Pitney Bowes Inc. 2018 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2018. Pitney Bowes is transforming from traditional mailing toward higher-growth commerce, shipping, fulfillment, presort, software, and data solutions. Its reportable segments are Global Ecommerce, Presort Services, North America Mailing, International Mailing, and Software Solutions.
The company sold its Production Mail Business in July 2018; its results are presented as discontinued operations. The company adopted ASC 606 revenue recognition on January 1, 2018 using the modified retrospective method.
Financial performance and liquidity
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Revenue | $3.522 billion | $3.123 billion | 13% |
| Segment EBIT | $623 million | $661 million | (6%) |
| Income from continuing operations | $200 million | $221 million | (10%) |
| Net income attributable to Pitney Bowes | $224 million | $261 million | (14%) |
| Diluted EPS from continuing operations | $1.06 | $1.18 | (10%) |
| Net cash from operating activities | $392 million | $496 million | (21%) |
| Cash and cash equivalents | $867 million | $1.009 billion | Down $142 million |
| Total debt | $3.266 billion | $3.830 billion | Down $565 million |
Revenue growth was led by Commerce Services, which increased 47% to $1.539 billion. Global Ecommerce revenue increased 85% to $1.023 billion, including the impact of the Newgistics acquisition, while Presort Services increased 4% to $516 million. SMB Solutions declined 6% to $1.643 billion, and Software Solutions increased 3% to $341 million.
Segment profitability weakened as the portfolio shifted toward lower-margin commerce and shipping services. Commerce Services EBIT declined 48% to $41 million, including a $32 million loss in Global Ecommerce. SMB Solutions EBIT declined 2% to $534 million, while Software Solutions EBIT increased 39% to $47 million.
Cash flow from operations was $392 million. Investing activities provided $260 million, primarily reflecting approximately $340 million of gross proceeds from the Production Mail sale, partially offset by $191 million of capital expenditures. Financing activities used $766 million, including $570 million of debt repayment and $140 million of common dividends. Capital expenditures increased from $168 million to $191 million, primarily for Commerce Services facilities and Presort automation.
At year-end, current assets were $2.324 billion versus current liabilities of $1.857 billion. The company had an undrawn $1 billion revolving credit facility expiring in January 2021 and was in compliance with its financial covenants. Debt maturities totaled approximately $3.296 billion, including $200 million in 2019 and approximately $2.3 billion within five years.
Material changes versus the prior comparable period
- Revenue increased 13%, but segment EBIT decreased 6% and continuing-operations income decreased 10%.
- Commerce Services expanded sharply, while traditional SMB mailing revenue continued to decline because of lower mail volumes, a shrinking installed meter base, and fewer lease opportunities.
- Commerce Services margins were pressured by approximately $40 million of higher labor and transportation costs and an $8 million Presort marketing-mail pilot program.
- SG&A declined $48 million, or 4%, despite $51 million of incremental Newgistics-related expenses, reflecting cost-reduction initiatives.
- The company recorded a $32 million non-cash pension settlement charge in continuing operations and an additional $13 million charge in discontinued operations.
- Restructuring and asset-impairment charges declined to $27 million from $56 million.
- Standard & Poor’s downgraded the corporate credit rating from BBB- to BB+; certain debt interest rates increased by 0.25%.
- The company completed the Production Mail divestiture, receiving approximately $270 million of net proceeds, used primarily to repay debt.
- 2018 revenue and income were affected by ASC 606 adoption, including a reported $43 million acceleration of software and data revenue relative to prior guidance.
Guidance, outlook, commentary, and risks
Management expects continued revenue growth from Global Ecommerce, domestic parcel and fulfillment expansion, shipping solutions, cross-selling, and higher Presort mail volumes. SMB Solutions revenue is expected to continue declining, although management expects the decline to moderate through SendPro products, new services, shipping capabilities, and expanded financing offerings. Software growth is expected from indirect channels, software and data licenses, SaaS, and maintenance.
Management expects to recognize the remaining portion of a targeted $200 million gross-spend reduction in 2019. A substantial portion of the savings will be reinvested in Commerce Services and third-party financing. The new third-party equipment leasing program is expected to reduce 2019 cash flow by $50 million to $70 million as the company originates leases and builds a finance receivable portfolio.
In February 2019, the board reduced the quarterly common dividend from $0.1875 to $0.05 per share and authorized an additional $100 million share repurchase, bringing total authorization to $121 million. Management stated that these actions are intended to improve financial flexibility.
Key risks include continuing declines in physical mail, postal regulation and USPS relationships, competition and pricing pressure, lower Commerce Services margins, labor and transportation costs, customer concentration in Global Ecommerce, Brexit, tariffs, foreign exchange, cybersecurity and privacy requirements, cloud-system interruptions, supplier and outsourcing dependencies, credit losses, access to capital markets, potential credit-rating downgrades, and the regulatory status of the Pitney Bowes Bank.
The company is defending securities and derivative lawsuits alleging inadequate disclosures related to 2017 performance. Management believes the matters are without merit, but a reasonable loss estimate cannot currently be made. The filing also identifies tax uncertainties and states that future tax reserve changes could materially affect results.
Most important facts for investors to verify
- Whether Global Ecommerce can achieve scale and improve profitability after reporting a $32 million 2018 EBIT loss.
- Whether labor, transportation, fulfillment, and delivery costs stabilize sufficiently to reverse Commerce Services margin pressure.
- The company’s ability to refinance approximately $3.296 billion of debt maturities, including $200 million due in 2019, following the BB+ downgrade.
- The effect of the 2019 dividend reduction and planned share repurchases on liquidity and shareholder returns.
- Cash-flow performance after the planned $50 million to $70 million investment in third-party equipment financing.
- The sustainability of declining SMB Solutions revenue and the pace of physical-mail volume erosion.
- The ultimate financial and regulatory outcomes of the securities litigation, tax uncertainties, Brexit, tariffs, and cybersecurity exposures.
- The comparability of reported 2018 results with prior periods after ASC 606 adoption and the Production Mail Business reclassification.