TEXT - S&P cuts Pitney Bowes ratings
Overview -- U.S. postage meter and mailing services provider Pitney Bowes reported a 5% decline in constant currency revenues for the third quarter of 2012, and a 20% decline in earnings before taxes. -- We are lowering our corporate credit rating on the company to 'BBB' from 'BBB+'. -- We are affirming the 'A-2' commercial paper rating. -- The outlook is stable, reflecting our expectation that relatively stable cash flow from operations and moderate financial policies will offset the challenges the company faces in stabilizing revenues, given global economic uncertainty and a mature mailing environment. Rating Action On Nov. 13, 2012, Standard & Poor's Ratings Services lowered its corporate credit rating on Stamford, Conn.-based Pitney Bowes Inc. (PBI) to 'BBB' from 'BBB+'. At the same time, we affirmed our 'A-2' commercial paper rating. The outlook is stable. The downgrade reflects PBI's lack of revenue growth, deterioration in its adjusted EBITDA margins, and our expectation that adjusted leverage will remain in the high 2x area in the near-to-intermediate term. Rationale The ratings on PBI reflect Standard & Poor's view of the company's business risk profile as "satisfactory" and its financial risk profile as "intermediate" (as defined by our criteria), and incorporate our expectation that operating trends will remain under pressure into 2013. The company reported a 5% decline in revenues for the third quarter of 2012, continuing a trend that began in 2011. While we expect sequential improvement in the fourth quarter, 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. Although PBI used cash and free cash flow to lower debt in 2012, we expect margins will remain under pressure, constraining the company's ability to materially reduce leverage from current levels. The ratio of adjusted debt to EBITDA was about 2.7x as of Sept. 30, 2012. PBI's satisfactory business profile incorporates a significant market share in the U.S. postage meter market, which remains a positive rating factor and supports the company's recurring and predictable cash flow. We believe PBI is maintaining share in a shrinking addressable market. PBI has continued to invest in growth businesses, although those initiatives have not offset the declines in the mainline businesses. While the company expects new products will contribute to revenue growth, PBI will continue to face obstacles from a weak global economy, which is suppressing equipment sales and meter usage. Adjusted EBITDA margins dropped to about 15% in the quarter ended Sept. 30, 2012, down from historical levels in the high teens as a percent of revenues. Although we expect ongoing cost reduction efforts will help stabilize margins, EBITDA declined to about $805 million as of Sept. 30, 2012, down from more than $900 million a year ago. PBI's financial risk profile is "intermediate," and we assess the company's management and governance to be "fair." Because of lower EBITDA generation and declining finance receivables, the ratio of fully adjusted debt to EBITDA has been high since fiscal year-end 2008, despite reductions in funded debt, as its finance assets decline. As of Sept. 30, 2012, we calculate debt to EBITDA of about 2.7x, down from 3.1x as of fiscal 2011, as recent debt maturities were repaid. However, we expect fully adjusted debt leverage to remain in the high 2x area over the rating horizon, reflecting our expectation of a lack of revenue and EBITDA growth. Liquidity The short-term rating on PBI's commercial paper is 'A-2'. PBI 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 $461 million as of Sept. 30, 2012, supplemented by a $1 billion revolving credit facility maturing 2016 and annual cash flow from operations that is expected to remain in excess of $500 million. Cash uses contemplate capital spending of about $170 million and the company's annual dividend (including the dividend on the preferred stock) of about $310 million. In our view, the company's relatively predictable and recurring cash flow will allow it to absorb low-probability shocks. We expect that sources of liquidity will exceed uses by 1.2x or more. We expect that net sources would be positive, even with a 15% drop in EBITDA. Maturities over the next 24 months are manageable, including recently issued term debt that will be used to repay 2013 maturities. In addition, we expect the company to maintain adequate headroom under the 3.5x adjusted leverage covenant in its revolving credit agreement. Finally, we expect share repurchases to be minimal in the near term, and to be funded from discretionary cash flow. Outlook The stable outlook incorporates our expectations that revenues will stabilize in 2013, but EBITDA levels will continue to be pressured by an ongoing revenue mix shift away from the higher margin mail segment. We expect PBI to offset diminished operating profitability by maintaining moderate financial policies. We do not foresee raising the rating within the two-year outlook horizon, given current expectations for leverage and operating performance. The stable outlook incorporates our expectation that EBITDA will be under moderate pressure in 2013, reflecting lower mail volumes, weak economic conditions and growth from lower-margin strategic initiatives. While leverage may marginally exceed 3x over the next 12-15 months, our expectation is that over the rating horizon PBI will maintain leverage below 3x. If continued EBITDA declines in 2014 lead us to expect that leverage will be sustained in excess of 3x we could lower the rating. Related Criteria And Research -- Top 10 Investor Questions: How Will The Global Technology Industry Fare Amid An Economy In Flux?, April 26, 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, Sept. 18, 2012 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 Temporary Contact Numbers: Jacob L Schlanger, New York, (1) 917-371-5651; Molly Toll-Reed, New York, (1) 917-685-3188 Ratings List Downgraded; CreditWatch/Outlook Action To From Pitney Bowes Inc. Corporate Credit Rating BBB/Stable/A-2 BBB+/Negative/A-2 Pitney Bowes International Holdings Inc. Corporate Credit Rating BBB/Stable/-- BBB+/Negative/-- Downgraded To From Pitney Bowes Inc. Senior Unsecured BBB BBB+ Pitney Bowes International Holdings Inc. Preferred Stock BB+ BBB- Ratings Affirmed Pitney Bowes Inc. Commercial Paper A-2
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