Pitney Bowes Inc. — Form 10-Q Summary
Business context and reporting period
Pitney Bowes is a global provider of mailing, software, customer engagement, analytics, ecommerce parcel management and related business services. This unaudited Form 10-Q covers the three and six months ended June 30, 2014. Results reflect the sale of the Canadian Document Imaging Solutions business on April 15, 2014, which is presented as discontinued operations.
Key financial metrics
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $958.5 million | $950.7 million | $1,895.9 million | $1,860.0 million |
| Income from continuing operations | $92.1 million | $84.6 million | $138.6 million | $148.7 million |
| Net income attributable to Pitney Bowes | $94.3 million | $(9.2) million | $138.9 million | $58.3 million |
| Diluted EPS from continuing operations | $0.43 | $0.39 | $0.63 | $0.69 |
| Diluted EPS | $0.46 | $(0.05) | $0.68 | $0.29 |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $280.4 million | $279.0 million |
- Q2 continuing-operations margin was approximately 9.6%, compared with 8.9% in the prior-year quarter. Six-month continuing-operations margin was approximately 7.3%, compared with 8.0%.
- Q2 segment EBIT increased 2% to $234.1 million; six-month segment EBIT increased 8% to $460.5 million.
- Q2 revenue growth was led by business services, up 28%, and software, up 9%. Equipment sales declined 15%, rentals declined 5%, financing declined 5%, and support services declined 1%.
- Digital Commerce Solutions revenue increased 27% in Q2 and 25% year to date; six-month EBIT increased 82%. Enterprise Business Solutions revenue declined 8% in Q2, primarily because of lower Production Mail equipment sales.
- Cash and short-term investments totaled $1.03 billion at June 30, 2014, compared with $939 million at December 31, 2013.
- Total debt was $3.24 billion at June 30, 2014, including $274.9 million classified as current debt. Estimated fair value was $3.48 billion.
- Net cash used in financing activities was $196.2 million, including $599.9 million of debt repayments and $76.0 million of common dividends. The quarterly dividend was $0.1875 per share.
Material changes versus the prior comparable period
- Revenue increased 1% in Q2 and 2% for the first six months, but the mix shifted toward business services, software and supplies and away from equipment, rentals and financing.
- Income from continuing operations increased in Q2 because of revenue growth, lower SG&A, restructuring charges and interest expense. The six-month amount declined because of $61.7 million of other expense associated with early debt extinguishment.
- Discontinued operations generated $6.7 million of income in Q2 and $9.5 million year to date, compared with losses of $89.3 million and $81.2 million in the corresponding 2013 periods. The 2013 losses included significant impairment charges related to previously sold businesses.
- The company issued $500 million of 4.625% notes due 2024, used primarily to fund a $500 million tender offer for portions of notes due 2017 and 2037. It also repaid $100 million of term loans during Q2.
- Restructuring charges were $8.3 million in Q2 and $18.1 million year to date, compared with $19.0 million in each 2013 period. Management expects total charges of $75 million to $125 million and annualized pretax benefits of $100 million to $125 million by 2015.
- SG&A declined 4% in Q2 and 2% year to date, although the company incurred $9 million of incremental ERP implementation expenses through June 30.
Guidance, outlook, risks and unusual items
Management expects mailing-business revenue and profit to remain challenged by declining physical mail volumes, but anticipates improvement during 2014 from its go-to-market channel strategy, cost reductions and moderating international meter declines. Management expects continued demand in Production Mail, growth in Presort Services and further expansion in Digital Commerce Solutions, particularly cross-border parcel management, software and customer engagement solutions.
- The global ERP implementation is expected to be a multi-year project. Management estimates approximately $0.10 of diluted EPS expense in 2014, with $45 million to $65 million of additional cash outlays expected during the remainder of the year.
- Key risks include declining mail volumes, competition and substitution by digital communications, customer credit risk, access to capital, interest-rate and currency movements, postal and banking regulation, system interruptions, ERP execution, pension and healthcare costs, tax matters and intellectual-property claims.
- The Department of Justice is investigating compliance with postal regulatory requirements in the Presort Services business under a Civil Investigative Demand. The company cannot estimate a potential loss or predict the outcome.
- A tax matter involving the Historic Boardwalk Hall partnership could require payment of up to $100 million if indemnification is not recovered, although the company expects to be indemnified.
- The company expects to sell its headquarters building and surrounding land, carried as approximately $47.0 million of assets held for sale, by year-end.
- The effective tax rate was 33.5% in Q2 and 28.2% for the first six months, compared with 22.3% and 22.0% in the prior-year periods; prior-year rates benefited from discrete tax items.
Important facts for investors to verify
- Whether Digital Commerce Solutions growth can offset continued declines in mailing equipment, rentals and financing revenue.
- Progress toward the stated restructuring savings and the timing and cost of the ERP implementation.
- Debt maturities, refinancing needs and the company’s ability to sustain dividends while reducing leverage.
- The outcome and potential financial exposure from the DOJ Presort Services inquiry and the Historic Boardwalk Hall tax matter.
- Trends in physical mail volumes, installed meter populations, finance receivables and customer credit losses.
- The assumptions supporting restructuring reserves, pension obligations, goodwill valuations and assets held for sale.