces Fourth Quarter and Annual Results for 2010

Wednesday 09. February 2011 - Pitney Bowes Inc. (NYSE:PBI) today reported 2010 fourth quarter and full year 2010 results.

Revenue for the quarter was $1.4 billion, a decline of one percent compared with the prior year. Adjusted earnings per diluted share from continuing operations for the fourth quarter was $0.66 compared with $0.64 for the prior year. On a Generally Accepted Accounting Principles (GAAP) basis, the company reported earnings per diluted share of $0.31 for the fourth quarter, compared with $0.47 per diluted share for the prior year. GAAP earnings per diluted share for the quarter included a $0.27 per share charge for restructuring and asset impairment costs associated with the company’s Strategic Transformation initiatives, including $0.07 per share for pension and retiree medical curtailment related non-cash charges; a non-cash net tax charge of $0.03 per share, associated with out-of-the money stock options that expired during the quarter; and a $0.05 per share loss associated with discontinued operations.
For the full year revenue was $5.4 billion, a decline of 3 percent when compared with the prior year, and adjusted earnings per diluted share from continuing operations was $2.23 compared with $2.28 for the prior year. GAAP earnings per diluted share was $1.41 for the full year compared with $2.04 for the prior year. GAAP earnings per diluted share for the year included a $0.59 charge for restructuring and asset impairment costs primarily associated with the company’s Strategic Transformation initiatives; a non-cash net tax charge of $0.13 primarily associated with out-of-the money stock options that expired during the year and healthcare legislation enacted at the beginning of the year; and a $0.09 loss associated with discontinued operations.
Free cash flow was $289 million for the quarter and $961 million for the year. On a GAAP basis, the company generated $284 million in cash from operations for the quarter and $951 million for the year. In comparison to the prior year’s free cash flow of $889 million, free cash flow for 2010 benefited primarily from improved working capital and reduced capital expenditures. Uses of cash for the year included $320 million of dividend payments to shareholders; $171 million of debt reduction; and $100 million to repurchase the company’s common shares outstanding.
The company’s results for the quarter and the year are summarized in the table below:
Fourth Quarter Full Year 2010*
Adjusted EPS $0.66 $2.23
Restructuring and Asset Impairments ($0.27) ($0.59)
Tax Charges ($0.03) ($0.13)
GAAP EPS from Continuing Operations $0.36 $1.50
Discontinued Operations ($0.05) ($0.09)
GAAP EPS $0.31 $1.41
*The sum of the earnings per share does not equal the totals above due to rounding.
Commenting on the quarter and the year, Chairman, President and CEO Murray D. Martin noted, “Our quarterly and full year’s results reflect progress against several key milestones toward growth. Equipment sales improved for the second consecutive quarter on a consolidated basis and in our global Mailing operations. Growth was enhanced by placement of new products, in particular, our Connect+ TM web-based communications system. We again had solid growth in software revenue even as we build more recurring streams through multi-year licensing agreements. Importantly, as we anticipated, relative comparisons in our recurring revenue streams of supplies, rentals and financing are improving. We continue to execute on our Strategic Transformation program and we reaped even greater benefits than expected. In addition to the cost savings, we have enhanced the way we interact with our customers and streamlined our processes to develop new products more quickly and efficiently. The program is reducing our fixed cost structure so we will be more profitable and flexible as we grow the business.
“Strategic Transformation is also enabling us to continue investing in new capabilities and solutions which are generating value for our customers and shareholders, even in the current global business climate. Our growth strategies are focused on delivering a range of solutions that help our SMB and enterprise customers more effectively manage communications with their customers.
“As a result of the actions that we took during the year, we exited the year in an excellent position to leverage profitable growth in 2011 and beyond. Therefore, for the 29th consecutive year our Board of Directors approved an increase in our quarterly dividend. The dividend for the first quarter 2011 will be $0.37 per common share. At the same time, the Board approved an increase of $100 million in the company’s share repurchase authorization from $50 million to a total of $150 million.
“As we enter 2011, we are introducing game-changing innovations that will support our growth well into the future. We are enabling businesses to bridge the physical and digital channels to enhance communications with their customers. In January we introduced Volly TM, which is our new secure digital mail delivery system. Volly TM is a cloud-based platform that empowers consumers to receive, view, organize and manage bills, statements, direct marketing catalogs, coupons and other content from multiple providers using a single application.”
