Pitney Bowes Inc. — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2019; filed August 6, 2019. Pitney Bowes provides mailing, shipping, ecommerce, presort, software, financing and related business services. The company continued shifting toward higher-growth Commerce Services while its traditional mailing and software businesses declined.
Financial Performance and Position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $860.8 million | $865.2 million | $1.729 billion | $1.762 billion |
| Income from continuing operations | $30.3 million | $50.4 million | $28.8 million | $101.9 million |
| Net income | $23.7 million | $51.6 million | $21.0 million | $111.6 million |
| Diluted EPS from continuing operations | $0.17 | $0.27 | $0.16 | $0.54 |
| Segment EBIT | $126.6 million | $158.2 million | $251.2 million | $324.6 million |
| Net cash from operating activities | Not separately provided | Not separately provided | $86.8 million | $154.5 million |
- Revenue mix: Q2 Business Services increased 13% to $418.0 million, while software declined 21%, supplies declined 16%, equipment sales declined 9%, support services declined 8%, financing declined 5% and rentals declined 5%.
- Segments: Commerce Services revenue grew 13% to $410.5 million, led by Global Ecommerce growth of 18% and Presort Services growth of 4%. SMB Solutions revenue declined 8% and Software Solutions revenue declined 21%.
- Margins: Cost of revenue rose to 57.1% of revenue in Q2 from 52.5% in the prior-year quarter, implying gross margins of approximately 42.9% and 47.5%, respectively. Six-month cost of revenue was 56.8% versus 52.3%.
- Cash and liquidity: Cash and cash equivalents were $771.0 million at June 30, 2019, down from $867.3 million at year-end 2018. Cash and short-term investments totaled $830.6 million. Management stated that cash, operating cash flow and borrowing capacity should support current needs.
- Debt: Total debt was $3.244 billion, including $214.9 million classified as current. The company had a $1.0 billion committed credit facility maturing in January 2021 and had not drawn on it.
- Equity returns: The company repurchased $100 million of common stock, or 17.4 million shares, during the first half and paid $18.3 million in dividends. Remaining repurchase authorization was approximately $21 million at June 30.
- Balance-sheet leverage: Stockholders’ equity was only $53.0 million at June 30, down from $101.8 million at December 31, 2018, reflecting share repurchases and other equity activity.
Material Changes Versus the Prior Comparable Period
- Q2 revenue decreased 1% and six-month revenue decreased 2%; management attributed the six-month decline primarily to foreign currency and the 2019 Market Exits.
- Q2 segment EBIT fell 20%; six-month segment EBIT fell 23%. Continuing-operations income declined 40% in Q2 and 72% year to date.
- Global Ecommerce revenue grew strongly, but EBIT losses widened to $15.6 million in Q2 and $30.2 million year to date, due to lower-margin growth, new facility and marketing investments, and higher labor, transportation and postal costs.
- Software Solutions EBIT declined 89% in Q2 and 82% year to date, principally because of lower license renewals and the absence of a large prior-year Location Intelligence deal.
- SMB profitability was pressured by lower mail volumes, declining meter population, tariffs and a SendPro C tablet replacement program related to battery longevity.
- The company recognized an $18 million pretax loss on the January 2019 sale of direct operations in six smaller international markets and moved those markets to a dealer model. The related discontinued-operations loss was $6.6 million in Q2 and $7.8 million year to date.
- Net cash from operations declined $67.7 million year to date, primarily due to lower earnings and the loss of cash flows from the production mail business sold in July 2018.
- Moody’s downgraded the corporate credit rating from Ba1 to Ba2 in April 2019. Certain debt interest rates increased or are scheduled to increase by 0.25%.
- ASC 842 lease accounting was adopted January 1, 2019 using a modified retrospective approach, with a $137 million reduction to retained earnings at adoption and recognition of operating lease assets and liabilities.
Outlook, Commentary, Risks and Unusual Items
- Management expects continued revenue growth from portfolio transformation, Global Ecommerce domestic parcel and shipping investments, higher seasonal shipping volumes and expected Presort volume, margin and efficiency improvements.
- Management expects continued revenue declines in SMB Solutions because of lower mail volumes, fewer lease opportunities and a declining meter population, partially offset by new products, SendPro C, international launches and adjacent offerings.
- Tariffs are expected to continue adversely affecting SMB equipment sales margins and EBIT in the second half of 2019.
- The company is expanding third-party equipment financing for existing U.S. SMB clients and expects this initiative to reduce cash flow during 2019 as finance receivables are originated and accumulated.
- Management expected the remaining portion of a previously announced $200 million gross-spend reduction program to be achieved in 2019, although a substantial portion of savings would be reinvested in Commerce Services and third-party financing.
- Global Ecommerce goodwill of $609 million had estimated fair value less than 20% above carrying value; declining revenue, lost contracts or weaker client acquisition could result in a future impairment.
- Capitalized international ERP software totaled $37 million and was under review following market exits; changes to the implementation footprint could affect recoverability.
- Principal risks include declining physical mail volumes, postal regulation and USPS relationships, competition, tariffs and trade policy, foreign exchange and interest rates, credit-rating downgrades, customer credit risk, cybersecurity and privacy, technology execution, supplier and outsourcing dependence, litigation, pension costs and tax matters.
- Pending securities and derivative lawsuits relate to disclosures concerning a 2017 notes offering. Management believes the claims are without merit, but no reasonable loss estimate could be made.
Investor Verification Checklist
- Verify whether Global Ecommerce can improve margins and reduce its widening EBIT losses while maintaining rapid revenue growth.
- Track software license renewals, the partner channel and whether Software Solutions returns to revenue and EBIT growth.
- Assess the sustainability of liquidity and debt servicing given $3.244 billion of debt, limited reported equity and upcoming maturities, including the September 2020 notes.
- Monitor the effect of tariffs, labor, transportation and postal costs on equipment and business-services margins.
- Review cash-flow effects of the third-party equipment-financing expansion and the planned $21 million remaining share-repurchase authorization.
- Evaluate potential Global Ecommerce goodwill or ERP-related impairment charges and the outcomes of pending litigation and tax matters.