DBRS Downgrades Pitney Bowes Long-Term Rating to “A”, Confirms R-1 (low)

DBRS has today downgraded the long-term ratings of Pitney Bowes of Canada Ltd. and Pitney Bowes Inc. (PBI or the Company) to “A” from A (high) and confirmed the Commercial Paper rating on Pitney Bowes of Canada Ltd. at R-1 (low). All trends are Stable. The rating action primarily reflects the increased risk in PBI’s business profile, which is no longer commensurate with the previous A (high) long-term rating. The Company’s operating results are viewed as more volatile than previously expected and DBRS believes that its core credit metrics are unlikely to materially improve over the near to medium term.

The reduction in earnings guidance issued by PBI for 2010 precipitated the rating downgrade. DBRS had expected earnings and associated credit metrics to weaken in 2009, but it was anticipated that business conditions would stabilize and lead to a gradual improvement in financial results through 2010. However, the greater-than-expected softening in mailing equipment demand through 2010, combined with limited signs of near-term stabilization, indicates a heightened level of exposure to industry cyclicality.

Margins in the Company’s core U.S. Mailing business have deteriorated more quickly than expected and are below the historical 40% range. The decline in new equipment installations led to a corresponding reduction in higher-margin financing product, rental and supplies sales that pressured earnings and margins. Over the near term, earnings are expected to be modestly lower, particularly as more of PBI’s Small and Medium Business (SMB) customers (which account for the largest share of overall earnings) opt for lease extensions rather than new mailing equipment installations. Business confidence and new business starts, which are key drivers for this end-market, have not improved as expected. PBI reduced its earnings guidance for the year (from $2.30 to $2.50 per share to $2.10 to $2.30) due to a sluggish recovery in mailing equipment demand in H2 2010. The magnitude of the earnings decline is not dramatic. However, as PBI’s sales mix gradually shifts away from its higher-margin SMB customers, the anticipated decline in margins, which is partly secular, is now likely to take place from a lower base.

DBRS notes that the Company is expected to continue to generate solid free cash flow (before working capital), which has been consistent, thanks to its large share of recurring revenue and strong market positions. However, debt repayment will not be sufficient to materially improve core credit metrics (on a gross basis) over the near term. PBI expects to use part of its free cash flow toward share repurchases and possibly for acquisitions as there is a lack of near-term term debt maturities and its short-term debt obligations are modest. Adjusted debt-to-EBITDA (as per DBRS calculations) was roughly 2.4 times at June 30, 2010, which is higher than expected and above the range of acceptability for the previous long-term rating. Given the modestly weaker earnings outlook, PBI’s coverage ratios are likely to remain relatively stable. The confirmation of the R-1 (low) rating reflects the Company’s very solid liquidity position, lack of near-term debt maturities and consistently solid free cash flow generation.

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

The applicable methodology is Rating the Industrial Products Industry, which can be found on our website under Methodologies.

This is a Corporate rating.