Pitney Bowes Inc. — 2019 Q1 Form 10-Q Summary
Business context and reporting period
Pitney Bowes is a global technology and commerce company providing ecommerce, shipping, mailing, fulfillment, returns, cross-border commerce, software, financing and related services. This unaudited report covers the three months ended March 31, 2019, compared with the three months ended March 31, 2018.
Reportable segments were Global Ecommerce, Presort Services, North America Mailing, International Mailing and Software Solutions. Commerce Services represented 46% of revenue, up from 43% in the prior-year quarter.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $868.4 million | $896.6 million | Down 3% |
| Segment EBIT | $124.6 million | $166.4 million | Down 25% |
| Continuing operations | $(1.4) million | $51.5 million | Declined |
| Net income | $(2.7) million | $60.0 million | Declined |
| Diluted EPS | $(0.01) | $0.32 | Declined |
| Cash from operating activities | $69.7 million | $69.6 million | Essentially flat |
| Cash and short-term investments | $904.3 million | $926.7 million at Dec. 31, 2018 | Down $22.4 million |
Cost of revenue increased to 56.5% of revenue from 52.2%, implying lower gross margin. Segment EBIT margin was approximately 14.3%, compared with 18.6% in the prior-year quarter. Net margin was approximately negative 0.3% versus 6.7% previously.
Revenue by major source included business services of $406.5 million, financing of $97.0 million, equipment sales of $89.8 million, software of $73.3 million, support services of $128.6 million, supplies of $51.0 million and rentals of $22.2 million.
Total debt was $3.25 billion at March 31, 2019, including $207.2 million of current debt and $3.05 billion of long-term debt. The company had an undrawn $1.0 billion committed credit facility expiring in January 2021. Total stockholders’ equity was only $86.4 million.
Material changes versus the prior comparable period
- Commerce Services revenue increased 5%, led by 8% growth in Global Ecommerce. Global Ecommerce EBIT worsened to a $14.6 million loss from a $7.7 million loss.
- SMB Solutions revenue declined 10%; North America Mailing declined 7% and International Mailing declined 20% as mailing volumes, meter populations and lease opportunities continued to weaken.
- Software Solutions revenue declined 4%, principally because the prior-year period benefited from a large Location Intelligence license transaction.
- Business services revenue rose 5%, but higher labor, transportation and postal costs increased cost of business services to 80.4% of related revenue from 75.9%.
- Equipment sales margin was adversely affected by a charge related to a SendPro C-Series tablet replacement program addressing a battery longevity issue.
- In January 2019, the company exited direct operations in six smaller International Mailing markets and shifted to a dealer model. It recorded an $18 million pretax loss, including a $10 million goodwill write-off, and reported a $1.2 million after-tax loss from discontinued operations.
- Financing activities included $39.1 million of share repurchases, $9.4 million of dividends and $12.5 million of term-loan repayments. Cash decreased by $28.4 million during the quarter.
- The company adopted ASC 842 lease accounting effective January 1, 2019 and recorded a $137 million cumulative reduction to retained earnings as of January 1, 2017; management stated that the adoption did not materially affect current-quarter earnings or cash flow.
Guidance, outlook, commentary and risks
Management expects revenue growth from Global Ecommerce, including domestic parcel, fulfillment, shipping and cross-selling opportunities; higher bound and packet mail volumes at Presort Services; and software licenses, SaaS, data updates, maintenance and indirect-channel sales. Management expects continued SMB revenue declines because of lower physical mail volumes and fewer lease opportunities, partially offset by SendPro C-Series products, new services and international launches.
The company expects to complete the remaining portion of a previously announced $200 million gross-spend reduction program in 2019. Savings are being reinvested, particularly in Commerce Services and a new third-party equipment-financing initiative. Management cautioned that this initiative will negatively affect cash flow as it builds a finance-receivable portfolio.
On April 17, 2019, Moody’s downgraded the corporate credit rating from Ba1 to Ba2. Coupon rates on $1.7 billion of notes are expected to increase by 0.25% at the applicable next interest payment dates, increasing future interest expense.
Global Ecommerce goodwill of $609 million had estimated fair value less than 20% above carrying value at March 31, 2019. Further deterioration in revenue, customer contracts or new-client acquisition could result in a future noncash impairment charge.
Key disclosed risks include declining physical mail volumes, postal regulation and USPS relationships, competition and pricing pressure, execution of the business transformation, customer credit risk, interest and foreign-exchange rates, cyber and information-security events, trade policies, supplier and outsourcing dependencies, credit-rating downgrades, pension and healthcare costs, tax matters and litigation. The filing also describes securities-law and derivative lawsuits for which management believes the claims are without merit; a reasonable loss estimate could not be made.
The board authorized an additional $100 million of share repurchases, leaving approximately $82 million available at March 31, 2019. The company also called for the June 18, 2019 redemption of its outstanding preferred and preference stock.
Investor verification checklist
- Verify whether Global Ecommerce can achieve growth while improving from its $14.6 million quarterly EBIT loss and absorbing elevated labor, transportation and postal costs.
- Monitor mailing-volume, meter-population and lease trends in North America and International Mailing, including the effects of the six-market exits.
- Assess the financial impact of the SendPro C-Series tablet replacement program and other unusual charges.
- Track debt maturities, the Moody’s downgrade, the resulting coupon increases and available liquidity relative to the company’s high debt balance.
- Evaluate cash-flow effects and credit risk from the third-party equipment-financing initiative.
- Reassess Global Ecommerce goodwill impairment headroom and the carrying value of international ERP investments.
- Confirm the pace and sustainability of the planned cost reductions and the amount reinvested in growth initiatives.
- Review subsequent filings for developments in the disclosed litigation, tax examinations, preferred-stock redemption and share repurchases.