Pitney Bowes Inc. Form 10-Q Summary
Reporting period: Three months ended March 31, 2020. The filing was dated May 4, 2020. Pitney Bowes provides commerce, ecommerce, presort, mailing, shipping, financing, equipment, supplies and related services through Global Ecommerce, Presort Services and SendTech Solutions.
Financial Results and Key Metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total revenue | $796.3 million | $795.1 million | Flat |
| Loss from continuing operations | $218.5 million | $2.5 million | Significantly worse |
| Net loss | $208.5 million | $2.7 million | Significantly worse |
| Diluted loss per share | $1.22 | $0.01 | Worse |
| Operating cash flow | $(66.3) million | $69.7 million | Decrease of $136.0 million |
| Cash and cash equivalents | $663.1 million | $924.4 million at Dec. 31, 2019 | Decrease of $261.4 million |
| Total debt | $2.630 billion | $2.740 billion at Dec. 31, 2019 | Decrease of $109.8 million |
| Total stockholders’ equity | $29.4 million | $286.1 million at Dec. 31, 2019 | Decrease of $256.7 million |
Revenue mix shifted materially. Business services revenue increased 9% to $444.4 million, while support services declined 5% to $122.0 million, financing declined 8% to $89.1 million, equipment sales declined 15% to $76.3 million, supplies declined 10% to $45.7 million and rentals declined 15% to $18.8 million.
Commerce Services revenue increased 8% to $433.0 million, including Global Ecommerce revenue growth of 10% and Presort Services growth of 4%. SendTech Solutions revenue declined 8% to $363.2 million. Total segment EBIT declined 24% to $92.8 million. Global Ecommerce reported a $29.5 million EBIT loss versus a $14.6 million loss in the prior-year quarter; SendTech EBIT declined 13% to $106.6 million.
Global Ecommerce gross margin declined to 9.3% from 16.4%, primarily because of a lower-margin service mix, new facility costs and reduced productivity related to COVID-19. Presort Services gross margin improved to 25.2% from 24.4%. SendTech Solutions gross margin was 63.6% versus 64.0%.
Material Changes and Unusual Items
- The company recorded a $198.2 million non-cash, pre-tax goodwill impairment charge for Global Ecommerce after weaker-than-expected performance and COVID-19-related economic conditions reduced the reporting unit’s estimated fair value.
- Pitney Bowes recorded a $37.0 million loss on the early extinguishment of debt after tendering for $928 million of notes maturing between 2021 and 2024.
- The company issued an $850 million term loan due January 2025, bearing interest at LIBOR plus 5.5%, and used the proceeds and cash to retire senior notes.
- The company adopted the current expected credit loss standard on January 1, 2020, reducing opening retained earnings by $21.9 million. COVID-19-related recession assumptions contributed approximately $11 million of additional credit loss provisions during the quarter.
- Income from discontinued operations was $10.1 million, primarily reflecting the gain on the sale of the Australian software business completed in January 2020.
- The company received a $4 million insurance advance related to the October 2019 ransomware attack.
- Restructuring charges were $3.8 million, with $9.0 million of restructuring reserves remaining at March 31, 2020. Most remaining payments are expected over the following 12 to 24 months.
- The quarterly dividend was $0.05 per common share. No share repurchases occurred during the quarter, and $16 million remained authorized for repurchases.
Cash Flow, Liquidity and Debt
Operating cash flow declined to an outflow of $66.3 million, driven primarily by payment timing, lower collections of accounts and finance receivables, and cash flows from discontinued operations. Investing cash outflow was $25.5 million, including $25.8 million of capital expenditures. Financing cash outflow was $159.6 million after debt refinancing and tender-offer payments.
Cash, cash equivalents and short-term investments totaled $730 million at March 31, 2020, including $144 million held by foreign subsidiaries. The company had a $500 million secured revolving credit facility, no borrowings under it at March 31, and was compliant with all covenants. In April 2020, after quarter-end, it drew $100 million as a precautionary measure.
Management stated that existing cash and investments, operating cash generation and available borrowing capacity were expected to support cash needs for the next 12 months. However, this conclusion depends on COVID-19 severity, business disruption, revenue, earnings and further cost-saving or cash-conservation actions.
Outlook, Risks and Management Commentary
Management could not reasonably estimate the full-year impact of COVID-19 because its severity and duration remained uncertain. The company expected significantly weaker global economic conditions to adversely affect second-quarter results, cash flow and liquidity.
- Global Ecommerce experienced growth through February, but growth slowed in March. Domestic delivery and fulfillment volumes were increasing early in the second quarter, while cross-border volumes were declining and transportation costs were rising.
- Presort Services began experiencing lower mail volumes in late March, with management expecting declines in First Class and Marketing Mail volumes, particularly Marketing Mail.
- SendTech Solutions experienced reduced equipment sales, supplies demand and on-site installations as customers worked remotely. Approximately two-thirds of SendTech revenue was recurring, but the company was monitoring collections and potential delinquencies.
- Social distancing, facility sanitization and other safety protocols increased costs and reduced productivity. The company was consolidating certain facilities and prioritizing essential capital expenditures.
- Management estimated that planned cost-saving and cash-conservation actions, including reduced capital expenditures and targeted reductions in loan originations, could benefit cash flow by approximately $85 million to $95 million.
- Principal risks include accelerated physical-mail declines, USPS and postal-sector financial pressure, customer credit deterioration, supply-chain disruption, cyberattacks, capital-market disruption, higher borrowing costs, credit-rating downgrades, foreign exchange and interest-rate changes, and continued effects from the ransomware incident.
Important Facts for Investors to Verify
- Whether COVID-19 caused sustained declines in Global Ecommerce growth, Presort mail volumes and SendTech equipment and supplies demand.
- Whether Global Ecommerce requires additional goodwill impairment charges, given the significant judgment in its valuation and the sensitivity to revenue, margins, cash flows, discount rates and terminal growth assumptions.
- Operating cash flow, customer collections, finance-receivable delinquencies and the adequacy of credit-loss reserves under prolonged recessionary conditions.
- Compliance with debt covenants, availability under the revolving credit facility, refinancing needs and the effect of higher interest rates following credit-rating actions and the new term loan.
- Whether management’s anticipated $85 million to $95 million of cash-flow benefits and its ability to fund cash needs for the next 12 months remain achievable.
- The permanence of reduced physical-mail volumes and the financial condition, operating policies and contractual relationships of the USPS and other postal operators.