Pitney Bowes Inc. — 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, 2017, compared with the corresponding 2016 periods.
Effective January 1, 2017, the company revised its segment presentation by moving office shipping solutions from Global Ecommerce to Small & Medium Business Solutions and recast prior-period results accordingly.
Financial Performance and Key Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Total revenue | $821.4 million, down 2% | $1.658 billion, down 1% |
| Income from continuing operations | $48.9 million, down 18% | $114.0 million, down 7% |
| Net income attributable to Pitney Bowes | $48.9 million, down 9% versus attributable 2016 net income | $114.0 million, up 2% versus attributable 2016 net income |
| Diluted EPS from continuing operations | $0.26, versus $0.29 | $0.61, versus $0.59 |
| Net cash provided by operating activities | Not separately provided | $184.6 million, up 16% |
| Cash and cash equivalents | $840.6 million at June 30, 2017 | |
| Cash and short-term investments | $1.005 billion at June 30, 2017 | |
| Total debt | $3.529 billion carrying value; $3.617 billion estimated fair value |
Second-quarter cost of revenue was $382.6 million, or 46.6% of revenue, implying an approximate gross margin of 53.4%, compared with 55.5% in the prior-year quarter. For the first six months, cost of revenue was 45.6% of revenue, implying an approximate gross margin of 54.4%, compared with 56.1% in 2016. Net margin was approximately 6.0% for the quarter and 6.9% for the first half.
Revenue mix in the second quarter included equipment sales of $158.6 million, supplies of $63.2 million, software of $86.7 million, rentals of $96.0 million, financing of $83.7 million, support services of $115.3 million and business services of $217.9 million.
Segment revenue and EBIT for the second quarter were:
- Small & Medium Business Solutions: $436.4 million of revenue and $134.8 million of EBIT.
- Enterprise Business Solutions: $204.0 million of revenue and $26.9 million of EBIT.
- Digital Commerce Solutions: $180.9 million of revenue and $3.5 million of EBIT.
Total segment EBIT declined 19% to $165.3 million in the quarter and declined 12% to $357.7 million for the first six months. Global Ecommerce generated revenue growth but remained unprofitable, with a second-quarter EBIT loss of $4.0 million and a first-half loss of $8.3 million.
Cash Flow, Liquidity and Capitalization
- First-half operating cash flow was $184.6 million, compared with $158.6 million in 2016. Management attributed the increase primarily to payment timing, lower variable compensation payments, lower restructuring and tax payments, and the absence of a $37 million special U.K. pension contribution made in 2016.
- Investing activities used $224.8 million, including $131.3 million of net investment purchases and $76.6 million of capital expenditures.
- Financing activities provided $91.4 million. The company issued $395.8 million of long-term debt, made $229.3 million of principal payments and paid $69.5 million of common dividends.
- The company issued $400 million of 3.875% notes due 2022. Proceeds were used partly to repay a $150 million term loan and are intended, together with cash and other financing sources, to repay a portion of the $385 million notes due September 2017.
- Current portion of long-term debt increased to $985.3 million from $614.5 million at December 31, 2016, while long-term debt declined to $2.543 billion from $2.750 billion.
- The company had a $1 billion committed credit facility, extended during the quarter through 2021, and had no outstanding commercial paper at June 30, 2017. Management stated that existing liquidity, operating cash flow and borrowing capacity should support current needs, including capital investment, dividends, acquisitions and share repurchases.
- The company paid $70 million of common dividends during the first half and declared quarterly dividends of $0.1875 per share. No shares were repurchased during the quarter; $21 million remained available under the repurchase authorization.
Material Changes Versus the Prior Comparable Period
- Revenue declined modestly on a reported basis but was flat on a constant-currency basis for both the quarter and first half. Foreign currency translation, particularly the British pound, reduced reported revenue.
- Business services and equipment sales grew, while financing, support services, rentals, supplies and software declined. Business services increased 8% in the quarter and 9% for the first half.
