Pitney Bowes Inc. 2019 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2019, filed February 20, 2020. Pitney Bowes is a global commerce technology company operating through Global Ecommerce, Presort Services and SendTech Solutions. Commerce Services includes Global Ecommerce and Presort Services; SendTech provides physical and digital mailing and shipping solutions, financing, supplies and support services.
The company continued shifting from traditional mailing toward ecommerce, shipping and other technology-enabled services. It processed a record 17 billion pieces of mail through its Presort network in 2019 and employed approximately 11,000 people worldwide.
Key financial metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Revenue | $3.205 billion | $3.212 billion | Flat |
| Segment EBIT | $490.9 million | $600.3 million | Down 18% |
| Income from continuing operations | $40.1 million | $181.7 million | Down 78% |
| Net income | $194.6 million | $241.8 million | Down 20% |
| Diluted EPS from continuing operations | $0.23 | $0.96 | Down 76% |
| Total diluted EPS | $1.10 | $1.28 | Down 14% |
| Cash flow from operations | $252.2 million | $342.9 million | Down 26% |
| Capital expenditures | $137.3 million | $137.8 million | Approximately flat |
| Total debt at year-end | $2.740 billion | $3.266 billion | Down $526 million |
Total cost of revenue was $1.922 billion, or approximately 60.0% of revenue, versus 55.7% in 2018. The resulting gross margin was approximately 40.0%, compared with 44.3% in 2018. Net income margin was approximately 6.1%; continuing-operations margin was approximately 1.3%.
Revenue by segment was $1.152 billion for Global Ecommerce, $529.6 million for Presort Services and $1.524 billion for SendTech Solutions. Commerce Services revenue increased 9%, while SendTech Solutions revenue declined 9%. Global Ecommerce generated a $70.1 million EBIT loss, Presort Services generated $70.7 million of EBIT and SendTech Solutions generated $490.3 million of EBIT.
Liquidity, cash flow and capitalization
- Cash and cash equivalents were $924.4 million and short-term investments were $115.9 million at December 31, 2019, for approximately $1.0 billion of combined liquidity; $168 million of cash was held by foreign subsidiaries.
- Operating cash flow was $252.2 million. Investing cash flow was $489.6 million, primarily reflecting approximately $700 million of proceeds from the Software Solutions sale. Financing cash flow was negative $686.6 million.
- The company repaid $930.2 million of debt, issued approximately $390.0 million of long-term debt, repurchased $105.0 million of common stock and paid $35.4 million of common dividends.
- Debt maturities totaled approximately $2.766 billion based on principal amounts, including $1.050 billion due in 2021-2022 and $795 million due in 2024. Contractual obligations totaled $4.375 billion, including debt, interest, leases, purchase obligations and benefit payments.
- The company had an undrawn $500 million secured revolving credit facility expiring in November 2024 and was in compliance with its covenants at year-end. Management stated that existing liquidity and operating cash flow should support current needs for at least the next 12 months.
- In February 2020, the company funded an $850 million 2025 Term Loan and planned to use its proceeds and remaining Software Solutions sale proceeds to redeem up to $950 million of notes. These actions occurred after the reporting date.
Material changes versus the prior comparable period
- Revenue remained approximately flat, as 9% growth in Commerce Services was offset by a 9% decline in SendTech Solutions. Currency effects and Market Exits reduced reported revenue growth by approximately 2%.
- Profitability deteriorated because of lower SendTech revenue, a lower-margin mix in Global Ecommerce, higher fulfillment and growth-related costs, tariffs and a SendPro C tablet replacement program.
- Restructuring charges and asset impairments increased to $69.6 million from $25.9 million, including a $39 million write-off of capitalized ERP development costs.
- The company completed the sale of Software Solutions for approximately $700 million. Software Solutions and the previously sold Production Mail business were classified as discontinued operations. The 2019 discontinued-operations result included a $181.3 million pre-tax gain on sale and produced $154.5 million of net income.
- The company repurchased 18.6 million shares for $105 million, compared with no repurchases in 2018, and reduced its common dividend to $0.20 per share from $0.75 per share.
- The company adopted ASC 842 lease accounting using a modified retrospective approach, reducing retained earnings by $137 million at January 1, 2017 and recasting prior periods.
Guidance, outlook, risks and unusual items
Management expects continued Global Ecommerce revenue growth from domestic parcels and shipping solutions, with potential margin improvement from scale, pricing, bundling and operational efficiencies. Presort Services is expected to benefit from higher Bound and Packet Mail and Marketing Mail volumes and cost optimization. SendTech mailing revenue is expected to continue declining, partially offset by shipping capabilities, product refreshes, third-party equipment financing and solutions-based offerings. The filing does not provide specific consolidated 2020 revenue or earnings guidance.
A ransomware attack on October 12, 2019 temporarily disrupted customer access to some services. Management estimates that it reduced full-year revenue by $18 million, EBIT by $19 million, EPS from continuing operations by approximately $0.08 and operating cash flow by $27 million. The company reported no evidence that sensitive data was accessed or extracted, but expects additional costs and claims in 2020 and cannot reasonably estimate insurance proceeds.
- Major risks include continued physical-mail volume declines, dependence on USPS relationships and regulations, lower Commerce Services margins, labor and transportation costs, cybersecurity and data privacy exposure, reliance on suppliers and logistics providers, customer concentration in Global Ecommerce, foreign exchange, tariffs and Brexit.
- Global Ecommerce goodwill was $609 million at year-end, and its estimated fair value exceeded carrying value by less than 20%; future deterioration could result in a material impairment charge.
- Credit ratings were downgraded during 2019, increasing borrowing costs. Additional 50-basis-point increases on certain unsecured notes were expected in the second quarter of 2020.
- Variable-rate facilities depend on LIBOR, which was expected to be phased out after 2021; the transition could increase borrowing costs.
- The company disclosed no material off-balance-sheet arrangements. The Livonia securities litigation was struck by the court in October 2019, and related derivative actions were expected to be dismissed.
Important facts for investors to verify
- Whether Global Ecommerce can achieve scale and convert 13% revenue growth into positive EBIT.
- The pace of SendTech revenue decline and the extent to which shipping and solutions offerings offset mailing weakness.
- Actual 2020 insurance recoveries, claims and continuing costs related to the ransomware attack.
- Debt refinancing and redemption activity after December 31, 2019, including interest expense under the $850 million 2025 Term Loan.
- Compliance with secured-credit-facility leverage and interest-coverage covenants amid lower operating cash flow.
- The sensitivity of the $609 million Global Ecommerce goodwill balance to changes in growth, profitability, cash-flow forecasts and discount rates.
- The sustainability of dividends and share repurchases given debt maturities, reduced earnings and the company’s transformation investments.