Pitney Bowes Inc. 2014 Form 10-K Summary
Business context and reporting period
Pitney Bowes is a global technology company serving approximately 1.5 million clients in about 100 countries through Small and Medium Business Solutions, Enterprise Business Solutions and Digital Commerce Solutions. The filing covers the fiscal year ended December 31, 2014. Fourth-quarter 2014 revenue was $983.9 million and income from continuing operations was $63.5 million.
Financial performance and key metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Total revenue | $3.822 billion | $3.791 billion | 1% |
| Income from continuing operations | $318.4 million | $306.0 million | 4% |
| Income attributable to common stockholders from continuing operations | $300.0 million | $287.6 million | 4% |
| Diluted EPS from continuing operations | $1.47 | $1.42 | 4% |
| Net income attributable to Pitney Bowes | $333.8 million | $142.8 million | 134% |
| Cash flow from operations | $655.5 million | $624.8 million | 5% |
| Cash and cash equivalents | $1.079 billion | $907.8 million | 19% |
| Total debt | $3.252 billion | $3.346 billion | Down $94 million |
Gross margin was approximately 56.0%, compared with 56.5% in 2013. Income from continuing operations attributable to common stockholders represented approximately 7.8% of revenue, while diluted EPS from continuing operations was $1.47. Total net income attributable to Pitney Bowes represented approximately 8.7% of revenue.
- Revenue by source: equipment sales declined 11% to $770 million; supplies increased 5% to $300 million; software increased 8% to $430 million; rentals declined 5% to $485 million; financing declined 4% to $433 million; support services declined 3% to $625 million; and business services increased 23% to $779 million.
- Segment revenue: Small and Medium Business Solutions declined 4% to $2.064 billion; Enterprise Business Solutions declined 2% to $919 million; and Digital Commerce Solutions increased 21% to $838 million.
- Segment EBIT increased 6% to $961 million. DCS EBIT increased 53% to $84 million, Presort Services EBIT increased 18% to $98 million, and SMB EBIT increased 3% to $731 million. Production Mail EBIT declined 14% to $48 million.
- Capital expenditures were $180.6 million, including increased spending related to the global ERP system. Dividends paid to common stockholders were $151.6 million, or $0.75 per share, and share repurchases totaled $50.0 million.
- Investing cash flow was an outflow of $143.3 million and included $102.4 million of proceeds from business sales. Financing cash flow was an outflow of $311.8 million.
Material changes versus the prior comparable period
- Growth shifted toward digital and service offerings. DCS benefited from global ecommerce volumes, higher parcel activity and increased software licensing revenue.
- Traditional mailing revenue remained under pressure from declining physical mail volumes, fewer installed meters and lower equipment sales. SMB revenue declined 4%, while rentals and support services also decreased.
- Production Mail revenue declined 10% following unusually strong 2013 installations of production printers and inserters. Presort Services benefited from higher first-class mail volumes and operating efficiencies.
- SG&A declined 3% due to restructuring, productivity initiatives and changes to the go-to-market model, partially offset by $36 million of expanded branding, marketing and ERP-related costs.
- The Operational Excellence restructuring program was completed by December 31, 2014. Total 2013 and 2014 restructuring charges related to the program were $157 million, with expected annualized pretax benefits of $130 million to $165 million by 2016.
- Net income benefited from $33.7 million of income from discontinued operations, compared with a $144.8 million loss in 2013. The 2014 amount included gains and tax effects associated with divestitures, including the sale of the Canadian Document Imaging Solutions business.
- The company issued $500 million of 4.625% ten-year notes and redeemed $500 million of older notes through a tender offer. It also repaid $100 million of term loans. Debt-related early redemption costs were $62 million.
- Other comprehensive loss was $271.6 million, primarily reflecting pension and postretirement adjustments and foreign currency translation. The adoption of updated mortality assumptions increased year-end pension and postretirement obligations by approximately $119 million in aggregate.
Guidance, outlook, risks and unusual items
- Management expects 2015 incremental expenses of approximately $0.15 to $0.18 per diluted share for ERP implementation, expanded branding and marketing, and completion of global go-to-market initiatives. Prior restructuring benefits and the inside-sales transition are expected to largely offset these costs.
- Management expects continued DCS growth from global ecommerce, U.K. outbound cross-border services, software licensing, marketing services and shipping solutions.
- SMB revenue is expected to decline at a moderating rate. International Mailing remains exposed to European macroeconomic weakness, product-line exits and dealer-network transitions.
- Presort Services is expected to continue benefiting from client expansion, higher processed-mail volumes and operating efficiencies. Production Mail revenue is expected to remain challenged by European conditions, dealer transitions and declining services revenue.
- Approximately $2.0 billion of debt matures within five years, including $325 million in 2015. Management expects to fund maturities with cash or refinancing, but acknowledged exposure to capital-market conditions and refinancing costs.
- Key risks include continued physical-mail declines, competition and pricing pressure, acceptance of digital offerings, ERP implementation disruption, cybersecurity and data-privacy events, supplier and outsourcing dependencies, customer credit risk, foreign-exchange volatility, pension and retiree medical costs, tax uncertainties and loss of significant DCS clients or partners.
- The Department of Justice is investigating compliance with certain postal regulatory requirements in the Presort Services business under a False Claims Act Civil Investigative Demand. The company cannot estimate any potential loss or predict the outcome.
- At December 31, 2014, the company had no material off-balance-sheet arrangements. Management and the independent auditor concluded that internal control over financial reporting was effective.
Important facts for investors to verify
- Whether DCS growth and improved EBIT can offset continued declines in core mailing revenue and installed meter volumes.
- The timing, cost and operational impact of the ERP implementation and whether expected 2016-and-beyond productivity benefits are achieved.
- Liquidity available for the $325 million 2015 debt maturity and approximately $2.0 billion of maturities over the following four years.
- The outcome and potential financial exposure of the DOJ Presort Services inquiry.
- The sustainability of the $0.75 per-share annual common dividend given debt service, pension obligations, restructuring payments and investment requirements.
- The effect of a stronger U.S. dollar on international revenue, profitability and global ecommerce demand.
- The effect of pension assumption changes, tax examinations and unrecognized tax benefits on future earnings, cash flow and equity.