- Digital Commerce Solutions revenue grew 4% in the quarter and 6% for the first half, led by Global Ecommerce growth of 14% and 15%, respectively, on a reported basis.
- Small & Medium Business Solutions revenue declined 3% in the quarter and 5% for the first half. North America Mailing EBIT declined 18% and 15%, respectively, due mainly to lower-margin recurring revenue, weaker service margins, increased scrap costs, marketing, residual losses and credit-loss provisions.
- Enterprise Business Solutions revenue declined 4% in the quarter and was flat for the first half. Production Mail declined, while Presort Services grew 2% and 3%, respectively.
- SG&A increased 3% in the quarter because of higher marketing, bad debt and Global Ecommerce investment, but declined 2% for the first half due to productivity savings and a $6 million gain from the sale of technology.
- The second-quarter effective tax rate was 9.2%, compared with 35.8% in 2016; the first-half rate was 24.2%, compared with 36.5%. The 2017 rates included benefits from the resolution of tax examinations.
- Restructuring charges and asset impairments were $26.9 million in the quarter and $29.0 million for the first half. Restructuring reserves were $35.1 million at June 30, 2017, with most payments expected over the next 12 to 24 months.
Guidance, Outlook, Risks and Unusual Items
Management did not provide specific full-year numerical revenue or earnings guidance in the filing. It expects new products, digital capabilities, the enterprise business platform, marketing, restructuring and cost-saving initiatives to provide longer-term benefits. Near-term earnings are expected to be affected by normalized variable compensation, higher marketing spending and increased innovation spending.
- Management expects service and rental margins to improve in the second half as revenue growth and productivity initiatives offset the cost of retiring aging meters.
- SendPro and the broader Pitney Bowes Commerce Cloud are expected to support long-term SMB growth.
- Presort Services is expected to benefit from network and parcel-services expansion, while Production Mail remains pressured by consolidation, outsourcing, pricing and deal timing.
- Global Ecommerce and Software Solutions will continue to require investment in partner channels, shipping APIs, cross-border offerings and market expansion. Global Ecommerce is expected to contribute to future growth but remained loss-making during the period.
- Management identified risks including declining physical mail volumes, competitive and pricing pressures, technology execution, cybersecurity and privacy requirements, postal and banking regulation, customer concentration in Global Ecommerce, foreign exchange and interest rates, access to capital markets, supplier and outsourcing issues, acquisitions, intellectual property claims, customer credit risk, pension costs, tax audits and geopolitical or natural events.
- Finance receivables more than 90 days past due had a contract value of $68.7 million at June 30, including $56 million of North America sales-type lease receivables. Management attributed much of the increase to billing-format and process changes related to the enterprise business platform rather than deterioration in customer credit quality. Approximately $26 million of the North America receivables had been paid by August 1, 2017.
- The company reported no material off-balance-sheet arrangements, no material changes to previously disclosed market-risk matters or risk factors, and no significant regulatory changes. Legal proceedings were not expected by management to have a material effect, although litigation outcomes remain inherently uncertain.
- The company plans to adopt the new revenue standard on a modified retrospective basis beginning January 1, 2018. It expects limited changes for most offerings but anticipates effects on the timing of certain software-license and ancillary revenue and on customer-acquisition cost accounting.
Important Facts for Investors to Verify
- Review the company’s ability to refinance or repay the $985.3 million current portion of debt, including the September 2017 notes and other near-term maturities.
- Assess whether declining high-margin recurring revenue in mailing, rental, financing and support services is offset by growth in equipment, business services and Digital Commerce Solutions.
- Monitor Global Ecommerce investment levels, revenue growth and the timing of achieving profitability.
- Evaluate whether finance-receivable delinquencies are primarily administrative, as management states, and whether subsequent collections support the stated credit-quality assessment.
- Separate recurring operating performance from restructuring charges, tax examination benefits, the technology-sale gain and other unusual items.
- Track execution of SendPro, the enterprise business platform, digital investments and the 2018 revenue-recognition implementation.