Pitney Bowes Inc. — Q2 2015 Form 10-Q Summary
Business context and reporting period
Pitney Bowes is a global technology company providing mailing, shipping, software, customer information management, location intelligence, customer engagement and global ecommerce solutions. This unaudited Form 10-Q covers the three and six months ended June 30, 2015, compared with the corresponding 2014 periods.
The company reports through Small and Medium Business Solutions, Enterprise Business Solutions and Digital Commerce Solutions. Segment reporting was realigned following the Borderfree acquisition and Imagitas divestiture, with prior periods recast.
Key financial metrics
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $880.9 million | $958.5 million | $1.772 billion | $1.896 billion |
| Income from continuing operations | $157.1 million | $92.1 million | $242.2 million | $138.6 million |
| Net income attributable to Pitney Bowes | $151.8 million | $94.3 million | $232.4 million | $138.9 million |
| Diluted EPS | $0.75 | $0.46 | $1.15 | $0.68 |
| Cash flow from operations | Not separately provided | Not separately provided | $200.3 million | $280.4 million |
| Gross margin | 56.3% | 55.8% | 56.2% | 56.1% |
| Continuing operations net margin | 17.8% | 9.6% | 13.7% | 7.3% |
Revenue declined 8% in Q2 and 7% year to date. Management attributed approximately 4% of the quarterly decline to foreign currency translation and 1% to divested businesses. Business services revenue was flat in Q2 and increased 5% year to date, while most other revenue categories declined.
Segment EBIT was $231.9 million in Q2, compared with $234.1 million in the prior-year quarter, and $461.1 million for the first six months, essentially unchanged year over year. Q2 segment EBIT margins were approximately 26.3% in 2015 and 24.4% in 2014.
Material changes versus the prior comparable period
- Q2 revenue decreased $77.6 million, primarily because of currency translation, lower mailing-related activity, European weakness, lower installed meters and customer migration toward lower-cost equipment or extended leases.
- Small and Medium Business Solutions revenue decreased 11% in Q2; International Mailing revenue declined 28%, while North America Mailing declined 4%.
- Enterprise Business Solutions revenue decreased 5%, with Production Mail down 13% and Presort Services up 2%. Presort Services EBIT increased 5%.
- Digital Commerce Solutions revenue was flat in Q2. Global Ecommerce revenue increased 14%, helped by Borderfree and higher U.K. cross-border volumes, while Software Solutions revenue declined 9%.
- SG&A expense declined 7% in Q2 and 9% year to date, reflecting cost reductions and productivity initiatives, partly offset by a $10 million Borderfree stock-based compensation charge.
- Income from continuing operations increased substantially because of the $109 million pretax gain on the sale of Imagitas, lower SG&A and lower interest expense, partly offset by lower revenue, restructuring charges and acquisition-related costs.
- Cash from operations declined $80.1 million year to date, while cash used in investing activities increased because of the Borderfree acquisition and higher capital expenditures.
Liquidity, debt and capital allocation
| Balance-sheet item | June 30, 2015 | December 31, 2014 |
|---|---|---|
| Cash and cash equivalents | $754.2 million | $1.079 billion |
| Cash and short-term investments | $800.4 million | $1.111 billion |
| Total debt carrying value | $2.994 billion | $3.252 billion |
| Current portion of debt and notes payable | $521.1 million | $324.9 million |
| Long-term debt | $2.473 billion | $2.927 billion |
Cash decreased $325.0 million during the first six months. The company paid $392 million for acquisitions, received approximately $290 million from business divestitures and $39 million from the sale of its former headquarters, repaid $355 million of long-term debt, increased commercial paper by $100 million, invested $88.9 million in capital expenditures and paid $84.8 million in dividends to stockholders and noncontrolling interests.
Pitney Bowes had $100 million of commercial paper outstanding at June 30, 2015, supported by a $1 billion committed credit facility expiring in January 2020. The facility had not been drawn. Management stated that cash, operating cash flow and commercial paper capacity should be sufficient for current needs, including capital investments, dividends and share repurchases.
Acquisitions, divestitures and unusual items
- Borderfree was acquired on June 10, 2015, for approximately $386 million net of cash acquired. The acquisition added $285.7 million of goodwill and $156.8 million of identifiable intangible assets; its Q2 contribution to consolidated revenue was approximately $7 million.
- Real Time Content was acquired on May 1, 2015, for approximately $6 million net of cash acquired.
- Imagitas was sold on May 29, 2015, for net proceeds of approximately $291 million, producing a $109 million pretax gain.
- The former corporate headquarters building was sold for $39 million, generating a $5 million loss recorded in restructuring charges and asset impairments.
- Restructuring and asset impairment charges were $14.4 million in Q2 and $14.3 million year to date. Remaining restructuring reserves were $68.5 million at June 30, 2015, with most payments expected over the next 12 to 24 months.
- The company accrued $7 million, net of estimated recoveries, for a settlement in principle with the Department of Justice concerning postal regulatory compliance in Presort Services.
- Other income included the Imagitas gain, while acquisition transaction costs and the legal settlement charge reduced results.
Guidance, outlook and risks
Management did not provide specific full-year numerical revenue or earnings guidance in the filing. It expected reported results to remain pressured by the strong U.S. dollar but anticipated improved operating results in the second half of 2015 excluding potential currency effects.
- SMB results were expected to stabilize as the go-to-market strategy was completed in major markets and new solutions were introduced.
- Presort Services was expected to benefit from client expansion, higher processed-mail volumes and operating efficiencies.
- Production Mail remained exposed to European macroeconomic weakness and declining services revenue.
- Software Solutions was expected to benefit from new products and improved sales efficiency.
- Global Ecommerce was expected to grow through Borderfree, expanded U.K. outbound offerings, shipping solutions and new client activity, although the strong dollar was pressuring U.S. cross-border volumes.
- The company had authorization to repurchase up to $100 million of common stock and expected to begin repurchases in Q3 and complete the authorization by year end.
Principal risks include declining physical mail volumes, pricing and technology competition, execution of the transition to digital products, foreign currency and macroeconomic conditions, postal and banking regulation, cybersecurity and privacy requirements, ERP implementation, acquisition integration, customer concentration in Digital Commerce Solutions, customer credit risk, pension and healthcare costs, tax examinations, litigation and supply-chain disruption.
Most important facts for investors to verify
- Whether the $109 million Imagitas gain and related tax benefit materially overstate reported Q2 and year-to-date earnings.
- The sustainability of revenue and EBIT trends in North America Mailing, International Mailing and Production Mail amid declining mail volumes.
- Borderfree’s post-acquisition revenue growth, integration costs, amortization and contribution to Global Ecommerce profitability.
- Whether operating cash flow can recover from the $200 million first-half level while funding debt maturities, restructuring payments, dividends, capital expenditures and planned share repurchases.
- Foreign exchange sensitivity, particularly the effect of a strong U.S. dollar on international revenue, profitability and cross-border ecommerce demand.
- Debt maturities, commercial paper usage and the company’s ability to maintain liquidity while pursuing acquisitions and capital returns.
- The outcome and final cost of the DOJ Presort Services matter and other litigation or regulatory contingencies.
- The company’s revised classification of customer deposits and revised 2014 investment-security cash-flow presentation.