PITNEY BOWES INC quarterly report, Q3 FY2017

Pitney Bowes Inc. Form 10-Q Summary

Reporting period: Three and nine months ended September 30, 2017. The company provides mailing, shipping, cross-border ecommerce, software, customer information management, location intelligence and customer engagement products and services. Results are unaudited and should be read with the 2016 Form 10-K.

Financial performance

Metric	Q3 2017	Q3 2016	9M 2017	9M 2016
Revenue	$842.8 million	$839.0 million	$2.501 billion	$2.520 billion
Income from continuing operations	$57.4 million	$70.4 million	$171.4 million	$192.9 million
Net income attributable to Pitney Bowes	$57.4 million	$65.5 million	$171.4 million	$177.1 million
Diluted EPS from continuing operations	$0.31	$0.35	$0.92	$0.94
Cash flow from operations	Not separately provided	Not separately provided	$330.6 million	$296.4 million

Third-quarter revenue was essentially flat year over year; nine-month revenue declined 1% as reported and was flat on a constant-currency basis.
Gross margin, calculated from reported revenue and cost of revenue, declined to approximately 52.4% in Q3 from 55.1% and to 53.7% for the nine months from 55.8%.
Net margin declined to approximately 6.8% in Q3 from 8.4% and to 6.9% for the nine months from 7.6%.
Q3 segment revenue increased 19% in Digital Commerce Solutions, including 28% growth in Global Ecommerce and 12% growth in Software Solutions. Small & Medium Business Solutions revenue declined 7%; Enterprise Business Solutions increased 1%.
Total segment EBIT declined 18% in Q3 to $162.2 million and 14% for the nine months to $519.9 million. Global Ecommerce generated EBIT losses of $9.6 million in Q3 and $17.9 million for the nine months.

Cash flow, liquidity and debt

Cash and cash equivalents were $1.697 billion at September 30, 2017, compared with $764.5 million at December 31, 2016. Cash and short-term investments totaled $1.742 billion.
Operating cash flow increased 12% to $330.6 million for the first nine months, primarily reflecting payment timing, lower variable compensation, lower restructuring and tax payments, and the absence of a $36.7 million special UK pension contribution made in 2016.
Investing cash outflow was $155.7 million, including $119.6 million of capital expenditures. Financing cash inflow was $715.1 million, primarily from debt issuance.
Total debt was $4.183 billion at September 30, 2017, versus $3.365 billion at year-end 2016. Current debt was $620.3 million and long-term debt was $3.563 billion.
In 2017, the company issued $1.05 billion of debt, including $700 million of fixed-rate notes and $350 million of term loans. Proceeds were used to repay or redeem debt and support the Newgistics acquisition.
The company reported no commercial paper outstanding at September 30 and had not drawn on its $1.0 billion committed revolving credit facility, extended to 2021.
Quarterly common dividends were $0.1875 per share; $104.5 million of dividends were paid during the first nine months. No share repurchases occurred during Q3, and $21 million remained authorized.

Material changes versus the prior comparable period

Profitability weakened despite stable Q3 revenue. Management attributed the decline primarily to lower gross margins, particularly in SMB Solutions, increased Global Ecommerce investment and higher interest expense.
Legacy mailing activities continued to contract: Q3 equipment sales declined 9%, supplies 5%, rentals 7%, financing 8% and support services 3%. Declining installed equipment, postage volumes and finance receivables were recurring drivers.
Business services revenue increased 14% in Q3 and 11% for the nine months, but related cost ratios increased because of continued Global Ecommerce investment.
SG&A increased 1% in Q3 to $304.4 million but declined 1% for the nine months to $908.2 million, reflecting productivity savings that offset higher ecommerce, marketing, acquisition-related and credit-loss expenses.
Restructuring charges declined to $1.5 million in Q3 and $30.5 million for the nine months, compared with $16.5 million and $49.5 million, respectively, in 2016.
Stockholders’ equity improved from a $103.7 million deficit at year-end 2016 to $100.8 million of equity at September 30, 2017, aided by net income and foreign-currency translation gains.

Outlook, commentary and risks

Management expects the portfolio shift toward digital and shipping solutions to continue, but noted that these businesses have different and currently lower margin structures than legacy operations.
Management expects normalized variable compensation, higher marketing expense and increased innovation spending to affect full-year 2017 earnings.
The company identified an opportunity to reduce its cost structure by an additional $200 million over 24 months, following approximately $300 million of reductions over the prior five years.
The SendPro C-series was introduced in the United States late in Q3 to combine mailing and cloud-based, multi-carrier shipping functionality.
Newgistics was acquired on October 2, 2017 for $475 million. The business provides parcel delivery, returns, fulfillment and digital commerce solutions and will be reported in Global Ecommerce.
The Board announced on November 1, 2017 that it was exploring strategic alternatives. No timetable or decision had been established, and there was no assurance of a transaction or other outcome.
Key risks include declining physical mail volumes, competitive and pricing pressure, execution of digital growth initiatives, Global Ecommerce losses and client concentration, cybersecurity and systems availability, credit-rating or capital-market disruption, integration of Newgistics, customer credit risk, foreign exchange and interest-rate exposure, pension obligations, tax examinations and litigation.
North American finance receivables aged over 90 days had a $52 million contract value. Management attributed much of the delinquency to billing changes from the enterprise platform rather than deterioration in customer credit quality; approximately $23 million had been collected by October 31, 2017.
Management stated that controls and procedures were effective as of September 30, 2017 and that there were no material changes in internal control over financial reporting during the quarter.

Important facts for investors to verify

Whether the Newgistics acquisition delivers the expected synergies and improves Global Ecommerce profitability after integration.
Progress toward the planned $200 million of additional cost reductions and the effect on margins.
Whether declining mailing equipment, rental, financing and support-service revenue stabilizes following the SendPro product launch.
Global Ecommerce’s path from operating losses to profitability, including the impact of shipping API stability and customer concentration.
Debt maturities, refinancing requirements and interest-rate sensitivity following the substantial increase in debt.
Whether the reported finance-receivable delinquencies remain administrative and are ultimately collected without materially higher credit-loss provisions.
The outcome and potential operational or financial effects of the Board’s strategic-alternatives review.