Pitney Bowes Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2014. The unaudited results cover Pitney Bowes’ technology, mailing, software, business services, financing and digital commerce operations. Prior periods were recast for discontinued operations and segment changes, including the April 2014 sale of the Document Imaging Solutions business.
Financial performance and position
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Total revenue | $941.6 million | $920.5 million | $2.838 billion | $2.781 billion |
| Income from continuing operations | $116.2 million | $77.6 million | $254.8 million | $226.3 million |
| Net income attributable to Pitney Bowes | $132.3 million | $(5.5) million | $271.2 million | $52.7 million |
| Diluted EPS from continuing operations | $0.55 | $0.36 | $1.18 | $1.05 |
| Diluted EPS | $0.65 | $(0.03) | $1.33 | $0.26 |
| Operating cash flow | — | — | $397.4 million | $493.6 million |
Margins: Continuing-operations income margin was approximately 12.3% in Q3 versus 8.4% in the prior-year quarter and approximately 9.0% for the nine months versus 8.1%. Total revenue cost was 44.8% of revenue in Q3 versus 42.9% and 44.2% year to date versus 43.1%. Segment EBIT was $231.7 million in Q3 and $692.2 million year to date, representing margins of approximately 24.6% and 24.4%, respectively.
- Revenue mix: Q3 business services increased 24% to $198.2 million, software increased 14% to $112.3 million, and supplies increased 6% to $72.5 million. Equipment sales declined 10% to $177.5 million; rentals declined 5%, financing 3%, and support services 3%.
- Segment trends: Digital Commerce Solutions revenue increased 26% and EBIT increased 90% in Q3. Presort Services revenue increased 6% and EBIT 7%. Small & Medium Business Solutions revenue declined 5% but EBIT increased 1%. Production Mail revenue declined 3% and EBIT 10%.
- Liquidity: Cash and cash equivalents were $923.7 million and short-term investments were $35.3 million at September 30, 2014. Cash and investments totaled approximately $959 million, compared with $939 million at December 31, 2013.
- Debt: Total long-term debt was $3.238 billion, including $274.9 million classified as current. Debt fair value was $3.435 billion. The company issued $500 million of 4.625% notes due 2024, used primarily to fund a $500 million tender offer for older notes, and repaid $100 million of term loans.
- Cash deployment: Year-to-date capital expenditures were $121.3 million, dividends paid were $114.0 million, and share repurchases were $50.0 million. Net cash used in investing activities was $81.6 million and net cash used in financing activities was $282.3 million.
Material changes versus prior comparable periods
- Q3 revenue increased 2%, while continuing-operations income increased approximately 50% and diluted continuing-operations EPS rose from $0.36 to $0.55.
- Improved profitability reflected lower restructuring charges and asset impairments, lower SG&A, operating cost reductions and $15.9 million of other income in Q3. SG&A declined 3% and fell to 36.3% of revenue from 38.3%.
- Net income and EPS benefited from discontinued operations. Q3 discontinued operations generated $20.7 million of income versus a $78.5 million loss in Q3 2013; the prior-year loss included substantial tax and impairment effects.
- Year-to-date operating cash flow declined $96.1 million, primarily because of working-capital timing, lower collections associated with the shrinking finance-receivable portfolio and higher cash payments related to debt extinguishment.
- Foreign currency translation produced a $64.0 million year-to-date reduction in other comprehensive income, compared with a $40.6 million reduction in the prior-year period.
Guidance, outlook, risks and unusual items
- Management provided qualitative rather than formal numerical revenue or earnings guidance. Priorities are stabilizing the mailing business, achieving operational excellence and growing Digital Commerce Solutions.
- Management expects continued pressure on Small & Medium Business Solutions from declining physical mail volumes, partly offset by the go-to-market strategy, postage-meter discounts and cost reductions. It expects continued demand in Production Mail, growth in Presort Services, and further growth in cross-border parcel, location intelligence and customer-engagement software.
- A multi-year global ERP implementation began in 2014. Incremental 2014 expenses were expected to reach up to $0.10 per diluted share; $14 million, or $0.05 per diluted share, had been incurred through September 30.
- Restructuring charges were $22.7 million year to date, with approximately $42.9 million of restructuring reserves remaining at September 30. Management expects most remaining payments over 12 to 24 months and anticipates reaching a $100 million to $125 million annualized pretax benefit run rate by 2015.
- Unusual items included a $62 million year-to-date cost for early debt extinguishment, a $16 million indemnity related to Historic Boardwalk Hall LLC, and $54 million of tax payments related to that matter. The company expected to receive $60 million from its partner in the fourth quarter and had accrued additional tax payments.
- The Department of Justice is investigating compliance with postal regulatory requirements in Presort Services under a Civil Investigative Demand. The company cannot estimate a loss or predict the outcome.
- Key ongoing risks include declining mail volumes, substitution by digital communications, ERP execution, customer credit risk, regulatory and postal changes, interest rates, foreign exchange, access to capital, pension costs, tax examinations, litigation, cybersecurity or information-system interruption, and supplier or outsourcing issues.
- The company reported effective disclosure controls and no material change in internal control over financial reporting. Management stated that no material changes occurred in previously disclosed risk factors.
Investor verification items
- Verify the sustainability of revenue and EBIT growth in Digital Commerce Solutions and Presort Services against continued declines in mailing equipment, rentals, financing and support services.
- Assess the quality of earnings excluding discontinued-operations gains, tax examination benefits, the Historic Boardwalk Hall tax effects and other unusual items.
- Monitor operating cash flow, finance-receivable runoff, credit losses and the ability to fund dividends, capital expenditures, ERP investment and debt maturities.
- Review the 2015 debt maturity, the $1 billion committed credit facility expiring in April 2016, commercial paper capacity and foreign cash repatriation constraints.
- Follow the DOJ Presort Services inquiry, pending tax obligations and the timing and magnitude of remaining restructuring payments.