Pitney Bowes Inc. 2017 Form 10-K Summary
Business context and reporting period
Pitney Bowes is a global technology and commerce-services company providing mailing, shipping, fulfillment, returns, cross-border ecommerce, software, customer information management and location-intelligence solutions. Reported segments are Small and Medium Business Solutions, Enterprise Business Solutions and Digital Commerce Solutions.
This filing covers the fiscal year ended December 31, 2017. The fourth quarter is included in the annual results; fourth-quarter 2017 revenue was $1.049 billion and net income attributable to Pitney Bowes was $89.9 million.
Financial performance and key metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Revenue | $3.550 billion | $3.407 billion | 4% |
| Income from continuing operations | $261.3 million | $114.6 million | More than doubled |
| Net income attributable to Pitney Bowes | $261.3 million | $92.8 million | More than doubled |
| Diluted EPS from continuing operations | $1.39 | $0.51 | More than doubled |
| Cash flow from operations | $495.8 million | $496.1 million | Flat |
| Capital expenditures | $171.0 million | $160.8 million | Higher |
| Total debt | $3.830 billion | $3.365 billion | Higher |
- Gross margin was approximately 51.5%, compared with 55.5% in 2016, primarily reflecting a greater mix of lower-margin business services and Newgistics-related costs.
- Net margin was approximately 7.4%, compared with 2.7% in 2016. The comparison benefited from the absence of the $171 million goodwill impairment recorded in 2016 and a $39 million provisional tax benefit in 2017.
- Digital Commerce Solutions revenue increased 32% to $904.6 million. Global Ecommerce revenue increased 63% to $552.2 million, but segment EBIT was a loss of $17.9 million due to growth investments and acquisition-related amortization.
- Small and Medium Business Solutions revenue declined 5% to $1.740 billion, and segment EBIT declined 14% to $546.0 million, reflecting continuing declines in mailing equipment, rental, financing and support-service revenue.
- Enterprise Business Solutions revenue increased 3% to $905.1 million, while segment EBIT declined 1% to $148.0 million. Presort Services revenue increased 5% on higher volumes and revenue per piece.
- Cash and short-term investments totaled $1.058 billion at year-end, including $1.009 billion of cash and cash equivalents.
- The company paid $139.5 million of common dividends, or $0.75 per share, and made no common-stock repurchases in 2017.
Material changes versus the prior comparable period
- Newgistics was acquired in October 2017 for approximately $471 million net of cash acquired. It contributed $140 million of 2017 revenue and added $330 million of goodwill and $135.6 million of intangible assets.
- Business services revenue increased 29%, driven by Newgistics, Global Ecommerce growth and higher Presort Services volumes. In contrast, equipment sales increased only 1%, while supplies, rentals, financing and support services declined.
- Operating cash flow remained essentially unchanged despite higher net income because working-capital movements offset lower restructuring payments and pension contributions.
- Total debt increased by approximately $465 million. The company issued $1.1 billion of notes and term loans during 2017 and repaid or redeemed several debt instruments.
- Long-term debt increased to $3.559 billion from $2.750 billion. Debt maturities include $270 million in 2018 and approximately $2.5 billion within the next five years.
- Stockholders’ equity improved from a deficit of $103.7 million to positive equity of $188.6 million, assisted by net income and a $148.0 million increase in accumulated other comprehensive income.
- Effective January 1, 2017, the company changed segment reporting to include office shipping solutions within Small and Medium Business Solutions. Prior-period segment information was presented for comparability.
Guidance, outlook, commentary, risks and unusual items
Management expects 2018 revenue to grow as the portfolio shifts toward digital, shipping and commerce services. Global Ecommerce is expected to benefit from domestic shipping APIs, carrier services, cross-border volumes and Newgistics. Management expects SendPro products to improve North American equipment and recurring-revenue trends and expects Software Solutions to benefit from indirect-channel growth.
Management expects overall gross margins to contract as higher-growth but lower-margin businesses become a larger portion of the portfolio. The company announced plans to reduce its cost structure by an additional $200 million over 24 months, following approximately $300 million of reductions over the preceding five years.
The company expects to repatriate approximately $500 million of foreign cash and use it to reduce debt. The 2017 effective tax rate was 7.7%, including a provisional $39 million benefit from the Tax Cuts and Jobs Act and $30 million of benefits from resolving certain tax examinations. The tax accounting related to the Tax Cuts and Jobs Act remained provisional.
In November 2017, the Board began exploring strategic alternatives, including a potential sale, merger, asset divestiture, partnership, acquisition, recapitalization or continuation under the existing plan. The filing states that there is no assurance that any transaction or other outcome will occur.
- Principal business risks include continuing declines in physical mail volumes, pricing and competitive pressure, execution of the digital transformation, cybersecurity and data-privacy exposure, third-party supplier and outsourcing dependence, postal and banking regulation, foreign exchange and cross-border trade risks, and the concentration of Global Ecommerce revenue among significant clients.
- Newgistics integration, market acceptance of shipping APIs and the ability to generate anticipated synergies are material execution risks.
- The company had $43.7 million of restructuring reserves at year-end, with most payments expected over the following 12 to 24 months.
- The company reported no material off-balance-sheet arrangements. Management stated that pending litigation was not reasonably expected to have a material effect, although litigation outcomes are inherently uncertain.
- Newgistics was excluded from the 2017 internal-control assessment because it was acquired during the year; excluded assets represented 2% of consolidated assets and excluded revenue represented less than 4% of consolidated revenue. Management and the auditor concluded that internal control over financial reporting was effective.
Important facts for investors to verify
- Verify the sustainability of revenue growth from Global Ecommerce and Newgistics, including whether the segment can reach profitability after acquisition and growth investments.
- Verify the pace of decline in mailing-related recurring revenue, installed meters, finance receivables and physical mail volumes.
- Review debt maturities, refinancing requirements, credit-rating changes, interest-rate adjustments and management’s intended use of repatriated foreign cash.
- Assess whether the planned $200 million cost reduction can offset expected gross-margin contraction and ongoing investment requirements.
- Monitor the strategic-alternatives process for transaction costs, operational disruption, financing effects and any announced transaction.
- Reconcile reported earnings growth for the effects of the 2016 goodwill impairment, the 2017 tax benefit and other unusual items.
- Review Newgistics purchase-price allocations, goodwill and intangible-asset carrying values for future impairment risk.
- Evaluate credit quality and aging of finance receivables, including $67.6 million of balances more than 90 days past due at year-end.