Pitney Bowes Inc. 2018 Q1 Form 10-Q Summary
Business Context and Reporting Period
Pitney Bowes is a global technology and services company providing mailing, shipping, ecommerce, software, customer information management, location intelligence and customer engagement solutions. The filing covers the three months ended March 31, 2018, compared with the three months ended March 31, 2017. Results include Newgistics, acquired in October 2017, which contributed approximately $131 million of first-quarter 2018 revenue.
Key Financial Metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenue | $983.2 million | $836.6 million | 18% increase |
| Gross margin | 46.8% | 56.8% | Down 10.0 percentage points |
| Income before taxes | $73.1 million | $96.5 million | 24% decrease |
| Net income | $53.5 million | $65.1 million | 18% decrease |
| Diluted EPS | $0.28 | $0.35 | 20% decrease |
| Operating cash flow | $82.7 million | $154.0 million | 46% decrease |
| Dividends declared per share | $0.1875 | $0.1875 | Unchanged |
Revenue growth was driven primarily by business services, which increased 72% to $386.5 million, and software, which increased 5% to $81.6 million. Equipment sales, supplies, rentals, financing and support services declined or were flat. Commerce Services revenue increased 73% to $381.0 million, while Small and Medium Business Solutions declined 6% to $423.3 million.
Total segment EBIT declined 12% to $169.1 million. Global Ecommerce reported an EBIT loss of $7.7 million, compared with a $4.3 million loss in the prior-year quarter. North America Mailing EBIT declined 15% to $119.5 million, while Software Solutions EBIT increased 76% to $4.8 million.
Cash and cash equivalents were $719.9 million at March 31, 2018, and cash plus short-term investments totaled $775.5 million. Total debt was $3.58 billion, including $327.4 million classified as current. The company had a $1.0 billion committed credit facility, with no borrowings outstanding at quarter-end. Finance receivables, net, totaled $1.43 billion.
Material Changes Versus the Prior Comparable Period
- Revenue increased 18%, or 15% on a constant-currency basis, primarily from Newgistics and continued Global Ecommerce growth.
- Gross margin contracted substantially because the portfolio shifted toward lower-margin digital, shipping and ecommerce businesses, while traditional mailing markets continued to decline.
- Net income and diluted EPS declined despite revenue growth, reflecting lower margins, continued Global Ecommerce investment and higher amortization from the Newgistics acquisition. The lower effective tax rate partially offset these pressures.
- Operating cash flow decreased by $71.3 million, primarily because of working-capital timing, including lower accounts payable and accrued liabilities and accounts receivable changes.
- The company repaid $255 million of debt during the quarter, consisting of the $250 million 5.6% notes due March 2018 and $5 million of term-loan principal.
- The company adopted ASC 606 using the modified retrospective method. The adoption reduced opening retained earnings by $9 million and increased reported first-quarter revenue by $12.7 million and net income by $7.7 million versus pro forma results under the prior guidance. Prior-period amounts were not restated.
- On April 27, 2018, the company agreed to sell its Document Messaging Technologies production mail business for $361 million, subject to adjustments. Expected net proceeds were approximately $270 million, primarily intended for debt repayment. The business was expected to be reported as discontinued operations beginning in the second quarter.
Guidance, Outlook, Risks and Unusual Items
Management expected 2018 revenue to grow, while overall gross margins were expected to contract as higher-growth, lower-margin shipping and digital businesses became a larger portion of the portfolio. Management expected continued Global Ecommerce growth, supported by Newgistics, domestic shipping APIs, carrier services and cross-border volumes. The company also expected long-term improvement from SendPro products, expanded finance offerings, Software Solutions customer growth and ongoing Presort Services and Production Mail performance around market ranges.
Management announced a plan to reduce costs by an additional $200 million over 24 months, following approximately $300 million of cost-structure reductions over the prior five years. The filing does not provide a specific full-year revenue or earnings-per-share target.
On May 4, 2018, after quarter-end, Standard & Poor’s lowered the company’s corporate credit rating to BB+ from BBB-. The downgrade was expected to increase coupon rates by 0.25% on $1.7 billion of notes, increase the term-loan rate by 0.25%, and increase credit-facility fees. The company identified declining physical mail volumes, competitive pricing pressure, technology and product execution, cybersecurity, macroeconomic and foreign-exchange conditions, supplier and outsourcing risks, postal and banking regulation, acquisition integration, customer credit risk, pension and tax matters, and access to capital as material risks.
Restructuring reserves totaled $29.0 million at March 31, 2018, with most payments expected over the next 12 to 24 months. The company stated that ordinary-course litigation was not expected to have a material effect, although litigation outcomes remain inherently unpredictable. No material off-balance-sheet arrangements were reported.
Important Facts for Investors to Verify
- Assess whether Newgistics and Global Ecommerce growth can become profitable as labor, transportation, depreciation and amortization costs remain elevated.
- Reconcile revenue and earnings comparisons for the impact of ASC 606, especially the $11 million favorable effect on software revenue and $9 million favorable effect on EBIT.
- Monitor debt reduction, refinancing needs, interest expense and the effect of the May 2018 credit-rating downgrade on borrowing costs.
- Evaluate liquidity after debt repayments, dividends, capital expenditures and restructuring payments, including the timing and actual net proceeds from the Document Messaging Technologies sale.
- Track continued declines in North America Mailing equipment, rental, financing and support-service revenue and the effect on recurring cash flows.
- Verify execution of the additional $200 million cost-reduction program and whether savings offset mix-related margin pressure.
- Review finance-receivable aging, credit-loss reserves and customer-credit performance; gross finance receivables over 90 days past due totaled $67.2 million at quarter-end.