Pitney Bowes Inc. — Q3 2013 Form 10-Q Summary
Business context and reporting period
Pitney Bowes provides mailing, software, digital commerce, financing, support, and business services. The filing covers the three and nine months ended September 30, 2013. Historical segment results were recast following organizational changes and the classification of several businesses as discontinued operations.
Key financial metrics
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Total revenue | $938.8 million | $949.8 million | $2.838 billion | $2.900 billion |
| Income from continuing operations | $81.3 million | $92.5 million | $235.9 million | $323.4 million |
| Continuing operations EPS, diluted | $0.38 | $0.44 | $1.10 | $1.54 |
| Net income attributable to Pitney Bowes | $(5.5) million | $76.5 million | $52.7 million | $334.8 million |
| Net EPS, diluted | $(0.03) | $0.38 | $0.26 | $1.66 |
| Operating cash flow | Not separately provided for Q3 | Not separately provided for Q3 | $493.6 million | $404.6 million |
Reported total cost of revenue was 43.2% of revenue in Q3 and 43.5% for the nine-month period, compared with 42.1% and 41.7%, respectively, in the comparable 2012 periods. Continuing-operations pre-tax income was $92.6 million in Q3 and $291.4 million for nine months. The effective tax rate was 12.3% in Q3 and 19.1% year to date, including discrete tax benefits.
At September 30, 2013, cash and cash equivalents were $759.6 million and short-term investments were $20.5 million. Total debt was $3.651 billion, including $299.6 million classified as current; estimated debt fair value was $3.867 billion. The company had no commercial paper outstanding at quarter end and maintained a $1.0 billion undrawn credit facility expiring in April 2016.
Material changes versus the prior comparable period
- Q3 revenue declined 1%; nine-month revenue declined 2%, driven primarily by lower rentals, financing, support services, and year-to-date software revenue.
- Q3 revenue increased in equipment sales, supplies, software, and business services, but declines in recurring mailing-related revenue more than offset those gains.
- Q3 continuing-operations income attributable to common stockholders fell 13% to $76.7 million, primarily due to $34.9 million of restructuring and asset impairment charges.
- Segment EBIT increased 6% in Q3 to $224.1 million but declined 6% year to date to $660.8 million. Q3 Digital Commerce Solutions revenue rose 9% and EBIT increased substantially from the prior year, while North America Mailing revenue declined 6%.
- The company reported $169.4 million of losses from discontinued operations for the first nine months, compared with $25.3 million of income in the prior-year period. Q3 discontinued-operations loss was $82.2 million.
- Operating cash flow increased $88.9 million year to date, partly because the prior-year period included a $95 million special pension contribution and higher tax payments.
- Debt declined from $4.017 billion at December 31, 2012 to $3.651 billion at September 30, 2013. The company issued $425 million of 6.7% notes, redeemed or repurchased approximately $780 million of debt through September 30, and paid $151.0 million of common dividends.
Outlook, commentary, risks, and unusual items
Management is focused on stabilizing the mailing business, achieving operational excellence, and expanding digital commerce. It expects recurring mailing revenue to continue declining, although the rate of decline should moderate. Production Mail demand was strong in 2013, but management does not expect similar growth rates in 2014 because of sales-cycle variability. Presort Services is expected to benefit from the U.S. Postal Service Intelligent Mail barcode mandate, workshare improvements, and new sales opportunities. Digital Commerce growth is expected from location intelligence, customer data and engagement solutions, and cross-border e-commerce.
Management expects restructuring charges of $75 million to $125 million and annualized pretax benefits of $100 million to $125 million, net of investments, with the benefit run rate expected by 2015. Nine-month restructuring charges were $28 million. The company also recorded a $26 million non-cash impairment related to its headquarters building and expects to close its sale by the end of the second quarter of 2014.
PBMS North America was sold on October 1, 2013 for $392 million in cash. PBMS International, International Mailing Services, and the Nordic furniture business were also sold or placed under sale agreements. The transactions generated significant discontinued-operations losses, including goodwill and asset impairments. On November 4, 2013, the company redeemed the remaining $300 million of 4.875% notes for total cash payments of $314 million and expects a $7 million fourth-quarter loss from the redemption.
Principal risks include declining physical mail volumes, substitution by digital communications, access to capital at reasonable cost, customer credit risk, interest-rate and foreign-currency movements, pension and retiree medical costs, tax audits and uncertain tax positions, postal and banking regulation, information-system interruptions, supplier and outsourcing risks, privacy and intellectual-property matters, and adverse economic conditions. The company stated that its disclosure controls were effective and that there were no material changes to previously disclosed risk factors.
Investor verification points
- Verify the completion, proceeds, accounting treatment, and remaining liabilities associated with the PBMS and other divestitures.
- Assess whether the projected $100 million to $125 million annualized restructuring benefits are achieved by 2015 and whether total charges remain within the stated $75 million to $125 million range.
- Monitor North America Mailing recurring revenue, installed meter trends, physical mail volumes, and financing receivables.
- Evaluate the sustainability of cash flow and dividends relative to debt maturities, credit ratings, pension obligations, and restricted foreign cash.
- Review the valuation sensitivity of the $684 million of goodwill associated with software operations, which had an estimated fair-value cushion of approximately 3%.
- Confirm the fourth-quarter $7 million debt-redemption loss and the effect of the October 1 PBMS North America proceeds on subsequent-period liquidity and leverage.