Pitney Bowes Inc. Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2020. Although the request references 2020 Q4, this filing is an annual Form 10-K; fourth-quarter information is included only in the unaudited quarterly data.
Business context
Pitney Bowes is a global technology company providing ecommerce fulfillment, parcel delivery, cross-border ecommerce, presort mail services, mailing and shipping technology, software, financing and related services. Reportable segments are Global Ecommerce, Presort Services and SendTech Solutions. Fourth-quarter revenue is seasonally higher because of holiday shipping volumes.
- Global Ecommerce and Presort Services comprise Commerce Services.
- Global Ecommerce benefited from accelerated ecommerce and parcel demand during COVID-19.
- SendTech Solutions remains exposed to declining physical mail volumes and includes equipment, supplies, support, rentals and financing.
Financial performance and key metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Total revenue | $3.554 billion | $3.205 billion | +11% |
| Continuing operations | $(192) million | $40 million | Declined materially |
| Net income attributable to common stockholders | $(182) million | $195 million | Declined materially |
| Diluted EPS | $(1.06) | $1.10 | Declined materially |
| Operating cash flow | $302 million | $268 million | +$34 million |
| Cash flow from continuing operations | $340 million | $259 million | +$81 million |
| Capital expenditures | $105 million | $137 million | Declined $32 million |
| Cash, cash equivalents and short-term investments | $940 million | $1.040 billion | Declined approximately $100 million |
| Total debt | $2.564 billion | $2.740 billion | Declined $175 million |
| Long-term debt | $2.348 billion | $2.720 billion | Declined $371 million |
| Dividend paid per share | $0.20 | $0.20 | No change |
Revenue from business services increased 28% to $2.191 billion, while support services declined 6%, financing declined 7%, equipment sales declined 11%, supplies declined 15% and rentals declined 8%.
| Segment | 2020 revenue | Change | 2020 segment EBIT | 2019 segment EBIT |
|---|---|---|---|---|
| Global Ecommerce | $1.619 billion | +41% | $(83) million | $(70) million |
| Presort Services | $521 million | -2% | $56 million | $71 million |
| SendTech Solutions | $1.414 billion | -7% | $441 million | $490 million |
| Total segment EBIT | $414 million | $491 million |
Global Ecommerce gross margin fell to 8.5% from 14.1%, primarily because of higher postal, transportation and labor costs, capacity constraints, investments to support growth and COVID-19 costs. Presort Services gross margin declined to 22.8% from 25.8%. SendTech Solutions gross margin declined to 63.2% from 64.7%.
Material changes versus the prior comparable period
- Revenue growth was driven by a 41% increase in Global Ecommerce, more than offsetting declines in Presort Services and SendTech Solutions.
- Profitability deteriorated despite revenue growth. Total segment EBIT declined 16%, and the company reported a continuing-operations loss.
- The company recorded a $198 million non-cash, pre-tax goodwill impairment charge related to Global Ecommerce in the first quarter. No additional impairment was recorded in the fourth quarter.
- Restructuring charges and asset impairments were $21 million, compared with $70 million in 2019; no asset impairment charges were recorded in 2020.
- SG&A declined 4% to $963 million and research and development expense declined 25% to $38 million, reflecting cost savings and lower spending.
- Credit loss provisions increased, including a $10 million increase cited for SendTech Solutions, reflecting COVID-19-related economic conditions.
- The company received $17 million of insurance proceeds related to the October 2019 ransomware attack. The 2019 attack had adversely affected 2019 revenue by $18 million and continuing-operations EPS by $0.08.
- The company did not repurchase shares in 2020, compared with $105 million of repurchases in 2019.
- Discontinued operations contributed $10 million in 2020, compared with $154 million in 2019, when the company recognized a substantial gain on the sale of its Software Solutions business.
Liquidity, debt and capital resources
- Management stated that cash, investments, operating cash flow and borrowing capacity under the $500 million revolving credit facility were sufficient to fund cash needs for the next 12 months.
