Pitney Bowes Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2015. The unaudited results are presented under U.S. GAAP. Pitney Bowes provides mailing, software, customer information, location intelligence, customer engagement, shipping and global ecommerce solutions.
Financial performance and liquidity
| Metric | Q3 2015 | Q3 2014 | Change | 9M 2015 | 9M 2014 | Change |
|---|---|---|---|---|---|---|
| Total revenue | $869.5 million | $941.6 million | (8%) | $2.641 billion | $2.838 billion | (7%) |
| Income from continuing operations | $93.9 million | $116.2 million | (19%) | $336.0 million | $254.8 million | 32% |
| Net income attributable to Pitney Bowes | $89.3 million | $132.3 million | (33%) | $321.7 million | $271.2 million | 19% |
| Diluted EPS from continuing operations | $0.44 | $0.55 | (20%) | $1.60 | $1.18 | 36% |
| Cash flow from operations | Not provided for quarter | Not provided for quarter | — | $350.7 million | $397.4 million | (12%) |
- Q3 gross margin was approximately 56.7%, compared with 55.2% in the prior-year quarter. Continuing-operations net margin was approximately 10.8%, compared with 12.3%.
- Nine-month gross margin was approximately 56.4%, compared with 55.8%. Continuing-operations net margin was approximately 12.7%, compared with 9.0%.
- Q3 segment EBIT was $221.7 million, down 5%; nine-month segment EBIT was $682.8 million, down 2%.
- Cash and cash equivalents were $716.0 million at September 30, 2015, versus $1.079 billion at December 31, 2014. Cash and short-term investments totaled approximately $750 million.
- Total debt was $2.992 billion, including $150 million of commercial paper, versus $3.252 billion at December 31, 2014. Long-term debt was $2.471 billion.
- Operating cash flow was used alongside asset-sale proceeds and borrowings to fund acquisitions, debt repayment, capital expenditures, dividends and share repurchases. Net cash decreased $363.2 million during the first nine months.
- The company paid $113.2 million in common dividends and $9.2 million to noncontrolling interests, and repurchased $100 million of common stock, or approximately 4.9 million shares, during the first nine months.
Material changes versus the prior comparable period
- Revenue declined primarily because of foreign currency translation, declining installed mailing meters, customer migration to lower-cost machines, weaker international markets and lower production-mail support revenue.
- Revenue by source changed as follows in Q3: equipment sales decreased 8%, supplies 2%, software 13%, rentals 9%, financing 7%, support services 11% and business services 3%.
- Digital Commerce Solutions revenue increased 6% in Q3 and 3% year to date, led by Global Ecommerce. Global Ecommerce revenue increased 34% in Q3 and 22% year to date, substantially reflecting the Borderfree acquisition.
- Small and Medium Business Solutions revenue decreased 8% in Q3, while Enterprise Business Solutions revenue decreased 3%. Presort Services revenue increased 4% and EBIT increased 18% in Q3.
- SG&A expense decreased 10% in Q3 and 9% year to date, reflecting productivity and cost-reduction initiatives, partly offset by Borderfree amortization and ERP-related spending.
- Income from continuing operations benefited from lower operating expenses, improved gross margins and favorable other income, but Q3 earnings were pressured by lower revenue and a higher effective tax rate of 31.3%, versus 17.9%.
- The nine-month effective tax rate was 30.2%, including a $20 million tax benefit related to the Imagitas disposition. The prior-year rate included a $22 million benefit from resolution of tax examinations.
Transactions, outlook, risks and unusual items
- In June 2015, Pitney Bowes acquired Borderfree for approximately $381 million net of cash acquired. Borderfree contributed $25 million of Q3 revenue and $31 million for the nine-month period. The company also acquired Real Time Content for $6 million.
- In May 2015, the company sold Imagitas for net proceeds of approximately $292 million and recognized a pre-tax gain of $111 million. It also sold its former headquarters building for $39 million and recorded a $5 million loss.
- The company repaid $275 million of notes maturing in March 2015 and $130 million of term loans. It announced plans to redeem $110 million of 5.25% notes in November 2015.
- Management expects liquidity from cash, operating cash flow and the commercial paper program to support current needs, including capital investments, dividends, strategic acquisitions and share repurchases. A committed $1 billion credit facility supports the commercial paper program and had not been drawn.
- Management expects stabilization in North American and international SMB trends, continued growth in Presort Services, ongoing challenges in European Production Mail, and increased demand in Software Solutions and Global Ecommerce. The strong U.S. dollar remains a significant headwind.
- Key risks include declining physical mail volumes, competition and pricing pressure, adoption of digital products, foreign exchange, macroeconomic conditions, customer credit risk, information security and privacy requirements, regulatory changes, ERP implementation, acquisition integration, pension and healthcare costs, tax matters and litigation.
- Restructuring reserves totaled approximately $52.1 million at September 30, 2015, with most payments expected over the next 12 to 24 months. The company expects to fund these payments from operating cash flow.
- The Department of Justice postal-regulatory investigation involving Presort Services was settled without admission of liability; management reported no significant quarterly impact. Management stated that pending litigation is not reasonably expected to have a material effect, while noting litigation remains inherently unpredictable.
- Disclosure controls and procedures were assessed as effective, and no material changes to internal control over financial reporting were reported.
Important facts for investors to verify
- Whether declining mailing volumes, installed meters and international operations stabilize as management expects.
- The recurring earnings contribution and integration costs of Borderfree and Real Time Content, including goodwill and acquired intangible balances.
- The sustainability of cash flow after debt maturities, restructuring payments, capital expenditures, dividends and share repurchases.
- Foreign-exchange sensitivity, particularly the impact of a strong U.S. dollar on international revenue, margins and Global Ecommerce demand.
- Credit quality and aging of finance receivables, including approximately $30.9 million of gross receivables more than 90 days past due at September 30, 2015.
- The timing and terms of the announced $110 million debt redemption and the company’s continued reliance on commercial paper.
- Potential effects of postal, tax, privacy, information-security and litigation matters, including the settled Department of Justice investigation.