Pitney Bowes Inc. 2018 Q2 Form 10-Q Summary
Business Context and Reporting Period
Pitney Bowes is a global technology company providing mailing, shipping, cross-border ecommerce, customer information management, location intelligence and customer engagement solutions. This unaudited Form 10-Q covers the three and six months ended June 30, 2018. The company reorganized its reporting groups and classified the Production Mail Business as discontinued operations; prior periods were recast accordingly.
Financial Performance and Key Metrics
| Metric | Q2 2018 | Q2 2017 | Six Months 2018 | Six Months 2017 |
|---|---|---|---|---|
| Total revenue | $861.4 million | $730.4 million | $1.742 billion | $1.474 billion |
| Revenue growth | 18% | 18% | ||
| Income from continuing operations | $47.0 million | $41.5 million | $92.0 million | $98.9 million |
| Net income | $48.2 million | $48.9 million | $101.7 million | $114.0 million |
| Diluted EPS from continuing operations | $0.25 | $0.22 | $0.49 | $0.53 |
| Operating cash flow | $175.0 million | $184.6 million | ||
| Operating cash flow from continuing operations | $133.3 million | $170.6 million |
- Revenue growth was driven primarily by Business Services, particularly Global Ecommerce and the contribution from the Newgistics acquisition, plus Software Solutions. Q2 Business Services revenue increased 69%; six-month revenue increased 71%.
- Q2 gross margin was approximately 47.1%, compared with 56.2% in the prior-year quarter. Management reported first-half gross margin of 48.6%, down from 59.0%, reflecting the shift toward higher-growth but lower-margin shipping and digital businesses.
- Q2 continuing-operations income increased 13%, despite lower gross margins, due in part to lower restructuring and pension-related expenses. First-half continuing-operations income declined 7%, reflecting mix pressure, Global Ecommerce investments and higher amortization from Newgistics.
- Cash and cash equivalents were $689.9 million at June 30, 2018, compared with $1.009 billion at December 31, 2017. Cash plus short-term investments totaled $745.6 million.
- Total debt was $3.573 billion at June 30, 2018, including $335.0 million classified as current. Debt fair value was $3.382 billion. The company had a $1.0 billion committed credit facility, undrawn at quarter-end, and no commercial paper borrowings.
- Capital expenditures were $100.0 million in the first half, dividends paid were $70.1 million, and debt principal repayments were $260.1 million. The quarterly dividend remained $0.1875 per share.
- Net finance receivables were $1.409 billion at June 30, 2018, down from $1.480 billion at year-end 2017. Finance receivables more than 90 days past due totaled $58.0 million, compared with $67.6 million at December 31, 2017.
Material Changes Versus the Prior Comparable Period
- Global Ecommerce revenue increased 153% in Q2 and 166% in the first half, primarily from Newgistics and higher shipping volumes. Global Ecommerce remained loss-making, with EBIT losses of $6.0 million in Q2 and $13.7 million in the first half.
- Commerce Services segment revenue rose 70% in Q2 and 71% in the first half, but segment EBIT declined 57% and 38%, respectively, due to investment, labor and transportation costs and lower Presort Services profitability.
- Small and Medium Business Solutions revenue declined 7% in Q2 and 6% in the first half, led by lower North America Mailing equipment and recurring stream revenues.
- Software Solutions revenue increased 13% in Q2 and 9% in the first half. ASC 606 increased reported software revenue by approximately $10 million in Q2 and $21 million in the first half, and increased continuing-operations pretax income by approximately $9 million and $19 million, respectively.
- Operating cash flow from continuing operations declined 22% in the first half, primarily due to lower net income, higher restructuring payments and working-capital changes.
- Standard & Poor’s lowered the corporate credit rating from BBB- to BB+. Certain debt interest rates increased or are scheduled to increase by 0.25% as a result.
- The company adopted ASC 606 using the modified retrospective method, reducing opening retained earnings by $9 million. Other accounting changes reduced opening retained earnings by an additional $3 million.
Guidance, Outlook, Risks and Unusual Items
- Management expects 2018 revenue to grow while overall gross margins contract because of the continuing mix shift toward shipping, digital and other lower-margin growth areas.
- Management expects to achieve at least $200 million of spend reductions over 24 months and stated that it was positioned to achieve $120 million of savings in 2018.
- The company expects shipping, shipping APIs, cross-border volumes, carrier services and the Newgistics network to support Global Ecommerce growth. Presort Services is expected to perform around market ranges, while North America Mailing trends are expected to improve over the long term through SendPro and expanded financing offerings.
- On July 2, 2018, the company completed the sale of the Production Mail Business, except for certain non-U.S. jurisdictions. Cash proceeds at closing were $316 million; an additional $24 million was received on August 1, 2018. Estimated net proceeds were approximately $270 million. The company used the majority of the proceeds to repay debt.
- On August 2, 2018, the company redeemed its $300 million of 6.25% notes due March 2019 and expects to recognize an $8 million loss in the third quarter.
- The company may incur material non-cash pension settlement charges during the second half of 2018 in connection with the Production Mail disposition and related actions; the amount and timing were not determinable at filing.
- Key risks include declining physical mail volumes, competition and pricing pressure, execution and integration of Newgistics, customer concentration in Global Ecommerce, transportation and labor costs, cybersecurity and privacy events, foreign exchange and interest-rate exposure, credit risk, credit-rating downgrades, postal or banking regulation changes, tax adjustments and litigation.
- Management stated that pending litigation was not expected to have a material effect, although litigation outcomes are inherently unpredictable. No material off-balance-sheet arrangements were reported.
Important Facts for Investors to Verify
- Whether Global Ecommerce can convert rapid revenue growth into positive EBIT while controlling transportation, labor, depreciation and amortization costs.
- The sustainability of the lower gross-margin profile and the timing and realization of the planned $200 million cost reductions.
- Post-quarter debt balances, interest expense and liquidity following the Production Mail sale and the August 2018 redemption of the $300 million notes.
- The final net proceeds, remaining non-U.S. closings and transition-service obligations related to the Production Mail divestiture.
- The amount and timing of potential pension settlement charges and any further tax adjustments related to the Tax Cuts and Jobs Act.
- The effects of ASC 606 revenue timing on future software revenue, advance billings, contract assets and comparability with prior periods.
- Credit quality and delinquency trends in the finance receivables portfolio, particularly as the mailing-equipment portfolio continues to decline.