Business Segment Results
The company reports its business segments in two groups based on the customers served: 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
4Q 2010 Y-O-Y Change Change ex Currency
Revenue $716 million (3%) (2%)
EBIT $219 million (2%)
Within the SMB Solutions Group:
U.S. Mailing
4Q 2010 Y-O-Y Change Change ex Currency
Revenue $473 million (5%) (5%)
EBIT $181 million 0%
U.S. Mailing had a second consecutive quarter of year-over-year equipment sales growth among its mid-and larger-sized customers, benefiting from increased placements of the new Connect+ mailing system and improved retention rates among existing customers. Achieving sequential quarters of year-over-year equipment sales growth in the U.S. Mailing segment is a key milestone towards returning the other revenue components of the core business to growth. The segment’s overall revenue continued to be affected by lower rental and financing revenue as a result of lower equipment sales in prior periods. However, the decline in financing revenue continues to moderate and overall revenue declined at its lowest rate in eight quarters. EBIT margin improved by 190 basis points versus the prior year, as a result of ongoing productivity improvements related to the company’s Strategic Transformation program, lower credit losses, and ongoing benefits from previous lease extensions.
International Mailing
4Q 2010 Y-O-Y Change Change ex Currency
Revenue $244 million 1% 3%
EBIT $37 million (9%)
International Mailing revenue grew both on a reported basis and excluding the impact of foreign currency when compared with the prior year. The segment also had a second consecutive quarter of year-over-year equipment sales growth, helped by sales of the new Connect+ mailing system, which was introduced in the UK during the quarter. The Connect+ mailing system will be rolled-out to other parts of Europe and Canada throughout 2011. Revenue also had a modest benefit from the initial placements of recently approved meter systems in Italy and growth in meters in service in Canada, both of which are expected to generate additional revenues in the future. Additionally, there was growth in support services revenue during the quarter. As in the U.S., financing revenue declined as a result of lower equipment sales in prior periods. EBIT declined versus the prior year in part due to mix of revenue and higher pension costs versus the prior year.
Enterprise Business Solutions
4Q 2010 Y-O-Y Change Change ex Currency
Revenue $718 million 0% 1%
EBIT $100 million 8%
Within the Enterprise Business Solutions Group:
Worldwide Production Mail
4Q 2010 Y-O-Y Change Change ex Currency
Revenue $177 million 11% 12%
EBIT $25 million 5%
Worldwide Production Mail had double-digit revenue growth during the quarter, when compared with the prior year, which was partially driven by a higher backlog entering the quarter and continued demand for the company’s high-speed, high integrity inserting systems, especially in the financial services and insurance sectors in the U.S. During the quarter, the company installed eleven inserting systems in China and completed the installation of two Intellijet color production printing systems from the company’s technology distribution partnership with HP. EBIT margin improved sequentially but declined versus the prior year due in part to product mix and start-up installation costs associated with the Intellijet color production printing systems.
Software
4Q 2010 Y-O-Y Change Change ex Currency
Revenue $ 111 million 6% 6%
EBIT $ 24 million 13%
During the quarter, the Software business experienced continued demand for its analytics and CRM software solutions in the U.S. The company’s continued transition to annuity-based pricing for selected software solutions resulted in selling a majority of its larger software solutions as multi-year arrangements, which will benefit recurring revenue in future periods. If these deals had been sold as one-time licenses, revenue would have grown at a double-digit pace. Revenue for the quarter, as compared to the prior year, benefited from the company’s recent acquisition of Portrait Software, plc, which further enhances the company’s analytics and customer communications management capabilities. Software EBIT grew at a double-digit rate and the margin improved versus the prior year primarily due to margin leverage on revenue growth and ongoing productivity gains.
Management Services
4Q 2010 Y-O-Y Change Change ex Currency
Revenue $251 million (8%) (6%)
EBIT $ 27 million 17%
During the quarter, Management Services had its best net new written business in the U.S. in two years as the business environment appears to be stabilizing. These new contracts will begin to offset the revenue decline resulting from account contractions and terminations in the U.S. during the economic downturn. Also, as noted previously, the company exited a number of postal facilities management contracts in the U.S., which reduced revenue during the quarter. Outside the U.S., where the company principally provides print and customer communication services to enterprise accounts in Europe, the company decided to exit some lower margin accounts. As a result of this decision and lower print volumes, revenue declined in the quarter. Despite lower revenue, segment EBIT margin improved for the sixth consecutive quarter versus the prior year. The margin improvement resulted from the company’s focus on more profitable contracts, ongoing productivity initiatives, and a continued transition to a more variable cost structure.
Mail Services
4Q 2010 Y-O-Y Change Change ex Currency
Revenue $146 million 1% 1%
EBIT $ 19 million (5%)
Mail Services continues to process increasing volumes of both First Class and Standard Class mail from new and existing customers in the U.S. There is ongoing customer demand for the company’s unique nationwide logistics capability to help mailers maximize presort discounts and expedite mail delivery. Presort-related revenue for the quarter grew and the EBIT margin continued to improve.
EBIT for the segment was impacted by increased costs associated with the International Mail Services (IMS) portion of the business. Higher shipping rates for some international destinations reduced parcel revenue margins for the quarter. However, the company is building scale in this business and has taken actions to mitigate these cost increases, including updating customer contract rates for 2011.
