DBRS Downgrades Pitney Bowes to A (high) and R-1 (low)

DBRS has today downgraded the long-term and commercial paper ratings of Pitney Bowes of Canada Ltd. to A (high) and R-1 (low) from AA (low) and R-1 (middle), respectively. The long-term rating for Pitney Bowes Inc. (PBI or the Company) has also been downgraded to A (high). The trends have been changed to Stable from Negative. The rating action is primarily related to the gradual decline in the Company’s credit protection ratios and the structural changes facing the mailing equipment market in the United States. The current ratings of A (high) and R-1 (low) are expected to remain Stable, mainly given the Company’s ability to consistently generate strong free cash flow and its large share of recurring revenue, which adds stability to earnings and cash flow.

PBI’s business and financial risk profiles are no longer viewed as acceptable for the previous ratings. The Company’s profit margins are not expected to meaningfully improve over the near to medium term, largely due to the expected shift in PBI’s sales mix away from its highly profitable U.S. Mailing segment (which has historically accounted for over two-thirds of operating earnings). The structural changes facing this business, including slowing mail volumes, have been well documented and are expected to constrain growth in this mature but highly profitable segment. In addition, the current economic recession has contributed to a higher share of sales being generated from smaller machines, and the deferral of equipment upgrades. These factors were partly responsible for the reduction in the Company’s annual guidance, and most of PBI’s business segments experienced declining operating earnings over the 12 months to March 31, 2009. DBRS expects demand for PBI’s products and services to gradually improve in 2010 with increased economic activity. However, growth in its mature U.S. Mailing business is likely to be limited, and an increasing share of sales from PBI’s higher-growth but less profitable business segments, such as software and mail services, are expected to limit upside to operating margins.

PBI’s debt levels have remained relatively unchanged over the past year despite solid free cash generation. Free cash flow was increasingly used toward share repurchases in 2008, which limited improvement in PBI’s balance sheet and coverage ratios. The share buyback program was suspended in Q3 2008 to preserve liquidity in light of the global credit market turmoil and deteriorating economic conditions, and debt was modestly reduced over the past two quarters. However, the reduction in debt was not sufficient to offset the impact of lower earnings and associated cash flow on PBI’s core coverage ratios, which weakened at a greater-than-expected rate over the past year and are considered aggressive for the previous rating. The Company is expected to gradually reduce debt from free cash flow over the near term, but a meaningful improvement in its credit protection measures is viewed as unlikely.

Despite the above-noted challenges, the ratings are expected to remain Stable over the near term. The Company will maintain a large share of recurring revenue, mainly from equipment leasing, support, and services, which provides support for the rating in the form of revenue and earnings stability. In addition, the change in business mix is likely to be gradual and should limit significant volatility in PBI’s earnings. U.S. Mailing operating margins should also remain at strong levels (operating margins have consistently been in the range of 40%), partly attributable to the significant market share maintained by this business and ongoing efficiency initiatives. Furthermore, strong and stable free cash flow generation is expected to continue, which provides financial flexibility to reduce debt. Lastly, PBI’s liquidity position is strong, with no long-term debt maturities to address until 2012 (other than a modest amount due in 2009). The Company has a $1.5 billion credit line that matures in May 2011 and has no financial covenants or material adverse change clause.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Rating Industrials, which can be found on our website under Methodologies.

This is a Corporate rating.