Pitney Bowes Inc. 2016 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2016, with quarterly data including the fourth quarter. Pitney Bowes provides mailing, shipping, presort, software, customer information, location intelligence, customer engagement and cross-border ecommerce solutions. Reportable segments are Small & Medium Business Solutions, Enterprise Business Solutions and Digital Commerce Solutions.
Financial performance and liquidity
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Total revenue | $3.407 billion | $3.578 billion | Down 5% |
| Gross profit | $1.892 billion | $2.019 billion | Down 6% |
| Gross margin | 55.5% | 56.4% | Down 0.9 percentage points |
| Income from continuing operations | $114.6 million | $421.0 million | Down 73% |
| Net income attributable to Pitney Bowes | $92.8 million | $407.9 million | Down 77% |
| Diluted EPS from continuing operations | $0.51 | $2.00 | Down $1.49 |
| Net cash from operating activities | $490.7 million | $515.1 million | Down $24.4 million |
| Capital expenditures | $160.8 million | $166.7 million | Down $5.9 million |
| Total debt | $3.365 billion | $2.951 billion | Up $414.2 million |
| Cash and cash equivalents | $764.5 million | $640.2 million | Up $124.3 million |
Continuing-operations pre-tax margin was approximately 7.2%, compared with 17.1% in 2015. Net income attributable to Pitney Bowes represented approximately 2.7% of revenue, compared with 11.4% in 2015.
- Revenue by segment: Small & Medium Business Solutions $1.749 billion, down 7%; Enterprise Business Solutions $880.3 million, down 2%; and Digital Commerce Solutions $776.8 million, up 4%.
- Global Ecommerce revenue increased 18% to $428.6 million, while Software Solutions revenue declined 10% to $348.2 million.
- Segment EBIT declined 12% to $820.3 million. Small & Medium Business Solutions EBIT declined 11%, Enterprise Business Solutions declined 2%, and Digital Commerce Solutions declined 27%.
- Cash and short-term investments totaled $803.0 million at year-end. The company had a $1.0 billion committed credit facility, with no borrowings outstanding under the facility or commercial paper program at December 31, 2016.
- Debt maturities total $3.381 billion, including $614.5 million due in 2017 and $2.0 billion due within five years. Management expects to fund maturities with cash or refinancing.
- The company paid $140.6 million in common dividends, or $0.75 per share, and repurchased $197.3 million of common stock during 2016.
Material changes versus the prior comparable period
- Revenue declined primarily because of lower equipment, supplies, software, rental, financing and support-services revenue. Business-services revenue increased 3%, led by ecommerce growth.
- The U.S. enterprise business platform was implemented in the second quarter of 2016. Management reported temporary sales-productivity disruption, lost sales and delayed or altered billing, which affected equipment, supplies, financing and other revenue streams.
- The company recorded a $171.1 million non-cash goodwill impairment charge for Software Solutions after weaker-than-expected fourth-quarter performance. Software Solutions EBIT fell 38%.
- Restructuring charges and asset impairments increased to $63.3 million from $25.8 million.
- 2015 results benefited from a $111 million pre-tax gain on the sale of Imagitas; 2016 included no comparable gain.
- The effective tax rate increased to 53.5% from 31.1%, primarily reflecting a $58 million tax charge associated with the largely non-tax-deductible goodwill impairment, partly offset by $15 million of tax benefits from resolved examinations.
- Global Ecommerce benefited from a full year of Borderfree operations and continued marketplace and retail-network expansion, but its EBIT was essentially flat because of acquisition amortization and additional investment.
- The company acquired Enroute for $14 million and Maponics for $24 million during 2016. It redeemed subsidiary preferred stock for $300 million.
Guidance, outlook, risks and unusual items
Management expects long-term benefits from new products, digital capabilities, the Commerce Cloud, partner channels, incremental marketing, restructuring actions and the enterprise platform. It does not expect further significant sales-productivity disruption from the platform implementation.
- SMB revenue is expected to stabilize over the long term through digital capabilities and meter upgrades, although declining physical mail volumes remain a structural headwind.
- Presort Services is expected to benefit from network expansion and the January 2017 USPS rate change. Production Mail growth remains challenged by consolidation and outsourcing.
- Software Solutions is expected to benefit from expanded partner channels, improved sales effectiveness and a reorganized sales function, but the filing does not provide quantitative 2017 revenue or earnings guidance.
- Global Ecommerce is expected to continue growing through existing marketplaces, retail clients, new customer acquisition and expanded services. Foreign exchange, customs, trade rules and customer concentration remain significant risks.
- Finance receivables aged more than 90 days increased after the platform implementation. Management believes most of the increase is administrative and expects full payment; North American sales-type lease receivables with a full contract value of $63 million were more than 90 days past due, and $31 million had been collected by February 15, 2017.
- Key risks include continued mail-volume declines, pricing and technology competition, cybersecurity and privacy incidents, supplier and outsourcing disruptions, capital-market access, credit risk, pension obligations, tax uncertainties, regulatory changes and litigation.
- The company had approximately $2.0 billion of unfunded pension obligations across U.S. and foreign plans and made a special $36.7 million U.K. pension contribution in 2016.
- Fourth-quarter 2016 included the $171.1 million goodwill impairment and a $36 million reversal of previously accrued variable compensation, contributing to a quarterly net loss attributable to Pitney Bowes of $84.3 million.
Important facts for investors to verify
- Whether Software Solutions revenue, margins and goodwill recover following the 2016 impairment.
- Whether the enterprise platform produces expected cost savings without further billing, collections or sales disruption.
- Progress in stabilizing SMB mailing revenue as installed meters and physical mail volumes decline.
- Global Ecommerce growth, profitability, customer concentration and exposure to foreign currency and cross-border regulation.
- Ability to refinance or repay the $614.5 million of debt maturing in 2017 and other near-term maturities.
- Sustainability of the $0.75 annual common dividend and share-repurchase program given lower earnings, negative stockholders’ equity of $103.7 million and total debt of $3.365 billion.
- Resolution and collectibility of the platform-related aged finance receivables and adequacy of credit-loss reserves.
- Potential effects of pension assumptions, tax examinations, unrecognized tax benefits and future accounting changes, including revenue recognition and credit-loss standards.