TEXT-S&P revises Pitney Bowes outlook to negative

Wed May 9, 2012 9:44am EDT

Overview	
     -- U.S. postage meter and mailing services provider Pitney Bowes reported 	
a 4% decline in constant currency revenues for the first quarter of 2012.	
     -- We are affirming our current ratings on the company, including our 	
'BBB+' corporate credit, the existing 'BBB+' senior unsecured, the 'BBB-' 	
preferred stock, and the 'A-2' commercial paper ratings.	
     -- We are also changing the outlook to negative from stable, reflecting 	
the challenges the company faces in stabilizing revenues in the current 	
mailing environment, along with current high leverage.	
	
Rating Action	
On May 9, 2012, Standard & Poor's Ratings Services revised its outlook on 	
Stamford, Conn.-based Pitney Bowes Inc. (PBI) to negative from stable. At the 	
same time, we affirmed our 'BBB+' corporate credit rating on the company and 	
the existing issue-level ratings. 	
	
Rationale	
The ratings on PBI reflect Standard & Poor's expectation that operating trends 	
will remain under pressure in 2012, and that fully adjusted debt levels will 	
drop somewhat by year-end 2012. The company reported a 4% decline in revenues 	
for the first quarter, continuing the trend of 2011. While we expect some 	
improvement in the trend as the year goes on, reflecting new product 	
introductions and increased sales activity, the company remains challenged to 	
achieve stable revenues in the current weak economy, which is exacerbating the 	
secular decline of mail. Recurring revenue continues to decline in the Small 	
and Medium Business Solutions segment, and Production Mail and Management 	
Services also showed declines in the first quarter. While Software and Mail 	
Services are showing growth, their relatively small size is not enough to 	
offset the declines in the mainline businesses. EBITDA has mirrored the trends 	
in revenues and totaled $883 million in 2011 compared with close to $1.2 	
billion in 2007. 	
	
We believe PBI is committed to reduce leverage from current levels and will 	
use cash and free cash flow to lower debt. The company has $400 million of 	
debt coming due in 2012 and an additional $375 million in 2013. We expect 	
fully adjusted credit measures to show improvement from the year-end 2011 	
level of 3.2x to the mid- to high-2x level by year-end. While we expect 	
revenues will remain under pressure in 2012, margins are likely to improve 	
modestly in 2012, as cost-reduction moves offset the lower contribution from 	
the U.S. Mailing segment. As a result, we expect reported EBITDA generation to 	
grow in the mid-single digits in 2012.	
	
Reflecting weaker operating trends, we have revised our view of PBI's business 	
profile to "satisfactory" from "strong." The company's significant market 	
share in the U.S. postage meter market remains a positive rating factor. We 	
believe PBI is maintaining share in a shrinking addressable market. Despite 	
ongoing mid- to high-single-digit North American mailing revenue declines, 	
segment operating margin remains high--in the 30% area--and the business 	
supports the company's recurring and predictable cash flow. PBI has continued 	
to invest in growth businesses to offset mail-related declines, although 	
initiatives remain relatively small and have not offset the ongoing revenue 	
decline in the meter business. The company expects to introduce several new 	
products and to undertake several new initiatives later this year that may 	
help arrest the decline. Restructuring efforts and improving profitability in 	
non-U.S. Mailing segments has allowed the company to largely maintain EBITDA 	
margin in the low- to mid-20% range, with slight improvement likely in 2012. 	
The extent of the improvement may also depend on how much the company 	
increases its marketing expenses to support the new rollouts.	
	
The financial risk profile remains "intermediate." Because of lower EBITDA 	
generation and declining finance receivables, fully adjusted debt to EBITDA 	
has been high since fiscal year-end 2008, despite modest reductions in funded 	
debt, as the finance assets decline. As of year-end 2011, we calculate debt to 	
EBITDA of about 3.2x. Finance assets have declined, reflecting the trend of 	
lease extensions, and were down by $250 million in 2011. However, recent lease 	
extensions have declined and sales have recently shown improving trends. We 	
expect fully adjusted debt leverage to improve in 2012, reflecting debt 	
paydowns and a modest increase in EBITDA.	
	
Liquidity	
PBI's short-term rating is 'A-2'. It has "adequate" sources of liquidity to 	
more than cover its needs over the next several years in the event of 	
moderate, unforeseen EBITDA declines. Sources of cash include cash and 	
short-term balances of $915 million, supplemented by a $1.0 billion revolving 	
credit facility and cash flow from operations of about $640 million. The 	
company recently extended its revolver to 2016 while reducing it to $1.0 	
billion from the previous $1.25 billion. In addition, the new agreement 	
contains a 3.5x adjusted leverage covenant which the previous one did not 	
have. Cash uses contemplate capital spending of about $200 million, about $577 	
million of notes payable and debt maturing in 2012, and the company's annual 	
dividend (including the dividend on the preferred stock) of over $300 million. 	
	
We expect that sources of liquidity will exceed uses by 1.2x or more. 	
Maturities over the next 24 months are manageable. We expect that net sources 	
would be positive, even with a 15%-20% drop in EBITDA. In our view, the 	
company's predictable and recurring cash flow will allow it to absorb 	
low-probability shocks.	
	
Outlook	
The negative outlook reflects our expectations that revenue will stabilize 	
later in 2012 and that most of discretionary cash flow will be directed to 	
debt reduction. However, we may lower the rating by one notch if revenue 	
continues to decline at the 2011 pace, reflecting lower mail volumes and weak 	
economic conditions and/or if sufficient cash is not used to pay down debt and 	
reduce leverage from 2011 levels to the mid- to high-2x level this year. We do 	
not foresee raising the rating within the two-year outlook horizon, given 	
current expectations for leverage and operating performance.	
	
Related Criteria And Research	
     -- Top 10 Investor Questions: How Will The Global Technology Industry 	
Fare Amid An Economy In Flux?, April 26, 2012	
     -- Global Technology Ratings Trend Shifts To Negative In The First 	
Quarter, April 11, 2012	
     -- Issuer Ranking: Global Technology Ratings, Strongest To Weakest, March 	
29, 2012	
     -- U.S. Technology Companies' Liquidity Is Higher, For Now, Jan. 18, 2012	
     -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011	
     -- Key Credit Factors: Methodology And Assumptions On Risks In The Global 	
High Technology Industry, Oct. 15, 2009	
     -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, 	
May 27, 2009	
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008	
	
Ratings List	
Pitney Bowes International Holdings Inc.	
	
Ratings Affirmed; Outlook Action	
                                        To                 From	
Pitney Bowes Inc.	
 Corporate Credit Rating                BBB+/Negative/A-2  BBB+/Stable/A-2	
	
Pitney Bowes International Holdings Inc.	
 Corporate Credit Rating                BBB+/Negative/--   BBB+/Stable/--	
Preferred Stock                         BBB-
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