Pitney Bowes Inc. — Q1 2014 Form 10-Q Summary
Business Context and Reporting Period
Pitney Bowes provides mailing, digital commerce, software, customer communications, analytics, and related financing solutions. The filing covers the quarter ended March 31, 2014. Results exclude the Canadian Document Imaging Solutions business from continuing operations because it was classified as held for sale; the business was sold on April 15, 2014.
The company reports three principal segment groups: Small & Medium Business Solutions, Enterprise Business Solutions, and Digital Commerce Solutions. Historical segment results were recast for changes in segment presentation and discontinued operations.
Financial Performance and Key Metrics
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Total revenue | $937.5 million | $909.4 million | +3% |
| Income from continuing operations | $46.5 million | $64.1 million | -27% |
| Net income attributable to Pitney Bowes | $44.7 million | $67.5 million | -34% |
| Diluted EPS | $0.22 | $0.33 | -33% |
| Diluted EPS from continuing operations | $0.21 | $0.29 | -28% |
| Cash flow from operating activities | $105.6 million | $132.2 million | -20% |
| Capital expenditures | $30.1 million | $38.8 million | -22% |
- Continuing-operations net margin attributable to common stockholders was approximately 4.5%, compared with approximately 6.5% in the prior-year quarter.
- Total revenue growth was led by business services, up 26% to $185.5 million; software increased 5% to $91.6 million and supplies increased 9% to $79.5 million.
- Equipment sales declined 4% to $189.1 million, while rentals, financing, and support services declined 4%, 3%, and 3%, respectively.
- Total segment EBIT increased 15% to $226.3 million. Digital Commerce Solutions revenue increased 23% to $181.5 million and EBIT improved to $9.5 million from a $0.3 million loss.
- Small & Medium Business Solutions revenue declined 1%, but EBIT increased 12% to $185.2 million. Enterprise Business Solutions revenue increased 1% and EBIT increased 1%.
- The effective tax rate was 14.7%, compared with 21.7% in Q1 2013. The 2014 rate included approximately $6 million of benefits from tax-examination resolutions and the early extinguishment of debt.
Cash, Debt, Liquidity, and Balance Sheet
- Cash and cash equivalents were $903.3 million at March 31, 2014; cash plus short-term investments totaled approximately $930.4 million.
- Total debt was $3.342 billion, including $274.9 million classified as current and $3.067 billion classified as long term. Estimated debt fair value was $3.538 billion.
- The company issued $500 million of 4.625% notes due 2024 and received net proceeds of $493 million. It used the proceeds to fund a $500 million tender offer for portions of its 2017 and 2037 notes.
- Debt extinguishment costs of $61.7 million were recorded in other expense. The company repaid an additional $100 million of term loans on April 22, 2014.
- Pitney Bowes had a $1.0 billion committed credit facility expiring in April 2016, had not drawn on it, and had no commercial paper borrowings during the quarter.
- Operating cash flow was reduced by lower earnings, working-capital changes, and cash payments related to debt extinguishment. Financing activities used $49.9 million, including $38.0 million of common dividends.
Material Changes Versus the Prior Comparable Period
- Revenue increased $28.1 million, primarily from ecommerce cross-border parcel solutions, software licensing, supplies, and Presort Services.
- Profitability declined despite higher revenue. The principal charges were $61.7 million of debt-extinguishment costs and $9.8 million of restructuring charges; there were no restructuring charges in Q1 2013.
- Segment EBIT improved, but unallocated corporate expenses increased to $56.6 million from $41.9 million.
- Operating cash flow declined $26.5 million, while capital spending declined $8.7 million.
- Discontinued-operations income fell to $2.8 million from $8.0 million. Q1 2013 included substantial revenue from businesses sold or classified as discontinued.
- The common dividend paid was $0.1875 per share, compared with $0.375 per share in Q1 2013.
- The company began a multiyear global ERP implementation and incurred $5 million of related expense in the quarter.
Guidance, Outlook, Commentary, and Risks
Management expects mailing-business revenue and profit to remain challenged by declining physical mail volumes, but anticipates improvement during 2014 from its North American go-to-market strategy, international meter stabilization, cost controls, and postage-meter discounts. Management does not expect Enterprise Business Solutions to grow over the prior year because of strong production-printer sales in 2013. Presort Services and Digital Commerce Solutions are expected to grow, particularly through workshare opportunities, ecommerce parcel management, location intelligence, customer data, and engagement software.
Management expects ERP implementation expenses to approximate $0.10 per diluted share in 2014 and anticipates long-term savings from eliminating redundant systems and improving operating efficiency.
- Key risks include continued physical-mail volume declines, customer migration to alternative communications, credit risk in finance receivables, access to capital, interest-rate and foreign-currency volatility, pension and healthcare costs, tax matters, regulatory changes, privacy and intellectual-property claims, supplier and outsourcing risks, and execution of the ERP implementation.
- The Department of Justice is investigating compliance with postal regulatory requirements in the Presort Services business under a Civil Investigative Demand. The company cannot estimate any potential loss or predict the outcome.
- A tax matter involving Historic Boardwalk Hall could result in as much as $100 million of tax and interest if the company does not recover under contractual indemnification provisions; timing of related cash flows remains uncertain.
- Management stated that ordinary-course litigation is not expected to have a material effect, while acknowledging that litigation outcomes are inherently unpredictable.
Important Facts for Investors to Verify
- Whether Digital Commerce Solutions growth and improved EBIT can offset continuing declines in mailing-related recurring revenue.
- The effect of the $61.7 million debt-extinguishment charge, refinancing activity, and subsequent $100 million term-loan repayment on future interest expense and leverage.
- The amount and timing of future ERP implementation costs, expected savings, and execution progress.
- The outcome and potential financial exposure from the DOJ Presort Services inquiry.
- The timing and recoverability of any Historic Boardwalk Hall tax-related amounts.
- Future credit losses, delinquency trends, and allowance adequacy for the approximately $1.95 billion net finance-receivables portfolio.
- The sustainability of dividends and other discretionary capital uses given high debt, declining mailing volumes, pension obligations, and ongoing restructuring.