Pitney Bowes Inc. 2017 First-Quarter Form 10-Q Summary
Business context and reporting period
Pitney Bowes is a global technology company providing mailing, shipping, software, customer information, location intelligence, customer engagement, and cross-border ecommerce solutions. This unaudited Form 10-Q covers the three months ended March 31, 2017, compared with the same period in 2016. The company revised segment reporting effective January 1, 2017; prior-period segment results were recast accordingly.
Key financial metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenue | $836.6 million | $844.6 million | Down 1%; flat on a constant-currency basis |
| Income before taxes | $96.5 million | $99.7 million | Down 3% |
| Net income attributable to Pitney Bowes | $65.1 million | $58.0 million | Up 12% |
| Diluted EPS | $0.35 | $0.30 | Up $0.05 |
| Net margin | 7.8% | 7.4% | Improved |
| Cash flow from operations | $154.0 million | $63.5 million | Up $90.5 million |
| Capital expenditures | $35.9 million | $40.7 million | Down $4.8 million |
| Cash and cash equivalents | $739.6 million | $602.2 million at March 31, 2016 | Up $137.3 million year over year |
| Cash and short-term investments | $783.4 million | $802.9 million at December 31, 2016 | Down $19.5 million sequentially |
| Total debt | $3.284 billion | $3.365 billion at December 31, 2016 | Down $80.6 million sequentially |
Total costs and expenses were $740.1 million, compared with $744.9 million in the prior-year quarter. Cost of revenue increased to 44.7% of revenue from 43.2%, while SG&A declined 6% to $306.3 million. Research and development increased 20% to $31.9 million. Segment EBIT was $192.4 million, or approximately 23.0% of revenue, compared with $201.7 million, or approximately 23.9%, in 2016.
Revenue and segment developments
- Business services revenue increased 9% to $224.5 million, equipment sales increased 2% to $163.0 million, and software revenue was approximately flat.
- Financing revenue declined 12% to $85.7 million, support services declined 7% to $118.8 million, supplies declined 7% to $66.8 million, and rentals declined 4% to $99.9 million.
- Small & Medium Business Solutions revenue declined 6% to $448.6 million, primarily because of lower recurring revenue streams. Segment EBIT declined 10% to $154.3 million.
- Enterprise Business Solutions revenue increased 3% to $221.6 million, and EBIT increased 11% to $39.7 million, supported by Presort Services growth and higher-margin Production Mail equipment sales.
- Digital Commerce Solutions revenue increased 9% to $166.4 million. Global Ecommerce revenue rose 17%, but the segment remained loss-making, with EBIT of negative $1.5 million.
Material changes versus the prior comparable period
- Net income attributable to Pitney Bowes increased despite slightly lower revenue and income before taxes, primarily due to cost-reduction benefits, benefits from the new enterprise business platform, and a lower effective tax rate.
- The effective tax rate decreased to 32.5% from 37.1%, including a $4 million benefit from the resolution of tax examinations in 2017.
- Operating cash flow more than doubled, primarily because of lower variable compensation payments, payment timing, lower interest and tax payments, and the absence of the $36.7 million special U.K. pension contribution made in 2016.
- The prior-year quarter benefited from a $10 million gain related to forgiveness of a loan by the State of Connecticut; no comparable benefit occurred in 2017.
- The company repaid $79 million of debt in January 2017 and made no common-share repurchases in the quarter, compared with $128.5 million of repurchases in Q1 2016.
- Stockholders’ deficit improved from $103.7 million at December 31, 2016 to $46.3 million at March 31, 2017, principally reflecting net income and other comprehensive income.
Cash flow, debt, and liquidity
Cash decreased by $25.0 million during the quarter to $739.6 million after $154.0 million of operating cash flow, $68.9 million of investing cash use, and $119.5 million of financing cash use. Financing uses included $79.3 million of debt principal payments and $34.6 million of dividends. The company had no commercial paper borrowings at March 31, 2017 and had not drawn on its $1 billion committed credit facility, which expires in January 2020.
Current liabilities exceeded current assets by approximately $215.3 million. Current debt was $785.3 million, including notes due in September 2017 and March and May 2018. Management stated that cash, investments, operating cash flow, and commercial-paper capacity should be sufficient for current needs, including capital investments, dividends, strategic acquisitions, and potential share repurchases.
Guidance, outlook, risks, and unusual items
- Management expects new products and digital capabilities, the enterprise business platform, marketing initiatives, restructuring actions, and cost savings to provide long-term benefits.
- These benefits are expected to be partly offset by normalized variable compensation and higher marketing and research and development expense in 2017.
- Management expects continued growth in Presort Services and Global Ecommerce, while Production Mail revenue may face consolidation, outsourcing, and deal-timing pressures.
- The company continues to invest in the Pitney Bowes Commerce Cloud, SendPro, software partner channels, cross-border ecommerce, and retail and ecommerce shipping.
- Gross finance receivables aged over 90 days increased following implementation of the enterprise business platform. Management attributed much of the increase to billing-format and administrative issues rather than customer credit deterioration. North America sales-type lease receivables over 90 days had a $69 million contract value at March 31, 2017; approximately $26 million had been paid by April 28, 2017.
- Key disclosed risks include declining physical mail volumes, competitive and pricing pressures, execution of the enterprise platform, acceptance of new products, postal and banking regulation, foreign exchange and interest rates, cybersecurity and information security, supplier and outsourcing risks, customer credit risk, pension costs, tax matters, and access to capital markets.
- Restructuring reserves were $17.7 million at March 31, 2017, with most payments expected over the following 12 to 24 months, although some may extend longer.
- The company reported no material off-balance-sheet arrangements, no material changes to previously disclosed risk factors or regulatory matters, and effective disclosure controls and procedures.
Important facts for investors to verify
- Whether declining mailing-equipment populations and recurring-revenue streams continue to pressure supplies, rentals, financing, and support-services revenue.
- Whether delinquent finance receivables normalize as enterprise-platform billing issues are resolved and whether additional credit-loss reserves become necessary.
- The company’s ability to refinance or repay the $785.3 million of current debt, including maturities in 2017 and 2018.
- Whether Global Ecommerce can transition from revenue growth to sustainable profitability while investment spending remains elevated.
- The effect of higher research and development and marketing spending, normalized compensation, foreign exchange, and interest rates on full-year earnings and cash flow.
- Progress in the enterprise platform rollout, Commerce Cloud and SendPro adoption, software partner-channel expansion, and Presort Services network growth.