Pitney Bowes Inc. 2013 Form 10-K Summary
Business context and reporting period
Pitney Bowes is a global provider of mailing, customer communications, software, data, digital commerce and e-commerce parcel management solutions. This Form 10-K covers the fiscal year ended December 31, 2013, with comparative results for 2012 and 2011. The filing recasts prior periods for discontinued operations and reorganizes reporting into Small & Medium Business Solutions, Enterprise Business Solutions and Digital Commerce Solutions.
During 2013, the company sold its global and North America Management Services businesses, Nordic furniture business and International Mailing Services business. The fiscal fourth quarter generated revenue of $1,031 million, continuing-operations income of $84 million and net income attributable to Pitney Bowes of $90 million.
Financial performance and key metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Total revenue | $3,869 million | $3,915 million | Down 1% |
| Income from continuing operations | $320 million | $414 million | Down 23% |
| Income from continuing operations attributable to common stockholders | $302 million | $396 million | Down 24% |
| Diluted EPS from continuing operations | $1.49 | $1.96 | Down 24% |
| Net income attributable to Pitney Bowes | $143 million | $445 million | Down 68% |
| Diluted EPS | $0.70 | $2.21 | Down 68% |
| Cash flow from operations | $625 million | $660 million | Down $35 million |
| Capital expenditures | $138 million | $177 million | Down $39 million |
| Cash and short-term investments | $939 million | $950 million | Down $11 million |
| Total debt | $3,346 million | $4,017 million | Down $671 million |
Total cost of revenue was $1,697 million, or 43.9% of revenue, compared with 41.8% in 2012, implying a consolidated gross margin of approximately 56.1% versus 58.2%. Continuing-operations income before taxes was $403 million, and the effective tax rate was 20.6%.
- Equipment sales increased 2% to $889 million, while supplies increased 2% to $290 million.
- Software revenue declined 3% to $399 million; rental revenue declined 5% to $522 million; financing revenue declined 7% to $461 million; and support services declined 4% to $678 million.
- Business services revenue increased 6% to $631 million, primarily due to cross-border e-commerce parcel management.
- Segment revenue was $2,331 million for Small & Medium Business Solutions, $942 million for Enterprise Business Solutions and $596 million for Digital Commerce Solutions.
- Segment EBIT was $928 million, down 3% from $957 million. Digital Commerce Solutions EBIT increased 14% to $43 million, while Enterprise Business Solutions EBIT declined 11% to $138 million.
Cash flow, debt and liquidity
Operating cash flow of $625 million funded $138 million of capital expenditures and $189 million of common dividends. Investing activities provided $251 million, including $390 million of proceeds from business sales. Financing activities used $868 million, including $1,079 million of debt redemptions, partially offset by $412 million of new debt issuance.
At year-end, the company had no commercial paper outstanding and had not drawn on its $1.0 billion committed credit facility, which expires in April 2016. Approximately 93% of debt was fixed-rate, with a weighted-average rate of 5.1%. The company disclosed almost $2 billion of debt maturities in the next two to five years, including $876 million due within one to three years and $1.1 billion due within three to five years.
The company paid common dividends of $0.9375 per share in 2013, compared with $1.50 in 2012. No common shares were repurchased during 2013 or 2012; $50 million remained available under the repurchase authorization.
Material changes versus the prior comparable period
- Revenue declined modestly, but profitability fell materially because of higher restructuring and asset-impairment charges, a $33 million loss from early debt redemption, and declines in high-margin recurring mailing revenue.
- North America Mailing revenue declined 5% and EBIT declined 2%, primarily because of fewer meters in service and lower prior-period equipment sales.
- Production Mail revenue increased 6% and EBIT increased 12%, driven by production printer and sorter sales.
- Presort Services revenue was flat and EBIT declined 22%, reflecting reduced discounts, margin compression and an $11 million insurance recovery received in 2012.
- Digital Commerce Solutions revenue increased 3% and EBIT increased 14%, supported by cross-border parcel and digital mail delivery volumes.
- SG&A declined 5% to $1,432 million due to restructuring and productivity initiatives, while restructuring charges and asset impairments increased to $84 million from $17 million.
- Discontinued operations produced a $159 million loss in 2013, including $101 million of goodwill impairment and $15 million of asset impairment charges, compared with $49 million of income in 2012.
- Total assets declined to $6,773 million from $7,860 million, primarily reflecting divestitures, asset impairments and debt-related activity.
Guidance, outlook, risks and unusual items
Management expects mailing revenue and profitability to remain challenged by declining physical mail volumes but anticipates improvement in 2014 from a new online and direct-sales go-to-market strategy, parcel solutions, postage-meter discounts and international meter stabilization. Production Mail demand is expected to continue, though at lower growth rates after strong 2013 printer sales. Presort Services, Digital Commerce Solutions and cross-border parcel management are expected to grow.
The company expects to begin a multi-year global ERP implementation in 2014. Related expenses could approximate $0.10 per diluted share in 2014, with anticipated longer-term cost savings and operational efficiencies. Restructuring actions are expected to generate $100 million to $125 million of annualized pretax benefits by 2015, after total restructuring charges estimated at $75 million to $125 million.
- Physical mail volume declines, customer migration to digital communications and lower margins on digital offerings threaten the traditional mailing business.
- Digital Commerce Solutions growth depends on successful product development, market acceptance and competition in rapidly changing markets.
- Capital-market access, credit ratings, deposit activity at the company bank and refinancing conditions affect customer financing and debt maturities.
- The Department of Justice issued a Civil Investigative Demand concerning compliance with postal regulatory requirements in the Presort Services business. The company cannot estimate a potential loss or predict the outcome.
- Goodwill impairment sensitivity is elevated in the software and direct marketing reporting units, whose estimated fair values exceeded carrying values by only 12% and 4%, respectively.
- The company is exposed to regulatory, privacy, cybersecurity, supplier, litigation, environmental, foreign exchange, pension and tax risks.
- The company disclosed a potential tax exposure of up to $100 million related to the Historic Boardwalk Hall partnership if indemnification is not recovered, although the company states it is indemnified under the partnership agreement.
- The corporate headquarters sale was expected to close by mid-2014 following a $26 million non-cash impairment charge.
Most important facts for investors to verify
- Whether recurring mailing revenue stabilizes despite continued declines in meter placements and physical mail volumes.
- Progress, cost and realized savings from restructuring initiatives and the new ERP implementation.
- Debt refinancing capacity and liquidity ahead of approximately $2 billion of maturities over the next two to five years.
- Growth, margins and cash generation from Digital Commerce Solutions and cross-border parcel management.
- The ultimate outcome and financial exposure from the DOJ Presort Services investigation.
- Potential future goodwill impairments in the software and direct marketing businesses.
- Sustainability of dividend payments relative to earnings, operating cash flow and refinancing requirements.