Marketing Services
4Q 2010 Y-O-Y Change Change ex Currency
Revenue $ 33 million (3%) (3)%
EBIT $ 6 million 2%
Marketing Services revenue declined versus the prior year primarily because of a reduced number of household moves during the quarter versus the prior year. EBIT margin continued to improve year-over-year due to improved marketing revenue per move. This business is built around a set of physical and digital products that help approximately 44 million U.S. residents with the change of address process each year.
Strategic Transformation Update
During 2010, the company accelerated several of its strategic initiatives to streamline processes and make its cost structure more variable to better leverage changing business conditions. As a result, it achieved benefits for 2010 of $120 million net of system and related investments, which was substantially in excess of its original target of at least $50 million in net benefits. Pre-tax restructuring and related impairment charges for the year were $182 million. This exceeded the company’s original target for 2010 charges in the range of $100 to $150 million, as it accelerated programs and incurred pension and retiree medical curtailment related non-cash charges of $24 million in the fourth quarter. Total costs related to the program are expected to remain within the original range, and are now estimated at $300 to $350 million. The company now expects that annualized pre-tax benefits net of system and related investments will be in the range of $250 to $300 million by 2012. This represents a $100 million increase in projected net benefits resulting from process automation, channel alignment, reduced infrastructure costs and streamlined product development.
2011 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 expects 2011 revenue, excluding the impacts of currency, to be in a range of flat to 3 percent growth. The company’s outlook projects a return to revenue growth due in part to a number of initiatives designed to stabilize its base business and drive new growth opportunities. This is occurring in a business and economic environment characterized by gradual improvement at varying rates by sector and geography.
The company anticipates continued improvement in equipment sales in 2011 building on two consecutive quarters of year-over-year improvement, as well as an expected positive outlook for sales of new solutions like the Connect+ TM communications system. As equipment sales improve, the company expects moderating declines in recurring revenue streams primarily related to the SMB Solutions Group. The company has previously discussed that lower equipment sales during the economic downturn affects financing, rentals and supplies revenue streams. The company expects growth in several areas in 2011 to offset the anticipated declines in SMB stream revenues. These include growth in Software revenue due to increasing demand for term-based licenses of customer communications management software solutions; expansion in Mail Services; and new customer communications management solutions across our enterprise business portfolio.
The company’s 2011 guidance for adjusted diluted earnings per share from continuing operations is summarized below:
2011 Earnings Guidance Reconciliation Full Year
2010 Adjusted EPS $2.23
Operations Growth Excluding SMB Stream Revenues* $0.32 to $0.42
Impact of Lower SMB Stream Revenues* ($0.30 to $0.25)
2011 EPS on a Comparative Basis $2.25 to $2.40
Investment in Volly TM Market Development ($0.10 to $0.05)
2011 Adjusted EPS from Continuing Operations $2.15 to $2.35
*Stream revenues include financing, rentals and supplies in the SMB Solutions Group
In 2011, the company anticipates generating incremental earnings of $0.32 to $0.42 per share from operations growth and productivity, excluding the impact of SMB stream revenues. As noted previously, the company anticipates lower SMB stream revenues as a result of lower equipment sales in prior periods, which are expected to negatively impact earnings by $0.25 – $0.30 per share, resulting in comparative earnings for the year of $2.25 to $2.40 per share. The company also plans to invest $.05 to $.10 per share to develop the market for Volly TM, a secure digital mail system. As a result, the company expects 2011 adjusted earnings per share from continuing operations in the range of $2.15 to $2.35.
The company’s 2011 guidance for GAAP diluted earnings per share from continuing operations is summarized below:
Full Year
2011 Adjusted EPS from Continuing Operations $2.15 to $2.35
Restructuring ($0.35 to $0.25)
2011 GAAP EPS from Continuing Operations $1.80 to $2.10
On a GAAP basis, the company expects 2011 earnings per diluted share from continuing operations in the range of $1.80 to $2.10 including the expected impact of $0.25 to $0.35 per share for restructuring charges associated with Strategic Transformation.
The company expects to generate free cash flow for 2011 in the range of $750 million to $850 million. As compared to the prior year, the company expects increased investment in finance receivables through higher levels of equipment sales, and higher capital expenditures associated with investments in business growth which would result in lower free cash flow in 2011.
The company’s Board of Directors approved an increase of $100 million in the company’s share repurchase authorization from $50 million to a total of $150 million. The company plans to utilize this authorization over the next twelve to eighteen months.
In closing, Mr. Martin noted, “In 2011 we expect increasing benefit from the actions we took to transform our business and invest in long-term value creation. We are excited about pursuing the promising growth opportunities that we see in leveraging our leadership in physical mail and growing our digital and hybrid capabilities to help our customers connect more effectively with their customers and prospects.”