Pitney Bowes Inc. — First Quarter 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. The filing presents unaudited interim consolidated results under U.S. GAAP. Pitney Bowes provides mailing, shipping, customer information, location intelligence, customer engagement and global ecommerce solutions.
Financial Performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Total revenue | $890.7 million | $937.5 million | Down 5% |
| Income from continuing operations | $85.0 million | $46.5 million | Up 83% |
| Net income attributable to Pitney Bowes | $80.6 million | $44.7 million | Up 80% |
| Diluted EPS | $0.40 | $0.22 | Up $0.18 |
| Operating cash flow | $103.9 million | $105.6 million | Down $1.7 million |
| Capital expenditures | $43.9 million | $30.1 million | Up $13.8 million |
| Common dividend per share | $0.1875 | $0.1875 | Unchanged |
- Revenue mix shifted toward business services, which increased 11% to $205.8 million. Equipment sales declined 12%, support services declined 12%, supplies declined 8%, rentals declined 8%, software declined 6% and financing declined 4%.
- Segment revenue was $478.0 million for Small and Medium Business Solutions, $221.0 million for Enterprise Business Solutions and $191.6 million for Digital Commerce Solutions.
- Segment EBIT increased 1% to $227.8 million. Digital Commerce Solutions EBIT increased 67% to $15.9 million; Enterprise Business Solutions EBIT increased 15% to $36.5 million; Small and Medium Business Solutions EBIT declined 5% to $175.4 million.
- Total cost of revenue was $390.5 million, or 43.8% of revenue, compared with 43.7% in the prior-year quarter. The implied gross margin was approximately 56.2%, versus 56.3%.
- Income from continuing operations before taxes was $135.6 million, representing approximately 15.2% of revenue, compared with $54.5 million, or approximately 5.8%, in Q1 2014.
- Net income attributable to Pitney Bowes represented approximately 9.1% of revenue, compared with approximately 4.8% in the prior-year quarter.
- SG&A declined 10% to $314.5 million and fell to 35.3% of revenue from 37.5%, primarily due to operational-excellence and productivity initiatives.
- The effective tax rate increased to 37.3% from 14.7%. The 2015 rate included a $3 million charge related to certain deferred tax assets; the 2014 rate benefited from debt-extinguishment tax effects and a $6 million tax-examination resolution benefit.
Liquidity, Cash Flow and Capitalization
- Cash and cash equivalents were $871.7 million at March 31, 2015, down from $1.079 billion at December 31, 2014. Cash and short-term investments totaled $913 million.
- Operating cash flow was $103.9 million. Investing activities used $64.4 million, while financing activities used $212.0 million. Cash declined by $207.5 million during the quarter, including a $34.9 million foreign-exchange impact.
- Total debt was $3.075 billion at March 31, 2015, including $100 million of commercial paper. Debt fair value was estimated at $3.295 billion. The company repaid $274.9 million of 5% notes that matured in March and borrowed $100 million through commercial paper.
- Long-term debt declined to $2.554 billion from $2.927 billion at year-end 2014, while the current portion of debt increased to $520.9 million, including commercial paper and notes due January 2016.
- Management stated that cash, operating cash flow and commercial-paper capacity should be sufficient for current needs, including capital investments, dividends and share repurchases. The company had a $1 billion committed credit facility expiring in January 2020 and had not drawn on it.
- Cash held by foreign subsidiaries was $465 million; repatriation could create additional taxes and some balances are subject to local restrictions.
Material Changes Versus Q1 2014
- Reported revenue declined 5%, including a 4% adverse foreign-currency translation effect and a 1% impact from divested businesses. Management attributed additional pressure to declining physical mail volumes, customers extending leases instead of purchasing equipment, European economic conditions and temporary disruptions from the European go-to-market transition.
- Profitability improved substantially because of lower SG&A, lower restructuring charges and the absence of the prior-year $61.7 million of other expense associated principally with debt refinancing and extinguishment.
- Restructuring charges were a net benefit of $0.1 million compared with $9.8 million of charges in Q1 2014. Restructuring reserves totaled $68.2 million at March 31, 2015, with most payments expected over the following 12 to 24 months.
- Foreign currency translation produced a $72.2 million other comprehensive loss, resulting in comprehensive income attributable to Pitney Bowes of $18.1 million versus $45.9 million in Q1 2014.
- Net finance receivables declined to $1.737 billion from $1.820 billion at December 31, 2014. Finance receivables more than 90 days past due increased to $40.9 million from $35.2 million.
Outlook, Commentary, Risks and Unusual Items
- Management expects the strong U.S. dollar to pressure reported revenue and profitability through translation and increased competitive pressure, and potentially to affect demand for U.S. goods sold through global ecommerce solutions.
- Digital Commerce Solutions is expected to benefit from global ecommerce, software licensing and shipping demand. Presort Services is expected to benefit from client expansion, higher mail volumes and operating efficiencies.
- Production Mail faces uncertain European economic conditions and declining services revenue. Small and Medium Business Solutions remains exposed to declining mail volumes, lower-featured equipment, lease extensions, European conditions, go-to-market implementation issues and divested businesses.
- On May 5, 2015, the company agreed to acquire Borderfree, Inc. for $14 per share in cash, or approximately $395 million net of expected cash and investments. Closing was expected in Q2 2015, subject to customary conditions. Borderfree was expected to become part of Digital Commerce Solutions.
- The company faces risks from declining physical mail volumes, competition, digital-transition execution, postal and banking regulation, information security and privacy requirements, ERP implementation, supplier and outsourcing dependencies, customer concentration, credit losses, pensions, taxes, foreign exchange and macroeconomic conditions.
- The Department of Justice is investigating compliance with postal regulatory requirements in the Presort Services business under a False Claims Act Civil Investigative Demand. The filing states that the outcome and potential impact cannot yet be predicted.
- Management reported no material changes to previously disclosed legal proceedings or risk factors. Disclosure controls and procedures were evaluated as effective as of March 31, 2015.
Investor Verification Priorities
- Verify the sustainability of earnings growth after excluding the prior-year debt-extinguishment costs, unusually low 2014 tax rate and restructuring differences.
- Monitor continuing declines in mailing equipment, installed meters, rentals and support services, particularly in North America and Europe.
- Assess whether Digital Commerce Solutions and Presort Services growth can offset structural declines in the traditional mailing businesses.
- Review debt maturities, commercial-paper reliance, liquidity after the planned Borderfree acquisition and the company’s ability to fund dividends, capital expenditures and restructuring payments.
- Track foreign-exchange effects, European go-to-market execution and the effect of currency movements on reported revenue and profitability.
- Follow the DOJ Presort Services inquiry and evaluate any potential financial, regulatory or operational consequences.
- Confirm the closing, financing and integration progress of the Borderfree acquisition and its effect on Digital Commerce Solutions.