STAMFORD, Conn, -- Pitney Bowes Inc. today reported second quarter 2009 financial results.
Revenue for the quarter was $1.38 billion compared with $1.59 billion in the prior year, a decline of 13 percent. A stronger dollar reduced revenue by 5 percent year-over-year. Adjusted earnings per diluted share from continuing operations was $0.55, compared with $0.69 in the prior year, which included $0.03 per diluted share from a 2008 legal settlement. Adjusted earnings per diluted share this quarter was equal to the first quarter of 2009.
Adjusted earnings per diluted share include the negative impacts of $0.04 per diluted share associated with currency and $0.01 per share from incremental pension costs when compared with the prior year. Earnings were further reduced by the impacts of lower revenue as a result of the weak global economic conditions.
On a Generally Accepted Accounting Principles (GAAP) basis, earnings per diluted share was $0.57 compared with $0.61 for the prior year. GAAP earnings per diluted share includes less than $0.01 in a non-cash tax charge associated with out-of-the money stock options that expired during the quarter and a $0.02 gain associated with discontinued operations.
Free cash flow was $204 million for the quarter while on a GAAP basis the company generated $207 million in cash from operations. Free cash flow benefited from strong accounts receivable management and lower levels of finance assets and capital investments. During the quarter the company paid $74 million of dividends. Year-to-date, the company has generated $444 million in free cash flow and on a GAAP basis $483 million in cash from operations, which was partially used to reduce debt by $179 million.
"Despite a challenging economic environment, we remain a healthy and profitable company that continues to generate significant cash flow and continues to invest for the future," noted Pitney Bowes Chairman, President and CEO Murray D. Martin, "Economic headwinds and unfavorable currency translation drove declines in revenue and EBIT year-over-year. However, as a result of significant cost containment measures, compared with the first quarter we improved EBIT margins in 6 of our 7 business reporting segments despite flat revenue. We have reduced costs across the entire business and have made a shift towards a more variable cost structure. We are committed to identifying and implementing meaningful structural and process improvements across the organization, that will reduce costs and enable continued investment to enhance customer and shareholder value.
"Looking ahead to the second half of 2009, we have seen a further slowing of business activity in key international markets, sales cycles for capital equipment purchases remain long, and we have not yet seen improvements in key mail-intensive industries like financial services. As a result, we are reducing our earnings outlook for the year. However, based on strong cash flow year-to-date, we are reaffirming our annual free cash flow guidance."
Business Segment Results
To provide further insight on the trends of the business, the company is also furnishing revenue and EBIT results on a sequential basis, which is a comparison to first quarter results.
Mailstream Solutions revenue declined 10 percent on a constant currency basis to $936 million. On a reported basis, revenue declined 15 percent and earnings before interest and taxes (EBIT) declined 19 percent to $238 million when compared with the prior year. When compared with the first quarter 2009, reported revenue increased by one percent and EBIT increased by 3 percent.
Within Mailstream Solutions:
U.S. Mailing revenue declined 8 percent to $505 million and EBIT declined 12 percent to $195 million when compared with the prior year. Revenue declined by one percent and EBIT increased by one percent when compared with the first quarter.
Similar to the first quarter, the segment benefited from the anticipated higher number of customers with leases becoming available for renewal and upgrade. Although equipment sales declined 7 percent compared with the prior year, there was an improvement in equipment sales on a sequential basis. The company continued its focus on customer retention by providing customers with a variety of options to upgrade or retain their existing equipment. Many customers elected to extend the lease on their existing equipment. These transactions benefit future period's profitability but have a less positive impact on revenue and profits during the quarter than lease upgrades for new equipment. The quarter's revenue and EBIT reflect lower levels of business activity and the related lower financing revenue, meter rentals, and supplies sales versus the prior year.
International Mailing revenue declined 14 percent on a constant currency basis to $218 million. On a reported basis, revenue declined 28 percent with 14 points of decline due to an adverse currency impact when compared with the prior year. EBIT declined 47 percent to $27 million. Adjusting for the legal settlement received during the second quarter last year, EBIT would have declined 38 percent. Reported revenue declined by 8 percent and EBIT declined 13 percent when compared with the first quarter.
Economic conditions internationally appear to be lagging the U.S. This has resulted in ongoing deferred capital purchases for mailing equipment and delays by customers in adding new services. This was particularly noticeable in Canada, Asia and certain key markets in Europe. In addition to a lower level of revenue during the quarter, EBIT was adversely affected by changes in currency rates that increased some product costs.
Worldwide Production Mail revenue declined 7 percent on a constant currency basis to $130 million. On a reported basis, revenue declined 13 percent with 6 points of the decline due to an adverse currency impact compared with the prior year. EBIT declined 32 percent to $10 million. Reported revenue increased 19 percent and EBIT doubled when compared with the first quarter.
