PITNEY BOWES INC quarterly report, Q1 FY2016

Pitney Bowes Inc. 2016 First-Quarter Form 10-Q Summary

Business Context and Reporting Period

Pitney Bowes is a global technology company providing mailing, shipping, software, customer information management, location intelligence, customer engagement and cross-border ecommerce solutions. This unaudited Form 10-Q covers the three months ended March 31, 2016, compared with the same period in 2015. The principal segments are Small & Medium Business Solutions, Enterprise Business Solutions and Digital Commerce Solutions.

Financial Performance and Key Metrics

Metric	Q1 2016	Q1 2015	Change
Total revenue	$844.6 million	$890.7 million	Down 5%
Income from continuing operations	$62.6 million	$85.0 million	Down 26%
Net income attributable to Pitney Bowes	$58.0 million	$80.6 million	Down 28%
Diluted EPS from continuing operations	$0.30	$0.40	Down $0.10
Total EBIT	$201.7 million	$229.2 million	Down 12%
Cash flow from operations	$58.4 million	$103.9 million	Down $45.5 million
Cash and cash equivalents	$613.0 million	$845.7 million at Q1 2015 end	Down $232.7 million year over year

Revenue mix was pressured by declines in equipment sales, software, rentals, financing and support services. Business services revenue was essentially flat. Global Ecommerce revenue increased 30% to $98.4 million, while Presort Services revenue increased 5% to $127.4 million. These gains were offset by declines in mailing and software activities.

Total cost of revenue was $365.2 million, or 43.2% of revenue, compared with 43.8% in the prior-year quarter. Income before taxes was $99.7 million, representing an approximately 11.8% margin versus 15.2% in Q1 2015. Net income attributable to Pitney Bowes represented an approximately 6.9% revenue margin versus 9.1% in the prior-year period. Total EBIT margin was approximately 23.9%, compared with 25.7%.

SG&A increased 4% to $326.9 million. The increase included approximately $12 million of advertising and ERP costs, $4 million of Borderfree amortization and $3 million of costs related to geographic exits. A $10 million Connecticut development-loan forgiveness and productivity initiatives partially offset these expenses. The effective tax rate was 37.1%, compared with 37.3%.

Liquidity, Debt and Capital Allocation

Cash and short-term investments totaled $735.1 million at March 31, 2016, compared with $767.6 million at December 31, 2015.
Total debt was $3.045 billion at March 31, 2016, including $269.6 million of commercial paper and $2.775 billion of long-term debt. The debt carrying value increased from $2.951 billion at December 31, 2015.
In January 2016, the company borrowed $300 million under a term loan, using the proceeds and operating cash to repay the $371 million of notes due January 2016. The new term loan matures in December 2020.
The company generated $58.4 million of operating cash flow, used $60.0 million in investing activities and used $55.9 million in financing activities during the quarter.
Capital expenditures were $40.5 million, and Enroute was acquired for $13.4 million in cash.
The company paid $36.0 million in dividends and repurchased $128.5 million of common stock, representing 6.8 million shares at an average price of $18.32 per share.
A $1 billion committed credit facility supports the commercial paper program; the company had not drawn on the facility at quarter-end.

Material Changes Versus the Prior Comparable Period

Revenue decreased $46.1 million, primarily due to declining mailing-related recurring revenue, lower software licensing revenue, foreign currency effects, geographic market exits and the absence of Imagitas revenue after its 2015 sale.
Small & Medium Business Solutions revenue declined 5% and EBIT declined 4%. North America Mailing revenue fell 3%, while International Mailing revenue fell 11%.
Enterprise Business Solutions revenue declined 3% and EBIT declined 2%. Production Mail revenue fell 12% and EBIT fell 24%; Presort Services revenue and EBIT each increased 5%.
Digital Commerce Solutions revenue increased 9, but EBIT declined to a $1.8 million loss from $12.3 million of EBIT in Q1 2015. Software Solutions produced a $2.6 million EBIT loss, while Global Ecommerce revenue grew 30% but EBIT fell 91% to $0.8 million.
Operating cash flow declined primarily because of lower earnings, a $36.7 million special pension contribution, higher tax payments and ERP and advertising expenditures.
Foreign currency translation reduced reported revenue and profitability. The company also exited direct operations in Mexico, South Africa and five Asian markets.
Other comprehensive income attributable to Pitney Bowes was $106.8 million, compared with $18.1 million in Q1 2015, primarily reflecting a $39.8 million foreign-currency translation gain versus a $72.2 million loss in the prior year.

Outlook, Commentary, Risks and Unusual Items

Management stated that it was executing priorities to stabilize and reinvent the mail business, improve operational efficiency and expand digital commerce. The company expects continued investment in its global ERP implementation and advertising campaign, with anticipated benefits from restructuring, acquisition synergies, go-to-market initiatives and new products. It launched the Pitney Bowes Commerce Cloud in April 2016.

Management expected stabilizing trends in major international markets, continued growth in Presort Services and Global Ecommerce, and challenged conditions in Production Mail. Software Solutions was expected to benefit from channel expansion, improved sales efficiency and new industry-specific offerings. The filing does not provide a full-year revenue or earnings-per-share guidance range.

The company expects to repurchase up to $215 million of common stock during 2016; $90 million of authorization remained at March 31, 2016.
The $300 million of subsidiary preferred stock becomes redeemable at the company’s option in October 2016. If not redeemed, its dividend rate increases by 50% and rises by an additional 50% every six months thereafter. Management was evaluating redemption or refinancing alternatives.
Remaining restructuring reserves were $31.4 million at March 31, 2016, with most payments expected over the next 12 to 24 months.
Key risks include declining physical mail volumes, competition and pricing pressure, ERP implementation disruption, foreign currency volatility, postal and banking regulation changes, information-security and privacy requirements, customer credit risk, pension obligations, acquisition integration and the loss of large Global Ecommerce customers.
Management stated that pending litigation was not reasonably expected to have a material effect, while acknowledging that litigation outcomes are inherently unpredictable.
The company concluded that its disclosure controls and procedures were effective as of March 31, 2016, with no material change in internal control over financial reporting during the quarter.

Important Facts for Investors to Verify

Whether declines in installed mailing equipment, rentals, financing and support services stabilize as new products and go-to-market initiatives are implemented.
The sustainability and profitability of Global Ecommerce growth, including the effects of Borderfree, Enroute, foreign currency and customer concentration.
The timing, cost and operational impact of the new ERP implementation and advertising campaign.
Liquidity and refinancing plans for the subsidiary preferred stock before and after the October 2016 redemption date.
Debt levels, commercial paper usage, interest-rate exposure and the company’s ability to fund dividends, restructuring payments, acquisitions and share repurchases.
Cash flow recovery following lower earnings, pension contributions and elevated strategic spending.
Progress in Production Mail, Software Solutions and International Mailing, where revenue or EBIT declined materially.
The effect of foreign currency movements, market exits and potential changes in postal, banking, tax and regulatory requirements.