- The company had no borrowings outstanding under the revolving facility at December 31, 2020 and was in compliance with all debt covenants.
- A $850 million term loan was obtained in February 2020 and matures in January 2025. The company also has $500 million of interest-rate swaps to mitigate variable-rate exposure.
- In March 2020, the company repurchased portions of notes maturing in 2021 through 2024 and recognized a $37 million loss on early extinguishment of debt.
- Contractual obligations totaled approximately $4.235 billion, including $2.610 billion of debt maturities, $966 million of estimated debt interest, $280 million of operating lease obligations and $244 million of purchase obligations.
- Approximately $2.1 billion of debt was scheduled to mature within five years. Debt maturities for 2021 were approximately $216 million.
- At December 31, 2020, 46% of debt was variable rate, compared with 14% in 2019. A one-percentage-point change in the effective interest rate on variable-rate debt would have reduced pre-tax income by approximately $7 million.
Guidance, outlook and management commentary
- Management expected modest consolidated revenue growth in 2021.
- Global Ecommerce was expected to continue benefiting from ecommerce market growth, with anticipated 2021 revenue growth and improved margins from pricing and operational initiatives.
- Presort Services was expected to benefit from improving mail volumes, organic growth, acquisitions, automation and facility optimization.
- SendTech Solutions was expected to experience continued declines in recurring revenue, partially offset by cloud-enabled shipping solutions and multipurpose device sales.
- Management expects margins to improve over time as the company shifts toward higher-growth markets, builds scale and realizes investment and optimization benefits.
Principal risks, contingencies and unusual items
- COVID-19 could continue to affect demand, physical mail volumes, labor availability and costs, transportation capacity, supply chains, customer collections, liquidity and credit ratings.
- Global Ecommerce has lower margins than legacy mailing businesses and depends on achieving sufficient scale and controlling per-package costs.
- The company depends significantly on the USPS, including USPS pricing, delivery performance, financial condition and contractual relationships.
- Physical mail volume declines pose ongoing risks to Presort Services and SendTech Solutions.
- Global Ecommerce revenue is concentrated among a relatively small number of large clients, creating customer concentration risk.
- The company experienced significant ransomware events in October 2019 and May 2020. The 2020 Maze attack resulted in limited confidential-data exfiltration but did not disrupt operations or affect reported financial results.
- Credit risk increased in the finance receivables portfolio. The allowance for credit losses was 3% of finance receivables at December 31, 2020, compared with 2% a year earlier.
- The company had approximately $37 million of outstanding letters of credit guarantees, primarily supporting insurance, lease, customs and performance obligations.
- Management stated that pending litigation was not reasonably expected to have a material effect, while noting that litigation outcomes are inherently unpredictable.
- After year-end, Standard & Poor’s downgraded the company and its debt ratings. Certain note interest rates were expected to increase by 0.25%, and the company announced redemption of the October 2021 notes.
- LIBOR, used in certain facilities and swaps, was expected to be phased out after 2021, creating potential refinancing and interest-cost uncertainty.
Important facts for investors to verify
- Whether Global Ecommerce can convert substantial revenue growth into positive EBIT and restore gross margins.
- The durability of ecommerce volume growth and the effects of labor, transportation, postal and fulfillment costs.
- Future physical mail volume trends and the financial condition and operating policies of the USPS.
- Debt refinancing plans, credit-rating actions, covenant compliance and the effect of higher interest rates.
- Customer concentration and retention within Global Ecommerce.
- Changes in credit losses, delinquencies and customer payment behavior.
- Potential additional goodwill or long-lived asset impairment charges based on revised forecasts, discount rates or operating performance.
- Progress on cybersecurity remediation and the potential financial or regulatory effects of future cyber incidents.
- The sustainability of the quarterly dividend given the 2020 net loss, leverage and upcoming debt maturities.
- The effects of LIBOR replacement, foreign exchange movements and continuing COVID-19 uncertainty.