Customers worldwide continued to defer making large capital investments and as a result are keeping existing equipment longer than usual. This trend again resulted in increased service revenue. There was also sequential improvement in the placement of new high-speed inserting equipment.
Software revenue declined 12 percent on a constant currency basis to $83 million. On a reported basis, revenue declined 19 percent and EBIT declined 17 percent to $5 million, when compared with the prior year. Reported revenue increased 10 percent and EBIT doubled when compared with the first quarter.
Worldwide consolidation in the financial services industry and slowness in the retail sector continued to adversely impact the sales and renewal of software licenses. Uncertainty surrounding the economy has resulted in many large multi-national organizations changing their approval policies for capital expenditures, which has lengthened the sales cycle. Ongoing business integration drove EBIT margin improvements versus the prior year and prior quarter. This helped offset the pressure on margin due to lower revenue and a mix of lower margin software sales.
Mailstream Services revenue declined 6 percent on a constant currency basis to $442 million. On a reported basis, revenue declined 8 percent and EBIT increased 9 percent to $41 million when compared with the prior year. Reported revenue declined one percent while EBIT increased 20 percent when compared with the first quarter.
Within Mailstream Services:
Management Services revenue declined 8 percent on a constant currency basis to $264 million. On a reported basis, revenue declined 12 percent and EBIT declined 11 percent to $16 million, when compared with the prior year. Reported revenue declined by one percent and EBIT increased 18 percent when compared with the first quarter.
In the U.S., EBIT as a percentage of revenue remained at 10 percent, comparable to the prior quarter, despite lower business activity and a decline in transaction volumes. The company continues to flex its costs with changing customer demand by taking actions to reduce the fixed cost structure of the business. Outside the U.S., the company's significant exposure to the weak financial services industry in the UK, and overall reduced print volumes throughout most of Europe, again pressured the segment's EBIT as a percentage of revenue.
Mail Services revenue increased 4 percent on a constant currency basis to $139 million. On a reported basis, revenue increased 3 percent and EBIT increased 36 percent to $22 million, when compared with the prior year. Reported revenue declined 2 percent and EBIT increased 17 percent when compared with the first quarter.
Expansion of the customer base and continued growth in mail volume processed drove an increase in revenue for the quarter. The company is achieving improved EBIT margin contributions from the integration of mail services sites acquired last year and the ongoing productivity initiatives taken by the business.
Marketing Services revenue declined 17 percent to $40 million and EBIT declined 11 percent to $3 million, when compared with the prior year. Revenue declined 3 percent while EBIT increased 56 percent when compared with the first quarter.
Revenue was negatively affected by reduced business in the areas of marketing campaign management and loyalty programs. Ongoing cost reduction initiatives resulted in EBIT margin improvement.
Revised 2009 Guidance
The company is adjusting the guidance it provided on May 5, 2009. The company has not seen indications that economic and business conditions in mail-intensive industries will improve this year and has also seen further declines in some key geographies. Sales cycles for most capital purchase decisions by customers remain long. The changing guidance reflects these factors, including the impact of the sustained economic downturn on high-margin financing, rental, and supplies revenue streams. While the company has been successful in reducing its cost structure across its entire business and is shifting to a more variable cost structure, these actions have not been enough to offset the impact of lower revenue.
Given the persistent decline in business activity and the lack of tangible signs of sustained near-term improvement in the economy, the company now expects 2009 revenue to decline in the range of 4 percent to 7 percent on a constant currency basis. On a reported basis, the company expects revenue to decline in the range of 7 percent to 10 percent, which includes an estimated negative 3 percent impact from currency when compared with 2008. The company expects adjusted earnings per diluted share from continuing operations for the year will be in the range of $2.15 to $2.35. This range includes the expected negative impact of $0.23 to $0.28 per diluted share from currency and incremental pension expense. Adjusted earnings per diluted share from continuing operations excludes an annual estimated 6 cents per diluted share non-cash tax charge associated with out-of-the-money stock options that was recorded in the first half of 2009. On a GAAP basis, the company expects earnings per diluted share from continuing operations for the year will be in the range of $2.09 to $2.29.
The company is reaffirming its free cash flow guidance in the range of $700 million to $800 million for the year, based on its strong cash flow performance year-to-date.
Mr. Martin concluded, "While the economic environment continues to be highly uncertain, we remain focused on the things that we can control. Let me reiterate our commitment to identify and implement structural and process improvements across the organization, as we remain focused on strengthening our long-term ability to generate value for customers and shareholders, while ensuring that the company is in the best possible position to capitalize on an eventual economic recovery."
Management of Pitney Bowes will discuss the company's results in a broadcast over the Internet today at 5:00 p.m. EST. Instructions for listening to the earnings results via the Web are available on the Investor Relations page of the company's web site at www.pb.com/investorrelations.
Pitney Bowes is a $6.3 billion global technology leader whose products, services and solutions deliver value within the mailstream and beyond. For more information about the company, its products, services and solutions, visit www.pitneybowes.com.
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