Pitney Bowes Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2018. The filing is unaudited. Pitney Bowes provides mailing, shipping, ecommerce, financing, software, data, and customer information solutions. Prior periods were recast for the Production Mail Business as discontinued operations and for revised segment reporting.
Financial Performance and Position
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Total revenue | $832.9 million | $733.3 million | $2.575 billion | $2.207 billion |
| Revenue change | 14% | — | 17% reported; 16% constant currency | — |
| Income from continuing operations | $47.1 million | $45.4 million | $139.1 million | $144.3 million |
| Diluted EPS from continuing operations | $0.25 | $0.24 | $0.74 | $0.77 |
| Net income, including discontinued operations | $77.0 million | $57.4 million | $178.7 million | $171.4 million |
| Cash flow from operating activities | Not provided for the quarter | Not provided for the quarter | $290.6 million total; $246.4 million continuing operations | $330.6 million total; $312.6 million continuing operations |
- Continuing-operations margin was approximately 5.7% in Q3 and 5.4% for the first nine months, versus approximately 6.2% and 6.5%, respectively, in the prior-year periods.
- Business services revenue increased 58% in Q3 and 66% for the first nine months, primarily reflecting the Newgistics acquisition and growth in ecommerce and presort services.
- Q3 segment EBIT declined 5% to $137.5 million; nine-month segment EBIT declined 7% to $448.3 million. Global Ecommerce remained loss-making, with EBIT losses of $14.3 million in Q3 and $28.0 million year to date.
- Cash and cash equivalents were $759.2 million at September 30, 2018; cash plus short-term investments totaled approximately $815.2 million.
- Total debt was $3.270 billion, down from $3.830 billion at December 31, 2017. Debt fair value was $3.093 billion. The company had an undrawn $1.0 billion committed credit facility expiring in January 2021 and no commercial paper borrowings.
- Stockholders’ equity was $251.7 million, compared with $188.6 million at year-end 2017.
- Capital expenditures were $140.5 million for the first nine months. Dividends paid were $105.3 million; the quarterly dividend remained $0.1875 per share.
Material Changes Versus the Prior Comparable Period
- Newgistics: The October 2017 acquisition contributed $126 million of Q3 revenue and $384 million of nine-month revenue. Integration, depreciation, amortization, transportation, and labor costs pressured profitability.
- Portfolio shift: Commerce Services revenue grew sharply, while Small & Medium Business Solutions declined 4% in Q3 and 5% year to date. Software Solutions declined 19% in Q3 and 2% year to date.
- Margins: Cost of revenue increased to 53.6% of revenue in Q3 and 53.1% year to date, versus 44.8% and 43.4%, respectively, primarily from the lower-margin business mix and investments in Global Ecommerce.
- Cost reduction: SG&A declined 6% in Q3 and 2% year to date despite Newgistics-related costs. Management stated that it remains on track to achieve or exceed a planned $200 million cost-reduction objective over 24 months.
- Production Mail divestiture: The company sold the Production Mail Business during 2018. Q3 cash proceeds were $340 million, with estimated net proceeds of approximately $270 million after closing costs, transaction fees, and taxes. Most proceeds were used to repay debt.
- Debt actions: The company redeemed $300 million of 6.25% notes due March 2019, repaid $250 million of 5.6% notes that matured in March 2018, and repaid $15 million of term-loan principal. The early redemption generated an $8 million loss.
- Credit rating: Standard & Poor’s lowered the corporate credit rating from BBB- to BB+, increasing certain debt interest rates by 0.25% or triggering increases after the next interest payment date.
- Accounting: ASC 606 was adopted using the modified retrospective method, reducing opening retained earnings by $9 million. Compared with prior guidance, ASC 606 increased 2018 nine-month revenue by $22.2 million and continuing-operations income before taxes by $27.2 million.
- Tax rate: The effective tax rate was negative 4.4% in Q3 and 13.0% year to date, including benefits from the resolution of tax examinations and adjustments related to the Tax Cuts and Jobs Act.
Outlook, Risks, Contingencies, and Unusual Items
- Management expects continued revenue growth from shipping, ecommerce, shipping APIs, cross-border volumes, carrier services, presort services, SendPro products, expanded financing offerings, and software distribution channels.
- Management expects growth to remain concentrated in higher-growth but lower-margin areas and is addressing higher transportation and labor costs while pursuing productivity and spending reductions.
- A non-cash pension settlement charge of approximately $40 million to $60 million is expected in Q4 2018; the amount depends on participant lump-sum elections.
- Restructuring reserves totaled $24.5 million at September 30, 2018. Most payments are expected over the next 12 to 24 months, with some extending longer because of international labor laws and lease obligations.
- Key risks include declining physical mail volumes, competition and pricing pressure, customer acceptance of new offerings, postal and banking regulation, foreign exchange and interest rates, tariffs and geopolitical conditions, cybersecurity and privacy, supplier and outsourcing dependencies, Newgistics integration, customer concentration in Global Ecommerce, credit losses, pension costs, tax audits, and access to capital markets.
- The company disclosed a putative securities class action filed in August 2018 relating to disclosures made in connection with a September 2017 notes offering. Management considers the case without merit and intends to defend it vigorously; litigation outcomes remain inherently unpredictable.
- Management stated that no material off-balance-sheet arrangements existed and that disclosure controls and procedures were effective as of September 30, 2018.
Investor Verification Items
- Verify whether Global Ecommerce can achieve sustained positive EBIT after Newgistics integration, transportation costs, labor costs, and acquisition-related amortization.
- Assess leverage, near-term maturities, interest-rate increases following the credit downgrade, and the availability of the $1.0 billion credit facility.
- Reconcile reported revenue and earnings trends with the ASC 606 adoption effects and the divestiture-related discontinued-operations presentation.
- Monitor the expected $40 million to $60 million Q4 pension settlement charge and remaining restructuring cash payments.
- Evaluate the sustainability of operating cash flow, which declined 21% for continuing operations year to date, against capital expenditures, dividends, debt service, and financing needs.
- Review the tax-rate benefits and provisional Tax Cuts and Jobs Act adjustments for potential future reversals or additional changes.
- Track the securities litigation, remaining non-U.S. Production Mail divestiture closings, and any related transition-service obligations.