Pitney Bowes Inc. — Form 10-Q Summary
Business context and reporting period
Quarterly report for the three and six months ended June 30, 2020. Pitney Bowes provides commerce, ecommerce fulfillment, shipping and returns, cross-border ecommerce, presort mail, mailing and shipping technology, services, supplies, leasing and financing solutions. Reportable segments are Global Ecommerce, Presort Services and SendTech Solutions.
Results were materially affected by COVID-19, which increased ecommerce parcel volumes but reduced physical mail volumes, equipment and supplies demand, on-site installations, productivity and collection performance. Prior-period results were recast for discontinued Software Solutions operations sold in 2019; the Australian software business sale closed in January 2020.
Financial results and key metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $837.5 million | $788.6 million | $1.634 billion | $1.584 billion |
| Revenue change | +6% reported; +7% constant currency | — | +3% reported and constant currency | — |
| Income from continuing operations | $(0.3) million | $29.3 million | $(218.8) million | $26.8 million |
| Net income (loss) | $(3.3) million | $23.7 million | $(211.8) million | $21.0 million |
| Diluted EPS | $(0.02) | $0.13 | $(1.24) | $0.12 |
| Net cash provided by operating activities | Not separately provided for the quarter | — | $86.8 million | $86.8 million |
Q2 consolidated cost of revenue and operating expenses resulted in income from continuing operations before taxes of $16.7 million, compared with $33.0 million in the prior-year quarter. The effective tax rate was 101.8% in Q2 and negative 3.3% for the six-month period, distorted by a $12 million tax charge related to surrendered company-owned life insurance policies and other discrete items.
- Global Ecommerce: Q2 revenue increased 41% to $398.5 million; segment EBIT was a loss of $18.9 million. Gross margin declined to 10.7% from 15.4%, primarily from higher labor, postage, safety and credit-loss costs.
- Presort Services: Q2 revenue decreased 8% to $118.1 million; segment EBIT declined 19% to $12.6 million. Gross margin declined to 20.8% from 24.3% because of lower mail volumes and COVID-related costs.
- SendTech Solutions: Q2 revenue decreased 15% to $320.9 million; segment EBIT declined 16% to $104.3 million. Segment EBIT margin was 32.5%, approximately flat year over year because cost savings offset lower revenue.
- Total segment EBIT declined 21% to $98.0 million in Q2 and 23% to $190.7 million for the first six months.
Cash flow, liquidity and debt
- Cash and cash equivalents were $862.9 million at June 30, 2020, compared with $924.4 million at December 31, 2019. Short-term investments were $153.2 million, providing approximately $1.0 billion of cash and short-term investments.
- Six-month operating cash flow was $86.8 million, investing cash outflow was $54.5 million and financing cash outflow was $84.6 million. Capital expenditures were $60.0 million.
- Total debt was $2.717 billion at June 30, 2020, including $163.3 million classified as current. Debt fair value was $2.157 billion. Stockholders’ equity declined to $44.6 million from $286.1 million at year-end 2019.
- The company secured an $850 million term loan due January 2025, used proceeds and cash to repurchase portions of notes due 2021, 2022, 2023 and 2024, and recognized a $37.0 million loss on debt extinguishment.
- Pitney Bowes drew $100 million under its $500 million secured revolving credit facility as a precautionary measure. It was in compliance with all debt covenants at June 30, 2020.
- The company paid $17.1 million of dividends during the first six months and made no share repurchases. The company stated that it expected to continue quarterly dividends, but provided no assurance given COVID-19 and macroeconomic conditions.
Material changes versus the prior comparable period
- Revenue growth was driven by a 41% increase in Global Ecommerce, which more than offset declines in Presort Services and SendTech Solutions.
- SendTech revenue declined because COVID-19 reduced equipment sales, supplies usage, customer contact and on-site installations. Support services and financing revenue also declined.
- Global Ecommerce segment EBIT worsened despite higher revenue because of increased credit losses, labor and postal costs, safety measures and an unfavorable business mix.
- The company recorded a $198.2 million non-cash goodwill impairment charge in Q1 2020 for Global Ecommerce, reflecting weaker performance and COVID-19-related valuation uncertainty.
- Credit-loss expense increased to $27.9 million for the first six months from $14.7 million in the prior year. Finance receivables declined to $1.139 billion net from $1.255 billion at December 31, 2019, while delinquency rates increased slightly.
- Goodwill declined to $1.133 billion from $1.324 billion, primarily because of the Global Ecommerce impairment. Total assets declined to $5.116 billion from $5.467 billion.
- The company adopted the expected-credit-loss accounting standard on January 1, 2020, reducing opening retained earnings by $21.9 million.
Guidance, outlook, commentary and risks
The filing provides no formal full-year revenue or earnings guidance. Management stated that it could not reasonably estimate the full impact of COVID-19 on the remainder of 2020. Management believed available cash, investments, operating cash flow and revolver capacity would be sufficient to fund cash needs for the next 12 months.
- Global Ecommerce domestic parcel volumes were expected to remain elevated, with more than 100 new clients signed in Q2. Cross-border volumes were expected to remain pressured while international shipping restrictions continued.
- Presort Services expected First Class and Marketing Mail volumes to remain below the prior year, although declines had begun to moderate as the quarter ended.
- SendTech expected recurring revenue to support cash flow, while equipment and supplies remained vulnerable to reduced demand and customer activity. Cloud-enabled shipping and mailing solutions were showing improving demand.
- Management planned to prioritize essential capital expenditures and reduce targeted loan originations at Wheeler Financial, estimating these actions could improve annual cash flow by approximately $75 million.
- COVID-19 risks include further physical-mail declines, lower postal volumes, customer bankruptcies and payment deferrals, supply-chain disruption, higher labor and safety costs, reduced productivity, additional credit losses, liquidity pressure, higher borrowing costs and further credit-rating downgrades.
- The company reported receiving $9 million of insurance proceeds during the first half related to the October 2019 malware attack. A May 2020 Maze ransomware attack exfiltrated a small amount of confidential data but did not disrupt operations or affect reported financial results.
- Management stated that disclosure controls and procedures were effective at June 30, 2020 and that remote work had not materially affected internal controls.
Important facts for investors to verify
- Whether elevated Global Ecommerce volumes translate into sustainable positive EBIT after labor, postage, safety and credit costs.
- The duration and permanence of COVID-19 effects on physical mail, Presort Services and SendTech equipment and supplies demand.
- Future credit losses, delinquencies, customer bankruptcies and the collectability of the $1.139 billion net finance-receivables portfolio.
- Debt maturities, variable-rate exposure, increased coupon rates following credit downgrades and compliance with revolver covenants.
- Whether liquidity remains adequate if operating cash flow weakens, dividends continue, or further restructuring, impairment or credit-rating actions occur.
- The valuation assumptions supporting Global Ecommerce goodwill and the potential for additional impairment charges.
- Future cybersecurity incidents, data-exfiltration risks and possible costs not reflected in the reported quarter.