Pitney Bowes Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2016, compared with the corresponding 2015 periods. Financial statements are unaudited and presented in accordance with U.S. GAAP. Pitney Bowes provides mailing, shipping, software, customer information, location intelligence, customer engagement and cross-border ecommerce solutions.
Financial performance and liquidity
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Revenue | $839.0 million | $869.5 million | $2.520 billion | $2.641 billion |
| Income from continuing operations | $70.4 million | $93.9 million | $192.9 million | $336.0 million |
| Net income attributable to Pitney Bowes | $65.5 million | $89.3 million | $177.1 million | $321.7 million |
| Diluted EPS from continuing operations | $0.35 | $0.44 | $0.94 | $1.60 |
| Operating cash flow | Not separately provided | Not separately provided | $290.9 million | $351.4 million |
- Revenue declined 4% in the quarter and 5% year to date. Foreign currency translation and market exits each reduced reported revenue by approximately 1% in the respective comparisons.
- Gross margin was approximately 55.1% in Q3 and 55.8% for the first nine months, compared with 56.7% and 56.4%, respectively, in the prior-year periods. Net margin attributable to Pitney Bowes was approximately 7.8% in Q3 and 7.0% year to date, versus 10.3% and 12.2%.
- Cash and cash equivalents were $992.1 million at September 30, 2016, and short-term investments were $24.3 million. Combined cash and short-term investments were $1.016 billion, compared with $768 million at December 31, 2015.
- Total debt was $3.367 billion, including $535.3 million classified as current and $2.832 billion classified as long term, compared with total debt of $2.951 billion at year-end 2015.
- Cash flow from operations was reduced by lower earnings, a $36.7 million special pension contribution and spending associated with the ERP implementation and advertising campaign. Investing cash use was $74.9 million, while financing activities provided $121.5 million.
- The company paid $105.8 million in common dividends and repurchased $197.3 million of common stock during the first nine months. Capital expenditures were $115.5 million.
Material changes versus the prior comparable period
- Equipment sales increased 6% in Q3 but declined 2% for the first nine months. Business services increased 5% in Q3 and 3% year to date.
- Q3 declines included supplies of 14%, software of 9%, rentals of 5%, financing of 12% and support services of 9%. The first-nine-month declines were 8%, 9%, 7%, 10% and 8%, respectively.
- Small & Medium Business Solutions revenue declined 7% in both periods, reflecting lower mailing, financing, supplies, rental and support-service revenue.
- Enterprise Business Solutions revenue increased 1% in Q3 but declined 1% year to date. Production Mail improved in Q3, while Presort Services experienced lower margins and higher processing costs.
- Digital Commerce Solutions revenue declined 1% in Q3 but increased 6% year to date. Global Ecommerce revenue increased 8% in Q3 and 23% year to date, while Software Solutions declined 9% in both periods.
- Total segment EBIT declined 11% in Q3 to $197.9 million and 12% year to date to $602.6 million. Software Solutions EBIT declined 49% year to date; Global Ecommerce EBIT was positive in Q3 but lower year to date.
- Restructuring charges and asset impairments increased to $16.5 million in Q3 and $49.5 million year to date, compared with $0.04 million and $14.3 million, respectively, in 2015.
- The 2015 results included a significant gain related to the sale of Imagitas, contributing to the year-over-year decline in 2016 earnings.
Guidance, outlook, risks and unusual items
- Management expects restructuring actions, acquisitions, new products, the Commerce Cloud, go-to-market initiatives and the ERP implementation to provide long-term benefits. No specific quantitative revenue or earnings guidance is provided in the filing.
- The U.S. ERP deployment temporarily disrupted sales activity and productivity in Q2. Equipment sales rebounded in Q3, but financing-related fees remained lower because of billing-format waivers and invoice timing. The worldwide ERP rollout is expected to continue through 2017.
- Management expects continued stabilization in mailing, growth in Presort Services and Global Ecommerce, and ongoing challenges for Production Mail and software licensing. A strong U.S. dollar may pressure international demand and reported results.
- Gross finance receivables aged more than 90 days increased after the ERP implementation. Management attributes most of the increase to administrative and billing-format changes, states that portfolio credit quality has not deteriorated, and did not increase the allowance for credit losses on that basis.
- Software Solutions goodwill was $678 million at September 30, 2016. Its estimated fair value exceeded carrying value by 15%; further revenue declines, lost contracts or weak client acquisition could result in a future non-cash impairment.
- The company issued $600 million of 3.375% notes due October 2021. It used the proceeds partly to repay commercial paper and subsequently redeemed the $300 million PBIH preferred stock on November 1, 2016.
- The filing identifies risks related to declining physical mail volumes, competition, technology adoption, ERP execution, information security and privacy, postal and banking regulation, customer credit, foreign exchange, interest rates, pensions, taxes, acquisitions, key customers and litigation.
- Management states that existing cash, operating cash flow and borrowing capacity should support current needs. The company had a $1 billion committed credit facility, had not drawn on it, and reported no material off-balance-sheet arrangements.
- Pending litigation is considered by management not reasonably expected to have a material effect, although litigation outcomes remain inherently unpredictable. No material changes to previously disclosed risk factors were reported.
Investor verification points
- Verify the sustainability of declining mailing, supplies, software, rental, financing and support-service revenue and the effect of recurring-revenue contraction on margins.
- Assess whether ERP-related billing and collection issues resolve without higher credit losses, additional waivers, revenue deferrals or customer attrition.
- Review leverage, upcoming debt maturities, the November 2016 preferred-stock redemption and the company’s capacity to fund dividends, repurchases, restructuring and acquisitions.
- Monitor Software Solutions goodwill headroom, Global Ecommerce profitability, Presort Services margins and the performance of acquired businesses.
- Evaluate the impact of foreign exchange, declining physical mail volumes, competitive pressure, postal regulation, customer concentration and information-security risks.
- Reconcile reported cash balances with the approximately $500 million held by foreign subsidiaries, including potential repatriation taxes and local restrictions.