Pitney Bowes Inc. 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2016. The financial statements are unaudited and prepared under U.S. GAAP. Pitney Bowes provides mailing, shipping, software, customer information, location intelligence, customer engagement and cross-border ecommerce solutions.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue | $835.9 million | $880.9 million | $1.680 billion | $1.772 billion |
| Income from continuing operations | $59.8 million | $157.1 million | $122.5 million | $242.2 million |
| Net income attributable to Pitney Bowes | $53.6 million | $151.8 million | $111.6 million | $232.4 million |
| Diluted EPS | $0.28 | $0.75 | $0.59 | $1.15 |
| Cash flow from operations | Not separately provided | Not separately provided | $153.6 million | $201.0 million |
- Revenue declined 5% in both the quarter and year-to-date period. The reported decline reflected foreign currency translation, market exits, the 2015 sale of Imagitas and disruption from the U.S. enterprise platform cut-over.
- Approximate net margin was 6.6% in the quarter and 6.7% year to date, compared with approximately 17.7% and 13.6%, respectively, in the prior comparable periods, based on net income attributable to Pitney Bowes.
- Segment EBIT was $203.0 million in the quarter and $404.7 million year to date, down 12% in both periods. Digital Commerce Solutions revenue grew 11% in the quarter and 10% year to date, led by Global Ecommerce growth of 35% and 33%, respectively.
- Cash and cash equivalents were $676.0 million at June 30, 2016, and cash plus short-term investments totaled approximately $750.8 million. Cash increased $25.4 million during the first six months.
- Total debt was $3.094 billion, including $470.1 million classified as current and $2.624 billion classified as long term. Debt fair value was estimated at $3.266 billion.
- The company had a $1.0 billion committed credit facility expiring in January 2020 and had not drawn on it. Commercial paper outstanding was $319.9 million at June 30, 2016.
- Six-month investing cash use was $16.5 million and financing cash use was $116.0 million. Financing uses included $71.0 million of common dividends and $194.8 million of share repurchases.
Material changes versus the prior comparable period
- Q2 income from continuing operations decreased 62% and year-to-date income from continuing operations decreased 49%. Management attributed the decline primarily to the absence of the $111 million pre-tax gain on the 2015 sale of Imagitas, lower revenue and higher restructuring and impairment charges.
- North America Mailing revenue declined 10% in the quarter and 7% year to date. Management estimated that the U.S. platform cut-over reduced second-quarter North America Mailing revenue by approximately 5% and first-half revenue by approximately 2%.
- Small & Medium Business Solutions revenue declined 8% in the quarter and 7% year to date. Enterprise Business Solutions revenue was flat in the quarter and down 1% year to date.
- Software Solutions revenue declined 9% in both periods, while its EBIT declined 37% in the quarter and 63% year to date due largely to fewer high-margin licensing deals and higher selling and marketing costs.
- Global Ecommerce revenue increased 35% in the quarter and 33% year to date, supported by expansion of the U.S. and U.K. cross-border business and the Borderfree acquisition. Year-to-date EBIT nevertheless declined 60% because of prior-year deferred-fee recognition, acquisition amortization and increased investment.
- Restructuring and asset impairment charges increased to $26.1 million in Q2 and $33.0 million year to date, versus $14.4 million in each comparable 2015 period. Q2 included a $5 million loss on a facility sale and $3 million of building impairment charges.
- Operating cash flow declined $47.4 million year to date, primarily because of lower income, $36.7 million of special pension contributions, higher tax payments and expenditures associated with the new platform and advertising campaign.
- The company repurchased $194.8 million of common stock during the first six months and had approximately $23.5 million remaining under its repurchase authorization at June 30.
Outlook, commentary and risks
- Management expects continued effects from the strong U.S. dollar on reported revenue, profitability, competitiveness and cross-border ecommerce demand.
- The company expects continued investment in and refinement of the enterprise business platform, with implementation phases extending through 2017. Management anticipates future automation, functionality, restructuring benefits, acquisition synergies and go-to-market benefits.
- Management expects further growth in Global Ecommerce and Presort Services, while Production Mail remains challenged by market changes and declining service revenue. Software Solutions is expected to benefit from alliance and partner expansion, new solutions and sales-force changes.
- The $300 million preferred stock of a subsidiary becomes redeemable at the company’s option in October 2016. If not redeemed, its dividend rate increases by 50% and rises by another 50% every six months thereafter. Management was evaluating redemption or refinancing alternatives.
- Remaining restructuring reserves were $36.3 million at June 30, 2016; most payments are expected over the next 12 to 24 months and are expected to be funded from operating cash flow.
- Key risks include declining physical mail volumes, competitive and pricing pressure, ERP implementation disruption, foreign exchange, postal and banking regulation, information security and privacy, customer credit risk, pension costs, tax matters, acquisition integration and the potential loss of large Global Ecommerce customers.
- Management reported no material changes to previously disclosed risk factors, no material off-balance-sheet arrangements and no material expected impact from pending legal proceedings, although litigation remains inherently unpredictable.
Important facts for investors to verify
- Whether the U.S. enterprise platform cut-over effects were temporary and whether North America Mailing revenue and collections normalized after Q2.
- The company’s plan and financing capacity for redeeming or refinancing the subsidiary’s $300 million preferred stock before the dividend escalation provisions become economically significant.
- Progress in reducing debt while continuing dividends, share repurchases, acquisitions and restructuring payments.
- Whether Global Ecommerce growth translates into sustainable profitability after acquisition amortization and ongoing investment.
- The effect of continued currency strength, declining physical mail volumes and lower installed mailing-equipment volumes on recurring revenue.
- Changes in finance-receivable delinquencies and credit-loss reserves after temporary collection-process disruption during the platform cut-over.
- The eventual financial and disclosure impact of pending accounting standards, particularly revenue recognition, leases and expected credit losses.