Pitney Bowes Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2019. The filing was dated November 5, 2019. Pitney Bowes provides shipping, mailing, fulfillment, returns, cross-border ecommerce, presort, financing and sending-technology solutions. Reportable segments are Global Ecommerce, Presort Services and SendTech Solutions.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Total revenue | $790.1 million | $760.3 million | $2.374 billion | $2.354 billion |
| Segment EBIT | $126.8 million | $137.7 million | $374.3 million | $441.4 million |
| Income from continuing operations | $5.3 million | $47.7 million | $32.1 million | $132.6 million |
| Net income | $(3.1) million | $80.3 million | $17.9 million | $191.8 million |
| Diluted EPS from continuing operations | $0.03 | $0.25 | $0.18 | $0.70 |
| Net cash from operating activities | Not separately provided | Not separately provided | $182.3 million | $258.6 million |
- Q3 revenue increased 4%; nine-month revenue increased 1%. Q3 income from continuing operations declined 89%, and nine-month income declined 76%.
- Approximate continuing-operations net margin was 0.7% in Q3 2019 versus 6.3% in Q3 2018, and 1.4% for the first nine months versus 5.6% in the prior-year period.
- Business services revenue increased 15% in Q3 and 11% year to date, while supplies, rentals, financing and support-services revenue declined.
- Q3 Global Ecommerce revenue rose 20% but produced a $21.8 million EBIT loss. Presort Services revenue rose 5% with $17.7 million of EBIT. SendTech Solutions revenue declined 6% and EBIT declined 3%.
- Cash and cash equivalents were $514.9 million at September 30, 2019, and cash plus short-term investments totaled $651.9 million, compared with $927 million at December 31, 2018.
- Total debt was $3.069 billion, including $501.7 million classified as current. Debt fair value was $2.954 billion. Total stockholders’ equity was only $25.4 million.
- Nine-month cash flow included $201.7 million used in investing activities and $327.2 million used in financing activities, including $202.6 million of debt repayments, $105.0 million of share repurchases and $26.9 million of dividends.
Material changes versus the prior comparable period
- Revenue growth shifted toward Commerce Services, while the legacy SendTech Solutions business continued to contract due to declining meter populations, supplies and financing revenue.
- Gross margin deteriorated: cost of revenue was 59.2% of revenue in Q3 2019 versus 55.2% in Q3 2018, and 59.1% for the first nine months versus 54.8%.
- Global Ecommerce losses widened because of lower-margin service mix, facility investments and higher fulfillment, transportation and labor costs.
- Q3 restructuring and asset-impairment charges increased to $47.0 million from $6.1 million. Nine-month charges were $56.6 million versus $18.8 million, primarily reflecting a $42 million impairment of capitalized software for an international ERP project.
- The company recorded an $18 million pre-tax loss from January 2019 Market Exits, when direct operations in six smaller markets were replaced with a dealer model.
- Software Solutions was classified as discontinued operations following an August 2019 agreement to sell the business for $700 million, subject to adjustments. The company expected approximately $625 million of net proceeds and planned to use most proceeds to repay debt.
- The company adopted ASC 842, Leases, effective January 1, 2019, recognizing operating lease assets and liabilities and recasting prior periods.
Guidance, outlook, risks and unusual items
- Management expects continued revenue growth, improving margins as scale develops, and benefits from cost-structure initiatives.
- Global Ecommerce is expected to benefit from domestic parcel and shipping-solution growth and higher fourth-quarter holiday volumes, although organizational changes and investments are intended to improve profitability.
- Presort Services is expected to deliver revenue and EBIT growth through higher volumes, operational efficiencies and margin improvement.
- SendTech Solutions revenue declines are expected to moderate through new products, adjacent-market opportunities, SendPro C sales and expanded third-party equipment financing. Trade tariffs are expected to continue adversely affecting EBIT and equipment-sales margins.
- Beginning October 12, 2019, a Ryuk malware attack encrypted information on some systems and disrupted client access. Management stated that financial systems and most backup data were not affected and that it had not identified improper access to sensitive data. Fourth-quarter results were expected to be adversely affected by service disruptions, remediation costs, client service-level obligations, consulting fees and hardware replacement costs. The financial impact and insurance reimbursement were not yet estimable.
- Moody’s downgraded the company’s corporate credit rating from Ba1 to Ba2 in April 2019, increasing certain note interest rates. In November 2019, after the quarter end, the company refinanced certain term loans and replaced its revolving credit facility with a $500 million facility.
- Goodwill at the Global Ecommerce reporting unit was $609 million, with estimated fair value less than 20% above carrying value; further operating deterioration could result in a future impairment.
- Key risks include declining physical mail volumes, cybersecurity events, postal and regulatory changes, competition, tariffs, foreign exchange and interest rates, credit risk, capital-market access, customer concentration, pension costs and tax examinations.
Important facts for investors to verify
- Completion terms, net proceeds and debt repayment resulting from the planned $700 million Software Solutions sale.
- Actual fourth-quarter and full-year financial effects of the October malware attack, including insurance recoveries and customer claims.
- Near-term debt maturities, refinancing capacity and the effect of the Ba2 credit rating on borrowing costs.
- Whether Global Ecommerce can scale profitably and whether its goodwill remains recoverable.
- Sustainability of the dividend and share-repurchase program given minimal reported equity, declining operating cash flow and significant debt.
- Progress in reversing SendTech Solutions revenue declines and mitigating tariffs, tablet-replacement costs and lower-margin business mix.